2016 Annual Report
and 10-K
Educators look out for their students’ futures.
They deserve someone to look out for theirs.
Financial Highlights
(Dollars in millions, except per share data)
Year Ended December 31,
2016
2015
2014
Operations
Insurance premiums written and
contract deposits (1)
Net income
Operating income (1)
Return on equity (2)
Property & Casualty
$
1,262.5
$
1,256.5
$
1,167.7
83.8
81.5
6.2%
93.5
84.9
7.1%
104.2
97.3
8.4%
combined loss and expense ratio
101.5%
97.0%
96.1%
Per share
Net income-diluted
Operating income (1)-diluted
Dividends paid
Book value
Book value excluding the fair
value adjustment for investments (1)
Financial position
Total assets
Short-term debt
Long-term debt
Total shareholders’ equity
$
$
$
$
$
2.02
1.97
1.06
32.15
27.79
$
$
$
$
$
2.20
2.00
1.00
31.18
26.86
$
$
$
$
$
2.47
2.30
0.92
32.65
25.38
$
10,576.8
$
10,057.0
$
9,768.4
–
247.2
1,294.0
–
247.0
1,264.7
38.0
199.8
1,336.5
(1) For a definition of this non-GAAP measure, see the Company’s SEC filings.
(2) Based on 12-month net income and average quarter-end shareholders’ equity.
Forward-looking information
It is important to note that the Company’s actual results could differ materially from those projected in
forward-looking statements. Additional information concerning factors that could cause actual results
to differ materially from those in the forward-looking statements is contained from time to time in the
Company’s SEC filings. Copies of these filings may be obtained by contacting the Company or the SEC.
Horace Mann 2016 Annual Report
Letter To Shareholders
For more than 70 years, Horace Mann has been a
dedicated partner to the nation’s educators, helping them
protect what they have today and prepare for a financially
successful future.
Beginning in 2013, we established a “PDI” strategy
that would capitalize on our success as the leading
financial services company focused on the educator
market to drive profitable growth. Our focus was to build
additional product offerings to ensure we could meet the
insurance and financial services needs for all educators,
advance our distribution options to ensure educators
have a consistent Horace Mann brand experience while
also accessing us according to their preferences, and
modernize our infrastructure to provide the customer
experience our educators expect and deserve.
In 2016, we accomplished some significant milestones
that strengthen the foundation of Horace Mann’s unique
value proposition; support scalable, profitable growth;
and benefit shareholders, agents and customers.
These achievements will help us reach more educators
and enhance our position as the leading insurance
and financial services provider focused on the
educator market.
Building out a full suite of tailored
products to serve educators
On the product front, we have successfully built a
comprehensive product suite that provides solutions
tailored to meet the insurance and financial services
needs of educators. Over the past few years, we’ve
introduced a fixed indexed annuity product and an
indexed universal life policy, modernized and redesigned
our suite of traditional life insurance products, and
significantly improved our auto and property offerings.
Horace Mann at a Glance
Horace Mann senior leaders ring the bell
at the New York Stock Exchange on
Dec. 1, 2016, to mark our 25th anniversary
as a publicly-traded company.
And in 2016, we built a new approach to the 403(b)
market, our Retirement Advantage products. These
offerings feature a superior customer experience with
transparent fees, more flexibility to move between
products with no surrender charges, and a best-of-breed
selection of third-party mutual funds and sub-accounts.
Retirement Advantage will replace our current 403(b) and
IRA offerings in 2017. This innovative new product suite
positions us well in a changing regulatory environment to
continue to be the retirement provider of choice for the
educational community.
In order to ensure educators have access to the products
necessary to meet all of their individualized insurance
and financial service needs, we complement our
manufactured offerings with a robust general agency
platform. In 2016, we further enhanced our Horace Mann
General Agency (“HMGA”) offerings, adding third-party
We serve 360,000
educators and their families
via 700+
representatives
in nearly 4,000
public school
districts
and safeguard our promises
with $10.6 billion
in assets
$
Horace Mann 2016 Annual Report
1
solutions for coverages that don’t fit our underwriting
criteria, such as coastal property and specialty life
insurance cases. This further enhances an already robust
lineup of HMGA solutions from trusted partners that are
known as leaders in their respective spaces, and allows
us to provide coverage options for non-standard auto,
high-value homes, motorcycle, RV and boat coverages,
classic car and small commercial policies.
As a result, our product offerings, whether manufactured
or through HMGA, are essentially complete. To further
reinforce our position as a holistic solutions provider
for the educator market, in 2017, we will introduce a
proprietary financial educational tool to help analyze
our customers’ financial and household information
and provide personalized education to help customers
achieve their retirement goals. The tool, which
will be administered by our agents, will also offer
recommendations on appropriate homeowners, auto
and life insurance options. In short, the tool will identify
product solutions to help address the financial
challenges individual customers face through a
consistent, holistic framework.
This approach to solving for all of the financial needs
in the household will further reinforce our unique value
proposition and should further increase our already
industry-leading cross sell ratios. Currently, nearly one
in five Horace Mann customers purchase more than one
product from us, and retention levels for those customers
with two or more of our products exceed 90%, creating
what is essentially a customer for life. In addition,
our holistic approach has reulted in an even split of
Property & Casualty and life retirement business,
positioning us as a truly balanced multiline insurance
and financial services campany.
Advancing our distribution
We also made significant advancements in
distribution in 2016. Our exclusive agents are
the face of Horace Mann in schools across the
country and are the cornerstone of our unique
value proposition. They help identify solutions to
the financial challenges educators face, and as
those challenges become more complex, the role
of a trusted, knowledgeable financial professional
becomes essential. But we have found that
although most customers value the expertise of a
trusted advisor as their financial needs become
more complex, we also know that not every
customer wants to begin their journey through
an agent.
In 2016, we continued to make enhancements to
our direct channel, allowing educators to reach us
on their terms. Providing options for educators to
access us how they choose is important, and this
allows Horace Mann to establish a presence in
geographies where we may not yet have an exclusive
agent. Our direct channel is not meant to replace
our exclusive agents, but instead complement their
capabilities and extend our reach.
Our business at Dec. 31, 2016
Other
Qualified
4%
Non-
Qualified
8%
Roth IRA
5%
IRA
22%
403(b)
61%
Life
9%
Retirement
41%
Traditional Whole
Life & IUL
12%
Auto
34%
Experience
Life
21%
$6.4 billion
in retirement
product assets
Property
16%
$1.3 billion
in premium &
contract deposits
67%
Traditional
Term
$17 billion
life insurance in force
2
Horace Mann 2016 Annual Report
Total revenues continue to grow
1,060.7
1,080.4
1,128.9
1,010.8
1,031.2
s
n
o
i
l
l
i
m
$
$1,150
$1,100
$1,050
$1,000
$950
2012
2013
2014
2015
2016
We continue to focus on the online customer
experience and introduced a number of significant
improvements in 2016. We modernized our online
auto quoting capabilities to provide customers with
faster quotes and various coverage options. And,
on the retirement front, we introduced an easy-to-
use online tool for customers enrolling in Retirement
Advantage, which provides a transparent, end-to-
end digital experience and significantly streamlines
the enrollment process.
Streamlining the user’s digital experience has
increased the number of customers who begin their
Horace Mann relationship online, and in terms of
business volume, the direct channel continues to
grow. We are focused on optimizing the business
mix that comes through this channel and expect
further success in 2017.
In addition, sales volumes generated through our
core exclusive agent channel continue to grow.
Our efforts to provide enhanced training for our
agency force, improved marketing materials and
campaigns, and improved online tools for agents are
strengthening our agencies and improving our local
market presence. And the proof is in our sales
results: P&C sales increased 6%, retirement assets
under management grew by 7%, and importantly,
life insurance sales increased by over 40%.
This significant increase in life sales illustrates
how our PDI strategy and unique solutions
orientation come together. Educator households,
like many middle-income families, are significantly
underinsured. Often, they rely on their group life
insurance coverage or have no coverage at all. And
even within our own customer base, life insurance
is the least common product educators purchased
from us.
We are solving this critical issue by taking an
integrated, multi-faceted approach. First, we
modernized the entire suite of life insurance
products. Then, we improved agent training that
was aligned with helping address our customers’
underserved life insurance needs. And we improved
educational point of sales materials, developed
online tools to make life insurance approachable and
understandable, and incorporated life insurance into
a holistic financial plan. This integrated approach
resulted in a significant increase in the number of
agents selling life policies, and was the primary driver
of the sizable increase in life sales in 2016.
Modernizing our infrastructure
During 2016, Horace Mann made significant
progress on our multi-year plan to modernize our
infrastructure. Life insurance system modernization
was completed, streamlining the user experience for
agents and customers and significantly reducing the
time needed to issue a policy.
Retirement modernization is underway, and we
began the first phase of P&C systems modernization
“Knowing our educator market is Horace
Mann’s biggest competitive advantage.”
Horace Mann 2016 Annual Report
3
financial goals. For example, retirement planning
generally includes 403(b) annuities to supplement
teachers’ pensions. Through our refinancing partner,
customers save an average of $137 a month.
Investing those savings at 6% over 40 years could
result in $260,000 in retirement savings — truly a
win-win for our customers and our company.
In addition, Horace Mann’s innovative Student Loan
Solutions helps address recruitment, productivity and
retention challenges in school districts nationwide.
A new educators’ average student loan debt is
around $35,000, which is almost equal to their
average annual pre-tax salary. We hope Student
Loan Solutions will enable young educators to avoid
leaving the profession they love in search of higher-
paying jobs to repay their debts.
While Student Loan Solutions is the newest of
Horace Mann’s programs, it’s by no means the only
way our company partners with educators.
DonorsChoose.org
The typical teacher spends $500 a year on
supplies for his or her classroom. Horace Mann
is a national sponsor of DonorsChoose.org, a
nonprofit crowdfunding platform that helps teachers
raise money for classroom projects. In addition to
funding many projects, Horace Mann agents provide
workshops in schools to help educators make the
most of their crowdfunding efforts. In schools
served by a Horace Mann agent, nearly 106,000
projects were completed at a value of nearly
$67 million in 2016.
State retirement system workshops
Horace Mann workshops help teachers and school
employees understand their state retirement system
benefits and how they can fill a retirement income
gap with supplemental plans.
Financial success workshops
Especially popular for millennial teachers, these
workshops cover the basics of spending, credit
scores, budgeting and saving.
in 2016. We focused on claims first, to improve
the customer experience and make the claims
process more seamless for our educators at the
“moment of truth.” Not only are we upgrading our
technology, we are also streamlining processes to
improve efficiencies, effectively increasing our ability
to support greater volumes of new business without
adding additional incremental costs.
In P&C claims, we’ve reduced cycle time, improved
our net promoter score, and introduced customer-
friendly digital tools, like a mobile app that allows
customers to submit auto damage photos and
related documentation. When we complete claims
technology modernization in 2017, we will move to
other areas of P&C, such as underwriting, billing and
policy administration systems.
In addition, Horace Mann continued to attract
seasoned talent from larger, industry-leading
organizations—in 2016, with a focus to build out the
Institutional Retirement Solutions sales team. Our
goal is to gain market share and accelerate growth
in the 403(b) retirement space by marketing Horace
Mann’s revised product offerings to medium to large
school districts.
Partnering with educators to achieve
financial security
Knowing our educator market is Horace Mann’s
biggest competitive advantage. Horace Mann was
Founded by Educators for Educators® in 1945 – so
we understand the needs of our educator customer,
the obstacles they face in achieving financial security,
and how to help them overcome those obstacles.
In 2016, we launched Horace Mann’s Student
Loan Solutions, a comprehensive suite of student
loan debt solutions for educators. Student Loan
Solutions help guide educators through the highly
complex federal student loan forgiveness and
repayment programs. In addition, educators can
seek to refinance student debt at a lower interest rate
through Horace Mann’s partnership with a third-party
financial institution that is a top-five private student
loan originator.
For educators as well as Horace Mann, the long-term
benefit of removing debt and reducing payments
is that savings can be redirected toward long-term
4
Horace Mann 2016 Annual Report
2016 highlights
The company’s business strategy, as well as its
collaborative approach to helping educators free
up dollars for retirement and other financial goals,
contributed to solid operating results across all
business segments in 2016:
Property & Casualty
Sales increased 6% as agency productivity
improved, although net income declined 36% to
$25.6 million due to higher catastrophes and a
nationwide increase in traffic accident frequency and
severity. People are driving more miles, distracted
driving is a significant and growing concern, and
today’s high-tech vehicles are more expensive
to repair. Despite rate actions to address these
profitability concerns, auto policy retention was a
very strong 84%. We continue to see opportunities
to profitably grow auto in specific geographies and
customer segments, and are managing profitability
concerns through rate actions, disciplined
underwriting and continued claim enhancements
focused on increasing operating efficiencies.
Property policy retention was 88% in 2016, among
the strongest in the industry.
Retirement products
Annuity profitability was a bright spot in 2016 due
to strong investment portfolio performance, despite
a persistently challenging interest rate environment.
Total annuity assets under management rose 7% to
$6.4 billion. Our value proposition is strong, as our
products are designed to meet the unique retirement
savings needs of educators, and sales momentum
remained solid. Net income increased 17% to
$50.7 million.
0.55
Life insurance
Sales climbed over 40%, making 2016 the fifth
consecutive year of strong sales in this segment. Life
segment net income grew 11% to $16.6 million in
2016, driven by higher investment income and lower
mortality expenses.
Financial strength
A.M. Best upgraded the financial strength rating of
Horace Mann Insurance Company and its Property/
Casualty insurance affiliates to A (Excellent).
Book value per diluted share excluding investment
fair value adjustments increased 3.5% to $27.79 at
December 31, 2016 ($32.15 on a reported basis, an
increase of 3.1%).
Horace Mann raised its dividend for the eighth
consecutive year and returned $65.8 million to
shareholders in 2016 through dividends and
share repurchases.
Strong five-year shareholder returns
Since the beginning of 2011, Horace Mann stock
achieved a total shareholder return of 257%, better
than both the S&P 500 Insurance Index (at 126%)
and S&P 500 Index (at 97%). Book value, including
accumulated dividends, has grown by more than
10% annually over this period.
Book Value Plus
Accumulated Dividends
4.31
3.25
2.25
1.33
18.55
19.79
21.93
23.83
25.38
26.86
27.79
2011
2012
2013
2014
2015
2016
BVPS
Accumulated Dividend
1 Book value per diluted share excluding investment fair value adjustments
Horace Mann 2016 Annual Report
5
While last year was full of achievements, our company began 2017 with a difficult loss. Executive Vice
President and Chief Financial Officer Dwayne D. Hallman passed away unexpectedly in February. We are
greatly saddened by his passing and will deeply miss his sense of humor, thoughtful leadership and ability to
inspire excellence in everyone around him.
Looking to the future
Building on the team’s hard work over the past three years, I continue to see many opportunities for Horace
Mann to accelerate profitable growth and create long-term shareholder value. We’re focused on attracting,
cross-selling and retaining more educator customers. We know educators. We know their protection and
financial security needs. And Horace Mann has the right products for each stage of an educator’s life and is
continuing to build distribution and infrastructure to serve them better. I’m confident that Horace Mann is well
on the way to fulfill our vision: to be the company of choice to help all educators protect what they have today
and prepare for a successful tomorrow.
I thank you for your investment in Horace Mann and look forward to updating you on the company’s progress
in the months and years to come.
Sincerely,
Marita Zuraitis
President & Chief Executive Officer
Lincoln Magnet School
students show their
robotics project to
Horace Mann
President and CEO
Marita Zuraitis.
6
Horace Mann 2016 Annual Report
Filed with the SEC March 1, 2017
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number 1-10890
HORACE MANN EDUCATORS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
37-0911756
(I.R.S. Employer Identification No.)
1 Horace Mann Plaza, Springfield, Illinois 62715-0001
(Address of principal executive offices, including Zip Code)
Registrant's Telephone Number, Including Area Code: 217-789-2500
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $0.001 per share
Name of each exchange on
which registered
New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes X No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Exchange Act. Yes No X
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12
months (or for such shorter period that the registrant was required to submit and post such files). Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark the registrant’s filer status, as such terms are defined in Rule 12b-2 of the Exchange Act.
Large accelerated filer X Accelerated filer Non-accelerated filer Smaller reporting company
Indicate by check mark whether the registrant is a shell company, as defined in Rule 12b-2 of the Act. Yes No X
The aggregate market value of the registrant’s Common Stock held by non-affiliates of the registrant based on the closing
price of the registrant’s Common Stock on the New York Stock Exchange and the shares outstanding on June 30, 2016, was
$1,356.3 million.
As of February 15, 2017, 40,339,323 shares of the registrant’s Common Stock, par value $0.001 per share, were
outstanding, net of 24,672,932 shares of treasury stock.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant’s Proxy Statement for the 2017 Annual Meeting of Shareholders are incorporated by
reference into Part III Items 10, 11, 12, 13 and 14 of Form 10-K as specified in those Items and will be filed with the Securities
and Exchange Commission within 120 days after December 31, 2016.
HORACE MANN EDUCATORS CORPORATION
FORM 10-K
YEAR ENDED DECEMBER 31, 2016
INDEX
Part
Item
Page
I
II
III
IV
1. Business .................................................................................................
Forward-looking Information ...................................................................
Overview and Available Information .......................................................
History ....................................................................................................
Selected Historical Consolidated Financial Data ....................................
Corporate Strategy and Marketing..........................................................
Property and Casualty Segment .............................................................
Retirement Segment ...............................................................................
Life Segment ..........................................................................................
Competition ............................................................................................
Investments ............................................................................................
Cash Flow ..............................................................................................
Regulation ..............................................................................................
Employees ..............................................................................................
1A. Risk Factors ...........................................................................................
1B. Unresolved Staff Comments ...................................................................
2. Properties ...............................................................................................
Legal Proceedings ..................................................................................
3.
4. Mine Safety Disclosures .........................................................................
5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities ..............................
6. Selected Financial Data ..........................................................................
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations ..........................................................................
7A. Quantitative and Qualitative Disclosures About Market Risk ..................
8. Consolidated Financial Statements and Supplementary Data ................
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ...................................................
9A. Controls and Procedures ........................................................................
9B. Other Information ....................................................................................
10. Directors, Executive Officers and Corporate Governance ......................
11. Executive Compensation ........................................................................
12. Security Ownership of Certain Beneficial Owners and Management,
1
1
1
2
3
4
7
12
15
17
18
20
21
22
23
40
40
40
41
41
43
43
43
43
44
44
45
45
45
and Related Stockholder Matters .........................................................
46
13. Certain Relationships and Related Transactions,
and Director Independence ..................................................................
14. Principal Accounting Fees and Services .................................................
15. Exhibits and Financial Statement Schedules ..........................................
46
46
46
Signatures ......................................................................................................
Index to Financial Information.........................................................................
52
F-1
ITEM 1. Business
PART I
Measures within this Annual Report on Form 10-K that are not based on accounting
principles generally accepted in the United States (“non-GAAP”) are marked by an asterisk
(“*”). An explanation of these measures is contained in the Glossary of Selected Terms
included as Exhibit 99.1 to this Annual Report on Form 10-K.
Forward-looking Information
It is important to note that the Company's actual results could differ materially from those
projected in forward-looking statements. Additional information concerning factors that could
cause actual results to differ materially from those in the forward-looking statements is
contained in “Item 1A. Risk Factors” and in “Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Forward-looking Information”.
Overview and Available Information
Horace Mann Educators Corporation (“HMEC”; and together with its subsidiaries, the
“Company” or “Horace Mann”) is an insurance holding company incorporated in Delaware.
Through its subsidiaries, HMEC markets and underwrites personal lines of property and
casualty (primarily personal lines automobile and homeowners) insurance, retirement products
(primarily tax-qualified annuities) and life insurance in the United States of America (“U.S.”).
HMEC's principal insurance subsidiaries are Horace Mann Life Insurance Company (“HMLIC”),
Horace Mann Insurance Company (“HMIC”), Horace Mann Property & Casualty Insurance
Company (“HMPCIC”) and Teachers Insurance Company (“TIC”), each of which is an Illinois
corporation, and Horace Mann Lloyds (“HM Lloyds”), an insurance company domiciled in
Texas.
Founded by Educators for Educators®, the Company markets its products primarily to K-
12 teachers, administrators and other employees of public schools and their families. The
Company's nearly one million customers typically have moderate annual incomes, with many
belonging to two-income households. Their financial planning tends to focus on retirement,
security, savings and primary insurance needs. Management believes that Horace Mann is
the largest national multiline insurance company focused on the nation's educators as its
primary market.
Horace Mann markets and services its products primarily through a dedicated sales
force of full-time agents supported by the Company’s Customer Contact Center. These agents
sell Horace Mann's products and limited additional third-party vendor products. Some of these
agents are former educators or individuals with close ties to the educational community who
utilize their contacts within, and knowledge of, the target market. This dedicated agent sales
force is supplemented by an independent agent distribution channel for the Company’s
retirement products.
1
The Company's insurance premiums written and contract deposits for the year ended
December 31, 2016 were $1.3 billion and net income was $83.8 million. The Company's total
assets were $10.6 billion at December 31, 2016. The Company's investment portfolio had an
aggregate fair value of $8.0 billion at December 31, 2016 and consisted principally of
investment grade, publicly traded fixed maturity securities.
The Company conducts and manages its business through four segments. The three
operating segments, representing the major lines of insurance business, are: Property and
Casualty insurance, Retirement products, and Life insurance. The Company does not allocate
the impact of corporate-level transactions to the insurance segments, consistent with the basis
for management’s evaluation of the results of those segments, but classifies those items in the
fourth segment, Corporate and Other. The Property and Casualty, Retirement, and Life
segments accounted for 50%, 41% and 9%, respectively, of the Company's insurance
premiums written and contract deposits for the year ended December 31, 2016.
The Company is one of the largest participants in the K-12 portion of the 403(b) tax-
qualified annuity market, measured by 403(b) net written premium on a statutory accounting
basis. The Company's 403(b) tax-qualified annuities are voluntarily purchased by individuals
employed by public school systems or other tax-exempt organizations through the employee
benefit plans of those entities. The Company has 403(b) payroll deduction capabilities utilized
by approximately one-third of the 13,500 public school districts in the U.S.
The Company's annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, proxy statements, and all amendments to those reports are available free
Internet website,
of charge
www.horacemann.com, as soon as reasonably practicable after such reports are electronically
filed with, or furnished to, the Securities and Exchange Commission (“SEC”). The EDGAR
filings of such reports are also available at the SEC's website, www.sec.gov.
Investors section of
the Company's
through
the
Also available in the Investors section of the Company’s website are its corporate
governance principles, code of conduct and code of ethics as well as the charters of the
Board’s Audit Committee, Compensation Committee, Executive Committee, Investment and
Finance Committee, and Nominating and Governance Committee.
On June 22, 2016, the Chief Executive Officer (“CEO”) of HMEC timely submitted the
Annual Section 12(a) CEO Certification to the New York Stock Exchange (“NYSE”) without any
qualifications. The Company filed with the SEC, as exhibits to the Annual Report on Form 10-
K for the year ended December 31, 2015, the CEO and Chief Financial Officer (“CFO”)
certifications required under Section 302 of the Sarbanes-Oxley Act.
History
The Company's business was founded in Springfield, Illinois in 1945 by two school
teachers to sell automobile insurance to other teachers within the State of Illinois. The
Company expanded its business to other states and broadened its product line to include life
insurance in 1949, 403(b) tax-qualified retirement annuities in 1961 and homeowners
insurance in 1965. In November 1991, HMEC completed an initial public offering of its
common stock (the “IPO”). The common stock is traded on the New York Stock Exchange
under the symbol “HMN”.
2
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following consolidated statement of operations and balance sheet data have been
derived from the consolidated financial statements of the Company, which have been prepared
in accordance with U.S. generally accepted accounting principles (“GAAP”). The consolidated
financial statements of the Company for each of the years in the five year period ended
December 31, 2016 have been audited by KPMG LLP, an independent registered public
accounting firm. The following selected historical consolidated financial data should be read in
conjunction with the consolidated financial statements of HMEC and its subsidiaries and
“Management's Discussion and Analysis of Financial Condition and Results of Operations”.
Year Ended December 31,
2012
2014
2016
(Dollars in millions, except per share data)
2013
2015
Statement of Operations Data:
Insurance premiums and contract charges earned ......................... $ 759.1
361.2
Net investment income ..................................................................
4.1
Net realized investment gains ........................................................
1,128.9
Total revenues ..............................................................................
11.8
Interest expense ............................................................................
114.2
Income before income taxes ..........................................................
83.8
Net income ....................................................................................
1.6x
Ratio of earnings to fixed charges (1) ............................................
$ 731.9
332.6
12.7
1,080.4
13.1
129.5
93.5
1.7x
$ 715.8
329.8
10.9
1,060.7
14.2
146.1
104.2
$ 690.9
313.6
22.2
1,031.2
14.2
154.1
110.9
$ 670.5
306.0
27.3
1,010.8
14.2
149.2
103.9
1.8x
1.8x
1.8x
Per Share Data (2):
Net income per share
Basic ......................................................................................... $ 2.04
Diluted ...................................................................................... $ 2.02
$ 2.23
$ 2.20
Shares of Common Stock (in millions)
Weighted average - basic ..........................................................
Weighted average - diluted ........................................................
Ending outstanding ...................................................................
41.2
41.5
40.2
Cash dividends per share .............................................................. $ 1.06
Book value per share..................................................................... $ 32.15
Balance Sheet Data, at Year End:
Total investments .......................................................................... $ 7,999.3
10,576.8
Total assets ...................................................................................
Total policy liabilities ......................................................................
6,024.1
Short-term debt .............................................................................
Long-term debt ..............................................................................
Total shareholders’ equity ..............................................................
-
247.2
1,294.0
41.9
42.4
40.6
$ 1.00
$ 31.18
$ 7,648.0
10,057.0
5,683.4
-
247.0
1,264.7
Segment Information (3):
Insurance premiums written and contract deposits
Property and Casualty ............................................................... $ 634.3
520.2
Retirement ................................................................................
108.0
Life ............................................................................................
1,262.5
Total .....................................................................................
$ 605.8
548.0
102.7
1,256.5
Net income (loss)
Property and Casualty ...............................................................
Retirement ................................................................................
Life ............................................................................................
Corporate and Other (4) ............................................................
Total .....................................................................................
25.6
50.7
16.6
(9.1)
83.8
40.0
43.4
15.0
(4.9)
93.5
$ 2.50
$ 2.47
41.6
42.2
40.9
$ 0.92
$ 32.65
$7,403.5
9,768.4
5,351.5
38.0
199.8
1,336.5
$ 584.4
480.6
102.7
1,167.7
46.9
45.3
17.5
(5.5)
104.2
$ 2.75
$ 2.66
$ 2.63
$ 2.51
40.4
41.6
40.5
$ 0.78
$ 27.14
39.5
41.4
39.4
$ 0.55
$ 31.65
$6,539.5
8,826.3
5,029.2
38.0
199.5
1,099.3
$ 570.4
423.0
100.8
1,094.2
44.4
44.7
20.4
1.4
110.9
$6,292.1
8,167.2
4,736.7
38.0
199.3
1,245.8
$ 550.8
417.6
99.3
1,067.7
37.1
40.5
21.9
4.4
103.9
(1)
(2)
(3)
(4)
For the purpose of determining the ratio of earnings to fixed charges, “earnings” consist of income before income taxes and fixed charges, and
“fixed charges” consist of interest expense (including amortization of debt issuance cost) and interest credited to policyholders on investment
contracts and life insurance products with account values.
Basic earnings per share is computed based on the weighted average number of shares outstanding plus the weighted average number of fully
vested restricted stock units and common stock units payable as shares of HMEC common stock. Diluted earnings per share is computed based
on the weighted average number of shares and common stock equivalents outstanding, to the extent dilutive. The Company's common stock
equivalents relate to outstanding common stock options, common stock units (related to deferred compensation for Directors and employees)
and restricted stock units.
Information regarding assets by segment at December 31, 2016, 2015 and 2014 is contained in “Notes to Consolidated Financial Statements --
Note 14 -- Segment Information” listed on page F-1 of this report.
The Corporate and Other segment primarily includes interest expense on debt, the impact of net realized investment gains and losses, corporate
debt retirement costs, and certain public company expenses.
3
Corporate Strategy and Marketing
The Horace Mann Value Proposition
The Horace Mann Value Proposition articulates the Company's overarching strategy and
business purpose: Provide lifelong financial well-being for educators and their families through
personalized service, advice, and a full range of tailored insurance and financial products.
Target Market
Management believes that Horace Mann is the largest national multiline insurance
company focused on the nation's educators as its primary market. The Company's target
market consists primarily of K-12 teachers, administrators and other employees of public
schools and their families located throughout the U.S. The U.S. Department of Education
estimates that there are approximately 6.2 million teachers, school administrators and
education support personnel in public schools in the U.S.; approximately 3.1 million of these
individuals are elementary and secondary teachers.
Distribution Strategy
In addition to the Company’s traditional exclusive agency force, Horace Mann continues
to build complementary distribution channels (i.e., on-line quoting, direct sales channel, and
institutional business to business). These various channels allow customers to access Horace
Mann how they choose. The Company believes that its customers will need expert advice at
the point of sale at some point in their lifetime, and they will choose the advice of a trusted
advisor.
Dedicated Agency Force
A cornerstone of Horace Mann’s marketing strategy is its dedicated sales force of
agents, supported by the Company’s Customer Contact Center. As of December 31, 2016,
the Company had a combined total of 666 Exclusive Agencies and Employee Agents.
Approximately 72% of the appointed agents are licensed by the Financial Industry Regulatory
Authority, Inc. (“FINRA”) to sell variable annuities and variable universal life policies. Some
individuals in the agency force were previously teachers, other members of the education
profession or persons with close ties to the educational community. The Company’s dedicated
agents are under contract to market only the Company's products and limited additional third-
party vendor products. Collectively, the Company's principal insurance subsidiaries are
licensed to write business in 49 states and the District of Columbia.
The Company’s dedicated agency force operates in its Agency Business Model (“ABM”),
consisting of Exclusive Agencies as well as a limited number of Employee Agents. The
Company’s Exclusive Agent (“EA”) agreement is designed to place agents in the position to
become business owners in their marketing territories and invest their own capital to grow their
agencies. Exclusive Agents are non-employee, independent contractors. The Company
provides ongoing training and support to agents regarding the Company’s products, as well as
to further embed repeatable processes and fully maximize the potential of ABM.
4
Broadening Distribution Options
To complement and extend the reach of the Company’s agency force and to more fully
utilize its approved payroll slots in school systems across the country, the Company utilizes a
network of independent agents to distribute the Company's 403(b) tax-qualified annuity
products. In addition to serving educators in areas where the Company does not have
dedicated agents, the independent agents complement the annuity capabilities of the
Company's agency force in under-penetrated areas. At December 31, 2016, there were 272
independent agents approved to market the Company’s annuity products throughout the U.S.
During 2016, collected contract deposits from this distribution channel were approximately $46
million. Combined with business from the Company’s dedicated agency force, total annuity
collected contract deposits were $520.2 million for the year ended December 31, 2016.
Geographic Composition of Business
The Company's business is geographically diversified. For the year ended December
31, 2016, based on direct premiums and contract deposits for all product lines, the top five
states and their portion of total direct insurance premiums and contract deposits were
California, 8.1%; Texas, 6.7%; North Carolina, 6.4%; Florida, 6.3%; and Minnesota, 5.7%.
HMEC's Property and Casualty subsidiaries are licensed to write business in 48 states
and the District of Columbia. The following table shows the Company's top ten Property and
Casualty states based on total direct premiums.
Property and Casualty Segment Top Ten States
(Dollars in millions)
Property and Casualty
Segment
2016 Direct
Premiums (1)
Percent
of Total
State
California .........................................................................................
Texas...............................................................................................
North Carolina .................................................................................
Minnesota ........................................................................................
Florida .............................................................................................
South Carolina .................................................................................
Louisiana .........................................................................................
Georgia............................................................................................
Pennsylvania ...................................................................................
Maine...............................................................................................
Total of top ten states ..................................................................
All other areas .................................................................................
Total direct premiums ..................................................................
$ 67.9
46.5
44.5
39.3
37.1
32.5
30.1
25.5
21.6
16.8
361.8
267.7
$629.5
10.8%
7.4
7.1
6.2
5.9
5.2
4.8
4.0
3.4
2.7
57.5
42.5
100.0%
(1) Defined as earned premiums before reinsurance as determined under statutory accounting principles.
5
HMEC's principal Life insurance subsidiary is licensed to write business in 48 states and
the District of Columbia. The following table shows the Company's top ten combined Life and
Retirement states based on total direct premiums and contract deposits.
Combined Life and Retirement Segments Top Ten States
(Dollars in millions)
2016 Direct
Premiums and
Contract Deposits (1)
Percent
of Total
State
Illinois ................................................................................................
Florida ...............................................................................................
Pennsylvania .....................................................................................
Texas.................................................................................................
North Carolina ...................................................................................
California ...........................................................................................
Minnesota ..........................................................................................
South Carolina ...................................................................................
Virginia ..............................................................................................
Indiana...............................................................................................
Total of top ten states ....................................................................
All other areas ...................................................................................
Total direct premiums ....................................................................
$ 47.8
42.8
41.4
37.4
36.2
34.0
33.1
33.0
28.2
26.5
360.4
272.7
$633.1
7.6%
6.8
6.5
5.9
5.7
5.4
5.2
5.2
4.4
4.2
56.9
43.1
100.0%
(1) Defined as collected premiums before reinsurance as determined under statutory accounting principles.
National, State and Local Education Associations
The Company has established relationships with a number of educator groups
throughout the U.S. These groups include the National Education Association (“NEA”); The
NEA Foundation; the Association of School Business Officials International (“ASBO”); and
various school administrator and principal associations such as the American Association of
School Administrators (“AASA”), The School Superintendents Association; the National
Association of Elementary School Principals (“NAESP”); and the National Association of
Secondary School Principals (“NASSP”). The Company does not pay these groups any
consideration in exchange for endorsement of the Company or its products. Depending on the
organization, the Company does pay for certain special functions and advertising.
In recent years, the Company has developed relationships and programs to align its
agents with school districts in a business to business relationship. In addition to working
relationships, Horace Mann has strategic alliances with AASA and ASBO, as well as ASBO’s
state and regional affiliates. The Company holds an annual meeting with selected ASBO
members to gain feedback on a variety of school district programs.
The Company has had its longest relationship with the NEA, the nation's largest
confederation of state and local teachers' associations, and many of the state and local
education associations affiliated with the NEA. The NEA has approximately 3.2 million
members. A number of state and local associations affiliated with the NEA endorse various
insurance products and services of the Company and its competitors. The Company does not
pay the NEA or any affiliated associations any consideration in exchange for endorsement of
Company products. The Company does pay for marketing agreements, certain special
functions and advertising.
6
Support of Educator Programs
The Company’s agents conduct state-specific State Teacher Retirement System
Workshops in addition to Financial Success Workshops designed to help educators gain or
increase their financial literacy. In addition, the Company offers services and products to
school districts that help meet the needs of educators including payroll deduction options for
individual insurance products, group life insurance and Section 125 programs. To help
districts determine what programs meet their needs, the Company has developed an Employer
Benefit Review Service and conducts workshops for school business officials.
Along with differentiating, value-added product features, the Company has a number of
programs that demonstrate its commitment to the educator profession, while also further
distinguishing Horace Mann from competitors within the K-12 educator market. Examples of
these programs include: the NEA Foundation’s Horace Mann Awards for Teaching Excellence
honoring 5 national finalists; Horace Mann is a national sponsor of DonorsChoose.org, an
online, not-for-profit organization that connects corporate and individual donors to teachers
with classroom projects in need of funding; Horace Mann sponsors ASBO’s Certified
Administrator of School Finance and Operations® (“SFO®”) certification program; and Horace
Mann is a sponsor of the AASA National Superintendent Certification Program and AASA’s
National Conference on Education.
Property and Casualty Segment
The Property and Casualty segment represented 50% of the Company's consolidated
insurance premiums written and contract deposits in 2016.
The primary Property and Casualty product offered by the Company is private passenger
automobile insurance, which in 2016 represented 34% of the Company’s total insurance
premiums written and contract deposits and 67% of Property and Casualty net written
premiums. As of December 31, 2016, the Company had approximately 485,000 automobile
policies in force. The Company's automobile business is primarily preferred risk, defined as a
household whose drivers have had no recent accidents and no more than one recent moving
violation.
In 2016, homeowners insurance represented 16% of the Company’s total insurance
premiums written and contract deposits and 32% of Property and Casualty net written
premiums. As of December 31, 2016, the Company had approximately 220,000 homeowners
policies in force. The Company insures primarily residential homes.
The Company has programs in a majority of states to provide higher-risk automobile and
homeowners coverages, as well as a number of other insurance coverages, with third-party
vendors underwriting and bearing the risk of such insurance and the Company receiving
commissions on the sales. Similarly, the Company has increased its offering of third-party
vendor products in many areas to include coverage for small business owners and
classic/collector automobile owners to meet those aspects of an educator’s needs.
7
Selected Historical Financial Information for the Property and Casualty Segment
The following table provides certain financial information for the Property and Casualty
segment for the periods indicated.
Property and Casualty Segment
Selected Historical Financial Information
(Dollars in millions)
Year Ended December 31,
2014
2015
2016
Financial Data:
Insurance premiums written ..................................................................
Insurance premiums earned .................................................................
Net investment income .........................................................................
Income before income taxes .................................................................
Net income ...........................................................................................
Catastrophe costs, pretax (1) ...............................................................
$634.3
620.5
39.0
30.3
25.6
60.0
Operating Statistics:
Loss and loss adjustment expense ratio ...............................................
Expense ratio ........................................................................................
Combined loss and expense ratio.........................................................
Effect of catastrophe costs on the combined ratio (1) ...........................
74.8%
26.7%
101.5%
9.7%
Automobile and Homeowners:
Insurance premiums written
Automobile ........................................................................................
Homeowners .....................................................................................
$425.9
208.2
Insurance premiums earned
Automobile ........................................................................................
Homeowners .....................................................................................
414.3
206.0
Policies in force (in thousands)
Automobile ........................................................................................
Homeowners .....................................................................................
Total ..............................................................................................
485
220
705
$605.8
596.0
33.5
51.3
40.0
44.4
70.5%
26.5%
97.0%
7.4%
$402.2
203.4
393.6
202.2
487
224
711
$584.4
581.8
36.8
60.8
46.9
37.5
68.7%
27.4%
96.1%
6.5%
$383.8
200.4
381.4
200.2
481
229
710
(1) These measures are used by the Company's management to evaluate performance against historical results and
establish targets on a consolidated basis. These measures are components of net income but are considered non-
GAAP financial measures under applicable SEC rules because they are not displayed as separate line items in the
Consolidated Statements of Operations and there is inclusion or exclusion of certain items not ordinarily included or
excluded in a GAAP financial measure. In the opinion of the Company's management, a discussion of these measures
is meaningful to provide investors with an understanding of the significant factors that comprise the Company's periodic
results of operations.
Catastrophe costs - The sum of catastrophe losses and Property and Casualty catastrophe reinsurance reinstatement
premiums.
Catastrophe losses - In categorizing Property and Casualty claims as being from a catastrophe, the Company utilizes
the designations of the Property Claim Services, a subsidiary of Insurance Services Office, Inc. (“ISO”), and
additionally beginning in 2007, includes losses from all such events that meet the definition of covered loss in the
Company’s primary catastrophe excess of loss reinsurance contract, and reports loss and loss adjustment expense
amounts net of reinsurance recoverables. A catastrophe is a severe loss resulting from natural and man-made events
within a particular territory, including risks such as hurricane, fire, earthquake, windstorm, explosion, terrorism and
other similar events, that causes $25 million or more in insured Property and Casualty losses for the industry and
affects a significant number of Property and Casualty insurers and policyholders. Each catastrophe has unique
characteristics. Catastrophes are not predictable as to timing or amount of loss in advance. Their effects are not
included in earnings or claim and claim adjustment expense reserves prior to occurrence. In the opinion of the
Company's management, a discussion of the impact of catastrophes is meaningful for investors to understand the
variability in periodic earnings.
8
Catastrophe Costs
The level of catastrophe costs can fluctuate significantly from year to year. Catastrophe
costs before federal income tax benefits for the Company for the last ten years are shown in
the following table.
Catastrophe Costs
(Dollars in millions)
Year Ended December 31,
2016 .................................................................................................................................
2015 .................................................................................................................................
2014 .................................................................................................................................
2013 .................................................................................................................................
2012 .................................................................................................................................
2011 .................................................................................................................................
2010 .................................................................................................................................
2009 .................................................................................................................................
2008 .................................................................................................................................
2007 .................................................................................................................................
The
Company (1)
$60.0
44.4
37.5
40.2
43.3
86.0
49.2
33.1
73.9
23.6
(1) Net of reinsurance and before federal income tax benefits. Includes allocated loss adjustment expenses and
reinsurance reinstatement premiums; excludes unallocated loss adjustment expenses. The Company's individually
significant catastrophe losses net of reinsurance were as follows:
2016 - Wind/hail event in March was $3.9 million; wind/hail event in April was $9.2 million; wind/hail/tornado event in
May was $3.4 million; Hurricane Matthew was $10.0 million; other weather events throughout the year were
each less than $3.0 million.
2015 - Winter storm in February was $8.9 million; wind/flooding event in October was $3.0 million; other weather events
throughout the year were each less than $3.0 million.
2014 - Wind/hail event in May was $8.5 million; other weather events throughout the year were each less than $3.0
million.
2013 - Wind/hail/tornado events in May, June and August were $10.1 million, $4.0 million and $7.9 million, respectively;
winter storm events in February and April were $3.7 million and $3.4 million, respectively.
2012 - Wind/hail/tornado events in March, April, May and June were $6.6 million, $6.6 million, $5.8 million and $11.9
million, respectively; June tropical storm and wildfire events, $1.4 million combined; $4.0 million, Hurricane Isaac;
$2.8 million, Hurricane/Superstorm Sandy.
2011 - Wind/hail/tornado events in April, May and June were $28.0 million, $17.6 million and $8.5 million, respectively;
$8.0 million, Hurricane Irene.
2010 - Wind/hail/tornado events in March, May, June, July and October were $4.8 million, $8.3 million, $12.1 million,
$5.5 million and $7.7 million, respectively.
2009 - $9.3 million, July wind/hail/tornadoes; $6.3 million, June wind/hail/tornadoes.
2008 - $16.5 million, Hurricane Gustav; $15.5 million, Hurricane Ike; $9.8 million, May wind/hail/tornadoes; $7.0 million,
June wind/hail/tornadoes; $3.0 million, December winter storm.
2007 - $4.7 million, August wind/hail/tornadoes; $4.5 million, October California wildfires; $3.5 million, June
wind/hail/tornadoes.
9
Fluctuations from year to year in the level of catastrophe losses impact a property and
casualty insurance company’s claims and claim adjustment expenses incurred and paid. For
comparison purposes, the following table provides amounts for the Company excluding
catastrophe losses.
Impact of Catastrophe Losses
(Dollars in millions)
Claims and claim expenses incurred (1) ..................................................
Deduct: amount attributable to catastrophes (2) ......................................
Excluding catastrophes (1) ...................................................................
Claims and claim expense payments .......................................................
Deduct: amount attributable to catastrophes (2) ......................................
Excluding catastrophes .........................................................................
Year Ended December 31,
2014
2015
2016
$464.1
60.0
$404.1
$468.8
62.0
$406.8
$420.3
44.4
$375.9
$436.4
44.6
$391.8
$399.5
37.5
$362.0
$393.8
38.2
$355.6
Includes the impact of development of prior years’ reserves as quantified in “Property and Casualty Reserves”.
(1)
(2) Net of reinsurance and before federal income tax benefits. Includes allocated loss adjustment expenses; excludes
unallocated loss adjustment expenses.
Property and Casualty Reserves
Property and Casualty unpaid claims and claim expenses (“loss reserves”) represent
management’s estimate of ultimate unpaid costs of losses and settlement expenses for claims
that have been reported and claims that have been incurred but not yet reported. The
Company calculates and records a single best estimate of the reserve as of each balance
sheet date in conformity with generally accepted actuarial standards. For additional
information regarding the process used to estimate Property and Casualty reserves and the
risk factors involved, as well as a summary reconciliation of the beginning and ending Property
and Casualty insurance claims and claim expense reserves and reserve development
recorded in each of the three years ended December 31, 2016, see “Notes to Consolidated
Financial Statements -- Note 5 -- Property and Casualty Unpaid Claims and Claim Expenses”,
“Management’s Discussion and Analysis of Financial Condition and Results of Operations --
Critical Accounting Policies -- Liabilities for Property and Casualty Claims and Claim
Expenses” and “Management’s Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations for the Three Years Ended December 31, 2016 -- Benefits,
Claims and Settlement Expenses”.
All of the Company's reserves for Property and Casualty unpaid claims and claim
expenses are carried at the full value of estimated liabilities and are not discounted for interest
expected to be earned on reserves. Due to the nature of the Company's personal lines
business, the Company has no exposure to losses related to claims for toxic waste cleanup,
other environmental remediation or asbestos-related illnesses other than claims under
homeowners insurance policies for environmentally related items such as mold.
10
Property and Casualty Reinsurance
All reinsurance is obtained through contracts which generally are entered into for each
calendar year. Although reinsurance does not legally discharge the Company from primary
liability for the full amount of its policies, it does allow for recovery from assuming reinsurers to
the extent of the reinsurance ceded. Past due reinsurance recoverables as of December 31,
2016 were not material.
The Company maintains catastrophe excess of loss reinsurance coverage. For 2016,
the Company’s catastrophe excess of loss coverage consisted of one contract in addition to a
minimal amount of coverage by the Florida Hurricane Catastrophe Fund (“FHCF”). The
catastrophe excess of loss contract provided 95% coverage for catastrophe losses above a
retention of $25.0 million per occurrence up to $175.0 million per occurrence. This contract
consisted of three layers, each of which provided for one mandatory reinstatement. The layers
were $25.0 million excess of $25.0 million, $40.0 million excess of $50.0 million and $85.0
million excess of $90.0 million.
For 2017, the Company’s catastrophe excess of loss coverage consists of one contract
in addition to a minimal amount of coverage by the FHCF. The catastrophe excess of loss
contract provides 95% coverage for catastrophe losses above a retention of $25 million per
occurrence up to $90 million per occurrence and 100% coverage for catastrophe losses above
$90 million per occurrence up to $175 million per occurrence. This contract consists of three
layers, each of which provide for one mandatory reinstatement. The layers are $25 million
excess of $25 million, $40 million excess of $50 million and $85 million excess of $90 million.
The Company has not joined the California Earthquake Authority (“CEA”). The
Company's exposure to losses from earthquakes is managed through its underwriting
standards, its earthquake policy coverage limits and deductible levels, and the geographic
distribution of its business, as well as its reinsurance program. After reviewing the exposure to
earthquake losses from the Company’s own policies and from what it would be with
participation in the CEA, including estimated start-up and ongoing costs related to CEA
participation, management believes it is in the Company's best economic interest to offer
earthquake coverage directly to its homeowners policyholders.
For liability coverages, in 2016 the Company reinsured each loss above a retention of
$0.9 million up to $5.0 million on a per occurrence basis and $20.0 million in a clash event. (A
clash cover is a reinsurance casualty excess contract requiring two or more casualty
coverages or policies issued by the Company to be involved in the same loss occurrence for
coverage to apply.) Effective January 1, 2017, for liability coverages the retention is $1.0
million with coverage up to $5.0 million on a per occurrence basis and $20.0 million in a clash
event.
For property coverages, in 2016 the Company reinsured each loss above a retention of
$0.9 million up to $5.0 million on a per risk basis, including catastrophe losses. Also, the
Company could submit to the reinsurers two per risk losses from the same occurrence for a
total of $8.2 million of property recovery in any one event. Retention for property coverage in
2017 is $1.0 million, with coverage up to $5.0 million on a per risk basis, including catastrophe
losses and the Company can submit to the reinsurers two per risk losses from the same
occurrence for a total of $8.0 million of property recovery in any one event.
11
The following table identifies the Company's most significant reinsurers under the
catastrophe first event excess of loss reinsurance program, their percentage participation in
this program and their ratings by A.M. Best Company (“A.M. Best”) and Standard & Poor's
Corporation (“S&P” or “Standard & Poor's”) as of January 1, 2017. No other single reinsurer's
percentage participation in 2017 or 2016 exceeds 5%.
Property Catastrophe First Event Excess of Loss
Reinsurance Participants In Excess of 5%
A.M. Best
Rating
S&P
Rating
Reinsurer
Parent
A
A+
NR
A
A++
A+
AA-
AA-
AA-
A+
Lloyd’s of London Syndicates
Swiss Re Underwriters Agency, Inc
R+V Versicherung AG
SCOR Global P&C SE
Tokio Millennium Re AG
Swiss Re Ltd
DZ BANK AG
SCOR SE
Tokio Marine Holdings, Inc.
NR - Not rated.
Participation
2016
2017
33%
10%
8%
7%
2%
27%
10%
7%
7%
5%
For 2017 and 2016, property catastrophe reinsurers representing 92% and 93%,
respectively, of the Company’s total reinsured catastrophe coverage were rated “A-
(Excellent)” or above by A.M. Best with the remaining percentages provided by a reinsurer
rated “AA-” by S&P but not formally followed by A.M. Best.
Retirement Segment
Effective December 31, 2016, the Company changed the name of its Annuity segment to
Retirement. The name change better aligns our external reports with internally used
terminology. This name change does not affect any previously reported results for the
Retirement segment.
Educators in the Company's target market continue to benefit from the provisions of
Section 403(b) of the Internal Revenue Code (the “Code”) which began in 1961. This section
of the Code allows public school employees and employees of other tax-exempt organizations,
such as not-for-profit private schools, to utilize pretax income to make periodic contributions to
a qualified retirement plan. (Also see “Regulation -- Regulation at Federal Level”.) The
Company entered the educators retirement annuity market in 1961 and is one of the largest
participants in the K-12 portion of the 403(b) tax-qualified annuity market, measured by 403(b)
net written premium on a statutory accounting basis. The Company has 403(b) payroll
deduction capabilities utilized by approximately one-third of the 13,500 public school districts in
the U.S. Approximately 49% of the Company's new annuity contract deposits in 2016 were for
403(b) tax-qualified annuities; approximately 60% of accumulated annuity value on deposit is
403(b) tax-qualified. In 2016, annuities represented 41% of the Company’s consolidated
insurance premiums written and contract deposits.
The Company markets both fixed and variable annuity contracts, primarily on a tax-
qualified basis. Fixed only annuities provide a guarantee of principal and a guaranteed
minimum rate of return. These contracts are backed by the Company’s general account
investments. The Company bears the investment risk associated with the investments and
may change the declared interest rate on these contracts subject to contract guarantees. In
2014, the Company began offering fixed indexed annuity (“FIA”) products with interest
crediting strategies linked to the Standard & Poor’s 500 Index and the Dow Jones Industrial
Average. These products are fixed annuities with a guaranteed minimum interest rate, as
12
described above, plus a contingent return based on equity market performance. The
Company purchases call options on the applicable indices as an investment to provide the
income needed to fund the annual index credits on the indexed products.
Variable annuities combine a fixed account option with equity- and bond-linked sub-
account options. In general, the contractholders bear the investment risk related to the
variable annuity sub-accounts and may change their allocation between the guaranteed
interest rate fixed account and the wide range of variable investment options at any time. By
utilizing tools that provide assistance in determining needs and making asset allocation
decisions, contractholders are able to choose the investment mix that matches their personal
risk tolerance and retirement goals. The Company’s sub-account options also include both
lifecycle funds and asset allocation funds. These all-purpose funds have assets allocated
among multiple investment classes within each fund based on a specific targeted retirement
date or risk tolerance.
Variable annuity contracts with a guaranteed minimum death benefit (“GMDB”) provide
an additional benefit if the contractholder dies and the contract value is less than a
contractually defined amount. The Company has a relatively low exposure to GMDB risk
because approximately 32% of contract values have no guarantee; approximately 62% have
only a return of premium guarantee; and only approximately 6% have a guarantee of premium
roll-up at an annual rate of 3% or 5%.
As of December 31, 2016, the Company had 80 variable sub-account options including
funds managed by some of the best-known names in the mutual fund industry, such as
AllianceBernstein, American Funds, Ariel, BlackRock, Calvert, Davis, Dreyfus, Fidelity,
Franklin Templeton, Goldman Sachs, JPMorgan, Lord Abbett, MFS, Neuberger Berman,
Putnam, T. Rowe Price, Vanguard, Wells Fargo and Wilshire, offering the Company's
customers multiple investment options to address their personal investment objectives and risk
tolerance. These funds have been selected with the assistance of Wilshire Associates, the
Company’s fund advisor, which provides oversight and input to fund manager additions and
replacements. Total accumulated fixed and variable annuity cash value on deposit at
December 31, 2016 was $6.4 billion.
Among the Company’s annuity products, the Goal Planning Annuity offers educators a
variable annuity with the Company’s wide array of sub-account investment choices. It includes
an optional first year premium bonus and two optional riders that enhance the death benefit
feature of the product. Another product, Expanding Horizon, is a fixed interest rate annuity
contract for investors who do not want investment risk exposure. This product offers educators
a competitive rate of interest on their retirement dollars and a choice of bonuses to optimize
their benefits at retirement. The Destination Fixed Indexed Annuity product is designed to
have potentially greater credited interest rates over the long term than traditional fixed rate
annuities, because the credited interest rate will be linked to changes in an index, either the
S&P 500 or the Dow Jones Industrial Average.
In addition to individual annuities, the Company offers group variable and fixed annuity
products that allow flexibility in customizing 403(b) annuity programs to meet the needs of
school districts.
13
To assist agents in delivering the Horace Mann Value Proposition, the Company has
entered into third-party vendor agreements with American Funds Distributors, Inc. and Fidelity
Distributors Corporation to market their retail mutual funds and with Raymond James
Financial, Inc. to market their mutual fund brokerage accounts. In addition to retail mutual fund
accounts, the Company’s agents can offer a 529 college savings program and Coverdell
Education Savings Accounts utilizing certain funds. The Company also markets 403(b)(7) tax-
deferred mutual fund investment programs and a minimal amount of fixed indexed annuities
through additional third-party vendor agreements. Third-party vendors underwrite these
accounts or contracts and the Company receives commissions on the sales of these products.
Selected Historical Financial Information for the Retirement Segment
The following table provides certain information for the Retirement segment for the
periods indicated.
Retirement Segment
Selected Historical Financial Information
(Dollars in millions, unless otherwise indicated)
Year Ended December 31,
2014
2015
2016
Financial Data:
Contract deposits
Variable .............................................................................................
Fixed .................................................................................................
Total .......................................................................................
Contract charges earned ......................................................................
Net investment income .........................................................................
Net interest margin (without net realized investment
$ 163.6
356.6
520.2
24.9
249.4
gains and losses) ..............................................................................
Income before income taxes .................................................................
Net income ...........................................................................................
102.1
71.0
$ 50.7
$ 174.9
373.1
548.0
25.4
228.4
89.7
63.3
$ 43.4
$ 140.6
340.0
480.6
25.6
222.1
89.6
66.7
$ 45.3
Operating Statistics:
Fixed
Accumulated value ............................................................................
Accumulated value persistency .........................................................
$ 4,503.1
$ 4,197.0
$ 3,885.1
94.6%
94.8%
94.5%
Variable
Accumulated value ............................................................................
Accumulated value persistency .........................................................
Number of contracts in force .................................................................
219,105
Average accumulated value (in dollars) ................................................ $ 29,333
Average annual deposit by contractholders (in dollars) ........................ $ 2,412
Annuity contracts terminated due to surrender, death,
$ 1,923.9
94.7%
$ 1,800.7
$ 1,813.6
94.3%
94.0%
211,071
$ 28,415
$ 2,381
202,572
$ 28,132
$ 2,352
maturity or other
Number of contracts ......................................................................
Amount ..........................................................................................
7,482
$ 373.2
7,089
$ 343.5
7,246
$ 340.9
Fixed accumulated value grouped
by applicable surrender charge
0% .................................................................................................
Greater than 0% but less than 5% .................................................
5% and greater but less than 10% .................................................
10% and greater ............................................................................
Supplementary contracts with life contingencies
$ 2,650.4
172.9
1,525.7
33.1
not subject to discretionary withdrawal ......................................
Total .......................................................................................
121.0
$ 4,503.1
$ 2,318.9
171.2
1,542.3
44.9
119.7
$ 4,197.0
$ 2,000.7
190.9
1,528.9
45.7
118.9
$ 3,885.1
14
Life Segment
The Company entered the individual life insurance business in 1949. The Company
offers traditional term and whole life insurance products and, from time to time, revises
products and product features or develops new products. For instance, the Company offers a
discount for educator customers.
Following is a description of some of the products and other features in the Company’s
life product portfolio. Life by Design is a portfolio of Horace Mann manufactured and branded
life insurance products which specifically addresses the financial planning needs of educators.
The Life by Design portfolio features individual whole life and individual term products,
including 10-, 20- and 30-year level term policies. The Life by Design policies have premiums
that are guaranteed for the duration of the contract and offer lower minimum face amounts.
The Company offers a combination product called Life Select that mixes a base of either
traditional whole life, 20-pay life or life paid-up at age 65 with a variety of term riders to allow
for more flexibility in tailoring the coverage to the customers’ varying life insurance needs.
Additional products and features are single premium whole life products, as well as a preferred
plus underwriting category and $500 thousand and $1 million rate band enhancements for
term products. The Company offers Cash Value Term -- a term policy that builds cash value
while providing the income protection of traditional level term life insurance.
In October 2015, the Company introduced an indexed universal life (“IUL”) product with
interest crediting strategies linked to the Standard & Poor’s 500 Index and the Dow Jones
Industrial Average offering a contingent return based on equity market performance. Along
with expanded product offerings, new marketing support tools continue to be introduced to aid
the agency force. After December 31, 2006, the Company no longer issues new policies for its
“Experience Life” product, a flexible, adjustable-premium life insurance contract that includes
availability of an interest-bearing account.
The Company's traditional term, whole life and group life business in force consists of
approximately 144,000 policies, representing approximately $13.5 billion of life insurance in
force, with annual insurance premiums and contract deposits of approximately $52.3 million as
of December 31, 2016. In addition, the Company also had in force approximately 54,000
Experience Life policies, representing approximately $3.6 billion of life insurance in force, with
annual insurance premiums and contract deposits of approximately $44.2 million.
In 2016, the Life segment represented 9% of the Company’s consolidated insurance
premiums written and contract deposits.
During 2016, the average face amount of ordinary life insurance policies issued by the
Company was approximately $182,000 and the average face amount of all ordinary life
insurance policies in force at December 31, 2016 was approximately $100,000.
15
The maximum individual life insurance risk retained by the Company is $300,000 on any
individual life, while either $100,000 or $125,000 is retained on each group life policy
depending on the type of coverage. The excess of the amounts retained are reinsured with life
reinsurers that are rated “A- (Excellent)” or above by A.M. Best. The Company also maintains
a life catastrophe reinsurance program. In 2016, the Company reinsured 100% of the
catastrophe risk in excess of $1 million up to $35 million per occurrence, with one
reinstatement. For 2017, the Company’s catastrophe risk coverage is unchanged. The
Company’s life catastrophe risk reinsurance program covers acts of terrorism and includes
nuclear, biological and chemical explosions but excludes other acts of war.
Selected Historical Financial Information for the Life Segment
The following table provides certain information for the Life segment for the periods
indicated.
Life Segment
Selected Historical Financial Information
(Dollars in millions, unless otherwise indicated)
Financial Data:
Insurance premiums and contract deposits ..........................................
Insurance premiums and contract charges earned ...............................
Net investment income .........................................................................
Income before income taxes .................................................................
Net income ...........................................................................................
$ 108.0
113.7
73.6
26.3
16.6
$ 102.7
110.5
71.6
22.9
15.0
$ 102.7
108.4
71.8
26.9
17.5
Year Ended December 31,
2014
2015
2016
Operating Statistics:
Life insurance in force
Ordinary life ....................................................................................... $ 16,261
764
Group life ..........................................................................................
Total .............................................................................................. $ 17,025
$ 15,589
916
$ 16,505
$ 14,871
930
$ 15,801
Number of policies in force
Ordinary life .......................................................................................
Group life ..........................................................................................
Total ..............................................................................................
163,056
34,881
197,937
162,670
39,119
201,789
161,759
39,108
200,867
Average face amount in force (in dollars)
Ordinary life ....................................................................................... $ 99,726
21,903
Group life ..........................................................................................
Total ..................................................................................................
86,012
Lapse ratio (ordinary life insurance in force) .........................................
Ordinary life insurance terminated due to death,
4.3%
surrender, lapse or other
$ 95,832
23,416
81,793
$ 91,933
23,780
78,664
4.1%
4.0%
Face amount of insurance surrendered or lapsed .........................
Number of policies .....................................................................
Amount of death claims opened ....................................................
Number of death claims opened ................................................
$ 674.7
4,951
$ 55.9
1,512
$ 643.5
5,014
$ 58.6
1,645
$ 565.2
4,093
$ 50.0
1,507
16
Competition
The Company operates in a highly competitive environment. The insurance industry
consists of a large number of insurance companies, some of which have substantially greater
financial resources, widespread advertising campaigns, more diversified product lines, greater
economies of scale and/or lower-cost marketing approaches compared to the Company. In
the Company’s target market, management believes that the principal competitive factors in
the sale of the Property and Casualty segment’s insurance products are price, overall service,
name recognition and worksite sales and service. Management believes that the principal
competitive factors in the sale of the Retirement segment’s products and Life segment’s
insurance are worksite sales and service, product features, perceived stability of the insurer,
price, overall service and name recognition.
The Company competes in its target market with a number of national providers of
personal automobile, homeowners and life insurance such as State Farm, Allstate, Farmers,
Liberty Mutual and Nationwide as well as several regional companies. The Company also
competes for automobile business with other companies such as GEICO, Progressive and
USAA, many of which feature direct marketing distribution.
Among the major national providers of annuities to educators, the Company’s
competitors for annuity business include The Variable Annuity Life Insurance Company
(“VALIC”), a subsidiary of American International Group (“AIG”); AXA; Voya Financial, Inc.; Life
Insurance Company of the Southwest, a subsidiary of National Life Insurance Company;
MetLife; Security Benefit; and Teachers Insurance and Annuity Association – College
Retirement Equities Fund (“TIAA-CREF”). Select mutual fund families and financial planners
also compete in this marketplace.
The market for tax-deferred retirement products in the Company’s target market has
been impacted by the revised Internal Revenue Service (“IRS”) Section 403(b) regulations,
which made the 403(b) market more comparable to the 401(k) market than it was in the past.
While this change has and may continue to reduce the number of competitors in this market, it
has made the 403(b) market more attractive to some of the larger companies experienced in
401(k) plans, including both insurance and mutual fund companies, that had not previously
been active competitors in this business.
17
Investments
The Company's investments are selected to balance the objectives of protecting
principal, minimizing exposure to interest rate risk and providing a high current yield. These
objectives are implemented through a portfolio that emphasizes investment grade, publicly
traded fixed maturity securities, which are selected to match the anticipated duration of the
Company’s liabilities. When impairment of the value of an investment is considered other-
than-temporary, the decrease in value is recorded and a new cost basis is established. At
December 31, 2016, fixed maturity securities represented 93.2% of the Company’s total
investment portfolio, at fair value. Of the fixed maturity securities portfolio, 95.6% was
investment grade and 95.5% was publicly traded. At December 31, 2016, the average quality
and average option-adjusted duration of the total fixed maturity securities portfolio were A and
5.9 years, respectively. At December 31, 2016, investments in non-investment grade fixed
income securities represented 3.8% of the total investment portfolio, at fair value. There are
no significant investments in mortgage whole loans, real estate or non-U.S. dollar-
denominated foreign securities.
The Company has separate investment strategies and guidelines for its Property and
Casualty, Retirement and Life assets, which recognize different characteristics of the
associated insurance liabilities, as well as different tax and regulatory environments. The
Company manages interest rate exposure for its portfolios through asset/liability management
techniques which attempt to coordinate the duration of the assets with the duration of the
insurance policy liabilities. Duration of assets and liabilities will generally differ only because of
opportunities to significantly increase yields or because policy values are not interest-sensitive,
as is the case in the Property and Casualty segment.
The investments of each insurance subsidiary must comply with the insurance laws of
such insurance subsidiary's domiciliary state. These laws prescribe the type and amount of
investments that may be purchased and held by insurance companies. In general, these laws
permit investments, within specified limits and subject to certain qualifications, in federal, state
and municipal obligations, corporate bonds, mortgage-backed bonds, other asset-backed
bonds, preferred stocks, common stocks, real estate mortgages, real estate, and alternative
investments.
18
The following table presents the carrying values and amortized cost of the Company's
investment portfolio.
Investment Portfolio
December 31, 2016
(Dollars in millions)
Percentage
of Total
Carrying
Value
Publicly Traded Fixed Maturity Securities,
Equity Securities and Short-term
Investments:
U.S. Government and agency obligations,
all investment grade (1):
Carrying Value
Property and
Casualty
Total Retirement
Life and
Amortized
Cost or Cost
Mortgage-backed securities...............................
Other, including U.S. Treasury securities ..........
5.5%
5.8
$ 442.4
467.1
$ 439.1
459.4
$ 3.3
7.7
$ 412.9
458.7
Investment grade corporate and public
utility bonds ...........................................................
29.7
2,375.3
2,232.6
Non-investment grade corporate and public
utility bonds (2) ......................................................
Investment grade municipal bonds ............................
Non-investment grade municipal bonds (2) ...............
Investment grade other
2.3
21.2
0.5
186.2
1,685.8
37.1
116.7
1,230.4
17.9
mortgage-backed securities (3) .............................
21.9
1,750.7
1,677.6
Non-investment grade other
mortgage-backed securities (2)(3) .........................
Foreign government bonds, all investment grade......
Redeemable preferred stock,
all investment grade ..............................................
0.7
1.2
0.2
54.7
98.7
19.7
54.6
97.4
19.7
Equity securities:
Non-redeemable
preferred stocks, all investment grade ...............
Common stocks ....................................................
Closed-end fund ....................................................
Short-term investments (4) ........................................
Total publicly traded securities .......................
0.6
0.9
0.2
0.6
91.3
Other Invested Assets:
Investment grade private placements ...........................
Non-investment grade private placements (2) ..............
Mortgage loans (5)........................................................
Policy loans ..................................................................
Other ............................................................................
Total other invested assets ............................
Total investments (6) .................................
4.0
0.3
-
1.8
2.6
8.7
100.0%
50.0
72.2
19.4
44.9
7,304.2
319.8
19.2
*
151.9
204.2
695.1
$7,999.3
46.1
1.1
19.4
9.9
6,421.9
319.8
19.2
*
151.9
159.2
650.1
$7,072.0
142.7
69.5
455.4
19.2
73.1
0.1
1.3
-
3.9
71.1
-
35.0
882.3
-
-
-
-
45.0
45.0
$ 927.3
2,249.9
184.7
1,561.6
40.6
1,752.6
49.2
93.9
17.6
52.3
61.7
20.0
44.9
7,000.6
311.7
18.8
*
151.9
204.2
686.6
$7,687.2
*
(1)
Less than $0.1 million.
Includes $429.0 million fair value of investments guaranteed by the full faith and credit of the U.S. Government and $480.5
million fair value of federally sponsored agency securities which are not backed by the full faith and credit of the U.S.
Government.
(2) A non-investment grade rating is assigned to a security when it is acquired or when it is downgraded from investment grade,
primarily on the basis of the Standard & Poor's Corporation (“Standard & Poor’s” or “S&P”) rating for such security, or if there is
no S&P rating, the Moody's Investors Service, Inc. (“Moody's”) rating for such security, or if there is no S&P or Moody's rating,
the National Association of Insurance Commissioners’ (the “NAIC”) rating for such security. The rating agencies monitor
securities, and their issuers, regularly and make changes to the ratings as necessary. The Company incorporates rating
changes on a monthly basis.
Includes commercial mortgage-backed securities, asset-backed securities, other mortgage-backed securities and collateralized
debt obligations. See also “Management’s Discussion and Analysis of Financial Condition and Results of Operations -- Results
of Operations for the Three Years Ended December 31, 2016 -- Net Realized Investment Gains and Losses” listed on page F-1
of this report.
(3)
(4) Short-term investments mature within one year of being acquired and are carried at cost, which approximates fair value. Short-
term investments included $44.2 million in money market funds rated AAA and one $0.7 million corporate bond rated BBB.
(5) Mortgage loans are carried at amortized cost or unpaid principal balance.
(6) Approximately 8% of the Company's investment portfolio, having a carrying value of $628.7 million as of December 31, 2016,
consisted of securities with some form of credit support, such as insurance. Of the securities with credit support as of December
31, 2016, municipal bonds represented $382.8 million carrying value.
19
Fixed Maturity Securities and Equity Securities
At December 31, 2016, approximately 33% of the Company's fixed maturity securities
portfolio was expected to mature within the next 5 years. Mortgage-backed securities,
including mortgage-backed securities of U.S. Governmental agencies,
represented
approximately 30% of the total investment portfolio at December 31, 2016. These securities
typically have average lives shorter than their stated maturities due to unscheduled
prepayments on the underlying mortgages. Mortgages are prepaid for a variety of reasons,
including sales of existing homes, interest rate changes over time that encourage homeowners
to refinance their mortgages and defaults by homeowners on mortgages that are then paid by
guarantors.
For financial reporting purposes, the Company has classified the entire fixed maturity
securities portfolio as “available for sale”. Fixed maturity securities to be held for indefinite
periods of time and not intended to be held to maturity are classified as available for sale and
carried at fair value. The net adjustment for unrealized investment gains and losses on
securities available for sale is recorded as a separate component of accumulated other
comprehensive income within shareholders' equity, net of applicable deferred tax assets or
liabilities and the related impact on deferred policy acquisition costs associated with
investment contracts and life insurance products with account values. Fixed maturity
securities held for indefinite periods of time include securities that management intends to use
as part of its asset/liability management strategy and that may be sold in response to changes
in interest rates, resultant prepayment risk and other related factors, other than securities that
are in an unrealized loss position for which management has the stated intent to hold until
recovery.
Cash Flow
Information regarding HMEC’s sources and uses of cash, including payment of principal
and interest with respect to HMEC's indebtedness, and payment by HMEC of dividends to its
shareholders, is contained in “Notes to Consolidated Financial Statements -- Note 10 --
Statutory Information and Restrictions” and “Management’s Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Financial Resources -- Cash
Flow” and “-- Capital Resources” listed on page F-1 of this report.
The ability of the insurance subsidiaries to pay cash dividends to HMEC is subject to
state insurance department regulations which generally permit dividends to be paid for any 12
month period in amounts equal to the greater of (i) net income for the preceding calendar year
or (ii) 10% of surplus, determined in conformity with statutory accounting principles, as of the
preceding December 31st. Any dividend in excess of these levels requires the prior approval
of the Director or Commissioner of the state insurance department of the state in which the
dividend paying insurance subsidiary is domiciled. The aggregate amount of dividends that
may be paid in 2017 from all of HMEC's insurance subsidiaries without prior regulatory
approval is approximately $91 million.
Notwithstanding the foregoing, if insurance regulators otherwise determine that payment
of a dividend or any other payment to an affiliate would be detrimental to an insurance
subsidiary's policyholders or creditors, because of the financial condition of the insurance
subsidiary or otherwise, the regulators may block dividends or other payments to affiliates that
would otherwise be permitted without prior approval.
20
Regulation
General Regulation at State Level
As an insurance holding company, HMEC is subject to extensive regulation by the states
in which its insurance subsidiaries are domiciled or transact business. Some regulations, such
as those addressing unclaimed property, generally apply to all corporations. In addition, the
laws of the various states establish regulatory agencies with broad administrative powers,
which relate to a wide variety of matters, including granting and revoking licenses to transact
business, regulating trade practices and rate setting, licensing agents, requiring statutory
financial statements, monitoring insurer solvency and reserve adequacy, and prescribing the
type and amount of investments permitted. On an ongoing basis, various state legislators and
insurance regulators examine the nature and scope of state insurance regulation.
In addition to individual state monitoring and regulation, state regulators develop
coordinated regulatory policies through the National Association of Insurance Commissioners
(“NAIC”). States have adopted NAIC risk-based capital guidelines to evaluate the adequacy of
statutory capital and surplus in relation to an insurance company's risks. Based on current
guidelines, the risk-based capital statutory requirements are not expected to have a negative
regulatory impact on HMEC’s insurance subsidiaries. At December 31, 2016 and 2015,
statutory capital and surplus of each of the Company’s insurance subsidiaries was above
required levels. States have also adopted the NAIC’s U.S. Own Risk and Solvency
Assessment (“ORSA”) which requires insurance companies to submit their own assessment of
their current and future risks and provide a consolidated group-level perspective on risk and
capital formulated through an internal risk self-assessment process.
Assessments Against Insurers and Mandatory Insurance Facilities
Under insurance insolvency or guaranty laws in most states in which the Company
operates, insurers doing business therein can be assessed for policyholder losses related to
insolvencies of other insurance companies, and many assessments paid by the Company
pursuant to these laws may be used as credits for a portion of the Company's premium taxes
in certain states. Also, the Company is required to participate in various mandatory insurance
facilities in proportion to the amount of the Company's direct writings in the applicable state.
For the three years ended December 31, 2016, the impact of the above industry items were
not material to the Company’s results of operations.
Regulation at Federal Level
Although the federal government generally does not directly regulate the insurance
industry, federal initiatives often impact the insurance business. Current and proposed federal
measures which may significantly affect insurance and retirement business include employee
benefits regulation, standards applied to employer sponsored retirement plans, standards
applied to certain financial advisors, controls on the costs of medical care, medical entitlement
programs such as Medicare, structure of retirement plans and accounts, changes to the
insurance industry anti-trust exemption, and minimum solvency requirements. See also “Item
1A. Risk Factors”. Other federal regulation such as the Patient Protection and Affordable Care
Act, Fair Credit Reporting Act, Gramm-Leach-Bliley Act and USA PATRIOT Act, including its
anti-money laundering regulations, also impact the Company’s business.
21
The variable annuities underwritten by HMLIC are regulated by the SEC. Horace Mann
Investors, Inc., the broker-dealer and Registered Investment Adviser subsidiary of HMEC, also
is regulated by the SEC, FINRA, the Municipal Securities Rule-making Board (“MSRB”) and
various state securities regulators.
Federal income taxation of the build-up of cash value within a life insurance policy or an
annuity contract could have a materially adverse impact on the Company's ability to market
and sell such products. Various legislation to this effect has been proposed in the past, but
has not been enacted. Although no such legislative proposals are known to exist at this time,
such proposals may be made again in the future. Changes in other federal and state laws and
regulations could also affect the relative tax and other advantages of the Company's annuity
and life products to customers.
Financial Regulation Legislation
The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”)
created the Federal Insurance Office (“FIO”) within the U.S. Department of the Treasury. The
FIO studies the current insurance regulatory system and is charged with monitoring and
providing specific reports on various aspects of the insurance industry. However, the FIO does
not have general supervisory or regulatory authority over the business of insurance. The FIO
has suggested an expanded federal role in some circumstances. The executive branch has
requested a review of financial regulation, including Dodd-Frank. Management will continue to
monitor these future developments for impact on the Company, insurers of similar size and the
insurance industry as a whole.
Employees
At December 31, 2016, the Company had approximately 1,440 non-agent employees
and 33 full-time Employee Agents. (This does not include 588 Exclusive Agent independent
contractors that were part of the Company’s total dedicated agency force at December 31,
2016.) The Company has no collective bargaining agreement with any employees.
22
ITEM 1A. Risk Factors
The following are certain risk factors that could affect the Company’s business, financial
results and results of operations. In addition, refer to the risk factors disclosed in
“Management’s Discussion and Analysis of Financial Condition and Results of Operations --
Forward-looking Information”, listed on page F-1 of this report for certain important factors that
may cause our financial condition and results of operations to differ materially from current
expectations. The risks that the Company has highlighted in these two sections of this report
are not the only ones that the Company faces. In this discussion, the Company is also
referred to as “our”, “we” and “us”.
The Company’s business involves various risks and uncertainties which are based on
the lines of business the Company writes as well as more global risks associated with the
general business and insurance industry environments.
Volatile financial markets and adverse economic environments can impact financial
market risk as well as our financial condition and results of operations.
Financial markets in the U.S. and elsewhere can experience extreme volatility and
disruption for uncertain periods of time. During such times, stresses affecting the global
banking system can lead to economic volatility which can exert significant downward pressure
on prices of equity securities and many other investment asset classes and result in
substantially increased market volatility, severely constrained credit and capital markets,
particularly for financial institutions, and an overall loss of investor confidence. Many states
and local governments can also be impacted by adverse economic conditions which could
have an impact on both the Company’s niche market and its investment portfolio. Like other
financial institutions which face significant financial market risk in their operations, the
Company was adversely affected by these conditions and could be adversely impacted by
similar circumstances in the future. The Company’s ability to access the capital markets to
refinance outstanding indebtedness or raise capital could be impaired during significant
financial market disruptions.
As discussed further in subsequent risk factors, in addition to the effects of financial
markets volatility, a prolonged economic recession may have other adverse impacts on our
financial condition and results of operations.
23
If our investment strategy is not successful, we could suffer unexpected losses.
The success of our investment strategy is crucial to the success of our business.
Specifically, our fixed income portfolio is subject to a number of risks including:
interest rate risk, which is the risk that interest rates will decline and funds reinvested
will earn less than expected;
market value risk, which is the risk that our invested assets will decrease in value due
to a change in the yields realized on our assets and prevailing market yields for similar
assets, an unfavorable change in the liquidity of the investment or an unfavorable
change in the financial prospects or a downgrade in the credit rating of the issuer of the
investment;
credit risk, which is the risk that the value of certain investments becomes impaired due
to deterioration in the financial condition of one or more issuers of those instruments or
the deterioration in performance or credit quality of the underlying collateral of certain
structured securities and, ultimately, the risk of permanent loss in the event of default
by an issuer or underlying credit;
market fundamentals risk, which is the risk that there are changes in the market that
can have an unfavorable impact on securities valuation such as availability of credit in
the capital markets, re-pricing of credit risk, reduced market liquidity due to broker-
dealers’ unwillingness to hold inventory, and increased market volatility;
concentration risk, which is the risk that the portfolio may be too heavily concentrated in
the securities of one or more issuers, sectors or industries, which could result in a
significant decrease in the value of the portfolio in the event of deterioration in the
financial condition of those issuers or the market value of their securities;
liquidity risk, which is the risk that liabilities are surrendered or mature sooner than
anticipated requiring us to sell assets at an undesirable time to provide for policyholder
surrenders, withdrawals or claims; and
regulatory risk, which is the risk that regulatory bodies or governments, in the U.S. or in
other countries, may make substantial investments or take significant ownership
positions in, or ultimately nationalize, financial institutions or other issuers of securities
held in the Company’s investment portfolio, which could adversely impact the seniority
or contractual terms of the securities. Regulatory risk could also come from changes in
tax laws or bankruptcy laws that would adversely impact the valuation and/or after tax
yields of certain invested assets.
In addition to significant steps taken to attempt to mitigate these risks through our
investment guidelines, policies and procedures, we also attempt to mitigate these risks through
product pricing, product features and the establishment of policy reserves, but we cannot
provide assurance that assets will be properly matched to meet anticipated liabilities or that our
investments will provide sufficient returns to enable us to satisfy our guaranteed fixed benefit
obligations.
The Company’s investment strategy and guidelines have resulted in an investment
portfolio which is comprised primarily of investment grade, fixed maturity securities. Inclusion
of alternative investments, even those consistent with the Company’s overall conservative
investment guidelines, could result in some volatility in our financial condition and results of
operations.
24
From time to time, the Company could enter into foreign currency, interest rate, credit
derivative and other hedging transactions in an effort to manage risks, including risks that may
be attributable to any new products offered by the Company. For instance, the Company
recently began utilizing call options to manage interest crediting risk related to its newly
introduced fixed indexed annuity and indexed universal life products. We cannot provide
assurance that we will successfully structure derivatives and hedges so as to effectively
manage risks. If our calculations are incorrect, or if we do not properly structure our
derivatives or hedges, we may have unexpected losses and our assets may not be adequate
to meet our needed reserves, which could adversely affect our financial condition and results
of operations.
Although the Company’s defined benefit pension plan is frozen, declining financial
markets could also cause, and in the past have caused, the value of the investments in this
pension plan to decrease, resulting in additional pension expense, a reduction in other
comprehensive income and an increase in required contributions to the defined benefit
pension plan, which could have an adverse effect on our financial condition and results of
operations.
The determination of the fair value of our fixed maturity and equity securities includes
methodologies, estimations and assumptions
to differing
interpretations and could result in changes to investment valuations that may materially
impact our financial condition and results of operations.
that are subject
The determination of fair values is made at a specific point in time, based on available
market information and judgments about financial instruments, including estimates of the
timing and amounts of expected future cash flows and the credit standing of the issuer or
counterparty. The use of different methodologies and assumptions may have a material effect
on the estimated fair value amounts. During periods of market disruption, including periods of
rapidly widening credit spreads or illiquidity, it may be difficult to value certain of our securities
if trading becomes less frequent and/or market data becomes less observable. There may be
certain asset classes that were in active markets with significant observable data that become
illiquid due to the financial environment. In such cases, fair value determination may require
more subjectivity and management judgment and those fair values may differ materially from
the value at which the investments ultimately could be sold. Further, rapidly changing and
unprecedented credit and equity market conditions could materially impact the valuation of
securities and the period-to-period changes in value could vary significantly. The difference
between fair value and amortized cost or cost, net of applicable deferred income tax asset or
liability and the related impact on deferred policy acquisition costs associated with investment
(annuity) contracts and life insurance products with account values, and interest-sensitive life
contracts, is reflected as a component of accumulated other comprehensive income within
shareholders' equity. Decreases in the fair value of our investments could have a material
adverse effect on our financial condition and results of operations.
25
A sustained period of low interest rates or interest rate fluctuations could negatively
affect the income we derive from the difference between the interest rates we earn on
our investments and the interest we pay under our fixed annuity contracts and life
insurance products with account values.
Significant changes in interest rates expose us to the risk of not earning income or
experiencing losses based on the differences between the interest rates earned on our
investments and the credited interest rates paid on our outstanding fixed annuity contracts and
life insurance products with account values. Significant changes in interest rates may affect:
the ability to maintain appropriate interest rate spreads over the fixed rates guaranteed
in our annuity and life products;
the book yield of our investment portfolio; and
the unrealized gains and losses in our investment portfolio and the related after tax
effect on our shareholders’ equity and total capital.
Both rising and declining interest rates can negatively affect the income we derive from
our annuity and life products’ interest rate spreads. During periods of falling interest rates or a
sustained period of low interest rates, our investment earnings will be lower because new
investments in fixed maturity securities likely will bear lower interest rates. We may not be able
to fully offset the decline in investment earnings with lower crediting rates on our annuity
contracts, particularly in a multi-year period of low interest rates. As of the time of this Annual
Report on Form 10-K, new money rates remain at historically low levels. If interest rates do
remain low over an extended period of time, it could pressure our net investment income by
having to invest insurance cash flows and reinvest the cash flows from the investment portfolio
in lower yielding securities.
During periods of rising interest rates, there may be competitive pressure to increase the
crediting rates on our annuity contracts. We may not, however, immediately have the ability to
acquire investments with interest rates sufficient to offset an increase in crediting rates under
our annuity contracts. Although we develop and maintain asset/liability management programs
and procedures designed to reduce the volatility of our income when interest rates are rising or
falling, changes in interest rates can affect our interest rate spreads.
Changes in interest rates may also affect our business in other ways. For example, a
rapidly changing interest rate environment may result in less competitive crediting rates on
certain of our fixed rate products which could make those products less attractive, leading to
lower sales and/or increases in the level of life insurance and annuity product surrenders and
withdrawals. New business volume also could be negatively impacted by product or agent
compensation changes which we might make to mitigate the income effect of spread
compression. Interest rate fluctuations that impact future profits may also impact the
amortization of deferred policy acquisition costs.
As another example of potential interest rate impacts, our Retirement and Life operations
participate in the cash flow testing procedures imposed by statutory insurance regulations, the
purpose of which is to ensure that such liabilities are adequate to meet the Company’s
obligations under a variety of interest rate scenarios. A continuation of the current low interest
rate environment over a prolonged period of time could cause the Company to increase
statutory reserves as a result of cash flow testing, which would reduce statutory surplus of the
Life insurance subsidiaries and potentially limit the subsidiaries’ ability to distribute cash to the
holding company or write insurance business (as further described in a subsequent risk factor).
26
Regulatory initiatives, including the enactment of the Dodd-Frank Wall Street Reform
and Consumer Protection Act (“Dodd-Frank”), could adversely impact liquidity and
volatility of financial markets in which we participate.
In response to the credit and financial crisis, U.S. and overseas governmental and
regulatory authorities are considering or
implementing enhanced or new regulatory
requirements intended to prevent future crises or stabilize the institutions under their
supervision. Such measures are leading to stricter regulation of financial institutions.
Changes from Dodd-Frank and other U.S. and overseas governmental initiatives have created
uncertainty and could continue to adversely impact liquidity and increase volatility of the
financial markets in which we participate and, in turn, negatively affect our financial condition
or results of operations. The executive branch has requested a review of financial regulations
including Dodd-Frank, which may eliminate or mitigate this risk.
Our Retirement business may be, and in the past has been, adversely affected by
volatile or declining financial market conditions.
Conditions in the U.S. and international financial markets affect the sale and profitability
of our annuity products. In general, sales of variable annuities decrease when financial
markets are declining or experiencing a higher than normal level of volatility over an extended
period of time. Therefore, weak and/or volatile financial market performance may adversely
affect sales of our variable annuity products to potential customers, may cause current
customers to withdraw or reduce the amounts invested in our variable annuity products and
may reduce the market value of existing customers’ investments in our variable annuity
products, in turn reducing the amount of variable annuity fee revenues generated. In addition,
some of our variable annuity contracts offer guaranteed minimum death benefit features, which
provide for a benefit if the contractholder dies and the contract value is less than a specified
amount. A decline in the financial markets could cause the contract value to fall below this
specified amount, increasing our exposure to losses from variable annuity products featuring
guaranteed minimum death benefits. Declining or volatile financial markets that impact future
profits may also impact the amortization of deferred policy acquisition costs.
27
We may experience volatility in our results of operations and financial condition due to
the fair value accounting for derivative instruments.
All derivative instruments, including derivative instruments embedded in fixed indexed
annuity contracts and indexed universal life policies, are recognized in the balance sheet at
their fair values. Changes in the fair value of these instruments are recognized immediately in
our results of operations as follows:
Call options purchased to fund the annual index credits on our fixed indexed annuity and
indexed universal life products are presented at fair value. The fair value of the call
options is based on the amount of cash expected to be received to settle the call options
obtained from the counterparties adjusted for the nonperformance risk of the
counterparty. The change in fair value of derivatives includes the gains or losses
recognized at expiration of the option term or upon early termination as well as changes
in fair value for open positions.
The fixed indexed annuity contractual obligations for future annual index credits are
treated as a "series of embedded derivatives" over the expected lives of the applicable
contracts. Increases or decreases in the fair value of embedded derivatives generally
correspond to increases or decreases in equity market performance and changes in the
interest rates used to discount the excess of the projected policy contract values over
the projected minimum guaranteed contract values.
The indexed universal life contractual obligations for future index credits are set equal to
the fair value of outstanding 12 month derivatives held in support of the applicable
contracts.
In future periods, the application of fair value accounting for derivatives and embedded
derivatives to our fixed indexed annuity and indexed universal life business may cause
volatility in our results of operations.
Mark-to-market adjustments on certain equity method investments may reduce our
profitability and/or cause volatility in our reported results of operations.
We invest a portion of our invested assets in limited partnership funds, which are
accounted for using the equity method with changes in fair value reported in net investment
income in the Consolidated Statement of Operations. The amount and timing of income from
such investment funds tend to be uneven as a result of the performance of the underlying
investments. The timing of distributions from the funds, which depends on particular events
relating to the underlying investments, as well as the funds’ schedules for making distributions
and their needs for cash, can be difficult to predict. As a result, the amount of income that we
record from these investments can vary substantially from period to period. Recent equity and
credit market volatility may reduce investment income from these types of investments and
negatively impact our results of operations.
An inability to access Federal Home Loan Bank (“FHLB”) funding could adversely affect
our results of operations.
Any changes in requirements to retain membership in the Federal Home Loan Bank, or
changes in regulation, could impact our eligibility for continued FHLB membership or our FHLB
funding capacity. Any event that adversely affects amounts received from FHLB could have
an adverse effect on our results of operations.
28
Losses due to defaults by others could reduce our profitability or negatively affect the
value of our investments.
Third-party debtors may not pay or perform their obligations. These parties may include
the issuers whose securities we hold, customers, reinsurers, borrowers under mortgage loans,
trading counterparties, counterparties under swaps and other derivative contracts, clearing
agents, exchanges, clearing houses and other financial intermediaries. These parties may
default on their obligations to us due to bankruptcy, lack of liquidity, downturns in the economy
or real estate values, operational failure or other reasons.
During or following an economic downturn, our municipal bond portfolio could be subject
to a higher risk of default or impairment due to declining municipal tax bases and revenue.
States are currently barred from seeking protection in federal bankruptcy court. However,
federal legislation could possibly be enacted to allow states to declare bankruptcy in
connection with deficit reductions or mounting unfunded pension liabilities, which could
adversely impact the value of our investment portfolio.
The default of a major market participant could disrupt the securities markets or
clearance and settlement systems in the U.S. or abroad. A failure of a major market
participant could cause some clearance and settlement systems to assess members of that
system, including our broker-dealer and Registered Investment Adviser regulatory entities, or
could lead to a chain of defaults that could adversely affect us. A default of a major market
participant could disrupt various markets, which could in turn cause market declines or volatility
and negatively impact our financial condition and results of operations.
Catastrophic events, as well as significant weather events not designated as
catastrophes, can have a material adverse effect on our financial condition and results
of operations.
Underwriting results of property and casualty insurers are subject to weather and other
conditions prevailing in an accident year. While one year may be relatively free of major
weather or other disasters -- not all of which are designated by the insurance industry as a
catastrophe, another year may have numerous such events causing results for such a year to
be materially worse than for other years.
Our Property and Casualty insurance subsidiaries have experienced, and we anticipate
that in the future they will continue to experience, catastrophe losses. A catastrophic event, a
series of multiple catastrophic events or a series of non-catastrophe severe weather events
could have a material adverse effect on the financial condition and results of operations of our
insurance subsidiaries.
29
Various events can cause catastrophes, including hurricanes, windstorms, hail, severe
winter weather, wildfires, earthquakes, explosions and terrorism. The frequency and severity
of these catastrophes are inherently unpredictable. The extent of losses from a catastrophe is
a function of both the total amount of insured exposures in the area affected by the event and
the severity of the event. Although catastrophes can cause losses in a variety of Property and
Casualty lines, most of the catastrophe-related claims of our insurance subsidiaries are related
to homeowners’ coverages. Our ability to provide accurate estimates of ultimate catastrophe
costs is based on several factors, including:
the proximity of the catastrophe occurrence date to the date of our estimate;
potential inflation of property repair costs in the affected area;
the occurrence of multiple catastrophes in a geographic area over a relatively short
period of time; and
the outcome of litigation which may be filed against the Company by policyholders,
state attorneys general and other parties relative to loss coverage disputes and loss
settlement payments.
Based on 2016 direct premiums earned, 57% of the total annual premiums for our
Property and Casualty business were for policies issued in the ten largest states in which our
insurance subsidiaries write property and casualty coverage. Included in this top ten group are
certain states which are considered to be more prone to catastrophe occurrences: California,
North Carolina, Texas, South Carolina, Florida and Louisiana.
As an ongoing practice, we manage our exposure to catastrophes, as well as our
exposure to non-catastrophe weather and other property loss risks. Reductions in Property
and Casualty business written in catastrophe-prone areas may have a negative impact on
near-term business growth and results of operations.
In addition to the potential impact on our Property and Casualty subsidiaries, our Life
subsidiary could experience claims of a catastrophic magnitude from events such as
pandemics; terrorism; nuclear, biological or chemical explosions; or other acts of war.
Our insurance subsidiaries seek to reduce their exposure to catastrophe losses through
their underwriting strategies and the purchase of catastrophe reinsurance. Nevertheless,
reinsurance may prove inadequate under certain circumstances.
Uncollectible reinsurance, as well as reinsurance availability and pricing, can have a
material adverse effect upon our business volume and profitability.
Reinsurance is a contract by which one insurer, called a reinsurer, agrees to cover a
portion of the losses incurred by a second insurer in the event a claim is made under a policy
issued by the second insurer. Our insurance subsidiaries obtain reinsurance to help manage
their exposure to property, casualty and life insurance risks. Although a reinsurer is liable to
our insurance subsidiaries according to the terms of its reinsurance policy, the insurance
subsidiaries remain primarily liable as the direct insurers on all risks reinsured. As a result,
reinsurance does not eliminate the obligation of our insurance subsidiaries to pay all claims,
and each insurance subsidiary is subject to the risk that one or more of its reinsurers will be
unable or unwilling to honor its obligations.
30
Although we limit participation in our reinsurance programs to reinsurers with high
financial strength ratings and also limit the amount of coverage from each reinsurer, our
insurance subsidiaries cannot guarantee that their reinsurers will pay in a timely fashion, if at
all. Reinsurers may become financially unsound by the time that they are called upon to pay
amounts due, which may not occur for many years.
Additionally, the availability and cost of reinsurance are subject to prevailing market
conditions beyond our control. For example, significant losses from hurricanes or terrorist
attacks, an increase in capital requirements, or a future lapse of the provisions of the Terrorism
Risk Insurance Act could have a significant adverse impact on the reinsurance market.
If one of our insurance subsidiaries is unable to obtain adequate reinsurance at
reasonable rates, that insurance subsidiary would have to increase its risk exposure and/or
reduce the level of its underwriting commitments, which could have a material adverse effect
upon the business volume and profitability of the subsidiary. Alternately, the insurance
subsidiary could elect to pay the higher than reasonable rates for reinsurance coverage, which
could have a material adverse effect upon its profitability until policy premium rates could be
raised, in some cases subject to approval by state regulators, to incorporate this additional
cost.
Our Property and Casualty loss reserves may not be adequate.
Our Property and Casualty insurance subsidiaries maintain loss reserves to provide for
their estimated ultimate liability for losses and loss adjustment expenses with respect to
reported and unreported claims incurred as of the end of each accounting period. If these loss
reserves prove inadequate, we will record a loss measured by the amount of the shortfall and,
as a result, the financial condition and results of operations of our insurance subsidiaries will
be adversely affected, potentially affecting their ability to distribute cash to the holding
company.
Reserves do not represent an exact calculation of liability. Reserves represent
estimates, generally involving actuarial projections at a given time, of what our insurance
subsidiaries expect the ultimate settlement and adjustment of claims will cost, net of salvage
and subrogation. Estimates are based on assessments of known facts and circumstances,
assumptions related to the ultimate cost to settle such claims, estimates of future trends in
claims severity and frequency, changing judicial theories of liability, and other factors. These
variables are affected by both internal and external events, including changes in claims
handling procedures, economic
inflation, unpredictability of court decisions, plaintiffs’
expanded theories of liability, risks inherent in major litigation and legislative changes. Many of
these items are not directly quantifiable, particularly on a prospective basis. Significant
reporting lags may exist between the occurrence of an insured event and the time it is actually
reported. Our insurance subsidiaries adjust their reserve estimates regularly as experience
develops and further claims are reported and settled.
Due to the inherent uncertainty in estimating reserves for losses and loss adjustment
expenses, we cannot be certain that the ultimate liability will not exceed amounts reserved,
with a resulting adverse effect on our financial condition and results of operations.
31
Changing climate conditions may adversely affect our financial condition, results of
operations or cash flows.
Many scientists indicate that the world’s overall climate is getting warmer. Climate
change, to the extent it produces rising temperatures and changes in weather patterns, could
impact the frequency and/or severity of weather events and wildfires, the affordability and
availability of our catastrophe reinsurance coverage, and our results of operations. If an
increase in weather events and/or wildfires were to occur, in addition to the attendant increase
in claim costs, which could adversely impact our results of operations and financial condition,
concentrations of insurance risk could impact our ability to make homeowners insurance
available to our customers. This could adversely impact our volume of business and our
results of operations or cash flows.
Deviations from assumptions regarding future market appreciation, interest spreads,
business persistency, mortality and morbidity used in calculating life and annuity
reserves and deferred policy acquisition expense amounts could have a material
adverse impact on our financial condition and results of operations.
The processes of calculating reserve and deferred policy acquisition expense amounts
for our life and annuity businesses involve the use of a number of assumptions, including those
related to market appreciation (the rate of growth in market value of the underlying variable
annuity subaccounts due to price appreciation), interest spreads (the interest rates expected to
be received on investments less the rate of interest credited to contractholders), business
persistency (how long a contract stays with the company), mortality (the relative incidence of
death over a given period of time) and morbidity (the relative incidence of disability resulting
from disease or physical impairment). We periodically review the adequacy of these reserves
and deferred policy acquisition expenses on an aggregate basis and, if future experience is
estimated to differ significantly from previous assumptions, adjustments to reserves and
deferred policy acquisition expenses may be required which could have a material adverse
effect on our financial condition and results of operations.
An impairment of all or part of our goodwill could adversely affect our results of
operations.
At December 31, 2016, we had $47.4 million of goodwill recorded on our Consolidated
Balance Sheet. Goodwill was recorded when the Company was acquired in 1989 and when
Horace Mann Property & Casualty Insurance Company was acquired in 1994, in both
instances reflecting the excess of cost over the fair market value of net assets acquired. In
2016, the goodwill balance was evaluated for impairment, as described in “Notes to
Consolidated Financial Statements -- Note 1 -- Summary of Significant Accounting Policies”,
with no impairment charge resulting from such assessment. The evaluation of goodwill
considers a number of factors including the impacts of a volatile financial market on earnings,
discount rate assumptions, liquidity and the Company’s market capitalization. If an evaluation
of the Company’s fair value or of the Company’s segments’ fair value indicated that all or a
portion of the goodwill balance was impaired, the Company would be required to write off the
impaired portion. Such a write-off could have a material adverse effect on our results of
operations in the period of the write-off; however, management does not anticipate a material
effect on the Company’s financial condition.
32
Any downgrade in or adverse change in outlook for our claims-paying ratings, financial
strength ratings or credit ratings could adversely affect our financial condition and
results of operations.
Claims-paying ratings and financial strength ratings have become an increasingly
important factor in establishing the competitive position of insurance companies. In the
evolving 403(b) annuity market, school districts and benefit consultants have placed an
emphasis on the relative financial strength ratings of competing companies. Each rating
agency reviews its ratings periodically and from time to time may modify its rating criteria
including, among other factors, its expectations regarding capital adequacy, profitability and
revenue growth. A downgrade in the ratings or adverse change in the ratings outlook of any of
our insurance subsidiaries by a major rating agency could result in a substantial loss of
business for that subsidiary if school districts, policyholders or independent agents move their
business to other companies having higher claims-paying ratings and financial strength ratings
than we do. This loss of business could have a material adverse effect on the results of
operations and financial condition of that subsidiary.
A downgrade in our holding company debt rating also could adversely impact our cost
and flexibility of borrowing which could have an adverse impact on our liquidity, financial
condition and results of operations.
Reduction of the statutory surplus of our insurance subsidiaries could adversely affect
their ability to write insurance business.
Insurance companies write business based, in part, upon guidelines including capital
ratios considered by the NAIC and various rating agencies. Some of these ratios include risk-
based capital ratios for both property and casualty insurance companies and life insurance
companies, as well as a ratio of premiums to surplus for property and casualty insurance
companies. Risk-based capital ratios measure an insurer’s capital adequacy and consider
various risks such as underwriting, investment, credit, asset concentration and interest rate. If
our insurance subsidiaries cannot maintain profitability in the future or if significant investment
valuation losses are incurred, they may be required to draw on their surplus, thereby reducing
capital adequacy, in order to pay dividends to us to enable us to meet our financial obligations.
As their surplus is reduced by the payment of dividends, continuing losses or both, our
insurance subsidiaries’ ability to write business and maintain acceptable financial strength
ratings could also be reduced. This could have a material adverse effect upon the business
volume and profitability of our insurance subsidiaries.
If we are not able to effectively develop and expand our marketing operations, including
agents and other points of distribution, our financial condition and results of operations
could be adversely affected.
The Company’s agencies are owned primarily by non-employee, independent contractor,
Exclusive Agents and nearly all of these agencies operate under the Agency Business Model -
- agents in outside offices with licensed producers -- which is designed to remove capacity
constraints while increasing productivity. The economic viability of each agency is directly
dependent of the productivity of the agency and the success at penetrating, serving and cross-
selling the Company’s educator market.
33
Our success in marketing and selling our products is largely dependent upon the efforts
of our agent sales force and the success of their agency operations. As we expand our
business, we may need to expand the number of agencies marketing our products. If we are
unable to appoint additional agents, fail to retain high-producing agents, are unable to maintain
the productivity of those agency operations or are unable to maintain market penetration in
existing territories, sales of our products likely would decline and our financial condition and
results of operations could be adversely affected.
If we are not able to maintain and secure (1) access to educators and (2) endorsements
and other relationships with the educational community, our financial condition and
results of operations could be adversely affected.
Our ability to successfully increase new business in the educator market is largely
dependent on our ability to effectively access educators either in their school buildings or
through other approaches. While this is especially true for the sale of 403(b) tax-qualified
annuity products via payroll deduction, any significant decrease in access, either through fewer
payroll slots, increased security measures, impacts of state or federal level pension reform
initiatives, requirements of national and state Do Not Call registries, or for other reasons could
adversely affect the sale of all lines of our business and require us to change our traditional
approach to worksite marketing and promotion, as well as contact with potential customers.
With the current IRS regulations regarding Section 403(b) arrangements, including annuities,
our ability to maintain and increase our share of the 403(b) market, and the access it gives us
for other product lines, will depend on our ability to successfully compete in this market. Some
school districts and benefit consultants have placed an emphasis on the relative financial
strength ratings of competing companies, as well as low cost product and distribution
approaches, which may put us at a competitive disadvantage relative to other more highly-
rated insurance companies.
Our ability to maintain and obtain product and corporate endorsements from, and/or
marketing agreements with, local, state and national education-related associations is
important to our marketing strategy. In addition to teacher organizations, we have established
relationships with various other educator, principal, school administrator and school business
official groups. These contacts and endorsements help to establish our brand name and
presence in the educational community and to enhance our access to educators.
The Department of Labor (“DOL”) fiduciary rule and the possible adoption by the
Securities and Exchange Commission (“SEC”) of a fiduciary standard of care could
have a material adverse effect on our business, financial condition and results of
operations.
On April 6, 2016, the DOL released a final regulation which more broadly defines the
types of activities that will result in a person being deemed a “fiduciary” for purposes of the
prohibited transaction rules of the Employee Retirement Income Security Act (“ERISA”) and
Internal Revenue Code Section 4975. Section 4975 prohibits certain kinds of compensation
with respect to transactions involving assets in certain accounts, including individual retirement
accounts (“IRAs”).
The DOL regulation provides that its requirements will generally become applicable on
April 10, 2017, with certain requirements becoming applicable on January 1, 2018.
34
The DOL regulation will affect the ways in which financial services representatives can
be compensated for sales to participants in ERISA employer-sponsored qualified plans and
sales to IRA customers, and it will impose significant additional legal obligations and disclosure
requirements. The DOL regulation could have a material adverse effect on our business and
results of operations. While the regulation does not affect non-ERISA employer-sponsored
qualified plans, such as public school 403(b) plans, it could have the following impacts, among
others:
It could inhibit our ability to sell and service IRAs, resulting in a change and/or a
reduction of the types of products we offer for IRAs, and impact our relationship with
current clients.
It could require changes in the way that we compensate our agents, thereby impacting
our agents’ business model.
It could require changes in our distribution model for financial services products and
could result in a decrease in the number of our agents.
It could increase our costs of doing IRA business and increase our litigation and
regulatory risks.
It could increase the cost and complexity of regulatory compliance for our Retirement
segment’s products, including our recently introduced fixed indexed annuity product.
At the request of the executive branch, the DOL is evaluating the fiduciary role, and the
related prohibited transaction exception. As a result of this review, the implementation of the
rule may be delayed. At this point, however, the regulatory landscape is uncertain.
Further, in January 2011, under the authority of the Dodd-Frank Act, the SEC submitted
a report to Congress recommending that the SEC adopt a fiduciary standard of conduct for
broker-dealers. According to the SEC, notice of proposed rulemaking is anticipated in 2017.
This regulatory activity by the SEC also has the potential to adversely impact our business,
financial condition and results of operations.
Economic and other factors affecting our niche market could adversely impact our
financial condition and results of operations.
Horace Mann's strategic objective is to become the company of choice in meeting the
insurance and financial services needs of the educational community. With K-12 teachers,
administrators, and support personnel representing a significant percentage of our business,
the financial condition and results of operations of our subsidiaries could be more prone than
many of our competitors to the effects of economic forces and other issues affecting the
educator market including, but not limited to, federal, state and local budget deficits and cut-
backs and adverse changes in state and local tax revenues.
While the U.S. financial market and certain sectors of the economy have shown
improvement over recent years, federal and state revenue shortages continue to pressure the
budgets of many school districts. Teacher layoffs and early retirements have taken place and
it is possible that additional reductions could occur. Similar to others in the insurance industry,
the Company has experienced periods with pressure on new business sales levels. However,
despite the economic headwinds, as of the time of this Annual Report on Form 10-K, the
Company’s retention of annuity accumulated values remains strong with continued positive
total annuity net fund flows. However, there can be no assurance that these business factors
will remain favorable.
35
The personal lines insurance and annuity markets are highly competitive and our
financial condition and results of operations may be adversely affected by competitive
forces.
We operate in a highly competitive environment and compete with numerous insurance
companies, as well as mutual fund families, independent agent companies and financial
planners. In some instances and geographic locations, competitors have specifically targeted
the educator marketplace with specialized products and programs. We compete in our target
market with a number of national providers of personal automobile and homeowners insurance
and life insurance and annuities.
The insurance industry consists of a large number of insurance companies, some of
which have substantially greater financial resources, more diversified product lines, more
sophisticated product pricing, greater economies of scale and/or lower-cost marketing
approaches compared to us. In our target market, we believe that the principal competitive
factors in the sale of property and casualty insurance products are price, overall service, name
recognition and worksite sales and service. We believe that for our market the principal
competitive factors in the sale of annuity products and life insurance are worksite sales and
service, product features, perceived stability of the insurer, price, overall service and name
recognition. And, we believe that the Company’s focus on the educator market niche, as well
as the knowledge obtained regarding this niche throughout the Company’s history, contribute
to our ability to effectively and profitably serve this market.
Particularly in the property and casualty business, our insurance subsidiaries from time
to time, generally on a cyclical basis, experience periods of intense competition during which
they may be unable to increase policyholders and revenues without adversely impacting profit
margins. During the current cycle, and potentially beyond, competition from direct writers and
large, mass market carriers has been particularly aggressive, evidenced in part by their
significant national advertising expenditures. In addition, advancements in vehicle technology
and safety features, such as accident prevention technologies or the development of
autonomous or partially autonomous vehicles -- once widely available and utilized, as well as
expanded availability of usage-based insurance could materially alter the way that automobile
insurance is marketed, priced and underwritten. The inability of our insurance subsidiaries to
effectively anticipate the impact of these issues on our business and compete successfully in
the property and casualty business could adversely affect the subsidiaries’ financial condition
and results of operations and the resulting ability to distribute cash to the holding company.
In our Retirement business, the current IRS Section 403(b) regulations make the 403(b)
market similar to the 401(k) market. These regulations have reduced and could continue to
reduce the number of competitors in this market as the 403(b) market has become more
attractive to some of the larger companies experienced in 401(k) plans, including both
insurance and mutual fund companies, that had not previously been active competitors in this
business. While not yet widespread, there has been continued pressure in some states to
adopt state-sponsored or mandated 403(b) plans with single- or limited-provider options; this
pressure has come from competitor lobbying efforts and state legislature-initiated pension
reform initiatives. The inability of our insurance subsidiaries to compete successfully in these
markets could adversely affect the subsidiaries’ financial condition and results of operations
and the resulting ability to distribute cash to the holding company.
36
A reduction or elimination of the tax advantages of annuity and life products and/or a
change in the tax benefits of various government-authorized retirement programs, such
as 403(b) annuities and individual retirement accounts (“IRAs”), could make our
products less attractive to clients and adversely affect our operating results.
A significant part of our Retirement business involves fixed and variable 403(b) tax-
qualified annuities, which are annuities purchased voluntarily by individuals employed by public
school systems or other tax-exempt organizations. Our financial condition and results of
operations could be adversely affected by changes in federal and state laws and regulations
that affect the relative tax and other advantages of our life and annuity products to clients or
the tax benefits of programs utilized by our customers. As a result of persisting economic
conditions, revenue challenges exist at federal, state and local government levels. These
challenges could increase the risk of future adverse impacts on current tax-advantaged
products or result in notable reforms to educator pension programs. See also “Item 1.
Business -- Regulation -- Regulation at Federal Level”.
Current federal income tax laws generally permit the tax-deferred accumulation of
earnings on the premiums paid by the holders of retirement and life insurance products.
Taxes, if any, are generally payable on income attributable to a distribution under the contract
for the year in which the distribution is made. From time to time, Congress has considered
legislation that would reduce or eliminate the benefit of such deferral of taxation on the
accretion of value within life insurance and non-qualified annuity contracts. Enactment of this
legislation, or other tax reform efforts, including a simplified “flat tax” income structure with an
exemption from taxation for investment income, could result in fewer sales of our life insurance
and annuity products.
The insurance industry is highly regulated.
We are subject to extensive regulation and supervision in the jurisdictions in which we do
business. Each jurisdiction has a unique and complex set of laws and regulations.
Furthermore, certain federal laws impose additional requirements on businesses, including
insurers. Regulation generally is designed to protect the interests of policyholders, as opposed
to stockholders and non-policyholder creditors. Such regulations, among other things, impose
restrictions on the amount and type of investments our subsidiaries may hold. Certain states
also regulate the rates insurers may charge for certain property and casualty products.
Legislation and voter initiatives have expanded, in some instances, the states’ regulation of
rates and have increased data reporting requirements. Consumer-related pressures to roll
back rates, even if not enacted by legislation or upheld upon judicial appeal, may affect our
ability to obtain timely rate increases or operate at desired levels of profitability. Changes in
insurance regulations, including those affecting the ability of our insurance subsidiaries to
distribute cash to us and those affecting the ability of our insurance subsidiaries to write
profitable property and casualty insurance policies in one or more states, may adversely affect
the financial condition and results of operations of our insurance subsidiaries. In addition,
consumer privacy requirements may increase our cost of processing business. Our ability to
comply with laws and regulations, at a reasonable cost, and to obtain necessary regulatory
action in a timely manner, is and will continue to be critical to our success.
Regulation that could adversely affect our insurance subsidiaries also includes statutory
surplus and risk-based capital requirements. Maintaining appropriate levels of surplus, as
measured by statutory accounting principles, is considered important by state insurance
regulatory authorities and the private agencies that rate insurers’ claims-paying abilities and
financial strength. The failure of an insurance subsidiary to maintain levels of statutory surplus
37
that are sufficient for the amount of its insurance written could result in increased regulatory
scrutiny, action by state regulatory authorities or a downgrade by rating agencies.
Similarly, the NAIC has adopted a system of assessing minimum capital adequacy that is
applicable to our insurance subsidiaries. This system, known as risk-based capital, is used to
identify companies that may merit further regulatory action by analyzing the adequacy of the
insurer’s surplus in relation to statutory requirements.
Because state legislatures remain concerned about the availability and affordability of
property and casualty insurance and the protection of policyholders, our insurance subsidiaries
expect that they will continue to face efforts by those legislatures to expand regulations to
address these concerns. Resulting new legislation could adversely affect the financial
condition and results of operations of our insurance subsidiaries.
In the event of the insolvency, liquidation or other reorganization of any of our insurance
subsidiaries, our creditors and stockholders would have no right to proceed against any such
insurance subsidiary or to cause the liquidation or bankruptcy of any such insurance subsidiary
under federal or state bankruptcy laws. The insurance laws of the domiciliary state would
govern such proceedings and the relevant insurance commissioner would act as liquidator or
rehabilitator for the insurance subsidiary. Creditors and policyholders of any such insurance
subsidiary would be entitled to payment in full from the assets of the insurance subsidiary
before we, as a stockholder, would be entitled to receive any distribution.
The financial position of our insurance subsidiaries also may be affected by court
decisions that expand insurance coverage beyond the intention of the insurer at the time it
originally issued an insurance policy.
Dodd-Frank created the Federal Insurance Office (“FIO”) within the U.S. Department of
the Treasury. The FIO studies the current insurance regulatory system and is charged with
monitoring and providing specific reports on various aspects of the insurance industry.
However, the FIO does not have general supervisory or regulatory authority over the business
of insurance. The FIO has suggested an expanded federal role in some circumstances.
Management will continue to monitor developments under Dodd-Frank, as various aspects of it
continue to be addressed by governmental bodies. Additional regulations could adversely
affect the efficiency and effectiveness of business processes, financial condition and results of
operations of the Company, insurers of similar size and/or the insurance industry as a whole.
The insurance industry is highly cyclical.
The results of companies in the insurance industry historically have been subject to
significant fluctuations due to competition, economic conditions, interest rates and other
factors. In particular, companies in the property and casualty insurance segment of the
industry historically have experienced pricing and profitability cycles. With respect to these
cycles, the factors having the greatest impact include significant and/or rapid changes in loss
costs, including changes in loss frequency and/or severity; prior approval and restrictions in
certain states for price increases; intense price competition; less restrictive underwriting
standards; aggressive marketing; and increased advertising, which have resulted in higher
industry-wide combined loss and expense ratios.
38
Cybersecurity Requirements for Financial Services Companies at State Level
Individual state regulation of Cybersecurity programs are being adopted on a state by
state basis to ensure the safety and soundness of the institution and protect its customers.
New York State Department of Financial Services adopted a regulation providing minimum
standards for an organization’s Cybersecurity program and requiring an annual certification
confirming compliance. Additional states may establish Cybersecurity regulations with varying
compliance requirements.
Litigation may harm our financial strength or reduce our profitability.
Companies in the insurance industry have been subject to substantial litigation resulting
from claims, disputes and other matters. Most recently, they have faced expensive claims,
including class action lawsuits, alleging, among other things, improper sales practices and
improper claims settlement procedures. Negotiated settlements of certain such actions have
had a material adverse effect on many insurance companies. The resolution of similar future
claims against any of our insurance subsidiaries, including the potential adverse effect on our
reputation and charges against the earnings of our insurance subsidiaries as a result of legal
defense costs, a settlement agreement or an adverse finding or findings against our insurance
subsidiaries in such a claim, could have a material adverse effect on the financial condition
and results of operations of our insurance subsidiaries.
Data security breaches or denial of service on our websites could have an adverse
impact on the Company’s business and reputation.
Unauthorized access to and unintentional dissemination of our confidential, highly-
sensitive customer, employee or Company data or other breaches of data security in our
facilities, networks or databases, or those of our agents or third-party vendors -- including
information technology and software vendors, could result in loss or theft of assets or sensitive
information, data corruption or operational disruption that may expose the Company to liability
and/or regulatory action and may have an adverse impact on the Company’s customers,
employees, investors, reputation and business. In addition, any compromise of the security of
our data or prolonged denial of service on our websites could harm the Company’s business
and reputation. We have designed, implemented and routinely test industry-compliant
procedures for protection of confidential information and sensitive corporate data, including
rapid response procedures to help contain or prevent data loss if a breach were to occur. We
have also implemented multiple technical security protections and contractual obligations
regarding security breaches for our agents and third-party vendors. Even with these efforts,
there can be no assurance that security breaches or service disruptions will be prevented.
39
Successful execution of our business growth strategy is dependent on effective
implementation of new or enhanced technology systems and applications.
Our ability to effectively execute our business growth strategy and leverage potential
economies of scale is dependent on our ability to provide the requisite technology components
for that strategy. While we have effectively upgraded our infrastructure technologies with
improvements in our data center, a new communications platform and enhancements to our
disaster recovery capabilities, our ability to replace or supplement dated, monolithic legacy
business systems -- such as our life, annuity and property and casualty policy administrative
systems -- with more flexible, maintainable, and customer accessible solutions will be
necessary to achieve our plans. The inherent difficulty in replacing and/or modernizing these
older technologies, coupled with the Company’s limited experience in these endeavors,
presents an increased risk to delivering these technology solutions in a cost effective and
timely manner. Our scale will require us to develop innovative solutions to address these
challenges, including consideration of “software as a service” arrangements and other third-
party based information technology capabilities. More modern approaches to software
development and utilization of third-party vendors can augment the Company’s internal
capacity for these implementations, but may not adequately reduce the operational risks of
timely and cost effective delivery.
Loss of key vendor relationships could affect our operations.
We increasing rely on services and products provided by a number of vendors in the
United States and abroad. These include, for example, vendors of computer hardware and
software, including on-demand software, and vendors of services such as investment
management advisement, information technology services -- such as those associated with
our life, annuity and property and casualty policy administrative systems -- and delivery
services for customer policy-level communications. In the event that one or more of our
vendors suffers a bankruptcy or otherwise becomes unable to continue to provide products or
services, we may suffer operational difficulties and financial losses.
ITEM 1B. Unresolved Staff Comments
None.
ITEM 2. Properties
HMEC's home office property at 1 Horace Mann Plaza in Springfield, Illinois, consisting
of an office building totaling 225,000 square feet, is owned by the Company. Also in
Springfield, the Company owns and leases some smaller buildings at other locations. In
addition, the Company leases office space in suburban Dallas, Texas, and Raleigh, North
Carolina, for its claims operations and leases some office space related to its field marketing
operations. These properties, which are utilized by all of the Company’s business segments,
are adequate and suitable for the Company's current and anticipated future needs.
ITEM 3. Legal Proceedings
At the time of this Annual Report on Form 10-K, the Company does not have pending
litigation from which there is a reasonable possibility of material loss.
40
ITEM 4. Mine Safety Disclosures
Not applicable.
PART II
ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
Market Information and Dividends
HMEC's common stock is traded on the NYSE under the symbol of HMN. The following
table provides the high and low closing prices of the common stock on the NYSE Composite
Tape and the cash dividends paid per share of common stock during the periods indicated.
Fiscal Period
2016:
Market Price
Low
High
Dividend
Paid
Fourth Quarter ...................................................................................
Third Quarter .....................................................................................
Second Quarter .................................................................................
First Quarter ......................................................................................
2015:
Fourth Quarter ...................................................................................
Third Quarter .....................................................................................
Second Quarter .................................................................................
First Quarter ......................................................................................
$43.30
37.36
34.51
32.30
$36.42
37.74
37.04
34.29
$33.30
33.40
30.36
27.59
$32.42
31.84
33.97
30.38
$0.265
0.265
0.265
0.265
$0.250
0.250
0.250
0.250
The payment of dividends in the future is subject to the discretion of the Board of
Directors of HMEC and will depend upon general business conditions, legal restrictions and
other factors the Board of Directors may deem to be relevant. Additional information is
contained in “Notes to Consolidated Financial Statements -- Note 10 -- Statutory Information
and Restrictions” listed on page F-1 of this report and in “Item 1. Business -- Cash Flow”.
41
Shareholder Return Performance Graph
The graph below compares cumulative total return* of Horace Mann Educators
Corporation’s common stock, the S&P 500 Insurance Index and the S&P 500 Index. The
graph assumes $100 invested on December 31, 2011 in HMEC, the S&P 500 Insurance Index
and the S&P 500 Index.
Comparison of Cumulative Five Year Total Return to Shareholders*
$400
$350
$300
$250
$200
$150
$100
$50
s
r
a
l
l
o
D
$0
Dec-11
Dec-12
Dec-13
Dec-14
Dec-15
Dec-16
HMEC
S&P 500 Insurance Index
S&P 500 Index
12/11
12/12
12/13
12/14
12/15
12/16
HMEC ........................................................................... $100
100
S&P 500 Insurance Index .............................................
100
S&P 500 Index ..............................................................
$150
119
116
$242
174
153
$262
188
174
$270
193
176
$357
226
197
*
The S&P 500 Index and the S&P 500 Insurance Index, as published by S&P, assume an annual reinvestment of dividends in calculating total
return. Horace Mann Educators Corporation assumes reinvestment of quarterly dividends when paid.
Holders and Shares Issued
As of February 15, 2017, the approximate number of holders of HMEC’s common stock
was 12,000.
During 2016, options were exercised for the issuance of 142,203 shares, 0.4% of the
Company’s common stock shares outstanding at December 31, 2015. The Company received
$3.0 million as a result of these option exercises, including related federal income tax benefits,
which was used for general corporate purposes.
Regarding the equity compensation plan information required by Item 201(d) of
Regulation S-K, see “Item 12. Security Ownership of Certain Beneficial Owners and
Management, and Related Stockholder Matters”.
42
Issuer Purchases of Equity Securities
On December 7, 2011, the Company’s Board of Directors (the “Board”) authorized a
share repurchase program allowing repurchases of up to $50.0 million of Horace Mann
Educators Corporation’s Common Stock, par value $0.001 (the “2011 Plan”). On September
30, 2015, the Board authorized an additional share repurchase program allowing repurchases
of up to $50.0 million to begin following the completion of the 2011 Plan and utilization of that
authorization began in January 2016. Both share repurchase programs authorize the
repurchase of common shares in open market or privately negotiated transactions, from time
to time, depending on market conditions. The current share repurchase program does not
have an expiration date and may be limited or terminated at any time without notice. During
the three months ended December 31, 2016, the Company did not repurchase shares of
HMEC common stock. As of December 31, 2016, $29.5 million remained authorized for future
share repurchases.
ITEM 6. Selected Financial Data
The information required by Item 301 of Regulation S-K is contained in the table in “Item
1. Business -- Selected Historical Consolidated Financial Data”.
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations
The information required by Item 303 of Regulation S-K is listed on page F-1 of this
report.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
The information required by Item 305 of Regulation S-K is contained under the heading
“Market Value Risk” in “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” listed on page F-1 of this report.
ITEM 8. Consolidated Financial Statements and Supplementary Data
The Company's consolidated financial statements, financial statement schedules, the
report of its independent registered public accounting firm and the selected quarterly financial
data required by Item 302 of Regulation S-K are listed on page F-1 of this report.
43
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
ITEM 9A. Controls and Procedures
a.) Management’s Conclusion Regarding the Effectiveness of Disclosure Controls
and Procedures
Under the supervision and with the participation of our management, including our chief
executive officer and chief financial officer, we conducted an evaluation of our disclosure
controls and procedures, as such term is defined under Rule 13a-15(e) of the Securities and
Exchange Act of 1934 as amended (the “Exchange Act”) as of December 31, 2016. Based on
this evaluation, our chief executive officer and our chief financial officer concluded that our
disclosure controls and procedures were effective as of December 31, 2016, the end of the
period covered by this Annual Report on Form 10-K.
b.) Management’s Annual Report on Internal Control Over Financial Reporting
Management of Horace Mann is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the
Exchange Act. Internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with U.S. generally accepted
accounting principles. A company's internal control over financial reporting includes those
policies and procedures that:
(i) Pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(ii) Provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with U.S. generally
accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and
directors of the company; and
(iii) Provide reasonable assurance regarding prevention or
timely detection of
unauthorized acquisition, use, or disposition of the company's assets that could
have a material effect on the consolidated financial statements.
Management of Horace Mann conducted an evaluation of the effectiveness of the
Company's internal control over financial reporting as of December 31, 2016, using the criteria
set forth in Internal Control – Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (“COSO”). Because of its inherent
limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate. Based on this evaluation,
management, including our CEO and our CFO, determined that, as of December 31, 2016, the
Company maintained effective internal control over financial reporting.
44
The effectiveness of the Company’s internal control over financial reporting as of
December 31, 2016 has been audited by KPMG LLP, the independent registered public
accounting firm that audited the Company’s consolidated financial statements, as stated in
their report listed on page F-1 of this Annual Report on Form 10-K.
Independent Registered Public Accounting Firm’s Report on Internal Control Over
c.)
Financial Reporting
The information required by Item 308(b) of Regulation S-K is contained in the “Report of
Independent Registered Public Accounting Firm” listed on page F-1 of this report.
d.) Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting that
occurred during the Company’s last fiscal quarter that have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B. Other Information
None.
PART III
ITEM 10. Directors, Executive Officers and Corporate Governance
The information required by Items 401, 405, 406, 407(c)(3), 407(d)(4) and 407(d)(5) of
Regulation S-K is incorporated by reference to the Company's Proxy Statement for the 2017
Annual Meeting of Shareholders.
Horace Mann Educators Corporation has adopted a code of ethics that applies to its
principal executive officer, principal financial officer, principal accounting officer and all other
employees of the Company. In addition, the Board of Directors of Horace Mann Educators
Corporation has adopted the code of ethics for its Board members as it applies to each Board
member’s business conduct on behalf of the Company. The code of ethics is posted on the
Company’s website, www.horacemann.com, under “Investors -- Corporate Overview --
Governance Documents”. In addition, amendments to the code of ethics and any grant of a
waiver from a provision of the code of ethics requiring disclosure under applicable SEC rules
will be disclosed at the same location as the code of ethics on the Company’s website.
ITEM 11. Executive Compensation
The information required by Items 402, 407(e)(4) and 407(e)(5) of Regulation S-K is
incorporated by reference to the Company's Proxy Statement for the 2017 Annual Meeting of
Shareholders.
45
ITEM 12. Security Ownership of Certain Beneficial Owners and Management, and
Related Stockholder Matters
The information required by Items 201(d) and 403 of Regulation S-K is incorporated by
reference to the Company's Proxy Statement for the 2017 Annual Meeting of Shareholders.
ITEM 13. Certain Relationships and Related Transactions, and Director Independence
The information required by Items 404 and 407(a) of Regulation S-K is incorporated by
reference to the Company's Proxy Statement for the 2017 Annual Meeting of Shareholders.
ITEM 14. Principal Accounting Fees and Services
The information required by Item 9(e) of Schedule 14A is incorporated by reference to
the Company’s Proxy Statement for the 2017 Annual Meeting of Shareholders.
ITEM 15. Exhibits and Financial Statement Schedules
PART IV
(a)(1)
The following consolidated financial statements of the Company are contained
in the Index to Financial Information on page F-1 of this report:
Consolidated Balance Sheets as of December 31, 2016 and 2015.
2016, 2015 and 2014.
Consolidated Statements of Operations for the Years Ended December 31,
Ended December 31, 2016, 2015 and 2014.
Consolidated Statements of Comprehensive Income (Loss) for the Years
Ended December 31, 2016, 2015 and 2014.
Consolidated Statements of Changes in Shareholders' Equity for the Years
2016, 2015 and 2014.
Consolidated Statements of Cash Flows for the Years Ended December 31,
(a)(2)
The following financial statement schedules of the Company are contained in
the Index to Financial Information on page F-1 of this report:
Parties.
Schedule I - Summary of Investments - Other than Investments in Related
Schedule II - Condensed Financial Information of Registrant.
Supplemental Information Concerning Property and Casualty Insurance Operations.
Schedules III and VI Combined - Supplementary Insurance Information and
Schedule IV - Reinsurance.
46
(a)(3)
The following items are filed as Exhibits. Management contracts and
compensatory plans are indicated by an asterisk (*).
Exhibit
No.
Description
(3) Articles of incorporation and bylaws:
3.1
3.2
3.3
Restated Certificate of Incorporation of HMEC, filed with the Delaware
Secretary of State on June 24, 2003, incorporated by reference to Exhibit 3.1
to HMEC’s Quarterly Report on Form 10-Q for the quarter ended June 30,
2003, filed with the Securities and Exchange Commission (the “SEC”) on
August 14, 2003.
Form of Certificate for shares of Common Stock, $0.001 par value per share,
of HMEC, incorporated by reference to Exhibit 4.5 to HMEC’s Registration
Statement on Form S-3 (Registration No. 33-53118) filed with the SEC on
October 9, 1992.
Bylaws of HMEC, incorporated by reference to Exhibit 3.2 to HMEC’s
Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, filed
with the SEC on August 14, 2003.
(4)
Instruments defining the rights of security holders, including indentures:
4.1
4.1(a)
4.2
Indenture, dated as of November 23, 2015, by and between HMEC and The
Bank of New York Mellon Trust Company, N.A., as trustee, incorporated by
reference to Exhibit 4.1 to HMEC’s Current Report on Form 8-K dated
November 18, 2015, filed with the SEC on November 23, 2015.
Form of HMEC 4.5000% Senior Notes due 2025, incorporated by reference to
Exhibit 4.2 to HMEC’s Current Report on Form 8-K dated November 18,
2015, filed with the SEC on November 23, 2015.
Certificate of Designations for HMEC Series A Cumulative Convertible
Preferred Stock, incorporated by reference to Exhibit 4.3 to HMEC’s Annual
Report on Form 10-K for the year ended December 31, 2005, filed with the
SEC on March 16, 2006.
(10) Material contracts:
10.1
Amended and Restated Credit Agreement dated as of July 30, 2014 among
HMEC, certain financial institutions named therein and JPMorgan Chase
Bank, N.A., as administrative agent, incorporated by reference to Exhibit 10.1
to HMEC’s Quarterly Report on Form 10-Q for the quarter ended June 30,
2014, filed with the SEC on August 8, 2014.
47
Exhibit
No.
10.1(a)
Description
First Amendment to Credit Agreement dated as of November 16, 2015 among
HMEC, certain financial institutions named therein and JPMorgan Chase
Bank, N.A., as administrative agent, incorporated by reference to Exhibit
10.1(a) to HMEC’s Annual Report on Form 10-K for the year ended
December 31, 2015, filed with the SEC on February 29, 2016.
10.2*
Horace Mann Educators Corporation Amended and Restated 2002 Incentive
Compensation Plan (“2002 Incentive Compensation Plan”), incorporated by
reference to Exhibit 10.2 to HMEC’s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2005, filed with the SEC on August 9, 2005.
10.2(a)* Revised Specimen Employee Stock Option Agreement under the 2002
Incentive Compensation Plan, incorporated by reference to Exhibit 10.6(b) to
HMEC’s Annual Report on Form 10-K for the year ended December 31, 2008,
filed with the SEC on March 2, 2009.
10.2(b)* Specimen Employee Restricted Stock Unit Agreement under the 2002
Incentive Compensation Plan, incorporated by reference to Exhibit 10.6(d) to
HMEC’s Annual Report on Form 10-K for the year ended December 31, 2005,
filed with the SEC on March 16, 2006.
10.2(c)* Revised Specimen Employee Restricted Stock Unit Agreement under the
2002 Incentive Compensation Plan, incorporated by reference to Exhibit
10.6(f) to HMEC’s Annual Report on Form 10-K for the year ended December
31, 2008, filed with the SEC on March 2, 2009.
10.2(d)* Specimen Non-employee Director Restricted Stock Unit Agreement under the
2002 Incentive Compensation Plan, incorporated by reference to Exhibit
10.6(e) to HMEC’s Annual Report on Form 10-K for the year ended
December 31, 2005, filed with the SEC on March 16, 2006.
10.2(e)* Revised Specimen Non-employee Director Restricted Stock Unit Agreement
under the 2002 Incentive Compensation Plan, incorporated by reference to
Exhibit 10.6(h) to HMEC’s Annual Report on Form 10-K for the year ended
December 31, 2008, filed with the SEC on March 2, 2009.
10.3*
HMEC 2010 Comprehensive Executive Compensation Plan As Amended and
Restated, incorporated by reference to Exhibit 1 (beginning on page E-1) to
HMEC’s Proxy Statement, filed with the SEC on April 8, 2015.
10.3(a)* Specimen Incentive Stock Option Agreement for Section 16 Officers under
the HMEC 2010 Comprehensive Executive Compensation Plan, incorporated
by reference to Exhibit 10.7(a) to HMEC’s Quarterly Report on Form 10-Q for
the quarter ended June 30, 2011, filed with the SEC on August 9, 2011.
48
Exhibit
No.
Description
10.3(b)* Specimen Incentive Stock Option Agreement for Non-Section 16 Officers
under the HMEC 2010 Comprehensive Executive Compensation Plan,
incorporated by reference to Exhibit 10.7(b) to HMEC’s Quarterly Report on
Form 10-Q for the quarter ended June 30, 2011, filed with the SEC on August
9, 2011.
10.3(c)* Specimen Employee Service-Vested Restricted Stock Units Agreement under
the HMEC 2010 Comprehensive Executive Compensation Plan, incorporated
by reference to Exhibit 10.7(c) to HMEC’s Quarterly Report on Form 10-Q for
the quarter ended June 30, 2011, filed with the SEC on August 9, 2011.
10.3(d)* Specimen Employee Performance-Based Restricted Stock Units Agreement
under the HMEC 2010 Comprehensive Executive Compensation Plan,
incorporated by reference to Exhibit 10.7(d) to HMEC’s Quarterly Report on
Form 10-Q for the quarter ended June 30, 2011, filed with the SEC on August
9, 2011.
10.3(e)* Specimen Employee Performance-Based Restricted Stock Units Agreement -
Key Strategic Grantee under the HMEC 2010 Comprehensive Executive
Compensation Plan incorporated by reference to Exhibit 10.3(e) to HMEC’s
Quarterly Report on Form 10-Q for the quarter ended March 31, 2016, filed
with the SEC on May 6, 2016.
10.3(f)* Specimen Non-employee Director Restricted Stock Unit Agreement under the
HMEC 2010 Comprehensive Executive Compensation Plan, incorporated by
reference to Exhibit 10.17(a) to HMEC’s Current Report on Form 8-K dated
May 27, 2010, filed with the SEC on June 2, 2010.
10.4*
10.5*
10.6*
10.7*
Horace Mann Supplemental Employee Retirement Plan, 2002 Restatement,
incorporated by reference to Exhibit 10.1 to HMEC’s Quarterly Report on
Form 10-Q for the quarter ended March 31, 2002, filed with the SEC on May
15, 2002.
Horace Mann Executive Supplemental Employee Retirement Plan, 2002
Restatement, incorporated by reference to Exhibit 10.2 to HMEC’s Quarterly
Report on Form 10-Q for the quarter ended March 31, 2002, filed with the
SEC on May 15, 2002.
Amended and Restated Horace Mann Nonqualified Supplemental Money
Purchase Pension Plan, incorporated by reference to Exhibit 10.9 to HMEC’s
Annual Report on Form 10-K for the year ended December 31, 2008, filed
with the SEC on March 2, 2009.
Summary of HMEC Non-employee Director Compensation, incorporated by
reference to Exhibit 10.7 to HMEC’s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2016, filed with the SEC on August 5, 2016.
49
Exhibit
No.
10.8*
Description
Summary of HMEC Named Executive Officer Annualized Salaries
incorporated by reference to Exhibit 10.8 to HMEC’s Quarterly Report on
Form 10-Q for the quarter ended March 31, 2016, filed with the SEC on May
6, 2016.
10.9*
Form of Severance Agreement between HMEC, Horace Mann Service
Corporation (“HMSC”) and certain officers of HMEC and/or HMSC,
incorporated by reference to Exhibit 10.13 to HMEC’s Annual Report on Form
10-K for the year ended December 31, 2012, filed with the SEC on February
28, 2013.
10.9(a)* Revised Schedule to Severance Agreements between HMEC, HMSC and
certain officers of HMEC and/or HMSC, incorporated by reference to Exhibit
10.9(a) to HMEC’s Quarterly Report on Form 10-Q for the quarter ended June
30, 2016, filed with the SEC on August 5, 2016.
10.10*
HMSC Executive Change in Control Plan, incorporated by reference to
Exhibit 10.15 to HMEC’s Current Report on Form 8-K dated February 15,
2012, filed with the SEC on February 22, 2012.
10.10(a)* HMSC Executive Change in Control Plan Schedule A Plan Participants
incorporated by reference to Exhibit 10.10(a) to HMEC’s Quarterly Report on
Form 10-Q for the quarter ended March 31, 2016, filed with the SEC on May
6, 2016.
10.11*
HMSC Executive Severance Plan, incorporated by reference to Exhibit 10.16
to HMEC’s Current Report on Form 8-K dated March 7, 2012, filed with the
SEC on March 13, 2012.
10.11(a)* First Amendment to the HMSC Executive Severance Plan, incorporated by
reference to Exhibit 10.16(a) to HMEC’s Quarterly Report on Form 10-Q for
the quarter ended June 30, 2012, filed with the SEC on August 9, 2012.
10.11(b)* HMSC Executive Severance Plan Schedule A Participants incorporated by
reference to Exhibit 10.11(b) to HMEC’s Quarterly Report on Form 10-Q for
the quarter ended March 31, 2016, filed with the SEC on May 6, 2016.
(11) Statement regarding computation of per share earnings.
(12) Statement regarding computation of ratios.
(21) Subsidiaries of HMEC.
(23) Consent of KPMG LLP.
50
Exhibit
No.
Description
(31) Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.1
Certification by Marita Zuraitis, Chief Executive Officer of HMEC.
31.2
Certification by Bret A. Conklin, Senior Vice President and Acting Chief
Financial Officer of HMEC.
(32) Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.1
Certification by Marita Zuraitis, Chief Executive Officer of HMEC.
32.2
Certification by Bret A. Conklin, Senior Vice President and Acting Chief
Financial Officer of HMEC.
(99) Additional exhibits
99.1
Glossary of Selected Terms.
(101) Interactive Data File
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema
101.CAL XBRL Taxonomy Extension Calculation Linkbase
101.DEF XBRL Taxonomy Extension Definition Linkbase
101.LAB XBRL Taxonomy Extension Label Linkbase
101.PRE XBRL Taxonomy Extension Presentation Linkbase
Copies of Form 10-K, Exhibits to Form 10-K, Horace Mann Educators Corporation’s
Code of Ethics and charters of the committees of the Board of Directors are available through
the Investors section of the Company’s Internet website, www.horacemann.com. Copies also
may be obtained by writing to Investor Relations, Horace Mann Educators Corporation, 1
Horace Mann Plaza, Springfield, Illinois 62715-0001.
51
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Horace Mann
Educators Corporation has duly caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SIGNATURES
HORACE MANN EDUCATORS CORPORATION
/s/ Marita Zuraitis
Marita Zuraitis
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of Horace Mann Educators Corporation and in the capacities and on the date indicated.
Principal Executive Officer:
Directors:
/s/ Marita Zuraitis
Marita Zuraitis
President, Chief Executive Officer and a Director
/s/ Gabriel L. Shaheen
Gabriel L. Shaheen, Chairman of the Board of Directors
Principal Financial and Accounting Officer:
/s/ Daniel A. Domenech
Daniel A. Domenech, Director
/s/ Stephen J. Hasenmiller
Stephen J. Hasenmiller, Director
/s/ Bret A. Conklin
Bret A. Conklin
Senior Vice President and Acting Chief Financial Officer
/s/ Ronald J. Helow
Ronald J. Helow, Director
/s/ Beverley J. McClure
Beverley J. McClure, Director
/s/ H. Wade Reece
H. Wade Reece, Director
/s/ Robert Stricker
Robert Stricker, Director
/s/ Steven O. Swyers
Steven O. Swyers, Director
Dated: March 1, 2017
52
HORACE MANN EDUCATORS CORPORATION
INDEX TO FINANCIAL INFORMATION
Page
Management's Discussion and Analysis of
Financial Condition and Results of Operations ............................................................
F-2
Report of Independent Registered Public Accounting Firm ............................................
F-34
Consolidated Balance Sheets .........................................................................................
F-36
Consolidated Statements of Operations .........................................................................
F-37
Consolidated Statements of Comprehensive Income (Loss) ..........................................
F-38
Consolidated Statements of Changes in Shareholders' Equity .......................................
F-39
Consolidated Statements of Cash Flows ........................................................................
F-40
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies ................................................
F-41
Note 2 - Investments ..................................................................................................
F-62
Note 3 - Fair Value of Financial Instruments ..............................................................
F-68
Note 4 - Derivative Instruments ..................................................................................
F-76
Note 5 - Property and Casualty Unpaid Claims and Claim Expenses ........................
F-78
Note 6 - Reinsurance and Catastrophes ....................................................................
F-86
Note 7 - Debt ..............................................................................................................
F-88
Note 8 - Income Taxes ...............................................................................................
F-90
Note 9 - Shareholders' Equity and Common Stock Equivalents ................................
F-92
Note 10 - Statutory Information and Restrictions .........................................................
F-96
F-98
Note 11 - Pension Plans and Other Postretirement Benefits .......................................
Note 12 - Contingencies and Commitments ................................................................ F-106
Note 13 - Supplementary Data on Cash Flows ............................................................ F-107
Note 14 - Segment Information .................................................................................... F-108
Note 15 - Unaudited Selected Quarterly Financial Data .............................................. F-109
Financial Statement Schedules
Schedule I - Summary of Investments - Other than Investments in
Related Parties .......................................................................................................... F-110
Schedule II - Condensed Financial Information of Registrant ...................................... F-111
Schedule III and VI Combined - Supplementary Insurance Information
and Supplemental Information Concerning Property and Casualty
Insurance Operations ................................................................................................ F-115
Schedule IV - Reinsurance .......................................................................................... F-116
F-1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (“MD&A”)
(Dollars in millions, except per share data)
Forward-looking Information
Statements made in the following discussion that are not historical in nature are forward-
looking within the meaning of the Private Securities Litigation Reform Act of 1995 and are
subject to known and unknown risks, uncertainties and other factors. Horace Mann is not
under any obligation to (and expressly disclaims any such obligation to) update or revise any
forward-looking statements, whether as a result of new information, future events or otherwise.
It is important to note that the Company’s actual results could differ materially from those
projected in forward-looking statements due to a number of risks and uncertainties inherent in
the Company’s business. For additional information regarding risks and uncertainties, see
“Item 1A. Risk Factors”. That discussion includes factors such as:
The impact that a prolonged economic recession may have on the Company’s
investment portfolio; volume of new business for automobile, homeowners, retirement
and life products; policy renewal rates; and additional annuity contract deposit receipts.
Fluctuations in the fair value of securities in the Company’s investment portfolio and the
related after tax effect on the Company’s shareholders’ equity and total capital through
either realized or unrealized investment losses.
Prevailing low interest rate levels, including the impact of interest rates on (1) the
Company’s ability to maintain appropriate interest rate spreads over minimum fixed rates
guaranteed in the Company’s annuity and life products, (2) the book yield of the
Company’s investment portfolio, (3) unrealized gains and losses in the Company’s
investment portfolio and the related after tax effect on the Company’s shareholders’
equity and total capital, (4) amortization of deferred policy acquisition costs and (5)
capital levels of the Company’s life insurance subsidiaries.
The frequency and severity of events such as hurricanes, storms, earthquakes and
wildfires, and the ability of the Company to provide accurate estimates of ultimate claim
costs in its consolidated financial statements.
The Company’s risk exposure to catastrophe-prone areas. Based on full year 2016
Property and Casualty direct earned premiums, the Company’s ten largest states
represented 57% of the segment total. Included in this top ten group are certain states
which are considered more prone to catastrophe occurrences: California, North
Carolina, Texas, South Carolina, Florida and Louisiana.
The ability of the Company to maintain a favorable catastrophe reinsurance program
considering both availability and cost; and the collectibility of reinsurance receivables.
Adverse changes in market appreciation, interest spreads, business persistency and
policyholder mortality and morbidity rates and the resulting impact on both estimated
reserves and the amortization of deferred policy acquisition costs.
The Company’s ability to refinance outstanding indebtedness or repurchase shares of
the Company’s common stock.
The Company’s ability to (1) develop and expand its marketing operations, including
agents and other points of distribution, (2) maintain and secure access to educators,
school administrators, principals and school business officials; and (3) profitably expand
its Property and Casualty business in highly competitive environments.
F-2
The effects of economic forces and other issues affecting the educator market including,
but not limited to, federal, state and local budget deficits and cut-backs and adverse
changes in state and local tax revenues. The effects of these forces can include, among
others, teacher layoffs and early retirements, as well as individual concerns regarding
employment and economic uncertainty.
Changes in federal and state laws and regulations, which affect the relative tax and other
advantages of the Company’s life and annuity products to customers, including, but not
limited to, changes in IRS regulations governing Section 403(b) plans.
Changes in public employee retirement programs as a result of federal and/or state level
pension reform initiatives.
Changes in federal and state laws and regulations, which affect the relative tax
advantage of certain investments or which affect the ability of debt issuers to declare
bankruptcy or restructure debt.
The Company’s ability to effectively implement new or enhanced information technology
systems and applications.
Changes in Cybersecurity regulations as a result of state level requirements.
Executive Summary
Horace Mann Educators Corporation (“HMEC”; and together with its subsidiaries, the
“Company” or “Horace Mann”) is an insurance holding company. Through its subsidiaries,
HMEC markets and underwrites personal lines of property and casualty insurance, annuities
and life insurance in the U.S. The Company markets its products primarily to K-12 teachers,
administrators and other employees of public schools and their families.
For 2016, the Company’s net income of $83.8 million decreased $9.7 million compared
to 2015. After tax net realized investment gains were $2.3 million compared to $8.6 million a
year earlier. For the Property and Casualty segment, net income of $25.6 million decreased
$14.4 million compared to 2015. The Property and Casualty combined ratio was 101.5% for
2016, 4.5 percentage points higher than the 97.0% in 2015, primarily as a result of a 2.3 point
increase in catastrophe losses, or an increase of $15.6 million on pretax basis. One
percentage increase, or $5.5 million pretax basis, was related to a lower level of favorable prior
years’ reserve development in 2016 compared to the full year 2015. On an underlying basis,
the combined ratio increased 1.2 percentage points to 92.9%. The underlying auto combined
ratio increased 2.4 percentage points, to 105.1%, primarily as a result of higher loss frequency
and severity. This increase was somewhat offset by a 1.7 percentage point improvement in
the underlying property combined ratio, which for the full year 2016 was 68.6%. The
improvement in property results was primarily driven by the impacts of profitability
improvement initiatives, as well as, lower catastrophe reinsurance costs. The Retirement
segment’s net income was $50.7 million for 2016 which increased $7.3 million compared to
2015, primarily due to an increase in investment income that drove improvement in the net
interest spread offset by costs related to the Company’s continued infrastructure and strategic
investments. The net interest margin amount (without net realized investment gains/losses)
increased $8.1 million after tax compared to 2015, including increases in investment
prepayment activity. The impact of unlocking deferred policy acquisition costs increased
income by $2.4 million compared to 2015. In addition, income tax expense was reduced by
approximately $0.9 million related to the filing of the prior calendar year tax return. Annuity
assets under management of $6.4 billion increased 7.2% compared to a year earlier and
disciplined crediting rate management continues. Life segment net income of $16.6 million
increased $1.6 million compared to 2015 primarily as a result of an increase in investment
income and a decrease in mortality expenses in 2016.
F-3
Premiums written and contract deposits* increased slightly compared to 2015 as growth
in the Property and Casualty and Life segments was offset by a decrease in the amount of
annuity deposits received in 2016. Property and Casualty segment premiums written
increased 4.7% compared to the prior year, primarily due to the favorable impacts from
increases in average premium per policy for homeowners and automobile, accompanied by
reductions in catastrophe reinsurance costs. Life segment insurance premiums and contract
deposits increased 5.2% compared to 2015. Annuity deposits received for Retirement
decreased 5.1%, due to the inclusion of a favorable impact of non-recurring deposits in 2015
related to changes in the Company’s employee retirement savings plans as further explained
in “Results of Operations -- Insurance Premiums and Contract Charges”.
The Company’s book value per share was $32.15 at December 31, 2016, an increase of
3.1% compared to 12 months earlier.
Critical Accounting Policies
The preparation of consolidated financial statements in conformity with U.S. generally
accepted accounting principles (“GAAP”) requires the Company's management to make
estimates and assumptions based on information available at the time the consolidated
financial statements are prepared. These estimates and assumptions affect the reported
amounts of the Company's consolidated assets, liabilities, shareholders' equity and net
income. Certain accounting estimates are particularly sensitive because of their significance to
the Company's consolidated financial statements and because of the possibility that
subsequent events and available information may differ markedly from management's
judgments at the time the consolidated financial statements were prepared. Management has
discussed with the Audit Committee the quality, not just the acceptability, of the Company's
accounting principles as applied in its financial reporting. The discussions generally included
such matters as the consistency of the Company's accounting policies and their application,
and the clarity and completeness of the Company's consolidated financial statements, which
include related disclosures. For the Company, areas most subject to significant management
judgments
impairment of
investments, goodwill, deferred policy acquisition costs for investment contracts and life
insurance products with account values, liabilities for property and casualty claims and claim
expenses, liabilities for future policy benefits, deferred taxes and valuation of assets and
liabilities related to the defined benefit pension plan.
fair value measurements, other-than-temporary
include:
Information regarding the Company’s accounting policies pertaining to these topics is
located in the “Notes to Consolidated Financial Statements” as listed on page F-1 of this report
and is not repeated in the discussion below.
Fair Value Measurements
The fair value of a financial instrument is the estimated amount at which the instrument
could be exchanged in an orderly transaction between knowledgeable, unrelated and willing
parties. The valuation of fixed maturity securities and equity securities is more subjective
when markets are less liquid due to the lack of market based inputs, which may increase the
potential that the estimated fair value of an investment is not reflective of the price at which an
actual transaction would occur. See also “Notes to Consolidated Financial Statements -- Note
3 -- Fair Value of Financial Instruments”.
F-4
Valuation of Fixed Maturity and Equity Securities
The fair value of the Company’s fixed maturity securities portfolio was $7,456.7 million at
December 31, 2016. For fixed maturity securities, each month the Company obtains fair value
prices from its investment managers and custodian bank, each of which use a variety of
independent, nationally recognized pricing sources to determine market valuations. Typical
inputs used by these pricing sources include, but are not limited to, reported trades,
benchmark yield curves, benchmarking of like securities, rating designations, sector groupings,
issuer spreads, bids, offers, and/or estimated cash flows and prepayment speeds. The
Company’s fixed maturity securities portfolio is primarily publicly traded, which allows for a high
percentage of the portfolio to be priced through pricing services. Approximately 90% of the
portfolio, based on fair value, was priced through pricing services or index priced using
observable inputs as of December 31, 2016. The remainder of the portfolio was priced by
broker-dealers or pricing models.
When the pricing sources cannot provide fair value determinations, the Company obtains
non-binding price quotes from broker-dealers. The broker-dealers’ valuation methodology is
sometimes matrix-based, using indicative evaluation measures and adjustments for specific
security characteristics and market sentiment. The market inputs utilized in the evaluation
measures and adjustments include: benchmark yield curves, reported trades, broker/dealer
quotes, ratings and corresponding issuer spreads, two-sided markets, benchmark securities,
bids, offers, reference data, and industry and economic events. The extent of the use of each
market input depends on the market sector and the market conditions. Depending on the
security, the priority of the use of inputs may change or some market inputs may not be
relevant. For some securities, additional inputs may be necessary.
The Company analyzes price and market valuations received and has in place certain
control processes to determine the reasonableness of the financial asset fair values. These
processes are designed to ensure (1) the values received are reasonable and accurately
recorded, (2) the data inputs and valuation techniques utilized are appropriate and consistently
applied, and (3) the assumptions are reasonable and consistent with the objective of
determining fair value.
The fair value of the Company’s equity securities portfolio was $141.6 million at
December 31, 2016. All of the portfolio was priced from observable market quotations at
December 31, 2016. Fair values of equity securities have been determined by the Company
from observable market quotations, when available. When a public quotation is not available,
equity securities are valued by using non-binding broker quotes or through the use of pricing
models or analysis that is based on market information regarding interest rates, credit spreads
and liquidity. The underlying source data for calculating the matrix of credit spreads relative to
the U.S. Treasury curve are nationally recognized indices. In addition, credit rating (or credit
quality equivalent information) of securities is also factored into a pricing matrix. These inputs
are based on assumptions deemed appropriate given the circumstances and are believed to
be consistent with what other market participants would use when pricing such securities.
At December 31, 2016, Level 3 invested assets comprised approximately 3% of the
Company’s total investment portfolio fair value. Invested assets are classified as Level 3 when
fair value is determined based on unobservable inputs that are supported by little or no market
activity and those inputs are significant to the fair value.
F-5
Other-than-temporary Impairment of Investments
The Company's methodology of assessing other-than-temporary impairments is based
on security-specific facts and circumstances as of the balance sheet date. The Company
reviews the fair value of all investments in its portfolio on a monthly basis to assess whether an
other-than-temporary decline in value has occurred. These reviews, in conjunction with the
Company's investment managers' monthly credit reports and relevant factors such as (1) the
financial condition and near-term prospects of the issuer, (2) the length of time and extent to
which the fair value has been less than amortized cost for fixed maturity securities or cost for
equity securities, (3) for fixed maturity securities, the Company’s intent to sell a security or
whether it is more likely than not the Company will be required to sell the security before the
anticipated recovery of the amortized cost basis; and for equity securities, the Company’s
ability and intent to hold the security for the recovery of cost or if recovery of cost is not
expected within a reasonable period of time, (4) the stock price trend of the issuer, (5) the
market leadership position of the issuer, (6) the debt ratings of the issuer, and (7) the cash
flows and liquidity of the issuer or the underlying cash flows for asset-backed securities, are all
considered in the impairment assessment.
When an other-than-temporary impairment is deemed to have occurred, the investment
is written-down to fair value, with a realized loss charged to income for the period for the full
loss amount for all equity securities and the credit-related loss portion associated with impaired
fixed maturity securities. The amount of the total other-than-temporary impairment related to
non-credit factors for fixed maturity securities is recognized in other comprehensive income,
net of applicable taxes, in which the Company has the intent to sell the security or if it is more
likely than not the Company will be required to sell the security before the anticipated recovery
of the amortized cost basis. See also “Notes to Consolidated Financial Statements -- Note 1 --
Summary of Significant Accounting Policies
Impairment of
Investments”.
-- Other-than-temporary
Goodwill
Goodwill represents the excess of the amounts paid to acquire a business over the fair
value of its net assets at the date of acquisition. Goodwill is not amortized, but is tested for
impairment at the reporting unit level at least annually or more frequently if events occur or
circumstances change that would more likely than not reduce the fair value of a reporting unit
below its carrying amount. If the carrying amount of the reporting unit goodwill exceeds the
implied goodwill value, an impairment loss would be recognized in an amount equal to that
excess; the charge could have a material adverse effect on the Company’s results of
operations. The Company’s reporting units, for which goodwill has been allocated, are
equivalent to the Company’s operating segments. As of December 31, 2016, the Company’s
allocation of goodwill by reporting unit/segment was as follows: $28.0 million, Retirement; $9.9
million, Life; and $9.5 million, Property and Casualty. Also see “Notes to Consolidated
Financial Statements -- Note 1 -- Summary of Significant Accounting Policies -- Goodwill”.
The process of evaluating goodwill for impairment requires management to make
multiple judgments and assumptions to determine the fair value of each reporting unit,
including discounted cash flow calculations, the level of the Company’s own share price and
assumptions that market participants would make in valuing each reporting unit. Fair value
estimates are based primarily on an in-depth analysis of historical experience, projected future
cash flows and relevant discount rates, which consider market participant inputs and the
relative risk associated with the projected cash flows. Other assumptions include levels of
F-6
economic capital, future business growth, earnings projections and assets under management
for each reporting unit. Estimates of fair value are subject to assumptions that are sensitive to
change and represent the Company’s reasonable expectation regarding future developments.
The Company also considers other valuation techniques such as peer company price-to-
earnings and price-to-book multiples.
The assessment of goodwill recoverability requires significant judgment and is subject to
inherent uncertainty. The use of different assumptions, within a reasonable range, could
cause the fair value to be below carrying value. Subsequent goodwill assessments could
result in impairment, particularly for each reporting unit with at-risk goodwill, due to the impact
of a volatile financial market on earnings, discount rate assumptions, liquidity and market
capitalization. There were no events or material changes in circumstances during 2016 that
indicated that a material change in the fair value of the Company’s reporting units had
occurred.
Deferred Policy Acquisition Costs for Investment Contracts and Life Insurance Products
with Account Values
Policy acquisition costs, consisting of commissions, policy issuance and other costs
which are incremental and directly related to the successful acquisition of new or renewal
business, are deferred and amortized on a basis consistent with the type of insurance
coverage. For all investment (annuity) contracts, deferred policy acquisition costs are
amortized over 20 years in proportion to estimated gross profits. Deferred policy acquisition
costs are amortized in proportion to estimated gross profits over 20 years for certain life
insurance products with account values and over 30 years for indexed universal life contracts
(“IUL”). See also “Notes to Consolidated Financial Statements -- Note 1 -- Summary of
Significant Accounting Policies -- Deferred Policy Acquisition Costs”.
include
interest rate spreads,
The most significant assumptions that are involved in the estimation of annuity gross
profits
financial market performance, business
future
surrender/lapse rates, expenses and the impact of realized investment gains and losses. For
the variable deposit portion of the Retirement segment, the Company amortizes deferred
policy acquisition costs utilizing a future financial market performance assumption of a 10%
reversion to the mean approach with a 200 basis point corridor around the mean during the
reversion period, representing a cap and a floor on the Company’s long-term assumption. The
Company’s practice with regard to returns on Separate Accounts assumes that long-term
appreciation in the financial market is not changed by short-term market fluctuations, but is
only changed when sustained annual deviations are experienced. The Company monitors
these fluctuations and only changes the assumption when the long-term expectation changes.
The potential effect of an increase/ (decrease) by 100 basis points in the assumed future rate
of return is reasonably likely to result in an estimated decrease/ (increase) in the deferred
policy acquisition costs amortization expense of approximately $1 million. Although this
evaluation reflects likely outcomes, it is possible an actual outcome may fall below or above
these estimates. At December 31, 2016, the ratio of deferred annuity policy acquisition costs
to the total annuity accumulated cash value was approximately 3%.
F-7
In the event actual experience differs significantly from assumptions or assumptions are
significantly revised, the Company may be required to record a material charge or credit to
current period amortization expense for the period in which the adjustment is made. As noted
above, there are key assumptions involved in the evaluation of deferred policy acquisition
costs. In terms of the sensitivity of this amortization to two of the more significant
assumptions, based on deferred annuity policy acquisition costs as of December 31, 2016 and
assuming all other assumptions are met, (1) a 10 basis point deviation in the annual targeted
interest rate spread assumption would impact amortization between $0.25 million and $0.35
million and (2) a 1% deviation from the targeted financial market performance for the
underlying mutual funds of the Company’s variable annuities would impact amortization
between $0.20 million and $0.30 million. These results may change depending on the
magnitude and direction of any actual deviations but represent a range of reasonably likely
experience for the noted assumptions. Detailed discussion of the impact of adjustments to the
amortization of deferred acquisition costs is included in “Results of Operations for the Three
Years Ended December 31, 2016 -- Policy Acquisition Expenses Amortized”.
Liabilities for Property and Casualty Claims and Claim Expenses
Underwriting results of the Property and Casualty segment are significantly influenced by
estimates of the Company's ultimate liability for insured events. There is a high degree of
uncertainty inherent in the estimates of ultimate losses underlying the liability for unpaid claims
and claim settlement expenses. This inherent uncertainty is particularly significant for liability-
related exposures due to the extended period, often many years that transpires between a loss
event, receipt of related claims data from policyholders and ultimate settlement of the claim.
Reserves for Property and Casualty claims include provisions for payments to be made on
reported claims (“case reserves”), claims incurred but not yet reported (“IBNR”) and associated
settlement expenses (together, “loss reserves”).
The process by which these reserves are established requires reliance upon estimates
based on known facts and on interpretations of circumstances, including the Company's
experience with similar cases and historical trends involving claim payments and related
patterns, pending levels of unpaid claims and product mix, as well as other factors including
court decisions, economic conditions, public attitudes and medical costs. The Company
calculates and records a single best estimate of the reserve (which is equal to the actuarial
point estimate) as of each balance sheet date.
Reserves are re-estimated quarterly. Changes to reserves are recorded in the period in
which development factor changes result in reserve re-estimates. A detailed discussion of the
process utilized to estimate loss reserves, risk factors considered and the impact of
adjustments recorded during recent years is included in “Notes to Consolidated Financial
Statements -- Note 5 -- Property and Casualty Unpaid Claims and Claim Expenses”. Due to
the nature of the Company’s personal lines business, the Company has no exposure to losses
related to claims for toxic waste cleanup, other environmental remediation or asbestos-related
illnesses other than claims under homeowners insurance policies for environmentally related
items such as mold.
F-8
Based on the Company’s products and coverages, historical experience, and modeling
of various actuarial methodologies used to develop reserve estimates, the Company estimates
that the potential variability of the Property and Casualty loss reserves within a reasonable
probability of other possible outcomes may be approximately plus or minus 6%, which equates
to plus or minus approximately $10 million of net income based on net reserves as of
December 31, 2016. Although this evaluation reflects the most likely outcomes, it is possible
the final outcome may fall below or above these estimates.
There are a number of assumptions involved in the determination of the Company’s
Property and Casualty loss reserves. Among the key factors affecting recorded loss reserves
for both long-tail and short-tail related coverages, claim severity and claim frequency are of
particular significance. Management estimates that a 2% change in claim severity or claim
frequency for the most recent 36 month period is a reasonably likely scenario based on recent
experience and would result in a change in the estimated net reserves of between $6.0 million
and $10.0 million for long-tail liability related exposures (automobile liability coverages) and
between $1.0 million and $3.0 million for short-tail liability related exposures (homeowners and
automobile physical damage coverages). Actual results may differ, depending on the
magnitude and direction of the deviation.
The Company’s actuaries discuss their loss and loss adjustment expense actuarial
analysis with management. As part of this discussion, the indicated point estimate of the IBNR
loss reserve by line of business (coverage) is reviewed. The Company’s actuaries also
discuss any indicated changes to the underlying assumptions used to calculate the indicated
point estimate. Any variance between the indicated reserves from these changes in
assumptions and the previously carried reserves is reviewed. After discussion of these
analyses and all relevant risk factors, management determines whether the reserve balances
require adjustment. The Company’s best estimate of loss reserves may change depending on
a revision in the underlying assumptions.
The Company’s liabilities for unpaid claims and claim expenses for the Property and
Casualty segment were as follows:
December 31, 2016
IBNR
Reserves
Case
Reserves
Total (1)
December 31, 2015
IBNR
Reserves
Case
Reserves
Total (1)
Automobile liability .............
Automobile other ................
Homeowners ......................
All other ..............................
Total ...............................
$ 95.2
6.9
11.2
2.9
$116.2
$152.5
1.8
26.2
11.1
$191.6
$247.7
8.7
37.4
14.0
$307.8
$ 92.5
8.4
15.3
4.7
$120.9
$139.5
1.5
30.7
9.0
$180.7
$232.0
9.9
46.0
13.7
$301.6
(1) These amounts are gross, before reduction for ceded reinsurance reserves.
The facts and circumstances leading to the Company’s re-estimate of reserves relate to
revisions of the development factors used to predict how losses are likely to develop from the
end of a reporting period until all claims have been paid. Re-estimates occur because actual
loss amounts are different than those predicted by the estimated development factors used in
prior reserve estimates. At December 31, 2016, the impact of a reserve re-estimation resulting
in a 1% increase in net reserves would be a decrease of approximately $2 million in net
income. A reserve re-estimation resulting in a 1% decrease in net reserves would increase net
income by approximately $2 million.
F-9
Favorable prior years’ reserve reestimates
in 2016 by
approximately $5 million, primarily the result of favorable severity trends in property for
accident years 2014 and prior. The lower than expected claims emergence and resultant
lower expected loss ratios caused the Company to lower its reserve estimate at December 31,
2016.
increased net
income
Investment Contract and Life Policy Reserves
Liabilities for future benefits on life and annuity policies are established in amounts
adequate to meet the estimated future obligations on policies in force. Liabilities for future
policy benefits on certain life insurance policies are computed using the net level premium
method and are based on assumptions as to future investment yield, mortality and lapses.
Mortality and lapse assumptions for all policies have been based on actuarial tables which are
consistent with the Company's own experience. In the event actual experience is worse than
the assumptions, additional reserves may be required. This would result in a charge to income
for the period in which the increase in reserves occurred. Liabilities for future benefits on
annuity contracts and certain long-duration life insurance contracts are carried at accumulated
policyholder values without reduction for potential surrender or withdrawal charges. See also
“Notes to Consolidated Financial Statements -- Note 1 -- Summary of Significant Accounting
Policies -- Investment Contract and Life Policy Reserves”.
Deferred Taxes
Deferred tax assets and liabilities represent the tax effect of the differences between the
financial statement carrying value of existing assets and liabilities and their respective tax
bases. The Company evaluates deferred tax assets periodically to determine if they are
realizable. Factors in the determination include the performance of the business including the
ability to generate taxable income from a variety of sources and tax planning strategies. If,
based on available information, it is more likely than not that the deferred income tax asset will
not be realized, then a valuation allowance must be established with a corresponding charge
to net income. Charges to establish a valuation allowance could have a material adverse
effect on the Company’s results of operations and financial position. See also “Notes to
Consolidated Financial Statements -- Note 8 -- Income Taxes”.
Valuation of Liabilities Related to the Defined Benefit Pension Plan
The Company's cost estimates for its frozen defined benefit pension plan are determined
annually based on assumptions which include the discount rate, expected return on plan
assets, anticipated retirement rate and estimated lump sum distributions. A discount rate of
3.90% was used by the Company for estimating accumulated benefits under the plan at
December 31, 2016, which was based on the average yield for long-term, high grade securities
having maturities generally consistent with the defined benefit pension payout period. To set
its discount rate, the Company looks to leading indicators, including the Mercer Above Mean
Yield Curve. The expected annual return on plan assets assumed by the Company at
December 31, 2016 was 6.50%. The assumption for the long-term rate of return on plan
assets was determined by considering actual investment experience during the lifetime of the
plan, balanced with reasonable expectations of future growth considering the various classes
of assets and percentage allocation for each asset class. Management believes that it has
adopted reasonable assumptions for investment returns, discount rates and other key factors
used in the estimation of pension costs and asset values.
F-10
To the extent that actual experience differs from the Company's assumptions,
subsequent adjustments may be required, with the effects of those adjustments charged or
credited to income and/or shareholders' equity for the period in which the adjustments are
made. Generally, a change of 50 basis points in the discount rate would inversely impact
pension expense and accumulated other comprehensive income (“AOCI”) by approximately
$0.1 million and $1.1 million, respectively. In addition, for every $1 million increase (decrease)
in the value of pension plan assets, there is a comparable pretax increase (decrease) in AOCI.
See also “Notes to Consolidated Financial Statements -- Note 11 -- Pension Plans and Other
Postretirement Benefits”.
Results of Operations for the Three Years Ended December 31, 2016
Insurance Premiums and Contract Charges
Year Ended
December 31,
2015
2016
Change From
Prior Year
Amount
Percent
Year Ended
December 31,
2014
Insurance premiums written and contract
deposits (includes annuity and
life contract deposits)
Property and Casualty ..............................
Retirement (annuity) .................................
Life............................................................
Total .....................................................
$ 634.3
520.2
108.0
$1,262.5
$ 605.8
548.0
102.7
$1,256.5
Insurance premiums and contract
charges earned (excludes annuity
and life contract deposits)
Property and Casualty ..............................
Retirement (annuity) .................................
Life ...........................................................
Total .....................................................
$ 620.5
24.9
113.7
$ 759.1
$ 596.0
25.4
110.5
$ 731.9
4.7%
-5.1%
5.2%
0.5%
4.1%
-2.0%
2.9%
3.7%
$ 28.5
(27.8)
5.3
$ 6.0
$ 584.4
480.6
102.7
$1,167.7
$ 24.5
(0.5)
3.2
$ 27.2
$ 581.8
25.6
108.4
$ 715.8
Number of Policies and Contracts in Force
(actual counts)
Property and Casualty
Automobile .............................................................................
Property ..................................................................................
Total ....................................................................................
Retirement .................................................................................
Life .............................................................................................
484,915
220,137
705,052
219,105
197,937
486,939
224,531
711,470
211,071
201,789
480,777
229,072
709,849
202,572
200,867
As of December 31,
2014
2015
2016
For 2016, the Company’s premiums written and contract deposits* of $1,262.5 million
increased $6.0 million, or 0.5%. For 2015, the Company’s premiums written and contract
deposits of $1,256.5 million increased $88.8 million, or 7.6%, compared to a year earlier, led
by growth in the Retirement segment as well as growth in the Property and Casualty segment.
Changes in the Company’s employee retirement savings plans which were effective beginning
in 2015 led to approximately $30 million of the $88.8 million increase in 2015; consolidated and
Retirement segment growth were approximately 5% and 7%, respectively, in 2015 excluding
this item. The Company’s premiums and contract charges earned increased $27.2 million, or
3.7%, compared to 2015, primarily due to increases in average premium per policy for both
homeowners and automobile. For 2015, the Company’s premiums and contract charges
earned increased $16.1 million, or 2.2%, compared to 2014 primarily due to increases in
average premium per policy for both homeowners and automobile.
F-11
Total Property and Casualty premiums written* increased 4.7%, or $28.5 million, in 2016,
compared to 2015, primarily due to increases in average written premium per policy for both
homeowners and automobile. For 2016, the Company’s full year rate plan anticipated mid-
single digit average rate increases (including states with no rate actions) for both automobile
and homeowners; average approved rate changes during 2016 were consistent with those
plans at 6.5% for automobile and 5% for homeowners.
Based on policies in force, the automobile 12 month retention rate for new and renewal
policies was 83.5% compared to 84.7% at both December 31, 2015 and 2014, respectively,
with the decrease due to recent rate and underwriting actions. The property 12 month new
and renewal policy retention rate was 87.8%, 88.3% and 87.9% at December 31, 2016, 2015
and 2014, respectively, with decrease due to recent rate and underwriting actions.
Automobile premiums written* increased 5.9%, or $23.7 million, compared to 2015. In
2016, the average written premium per policy and average earned premium per policy
increased approximately 5% and 4%, respectively, compared to a year earlier. In 2015,
automobile premiums written increased 4.8%, or $18.4 million, compared to 2014. In 2015,
the average written premium per policy and average earned premium per policy increased
approximately 3% and 2%, respectively, compared to a year earlier, which was augmented by
the 2015 increase in policies in force. The number of educator policies increased more than
the total policy count over the three year period and represented approximately 85%, 85% and
84% of the automobile policies in force at December 31, 2016, 2015 and 2014, respectively.
Homeowners premiums written* increased 2.4%, or $4.8 million, compared to 2015.
Homeowners premiums written increased 1.5%, or $3.0 million, compared to 2014. While the
number of homeowners policies in force has declined, the average written premium per policy
and average earned premium per policy each increased approximately 4%, in 2016 compared
to a year earlier. In addition, reduced catastrophe reinsurance costs benefited the current
period premiums written by approximately $1.4 million. In 2015, while the number of
homeowners policies in force declined, the average written premium per policy and average
earned premium per policy each increased approximately 3% compared to a year earlier. The
number of educator policies represented approximately 82% of the homeowners policies in
force at December 31, 2016, compared to approximately 81% at December 31, 2015 and 80%
at December 31, 2014, respectively, and has reflected more moderate declines than the
overall homeowner policies in force count. The number of educator policies and total policies
has been, and may continue to be, impacted by the Company’s risk mitigation programs,
including actions in catastrophe-prone coastal areas, involving policies of both educators and
non-educators.
The Company continues to evaluate and implement actions to further mitigate its risk
exposure in hurricane-prone areas, as well as other areas of the country. Such actions could
include, but are not limited to, non-renewal of homeowners policies, restricted agent
geographic placement, limitations on agent new business sales, further tightening of
underwriting standards and increased utilization of third-party vendor products. By June 30,
2015, the Company completed a non-renewal program to further address homeowners
profitability and hurricane exposure issues in Florida. While this program impacted the overall
policy in force count and premiums in the short-term, it reduced risk exposure concentration,
reduced overall catastrophe reinsurance costs and is expected to improve homeowners
longer-term underwriting results. The Company continues to write policies for tenants in
Florida. The Company also authorized its agents to write certain third-party vendors’
homeowners policies in Florida.
F-12
For 2016, total annuity deposits* received decreased 5.1%, or $27.8 million, compared to
the prior year, primarily due to changes in the Company’s employee retirement savings plans
which resulted in non-recurring deposits received in 2015. The 2016 decrease reflected a
7.6% decrease in recurring deposit receipts and a 3.3% decrease in single premium and
rollover deposit receipts. Excluding the 2015 non-recurring item, the remaining 2016 decrease
was minimal. For 2015, total annuity deposits received increased 14.0%, or $67.4 million,
compared to the prior year, including a 22.6% increase in recurring deposit receipts and an
8.7% increase in single premium and rollover deposit receipts.
In addition to external contractholder deposits, annuity new recurring deposits include
contributions and transfers by Horace Mann’s employees into the Company’s 401(k) group
annuity contract. The Company’s employee retirement savings plans are described in “Notes
to Consolidated Financial Statements -- Note 11 -- Pension Plans and Other Postretirement
Benefits”. Note that deposits into the Company’s employee 401(k) group annuity contract are
not reported as “sales”.
In 2016, new deposits to fixed accounts of $356.6 million decreased 4.4%, or $16.5
million, and new deposits to variable accounts of $163.6 million decreased 6.5%, or $11.3
million, compared to the prior year, including the impact of the 2015 non-recurring employee
retirement savings plans item described above. In 2015, new deposits to fixed accounts of
$373.1 million increased 9.7%, or $33.1 million, and new deposits to variable accounts of
$174.9 million increased 24.4%, or $34.3 million, compared to the prior year.
Total annuity accumulated value on deposit of $6.4 billion at December 31, 2016
increased 7.2% compared to a year earlier, reflecting the increase from new deposits received
as well as favorable retention. Accumulated value retention for the variable annuity option was
94.7%, 94.3% and 94.0% for the 12 month periods ended December 31, 2016, 2015 and
2014, respectively; fixed annuity retention was 94.6%, 94.8% and 94.5% for the respective
periods.
Variable annuity accumulated balances of $1.9 billion at December 31, 2016 increased
6.8% compared to December 31, 2015, reflecting a positive impact from financial market
performance over the 12 months partially offset by net balances transferred from the variable
account option to the guaranteed interest rate fixed account option. Compared to 2015,
Retirement segment contract charges earned decreased 2.0%, or $0.5 million. Variable
annuity accumulated balances of $1.8 billion at December 31, 2015 decreased 0.7%
compared to December 31, 2014, reflecting minimal impact from financial market performance
over the 12 months and net balances transferred from the variable account option to the
guaranteed interest rate fixed account option partially offset by net positive cash flows.
Retirement segment contract charges earned decreased 0.8%, or $0.2 million, compared to
2014.
Life segment premiums and contract deposits* for 2016 increased 5.2%, or $5.3 million,
compared to the prior year, including the favorable impact of new ordinary life business growth.
Life segment premiums and contract deposits for 2015 were equal to the prior year, including
the favorable impact of new ordinary life business growth offset by a modest decline in group
life premiums. The ordinary life insurance in force lapse ratio was 4.3%, 4.1% and 4.0% for
the 12 months ended December 31, 2016, 2015 and 2014, respectively.
F-13
Sales*
For 2016, Property and Casualty new annualized sales premiums increased 5.5%
compared to 2015, as 5.7%, or $4.8 million, growth in new automobile sales was accompanied
by growth in homeowners sales of 4.7%, or $0.8 million, compared to the prior year.
While the 2016 annuity new business levels were lower than in the prior year period, the
Company’s Retirement segment new business levels continued to benefit from agent training
and marketing programs, which focus on retirement planning, and build on the positive results
produced in recent years. Annuity sales by Horace Mann’s agency force decreased 2.1%
compared to 2015, primarily due to the impact in 2015 of non-recurring, non 401(k) rollover
deposits from the Company’s employee retirement savings plans. Sales from the independent
agent distribution channel, which represent approximately 9.2% of total annuity sales in 2016
and are largely single premium and rollover annuity deposits, decreased approximately 17.6%
compared to a year earlier. As a result, total Horace Mann annuity sales from the combined
distribution channels decreased 3.7%, or $13.8, compared to 2015.
Overall, the Company’s new recurring deposit business (measured on an annualized
basis at the time of sale, compared to the reporting of new contract deposits which are
recorded when cash is received) decreased 6.3% compared to 2015, and single premium and
rollover deposits decreased 3.3% compared to the prior year. In February 2014, the Company
expanded its annuity product portfolio by introducing a fixed indexed annuity contract. This
new product continues to be well received by the Company’s customers and represented
approximately one-third of total annuity sales for both 2016 and 2015. Previously, the
Company offered indexed annuity products underwritten by third-party vendors.
The Company’s introduction of new educator-focused portfolios of term and whole life
products in recent years, including a single premium whole life product, as well as the October
2015 introduction of the Company’s IUL product have contributed to an increase in sales of
proprietary life products. For 2016, sales of Horace Mann’s proprietary life insurance products
totaled $15.6 million, representing an increase of 43.1%, or $4.7 million, compared to the prior
year, including an increase of $3.8 million for single premium sales.
Distribution
At December 31, 2016, there was a combined total of 666 Exclusive Agencies and
Employee Agents, compared to 735 at December 31, 2015 and 755 at December 31, 2014.
The Company continues to expect higher quality standards for agents and agencies to focus
on improving both customer experiences and agent productivity in their respective territories.
Growth in new automobile sales and life sales reflects improvement in average agency
productivity. The dedicated sales force is supported by the Company’s Customer Contact
Center which provides a means for educators to begin their experience directly with the
Company, if that is their preference. The Customer Contact Center is also able to assist
educators in territories which are not currently served by an Exclusive Agency.
As mentioned above, the Company also utilizes a nationwide network of Independent
Agents who comprise an additional distribution channel for the Company’s 403(b) tax-qualified
annuity products. The Independent Agent distribution channel included 272 authorized agents
at December 31, 2016. During 2016, this channel generated $32.8 million in annualized new
annuity sales for the Company compared to $39.8 million for 2015 and $34.4 million for 2014,
with the new business primarily comprised of single and rollover deposit business over the
three year period.
F-14
Net Investment Income
For 2016, pretax net investment income of $361.2 million increased 8.6%, or $28.6
million, (7.9%, or $17.7 million, after tax) compared to 2015. While asset balances in the
Retirement segment continue to grow, overall investment results reflected an increase in
investment prepayment activity and favorable returns on alternative investments, partially
offset by the impact of the current low interest rate environment. For 2015, pretax net
investment income of $332.6 million increased 0.8%, or $2.8 million, (0.7%, or $1.5 million,
after tax) compared to 2014. Average invested assets increased 5.6% over the 12 months
ended December 31, 2016. The average pretax yield on the total investment portfolio was
5.21% (3.47% after tax) for 2016, compared to the pretax yield of 5.06% (3.39% after tax) and
5.32% (3.57% after tax) for 2015 and 2014, respectively. During 2016, management
continued to identify and purchase investments, including a modest level of alternative
investments, with attractive risk-adjusted yields without venturing into asset classes or
individual securities that would be inconsistent with the Company’s overall conservative
investment guidelines.
Net Realized Investment Gains and Losses (Pretax)
For 2016, net realized investment gains were $4.1 million compared to net realized
investment gains of $12.7 million and $10.9 million in 2015 and 2014, respectively. The net
gains and losses in all periods were realized primarily from ongoing investment portfolio
management activity and, when determined,
the recognition of other-than-temporary
impairment.
For the year ended December 31, 2016, the Company’s net realized investment gains of
$4.1 million included $23.3 million of gross gains realized on security sales and calls partially
offset by $8.1 million of realized losses primarily on securities that were disposed of during
2016 and $11.1 million of other-than-temporary impairment charges recorded largely on Puerto
Rico and energy sector fixed maturity securities, as well as some equity securities.
For the year ended December 31, 2015, the Company’s net realized investment gains of
$12.7 million included $39.6 million of gross gains realized on security sales and calls partially
offset by $7.4 million of realized losses on securities that were disposed of during 2015 and
$19.5 million of other-than-temporary impairment charges recorded largely on energy sector
and Puerto Rico fixed maturity securities and one unrelated equity security.
For the year ended December 31, 2014, the Company’s net realized investment gains of
$10.9 million included $26.7 million of gross gains realized on security sales and calls partially
offset by $9.4 million of realized losses on securities that were disposed of during 2014,
primarily mortgage-backed and municipal securities, and the $6.4 million other-than-temporary
charge recorded largely on energy sector securities in the fourth quarter.
The Company, from time to time, sells securities subsequent to the balance sheet date
that were considered temporarily impaired at the balance sheet date. Such sales are due to
issuer specific events occurring subsequent to the balance sheet date that result in a change
in the Company’s intent to sell an invested asset.
F-15
Fixed Maturity Securities and Equity Securities Portfolios
The table below presents the Company’s fixed maturity securities and equity securities
portfolios by major asset class, including the ten largest sectors of the Company’s corporate
bond holdings (based on fair value). Compared to December 31, 2015, credit spreads were
tighter across most asset classes at December 31, 2016 and U.S. Treasury rates increased,
which resulted in net unrealized investment gains to be flat in the Company’s fixed maturity
securities holdings.
December 31, 2016
Pretax Net
Unrealized
Gain (Loss)
Amortized
Cost or
Cost
Number of
Issuers
Fair
Value
Fixed maturity securities
Corporate bonds
Banking and Finance .....................................................
Insurance .......................................................................
Energy (1) ......................................................................
Healthcare, Pharmacy ....................................................
Real estate ....................................................................
Technology ....................................................................
Utilities ..........................................................................
Transportation ................................................................
Telecommunications ......................................................
Natural gas .....................................................................
All Other Corporates (2) .................................................
Total corporate bonds .............................................
Mortgage-backed securities
U.S. Government and federally
sponsored agencies ...................................................
Commercial (3)...............................................................
Other ..............................................................................
Municipal bonds (4) ...........................................................
Government bonds
U.S. ................................................................................
Foreign ...........................................................................
Collateralized debt obligations (5) .....................................
Asset-backed securities .....................................................
Total fixed maturity securities ..................................
Equity securities
Non-redeemable preferred stocks .....................................
Common stocks .................................................................
Closed-end fund ................................................................
Total equity securities .............................................
97
51
48
39
35
28
39
22
23
19
180
581
359
121
29
593
10
17
112
107
1,929
14
177
1
192
$ 709.8
260.9
221.8
168.2
162.5
161.8
159.3
156.3
123.8
96.5
589.4
2,810.3
442.4
503.8
70.4
1,769.4
467.1
98.7
667.7
626.9
$7,456.7
$ 50.0
72.2
19.4
$ 141.6
$ 682.3
240.8
208.7
161.6
156.8
158.8
140.9
150.4
115.8
93.1
563.7
2,672.9
412.9
508.5
69.2
1,648.3
458.7
93.9
662.9
624.8
$7,152.1
$ 52.3
61.7
20.0
$ 134.0
$ 27.5
20.1
13.1
6.6
5.7
3.0
18.4
5.9
8.0
3.4
25.7
137.4
29.5
(4.7)
1.2
121.1
8.4
4.8
4.8
2.1
$304.6
$ (2.3)
10.5
(0.6)
$ 7.6
Total ....................................................................
2,121
$7,598.3
$7,286.1
$312.2
(1) At December 31, 2016, the fair value amount included $13.9 million which were non-investment grade.
(2) The All Other Corporates category contains 19 additional industry classifications. Gaming, broadcast and media, food
and beverage, consumer products and retail represented $428.9 million of fair value at December 31, 2016, with the
remaining 13 classifications each representing less than $34.0 million.
(3) At December 31, 2016, 100% were investment grade, with an overall credit rating of AA, and the positions were well
diversified by property type, geography and sponsor.
(4) Holdings are geographically diversified, approximately 40% are tax-exempt and 78% are revenue bonds tied to essential
services, such as mass transit, water and sewer. The overall credit quality of the municipal bond portfolio was AA- at
December 31, 2016.
(5) Based on fair value, 96% of the collateralized debt obligation securities were rated investment grade by Standard and
Poor’s Corporation (“S&P”) and/or Moody’s Investors Service, Inc. (“Moody’s”) at December 31, 2016.
F-16
At December 31, 2016, the Company’s diversified fixed maturity securities portfolio
consisted of 2,465 investment positions, issued by 1,929 entities, and totaled approximately
$7.5 billion in fair value. This portfolio was 95.9% investment grade, based on fair value, with
an average quality rating of A. The Company’s investment guidelines generally limit single
corporate issuer concentrations to 0.5% of invested assets for “AA” or “AAA” rated securities,
0.35% of invested assets for “A” or “BBB” rated securities, and 0.2% of invested assets for
non-investment grade securities.
The following table presents the composition and value of the Company’s fixed maturity
securities and equity securities portfolios by rating category. At December 31, 2016, 94.7% of
these combined portfolios were investment grade, based on fair value, with an overall average
quality rating of A. The Company has classified the entire fixed maturity securities and equity
securities portfolios as available for sale, which are carried at fair value.
Rating of Fixed Maturity Securities and Equity Securities (1)
(Dollars in millions)
December 31, 2016
Percent
of Total
Fair
Value
Fair
Value
Amortized
Cost or Cost
Fixed maturity securities
AAA ............................................................................................................
AA (2) .........................................................................................................
A .................................................................................................................
BBB ............................................................................................................
BB ...............................................................................................................
B .................................................................................................................
CCC or lower ..............................................................................................
Not rated (3) ...............................................................................................
Total fixed maturity securities ..................................................................
Equity securities
AAA ............................................................................................................
AA ...............................................................................................................
A .................................................................................................................
BBB ............................................................................................................
BB ...............................................................................................................
B .................................................................................................................
CCC or lower ..............................................................................................
Not rated .....................................................................................................
Total equity securities .............................................................................
8.3%
35.5
23.6
28.4
2.4
1.0
0.2
0.6
100.0%
-
-
-
35.3%
-
-
-
64.7
100.0%
$ 620.8
2,648.4
1,759.6
2,118.7
176.4
76.3
10.9
45.6
$7,456.7
-
-
-
$ 50.0
-
-
-
91.6
$ 141.6
$ 611.6
2,533.5
1,663.9
2,038.5
174.7
79.5
10.6
39.8
$7,152.1
-
-
-
$ 52.3
-
-
-
81.7
$ 134.0
Total ....................................................................................................
$7,598.3
$7,286.1
(1) Ratings are as assigned primarily by S&P when available, with remaining ratings as assigned on an equivalent basis by
Moody’s. Ratings for publicly traded securities are determined when the securities are acquired and are updated
monthly to reflect any changes in ratings.
(2) At December 31, 2016, the AA rated fair value amount included $467.1 million of U.S. Government and federally
sponsored agency securities and $522.8 million of mortgage- and asset-backed securities issued by U.S. Government
and federally sponsored agencies.
(3) This category primarily represents private placement and municipal securities not rated by either S&P or Moody’s.
At December 31, 2016, the fixed maturity securities and equity securities portfolios had a
combined $76.0 million pretax of gross unrealized investment losses on $2,302.4 million fair
value related to 731 positions. Of the investment positions (fixed maturity securities and equity
securities) with gross unrealized investment losses, 12 were trading below 80% of the carrying
value at December 31, 2016 and were not considered other-than-temporarily impaired. These
positions had fair value of $15.2 million, representing 0.2% of the Company’s total investment
portfolio at fair value, and had a gross unrealized investment loss of $6.6 million.
F-17
The Company views the unrealized investment losses of all of the securities at
December 31, 2016 as temporary. Future changes in circumstances related to these and
other securities could require subsequent recognition of other-than-temporary impairment.
Benefits, Claims and Settlement Expenses
Year Ended
December 31,
2015
2016
Change From
Prior Year
Amount
Percent
Year Ended
December 31,
2014
Property and Casualty ........................................ $464.1
3.9
Retirement (annuity) ...........................................
73.1
Life ......................................................................
Total ............................................................. $541.1
$420.3
3.2
72.9
$496.4
10.4%
21.9%
0.3%
9.0%
$43.8
0.7
0.2
$44.7
$399.5
2.2
66.7
$468.4
Property and Casualty catastrophe
losses, included above (1) ...............................
$ 60.0
$ 44.4
35.1%
$15.6
$ 37.5
(1) See footnote (1) to the table below.
Property and Casualty Claims and Claim Expenses (“losses”)
Year Ended December 31,
2014
2015
2016
Incurred claims and claim expenses:
Claims occurring in the current year .......................................
Decrease in estimated reserves for claims
$471.1
occurring in prior years (2) ..................................................
Total claims and claim expenses incurred .......................
(7.0)
$464.1
Property and Casualty loss ratio:
Total ........................................................................................
Effect of catastrophe costs, included above (1) ......................
Effect of prior years’ reserve development,
74.8%
9.7%
included above (2) ..........................................................................................
-1.1%
(1) Property and Casualty catastrophe losses were incurred as follows:
$432.8
(12.5)
$420.3
70.5%
7.4%
-2.1%
$416.5
(17.0)
$399.5
68.7%
6.5%
-2.9%
Three months ended
March 31 ......................................................................
June 30 ........................................................................
September 30 ...............................................................
December 31 ................................................................
Total full year ............................................................
$ 12.7
27.3
8.4
11.6
$ 60.0
$ 10.5
21.3
5.0
7.6
$ 44.4
$ 6.3
23.5
5.7
2.0
$ 37.5
2016
2015
2014
(2) Shows the amounts by which the Company decreased its reserves in each of the periods indicated for claims occurring
in previous years to reflect subsequent information on such claims and changes in their projected final settlement costs
indicating that the actual and remaining projected losses for prior years are below the level anticipated in the previous
December 31 loss reserve estimate.
Three months ended
March 31 ....................................................................
June 30 ......................................................................
September 30 .............................................................
December 31 ..............................................................
Total full year ..........................................................
2016
$ (2.0)
(1.6)
(0.7)
(2.7)
$ (7.0)
2015
$ (4.0)
(3.2)
(2.8)
(2.5)
$ (12.5)
2014
$ (4.0)
(3.0)
(4.4)
(5.6)
$ (17.0)
F-18
For 2016, the Company’s benefits, claims and settlement expenses increased $44.7
million, or 9.0%, compared to the prior year primarily reflecting increases in Property and
Casualty current accident year loss severity and frequency -- specifically, in automobile -- and
catastrophe costs, partially offset by a reduction in homeowners current accident year non-
catastrophe losses and a $4.0 million decrease in life mortality costs. In 2015, the Company’s
benefits, claims and settlement expenses increased $28.0 million, or 6.0%, compared to the
prior year primarily reflecting increases in Property and Casualty current accident year loss
severity -- specifically, in automobile -- and catastrophe costs, as well as a $4.5 million
increase in life mortality costs.
For 2016, 2015 and 2014, the favorable development of prior years’ Property and
Casualty reserves of $7.0 million, $12.5 million and $17.0 million, respectively, for each year
was the result of actual and remaining projected losses for prior years being below the level
anticipated in the immediately preceding December 31 loss reserve estimate. In 2016, the
favorable development was predominantly the result of favorable severity trends in property for
accident years 2014 and prior. For 2015, the favorable development was primarily for accident
years 2013 and prior and predominantly the result of favorable severity trends in homeowners
loss emergence, accompanied by favorable severity and frequency trends in automobile loss
emergence. For 2014, the favorable development was primarily for accident years 2011 and
prior and predominantly the result of favorable frequency and severity trends in automobile
loss emergence.
For 2016, the automobile loss ratio of 80.2% increased by 4.8 percentage points
compared to the prior year, including (1) the impact of catastrophe costs that resulted in a 1.7
percentage point increase, (2) the impacts of higher current accident year non-catastrophe
losses for 2016 primarily driven by loss severity and accompanied by an increase in loss
frequencies and (3) development of prior years’ reserves that had a 0.8 percentage point less
favorable impact in the current year, partially offset by the favorable impact of rate actions
taken in recent years. The homeowners loss ratio of 63.9% for 2016 increased 2.4 percentage
points compared to a year earlier, including favorable current accident year non-catastrophe
experience offset by development of prior years’ reserves that had a 0.8 percentage point less
favorable impact in the current year and high catastrophe costs. Catastrophe costs
represented 24.2 percentage points of the homeowners loss ratio for 2016 compared to 20.4
percentage points for 2015.
Interest Credited to Policyholders
Year Ended
December 31,
2015
2016
Change From
Prior Year
Amount
Percent
Year Ended
December 31,
2014
Retirement (annuity) ......................................
Life ................................................................
Total ...........................................................
$147.3
44.7
$192.0
$138.7
44.1
$182.8
6.2%
1.4%
5.0%
$8.6
0.6
$9.2
$132.5
43.6
$176.1
Compared to 2015, the 2016 increase in Retirement segment interest credited reflected
a 7.6% increase in average accumulated fixed deposits, at an average crediting rate of 3.55%.
Compared to a year earlier, the 2015 increase in Retirement segment interest credited
reflected a 7.7% increase in average accumulated fixed deposits, partially offset by a 6 basis
point decline in the average annual interest rate credited to 3.56%. Life insurance interest
credited increased slightly in both 2016 and 2015 as a result of the growth in reserves for life
insurance products with account values.
F-19
The net interest spread on fixed annuity assets under management measures the
difference between the rate of income earned on the underlying invested assets and the rate of
interest which policyholders are credited on their account values. The net interest spreads for
the years ended December 31, 2016, 2015 and 2014, were 193 basis points, 184 basis points
and 204 basis points, respectively. The interest spread increased due to an increase in
investment prepayment activity as well as favorable returns within the Company’s alternative
investment portfolio and a continuation of disciplined crediting rate management, partially
offset by pressures of the low interest rate environment.
As of December 31, 2016, fixed annuity account values totaled $4.5 billion, including
$4.3 billion of deferred annuities. As shown in the table below, for approximately 87%, or $3.7
billion of the deferred annuity account values, the credited interest rate was equal to the
minimum guaranteed rate. Due to limitations on the Company’s ability to further lower interest
crediting rates, coupled with the expectation for continued low reinvestment interest rates,
management anticipates fixed annuity spread compression in future periods. The majority of
assets backing the net interest spread on fixed annuity business is invested in fixed maturity
securities.
The Company actively manages its interest rate risk exposure, considering a variety of
factors, including earned interest rates, credited interest rates and the relationship between the
expected durations of assets and liabilities. Management estimates that over the next 12
months approximately $530 million of the Retirement segment and Life segment combined
investment portfolio and related investable cash flows will be reinvested at current market
rates. As interest rates remain at low levels, borrowers may prepay or redeem the securities
with greater frequency in order to borrow at lower market rates, which could increase
investable cash flows and exacerbate the reinvestment risk.
As a general guideline, for a 100 basis point decline in the average reinvestment rate
and based on the Company’s existing policies and investment portfolio, the impact from
investing in that lower interest rate environment could further reduce Retirement segment net
investment income by approximately $1.5 million in year one and $5.3 million in year two,
further reducing the net interest spread by approximately 3 basis points and 11 basis points in
the respective periods, compared to the current period annualized net interest spread. The
Company could also consider potential changes in rates credited to policyholders, tempered by
any restrictions on the ability to adjust policyholder rates due to minimum guaranteed crediting
rates.
The expectation for future net interest spreads is also an important component in the
amortization of deferred policy acquisition costs. In terms of the sensitivity of this amortization
to the net interest spread, based on deferred policy acquisition costs as of December 31, 2016
and assuming all other assumptions are met, a 10 basis point deviation in the current year
targeted interest rate spread assumption would impact amortization between $0.25 million and
$0.35 million. This result may change depending on the magnitude and direction of any actual
deviations but represents a range of reasonably likely experience for the noted assumption.
F-20
Additional information regarding the interest crediting rates and balances equal to the
minimum guaranteed rate for deferred annuity account values is shown below.
December 31, 2016
Total Deferred Annuities
Deferred Annuities at
Minimum Guaranteed Rate
Percent of
Percent
of Total Value (“AV”)
Accumulated Total Deferred
Annuities AV
Percent
of Total
Accumulated
Value
Minimum guaranteed interest rates:
Less than 2% ........................................................ 23.5%
Equal to 2% but less than 3% ............................... 7.2
Equal to 3% but less than 4% ............................... 14.2
Equal to 4% but less than 5% ............................... 53.7
5% or higher ......................................................... 1.4
Total .................................................................. 100.0%
$1,003.6
308.6
606.7
2,290.2
55.5
$4,264.6
48.2%
82.8%
99.8%
100.0%
100.0%
86.5%
13.1%
6.9
16.4
62.1
1.5
100.0%
$ 483.8
255.4
605.1
2,290.2
55.5
$3,690.0
The Company will continue to be disciplined in executing strategies to mitigate the
negative impact on profitability of a sustained low interest rate environment. However, the
success of these strategies may be affected by the factors discussed in “Item 1A. Risk
Factors” in this Annual Report on Form 10-K and other factors discussed herein.
Policy Acquisition Expenses Amortized
Amortized policy acquisition expenses were $96.7 million for 2016 compared to $98.9
million and $93.8 million for the years ended December 31, 2015 and 2014, respectively. The
decrease in 2016 was largely attributable to the Retirement segment including the impact of
the unlocking of deferred policy acquisition costs (“unlocking”) offset by the growth in
premiums and related commissions for the Property and Casualty segment. At December 31,
2016, Retirement segment unlocking resulted in a $0.3 million decrease in amortization
compared to a $3.4 million increase in amortization a year earlier. For the prior period, the
impact was largely due to financial market performance. For the Life segment, unlocking
resulted in an immaterial change in amortization at December 31, 2016, 2015 and 2014.
Operating Expenses
In 2016, operating expenses of $173.1 million increased $15.7 million, or 10.0%,
compared to 2015. In 2015, expenses reflected a reduction in incentive compensation
expense with the majority of the cost reduction benefiting the Property and Casualty segment.
The 2016 expense level was consistent with management’s expectations as the Company
makes expenditures related to customer service and infrastructure improvements, which are
intended to enhance the overall customer experience and support favorable policy retention
and business cross-sale ratios. In 2015, operating expenses of $157.4 million decreased $4.7
million, or 2.9%, compared to 2014.
The Property and Casualty expense ratio of 26.7% for 2016 increased 0.2 percentage
points compared to the prior year expense ratio of 26.5%, or slightly below management’s
expectations for 2016. The 2015 incentive compensation expense reduction reduced the
expense ratio for 2015 by 0.4 percentage points. The Property and Casualty expense ratio
was 27.4% for 2014.
F-21
Interest Expense and Debt Retirement Costs
In June 2015, the Company repaid its outstanding $75.0 million 6.05% Senior Notes
upon maturity initially utilizing funds borrowed under its existing Bank Credit Facility. In
November 2015, the Company issued $250.0 million face amount of 4.50% Senior Notes due
2025. The Company used the net proceeds from this issuance to redeem all its outstanding
6.85% Senior Notes due April 15, 2016 and to repay in full the $113.0 million of outstanding
borrowings under its Bank Credit Facility. The combined impact of these transactions reduced
interest expense in 2016 by $1.3 million compared to 2015 and $1.1 million in 2015, compared
to 2014.
The redemption of the 6.85% Senior Notes in 2015 resulted in a pretax charge of $2.3
million, largely due to the make-whole premium.
Income Tax Expense
The effective income tax rate on the Company’s pretax income, including net realized
investment gains and losses, was 26.6%, 27.8% and 28.7% for the years ended December 31,
2016, 2015 and 2014, respectively. Income from investments in tax-advantaged securities
reduced the effective income tax rates 8.5, 7.9 and 7.1 percentage points for 2016, 2015 and
2014, respectively. In 2016, income tax expense was reduced by approximately $0.9 million
related to the filing of the prior calendar year tax return; this item primarily benefited the
Retirement segment.
The Company records liabilities for uncertain tax filing positions where it is more likely
than not that the position will not be sustainable upon audit by taxing authorities. These
liabilities are reevaluated routinely and are adjusted appropriately based on changes in facts or
law. The Company has no unrecorded liabilities from uncertain tax filing positions.
At December 31, 2016, the Company’s federal income tax returns for years prior to 2013
are no longer subject to examination by the IRS. Management does not anticipate any
assessments for tax years that remain subject to examination to have a material effect on the
Company’s financial position or results of operations.
Net Income
For 2016, the Company’s net income of $83.8 million decreased $9.7 million compared
to 2015. After tax net realized investment gains were $2.3 million compared to $8.6 million a
year earlier. Additional detail is included in the “Executive Summary” at the beginning of this
MD&A.
For 2015, the Company’s net income of $93.5 million represented a decrease of $10.7
million compared to 2014 reflecting improvement in current accident year non-catastrophe
results for homeowners, pressure on automobile results primarily due to loss severity, a higher
level of life mortality losses and a negative impact due to the unlocking of Retirement segment
deferred policy acquisition costs. Net income in 2015 was also reduced by debt retirement
costs.
For 2014, the Company’s net income of $104.2 million declined $6.7 million compared to
2013, as improvements in Property and Casualty segment and Retirement segment results, as
well as solid earnings in the Life segment, were offset by a decrease in net realized investment
F-22
gains. After tax net realized investment gains of $6.9 million were $7.5 million less than in
2013. For the Property and Casualty segment, net income of $46.9 million increased $2.5
million compared to 2013. The Property and Casualty combined ratio was 96.1% for 2014, a
0.2 percentage point improvement compared to 96.3% for 2013.
Net income (loss) by segment and net income per share were as follows:
Year Ended
December 31,
2015
2016
Change From
Prior Year
Amount
Percent
Year Ended
December 31,
2014
Analysis of net income (loss) by segment:
Property and Casualty ....................................
Retirement .....................................................
Life .................................................................
Corporate and Other (1) .................................
Net income .................................................
$ 25.6
50.7
16.6
(9.1)
$ 83.8
Effect of catastrophe costs, after tax,
$ 40.0
43.4
15.0
(4.9)
$ 93.5
-36.0%
16.8%
10.7%
-85.7%
-10.4%
$(14.4)
7.3
1.6
(4.2)
$ (9.7)
$ 46.9
45.3
17.5
(5.5)
$104.2
included above ...............................................
$(39.1)
$(28.9)
35.3%
$ 10.2
$ (24.4)
Effect of net realized investment gains,
after tax, included above ................................
$ 2.3
$ 8.6
-73.3%
$ (6.3)
$ 6.9
Effect of debt retirement costs,
after tax, included above ................................
$ -
$ (1.5)
N.M.
$ (1.5)
$ -
Diluted:
Net income per share .....................................
Weighted average number of shares
$ 2.02
$ 2.20
-8.2%
$(0.18)
$ 2.47
and equivalent shares (in millions) .............
41.5
42.4
-2.1%
(0.9)
42.2
Property and Casualty combined ratio:
Total ...............................................................
Effect of catastrophe costs,
101.5%
97.0%
included above ...........................................
9.7%
Effect of prior years’ reserve
development, included above ....................
-1.1%
7.4%
-2.1%
N.M.
N.M.
N.M.
4.5%
2.3%
1.0%
96.1%
6.5%
-2.9%
N.M. - Not meaningful.
(1) The Corporate and Other segment includes interest expense on debt, realized investment gains and losses, corporate
debt retirement costs, certain public company expenses and other corporate-level items. The Company does not
allocate the impact of corporate-level transactions to the insurance segments, consistent with the basis for
management’s evaluation of the results of those segments.
As described in footnote (1) to the table above, the Corporate and Other segment
reflects corporate-level transactions. Of those transactions, net realized investment gains and
losses may vary notably between reporting periods and are often the driver of fluctuations in
the level of this segment’s net income or loss. For 2016, 2015 and 2014, net realized
investment gains after tax were $2.3 million, $8.6 million and $6.9 million, respectively. In
addition, 2016 reflected a $1.3 million pretax reduction in debt interest expense as a result of
the refinancing transactions completed in 2015. The debt redemption in 2015 resulted in a
pretax charge of $2.3 million, partially offset by a $1.1 million reduction in debt interest
expense compared to 2014.
Return on average shareholders’ equity based on net income was 6.2%, 7.1% and 8.4%
for the years ended December 31, 2016, 2015 and 2014, respectively.
F-23
Outlook for 2017
to
related
the Company’s continued modernization of
At the time of this Annual Report on Form 10-K, management estimates that 2017 full
year net income before net realized investment gains and losses will be within a range of $1.95
to $2.15 per diluted share. This projection incorporates the Company’s results for 2016 and
anticipates continued improvement in the Company’s underlying automobile combined ratio,
modeled catastrophe losses as well as modestly lower earnings in the Retirement and Life
segments reflecting lower net interest spreads, and approximately $0.10 cents of continued
strategic investing in our Retirement business that we expect will accelerate growth
momentum
technology and
infrastructure. As a result of the continued low interest rate environment, management
expects the Company’s overall portfolio yield to decline by approximately 10 basis points over
the course of 2017, impacting each of the three business segments. Within the Property and
Casualty segment, both approved and planned premium rate increases, as well as
underwriting initiatives, are expected to improve profitability margins for the automobile line
compared to 2016. The property line is anticipated to produce solid profitability, although at a
reduced level that assumes non-catastrophe weather related losses return to a more
normalized level than the comparison to 2016; and, catastrophe losses are estimated to be
lower than the 2016 level. Net income for the Retirement segment will continue to be impacted
by the prolonged interest rate environment and the 2016 net interest spread of 193 basis
points is anticipated to grade down to the low 180s through the course of 2017. Assuming
mortality costs consistent with the Company’s actuarial models, Life segment net income is
expected to decrease compared to 2016, due to net investment income pressure and the
increase in expenses. In addition to the segment-specific factors, the Company’s initiatives for
customer service and infrastructure improvements, as well as enhanced training and education
for the Company’s agency force, all intended to enhance the overall customer experience and
support further improvement in policy retention and business cross-sale ratios, will continue
and result in a moderate increase in expense levels compared to 2016.
As described in “Critical Accounting Policies”, certain of the Company’s significant
accounting measurements require the use of estimates and assumptions. As additional
information becomes available, adjustments may be required. Those adjustments are charged
or credited to income for the period in which the adjustments are made and may impact actual
results compared to management’s estimate above. Additionally, see “Forward-looking
Information” and “Item 1A. Risk Factors” in this Annual Report on Form 10-K concerning other
important factors that could impact actual results. Management believes that a projection of
net income including net realized investment gains and losses* is not appropriate on a forward-
looking basis because it is not possible to provide a valid forecast of net realized investment
gains and losses, which can vary substantially from one period to another and may have a
significant impact on net income.
Liquidity and Financial Resources
Off-Balance Sheet Arrangements
At December 31, 2016, 2015 and 2014, the Company did not have any relationships with
unconsolidated entities or financial partnerships, such as entities often referred to as structured
finance or special purpose entities, which would have been established for the purpose of
facilitating off-balance sheet arrangements or for other contractually narrow or limited
purposes. As such, the Company is not exposed to any financing, liquidity, market or credit
risk that could arise if the Company had engaged in such relationships.
F-24
Investments
Information regarding the Company’s investment portfolio, which is comprised primarily
of investment grade, fixed maturity securities, is located in “Results of Operations for the Three
Years Ended December 31, 2016 -- Net Realized Investment Gains and Losses”, “Item 1.
Business -- Investments” and in the “Notes to Consolidated Financial Statements -- Note 2 --
Investments” listed on page F-1 of this report.
Cash Flow
The short-term liquidity requirements of the Company, within a 12 month operating cycle,
are for the timely payment of claims and benefits to policyholders, operating expenses, interest
payments and federal income taxes. Cash flow generated from operations has been, and is
expected to be, adequate to meet the Company’s operating cash needs in the next 12 months.
Cash flow in excess of operational needs has been used to fund business growth, pay
dividends to shareholders and repurchase shares of HMEC’s common stock. Long-term
liquidity requirements, beyond one year, are principally for the payment of future insurance and
annuity policy claims and benefits, as well as retirement of long-term debt.
Operating Activities
As a holding company, HMEC conducts its principal operations in the personal lines
segment of the property and casualty and life insurance industries through its subsidiaries.
HMEC's insurance subsidiaries generate cash flow from premium and investment income,
generally well in excess of their immediate needs for policy obligations, operating expenses
and other cash requirements. Cash provided by operating activities primarily reflects net cash
generated by the insurance subsidiaries. For 2016, net cash provided by operating activities
increased slightly compared to 2015, largely due to a decrease in claims and policyholder
benefits paid in 2016, partially offset by a decrease in premiums collected and an increase in
investment income collected in 2016.
Payment of principal and interest on debt, dividends to shareholders and parent
company operating expenses is largely dependent on the ability of the insurance subsidiaries
to pay cash dividends or make other cash payments to HMEC, including tax payments
pursuant to tax sharing agreements. Payments for share repurchase programs also have this
dependency. If necessary, HMEC also has other potential sources of liquidity that could
provide for additional funding to meet corporate obligations or pay shareholder dividends,
which include a revolving line of credit, as well as issuances of various securities. The
insurance subsidiaries are subject to various regulatory restrictions which limit the amount of
annual dividends or other distributions, including loans or cash advances, available to HMEC
without prior approval of the insurance regulatory authorities. The aggregate amount of
dividends that may be paid in 2017 from all of HMEC’s insurance subsidiaries without prior
regulatory approval is approximately $91 million. Although regulatory restrictions exist,
dividend availability from subsidiaries has been, and is expected to be, adequate for HMEC's
capital needs. Additional information is contained in “Notes to Consolidated Financial
Statements -- Note 10 -- Statutory Information and Restrictions” listed on page F-1 of this
report.
F-25
Investing Activities
HMEC's insurance subsidiaries maintain significant investments in fixed maturity
securities to meet future contractual obligations to policyholders. In conjunction with its
management of liquidity and other asset/liability management objectives, the Company, from
time to time, will sell fixed maturity securities prior to maturity, as well as equity securities, and
reinvest the proceeds in other investments with different interest rates, maturities or credit
characteristics. Accordingly, the Company has classified the entire fixed maturity securities
and equity securities portfolios as “available for sale”.
Financing Activities
Financing activities include primarily payment of dividends, the receipt and withdrawal of
funds by annuity contractholders, issuances and repurchases of HMEC’s common stock,
fluctuations in bank overdraft balances, and borrowings, repayments and repurchases related
to its debt facilities.
In 2013, one of the Company’s subsidiaries became a member of the Federal Home
Loan Bank of Chicago (“FHLB”). That subsidiary received $250.0 million under a funding
agreement in December 2013, received an additional $250.0 million in September 2014, and
received an additional $75.0 million in December 2015 with receipt of those funds reflected in
Annuity Contracts: Variable, Fixed and FHLB Funding Agreements, Deposits as a component
of the Company’s financing activities for the respective years. Exclusive of these transactions,
the Company’s annuity business produced net positive cash flows in 2016, 2015 and 2014.
For the year ended December 31, 2016, receipts from annuity contracts, also excluding the
FHLB transactions, decreased $27.8 million, or 5.1%, compared to 2015, as described in
“Results of Operations for the Three Years Ended December 31, 2016 -- Insurance Premiums
and Contract Charges”. In total, annuity contract benefits, withdrawals and net transfers to
variable annuity accumulated cash values decreased $4.8 million, or 1.4%, compared to the
prior year.
The Company’s Senior Notes due 2015 matured on June 15, 2015 and the Company
repaid the $75.0 million initially utilizing funds borrowed under its existing Bank Credit Facility.
Repayment of the Senior Notes due 2015 resulted in no debt retirement costs impacting the
Company’s net income for 2015. In November 2015, the Company issued $250.0 million
aggregate principal amount of 4.50% Senior Notes due 2025 and used the net proceeds to
redeem all of its outstanding 6.85% Senior Notes due April 15, 2016 and fully repay the $113.0
million of outstanding borrowings under the Company’s Bank Credit Facility. Repayment of the
Senior Notes due 2016 resulted in $2.3 million pretax of debt retirement costs impacting the
Company’s net income for 2015, nearly all of which required cash. The remaining net
proceeds from the issuance of the Senior Notes due 2025 were available for general corporate
purposes.
F-26
Contractual Obligations
The following table shows the Company’s contractual obligations, as well as the
projected timing of payments.
Payments Due By Period as of December 31, 2016
Less Than
1 Year
(2017)
1 - 3 Years
(2018 and
2019)
3 - 5 Years
(2020 and
2021)
Total
More Than
5 Years
(2022 and
beyond)
Fixed annuities and fixed option
of variable annuities (1) ..................................... $ 6,901.2
1,058.0
2,564.0
Supplemental contracts (1)(2) ...............................
Life insurance policies (1) .....................................
Property and casualty claims and claim
$248.8
27.1
87.2
$ 507.5
299.3
180.2
$521.2
43.2
184.7
$5,623.7
688.4
2,111.9
adjustment expenses (1) ...................................
246.6
161.4
76.0
8.4
0.8
Long-term debt obligations
Senior Notes due December 1, 2025 .............
Operating lease obligations (4) .............................
351.3
11.9
11.3
2.6
22.5
5.0
22.5
2.7
295.0
1.6
Total ........................................................... $11,133.0
$538.4
$1,090.5
$782.7
$8,721.4
(1) This information represents estimates of both the amounts to be paid to policyholders and the timing of such payments
and is net of anticipated reinsurance recoveries.
Includes $575.0 million obligation to FHLB plus interest.
Includes principal and interest.
(2)
(3)
(4) The Company has entered into various operating lease agreements, primarily for real estate (claims and marketing
offices in a few states, as well as portions of the home office complex) and also for computer equipment and copy
machines.
Estimated Future Policy Benefit and Claim Payments - Retirement and Life Segments
This discussion addresses the following contractual obligations disclosed above: fixed
annuities and fixed option of variable annuities, supplemental contracts and life insurance
policies. Payment amounts reflect the Company’s estimate of undiscounted cash flows related
to these obligations and commitments. Balance sheet amounts were determined in
accordance with GAAP, including the effect of discounting, and consequently in many cases
differ significantly from the summation of undiscounted cash flows.
For the majority of the Company’s Retirement and Life insurance operations, the
estimated contractual obligations for future policyholder benefits as presented in the table
above were derived from the annual cash flow testing analysis used to develop actuarial
opinions of statutory reserve adequacy for state regulatory purposes. These cash flows are
materially representative of the cash flows under GAAP. Actual amounts may vary, potentially
in a significant manner, from the amounts indicated due to deviations between assumptions
and actual results and the addition of new business in future periods.
Amounts presented in the table above represent the estimated cash payments to be
made to policyholders undiscounted by interest and including assumptions related to the
receipt of future premiums and deposits, future interest credited, full and partial withdrawals,
policy lapses, surrender charges, annuitization, mortality, and other contingent events as
appropriate to the respective product types. Additionally, coverage levels are assumed to
remain unchanged from those provided under contracts in force at December 31, 2016.
Separate Account (variable annuity) payments are not reflected due to the matched nature of
these obligations and the fact that the contract owners maintain the investment risk on such
deposits.
F-27
See “Notes to Consolidated Financial Statements -- Note 1 -- Summary of Significant
Accounting Policies -- Investment Contract and Life Policy Reserves” listed on page F-1 of this
report for a description of the Company’s method for establishing life and annuity reserves in
accordance with GAAP.
Estimated Claims and Claim Related Payments - Property and Casualty Segment
This discussion addresses claims and claim adjustment expenses as disclosed above.
The amounts reported in the table are presented on a nominal basis, have not been
discounted and represent the estimated timing of future payments for both reported and
unreported claims incurred and related claim adjustment expenses. Both the total liability and
the estimated payments are based on actuarial projection techniques, at a given accounting
date. These estimates include assumptions of the ultimate settlement and administrative costs
based on the Company’s assessment of facts and circumstances then known, review of
historical settlement patterns, estimates of trends in claims severity, frequency and other
factors. Variables in the reserve estimation process can be affected by both internal and
external events, such as changes in claims handling procedures, economic inflation, legal
trends and legislative changes. Many of these items are not directly quantifiable, particularly
on a prospective basis. Additionally, there may be significant reporting lags between the
occurrence of a claim and the time it is actually reported to the Company. The future cash
flows related to the items contained in the table above required estimation of both amount
(including severity considerations) and timing. Amount and timing are frequently estimated
separately. An estimation of both amount and timing of future cash flows related to claims and
claim related payments is generally reliable only in the aggregate with some unavoidable
estimation uncertainty.
Capital Resources
The Company has determined the amount of capital which is needed to adequately fund
and support business growth, primarily based on risk-based capital formulas including those
developed by the NAIC. Historically, the Company's insurance subsidiaries have generated
capital in excess of such needed capital. These excess amounts have been paid to HMEC
through dividends. HMEC has then utilized these dividends and its access to the capital
markets to service and retire long-term debt, pay dividends to its shareholders, fund growth
initiatives, repurchase shares of its common stock and for other corporate purposes.
Management anticipates that the Company's sources of capital will continue to generate
sufficient capital to meet the needs for business growth, debt interest payments, shareholder
dividends and its share repurchase program. Additional information is contained in “Notes to
Consolidated Financial Statements -- Note 10 -- Statutory Information and Restrictions” listed
on page F-1 of this report.
The total capital of the Company was $1,541.2 million at December 31, 2016, including
$247.2 million of long-term debt and no short-term debt outstanding. Total debt represented
18.1% of total capital excluding net unrealized investment gains and losses (16.0% including
net unrealized investment gains and losses) at December 31, 2016, which was below the
Company's long-term target of 25%.
Shareholders' equity was $1,294.0 million at December 31, 2016, including a net
unrealized investment gain in the Company's investment portfolio of $175.7 million after taxes
and the related impact of deferred policy acquisition costs associated with investment
contracts and life insurance products with account values. The market value of the Company's
F-28
common stock and the market value per share were $1,722.2 million and $42.80, respectively,
at December 31, 2016. Book value per share was $32.15 at December 31, 2016 ($27.79
excluding investment fair value adjustments).
Additional information regarding the net unrealized gain in the Company’s investment
portfolio at December 31, 2016 is included in “Results of Operations for the Three Years
Ended December 31, 2016 -- Net Realized Investment Gains and Losses”.
Total shareholder dividends were $44.3 million for the year ended December 31, 2016.
In March, May, September and December 2016, the Board of Directors announced regular
quarterly dividends of $0.265 per share. Compared to the full year per share dividends paid in
2015 of $1.00, the total 2016 dividends paid per share of $1.06 represented an increase of
6.0%.
In December 2011, HMEC’s Board of Directors (the “Board”) authorized a share
repurchase program allowing repurchases of up to $50,000 (the “2011 Plan”). In September
2015, the Board authorized an additional share repurchase program allowing repurchases of
up to $50,000 (the “2015 Plan”) to begin following the completion of the 2011 Plan. Both share
repurchase programs authorize the repurchase of HMEC’s common share in open market or
privately negotiated transactions, from time to time, depending on market conditions. The
share repurchase programs do not have expiration dates and may be limited or terminated at
any time without notice. During 2016, the Company repurchased 701,410 shares of its
common stock, or 1.7%, of the outstanding shares on December 31, 2015, at an aggregate
cost of $21.5 million, or an average price of $30.65 per share, under the 2011 and the 2015
Plans. Utilization of the remaining authorization under the 2011 program was completed in
January 2016. In total and through December 31, 2016, 2,799,610 shares were repurchased
under the 2011 and 2015 Plans at an average price of $25.18 per share. The repurchase of
shares was funded through use of cash. As of December 31, 2016, $29.5 million remained
authorized for future share repurchases under the 2015 Plan authorization.
In November 2015, the Company issued $250.0 million aggregate principal amount of
4.50% Senior Notes (“Senior Notes due 2025”), which will mature on December 1, 2025, at a
discount resulting in an effective yield of 4.53%. Interest on the Senior Notes due 2025 is
payable semi-annually at a rate of 4.50%. Detailed information regarding the redemption
terms of the Senior Notes due 2025 is contained in the “Notes to Consolidated Financial
Statements -- Note 7 -- Debt” listed on page F-1 of this report. For information regarding the
use of proceeds from the issuance, see “Liquidity and Financial Resources -- Cash Flow --
Financing Activities”. The Senior Notes due 2025 are traded in the open market (HMN 4.50).
As of December 31, 2016, the Company had no balance outstanding under its Bank
Credit Facility. The Bank Credit Facility provides for unsecured borrowings of up to $150.0
million and expires on July 30, 2019. Interest accrues at varying spreads relative to prime or
Eurodollar base rates and is payable monthly or quarterly depending on the applicable base
rate. The unused portion of the Bank Credit Facility is subject to a variable commitment fee,
which was 0.15% on an annual basis at December 31, 2016. On June 15, 2015, the Senior
Notes due 2015 matured and the Company repaid the $75.0 million aggregate principal
amount initially utilizing $75.0 million of additional borrowing under the existing Bank Credit
Facility. In November 2015, the Company utilized a portion of the proceeds from the issuance
of the Senior Notes due 2025, described above, to fully repay the $113.0 million outstanding
balance under the Company’s Bank Credit Facility.
F-29
To provide additional capital management flexibility, the Company filed a “universal
shelf” registration on Form S-3 with the SEC on March 12, 2015. The registration statement,
which registered the offer and sale by the Company from time to time of an indeterminate
amount of various securities, which may include debt securities, common stock, preferred
stock, depositary shares, warrants, delayed delivery contracts and/or units that include any of
these securities, was automatically effective on March 12, 2015. Unless withdrawn by the
Company earlier, this registration statement will remain effective through March 12, 2018. The
Senior Notes due 2025, described above, were issued utilizing this registration statement. No
other securities associated with the registration statement have been issued as of the date of
this Annual Report on Form 10-K.
The Company's ratio of earnings to fixed charges (with fixed charges including interest
credited to policyholders on investment contracts and life insurance products with account
values) for the years ended December 31, 2016, 2015 and 2014 was 1.6x, 1.7x and 1.8x,
respectively. See also “Exhibit 12 -- Statement Regarding Computation of Ratios”. The
Company’s ratio of earnings before interest expense to interest expense was 10.7x, 10.9x and
11.3x for the years ended December 31, 2016, 2015 and 2014, respectively.
Financial Ratings
HMEC’s principal insurance subsidiaries are rated by S&P, Moody’s, A.M. Best
Company, Inc. (“A.M. Best”) and Fitch Ratings, Inc. (“Fitch”). These rating agencies have also
assigned ratings to the Company’s long-term debt securities. The ratings that are assigned by
these agencies, which are subject to change, can impact, among other things, the Company’s
access to sources of capital, cost of capital and competitive position. These ratings are not a
recommendation to buy or hold any of the Company’s securities.
In March 2016, A.M. Best upgraded the insurance financial strength rating of the
Company’s Property and Casualty subsidiaries to “A (Excellent)” from “A- (Excellent)”. With
the exception of the ratings by A.M. Best, assigned ratings as of February 15, 2017 were
unchanged from the disclosure in the Company’s Annual Report on Form 10-K for the year
ended December 31, 2015. In addition, in November 2016, Moody’s affirmed the A3 insurance
financial strength rating of HMEC’s Property and Casualty subsidiaries and changed the rating
outlook to positive from stable. Assigned ratings were as follows (unless otherwise indicated,
the insurance financial strength ratings for the Company’s Property and Casualty insurance
subsidiaries and the Company’s principal Life insurance subsidiary are the same):
As of February 15, 2017
S&P ........................................................................................
Moody’s
Horace Mann Life Insurance Company ...............................
HMEC’s Property and Casualty subsidiaries .......................
HMEC .................................................................................
A.M. Best ................................................................................
Fitch ........................................................................................
N.A. – Not applicable.
Insurance Financial
Strength Ratings
(Outlook)
Debt Ratings
(Outlook)
A
(stable)
BBB
(stable)
A3
A3
N.A.
A
A
(positive)
(positive)
(stable)
(stable)
N.A.
N.A.
Baa(3)
bbb
BBB
(positive)
(stable)
(stable)
F-30
Reinsurance Programs
Information regarding the reinsurance program for the Company’s Property and Casualty
segment is located in “Item 1. Business -- Property and Casualty Segment -- Property and
Casualty Reinsurance”.
Information regarding the reinsurance program for the Company’s Life segment is
located in “Item 1. Business -- Life Segment”.
Market Value Risk
Market value risk, the Company's primary market risk exposure, is the risk that the
Company's invested assets will decrease in value. This decrease in value may be due to (1) a
change in the yields realized on the Company's assets and prevailing market yields for similar
assets, (2) an unfavorable change in the liquidity of the investment, (3) an unfavorable change
in the financial prospects of the issuer of the investment, or (4) a downgrade in the credit rating
of the issuer of the investment. See also "Results of Operations for the Three Years Ended
December 31, 2016 -- Net Realized Investment Gains and Losses".
Significant changes in interest rates expose the Company to the risk of experiencing
losses or earning a reduced level of income based on the difference between the interest rates
earned on the Company's investments and the credited interest rates on the Company's
insurance liabilities. See also “Results of Operations for the Three Years Ended December 31,
2016 -- Interest Credited to Policyholders”.
The Company seeks to manage its market value risk by coordinating the projected cash
inflows of assets with the projected cash outflows of liabilities. For all its assets and liabilities,
the Company seeks to maintain reasonable durations, consistent with the maximization of
income without sacrificing investment quality, while providing for liquidity and diversification.
The investment risk associated with variable annuity deposits and the underlying mutual funds
is assumed by those contractholders, and not by the Company. Certain fees that the
Company earns from variable annuity deposits are based on the market value of the funds
deposited.
funding
future obligations
to policyholders, subject
Through active investment management, the Company invests available funds with the
to appropriate risk
objective of
considerations, and maximizing shareholder value. This objective is met through investments
that (1) have similar characteristics to the liabilities they support; (2) are diversified among
industries, issuers and geographic locations; and (3) are predominately investment-grade fixed
maturity securities classified as available for sale. As of the time of this Annual Report on
Form 10-K, derivatives are only used to manage the interest crediting rate risk within the fixed
indexed annuity and indexed universal life products. At December 31, 2016, approximately
10% of the fixed maturity securities portfolio represented investments supporting the Property
and Casualty operations and approximately 90% supported the Retirement and Life business.
For discussions regarding the Company’s investments see “Results of Operations for the
Three Years Ended December 31, 2016 -- Net Realized Investment Gains and Losses” and
“Item 1. Business -- Investments”.
The Company’s Retirement and Life earnings are affected by the spreads between
interest yields on investments and rates credited or accruing on fixed annuity and life
insurance liabilities. Although credited rates on fixed annuities may be changed annually
F-31
(subject to minimum guaranteed rates), competitive pricing and other factors, including the
impact on the level of surrenders and withdrawals, may limit the Company’s ability to adjust or
to maintain crediting rates at levels necessary to avoid narrowing of spreads under certain
market conditions. See also “Results of Operations for the Three Years Ended December 31,
2016 -- Interest Credited to Policyholders”.
Using financial modeling and other techniques, the Company regularly evaluates the
appropriateness of investments relative to the characteristics of the liabilities that they support.
Simulations of cash flows generated from existing business under various interest rate
scenarios measure the potential gain or loss in fair value of interest-rate sensitive assets and
liabilities. Such estimates are used to closely match the duration of assets to the duration of
liabilities. The overall duration of liabilities of the Company’s multiline insurance operations
combines the characteristics of its long duration annuity and interest-sensitive life liabilities with
its short duration non-interest-sensitive property and casualty liabilities. Overall, at December
31, 2016, the duration of the fixed maturity securities portfolio was estimated to be
approximately 5.9 years and the duration of the Company’s insurance liabilities and debt was
estimated to be approximately 7.5 years.
The Retirement and Life operations participate in the cash flow testing procedures
imposed by statutory insurance regulations, the purpose of which is to ensure that such
liabilities are adequate to meet the Company’s obligations under a variety of interest rate
scenarios. Based on these procedures, the Company’s assets and the investment income
expected to be received on such assets are adequate to meet the insurance policy obligations
and expenses of the Company’s insurance activities in all but the most extreme circumstances.
The Company periodically evaluates its sensitivity to interest rate risk. Based on
commonly used models, the Company projects the impact of interest rate changes, assuming
a wide range of factors, including duration and prepayment, on the fair value of assets and
liabilities. Fair value is estimated based on the net present value of cash flows or duration
estimates. At December 31, 2016, assuming an immediate decrease of 100 basis points in
interest rates, the fair value of the Company’s assets and liabilities would both increase, the
net of which would result in a decrease in shareholders’ equity of approximately $51 million
after tax, or 4.8%. A 100 basis point increase in interest rates would decrease the fair value of
both assets and liabilities, the net of which would result in an increase in shareholders’ equity
of approximately $4 million after tax, or 0.4%. At December 31, 2015, assuming an immediate
decrease of 100 basis points in interest rates, the fair value of the Company’s assets and
liabilities would both increase, the net of which would result in a decrease in shareholders’
equity of approximately $47 million after tax, or 4.0%. A 100 basis point increase in interest
rates would decrease the fair value of both assets and liabilities, the net of which would result
in an increase in shareholders’ equity of approximately $2 million after tax, or 0.2%. In each
case, these changes in interest rates assume a parallel shift in the yield curve. While the
Company believes that these assumed market rate changes are reasonably possible, actual
results may differ, particularly as a result of any management actions that would be taken to
attempt to mitigate such hypothetical losses in fair value of shareholders’ equity.
Interest rates continue to be at historically low levels. If interest rates remain low over an
extended period of time, management recognizes it could pressure net investment income by
having to invest insurance cash flows and reinvest the cash flows from the investment portfolio
in lower yielding securities. Moreover, issuers of securities in the Company’s investment
portfolio may prepay or redeem fixed maturity securities, as well as asset-backed and
commercial and mortgage-backed securities, with greater frequency to borrow at lower market
F-32
rates. As a general guideline, management estimates that pretax net income in 2017 and
2018 would decrease by approximately $2.1 million (by segment: Retirement $1.5 million, Life
$0.4 million and Property and Casualty $0.2 million) and $7.4 million (by segment: Retirement
$5.3 million, Life $1.5 million and Property and Casualty $0.6 million), respectively, for each
100 basis point decline in reinvestment rates, before assuming any reduction in annuity
crediting rates on in-force contracts. In addition, declining interest rates also could negatively
impact the amortization of deferred policy acquisition costs, as well as the recoverability of
goodwill, due to the impacts on the estimated fair value of the Company’s reporting segments.
The Company has been and continues to be proactive in its investment strategies,
product designs and crediting rate strategies to mitigate the risk of unfavorable consequences
in this type of interest rate environment without venturing into asset classes or individual
securities that would be inconsistent with the Company’s conservative investment guidelines.
Lowering interest crediting rates on annuity contracts can help offset decreases in investment
margins on some products. The Company’s ability to lower interest crediting rates could be
limited by competition, regulatory approval or contractual guarantees of minimum rates and
may not match the timing or magnitude of changes in investment yields.
Based on the Company’s overall exposure to interest rate risk, the Company believes
that these changes in interest rates would not materially affect its consolidated near-term
financial position, results of operations or cash flows.
Pending Accounting Standards
There are several pending accounting standards that we have not implemented because
the implementation date has not yet occurred. For a discussion of these pending standards,
see “Notes to Consolidated Financial Statements -- Note 1 -- Summary of Significant
Accounting Policies -- Pending Accounting Standards”.
Effects of Inflation and Changes in Interest Rates
The Company's operating results are affected significantly in at least three ways by
changes in interest rates and inflation. First, inflation directly affects property and casualty
claims costs. Second, the investment income earned on the Company's investment portfolio
and the fair value of the investment portfolio are related to the yields available in the fixed
income markets. An increase in interest rates will decrease the fair value of the investment
portfolio, but will increase investment income as investments mature and proceeds are
reinvested at higher rates. Third, as interest rates increase, competitors will typically increase
crediting rates on investment contracts and life insurance products with account values, and
may lower premium rates on property and casualty lines to reflect the higher yields available in
the market. The risk of interest rate fluctuation is managed through asset/liability management
techniques, including cash flow analysis.
F-33
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Horace Mann Educators Corporation:
We have audited the accompanying consolidated balance sheets of Horace Mann
Educators Corporation and subsidiaries (the Company) as of December 31, 2016 and 2015,
and the related consolidated statements of operations, comprehensive income (loss), changes
in shareholders’ equity, and cash flows for each of the years in the three-year period ended
December 31, 2016. In connection with our audits of the consolidated financial statements, we
also have audited financial statement schedules I to IV and VI. We also have audited the
Company’s internal control over financial reporting as of December 31, 2016, based on criteria
established in Internal Control - Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of
The Company's
management is responsible for these consolidated financial statements and financial statement
schedules, for maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting, included in the
accompanying Management’s Annual Report on Internal Control Over Financial Reporting
(Item 9A.b.). Our responsibility is to express an opinion on these consolidated financial
statements and financial statement schedules, and an opinion on the Company's internal
control over financial reporting based on our audits.
the Treadway Commission (COSO).
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement and whether effective internal control over financial reporting was
maintained in all material respects. Our audits of the consolidated financial statements
included examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates made
by management, and evaluating the overall financial statement presentation. Our audit of
internal control over financial reporting included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audits also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles. A company's internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company's assets that could have a material effect on the financial
statements.
F-34
Because of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31, 2016 and
2015, and the results of its operations and its cash flows for each of the years in the three-year
period ended December 31, 2016, in conformity with U.S. generally accepted accounting
principles. Also in our opinion, the related financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
Also in our opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2016, based on criteria established in
Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
KPMG LLP
Chicago, Illinois
March 1, 2017
F-35
ASSETS
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED BALANCE SHEETS
As of December 31, 2016 and 2015
(Dollars in thousands, except per share data)
December 31,
2015
2016
Investments
Fixed maturities, available for sale, at fair value
ASSETS
(amortized cost 2016, $7,152,127; 2015, $6,785,626) ...................... $ 7,456,708
$ 7,091,340
Equity securities, available for sale, at fair value
(cost 2016, $134,013; 2015, $95,722) ...............................................
141,649
Short-term and other investments ........................................................ 401,015
7,999,372
Total investments ...........................................................................
16,670
Cash .......................................................................................................
267,580
Deferred policy acquisition costs .............................................................
47,396
Goodwill ..................................................................................................
Other assets ...........................................................................................
321,874
Separate Account (variable annuity) assets ............................................ 1,923,932
Total assets ................................................................................. $10,576,824
99,797
456,893
7,648,030
15,509
253,176
47,396
292,139
1,800,722
$10,056,972
Policy liabilities
LIABILITIES AND SHAREHOLDERS' EQUITY
Investment contract and life policy reserves ......................................... $ 5,447,969
Unpaid claims and claim expenses ......................................................
329,888
Unearned premiums ............................................................................ 246,274
6,024,131
Total policy liabilities ......................................................................
708,950
Other policyholder funds .........................................................................
378,620
Other liabilities ........................................................................................
Long-term debt .......................................................................................
247,209
Separate Account (variable annuity) liabilities ......................................... 1,923,932
Total liabilities.............................................................................. 9,282,842
$ 5,126,842
323,720
232,841
5,683,403
692,652
368,559
246,975
1,800,722
8,792,311
Preferred stock, $0.001 par value, authorized
1,000,000 shares; none issued ............................................................
-
-
Common stock, $0.001 par value, authorized 75,000,000 shares;
issued, 2016, 64,917,683; 2015, 64,537,554 .......................................
Additional paid-in capital .........................................................................
Retained earnings ...................................................................................
Accumulated other comprehensive income (loss), net of taxes:
Net unrealized gains on fixed maturities
65
453,479
1,155,732
65
442,648
1,116,277
and equity securities .........................................................................
Net funded status of benefit plans ........................................................
175,738
(11,817)
175,167
(11,794)
Treasury stock, at cost, 2016, 24,672,932 shares;
2015, 23,971,522 shares ..................................................................... (479,215)
Total shareholders' equity ........................................................... 1,293,982
Total liabilities and shareholders' equity ................................... $10,576,824
(457,702)
1,264,661
$10,056,972
See accompanying Notes to Consolidated Financial Statements.
F-36
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
Year Ended December 31,
2014
2015
2016
Revenues
Insurance premiums and contract charges earned..... $ 759,146
361,186
Net investment income ..............................................
Net realized investment gains ....................................
4,123
Other income ............................................................. 4,455
$ 731,880
332,600
12,713
3,255
$ 715,760
329,815
10,917
4,193
Total revenues ............................................... 1,128,910
1,080,448
1,060,685
Benefits, losses and expenses
541,004
Benefits, claims and settlement expenses .................
192,022
Interest credited .........................................................
96,732
Policy acquisition expenses amortized .......................
173,112
Operating expenses ...................................................
Interest expense ........................................................
11,808
Debt retirement costs ................................................. -
496,364
182,842
98,919
157,411
13,122
2,338
468,426
176,139
93,817
161,992
14,198
-
Total benefits, losses and expenses ............... 1,014,678
950,996
914,572
114,232
Income before income taxes .........................................
Income tax expense ...................................................... 30,467
129,452
35,970
146,113
41,870
Net income ................................................................... $ 83,765
$ 93,482
$ 104,243
Net income per share
Basic .......................................................................... $ 2.04
Diluted ....................................................................... $ 2.02
$ 2.23
$ 2.20
$ 2.50
$ 2.47
Weighted average number of shares
and equivalent shares
Basic ....................................................................... 41,158,349
Diluted .................................................................... 41,475,516
41,914,864
42,424,806
41,646,281
42,230,559
Net realized investment gains
Total other-than-temporary impairment
losses on securities ................................................. $ (11,401)
$ (23,796)
$ (6,385)
Portion of losses recognized in other
comprehensive income (loss) .................................. (290)
(4,300)
-
Net other-than-temporary impairment losses
on securities recognized in earnings .................
(11,111)
Realized gains, net .................................................... 15,234
Total ............................................................... $ 4,123
(19,496)
32,209
$ 12,713
(6,385)
17,302
$ 10,917
See accompanying Notes to Consolidated Financial Statements.
F-37
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands)
Comprehensive income (loss)
Net income ................................................................
Other comprehensive income (loss), net of taxes:
Change in net unrealized investment gains and
losses on fixed maturities and equity securities ....
Change in net funded status of benefit plans ..........
Other comprehensive income (loss) ..................
Total ...............................................................
Year Ended December 31,
2014
2015
2016
$83,765
$ 93,482
$104,243
571
(23)
548
$84,313
(122,387)
1,159
(121,228)
$ (27,746)
163,564
(1,177)
162,387
$266,630
See accompanying Notes to Consolidated Financial Statements.
F-38
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in thousands, except per share data)
Year Ended December 31,
2014
2015
2016
Common stock, $0.001 par value
Beginning balance ........................................................ $ 65
Options exercised, 2016, 142,203 shares;
$ 64
$ 64
2015, 85,532 shares; 2014, 435,665 shares ..............
Conversion of common stock units,
2016, 15,629 shares; 2015, 8,293 shares;
2014, 10,834 shares .................................................
Conversion of restricted stock units,
-
-
-
-
-
-
2016, 222,297 shares; 2015, 198,681 shares;
2014, 169,444 shares ................................................ -
Ending balance ............................................................. 65
1
65
-
64
Additional paid-in capital
Beginning balance ........................................................
Options exercised and conversion of common
442,648
422,232
407,056
stock units and restricted stock units ..........................
2,696
Share-based compensation expense ............................ 8,135
Ending balance ............................................................. 453,479
13,605
6,811
442,648
13,906
1,270
422,232
Retained earnings
Beginning balance ........................................................ 1,116,277
83,765
Net income ...................................................................
Cash dividends, 2016, $1.06 per share;
1,065,318
93,482
1,000,312
104,243
2015, $1.00 per share; 2014, $0.92 per share ........... (44,310)
Ending balance ............................................................. 1,155,732
(42,523)
1,116,277
(39,237)
1,065,318
Accumulated other comprehensive income (loss),
net of taxes
Beginning balance .....................................................
Change in net unrealized investment gains and
163,373
284,601
122,214
losses on fixed maturities and equity securities .......
571
Change in net funded status of benefit plans ............. (23)
Ending balance .......................................................... 163,921
(122,387)
1,159
163,373
163,564
(1,177)
284,601
Treasury stock, at cost
Beginning balance, 2016, 23,971,522 shares;
2015, 23,308,430 shares; 2014, 23,117,554 shares ..
(457,702)
(435,752)
(430,341)
Acquisition of shares, 2016, 701,410 shares;
2015, 663,092 shares; 2014, 190,876 shares ............ (21,513)
(21,950)
(5,411)
Ending balance, 2016, 24,672,932 shares;
2015, 23,971,522 shares; 2014, 23,308,430 shares .. (479,215)
(457,702)
(435,752)
Shareholders' equity at end of period ............................... $1,293,982
$1,264,661
$1,336,463
See accompanying Notes to Consolidated Financial Statements.
F-39
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Year Ended December 31,
2014
2015
2016
Cash flows - operating activities
Premiums collected ....................................................... $ 710,646
Policyholder benefits paid .............................................
(511,017)
Policy acquisition and
(277,076)
other operating expenses paid ...................................
(27,847)
Federal income taxes paid ............................................
344,778
Investment income collected .........................................
Interest expense paid ....................................................
(11,754)
Other............................................................................. (20,312)
Net cash provided by operating activities .......... 207,418
$ 723,705
(534,359)
$ 707,275
(486,295)
(267,854)
(24,861)
330,034
(13,521)
(6,101)
207,043
(262,765)
(29,195)
324,252
(13,902)
(17,437)
221,933
Cash flows - investing activities
Fixed maturities
Purchases .................................................................. (1,566,047)
429,251
Sales ..........................................................................
799,653
Maturities, paydowns, calls and redemptions .............
Purchase of other invested assets ................................
(83,588)
Net cash provided by (used in)
(1,490,376)
445,100
683,335
(38,018)
(1,309,267)
261,696
451,074
(16,041)
short-term and other investments ............................... 95,371
Net cash used in investing activities .................. (325,360)
(15,890)
(415,849)
47,023
(565,515)
Cash flows - financing activities
Dividends paid to shareholders .....................................
Proceeds from issuance of
Senior Notes due 2025 ..............................................
Redemption of Senior Notes due 2016 .........................
Maturity of Senior Notes due 2015 ................................
Principal repayment on Bank Credit Facility ..................
Acquisition of treasury stock .........................................
Exercise of stock options ..............................................
Annuity contracts: variable, fixed and
FHLB funding agreements
Deposits ..................................................................
Benefits, withdrawals and net transfers to
(44,310)
(42,523)
(39,237)
-
-
-
-
(21,513)
3,329
246,937
(127,292)
(75,000)
(38,000)
(21,950)
1,629
-
-
-
-
(5,411)
8,252
520,211
623,021
730,632
Separate Account (variable annuity) assets .........
(349,915)
(354,735)
(326,374)
Life policy accounts
Deposits .....................................................................
Withdrawals and surrenders .......................................
4,018
(3,965)
1,455
(3,985)
1,093
(4,883)
Cash received (paid) related
to repurchase agreements .........................................
-
Change in bank overdrafts ............................................ 11,248
Net cash provided by financing activities ........... 119,103
-
3,083
212,640
(25,848)
(1,156)
337,068
Net increase (decrease) in cash ......................................
1,161
3,834
(6,514)
Cash at beginning of period ............................................. 15,509
11,675
18,189
Cash at end of period ...................................................... $ 16,670
$ 15,509
$ 11,675
See accompanying Notes to Consolidated Financial Statements.
F-40
HORACE MANN EDUCATORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016, 2015 and 2014
(Dollars in thousands, except per share data)
NOTE 1 - Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance
with United States (“U.S.”) generally accepted accounting principles (“GAAP”) and with the
rules and regulations of the Securities and Exchange Commission (“SEC”), specifically
Regulation S-X and the instructions to Form 10-K. The preparation of consolidated financial
to make estimates and
statements
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.
in conformity with GAAP requires management
The consolidated financial statements include the accounts of Horace Mann Educators
Corporation and its wholly-owned subsidiaries (“HMEC”; and together with its subsidiaries, the
“Company” or “Horace Mann”). HMEC and its subsidiaries have common management, share
office facilities and are parties to intercompany service agreements for management,
administrative, utilization of personnel, financial, investment advisory, underwriting, claims
adjusting, agency and data processing services. Under these agreements, costs have been
allocated among the companies in conformity with GAAP. In addition, certain of the
subsidiaries have entered into intercompany reinsurance agreements. HMEC and its
subsidiaries file a consolidated federal income tax return, and there are related tax sharing
agreements. All significant intercompany balances and transactions have been eliminated in
consolidation.
The subsidiaries of HMEC market and underwrite personal lines of property and casualty
insurance products (primarily personal lines automobile and homeowners insurance),
retirement products (primarily tax-qualified annuities) and life insurance, primarily to K-12
teachers, administrators and other employees of public schools and their families. HMEC’s
principal operating subsidiaries are Horace Mann Life Insurance Company, Horace Mann
Insurance Company, Teachers Insurance Company, Horace Mann Property & Casualty
Insurance Company and Horace Mann Lloyds.
The Company has evaluated subsequent events through the date these consolidated
financial statements were issued. There were no subsequent events requiring adjustment to
the financial statements or disclosure.
F-41
NOTE 1 - Summary of Significant Accounting Policies-(Continued)
Investments
The Company invests primarily in fixed maturity securities (“fixed maturities”). This
category includes primarily bonds and notes, but also includes redeemable preferred stocks.
These securities are classified as available for sale and carried at fair value. The adjustment
for net unrealized investment gains and losses on all securities available for sale, carried at fair
value, is recorded as a separate component of accumulated other comprehensive income
within shareholders' equity, net of applicable deferred taxes and the related impact on deferred
policy acquisition costs associated with annuity contracts and life insurance products with
account values that would have occurred if the securities had been sold at their aggregate fair
value and the proceeds reinvested at current yields.
Equity securities are classified as available for sale and carried at fair value. This
category includes nonredeemable preferred stocks and common stocks.
Short-term and other investments are comprised of short-term fixed maturity securities,
generally carried at cost which approximates fair value; derivative instruments (all call options),
carried at fair value; policy loans, carried at unpaid principal balances; mortgage loans, carried
at unpaid principal; certain alternative
limited
partnerships) which are accounted for as equity method investments; and restricted Federal
Home Loan Bank membership and activity stocks, carried at redemption value which
approximates fair value.
investments (primarily
investments
in
The Company invests in fixed maturity securities and alternative investment funds that
could qualify as variable interest entities, including corporate securities, mortgage-backed
securities and asset-backed securities. Such securities have been reviewed and determined
not to be subject to consolidation as the Company is not the primary beneficiary of these
securities because the Company does not have the power to direct the activities that most
significantly impact the entities’ economic performance.
Investment income is recognized as earned. Investment income reflects amortization of
premiums and accrual of discounts on an effective-yield basis.
Realized gains and losses arising from the disposal (recorded on a trade date basis) or
impairment of securities are determined based upon specific identification of securities. The
Company evaluates all investments in its portfolio for other-than-temporary declines in value
as described in the following section.
F-42
NOTE 1 - Summary of Significant Accounting Policies-(Continued)
Other-than-temporary Impairment of Investments
The Company's methodology of assessing other-than-temporary impairments is based
on security-specific facts and circumstances as of the balance sheet date. Based on these
facts, for fixed maturity securities if (1) the Company has the intent to sell the fixed maturity
security, (2) it is more likely than not the Company will be required to sell the fixed maturity
security before the anticipated recovery of the amortized cost basis, or (3) management does
not expect to recover the entire cost basis of the fixed maturity security, an other-than-
temporary impairment is considered to have occurred. For equity securities, if (1) the
Company does not have the ability and intent to hold the security for the recovery of cost or (2)
recovery of cost is not expected within a reasonable period of time, an other-than-temporary
impairment is considered to have occurred. Additionally, if events become known that call into
question whether the security issuer has the ability to honor its contractual commitments, such
security holding will be evaluated to determine whether or not such security has suffered an
other-than-temporary decline in value.
The Company reviews the fair value of all investments in its portfolio on a monthly basis
to assess whether an other-than-temporary decline in value has occurred. These reviews, in
conjunction with the Company's investment managers' monthly credit reports and relevant
factors such as (1) the financial condition and near-term prospects of the issuer, (2) the length
of time and extent to which the fair value has been less than amortized cost for fixed maturity
securities or cost for equity securities, (3) for fixed maturity securities, the Company’s intent to
sell a security or whether it is more likely than not the Company will be required to sell the
security before the anticipated recovery in the amortized cost basis; and for equity securities,
the Company’s ability and intent to hold the security for the recovery of cost or if recovery of
cost is not expected within a reasonable period of time, (4) the stock price trend of the issuer,
(5) the market leadership position of the issuer, (6) the debt ratings of the issuer, and (7) the
cash flows and liquidity of the issuer or the underlying cash flows for asset-backed securities,
are all considered in the impairment assessment. When an other-than-temporary impairment
is deemed to have occurred, the investment is written-down to fair value, with a realized loss
charged to income for the period for the full loss amount for all equity securities and the credit-
related loss portion associated with impaired fixed maturity securities. The amount of the total
other-than-temporary impairment related to non-credit factors for fixed maturity securities is
recognized in other comprehensive income, net of applicable taxes, in which the Company has
the intent to sell the security or if it is more likely than not the Company will be required to sell
the security before the anticipated recovery of the amortized cost basis.
With respect to fixed maturity securities involving securitized financial assets -- primarily
asset-backed and commercial mortgage-backed securities in the Company’s portfolio -- the
securitized financial asset securities’ underlying collateral cash flows are stress tested to
determine if there has been any adverse change in the expected cash flows.
F-43
NOTE 1 - Summary of Significant Accounting Policies-(Continued)
A decline in fair value below amortized cost is not assumed to be other-than-temporary
for fixed maturity investments with unrealized losses due to spread widening, market illiquidity
or changes in interest rates where there exists a reasonable expectation based on the
Company’s consideration of all objective information available that the Company will recover
the entire cost basis of the security and the Company does not have the intent to sell the
investment before maturity or a market recovery is realized and it is more likely than not the
Company will not be required to sell the investment. An other-than-temporary impairment loss
will be recognized based upon all relevant facts and circumstances for each investment, as
appropriate.
Additional considerations for certain types of securities include the following:
Corporate Fixed Maturity Securities
Judgments regarding whether a corporate fixed maturity security is other-than-
temporarily impaired include analyzing the issuer’s financial condition and whether there has
been a decline in the issuer’s ability to service the specific security. The analysis of the
security issuer is based on asset coverage, cash flow multiples or other industry standards.
Several factors assessed include, but are not limited to, credit quality ratings, cash flow
sustainability, liquidity, financial strength, industry and market position. Sources of information
include, but are not limited to, management projections, independent consultants, external
analysts’ research, peer analysis and the Company’s internal analysis.
If the Company has concerns regarding the viability of the issuer or its ability to service
the specific security after this assessment, a cash flow analysis is prepared to determine if the
present value of future cash flows has declined below the amortized cost of the fixed maturity
security. This analysis to determine an estimate of ultimate recovery value is combined with
the estimated timing to recovery and any other applicable cash flows that are expected. If a
cash flow analysis estimate is not feasible, then the market’s view of cash flows implied by the
period end fair value, market discount rates and effective yield are the primary factors used to
estimate a recovery value.
Mortgage-Backed Securities Not
Issued By
the U.S. Government or Federally
Sponsored Agencies
The Company uses an estimate of future cash flows expected to be collected to evaluate
its mortgage-backed securities for other-than-temporary impairment. The determination of
cash flow estimates is inherently subjective and methodologies may vary depending on facts
and circumstances specific to the security. All reasonably available information relevant to the
collectability of the security, including past events, current conditions, and reasonable and
supportable assumptions and forecasts, are considered when developing the estimate of cash
flows expected to be collected. Information includes, but is not limited to, debt-servicing,
missed refinancing opportunities and geography.
F-44
NOTE 1 - Summary of Significant Accounting Policies-(Continued)
Loan level characteristics such as issuer, FICO score, payment terms, level of
documentation, property or residency type, and economic outlook are also utilized in financial
models, along with historical performance, to estimate or measure the loan’s propensity to
default. Additionally, financial models take into account loan age, lease rollovers, rent
volatilities, vacancy rates and exposure to refinancing as additional drivers of default. For
transactions where loan level data is not available, financial models use a proxy based on the
collateral characteristics. Loss severity is a function of multiple factors including, but not
limited to, the unpaid balance, interest rate, mortgage insurance ratios, assessed property
value at origination, change in property valuation and loan-to-value ratio at origination.
Prepayment speeds, both actual and estimated, cost of capital rates and debt service ratios
are also considered. The cash flows generated by the collateral securing these securities are
then estimated with these default, loss severity and prepayment assumptions. These collateral
cash flows are then utilized, along with consideration for the issue’s position in the overall
structure, to estimate the cash flows associated with the residential or commercial mortgage-
backed security held by the Company.
Municipal Bonds
The Company’s municipal bond portfolio consists primarily of special revenue bonds,
which present unique considerations in evaluating other-than-temporary impairments, but also
includes general obligation bonds. The Company evaluates special revenue bonds for other-
than-temporary impairment based on guarantees associated with the repayment from
revenues generated by the specified revenue-generating activity associated with the purpose
of the bonds. Judgments regarding whether a municipal bond is other-than-temporarily
impaired include analyzing the issuer’s financial condition and whether there has been a
decline in the overall financial condition of the issuer or its ability to service the specific
security. Security credit ratings are reviewed with emphasis on the economy, finances, debt
and management of the municipal issuer. Certain securities may be guaranteed by the mono-
line credit insurers or other forms of guarantee.
While not relied upon in the initial security purchase decision, insurance benefits are
considered in the assessments for other-than-temporary impairment, including the credit-
worthiness of the guarantor. Municipalities possess unique powers, along with a special legal
standing and protections, that enable them to act quickly to restore budgetary balance and
fiscal integrity. These powers include the sovereign power to tax, access to one-time revenue
sources, capacity to issue or restructure debt, and ability to shift spending to other authorities.
State governments often provide secondary support to local governments in times of financial
stress and the federal government has provided assistance to state governments during
recessions.
If the Company has concerns regarding the viability of the municipal issuer or its ability to
service the specific security after this analysis, a cash flow analysis is prepared to determine a
present value and whether it has declined below the amortized cost of the security. If a cash
flow analysis is not feasible, then the market’s view of the period end fair value, market
discount rates and effective yield are the primary factors used to estimate the present value.
F-45
NOTE 1 - Summary of Significant Accounting Policies-(Continued)
Credit Losses
The Company estimates the amount of the credit loss component of a fixed maturity
security impairment as the difference between amortized cost and the present value of the
expected cash flows of the security. The present value is determined using the best estimate
cash flows discounted at the effective interest rate implicit to the security at the date of
purchase or the current yield to accrete an asset-backed or floating rate security. The
methodology and assumptions for establishing the best estimate cash flows vary depending on
the type of security. Corporate fixed maturity security and municipal bond cash flow estimates
are derived from scenario-based outcomes of expected restructurings or the disposition of
assets using specific facts and other circumstances, including timing, security interests and
loss severity and when not reasonably estimable, such securities are impaired to fair value as
management’s best estimate of the present value of future cash flows. The cash flow
estimates for mortgage-backed and other structured securities are based on security specific
facts and circumstances
include collateral characteristics, expectations of
delinquency and default rates, loss severity and prepayment speeds, and structural support,
including subordination and guarantees.
that may
Deferred Policy Acquisition Costs
The Company’s deferred policy acquisition costs (“DAC”) asset by segment was as
follows:
December 31,
2015
2016
Retirement (annuity) .........................................................................................
Life ....................................................................................................................
Property and Casualty ......................................................................................
Total ...............................................................................................................
$188,117
51,859
27,604
$267,580
$178,300
48,191
26,685
$253,176
Policy acquisition costs, consisting of commissions, policy issuance and other costs
which are incremental and directly related to the successful acquisition of new or renewal
business, are deferred and amortized on a basis consistent with the type of insurance
coverage. For all investment (annuity) contracts, deferred policy acquisition costs are
amortized over 20 years in proportion to estimated gross profits. Deferred policy acquisition
costs are amortized in proportion to estimated gross profits over 20 years for certain life
insurance products with account values and over 30 years for indexed universal life contracts.
For other individual life contracts, deferred policy acquisition costs are amortized in proportion
to anticipated premiums over the terms of the insurance policies (10, 15, 20 or 30 years). For
Property and Casualty policies, deferred policy acquisition costs are amortized over the terms
of the insurance policies (6 or 12 months).
F-46
NOTE 1 - Summary of Significant Accounting Policies-(Continued)
The Company periodically reviews the assumptions and estimates used in deferring
policy acquisition costs and also periodically reviews its estimations of gross profits, a process
sometimes referred to as “unlocking”. The most significant assumptions that are involved in
the estimation of annuity gross profits include interest rate spreads, future financial market
performance, business surrender/lapse rates, expenses and the impact of net realized
investment gains and losses. For the variable deposit portion of the Retirement segment, the
Company amortizes deferred policy acquisition costs utilizing a future financial market
performance assumption of a 10% reversion to the mean approach with a 200 basis point
corridor around the mean during the reversion period, representing a cap and a floor on the
Company’s long-term assumption. The Company’s practice with regard to returns on Separate
Accounts assumes that long-term appreciation in the financial market is not changed by short-
term market fluctuations, but is only changed when sustained deviations are experienced. The
Company monitors these fluctuations and only changes the assumption when its long-term
expectation changes.
In the event actual experience differs significantly from assumptions or assumptions are
significantly revised, the Company may be required to record a material charge or credit to
current period amortization expense for the period in which the adjustment is made. The
Company recorded the following adjustments to amortization expense as a result of evaluating
actual experience and prospective assumptions, the impact of unlocking:
Increase (decrease) to amortization:
Annuity ..................................................................................................
Life ........................................................................................................
Total ..................................................................................................
$(313)
(394)
$(707)
$3,403
(34)
$3,369
$1,224
(131)
$1,093
Year Ended December 31,
2014
2015
2016
Deferred policy acquisition costs for investment contracts and life insurance products
with account values are adjusted for the impact on estimated future gross profits as if net
unrealized investment gains and losses had been realized at the balance sheet date. This
adjustment reduced the deferred policy acquisition costs by $40,274 and $38,819 at December
31, 2016 and 2015, respectively. The after tax impact of this adjustment is included in
accumulated other comprehensive income (net unrealized investment gains and losses on
fixed maturities and equity securities) within shareholders' equity.
Deferred policy acquisition costs is reviewed for recoverability from future income,
including investment income, and costs which are deemed unrecoverable are expensed in the
period in which the determination is made. No such costs were deemed unrecoverable during
the years ended December 31, 2016, 2015 and 2014.
Goodwill
When the Company was acquired in 1989, intangible assets were recorded in the
application of purchase accounting to recognize goodwill. In addition, goodwill was recorded in
1994 related to the purchase of Horace Mann Property & Casualty Insurance Company.
F-47
NOTE 1 - Summary of Significant Accounting Policies-(Continued)
Goodwill represents the excess of the amounts paid to acquire a business over the fair
value of its net assets at the date of acquisition. Goodwill is not amortized, but is tested for
impairment at the reporting unit level at least annually or more frequently if events occur or
circumstances change that would more likely than not reduce the fair value of a reporting unit
below its carrying amount. A reporting unit is defined as an operating segment or a business
unit one level below an operating segment, if separate financial information is prepared and
regularly reviewed by management at that level. The Company’s reporting units, for which
goodwill has been allocated, are equivalent to the Company’s operating segments.
The allocation of goodwill by reporting unit is as follows:
Retirement ............................................................................................................................
Life ........................................................................................................................................
Property and Casualty ..........................................................................................................
Total ...................................................................................................................................
$28,025
9,911
9,460
$47,396
The goodwill impairment test, as defined in the accounting guidance, allows an entity the
option to first assess qualitative factors to determine whether the existence of events or
circumstances leads to a determination that it is more likely than not that the fair value of a
reporting unit is less than its carrying amount. If an entity determines it is more likely than not
that the fair value of a reporting unit is less than its carrying amount, then the entity follows a
two-step process. In the first step, the fair value of a reporting unit is compared to its carrying
value. If the carrying value of a reporting unit exceeds its fair value, the second step of the
impairment test is performed for purposes of confirming and measuring the impairment. In the
second step, the fair value of the reporting unit is allocated to all of the assets and liabilities of
the reporting unit to determine an implied goodwill value. If the carrying amount of the
reporting unit goodwill exceeds the implied goodwill value, an impairment loss would be
recognized in an amount equal to that excess. Any amount of goodwill determined to be
impaired will be recorded as an expense in the period in which the impairment determination is
made.
The Company completed its annual goodwill assessment for the individual reporting
units as of October 1, 2016 and did not utilize the option to perform an initial assessment of
qualitative factors. The first step of the Company’s analysis indicated that fair value exceeded
carrying value for all reporting units. The process of evaluating goodwill for impairment
required management to make multiple judgments and assumptions to determine the fair value
of each reporting unit, including discounted cash flow calculations, the level of the Company’s
own share price and assumptions that market participants would make in valuing each
reporting unit. Fair value estimates were based primarily on an in-depth analysis of historical
experience, projected future cash flows and relevant discount rates, which considered market
participant inputs and the relative risk associated with the projected cash flows. Other
assumptions included levels of economic capital, future business growth, earnings projections
and assets under management for each reporting unit. Estimates of fair value are subject to
assumptions that are sensitive to change and represent the Company’s reasonable
expectation regarding future developments. The Company also considered other valuation
techniques such as peer company price-to-earnings and price-to-book multiples.
F-48
NOTE 1 - Summary of Significant Accounting Policies-(Continued)
As part of the Company’s October 1, 2016 goodwill analysis, the Company compared the
fair value of the aggregated reporting units to the market capitalization of the Company. The
difference between the aggregated fair value of the reporting units and the market
capitalization of the Company was attributed to several factors, most notably market sentiment,
trading volume and transaction premium. The amount of the transaction premium was
determined to be reasonable based on insurance industry and Company-specific facts and
circumstances. There were no other events or material changes in circumstances during 2016
that indicated that a material change in the fair value of the Company’s reporting units had
occurred.
During each year from 2014 through 2016, the Company completed the required annual
testing; no impairment charges were necessary as a result of such assessments. The
assessment of goodwill recoverability requires significant judgment and is subject to inherent
uncertainty. The use of different assumptions, within a reasonable range, could cause the fair
value to be below carrying value. Subsequent goodwill assessments could result in
impairment, particularly for any reporting unit with at-risk goodwill, due to the impact of a
volatile financial market on earnings, discount rate assumptions, liquidity and market
capitalization.
Property and Equipment
Property and equipment are carried at cost less accumulated depreciation, which is
calculated on the straight-line method based on the estimated useful lives of the assets. The
estimated life for real estate is identified by specific property and ranges from 20 to 45 years.
The estimated useful lives of leasehold improvements and other property and equipment,
including capitalized software, generally range from 2 to 10 years. The following amounts are
included in Other assets in the Consolidated Balance Sheets:
December 31,
2015
2016
Property and equipment ....................................................................................
Less: accumulated depreciation........................................................................
Total .............................................................................................................
$120,712
88,524
$ 32,188
$107,876
82,236
$ 25,640
Separate Account (Variable Annuity) Assets and Liabilities
Separate Account assets represent variable annuity contractholder funds invested in
various mutual funds. Separate Account assets are recorded at fair value primarily based on
market quotations of the underlying securities. Separate Account liabilities are equal to the
estimated fair value of Separate Account assets. The investment income, gains and losses of
these accounts accrue directly to the contractholders and are not included in the operations of
the Company. The activity of the Separate Accounts is not reflected in the Consolidated
Statements of Operations except for (1) contract charges earned, (2) the activity related to
contract guarantees, which are benefits on existing variable annuity contracts, and (3) the
impact of financial market performance on the amortization of deferred policy acquisition costs.
The Company’s contract charges earned include fees charged to the Separate Accounts,
including mortality charges, risk charges, policy administration fees, investment management
fees and surrender charges.
F-49
NOTE 1 - Summary of Significant Accounting Policies-(Continued)
Investment Contract and Life Policy Reserves
This table summarizes the Company’s investment contract and life policy reserves.
December 31,
2015
2016
Investment contract reserves ..............................................................................
Life policy reserves .............................................................................................
Total ...............................................................................................................
$4,360,456
1,087,513
$5,447,969
$4,072,102
1,054,740
$5,126,842
Liabilities for future benefits on life and annuity policies are established in amounts
adequate to meet the estimated future obligations on policies in force.
Liabilities for future policy benefits on certain life insurance policies are computed using
the net level premium method including assumptions as to investment yields, mortality,
persistency, expenses and other assumptions based on the Company’s experience, including
a provision for adverse deviation. These assumptions are established at the time the policy is
issued and are intended to estimate the experience for the period the policy benefits are
payable. If experience is less favorable than the assumptions, additional liabilities may be
established, resulting in a charge to income for that period. At December 31, 2016, reserve
investment yield assumptions ranged from 3.5% to 8.0%.
Liabilities for future benefits on annuity contracts and certain long-duration life insurance
contracts are carried at accumulated policyholder values without reduction for potential
surrender or withdrawal charges. The liability also includes provisions for the unearned portion
of certain policy charges.
A guaranteed minimum death benefit (“GMDB”) generally provides an additional benefit
if the contractholder dies and the variable annuity contract value is less than a contractually
defined amount. The Company has estimated and recorded a GMDB reserve on variable
annuity contracts in accordance with accounting guidance. Contractually defined amounts
vary from contract to contract based on the date the contract was entered into as well as the
GMDB feature elected by the contractholder. The Company regularly monitors the GMDB
reserve considering fluctuations in the financial market. The Company has a relatively low
exposure to GMDB risk as shown below.
GMDB reserve ....................................................................................................
Aggregate in-the-money death benefits under the GMDB provision ...................
Variable annuity contract value distribution based on GMDB feature:
No guarantee ...................................................................................................
Return of premium guarantee ..........................................................................
Guarantee of premium roll-up at an annual rate of 3% or 5% ..........................
Total ...............................................................................................................
December 31,
2015
2016
$ 225
32,106
$ 358
35,563
32%
62%
6%
100%
32%
62%
6%
100%
F-50
NOTE 1 - Summary of Significant Accounting Policies-(Continued)
Reserves for Fixed Indexed Annuities and Indexed Universal Life Policies
In 2014, the Company began offering fixed indexed annuity (“FIA”) products with interest
crediting strategies linked to the Standard & Poor’s 500 Index and the Dow Jones Industrial
Average. The Company purchases call options on the applicable indices as an investment to
provide the income needed to fund the annual index credits on the indexed products. These
products are deferred fixed annuities with a guaranteed minimum interest rate plus a
contingent return based on equity market performance and are considered hybrid financial
instruments under the Financial Accounting Standards Board’s (“FASB”) Accounting Standards
Codification (“ASC”) Topic 815 “Derivatives and Hedging”.
The Company elected to not use hedge accounting for derivative transactions related to
the FIA products. As a result, the Company records the purchased call options and the
embedded derivative related to the provision of a contingent return at fair value, with changes
in fair value reported in Net realized investment gains and losses in the Consolidated
Statements of Operations. The embedded derivative is bifurcated from the host contract and
included in Other policyholder funds in the Consolidated Balance Sheets. The host contract is
accounted for as a debt instrument in accordance with ASC Topic 944 “Financial Services --
Insurance” and is included in Investment contract and life policy reserves in the Consolidated
Balance Sheets with any discount to the minimum account value being accreted using the
effective yield method. In the Consolidated Statements of Operations, accreted interest for FIA
products and benefit claims on these products incurred during the reporting period are
included in Benefits, claims and settlement expenses.
In October 2015, the Company began offering indexed universal life (“IUL”) products as
part of its product portfolio with interest crediting strategies linked to the Standard & Poor’s 500
Index and the Dow Jones Industrial Average as well as a fixed option. The Company
purchases call options monthly to hedge the potential liabilities arising in IUL accounts. The
Company elected to not use hedge accounting for derivative transactions related to the IUL
products. As a result, the Company records the purchased call options and the embedded
derivative related to the provision of a contingent return at fair value, with changes in fair value
reported in Net realized investment gains and losses in the Consolidated Statements of
Operations. IUL policies with a balance in one or more indexed accounts are considered to
have an embedded derivative. The benefit reserve for the host contract is measured using the
retrospective deposit method, which for Horace Mann’s IUL product is equal to the account
balance. The embedded derivative is bifurcated from the host contract, carried at fair value
and included in Investment contract and life policy reserves in the Consolidated Balance
Sheets.
More information regarding the determination of fair value of the FIA and IUL embedded
derivatives and purchased call options, the only derivative instruments utilized by the
Company, is included in “Note 3 -- Fair Value of Financial Instruments”.
F-51
NOTE 1 - Summary of Significant Accounting Policies-(Continued)
Unpaid Claims and Claim Expenses
Liabilities for Property and Casualty unpaid claims and claim expenses include
provisions for payments to be made on reported claims, claims incurred but not yet reported
and associated settlement expenses. All of the Company's reserves for Property and Casualty
unpaid claims and claim expenses are carried at the full value of estimated liabilities and are
not discounted for interest expected to be earned on reserves. Estimated amounts of salvage
and subrogation on unpaid Property and Casualty claims are deducted from the liability for
unpaid claims. Due to the nature of the Company's personal lines business, the Company has
no exposure to losses related to claims for toxic waste cleanup, other environmental
remediation or asbestos-related illnesses other than claims under homeowners insurance
policies for environmentally related items such as mold.
Other Policyholder Funds
Other policyholder funds includes supplementary contracts without life contingencies
and dividend accumulations, as well as balances outstanding under the funding agreements
with the Federal Home Loan Bank of Chicago (“FHLB”) and embedded derivatives related to
fixed indexed annuities. Except for embedded derivatives, each of these components is
carried at cost. Embedded derivatives are carried at fair value. Amounts received and
repaid under the FHLB funding agreements are classified in the financing activities section
of the Company’s Consolidated Statements of Cash Flows combined with annuity contract
deposits and disbursements, respectively.
Federal Home Loan Bank Funding Agreements
In 2013, one of the Company's subsidiaries, Horace Mann Life Insurance Company
(“HMLIC”), became a member of the FHLB, which provides HMLIC with access to
collateralized borrowings and other FHLB products. As membership requires the ownership
of member stock, in June 2013, HMLIC purchased common stock to meet the membership
requirement. Any borrowing from the FHLB requires the purchase of FHLB activity-based
common stock in an amount equal to 5.0% of the borrowing, or a lower percentage -- such
as 2.0% based on the Reduced Capitalization Advance Program. For FHLB advances and
funding agreements combined, HMEC's Board of Directors has authorized a maximum
amount equal to 10% of HMLIC’s admitted assets using prescribed statutory accounting
principles. On both September 18, 2014 and December 27, 2013, the Company received
$250,000 under funding agreements and on December 28, 2015, an additional $75,000 was
received under a funding agreement. For the total $575,000 received, $250,000 matures on
September 13, 2019, $125,000 matures on December 15, 2023 and $200,000 matures on
January 16, 2026. Interest on the funding agreements accrues at an annual weighted
average rate of 0.52% as of December 31, 2016. FHLB borrowings of $575,000 are
included in Other policyholder funds in the Consolidated Balance Sheet.
F-52
NOTE 1 - Summary of Significant Accounting Policies-(Continued)
Insurance Premiums and Contract Charges Earned
Property and Casualty insurance premiums are recognized as revenue ratably over the
related contract periods in proportion to the risks insured. The unexpired portions of these
Property and Casualty premiums are recorded as unearned premiums, using the monthly pro
rata method.
Premiums and contract charges for life insurance contracts with account values and
insurance, policy
investment (annuity) contracts consist of charges
administration and withdrawals. Premiums for long-term traditional life policies are recognized
as revenues when due over the premium-paying period. Contract deposits to investment
contracts and life insurance contracts with account values represent funds deposited by
policyholders and are not included in the Company's premiums or contract charges earned.
the cost of
for
Share-Based Compensation
The Company grants stock options and both service-based and performance-based
restricted common stock units (“RSUs”) to executive officers, other employees and Directors in
an effort to attract and retain individuals while also aligning compensation with the interests of
the Company’s shareholders. Additional information regarding the Company's share-based
compensation plans is contained in “Note 9 -- Shareholders' Equity and Common Stock
Equivalents”.
Stock options are accounted for under the fair value method of accounting using a Black-
Scholes valuation model to measure stock option expense at the date of grant. The fair value
of RSUs is measured at the market price of the Company’s common stock on the date of
grant, with the exception of market-based performance awards, for which the Company uses a
Monte Carlo simulation model to determine fair value for purposes of measuring RSU
expense. For the years ended December 31, 2016, 2015 and 2014, the Company recognized
$1,207, $1,285 and $1,270, respectively, in stock option expense as a result of the vesting of
stock options during the respective periods. For the years ended December 31, 2016, 2015
and 2014, the Company recognized $6,929, $892 and $6,132, respectively, in RSU expense
as a result of the earning and/or vesting of RSUs during the respective periods.
F-53
NOTE 1 - Summary of Significant Accounting Policies-(Continued)
In 2016, 2015 and 2014, the Company granted stock options as quantified in the table
below, which also provides the weighted average grant date fair value for stock options
granted in each year. The fair value of stock options granted was estimated on the respective
dates of grant using the Black-Scholes option pricing model with the weighted average
assumptions shown in the following table.
Year Ended December 31,
2014
2015
2016
307,176
Number of stock options granted .............................................................
Weighted average grant date fair value of stock options granted ............. $ 5.01
Weighted average assumptions:
Risk-free interest rate ...........................................................................
Expected dividend yield ........................................................................
Expected life, in years ...........................................................................
Expected volatility (based on historical volatility) ..................................
1.3%
3.2%
4.9
25.6%
142,908
$ 11.18
175,632
$ 9.01
1.7%
2.6%
7.2
42.8%
1.9%
2.5%
5.7
40.3%
The weighted average fair value of nonvested stock options outstanding on December
31, 2016 was $6.82. Total unrecognized compensation expense relating to the nonvested
stock options outstanding as of December 31, 2016 was approximately $2,299. This amount
will be recognized as expense over the remainder of the vesting period, which is scheduled to
be 2017 through 2020. Expense is reflected on a straight-line basis over the vesting period for
the entire award.
Total unrecognized compensation expense relating to RSUs outstanding as of
December 31, 2016 was approximately $9,517. This amount will be recognized as expense
over the remainder of the earning and vesting period, which is scheduled to be 2017 through
2020. Expense is reflected on a straight-line basis from the date of grant through the end of
the vesting period for the entire award.
Income Taxes
The Company uses the asset and liability method for calculating deferred federal income
taxes. Income tax provisions are generally based on income reported for financial statement
purposes. The provisions for federal income taxes for the years ended December 31, 2016,
2015 and 2014 included amounts currently payable and deferred income taxes resulting from
the cumulative differences in the Company's assets and liabilities, determined on a tax return
versus financial statement basis.
Deferred tax assets and liabilities include provisions for unrealized investment gains and
losses as well as the net funded status of pension and other postretirement benefit obligations
with the changes for each period included in the respective components of accumulated other
comprehensive income (loss) within shareholders' equity.
F-54
NOTE 1 - Summary of Significant Accounting Policies-(Continued)
Earnings Per Share
Basic earnings per share is computed based on the weighted average number of
common shares outstanding plus the weighted average number of fully vested restricted stock
units and common stock units payable as shares of HMEC common stock. Diluted earnings
per share is computed based on the weighted average number of common shares and
common stock equivalents outstanding, to the extent dilutive. The Company’s common stock
equivalents relate to outstanding common stock options, deferred compensation common
stock units and incentive compensation restricted common stock units, which are described in
“Note 9 -- Shareholders’ Equity and Common Stock Equivalents”.
The computations of net income per share on both basic and diluted bases, including
reconciliations of the numerators and denominators, were as follows:
Basic:
Net income for the period .........................................................................
Weighted average number of common shares
Year Ended December 31,
2014
2015
2016
$83,765
$ 93,482
$104,243
during the period (in thousands) ...........................................................
Net income per share - basic ...................................................................
41,158
$ 2.04
41,915
$ 2.23
41,646
$ 2.50
Diluted:
Net income for the period .........................................................................
Weighted average number of common shares
$83,765
$ 93,482
$104,243
during the period (in thousands) ...........................................................
41,158
41,915
41,646
Weighted average number of common equivalent
shares to reflect the dilutive effect of common
stock equivalent securities (in thousands):
Stock options.....................................................................................
Common stock units related to deferred
compensation for employees .........................................................
100
52
158
55
137
70
Restricted common stock units related to
incentive compensation .................................................................
166
297
378
Total common and common equivalent shares adjusted
to calculate diluted earnings per share (in thousands) ...........
Net income per share - diluted .................................................................
41,476
$ 2.02
42,425
$ 2.20
42,231
$ 2.47
Options to purchase 413,406 shares of common stock at $31.01 to $36.04 per share
were granted in 2015 through 2016 but were not included in the computation of 2016 diluted
earnings per share because of their anti-dilutive effect as a result of the effect of unrecognized
compensation cost. The options, which expire in 2025 through 2026, were still outstanding at
December 31, 2016.
F-55
NOTE 1 - Summary of Significant Accounting Policies-(Continued)
Comprehensive Income (Loss) and Accumulated Other Comprehensive Income (Loss)
Comprehensive income (loss) represents the change in shareholders’ equity during a
reporting period from transactions and other events and circumstances from non-shareholder
sources. For the Company, comprehensive income (loss) is equal to net income plus or minus
the after tax change in net unrealized gains and losses on fixed maturities and equity securities
and the after tax change in net funded status of benefit plans for the period as shown in the
Consolidated Statements of Changes
Accumulated other
comprehensive income (loss) represents the accumulated change in shareholders’ equity from
these transactions and other events and circumstances from non-shareholder sources as
shown in the Consolidated Balance Sheets.
in Shareholders' Equity.
In the Consolidated Balance Sheets, the Company recognizes the funded status of
benefit plans as a component of accumulated other comprehensive income (loss), net of tax.
Comprehensive Income (Loss)
The components of comprehensive income (loss) were as follows:
Year Ended December 31,
2014
2015
2016
Net income ...............................................................................................
Other comprehensive income (loss):
$83,765
$ 93,482
$104,243
Change in net unrealized investment gains and losses
on fixed maturities and equity securities:
Net unrealized investment gains and losses on fixed
maturities and equity securities arising during the period ..........
6,144
(178,035)
264,136
Less: reclassification adjustment for net gains
included in income before income tax ........................................
Total, before tax .....................................................................
Income tax expense (benefit) .................................................
Total, net of tax ...................................................................
Change in net funded status of benefit plan obligations:
Before tax ..........................................................................................
Income tax expense (benefit) ............................................................
Total, net of tax ...................................................................
Total comprehensive income (loss) .................................
5,176
968
397
571
(37)
(14)
(23)
$84,313
11,667
(189,702)
(67,315)
(122,387)
10,943
253,193
89,629
163,564
1,815
656
1,159
$ (27,746)
(1,810)
(633)
(1,177)
$266,630
F-56
NOTE 1 - Summary of Significant Accounting Policies-(Continued)
Accumulated Other Comprehensive Income (Loss)
The following table reconciles the components of accumulated other comprehensive
income (loss) for the periods indicated.
Unrealized
Gains and
Losses on
Fixed Maturities
and Equity
Defined
Securities (1)(2) Benefit Plans (1)
Total (1)
Beginning balance, January 1, 2016 ..........................................................
Other comprehensive income (loss) before reclassifications ..................
Amounts reclassified from accumulated
$ 175,167
3,935
$(11,794)
(23)
$ 163,373
3,912
other comprehensive income (loss) ....................................................
Net current period other comprehensive income (loss) ...................
Ending balance, December 31, 2016 .........................................................
(3,364)
571
$ 175,738
-
(23)
$(11,817)
(3,364)
548
$ 163,921
Beginning balance, January 1, 2015 ..........................................................
Other comprehensive income (loss) before reclassifications ..................
Amounts reclassified from accumulated
$ 297,554
(114,803)
$(12,953)
1,159
$ 284,601
(113,644)
other comprehensive income (loss) ....................................................
Net current period other comprehensive income (loss) ...................
Ending balance, December 31, 2015 .........................................................
(7,584)
(122,387)
$ 175,167
-
1,159
$(11,794)
(7,584)
(121,228)
$ 163,373
Beginning balance, January 1, 2014 ..........................................................
Other comprehensive income (loss) before reclassifications ..................
Amounts reclassified from accumulated
$ 133,990
170,677
$(11,776)
(1,177)
$ 122,214
169,500
other comprehensive income (loss) ....................................................
Net current period other comprehensive income (loss) ...................
Ending balance, December 31, 2014 .........................................................
(7,113)
163,564
$ 297,554
-
(1,177)
$(12,953)
(7,113)
162,387
$ 284,601
(1) All amounts are net of tax.
(2) The pretax amounts reclassified from accumulated other comprehensive income, $5,176, $11,667 and $10,943, are
included in net realized investment gains and losses and the related tax expenses, $1,812, $4,083 and $3,830, are
included in income tax expense in the Consolidated Statements of Operations for the years ended December 31, 2016,
2015 and 2014, respectively.
Comparative information for elements that are not required to be reclassified in their
entirety to net income in the same reporting period is located in “Note 2 -- Investments --
Unrealized Gains and Losses on Fixed Maturities and Equity Securities”.
Statements of Cash Flows
For purposes of the Consolidated Statements of Cash Flows, cash constitutes cash on
deposit at banks.
Reclassification and Retrospective Adoption
The Company has reclassified the presentation of certain prior period information to
conform to the current year’s presentation.
F-57
NOTE 1 - Summary of Significant Accounting Policies-(Continued)
Adopted Accounting Standards
Disclosures About Short-Duration Insurance Contracts
Effective December 31, 2016, the Company adopted accounting guidance which
requires expanded disclosure regarding claims on short-duration insurance contracts, which
applies primarily to the contracts in the Company’s Property and Casualty segment.
Presentation of Debt Issuance Costs
Effective January 1, 2016, the Company adopted accounting guidance which was issued
to simplify the presentation of costs incurred to issue debt securities. The guidance requires
debt issuance costs associated with specific debt securities to be presented in the balance
sheet as a direct deduction from the carrying value of the associated debt liability, consistent
with the presentation of a debt discount. Costs incurred related to line of credit arrangements
continue to be presented as an asset in the Consolidated Balance Sheet. Also, the guidance
does not affect the recognition and measurement of debt issuance costs. The guidance
required retrospective application. As a result of this adoption, the following items in the
Company’s December 31, 2015 Consolidated Balance Sheet were each reduced by $2,371:
Other assets, Total assets, Long-term debt, Total liabilities and Total liabilities and
shareholders’ equity. Net income per share (basic and diluted) did not change as a result of
the adopted accounting change.
Pending Accounting Standards
Simplifying the Test for Goodwill Impairment
In January 2017, the Financial Accounting Standards Board (“FASB”) issued guidance to
simplify the accounting for goodwill impairment. The guidance removes Step 2 of the goodwill
impairment test, which requires a hypothetical purchase price allocation. A goodwill
impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair
value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance
will remain largely unchanged. Entities will continue to have the option to perform a qualitative
assessment to determine if a quantitative impairment test is necessary. The same one-step
impairment test will be applied to goodwill at all reporting units, even those with zero or
negative carrying amounts. Entities will be required to disclose the amount of goodwill for
reporting units with zero or negative carrying amounts. Public business entities should adopt
the guidance prospectively for its annual or any interim goodwill impairment tests in fiscal
years beginning after December 15, 2019. Early application is permitted. Management
believes the adoption of this accounting guidance will not have a material effect on how it tests
goodwill for impairment.
F-58
NOTE 1 - Summary of Significant Accounting Policies-(Continued)
Statement of Cash Flows -- Classification
In August 2016, the FASB issued guidance to reduce diversity in practice in the
statement of cash flows between operating, investing and financing activities related to the
classification of cash receipts and cash payments for eight specific issues. The FASB
acknowledged that current GAAP either is unclear or does not include specific guidance on
these eight cash flow classification issues: (1) debt prepayment or extinguishment costs; (2)
settlement of zero-coupon bonds (pertains to issuers); (3) contingent consideration payments
made after a business combination; (4) proceeds from the settlement of insurance claims
(pertains to claimants); (5) proceeds from the settlement of corporate-owned life insurance
policies; (6) distributions received from equity method investees; (7) beneficial interests in
securitization transactions (pertains to transferors) and (8) separately identifiable cash flows
and application of the predominance principle. For public business entities, the guidance is
effective for annual reporting periods beginning after December 15, 2017, including interim
periods within those years, using a retrospective approach. The guidance allows prospective
adoption for individual issues if it is impracticable to apply the amendments retrospectively for
those issues. Early application is permitted. Management believes the adoption of this
accounting guidance will not have a material effect on the classifications in the Company’s
consolidated statement of cash flows. The adoption of this accounting guidance will not have
any effect on the results of operations or financial position of the Company.
Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued guidance to improve financial reporting by requiring
timelier recording of credit losses on loans and other financial instruments, including
reinsurance receivables, held by companies. The new guidance replaces the incurred loss
impairment methodology and requires an organization to measure and recognize all current
expected credit losses (“CECL”) for financial assets held at the reporting date based on
historical experience, current conditions, and reasonable and supportable
forecasts.
Companies will need to utilize forward-looking information to better inform their credit loss
estimates. Companies will continue to use judgment to determine which loss estimation
method is appropriate for their circumstances. Credit losses related to available for sale debt
securities -- which represent over 90% of Horace Mann’s total investment portfolio -- will be
recorded through an allowance for credit losses with this allowance having a limit equal to the
amount by which fair value is below amortized cost. The guidance also requires enhanced
qualitative and quantitative disclosures to provide additional information about the amounts
recorded in the financial statements. For public business entities that are SEC filers, the
guidance is effective for annual reporting periods beginning after December 15, 2019,
including interim periods within those years, using a modified-retrospective approach. Early
application is permitted for annual reporting periods, and interim periods within those years,
beginning after December 15, 2018. Management is evaluating the impact this guidance will
have on the results of operations and financial position of the Company.
F-59
NOTE 1 - Summary of Significant Accounting Policies-(Continued)
Employee Share-based Payment Accounting
In March 2016, the FASB issued guidance to simplify and improve the accounting for
employee share-based payment transactions. Under the new guidance, several aspects of the
accounting for share-based payment transactions are changed including: (1) the entire tax
impact of the difference between a company’s share-based payment deduction for tax
purposes and the compensation cost recognized in the financial statements (“excess tax
benefits”) will be recorded in the income statement (the additional paid-in capital pool is
eliminated) and classified with other income tax cash flows as an operating activity in the
statement of cash flows; (2) election of an accounting policy regarding forfeitures, either
retaining the current GAAP approach of estimating forfeitures or accounting for forfeitures
when they occur; (3) companies may withhold up to the maximum individual statutory tax rate
without triggering classification of the award as a liability; (4) cash paid to satisfy the statutory
income tax withholding obligation is to be classified as a financing activity in the statement of
cash flows; and (5) certain additional aspects which apply only to nonpublic entities. There are
different approaches specified for transition to the new guidance encompassing prospective,
retrospective and modified retrospective (cumulative-effect adjustment) approaches. The
guidance is effective for annual reporting periods beginning after December 15, 2016,
including interim periods within those years. Early application is permitted; however, all
components of the guidance must be implemented at the same time. Management is
evaluating the impact this guidance will have on the results of operations and financial position
of the Company.
Accounting for Leases
In February 2016, the FASB issued accounting and disclosure guidance to improve
financial reporting and comparability among organizations about leasing transactions. Under
the new guidance, for leases with lease terms of more than 12 months, a lessee will be
required to recognize assets and liabilities on the balance sheet for the rights and obligations
created by those leases. Consistent with current accounting guidance, the recognition,
measurement and presentation of expenses and cash flows arising from a lease by a lessee
primarily will depend on its classification as a finance or an operating lease. However, while
current guidance requires only capital leases to be recognized on the balance sheet, the new
guidance will require both operating and capital leases to be recognized on the balance sheet.
In transition to the new guidance, companies are required to recognize and measure leases at
the beginning of the earliest period presented using a modified retrospective approach. The
guidance is effective for annual reporting periods beginning after December 15, 2018,
including interim periods within those years. Early application is permitted. Management is
evaluating the impact this guidance will have on the results of operations and financial position
of the Company.
F-60
NOTE 1 - Summary of Significant Accounting Policies-(Continued)
Recognition and Measurement of Financial Assets and Liabilities
to
identify
In January 2016, the FASB issued accounting guidance to improve certain aspects of the
recognition, measurement, presentation and disclosure of financial instruments. Among other
things, this guidance requires public entities to measure equity investments (except those
accounted for under the equity method of accounting or those that result in consolidation of the
investee) at fair value with changes in fair value recognized in net income and to perform a
qualitative assessment
investments without readily
determinable fair values. Companies are required to apply this guidance by means of a
cumulative-effect adjustment to the balance sheet as of the beginning of the year of adoption
and, for the guidance related to equity securities without readily determinable fair values,
companies are required to apply a prospective approach to equity investments that exist as of
the date of adoption. The guidance is effective for annual reporting periods beginning after
December 15, 2017, including interim periods within those years. Early application is
permitted. The guidance will not have an impact on the Company’s financial position and
management is evaluating the impact that this guidance will have on the Company’s results of
operations.
impairment
for equity
Revenue Recognition
In May 2014, the FASB issued accounting guidance to provide a single comprehensive
model in accounting for revenue arising from contracts with customers. The guidance applies
to all contracts with customers; however, insurance contracts are specifically excluded from
this updated guidance. The guidance is effective for annual reporting periods beginning after
December 15, 2017, including interim periods within those years. Early adoption is permitted
only for annual reporting periods beginning after December 15, 2016. The Company plans to
adopt the guidance as of January 1, 2018. Management believes the adoption of this
accounting guidance will not have a material effect on the results of operations or financial
position, and related disclosures, of the Company.
F-61
NOTE 2 - Investments
includes
The Company’s
investment portfolio
free-standing derivative
financial
instruments (currently over the counter (“OTC”) index call option contracts) to economically
hedge risk associated with its fixed indexed annuity and indexed universal life products’
contingent liabilities. The Company’s fixed indexed annuity and indexed universal life products
include embedded derivative features that are discussed in “Note 1 -- Summary of Significant
Accounting Policies -- Investment Contract and Life Policy Reserves -- Reserves for Fixed
Indexed Annuities and Indexed Universal Life Policies”. The Company's investment portfolio
included no other free-standing derivative financial instruments (futures, forwards, swaps,
option contracts or other financial instruments with similar characteristics), and there were no
other embedded derivative features related to the Company’s insurance products during the
three years ended December 31, 2016.
Net Investment Income
The components of net investment income for the following periods were:
Year Ended December 31,
2014
2015
2016
Fixed maturities ........................................................................................ $342,773
4,703
Equity securities .......................................................................................
9,668
Short-term and other investments ............................................................
13,609
Other invested assets (equity method investments) ................................
370,753
Total investment income .......................................................................
(9,567)
Investment expenses ...............................................................................
Net investment income ......................................................................... $361,186
$326,207
4,355
9,187
1,984
341,733
(9,133)
$332,600
$317,756
4,849
8,459
7,229
338,293
(8,478)
$329,815
Realized Investment Gains (Losses)
Net realized investment gains (losses) for the following periods were:
Year Ended December 31,
2014
2015
2016
Fixed maturities ........................................................................................ $ 5,784
(608)
Equity securities .......................................................................................
(1,053)
Short-term investments and other ............................................................
Net realized investment gains ............................................................... $ 4,123
$ 10,289
1,378
1,046
$ 12,713
$ 8,150
2,793
(26)
$ 10,917
The Company, from time to time, sells invested assets subsequent to the balance sheet
date that were considered temporarily impaired at the balance sheet date. Such sales are due
to issuer specific events occurring subsequent to the balance sheet date that result in a
change in the Company’s intent or ability to hold an invested asset. The types of events that
may result in a sale include significant changes in the economic facts and circumstances
related to the invested asset, significant unforeseen changes in liquidity needs, or changes in
the Company’s investment strategy.
F-62
NOTE 2 - Investments-(Continued)
Fixed Maturities and Equity Securities
The Company’s investment portfolio is comprised primarily of fixed maturity securities
and also includes equity securities. The amortized cost or cost, net unrealized investment
gains and losses, fair values and other-than-temporary impairment included in accumulated
other comprehensive income (loss) (“AOCI”) of all fixed maturities and equity securities in the
portfolio were as follows:
Amortized
Cost/Cost
Unrealized
Gains
Unrealized
Losses
Fair
Value
OTTI in
AOCI (1)
December 31, 2016
Fixed maturity securities
U.S. Government and federally
sponsored agency obligations (2):
Mortgage-backed securities ............ $ 412,891
Other, including
U.S. Treasury securities ..............
458,745
Municipal bonds ..................................... 1,648,252
93,864
Foreign government bonds ....................
Corporate bonds .................................... 2,672,818
Other mortgage-backed securities ......... 1,865,557
Totals........................................... $7,152,127
$ 33,168
$ 3,640
$ 442,419
$ -
18,518
143,733
5,102
152,229
22,241
$374,991
10,120
22,588
297
14,826
18,939
$70,410
467,143
1,769,397
98,669
2,810,221
1,868,859
$7,456,708
-
-
-
-
1,618
$ 1,618
Equity securities (3) ................................... $ 134,013
$ 13,210
$ 5,574
$ 141,649
$ -
December 31, 2015
Fixed maturity securities
U.S. Government and federally
sponsored agency obligations (2):
Mortgage-backed securities ............ $ 461,862
Other, including
U.S. Treasury securities ..............
532,373
Municipal bonds ..................................... 1,553,603
Foreign government bonds ....................
67,441
Corporate bonds .................................... 2,687,376
Other mortgage-backed securities ......... 1,482,971
Totals........................................... $6,785,626
$ 44,413
$ 1,861
$ 504,414
$ -
21,153
165,680
6,288
140,873
16,830
$395,237
7,415
10,340
112
48,834
20,961
$89,523
546,111
1,708,943
73,617
2,779,415
1,478,840
$7,091,340
-
(4,140)
-
-
1,382
$(2,758)
Equity securities (3) ................................... $ 95,722
$ 8,405
$ 4,330
$ 99,797
$ -
(1) Related to securities for which an unrealized loss was bifurcated to distinguish the credit-related portion and the portion
driven by other market factors. Represents the amount of other-than-temporary impairment losses in AOCI which was
not included in earnings; amounts also include net unrealized investment gains and losses on such impaired securities
relating to changes in the fair value of those securities subsequent to the impairment measurement date.
(2) Fair value includes securities issued by Federal National Mortgage Association (“FNMA”) of $196,468 and $231,294;
Federal Home Loan Mortgage Corporation (“FHLMC”) of $284,050 and $363,957; and Government National Mortgage
Association (“GNMA”) of $115,627 and $130,940 as of December 31, 2016 and 2015, respectively.
Includes nonredeemable (perpetual) preferred stocks, common stocks and closed-end funds.
(3)
F-63
NOTE 2 - Investments-(Continued)
The following table presents the fair value and gross unrealized losses of fixed maturities
and equity securities in an unrealized loss position at December 31, 2016 and 2015,
respectively. The Company views the decrease in value of all of the securities with unrealized
losses at December 31, 2016 -- which was driven largely by changes in interest rates, spread
widening, financial market illiquidity and/or market volatility from the date of acquisition -- as
temporary. For fixed maturity securities, management does not have the intent to sell the
securities and it is not more likely than not the Company will be required to sell the securities
before the anticipated recovery of the amortized cost bases, and management expects to
recover the entire amortized cost bases of the fixed maturity securities. For equity securities,
the Company has the ability and intent to hold the securities for the recovery of cost and
recovery of cost is expected within a reasonable period of time. Therefore, no impairment of
these securities was recorded at December 31, 2016.
12 months or less
Gross
Unrealized
Losses
Fair Value
More than 12 months
Gross
Unrealized
Losses
Fair Value
Total
Gross
Unrealized
Losses
Fair Value
December 31, 2016
Fixed maturity securities
U.S. Government and federally
sponsored agency obligations:
Mortgage-backed securities ..... $ 76,573
219,372
Other ........................................
408,163
Municipal bonds ..............................
24,182
Foreign government bonds .............
459,402
Corporate bonds .............................
Other mortgage-backed securities .. 750,557
$ 3,096
10,120
19,006
297
11,056
13,550
$ 3,235
-
9,928
-
57,261
229,106
$ 544
-
3,582
-
3,770
5,389
$ 79,808
219,372
418,091
24,182
516,663
979,663
$ 3,640
10,120
22,588
297
14,826
18,939
Total fixed
maturity securities ............. 1,938,249
Equity securities (1) ............................ 56,676
Combined totals ............ $1,994,925
57,125
4,567
$61,692
299,530
7,956
$307,486
13,285
1,007
$14,292
2,237,779
64,632
$2,302,411
70,410
5,574
$75,984
Number of positions with a
gross unrealized loss ......................
629
Fair value as a percentage of
total fixed maturities and
equity securities fair value ...............
26.3%
102
4.0%
731
30.3%
December 31, 2015
Fixed maturity securities
U.S. Government and federally
sponsored agency obligations:
Mortgage-backed securities ..... $ 48,097
248,478
Other ........................................
168,939
Municipal bonds ..............................
11,867
Foreign government bonds .............
Corporate bonds .............................
858,647
Other mortgage-backed securities .. 929,268
$ 1,748
7,338
5,382
112
37,244
19,165
$ 1,595
1,921
21,717
-
50,340
140,561
$ 113
77
4,958
-
11,590
1,796
$ 49,692
250,399
190,656
11,867
908,987
1,069,829
$ 1,861
7,415
10,340
112
48,834
20,961
Total fixed
maturity securities ............. 2,265,296
Equity securities (1) ............................ 38,764
Combined totals ............ $2,304,060
70,989
3,022
$74,011
216,134
8,379
$224,513
18,534
1,308
$19,842
2,481,430
47,143
$2,528,573
89,523
4,330
$93,853
Number of positions with a
gross unrealized loss ......................
684
Fair value as a percentage of
total fixed maturities and
equity securities fair value ...............
32.0%
78
3.1%
762
35.1%
(1)
Includes nonredeemable (perpetual) preferred stocks, common stocks and closed-end funds.
F-64
NOTE 2 - Investments-(Continued)
Fixed maturities and equity securities with an investment grade rating represented 88%
of the gross unrealized loss as of December 31, 2016. With respect to fixed maturity securities
involving securitized financial assets, the underlying collateral cash flows were stress tested to
determine there was no adverse change in the present value of cash flows below the
amortized cost basis.
Credit Losses
The following table summarizes the cumulative amounts related to the Company’s credit
loss component of the other-than-temporary impairment losses on fixed maturity securities
held as of December 31, 2016 and 2015 that the Company did not intend to sell as of those
dates, and it was not more likely than not that the Company would be required to sell the
securities before the anticipated recovery of the amortized cost bases, for which the non-credit
portions of
in other
comprehensive income (loss):
the other-than-temporary
losses were
impairment
recognized
Cumulative credit loss (1)
Beginning of period ..............................................................................................................
New credit losses .............................................................................................................
Increases to previously recognized credit losses .............................................................
Losses related to securities sold or paid down during the period .....................................
End of period .......................................................................................................................
$ 7,844
300
5,859
(300)
$13,703
2016
2015
$2,877
4,967
-
-
$7,844
Year Ended December 31,
(1) The cumulative credit loss amounts exclude other-than-temporary impairment losses on securities held as of the periods
indicated that the Company intended to sell or it was more likely than not that the Company would be required to sell the
security before the recovery of the amortized cost basis.
Maturities/Sales of Fixed Maturities and Equity Securities
The following table presents the distribution of the Company’s fixed maturity securities
portfolio by estimated expected maturity. Estimated expected maturities differ from contractual
maturities, reflecting assumptions regarding borrowers' utilization of the right to call or prepay
obligations with or without call or prepayment penalties. For structured securities, including
mortgage-backed securities and other asset-backed securities, estimated expected maturities
consider broker-dealer survey prepayment assumptions and are verified for consistency with
the interest rate and economic environments.
December 31, 2016
Percent of
Total Fair
Value
Amortized
Cost
Fair
Value
Estimated expected maturity:
Due in 1 year or less ............................................................................. $ 276,403
2,051,674
Due after 1 year through 5 years ..........................................................
2,518,896
Due after 5 years through 10 years ......................................................
1,397,499
Due after 10 years through 20 years ....................................................
907,655
Due after 20 years ................................................................................
Total .................................................................................................. $7,152,127
$ 290,811
2,140,074
2,624,759
1,454,057
947,007
$7,456,708
3.9%
28.7%
35.2%
19.5%
12.7%
100.0%
Average option-adjusted duration, in years ..............................................
5.9
F-65
NOTE 2 - Investments-(Continued)
Proceeds received from sales of fixed maturities and equity securities, each determined
using the specific identification method, and gross gains and gross losses realized as a result
of those sales for each year were:
Year Ended December 31,
2014
2015
2016
Fixed maturity securities
Proceeds received ................................................................................
Gross gains realized .............................................................................
Gross losses realized ...........................................................................
$429,251
15,915
(4,163)
$ 445,100
22,476
(5,487)
$261,696
13,224
(6,325)
Equity securities
Proceeds received ................................................................................
Gross gains realized .............................................................................
Gross losses realized ...........................................................................
$ 21,210
2,869
(935)
$ 31,621
6,604
(672)
$ 17,194
3,206
(482)
Net Unrealized Investment Gains and Losses on Fixed Maturities and Equity Securities
Net unrealized investment gains and losses are computed as the difference between fair
value and amortized cost for fixed maturities or cost for equity securities. The following table
reconciles the net unrealized investment gains and losses, net of tax, included in accumulated
other comprehensive income (loss), before the impact on deferred policy acquisition costs:
Year Ended December 31,
2014
2015
2016
Net unrealized investment gains and losses
on fixed maturity securities, net of tax
Beginning of period ...........................................................................
Change in unrealized investment gains and losses .......................
Reclassification of net realized investment (gains)
$198,714
3,024
$ 336,604
(131,202)
losses to net income ..................................................................
End of period .....................................................................................
(3,760)
$197,978
(6,688)
$ 198,714
Net unrealized investment gains and losses
on equity securities, net of tax
Beginning of period ...........................................................................
Change in unrealized investment gains and losses .......................
Reclassification of net realized investment (gains)
$ 2,649
1,919
$ 6,988
(3,443)
losses to net income ..................................................................
End of period .....................................................................................
395
$ 4,963
(896)
$ 2,649
$146,489
195,413
(5,298)
$336,604
$ 4,618
4,185
(1,815)
$ 6,988
Investment in Entities Exceeding 10% of Shareholders' Equity
At December 31, 2016 and 2015, there were no investments which exceeded 10% of
total shareholders' equity in entities other than obligations of the U.S. Government and
federally sponsored government agencies and authorities.
F-66
NOTE 2 - Investments-(Continued)
Offsetting of Assets and Liabilities
The Company’s derivative instruments (call options) are subject to enforceable master
netting arrangements. Collateral support agreements associated with each master netting
arrangement provide that the Company will receive or pledge financial collateral in the event
minimum thresholds have been reached.
The following table presents the instruments that were subject to a master netting
arrangement for the Company.
Net Amounts
of Assets/
Liabilities
Presented
in the
Gross
Amounts
Offset in the
Consolidated Consolidated
Gross Amounts Not Offset
in the Consolidated
Balance Sheets
Gross
Amounts
Balance
Sheets
Balance
Sheets
Financial
Instruments
Cash
Collateral
Received
Net
Amount
December 31, 2016
Asset derivatives
Free-standing derivatives............
$8,694
$ -
$8,694
$ -
$8,824
$(130)
December 31, 2015
Asset derivatives
Free-standing derivatives...........
2,501
-
2,501
-
2,617
(116)
Deposits
At December 31, 2016 and 2015, fixed maturity securities with a fair value of $18,119
and $18,312, respectively, were on deposit with governmental agencies as required by law in
various states in which the insurance subsidiaries of HMEC conduct business. In addition, at
December 31, 2016 and 2015, fixed maturity securities with a fair value of $620,489 and
$621,077, respectively, were on deposit with the Federal Home Loan Bank of Chicago
(“FHLB”) as collateral for amounts subject to funding agreements which were equal to
$575,000 at both of the respective dates. The deposited securities are included in “Fixed
maturities” on the Company’s Consolidated Balance Sheets.
F-67
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
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.
the determination of
for which
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.
F-68
NOTE 3 - Fair Value of Financial Instruments-(Continued)
The following discussion describes the valuation methodologies used for financial assets
and financial liabilities measured at fair value. The techniques utilized in estimating the fair
values are affected by the assumptions used, including discount rates and estimates of the
amount and timing of future cash flows. The use of different methodologies, assumptions and
inputs may have a material effect on the estimated fair values of the Company’s securities
holdings. Care should be exercised in deriving conclusions about the Company’s business, its
value or financial position based on the fair value information of financial and nonfinancial
assets and liabilities presented below.
Fair value estimates are made at a specific point in time, based on available market
information and judgments about the financial asset or financial liability, including estimates of
timing, amount of expected future cash flows and the credit standing of the issuer. In some
cases, the fair value estimates cannot be substantiated by comparison to independent
markets. In addition, the disclosed fair value may not be realized in the immediate settlement
of the financial asset or financial liability. The disclosed fair values do not reflect any premium
or discount that could result from offering for sale at one time an entire holding of a particular
financial asset or financial liability. In periods of market disruption, the ability to observe prices
and inputs may be reduced for many instruments. This condition could cause an instrument to
be reclassified from Level 1 to Level 2 or from Level 2 to Level 3. Potential taxes and other
expenses that would be incurred in an actual sale or settlement are not reflected in amounts
disclosed.
Investments
For fixed maturity securities, each month the Company obtains fair value prices from its
investment managers and custodian bank. Fair values for the Company’s fixed maturity
securities are based primarily on prices provided by its investment managers as well as its
custodian bank for certain securities. The prices from the custodian bank are compared to
prices from the investment managers. Differences in prices between the sources that the
Company considers significant are researched and the Company utilizes the price that it
considers most representative of an exit price. Both the investment managers and the
custodian bank use a variety of independent, nationally recognized pricing sources to
determine market valuations. Each designate specific pricing services or indexes for each
sector of the market based upon the provider’s expertise. Typical inputs used by these pricing
sources include, but are not limited to, reported trades, benchmark yield curves, benchmarking
of like securities, ratings designations, sector groupings, issuer spreads, bids, offers, and/or
estimated cash flows and prepayment speeds.
When the pricing sources cannot provide fair value determinations, the Company obtains
non-binding price quotes from broker-dealers. The broker-dealers’ valuation methodology is
sometimes matrix-based, using indicative evaluation measures and adjustments for specific
security characteristics and market sentiment. The market inputs utilized in the evaluation
measures and adjustments include: benchmark yield curves, reported trades, broker/dealer
quotes, ratings and corresponding issuer spreads, two-sided markets, benchmark securities,
bids, offers, reference data, and industry and economic events. The extent of the use of each
market input depends on the market sector and the market conditions. Depending on the
security, the priority of the use of inputs may change or some market inputs may not be
relevant. For some securities, additional inputs may be necessary.
F-69
NOTE 3 - Fair Value of Financial Instruments-(Continued)
The Company analyzes price and market valuations received to verify reasonableness,
to understand the key assumptions used and their sources, to conclude the prices obtained
are appropriate, and to determine an appropriate fair value hierarchy level based upon trading
activity and the observability of market inputs. Based on this evaluation and investment class
analysis, each security is classified into Level 1, 2, or 3. The Company has in place certain
control processes to determine the reasonableness of the financial asset fair values. These
processes are designed to ensure (1) the values received are reasonable and accurately
recorded, (2) the data inputs and valuation techniques utilized are appropriate and consistently
applied, and (3) the assumptions are reasonable and consistent with the objective of
determining fair value. For example, on a continuing basis, the Company assesses the
reasonableness of individual security values received from pricing sources that vary from
certain thresholds.
The Company’s fixed maturity securities portfolio is primarily publicly traded, which
allows for a high percentage of the portfolio to be priced through pricing services.
Approximately 90% of the portfolio, based on fair value, was priced through pricing services or
index priced as of both December 31, 2016 and 2015. The remainder of the portfolio was
priced by broker-dealers or pricing models. When non-binding broker-dealer quotes could be
corroborated by comparison to other vendor quotes, pricing models or analyses, the securities
were generally classified as Level 2, otherwise they were classified as Level 3. There were no
significant changes to the valuation process during 2016.
At December 31, 2016, all of the equity securities portfolio was priced from observable
market quotations. Fair values of equity securities have been determined by the Company from
observable market quotations, when available. When a public quotation is not available, equity
securities are valued by using non-binding broker quotes or through the use of pricing models or
analyses that are based on market information regarding interest rates, credit spreads and
liquidity. The underlying source data for calculating the matrix of credit spreads relative to the
U.S. Treasury curve are nationally recognized indices. In addition, credit rating (or credit quality
equivalent information) of securities is also factored into a pricing matrix. These inputs are
based on assumptions deemed appropriate given the circumstances and are believed to be
consistent with what other market participants would use when pricing such securities. There
were no significant changes to the valuation process in 2016.
Short-term and other investments are comprised of short-term fixed maturity securities,
derivative instruments (all call options), policy loans, mortgage loans, and restricted FHLB
membership and activity stocks, as well as certain alternative investments which are
accounted for using the equity method and therefore excluded from the fair value tabular
disclosures.
F-70
NOTE 3 - Fair Value of Financial Instruments-(Continued)
In summary, the following investments are carried at fair value:
Fixed maturity securities, as described above.
Equity securities, as described above.
Short-term fixed maturity securities -- Because of the nature of these assets,
carrying amounts generally approximate fair values.
Derivative instruments, all call options -- Fair values are based on the amount of
cash expected to be received to settle each derivative instrument on the reporting
date. These amounts are obtained from each of the counterparties using industry
accepted valuation models and observable inputs. Significant inputs include
contractual terms, underlying index prices, market volatilities, interest rates and
dividend yields.
FHLB membership and activity stocks -- Fair value is based on redemption value,
which is equal to par value.
The following investments are not carried at fair value; disclosure is provided:
Policy loans -- Fair value is based on estimates using discounted cash flow
analysis and current interest rates being offered for new loans.
Mortgage loans -- Fair value is estimated by discounting the future cash flows
using the current rates at which similar loans would be made to borrowers with
similar credit ratings and the same remaining maturities.
Investment Contract and Life Policy Reserves
The fair values of fixed annuity contract liabilities and policyholder account balances on
life contracts are equal to the discounted estimated future cash flows (using the Company's
current interest rates for similar products including consideration of minimum guaranteed
interest rates). The Company carries these financial liabilities at cost.
Also included in investment contract and life policy reserves are embedded derivatives
related to the Company’s indexed universal life product, which was introduced in October
2015. The fair value of these embedded derivatives is estimated to be equal to the fair value
of the current call options purchased to hedge the liability. The Company carries these
embedded derivatives at fair value.
F-71
NOTE 3 - Fair Value of Financial Instruments-(Continued)
Other Policyholder Funds
Other policyholder funds are liabilities related to supplementary contracts without life
contingencies and dividend accumulations, as well as balances outstanding under funding
agreements with the FHLB and embedded derivatives related to fixed indexed annuities
(“FIA”). Except for embedded derivatives, each of these components is carried at cost, which
management believes is a reasonable estimate of fair value due to the relatively short duration
of these items, based on the Company’s past experience.
The fair value of the embedded derivatives, all related to the Company’s FIA products, is
estimated at each valuation date by (1) projecting policy contract values and minimum
guaranteed contract values over the expected lives of the contracts and (2) discounting the
excess of the projected contract value amounts at the applicable risk free interest rates
adjusted for the Company’s nonperformance risk related to those liabilities. The projections of
policy contract values are based on the Company’s best estimate assumptions for future
contract growth and decrements. The assumptions for future contract growth include the
expected index credits which are derived from the fair values of the underlying call options
purchased to fund such index credits and the expected costs of annual call options that will be
purchased in the future to fund index credits beyond the next contract anniversary. Projections
of minimum guaranteed contract values include the same best estimate assumptions for
contract decrements used to project policy contract values.
Long-term Debt
The Company carries long-term debt at amortized cost. The fair value of long-term debt
is estimated based on unadjusted quoted market prices of the Company’s securities or
unadjusted market prices based on similar publicly traded issues when trading activity for the
Company’s securities is not sufficient to provide a market price.
F-72
NOTE 3 - Fair Value of Financial Instruments-(Continued)
Financial Instruments Measured and Carried at Fair Value
The following table presents the Company’s fair value hierarchy for those assets and
liabilities measured and carried at fair value on a recurring basis. At December 31, 2016,
these Level 3 invested assets comprised approximately 2.7% of the Company’s total
investment portfolio fair value.
Carrying
Amount
Fair
Value
Fair Value Measurements at
Reporting Date Using
Level 3
Level 2
Level 1
December 31, 2016
Financial Assets
Investments
Fixed maturities
U.S. Government and federally
sponsored agency obligations:
Mortgage-backed securities .............. $ 442,419
Other, including
U.S. Treasury securities ................
467,143
Municipal bonds ....................................... 1,769,397
Foreign government bonds ......................
98,669
Corporate bonds ...................................... 2,810,221
Other mortgage-backed securities ........... 1,868,859
Total fixed maturities .................. 7,456,708
141,649
Equity securities ..........................................
Short-term investments ...............................
44,918
Other investments ....................................... 20,194
Totals ..................................... 7,663,469
Financial Liabilities
Investment contract and life policy
$ 442,419
$ -
$ 439,004
$ 3,415
467,143
1,769,397
98,669
2,810,221
1,868,859
7,456,708
141,649
44,918
20,194
7,663,469
13,631
-
-
13,532
-
27,163
98,632
44,167
-
169,962
453,512
1,722,900
98,669
2,736,498
1,767,615
7,218,198
43,011
-
20,194
7,281,403
-
46,497
-
60,191
101,244
211,347
6
751
-
212,104
reserves, embedded derivatives ..................
158
158
Other policyholder funds,
embedded derivatives .................................
59,393
59,393
-
-
158
-
-
59,393
December 31, 2015
Financial Assets
Investments
Fixed maturities
U.S. Government and federally
sponsored agency obligations:
Mortgage-backed securities .............. $ 504,414
Other, including
U.S. Treasury securities ................
546,111
Municipal bonds ....................................... 1,708,943
Foreign government bonds ......................
73,617
Corporate bonds ...................................... 2,779,415
Other mortgage-backed securities ........... 1,478,840
Total fixed maturities .................. 7,091,340
99,797
Equity securities ..........................................
Short-term investments ...............................
174,152
Other investments ....................................... 14,001
Totals ..................................... 7,379,290
Financial Liabilities
Investment contract and life policy
$ 504,414
$ -
$ 504,414
$ -
546,111
1,708,943
73,617
2,779,415
1,478,840
7,091,340
99,797
174,152
14,001
7,379,290
14,258
-
-
10,195
-
24,453
86,088
169,764
-
280,305
531,853
1,678,564
73,617
2,701,645
1,403,374
6,893,467
13,703
4,388
14,001
6,925,559
-
30,379
-
67,575
75,466
173,420
6
-
-
173,426
reserves, embedded derivatives ..................
14
14
Other policyholder funds,
embedded derivatives .................................
39,021
39,021
-
-
14
-
-
39,021
F-73
NOTE 3 - Fair Value of Financial Instruments-(Continued)
The Company did not have any other transfers between Levels 1 and 2 during the years ended
December 31, 2016 and 2015. The following tables present reconciliations for the periods indicated for
all Level 3 assets and liabilities measured at fair value on a recurring basis.
Financial Assets
Municipal
Bonds
Corporate
Bonds
Other
Mortgage-
Backed
Securities (2)
Total
Fixed
Maturities
Equity
Securities
Short-term
Investments
Total
Financial
Liabilities(1)
$ 67,575
27,561
(14,334)
$ 75,466
39,128
(6,694)
$173,420
84,399
(21,028)
$ 6
-
-
$ -
751
-
$173,426
85,150
(21,028)
$39,021
-
-
Beginning balance, January 1, 2016 ................
Transfers into Level 3 (3) .............................
Transfers out of Level 3 (3) ..........................
Total gains or losses
$30,379
17,710
-
Net realized investment gains
(losses) included in net
income related to
financial assets ....................................
Net realized (gains) losses
included in net income
related to financial liabilities ..................
-
-
Net unrealized investment gains
(losses) included in other
comprehensive income ........................
Purchases ....................................................
Issuances .....................................................
Sales ............................................................
Settlements ..................................................
Paydowns, maturities
(990)
-
-
-
-
Beginning balance, January 1, 2015 ................
Transfers into Level 3 (3) .............................
Transfers out of Level 3 (3) ..........................
Total gains or losses
$13,628
16,326
-
Net realized investment gains
(losses) included in net
income related to
financial assets ....................................
Net realized (gains) losses
included in net income
related to financial liabilities ..................
-
-
Net unrealized investment gains
(losses) included in other
comprehensive income ........................
Purchases ....................................................
Issuances .....................................................
Sales ............................................................
Settlements ..................................................
Paydowns, maturities
782
-
-
-
-
(1,833)
(56)
(1,889)
-
-
-
(205)
-
-
-
-
5,895
-
-
-
-
4,700
-
-
-
-
-
-
-
-
-
-
-
$ 74,717
5,729
(1,351)
$ 82,949
15,685
(9,663)
$171,294
37,740
(11,014)
$ 6
-
-
-
-
-
-
-
-
-
(1,889)
-
-
5,011
4,700
-
-
-
-
-
-
17,113
-
-
-
$751
$ -
-
-
(28,255)
$212,104
(1,752)
$59,393
$171,300
37,740
(11,014)
$20,049
-
-
1,087
-
(1,935)
-
-
(476)
-
-
-
(854)
-
-
-
-
1,087
(3)
-
(2,007)
-
-
(476)
-
-
4
-
-
(1)
-
-
-
-
-
-
-
-
1,084
-
-
(2,528)
(2,003)
-
-
(477)
-
-
-
23,595
-
-
and distributions .......................................
Ending balance, December 31, 2016 ...............
(602)
$46,497
(18,573)
$ 60,191
(9,080)
$104,659
(28,255)
$211,347
-
$ 6
and distributions .......................................
Ending balance, December 31, 2015 ...............
(357)
$30,379
(10,196)
$ 67,575
(12,651)
$ 75,466
(23,204)
$173,420
-
$ 6
-
$ -
(23,204)
$173,426
(2,095)
$39,021
(1) Represents embedded derivatives, all related to the Company’s FIA products, reported in Other policyholder funds in the Company’s Consolidated
(2)
(3)
Balance Sheets.
Includes U.S. Government and federally sponsored agency obligations for mortgage-backed securities and other mortgage-backed securities.
Transfers into and out of Level 3 during the years ended December 31, 2016 and 2015 were attributable to changes in the availability of observable
market information for individual fixed maturity securities and short-term investments. The Company’s policy is to recognize transfers into and
transfers out of the levels as having occurred at the end of the reporting period in which the transfers were determined.
At December 31, 2016, the Company impaired a Level 3 security for a $1,833 realized loss. At
December 31, 2015, there were no net realized investment gains or losses included in earnings that
were attributable to changes in the fair value of Level 3 assets still held. For the years ended
December 31, 2016 and 2015, realized gains/(losses) of ($5,011) and $2,528, respectively, were
included in earnings that were attributable to the changes in the fair value of Level 3 liabilities
(embedded derivatives) still held.
F-74
NOTE 3 - Fair Value of Financial Instruments-(Continued)
The valuation techniques and significant unobservable inputs used in the fair value
measurement for financial assets classified as Level 3 are subject to the control processes as
previously described in this note for “Investments”. Generally, valuation techniques for fixed
maturity securities
flow
methodologies; include inputs such as quoted prices for identical or similar securities that are
less liquid; and are based on lower levels of trading activity than securities classified as Level
2. The valuation techniques and significant unobservable inputs used in the fair value
measurement for equity securities classified as Level 3 use similar valuation techniques and
significant unobservable inputs as those used for fixed maturities.
include spread pricing, matrix pricing and discounted cash
The sensitivity of the estimated fair values to changes in the significant unobservable
inputs for fixed maturities and equity securities included in Level 3 generally relates to interest
rate spreads, illiquidity premiums and default rates. Significant spread widening in isolation will
adversely impact the overall valuation, while significant spread tightening will lead to
substantial valuation increases. Significant increases (decreases) in illiquidity premiums in
isolation will result in substantially lower (higher) valuations. Significant increases (decreases)
in expected default rates in isolation will result in substantially lower (higher) valuations.
Financial Instruments Not Carried at Fair Value; Disclosure Required
The Company has various other financial assets and financial liabilities used in the
normal course of business that are not carried at fair value, but for which fair value disclosure
is required. The following table presents the carrying value, fair value and fair value hierarchy
of these financial assets and financial liabilities.
Carrying
Amount
Fair
Value
Fair Value Measurements at
Reporting Date Using
Level 3
Level 2
Level 1
December 31, 2016
Financial Assets
Investments
Other investments ...................................... $ 151,965
$ 156,536
$ -
$ -
$ 156,536
Financial Liabilities
Investment contract and life policy
reserves, fixed annuity contracts ................ 4,360,456
4,280,528
-
-
4,280,528
Investment contract and life policy
reserves, account values on life contracts ..
Other policyholder funds ................................
Long-term debt ...............................................
79,591
649,557
247,209
85,066
649,557
248,191
-
-
248,191
-
575,253
-
85,066
74,304
-
December 31, 2015
Financial Assets
Investments
Other investments ...................................... $ 148,759
$ 153,228
$ -
$ -
$ 153,228
Financial Liabilities
Investment contract and life policy
reserves, fixed annuity contracts ................ 4,072,102
4,049,840
-
-
4,049,840
Investment contract and life policy
reserves, account values on life contracts ..
Other policyholder funds ................................
Long-term debt ...............................................
77,429
653,631
246,975
81,360
653,631
252,700
-
-
252,700
-
575,104
-
81,360
78,527
-
F-75
NOTE 4 - Derivative Instruments
In February 2014, the Company began offering fixed indexed annuity products (“FIA”),
which are deferred fixed annuities that guarantee the return of principal to the contractholder
and credit interest based on a percentage of the gain in a specified market index. In October
2015, the Company began offering indexed universal life products (“IUL”), which also credit
interest based on a percentage of the gain in a specified market index. When deposits are
received for FIA and IUL contracts, a portion is used to purchase derivatives consisting of call
options on the applicable market indices to fund the index credits due to FIA and IUL
policyholders. For the Company, substantially all such call options are one-year options
purchased to match the funding requirements of the underlying contracts. The call options are
carried at fair value with the change in fair value included in Net realized investment gains and
losses, a component of revenues, in the Consolidated Statements of Operations.
The change in fair value of derivatives includes the gains or losses recognized at the
expiration of the option term or early termination and the changes in fair value for open
positions. Call options are not purchased to fund the index liabilities which may arise after the
next deposit anniversary date. On the respective anniversary dates of the indexed deposits,
the index used to compute the annual index credit is reset and new one-year call options are
purchased to fund the next annual index credit. The cost of these purchases is managed
through the terms of the FIA and IUL contracts, which permit changes to index return caps,
participation rates and/or asset fees, subject to guaranteed minimums on each contract’s
anniversary date. By adjusting the index return caps, participation rates or asset fees,
crediting rates generally can be managed except in cases where the contractual features
would prevent further modifications.
The future annual index credits on fixed indexed annuities are treated as a “series of
embedded derivatives” over the expected life of the applicable contract with a corresponding
reserve recorded. For the indexed universal life contract, the embedded derivative represents
a single year liability for the index return.
The Company carries all derivative instruments as assets or liabilities in the
Consolidated Balance Sheets at fair value. The Company elected to not use hedge
accounting for derivative transactions related to the FIA and IUL products. As a result, the
Company records the purchased call options and the embedded derivatives related to the
provision of a contingent return at fair value, with changes in the fair value of the derivatives
recognized immediately in the Consolidated Statements of Operations. The fair values of
derivative instruments, including derivative instruments embedded in FIA and IUL contracts,
presented in the Consolidated Balance Sheets were as follows:
Assets
Derivative instruments, included in Short-term
and other investments ...........................................................................................
$ 8,694
$ 2,501
Liabilities
Fixed indexed annuities - embedded derivatives,
included in Other policyholder funds .....................................................................
59,393
Indexed universal life - embedded derivatives,
included in Investment contract and life policy reserves .......................................
158
39,021
14
December 31,
2016
2015
F-76
NOTE 4 - Derivative Instruments-(Continued)
In general, the change in the fair value of the embedded derivatives related to the fixed
indexed annuities will not correspond to the change in fair value of the purchased call options
because the purchased call options are one-year options while the options valued in those
embedded derivatives represent the rights of the policyholder to receive index credits over the
entire period the fixed indexed annuities are expected to be in force, which typically exceeds
10 years. The changes in fair value of derivatives included in the Consolidated Statements of
Operations were as follows:
Year Ended December 31,
2014
2015
2016
Change in fair value of derivatives (1):
Revenues
Net realized investment gains (losses) ..................................................
$ 4,024
$(1,483)
$ 995
Change in fair value of embedded derivatives:
Revenues
Net realized investment gains (losses) ..................................................
(5,076)
2,529
(1,157)
(1)
Includes the gains or losses recognized at the expiration of the option term or early termination and the changes in fair
value for open options.
through a
regular monitoring process, which evaluates
The Company’s strategy attempts to mitigate potential risk of loss under these
the program's
agreements
effectiveness. The Company is exposed to risk of loss in the event of nonperformance by the
counterparties and, accordingly, option contracts are purchased from multiple counterparties,
which are evaluated for creditworthiness prior to purchase of the contracts. All of these
options have been purchased from nationally recognized financial institutions with a Standard
and Poor's/Moody’s long-term credit rating of “BBB+/Baa1” or higher at the time of purchase
and the maximum credit exposure to any single counterparty is subject to concentration limits.
The Company also obtains credit support agreements that allow it to request the counterparty
to provide collateral when the fair value of the exposure to the counterparty exceeds specified
amounts.
The notional amount and fair value of call options by counterparty and each
counterparty's long-term credit ratings were as follows:
Counterparty
December 31, 2016
Credit Rating (1)
Moody’s
S&P
Notional
Amount
Fair
Value
December 31, 2015
Notional
Amount
Fair
Value
Bank of America, N.A. ...................
Barclays Bank PLC .......................
Citigroup Inc. .................................
Credit Suisse International ............
Societe Generale ..........................
A+
A-
BBB+
A
A
A1
A1
Baa1
A1
A2
$ 38,500
66,800
-
65,200
15,600
$1,934
1,543
-
4,281
936
$ 17,000
7,600
17,300
12,000
80,800
$ 5
137
845
167
1,347
Total ...........................................
$186,100
$8,694
$134,700
$2,501
(1)
As assigned by Standard & Poor’s Corporation (“S&P”) and Moody’s Investors Service, Inc. (“Moody’s”).
F-77
NOTE 4 - Derivative Instruments-(Continued)
As of December 31, 2016 and 2015, the Company held $8,824 and $2,617, respectively,
of cash received from counterparties for derivative collateral, which is included in Other
liabilities on the Consolidated Balance Sheets. This derivative collateral limits the Company’s
maximum amount of economic loss due to credit risk that would be incurred if parties to the
call options failed completely to perform according to the terms of the contracts to $250 per
counterparty.
NOTE 5 - Property and Casualty Unpaid Claims and Claim Expenses
The following table is a summary reconciliation of the beginning and ending Property and
Casualty unpaid claims and claim expense reserves for the periods indicated. The table
presents reserves on both gross and net (after reinsurance) bases. The total net Property and
Casualty insurance claims and claim expense incurred amounts are reflected in the
Consolidated Statements of Operations. The end of the year gross reserve (before
reinsurance) balances and the reinsurance recoverable balances are reflected on a gross
basis in the Consolidated Balance Sheets.
Year Ended December 31,
2014
2015
2016
Property and Casualty segment
Gross reserves, beginning of year (1) ................................................................ $301,569
50,332
251,237
Less: reinsurance recoverables ....................................................................
Net reserves, beginning of year (2) ....................................................................
Incurred claims and claim expenses:
$311,097
43,740
267,357
$275,809
14,107
261,702
Claims occurring in the current year ...............................................................
Decrease in estimated reserves for
471,099
432,811
416,512
claims occurring in prior years (3) ............................................................... (7,000)
464,099
Total claims and claim expenses incurred (4) .........................................
(12,500)
420,311
(17,000)
399,512
Claims and claim expense payments
for claims occurring during:
Current year................................................................................................
Prior years ..................................................................................................
Total claims and claim expense payments .............................................
Net reserves, end of year (2) .............................................................................
Plus: reinsurance recoverables .....................................................................
323,025
145,753
468,778
246,558
61,199
Gross reserves, end of year (1) ......................................................................... $307,757
294,449
141,982
436,431
251,237
50,332
$301,569
273,699
120,158
393,857
267,357
43,740
$311,097
(1) Unpaid claims and claim expenses as reported in the Consolidated Balance Sheets also include reserves for the Life and
Retirement segments of $22,131, $22,151 and $14,687 as of December 31, 2016, 2015 and 2014, respectively, in
addition to Property and Casualty segment reserves.
(2) Reserves net of anticipated reinsurance recoverables.
(3) Shows the amounts by which the Company decreased its reserves in each of the periods indicated for claims occurring
in previous periods to reflect subsequent information on such claims and changes in their projected final settlement
costs. Also refer to the paragraphs below for additional information regarding the reserve development recorded in
2016, 2015 and 2014.
(4) Benefits, claims and settlement expenses as reported in the Consolidated Statements of Operations also include
amounts for the Life and Retirement segments of $76,905, $76,053 and $68,914 for the years ended December 31,
2016, 2015 and 2014, respectively, in addition to the Property and Casualty segment amounts.
F-78
NOTE 5 - Property and Casualty Unpaid Claims and Claim Expenses-(Continued)
Underwriting results of the Property and Casualty segment are significantly influenced by
estimates of the Company's ultimate liability for insured events. There is a high degree of
uncertainty inherent in the estimates of ultimate losses underlying the liability for unpaid claims
and claim settlement expenses. This inherent uncertainty is particularly significant for liability-
related exposures due to the extended period, often many years, that transpires between a
loss event, receipt of related claims data from policyholders and ultimate settlement of the
claim. Reserves for Property and Casualty claims include provisions for payments to be made
on reported claims (“case reserves”), claims incurred but not yet reported (“IBNR”) and
associated settlement expenses (together, “loss reserves”). The process by which these
reserves are established requires reliance upon estimates based on known facts and on
interpretations of circumstances, including the Company's experience with similar cases and
historical trends involving claim payments and related patterns, pending levels of unpaid
claims and product mix, as well as other factors including court decisions, economic
conditions, public attitudes and medical costs.
The Company believes the Property and Casualty loss reserves are appropriately
established based on available facts, laws, and regulations. The Company calculates and
records a single best estimate of the reserve (which is equal to the actuarial point estimate) as
of each balance sheet date, for each line of business and its coverages for reported losses and
for IBNR losses and as a result believes no other estimate is better than the recorded amount.
Due to uncertainties involved, the ultimate cost of losses may vary materially from recorded
amounts.
The Company continually updates loss estimates using both quantitative and qualitative
information from its reserving actuaries and information derived from other sources.
Adjustments may be required as information develops which varies from experience, or, in
some cases, augments data which previously were not considered sufficient for use in
determining liabilities. The effects of these adjustments may be significant and are charged or
credited to income in the period in which the adjustments are made.
Numerous risk factors will affect more than one product line. One of these factors is
changes in claim department practices, including claim closure rates, number of claims closed
without payment, the use of third-party claim adjusters and the level of needed case reserve
estimated by the adjuster. Other risk factors include changes in claim frequency, changes in
claim severity, regulatory and legislative actions, court actions, changes in economic
conditions and trends (e.g. medical costs, labor rates and the cost of materials), the
occurrence of unusually large or frequent catastrophic loss events, timeliness of claim
reporting, the state in which the claim occurred and degree of claimant fraud. The extent of
the impact of a risk factor will also vary by coverages within a product line. Individual risk
factors are also subject to interactions with other risk factors within product line coverages.
While all product lines are exposed to these risks, there are some loss types or product
lines for which the financial effect will be more significant. For instance, given the relatively
large proportion (approximately 80% as of December 31, 2016) of the Company’s reserves
that are in the longer-tail automobile liability coverages, regulatory and court actions, changes
in economic conditions and trends, and medical costs could be expected to impact this product
line more extensively than others.
F-79
NOTE 5 - Property and Casualty Unpaid Claims and Claim Expenses-(Continued)
Reserves are established for claims as they occur for each line of business based on
estimates of the ultimate cost to settle the claims. The actual loss results are compared to
prior estimates and differences are recorded as reestimates. The primary actuarial techniques
(development of paid loss dollars, development of reported loss dollars, methods based on
expected loss ratios and methods utilizing frequency and severity of claims) used to estimate
reserves and provide for losses are applied to actual paid losses and reported losses (paid
losses plus individual case reserves set by claim adjusters) for an accident year to create an
estimate of how losses are likely to develop over time.
An accident year refers to classifying claims based on the year in which the claim
occurred. For estimating short-tail coverage reserves (e.g. homeowners and automobile
physical damage), which comprise approximately 15% of the Company’s total loss reserves as
of December 31, 2016, the primary actuarial technique utilized is the development of paid loss
dollars due to the relatively quick claim settlement period. As it relates to estimating long-tail
coverage reserves (primarily related to automobile liability), which comprise approximately
85% of the Company’s total loss reserves as of December 31, 2016, the primary actuarial
technique utilized is the development of reported loss dollars due to the relatively long claim
settlement period.
In all of the loss estimation techniques referred to above, a ratio (development factor) is
calculated which compares current results to results in the prior period for each accident year.
Various development factors, based on historical results, are multiplied by the current
experience to estimate the development of losses of each accident year from the current time
period into the next time period. The development factors for the next time period for each
accident year are compounded over the remaining calendar years to calculate an estimate of
ultimate losses for each accident year. Occasionally, unusual aberrations in loss patterns are
caused by factors such as changes in claim reporting, settlement patterns, unusually large
losses, process changes, legal or regulatory environment changes, and other influences. In
these instances, analyses of alternate development factor selections are performed to evaluate
the effect of these factors, and actuarial judgment is applied to make appropriate development
factor assumptions needed to develop a best estimate of ultimate losses. Paid losses are then
subtracted from estimated ultimate losses to determine the indicated loss reserves. The
difference between indicated reserves and recorded reserves is the amount of reserve
reestimate.
Reserves are reestimated quarterly. When new development factors are calculated from
actual losses, and they differ from estimated development factors used in previous reserve
estimates, assumptions about losses and required reserves are revised based on the new
development factors. Changes to reserves are recorded in the period in which development
factor changes result in reserve reestimates.
F-80
NOTE 5 - Property and Casualty Unpaid Claims and Claim Expenses-(Continued)
Claim count estimates are also established for claims as they occur for each line of
business based on estimates of the ultimate claim counts. (These counts are derived by
counting the number of claimants by insurance coverage.) The primary actuarial techniques
(development of paid claim counts, and development of reported claim counts) used to
estimate ultimate claim counts are applied to actual paid claim counts and reported claim
counts (paid claims plus individual unpaid claims set by claim adjusters) for an accident year to
create an estimate of how claims are likely to develop over time. An accident year refers to
classifying claims based on the year in which the claim occurred. The ultimate claim count
generally gives equal consideration to the results of the two actuarial techniques described.
Occasionally, unusual aberrations in claim reporting patterns or claims payment patterns
may occur. In these instances, analyses of alternate development factor selections are
performed to evaluate the effect of these factors, and actuarial judgment is applied to make
appropriate development factor assumptions needed to develop a best estimate of ultimate
claims.
See tables on the following pages of Note 5 for details of the average annual percentage
payout of incurred claims by age, also referred to as a history of claims duration and tables
illustrating the incurred and paid claims development information by accident year on a net
basis for the lines of Homeowners, Auto Liability, and Auto Physical Damage, which
represents over 97% of the Company’s incurred losses for 2016.
Numerous actuarial estimates of the types described above are prepared each quarter to
monitor losses for each line of business, including the line’s individual coverages; for reported
losses and IBNR. Often, several different estimates are prepared for each detailed
component, incorporating alternative analyses of changing claim settlement patterns and other
influences on losses, from which the Company selects the best estimate for each component,
occasionally incorporating additional analyses and actuarial judgment, as described above.
These estimates also incorporate the historical impact of inflation into reserve estimates, the
implicit assumption being that a multi-year average development factor represents an
adequate provision. Based on the Company’s review of these estimates, as well as the review
of the independent reserve studies, the best estimate of required reserves for each line of
business, including the line’s individual coverages, is determined by management and is
recorded for each accident year, then the required reserves for each component are summed
to create the reserve balances carried on the Company’s Consolidated Balance Sheets.
Based on the Company’s products and coverages, historical experience, and various
actuarial methodologies used to develop reserve estimates, the Company estimates that the
potential variability of the Property and Casualty loss reserves within a reasonable probability
of other possible outcomes may be approximately plus or minus 6% of reserves, which
equates to plus or minus approximately $10,000 of net income as of December 31, 2016.
Although this evaluation reflects the most likely outcomes, it is possible the final outcome may
fall below or above these estimates.
F-81
NOTE 5 - Property and Casualty Unpaid Claims and Claim Expenses-(Continued)
Net favorable development of total reserves for Property and Casualty claims occurring
in prior years was $17,000 in 2014, $12,500 in 2015 and $7,000 in 2016. The favorable
development in 2014 was predominantly the result of favorable frequency and severity trends
in automobile liability loss emergence for accident years 2011 and prior. In 2015, the favorable
development was predominantly the result of favorable frequency and severity trends in
automobile liability loss emergence for accident years 2013 and prior, as well as favorable
severity trends in property for accident years 2013 and prior. In 2016, the favorable
development was predominantly the result of favorable severity trends in property for accident
years 2014 and prior.
The Company completes a detailed study of Property and Casualty reserves based on
information available at the end of each quarter and year. Trends of reported losses (paid
amounts and case reserves on claims reported to the Company) for each accident year are
reviewed and ultimate loss costs for those accident years are estimated. The Company
engages an independent property and casualty actuarial consulting firm to prepare an
independent study of the Company's Property and Casualty reserves at December 31 of each
year. The result of the independent actuarial study at December 31, 2016 was consistent with
management’s analysis and selected estimates and did not result in any adjustments to the
Company’s recorded Property and Casualty reserves.
At the time each of the reserve analyses was performed, the Company believed that
each estimate was based upon sound methodology and such methodologies were
appropriately applied and that there were no trends which indicated the likelihood of future loss
reserve development. The financial impact of the net reserve development was therefore
accounted for in the period that the development was determined.
No other adjustments were made in the determination of the liabilities during the periods
covered by these consolidated financial statements. Management believes that, based on
data currently available, it has reasonably estimated the Company's ultimate losses.
Below is the average annual percentage payout of incurred claims by age, also referred
to as a history of claims duration:
Years
Homeowners .....................
Auto liability .......................
Auto physical damage .......
Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
8
-
0.2%
-
3
2.8%
13.8%
-
2
18.4%
34.3%
4.9%
1
76.8%
41.0%
95.1%
4
1.4%
6.3%
-
7
0.1%
0.4%
-
5
0.7%
2.4%
-
6
0.2%
1.0%
-
9
0.1%
0.1%
-
10
-
0.1%
-
The following tables illustrate the incurred and paid claims development by accident year
on a net basis for the lines of homeowners, auto liability and auto physical damage.
Conditions and trends that have affected the development of these reserves in the past will not
necessarily recur in the future. It may not be appropriate to use this cumulative history in the
projection of future performance.
F-82
NOTE 5 - Property and Casualty Unpaid Claims and Claim Expenses-(Continued)
Homeowners
Incurred Claims and Allocated Claim Adjustment Expense, Net of Reinsurance
Year Ended December 31,
Accident
Year
Unaudited
2007
Unaudited
2008
Unaudited
2009
Unaudited
2010
Unaudited
2011
Unaudited
2012
Unaudited
2013
Unaudited
2014
Unaudited
2015
Audited
2016
As of December 31, 2016
Total of Incurred-
But-Not-Reported
Liabilities Plus
Expected Development
on Reported Claims
Cumulative
Number of
Reported Claims
$85,552
$ 85,725
140,469
$ 84,666
136,743
113,274
$ 85,605
136,002
112,280
140,994
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
$ 83,198
139,743
112,970
136,907
150,141
$ 83,266
139,232
113,096
133,358
150,334
108,754
$ 83,241
139,511
113,357
133,235
150,791
109,156
105,584
$ 83,090
139,472
113,230
133,216
148,860
109,360
107,489
111,647
$ 83,101
139,348
113,216
133,136
148,755
106,486
103,982
113,506
111,706
Total
$ 83,111
139,306
112,900
132,859
148,414
106,309
102,406
109,058
115,134
115,931
$1,165,428
$ -
-
22
235
358
502
1,023
3,136
4,480
11,737
19,298
31,376
20,320
23,624
27,676
20,239
18,066
18,400
17,054
15,578
Homeowners
Cumulative Paid Claims and Allocated Claim Adjustment Expense, Net of Reinsurance
Year Ended December 31,
Accident
Year
Unaudited
2007
Unaudited
2008
Unaudited
2009
Unaudited
2010
Unaudited
2011
Unaudited
2012
Unaudited
2013
Unaudited
2014
Unaudited
2015
Audited
2016
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
$59,268
$ 79,566
105,401
$ 82,272
130,888
81,570
$ 82,862
134,235
104,407
98,190
$ 82,722
136,923
108,217
124,326
123,046
$ 82,977
138,802
110,324
129,790
142,846
84,260
$ 83,028
138,992
112,554
132,246
145,852
101,566
76,890
$ 83,028
139,121
112,720
132,523
146,908
104,203
96,599
83,314
$ 83,096
139,224
112,827
132,604
147,451
105,156
99,361
103,030
90,704
Total
Outstanding prior to 2006
Prior years paid
Liabilities for claims and
claim adjustment
expenses, net of
reinsurance
F-83
$ 83,096
139,256
112,848
132,599
148,026
105,561
100,968
105,703
109,303
95,772
1,133,132
18
23
$ 32,314
NOTE 5 - Property and Casualty Unpaid Claims and Claim Expenses-(Continued)
Auto Liability
Incurred Claims and Allocated Claim Adjustment Expense, Net of Reinsurance
Year Ended December 31,
Accident
Year
Unaudited
2007
Unaudited
2008
Unaudited
2009
Unaudited
2010
Unaudited
2011
Unaudited
2012
Unaudited
2013
Unaudited
2014
Unaudited
2015
Audited
2016
As of December 31, 2016
Total of Incurred-
But-Not-Reported
Liabilities Plus
Expected Development
on Reported Claims
Cumulative
Number of
Reported Claims
$148,884
$146,400
144,694
$144,661
145,669
159,934
$139,619
142,279
158,703
157,712
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
$138,148
149,225
153,662
160,058
150,803
$137,151
141,666
157,941
156,369
146,713
156,448
$136,817
140,648
151,418
154,222
145,735
153,815
153,860
$136,855
139,938
150,919
152,483
143,133
150,336
152,858
155,105
$136,745
139,131
150,568
151,653
142,488
149,347
150,720
157,249
165,515
Total
$ 136,826
138,975
149,822
149,818
139,840
147,594
150,657
158,470
172,553
180,380
$1,524,935
$ -
2
-
324
1,164
2.849
6,501
8,493
13,074
55,506
49,856
47,932
48,780
49,310
46,171
45,615
46,195
47,146
47,529
41,220
Auto Liability
Cumulative Paid Claims and Allocated Claim Adjustment Expense, Net of Reinsurance
Year Ended December 31,
Accident
Year
Unaudited
2007
Unaudited
2008
Unaudited
2009
Unaudited
2010
Unaudited
2011
Unaudited
2012
Unaudited
2013
Unaudited
2014
Unaudited
2015
Audited
2016
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
$56,819
$101,803
54,750
$122,129
103,370
60,011
$130,555
123,062
110,921
63,416
$134,207
134,377
133,568
118,345
61,070
$135,467
137,980
142,524
137,012
108,837
61,279
$136,056
138,539
146,383
144,255
126,812
109,574
62,224
$136,504
138,758
148,783
147,337
133,931
127,185
108,856
61,329
$136,630
138,875
149,608
148,751
136,906
138,641
131,215
117,468
70,834
Total
Outstanding prior to 2006
Prior years paid
Liabilities for claims and
claim adjustment
expenses, net of
reinsurance
F-84
$ 136,815
138,962
149,801
149,247
138,151
142,916
139,954
139,463
134,473
73,073
1,342,855
80
451
$ 182,162
NOTE 5 - Property and Casualty Unpaid Claims and Claim Expenses-(Continued)
Auto Physical Damage
Incurred Claims and Allocated Claim Adjustment Expense, Net of Reinsurance
Year Ended December 31,
Accident
Year
Unaudited
2007
Unaudited
2008
Unaudited
2009
Unaudited
2010
Unaudited
2011
Unaudited
2012
Unaudited
2013
Unaudited
2014
Unaudited
2015
Audited
2016
As of December 31, 2016
Total of Incurred-
But-Not-Reported
Liabilities Plus
Expected Development
on Reported Claims
Cumulative
Number of
Reported Claims
$87,051
$86,178
89,088
$86,178
87,854
84,539
$85,515
87,834
83,515
84,112
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
$86,695
86,900
83,202
83,420
86,205
$86,713
87,992
82,635
83,103
85,507
83,770
$86,706
87,979
82,000
83,046
86,023
82,337
91,448
$86,694
87,976
81,986
83,052
85,120
83,402
88,856
95,572
$86,683
87,966
81,972
83,050
85,143
83,431
88,672
95,634
99,291
Total
$ 86,680
87,954
81,963
83,036
85,116
83,354
88,627
95,422
97,994
112,430
$902,576
$ -
-
-
-
-
7
95
151
139
(944)
70,280
72,117
72,867
77,343
76,113
72,803
75,845
82,467
82,335
77,495
Auto Physical Damage
Cumulative Paid Claims and Allocated Claim Adjustment Expense, Net of Reinsurance
Year Ended December 31,
Accident
Year
Unaudited
2007
Unaudited
2008
Unaudited
2009
Unaudited
2010
Unaudited
2011
Unaudited
2012
Unaudited
2013
Unaudited
2014
Unaudited
2015
Audited
2016
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
$81,171
$86,439
82,412
$86,678
87,963
78,456
$86,637
87,905
82,117
79,329
$86,695
87,949
82,039
83,120
83,227
$86,713
87,992
82,015
83,103
85,254
80,519
$86,706
87,979
82,000
83,087
85,181
83,418
85,110
$86,694
87,976
81,985
83,067
85,148
83,372
88,688
88,939
$86,685
87,966
81,973
83,051
85,127
83,355
88,580
95,444
92,138
Total
Outstanding prior to 2006
Prior years paid
Liabilities for claims and
claim adjustment
expenses, net of
reinsurance
F-85
$ 86,680
87,954
81,963
83,036
85,116
83,347
88,532
95,266
97,850
106,458
896,202
-
-
$ 6,374
NOTE 5 - Property and Casualty Unpaid Claims and Claim Expenses-(Continued)
The reconciliation of the net incurred and paid claims development tables to the liability
for claims and claim adjustment expenses in the Consolidated Balance Sheet is as follows:
Year Ended December 31,
2016
Property and Casualty segment
Net reserves
Homeowners .........................................................................................................
Auto liability ...........................................................................................................
Auto physical damage ...........................................................................................
Other short duration lines ......................................................................................
Total net reserves for unpaid claims and claim adjustment expense,
net of reinsurance ..........................................................................................
Reinsurance recoverable on unpaid claims
Homeowners .........................................................................................................
Auto liability ...........................................................................................................
Other short duration lines ......................................................................................
Total reinsurance recoverable on unpaid claims ...............................................
Insurance lines other than short duration (1) .............................................................
Unallocated claims adjustment expenses .................................................................
Total other than short duration and unallocated claims
adjustment expenses .....................................................................................
Gross reserves, end of year (1) ....................................................................................
(1)
This line includes Retirement and Life reserves as included in the Consolidated Balance Sheet.
NOTE 6 - Reinsurance and Catastrophes
$ 32,314
182,162
6,374
3,588
224,438
375
50,959
9,865
61,199
22,131
22,120
44,251
$329,888
In the normal course of business, the Company’s insurance subsidiaries assume and
cede reinsurance with other insurers. Reinsurance is ceded primarily to limit losses from large
events and to permit recovery of a portion of direct losses; however, such a transfer does not
relieve the originating insurance company of primary liability.
The Company is a national underwriter and therefore has exposure to catastrophic
losses in certain coastal states and other regions throughout the U.S. Catastrophes can be
caused by various events including hurricanes, windstorms, hail, severe winter weather,
wildfires and earthquakes, and the frequency and severity of catastrophes are inherently
unpredictable. The financial impact from catastrophic losses results from both the total amount
of insured exposure in the area affected by the catastrophe as well as the severity of the event.
The Company seeks to reduce its exposure to catastrophe losses through the geographic
diversification of its insurance coverage, deductibles, maximum coverage limits and the
purchase of catastrophe reinsurance.
The Company’s catastrophe losses incurred of approximately $60,043, $44,429 and
$37,500 for the years ended December 31, 2016, 2015 and 2014, respectively, reflected
losses from winter storm events in the first part of each year, wind/hail/tornado events in the
spring and summer months of each year, as well as losses from several storms in the latter
part of each year. The fourth quarter of 2016 also included losses from Hurricane Matthew.
F-86
NOTE 6 - Reinsurance and Catastrophes-(Continued)
The total amounts of reinsurance recoverable on unpaid insurance reserves classified as
assets and reported in Other assets in the Consolidated Balance Sheets were as follows:
Reinsurance recoverables on reserves and unpaid claims
Property and Casualty
Reinsurance companies ......................................................................................
State insurance facilities .....................................................................................
Life and health ........................................................................................................
Total ................................................................................................................
$10,239
50,960
9,275
$70,474
$ 9,026
41,306
9,780
$60,112
December 31,
2015
2016
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:
Gross
Amount
Ceded to
Other
Companies
Assumed
from Other
Companies
Net
Amount
Year ended December 31, 2016
Premiums written and contract deposits .................... $1,280,903
777,651
Premiums and contract charges earned ....................
562,385
Benefits, claims and settlement expenses .................
$22,728
22,826
25,739
$4,324
4,321
4,358
$1,262,499
759,146
541,004
Year ended December 31, 2015
Premiums written and contract deposits ....................
Premiums and contract charges earned ....................
Benefits, claims and settlement expenses .................
1,277,066
752,798
508,904
Year ended December 31, 2014
Premiums written and contract deposits ....................
Premiums and contract charges earned ....................
Benefits, claims and settlement expenses .................
1,191,123
739,281
504,550
24,737
25,077
16,221
27,144
27,276
39,236
4,184
4,159
3,681
3,676
3,755
3,112
1,256,513
731,880
496,364
1,167,655
715,760
468,426
There were no losses from uncollectible reinsurance recoverables in the three years
ended December 31, 2016. Past due reinsurance recoverables as of December 31, 2016
were not material.
The Company maintains catastrophe excess of loss reinsurance coverage. For 2016,
the Company’s catastrophe excess of loss coverage consisted of one contract and it provided
95% coverage for catastrophe losses above a retention of $25,000 per occurrence up to
$175,000 per occurrence. This contract consisted of three layers, each of which provided for
one mandatory reinstatement. The layers were $25,000 excess of $25,000, $40,000 excess of
$50,000 and $85,000 excess of $90,000.
F-87
NOTE 6 - Reinsurance and Catastrophes-(Continued)
For liability coverages, in 2016, the Company reinsured each loss above a retention of
$900 with coverage up to $5,000 on a per occurrence basis and $20,000 in a clash event. (A
clash cover is a reinsurance casualty excess contract requiring two or more casualty
coverages or policies issued by the Company to be involved in the same loss occurrence for
coverage to apply.) For property coverages, in 2016 the Company reinsured each loss above
a retention of $900 up to $5,000 on a per risk basis, including catastrophe losses. Also, the
Company could submit to the reinsurers two per risk losses from the same occurrence for a
total of $8,200 of property recovery in any one event.
The maximum individual life insurance risk retained by the Company is $300 on any
individual life, while either $100 or $125 is retained on each group life policy depending on the
type of coverage. Excess amounts are reinsured. The Company also maintains a life
catastrophe reinsurance program. For 2016, the Company reinsured 100% of the catastrophe
risk in excess of $1,000 up to $35,000 per occurrence, with one reinstatement. The
Company’s life catastrophe risk reinsurance program covers acts of terrorism and includes
nuclear, biological and chemical explosions but excludes other acts of war.
NOTE 7 - Debt
Indebtedness and scheduled maturities consisted of the following:
Short-term debt
Bank Credit Facility .................................................................
Variable
2019
$ -
$ -
Effective
Interest
Rates
Final
Maturity
December 31,
2015
2016
Long-term debt (1)
4.50% Senior Notes, Aggregate principal amount of
$250,000 less unaccrued discount of $603
and $654 and unamortized debt issuance costs
of $2,188 and $2,371 ..........................................................
4.5%
2025
247,209
246,975
Total ................................................................................
$247,209
$246,975
(1) The Company designates debt obligations as “long-term” based on maturity date at issuance.
Credit Agreement with Financial Institutions (“Bank Credit Facility”)
In 2014, HMEC’s Bank Credit Agreement (the “Bank Credit Facility”) was amended and
restated to extend the commitment termination date to July 30, 2019 from the previous
termination date of October 6, 2015 and to decrease the interest rate spread relative to
Eurodollar base rates. The financial covenants within the agreement were not changed. The
Bank Credit Facility is by and between HMEC, certain financial institutions named therein and
JPMorgan Chase Bank, N.A., as administrative agent, and provides for unsecured borrowings
of up to $150,000. Interest accrues at varying spreads relative to prime or Eurodollar base
rates and is payable monthly or quarterly depending on the applicable base rate (Eurodollar
base rate plus 1.15%). The unused portion of the Bank Credit Facility is subject to a variable
commitment fee, which was 0.15% on an annual basis at December 31, 2016.
F-88
NOTE 7 - Debt-(Continued)
On June 15, 2015, the Senior Notes due 2015 matured and the Company repaid the
$75,000 aggregate principal amount initially utilizing $75,000 of additional borrowing under the
existing Bank Credit Facility. In November 2015, the Company repaid the Bank Credit Facility
balance in full utilizing a portion of the net proceeds from the issuance of the 4.50% Senior
Notes due 2025, as described below.
4.50% Senior Notes due 2025 (“Senior Notes due 2025”)
On November 23, 2015, the Company issued $250,000 aggregate principal amount of
4.50% senior notes, which will mature on December 1, 2025, issued at a discount of 0.265%
resulting in an effective yield of 4.533%. Interest on the Senior Notes due 2025 is payable
semi-annually at a rate of 4.50%. The Senior Notes due 2025 are redeemable in whole or in
part, at any time, at the Company's option, at a redemption price equal to the greater of (1)
100% of the principal amount of the notes being redeemed or (2) the sum of the present
values of the remaining scheduled payments of principal and interest thereon discounted, on a
semi-annual basis, at the Treasury yield (as defined in the indenture) plus 35 basis points,
plus, in either of the above cases, accrued interest to the date of redemption.
The net proceeds from the sale of the Senior Notes due 2025 were used to (1) repay the
$113,000 balance on the Bank Credit Facility, (2) redeem the Senior Notes due 2016, as
described below, and (3) for general corporate purposes.
6.05% Senior Notes due 2015 (“Senior Notes due 2015”)
On June 15, 2015, the Senior Notes due 2015 matured and the Company repaid the
$75,000 aggregate principal amount initially utilizing $75,000 of additional borrowing under the
existing Bank Credit Facility.
6.85% Senior Notes due 2016 (“Senior Notes due 2016”)
On December 23, 2015, the Company redeemed all of its outstanding Senior Notes due
2016, $125,000 aggregate principal amount, at a cost of $127,292. The redemption was
funded utilizing a portion of the net proceeds from the issuance of the 4.50% Senior Notes due
2025.
Debt Retirement Charges
The redemption of the Senior Notes due 2016 resulted in a pretax charge to income for
the year ended December 31, 2015 of $2,338.
Covenants
The Company is in compliance with all of the financial covenants contained in the Senior
Notes due 2025 indenture and the Bank Credit Facility agreement, consisting primarily of
relationships of (1) debt to capital, (2) net worth, as defined in the financial covenants, (3)
insurance subsidiaries' risk-based capital and (4) securities subject to funding agreements and
repurchase agreements.
F-89
NOTE 8 - Income Taxes
The income tax assets and liabilities included in Other assets and Other liabilities,
respectively, in the Consolidated Balance Sheets were as follows:
Income tax (asset) liability
Current ....................................................................................................................
Deferred ..................................................................................................................
$ (3,832)
205,699
$ 1,000
201,208
December 31,
2015
2016
Deferred tax assets and liabilities are recognized for all future tax consequences
attributable to “temporary differences” between the financial statement carrying value of
existing assets and liabilities and their respective tax bases. There are no deferred tax
liabilities that have not been recognized. The “temporary differences” that gave rise to the
deferred tax balances were as follows:
December 31,
2015
2016
Deferred tax assets
Unearned premium reserve reduction ....................................................................
Compensation accruals ..........................................................................................
Impaired securities ..................................................................................................
Other comprehensive income - net funded status of pension
and other postretirement benefit obligations .......................................................
Discounting of unpaid claims and claim expense tax reserves ...............................
Postretirement benefits other than pensions ..........................................................
Other, net ................................................................................................................
Total gross deferred tax assets .......................................................................
Deferred tax liabilities
Other comprehensive income - net unrealized gains
on fixed maturities and equity securities .............................................................
Deferred policy acquisition costs ............................................................................
Life insurance future policy benefit reserve ............................................................
Investment related adjustments ..............................................................................
Intangible assets .....................................................................................................
Other, net ................................................................................................................
Total gross deferred tax liabilities ....................................................................
Net deferred tax liability ...............................................................................
$ 18,253
15,893
8,214
6,387
2,463
578
-
51,788
112,311
91,028
33,145
15,762
4,262
979
257,487
$205,699
$ 17,402
13,737
7,635
6,375
3,213
664
1,189
50,215
112,934
85,341
30,177
18,709
4,262
-
251,423
$201,208
The Company evaluated sources and character of income, including historical earnings,
loss carryback potential, taxable income from future reversals of existing taxable temporary
differences, future taxable income exclusive of reversing temporary differences, and taxable
income from prudent and feasible tax planning strategies. Although realization of deferred tax
assets is not assured, the Company believes it is more likely than not that gross deferred tax
assets will be fully realized and that a valuation allowance with respect to the realization of the
total gross deferred tax assets was not necessary as of December 31, 2016 and 2015.
At December 31, 2016, the Company did not have any loss carryforwards or credits.
F-90
NOTE 8 - Income Taxes-(Continued)
The components of income tax expense were as follows:
Year Ended December 31,
2014
2015
2016
Current .....................................................................................................
Deferred ...................................................................................................
Total income tax expense .....................................................................
$26,359
4,108
$30,467
$29,885
6,085
$35,970
$32,295
9,575
$41,870
Income tax expense for the following periods differed from the expected tax computed by
applying the federal corporate tax rate of 35% to income before income taxes as follows:
Year Ended December 31,
2014
2015
2016
Expected federal tax on income ...............................................................
Add (deduct) tax effects of:
Tax-exempt interest ..............................................................................
Dividend received deduction .................................................................
Other, net ..............................................................................................
Income tax expense provided on income .................................................
$39,981
$45,308
$51,140
(5,789)
(3,985)
260
$30,467
(6,678)
(3,564)
904
$35,970
(6,849)
(3,566)
1,145
$41,870
The Company’s federal income tax returns for years prior to 2013 are no longer subject
to examination by the Internal Revenue Service (“IRS”).
The Company recognizes tax benefits from tax return positions only if it is more likely
than not the position will be sustainable, upon examination, on its technical merits and any
relevant administrative practices or precedents. As a result, the Company applies a more
likely than not recognition threshold for all tax uncertainties.
The Company records liabilities for uncertain tax filing positions where it is more likely
than not that the position will not be sustainable upon audit by taxing authorities. These
liabilities are reevaluated routinely and are adjusted appropriately based upon changes in facts
or law. The Company has no unrecorded liabilities from uncertain tax filing positions.
HMEC and its subsidiaries file a consolidated federal income tax return. The federal
income tax sharing agreements between HMEC and its subsidiaries, as approved by the
Board of Directors, provide that tax on income is charged to each subsidiary as if it were filing
a separate tax return with the limitation that each subsidiary will receive the benefit of any
losses or tax credits to the extent utilized in the consolidated tax return. Intercompany
balances are settled quarterly with a final settlement after filing the consolidated federal
income tax return with the IRS.
F-91
NOTE 8 - Income Taxes-(Continued)
A reconciliation of the beginning and ending amounts of unrecognized tax benefits,
excluding interest and penalties, is as follows:
Year Ended December 31,
2014
2015
2016
Balance as of the beginning of the year ...................................................
Increases related to prior year tax positions .........................................
Decreases related to prior year tax positions .......................................
Increases related to current year tax positions .....................................
Settlements ..........................................................................................
Lapse of statue .....................................................................................
Balance as of the end of the year ............................................................
$1,039
348
-
283
-
(76)
$1,594
$ 656
-
(15)
398
-
-
$ 1,039
$ 641
-
(244)
259
-
-
$ 656
The Company’s effective tax rate would be affected to the extent there were
unrecognized tax benefits that could be recognized. There are no positions for which it is
reasonably possible that the total amount of unrecognized tax benefit will significantly increase
within the next 12 months.
The Company classifies all tax related interest and penalties as income tax expense.
Interest and penalties were both immaterial in each of the years ended December 31,
2016, 2015 and 2014.
NOTE 9 - Shareholders' Equity and Common Stock Equivalents
Share Repurchase Programs and Treasury Shares Held (Common Stock)
In December 2011, HMEC’s Board of Directors (the “Board”) authorized a share
repurchase program allowing repurchases of up to $50,000 (the “2011 Plan”). In September
2015, the Board authorized an additional share repurchase program allowing repurchases of
up to $50,000 (the “2015 Plan”) to begin following the completion of the 2011 Plan. Both share
repurchase programs authorize the repurchase of HMEC’s common shares in open market or
privately negotiated transactions, from time to time, depending on market conditions. The
share repurchase programs do not have expiration dates and may be limited or terminated at
any time without notice.
During 2014, the Company repurchased 190,876 shares of its common stock, or 0.5% of
the outstanding shares on December 31, 2013, at an aggregate cost of $5,411, or an average
price of $28.33 per share, under the 2011 Plan. During 2015, the Company repurchased
663,092 shares of its common stock, or 1.6% of the outstanding shares on December 31,
2014, at an aggregate cost of $21,950, or an average price of $33.08 per share, under the
2011 Plan. During 2016, the Company repurchased 701,410 shares of its common stock, or
1.7% of the outstanding shares on December 31, 2015, at an aggregate cost of $21,513, or an
average price of $30.65 per share, under the 2011 and the 2015 Plans. Utilization of the
remaining authorization under the 2011 program was completed in January 2016. In total and
through December 31, 2016, 2,799,610 shares were repurchased under the 2011 and 2015
Plans at an average price of $25.18 per share. The repurchase of shares was financed
through use of cash. As of December 31, 2016, $29,511 remained authorized for future share
repurchases under the 2015 Plan authorization.
F-92
NOTE 9 - Shareholders' Equity and Common Stock Equivalents-(Continued)
At December 31, 2016, the Company held 24,673 shares in treasury.
Authorization of Preferred Stock
In 1996, the shareholders of HMEC approved authorization of 1,000,000 shares of
$0.001 par value preferred stock. The Board of Directors is authorized to (1) direct the
issuance of the preferred stock in one or more series, (2) fix the dividend rate, conversion or
exchange rights, redemption price and liquidation preference, of any series of the preferred
stock, (3) fix the number of shares for any series and (4) increase or decrease the number of
shares of any series. No shares of preferred stock were outstanding at December 31, 2016
and 2015.
2010 Comprehensive Executive Compensation Plan
In 2010, the shareholders of HMEC approved the 2010 Comprehensive Executive
Compensation Plan (the “Comprehensive Plan”). The purpose of the Comprehensive Plan is
to aid the Company in attracting, retaining, motivating and rewarding employees and non-
employee Directors; to provide for equitable and competitive compensation opportunities,
including deferral opportunities; to encourage long-term service; to recognize individual
contributions and reward achievement of Company goals; and to promote the creation of long-
term value for the Company’s shareholders by closely aligning the interests of plan participants
with those of shareholders. The Comprehensive Plan authorizes share-based and cash-based
incentives for plan participants. In 2012, the shareholders of HMEC approved the
implementation of a fungible share pool under which grants of full value shares will count
against the share limit as two and one half shares for every share subject to a full value award.
In 2015, the shareholders of HMEC approved an amendment and restatement of the
Comprehensive Plan which included an increase of 3.25 million in the number of shares of
common stock reserved for issuance under the Comprehensive Plan. As of December 31,
2016, approximately 2.9 million shares were available for grant under the Comprehensive
Plan. Shares of common stock issued under the Comprehensive Plan may be either
authorized and unissued shares of HMEC or shares that have been reacquired by HMEC;
however, new shares have been issued historically.
As further described in the paragraphs below, outstanding stock units and stock options
under the Comprehensive Plan were as follows:
December 31,
2014
2015
2016
Common stock units related to
deferred compensation for Directors .....................................................
74,058
85,200
87,993
Common stock units related to
deferred compensation for employees..................................................
Stock options ...........................................................................................
Restricted common stock units
51,502
747,032
55,443
669,693
69,598
634,437
related to incentive compensation ........................................................ 1,419,268
Total .................................................................................................. 2,291,860
1,442,325
2,252,661
1,590,138
2,382,166
F-93
NOTE 9 - Shareholders' Equity and Common Stock Equivalents-(Continued)
Director Common Stock Units
Deferred compensation of Directors is in the form of common stock units, which
represent an equal number of common shares to be issued in the future. The outstanding
units of Directors serving on the Board accrue dividends at the same rate as dividends paid to
HMEC’s shareholders; outstanding units of retired Directors do not accrue dividends. These
dividends are reinvested into additional common stock units.
Employee Common Stock Units
Deferred compensation of employees is in the form of common stock units, which
represent an equal number of common shares to be issued in the future. Distributions of
employee deferred compensation are allowed to be either in common shares or cash.
Through December 31, 2016, all distributions have been in cash. The outstanding units
accrue dividends at the same rate as dividends paid to HMEC’s shareholders. These
dividends are reinvested into additional common stock units.
Stock Options
Options to purchase shares of HMEC common stock may be granted to executive
officers, other employees and Directors. The options become exercisable in installments
based on service generally beginning in the first year from the date of grant and generally
become fully vested 4 years from the date of grant. The options generally expire 7 to 10 years
from the date of grant. The exercise price of the option is equal to the market price of HMEC’s
common stock on the date of grant resulting in a grant date intrinsic value of $0.
Changes in outstanding options were as follows:
Weighted Average
Option Price
per Share
Range of
Option Prices
per Share
Options
Outstanding
Vested and
Exercisable
December 31, 2015 ..............
Granted .............................
Vested ..............................
Exercised ..........................
Forfeited ...........................
Expired .............................
$24.00
$31.13
$22.73
$17.02
$27.53
-
$ 6.91-$33.41
669,693
$31.01-$36.04
$13.83-$36.04
$ 6.91-$33.41
$17.32-$32.35
-
307,176
-
(146,278)
(83,559)
-
December 31, 2016 ..............
$27.67
$13.83-$36.04
747,032
281,632
-
137,763
(146,278)
-
-
273,117
F-94
NOTE 9 - Shareholders' Equity and Common Stock Equivalents-(Continued)
Option information segregated by ranges of exercise prices was as follows:
December 31, 2016
Vested and Exercisable Options
Weighted
Average
Option Price
per Share
Total Outstanding Options
Weighted
Average
Option Price
per Share
Weighted
Average
Remaining
Term
Weighted
Average
Remaining
Term
Range of
Option Prices
per Share
Options
Options
$13.83-$20.75
$28.88-$31.13
$32.35-$36.04
Total ..... $13.83-$36.04
176,688
450,674
119,670
747,032
$18.57
$29.91
$32.67
$27.67
2.3 years
8.2 years
8.3 years
6.9 years
157,029
87,832
28,256
273,117
$18.32
$27.50
$32.39
$22.73
2.3 years
6.2 years
8.2 years
4.1 years
The weighted average exercise prices of vested and exercisable options as of December
31, 2015 and 2014 were $19.32 and $17.20, respectively.
As of December 31, 2016, based on a closing stock price of $42.80 per share, the
aggregate intrinsic (in-the-money) values of vested options and all options outstanding were
$5,482 and $11,303, respectively.
Restricted Common Stock Units
Restricted common stock units may be granted to executive officers, other employees
and Directors and represent an equal number of common shares to be issued in the future.
The restricted common stock units vest in installments based on service or attainment of
performance criteria generally beginning in the first year from the date of grant and generally
become fully vested 1 to 5 years from the date of grant. The outstanding units accrue
dividends at the same rate as dividends paid to HMEC’s shareholders. These dividends are
reinvested into additional restricted common stock units.
Changes in outstanding restricted common stock units were as follows:
Total Outstanding Units
Weighted Average
Grant Date Fair
Value per Unit
Units
Vested Units
Weighted Average
Grant Date Fair
Value per Unit
Units
December 31, 2015 ..............
1,442,325
Granted (1) .......................
Vested ..............................
Forfeited ...........................
Distributed (2) ...................
370,175
-
(49,310)
(343,922)
December 31, 2016 ..............
1,419,268
$24.29
$31.75
-
$26.01
$18.28
$27.63
849,912
-
262,074
-
(343,922)
768,064
$15.51
-
$22.92
-
$18.28
$16.80
(1)
(2)
Includes dividends reinvested into additional restricted common stock units.
Includes distributed units which were utilized to satisfy withholding taxes due on the distribution.
F-95
NOTE 10 - Statutory Information and Restrictions
The insurance departments of various states in which the insurance subsidiaries of
HMEC are domiciled recognize as net income and surplus those amounts determined in
conformity with statutory accounting principles prescribed or permitted by the insurance
departments, which differ in certain respects from GAAP.
Reconciliations of statutory capital and surplus and net income, as determined using
statutory accounting principles, to the amounts included in the accompanying consolidated
financial statements are as follows:
December 31,
2015
2016
Statutory capital and surplus of insurance subsidiaries ........................... $ 912,336
Increase (decrease) due to:
$ 883,870
Deferred policy acquisition costs ..........................................................
Difference in policyholder reserves .......................................................
Goodwill ................................................................................................
Investment fair value adjustments on fixed maturities ..........................
Difference in investment reserves.........................................................
Federal income tax liability ...................................................................
Net funded status of pension and other
postretirement benefit obligations .....................................................
Non-admitted assets and other, net ......................................................
Shareholders' equity of parent company and
267,580
98,360
47,396
301,518
125,805
(228,090)
(18,250)
22,888
253,176
95,536
47,396
314,705
120,795
(224,492)
(18,213)
21,691
non-insurance subsidiaries ...............................................................
11,648
Parent company short-term and long-term debt ................................... (247,209)
Shareholders' equity as reported herein ........................................ $1,293,982
17,172
(246,975)
$1,264,661
Year Ended December 31,
2014
2015
2016
Statutory net income of insurance subsidiaries ........................................ $ 74,574
(5,135)
Net loss of non-insurance companies ......................................................
(11,808)
Interest expense ......................................................................................
-
Debt retirement costs ...............................................................................
Tax benefit of interest expense and other
$ 87,619
(4,474)
(13,122)
(2,338)
$ 97,875
(3,906)
(14,198)
-
parent company current tax adjustments ..............................................
Combined net income ..............................................................................
Increase (decrease) due to:
5,637
63,268
6,829
74,514
6,371
86,142
19,442
Deferred policy acquisition costs ..........................................................
14,919
Policyholder benefits .............................................................................
(5,312)
Federal income tax expense .................................................................
Investment reserves .............................................................................
(1,320)
Other adjustments, net ......................................................................... (7,232)
Net income as reported herein .......................................................... $ 83,765
13,249
14,065
(6,678)
7,339
(9,007)
$ 93,482
16,828
15,284
(10,548)
3,574
(7,037)
$ 104,243
HMEC has principal insurance subsidiaries domiciled in Illinois and Texas. The statutory
financial statements of these subsidiaries are prepared in accordance with accounting
principles prescribed or permitted by the Illinois Department of Insurance and the Texas
Department of Insurance, as applicable. Prescribed statutory accounting principles include a
variety of publications of the National Association of Insurance Commissioners (the “NAIC”), as
well as state laws, regulations and general administrative rules.
F-96
NOTE 10 - Statutory Information and Restrictions-(Continued)
The NAIC has risk-based capital guidelines to evaluate the adequacy of statutory capital
and surplus in relation to risks assumed in investments, reserving policies, and volume and
types of insurance business written. At December 31, 2016 and 2015, the minimum statutory-
basis capital and surplus required to be maintained by HMEC’s insurance subsidiaries was
$148,583 and $139,949, respectively. At December 31, 2016 and 2015, statutory capital and
surplus of each of the Company’s insurance subsidiaries was above required levels. The
restricted net assets of HMEC’s insurance subsidiaries were $18,119 and $18,312 as of
December 31, 2016 and 2015, respectively. The minimum statutory-basis capital and surplus
amount at each date is the total estimated authorized control level risk-based capital for all of
HMEC’s insurance subsidiaries combined. Authorized control level risk-based capital
represents the minimum level of statutory-basis capital and surplus necessary before the
insurance commissioner in the respective state of domicile is authorized to take whatever
regulatory actions considered necessary to protect the best interests of the policyholders and
creditors of the insurer. The amount of restricted net assets represents the combined fair
value of securities on deposit with governmental agencies for the insurance subsidiaries as
required by law in various states in which the insurance subsidiaries of HMEC conduct
business.
HMEC relies largely on dividends from its insurance subsidiaries to meet its obligations
for payment of principal and interest on debt, dividends to shareholders and parent company
operating expenses, including tax payments pursuant to tax sharing agreements. Payments
for share repurchase programs also have this dependency. HMEC’s insurance subsidiaries
are subject to various regulatory restrictions which limit the amount of annual dividends or
other distributions, including loans or cash advances, available to HMEC without prior approval
of the insurance regulatory authorities. As a result, HMEC may not be able to receive
dividends from such subsidiaries at times and in amounts necessary to pay desired dividends
to shareholders. The aggregate amount of dividends that may be paid in 2017 from all of
HMEC’s insurance subsidiaries without prior regulatory approval is approximately $91,000.
As disclosed in the reconciliation of the statutory capital and surplus of insurance
subsidiaries to the consolidated GAAP shareholders’ equity, the insurance subsidiaries have
statutory capital and surplus of $912,336 as of December 31, 2016, which is subject to
regulatory restrictions. The parent company equity is not restricted. At December 31, 2016,
HMEC had $4,069 of liquid assets, comprised of investments and cash, which could be used
to fund debt interest, general corporate obligations, as well as dividend payments to
shareholders. If necessary, HMEC also has other potential sources of liquidity that could
provide for additional funding to meet corporate obligations or pay shareholder dividends,
which include a revolving line of credit, as well as issuances of various securities.
At the time of this Annual Report on Form 10-K and during each of the years in the three
year period ended December 31, 2016, the Company had no financial reinsurance agreements
in effect.
F-97
NOTE 11 - Pension Plans and Other Postretirement Benefits
The Company sponsors three qualified and two non-qualified retirement plans.
Substantially all employees participate in the 401(k) plan and through December 31, 2014
participated in the non-contributory defined contribution plan. Both the qualified and the non-
qualified defined benefit plans have been frozen since 2002. All participants in both frozen
plans are 100% vested in their accrued benefit and all non-qualified defined benefit plan
participants are receiving payment. Certain employees participate in a non-qualified defined
contribution plan.
Qualified Plans
All employees participate in the 401(k) plan and receive a 100% vested 3% “safe harbor”
company contribution based on employees’ eligible earnings. Effective January 1, 2015, the
Company began matching each dollar of employee contributions up to a 5% maximum -- in
addition to maintaining the automatic 3% “safe harbor” contribution. The new matching
company contribution vests after 5 years of service. The 401(k) plan is fully funded.
Prior to 2015, employees participated in a defined contribution plan after one year of
service; contributions were made based on eligible earnings and years of service and were
credited to each employee’s individual plan account. The majority of employees received a
5% contribution. Accounts vested after 3 years of service. The Company terminated this fully
funded defined contribution plan on December 31, 2014 and all participant accounts became
100% vested. The majority of plan assets were distributed to participants in 2015, with a final
settlement of all remaining participant accounts in 2016 through the purchase of qualified
individual annuities under a HMLIC group annuity contract.
In 2002, participants ceased accruing benefits for earnings and years of service in the
frozen defined benefit plan. A substantial number of those participants are former employees
of the Company who are not eligible to receive an immediate annuity benefit until age 65
and/or are not eligible for a lump sum distribution. In November 2014, the Company
announced a cash-out election period or “window” ending in December 2014, for terminated
vested participants with accrued lump sum values under $100. During the window, 385 former
employees elected to receive a total of approximately $4,200 in lump sum distributions,
resulting in approximately $1,600 of additional settlement expense in 2014. Subsequently, in
August of 2016, the Company announced a second cash-out election “window” ending in
September 2016 for all vested terminated participants, regardless of lump sum value. During
this window, 52 former employees elected to receive a total of approximately $1,400 in lump
sums distributions.
The Company’s policy for the frozen defined benefit plan is to contribute to the plan
amounts which are actuarially determined to provide sufficient funding to meet future benefit
payments as defined by federal laws and regulations.
For the two qualified plans, all assets are held in their respective plan trusts.
F-98
NOTE 11 - Pension Plans and Other Postretirement Benefits-(Continued)
Non-qualified Plans
The non-qualified plans were established for specific employees whose otherwise
eligible earnings exceeded the statutory limits under the qualified plans. Benefit accruals
under the non-qualified defined benefit plan were frozen in 2002 and all participants are
currently in payment status. Both the non-qualified frozen defined benefit plan and the non-
qualified contribution plan are unfunded plans with the Company’s contributions made at the
time payments are made to participants.
Total Expense and Contribution Plans’ Information
Total expense recorded for the qualified and non-qualified defined contribution, 401(k),
defined benefit and supplemental retirement plans was $8,527, $8,899 and $11,850 for the
years ended December 31, 2016, 2015 and 2014, respectively.
Contributions to employees' accounts under the qualified defined contribution plan, the
401(k) plan and the non-qualified defined contribution plan, as well as total assets of the plans,
were as follows:
Year Ended December 31,
2014
2015
2016
401(k) plan
Contributions to employees’ accounts .................................................. $ 6,918
177,352
Total assets at the end of the year........................................................
$ 6,466
161,956
$ 2,753
132,053
Qualified defined contribution plan
Contributions to employees’ accounts ..................................................
Total assets at the end of the year........................................................
Non-qualified defined contribution plan
Contributions to employees’ accounts ..................................................
Total assets at the end of the year........................................................
-
-
72
-
-
9,118
122
-
4,580
123,008
74
-
F-99
NOTE 11 - Pension Plans and Other Postretirement Benefits-(Continued)
Defined Benefit Plan and Supplemental Retirement Plans
The following tables summarize the funded status of the defined benefit and
supplemental retirement pension plans as of December 31, 2016, 2015 and 2014 (the
measurement dates) and identify (1) the assumptions used to determine the projected benefit
obligation and (2) the components of net pension cost for the defined benefit plan and
supplemental retirement plans for the following periods:
Defined Benefit Plan
December 31,
2014
2015
2016
Supplemental
Defined Benefit Plans
December 31,
2014
2015
2016
Change in benefit obligation:
Projected benefit obligation
at beginning of year ..................... $31,233
650
1,244
-
(220)
(3,500)
-
Service cost .....................................
Interest cost .....................................
Plan amendments ...........................
Actuarial loss (gain) .........................
Benefits paid....................................
Settlements .....................................
Projected benefit obligation
$34,279
450
1,189
-
(1,371)
(3,314)
-
$39,483
360
1,679
-
1,254
(1,737)
(6,760)
$ 17,004
-
687
-
488
(1,332)
-
$ 18,524
-
654
-
(845)
(1,329)
-
$ 16,706
-
716
-
2,431
(1,329)
-
at end of year ............................... $29,407
$31,233
$34,279
$ 16,847
$ 17,004
$ 18,524
Change in plan assets:
Fair value of plan assets
at beginning of year ..................... $27,667
1,766
-
(3,500)
(487)
-
Actual return on plan assets ............
Employer contributions ....................
Benefits paid....................................
Expenses paid .................................
Settlements .....................................
Fair value of plan assets at
$31,408
200
-
(3,314)
(627)
-
$35,879
2,535
2,000
(1,737)
(509)
(6,760)
$ -
-
1.332
(1,332)
-
-
$ -
-
1,329
(1,329)
-
-
$ -
-
1,329
(1,329)
-
-
end of year ................................... $25,446
Funded status ..................................... $ (3,961)
$27,667
$ (3,566)
$31,408
$ (2,871)
$ -
$(16,847)
$ -
$(17,004)
$ -
$(18,524)
Prepaid (accrued) benefit expense ..... $ 8,653
$ 9,265
$10,656
$(11,210)
$(11,622)
$(12,024)
Total amount recognized in
Consolidated Balance Sheets,
all in Other liabilities ......................... $ (3,961)
$ (3,566)
$ (2,871)
$(16,847)
$(17,004)
$(18,524)
Amounts recognized in
accumulated other
comprehensive income
(loss) (“AOCI”):
Prior service cost ......................... $ -
12,613
Net actuarial loss .........................
Total amount recognized
$ -
12,831
$ -
13,527
$ -
5,637
$ -
5,382
$ -
6,500
in AOCI ..................................... $12,613
$12,831
$13,527
$ 5,637
$ 5,382
$ 6,500
Information for pension plans with
an accumulated benefit
obligation greater than
plan assets:
Projected benefit obligation .......... $29,407
29,407
Accumulated benefit obligation ....
25,446
Fair value of plan assets ..............
$31,233
31,233
27,667
$34,279
34,279
31,408
$ 16,847
16,847
-
$ 17,004
17,004
-
$ 18,524
18,524
-
F-100
NOTE 11 - Pension Plans and Other Postretirement Benefits-(Continued)
The change in the Company’s AOCI for the defined benefit plans for the year ended
December 31, 2016 was primarily attributable to a decrease in the discount rate, partially offset
by the performance of plan assets. The change in the Company’s AOCI for the defined benefit
plans for the year ended December 31, 2015 was primarily attributable to an increase in the
discount rate, partially offset by the performance of plan assets. The change in the Company’s
AOCI for the defined benefit plans for the year ended December 31, 2014 was primarily
attributable to loss recognition in 2014, due to settlement accounting as well as loss
amortization included in net periodic benefit cost for 2014. This loss recognition was partially
offset by liability losses in 2014 due to a decrease in the discount rate as well as a change in
the mortality assumption.
Defined Benefit Plan
Year Ended December 31,
2014
2015
2016
Supplemental
Defined Benefit Plans
Year Ended December 31,
2014
2015
2016
Components of net periodic pension
(income) expense:
Service cost:
Benefit accrual ............................. $ -
650
Other expenses ...........................
1,244
Interest cost ....................................
(1,675)
Expected return on plan assets ......
Settlement loss ...............................
-
Amortization of:
$ -
450
1,189
(1,875)
-
$ -
360
1,679
(2,402)
2,668
$ -
-
687
-
-
$ -
-
654
-
-
$ -
-
716
-
-
Prior service cost .........................
Actuarial loss ...............................
-
393
Net periodic pension expense ................ $ 612
-
1,626
$ 1,390
-
1,371
$ 3,676
-
233
$ 920
-
273
$ 927
-
157
$ 873
Changes in plan assets and benefit
obligations included in other
comprehensive income (loss):
Prior service cost ............................ $ -
Net actuarial loss (gain) ..................
175
Amortization of:
$ -
930
$ -
(1,037)
$ -
488
$ -
(845)
$ -
2,431
Prior service cost .........................
Actuarial loss ...............................
-
(393)
-
(1,626)
-
(1,371)
-
(233)
-
(273)
(2)
(157)
Total recognized in other
comprehensive income
(loss)..................................... $ (218)
Weighted average assumptions
used to determine expense:
$ (696)
$(2,408)
$ 255
$(1,118)
$2,272
Discount rate ...................................
Expected return on plan assets .......
Annual rate of salary increase .........
4.20%
6.50%
*
3.66%
6.75%
*
4.46%
7.50%
*
4.20%
6.50%
*
3.66%
*
*
4.46%
*
*
Weighted average assumptions
used to determine benefit
obligations as of December 31:
Discount rate ...................................
Expected return on plan assets .......
Annual rate of salary increase .........
3.90%
6.50%
*
4.20%
6.75%
*
3.66%
7.50%
*
3.90%
6.50%
*
4.20%
*
*
3.66%
*
*
*
Not applicable.
F-101
NOTE 11 - Pension Plans and Other Postretirement Benefits-(Continued)
The discount rates at December 31, 2016 were based on the average yield for long-term,
high-grade securities available during the benefit payout period. To set its discount rate, the
Company looks to leading indicators, including the Mercer Above Mean Yield Curve.
The assumption for the long-term rate of return on plan assets was determined by
considering actual investment experience during the lifetime of the plan, balanced with
reasonable expectations of future growth considering the various classes of assets and
percentage allocation for each asset class.
The Company has an investment policy for the defined benefit pension plan that aligns
the assets within the plan’s trust to an approximate allocation of 50% equity and 50% fixed
income funds. Management believes this allocation will produce the targeted long-term rate of
return on assets necessary for payment of future benefit obligations, while providing adequate
liquidity for payments to current beneficiaries. Assets are reviewed against the defined benefit
pension plan’s investment policy and the trustee has been directed to adjust invested assets at
least quarterly to maintain the target allocation percentages.
Fair values of the equity security funds and fixed income funds have been determined
from public quotations. The following table presents the fair value hierarchy for the Company’s
defined benefit pension plan assets, excluding cash held.
Total
Fair Value Measurements at
Reporting Date Using
Level 3
Level 2
Level 1
December 31, 2016
Asset category
Equity security funds (1)
United States ................................................................ $ 9,836
2,492
International ..................................................................
12,402
Fixed income funds ..........................................................
716
Short-term investment funds ............................................
Total .......................................................................... $25,446
December 31, 2015
Asset category
Equity security funds (1)
United States ................................................................ $10,844
2,681
International ..................................................................
13,720
Fixed income funds ..........................................................
422
Short-term investments funds ..........................................
Total .......................................................................... $27,667
$ -
-
-
716
$716
$ -
-
-
422
$422
$ 9,836
2,492
12,402
-
$24,730
$10,844
2,681
13,720
-
$27,245
$ -
-
-
-
$ -
$ -
-
-
-
$ -
(1) None of the trust fund assets for the defined benefit pension plan have been invested in shares of HMEC’s common
stock.
There were no Level 3 assets held during the years ended December 31, 2016 and
2015.
F-102
NOTE 11 - Pension Plans and Other Postretirement Benefits-(Continued)
In 2017, the Company expects amortization of net losses of $389 and $258 for the
defined benefit plan and the supplemental retirement plans, respectively, and expects no
amortization of prior service cost for the supplemental retirement plans to be included in net
periodic pension expense.
Postretirement Benefits Other than Pensions
In addition to providing pension benefits, as further described below, prior to 2015 the
Company also provided certain health care and life insurance benefits to a closed group of
eligible employees (pre-age 65 and former employees). Postretirement benefits other than
pensions of active and retired employees were accrued as expense over the employees'
service years.
As of December 31, 2006, upon discontinuation of retiree medical benefits, Health
Reimbursement Accounts (“HRAs”) were established for eligible participants and totaled
$7,310. As of December 31, 2016, the balance of the previously established HRAs was
$1,652. Funding of HRAs was $218, $523 and $252 for the years ended December 31, 2016,
2015 and 2014, respectively.
In December 2013, the Company announced the elimination of postretirement medical
coverage for all remaining eligible participants effective March 31, 2014. As a result of this
plan change, prior service cost was amortized over the average working lifetime of active
eligible participants.
In November 2014, the Company announced it would no longer sponsor the retiree
group life benefit as of December 2014 and offered a conversion option to individual policies.
This was the last remaining postretirement benefit other than pensions.
As a result of the changes in the plan for other postretirement benefits, the Company
recorded a reduction in its expenses of $2,980 for the year ended December 31, 2014.
F-103
NOTE 11 - Pension Plans and Other Postretirement Benefits-(Continued)
The following table presents the funded status of postretirement benefits other than
pensions of active and retired employees (including employees on disability more than 2
years) as of December 31, 2014 (the measurement date) reconciled with amounts recognized
in the Company's Consolidated Balance Sheets. The tables present postretirement expenses
and liabilities only for those years in which the Company incurred expenses or accrued
liabilities.
Change in accumulated postretirement benefit obligations:
Accumulated postretirement benefit
obligations at beginning of year...........................................................................................
Changes during fiscal year:
Service cost ........................................................................................................................
Interest cost ........................................................................................................................
Plan amendment .................................................................................................................
Settlements .........................................................................................................................
Employer payments net of participant contributions ............................................................
Actuarial (gain) loss .............................................................................................................
Accumulated postretirement benefit obligations at end of year ..............................................
Unfunded status .........................................................................................................................
December 31,
2014
$ 1,130
-
46
-
(965)
(95)
(116)
$ -
$ -
Total amount recognized in Consolidated Balance Sheets,
all in Other liabilities ................................................................................................................
$ -
Amounts recognized in accumulated
other comprehensive income (loss) (“AOCI”):
Prior service cost (credit) ....................................................................................................
Net actuarial loss (gain) ......................................................................................................
Total amount recognized in AOCI ....................................................................................
$ -
-
$ -
Components of net periodic benefit:
Service cost ............................................................................................................................
Interest cost ............................................................................................................................
Curtailment gain......................................................................................................................
Settlement gain .......................................................................................................................
Amortization of prior service cost ............................................................................................
Amortization of prior gain ........................................................................................................
Net periodic income ............................................................................................................
Year Ended
December 31,
2014
$ -
46
(713)
(1,439)
(628)
(246)
$(2,980)
F-104
NOTE 11 - Pension Plans and Other Postretirement Benefits-(Continued)
Sensitivity Analysis and Assumptions for Postretirement Benefits Other than Pensions
A one percentage point change in the assumed health care cost trend rate for each year
would change the accumulated postretirement benefit obligations as follows:
Accumulated postretirement benefit obligations
Effect of a one percentage point increase ..........................................................................................
Effect of a one percentage point decrease .........................................................................................
Service and interest cost components of the net
periodic postretirement benefit expense
Effect of a one percentage point increase .......................................................................................
Effect of a one percentage point decrease ......................................................................................
Weighted average assumptions used to determine
benefit obligations as of December 31:
Discount rate ...................................................................................................................................
Healthcare cost trend rate ...............................................................................................................
Rate to which the cost trend rate is assumed to decline
(ultimate trend rate) .....................................................................................................................
Year the rate is assumed to reach the ultimate trend rate ...............................................................
Expected return on plan assets .......................................................................................................
Weighted average assumptions used to determine net periodic
benefit cost for the years ended December 31:
Discount rate ...................................................................................................................................
Healthcare cost trend rate ...............................................................................................................
Rate to which the cost trend rate is assumed to decline
(ultimate trend rate) .....................................................................................................................
Year the rate is assumed to reach the ultimate trend rate ...............................................................
Expected return on plan assets .......................................................................................................
*
Not applicable.
December 31,
2014
*
*
*
*
3.66%
*
*
*
*
4.46%
*
*
*
*
The discount rates were based on the average yield for long-term, high-grade securities
available during the benefit payout period. To set its discount rate, the Company looks to
leading indicators, including the Mercer Above Mean Yield Curve.
2017 Contributions
In 2017, there is no minimum funding requirement for the Company’s defined benefit
plan. The following table discloses that minimum funding requirement and the expected full
year contributions for the Company’s plans.
Minimum funding requirement for 2017 ........................................................................
Expected contributions (approximations)
for the year ended December 31, 2017
as of the time of this Form 10-K (1) ..........................................................................
N/A - Not applicable.
(1)
HMEC’s Annual Report on Form 10-K for the year ended December 31, 2016.
F-105
Defined Benefit Pension Plans
Supplemental
Defined Benefit
Plans
Defined
Benefit
Plan
$ -
N/A
-
$1,318
NOTE 11 - Pension Plans and Other Postretirement Benefits-(Continued)
Estimated Future Benefit Payments
The Company’s defined benefit plan may be subject to settlement accounting.
Assumptions for both the number of individuals retiring in a calendar year and their elections
regarding lump sum distributions are significant factors impacting the payout patterns for each
of the plans below. Therefore, actual results could vary from the estimates shown. Estimated
future benefit payments as of December 31, 2016 were as follows:
Pension plans
Defined benefit plan .......................... $2,850
1,318
Supplemental retirement plans .........
$2,752
1,305
$3,043
1,291
$2,431
1,274
$2,180
1,256
$10,275
5,909
2017
2018
2019
2020
2021
2022-2026
NOTE 12 - Contingencies and Commitments
Lawsuits and Legal Proceedings
Companies in the insurance industry have been subject to substantial litigation resulting
from claims, disputes and other matters. For instance, they have faced expensive claims,
including class action lawsuits, alleging, among other things, improper sales practices and
improper claims settlement procedures. Negotiated settlements of certain such actions have
had a material adverse effect on many insurance companies.
At the time of this Annual Report on Form 10-K, the Company does not have pending
litigation from which there is a reasonable possibility of material loss.
Assessments for Insolvencies of Unaffiliated Insurance Companies
The Company is contingently liable for possible assessments under regulatory
requirements pertaining to potential insolvencies of unaffiliated insurance companies.
Liabilities, which are established based upon regulatory guidance, have generally been
insignificant.
Leases
The Company has entered into various operating lease agreements, primarily for real
estate (claims and marketing offices in a few states, as well as portions of the home office
complex) and also for computer equipment and copy machines. Rental expenses were
$2,546, $2,872 and $2,823 for the years ended December 31, 2016, 2015 and 2014,
respectively. Future minimum lease payments under leases expiring subsequent to December
31, 2016 are as follows:
As of December 31, 2016
2027 and
beyond
2022-
2026
2019
2020
2017
2021
2018
Minimum operating lease payments ..... $2,608
$2,583
$2,400
$1,598
$1,147
$1,627
$ -
F-106
NOTE 12 - Contingencies and Commitments-(Continued)
Investment Commitments
From time to time, the Company has outstanding commitments to purchase investments
and/or commitments to lend funds under bridge loans. Unfunded commitments to purchase
investments were $135,054 and $147,139 for the years ended December 31, 2016 and 2015,
respectively.
NOTE 13 - Supplementary Data on Cash Flows
A reconciliation of net income to net cash provided by operating activities as presented in
the Consolidated Statements of Cash Flows is as follows:
Year Ended December 31,
2014
2015
2016
Cash flows from operating activities
Net income ........................................................................................... $ 83,765
Adjustments to reconcile net income to net
cash provided by operating activities:
$ 93,482
$104,243
Net realized investment gains........................................................
Increase in accrued investment income ........................................
Increase (decrease) in accrued expenses .....................................
Depreciation and amortization .......................................................
Increase in insurance liabilities ......................................................
Increase in premium receivables ...................................................
Increase in deferred policy acquisition costs .................................
(Increase) decrease in reinsurance recoverables ..........................
(Decrease) increase in income tax liabilities ..................................
Debt retirement costs ....................................................................
Other .............................................................................................
Total adjustments .......................................................................
(4,123)
(2,208)
4,378
6,896
176,315
(11,496)
(15,859)
(481)
(1,293)
-
(28,476)
123,653
Net cash provided by operating activities ............................... $207,418
(12,713)
(2,566)
(5,798)
7,734
145,313
(8,641)
(8,981)
(748)
8,935
2,338
(11,312)
113,561
$207,043
(10,917)
(5,563)
1,513
7,958
153,423
(3,638)
(12,662)
1,570
9,745
-
(23,739)
117,690
$221,933
The Company’s redemption of debt in 2015 resulted in non-cash financing charges of
$45.
F-107
NOTE 14 - Segment Information
The Company conducts and manages its business through four segments. The three
operating segments, representing the major lines of insurance business, are: Property and
Casualty segment, primarily personal lines automobile and homeowners products; Retirement
segment, primarily tax-qualified fixed and variable annuities; and Life segment life insurance.
The Company does not allocate the impact of corporate-level transactions to these operating
segments, consistent with the basis for management’s evaluation of the results of those
segments, but classifies those items in the fourth segment, Corporate and Other. In addition to
ongoing transactions such as corporate debt service, realized investment gains and losses and
certain public company expenses, such items also have included corporate debt retirement
costs/gains, when applicable.
The accounting policies of the segments are the same as those described in “Note 1 --
Summary of Significant Accounting Policies”. The Company accounts for intersegment
transactions, primarily the allocation of operating and agency costs from the Corporate and
Other segment to the Property and Casualty, Retirement and Life segments, on a direct cost
basis.
Summarized financial information for these segments is as follows:
Year Ended December 31,
2014
2015
2016
Insurance premiums and contract charges earned
Property and Casualty .............................................................................. $ 620,514
24,937
Retirement ................................................................................................
Life ............................................................................................................ 113,695
Total ...................................................................................................... $ 759,146
$ 595,958
25,378
110,544
$ 731,880
$ 581,828
25,540
108,392
$ 715,760
Net investment income
Property and Casualty .............................................................................. $ 38,998
249,410
Retirement ................................................................................................
73,567
Life ............................................................................................................
Corporate and Other .................................................................................
66
Intersegment eliminations ......................................................................... (855)
Total ...................................................................................................... $ 361,186
$ 33,461
228,378
71,614
38
(891)
$ 332,600
$ 36,790
222,071
71,865
14
(925)
$ 329,815
Net income (loss)
Property and Casualty .............................................................................. $ 25,644
50,674
Retirement ................................................................................................
Life ............................................................................................................
16,559
Corporate and Other ................................................................................. (9,112)
Total ...................................................................................................... $ 83,765
$ 40,043
43,384
14,982
(4,927)
$ 93,482
$ 46,907
45,336
17,503
(5,503)
$ 104,243
Assets
$ 1,110,958
Property and Casualty ..............................................................................
7,449,777
Retirement ................................................................................................
1,912,771
Life ............................................................................................................
Corporate and Other .................................................................................
140,104
Intersegment eliminations ......................................................................... (36,786)
Total ...................................................................................................... $10,576,824
$ 1,098,415
7,001,411
1,862,719
131,635
(37,208)
$10,056,972
$1,107,962
6,683,473
1,858,150
155,497
(36,736)
$9,768,346
December 31,
2014
2015
2016
F-108
NOTE 14 - Segment Information-(Continued)
Additional significant financial information for these segments is as follows:
Year Ended December 31,
2014
2015
2016
Policy acquisition expenses amortized
Property and Casualty ..............................................................................
Retirement ................................................................................................
Life ............................................................................................................
Total ......................................................................................................
$74,950
14,635
7,147
$96,732
$73,173
18,155
7,591
$98,919
Income tax expense (benefit)
Property and Casualty ..............................................................................
Retirement ................................................................................................
Life ............................................................................................................
Corporate and Other .................................................................................
Total ......................................................................................................
$ 4,627
20,334
9,775
(4,269)
$30,467
$11,274
19,873
7,951
(3,128)
$35,970
$71,327
14,781
7,709
$93,817
$13,944
21,319
9,432
(2,825)
$41,870
NOTE 15 - Unaudited Selected Quarterly Financial Data
Selected quarterly financial data is presented below.
2016
Insurance premiums written and contract deposits ......
Total revenues .............................................................
Net income ...................................................................
Per share information
Basic
Three Months Ended
March 31,
December 31, September 30,
June 30,
$315,917
282,873
19,823
$351,534
291,176
26,923
$311,879
283,558
11,866
$283,169
271,303
25,153
Net income ............................................................
Shares of common stock - weighted average (1) ..
$ 0.48
41,093
$ 0.66
41,092
$ 0.29
41,082
$ 0.61
41,297
Diluted
Net income ............................................................
Shares of common stock and equivalent shares -
weighted average (1) .........................................
2015
Insurance premiums written and contract deposits ......
Total revenues .............................................................
Net income ...................................................................
Per share information
Basic
$ 0.48
$ 0.65
$ 0.29
$ 0.61
41,482
41,347
41,314
41,492
$305,186
276,106
21,040
$326,198
265,753
21,984
$319,394
268,470
16,183
$305,735
270,119
34,275
Net income ............................................................
Shares of common stock - weighted average (1) ..
$ 0.51
41,564
$ 0.53
41,852
$ 0.39
41,990
$ 0.82
41,950
Diluted
Net income ............................................................
Shares of common stock and equivalent shares -
weighted average (1) .........................................
$ 0.50
$ 0.52
$ 0.38
$ 0.81
42,127
42,305
42,425
42,300
2014
Insurance premiums written and contract deposits ....... $292,241
269,157
Total revenues ..............................................................
Net income ....................................................................
30,068
Per share information
Basic
$322,746
265,520
25,357
$292,393
264,743
20,452
$260,275
261,265
28,366
Net income ............................................................. $ 0.72
41,748
Shares of common stock - weighted average (1) ...
$ 0.61
41,514
$ 0.49
41,432
$ 0.69
41,180
Diluted
Net income ............................................................. $ 0.71
Shares of common stock and equivalent shares -
$ 0.60
$ 0.48
$ 0.67
weighted average (1) ..........................................
42,362
42,319
42,310
42,259
(1) Rounded to thousands.
F-109
SCHEDULE I
HORACE MANN EDUCATORS CORPORATION
SUMMARY OF INVESTMENTS-OTHER THAN INVESTMENTS IN RELATED PARTIES
December 31, 2016
(Dollars in thousands)
Type of Investments
Cost (1)
Fair
Value
Amount
Shown in
Balance
Sheet
Fixed maturities
U.S. Government and federally sponsored
agency obligations .................................................................. $ 921,477
1,648,252
93,864
140,893
4,347,641
States, municipalities and political subdivisions ..........................
Foreign government bonds .........................................................
Public utilities ..............................................................................
Other bonds ................................................................................
$ 946,268
1,769,398
98,669
159,328
4,483,045
$ 946,268
1,769,398
98,669
159,328
4,483,045
Total fixed maturity securities ..............................................
7,152,127
7,456,708
7,456,708
Equity securities
Non-redeemable preferred stocks ..............................................
Common stocks ..........................................................................
Closed-end fund .........................................................................
52,294
61,715
20,004
50,048
72,233
19,368
50,048
72,233
19,368
Total equity securities ..........................................................
134,013
141,649
141,649
Short-term investments ..................................................................
Policy loans ....................................................................................
Derivative instruments ....................................................................
Mortgage loans ..............................................................................
Other ..............................................................................................
44,918
151,908
8,694
57
195,438
Total investments ................................................................ $7,687,155
XXX
XXX
XXX
XXX
XXX
XXX
44,918
151,908
8,694
57
195,438
$7,999,372
(1) Bonds at original cost reduced by repayments and adjusted for amortization of premiums or accrual of discounts and
impairment in value of specifically identified investments.
See accompanying Report of Independent Registered Public Accounting Firm.
F-110
SCHEDULE II
HORACE MANN EDUCATORS CORPORATION
(Parent Company Only)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
As of December 31, 2016 and 2015
(Dollars in thousands, except per share data)
December 31,
2015
2016
ASSETS
Investments and cash ..................................................................................
Investment in subsidiaries ............................................................................
Other assets .................................................................................................
$ 4,069
1,487,457
60,057
$ 13,237
1,451,290
57,743
Total assets .......................................................................................
$1,551,583
$1,522,270
LIABILITIES AND SHAREHOLDERS’ EQUITY
Long-term debt .............................................................................................
Other liabilities ..............................................................................................
$ 247,209
10,392
$ 246,975
10,634
Total liabilities ....................................................................................
257,601
257,609
Preferred stock, $0.001 par value, authorized
1,000,000 shares; none issued .................................................................
-
-
Common stock, $0.001 par value, authorized 75,000,000 shares;
issued, 2016, 64,917,683; 2015, 64,537,554 ............................................
Additional paid-in capital ..............................................................................
Retained earnings ........................................................................................
Accumulated other comprehensive income (loss), net of taxes:
Net unrealized investment gains on fixed maturities
65
453,479
1,155,732
and equity securities .............................................................................
Net funded status of pension benefit obligations ......................................
175,738
(11,817)
Treasury stock, at cost, 2016, 24,672,932 shares;
65
442,648
1,116,277
175,167
(11,794)
2015, 23,971,522 shares ..........................................................................
(479,215)
(457,702)
Total shareholders' equity ..................................................................
1,293,982
1,264,661
Total liabilities and shareholders' equity .........................................
$1,551,583
$1,522,270
See accompanying Note to Condensed Financial Statements.
See accompanying Report of Independent Registered Public Accounting Firm.
F-111
SCHEDULE II
HORACE MANN EDUCATORS CORPORATION
(Parent Company Only)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS
(Dollars in thousands)
Year Ended December 31,
2014
2015
2016
Revenues
Net investment income ............................................................
Realized investment gains .......................................................
$ 20
-
$ 33
-
$ 10
-
Total revenues .....................................................................
20
33
10
Expenses
Interest .....................................................................................
Debt retirement costs ...............................................................
Other ........................................................................................
11,808
-
5,631
13,122
2,338
5,153
14,198
-
5,071
Total expenses .....................................................................
17,439
20,613
19,269
Loss before income tax benefit
and equity in net earnings of subsidiaries ................................
Income tax benefit .......................................................................
Loss before equity in net earnings of subsidiaries .......................
Equity in net earnings of subsidiaries ..........................................
(17,419)
(6,076)
(11,343)
95,108
(20,580)
(7,202)
(13,378)
106,860
(19,259)
(6,734)
(12,525)
116,768
Net income ..................................................................................
$ 83,765
$ 93,482
$104,243
See accompanying Note to Condensed Financial Statements.
See accompanying Report of Independent Registered Public Accounting Firm.
F-112
SCHEDULE II
HORACE MANN EDUCATORS CORPORATION
(Parent Company Only)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Year Ended December 31,
2014
2015
2016
Cash flows - operating activities
Interest expense paid ..............................................................
Federal income taxes recovered..............................................
Cash dividends received from subsidiaries ..............................
Other, net, including settlement of payables to subsidiaries ....
$(11,754)
8,914
59,600
(3,434)
$ (13,521)
8,413
50,000
(4,097)
$(13,902)
10,030
46,000
(1,478)
Net cash provided by operating activities .............................
53,326
40,795
40,650
Cash flows - investing activities
Net increase (decrease) in investments ...................................
9,161
15,402
(4,647)
Net cash provided by (used in) investing activities ...............
9,161
15,402
(4,647)
Cash flows - financing activities
Dividends paid to shareholders ...............................................
Proceeds from issuance of Senior Notes due 2025 .................
Redemption of Senior Notes due 2016 ....................................
Maturity of Senior Notes due 2015 ..........................................
Principal repayment on Bank Credit Facility ............................
Acquisition of treasury stock ....................................................
Exercise of stock options .........................................................
(44,310)
-
-
-
-
(21,513)
3,329
(42,523)
246,937
(127,292)
(75,000)
(38,000)
(21,950)
1,629
(39,237)
-
-
-
-
(5,411)
8,252
Net cash used in financing activities ....................................
(62,494)
(56,199)
(36,396)
Net decrease in cash...................................................................
Cash at beginning of period ........................................................
(7)
75
(2)
77
(393)
470
Cash at end of period ..................................................................
$ 68
$ 75
$ 77
See accompanying Note to Condensed Financial Statements.
See accompanying Report of Independent Registered Public Accounting Firm.
F-113
SCHEDULE II
HORACE MANN EDUCATORS CORPORATION
(Parent Company Only)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTE TO CONDENSED FINANCIAL STATEMENTS
The accompanying condensed financial statements should be read in conjunction with the
Consolidated Financial Statements and the accompanying notes thereto.
F-114
SCHEDULE III: SUPPLEMENTARY INSURANCE INFORMATION
SCHEDULE VI: SUPPLEMENTAL INFORMATION CONCERNING PROPERTY AND CASUALTY INSURANCE OPERATIONS
HORACE MANN EDUCATORS CORPORATION
SCHEDULE III & VI (COMBINED)
Column identification for
Schedule III:
Schedule VI:
A
A
Segment
B
B
C
C
D
D
E
E
F
F
G
G
H
H
I
I
J
J
K
K
(Dollars in thousands)
Deferred
policy
acquisition
Future policy
benefits,
claims and
previous Unearned
costs claim expenses column premiums
Discount,
if any,
deducted in
Other
policy
claims and
benefits
payable
Premium
revenue/
premium
earned
Benefits, Claims and claim
Amortization
claims adjustment expenses of deferred
Net
and
investment settlement Current
expenses year
income
incurred related to
Prior
years
policy
acquisition
costs
Paid
claims
and claim
operating adjustment Premiums
written
expenses expenses
Other
F
-
1
1
5
Year Ended December 31, 2016
Property and Casualty .......... $ 27,604
188,117
Retirement ............................
Life ........................................
51,859
Other, including
$ 307,757
4,372,062
1,098,038
$ 0
xxx
xxx
$244,005
671
1,598
$ -
705,603
3,347
$620,514 $ 38,997
249,410
73,567
24,937
113,695
$464,098 $471,098
xxx
xxx
151,185
117,743
$ (7,000) $74,950
14,635
7,147
xxx
xxx
$ 90,802
40,289
36,806
$468,778
xxx
xxx
$634,319
xxx
xxx
consolidating eliminations ..
N/A
N/A
xxx
N/A
N/A
N/A
(788)
N/A
Total ............................... $267,580
$5,777,857
xxx
$246,274
$708,950
$759,146 $361,186
$733,026
xxx
xxx
xxx
N/A
17,023
xxx
$96,732
$184,920
xxx
xxx
xxx
xxx
Year Ended December 31, 2015
Property and Casualty .......... $ 26,685
178,300
Retirement ............................
Life ........................................
48,191
Other, including
$ 301,569
4,082,217
1,066,776
$ 0
xxx
xxx
$230,201
734
1,906
$ -
689,116
3,536
$595,958 $ 33,461
228,378
71,614
25,378
110,544
$420,311 $432,811
xxx
xxx
141,893
117,002
$(12,500) $73,173
18,155
7,591
xxx
xxx
$ 84,785
32,555
35,470
$436,431
xxx
xxx
$605,753
xxx
xxx
consolidating eliminations ..
N/A
N/A
xxx
N/A
N/A
N/A
(853)
N/A
Total ............................... $253,176
$5,450,562
xxx
$232,841
$692,652
$731,880 $332,600
$679,206
xxx
xxx
xxx
N/A
20,061
xxx
$98,919
$172,871
xxx
xxx
xxx
xxx
Year Ended December 31, 2014
Property and Casualty .......... $ 27,160
143,522
Retirement ............................
Life ........................................
44,400
Other, including
$ 311,097
3,781,260
1,035,698
$ 0
xxx
xxx
$220,406
708
2,299
$ -
603,267
3,471
$581,828 $ 36,790
222,071
71,865
25,540
108,392
$399,512 $416,512
xxx
xxx
134,760
110,293
$(17,000) $71,327
14,781
7,709
xxx
xxx
$ 88,305
33,210
36,421
$393,857
xxx
xxx
$584,393
xxx
xxx
consolidating eliminations ..
N/A
N/A
xxx
N/A
N/A
N/A
(911)
N/A
Total ............................... $215,082
$5,128,055
xxx
$223,413
$606,738
$715,760 $329,815
$644,565
xxx
xxx
xxx
N/A
18,254
xxx
$93,817
$176,190
xxx
xxx
xxx
xxx
N/A - Not applicable.
See accompanying Report of Independent Registered Public Accounting Firm.
SCHEDULE IV
HORACE MANN EDUCATORS CORPORATION
REINSURANCE
(Dollars in thousands)
Column A
Column B
Gross
Amount
Column C
Ceded to
Other
Companies
Column D
Assumed
from Other
Companies
Column E
Net
Column F
Percentage
of Amount
Amount Assumed to Net
Year ended December 31, 2016
Life insurance in force .................. $17,025,125
Premiums
$4,065,449
$ -
$12,959,676
Property and Casualty .............. $ 632,372
Retirement ...............................
24,937
Life ........................................... 120,342
$ 16,179
-
6,647
$4,321
-
-
$ 620,514
24,937
113,695
Total premiums ..................... $ 777,651
$ 22,826
$4,321
$ 759,146
Year ended December 31, 2015
Life insurance in force .................. $16,504,539
Premiums
$3,625,946
$ -
$12,878,593
Property and Casualty .............. $ 610,347
Retirement ...............................
25,378
Life ........................................... 117,073
$ 18,548
-
6,529
$4,159
-
-
$ 595,958
25,378
110,544
Total premiums ..................... $ 752,798
$ 25,077
$4,159
$ 731,880
Year ended December 31, 2014
Life insurance in force .................. $15,800,701
Premiums
$3,360,016
$ -
$12,440,685
Property and Casualty .............. $ 599,230
Retirement ...............................
25,540
Life ........................................... 114,511
$ 21,157
-
6,119
$3,755
-
-
$ 581,828
25,540
108,392
Total premiums ..................... $ 739,281
$ 27,276
$3,755
$ 715,760
Note: Premiums above include insurance premiums earned and contract charges earned.
-
0.7%
-
-
0.6%
-
0.7%
-
-
0.6%
-
0.6%
-
-
0.5%
See accompanying Report of Independent Registered Public Accounting Firm.
F-116
HORACE MANN EDUCATORS CORPORATION
EXHIBITS
To
FORM 10-K
For the Year Ended December 31, 2016
VOLUME 1 OF 1
The following items are filed as Exhibits to Horace Mann Educators Corporation's ("HMEC") Annual Report on Form 10-K for the
year ended December 31, 2016. Management contracts and compensatory plans are indicated by an asterisk (*).
Exhibit
No.
Description
(3)
Articles of incorporation and bylaws:
EXHIBIT INDEX
3.1
3.2
3.3
Restated Certificate of Incorporation of HMEC, filed with the Delaware Secretary of State on June 24, 2003,
incorporated by reference to Exhibit 3.1 to HMEC’s Quarterly Report on Form 10-Q for the quarter ended June
30, 2003, filed with the Securities and Exchange Commission (the “SEC”) on August 14, 2003.
Form of Certificate for shares of Common Stock, $0.001 par value per share, of HMEC, incorporated by
reference to Exhibit 4.5 to HMEC’s Registration Statement on Form S-3 (Registration No. 33-53118) filed with
the SEC on October 9, 1992.
Bylaws of HMEC, incorporated by reference to Exhibit 3.2 to HMEC’s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2003, filed with the SEC on August 14, 2003.
(4)
Instruments defining the rights of security holders, including indentures:
4.1
4.1(a)
4.2
Indenture, dated as of November 23, 2015, by and between HMEC and The Bank of New York Mellon Trust
Company, N.A., as trustee, incorporated by reference to Exhibit 4.1 to HMEC’s Current Report on Form 8-K
dated November 18, 2015, filed with the SEC on November 23, 2015.
Form of HMEC 4.5000% Senior Notes due 2025, incorporated by reference to Exhibit 4.2 to HMEC’s Current
Report on Form 8-K dated November 18, 2015, filed with the SEC on November 23, 2015.
Certificate of Designations for HMEC Series A Cumulative Convertible Preferred Stock, incorporated by
reference to Exhibit 4.3 to HMEC’s Annual Report on Form 10-K for the year ended December 31, 2005, filed
with the SEC on March 16, 2006.
(10)
Material contracts:
10.1
Amended and Restated Credit Agreement dated as of July 30, 2014 among HMEC, certain financial
institutions named therein and JPMorgan Chase Bank, N.A., as administrative agent, incorporated by
reference to Exhibit 10.1 to HMEC’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014, filed
with the SEC on August 8, 2014.
-1-
Exhibit
No.
Description
10.1(a)
10.2*
10.2(a)*
10.2(b)*
10.2(c)*
10.2(d)*
10.2(e)*
10.3*
10.3(a)*
First Amendment to Credit Agreement dated as of November 16, 2015 among HMEC, certain financial
institutions named therein and JPMorgan Chase Bank, N.A., as administrative agent, incorporated by
reference to Exhibit 10.1(a) to HMEC’s Annual Report on Form 10-K for the year ended December 31, 2015,
filed with the SEC on February 29, 2016.
Horace Mann Educators Corporation Amended and Restated 2002 Incentive Compensation Plan (“2002
Incentive Compensation Plan”), incorporated by reference to Exhibit 10.2 to HMEC’s Quarterly Report on
Form 10-Q for the quarter ended June 30, 2005, filed with the SEC on August 9, 2005.
Revised Specimen Employee Stock Option Agreement under the 2002 Incentive Compensation Plan,
incorporated by reference to Exhibit 10.6(b) to HMEC’s Annual Report on Form 10-K for the year ended
December 31, 2008, filed with the SEC on March 2, 2009.
Specimen Employee Restricted Stock Unit Agreement under the 2002 Incentive Compensation Plan,
incorporated by reference to Exhibit 10.6(d) to HMEC’s Annual Report on Form 10-K for the year ended
December 31, 2005, filed with the SEC on March 16, 2006.
Revised Specimen Employee Restricted Stock Unit Agreement under the 2002 Incentive Compensation Plan,
incorporated by reference to Exhibit 10.6(f) to HMEC’s Annual Report on Form 10-K for the year ended
December 31, 2008, filed with the SEC on March 2, 2009.
Specimen Non-employee Director Restricted Stock Unit Agreement under the 2002 Incentive Compensation
Plan, incorporated by reference to Exhibit 10.6(e) to HMEC’s Annual Report on Form 10-K for the year ended
December 31, 2005, filed with the SEC on March 16, 2006.
Revised Specimen Non-employee Director Restricted Stock Unit Agreement under the 2002 Incentive
Compensation Plan, incorporated by reference to Exhibit 10.6(h) to HMEC’s Annual Report on Form 10-K for
the year ended December 31, 2008, filed with the SEC on March 2, 2009.
HMEC 2010 Comprehensive Executive Compensation Plan As Amended and Restated, incorporated by
reference to Exhibit 1 (beginning on page E-1) to HMEC’s Proxy Statement, filed with the SEC on April 8,
2015.
Specimen Incentive Stock Option Agreement for Section 16 Officers under the HMEC 2010 Comprehensive
Executive Compensation Plan, incorporated by reference to Exhibit 10.7(a) to HMEC’s Quarterly Report on
Form 10-Q for the quarter ended June 30, 2011, filed with the SEC on August 9, 2011.
-2-
Exhibit
No.
Description
10.3(b)*
10.3(c)*
10.3(d)*
10.3(e)*
10.3(f)*
10.4*
10.5*
10.6*
10.7*
Specimen Incentive Stock Option Agreement for Non-Section 16 Officers under the HMEC 2010
Comprehensive Executive Compensation Plan, incorporated by reference to Exhibit 10.7(b) to HMEC’s
Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, filed with the SEC on August 9, 2011.
Specimen Employee Service-Vested Restricted Stock Units Agreement under
the HMEC 2010
Comprehensive Executive Compensation Plan, incorporated by reference to Exhibit 10.7(c) to HMEC’s
Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, filed with the SEC on August 9, 2011.
Specimen Employee Performance-Based Restricted Stock Units Agreement under the HMEC 2010
Comprehensive Executive Compensation Plan, incorporated by reference to Exhibit 10.7(d) to HMEC’s
Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, filed with the SEC on August 9, 2011.
Specimen Employee Performance-Based Restricted Stock Units Agreement - Key Strategic Grantee under the
HMEC 2010 Comprehensive Executive Compensation Plan incorporated by reference to Exhibit 10.3(e) to
HMEC’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016, filed with the SEC on May 6,
2016.
Specimen Non-employee Director Restricted Stock Unit Agreement under the HMEC 2010 Comprehensive
Executive Compensation Plan, incorporated by reference to Exhibit 10.17(a) to HMEC’s Current Report on
Form 8-K dated May 27, 2010, filed with the SEC on June 2, 2010.
Horace Mann Supplemental Employee Retirement Plan, 2002 Restatement, incorporated by reference to
Exhibit 10.1 to HMEC’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002, filed with the
SEC on May 15, 2002.
Horace Mann Executive Supplemental Employee Retirement Plan, 2002 Restatement, incorporated by
reference to Exhibit 10.2 to HMEC’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002,
filed with the SEC on May 15, 2002.
Amended and Restated Horace Mann Nonqualified Supplemental Money Purchase Pension Plan,
incorporated by reference to Exhibit 10.9 to HMEC’s Annual Report on Form 10-K for the year ended
December 31, 2008, filed with the SEC on March 2, 2009.
Summary of HMEC Non-employee Director Compensation, incorporated by reference to Exhibit 10.7 to
HMEC’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016, filed with the SEC on August 5,
2016.
-3-
Exhibit
No.
Description
10.8*
10.9*
10.9(a)*
10.10*
10.10(a)*
10.11*
10.11(a)*
10.11(b)*
Summary of HMEC Named Executive Officer Annualized Salaries incorporated by reference to Exhibit 10.8 to
HMEC’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016, filed with the SEC on May 6,
2016.
Form of Severance Agreement between HMEC, Horace Mann Service Corporation (“HMSC”) and certain
officers of HMEC and/or HMSC, incorporated by reference to Exhibit 10.13 to HMEC’s Annual Report on Form
10-K for the year ended December 31, 2012, filed with the SEC on February 28, 2013.
Revised Schedule to Severance Agreements between HMEC, HMSC and certain officers of HMEC and/or
HMSC, incorporated by reference to Exhibit 10.9(a) to HMEC’s Quarterly Report on Form 10-Q for the quarter
ended June 30, 2016, filed with the SEC on August 5, 2016.
HMSC Executive Change in Control Plan, incorporated by reference to Exhibit 10.15 to HMEC’s Current
Report on Form 8-K dated February 15, 2012, filed with the SEC on February 22, 2012.
HMSC Executive Change in Control Plan Schedule A Plan Participants incorporated by reference to Exhibit
10.10(a) to HMEC’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016, filed with the SEC
on May 6, 2016.
HMSC Executive Severance Plan, incorporated by reference to Exhibit 10.16 to HMEC’s Current Report on
Form 8-K dated March 7, 2012, filed with the SEC on March 13, 2012.
First Amendment to the HMSC Executive Severance Plan, incorporated by reference to Exhibit 10.16(a) to
HMEC’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, filed with the SEC on August 9,
2012.
HMSC Executive Severance Plan Schedule A Participants incorporated by reference to Exhibit 10.11(b) to
HMEC’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016, filed with the SEC on May 6,
2016.
(11)
(12)
(21)
(23)
Statement regarding computation of per share earnings.
Statement regarding computation of ratios.
Subsidiaries of HMEC.
Consent of KPMG LLP.
-4-
Exhibit
No.
Description
(31)
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.1
31.2
Certification by Marita Zuraitis, Chief Executive Officer of HMEC.
Certification by Bret A. Conklin, Senior Vice President and Acting Chief Financial Officer of HMEC.
(32)
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.1
32.2
Certification by Marita Zuraitis, Chief Executive Officer of HMEC.
Certification by Bret A. Conklin, Senior Vice President and Acting Chief Financial Officer of HMEC.
(99)
Additional exhibits
99.1
Glossary of Selected Terms.
(101)
Interactive Data File
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
101.DEF
XBRL Taxonomy Extension Definition Linkbase
101.LAB
XBRL Taxonomy Extension Label Linkbase
101.PRE
XBRL Taxonomy Extension Presentation Linkbase
-5-
(Back To Top)
Section 2: EX-11 (EXHIBIT 11)
Horace Mann Educators Corporation
Computation of Net Income per Share
For the Years Ended December 31, 2016, 2015 and 2014
(Amounts in thousands, except per share data)
Exhibit 11
Basic:
Net income
Weighted average number of common shares during the period
Net income per share - basic
Diluted:
Net income
Weighted average number of common shares during the period
Weighted average number of common equivalent shares to reflect the
dilutive effect of common stock equivalent securities:
Stock options
Common stock units related to deferred compensation for employees
Restricted common stock units related to incentive compensation
Total common and common equivalent shares adjusted to calculate diluted
earnings per share
Net income per share – diluted
2016
Year Ended December 31,
2015
2014
$
$
$
83,765
41,158
2.04
83,765
41,158
100
52
166
$
$
$
93,482
41,915
2.23
93,482
41,915
158
55
297
$
$
$
104,243
41,646
2.50
104,243
41,646
137
70
378
41,476
42,425
42,231
$
2.02
$
2.20
$
2.47
Percentage of dilution compared to basic net income per share
1.0%
1.3%
1.2%
(Back To Top)
Section 3: EX-12 (EXHIBIT 12)
Exhibit 12
Horace Mann Educators Corporation
Statement Regarding Computation of Ratios
Computation of Ratio of Earnings to Fixed Charges
For the Years Ended December 31, 2016, 2015, 2014, 2013 and 2012
(Dollars in millions)
Fixed charges:
Interest expense
Interest credited to policyholders on investment
contracts and life insurance products with account
values
Total fixed charges
Earnings:
Income before income taxes
Add: Interest expense
Subtotal – earnings before interest expense
Add: Interest credited to policyholders on investment
contracts and life insurance products with account
values
2016
Year Ended December 31,
2014
2015
2013
2012
$
11.8
$
13.1
$
14.2
$
14.2
$
14.2
192.0
182.8
176.1
169.9
163.6
$
203.8
$
195.9
$
190.3
$
184.1
$
177.8
$
114.2
11.8
126.0
$
129.5
13.1
142.6
$
146.1
14.2
160.3
$
154.1
14.2
168.3
$
149.2
14.2
163.4
192.0
182.8
176.1
169.9
163.6
Earnings before fixed charges
$
318.0
$
325.4
$
336.4
$
338.2
$
327.0
Ratio of earnings to fixed charges
1.6x
1.7x
1.8x
1.8x
1.8x
Supplemental information (A):
Ratio of earnings before interest expense to interest
expense
10.7x
10.9x
11.3x
11.9x
11.5x
(A) Fixed charges and earnings in this calculation do not include interest credited to policyholders on investment contracts and life
insurance products with account values. This adjusted coverage ratio is not required, but is provided as supplemental information
because it is commonly used by individuals who analyze the Company’s results.
(Back To Top)
Section 4: EX-21 (EXHIBIT 21)
Horace Mann Educators Corporation
Insurance Subsidiaries, Other Significant Subsidiaries and
Their Respective States of Incorporation or Organization
December 31, 2016
Exhibit 21
Insurance Subsidiaries:
Educators Life Insurance Company of America - Illinois
Horace Mann Insurance Company - Illinois
Horace Mann Life Insurance Company - Illinois
Horace Mann Lloyds - Texas
Horace Mann Property & Casualty Insurance Company - Illinois
Teachers Insurance Company - Illinois
Other Subsidiaries:
ABM Service Corporation - Delaware
Horace Mann General Agency, Inc. - Texas
Horace Mann Investors, Inc. - Maryland
Horace Mann Lloyds Management Corporation - Texas
Horace Mann MGA and Brokerage of Florida Inc. - Florida
Horace Mann Service Corporation - Illinois
(Back To Top)
Section 5: EX-23 (EXHIBIT 23)
Consent of Independent Registered Public Accounting Firm
Exhibit 23
The Board of Directors
Horace Mann Educators Corporation
We consent to the incorporation by reference in the registration statements (No. 33-47066, No. 33-45152, No. 333-16473, No. 333-
74686, No. 333-98917, No. 333-171384, and No. 333-185231) on Form S-8 and the registration statement (No. 333-202697) on Form S-3
of Horace Mann Educators Corporation and subsidiaries (the Company) of our report dated March 1, 2017, with respect to the
consolidated balance sheets of the Company as of December 31, 2016 and 2015, and the related consolidated statements of operations,
comprehensive income (loss), changes in shareholders' equity, and cash flows for each of the years in the three-year period ended
December 31, 2016, and all related financial statement schedules and the effectiveness of internal control over financial reporting as of
December 31, 2016, which report appears in the December 31, 2016 annual report on Form 10-K of the Company.
/s/ KPMG LLP
KPMG LLP
Chicago, Illinois
March 1, 2017
(Back To Top)
Section 6: EX-31.1 (EXHIBIT 31.1)
Chief Executive Officer Certification
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.1
I, Marita Zuraitis, certify that:
1. I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2016 of Horace Mann Educators Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant
and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors:
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely
to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
/s/ Marita Zuraitis
Marita Zuraitis, Chief Executive Officer
Horace Mann Educators Corporation
Date:
March 1, 2017
(Back To Top)
Section 7: EX-31.2 (EXHIBIT 31.2)
Chief Financial Officer Certification
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2
I, Bret A. Conklin, certify that:
1.
I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2016 of Horace Mann Educators Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant
and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors:
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely
to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
/s/ Bret A. Conklin
Bret A. Conklin, Senior Vice President
and Acting Chief Financial Officer
Horace Mann Educators Corporation
Date:
March 1, 2017
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Section 8: EX-32.1 (EXHIBIT 32.1)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report of Horace Mann Educators Corporation (the “Company”) on Form 10-K for the year ended December 31, 2016 as
filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Marita Zuraitis, Chief Executive Officer of the Company,
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
/s/ Marita Zuraitis
Marita Zuraitis
Chief Executive Officer
Date: March 1, 2017
A signed original of this written statement required by Section 906 has been provided to Horace
Mann Educators Corporation and will be retained by Horace Mann Educators Corporation
and furnished to the Securities and Exchange Commission or its staff upon request.
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Section 9: EX-32.2 (EXHIBIT 32.2)
CERTIFICATION PURSUANT TO
Exhibit 32.2
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Horace Mann Educators Corporation (the “Company”) on Form 10-K for the year ended December 31, 2016 as
filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Bret A. Conklin, Acting Chief Financial Officer of the
Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
/s/ Bret A. Conklin
Bret A. Conklin
Senior Vice President and Acting Chief Financial Officer
Date: March 1, 2017
A signed original of this written statement required by Section 906 has been provided to Horace
Mann Educators Corporation and will be retained by Horace Mann Educators Corporation
and furnished to the Securities and Exchange Commission or its staff upon request.
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Section 10: EX-99.1 (EXHIBIT 99.1)
Glossary of Selected Terms
Exhibit 99.1
The following measures are used by the Company’s management to evaluate performance against historical results and establish
targets on a consolidated basis. A number of these measures are components of net income or the balance sheet but, in some cases,
may be considered non-GAAP financial measures under applicable SEC rules because they are not displayed as separate line items in
the Consolidated Statement of Operations or Consolidated Balance Sheet, and in some cases, there is inclusion or exclusion of certain
items not ordinarily included or excluded in a GAAP financial measure. In the opinion of the Company’s management, a discussion of
these measures is meaningful to provide investors with an understanding of the significant factors that comprise the Company’s periodic
results of operations and financial condition.
Agent - A licensed representative of an insurer in marketing insurance products.
(cid:120) Exclusive Agency - A local Horace Mann agency created and owned by an independent contractor who has signed an Exclusive
Agent agreement with the Company (an “Exclusive Agent”). That agreement states that only the Company’s products and limited
additional third-party vendor products authorized by the Company will be marketed by the agency. An independent contractor may
sign multiple Exclusive Agent agreements with the Company and/or manage more than one Exclusive Agency territory.
(cid:120) Employee Agents - Agents who have employee status with the Company and by contract market only the Company’s products
and limited additional third-party vendor products authorized by the Company.
Independent Agents - Non-exclusive independent contractors who are under contract with the Company to market the Company’s
annuity products but who are not restricted to writing only the Company’s products and products authorized by the Company.
(cid:120)
Book value per share excluding the fair value adjustment for investments - The result of dividing total shareholders’ equity excluding
after tax net unrealized gains and losses on fixed maturities and equity securities, including the related effect on certain deferred policy
acquisition costs and value of acquired insurance in force, by ending shares outstanding. Book value per share is the most directly
comparable GAAP measure. Management believes it is useful to consider the trend in book value per share excluding unrealized net
investment gains and losses in conjunction with book value per share to identify and analyze the change in net worth. Management also
believes the non-GAAP measure is useful to investors because it eliminates the effect of items that can fluctuate significantly from period
to period and are generally driven by economic developments, primarily financial market conditions, the magnitude and timing of which are
generally not influenced by the Company’s underlying insurance operations.
- 1 -
Catastrophe costs - The sum of catastrophe losses and property and casualty catastrophe reinsurance reinstatement premiums.
Catastrophe losses - In categorizing property and casualty claims as being from a catastrophe, the Company utilizes the designations of
the Property Claim Services, a subsidiary of Insurance Services Office, Inc., and additionally beginning in 2007, includes losses from all
such events that meet the definition of covered loss in the Company’s primary catastrophe excess of loss reinsurance contract, and
reports claims and claim expense amounts net of reinsurance recoverables. A catastrophe is a severe loss resulting from natural and
man-made events within a particular territory, including risks such as hurricane, fire, earthquake, windstorm, explosion, terrorism and other
similar events, that causes $25 million or more in insured property and casualty losses for the industry and affects a significant number of
property and casualty insurers and policyholders. Each catastrophe has unique characteristics. Catastrophes are not predictable as to
timing or amount of loss in advance. Their effects are not included in earnings or claim and claim expense reserves prior to occurrence. In
the opinion of the Company’s management, a discussion of the impact of catastrophes is meaningful for investors to understand the
variability in periodic earnings.
Insurance premiums written and contract deposits - Premiums written represent (1) the amount charged for policies issued during a
fiscal period for property and casualty business, such amounts may be earned and included in financial results over future fiscal periods,
and (2) the amount charged for policies in force during a fiscal period for traditional life and group life business. Amounts are reported net
of reinsurance, unless otherwise specified. Contract deposits include amounts received from customers on deposit-type contracts, such as
investment contracts (annuities) and life products with account values, including deposit amounts and any related contract or policy fees.
Management utilizes this non-GAAP measure, which is based on statutory accounting principles, in analyzing and evaluating the business
growth of its operating segments. Insurance premiums and contract charges earned is the most directly comparable GAAP measure.
Net Reserves - Property and casualty unpaid claim and claim expense reserves net of anticipated reinsurance recoverables.
Operating income or Net income before realized investment gains and losses - Net income adjusted to exclude after tax realized
investment gains and losses. Net income is the most directly comparable GAAP measure. Management believes the measure provides
investors with a valuable measure of the Company’s ongoing performance because it reveals trends in the business that may be obscured
by the net effect of realized investment gains and losses. Realized investment gains and losses may vary significantly between periods
and are generally driven by business decisions and external economic developments that are unrelated to the insurance underwriting
process. Operating income is used by management along with other components of net income to assess their performance and adjusted
measures of operating income and operating income per diluted share are used in incentive compensation programs. Management
believes that a projection of net income including after tax 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.
- 2 -
Prior Years’ Reserve Development - A measure which the Company reports for its property and casualty segment which identifies the
increase or decrease in net incurred claim and claim expense reserves at successive valuation dates for claims which occurred in
previous calendar years. In the opinion of the Company’s management, a discussion of prior years’ loss reserve development is useful to
investors as it allows them to assess the impact on current period earnings of incurred claims experience from the current calendar year
and previous calendar years.
Property and casualty operating statistics - Operating measures utilized by the Company and the insurance industry regarding the
relative profitability of property and casualty underwriting results.
(cid:120) Loss Ratio or Loss and Loss Adjustment Expense Ratio - The ratio of (1) the sum of net incurred losses and loss adjustment
expenses to (2) net earned premiums.
(cid:120) Expense Ratio - The ratio of (1) the sum of operating expenses and the amortization of policy acquisition costs to (2) net earned
premiums.
(cid:120) Combined Ratio - The sum of the Loss Ratio and the Expense Ratio. A Combined Ratio less than 100% generally indicates
profitable underwriting prior to the consideration of investment income.
(cid:120) Combined Ratio Excluding Catastrophes and Prior Years’ Reserve Development or Underlying Combined Ratio - The sum
of the Loss Ratio and the Expense Ratio adjusted to remove the effect of catastrophe costs and prior years’ reserve development.
The Combined Ratio is the most directly comparable GAAP measure. Management believes this ratio provides a valuable measure
of the Company’s underlying underwriting performance that may be obscured by the effects of catastrophe costs and prior years’
reserve development, the amounts of which may be significant and may vary significantly between periods.
Return on equity - The ratio of (1) trailing 12 month net income to (2) the average of ending shareholders’ equity for the current quarter
end and the preceding four quarter ends.
Sales or Annualized New Sales - Sales represent the amount of new business sold during the period and exclude renewal of policies
sold in previous periods. Sales are measured by the Company as premiums and deposits to be collected over the 12 months following the
sale of a new policy for annuity, life, automobile and homeowners business, as well as increases in contributions to annuity and certain life
business, and this time period may extend into the following calendar year. In addition, the Company may disclose new policy count
(units) information for automobile and homeowners business. Sales data pertains to Horace Mann products and excludes authorized
products sold by Exclusive Agents, Employee Agents, and their licensed staff which are underwritten by third-party vendors. Sales should
not be viewed as a substitute for any financial measure determined in accordance with GAAP, including "sales" as it relates to non-
insurance companies, and the Company’s definition of sales might differ from that used by other companies. The Company utilizes sales
information as a performance measure that indicates the productivity of its agency force. Sales are also a leading indicator of future
revenue trends.
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- 3 -
Directors
Gabriel L. Shaheen*
President & Chief Executive Officer (retired)
Lincoln National Life Insurance Company
Beverley J. McClure**
Senior Vice President, Enterprise Operations (retired)
United Services Automobile Association (USAA)
Marita Zuraitis
President & Chief Executive Officer
Horace Mann Educators Corporation
Daniel A. Domenech
Executive Director
AASA, The School Superintendents Association
Stephen J. Hasenmiller
Senior Vice President (retired)
The Hartford Financial Services Group, Inc.
Ronald J. Helow**
Managing Director
New Course Advisors
H. Wade Reece
Chairman of the Board & Chief Executive
Officer (retired)
BB & T Insurance Services, Inc. and
BB & T Insurance Holdings, Inc.
Robert Stricker
Senior Vice President & Principal (retired)
Shenkman Capital Management, Inc.
Steven O. Swyers**
Managing Partner (retired)
PricewaterhouseCoopers LLP
* Chairman of the Board of Directors
** Member of the Audit Committee, each an
independent director
Officers
Marita Zuraitis
President &
Chief Executive Officer
William J. Caldwell
Executive Vice President
Property & Casualty
Matthew P. Sharpe
Executive Vice President
Life & Retirement
Bret A. Conklin
Senior Vice President & Acting
Chief Financial Officer
Donald M. Carley
Senior Vice President,
General Counsel & Corporate
Secretary
Sandra L. Figurski
Senior Vice President
Chief Information Officer
John P. McCarthy
Senior Vice President
Chief Human Resources Officer
Allan C. Robinson III
Senior Vice President
Property & Casualty Claims
Kelly J. Stacy
Senior Vice President
Field Operations & Distribution
Angela S. Christian
Vice President & Treasurer
Horace Mann 2016 Annual Report
The Company’s common stock is traded on the New York Stock Exchange under the symbol HMN.
The following table sets forth the high and low closing prices and the cash dividends paid per share
during the periods indicated.
Market Price
Fiscal Period
High
Low
Dividend Paid
$33.30
33.40
30.36
27.59
$32.42
31.84
33.97
30.38
$0.265
0.265
0.265
0.265
$0.250
0.250
0.250
0.250
Common Stock
HMN Stock is traded
on the NYSE
Transfer Agent
American Stock Transfer
& Trust Company, LLC
6201 15th Avenue
Brooklyn, NY 11219
Senior Notes
HMN senior notes are
traded in the open market
(HMN 4.50)
Additional Information
Additional financial data
on HMN and its subsidiaries
is included in Form 10-K filed
with the Securities and
Exchange Commission.
Electronic copies
of HMN’s SEC filings are
available at horacemann.com.
Printed copies of SEC filings
are available upon written
request from:
Investor Relations
Horace Mann
1 Horace Mann Plaza
Springfield, IL 62715-0001
2016
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
2015
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
$43.30
37.36
34.51
32.30
$36.42
37.74
37.04
34.29
Corporate Data
Corporate Office
1 Horace Mann Plaza
Springfield, IL 62715-0001
217-789-2500
horacemann.com
Annual Meeting
May 24, 2017
9:00 a.m.
Horace Mann Lincoln Auditorium
1 Horace Mann Plaza
Springfield, IL 62715-0001
Independent Accountants
KPMG LLP
200 East Randolph Street
Chicago, IL 60601
Horace Mann 2016 Annual Report
HA-C00379 (Mar. 17)
horacemann.com