2017
Annual Report
and 10-K
We understand and solve the issues facing educators, helping them to achieve
financial success to live better and retire happier.
At a glance
$11 BILLION
in assets under management
$1.2 BILLION
in premiums and contract deposits
in 2017
9%
37%
37%
17%
Life
Auto
Property
Retirement
$46.4 MILLION
returned to shareholders in 2017
through dividends and share repurchases
360,000
educator households served
91,180
educators reached through
Financial Wellness workshops
242,354
students reached through
DonorsChoose.org sponsorship
Financial Strength Ratings
Agency
Rating
(affirmed/reviewed)
Outlook
S&P
Moody’s
A.M. Best
Fitch
A
(2/8/18)
A3
(3/10/17)
A
(5/16/17)
A
(7/27/17)
Stable
Positive
Stable
Stable
Dear fellow shareholders,
2017 was another year of significant
change, both for the industry and at
Horace Mann. We solidified our “PDI”
foundation: the right products to meet
the insurance and financial services
needs of educators, comprehensive
distribution options to allow customers
to begin their journey with us on their
terms, and updated infrastructure to
provide a consistent, modern customer
experience.
Our core earnings per share result of $1.74
decreased from 2016, mostly due to claims costs
from elevated catastrophes in the first half of
the year. Despite the significant weather-related
losses, our strong underlying results affirm the
thoughtful approach we’ve taken to recent
industry developments like the increasing
costs of auto accidents, elevated catastrophe
levels and major regulatory disruption in the
retirement space.
As a mission-centric company, we’re inspired
every day by the commitment and dedication
of those who serve our children and our
community. They are taking care of our
children’s future, and we believe they deserve
someone to look after theirs. We understand
and solve for their unique insurance and
financial services challenges, helping them
achieve financial success.
We are focused on achieving profitable
growth so we can provide value to all our
stakeholders—not only to customers and
shareholders, but to employees, agents and
the communities we do business in as well.
Horace Mann Annual Report
1
Strong 2017 results
validate strategy
In 2017, total revenues of $1.2 billion
increased 4% over the previous year.
Core earnings of $1.74 per diluted share
reflect improvement in auto profitability,
growth in retirement assets under
management and double-digit sales
growth in life insurance.
For the second year in a row, the P&C industry
experienced record levels of catastrophe losses.
In the first half of the year, we, like the broader
industry, experienced significant storm activity
with severe wind and hail damage. Adverse
weather continued into the second half of the
year, with hurricanes Harvey and Irma impacting
Texas and Florida, and wildfires spreading
across California.
For customers, this is the “moment of truth”
with their insurance company, and we delivered
on that promise to thousands of customers
affected by these events.
Still, our strong underwriting criteria limited
hurricane and wildfire losses, and our losses
were significantly lower than our market share
would imply. Despite the heavy catastrophe
losses in the first half of the year, we ended
the year profitable in property — a rare feat in
the P&C industry for 2017 given the elevated
catastrophe levels.
We are intently focused on driving long-term
shareholder value and being a responsible
steward of shareholder equity. The Board of
Directors approved a 4% dividend increase
early last year—the ninth consecutive
annual increase. Since 2011, our book value
(excluding net unrealized investment gains) and
accumulated dividends paid to shareholders
have a compound annual growth rate of 10%.
Over the past five years, Horace Mann has
outperformed both peer group and the S&P 500
in total shareholder return, due to consistent
dividend increases, an active share buyback
program and strong business results.
Under the Tax Cuts and Jobs Act of 2017, we
received a net benefit of $99 million, due to a
re-measurement of our net deferred tax liability.
This additional balance sheet flexibility will
allow us to continue to invest in our business,
accelerate profitable growth, and create
continual value for all our stakeholders.
2
Horace Mann Annual Report
Growing
Shareholder Value(1)
10%
CAGR
increase
$1.36
$23.83
2013
$3.71
$26.86
$5.87
$29.51
2015
2017
$0.35
$19.79
2011
BVPS Accumulated Dividend
(1) Book value per share excluding net unrealized investment gains/losses. 2011 numbers have been restated to include
the retrospective application of new accounting guidance for deferred policy acquisition costs.
5-Year Total
Shareholder Return(2)
106%
S&P 500
141%
Peer Average
152%
Horace Mann
(2) Bloomberg as of 12/31/17, peer group as determined by Horace Mann management.
Horace Mann Annual Report
3
Completing the foundation
for profitable growth
In 2017, we launched the new Horace
Mann Retirement Advantage™ program,
designed to offer low-cost mutual fund
options and a transparent fee structure.
This open architecture mutual fund
platform was added to help meet the
needs of more educators and school
districts. We made additional changes
to our operations, such as level
agent compensation for all retirement
products, that address the evolving
regulatory landscape, including the U.S.
Department of Labor’s fiduciary rule.
Unlike others in the industry, we made these
changes across all retirement product types,
including non-ERISA 403(b).
We also completed the first phase of a multi-year
journey to modernize our P&C infrastructure,
integrating multiple administrative systems
into a single, comprehensive platform to
drive efficiencies and improve the customer
experience. As a result of the first phase, we
expect to see reduced claim cycle times, which
benefits both customers and the business.
We’ve undertaken similar upgrades to our
Retirement and Life systems over the past few
years. These upgrades help us “widen the pipes”
to support greater volumes of new business
more efficiently.
These improvements and upgrades would
not have been possible without the smart,
experienced executive leadership team we’ve
assembled over the past few years from industry-
leading companies. Like our customers, our
leaders appreciate our focus on helping those
who serve our community.
In addition, we have provided our agency force
with more resources to help their clients build a
holistic financial plan. As the face of the company
in communities across the country, agents are
the local experts that educators trust.
But we know that, particularly for young
customers, self-service can be a priority. To
address that preference, we continue to build
and improve our direct and online channels to
allow customers to start their relationship with us
on their terms. As their insurance and financial
needs become more complex, we are confident
they will seek the advice of our trusted advisors.
In addition to improving our online quoting
system, we made significant strides to improve
customer experience by streamlining processes
and addressing common customer concerns.
Corresponding increases in Net Promoter Score
show that we’re on the right track. Over the past
year, we have also introduced a refreshed brand
and a new website with a more contemporary
look and feel that speaks to both a customer and
institutional audience.
4
Horace Mann Annual Report
Commitment to
community partnerships
Being a responsible corporate citizen is an important part of who we are. We aim
to be a partner to the educational community, empowering educators to learn more
about financial wellness and, ultimately, achieve their financial goals. In 2017, we
reached more than 90,000 educators nationwide through our financial wellness
workshops, with topics like financial success basics, student loan debt management
and state pension systems.
Horace Mann gave monetary and volunteer support to educational and community causes in 2017.
As a national sponsor of DonorsChoose.org, we provide classrooms with materials and experiences
to enrich students’ learning environments. Locally, we are the largest contributor to the United Way
of Central Illinois. In addition, our employees raised funds for local schools and nonprofits serving
our communities through various events and sponsorships.
Horace Mann Annual Report
5
We are committed to achieving
a double-digit shareholder
return on equity.
Driving higher return
on equity
We are committed to achieving a
double-digit shareholder return on equity
(ROE), and last year identified three key
drivers to achieve that goal. We have
made significant progress on the first,
improving our underlying auto loss
ratio—a key driver of P&C profitability.
By continuing to address auto loss trends
through a combination of rate actions, disciplined
underwriting programs and prudent use of third-
party carriers, we are on the right track to achieve
our profitability target over the next few years.
The second driver is to increase retirement
fee income. Our new retirement product suite,
including an open architecture mutual fund
platform, has been well received since its
mid-year launch. We expect that business
to grow incrementally over time, providing a
consistent, dependable source of income to
balance spread-based annuity earnings.
And finally, we will continue to exercise expense
discipline as we add scale. Our strategic
infrastructure investments have provided
opportunities to reduce operating expenses as
a result of more efficient processes, which we
expect to fully realize as we grow.
If interest rates increase, or catastrophes
return closer to modeled levels, we could
see additional improvement — but we’re not
counting on that. We remain focused on the
levers to higher ROE that we can control.
6
Horace Mann Annual Report
Bringing it all together
in 2018
I’m very proud of the advancements we’ve made
as a company in our products, distribution and
infrastructure. We made a commitment four years
ago to put the educator at the center of our strategy
and everything we do. We aspired to provide a full
product suite to meet the varied needs of today’s
educators — and we’ve achieved that. Our roadmap
to modernize our infrastructure is complete and with
every implementation, we improve our customer
experience significantly. And we continue to
evolve our distribution channels to meet customer
expectations.
This is an exciting time for Horace Mann. We
have built a foundation that can efficiently deliver
profitable growth, and assembled a leadership
team that is focused on fully leveraging those
investments. As we strengthen our focus on
execution in 2018, I’m excited to see what this
talented team can accomplish.
As always, thank you for your continued
investment in Horace Mann.
Sincerely,
President and CEO
Horace Mann Annual Report
7
Directors
Gabriel L. Shaheen,
Chairman
President & Chief
Executive Officer (retired)
Lincoln National Life
Insurance Company
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
Beverley J. McClure*
Senior Vice President,
Enterprise Operations (retired)
United Services Automobile
Association (USAA)
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 and
Principal (retired)
Shenkman Capital
Management, Inc.
Steven O. Swyers*
Managing Partner (retired)
PricewaterhouseCoopers LLP
* Member of the Audit Committee, each an independent director
8
Horace Mann Annual Report
Officers
Marita Zuraitis
President &
Chief Executive Officer
Bret A. Conklin
Executive Vice President
& Chief Financial Officer
Donald M. Carley
Senior Vice President,
General Counsel
& Corporate Secretary
Sandra L. Figurski
Senior Vice President
& Chief Information Officer
William J. Caldwell
Executive Vice President,
Property & Casualty
John P. McCarthy
Senior Vice President & Chief
Human Resources Officer
Bret L. Benham
Executive Vice President,
Life & Retirement
Allan C. Robinson III
Senior Vice President,
Field Operations & Distribution
Matthew P. Sharpe
Executive Vice President,
Strategy & Business
Development
Angela S. Christian
Vice President & Treasurer
Horace Mann Annual Report
9
Our shared
goals and
principles
Our corporate goal is to create
long-term stakeholder value by driving
profitable growth.
Our vision is to be the company of
choice to provide financial solutions
for all educators – to help them protect
what they have today and prepare for a
successful tomorrow.
We can achieve this by understanding
and solving the issues facing educators,
helping them to achieve financial success
to live better and retire happier.
Our priorities are to:
• Offer a full suite of products to meet
educators’ unique needs
• Tailor distribution channels to
educator preferences and offer expert
advice through trusted advisors
• Modernize infrastructure continuously
to enhance the customer experience
Our leadership principles guide
our interactions as individuals and
as an organization, with clients and
all our stakeholders. We strive to
be compassionate, trustworthy,
straightforward, approachable,
knowledgeable and respectful.
10
Horace Mann Annual Report
Filed with the SEC March 1, 2018
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, 2017
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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an
emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company,"and "emerging growth company"
in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Emerging growth company
X
Accelerated filer
Smaller reporting company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
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, 2017, was $1,509.3 million.
As of February 15, 2018, the registrant had 40,780,247 shares of Common Stock, par value $0.001 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's Proxy Statement for the 2018 Annual Meeting of Shareholders are incorporated by reference into Part III Items 10,
11, 12, 13 and 14 of this Form 10-K as specified in those Items and will be filed with the Securities and Exchange Commission within 120 days after
December 31, 2017.
HORACE MANN EDUCATORS CORPORATION
FORM 10-K
YEAR ENDED DECEMBER 31, 2017
INDEX
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
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Consolidated Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management,
and Related Stockholder Matters
Part
I
Item
1.
1A.
1B.
2.
3.
4.
5.
6.
7.
7A.
8.
9.
9A.
9B.
10.
11.
12.
II
III
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Exhibits and Financial Statement Schedules
Form 10-K Summary
13.
14.
IV 15.
16.
Signatures
Index to Financial Information
Page
1
1
1
2
3
4
7
12
14
16
17
19
20
21
21
37
37
38
38
38
40
40
40
40
40
41
42
42
42
42
42
43
43
47
48
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 of America (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 and are reconciled to the most directly comparable measures prepared
in accordance with United States of America (U.S.) generally accepted accounting principles (GAAP) in
the Appendix to the Company's Investor Supplement.
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 of automobile
and property) insurance, retirement products (primarily tax-qualified annuities) and life insurance in the
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 multi-line 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 Exclusive Distributors 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,
2017 were $1.2 billion and net income was $169.4 million. The Company's total assets were $11.2 billion
at December 31, 2017. The Company's investment portfolio had an aggregate fair value of $8.4 billion at
December 31, 2017 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, Retirement and
Life. The Company does not allocate the impact of corporate-level transactions to the 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. Property and Casualty, Retirement, and Life accounted
for 54.0%, 36.9% and 9.1%, respectively, of the Company's insurance premiums written and contract
deposits for the year ended December 31, 2017.
The Company is one of the largest participants in the K-12 educator 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 30% of the 13,600 public school districts
in the U.S.
The Company's annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, proxy statements, and all amendments to those reports are available free of charge through the
Investors section of the Company's Internet website, www.horacemann.com, as soon as reasonably
practicable after such reports are electronically filed with, or furnished to, the Securities and Exchange
Commission (SEC). The EDGAR filings of such reports are also available at the SEC's website,
www.sec.gov.
Also available in the Investors section of the Company's website are its corporate governance
principles, code of conduct and code of ethics as well as the charters of the HMEC Board of Director's
(Board) Audit Committee, Compensation Committee, Executive Committee, Investment and Finance
Committee, and Nominating and Governance Committee. Copies also may be obtained by writing to
Investor Relations, Horace Mann Educators Corporation, 1 Horace Mann Plaza, Springfield, Illinois
62715-0001.
On August 8, 2017, the Chief Executive Officer (CEO) of HMEC 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, 2016,
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 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 property insurance in 1965. In November 1991, HMEC completed an initial public offering
of its common stock. The common stock is traded on the NYSE 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 GAAP.
The consolidated financial statements of the Company for each of the years in the five year period ended
December 31, 2017 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.
Statement of Operations Data:
Insurance premiums and contract charges earned
Net investment income
Net realized investment gains (losses)
Total revenues
Interest expense
Income before income taxes
Net income
Ratio of earnings to fixed charges (1)
Per Share Data (2):
Net income per share
Basic
Diluted
Shares of Common Stock (in millions)
Weighted average - basic
Weighted average - diluted
Ending outstanding
Cash dividends per share
Book value per share
Balance Sheet Data, at Year End:
Total investments
Total assets
Total policy liabilities
Short-term debt
Long-term debt
Total shareholders' equity
Segment Information (3):
Insurance premiums written and contract deposits
Property and Casualty
Retirement
Life
Total
Net income (loss)
Property and Casualty
Retirement
Life
Corporate and Other (4)
Total
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2017
794.7
373.6
(3.4)
1,171.5
11.9
88.7
169.4
1.4x
4.10
4.08
41.4
41.6
40.7
1.10
36.88
8,352.3
11,198.3
6,182.0
—
297.5
1,501.6
662.8
453.1
111.2
1,227.1
17.8
88.4
77.6
(14.4)
169.4
Year Ended December 31,
2014
2015
2016
($ in millions, except per share data)
2013
$
$
$
$
$
$
$
759.1
361.2
4.1
1,128.9
11.8
114.2
83.8
1.6x
2.04
2.02
41.2
41.5
40.2
1.06
32.15
7,999.3
10,576.8
6,024.1
—
247.2
1,294.0
634.3
520.2
108.0
1,262.5
25.6
50.7
16.6
(9.1)
83.8
$
$
$
$
$
$
$
731.9
332.6
12.7
1,080.4
13.1
129.5
93.5
1.7x
2.23
2.20
41.9
42.4
40.6
1.00
31.18
7,648.0
10,057.0
5,683.4
—
247.0
1,264.7
605.8
548.0
102.7
1,256.5
40.0
43.4
15.0
(4.9)
93.5
$
$
$
$
$
$
$
715.8
329.8
10.9
1,060.7
14.2
146.1
104.2
1.8x
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
690.9
313.6
22.2
1,031.2
14.2
154.1
110.9
1.8x
2.75
2.66
40.4
41.6
40.5
0.78
27.14
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
(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 costs) 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, 2017, 2016 and 2015 is contained in Notes to Consolidated Financial Statements — Note 14
— Segment Information.
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 to 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 multi-line 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, 2017, the Company had a combined total
of 694 Exclusive Distributors. Approximately 72.1% 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
its ABM.
4
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 has utilized a network of
independent agents to distribute the Company's products including 403(b) tax-qualified annuities. 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.
Effective January 1, 2018, the Company is allowing the independent agents to service their legacy books
of annuity business, but the Company has ceased expansion of those books of annuity business for new
customers. However, the Company may consider future use of this channel. During 2017, collected contract
deposits from this distribution channel were $31.7 million. Combined with business from the Company's
dedicated agency force, total annuity collected contract deposits were $453.1 million for the year ended
December 31, 2017.
Geographic Composition of Business
The Company's business is geographically diversified. For the year ended December 31, 2017, based
on direct premiums and contract deposits for all product lines, the top five states and their portion of total
direct insurance premiums and contract deposits were California, 8.0%; Texas, 7.0%; North Carolina, 6.5%;
Minnesota, 5.8%; and Florida, 5.4%.
HMEC's Property and Casualty subsidiaries are licensed to write business in 48 states and the District
of Columbia. The following table shows the Company's top ten Property and Casualty states based on total
direct premiums.
Property and Casualty Segment Top Ten States
($ in millions)
Property and Casualty Segment
Percent
of Total
2017 Direct
Premiums (1)
State
California
Texas
North Carolina
Minnesota
Florida
South Carolina
Louisiana
Georgia
Pennsylvania
Colorado
Total of top ten states
All other areas
Total direct premiums
$
$
70.6
56.1
46.9
39.7
36.2
33.3
32.0
29.6
23.1
19.7
387.2
283.3
670.5
10.5%
8.4
7.0
5.9
5.4
5.0
4.8
4.4
3.4
2.9
57.7
42.3
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
($ in millions)
2017 Direct
Premiums and
Contract Deposits (1)
Percent
of Total
State
South Carolina
Pennsylvania
North Carolina
Minnesota
Florida
Texas
Illinois
California
Indiana
Virginia
Total of top ten states
All other areas
Total direct premiums
$
$
34.0
33.8
33.4
32.1
31.2
30.4
30.4
28.0
27.7
27.0
308.0
262.0
570.0
6.0%
5.9
5.9
5.6
5.5
5.3
5.3
4.9
4.9
4.7
54.0
46.0
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 marketing agreements, 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 NEA, the nation's largest confederation of state
and local teachers' associations, and many of the state and local education associations affiliated with NEA.
NEA has approximately 3.2 million members. A number of state and local associations affiliated with NEA
endorse various insurance products and services of the Company and its competitors.
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
Property and Casualty represented 54.0% of the Company's consolidated insurance premiums written
and contract deposits in 2017.
The primary Property and Casualty product offered by the Company is private passenger automobile
insurance, which in 2017 represented 36.7% of the Company's total insurance premiums written and contract
deposits and 68.0% of Property and Casualty net written premiums. As of December 31, 2017, the Company
had approximately 479,000 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 2017, property insurance represented 17.3% of the Company's total insurance premiums written
and contract deposits and 32.0% of Property and Casualty net written premiums. As of December 31, 2017,
the Company had approximately 216,000 property policies in force. The Company insures primarily
residential homes.
The Company has programs in a majority of states to provide higher-risk automobile and property
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 automobiles 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
($ in millions)
Financial Data:
Insurance premiums written
Insurance premiums earned
Net investment income
Income before income taxes
Net income
Catastrophe costs, pretax*
Operating Statistics:
Loss and loss adjustment expense ratio
Expense ratio
Combined loss and expense ratio
Effect of catastrophe costs on the combined ratio*
Automobile and Property:
Insurance premiums written
Automobile
Property
Insurance premiums earned
Automobile
Property
Policies in force (in thousands)
Automobile
Property
Total
$
$
Year Ended December 31,
2016
2015
2017
$
$
662.8
648.3
36.2
14.5
17.8
61.8
76.6%
26.7%
103.3%
9.5%
450.7
211.7
438.0
210.0
479
216
695
$
$
634.3
620.5
39.0
30.3
25.6
60.0
74.8%
26.7%
101.5%
9.7%
425.9
208.2
414.3
206.0
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
8
Catastrophe Costs (Pretax)
The level of catastrophe costs can fluctuate significantly from year to year. Catastrophe costs before
income tax benefits for the Company for the last ten years are shown in the following table.
Catastrophe Costs
($ in millions)
Year Ended December 31,
The
Company (1)
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
$
61.8
60.0
44.4
37.5
40.2
43.3
86.0
49.2
33.1
73.9
(1) Net of reinsurance and before 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:
2017 - Hail, tornadoes, wind events in February and March were $11.0 million; wind, hail, tornado event in May in
Colorado primarily was $8.8 million; wind and hail event in June in Minnesota primarily was $8.0 million;
wind, hail, tornado event in June in the Midwest was $3.8 million; Hurricane Harvey was $5.0 million; Hurricane
Irma was $2.5 million; California wildfires in October and December were $1.3 million; other weather events
throughout the year were each less than $3.0 million.
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; $3.0 million, December winter storm.
9
Fluctuations from year to year in the level of catastrophe losses impact a property and casualty
insurance company's claims and claim adjustment expenses incurred and paid. For comparison purposes,
the following table provides amounts for the Company excluding catastrophe losses.
Impact of Catastrophe Losses
($ 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,
2016
2015
2017
$
$
$
$
496.3
61.8
434.5
481.1
65.6
415.5
$
$
$
$
464.1
60.0
404.1
468.8
62.0
406.8
$
$
$
$
420.3
44.4
375.9
436.4
44.6
391.8
Includes the impact of development of prior years' reserves as quantified in Property and Casualty Reserves.
(1)
(2) Net of reinsurance and before 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 reporting 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, 2017, 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, 2017 — 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 property insurance policies for environmentally related items such as
mold.
Property and Casualty Reinsurance
All reinsurance is obtained through contracts which generally are entered into for each calendar year.
Although reinsurance does not legally discharge the Company from primary liability for the full amount
of its policies, it does allow for recovery from assuming reinsurers to the extent of the reinsurance ceded.
Past due reinsurance recoverables as of December 31, 2017 were not material.
10
The Company maintains catastrophe excess of loss reinsurance coverage. For 2017, 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 $90.0 million per
occurrence and 100% coverage for catastrophe losses above $90.0 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. The Company's 2018 catastrophe excess of loss coverage is
unchanged from 2017.
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 property policyholders.
For liability coverages, in 2017 the Company reinsured each loss above a retention of $1.0 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.) The Company's 2018 liability coverages
are unchanged from 2017.
For property coverages, in 2017 the Company reinsured each loss above a retention of $1.0 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 $8.0 million of property recovery in
any one event. The Company's 2018 property coverages are unchanged from 2017.
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 Financial Services LLC (S&P) as of January
1, 2018. No other single reinsurer's percentage participation in 2018 or 2017 exceeds 5%.
Property Catastrophe First Event Excess of Loss
Reinsurance Participants In Excess of 5%
Reinsurer
Parent
Lloyd's of London Syndicates
R+V Versicherung AG
Swiss Re Underwriters Agency, Inc Swiss Re Ltd
SCOR Global P&C SE
SCOR SE
DZ BANK AG
Participation
2018
2017
31%
8%
7%
7%
33%
8%
10%
7%
A.M. Best
Rating
S&P
Rating
A
NR
A+
A+
A+
AA-
AA-
AA-
NR - Not rated.
For 2018 and 2017, property catastrophe reinsurers representing 100% and 92%, 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.
11
Retirement Segment
Educators in the Company's target market continue to benefit from the provisions of Section 403(b)
of the Internal Revenue Code (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 educator 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 30% of the 13,600 public school districts in the U.S.
Approximately 55.8% of the Company's new annuity contract deposits in 2017 were for 403(b) tax-qualified
annuities; approximately 62.1% of accumulated annuity value on deposit is 403(b) tax-qualified. In 2017,
annuities represented 36.9% 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. The Company also offers fixed indexed annuity (FIA) products with interest crediting
strategies linked to the S&P's 500 Index and the Dow Jones Industrial Average (DJIA). These products are
fixed annuities with a guaranteed minimum interest rate, as described above, plus a contingent return based
on equity market performance. The Company purchases call options on the applicable indices as an
investment to provide the income needed to fund the annual index credits on the indexed products.
Variable annuities combine a fixed account option with equity- and bond-linked sub-account options.
In general, the contractholders bear the investment risk related to the variable annuity sub-accounts and
may change their allocation between the guaranteed interest rate fixed account and the wide range of variable
investment options at any time. By utilizing tools that provide assistance in determining needs and making
asset allocation decisions, contractholders are able to choose the investment mix that matches their personal
risk tolerance and retirement goals. The Company's sub-account options also include both lifecycle funds
and asset allocation funds. These all-purpose funds have assets allocated among multiple investment classes
within each fund based on a specific targeted retirement date or risk tolerance.
Variable annuity contracts with a guaranteed minimum death benefit (GMDB) provide an additional
benefit if the contractholder dies and the contract value is less than a contractually defined amount. The
Company has a relatively low exposure to GMDB risk as 29.4% of contract values have no guarantee;
64.7% have only a return of premium guarantee; and only 5.9% have a guarantee of premium roll-up at an
annual rate of 3.5% or 5.0%.
As of December 31, 2017, the Company had 105 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, 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, 2017 was $6.8 billion.
12
In 2017, the Company introduced the Personal Retirement Planner (PRP) annuity series, replacing
its previous individual annuity lineup. The PRP series includes a flexible premium deferred variable annuity,
a flexible premium deferred fixed indexed annuity, a single premium deferred fixed annuity and a single
premium immediate annuity. Consistent across all of these products is the elimination of any surrender
charges for early withdrawal. This is supported by a revision in the compensation structure for the Company's
Exclusive Distributors which pays them a consistent level percentage of account value each year in lieu of
paying commissions up front on each deposit. The two fixed deferred annuity products each contain a
market value adjustment clause to help mitigate disintermediation risk. The variable annuity offers a wide
array of variable sub-accounts that are devoid of any revenue sharing or 12b-1 fees to provide greater fee
transparency. The single premium deferred fixed annuity allows the customer to lock in a fixed interest
rate for a single lump sum payment for a period of 5, 7 or 10 years. FIA provides an opportunity for
potentially greater credited interest over the long term than traditional fixed rate annuities by linking the
credited interest rates to changes in a market index.
In addition to variable annuities, the Company has launched the Horace Mann Retirement Advantage®
open architecture platform for 403(b)(7) and other defined contribution plans. This platform combines a
wide array of mutual funds integrated with a group unallocated fixed annuity stable value fund. This platform
provides the Company with greater flexibility to offer customized 403(b)(7) and other qualified plan
solutions to better meet the needs of school districts and other nonprofit plan sponsors.
To further assist registered representatives 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 respective 529 college savings programs, and a brokerage
clearing arrangement with Raymond James Financial, Inc. The Company also markets 403(b)(7) tax
deferred mutual fund investment programs and a minimal amount of FIA products through third-party
vendor agreements. Third-party vendors underwrite these accounts or contracts and the Company receives
fees on the sales of these products. In addition, the Company's Investment Advisor Representatives offer
investment management portfolios managed by unaffiliated registered investment advisors.
13
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
($ in millions, unless otherwise indicated)
Financial Data:
Contract deposits
Variable
Fixed
Total
Contract charges earned
Net investment income
Net interest margin (without net realized investment gains and losses)
Income before income taxes
Net income
Operating Statistics:
Fixed
Accumulated value
Accumulated value persistency
Variable
Accumulated value
Accumulated value persistency
Number of contracts in force
Average accumulated value (in dollars)
Average annual deposit by contractholders (in dollars)
Annuity contracts terminated due to surrender, death, maturity or other
Number of contracts
Amount
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
not subject to discretionary withdrawal
Total
Life Segment
Year Ended December 31,
2016
2015
2017
$
$
$
$
$
$
$
$
$
173.9
279.2
453.1
28.0
262.0
108.5
69.0
88.4
4,612.0
92.6%
2,152.0
89.5%
223,287
30,293
2,420
8,037
564.3
2,859.8
173.3
1,436.0
21.6
121.3
4,612.0
$
$
$
$
$
$
$
$
$
163.6
356.6
520.2
24.9
249.4
102.1
71.0
50.7
4,503.1
94.6%
1,923.9
94.7%
219,105
29,333
2,412
7,482
373.2
2,650.4
172.9
1,525.7
33.1
121.0
4,503.1
$
$
$
$
$
$
$
$
$
174.9
373.1
548.0
25.4
228.4
89.7
63.3
43.4
4,197.0
94.8%
1,800.7
94.3%
211,071
28,415
2,381
7,089
343.5
2,318.9
171.2
1,542.3
44.9
119.7
4,197.0
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.
14
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.
The Company offers an indexed universal life (IUL) product with interest crediting strategies linked
to the S&P's 500 Index and the DJIA 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
145,000 policies, representing approximately $14.0 billion of life insurance in force, with annual insurance
premiums and contract deposits of approximately $51.3 million as of December 31, 2017. In addition, the
Company also had in force approximately 53,000 Experience Life and IUL policies, representing
approximately $3.6 billion of life insurance in force, with annual insurance premiums and contract deposits
of approximately $44.2 million.
In 2017, Life represented 9.1% of the Company's consolidated insurance premiums written and
contract deposits.
During 2017, the average face amount of ordinary life insurance policies issued by the Company
was approximately $183,000 and the average face amount of all ordinary life insurance policies in force
at December 31, 2017 was approximately $103,000.
The maximum individual life insurance risk retained by the Company is $300,000 on any individual
life, while either $100,000 or $125,000 is retained on each group life policy depending on the type of
coverage. The excess of the amounts retained are reinsured with life reinsurers that are rated A (Excellent)
or above by A.M. Best. The Company also maintains a life catastrophe reinsurance program. In 2017, the
Company reinsured 100% of the catastrophe risk in excess of $1.0 million up to $35.0 million per occurrence,
with one reinstatement. For 2018, the Company's catastrophe risk coverage is unchanged. The Company's
life catastrophe risk reinsurance program covers acts of terrorism and includes nuclear, biological and
chemical explosions but excludes other acts of war.
15
Selected Historical Financial Information for the Life Segment
The following table provides certain information for the Life segment for the periods indicated.
Life Segment
Selected Historical Financial Information
($ 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
Operating Statistics:
Life insurance in force
Ordinary life
Group life
Total
Number of policies in force
Ordinary life
Group life
Total
Average face amount in force (in dollars)
Ordinary life
Group life
Total
Lapse ratio (ordinary life insurance in force)
Ordinary life insurance terminated due to death,
surrender, lapse or other
Face amount of insurance surrendered or lapsed
Number of policies
Amount of death claims opened
Number of death claims opened
Competition
Year Ended December 31,
2016
2015
2017
111.2
118.4
76.2
25.7
77.6
16,748
816
17,564
162,025
35,864
197,889
103,369
22,753
88,758
4.9%
864.0
6,373
58.4
1,618
$
$
$
$
$
$
108.0
113.7
73.6
26.3
16.6
16,261
764
17,025
163,056
34,881
197,937
99,726
21,903
86,012
4.3%
674.7
4,951
55.9
1,512
$
$
$
$
$
$
102.7
110.5
71.6
22.9
15.0
15,589
916
16,505
162,670
39,119
201,789
95,832
23,416
81,793
4.1%
643.5
5,014
58.6
1,645
$
$
$
$
$
$
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 Property and Casualty's insurance products are overall
service, worksite sales and service, price, and name recognition. Management believes that the principal
competitive factors in the sale of Retirement's products and Life'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, property 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.
16
Among the major national providers of annuities to educators, the Company's competitors for annuity
business include The Variable Annuity Life Insurance Company, a subsidiary of American International
Group; AXA; Voya Financial, Inc.; Life Insurance Company of the Southwest, a subsidiary of National
Life Insurance Company; Security Benefit; and Teachers Insurance and Annuity Association – College
Retirement Equities Fund. Select mutual fund families and financial planners also compete in this
marketplace.
The market for tax-deferred retirement products in the Company's target market has been impacted
by the revised Internal Revenue Service (IRS) Section 403(b) regulations, which made the 403(b) market
more comparable to the 401(k) market than it was in the past. While this change has and may continue to
reduce the number of competitors in this market, it has made the 403(b) market more attractive to some of
the larger companies experienced in 401(k) plans, including both insurance and mutual fund companies,
that had not previously been active competitors in this business.
Investments
The Company's investments are selected to balance the objectives of protecting principal, minimizing
exposure to interest rate risk and providing a high current yield. These objectives are implemented through
a portfolio that emphasizes investment grade, publicly traded fixed maturity securities, which are selected
to match the anticipated duration of the Company's liabilities. When impairment of the value of an
investment is considered other-than-temporary, the decrease in value is recorded and a new cost basis is
established. At December 31, 2017, fixed maturity securities represented 92.5% of the Company's total
investment portfolio, at fair value. Of the fixed maturity securities portfolio, 96.5% was investment grade
and 95.0% was publicly traded. At December 31, 2017, 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,
2017, investments in non-investment grade fixed maturity securities represented 3.2% of the total
investment portfolio, at fair value.
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 Property and Casualty.
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.
17
The following table presents the carrying values and amortized cost or cost of the Company's
investment portfolio.
Investment Portfolio
December 31, 2017
($ in millions)
Percentage
of Total
Carrying
Value
Carrying Value
Total
Life and
Retirement
Property
and
Casualty
Amortized
Cost or
Cost
Publicly Traded Fixed Maturity Securities, Equity Securities
and Short-term Investments:
U.S. Government and agency obligations,
all investment grade (1):
Mortgage-backed securities
Other, including U.S. Treasury securities
Investment grade corporate and public utility bonds
Non-investment grade corporate and public utility bonds (2)
Investment grade municipal bonds
Non-investment grade municipal bonds (2)
Investment grade other mortgage-backed securities (3)
Non-investment grade other mortgage-backed securities (2)(3)
Foreign government bonds
Redeemable preferred stock, all investment grade
Equity securities:
Non-redeemable preferred stocks, all investment grade
Common stocks
Closed-end fund
Short-term investments (4)
8.3% $
696.7
$
686.5
$
10.2
$
8.8
26.0
1.6
21.8
0.3
18.8
0.8
1.2
0.3
0.7
0.6
0.2
0.7
735.4
2,171.6
129.6
1,819.9
24.1
1,569.8
65.5
102.7
20.4
61.5
53.4
20.6
62.5
727.8
2,020.2
71.6
1,336.0
—
1,466.4
55.5
101.3
20.4
60.3
—
20.6
36.4
7.6
151.4
58.0
483.9
24.1
103.4
10.0
1.4
—
1.2
53.4
—
26.1
669.3
714.6
2,017.6
126.4
1,643.1
23.1
1,560.6
59.3
96.7
17.6
58.6
37.7
20.0
62.6
Total publicly traded securities
90.1
7,533.7
6,603.0
930.7
7,107.2
Other Invested Assets:
Investment grade private placements
Non-investment grade private placements (2)
Mortgage loans (5)
Policy loans (5)
Other
Total other invested assets
Total investments (6)
4.2
0.5
0.1
1.8
3.3
9.9
349.4
39.0
1.3
153.6
275.3
818.6
349.4
39.0
1.3
153.6
202.4
745.7
—
—
—
—
72.9
72.9
335.8
38.9
1.3
153.6
275.3
804.9
100.0% $ 8,352.3
$
7,348.7
$
1,003.6
$
7,912.1
(1)
Includes $670.2 million fair value of investments guaranteed by the full faith and credit of the U.S. Government and $761.9 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 S&P rating for such security, or if there is no S&P rating, the Moody's Investors Service, Inc. (Moody's) or Fitch Ratings, Inc. (Fitch)
rating for such security, or if there is no S&P, Moody's or Fitch 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 loan 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, 2017 — Net Realized Investment Gains and Losses.
Short-term investments mature within one year of being acquired and are carried at cost, which approximates fair value. Short-term investments
included $0.1 million in money market funds and is not rated.
(4)
(3)
(5) Mortgage and policy loans are carried at amortized cost or unpaid principal balance.
(6) Approximately 6.4% of the Company's investment portfolio, having a carrying value of $536.2 million as of December 31, 2017, consisted of
securities with some form of credit support, such as insurance. Of the securities with credit support as of December 31, 2017, municipal bonds
represented $359.2 million carrying value.
18
Fixed Maturity and Equity Securities
At December 31, 2017, 29.9% 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 13.3% of the total investment portfolio at December 31, 2017. 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 portfolio of fixed maturity
and equity securities 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.
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 2018 from all of HMEC's insurance subsidiaries without prior regulatory
approval is $94.0 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.
19
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, 2017 and 2016, 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, 2017, the impacts 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 antitrust exemption, and minimum solvency requirements.
See also Item 1A. Risk Factors. Other federal regulation such as the Patient Protection and Affordable Care
Act, Fair Credit Reporting Act, Gramm-Leach-Bliley Act and USA PATRIOT Act, including its anti-money
laundering regulations, also impact the Company's business.
The variable annuities underwritten by HMLIC are regulated by the SEC. Horace Mann Investors,
Inc., the broker-dealer and Registered Investment Adviser subsidiary of HMEC, also is regulated by the
SEC, FINRA, the Municipal Securities Rule-making Board (MSRB) and various state securities regulators.
20
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.
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, 2017, the Company had approximately 1,470 non-agent employees and 26 full-
time Employee Agents. (This does not include exclusive agents that were part of the Company's total
dedicated agency force at December 31, 2017.) The Company has no collective bargaining agreement with
any employees.
ITEM 1A. Risk Factors
The following are certain risk factors that could affect the Company's business, financial results and
results of operations. In addition, refer to the risk factors disclosed in Management's Discussion and Analysis
of Financial Condition and Results of Operations — Forward-looking Information 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.
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.
Risks Related to Economic Conditions, Market Conditions and Investments
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
21
institutions which face significant financial market risk in their operations, the Company was adversely
affected by these conditions and could be adversely impacted by similar circumstances in the future. The
Company's ability to access the capital markets to refinance outstanding indebtedness or raise capital could
be impaired during significant financial market disruptions.
As discussed further in subsequent risk factors, in addition to the effects of financial markets volatility,
a prolonged economic recession may have other adverse impacts on our financial condition and results of
operations.
If our investment strategy is not successful, we could suffer unexpected losses.
The success of our investment strategy is crucial to the success of our business. Specifically, our
fixed maturity securities 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.
22
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,
although consistent with the Company's overall conservative investment guidelines, could result in some
volatility in our financial condition and results of operations.
From time to time, the Company could enter into foreign currency, interest rate, credit derivative
and other hedging transactions in an effort to manage risks, including risks that may be attributable to any
new products offered by the Company. For instance, the Company utilizes call options to manage interest
crediting risk related to its FIA and IUL 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 that may require
us to draw on surplus, which could adversely affect our financial condition and results of operations.
Although the Company's defined benefit pension plan is frozen, declining financial markets could
also cause, and in the past have caused, the value of the investments in this pension plan to decrease,
resulting in additional pension expense, a reduction in other comprehensive income and an increase in
required contributions to the defined benefit pension plan, which could have an adverse effect on our
financial condition and results of operations.
The determination of the fair value of our fixed maturity and equity securities includes methodologies,
estimations and assumptions that are subject to differing interpretations and could result in changes to
investment valuations that may materially impact our financial condition and results of operations.
The determination of fair values is made at a specific point in time, based on available market
information and judgments about financial instruments, including estimates of the timing and amounts of
expected future cash flows and the credit standing of the issuer or counterparty. The use of different
methodologies and assumptions may have a material effect on the estimated fair value amounts. During
periods of market disruption, including periods of rapidly widening credit spreads or illiquidity, it may be
difficult to value certain of our securities if trading becomes less frequent and/or market data becomes less
observable. There may be certain asset classes that were in active markets with significant observable data
that become illiquid due to the financial environment. In such cases, fair value determination may require
more subjectivity and management judgment and those fair values may differ materially from the value at
which the investments ultimately could be sold. Further, rapidly changing and unprecedented credit and
equity market conditions could materially impact the valuation of securities and the period-to-period
changes in value could vary significantly. The difference between fair value and amortized cost or cost,
net of applicable deferred income tax asset or liability and the related impact on deferred policy acquisition
costs associated with investment (annuity) contracts and life insurance products with account values, and
interest-sensitive life contracts, is reflected as a component of accumulated other comprehensive income
within shareholders' equity. Decreases in the fair value of our investments could have a material adverse
effect on our financial condition and results of operations.
23
Equity method adjustments on certain limited partnership 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. This means that our proportionate share of the changes in fair value of the underlying
net asset values are reported in net investment income in the Consolidated Statement of Operations. As a
result, the amount of net investment income that we record from these investments can vary substantially
from period to period. Recent equity and credit market volatility may reduce net investment income from
these types of investments and negatively impact our results of operations.
An impairment of all or part of our goodwill could adversely affect our results of operations.
At December 31, 2017, 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 HMPCIC was acquired
in 1994, in both instances reflecting the excess of cost over the fair market value of net assets acquired. In
2017, 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 operating 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.
Risks Related to Life and Retirement Segments
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
24
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.
Our Life and Retirement 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. Variable annuity reserves are also
calculated under a variety of interest rate and market rate scenarios. A continuation of the current low
interest rate environment could cause the Company to increase statutory reserves as a result of cash flow
testing or minimum requirements for variable annuities, 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).
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.
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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 FIA and IUL products, are
recognized on 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 FIA and IUL products are carried
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 FIA 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 IUL 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 FIA and IUL business may cause volatility in our results of operations.
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 reserves and deferred policy acquisition expenses 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.
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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
results of operations.
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.
Risks Related to Property and Casualty
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 previous 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.
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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 property 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 2017 direct premiums earned, 57.7% 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.
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.
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 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.
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Due to the inherent uncertainty in estimating reserves for losses and loss adjustment expenses, we
cannot be certain that the ultimate liability will not exceed amounts reserved, with a resulting adverse effect
on our financial condition and results of operations.
Changing climate conditions may adversely affect our financial condition, results of operations or cash
flows.
Many scientists indicate that the world's overall climate is getting warmer. Climate change, to the
extent it produces rising temperatures and changes in weather patterns, could impact the frequency and/or
severity of weather events and wildfires, the affordability and availability of our catastrophe reinsurance
coverage, and our results of operations. If an increase in weather events and/or wildfires were to occur, in
addition to the attendant increase in claim costs, which could adversely impact our results of operations
and financial condition, concentrations of insurance risk could impact our ability to make property insurance
available to our customers. This could adversely impact our volume of business and our results of operations
or cash flows.
Strategic Risks and Operational Risks
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 property 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 overall service, worksite sales and service, price and name recognition. 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 have experienced
pricing and profitability cycles. During these periods of intense competition, they may be unable to increase
policyholders and revenues without adversely impacting profit margins. 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. 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
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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 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 Company.
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, EAs and
nearly all of these agencies operate under the ABM — 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 on the productivity of the agency and the success at penetrating,
serving and cross-selling the Company's educator market.
Our success in marketing and selling our products is largely dependent upon the efforts of our agent
sales force and the success of their agency operations. As we expand our business, we may need to expand
the number of agencies marketing our products. If we are unable to appoint additional agents, fail to retain
high-producing agents, are unable to maintain the productivity of those agency operations or are unable to
maintain market penetration in existing territories, sales of our products likely would decline and our
financial condition and results of operations could be adversely affected.
If we are not able to maintain and secure (1) access to educators and (2) endorsements and other
relationships with the educational community, our financial condition and results of operations could
be adversely affected.
Our ability to successfully increase new business in the educator market is largely dependent on our
ability to effectively access educators either in their school buildings or through other approaches. While
this is especially true for the sale of 403(b) tax-qualified annuity products via payroll deduction, any
significant decrease in access, either through fewer payroll slots, increased security measures, impacts of
state or federal level pension reform initiatives, requirements of national and state Do Not Call registries,
or for other reasons could adversely affect the sale of all lines of our business and require us to change our
traditional approach to worksite marketing and promotion, as well as contact with potential customers.
With the current IRS regulations regarding Section 403(b) arrangements, including annuities, our ability
to maintain and increase our share of the 403(b) market, and the access it gives us for other product lines,
will depend on our ability to successfully compete in this market. Some school districts and benefit
consultants have placed an emphasis on the relative financial strength ratings of competing companies, as
well as low cost product and distribution approaches, which may put us at a competitive disadvantage
relative to other more highly-rated insurance companies.
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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.
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.
Individual states may impose additional cybersecurity regulations, increasing the complexity of
compliance.
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.
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. Additionally, the Company recognizes the increased external threats
of data breaches in the marketplace resulting in non-public data of customers becoming increasingly
available in the public domain. 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 and the evaluation of our customer
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identification authentication programs. We have also implemented multiple technical security protections
and contractual obligations regarding security breaches for our agents and third-party vendors. Even with
these efforts, there can be no assurance that security breaches or service disruptions will be prevented.
Successful execution of our business growth strategy is dependent on effective implementation of new
or enhanced technology systems and applications.
Our ability to effectively execute our business growth strategy and leverage potential economies of
scale is dependent on our ability to provide the requisite technology components for that strategy. While
we have effectively upgraded our infrastructure technologies with improvements in our data center, a new
communications platform and enhancements to our disaster recovery capabilities, our ability to replace or
supplement dated, monolithic legacy business systems — such as our Life, Retirement 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 U.S. 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, Retirement 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.
Financial Strength, Credit and Counterparty Risks
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.
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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.
Uncollectible reinsurance, as well as reinsurance availability and pricing, can have a material adverse
effect upon our business volume and profitability.
Reinsurance is a contract by which one insurer, called a reinsurer, agrees to cover a portion of the
losses incurred by a second insurer in the event a claim is made under a policy issued by the second insurer.
Our insurance subsidiaries obtain reinsurance to help manage their exposure to property, casualty and life
insurance risks. Although a reinsurer is liable to our insurance subsidiaries according to the terms of its
reinsurance policy, the insurance subsidiaries remain primarily liable as the direct insurers on all risks
reinsured. As a result, reinsurance does not eliminate the obligation of our insurance subsidiaries to pay all
claims, and each insurance subsidiary is subject to the risk that one or more of its reinsurers will be unable
or unwilling to honor its obligations.
Although we limit participation in our reinsurance programs to reinsurers with high financial strength
ratings and also limit the amount of coverage from each reinsurer, our insurance subsidiaries cannot
guarantee that their reinsurers will pay in a timely fashion, if at all. Reinsurers may become financially
unsound by the time that they are called upon to pay amounts due, which may not occur for many years.
Additionally, the availability and cost of reinsurance are subject to prevailing market conditions
beyond our control. For example, significant losses from hurricanes or terrorist attacks, an increase in
capital requirements, or a future lapse of the provisions of the Terrorism Risk Insurance Act could have a
significant adverse impact on the reinsurance market.
If one of our insurance subsidiaries is unable to obtain adequate reinsurance at reasonable rates, that
insurance subsidiary would have to increase its risk exposure and/or reduce the level of its underwriting
commitments, which could have a material adverse effect upon the business volume and profitability of
the subsidiary. Alternately, the insurance subsidiary could elect to pay the higher than reasonable rates for
reinsurance coverage, which could have a material adverse effect upon its profitability until policy premium
rates could be raised, in some cases subject to approval by state regulators, to incorporate this additional
cost.
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.
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A downgrade of the Company's 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.
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 FHLB, 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.
Regulatory and Legal Risks
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.
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Regulation that could adversely affect our insurance subsidiaries also includes statutory surplus and
risk-based capital requirements. Maintaining appropriate levels of surplus, as measured by statutory
accounting principles, is considered important by state insurance regulatory authorities and the private
agencies that rate insurers' claims-paying abilities and financial strength. The failure of an insurance
subsidiary to maintain levels of statutory surplus that are sufficient for the amount of its insurance written
could result in increased regulatory scrutiny, action by state regulatory authorities or a downgrade by rating
agencies.
Similarly, the NAIC has adopted a system of assessing minimum capital adequacy that is applicable
to our insurance subsidiaries. This system, known as risk-based capital, is used to identify companies that
may merit further regulatory action by analyzing the adequacy of the insurer's surplus in relation to statutory
requirements.
Because state legislatures remain concerned about the availability and affordability of property and
casualty insurance and the protection of policyholders, our insurance subsidiaries expect that they will
continue to face efforts by those legislatures to expand regulations to address these concerns. Resulting
new legislation could adversely affect the financial condition and results of operations of our insurance
subsidiaries.
In the event of the insolvency, liquidation or other reorganization of any of our insurance subsidiaries,
our creditors and stockholders would have no right to proceed against any such insurance subsidiary or to
cause the liquidation or bankruptcy of any such insurance subsidiary under federal or state bankruptcy
laws. The insurance laws of the domiciliary state would govern such proceedings and the relevant insurance
commissioner would act as liquidator or rehabilitator for the insurance subsidiary. Creditors and
policyholders of any such insurance subsidiary would be entitled to payment in full from the assets of the
insurance subsidiary before we, as a stockholder, would be entitled to receive any distribution.
The financial position of our insurance subsidiaries also may be affected by court decisions that
expand insurance coverage beyond the intention of the insurer at the time it originally issued an insurance
policy.
Dodd-Frank created the 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.
Regulatory initiatives, including the enactment 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.
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The Department of Labor (DOL) fiduciary rule and the possible adoption by the 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 Code Section 4975. Section 4975
prohibits certain kinds of compensation with respect to transactions involving assets in certain accounts,
including IRAs.
The DOL rule was originally to be effective on April 10, 2017, but under a delay measure, the
fiduciary definition went into effect on June 9, 2017, with certain conditions for prohibited transaction
exemption relief delayed until July 1, 2019. The DOL is continuing its examination of the rule as directed
by President Trump.
In its current form, 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.
Further, the SEC has announced its intention to formulate a standard of conduct for broker-dealers
and investment advisers. This regulatory activity by the SEC also has the potential to adversely impact
our business, financial condition and results of operations.
The NAIC has proposed amendments to its Suitability in Annuity Transactions model regulation,
including incorporation of a requirement that a recommendation be in the consumer's best interest. In
addition, Nevada passed a fiduciary statute, New York has proposed amendments to its suitability regulation,
and other states are considering passing their own "fiduciary rules".
36
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.
Changes in regulations related to tax reform may impact our tax obligations and the rates needed to
achieve our target rate of returns.
On December 22, 2017, the Tax Cuts and Jobs Act (the Tax Act) was enacted and significantly
affected U.S. tax law by changing how the U.S. imposes income tax on insurance corporations. The U.S.
Department of Treasury has broad authority to issue regulations and interpretative guidance that may
significantly impact how we will apply the law and such guidance could impact our results of operations
in the period(s) issued. As a result, we have provided provisional estimates of the effect of the Tax Act in
our financial statements as it relates to limited partnership investments and property and casualty loss
reserves. As additional regulatory guidance is issued by the applicable authorities, as accounting treatment
is clarified, as we perform additional analysis on the application of the law, and as we refine estimates in
calculating the effect, our final analysis, which will be recorded in the period completed, may be different
from our current provisional amounts, which could materially affect our tax obligations.
California's Insurance Commissioner has directed staff to review property and casualty insurers'
rates to see whether, under the new 21% federal corporate tax rate, expected profits exceed the limits
embedded in California's prior approval process. Various consumer advocacy groups have also called for
premium reductions in light of tax reform. Any resulting changes in individual state regulations may slow
down the Company's rate filing process or impede efforts to achieve profitability targets. In addition, the
NAIC may choose to revise the RBC formula in response to the Tax Act which may change the amount of
capital the insurance subsidiaries of the Company are required to hold.
ITEM 1B. Unresolved Staff Comments
None.
ITEM 2.
Properties
The 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 Chicago, Illinois, 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.
37
ITEM 3.
Legal Proceedings
At the time of this Annual Report on Form 10-K, the Company does not have pending litigation
from which there is a reasonable possibility of material loss.
ITEM 4.
Mine Safety Disclosures
Not applicable.
PART II
ITEM 5.
Purchases of Equity Securities
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer
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
2017:
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
2016:
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Market Price
High
Low
Dividend
Paid
$
$
$
$
47.15
39.60
40.45
43.50
43.30
37.36
34.51
32.30
$
$
39.60
34.00
36.95
39.50
33.30
33.40
30.36
27.59
0.275
0.275
0.275
0.275
0.265
0.265
0.265
0.265
The payment of dividends in the future is subject to the discretion of the Board and will depend upon
general business conditions, legal restrictions and other factors the Board 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.
38
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, 2012 in HMEC, the S&P 500 Insurance Index and the S&P 500 Index.
HMEC
S&P 500 Insurance Index
S&P 500 Index
Dec 2012
Dec 2013
Dec 2014
Dec 2015
Dec 2016
Dec 2017
$
$
100
100
100
$
162
146
132
$
175
158
150
$
180
162
152
$
238
190
170
252
220
206
(1)
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.
HMEC assumes reinvestment of quarterly dividends when paid.
Holders and Shares Issued
As of February 15, 2018, the approximate number of holders of HMEC's common stock was 13,500.
During 2017, options were exercised for the issuance of 192,289 shares, 0.5% of the Company's
common stock shares outstanding at December 31, 2016. The Company received $4.2 million as a result
of these option exercises 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.
39
Issuer Purchases of Equity Securities
On December 7, 2011, 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 (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, 2017, the Company did not repurchase
shares of HMEC common stock. As of December 31, 2017, $27.8 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.
Operations
Management's Discussion and Analysis of Financial Condition and Results of
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.
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 Unaudited Selected Quarterly Financial Data
required by Item 302 of Regulation S-K are listed on page F-1 of this report.
Changes in and Disagreements with Accountants on Accounting and Financial
ITEM 9.
Disclosure
None.
40
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
(Exchange Act) as of December 31, 2017. 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, 2017, 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, 2017, 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, 2017, the Company maintained
effective internal control over financial reporting.
The effectiveness of the Company's internal control over financial reporting as of December 31,
2017 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.
41
Independent Registered Public Accounting Firm's Report on Internal Control Over Financial
c.)
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.
ITEM 10.
Directors, Executive Officers and Corporate Governance
PART III
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 2018 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 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 2018 Annual Meeting of Shareholders.
ITEM 12.
Stockholder Matters
Security Ownership of Certain Beneficial Owners and Management, and Related
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 2018 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 2018 Annual Meeting of Shareholders.
42
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 2018 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, 2017 and 2016.
Consolidated Statements of Operations for the Years Ended December 31, 2017, 2016 and
2015.
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December
31, 2017, 2016 and 2015.
Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December
31, 2017, 2016 and 2015.
Consolidated Statements of Cash Flows for the Years Ended December 31, 2017, 2016
and 2015.
(a)(2) The following financial statement schedules of the Company are contained in the Index to
Financial Information on page F-1 of this report:
Schedule I - Summary of Investments Other than Investments in Related Parties.
Schedule II - Condensed Financial Information of Registrant.
Schedules III and VI Combined - Supplementary Insurance Information and Supplemental
Information Concerning Property and Casualty Insurance Operations.
Schedule IV - Reinsurance.
(a)(3) The following items are filed as Exhibits. Management contracts and compensatory plans
are indicated by an asterisk (*).
Exhibit
No.
Description
(3) Articles of incorporation and bylaws:
3.1
3.2
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.
43
3.3
Bylaws of HMEC, incorporated by reference to Exhibit 3.2 to HMEC’s Quarterly
Report on Form 10-Q for the quarter ended June 30, 2003, filed with the SEC on August
14, 2003.
(4)
Instruments defining the rights of security holders, including indentures:
4.1
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 4.500% 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
10.1(a)
10.1(b)
10.2*
10.2(a)*
10.2(b)*
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.
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.
Second Amendment to the Credit Agreement dated August 14, 2017 among HMEC,
certain financial institutions named therein and JPMorgan Chase Bank, N.A., as
administrative agent.
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.
44
10.2(c)*
10.2(d)*
10.2(e)*
10.3*
10.3(a)*
10.3(b)*
10.3(c)*
10.3(d)*
10.3(e)*
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.
First Amendment to the HMEC 2010 Comprehensive Executive Compensation Plan
(As Amended and Restated Effective as of May 20, 2015), incorporated by reference
to Exhibit 10.3 to HMEC's Quarterly Report on Form 10-Q for the quarter ended March
31, 2017, filed with the SEC on May 9, 2017.
HMEC 2010 Comprehensive Executive Compensation Plan (As Amended and
Restated Effective May 20, 2015) (Section 16 Officer) Non-Qualified Stock Option
Agreement - Employee Grantee, incorporated by reference to Exhibit 10.3(a) to
HMEC's Quarterly Report on Form 10-Q for the quarter ended March 31, 2017, filed
with the SEC on May 9, 2017.
HMEC 2010 Comprehensive Executive Compensation Plan (As Amended and
Restated Effective May 20, 2015) (Non-Section 16) Non-Qualified Stock Option
Agreement - Employee Grantee, incorporated by reference to Exhibit 10.3(b) to
HMEC's Quarterly Report on Form 10-Q for the quarter ended March 31, 2017, filed
with the SEC on May 9, 2017.
HMEC 2010 Comprehensive Executive Compensation Plan (As Amended and
Restated Effective May 20, 2015) Service-Vested Restricted Stock Units Agreement
- Employee Grantee, incorporated by reference to Exhibit 10.3(c) to HMEC's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2017, filed with the SEC on
May 9, 2017.
HMEC 2010 Comprehensive Executive Compensation Plan (As Amended and
Restated Effective May 20, 2015) Performance-Based Restricted Stock Units
Agreement - Employee Grantee, incorporated by reference to Exhibit 10.3(d) to
HMEC's Quarterly Report on Form 10-Q for the quarter ended March 31, 2017, filed
with the SEC on May 9, 2017.
HMEC 2010 Comprehensive Executive Compensation Plan (As Amended and
Restated Effective May 20, 2015) Service-Vested Restricted Stock Units Agreement
- Employee Grantee (One-Time Grant Service), incorporated by reference to Exhibit
10.3(e) to HMEC's Quarterly Report on Form 10-Q for the quarter ended March 31,
2017, filed with the SEC on May 9, 2017.
10.3(f)*
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.
45
10.3(g)*
Specimen Non-employee Director Restricted Stock Units Award 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*
10.8*
10.9*
Horace Mann Supplemental Employee Retirement Plan (SERP), 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 (ESERP), 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, 2017, filed with the SEC on August 8, 2017.
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, 2017, filed with the SEC on May 9, 2017.
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, 2017, filed
with the SEC on August 8, 2017.
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 June 30, 2017, filed with the SEC on August 8, 2017.
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.
46
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
June 30, 2017, filed with the SEC on August 8, 2017.
(11) Statement regarding computation of per share earnings.
(12) Statement regarding computation of ratios.
(21) Subsidiaries of HMEC.
(23) Consent of KPMG LLP.
(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, 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, Chief Financial Officer of HMEC.
(99) Additional exhibits:
99.1
Glossary of Selected Terms.
(101) Interactive Data File:
101.INS
XBRL Instance Document - the instance document does not appear in the Interactive
Data File because its XBRL tags are embedded within the Inline XBRL 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
ITEM 16.
Form 10-K Summary
None.
47
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
/s/ Gabriel L. Shaheen
Marita Zuraitis
Gabriel L. Shaheen, Chairman of the Board of Directors
President, Chief Executive Officer and a Director
Principal Financial Officer:
/s/ Bret A. Conklin
Bret A. Conklin
Executive Vice President and Chief Financial Officer
Principal Accounting Officer:
/s/ Kimberly A. Johnson
Kimberly A. Johnson
Vice President and Controller
Dated: February 28, 2018
/s/ Daniel A. Domenech
Daniel A. Domenech, Director
/s/ Stephen J. Hasenmiller
Stephen J. Hasenmiller, Director
/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
48
HORACE MANN EDUCATORS CORPORATION
INDEX TO FINANCIAL INFORMATION
Management's Discussion and Analysis of Financial Condition and Results of Operations
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income (Loss)
Consolidated Statements of Changes in Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies
Note 2 - Investments
Note 3 - Fair Value of Financial Instruments
Note 4 - Derivative Instruments
Note 5 - Property and Casualty Unpaid Claims and Claim Expenses
Note 6 - Reinsurance and Catastrophes
Note 7 - Debt
Note 8 - Income Taxes
Note 9 - Shareholders' Equity and Common Stock Equivalents
Note 10 - Statutory Information and Restrictions
Note 11 - Pension Plans and Other Postretirement Benefits
Note 12 - Contingencies and Commitments
Note 13 - Supplementary Data on Cash Flows
Note 14 - Segment Information
Note 15 - Unaudited Selected Quarterly Financial Data
Financial Statement Schedules
Schedule I - Summary of Investments - Other than Investments in Related Parties
Schedule II - Condensed Financial Information of Registrant
Schedule III and VI Combined - Supplementary Insurance Information and Supplemental
Information Concerning Property and Casualty Insurance Operations
Schedule IV - Reinsurance
Page
F-2
F-33
F-35
F-36
F-37
F-38
F-39
F-40
F-58
F-64
F-71
F-73
F-80
F-82
F-83
F-86
F-90
F-92
F-98
F-99
F-99
F-101
F-102
F-103
F-107
F-108
F-1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A)
($ 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.
Executive Summary
Horace Mann Educators Corporation (HMEC) 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 2017, the Company's net income of $169.4 million increased $85.6 million compared to 2016.
In the fourth quarter of 2017, the Company's net income benefited $99.0 million from the re-measurement
of its net deferred tax liability (DTL) attributed to the passage of what is commonly referred to as the Tax
Cuts and Jobs Act of 2017. After tax net realized investment losses were $1.7 million compared to net
realized investment gains of $2.3 million a year earlier.
For 2017, Property and Casualty segment core earnings* decreased to $17.2 million compared to
$25.6 million in the prior year period as a result of lower levels of favorable prior years' reserve development
as well as elevated weather-related losses that occurred in the first half of 2017. Favorable prior years'
reserve development was $4.3 million pretax less than a year ago and catastrophe losses were $1.8 million
pretax higher than a year ago. As a result, the Property and Casualty combined ratio was 103.3% for 2017,
1.8 percentage points higher than the 101.5% in 2016. On an underlying basis, the auto loss ratio* of 77.2%
decreased 0.8 points compared to the prior year period, with the underlying combined ratio improving 1.0
point compared to the prior year period. For property, the underlying loss ratio* of 47.2% increased 4.8
points compared to the prior year period and was largely related to the impact of higher non-catastrophe
weather-related losses that occurred in the first half of 2017. The expense ratio for Property and Casualty
of 26.7% was comparable to the prior year period. Written premiums* of $662.8 million increased 4.5%
compared to the prior year period. The growth was driven primarily by rate actions, which resulted in an
increase in the average premium per policy for both auto and property. Policy retention continues to be
strong with auto and property policy retention rates of 83.0% and 87.6%, respectively.
For 2017, Retirement segment core earnings* was $48.9 million which decreased 3.6% compared
to $50.7 million in the prior year period. The decrease was primarily attributed to higher operating expenses
driven by strategic investments in technology, products and distribution as well as a $3.2 million pretax
increase in deferred policy acquisition costs (DAC) amortization and unlocking offset by a $6.4 million
pretax increase in net interest margin. The annualized net interest spread on fixed annuity assets was 194
basis points, an increase of 1 basis point compared to a year ago. The net interest spread benefited from
strong prepayment activity in the fourth quarter of 2017, as well as favorable alternative investment returns.
F-2
Annuity assets under management of $6.8 billion increased 5.2% compared to a year ago, and total cash
value persistency remained strong at 89.5% for variable annuities and 92.6% for fixed annuities. Retirement
deposits* were comparable to the prior year period with an increase in asset flows related to fee-based
mutual fund offerings nearly offsetting a decrease in traditional annuity products. Annuity deposits* of
$453.1 million decreased 12.9% compared to the prior year period. The decline in annuity deposits was
related to lower sales of single premium annuity products in the current year. For the current year, deposits
on recurring annuity products were comparable to the prior year period. Sales* and deposit activity related
to new retail and institutional Retirement Advantage® products, as well as other mutual fund offerings,
were strong with $80.0 million of deposits in the current year compared to $39.0 million in the prior year
period.
For 2017, Life segment core earnings* of $17.3 million increased 4.2% compared to the prior year
period. Life insurance premiums and contract deposits increased 3.0% to $111.2 million and sales of the
Company's proprietary life insurance products increased 13.5% compared to the prior year period. Life
persistency of 95.1% was comparable to prior year.
The Company's book value per share was $36.88 at December 31, 2017, an increase of 14.7%
compared to 12 months earlier.
Critical Accounting Policies
The preparation of consolidated financial statements in conformity with U.S. generally accepted
accounting principles (GAAP) requires the Company's management to make estimates and assumptions
based on information available at the time the consolidated financial statements are prepared. These
estimates and assumptions affect the reported amounts of the Company's consolidated assets, liabilities,
shareholders' equity and net income. Certain accounting estimates are particularly sensitive because of their
significance to the Company's consolidated financial statements and because of the possibility that
subsequent events and available information may differ markedly from management's judgments at the
time the consolidated financial statements were prepared. Management has discussed with the Audit
Committee the quality, not just the acceptability, of the Company's accounting principles as applied in its
financial reporting. The discussions generally included such matters as the consistency of the Company's
accounting policies and their application, and the clarity and completeness of the Company's consolidated
financial statements, which include related disclosures. For the Company, areas most subject to significant
management judgments include: fair value measurements, other-than-temporary impairment (OTTI) 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 and liabilities for future
policy benefits.
Additional 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 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-3
Valuation of Fixed Maturity and Equity Securities
The fair value of the Company's fixed maturity securities portfolio was $7,724.1 million at
December 31, 2017. 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 for fixed maturity securities. 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 90.7%
of the portfolio, based on fair value, was priced through pricing services or index priced using observable
inputs as of December 31, 2017. 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 methodologies are 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 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 $135.5 million at December 31,
2017. All of the portfolio was priced from observable market quotations at December 31, 2017. 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-dealer 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, 2017, Level 3 invested assets comprised 2.8% 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-4
Other-than-temporary Impairment
The Company's methodology of assessing OTTI is based on security-specific facts and circumstances
as of the reporting date. The Company has a policy and process to evaluate investments (at the cusip/issuer
level) on a quarterly basis to assess whether there has been OTTI. 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 OTTI is deemed to have occurred, the investment is written-down to fair value at the trade
lot level, 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 OTTI related to non-credit factors for fixed maturity securities is recognized in other comprehensive
income, net of applicable taxes, in which the Company has the intent to sell the security or if it is more
likely than not the Company will be required to sell the security before the anticipated recovery of the
amortized cost basis. See also Notes to Consolidated Financial Statements — Note 1 — Summary of
Significant Accounting Policies — Other-than-temporary Impairment.
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, 2017, the Company's allocation of goodwill by
reporting unit/segment was as follows: $28.0 million, Retirement; $9.9 million, Life; and $9.5 million,
Property and Casualty. Also see Notes to Consolidated Financial Statements — Note 1 — Summary of
Significant Accounting Policies — Goodwill.
The process of evaluating goodwill for impairment requires management to make multiple judgments
and assumptions to determine the fair value of each reporting unit, including discounted cash flow
calculations, the level of the Company's own share price and assumptions that market participants would
make in valuing each reporting unit. Fair value estimates are based primarily on an in-depth analysis of
historical experience, projected future cash flows and relevant discount rates, which consider market
participant inputs and the relative risk associated with the projected cash flows. Other assumptions include
levels of economic capital, future business growth, earnings projections and assets under management for
each reporting unit. Estimates of fair value are subject to assumptions that are sensitive to change and
represent the Company's reasonable expectation regarding future developments. The Company also
considers other valuation techniques such as peer company price-to-earnings and price-to-book multiples.
F-5
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 of a
reporting unit 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 2017 that indicated that an adverse 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
Deferred Policy Acquisition Costs (DAC), 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, DAC is amortized over 20 years in proportion to estimated gross profits. DAC is
amortized in proportion to estimated gross profits over 20 years for certain life insurance products with
account values and over 30 years for IUL. See also Notes to Consolidated Financial Statements — Note 1
— Summary of Significant Accounting Policies — Deferred Policy Acquisition Costs.
The most significant assumptions that are involved in the estimation of annuity gross profits include
interest rate spreads, future financial market performance, business surrender/lapse rates, expenses and the
impact of net realized investment gains and losses. For the variable deposit portion of Retirement, the
Company amortizes DAC utilizing a future financial market performance assumption of an 8.0% 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 DAC amortization expense
of approximately $2.0 million. Although this evaluation reflects likely outcomes, it is possible an actual
outcome may fall below or above these estimates. At December 31, 2017, the ratio of DAC to the total
annuity accumulated cash value was 2.6%.
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 DAC. In terms of the sensitivity of this amortization to two of the more significant
assumptions, based on DAC as of December 31, 2017 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 $0.3 million and $0.4 million and (2) a 1.0% deviation from the targeted financial market
performance for the underlying mutual funds of the Company's variable annuities would impact
amortization between $0.3 million and $0.4 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 DAC amortization expense is included
in Results of Operations for the Three Years Ended December 31, 2017.
F-6
Liabilities for Property and Casualty Claims and Claim Expenses
Underwriting results of Property and Casualty 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 transpire 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 reporting 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 property insurance policies for environmentally related items such
as mold.
Based on the Company's products and coverages, historical experience, and modeling of various
actuarial methodologies used to develop reserve estimates, the Company estimates that the potential
variability of the Property and Casualty loss reserves within a reasonable probability of other possible
outcomes may be approximately plus or minus 6.0%, which equates to plus or minus approximately $10.0
million of net income based on net reserves as of December 31, 2017. 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 2.0% 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 $7.0 million and $11.0 million for long-tail liability related exposures (automobile
liability coverages) and between $1.0 million and $3.0 million for short-tail liability related exposures
(property and automobile physical damage coverages). Actual results may differ, depending on the
magnitude and direction of the deviation.
F-7
The Company's actuaries discuss their loss and loss adjustment expense actuarial analysis with
management. As part of this discussion, the indicated point estimate of the IBNR loss reserve by line of
business (coverage) is reviewed. The Company's actuaries also discuss any indicated changes to the
underlying assumptions used to calculate the indicated point estimate. Any variance between the indicated
reserves from these changes in assumptions and the previously carried reserves is reviewed. After discussion
of these analyses and all relevant risk factors, management determines whether the reserve balances require
adjustment. The Company's best estimate of loss reserves may change depending on a revision in the
underlying assumptions.
The Company's liabilities for unpaid claims and claim expenses for Property and Casualty were as
follows:
($ in millions)
Automobile liability
Automobile other
Property
All other
Total
December 31, 2017
December 31, 2016
Case
Reserves
IBNR
Reserves
Total (1)
Case
Reserves
IBNR
Reserves
Total (1)
$
$
97.3
11.9
9.2
1.4
119.8
$
$
164.5
0.7
26.0
8.2
199.4
$
$
261.8
12.6
35.2
9.6
319.2
$
$
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
(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, 2017, the
impact of a reserve re-estimation resulting in a 1.0% increase in net reserves would be a decrease of
approximately $2.0 million in net income. A reserve re-estimation resulting in a 1.0% decrease in net
reserves would increase net income by approximately $2.0 million.
Favorable prior years' reserve reestimates increased net income in 2017 by approximately $2.7
million pretax, primarily the result of favorable severity trends in property for accident years 2015 and
prior. The lower than expected claims emergence and resultant lower expected loss ratios caused the
Company to lower its reserve estimate at December 31, 2017.
Investment Contract and Life Policy Reserves
Liabilities for future benefits on life and annuity policies are established in amounts adequate to
meet the estimated future obligations on policies in force. Liabilities for future policy benefits on certain
life insurance policies are computed using the net level premium method and are based on assumptions as
to future investment yield, mortality and lapses. Mortality and lapse assumptions for all policies have been
based on actuarial tables which are consistent with the Company's own experience. In the event actual
experience is worse than the assumptions, additional reserves may be required. This would result in a charge
to income for the period in which the increase in reserves occurred. Liabilities for future benefits on annuity
contracts and certain long-duration life insurance contracts are carried at accumulated policyholder values
without reduction for potential surrender or withdrawal charges. See also Notes to Consolidated Financial
Statements — Note 1 — Summary of Significant Accounting Policies — Investment Contract and Life
Policy Reserves.
F-8
Results of Operations for the Three Years Ended December 31, 2017
Insurance Premiums and Contract Charges
($ in millions)
Insurance premiums written and contract
deposits (includes annuity and
life contract deposits)
Property and Casualty
Retirement (annuity)
Life
Total
Insurance premiums and contract
charges earned (excludes annuity
and life contract deposits)
Property and Casualty
Retirement (annuity)
Life
Total
Year Ended
December 31,
Change From
Prior Year
Year Ended
December 31,
2017
2016
Percent
Amount
2015
$
$
$
$
662.8
453.1
111.2
1,227.1
648.3
28.0
118.4
794.7
$
$
$
$
634.3
520.2
108.0
1,262.5
4.5% $
-12.9%
3.0%
-2.8% $
$
28.5
(67.1)
3.2
(35.4) $
605.8
548.0
102.7
1,256.5
620.5
24.9
113.7
759.1
4.5% $
12.4%
4.1%
4.7% $
27.8
3.1
4.7
35.6
$
$
596.0
25.4
110.5
731.9
Number of Policies and Contracts in Force
(actual counts)
As of December 31,
2017
2016
2015
478,951
216,306
695,257
223,287
197,889
484,915
220,137
705,052
219,105
197,937
486,939
224,531
711,470
211,071
201,789
Property and Casualty
Automobile
Property
Total
Retirement
Life
For 2017, the Company's premiums written and contract deposits* of $1,227.1 million decreased
$35.4 million, or 2.8% driven by a decline in sales of single premium annuity products in Retirement. For
2016, the Company's premiums written and contract deposits of $1,262.5 million increased $6.0 million,
or 0.5%, compared to 2015. The Company's premiums and contract charges earned increased $35.6 million,
or 4.7%, compared to 2016, primarily due to increases in average premium per policy for both property and
automobile. For 2016, 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 property and
automobile.
Total Property and Casualty premiums written* increased 4.5%, or $28.5 million, in 2017, compared
to 2016, primarily due to increases in average written premium per policy for both property and automobile.
For 2017, the Company's full year rate plan anticipated mid-single digit average rate increases (including
states with no rate actions) for both automobile and property; average approved rate changes during 2017
were slightly higher at 8.7% for automobile and slightly lower at 4.3% for property.
F-9
Based on policies in force, the automobile 12 month retention rate for new and renewal policies was
83.0% compared to 83.5% at December 31, 2016 and 84.7% at December 31, 2015, respectively, with the
decrease due to recent rate and underwriting actions. The property 12 month new and renewal policy retention
rate was 87.6%, 87.8% and 88.3% at December 31, 2017, 2016 and 2015, respectively, with the decrease
due to recent rate and underwriting actions.
Automobile premiums written* increased 5.8%, or $24.8 million, compared to 2016. In 2017, the
average written premium per policy and average earned premium per policy increased 6.1% and 5.7%,
respectively, compared to 2016. In 2016, 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 5.0% and 3.8%, respectively, compared to 2015. For automobile, the number of educator policies
has been stable relative to overall automobile policies over the past three years as educators represented
85.2%, 85.2% and 85.0% of the automobile policies in force as of December 31, 2017, 2016 and 2015,
respectively.
Property premiums written* increased 1.7%, or $3.5 million, compared to 2016. Property premiums
written increased 2.4%, or $4.8 million, compared to 2015. While the number of property policies in force
has declined, the average written premium per policy and average earned premium per policy increased
2.2% and 2.6%, respectively, in 2017 compared to 2016. In addition, reduced catastrophe reinsurance costs
benefited the current period premiums written by approximately $0.5 million. In 2016, while the number
of property policies in force declined, the average written premium per policy and average earned premium
per policy each increased 3.5% compared to a year earlier. For property, the number of educator policies
has been stable relative to overall property policies over the past three years as educators represented 82.3%,
82.0% and 81.5% of the property policies in force as of December 31, 2017, 2016 and 2015, respectively.
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 property policies, restricted agent geographic placement, limitations on agent new
business sales, further tightening of underwriting standards and increased utilization of third-party vendor
products.
For 2017, total annuity deposits* decreased 12.9%, or $67.1 million, compared to 2016. The 2017
decrease reflected a 21.3% decrease in single premium and rollover deposit receipts, while recurring deposit
receipts were flat. For 2016, total annuity deposits received decreased 5.1%, or $27.8 million, compared to
2015, including a 7.6% decrease in recurring deposit receipts and a 3.3% decrease in single premium and
rollover deposit receipts. The decrease is largely due to non-recurring deposits in 2015 related to changes
in the Company's employee retirement savings plan.
In 2017, new deposits to fixed accounts of $279.2 million decreased 21.7%, or $77.4 million, and
new deposits to variable accounts of $173.9 million increased 6.3%, or $10.3 million, compared to 2016.
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 2015.
Total annuity accumulated value on deposit of $6.8 billion at December 31, 2017 increased 5.2%
compared to December 31, 2016, reflecting new deposits received as well as favorable retention.
Accumulated value retention for the variable annuity option was 89.5%, 94.7% and 94.3% for 2017, 2016
and 2015, respectively; fixed annuity retention was 92.6%, 94.6% and 94.8% for the respective years.
F-10
Variable annuity accumulated balances of $2.2 billion at December 31, 2017 increased 11.9%
compared to December 31, 2016, 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 2016, Retirement contract charges earned increased 12.4%,
or $3.1 million. 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. Retirement contract charges earned decreased 2.0%, or $0.5 million,
compared to 2015.
Life premiums and contract deposits* for 2017 increased 3.0%, or $3.2 million, compared to 2016,
including the favorable impact of new ordinary life business growth. Life premiums and contract deposits
for 2016 increased 5.2%, or $5.3 million, compared to 2015, including the favorable impact of new ordinary
life business growth. The ordinary life insurance in force lapse ratio was 4.9%, 4.3% and 4.1% for 2017,
2016 and 2015, respectively.
Sales*
For 2017, Property and Casualty new annualized sales premiums increased 4.9% compared to 2016,
as 4.9%, or $4.4 million, growth in new automobile sales was accompanied by growth in property sales of
4.4%, or $0.8 million.
During the second quarter of 2017, the Company introduced a series of annuity products featuring a
level commissions structure based on account value and flexibility to move between products without
surrender charges. Although the Company continues to focus on new products, agent training and marketing
programs which emphasize retirement planning, annuity sales by Horace Mann's Exclusive Distributors
decreased 11.1% compared to 2016 consistent with our expectations after removing commission-based
products for new sales. Sales from the Independent Agent distribution channel, which represent 7.0% of
total annuity sales in 2017 and are largely single premium and rollover annuity deposits, decreased 31.7%
compared to a year earlier. As a result, total Horace Mann annuity sales from the combined distribution
channels decreased 12.9%, or $67.1 million, compared to 2016. It should be noted that historically, reported
annuity sales for HM products were determined based on annualized new recurring deposits as well as single
deposits/rollovers. Effective January 1, 2017, reported annuity sales are based on total recurring deposits
as well as single deposits/rollovers. All historical annuity sales information presented has been revised to
conform to the new reporting methodology.
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 IUL product, have contributed
to an increase in sales of proprietary life products. For 2017, sales of Horace Mann's proprietary life insurance
products totaled $17.7 million, representing an increase of 13.5%, or $2.1 million, compared to 2016,
including an increase of $2.0 million for single premium sales.
F-11
Distribution
At December 31, 2017, there was a combined total of 694 Exclusive Distributors, compared to 683
at December 31, 2016 and 742 at December 31, 2015. The Company continues to expect higher quality
standards for Exclusive Distributors to focus on improving both customer experiences and productivity in
their respective territories. 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 Distributor.
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 266 authorized agents at December 31, 2017. During 2017,
this channel generated $31.7 million in new annuity sales for the Company compared to $46.4 million for
2016 and $53.3 million for 2015, with the new business primarily comprised of single and rollover deposit
business over the three year period.
Net Investment Income
For 2017, net investment income of $373.6 million pretax increased 3.4%, or $12.4 million, (3.2%,
or $7.7 million, after tax) compared to 2016. While annuity asset balances in Retirement 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 2016,
net investment income of $361.2 million pretax increased 8.6%, or $28.6 million, (7.9%, or $17.7 million,
after tax) compared to 2015. Average invested assets increased 4.2% for the year ended December 31, 2017.
The average pretax yield on the total investment portfolio was 5.2% (3.4% after tax) for 2017, compared
to the pretax yield of 5.2% (3.5% after tax) and 5.1% (3.4% after tax) for 2016 and 2015, respectively.
During 2017, management continued to identify and purchase investments, including a modest level of
alternative investments, with attractive risk-adjusted yields relative to market conditions 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 2017, net realized investment losses were $3.4 million compared to net realized investment gains
of $4.1 million and $12.7 million in 2016 and 2015, respectively. The net gains and losses in all periods
were realized primarily from ongoing investment portfolio management activity and, when determined, the
recognition of OTTI.
For 2017, the Company's net realized investment losses of $3.4 million included $30.5 million of
gross gains realized on security sales partially offset by $21.3 million of realized losses primarily on securities
that were disposed of during 2017 and $12.6 million of OTTI charges recorded largely on Puerto Rico and
other fixed maturity securities, as well as some equity securities.
For 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 on securities
that were disposed of during 2016 and $11.1 million of OTTI charges recorded largely on Puerto Rico and
energy sector fixed maturity securities, as well as some equity securities.
F-12
For 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, primarily mortgage-backed and municipal securities, and $19.5 million
of OTTI charges recorded largely on energy sector and Puerto Rico fixed maturity securities and one unrelated
equity security.
The Company, from time to time, sells securities subsequent to the reporting date that were considered
temporarily impaired at the reporting date. Such sales are due to issuer specific events occurring subsequent
to the reporting date that result in a change in the Company's intent to sell an invested asset.
F-13
Fixed Maturity and Equity Securities Portfolios
The table below presents the Company's fixed maturity and equity securities portfolios by major asset
class, including the ten largest sectors of the Company's corporate bond holdings (based on fair value).
Compared to December 31, 2016, credit spreads were tighter across most asset classes at December 31,
2017 and U.S. Treasury rates were mostly flat, which resulted in higher net unrealized investment gains in
the Company's fixed maturity securities holdings.
($ in millions)
Fixed maturity securities
Corporate bonds
Banking & Finance
Insurance
Energy (1)
Technology
HealthCare,Pharmacy
Real Estate
Utilities
Transportation
Telecommunications
Food and Beverage
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 loan obligations (5)
Asset-backed securities
Total fixed maturity securities
Equity securities
Non-redeemable preferred stocks
Common stocks
Closed-end fund
Total equity securities
Total
December 31, 2017
Number of
Issuers
Fair
Value
Amortized
Cost or
Cost
Pretax Net
Unrealized
Gain (Loss)
116
55
57
34
45
40
38
36
19
20
181
641
233
137
29
398
39
16
115
104
1,712
12
97
1
110
1,822
$
$
$
$
$
657.3
278.2
222.3
182.9
161.6
155.0
142.9
136.5
90.1
81.8
470.4
2,579.0
442.3
582.0
87.8
1,893.3
735.4
102.7
649.7
651.9
7,724.1
61.5
53.4
20.6
135.5
7,859.6
$
$
$
$
$
619.5
250.3
207.5
175.3
151.8
147.4
123.7
129.9
82.7
78.5
442.9
2,409.5
417.3
580.7
86.8
1,711.6
714.6
96.7
647.1
638.7
7,303.0
58.6
37.7
20.0
116.3
7,419.3
$
$
$
$
$
37.8
27.9
14.8
7.6
9.8
7.6
19.2
6.6
7.4
3.3
27.5
169.5
25.0
1.3
1.0
181.7
20.8
6.0
2.6
13.2
421.1
2.9
15.7
0.6
19.2
440.3
(1) At December 31, 2017, the fair value amount included $15.5 million which were non-investment grade.
(2) The All Other Corporates category contains 19 additional industry classifications. Gaming, broadcast and media, natural
gas, metal and mining and retail represented $306.0 million of fair value at December 31, 2017, with the remaining 14
classifications each representing less than $29.7 million.
(3) At December 31, 2017, 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, 40.2% are tax-exempt and 77.8% 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, 2017.
(5) Based on fair value, 96.7% of the collateralized loan obligation securities were rated investment grade by S&P, Moody's
and/or Fitch at December 31, 2017.
F-14
At December 31, 2017, the Company's diversified fixed maturity securities portfolio consisted of
2,701 investment positions, issued by 1,712 entities, and totaled approximately $7.7 billion in fair value.
This portfolio was 96.5% investment grade, based on fair value, with an average quality rating of A+. The
Company's investment guidelines generally limit single corporate issuer concentrations to 0.5% of invested
assets for AA or AAA rated securities, 0.35% of invested assets for A or BBB rated securities, and 0.2% of
invested assets for non-investment grade securities.
The following table presents the composition and value of the Company's fixed maturity securities
and equity securities portfolios by rating category. At December 31, 2017, 95.6% of these combined
portfolios were investment grade, based on fair value, with an overall average quality rating of A+. The
Company has classified the entire fixed maturity securities and equity securities portfolios as available for
sale, which are carried at fair value.
Rating of Fixed Maturity Securities and Equity Securities (1)
($ in millions)
($ in millions)
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
Total
December 31, 2017
Percent
of Total
Fair
Value
Fair
Value
Amortized
Cost or Cost
7.4% $
40.4
23.8
24.8
2.2
0.6
0.1
0.7
100.0% $
—
—
—
45.4% $
—
—
—
54.6
100.0% $
571.8
3,121.5
1,838.7
1,915.1
173.8
47.3
1.3
54.6
7,724.1
—
—
—
61.5
—
—
—
74.0
135.5
$
7,859.6
$
$
$
$
$
554.5
2,966.4
1,710.3
1,806.6
170.1
46.8
1.3
47.0
7,303.0
—
—
—
58.6
—
—
—
57.7
116.3
7,419.3
(1) Ratings are as assigned primarily by S&P when available, with remaining ratings as assigned on an equivalent basis by
Moody's or Fitch. 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, 2017, the AA rated fair value amount included $735.4 million of U.S. Government and federally sponsored
agency securities and $603.9 million of mortgage- and asset-backed securities issued by U.S. Government and federally
sponsored agencies.
(3) This category primarily represents private placement and municipal securities not rated by either S&P, Moody's or Fitch.
F-15
At December 31, 2017, the fixed maturity securities and equity securities portfolios had a combined
$22.8 million pretax of gross unrealized investment losses on $1,359.2 million fair value related to 512
positions. Of the investment positions (fixed maturity securities and equity securities) with gross unrealized
investment losses, there were none trading below 80.0% of the carrying value at December 31, 2017.
The Company views the unrealized investment losses of all of the securities at December 31, 2017
as temporary. Future changes in circumstances related to these and other securities could require subsequent
recognition of OTTI.
Benefits, Claims and Settlement Expenses
($ in millions)
Property and Casualty
Retirement
Life
Total
Property and Casualty catastrophe losses,
included above (1)
Year Ended
December 31,
Change From
Prior Year
Year Ended
December 31,
2017
2016
Percent
Amount
2015
496.3
5.8
80.2
582.3
$
$
464.1
3.9
73.1
541.1
6.9% $
48.7%
9.7%
7.6% $
32.2
1.9
7.1
41.2
$
$
420.3
3.2
72.9
496.4
61.8
$
60.0
3.0% $
1.8
$
44.4
$
$
$
(1)
Property and Casualty catastrophe losses were incurred as follows:
Three months ended
March 31
June 30
September 30
December 31
Total full year
Year Ended December 31,
2017
2016
2015
$
$
$
17.2
32.4
8.6
3.6
61.8
$
12.7
27.3
8.4
11.6
60.0
$
$
10.5
21.3
5.0
7.6
44.4
F-16
Property and Casualty Claims and Claim Expenses (losses)
($ in millions)
Incurred claims and claim expenses:
Year Ended December 31,
2017
2016
2015
Claims occurring in the current year
Decrease in estimated reserves for claims occurring in prior years (1)
Total claims and claim expenses incurred
$
$
499.0
(2.7)
496.3
$
$
471.1
(7.0)
464.1
$
$
432.8
(12.5)
420.3
Property and Casualty loss ratio:
Total
Effect of catastrophe costs, included above
Effect of prior years' reserve development, included above
76.6%
9.5%
-0.4%
74.8%
9.7%
-1.1%
70.5%
7.4%
-2.1%
(1)
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
Year Ended December 31,
2017
2016
2015
$
$
(1.0) $
(2.0) $
(0.6)
(0.5)
(0.6)
(1.6)
(0.7)
(2.7)
(2.7) $
(7.0) $
(4.0)
(3.2)
(2.8)
(2.5)
(12.5)
For 2017, the Company's benefits, claims and settlement expenses increased $41.2 million, or 7.6%,
compared to the prior year primarily reflecting increases in Property and Casualty current accident year loss
severity and frequency and catastrophe costs as well as a $3.0 million increase in life mortality costs. In
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
property current accident year non-catastrophe losses and a $4.0 million decrease in life mortality costs.
For 2017, 2016 and 2015, the favorable development of prior years' Property and Casualty reserves
of $2.7 million, $7.0 million and $12.5 million, respectively, for each year was the result of actual and
remaining projected losses for prior years being below the level anticipated in the immediately preceding
December 31st loss reserve estimate. In 2017, the favorable development was predominantly the result of
favorable severity trends in property for accident years 2015 and prior. For 2016, the favorable development
was predominantly the result of favorable severity trends in property for accident years 2014 and prior. For
2015, the favorable development was primarily for accident years 2013 and prior and predominantly the
result of favorable severity trends in property loss emergence, accompanied by favorable severity and
frequency trends in automobile loss emergence.
F-17
For 2017, the automobile loss ratio of 79.4% decreased by 0.8 percentage points compared to the
prior year, including (1) the favorable impact of rate actions taken in recent years and (2) the impact of
catastrophe costs that resulted in a 0.2 percentage point decrease partially offset by (3) development of prior
years' reserves that had a 0.2 percentage point less favorable impact in the current year. The property loss
ratio of 70.5% for 2017 increased 6.6 percentage points compared to the prior year, including (1) the impact
of higher current accident year non-catastrophe losses weather-related for 2017, (2) development of prior
years' reserves that had a 1.5 percentage point less favorable impact in the current year, and (3) higher
catastrophe costs. Catastrophe costs represented 24.5 percentage points of the property loss ratio for 2017
compared to 24.2 percentage points for 2016.
Interest Credited to Policyholders
($ in millions)
Year Ended
December 31,
Change From
Prior Year
2017
2016
Percent
Amount
Year Ended
December 31,
2015
Retirement (annuity)
Life
Total
$
$
153.5
45.1
198.6
$
$
147.3
44.7
192.0
4.2% $
0.9%
3.4% $
6.2
0.4
6.6
$
$
138.7
44.1
182.8
Compared to 2016, the 2017 increase in Retirement segment interest credited reflected a 4.8% increase
in average accumulated fixed deposits, at an average crediting rate of 3.6% for both years. Compared to a
year earlier, the 2016 increase in Retirement interest credited reflected a 7.6% increase in average
accumulated fixed deposits, partially offset by a 1 basis point decline in the average annual interest rate
credited to 3.6%. Life interest credited increased slightly in both 2017 and 2016 as a result of the growth in
reserves for life insurance products with account values.
The net interest spread on fixed annuity assets under management measures the difference between
the rate of income earned on the underlying invested assets and the rate of interest which policyholders are
credited on their account values. The net interest spreads for the years ended December 31, 2017, 2016 and
2015, were 194 basis points, 193 basis points and 184 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, 2017, fixed annuity account values totaled $4.6 billion, including $4.4 billion
of deferred annuities. As shown in the table below, for 86.6%, or $3.8 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 are 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 $510.6 million
of Retirement and Life 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.
F-18
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 net investment income by approximately $2.0 million in
year one and $6.0 million in year two, further reducing the net interest spread by approximately 4 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 DAC as of December 31, 2017 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
$0.3 million and $0.4 million. This result may change depending on the magnitude and direction of any
actual deviations but represents a range of reasonably likely experience for the noted assumption.
Additional information regarding the interest crediting rates and balances equal to the minimum
guaranteed rate for deferred annuity account values is shown below.
($ in millions)
Minimum guaranteed interest rates:
Less than 2%
Equal to 2% but less than 3%
Equal to 3% but less than 4%
Equal to 4% but less than 5%
5% or higher
Total
December 31, 2017
Deferred Annuities at
Total Deferred Annuities
Minimum Guaranteed Rate
Percent
of Total
Accumulated
Value (AV)
Percent of
Total Deferred
Annuities AV
Percent
of Total
Accumulated
Value
25.2% $
1,100.2
51.6%
15.0% $
7.0
14.1
52.5
1.2
306.9
615.5
2,297.7
54.0
82.9
99.9
100.0
100.0
6.7
16.2
60.7
1.4
567.9
254.5
615.0
2,297.7
54.0
100.0% $
4,374.3
86.6%
100.0% $
3,789.1
The Company will continue to be disciplined in executing strategies to mitigate the negative impact
on profitability of a sustained low interest rate environment. However, the success of these strategies may
be affected by the factors discussed in Item 1A. Risk Factors in this Annual Report on Form 10-K and other
factors discussed herein.
DAC Amortization Expense
DAC amortization expense was $102.2 million for 2017 compared to $96.7 million and $98.9 million
for the years ended December 31, 2016 and 2015, respectively. The increase in 2017 was primarily
attributable to Retirement unlocking DAC accompanied by growth in premiums and related commissions
for Property and Casualty. For 2016, the decrease in DAC amortization expense was largely attributable to
a $3.7 million pretax favorable change in DAC unlocking in Retirement offset by the growth in premiums
and related commissions for Property and Casualty. For Life, unlocking resulted in an immaterial change
in amortization at December 31, 2017, 2016 and 2015.
F-19
Operating Expenses
In 2017, operating expenses of $187.8 million increased $14.7 million, or 8.5%, compared to 2016.
The 2017 expense level was consistent with management's expectations as the Company makes expenditures
supporting targeted strategies in product, distribution and infrastructure, which are intended to enhance the
overall customer experience, increase sales, and support favorable policy retention and business cross-sale
ratios. In 2016, operating expenses of $173.1 million increased $15.7 million, or 10.0%, compared to 2015.
The Property and Casualty expense ratio was 26.7% for 2017 and 2016. The Property and Casualty
expense ratio for 2015 was 26.5%, which included an incentive compensation expense reduction of 0.4
percentage points.
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 (91.1)%, 26.6% and 27.8% for the years ended December 31, 2017, 2016 and 2015,
respectively. Income from investments in tax-advantaged securities reduced the effective income tax rates
11.0, 8.5 and 7.9 percentage points for 2017, 2016 and 2015, respectively.
On December 22, 2017, comprehensive tax legislation commonly referred to as the Tax Cuts and
Jobs Act (the Tax Act) was enacted by the U.S. government. The Tax Act is generally effective January 1,
2018, and among other changes, reduced the federal corporate income tax rate from 35% to 21%, eliminated
the corporate Alternative Minimum Tax, modified numerous insurance-specific provisions, and further
limited deductions for executive compensation. The effects of the Tax Act are reflected in the Company's
deferred tax calculations as of December 31, 2017.
ASC 740 Income Taxes requires that the impact of the Tax Act be recognized in the period in which
the law was enacted. As a result, total income tax expense for 2017 included a benefit of $99.0 million,
reducing the 2017 effective income tax rate by 111.6 percentage points, from re-measuring the Company’s
deferred taxes to reflect the change in tax rates included in the Tax Act as of the date of enactment. The Tax
Act will have an ongoing benefit to the Company, with near-term effective tax rates on operations of
approximately 15.0 to 18.0 percent.
F-20
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, 2017, the Company's federal income tax returns for years prior to 2014 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.
See also Notes to Consolidated Financial Statements - Note 8 - Income Taxes.
Net Income
For 2017, the Company's net income of $169.4 million increased $85.6 million compared to 2016.
The Company's net income benefited $99.0 million ($0.6 million in Property and Casualty, $39.5 million
in Retirement, $60.3 million in Life and $(1.4) million in Corporate and Other) from the re-measurement
of its DTL attributed to the passage of the Tax Cuts and Jobs Act of 2017. After tax net realized investment
losses were $1.7 million compared to after tax net realized investment gains of $2.3 million a year earlier.
Additional detail is included in the Executive Summary at the beginning of this MD&A.
For 2016, the Company's net income of $83.8 million represented a decrease of $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 2015, the Company's net income of $93.5 million declined $10.7 million compared to 2014,
reflecting improvement in current accident year non-catastrophe results for property, pressure on automobile
results primarily due to loss severity, a higher level of life mortality losses and a negative impact due to
DAC unlocking in Retirement. Net income in 2015 was also reduced by debt retirement costs.
F-21
Net income (loss) by segment and net income per diluted share were as follows:
($ in millions)
Analysis of net income (loss) by segment:
Property and Casualty
Retirement
Life
Corporate and Other (1)
Net income
Effect of catastrophe costs, after tax,
included above
Effect of net realized investment gains (losses),
after tax, included above
Effect of debt retirement costs,
after tax, included above
Diluted:
Net income per share
Weighted average number of shares
and equivalent shares (in millions)
Property and Casualty combined ratio:
Total
Effect of catastrophe costs,
included above
Effect of prior years' reserve
development, included above
Year Ended
December 31,
Change From
Prior Year
Year Ended
December 31,
2017
2016
Percent
Amount
2015
$
$
$
$
$
$
17.8
88.4
77.6
(14.4)
169.4
(40.2)
(1.7)
$
$
— $
4.08
$
41.6
25.6
50.7
16.6
(9.1)
83.8
-30.5% $
74.4%
N.M.
58.2%
102.1%
(7.8)
37.7
61.0
(5.3)
85.6
(39.1)
2.8% $
(1.1)
$
$
$
40.0
43.4
15.0
(4.9)
93.5
(28.9)
8.6
(4.0)
N.M.
N.M.
$
$
— $
(1.5)
102.0% $
2.06
$
0.2%
0.1
2.20
42.4
2.3
—
2.02
41.5
103.3%
101.5%
N.M.
1.8%
97.0%
9.5%
-0.4%
9.7%
N.M.
-0.2%
-1.1%
N.M.
0.7%
7.4%
-2.1%
N.M. - Not meaningful.
(1) Corporate and Other includes interest expense on debt, net 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 operating segments, consistent with the basis for management's evaluation of the results
of those segments.
As described in footnote (1) to the table above, Corporate and Other 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 2017, net realized investment losses after tax were $1.7 million while in 2016 and 2015, net realized
investment gains after tax were $2.3 million and $8.6 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 12.3%, 6.2% and 7.1% for the years
ended December 31, 2017, 2016 and 2015, respectively.
F-22
Outlook for 2018
At the time of this Annual Report on Form 10-K, management estimates that 2018 full year core
earnings* will be within a range of $2.10 to $2.30 per diluted share. This projection incorporates the
Company's results for 2017 and anticipates continued improvement in the Company's underlying automobile
combined ratio, 6 to 7 points of catastrophe losses, Retirement and Life segment core earnings* comparable
to 2017 reflecting lower net interest spreads and consistent mortality costs, as well as continued strategic
investment in modernization of technology and infrastructure to accelerate growth and capacity. This
projection also encompasses the impacts of the Tax Cuts and Jobs Act of 2017, reflecting an overall effective
tax rate of between 15% and 18%. As a result of the continued low interest rate environment, management
expects the Company's overall pretax annualized investment yield to decline by 20-30 basis points, impacting
each of the three operating segments. Within Property and Casualty, both approved and planned premium
rate increases, as well as continued underwriting initiatives, are expected to improve the underlying
automobile combined ratio by 2 to 2.5 points and the underlying property combined ratio by 1.0 to 1.5
points. Net income for Retirement will continue to be impacted by the prolonged interest rate environment
and the net interest spread is anticipated to grade down to around 170 basis points through the course of
2018. Life net income will be consistent with 2017 due to net investment income pressures and comparable
mortality costs. In addition to the segment-specific factors, the Company's initiatives for customer service
and infrastructure improvements, as well as continued investment in the Company's agency force, will
continue and result in a modest increase in expense levels compared to 2017.
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 estimates 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 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, 2017, 2016 and 2015, the Company did not have any relationships with
unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or
special purpose entities, which would have been established for the purpose of facilitating off-balance sheet
arrangements or for other contractually narrow or limited purposes. As such, the Company is not exposed
to any financing, liquidity, market or credit risk that could arise if the Company had engaged in such
relationships.
Investments
Information regarding the Company's investment portfolio, which is comprised primarily of
investment grade, fixed maturity securities, is located in Results of Operations for the Three Years Ended
December 31, 2017 — 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.
F-23
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 2017, net cash provided
by operating activities increased $45.2 million, or 21.4% compared to 2016, largely due to an increase in
Premiums collected and Investment income collected and a decrease in Income taxes paid offset by an
increase in Policyholder benefits paid.
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 2018 from all of
HMEC's insurance subsidiaries without prior regulatory approval is $94.0 million. Although regulatory
restrictions exist, dividend availability from subsidiaries has been, and is expected to be, adequate for
HMEC's capital needs. Additional information is contained in Notes to Consolidated Financial Statements
— Note 10 — Statutory Information and Restrictions listed on page F-1 of this report.
Investing Activities
HMEC's insurance subsidiaries maintain significant investments in fixed maturity securities to meet
future contractual obligations to policyholders. In conjunction with its management of liquidity and other
asset/liability management objectives, the Company, from time to time, will sell fixed maturity securities
prior to maturity, as well as equity securities, and reinvest the proceeds into 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.
F-24
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 debt facilities. For the year
ended 2017, financing activities included an increase of $77.9 million attributable to fixed account
withdrawals due to the transfer of all the Company’s 401(k) assets to a third-party provider.
In 2013, Horace Mann Life Insurance Company (HMLIC) one of the Company's subsidiaries became
a member of FHLB. HMLIC 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 2017,
2016 and 2015. For the year ended December 31, 2017, receipts from annuity contracts, also excluding the
FHLB transactions, decreased $67.1 million, or 12.9%, compared to 2016, as described in Results of
Operations for the Three Years Ended December 31, 2017 — Insurance Premiums and Contract Charges.
In total, annuity contract benefits, withdrawals and net transfers to variable annuity accumulated cash values
decreased $61.1 million, or 17.5%, compared to the prior year.
In 2017, Horace Mann Insurance Company (HMIC) became a member of FHLB, which provides
HMIC with access to collateralized borrowings and other FHLB products. In the fourth quarter of 2017,
HMIC received $50.0 million in executed borrowings with receipt of those funds reflected in FHLB
borrowings. HMIC's FHLB borrowings of $50.0 million are included in Long-term debt on the Consolidated
Balance Sheet. Proceeds from the FHLB borrowings have been invested in high quality floating rate assets
with the primary objective of generating incremental investment income with an emphasis on minimizing
interest rate risk and preserving capital.
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 $2.3 million pretax of debt retirement costs impacting
the Company's net income for 2015, nearly all of which required cash. The remaining net proceeds from
the issuance of the Senior Notes due 2025 were available for general corporate purposes.
F-25
Contractual Obligations
The following table shows the Company's contractual obligations, as well as the projected timing
of payments.
($ in millions)
Fixed annuities and fixed option
of variable annuities (1)
Supplemental contracts (1)(2)
Life insurance policies (1)
Property and Casualty claims and claim
adjustment expenses (1)
Long-term debt obligations,
FHLB borrowings due October
and December 2022 (3)
Long-term debt obligations
Senior Notes due December 1, 2025 (4)
Operating lease obligations (5)
Payments Due By Period as of December 31, 2017
Less Than
1 Year
(2018)
1 - 3 Years
(2019 and
2020)
3 - 5 Years
(2021 and
2022)
Total
More Than
5 Years
(2023 and
beyond)
$
7,012.3
$
263.9
$
535.8
$
560.1
$
5,652.5
1,055.6
2,577.9
29.6
93.7
261.8
168.9
54.6
340.0
9.8
1.6
11.3
2.7
301.8
191.8
81.6
1.6
22.5
4.2
46.1
192.6
10.8
51.4
22.5
2.4
678.1
2,099.8
0.5
—
283.7
0.5
Total
$
11,312.0
$
571.7
$
1,139.3
$
885.9
$
8,715.1
(1) This information represents estimates of both the amounts to be paid to policyholders and the timing of such payments and
is net of anticipated reinsurance recoveries.
(2) Includes $575.0 million obligation to FHLB plus interest.
(3) Includes $50.0 million obligation to FHLB plus interest.
(4) Includes principal and interest.
(5) 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 copier machines.
Estimated Future Policy Benefit and Claim Payments - Retirement and Life
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
F-26
force at December 31, 2017. Separate Account (variable annuity) payments are not reflected due to the
matched nature of these obligations and the fact that the contract owners maintain the investment risk on
such deposits.
See Notes to Consolidated Financial Statements — Note 1 — Summary of Significant Accounting
Policies — Investment Contract and Life Policy Reserves 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
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 reporting 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 $1,799.1 million at December 31, 2017, including $297.5
million of long-term debt. Total debt represented 19.8% of total capital excluding net unrealized investment
gains on fixed maturity and equity securities (16.5% including net unrealized investment gains on fixed
maturity and equity securities) at December 31, 2017, which was below the Company's long-term target
of 25%.
Shareholders' equity was $1,501.6 million at December 31, 2017, including net unrealized
investment gains on fixed maturity and equity securities in the Company's investment portfolio of $300.1
million after taxes and the related impact of DAC associated with investment contracts and life insurance
products with account values. The market value of the Company's common stock and the market value per
share were $1,795.7 million and $44.10, respectively, at December 31, 2017. Book value per share was
F-27
$36.88 at December 31, 2017 ($29.51 excluding net unrealized investment gains on fixed maturity and
equity securities).
Additional information regarding net unrealized investment gains on fixed maturity and equity
securities in the Company's investment portfolio at December 31, 2017 is included in Results of Operations
for the Three Years Ended December 31, 2017 — Net Realized Investment Gains and Losses.
Total shareholder dividends were $46.1 million for the year ended December 31, 2017. In March,
May, September and December 2017, the Board announced regular quarterly dividends of $0.275 per share.
Compared to the full year per share dividends paid in 2016 of $1.06, the total 2017 dividends paid per share
of $1.10 represented an increase of 3.8%.
In December 2011, the Board authorized a share repurchase program allowing repurchases of up to
$50.0 million (2011 Plan). In September 2015, the Board authorized an additional share repurchase program
allowing repurchases of up to $50.0 million (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. Utilization of the remaining authorization under the 2011 program was completed in January 2016.
During 2017, the Company repurchased 48,440 shares of its common stock, or 0.1%, of the outstanding
shares on December 31, 2016, at an aggregate cost of $1.7 million, or an average price of $34.26 per share,
under the 2015 Plan. In total and through December 31, 2017, 2,848,050 shares were repurchased under
the 2011 and 2015 Plans at an average price of $25.33 per share. The repurchase of shares was funded
through use of cash. As of December 31, 2017, $27.8 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. 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).
In 2017, HMIC became a member of FHLB, which provides HMIC with access to collateralized
borrowings and other FHLB products. As membership requires the ownership of membership stock, in
June 2017, HMIC 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.
In 2017, HMIC purchased common stock to meet the activity-based requirement. For FHLB borrowings,
the Board has authorized a maximum amount equal to the greater of 10% of admitted assets or 20% of
surplus of the consolidated property and casualty companies. In the fourth quarter of 2017, the Company
received $50.0 million in executed borrowings for HMIC. For the total $50.0 million received, $25.0 million
matures on October 5, 2022 and $25.0 million matures on December 2, 2022. Interest on the borrowings
accrues at an annual weighted average rate of 1.57% as of December 31, 2017. HMIC's FHLB borrowings
of $50.0 million are included in Long-term debt on the Consolidated Balance Sheet.
As of December 31, 2017, 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
F-28
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, 2017. On
June 15, 2015, the Senior Notes due 2015 matured and the Company repaid the $75.0 million aggregate
principal amount initially utilizing $75.0 million of additional borrowing under the existing Bank Credit
Facility. In November 2015, the Company utilized a portion of the proceeds from the issuance of the Senior
Notes due 2025, described above, to fully repay the $113.0 million outstanding balance under the Company's
Bank Credit Facility.
To provide additional capital management flexibility, the Company filed a "universal shelf"
registration on Form S-3 with the SEC on March 12, 2015. The registration statement, which registered
the offer and sale by the Company from time to time of an indeterminate amount of various securities,
which may include debt securities, common stock, preferred stock, depositary shares, warrants, delayed
delivery contracts and/or units that include any of these securities, was automatically effective on March
12, 2015. Unless withdrawn by the Company earlier, this registration statement will remain effective through
March 12, 2018. The Senior Notes due 2025, described above, were issued utilizing this registration
statement. No other securities associated with the registration statement have been issued as of the date of
this Annual Report on Form 10-K.
The Company's ratio of earnings to fixed charges (with fixed charges including interest credited to
policyholders on investment contracts and life insurance products with account values) for the years ended
December 31, 2017, 2016 and 2015 was 1.4x,1.6x and 1.7x, respectively. See also Exhibit 12 — Statement
Regarding Computation of Ratios. The Company's ratio of earnings before interest expense to interest
expense was 8.5x, 10.7x and 10.9x for the years ended December 31, 2017, 2016 and 2015, respectively.
Financial Ratings
HMEC's principal insurance subsidiaries are rated by S&P, Moody's, A.M. Best and 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.
Assigned ratings as of February 15, 2018 were unchanged from the disclosure in the Company's
Annual Report on Form 10-K for the year ended December 31, 2016. 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):
February 15, 2018
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-29
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, 2017 — 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, 2017 — Interest Credited to Policyholders.
The Company seeks to manage its market value risk by coordinating the projected cash inflows of
assets with the projected cash outflows of liabilities. For all its assets and liabilities, the Company seeks to
maintain reasonable durations, consistent with the maximization of income without sacrificing investment
quality, while providing for liquidity and diversification. The investment risk associated with variable
annuity deposits and the underlying mutual funds is assumed by those contractholders, and not by the
Company. Certain fees that the Company earns from variable annuity deposits are based on the market
value of the funds deposited.
Through active investment management, the Company invests available funds with the objective of
funding future obligations to policyholders, subject to appropriate risk considerations, and maximizing
shareholder value. This objective is met through investments that (1) have similar characteristics to the
liabilities they support; (2) are diversified among industries, issuers and geographic locations; and (3) are
predominately investment-grade fixed maturity securities classified as available for sale. As of the time of
this Annual Report on Form 10-K, derivatives are only used to manage the interest crediting rate risk within
the FIA and IUL products. At December 31, 2017, approximately 11% of the fixed maturity securities
portfolio represented investments supporting the Property and Casualty operations and approximately 89%
supported Retirement and Life business. For discussions regarding the Company's investments see Results
of Operations for the Three Years Ended December 31, 2017 — Net Realized Investment Gains and Losses
and Item 1. Business — Investments.
The Company's Retirement and Life earnings are affected by the spreads between interest yields on
investments and rates credited or accruing on fixed annuity and life insurance liabilities. Although credited
rates on fixed annuities may be changed annually (subject to minimum guaranteed rates), competitive
pricing and other factors, including the impact on the level of surrenders and withdrawals, may limit the
Company's ability to adjust or to maintain crediting rates at levels necessary to avoid narrowing of spreads
under certain market conditions. See also Results of Operations for the Three Years Ended December 31,
2017 — Interest Credited to Policyholders.
F-30
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,
2017, 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 6.9
years.
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. Based on the most recent study, assuming a
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%. In each case, these changes in interest rates assume a parallel shift in the yield
curve. While the Company believes that these assumed market rate changes are reasonably possible, actual
results may differ, particularly as a result of any management actions that would be taken to attempt to
mitigate such hypothetical losses in fair value of shareholders' equity.
Interest rates continue to be at historically low levels. If interest rates remain low over an extended
period of time, management recognizes it could pressure net investment income by having to invest
insurance cash flows and reinvest the cash flows from the investment portfolio in lower yielding securities.
Moreover, issuers of securities in the Company's investment portfolio may prepay or redeem fixed maturity
securities, as well as asset-backed and commercial and mortgage-backed securities, with greater frequency
to borrow at lower market rates. As a general guideline, management estimates that pretax net income in
2018 and 2019 would decrease by approximately $1.5 million (by segment: Retirement $1.0 million, Life
$0.3 million and Property and Casualty $0.2 million) and $7.8 million (by segment: Retirement $5.4 million,
Life $1.5 million and Property and Casualty $0.9 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 operating 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
F-31
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 the Company has 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. The effect of implementing certain accounting standards on the Company's financial
results and financial condition is often based in part on market conditions at the time of implementation of
the standard and other factors that the Company is unable to determine prior to implementation. For this
reason, the Company is sometimes unable to estimate the effect of certain pending accounting standards
until the relevant authoritative body finalizes these standards or until the Company implements them.
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-32
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Horace Mann Educators Corporation:
Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheets of Horace Mann Educators Corporation
and subsidiaries (the "Company") as of December 31, 2017 and 2016, 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, 2017, and the related notes and
financial statement schedules I to IV and VI (collectively, the "consolidated financial statements"). We
also have audited the Company’s internal control over financial reporting as of December 31, 2017,
based on criteria established in Internal Control - Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
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, 2017 and 2016, and the results of its
operations and its cash flows for each of the years in the three-year period ended December 31, 2017, in
conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, 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 the
Company’s consolidated financial statements and an opinion on the Company’s internal control over
financial reporting based on our audits. We are a public accounting firm registered with the Public
Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent
with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules
and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement, whether due to error or fraud, and whether effective
internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of
material misstatement of the consolidated financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also
included evaluating the accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the consolidated financial statements. 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.
F-33
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only
in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the
risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
We have served as the Company’s auditor since 1989.
KPMG LLP
Chicago, Illinois
February 28, 2018
F-34
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED BALANCE SHEETS
As of December 31, 2017 and 2016
($ in thousands, except per share data)
ASSETS
Investments
Fixed maturity securities, available for sale, at fair value
(amortized cost 2017, $7,302,950; 2016, $7,152,127)
Equity securities, available for sale, at fair value
(cost 2017, $116,320; 2016, $134,013)
Short-term and other investments
Total investments
Cash
Deferred policy acquisition costs
Goodwill
Other assets
Separate Account (variable annuity) assets
Total assets
December 31,
2017
2016
$
7,724,075 $
7,456,708
135,466
492,807
8,352,348
7,627
257,826
47,396
381,182
2,151,961
11,198,340 $
$
LIABILITIES AND SHAREHOLDERS' EQUITY
$
Policy liabilities
Investment contract and life policy reserves
Unpaid claims and claim expenses
Unearned premiums
Total policy liabilities
Other policyholder funds
Other liabilities
Long-term debt
Separate Account (variable annuity) liabilities
Total liabilities
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, 2017, 65,439,245; 2016, 64,917,683
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss), net of taxes:
Net unrealized investment gains
on fixed maturity and equity securities
Net funded status of benefit plans
Treasury stock, at cost, 2017, 24,721,372 shares;
2016, 24,672,932 shares
Total shareholders' equity
Total liabilities and shareholders' equity
$
5,573,735 $
347,749
260,539
6,182,023
724,261
341,053
297,469
2,151,961
9,696,767
—
65
464,246
1,231,177
300,177
(13,217)
(480,875)
1,501,573
11,198,340 $
175,738
(11,817)
(479,215)
1,293,982
10,576,824
141,649
401,015
7,999,372
16,670
267,580
47,396
321,874
1,923,932
10,576,824
5,447,969
329,888
246,274
6,024,131
708,950
378,620
247,209
1,923,932
9,282,842
—
65
453,479
1,155,732
See accompanying Notes to Consolidated Financial Statements.
F-35
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
($ in thousands, except per share data)
Year Ended December 31,
2016
2015
2017
Revenues
Insurance premiums and contract charges earned
Net investment income
Net realized investment gains (losses)
Other income
$
794,703 $
373,630
(3,406)
6,623
759,146 $
361,186
4,123
4,455
731,880
332,600
12,713
3,255
Total revenues
1,171,550
1,128,910
1,080,448
Benefits, losses and expenses
Benefits, claims and settlement expenses
Interest credited
DAC amortization expense
Operating expenses
Interest expense
Debt retirement costs
582,306
198,635
102,185
187,789
11,948
—
541,004
192,022
96,732
173,112
11,808
—
496,364
182,842
98,919
157,411
13,122
2,338
Total benefits, losses and expenses
1,082,863
1,014,678
950,996
Income before income taxes
Income tax expense (benefit)
Net income
Net income per share
Basic
Diluted
Weighted average number of shares and equivalent shares
Basic
Diluted
Net realized investment gains (losses)
Total other-than-temporary impairment losses on securities
Portion of losses recognized in other
comprehensive income (loss)
Net other-than-temporary impairment losses
on securities recognized in earnings
Realized gains, net
Total
88,687
(80,772)
114,232
30,467
129,452
35,970
169,459 $
83,765 $
93,482
4.10 $
4.08 $
2.04 $
2.02 $
2.23
2.20
$
$
$
41,364,546
41,564,979
41,158,349
41,475,516
41,914,864
42,424,806
$
(12,620) $
(11,401) $
(23,796)
—
(290)
(4,300)
(12,620)
9,214
(3,406) $
(11,111)
15,234
4,123 $
(19,496)
32,209
12,713
$
See accompanying Notes to Consolidated Financial Statements.
F-36
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
($ in thousands)
Year Ended December 31,
2016
2015
2017
Comprehensive income (loss)
Net income
Other comprehensive income (loss), net of taxes:
Change in net unrealized investment gains and
losses on fixed maturity and equity securities
Change in net funded status of benefit plans
Other comprehensive income (loss)
Total
$
169,459 $
83,765 $
93,482
74,405
734
75,139
244,598 $
$
571
(23)
548
84,313 $
(122,387)
1,159
(121,228)
(27,746)
See accompanying Notes to Consolidated Financial Statements.
F-37
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
($ in thousands, except per share data)
Year Ended December 31,
2016
2015
2017
Common stock, $0.001 par value
Beginning balance
Options exercised, 2017, 208,306 shares;
2016, 142,203 shares; 2015, 85,532 shares
Conversion of common stock units, 2017, 15,981 shares;
2016, 15,629 shares; 2015, 8,293 shares
Conversion of restricted stock units, 2017, 313,292 shares;
2016, 222,297 shares; 2015, 198,681 shares
Ending balance
$
65 $
65 $
—
—
—
65
—
—
—
65
64
—
—
1
65
Additional paid-in capital
Beginning balance
Options exercised and conversion of common
stock units and restricted stock units
Share-based compensation expense
Ending balance
Retained earnings
Beginning balance
Net income
Cash dividends, 2017, $1.10 per share;
2016, $1.06 per share; 2015, $1.00 per share
Reclassification of deferred taxes
Ending balance
Accumulated other comprehensive income (loss), net of taxes
Beginning balance
Change in net unrealized investment gains and
losses on fixed maturity and equity securities
Change in net funded status of benefit plans
Reclassification of deferred taxes
Ending balance
Treasury stock, at cost
Beginning balance, 2017, 24,672,932 shares;
2016, 23,971,522 shares; 2015, 23,308,430 shares
Acquisition of shares, 2017, 48,440 shares;
2016, 701,410 shares; 2015, 663,092 shares
Ending balance, 2017, 24,721,372 shares;
2016, 24,672,932 shares; 2015, 23,971,522 shares
453,479
442,648
422,232
2,962
7,805
464,246
2,696
8,135
453,479
13,605
6,811
442,648
1,155,732
169,459
1,116,277
83,765
1,065,318
93,482
(46,114)
(47,900)
1,231,177
(44,310)
—
1,155,732
(42,523)
—
1,116,277
163,921
163,373
284,601
74,405
734
47,900
286,960
571
(23)
—
163,921
(122,387)
1,159
—
163,373
(479,215)
(457,702)
(435,752)
(1,660)
(21,513)
(21,950)
(480,875)
(479,215)
(457,702)
Shareholders' equity at end of period
$ 1,501,573 $ 1,293,982 $ 1,264,661
See accompanying Notes to Consolidated Financial Statements.
F-38
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
Year Ended December 31,
2016
2015
2017
Cash flows - operating activities
Premiums collected
Policyholder benefits paid
Policy acquisition and other operating expenses paid
Income taxes paid
Investment income collected
Interest expense paid
Other
Net cash provided by operating activities
Cash flows - investing activities
Fixed maturity securities
Purchases
Sales
Maturities, paydowns, calls and redemptions
Equity securities
Purchases
Sales and repayments
Purchase of other invested assets
Net cash provided by (used in) short-term and other investments
Net cash used in investing activities
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
FHLB borrowings
Acquisition of treasury stock
Proceeds from exercise of stock options
Withholding tax payments on RSUs tendered
Annuity contracts: variable, fixed and
FHLB funding agreements
$
739,503 $
(528,501)
(283,351)
(16,259)
363,283
(11,555)
(6,534)
256,586
710,646 $
(511,017)
(277,076)
(27,847)
344,778
(11,754)
(16,297)
211,433
723,705
(534,359)
(267,854)
(24,861)
330,034
(13,521)
(5,430)
207,714
(1,569,220)
500,760
927,665
(1,566,047)
429,251
799,653
(1,490,376)
445,100
683,335
(32,312)
53,100
(117,502)
8,845
(228,664)
(60,135)
21,210
(83,588)
134,296
(325,360)
(46,114)
—
—
—
—
50,000
(1,660)
4,190
(3,245)
(44,310)
—
—
—
—
—
(21,513)
3,329
(4,015)
(33,922)
37,943
(38,018)
(19,911)
(415,849)
(42,523)
246,937
(127,292)
(75,000)
(38,000)
—
(21,950)
1,629
(671)
Deposits
Benefits, withdrawals and net transfers to
Separate Account (variable annuity) assets
Transfer of Company 401(k) to a third-party provider
453,146
520,211
623,021
(411,061)
(77,898)
(349,915)
—
(354,735)
—
Life policy accounts
Deposits
Withdrawals and surrenders
Change in bank overdrafts
Net cash provided by (used in) financing activities
Net increase (decrease) in cash
Cash at beginning of period
Cash at end of period
4,883
(4,458)
(4,748)
(36,965)
4,018
(3,965)
11,248
115,088
1,455
(3,985)
3,083
211,969
(9,043)
1,161
3,834
16,670
15,509
11,675
$
7,627 $
16,670 $
15,509
See accompanying Notes to Consolidated Financial Statements.
F-39
HORACE MANN EDUCATORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017, 2016 and 2015
($ in thousands, except per share data)
NOTE 1 - Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with United
States (U.S.) generally accepted accounting principles (GAAP) and with the rules and regulations of the
Securities and Exchange Commission (SEC), specifically Regulation S-X and the instructions to Form
10-K. The preparation of consolidated financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect (1) the reported amounts of assets and liabilities, (2) disclosure
of contingent assets and liabilities at the date of the consolidated financial statements, and (3) the reported
amounts of revenues and expenses during the reporting period. Actual results could differ from those
estimates.
The consolidated financial statements include the accounts of Horace Mann Educators Corporation
and its wholly-owned subsidiaries (HMEC; and together with its subsidiaries, the Company or Horace
Mann). HMEC and its subsidiaries have common management, share office facilities and are parties to
intercompany service agreements for management, administrative, utilization of personnel, financial,
investment advisory, underwriting, claims adjusting, agency and data processing services. Under these
agreements, costs have been allocated among the companies in conformity with GAAP. In addition, certain
of the subsidiaries have entered into intercompany reinsurance agreements. HMEC and its subsidiaries file
a consolidated federal income tax return, and there are related tax sharing agreements. All significant
intercompany balances and transactions have been eliminated in consolidation.
The subsidiaries of HMEC market and underwrite personal lines of property and casualty insurance
products (primarily personal lines automobile and property 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.
Investments
The Company invests primarily in fixed maturity securities. 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.
F-40
NOTE 1 - Summary of Significant Accounting Policies-(Continued)
Equity securities are classified as available for sale and carried at fair value. This category includes
nonredeemable preferred stocks and common stocks.
Short-term and other investments are comprised of short-term fixed maturity securities, generally
carried at cost which approximates fair value; derivative instruments (all call options), carried at fair value;
policy loans, carried at unpaid principal balances; mortgage loans, carried at unpaid principal; certain
alternative investments (primarily investments in limited partnerships) which are accounted for as equity
method investments; and restricted Federal Home Loan Bank membership and activity stocks, carried at
redemption value which approximates fair value.
The Company invests in fixed maturity securities and alternative investment funds that could qualify
as variable interest entities, including corporate securities, mortgage-backed securities and asset-backed
securities. Such securities have been reviewed and determined not to be subject to consolidation as the
Company is not the primary beneficiary of these securities because the Company does not have the power
to direct the activities that most significantly impact the entities' economic performance.
Investment income is recognized as earned. Investment income reflects amortization of premiums
and accrual of discounts on an effective-yield basis.
Realized gains and losses arising from the disposal (recorded on a trade date basis) or impairment
of securities are determined based upon specific identification of securities. The Company evaluates all
investments in its portfolio for other-than-temporary declines in value as described in the following section.
Other-than-temporary Impairment
The Company's methodology of assessing other-than-temporary impairments (OTTI) is based on
security-specific facts and circumstances as of the reporting 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 OTTI 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, OTTI 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 has a policy and process to evaluate investments (at the cusip/issuer level) on a
quarterly basis to assess whether there has been OTTI. 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 OTTI is deemed to have occurred, the investment is written-down to fair value at the trade lot level,
with a realized loss charged to income for the period for the full loss amount for all equity securities and
F-41
NOTE 1 - Summary of Significant Accounting Policies-(Continued)
the credit-related loss portion associated with impaired fixed maturity securities. The amount of total OTTI
related to non-credit factors for fixed maturity securities is recognized in other comprehensive income
(OCI), 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.
A decline in fair value below amortized cost is not assumed to be other-than-temporary for fixed
maturity securities 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 amortized cost basis of the security and the
Company does not have the intent to sell the security before maturity or a market recovery is realized and
it is more likely than not the Company will not be required to sell the security. OTTI 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 an ultimate 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 OTTI. 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 future cash flows expected to be collected. Information includes, but is not limited to, debt-servicing,
missed refinancing opportunities and geography.
F-42
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
issuer'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 OTTI, but also includes general obligation bonds. The Company
evaluates special revenue bonds for OTTI 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 OTTI, 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-43
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 of 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 of cash flows
vary depending on the type of security. Corporate fixed maturity security and municipal bond cash flow
estimates are derived from scenario-based outcomes of expected restructurings or the disposition of assets
using specific facts and other circumstances, including timing, security interests and loss severity and when
not reasonably estimable, such securities are impaired to fair value as management's best estimate of the
present value of future cash flows. The cash flow estimates for mortgage-backed and other structured
securities are based on security specific facts and circumstances that may include collateral characteristics,
expectations of delinquency and default rates, loss severity and prepayment speeds, and structural support,
including subordination and guarantees.
Deferred Policy Acquisition Costs
The Company's deferred policy acquisition costs (DAC) by operating segment was as follows:
($ in thousands)
Retirement (annuity)
Life
Property and Casualty
Total
December 31,
2017
2016
$
$
174,661
53,974
29,191
257,826
$
$
188,117
51,859
27,604
267,580
DAC consists of commissions, policy issuance and other costs which are incremental and directly
related to the successful acquisition of new or renewal business, which are deferred and amortized on a
basis consistent with the type of insurance coverage. For all investment (annuity) contracts, DAC is
amortized over 20 years in proportion to estimated gross profits. DAC is 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 (IUL) contracts. For other individual life contracts, DAC is amortized in proportion
to anticipated premiums over the terms of the insurance policies (10, 15, 20, 30 years). For Property and
Casualty policies, DAC is amortized over the terms of the insurance policies (6 or 12 months).
The Company periodically reviews the assumptions and estimates used in DAC 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 on fixed maturity and equity securities. For the variable deposit portion of
Retirement, the Company amortizes DAC utilizing a future financial market performance assumption of
a 8% 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.
F-44
NOTE 1 - Summary of Significant Accounting Policies-(Continued)
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:
($ in thousands)
Increase (decrease) to amortization expense:
Retirement
Life
Total
Year Ended December 31,
2017
2016
2015
$
$
1,081
(200)
881
$
$
(313) $
(394)
(707) $
3,403
(34)
3,369
DAC 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 on fixed maturity
and equity securities had been realized at the reporting date. This adjustment reduced DAC by $57,995
thousand and $40,274 thousand at December 31, 2017 and 2016, respectively. The after tax impact of this
adjustment is included in accumulated other comprehensive income (net unrealized investment gains and
losses on fixed maturity and equity securities) within shareholders' equity.
DAC is reviewed for recoverability from future income, including investment income, and costs
which are deemed unrecoverable are expensed in the period in which the determination is made. No such
costs were deemed unrecoverable during the years ended December 31, 2017, 2016 and 2015.
Goodwill
When the Company was acquired in 1989, intangible assets were recorded in the application of
purchase accounting to recognize goodwill. In addition, goodwill was recorded in 1994 related to the
purchase of Horace Mann Property & Casualty Insurance Company.
Goodwill represents the excess of the amounts paid to acquire a business over the fair value of its
net assets at the date of acquisition. Goodwill is not amortized, but is tested for impairment at the reporting
unit level at least annually or more frequently if events occur or circumstances change that would more
likely than not reduce the fair value of a reporting unit below its carrying amount. A reporting unit is defined
as an operating segment or a business unit one level below an operating segment, if separate financial
information is prepared and regularly reviewed by management at that level. The Company's reporting
units, for which goodwill has been allocated, are equivalent to the Company's operating segments.
The allocation of goodwill by reporting unit is as follows:
($ in thousands)
Retirement
Life
Property and Casualty
Total
$
$
28,025
9,911
9,460
47,396
F-45
NOTE 1 - Summary of Significant Accounting Policies-(Continued)
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, 2017 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.
As part of the Company's October 1, 2017 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 2015 through 2017, 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.
F-46
NOTE 1 - Summary of Significant Accounting Policies-(Continued)
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:
($ in thousands)
Property and equipment
Less: accumulated depreciation
Total
December 31,
2017
2016
$
$
133,803
94,862
38,941
$
$
120,712
88,524
32,188
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 results of 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 DAC amortization expense. 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.
Investment Contract and Life Policy Reserves
This table summarizes the Company's investment contract and life policy reserves.
($ in thousands)
Investment contract reserves
Life policy reserves
Total
December 31,
2017
2016
$
$
4,452,972
1,120,763
5,573,735
$
$
4,360,456
1,087,513
5,447,969
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, 2017, reserve
investment yield assumptions ranged from 3.5% to 8.0%.
F-47
NOTE 1 - Summary of Significant Accounting Policies-(Continued)
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
GAAP. 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 financial markets. The Company has a relatively low
exposure to GMDB risk as shown below.
($ in thousands)
December 31,
2017
2016
GMDB reserve
Aggregate in-the-money death benefits under the GMDB provision
Variable annuity contract value distribution based on GMDB feature:
$
152
28,345
$
225
32,106
No guarantee
Return of premium guarantee
Guarantee of premium roll-up at an annual rate of 3% or 5%
Total
29%
65%
6%
100%
32%
62%
6%
100%
Reserves for Fixed Indexed Annuities and Indexed Universal Life Policies
The Company offers fixed indexed annuity (FIA) products with interest crediting strategies linked
to the Standard & Poor's (S&P) 500 Index and the Dow Jones Industrial Average (DJIA). 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.
F-48
NOTE 1 - Summary of Significant Accounting Policies-(Continued)
The Company offers indexed universal life (IUL) products as part of its product portfolio with interest
crediting strategies linked to the S&P's 500 Index and the DJIA as well as a fixed option. The Company
purchases call options monthly to economically 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.
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 property 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 funding agreements with the Federal Home Loan
Bank of Chicago (FHLB) and embedded derivatives related to FIA products. Except for embedded
derivatives, each of these components is carried at cost. Embedded derivatives are carried at fair value.
Amounts received and repaid under 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.
F-49
NOTE 1 - Summary of Significant Accounting Policies-(Continued)
Federal Home Loan Bank (FHLB) Funding Agreements
One of the Company's subsidiaries, Horace Mann Life Insurance Company (HMLIC), is a member
of the FHLB, which provides HMLIC with access to collateralized borrowings and other FHLB products.
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
(Board) has authorized a maximum amount equal to 10% of HMLIC's admitted assets using prescribed
statutory accounting principles. On both December 27, 2013 and September 18, 2014, the Company received
$250,000 thousand under funding agreements and on December 28, 2015, an additional $75,000 thousand
was received under a funding agreement for HMLIC. For the total $575,000 thousand received, $250,000
thousand matures on September 13, 2019, $125,000 thousand matures on December 15, 2023 and, $200,000
thousand matures on January 16, 2026. Interest on the funding agreements accrues at an annual weighted
average rate of 1.28% as of December 31, 2017. HMLIC's FHLB funding agreements of $575,000 thousand
are included in Other policyholder funds in the Consolidated Balance Sheet.
Insurance Premiums and Contract Charges Earned
Property and Casualty insurance premiums are recognized as revenue ratably over the related contract
periods in proportion to the risks insured. The unexpired portions of these Property and Casualty premiums
are recorded as unearned premiums, using the monthly pro rata method.
Premiums and contract charges for life insurance contracts with account values and investment
(annuity) contracts consist of charges for the cost of insurance, policy administration and withdrawals.
Premiums for long-term traditional life policies are recognized as revenues when due over the premium-
paying period. Contract deposits to investment contracts and life insurance contracts with account values
represent funds deposited by policyholders and are not included in the Company's premiums or contract
charges earned.
Share-Based Compensation
The Company grants stock options and both service-based and performance-based restricted common
stock units (RSUs) to executive officers, other employees and Directors in an effort to attract and retain
individuals while also aligning compensation with the interests of the Company's shareholders. Additional
information regarding the Company's share-based compensation plans is contained in Note 9 —
Shareholders' Equity and Common Stock Equivalents.
Stock options are accounted for under the fair value method of accounting using a Black-Scholes
valuation model to measure stock option expense at the date of grant. The fair value of RSUs is measured
at the market price of the Company's common stock on the date of grant, with the exception of market-
based performance awards, for which the Company uses a Monte Carlo simulation model to determine fair
value for purposes of measuring RSU expense. For the years ended December 31, 2017, 2016 and 2015,
the Company recognized $1,347 thousand, $1,207 thousand, and $1,285 thousand, respectively, in stock
option expense as a result of the vesting of stock options during the respective periods. For the years ended
December 31, 2017, 2016 and 2015, the Company recognized $6,459 thousand, $6,929 thousand and $892
thousand, respectively, in RSU expense as a result of the performance and/or vesting of RSUs during the
respective periods.
F-50
NOTE 1 - Summary of Significant Accounting Policies-(Continued)
In 2017, 2016 and 2015, 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.
Number of stock options granted
Weighted average grant date fair value of stock options granted
Weighted average assumptions:
Risk-free interest rate
Expected dividend yield
Expected life, in years
Expected volatility (based on historical volatility)
Year Ended December 31,
2017
2016
2015
222,828
6.57
$
307,176
5.01
$
142,908
11.18
$
2.0%
2.5%
4.9
21.4%
1.3%
3.2%
4.9
25.6%
1.7%
2.6%
7.2
42.8%
The weighted average fair value of nonvested stock options outstanding on December 31, 2017 was
$6.49. Total unrecognized compensation expense relating to the nonvested stock options outstanding as of
December 31, 2017 was approximately $2,102 thousand. This amount will be recognized as expense over
the remainder of the vesting period, which is scheduled to be 2018 through 2021. Expense is reflected on
a straight-line basis over the vesting period for the entire award. Forfeitures of unvested amounts due to
terminations and/or early retirements are recognized as a reduction to the related expenses.
Total unrecognized compensation expense relating to RSUs outstanding as of December 31, 2017
was approximately $7,355 thousand. This amount will be recognized as expense over the remainder of the
performance and/or vesting period, which is scheduled to be 2018 through 2021. Expense is reflected on
a straight-line basis from the date of grant through the end of the performance and/or vesting period for
the entire award. Forfeitures of unvested amounts due to terminations are recognized as a reduction to the
related expenses.
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, 2017, 2016 and 2015 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 net unrealized investment gains and losses
on fixed maturity and equity securities 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.
The effect of changes in tax law are recorded discretely as a component of the income tax provision
related to continuing operations in the period of enactment. This includes deferred taxes being re-measured
that were established through a financial statement component other than continuing operations (e.g.,
accumulated other comprehensive income for net unrealized investment gains and losses on fixed maturity
and equity securities).
F-51
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 RSUs and common stock units (CSUs)
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
CSUs and incentive compensation RSUs, 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:
($ in thousands)
Basic:
Net income for the period
Weighted average number of common shares
during the period (in thousands)
Net income per share - basic
Diluted:
Net income for the period
Weighted average number of common shares
during the period (in thousands)
Weighted average number of common equivalent shares to reflect the
dilutive effect of common stock equivalent securities (in thousands):
Stock options
CSUs related to deferred compensation for employees
RSUs related to incentive compensation
Total common and common equivalent shares adjusted
to calculate diluted earnings per share (in thousands)
Net income per share - diluted
Year Ended December 31,
2017
2016
2015
169,459
$
83,765
$
93,482
41,365
4.10
$
41,158
2.04
$
41,915
2.23
169,459
$
83,765
$
93,482
41,365
41,158
41,915
112
25
63
100
52
166
158
55
297
41,565
4.08
$
41,476
2.02
$
42,425
2.20
$
$
$
$
Options to purchase 208,740 shares of common stock at $38.05 to $41.95 per share were granted in
2017 but were not included in the computation of 2017 diluted earnings per share because of their anti-
dilutive effect as a result of the effect of unrecognized compensation cost. The options, which expire in
2027, were still outstanding at December 31, 2017.
F-52
NOTE 1 - Summary of Significant Accounting Policies-(Continued)
Comprehensive Income (Loss) and Accumulated Other Comprehensive Income (Loss)
Comprehensive income (loss) represents the change in shareholders' equity during a reporting period
from transactions and other events and circumstances from non-shareholder sources. For the Company,
comprehensive income (loss) is equal to net income plus or minus the after tax change in net unrealized
investment gains and losses on fixed maturity and equity securities and the after tax change in net funded
status of benefit plans for the periods as shown in the Consolidated Statements of Changes in Shareholders'
Equity. Accumulated other comprehensive income (loss) represents the accumulated change in shareholders'
equity from these transactions and other events and circumstances from non-shareholder sources as shown
in the Consolidated Balance Sheets.
In the Consolidated Balance Sheets, the Company recognizes the funded status of benefit plans as
a component of accumulated other comprehensive income (loss), net of tax.
Comprehensive Income (Loss)
The components of comprehensive income (loss) were as follows:
($ in thousands)
Net income
Other comprehensive income (loss):
Change in net unrealized investment gains and losses
on fixed maturity and equity securities:
Net unrealized investment gains and losses on fixed
maturity and equity securities arising during the period
Less: reclassification adjustment for net gains (losses)
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
Year Ended December 31,
2017
2016
2015
$
169,459
$
83,765
$
93,482
105,475
6,144
(178,035)
(4,863)
110,338
35,933
74,405
5,176
968
397
571
1,461
727
734
244,598
$
(37)
(14)
(23)
84,313
$
11,667
(189,702)
(67,315)
(122,387)
1,815
656
1,159
(27,746)
Total comprehensive income (loss)
$
F-53
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.
($ in thousands)
Net Unrealized
Investment
Gains and
Losses on
Fixed Maturity
and Equity
Securities (1)(2)
Defined
Benefit Plans
(1)
Total (1)(3)
Beginning balance, January 1, 2017
Other comprehensive income (loss) before reclassifications
Amounts reclassified from accumulated
other comprehensive income (loss)
Reclassification of deferred taxes (3)
Net current period other comprehensive income (loss)
Ending balance, December 31, 2017
Beginning balance, January 1, 2016
Other comprehensive income (loss) before reclassifications
Amounts reclassified from accumulated
other comprehensive income (loss)
Net current period other comprehensive income (loss)
Ending balance, December 31, 2016
Beginning balance, January 1, 2015
Other comprehensive income (loss) before reclassifications
Amounts reclassified from accumulated
other comprehensive income (loss)
Net current period other comprehensive income (loss)
Ending balance, December 31, 2015
$
$
$
$
$
$
175,738
71,244
$
3,161
50,034
124,439
300,177
175,167
3,935
(3,364)
571
175,738
297,554
(114,803)
(7,584)
(122,387)
175,167
$
$
$
$
$
(11,817) $
734
—
(2,134)
(1,400)
(13,217) $
(11,794) $
(23)
—
(23)
(11,817) $
(12,953) $
1,159
—
1,159
(11,794) $
163,921
71,978
3,161
47,900
123,039
286,960
163,373
3,912
(3,364)
548
163,921
284,601
(113,644)
(7,584)
(121,228)
163,373
___________________
(1) All amounts are net of tax.
(2) The pretax amounts reclassified from accumulated other comprehensive income, $(4,863), $5,176 thousand and $11,667
thousand, are included in net realized investment gains and losses and the related tax expenses, $(1,702), $1,812 thousand
and $4,083 thousand, are included in income tax expense in the Consolidated Statements of Operations for the years ended
December 31, 2017, 2016 and 2015, respectively.
(3) For the period ended December 31, 2017, deferred taxes attributable to Net unrealized investment gains and losses on fixed
maturity and equity securities and Defined benefit plans were re-measured as a result of the enactment of the Tax Cuts and
Jobs Act (Tax Act). ASC 740, Income Taxes, requires that the income tax effect from the deferred tax re-measurement be
reflected in the Company’s income tax expense, even if the deferred taxes being re-measured were originally established
through Accumulated other comprehensive income (AOCI). The mismatch between deferred taxes established in AOCI at
35% and re-measuring these same deferred taxes at 21% through income tax expense results in stranded deferred taxes in
AOCI. On February 14, 2018, the FASB issued accounting guidance that permits recognition of a reclassification adjustment
between AOCI and Retained earnings for stranded deferred tax amounts related to the reduced corporate tax rate enacted
under the Tax Act. As permitted under its provisions, the Company early adopted the accounting guidance effective for the
quarterly period that ended December 31, 2017 and has elected to reclassify the stranded deferred tax amounts. The impact
from early adoption resulted in an increase to AOCI and a reduction to Retained earnings of approximately $47,900 thousand;
representing the stranded deferred tax liabilities of $50,034 thousand and $(2,134) thousand for Net unrealized investment
gains and losses on fixed maturity and equity securities and Defined benefit plans, 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 — Net Unrealized Investment
Gains and Losses on Fixed Maturity and Equity Securities.
F-54
NOTE 1 - Summary of Significant Accounting Policies-(Continued)
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.
Adopted Accounting Standards
Employee Share-based Payment Accounting
Effective January 1, 2017, the Company adopted new accounting guidance for employee share-based
payments which simplifies several aspects of the accounting for share-based payment transactions,
including the income tax consequences, classification of awards as either equity or liabilities, and
classification on the statement of cash flows. The recognition and classification of the excess tax benefit
provisions were applied prospectively in the Consolidated Statements of Operations. This adoption resulted
in additional excess tax benefits of $3,344 thousand which reduced the current provision for income taxes
in the Consolidated Statements of Operations. The statutory tax withholding classification, which are cash
payments made to taxing authorities for withheld taxes funded through tendered shares, were applied
retrospectively and the Company reclassified the statutory tax withholding requirements in the statement
of cash flows from Other in operating activities to Withholding tax payments on RSUs tendered in financing
activities. This statutory withholding reclassification resulted in $3,245 thousand, $4,015 thousand and
$671 thousand being included in financing activities for the years ended December 31, 2017, 2016 and
2015, respectively. There were no cumulative effect adjustments upon adoption of the new accounting
guidance.
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
On February 14, 2018, the FASB issued accounting guidance that permits recognition of a
reclassification adjustment between AOCI and Retained earnings for stranded tax amounts related to the
reduced corporate tax rate enacted under the Tax Act. As permitted under its provisions, the Company early
adopted the accounting guidance effective for the quarterly period that ended December 31, 2017 and has
elected to reclassify the stranded tax amounts. The impact from early adoption resulted in an increase to
AOCI and a reduction to Retained earnings of approximately $47,900 thousand; representing the stranded
deferred tax liabilities of $50,034 thousand and $(2,134) thousand for Net unrealized investment gains and
losses on fixed maturity and equity securities and Defined benefit plans, respectively.
F-55
NOTE 1 - Summary of Significant Accounting Policies-(Continued)
Pending Accounting Standards
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, certain 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 adopted the guidance on January 1, 2018, using the modified
retrospective transition method. The guidance did not have an impact on the Company’s consolidated
financial position, results of operations, or cash flows. The Company will make any additional required
disclosures under the guidance, starting with the Company's consolidated financial statements that include
the initial adoption date.
Recognition and Measurement of Financial Assets and Liabilities
In January 2016, the FASB issued accounting guidance to improve certain aspects of the recognition,
measurement, presentation and disclosure of financial instruments. Among other things, the guidance
revises the accounting related to the classification and measurement of investments in equity securities and
the presentation of certain fair value changes for financial liabilities measured at fair value. The Company's
Consolidated Statements of Operations will be impacted as changes in fair value of equity securities will
be reported in net income instead of reported in OCI. The effective date of the guidance is for interim and
annual reporting periods beginning after December 15, 2017. The Company adopted the guidance on
January 1, 2018 using the modified retrospective approach that resulted in reclassifying $15,125 thousand
of after-tax unrealized gains on equity securities from accumulated other comprehensive income to retained
earnings.
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 Company
adopted the guidance on January 1, 2018 and the impact to the prior years' amounts reported in the
Consolidated Statement of Cash Flows was $0 for 2017, $0 for 2016 and a reclassification of $2,801
thousand of cash receipts from Net cash provided by (used in) equity securities, short-term and other
investments to Investment income collected in 2015, representing return on capital distributions received
from equity method investees.
F-56
NOTE 1 - Summary of Significant Accounting Policies-(Continued)
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. While the Company is in the process of evaluating the impact of the guidance, it does not expect
the guidance to have a material impact on its consolidated financial statements, except for recognizing lease
assets and lease liabilities for its operating leases. The Company's lease obligations under various non-
cancellable operating lease agreements amounted to approximately $9,760 thousand at December 31, 2017.
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. Any credit losses related to available for sale debt securities 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.
Simplifying the Test for Goodwill Impairment
In January 2017, the 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-57
NOTE 2 - Investments
The Company's investment portfolio includes free-standing derivative financial instruments
(currently over the counter index call option contracts) used to economically hedge risk associated with its
FIA and IUL products' contingent liabilities. The Company's FIA and IUL 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 investment
or insurance products during the three years ended December 31, 2017.
Net Investment Income
The components of net investment income for the following periods were:
($ in thousands)
Fixed maturity securities
Equity securities
Short-term and other investments
Other invested assets (equity method investments)
Total investment income
Investment expenses
Net investment income
Net Realized Investment Gains (Losses)
Year Ended December 31,
2017
2016
2015
$
$
354,290
6,411
10,214
12,555
383,470
(9,840)
373,630
$
$
342,773
4,703
9,668
13,609
370,753
(9,567)
361,186
$
$
326,207
4,355
9,187
1,984
341,733
(9,133)
332,600
Net realized investment gains (losses) for the following periods were:
($ in thousands)
Fixed maturity securities
Equity securities
Short-term investments and other
Net realized investment gains (losses)
Year Ended December 31,
2017
2016
2015
$
$
(8,867) $
4,003
1,458
(3,406) $
5,784
(608)
(1,053)
4,123
$
$
10,289
1,378
1,046
12,713
The Company, from time to time, sells invested assets subsequent to the reporting date that were
considered temporarily impaired at the reporting date. Such sales are due to issuer specific events occurring
subsequent to the reporting 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-58
NOTE 2 - Investments-(Continued)
Fixed Maturity 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 OTTI included in accumulated other comprehensive income (loss) (AOCI) of all fixed maturity and
equity securities in the portfolio were as follows:
($ in thousands)
December 31, 2017
Fixed maturity securities
U.S. Government and federally
sponsored agency obligations (2):
Mortgage-backed securities
Other, including U.S. Treasury securities
Municipal bonds
Foreign government bonds
Corporate bonds
Other mortgage-backed securities
Totals
Equity securities (3)
December 31, 2016
Fixed maturity securities
U.S. Government and federally
sponsored agency obligations (2):
Mortgage-backed securities
Other, including U.S. Treasury securities
Municipal bonds
Foreign government bonds
Corporate bonds
Other mortgage-backed securities
Totals
Equity securities (3)
Amortized
Cost/Cost
Unrealized
Gains
Unrealized
Losses
Fair
Value
OTTI in
AOCI (1)
$
669,297
714,613
1,711,581
96,780
2,409,426
1,701,253
$ 7,302,950
$
116,320
$
412,891
458,745
1,648,252
93,864
2,672,818
1,865,557
$ 7,152,127
$
134,013
$
$
$
$
$
$
30,460
26,311
184,107
5,958
173,862
22,935
443,633
19,425
33,168
18,518
143,733
5,102
152,229
22,241
374,991
13,210
$
$
$
$
$
$
3,032
5,516
2,435
—
4,334
7,191
22,508
$
696,725
735,408
1,893,253
102,738
2,578,954
1,716,997
$ 7,724,075
279
$
135,466
3,640
10,120
22,588
297
14,826
18,939
70,410
$
442,419
467,143
1,769,397
98,669
2,810,221
1,868,859
$ 7,456,708
5,574
$
141,649
$
$
$
$
$
$
—
—
—
—
—
—
—
—
—
—
—
—
—
1,618
1,618
—
(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 OTTI 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 $361,955 thousand and $196,468 thousand;
Federal Home Loan Mortgage Corporation (FHLMC) of $400,001 thousand and $284,050 thousand; and Government National Mortgage
Association (GNMA) of $104,168 thousand and $115,627 thousand as of December 31, 2017 and 2016, respectively.
(3) Includes nonredeemable (perpetual) preferred stocks, common stocks and closed-end funds.
F-59
NOTE 2 - Investments-(Continued)
The following table presents the fair value and gross unrealized losses of fixed maturity and equity
securities in an unrealized loss position at December 31, 2017 and 2016, respectively. The Company views
the decrease in value of all of the securities with unrealized losses at December 31, 2017 — which was
driven largely by changes in interest rates, spread widening, financial market illiquidity and/or market
volatility from the date of acquisition — as temporary. For fixed maturity securities, management does not
have the intent to sell the securities and it is not more likely than not the Company will be required to sell
the securities before the anticipated recovery of the amortized cost bases, and management expects to
recover the entire amortized cost bases of the fixed maturity securities. For equity securities, the Company
has the ability and intent to hold the securities for the recovery of cost and recovery of cost is expected
within a reasonable period of time. Therefore, no impairment of these securities was recorded at December
31, 2017.
($ in thousands)
12 months or less
More than 12 months
Total
Gross
Unrealized
Losses
Gross
Unrealized
Losses
Fair Value
Fair Value
Gross
Unrealized
Losses
Fair Value
December 31, 2017
Fixed maturity securities
U.S. Government and federally
sponsored agency obligations:
Mortgage-backed securities
Other
Municipal bonds
Foreign government bonds
Corporate bonds
Other mortgage-backed securities
Total fixed maturity securities
Equity securities (1)
Combined totals
Number of positions with a
gross unrealized loss
Fair value as a percentage of total fixed
maturities and equity securities fair value
December 31, 2016
Fixed maturity securities
U.S. Government and federally
sponsored agency obligations:
Mortgage-backed securities
Other
Municipal bonds
Foreign government bonds
Corporate bonds
Other mortgage-backed securities
Total fixed maturity securities
Equity securities (1)
Combined totals
$ 134,032
168,634
29,437
—
115,113
457,166
904,382
6,027
$ 910,409
354
11.6%
$
76,573
219,372
408,163
24,182
459,402
750,557
1,938,249
56,676
$1,994,925
$
$
$
$
1,053
1,849
100
—
2,701
2,791
8,494
249
8,743
$
40,606
122,753
79,140
—
36,081
168,972
447,552
1,277
$ 448,829
158
5.7%
3,096
10,120
19,006
297
11,056
13,550
57,125
4,567
61,692
$
3,235
—
9,928
—
57,261
229,106
299,530
7,956
$ 307,486
$
$
$
$
1,979
3,667
2,335
—
1,633
4,400
14,014
30
14,044
$ 174,638
291,387
108,577
—
151,194
626,138
1,351,934
7,304
$1,359,238
512
17.3%
544
—
3,582
—
3,770
5,389
13,285
1,007
14,292
$
79,808
219,372
418,091
24,182
516,663
979,663
2,237,779
64,632
$2,302,411
$
$
$
$
3,032
5,516
2,435
—
4,334
7,191
22,508
279
22,787
3,640
10,120
22,588
297
14,826
18,939
70,410
5,574
75,984
Number of positions with a
gross unrealized loss
Fair value as a percentage of total fixed
maturities and equity securities fair value
629
26.3%
102
4.0%
731
30.3%
____________________
(1) Includes nonredeemable (perpetual) preferred stocks, common stocks and closed-end funds.
F-60
NOTE 2 - Investments-(Continued)
Fixed maturity and equity securities with an investment grade rating represented 90.3% of the gross
unrealized loss as of December 31, 2017. 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 OTTI losses on fixed maturity securities held as of December 31, 2017 and 2016 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 OTTI losses were recognized in other comprehensive income (loss):
($ in thousands)
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
$
$
Year Ended December 31,
2017
2016
13,703
—
1,995
(11,873)
3,825
$
$
7,844
300
5,859
(300)
13,703
____________________
(1) The cumulative credit loss amounts exclude OTTI 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 Maturity 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.
($ in thousands)
Estimated expected maturity:
Due in 1 year or less
Due after 1 year through 5 years
Due after 5 years through 10 years
Due after 10 years through 20 years
Due after 20 years
Total
December 31, 2017
Amortized
Cost
Fair
Value
Percent of
Total Fair
Value
$
$
243,998
1,985,554
2,428,868
1,731,226
913,304
7,302,950
$
$
248,959
2,059,625
2,522,414
1,867,055
1,026,022
7,724,075
3.2%
26.7%
32.6%
24.2%
13.3%
100.0%
Average option-adjusted duration, in years
5.9
F-61
NOTE 2 - Investments-(Continued)
Sales of Fixed Maturity and Equity Securities
Proceeds received from sales of fixed maturity 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:
($ in thousands)
Fixed maturity securities
Proceeds received
Gross gains realized
Gross losses realized
Equity securities
Proceeds received
Gross gains realized
Gross losses realized
Year Ended December 31,
2017
2016
2015
$
$
$
$
500,760
13,570
(11,842)
50,113
7,753
(1,972)
$
$
429,251
15,915
(4,163)
21,210
2,869
(935)
445,100
22,476
(5,487)
31,621
6,604
(672)
Net Unrealized Investment Gains and Losses on Fixed Maturity and Equity Securities
Net unrealized investment gains and losses are computed as the difference between fair value and
amortized cost for fixed maturity securities 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 DAC:
($ in thousands)
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)
losses to net income
End of period
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)
losses to net income
End of period
Year Ended December 31,
2017
2016
2015
$
$
$
$
197,978
69,989
5,764
273,731
4,963
10,084
(2,602)
12,445
$
$
$
$
198,714
3,024
(3,760)
197,978
2,649
1,919
395
4,963
$
$
$
$
336,604
(131,202)
(6,688)
198,714
6,988
(3,443)
(896)
2,649
Investment in Entities Exceeding 10% of Shareholders' Equity
At December 31, 2017 and 2016, 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-62
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.
($ in thousands)
December 31, 2017
Asset derivatives
Gross
Amounts
Offset in the
Consolidated
Balance
Sheets
Net Amounts
of Assets/
Liabilities
Presented
in the
Consolidated
Balance
Sheets
Gross
Amounts
Gross Amounts Not Offset
in the Consolidated
Balance Sheets
Financial
Instruments
Cash
Collateral
Received
Net
Amount
Free-standing derivatives
$
15,550
$
— $
15,550
$
— $
15,584
$
(34)
December 31, 2016
Asset derivatives
Free-standing derivatives
8,694
—
8,694
—
8,824
(130)
Deposits
At December 31, 2017 and 2016, fixed maturity securities with a fair value of $17,985 thousand and
$18,119 thousand, 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, 2017
and 2016, fixed maturity securities with a fair value of $686,790 thousand and $620,489 thousand,
respectively, were on deposit with FHLB as collateral for amounts subject to funding agreements, advances
and borrowings which were equal to $625,000 thousand and $575,000 thousand at the respective dates.
The deposited securities are included in Fixed maturity securities on the Company's Consolidated Balance
Sheets.
F-63
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
Level 2
Level 3
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.
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 instruments.
Unobservable inputs that are supported by little or no market activity and that are significant
to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial
instruments whose value is determined using pricing models, certain discounted cash flow
methodologies, or similar techniques, as well as instruments for which the determination of
fair value requires significant management judgment or estimation and for which the
significant inputs are unobservable. This category generally includes certain private debt and
equity investments, as well as embedded derivatives.
When the inputs used to measure fair value fall within different levels of the hierarchy, the level
within which the fair value measurement is categorized is based on the lowest level input that is significant
to the fair value measurement in its entirety. As a result, a Level 3 fair value measurement may include
inputs that are observable (Level 1 or Level 2) and unobservable (Level 3). Net transfers into or out of each
of the three levels are reported as having occurred at the end of the reporting period in which the transfers
were determined.
F-64
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 investment holdings. Care is exercised in deriving conclusions about the Company's
business, its value or financial position based on the fair value information of financial 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 both the timing and amount
of expected future cash flows and the credit standing of the issuer. In some cases, 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 methodologies are 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-65
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 90.7% of the portfolio,
based on fair value, was priced through pricing services or index priced as of both December 31, 2017 and
2016. The remainder of the portfolio was priced by broker-dealers or pricing models. When non-binding
broker-dealer quotes can be corroborated by comparison to other vendor quotes, pricing models or analyses,
the securities are generally classified as Level 2, otherwise they are classified as Level 3. There were no
significant changes to the valuation process during 2017.
When a public quotation is not available, equity securities are valued by using non-binding broker-
dealer 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 2017. At December 31, 2017, all of the publicly traded equity securities were
priced from observable market quotations. Fair values of equity securities have been determined by the
Company from observable market quotations, when available.
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 of
accounting and are excluded from the fair value hierarchy.
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.
F-66
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, 2017, Level 3 investments comprised
approximately 2.8% of the Company's total investment portfolio fair value.
($ in thousands)
December 31, 2017
Financial Assets
Investments
Fixed maturity securities
U.S. Government and federally
sponsored agency obligations:
Mortgage-backed securities
Other, including U.S. Treasury securities
Municipal bonds
Foreign government bonds
Corporate bonds
Other mortgage-backed securities
Total fixed maturity securities
Equity securities
Short-term investments
Other investments
Totals
Financial Liabilities
Carrying
Amount
Fair
Value
$
696,725
735,408
1,893,253
102,738
2,578,954
1,716,997
7,724,075
135,466
62,593
28,050
$ 7,950,184
$
696,725
735,408
1,893,253
102,738
2,578,954
1,716,997
7,724,075
135,466
62,593
28,050
$ 7,950,184
Investment contract and life policy reserves,
embedded derivatives
Other policyholder funds, embedded derivatives
$
$
594
80,733
$
$
594
80,733
December 31, 2016
Financial Assets
Investments
Fixed maturity securities
U.S. Government and federally
sponsored agency obligations:
Mortgage-backed securities
Other, including U.S. Treasury securities
Municipal bonds
Foreign government bonds
Corporate bonds
Other mortgage-backed securities
Total fixed maturity securities
Equity securities
Short-term investments
Other investments
Totals
Financial Liabilities
$
442,419
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
$
442,419
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
Investment contract and life policy reserves,
embedded derivatives
Other policyholder funds, embedded derivatives
$
$
158
59,393
$
$
158
59,393
$
$
$
$
$
$
$
$
F-67
Fair Value Measurements at
Reporting Date Using
Level 2
Level 1
Level 3
— $
13,393
—
—
14,345
—
27,738
82,208
62,593
—
172,539
693,375
722,015
1,843,925
102,738
2,491,630
1,612,403
7,466,086
53,252
—
28,050
$ 7,547,388
$
$
3,350
—
49,328
—
72,979
104,594
230,251
6
—
—
230,257
— $
— $
594
$
— $
—
80,733
— $
13,631
—
—
13,532
—
27,163
98,632
44,167
—
169,962
439,004
453,512
1,722,900
98,669
2,736,498
1,767,615
7,218,198
43,011
—
20,194
$ 7,281,403
$
$
3,415
—
46,497
—
60,191
101,244
211,347
6
751
—
212,104
— $
— $
$
158
— $
—
59,393
NOTE 3 - Fair Value of Financial Instruments-(Continued)
The Company transferred one equity security between Levels 2 and 1 during 2017 because that
security became more actively traded. The Company did not have any transfers between Levels 1 and 2
during 2016. The following tables present reconciliations for the periods indicated for all Level 3 assets and
liabilities measured at fair value on a recurring basis.
($ in thousands)
Municipal
Bonds
Corporate
Bonds
Financial Assets
Other
Mortgage-
Backed
Securities (2)
Total
Fixed
Maturity
Securities
Equity
Securities
Short-term
Investments
Total
Financial
Liabilities(1)
Beginning balance, January 1, 2017
$
46,497
$
60,191
$
104,659
$
211,347
$
6
$
751
$
212,104
$
59,393
Ending balance, December 31, 2017
Beginning balance, January 1, 2016
$
$
49,328
$
72,979
$
107,944
$
230,251
$
6
$
— $
230,257
$
80,733
30,379
$
67,575
$
75,466
$
173,420
$
6
$
— $
173,426
$
39,021
Transfers into Level 3 (3)
Transfers out of Level 3 (3)
Total gains or losses
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 OCI
Purchases
Issuances
Sales
Settlements
5,214
38,483
(5,557)
(16,252)
43,091
(6,542)
86,788
(28,351)
—
—
3,977
—
—
—
—
(1)
(1,832)
(1,833)
—
661
—
—
—
—
2,075
6,713
—
—
—
—
(1,999)
(9,179)
(11,178)
—
—
—
Paydowns, maturities and distributions
(803)
(8,104)
(24,328)
(33,235)
—
—
—
—
—
—
—
—
—
—
Transfers into Level 3 (3)
17,710
27,561
Transfers out of Level 3 (3)
—
(14,334)
39,128
(6,694)
84,399
(21,028)
Total gains or losses
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 OCI
Purchases
Issuances
Sales
Settlements
—
—
(1,833)
(56)
(1,889)
—
—
—
(990)
(205)
5,895
4,700
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Paydowns, maturities and distributions
(602)
(18,573)
(9,080)
(28,255)
—
—
—
—
—
—
—
—
—
—
—
(751)
86,788
(29,102)
—
—
—
—
—
—
(1,833)
—
12,942
6,713
—
—
(11,178)
—
—
—
12,605
—
—
(33,235)
(4,207)
(1,889)
—
5,011
4,700
—
—
—
—
—
—
17,113
—
—
(28,255)
(1,752)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
751
—
85,150
(21,028)
Ending balance, December 31, 2016
$
46,497
$
60,191
$
104,659
$
211,347
$
6
$
751
$
212,104
$
59,393
Includes U.S. Government and federally sponsored agency obligations for mortgage-backed securities and other mortgage-backed securities.
____________________
(1) Represents embedded derivatives, all related to the Company's FIA products, reported in Other policyholder funds in the Company's Consolidated Balance Sheets.
(2)
(3) Transfers into and out of Level 3 during the years ended December 31, 2017 and 2016 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, 2017, the Company impaired Level 3 securities for a $1,833 thousand realized loss.
At December 31, 2016 the Company impaired Level 3 securities for a $1,889 thousand realized loss. For
the years ended December 31, 2017 and 2016, realized losses of $12,942 thousand and $5,011 thousand,
respectively, were included in earnings that were attributable to the changes in the fair value of Level 3
liabilities (embedded derivatives) still held.
F-68
NOTE 3 - Fair Value of Financial Instruments-(Continued)
The valuation techniques and significant unobservable inputs used in the fair value measurement for
financial assets and liabilities classified as Level 3 are subject to the control processes as previously described
in this Note. Generally, valuation techniques for fixed maturity securities include spread pricing, matrix
pricing and discounted cash flow methodologies; include inputs such as quoted prices for identical or similar
securities that are less liquid; and are based on lower levels of trading activity than securities classified as
Level 2. The valuation techniques and significant unobservable inputs used in the fair value measurement
for equity securities classified as Level 3 use similar valuation techniques and significant unobservable
inputs as those used for fixed maturity securities.
The sensitivity of the estimated fair values to changes in the significant unobservable inputs for fixed
maturity 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.
($ in thousands)
December 31, 2017
Financial Assets
Investments
Other investments
Financial Liabilities
Carrying
Amount
Fair
Value
Fair Value Measurements at
Reporting Date Using
Level 1
Level 2
Level 3
$ 154,898
$ 159,575
$
— $
— $ 159,575
Investment contract and life policy reserves,
fixed annuity contracts
Investment contract and life policy reserves,
account values on life contracts
Other policyholder funds
Long-term debt
4,452,972
4,366,334
82,911
643,528
297,469
88,620
643,528
311,315
—
—
—
—
— 4,366,334
—
575,622
311,315
88,620
67,906
—
December 31, 2016
Financial Assets
Investments
Other investments
Financial Liabilities
$ 151,965
$ 156,536
$
— $
— $ 156,536
Investment contract and life policy reserves,
fixed annuity contracts
Investment contract and life policy reserves,
account values on life contracts
Other policyholder funds
Long-term debt
4,360,456
4,280,528
79,591
649,557
247,209
85,066
649,557
248,191
—
—
—
—
— 4,280,528
—
575,253
248,191
85,066
74,304
—
F-69
NOTE 3 - Fair Value of Financial Instruments-(Continued)
Other Investments
Other investments includes policy loans and mortgage loans. For policy loans the fair value is based
on estimates using discounted cash flow analysis and current interest rates being offered for new loans. For
mortgage loans, the fair value is estimated by discounting the future cash flows using current rates at which
similar loans would be made to borrowers with similar credit ratings and similar 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 IUL products. These embedded derivatives are carried at fair value with fair value equal to the
fair value of the current call options purchased to hedge the liability.
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 the FIA products. 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 related to FIA products is estimated at each reporting 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-70
NOTE 4 - Derivative Instruments
The Company offers FIA products, 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. The Company also offers IUL products which 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 changes 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 FIA are treated as a "series of embedded derivatives" over the
expected life of the applicable contract with a corresponding reserve recognized. For IUL, the embedded
derivative represents a single year liability for the index return.
The Company carries all derivative instruments at fair value in the Consolidated Balance Sheets.
The Company elected to not use hedge accounting for derivative transactions related to the FIA and IUL
products. As a result, the Company recognizes 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 as Net realized investment gains (losses) in the Consolidated Statements of
Operations. The fair values of derivative instruments, including derivative instruments embedded in FIA
and IUL contracts are presented in the Consolidated Balance Sheets as follows:
($ in thousands)
Assets
December 31,
2017
2016
Derivative instruments, included in Short-term and other investments
$
15,550
$
8,694
Liabilities
Fixed indexed annuities - embedded derivatives,
included in Other policyholder funds
Indexed universal life - embedded derivatives,
included in Investment contract and life policy reserves
80,733
594
59,393
158
F-71
NOTE 4 - Derivative Instruments-(Continued)
In general, the change in the fair value of the embedded derivatives related to FIA 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 the embedded derivatives represent the rights of the policyholder to
receive index credits over the entire period the FIA contracts 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:
($ in thousands)
Change in fair value of derivatives (1):
Revenues
Years Ended December 31,
2017
2016
2015
Net realized investment gains (losses)
$
14,867
$
4,024
$
(1,483)
Change in fair value of embedded derivatives:
Revenues
Net realized investment gains (losses)
(13,410)
(5,076)
2,529
____________________
(1) Includes gains or losses recognized at the expiration of the option term or early termination and the changes in fair value
for open options.
The Company's strategy attempts to mitigate potential risk of loss under these agreements through
a regular monitoring process, which evaluates the program's effectiveness. The Company is exposed to
risk of loss in the event of nonperformance by the counterparties and, accordingly, option contracts are
purchased from multiple counterparties, which are evaluated for creditworthiness prior to purchase of the
contracts. All of these options have been purchased from nationally recognized financial institutions with
a S&P/Moody's Investors Service (Moody's) long-term credit rating of "BBB+/A1" 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:
($ in thousands)
December 31, 2017
December 31, 2016
Counterparty
S&P
Moody's
Credit Rating
Notional
Amount
Fair
Value
Notional
Amount
Fair
Value
Bank of America, N.A.
Barclays Bank PLC
Citigroup Inc.
Credit Suisse International
Societe Generale
A+
A
BBB+
A
A
Aa3
A1
A1
$
$
85,100
48,900
—
21,100
91,700
$
6,320
1,828
—
1,444
5,958
$
38,500
66,800
—
65,200
15,600
1,934
1,543
—
4,281
936
Total
$
246,800
$
15,550
$
186,100
$
8,694
As of December 31, 2017 and 2016, the Company held $15,584 thousand and $8,824 thousand,
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 $250 thousand per counterparty.
F-72
NOTE 5 - Property and Casualty Unpaid Claims and Claim Expenses
The following table is a summary reconciliation of the beginning and ending Property and Casualty
unpaid claims and claim expense reserves for the periods indicated. The table presents reserves on both
gross and net (after reinsurance) bases. The total net Property and Casualty insurance claims and claim
expense incurred amounts are reflected in the Consolidated Statements of Operations. The end of the year
gross reserve (before reinsurance) balances and the reinsurance recoverable balances are reflected on a
gross basis in the Consolidated Balance Sheets.
($ in thousands)
Property and Casualty segment
Gross reserves, beginning of year (1)
Less: reinsurance recoverables
Net reserves, beginning of year (2)
Incurred claims and claim expenses:
Claims occurring in the current year
Decrease in estimated reserves for claims occurring in prior years (3)
Total claims and claim expenses incurred (4)
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
Gross reserves, end of year (1)
Years Ended December 31,
2017
2016
2015
$
$
307,757
61,199
246,558
$
301,569
50,332
251,237
311,097
43,740
267,357
498,989
(2,700)
496,289
333,385
147,689
481,074
261,773
57,409
319,182
$
471,099
(7,000)
464,099
323,025
145,753
468,778
246,558
61,199
307,757
$
432,811
(12,500)
420,311
294,449
141,982
436,431
251,237
50,332
301,569
$
____________________
(1) Unpaid claims and claim expenses as reported in the Consolidated Balance Sheets also include reserves for Life and
Retirement of $28,567 thousand, $22,131 thousand and $22,151 thousand as of December 31, 2017, 2016 and 2015,
respectively, in addition to Property and Casualty 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 2017, 2016 and
2015.
(4) Benefits, claims and settlement expenses as reported in the Consolidated Statements of Operations also include amounts
for Life and Retirement of $86,017 thousand, $76,905 thousand, and $76,053 thousand for the years ended December 31,
2017, 2016 and 2015, respectively, in addition to Property and Casualty amounts.
Underwriting results for Property and Casualty 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.
F-73
NOTE 5 - Property and Casualty Unpaid Claims and Claim Expenses-(Continued)
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 reporting 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 recognized amount. Due to uncertainties involved, the ultimate cost of losses may vary materially
from recognized 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 80.0% as of December 31, 2017) 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.
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 re-estimates. 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 claims occurred. For
estimating short-tail coverage reserves (e.g., homeowners and automobile physical damage), which
comprise approximately 15.0% of the Company's total loss reserves as of December 31, 2017, 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 85.0% of the Company's total loss reserves as of December 31, 2017, the
primary actuarial technique utilized is the development of reported loss dollars due to the relatively long
claim settlement period.
F-74
NOTE 5 - Property and Casualty Unpaid Claims and Claim Expenses-(Continued)
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 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 re-estimate.
Reserves are re-estimated 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
recognized in the period in which development factor changes result in reserve re-estimates.
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 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 99.0% of the Company's incurred losses for
2017.
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 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 recognized 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.
F-75
NOTE 5 - Property and Casualty Unpaid Claims and Claim Expenses-(Continued)
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 6.0% of reserves, which equates to plus or minus approximately $10,000
thousand of net income as of December 31, 2017. Although this evaluation reflects the most likely outcomes,
it is possible the final outcome may fall below or above these estimates.
Net favorable development of total reserves for Property and Casualty claims occurring in prior
years was $2,700 thousand in 2017, $7,000 thousand in 2016 and $12,500 thousand in 2015. In 2017, the
favorable development was predominantly the result of favorable severity trends in property for accident
years 2015 and prior. In 2016, the favorable development was predominantly the result of favorable severity
trends in property for accident years 2014 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.
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 31st of each year. The result of the independent actuarial study at December 31, 2017 was
consistent with management's analysis and selected estimates and did not result in any adjustments to the
Company's Property and Casualty reserves recognized.
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:
($ in thousands) Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
Years
Homeowners
Auto liability
Auto physical damage
1
78.2%
41.0%
95.4%
2
17.1%
34.9%
4.6%
3
2.5%
13.8%
—
4
1.0%
6.3%
—
5
0.9%
2.5%
—
6
0.2%
1.0%
—
7
0.1%
0.3%
—
8
—
0.1%
—
9
—
—
—
10
—
—
—
F-76
NOTE 5 - Property and Casualty Unpaid Claims and Claim Expenses-(Continued)
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 reoccur in the future. It may not
be appropriate to use this cumulative history in the projection of future performance.
($ in thousands)
Incurred Claims and Allocated Claim Adjustment Expense, Net of Reinsurance
Homeowners
Years Ended December 31,
As of December 31, 2017
Accident
Unaudited
Unaudited
Unaudited
Unaudited
Unaudited
Unaudited
Unaudited
Unaudited
Unaudited
Year
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Total of
Incurred-
But-Not-
Reported
Liabilities
Plus
Expected
Development
on Reported
Claims
Cumulative
Number of
Reported
Claims
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
$ 140,469
$ 136,743
$ 136,002
$ 139,743
$ 139,232
$ 139,511
$ 139,472
$ 139,348
$ 139,306
$ 139,311
$
113,274
112,280
112,970
113,096
113,357
113,230
113,216
112,900
140,994
136,907
133,358
133,235
133,216
133,136
132,859
150,141
150,334
150,791
148,860
148,755
148,414
108,754
109,156
109,360
106,486
106,308
105,584
107,489
103,982
102,407
111,647
113,505
109,059
111,706
115,134
115,931
112,958
132,905
148,370
106,348
102,345
106,844
114,404
118,604
126,285
Total
$ 1,208,374
—
—
74
326
433
718
654
1,667
4,677
12,834
32,277
21,809
25,149
29,526
21,576
19,214
20,076
18,673
19,733
17,494
Cumulative Paid Claims and Allocated Claim Adjustment Expense, Net of Reinsurance
Years Ended December 31,
Homeowners
Accident
Unaudited
Unaudited
Unaudited
Unaudited
Unaudited
Unaudited
Unaudited
Unaudited
Unaudited
Year
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
$ 105,401
$ 130,888
$ 134,235
$ 136,923
$ 138,802
$ 138,992
$ 139,121
$ 139,224
$ 139,256
$ 139,257
81,570
104,407
108,217
110,324
112,554
112,720
112,827
112,848
98,190
124,326
129,790
132,246
132,523
132,604
132,599
123,046
142,846
145,852
146,908
147,451
148,026
84,260
101,566
104,203
105,156
105,561
76,890
96,599
83,314
99,361
100,968
103,030
105,704
90,704
109,303
95,772
112,851
132,602
148,014
105,909
101,527
106,081
111,882
113,186
106,800
Total
1,178,109
Outstanding prior to
2008
Prior years paid
Liabilities for claims and
claim adjustment
expenses, net of
reinsurance
37
—
$
30,302
F-77
NOTE 5 - Property and Casualty Unpaid Claims and Claim Expenses-(Continued)
($ in thousands)
Incurred Claims and Allocated Claim Adjustment Expense, Net of Reinsurance
Auto Liability
Years Ended December 31,
As of December 31, 2017
Accident
Unaudited
Unaudited
Unaudited
Unaudited
Unaudited
Unaudited
Unaudited
Unaudited
Unaudited
Year
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Total of
Incurred-
But-Not-
Reported
Liabilities
Plus
Expected
Development
on Reported
Claims
Cumulative
Number of
Reported
Claims
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
$ 144,694
$ 145,669
$ 142,279
$ 149,225
$ 141,666
$ 140,648
$ 139,938
$ 139,131
$ 138,975
$ 138,973
$
159,934
158,703
153,662
157,941
151,418
150,919
150,568
149,822
157,712
160,058
156,369
154,222
152,483
151,653
149,818
150,803
146,713
145,735
143,133
142,488
139,840
156,448
153,815
150,336
149,346
147,594
153,860
152,858
150,720
150,657
155,105
157,249
158,470
165,517
172,553
180,380
149,888
149,425
138,891
145,847
148,111
159,937
177,021
184,440
187,983
Total
$ 1,580,516
—
(1)
14
325
758
1,521
4,397
7,703
17,107
67,236
47,245
49,232
48,939
45,973
45,983
47,353
49,332
50,428
51,575
41,269
Cumulative Paid Claims and Allocated Claim Adjustment Expense, Net of Reinsurance
Years Ended December 31,
Auto Liability
Accident
Unaudited
Unaudited
Unaudited
Unaudited
Unaudited
Unaudited
Unaudited
Unaudited
Unaudited
Year
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
$ 54,750
$ 103,370
$ 123,062
$ 134,377
$ 137,980
$ 138,539
$ 138,758
$ 138,875
$ 138,962
$ 138,970
60,011
110,921
133,568
142,524
146,383
148,783
149,608
149,801
63,416
118,345
137,012
144,255
147,337
148,751
149,247
61,070
108,837
126,812
133,931
136,906
138,151
61,279
109,574
127,185
138,641
142,916
62,224
108,856
131,214
139,954
61,329
117,468
139,463
70,836
134,473
73,073
149,855
149,364
138,358
144,622
145,291
149,059
157,980
140,901
70,682
Total
1,385,082
Outstanding prior to
2008
Prior years paid
Liabilities for claims and
claim adjustment
expenses, net of
reinsurance
205
—
$ 195,636
F-78
NOTE 5 - Property and Casualty Unpaid Claims and Claim Expenses-(Continued)
($ in thousands)
Incurred Claims and Allocated Claim Adjustment Expense, Net of Reinsurance
Auto Physical Damage
Years Ended December 31,
As of December 31, 2017
Accident
Unaudited
Unaudited
Unaudited
Unaudited
Unaudited
Unaudited
Unaudited
Unaudited
Unaudited
Year
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Total of
Incurred-
But-Not-
Reported
Liabilities
Plus
Expected
Development
on Reported
Claims
Cumulative
Number of
Reported
Claims
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
$ 89,088
$ 87,854
$ 87,834
$ 86,900
$ 87,992
$ 87,979
$ 87,976
$ 87,966
$ 87,954
$
87,947
$
84,539
83,515
84,112
83,202
83,420
86,205
82,635
83,103
85,507
83,770
82,000
83,046
86,023
82,337
91,448
81,986
83,052
85,120
83,402
88,856
95,572
81,972
83,050
85,143
83,431
88,672
95,634
99,291
81,963
83,036
85,116
83,354
88,627
95,422
97,994
112,430
81,972
83,028
85,108
83,342
88,455
95,239
97,624
109,515
115,483
Total
$ 927,713
—
—
—
—
—
(29)
(17)
(62)
(211)
(1,520)
76,517
77,449
81,581
80,803
78,162
80,916
87,896
87,472
93,098
84,684
Auto Physical Damage
Cumulative Paid Claims and Allocated Claim Adjustment Expense, Net of Reinsurance
Year Ended December 31,
Accident
Unaudited
Unaudited
Unaudited
Unaudited
Unaudited
Unaudited
Unaudited
Unaudited
Unaudited
Year
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
$ 82,412
$ 87,963
$ 87,905
$ 87,949
$ 87,992
$ 87,979
$ 87,976
$ 87,966
$ 87,954
$
87,947
78,456
82,117
79,329
82,039
83,120
83,227
82,015
83,103
85,254
80,519
82,000
83,087
85,181
83,418
85,110
81,985
83,067
85,148
83,372
88,688
88,939
81,973
83,051
85,127
83,355
88,580
95,444
92,138
81,963
83,036
85,116
83,347
88,532
95,266
97,850
106,459
Total
Outstanding prior to
2008
Prior years paid
Liabilities for claims and
claim adjustment
expenses, net of
reinsurance
81,955
83,028
85,108
83,342
88,484
95,256
97,685
109,686
105,156
917,647
—
—
$
10,066
F-79
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:
($ in thousands)
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
$
Years Ended
December 31,
2017
30,302
195,636
10,066
2,723
238,727
298
50,713
6,398
57,409
28,567
23,046
51,613
Gross reserves, end of year (1)
$
347,749
____________________
(1) This line includes Retirement and Life reserves as included in the Consolidated Balance Sheet.
NOTE 6 - Reinsurance and Catastrophes
In the normal course of business, the Company's insurance subsidiaries assume and cede reinsurance
with other insurers. Reinsurance is ceded primarily to limit losses from large events and to permit recovery
of a portion of direct losses; however, such a transfer does not relieve the originating insurance company
of primary liability.
The Company is a national underwriter and therefore has exposure to catastrophic losses in certain
coastal states and other regions throughout the U.S. Catastrophes can be caused by various events including
hurricanes, windstorms, hail, severe winter weather, wildfires and earthquakes, and the frequency and
severity of catastrophes are inherently unpredictable. The financial impact from catastrophic losses results
from both the total amount of insured exposure in the area affected by the catastrophe as well as the severity
of the event. The Company seeks to reduce its exposure to catastrophe losses through the geographic
diversification of its insurance coverage, deductibles, maximum coverage limits and the purchase of
catastrophe reinsurance.
The Company's catastrophe losses incurred of approximately $61,814 thousand, $60,043 thousand
and $44,429 thousand for the years ended December 31, 2017, 2016 and 2015, respectively, reflected losses
from winter storm events in the first part of each year, wind/hail/tornado events in the spring and summer
months of each year, as well as losses from several storms in the latter part of each year. The third quarter
of 2017 also included losses from Hurricanes Harvey and Irma.
F-80
NOTE 6 - Reinsurance and Catastrophes-(Continued)
The total amounts of reinsurance recoverable on unpaid insurance reserves classified as assets and
reported in Other assets in the Consolidated Balance Sheets were as follows:
($ in thousands)
Reinsurance recoverables on reserves and unpaid claims
December 31,
2017
2016
Property and Casualty
Reinsurance companies
State insurance facilities
Life and health
Total
$
$
6,696
50,713
11,037
68,446
$
$
10,239
50,960
9,275
70,474
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:
($ in thousands)
Year Ended December 31, 2017
Premiums written and contract deposits (1)
Premiums and contract charges earned
Benefits, claims and settlement expenses
Year Ended December 31, 2016
Premiums written and contract deposits
Premiums and contract charges earned
Benefits, claims and settlement expenses
Year Ended December 31, 2015
Premiums written and contract deposits
Premiums and contract charges earned
Benefits, claims and settlement expenses
Gross
Amount
Ceded to
Other
Companies
Assumed
from Other
Companies
Net
Amount
$
$
1,244,500
812,099
588,621
$
21,989
22,036
10,472
$
4,606
4,640
4,157
1,227,117
794,703
582,306
1,280,903
777,651
562,385
1,277,066
752,798
508,904
22,728
22,826
25,739
24,737
25,077
16,221
4,324
4,321
4,358
4,184
4,159
3,681
1,262,499
759,146
541,004
1,256,513
731,880
496,364
____________________
(1) This measure is not based on accounting principles generally accepted in the U.S. (non-GAAP). An explanation of this non-
GAAP measure is contained in the Glossary of Selected Terms included as an exhibit in the Company's reports filed with
the SEC.
There were no losses from uncollectible reinsurance recoverables in the three years ended December
31, 2017. Past due reinsurance recoverables as of December 31, 2017 were not material.
The Company maintains catastrophe excess of loss reinsurance coverage. For 2017, 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 $25,000 thousand per occurrence up to $90,000 thousand
per occurrence and 100% coverage for losses above $90,000 per occurrence to $175,000 per occurrence.
This contract consisted of three layers, each of which provided for one mandatory reinstatement. The layers
were $25,000 thousand excess of $25,000 thousand, $40,000 thousand excess of $50,000 thousand and
$85,000 thousand excess of $90,000 thousand.
F-81
NOTE 6 - Reinsurance and Catastrophes-(Continued)
For liability coverages, in 2017, the Company reinsured each loss above a retention of $1,000 thousand
with coverage up to $5,000 thousand on a per occurrence basis and $20,000 thousand 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 2017 the Company reinsured each loss above a retention of $1,000 thousand up to $5,000
thousand 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 $8,000 thousand of property recovery in any one
event.
The maximum individual life insurance risk retained by the Company is $300 thousand on any
individual life, while either $100 thousand or $125 thousand 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 2017, the Company reinsured 100% of the catastrophe risk in excess of $1,000
thousand up to $35,000 thousand per occurrence, with one reinstatement. The Company's life catastrophe
risk reinsurance program covers acts of terrorism and includes nuclear, biological and chemical explosions
but excludes other acts of war.
NOTE 7 - Debt
Indebtedness and scheduled maturities consisted of the following:
($ in thousands)
Short-term debt
Bank Credit Facility
Long-term debt (1)
Effective
Interest
Rates
Final
Maturity
December 31,
2017
2016
Variable
2019
$
— $
—
4.50% Senior Notes, Aggregate principal amount of
$250,000 less unaccrued discount of $547
and $603 and unamortized debt issuance costs
of $1,984 and $2,188
Federal Home Loan Bank borrowing
4.50%
1.57%
2025
2022
247,469
50,000
247,209
—
Total
$
297,469
$
247,209
____________________
(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 thousand. 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, 2017.
F-82
NOTE 7 - Debt-(Continued)
4.50% Senior Notes due 2025 (Senior Notes due 2025)
On November 23, 2015, the Company issued $250,000 thousand 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.
Federal Home Loan Bank Borrowings
In 2017, HMIC became a member of the FHLB, which provides HMIC with access to collateralized
borrowings and other FHLB products. As membership requires the ownership of membership stock, in
June 2017, HMIC 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.
In the fourth quarter of 2017, HMIC purchased common stock to meet the activity-based requirement. For
FHLB borrowings, the Board has authorized a maximum amount equal to the greater of 10% of admitted
assets or 20% of surplus of the consolidated property and casualty companies. During the fourth quarter
of 2017, the Company received $50,000 thousand in executed borrowings for HMIC. Of the total $50,000
thousand received, $25,000 thousand matures on October 5, 2022 and $25,000 thousand matures on
December 2, 2022. Interest on the borrowings accrues at an annual weighted average rate of 1.57% as of
December 31, 2017. HMIC's FHLB borrowings of $50,000 thousand are included in Long-term debt in
the Consolidated Balance Sheets.
Covenants
The Company is in compliance with all of the financial covenants contained in the Senior Notes due
2025 indenture and the Bank Credit Facility agreement, consisting primarily of relationships of (1) debt to
capital, (2) net worth, as defined in the financial covenants, (3) insurance subsidiaries' risk-based capital
and (4) securities subject to funding agreements and repurchase agreements.
NOTE 8 - Income Taxes
On December 22, 2017, comprehensive tax legislation commonly referred to as the Tax Cuts and
Jobs Act (Tax Act) was enacted by the U.S. government. The Tax Act is generally effective January 1, 2018,
and among other changes, reduced the federal corporate income tax rate from 35% to 21%, eliminated the
corporate Alternative Minimum Tax, modified numerous insurance-specific provisions, and further limited
deductions for executive compensation. The effects of the Tax Act are reflected in the Company's deferred
tax calculations as of December 31, 2017.
ASC 740 Income Taxes requires that the impact of the Tax Act be recognized in the period in which
the law was enacted. As a result, total income tax expense for 2017 included a benefit of $99.0 million to
reflect the change in tax rates included in the Tax Act as of the date of enactment, as a result of re-measuring
the Company's net deferred tax liability.
F-83
NOTE 8 - Income Taxes-(Continued)
The Company has recorded provisional amounts for the taxes associated with its partnership
investments and the changes in discounting unpaid loss reserves based on information available at December
31, 2017. The Company has reasonably estimated the tax impact of its partnership investments; however,
accumulated foreign earnings in the Company's partnership investments could be impacted by the Tax Act.
As part of its normal U.S. income tax return preparation process, the Company expects taxes to be adjusted
as final earnings from partnership investments are received. Provisional tax computations related to the Tax
Act’s loss reserve discounting changes have also been reasonably estimated, and may be adjusted once the
U.S. Treasury issues additional guidance. With respect to loss reserves, the Tax Act changed the prescribed
interest rates, extended the time periods for discounting certain long-tail line coverages, and eliminated the
Company’s ability to use its own payment patterns. The Tax Act’s changes to computing loss reserves are
generally effective January 1, 2018, and any additional income taxes determined to be owed as a result of
applying these new provisions versus the previously calculated amounts are includible in taxable income
pro-rata over the next eight years, beginning in 2018. Any adjustments to provisional amounts will impact
the Company's consolidated results of operations and must be reflected no later than in the Company's
December 31, 2018 Consolidated Financial Statements.
The income tax assets and liabilities included in Other assets and Other liabilities, respectively, in
the Consolidated Balance Sheets were as follows:
($ in thousands)
Income tax (asset) liability
Current
Deferred
December 31,
2017
2016
$
(16,266) $
157,775
(3,832)
205,699
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:
($ in thousands)
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
Total gross deferred tax assets
Deferred tax liabilities
Other comprehensive income - net unrealized gains
on fixed maturity and equity securities
Deferred policy acquisition costs
Life insurance future policy benefit reserve
Life insurance future policy benefit reserve (transitional rule)
Discounting of unpaid claims and claim expense tax reserves
(transitional rule)
Investment related adjustments
Intangible assets
Other, net
Total gross deferred tax liabilities
Net deferred tax liability
F-84
December 31,
2017
2016
11,472
8,359
2,240
3,526
3,889
321
29,807
95,583
52,438
102
23,869
2,513
8,127
2,557
2,393
187,582
157,775
$
$
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
$
$
NOTE 8 - Income Taxes-(Continued)
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, 2017
and 2016.
At December 31, 2017, the Company had available the following carryforwards or credits.
($ in thousands)
Pretax
Amount
Expiration Years
Operating loss carryforwards
Charitable contributions carryforwards
$
705
296
2037
2021-2022
The components of the provision for income tax expense were as follows:
($ in thousands)
Current
Deferred
Total income tax expense
Years Ended December 31,
2017
2016
2015
$
$
$
3,813
(84,585)
(80,772) $
26,359
4,108
30,467
$
$
29,885
6,085
35,970
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:
($ in thousands)
Expected federal tax on income
Add (deduct) tax effects of:
Tax-exempt interest
Dividend received deduction
Tax Act DTL re-measurement
Employee share-based compensation
Other, net
Years Ended December 31,
2017
2016
2015
$
31,041
$
39,981
$
45,308
(5,335)
(4,448)
(98,988)
(3,258)
216
(80,772) $
(5,789)
(3,985)
—
127
133
30,467
$
(6,678)
(3,564)
—
265
639
35,970
Income tax expense (benefit) provided on income
$
The Company's federal income tax returns for years prior to 2014 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.
F-85
NOTE 8 - Income Taxes-(Continued)
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, 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.
A reconciliation of the beginning and ending amounts of unrecognized tax benefits, excluding interest
and penalties, is as follows:
($ in thousands)
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 statute
Balance as of the end of the year
Years Ended December 31,
2017
2016
2015
$
$
1,594
101
—
422
—
(327)
1,790
$
$
1,039
348
—
283
—
(76)
1,594
$
$
656
—
(15)
398
—
—
1,039
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 change 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, 2017, 2016 and
2015.
NOTE 9 - Shareholders' Equity and Common Stock Equivalents
Share Repurchase Programs and Treasury Shares Held (Common Stock)
In December 2011, the Board authorized a share repurchase program allowing repurchases of up to
$50,000 thousand (the 2011 Plan). In September 2015, the Board authorized an additional share repurchase
program allowing repurchases of up to $50,000 thousand (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 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 thousand, 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
thousand, 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. During 2017, the Company
repurchased 48,440 shares of its common stock, or 0.1% of the outstanding shares on December 31, 2016,
at an aggregate cost of $1,660 thousand, or an average price of $34.26 per share, under the 2015 Plan. In
F-86
NOTE 9 - Shareholders' Equity and Common Stock Equivalents-(Continued)
total and through December 31, 2017, 2,848,050 shares were repurchased under the 2011 and 2015 Plans
at an average price of $25.33 per share. The repurchase of shares was financed through use of cash. As of
December 31, 2017, $27,852 thousand remained authorized for future share repurchases under the 2015
Plan authorization.
At December 31, 2017, the Company held 24,721 thousand 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 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, 2017
and 2016.
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, 2017, approximately 2,391 thousand 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:
CSUs related to deferred compensation for Directors
CSUs related to deferred compensation for employees
Stock options
RSUs related to incentive compensation
Total
December 31,
2017
2016
2015
61,677
24,903
719,015
1,149,679
1,955,274
74,058
51,502
747,032
1,419,268
2,291,860
85,200
55,443
669,693
1,442,325
2,252,661
F-87
NOTE 9 - Shareholders' Equity and Common Stock Equivalents-(Continued)
Director Common Stock Units
Deferred compensation of Directors is in the form of CSUs, 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 CSUs.
Employee Common Stock Units
Deferred compensation of employees is in the form of CSUs, 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, 2017, 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 CSUs.
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:
December 31, 2016
Granted
Vested
Exercised
Forfeited
Expired
December 31, 2017
Weighted Average
Option Price
per Share
Range of
Option Prices
per Share
Options
Outstanding
Vested and
Exercisable
$27.67
$41.83
$27.12
$23.63
$34.97
—
$32.80
$13.83-$36.04
747,032
273,117
$38.05-$41.95
$17.01-$36.04
$13.83-$32.35
$28.88-$41.95
—
222,828
—
(208,306)
(42,539)
—
—
193,510
(208,306)
—
—
$17.01-$41.95
719,015
258,321
F-88
NOTE 9 - Shareholders' Equity and Common Stock Equivalents-(Continued)
Option information segregated by ranges of exercise prices was as follows:
December 31, 2017
Range of
Option Prices
per Share
$17.01-$22.69
$22.88-$33.41
$36.04-$41.95
$17.01-$41.95
Total
Total Outstanding Options
Weighted
Average
Option Price
per Share
Weighted
Average
Remaining
Term
Options
Vested and Exercisable Options
Weighted
Average
Option Price
per Share
Weighted
Average
Remaining
Term
Options
78,774
424,057
216,184
719,015
$19.30
$30.81
$41.62
$32.80
1.55 years
7.53 years
9.17 years
7.37 years
78,774
177,686
1,861
258,321
$19.30
$30.49
$36.04
$27.12
1.55 years
7.12 years
8.73 years
5.43 years
The weighted average exercise prices of vested and exercisable options as of December 31, 2016
and 2015 were $22.73 and $19.32, respectively.
As of December 31, 2017, based on a closing stock price of $44.10 per share, the aggregate intrinsic
(in-the-money) values of vested options and all options outstanding were $4,387 thousand and $8,126
thousand, respectively.
Restricted Common Stock Units
RSUs 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 RSUs 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 RSUs.
Changes in outstanding RSUs were as follows:
Total Outstanding Units
Vested Units
Units
Weighted Average
Grant Date Fair
Value per Unit
Units
Weighted Average
Grant Date Fair
Value per Unit
December 31, 2016
1,419,268
$27.63
768,064
$16.80
Granted (1)
Vested
Forfeited
Distributed (2)
193,044
—
(72,953)
(389,680)
$40.77
—
$32.58
$20.16
—
179,755
—
(389,680)
—
$29.15
—
$20.16
December 31, 2017
1,149,679
$32.05
558,139
$19.80
____________________
(1) Includes dividends reinvested into additional RSUs.
(2) Includes distributed units which were utilized to satisfy withholding taxes due on the distribution.
F-89
NOTE 10 - Statutory Information and Restrictions
The insurance departments of various states in which the insurance subsidiaries of HMEC are
domiciled recognize as net income and surplus those amounts determined in conformity with statutory
accounting principles prescribed or permitted by the insurance departments, which differ in certain respects
from GAAP.
Reconciliations of statutory capital and surplus and net income, as determined using statutory
accounting principles, to the amounts included in the accompanying consolidated financial statements are
as follows:
($ in thousands)
Statutory capital and surplus of insurance subsidiaries
Increase (decrease) due to:
Deferred policy acquisition costs
Difference in policyholder reserves
Goodwill
Investment fair value adjustments on fixed maturity securities
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
non-insurance subsidiaries
Parent company short-term and long-term debt
Shareholders' equity as reported herein
($ in thousands)
Statutory net income of insurance subsidiaries
Net loss of non-insurance companies
Interest expense
Debt retirement costs
Tax benefit of interest expense and other
parent company current tax adjustments
Combined net income
Increase (decrease) due to:
Deferred policy acquisition costs
Policyholder benefits
Federal income tax (expense) benefit
Investment reserves
Other adjustments, net
Net income as reported herein
December 31,
2017
2016
$
944,139
$
912,336
257,826
111,188
47,396
415,775
111,225
(162,634)
(16,789)
28,870
12,046
(247,469)
1,501,573
$
267,580
98,360
47,396
301,518
125,805
(228,090)
(18,250)
22,888
11,648
(247,209)
1,293,982
Years Ended December 31,
2017
2016
2015
$
82,587
(4,496)
(11,836)
—
$
74,574
(5,135)
(11,808)
—
5,654
71,909
9,385
30,609
84,198
(20,966)
(5,676)
169,459
$
5,637
63,268
19,442
14,919
(5,312)
(1,320)
(7,232)
83,765
$
87,619
(4,474)
(13,122)
(2,338)
6,829
74,514
13,249
14,065
(6,678)
7,339
(9,007)
93,482
$
$
$
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-90
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, 2017 and 2016, the minimum statutory-basis capital and surplus required to be
maintained by HMEC's insurance subsidiaries was $101,463 thousand and $95,095 thousand, respectively.
At December 31, 2017 and 2016, 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
$17,985 thousand and $18,119 thousand as of December 31, 2017 and 2016, 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 2018 from all of HMEC's insurance
subsidiaries without prior regulatory approval is approximately $94,000 thousand.
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
$944,139 thousand as of December 31, 2017, which is subject to regulatory restrictions. The parent company
equity is not restricted. At December 31, 2017, HMEC had $6,464 thousand of liquid assets, comprised of
investments and cash, which could be used to fund debt interest payments, 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, 2017, the Company had no financial reinsurance agreements in effect.
F-91
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 payments. 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 August of 2016, the Company announced a cash-out election "window" ending in September
2016 for all vested terminated participants. During this window, 52 former employees elected to receive a
total of approximately $1,400 thousand 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.
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.
F-92
NOTE 11 - Pension Plans and Other Postretirement Benefits-(Continued)
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 $9,114 thousand, $8,527 thousand and $8,899 thousand for
the years ended December 31, 2017, 2016 and 2015, respectively.
Contributions to employees' accounts under the qualified defined contribution plan, the 401(k) plan
and the non-qualified defined contribution plan, as well as total assets of the plans, were as follows:
($ in thousands)
401(k) plan
Contributions to employees' accounts
Total assets at the end of the year
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
Year Ended December 31,
2017
2016
2015
$
7,637
180,514
$
6,918
177,352
$
6,466
161,956
—
—
84
—
—
—
72
—
—
9,118
122
—
F-93
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, 2017, 2016 and 2015 (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:
($ in thousands)
Change in benefit obligation:
Projected benefit obligation
at beginning of year
Service cost
Interest cost
Plan amendments
Actuarial loss (gain)
Benefits paid
Settlements
Projected benefit obligation at end of year
Change in plan assets:
Fair value of plan assets
at beginning of year
Actual return on plan assets
Employer contributions
Benefits paid
Expenses paid
Settlements
Fair value of plan assets at end of year
Funded status
Prepaid (accrued) benefit expense
Total amount recognized in Consolidated
Balance Sheets, all in Other liabilities
Amounts recognized in accumulated other
comprehensive income (loss) (AOCI):
Prior service cost
Net actuarial loss
Total amount recognized in AOCI
Information for pension plans with an
accumulated benefit obligation greater
than plan assets:
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
$
$
$
$
$
$
$
$
$
$
Defined Benefit Plan
December 31,
Supplemental
Defined Benefit Plans
December 31,
2017
2016
2015
2017
2016
2015
29,407
650
1,091
—
(721)
(1,995)
—
28,432
25,446
2,909
—
(1,995)
(517)
—
25,843
$
$
$
$
31,233
650
1,244
—
(220)
(3,500)
—
29,407
27,667
1,766
—
(3,500)
(487)
—
25,446
$
$
$
$
34,279
450
1,189
—
(1,371)
(3,314)
—
31,233
31,408
200
—
(3,314)
(627)
—
27,667
$
$
$
$
16,847
—
631
—
805
(1,451)
—
16,832
$
$
— $
—
1,451
(1,451)
—
—
— $
17,004
—
687
—
488
(1,332)
—
16,847
$
$
— $
—
1,332
(1,332)
—
—
— $
18,524
—
654
—
(845)
(1,329)
—
17,004
—
—
1,329
(1,329)
—
—
—
(2,589) $
(3,961) $
(3,566) $
(16,832) $
(16,847) $
(17,004)
8,016
$
8,653
$
9,265
$
(10,648) $
(11,210) $
(11,622)
(2,589) $
(3,961) $
(3,566) $
(16,832) $
(16,847) $
(17,004)
— $
— $
— $
— $
— $
$
$
10,605
10,605
28,432
28,432
25,843
$
$
12,613
12,613
29,407
29,407
25,446
$
$
12,831
12,831
31,233
31,233
27,667
$
$
6,184
6,184
16,832
16,832
—
$
$
5,637
5,637
16,847
16,847
—
—
5,382
5,382
17,004
17,004
—
F-94
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,
2017 was primarily attributable to better than expected asset returns and updates to mortality assumptions
partially offset by a decrease in the discount rate. 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.
($ in thousands)
Components of net periodic pension
(income) expense:
Service cost:
Benefit accrual
Other expenses
Interest cost
Expected return on plan assets
Settlement loss
Amortization of:
Prior service cost
Actuarial loss
Net periodic pension expense
Changes in plan assets and benefit
obligations included in other
comprehensive income (loss):
Prior service cost
Net actuarial loss (gain)
Amortization of:
Prior service cost
Actuarial loss
Total recognized in other
Defined Benefit Plan
Year Ended December 31,
2016
2015
2017
Supplemental
Defined Benefit Plans
Year Ended December 31,
2016
2015
2017
$
$
$
— $
650
1,091
(1,493)
—
— $
650
1,244
(1,675)
—
— $
450
1,189
(1,875)
—
—
389
637
$
—
393
612
$
—
1,626
1,390
$
— $
—
631
—
—
—
258
889
$
— $
—
687
—
—
—
233
920
$
— $
(1,619)
— $
175
— $
930
— $
805
— $
488
—
(389)
—
(393)
—
(1,626)
—
(258)
—
(233)
—
—
654
—
—
—
273
927
—
(845)
—
(273)
comprehensive income (loss)
$
(2,008)
$
(218)
$
(696)
$
547
$
255
$
(1,118)
Weighted average assumptions used to
determine expense:
Discount rate
Expected return on plan assets
Annual rate of salary increase
Weighted average assumptions
used to determine benefit obligations
as of December 31:
Discount rate
Expected return on plan assets
Annual rate of salary increase
____________________
* Not applicable.
3.90%
6.25%
*
4.20%
6.50%
*
3.66%
6.75%
*
3.90%
*
*
4.20%
*
*
3.66%
*
*
3.50%
6.25%
*
3.90%
6.50%
*
4.20%
6.75%
*
3.50%
*
*
3.90%
*
*
4.20%
*
*
F-95
NOTE 11 - Pension Plans and Other Postretirement Benefits-(Continued)
The discount rates at December 31, 2017 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.
($ in thousands)
December 31, 2017
Asset category
Equity security funds (1)
United States
International
Fixed income funds
Short-term investment funds
Total
December 31, 2016
Asset category
Equity security funds (1)
United States
International
Fixed income funds
Short-term investments funds
Total
Total
$
$
$
$
10,517
2,573
12,165
588
25,843
9,836
2,492
12,402
716
25,446
$
$
$
$
Fair Value Measurements at
Reporting Date Using
Level 2
Level 3
Level 1
— $
—
—
588
588
$
10,517
2,573
12,165
—
25,255
— $
—
—
716
716
$
9,836
2,492
12,402
—
24,730
$
$
$
$
—
—
—
—
—
—
—
—
—
—
____________________
(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, 2017 and 2016.
In 2018, the Company expects amortization of net losses of $371 thousand and $310 thousand 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.
F-96
NOTE 11 - Pension Plans and Other Postretirement Benefits-(Continued)
Postretirement Benefits Other than Pensions
As of December 31, 2006, upon discontinuation of retiree medical benefits, Health Reimbursement
Accounts (HRAs) were established for eligible participants and totaled $7,310 thousand. As of
December 31, 2017, the balance of the previously established HRAs was $1,526 thousand. Funding of
HRAs was $133 thousand, $218 thousand and $523 thousand for the years ended December 31, 2017, 2016
and 2015, respectively.
2018 Contributions
In 2018, there is no minimum funding requirement for the Company's defined benefit plan. The
following table discloses that minimum funding requirement and the expected full year contributions for
the Company's plans.
($ in thousands)
Defined Benefit Pension Plans
Defined
Benefit Plan
Supplemental
Defined Benefit Plans
Minimum funding requirement for 2018
Expected contributions (approximations) for the year ended
December 31, 2018 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, 2017.
—
— $
N/A
1,317
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, 2017 were as
follows:
($ in thousands)
Pension plans
2018
2019
2020
2021
2022
2023-2027
Defined benefit plan
Supplemental retirement plans
$
$
2,726
1,317
$
2,576
1,303
$
2,443
1,287
$
2,207
1,269
$
2,216
1,248
9,140
5,820
F-97
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 copier machines. Rental expenses were $2,870 thousand, $2,546 thousand and $2,872
thousand for the years ended December 31, 2017, 2016 and 2015, respectively. Future minimum lease
payments under leases expiring subsequent to December 31, 2017 are as follows:
($ in thousands)
As of December 31, 2017
2018
2019
2020
2021
2022
2023-
2027
2028 and
beyond
Minimum operating lease payments
$
2,707
$
2,516
$
1,697
$
1,180
$
1,177
$
483
$
—
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
$106,381 thousand and $135,054 thousand for the years ended December 31, 2017 and 2016, respectively.
F-98
NOTE 13 - Supplementary Data on Cash Flows
A reconciliation of net income to net cash provided by operating activities as presented in the
Consolidated Statements of Cash Flows is as follows:
($ in thousands)
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net cash
provided by operating activities:
Net realized investment (gains) losses
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
Years Ended December 31,
2017
2016
2015
$
169,459
$
83,765
$
93,482
3,406
(3,404)
(2,240)
6,615
154,061
(12,917)
(7,967)
11
(74,487)
—
24,049
87,127
256,586
$
(4,123)
(2,208)
4,378
6,896
176,315
(11,496)
(15,859)
(481)
(1,293)
—
(24,461)
127,668
211,433
$
(12,713)
(2,566)
(5,798)
7,734
145,313
(8,641)
(8,981)
(748)
8,935
2,338
(10,641)
114,232
207,714
Net cash provided by operating activities
$
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, primarily personal
lines automobile and property insurance products; Retirement, primarily tax-qualified fixed and variable
annuities; and Life, 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, net realized investment gains and losses and certain public
company expenses, such items also have included corporate debt retirement costs, 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 Corporate and Other to Property and Casualty, Retirement
and Life, on a direct cost basis.
F-99
NOTE 14 - Segment Information-(Continued)
Summarized financial information for these segments is as follows:
($ in thousands)
Insurance premiums and contract charges earned
Property and Casualty
Retirement
Life
Total
Net investment income
Property and Casualty
Retirement
Life
Corporate and Other
Intersegment eliminations
Total
Net income (loss)
Property and Casualty
Retirement
Life
Corporate and Other
Total
($ in thousands)
Assets
Property and Casualty
Retirement
Life
Corporate and Other
Intersegment eliminations
Total
Years Ended December 31,
2017
2016
2015
$
$
$
$
$
$
648,263
28,003
118,437
794,703
36,178
261,994
76,195
78
(815)
373,630
17,790
88,473
77,595
(14,399)
169,459
$
$
$
$
$
$
620,514
24,937
113,695
759,146
38,998
249,410
73,567
66
(855)
361,186
25,644
50,674
16,559
(9,112)
83,765
$
$
$
$
$
$
595,958
25,378
110,544
731,880
33,461
228,378
71,614
38
(891)
332,600
40,043
43,384
14,982
(4,927)
93,482
December 31,
2017
2016
2015
$
1,217,394
8,063,912
1,815,732
143,784
(42,482)
$ 11,198,340
$
1,110,958
7,449,777
1,912,771
140,104
(36,786)
$ 10,576,824
$
1,098,415
7,001,411
1,862,719
131,635
(37,208)
$ 10,056,972
Additional significant financial information for these segments is as follows:
($ in thousands)
DAC amortization expense
Property and Casualty
Retirement
Life
Total
Income tax expense (benefit)
Property and Casualty
Retirement
Life
Corporate and Other
Total
Years Ended December 31,
2016
2015
2017
$
$
$
$
76,967
17,759
7,459
102,185
$
$
(3,279) $
(19,498)
(51,876)
(6,119)
(80,772) $
74,950
14,635
7,147
96,732
4,627
20,334
9,775
(4,269)
30,467
$
$
$
$
73,173
18,155
7,591
98,919
11,274
19,873
7,951
(3,128)
35,970
F-100
NOTE 15 - Unaudited Selected Quarterly Financial Data
Selected quarterly financial data is presented below.
($ in thousands, except per share data)
Three Months Ended
December 31,
September 30,
June 30,
March 31,
2017
Insurance premiums written and contract deposits (1)
Total revenues
Net income
Per share information
Basic
Net income (3)
Shares of common stock - weighted average (2)
Diluted
Net income (3)
Shares of common stock and equivalent shares -
weighted average (2)
2016
Insurance premiums written and contract deposits (1)
Total revenues
Net income
Per share information
Basic
Net income
Shares of common stock - weighted average (2)
Diluted
Net income
Shares of common stock and equivalent shares -
weighted average (2)
2015
Insurance premiums written and contract deposits (1)
Total revenues
Net income
Per share information
Basic
Net income
Shares of common stock - weighted average (2)
Diluted
Net income
Shares of common stock and equivalent shares -
weighted average (2)
$
$
$
$
$
$
$
$
$
300,416
302,993
125,329
3.03
41,419
$
$
318,355
289,817
26,551
0.64
41,433
$
$
311,614
291,436
2,261
0.05
41,368
$
$
296,732
287,304
15,318
0.37
41,135
3.00
$
0.64
$
0.05
$
0.37
41,718
41,575
41,493
41,342
315,917
282,873
19,823
0.48
41,093
$
$
351,534
291,176
26,923
0.66
41,092
$
$
311,879
283,558
11,866
0.29
41,082
$
$
283,169
271,303
25,153
0.61
41,297
0.48
$
0.65
$
0.29
$
0.61
41,482
41,347
41,314
41,492
305,186
276,106
21,040
0.51
41,564
$
$
326,198
265,753
21,984
0.53
41,852
$
$
319,394
268,470
16,183
0.39
41,990
$
$
305,735
270,119
34,275
0.82
41,950
0.50
$
0.52
$
0.38
$
0.81
42,127
42,305
42,425
42,300
____________________
(1) This measure is not based on accounting principles generally accepted in the U.S. (non-GAAP). An explanation of this measure is
contained in the Glossary of Selected Terms included as an exhibit in the Company's reports filed with the SEC.
(2) Rounded to thousands.
(3) For the three months ended December 31, 2017, net income per basic share of $3.03 and net income per diluted share of $3.00 benefited
$2.39 and $2.37, respectively, from the Tax Act.
F-101
HORACE MANN EDUCATORS CORPORATION
SCHEDULE I
SUMMARY OF INVESTMENTS-OTHER THAN INVESTMENTS IN RELATED PARTIES
December 31, 2017
($ in thousands)
Type of Investments
Fixed maturity securities
U.S. Government and federally sponsored agency obligations
States, municipalities and political subdivisions
Foreign government bonds
Public utilities
All other corporate bonds
Asset-backed securities
Residential mortgage-backed securities (non-agency)
Commercial mortgage-backed securities
Redeemable preferred stocks
Cost (1)
Fair
Value
Amount
Shown in
Balance
Sheet
$
$
1,131,962
1,711,581
96,780
107,339
2,284,448
1,285,804
86,741
580,655
17,640
$
1,177,760
1,893,252
102,738
125,201
2,433,349
1,301,634
87,773
581,962
20,406
1,177,760
1,893,252
102,738
125,201
2,433,349
1,301,634
87,773
581,962
20,406
Total fixed maturity securities
7,302,950
7,724,075
7,724,075
Equity securities
Industrial, miscellaneous and all other
Banking & finance and insurance companies
Public utilities
Non-redeemable preferred stocks
Closed-end fund
26,040
10,601
1,104
58,571
20,004
34,623
16,979
1,844
61,458
20,562
34,623
16,979
1,844
61,458
20,562
Total equity securities
116,320
135,466
135,466
Short-term investments
Policy loans
Derivative instruments
Mortgage loans
Other
62,593
153,635
5,396
1,263
259,766
XXX
XXX
$
15,550
XXX
XXX
62,593
153,635
15,550
1,263
259,766
Total investments
$
7,901,923
XXX
$
8,352,348
____________________
(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.
F-102
Investments and cash
Investment in subsidiaries
Other assets
Total assets
Long-term debt
Other liabilities
Total liabilities
SCHEDULE II
HORACE MANN EDUCATORS CORPORATION
(Parent Company Only)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
As of December 31, 2017 and 2016
($ in thousands, except per share data)
December 31,
2017
2016
ASSETS
$
$
$
6,464
1,685,390
66,445
4,069
1,487,457
60,057
1,758,299
$
1,551,583
LIABILITIES AND SHAREHOLDERS' EQUITY
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, 2017, 65,439,245; 2016, 64,917,683
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss), net of taxes:
Net unrealized investment gains on fixed maturity
and equity securities
Net funded status of pension benefit obligations
Treasury stock, at cost, 2017, 24,721,372 shares;
2016, 24,672,932 shares
$
247,469
9,257
$
256,726
247,209
10,392
257,601
—
—
65
464,246
1,231,177
300,177
(13,217)
(480,875)
65
453,479
1,155,732
175,738
(11,817)
(479,215)
Total shareholders' equity
1,501,573
1,293,982
Total liabilities and shareholders' equity
$
1,758,299
$
1,551,583
See accompanying Note to Condensed Financial Statements.
F-103
SCHEDULE II
HORACE MANN EDUCATORS CORPORATION
(Parent Company Only)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS
($ in thousands)
Revenues
Net investment income
Realized investment gains
Total revenues
Expenses
Interest expense
Debt retirement costs
Other
Total expenses
Years Ended December 31,
2017
2016
2015
$
$
34
—
34
$
20
—
20
33
—
33
11,835
—
5,101
11,808
—
5,631
13,122
2,338
5,153
16,936
17,439
20,613
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
(16,902)
(6,667)
(10,235)
179,694
(17,419)
(6,076)
(11,343)
95,108
(20,580)
(7,202)
(13,378)
106,860
Net income
$
169,459
$
83,765
$
93,482
See accompanying Note to Condensed Financial Statements.
F-104
SCHEDULE II
HORACE MANN EDUCATORS CORPORATION
(Parent Company Only)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
($ in thousands)
Cash flows - operating activities
Interest expense paid
Income taxes recovered (paid)
Cash dividends received from subsidiaries
Other, net, including settlement of payables to subsidiaries
Years Ended December 31,
2017
2016
2015
$
(11,503) $
(373)
56,900
4,201
(11,754) $
8,914
59,600
581
(13,521)
8,413
50,000
(3,426)
Net cash provided by operating activities
49,225
57,341
41,466
Cash flows - investing activities
Net increase (decrease) in investments
Net cash provided by (used in) investing activities
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
Withholding tax payments on RSUs tendered
Net cash used in financing activities
Net increase (decrease) in cash
Cash at beginning of period
(2,338)
(2,338)
(46,114)
—
—
—
—
(1,660)
4,190
(3,245)
(46,829)
58
68
9,161
9,161
15,402
15,402
(44,310)
—
—
—
—
(21,513)
3,329
(4,015)
(66,509)
.
(7)
75
(42,523)
246,937
(127,292)
(75,000)
(38,000)
(21,950)
1,629
(671)
(56,870)
(2)
77
75
Cash at end of period
$
126
$
68
$
See accompanying Note to Condensed Financial Statements.
F-105
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-106
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F
SCHEDULE IV
HORACE MANN EDUCATORS CORPORATION
REINSURANCE
($ in thousands)
Column A
Column B
Gross
Amount
Column C
Ceded to
Other
Companies
Column D
Assumed
from Other
Companies
Column E
Net
Amount
Column F
Percentage
of Amount
Assumed to Net
Year ended December 31, 2017
Life insurance in force
Premiums
Property and Casualty
Retirement
Life
$
$
$ 17,564,270
$
658,960
28,003
125,136
$
$
4,295,412
15,337
—
6,699
— $ 13,268,858
$
4,640
—
—
648,263
28,003
118,437
Total premiums
$
812,099
$
22,036
$
4,640
$
794,703
Year ended December 31, 2016
Life insurance in force
Premiums
Property and Casualty
Retirement
Life
$
$
$ 17,025,125
$
632,372
24,937
120,342
$
$
4,065,449
16,179
—
6,647
— $ 12,959,676
$
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
Premiums
Property and Casualty
Retirement
Life
$
$
$ 16,504,539
$
610,347
25,378
117,073
$
$
3,625,946
18,548
—
6,529
— $ 12,878,593
$
4,159
—
—
595,958
25,378
110,544
Total premiums
$
752,798
$
25,077
$
4,159
$
731,880
____________________
Note:
Premiums above include insurance premiums earned and contract charges earned.
—
0.7%
—
—
0.6%
—
0.7%
—
—
0.6%
—
0.7%
—
—
0.6%
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Financial highlights
Dollars in millions,
except per share data
Earned premiums
2017
$794.7
2016
$759.1
2015
$731.9
Total revenues
$1,171.5
$1,128.9
$1,080.4
Net income
Core earnings(1)
$169.4
$72.1
$83.8
$81.5
$93.5
$84.9
Total assets
$11,198.3
$10,576.8
$10,057.0
Shareholders’ equity
$1,501.6
$1,294.0
$1,264.7
Book value per share
$36.88
Core earnings per
diluted share(1)
Dividends per share
$1.74
$1.10
$32.15
$1.97
$1.06
$31.18
$2.00
$1.00
(1) For a definition of this non-GAAP measure, see the Company’s SEC filings.
Corporate data
Corporate Office
1 Horace Mann Plaza
Springfield, IL 62715-0001
217-789-2500
horacemann.com
Annual Meeting
May 23, 2018
9 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
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
investorrelations@horacemann.com
HA-C00382 (Mar. 18)
horacemann.com