Horace Mann Educators Corporation
2019 Annual Report
on Form 10-K
horacemann.com
Serving educators since 1945
Proud to be the largest multiline financial services company
focused on America’s educators
A financially sound company with a strong strategy for profitable growth
Longevity
Financial strength
Niche market
Multiline model
• Founded by
Educators for
Educators in 1945
• Offering 403(b) tax
qualified annuities
since 1961
• NYSE listed (HMN)
since 1991
• $12.5B in assets(1)
• $1.3B in premium
and contract
deposits for 2019
• $1.8B market
capitalization(1)
• Highly rated by
all four major rating
agencies
• Educators have
preferred risk
profile
• Homogeneous
customer set
• Serving about
half of school
locations(2) in our
market footprint
• Business mix
balanced between
segments
• Ability to provide
total household
solutions
• Provides earnings
diversification
(1) As of December 31, 2019
(2) Includes school buildings and administration locations
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
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) (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
Trading Symbol
HMN
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
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
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
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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.
No
No
No
No
Large accelerated filer
Non-accelerated filer
Accelerated filer
Smaller reporting company
Emerging growth 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 Exchange Act). Yes
No
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, 2019, was $1,619.7 million.
As of February 15, 2020, the registrant had 41,266,751 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 2020 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,
2019.
HORACE MANN EDUCATORS CORPORATION
FORM 10-K
YEAR ENDED DECEMBER 31, 2019
INDEX
Part
I
Item
1.
Business
Introduction
Forward-looking Information
Overview, History and Available Information
Corporate Strategy
Reporting Segments
Geographic Composition of Business
Competition
Investments
Cash Flow
Regulation
Employees
1A.
1B.
2.
3.
4.
5.
6.
7.
7A.
8.
9.
9A.
9B.
10.
11.
12.
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
Introduction
Consolidated Financial Highlights
Consolidated Results of Operations
Outlook for 2020
Critical Accounting Estimates
Results of Operations by Segment for the Three Years Ended December 31, 2019
Liquidity and Financial Resources
Pending Accounting Standards
Effects of Inflation and Changes in Interest Rates
Quantitative and Qualitative Disclosures about Market Risk
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 Shareholder Matters
Certain Relationships and Related Transactions and Director Independence
Principal Accountant Fees and Services
Exhibits and Financial Statement Schedules
Form 10-K Summary
13.
14.
15.
16.
Signatures
II
III
IV
Page
1
1
1
1
2
4
12
13
13
15
16
17
17
31
31
31
31
32
35
36
36
37
38
40
41
48
58
63
63
63
66
135
135
137
138
138
138
138
138
139
150
151
PART I
Item 1 I Business
Measures within this Annual Report on Form 10-K that are not based on accounting principles generally
accepted in the U.S. (non-GAAP) are marked with an asterisk (*) the first time they are presented within Part I -
Item 1 of this report. 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 accounting principles generally accepted in the U.S. (GAAP) in the Appendix to the
Company's Fourth Quarter 2019 Investor Supplement.
Forward-looking Information
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
forward-looking statements is contained in Part I - Item 1A and in Part II - Item 7 of this report.
Overview, History 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, the Company markets and
underwrites:
• personal lines of property and casualty insurance, primarily automobile and property coverages
•
•
•
supplemental insurance, primarily heart, cancer, accident and limited short-term supplemental disability
coverages
retirement products, primarily tax-qualified annuities
life insurance, primarily whole life, term and indexed universal life (IUL)
The Company conducts and manages its business
through a total of five reporting segments. The four
operating segments, representing the major lines of
insurance business, are: Property and Casualty,
Supplemental, Retirement and Life. The Company
does not allocate the impact of corporate-level
transactions to the four operating segments,
consistent with the basis for management's
evaluation of the results of those segments, but
classifies those items in the fifth reporting segment,
Corporate and Other.
Founded by Educators for Educators®, the
Company's business began in Springfield, Illinois in
1945 when two school teachers started selling
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. On July 1, 2019, the Company added its
newest segment - Supplemental - when it acquired
all of the equity interests in NTA Life Enterprises,
LLC (NTA).
Horace Mann Educators Corporation
Annual Report on Form 10-K 1
In November 1991, HMEC completed an initial public offering of its common stock. The common stock is traded
on the New York Stock Exchange (NYSE) under the symbol HMN.
Today, the Company markets primarily to K-12 teachers, administrators and other employees of public schools
and their families. The Company's more than 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 the Company is the largest national multi-line
insurance company focused on the nation's educators as its primary market.
Horace Mann markets 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 third-party
vendor products made available through the Horace Mann General Agency. 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.
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 employee benefit plans of those entities.
The Company's new Supplemental segment predominantly sells a variety of guaranteed renewable supplemental
health insurance products including heart, cancer, accident and limited short-term supplemental disability
coverages to the K-12 education market. Approximately 80% of its 150,000 households are individuals
employed by educational institutions; the remainder generally are other public sector employees such as
firefighters.
Including results for the Supplemental segment since the date it was acquired, the Company's insurance
premiums and contract charges earned for the year ended December 31, 2019 were $898.0 million and
insurance premiums written and contract deposits* for the year ended December 31, 2019 were $1.3 billion. Net
income was $184.4 million. The Company's total assets were $12.5 billion at December 31, 2019. The
Company's investment portfolio had an aggregate fair value of $6.6 billion at December 31, 2019 and consisted
primarily of investment grade fixed maturity securities.
The Company's annual reports 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 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, code of ethics, and corporate social responsibility reports, 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 June 19, 2019, the Chief Executive Officer (CEO) of HMEC submitted the Annual Section 12(a) CEO
Certification to the 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, 2018, the CEO and Chief Financial Officer (CFO)
certifications required under Section 302 of the Sarbanes-Oxley Act.
Corporate Strategy
The Company's vision is to be the company of choice to provide financial solutions for educators and others
who serve their communities. Management believes the unique value of the Company is providing solutions
tailored for educators at each stage of their lives, empowering them to achieve lifelong financial success.
Education Market
Today, the Company serves approximately 470,000 educator households in roughly half of the of the K-12 public
school buildings in its market footprint in the U.S., with significant opportunity to grow in this niche market. The
U.S. Department of Education estimates that there are approximately 6.4 million K-12 public school teachers,
2 Annual Report on Form 10-K
Horace Mann Educators Corporation
administrators and support staff nationwide, a number that is steadily growing. Adjacent markets such as private
education staff offer further opportunity.
Because of the focus on this niche market, the Company has a homogeneous customer set with similar
characteristics and preferred risk profiles. This allows for more precise underwriting processes and more
targeted marketing operations, amplifying the benefit of successful approaches.
In addition, the Company has taken steps to increase its "business-to-business" value to administrators and
business officials who make decisions on financial solution providers at the school district level.
Growth Strategy
Over the past several years, the Company has established its solutions orientation for the education market
through a focus on products, distribution and infrastructure (PDI):
• Products designed to meet educators’ needs and protect their unique risks;
• Knowledgeable, trusted distribution tailored to educator preferences; and,
• Modern, scalable infrastructure that is easy to do business with.
In addition, the Company completed three transactions in 2019 that supported its PDI strategy: acquiring NTA
and Benefit Consultants Group, Inc. (BCG), as well as reinsuring a $2.9 billion block of legacy annuity business.
The annuity reinsurance transaction reduced the Company's interest rate risk while releasing capital that was
redeployed into higher-margin products through the acquisition of NTA.
As a result, the Company has become a larger, more diverse company that expects to continue its
transformation by leveraging its market leadership to increase its share of the education market.
Relevant Products
At the core of Horace Mann’s value proposition is the commitment to providing relevant products and solutions
to address the issues that educators face at each stage of their career and life. For example, for young educators
new to the profession, student loan debt often precludes saving for retirement at the point when those savings
would have the most time to grow and make a significant impact at retirement age. Through the Company’s
Student Loan Solutions program, educators receive complimentary financial guidance to pursue public servant
forgiveness or alternate repayment programs, or consolidate loans at a lower rate, freeing up money to begin a
savings program.
Other solutions are valuable to educators across all career stages. Many educators are concerned about the
rising out-of-pocket expenses stemming from unexpected medical events. Supplemental solutions, like cancer,
heart and accident coverages, offer a defined dollar benefit that can be used for medical or non-medical
expenses of an accident or health emergency. This can help customers address unexpected issues without
needing to draw down retirement or other savings.
Trusted Distribution
The Company aims to provide multiple complementary distribution channels to meet individual educator
preferences. The largest component of this strategy is the Company’s agency force, which builds strong
relationships at the school and district level. These more than 800 local agents serve as a partner to educational
institutions, providing financial wellness workshops in schools, consulting with educators and administrators,
and supporting school events and activities. This trusted adviser model builds particularly strong brand loyalty
and affinity. With the acquisition of NTA, the Company added approximately 200 captive agents experienced in
school worksite marketing in largely complementary geographies.
To build brand awareness, engage with the educator community, and stay abreast of developments and
challenges faced by educators, the Company partners with multiple national, state and local associations.
Through strategic alliances with a diverse group of educator associations (e.g., the American Association of
School Administrators, The School Superintendents Association and the Association of School Business
Officials), the Company builds relationships with administrators. Through partnerships with some state and local
National Education Association (NEA) teacher associations and sponsoring the teacher of the year award with
the NEA Foundation, the Company has the opportunity to build its brand awareness and discuss issues and
challenges faced by individual educators.
Horace Mann Educators Corporation
Annual Report on Form 10-K 3
To meet the preferences of customers who prefer "on demand" services, the Company’s direct sales team is
available by phone or electronically to respond to questions or bind coverages. Customers can also secure auto,
home, supplemental and life quotes and coverage comparisons online.
Modern Infrastructure
The Company is implementing a multi-year effort to upgrade its infrastructure to provide an enhanced customer
experience. One current example is the Guidewire property and casualty administrative platform. In 2020, the
Company plans to on-board 14 states on to the Guidewire platform -- representing more than 60% of its
customer base. This will increase customer convenience through improved digital capabilities, e-signatures, real-
time policy issuance and changes, coverage comparison features and consolidated billing. The first phase of the
Guidewire implementation, encompassing the claims system completed in 2017, resulted in reduced cycle times
and more insight into customer and loss trends.
Through the acquisition of BCG, the Company strengthened its retirement platform to better meet the needs of
employers, as well as other worksite capabilities. This strengthened Horace Mann's value proposition and
enhanced its retirement plan infrastructure and offerings for school districts.
Reporting Segments
The Company conducts business primarily in five reporting segments: Property and Casualty, Supplemental,
Retirement, Life and Corporate and Other.
These segments are defined based on the way management organizes the segments for making operating
decisions and assessing performance. Management maintains discrete financial information by these segments
to evaluate performance and allocate resources.
The calculations of segment data are described in more detail in Part II - Item 8, Note 18 of the Consolidated
Financial Statements in this report. Additionally, the business operations of each segment are explained in this
section. The financial performance of each segment is discussed in Part II - Item 7 of this report.
Property and Casualty
The Company's primary Property and Casualty
insurance products include private passenger
automobile insurance and residential home
insurance.
The Company offers standard auto coverages,
including liability, collision and comprehensive.
Property coverage includes both homeowners and
renters policies. For both auto and property
coverage, the Company offers educators a
discounted rate and the Educator Advantage®
package of features. This includes value-added
benefits specifically for educators, such as liability
coverage for transporting students in an insured
vehicle and reimbursement for stolen school
fundraising items.
433,060 auto policies in force and
193,727 property policies in force at December 31, 2019
The Company has programs in a majority of states to provide higher-risk automobile and property coverages.
The Company also has a number of other insurance coverages with third-party vendors who underwrite and bear
the risk of such insurance. The Company receives commissions on these sales.
Similarly, the Company has increased its offering of third-party vendor products in many areas to meet additional
educator needs such as coverage for small business owners or classic/collector automobiles.
4 Annual Report on Form 10-K
Horace Mann Educators Corporation
Catastrophe Costs (Pretax) (1)
The level of catastrophe costs can fluctuate significantly from year to year. The Company's catastrophe costs for
the last five years are shown in the following table ($ in millions).
Year
Month
Event Description
States/Region
Total
2019
2018
2017
2016
2015
May
Wind and Hail
CO, IA, IL, IN, KS, MO, NE, OH, OK, PA, WY
Other single events less than $5.0 million
March
Winter Storm
June
July
Wind and Hail
Carr Fire
Northeastern U.S.
CO, UT
CA
September Hurricane Florence
Southeast and Mid-Atlantic
October
Hurricane Michael
Southeastern U.S.
November
Camp Fire
Other single events less than $5.0 million
May
June
Wind, Hail, Tornado
Wind and Hail
August
Hurricane Harvey
August
Hurricane Irma
Other single events less than $5.0 million
CA
CO
MN (primarily)
Southeastern U.S.
Eastern U.S.
April
Wind and Hail
FL, TX
September Hurricane Matthew
Southeastern U.S.
Other single events less than $5.0 million
February
Winter Storm
Midwest & Eastern U.S.
Other single events less than $5.0 million
$
52.0
5.5
46.5
$
114.1
3.5
8.2
5.9
11.4
4.5
31.2
49.4
61.8
10.0
10.0
4.8
3.0
34.0
60.0
9.3
10.0
40.7
44.4
8.9
35.5
$
$
$
(1)
Net of reinsurance and before income tax benefits. Includes allocated loss adjustment expenses and reinsurance reinstatement premiums;
excludes unallocated loss adjustment expenses.
Horace Mann Educators Corporation
Annual Report on Form 10-K 5
Fluctuations in catastrophe losses impact a property and casualty insurance company's claims and claim
adjustment expenses incurred and paid.
Claims and Claim Expenses Incurred(1)(2), 2017-2019 ($ in millions)
(1) Claims and claim expenses incurred include the impact of prior years' reserve development as quantified in Property and Casualty reserves.
Catastrophe totals are net of reinsurance and before income tax benefits.
Excludes 2018 reinsurance reinstatement premiums.
(2)
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 reported claims and claims that have been incurred
but not yet reported (IBNR). 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 prior years' reserve development recorded in each of the three years ended December 31, 2019,
see Part II - Item 8, Note 8 of the Consolidated Financial Statements, and Part II - Item 7, Critical Accounting
Estimates and Results of Operations for the Property and Casualty Segment for the Three Years Ended
December 31, 2019 in this report.
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 the 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 environmental 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, 2019 were not material.
The Company maintains catastrophe excess of loss reinsurance coverage. For 2019, 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. The catastrophe excess of loss contract provided 95% coverage for catastrophe
losses above a $25.0 million retention 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 2020 catastrophe excess of loss coverage is unchanged from 2019.
6 Annual Report on Form 10-K
Horace Mann Educators Corporation
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 2019 the Company reinsured each loss above a retention of $1.0 million up to $5.0
million per occurrence 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 2020 liability coverages are unchanged from 2019.
The Company markets personal lines excess liability policies. The limits of these policies are $1.0 million to $5.0
million in excess of $0.5 million of underlying auto and homeowners liability coverage. The Company reinsures
these policies on a quota share basis with General Reinsurance Corporation who assumes 95% of losses,
including allocated loss adjustment expenses and premiums for all states except Massachusetts. For business
written in Massachusetts, the quota share portion is 75%.
For auto insurance sold in Michigan, Personal Injury Protection (PIP) coverage is unlimited in compliance with
Michigan state law. The Company participates in the Michigan Catastrophic Claims Association (MCCA). For
policies issued in 2019, MCCA reimburses PIP losses including allocated loss adjustment expenses in excess of
$0.6 million.
For property coverages, in 2019 the Company reinsured each loss above a retention of $1.0 million up to $5.0
million per risk, 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 2020 property coverages are unchanged from 2019.
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 Global Inc. (S&P) as of January 1, 2020. No other single reinsurer's
percentage participation in 2020 or 2019 exceeds 5%. The Company monitors reinsurers' financial strength by
reviewing A.M. Best and S&P ratings.
Property Catastrophe First Event Excess of Loss Reinsurance Participants In Excess of 5%
A.M.
Best
Rating
S&P
Rating
A
A+
NR
A+
A+
AA-
AA-
AA-
NR - Not rated.
Reinsurer
Parent
2020
2019
Lloyd's of London Syndicates
22%
28%
Swiss Re Underwriters Agency, Inc.
Swiss Re Ltd.
10%
7%
R+V Versicherung AG
SCOR Global P&C SE
DZ BANK AG
SCOR SE
9%
7%
8%
7%
Horace Mann Educators Corporation
Annual Report on Form 10-K 7
Supplemental
The Company's new Supplemental insurance
products include heart, cancer, accident and limited
short-term supplemental disability coverages and it
also markets life insurance products. A typical
supplemental policy offers "HIPAA Excepted"
benefits with simplified issuance. Supplemental
insurance products are limited benefit products that
offer defined benefit amounts paid directly to the
insured, and are payable in addition to any other
insurance coverages. An insured can use the
supplemental payments to cover medical or non-
medical costs of a covered injury or illness.
Supplemental products continue to gain popularity
in the changing healthcare landscape with higher
deductible health care plans and expanded
voluntary offerings along with an increasing focus
on health and wellness. The Company's
supplemental products are well designed, offering
indemnity benefits only rather than reimbursement
of actual costs. The benefit risk is well controlled
with no coverage for pre-existing conditions and
specified benefit maximums per occurrence or time
period. Diagnosis or treatment is required for benefit
payment.
The limited supplemental disability products have
elimination and short-term benefit periods. Sound
underwriting techniques and significant underwriting
expertise help ensure loss experience is
commensurate with pricing expectations.
297,000 total Supplemental policies in force at December 31, 2019
Supplemental Reserves
Supplemental policy reserves represent management's estimate of the present value of the future ultimate
benefits to be provided for heart, cancer, accident and limited short-term supplemental disability claims. Unpaid
claims and claim expenses provide provisions for claims reported to the Company plus an estimated accrual for
IBNR claims.
Supplemental Reinsurance
The Company retains all of the risk on its supplemental health product lines, including accidental death risk
embedded within certain products. However, the Company’s other accidental death and dismemberment risk
issued through all other policies and riders are ceded 100%. The maximum life insurance risk retained on any
individual life by the Company's Supplemental segment is $100,000. The excess risk on the life insurance
products issued by the Company's Supplemental segment is ceded to and reinsured by a third party that is
rated A (Excellent) by A.M. Best.
Retirement
Educators in the Company's target market continue to benefit from the provisions of Section 403(b) of the
Internal Revenue Code (Code). 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).
8 Annual Report on Form 10-K
Horace Mann Educators Corporation
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. Of the Company's annuity contract deposits* in 2019, 51.8% were for 403(b) tax-
qualified annuities, and 62.2% of accumulated annuity value on deposit is 403(b) tax-qualified. To further assist
registered representatives in delivering the Horace Mann Value Proposition, the Company has entered into third-
party vendor agreements to market 529 college savings programs and provide brokerage clearing arrangements.
Annuity Reinsurance
Effective April 1, 2019, the Company reinsured a block of approximately $2.9 billion of policy liabilities related to
legacy individual annuities written in 2002 or earlier. The block includes $2.2 billion of fixed annuities with a
minimum guaranteed crediting rate of 4.5% that represented approximately 50% of the Company’s fixed annuity
assets under management at March 31, 2019, and $700 million of variable annuities. The reinsurance is
structured as coinsurance for the fixed annuities and modified coinsurance for the variable annuities with RGA
Reinsurance Company, a subsidiary of Reinsurance Group of America, Incorporated (RGA). The Company
determined that the reinsurance agreement does not expose the reinsurer to a reasonable possibility of
significant loss from insurance risk. Therefore, the Company recognizes the reinsurance agreement using the
deposit method of accounting.
Assets under Management
The Company markets both fixed and variable annuity
contracts, primarily on a tax-qualified basis. Total
accumulated fixed and variable annuity cash value on
deposit at December 31, 2019 was $4.4 billion, net of
the reinsured block.
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 500 Index and the Dow Jones Industrial Average
(DJIA).
229,000 annuity contracts in force at December 31, 2019
Variable annuities combine a fixed account option with equity-linked and bond-linked sub-account options. 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. As of December 31, 2019, the Company had 110 variable sub-account options including funds managed
by some of the larger participants in the mutual fund industry.
In 2017, the Company introduced the Personal Retirement Planner annuity series, which 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.
Assets under Administration
In addition to annuities, the Company markets 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 non-for-profit plan sponsors. After the acquisition of BCG, the Company migrated the
administration of its Horace Mann Retirement Advantage® platform from a third-party vendor to the BCG
platform. The Company offers its group unallocated fixed annuity, Horace Mann Stable Value Solution, as an
option within a number of the 401(k) plans BCG administers. BCG had $1.5 billion of recordkeeping assets and
$2.0 billion of advisory assets as of December 31, 2019.
Horace Mann Educators Corporation
Annual Report on Form 10-K 9
Retirement Assets Under Administration, 2017-2019 ($ in billions)
Life
The Company entered the individual life insurance
business in 1949. The Company primarily offers
traditional term and whole life insurance products as
well as IUL products and, from time to time, revises
products and product features or develops new
products. Additionally, the Company offers educator
rates for its customers.
During 2019, the average face amount of ordinary
life insurance policies issued by the Company was
approximately $199,000 and the average face
amount of all ordinary life insurance policies in force
at December 31, 2019 was approximately $95,000.
The Company offers a lineup of several product
portfolios. Life by Design® is a portfolio of Horace
Mann manufactured and branded life insurance
products that specifically address the financial
planning needs of educators. The Life by Design®
portfolio features individual whole life and individual
term products, including 10, 15, 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.
149,887 whole life, term and group policies in force; 50,973
Experience Life and IUL policies in force at December 31, 2019
10 Annual Report on Form 10-K
Horace Mann Educators Corporation
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 customers' varying life insurance needs. Additional products include single premium whole life
products and 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 IUL product with interest crediting strategies linked to the S&P 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.
Life Reinsurance
The maximum individual life insurance risk retained by the Company's Life segment is $500,000 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 2019, 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 2020, 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.
Corporate and Other
Corporate and Other includes capital raising activities (including debt financing and related interest expense), net
investment gains (losses), certain public company expenses and other corporate-level transactions including
expenses related to business acquisition activity. 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.
Horace Mann Educators Corporation
Annual Report on Form 10-K 11
2019 Geographic Composition of Business
The Company's business is geographically diversified. For the year ended December 31, 2019, 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, 9.6%; Texas, 7.7%; North Carolina, 6.6%; Minnesota, 5.7%;
and Pennsylvania, 5.1%.
$686.3 million in direct premiums, defined as earned premiums
before reinsurance as determined under statutory accounting
principles. HMEC's property and casualty subsidiaries are licensed
to write business in 49 states and the District of Columbia.
$580.6 million in direct premiums and contract deposits, defined as
collected premiums before reinsurance as determined under
statutory accounting principles. HMEC's principal life subsidiary is
licensed to write business in 49 states and the District of Columbia.
$65.8 million in insurance premiums and contract charges earned. HMEC's principal
supplemental insurance subsidiaries are licensed to write business in all 50 states,
the U.S. Virgin Islands and the District of Columbia.
12 Annual Report on Form 10-K
Horace Mann Educators Corporation
Competition
Horace Mann has 75 years of experience serving the education market and is uniquely positioned to tailor
financial solutions for educators at each stage of their lives, empowering them to achieve lifelong financial
success. The Company believes this helps it succeed 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 its principal competitive advantages in the sale of Property and Casualty's and Supplemental's
insurance products are overall service, worksite sales and service, price, and name recognition. Management
believes that its principal competitive advantages in the sale of Retirement products and Life insurance are
worksite sales and service, product features, perceived stability of the insurer, price, overall service and name
recognition.
With the Company's focus on the educator market it can benefit from a homogeneous customer set that permits
more precise underwriting processes and more targeted marketing operations, amplifying the benefit of
successful approaches. The Company seeks to provide:
• Products designed to meet educators’ needs and protect their unique risks;
• Knowledgeable, trusted distribution tailored to educator preferences; and
• Modern, scalable infrastructure that is easy to do business with.
Competition in this market is from a number of national providers of personal automobile, property,
supplemental and life insurance including State Farm, Allstate, Farmers, Liberty Mutual, Aflac, Unum and
Nationwide, as well as a number of 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. A number of technology start-ups have also entered the market.
National providers of annuities and other financial service platforms that serve the retirement needs of educators
and others that serve the community, 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 Code 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
primarily emphasizes investment grade fixed maturity securities that are selected to match the anticipated
duration of the Company's liabilities. In addition to these securities, the Company also invests in limited
partnership interests, commercial mortgage loans and equity securities to improve overall returns.
The Company has separate investment strategies and guidelines for its Property and Casualty, Supplemental,
Retirement and Life portfolios, 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 that 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 rate sensitive, as is the
case in Property and Casualty and Supplemental.
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
Horace Mann Educators Corporation
Annual Report on Form 10-K 13
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
securities, other asset-backed securities, preferred stocks, common stocks, real estate mortgages, real estate,
and alternative investments.
Investment Portfolio at December 31, 2019
($ in millions)
% of
Total
Carrying
Value
Carrying Value
Life and
Total
Retirement Supplemental
Property
and
Casualty (7)
Amortized
Cost or
Cost (8)
Publicly Traded Fixed Maturity Securities, Equity
Securities and Short-term Investments:
U.S. Government and agency obligations: (1)
Mortgage-backed securities
10.9% $ 724.3
$
547.9
$
130.0
$
46.4
$
Other, including U.S. Treasury securities
6.9
458.9
Investment grade corporate and public utility
bonds
17.7
1,173.8
440.7
797.5
72.6
40.4
1,592.9
34.5
1,195.4
1,105.5
17.1
958.6
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)
1.1
24.0
0.5
18.0
0.5
0.7
0.4
0.9
0.3
0.3
2.6
31.0
45.4
24.3
60.4
20.1
21.4
172.7
Total publicly traded securities
84.8
5,627.7
Other Invested Assets:
Investment grade private placements
Non-investment grade private placements (2)
Mortgage loans (5)
Policy loans (5)
Limited partnership interests
Other
5.8
0.8
0.1
2.3
5.8
0.4
385.8
52.8
9.8
153.5
383.7
25.9
Total other invested assets
15.2
1,011.5
24.4
43.9
23.5
57.9
0.1
21.4
113.6
4,192.5
377.4
50.2
9.8
152.7
253.1
24.9
868.1
6.6
174.9
7.1
78.0
—
56.3
0.5
—
0.8
1.4
—
—
57.5
513.1
8.4
2.6
—
0.8
16.0
—
27.8
11.6
684.5
436.7
201.4
1,074.8
25.1
409.4
17.4
180.5
6.1
1.5
—
1.1
20.0
—
1.6
922.1
—
—
—
—
114.6
1.0
115.6
70.1
1,457.9
32.4
1,188.7
28.4
42.8
21.9
60.4
20.1
21.4
172.7
5,312.8
368.0
50.8
9.8
153.5
383.7
25.9
991.7
Total investments (6)
100.0% $ 6,639.2
$
5,060.6
$
540.9
$
1,037.7
$
6,304.5
(1)
(2)
(3)
(4)
All investment grade that includes $494.9 million fair value of investments guaranteed by the full faith and credit of the U.S. Government and
$688.3 million fair value of federally sponsored agency securities which are not backed by the full faith and credit of the U.S. Government.
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' (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.
Short-term investments mature within one year of being acquired and are carried at cost, which approximates fair value. Short-term
investments of $172.7 million are all money market funds and not rated.
(5) Mortgage and policy loans are carried at amortized cost or unpaid principal balance.
(6)
Approximately 7.0% of the Company's investment portfolio, having a carrying value of $462.8 million as of December 31, 2019, consisted of
securities with some form of credit support, such as insurance. Of the securities with credit support as of December 31, 2019, municipal
bonds represented $349.1 million carrying value.
Includes $1.4 million of short-term investments held in Corporate and Other.
The values of limited partnership interests are carried using the equity method of accounting which approximates fair value.
(7)
(8)
14 Annual Report on Form 10-K
Horace Mann Educators Corporation
Fixed Maturity Securities
For reporting purposes, the Company has classified the entire portfolio of fixed maturity securities as "available
for sale" and the portfolio is carried at fair value. The adjustment for net unrealized investment gains (losses) on
securities available for sale is recognized 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 (DAC) associated with investment (annuity) 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.
Fixed Maturity Securities Portfolio at December 31, 2019
Investment grade
Non-investment grade
Average quality
Average option-adjusted duration
Percent maturing in next 5 years
Cash Flow
% of Fixed Maturity
Securities Portfolio
% of Total
Investment Portfolio
96.4%
3.6%
A+
6.0
31.1%
84.0%
3.2%
A+
6.0
27.1%
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 Part II
- Item 8, Note 14 of the Consolidated Financial Statements and in Part II - Item 7, Liquidity and Financial
Resources — Cash Flow and — Capital Resources in this report.
The ability of the insurance subsidiaries to pay cash dividends to HMEC is subject to state insurance department
regulations which generally permit dividends to be paid for any 12 month period in amounts equal to the greater
of (i) net income for the preceding calendar year or (ii) 10% of surplus, determined in conformity with statutory
accounting principles, as of the preceding December 31st. Any dividend in excess of these levels requires the
prior approval of the Director or Commissioner of the state insurance department of the state in which the
dividend paying insurance subsidiary is domiciled. The maximum amount of dividends that may be paid in 2020
from all of HMEC's insurance subsidiaries without prior regulatory approval is $105.3 million, excluding the
impact and timing of prior year dividends.
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.
Horace Mann Educators Corporation
Annual Report on Form 10-K 15
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 and the manner in which they may be sold. 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 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 the Company's
insurance subsidiaries. At December 31, 2019 and 2018, statutory capital and surplus of each of the Company's
insurance subsidiaries were above required levels. States have also adopted the NAIC's U.S. Own Risk and
Solvency Assessment 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, 2019, 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 broker-dealers and investment advisers, 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. Also, see Part I -
Item 1A of this report. 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 Horace Mann Life Insurance Company (HMLIC) are regulated by the SEC.
Horace Mann Investors, Inc., and BCG Securities, Inc., the broker-dealer and Registered Investment Adviser
subsidiaries of the Company, are also regulated by the SEC, the Financial Industry Regulatory Authority, Inc., the
Municipal Securities Rule-making Board and various state securities regulators.
Federal income taxation of the build-up of cash value within a life insurance policy or an annuity contract could
have a materially adverse impact on the Company's ability to market and sell such products. Various legislation
to this effect has been proposed in the past, but has not been enacted. Although no such legislative proposals
are known to exist at this time, such proposals may be made again in the future. Changes in other federal and
state laws and regulations could also affect the relative tax and other advantages of the Company's annuity and
life products.
16 Annual Report on Form 10-K
Horace Mann Educators Corporation
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. FIO studies the current insurance regulatory system and
is charged with monitoring and providing specific reports on various aspects of the insurance industry. However,
FIO does not have general supervisory or regulatory authority over the business of insurance. FIO has suggested
an expanded federal role in some circumstances. In 2017, the executive branch requested a review of financial
regulation, including Dodd-Frank. Management will continue to monitor future developments for impact on the
Company, insurers of similar size and the insurance industry as a whole.
Employees
At December 31, 2019, the Company had 1,516 non-agent employees and 22 full-time Employee Agents. This
does not include Exclusive Distributors that were part of the Company's total dedicated agency force at
December 31, 2019. The Company has no collective bargaining agreements with any employees.
ITEM 1A. I Risk Factors
The following are certain risk factors that could affect the Company's business, financial position and results of
operations. The risks that the Company has highlighted in the following section 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 the Company's 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 severely constrained credit and capital markets, particularly for financial institutions, and an
overall loss of investor confidence. Many states and local governments can also be impacted by adverse
economic conditions which could have an impact on both the Company's niche market and its investment
portfolio. Like other financial institutions which face significant financial market risk in their operations, the
Company has been 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 the Company's financial condition and
results of operations.
If the Company's investment strategy is not successful, the Company could suffer unexpected
losses.
The success of the Company's investment strategy is crucial to the success of its business. Specifically, the
Company's 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 invested assets will decrease in value due to changes in yields
realized on the assets and prevailing market yields for similar assets, an unfavorable change in the
liquidity of the asset or an unfavorable change in the financial prospects or a downgrade in the credit
rating of the issuer of the asset;
Horace Mann Educators Corporation
Annual Report on Form 10-K 17
• credit risk, which is the risk that the value of certain investments become 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
the sale of 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 could 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 the Company's investment
guidelines, policies and procedures, the Company also attempts to mitigate these risks through product pricing,
product features and the establishment of policy reserves, but it cannot provide assurance that assets will be
properly matched to meet anticipated liabilities or that the investments will provide sufficient returns to enable
satisfaction of guaranteed fixed benefit obligations.
The Company's investment strategy and guidelines have resulted in an investment portfolio that 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 the Company's
financial condition and results of operations.
From time to time, the Company may 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. The Company cannot provide complete assurance that it will successfully structure
derivatives and hedges so as to effectively manage risks. If the Company's calculations are incorrect, or if it does
not properly structure derivatives or hedges, it may have unexpected losses that may require it to draw on
surplus, which could adversely affect the Company's financial condition and results of operations.
Although the Company's defined benefit pension plan has been frozen since 2002, declining financial markets
could also cause, and in the past have caused, the value of the investments in this plan to decrease, resulting in
additional pension expense, a reduction in other comprehensive income and an increase in required
contributions to this plan, which could have an adverse effect on the Company's financial condition and results
of operations.
The determination of fair value of the Company's fixed maturity securities portfolio includes
methodologies, estimations and assumptions that are subject to differing interpretations and
could result in changes to investment valuations that may materially impact the Company's
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 securities if trading
18 Annual Report on Form 10-K
Horace Mann Educators Corporation
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 could ultimately 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, net of applicable deferred income taxes and the related impact on DAC 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 investments could have a material adverse effect on the Company's financial
condition and results of operations.
Equity method adjustments on certain investments in limited partnership interests as well as
fair value accounting for equity securities may reduce profitability and/or cause volatility in the
Company's results of operations.
The Company invests in limited partnership interests, which are accounted for using the equity method of
accounting. This means that the Company's proportionate share of the changes in fair value of the underlying
net asset values are reported in net investment income in the Consolidated Statements of Operations. As a
result, the amount of net investment income recognized from these investments can vary substantially from
period to period. Equity and credit market volatility may reduce net investment income from these types of
investments and negatively impact the results of operations. Changes in fair value from applying fair value
accounting to equity securities that are reported in net investment gains (losses) in the Consolidated Statements
of Operations may cause volatility in the Company's results of operations.
Risks Related to Property and Casualty Segment
Catastrophic events, as well as significant weather events not designated as catastrophes, can
have a material adverse effect on the Company's 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.
The Company's Property and Casualty insurance subsidiaries have experienced, and the Company anticipates
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 the insurance subsidiaries.
Various events can cause catastrophes, including hurricanes, windstorms, hail, severe winter weather, wildfires,
earthquakes, explosions and terrorism. The frequency and severity of these catastrophes are inherently
unpredictable. The extent of losses from a catastrophe is a function of both the total amount of insured
exposures in the area affected by the event and the severity of the event. Although catastrophes can cause
losses in a variety of property and casualty lines, most of the catastrophe-related claims of the Company's
insurance subsidiaries are related to property coverages. The Company's 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 the Company's 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 2019 direct premiums earned, 57.4% of the total annual premiums for the Company's Property and
Casualty business were for policies issued in the ten largest states in which the insurance subsidiaries write
property and casualty coverage. Included in this top ten group are certain states which are considered to be
Horace Mann Educators Corporation
Annual Report on Form 10-K 19
more prone to catastrophe occurrences: California, Texas, North Carolina, Minnesota, South Carolina, Florida,
Louisiana and Colorado.
The Company's insurance subsidiaries seek to reduce their exposure to catastrophe losses through their
underwriting strategies, pooling of losses and the purchase of catastrophe reinsurance. However, reinsurance
may prove inadequate under certain circumstances.
Climate change may adversely affect the Company’s financial position, results of operations
and cash flows.
Climate change presents risk to the Company and there are concerns that the increased frequency and severity
of weather-related catastrophes and other losses is indicative of changing weather patterns, whether as a result
of climate-warming trends (global climate change) caused by human activities or otherwise, which could cause
such events to persist. Increased weather-related catastrophes could lead to higher overall losses, which the
Company may not be able to recoup, particularly in a highly regulated and competitive environment, and higher
reinsurance costs. Certain catastrophe models assume an increase in frequency and severity of certain weather
or other events, which could result in a disproportionate impact on insurers with certain geographic
concentrations of risk. This could also likely increase the risks of writing property insurance in coastal areas or
areas susceptible to wildfires or flooding, particularly in jurisdictions that restrict pricing and underwriting
flexibility. The threat of rising sea levels or other catastrophe losses as a result of global climate change may also
cause property values in coastal or such other communities to decrease, reducing the total amount of insurance
coverage that is required.
In addition, global climate change could have an impact on the Company’s fixed maturity security and limited
partnership portfolios, resulting in realized and unrealized losses in future periods that could have a material
adverse effect on the Company’s financial position, results of operations and cash flows. It is not possible to
foresee which, if any, assets, industries or markets may be materially and adversely affected, nor is it possible to
foresee the magnitude of such effect. Further, it is also possible that the legal, regulatory and social responses
to climate change could have an adverse effect on the Company’s financial condition, results of operations and
cash flows.
The Company's Property and Casualty loss reserves may not be adequate.
The Company's 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 reporting date. If these loss reserves prove inadequate, a loss is
recognized and measured by the amount of the shortfall and, as a result, the financial condition and results of
operations of the insurance subsidiaries may be adversely affected, potentially affecting their ability to distribute
cash to HMEC.
Reserves do not represent an exact calculation of liability. Reserves represent estimates, generally involving
actuarial projections at a given time, of what the 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. The Company's insurance subsidiaries adjust their reserve estimates regularly as experience develops
and further claims are reported and settled.
Due to the inherent uncertainty in estimating reserves for losses and loss adjustment expenses, the Company
cannot be certain that the ultimate liability will not exceed amounts reserved, with a resulting adverse effect on
the financial condition and results of operations.
20 Annual Report on Form 10-K
Horace Mann Educators Corporation
Risks Related to Supplemental Segment
Actual experience in the Supplemental segment may differ from actuarial assumptions which
could adversely affect profitability, results of operations and financial condition.
Historical results may not be indicative of future performance due to, among other things, changes in the
Company’s mix of business, regulatory actions or changes in legal doctrine impacting the Company's products
or lines of business, or any number of economic cyclical effects. Reserves do not represent an exact calculation
of future benefit liabilities but are instead actuarial and statistical-based estimates. Actual experience may differ
from the Company's reserve assumptions. There are no assurances that reserves will be sufficient to fund the
Company's future liabilities in all scenarios. Future loss development may require reserves to be increased,
which could adversely affect earnings in current and future periods. Adjustments to reserve amounts may be
required in the event of changes from the assumptions regarding future morbidity, mortality, persistency, and
interest rates used in calculating the reserve amounts, which could have a material adverse effect on the
Company's results of operations or financial condition.
Risks Related to Life and Retirement Segments
A sustained period of low interest rates or interest rate fluctuations could negatively affect net
interest margin derived from the difference between interest earned on investments and interest
paid under fixed annuity and life insurance products with account values.
Significant changes in interest rates expose the Company to the risk of not earning the appropriate level of
income or experiencing losses based on the differences between the interest earned on investments and the
credited interest paid on outstanding fixed annuity and life insurance products with account values. Significant
changes in interest rates may affect:
•
•
•
the ability to maintain appropriate interest rate spreads over the rates guaranteed in fixed annuity and life
products;
the book yield of the investment portfolio; and
the net unrealized investment gains (losses) in the portfolio and the related after tax effect on
shareholders' equity and total capital.
Both rising and declining interest rates can negatively affect the income derived from fixed annuity and life
products' interest rate spreads. During periods of falling interest rates or a sustained period of low interest rates,
investment earnings will be lower because new investments in fixed maturity securities likely will bear lower
interest rates. The Company may not be able to fully offset the decline in investment earnings with lower
crediting rates on fixed annuity products, particularly in a multi-year period of low interest rates. As of the time of
issuance of this Annual Report on Form 10-K, rates on new investments remain at historically low levels. If
interest rates do remain low over an extended period of time, it could pressure investment income by having to
invest insurance cash flows and reinvest the cash flows from the investment portfolio in lower yielding securities.
During periods of rising interest rates, there may be competitive pressure to increase the crediting rates on fixed
annuity products. The Company may not, however, immediately have the ability to acquire investments with
interest rates sufficient to offset an increase in crediting rates under fixed annuity products. Therefore, changes
in interest rates could affect interest rate spreads.
Changes in interest rates may also affect business in other ways. For example, a rapidly changing interest rate
environment may result in less competitive crediting rates on certain fixed rate products which could make those
products less attractive, leading to lower sales and/or increases in the level of life insurance and fixed annuity
product surrenders and withdrawals. New business volume also could be negatively impacted by product or
agent compensation changes which the Company might make to mitigate the income effect of spread
compression. Interest rate fluctuations that impact future profits may also impact DAC amortization.
The Company's Life and Retirement operations participate in cash flow testing procedures imposed by statutory
insurance regulations, the purpose of which is to ensure that reserves are adequate to meet the Company's
obligations under a variety of interest rate scenarios. Risk based capital requirements are also calculated under a
variety of interest rate and market rate scenarios. A continuation of the current low interest rate environment
Horace Mann Educators Corporation
Annual Report on Form 10-K 21
could cause the Company to increase statutory reserves as a result of cash flow testing or increase required
capital levels, which could reduce available statutory surplus of the Life insurance subsidiaries and potentially
limit the subsidiaries' ability to distribute cash to HMEC or write insurance business (as further described in a
subsequent risk factor).
The 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 retirement products.
In general, sales of fee-based products 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 fee-based products to potential customers, may cause current
customers to withdraw or reduce the amounts invested in fee-based products and may reduce the market value
of existing customers' investments in fee-based products, in turn reducing the amount of fee-based product
revenues generated. In addition, some variable annuity products 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 exposure to losses from variable annuity products featuring guaranteed minimum death benefits.
Declining or volatile financial markets that impact future profits may also impact DAC amortization.
The Company may experience volatility in its results of operations and financial condition due to
fair value accounting for derivatives.
All derivatives, including derivatives embedded in FIA and IUL products, are recognized on the balance sheet at
fair value. Changes in the fair value of these instruments are recognized immediately in the Company's results of
operations as follows:
• Call options purchased to fund the annual index credits on FIA and IUL products are carried at fair value.
Fair value is based on the amount of cash expected to be received to settle the call options adjusted for
the nonperformance risk of the counterparty. Changes in fair value of derivatives include 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.
• FIA contractual obligations for future annual index credits are accounted for 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 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 for FIA and
IUL business may cause volatility in the Company's 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 DAC
amortization could have a material adverse impact on the Company's financial condition and
results of operations.
The processes of calculating reserves and DAC amortization for the 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 sub-accounts 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).
The Company periodically reviews the adequacy of these reserves and DAC recoverability on an aggregate basis
and, if future experience is estimated to differ significantly from previous assumptions, adjustments to reserves
and DAC amortization may be required that could have a material adverse effect on the Company's financial
condition and results of operations.
22 Annual Report on Form 10-K
Horace Mann Educators Corporation
A reduction or elimination of the tax advantages of retirement and life products and/or a change
in the tax benefits of various government-authorized retirement programs, such as 403(b)
products and individual retirement accounts (IRAs), could make the Company's products less
attractive to clients and adversely affect its results of operations.
A significant part of the Company's retirement business involves fixed and variable 403(b) tax-qualified products,
which are purchased voluntarily by individuals employed by public school systems or other tax-exempt
organizations. The Company's 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 its life and
retirement products to clients or the tax benefits of programs utilized by its 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. Also, see Part I - Item 1, Regulation of this report.
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 life insurance and retirement products.
Strategic Risks and Operational Risks
The integration of NTA into the Company may not be as successful as anticipated.
The NTA acquisition involves numerous operational, strategic, financial, accounting, legal, tax and other risks.
Difficulties in executing the acquisition strategy may cause the Company's financial results to differ from its
expectations or the expectations of the investor community. Potential difficulties that may be encountered in the
integration process include, among other factors:
•
the inability to successfully integrate the businesses and distribution force of NTA in a manner that
permits the Company to achieve the full revenue and cost savings desired from the acquisition;
• complexities associated with managing the larger, more complex, business;
•
•
loss of key employees; and,
the disruption of, or the loss of momentum in, each company's ongoing business.
Lack of successful execution on acquisition strategies could result in impairment of goodwill
and intangible assets that could adversely affect the results of operations.
The Company accounted for the NTA and BCG acquisitions using the acquisition method of accounting, which
requires that the assets acquired and liabilities assumed be recognized on the Company's consolidated balance
sheet at their respective fair values as of the acquisition date, including recognition of intangible assets. Any
excess of the purchase consideration over the fair value of the acquired net tangible and intangible assets is
recognized as goodwill.
As of December 31, 2019, the Company's consolidated balance sheet reflected goodwill of $29.7 million and
intangible assets of $177.2 million recognized in connection with the NTA and BCG acquisitions (see Part II -
Item 8, Note 7 of the Consolidated Financial Statements for more information). To the extent the acquisitions do
not provide the modeled returns, the value of goodwill or intangible assets could become impaired and thus, the
Company may be required to recognize material non-cash charges relating to such impairment, which could
adversely affect its results of operations.
The personal lines insurance and retirement markets are highly competitive and the Company's
financial condition and results of operations may be adversely affected by competitive forces.
The Company operates in a highly competitive environment and competes with numerous insurance companies,
as well as mutual fund families, independent agent companies and financial planners. In some instances and
Horace Mann Educators Corporation
Annual Report on Form 10-K 23
geographic locations, competitors have specifically targeted the educator marketplace with specialized products
and programs. The Company competes in its target market with a number of national providers of personal
automobile and property insurance and life insurance and retirement products.
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 the Company. In the Company's
target market, it believes that the principal competitive factors in the sale of property and casualty insurance
products and supplemental insurance products are overall service, worksite sales and service, price, and name
recognition. The Company believes that for its market, the principal competitive factors in the sale of retirement
products and life insurance are worksite sales and service, product features, perceived stability of the insurer,
price, overall service and name recognition.
Particularly in the Property and Casualty business, the Company's 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 insurance is marketed, priced and underwritten.
The inability of the Company's insurance subsidiaries to effectively anticipate the impact of these issues on its
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 HMEC.
In the Retirement business, the current IRS Section 403(b) regulations have made 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-provider or limited-provider options; this pressure has come
from competitor lobbying efforts and state legislature pension reform initiatives. The inability of the Company's
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 HMEC.
If the Company is not able to effectively develop and expand its marketing operations, including
agents and other points of distribution, its financial condition and results of operations could be
adversely affected.
The Company's agencies are owned primarily by non-employee, independent contractor Exclusive Distributors
with most agencies operating in outside offices with licensed producers. 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.
The Company's success in marketing and selling its products is largely dependent upon the efforts of its agent
sales force and the success of their agency operations. As the Company expands its business, it may need to
expand the number of agencies marketing its products. If the Company is unable to appoint additional agents,
fails to retain high-producing agents, is unable to maintain the productivity of those agency operations or is
unable to maintain market penetration in existing territories, sales of the Company's products could likely decline
and the Company's financial condition and results of operations could be adversely affected.
If the Company is not able to maintain secure access to educators, its financial condition and
results of operations could be adversely affected.
The Company's ability to successfully increase new business in the educator market is largely dependent on its
ability to effectively access educators either in their school buildings or through other approaches. While this is
24 Annual Report on Form 10-K
Horace Mann Educators Corporation
especially true for the sale of 403(b) tax-qualified retirement 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 business and require the Company to change its 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 retirement products, the Company's ability to
maintain and increase its share of the 403(b) market, and the access it gives for other product lines, will depend
on its ability to successfully compete in this market. Some school districts and benefit consultants have placed
emphasis on the relative financial strength ratings of competing companies, as well as low cost product and
distribution approaches, which may put the Company at a competitive disadvantage relative to other more
highly-rated insurance companies.
The Company's 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 its marketing strategy.
In addition to teacher organizations, the Company has established relationships with various other educator,
principal, school administrator and school business official groups. These contacts and endorsements help to
establish the Company's brand name and presence in the educational community and to enhance access to
educators.
Economic and other factors affecting the Company's niche market could adversely impact its
financial condition and results of operations.
The Company'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 the majority of its business, the financial condition and results of operations of the Company's
subsidiaries could be more prone than many of its 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 markets 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.
Individual states may impose additional cybersecurity regulations, increasing the complexity of
compliance.
In the absence of overarching federal law, individual states are adopting their own privacy and cybersecurity
laws and regulations. Indeed, most states have passed some form of privacy and/or cybersecurity laws or
regulations, including New York, South Carolina, and California. For example, the New York State Department of
Financial Services adopted regulation providing minimum standards for an organization's cybersecurity program
and requiring an annual certification confirming compliance. Also, in May 2018, South Carolina passed a
cybersecurity bill requiring, among other things, any insurance entity operating in the state to establish and
implement a cybersecurity program protecting their business and their customers from a data breach, to
investigate data breaches and notify regulators of a cybersecurity event. In July 2018, California passed a broad-
based privacy law which provides consumers with the following new rights: (1) the right to request information
about personal information a company has collected about them; (2) the right to require deletion of their personal
information; (3) the right to request disclosures of information about how their personal information is collected
and shared; and (4) the right to instruct a company not to share their personal information. In the absence of
overarching federal laws and regulations on data privacy and cybersecurity, it is anticipated that individual states
will enact new or amended state laws and regulations governing data privacy and cybersecurity which could
increase the Company's expenses for compliance.
Data security breaches or denial of service on the Company's websites could have an adverse
impact on its business and reputation.
Unauthorized access to and unintentional dissemination of the Company's confidential, highly-sensitive
customer, employee or Company data or other breaches of data security in the Company's facilities, networks or
databases, or those of its 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
Horace Mann Educators Corporation
Annual Report on Form 10-K 25
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
Company data or prolonged denial of service on the Company's websites could harm its 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. The
Company has industry-compliant procedures for protection of confidential information and sensitive corporate
data, including response procedures to help contain or prevent data loss if a breach were to occur and the
evaluation of its customer identification authentication programs. The Company has also implemented multiple
technical security protections and contractual obligations regarding security breaches for its 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 the Company's business growth strategy is dependent on effective
implementation of new or enhanced technology systems and applications.
The Company's ability to effectively execute its business growth strategy and leverage potential economies of
scale is dependent on its ability to provide the requisite technology components for that strategy. While the
Company has effectively upgraded its infrastructure technologies with improvements in its data center, a new
communications platform and enhancements to its disaster recovery capabilities, its ability to replace or
supplement dated, monolithic legacy business systems — such as the Company's Life, Retirement and Property
and Casualty policy administrative systems — with more flexible, maintainable, and customer accessible
solutions will be necessary to achieve its 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. The Company's scale will
require it 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 the Company's operations.
The Company increasingly relies 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 the 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 the
Company's vendors suffers a bankruptcy or otherwise becomes unable to continue to provide products or
services, the Company may suffer operational difficulties and financial losses.
Financial Strength, Credit and Counterparty Risks
Losses due to defaults by others could reduce the Company's profitability or negatively affect
the value of its investments.
Third-party debtors may not pay or perform their obligations. These parties may include the issuers whose
securities the Company holds, customers, reinsurers, borrowers under mortgage loans, trading counterparties,
derivative counterparties, clearing agents, exchanges, clearing houses and other financial intermediaries. These
parties may default on their obligations to the Company 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, the Company's 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 the Company's investment portfolio.
26 Annual Report on Form 10-K
Horace Mann Educators Corporation
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 the Company's broker-dealer and Registered
Investment Adviser regulatory entities, or could lead to a chain of defaults that could adversely affect the
Company. A default of a major market participant could disrupt various markets, which could in turn cause
market declines or volatility and negatively impact the Company's financial condition and results of operations.
Uncollectible reinsurance, as well as reinsurance availability and pricing, can have a material
adverse effect upon the Company's 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. Although
a reinsurer is liable to the Company's 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 the 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 the Company limits participation in its reinsurance programs to reinsurers with high financial strength
ratings and also limits the amount of coverage from each reinsurer, the Company's 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 the
Company's 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 the Company's 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.
The Company is subject to the credit risk of its counterparties, including reinsurers who
reinsure business from the Company's insurance companies.
The Company's insurance subsidiaries may cede certain risks to third-party insurance companies through
reinsurance. HMLIC entered into a reinsurance agreement with RGA to effectuate the reinsurance of a block of in
force fixed and variable annuities on a coinsurance and modified coinsurance basis. The variable portion of the
reinsured annuities is reinsured on a modified coinsurance basis and assets supporting the variable account
liabilities are still held in its separate accounts. Because the reinsurance agreement covers a large volume of the
Company's in force annuity business, the transaction exposes the Company to a concentration of credit risk with
respect to this counterparty. RGA's financial obligations for the general account liabilities of the reinsured annuity
contracts are secured by its assets placed in a comfort trust for the Company's sole use and benefit. Upon
RGA's material breach of the reinsurance agreement, deterioration of its risk-based capital ratio to a certain level,
or certain other events, the Company may recapture the reinsured business. However, in the event of RGA's
insolvency, the Company's right to use the assets in the trust account may be delayed. Also, if at the time of its
insolvency the trust account is not funded at a level to fully discharge all its obligations, the Company's claims to
the extent not covered by the assets in the trust would be those of a general creditor.
Any downgrade in or adverse change in outlook for the Company's claims-paying ratings,
financial strength ratings or credit ratings could adversely affect its 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) retirement 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
Horace Mann Educators Corporation
Annual Report on Form 10-K 27
in the ratings or adverse change in the ratings outlook of any of the Company's insurance subsidiaries by a major
rating agency could result in 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 the Company has. This loss of business could have a material adverse effect on the results
of operations and financial condition of that subsidiary.
A downgrade of the Company's debt rating also could adversely impact its cost and flexibility of borrowing,
which could have an adverse impact on its liquidity, financial condition and results of operations.
Reduction of the statutory surplus of the Company's 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 property and
casualty insurance companies, supplemental 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 the Company's 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 the Company to enable it to meet its financial
obligations. As their surplus is reduced by the payment of dividends, continuing losses or both, the Company's
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 the insurance
subsidiaries.
An inability to access Federal Home Loan Bank (FHLB) funding could adversely affect the
Company's results of operations.
Any changes in requirements to retain membership in the FHLB, or changes in regulation, could impact the
Company's eligibility for continued FHLB membership or its FHLB funding capacity. Any event that adversely
affects amounts received from FHLB could have an adverse effect on the Company's results of operations. See
Part II - Item 7, Financing Activities for more information about FHLB activities.
Regulatory and Legal Risks
The insurance industry is highly regulated.
The Company is subject to extensive regulation and supervision in the jurisdictions in which it does 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 the Company's 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 the Company's ability to obtain timely rate increases or operate at
desired levels of profitability. Changes in insurance regulations, including those affecting the ability of the
Company's insurance subsidiaries to distribute cash to HMEC and those affecting the ability of its 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 the insurance subsidiaries. In addition, consumer
privacy requirements may increase the Company's cost of processing business. The Company's 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 its success.
Regulation that could adversely affect the Company's 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.
28 Annual Report on Form 10-K
Horace Mann Educators Corporation
Similarly, the NAIC has adopted a system of assessing minimum capital adequacy that is applicable to the
Company's 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, the Company's 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 the insurance subsidiaries.
In the event of insolvency, liquidation or other reorganization of any of the Company's insurance subsidiaries, its
creditors and stockholders would have no right to proceed against any such insurance subsidiary or 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 full payment from the assets of the insurance subsidiary before the Company, as
a stockholder, would be entitled to receive any distribution.
The financial position of the Company's 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 FIO within the U.S. Department of the Treasury. FIO studies the current insurance regulatory
system and is charged with monitoring and providing specific reports on various aspects of the insurance
industry. However, FIO does not have general supervisory or regulatory authority over the business of insurance.
FIO has suggested an expanded federal role in some circumstances. 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 of Dodd-Frank, could adversely impact liquidity
and volatility of financial markets in which the Company participates.
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 the Company participates and, in turn, negatively affect its 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.
Adopted and proposed regulatory and legislative actions, including standards of conduct
adopted by the SEC, could make it more difficult for the Company to sell securities products
and other investment vehicles, adversely impacting its financial condition and results of
operations.
In 2018, the U.S. Court of Appeals for the 5th Circuit vacated the U.S. Department of Labor’s regulations defining
who would be a “fiduciary” of an employee benefit plan under the Employee Retirement Income Security Act
(ERISA) as a result of giving investment advice (Fiduciary Rule), as well as the accompanying prohibited
transaction exemptions, including the Best Interest Contract Exemption. Recently, the Department of Labor
announced its intention to propose a revised fiduciary regulation, but it is unclear when that will occur or what
form the regulations may take.
In June 2019, the SEC adopted rules and interpretations addressing the standards of conduct applicable to
broker-dealers and investment advisers and their associated persons, including Regulation Best Interest that
may affect securities sales practices. As a result of the new rules, beginning June 30, 2020, broker-dealers
recommending securities products to retail customers will be required to comply with a “best interest” standard.
In the June 2019 action, the SEC did not define a “best interest” standard but confirmed the standard is greater
than the current suitability standard but would not rise to the level of “fiduciary.” The new rules also require
additional disclosures about standards of conduct and conflicts of interest, including a new standardized client
relationship summary disclosure (Form CRS).
Horace Mann Educators Corporation
Annual Report on Form 10-K 29
Separately, the NAIC has stated it is close to adopting an amendment to its Suitability in Annuity Transactions
Model Regulation to include a “best interest” standard of care. Significant activity at the state legislative level
appears to be directed to incorporating "fiduciary" and/or "best interest" standards of conduct for financial
intermediaries into state-level oversight of securities.
Finally, the SEC and a number of state insurance departments have begun investigations into sales and
disclosure practices and distribution of retirement products to teachers, including 403(b) and 457(b) annuity
products sold to teachers. A significant part of the Company's retirement business involves fixed and variable
403(b) tax qualified annuity products, which are purchased voluntarily by individuals employed by public school
systems or other tax-exempt organizations. The Company's financial condition and results of operations could
be adversely affected by recently adopted or pending changes in federal and state laws and regulations that
affect the manner in which these products are sold to educators.
Individually and collectively, these federal and state regulatory and legislative activities have the potential to
increase the Company's regulatory and compliance burden, as well as constrain its sales practices. Additionally,
the activities could limit the type, amount or structure of compensation arrangements into which the Company
may enter, which could negatively impact its ability to compete with other companies to recruit and retain key
personnel. Such changes could adversely impact the Company's business, financial condition and results of
operations.
Litigation may harm the Company's financial strength or reduce its 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 the Company's insurance subsidiaries, including the potential
adverse effect on its reputation and charges against the earnings of its insurance subsidiaries as a result of legal
defense costs, a settlement agreement or an adverse finding or findings against its insurance subsidiaries in
such a claim, could have a material adverse effect on the financial condition and results of operations of the
insurance subsidiaries.
Events, including those external to the Company's operations, could damage the Company's
reputation.
There are many events which may harm the Company’s reputation, including, but not limited to, those discussed
in this Item 1A regarding regulatory investigations, legal proceedings, and cyber or other information security
incidents. Any negative public perception, founded or otherwise, can be widely and rapidly shared over social
media or other means, and could cause damage to the Company’s reputation. Damage to the Company’s
reputation could reduce demand for its insurance products, reduce its ability to recruit and retain employees, or
lead to greater regulatory scrutiny of its operations
As an insurance company, the Company is paid to accept certain risks. Those who conduct the Company’s
business, including executive officers and members of management, employees and independent agents, do so
in part by making decisions that involve exposing the Company to risk. These include decisions such as
maintaining effective underwriting and pricing discipline, maintaining effective claim management and customer
service performance, managing the Company’s investment portfolio, delivering effective technology solutions,
complying with established sales practices, executing the Company’s capital management strategy, exiting a line
of business and/or pursuing strategic growth initiatives, and other decisions. Although the Company employs
controls and procedures designed to monitor business decisions and prevent the Company from taking
excessive risks or unintentionally failing to comply with internal policies and practices, there can be no assurance
that these controls and procedures will be effective. If the Company’s employees and independent agents take
excessive risks and/or fail to comply with internal policies and practices, the impact of those events may damage
the Company’s market position and reputation.
30 Annual Report on Form 10-K
Horace Mann Educators Corporation
ITEM 1B. I Unresolved Staff Comments
None.
ITEM 2. I Properties
As of December 31, 2019, the Company owned its headquarters of approximately 225,000 square feet located at
1 Horace Mann Plaza in Springfield, Illinois. 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 (approximately 114,000 of rentable square feet), suburban Raleigh, North Carolina, and
Cherry Hill, New Jersey which are utilized by one or more of all five reporting segments, depending on the
location. For more information on reporting segments, see Part I - Item 1, Reporting Segments. The Company
believes its properties and facilities are suitable and adequate for current operations.
ITEM 3. I Legal Proceedings
At the time of issuance 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. I Mine Safety Disclosures
Not applicable.
Horace Mann Educators Corporation
Annual Report on Form 10-K 31
PART II
ITEM 5. I Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities
Market Information and Dividends
HMEC's common stock is traded on the NYSE under the symbol of HMN. The following table provides the high
and low closing prices of the common stock on the NYSE Composite Tape and the cash dividends paid per
share of common stock during the periods indicated.
Fiscal Period
2019:
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
2018:
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Market Price
High
Low
Dividend
Paid
$
45.87 $
42.83 $
0.2875
47.68
41.83
42.18
40.87
35.23
34.68
0.2875
0.2875
0.2875
$
43.60 $
35.81 $
0.2850
46.56
45.12
43.86
42.66
40.77
37.68
0.2850
0.2850
0.2850
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 Part I - Item 1, Cash Flow and in Part II - Item 8, Note 14 of the Consolidated
Financial Statements in this report.
32 Annual Report on Form 10-K
Horace Mann Educators Corporation
Shareholder Return Performance Graph
The graph below sets forth the total five-year shareholder return on HMEC common stock. The graph assumes a
$100 investment at December 31, 2014. The S&P 500 Index and the S&P 500 Insurance Index assume an annual
reinvestment of dividends in calculating total return. The Company assumes reinvestment of quarterly dividends
when paid.
Comparison of Cumulative Five Year Total Return to Shareholders
Dec. 2014 Dec. 2015
Dec. 2016
Dec. 2017 Dec. 2018 Dec. 2019
HMEC
$
100 $
103 $
137 $
145 $
126 $
S&P 500 Insurance Index
S&P 500 Index
100
100
102
101
120
113
140
138
124
132
151
161
174
Holders and Shares Issued
As of February 15, 2020, the number of holders of HMEC's common stock was approximately 28,000.
During 2019, stock options were exercised for the issuance of 64,095 shares or 0.2% of the HMEC's common
shares outstanding at December 31, 2018. The Company received $1.7 million in proceeds from the exercise of
stock options which was used for general corporate purposes.
For information required by Item 201(d) of Regulation S-K regarding the equity compensation plan, see Part III -
Item 12, of this report.
Horace Mann Educators Corporation
Annual Report on Form 10-K 33
Issuer Purchases of Equity Securities
On September 30, 2015, the Board authorized a share repurchase program allowing repurchases of up to $50.0
million of HMEC's common stock, par value $0.001 (Program). The Program authorizes the repurchase of
common shares in open market or privately negotiated transactions, from time to time, depending on market
conditions. The 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, 2019, HMEC did not repurchase shares of its common
stock under the Program.
For the quarterly periods ended in 2019 and 2018, HMEC repurchased shares of its common stock under the
Program as follows:
Period
Fourth Quarter 2019
Third Quarter 2019
Second Quarter 2019
First Quarter 2019
Total Number
of Shares
Purchased
Average Price
Paid per Share
Total Number of
Shares
Purchased
under the
Program
Approximate Dollar
Value of Shares
that may yet be
Purchased under the
Program
—
—
—
—
—
—
—
—
—
—
—
—
$22.8 million
$22.8 million
$22.8 million
$22.8 million
Fourth Quarter 2018
126,951 $
39.41
126,951
$22.8 million
Third Quarter 2018
Second Quarter 2018
First Quarter 2018
—
2,000
161
—
39.72
37.52
—
2,000
161
$27.8 million
$27.8 million
$27.8 million
34 Annual Report on Form 10-K
Horace Mann Educators Corporation
ITEM 6. I Selected Financial Data
The following consolidated statement of operations and balance sheet data have been derived from the
consolidated financial statements of the Company, which have been prepared in accordance with GAAP. The
selected financial data should be read in conjunction with Management's Discussion and Analysis of Financial
Condition and Results of Operations in Part II - Item 7 of this report and the Consolidated Financial Statements
of the Company and its subsidiaries presented in Part II - Item 8 of this report.
($ in millions, except per share data)
Consolidated Statement of Operations Data:
Insurance premiums and contract charges earned
Net investment income
Net investment gains (losses)
Other income
Total revenues
Interest expense
Income before income taxes
Net income (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)
2019
Year Ended December 31,
2017
2016
2018
2015
$
$
$
898.0 $
365.1
153.3
14.1
1,430.5
15.6
236.4
184.4
817.3 $
376.5
(12.5)
10.3
1,191.6
13.0
19.5
18.3
794.7 $
373.6
(3.4)
6.6
1,171.5
11.9
88.7
169.4
759.1 $
361.2
4.1
4.5
1,128.9
11.8
114.2
83.8
731.9
332.6
12.7
3.2
1,080.4
13.1
129.5
93.5
4.42 $
4.40
41.7
41.9
41.2
1.15 $
0.44 $
0.44
41.6
41.9
41.0
1.14 $
4.10 $
4.08
41.4
41.6
40.7
1.10 $
2.04 $
2.02
41.2
41.5
40.2
1.06 $
38.01
31.50
36.88
32.15
2.23
2.20
41.9
42.4
40.6
1.00
31.18
$ 6,639.2 $ 8,250.7 $ 8,352.3 $ 7,999.3 $ 7,648.0
10,057.0
5,683.4
—
247.0
1,264.7
11,198.3
6,182.0
—
297.5
1,501.6
11,031.9
6,384.1
—
297.7
1,290.6
10,576.8
6,024.1
—
247.2
1,294.0
12,478.7
6,956.5
135.0
298.0
1,567.3
Insurance premiums written and contract deposits
Property and Casualty
Supplemental
Retirement
Life
Total
Net income (loss)
$
683.1 $
65.7
462.5
113.2
1,324.5
681.5 $
—
439.1
114.4
1,235.0
662.8 $
—
453.1
111.2
1,227.1
634.3 $
—
520.2
108.0
1,262.5
605.8
—
548.0
102.7
1,256.5
$
(14.3) $
—
41.7
18.8
(27.9)
18.3
54.3 $
18.0
(4.8)
17.6
99.3
184.4
Property and Casualty
Supplemental
Retirement
Life
Corporate and Other (4)
Total
40.0
—
43.4
15.0
(4.9)
93.5
Net income in 2019 reflects an after tax realized investment gain of $106.9 million associated with an annuity reinsurance transaction. 2018
reflects after tax impacts of $90.1 million from catastrophes. 2017 reflects a one-time income tax benefit of $99.0 million from TCJA.
Basic earnings per share is computed based on the weighted average number of shares outstanding plus the weighted average number of
fully vested restricted common 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 common stock units.
Information regarding assets by segment at December 31, 2019, 2018 and 2017 is contained in Part II - Item 8, Note 18 of the Consolidated
Financial Statements in this report.
The Corporate and Other segment primarily includes interest expense on debt, the impact of net investment gains (losses), corporate debt
retirement costs, and certain public company expenses.
17.8 $
—
88.4
77.6
(14.4)
169.4
25.6 $
—
50.7
16.6
(9.1)
83.8
(1)
(2)
(3)
(4)
Horace Mann Educators Corporation
Annual Report on Form 10-K 35
ITEM 7. I Management's Discussion and Analysis of Financial
Condition and Results of Operations (MD&A)
($ in millions, except per share data)
Measures within this MD&A that are not based on accounting principles generally accepted in the U.S. (non-
GAAP) are marked with an asterisk (*) the first time they are presented within Part II - Item 7 of this report. 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 accounting principles generally accepted in the U.S. (GAAP) in the Appendix to the Company's
Fourth Quarter 2019 Investor Supplement.
Increases or decreases in this MD&A that are not meaningful are marked "N.M.".
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. HMEC 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. See Part I - Item 1A in this Annual Report on Form 10-K for additional information regarding risks and
uncertainties.
Introduction
The purpose of this MD&A is to provide an understanding of the Company’s consolidated results of operations
and financial condition. This MD&A should be read in conjunction with the Consolidated Financial Statements
and Notes thereto contained in Part II - Item 8 of this report.
HMEC is an insurance holding company and through its subsidiaries, the Company markets and underwrites
personal lines of property and casualty insurance, supplemental health insurance and limited short-term
supplemental disability coverages, retirement products, including 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.
On January 2, 2019, the Company acquired all of the equity interests in BCG which provides advisory and
benefit plan record keeping services. BCG's results are reported in the Retirement segment.
In the second quarter of 2019, the Company reinsured a $2.9 billion block of in force fixed and variable annuity
business with a minimum crediting rate of 4.5%. This represented approximately 50% of the Company’s in force
fixed annuity account balances. The arrangement contains investment guidelines and a trust to help meet the
Company’s risk management objectives. The annuity reinsurance transaction was effective April 1, 2019.
On July 1, 2019, the Company acquired all of the equity interests in NTA. NTA’s insurance subsidiaries
predominantly sell a variety of guaranteed renewable supplemental health insurance products (primarily heart,
cancer and limited short-term supplemental disability coverages). The insurance subsidiaries also market life
insurance products. NTA’s insurance subsidiaries are licensed in 50 states, the U.S. Virgin Islands and the District
of Columbia and their marketplace is primarily within the public sector for which approximately 80% are
individuals employed by educational institutions, with the remainder employed in state and local governments
and emergency services facilities. NTA’s results are reported in a newly created Supplemental segment.
This MD&A begins with the Company’s consolidated financial highlights followed by consolidated results of
operations, an outlook for future performance, details about critical accounting estimates and the results of
operations by segment.
36 Annual Report on Form 10-K
Horace Mann Educators Corporation
Consolidated Financial Highlights
($ in millions)
Total revenues
Net income
Per diluted share:
Net income
Net investment gains (losses), after tax
Book value per share
Net income return on equity - last twelve months
Net income (loss) by segment:
Property and Casualty
Supplemental
Retirement
Life
Corporate and Other
Net income
N/A - The acquisition of NTA closed on July 1, 2019.
Year Ended December 31,
2019-2018
2018-2017
2019
2018
2017
$ Change
$ Change
$ 1,430.5
184.4
$ 1,191.6
18.3
$ 1,171.5
169.4
$ 238.9
166.1
$
20.1
(151.1)
4.40
2.87
38.01
0.44
(0.24)
31.50
4.08
(0.04)
36.88
12.5%
1.3%
12.3%
3.96
3.11
6.51
11.2pts
(3.64)
(0.20)
(5.38)
-11.0pts
$
$
54.3
18.0
(4.8)
17.6
99.3
184.4
$
$
(14.3)
—
41.7
18.8
(27.9)
18.3
$
$
17.8
—
88.4
77.6
(14.4)
169.4
$
68.6
$
(32.1)
N/A
N/A
(46.5)
(1.2)
127.2
$ 166.1
(46.7)
(58.8)
(13.5)
$ (151.1)
For 2019, the Company's net income increased $166.1 million compared to 2018. The increase in net income
was primarily due to recognition of a $106.9 million after tax realized investment gain in the second quarter of
2019 associated with an annuity reinsurance transaction. The impact from the realized investment gain was
partially offset by a $28.0 million annuity goodwill impairment charge. Lower catastrophe costs of $49.0 million
after tax in Property and Casualty as well as the addition of $18.0 million of net income from the Supplemental
segment also contributed to the increase in consolidated net income. See Part II - Item 8, Notes 2, 6 and 7 of the
Consolidated Financial Statements in this report for more information regarding Supplemental, the annuity
reinsurance transaction and the goodwill impairment charge.
Net income in 2018 was negatively impacted by an elevated level of catastrophe costs of $90.1 million after tax
while net income in 2017 benefited $99.0 million from the passage of the Tax Cuts and Jobs Act of 2017 (TCJA).
See Results of Operations by Segment for further details.
Horace Mann Educators Corporation
Annual Report on Form 10-K 37
9.9%
-3.0%
N.M.
36.9%
20.0%
-8.2%
3.2%
14.2%
-0.6%
N.M.
20.0%
N.M.
1.9%
N.M.
N.M.
N.M.
2.8%
0.8%
N.M.
56.1%
1.7%
9.5%
3.8%
9.4%
7.5%
N.M.
9.2%
N.M.
8.2%
-78.0%
-101.5%
-89.2%
Consolidated Results of Operations
($ in millions)
Year Ended December 31,
2019-2018
2018-2017
2019
2018
2017
Change % Change %
Insurance premiums and contract charges earned
$
898.0 $
817.3 $
Net investment income
Net investment gains (losses)
Other income
Total revenues
Benefits, claims and settlement expenses
Interest credited
Operating expenses
DAC unlocking and amortization expense
Intangible asset amortization expense
Interest expense
Other expense - goodwill impairment
365.1
153.3
14.1
376.5
(12.5)
10.3
794.7
373.6
(3.4)
6.6
1,430.5
1,191.6
1,171.5
585.1
212.8
234.6
109.2
8.8
15.6
28.0
637.6
206.2
205.4
109.9
—
13.0
—
582.3
198.6
187.8
102.2
—
11.9
—
Total benefits, losses and expenses
1,194.1
1,172.1
1,082.8
Income before income taxes
Income tax expense (benefit)
Net income
236.4
52.0
19.5
1.2
88.7
(80.7)
$
184.4 $
18.3 $
169.4
Insurance Premiums and Contract Charges Earned
For 2019, insurance premiums and contract charges earned increased $80.7 million compared to 2018, primarily
due to the addition of earned premiums from Supplemental as well as increases in average premium per policy
for both automobile and property. For 2018, insurance premiums and contract charges earned increased $22.6
million compared to 2017, primarily due to increases in average premium per policy for both automobile and
property.
Net Investment Income
Excluding accreted investment income on the deposit asset on reinsurance, 2019 net investment income
decreased $82.2 million compared to 2018, primarily due to a $2.1 billion reduction in invested assets from
investments transferred under the annuity reinsurance transaction in the second quarter of 2019 as well as
continued low rates on new investments and lower prepayment levels, partially offset by stronger returns on
alternative investments. Investment yields continue to be impacted by the low interest rate environment of recent
years. For 2018, net investment income reflected increased prepayment activity offset by a reduction in yields
from a strategic decision to improve the quality of the portfolio. The annualized yield on the total investment
portfolio for the past three years was:
Pretax yield
After tax yield
2019
4.8%
3.8%
2018
5.1%
4.1%
2017
5.2%
3.4%
38 Annual Report on Form 10-K
Horace Mann Educators Corporation
During 2019, management continued to identify and purchase investments, including 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 Investment Gains (Losses)
For 2019, net investment gains increased primarily due to recognition of a realized investment gain of $135.3
million in the second quarter of 2019 in connection with the transfer of investments related to the aforementioned
annuity reinsurance transaction.
Effective January 1, 2018, with the adoption of new accounting guidance for recognition and measurement of
financial instruments, equity securities are reported at fair value with changes in fair value recognized in net
investment gains (losses). The changes in fair value of equity securities accounted for the 2018 increase in net
investment losses over 2017. The break down of net investment gains (losses) by transaction type is shown in
the following table:
($ in millions)
Year Ended December 31,
2019
2018
2017
Other-than-temporary impairments (OTTI) losses recognized in earnings
Sales and other, net
Change in fair value - equity securities
$
(1.4) $
151.5
7.3
(1.5) $
3.5
(18.3)
Change in fair value and gains (losses) realized
on settlements - derivatives
Net investment gains (losses)
(4.1)
3.8
$
153.3 $
(12.5) $
(12.6)
7.7
N/A
1.5
(3.4)
The Company, from time to time, sells securities subsequent to a 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 hold an invested asset.
Other Income
For 2019, 2018 and 2017, other income steadily rose due to increases in commissions from third-party vendor
products, decreases in annuity premium bonuses and the inclusion of BCG brokerage fees in 2019.
Benefits, Claims and Settlement Expenses
For 2019, benefits, claims and settlement expenses were lower due to reduced catastrophe losses and improved
automobile experience, partially offset by the inclusion of losses from the new Supplemental segment. For 2018,
benefits, claims and settlement expenses increased compared to 2017, driven primarily by elevated catastrophe
costs in Property and Casualty.
Interest Credited
For 2019, 2018 and 2017, interest credited steadily increased, primarily due to higher interest costs on FHLB
funding agreements.
Operating Expenses
For 2019, operating expenses increased $29.2 million compared to 2018, driven by the inclusion of NTA and
BCG operations as well as $5.5 million of severance charges incurred in 2019 pertaining to expense reduction
initiatives. The increase in operating expenses in 2018 was consistent with management's expectations as the
Company incurred expenditures to support targeted strategies in product, distribution and infrastructure, which
were intended to enhance the overall customer experience, increase sales, and support favorable policy
retention and business cross-sale ratios. 2018 also included transaction costs of $5.1 million to acquire BCG and
NTA.
Horace Mann Educators Corporation
Annual Report on Form 10-K 39
DAC Unlocking and Amortization Expense
DAC unlocking and amortization expense was comparable to 2018. The 2018 increase in DAC amortization
expense was primarily attributable to DAC unlocking in Retirement accompanied by growth in premiums and
related commissions for Property and Casualty. For Life, DAC unlocking resulted in immaterial changes to
amortization for the three years ended 2019, 2018 and 2017.
Intangible Asset Amortization Expense
For 2019, the increase in intangible asset amortization expense was due to the acquisitions of NTA and BCG.
Interest Expense
Interest expense increased $2.6 million in 2019, primarily due to the Company utilizing its senior revolving credit
facility in the third quarter of 2019 to partially fund the acquisition of NTA. Interest expense increased in 2018,
primarily due to FHLB borrowings in the fourth quarter of 2017 as described further in Part II - Item 8, Note 10 of
the Consolidated Financial Statements in this report.
Other Expense - Goodwill Impairment
For 2019, other expense represents an annuity goodwill impairment charge in Retirement resulting from the
annuity reinsurance transaction. See Part II - Item 8, Note 7 of the Consolidated Financial Statements in this
report for further information.
Income Tax Expense (Benefit)
The effective income tax rate on the Company's pretax income, including net investment gains (losses) was
22.0%, 6.2% and (91.1)% for the years ended December 31, 2019, 2018 and 2017, respectively. Income from
investments in tax-exempt securities reduced the effective income tax rates by 2.3, 21.2 and 11.0 percentage
points for 2019, 2018 and 2017, respectively. The goodwill impairment charge in the Retirement segment
increased the effective income tax rate by 2.3 percentage points and the acquisitions of NTA and BCG increased
the effective income tax rate by 0.1 percentage points at December 31, 2019. The TCJA reduced the 2017
effective tax rate by 111.6 percentage points from re-measuring the Company's deferred taxes to reflect the
changes in tax rates included in the TCJA as of the date of enactment.
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, 2019, 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 Part II -
Item 8, Note 11 of the Consolidated Financial Statements in this report for further information.
Outlook for 2020
At the time of issuance of this Annual Report on Form 10-K, management estimates that 2020 full year net
income will be within a range of $2.55 to $2.75 per diluted share and that the Company anticipates generating a
core return on equity* of over 8%. Management expects the Company's overall pretax net investment income to
be flat with 2019, with increases from a full year of Supplemental net investment income offsetting declines in
Retirement net investment income. This projection also reflects an overall effective tax rate of between 17% and
19%.
Within Property and Casualty, low to mid-single digit planned rate increases, as well as continued underwriting
initiatives, are expected to maintain the underlying loss ratios* at levels comparable to 2019. The expense ratio is
expected to improve slightly from the 2019 expense ratio of 26.9 points. As a result, the Property and Casualty
full-year combined ratio is expected to be 95-97%, assuming catastrophe losses add approximately 7.5 points,
similar to 2019. Net income for Property and Casualty is anticipated to be in the range of $55 million to $60
million.
Supplemental is anticipated to generate a pretax profit margin in the low to mid 20% range and net investment
income should begin to benefit from portfolio repositioning. As a result, net income is anticipated to be between
$28 million and $30 million.
40 Annual Report on Form 10-K
Horace Mann Educators Corporation
Retirement net investment income is expected to reflect further spread compression with rates on new
investments below the average portfolio earned rate as well as the impact of lower invested assets as a result of
the annuity reinsurance transaction. This should be offset by a reduced level of operating expenses. As a result,
net income for Retirement is anticipated to be in the range of $27 million to $29 million.
Life is expected to generate net income between $14 million and $16 million, including a return to modeled
mortality cost levels.
As described in Critical Accounting Estimates, 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 in Part I - Item 1 and Part I - Item 1A of 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 investment gains (losses),
which can vary substantially from one period to another and may have a significant impact on net income.
Critical Accounting Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted
in the U.S. (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. Information regarding the Company's accounting policies pertaining to these topics is located in the
Notes to Consolidated Financial Statements as listed in Part II - Item 8 of this report.
The Company has identified the following accounting estimates as critical in that they involve a higher degree of
judgment and are subject to a significant degree of variability:
• Valuation of hard-to-value fixed maturity securities, including evaluation of other-than-temporary
impairments
• Evaluation of goodwill and intangible assets for impairment
• Valuation of supplemental, annuity and life deferred policy acquisition costs
• Valuation of liabilities for property and casualty unpaid claims and claim expenses
• Valuation of certain investment contracts and policy reserves
• Valuation of assets acquired and liabilities assumed under purchase accounting
Although variability is inherent in these accounting estimates, management believes the amounts provided are
appropriate based upon the facts available during preparation of the consolidated financial statements.
Valuation of Hard-to-Value Fixed Maturity Securities
The fair value of a fixed maturity security is the estimated amount at which the security could be exchanged in an
orderly transaction between knowledgeable, unrelated and willing parties. The Company utilizes its investment
managers and its custodian bank to obtain fair value prices from independent third-party valuation service
providers, broker-dealer quotes, and model prices. 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. 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. Typical inputs used by these pricing sources include, but are not
Horace Mann Educators Corporation
Annual Report on Form 10-K 41
limited to, reported trades, bids, offers, benchmark yield curves, benchmarking of like securities, rating
designations, sector groupings, issuer spreads, and/or estimated cash flows, prepayment and default speeds,
among others. 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 94.1% of the portfolio,
based on fair value, was priced through pricing services or index priced using observable inputs as of
December 31, 2019.
The valuation of hard-to-value fixed maturity securities (generally 100 -150 securities) is more subjective because
the markets are less liquid and there is a lack of observable market-based inputs. This 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. When the pricing sources cannot provide fair value determinations, the investment managers and
custodian bank obtain non-binding price quotes from broker-dealers. For those securities where the investment
manager cannot obtain broker-dealer quotes, they will model the security, generally using anticipated cash flows
of the underlying collateral. Broker-dealers' valuation methodologies as well as investment managers’ modeling
methodologies are sometimes matrix-based, using indicative evaluation measures and adjustments for specific
security characteristics and market sentiment. The selection of the market inputs and assumptions used to
estimate the fair value of hard-to-value fixed maturity securities require judgment and include: benchmark yield,
liquidity premium, estimated cash flows, prepayment and default speeds, spreads, weighted average life, and
credit rating. The extent of the use of each market input depends on the market sector and 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 gains assurance that its portfolio of fixed maturity securities and hard-to-value fixed maturity
securities is appropriately valued through the execution of various processes and controls designed to ensure
the overall reasonableness and consistent application of valuation methodologies, including inputs and
assumptions, and compliance with accounting standards. The Company’s processes and controls are designed
to ensure (1) the valuation methodologies are appropriate and consistently applied, (2) the inputs and
assumptions are reasonable and consistent with the objective of determining fair value, and (3) the fair values are
accurately recorded. For example, on a continuing basis, the Company assesses the reasonableness of
individual fair values that have stale security prices or that exceed certain thresholds as compared to previous
fair values received from valuation service providers. The Company performs procedures to understand and
assess the methodologies, processes and controls of valuation service providers. In addition, the Company may
validate the reasonableness of fair values by comparing information obtained from valuation service providers or
broker-dealers to other third-party valuation sources for selected securities.
At December 31, 2019, Level 3 invested assets comprised 4.8% 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 determination of fair value.
Evaluation of Other-than-Temporary Impairments
The Company's methodology of assessing OTTI for fixed maturity securities is based on security-specific facts
and circumstances as of the reporting date. The Company has a policy and process to evaluate fixed maturity
securities (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 the amortized cost basis, (3) 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, (4) the market leadership position of the issuer, (5) the debt ratings of the issuer, and (6) 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 and the
credit-related loss portion is recognized as a net investment loss during the period. 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. Also,
see Part II - Item 8, Note 1 of the Consolidated Financial Statements in this report.
42 Annual Report on Form 10-K
Horace Mann Educators Corporation
Evaluation of Goodwill and Intangible Assets for Impairment
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 value. Goodwill impairment is the amount by which a reporting
unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. A goodwill impairment
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, 2019, the Company's allocation of goodwill by reporting unit was as follows: $9.5 million, Property
and Casualty; $19.6 million, Supplemental; $10.1 million, Retirement; and $9.9 million, Life. Also see Part II - Item
8, Notes 1 and 7 of the Consolidated Financial Statements in this report.
The goodwill impairment test, as defined in GAAP, 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 value. If an entity determines it is more likely than
not that the fair value of a reporting unit is less than its carrying value, then the entity performs a quantitative
goodwill impairment test by comparing the fair value of a reporting unit to its carrying value for purposes of
confirming and measuring an impairment.
The process of evaluating goodwill for impairment requires management to make multiple judgments and
assumptions to determine the fair value of each reporting unit, including discounted cash flow calculations, the
level of the Company's own share price and assumptions that market participants would make in valuing each
reporting unit. Fair value estimates are based primarily on an in-depth analysis of historical experience, projected
future cash flows and relevant discount rates, which consider market participant inputs and the relative risk
associated with the projected cash flows. Other assumptions include levels of economic capital, future business
growth, earnings projections and assets under management for each reporting unit. Estimates of fair value are
subject to assumptions that are sensitive to change and represent the Company's reasonable expectation
regarding future developments. The Company also considers other valuation techniques such as peer company
price-to-earnings and price-to-book multiples.
The assessment of goodwill recoverability requires significant judgment and is subject to inherent uncertainty.
The use of different assumptions, within a reasonable range, could cause the fair value 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 markets on earnings, discount rate
assumptions, liquidity and market capitalization. The annuity reinsurance transaction triggered an assessment
resulting in the write-down of a certain amount of goodwill for impairment during the second quarter of 2019 (see
Part II - Item 8, Note 7 of the Consolidated Financial Statements in this report for more information). There were
no other events or material changes in circumstances during 2019 that indicated that an adverse material
change in the fair value of the Company's reporting units had occurred.
The value of business acquired (VOBA) represents the difference between the fair value of insurance contracts
and insurance policy reserves measured in accordance with the Company's accounting policies for insurance
contracts acquired. VOBA was based on an actuarial estimate of the present value of future distributable
earnings for insurance in force on the acquisition date. VOBA was $90.7 million as of December 31, 2019 and is
being amortized by product based on the present value of future premiums to be received. The Company
estimates that it will recognize VOBA amortization of $7.1 million in 2020, $6.7 million in 2021, $6.2 million in
2022, $5.8 million in 2023 and $5.4 million in 2024.
The Company accounts for the value of distribution acquired (VODA) associated with the acquisition of NTA
based on an actuarial estimate of the present value of future business to be written by the existing distribution
channel. VODA was $47.5 million as of December 31, 2019 and is being amortized on a straight-line basis. The
Company estimates that it will recognize VODA amortization of $2.9 million in each of the years 2020 through
2024, respectively.
The Company accounts for VODA associated with the acquisition of BCG based on management's estimate of
the present value of future business to be written by the existing distribution channel. VODA was $4.6 million as
of December 31, 2019 and is being amortized based on the present value of future profits to be received. The
Company estimates that it will recognize VODA amortization of $0.4 million in each of the years 2020 through
2024, respectively.
Horace Mann Educators Corporation
Annual Report on Form 10-K 43
The Company accounts for the value of agency relationships based on the present value of commission
overrides retained by NTA. Agency relationships was $15.5 million as of December 31, 2019 and is being
amortized based on the present value of future premiums to be received. The Company estimates that it will
recognize agency relationships amortization of $2.6 million in 2020, $2.2 million in 2021, $1.9 million in 2022,
$1.6 million in 2023 and $1.4 million in 2024.
The Company accounts for the value of customer relationships based on the present value of expected profits
from existing BCG customers in force at the date of acquisition. Customer relationships was $7.3 million as of
December 31, 2019 and is being amortized based on the present value of future profits to be received. The
Company estimates that it will recognize customer relationships amortization of $1.5 million in 2020, $1.2 million
in 2021, $1.0 million in 2022, $0.9 million in 2023 and $0.7 million in 2024.
Trade names represents the present value of future savings accruing to NTA and BCG by virtue of not having to
pay royalties for the use of the trade names, valued using the relief from royalty method. State licenses
represents the regulatory licenses held by NTA that were valued using the cost approach. Both trade names and
state licenses are indefinite-lived intangibles that are not subject to amortization.
VOBA is reviewed for recoverability from future income, including net 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 year ended December 31, 2019.
Amortizing intangible assets (i.e., VODA, agency relationships and customer relationships) are tested for
recoverability whenever events or changes in circumstances indicate that its carrying value may not be
recoverable. The carrying amount of an amortizing intangible asset is not recoverable if it exceeds the sum of
undiscounted cash flows expected to result from the use and eventual disposition of the asset. If the carrying
value is not recoverable from undiscounted cash flows, the impairment is measured as the difference between
the carrying value and fair value.
Intangible assets that are not subject to amortization (i.e., trade names and state licenses) are tested for
impairment annually or more frequently if events or changes in circumstances indicate that the asset might be
impaired. The impairment test consists of a comparison of the fair value of an intangible asset with its carrying
value. If the carrying value of an intangible asset that is not subject to amortization exceeds its fair value, an
impairment loss is to be recognized in an amount equal to that excess.
Valuation of Supplemental, Annuity and Life 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 supplemental policies, DAC is amortized in proportion to anticipated premiums
over the terms of the insurance policies (approximately 6 years, based on an estimated average duration across
all supplemental products). 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. For further information, see Part II - Item 8,
Note 1 of the Consolidated Financial Statements in this report.
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
investment gains (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 future financial market performance assumes that
long-term appreciation in the financial markets 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 DAC amortization expense of approximately $3.0 million. Although this evaluation reflects likely
outcomes, it is possible an actual outcome may fall below or above these estimates. At December 31, 2019, the
ratio of DAC to the total annuity accumulated cash value was 2.5%.
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
44 Annual Report on Form 10-K
Horace Mann Educators Corporation
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 three of the more significant assumptions, based on DAC
as of December 31, 2019 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, (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 and (3) a $1.0
million net investment gain (loss) would impact amortization by approximately $0.1 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 by Segment for the Three Years Ended December 31,
2019.
The most significant assumptions that are involved in the estimation of life insurance gross profits include
interest rates expected to be received on investments, business persistency, and mortality. Conversions from
term to permanent insurance cause an immediate write down of the associated DAC. The impact on amortization
due to assumption changes has an immaterial impact on the results of operations.
The most significant assumptions that are involved in the estimation of supplemental gross profits include
morbidity, persistency, expenses and interest rates expected to be received on investments. When a
supplemental policy lapses, there is an immediate write down of the associated DAC. The impact on
amortization due to assumption changes has an immaterial impact on the results of operations.
Annually, the Company performs a gross premium valuation on life insurance and supplemental policies to
assess whether a loss recognition event has occurred. This involves discounting expected future benefits and
expenses less expected future premiums. To the extent that this amount is greater than the liability for future
benefits less the DAC asset, in aggregate for the life insurance or the supplemental block, a loss would be
recognized by first writing off the DAC and then increasing the liability.
Valuation of Liabilities for Property and Casualty Unpaid 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 liabilities 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),
IBNR claims 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 Item 8., Note 8
of the Consolidated Financial Statements in this report. 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 $13.0 million of net income
based on net reserves as of December 31, 2019. Although this evaluation reflects the most likely outcomes, it is
possible the final outcome may fall below or above these estimates.
Horace Mann Educators Corporation
Annual Report on Form 10-K 45
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 $6.0 million
and $10.0 million for long-tail liability related exposures (automobile liability coverages) and between $2.0 million
and $4.0 million for short-tail liability related exposures (property and automobile physical damage coverages).
Actual results may differ, depending on the magnitude and direction of the deviation.
The Company's actuaries discuss their loss and loss adjustment expense actuarial analysis with management.
As part of this discussion, the indicated point estimate of the IBNR loss reserve by line of business (coverage) is
reviewed. The Company's actuaries also discuss any indicated changes to the underlying assumptions used to
calculate the indicated point estimate. Any variance between the indicated reserves from these changes in
assumptions and the previously carried reserves is reviewed. After discussion of these analyses and all relevant
risk factors, management determines whether the reserve balances require adjustment. The Company's best
estimate of loss reserves may change depending on a revision in the underlying assumptions.
The Company's liabilities for unpaid claims and claim expenses for Property and Casualty were as follows:
($ in millions)
December 31, 2019
December 31, 2018
Automobile liability
Automobile other
Property
All other
Total
Case
Reserves
IBNR
Reserves
Total (1)
Case
Reserves
IBNR
Reserves
Total (1)
$
97.9 $
12.3
12.8
2.3
$
125.3 $
219.2 $
(5.4)
39.5
8.4
261.7 $
317.1 $
6.9
52.3
10.7
387.0 $
103.5 $
12.4
24.3
2.1
142.3 $
171.7 $
(4.0)
48.2
9.0
224.9 $
275.2
8.4
72.5
11.1
367.2
(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, 2019, 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 re-estimates increased net income in 2019 by approximately $7.5 million pretax,
primarily the result of favorable severity trends in auto for accident year 2018. The lower than expected claims
emergence and resultant lower expected loss ratios caused the Company to lower its reserve estimate at
December 31, 2019.
Valuation of Certain Investment Contracts and Policy Reserves
Liabilities for future benefits on annuity and life policies are established in amounts adequate to meet the
estimated future obligations on policies in force.
Liabilities for future benefits on deferred annuity contracts, excluding fixed indexed annuity (FIA) products, are
carried at accumulated policyholder values without reduction for potential surrender or withdrawal charges.
Liabilities for FIA products are bifurcated into an embedded derivative and a host contract. The embedded
derivative is recognized at fair value and is reported in Other policyholder funds on the Consolidated Balance
Sheets, and is determined using the option budget method. The host contract is accounted for as a debt
instrument with the initial amount determined as the consideration amount less the initial embedded derivative,
as described above. Any discount to the minimum account value is accreted over the life of the products using
the effective yield method. Key assumptions used in the estimation of the liabilities for FIA products include the
risk free interest rate, the value of options currently in force, the future expected option budget based on product
pricing targets, mortality and lapses.
46 Annual Report on Form 10-K
Horace Mann Educators Corporation
Liabilities for future benefits on payout annuity contracts are determined as the present value of expected future
benefit payments. Key assumptions used in the calculation include the future investment yield and mortality, for
those contracts with life contingencies.
Liabilities for future policy benefits on supplemental insurance policies are computed using the net level premium
method and are based on assumptions as to future investment yields, morbidity, mortality, persistency,
expenses and other assumptions based on the Company’s experience, including provisions for adverse
deviation. Mortality, morbidity and lapse assumptions for all policies have been based on standard actuarial
tables which are modified as appropriate to reflect the Company's own experience. In the event actual
experience is worse than the assumptions, additional reserves may be required. This would result in recognition
of a loss for the period in which the increase in reserves occurred.
Liabilities for future policy benefits on life insurance policies, excluding indexed universal life (IUL) products, 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 recognition of a loss for the period in
which the increase in reserves occurred. Also, see Part II - Item 8, Note 1 of the Consolidated Financial
Statements in this report. Liabilities for IUL products are bifurcated into an embedded derivative and a host
contract. The embedded derivative is recognized at fair value and is set equal to the fair value of the current call
options purchased to hedge the liability. The host contract is measured using the retrospective deposit method
which is equal to the account balance.
Valuation of Assets Acquired and Liabilities Assumed under Purchase Accounting and Purchase Price
Allocation
In accounting for the acquisitions of NTA and BCG, assets acquired and liabilities assumed were recognized
based on estimated fair values as of the date of acquisition. The excess of the purchase price when compared to
the fair value of the net tangible and identifiable intangible assets acquired was recognized as goodwill. A
significant amount of judgment was involved in estimating the individual fair values of tangible assets, intangible
assets, and other assets and liabilities. The Company used all available information to make these fair value
determinations and engaged third-party consultants for valuation assistance. The fair value of assets and
liabilities as of the acquisition date were estimated using a combination of approaches, including the income
approach, which required the Company to project future cash flows and apply an appropriate discount rate; the
cost approach, which required estimates of replacement costs and depreciation and obsolescence estimates;
and the market approach. The estimates used in determining fair values were based on assumptions believed to
be reasonable but which are inherently uncertain. Accordingly, actual results may differ materially from the
projected results used to determine fair value.
The VOBA intangible asset represents the difference between the fair value of insurance contracts and insurance
policy reserves measured in accordance with the Company's accounting policies for insurance contracts
acquired. VOBA was based on an actuarial estimate of the present value of future distributable earnings for
insurance in force on the acquisition date. The VODA intangible asset associated with the acquisition of NTA was
based on an actuarial estimate of the present value of future business to be written by the existing distribution
channel. The VODA intangible asset associated with the acquisition of BCG was based on management's
estimate of the present value of future business to be written by the distribution channel. The value of agency
relationships intangible asset represents the present value of the commission overrides retained by NTA. The
aforementioned intangible assets were valued using the income approach. The trade names intangible asset
represents the present value of future savings accruing to NTA and BCG by virtue of not having to pay royalties
for the use of the trade names, valued using the relief from royalty method. The state licenses intangible asset
represents the regulatory licenses held by NTA that were valued using the cost approach. The valuation of NTA's
policy reserves represents the present value of future benefits and expenses associated with the policies, valued
using the actuarial appraisal approach.
The valuation of insurance contracts, consisting of VOBA and insurance policy reserves, and VODA, required
management to use judgment to estimate the fair value. Assumptions included discount rate, future policy and
contract charges, premiums, morbidity and mortality, and persistency by product, as well as expenses,
investment returns, growth rates, agent termination rates and other factors. Two of the most significant inputs in
these calculations are the discount rate assumption used to arrive at the present value of the net cash flows and
the morbidity assumption used to estimate the fair value of insurance contracts and insurance policy reserves
Horace Mann Educators Corporation
Annual Report on Form 10-K 47
and future business to be produced by the existing distribution channel. Actual experience on the purchased
business may vary from these projections and the recovery of the net assets recorded is dependent upon the
future profitability of the related business.
Results of Operations by Segment for the Three Years Ended December 31,
2019
Consolidated financial results primarily reflect the operating results of four reporting segments as well as the
corporate and other line. These segments are defined based on financial information management uses to
evaluate performance and to determine the allocation of resources (see Part II - Item 8, Note 1 for a description
of changes to the Company's reporting segments).
• Property and Casualty
• Supplemental
• Retirement
• Life
• Corporate and Other
The determination of segment data is described in more detail in Part II - Item 8, Note 18 of the Consolidated
Financial Statements in this report. The following sections provide analysis and discussion of results of
operations for each of the reporting segments as well as investment results.
Property and Casualty
2019 net income reflected three factors:
• 12.8 points of improvement in the Property
and Casualty combined ratio for the year
due to lower catastrophe losses
•
•
favorable prior years' reserve development
improved automobile underwriting results
2018 core earnings reflected a significant level of
catastrophe costs. The most significant catastrophe
event in 2018 was the Camp Fire in California, which
generated gross losses of $150.0 million, and, net
losses after reinsurance of $37.9 million pretax. The
Camp Fire in California was the largest single
catastrophe event for the Company since Hurricane
Katrina in 2005.
48 Annual Report on Form 10-K
Horace Mann Educators Corporation
The following table provides certain financial information for the Property and Casualty segment for the periods
indicated.
($ in millions, unless otherwise indicated)
Year Ended December 31,
2019-2018 2018-2017
2019
2018
2017
Change % Change %
Financial Data:
Premiums written*:
Automobile
Property and other
Total premiums written
Change in unearned insurance premiums
Total insurance premiums earned
Incurred claims and claims expenses:
Claims occurring in the current year
Prior years' reserve development
Total claims and claim expenses incurred
Operating expenses, including DAC amortization
Underwriting gain (loss)
Net investment income
Income (loss) before income taxes
Net income (loss)
Core earnings (loss)*
Operating Statistics:
Total Property and Casualty
Loss and loss adjustment expense ratio
Expense ratio
Combined ratio:
Prior years' reserve development
Catastrophes
Underlying combined ratio*
Automobile
Loss and loss adjustment expense ratio
Expense ratio
Combined ratio:
Prior years' reserve development
Catastrophes
Underlying combined ratio*
Property
Loss and loss adjustment expense ratio
Expense ratio
Combined ratio:
Prior years' reserve development
Catastrophes
Underlying combined ratio*
Policies in force (in thousands)
Automobile
Property
Total
$
461.7
$
469.9
$
450.7
221.4
683.1
(0.4)
683.5
483.1
(7.5)
475.6
183.6
24.3
41.7
66.7
54.3
54.3
69.6 %
26.9 %
96.5 %
-1.1 %
7.6 %
90.0 %
70.6 %
27.0 %
97.6 %
-1.2 %
1.2 %
97.6 %
67.4 %
26.8 %
94.2 %
-0.9 %
21.1 %
74.0 %
433
194
627
211.6
681.5
15.8
665.7
548.0
(0.3)
547.7
179.8
(61.8)
40.1
(20.9)
(14.3)
(14.3)
212.1
662.8
14.5
648.3
499.0
(2.7)
496.3
173.4
(21.4)
36.2
14.5
17.8
17.2
82.3%
27.0%
76.6%
26.7%
109.3%
103.3%
—%
17.1%
92.2%
76.3%
26.8%
-0.4%
9.5%
94.2%
79.4%
26.9%
103.1%
106.3%
—%
1.7%
-0.1%
2.3%
101.4%
104.1%
95.4%
27.7%
123.1%
-0.1%
50.2%
73.0%
463
201
664
70.5%
26.5%
97.0%
-1.2%
24.5%
73.7%
479
205
684
-1.7%
4.6%
0.2%
-102.5%
2.7%
-11.8%
N.M.
-13.2%
2.1%
-139.3%
4.0%
N.M.
N.M.
N.M.
-12.7pts
-0.1pts
-12.8pts
-1.1pts
-9.5pts
-2.2pts
-5.7pts
0.2pts
-5.5pts
-1.2pts
-0.5pts
-3.8pts
-28.0pts
-0.9pts
-28.9pts
-0.8pts
-29.1pts
1.0pts
-6.5%
-3.5%
-5.6%
4.3%
-0.2%
2.8%
9.0%
2.7%
9.8%
-88.9%
10.4%
3.7%
N.M.
10.8%
N.M.
N.M.
N.M.
5.7pts
0.3pts
6.0pts
0.4pts
7.6pts
-2.0pts
-3.1pts
-0.1pts
-3.2pts
0.1pts
-0.6pts
-2.7pts
24.9pts
1.2pts
26.1pts
1.1pts
25.7pts
-0.7pts
-3.3%
-2.0%
-2.9%
Horace Mann Educators Corporation
Annual Report on Form 10-K 49
On a reported basis, the improvement in the automobile combined ratio in 2019 was mainly attributed to 4.0
points of improvement in the underlying loss ratio* due to rate actions combined with continued stabilization in
auto loss trends. The property combined ratio improved 28.9 points in 2019 primarily due to lower catastrophe
losses. On an underlying basis, the property loss ratio* increased 1.0 point compared to the prior year.
Catastrophe costs incurred were as follows:
($ in millions)
Three months ended in 2019
March 31
June 30
September 30
December 31
Total full year
Year Ended December 31,
2019
2018
2017
$
$
10.8 $
22.1
14.7
4.4
52.0 $
9.8 $
26.8
32.2
45.3
114.1 $
17.2
32.4
8.6
3.6
61.8
Rate actions were the primary factor for the slight increase in total premiums written* compared to 2018. For
2019, average approved rate changes were 4.8% for automobile and 3.5% for property.
Automobile premiums written* decreased $8.2 million compared to 2018. In 2019, the average written premium
per policy and average earned premium per policy increased 4.1% and 5.3%, respectively, compared to 2018. In
2018, automobile premiums written increased $19.2 million compared to 2017. In 2018, the average written
premium per policy and average earned premium per policy increased 6.9% and 6.8%, respectively, compared
to 2017. Based on policies in force, the automobile 12 month retention rate for new and renewal policies was
81.1%, 81.9% and 83.0% at December 31, 2019, 2018 and 2017, respectively, with the decrease due to recent
rate and underwriting actions. The number of educator policies has been stable relative to overall automobile
policies over the past three years as educators represented 85.4%, 85.4% and 85.2% of the automobile policies
in force as of December 31, 2019, 2018 and 2017, respectively.
Property and other premiums written* increased $9.8 million compared to 2018, as catastrophe reinstatement
reinsurance premiums reduced premiums written by approximately $6.7 million in 2018. While the number of
property policies in force has declined, the average written premium per policy and average earned premium per
policy increased 6.2% and 5.4%, respectively, compared to 2018. In 2018, the average written premium per
policy and average earned premium per policy increased 4.3% and 3.1%, respectively, compared to 2017.
Based on policies in force, the property 12 month new and renewal policy retention rate was 87.1%, 88.0% and
87.6% at December 31, 2019, 2018 and 2017, respectively. The number of educator policies has been stable
relative to overall property policies over the past three years as educators represented 82.4%, 82.2% and 82.1%
of the property policies in force as of December 31, 2019, 2018 and 2017, respectively.
The Property and Casualty expense ratio was 26.9%, 27.0% and 26.7% for 2019, 2018 and 2017, respectively.
The Company continues to evaluate and implement actions to further mitigate its risk exposure. 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.
Supplemental
The Company acquired NTA on July 1, 2019. As a result, the Company’s reporting segments have changed
effective in the third quarter of 2019. A new reporting segment titled "Supplemental" was added to report on the
personal lines of supplemental insurance products (primarily heart, cancer, accident and limited short-term
supplemental disability coverages) that are marketed and underwritten by NTA.
Supplemental contributed $18.0 million of net income during the second half of 2019. The pretax profit margin
was 30.8% reflecting this business' focus on efficient operations and product mix. The non-cash impact from
amortization of intangible assets recognized in connection with the purchase accounting of NTA reduced pretax
net income by $6.6 million.
50 Annual Report on Form 10-K
Horace Mann Educators Corporation
The following table provides certain information for the Supplemental segment for the periods indicated.
($ in millions, unless otherwise indicated)
Year Ended December 31,
2018
2017
2019
2019-2018 2018-2017
Change % Change %
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Financial Data:
Insurance premiums and contract deposits
$
65.7
Insurance premiums and contract charges
earned
Net investment income
Benefits and settlement expenses
Operating expenses (includes DAC unlocking
and amortization expense)
Intangible asset amortization expense
Income before income taxes
Net income
Core earnings*
Operating Statistics:
Supplemental insurance in force (thousands)
Benefits ratio (1)
Expense ratio (2)
Pretax profit margin (2)
Persistency
65.8
7.5
21.7
20.4
6.6
23.0
18.0
18.0
297
37.5%
27.3%
30.8%
89.3%
N/A - The acquisition of NTA closed on July 1, 2019.
(1)
Benefits ratio measured to earned premium.
(2)
Expense ratio and pretax profit margin measured to total revenues.
Retirement
2019 net income decreased $46.5 million due to the
impacts of the annuity reinsurance transaction
coupled with a $28.0 million goodwill impairment
charge triggered by the transaction. 2019 core
earnings* decreased $18.5 million compared to
2018, reflecting the impact of the annuity
reinsurance transaction which ceded $2.9 billion of
fixed and variable reserves (see Part II - Item 8, Note
6 of the Consolidated Financial Statements for
further details). 2019 results also include higher
operating expenses from the inclusion of BCG.
2018 net income declined due to a favorable impact
from TCJA enacted in 2017. 2018 core earnings
decreased $7.2 million compared to 2017, reflecting
tightening annualized net interest spreads on fixed
annuities, higher DAC unlocking, and higher
operating expenses to support long-term retirement
infrastructure.
Horace Mann Educators Corporation
Annual Report on Form 10-K 51
The following table provides certain information for the Retirement segment for the periods indicated.
($ in millions, unless otherwise indicated)
Year Ended December 31,
2019-2018 2018-2017
2019
2018
2017
Change % Change %
Financial Data:
Contract charges earned
Net investment income
Interest credited
Net interest margin without net
investment gains (losses)
Net interest margin - Reinsured block
Mortality loss and other reserve charges
Operating expenses
DAC and intangible asset amortization expense,
excluding DAC unlocking
DAC unlocking
Other expenses - goodwill impairment
Income (loss) before income taxes
Net income (loss)
Core earnings*
Operating Statistics:
Annuity contract deposits*
Variable
Fixed
Total
Single
Recurring
Total
$
29.1
174.7
93.6
$
31.2
262.6
161.1
$
28.0
262.0
153.5
81.1
3.4
5.3
60.5
18.0
3.5
28.0
(1.8)
(4.8)
23.2
101.5
108.5
—
7.6
57.3
19.2
3.9
—
51.7
41.7
41.7
—
5.8
49.8
16.7
1.1
—
69.0
88.4
48.9
$
217.3
245.2
462.5
256.6
205.9
462.5
$
205.8
233.3
439.1
234.2
204.9
439.1
$
173.9
279.2
453.1
244.4
208.7
453.1
-6.7%
-33.5%
-41.9%
-20.1%
N.M.
-30.3%
5.6%
-6.3%
-10.3%
N.M.
-103.5%
-111.5%
-44.4%
5.6%
5.1%
5.3%
9.6%
0.5%
5.3%
11.4%
0.2%
5.0%
-6.5%
N.M.
31.0%
15.1%
15.0%
N.M.
N.M.
-25.1%
-52.8%
-14.7%
18.3%
-16.4%
-3.1%
-4.2%
-1.8%
-3.1%
Assets under administration (AUA)
Annuity assets under management (1)
Broker and advisory assets
under administration (2)
Recordkeeping assets under administration (2)
Total
Persistency
Variable annuities
Fixed annuities
Total
Annuity contracts in force (thousands)
Fixed spread - YTD annualized (basis points)
4,379.6
6,713.3
6,764.0
-34.8%
-0.7%
2,391.8
1,499.2
8,270.6
330.3
—
7,043.6
266.2
—
7,030.2
94.7%
94.0%
94.3%
229
194
94.4%
94.0%
94.1%
226
171
94.8%
94.5%
94.6%
223
194
N.M.
N.M.
17.4%
0.3pts
—pts
0.2pts
1.3%
23bps
24.1%
N.M.
0.2%
-0.4pts
-0.5pts
-0.5pts
1.3%
-23bps
(1)
(2)
Amount reported as of December 31, 2019 excludes $707.8 million of assets under management held under modified coinsurance
reinsurance.
2019 includes the results of BCG acquired on January 2, 2019.
2019 annuity contract deposits* increased $23.4 million compared to 2018, reflecting positive momentum in
retirement initiatives and in engaging new households. Compared to 2018, variable and fixed annuity deposits
increased $11.5 million and $11.9, respectively.
At December 31, 2019, assets under management were $2.3 billion below a year ago, driven primarily by the
annuity reinsurance transaction. Variable assets under management, excluding amounts held under the modified
coinsurance agreement, decreased by $218.4 million primarily due to the annuity reinsurance transaction
partially offset by favorable market performance. The 194 basis point net interest spread for full-year 2019
includes the 142 basis point net annualized net interest spread for the first quarter, which was prior to the annuity
reinsurance transaction.
52 Annual Report on Form 10-K
Horace Mann Educators Corporation
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 $215.0 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.
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 $2.1 million in year one
and $6.3 million in year two, further reducing the annualized net interest spread by approximately 8 basis points
and 22 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 annualized net interest spreads is also an important component in the amortization of
DAC. In terms of the sensitivity of this amortization to the annualized net interest spread, based on DAC as of
December 31, 2019 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.
The annuity reinsurance agreement entered into in the second quarter of 2019, which reinsured a $2.2 billion
block of in force fixed annuities with a minimum crediting rate of 4.5%, helps mitigate the risk of not being able
to generate appropriate spreads on the annuity business. Information regarding the interest crediting rates and
balances equal to the minimum guaranteed rate for deferred annuity account values is shown below.
($ in millions)
December 31, 2019
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
Minimum guaranteed interest rates:
Less than 2%
53.0% $
1,261.5
49.5%
36.8% $
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
12.1
25.6
7.2
2.1
289.1
610.5
170.6
50.9
83.3
99.9
100.0
100.0
14.2
36.0
10.0
3.0
100.0% $
2,382.6
71.2%
100.0% $
1,696.4
623.9
240.9
610.1
170.6
50.9
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 Part I - Item 1A and other factors within this report.
Horace Mann Educators Corporation
Annual Report on Form 10-K 53
Life
2019 net income and core earnings* decreased $1.2
million compared to 2018, reflecting lower net
investment income and higher expenses partially
offset by lower mortality costs. 2018 net income
decreased $58.8 million compared to 2017,
primarily due to the benefit of a $60.3 million from
TCJA enacted in 2017.
For 2019, insurance premiums and contract
deposits* decreased $1.2 million in 2019 compared
to 2018, primarily due to a decline in single
premiums. The ordinary life insurance in force lapse
ratio was 4.6%, 4.6% and 4.9% for 2019, 2018 and
2017, respectively.
The following table provides certain information for
the Life segment for the periods indicated.
($ in millions, unless otherwise indicated)
Year Ended December 31,
2019-2018
2018-2017
2019
2018
2017
Change % Change %
Financial Data:
$
Insurance premiums and contract deposits*
Insurance premiums and contract charges earned
Net investment income
Benefits and settlement expenses
Interest credited
DAC amortization expense, excluding unlocking
DAC unlocking
Operating expenses
Income before income taxes
Net income
Core earnings*
113.2
119.6
72.0
79.5
45.0
8.1
(0.3)
37.9
21.8
17.6
17.6
$
114.4
120.4
74.4
82.3
45.1
7.3
0.3
36.4
23.7
18.8
18.8
$
111.2
118.4
76.2
80.2
45.1
7.7
(0.2)
36.5
25.7
77.6
17.3
Operating Statistics:
Life insurance in force
Number of policies in force* (in thousands)
Average face amount in force (in dollars)
Lapse ratio (ordinary life insurance in force)
$ 19,180
201
$ 95,488
$ 18,278
199
$ 92,073
$ 17,564
198
$ 88,758
4.6%
4.6%
4.9%
-1.0%
-0.7%
-3.2%
-3.4%
-0.2%
11.0%
N.M.
4.1%
-8.0%
-6.4%
-6.4%
4.9%
1.0%
3.7%
—pts
Mortality costs
$
33.5
$
35.1
$
36.1
-4.6%
2.9%
1.7%
-2.4%
2.6%
—%
-5.2%
N.M.
-0.3%
-7.8%
-75.8%
8.7%
4.1%
0.5%
3.7%
-0.3pts
-2.8%
54 Annual Report on Form 10-K
Horace Mann Educators Corporation
0.8%
N.M.
41.2%
N.M.
-93.8%
-57.5%
0.8%
N.M.
0.8%
N.M.
Corporate and Other
2019 net income increased $127.2 million compared to 2018, primarily due to recognition of a $106.9 million
after tax realized investment gain in the second quarter of 2019 associated with the annuity reinsurance
transaction. 2019 core earnings* decreased $3.1 compared to 2018, driven by increased interest expense as the
Company utilized its senior revolving credit facility on July 1, 2019 to partially fund the acquisition of NTA as well
as acquisition costs associated with BCG and NTA. 2018 core earnings decreased compared to 2017, driven by
transaction costs to acquire BCG and NTA of $4.0 million after tax.
($ in millions)
Year Ended December 31,
2019-2018
2018-2017
2019
2018
2017
Change % Change %
Interest expense
$
14.3 $
11.9 $
11.8
20.2%
153.3
33.1
120.2
99.3
(20.9)
(12.5)
(2.4)
(10.1)
(27.9)
(17.8)
(3.4)
(1.7)
(1.7)
(14.4)
(11.3)
N.M.
N.M.
N.M.
N.M.
-17.4%
Net investment gains (losses) pretax
Tax on net investment gains (losses)
Net investment gains (losses) after tax
Net income (loss)
Core earnings (loss)*
Investment Results
($ in millions)
Year Ended December 31,
2019-2018
2018-2017
2019
2018
2017
Change % Change %
Net investment income - investment portfolio
$
294.3 $
376.5 $
373.6
-21.8%
Investment income - deposit asset on reinsurance
Total net investment income
Pretax net investment gains (losses)
Pretax net unrealized investment gains on securities
70.8
365.1
153.3
334.7
—
376.5
(12.5)
141.4
—
373.6
(3.4)
440.3
N.M.
-3.0%
N.M.
136.7%
-67.9%
Excluding accreted investment income on the deposit asset on reinsurance, 2019 net investment income
decreased $82.2 million compared to 2018, primarily due to a $2.1 billion reduction of invested assets from
investments transferred under the annuity reinsurance transaction in the second quarter of 2019 as well as low
rates on new investments and prepayments that were partially offset by stronger returns on alternative
investments. For 2018, net investment income was comparable to 2017 as increased prepayment activity and
returns on alternative investments offset by a reduction in yields from a strategic decision to improve the quality
of the portfolio.
For 2019, pretax net unrealized investment gains on securities were up $193.3 million compared to 2018,
reflecting U.S. Treasury rates that declined 76 basis points and tighter credit spreads across most asset classes.
For 2018, pretax net unrealized investment gains on securities were down $298.9 million compared to 2017,
reflecting U.S. Treasury rates that rose 28 basis points and wider credit spreads across most asset classes.
Horace Mann Educators Corporation
Annual Report on Form 10-K 55
Fixed Maturity and Equity Securities Portfolios
The table below presents the Company's fixed maturity securities portfolio by major asset class, including the
ten largest sectors of the Company's corporate bond holdings (based on fair value) as well as the Company's
equity securities portfolio.
($ in millions)
December 31, 2019
Number of
Issuers
Fair
Value
Amortized
Cost or
Cost
Pretax Net
Unrealized
Gain (Loss)
Fixed maturity securities
Corporate bonds
Banking & Finance
Insurance
Energy (1)
Healthcare, Pharmacy
Real Estate
Technology
Transportation
Utilities
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
118
44
68
58
36
30
32
53
27
23
223
712
268
130
45
560
36
9
117
$
426.5 $
166.2
121.8
397.9 $
149.0
111.7
116.4
114.4
85.6
84.8
76.2
52.9
46.8
289.9
108.5
108.7
80.6
79.5
68.0
47.6
43.8
269.2
28.6
17.2
10.1
7.9
5.7
5.0
5.3
8.2
5.3
3.0
20.7
1,581.5
1,464.5
117.0
497.2
367.1
75.9
1,686.1
458.9
45.4
619.4
470.2
352.2
76.2
1,545.8
436.7
42.8
621.6
27.0
14.9
(0.3)
140.3
22.2
2.6
(2.2)
13.2
334.7
111
1,988 $
460.2
5,791.7 $
447.0
5,457.0 $
14
94
1
109
$
$
60.4
20.1
21.4
101.9
(1)
(2)
(3)
(4)
(5)
Total
2,097 $
5,893.6
At December 31, 2019, the fair value amount included $9.3 million which were non-investment grade.
The All Other Corporates category contains 18 additional industry classifications. Broadcasting and media, aerospace and defense,
consumer products, metal and mining and retail represented $158.4 million of fair value at December 31, 2019, with the remaining 13
classifications each representing less than $18.0 million.
At December 31, 2019, 100% were investment grade, with an overall credit rating of AA+, and the positions were well diversified by property
type, geography and sponsor.
Holdings are geographically diversified, 51.4% are tax-exempt and 77.5% 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, 2019.
Based on fair value, 95.2% of the collateralized loan obligation securities were rated investment grade by Standard & Poor's Global Inc. (S&P),
Moody's Investors Service, Inc. (Moody's) and/or Fitch Ratings, Inc. (Fitch) at December 31, 2019.
56 Annual Report on Form 10-K
Horace Mann Educators Corporation
At December 31, 2019, the Company's diversified fixed maturity securities portfolio consisted of 3,133
investment positions, issued by 1,988 entities, and totaled approximately $5.8 billion in fair value. This portfolio
was 96.4% investment grade, based on fair value, with an average quality rating of A+. The Company's
investment guidelines generally limit single corporate issuer concentrations to 0.5% of invested assets for AA or
AAA rated securities, 0.35% of invested assets for A or BBB rated securities, and 0.2% of invested assets for
non-investment grade securities.
The following table presents the composition and fair value of the Company's fixed maturity and equity securities
portfolios by rating category. At December 31, 2019, 95.7% of these combined portfolios were investment grade,
based on fair value, with an overall average quality rating of A+. The Company has classified the entire fixed
maturity securities portfolio as available for sale, which is carried at fair value.
Rating of Fixed Maturity Securities and Equity Securities (1)
($ 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, 2019
Percent
of Total
Fair
Value
Fair
Value
Amortized
Cost or
Cost
11.5% $
665.1 $
42.7
23.3
18.9
1.7
0.4
—
1.5
2,473.4
1,349.5
1,093.3
98.8
24.6
1.6
85.4
654.9
2,327.3
1,250.8
1,022.7
95.1
23.9
1.9
80.4
100.0% $
5,791.7 $
5,457.0
—
—
—
59.3% $
—
—
—
40.7
100.0% $
—
—
—
60.4
—
—
—
41.5
101.9
$
5,893.6
(1)
(2)
(3)
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.
At December 31, 2019, the AA rated fair value amount included $458.9 million of U.S. Government and federally sponsored agency securities
and $708.4 million of mortgage-backed and asset-backed securities issued by U.S. Government and federally sponsored agencies.
This category primarily represents private placement and municipal securities not rated by either S&P, Moody's or Fitch.
At December 31, 2019, the fixed maturity securities portfolio had $13.6 million of pretax gross unrealized
investment losses on $951.6 million of fair value related to 467 positions. Of the investment positions with gross
unrealized investment losses, there were six securities trading below 80.0% of the carrying value at
December 31, 2019.
The Company views the unrealized investment losses of all of the securities at December 31, 2019 as temporary.
Future changes in circumstances related to these and other securities could require subsequent recognition of
OTTI.
Horace Mann Educators Corporation
Annual Report on Form 10-K 57
Liquidity and Financial Resources
Off-Balance Sheet Arrangements
At December 31, 2019, 2018 and 2017, 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 as of December 31,
2019.
Investments
Information regarding the Company's investment portfolio, which is comprised primarily of investment grade,
fixed maturity securities, is presented in Part II - Item 7, Results of Operations by Segment for the Three Years
Ended December 31, 2019, Part I - Item 1, Investments and in Part II - Item 8, Note 3 of the Consolidated
Financial Statements in this report.
Cash Flow
The short-term liquidity requirements of the Company, within a 12 month operating cycle, are for the timely
payment of claims and benefits to policyholders, operating expenses, interest payments and federal income
taxes. Cash flow generated from operations has been, and is expected to be, adequate to meet the Company's
operating cash needs in the next 12 months. Cash flow in excess of operational needs has been used to fund
business growth, pay dividends to shareholders and repurchase shares of HMEC's common stock. Long-term
liquidity requirements, beyond one year, are principally for the payment of future insurance and annuity policy
claims and benefits, as well as retirement of long-term debt. The following table summarizes the Company's
consolidated cash flows activity for the periods indicated.
($ in millions)
Year Ended December 31,
2019-2018
2018-2017
2019
2018
2017
Change % Change %
Net cash provided by operating activities
$
127.6 $
200.9 $
256.6
Net cash provided by (used in) investing activities
Net cash used in financing activities
Net increase (decrease) in cash
Cash at beginning of period
Cash at end of period
55.9
(169.9)
13.6
11.9
(186.5)
(10.1)
4.3
7.6
$
25.5 $
11.9 $
(228.7)
(37.0)
(9.1)
16.7
7.6
-36.5%
130.0%
N.M.
N.M.
56.6%
114.3%
-21.7%
18.5%
72.7%
N.M.
-54.5%
56.6%
Operating Activities
As a holding company, HMEC conducts its principal operations in the personal lines portion 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 2019, net cash provided by operating activities decreased $73.3 million compared to 2018, primarily due to
lower net investment income as a result of a $2.1 billion reduction of invested assets from investments
transferred under the annuity reinsurance transaction in the second quarter of 2019.
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, 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 portfolio as available for sale.
Investing activities include the Company's acquisitions of NTA and BCG in 2019.
58 Annual Report on Form 10-K
Horace Mann Educators Corporation
Financing Activities
Financing activities include primarily payment of dividends, receipt and withdrawal of funds by annuity
contractholders, issuances and repurchases of HMEC's common stock, fluctuations in book overdraft balances,
and borrowings, repayments and repurchases related to debt facilities.
On July 1, 2019, the Company utilized $135.0 million of its $225.0 million senior revolving credit facility to
partially fund the acquisition of NTA.
HMLIC, one of the Company's subsidiaries, operates under funding agreements with FHLB. In 2019, HMLIC
received an additional $175.0 million from FHLB under funding agreements as well as repaid FHLB $305.0
million of principal. Advances under funding agreements are reported as Annuity Contracts: Variable, Fixed and
FHLB Funding Agreements, Deposits and totaled $495.0 million as of December 31, 2019. For the year ended
December 31, 2019, cash inflows from annuity contract deposits, excluding FHLB transactions, increased $23.4
million, or 5.3%, compared to 2018. Cash outflows from annuity contract benefits, withdrawals and net transfers
to Separate Account (variable annuity) assets decreased $54.0 million, or 11.4%, compared to 2018.
Contractual Obligations
The following table shows the Company's contractual obligations, as well as the projected timing of payments.
($ in millions)
Payments Due By Period as of December 31, 2019
Fixed annuities and fixed option
of variable annuities (1)
Payout annuity contracts (1)(2)
Supplemental and life insurance policies (1)
Property and Casualty claims and claim
adjustment expenses (1)
Short-term debt obligations,
Bank Credit Facility
(expires June 21, 2024) (3)
Long-term debt obligations,
FHLB borrowings due October
and December 2022 (4)
Long-term debt obligations
Senior Notes due December 1, 2025 (3)
Operating lease obligations (5)
Less Than
1 Year
(2020)
1 - 3 Years
(2021 and
2022)
3 - 5 Years
(2023 and
2024)
Total
More Than
5 Years
(2025 and
beyond)
$
3,420.3 $
159.4 $
328.2 $
349.3 $
2,583.4
885.4
3,710.3
266.5
153.5
52.8
317.6
19.1
154.0
158.1
153.0
4.1
1.0
11.3
4.5
49.5
323.2
103.8
212.2
328.9
9.2
8.2
141.2
51.8
22.5
8.4
—
22.5
5.4
469.7
2,900.1
0.5
—
—
261.3
0.8
Total
$
8,825.5 $
645.4 $
895.6 $
1,068.7 $
6,215.8
(1)
(2)
(3)
(4)
(5)
This information represents estimates of both the amounts to be paid to policyholders and the timing of such payments and is net of
anticipated reinsurance recoveries.
Includes $495.0 million obligation to FHLB plus interest.
Includes principal and interest.
Includes $50.0 million obligation to FHLB plus interest.
The Company has entered into various operating lease agreements, primarily for real estate offices.
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.
Horace Mann Educators Corporation
Annual Report on Form 10-K 59
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.
For the majority of the Company's Supplemental insurance operations, the estimated contractual obligations for
future policyholder benefits as presented in the table above were derived from future projections of the business
developed as part of the purchase accounting associated with the acquisition of NTA.
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,
morbidity, and other contingent events as appropriate to the respective product types. Additionally, coverage
levels are assumed to remain unchanged from those provided under contracts in force at December 31, 2019.
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 Part II - Item 8, Note 1 of the Consolidated Financial Statements in 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. 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 maximum amount of dividends that may be paid in 2020 from all of HMEC's insurance
subsidiaries without prior regulatory approval is $105.3 million, excluding the impact and timing of prior year
dividends. 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 Part II - Item 8, Note 14 of the Consolidated Financial
Statements in this report.
60 Annual Report on Form 10-K
Horace Mann Educators Corporation
The total capital of the Company was $2,000.3 million at December 31, 2019, including $298.0 million of long-
term debt and $135.0 million of short-term debt outstanding. Total debt represented 21.6% of total capital
including net unrealized investment gains on securities (24.5% of total capital excluding net unrealized
investment gains on securities*) at December 31, 2019, which was below the Company's long-term target of
25.0%.
Shareholders' equity was $1,567.3 million at December 31, 2019, including net unrealized investment gains on
securities in the Company's investment portfolio of $230.4 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 $1,800.5 million and $43.66, respectively, at
December 31, 2019. Book value per share was $38.01 at December 31, 2019 ($32.42 excluding net unrealized
investment gains on securities*).
Additional information regarding net unrealized investment gains on securities in the Company's investment
portfolio at December 31, 2019 is included in Part II - Item 7, Results of Operations by Segment for the Three
Years Ended December 31, 2019 and Part II - Item 8, Note 3 of the Consolidated Financial Statements in this
report.
Total shareholder dividends were $47.3 million for the year ended December 31, 2019. In March, May,
September and December 2019, the Board announced regular quarterly dividends of $0.2875 per share.
Compared to the full year per share dividends paid in 2018 of $1.14, the total 2019 dividends paid per share of
$1.15 represented an increase of 0.9%.
On September 30, 2015, the Board authorized a share repurchase program allowing repurchases of up to $50.0
million of HMEC's common stock, par value $0.001 (Program). The Program authorizes the repurchase of
common shares in open market or privately negotiated transactions, from time to time, depending on market
conditions. The Program does not have an expiration date and may be limited or terminated at any time without
notice. During 2019, the Company did not repurchase any shares of its common stock. In total and through
December 31, 2019, 847,373 shares were repurchased under the Program at an average price of $32.16 per
share. The repurchase of shares was funded through use of cash. As of December 31, 2019, $22.8 million
remained authorized for future share repurchases under the Program.
The following table summarizes the Company's debt obligations.
($ in millions)
Short-term debt
Bank Credit Facility
Long-term debt (1)
Effective
Interest
Rates
Final
Maturity
December 31,
2019
2018
Variable
2024
$
135.0 $
—
4.50% Senior Notes, Aggregate principal amount of
$250,000 less unaccrued discount of $426 and
$488 and unamortized debt issuance costs
of $1,549 and $1,772
Federal Home Loan Bank borrowing
Total
4.50%
1.99%
2025
2022
248.0
50.0
$
433.0 $
247.7
50.0
297.7
(1)
The Company designates debt obligations as "long-term" based on maturity date at issuance.
In November 2015, the Company issued $250.0 million aggregate principal amount of Senior Notes, 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. Detailed information regarding the redemption terms of the Senior Notes due
2025 is contained in Part II - Item 8, Note 10 of the Consolidated Financial Statements in this report. The Senior
Notes due 2025 are traded in the open market (HMN 4.50).
Horace Mann Educators Corporation
Annual Report on Form 10-K 61
In 2017, Horace Mann Insurance Company (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
4.5% 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. In 2019, the Board
authorized a maximum amount equal to 15% of net aggregate admitted assets less separate account assets of
the insurance subsidiaries for FHLB borrowings. 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 1.99% as of December 31, 2019. HMIC's FHLB borrowings of $50.0 million are included in Long-
term debt on the Consolidated Balance Sheets.
As of December 31, 2019, the Company had $135.0 million outstanding under its Bank Credit Facility. On June
21, 2019, the Company, as borrower, replaced its current line of credit with a new five-year Credit Agreement
(Bank Credit Facility). The new Bank Credit Facility increased the amount available on this senior revolving credit
facility to $225.0 million from $150.0 million. PNC Capital Markets, LLC and JPMorgan Chase Bank, N.A. served
as joint leads on the new agreement, with The Northern Trust Company, U.S. Bank National Association,
KeyBank National Association, Comerica Bank and Illinois National Bank participating in the syndicate. Terms
and conditions of the new Bank Credit Facility are substantially consistent with the prior agreement, with an
interest rate based on LIBOR plus 115 basis points.
On July 1, 2019, the Company utilized the senior revolving credit facility to partially fund the acquisition of NTA.
As of December 31, 2019, the amount outstanding on the senior revolving credit facility was $135.0 million. 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, 2019.
To provide additional capital management flexibility, the Company filed a "universal shelf" registration on Form
S-3 with the SEC on March 13, 2018. 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 13, 2018. Unless withdrawn by the Company
earlier, this registration statement will remain effective through March 13, 2021. No securities associated with the
registration statement have been issued at the time of issuance of this Annual Report on Form 10-K.
On March 13, 2018, the Company filed a "shelf" registration statement on Form S-4 with the SEC which became
effective on May 2, 2018. Under this registration statement, the Company may from time to time offer and issue
up to 5,000,000 shares of its common stock in connection with future acquisitions of other businesses, assets or
securities. Unless withdrawn by the Company, this registration statement will remain effective indefinitely. No
securities associated with the registration statement have been issued at the time of issuance of this Annual
Report on Form 10-K.
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 for HMEC and its Property and Casualty and Life insurance subsidiaries were reviewed by all of
the rating agencies in June and July 2019 in conjunction with the announcement of the Company's financing
plans to purchase NTA. A.M. Best and S&P affirmed the ratings that were in place at December 31, 2018.
Moody's and Fitch affirmed their ratings with a stable outlook, removing negative watches from their respective
debt and insurance financial strength ratings placed after the announcement of NTA acquisition in December
2018.
62 Annual Report on Form 10-K
Horace Mann Educators Corporation
All four agencies currently have assigned the same insurance financial strength ratings to the Company's
Property and Casualty and the Company's Life insurance subsidiaries. Only A.M Best currently rates the
Company's Supplemental segment's subsidiaries. Assigned ratings as of February 15, 2020 were as follows:
S&P
Moody's
A.M. Best
HMEC (parent company)
HMEC's Life
HMEC's Property and Casualty subsidiaries
HMEC's Supplemental subsidiaries
Fitch
Reinsurance Programs
Insurance Financial
Strength Ratings (Outlook)
Debt Ratings (Outlook)
A
A2
N.A.
A
A
A-
A
(stable)
(stable)
(stable)
(stable)
(stable)
(stable)
BBB
Baa2
bbb
N.A.
N.A.
N.A.
BBB
(stable)
(stable)
(stable)
(stable)
Information regarding the reinsurance programs for the Company's Property and Casualty, Supplemental,
Retirement and Life segments are located in Part I - Item 1, Reporting Segments of this report.
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 Part II - Item 8,
Note 1 of the Consolidated Financial Statements in this report. 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. In addition, an annuity reinsurance
agreement entered into in the second quarter of 2019, which reinsured a $2.2 billion block of in force fixed
annuities with a minimum crediting rate of 4.5%, helps mitigate the risk of not being able to generate appropriate
spreads on the annuity business.
ITEM 7A. I Quantitative and Qualitative Disclosures about
Market 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. Also, see Part II - Item 7, Results of Operations by Segment for the
Three Years Ended December 31, 2019 of this report regarding net investment gains (losses).
Horace Mann Educators Corporation
Annual Report on Form 10-K 63
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. Also, see Part II - Item 7, Results of Operations
by Segment for the Three Years Ended December 31, 2019 of this report regarding 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, 2019,
approximately 15.5% of the fixed maturity securities portfolio represented investments supporting the Property
and Casualty operations and approximately 84.5% supported by Supplemental, Retirement and Life business.
For discussions regarding the Company's investments see Part II - Item 7, Results of Operations by Segment for
the Three Years Ended December 31, 2019 of this report regarding net investment gains (losses) and Part I - Item
1, Investments of this report.
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
maintain crediting rates at levels necessary to avoid narrowing of spreads under certain market conditions.
However, an annuity reinsurance agreement entered into in the second quarter of 2019, which reinsured a $2.2
billion block of in force fixed annuities with a minimum crediting rate of 4.5%, mitigates the risk of not being able
to generate appropriate spreads on the annuity business. Also, see Part II - Item 7, Results of Operations by
Segment for the Three Years Ended December 31, 2019 of this report regarding interest credited to
policyholders.
Using financial modeling and other techniques, the Company regularly evaluates the appropriateness of
investments relative to the characteristics of the liabilities that they support. Simulations of cash flows generated
from existing business under various interest rate scenarios measure the potential gain or loss in fair value of
interest rate sensitive assets and liabilities. Such estimates are used to closely match the duration of assets to
the duration of liabilities. The overall duration of liabilities of the Company's multiline insurance operations
combines the characteristics of its long duration annuity and interest rate sensitive life liabilities with its short
duration non-interest rate sensitive Property and Casualty liabilities. Overall, at December 31, 2019, the duration
of the fixed maturity securities portfolio was estimated to be approximately 6.0 years and the duration of the
Company's insurance liabilities and debt was estimated to be approximately 5.3 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 an immediate decrease of 100
basis points in interest rates, the fair value of the Company's assets and liabilities would both increase, the net of
which would result in an increase in shareholders' equity of approximately $41.1 million after tax, or 2.6%. 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 a decrease in shareholders' equity of approximately $87.7 million after tax, or 5.6%. In each case,
64 Annual Report on Form 10-K
Horace Mann Educators Corporation
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 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 2020 and 2021 would decrease by
approximately $4.1 million (by segment: Property and Casualty $0.0 million, Supplemental $1.0 million,
Retirement $2.4 million, and Life $0.7 million) and $9.7 million (by segment: Property and Casualty $0.3 million,
Supplemental $1.3 million, Retirement $6.2 million and Life $1.9 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 DAC, 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 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.
Horace Mann Educators Corporation
Annual Report on Form 10-K 65
ITEM 8. I Financial Statements and Supplementary Data
HORACE MANN EDUCATORS CORPORATION
INDEX TO FINANCIAL INFORMATION
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 - Acquisitions
Note 3 - Investments
Note 4 - Fair Value of Financial Instruments
Note 5 - Derivatives
Note 6 - Deposit Asset on Reinsurance
Note 7 - Goodwill and Intangible Assets, net
Note 8 - Property and Casualty Unpaid Claims and Claim Expenses
Note 9 - Reinsurance and Catastrophes
Note 10 - Debt
Note 11 - Income Taxes
Note 12 - Operating Leases
Note 13 - Shareholders' Equity and Common Stock Equivalents
Note 14 - Statutory Information and Restrictions
Note 15 - Retirement Plans and Other Postretirement Benefits
Note 16 - Contingencies and Commitments
Note 17 - Supplemental Disclosure of Consolidated Cash Flow Information
Note 18 - Segment Information
Note 19 - Unaudited Selected Quarterly Financial Data
Page
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71
72
73
74
75
75
90
91
97
103
105
106
107
114
116
117
120
121
124
125
130
131
131
134
66 Annual Report on Form 10-K
Horace Mann Educators Corporation
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Horace Mann Educators Corporation:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Horace Mann Educators Corporation and
subsidiaries (the Company) as of December 31, 2018 and 2019, 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, 2019, and the related notes and financial statement schedules I to
IV and VI (collectively, the consolidated financial statements). In our opinion, the consolidated financial
statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019
and 2018, and the results of its operations and its cash flows for each of the years in the three year period ended
December 31, 2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based
on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission, and our report dated February 28, 2020 expressed an unqualified
opinion on the effectiveness of the Company’s internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of
accounting for the change in fair value of equity investments effective January 1, 2018 due to the adoption of
ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial
Assets and Financial Liabilities.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility
is to express an opinion on these consolidated financial statements based on our audits. We are a public
accounting firm registered with the 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 audit to obtain reasonable assurance about whether the consolidated financial statements are
free of material misstatement, whether due to error or fraud. Our audits 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. We believe that our audits provide a
reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the
consolidated financial statements that were communicated or required to be communicated to the audit
committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial
statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of
critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a
whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the
critical audit matters or on the accounts or disclosures to which they relate.
Assessment of the estimate of fair value for hard-to-value fixed maturity securities
As discussed in Notes 1 and 4 to the consolidated financial statements, as of December 31, 2019, the Company
has recorded an estimated fair value for fixed maturity securities, of which a portion represent securities that are
Horace Mann Educators Corporation
Annual Report on Form 10-K 67
hard-to-value. This includes securities that use both level II (observable) and level III (unobservable) inputs in the
estimation of fair value. The Company estimates the fair value of hard-to-value fixed maturity securities, which
includes securities that do not have market observable prices or that trade infrequently. The Company uses
judgment to determine the appropriate inputs and assumptions used to estimate the fair value of these hard-to-
value securities. The significant inputs and assumptions include benchmark yields, liquidity premium, estimated
cash flows, and prepayment and default speeds. As of December 31, 2019, the estimated fair value of fixed
maturity securities was $5,791.7 million.
We identified the assessment of the Company’s estimate of the fair value of hard-to-value fixed maturity
securities as a critical audit matter. Due to the significant measurement uncertainty associated with the fair value
of such securities, there was a high degree of subjectivity and judgment in evaluating the fair value and certain
related assumptions. Our assessment included evaluating the specific inputs and assumptions to which the
estimate is most sensitive.
The primary procedures we performed to address this critical audit matter included the following. We tested
certain internal controls over the Company’s process to measure the fair value of hard-to-value securities. In
addition, we tested internal controls over the Company’s pricing assumptions and methodologies for hard-to-
value fixed maturity securities. We involved valuation professionals with specialized skills and knowledge, who
assisted in:
• Developing an independent range of fair value estimates using information from the Company, market
data sources, models, and key assumptions for a selection of securities; and
• Comparing the Company’s fair value estimates of hard-to-value securities to our independent range of
fair value estimates for the same selection of securities.
Assessment of the estimate of property and casualty unpaid claims and claim expenses
As discussed in Notes 1 and 8 of the consolidated financial statements, the Company employs actuarial
techniques to estimate the liability for property and casualty unpaid claims and claims expenses (reserves). The
Company develops reserves based on the application of appropriate methods and assumptions to historical
claim experience. The reserves are continually updated by the Company as experience develops and new
information becomes known. The Company recorded an estimated liability of $266.5 million for property and
casualty unpaid claims and claim expenses as of December 31, 2019.
We identified the assessment of the estimate of reserves as a critical audit matter because it involved
measurement uncertainty requiring complex auditor judgment. Complex auditor judgment and specialized skills
and knowledge were required in evaluating the Company’s methods and key assumptions, including the
selection of loss development factors and changes in claim frequency and severity trends. The assumptions
included a range of potential inputs and changes to these assumptions could affect the reserves recorded by the
Company.
The primary procedures we performed to address this critical audit matter included the following. We tested
certain internal controls over the Company’s process for the development of the estimate of reserves, including
controls over methods and assumptions used for the Company’s best estimate. We also involved an actuarial
professional with specialized skills and knowledge, who assisted in:
• Evaluating the Company’s reserving methods, procedures, key assumptions and judgments by
comparing to generally accepted actuarial standards;
• Developing an independent estimate of the reserves for certain lines of business;
• Examining the Company’s internal actuarial analyses for certain remaining lines of business;
• Developing an independent range of reserves based on actuarial methodologies in order to evaluate the
Company’s recorded reserves; and
• Assessing any movement of the Company’s recorded reserves within the range of reserves.
68 Annual Report on Form 10-K
Horace Mann Educators Corporation
Assessment of the fair value of insurance contracts acquired in the National Teachers Association business
combination
As discussed in Notes 1, 2, and 7 to the consolidated financial statements, on July 1, 2019, the Company
acquired NTA Life Enterprises, LLC (NTA) in a business combination. As a result of the transaction, the Company
acquired the assets and assumed the liabilities of NTA. The Company uses judgment to determine the
appropriate assumptions used to estimate the fair value of the insurance contracts, consisting of the value of
business acquired (VOBA) and insurance policy reserves, and the future business to be written by the existing
distribution channel (VODA). The acquisition-date balance was $94.4 million, $366.8 million and $49.0 million for
VOBA, insurance policy reserves, and VODA, respectively.
We identified the assessment of the fair value of the insurance contracts acquired, consisting of VOBA and
insurance policy reserves, and VODA, as a critical audit matter. There was a high degree of subjective auditor
judgment in evaluating the valuation methods and certain assumptions used to estimate the fair value of the
insurance contracts, consisting of VOBA and insurance policy reserves, and VODA. Changes in certain
assumptions, specifically morbidity and discount rate, could affect the fair value of the balances recorded by the
Company. Specialized skills and knowledge were required to assess the valuation methods, models, and
assumptions used to estimate fair value.
The primary procedures we performed to address this critical audit matter included the following. We tested
certain internal controls over the Company’s acquisition-date valuation process to develop the key assumptions
as well as the valuation methods and models used to estimate the fair value of the insurance contracts,
consisting of VOBA and insurance policy reserves, and VODA.
We involved actuarial professionals with specialized skills and knowledge, who assisted in:
• Evaluating the valuation methods, models, and assumptions used to estimate the fair value of the
insurance contracts, consisting of VOBA and insurance policy reserves, and VODA, in light of the
generally accepted actuarial standards;
• Performing independent estimates of insurance policy reserves using the Company’s policy data and
assumptions for a selection of policies; and
• Assessing the morbidity and discount rate assumptions in light of NTA’s historical experience as well as
industry trends.
We involved valuation professionals with specialized skills and knowledge, who assisted in:
• Comparing the Company’s discount rate, to a discount rate that was independently developed using
publicly available market data for comparable entities; and
• Comparing the estimated fair value of VODA to an independent estimate derived using a multi-period
excess earnings method under the income approach based on NTA’s forecasted business production.
KPMG LLP
We have served as the Company’s auditor since 1989.
Chicago, Illinois
February 28, 2020
Horace Mann Educators Corporation
Annual Report on Form 10-K 69
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED BALANCE SHEETS
As of December 31, 2019 and 2018
($ in thousands, except share data)
December 31,
2019
2018
Investments
ASSETS
Fixed maturity securities, available for sale, at fair value
(amortized cost 2019, $5,456,980; 2018, $7,373,911)
$
5,791,676 $
Equity securities at fair value
Limited partnership interests
Short-term and other investments
Total investments
Cash
Deferred policy acquisition costs
Deposit asset on reinsurance
Intangible assets, net
Goodwill
Other assets
Separate Account (variable annuity) assets
Total assets
101,864
383,717
361,976
6,639,233
25,508
276,668
2,346,166
177,217
49,079
474,364
2,490,469
$
12,478,704 $
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities
Investment contract and policy reserves
Unpaid claims and claim expenses
Unearned premiums
Total policy liabilities
Other policyholder funds
Other liabilities
Short-term debt
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, 2019, 66,088,808; 2018, 65,820,369
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss), net of tax:
Net unrealized investment gains on fixed maturity securities
Net funded status of benefit plans
Treasury stock, at cost, 2019, 24,850,484 shares;
2018, 24,850,484 shares
Total shareholders' equity
$
6,234,452 $
442,854
279,163
6,956,469
647,283
384,173
135,000
298,025
2,490,469
10,911,419
—
66
480,962
1,352,539
230,448
(10,767)
(485,963)
1,567,285
Total liabilities and shareholders' equity
$
12,478,704 $
7,515,318
111,750
328,516
295,093
8,250,677
11,906
298,742
—
—
47,396
422,047
2,001,128
11,031,896
5,711,193
396,714
276,225
6,384,132
767,988
290,358
—
297,740
2,001,128
9,741,346
—
66
475,109
1,216,582
96,941
(12,185)
(485,963)
1,290,550
11,031,896
See accompanying Notes to Consolidated Financial Statements.
70 Annual Report on Form 10-K
Horace Mann Educators Corporation
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
($ in thousands, except per share data)
Revenues
Insurance premiums and contract charges earned
Net investment income
Net investment gains (losses)
Other income
Year Ended December 31,
2019
2018
2017
$
897,954 $
365,064
153,340
14,127
817,333 $
376,507
(12,543)
10,302
794,703
373,630
(3,406)
6,623
Total revenues
1,430,485
1,191,599
1,171,550
Benefits, losses and expenses
Benefits, claims and settlement expenses
Interest credited
Operating expenses
DAC unlocking and amortization expense
Intangible asset amortization expense
Interest expense
Other expense - goodwill impairment
585,068
212,786
234,609
109,181
8,790
15,577
28,025
637,560
206,199
205,413
109,889
—
13,001
—
582,306
198,635
187,789
102,185
—
11,948
—
Total benefits, losses and expenses
1,194,036
1,172,062
1,082,863
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 investment gains (losses)
236,449
52,006
19,537
1,194
88,687
(80,772)
184,443 $
18,343 $
169,459
4.42 $
4.40 $
0.44 $
0.44 $
4.10
4.08
$
$
$
41,737,876
41,948,531
41,570,492
41,894,232
41,364,546
41,564,979
Total other-than-temporary impairment losses on securities
$
(1,380) $
(1,530) $
(12,620)
Portion of losses recognized in other
comprehensive income (loss)
Net other-than-temporary impairment losses
on securities recognized in earnings
Sales and other, net
Change in fair value - equity securities
Change in fair value and gains realized
on settlements - derivatives
Total
—
—
—
(1,380)
151,495
7,308
(1,530)
3,491
(18,323)
(4,083)
3,819
$
153,340 $
(12,543) $
(12,620)
7,756
—
1,458
(3,406)
See accompanying Notes to Consolidated Financial Statements.
Horace Mann Educators Corporation
Annual Report on Form 10-K 71
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
($ in thousands)
Comprehensive income (loss)
Net income
Other comprehensive income (loss), net of tax:
Change in net unrealized investment gains
(losses) on securities
Change in net funded status of benefit plans
Cumulative effect of change in accounting principle
Other comprehensive income (loss)
Total
Year Ended December 31,
2019
2018
2017
$
184,443 $
18,343 $
169,459
133,507
(188,195)
1,418
—
134,925
319,368 $
1,032
(15,041)
(202,204)
(183,861) $
74,405
734
—
75,139
244,598
$
See accompanying Notes to Consolidated Financial Statements.
72 Annual Report on Form 10-K
Horace Mann Educators Corporation
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
($ in thousands, except per share data)
Common stock, $0.001 par value
Beginning balance
Options exercised
Conversion of common stock units
Conversion of restricted common stock units
Ending balance
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
Dividends, 2019, $1.15 per share; 2018, $1.14 per share;
2017, $1.10 per share
Reclassification of deferred taxes
Cumulative effect of change in accounting principle
Ending balance
Accumulated other comprehensive income (loss), net of tax:
Beginning balance
Change in net unrealized investment gains (losses) on securities
Change in net funded status of benefit plans
Reclassification of deferred taxes
Cumulative effect of change in accounting principle
Ending balance
Treasury stock, at cost
Beginning balance
Acquisition of shares
Ending balance
Shareholders' equity at end of period
Year Ended December 31,
2019
2018
2017
$
66 $
65 $
—
—
—
66
—
—
1
66
65
—
—
—
65
475,109
464,246
453,479
(555)
6,408
3,008
7,855
2,962
7,805
480,962
475,109
464,246
1,216,582
1,231,177
1,155,732
184,443
18,343
169,459
(48,486)
(47,979)
—
—
—
15,041
(46,114)
(47,900)
—
1,352,539
1,216,582
1,231,177
84,756
133,507
1,418
—
—
219,681
286,960
(188,195)
1,032
—
(15,041)
84,756
163,921
74,405
734
47,900
—
286,960
(485,963)
(480,875)
(479,215)
—
(5,088)
(1,660)
(485,963)
(485,963)
(480,875)
$
1,567,285 $
1,290,550 $
1,501,573
See accompanying Notes to Consolidated Financial Statements.
Horace Mann Educators Corporation
Annual Report on Form 10-K 73
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net cash provided
by operating activities:
Net investment (gains) losses
Amortization of premiums and accretion of discounts on
fixed maturity securities, net
Depreciation and intangible asset amortization
Share-based compensation expense
Other expense - goodwill impairment
Changes in:
Accrued investment income
Insurance liabilities
Premium receivables
Deferred policy acquisition costs
Reinsurance recoverables
Income tax liabilities
Other operating assets and liabilities
Other
Net cash provided by operating activities
Cash flows from investing activities
Fixed maturity securities
Purchases
Sales
Maturities, paydowns, calls and redemptions
Equity securities
Purchases
Sales and repayments
Limited partnership interests
Purchases
Sales
Change in short-term and other investments, net
Acquisition of businesses, net of cash acquired
Net cash provided by (used in) investing activities
Cash flows from financing activities
Dividends paid to shareholders
Principal borrowings on senior revolving 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
Deposits
Benefits, withdrawals and net transfers to Separate Account
Principal repayment on FHLB funding agreements
Transfer of Company 401(k) to a third-party provider
Life policy accounts
Deposits
Withdrawals and surrenders
Change in deposit asset on reinsurance, net
Change in book overdrafts
Net cash used in financing activities
Net increase (decrease) in cash
Cash and restricted cash at beginning of period
Cash and restricted cash at end of period
See accompanying Notes to Consolidated Financial Statements.
Year Ended December 31,
2018
2017
2019
$
184,443
$
18,343
$
169,459
(153,340)
12,543
3,406
3,806
15,629
7,338
28,025
46,858
(96,802)
(5,031)
(1,274)
22,006
28,726
53,406
(6,217)
127,573
(10,095)
(13,385)
7,357
8,346
—
4,449
203,370
(10,026)
(783)
(21,317)
(3,383)
(2,048)
(5,868)
200,888
6,615
8,592
—
(3,404)
119,311
(12,917)
(7,967)
11
(4,620)
(1,692)
(6,823)
256,586
(1,058,747)
805,887
799,526
(1,428,889)
625,527
737,535
(1,569,220)
500,760
927,665
(15,583)
33,502
(129,389)
91,587
(49,325)
(421,516)
55,942
(47,333)
135,000
—
—
1,730
(3,680)
637,538
(419,001)
(305,005)
—
9,391
(3,558)
(150,434)
(24,561)
(169,913)
13,602
11,906
(13,430)
25,498
(93,545)
16,997
(56,192)
—
(186,499)
(46,689)
—
—
(5,088)
3,627
(3,165)
489,097
(473,003)
—
—
8,149
(4,910)
—
21,872
(10,110)
4,279
7,627
$
25,508
$
11,906
$
(32,312)
53,100
(103,200)
20,234
(25,691)
—
(228,664)
(46,114)
—
50,000
(1,660)
4,190
(3,245)
453,146
(411,061)
—
(77,898)
4,883
(4,458)
—
(4,748)
(36,965)
(9,043)
16,670
7,627
74 Annual Report on Form 10-K
Horace Mann Educators Corporation
HORACE MANN EDUCATORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018 and 2017
NOTE 1 - Summary of Significant Accounting Policies
Basis of Presentation
The accompanying audited consolidated financial statements of Horace Mann Educators Corporation and its
wholly-owned subsidiaries (HMEC; and together with its subsidiaries, the Company or Horace Mann) have been
prepared in accordance with accounting principles generally accepted in the U.S. (GAAP) and with the rules and
regulations of the Securities and Exchange Commission (SEC). 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.
Effective for the year ended December 31, 2019, the Company decided to change the approach it uses for
presentation in its Consolidated Statements of Cash Flows from the direct method to the indirect method as
management considers presentation under the indirect method as more comparable to the method used by
others in the insurance industry. Accordingly, the Company has recast all prior periods presented in the
Consolidated Statements of Cash Flows to conform to the current year’s presentation.
The consolidated financial statements include the accounts of HMEC and its wholly-owned subsidiaries. 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 (with exception of National Teachers
Associates Life Insurance Company and NTA Life Insurance Company of New York) 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), supplemental insurance products (primarily heart,
cancer, accident and limited supplemental disability coverages), 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, Horace Mann Lloyds, National Teachers Associates Life Insurance Company and NTA Life Insurance
Company of New York.
As described more fully in Note 2, the Company acquired NTA Life Enterprises, LLC (NTA) on July 1, 2019. As a
result, the Company’s reporting segments have changed effective in the third quarter of 2019. A new reporting
segment titled "Supplemental" was added to report on the personal lines of supplemental insurance products
(primarily heart, cancer, accident and limited short-term supplemental disability coverages) that are marketed
and underwritten by NTA.
The Company has evaluated subsequent events through the date these consolidated financial statements were
issued. There were no subsequent events requiring adjustment to the consolidated financial statements or
disclosure.
Cash
Cash reported on the Consolidated Balance Sheet at December 31, 2019 includes restricted cash in the amount
of $0.3 million, representing funds held in segregated accounts for insurance premiums to be remitted to
insurance companies on behalf of the Company’s customers or for the purpose of reimbursement to cafeteria
plan participants.
Horace Mann Educators Corporation
Annual Report on Form 10-K 75
NOTE 1 - Summary of Significant Accounting Policies (continued)
Investments
The Company invests predominantly 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, of which a portion represent securities that are hard-to-value.
The fair value of a fixed maturity security is the estimated amount at which the security could be exchanged in an
orderly transaction between knowledgeable, unrelated and willing parties. The Company utilizes its investment
managers and its custodian bank to obtain fair value prices from independent third-party valuation service
providers, broker-dealer quotes, and model prices. 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. 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. Typical inputs used by these pricing sources include, but are not
limited to, reported trades, bids, offers, benchmark yield curves, benchmarking of like securities, rating
designations, sector groupings, issuer spreads, and/or estimated cash flows, prepayment and default speeds,
among others. 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 94.1% of the portfolio,
based on fair value, was priced through pricing services or index priced using observable inputs as of December
31, 2019.
The valuation of hard-to-value fixed maturity securities (generally 100 -150 securities) is more subjective because
the markets are less liquid and there is a lack of observable market-based inputs. This 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. When the pricing sources cannot provide fair value determinations, the investment managers and
custodian bank obtain non-binding price quotes from broker-dealers. For those securities where the investment
manager cannot obtain broker-dealer quotes, they will model the security, generally using anticipated cash flows
of the underlying collateral. Broker-dealers' valuation methodologies as well as investment managers’ modeling
methodologies are sometimes matrix-based, using indicative evaluation measures and adjustments for specific
security characteristics and market sentiment. The selection of the market inputs and assumptions used to
estimate the fair value of hard-to-value fixed maturity securities require judgment and include: benchmark yield,
liquidity premium, estimated cash flows, prepayment and default speeds, spreads, weighted average life, and
credit rating. The extent of the use of each market input depends on the market sector and 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.
An adjustment for net unrealized investment gains (losses) on all securities available for sale and carried at fair
value, is recognized as a separate component of accumulated other comprehensive income (AOCI) within
shareholders' equity, net of applicable deferred taxes and the related impact on DAC 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.
Beginning January 1, 2018, equity securities are carried at fair value with changes in fair value recognized as Net
investment gains (losses). This category includes nonredeemable preferred stocks and common stocks.
Limited partnership interests include investments in commercial mortgage loans, infrastructure, corporate credit,
private equity, real estate and other funds. All investments in limited partnership interests are accounted for in
accordance with the equity method of accounting.
Short-term and other investments are comprised of short-term fixed maturity securities, generally carried at cost
which approximates fair value; derivatives, carried at fair value; policy loans, carried at unpaid principal balances;
mortgage loans, carried at unpaid principal balances; and restricted Federal Home Loan Bank (FHLB)
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 interests
in variable interest entities (VIEs), including corporate securities, mortgage-backed securities and asset-backed
securities. Such interests in VIEs have been reviewed and the Company determined that those VIEs are not
subject to consolidation as the Company is not the primary beneficiary because it does not have the power to
direct the activities that most significantly impact those VIEs' economic performance.
76 Annual Report on Form 10-K
Horace Mann Educators Corporation
NOTE 1 - Summary of Significant Accounting Policies (continued)
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 fair value as described in the following section.
Other-than-temporary Impairment
The Company's methodology of assessing other-than-temporary impairments (OTTI) for fixed maturity securities
is based on security-specific facts and circumstances as of the reporting date. Based on these facts, if (1) the
Company has the intent to sell the security, (2) it is more likely than not the Company will be required to sell the
security before the anticipated recovery of the amortized cost basis, or (3) management does not expect to
recover the entire amortized cost basis of the security, 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 fair value.
The Company has a policy and process to evaluate fixed maturity securities (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 the
amortized cost basis (3) 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, (4) the market
leadership position of the issuer, (5) the debt ratings of the issuer, and (6) 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 and the
credit-related loss portion is recognized as a net investment loss during the period. 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 underlying collateral cash flows are
stress tested to determine if there has been any adverse change in the expected future cash flows.
A decline in fair value below the amortized cost basis 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 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 basis 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 to be collected. If a cash flow analysis estimate is not feasible, then the market's view of cash
Horace Mann Educators Corporation
Annual Report on Form 10-K 77
NOTE 1 - Summary of Significant Accounting Policies (continued)
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.
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 that is 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 Company's position in the overall structure, to estimate the future 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 revenue bonds, which present unique
considerations in evaluating OTTI, but also includes general obligation bonds. The Company evaluates 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 basis 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.
Credit Losses
The Company estimates the amount of the credit loss component of a fixed maturity security impairment as the
difference between amortized cost basis and the present value of the expected future 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.
78 Annual Report on Form 10-K
Horace Mann Educators Corporation
NOTE 1 - Summary of Significant Accounting Policies (continued)
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 reporting segment was as follows:
($ in thousands)
Property and Casualty
Supplemental
Retirement (annuity)
Life
Total
December 31,
2019
2018
$
$
28,616 $
1,967
185,294
60,791
276,668 $
30,033
N/A
209,231
59,478
298,742
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 property and casualty policies, DAC is amortized over the terms of the
insurance policies (6 or 12 months). For supplemental policies, DAC is amortized in proportion to anticipated
premiums over the terms of the insurance policies (approximately 6 years, based on an estimated average
duration across all supplemental products). 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)
products. 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).
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 investment gains (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 an 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 future financial market performance
assumes that long-term appreciation in the financial markets 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 long-term expectations change.
The most significant assumptions that are involved in the estimation of life insurance gross profits include
interest rates expected to be received on investments, business persistency, and mortality. Conversions from
term to permanent insurance cause an immediate write down of the associated DAC. The impact on amortization
due to assumption changes has an immaterial impact on the results of operations.
The most significant assumptions that are involved in the estimation of supplemental gross profits include
morbidity, persistency, expenses and interest rates expected to be received on investments. When a
supplemental policy lapses, there is an immediate write down of the associated DAC. The impact on
amortization due to assumption changes has an immaterial impact on the results of operations.
Annually, the Company performs a gross premium valuation on life insurance and supplemental policies to
assess whether a loss recognition event has occurred. This involves discounting expected future benefits and
expenses less expected future premiums. To the extent that this amount is greater than the liability for future
benefits less the DAC asset, in aggregate for the life insurance or the supplemental block, a loss would be
recognized by first writing off the DAC and then increasing the liability.
Horace Mann Educators Corporation
Annual Report on Form 10-K 79
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 recognize a material charge or credit to current period amortization expense for the
period in which the adjustment is made. The Company recognized 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 DAC amortization expense:
Retirement
Life
Total
Year Ended December 31,
2019
2018
2017
$
$
3,480 $
(267)
3,213 $
3,948 $
283
4,231 $
1,081
(200)
881
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 (losses) on securities had been realized at the
reporting date. This adjustment reduced DAC by $41.2 million and $17.9 million at December 31, 2019 and 2018,
respectively. The after tax impact of this adjustment is included in AOCI (net unrealized investment gains (losses)
on securities) within shareholders' equity.
DAC is reviewed for recoverability from future income, including net investment income, and costs that 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, 2019, 2018 and 2017.
Intangible Assets
The value of business acquired (VOBA) represents the difference between the fair value of insurance contracts
and insurance policy reserves measured in accordance with the Company's accounting policies for insurance
contracts acquired. VOBA was based on an actuarial estimate of the present value of future distributable
earnings for insurance in force on the acquisition date. VOBA was $90.7 million as of December 31, 2019 and is
being amortized by product based on the present value of future premiums to be received. The Company
estimates that it will recognize VOBA amortization of $7.1 million in 2020, $6.7 million in 2021, $6.2 million in
2022, $5.8 million in 2023 and $5.4 million in 2024.
The Company accounts for the value of distribution acquired (VODA) associated with the acquisition of NTA
based on an actuarial estimate of the present value of future business to be written by the existing distribution
channel. VODA was $47.5 million as of December 31, 2019 and is being amortized on a straight-line basis. The
Company estimates that it will recognize VODA amortization of $2.9 million in each of the years 2020 through
2024, respectively.
The Company accounts for VODA associated with the acquisition of Benefit Consultants Group, Inc. (BCG)
based on management's estimate of the present value of future business to be written by the existing
distribution channel. VODA was $4.6 million as of December 31, 2019 and is being amortized based on the
present value of future profits to be received. The Company estimates that it will recognize VODA amortization of
$0.4 million in each of the years 2020 through 2024, respectively.
The Company accounts for the value of agency relationships based on the present value of commission
overrides retained by NTA. Agency relationships was $15.5 million as of December 31, 2019 and is being
amortized based on the present value of future premiums to be received. The Company estimates that it will
recognize agency relationships amortization of $2.6 million in 2020, $2.2 million in 2021, $1.9 million in 2022,
$1.6 million in 2023 and $1.4 million in 2024.
The Company accounts for the value of customer relationships based on the present value of expected profits
from existing BCG customers in force at the date of acquisition. Customer relationships was $7.3 million as of
December 31, 2019 and is being amortized based on the present value of future profits to be received. The
Company estimates that it will recognize customer relationships amortization of $1.5 million in 2020, $1.2 million
in 2021, $1.0 million in 2022, $0.9 million in 2023 and $0.7 million in 2024.
Trade names represents the present value of future savings accruing to NTA and BCG by virtue of not having to
pay royalties for the use of the trade names, valued using the relief from royalty method. State licenses
80 Annual Report on Form 10-K
Horace Mann Educators Corporation
NOTE 1 - Summary of Significant Accounting Policies (continued)
represents the regulatory licenses held by NTA that were valued using the cost approach. Both trade names and
state licenses are indefinite-lived intangibles that are not subject to amortization.
VOBA is reviewed for recoverability from future income, including net 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 year ended December 31, 2019.
Amortizing intangible assets (i.e., VODA, agency relationships and customer relationships) are tested for
recoverability whenever events or changes in circumstances indicate that its carrying value may not be
recoverable. The carrying amount of an amortizing intangible asset is not recoverable if it exceeds the sum of
undiscounted cash flows expected to result from the use and eventual disposition of the asset. If the carrying
value is not recoverable from undiscounted cash flows, the impairment is measured as the difference between
the carrying value and fair value.
Intangible assets that are not subject to amortization (i.e., trade names and state licenses) are tested for
impairment annually or more frequently if events or changes in circumstances indicate that the asset might be
impaired. The impairment test consists of a comparison of the fair value of an intangible asset with its carrying
value. If the carrying value of an intangible asset that is not subject to amortization exceeds its fair value, an
impairment loss is to be recognized in an amount equal to that excess.
Goodwill
When the Company was acquired from CIGNA Corporation by HME Holdings, Inc. in 1989, intangible assets
were recognized as goodwill in the application of purchase accounting. In addition, goodwill was recognized in
1994 related to the acquisition of Horace Mann Property & Casualty Insurance Company and in 2019 related to
the acquisitions of BCG and NTA.
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. Refer to Note 7 for the allocation of goodwill by reporting
unit as of December 31, 2019.
The goodwill impairment test, as defined in GAAP, 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 value. If an entity determines it is more likely than
not that the fair value of a reporting unit is less than its carrying value, then the entity performs a quantitative
goodwill impairment test by comparing the fair value of a reporting unit to its carrying value for purposes of
confirming and measuring an impairment. In the second quarter of 2019, the Company adopted guidance to
eliminate Step 2 of the goodwill impairment test. Goodwill impairment is now the amount by which a reporting
unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. Any amount of
goodwill determined to be impaired will be recognized as an expense in the period in which the impairment
determination is made.
As of October 1, 2019, the Company performed a qualitative assessment to determine whether it was necessary
to perform a quantitative goodwill impairment test. Based on the assessment of qualitative factors, there were no
events or circumstances that lead to a determination that it is more likely than not that the fair value of a
reporting unit is less than its carrying value.
During each year from 2017 through 2019, the Company completed the required annual goodwill impairment
testing. With exception to the goodwill impairment charge described in Note 7, no other goodwill 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 the 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.
Horace Mann Educators Corporation
Annual Report on Form 10-K 81
NOTE 1 - Summary of Significant Accounting Policies (continued)
Property and Equipment
Property and equipment are carried at cost less accumulated depreciation, which is calculated using 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 3 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,
2019
2018
$
$
166,583 $
106,458
60,125 $
142,243
101,267
40,976
Separate Account (Variable Annuity) Assets and Liabilities
Separate Account assets represent variable annuity contractholder funds invested in various mutual funds. The
Separate Account assets comprise actively traded mutual funds that have daily quoted net asset values that are
readily determinable for identical assets that the Company can access. Net asset values for the actively traded
mutual funds in which the Separate Account assets are invested are obtained daily from the fund managers.
Separate Account liabilities are equal to the estimated fair value of Separate Account assets. The investment
income, gains and losses of these accounts accrue directly to the contractholders and are not included in the
operations of the Company. The activity of the Separate Accounts is not reflected in the Consolidated
Statements of Operations except for (1) contract charges earned, (2) the activity related to contract guarantees,
which are benefits on existing variable annuity contracts, and (3) the impact of financial market performance on
the amortization of DAC. 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 Policy Reserves
This table summarizes the Company's investment contract and policy reserves.
($ in thousands)
Investment contract reserves
Policy reserves
Total
December 31,
2019
2018
$
$
4,675,774 $
1,558,678
6,234,452 $
4,555,856
1,155,337
5,711,193
Liabilities for future benefits on supplemental, 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 supplemental and life insurance policies are computed using the
net level premium method including assumptions as to investment yields, mortality, morbidity, 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 recognition of a loss for that period.
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.
82 Annual Report on Form 10-K
Horace Mann Educators Corporation
NOTE 1 - Summary of Significant Accounting Policies (continued)
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)
GMDB reserve
Aggregate in-the-money death benefits under the GMDB provision
Variable annuity contract value distribution based on GMDB feature:
$
No guarantee
Return of premium guarantee
Guarantee of premium roll-up at an annual rate of 3% or 5%
Total
December 31,
2019
2018
126
29,367
$
258
48,083
28%
67%
5%
100%
30%
65%
5%
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
GAAP.
The Company elected to not use hedge accounting for derivative transactions related to the FIA products. As a
result, the Company accounts for the purchased call options and the embedded derivative related to the
provision of a contingent return at fair value, with changes in fair value recognized as Net investment gains
(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 GAAP 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.
The Company offers indexed universal life (IUL) products as part of its product portfolio with interest crediting
strategies linked to the S&P 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 investment gains (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.
See Note 4 for more information regarding the determination of fair value for the FIA and IUL embedded
derivatives and purchased call options.
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 (IBNR) 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
Horace Mann Educators Corporation
Annual Report on Form 10-K 83
NOTE 1 - Summary of Significant Accounting Policies (continued)
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 payout annuity contracts without life contingencies and dividend
accumulations, as well as balances outstanding under funding agreements with 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 as financing activities in the Company's Consolidated Statements of Cash Flows
combined with annuity contract deposits and disbursements, respectively.
FHLB Funding Agreements
In 2013, Horace Mann Life Insurance Company (HMLIC), and in 2019, NTA became members of FHLB, which
provides both subsidiaries with access to collateralized borrowings and other FHLB products. Any borrowing
from FHLB requires the purchase of FHLB activity-based common stock in an amount equal to 4.5% of the
borrowing, or a lower percentage — such as 2.0% based on the Reduced Capitalization Advance Program. In
2019, HMEC's Board of Directors (Board) authorized a maximum amount equal to 15% of net aggregate
admitted assets less separate account assets of the insurance subsidiaries for FHLB advances and funding
agreements combined. In 2019, HMLIC received an additional $175.0 million from FHLB under funding
agreements as well as repaid FHLB $305.0 million of principal. Outstanding advances under funding agreements
are reported as Other policyholder funds in the Consolidated Balance Sheets and totaled $495.0 million as of
December 31, 2019 of which $125.0 million matures on September 11, 2020, $20.0 million matures on
November 15, 2023, $100.0 million matures on December 15, 2023, $50.0 million matures on January 12, 2024
and the remaining $200.0 million matures on January 16, 2026. Interest on the funding agreements accrues at an
annual weighted average rate of 1.87% as of December 31, 2019.
Reinsurance
The Company enters into reinsurance arrangements pursuant to which it cedes certain insurance risks to
unaffiliated reinsurers. Cessions under reinsurance agreements do not discharge the Company's obligations as
the primary insurer. The accounting for reinsurance arrangements depends on whether the arrangement provides
indemnification against loss or liability relating to insurance risk in accordance with GAAP.
If the Company determines that a reinsurance agreement exposes the reinsurer to a reasonable possibility of a
significant loss from insurance risk, the ceded unearned premiums and reinsurance balances recoverable on
paid and unpaid losses and settlement expenses are reported separately as assets, instead of being netted with
the related liabilities, since reinsurance does not relieve the Company of its legal liability to its policyholders. See
Note 9 for further details.
If the Company determines that a reinsurance agreement does not expose the reinsurer to a reasonable
possibility of a significant loss from insurance risk, the Company recognizes the reinsurance agreement using the
deposit method of accounting. The assets transferred to the reinsurer as consideration paid is reported as a
Deposit asset on reinsurance on the Company's Consolidated Balance Sheet. As amounts are received or paid
or received, consistent with the underlying reinsured contracts, the Deposit asset on reinsurance is adjusted. The
Deposit asset on reinsurance is accreted to the estimated ultimate cash flows using the interest method and the
adjustment is reported as Net investment income. See Note 6 for further details.
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 and supplemental policies are recognized as revenues when due over the premium-paying
84 Annual Report on Form 10-K
Horace Mann Educators Corporation
NOTE 1 - Summary of Significant Accounting Policies (continued)
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 13.
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, 2019, 2018 and 2017, the Company recognized
$1.2 million, $1.2 million, and $1.3 million, respectively, of stock option expense as a result of the vesting of
stock options during the respective periods. For the years ended December 31, 2019, 2018 and 2017, the
Company recognized $5.2 million, $6.6 million and $6.5 million, respectively, in RSU expense as a result of the
performance and/or vesting of RSUs during the respective periods.
In 2019, 2018 and 2017, 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,
2019
282,040
6.26
$
2018
223,208
7.16
$
2017
222,828
6.57
$
2.5%
2.9%
5.0
21.9%
2.6%
2.6%
4.8
21.5%
2.0%
2.5%
4.9
21.4%
The weighted average fair value of nonvested stock options outstanding on December 31, 2019 was $6.42. Total
unrecognized compensation expense relating to the nonvested stock options outstanding as of December 31,
2019 was approximately $2.4 million. This amount will be recognized as expense over the remainder of the
vesting period, which is scheduled to be 2020 through 2023. 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, 2019 was
approximately $6.6 million. This amount will be recognized as expense over the remainder of the performance
and/or vesting period, which is scheduled to be 2020 through 2022. 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, 2019, 2018 and 2017 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 (losses) on securities as
well as the net funded status of benefit plans with the changes for each period included in the respective
components of AOCI within shareholders' equity.
Horace Mann Educators Corporation
Annual Report on Form 10-K 85
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 13.
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,
2019
2018
2017
184,443 $
18,343 $
169,459
41,738
41,570
4.42 $
0.44 $
41,365
4.10
184,443 $
18,343 $
169,459
41,738
41,570
41,365
$
$
$
79
—
132
100
25
199
41,949
41,894
$
4.40 $
0.44 $
112
25
63
41,565
4.08
Options to purchase 622,500 shares of common stock at $38.05 to $44.75 per share were granted in 2017, 2018
and 2019 but were not included in the computation of 2019 diluted earnings per share because of their anti-
dilutive effect. These options, which expire in 2027, 2028 and 2029, were still outstanding at December 31, 2019.
86 Annual Report on Form 10-K
Horace Mann Educators Corporation
NOTE 1 - Summary of Significant Accounting Policies (continued)
Comprehensive Income (Loss) and Accumulated Other Comprehensive Income (Loss)
Comprehensive income (loss) represents the change in shareholders' equity during a reporting period from
transactions and other events and circumstances from non-shareholder sources. For the Company,
comprehensive income (loss) is equal to net income plus or minus the after tax change in net unrealized
investment gains (losses) on securities and the after tax change in net funded status of benefit plans for the
periods as shown in the Consolidated Statements of Changes in Shareholders' Equity. AOCI represents the
accumulated change in shareholders' equity from these transactions and other events and circumstances from
non-shareholder sources as shown in the Consolidated Balance Sheets.
In the Consolidated Balance Sheets, the Company recognizes the net funded status of benefit plans as a
component of AOCI, net of tax.
Comprehensive Income (Loss)
The components of comprehensive income (loss) were as follows:
($ in thousands)
Net income
Other comprehensive income (loss):
Change in net unrealized investment gains (losses) on securities:
Net unrealized investment gains (losses) on securities arising
during the period
Less: reclassification adjustment for net investment 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 plans:
Before tax
Income tax expense
Total, net of tax
Total comprehensive income (loss)
$
Year Ended December 31,
2019
2018
2017
$
184,443 $
18,343 $
169,459
327,363
(275,094)
105,475
157,423
169,940
36,433
133,507
(16,363)
(258,731)
(55,495)
(203,236)
1,805
387
1,418
319,368 $
1,294
262
1,032
(183,861) $
(4,863)
110,338
35,933
74,405
1,461
727
734
244,598
Horace Mann Educators Corporation
Annual Report on Form 10-K 87
NOTE 1 - Summary of Significant Accounting Policies (continued)
Accumulated Other Comprehensive Income (Loss)
The following table reconciles the components of AOCI for the periods indicated.
($ in thousands)
Beginning balance, January 1, 2019
Other comprehensive income (loss) before reclassifications
Amounts reclassified from AOCI
Net current period other comprehensive income (loss)
Ending balance, December 31, 2019
Beginning balance, January 1, 2018
Other comprehensive income (loss) before reclassifications
Amounts reclassified from AOCI
Cumulative effect of change in accounting principle (4)
Net current period other comprehensive income (loss)
Ending balance, December 31, 2018
Beginning balance, January 1, 2017
Other comprehensive income (loss) before reclassifications
Amounts reclassified from AOCI
Reclassification of deferred taxes (3)
Net current period other comprehensive income (loss)
Net Unrealized
Investment
Gains (Losses)
on
Securities (1)(2)
Net Funded
Status of
Benefit Plans (1)
Total (1)(3)
$
$
$
$
$
$
96,941 $
257,871
(124,364)
133,507
(12,185) $
1,418
—
1,418
230,448 $
(10,767) $
300,177 $
(201,122)
12,927
(15,041)
(203,236)
(13,217) $
1,032
—
—
1,032
96,941 $
(12,185) $
175,738 $
71,244
3,161
50,034
124,439
(11,817) $
734
—
(2,134)
(1,400)
300,177 $
(13,217) $
84,756
259,289
(124,364)
134,925
219,681
286,960
(200,090)
12,927
(15,041)
(202,204)
84,756
163,921
71,978
3,161
47,900
123,039
286,960
Ending balance, December 31, 2017
(1)
(2)
All amounts are net of tax.
The pretax amounts reclassified from AOCI, $157.4 million, $(16.4) million and $(4.9) million, are included in net investment gains (losses) and
the related tax expenses, $33.1 million, $(3.4) million and $(1.7) million, are included in income tax expense in the Consolidated Statements of
Operations for the years ended December 31, 2019, 2018 and 2017, respectively.
For the period ended December 31, 2017, deferred taxes attributable to net unrealized investment gains (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 of 2017 (TCJA). 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 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 Financial Accounting Standards Board (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 TCJA. 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 $47.9 million; representing the stranded deferred tax
liabilities of $50.0 million and $(2.1) million for net unrealized investment gains (losses) on fixed maturity and equity securities and Defined
benefit plans, respectively.
The Company adopted guidance on January 1, 2018 that resulted in reclassifying $15.0 million of after tax net unrealized gains on equity
securities from AOCI to Retained earnings.
(3)
(4)
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 3.
Statements of Cash Flows
For purposes of the Consolidated Statements of Cash Flows, cash constitutes cash on deposit at banks as well
as restricted cash. See Note 17 for further information.
88 Annual Report on Form 10-K
Horace Mann Educators Corporation
NOTE 1 - Summary of Significant Accounting Policies (continued)
Adopted Accounting Standards
Accounting for Leases
Effective for the quarter ended March 31, 2019, the Company adopted guidance for leases and elected to utilize
a cumulative-effect adjustment to the opening balance of retained earnings. Accordingly, the Company’s
reporting for the comparative periods prior to adoption continues to be presented in the financial statements in
accordance with previous lease accounting guidance. The Company elected to apply all practical expedients in
the guidance for transition for leases in effect at adoption, including using hindsight to determine the lease term
of existing leases, the option to not reassess whether an existing contract is a lease or contains a lease and
whether the lease is an operating or finance lease. The adoption of the guidance resulted in the Company
recognizing a $14.5 million lease liability equal to the present value of lease payments and a $13.9 million right-
of-use (ROU) asset, which is the corresponding lease liability adjusted for qualifying accrued lease payments.
The lease liability and ROU asset are reported in Other liabilities and Other assets on the Consolidated Balance
Sheets. The impact of these changes at adoption had no impact on net income or shareholders' equity.
Simplifying the Test for Goodwill Impairment
Effective for the quarter ended June 30, 2019, the Company adopted guidance to simplify the accounting for
goodwill impairment. Adoption of this guidance removed Step 2 of the goodwill impairment test, which required
a hypothetical purchase price allocation. Goodwill impairment is now the amount by which a reporting unit's
carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.
Pending Accounting Standards
Measurement of Credit Losses on Financial Instruments
In June 2016 , the FASB issued guidance which revises the credit loss recognition criteria for certain financial
assets measured at amortized cost, including reinsurance recoverables. The new guidance replaces the existing
incurred loss recognition model with an expected loss recognition model. The objective of the expected credit
loss model is for a reporting entity to recognize its estimate of expected credit losses for affected financial assets
in a valuation allowance that when deducted from the amortized cost basis of the related financial assets results
in a net carrying value at the amount expected to be collected. A reporting entity must consider all relevant
information available when estimating expected credit losses, including details about past events, current
conditions, and reasonable and supportable forecasts over the life of an asset. Financial assets may be
evaluated individually or on a pooled basis when they share similar risk characteristics. The measurement of
credit losses for available-for-sale debt securities measured at fair value is not affected except that credit losses
recognized are limited to the amount by which fair value is below amortized cost and the carrying value
adjustment is recognized through a valuation allowance which may change over time but once recorded cannot
subsequently be reduced to an amount below zero. The guidance is effective for reporting periods beginning
after December 15, 2019, and for most affected instruments must be adopted using a modified retrospective
approach, with a cumulative effect adjustment recorded to beginning retained earnings.
The Company’s implementation activities are substantially complete and the impacts relate primarily to the
Company’s commercial mortgage portfolio, property and casualty reinsurance recoverables and off-balance-
sheet credit exposures for unfunded commercial mortgage loan commitments. The Company adopted the new
guidance on January 1, 2020 and recognized a cumulative effect adjustment that decreased retained earnings
by an insignificant amount.
Accounting for Long-Duration Insurance Contracts
In August 2018, the FASB issued accounting and disclosure guidance that contains targeted improvements to
the accounting for long-duration insurance contracts. Under the new guidance, the cash flow assumptions used
to measure the liability for future policy benefits for traditional insurance contracts will be required to be updated
at least annually with changes recognized as a benefit expense (i.e., assumptions will no longer be locked-in).
Insurance entities will be required to use a standard discount rate to measure the liabilities that will be equivalent
to the yield from a high-quality bond. The new guidance also changes the amortization of DAC to be on a
constant-level basis over the expected term of the related contracts with no interest accruing on the DAC
balance. The new guidance also introduces a new category of contract features associated with deposit type
contracts referred to as market risk benefits (MRBs). Contract features meeting the definition of a MRB will be
measured at fair value. New disclosures will be required for long-duration insurance contracts in order to provide
better transparency into the exposure of insurance entities and the drivers of their results. For public business
Horace Mann Educators Corporation
Annual Report on Form 10-K 89
NOTE 1 - Summary of Significant Accounting Policies (continued)
entities, the guidance is effective for annual reporting periods beginning after December 15, 2021, including
interim periods within those years. With regards to the liability for future policy benefits and DAC, the guidance
applies to contracts in force as of the beginning of the earliest period presented and may be applied
retrospectively. With regards to MRBs, the guidance is to be applied retrospectively at the beginning of the
earliest period presented. Early adoption is permitted. Management is evaluating the impact this guidance will
have on the results of operations and financial position of the Company.
NOTE 2 - Acquisitions
On January 2, 2019, the Company acquired all of the equity interests in BCG for a total purchase consideration
of $25.0 million. BCG provides advisory and benefit plan record keeping services. BCG's results are reported in
Retirement. The acquisition of BCG resulted in the recognition of intangible assets of $16.2 million and goodwill
of $10.1 million as a result of the purchase accounting. The intangible assets that are amortizable have lives of
10 to 16 years. See Note 7 for further information. The amount of goodwill that is expected to be deductible for
federal income tax purposes is $10.1 million.
On July 1, 2019, the Company acquired all the equity interests in NTA pursuant to a Purchase Agreement
(Agreement) dated as of December 10, 2018. The purchase price of the transaction was $425.9 million which
includes $20.9 million representing NTA's share of "adjusted earnings" (as determined in accordance with the
terms of the Agreement) from July 1, 2018 to July 1, 2019. As a result of the acquisition, NTA became a wholly
owned subsidiary of the Company. NTA provides supplemental insurance products (primarily heart, cancer,
accident and limited short-term supplemental disability coverages) primarily within the public sector for which
approximately 80% are individuals employed by educational institutions, with the remainder employed in state
and local governments and emergency services facilities. NTA's results are being reported in a newly created
reporting segment titled "Supplemental".
During the fourth quarter of 2019, the Company finalized its estimates of the fair value of NTA assets acquired
and liabilities assumed, including, but not limited to, intangible assets, policy reserves, certain tax-related
balances and certain investments. In accordance with Accounting Standards Codification (ASC) 805, Business
Combinations, changes to the preliminary estimates and allocation as a result of events or conditions as of the
acquisition date have been reported in the Company's consolidated financial statements as adjustments to the
assets acquired and liabilities assumed. Such adjustments were insignificant. The Company has allocated all of
the goodwill associated with the NTA acquisition to the Supplemental segment. The factors that contributed to
recognition of goodwill include synergies from economies of scale within underwriting operations, acquiring a
talented workforce and cost savings opportunities.
Based on the Company's final allocation of the purchase price, the fair value of the assets acquired and liabilities
assumed were as follows:
($ in millions)
Assets:
Investments
Cash and short-term investments
Intangible assets(1)
Other assets
Liabilities:
Policy reserves
Policy claims
Unearned premiums
Other liabilities
Total identifiable net assets acquired
Goodwill(2)
Purchase price
(1)
$
$
542.6
73.8
169.8
18.3
366.8
21.8
4.1
5.5
406.3
19.6
425.9
Intangible assets consist of the value of business acquired, value of distribution acquired, agency relationships, trade names and state
licenses. The intangible assets that are amortizable have a total weighted average useful life of 23 years. See Note 7 for further information.
The amount of goodwill that is expected to be deductible for federal income tax purposes is $17.9 million.
(2)
90 Annual Report on Form 10-K
Horace Mann Educators Corporation
NOTE 2 - Acquisitions (continued)
The following unaudited pro forma information presents the Company's results of operations as if the acquisition
of NTA occurred on January 1, 2018. The adjustments to arrive at the unaudited pro forma information below
includes, among other things, adjustments for lost investment income on the cash used to fund the acquisition,
amortization of an estimated fair value adjustment on NTA's policy reserves, amortization of acquired intangible
assets, interest expense on debt incurred to finance the acquisition and exclusion of certain transaction costs
attributable to the acquisition as such costs are considered non-recurring.
($ in thousands, except per share data)
Total revenues
Total expenses
Income before income taxes
Net income
Net income per share: (1)
Basic
Diluted
Unaudited
Year Ended December 31,
2019
2018
1,507,352 $
1,259,213
248,139
193,755 $
1,339,896
1,288,690
51,206
43,373
4.64 $
4.62 $
1.04
1.04
$
$
$
$
(1)
The unaudited pro forma basic and diluted net income per share calculations are based on the Company's historical basic and diluted
weighted average number of shares outstanding for the years ended December 31, 2019 and 2018, respectively.
The unaudited pro forma financial information is not necessarily indicative of the consolidated results of
operations that might have been achieved had the transaction in fact occurred at the beginning of the periods
presented, nor does the information project results for any future period. The unaudited pro forma information
does not include the impact of any future cost savings or synergies that may be achieved as a result of the
acquisition.
NOTE 3 - Investments
Net Investment Income
The components of net investment income for the following periods were:
($ in thousands)
Fixed maturity securities
Equity securities
Limited partnership interests
Short-term and other investments
Total investment income
Investment expenses
Net investment income
Year Ended December 31,
2019
2018
2017
$
$
283,228 $
4,923
25,694
60,703
374,548
(9,484)
365,064 $
353,303 $
6,017
15,406
11,981
386,707
(10,200)
376,507 $
354,290
6,411
12,555
10,214
383,470
(9,840)
373,630
Horace Mann Educators Corporation
Annual Report on Form 10-K 91
NOTE 3 - Investments (continued)
Net Investment Gains (Losses)
Net investment gains (losses) for the following periods were:
($ in thousands)
Fixed maturity securities (1)
Equity securities
Short-term investments and other
Net investment gains (losses)
Year Ended December 31,
2019
2018
2017
$
$
141,448 $
15,975
(4,083)
153,340 $
(5,713) $
(10,649)
3,819
(12,543) $
(8,867)
4,003
1,458
(3,406)
(1)
Net investment gains realized on fixed maturity securities include a $135.3 million realized investment gain associated with a transfer of
investments to a reinsurer as consideration paid during the second quarter of 2019 in connection with the reinsurance of a $2.9 billion block
of in force fixed and variable annuity business. See Notes 6 and 17 for further information.
The Company, from time to time, sells invested assets subsequent to the reporting date that were considered
temporarily impaired at the reporting date. Such sales are due to issuer specific events occurring subsequent to
the reporting date that result in a change in the Company's intent or ability to hold an invested asset. The types
of events that may result in a sale include significant changes in the economic facts and circumstances related
to the invested asset, significant unforeseen changes in liquidity needs, or changes in the Company's investment
strategy.
Net Investment Gains (Losses) by Transaction Type
The following table reconciles net investment gains (losses) by transaction type:
($ in thousands)
Impairment write-downs
Change in intent write-downs
Net OTTI losses recognized in earnings
Sales and other, net
Change in fair value - equity securities (1)
Change in fair value and gains (losses) realized
on settlements - derivatives
Net investment gains (losses)
Year Ended December 31,
2018
2017
2019
$
(1,105) $
(275)
(1,380)
151,495
— $
(1,530)
(1,530)
3,491
7,308
(18,323)
(4,083)
3,819
$
153,340 $
(12,543) $
(1,778)
(10,842)
(12,620)
7,756
—
1,458
(3,406)
(1)
Effective January 1, 2018, with the adoption of new accounting guidance for recognition and measurement of financial instruments, equity
securities are reported at fair value with changes in fair value recognized in Net investment gains (losses) and are no longer included in
impairment write-downs or change in intent write-downs.
92 Annual Report on Form 10-K
Horace Mann Educators Corporation
NOTE 3 - Investments (continued)
Fixed Maturity Securities
The Company's investment portfolio is comprised primarily of fixed maturity securities. Amortized cost, net
unrealized investment gains (losses) and fair values of all fixed maturity securities in the portfolio were as follows:
($ in thousands)
December 31, 2019
Fixed maturity securities
U.S. Government and federally
sponsored agency obligations: (1)
Mortgage-backed securities
Other, including U.S. Treasury securities
Municipal bonds
Foreign government bonds
Corporate bonds
Other mortgage-backed securities
Totals
December 31, 2018
Fixed maturity securities
U.S. Government and federally
sponsored agency obligations: (1)
Mortgage-backed securities
Other, including U.S. Treasury securities
Municipal bonds
Foreign government bonds
Corporate bonds
Other mortgage-backed securities
Totals
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair
Value
$
$
$
$
684,543
436,665
1,545,787
42,801
1,464,444
1,282,740
5,456,980
778,038
835,096
1,884,313
83,343
2,054,105
1,739,016
7,373,911
$
$
$
$
41,263
22,824
141,996
2,569
118,775
20,883
348,310
22,724
16,127
133,150
2,321
64,296
10,467
249,085
$
$
$
$
1,487
621
1,580
—
1,795
8,131
13,614
13,321
17,681
13,494
760
38,891
23,531
107,678
$
$
$
$
724,319
458,868
1,686,203
45,370
1,581,424
1,295,492
5,791,676
787,441
833,542
2,003,969
84,904
2,079,510
1,725,952
7,515,318
(1)
Fair value includes securities issued by Federal National Mortgage Association (FNMA) of $405.1 million and $441.3 million; Federal Home
Loan Mortgage Corporation (FHLMC) of $283.1 million and $417.3 million; and Government National Mortgage Association (GNMA) of
$147.4 million and $96.5 million as of December 31, 2019 and 2018, respectively.
Horace Mann Educators Corporation
Annual Report on Form 10-K 93
NOTE 3 - Investments (continued)
The following table presents the fair value and gross unrealized losses securities in an unrealized loss position at
December 31, 2019 and 2018, respectively. The Company views the decrease in fair value of all of the securities
with unrealized losses at December 31, 2019 — which was driven largely by increasing interest rates, spread
widening, financial market illiquidity and/or market volatility from the date of acquisition — as temporary. As of
December 31, 2019, the Company has not made the decision to sell and it is not more likely than not the
Company will be required to sell fixed maturity securities with unrealized losses before recovery of the amortized
cost basis. Therefore, it was determined that the unrealized losses on the securities presented in the table below
were not other-than-temporarily impaired as of December 31, 2019.
($ in thousands)
12 months or less
More than 12 months
Total
Fair Value
Gross
Unrealized
Losses
Fair Value
Gross
Unrealized
Losses
Fair Value
Gross
Unrealized
Losses
December 31, 2019
Fixed maturity securities
U.S. Government and federally
sponsored agency obligations:
Mortgage-backed securities
$
72,422
$
1,282
$
Other
Municipal bonds
Foreign government bonds
Corporate bonds
Other mortgage-backed securities
38,341
91,195
—
58,198
218,710
2,620
1,527
9,160
—
16,622
$
205
$
75,042
$
2
603
—
909
39,868
100,355
—
74,820
619
977
—
886
1,970
442,791
6,161
661,501
1,487
621
1,580
—
1,795
8,131
Total
$ 478,866
$
5,734
$ 472,720
$
7,880
$ 951,586
$
13,614
Number of positions with a
gross unrealized loss
Fair value as a percentage of total fixed
maturities securities fair value
330
8.3%
137
8.2%
467
16.5%
December 31, 2018
Fixed maturity securities
U.S. Government and federally
sponsored agency obligations:
Mortgage-backed securities
$ 193,447
$
5,026
$ 157,295
$
8,295
$ 350,742
$
Other
Municipal bonds
Foreign government bonds
Corporate bonds
Other mortgage-backed securities
263,497
291,869
16,250
818,519
913,858
6,746
7,603
760
27,429
16,076
246,213
95,297
—
99,171
291,442
10,935
5,891
—
509,710
387,166
16,250
11,462
917,690
7,455
1,205,300
13,321
17,681
13,494
760
38,891
23,531
Total
$ 2,497,440
$
63,640
$ 889,418
$
44,038
$ 3,386,858
$
107,678
Number of positions with a
gross unrealized loss
Fair value as a percentage of total fixed
maturities and equity securities fair value
1,052
32.7%
359
11.7%
1,411
44.4%
Fixed maturity securities with an investment grade rating represented 93.9% of the gross unrealized losses as of
December 31, 2019. 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.
94 Annual Report on Form 10-K
Horace Mann Educators Corporation
NOTE 3 - Investments (continued)
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, 2019 and 2018 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 basis, for which the non-credit portions of OTTI
losses were recognized in OCI:
($ 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,
2019
2018
1,529 $
—
—
—
1,529 $
3,825
—
246
(2,542)
1,529
(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 of Fixed Maturity 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, 2019
Amortized
Cost
Fair
Value
Percent of
Total Fair
Value
$
205,798 $
1,541,749
1,613,539
1,393,503
702,391
5,456,980 $
$
211,420
1,587,300
1,712,236
1,512,769
767,951
5,791,676
3.6%
27.4%
29.6%
26.1%
13.3%
100.0%
Average option-adjusted duration, in years
6.0
Horace Mann Educators Corporation
Annual Report on Form 10-K 95
NOTE 3 - 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
Year Ended December 31,
2019 (1)
2018
2017
$
805,887 $
150,852
(7,807)
625,527 $
10,536
(14,932)
500,760
13,570
(11,842)
Proceeds received
Gross gains realized
Gross losses realized
50,113
7,753
(1,972)
(1) Gross gains realized presented above include a $135.3 million realized investment gain associated with a transfer of investments to a reinsurer
9,193
(788)
8,592
(917)
29,863 $
25,498 $
$
as consideration paid during the second quarter of 2019 in connection with the reinsurance of a $2.9 billion block of in force fixed and
variable annuity business. See Notes 6 and 17 for further information.
Net Unrealized Investment Gains (Losses) on Fixed Maturity Securities
Net unrealized investment gains (losses) on securities are computed as the difference between fair value and
amortized cost for fixed maturity securities or cost for equity securities. The following table reconciles the net
unrealized investment gains (losses) on securities, net of tax, included in AOCI, before the impact on DAC:
($ in thousands)
Net unrealized investment gains (losses) on fixed maturity
securities, net of tax
Beginning of period
Change in unrealized investment gains (losses)
on fixed maturity securities
Reclassification of net investment (gains)
losses on securities to net income
Cumulative effect of change in accounting principle (1)
End of period
Year Ended December 31,
2019
2018
2017
$
111,712 $
286,176 $
202,941
277,062
(172,350)
80,073
(124,364)
12,927
—
$
264,410 $
(15,041)
111,712 $
3,162
—
286,176
(1)
Effective January 1, 2018, with the adoption of new accounting guidance for recognition and measurement of financial instruments, available
for sale equity securities were reclassified to equity securities at fair value and the related net unrealized gains were reclassified from AOCI to
Retained earnings.
Limited Partnership Interests
As of December 31, 2019 and 2018, the carrying value of equity method limited partnerships totaled $383.7
million and $328.5 million, respectively. Principal factors influencing carrying value appreciation or decline
include operating performance, comparable public company earnings multiples, capitalization rates and the
economic environment. The Company recognizes an impairment loss for equity method limited partnerships
when evidence demonstrates that the loss is other than temporary. Evidence of a loss in value that is other than
temporary may include the absence of an ability to recover the carrying amount of the investment or the inability
of the investee to sustain a level of earnings that would justify the carrying amount of the investment.
Investment in Entities Exceeding 10% of Shareholders' Equity
At December 31, 2019 and 2018, there were no investments which exceeded 10% of total shareholders' equity
in entities other than obligations of the U.S. Government and federally sponsored government agencies and
authorities.
96 Annual Report on Form 10-K
Horace Mann Educators Corporation
NOTE 3 - Investments (continued)
Offsetting of Assets and Liabilities
The Company's derivatives (call options) are subject to enforceable master netting arrangements. Collateral
support agreements associated with each master netting arrangement provide that the Company will receive or
pledge cash collateral in the event minimum thresholds have been reached.
The following table presents the instruments that were subject to a master netting arrangement for the Company.
($ in thousands)
December 31, 2019
Asset derivatives
Gross
Amounts
Offset in the
Consolidated
Balance
Sheets
Net Amounts
of Assets/
Liabilities
Presented
Consolidated
Balance
Sheets
Gross Amounts Not Offset
in the Consolidated
Balance Sheets
Financial
Instruments
Cash
Collateral
Received
Net
Amount
Gross
Amounts
Free-standing derivatives
$
13,239 $
— $
13,239 $
7,687 $
6,640 $
(1,088)
December 31, 2018
Asset derivatives
Free-standing derivatives
2,647
—
2,647
—
1,868
779
Deposits
At December 31, 2019 and 2018, fixed maturity securities with a fair value of $26.0 million and $17.7 million,
respectively, were on deposit with governmental agencies as required by law in various states in which the
insurance subsidiaries of the Company conduct business. In addition, at December 31, 2019 and 2018, fixed
maturity securities with a fair value of $594.2 million and $740.0 million, respectively, were on deposit with FHLB
as collateral for amounts subject to funding agreements, advances and borrowings that were equal to $545.0
million and $675.0 million at the respective dates. The deposited securities are included in Fixed maturity
securities on the Company's Consolidated Balance Sheets.
NOTE 4 - 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 (which are
investment contracts) are not required to be disclosed. However, the estimated fair values of liabilities under all
insurance contracts are taken into consideration in the Company's overall management of interest rate risk
through the matching of investment maturities with amounts due under insurance contracts.
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an
exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between
knowledgeable, unrelated and willing market participants on the measurement date. In determining fair value, the
Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of
unobservable inputs. The Company categorizes its financial and nonfinancial assets and liabilities into a three-
level hierarchy based on the priority of the inputs to the valuation technique. The three levels of inputs that may
be used to measure fair value are:
Level 1
Unadjusted quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities
include fixed maturity and equity securities (both common stock and preferred stock) that are traded
in an active exchange market, as well as U.S. Treasury securities.
Horace Mann Educators Corporation
Annual Report on Form 10-K 97
NOTE 4 - Fair Value of Financial Instruments (continued)
Level 2
Level 3
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, derivatives and embedded
derivatives.
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.
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 expected 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
The fair value of a fixed maturity security is the estimated amount at which the security could be exchanged in an
orderly transaction between knowledgeable, unrelated and willing parties. The Company utilizes its investment
managers and its custodian bank to obtain fair value prices from independent third-party valuation service
providers, broker-dealer quotes, and model prices. 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. 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. Typical inputs used by these pricing sources include, but are not
limited to, reported trades, bids, offers, benchmark yield curves, benchmarking of like securities, rating
designations, sector groupings, issuer spreads, and/or estimated cash flows, prepayment and default speeds,
among others. 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 94.1% and 90.7% of the
portfolio, based on fair value, was priced through pricing services or index priced as of December 31, 2019 and
2018, respectively. 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 2019.
98 Annual Report on Form 10-K
Horace Mann Educators Corporation
NOTE 4 - Fair Value of Financial Instruments (continued)
The valuation of hard-to-value fixed maturity securities (generally 100 -150 securities) is more subjective because
the markets are less liquid and there is a lack of observable market-based inputs. This 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. When the pricing sources cannot provide fair value determinations, the investment managers and
custodian bank obtain non-binding price quotes from broker-dealers. For those securities where the investment
manager cannot obtain broker-dealer quotes, they will model the security, generally using anticipated cash flows
of the underlying collateral. Broker-dealers' valuation methodologies as well as investment managers’ modeling
methodologies are sometimes matrix-based, using indicative evaluation measures and adjustments for specific
security characteristics and market sentiment. The selection of the market inputs and assumptions used to
estimate the fair value of hard-to-value fixed maturity securities require judgment and include: benchmark yield,
liquidity premium, estimated cash flows, prepayment and default speeds, spreads, weighted average life, and
credit rating. The extent of the use of each market input depends on the market sector and 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 gains assurance that its portfolio of fixed maturity securities and hard-to-value fixed maturity
securities is appropriately valued through the execution of various processes and controls designed to ensure
the overall reasonableness and consistent application of valuation methodologies, including inputs and
assumptions, and compliance with accounting standards. The Company’s processes and controls are designed
to ensure (1) the valuation methodologies are appropriate and consistently applied, (2) the inputs and
assumptions are reasonable and consistent with the objective of determining fair value, and (3) the fair values are
accurately recorded. For example, on a continuing basis, the Company assesses the reasonableness of
individual fair values that have stale security prices or that exceed certain thresholds as compared to previous
fair values received from valuation service providers. The Company performs procedures to understand and
assess the methodologies, processes and controls of valuation service providers. In addition, the Company may
validate the reasonableness of fair values by comparing information obtained from valuation service providers or
broker-dealers to other third-party valuation sources for selected securities.
To determine the fair value of equity securities, the Company utilizes its investment managers and its custodian
bank to obtain fair value prices from independent third-party valuation service providers. 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 equity
securities.
Policy loans and mortgage loans as well as certain alternative investments which are accounted for using the
equity method of accounting 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.
• Derivatives, all call options — Fair values are based on the amount of cash expected to be received to
settle each derivative 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.
Horace Mann Educators Corporation
Annual Report on Form 10-K 99
NOTE 4 - 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, 2019, Level 3 investments comprised approximately
4.8% of the Company's total investment portfolio at fair value.
($ in thousands)
December 31, 2019
Financial Assets
Investments
Fixed maturity securities
U.S. Government and federally
sponsored agency obligations:
Carrying
Amount
Fair
Value
Fair Value Measurements at
Reporting Date Using
Level 2
Level 3
Level 1
Mortgage-backed securities
$
724,319
$
724,319
$
— $
711,004
$
13,315
Other, including U.S. Treasury securities
458,868
458,868
17,699
441,169
—
Municipal bonds
Foreign government bonds
Corporate bonds
1,686,203
1,686,203
45,370
45,370
—
—
45,370
1,641,912
44,291
1,581,424
1,581,424
14,470
1,463,002
Other mortgage-backed securities
1,295,492
1,295,492
—
1,161,979
Total fixed maturity securities
5,791,676
5,791,676
Equity securities
Short-term investments
Other investments
Totals
101,864
172,667
25,997
101,864
172,667
25,997
32,169
49,834
172,667
5,464,436
51,923
—
—
25,997
$ 6,092,204
$ 6,092,204
$
254,670
$ 5,542,356
$
295,178
Separate Account (variable annuity) assets (1)
$ 2,490,469
$ 2,490,469
$ 2,490,469
$
— $
Financial Liabilities
Investment contract and life policy reserves,
embedded derivatives
Other policyholder funds, embedded derivatives
$
$
1,314
93,733
$
$
1,314
93,733
$
$
— $
— $
December 31, 2018
Financial Assets
Investments
Fixed maturity securities
U.S. Government and federally
sponsored agency obligations:
1,314
$
— $
93,733
Mortgage-backed securities
$
787,441
$
787,441
$
— $
784,224
$
3,217
Other, including U.S. Treasury securities
833,542
833,542
13,291
820,251
—
Municipal bonds
Foreign government bonds
Corporate bonds
2,003,969
2,003,969
84,904
84,904
—
—
84,904
1,956,438
47,531
2,079,510
2,079,510
12,281
1,986,487
Other mortgage-backed securities
1,725,952
1,725,952
—
1,608,958
Total fixed maturity securities
7,515,318
7,515,318
111,750
122,222
16,147
111,750
122,222
16,147
25,572
64,330
117,296
—
7,241,262
47,415
4,926
16,147
$ 7,765,437
$ 7,765,437
$
207,198
$ 7,309,750
$
248,489
Equity securities
Short-term investments
Other investments
Totals
Separate Account (variable annuity) assets (1)
$ 2,001,128
$ 2,001,128
$ 2,001,128
$
— $
Financial Liabilities
Investment contract and life policy reserves,
embedded derivatives
Other policyholder funds, embedded derivatives
$
$
248
78,700
$
$
248
78,700
$
$
— $
— $
248
$
— $
78,700
(1)
Separate Account (variable annuity) assets represent contractholder funds invested in various actively traded mutual funds that have daily
quoted net asset values that are readily determinable for identical assets that the Company can access. Separate Account (variable annuity)
liabilities are equal to the estimated fair value of Separate Account (variable annuity) assets.
100 Annual Report on Form 10-K
Horace Mann Educators Corporation
—
103,952
133,513
295,071
107
—
—
—
—
—
80,742
116,994
248,484
5
—
—
—
—
NOTE 4 - Fair Value of Financial Instruments (continued)
The Company did not have any transfers between Levels 1 and 2 during 2019 and 2018. 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)
Financial Assets
Financial
Liabilities(1)
Beginning balance, January 1, 2019
$
47,531
$
80,742
$
120,211
$ 248,484
$
5
$ 248,489
$
78,700
Municipal
Bonds
Corporate
Bonds
Other
Mortgage-
Backed
Securities(2)
Total
Fixed
Maturity
Securities
Equity
Securities
Total
33,475
(7,698)
56,766
(2,568)
90,241
(10,266)
65
—
90,306
(10,266)
—
—
4,461
2,483
—
—
—
(1,105)
(1,105)
38
(1,067)
—
—
6,100
—
—
(607)
—
11,035
2,483
—
(607)
—
—
—
—
—
(1)
—
—
—
12,636
11,035
2,483
—
(608)
—
—
—
10,039
—
—
(45,194)
(7,642)
Paydowns, maturities and
distributions
(3,714)
(9,511)
(31,969)
(45,194)
Ending balance, December 31, 2019
$
44,291
$ 103,952
$
146,828
$ 295,071
$
107
$ 295,178
$
93,733
Beginning balance, January 1, 2018
$
49,328
$
72,979
$
107,944
$ 230,251
$
$ 230,257
$
80,733
40,488
(11,279)
50,771
(5,200)
91,259
(16,479)
6
—
—
91,259
(16,479)
Transfers into Level 3 (3)
Transfers out of Level 3 (3)
Total gains or losses
Net 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
—
—
—
—
474
—
—
—
—
—
—
—
—
Transfers into Level 3 (3)
Transfers out of Level 3 (3)
Total gains or losses
Net 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
Paydowns, maturities and
distributions
(487)
—
—
—
—
(487)
3
(484)
(1,195)
(2,840)
(5,570)
(9,605)
—
—
—
—
—
—
(6,135)
—
—
—
(187)
—
—
—
(6,322)
—
(602)
(11,984)
(27,547)
(40,133)
—
—
—
—
(4)
—
—
5
—
(7,518)
(9,605)
—
—
(6,326)
—
—
—
11,183
—
—
(40,133)
(5,698)
$ 248,489
$
78,700
Ending balance, December 31, 2018
$
47,531
$
80,742
$
120,211
$ 248,484
$
(1)
(2)
(3)
Represents embedded derivatives, all related to the Company's FIA products, reported in Other policyholder funds in the Company's
Consolidated Balance Sheets.
Includes U.S. Government and federally sponsored agency obligations for mortgage-backed securities and other mortgage-backed
securities.
Transfers into and out of Level 3 during the years ended December 31, 2019 and 2018 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.
Horace Mann Educators Corporation
Annual Report on Form 10-K 101
—
—
—
—
—
—
NOTE 4 - Fair Value of Financial Instruments (continued)
At December 31, 2019, the Company realized a loss of $1.1 million on Level 3 securities. At December 31, 2018
the Company realized a loss of $0.5 million on Level 3 securities. For the years ended December 31, 2019 and
2018, a realized loss of $12.6 million and a realized gain of $7.5 million, respectively, were included in earnings
that were attributable to the changes in the fair value of Level 3 liabilities (embedded derivatives) still held.
The valuation techniques and significant unobservable inputs used in the fair value measurement for financial
assets 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, 2019
Financial Assets
Investments
Other investments
Deposit asset on reinsurance
Financial Liabilities
Investment contract and policy reserves,
fixed annuity contracts
Investment contract and life policy reserves,
account values on life contracts
Other policyholder funds
Short-term debt
Long-term debt
December 31, 2018
Financial Assets
Investments
Other investments
Financial Liabilities
Carrying
Fair
Fair Value Measurements at
Reporting Date Using
Amount
Value
Level 1
Level 2
Level 3
$ 163,312 $ 167,185 $
2,346,166
2,634,012
— $
—
— $ 167,185
— 2,634,012
4,675,774
4,609,880
93,465
553,550
135,000
298,025
98,332
553,550
135,000
322,678
—
—
—
—
—
— 4,609,880
—
495,812
—
322,678
98,332
57,738
135,000
—
$ 156,725 $ 161,449 $
— $
— $ 161,449
Investment contract and policy reserves,
fixed annuity contracts
Investment contract and life policy reserves,
account values on life contracts
Other policyholder funds
Long-term debt
4,555,849
4,478,338
87,229
689,287
297,740
90,402
689,287
291,938
—
—
—
—
— 4,478,338
—
626,325
291,938
90,402
62,962
—
102 Annual Report on Form 10-K
Horace Mann Educators Corporation
NOTE 4 - Fair Value of Financial Instruments (continued)
Other Investments
Other investments includes policy loans and mortgage loans. For policy loans, fair value is based on estimates
using discounted cash flow analysis and current interest rates being offered for new loans. For mortgage loans,
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.
Deposit Asset on Reinsurance
The fair value of the deposit asset on reinsurance is estimated by discounting the future cash flows that are
expected to arise out of the annuity reinsurance transaction. The treasury yield curve, plus an assumed credit
spread, is used to determine the appropriate discount rate.
Investment Contract and 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 policy reserves are embedded derivatives related to the Company's
IUL products which are carried at fair value. See Note 5 for further information.
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.
Short-term Debt
The Company carries short-term debt at amortized cost which approximates fair value.
Long-term Debt
The Company carries long-term debt at amortized cost. The fair value of long-term debt is estimated based on
unadjusted quoted market prices of the Company's securities or unadjusted market prices based on similar
publicly traded issues when trading activity for the Company's securities is not sufficient to provide a market
price.
NOTE 5 - Derivatives
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
investment gains (losses), a component of revenues, in the Consolidated Statements of Operations.
Horace Mann Educators Corporation
Annual Report on Form 10-K 103
NOTE 5 - Derivatives (continued)
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 that 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 accounted for 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 derivatives 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
investment gains (losses) in the Consolidated Statements of Operations. The fair values of derivatives, including
derivatives embedded in FIA and IUL contracts, are presented in the Consolidated Balance Sheets as follows:
($ in thousands)
Assets
December 31,
2019
2018
Derivatives, included in Short-term and other investments
$
13,239 $
2,647
Liabilities
Fixed indexed annuities - embedded derivatives,
included in Other policyholder funds
Indexed universal life - embedded derivatives,
included in Investment contract and policy reserves
93,733
1,314
78,700
248
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
Net investment gains (losses)
Change in fair value of embedded derivatives:
Revenues
Net investment gains (losses)
Years Ended December 31,
2019
2018
2017
$
9,493 $
(4,112) $
14,867
(13,576)
7,931
(13,410)
(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.
104 Annual Report on Form 10-K
Horace Mann Educators Corporation
NOTE 5 - Derivatives (continued)
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, Inc.
(Moody's) long-term credit rating of "BBB+/A3" 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 cash 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, 2019
December 31, 2018
Counterparty
Bank of America, N.A.
Barclays Bank PLC
Citigroup Inc.
Credit Suisse International
Societe Generale
Total
S&P
A+
A
BBB+
A+
A
Credit Rating
Notional
Moody's
Amount
Fair
Value
Notional
Amount
Fair
Value
Aa2
A2
A3
A1
A1
$
174,900 $
115,300
—
—
27,800
8,523 $
3,348
—
—
1,369
144,500 $
28,500
—
16,100
89,100
$
318,000 $
13,240 $
278,200 $
870
247
—
55
1,475
2,647
As of December 31, 2019 and 2018, the Company held $14.3 million and $1.9 million, respectively, of cash and
securities 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 $0.3 million per counterparty.
NOTE 6 - Deposit Asset on Reinsurance
The Company reinsured a $2.9 billion block of in force fixed and variable annuity business with a minimum
crediting rate of 4.5%. This represented approximately 50% of the Company’s in force fixed annuity account
balances. The arrangement contains investment guidelines and a trust to help meet the Company’s risk
management objectives.
The annuity reinsurance transaction was effective April 1, 2019. Under the agreement, approximately $2.2 billion
of fixed annuity reserves were reinsured on a coinsurance basis for consideration of approximately $2.3 billion
which resulted in recognition of an after tax realized investment gain of $106.9 million. The separate account
assets and liabilities of approximately $0.7 billion were reinsured on a modified coinsurance basis and thus,
remain on the Company's consolidated financial statements, but the related results of operations are fully
reinsured.
The Company determined that the reinsurance agreement does not expose the reinsurer to a reasonable
possibility of a significant loss from insurance risk. Therefore, the Company recognizes the reinsurance
agreement using the deposit method of accounting. The assets transferred to the reinsurer as consideration paid
is reported as a Deposit asset on reinsurance on the Company's Consolidated Balance Sheet. As amounts are
received or paid, consistent with the underlying reinsured contracts, the Deposit asset on reinsurance is
adjusted. The Deposit asset on reinsurance is accreted to the estimated ultimate cash flows using the interest
method and the adjustment is reported as Net investment income.
Horace Mann Educators Corporation
Annual Report on Form 10-K 105
NOTE 7 - Goodwill and Intangible Assets, net
The Company conducts impairment testing for goodwill at least annually, or more often if events, changes or
circumstances indicate that the carrying amount may not be recoverable. See Note 1 for further description of
impairment testing.
The annuity reinsurance transaction described in Note 6 triggered a requirement to evaluate the goodwill
associated with the annuity business of the Retirement reporting unit. For the evaluation, the fair value of the
Retirement reporting unit was measured using a discounted cash flow method. The carrying value exceeded the
fair value, resulting in a $28.0 million non-cash goodwill impairment charge during the second quarter of 2019.
In the second quarter of 2019, the Company adopted guidance to eliminate Step 2 of the goodwill impairment
test and as such, the goodwill impairment charge represented the entire balance of the goodwill associated with
the annuity business of the Retirement reporting unit. The goodwill impairment charge was reported as Other
expense - goodwill impairment in the Consolidated Statement of Operations.
The changes in the carrying amount of goodwill by reportable segment for the year ended December 31, 2019
were as follows:
($ in thousands)
Property and Casualty
Supplemental
Retirement
Life
Total
December 31,
2018
Impairment
Acquisitions
December 31,
2019
$
$
9,460 $
—
28,025
9,911
— $
—
(28,025)
—
— $
19,621
10,087
—
47,396 $
(28,025) $
29,708 $
9,460
19,621
10,087
9,911
49,079
As of December 31, 2019, the outstanding amounts of definite-lived intangible assets subject to amortization are
attributable to the acquisitions of BCG and NTA during 2019. The acquisition of BCG resulted in initial
recognition of definite-lived intangible assets subject to amortization in the amount of $14.1 million and the
acquisition of NTA resulted in initial recognition of definite-lived intangible assets subject to amortization in the
amount of $160.4 million. As of December 31, 2019 the outstanding amounts of definite-lived intangible assets
subject to amortization were as follows:
($ in thousands)
At inception:
Value of business acquired
Value of distribution acquired
Value of agency relationships
Value of customer relationships
Total
Accumulated amortization:
Value of business acquired
Value of distribution acquired
Value of agency relationships
Value of customer relationships
Total
Net intangible assets subject to amortization:
Weighted Average
Useful Life (in Years)
30
17
14
10
23
$
$
94,419
53,996
16,981
9,080
174,476
(3,697)
(1,871)
(1,489)
(1,733)
(8,790)
165,686
106 Annual Report on Form 10-K
Horace Mann Educators Corporation
NOTE 7 - Goodwill and Intangible Assets, net (continued)
In regard to the definite-lived intangible assets in the table above, the VOBA intangible asset represents the
difference between the fair value of insurance contracts and insurance policy reserves measured in accordance
with the Company's accounting policies for insurance contracts acquired. VOBA was based on an actuarial
estimate of the present value of future distributable earnings for insurance in force as of the acquisition date. The
VODA intangible asset represents the present value of future business to be written by the existing distribution
channel. The value of agency relationships intangible asset represents the present value of the commission
overrides retained by NTA. The value of customer relationships intangible asset represents the present value of
the expected profits from existing BCG customers in force at the date of acquisition. All of the aforementioned
definite-lived intangible assets were valued using the income approach.
Estimated future amortization of the Company's definite-lived intangible assets were as follows:
($ in thousands)
Year Ending December 31,
2020
2021
2022
2023
2024
Thereafter
Total
$
$
14,488
13,411
12,433
11,577
10,805
102,972
165,686
The VOBA intangible asset is being amortized by product based on the present value of future premiums to be
received. The VODA intangible asset in respect to the acquisition of NTA is being amortized on a straight-line
basis. The VODA intangible asset in respect to the acquisition of BCG is being amortized based on the present
value of future profits to be received. The value of agency relationships intangible asset is being amortized based
on the present value of future premiums to be received. The value of customer relationships intangible asset is
being amortized based on the present value of future profits to be received.
Indefinite-lived intangible assets (not subject to amortization) as of December 31, 2019 were as follows:
($ in thousands)
Trade names
State licenses
Total
$
$
8,645
2,886
11,531
The trade names intangible asset represents the present value of future savings accruing NTA and BCG by virtue
of not having to pay royalties for the use of the trade names, valued using the relief from royalty method. The
state licenses intangible asset represents the regulatory licenses held by NTA that were valued using the cost
approach.
NOTE 8 - 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) basis. 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.
Horace Mann Educators Corporation
Annual Report on Form 10-K 107
NOTE 8 - Property and Casualty Unpaid Claims and Claim Expenses (continued)
($ 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,
2019
2018
2017
$
367,180 $
319,182 $
89,725
277,455
483,062
(7,500)
475,562
329,475
157,072
486,547
266,470
120,506
386,976 $
57,409
261,773
547,959
(300)
547,659
369,194
162,783
531,977
277,455
89,725
367,180 $
$
307,757
61,199
246,558
498,989
(2,700)
496,289
333,385
147,689
481,074
261,773
57,409
319,182
(1)
(2)
(3)
(4)
Unpaid claims and claim expenses as reported in the Consolidated Balance Sheets also include reserves for Supplemental, Retirement and
Life of $55.9 million, $29.5 million and $28.6 million as of December 31, 2019, 2018 and 2017, respectively, in addition to Property and
Casualty reserves.
Reserves are net of anticipated reinsurance recoverables.
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 2019, 2018 and 2017.
Benefits, claims and settlement expenses as reported in the Consolidated Statements of Operations also include amounts for Supplemental,
Retirement and Life of $109.5 million, $89.9 million, and $86.0 million for the years ended December 31, 2019, 2018 and 2017, 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, which
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), IBNR claims and associated settlement expenses (together, loss reserves). The process by
which these reserves are established requires reliance upon estimates based on known facts and on
interpretations of circumstances, including the Company's experience with similar cases and historical trends
involving claim payments and related patterns, pending levels of unpaid claims and product mix, as well as other
factors including court decisions, economic conditions, public attitudes and medical costs.
The Company believes the Property and Casualty loss reserves are appropriately established based on available
facts, laws, and regulations. The Company calculates and records a single best estimate of the reserve (which is
equal to the actuarial point estimate) as of each 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
108 Annual Report on Form 10-K
Horace Mann Educators Corporation
NOTE 8 - Property and Casualty Unpaid Claims and Claim Expenses (continued)
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, 2019) 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 20.0% of the Company's total loss reserves as of December 31, 2019, 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 80.0% of the Company's total loss reserves as of December 31, 2019, the primary actuarial
technique utilized is the development of reported loss dollars due to the relatively long claim settlement period.
In all of the loss estimation techniques referred to above, a ratio (development factor) is calculated which
compares current results to results in the prior period for each accident year. Various development factors,
based on historical results, are multiplied by the current experience to estimate the development of losses of
each accident year from the current time period into the next time period. The development factors for the next
time period for each accident year are compounded over the remaining calendar years to calculate an estimate
of ultimate losses for each accident year. Occasionally, unusual aberrations in loss patterns are caused by
factors such as changes in claim reporting, settlement patterns, unusually large losses, process changes, legal
or regulatory environment changes, and other influences. In these instances, analyses of alternate development
factor selections are performed to evaluate the effect of these factors and 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 8 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 2019.
Horace Mann Educators Corporation
Annual Report on Form 10-K 109
NOTE 8 - Property and Casualty Unpaid Claims and Claim Expenses (continued)
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.
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 $13.0 million of net income as of
December 31, 2019. 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 $7.5
million in 2019, $0.3 million in 2018 and $2.7 million in 2017. In 2019, the favorable development was
predominantly the result of favorable severity trends in Auto for accident year 2018. In 2018, the favorable
development was predominantly the result of favorable severity trends in property for accident years 2016 and
prior. In 2017, the favorable development was predominantly the result of favorable severity trends in property for
accident years 2015 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, 2019 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:
Years
Homeowners
Auto liability
Auto physical damage
Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
4
1.0%
6.1%
—
3
2.2%
79.5% 16.6%
40.8% 34.9% 13.8%
4.4%
95.6%
6
0.3%
1.0%
—
7
—
0.3%
—
8
—
0.1%
—
5
0.4%
3.0%
—
—
2
1
9
—
—
—
10
—
—
—
110 Annual Report on Form 10-K
Horace Mann Educators Corporation
NOTE 8 - 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.
The information about incurred and paid claims development for the years ended December 31, 2010 to 2018 is
presented as unaudited supplementary information.
($ in thousands)
Incurred Claims and Allocated Claim Adjustment Expense, Net of Reinsurance
Homeowners
Years Ended December 31,
As of December 31, 2019
Total of
Incurred-
But-Not-
Reported
Liabilities
Plus
Expected
Development
on Reported
Claims
Cumulative
Number of
Reported
Claims
Accident
Unaudited
Unaudited
Unaudited
Unaudited
Unaudited
Unaudited
Unaudited
Unaudited
Unaudited
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Year
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
$ 140,994
$ 136,907
$ 133,358
$ 133,235
$ 133,216
$ 133,136
$ 132,859
$ 132,905
$ 132,627
$
132,627
$
150,141
150,334
150,791
148,860
148,755
148,414
148,370
148,079
148,067
108,754
109,156
109,360
106,486
106,308
106,348
106,000
106,028
105,584
107,489
103,982
102,407
102,345
101,769
101,709
111,647
113,505
109,059
106,844
106,554
106,458
111,706
115,134
114,404
114,053
115,050
115,931
118,604
117,009
117,933
126,285
129,818
132,666
166,793
157,404
—
—
—
—
59
276
280
2,285
4,170
130,391
16,842
Total
$ 1,248,333
25,150
29,531
21,578
19,221
20,084
18,714
19,853
19,827
20,954
16,155
($ in thousands)
Homeowners
Cumulative Paid Claims and Allocated Claim Adjustment Expense, Net of Reinsurance
Years Ended December 31,
Accident
Unaudited
Unaudited
Unaudited
Unaudited
Unaudited
Unaudited
Unaudited
Unaudited
Unaudited
Year
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
$
98,190
$ 124,326
$ 129,790
$ 132,246
$ 132,523
$ 132,604
$ 132,599
$ 132,602
$ 132,602
$
132,602
123,046
142,846
145,852
146,908
147,451
148,026
148,014
148,069
148,067
84,260
101,566
104,203
105,156
105,561
105,909
105,993
106,021
76,890
96,599
99,361
100,968
101,527
101,677
101,709
83,314
103,030
105,704
106,081
106,258
106,388
90,704
109,303
111,882
113,321
114,648
95,772
113,186
115,053
117,537
106,800
128,518
129,767
130,548
152,356
Total
Outstanding prior to 2010
Prior years paid
Liabilities for claims and
claim adjustment
expenses, net of
reinsurance
103,790
1,212,885
32
668
$
35,480
Horace Mann Educators Corporation
Annual Report on Form 10-K 111
NOTE 8 - 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, 2019
Total of
Incurred-
But-Not-
Reported
Liabilities
Plus
Expected
Development
on Reported
Claims
Cumulative
Number of
Reported
Claims
Accident
Unaudited
Unaudited
Unaudited
Unaudited
Unaudited
Unaudited
Unaudited
Unaudited
Unaudited
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Year
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
$ 157,712
$ 160,058
$ 156,369
$ 154,222
$ 152,483
$ 151,653
$ 149,818
$ 149,425
$ 149,542
$
149,481
$
150,803
146,713
145,735
143,133
142,488
139,840
138,891
138,949
138,849
156,448
153,815
150,336
149,346
147,594
145,847
145,620
145,515
153,860
152,858
150,720
150,657
148,111
147,993
148,135
155,105
157,249
158,470
159,937
159,794
159,355
165,517
172,553
177,021
178,325
178,654
180,380
184,440
184,567
186,568
187,983
188,756
188,625
200,314
195,284
181,141
Total
$ 1,671,607
—
94
204
575
665
1,850
2,649
8,025
26,931
64,778
48,942
45,976
45,984
47,369
49,386
50,618
51,995
48,906
47,078
42,587
($ in thousands)
Auto Liability
Cumulative Paid Claims and Allocated Claim Adjustment Expense, Net of Reinsurance
Years Ended December 31,
Accident
Unaudited
Unaudited
Unaudited
Unaudited
Unaudited
Unaudited
Unaudited
Unaudited
Unaudited
Year
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
$
63,416
$ 118,345
$ 137,012
$ 144,255
$ 147,337
$ 148,751
$ 149,247
$ 149,364
$ 149,439
$
149,474
61,070
108,837
126,812
133,931
136,906
138,151
138,358
138,689
138,692
61,279
109,574
127,185
138,641
142,916
144,622
145,121
145,184
62,224
108,856
131,214
139,954
145,291
146,770
147,409
61,329
117,468
139,463
149,059
155,758
157,596
70,836
134,473
157,980
170,088
174,495
73,073
140,901
166,815
177,834
70,682
139,531
166,614
77,528
141,537
Total
69,665
1,468,500
Outstanding prior to 2010
Prior years paid
73
(219)
Liabilities for claims and
claim adjustment
expenses, net of
reinsurance
$
203,180
112 Annual Report on Form 10-K
Horace Mann Educators Corporation
NOTE 8 - 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, 2019
Total of
Incurred-
But-Not-
Reported
Liabilities
Plus
Expected
Development
on Reported
Claims
Cumulative
Number of
Reported
Claims
Accident
Unaudited
Unaudited
Unaudited
Unaudited
Unaudited
Unaudited
Unaudited
Unaudited
Unaudited
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Year
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
$
84,112
$
83,420
$
83,103
$
83,046
$
83,052
$
83,050
$
83,036
$
83,028
$
83,018
$
83,011
$
86,205
85,507
83,770
86,023
82,337
91,448
85,120
83,402
88,856
95,572
85,143
83,431
88,672
95,634
99,291
85,116
83,354
88,627
95,422
97,994
85,108
83,342
88,455
95,239
97,624
85,102
83,334
88,525
95,232
97,455
85,090
83,322
88,457
95,241
97,612
112,430
109,515
109,348
109,603
115,483
111,798
110,520
109,040
108,886
—
—
—
—
—
(18)
(17)
(161)
(326)
111,577
(6,829)
Total
$
973,319
81,581
80,804
78,165
80,920
87,901
87,497
93,225
91,270
94,388
89,207
($ in thousands)
Auto Physical Damage
Cumulative Paid Claims and Allocated Claim Adjustment Expense, Net of Reinsurance
Years Ended December 31,
Accident
Unaudited
Unaudited
Unaudited
Unaudited
Unaudited
Unaudited
Unaudited
Unaudited
Unaudited
Year
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
$
79,329
$
83,120
$
83,103
$
83,087
$
83,067
$
83,051
$
83,036
$
83,028
$
83,015
$
83,009
83,227
85,254
80,519
85,181
83,418
85,110
85,148
83,372
88,688
88,939
85,127
83,355
88,580
95,444
92,138
85,116
83,347
88,532
95,266
97,850
85,108
83,342
88,484
95,256
97,685
85,095
83,326
88,471
95,258
97,638
85,090
83,322
88,452
95,243
97,625
106,459
109,686
109,536
109,611
105,156
110,817
110,674
103,559
109,103
Total
Outstanding prior to 2010
Prior years paid
Liabilities for claims and
claim adjustment
expenses, net of
reinsurance
106,243
968,372
—
—
$
4,947
Horace Mann Educators Corporation
Annual Report on Form 10-K 113
NOTE 8 - 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,
2019
$
35,480
203,180
4,947
2,892
246,499
12,394
100,866
7,246
120,506
55,878
19,971
75,849
Gross reserves, end of year (1)
(1)
This line includes Supplemental, Retirement and Life reserves as included in the Consolidated Balance Sheet.
$
442,854
NOTE 9 - 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 $52.0 million, $107.3 million and $61.8 million for
the years ended December 31, 2019, 2018 and 2017, respectively. For 2019, catastrophe losses were impacted
by winter storm events in the first part of the year, wind/hail/tornado events in spring and summer months as well
as losses from several storms in the latter part of the year.
114 Annual Report on Form 10-K
Horace Mann Educators Corporation
NOTE 9 - Reinsurance and Catastrophes (continued)
The total amounts of reinsurance recoverable on unpaid insurance reserves classified as assets and reported in
Other assets in the Consolidated Balance Sheets were as follows:
($ in thousands)
Reinsurance recoverables on reserves and unpaid claims
December 31,
2019
2018
Property and Casualty
Reinsurance companies
State insurance facilities
Life and health
Total
$
$
19,640 $
100,866
8,707
129,213 $
33,754
55,971
9,785
99,510
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, IBNR claims 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, 2019
Premiums written and contract deposits (2)
Premiums and contract charges earned
Benefits, claims and settlement expenses
Year Ended December 31, 2018
Premiums written and contract deposits (2)
Premiums and contract charges earned
Benefits, claims and settlement expenses
Year Ended December 31, 2017
Premiums written and contract deposits (2)
Premiums and contract charges earned
Benefits, claims and settlement expenses
Gross
Amount
Ceded to
Other
Companies(1)
Assumed
from Other
Companies
Net
Amount
$
1,337,847 $
917,610
633,874
23,872 $
30,412
56,325
10,567 $ 1,324,542
897,954
10,756
585,068
7,519
1,255,557
841,147
769,664
1,244,500
812,099
588,621
28,773
28,837
136,601
21,989
22,036
10,472
8,259
5,023
4,497
4,606
4,640
4,157
1,235,043
817,333
637,560
1,227,117
794,703
582,306
(1)
(2)
Excludes the annuity reinsurance agreement accounted for under the deposit method that is discussed in Note 6.
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, 2019.
Past due reinsurance recoverables as of December 31, 2019 were not material.
The Company maintains catastrophe excess of loss reinsurance coverage. For 2019, the Company's catastrophe
excess of loss coverage consisted of one contract in addition to a minimal amount of coverage by the Florida
Hurricane Catastrophe Fund (FHCF). The catastrophe excess of loss contract provided 95% coverage for
catastrophe losses above a retention of $25.0 million per occurrence up to $175.0 million per occurrence. This
contract consisted of three layers, each of which provided for one mandatory reinstatement. The layers were
$25.0 million excess of $25.0 million, $40.0 million excess of $50.0 million and $85.0 million excess of $90.0
million.
For liability coverages, in 2019, the Company reinsured each loss above a retention of $1.0 million with coverage
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.) For property coverages, in 2019, the Company
Horace Mann Educators Corporation
Annual Report on Form 10-K 115
NOTE 9 - Reinsurance and Catastrophes (continued)
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 maximum individual life insurance risk retained by the Company is $0.5 million on any individual life, while
either $0.1 million or $0.125 million 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 2019,
the Company reinsured 100% of the catastrophe risk in excess of $1.0 million up to $35.0 million 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.
The Company retains all of the risk on its supplemental health product lines, including accidental death risk
embedded within certain products. However, the Company’s other accidental death and dismemberment risk
issued through all other policies and riders are ceded 100%. The maximum risk retained on any individual life by
the Company is $0.1 million.
NOTE 10 - Debt
Indebtedness and scheduled maturities consisted of the following:
($ in thousands)
Short-term debt
Bank Credit Facility
Long-term debt (1)
Effective
Interest
Rates
Final
Maturity
December 31,
2019
2018
Variable
2024
$
135,000 $
—
4.50% Senior Notes, Aggregate principal amount of
$250,000 less unaccrued discount of $426 and
$488 and unamortized debt issuance costs
of $1,549 and $1,772
Federal Home Loan Bank borrowing
Total
4.50%
1.99%
2025
2022
248,025
50,000
$
433,025 $
247,740
50,000
297,740
(1)
The Company designates debt obligations as "long-term" based on maturity date at issuance.
Credit Agreement with Financial Institutions (Bank Credit Facility)
On June 21, 2019, the Company, as borrower, replaced its current line of credit with a new five-year Credit
Agreement (Bank Credit Facility). The new Bank Credit Facility increased the amount available on this senior
revolving credit facility to $225.0 million from $150.0 million. PNC Capital Markets, LLC and JPMorgan Chase
Bank, N.A. served as joint leads on the new agreement, with The Northern Trust Company, U.S. Bank National
Association, KeyBank National Association, Comerica Bank and Illinois National Bank participating in the
syndicate. Terms and conditions of the new Bank Credit Facility are substantially consistent with the prior
agreement, with an interest rate based on LIBOR plus 115 basis points.
On July 1, 2019, the Company utilized the senior revolving credit facility to partially fund the acquisition of NTA.
As of December 31, 2019, the amount outstanding on the senior revolving credit facility was $135.0 million. 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, 2019.
Senior Notes
On November 23, 2015, the Company issued $250.0 million 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 4.53%
(Senior Notes). Interest on the Senior Notes is payable semi-annually at a rate of 4.50%. The Senior Notes 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.
116 Annual Report on Form 10-K
Horace Mann Educators Corporation
NOTE 10 - Debt (continued)
Federal Home Loan Bank Borrowings
In 2017, Horace Mann Insurance Company (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
4.5% 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.
In 2019, the Board authorized a maximum amount equal to 15% of net aggregate admitted assets less separate
account assets of the insurance subsidiaries for FHLB borrowings. During the fourth quarter of 2017, the
Company received $50.0 million in executed borrowings for HMIC. Of 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 1.99% as of December 31, 2019. HMIC's FHLB borrowings of
$50.0 million are included in Long-term debt in the Consolidated Balance Sheets.
Covenants
The Company is in compliance with all of the financial covenants contained in the Senior Notes indenture and
the Bank Credit Facility agreement, consisting primarily of relationships of (1) debt to capital, (2) net worth, as
defined in the financial covenants, (3) insurance subsidiaries' risk-based capital and (4) securities subject to
funding agreements and repurchase agreements.
NOTE 11 - Income Taxes
The income tax assets and liabilities included in Other assets and Other liabilities, respectively, in the
Consolidated Balance Sheets were as follows:
($ in thousands)
Income tax (asset) liability
Current
Deferred
December 31,
2019
2018
$
(12,184) $
160,624
(20,793)
103,686
Horace Mann Educators Corporation
Annual Report on Form 10-K 117
NOTE 11 - Income Taxes (continued)
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
Reinsurance commissions
Impaired securities
Other comprehensive income - net funded status of benefit plans
Discounting of unpaid claims and claim expense tax reserves
Postretirement benefits other than pensions
Charitable contributions carryforwards
Net operating loss carryforwards
Total gross deferred tax assets
Deferred tax liabilities
Other comprehensive income - net unrealized gains on 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
Intangibles
Other, net
Total gross deferred tax liabilities
Net deferred tax liability
December 31,
2019
2018
$
12,103 $
8,866
6,804
1,245
2,875
2,530
285
—
3,803
38,511
74,645
49,326
38,210
12,786
947
15,718
2,021
5,482
199,135
160,624 $
$
12,112
6,866
—
1,295
3,254
2,772
302
89
10,969
37,659
32,897
60,330
9,304
14,910
1,203
17,531
2,557
2,613
141,345
103,686
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, 2019 and 2018.
At December 31, 2019, the Company had available the following carryforwards or credits.
($ in thousands)
Operating loss carryforwards
Operating loss carryforwards
Pretax Amount
$
12,711
5,397
Expiration Year
2038
Indefinite
The components of the provision for income tax expense (benefit) were as follows:
($ in thousands)
Current
Deferred
Total income tax expense (benefit)
Years Ended December 31,
2019
2018
2017
$
$
31,518 $
20,488
52,006 $
4,152 $
(2,958)
1,194 $
3,813
(84,585)
(80,772)
118 Annual Report on Form 10-K
Horace Mann Educators Corporation
NOTE 11 - Income Taxes (continued)
Income tax expense for the following periods differed from the expected tax computed by applying the federal
corporate tax rate of 21% for 2019 and 2018 and 35% for 2017 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
Goodwill impairment
Tax Act DTL re-measurement
Employee share-based compensation
Compensation deduction limitation
Prior year adjustments
Other, net
Years Ended December 31,
2019
2018
2017
$
49,654 $
4,103 $
31,041
(4,159)
(1,392)
5,885
—
272
680
(716)
1,782
(3,726)
(412)
—
—
(1,134)
1,754
300
309
1,194 $
(5,335)
(4,810)
—
(98,988)
(3,258)
326
(293)
545
(80,772)
Income tax expense (benefit) provided on income
$
52,006 $
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.
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. National Teachers Associates Life Insurance Company and NTA Life Insurance Company of New York
are not included in the consolidated federal income tax return and will file separate federal income tax returns
until they are eligible to participate in the consolidated federal income tax return. This is expected to occur in
2025.
Horace Mann Educators Corporation
Annual Report on Form 10-K 119
NOTE 11 - Income Taxes (continued)
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,
2019
2018
2017
$
$
1,734 $
109
—
123
—
—
1,966 $
1,790 $
—
(152)
96
—
—
1,734 $
1,594
101
—
422
—
(327)
1,790
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, 2019, 2018 and 2017.
NOTE 12 - Operating Leases
The Company has various operating lease agreements, primarily for real estate offices. Such leases have
remaining lease terms of 1 year to 6 years, some of which may include options to extend certain leases for up to
an additional 25 years.
The components of lease expense were as follows:
($ in thousands)
Operating lease cost
Short-term lease cost
Total lease cost
Supplemental cash flow information related to operating leases was as follows:
($ in thousands)
Cash paid for amounts included in the measurement of lease liabilities
Supplemental balance sheet information related to operating leases were as follows:
($ in thousands, except lease term and discount rate)
Assets
Right of use assets, included in Other assets
Liabilities
Operating lease liabilities, included in Other liabilities
Weighted average remaining lease term
Weighted average discount rate
$
$
$
$
$
Year Ended
December 31, 2019
3,841
208
4,049
Year Ended
December 31, 2019
3,447
December 31, 2019
16,483
17,499
4.51
3.78%
120 Annual Report on Form 10-K
Horace Mann Educators Corporation
NOTE 12 - Operating Leases (continued)
Future minimum lease payments under non-cancellable operating leases as of December 31, 2019 are as
follows:
($ in thousands)
Year Ending December 31,
2020
2021
2022
2023
2024
Thereafter
Total future minimum lease payments
Less imputed interest
Total
$
$
4,440
4,285
4,156
3,459
1,929
787
19,056
(1,557)
17,499
As of December 31, 2019, the Company has no additional operating leases that have not yet commenced.
Note 13 - Shareholders' Equity and Common Stock Equivalents
Share Repurchase Program and Treasury Shares
On September 30, 2015, the Board authorized a share repurchase program allowing repurchases of up to $50.0
million of HMEC's common stock, par value $0.001 (Program). The Program authorizes the repurchase of
common shares in open market or privately negotiated transactions, from time to time, depending on market
conditions. The Program does not have an expiration date and may be limited or terminated at any time without
notice.
During 2017, the Company repurchased 48,440 shares of its common stock, or 0.1% of the shares outstanding
as of December 31, 2016, at an aggregate cost of $1.7 million, or an average price of $34.28 per share. During
2018, the Company repurchased 129,112 shares of its common stock, or 0.3% of the shares outstanding as of
December 31, 2017, at an aggregate cost of $5.1 million, or an average price of $39.41 per share. During 2019,
the Company did not repurchase any shares of its common stock. In total and through December 31, 2019,
2,977,162 shares were repurchased under the Program at an average price of $25.94 per share. The repurchase
of shares was funded through use of cash. As of December 31, 2019, $22.8 million remained authorized for
future share repurchases under the Program.
At December 31, 2019, the Company held 24,850,484 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 issued or outstanding at December 31, 2019 and 2018.
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
Horace Mann Educators Corporation
Annual Report on Form 10-K 121
NOTE 13 - Shareholders' Equity and Common Stock Equivalents (continued)
Comprehensive Plan which included an increase of 3,250,000 in the number of shares of common stock
reserved for issuance under the Comprehensive Plan. As of December 31, 2019, approximately 1,187,200 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, CSUs, stock options and RSUs 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
Director Common Stock Units
December 31,
2019
28,526
25,194
908,557
889,438
1,851,715
2018
32,288
24,498
774,821
1,008,249
1,839,856
2017
61,677
24,903
719,015
1,149,679
1,955,274
Deferred compensation for 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. These dividends are reinvested into additional CSUs.
Employee Common Stock Units
Deferred compensation for 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, 2019, 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, 2018
Granted
Vested
Exercised
Forfeited
Expired
December 31, 2019
Weighted
Average
Option Price
per Share
$36.65
$39.22
$34.46
$26.98
$39.97
—
$37.82
Range of
Option Prices
per Share
$17.32-$44.75
$38.99-$42.73
$20.60-$44.75
$17.32-$42.95
$31.01-$44.75
—
$20.60-$44.75
Options
Outstanding
Vested and
Exercisable
774,821
271,116
282,040
—
(64,095)
(84,209)
—
908,557
—
161,679
(64,095)
—
—
368,700
122 Annual Report on Form 10-K
Horace Mann Educators Corporation
NOTE 13 - Shareholders' Equity and Common Stock Equivalents (continued)
Option information segregated by ranges of exercise prices were as follows:
December 31, 2019
Total Outstanding Options
Vested and Exercisable Options
Range of
Option
Prices
per Share
$20.60-$22.69
$28.88-$32.35
$38.05-$41.95
$42.95-$44.75
Total
Options
11,100
271,579
415,356
210,522
908,557
Weighted
Average
Option Price
per Share
Weighted
Average
Remaining
Term
$22.34
$30.94
$40.14
$42.94
$37.82
0.36
5.65
8.36
8.30
7.44
Weighted
Average
Option Price
per Share
Weighted
Average
Remaining
Term
$22.34
$30.92
$41.80
$43.00
$34.81
0.36 years
5.53 years
7.19 years
8.19 years
6.11 years
Options
11,100
222,499
85,766
49,335
368,700
The weighted average exercise prices of vested and exercisable options as of December 31, 2018 and 2017
were $31.42 and $27.12, respectively.
As of December 31, 2019, based on a closing stock price of $43.66 per share, the aggregate intrinsic (in-the-
money) values of vested options and all options outstanding were $3.3 million and $5.3 million, respectively.
Restricted 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, 2018
1,008,249
$35.64
417,179
$20.22
Granted (1)
Adjustment for performance
achievement
Vested
Forfeited
Distributed (2)
210,712
$41.52
(3,789)
—
(34,895)
(290,839)
$32.16
—
$43.08
$31.39
—
—
417,454
—
(290,839)
—
—
$33.93
—
$31.39
December 31, 2019
(1)
(2)
Includes dividends reinvested into additional RSUs.
Includes distributed units which were utilized to satisfy withholding taxes due on the distribution.
889,438
$31.94
543,794
$24.77
Horace Mann Educators Corporation
Annual Report on Form 10-K 123
NOTE 14 - Statutory Information and Restrictions
The insurance departments of various states in which the insurance subsidiaries of HMEC are domiciled
recognize as net income and surplus those amounts determined in conformity with statutory accounting
principles prescribed or permitted by the insurance departments, which differ in certain respects from GAAP.
Reconciliations of statutory capital and surplus and net income, as determined using statutory accounting
principles, to the amounts included in the accompanying consolidated financial statements are as follows:
($ in thousands)
Statutory capital and surplus of insurance subsidiaries
Increase (decrease) due to:
Deferred policy acquisition costs
Deposit asset on reinsurance
Annuity reserves ceded
Difference in policyholder reserves
Goodwill
Intangible assets, net
Investment fair value adjustments on fixed maturity securities
Difference in investment reserves
Federal income tax liability
Net funded status of benefit plans
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
Tax benefit of interest expense and other
parent company current tax adjustments
Combined net income
Increase (decrease) due to:
Deferred policy acquisition costs
Intangible asset amortization expense
Policyholder benefits
Federal income tax (expense) benefit
Investment reserves
Other adjustments, net
Net income as reported herein
December 31,
2019
2018
$
868,839 $
903,564
276,668
2,346,166
(2,239,717)
209,127
49,079
177,217
397,762
102,380
(178,026)
(13,690)
(53,801)
8,306
(383,025)
1,567,285 $
298,742
—
—
142,601
47,396
—
142,512
105,430
(115,667)
(15,495)
20,412
8,795
(247,740)
1,290,550
Years Ended December 31,
2019
2018
2017
62,316 $
(9,537)
(14,272)
45,977 $
(9,755)
(11,892)
8,993
47,500
121
24,451
2,101
(8,790)
117,369
(23,492)
88,627
(38,872)
184,443 $
1,015
—
26,318
3,020
(31,529)
(4,932)
18,343 $
82,587
(4,496)
(11,836)
5,654
71,909
9,385
—
30,609
84,198
(20,966)
(5,676)
169,459
$
$
$
The Company has principal insurance subsidiaries domiciled in Illinois, New York 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, the New York 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 (NAIC), as well as state laws, regulations
and general administrative rules.
124 Annual Report on Form 10-K
Horace Mann Educators Corporation
NOTE 14 - 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, 2019 and 2018, the minimum statutory-basis capital and surplus required to be maintained by
HMEC's insurance subsidiaries was $108.1 million and $108.5 million, respectively. At December 31, 2019 and
2018, 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 $26.0 million and $17.7 million as of December
31, 2019 and 2018, 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 maximum
amount of dividends that may be paid in 2020 from all of HMEC's insurance subsidiaries without prior regulatory
approval is $105.3 million, excluding the impact and timing of prior year dividends.
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 $868.8
million as of December 31, 2019, which is subject to regulatory restrictions.
NOTE 15 - Retirement Plans and Other Postretirement Benefits
The Company sponsors two qualified and three non-qualified retirement plans. Substantially all employees
participate in the 401(k) plan. Both the qualified defined benefit plan and the two non-qualified supplemental
defined benefit plans have been frozen since 2002. All participants in the frozen plans are 100% vested in their
accrued benefit and all non-qualified supplemental 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. The Company matches each dollar of employee contributions up to a 5%
maximum — in addition to maintaining the automatic 3% "safe harbor" contribution. The matching company
contribution vests after 5 years of service. The 401(k) plan is fully funded.
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 supplemental defined benefit
plans were frozen in 2002 and all participants are currently in payment status. Both the non-qualified frozen
supplemental defined benefit plans and the non-qualified contribution plan are unfunded plans with the
Company's contributions made at the time payments are made to participants.
Horace Mann Educators Corporation
Annual Report on Form 10-K 125
NOTE 15 - Retirement Plans and Other Postretirement Benefits (continued)
Total Expense and Contribution Plans' Information
Total expense recorded for the non-qualified defined contribution, 401(k), defined benefit and supplemental
retirement plans was $9.3 million, $8.9 million and $9.1 million for the years ended December 31, 2019, 2018 and
2017, respectively.
Contributions to employees' accounts under the 401(k) plan and the non-qualified defined contribution plan, as
well as total assets of the plans, were as follows:
($ in thousands)
401(k) plan
Contributions to employees' accounts
Total assets at the end of the year
Non-qualified defined contribution plan
Contributions to employees' accounts
Total assets at the end of the year
Year Ended December 31,
2019
2018
2017
$
8,233 $
7,655 $
206,247
167,767
7,637
180,514
58
—
70
—
84
—
126 Annual Report on Form 10-K
Horace Mann Educators Corporation
NOTE 15 - Retirement 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, 2019, 2018 and 2017 (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,
2019
2018
2017
2019
2018
2017
$
25,075 $
28,432 $
29,407 $
15,404 $
16,832 $
16,847
650
997
—
101
(2,003)
—
650
947
—
(2,208)
(2,746)
—
650
1,091
—
(721)
(1,995)
—
—
620
—
516
(1,312)
—
—
566
—
(789)
(1,205)
—
—
631
—
805
(1,451)
—
$
24,820 $
25,075 $
28,432 $
15,228 $
15,404 $
16,832
$
22,090 $
25,843 $
25,446 $
— $
— $
—
3,471
—
(2,003)
(394)
—
23,164 $
(640)
—
(2,746)
(367)
—
22,090 $
2,909
—
(1,995)
(517)
—
25,843 $
—
1,312
(1,312)
—
—
— $
—
1,205
(1,205)
—
—
— $
—
1,451
(1,451)
—
—
—
(1,656) $
(2,985) $
(2,589) $ (15,228) $ (15,404) $ (16,832)
6,690 $
7,425 $
8,016 $
(9,884) $ (10,320) $ (10,648)
(1,656) $
(2,985) $
(2,589) $ (15,228) $ (15,404) $ (16,832)
— $
— $
— $
— $
(8,345)
(8,345) $
10,410
10,410 $
10,605
10,605 $
(5,345)
(5,345) $
— $
5,084
5,084 $
—
6,184
6,184
24,820 $
24,820
23,164
25,075 $
25,075
22,090
28,432 $
28,432
25,843
15,228 $
15,228
—
15,404 $
15,404
—
16,832
16,832
—
$
$
$
$
$
$
$
Horace Mann Educators Corporation
Annual Report on Form 10-K 127
NOTE 15 - Retirement Plans and Other Postretirement Benefits (continued)
The change in the Company's AOCI for the defined benefit plans for the year ended December 31, 2019 was
primarily attributable to better than expected asset returns, updates to mortality assumptions and updated
census dates 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, 2018 was primarily attributable to lower than expected asset
returns and updates to mortality assumptions and an increase in the discount rate. 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.
($ in thousands)
Defined Benefit Plan
Supplemental
Defined Benefit Plans
Year Ended December 31,
2018
2017
2019
Year Ended December 31,
2018
2017
2019
Components of net periodic pension
(income) expense:
Service cost:
Benefit accrual
Other expenses
Interest cost
Expected return on plan assets
Settlement loss
Amortization of:
$
— $
— $
— $
650
997
(1,222)
—
650
947
(1,377)
—
650
1,091
(1,493)
—
Prior service cost
Actuarial loss
Net periodic pension expense
—
310
735
$
—
371
591
$
—
389
637
$
$
— $
—
620
—
—
—
256
876
$
— $
—
566
—
—
—
310
876
$
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 comprehensive
income (loss)
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.
$
— $
— $
— $
— $
— $
(1,755)
177
(1,619)
516
(789)
—
(310)
—
(371)
—
(389)
—
(256)
—
(310)
$ (2,065)
$
(194)
$ (2,008)
$
260
$ (1,099)
$
547
4.20%
5.75%
*
3.50%
5.90%
*
3.90%
6.25%
*
4.20%
*
*
3.50%
*
*
3.90%
*
*
3.10%
5.75%
*
4.20%
5.90%
*
3.50%
6.25%
*
3.10%
*
*
4.20%
*
*
3.50%
*
*
—
—
631
—
—
—
258
889
—
805
—
(258)
128 Annual Report on Form 10-K
Horace Mann Educators Corporation
NOTE 15 - Retirement Plans and Other Postretirement Benefits (continued)
The discount rates at December 31, 2019 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, 2019
Asset category
Equity security funds (1)
United States
International
Fixed income funds
Short-term investment funds
Total
December 31, 2018
Asset category
Equity security funds (1)
United States
International
Fixed income funds
Short-term investments funds
Total
Fair Value Measurements at
Reporting Date Using
Total
Level 1
Level 2
Level 3
$
$
$
$
8,883 $
2,214
11,116
951
23,164 $
— $
—
—
951
951 $
8,883 $
2,214
11,116
—
22,213 $
8,198 $
2,089
11,003
800
22,090 $
— $
—
—
800
800 $
8,198 $
2,089
11,003
—
21,290 $
—
—
—
—
—
—
—
—
—
—
(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, 2019 and 2018.
In 2020, the Company expects amortization of net losses of $0.3 million and $0.3 million for the defined benefit
plan and the supplemental retirement plans, respectively, and expects no amortization of prior service cost for
the supplemental retirement plans to be included in net periodic pension expense.
Postretirement Benefits Other than Pensions
As of December 31, 2006, upon discontinuation of retiree medical benefits, Health Reimbursement Accounts
(HRAs) were established for eligible participants and totaled $7.3 million. As of December 31, 2019, the balance
of the previously established HRAs was $1.4 million. Funding of HRAs was $0.1 million, $0.1 million and $0.1
million for the years ended December 31, 2019, 2018 and 2017, respectively.
Horace Mann Educators Corporation
Annual Report on Form 10-K 129
NOTE 15 - Retirement Plans and Other Postretirement Benefits (continued)
2020 Contributions
In 2020, there is no minimum funding requirement for the Company's defined benefit plan. The following table
discloses that minimum funding requirement and the expected full year contributions for the Company's plans.
($ in thousands)
Minimum funding requirement for 2019
Expected contributions (approximations) for the year ended
December 31, 2020 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, 2019.
Estimated Future Benefit Payments
Defined Benefit Pension Plans
Defined
Benefit Plan
Supplemental
Defined Benefit
Plans
—
— $
N/A
1,282
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, 2019 were as follows:
($ in thousands)
Pension plans
2020
2021
2022
2023
2024
2025-2029
Defined benefit plan
Supplemental retirement plans
$
2,478 $
1,282
2,277 $
1,265
2,219 $
1,245
1,987 $
1,222
2,099 $
1,195
7,927
5,407
NOTE 16 - 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 issuance 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.
Investment Commitments
From time to time, the Company has outstanding commitments to fund investments in limited partnership
interests, commercial mortgage loans and bank loans. Such unfunded commitments were $306.2 million and
$145.4 million for the years ended December 31, 2019 and 2018, respectively.
130 Annual Report on Form 10-K
Horace Mann Educators Corporation
NOTE 17 - Supplemental Disclosure of Consolidated Cash Flow Information
($ in thousands)
Cash
Restricted cash
Total cash and restricted cash shown in the Consolidated Statements of
Cash Flows
Cash paid during the year for:
Interest
Income taxes
Years Ended December 31,
2019
2018
2017
25,206 $
11,906 $
302
—
7,627
—
25,508 $
11,906 $
7,627
14,104 $
12,532 $
22,946
8,679
11,555
16,259
$
$
$
Non-cash investing activities include $2.1 billion of investments transferred to a reinsurer as consideration paid
during the second quarter of 2019 in connection with the Company's reinsurance of a $2.9 billion block of in
force fixed and variable annuity business. See Note 6 for further information.
Non-cash investing activities in respect to modifications or exchanges of fixed maturity securities as well as
paid-in-kind activity for policy loans were insignificant for the years ended December 31, 2019, 2018 and 2017,
respectively.
NOTE 18 - Segment Information
The Company conducts and manages its business through five segments. See Note 1 for a description of the
Company's reporting segments that changed effective in the third quarter of 2019. The four operating segments,
representing the major lines of insurance business, are Property and Casualty (primarily personal lines of
automobile and property insurance products), the newly created Supplemental (primarily heart, cancer, accident
and limited short-term supplemental disability coverages), Retirement (primarily tax-qualified fixed and variable
annuities) and Life (life insurance). The Company does not allocate the impact of corporate-level transactions to
these operating segments, consistent with the basis for management's evaluation of the results of those
segments, but classifies those items in the fifth segment, Corporate and Other. In addition to ongoing
transactions such as corporate debt service, net investment gains (losses) and certain public company
expenses, such items also have included corporate debt retirement costs, when applicable.
The accounting policies of the segments are the same as those described in Note 1. The Company accounts for
intersegment transactions, primarily the allocation of operating and agency costs from Corporate and Other to
Property and Casualty, Supplemental, Retirement and Life, on a direct cost basis.
Horace Mann Educators Corporation
Annual Report on Form 10-K 131
NOTE 18 - Segment Information (continued)
Summarized financial information for these segments is as follows:
($ in thousands)
Insurance premiums and contract charges earned
Property and Casualty
Supplemental
Retirement
Life
Total
Net investment income
Property and Casualty
Supplemental
Retirement
Life
Corporate and Other
Intersegment eliminations
Total
Net income (loss)
Property and Casualty
Supplemental
Retirement
Life
Corporate and Other
Total
($ in thousands)
Assets
Property and Casualty
Supplemental
Retirement
Life
Corporate and Other
Intersegment eliminations
Total
Years Ended December 31,
2019
2018
2017
$
683,454 $
$
$
$
$
65,815
29,083
119,602
897,954 $
41,740 $
7,480
245,475
71,957
(85)
(1,503)
365,064 $
54,359 $
17,989
(4,867)
17,574
99,388
$
184,443 $
665,734 $
N/A
31,269
120,330
817,333 $
648,263
N/A
28,003
118,437
794,703
40,104 $
N/A
262,634
74,399
142
(772)
376,507 $
(14,243) $
N/A
41,736
18,754
(27,904)
18,343 $
36,178
N/A
261,994
76,195
78
(815)
373,630
17,790
N/A
88,473
77,595
(14,399)
169,459
December 31,
2019
2018
2017
$
1,236,362 $
1,327,099 $
747,602
8,330,127
1,964,993
172,955
(64,072)
1,217,394
N/A
8,063,912
1,815,732
143,784
(42,482)
$ 12,478,704 $ 11,031,896 $ 11,198,340
N/A
7,866,969
1,821,351
149,014
(41,800)
132 Annual Report on Form 10-K
Horace Mann Educators Corporation
NOTE 18 - Segment Information (continued)
Additional significant financial information for these segments is as follows:
($ in thousands)
DAC amortization expense
Property and Casualty
Supplemental
Retirement
Life
Total
Income tax expense (benefit)
Property and Casualty
Supplemental
Retirement
Life
Corporate and Other
Total
Years Ended December 31,
2018
2017
2019
$
$
$
$
79,453 $
438
21,446
7,844
109,181 $
79,073 $
N/A
23,186
7,630
109,889 $
76,967
N/A
17,759
7,459
102,185
13,954 $
5,105
33,772
4,907
(5,732)
52,006 $
(6,622) $
N/A
10,000
4,979
(7,163)
1,194 $
(3,279)
N/A
(19,498)
(51,876)
(6,119)
(80,772)
Horace Mann Educators Corporation
Annual Report on Form 10-K 133
NOTE 19 - 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,
2019
Insurance premiums and contract charges earned (1)
$
240,392
$
239,681
$
208,096
$
209,785
Insurance premiums written and contract deposits (1)(2)(3)
Total revenues (1)
Net income (1)
Per share information
Basic
Net income (1)
Shares of common stock - weighted average (4)
Diluted
Net income (1)
Shares of common stock and equivalent shares -
weighted average (4)
2018
Insurance premiums and contract charges earned
Insurance premiums written and contract deposits (2)
Total revenues
Net income (loss)
Per share information
Basic
Net income (loss)
Shares of common stock - weighted average (4)
Diluted
Net income (loss)
Shares of common stock and equivalent shares -
weighted average (4)
2017
Insurance premiums and contract charges earned
Insurance premiums written and contract deposits (2)
Total revenues
Net income
Per share information
Basic
Net income (5)
Shares of common stock - weighted average (4)
Diluted
Net income (5)
$
$
$
$
$
$
$
$
346,242
331,376
33,001
371,216
334,418
25,454
311,691
451,478
93,822
0.79
$
0.61
$
2.25
$
41,814
41,785
41,762
295,394
313,213
32,166
0.77
41,610
0.78
$
0.60
$
2.24
$
0.77
42,093
42,030
41,921
41,785
201,905
$
206,820
$
205,610
$
202,998
311,216
278,535
(20,257)
338,097
311,318
12,528
301,722
306,257
5,917
(0.49) $
0.30
$
0.14
$
41,596
41,683
41,600
284,008
295,489
20,155
0.49
41,497
(0.49) $
0.30
$
0.14
$
0.48
41,911
41,850
41,735
41,653
204,328
$
198,935
$
195,718
$
195,722
300,416
302,993
125,329
318,355
289,817
26,551
311,614
291,436
2,261
3.03
$
0.64
$
0.05
$
41,419
41,433
41,368
296,732
287,304
15,318
0.37
41,135
3.00
$
0.64
$
0.05
$
0.37
Shares of common stock and equivalent shares -
weighted average (4)
41,718
41,575
41,493
41,342
(1)
(2)
(3)
(4)
(5)
See Note 2 for more information regarding the acquisition of NTA on July 1, 2019.
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.
Excludes the annuity reinsurance agreement accounted for under the deposit method that is discussed in Note 6.
Rounded to thousands.
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 TCJA.
134 Annual Report on Form 10-K
Horace Mann Educators Corporation
ITEM 9. I Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None.
ITEM 9A. I Controls and Procedures
Management's Conclusion Regarding the Effectiveness of Disclosure
Controls and Procedures
Under the supervision and with the participation of the Company's management, including the Company's chief
executive officer and chief financial officer, the Company conducted an evaluation of the effectiveness of the
design and operation of the Company's 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, 2019.
Based on this evaluation, the Company's chief executive officer and chief financial officer concluded that the
Company's disclosure controls and procedures were effective as of December 31, 2019, the end of the period
covered by this Annual Report on Form 10-K.
Changes in Internal Control Over Financial Reporting
Except as noted below, there were no changes in the Company's internal control over financial reporting that
occurred during the quarter ended December 31, 2019 that has materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
On July 1, 2019, the Company completed its acquisition of NTA. The Company is in the process of integrating
NTA and the Company's controls over financial reporting. As a result of these integration activities, certain
controls will be evaluated and may be changed. Therefore, the Company has elected to exclude NTA from the
Company's assessment of internal control over financial reporting as of December 31, 2019.
Concurrent with the NTA acquisition, changes were made to the relevant business processes and the related
control activities over purchase accounting in order to monitor and maintain appropriate controls over financial
reporting.
Management's Annual Report on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over
financial reporting. The Company's internal control over financial reporting is designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of the consolidated financial
statements in accordance with U.S. generally accepted accounting principles. The Company's accounting
policies and internal controls over financial reporting, established and maintained by management, are under the
general oversight of the Company's Audit Committee.
The Company's internal control over financial reporting includes those policies and procedures that:
•
•
•
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the Company;
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 are being made only in accordance with authorizations of the Company's
management and directors; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition,
use, or disposition of 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
Horace Mann Educators Corporation
Annual Report on Form 10-K 135
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Management has assessed the Company's internal control over financial reporting as of December 31, 2019.
The standard measures adopted by management in making its evaluation are the measures in the Internal
Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
Consistent with guidance issued by the Securities and Exchange Commission that an assessment of a recently
acquired business may be omitted from management’s report on internal control over financial reporting in the
year of acquisition, management excluded an assessment of the effectiveness of the Company’s internal control
over financial reporting related to NTA. The Company acquired all of the equity interests of NTA on July 1, 2019.
NTA represented $747.6 million of consolidated total assets and $65.8 million of consolidated total revenues
included in the consolidated financial statements of the Company as of and for the year ended December 31,
2019.
Based on its assessment, management concluded that the Company's internal control over financial reporting
was effective at December 31, 2019, and that there were no material weaknesses in the Company's internal
control over financial reporting as of that date.
KPMG LLP, an independent registered public accounting firm, which has audited and reported on the
Consolidated Financial Statements contained in this Annual Report on Form 10-K, has issued its report on the
effectiveness of the Company’s internal control over financial reporting which follows this report.
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Horace Mann Educators Corporation:
Opinion on Internal Control Over Financial Reporting
We have audited Horace Mann Educators Corporation and subsidiaries’ (the “Company”) internal control over
financial reporting as of December 31, 2019, 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 Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2019 and 2018,
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, 2019, and the related
notes and financial statement schedules I to IV and VI (collectively, the consolidated financial statements), and
our report dated February 28, 2020 expressed an unqualified opinion on those consolidated financial statements.
The Company acquired all of the issued and outstanding shares of NTA Life Enterprises, LLC (NTA) on July 1,
2019. Management excluded NTA from its assessment of the effectiveness of the Company’s internal control
over financial reporting as of December 31, 2019. NTA represented $747.6 million of consolidated total assets
and $65.8 million of consolidated total revenues included in the consolidated financial statements of the
Company as of and for the year ended December 31, 2019. Our audit of internal control over financial reporting
of the Company also excluded an evaluation of the internal control over financial reporting of NTA.
Basis for Opinion
The Company’s management is responsible 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. Our responsibility is to express an
opinion on the Company’s internal control over financial reporting based on our audit. We are a public
accounting firm registered with the PCAOB and are required to be independent with respect to the Company in
136 Annual Report on Form 10-K
Horace Mann Educators Corporation
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 audit in accordance with the standards of the PCAOB. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. 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 audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
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.
KPMG LLP
Chicago, Illinois
February 28, 2020
ITEM 9B. I Other Information
None.
PART III
Horace Mann Educators Corporation's (Company) Proxy Statement will be filed with the SEC no later than April
30, 2020, in preparation for its 2020 Annual Meeting of Shareholders. As permitted in Paragraph G(3) of the
General Instructions for Form 10-K, the Company is incorporating by reference, to that Proxy Statement, portions
of the information required by Part III as noted in Item 10 through Item 14 below.
Horace Mann Educators Corporation
Annual Report on Form 10-K 137
ITEM 10. I Directors, Executive Officers and Corporate
Governance
(a)
(b)
The following sections of the Company's Proxy Statement for its 2020 Annual Meeting of Shareholders,
are incorporated herein by reference: "Board of Directors and Committees", "Executive Officers",
"Section 16(a) Beneficial Ownership Reporting Compliance", and "Corporate Governance".
The Company 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 posted on the Company's website set forth
above within four days after such amendment or grant of waiver rather than by filing a Current Report on
Form 8-K.
ITEM 11. I Executive Compensation
The "Proposal No. 2 - Advisory Resolution to Approve Named Executive Officers' Compensation" section of the
Company's Proxy Statement for its 2020 Annual Meeting of Shareholders, is incorporated herein by reference. It
includes "Compensation Discussion and Analysis", and "Compensation Committee Report".
ITEM 12. I Security Ownership of Certain Beneficial Owners and
Management and Related Shareholder Matters
(a)
(b)
The "Security Ownership of Certain Beneficial Owners and Management" section of the Company's
Proxy Statement for its 2020 Annual Meeting of Shareholders, is incorporated herein by reference.
The "Equity Compensation Plan Information" section of the Company's Proxy Statement for its 2020
Annual Meeting of Shareholders, is incorporated herein by reference. Additional information on share-
based equity compensation under the Company's equity compensation plans is available in Part II - Item
8, Note 13 of the Consolidated Financial Statements.
ITEM 13. I Certain Relationships and Related Transactions and
Director Independence
The following sections of the Company's Proxy Statement for its 2020 Annual Meeting of Shareholders, are
incorporated by reference: "Corporate Governance - Director Independence", and "Corporate Governance -
Related Person Transactions".
ITEM 14. I Principal Accountant Fees and Services
Information required for this Item 14 is incorporated herein by reference, to the Company's Proxy Statement for
its 2020 Annual Meeting of Shareholders in the section "Proposal No. 3 - Ratification of Independent Registered
Public Accounting Firm".
138 Annual Report on Form 10-K
Horace Mann Educators Corporation
PART IV
ITEM 15. I Exhibits and Financial Statement Schedules
(a)(1) The following consolidated financial statements of the Company are contained in Part II - Item 8
of this report, Page 70 to Page 134
(a)(2)
Financial statement schedules
Schedule I - Summary of Investments Other than Investments in Related Parties, Page 140
Schedule II - Condensed Financial Information of Registrant, Page 141 to Page 144
Schedules III and VI Combined - Supplementary Insurance Information and Supplemental
Information Concerning Property and Casualty Insurance Operations, Page 145
Schedule IV - Reinsurance, Page 146
Horace Mann Educators Corporation
Annual Report on Form 10-K 139
HORACE MANN EDUCATORS CORPORATION
SUMMARY OF INVESTMENTS-OTHER THAN INVESTMENTS IN RELATED PARTIES
December 31, 2019
($ in thousands)
SCHEDULE I
Fixed maturity securities
Type of Investments
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
$
906,886 $
956,104 $
1,545,787
42,801
54,519
1,388,035
1,068,661
76,237
352,164
21,890
1,686,203
45,370
61,748
1,495,426
1,079,586
75,933
367,055
24,251
Amount
Shown in
Balance
Sheet
956,104
1,686,203
45,370
61,748
1,495,426
1,079,586
75,933
367,055
24,251
Total fixed maturity securities
5,456,980
5,791,676
5,791,676
Equity securities
Industrial, miscellaneous and all other
Banking & finance and insurance companies
Public utilities
Non-redeemable preferred stocks
Closed-end fund
13,360
5,706
1,052
60,325
21,421
13,360
5,706
1,052
60,325
21,421
13,360
5,706
1,052
60,325
21,421
Total equity securities
101,864
101,864
101,864
Limited partnership interests
Short-term investments
Policy loans
Derivatives
Mortgage loans
Other
383,717
172,667
153,541
XXX
XXX
XXX
8,657 $
9,771
12,758
13,239
XXX
XXX
383,717
172,667
153,541
13,239
9,771
12,758
Total investments
$
6,299,955
XXX
$
6,639,233
(1)
Bonds at original cost reduced by repayments and adjusted for amortization of premiums or accrual of discounts and impairment in value of
specifically identified investments.
See accompanying Report of Independent Registered Public Accounting Firm.
140 Annual Report on Form 10-K
Horace Mann Educators Corporation
HORACE MANN EDUCATORS CORPORATION
(Parent Company Only)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEETS
As of December 31, 2019 and 2018
($ in thousands, except share data)
SCHEDULE II
December 31,
2019
2018
ASSETS
$
$
$
1,453
1,901,725
62,442
5,255
1,473,538
66,138
1,965,620
$
1,544,931
LIABILITIES AND SHAREHOLDERS' EQUITY
$
Investments and cash
Investment in subsidiaries
Other assets
Total assets
Short-term debt
Long-term debt
Other 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, 2019, 66,088,808; 2018, 65,820,369
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss), net of taxes:
Net unrealized investment gains on securities
Net funded status of benefit plans
Treasury stock, at cost, 2019, 24,850,484 shares;
2018, 24,850,484 shares
$
135,000
248,025
15,310
398,335
—
66
480,962
1,352,539
230,448
(10,767)
—
247,740
6,641
254,381
—
66
475,109
1,216,582
96,941
(12,185)
(485,963)
(485,963)
Total shareholders' equity
1,567,285
1,290,550
Total liabilities and shareholders' equity
$
1,965,620
$
1,544,931
See accompanying Note to Condensed Financial Statements.
See accompanying Report of Independent Registered Public Accounting Firm.
Horace Mann Educators Corporation
Annual Report on Form 10-K 141
HORACE MANN EDUCATORS CORPORATION
(Parent Company Only)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF OPERATIONS
($ in thousands)
SCHEDULE II (continued)
Revenues
Net investment income
Realized investment gains
Total revenues
Expenses
Interest expense
Other
Total expenses
Year Ended December 31,
2019
2018
2017
$
(135) $
—
100 $
—
(135)
100
34
—
34
14,272
12,632
11,892
10,898
11,835
5,101
26,904
22,790
16,936
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
(27,039)
(6,029)
(21,010)
205,453
(22,690)
(4,723)
(17,967)
36,310
(16,902)
(6,667)
(10,235)
179,694
Net income
$
184,443 $
18,343 $
169,459
See accompanying Note to Condensed Financial Statements.
See accompanying Report of Independent Registered Public Accounting Firm.
142 Annual Report on Form 10-K
Horace Mann Educators Corporation
HORACE MANN EDUCATORS CORPORATION
(Parent Company Only)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF CASH FLOWS
($ in thousands)
SCHEDULE II (continued)
Cash flows from operating activities
Net Income
Equity in net income of subsidiaries
Dividends received from subsidiaries
Changes in:
Income taxes
Operating assets and liabilities
Other
Year Ended December 31,
2019
2018
2017
$
184,443 $
(205,453)
363,250
18,343 $
(36,310)
61,000
169,459
(179,694)
56,900
3,369
8,310
686
(4,939)
(1,792)
13,804
(7,041)
(260)
9,861
Net cash provided by operating activities
354,605
50,106
49,225
Cash flows from investing activities
Net increase (decrease) in short-term investments
Acquisition of businesses
3,336
(444,124)
1,621
—
(2,338)
—
Net cash provided by (used in) investing activities
(440,788)
1,621
(2,338)
Cash flows from financing activities
Dividends paid to shareholders
Principal borrowings on senior revolving credit facility
Acquisition of treasury stock
Proceeds from exercise of stock options
Withholding tax payments on RSUs tendered
(47,333)
135,000
—
1,730
(3,680)
(46,689)
—
(5,088)
3,627
(3,165)
(46,114)
—
(1,660)
4,190
(3,245)
Net cash provided by (used in) financing activities
85,717
(51,315)
(46,829)
Net increase (decrease) in cash
Cash at beginning of period
(466)
538
412
126
58
68
Cash at end of period
$
72 $
538 $
126
See accompanying Note to Condensed Financial Statements.
See accompanying Report of Independent Registered Public Accounting Firm.
Horace Mann Educators Corporation
Annual Report on Form 10-K 143
HORACE MANN EDUCATORS CORPORATION
(Parent Company Only)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTE TO CONDENSED FINANCIAL STATEMENTS
SCHEDULE II (continued)
The accompanying condensed financial statements should be read in conjunction with the Consolidated
Financial Statements and the accompanying notes thereto.
144 Annual Report on Form 10-K
Horace Mann Educators Corporation
SCHEDULE III & VI (COMBINED)
HORACE MANN EDUCATORS CORPORATION
SCHEDULE III: SUPPLEMENTARY INSURANCE INFORMATION
SCHEDULE VI: SUPPLEMENTAL INFORMATION CONCERNING PROPERTY AND CASUALTY INSURANCE OPERATIONS
($ in thousands)
Column identification
Schedule
Schedule
B
B
C
C
D
D
E
Deferred
policy
acquisition
costs
Future
policy
benefits,
claims
and claim
expenses
Discount,
if any,
deducted
in
previous
column
Unearned
premiums
Segment
Year Ended December 31, 2019
E
Other
policy
claims
and
benefits
payable
F
F
G
G
H
Premium
revenue/
premium
earned
Net
investment
income
Benefits,
claims
and
settlement
expenses
H
Claims and claim
adjustment
expenses
incurred related to
Current
year
Prior
years
I
I
J
J
K
K
Amortization
of deferred
policy
acquisition
costs
Other
operating
expenses
Paid
claims and
claim
adjustment
expenses
Premiums
written
Property and Casualty
$
28,616
$ 386,976
$
— $ 273,998
$
— $683,454
$
41,740
$ 475,563
$ 483,062
$ (7,500) $
79,453
$ 105,489
$
486,547
$ 683,101
Supplemental
Retirement
Life
Other, including consolidating
eliminations
1,967
390,276
185,294
4,698,461
60,791
1,201,593
N/A
N/A
xxx
xxx
xxx
xxx
3,218
—
734
643,826
65,815
29,083
7,480
24,723
245,475
173,116
1,213
3,457
119,602
71,957
124,452
N/A
N/A
N/A
(1,588)
N/A
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
438
21,446
7,844
26,476
90,782
37,820
N/A
26,434
Total
$
276,668
$6,677,306
xxx
$ 279,163
$ 647,283
$897,954
$
365,064
$ 797,854
xxx
xxx
$
109,181
$ 287,001
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
Year Ended December 31, 2018
Property and Casualty
$
30,033
$ 367,180
$
— $ 274,351
$
— $665,734
$
40,104
$ 547,659
$ 547,959
$
(300) $
79,073
$ 101,834
$
531,977
$ 681,583
Retirement
Life
Other, including consolidating
eliminations
209,232
4,573,170
59,477
1,167,557
N/A
N/A
xxx
xxx
xxx
704
764,607
31,269
262,634
168,732
1,170
3,381
120,330
74,399
127,368
N/A
N/A
N/A
(630)
N/A
xxx
xxx
xxx
xxx
xxx
xxx
23,186
7,630
57,269
36,314
N/A
22,997
Total
$
298,742
$6,107,907
xxx
$ 276,225
$ 767,988
$817,333
$
376,507
$ 843,759
xxx
xxx
$
109,889
$ 218,414
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
Year Ended December 31, 2017
Property and Casualty
$
29,191
$ 319,182
$
— $ 258,502
$
— $648,263
$
36,178
$ 496,289
$ 498,989
$ (2,700) $
76,967
$ 96,488
$
481,074
$ 662,760
Retirement
Life
Other, including consolidating
eliminations
174,661
4,466,039
53,974
1,136,263
N/A
N/A
xxx
xxx
xxx
705
720,926
28,003
261,994
159,385
1,332
3,335
118,437
76,195
125,267
N/A
N/A
N/A
(737)
N/A
xxx
xxx
xxx
xxx
xxx
xxx
17,759
7,459
49,733
36,550
N/A
16,966
Total
$
257,826
$5,921,484
xxx
$ 260,539
$ 724,261
$794,703
$
373,630
$ 780,941
xxx
xxx
$
102,185
$ 199,737
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
N/A - Not applicable.
See accompanying Report of Independent Registered Public Accounting Firm.
Horace Mann Educators Corporation
Annual Report on Form 10-K 145
HORACE MANN EDUCATORS CORPORATION
REINSURANCE
($ in thousands)
SCHEDULE IV
Column A
Column B
Column C
Column D
Column E
Column F
Gross
Amount
Ceded to
Other
Companies
Assumed
from Other
Companies
Net
Amount
Percentage
of Amount
Assumed to Net
Year Ended December 31, 2019
Life insurance in force
Premiums
Property and Casualty
Supplemental
Retirement
Life
$ 19,179,823 $
4,813,185 $
— $ 14,366,638
$
689,156 $
65,918
35,602
126,934
16,457 $
104
6,519
7,332
10,755 $
1
—
—
683,454
65,815
29,083
119,602
Total premiums
$
917,610 $
30,412 $
10,756 $
897,954
Year Ended December 31, 2018
Life insurance in force
Premiums
Property and Casualty
Retirement
Life
$ 18,277,691 $
4,505,208 $
— $ 13,772,483
$
682,478 $
31,269
127,400
21,767 $
—
7,070
5,023 $
—
—
665,734
31,269
120,330
Total premiums
$
841,147 $
28,837 $
5,023 $
817,333
Year Ended December 31, 2017
Life insurance in force
Premiums
Property and Casualty
Retirement
Life
$ 17,564,270 $
4,295,412 $
— $ 13,268,858
$
658,960 $
28,003
125,136
15,337 $
—
6,699
4,640 $
—
—
648,263
28,003
118,437
Total premiums
$
812,099 $
22,036 $
4,640 $
794,703
Note:
Premiums above include insurance premiums earned and contract charges earned.
—
1.6%
—
—
—
1.2%
—
0.8%
—
—
0.6%
—
0.7%
—
—
0.6%
See accompanying Report of Independent Registered Public Accounting Firm.
146 Annual Report on Form 10-K
Horace Mann Educators Corporation
(a)(3)
by an asterisk (*).
The following items are filed as Exhibits. Management contracts and compensatory plans are indicated
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.
Bylaws of HMEC, incorporated by reference to Exhibit 3.2 to HMEC's Quarterly Report on Form
10-Q for the quarter ended June 30, 2003, filed with the SEC on August 14, 2003.
(4) Instruments defining the rights of security holders, including indentures:
4.1
Indenture, dated as of November 23, 2015, by and between HMEC and The Bank of New York
Mellon Trust Company, N.A., as trustee, incorporated by reference to Exhibit 4.1 to HMEC's Current
Report on Form 8-K dated November 18, 2015, filed with the SEC on November 23, 2015.
4.1(a)
Form of HMEC 4.500% 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.
4.2
Certificate of Designations for HMEC Series A Cumulative Convertible Preferred Stock, incorporated
by reference to Exhibit 4.3 to HMEC's Annual Report on Form 10-K for the year ended December
31, 2005, filed with the SEC on March 16, 2006.
4.3
Description of Securities
(10) Material contracts:
10.1
Credit Agreement dated as of June 21, 2019 among HMEC, certain financial institutions named
therein and PNC Bank, N.A., as administrative agent, incorporated by reference to Exhibit 10.1 to
HMEC’s Current Report on Form 8-K dated June 24, 2019, filed with the SEC on June 24, 2019.
10.1(a)
First Amendment to Credit Agreement dated as of June 21, 2019 among HMEC, certain financial
institutions named therein and PNC Bank, N.A., as administrative agent.
10.2*
Horace Mann Educators Corporation Amended and Restated 2002 Incentive Compensation Plan
("2002 Incentive Compensation Plan"), incorporated by reference to Exhibit 10.2 to HMEC's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2005, filed with the SEC on August
9, 2005.
10.2(a)*
Revised Specimen Employee Stock Option Agreement under the 2002 Incentive Compensation
Plan, incorporated by reference to Exhibit 10.6(b) to HMEC's Annual Report on Form 10-K for the
year ended December 31, 2008, filed with the SEC on March 2, 2009.
10.2(b)*
Specimen Employee Restricted Stock Unit Agreement under the 2002 Incentive Compensation
Plan, incorporated by reference to Exhibit 10.6(d) to HMEC's Annual Report on Form 10-K for the
year ended December 31, 2005, filed with the SEC on March 16, 2006.
Horace Mann Educators Corporation
Annual Report on Form 10-K 147
10.2(c)*
Revised Specimen Employee Restricted Stock Unit Agreement under the 2002 Incentive
Compensation Plan, incorporated by reference to Exhibit 10.6(f) to HMEC's Annual Report on Form
10-K for the year ended December 31, 2008, filed with the SEC on March 2, 2009.
10.2(d)*
Specimen Non-employee Director Restricted Stock Unit Agreement under the 2002 Incentive
Compensation Plan, incorporated by reference to Exhibit 10.6(e) to HMEC's Annual Report on Form
10-K for the year ended December 31, 2005, filed with the SEC on March 16, 2006.
10.2(e)*
Revised Specimen Non-employee Director Restricted Stock Unit Agreement under the 2002
Incentive Compensation Plan, incorporated by reference to Exhibit 10.6(h) to HMEC's Annual Report
on Form 10-K for the year ended December 31, 2008, filed with the SEC on March 2, 2009.
10.3*
10.3(a)*
10.3(b)*
10.3(c)*
10.3(d)*
10.3(e)*
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.
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.
148 Annual Report on Form 10-K
Horace Mann Educators Corporation
10.4*
10.5*
10.6*
10.7*
10.8*
10.9*
Horace Mann Supplemental Employee Retirement Plan, 2002 Restatement, incorporated by
reference to Exhibit 10.1 to HMEC's Quarterly Report on Form 10-Q for the quarter ended March
31, 2002, filed with the SEC on May 15, 2002.
Horace Mann Executive Supplemental Employee Retirement Plan, 2002 Restatement, incorporated
by reference to Exhibit 10.2 to HMEC's Quarterly Report on Form 10-Q for the quarter ended March
31, 2002, filed with the SEC on May 15, 2002.
Amended and Restated Horace Mann Nonqualified Supplemental Money Purchase Pension Plan,
incorporated by reference to Exhibit 10.9 to HMEC's Annual Report on Form 10-K for the year
ended December 31, 2008, filed with the SEC on March 2, 2009.
Summary of HMEC Non-employee Director Compensation, incorporated by reference to Exhibit
10.7 to HMEC's Quarterly Report on Form 10-Q for the quarter ended June 30, 2019, filed with the
SEC on August 8, 2019.
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, 2019, filed
with the SEC on May 10, 2019.
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 March 31,
2019, filed with the SEC on May 10, 2019.
10.11*
HMSC Executive Severance Plan, incorporated by reference to Exhibit 10.16 to HMEC's Current
Report on Form 8-K dated March 7, 2012, filed with the SEC on March 13, 2012.
10.11(a)*
First Amendment to the HMSC Executive Severance Plan, incorporated by reference to Exhibit
10.16(a) to HMEC's Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, filed with
the SEC on August 9, 2012.
10.11(b)*
HMSC Executive Severance Plan Schedule A Participants, incorporated by reference to Exhibit
10.11(b) to HMEC's Quarterly Report on Form 10-Q for the quarter ended March 31, 2019, filed
with the SEC on May 10, 2019.
10.12
Stock Purchase Agreement Among Horace Mann Educators Corporation, and Robert Paglione,
Paglione Family Irrevocable Trust F/B/O Adam Paglione, Paglione Family Irrevocable Trust F/B/O
Lisa and Jorge Arroyo, Beau Adams and Benefit Consultants Group, Inc. dated as of October 30,
2018, incorporated by reference to Exhibit 10.12 to HMEC's Annual Report on Form 10-K for the
year ended December 31, 2018, filed with the SEC on March 1, 2019.
Horace Mann Educators Corporation
Annual Report on Form 10-K 149
10.13
Purchase Agreement By and Among Ellard Family Holdings, Inc., Brian M. Ellard, The JCE Exempt
Trust and Horace Mann Educators Corporation dated as of December 10, 2018, incorporated by
reference to Exhibit 10.13 to HMEC's Annual Report on Form 10-K for the year ended December
31, 2018, filed with the SEC on March 1, 2019.
10.14
Executive Transition Agreement between HMSC and Wade A. Rugenstein as of December 5, 2018.
(11)
(21)
(23)
Statement regarding computation of per share earnings.
Subsidiaries of HMEC.
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:
101.1
The following information from Horace Mann Educators Corporation’s Annual Report on
Form 10-K for the year ended December 31, 2019 formatted in Inline XBRL: (i) Consolidated
Balance Sheets at December 31, 2019 and 2018 (ii) Consolidated Statements of Operations for
the years ended December 31, 2019, 2018 and 2017; (iii) Consolidated Statements of
Comprehensive Income (Loss) for the years ended December 31, 2019, 2018 and 2017;
(iv) Consolidated Statements of Changes in Shareholders' Equity for the years ended
December 31, 2019, 2018 and 2017; (v) Consolidated Statements of Cash Flows for the years
ended December 31, 2019, 2018 and 2017; (vi) Notes to Consolidated Financial Statements;
(vii) Financial Statement Schedules; and (viii) the cover page.
104.1
Cover Page Interactive Data File (Embedded within the Inline XBRL document and included in
Exhibit 101.1).
ITEM 16. I Form 10-K Summary
On June 24, 2019, the Company reinsured a $2.9 billion block of in force fixed and variable annuity business with
a minimum crediting rate of 4.5%. This represented approximately 50% of the Company’s in force fixed annuity
account balances. The arrangement contains investment guidelines and a trust to help meet the Company’s risk
management objectives. The annuity reinsurance transaction was effective April 1, 2019.
On July 1, 2019, the Company acquired all the equity interests in NTA pursuant to a Purchase Agreement
(Agreement) dated as of December 10, 2018. The purchase price of the transaction was $425.9 million includes
$20.9 million representing NTA’s share of "adjusted earnings" (as determined in accordance with the terms of the
Agreement) from July 1, 2018 to July 1, 2019.
150 Annual Report on Form 10-K
Horace Mann Educators Corporation
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Horace Mann
Educators Corporation has duly caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
HORACE MANN EDUCATORS CORPORATION
By:
/s/ Marita Zuraitis
Marita Zuraitis
President and Chief Executive Officer
February 28, 2020
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.
Signature
Title
Date
By:
/s/ Marita Zuraitis
Marita Zuraitis
President, Chief Executive Officer and Director
(Principal Executive Officer)
February 28, 2020
By:
/s/ Bret A. Conklin
Executive Vice President and Chief Financial Officer
February 28, 2020
Bret A. Conklin
(Principal Financial Officer)
By:
By:
By:
By:
By:
By:
By:
By:
By:
By:
/s/ Kimberly A. Johnson
Kimberly A. Johnson
Senior Vice President and Controller
(Principal Accounting Officer)
February 28, 2020
/s/ H. Wade Reece
H. Wade Reece
/s/ Mark S. Casady
Mark S. Casady
/s/ Daniel A. Domenech
Daniel A. Domenech
/s/ Stephen J. Hasenmiller
Stephen J. Hasenmiller
/s/ Perry G. Hines
Perry G. Hines
/s/ Mark E. Konen
Mark E. Konen
/s/ Beverley J. McClure
Beverley J. McClure
/s/ Robert Stricker
Robert Stricker
/s/ Steven O. Swyers
Steven O. Swyers
Chairman of the Board of Directors
February 28, 2020
Director
Director
Director
Director
Director
Director
Director
Director
February 28, 2020
February 28, 2020
February 28, 2020
February 28, 2020
February 28, 2020
February 28, 2020
February 28, 2020
February 28, 2020
Horace Mann Educators Corporation
Annual Report on Form 10-K 151
1945
2020
Y E A R S
Serving educators since 1945
HA-C00387 (Mar. 20)