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Section 1: 10-Q (10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q 

[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 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
37-0911756
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
1 Horace Mann Plaza, Springfield, Illinois      62715-0001
(Address of principal executive offices, including Zip Code)
Registrant’s Telephone Number, Including Area Code: 217-789-2500

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   X   No      

Indicate by check mark whether the registrant has submitted electronically 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   X   No      

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.
Large accelerated filer
 X
 
Accelerated filer
        
Non-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   X  
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol
 
Name of each exchange
on which registered
Common Stock, $0.001 par value
 
HMN
 
New York Stock Exchange

As of April 30, 2019, the registrant had 41,154,802 shares of Common Stock, par value $0.001 per share, outstanding.







HORACE MANN EDUCATORS CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2019
INDEX
Page
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 




PART I: FINANCIAL INFORMATION

Item 1.    Financial Statements (Unaudited)

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
To the Shareholders and Board of Directors
Horace Mann Educators Corporation:

Results of Review of Interim Financial Information
We have reviewed the consolidated balance sheet of Horace Mann Educators Corporation and subsidiaries (the Company) as of March 31, 2019, and the related consolidated statements of operations, comprehensive income (loss), changes in shareholders’ equity and cash flows for the three-months ended March 31, 2019 and 2018, and the related notes (collectively, the consolidated interim financial information). Based on our reviews, we are not aware of any material modifications that should be made to the consolidated interim financial information for it to be in conformity with U.S. generally accepted accounting principles.
 
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of December 31, 2018, and the related consolidated statements of operations and comprehensive income (loss), changes in shareholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated March 1, 2019, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2018, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
Basis for Review Results
This consolidated interim financial information is the responsibility of the Company’s management. 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 reviews in accordance with the standards of the PCAOB. A review of consolidated interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
 
/s/ KPMG LLP
KPMG LLP
 
 
Chicago, Illinois
 
May 10, 2019
 
 


1



HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED BALANCE SHEETS
($ in thousands, except share data)

 
 
March 31, 2019
 
December 31, 2018
 
 
(Unaudited)
 
 
ASSETS
Investments
 
 
 
 
Fixed maturity securities, available for sale, at fair value
(amortized cost 2019, $7,487,473; 2018, $7,373,911)
 
$
7,798,004

 
$
7,515,318

Equity securities, at fair value
 
105,487

 
111,750

Limited partnership interests
 
330,434

 
328,516

Short-term and other investments
 
323,853

 
295,093

Total investments
 
8,557,778

 
8,250,677

Cash
 
7,281

 
11,906

Deferred policy acquisition costs
 
275,431

 
298,742

Goodwill
 
57,483

 
47,396

Other assets
 
439,008

 
422,047

Separate Account (variable annuity) assets
 
2,224,099

 
2,001,128

Total assets
 
$
11,561,080

 
$
11,031,896

 
 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Policy liabilities
 
 
 
 
Investment contract and life policy reserves
 
$
5,748,140

 
$
5,711,193

Unpaid claims and claim expenses
 
393,549

 
396,714

Unearned premiums
 
267,029

 
276,225

Total policy liabilities
 
6,408,718

 
6,384,132

Other policyholder funds
 
821,813

 
767,988

Other liabilities
 
384,926

 
290,358

Long-term debt
 
297,810

 
297,740

Separate Account (variable annuity) liabilities
 
2,224,099

 
2,001,128

Total liabilities
 
10,137,366

 
9,741,346

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, 66,000,489; 2018, 65,820,369
 
66

 
66

Additional paid-in capital
 
474,336

 
475,109

Retained earnings
 
1,236,621

 
1,216,582

Accumulated other comprehensive income (loss), net of tax:
 
 
 
 

Net unrealized investment gains on securities
 
210,839

 
96,941

Net funded status of benefit plans
 
(12,185
)
 
(12,185
)
Treasury stock, at cost, 2019, 24,850,484 shares;
2018, 24,850,484 shares
 
(485,963
)
 
(485,963
)
Total shareholders’ equity
 
1,423,714

 
1,290,550

Total liabilities and shareholders’ equity
 
$
11,561,080

 
$
11,031,896









See Notes to Consolidated Financial Statements.

2



HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
($ in thousands, except per share data)

 
 
Three Months Ended
March 31,
 
 
2019
 
2018
Revenues
 
 
 
 
Insurance premiums and contract charges earned
 
$
209,785

 
$
202,998

Net investment income
 
92,800

 
91,864

Net investment gains (losses)
 
7,417

 
(1,654
)
Other income
 
3,211

 
2,281

 
 
 
 
 
Total revenues
 
313,213

 
295,489

 
 
 
 
 
Benefits, losses and expenses
 
 
 
 
Benefits, claims and settlement expenses
 
139,384

 
143,562

Interest credited
 
52,922

 
50,035

DAC amortization expense
 
24,973

 
26,705

Operating expenses
 
54,053

 
48,169

Interest expense
 
3,303

 
3,172

 
 
 
 
 
Total benefits, losses and expenses
 
274,635

 
271,643

 
 
 
 
 
Income before income taxes
 
38,578

 
23,846

Income tax expense
 
6,412

 
3,691

 
 
 
 
 
Net income
 
$
32,166

 
$
20,155

 
 
 
 
 
Net income per share
 
 
 
 
Basic
 
$
0.77

 
$
0.49

Diluted
 
$
0.77

 
$
0.48

 
 
 
 
 
Weighted average number of shares
and equivalent shares
 
 
 
 
Basic
 
41,610

 
41,497

Diluted
 
41,785

 
41,653

 
 
 
 
 
Net investment gains (losses)
 
 
 
 
Total other-than-temporary impairment losses
on securities
 
$
(236
)
 
$
(110
)
Portion of losses recognized in other
comprehensive income (loss)
 

 

Net other-than-temporary impairment losses
on securities recognized in earnings
 
(236
)
 
(110
)
Sales and other, net
 
4,838

 
2,203

Change in fair value - equity securities
 
3,506

 
(5,186
)
Change in fair value and gains realized
on settlements - derivative instruments
 
(691
)
 
1,439

Total
 
$
7,417

 
$
(1,654
)


See Notes to Consolidated Financial Statements.

3



HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
($ in thousands)

 
 
Three Months Ended
March 31,
 
 
2019
 
2018
Comprehensive income (loss)
 
 
 
 
Net income
 
$
32,166

 
$
20,155

Other comprehensive income (loss), net of tax:
 
 
 
 
Change in net unrealized investment gains
(losses) on securities
 
113,898

 
(107,096
)
Change in net funded status of benefit plans
 

 

Cumulative effect of change in accounting principle
 

 
(15,041
)
Other comprehensive income (loss)
 
113,898

 
(122,137
)
Total
 
$
146,064

 
$
(101,982
)
 






































See Notes to Consolidated Financial Statements.

4



HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)
($ in thousands, except per share data)

 
 
Three Months Ended
March 31,
 
 
2019
 
2018
Common stock, $0.001 par value
 
 
 
 
Beginning balance
 
$
66

 
$
65

Options exercised, 2019, 26,094 shares; 2018, 56,614 shares
 

 

Conversion of common stock units, 2019, 7,585 shares;
2018, 11,804 shares
 

 

Conversion of restricted stock units, 2019, 146,441 shares;
2018, 105,116 shares
 

 
1

Ending balance
 
66

 
66

 
 
 
 
 
Additional paid-in capital
 
 
 
 
Beginning balance
 
475,109

 
464,246

Options exercised and conversion of common stock
units and restricted stock units
 
(2,104
)
 
(125
)
Share-based compensation expense
 
1,331

 
2,156

Ending balance
 
474,336

 
466,277

 
 
 
 
 
Retained earnings
 
 
 
 
Beginning balance
 
1,216,582

 
1,231,177

Net income
 
32,166

 
20,155

Dividends, 2019, $0.2875 per share; 2018, $0.2850 per share
 
(12,127
)
 
(11,979
)
Cumulative effect of change in accounting principle
 

 
15,041

Ending balance
 
1,236,621

 
1,254,394

 
 
 
 
 
Accumulated other comprehensive income (loss), net of tax:
 
 
 
 
Beginning balance
 
84,756

 
286,960

Change in net unrealized investment gains on securities
 
113,898

 
(107,096
)
Change in net funded status of benefit plans
 

 

Cumulative effect of change in accounting principle
 

 
(15,041
)
Ending balance
 
198,654

 
164,823

 
 
 
 
 
Treasury stock, at cost
 
 
 
 
Beginning balance, 2019, 24,850,484 shares;
2018, 24,721,372 shares
 
(485,963
)
 
(480,875
)
Acquisition of shares, 2019, 0 shares; 2018, 161 shares
 

 
(6
)
Ending balance, 2019, 24,850,484 shares;
2018, 24,721,533 shares
 
(485,963
)
 
(480,881
)
 
 
 
 
 
Shareholders’ equity at end of period
 
$
1,423,714

 
$
1,404,679










See Notes to Consolidated Financial Statements.

5



HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
($ in thousands)
 
 
Three Months Ended
March 31,
 
 
2019
 
2018
Cash flows - operating activities
 
 
 
 
Premiums collected
 
$
197,695

 
$
179,456

Policyholder benefits paid
 
(101,583
)
 
(131,090
)
Policy acquisition and other operating expenses paid
 
(77,035
)
 
(72,592
)
Income taxes recovered
 
125

 
690

Investment income collected
 
89,984

 
93,426

Interest expense paid
 
(399
)
 
(256
)
Other
 
16,016

 
2,492

 
 
 
 
 
Net cash provided by operating activities
 
124,803

 
72,126

 
 
 
 
 
Cash flows - investing activities
 
 

 
 

Fixed maturity securities
 
 

 
 

Purchases
 
(307,451
)
 
(308,450
)
Sales
 
59,724

 
89,894

Maturities, paydowns, calls and redemptions
 
136,141

 
151,722

Equity securities
 
 
 
 
Purchases
 
(3,569
)
 
(2,208
)
Sales and repayments
 
15,489

 
2,048

Limited partnership interests
 
 
 
 
Purchases
 
(8,842
)
 
(13,016
)
Sales
 
9,858

 
3,996

Change in short-term and other investments, net
 
(29,341
)
 
42,310

Acquisition of business, net of cash acquired
 
(18,198
)
 

 
 
 
 
 
Net cash used in investing activities
 
(146,189
)
 
(33,704
)
 
 
 
 
 
Cash flows - financing activities
 
 

 
 

Dividends paid to shareholders
 
(11,790
)
 
(11,638
)
Acquisition of treasury stock
 

 
(6
)
Proceeds from exercise of stock options
 
583

 
1,136

Withholding tax payments on RSUs tendered
 
(3,311
)
 
(2,061
)
Annuity contracts: variable, fixed and FHLB funding agreements
 
 

 
 

Deposits
 
157,305

 
98,837

Benefits, withdrawals and net transfers to
Separate Account (variable annuity) assets
 
(109,246
)
 
(112,272
)
Life policy accounts
 
 
 
 

Deposits
 
2,714

 
1,111

Withdrawals and surrenders
 
(904
)
 
(1,329
)
Change in book overdrafts
 
(18,590
)
 
4,124

 
 
 
 
 
Net cash provided by (used in) financing activities
 
16,761

 
(22,098
)
 
 
 
 
 
Net increase (decrease) in cash
 
(4,625
)
 
16,324

 
 
 
 
 
Cash at beginning of period
 
11,906

 
7,627

 
 
 
 
 
Cash at end of period
 
$
7,281

 
$
23,951


See Notes to Consolidated Financial Statements.

6



HORACE MANN EDUCATORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2019 and 2018
($ in thousands, except per share data and unless noted otherwise)

Note 1 - Basis of Presentation

The accompanying unaudited consolidated financial statements of Horace Mann Educators Corporation (HMEC; and together with its subsidiaries, the Company or Horace Mann) have been prepared in conformity with accounting principles generally accepted in the U.S. (GAAP) and with the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and disclosures normally included in annual financial statements prepared in conformity with GAAP, but are not required for interim reporting purposes, have been omitted. The Company believes that these consolidated financial statements contain all adjustments (consisting of normal recurring accruals) which are, in the opinion of management, necessary to present fairly the Company’s consolidated financial position as of March 31, 2019, the consolidated results of operations, comprehensive income (loss), changes in shareholders’ equity and cash flows for the three month periods ended March 31, 2019 and 2018. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
 
The Company has reclassified the presentation of certain prior period information to conform to the current presentation.

The subsidiaries of HMEC market and underwrite personal lines of property and casualty insurance products (primarily personal lines of automobile and property insurance), retirement products (primarily tax-qualified annuities) and life insurance, primarily to K-12 teachers, administrators and other employees of public schools and their families. HMEC’s principal operating subsidiaries are Horace Mann Life Insurance Company, Horace Mann Insurance Company, Teachers Insurance Company, Horace Mann Property & Casualty Insurance Company and Horace Mann Lloyds.
 
These consolidated financial statements should be read in conjunction with the consolidated financial statements and the related notes to consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
 
The results of operations for the three month period ended March 31, 2019 are not necessarily indicative of the results to be expected for the full year.

Investment Contract and Life Policy Reserves
 
This table summarizes the Company’s investment contract and life policy reserves.
($ in thousands)
 
March 31, 2019
 
December 31, 2018
Investment contract reserves
 
$
4,585,141

 
$
4,555,856

Life policy reserves
 
1,162,999

 
1,155,337

Total
 
$
5,748,140

 
$
5,711,193



7


Note 1 - Basis of Presentation (Continued)

Accumulated Other Comprehensive Income (Loss)

Accumulated other comprehensive income (loss) (AOCI) represents the accumulated change in shareholders’ equity from transactions and other events and circumstances from non-shareholder sources. For the Company, AOCI includes 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. The following tables reconcile these components.
($ in thousands)
 
Net Unrealized Investment Gains
(Losses) on Securities (1)(2)
 
Net Funded Status of
Benefit Plans (1)
 
Total (1)(3)
Beginning balance, January 1, 2019
 
$
96,941

 
$
(12,185
)
 
$
84,756

Other comprehensive income (loss) before reclassifications
 
120,303

 

 
120,303

Amounts reclassified from AOCI
 
(6,405
)
 

 
(6,405
)
Net current period other comprehensive income (loss)
 
113,898

 

 
113,898

Ending balance, March 31, 2019
 
$
210,839

 
$
(12,185
)
 
$
198,654

 
 
 
 
 
 
 
Beginning balance, January 1, 2018
 
$
300,177

 
$
(13,217
)
 
$
286,960

Other comprehensive income (loss) before reclassifications
 
(109,539
)
 

 
(109,539
)
Amounts reclassified from AOCI
 
2,443

 

 
2,443

Cumulative effect of change in accounting principle (3)
 
(15,041
)
 

 
(15,041
)
Net current period other comprehensive income (loss)
 
(122,137
)
 

 
(122,137
)
Ending balance, March 31, 2018
 
$
178,040

 
$
(13,217
)
 
$
164,823

________________
(1) 
All amounts are net of tax.
(2) 
The pretax amounts reclassified from AOCI, $8,108 thousand and $(3,092) thousand, are included in net investment gains (losses) and the related income tax expenses, $1,703 thousand and $(649) thousand, are included in income tax expense in the Consolidated Statements of Operations for the three month periods ended March 31, 2019 and 2018, respectively.
(3) 
The Company adopted guidance on January 1, 2018 that resulted in reclassifying $15,041 thousand of after tax net unrealized gains on equity securities from AOCI to Retained earnings.

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.


8


Note 1 - Basis of Presentation (Continued)

Adopted Accounting Standards

Accounting for Leases

Effective for the quarter ended March 31, 2019, the Company adopted the updated guidance for leases and elected to utilize a cumulative-effect adjustment to the opening balance of retained earnings for the year of adoption. Accordingly, the Company’s reporting for the comparative periods prior to adoption continue to be presented in the financial statements in accordance with previous lease accounting guidance. The Company also elected to apply all practical expedients applicable to the Company in the updated 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 updated guidance resulted in the Company recognizing a $14,499 thousand lease liability equal to the present value of lease payments and a $13,908 thousand 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.

Pending Accounting Standards

Measurement of Credit Losses on Financial Instruments

In June 2016, the FASB issued guidance to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments, including reinsurance receivables, held by companies. The new guidance replaces the incurred loss impairment methodology and requires an organization to measure and recognize all current expected credit losses (CECL) for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Companies will need to utilize forward-looking information to better estimate their credit losses. Companies will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. Any credit losses related to available for sale debt securities will be recorded through an allowance for credit losses with this allowance having a limit equal to the amount by which fair value is below amortized cost. The guidance also requires enhanced qualitative and quantitative disclosures to provide additional information about the amounts recorded in the financial statements. For public business entities, the guidance is effective for annual reporting periods beginning after December 15, 2019, including interim periods within those years, using a modified-retrospective approach. Early application is permitted for annual reporting periods, and interim periods within those years, beginning after December 15, 2018. Management is evaluating the impact this guidance will have on the results of operations and financial position of the Company.


9


Note 1 - Basis of Presentation (Continued)

Simplifying the Test for Goodwill Impairment

In January 2017, the FASB issued guidance to simplify the accounting for goodwill impairment. The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance will remain largely unchanged. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. The same one-step impairment test will be applied to goodwill at all reporting units, even those with zero or negative carrying amounts. Entities will be required to disclose the amount of goodwill for reporting units with zero or negative carrying amounts. Public business entities should adopt the guidance prospectively for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early application is permitted. Management believes the adoption of this accounting guidance will not have a material effect on the results of operations and financial position of the Company.

Accounting for Long-Duration Insurance Contracts

In August 2018, the FASB issued accounting and disclosure guidance that contains targeted changes 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 deferred acquisition costs (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 entities, the guidance is effective for annual reporting periods beginning after December 15, 2020, 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.


10


Note 2 - Acquisitions

The Company and Benefit Consultants Group, Inc. (BCG) entered into a Stock Purchase Agreement under which the Company acquired all of the outstanding capital stock of BCG with a transaction valued at $25 million. The acquisition was approved by the Company’s Board and closed on January 2, 2019. The acquisition of BCG gave rise to recognition of intangible assets of $16.2 million and goodwill of $10.1 million as a result of the purchase accounting. The intangible assets are reported as Other assets in the Consolidated Balance Sheets. Intangible assets that are amortizable have lives of 10 to 16 years.

On December 10, 2018, the Company and NTA Life Enterprises, LLC and Ellard Enterprises, Inc. (collectively, NTA) holding companies and their supplemental insurance subsidiaries entered into a Purchase Agreement under which the Company will acquire all of the equity interests in NTA for $405 million. The acquisition has been approved by the Company’s Board and is expected to close in mid-2019, pending regulatory approvals and other customary closing conditions.

Note 3 - Investments

Fixed Maturity Securities

The Company’s investment portfolio is comprised primarily of fixed maturity securities. The amortized cost, net unrealized investment gains (losses) and fair values of all fixed maturity securities in the portfolio were as follows:
($ in thousands)
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
March 31, 2019
 
 
 
 
 
 
 
 
Fixed maturity securities
 
 
 
 
 
 
 
 
U.S. Government and federally
sponsored agency obligations: (1)
 
 
 
 
 
 
 
 
Mortgage-backed securities
 
$
793,290

 
$
32,299

 
$
5,402

 
$
820,187

Other, including U.S. Treasury securities
 
848,659

 
23,333

 
6,534

 
865,458

Municipal bonds
 
1,915,504

 
171,412

 
3,872

 
2,083,044

Foreign government bonds
 
83,330

 
3,084

 
179

 
86,235

Corporate bonds
 
2,041,390

 
104,303

 
11,601

 
2,134,092

Other mortgage-backed securities
 
1,805,300

 
16,234

 
12,546

 
1,808,988

Totals
 
$
7,487,473

 
$
350,665

 
$
40,134

 
$
7,798,004

 
 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
 
Fixed maturity securities
 
 
 
 
 
 
 
 
U.S. Government and federally
sponsored agency obligations: (1)
 
 
 
 
 
 
 
 
Mortgage-backed securities
 
$
778,038

 
$
22,724

 
$
13,321

 
$
787,441

Other, including U.S. Treasury securities
 
835,096

 
16,127

 
17,681

 
833,542

Municipal bonds
 
1,884,313

 
133,150

 
13,494

 
2,003,969

Foreign government bonds
 
83,343

 
2,321

 
760

 
84,904

Corporate bonds
 
2,054,105

 
64,296

 
38,891

 
2,079,510

Other mortgage-backed securities
 
1,739,016

 
10,467

 
23,531

 
1,725,952

Totals
 
$
7,373,911

 
$
249,085

 
$
107,678

 
$
7,515,318

________________
(1) 
Fair value includes securities issued by Federal National Mortgage Association (FNMA) of $474,541 thousand and $441,308 thousand; Federal Home Loan Mortgage Corporation (FHLMC) of $421,933 thousand and $417,308 thousand; and Government National Mortgage Association (GNMA) of $96,844 thousand and $96,466 thousand as of March 31, 2019 and December 31, 2018, respectively.


11


Note 3 - Investments (Continued)

The following table presents the fair value and gross unrealized losses of securities in an unrealized loss position at March 31, 2019 and December 31, 2018, respectively. The Company views the decrease in fair value of all of the securities with unrealized losses at March 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. For fixed maturity securities, management does not have the intent to sell the securities and it is not more likely than not the Company will be required to sell the securities before the anticipated recovery of their amortized cost bases, and management expects to recover the entire amortized cost bases of the fixed maturity securities. Therefore, it was determined that the unrealized losses on the securities presented in the table below were not other than temporarily impaired as of March 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
March 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturity securities
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government and federally
sponsored agency obligations:
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
 
$
4,364

 
$
49

 
$
218,612

 
$
5,353

 
$
222,976

 
$
5,402

Other
 
8,230

 
16

 
303,498

 
6,518

 
311,728

 
6,534

Municipal bonds
 
15,003

 
254

 
127,688

 
3,618

 
142,691

 
3,872

Foreign government bonds
 
7,925

 
59

 
6,416

 
120

 
14,341

 
179

Corporate bonds
 
89,954

 
808

 
215,797

 
10,793

 
305,751

 
11,601

Other mortgage-backed securities
 
630,075

 
8,593

 
332,167

 
3,953

 
962,242

 
12,546

Total
 
$
755,551

 
$
9,779

 
$
1,204,178

 
$
30,355

 
$
1,959,729

 
$
40,134

 
 
 
 
 
 
 
 
 
 
 
 
 
Number of positions with a
gross unrealized loss
 
234

 
 
 
496

 
 
 
730

 
 
Fair value as a percentage of total fixed
maturity securities fair value
 
9.6
%
 
 
 
15.2
%
 
 
 
24.8
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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

 
$
13,321

Other
 
263,497

 
6,746

 
246,213

 
10,935

 
509,710

 
17,681

Municipal bonds
 
291,869

 
7,603

 
95,297

 
5,891

 
387,166

 
13,494

Foreign government bonds
 
16,250

 
760

 

 

 
16,250

 
760

Corporate bonds
 
818,519

 
27,429

 
99,171

 
11,462

 
917,690

 
38,891

Other mortgage-backed securities
 
913,858

 
16,076

 
291,442

 
7,455

 
1,205,300

 
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
 
1,052

 
 
 
359

 
 
 
1,411

 
 
Fair value as a percentage of total fixed
maturity securities fair value
 
32.7
%
 
 
 
11.7
%
 
 
 
44.4
%
 
 

Fixed maturity securities with an investment grade rating represented 93.3% of the gross unrealized losses as of March 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 their amortized cost bases.

12


Note 3 - Investments (Continued)

Limited Partnership Interests

As of March 31, 2019 and December 31, 2018, the carrying value of equity method limited partnerships totaled $330,434 thousand and $328,516 thousand, 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.

Credit Losses
 
The following table summarizes the cumulative amounts related to the Company’s credit loss component of other-than-temporary impairment (OTTI) losses on fixed maturity securities held as of March 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 bases, for which the non-credit portions of OTTI losses were recognized in OCI:
($ in thousands)
 
Three Months Ended
March 31,
 
 
2019
 
2018
Cumulative credit loss (1)
 
 
 
 
Beginning of period
 
$
1,529

 
$
3,825

New credit losses
 

 

Increases to previously recognized credit losses
 

 

Losses related to securities sold or paid down during the period
 

 

End of period
 
$
1,529

 
$
3,825

________________
(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)
 
Percent of Total Fair Value
 
March 31, 2019
 
 
March 31, 2019
 
December 31, 2018
 
Fair
Value
 
Amortized
Cost
Estimated expected maturity:
 
 
 
 
 
 
 
 
Due in 1 year or less
 
4.8
%
 
4.8
%
 
$
371,816

 
$
366,071

Due after 1 year through 5 years
 
23.8
%
 
22.8
%
 
1,854,784

 
1,813,271

Due after 5 years through 10 years
 
32.3
%
 
32.8
%
 
2,522,113

 
2,450,544

Due after 10 years through 20 years
 
26.5
%
 
26.5
%
 
2,068,846

 
1,947,733

Due after 20 years
 
12.6
%
 
13.1
%
 
980,445

 
909,854

Total
 
100.0
%
 
100.0
%
 
$
7,798,004

 
$
7,487,473

 
 
 
 
 
 
 
 
 
Average option-adjusted duration, in years
 
5.7

 
5.9

 
 
 
 


13


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 period were:
($ in thousands)
 
Three Months Ended
March 31,
 
 
2019
 
2018
Fixed maturity securities
 
 
 
 
Proceeds received
 
$
59,724

 
$
89,894

Gross gains realized
 
542

 
1,670

Gross losses realized
 
(105
)
 
(53
)
 
 
 
 
 
Equity securities
 
 
 
 
Proceeds received
 
$
15,489

 
$
2,048

Gross gains realized
 
4,745

 
616

Gross losses realized
 
(344
)
 
(34
)


Net Investment Gains (Losses)

The following table reconciles the net investment gains (losses) pretax by transaction type:
($ in thousands)
 
Three Months Ended
March 31,
 
 
2019
 
2018
Impairment write-downs
 
$

 
$

Change in intent write-downs
 
(236
)
 
(110
)
Net OTTI losses recognized in earnings