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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 

    QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 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 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
 
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
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 July 31, 2019, the registrant had 41,198,167 shares of Common Stock, par value $0.001 per share, outstanding.







HORACE MANN EDUCATORS CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 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 June 30, 2019, the related consolidated statements of operations, comprehensive income (loss) and changes in shareholders' equity for the three-month and six-month periods ended June 30, 2019 and 2018, and cash flows for the six-month periods ended June 30, 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, 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
 
August 8, 2019
 
 


1



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

 
 
June 30, 2019
 
December 31, 2018
 
 
(Unaudited)
 
 
ASSETS
Investments
 
 
 
 
Fixed maturity securities, available for sale, at fair value
(amortized cost 2019, $5,241,755; 2018, $7,373,911)
 
$
5,534,270

 
$
7,515,318

Equity securities, at fair value
 
100,143

 
111,750

Limited partnership interests
 
351,515

 
328,516

Short-term and other investments
 
433,688

 
295,093

Total investments
 
6,419,616

 
8,250,677

Cash
 
7,616

 
11,906

Deferred policy acquisition costs
 
279,041

 
298,742

Deposit asset on reinsurance
 
2,315,330

 

Goodwill
 
29,458

 
47,396

Other assets
 
417,460

 
422,047

Separate Account (variable annuity) assets
 
2,310,886

 
2,001,128

Total assets
 
$
11,779,407

 
$
11,031,896

 
 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Policy liabilities
 
 
 
 
Investment contract and life policy reserves
 
$
5,776,769

 
$
5,711,193

Unpaid claims and claim expenses
 
398,339

 
396,714

Unearned premiums
 
270,163

 
276,225

Total policy liabilities
 
6,445,271

 
6,384,132

Other policyholder funds
 
821,880

 
767,988

Other liabilities
 
403,812

 
290,358

Long-term debt
 
297,881

 
297,740

Separate Account (variable annuity) liabilities
 
2,310,886

 
2,001,128

Total liabilities
 
10,279,730

 
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, 66,036,205; 2018, 65,820,369
 
66

 
66

Additional paid-in capital
 
476,353

 
475,109

Retained earnings
 
1,318,329

 
1,216,582

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

Net unrealized investment gains on fixed maturity securities
 
203,077

 
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
 
1,499,677

 
1,290,550

Total liabilities and shareholders’ equity
 
$
11,779,407

 
$
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
June 30,
 
Six Months Ended
June 30,
 
 
2019
 
2018
 
2019
 
2018
Revenues
 
 

 
 

 
 
 
 
Insurance premiums and contract charges earned
 
$
208,096

 
$
205,610

 
$
417,881

 
$
408,608

Net investment income
 
93,458

 
97,101

 
186,258

 
188,965

Net investment gains (losses)
 
146,333

 
735

 
153,750

 
(919
)
Other income
 
3,591

 
2,811

 
6,802

 
5,092

 
 
 
 
 
 
 
 
 
Total revenues
 
451,478

 
306,257

 
764,691

 
601,746

 
 
 
 
 
 
 
 
 
Benefits, losses and expenses
 
 
 
 
 
 
 
 
Benefits, claims and settlement expenses
 
152,692

 
168,278

 
292,076

 
311,840

Interest credited
 
53,594

 
51,071

 
106,516

 
101,105

DAC amortization expense
 
31,648

 
26,586

 
56,621

 
53,291

Operating expenses
 
55,252

 
50,218

 
109,305

 
98,387

Interest expense
 
3,312

 
3,291

 
6,615

 
6,464

Other expense
 
28,025

 

 
28,025

 

 
 
 
 
 
 
 
 
 
Total benefits, losses and expenses
 
324,523

 
299,444

 
599,158

 
571,087

 
 
 
 
 
 
 
 
 
Income before income taxes
 
126,955

 
6,813

 
165,533

 
30,659

Income tax expense
 
33,133

 
896

 
39,545

 
4,587

 
 
 
 
 
 
 
 
 
Net income
 
$
93,822

 
$
5,917

 
$
125,988

 
$
26,072

 
 
 
 
 
 
 
 
 
Net income per share
 
 
 
 
 
 
 
 
Basic
 
$
2.25

 
$
0.14

 
$
3.02

 
$
0.63

Diluted
 
$
2.24

 
$
0.14

 
$
3.01

 
$
0.63

 
 
 
 
 
 
 
 
 
Weighted average number of shares
and equivalent shares
 
 
 
 
 
 
 
 
Basic
 
41,762

 
41,600

 
41,685

 
41,531

Diluted
 
41,921

 
41,735

 
41,851

 
41,659

 
 
 
 
 
 
 
 
 
Net investment gains (losses)
 
 
 
 
 
 
 
 
Total other-than-temporary impairment losses
on securities
 
$
(34
)
 
$
(1,177
)
 
$
(271
)
 
$
(1,287
)
Portion of losses recognized in other
comprehensive income (loss)
 

 

 

 

Net other-than-temporary impairment losses
on securities recognized in earnings
 
(34
)
 
(1,177
)
 
(271
)
 
(1,287
)
Sales and other, net
 
142,067

 
1,789

 
146,905

 
3,992

Change in fair value - equity securities
 
3,441

 
(1,156
)
 
6,948

 
(6,342
)
Change in fair value and gains realized
on settlements - derivative instruments
 
859

 
1,279

 
168

 
2,718

Total
 
$
146,333

 
$
735

 
$
153,750

 
$
(919
)

See Notes to Consolidated Financial Statements.

3



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

 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2019
 
2018
 
2019
 
2018
Comprehensive income (loss)
 
 

 
 

 
 
 
 
Net income
 
$
93,822

 
$
5,917

 
$
125,988

 
$
26,072

Other comprehensive income (loss), net of tax:
 
 

 
 

 
 
 
 
Change in net unrealized investment gains
(losses) on fixed maturity securities
 
(7,762
)
 
(52,444
)
 
106,136

 
(159,540
)
Change in net funded status of benefit plans
 

 

 

 

Cumulative effect of change in accounting principle
 

 

 

 
(15,041
)
Other comprehensive income (loss)
 
(7,762
)
 
(52,444
)
 
106,136

 
(174,581
)
Total
 
$
86,060

 
$
(46,527
)
 
$
232,124

 
$
(148,509
)
 






































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
June 30,
 
Six Months Ended
June 30,
 
 
2019
 
2018
 
2019
 
2018
Common stock, $0.001 par value
 
 
 
 
 
 
 
 
Beginning balance
 
$
66

 
$
66

 
$
66

 
$
65

Options exercised
 

 

 

 

Conversion of common stock units
 

 

 

 

Conversion of restricted stock units
 

 

 

 
1

Ending balance
 
66

 
66

 
66

 
66

 
 
 
 
 
 
 
 
 
Additional paid-in capital
 
 
 
 
 
 
 
 
Beginning balance
 
474,336

 
466,277

 
475,109

 
464,246

Options exercised and conversion of common stock
units and restricted stock units
 
344

 
2,384

 
(1,761
)
 
2,259

Share-based compensation expense
 
1,673

 
1,991

 
3,005

 
4,147

Ending balance
 
476,353

 
470,652

 
476,353

 
470,652

 
 
 
 
 
 
 
 
 
Retained earnings
 
 
 
 
 
 
 
 
Beginning balance
 
1,236,621

 
1,254,394

 
1,216,582

 
1,231,177

Net income
 
93,822

 
5,917

 
125,988

 
26,072

Dividends, 2019, $0.2875, $0.5750 per share;
2018, $0.2850, $0.5700 per share
 
(12,114
)
 
(12,006
)
 
(24,241
)
 
(23,985
)
Cumulative effect of change in accounting principle
 

 

 

 
15,041

Ending balance
 
1,318,329

 
1,248,305

 
1,318,329

 
1,248,305

 
 
 
 
 
 
 
 
 
Accumulated other comprehensive income (loss),
net of tax:
 
 
 
 
 
 
 
 
Beginning balance
 
198,654

 
164,823

 
84,756

 
286,960

Change in net unrealized investment gains
on fixed maturity securities
 
(7,762
)
 
(52,444
)
 
106,136

 
(159,540
)
Change in net funded status of benefit plans
 

 

 

 

Cumulative effect of change in accounting principle
 

 

 

 
(15,041
)
Ending balance
 
190,892

 
112,379

 
190,892

 
112,379

 
 
 
 
 
 
 
 
 
Treasury stock, at cost
 
 
 
 
 
 
 
 
Beginning balance
 
(485,963
)
 
(480,881
)
 
(485,963
)
 
(480,875
)
Acquisition of shares
 

 
(80
)
 

 
(86
)
Ending balance
 
(485,963
)
 
(480,961
)
 
(485,963
)
 
(480,961
)
 
 
 
 
 
 
 
 
 
Shareholders’ equity at end of period
 
$
1,499,677

 
$
1,350,441

 
$
1,499,677

 
$
1,350,441









See Notes to Consolidated Financial Statements.

5



HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
($ in thousands)
 
 
Six Months Ended
June 30,
 
 
2019
 
2018
Cash flows - operating activities
 
 
 
 
Premiums collected
 
$
396,887

 
$
392,103

Policyholder benefits paid
 
(275,437
)
 
(272,769
)
Policy acquisition and other operating expenses paid
 
(161,863
)
 
(141,620
)
Income taxes paid
 
(78
)
 
(7,393
)
Investment income collected
 
139,210

 
184,749

Interest expense paid
 
(6,440
)
 
(6,190
)
Other
 
5,557

 
2,429

Net cash provided by operating activities
 
97,836

 
151,309

 
 
 
 
 
Cash flows - investing activities
 
 

 
 

Fixed maturity securities
 
 

 
 

Purchases
 
(644,104
)
 
(551,984
)
Sales
 
501,739

 
190,023

Maturities, paydowns, calls and redemptions
 
342,998

 
383,090

Equity securities
 
 
 
 
Purchases
 
(5,282
)
 
(6,028
)
Sales and repayments
 
17,122

 
5,783

Limited partnership interests
 
 
 
 
Purchases
 
(29,357
)
 
(33,031
)
Sales
 
15,029

 
9,457

Change in short-term and other investments, net
 
(156,748
)
 
(109,711
)
Acquisition of business, net of cash acquired
 
(18,198
)
 

Net cash provided by (used in) investing activities
 
23,199

 
(112,401
)
 
 
 
 
 
Cash flows - financing activities
 
 

 
 

Dividends paid to shareholders
 
(23,630
)
 
(23,320
)
Acquisition of treasury stock
 

 
(86
)
Proceeds from exercise of stock options
 
722

 
2,460

Withholding tax payments on RSUs tendered
 
(3,366
)
 
(2,155
)
Annuity contracts: variable, fixed and FHLB funding agreements
 
 

 
 

Deposits
 
266,310

 
199,074

Benefits, withdrawals and net transfers to
Separate Account (variable annuity) assets
 
(214,243
)
 
(218,694
)
Life policy accounts
 
 
 
 

Deposits
 
4,638

 
3,163

Withdrawals and surrenders
 
(1,733
)
 
(2,525
)
Change in deposit asset on reinsurance, net
 
(134,682
)
 

Change in book overdrafts
 
(19,341
)
 
3,795

Net cash used in financing activities
 
(125,325
)
 
(38,288
)
 
 
 
 
 
Net increase (decrease) in cash
 
(4,290
)
 
620

 
 
 
 
 
Cash at beginning of period
 
11,906

 
7,627

 
 
 
 
 
Cash at end of period
 
$
7,616

 
$
8,247



See Notes to Consolidated Financial Statements.

6



HORACE MANN EDUCATORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 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 June 30, 2019, the consolidated results of operations, comprehensive income (loss), changes in shareholders’ equity and cash flows for the six month periods ended June 30, 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 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 and six month periods ended June 30, 2019 are not necessarily indicative of the results to be expected for the full year.

Investment Contract and Life Policy Reserves
 
The following table summarizes investment contract and life policy reserves.
($ in thousands)
 
June 30, 2019
 
December 31, 2018
Investment contract reserves
 
$
4,605,272

 
$
4,555,856

Life policy reserves
 
1,171,497

 
1,155,337

Total
 
$
5,776,769

 
$
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 fixed maturity 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 Fixed Maturity Securities (1)(2)
 
Net Funded Status of
Benefit Plans (1)
 
Total (1)
Beginning balance, April 1, 2019
 
$
210,839

 
$
(12,185
)
 
$
198,654

Other comprehensive income (loss) before reclassifications
 
107,163

 

 
107,163

Amounts reclassified from AOCI
 
(114,925
)
 

 
(114,925
)
Net current period other comprehensive income (loss)
 
(7,762
)
 

 
(7,762
)
Ending balance, June 30, 2019
 
$
203,077

 
$
(12,185
)
 
$
190,892

 
 
 
 
 
 
 
Beginning balance, January 1, 2019
 
$
96,941

 
$
(12,185
)
 
$
84,756

Other comprehensive income (loss) before reclassifications
 
227,466

 

 
227,466

Amounts reclassified from AOCI
 
(121,330
)
 

 
(121,330
)
Net current period other comprehensive income (loss)
 
106,136

 

 
106,136

Ending balance, June 30, 2019
 
$
203,077

 
$
(12,185
)
 
$
190,892

________________
(1) 
All amounts are net of tax.
(2) 
The pretax amounts reclassified from AOCI, $145,474 thousand and $153,582 thousand, are included in net investment gains (losses) and the related income tax expenses, $30,549 thousand and $32,252 thousand, are included in income tax expense in the Consolidated Statements of Operations for the three and six month periods ended June 30, 2019, respectively.


8


Note 1 - Basis of Presentation (Continued)

($ in thousands)
 
Net Unrealized Investment
Gains (Losses)
on Fixed Maturity Securities
(1)(2)
 
Net Funded Status of
Benefit Plans
(1)
 
Total (1)(3)
Beginning balance, April 1, 2018,
 
$
178,040

 
$
(13,217
)
 
$
164,823

Other comprehensive income (loss) before reclassifications
 
(52,873
)
 

 
(52,873
)
Amounts reclassified from AOCI
 
429

 

 
429

Net current period other comprehensive income (loss)
 
(52,444
)
 

 
(52,444
)
Ending balance, June 30, 2018
 
$
125,596

 
$
(13,217
)
 
$
112,379

 
 
 
 
 
 
 
Beginning balance, January 1, 2018
 
$
300,177

 
$
(13,217
)
 
$
286,960

Other comprehensive income (loss) before reclassifications
 
(162,412
)
 

 
(162,412
)
Amounts reclassified from AOCI
 
2,872

 

 
2,872

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

 
(15,041
)
Net current period other comprehensive income (loss)
 
(174,581
)
 

 
(174,581
)
Ending balance, June 30, 2018
 
$
125,596

 
$
(13,217
)
 
$
112,379

________________
(1) 
All amounts are net of tax.
(2) 
The pretax amounts reclassified from AOCI, $(544) thousand and $(3,636) thousand, are included in Net investment gains (losses) and the related income tax expenses, $(115) thousand and $(764) thousand, are included in Income tax expense in the Consolidated Statements of Operations for the three and six month periods ended June 30, 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 disclosed in Note 3.

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 continue 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 an initial $14,499 thousand lease liability equal to the present value of lease payments and an initial $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.

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.

9


Note 1 - Basis of Presentation (Continued)

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 for financial instruments other than available for sale debt securities 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.

This guidance is effective for annual and interim reporting periods beginning after December 15, 2019. Early adoption is permitted beginning after December 15, 2018. Upon adoption, the guidance will be applied using the modified-retrospective approach, by which a cumulative-effect adjustment will be made to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The guidance will have the most impact on the Company’s available for sale fixed maturity securities portfolio. However, as the Company’s fixed maturity securities portfolio is weighted towards higher rated bonds (97.1% investment grade, based on fair value, with an average quality rating of A+ at June 30, 2019), the Company does not expect that the effect of adoption will be material.

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 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 July 1, 2019, the Company completed its acquisition of all the equity interests in National Teachers Associates Life Insurance Company (NTA) pursuant to a Purchase Agreement (Agreement) dated as of December 10, 2018, by and among the Company and Ellard Family Holdings, Inc., Brian M. Ellard and The JCE Exempt Trust. The purchase price of the transaction was $425 million which includes $20 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, including heart and cancer, to the education market. NTA's results will be reported in a newly created operating segment titled "Supplemental".


11


Note 3 - Investments

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)
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
June 30, 2019
 
 
 
 
 
 
 
 
Fixed maturity securities
 
 
 
 
 
 
 
 
U.S. Government and federally
sponsored agency obligations: (1)
 
 
 
 
 
 
 
 
Mortgage-backed securities
 
$
550,059

 
$
37,900

 
$
1,201

 
$
586,758

Other, including U.S. Treasury securities
 
546,396

 
20,574

 
533

 
566,437

Municipal bonds
 
1,472,794

 
127,700

 
801

 
1,599,693

Foreign government bonds
 
45,303

 
2,064

 

 
47,367

Corporate bonds
 
1,226,962

 
96,535

 
2,211

 
1,321,286

Other mortgage-backed securities
 
1,400,241

 
20,786

 
8,298

 
1,412,729

Totals
 
$
5,241,755

 
$
305,559

 
$
13,044

 
$
5,534,270

 
 
 
 
 
 
 
 
 
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 $370,182 thousand and $441,308 thousand; Federal Home Loan Mortgage Corporation (FHLMC) of $256,531 thousand and $417,308 thousand; and Government National Mortgage Association (GNMA) of $79,141 thousand and $96,466 thousand as of June 30, 2019 and December 31, 2018, respectively.


12


Note 3 - Investments (Continued)

The following table presents the fair value and gross unrealized losses of securities in an unrealized loss position at June 30, 2019 and December 31, 2018, respectively. The Company views the decrease in fair value of all of the securities with unrealized losses at June 30, 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 June 30, 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
June 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturity securities