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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 September 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 October 31, 2019, the registrant had 41,219,737 shares of Common Stock, par value $0.001 per share, outstanding.







HORACE MANN EDUCATORS CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2019
INDEX
Page
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 




PART I: FINANCIAL INFORMATION

1.    Consolidated Financial Statements

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 September 30, 2019, the related consolidated statements of operations, comprehensive income (loss) and changes in shareholders' equity for the three-month and nine-month periods ended September 30, 2019 and 2018, and cash flows for the nine-month periods ended September 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
 
November 8, 2019
 
 


1



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

 
 
September 30, 2019
 
December 31, 2018
 
 
(Unaudited)
 
 
ASSETS
Investments
 
 
 
 
Fixed maturity securities, available for sale, at fair value
(amortized cost 2019, $5,453,433; 2018, $7,373,911)
 
$
5,839,560

 
$
7,515,318

Equity securities, at fair value
 
105,483

 
111,750

Limited partnership interests
 
354,611

 
328,516

Short-term and other investments
 
433,336

 
295,093

Total investments
 
6,732,990

 
8,250,677

Cash
 
39,349

 
11,906

Deferred policy acquisition costs
 
269,215

 
298,742

Deposit asset on reinsurance
 
2,342,305

 

Intangible assets, net
 
181,145

 

Goodwill
 
48,744

 
47,396

Other assets
 
410,663

 
422,047

Separate Account (variable annuity) assets
 
2,308,134

 
2,001,128

Total assets
 
$
12,332,545

 
$
11,031,896

 
 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Policy liabilities
 
 
 
 
Investment contract and policy reserves
 
$
6,207,888

 
$
5,711,193

Unpaid claims and claim expenses
 
412,272

 
396,714

Unearned premiums
 
285,215

 
276,225

Total policy liabilities
 
6,905,375

 
6,384,132

Other policyholder funds
 
672,845

 
767,988

Other liabilities
 
434,626

 
290,358

Short-term debt
 
135,000

 

Long-term debt
 
297,953

 
297,740

Separate Account (variable annuity) liabilities
 
2,308,134

 
2,001,128

Total liabilities
 
10,753,933

 
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, 66,063,569; 2018, 65,820,369
 
66

 
66

Additional paid-in capital
 
478,650

 
475,109

Retained earnings
 
1,331,663

 
1,216,582

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

Net unrealized investment gains on fixed maturity securities
 
266,381

 
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
 
1,578,612

 
1,290,550

Total liabilities and shareholders’ equity
 
$
12,332,545

 
$
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
September 30,
 
Nine Months Ended
September 30,
 
 
2019
 
2018
 
2019
 
2018
Revenues
 
 

 
 

 
 
 
 
Insurance premiums and contract charges earned
 
$
239,681

 
$
206,820

 
$
657,562

 
$
615,428

Net investment income
 
93,071

 
99,083

 
279,329

 
288,048

Net investment gains (losses)
 
(2,156
)
 
2,803

 
151,594

 
1,884

Other income
 
3,822

 
2,612

 
10,624

 
7,704

 
 
 
 
 
 
 
 
 
Total revenues
 
334,418

 
311,318

 
1,099,109

 
913,064

 
 
 
 
 
 
 
 
 
Benefits, losses and expenses
 
 
 
 
 
 
 
 
Benefits, claims and settlement expenses
 
154,191

 
161,846

 
446,267

 
473,686

Interest credited
 
53,576

 
52,124

 
160,092

 
153,229

Operating expenses
 
61,414

 
50,989

 
169,637

 
149,376

DAC unlocking and amortization expense
 
26,344

 
26,066

 
82,965

 
79,357

Intangible asset amortization expense
 
3,781

 

 
4,863

 

Interest expense
 
4,608

 
3,253

 
11,223

 
9,717

Other expense - goodwill impairment
 

 

 
28,025

 

 
 
 
 
 
 
 
 
 
Total benefits, losses and expenses
 
303,914

 
294,278

 
903,072

 
865,365

 
 
 
 
 
 
 
 
 
Income before income taxes
 
30,504

 
17,040

 
196,037

 
47,699

Income tax expense
 
5,050

 
4,512

 
44,595

 
9,099

 
 
 
 
 
 
 
 
 
Net income
 
$
25,454

 
$
12,528

 
$
151,442

 
$
38,600

 
 
 
 
 
 
 
 
 
Net income per share
 
 
 
 
 
 
 
 
Basic
 
$
0.61

 
$
0.30

 
$
3.63

 
$
0.93

Diluted
 
$
0.60

 
$
0.30

 
$
3.61

 
$
0.93

 
 
 
 
 
 
 
 
 
Weighted average number of shares
and equivalent shares
 
 
 
 
 
 
 
 
Basic
 
41,785

 
41,683

 
41,715

 
41,586

Diluted
 
42,030

 
41,850

 
41,911

 
41,727

 
 
 
 
 
 
 
 
 
Net investment gains (losses)
 
 
 
 
 
 
 
 
Total other-than-temporary impairment losses
on securities
 
$
(5
)
 
$
(70
)
 
$
(276
)
 
$
(1,357
)
Portion of losses recognized in other
comprehensive income (loss)
 

 

 

 

Net other-than-temporary impairment losses
on securities recognized in earnings
 
(5
)
 
(70
)
 
(276
)
 
(1,357
)
Sales and other, net
 
608

 
(1,331
)
 
147,513

 
2,661

Change in fair value - equity securities
 
1,081

 
2,000

 
8,029

 
(4,342
)
Change in fair value and gains realized
on settlements - derivatives
 
(3,840
)
 
2,204

 
(3,672
)
 
4,922

Total
 
$
(2,156
)
 
$
2,803

 
$
151,594

 
$
1,884

See Notes to Consolidated Financial Statements.

3



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

 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2019
 
2018
 
2019
 
2018
Comprehensive income (loss)
 
 

 
 

 
 
 
 
Net income
 
$
25,454

 
$
12,528

 
$
151,442

 
$
38,600

Other comprehensive income (loss), net of tax:
 
 

 
 

 
 
 
 
Change in net unrealized investment gains
(losses) on fixed maturity securities
 
63,304

 
(49,638
)
 
169,440

 
(209,178
)
Change in net funded status of benefit plans
 

 

 

 

Cumulative effect of change in accounting principle
 

 

 

 
(15,041
)
Other comprehensive income (loss)
 
63,304

 
(49,638
)
 
169,440

 
(224,219
)
Total
 
$
88,758

 
$
(37,110
)
 
$
320,882

 
$
(185,619
)
 






































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
September 30,
 
Nine Months Ended
September 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
 
476,353

 
470,652

 
475,109

 
464,246

Options exercised and conversion of common stock
units and restricted stock units
 
447

 
1,003

 
(1,314
)
 
3,262

Share-based compensation expense
 
1,850

 
1,941

 
4,855

 
6,088

Ending balance
 
478,650

 
473,596

 
478,650

 
473,596

 
 
 
 
 
 
 
 
 
Retained earnings
 
 
 
 
 
 
 
 
Beginning balance
 
1,318,329

 
1,248,305

 
1,216,582

 
1,231,177

Net income
 
25,454

 
12,528

 
151,442

 
38,600

Dividends, 2019, $0.2875, $0.8625 per share;
2018, $0.2850, $0.8550 per share
 
(12,120
)
 
(12,019
)
 
(36,361
)
 
(36,004
)
Cumulative effect of change in accounting principle
 

 

 

 
15,041

Ending balance
 
1,331,663

 
1,248,814

 
1,331,663

 
1,248,814

 
 
 
 
 
 
 
 
 
Accumulated other comprehensive income (loss),
net of tax:
 
 
 
 
 
 
 
 
Beginning balance
 
190,892

 
112,379

 
84,756

 
286,960

Change in net unrealized investment gains (losses)
on fixed maturity securities
 
63,304

 
(49,638
)
 
169,440

 
(209,178
)
Change in net funded status of benefit plans
 

 

 

 

Cumulative effect of change in accounting principle
 

 

 

 
(15,041
)
Ending balance
 
254,196

 
62,741

 
254,196

 
62,741

 
 
 
 
 
 
 
 
 
Treasury stock, at cost
 
 
 
 
 
 
 
 
Beginning balance
 
(485,963
)
 
(480,961
)
 
(485,963
)
 
(480,875
)
Acquisition of shares
 

 

 

 
(86
)
Ending balance
 
(485,963
)
 
(480,961
)
 
(485,963
)
 
(480,961
)
 
 
 
 
 
 
 
 
 
Shareholders' equity at end of period
 
$
1,578,612

 
$
1,304,256

 
$
1,578,612

 
$
1,304,256









See Notes to Consolidated Financial Statements.

5



HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
($ in thousands)
 
 
Nine Months Ended
September 30,
 
 
2019
 
2018
Cash flows - operating activities
 
 
 
 
Premiums collected
 
$
674,170

 
$
598,443

Policyholder benefits paid
 
(404,086
)
 
(419,736
)
Policy acquisition and other operating expenses paid
 
(253,101
)
 
(218,464
)
Income taxes paid
 
(12,696
)
 
(8,719
)
Investment income collected
 
204,186

 
277,178

Interest expense paid
 
(6,948
)
 
(6,537
)
Other
 
5,711

 
(4,691
)
Net cash provided by operating activities
 
207,236

 
217,474

 
 
 
 
 
Cash flows - investing activities
 
 

 
 

Fixed maturity securities
 
 

 
 

Purchases
 
(845,967
)
 
(1,044,002
)
Sales
 
651,058

 
360,246

Maturities, paydowns, calls and redemptions
 
645,946

 
577,425

Equity securities
 
 
 
 
Purchases
 
(10,510
)
 
(8,578
)
Sales and repayments
 
20,989

 
8,493

Limited partnership interests
 
 
 
 
Purchases
 
(42,388
)
 
(84,444
)
Sales
 
36,108

 
11,754

Change in short-term and other investments, net
 
(99,702
)
 
(4,700
)
Acquisition of businesses, net of cash acquired
 
(421,174
)
 

Net cash used in investing activities
 
(65,640
)
 
(183,806
)
 
 
 
 
 
Cash flows - financing activities
 
 

 
 

Dividends paid to shareholders
 
(35,477
)
 
(35,016
)
Principal borrowings on Bank Credit Facility
 
135,000

 

Acquisition of treasury stock
 

 
(86
)
Proceeds from exercise of stock options
 
1,105

 
3,191

Withholding tax payments on RSUs tendered
 
(3,560
)
 
(2,190
)
Annuity contracts: variable, fixed and FHLB funding agreements
 
 

 
 

Deposits
 
519,636

 
326,003

Benefits, withdrawals and net transfers to
Separate Account (variable annuity) assets
 
(313,653
)
 
(333,473
)
Principal repayment on FHLB funding agreements
 
(275,000
)
 

Life policy accounts
 
 
 
 

Deposits
 
7,143

 
5,618

Withdrawals and surrenders
 
(2,682
)
 
(3,766
)
Change in deposit asset on reinsurance, net
 
(130,740
)
 

Change in book overdrafts
 
(15,925
)
 
4,855

Net cash used in financing activities
 
(114,153
)
 
(34,864
)
 
 
 
 
 
Net increase (decrease) in cash
 
27,443

 
(1,196
)
 
 
 
 
 
Cash at beginning of period
 
11,906

 
7,627

 
 
 
 
 
Cash at end of period
 
$
39,349

 
$
6,431


See Notes to Consolidated Financial Statements.

6



HORACE MANN EDUCATORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 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 September 30, 2019, the consolidated results of operations, comprehensive income (loss) and changes in shareholders’ equity for the three and nine month periods ended September 30, 2019 and 2018 and cash flows for the nine month periods ended September 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 these 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, Horace Mann Lloyds and National Teachers Associates Life Insurance Company (NTA).

As described more fully in Note 2, 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 supplemental disability coverages) that are marketed and underwritten by NTA.
These consolidated financial statements should be read in conjunction with the consolidated financial statements and the related notes to consolidated financial statements included in Item 8 of the Company's Annual Report on Form 10-K for the year ended December 31, 2018.
 
The results of operations for the three and nine month periods ended September 30, 2019 are not necessarily indicative of the results to be expected for the full year.

The Company has reclassified the presentation of certain prior period information to conform to the current presentation.


7


Note 1 - Basis of Presentation (Continued)

Cash
 
Cash reported on the Consolidated Balance Sheet at September 30, 2019 includes restricted cash in the amount of $672 thousand, 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.

Investment Contract and Policy Reserves
 
The following table summarizes investment contract and policy reserves.
($ in thousands)
 
September 30, 2019
 
December 31, 2018
Investment contract reserves
 
$
4,658,148

 
$
4,555,856

Policy reserves
 
1,549,740

 
1,155,337

Total
 
$
6,207,888

 
$
5,711,193



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, July 1, 2019
 
$
203,077

 
$
(12,185
)
 
$
190,892

Other comprehensive income (loss) before reclassifications
 
64,577

 

 
64,577

Amounts reclassified from AOCI
 
(1,273
)
 

 
(1,273
)
Net current period other comprehensive income (loss)
 
63,304

 

 
63,304

Ending balance, September 30, 2019
 
$
266,381

 
$
(12,185
)
 
$
254,196

 
 
 
 
 
 
 
Beginning balance, January 1, 2019
 
$
96,941

 
$
(12,185
)
 
$
84,756

Other comprehensive income (loss) before reclassifications
 
292,043

 

 
292,043

Amounts reclassified from AOCI
 
(122,603
)
 

 
(122,603
)
Net current period other comprehensive income (loss)
 
169,440

 

 
169,440

Ending balance, September 30, 2019
 
$
266,381

 
$
(12,185
)
 
$
254,196

______________
(1) 
All amounts are net of tax.
(2) 
The pretax amounts reclassified from AOCI, $1,612 thousand and $155,194 thousand, are included in net investment gains (losses) and the related income tax expenses, $339 thousand and $32,591 thousand, are included in income tax expense in the Consolidated Statements of Operations for the three and nine month periods ended September 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)
Beginning balance, July 1, 2018,
 
$
125,596

 
$
(13,217
)
 
$
112,379

Other comprehensive income (loss) before reclassifications
 
(49,165
)
 

 
(49,165
)
Amounts reclassified from AOCI
 
(473
)
 

 
(473
)
Net current period other comprehensive income (loss)
 
(49,638
)
 

 
(49,638
)
Ending balance, September 30, 2018
 
$
75,958

 
$
(13,217
)
 
$
62,741

 
 
 
 
 
 
 
Beginning balance, January 1, 2018
 
$
300,177

 
$
(13,217
)
 
$
286,960

Other comprehensive income (loss) before reclassifications
 
(211,577
)
 

 
(211,577
)
Amounts reclassified from AOCI
 
2,399

 

 
2,399

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

 
(15,041
)
Net current period other comprehensive income (loss)
 
(224,219
)
 

 
(224,219
)
Ending balance, September 30, 2018
 
$
75,958

 
$
(13,217
)
 
$
62,741

______________
(1) 
All amounts are net of tax.
(2) 
The pretax amounts reclassified from AOCI, $599 thousand and $(3,037) thousand, are included in Net investment gains (losses) and the related income tax expenses, $126 thousand and $(638) thousand, are included in Income tax expense in the Consolidated Statements of Operations for the three and nine month periods ended September 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 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 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 (96.7% investment grade, based on fair value, with an average quality rating of A+ at September 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, 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.


10


Note 2 - Acquisitions


On January 2, 2019, the Company completed its acquisition of all the equity interests in Benefit Consultants Group, Inc. (BCG) for a total purchase consideration of $25 million. BCG provides advisory and benefit plan record keeping services. BCG's results are reported in Retirement. 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 that are amortizable have lives of 10 to 16 years. See Note 14 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 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. The purchase price adjustment is subject to finalization within 135 days of the acquisition date pursuant to the terms of the Agreement. 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 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".

The Company has not yet completed the process of estimating 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. Accordingly, the Company’s preliminary estimates and the allocation of the purchase price to the assets acquired and liabilities assumed are subject to change as the Company completes the process. In accordance with Accounting Standards Codification (ASC) 805, Business Combinations, changes if any, to the preliminary estimates and allocation of the purchase price will be reported in the Company’s financial statements as an adjustment to the opening balance sheet. Based on the Company’s preliminary allocation of the purchase price, the fair values of the assets acquired and liabilities assumed were as follows:

($ in millions)
 
 
Assets:
 
 
Investments
 
$
542.6

Cash and short-term investments
 
73.8

Intangible assets (1)
 
169.8

Other assets
 
18.3

Liabilities:
 
 
Policy reserves
 
366.8

Policy claims
 
21.8

Unearned premiums
 
4.1

Other liabilities
 
5.5

Total identifiable net assets acquired
 
406.3

Goodwill (2)
 
19.3

Purchase price
 
$
425.6

_____________
(1) 
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 estimated lives of 14 to 35 years. See Note 14 for further information.
(2) 
The amount of goodwill that is expected to be deductible for federal income tax purposes is $17.9 million.

11


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)
 
Unaudited
 
 
Nine Months Ended
September 30,
 
Year Ended
December 31,
 
 
2019
 
2018
Total revenues
 
$
1,175,977

 
$
1,339,896

Total expenses
 
967,352

 
1,288,690

Income before income taxes
 
208,625

 
51,206

Net income
 
$
161,463

 
$
43,373

 
 
 
 
 
Net income per share: (1)
 
 
 
 
Basic
 
$
3.87

 
$
1.04

Diluted
 
$
3.85

 
$
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 nine months ended September 30, 2019 and the year ended December 31, 2018.

The unaudited pro forma financial information is not necessarily indicative of the consolidated results of operations that might 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.

12


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
September 30, 2019
 
 
 
 
 
 
 
 
Fixed maturity securities
 
 
 
 
 
 
 
 
U.S. Government and federally
sponsored agency obligations: (1)
 
 
 
 
 
 
 
 
Mortgage-backed securities
 
$
698,794

 
$
55,868

 
$
307

 
$
754,355

Other, including U.S. Treasury securities
 
430,149

 
28,161

 
135

 
458,175

Municipal bonds
 
1,511,967

 
164,811