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Section 1: 10-K (10-K)

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

FORM 10-K 
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
OR
[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______ 

Commission file number 1-10890 

HORACE MANN EDUCATORS CORPORATION
(Exact name of registrant as specified in its charter) 
Delaware
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

Securities Registered Pursuant to Section 12(b) of the Act:
 
Name of each exchange on
Title of each class
which registered
Common Stock, par value $0.001 per share
New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: None 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes   X   No      
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes        No   X
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   X   No       
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes   X   No       
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company,"and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer       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 Act). Yes       No   X

The aggregate market value of the registrant's Common Stock held by non-affiliates of the registrant based on the closing price of the registrant's Common Stock on the New York Stock Exchange and the shares outstanding on June 30, 2017, was $1,509.3 million

As of February 15, 2018, the registrant had 40,780,247 shares of Common Stock, par value $0.001 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's Proxy Statement for the 2018 Annual Meeting of Shareholders are incorporated by reference into Part III Items 10, 11, 12, 13 and 14 of this Form 10-K as specified in those Items and will be filed with the Securities and Exchange Commission within 120 days after December 31, 2017.









HORACE MANN EDUCATORS CORPORATION
FORM 10-K
YEAR ENDED DECEMBER 31, 2017
INDEX
Part
 
Item
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 






PART I
 
ITEM 1.    Business

Measures within this Annual Report on Form 10-K that are not based on accounting principles generally accepted in the United States of America (non-GAAP) are marked by an asterisk (*). An explanation of these measures is contained in the Glossary of Selected Terms included as Exhibit 99.1 to this Annual Report on Form 10-K and are reconciled to the most directly comparable measures prepared in accordance with United States of America (U.S.) generally accepted accounting principles (GAAP) in the Appendix to the Company's Investor Supplement.
 
Forward-looking Information
 
It is important to note that the Company's actual results could differ materially from those projected in forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in Item 1A. Risk Factors and in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations — Forward-looking Information.
 
Overview and Available Information
 
Horace Mann Educators Corporation (HMEC; and together with its subsidiaries, the Company or Horace Mann) is an insurance holding company incorporated in Delaware. Through its subsidiaries, HMEC markets and underwrites personal lines of property and casualty (primarily personal lines of automobile and property) insurance, retirement products (primarily tax-qualified annuities) and life insurance in the U.S. HMEC's principal insurance subsidiaries are Horace Mann Life Insurance Company (HMLIC), Horace Mann Insurance Company (HMIC), Horace Mann Property & Casualty Insurance Company (HMPCIC) and Teachers Insurance Company (TIC), each of which is an Illinois corporation, and Horace Mann Lloyds (HM Lloyds), an insurance company domiciled in Texas.
 
Founded by Educators for Educators®, the Company markets its products primarily to K-12 teachers, administrators and other employees of public schools and their families. The Company's nearly one million customers typically have moderate annual incomes, with many belonging to two-income households. Their financial planning tends to focus on retirement, security, savings and primary insurance needs. Management believes that Horace Mann is the largest national multi-line insurance company focused on the nation's educators as its primary market.
 
Horace Mann markets and services its products primarily through a dedicated sales force of full-time Exclusive Distributors supported by the Company's Customer Contact Center. These agents sell Horace Mann's products and limited additional third-party vendor products. Some of these agents are former educators or individuals with close ties to the educational community who utilize their contacts within, and knowledge of, the target market. This dedicated agent sales force is supplemented by an independent agent distribution channel for the Company's retirement products.
 

1





The Company's insurance premiums written and contract deposits* for the year ended December 31, 2017 were $1.2 billion and net income was $169.4 million. The Company's total assets were $11.2 billion at December 31, 2017. The Company's investment portfolio had an aggregate fair value of $8.4 billion at December 31, 2017 and consisted principally of investment grade, publicly traded fixed maturity securities.
 
The Company conducts and manages its business through four segments. The three operating segments, representing the major lines of insurance business, are: Property and Casualty, Retirement and Life. The Company does not allocate the impact of corporate-level transactions to the operating segments, consistent with the basis for management's evaluation of the results of those segments, but classifies those items in the fourth segment, Corporate and Other. Property and Casualty, Retirement, and Life accounted for 54.0%, 36.9% and 9.1%, respectively, of the Company's insurance premiums written and contract deposits for the year ended December 31, 2017.
 
The Company is one of the largest participants in the K-12 educator portion of the 403(b) tax-qualified annuity market, measured by 403(b) net written premium on a statutory accounting basis. The Company's 403(b) tax-qualified annuities are voluntarily purchased by individuals employed by public school systems or other tax-exempt organizations through the employee benefit plans of those entities. The Company has 403(b) payroll deduction capabilities utilized by approximately 30% of the 13,600 public school districts in the U.S.
 
The Company's annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, and all amendments to those reports are available free of charge through the Investors section of the Company's Internet website, www.horacemann.com, as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the Securities and Exchange Commission (SEC). The EDGAR filings of such reports are also available at the SEC's website, www.sec.gov.
 
Also available in the Investors section of the Company's website are its corporate governance principles, code of conduct and code of ethics as well as the charters of the HMEC Board of Director's (Board) Audit Committee, Compensation Committee, Executive Committee, Investment and Finance Committee, and Nominating and Governance Committee. Copies also may be obtained by writing to Investor Relations, Horace Mann Educators Corporation, 1 Horace Mann Plaza, Springfield, Illinois 62715-0001.
 
On August 8, 2017, the Chief Executive Officer (CEO) of HMEC submitted the Annual Section 12(a) CEO Certification to the New York Stock Exchange (NYSE) without any qualifications. The Company filed with the SEC, as exhibits to the Annual Report on Form 10-K for the year ended December 31, 2016, the CEO and Chief Financial Officer (CFO) certifications required under Section 302 of the Sarbanes-Oxley Act.
 
History
 
The Company's business was founded in Springfield, Illinois in 1945 by two school teachers to sell automobile insurance to other teachers within Illinois. The Company expanded its business to other states and broadened its product line to include life insurance in 1949, 403(b) tax-qualified retirement annuities in 1961 and property insurance in 1965. In November 1991, HMEC completed an initial public offering of its common stock. The common stock is traded on the NYSE under the symbol HMN.
 

2





SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

The following consolidated statement of operations and balance sheet data have been derived from the consolidated financial statements of the Company, which have been prepared in accordance with GAAP. The consolidated financial statements of the Company for each of the years in the five year period ended December 31, 2017 have been audited by KPMG LLP, an independent registered public accounting firm. The following selected historical consolidated financial data should be read in conjunction with the consolidated financial statements of HMEC and its subsidiaries and Management's Discussion and Analysis of Financial Condition and Results of Operations.
 
 
Year Ended December 31,
 
 
2017
 
2016
 
2015
 
2014
 
2013
 
 
($ in millions, except per share data)
Statement of Operations Data:
 
 

 
 

 
 

 
 

 
 

Insurance premiums and contract charges earned
 
$
794.7

 
$
759.1

 
$
731.9

 
$
715.8

 
$
690.9

Net investment income
 
373.6

 
361.2

 
332.6

 
329.8

 
313.6

Net realized investment gains (losses)
 
(3.4
)
 
4.1

 
12.7

 
10.9

 
22.2

Total revenues
 
1,171.5

 
1,128.9

 
1,080.4

 
1,060.7

 
1,031.2

Interest expense
 
11.9

 
11.8

 
13.1

 
14.2

 
14.2

Income before income taxes
 
88.7

 
114.2

 
129.5

 
146.1

 
154.1

Net income
 
169.4

 
83.8

 
93.5

 
104.2

 
110.9

Ratio of earnings to fixed charges (1)
 
1.4x

 
1.6x

 
1.7x

 
1.8x

 
1.8x

 
 
 
 
 
 
 
 
 
 
 
Per Share Data (2):
 
 

 
 

 
 

 
 

 
 

Net income per share
 
 

 
 

 
 

 
 

 
 

Basic
 
$
4.10

 
$
2.04

 
$
2.23

 
$
2.50

 
$
2.75

Diluted
 
$
4.08

 
$
2.02

 
$
2.20

 
$
2.47

 
$
2.66

Shares of Common Stock (in millions)
 
 

 
 

 
 

 
 

 
 

Weighted average - basic
 
41.4

 
41.2

 
41.9

 
41.6

 
40.4

Weighted average - diluted
 
41.6

 
41.5

 
42.4

 
42.2

 
41.6

Ending outstanding
 
40.7

 
40.2

 
40.6

 
40.9

 
40.5

Cash dividends per share
 
$
1.10

 
$
1.06

 
$
1.00

 
$
0.92

 
$
0.78

Book value per share
 
$
36.88

 
$
32.15

 
$
31.18

 
$
32.65

 
$
27.14

 
 
 
 
 
 
 
 
 
 
 
Balance Sheet Data, at Year End:
 
 

 
 

 
 

 
 

 
 

Total investments
 
$
8,352.3

 
$
7,999.3

 
$
7,648.0

 
$
7,403.5

 
$
6,539.5

Total assets
 
11,198.3

 
10,576.8

 
10,057.0

 
9,768.4

 
8,826.3

Total policy liabilities
 
6,182.0

 
6,024.1

 
5,683.4

 
5,351.5

 
5,029.2

Short-term debt
 

 

 

 
38.0

 
38.0

Long-term debt
 
297.5

 
247.2

 
247.0

 
199.8

 
199.5

Total shareholders' equity
 
1,501.6

 
1,294.0

 
1,264.7

 
1,336.5

 
1,099.3

 
 
 
 
 
 
 
 
 
 
 
Segment Information (3):
 
 

 
 

 
 

 
 

 
 

Insurance premiums written and contract deposits
 
 

 
 

 
 

 
 

 
 

Property and Casualty
 
$
662.8

 
$
634.3

 
$
605.8

 
$
584.4

 
$
570.4

Retirement
 
453.1

 
520.2

 
548.0

 
480.6

 
423.0

Life
 
111.2

 
108.0

 
102.7

 
102.7

 
100.8

Total
 
1,227.1

 
1,262.5

 
1,256.5

 
1,167.7

 
1,094.2

Net income (loss)
 
 

 
 

 
 

 
 

 
 

Property and Casualty
 
17.8

 
25.6

 
40.0

 
46.9

 
44.4

Retirement
 
88.4

 
50.7

 
43.4

 
45.3

 
44.7

Life
 
77.6

 
16.6

 
15.0

 
17.5

 
20.4

Corporate and Other (4)
 
(14.4
)
 
(9.1
)
 
(4.9
)
 
(5.5
)
 
1.4

Total
 
169.4

 
83.8

 
93.5

 
104.2

 
110.9

 
 
 
 
 
(1)
For the purpose of determining the ratio of earnings to fixed charges, "earnings" consist of income before income taxes and fixed charges, and "fixed charges" consist of interest expense (including amortization of debt issuance costs) and interest credited to policyholders on investment contracts and life insurance products with account values.
(2)
Basic earnings per share is computed based on the weighted average number of shares outstanding plus the weighted average number of fully vested restricted stock units and common stock units payable as shares of HMEC common stock. Diluted earnings per share is computed based on the weighted average number of shares and common stock equivalents outstanding, to the extent dilutive. The Company's common stock equivalents relate to outstanding common stock options, common stock units (related to deferred compensation for Directors and employees) and restricted stock units.
(3)
Information regarding assets by segment at December 31, 2017, 2016 and 2015 is contained in Notes to Consolidated Financial Statements — Note 14 — Segment Information.
(4)
The Corporate and Other segment primarily includes interest expense on debt, the impact of net realized investment gains and losses, corporate debt retirement costs, and certain public company expenses.

3





Corporate Strategy and Marketing
 
The Horace Mann Value Proposition
 
The Horace Mann Value Proposition articulates the Company's overarching strategy and business purpose to provide lifelong financial well-being for educators and their families through personalized service, advice, and a full range of tailored insurance and financial products.
 
Target Market
 
Management believes that Horace Mann is the largest national multi-line insurance company focused on the nation's educators as its primary market. The Company's target market consists primarily of K-12 teachers, administrators and other employees of public schools and their families located throughout the U.S. The U.S. Department of Education estimates that there are approximately 6.2 million teachers, school administrators and education support personnel in public schools in the U.S.; approximately 3.1 million of these individuals are elementary and secondary teachers.
 
Distribution Strategy
 
In addition to the Company's traditional exclusive agency force, Horace Mann continues to build complementary distribution channels (i.e., on-line quoting, direct sales channel, and institutional business to business). These various channels allow customers to access Horace Mann how they choose. The Company believes that its customers will need expert advice at the point of sale at some point in their lifetime, and they will choose the advice of a trusted advisor.
 
Dedicated Agency Force
 
A cornerstone of Horace Mann's marketing strategy is its dedicated sales force of agents, supported by the Company's Customer Contact Center. As of December 31, 2017, the Company had a combined total of 694 Exclusive Distributors. Approximately 72.1% of the appointed agents are licensed by the Financial Industry Regulatory Authority, Inc. (FINRA) to sell variable annuities and variable universal life policies. Some individuals in the agency force were previously teachers, other members of the education profession or persons with close ties to the educational community. The Company's dedicated agents are under contract to market only the Company's products and limited additional third-party vendor products. Collectively, the Company's principal insurance subsidiaries are licensed to write business in 49 states and the District of Columbia.
 
The Company's dedicated agency force operates in its Agency Business Model (ABM), consisting of Exclusive Agencies as well as a limited number of Employee Agents. The Company's Exclusive Agent (EA) agreement is designed to place agents in the position to become business owners in their marketing territories and invest their own capital to grow their agencies. Exclusive Agents are non-employee, independent contractors. The Company provides ongoing training and support to agents regarding the Company's products, as well as to further embed repeatable processes and fully maximize the potential of its ABM.

4





Distribution Options
 
To complement and extend the reach of the Company's agency force and to more fully utilize its approved payroll slots in school systems across the country, the Company has utilized a network of independent agents to distribute the Company's products including 403(b) tax-qualified annuities. In addition to serving educators in areas where the Company does not have dedicated agents, the independent agents complement the annuity capabilities of the Company's agency force in under-penetrated areas. Effective January 1, 2018, the Company is allowing the independent agents to service their legacy books of annuity business, but the Company has ceased expansion of those books of annuity business for new customers. However, the Company may consider future use of this channel. During 2017, collected contract deposits from this distribution channel were $31.7 million. Combined with business from the Company's dedicated agency force, total annuity collected contract deposits were $453.1 million for the year ended December 31, 2017.

Geographic Composition of Business
 
The Company's business is geographically diversified. For the year ended December 31, 2017, based on direct premiums and contract deposits for all product lines, the top five states and their portion of total direct insurance premiums and contract deposits were California, 8.0%; Texas, 7.0%; North Carolina, 6.5%; Minnesota, 5.8%; and Florida, 5.4%.
 
HMEC's Property and Casualty subsidiaries are licensed to write business in 48 states and the District of Columbia. The following table shows the Company's top ten Property and Casualty states based on total direct premiums.
 
Property and Casualty Segment Top Ten States
($ in millions)
 
 
Property and Casualty Segment
 
 
2017 Direct
Premiums (1)
 
Percent
of Total
State
 
 
 
 
California
 
$
70.6

 
10.5
%
Texas
 
56.1

 
8.4

North Carolina
 
46.9

 
7.0

Minnesota
 
39.7

 
5.9

Florida
 
36.2

 
5.4

South Carolina
 
33.3

 
5.0

Louisiana
 
32.0

 
4.8

Georgia
 
29.6

 
4.4

Pennsylvania
 
23.1

 
3.4

Colorado
 
19.7

 
2.9

Total of top ten states
 
387.2

 
57.7

All other areas
 
283.3

 
42.3

Total direct premiums
 
$
670.5

 
100.0
%
 
 
 
 
 
(1)
Defined as earned premiums before reinsurance as determined under statutory accounting principles.


5





HMEC's principal life insurance subsidiary is licensed to write business in 48 states and the District of Columbia. The following table shows the Company's top ten combined Life and Retirement states based on total direct premiums and contract deposits.
 
Combined Life and Retirement Segments Top Ten States
($ in millions) 
 
 
2017 Direct
Premiums and
Contract Deposits (1)
 
Percent
of Total
State
 
 
 
 
South Carolina
 
$
34.0

 
6.0
%
Pennsylvania
 
33.8

 
5.9

North Carolina
 
33.4

 
5.9

Minnesota
 
32.1

 
5.6

Florida
 
31.2

 
5.5

Texas
 
30.4

 
5.3

Illinois
 
30.4

 
5.3

California
 
28.0

 
4.9

Indiana
 
27.7

 
4.9

Virginia
 
27.0

 
4.7

Total of top ten states
 
308.0

 
54.0

All other areas
 
262.0

 
46.0

Total direct premiums
 
$
570.0

 
100.0
%
 
 
 
 
 
(1)
Defined as collected premiums before reinsurance as determined under statutory accounting principles.

National, State and Local Education Associations
 
The Company has established relationships with a number of educator groups throughout the U.S. These groups include the National Education Association (NEA); The NEA Foundation; the Association of School Business Officials International (ASBO); and various school administrator and principal associations such as the American Association of School Administrators (AASA), the School Superintendents Association; the National Association of Elementary School Principals (NAESP); and the National Association of Secondary School Principals (NASSP). The Company does not pay these groups any consideration in exchange for endorsement of the Company or its products. Depending on the organization, the Company does pay for certain marketing agreements, special functions and advertising.
 
In recent years, the Company has developed relationships and programs to align its agents with school districts in a business to business relationship. In addition to working relationships, Horace Mann has strategic alliances with AASA and ASBO, as well as ASBO's state and regional affiliates. The Company holds an annual meeting with selected ASBO members to gain feedback on a variety of school district programs.
 
The Company has had its longest relationship with NEA, the nation's largest confederation of state and local teachers' associations, and many of the state and local education associations affiliated with NEA. NEA has approximately 3.2 million members. A number of state and local associations affiliated with NEA endorse various insurance products and services of the Company and its competitors.

6





Support of Educator Programs
 
The Company's agents conduct state-specific State Teacher Retirement System Workshops in addition to Financial Success Workshops designed to help educators gain or increase their financial literacy. In addition, the Company offers services and products to school districts that help meet the needs of educators including payroll deduction options for individual insurance products, group life insurance and Section 125 programs. To help districts determine what programs meet their needs, the Company has developed an Employer Benefit Review Service and conducts workshops for school business officials.
 
Along with differentiating value-added product features, the Company has a number of programs that demonstrate its commitment to the educator profession, while also further distinguishing Horace Mann from competitors within the K-12 educator market. Examples of these programs include: the NEA Foundation's Horace Mann Awards for Teaching Excellence honoring 5 national finalists; Horace Mann is a national sponsor of DonorsChoose.org, an online, not-for-profit organization that connects corporate and individual donors to teachers with classroom projects in need of funding; Horace Mann sponsors ASBO's Certified Administrator of School Finance and Operations® (SFO®) certification program; and Horace Mann is a sponsor of the AASA National Superintendent Certification Program and AASA's National Conference on Education. 

Property and Casualty Segment
 
Property and Casualty represented 54.0% of the Company's consolidated insurance premiums written and contract deposits in 2017.
 
The primary Property and Casualty product offered by the Company is private passenger automobile insurance, which in 2017 represented 36.7% of the Company's total insurance premiums written and contract deposits and 68.0% of Property and Casualty net written premiums. As of December 31, 2017, the Company had approximately 479,000 automobile policies in force. The Company's automobile business is primarily preferred risk, defined as a household whose drivers have had no recent accidents and no more than one recent moving violation.
 
In 2017, property insurance represented 17.3% of the Company's total insurance premiums written and contract deposits and 32.0% of Property and Casualty net written premiums. As of December 31, 2017, the Company had approximately 216,000 property policies in force. The Company insures primarily residential homes.
 
The Company has programs in a majority of states to provide higher-risk automobile and property coverages, as well as a number of other insurance coverages, with third-party vendors underwriting and bearing the risk of such insurance and the Company receiving commissions on the sales. Similarly, the Company has increased its offering of third-party vendor products in many areas to include coverage for small business owners and classic/collector automobiles to meet those aspects of an educator's needs.


7





Selected Historical Financial Information for the Property and Casualty Segment
 
The following table provides certain financial information for the Property and Casualty segment for the periods indicated.
 
Property and Casualty Segment
Selected Historical Financial Information
($ in millions)
 
 
Year Ended December 31,
 
 
2017
 
2016
 
2015
Financial Data:
 
 

 
 

 
 

Insurance premiums written
 
$
662.8

 
$
634.3

 
$
605.8

Insurance premiums earned
 
648.3

 
620.5

 
596.0

Net investment income
 
36.2

 
39.0

 
33.5

Income before income taxes
 
14.5

 
30.3

 
51.3

Net income
 
17.8

 
25.6

 
40.0

Catastrophe costs, pretax*
 
61.8

 
60.0

 
44.4

 
 
 
 
 
 
 
Operating Statistics:
 
 

 
 

 
 

Loss and loss adjustment expense ratio
 
76.6
%
 
74.8
%
 
70.5
%
Expense ratio
 
26.7
%
 
26.7
%
 
26.5
%
Combined loss and expense ratio
 
103.3
%
 
101.5
%
 
97.0
%
Effect of catastrophe costs on the combined ratio*
 
9.5
%
 
9.7
%
 
7.4
%
 
 
 
 
 
 
 
Automobile and Property:
 
 

 
 

 
 

Insurance premiums written
 
 

 
 

 
 

Automobile
 
$
450.7

 
$
425.9

 
$
402.2

Property
 
211.7

 
208.2

 
203.4

Insurance premiums earned
 
 

 
 

 
 

Automobile
 
438.0

 
414.3

 
393.6

Property
 
210.0

 
206.0

 
202.2

Policies in force (in thousands)
 
 

 
 

 
 

Automobile
 
479

 
485

 
487

Property
 
216

 
220

 
224

Total
 
695

 
705

 
711



8





Catastrophe Costs (Pretax)
 
The level of catastrophe costs can fluctuate significantly from year to year. Catastrophe costs before income tax benefits for the Company for the last ten years are shown in the following table.

Catastrophe Costs
($ in millions)
 
 
The
Year Ended December 31,
 
Company (1)
 
 
 
2017
 
$
61.8

2016
 
60.0

2015
 
44.4

2014
 
37.5

2013
 
40.2

2012
 
43.3

2011
 
86.0

2010
 
49.2

2009
 
33.1

2008
 
73.9

 
 
 
 
 
(1)
Net of reinsurance and before income tax benefits. Includes allocated loss adjustment expenses and reinsurance reinstatement premiums; excludes unallocated loss adjustment expenses. The Company's individually significant catastrophe losses net of reinsurance were as follows:
2017 -
Hail, tornadoes, wind events in February and March were $11.0 million; wind, hail, tornado event in May in Colorado primarily was $8.8 million; wind and hail event in June in Minnesota primarily was $8.0 million; wind, hail, tornado event in June in the Midwest was $3.8 million; Hurricane Harvey was $5.0 million; Hurricane Irma was $2.5 million; California wildfires in October and December were $1.3 million; other weather events throughout the year were each less than $3.0 million.
2016 -
Wind/hail event in March was $3.9 million; wind/hail event in April was $9.2 million; wind/hail/tornado event in May was $3.4 million; Hurricane Matthew was $10.0 million; other weather events throughout the year were each less than $3.0 million.
2015 -
Winter storm in February was $8.9 million; wind/flooding event in October was $3.0 million; other weather events throughout the year were each less than $3.0 million.
2014 -
Wind/hail event in May was $8.5 million; other weather events throughout the year were each less than $3.0 million.
2013 -
Wind/hail/tornado events in May, June and August were $10.1 million, $4.0 million and $7.9 million, respectively; winter storm events in February and April were $3.7 million and $3.4 million, respectively.
2012 -
Wind/hail/tornado events in March, April, May and June were $6.6 million, $6.6 million, $5.8 million and $11.9 million, respectively; June tropical storm and wildfire events, $1.4 million combined; $4.0 million, Hurricane Isaac; $2.8 million, Hurricane/Superstorm Sandy.
2011 -
Wind/hail/tornado events in April, May and June were $28.0 million, $17.6 million and $8.5 million, respectively; $8.0 million, Hurricane Irene.
2010 -
Wind/hail/tornado events in March, May, June, July and October were $4.8 million, $8.3 million, $12.1 million, $5.5 million and $7.7 million, respectively.
2009 -
$9.3 million, July wind/hail/tornadoes; $6.3 million, June wind/hail/tornadoes.
2008 -
$16.5 million, Hurricane Gustav; $15.5 million, Hurricane Ike; $9.8 million, May wind/hail/tornadoes; $7.0 million, June wind/hail/tornadoes; $3.0 million, December winter storm.

9





Fluctuations from year to year in the level of catastrophe losses impact a property and casualty insurance company's claims and claim adjustment expenses incurred and paid. For comparison purposes, the following table provides amounts for the Company excluding catastrophe losses.
 
Impact of Catastrophe Losses
($ in millions)
 
 
Year Ended December 31,
 
 
2017
 
2016
 
2015
 
 
 
 
 
 
 
Claims and claim expenses incurred (1)
 
$
496.3

 
$
464.1

 
$
420.3

Deduct: amount attributable to catastrophes (2)
 
61.8

 
60.0

 
44.4

Excluding catastrophes (1)
 
$
434.5

 
$
404.1

 
$
375.9

 
 
 
 
 
 
 
Claims and claim expense payments
 
$
481.1

 
$
468.8

 
$
436.4

Deduct: amount attributable to catastrophes (2)
 
65.6

 
62.0

 
44.6

Excluding catastrophes
 
$
415.5

 
$
406.8

 
$
391.8

 
 
 
 
 
(1)
Includes the impact of development of prior years' reserves as quantified in Property and Casualty Reserves.
(2)
Net of reinsurance and before income tax benefits. Includes allocated loss adjustment expenses; excludes unallocated loss adjustment expenses.

Property and Casualty Reserves
 
Property and Casualty unpaid claims and claim expenses (loss reserves) represent management's estimate of ultimate unpaid costs of losses and settlement expenses for claims that have been reported and claims that have been incurred but not yet reported. The Company calculates and records a single best estimate of the reserve as of each reporting date in conformity with generally accepted actuarial standards. For additional information regarding the process used to estimate Property and Casualty reserves and the risk factors involved, as well as a summary reconciliation of the beginning and ending Property and Casualty insurance claims and claim expense reserves and reserve development recorded in each of the three years ended December 31, 2017, see Notes to Consolidated Financial Statements — Note 5 — Property and Casualty Unpaid Claims and Claim Expenses, Management's Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies — Liabilities for Property and Casualty Claims and Claim Expenses and Management's Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations for the Three Years Ended December 31, 2017 — Benefits, Claims and Settlement Expenses.
 
All of the Company's reserves for Property and Casualty unpaid claims and claim expenses are carried at the full value of estimated liabilities and are not discounted for interest expected to be earned on reserves. Due to the nature of the Company's personal lines business, the Company has no exposure to losses related to claims for toxic waste cleanup, other environmental remediation or asbestos-related illnesses other than claims under property insurance policies for environmentally related items such as mold.
 
Property and Casualty Reinsurance
 
All reinsurance is obtained through contracts which generally are entered into for each calendar year. Although reinsurance does not legally discharge the Company from primary liability for the full amount of its policies, it does allow for recovery from assuming reinsurers to the extent of the reinsurance ceded. Past due reinsurance recoverables as of December 31, 2017 were not material.
 

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The Company maintains catastrophe excess of loss reinsurance coverage. For 2017, the Company's catastrophe excess of loss coverage consisted of one contract in addition to a minimal amount of coverage by the Florida Hurricane Catastrophe Fund (FHCF). The catastrophe excess of loss contract provided 95% coverage for catastrophe losses above a retention of $25.0 million per occurrence up to $90.0 million per occurrence and 100% coverage for catastrophe losses above $90.0 million per occurrence up to $175.0 million per occurrence. This contract consisted of three layers, each of which provided for one mandatory reinstatement. The layers were $25.0 million excess of $25.0 million, $40.0 million excess of $50.0 million and $85.0 million excess of $90.0 million. The Company's 2018 catastrophe excess of loss coverage is unchanged from 2017.
 
The Company has not joined the California Earthquake Authority (CEA). The Company's exposure to losses from earthquakes is managed through its underwriting standards, its earthquake policy coverage limits and deductible levels, and the geographic distribution of its business, as well as its reinsurance program. After reviewing the exposure to earthquake losses from the Company's own policies and from what it would be with participation in the CEA, including estimated start-up and ongoing costs related to CEA participation, management believes it is in the Company's best economic interest to offer earthquake coverage directly to its property policyholders.
 
For liability coverages, in 2017 the Company reinsured each loss above a retention of $1.0 million up to $5.0 million on a per occurrence basis and $20.0 million in a clash event. (A clash cover is a reinsurance casualty excess contract requiring two or more casualty coverages or policies issued by the Company to be involved in the same loss occurrence for coverage to apply.) The Company's 2018 liability coverages are unchanged from 2017.
 
For property coverages, in 2017 the Company reinsured each loss above a retention of $1.0 million up to $5.0 million on a per risk basis, including catastrophe losses. Also, the Company could submit to the reinsurers two per risk losses from the same occurrence for a total of $8.0 million of property recovery in any one event. The Company's 2018 property coverages are unchanged from 2017.

The following table identifies the Company's most significant reinsurers under the catastrophe first event excess of loss reinsurance program, their percentage participation in this program and their ratings by A.M. Best Company (A.M. Best) and Standard & Poor's Financial Services LLC (S&P) as of January 1, 2018. No other single reinsurer's percentage participation in 2018 or 2017 exceeds 5%.
 
Property Catastrophe First Event Excess of Loss
Reinsurance Participants In Excess of 5%
A.M. Best
 
S&P
 
 
 
 
 
Participation
Rating
 
Rating
 
Reinsurer
 
Parent
 
2018
 
2017
 
 
 
 
 
 
 
 
 
 
 
A
 
A+
 
Lloyd's of London Syndicates
 
 
 
31
%
 
33
%
NR
 
AA-
 
R+V Versicherung AG
 
DZ BANK AG
 
8
%
 
8
%
A+
 
AA-
 
Swiss Re Underwriters Agency, Inc
 
Swiss Re Ltd
 
7
%
 
10
%
A+
 
AA-
 
SCOR Global P&C SE
 
SCOR SE
 
7
%
 
7
%
 
 
 
 
 
NR - Not rated.
 
For 2018 and 2017, property catastrophe reinsurers representing 100% and 92%, respectively, of the Company's total reinsured catastrophe coverage were rated A- (Excellent) or above by A.M. Best with the remaining percentages provided by a reinsurer rated AA- by S&P but not formally followed by A.M. Best.
 

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Retirement Segment

Educators in the Company's target market continue to benefit from the provisions of Section 403(b) of the Internal Revenue Code (Code) which began in 1961. This section of the Code allows public school employees and employees of other tax-exempt organizations, such as not-for-profit private schools, to utilize pretax income to make periodic contributions to a qualified retirement plan. (Also see Regulation — Regulation at Federal Level.) The Company entered the educators retirement annuity market in 1961 and is one of the largest participants in the K-12 educator portion of the 403(b) tax-qualified annuity market, measured by 403(b) net written premium on a statutory accounting basis. The Company has 403(b) payroll deduction capabilities utilized by approximately 30% of the 13,600 public school districts in the U.S. Approximately 55.8% of the Company's new annuity contract deposits in 2017 were for 403(b) tax-qualified annuities; approximately 62.1% of accumulated annuity value on deposit is 403(b) tax-qualified. In 2017, annuities represented 36.9% of the Company's consolidated insurance premiums written and contract deposits.
 
The Company markets both fixed and variable annuity contracts, primarily on a tax-qualified basis. Fixed only annuities provide a guarantee of principal and a guaranteed minimum rate of return. These contracts are backed by the Company's general account investments. The Company bears the investment risk associated with the investments and may change the declared interest rate on these contracts subject to contract guarantees. The Company also offers fixed indexed annuity (FIA) products with interest crediting strategies linked to the S&P's 500 Index and the Dow Jones Industrial Average (DJIA). These products are fixed annuities with a guaranteed minimum interest rate, as described above, plus a contingent return based on equity market performance. The Company purchases call options on the applicable indices as an investment to provide the income needed to fund the annual index credits on the indexed products.
 
Variable annuities combine a fixed account option with equity- and bond-linked sub-account options. In general, the contractholders bear the investment risk related to the variable annuity sub-accounts and may change their allocation between the guaranteed interest rate fixed account and the wide range of variable investment options at any time. By utilizing tools that provide assistance in determining needs and making asset allocation decisions, contractholders are able to choose the investment mix that matches their personal risk tolerance and retirement goals. The Company's sub-account options also include both lifecycle funds and asset allocation funds. These all-purpose funds have assets allocated among multiple investment classes within each fund based on a specific targeted retirement date or risk tolerance.
 
Variable annuity contracts with a guaranteed minimum death benefit (GMDB) provide an additional benefit if the contractholder dies and the contract value is less than a contractually defined amount. The Company has a relatively low exposure to GMDB risk as 29.4% of contract values have no guarantee; 64.7% have only a return of premium guarantee; and only 5.9% have a guarantee of premium roll-up at an annual rate of 3.5% or 5.0%.
 
As of December 31, 2017, the Company had 105 variable sub-account options including funds managed by some of the best-known names in the mutual fund industry, such as AllianceBernstein, American Funds, Ariel, BlackRock, Calvert, Davis, Dreyfus, Fidelity, Goldman Sachs, JPMorgan, Lord Abbett, MFS, Neuberger Berman, Putnam, T. Rowe Price, Vanguard, Wells Fargo and Wilshire, offering the Company's customers multiple investment options to address their personal investment objectives and risk tolerance. These funds have been selected with the assistance of Wilshire Associates, the Company's fund advisor, which provides oversight and input to fund manager additions and replacements. Total accumulated fixed and variable annuity cash value on deposit at December 31, 2017 was $6.8 billion.
 

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In 2017, the Company introduced the Personal Retirement Planner (PRP) annuity series, replacing its previous individual annuity lineup. The PRP series includes a flexible premium deferred variable annuity, a flexible premium deferred fixed indexed annuity, a single premium deferred fixed annuity and a single premium immediate annuity. Consistent across all of these products is the elimination of any surrender charges for early withdrawal. This is supported by a revision in the compensation structure for the Company's Exclusive Distributors which pays them a consistent level percentage of account value each year in lieu of paying commissions up front on each deposit. The two fixed deferred annuity products each contain a market value adjustment clause to help mitigate disintermediation risk. The variable annuity offers a wide array of variable sub-accounts that are devoid of any revenue sharing or 12b-1 fees to provide greater fee transparency. The single premium deferred fixed annuity allows the customer to lock in a fixed interest rate for a single lump sum payment for a period of 5, 7 or 10 years. FIA provides an opportunity for potentially greater credited interest over the long term than traditional fixed rate annuities by linking the credited interest rates to changes in a market index.

In addition to variable annuities, the Company has launched the Horace Mann Retirement Advantage® open architecture platform for 403(b)(7) and other defined contribution plans. This platform combines a wide array of mutual funds integrated with a group unallocated fixed annuity stable value fund. This platform provides the Company with greater flexibility to offer customized 403(b)(7) and other qualified plan solutions to better meet the needs of school districts and other nonprofit plan sponsors.

To further assist registered representatives in delivering the Horace Mann Value Proposition, the Company has entered into third-party vendor agreements with American Funds Distributors, Inc. and Fidelity Distributors Corporation, to market their respective 529 college savings programs, and a brokerage clearing arrangement with Raymond James Financial, Inc. The Company also markets 403(b)(7) tax deferred mutual fund investment programs and a minimal amount of FIA products through third-party vendor agreements. Third-party vendors underwrite these accounts or contracts and the Company receives fees on the sales of these products. In addition, the Company's Investment Advisor Representatives offer investment management portfolios managed by unaffiliated registered investment advisors.


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Selected Historical Financial Information for the Retirement Segment
 
The following table provides certain information for the Retirement segment for the periods indicated.
 
Retirement Segment
Selected Historical Financial Information
($ in millions, unless otherwise indicated)
 
 
Year Ended December 31,
 
 
2017
 
2016
 
2015
Financial Data:
 
 

 
 

 
 

Contract deposits
 
 

 
 

 
 

Variable
 
$
173.9

 
$
163.6

 
$
174.9

Fixed
 
279.2

 
356.6

 
373.1

Total
 
453.1

 
520.2

 
548.0

Contract charges earned
 
28.0

 
24.9

 
25.4

Net investment income
 
262.0

 
249.4

 
228.4

Net interest margin (without net realized investment gains and losses)
 
108.5

 
102.1

 
89.7

Income before income taxes
 
69.0

 
71.0

 
63.3

Net income
 
$
88.4

 
$
50.7

 
$
43.4