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Section 1: 10-Q (10-Q)

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

FORM 10-Q 

[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2018
OR
[  ]
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________

Commission file number 1-10890

HORACE MANN EDUCATORS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
37-0911756
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)

1 Horace Mann Plaza, Springfield, Illinois      62715-0001
(Address of principal executive offices, including Zip Code)

Registrant’s Telephone Number, Including Area Code: 217-789-2500

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

Indicate by check mark whether the registrant has submitted electronically 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 the registrant’s filer status, as such terms are defined in Rule 12b-2 of the 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  

As of April 30, 2018, the registrant had 40,893,687 shares of Common Stock, par value $0.001 per share, outstanding.







HORACE MANN EDUCATORS CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2018
INDEX
PART I - FINANCIAL INFORMATION
Page
 
 
 
Item 1.
Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 






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

Results of Review of Interim Financial Information
We have reviewed the consolidated balance sheet of Horace Mann Educators Corporation and subsidiaries (the Company) as of March 31, 2018, the related consolidated statements of operations, comprehensive income, changes in shareholders’ equity, and cash flows for the three-month period ended March 31, 2018 and 2017, 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, 2017, and the related consolidated statements of operations, comprehensive income, changes in shareholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated February 28, 2018, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2017, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
Basis for Review Results
This consolidated interim financial information is the responsibility of the Company’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our reviews in accordance with the standards of the PCAOB. A review of consolidated interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
 
/s/ KPMG LLP
KPMG LLP
 
 
Chicago, Illinois
 
May 9, 2018
 
 


1



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

 
 
March 31, 2018
 
December 31, 2017
 
 
(Unaudited)
 
 
ASSETS
Investments
 
 
 
 
Fixed maturity securities, available for sale, at fair value
(amortized cost 2018, $7,373,552; 2017, $7,302,950)
 
$
7,634,682

 
$
7,724,075

Equity securities, at fair value (cost 2017, $116,320)
 
131,023

 
135,466

Short-term and other investments
 
458,957

 
492,807

Total investments
 
8,224,662

 
8,352,348

Cash
 
23,951

 
7,627

Deferred policy acquisition costs
 
280,165

 
257,826

Goodwill
 
47,396

 
47,396

Other assets
 
352,804

 
381,182

Separate Account (variable annuity) assets
 
2,139,564

 
2,151,961

Total assets
 
$
11,068,542

 
$
11,198,340

 
 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Policy liabilities
 
 
 
 
Investment contract and life policy reserves
 
$
5,598,678

 
$
5,573,735

Unpaid claims and claim expenses
 
358,317

 
347,749

Unearned premiums
 
254,401

 
260,539

Total policy liabilities
 
6,211,396

 
6,182,023

Other policyholder funds
 
720,521

 
724,261

Other liabilities
 
294,846

 
341,053

Long-term debt
 
297,536

 
297,469

Separate Account (variable annuity) liabilities
 
2,139,564

 
2,151,961

Total liabilities
 
9,663,863

 
9,696,767

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, 2018, 65,610,067; 2017, 65,439,245
 
66

 
65

Additional paid-in capital
 
466,277

 
464,246

Retained earnings
 
1,254,394

 
1,231,177

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

Net unrealized investment gains on securities
 
178,040

 
300,177

Net funded status of benefit plans
 
(13,217
)
 
(13,217
)
Treasury stock, at cost, 2018, 24,721,533 shares;
2017, 24,721,372 shares
 
(480,881
)
 
(480,875
)
Total shareholders’ equity
 
1,404,679

 
1,501,573

Total liabilities and shareholders’ equity
 
$
11,068,542

 
$
11,198,340










See Notes to Consolidated Financial Statements. 

2



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

 
 
 
Three Months Ended March 31,
 
 
 
2018
 
2017
 
 
 
 
 
 
Revenues
 
 
 
 
 
Insurance premiums and contract charges earned
 
 
$
202,998

 
$
195,722

Net investment income
 
 
91,864

 
90,711

Net investment losses
 
 
(1,654
)
 
(242
)
Other income
 
 
2,281

 
1,113

 
 
 
 
 
 
Total revenues
 
 
295,489

 
287,304

 
 
 
 
 
 
Benefits, losses and expenses
 
 


 


Benefits, claims and settlement expenses
 
 
143,562

 
144,096

Interest credited
 
 
50,035

 
48,774

DAC amortization expense
 
 
26,705

 
24,886

Operating expenses
 
 
48,169

 
48,756

Interest expense
 
 
3,172

 
2,956

 
 
 
 
 
 
Total benefits, losses and expenses
 
 
271,643

 
269,468

 
 
 
 
 
 
Income before income taxes
 
 
23,846

 
17,836

Income tax expense
 
 
3,691

 
2,518

 
 
 
 
 
 
Net income
 
 
$
20,155

 
$
15,318

 
 
 
 
 
 
Net income per share
 
 


 


Basic
 
 
$
0.49

 
$
0.37

Diluted
 
 
$
0.48

 
$
0.37

 
 
 
 
 
 
Weighted average number of shares and equivalent shares
 
 
 
 
 
Basic
 
 
41,497

 
41,135

Diluted
 
 
41,653

 
41,342

 
 
 
 
 
 
Net investment losses
 
 
 
 
 
Total other-than-temporary impairment losses on securities
 
 
$
(110
)
 
$
(2,797
)
Portion of losses recognized in other
comprehensive income
 
 

 

Net other-than-temporary impairment losses
on securities recognized in earnings
 
 
(110
)
 
(2,797
)
Sales and other
 
 
2,203

 
2,484

Change in fair value - equity securities
 
 
(5,186
)
 

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

 
71

Total
 
 
$
(1,654
)
 
$
(242
)




See Notes to Consolidated Financial Statements.

3



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

 
 
 
Three Months Ended March 31,
 
 
 
2018
 
2017
Comprehensive income
 
 
 
 
 
Net income
 
 
$
20,155

 
$
15,318

Other comprehensive income, net of tax:
 
 
 
 
 
Change in net unrealized investment gains
(losses) on securities
 
 
(107,096
)
 
22,533

Change in net funded status of benefit plans
 
 

 

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

Other comprehensive income (loss)
 
 
(122,137
)
 
22,533

Total
 
 
$
(101,982
)
 
$
37,851

 








































See Notes to Consolidated Financial Statements.

4



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

 
 
Three Months Ended March 31,
 
 
2018
 
2017
 
 
 
 
 
Common stock, $0.001 par value
 
 
 
 
Beginning balance
 
$
65

 
$
65

Options exercised, 2018, 56,614 shares; 2017, 33,764 shares
 

 

Conversion of common stock units, 2018, 11,804 shares;
2017, 15,981 shares
 

 

Conversion of restricted stock units, 2018, 105,116 shares;
2017, 247,620 shares
 
1

 

Ending balance
 
66

 
65

 
 
 
 
 
Additional paid-in capital
 
 
 
 
Beginning balance
 
464,246

 
453,479

Options exercised and conversion of common stock
units and restricted stock units
 
(125
)
 
(750
)
Share-based compensation expense
 
2,156

 
2,253

Ending balance
 
466,277

 
454,982

 
 
 
 
 
Retained earnings
 
 
 
 
Beginning balance
 
1,231,177

 
1,155,732

Net income
 
20,155

 
15,318

Dividends, 2018, $0.285 per share;
2017, $0.275 per share
 
(11,979
)
 
(11,518
)
Cumulative effect of change in accounting principle
 
15,041

 

Ending balance
 
1,254,394

 
1,159,532

 
 
 
 
 
Accumulated other comprehensive income, net of tax
 
 
 
 
Beginning balance
 
286,960

 
163,921

Change in net unrealized investment gains (losses) on securities
 
(107,096
)
 
22,533

Change in net funded status of benefit plans
 

 

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

Ending balance
 
164,823

 
186,454

 
 
 
 
 
Treasury stock, at cost
 
 
 
 
Beginning balance, 2018, 24,721,372 shares;
2017, 24,672,932 shares
 
(480,875
)
 
(479,215
)
Acquisition of shares, 2018, 161 shares;
2017, 0 shares
 
(6
)
 

Ending balance, 2018, 24,721,533 shares;
2017, 24,672,932 shares
 
(480,881
)
 
(479,215
)
 
 
 
 
 
Shareholders’ equity at end of period
 
$
1,404,679

 
$
1,321,818









See Notes to Consolidated Financial Statements.

5



HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
($ in thousands)

 
 
Three Months Ended March 31,
 
 
2018
 
2017
Cash flows - operating activities
 
 
 
 
Premiums collected
 
$
179,456

 
$
172,588

Policyholder benefits paid
 
(131,090
)
 
(127,823
)
Policy acquisition and other operating expenses paid
 
(72,592
)
 
(74,763
)
Income taxes paid
 
690

 
11

Investment income collected
 
93,426

 
91,840

Interest expense paid
 
(256
)
 
(63
)
Other
 
2,492

 
11,008

 
 
 
 
 
Net cash provided by operating activities
 
72,126

 
72,798

 
 
 
 
 
Cash flows - investing activities
 
 

 
 

Fixed maturity securities
 
 

 
 

Purchases
 
(308,450
)
 
(318,629
)
Sales
 
89,894

 
110,872

Maturities, paydowns, calls and redemptions
 
151,722

 
190,068

Equity securities
 
 
 
 
Purchases
 
(2,208
)
 
(15,502
)
Sales and repayments
 
2,048

 
5,489

Purchase of other invested assets
 
(13,856
)
 
(24,177
)
Net cash provided by (used in) short-term and other investments
 
47,146

 
(32,406
)
 
 
 
 
 
Net cash used in investing activities
 
(33,704
)
 
(84,285
)
 
 
 
 
 
Cash flows - financing activities
 
 

 
 

Dividends paid to shareholders
 
(11,638
)
 
(11,518
)
Acquisition of treasury stock
 
(6
)
 

Proceeds from exercise of stock options
 
1,136

 
723

Withholding tax payments on RSUs tendered
 
(2,061
)
 
(2,532
)
Annuity contracts: variable, fixed and FHLB funding agreements
 
 

 
 

Deposits
 
98,837

 
117,311

Benefits, withdrawals and net transfers to
Separate Account (variable annuity) assets
 
(112,272
)
 
(99,757
)
Life policy accounts
 
 
 
 

Deposits
 
1,111

 
1,183

Withdrawals and surrenders
 
(1,329
)
 
(1,066
)
Change in bank overdrafts
 
4,124

 
(2,934
)
 
 
 
 
 
Net cash (used in) provided by financing activities
 
(22,098
)
 
1,410

 
 
 
 
 
Net increase (decrease) in cash
 
16,324

 
(10,077
)
 
 
 
 
 
Cash at beginning of period
 
7,627

 
16,670

 
 
 
 
 
Cash at end of period
 
$
23,951

 
$
6,593


See Notes to Consolidated Financial Statements.

6



HORACE MANN EDUCATORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2018 and 2017
($ in thousands, except per share data)

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 accordance with United States (U.S.) generally accepted accounting principles (GAAP) and with the rules and regulations of the Securities and Exchange Commission (SEC), specifically Regulation S-X and the instructions to Form 10-Q. Certain information and disclosures normally included in annual financial statements prepared in accordance with GAAP, but are not required for interim reporting purposes, have been omitted. The Company believes that these consolidated financial statements contain all adjustments (consisting of normal recurring accruals) which are, in the opinion of management, necessary to present fairly the Company’s consolidated financial position as of March 31, 2018, the consolidated results of operations, comprehensive income, changes in shareholders’ equity and cash flows for the three month periods ended March 31, 2018 and 2017. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect (1) the reported amounts of assets and liabilities, (2) disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and (3) the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
 
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, 2017.
 
The results of operations for the three month period ended March 31, 2018 are not necessarily indicative of the results to be expected for the full year.

Investment Contract and Life Policy Reserves
 
This table summarizes the Company’s investment contract and life policy reserves.
($ in thousands)
 
March 31, 2018
 
December 31, 2017
 
 
 
 
 
Investment contract reserves
 
$
4,471,733

 
$
4,452,972

Life policy reserves
 
1,126,945

 
1,120,763

Total
 
$
5,598,678

 
$
5,573,735



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 and losses on securities and the after tax change in net funded status of defined benefit plans for the periods as shown in the Consolidated Statement of Changes in Shareholders’ Equity. The following tables reconcile these components.
($ in thousands)
 
Net Unrealized Investment Gains and Losses on Securities (1)(2)
 
Defined Benefit Plans (1)
 
Total (1)
 
 
 
 
 
 
 
Beginning balance, January 1, 2018
 
$
300,177

 
$
(13,217
)
 
$
286,960

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

 
(109,539
)
Amounts reclassified from accumulated
other comprehensive income (loss)
 
2,443

 

 
2,443

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

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

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

 
$
(13,217
)
 
$
164,823

 
 
 
 
 
 
 
Beginning balance, January 1, 2017
 
$
175,738

 
$
(11,817
)
 
$
163,921

Other comprehensive income (loss) before reclassifications
 
22,330

 

 
22,330

Amounts reclassified from accumulated
other comprehensive income (loss)
 
203

 

 
203

Net current period other comprehensive income (loss)
 
22,533

 

 
22,533

Ending balance, March 31, 2017
 
$
198,271

 
$
(11,817
)
 
$
186,454

________________
(1)
All amounts are net of tax.
(2)
The pretax amounts reclassified from accumulated other comprehensive income (loss), $(3,092) thousand and $(313) thousand, are included in net investment gains and losses and the related income tax expenses, $(649) thousand and $(110) thousand, are included in income tax expense in the Consolidated Statements of Operations for the three month periods ended March 31, 2018 and 2017, respectively.
(3)
The Company adopted guidance on January 1, 2018 that resulted in reclassifying $15,041 thousand of after tax unrealized gains on equity securities from AOCI to Retained earnings.

Comparative information for elements that are not required to be reclassified in their entirety to net income in the same reporting period is located in Note 2 -- Investments -- Net Unrealized Investment Gains and Losses on Securities.
 
Adopted Accounting Standards
 
Revenue Recognition
In May 2014, the FASB issued accounting guidance to provide a single comprehensive model in accounting for revenue arising from contracts with customers. The guidance applies to all contracts with customers; however, certain insurance contracts are specifically excluded from this updated guidance. The Company adopted the guidance on January 1, 2018, using the modified retrospective transition method. The guidance did not have an impact on the Company’s consolidated financial position, results of operations, cash flows, or disclosures.


8

Note 1 - Basis of Presentation (Continued)


Recognition and Measurement of Financial Assets and Liabilities
In January 2016, the FASB issued accounting guidance to improve certain aspects of the recognition, measurement, presentation and disclosure of financial instruments. Among other things, the guidance revises the accounting related to the classification and measurement of investments in equity securities and the presentation of certain fair value changes for financial liabilities measured at fair value. The Company adopted the guidance on January 1, 2018 using the modified retrospective approach that resulted in reclassifying $15,041 thousand of after tax unrealized gains on equity securities from AOCI to Retained earnings. The Company's Consolidated Statements of Operations were impacted as changes in fair value of equity securities are now being reported in Net investment gains and losses instead of reported in other comprehensive income (loss) (OCI).
Statement of Cash Flows -- Classification
In August 2016, the FASB issued guidance to reduce diversity in practice in the statement of cash flows between operating, investing and financing activities related to the classification of cash receipts and cash payments for eight specific issues. The FASB acknowledged that current GAAP either is unclear or does not include specific guidance on these eight cash flow classification issues: (1) debt prepayment or extinguishment costs; (2) settlement of zero-coupon bonds (pertains to issuers); (3) contingent consideration payments made after a business combination; (4) proceeds from the settlement of insurance claims (pertains to claimants); (5) proceeds from the settlement of corporate-owned life insurance policies; (6) distributions received from equity method investees; (7) beneficial interests in securitization transactions (pertains to transferors) and (8) separately identifiable cash flows and application of the predominance principle. The Company adopted the guidance on January 1, 2018 using a retrospective approach which had no impact to the prior year amounts reported in the Consolidated Statement of Cash Flows.

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
On February 14, 2018, the FASB issued accounting guidance that permits recognition of a reclassification adjustment between AOCI and Retained earnings for stranded tax amounts related to the reduced corporate tax rate enacted under the Tax Act. As permitted under its provisions, the Company early adopted the accounting guidance effective for the quarterly period that ended December 31, 2017 and elected to reclassify the stranded tax amounts. The impact from early adoption resulted in an increase to AOCI and a reduction to Retained earnings of approximately $47,900 thousand; representing the stranded deferred tax liabilities of $50,034 thousand and $(2,134) thousand for Net unrealized investment gains and losses on securities and Defined benefit plans, respectively.
Pending Accounting Standards

Accounting for Leases
In February 2016, the FASB issued accounting and disclosure guidance to improve financial reporting and comparability among organizations about leasing transactions. Under the new guidance, for leases with lease terms of more than 12 months, a lessee will be required to recognize assets and liabilities on the balance sheet for the rights and obligations created by those leases. Consistent with current accounting guidance, the recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or an operating lease. However, while current guidance requires only capital leases to be recognized on the balance sheet, the new guidance will require both operating and capital leases to be recognized on the balance sheet. In transition to the new guidance, companies are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those years. Early application is permitted. While the Company is in the process of evaluating the impact of the guidance, it does not expect the guidance to have a material impact on its consolidated financial statements, except for recognizing lease assets and lease liabilities for its operating leases. The Company's lease obligations under various non-cancellable operating lease agreements amounted to approximately $9,093 thousand at March 31, 2018.

9

Note 1 - Basis of Presentation (Continued)


Measurement of Credit Losses on Financial Instruments

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

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



10

Note 2 - Investments

The Company’s investment portfolio includes free-standing derivative financial instruments (currently over the counter index call option contracts) to economically hedge risk associated with its fixed indexed annuity (FIA) and indexed universal life (IUL) products’ contingent liabilities. The Company’s FIA and IUL products include embedded derivative features that are discussed in Note 1 -- Summary of Significant Accounting Policies -- Investment Contract and Life Policy Reserves -- Reserves for Fixed Indexed Annuities and Indexed Universal Life Policies of the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. The Company’s investment portfolio included no other free-standing derivative financial instruments (futures, forwards, swaps, option contracts or other financial instruments with similar characteristics), and there were no other embedded derivative features related to the Company’s investment or insurance products during the three month periods ended March 31, 2018 and 2017.

Fixed Maturity Securities

The Company’s investment portfolio is comprised primarily of fixed maturity securities. The amortized cost, net unrealized investment gains and losses, fair values and other-than-temporary impairment (OTTI) included in AOCI of all fixed maturity securities in the portfolio were as follows:
($ in thousands)
 
Amortized
Cost/Cost
 
Unrealized
Investment
Gains
 
Unrealized
Investment
Losses
 
Fair
Value
 
OTTI in
AOCI (2)
March 31, 2018 (1)
 
 
 
 
 
 
 
 
 
 
Fixed maturity securities
 
 
 
 
 
 
 
 
 
 
U.S. Government and federally
sponsored agency obligations (3):
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
 
$
699,629

 
$
22,930

 
$
11,601

 
$
710,958

 
$

Other, including U.S. Treasury securities
 
760,390

 
18,797

 
17,220

 
761,967

 

Municipal bonds
 
1,721,046

 
149,774

 
9,516

 
1,861,304

 

Foreign government bonds
 
94,870

 
4,307

 
136

 
99,041

 

Corporate bonds
 
2,383,394

 
112,451

 
14,575

 
2,481,270

 

Other mortgage-backed securities
 
1,714,223

 
16,621

 
10,702

 
1,720,142

 

Totals
 
$
7,373,552

 
$
324,880

 
$
63,750

 
$
7,634,682

 
$

 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
 
 
 
Fixed maturity securities
 
 
 
 
 
 
 
 
 
 
U.S. Government and federally
sponsored agency obligations (3):
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
 
$
669,297

 
$
30,460

 
$
3,032

 
$
696,725

 
$

Other, including U.S. Treasury securities
 
714,613

 
26,311

 
5,516

 
735,408

 

Municipal bonds
 
1,711,581

 
184,107

 
2,435

 
1,893,253

 

Foreign government bonds
 
96,780

 
5,958

 

 
102,738

 

Corporate bonds
 
2,409,426

 
173,862

 
4,334

 
2,578,954

 

Other mortgage-backed securities
 
1,701,253

 
22,935

 
7,191

 
1,716,997

 

Totals
 
$
7,302,950

 
$
443,633

 
$
22,508

 
$
7,724,075

 
$

 
 
 
 
 
 
 
 
 
 
 
Equity securities (4)
 
$
116,320

 
$
19,425

 
$
279

 
$
135,466

 
$

________________
(1)
Effective January 1, 2018, with the adoption of new accounting guidance for recognition and measurement of financial instruments, available for sale equity securities were reclassified to equity securities at fair value and are excluded from the table above as of March 31, 2018.
(2)
Related to securities for which an unrealized loss was bifurcated to distinguish the credit-related portion and the portion driven by other market factors. Represents the amount of OTTI losses in AOCI which was not included in earnings; amounts also include net unrealized investment gains and losses on such impaired securities relating to changes in the fair value of those securities subsequent to the impairment measurement date.
(3)
Fair value includes securities issued by Federal National Mortgage Association (FNMA) of $386,398 thousand and $361,955 thousand; Federal Home Loan Mortgage Corporation (FHLMC) of $396,957 thousand and $400,001 thousand; and Government National Mortgage Association (GNMA) of $98,056 thousand and $104,168 thousand as of March 31, 2018 and December 31, 2017, respectively.
(4)
Includes nonredeemable (perpetual) preferred stocks, common stocks and closed-end funds.


11

Note 2 - Investments (Continued)


The following table presents the fair value and gross unrealized losses of securities in an unrealized loss position at March 31, 2018 and December 31, 2017, respectively. The Company views the decrease in value of all of the securities with unrealized losses at March 31, 2018 -- which was driven largely by changes in 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 the amortized cost bases, and management expects to recover the entire amortized cost bases of the fixed maturity securities. Therefore, no impairment of fixed maturity securities was recorded at March 31, 2018.
($ in thousands)
 
12 Months or Less
 
More than 12 Months
 
Total
 
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
March 31, 2018 (1)
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturity securities
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government and federally sponsored agency obligations:
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
 
$
301,927

 
$
8,346

 
$
39,339

 
$
3,255

 
$
341,266

 
$
11,601

Other
 
393,555

 
9,415

 
118,166

 
7,805

 
511,721

 
17,220

Municipal bonds
 
224,400

 
4,614

 
76,577

 
4,902

 
300,977

 
9,516

Foreign government bonds
 
6,390

 
136

 

 

 
6,390

 
136

Corporate bonds
 
450,467

 
11,923

 
37,572

 
2,652

 
488,039

 
14,575

Other mortgage-backed securities
 
607,571

 
6,298

 
146,659

 
4,404

 
754,230

 
10,702

Total
 
$
1,984,310

 
$
40,732

 
$
418,313

 
$
23,018

 
$
2,402,623

 
$
63,750

 
 
 
 
 
 
 
 
 
 
 
 
 
Number of positions with a
gross unrealized loss
 
837

 
 
 
153

 
 
 
990

 
 
Fair value as a percentage of total fixed
maturity securities fair value
 
25.6
%
 
 
 
5.4
%
 
 
 
31.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturity securities
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government and federally sponsored agency obligations:
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
 
$
134,032

 
$
1,053

 
$
40,606

 
$
1,979

 
$
174,638

 
$
3,032

Other
 
168,634

 
1,849

 
122,753

 
3,667

 
291,387

 
5,516

Municipal bonds
 
29,437

 
100

 
79,140

 
2,335

 
108,577

 
2,435

Foreign government bonds
 

 

 

 

 

 

Corporate bonds
 
115,113

 
2,701

 
36,081

 
1,633

 
151,194

 
4,334

Other mortgage-backed securities
 
457,166

 
2,791

 
168,972

 
4,400

 
626,138

 
7,191

Total fixed maturity securities
 
904,382

 
8,494

 
447,552

 
14,014

 
1,351,934

 
22,508

Equity securities (2)
 
6,027

 
249

 
1,277

 
30

 
7,304

 
279

Combined totals
 
$
910,409

 
$
8,743

 
$
448,829

 
$
14,044

 
$
1,359,238

 
$
22,787

 
 
 
 
 
 
 
 
 
 
 
 
 
Number of positions with a
gross unrealized loss
 
354

 
 
 
158

 
 
 
512

 
 
Fair value as a percentage of total fixed
maturity and equity securities fair value
 
11.6
%
 
 
 
5.7
%
 
 
 
17.3
%
 
 
________________
(1)
Effective January 1, 2018, with the adoption of new accounting guidance for recognition and measurement of financial instruments, available for sale equity securities were reclassified to equity securities at fair value and are excluded from the table above as of March 31, 2018.
(2)
Includes nonredeemable (perpetual) preferred stocks, common stocks and closed-end funds.


12

Note 2 - Investments (Continued)


Fixed maturity securities with an investment grade rating represented 95.3% of the gross unrealized losses as of March 31, 2018. With respect to fixed maturity securities involving securitized financial assets, the underlying collateral cash flows were stress tested to determine there was no adverse change in the present value of cash flows below the amortized cost basis.
 
Credit Losses
 
The following table summarizes the cumulative amounts related to the Company’s credit loss component of OTTI losses on fixed maturity securities held as of March 31, 2018 and 2017 that the Company did not intend to sell as of those dates, and it was not more likely than not that the Company would be required to sell the securities before the anticipated recovery of the amortized cost bases, for which the non-credit portions of OTTI losses were recognized in OCI:
($ in thousands)
 
Three Months Ended March 31,
 
 
2018
 
2017
Cumulative credit loss (1)
 
 
 
 
Beginning of period
 
$
3,825

 
$
13,703

New credit losses
 

 

Increases to previously recognized credit losses
 

 
726

Gains (losses) related to securities sold or paid down during the period
 

 
(2
)
End of period
 
$
3,825

 
$
14,427

________________
(1)
The cumulative credit loss amounts exclude OTTI losses on securities held as of the periods indicated that the Company intended to sell or it was more likely than not that the Company would be required to sell the security before the recovery of the amortized cost basis.

Maturities/Sales of Fixed Maturity Securities
 
The following table presents the distribution of the Company’s fixed maturity securities portfolio by estimated expected maturity. Estimated expected maturities differ from contractual maturities, reflecting assumptions regarding borrowers’ utilization of the right to call or prepay obligations with or without call or prepayment penalties. For structured securities, including mortgage-backed securities and other asset-backed securities, estimated expected maturities consider broker-dealer survey prepayment assumptions and are verified for consistency with the interest rate and economic environments.
($ in thousands)
 
Percent of Total Fair Value
 
March 31, 2018
 
 
March 31, 2018
 
December 31, 2017
 
Fair
Value
 
Amortized
Cost
Estimated expected maturity:
 
 
 
 
 
 
 
 
Due in 1 year or less
 
4.0
%
 
3.2
%