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 June 30, 2014
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 | ¨ |
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 July 31, 2014, 40,933,782 shares of Common Stock, par value $0.001 per share, were outstanding, net of 23,254,530 shares of treasury stock.
HORACE MANN EDUCATORS CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2014
INDEX
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Horace Mann Educators Corporation:
We have reviewed the accompanying consolidated balance sheet of Horace Mann Educators Corporation and subsidiaries (the Company) as of June 30, 2014, the related consolidated statements of operations and comprehensive income (loss) for the three-month and six-month periods ended June 30, 2014 and 2013, and the related consolidated statements of changes in shareholders’ equity and cash flows for the six-month periods ended June 30, 2014 and 2013. These consolidated financial statements are the responsibility of the Company’s management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of 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 Public Company Accounting Oversight Board (United States), 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.
Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated financial statements referred to above for them 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), the consolidated balance sheet of Horace Mann Educators Corporation and subsidiaries as of December 31, 2013, 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 3, 2014, we expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
KPMG LLP
Chicago, Illinois
August 8, 2014
1 |
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
June 30, | December 31, | |||||||||||
2014 | 2013 | |||||||||||
(Unaudited) | ||||||||||||
ASSETS | ||||||||||||
Investments | ||||||||||||
Fixed maturities, available for sale, at fair value | ||||||||||||
(amortized cost 2014, $6,187,429; 2013, $5,784,205) | $ | 6,676,339 | $ | 6,009,573 | ||||||||
Equity securities, available for sale, at fair value | ||||||||||||
(cost 2014, $97,224; 2013, $84,754) | 109,462 | 91,858 | ||||||||||
Short-term and other investments | 303,879 | 438,042 | ||||||||||
Total investments | 7,089,680 | 6,539,473 | ||||||||||
Cash | 44,703 | 18,189 | ||||||||||
Deferred policy acquisition costs | 209,998 | 245,355 | ||||||||||
Goodwill | 47,396 | 47,396 | ||||||||||
Other assets | 240,246 | 228,264 | ||||||||||
Separate Account (variable annuity) assets | 1,814,152 | 1,747,995 | ||||||||||
Total assets | $ | 9,446,175 | $ | 8,826,672 | ||||||||
|
||||||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||
Policy liabilities | ||||||||||||
Fixed annuity contract liabilities | $ | 3,629,065 | $ | 3,515,865 | ||||||||
Interest-sensitive life contract liabilities | 785,308 | 777,292 | ||||||||||
Unpaid claims and claim expenses | 302,636 | 291,627 | ||||||||||
Future policy benefits | 228,593 | 223,295 | ||||||||||
Unearned premiums | 217,729 | 221,114 | ||||||||||
Total policy liabilities | 5,163,331 | 5,029,193 | ||||||||||
Other policyholder funds | 347,052 | 346,292 | ||||||||||
Other liabilities | 600,590 | 366,013 | ||||||||||
Short-term debt | 38,000 | 38,000 | ||||||||||
Long-term debt | 199,907 | 199,874 | ||||||||||
Separate Account (variable annuity) liabilities | 1,814,152 | 1,747,995 | ||||||||||
Total liabilities | 8,163,032 | 7,727,367 | ||||||||||
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, 2014, 64,114,248; 2013, 63,629,105 | 64 | 64 | ||||||||||
Additional paid-in capital | 417,992 | 407,056 | ||||||||||
Retained earnings | 1,029,516 | 1,000,312 | ||||||||||
Accumulated other comprehensive income (loss), net of taxes: | ||||||||||||
Net unrealized gains on fixed maturities and equity securities | 281,555 | 133,990 | ||||||||||
Net funded status of pension and other postretirement benefit obligations | (11,776 | ) | (11,776 | ) | ||||||||
Treasury stock, at cost, 2014, 23,254,530 shares; 2013, 23,117,554 shares | (434,208 | ) | (430,341 | ) | ||||||||
Total shareholders’ equity | 1,283,143 | 1,099,305 | ||||||||||
Total liabilities and shareholders’ equity | $ | 9,446,175 | $ | 8,826,672 |
See accompanying Notes to Consolidated Financial Statements.
See accompanying Report of Independent Registered Public Accounting Firm.
2 |
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollars in thousands, except per share data)
Three Months Ended | Six Months Ended | ||||||||||||||||
June 30, | June 30, | ||||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||||
Revenues | |||||||||||||||||
Insurance premiums and contract charges earned | $ | 179,138 | $ | 171,561 | $ | 354,541 | $ | 340,719 | |||||||||
Net investment income | 81,405 | 77,361 | 164,449 | 154,764 | |||||||||||||
Net realized investment gains | 3,463 | 15,417 | 5,162 | 22,279 | |||||||||||||
Other income | 737 | 1,298 | 1,856 | 2,406 | |||||||||||||
Total revenues | 264,743 | 265,637 | 526,008 | 520,168 | |||||||||||||
Benefits, losses and expenses | |||||||||||||||||
Benefits, claims and settlement expenses | 127,158 | 120,765 | 239,146 | 233,464 | |||||||||||||
Interest credited | 43,730 | 42,098 | 86,817 | 83,506 | |||||||||||||
Policy acquisition expenses amortized | 22,517 | 23,000 | 45,550 | 43,074 | |||||||||||||
Operating expenses | 39,211 | 39,014 | 79,158 | 77,832 | |||||||||||||
Interest expense | 3,546 | 3,549 | 7,092 | 7,103 | |||||||||||||
Total benefits, losses and expenses | 236,162 | 228,426 | 457,763 | 444,979 | |||||||||||||
Income before income taxes | 28,581 | 37,211 | 68,245 | 75,189 | |||||||||||||
Income tax expense | 8,129 | 11,216 | 19,427 | 22,182 | |||||||||||||
Net income | $ | 20,452 | $ | 25,995 | $ | 48,818 | $ | 53,007 | |||||||||
Net income per share | |||||||||||||||||
Basic | $ | 0.49 | $ | 0.65 | $ | 1.18 | $ | 1.34 | |||||||||
Diluted | $ | 0.48 | $ | 0.63 | $ | 1.16 | $ | 1.29 | |||||||||
Weighted average number of shares and equivalent shares (in thousands) | |||||||||||||||||
Basic | 41,432 | 39,768 | 41,343 | 39,648 | |||||||||||||
Diluted | 42,310 | 41,395 | 42,213 | 41,219 | |||||||||||||
Net realized investment gains | |||||||||||||||||
Total other-than-temporary impairment losses on securities | $ | (452 | ) | $ | (963 | ) | $ | (452 | ) | $ | (963 | ) | |||||
Portion of losses recognized in other comprehensive income | - | - | - | - | |||||||||||||
Net other-than-temporary impairment losses on securities recognized in earnings | (452 | ) | (963 | ) | (452 | ) | (963 | ) | |||||||||
Realized gains, net | 3,915 | 16,380 | 5,614 | 23,242 | |||||||||||||
Total | $ | 3,463 | $ | 15,417 | $ | 5,162 | $ | 22,279 |
See accompanying Notes to Consolidated Financial Statements.
See accompanying Report of Independent Registered Public Accounting Firm.
3 |
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(Dollars in thousands)
Three Months Ended | Six Months Ended | ||||||||||||||||
June 30, | June 30, | ||||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||||
Comprehensive income (loss) | |||||||||||||||||
Net income | $ | 20,452 | $ | 25,995 | $ | 48,818 | $ | 53,007 | |||||||||
Other comprehensive income (loss), net of taxes: | |||||||||||||||||
Change in net unrealized gains and losses on fixed maturities and equity securities | 70,157 | (177,219 | ) | 147,565 | (185,553 | ) | |||||||||||
Change in net funded status of pension and other postretirement benefit obligations | - | - | - | - | |||||||||||||
Other comprehensive income (loss) | 70,157 | (177,219 | ) | 147,565 | (185,553 | ) | |||||||||||
Total | $ | 90,609 | $ | (151,224 | ) | $ | 196,383 | $ | (132,546 | ) |
See accompanying Notes to Consolidated Financial Statements.
See accompanying Report of Independent Registered Public Accounting Firm.
4 |
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)
(Dollars in thousands, except per share data)
Six Months Ended | ||||||||
June 30, | ||||||||
2014 | 2013 | |||||||
Common stock, $0.001 par value | ||||||||
Beginning balance | $ | 64 | $ | 62 | ||||
Options exercised, 2014, 382,956 shares; | ||||||||
2013, 563,487 shares | - | 1 | ||||||
Conversion of common stock units, | ||||||||
2014, 10,834 shares; 2013, 11,851 shares | - | - | ||||||
Conversion of restricted stock units, | ||||||||
2014, 91,353 shares; 2013, 141,732 shares | - | - | ||||||
Ending balance | 64 | 63 | ||||||
Additional paid-in capital | ||||||||
Beginning balance | 407,056 | 383,135 | ||||||
Options exercised and conversion of common stock units and restricted stock units | 10,301 | 12,413 | ||||||
Share-based compensation expense | 635 | 710 | ||||||
Ending balance | 417,992 | 396,258 | ||||||
Retained earnings | ||||||||
Beginning balance | 1,000,312 | 921,969 | ||||||
Net income | 48,818 | 53,007 | ||||||
Cash dividends, 2014, $0.46 per share; 2013, $0.39 per share | (19,614 | ) | (16,160 | ) | ||||
Ending balance | 1,029,516 | 958,816 | ||||||
Accumulated other comprehensive income (loss), net of taxes | ||||||||
Beginning balance | 122,214 | 367,089 | ||||||
Change in net unrealized gains and losses on fixed maturities and equity securities | 147,565 | (185,553 | ) | |||||
Change in net funded status of pension and other postretirement benefit obligations | - | - | ||||||
Ending balance | 269,779 | 181,536 | ||||||
Treasury stock, at cost | ||||||||
Beginning balance, 2014, 23,117,554 shares; | ||||||||
2013, 22,943,925 shares | (430,341 | ) | (426,452 | ) | ||||
Acquisition of shares, 2014, 136,976 shares; | ||||||||
2013, 173,428 shares | (3,867 | ) | (3,884 | ) | ||||
Ending balance, 2014, 23,254,530 shares; | ||||||||
2013, 23,117,353 shares | (434,208 | ) | (430,336 | ) | ||||
Shareholders’ equity at end of period | $ | 1,283,143 | $ | 1,106,337 |
See accompanying Notes to Consolidated Financial Statements.
See accompanying Report of Independent Registered Public Accounting Firm.
5 |
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
Six Months Ended | ||||||||
June 30, | ||||||||
2014 | 2013 | |||||||
Cash flows - operating activities | ||||||||
Premiums collected | $ | 351,404 | $ | 335,344 | ||||
Policyholder benefits paid | (242,035 | ) | (235,046 | ) | ||||
Policy acquisition and other operating expenses paid | (135,428 | ) | (136,046 | ) | ||||
Federal income taxes paid | (17,363 | ) | (22,545 | ) | ||||
Investment income collected | 161,033 | 152,500 | ||||||
Interest expense paid | (7,005 | ) | (6,972 | ) | ||||
Other | (2,490 | ) | (1,908 | ) | ||||
Net cash provided by operating activities | 108,116 | 85,327 | ||||||
Cash flows - investing activities | ||||||||
Fixed maturities | ||||||||
Purchases | (657,797 | ) | (677,196 | ) | ||||
Sales | 99,249 | 213,986 | ||||||
Maturities, paydowns, calls and redemptions | 177,370 | 254,763 | ||||||
Purchase of other invested assets | - | (10,000 | ) | |||||
Net cash provided by (used in) short-term and other investments | 139,984 | (18,971 | ) | |||||
Net cash used in investing activities | (241,194 | ) | (237,418 | ) | ||||
Cash flows - financing activities | ||||||||
Dividends paid to shareholders | (19,614 | ) | (16,160 | ) | ||||
Acquisition of treasury stock | (3,867 | ) | (3,884 | ) | ||||
Exercise of stock options | 7,262 | 9,394 | ||||||
Annuity contracts: variable, fixed and | ||||||||
FHLB funding agreements | ||||||||
Deposits | 218,331 | 188,562 | ||||||
Benefits, withdrawals and net transfers to | ||||||||
Separate Account (variable annuity) assets | (159,680 | ) | (135,036 | ) | ||||
Life policy accounts | ||||||||
Deposits | 476 | 801 | ||||||
Withdrawals and surrenders | (2,410 | ) | (2,410 | ) | ||||
Cash received related to repurchase agreements | 114,083 | 133,980 | ||||||
Change in bank overdrafts | 5,011 | (456 | ) | |||||
Net cash provided by financing activities | 159,592 | 174,791 | ||||||
Net increase in cash | 26,514 | 22,700 | ||||||
Cash at beginning of period | 18,189 | 15,181 | ||||||
Cash at end of period | $ | 44,703 | $ | 37,881 |
See accompanying Notes to Consolidated Financial Statements.
See accompanying Report of Independent Registered Public Accounting Firm.
6 |
HORACE MANN EDUCATORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2014 and 2013
(Dollars 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 note disclosures which are 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 June 30, 2014, the consolidated results of operations and comprehensive income (loss) for the three and six months ended June 30, 2014 and 2013, and the consolidated changes in shareholders’ equity and cash flows for the six months ended June 30, 2014 and 2013. 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 (primarily personal lines automobile and homeowners) insurance, retirement annuities (primarily tax-qualified products) 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.
The Company has evaluated subsequent events through the date these consolidated financial statements were issued.
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, 2013.
The results of operations for the three and six months ended June 30, 2014 are not necessarily indicative of the results to be expected for the full year.
7 |
Note 1 - Basis of Presentation-(Continued)
Accounting Policy for Fixed Indexed Annuities
In 2014, the Company began offering fixed indexed annuity (“FIA”) products with interest crediting strategies linked to the Standard & Poor’s 500 Index and the Dow Jones Industrial Average. 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. These products are deferred fixed annuities with a guaranteed minimum interest rate plus a contingent return based on equity market performance and are considered hybrid financial instruments under the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) Topic 815 “Derivatives and Hedging”. The Company elected to not use hedge accounting for derivative transactions related to the FIA products. As a result, the Company records the purchased call options and the embedded derivative related to the provision of a contingent return at fair value, with changes in fair value reported in the Consolidated Statements of Operations. More information regarding the determination of fair value of the FIA embedded derivative and purchased call options, the only derivative instruments utilized by the Company, is included in “Note 3 — Fair Value of Financial Instruments”.
8 |
Note 1 - Basis of Presentation-(Continued)
Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) represents the accumulated change in shareholders’ equity from transactions and other events and circumstances from non-shareholder sources. For the Company, accumulated other comprehensive income (loss) includes the after-tax change in net unrealized gains and losses on fixed maturities and equity securities and the after-tax change in net funded status of pension and other postretirement benefit obligations as shown in the Consolidated Statements of Changes in Shareholders’ Equity. The following tables reconcile these components.
Unrealized Gains | ||||||||||||||||
and Losses on | ||||||||||||||||
Fixed Maturities | ||||||||||||||||
and Equity | Defined | |||||||||||||||
Securities (1)(2) | Benefit Plans (1) | Total (1) | ||||||||||||||
Beginning balance, April 1, 2014 | $ | 211,398 | $ | (11,776 | ) | $ | 199,622 | |||||||||
Other comprehensive income (loss) before reclassifications | 72,402 | - | 72,402 | |||||||||||||
Amounts reclassified from accumulated other comprehensive income (loss) | (2,245 | ) | - | (2,245 | ) | |||||||||||
Net current period other comprehensive income (loss) | 70,157 | - | 70,157 | |||||||||||||
Ending balance, June 30, 2014 | $ | 281,555 | $ | (11,776 | ) | $ | 269,779 | |||||||||
Beginning balance, January 1, 2014 | $ | 133,990 | $ | (11,776 | ) | $ | 122,214 | |||||||||
Other comprehensive income (loss) before reclassifications | 150,906 | - | 150,906 | |||||||||||||
Amounts reclassified from accumulated other comprehensive income (loss) | (3,341 | ) | - | (3,341 | ) | |||||||||||
Net current period other comprehensive income (loss) | 147,565 | - | 147,565 | |||||||||||||
Ending balance, June 30, 2014 | $ | 281,555 | $ | (11,776 | ) | $ | 269,779 |
(1) | All amounts are net of tax. |
(2) | The pretax amounts reclassified from accumulated other comprehensive income (loss), $3,455 and $5,140, are included in net realized investment gains and losses and the related tax expenses, $1,210 and $1,799, are included in income tax expense in the Consolidated Statements of Operations for the three and six months ended June 30, 2014, respectively. |
9 |
Note 1 - Basis of Presentation-(Continued)
Unrealized Gains | ||||||||||||||||
and Losses on | ||||||||||||||||
Fixed Maturities | ||||||||||||||||
and Equity | Defined | |||||||||||||||
Securities (1)(2) | Benefit Plans (1) | Total (1) | ||||||||||||||
Beginning balance, April 1, 2013 | $ | 374,066 | $ | (15,311 | ) | $ | 358,755 | |||||||||
Other comprehensive loss before reclassifications | (167,198 | ) | - | (167,198 | ) | |||||||||||
Amounts reclassified from accumulated other comprehensive income | (10,021 | ) | - | (10,021 | ) | |||||||||||
Net current period other comprehensive loss | (177,219 | ) | - | (177,219 | ) | |||||||||||
Ending balance, June 30, 2013 | $ | 196,847 | $ | (15,311 | ) | $ | 181,536 | |||||||||
Beginning balance, January 1, 2013 | $ | 382,400 | $ | (15,311 | ) | $ | 367,089 | |||||||||
Other comprehensive loss before reclassifications | (171,072 | ) | - | (171,072 | ) | |||||||||||
Amounts reclassified from accumulated other comprehensive income | (14,481 | ) | - | (14,481 | ) | |||||||||||
Net current period other comprehensive loss | (185,553 | ) | - | (185,553 | ) | |||||||||||
Ending balance, June 30, 2013 | $ | 196,847 | $ | (15,311 | ) | $ | 181,536 |
(1) | All amounts are net of tax. |
(2) | The pretax amounts reclassified from accumulated other comprehensive loss, $15,417 and $22,279, are included in net realized investment gains and the related tax expenses, $5,396 and $7,798, are included in income tax expense in the Consolidated Statements of Operations for the three and six months ended June 30, 2013, respectively. |
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 — Unrealized Gains and Losses on Fixed Maturities and Equity Securities”.
The Company’s investment portfolio includes free-standing derivative financial instruments (currently over the counter (“OTC”) index options contracts) to hedge risk associated with its fixed indexed annuity products’ contingent liabilities. The Company’s fixed indexed annuity product includes embedded derivative features that are discussed in “Note 1 — Basis of Presentation — Accounting Policy for Fixed Indexed Annuities”. The Company's investment portfolio includes no other free-standing derivative financial instruments (futures, forwards, swaps, option contracts or other financial instruments with similar characteristics), and there are no other embedded derivative features related to the Company’s insurance products.
10 |
Note 2 - Investments-(Continued)
Fixed Maturities and Equity Securities
The Company’s investment portfolio is comprised primarily of fixed maturity securities (“fixed maturities”) and equity securities. The amortized cost or cost, unrealized investment gains and losses, fair values and other-than-temporary impairment (“OTTI”) included in accumulated other comprehensive income (loss) (“AOCI”) of all fixed maturities and equity securities in the portfolio were as follows:
Amortized | Unrealized | Unrealized | Fair | OTTI in | ||||||||||||||||||||||
Cost/Cost | Gains | Losses | Value | AOCI (2) | ||||||||||||||||||||||
June 30, 2014 | ||||||||||||||||||||||||||
Fixed maturity securities | ||||||||||||||||||||||||||
U.S. Government and federally sponsored agency obligations (1): | ||||||||||||||||||||||||||
Mortgage-backed securities | $ | 546,236 | $ | 45,587 | $ | 9,691 | $ | 582,132 | $ | - | ||||||||||||||||
Other, including U.S. Treasury securities | 464,978 | 19,207 | 8,007 | 476,178 | - | |||||||||||||||||||||
Municipal bonds | 1,455,567 | 149,837 | 7,515 | 1,597,889 | - | |||||||||||||||||||||
Foreign government bonds | 50,604 | 6,435 | - | 57,039 | - | |||||||||||||||||||||
Corporate bonds | 2,599,455 | 269,905 | 5,623 | 2,863,737 | - | |||||||||||||||||||||
Other mortgage-backed securities | 1,070,589 | 32,712 | 3,937 | 1,099,364 | 2,866 | |||||||||||||||||||||
Totals | $ | 6,187,429 | $ | 523,683 | $ | 34,773 | $ | 6,676,339 | $ | 2,866 | ||||||||||||||||
Equity securities | $ | 97,224 | $ | 13,127 | $ | 889 | $ | 109,462 | $ | - | ||||||||||||||||
December 31, 2013 | ||||||||||||||||||||||||||
Fixed maturity securities | ||||||||||||||||||||||||||
U.S. Government and federally sponsored agency obligations (1): | ||||||||||||||||||||||||||
Mortgage-backed securities | $ | 555,574 | $ | 33,711 | $ | 19,560 | $ | 569,725 | $ | - | ||||||||||||||||
Other, including U.S. Treasury securities | 449,060 | 9,865 | 23,351 | 435,574 | - | |||||||||||||||||||||
Municipal bonds | 1,425,441 | 80,701 | 34,615 | 1,471,527 | - | |||||||||||||||||||||
Foreign government bonds | 50,641 | 4,700 | 390 | 54,951 | - | |||||||||||||||||||||
Corporate bonds | 2,457,727 | 188,832 | 32,150 | 2,614,409 | - | |||||||||||||||||||||
Other mortgage-backed securities | 845,762 | 26,477 | 8,852 | 863,387 | 2,812 | |||||||||||||||||||||
Totals | $ | 5,784,205 | $ | 344,286 | $ | 118,918 | $ | 6,009,573 | $ | 2,812 | ||||||||||||||||
Equity securities | $ | 84,754 | $ | 10,723 | $ | 3,619 | $ | 91,858 | $ | - |
(1) | Fair value includes securities issued by Federal National Mortgage Association (“FNMA”) of $342,198 and $336,193; Federal Home Loan Mortgage Corporation (“FHLMC”) of $441,363 and $427,172; and Government National Mortgage Association (“GNMA”) of $136,208 and $126,245 as of June 30, 2014 and December 31, 2013, respectively. |
(2) | Represents the amount of other-than-temporary impairment losses in AOCI which, beginning April 1, 2009, was not included in earnings under current accounting guidance. Amounts also include unrealized gains/(losses) on impaired securities relating to changes in the fair value of such securities subsequent to the impairment measurement date. |
Compared to December 31, 2013, the increase in net unrealized gains at June 30, 2014 was due to lower yields on U.S. Treasury securities and slightly narrower credit spreads across most asset classes in 2014, the combination of which resulted in an increase in net unrealized gains for all classes of the Company’s fixed maturity securities holdings.
11 |
Note 2 - Investments-(Continued)
The following table presents the fair value and gross unrealized losses of fixed maturities and equity securities in an unrealized loss position at June 30, 2014 and December 31, 2013, respectively. The Company views the decrease in value of all of the securities with unrealized losses at June 30, 2014 — 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 the present value of future cash flows exceeds the amortized cost bases. In addition, management expects to recover the entire cost bases of the fixed maturity securities. For equity securities, the Company has the ability and intent to hold the securities for the recovery of cost and recovery of cost is expected within a reasonable period of time. Therefore, no impairment of these securities was recorded at June 30, 2014.
12 Months or Less | More than 12 Months | Total | ||||||||||||||||||||||||||||
Gross | Gross | Gross | ||||||||||||||||||||||||||||
Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
|||||||||||||||||||||||||
June 30, 2014 | ||||||||||||||||||||||||||||||
Fixed maturity securities | ||||||||||||||||||||||||||||||
U.S. Government and federally sponsored agency obligations: | ||||||||||||||||||||||||||||||
Mortgage-backed securities | $ | 13,483 | $ | 637 | $ | 95,845 | $ | 9,054 | $ | 109,328 | $ | 9,691 | ||||||||||||||||||
Other | 5,257 | 26 | 165,165 | 7,981 | 170,422 | 8,007 | ||||||||||||||||||||||||
Municipal bonds | 45,797 | 2,883 | 151,155 | 4,632 | 196,952 | 7,515 | ||||||||||||||||||||||||
Foreign government bonds | - | - | - | - | - | - | ||||||||||||||||||||||||
Corporate bonds | 45,966 | 432 | 200,615 | 5,191 | 246,581 | 5,623 | ||||||||||||||||||||||||
Other mortgage-backed securities | 259,347 | 1,463 | 79,799 | 2,474 | 339,146 | 3,937 | ||||||||||||||||||||||||
Total fixed maturity securities | 369,850 | 5,441 | 692,579 | 29,332 | 1,062,429 | 34,773 | ||||||||||||||||||||||||
Equity securities (1) | 1,148 | 11 | 28,701 | 878 | 29,849 | 889 | ||||||||||||||||||||||||
Combined totals | $ | 370,998 | $ | 5,452 | $ | 721,280 | $ | 30,210 | $ | 1,092,278 | $ | 35,662 | ||||||||||||||||||
Number of positions with a gross unrealized loss | 115 | 202 | 317 | |||||||||||||||||||||||||||
Fair value as a percentage of total fixed maturities and equity securities fair value | 5.5 | % | 10.6 | % | 16.1 | % | ||||||||||||||||||||||||
December 31, 2013 | ||||||||||||||||||||||||||||||
Fixed maturity securities | ||||||||||||||||||||||||||||||
U.S. Government and federally sponsored agency obligations: | ||||||||||||||||||||||||||||||
Mortgage-backed securities | $ | 150,602 | $ | 19,145 | $ | 1,383 | $ | 415 | $ | 151,985 | $ | 19,560 | ||||||||||||||||||
Other | 249,765 | 22,479 | 4,450 | 872 | 254,215 | 23,351 | ||||||||||||||||||||||||
Municipal bonds | 375,523 | 26,529 | 42,899 | 8,086 | 418,422 | 34,615 | ||||||||||||||||||||||||
Foreign government bonds | 6,738 | 390 | - | - | 6,738 | 390 | ||||||||||||||||||||||||
Corporate bonds | 582,849 | 28,634 | 12,948 | 3,516 | 595,797 | 32,150 | ||||||||||||||||||||||||
Other mortgage-backed securities | 274,983 | 8,300 | 20,008 | 552 | 294,991 | 8,852 | ||||||||||||||||||||||||
Total fixed maturity securities | 1,640,460 | 105,477 | 81,688 | 13,441 | 1,722,148 | 118,918 | ||||||||||||||||||||||||
Equity securities (1) | 32,392 | 3,117 | 1,405 | 502 | 33,797 | 3,619 | ||||||||||||||||||||||||
Combined totals | $ | 1,672,852 | $ | 108,594 | $ | 83,093 | $ | 13,943 | $ | 1,755,945 | $ | 122,537 | ||||||||||||||||||
Number of positions with a gross unrealized loss | 534 | 46 | 580 | |||||||||||||||||||||||||||
Fair value as a percentage of total fixed maturities and equity securities fair value | 27.4 | % | 1.4 | % | 28.8 | % |
(1) Includes nonredeemable (perpetual) preferred stocks, common stocks and closed-end funds.
12 |
Note 2 - Investments-(Continued)
Fixed maturities and equity securities with an investment grade rating represented 95% of the gross unrealized loss as of June 30, 2014. With respect to fixed income 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 the other-than-temporary impairment losses on fixed maturity securities held as of June 30, 2014 and 2013 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 the other-than-temporary impairment losses were recognized in other comprehensive income (loss):
Six Months Ended | ||||||||||
June 30, | ||||||||||
2014 | 2013 | |||||||||
Cumulative credit loss (1) | ||||||||||
Beginning of period | $ | 4,097 | $ | 2,877 | ||||||
New credit losses | 280 | 860 | ||||||||
Losses related to securities sold or paid down during the period | - | - | ||||||||
End of period | $ | 4,377 | $ | 3,737 |
(1) | The cumulative credit loss amounts exclude other-than-temporary impairment 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. |
13 |
Note 2 - Investments-(Continued)
Maturities/Sales of Fixed Maturities and Equity 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.
Percent of Total Fair Value | June 30, 2014 | |||||||||||||||||||
June 30, | December 31, | Fair | Amortized | |||||||||||||||||
2014 | 2013 | Value | Cost | |||||||||||||||||
Estimated expected maturity: | ||||||||||||||||||||
Due in 1 year or less | 4.5 | % | 4.1 | % | $ | 299,402 | $ | 277,477 | ||||||||||||
Due after 1 year through 5 years | 23.6 | 20.9 | 1,576,524 | 1,461,075 | ||||||||||||||||
Due after 5 years through 10 years | 38.1 | 38.4 | 2,542,155 | 2,355,992 | ||||||||||||||||
Due after 10 years through 20 years | 19.9 | 20.8 | 1,327,483 | 1,230,271 | ||||||||||||||||
Due after 20 years | 13.9 | 15.8 | 930,775 | 862,614 | ||||||||||||||||
Total | 100.0 | % | 100.0 | % | $ | 6,676,339 | $ | 6,187,429 | ||||||||||||
Average option-adjusted duration, in years | 6.2 | 6.3 |
Proceeds received from sales of fixed maturities and equity securities, each determined using the specific identification method, and gross gains and gross losses realized as a result of those sales for each period were:
Three Months Ended | Six Months Ended | |||||||||||||||||||
June 30, | June 30, | |||||||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||||||
Fixed maturity securities | ||||||||||||||||||||
Proceeds received | $ | 46,309 | $ | 114,804 | $ | 99,249 | $ | 213,986 | ||||||||||||
Gross gains realized | 2,600 | 9,878 | 4,127 | 14,390 | ||||||||||||||||
Gross losses realized | (303 | ) | (471 | ) | (978 | ) | (481 | ) | ||||||||||||
Equity securities | ||||||||||||||||||||
Proceeds received | $ | 4,843 | $ | 6,299 | $ | 8,491 | $ | 11,133 | ||||||||||||
Gross gains realized | 995 | 2,776 | 1,474 | 3,344 | ||||||||||||||||
Gross losses realized | (64 | ) | (172 | ) | (181 | ) | (387 | ) |
14 |
Note 2 - Investments-(Continued)
Unrealized Gains and Losses on Fixed Maturities and Equity Securities
Net unrealized gains and losses are computed as the difference between fair value and amortized cost for fixed maturities or cost for equity securities. The following table reconciles the net unrealized investment gains and losses, net of tax, included in accumulated other comprehensive income (loss), before the impact on deferred policy acquisition costs:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Net unrealized investment gains (losses) on fixed maturity securities, net of tax | ||||||||||||||||
Beginning of period | $ | 238,854 | $ | 411,979 | $ | 146,489 | $ | 423,004 | ||||||||
Change in unrealized investment gains and losses | 80,577 | (182,919 | ) | 173,802 | (189,828 | ) | ||||||||||
Reclassification of net realized investment (gains) losses to net income | (1,640 | ) | (8,392 | ) | (2,500 | ) | (12,508 | ) | ||||||||
End of period | $ | 317,791 | $ | 220,668 | $ | 317,791 | $ | 220,668 | ||||||||
Net unrealized investment gains (losses) on equity securities, net of tax | ||||||||||||||||
Beginning of period | $ | 5,695 | $ | 3,604 | $ | 4,618 | $ | 720 | ||||||||
Change in unrealized investment gains and losses | 2,865 | 1,291 | 4,178 | 4,519 | ||||||||||||
Reclassification of net realized investment (gains) losses to net income | (605 | ) | (1,629 | ) | (841 | ) | (1,973 | ) | ||||||||
End of period | $ | 7,955 | $ | 3,266 | $ | 7,955 | $ | 3,266 |
Repurchase Agreements
The Company enters into repurchase agreements to earn incremental spread income. A repurchase agreement is a transaction in which one party (transferor) agrees to sell securities to another party (transferee) in return for cash (or securities), with a simultaneous agreement to repurchase the same securities at a specified price at a later date. These transactions are generally short-term in nature, and therefore, the carrying amounts of these instruments approximate fair value.
15 |
Note 2 - Investments-(Continued)
As part of repurchase agreements, the Company transfers primarily U.S. Government, government agency and corporate securities and receives cash. For the repurchase agreements, the Company receives cash in an amount equal to at least 95% of the fair value of the securities transferred, and the agreements with third parties contain contractual provisions to allow for additional collateral to be obtained when necessary. The cash received from the repurchase program is typically invested in high quality floating rate fixed maturity securities. The Company accounts for the repurchase agreements as collateralized borrowings. The securities transferred under repurchase agreements are included in fixed maturity, available-for-sale securities with the obligation to repurchase those securities recorded in Other Liabilities on the Company's Consolidated Balance Sheets. The fair value of the securities transferred was $143,216 and $24,791 as of June 30, 2014 and December 31, 2013, respectively. The obligation for securities sold under agreement to repurchase was $139,959 and $25,864, including accrued interest, as of June 30, 2014 and December 31, 2013, respectively.
Offsetting of Assets and Liabilities
The Company’s derivative instruments (call options) are subject to enforceable master netting arrangements. Collateral support agreements associated with each master netting arrangement provide that the Company will receive or pledge financial collateral in the event minimum thresholds have been reached. The Company’s repurchase agreements and the embedded derivatives related to the Company’s fixed indexed annuity product are not subject to master netting arrangements and there was no offsetting in their presentation in the Company’s Consolidated Balance Sheets.
The following table presents the instruments that were subject to a master netting arrangement for the Company. No instruments were subject to master netting arrangements as of December 31, 2013.
Net Amounts | ||||||||||||||||||||||||
of Assets/ | ||||||||||||||||||||||||
Gross | Liabilities | Gross Amounts Not Offset | ||||||||||||||||||||||
Amounts | Presented | in the Consolidated | ||||||||||||||||||||||
Offset in the | in the | Balance Sheet | ||||||||||||||||||||||
Consolidated | Consolidated | Cash | ||||||||||||||||||||||
Gross | Balance | Balance | Financial | Collateral | Net | |||||||||||||||||||
Amounts | Sheet | Sheet | Instruments | Received | Amount | |||||||||||||||||||
June 30, 2014 | ||||||||||||||||||||||||
Asset derivatives: | ||||||||||||||||||||||||
Free-standing derivatives | $ | 708 | $ | - | $ | 708 | $ | - | $ | 300 | $ | 408 |
Deposits
At June 30, 2014 and December 31, 2013, securities with a fair value of $18,420 and $17,967, respectively, were on deposit with governmental agencies as required by law in various states in which the insurance subsidiaries of HMEC conduct business. In addition, at June 30, 2014 and December 31, 2013, securities with a fair value of $275,888 and $274,437, respectively, were on deposit with the Federal Home Loan Bank of Chicago (“FHLB”) as collateral for amounts subject to funding agreements which were equal to $250,000 as of each of these dates. The deposited securities are included in fixed maturities on the Company’s Consolidated Balance Sheets.
16 |
Note 3 - Fair Value of Financial Instruments
The Company is required under GAAP to disclose estimated fair values for certain financial and nonfinancial assets and liabilities. Fair values of the Company’s insurance contracts other than annuity contracts are not required to be disclosed. However, the estimated fair values of liabilities under all insurance contracts are taken into consideration in the Company’s overall management of interest rate risk through the matching of investment maturities with amounts due under insurance contracts.
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between knowledgeable, unrelated and willing market participants on the measurement date. In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. The Company categorizes its financial and nonfinancial assets and liabilities into a three-level hierarchy based on the priority of the inputs to the valuation technique. The three levels of inputs that may be used to measure fair value are:
Level 1 | Unadjusted quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include fixed maturity and equity securities (both common stock and preferred stock) that are traded in an active exchange market, as well as U.S. Treasury securities. |
Level 2 | Unadjusted observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for the assets or liabilities. Level 2 assets and liabilities include fixed maturity securities (1) with quoted prices that are traded less frequently than exchange-traded instruments or (2) values based on discounted cash flows with observable inputs. This category generally includes certain U.S. Government and agency mortgage-backed securities, non-agency structured securities, corporate fixed maturity securities, preferred stocks and derivative securities. |
Level 3 | Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, certain discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation and for which the significant inputs are unobservable. This category generally includes certain private debt and equity investments, as well as embedded derivatives. |
When the inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement in its entirety. As a result, a Level 3 fair value measurement may include inputs that are observable (Level 1 or Level 2) and unobservable (Level 3). Net transfers into or out of each of the three levels are reported as having occurred at the end of the reporting period in which the transfers were determined.
17 |
Note 3 - Fair Value of Financial Instruments-(Continued)
The following discussion describes the valuation methodologies used for financial assets and financial liabilities measured at fair value. The techniques utilized in estimating the fair values are affected by the assumptions used, including discount rates and estimates of the amount and timing of future cash flows. The use of different methodologies, assumptions and inputs may have a material effect on the estimated fair values of the Company’s securities holdings. Care should be exercised in deriving conclusions about the Company’s business, its value or financial position based on the fair value information of financial and nonfinancial assets and liabilities presented below.
Fair value estimates are made at a specific point in time, based on available market information and judgments about the financial asset or financial liability, including estimates of timing, amount of expected future cash flows and the credit standing of the issuer. In some cases, the fair value estimates cannot be substantiated by comparison to independent markets. In addition, the disclosed fair value may not be realized in the immediate settlement of the financial asset or financial liability. The disclosed fair values do not reflect any premium or discount that could result from offering for sale at one time an entire holding of a particular financial asset or financial liability. In periods of market disruption, the ability to observe prices and inputs may be reduced for many instruments. This condition could cause an instrument to be reclassified from Level 1 to Level 2 or from Level 2 to Level 3. Potential taxes and other expenses that would be incurred in an actual sale or settlement are not reflected in amounts disclosed.
Investments
For fixed maturity securities, each month the Company obtains fair value prices from its investment managers and custodian bank. Fair values for the Company’s fixed maturity securities are based primarily on prices provided by its investment managers as well as its custodian bank for certain securities. The prices from the custodian bank are compared to prices from the investment managers. Differences in prices between the sources that the Company considers significant are researched and the Company utilizes the price that it considers most representative of an exit price. Both the investment managers and the custodian bank use a variety of independent, nationally recognized pricing sources to determine market valuations. Each designate specific pricing services or indexes for each sector of the market based on the provider’s expertise. Typical inputs used by these pricing sources include, but are not limited to, reported trades, benchmark yield curves, benchmarking of like securities, ratings designations, sector groupings, issuer spreads, bids, offers, and/or estimated cash flows and prepayment speeds.
When the pricing sources cannot provide fair value determinations, the Company obtains non-binding price quotes from broker-dealers. The broker-dealers’ valuation methodology is sometimes matrix-based, using indicative evaluation measures and adjustments for specific security characteristics and market sentiment. The market inputs utilized in the evaluation measures and adjustments include: benchmark yield curves, reported trades, broker/dealer quotes, ratings and corresponding issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, and industry and economic events. The extent of the use of each market input depends on the market sector and the market conditions. Depending on the security, the priority of the use of inputs may change or some market inputs may not be relevant. For some securities, additional inputs may be necessary.
18 |
Note 3 - Fair Value of Financial Instruments-(Continued)
The Company analyzes price and market valuations received to verify reasonableness, to understand the key assumptions used and their sources, to conclude the prices obtained are appropriate, and to determine an appropriate fair value hierarchy level based on trading activity and the observability of market inputs. Based on this evaluation and investment class analysis, each security is classified into Level 1, 2, or 3. The Company has in place certain control processes to determine the reasonableness of the financial asset fair values. These processes are designed to ensure (1) the values received are reasonable and accurately recorded, (2) the data inputs and valuation techniques utilized are appropriate and consistently applied, and (3) the assumptions are reasonable and consistent with the objective of determining fair value. For example, on a continuing basis, the Company assesses the reasonableness of individual security values received from pricing sources that vary from certain thresholds. The Company’s fixed maturity securities portfolio is primarily publicly traded, which allows for a high percentage of the portfolio to be priced through pricing services. Approximately 89% and 88% of the portfolio, based on fair value, was priced through pricing services or index priced as of June 30, 2014 and 2013, respectively. The remainder of the portfolio was priced by broker-dealers or pricing models. When non-binding broker-dealer quotes could be corroborated by comparison to other vendor quotes, pricing models or analysis, the securities were generally classified as Level 2, otherwise they were classified as Level 3. There were no significant changes to the valuation process during the first six months of 2014.
Fair values of equity securities have been determined by the Company from observable market quotations, when available. When a public quotation is not available, equity securities are valued by using non-binding broker quotes or through the use of pricing models or analysis that is based on market information regarding interest rates, credit spreads and liquidity. The underlying source data for calculating the matrix of credit spreads relative to the U.S. Treasury curve are nationally recognized indices. In addition, credit rating (or credit quality equivalent information) of securities is also factored into a pricing matrix. These inputs are based on assumptions deemed appropriate given the circumstances and are believed to be consistent with what other market participants would use when pricing such securities. There were no significant changes to the valuation process in the first six months of 2014.
19 |
Note 3 - Fair Value of Financial Instruments-(Continued)
Short-term and other investments are comprised of short-term fixed income securities, derivative instruments (all call options), policy loans, mortgage loans, and restricted FHLB membership and activity stocks, as well as certain alternative investments which are accounted for as equity method investments and therefore excluded from the fair value tabular disclosures.
In summary, the following investments are carried at fair value:
• | Fixed maturity securities, as described above. |
• | Equity securities, as described above. |
• | Short-term fixed income securities — Because of the nature of these assets, carrying amounts generally approximate fair values. |
• | Derivative instruments, all call options — Fair values are based on the amount of cash expected to be received to settle each derivative instrument on the reporting date. These amounts are obtained from each of the counterparties using industry accepted valuation models and observable inputs. Significant inputs include contractual terms, underlying index prices, market volatilities, interest rates and dividend yields. |
• | FHLB membership and activity stocks — Fair value is based on redemption value, which is equal to par value. |
The following investments are not carried at fair value; disclosure is provided:
• | Policy loans — Fair value is based on estimates using discounted cash flow analysis and current interest rates being offered for new loans. |
• | Mortgage loans — Fair value is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and the same remaining maturities. |
Separate Account (Variable Annuity) Assets and Liabilities
Separate Account assets are carried at fair value and represent variable annuity contractholder funds invested in various mutual funds. Fair values of these assets are based primarily on market quotations of the underlying securities. Investment performance related to these assets is fully offset by corresponding amounts credited to contractholders with the liability reflected within Separate Account liabilities. Separate Account liabilities are equal to the estimated fair value of Separate Account assets.
Fixed Annuity Contract Liabilities and Policyholder Account Balances on Interest-sensitive Life Contracts
The fair values of fixed annuity contract liabilities and policyholder account balances on interest-sensitive life contracts are equal to the discounted estimated future cash flows (using the Company's current interest rates for similar products including consideration of minimum guaranteed interest rates). The Company carries these financial liabilities at cost.
20 |
Note 3 - Fair Value of Financial Instruments-(Continued)
Other Policyholder Funds
Other policyholder funds are liabilities related to supplementary contracts without life contingencies and dividend accumulations, both of which represent deposits that do not have defined maturities, as well as balances outstanding under funding agreements with the FHLB and embedded derivatives. Except for embedded derivatives, each of these components is carried at cost, which management believes is a reasonable estimate of fair value due to the relatively short duration of these items, based on the Company’s past experience.
The fair value of the embedded derivatives, all related to the Company’s FIA products, is estimated at each valuation date by (1) projecting policy contract values and minimum guaranteed contract values over the expected lives of the contracts and (2) discounting the excess of the projected contract value amounts at the applicable risk free interest rates adjusted for the Company’s nonperformance risk related to those liabilities. The projections of policy contract values are based on the Company’s best estimate assumptions for future contract growth and decrements. The assumptions for future contract growth include the expected index credits which are derived from the fair values of the underlying call options purchased to fund such index credits and the expected costs of annual call options that will be purchased in the future to fund index credits beyond the next contract anniversary. Projections of minimum guaranteed contract values include the same best estimate assumptions for contract decrements used to project policy contract values.
Short-term Debt
Short-term debt is carried at amortized cost, which management believes is a reasonable estimate of fair value due to the liquidity and short duration of these variable rate instruments.
Long-term Debt
The Company carries long-term debt at amortized cost. The fair value of long-term debt is estimated based on unadjusted quoted market prices of the Company’s securities or unadjusted market prices based on similar publicly traded issues when trading activity for the Company’s securities is not sufficient to provide a market price.
Other Liabilities, Repurchase Agreements
The Company carries the obligations for securities sold under agreements to repurchase at cost, which approximates fair value due to the short duration of the obligations.
21 |
Note 3 - Fair Value of Financial Instruments-(Continued)
Financial Instruments Measured and Carried at Fair Value
The following table presents the Company’s fair value hierarchy for those assets and liabilities measured and carried at fair value on a recurring basis. At June 30, 2014, Level 3 invested assets comprised approximately 2.0% of the Company’s total investment portfolio fair value.
Fair Value Measurements at | ||||||||||||||||||||
Carrying | Fair | Reporting Date Using | ||||||||||||||||||
Amount | Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||
June 30, 2014 | ||||||||||||||||||||
Financial Assets | ||||||||||||||||||||
Investments | ||||||||||||||||||||
Fixed maturities | ||||||||||||||||||||
U.S. Government and federally | ||||||||||||||||||||
sponsored agency obligations: | ||||||||||||||||||||
Mortgage-backed securities | $ | 582,132 | $ | 582,132 | $ | - | $ | 582,132 | $ | - | ||||||||||
Other, including | ||||||||||||||||||||
U.S. Treasury securities | 476,178 | 476,178 | 17,854 | 458,324 | - | |||||||||||||||
Municipal bonds | 1,597,889 | 1,597,889 | - | 1,584,835 | 13,054 | |||||||||||||||
Foreign government bonds | 57,039 | 57,039 | - | 57,039 | - | |||||||||||||||
Corporate bonds | 2,863,737 | 2,863,737 | 10,599 | 2,779,212 | 73,926 | |||||||||||||||
Other mortgage-backed securities | 1,099,364 | 1,099,364 | - | 1,046,842 | 52,522 | |||||||||||||||
Total fixed maturities | 6,676,339 | 6,676,339 | 28,453 | 6,508,384 | 139,502 | |||||||||||||||
Equity securities | 109,462 | 109,462 | 80,821 | 28,635 | 6 | |||||||||||||||
Short-term investments | 68,458 | 68,458 | 68,055 | 403 | - | |||||||||||||||
Other investments | 5,708 | 5,708 | - | 5,708 | - | |||||||||||||||
Totals | 6,859,967 | 6,859,967 | 177,329 | 6,543,130 | 139,508 | |||||||||||||||
Separate Account | ||||||||||||||||||||
(variable annuity) assets (1) | 1,814,152 | 1,814,152 | 1,814,152 | - | - | |||||||||||||||
Financial Liabilities | ||||||||||||||||||||
Other policyholder funds, | ||||||||||||||||||||
embedded derivatives | 6,915 | 6,915 | - | - | 6,915 | |||||||||||||||
December 31, 2013 | ||||||||||||||||||||
Financial Assets | ||||||||||||||||||||
Investments | ||||||||||||||||||||
Fixed maturities | ||||||||||||||||||||
U.S. Government and federally | ||||||||||||||||||||
sponsored agency obligations: | ||||||||||||||||||||
Mortgage-backed securities | $ | 569,725 | $ | 569,725 | $ | - | $ | 569,725 | $ | - | ||||||||||
Other, including | ||||||||||||||||||||
U.S. Treasury securities | 435,574 | 435,574 | 17,757 | 417,817 | - | |||||||||||||||
Municipal bonds | 1,471,527 | 1,471,527 | - | 1,468,833 | 2,694 | |||||||||||||||
Foreign government bonds | 54,951 | 54,951 | - | 54,951 | - | |||||||||||||||
Corporate bonds | 2,614,409 | 2,614,409 | 10,181 | 2,543,402 | 60,826 | |||||||||||||||
Other mortgage-backed securities | 863,387 | 863,387 | - | 817,378 | 46,009 | |||||||||||||||
Total fixed maturities | 6,009,573 | 6,009,573 | 27,938 | 5,872,106 | 109,529 | |||||||||||||||
Equity securities | 91,858 | 91,858 | 74,279 | 17,573 | 6 | |||||||||||||||
Short-term investments | 206,758 | 206,758 | 206,354 | 404 | - | |||||||||||||||
Other investments | 5,000 | 5,000 | - | 5,000 | - | |||||||||||||||
Totals | 6,313,189 | 6,313,189 | 308,571 | 5,895,083 | 109,535 | |||||||||||||||
Separate Account | ||||||||||||||||||||
(variable annuity) assets (1) | 1,747,995 | 1,747,995 | 1,747,995 | - | - | |||||||||||||||
Financial Liabilities | ||||||||||||||||||||
Other policyholder funds, | ||||||||||||||||||||
embedded derivatives | - | - | - | - | - |
(1) | Separate Account (variable annuity) liabilities are set equal to Separate Account (variable annuity) assets. |
22 |
Note 3 - Fair Value of Financial Instruments-(Continued)
The Company did not have any transfers between Levels 1 and 2 during the six months ended June 30, 2014. The following tables present reconciliations for the periods indicated for all Level 3 assets and liabilities measured at fair value on a recurring basis.
Financial | |||||||||||||||||||||||||||||||||||
Financial Assets | Liabilities(1) | ||||||||||||||||||||||||||||||||||
Municipal
Bonds |
Corporate
Bonds |
Other
Mortgage- Backed Securities |
Total
Fixed Maturities |
Equity
Securities |
Total | ||||||||||||||||||||||||||||||
Beginning balance April 1, 2014 | $ | 12,779 | $ | 60,204 | $ | 52,551 | $ | 125,534 | $ | 6 | $ | 125,540 | $ | 2,747 | |||||||||||||||||||||
Transfers into Level 3 (2) | - | 12,452 | - | 12,452 | - | 12,452 | - | ||||||||||||||||||||||||||||
Transfers out of Level 3 (2) | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||
Total gains or losses | |||||||||||||||||||||||||||||||||||
Net realized gains (losses) included in net income | - | - | (26 | ) | (26 | ) | - | (26 | ) | 57 | |||||||||||||||||||||||||
Net unrealized gains (losses) included in other comprehensive income | 337 | 1,546 | 108 | 1,991 | - | 1,991 | - | ||||||||||||||||||||||||||||
Purchases | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||
Issuances | - | - | - | - | - | - | 4,121 | ||||||||||||||||||||||||||||
Sales | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||
Settlements | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||
Paydowns, maturities and distributions | (62 | ) | (276 | ) | (111 | ) | (449 | ) | - | (449 | ) | (10 | ) | ||||||||||||||||||||||
Ending balance, June 30, 2014 | $ | 13,054 | $ | 73,926 | $ | 52,522 | $ | 139,502 | $ | 6 | $ | 139,508 | $ | 6,915 | |||||||||||||||||||||
Beginning balance, January 1, 2014 | $ | 2,694 | $ | 60,826 | $ | 46,009 | $ | 109,529 | $ | 6 | $ | 109,535 | $ | - | |||||||||||||||||||||
Transfers into Level 3 (2) | 10,056 | 12,452 | 7,109 | 29,617 | - | 29,617 | - | ||||||||||||||||||||||||||||
Transfers out of Level 3 (2) | - | - | (519 | ) | (519 | ) | - | (519 | ) | - | |||||||||||||||||||||||||
Total gains or losses | |||||||||||||||||||||||||||||||||||
Net realized gains (losses) included in net income | - | - | (26 | ) | (26 | ) | - | (26 | ) | 69 | |||||||||||||||||||||||||
Net unrealized gains (losses) included in other comprehensive income | 434 | 2,560 | 292 | 3,286 | - | 3,286 | - | ||||||||||||||||||||||||||||
Purchases | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||
Issuances | - | - | - | - | - | - | 6,856 | ||||||||||||||||||||||||||||
Sales | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||
Settlements | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||
Paydowns, maturities and distributions | (130 | ) | (1,912 | ) | (343 | ) | (2,385 | ) | - | (2,385 | ) | (10 | ) | ||||||||||||||||||||||
Ending balance, June 30, 2014 | $ | 13,054 | $ | 73,926 | $ | 52,522 | $ | 139,502 | $ | 6 | $ | 139,508 | $ | 6,915 |
(1) | Represents embedded derivatives, all related to the Company’s FIA products, reported in Other Policyholder Funds in the Company’s Consolidated Balance Sheets. |
(2) | Transfers into and out of Level 3 during the three and six months ended June 30, 2014 were attributable to changes in the availability of observable market information for individual fixed maturity securities. The Company’s policy is to recognize transfers into and transfers out of the levels as having occurred at the end of the reporting period in which the transfers were determined. |
23 |
Note 3 - Fair Value of Financial Instruments-(Continued)
Financial Assets | ||||||||||||||||||||||||||||||
Municipal
Bonds |
Corporate
Bonds |
Other
Mortgage- Backed Securities |
Total
Fixed Maturities |
Equity
Securities |
Total | |||||||||||||||||||||||||
Beginning balance April 1, 2013 | $ | 15,146 | $ | 55,527 | $ | 33,083 | $ | 103,756 | $ | 340 | $ | 104,096 | ||||||||||||||||||
Transfers into Level 3 (1) | 1,000 | 18,768 | 35,533 | 55,301 | - | 55,301 | ||||||||||||||||||||||||
Transfers out of Level 3 (1) | - | (16,663 | ) | (18,403 | ) | (35,066 | ) | - | (35,066 | ) | ||||||||||||||||||||
Total gains or losses | ||||||||||||||||||||||||||||||
Net realized gains (losses) included in net income | - | - | - | - | - | - | ||||||||||||||||||||||||
Net unrealized gains (losses) included in other comprehensive income | (315 | ) | (824 | ) | (291 | ) | (1,430 | ) | - | (1,430 | ) | |||||||||||||||||||
Purchases | - | - | - | - | - | - | ||||||||||||||||||||||||
Issuances | - | - | - | - | - | - | ||||||||||||||||||||||||
Sales | - | - | - | - | (334 | ) | (334 | ) | ||||||||||||||||||||||
Settlements | - | - | - | - | - | - | ||||||||||||||||||||||||
Paydowns, maturities and distributions | (12,067 | ) | (218 | ) | (579 | ) | (12,864 | ) | - | (12,864 | ) | |||||||||||||||||||
Ending balance, June 30, 2013 | $ | 3,764 | $ | 56,590 | $ | 49,343 | $ | 109,697 | $ | 6 | $ | 109,703 | ||||||||||||||||||
Beginning balance, January 1, 2013 | $ | 12,275 | $ | 85,722 | $ | 33,172 | $ | 131,169 | $ | 340 | $ | 131,509 | ||||||||||||||||||
Transfers into Level 3 (1) | 3,907 | 23,439 | 43,999 | 71,345 | - | 71,345 | ||||||||||||||||||||||||
Transfers out of Level 3 (1) | - | (50,341 | ) | (18,403 | ) | (68,744 | ) | - | (68,744 | ) | ||||||||||||||||||||
Total gains or losses | ||||||||||||||||||||||||||||||
Net realized gains (losses) included in net income | - | - | - | - | - | - | ||||||||||||||||||||||||
Net unrealized gains (losses) included in other comprehensive income | (351 | ) | (1,709 | ) | (418 | ) | (2,478 | ) | - | (2,478 | ) | |||||||||||||||||||
Purchases | - | - | - | - | - | - | ||||||||||||||||||||||||
Issuances | - | - | - | - | - | - | ||||||||||||||||||||||||
Sales | - | - | - | - | (334 | ) | (334 | ) | ||||||||||||||||||||||
Settlements | - | - | - | - | - | - | ||||||||||||||||||||||||
Paydowns, maturities and distributions | (12,067 | ) | (521 | ) | (9,007 | ) | (21,595 | ) | - | (21,595 | ) | |||||||||||||||||||
Ending balance, June 30, 2013 | $ | 3,764 | $ | 56,590 | $ | 49,343 | $ | 109,697 | $ | 6 | $ | 109,703 |
(1) | Transfers into and out of Level 3 during the three and six months ended June 30, 2013 were attributable to changes in the availability of observable market information for individual fixed maturity securities. The Company’s policy is to recognize transfers into and transfers out of the levels as having occurred at the end of the reporting period in which the transfers were determined. |
At June 30, 2014 and 2013, there were no realized gains or losses included in earnings that were attributable to changes in the fair value of Level 3 assets still held. For the three and six months ended June 30, 2014, realized investment gains/(losses) of $57 and $69, respectively, were included in earnings that were attributable to the changes in the fair value of Level 3 liabilities (embedded derivatives) still held.
The valuation techniques and significant unobservable inputs used in the fair value measurement for financial assets classified as Level 3 are subject to the control processes as previously described in this note for “Investments”. Generally, valuation for fixed maturity securities include spread pricing, matrix pricing and discounted cash flow methodologies; include inputs such as quoted prices for identical or similar securities that are less liquid; and are based on lower levels of trading activity than securities classified as Level 2. The valuation techniques and significant unobservable inputs used in the fair value measurement for equity securities classified as Level 3 use similar valuation techniques and significant unobservable inputs as fixed maturities.
24 |
Note 3 - Fair Value of Financial Instruments-(Continued)
The sensitivity of the estimated fair values to changes in the significant unobservable inputs for fixed maturities and equity securities included in Level 3 generally relate to interest rate spreads, illiquidity premiums and default rates. Significant spread widening in isolation will adversely impact the overall valuation, while significant spread tightening will lead to substantial valuation increases. Significant increases (decreases) in illiquidity premiums in isolation will result in substantially lower (higher) valuations. Significant increases (decreases) in expected default rates in isolation will result in substantially lower (higher) valuations.
Financial Instruments Not Carried at Fair Value; Disclosure Required
The Company has various other financial assets and financial liabilities used in the normal course of business that are not carried at fair value, but for which fair value disclosure is required. The following table presents the carrying value, fair value and fair value hierarchy of these financial assets and financial liabilities.
Fair Value Measurements at | ||||||||||||||||||||
Carrying | Fair | Reporting Date Using | ||||||||||||||||||
Amount | Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||
June 30, 2014 | ||||||||||||||||||||
Financial Assets | ||||||||||||||||||||
Investments | ||||||||||||||||||||
Other investments | $ | 142,257 | $ | 146,547 | $ | - | $ | - | $ | 146,547 | ||||||||||
Financial Liabilities | ||||||||||||||||||||
Fixed annuity contract liabilities | 3,629,065 | 3,408,658 | - | - | 3,408,658 | |||||||||||||||
Policyholder account balances on | ||||||||||||||||||||
interest-sensitive life contracts | 77,848 | 78,917 | - | - | 78,917 | |||||||||||||||
Other policyholder funds | 340,137 | 340,137 | - | 250,044 | 90,093 | |||||||||||||||
Short-term debt | 38,000 | 38,000 | - | 38,000 | - | |||||||||||||||
Long-term debt | 199,907 | 214,597 | 214,597 | - | - | |||||||||||||||
Other liabilities, repurchase | ||||||||||||||||||||
agreement obligations | 139,959 | 139,959 | - | 139,959 | - | |||||||||||||||
December 31, 2013 | ||||||||||||||||||||
Financial Assets | ||||||||||||||||||||
Investments | ||||||||||||||||||||
Other investments | $ | 140,685 | $ | 144,921 | $ | - | $ | - | $ | 144,921 | ||||||||||
Financial Liabilities | ||||||||||||||||||||
Fixed annuity contract liabilities | 3,515,865 | 3,302,333 | - | - | 3,302,333 | |||||||||||||||
Policyholder account balances on | ||||||||||||||||||||
interest-sensitive life contracts | 78,598 | 79,678 | - | - | 79,678 | |||||||||||||||
Other policyholder funds | 346,292 | 346,292 | - | 250,000 | 96,292 | |||||||||||||||
Short-term debt | 38,000 | 38,000 | - | 38,000 | - | |||||||||||||||
Long-term debt | 199,874 | 218,565 | 218,565 | - | - | |||||||||||||||
Other liabilities, repurchase | ||||||||||||||||||||
agreement obligations | 25,864 | 25,864 | - | 25,864 | - |
25 |
Indebtedness outstanding was as follows:
June 30, | December 31, | |||||||||
2014 | 2013 | |||||||||
Short-term debt: | ||||||||||
Bank Credit Facility, expires October 6, 2015 | $ | 38,000 | $ | 38,000 | ||||||
Long-term debt: | ||||||||||
6.05% Senior Notes, due June 15, 2015. Aggregate principal amount of $75,000 less unaccrued discount of $24 and $38 (6.1% imputed rate) | 74,976 | 74,962 | ||||||||
6.85% Senior Notes, due April 15, 2016. Aggregate principal amount of $125,000 less unaccrued discount of $69 and $88 (6.9% imputed rate) | 124,931 | 124,912 | ||||||||
Total | $ | 237,907 | $ | 237,874 |
The Bank Credit Facility, 6.05% Senior Notes due 2015 (“Senior Notes due 2015”) and 6.85% Senior Notes due 2016 (“Senior Notes due 2016”) are described in “Notes to Consolidated Financial Statements — Note 5 — Debt” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.
Credit Agreement with Financial Institutions (“Bank Credit Facility” )
On October 7, 2011, HMEC entered into a Bank Credit Agreement (the “Bank Credit Facility”) that replaced a previous bank credit agreement which was scheduled to expire on December 19, 2011. The Bank Credit Facility is by and between HMEC, certain financial institutions named therein and JPMorgan Chase Bank, N.A., as administrative agent, provides for unsecured borrowings of up to $150,000 and was scheduled to expire on October 6, 2015. Interest accrues at varying spreads relative to prime or Eurodollar base rates and is payable monthly or quarterly depending on the applicable base rate (Eurodollar base rate plus 1.25%, which totaled 1.40%, as of June 30, 2014). The unused portion of the Bank Credit Facility is subject to a variable commitment fee, which was 0.15% on an annual basis at June 30, 2014.
Effective July 30, 2014, the Bank Credit Facility agreement was amended and restated to extend the commitment termination date to July 30, 2019 from the previous termination date of October 6, 2015 and to decrease the interest rate spread relative to Eurodollar base rates. The financial covenants within the agreement were not changed. As of July 30, 2014, HMEC’s outstanding short-term debt balance remained $38,000; no change compared to the June 30, 2014 balance.
26 |
Note 5 - Pension Plans and Other Postretirement Benefits
The Company has the following retirement plans: a defined contribution plan; a 401(k) plan; a frozen defined benefit plan for employees hired on or before December 31, 1998; and certain employees participate in a supplemental defined contribution plan or a frozen supplemental defined benefit plan or both.
Defined Benefit Plan and Supplemental Defined Benefit Plans
The following tables summarize the components of net periodic pension cost recognized for the defined benefit plan and the supplemental defined benefit plans for the following periods:
Defined Benefit Plan | ||||||||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||||||
June 30, | June 30, | |||||||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||||||
Components
of net periodic
pension (income) expense: |
||||||||||||||||||||
Service cost: | ||||||||||||||||||||
Benefit accrual | $ | - | $ | - | $ | - | $ | - | ||||||||||||
Other expenses | 90 | 90 | 180 | 180 | ||||||||||||||||
Interest cost | 419 | 343 | 839 | 685 | ||||||||||||||||
Expected return on plan assets | (600 | ) | (559 | ) | (1,201 | ) | (1,119 | ) | ||||||||||||
Settlement loss | 190 | 229 | 379 | 487 | ||||||||||||||||
Amortization of: | ||||||||||||||||||||
Prior service cost | - | - | - | - | ||||||||||||||||
Actuarial loss | 343 | 400 | 686 | 801 | ||||||||||||||||
Net periodic pension expense | $ | 442 | $ | 503 | $ | 883 | $ | 1,034 |
Supplemental Defined Benefit Plans | ||||||||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||||||
June 30, | June 30, | |||||||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||||||
Components
of net periodic
pension (income) expense: |
||||||||||||||||||||
Service cost: | ||||||||||||||||||||
Benefit accrual | $ | - | $ | - | $ | - | $ | - | ||||||||||||
Other expenses | - | - | - | - | ||||||||||||||||
Interest cost | 179 | 153 | 358 | 307 | ||||||||||||||||
Expected return on plan assets | - | - | - | - | ||||||||||||||||
Settlement loss | - | - | - | - | ||||||||||||||||
Amortization of: | ||||||||||||||||||||
Prior service cost | - | 32 | - | 63 | ||||||||||||||||
Actuarial loss | 40 | 51 | 79 | 102 | ||||||||||||||||
Net periodic pension expense | $ | 219 | $ | 236 | $ | 437 | $ | 472 |
27 |
Note 5 - Pension Plans and Other Postretirement Benefits-(Continued)
Postretirement Benefits Other Than Pensions
In addition to providing pension benefits, the Company also provides certain health care and life insurance benefits to a closed group of eligible employees. In December 2013, the Company announced the elimination of postretirement medical coverage for all remaining eligible participants effective March 31, 2014. As a result of this plan change, prior service cost will be amortized as a credit over the average working lifetime of active eligible participants. As a result of the changes in the plan for other postretirement benefits, the Company recorded a reduction in its expenses of $556 and $186 for the six months ended June 30, 2014 and 2013, respectively. Funding of the previously established Health Reimbursement Accounts (“HRAs”) was $132 and $90 for the six months ended June 30, 2014 and 2013, respectively.
The following table summarizes the components of the net periodic benefit for postretirement benefits other than pensions for the following periods:
Three Months Ended | Six Months Ended | |||||||||||||||||||
June 30, | June 30, | |||||||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||||||
Components of net periodic benefit: | ||||||||||||||||||||
Service cost | $ | - | $ | - | $ | - | $ | - | ||||||||||||
Interest cost | 11 | 23 | 23 | 46 | ||||||||||||||||
Amortization of prior service credit | (157 | ) | - | (314 | ) | - | ||||||||||||||
Amortization of prior gain | (61 | ) | (59 | ) | (123 | ) | (118 | ) | ||||||||||||
Net periodic income | $ | (207 | ) | $ | (36 | ) | $ | (414 | ) | $ | (72 | ) |
2014 Contributions
In 2014, there is no minimum funding requirement for the Company’s defined benefit plan. The following table discloses the minimum funding requirements, contributions made and expected full year contributions for the Company’s plans.
Defined Benefit Pension Plans | |||||||||||||||
Defined | Supplemental | Other | |||||||||||||
Benefit | Defined Benefit | Postretirement | |||||||||||||
Plan | Plans | Benefits | |||||||||||||
Minimum funding requirement for 2014 | $ | - | N/A | N/A | |||||||||||
Contributions made in the six months | |||||||||||||||
ended June 30, 2014 | - | $ | 664 | $ | 93 | ||||||||||
Expected contributions (approximations) for the year ended December 31, 2014 as of the time of : | |||||||||||||||
This Form 10-Q (1) | 2,000 | 1,320 | 217 | ||||||||||||
2013 Form 10-K (2) | 2,000 | 1,320 | 217 |
N/A - Not applicable.
(1) | HMEC’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014. |
(2) | HMEC’s Annual Report on Form 10-K for the year ended December 31, 2013, specifically “Notes to Consolidated Financial Statements — Note 9 — Pension Plans and Other Postretirement Benefits”. |
28 |
The Company recognizes the cost of reinsurance premiums over the contract periods for such premiums in proportion to the insurance protection provided. Amounts recoverable from reinsurers for unpaid claims and claim settlement expenses, including estimated amounts for unsettled claims, claims incurred but not yet reported and policy benefits, are estimated in a manner consistent with the insurance liability associated with the policy. The effects of reinsurance on premiums written and contract deposits; premiums and contract charges earned; and benefits, claims and settlement expenses were as follows:
Ceded to | Assumed | |||||||||||||||||||
Gross | Other | from Other | Net | |||||||||||||||||
Amount | Companies | Companies | Amount | |||||||||||||||||
Three months ended June 30, 2014 | ||||||||||||||||||||
Premiums written and contract deposits | $ | 298,163 | $ | 6,712 | $ | 942 | $ | 292,393 | ||||||||||||
Premiums and contract charges earned | 185,169 | 6,893 | 862 | 179,138 | ||||||||||||||||
Benefits, claims and settlement expenses | 129,163 | 2,684 | 679 | 127,158 | ||||||||||||||||
Three months ended June 30, 2013 | ||||||||||||||||||||
Premiums written and contract deposits | $ | 274,199 | $ | 7,509 | $ | 1,013 | $ | 267,703 | ||||||||||||
Premiums and contract charges earned | 178,344 | 7,697 | 914 | 171,561 | ||||||||||||||||
Benefits, claims and settlement expenses | 122,835 | 2,718 | 648 | 120,765 | ||||||||||||||||
Six months ended, June 30, 2014 | ||||||||||||||||||||
Premiums written and contract deposits | $ | 564,600 | $ | 13,343 | $ | 1,411 | $ | 552,668 | ||||||||||||
Premiums and contract charges earned | 366,902 | 13,786 | 1,425 | 354,541 | ||||||||||||||||
Benefits, claims and settlement expenses | 244,040 | 6,129 | 1,235 | 239,146 | ||||||||||||||||
Six months ended June 30, 2013 | ||||||||||||||||||||
Premiums written and contract deposits | $ | 526,264 | $ | 14,912 | $ | 1,429 | $ | 512,781 | ||||||||||||
Premiums and contract charges earned | 354,652 | 15,361 | 1,428 | 340,719 | ||||||||||||||||
Benefits, claims and settlement expenses | 237,013 | 4,649 | 1,100 | 233,464 |
29 |
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 insurance, primarily personal lines automobile and homeowners products; retirement annuity products, primarily tax-qualified fixed and variable deposits; and life insurance. The Company does not allocate the impact of corporate-level transactions to the insurance 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. In addition to ongoing transactions such as corporate debt service, realized investment gains and losses and certain public company expenses, such items have also included corporate debt retirement costs/gains, when applicable. Summarized financial information for these segments is as follows:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Insurance premiums and contract charges earned | ||||||||||||||||
Property and casualty | $ | 144,658 | $ | 139,457 | $ | 288,550 | $ | 277,393 | ||||||||
Annuity | 6,453 | 5,747 | 12,377 | 10,819 | ||||||||||||
Life | 28,027 | 26,357 | 53,614 | 52,507 | ||||||||||||
Total | $ | 179,138 | $ | 171,561 | $ | 354,541 | $ | 340,719 | ||||||||
Net investment income | ||||||||||||||||
Property and casualty | $ | 9,455 | $ | 9,100 | $ | 18,740 | $ | 18,070 | ||||||||
Annuity | 54,338 | 51,289 | 110,195 | 102,643 | ||||||||||||
Life | 17,842 | 17,210 | 35,976 | 34,529 | ||||||||||||
Corporate and other | 2 | 4 | 4 | 4 | ||||||||||||
Intersegment eliminations | (232 | ) | (242 | ) | (466 | ) | (482 | ) | ||||||||
Total | $ | 81,405 | $ | 77,361 | $ | 164,449 | $ | 154,764 | ||||||||
Net income (loss) | ||||||||||||||||
Property and casualty | $ | 4,895 | $ | 4,166 | $ | 18,922 | $ | 14,326 | ||||||||
Annuity | 11,573 | 9,230 | 23,812 | 20,291 | ||||||||||||
Life | 5,015 | 5,528 | 8,897 | 9,868 | ||||||||||||
Corporate and other | (1,031 | ) | 7,071 | (2,813 | ) | 8,522 | ||||||||||
Total | $ | 20,452 | $ | 25,995 | $ | 48,818 | $ | 53,007 |
June 30, | December 31, | |||||||||
2014 | 2013 | |||||||||
Assets | ||||||||||
Property and casualty | $ | 1,079,368 | $ | 1,001,561 | ||||||
Annuity | 6,364,058 | 5,963,348 | ||||||||
Life | 1,882,043 | 1,743,084 | ||||||||
Corporate and other | 150,741 | 154,557 | ||||||||
Intersegment eliminations | (30,035 | ) | (35,878 | ) | ||||||
Total | $ | 9,446,175 | $ | 8,826,672 |
30 |
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (“MD&A”)
(Dollars in millions, except per share data)
Forward-looking Information
Statements made in the following discussion that are not historical in nature are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995 and are subject to known and unknown risks, uncertainties and other factors. Horace Mann is not under any obligation to (and expressly disclaims any such obligation to) update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. It is important to note that the Company's actual results could differ materially from those projected in forward-looking statements due to a number of risks and uncertainties inherent in the Company's business. For additional information regarding risks and uncertainties, see “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. That discussion includes factors such as:
· | The impact that a prolonged economic recession may have on the Company’s investment portfolio; volume of new business for automobile, homeowners, annuity and life products; policy renewal rates; and additional annuity contract deposit receipts. | |
· | Fluctuations in the fair value of securities in the Company's investment portfolio and the related after-tax effect on the Company's shareholders' equity and total capital through either realized or unrealized investment losses. | |
· | Prevailing low interest rate levels, including the impact of interest rates on (1) the Company's ability to maintain appropriate interest rate spreads over minimum fixed rates guaranteed in the Company's annuity and life products, (2) the book yield of the Company's investment portfolio, (3) unrealized gains and losses in the Company's investment portfolio and the related after-tax effect on the Company's shareholders' equity and total capital, (4) amortization of deferred policy acquisition costs and (5) capital levels of the Company’s life insurance subsidiaries. | |
· | The frequency and severity of events such as hurricanes, storms, earthquakes and wildfires, and the ability of the Company to provide accurate estimates of ultimate claim costs in its consolidated financial statements. | |
· | The Company’s risk exposure to catastrophe-prone areas. Based on full year 2013 property and casualty direct earned premiums, the Company’s ten largest states represented 58% of the segment total. Included in this top ten group are certain states which are considered more prone to catastrophe occurrences: California, North Carolina, Texas, Florida, South Carolina, Louisiana and Georgia. | |
· | The ability of the Company to maintain a favorable catastrophe reinsurance program considering both availability and cost; and the collectibility of reinsurance receivables. | |
· | Adverse changes in market appreciation, interest spreads, business persistency and policyholder mortality and morbidity rates and the resulting impact on both estimated reserves and the amortization of deferred policy acquisition costs. | |
· | Adverse results from the assessment of the Company’s goodwill asset requiring write off of the impaired portion. | |
· | The Company's ability to refinance outstanding indebtedness or repurchase shares of the Company’s common stock. |
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· | The Company's ability to (1) develop and expand its marketing operations, including agents and other points of distribution, and (2) maintain and secure access to educators, as well as endorsements by and/or marketing agreements with education-related associations, including various teacher, school administrator, principal and business official associations. | |
· | The effects of economic forces and other issues affecting the educator market including, but not limited to, federal, state and local budget deficits and cut-backs and adverse changes in state and local tax revenues. The effects of these forces include, among others, teacher layoffs and early retirements, as well as individual concerns regarding employment and economic uncertainty. | |
· | The Company's ability to profitably expand its property and casualty business in highly competitive environments. | |
· | Changes in federal and state laws and regulations, which affect the relative tax and other advantages of the Company’s life and annuity products to customers, including, but not limited to, changes in IRS regulations governing Section 403(b) plans. | |
· | Changes in public employee retirement programs as a result of federal and/or state level pension reform initiatives. | |
· | Changes in federal and state laws and regulations, which affect the relative tax advantage of certain investments or which affect the ability of debt issuers to declare bankruptcy or restructure debt. | |
· | The Company's ability to effectively implement new or enhanced information technology systems and applications. |
Executive Summary
Horace Mann Educators Corporation (“HMEC”; and together with its subsidiaries, the “Company” or “Horace Mann”) is an insurance holding company. Through its subsidiaries, HMEC markets and underwrites personal lines of property and casualty insurance, retirement annuities and life insurance in the U.S. The Company markets its products primarily to K-12 teachers, administrators and other employees of public schools and their families.
For the three months ended June 30, 2014, the Company’s net income of $20.4 million represented a decrease of $5.6 million compared to the prior year, as strong annuity segment results, as well as solid earnings in the property and casualty and life segments, were offset by a decrease in realized investment gains. After-tax net realized investment gains of $2.2 million were $7.8 million less than a year earlier. Annuity segment net income of $11.5 million for the current period increased $2.3 million compared to the second quarter of 2013, largely due to an increase in the amount of interest margin earned on fixed annuity assets — driven by the growth in assets under management and continued solid investment portfolio performance — accompanied by favorable deferred policy acquisition costs unlocking in the current quarter. For the property and casualty segment, net income of $4.9 million reflected an increase of $0.8 million compared to the second quarter of 2013, despite an increase in catastrophe losses which included May and June hail storms in 2014. Life segment net income of $5.0 million decreased $0.6 million compared to the second quarter of 2013 due to a more normal level of mortality costs, compared to the favorable experience in the prior year, partially offset by growth in investment income in the current period.
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For the six months ended June 30, 2014, the Company’s net income of $48.8 million represented a decrease of $4.2 million compared to the prior year, led by improvement in property and casualty segment and annuity segment results, as well as solid earnings in the life segment which were offset by a decrease in realized investment gains. After-tax net realized investment gains of $3.3 million were $11.1 million less than a year earlier. For the property and casualty segment, net income of $18.9 million increased $4.6 million compared to the first half of 2013. The property and casualty combined ratio was 98.2% for the first six months of 2014, a 2.1 percentage point improvement compared to 100.3% for the same period in 2013, including weather-related losses. Automobile current accident year non-catastrophe underwriting results improved, coupled with a slightly higher level of favorable development of prior years’ reserves. Homeowners current accident year non-catastrophe underwriting results were comparable to the first six months of 2013. Catastrophe losses increased modestly in the current period, representing a $1.1 million after-tax decrease to net income compared to the first six months of 2013. Annuity segment net income of $23.8 million for the current period increased $3.5 million compared to the first six months of 2013, due to an increase in the amount of interest margin earned on fixed annuity assets — driven by the growth in assets under management and continued solid investment portfolio performance accompanied by increased security prepayment activity from the first quarter of 2014. For the six months, unlocking of deferred policy acquisition costs had a positive, but minimal, impact on net income in both 2014 and 2013. Life segment net income of $8.9 million decreased $1.0 million compared to the first six months of 2013 due to a more normal level of mortality costs, consistent with actuarial expectations, partially offset by growth in investment income in the current period. Compared to the first half of 2013, across all of the business segments, operating expenses increased reflecting the Company’s various infrastructure and technology investments, which are intended to enhance the overall customer experience and support favorable policy retention and business cross-sale ratios.
Premiums written and contract deposits increased 8% compared to the first six months of 2013 primarily due to an increase in the amount of annuity single premium and rollover deposits received in the current period, as well as the favorable premium impact from increases in average premium per policy for both homeowners and automobile. Annuity deposits received were 16% greater than the prior year. Property and casualty segment premiums written increased 3% compared to the prior year. Life segment insurance premiums and contract deposits increased 2% compared to the first half of the prior year.
The Company’s book value per share was $31.40 at June 30, 2014, an increase of 13% compared to 12 months earlier. This increase reflected net income for the trailing 12 months and an increase in net unrealized investment gains due to narrower credit spreads across most asset classes partially offset by slightly higher yields on U.S. Treasury securities, the combination of which resulted in an increase in net unrealized gains for the Company’s holdings of corporate securities and municipal securities. At June 30, 2014, book value per share excluding investment fair value adjustments was $24.51, representing an 8% increase compared to 12 months earlier.
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Critical Accounting Policies
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires the Company's management to make estimates and assumptions based on information available at the time the consolidated financial statements are prepared. These estimates and assumptions affect the reported amounts of the Company's consolidated assets, liabilities, shareholders' equity and net income. Certain accounting estimates are particularly sensitive because of their significance to the Company's consolidated financial statements and because of the possibility that subsequent events and available information may differ markedly from management's judgments at the time the consolidated financial statements were prepared. Management has discussed with the Audit Committee the quality, not just the acceptability, of the Company's accounting principles as applied in its financial reporting. The discussions generally included such matters as the consistency of the Company's accounting policies and their application, and the clarity and completeness of the Company's consolidated financial statements, which include related disclosures. For the Company, the areas most subject to significant management judgments include: fair value measurements, other-than-temporary impairment of investments, goodwill, deferred policy acquisition costs for annuity and interest-sensitive life products, liabilities for property and casualty claims and claim expenses, liabilities for future policy benefits, deferred taxes and valuation of assets and liabilities related to the defined benefit pension plan.
Compared to December 31, 2013, at June 30, 2014 there were no material changes to the accounting policies for the areas most subject to significant management judgments identified above. In addition to disclosures in “Notes to Consolidated Financial Statements” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, discussion of accounting policies, including certain sensitivity information, was presented in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies” in that Form 10-K.
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Results of Operations
Insurance Premiums and Contract Charges
Six Months Ended | Change From | |||||||||||||||||||
June 30, | Prior Year | |||||||||||||||||||
2014 | 2013 | Percent | Amount | |||||||||||||||||
Insurance premiums written and contract | ||||||||||||||||||||
deposits (includes annuity and | ||||||||||||||||||||
life contract deposits) | ||||||||||||||||||||
Property & casualty (1) | $ | 285.4 | $ | 276.1 | 3.4 | % | $ | 9.3 | ||||||||||||
Annuity deposits | 218.3 | 188.6 | 15.7 | % | 29.7 | |||||||||||||||
Life | 49.0 | 48.1 | 1.9 | % | 0.9 | |||||||||||||||
Total | $ | 552.7 | $ | 512.8 | 7.8 | % | $ | 39.9 | ||||||||||||
Insurance premiums and contract | ||||||||||||||||||||
charges earned (excludes annuity | ||||||||||||||||||||
and life contract deposits) | ||||||||||||||||||||
Property & casualty (1) | $ | 288.5 | $ | 277.4 | 4.0 | % | $ | 11.1 | ||||||||||||
Annuity | 12.4 | 10.8 | 14.8 | % | 1.6 | |||||||||||||||
Life | 53.6 | 52.5 | 2.1 | % | 1.1 | |||||||||||||||
Total | $ | 354.5 | $ | 340.7 | 4.1 | % | $ | 13.8 |
(1) | Includes voluntary business and an immaterial amount of involuntary business. Voluntary business represents policies sold through the Company's marketing organization and issued under the Company's underwriting guidelines. Involuntary business consists of allocations of business from state mandatory insurance facilities and assigned risk business. |
For the three months ended June 30, 2014, the Company’s premiums written and contract deposits of $292.4 million increased $24.7 million, or 9.2%, compared to the prior year, led by the annuity segment. For the first six months of 2014, the Company’s premiums written and contract deposits of $552.7 million increased $39.9 million, or 7.8%, compared to the prior year, also led by the annuity segment. The Company’s premiums and contract charges earned increased $7.6 million, or 4.4%, compared to the second quarter of 2013 and increased $13.8 million, or 4.1%, compared to the six months ended June 30, 2013, primarily due to increases in average premium per policy for both homeowners and automobile.
Total voluntary automobile and homeowners premiums written increased 3.4%, or $9.4 million, in the first six months of 2014. Average written premium per policy for both automobile and homeowners increased compared to the prior year, with the impact partially offset by a reduced level of policies in force in the current period. For 2014, the Company’s full year rate plan anticipates mid-single digit average rate increases (including states with no rate actions) for both automobile and homeowners; rate actions during the first six months of 2014 were consistent with those plans. For full year 2013, the Company’s average approved rate changes (including states with no rate actions) for automobile and homeowners were 6% and 9%, respectively. At June 30, 2014, there were 480,000 voluntary automobile and 232,000 homeowners policies in force, for a total of 712,000 policies, compared to a total of 717,000 policies at December 31, 2013 and 724,000 policies at June 30, 2013.
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Based on policies in force, the current year voluntary automobile 12-month retention rate for new and renewal policies was 84.5% compared to 85.1% at June 30, 2013. The property 12-month new and renewal policy retention rate was 88.8% at June 30, 2014 compared to 89.5% at June 30, 2013. Although modestly lower than 12 months earlier, the retention rates have been favorably impacted by the Company’s focus on expanding the number of multiline customers and customer utilization of automatic payment plans, particularly for voluntary automobile business.
Voluntary automobile premiums written increased 2.4%, or $4.4 million, compared to the first half of 2013. In the first six months of 2014, the average written premium per policy and average earned premium per policy increased approximately 4% and 3%, respectively, compared to a year earlier, which was partially offset by the decline in policies in force. Voluntary automobile policies in force at June 30, 2014 decreased 2,000 compared to December 31, 2013 and decreased 7,000 compared to June 30, 2013. The number of educator policies represented approximately 84% of the voluntary automobile policies in force at June 30, 2014 and December 31, 2013 compared to approximately 83% at June 30, 2013.
Voluntary homeowners premiums written increased 5.5%, or $5.0 million, compared to the first half of 2013. The average written and earned premium per policy increased 6% and 5%, respectively, in the first half of 2014 compared to a year earlier. In addition, reduced catastrophe reinsurance costs benefitted the current period by approximately $2 million. Homeowners policies in force at June 30, 2014 decreased 3,000 compared to December 31, 2013 and decreased 5,000 compared to June 30, 2013. The number of educator policies represented approximately 79% of the homeowners policies in force at June 30, 2014, December 31, 2013 and June 30, 2013. Growth in the number of educator policies and total policies has been, and may continue to be, impacted by the Company’s risk mitigation programs, including actions in catastrophe-prone coastal areas, involving policies of both educators and non-educators. The Company continues to evaluate and implement actions to further mitigate its risk exposure in hurricane-prone areas, as well as other areas of the country. Such actions could include, but are not limited to, non-renewal of homeowners policies, restricted agent geographic placement, limitations on agent new business sales, further tightening of underwriting standards and increased utilization of third-party vendor products.
As an example, in 2014 the Company initiated a program to further address homeowners profitability and hurricane exposure issues in Florida. The Company expects to non-renew about 4,800 policies, approximately 95% of its remaining Florida book of property business, starting with June 2014 policy effective dates. As of June 30, 2014, approximately 1,000 of the policies in the non-renewal program have been terminated — most at the client’s request — a result that occurred sooner than management’s expected timing. While this program will impact the overall policy in force count and premiums in the short-term, it is expected to reduce risk exposure concentration, reduce overall catastrophe reinsurance costs and improve homeowners longer-term underwriting results.
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For the six months ended June 30, 2014, total annuity deposits received increased 15.7%, or $29.7 million, compared to the prior year, driven by a 29.0% increase in single premium and rollover deposit receipts accompanied by a 1.9% increase in recurring deposit receipts. As further described in “Sales” below, the Company’s recently introduced fixed indexed annuity contract contributed to the current period favorable result. In the first six months of 2014, new deposits to fixed accounts of $150.6 million increased 22.4%, or $27.6 million, and new deposits to variable accounts of $67.7 million increased 3.2%, or $2.1 million, compared to the prior year. In addition to external contractholder deposits, annuity new deposits include contributions and transfers by Horace Mann’s employees in the Company’s 401(k) group annuity contract.
Total annuity accumulated cash value of $5.5 billion at June 30, 2014 increased 11.0% compared to a year earlier, reflecting the increase from new deposits received as well as favorable retention and financial market performance. Cash value retentions for variable and fixed annuity options were 94.1% and 94.9%, respectively, for the 12 month period ended June 30, 2014, with variable consistent and fixed declining slightly, compared to a year earlier. At June 30, 2014, the number of annuity contracts outstanding of 197,000 increased 2,000 contracts compared to December 31, 2013 and 6,000 contracts compared to June 30, 2013.
Variable annuity accumulated balances of $1.8 billion at June 30, 2014 increased 18.9% compared to June 30, 2013, reflecting favorable financial market performance over the 12 months (driven primarily by equity securities) partially offset by net balances transferred from the variable account option to the guaranteed interest rate fixed account option. Annuity segment contract charges earned increased 14.8%, or $1.6 million, compared to the first six months of 2013.
Life segment premiums and contract deposits for the first six months of 2014 increased 1.9%, or $0.9 million, compared to the prior year, due to the favorable impact of new business growth. The ordinary life insurance in force lapse ratio was 4.1% for the 12 months ended June 30, 2014 compared to 4.4% for the 12 months ended June 30, 2013.
Sales
For the first six months of 2014, property and casualty new annualized sales premiums decreased 1.1% compared to the first half of 2013, as growth in new automobile sales was more than offset by a decline in homeowners new business. The current period decline in homeowners new business was largely due to continued risk mitigation initiatives.
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For sales by Horace Mann’s agency force, the Company’s annuity new business levels continued to benefit from agent training and marketing programs, which focus on retirement planning, and build on the positive results produced in recent years resulting in a 31.8% increase compared to the first half of 2013. Sales from the independent agent distribution channel, which are largely single premium and rollover annuity deposits, decreased 1.7% compared to a year ago. As a result, total Horace Mann annuity sales from the combined distribution channels increased 26.5% compared to the six months ended June 30, 2013, led by sales of the Company’s new fixed indexed annuity product as described below. Overall, the Company’s new recurring deposit business (measured on an annualized basis at the time of sale, compared to the reporting of new contract deposits which are recorded when cash is received) increased 12.6% compared to the first half of 2013, and single premium and rollover deposits for Horace Mann annuity products increased 29.0% compared to the prior year. In February 2014, the Company expanded its annuity product portfolio by introducing a fixed indexed annuity contract. This new product has been well received by the Company’s customers and represented approximately one-third of total annuity sales for the current six months, largely single premium and rollover deposits. Previously, the Company had entered into third-party vendor agreements to offer an indexed annuity product underwritten by the third parties.
The Company’s introduction of new educator-focused portfolios of term and whole life products in recent years, including a single premium whole life product, has contributed to the increase in sales of proprietary life products. For the six months ended June 30, 2014, sales of Horace Mann’s proprietary life insurance products totaled $5.0 million, representing an increase of 42.9%, compared to the prior year.
Distribution System
At June 30, 2014, there was a combined total of 707 Exclusive Agencies and Employee Agents, compared to 759 at December 31, 2013 and 736 at June 30, 2013. Within the 12 month decrease, there was a net increase in new Exclusive Agency appointments, offset by termination of lower producing agents. The Company has begun to introduce higher quality standards for agents and agencies focused on improving both customer experiences and agent productivity. These higher standards contributed to the current period turnover.
At June 30, 2014, there were 620 Horace Mann Exclusive Agencies, an increase of 5 compared to June 30, 2013. At June 30, 2014, in addition to the Exclusive Agencies, there were 87 Employee Agents, a decrease of 34 compared to 12 months earlier. See additional description in “Business — Corporate Strategy and Marketing — Dedicated Agency Force” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.
As mentioned above, the Company also utilizes a nationwide network of Independent Agents who comprise an additional distribution channel for the Company’s 403(b) tax-qualified annuity products. The Independent Agent distribution channel included 462 authorized agents at June 30, 2014. During the first six months of 2014, this channel generated $17.4 million in annualized new annuity sales for the Company compared to $17.7 million for the first six months of 2013, with the new business in both periods primarily comprised of single and rollover deposit business.
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Net Investment Income
For the three months ended June 30, 2014, pretax investment income of $81.4 million increased 5.2%, or $4.0 million, (5.0%, or $2.6 million, after tax) compared to the prior year. Pretax investment income of $164.4 million for the six months ended June 30, 2014 increased 6.2%, or $9.6 million, (6.0%, or $6.2 million, after tax) compared to the prior year. The increase reflected growth in the size of the average investment portfolio on an amortized cost basis and continued strong performance in the fixed maturity and alternative investment portfolios accompanied by the effects of increased prepayment activity in the asset-backed securities portfolio in the current six month period. Average invested assets increased 6.5% over the 12 months ended June 30, 2014. The average pretax yield on the investment portfolio was 5.38% (3.61% after tax) for the first six months of 2014, compared to the pretax yield of 5.40% (3.64% after tax) a year earlier. During the first six months of 2014, management continued to identify and secure investments, including a modest level of alternative investments, with attractive risk-adjusted yields without venturing into asset classes or individual securities that would be inconsistent with the Company’s overall conservative investment guidelines.
Net Realized Investment Gains and Losses
For the three months ended June 30, 2014, net realized investment gains (pretax) were $3.5 million compared to net realized investment gains of $15.4 million in the same period in the prior year. For the six months, net realized investment gains (pretax) were $5.2 million compared to net realized investment gains of $22.3 million in the prior year. The net gains and losses in both periods were realized primarily from ongoing investment portfolio management activity. Impairment charges of $0.5 million in 2014 and $1.0 million in 2013 were recorded in the six months ended June 30, in both years occurring in the second quarter.
For the first half of 2014, the Company’s net realized investment gains of $5.2 million included $6.9 million of gross gains realized on security sales and calls partially offset by $1.2 million of realized losses on securities that were disposed of during the six months, primarily municipal securities, and the $0.5 million impairment charge recorded on five securities.
For the first half of 2013, the Company’s net realized investment gains of $22.3 million included $24.2 million of gross gains realized on security sales and calls partially offset by $0.9 million of realized losses on securities that were disposed of during the six months, primarily common stocks, and the $1.0 million impairment charge recorded on two securities. The impairment charge included $0.9 million attributable to one general obligation bond.
The Company, from time to time, sells securities subsequent to the balance sheet date that were considered temporarily impaired at the balance sheet date. Such sales are due to issuer-specific events occurring subsequent to the balance sheet date that result in a change in the Company’s intent to sell an invested asset.
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Fixed Maturity Securities and Equity Securities Portfolios
The table below presents the Company’s fixed maturity securities and equity securities portfolios by major asset class, including the ten largest sectors of the Company’s corporate bond holdings (based on fair value). Compared to December 31, 2013, yields on U.S. Treasury securities decreased and credit spreads were slightly narrower across most asset classes in 2014, the combination of which resulted in an increase in net unrealized gains for all classes of the Company’s fixed maturity securities holdings.
June 30, 2014 | |||||||||||||||||||||||
Amortized | Pretax Net | ||||||||||||||||||||||
Number of | Fair | Cost or | Unrealized | ||||||||||||||||||||
Issuers | Value | Cost | Gain (Loss) | ||||||||||||||||||||
Fixed maturity securities | |||||||||||||||||||||||
Corporate bonds | |||||||||||||||||||||||
Banking and Finance | 79 | $ | 528.1 | $ | 481.3 | $ | 46.8 | ||||||||||||||||
Energy | 69 | 293.3 | 261.3 | 32.0 | |||||||||||||||||||
Utilities | 46 | 237.7 | 200.9 | 36.8 | |||||||||||||||||||
Insurance | 40 | 210.9 | 181.7 | 29.2 | |||||||||||||||||||
Real estate | 36 | 166.5 | 156.0 | 10.5 | |||||||||||||||||||
Technology | 37 | 162.0 | 155.0 | 7.0 | |||||||||||||||||||
Transportation | 27 | 148.2 | 136.6 | 11.6 | |||||||||||||||||||
Metal and Mining | 18 | 134.5 | 127.5 | 7.0 | |||||||||||||||||||
Broadcasting and Media | 28 | 130.2 | 114.0 | 16.2 | |||||||||||||||||||
Telecommunications | 25 | 127.8 | 117.9 | 9.9 | |||||||||||||||||||
All Other Corporates (1) | 196 | 724.4 | 667.1 | 57.3 | |||||||||||||||||||
Total corporate bonds | 601 | 2,863.6 | 2,599.3 | 264.3 | |||||||||||||||||||
Mortgage-backed securities | |||||||||||||||||||||||
U.S. Government and federally sponsored agencies | 403 | 582.2 | 546.3 | 35.9 | |||||||||||||||||||
Commercial | 38 | 125.7 | 122.8 | 2.9 | |||||||||||||||||||
Other | 18 | 28.6 | 26.3 | 2.3 | |||||||||||||||||||
Municipal bonds | 498 | 1,597.9 | 1,455.6 | 142.3 | |||||||||||||||||||
Government bonds | |||||||||||||||||||||||
U.S. | 9 | 476.2 | 465.0 | 11.2 | |||||||||||||||||||
Foreign | 8 | 57.0 | 50.6 | 6.4 | |||||||||||||||||||
Collateralized debt obligations (2) | 79 | 435.5 | 430.7 | 4.8 | |||||||||||||||||||
Asset-backed securities | 94 | 509.6 | 490.8 | 18.8 | |||||||||||||||||||
Total fixed maturity securities | 1,748 | $ | 6,676.3 | $ | 6,187.4 | $ | 488.9 | ||||||||||||||||
Equity securities | |||||||||||||||||||||||
Non-redeemable preferred stocks | 13 | $ | 22.0 | $ | 22.2 | $ | (0.2 | ) | |||||||||||||||
Common stocks | 170 | 67.6 | 55.0 | 12.6 | |||||||||||||||||||
Closed-end fund | 1 | 19.9 | 20.0 | (0.1 | ) | ||||||||||||||||||
Total equity securities | 184 | $ | 109.5 | $ | 97.2 | $ | 12.3 | ||||||||||||||||
Total | 1,932 | $ | 6,785.8 | $ | 6,284.6 | $ | 501.2 |
(1) | The All Other Corporates category contains 20 additional industry classifications. Health care, natural gas, industry, gaming, food and beverage and consumer products represented $510.8 million of fair value at June 30, 2014, with the remaining 14 classifications each representing less than $57 million. | |
(2) | Based on fair value, 94.8% of the collateralized debt obligation securities were rated investment grade by Standard and Poor’s Corporation (“S&P”) and/or Moody’s Investors Service, Inc. (“Moody’s”) at June 30, 2014. |
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At June 30, 2014, the Company’s diversified fixed maturity securities portfolio consisted of 2,141 investment positions, issued by 1,748 entities, and totaled approximately $6.7 billion in fair value. This portfolio was 95.8% investment grade, based on fair value, with an average quality rating of A. The Company’s investment guidelines generally limit single corporate issuer concentrations to 0.5% of invested assets for “AA” or “AAA” rated securities, 0.35% of invested assets for “A” or “BBB” rated securities, and 0.2% of invested assets for non-investment grade securities.
The following table presents the composition and value of the Company’s fixed maturity securities and equity securities portfolios by rating category. At June 30, 2014, 94.9% of these combined portfolios were investment grade, based on fair value, with an overall average quality rating of A. The Company has classified the entire fixed maturity securities and equity securities portfolios as available for sale, which are carried at fair value.
Rating of Fixed Maturity Securities and Equity Securities (1)
(Dollars in millions)
Percent of Portfolio | ||||||||||||||||||||
Fair Value | June 30, 2014 | |||||||||||||||||||
December 31, | June 30, | Fair | Amortized | |||||||||||||||||
2013 | 2014 | Value | Cost or Cost | |||||||||||||||||
Fixed maturity securities | ||||||||||||||||||||
AAA | 6.1 | % | 6.9 | % | $ | 462.3 | $ | 448.7 | ||||||||||||
AA (2) | 33.4 | 35.3 | 2,347.3 | 2,195.4 | ||||||||||||||||
A | 25.7 | 24.7 | 1,651.2 | 1,500.5 | ||||||||||||||||
BBB | 30.3 | 29.0 | 1,938.2 | 1,777.0 | ||||||||||||||||
BB | 2.5 | 2.2 | 149.4 | 142.4 | ||||||||||||||||
B | 1.8 | 1.6 | 104.1 | 99.6 | ||||||||||||||||
CCC or lower | 0.1 | 0.1 | 7.5 | 7.4 | ||||||||||||||||
Not rated (3) | 0.1 | 0.2 | 16.3 | 16.4 | ||||||||||||||||
Total fixed maturity securities | 100.0 | % | 100.0 | % | $ | 6,676.3 | $ | 6,187.4 | ||||||||||||
Equity securities | ||||||||||||||||||||
AAA | - | - | - | - | ||||||||||||||||
AA | 4.5 | % | 3.8 | % | $ | 4.2 | $ | 4.1 | ||||||||||||
A | 3.3 | 2.8 | 3.1 | 3.4 | ||||||||||||||||
BBB | 33.0 | 30.2 | 33.0 | 33.2 | ||||||||||||||||
BB | 1.5 | 1.4 | 1.5 | 1.5 | ||||||||||||||||
B | - | - | - | - | ||||||||||||||||
CCC or lower | - | - | - | - | ||||||||||||||||
Not rated (4) | 57.7 | 61.8 | 67.7 | 55.0 | ||||||||||||||||
Total equity securities | 100.0 | % | 100.0 | % | $ | 109.5 | $ | 97.2 | ||||||||||||
Total | $ | 6,785.8 | $ | 6,284.6 |
(1) Ratings are as assigned primarily by S&P when available, with remaining ratings as assigned on an equivalent basis by Moody's. Ratings for publicly traded securities are determined when the securities are acquired and are updated monthly to reflect any changes in ratings. | |
(2) At June 30, 2014, the AA rated fair value amount included $476.2 million of U.S. Government and federally sponsored agency securities and $586.2 million of mortgage- and asset-backed securities issued by U.S. Government and federally sponsored agencies. | |
(3) Included in this category is $16.3 million fair value of private placement securities not rated by either S&P or Moody's. | |
(4) This category represents common stocks that are not rated by either S&P or Moody’s. |
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At June 30, 2014, the Company had $1,597.9 million fair value invested in municipal bonds with a net unrealized gain of $142.3 million. Of the geographically diversified municipal bond holdings, approximately 51% are tax-exempt and 79% are revenue bonds tied to essential services, such as mass transit, water and sewer. The overall credit quality of the municipal bond portfolio was AA-, with approximately 21% of the value insured at June 30, 2014. This represents approximately 5% of the Company’s total investment portfolio that is guaranteed by the mono-line credit insurers or other forms of guarantee. When selecting securities, the Company focuses primarily on the quality of the underlying security and does not place significant reliance on the additional insurance benefit. Excluding the effect of insurance, the credit quality of the underlying municipal bond portfolio was A+ at June 30, 2014.
At June 30, 2014, the Company had $562.1 million fair value in financial institution bonds, preferred stocks and common stocks with a net unrealized gain of $49.0 million. The Company’s holdings in this sector are well diversified among numerous institutions.
At June 30, 2014, total fair value of the Company’s European fixed maturity securities direct exposure was $298.3 million with a net unrealized gain of $18.5 million. These securities were primarily corporate securities and $137.8 million fair value related to the United Kingdom. The Company generally defines its country classification by issuer country of incorporation, domicile or business risk where appropriate. Given the economic, fiscal and political uncertainties surrounding a number of European countries, especially Greece, Ireland, Italy, Portugal and Spain (collectively “GIIPS”) and France, the Company closely monitors its direct European securities exposures. At June 30, 2014, the Company’s European investment portfolio had (1) no sovereign or equity security exposure in any European country, (2) no exposure in the banking and finance industry in any of the GIIPS countries or France, (3) no unfunded exposure related to its European securities holdings and (4) no derivative or hedging instruments, other than a minimal amount of European counterparty exposure.
The Company also carefully monitors, and analyzes a number of factors to understand and identify, its indirect European exposure. While many factors are considered, it is difficult to know if all potential factors which may indirectly impact the Company’s investment portfolio have been identified. The factors the Company considers include, but are not limited to, the issuer’s parent-subsidiary relationship, principal place of business, management location, source of revenue streams, industry classification and asset characteristics. At June 30, 2014, the Company did not identify significant indirect exposure to European countries in its investment portfolio.
At June 30, 2014, the Company had $125.7 million fair value in commercial mortgage-backed securities (“CMBS”), all in the annuity and life portfolios, with a net unrealized gain of $2.9 million. At June 30, 2014, the Company’s CMBS portfolio was 100% investment grade, with an overall credit rating of AA, and the 38 positions were well diversified by property type, geography and sponsor.
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At June 30, 2014, the fixed maturity securities and equity securities portfolios had a combined $35.7 million pretax of gross unrealized losses on $1,092.3 million fair value related to 317 positions. Of this amount, $5.5 million of pretax gross unrealized losses were on $371.0 million fair value for 115 positions that had been in a continuous unrealized loss position for 12 months or less.
Of the investment positions (fixed maturity securities and equity securities) with gross unrealized losses, 6 were trading below 80% of book value at June 30, 2014 and were not considered other-than-temporarily impaired. These positions included structured securities, corporate securities and equity securities. The 6 securities with fair values below 80% of book value at June 30, 2014 had fair value of $9.9 million, representing 0.1% of the Company’s total investment portfolio at fair value, and had a gross unrealized loss of $3.4 million.
The Company views the unrealized losses of all of the securities at June 30, 2014 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 the present value of expected cash flows exceeds the Company’s amortized cost bases. In addition, management expects to recover the entire cost bases of the fixed maturity securities. For equity securities, the Company has the ability and intent to hold the securities for the recovery of cost and recovery of cost is expected within a reasonable period of time. Additionally, as of the date of this Quarterly Report on Form 10-Q, the Company is not aware of any events that call into question the ability of the issuers of the securities to honor their contractual commitments. Therefore, no impairment of these securities was recorded at June 30, 2014. Future changes in circumstances related to these and other securities could require subsequent recognition of other-than-temporary impairment losses.
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Benefits, Claims and Settlement Expenses
Six Months Ended | Change From | ||||||||||||||||
June 30, | Prior Year | ||||||||||||||||
2014 | 2013 | Percent | Amount | ||||||||||||||
Property and casualty | $ | 204.9 | $ | 202.5 | 1.2 | % | $ | 2.4 | |||||||||
Annuity | 0.8 | 1.0 | -20.0 | % | (0.2 | ) | |||||||||||
Life | 33.5 | 30.0 | 11.7 | % | 3.5 | ||||||||||||
Total | $ | 239.2 | $ | 233.5 | 2.4 | % | $ | 5.7 | |||||||||
Property and casualty catastrophe losses, included above (1) | $ | 29.8 | $ | 28.2 | 5.7 | % | $ | 1.6 |
(1) See footnote (1) to the table below. |
Property and Casualty Claims and Claim Expenses (“losses”)
Six Months Ended | |||||||||
June 30, | |||||||||
2014 | 2013 | ||||||||
Incurred claims and claim expenses: | |||||||||
Claims occurring in the current year | $ | 211.9 | $ | 208.4 | |||||
Decrease in estimated reserves for claims | |||||||||
occurring in prior years (2) | (7.0 | ) | (5.9 | ) | |||||
Total claims and claim expenses incurred | $ | 204.9 | $ | 202.5 | |||||
Property and casualty loss ratio: | |||||||||
Total | 71.0 | % | 73.0 | % | |||||
Effect of catastrophe costs, included above (1) | 10.3 | % | 10.2 | % | |||||
Effect of prior years’ reserve development, included above (2) | -2.4 | % | -2.2 | % | |||||
(1) | Property and casualty catastrophe losses were incurred as follows: |
2014 | 2013 | |||||||
Three months ended | ||||||||
March 31 | $ | 6.3 | $ | 5.7 | ||||
June 30 | 23.5 | 22.5 | ||||||
Total year-to-date | $ | 29.8 | $ | 28.2 | ||||
(2) Shows the amounts by which the Company decreased its | ||||||||
reserves in each of the periods indicated for claims occurring | ||||||||
in previous years to reflect subsequent information on such | ||||||||
claims and changes in their projected final settlement costs. | ||||||||
2014 | 2013 | |||||||
Three months ended | ||||||||
March 31 | $ | (4.0 | ) | $ | (3.3 | ) | ||
June 30 | (3.0 | ) | (2.6 | ) | ||||
Total year-to-date | $ | (7.0 | ) | $ | (5.9 | ) |
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For the three months ended June 30, 2014, the Company’s benefits, claims and settlement expenses increased $6.4 million, or 5.3%, compared to the prior year including a more normalized level of life mortality costs in the current period. In the second quarter of 2014, the property and casualty non-catastrophe current accident year loss ratio of 61.8% was equal to the prior year, reflecting improvement in the current accident year automobile loss ratio offset by adverse experience in the homeowners line.
For the six months ended June 30, 2014, the Company’s benefits, claims and settlement expenses increased $5.7 million, or 2.4%, compared to the prior year primarily reflecting the more normalized life mortality costs and an increase in property and casualty catastrophe losses.
For the first half of 2014, the favorable development of prior years’ property and casualty reserves of $7.0 million was the result of actual and remaining projected losses for prior years being below the level anticipated in the December 31, 2013 loss reserve estimate, primarily for accident years 2011 and prior and predominantly the result of favorable frequency and severity trends in automobile liability loss emergence.
For the first half of 2013, the favorable development of prior years’ property and casualty reserves of $5.9 million was the result of actual and remaining projected losses for prior years being below the level anticipated in the December 31, 2012 loss reserve estimate, primarily the result of favorable frequency and severity trends in voluntary automobile loss emergence for accident years 2011 and prior.
For the six months ended June 30, 2014, the voluntary automobile loss ratio of 69.0% decreased by 2.3 percentage points compared to the prior year, including (1) the favorable impacts of lower current accident year non-catastrophe losses for 2014 and rate actions taken in recent years, (2) development of prior years’ reserves that had a 0.4 percentage point more favorable impact in the current year partially offset by (3) increased catastrophe losses for this line of business which represented a 0.9 percentage point increase in the current accident year loss ratio. In the second quarter of 2014, hailstorms in May and June, particularly in the Midwest and Southeast, had a more severe impact on this line of business. While the first quarter 2014 winter weather impacted collision and physical damage claims, for the six months the Company had improved automobile liability experience compared to the same period in the prior year. The homeowners loss ratio of 74.5% for the six months ended June 30, 2014 decreased 1.2 percentage points compared to a year earlier, including a 1.7 percentage point decrease due to a smaller impact from catastrophe costs. Catastrophe costs represented 25.9 percentage points of the homeowners loss ratio for the current period compared to 27.6 percentage points for the prior year period.
For the life segment, benefits in the current six months increased $3.5 million compared to a year earlier, primarily as a result of an increase in mortality costs. Variability in the Company’s life mortality experience is not unexpected considering the size of Horace Mann’s life insurance in force.
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Interest Credited to Policyholders
Six Months Ended | Change From | |||||||||||||||||||
June 30, | Prior Year | |||||||||||||||||||
2014 | 2013 | Percent | Amount | |||||||||||||||||
Annuity | $ | 65.1 | $ | 62.1 | 4.8 | % | $ | 3.0 | ||||||||||||
Life | 21.7 | 21.4 | 1.4 | % | 0.3 | |||||||||||||||
Total | $ | 86.8 | $ | 83.5 | 4.0 | % | $ | 3.3 |
For the three months ended June 30, 2014, interest credited of $43.7 million increased 3.8%, or $1.6 million, compared to the same period in 2013, comparable to the percentage increase reflected for the six months.
Compared to the first six months of 2013, the current year increase in annuity segment interest credited reflected a 7.5% increase in average accumulated fixed deposits, partially offset by an 8 basis point decline in the average annual interest rate credited to 3.66%. Life insurance interest credited increased slightly as a result of the growth in interest-sensitive life insurance reserves.
The net interest spread on fixed annuity assets under management measures the difference between the rate of income earned on the underlying invested assets and the rate of interest which policyholders are credited on their account values. The annualized net interest spreads for the six months ended June 30, 2014 and 2013 were 205 basis points and 198 basis points, respectively. The net interest spread increase for the current period reflected lower average investment yields which were more than offset by the benefit of increased asset-backed security prepayment activity and crediting rate decreases.
As of June 30, 2014, fixed annuity account values totaled $3.7 billion, including $3.5 billion of deferred annuities. As shown in the table below, for approximately 86%, or $3.0 billion of the deferred annuity account values, the credited interest rate was equal to the minimum guaranteed rate. Due to limitations on the Company’s ability to further lower interest crediting rates, coupled with the expectation for continued low reinvestment interest rates, management anticipates fixed annuity spread compression in future periods. The majority of assets backing the net interest spread on fixed annuity business is invested in fixed-income securities. The Company actively manages its interest rate risk exposure, considering a variety of factors, including earned interest rates, credited interest rates and the relationship between the expected durations of assets and liabilities. Management estimates that over the next 12 months approximately $625 million of the annuity segment and life segment combined investment portfolio and related investable cash flows will be reinvested at current market rates. As interest rates remain at low levels, borrowers may prepay or redeem the securities with greater frequency in order to borrow at lower market rates, which could increase investable cash flows and exacerbate the reinvestment risk . As a general guideline, for a 100 basis point decline in the average reinvestment rate and based on the Company’s existing policies and investment portfolio, the impact from investing in that lower interest rate environment could further reduce annuity segment net investment income by approximately $2.4 million in year one and $7.1 million in year two, further reducing the net interest spread by approximately 6 basis points and 18 basis points in the respective periods, compared to the current period annualized net interest spread. The Company could also consider potential changes in rates credited to policyholders, tempered by any restrictions on the ability to adjust policyholder rates due to minimum guaranteed crediting rates.
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The expectation for future net interest spreads is also an important component in the amortization of annuity deferred policy acquisition costs. In terms of the sensitivity of this amortization to the net interest spread, based on capitalized annuity policy acquisition costs as of June 30, 2014 and assuming all other assumptions are met, a 10 basis point deviation in the current year targeted interest rate spread assumption would impact amortization between $0.20 million and $0.30 million. This result may change depending on the magnitude and direction of any actual deviations but represents a range of reasonably likely experience for the noted assumption.
Additional information regarding the interest crediting rates and balances equal to the minimum guaranteed rate for deferred annuity account values is shown below.
June 30, 2014 | |||||||||||||||||||||||||
Deferred Annuities at | |||||||||||||||||||||||||
Total Deferred Annuities | Minimum Guaranteed Rate | ||||||||||||||||||||||||
Percent of | |||||||||||||||||||||||||
Percent | Accumulated | Total Deferred | Percent | Accumulated | |||||||||||||||||||||
of Total | Value (“AV”) | Annuities AV | of Total | Value | |||||||||||||||||||||
Minimum guaranteed interest rates: | |||||||||||||||||||||||||
Less than 2% | 17.4 | % | $ | 604.4 | 28.4 | % | 5.8 | % | $ | 171.9 | |||||||||||||||
Equal to 2% but less than 3% | 8.8 | 308.0 | 81.6 | % | 8.4 | 251.4 | |||||||||||||||||||
Equal to 3% but less than 4% | 15.8 | 549.2 | 98.4 | % | 18.1 | 540.3 | |||||||||||||||||||
Equal to 4% but less than 5% | 56.4 | 1,961.4 | 100.0 | % | 65.8 | 1,961.4 | |||||||||||||||||||
5% or higher | 1.6 | 57.6 | 100.0 | % | 1.9 | 57.6 | |||||||||||||||||||
Total | 100.0 | % | $ | 3,480.6 | 85.7 | % | 100.0 | % | $ | 2,982.6 |
The Company will continue to be proactive in executing strategies to mitigate the negative impact on profitability of a sustained low interest rate environment. However, the success of these strategies may be affected by the factors discussed in “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 and other factors discussed herein.
Policy Acquisition Expenses Amortized
Amortized policy acquisition expenses were $22.5 million for the three months ended June 30, 2014 compared to $23.0 million for the same period in 2013. The unlocking of annuity deferred policy acquisition costs in the current quarter decreased amortization $0.4 million compared to a $1.0 million increase in the prior year.
Amortized policy acquisition expenses were $45.5 million for the first six months of 2014 compared to $43.1 million for the same period in 2013 with the increase primarily attributable to the property and casualty segment reflecting the recent growth in premiums and related commissions. In addition, amortization increased in the annuity segment. At June 30, 2014, the unlocking of annuity deferred policy acquisition costs resulted in a decrease in amortization of $0.3 million compared to a decrease in amortization of $0.6 million from unlocking at June 30, 2013. For the life segment, the June 30, 2014 and 2013 unlocking of deferred policy acquisition costs each resulted in an immaterial change in amortization.
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Operating Expenses
For the three months ended June 30, 2014, operating expenses of $39.3 million increased 0.8%, or $0.3 million, compared to the second quarter of 2013.
For the first six months of 2014, operating expenses of $79.2 million increased 1.8%, or $1.4 million, compared to the same period in the prior year. The current period expense level was consistent with management’s expectations as the Company makes expenditures related to customer service and infrastructure improvements, which are intended to enhance the overall customer experience and support favorable policy retention and business cross-sale ratios.
The property and casualty expense ratio of 27.2% for the six months ended June 30, 2014 was comparable to the prior year expense ratio of 27.3%, consistent with management’s expectations for the current period.
Income Tax Expense
The effective income tax rate on the Company’s pretax income, including net realized investment gains and losses, was 28.4% and 29.5% for the six months ended June 30, 2014 and 2013, respectively. Income from investments in tax-advantaged securities reduced the effective income tax rate 7.0 and 5.8 percentage points for the six months ended June 30, 2014 and 2013, respectively.
The Company records liabilities for uncertain tax filing positions where it is more likely than not that the position will not be sustainable upon audit by taxing authorities. These liabilities are reevaluated routinely and are adjusted appropriately based on changes in facts or law. The Company has no unrecorded liabilities from uncertain tax filing positions.
At June 30, 2014, the Company’s federal income tax returns for years prior to 2010 are no longer subject to examination by the IRS. Management does not anticipate any assessments for tax years that remain subject to examination to have a material effect on the Company’s financial position or results of operations.
Net Income
For the three months ended June 30, 2014, the Company’s net income of $20.4 million represented a decrease of $5.6 million compared to the prior year. For the six months ended June 30, 2014, the Company’s net income of $48.8 million represented a decrease of $4.2 million compared to the prior year. The decreases for the current periods were due to declines in realized investment gains which offset income growth from the combined insurance segments. Additional detail is included in the “Executive Summary” at the beginning of this MD&A.
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Net income (loss) by segment and net income per share were as follows:
Six Months Ended | Change From | |||||||||||||||||||
June 30, | Prior Year | |||||||||||||||||||
2014 | 2013 | Percent | Amount | |||||||||||||||||
Analysis of net income (loss) by segment: | ||||||||||||||||||||
Property and casualty | $ | 18.9 | $ | 14.3 | 32.2 | % | $ | 4.6 | ||||||||||||
Annuity | 23.8 | 20.3 | 17.2 | % | 3.5 | |||||||||||||||
Life | 8.9 | 9.9 | -10.1 | % | (1.0 | ) | ||||||||||||||
Corporate and other (1) | (2.8 | ) | 8.5 | N.M. | (11.3 | ) | ||||||||||||||
Net income | $ | 48.8 | $ | 53.0 | -7.9 | % | $ | (4.2 | ) | |||||||||||
Effect of catastrophe costs, after tax, | ||||||||||||||||||||
included above | $ | (19.4 | ) | $ | (18.3 | ) | 6.0 | % | $ | (1.1 | ) | |||||||||
Effect of realized investment gains, | ||||||||||||||||||||
after tax, included above | $ | 3.3 | $ | 14.4 | -77.1 | % | $ | (11.1 | ) | |||||||||||
Diluted: | ||||||||||||||||||||
Net income per share | $ | 1.16 | $ | 1.29 | -10.1 | % | $ | (0.13 | ) | |||||||||||
Weighted average number of shares | ||||||||||||||||||||
and equivalent shares (in millions) | 42.2 | 41.2 | 2.4 | % | 1.0 | |||||||||||||||
Property and casualty combined ratio: | ||||||||||||||||||||
Total | 98.2 | % | 100.3 | % | N.M. | -2.1 | % | |||||||||||||
Effect of catastrophe costs, | ||||||||||||||||||||
included above | 10.3 | % | 10.2 | % | N.M. | 0.1 | % | |||||||||||||
Effect of prior years’ reserve | ||||||||||||||||||||
development, included above | -2.4 | % | -2.2 | % | N.M. | -0.2 | % | |||||||||||||
N.M. – Not meaningful.
(1) | The corporate and other segment includes interest expense on debt, realized investment gains and losses, certain public company expenses and other corporate-level items. The Company does not allocate the impact of corporate-level transactions to the insurance segments, consistent with the basis for management’s evaluation of the results of those segments. |
As described in footnote (1) to the table above, the corporate and other segment reflects corporate-level transactions. Of those transactions, realized investment gains and losses may vary notably between reporting periods and are often the driver of fluctuations in the level of this segment’s net income or loss. For the six months ended June 30, 2014 and 2013, net realized investment gains after tax were $3.3 million and $14.4 million, respectively. For the corporate and other segment, this decline in net realized investment gains resulted in a net loss which was also lower than the net income reported for the first half of 2013.
Return on average shareholders’ equity based on net income was 9% and 10% for the trailing 12 months ended June 30, 2014 and 2013, respectively.
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Outlook for 2014
At the time of this Quarterly Report on Form 10-Q, management estimates that 2014 full year net income before realized investment gains and losses will be within a range of $2.05 to $2.25 per diluted share. This projection incorporates the Company’s results for 2013 — results that exceeded management’s expectations — along with the assumptions that life mortality costs will return to modeled levels and the impact of unlocking annuity deferred policy acquisition costs will be minimal. Compared to 2013, estimated net income for 2014 also anticipates continued improvement in property and casualty segment current accident year results partially offset by a lower level of favorable development of prior years’ reserves. Excluding the impact of the unlocking of deferred policy acquisition costs, 2014 annuity segment net income is anticipated to be modestly lower than full year 2013, as growth in assets under management is expected to nearly offset an anticipated decline in the net interest spread. For the life segment, along with the assumption that mortality will return to modeled levels, some modest net investment income pressure is anticipated as a result of reinvestment rate assumptions, both of which are expected to result in a lower level of income compared to 2013. In addition to these segment-specific factors, the Company’s initiatives for customer service and infrastructure improvements, which are intended to enhance the overall customer experience and support further improvement in policy retention and business cross-sale ratios, will continue and result in expense levels comparable to 2013.
As described in “Critical Accounting Policies”, certain of the Company’s significant accounting measurements require the use of estimates and assumptions. As additional information becomes available, adjustments may be required. Those adjustments are charged or credited to income for the period in which the adjustments are made and may impact actual results compared to management’s estimate above. Additionally, see “Forward-looking Information” in this Quarterly Report on Form 10-Q and “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 concerning other important factors that could impact actual results. Management believes that a projection of net income including realized investment gains and losses is not appropriate on a forward-looking basis because it is not possible to provide a valid forecast of realized investment gains and losses, which can vary substantially from one period to another and may have a significant impact on net income.
Liquidity and Financial Resources
Off-Balance Sheet Arrangements
At June 30, 2014 and 2013, the Company did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or for other contractually narrow or limited purposes. As such, the Company is not exposed to any financing, liquidity, market or credit risk that could arise if the Company had engaged in such relationships.
50 |
Investments
Information regarding the Company’s investment portfolio, which is comprised primarily of investment grade, fixed income securities, is located in “Results of Operations — Net Realized Investment Gains and Losses” and in the “Notes to Consolidated Financial Statements — Note 2 — Investments”.
Cash Flow
The short-term liquidity requirements of the Company, within a 12-month operating cycle, are for the timely payment of claims and benefits to policyholders, operating expenses, interest payments and federal income taxes. Cash flow generated from operations has been, and is expected to be, adequate to meet the Company’s operating cash needs in the next 12 months. Cash flow in excess of operational needs has been used to fund business growth, retire short-term debt, pay dividends to shareholders and repurchase shares of HMEC’s common stock. Long-term liquidity requirements, beyond one year, are principally for the payment of future insurance and annuity policy claims and benefits, as well as retirement of long-term debt.
Operating Activities
As a holding company, HMEC conducts its principal operations in the personal lines segment of the property and casualty and life insurance industries through its subsidiaries. HMEC’s insurance subsidiaries generate cash flow from premium and investment income, generally well in excess of their immediate needs for policy obligations, operating expenses and other cash requirements. Cash provided by operating activities primarily reflects net cash generated by the insurance subsidiaries. For the first six months of 2014, net cash provided by operating activities increased compared to the same period in 2013, primarily due to an increase in investment income received and growth in premiums received in the current period.
Payment of principal and interest on debt, dividends to shareholders and parent company operating expenses is largely dependent on the ability of the insurance subsidiaries to pay cash dividends or make other cash payments to HMEC, including tax payments pursuant to tax sharing agreements. Payments for share repurchase programs also have this dependency. If necessary, HMEC also has other potential sources of liquidity that could provide for additional funding to meet corporate obligations or pay shareholder dividends, which include a revolving line of credit, as well as issuances of various securities. The insurance subsidiaries are subject to various regulatory restrictions which limit the amount of annual dividends or other distributions, including loans or cash advances, available to HMEC without prior approval of the insurance regulatory authorities. The aggregate amount of dividends that may be paid in 2014 from all of HMEC’s insurance subsidiaries without prior regulatory approval is approximately $82 million, of which $24 million was paid during the six months ended June 30, 2014. Although regulatory restrictions exist, dividend availability from subsidiaries has been, and is expected to be, adequate for HMEC’s capital needs. Additional information is contained in “Notes to Consolidated Financial Statements — Note 8 — Statutory Information and Restrictions” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.
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Investing Activities
HMEC’s insurance subsidiaries maintain significant investments in fixed maturity securities to meet future contractual obligations to policyholders. In conjunction with its management of liquidity and other asset/liability management objectives, the Company, from time to time, will sell fixed maturity securities prior to maturity, as well as equity securities, and reinvest the proceeds in other investments with different interest rates, maturities or credit characteristics. Accordingly, the Company has classified the entire fixed maturity securities and equity securities portfolios as “available for sale”.
Financing Activities
Financing activities include primarily payment of dividends, the receipt and withdrawal of funds by annuity contractholders, issuances and repurchases of HMEC’s common stock, fluctuations in bank overdraft balances, and borrowings, repayments and repurchases related to its debt facilities.
The Company’s annuity business produced net positive cash flows in the first six months of 2014. For the six months ended June 30, 2014, receipts from annuity contracts increased $29.7 million, or 15.7%, compared to the same period in the prior year, as described in “Results of Operations — Insurance Premiums and Contract Charges”. In total, annuity contract benefits, withdrawals and net of transfers from variable annuity accumulated cash values increased $24.7 million, or 18.3%, compared to the prior year. One of the Company’s subsidiaries is a member of the Federal Home Loan Bank of Chicago (“FHLB”) and received $250.0 million under funding agreements in December 2013. During the six months ended June 30, 2014, there was no change in the amounts outstanding under FHLB funding agreements.
Capital Resources
The Company has determined the amount of capital which is needed to adequately fund and support business growth, primarily based on risk-based capital formulas including those developed by the National Association of Insurance Commissioners (“NAIC”). Historically, the Company’s insurance subsidiaries have generated capital in excess of such needed capital. These excess amounts have been paid to HMEC through dividends. HMEC has then utilized these dividends and its access to the capital markets to service and retire long-term debt, pay dividends to its shareholders, fund growth initiatives, repurchase shares of its common stock and for other corporate purposes. Management anticipates that the Company’s sources of capital will continue to generate sufficient capital to meet the needs for business growth, debt interest payments, shareholder dividends and its share repurchase program. Additional information is contained in “Notes to Consolidated Financial Statements — Note 8 — Statutory Information and Restrictions” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.
The total capital of the Company was $1,521.0 million at June 30, 2014, including $199.9 million of long-term debt and $38.0 million of short-term debt outstanding. Total debt represented 19.2% of total capital excluding unrealized investment gains and losses (15.6% including unrealized investment gains and losses) at June 30, 2014, which was below the Company’s long-term target of 25%.
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Shareholders’ equity was $1,283.1 million at June 30, 2014, including a net unrealized gain in the Company’s investment portfolio of $281.6 million after taxes and the related impact of deferred policy acquisition costs associated with annuity and interest-sensitive life policies. The market value of the Company’s common stock and the market value per share were $1,277.7 million and $31.27, respectively, at June 30, 2014. Book value per share was $31.40 at June 30, 2014 ($24.51 excluding investment fair value adjustments).
Additional information regarding the net unrealized gain in the Company’s investment portfolio at June 30, 2014 is included in “Results of Operations — Net Realized Investment Gains and Losses”.
Total shareholder dividends were $19.6 million for the six months ended June 30, 2014. In March and May 2014, the Board of Directors announced regular quarterly dividends of $0.23 per share.
During the first six months of 2014, the Company repurchased 136,976 shares of its common stock, or 0.3% of the outstanding shares on December 31, 2013, at an aggregate cost of $3.9 million, or an average price per share of $28.21 under its $50.0 million share repurchase program, which is further described in “Notes to Consolidated Financial Statements — Note 6 — Shareholders’ Equity and Stock Options” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. The repurchase of shares was financed through use of cash. As of June 30, 2014, $24.5 million remained authorized for future share repurchases.
As of June 30, 2014, the Company had outstanding $75.0 million aggregate principal amount of 6.05% Senior Notes (“Senior Notes due 2015”), which will mature on June 15, 2015, issued at a discount resulting in an effective yield of 6.098%. Interest on the Senior Notes due 2015 is payable semi-annually at a rate of 6.05%. Detailed information regarding the redemption terms of the Senior Notes due 2015 is contained in the “Notes to Consolidated Financial Statements — Note 5 — Debt” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. The Senior Notes due 2015 are traded in the open market (HMN 6.05).
As of June 30, 2014, the Company had outstanding $125.0 million aggregate principal amount of 6.85% Senior Notes (“Senior Notes due 2016”), which will mature on April 15, 2016, issued at a discount resulting in an effective yield of 6.893%. Interest on the Senior Notes due 2016 is payable semi-annually at a rate of 6.85%. Detailed information regarding the redemption terms of the Senior Notes due 2016 is contained in the “Notes to Consolidated Financial Statements — Note 5 — Debt” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. The Senior Notes due 2016 are traded in the open market (HMN 6.85).
As of June 30, 2014, the Company had $38.0 million outstanding under its Bank Credit Facility. The Bank Credit Facility provides for unsecured borrowings of up to $150.0 million and expires on October 6, 2015. Interest accrues at varying spreads relative to prime or Eurodollar base rates and is payable monthly or quarterly depending on the applicable base rate (Eurodollar base rate plus 1.25%, which totaled 1.40%, as of June 30, 2014). The unused portion of the Bank Credit Facility is subject to a variable commitment fee, which was 0.15% on an annual basis at June 30, 2014. During the six months ended June 30, 2014, there was no change in the amount outstanding under the Company’s Bank Credit Facility.
53 |
Effective July 30, 2014, the Bank Credit Facility agreement was amended and restated to extend the commitment termination date to July 30, 2019 from the previous termination date of October 6, 2015 and to decrease the interest rate spread relative to Eurodollar base rates. The financial covenants within the agreement were not changed. As of July 30, 2014, HMEC’s outstanding short-term debt balance remained $38.0 million; no change compared to the June 30, 2014 balance.
To provide additional capital management flexibility, the Company filed a “universal shelf” registration on Form S-3 with the SEC on January 5, 2012. The registration statement, which registers the offer and sale by the Company from time to time of up to $300 million of various securities, which may include debt securities, common stock, preferred stock, depositary shares, warrants and/or delayed delivery contracts, was declared effective on January 18, 2012. Unless fully utilized or withdrawn by the Company earlier, this registration statement will remain effective through January 18, 2015. No securities associated with the registration statement have been issued as of the date of this Quarterly Report on Form 10-Q.
Financial Ratings
HMEC’s principal insurance subsidiaries are rated by S&P, Moody’s and A.M. Best Company, Inc. (“A.M. Best”). These rating agencies have also assigned ratings to the Company’s long-term debt securities. The ratings that are assigned by these agencies, which are subject to change, can impact, among other things, the Company’s access to sources of capital, cost of capital, and competitive position.
Assigned ratings as of July 31, 2014 were unchanged from the disclosure in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. A.M. Best did revise the ratings outlook for the Company’s property and casualty insurance subsidiaries to “positive” from “stable”. Assigned ratings were as follows (unless otherwise indicated, the insurance financial strength ratings for the Company’s property and casualty insurance subsidiaries and the Company’s principal life insurance subsidiary are the same):
Insurance Financial | ||||||
Strength Ratings | Debt Ratings | |||||
(Outlook) | (Outlook) | |||||
As of July 31, 2014 | ||||||
S&P | A | (stable) | BBB | (stable) | ||
Moody’s | A3 | (stable) | Baa3 | (stable) | ||
A.M. Best | ||||||
Horace Mann Life Insurance Company | A | (stable) | N.A. | |||
HMEC’s property and casualty subsidiaries | A- | (positive) | N.A. | |||
HMEC | N.A. | bbb | (stable) |
N.A. – Not applicable.
54 |
Reinsurance Programs
Information regarding the reinsurance program for the Company’s property and casualty segment is located in “Business — Property and Casualty Segment — Property and Casualty Reinsurance” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. All components of the Company’s property and casualty reinsurance program remain consistent with the Form 10-K disclosure, with the exception of the Florida Hurricane and Catastrophe Fund (“FHCF”) coverage. Subsequent to the March 3, 2014 SEC filing of the Company’s recent Form 10-K, information received from the FHCF indicated that the Company’s maximum for the 2013-2014 contract period had been revised to $20.9 million from $20.3 million, based on the FHCF’s financial resources, with no change in the retention, for the Company’s predominant insurance subsidiary for property and casualty business written in Florida. The FHCF contract is a one-year contract. Effective June 1, 2014, the new contract with the FHCF, for the Company’s predominant insurance subsidiary for property and casualty business written in Florida, reinsures 90% of hurricane losses in Florida above an estimated retention of $5.7 million up to $21.0 million based on the FHCF’s financial resources.
Information regarding the reinsurance program for the Company’s life segment is located in “Business — Life Segment” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.
Market Value Risk
Market value risk, the Company’s primary market risk exposure, is the risk that the Company’s invested assets will decrease in value. This decrease in value may be due to (1) a change in the yields realized on the Company’s assets and prevailing market yields for similar assets, (2) an unfavorable change in the liquidity of the investment, (3) an unfavorable change in the financial prospects of the issuer of the investment, or (4) a downgrade in the credit rating of the issuer of the investment. See also “Results of Operations — Net Realized Investment Gains and Losses”.
Significant changes in interest rates expose the Company to the risk of experiencing losses or earning a reduced level of income based on the difference between the interest rates earned on the Company’s investments and the credited interest rates on the Company’s insurance liabilities. See also “Results of Operations — Interest Credited to Policyholders”.
The Company seeks to manage its market value risk by coordinating the projected cash inflows of assets with the projected cash outflows of liabilities. For all its assets and liabilities, the Company seeks to maintain reasonable durations, consistent with the maximization of income without sacrificing investment quality, while providing for liquidity and diversification. The investment risk associated with variable annuity deposits and the underlying mutual funds is assumed by those contractholders, and not by the Company. Certain fees that the Company earns from variable annuity deposits are based on the market value of the funds deposited.
More detailed descriptions of the Company’s exposure to market value risks and the management of those risks is presented in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Market Value Risk” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.
55 |
Recent Accounting Changes
Revenue Recognition
In May 2014, the Financial Accounting Standards Board (“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, insurance contracts are specifically excluded. The guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within those years. Early application is not permitted. Management believes the adoption of this accounting guidance will not have a material effect on the results of operations or financial position of the Company.
Repurchase Agreements
In June 2014, the FASB issued accounting and reporting guidance for repurchase agreements and similar transactions that distinguishes between transactions that settle at the same time as the maturity of the transferred financial asset and those that settle any time before maturity. The guidance requires repurchase-to-maturity transactions to be accounted for as secured borrowings rather than as sales with forward repurchase agreements. The guidance is effective for annual reporting periods beginning after December 15, 2014, including interim periods within those years. Early application is not permitted. Management believes the adoption of this accounting guidance will not have a material effect on the results of operations or financial position of the Company.
Equity Compensation
In June 2014, the FASB issued guidance to address diversity in accounting treatment of share-based payment awards that require a specific performance target to be achieved for employees to become eligible to vest in the awards and the terms of an award provide that the performance target could be achieved after an employee completes the requisite service period. The guidance is effective for annual reporting periods beginning after December 15, 2015, including interim periods within those years. Early application is permitted. Management believes the adoption of this accounting guidance will not have a material effect on the results of operations or financial position of the Company.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
The information required by Item 305 of Regulation S-K is contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Market Value Risk” contained in this Quarterly Report on Form 10-Q.
56 |
Item 4: Controls and Procedures
Management’s Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, the Company conducted an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as such term is defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 as amended (the “Exchange Act”), as of June 30, 2014 pursuant to Rule 13a-15(b) of the Exchange Act. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) that is required to be included in the Company’s periodic Securities and Exchange Commission filings. No material weaknesses in the Company’s disclosure controls and procedures were identified in the evaluation and therefore, no corrective actions were taken. There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
At the time of this Quarterly Report on Form 10-Q, management believes there are no material changes from the risk factors as previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
As previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, on December 7, 2011 the Company’s Board of Directors authorized a share repurchase program allowing repurchases of up to $50.0 million of Horace Mann Educators Corporation’s Common Stock, par value $0.001. The share repurchase program authorizes the opportunistic repurchase of common shares in open market or privately negotiated transactions, from time to time, depending on market conditions. The share repurchase program does not have an expiration date and may be limited or terminated at any time without notice. During the three months ended June 30, 2014, the Company did not repurchase shares of HMEC common stock. As of June 30, 2014, $24.5 million remained authorized for future share repurchases.
The Company is not
aware of any information required to be disclosed in a report on Form 8-K during the three months ended June 30, 2014 which has
not been filed with the SEC.
57 |
The following items are filed as Exhibits. Management contracts and compensatory plans are indicated by an asterisk (*).
58 |
59 |
Exhibit | |||
No. | Description | ||
10.6(d)* | Specimen Employee Restricted Stock Unit Agreement under the 2002 Incentive Compensation Plan, incorporated by reference to Exhibit 10.6(d) to HMEC’s Annual Report on Form 10-K for the year ended December 31, 2005, filed with the SEC on March 16, 2006. | ||
10.6(e)* | Revised Specimen Employee Restricted Stock Unit Agreement under the 2002 Incentive Compensation Plan, incorporated by reference to Exhibit 10.6(f) to HMEC’s Annual Report on Form 10-K for the year ended December 31, 2008, filed with the SEC on March 2, 2009. | ||
10.6(f)* | Specimen Non-employee Director Restricted Stock Unit Agreement under the 2002 Incentive Compensation Plan, incorporated by reference to Exhibit 10.6(e) to HMEC’s Annual Report on Form 10-K for the year ended December 31, 2005, filed with the SEC on March 16, 2006. | ||
10.6(g)* | Revised Specimen Non-employee Director Restricted Stock Unit Agreement under the 2002 Incentive Compensation Plan, incorporated by reference to Exhibit 10.6(h) to HMEC’s Annual Report on Form 10-K for the year ended December 31, 2008, filed with the SEC on March 2, 2009. | ||
10.7* | HMEC 2010 Comprehensive Executive Compensation Plan, incorporated by reference to Exhibit 1 (beginning on page E-1) to HMEC’s Proxy Statement, filed with the SEC on April 9, 2010. | ||
10.7(a)* | Amendment No. 1 to the HMEC 2010 Comprehensive Executive Compensation Plan, incorporated by reference to Exhibit 1 (beginning on page E-1) to HMEC’s Proxy Statement, filed with the SEC on April 9, 2012. | ||
10.7(b)* | Specimen Incentive Stock Option Agreement for Section 16 Officers under the HMEC 2010 Comprehensive Executive Compensation Plan, incorporated by reference to Exhibit 10.7(a) to HMEC's Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, filed with the SEC on August 9, 2011. | ||
10.7(c)* | Specimen Incentive Stock Option Agreement for Non-Section 16 Officers under the HMEC 2010 Comprehensive Executive Compensation Plan, incorporated by reference to Exhibit 10.7(b) to HMEC's Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, filed with the SEC on August 9, 2011. | ||
10.7(d)* | Specimen Employee Service-Vested Restricted Stock Units Agreement under the HMEC 2010 Comprehensive Executive Compensation Plan, incorporated by reference to Exhibit 10.7(c) to HMEC's Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, filed with the SEC on August 9, 2011. |
60 |
Exhibit | |||
No. | Description | ||
10.7(e)* | Specimen Employee Performance-Based Restricted Stock Units Agreement under the HMEC 2010 Comprehensive Executive Compensation Plan, incorporated by reference to Exhibit 10.7(d) to HMEC's Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, filed with the SEC on August 9, 2011. | ||
10.7(f)* | Specimen Non-Employee Director Restricted Stock Unit Agreement under the HMEC 2010 Comprehensive Executive Compensation Plan, incorporated by reference to Exhibit 10.17(a) to HMEC’s Current Report on Form 8-K dated May 27, 2010, filed with the SEC on June 2, 2010. | ||
10.8* | Horace Mann Supplemental Employee Retirement Plan, 2002 Restatement, incorporated by reference to Exhibit 10.1 to HMEC's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002, filed with the SEC on May 15, 2002. | ||
10.9* | Horace Mann Executive Supplemental Employee Retirement Plan, 2002 Restatement, incorporated by reference to Exhibit 10.2 to HMEC's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002, filed with the SEC on May 15, 2002. | ||
10.10* | Amended and Restated Horace Mann Nonqualified Supplemental Money Purchase Pension Plan, incorporated by reference to Exhibit 10.9 to HMEC’s Annual Report on Form 10-K for the year ended December 31, 2008, filed with the SEC on March 2, 2009. | ||
10.11* | Summary of HMEC Non-Employee Director Compensation. | ||
10.12* | Summary of HMEC Named Executive Officer Annualized Salaries, incorporated by reference to Exhibit 10.12 to HMEC's Quarterly Report on Form 10-Q for the quarter ended March 31, 2014, filed with the SEC on May 9, 2014. | ||
10.13* | Form of Severance Agreement between HMEC, Horace Mann Service Corporation (“HMSC”) and certain officers of HMEC and/or HMSC, incorporated by reference to Exhibit 10.13 to HMEC’s Annual Report on Form 10-K for the year ended December 31, 2012, filed with the SEC on February 28, 2013. | ||
10.13(a)* | Revised Schedule to Severance Agreements between HMEC, HMSC and certain officers of HMEC and/or HMSC. |
61 |
62 |
63 |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
HORACE MANN EDUCATORS CORPORATION | |||
(Registrant) | |||
Date | August 8, 2014 | /s/ Marita Zuraitis | |
Marita Zuraitis | |||
President and Chief Executive Officer | |||
Date | August 8, 2014 | /s/ Dwayne D. Hallman | |
Dwayne D. Hallman | |||
Executive Vice President | |||
and Chief Financial Officer | |||
Date | August 8, 2014 | /s/ Bret A. Conklin | |
Bret A. Conklin | |||
Senior Vice President | |||
and Controller |
64 |
HORACE MANN EDUCATORS CORPORATION
EXHIBITS
To
FORM 10-Q
For the Quarter Ended June 30, 2014
VOLUME 1 OF 1
The following items are filed as Exhibits to Horace Mann Educators Corporation’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2014. Management contracts and compensatory plans are indicated by an asterisk (*).
EXHIBIT INDEX
- 1 - |
- 2 - |
Exhibit | |||
No. | Description | ||
10.6(d)* | Specimen Employee Restricted Stock Unit Agreement under the 2002 Incentive Compensation Plan, incorporated by reference to Exhibit 10.6(d) to HMEC’s Annual Report on Form 10-K for the year ended December 31, 2005, filed with the SEC on March 16, 2006. | ||
10.6(e)* | Revised Specimen Employee Restricted Stock Unit Agreement under the 2002 Incentive Compensation Plan, incorporated by reference to Exhibit 10.6(f) to HMEC’s Annual Report on Form 10-K for the year ended December 31, 2008, filed with the SEC on March 2, 2009. | ||
10.6(f)* | Specimen Non-employee Director Restricted Stock Unit Agreement under the 2002 Incentive Compensation Plan, incorporated by reference to Exhibit 10.6(e) to HMEC’s Annual Report on Form 10-K for the year ended December 31, 2005, filed with the SEC on March 16, 2006. | ||
10.6(g)* | Revised Specimen Non-employee Director Restricted Stock Unit Agreement under the 2002 Incentive Compensation Plan, incorporated by reference to Exhibit 10.6(h) to HMEC’s Annual Report on Form 10-K for the year ended December 31, 2008, filed with the SEC on March 2, 2009. | ||
10.7* | HMEC 2010 Comprehensive Executive Compensation Plan, incorporated by reference to Exhibit 1 (beginning on page E-1) to HMEC’s Proxy Statement, filed with the SEC on April 9, 2010. | ||
10.7(a)* | Amendment No. 1 to the HMEC 2010 Comprehensive Executive Compensation Plan, incorporated by reference to Exhibit 1 (beginning on page E-1) to HMEC’s Proxy Statement, filed with the SEC on April 9, 2012. | ||
10.7(b)* | Specimen Incentive Stock Option Agreement for Section 16 Officers under the HMEC 2010 Comprehensive Executive Compensation Plan, incorporated by reference to Exhibit 10.7(a) to HMEC's Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, filed with the SEC on August 9, 2011. | ||
10.7(c)* | Specimen Incentive Stock Option Agreement for Non-Section 16 Officers under the HMEC 2010 Comprehensive Executive Compensation Plan, incorporated by reference to Exhibit 10.7(b) to HMEC's Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, filed with the SEC on August 9, 2011. | ||
10.7(d)* | Specimen Employee Service-Vested Restricted Stock Units Agreement under the HMEC 2010 Comprehensive Executive Compensation Plan, incorporated by reference to Exhibit 10.7(c) to HMEC's Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, filed with the SEC on August 9, 2011. |
- 3 - |
Exhibit | |||
No. | Description | ||
10.7(e)* | Specimen Employee Performance-Based Restricted Stock Units Agreement under the HMEC 2010 Comprehensive Executive Compensation Plan, incorporated by reference to Exhibit 10.7(d) to HMEC's Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, filed with the SEC on August 9, 2011. | ||
10.7(f)* | Specimen Non-Employee Director Restricted Stock Unit Agreement under the HMEC 2010 Comprehensive Executive Compensation Plan, incorporated by reference to Exhibit 10.17(a) to HMEC’s Current Report on Form 8-K dated May 27, 2010, filed with the SEC on June 2, 2010. | ||
10.8* | Horace Mann Supplemental Employee Retirement Plan, 2002 Restatement, incorporated by reference to Exhibit 10.1 to HMEC's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002, filed with the SEC on May 15, 2002. | ||
10.9* | Horace Mann Executive Supplemental Employee Retirement Plan, 2002 Restatement, incorporated by reference to Exhibit 10.2 to HMEC's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002, filed with the SEC on May 15, 2002. | ||
10.10* | Amended and Restated Horace Mann Nonqualified Supplemental Money Purchase Pension Plan, incorporated by reference to Exhibit 10.9 to HMEC’s Annual Report on Form 10-K for the year ended December 31, 2008, filed with the SEC on March 2, 2009. | ||
10.11* | Summary of HMEC Non-Employee Director Compensation. | ||
10.12* | Summary of HMEC Named Executive Officer Annualized Salaries, incorporated by reference to Exhibit 10.12 to HMEC's Quarterly Report on Form 10-Q for the quarter ended March 31, 2014, filed with the SEC on May 9, 2014. | ||
10.13* | Form of Severance Agreement between HMEC, Horace Mann Service Corporation (“HMSC”) and certain officers of HMEC and/or HMSC, incorporated by reference to Exhibit 10.13 to HMEC’s Annual Report on Form 10-K for the year ended December 31, 2012, filed with the SEC on February 28, 2013. | ||
10.13(a)* | Revised Schedule to Severance Agreements between HMEC, HMSC and certain officers of HMEC and/or HMSC. |
- 4 - |
- 5 - |
- 6 - |
Exhibit 10.1
EXECUTION VERSION
[ J.P.Morgan logo]
AMENDED AND RESTATED CREDIT AGREEMENT
dated as of
July 30, 2014
among
HORACE MANN EDUCATORS CORPORATION
The Lenders Party Hereto
and
JPMORGAN CHASE BANK, N.A.,
as Administrative Agent
J.P. MORGAN SECURITIES LLC,
as Sole Bookrunner and Joint Lead Arranger
PNC CAPITAL MARKETS LLC,
as Joint Lead Arranger
PNC BANK, NATIONAL ASSOCIATION,
as Syndication Agent
NORTHERN TRUST COMPANY
and
STATE STREET BANK AND TRUST COMPANY,
as Co-Documentation Agents
Table of Contents
Page | ||
ARTICLE I | Definitions | 1 |
SECTION 1.01. | Defined Terms | 1 |
SECTION 1.02. | Classification of Loans and Borrowings | 17 |
SECTION 1.03. | Terms Generally | 17 |
SECTION 1.04. | Accounting Terms; GAAP | 18 |
SECTION 1.05. | Allocation of Loans and Percentages as of the Effective Date | 18 |
ARTICLE II | The Credits | 19 |
SECTION 2.01. | Commitments | 19 |
SECTION 2.02. | Loans and Borrowings | 19 |
SECTION 2.03. | Requests for Borrowings | 20 |
SECTION 2.04. | Funding of Borrowings | 20 |
SECTION 2.05. | Interest Elections | 21 |
SECTION 2.06. | Termination and Reduction of Commitments | 22 |
SECTION 2.07. | Repayment of Loans; Evidence of Debt | 23 |
SECTION 2.08. | Prepayment of Loans | 23 |
SECTION 2.09. | Fees | 24 |
SECTION 2.10. | Interest | 24 |
SECTION 2.11. | Alternate Rate of Interest | 25 |
SECTION 2.12. | Increased Costs | 25 |
SECTION 2.13. | Break Funding Payments | 26 |
SECTION 2.14. | Taxes | 27 |
SECTION 2.15. | Payments Generally; Pro Rata Treatment; Sharing of Set-offs | 31 |
SECTION 2.16. | Mitigation Obligations; Replacement of Lenders | 32 |
SECTION 2.17. | Defaulting Lenders | 33 |
SECTION 2.18. | Increase of Commitments | 33 |
ARTICLE III | Representations and Warranties | 34 |
SECTION 3.01. | Due Organization, Authorization, Etc | 34 |
SECTION 3.02. | Statutory Financial Statements | 35 |
SECTION 3.03. | GAAP Financial Statements | 36 |
SECTION 3.04. | Litigation and Contingent Liabilities | 36 |
SECTION 3.05. | Investment Company Act | 37 |
SECTION 3.06. | Regulations T, U and X | 37 |
SECTION 3.07. | Proceeds | 37 |
SECTION 3.08. | Insurance | 37 |
SECTION 3.09. | Accuracy of Information | 37 |
SECTION 3.10. | Subsidiaries | 37 |
SECTION 3.11. | Insurance Licenses | 38 |
SECTION 3.12. | Taxes | 38 |
SECTION 3.13. | Compliance with Laws | 38 |
i |
Table of Contents
(continued)
Page | ||
SECTION 3.14. | No Default | 38 |
SECTION 3.15. | Ownership of Property; Liens | 38 |
SECTION 3.16. | Anti-Corruption Laws and Sanctions | 38 |
ARTICLE IV | Conditions | 39 |
SECTION 4.01. | Effective Date | 39 |
SECTION 4.02. | Each Credit Event | 40 |
ARTICLE V | Affirmative Covenants | 40 |
SECTION 5.01. | Reports, Certificates and Other Information | 40 |
SECTION 5.02. | Corporate Existence; Foreign Qualification | 44 |
SECTION 5.03. | Books, Records and Inspections | 44 |
SECTION 5.04. | Insurance | 44 |
SECTION 5.05. | Taxes and Liabilities | 44 |
SECTION 5.06. | Compliance with Laws | 44 |
SECTION 5.07. | Conduct of Business | 44 |
SECTION 5.08. | Maintenance of Properties | 44 |
SECTION 5.09. | Use of Proceeds | 45 |
SECTION 5.10. | Accuracy Of Information | 45 |
SECTION 5.11. | Anti-Corruption Laws and Sanctions | 45 |
ARTICLE VI | Negative Covenants | 45 |
SECTION 6.01. | Consolidated Debt to Total Capitalization | 45 |
SECTION 6.02. | Net Worth | 45 |
SECTION 6.03. | Minimum Risk Based Capital | 45 |
SECTION 6.04. | Mergers, Consolidations and Sales | 46 |
SECTION 6.05. | Regulations T, U and X | 46 |
SECTION 6.06. | Restrictive Agreements | 46 |
SECTION 6.07. | Transactions with Affiliates | 46 |
SECTION 6.08. | Liens | 46 |
SECTION 6.09. | Subsidiary Debt | 47 |
SECTION 6.10. | Securities Lending | 47 |
ARTICLE VII | Events of Default | 47 |
ARTICLE VIII | The Administrative Agent | 50 |
ARTICLE IX | Miscellaneous | 52 |
SECTION 9.01. | Notices | 52 |
SECTION 9.02. | Waivers; Amendments | 53 |
SECTION 9.03. | Expenses; Indemnity; Damage Waiver | 54 |
SECTION 9.04. | Successors and Assigns | 55 |
SECTION 9.05. | Survival | 58 |
SECTION 9.06. | Counterparts; Integration; Effectiveness | 59 |
SECTION 9.07. | Severability | 59 |
ii |
Table of Contents
(continued)
Page | ||
SECTION 9.08. | Right of Setoff | 59 |
SECTION 9.09. | Governing Law; Jurisdiction; Consent to Service of Process | 59 |
SECTION 9.10. | WAIVER OF JURY TRIAL | 60 |
SECTION 9.11. | Headings | 60 |
SECTION 9.12. | Confidentiality | 60 |
SECTION 9.13. | Interest Rate Limitation | 61 |
SECTION 9.14. | USA PATRIOT Act | 62 |
SECTION 9.15. | No Advisory or Fiduciary Responsibility | 62 |
iii |
SCHEDULES:
Schedule 2.01 | Commitments |
Schedule 3.01 | Jurisdictions |
Schedule 3.02(a) | SAP Exceptions |
Schedule 3.04 | Litigation |
Schedule 3.10 | Subsidiaries |
Schedule 3.11 | Insurance Licenses |
Schedule 6.06 | Restrictive Agreements |
EXHIBITS:
Exhibit A | Form of Assignment and Assumption |
Exhibit B | Compliance Certificate |
Exhibit C-1 | U.S. Tax Certificate (For Non-U.S. Lenders that are not Partnerships for U.S. Federal Income Tax Purposes) |
Exhibit C-2 | U.S. Tax Certificate (For Non-U.S. Lenders that are Partnerships for U.S. Federal Income Tax Purposes) |
Exhibit C-3 | U.S. Tax Certificate (For Non-U.S. Participants that are not Partnerships for U.S. Federal Income Tax Purposes) |
Exhibit C-4 | U.S. Tax Certificate (For Non-U.S. Participants that are Partnerships for U.S. Federal Income Tax Purposes) |
AMENDED AND RESTATED CREDIT AGREEMENT
CREDIT AGREEMENT, dated as of July 30, 2014, among HORACE MANN EDUCATORS CORPORATION, a Delaware corporation (the “ Borrower ”), the LENDERS party hereto, and JPMORGAN CHASE BANK, N.A., as Administrative Agent (the “ Administrative Agent ”).
WHEREAS, the Borrower, various lenders and the Administrative Agent are parties to a Credit Agreement, dated as of October 7, 2011, (the “ Existing Credit Agreement ”);
WHEREAS, the parties have agreed to amend and restate the Existing Credit Agreement pursuant to this Agreement; and
WHEREAS, the parties intend that this Agreement and the documents executed in connection herewith not effect a novation of the obligations of the Borrower under the Existing Credit Agreement, but merely a restatement of and, where applicable, an amendment to the terms governing such obligations;
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE I
Definitions
SECTION 1.01. Defined Terms . As used in this Agreement, the following terms have the meanings specified below:
“ ABR ”, when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans comprising such Borrowing, are bearing interest at a rate determined by reference to the Alternate Base Rate.
“ Adjusted LIBO Rate ” means, with respect to any Eurodollar Borrowing for any Interest Period, an interest rate per annum equal to (a) the LIBO Rate for such Interest Period multiplied by (b) the Statutory Reserve Rate.
“ Administrative Agent ” has the meaning assigned to such term in the Preamble.
“ Administrative Questionnaire ” means an Administrative Questionnaire in a form supplied by the Administrative Agent.
“ Affiliate ” means, with respect to a specified Person, another Person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the Person specified.
“ Agreement ” means this Credit Agreement as from time to time amended, modified, supplemented, restated, refunded or renewed and in effect.
“ Alternate Base Rate ” means, for any day, a rate per annum equal to the greatest of (a) the Prime Rate in effect on such day, (b) the Federal Funds Effective Rate in effect on such day plus ½ of 1%, and (c) the Adjusted LIBO Rate for a one-month Interest Period on such day (or if such day is not a Business Day, the immediately preceding Business Day) plus 1%, provided that, for the avoidance of doubt, the Adjusted LIBO Rate for any day shall be based on the rate appearing on the Reuters Screen LIBOR01 Page (or on any successor or substitute page) at approximately 11:00 a.m. London time on such day. Any change in the Alternate Base Rate due to a change in the Prime Rate, the Federal Funds Effective Rate or the Adjusted LIBO Rate shall be effective from and including the effective date of such change in the Prime Rate, the Federal Funds Effective Rate or the Adjusted LIBO Rate, respectively.
“ Annual Statement ” means the annual statutory financial statement of any Insurance Subsidiary required to be filed with the insurance commissioner (or similar authority) of its jurisdiction of incorporation, which statement shall be in the form required by such Insurance Subsidiary’s jurisdiction of incorporation or, if no specific form is so required, in the form of financial statements permitted by such insurance commissioner (or such similar authority) to be used for filing annual statutory financial statements and shall contain the type of information permitted by such insurance commissioner (or such similar authority) to be disclosed therein, together with all exhibits or schedules filed therewith.
“ Anti-Corruption Laws ” means all laws, rules, and regulations of any jurisdiction applicable to the Borrower or its Subsidiaries from time to time concerning or relating to bribery or corruption.
“ Applicable Percentage ” means, with respect to any Lender, the percentage of the total Commitments represented by such Lender’s Commitment. If the Commitments have terminated or expired, the Applicable Percentages shall be determined based upon the Commitments most recently in effect, giving effect to any assignments.
“ Applicable Rate ” means, for any day, with respect to any ABR Loan or Eurodollar Loan, or with respect to the commitment fees payable hereunder, as the case may be, the applicable rate per annum set forth below under the caption “ABR Spread”, “Eurodollar Spread” or “Commitment Fee Rate”, as the case may be, based upon the ratings by S&P and Moody’s, respectively, applicable on such date to the Index Debt:
Index Debt Ratings
(S&P/Moody’s): |
ABR
Spread: |
Eurodollar
Spread: |
Commitment Fee
Rate: |
|||||||||
Category 1
A-/A3 or better |
0 | % | 0.875 | % | 0.10 | % | ||||||
Category 2
BBB+/Baa1 |
0.125 | % | 1.000 | % | 0.125 | % | ||||||
Category 3
BBB/Baa2 |
0.250 | % | 1.150 | % | 0.15 | % |
2 |
Category 4
BBB-/Baa3 |
0.375 | % | 1.250 | % | 0.175 | % | ||||||
Category 5
less than BBB-/Baa3 |
0.50 | % | 1.375 | % | 0.25 | % |
For purposes of the foregoing, (i) if either Moody’s or S&P shall not have in effect a rating for the Index Debt (other than by reason of the circumstances referred to in the last sentence of this definition), then such rating agency shall be deemed to have established a rating in Category 5; (ii) if the ratings established or deemed to have been established by Moody’s and S&P for the Index Debt shall differ by one rating, the Applicable Rate shall be based on the higher of the two credit ratings; (iii) if the ratings established or deemed to have been established by Moody’s and S&P for the Index Debt shall differ by two or more ratings, the Applicable Rate shall be one rating level below the higher of such credit ratings; and (iv) if the ratings established or deemed to have been established by Moody’s and S&P for the Index Debt shall be changed (other than as a result of a change in the rating system of Moody’s or S&P), such change shall be effective as of the date on which it is first announced by the applicable rating agency, irrespective of when notice of such change shall have been furnished by the Borrower to the Agent and the Lenders pursuant to Section 5.01 or otherwise. Each change in the Applicable Rate shall apply during the period commencing on the effective date of such change and ending on the date immediately preceding the effective date of the next such change. If the rating system of Moody’s or S&P shall change, or if either such rating agency shall cease to be in the business of rating corporate debt obligations, the Borrower and the Lenders shall negotiate in good faith to amend this definition to reflect such changed rating system or the unavailability of ratings from such rating agency and, pending the effectiveness of any such amendment, the Applicable Rate shall be determined by reference to the rating most recently in effect from such rating agency prior to such change or cessation.
“ Approved Fund ” means any Person (other than a natural person) that is engaged in making, purchasing, holding or investing in bank loans and similar extensions of credit in the ordinary course of its business and that is administered or managed by (a) a Lender, (b) an Affiliate of a Lender or (c) an entity or an Affiliate of an entity that administers or manages a Lender.
“ Arrangers ” means J.P. Morgan Securities, LLC and PNC Capital Markets LLC in their capacities as joint lead arrangers.
“ Assignment and Assumption ” means an assignment and assumption entered into by a Lender and an assignee (with the consent of any party whose consent is required by Section 9.04), and accepted by the Administrative Agent, in the form of Exhibit A or any other form approved by the Administrative Agent.
“ Attributable Debt ” means, on any date, (a) in respect of any capital lease of any Person, the capitalized amount thereof that would appear on a balance sheet of such Person prepared as of such date in accordance with GAAP, and (b) in respect of any Synthetic Lease Obligation, the capitalized amount of the remaining lease payments under the relevant lease that
3 |
would appear on a balance sheet of such Person prepared as of such date in accordance with GAAP if such lease were accounted for as a capital lease.
“ Augmenting Lender ” has the meaning assigned to such term in Section 2.18.
“ Availability Period ” means the period from and including the Effective Date to but excluding the earlier of the Maturity Date and the date of termination of the Commitments.
“ Bankruptcy Event ” means, with respect to any Person, such Person becomes the subject of a bankruptcy or insolvency proceeding, or has had a receiver, conservator, trustee, administrator, custodian, assignee for the benefit of creditors or similar Person charged with the reorganization or liquidation of its business appointed for it, or, in the good faith determination of the Administrative Agent, has taken any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any such proceeding or appointment, provided that a Bankruptcy Event shall not result solely by virtue of any ownership interest, or the acquisition of any ownership interest, in such Person by a Governmental Authority or instrumentality thereof, provided , further , that such ownership interest does not result in or provide such Person with immunity from the jurisdiction of courts within the United States or from the enforcement of judgments or writs of attachment on its assets or permit such Person (or such Governmental Authority or instrumentality) to reject, repudiate, disavow or disaffirm any contracts or agreements made by such Person.
“ Beneficial Owner ” means, with respect to any U.S. federal withholding Tax, the beneficial owner, for U.S. federal income tax purposes, to whom such Tax relates.
“ Board ” means the Board of Governors of the Federal Reserve System of the United States of America.
“ Borrower ” has the meaning assigned to such term in the Preamble.
“ Borrowing ” means Loans of the same Type, made, converted or continued on the same date and, in the case of Eurodollar Loans, as to which a single Interest Period is in effect.
“ Borrowing Request ” means a request by the Borrower for a Borrowing in accordance with Section 2.03.
“ Business Day ” means any day that is not a Saturday, Sunday or other day on which commercial banks in Chicago, Illinois or New York, New York are authorized or required by law to remain closed; provided that, when used in connection with a Eurodollar Loan, the term “Business Day” shall also exclude any day on which banks are not open for dealings in dollar deposits in the London interbank market.
“ Capitalized Lease ” shall mean, as to any Person, any lease which is or should be capitalized on the balance sheet in accordance with GAAP, together with any other lease which is in substance a financing lease, including, without limitation, any lease under which (a) such Person has or will have an option to purchase the property subject thereto at a nominal amount or an amount less than a reasonable estimate of the fair market value of such property as of the date
4 |
the lease is entered into or (b) the term of the lease approximates or exceeds the expected useful life of the property leased thereunder.
“ Change in Control ” shall be deemed to have occurred if (a) there shall be consummated (i) any consolidation or merger of the Borrower in which the Borrower is not the continuing or surviving corporation, or pursuant to which shares of the Borrower’s common stock would be converted into cash, securities or other property, other than a merger of the Borrower in which no Borrower shareholder’s ownership percentage in the surviving corporation immediately after the merger is less than such shareholder’s ownership percentage in the Borrower immediately prior to such merger by ten percent (10%) or more, or (ii) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Borrower; (b) the shareholders of the Borrower approve any plan or proposal for the liquidation or dissolution of the Borrower; (c) any “person” or “group” as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the “Exchange Act”), is or becomes, directly or indirectly, the “beneficial owner,” as defined in Rule 13d-3 under the Exchange Act, of securities of the Borrower that represent 51% or more of the combined voting power of the Borrower’s then outstanding securities; or (d) a majority of the members of the Borrower’s Board of Directors are persons who are then serving on the Board of Directors without having been elected by the Board of Directors or having been nominated by the Borrower for election by its shareholders.
“ Change in Law ” means the occurrence after the date of this Agreement (or, with respect to any Lender, such later date on which such Lender becomes a party to this Agreement) of any of the following: (a) the adoption or taking effect of any law, rule, regulation or treaty (including any rules or regulations issued under or implementing any existing law), (b) any change in any law, rule, regulation or treaty or in the administration, interpretation or application thereof by any Governmental Authority or (c) compliance by any Lender (or, for purposes of Section 2.15(b), by any lending office of such Lender or by such Lender’s holding company, if any) with any request, guideline, requirement or directive (whether or not having the force of law) of any Governmental Authority made or issued after the date of this Agreement; provided that, notwithstanding anything herein to the contrary, (x) the Dodd-Frank Wall Street Reform and Consumer Protection Act and all requests, rules, guidelines, requirements or directives thereunder or issued in connection therewith or in the implementation thereof, and (y) all requests, rules, guidelines, requirements or directives promulgated by the Bank for International Settlements, the Basel Committee on Banking Supervision (or any successor or similar authority) or the U.S. or foreign regulatory authorities, in each case pursuant to Basel III, shall in each case be deemed to be a “Change in Law”, regardless of the date enacted, adopted, issued or implemented.
“ Code ” means the Internal Revenue Code of 1986, as amended.
“ Commitment ” means, with respect to each Lender, the commitment of such Lender to make Loans, expressed as an amount representing the maximum aggregate amount of such Lender’s Revolving Credit Exposure hereunder, as such commitment may be (a) reduced from time to time pursuant to Section 2.06, (b) increased from time to time pursuant to Section 2.18 and (c) reduced or increased from time to time pursuant to assignments by or to such Lender pursuant to Section 9.04. The initial amount of each Lender’s Commitment is set forth on
5 |
Schedule 2.01, or in the Assignment and Assumption pursuant to which such Lender shall have assumed its Commitment, as applicable. The initial aggregate amount of the Lenders’ Commitments is $150,000,000.
“ Compliance Certificate ” means a certificate substantially in the form of Exhibit B, but with such changes as the Administrative Agent may from time to time request for purposes of monitoring the Borrower’s compliance herewith.
“ Consolidated Debt ” means the consolidated Debt of the Borrower and its consolidated Subsidiaries, including without limitation the principal amount of the Loans, but excluding FHLB Operating Debt in an aggregate amount at any time outstanding up to the Threshold Amount less the aggregate market value of securities subject to Securities Lending at such time; provided that any amount of FHLB Operating Debt at any time outstanding in excess of the Threshold Amount shall not be excluded from Consolidated Debt.
“ Contingent Liability ” means any agreement, undertaking or arrangement by which any Person (outside the ordinary course of business) guarantees, endorses, acts as surety for or otherwise becomes or is contingently liable for (by direct or indirect agreement, contingent or otherwise, to provide funds for payment by, to supply funds to, or otherwise to invest in, a debtor, or otherwise to assure a creditor against loss) the debt, obligation or other liability of any other Person (other than by endorsements of instruments in the course of collection), or for the payment of dividends or other distributions upon the shares of any other Person or undertakes or agrees (contingently or otherwise) to purchase, repurchase, or otherwise acquire or become responsible for any Debt, obligation or liability or any security therefor, or to provide funds for the payment or discharge thereof (whether in the form of loans, advances, stock purchases, capital contributions or otherwise), or to maintain solvency, assets, level of income, or other financial condition of any other Person, or to make payment or transfer property to any other Person other than for fair value received; provided , however , that obligations of each of the Insurance Subsidiaries under insurance policies, annuities, or surety contracts issued by it or to which it is a party, reinsurance treaties, certificates or other agreements of each of the Insurance Subsidiaries which are entered into in the ordinary course of business (including security posted by each of the Insurance Subsidiaries in the ordinary course of its business to secure obligations thereunder) shall not be deemed to be Contingent Liabilities of such Insurance Subsidiary or the Borrower for the purposes of this Agreement. The amount of any Person’s obligation under any Contingent Liability shall (subject to any limitation set forth therein) be deemed to be the outstanding principal amount (or maximum permitted principal amount, if larger) of the debt, obligation or other liability guaranteed or supported thereby.
“ Contractual Obligation ” means, relative to any Person, any obligation, commitment or undertaking under any agreement or other instrument to which such Person is a party or by which it or any of its property is bound or subject.
“ Control ” means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ability to exercise voting power, by contract or otherwise. “Controlling” and “Controlled” have meanings correlative thereto.
6 |
“ Controlled Group ” means the Borrower and any corporation, trade or business that is, along with the Borrower, a member of a controlled group of corporations or a controlled group of trades or businesses as described in sections 414(b) and 414(c), respectively, of the Code or in section 4001 of ERISA.
“ Debt ” means, with respect to any Person, at any date, without duplication, (a) all obligations of such Person for borrowed money or in respect of loans or advances; (b) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments; (c) all obligations in respect of letters of credit which have been drawn but not reimbursed by the Person for whose account such letter of credit was issued, and bankers’ acceptances issued for the account of such Person; (d) all obligations in respect of Capitalized Leases and Synthetic Lease Obligations of such Person; (e) all Hedging Obligations of such Person; (f) whether or not so included as liabilities in accordance with GAAP, all obligations of such Person to pay the deferred purchase price of property or services; (g) Debt of such Person secured by a Lien on property owned or being purchased by such Person (including Debt arising under conditional sales or other title retention agreements) whether or not such Debt is limited in recourse; (h) any Debt of another Person secured by a Lien on any assets of such first Person, whether or not such Debt is assumed by such first Person; (i) any Debt of a partnership in which such Person is a general partner; and (j) all Contingent Liabilities of such Person whether or not in connection with the foregoing. The amount of any net obligation under any Hedging Obligation on any date shall be deemed to be the Swap Termination Value thereof as of such date. The amount of any capital lease or Synthetic Lease Obligation as of any date shall be deemed to be the amount of Attributable Debt in respect thereof as of such date. Notwithstanding anything to the contrary, Debt shall not include any Securities Lending.
“ Default ” means any event or condition which constitutes an Event of Default or which upon notice, lapse of time or both would, unless cured or waived, become an Event of Default.
“ Defaulting Lender ” means any Lender that (a) has failed, within two Business Days of the date required to be funded or paid, to (i) fund any portion of its Loans or (ii) pay over to the Administrative Agent or any Lender any other amount required to be paid by it hereunder, unless, in the case of clause (i) above, such Lender notifies the Administrative Agent in writing that such failure is the result of such Lender’s good faith determination that a condition precedent to funding (specifically identified and including the particular default, if any) has not been satisfied, (b) has notified the Borrower, the Administrative Agent or any Lender in writing, or has made a public statement to the effect, that it does not intend or expect to comply with any of its funding obligations under this Agreement (unless such writing or public statement indicates that such position is based on such Lender’s good faith determination that a condition precedent (specifically identified and including the particular default, if any) to funding a loan under this Agreement cannot be satisfied) or generally under other agreements in which it commits to extend credit, (c) has failed, within three Business Days after request by the Administrative Agent or any Lender, acting in good faith, to provide a certification in writing from an authorized officer of such Lender that it will comply with its obligations (and is financially able to meet such obligations) to fund prospective Loans under this Agreement, provided that such Lender shall cease to be a Defaulting Lender pursuant to this clause (c) upon the Administrative Agent’s or such Lender’s receipt of such certification in form and substance
7 |
satisfactory to it and the Administrative Agent, as applicable, or (d) has become the subject of a Bankruptcy Event.
“ Department ” has the meaning assigned to such term in Section 3.02.
“ dollars ” or “ $ ” refers to lawful money of the United States of America.
“ Effective Date ” means the date on which the conditions specified in Section 4.01 are satisfied (or waived in accordance with Section 9.02).
“ ERISA ” means the Employee Retirement Income Security Act of 1974, as amended from time to time.
“ Eurodollar ”, when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans comprising such Borrowing, bear interest at a rate determined by reference to the Adjusted LIBO Rate.
“ Event of Default ” has the meaning assigned to such term in Article VII.
“ Excluded Taxes ” means any of the following Taxes imposed on or with respect to a Recipient or required to be withheld or deducted from a payment to a Recipient: (a) Taxes imposed on or measured by net income (however denominated), franchise Taxes, and branch profits Taxes, in each case, (i) imposed as a result of such Recipient being organized under the laws of, or having its principal office or, in the case of any Lender, its applicable lending office located in, the jurisdiction imposing such Tax (or any political subdivision thereof) or (ii) that are Other Connection Taxes, (b) in the case of a Lender, U.S. federal withholding Taxes imposed on amounts payable to or for the account of such Lender with respect to an applicable interest in a Loan or Commitment pursuant to a law in effect on the date on which (i) such Lender acquires such interest in the Loan or Commitment (other than pursuant to an assignment request by the Borrower under Section 2.19(b)) or (ii) such Lender changes its lending office, except in each case to the extent that, pursuant to Section 2.17, amounts with respect to such Taxes were payable either to such Lender’s assignor immediately before such Lender acquired the applicable interest in a Loan or Commitment or to such Lender immediately before it changed its lending office, (c) Taxes attributable to such Recipient’s failure to comply with Section 2.17(f) and (d) any U.S. federal withholding Taxes imposed under FATCA.
“ Executive Officer ” means, as to any Person, the president, the chief financial officer, the chief executive officer, the senior vice president-finance, the general counsel, the treasurer or the secretary.
“ Existing Credit Agreement ” has the meaning assigned to such term in the Recitals.
“ Existing Lender ” has the meaning assigned to such term in Section 1.05(b).
“ Existing Loans ” has the meaning assigned to such term in Section 1.05(b).
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“ FATCA ” means Sections 1471 through 1474 of the Code, as of the date of this Agreement (or any amended or successor version that is substantively comparable and not materially more onerous to comply with), any current or future regulations or official interpretations thereof and any agreement entered into pursuant to Section 147(b)(1) of the Code.
“ Federal Funds Effective Rate ” means, for any day, the weighted average (rounded upwards, if necessary, to the next 1/100 of 1%) of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average (rounded upwards, if necessary, to the next 1/100 of 1%) of the quotations for such day for such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by it.
“ Fee Letters ” means, collectively, the JPMCB Fee Letter and the PNC Fee Letter.
“ FHLB Liquidity Debt ” means any transaction or series of transactions pursuant to which any Insurance Subsidiary makes a pledge or assignment of marketable securities as collateral to the Federal Home Loan Bank in exchange for cash, the proceeds of which are to be used for anything other than to purchase marketable securities.
“ FHLB Operating Debt ” means any transaction or series of transactions pursuant to which any Insurance Subsidiary makes a pledge or assignment of marketable securities as collateral to the Federal Home Loan Bank in exchange for cash, the proceeds of which are to be used to purchase marketable securities.
“ Fiscal Quarter ” means any quarter of a Fiscal Year.
“ Fiscal Year ” means any period of twelve consecutive calendar months ending on the last day of December.
“ GAAP ” means generally accepted accounting principles in the United States of America.
“ Governmental Authority ” means the government of the United States of America, any other nation or any political subdivision thereof, whether state or local, and any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government.
“ Hedging Obligations ” means, with respect to any Person, the net liability of such Person under Swap Contracts.
“ Impacted Interest Period ” has the meaning assigned to such term in the definitions of “LIBO Rate.”
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“ Indemnified Taxes ” means (a) Taxes other than Excluded Taxes, imposed on or with respect to any payment made by or on account of any obligation of the Borrower under any Loan Document and (b) to the extent not otherwise described in subsection (a), Other Taxes.
“ Indemnitee ” has the meaning assigned to it in Section 9.03(b).
“ Index Debt ” means senior, unsecured, long-term indebtedness for borrowed money of the Borrower that is not guaranteed by any other Person or subject to any other credit enhancement.
“ Ineligible Institution ” has the meaning assigned to it in Section 9.04(b).
“ Information ” has the meaning assigned to it in Section 9.12.
“ Insurance Code ” means, with respect to any Insurance Subsidiary, the Insurance Code of such Insurance Subsidiary’s state of domicile and any successor statute of similar import, together with the regulations thereunder, as amended or otherwise modified and in effect from time to time. References to sections of the Insurance Code shall be construed to also refer to successor sections.
“ Insurance Policies ” means policies purchased from insurance companies by any of the Borrower or its Subsidiaries, for its own account to insure against its own liability and property loss (including, without limitation, casualty, liability and workers’ compensation insurance), other than Reinsurance Agreements and Surplus Relief Reinsurance Agreements.
“ Insurance Subsidiary ” means any Life Subsidiary or any P/C Subsidiary.
“ Interest Election Request ” means a request by the Borrower to convert or continue a Borrowing in accordance with Section 2.05.
“ Interest Payment Date ” means (a) with respect to any ABR Loan, the last day of each March, June, September and December and (b) with respect to any Eurodollar Loan, the last day of the Interest Period applicable to the Eurodollar Borrowing of which such Loan is a part and, in the case of a Eurodollar Borrowing with an Interest Period of more than three months’ duration, each day prior to the last day of such Interest Period that occurs at intervals of three months’ duration after the first day of such Interest Period.
“ Interest Period ” means with respect to any Eurodollar Borrowing, the period commencing on the date of such Eurodollar Borrowing and ending on the numerically corresponding day in the calendar month that is one, three or six months thereafter, as the Borrower may elect; provided that (i) if any Interest Period would end on a day other than a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless such next succeeding Business Day would fall in the next calendar month, in which case such Interest Period shall end on the next preceding Business Day and (ii) any Interest Period pertaining to a Eurodollar Borrowing that commences on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the last calendar month of such Interest Period) shall end on the last Business Day of the last calendar month of such Interest Period. For purposes hereof, the date of a Borrowing initially shall be the date on
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which such Borrowing is made and thereafter shall be the effective date of the most recent conversion or continuation of such Borrowing.
“ Interpolated Rate ” means, at any time, for any Interest Period, the rate per annum (rounded upward to four decimal places) determined by the Administrative Agent (which determination shall be conclusive and binding absent manifest error) to be equal to the rate that results from interpolating on a linear basis between: (a) the LIBO Screen Rate for the longest period (for which the LIBO Screen Rate is available) that is shorter than the Impacted Interest Period and (b) the LIBO Screen Rate for the shortest period (for which the LIBO Screen Rate is available) that exceeds the Impacted Interest Period, in each case, at such time.
“ IRS ” means the United States Internal Revenue Service.
“ JPMCB Fee Letter ” means the letter agreement, dated as of July 3, 2014, among the Borrower, the Administrative Agent and J.P. Morgan Securities LLC.
“ Lease Obligations ” means, at any date, the rental commitments of any person under leases for real and/or personal property (including taxes, insurance, maintenance and similar expenses which any Person is obligated to pay under the terms of said leases) on such date, whether or not such obligations are reflected as liabilities or commitments on a balance sheet of such Person or in the notes thereto, excluding, however, obligations under Capitalized Leases.
“ Lenders ” means the Persons listed on Schedule 2.01 and any other Person that shall have become a party hereto pursuant to an Assignment and Assumption, other than any such Person that ceases to be a party hereto pursuant to an Assignment and Assumption.
“ LIBO Rate ” means, with respect to any Eurodollar Borrowing for any Interest Period, the London interbank offered rate as administered by ICE Benchmark Administration (or any other Person that takes over the administration of such rate for Dollars) for a period equal in length to such Interest Period as displayed on pages LIBOR01 or LIBOR02 of the Reuters screen that displays such rate (or, in the event such rate does not appear on a Reuters page or screen, on any successor or substitute page on such screen that displays such rate, or on the appropriate page of such other information service that publishes such rate from time to time as selected by the Administrative Agent in its reasonable discretion; in each case the “ LIBO Screen Rate ”) at approximately 11:00 a.m., London time, two (2) Business Days prior to the commencement of such Interest Period; provided that, if the LIBO Screen Rate shall be less than zero, such rate shall be deemed to be zero for the purposes of this Agreement and provided , further , if the LIBO Screen Rate shall not be available at such time for such Interest Period (an “ Impacted Interest Period ”), then the LIBO Rate shall be the Interpolated Rate, provided that, if any Interpolated Rate shall be less than zero, such rate shall be deemed to be zero for purposes of this Agreement.
“ LIBO Screen Rate ” has the meaning assigned to such term in the definition of “LIBO Rate”.
“ Licenses ” has the meaning assigned to it in Section 3.11.
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“ Lien ” means, with respect to any asset, (a) any mortgage, deed of trust, lien, pledge, hypothecation, encumbrance, charge or security interest in, on or of such asset, (b) the interest of a vendor or a lessor under any conditional sale agreement, capital lease or title retention agreement (or any financing lease having substantially the same economic effect as any of the foregoing) relating to such asset and (c) in the case of securities, any purchase option, call or similar right of a third party with respect to such securities.
“ Life Subsidiary ” means any Subsidiary of the Borrower that is engaged in the business of providing life insurance and/or annuities, and related services.
“ Loan Document ” means, collectively, this Agreement, any Note and the Fee Letters.
“ Loans ” means the loans made by the Lenders to the Borrower pursuant to Section 2.03.
“ Material Adverse Effect ” means, relative to any occurrence of whatever nature (including any adverse determination in any litigation, arbitration, or governmental investigation or proceeding), a materially adverse effect on:
(a) the assets, business, financial condition, operations or prospects of the Borrower or any Subsidiary; or
(b) the ability of the Borrower or any Subsidiary to perform any of its payment or other material obligations under any of the Loan Documents.
“ Material Insurance Subsidiary ” means, at any time, an Insurance Subsidiary having (on a consolidated basis with its Subsidiaries) at such time either (a) gross revenues for the most recent four Fiscal Quarter period in excess of 5% of the gross revenues of the Borrower and its Subsidiaries for such Four Fiscal Quarter period or (b) total assets, as of the last day of the preceding Fiscal Quarter, having a net book value in excess of 5% of the total assets of the Borrower and its Subsidiaries as of such day, in each case, based upon the Borrower’s most recent annual or quarterly financial statements delivered to the Administrative Agent under Section 5.01. Notwithstanding the foregoing, it is agreed that Educators Life Insurance Company of America shall not be deemed a Material Insurance Subsidiary but its Subsidiary, Horace Mann Life Insurance Company, shall be a Material Insurance Subsidiary. The Material Insurance Subsidiaries are set forth on Schedule 3.10, as such schedule may be updated from time to time.
“ Maturity Date ” means July 30, 2019.
“ Minimum Net Worth ” has the meaning assigned to such term in Section 6.02.
“ Moody’s ” means Moody’s Investors Service, Inc.
“ Multiemployer Plan ” means a multiemployer plan as defined in Section 4001(a)(3) of ERISA.
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“ NAIC ” means the National Association of Insurance Commissioners, or any successor thereto.
“ Net Worth ” means the consolidated net worth, calculated in accordance with GAAP, of the Borrower and its consolidated Subsidiaries, excluding unrealized gains and losses as calculated in accordance with FASB 115.
“ Non-U.S. Lender ” means a Lender that is not a U.S. Person.
“ Note ” has the meaning assigned to such term in Section 2.07(e).
“ OFAC ” means the Office of Foreign Assets Control of the U.S. Department of the Treasury.
“ Ordinary Course Litigation ” has the meaning assigned to such term in Section 3.04.
“ Other Connection Taxes ” means, with respect to any Recipient, Taxes imposed as a result of a present or former connection between such Recipient and the jurisdiction imposing such Taxes (other than a connection arising from such Recipient having executed, delivered, enforced, become a party to, performed its obligations under, received payments under, received or perfected a security interest under, engaged in any other transaction pursuant to or enforced any Loan Document), or sold or assigned an interest in any Loan or any Loan Document.
“ Other Taxes ” means all present or future stamp, court or documentary, intangible, recording, filing or similar Taxes that arise from any payment made under, from the execution, delivery, performance, enforcement or registration of, from the receipt or perfection of a security interest under, or otherwise with respect to, any Loan Document, except any such Taxes that are Other Connection Taxes imposed with respect to an assignment (other than an assignment made under Section 2.16(b)).
“ P/C Subsidiary ” means any Subsidiary of the Borrower that is engaged in the business of providing property and casualty insurance and related services.
“ Participant ” has the meaning assigned to such term in Section 9.04.
“ Participant Register ” has the meaning assigned to such term in Section 9.04(c).
“ Person ” means any natural person, corporation, limited liability company, trust, joint venture, association, company, partnership, Governmental Authority or other entity.
“ Plan ” means any employee pension benefit plan (other than a Multiemployer Plan) subject to the provisions of Title IV of ERISA or Section 412 of the Code or Section 302 of ERISA, and in respect of which the Borrower or any member of its Controlled Group is (or, if such plan were terminated, would under Section 4069 of ERISA be deemed to be) an “employer” as defined in Section 3(5) of ERISA.
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“ PNC Fee Letter ” means the letter agreement, dated as of July 7, 2014, among the Borrower, PNC Bank, National Association and PNC Capital Markets LLC.
“ Prime Rate ” means the rate of interest per annum publicly announced from time to time by JPMorgan Chase Bank as its prime rate in effect at its office located at 270 Park Avenue, New York, New York; each change in the Prime Rate shall be effective from and including the date such change is publicly announced as being effective.
“ Quarterly Statement ” means the quarterly financial statement of any Insurance Subsidiary as required to be filed with the insurance commissioner (or similar authority) of such Insurance Subsidiary’s state of domicile, together with all exhibits or schedules filed therewith, prepared in conformity with SAP.
“ Recipient ” means, as applicable, (a) the Administrative Agent and (b) any Lender.
“ Register ” has the meaning assigned to such term in Section 9.04.
“ Reinsurance Agreements ” means any agreement, contract, treaty, certificate or other arrangement (other than a Surplus Relief Reinsurance Agreement) whereby any Insurance Subsidiary agrees to transfer or cede to another insurer all or part of the liability assumed by such Insurance Subsidiary under a policy or policies of insurance reinsured by such Insurance Subsidiary.
“ Related Parties ” means, with respect to any specified Person, such Person’s Affiliates and the respective directors, officers, employees, agents and advisors of such Person and such Person’s Affiliates.
“ Required Lenders ” means, at any time, Lenders having Revolving Credit Exposures and unused Commitments representing more than 50% of the sum of the total Revolving Credit Exposures and unused Commitments at such time; provided that for the purpose of determining the Required Lenders needed for any waiver, amendment, modification or consent, any Lender that is the Borrower or any Affiliate of the Borrower or, subject to Section 2.17(b), a Defaulting Lender shall be disregarded.
“ Requirement of Law ” for any Person means the corporate charter and by-laws or other organizational or governing documents of such Person, and any law, treaty, rule, ordinance or regulation or determination of an arbitrator or a court or other governmental authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject.
“ Revolving Credit Exposure ” means, with respect to any Lender at any time, the sum of the outstanding principal amount of such Lender’s Loans at such time.
“ S&P ” means Standard & Poor’s Ratings Services, a Standard & Poor’s Financial Services LLC business.
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“ Sanctioned Country ” means, at any time, a country or territory which is the subject or target of any Sanctions.
“ Sanctioned Person ” means, at any time, (a) any Person listed in any Sanctions-related list of designated Persons maintained by the OFAC or the U.S. Department of State, (b) any Person operating, organized or resident in a Sanctioned Country or (c) any Person controlled by any such Person.
“ Sanctions ” means economic or financial sanctions or trade embargoes imposed, administered or enforced from time to time by the U.S. government, including those administered by the OFAC or the U.S. Department of State.
“ SAP ” means, as to each Insurance Subsidiary, the statutory accounting practices prescribed or permitted by the insurance commissioner (or other similar authority) in such Insurance Subsidiary’s state of domicile for the preparation of Annual Statements and other financial reports by insurance corporations of the same type as such Insurance Subsidiary.
“ Securities Lending ” means any transaction or series of transactions pursuant to which any Insurance Subsidiary makes a pledge or assignment of marketable securities to another Person (including repurchase transactions, reserve repurchase transactions, fee-based transactions and other similar securities lending arrangements); provided that “Securities Lending” shall not include FHLB Liquidity Debt or FHLB Operating Debt.
“ Statutory Financial Statements ” has the meaning specified in Section 3.02(a).
“ Statutory Reserve Rate ” means a fraction (expressed as a decimal), the numerator of which is the number one and the denominator of which is the number one minus the aggregate of the maximum reserve percentage (including any marginal, special, emergency or supplemental reserves) expressed as a decimal established by the Board to which the Administrative Agent is subject with respect to the Adjusted LIBO Rate, for eurocurrency funding (currently referred to as “Eurocurrency Liabilities” in Regulation D of the Board). Such reserve percentage shall include those imposed pursuant to such Regulation D. Eurodollar Loans shall be deemed to constitute eurocurrency funding and to be subject to such reserve requirements without benefit of or credit for proration, exemptions or offsets that may be available from time to time to any Lender under such Regulation D or any comparable regulation. The Statutory Reserve Rate shall be adjusted automatically on and as of the effective date of any change in any reserve percentage.
“S ubsidiary ” means, with respect to the Borrower at any date, any corporation, limited liability company, partnership, association or other entity the accounts of which would be consolidated with those of the Borrower in the Borrower’s consolidated financial statements if such financial statements were prepared in accordance with GAAP as of such date, as well as any other corporation, limited liability company, partnership, association or other entity (a) of which securities or other ownership interests representing more than 50% of the equity or more than 50% of the ordinary voting power or, in the case of a partnership, more than 50% of the general partnership interests are, as of such date, owned, controlled or held, or (b) that is, as of
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such date, otherwise Controlled, by the Borrower or one or more subsidiaries of the Borrower or by the Borrower and one or more Subsidiaries of the Borrower.
“ Surplus Relief Reinsurance Agreements ” means any agreement whereby any Insurance Subsidiary assumes or cedes business under a reinsurance agreement that would be considered a “financing-type” reinsurance agreement and (a) with respect to any P/C Subsidiary, which is entered into solely for the purpose of affecting the income statement of such P/C Subsidiary as the same may be amended from time to time, and (b) with respect to any Life Subsidiary, as determined in the Fourth Edition of the AICPA Audit Guide for Stock Life Insurance Companies on pp. 91-92 thereof as the same may be amended from time to time.
“ Swap Contract ” means (a) any and all rate swap transactions, basis swaps, credit derivative transactions, forward rate transactions, commodity swaps, commodity options, forward commodity contracts, equity or equity index swaps or options, bond or bond price or bond index swaps or options or forward bond or forward bond price or forward bond index transactions, interest rate options, forward foreign exchange transactions, cap transactions, floor transactions, collar transactions, currency swap transactions, cross-currency rate swap transactions, currency options, spot contracts, or any other similar transactions or any combination of any of the foregoing (including any options to enter into any of the foregoing), whether or not any such transaction is governed by or subject to any master agreement, and (b) any and all transactions of any kind, and the related confirmations, which are subject to the terms and conditions of, or governed by, any form of master agreement published by the International Swaps and Derivatives Association, Inc., any International Foreign Exchange Master Agreement, or any other master agreement (any such master agreement, together with any related schedules, a “ Master Agreement ”), including any such obligations or liabilities under any Master Agreement.
“ Swap Termination Value ” means, in respect of any one or more Swap Contracts, after taking into account the effect of any legally enforceable netting agreement relating to such Swap Contracts, (a) for any date on or after the date such Swap Contracts have been closed out and termination value(s) determined in accordance therewith, such termination value(s), and (b) for any date prior to the date referenced in clause (a), the amount(s) determined as the mark-to-market value(s) for such Swap Contracts, as determined based upon one or more mid-market or other readily available quotations provided by any recognized dealer in such Swap Contracts (which may include a Lender or any Affiliate of a Lender).
“ Synthetic Lease Obligation ” means the monetary obligation of a Person under (a) a so-called synthetic, off-balance sheet or tax retention lease, or (b) an agreement for the use or possession of property creating obligations that do not appear on the balance sheet of such Person but which, upon the insolvency or bankruptcy of such Person, would be characterized as the indebtedness of such Person (without regard to accounting treatment).
“ Taxes ” means any and all present or future taxes, levies, imposts, duties, deductions, withholdings (including backup withholding), assessments, fees or other charges imposed by any Governmental Authority, including any interest, additions to tax or penalties applicable thereto.
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“ Threshold Amount ” means, as of any date of determination, ten percent (10%) of the net admitted assets less separate accounts assets (as set forth on the financial statements most recently provided pursuant to Section 5.01(c)) of Horace Mann Life Insurance Company.
“ Transactions ” means the execution, delivery and performance by the Borrower of this Agreement, the borrowing of Loans and the use of the proceeds thereof.
“ Type ”, when used in reference to any Loan or Borrowing, refers to whether the rate of interest on such Loan, or on the Loans comprising such Borrowing, is determined by reference to the Adjusted LIBO Rate or the Alternate Base Rate.
“ U.S. ” means the United States of America.
“ U.S. Person ” means a “United States person” within the meaning of Section 7701(a)(30) of the Code.
“ U.S. Tax Certificate ” has the meaning assigned to such term in Section 2.14(f)(ii)(D)(2).
“ Withholding Agent ” means the Borrower and the Administrative Agent.
“ 2012 Annual Statement ” has the meaning assigned to such term in Section 3.02(b).
“ 2013 Annual Statement ” has the meaning assigned to such term in Section 3.02(b).
“ 2014 Quarterly Statement ” has the meaning assigned to such term in Section 3.02(b).
SECTION 1.02. Classification of Loans and Borrowings . For purposes of this Agreement, Loans may be classified and referred to by Type (e.g., a “ Eurodollar Loan ”). Borrowings also may be classified and referred to by Type (e.g., a “ Eurodollar Borrowing ”).
SECTION 1.03. Terms Generally . The definitions of terms herein shall apply equally to the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words “include”, “includes” and “including” shall be deemed to be followed by the phrase “without limitation”. The word “will” shall be construed to have the same meaning and effect as the word “shall”. Unless the context requires otherwise (a) any definition of or reference to any agreement, instrument or other document herein shall be construed as referring to such agreement, instrument or other document as from time to time amended, restated, supplemented or otherwise modified (subject to any restrictions on such amendments, restatements, supplements or modifications set forth herein), (b) any reference herein to any Person shall be construed to include such Person’s successors and assigns (subject to any restrictions on assignments set forth herein) and, in the case of any Governmental Authority, any other Governmental Authority that shall have succeeded to any or all functions thereof, (c) the words “herein”, “hereof” and “hereunder”, and words of similar import, shall be construed to refer to
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this Agreement in its entirety and not to any particular provision hereof, (d) all references herein to Articles, Sections, Exhibits and Schedules shall be construed to refer to Articles and Sections of, and Exhibits and Schedules to, this Agreement, (e) any reference in any definition to the phrase “at any time” or “for any period” shall refer to the same time or period for all calculations or determinations within such definition, and (f) the words “asset” and “property” shall be construed to have the same meaning and effect and to refer to any and all tangible and intangible assets and properties, including cash, securities, accounts and contract rights.
SECTION 1.04. Accounting Terms; GAAP . Unless otherwise defined or the context otherwise requires, all financial and accounting terms used herein or in any of the Loan Documents or any certificate or other document made or delivered pursuant hereto shall be defined in accordance with GAAP or SAP, as the context may require. When used in this Agreement, the term “financial statements” shall include the notes and schedules thereto. In addition, when used herein, the terms “best knowledge of” or “to the best knowledge of” any Person shall mean matters within the actual knowledge of such Person (or an Executive Officer or general partner of such Person) or which should have been known by such Person after reasonable inquiry. Except as otherwise expressly provided herein, all terms of an accounting or financial nature shall be construed in accordance with GAAP, as in effect from time to time; provided that, if the Borrower notifies the Administrative Agent that the Borrower requests an amendment to any provision hereof to eliminate the effect of any change occurring after the date hereof in GAAP or in the application thereof on the operation of such provision (or if the Administrative Agent notifies the Borrower that the Required Lenders request an amendment to any provision hereof for such purpose), regardless of whether any such notice is given before or after such change in GAAP or in the application thereof, then such provision shall be interpreted on the basis of GAAP as in effect and applied immediately before such change shall have become effective until such notice shall have been withdrawn or such provision amended in accordance herewith.
SECTION 1.05. Allocation of Loans and Percentages as of the Effective Date . (a) The Borrower and each Lender agree that, as of the Effective Date, (i) this Agreement shall amend and restate in its entirety the Existing Credit Agreement and (ii) the outstanding “Loans” thereunder shall be allocated among the Lenders in accordance with their respective Applicable Percentages.
(b) To facilitate the allocation described in clause (a), as of the Effective Date, (i) all “Loans” under the Existing Credit Agreement (“ Existing Loans ”) shall be deemed to be Loans hereunder, (ii) each Lender that is a party to the Existing Credit Agreement (an “ Existing Lender ”) shall transfer to the Administrative Agent an amount equal to the excess, if any, of such Lender’s pro rata share (according to its Applicable Percentage) of the outstanding Loans hereunder (including any Loans made as of the Effective Date) over the amount of all of such Lender’s Existing Loans, (iii) each Lender that is not a party to the Existing Credit Agreement shall transfer to the Administrative Agent an amount equal to such Lender’s pro rata share (according to its Applicable Percentage) of the outstanding Loans hereunder (including any Loans made as of the Effective Date), (iv) the Administrative Agent shall apply the funds received from the Lenders pursuant to clauses (ii) and (iii), first, on behalf of the Lenders (pro rata according to the amount of the applicable Existing Loans each is required to purchase to achieve the allocation described in clause (a)), to purchase from each Existing Lender that has
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Loans in excess of such Lender’s pro rata share (according to its Applicable Percentage) of the outstanding Loans hereunder (including any Loans made as of the Effective Date), a portion of such Existing Loans equal to such excess, second, to pay to each Existing Lender all interest, fees and other amounts (including amounts payable pursuant to Section 2.12 of the Existing Credit Agreement, assuming for such purpose that the Existing Loans were prepaid rather than allocated as of the Effective Date) owed to such Existing Lender under the Existing Credit Agreement (whether or not otherwise then due) and, third, as the Borrower shall direct, and (v) all Loans shall commence new Interest Periods in accordance with elections made by the Borrower at least three Business Days prior to the Effective Date pursuant to the procedures applicable to conversions and continuations set forth in Section 2.05 (all as if the Existing Loans were continued or converted as of the Effective Date). To the extent the Borrower fails to make a timely election pursuant to clause (v) of the preceding sentence with respect to any Loans, such Loans shall be ABR Loans.
ARTICLE II
The Credits
SECTION 2.01. Commitments . Subject to the terms and conditions set forth herein, each Lender agrees to make Loans to the Borrower from time to time during the Availability Period in an aggregate principal amount that will not result in such Lender’s Revolving Credit Exposure exceeding such Lender’s Commitment. Within the foregoing limits and subject to the terms and conditions set forth herein, the Borrower may borrow, prepay and reborrow Loans.
SECTION 2.02. Loans and Borrowings . (a) Each Loan shall be made as part of a Borrowing consisting of Loans made by the Lenders ratably in accordance with their respective Commitments. The failure of any Lender to make any Loan required to be made by it shall not relieve any other Lender of its obligations hereunder; provided that the Commitments of the Lenders are several and no Lender shall be responsible for any other Lender’s failure to make Loans as required.
(b) Subject to Section 2.14, each Borrowing shall be comprised entirely of ABR Loans or Eurodollar Loans as the Borrower may request in accordance herewith. Each Lender at its option may make any Eurodollar Loan by causing any domestic or foreign branch or Affiliate of such Lender to make such Loan; provided that any exercise of such option shall not affect the obligation of the Borrower to repay such Loan in accordance with the terms of this Agreement.
(c) At the commencement of each Interest Period for any Eurodollar Borrowing, such Borrowing shall be in an aggregate amount that is an integral multiple of $1,000,000 and not less than $5,000,000. At the time that each ABR Borrowing is made, such Borrowing shall be in an aggregate amount that is an integral multiple of $100,000 and not less than $500,000; provided that an ABR Borrowing may be in an aggregate amount that is equal to the entire unused balance of the total Commitments. Borrowings of more than one Type may be outstanding at the same time; provided that there shall not at any time be more than a total of 5 Eurodollar Borrowings outstanding.
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(d) Notwithstanding any other provision of this Agreement, the Borrower shall not be entitled to request, or to elect to convert or continue, any Borrowing if the Interest Period requested with respect thereto would end after the Maturity Date.
SECTION 2.03. Requests for Borrowings . To request a Borrowing, the Borrower shall notify the Administrative Agent of such request by telephone (a) in the case of a Eurodollar Borrowing, not later than 11:00 a.m., New York City time, three Business Days before the date of the proposed Borrowing or (b) in the case of an ABR Borrowing, not later than 11:00 a.m., New York City time, one Business Day before the date of the proposed Borrowing. Each such telephonic Borrowing Request shall be irrevocable and shall be confirmed promptly by hand delivery or facsimile (or e-mail with a PDF copy attached) to the Administrative Agent of a written Borrowing Request in a form approved by the Administrative Agent and signed by the Borrower. Each such telephonic and written Borrowing Request shall specify the following information in compliance with Section 2.02:
(i) the aggregate amount of the requested Borrowing;
(ii) the date of such Borrowing, which shall be a Business Day;
(iii) whether such Borrowing is to be an ABR Borrowing or a Eurodollar Borrowing;
(iv) in the case of a Eurodollar Borrowing, the initial Interest Period to be applicable thereto, which shall be a period contemplated by the definition of the term “Interest Period”; and
(v) the location and number of the Borrower’s account to which funds are to be disbursed, which shall comply with the requirements of Section 2.04.
If no election as to the Type of Borrowing is specified, then the requested Revolving Borrowing shall be an ABR Borrowing. If no Interest Period is specified with respect to any requested Eurodollar Borrowing, then the Borrower shall be deemed to have selected an Interest Period of one month’s duration. Promptly following receipt of a Borrowing Request in accordance with this Section, the Administrative Agent shall advise each Lender of the details thereof and of the amount of such Lender’s Loan to be made as part of the requested Borrowing.
SECTION 2.04. Funding of Borrowings . (a) Each Lender shall make each Loan to be made by it hereunder on the proposed date thereof by wire transfer of immediately available funds by 12:00 noon, New York City time, to the account of the Administrative Agent most recently designated by it for such purpose by notice to the Lenders. The Administrative Agent will make such Loans available to the Borrower by promptly crediting the amounts so received, in like funds, to an account of the Borrower maintained with the Administrative Agent in Illinois and designated by the Borrower in the applicable Borrowing Request.
(b) Unless the Administrative Agent shall have received notice from a Lender prior to the proposed date of any Borrowing that such Lender will not make available to the Administrative Agent such Lender’s share of such Borrowing, the Administrative Agent may assume that such Lender has made such share available on such date in accordance with
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paragraph (a) of this Section and may, in reliance upon such assumption, make available to the Borrower a corresponding amount. In such event, if a Lender has not in fact made its share of the applicable Borrowing available to the Administrative Agent, then the applicable Lender and the Borrower severally agree to pay to the Administrative Agent forthwith on demand such corresponding amount with interest thereon, for each day from and including the date such amount is made available to the Borrower to but excluding the date of payment to the Administrative Agent, at (i) in the case of such Lender, the greater of the Federal Funds Effective Rate and a rate determined by the Administrative Agent in accordance with banking industry rules on interbank compensation or (ii) in the case of the Borrower, the interest rate applicable to ABR Loans. If such Lender pays such amount to the Administrative Agent, then such amount shall constitute such Lender’s Loan included in such Borrowing.
SECTION 2.05. Interest Elections . (a) Each Borrowing initially shall be of the Type specified in the applicable Borrowing Request and, in the case of a Eurodollar Borrowing, shall have an initial Interest Period as specified in such Borrowing Request. Thereafter, the Borrower may elect to convert such Borrowing to a different Type or to continue such Borrowing and, in the case of a Eurodollar Revolving Borrowing, may elect Interest Periods therefor, all as provided in this Section. The Borrower may elect different options with respect to different portions of the affected Borrowing, in which case each such portion shall be allocated ratably among the Lenders holding the Loans comprising such Borrowing, and the Loans comprising each such portion shall be considered a separate Borrowing.
(b) To make an election pursuant to this Section, the Borrower shall notify the Administrative Agent of such election by telephone by the time that a Borrowing Request would be required under Section 2.03 if the Borrower were requesting a Borrowing of the Type resulting from such election to be made on the effective date of such election. Each such telephonic Interest Election Request shall be irrevocable and shall be confirmed promptly by hand delivery, telecopy or facsimile (or e-mail with a PDF copy attached) to the Administrative Agent of a written Interest Election Request in a form approved by the Administrative Agent and signed by the Borrower.
(c) Each telephonic and written Interest Election Request shall specify the following information in compliance with Section 2.02:
(i) the Borrowing to which such Interest Election Request applies and, if different options are being elected with respect to different portions thereof, the portions thereof to be allocated to each resulting Borrowing (in which case the information to be specified pursuant to clauses (iii) and (iv) below shall be specified for each resulting Borrowing);
(ii) the effective date of the election made pursuant to such Interest Election Request, which shall be a Business Day;
(iii) whether the resulting Borrowing is to be an ABR Borrowing or a Eurodollar Borrowing; and
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(iv) if the resulting Borrowing is a Eurodollar Borrowing, the Interest Period to be applicable thereto after giving effect to such election, which shall be a period contemplated by the definition of the term “Interest Period”.
If any such Interest Election Request requests a Eurodollar Borrowing but does not specify an Interest Period, then the Borrower shall be deemed to have selected an Interest Period of one month’s duration.
(d) Promptly following receipt of an Interest Election Request, the Administrative Agent shall advise each Lender of the details thereof and of such Lender’s portion of each resulting Borrowing.
(e) If the Borrower fails to deliver a timely Interest Election Request with respect to a Eurodollar Borrowing prior to the end of the Interest Period applicable thereto, then, unless such Borrowing is repaid as provided herein, at the end of such Interest Period such Borrowing shall be converted to an ABR Borrowing. Notwithstanding any contrary provision hereof, if an Event of Default has occurred and is continuing and the Administrative Agent, at the request of the Required Lenders, so notifies the Borrower, then, so long as an Event of Default is continuing (i) no outstanding Borrowing may be converted to or continued as a Eurodollar Borrowing and (ii) unless repaid, each Eurodollar Borrowing shall be converted to an ABR Borrowing at the end of the Interest Period applicable thereto.
SECTION 2.06. Termination and Reduction of Commitments . (a) Unless previously terminated, the Commitments shall terminate on the Maturity Date.
(b) The Borrower may at any time terminate, or from time to time reduce, the Commitments; provided that (i) each reduction of the Commitments shall be in an amount that is an integral multiple of $1,000,000 and not less than $5,000,000 and (ii) the Borrower shall not terminate or reduce the Commitments if, after giving effect to any concurrent prepayment of the Loans in accordance with Section 2.08, the Revolving Credit Exposures would exceed the total Commitments.
(c) The Borrower shall notify the Administrative Agent of any election to terminate or reduce the Commitments under paragraph (b) of this Section at least three Business Days prior to the effective date of such termination or reduction, specifying such election and the effective date thereof. Promptly following receipt of any notice, the Administrative Agent shall advise the Lenders of the contents thereof. Each notice delivered by the Borrower pursuant to this Section shall be irrevocable; provided that a notice of termination of the Commitments delivered by the Borrower may state that such notice is conditioned upon the effectiveness of other credit facilities, in which case such notice may be revoked by the Borrower (by notice to the Administrative Agent on or prior to the specified effective date) if such condition is not satisfied. Any termination or reduction of the Commitments shall be permanent. Each reduction of the Commitments shall be made ratably among the Lenders in accordance with their respective Commitments.
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SECTION 2.07. Repayment of Loans; Evidence of Debt . (a) The Borrower hereby unconditionally promises to pay to the Administrative Agent for the account of each Lender the then unpaid principal amount of each Loan on the Maturity Date.
(b) Each Lender shall maintain in accordance with its usual practice an account or accounts evidencing the indebtedness of the Borrower to such Lender resulting from each Loan made by such Lender, including the amounts of principal and interest payable and paid to such Lender from time to time hereunder.
(c) The Administrative Agent shall maintain accounts in which it shall record (i) the amount of each Loan made hereunder, the thereof and the Interest Period applicable thereto, (ii) the amount of any principal or interest due and payable or to become due and payable from the Borrower to each Lender hereunder and (iii) the amount of any sum received by the Administrative Agent hereunder for the account of the Lenders and each Lender’s share thereof.
(d) The entries made in the accounts maintained pursuant to paragraph (b) or (c) of this Section shall be prima facie evidence of the existence and amounts of the obligations recorded therein; provided that the failure of any Lender or the Administrative Agent to maintain such accounts or any error therein shall not in any manner affect the obligation of the Borrower to repay the Loans in accordance with the terms of this Agreement.
(e) Any Lender may request that Loans made by it be evidenced by a promissory note (each, a “ Note ”). In such event, the Borrower shall prepare, execute and deliver to such Lender a Note payable to the order of such Lender (or, if requested by such Lender, to such Lender and its registered assigns). Thereafter, the Loans evidenced by such Note and interest thereon shall at all times (including after assignment pursuant to Section 9.04) be represented by one or more Notes payable to the order of the payee named therein (or, if such Notes is a registered note, to such payee and its registered assigns).
SECTION 2.08. Prepayment of Loans . (a) The Borrower shall have the right at any time and from time to time to prepay any Borrowing in whole or in part, subject to prior notice in accordance with paragraph (b) of this Section.
(b) The Borrower shall notify the Administrative Agent by telephone (confirmed by telecopy or facsimile (or e-mail with a PDF copy attached)) of any prepayment hereunder (i) in the case of prepayment of a Eurodollar Borrowing, not later than 11:00 a.m., New York City time, three Business Days before the date of prepayment or (ii) in the case of prepayment of an ABR Borrowing, not later than 11:00 a.m., New York City time, one Business Day before the date of prepayment. Each such notice shall be irrevocable and shall specify the prepayment date and the principal amount of each Borrowing or portion thereof to be prepaid; provided that, if a notice of prepayment is given in connection with a conditional notice of termination of the Commitments as contemplated by Section 2.06, then such notice of prepayment may be revoked if such notice of termination is revoked in accordance with Section 2.06. Promptly following receipt of any such notice relating to a Revolving Borrowing, the Administrative Agent shall advise the Lenders of the contents thereof. Each partial prepayment of any Borrowing shall be in an amount that would be permitted in the case of an
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advance of a Borrowing of the same Type as provided in Section 2.02. Each prepayment of a Borrowing shall be applied ratably to the Loans included in the prepaid Borrowing. Prepayments shall be accompanied by accrued interest to the extent required by Section 2.10.
SECTION 2.09. Fees . (a) The Borrower agrees to pay to the Administrative Agent for the account of each Lender a commitment fee, which shall accrue at the Applicable Rate on the daily unused amount of the Commitment of such Lender during the period from and including the Effective Date to but excluding the date on which such Commitment terminates. Accrued commitment fees shall be payable in arrears on the last day of March, June, September and December of each year and on the date on which the Commitments terminate, commencing on the first such date to occur after the date hereof; provided that any commitment fees accruing after the date on which the Commitments terminate shall be payable on demand. All commitment fees shall be computed on the basis of a year of 360 days and shall be payable for the actual number of days elapsed (including the first day but excluding the last day).
(b) The Borrower agrees to pay to the Administrative Agent, for its own account, fees payable in the amounts and at the times separately agreed upon between the Borrower and the Administrative Agent.
(c) All fees payable hereunder shall be paid on the dates due, in immediately available funds, to the Administrative Agent for distribution, in the case of commitment fees, to the Lenders. Fees paid shall not be refundable under any circumstances.
SECTION 2.10. Interest . (a) The Loans comprising each ABR Borrowing shall bear interest at the Alternate Base Rate plus the Applicable Rate.
(b) The Loans comprising each Eurodollar Borrowing shall bear interest at the Adjusted LIBO Rate for the Interest Period in effect for such Borrowing plus the Applicable Rate.
(c) Notwithstanding the foregoing, if any principal of or interest on any Loan or any fee or other amount payable by the Borrower hereunder is not paid when due, whether at stated maturity, upon acceleration or otherwise, upon the request of the Required Lenders such overdue amount shall bear interest, after as well as before judgment, at a rate per annum equal to (i) in the case of overdue principal of any Loan, 2% plus the rate otherwise applicable to such Loan as provided in the preceding paragraphs of this Section or (ii) in the case of any other amount, 2% plus the rate applicable to ABR Loans as provided in paragraph (a) of this Section. If any other Event of Default hereunder shall arise, then upon the request of the Required Lenders, all principal of and interest on any Loan, and any other fee or other amount payable by the Borrower hereunder shall bear interest at 2% plus the rate applicable to ABR Loans as provided in paragraph (a) of this Section, until such Event of Default is cured or is waived.
(d) Accrued interest on each Loan shall be payable in arrears on each Interest Payment Date for such Loan and upon termination of the Commitments; provided that (i) interest accrued pursuant to paragraph (c) of this Section shall be payable on demand, (ii) in the event of any repayment or prepayment of any Loan (other than a prepayment of an ABR Loan prior to the end of the Availability Period), accrued interest on the principal amount repaid or prepaid shall
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be payable on the date of such repayment or prepayment and (iii) in the event of any conversion of any Eurodollar Loan prior to the end of the current Interest Period therefor, accrued interest on such Loan shall be payable on the effective date of such conversion.
(e) All interest hereunder shall be computed on the basis of a year of 360 days, except that interest computed by reference to the Alternate Base Rate at times when the Alternate Base Rate is based on the Prime Rate shall be computed on the basis of a year of 365 days (or 366 days in a leap year), and in each case shall be payable for the actual number of days elapsed (including the first day but excluding the last day). The applicable Alternate Base Rate, Adjusted LIBO Rate or LIBO Rate shall be determined by the Administrative Agent, and such determination shall be conclusive absent manifest error.
SECTION 2.11. Alternate Rate of Interest . If prior to the commencement of any Interest Period for a Eurodollar Borrowing:
(a) the Administrative Agent determines (which determination shall be conclusive absent manifest error) that adequate and reasonable means do not exist for ascertaining the Adjusted LIBO Rate or the LIBO Rate, as applicable, for such Interest Period; or
(b) the Administrative Agent is advised by the Required Lenders that the Adjusted LIBO Rate or the LIBO Rate, as applicable, for such Interest Period will not adequately and fairly reflect the cost to such Lenders (or Lender) of making or maintaining their Loans (or its Loan) included in such Borrowing for such Interest Period; then the Administrative Agent shall give notice thereof to the Borrower and the Lenders by telephone or telecopy as promptly as practicable thereafter and, until the Administrative Agent notifies the Borrower and the Lenders that the circumstances giving rise to such notice no longer exist, (i) any Interest Election Request that requests the conversion of any Borrowing to, or continuation of any Borrowing as, a Eurodollar Borrowing shall be ineffective and (ii) if any Borrowing Request requests a Eurodollar Revolving Borrowing, such Borrowing shall be made as an ABR Borrowing provided that if the circumstances giving rise to such notice affect only one Type of Borrowings, then the other Type of Borrowings shall be permitted.
SECTION 2.12. Increased Costs . (a) If any Change in Law shall:
(i) impose, modify or deem applicable any reserve, special deposit or similar requirement (including any compulsory loan requirement, insurance charge or other assessment) against assets of, deposits with or for the account of, or credit extended by, any Lender (except any such reserve requirement reflected in the Adjusted LIBO Rate);
(ii) impose on any Lender or the London interbank market any other condition, cost or expense affecting this Agreement or Eurodollar Loans made by such Lenders; or
(iii) subject any Recipient to any Taxes (other than (A) Indemnified Taxes, (B) Taxes described in clauses (b) through (d) of the definition of Excluded Taxes and (C) Connection Income Taxes) on its loans, loan principal,
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letters of credit, commitments, or other obligations, or its deposits, reserves, other liabilities or capital attributable thereto;
and the result of any of the foregoing shall be to increase the cost to such Lender or such other Recipient of making, continuing, converting into or maintaining any Loan (or of maintaining its obligation to make any such Loan) or to reduce the amount of any sum received or receivable by such Lender or such other Recipient hereunder (whether of principal, interest or otherwise), then the Borrower will pay to such Lender or such other Recipient, as the case may be, such additional amount or amounts as will compensate such Lender or such other Recipient, as the case may be, for such additional costs incurred or reduction suffered.
(b) If any Lender determines that any Change in Law regarding capital or liquidity requirements has or would have the effect of reducing the rate of return on such Lender’s capital or on the capital of such Lender’s holding company, if any, as a consequence of this Agreement, the Commitments of or the Loans made by such Lender to a level below that which such Lender or such Lender’s holding company could have achieved but for such Change in Law (taking into consideration such Lender’s policies and the policies of such Lender’s holding company with respect to capital adequacy or liquidity), then from time to time the Borrower will pay to such Lender such additional amount or amounts as will compensate such Lender or such Lender’s holding company for any such reduction suffered.
(c) A certificate of a Lender setting forth the amount or amounts necessary to compensate such Lender or its holding company, as the case may be, as specified in paragraph (a) or (b) of this Section shall be delivered to the Borrower and shall be conclusive absent manifest error. The Borrower shall pay such Lender the amount shown as due on any such certificate within 10 days after receipt thereof.
(d) Failure or delay on the part of any Lender to demand compensation pursuant to this Section shall not constitute a waiver of such Lender’s right to demand such compensation; provided that the Borrower shall not be required to compensate a Lender pursuant to this Section for any increased costs or reductions incurred more than 270 days prior to the date that such Lender notifies the Borrower of the Change in Law giving rise to such increased costs or reductions and of such Lender’s intention to claim compensation therefor; provided , further , that, if the Change in Law giving rise to such increased costs or reductions is retroactive, then the 270-day period referred to above shall be extended to include the period of retroactive effect thereof.
SECTION 2.13. Break Funding Payments . In the event of (a) the payment of any principal of any Eurodollar Loan other than on the last day of an Interest Period applicable thereto (including as a result of an Event of Default or as a result of any prepayment pursuant to Section 2.08), (b) the conversion of any Eurodollar Loan other than on the last day of the Interest Period applicable thereto, (c) the failure to borrow, convert, continue or prepay any Eurodollar Loan on the date specified in any notice delivered pursuant hereto (regardless of whether such notice may be revoked under Section 2.08(b) and is revoked in accordance therewith), or (d) the assignment of any Eurodollar Loan other than on the last day of the Interest Period applicable thereto as a result of a request by the Borrower pursuant to Section 2.16, then, in any such event, the Borrower shall compensate each Lender for the loss, cost and expense attributable to such
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event. In the case of a Eurodollar Loan, such loss, cost or expense to any Lender shall be deemed to include an amount determined by such Lender to be the excess, if any, of (i) the amount of interest which would have accrued on the principal amount of such Eurodollar Loan had such event not occurred, at the Adjusted LIBO Rate that would have been applicable to such Eurodollar Loan, for the period from the date of such event to the last day of the then current Interest Period therefor (or, in the case of a failure to borrow, convert or continue, for the period that would have been the Interest Period for such Eurodollar Loan), over (ii) the amount of interest which would accrue on such principal amount for such period at the interest rate which such Lender would bid were it to bid, at the commencement of such period, for dollar deposits of a comparable amount and period from other banks in the eurodollar market. A certificate of any Lender setting forth any amount or amounts that such Lender is entitled to receive pursuant to this Section shall be delivered to the Borrower and shall be conclusive absent manifest error. The Borrower shall pay such Lender the amount shown as due on any such certificate within 10 days after receipt thereof.
SECTION 2.14. Taxes .
(a) Withholding Taxes; Gross-Up . Any and all payments by or on account of any obligation of the Borrower under any Loan Document shall be made without deduction or withholding for any Taxes except as required by applicable law. If any applicable law (as determined in good faith discretion of an applicable Withholding Agent) requires the deduction or withholding of any Tax from any such payment by a Withholding Agent, then the applicable Withholding Agent shall be entitled to make such deduction or withholding and shall timely pay the full amount deducted or withheld to the relevant Governmental Authority in accordance with applicable law and, if such Tax is an Indemnified Tax, then the sum payable by the Borrower shall be increased as necessary so that after such deduction or withholding has been made (including such deduction and withholdings applicable to additional sums payable under this Section 2.14), the applicable Recipient receives an amount equal to the sum it would have received had no such deduction or withholding been made.
(b) Payment of Other Taxes by the Borrower . The Borrower shall timely pay to the relevant Governmental Authority in accordance with applicable law, or at the option of the Administrative Agent timely reimburse it for, Other Taxes.
(c) Evidence of Payment . As soon as practicable after any payment of Taxes by the Borrower to a Governmental Authority pursuant to this Section 2.14, the Borrower shall deliver to the Administrative Agent the original or a certified copy of a receipt issued by such Governmental Authority evidencing such payment, a copy of the return reporting such payment or other evidence of such payment reasonably satisfactory to the Administrative Agent.
(d) Indemnification by the Borrower . The Borrower shall indemnify each Recipient, within 10 days after demand therefor, for the full amount of any Indemnified Taxes (including Indemnified Taxes imposed or asserted on or attributable to amounts payable under this Section 2.14(d)) payable or paid by such Recipient or required to be withheld or deducted from a payment to such Recipient and any reasonable expenses arising therefrom or with respect thereto, whether or not such Indemnified Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority. A certificate as to the amount of such payment or liability
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delivered to the Borrower by a Lender (with a copy to the Administrative Agent), or by the Administrative Agent on its own behalf or on behalf of a Lender, shall be conclusive absent manifest error.
(e) Indemnification by the Lenders . Each Lender shall severally indemnify the Administrative Agent, within ten 10 days after demand therefor, for (i) any Indemnified Taxes attributable to such Lender (but only to the extent that the Borrower has not already indemnified the Administrative Agent for such Indemnified Taxes and without limiting the obligation of the Borrower to do so) and (ii) any Excluded Taxes attributable to such Lender, in each case, that are payable or paid by the Administrative Agent in connection with any Loan Document, and any reasonable expenses arising therefrom or with respect thereto, whether or not such Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority. A certificate as to the amount of such payment or liability delivered to any Lender by the Administrative Agent shall be conclusive absent manifest error. Each Lender hereby authorizes the Administrative Agent to set off and apply any and all amounts at any time owing to such Lender under any Loan Document or otherwise payable by the Administrative Agent to such Lender from any other source against any amount due to the Administrative Agent under this paragraph (e).
(f) Status of Lenders .
(i) Any Lender that is entitled to an exemption from or reduction of withholding Tax with respect to payments made under any Loan Document shall deliver to the Borrower and the Administrative Agent, at the time or times reasonably requested by the Borrower or the Administrative Agent, such properly completed and executed documentation reasonably requested by the Borrower or the Administrative Agent as will permit such payments to be made without withholding or at a reduced rate of withholding. In addition, any Lender, if reasonably requested by the Borrower or the Administrative Agent, shall deliver such other documentation prescribed by applicable law or reasonably requested by the Borrower or the Administrative Agent as will enable the Borrower or the Administrative Agent to determine whether or not such Lender is subject to backup withholding or information reporting requirements. Notwithstanding anything to the contrary in the preceding two sentences, the completion, execution and submission of such documentation (other than such documentation set forth in Section 2.14 U.S. (f)(ii)(A), (ii)(B) and (ii)(D) below) shall not be required if in the Lender’s reasonable judgment such completion, execution or submission would subject such Lender to any material unreimbursed cost or expense or would materially prejudice the legal or commercial position of such Lender.
(ii) Without limiting the generality of the foregoing, if the Borrower is a U.S. Person,
(A) any Lender that is a U.S. Person shall deliver to the Borrower and the Administrative Agent on or prior to the date on which such Lender becomes a Lender under this Agreement (and from time to time thereafter upon the reasonable request of the Borrower or the
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Administrative Agent), executed originals of IRS Form W-9 certifying that such Lender is exempt from U.S. federal backup withholding tax;
(B) any Non-U.S. Lender shall, to the extent it is legally entitled to do so, deliver to the Borrower and the Administrative Agent (in such number of copies as shall be requested by the recipient) on or prior to the date on which such Non-U.S. Lender becomes a Lender under this Agreement (and from time to time thereafter upon the reasonable request of the Borrower or the Administrative Agent), whichever of the following is applicable:
(1) in the case of a Non-U.S. Lender claiming the benefits of an income tax treaty to which the U.S. is a party (x) with respect to payments of interest under any Loan Document, executed originals of IRS Form W-8BEN establishing an exemption from, or reduction of, U.S. federal withholding Tax pursuant to the “interest” article of such tax treaty and (y) with respect to any other applicable payments under any Loan Document, IRS Form W-8BEN establishing an exemption from, or reduction of, U.S. federal withholding Tax pursuant to the “business profits” or “other income” article of such tax treaty;
(2) in the case of a Non-U.S. Lender claiming that its extension of credit will generate U.S. effectively connected income, executed originals of IRS Form W-8ECI;
(3) in the case of a Non-U.S. Lender claiming the benefits of the exemption for portfolio interest under Section 881(c) of the Code, (x) a certificate substantially in the form of Exhibit C-1 to the effect that such Non-U.S. Lender is not a “bank” within the meaning of Section 881(c)(3)(A) of the Code, a “10 percent shareholder” of the Borrower within the meaning of Section 881(c)(3)(B) of the Code, or a “controlled foreign corporation” described in Section 881(c)(3)(C) of the Code (a “ U.S. Tax Compliance Certificate ”) and (y) executed originals of IRS Form W-8BEN; or
(4) to the extent a Non-U.S. Lender is not the Beneficial Owner, executed originals of IRS Form W-8IMY, accompanied by IRS Form W-8ECI, IRS Form W-8BEN, a U.S. Tax Compliance Certificate substantially in the form of Exhibit C-2 or Exhibit C-3, IRS Form W-9, and/or other certification documents from each Beneficial Owner, as applicable; provided that if the Non-U.S. Lender is a partnership and one or more direct or indirect partners of such Non-U.S. Lender are claiming the portfolio interest exemption, such Non-U.S. Lender may provide a
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U.S. Tax Compliance Certificate substantially in the form of Exhibit C-4 on behalf of each such direct and indirect partner
(C) any Non-U.S. Lender shall, to the extent it is legally entitled to do so, deliver to the Borrower and the Administrative Agent (in such number of copies as shall be requested by the recipient) on or prior to the date on which such Non-U.S. Lender becomes a Lender under this Agreement (and from time to time thereafter upon the reasonable request of the Borrower or the Administrative Agent), executed originals of any other form prescribed by applicable law as a basis for claiming exemption from or a reduction in U.S. federal withholding Tax, duly completed, together with such supplementary documentation as may be prescribed by applicable law to permit the Borrower or the Administrative Agent to determine the withholding or deduction required to be made; and
(D) if a payment made to a Lender under any Loan Document would be subject to U.S. federal withholding Tax imposed by FATCA if such Lender were to fail to comply with the applicable reporting requirements of FATCA (including those contained in Section 1471(b) or 1472(b) of the Code, as applicable), such Lender shall deliver to the Borrower and the Administrative Agent at the time or times prescribed by law and at such time or times reasonably requested by the Borrower or the Administrative Agent such documentation prescribed by applicable law (including as prescribed by Section 1471(b)(3)(C)(i) of the Code) and such additional documentation reasonably requested by the Borrower or the Administrative Agent as may be necessary for the Borrower and the Administrative Agent to comply with their obligations under FATCA and to determine that such Lender has complied with such Lender’s obligations under FATCA or to determine the amount to deduct and withhold from such payment. Solely for purposes of this clause (D), “FATCA” shall include any amendments made to FATCA after the date of this Agreement.
Each Lender agrees that if any form or certification it previously delivered expires or becomes obsolete or inaccurate in any respect, it shall update such form or certification or promptly notify the Borrower and the Administrative Agent in writing of its legal inability to do so.
(g) Treatment of Certain Refunds . If any party determines, in its sole discretion exercised in good faith, that it has received a refund of any Taxes as to which it has been indemnified pursuant to this Section 2.14 (including by the payment of additional amounts pursuant to this Section 2.14), it shall pay to the indemnifying party an amount equal to such refund (but only to the extent of indemnity payments made under this Section 2.14 with respect to the Taxes giving rise to such refund), net of all out-of-pocket expenses (including Taxes) of such indemnified party and without interest (other than any interest paid by the relevant Governmental Authority with respect to such refund). Such indemnifying party, upon the request of such indemnified party, shall repay to such indemnified party the amount paid over
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pursuant to this paragraph (g) (plus any penalties, interest or other charges imposed by the relevant Governmental Authority) in the event that such indemnified party is required to repay such refund to such Governmental Authority. Notwithstanding anything to the contrary in this paragraph (g), in no event will the indemnified party be required to pay any amount to an indemnifying party pursuant to this paragraph (g) the payment of which would place the indemnified party in a less favorable net after-Tax position than the indemnified party would have been in if the Tax subject to indemnification and giving rise to such refund had not been deducted, withheld or otherwise imposed and the indemnification payments or additional amounts giving rise to such refund had never been paid. This paragraph (g) shall not be construed to require any indemnified party to make available its Tax returns (or any other information relating to its Taxes that it deems confidential) to the indemnifying party or any other Person.
(h) Survival . Each party’s obligations under this Section 2.14 shall survive the resignation or replacement of the Administrative Agent or any assignment of rights by, or the replacement of, a Lender, the termination of the Commitments and the repayment, satisfaction or discharge of all obligations under any Loan Document.
(i) Defined Terms . For purposes of this Section 2.14, the term “applicable law” includes FATCA.
SECTION 2.15. Payments Generally; Pro Rata Treatment; Sharing of Set-offs . (a) The Borrower shall make each payment required to be made by it hereunder (whether of principal, interest, fees or of amounts payable under Section 2.12, 2.13 or 2.14, or otherwise) prior to 2:00 p.m., New York City time, on the date when due, in immediately available funds, without set-off or counterclaim. Any amounts received after such time on any date may, in the discretion of the Administrative Agent, be deemed to have been received on the next succeeding Business Day for purposes of calculating interest thereon. All such payments shall be made to the Administrative Agent at its offices at 270 Park Avenue, New York, New York, except that payments pursuant to Sections 2.12, 2.13, 2.14 and 9.03 shall be made directly to the Persons entitled thereto. The Administrative Agent shall distribute any such payments received by it for the account of any other Person to the appropriate recipient promptly following receipt thereof. If any payment hereunder shall be due on a day that is not a Business Day, the date for payment shall be extended to the next succeeding Business Day, and, in the case of any payment accruing interest, interest thereon shall be payable for the period of such extension. All payments hereunder shall be made in dollars.
(b) If at any time insufficient funds are received by and available to the Administrative Agent to pay fully all amounts of principal, interest and fees then due hereunder, such funds shall be applied (i) first, towards payment of interest and fees then due hereunder, ratably among the parties entitled thereto in accordance with the amounts of interest and fees then due to such parties, and (ii) second, towards payment of principal then due hereunder, ratably among the parties entitled thereto in accordance with the amounts of principal then due to such parties.
(c) If any Lender shall, by exercising any right of set-off or counterclaim or otherwise, obtain payment in respect of any principal of or interest on any of its Loans resulting
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in such Lender receiving payment of a greater proportion of the aggregate amount of its Loans and accrued interest thereon than the proportion received by any other Lender, then the Lender receiving such greater proportion shall purchase (for cash at face value) participations in the Loans of other Lenders to the extent necessary so that the benefit of all such payments shall be shared by the Lenders ratably in accordance with the aggregate amount of principal of and accrued interest on their respective Loans; provided that (i) if any such participations are purchased and all or any portion of the payment giving rise thereto is recovered, such participations shall be rescinded and the purchase price restored to the extent of such recovery, without interest, and (ii) the provisions of this paragraph shall not be construed to apply to any payment made by the Borrower pursuant to and in accordance with the express terms of this Agreement or any payment obtained by a Lender as consideration for the assignment of or sale of a participation in any of its Loans to any assignee or participant, other than to the Borrower or any Subsidiary or Affiliate thereof (as to which the provisions of this paragraph shall apply). The Borrower consents to the foregoing and agrees, to the extent it may effectively do so under applicable law, that any Lender acquiring a participation pursuant to the foregoing arrangements may exercise against the Borrower rights of set-off and counterclaim with respect to such participation as fully as if such Lender were a direct creditor of the Borrower in the amount of such participation.
(d) Unless the Administrative Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Administrative Agent for the account of the Lenders hereunder that the Borrower will not make such payment, the Administrative Agent may assume that the Borrower has made such payment on such date in accordance herewith and may, in reliance upon such assumption, distribute to the Lenders the amount due. In such event, if the Borrower has not in fact made such payment, then each of the Lenders severally agrees to repay to the Administrative Agent forthwith on demand the amount so distributed to such Lender with interest thereon, for each day from and including the date such amount is distributed to it to but excluding the date of payment to the Administrative Agent, at the greater of the Federal Funds Effective Rate and a rate determined by the Administrative Agent in accordance with banking industry rules on interbank compensation.
(e) If any Lender shall fail to make any payment required to be made by it pursuant to Section 2.04(b), 2.15(d) or 9.03(c), then the Administrative Agent may, in its discretion and notwithstanding any contrary provision hereof, apply any amounts thereafter received by the Administrative Agent for the account of such Lender to satisfy such Lender’s obligations under such Sections until all such unsatisfied obligations are fully paid, and/or hold such amounts in a segregated account over which the Administrative Agent shall have exclusive control as cash collateral for, and application to, any future funding obligations of such Lender under any such Section, in each case, in any order as determined by the Administrative Agent in its discretion.
SECTION 2.16. Mitigation Obligations; Replacement of Lenders . (a) If any Lender requests compensation under Section 2.12, or if the Borrower is required to pay any additional amount to any Lender or any Governmental Authority for the account of any Lender pursuant to Section 2.14, then such Lender shall use reasonable efforts to designate a different lending office for funding or booking its Loans hereunder or to assign its rights and obligations hereunder to another of its offices, branches or affiliates, if, in the judgment of such Lender, such designation
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or assignment (i) would eliminate or reduce amounts payable pursuant to Section 2.12 or 2.14, as the case may be, in the future and (ii) would not subject such Lender to any unreimbursed cost or expense and would not otherwise be disadvantageous to such Lender. The Borrower hereby agrees to pay all reasonable costs and expenses incurred by any Lender in connection with any such designation or assignment.
(b) If any Lender requests compensation under Section 2.12, or if the Borrower is required to pay any additional amount to any Lender or any Governmental Authority for the account of any Lender pursuant to Section 2.14, or if any Lender becomes a Defaulting Lender, then the Borrower may, at its sole expense and effort, upon notice to such Lender and the Administrative Agent, require such Lender to assign and delegate, without recourse (in accordance with and subject to the restrictions contained in Section 9.04), all its interests, rights and obligations under this Agreement to an assignee that shall assume such obligations (which assignee may be another Lender, if a Lender accepts such assignment); provided that (i) the Borrower shall have received the prior written consent of the Administrative Agent, which consent shall not unreasonably be withheld, (ii) such Lender shall have received payment of an amount equal to the outstanding principal of its Loans, accrued interest thereon, accrued fees and all other amounts payable to it hereunder, from the assignee (to the extent of such outstanding principal and accrued interest and fees) or the Borrower (in the case of all other amounts) and (iii) in the case of any such assignment resulting from a claim for compensation under Section 2.12 or payments required to be made pursuant to Section 2.14, such assignment will result in a reduction in such compensation or payments. A Lender shall not be required to make any such assignment and delegation if, prior thereto, as a result of a waiver by such Lender or otherwise, the circumstances entitling the Borrower to require such assignment and delegation cease to apply.
SECTION 2.17. Defaulting Lenders .
Notwithstanding any provision of this Agreement to the contrary, if any Lender becomes a Defaulting Lender, then the following provisions shall apply for so long as such Lender is a Defaulting Lender:
(a) fees shall cease to accrue on the unfunded portion of the Commitment of such Defaulting Lender pursuant to Section 2.12(a); and
(b) such Defaulting Lender shall not have the right to vote on any issue on which voting is required (other than to the extent provided in Section 9.02(b)) and the Commitment and Revolving Credit Exposure of such Defaulting Lender shall not be included in determining whether the Required Lenders have taken or may take any action hereunder; provided that, except as otherwise provided in Section 9.02, this clause (b) shall not apply to the vote of a Defaulting Lender in the case of an amendment, waiver or other modification requiring the consent of such Lender or each Lender affected thereby.
SECTION 2.18. Increase of Commitments .
(a) The Borrower may, from time to time, by notice to the Administrative Agent, request that the aggregate Commitments be increased by an amount that will not result in
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the aggregate Commitments exceeding $200,000,000; provided that each increase in aggregate Commitments under this Section shall be in a minimum amount of $25,000,000. Each such notice shall set forth the requested amount of the increase in the Commitments and the date on which such increase is to become effective. The Borrower shall have the right, but not the obligation, to arrange for one or more commercial banks or other financial institutions (any such bank or other financial institution being called an “ Augmenting Lender ”), which may include any Lender, to extend Commitments or increase their existing Commitments in an aggregate amount up to, but not greater than, the requested increase, provided that each Augmenting Lender, if not already a Lender hereunder (i) shall extend a new Commitment of not less than $5,000,000, (ii) shall execute all such documentation as the Administrative Agent shall reasonably specify to evidence its status as a Lender hereunder and (iii) shall be consented to by the Administrative Agent (which consent shall not be unreasonably withheld or delayed). Such increases and such new Commitments shall become effective on the date agreed to by the Borrower, the Augmenting Lenders and the Administrative Agent. Notwithstanding the foregoing, no increase in the aggregate Commitments (or in the Commitment of any Lender) shall become effective under this paragraph unless, on the date of such increase, the conditions set forth in Section 4.02 shall be satisfied (with all references in such paragraphs to a Loan being deemed to be references to such increase) and the Administrative Agent shall have received a certificate to that effect dated such date and executed by an Executive Officer of the Borrower. Notwithstanding anything else in the foregoing, no Lender shall become an Augmenting Lender without such Lender’s consent.
(b) Upon the effectiveness of any increase pursuant to this Section 2.18 of the aggregate Commitments and any resulting adjustment in the Applicable Percentages, the Lenders and the Augmenting Lenders will purchase from each other and sell to each other outstanding Loans sufficient to cause the outstanding Loans of each Lender and Augmenting Lender to equal its Applicable Percentage (as so adjusted) of the aggregate outstanding Revolving Loans. Such purchase and sale shall be made pursuant to Section 9.04 except that no minimum amount shall be required, no processing fee shall be charged and, if any Lender shall suffer a loss or incur an expense as a result of the effectiveness of such purchase or sale being during an Interest Period, the Borrower shall reimburse such Lender the amount of such loss or expense. Each such Lender shall furnish the Borrower with a certificate setting forth, in reasonable detail, the basis for determining the amount to be paid to it hereunder.
ARTICLE III
Representations and Warranties
The Borrower represents and warrants to the Lenders that:
SECTION 3.01. Due Organization, Authorization, Etc . Each of the Borrower and each Subsidiary (a) is a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation, (b) is duly qualified to do business and in good standing in each jurisdiction where, because of the nature of its activities or properties, such qualification is required, which jurisdictions are set forth with respect to the Borrower and each Subsidiary on Schedule 3.01, (c) has the requisite corporate power and authority and the right to own and operate its properties, to lease the property it operates under lease, and to conduct its business as
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now and proposed to be conducted, and (d) has obtained all material licenses, permits, consents or approvals from or by, and has made all filings with, and given all notices to, all Governmental Authorities having jurisdiction, to the extent required for such ownership, operation and conduct (including, without limitation, the consummation of the transactions contemplated by this Agreement) as to each of the foregoing except where the failure to do so would not have a Material Adverse Effect on the Borrower, or on the Borrower and its Subsidiaries taken as a whole. The execution, delivery and performance by the Borrower of this Agreement and the consummation of the transactions contemplated hereby and thereby are within its corporate powers, have been duly authorized by all necessary corporate action (including, without limitation, shareholder approval, if required) and do not contravene or conflict with the Borrower’s articles of incorporation or bylaws. Each of the Borrower and its Subsidiaries has received all material governmental and other consents and approvals (if any shall be required) necessary for such execution, delivery and performance, and such execution, delivery and performance do not and will not contravene or conflict with, or create a Lien or right of termination or acceleration under, any Requirement of Law or Contractual Obligation binding upon the Borrower or such Subsidiaries. This Agreement and each of the Loan Documents is (or when executed and delivered will be) the legal, valid, and binding obligation of the Borrower enforceable against the Borrower in accordance with its respective terms; provided that the Borrower assumes for purposes of this Section 3.01 that this Agreement and the other Loan Documents have been validly executed and delivered by each of the parties thereto other than the Borrower.
SECTION 3.02. Statutory Financial Statements . (a) The Annual Statement of each of the Insurance Subsidiaries as filed with the appropriate Governmental Authority of its state of domicile (the “ Department ”) and delivered to each Lender prior to the execution and delivery of this Agreement, as of and for the 2012 and 2013 Fiscal Years and as of and for the Fiscal Quarter ended March 31, 2014 (collectively, the “ Statutory Financial Statements ”), have been prepared in accordance with SAP applied on a consistent basis (except as noted therein). Each such Statutory Financial Statement was in material compliance with applicable law when filed. The Statutory Financial Statements fairly present the financial position, the results of operations, changes in equity and changes in financial position of each such Insurance Subsidiary as of and for the respective dates and periods indicated therein in accordance with SAP applied on a consistent basis, except as set forth in the notes thereto or on Schedule 3.02(a). All books of account of each of the Insurance Subsidiaries fully and fairly disclose all of the transactions, properties, assets, investments, liabilities and obligations of such Insurance Subsidiary and all of such books of account are in the possession of each such Insurance Subsidiary and are true, correct and complete in all material respects.
(b) The investments of Insurance Subsidiaries reflected in the Annual Statements filed with the respective Departments with respect to the 2012 Fiscal Year (the “ 2012 Annual Statement ”), the 2013 Fiscal Year (the “ 2013 Annual Statement ”) and the March 31, 2014 Quarterly Statement (the “ 2014 Quarterly Statement ”) comply in all material respects with all applicable requirements of the Department with respect to each such Insurance Subsidiary as well as those of any other applicable jurisdiction relating to investments in respect of which it may invest its funds.
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(c) Marketable securities and short term investments reflected in the 2012 Annual Statement, the 2013 Annual Statement and in the 2014 Quarterly Statement of each Insurance Subsidiary are valued at cost, amortized cost or market value, as required by applicable law.
(d) There has been no event or occurrence which has had or could reasonably be expected to have a Material Adverse Effect on the Borrower, or on the Borrower and its Subsidiaries taken as a whole, since March 31, 2014.
SECTION 3.03. GAAP Financial Statements . (a) The Borrower has furnished to the Administrative Agent and each of the Lenders (i) a copy of the unaudited consolidated balance sheets of the Borrower and its Subsidiaries, and the balance sheet of the Borrower on an unconsolidated basis as of March 31, 2014 and the related consolidated statements of income and cash flows for that portion of the Fiscal Year ending as of the close of March 31, 2014 and (ii) a copy of the unaudited consolidated statement of income of the Borrower and its Subsidiaries, and the statement of income of the Borrower on an unconsolidated basis, for March 31, 2014, all prepared in accordance with GAAP (subject to normal year-end adjustments and except that footnote and schedule disclosures are abbreviated) which financial statements are complete and correct and present fairly in accordance with GAAP (subject to normal year-end adjustments) consolidated or unconsolidated, as the case may be results of operations and cash flows of the Borrower as of March 31, 2014 and the period then ended.
(b) The Borrower has provided to the Administrative Agent and each Lender a copy of the annual audited consolidated financial statements of the Borrower and its Subsidiaries, consisting of consolidated balance sheets and consolidated statements of income and retained earnings and cash flows, setting forth in comparative form in each case the consolidated figures for the years ended December 31, 2012 and December 31, 2013, which financial statements have been prepared in accordance with GAAP and certified without material qualification by KPMG LLP. Such financial statements are complete and correct and present fairly in accordance with GAAP the consolidated financial position and the consolidated results of operations and cash flows of the Borrower and its Subsidiaries as at the end of such year and for the period then ended.
(c) With respect to any representation and warranty which is deemed to be made after the date hereof by the Borrower, the balance sheet and statements of operations, of shareholders’ equity and of cash flow, which as of such date shall most recently have been furnished by or on behalf of the Borrower to each Lender for the purposes of or in connection with this Agreement or any transaction contemplated hereby, shall have been prepared in accordance with GAAP consistently applied (except as disclosed therein), and shall present fairly the consolidated financial condition of the corporations covered thereby as at the dates thereof for the periods then ended, subject, in the case of quarterly financial statements, to normal year-end audit adjustments.
SECTION 3.04. Litigation and Contingent Liabilities . Except as set forth (including estimates of the dollar amounts involved) in Schedule 3.04 hereto and except for claims which are covered by Insurance Policies, coverage for which has not been denied in writing, or which relate to insurance policies or surety contracts issued by the Borrower or to
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which it is a party, reinsurance treaties, reinsurance certificates, or any other such agreements entered into by the Borrower in the ordinary course of business (referred to herein as “ Ordinary Course Litigation ”), no claim, litigation (including, without limitation, derivative actions), arbitration, governmental investigation or proceeding or inquiry is pending or threatened against the Borrower or any of its Subsidiaries (i) which would, if adversely determined, have a Material Adverse Effect on the Borrower, or on the Borrower and its Subsidiaries taken as a whole or (ii) which relates to any of the transactions contemplated hereby, and there is no basis known to the Borrower for any of the foregoing. Other than any liability incident to such claims, litigation or proceedings, the Borrower has no material Contingent Liabilities not provided for or referred to in the financial statements delivered pursuant to Section 3.03.
SECTION 3.05. Investment Company Act . Other than Horace Mann Investors, Inc., neither the Borrower nor any of its Subsidiaries is an “investment company” or a company “controlled by an investment company,” within the meaning of the Investment Company Act of 1940, as amended.
SECTION 3.06. Regulations T, U and X . Neither the Borrower nor any of its Subsidiaries is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying margin stock. None of the Borrower, any of its Subsidiaries or any Person acting on their behalf has taken or will take action to cause the execution, delivery or performance of this Agreement or the Note, the making or existence of the Loans or the use of proceeds of the Loans to violate Regulations T, U or X of the Board.
SECTION 3.07. Proceeds . The proceeds of the Loans will be used for general corporate purposes. None of such proceeds will be used in violation of applicable law, and none of such proceeds will be used, directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of buying or carrying any margin stock as defined in Regulation U of the Board.
SECTION 3.08. Insurance . The Borrower and its Subsidiaries maintain Insurance Policies to such extent and against such hazards and liabilities as is required by law or customarily maintained by prudent companies similarly situated.
SECTION 3.09. Accuracy of Information . All factual written information furnished heretofore or contemporaneously herewith by or on behalf of the Borrower or any of its Subsidiaries to the Administrative Agent or the Lenders for purposes of or in connection with this Agreement or any of the transactions contemplated hereby, as supplemented to the date hereof, is and all other such factual written information hereafter furnished by or on behalf of the Borrower or any of its Subsidiaries to the Administrative Agent or the Lenders will be, true and accurate in every material respect on the date as of which such information is dated or certified and not incomplete by omitting to state any material fact necessary to make such information not misleading.
SECTION 3.10. Subsidiaries . As of the Effective Date, Schedule 3.10 contains a complete list of the Borrower’s Subsidiaries and indicates which Subsidiaries are Material Insurance Subsidiaries.
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SECTION 3.11. Insurance Licenses . Except as set forth on Schedule 3.11, to the best of the Borrower’s knowledge, no license (including, without limitation, licenses or certificates of authority from applicable insurance departments), permits or authorizations to transact insurance and reinsurance business (collectively, the “ Licenses ”) is the subject of a proceeding for suspension or revocation or any similar proceedings, there is no sustainable basis for such a suspension or revocation, and no such suspension or revocation is threatened by any state insurance department.
SECTION 3.12. Taxes . The Borrower and each of its Subsidiaries has filed all material Tax returns and reports that are required to be filed by it, and has paid or provided adequate reserves for the payment of all material Taxes payable by it that have become due, other than those that are not yet delinquent and are being contested in good faith by appropriate proceedings and with respect to which reserves have been established, and are being maintained, in accordance with GAAP.
SECTION 3.13. Compliance with Laws . Neither the Borrower nor any of its Subsidiaries is in violation of any law, ordinance, rule, regulation, order, policy, guideline or other requirement of any Governmental Authority (including, without limitation, ERISA or environmental laws), if the effect of such violation could reasonably be expected to have a Material Adverse Effect on the Borrower, or on the Borrower and its Subsidiaries taken as a whole and, to the best of the Borrower’s knowledge, no such violation has been alleged and each of the Borrower and its Subsidiaries (a) has filed in a timely manner all reports, documents and other materials required to be filed by it with any Governmental Authority, if such failure to so file could reasonably be expected to have a Material Adverse Effect on the Borrower, or on the Borrower and its Subsidiaries taken as a whole; and the information contained in each of such filings is true, correct and complete in all material respects and (b) has retained all records and documents required to be retained by it pursuant to any law, ordinance, rule, regulation, order, policy, guideline or other requirement of any Governmental Authority, if the failure to so retain such records and documents could reasonably be expected to have a Material Adverse Effect on the Borrower, or on the Borrower and its Subsidiaries taken as a whole.
SECTION 3.14. No Default . Neither the Borrower nor any Subsidiary is in default under or with respect to any Contractual Obligation that could, either individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. No Default has occurred and is continuing or would result from the consummation of the transactions contemplated by this Agreement or any other Loan Document.
SECTION 3.15. Ownership of Property; Liens . Each of the Borrower and each Subsidiary has good record and marketable title in fee simple to, or valid leasehold interests in, all real property necessary or used in the ordinary conduct of its business, except for such defects in title as could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. The property of the Borrower and its Subsidiaries is subject to no Liens, other than Liens permitted by Section 6.08.
SECTION 3.16. Anti-Corruption Laws and Sanctions . The Borrower has implemented and maintains in effect policies and procedures designed to ensure compliance by the Borrower, its Subsidiaries and their respective directors, officers, employees and agents with
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Anti-Corruption Laws and applicable Sanctions, and the Borrower, its Subsidiaries and their respective directors, officers, employees and agents are in compliance with Anti-Corruption Laws and applicable Sanctions in all material respects. None of (a) the Borrower, any Subsidiary or any of their respective directors, officers or employees, or (b) to the knowledge of the Borrower, any Subsidiary or any of their respective agents that will act in any capacity in connection with or benefit from the credit facility established hereby, is a Sanctioned Person. No Borrowing, use of proceeds, Transaction or other transaction contemplated by this Agreement or the other Loan Documents will violate Anti-Corruption Laws or applicable Sanctions.
ARTICLE
IV
Conditions
SECTION 4.01. Effective Date . The obligations of the Lenders to make Loans hereunder shall not become effective until the date on which each of the following conditions is satisfied (or waived in accordance with Section 9.02):
(a) The Administrative Agent (or its counsel) shall have received from each party hereto either (i) a counterpart of this Agreement signed on behalf of such party or (ii) written evidence satisfactory to the Administrative Agent (which may include telecopy transmission of a signed signature page of this Agreement) that such party has signed a counterpart of this Agreement.
(b) The Administrative Agent shall have received a favorable written opinion (addressed to the Administrative Agent and the Lenders and dated the Effective Date) of counsel for the Borrower, covering such other matters relating to the Borrower, this Agreement or the Transactions as the Administrative Agent shall reasonably request. The Borrower hereby requests such counsel to deliver such opinion.
(c) The Administrative Agent shall have received such documents and certificates as the Administrative Agent or its counsel may reasonably request relating to the organization, existence and good standing of the Borrower, the authorization of the Transactions and any other legal matters relating to the Borrower, this Agreement or the Transactions, all in form and substance satisfactory to the Administrative Agent and its counsel.
(d) The Administrative Agent shall have received a certificate, dated the Effective Date and signed by the President, a Vice President or an Executive Officer of the Borrower, confirming compliance with the conditions set forth in paragraphs (a) and (b) of Section 4.02.
(e) The Administrative Agent shall have received all fees and other amounts due and payable on or prior to the Effective Date, including, to the extent invoiced, reimbursement or payment of all out-of-pocket expenses required to be reimbursed or paid by the Borrower hereunder.
(f) The Borrower shall have delivered the financial statements referred to in Section 3.02.
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The Administrative Agent shall notify the Borrower and the Lenders of the Effective Date, and such notice shall be conclusive and binding.
SECTION 4.02. Each Credit Event . The obligation of each Lender to make a Loan on the occasion of any Borrowing is subject to the satisfaction of the following conditions:
(a) The representations and warranties of the Borrower set forth in this Agreement shall be true and correct on and as of the date of such Borrowing, except to the extent that such representations and warranties specifically refer to an earlier date, in which case they shall be true and correct as of the date of such earlier date.
(b) At the time of and immediately after giving effect to such Borrowing, no Default shall have occurred and be continuing.
Each Borrowing shall be deemed to constitute a representation and warranty by the Borrower on the date thereof as to the matters specified in paragraphs (a) and (b) of this Section.
ARTICLE
V
Affirmative Covenants
Until the Commitments have expired or been terminated and the principal of and interest on each Loan and all fees payable hereunder shall have been paid in full, the Borrower covenants and agrees with the Lenders that it will:
SECTION 5.01. Reports, Certificates and Other Information . Furnish or cause to be furnished to the Administrative Agent and the Lenders:
(a) GAAP Financial Statements :
(i) Within 50 days after the close of each of the first three Fiscal Quarters of each Fiscal Year of the Borrower, a copy of its Form 10-Q filed with the Securities and Exchange Commission and accompanied by the certification of the chief executive officer, chief financial officer or treasurer of the Borrower that the financial statements set forth therein are complete and correct and present fairly in accordance with GAAP (subject to normal year-end adjustments) the consolidated, or unconsolidated, as the case may be, results of operations and cash flows of the Borrower as at the end of such Fiscal Quarter and for the period then ended.
(ii) Within 95 days after the close of each Fiscal Year, a copy of the annual audited consolidated financial statements of the Borrower and its Subsidiaries, consisting of consolidated balance sheets and consolidated statements of income and retained earnings and cash flows, setting forth in comparative form in each case the consolidated figures for the previous Fiscal Year, which financial statements shall be prepared in accordance with GAAP, certified without material qualification by the independent certified public accountants regularly retained by the Borrower, or any other firm of independent
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certified public accountants of recognized national standing selected by the Borrower and reasonably acceptable to the Required Lenders that all such financial statements are complete and correct and present fairly in accordance with GAAP the consolidated financial position and the consolidated results of operations and cash flows of the Borrower and its Subsidiaries as at the end of such year and for the period then ended.
(b) Tax Returns . If requested by the Administrative Agent, copies of all federal, state, local and foreign Tax returns and reports in respect of income, franchise or other Taxes on or measured by income (excluding sales, use or like Taxes) filed by the Borrower or any of its Subsidiaries.
(c) SAP Financial Statements :
(i) Within 5 days after the applicable regulatory filing date for each of its Fiscal Quarters, but in any event within 50 days after the end of each of the first three Fiscal Quarters of each Fiscal Year of each Insurance Subsidiary a copy of the Quarterly Statement of such Insurance Subsidiary for such Fiscal Quarter, all prepared in accordance with SAP and accompanied by the certification of the chief financial officer or chief executive officer of each Insurance Subsidiary that all such financial statements are complete and correct and present fairly in accordance with SAP the financial position of such Insurance Subsidiary for the periods then ended.
(ii) Within 5 days after the applicable regulatory filing date for each of its Fiscal Years, but in any event within 60 days after the end of each Fiscal Year of each Insurance Subsidiary a copy of the Annual Statement of each Insurance Subsidiary for such Fiscal Year prepared in accordance with SAP and accompanied by the certification of the chief financial officer or chief executive officer of each Insurance Subsidiary that such financial statement is complete and correct and presents fairly in accordance with SAP the financial position of such Insurance Subsidiary for the period then ended.
(iii) Within 5 days after the applicable regulatory filing date for each of its Fiscal Years, but in any event within 95 days after the close of each Fiscal Year of each Insurance Subsidiary a copy of each Insurance Subsidiary’s “Statement of Actuarial Opinion” which is provided to the applicable Department (or equivalent information should the Department no longer require such a statement) as to the adequacy of loss reserves of such Insurance Subsidiary. Such opinion shall be in the format prescribed by the applicable Insurance Code.
(d) Notice of Default, etc . Immediately after an Executive Officer of the Borrower knows or has reason to know of the existence of any Default, or any development or other information which would have a Material Adverse Effect on the Borrower, or on the Borrower and its Subsidiaries taken as a whole, telephonic notice specifying the nature of such Default or development or information, including the anticipated effect thereof, which notice shall be promptly confirmed in writing within two (2) Business Days.
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(e) Other Information . The following certificates and other information related to the Borrower:
(i) Promptly after completion of each such item but in no event later than the first day of April of each Fiscal Year of the Borrower, a copy of the Borrower’s (A) operating budget and (B) new business plans, if any, which are in the form approved by the Board of Directors of the Borrower.
(ii) Within five (5) Business Days of receipt, a copy of any financial examination reports by a Governmental Authority with respect to the Insurance Subsidiaries relating to the insurance business of the Insurance Subsidiaries (when, and if, prepared); provided the Borrower shall only be required to deliver any interim report hereunder at such time as Borrower has knowledge that a final report will not be issued and delivered to the Administrative Agent within 90 days of any such interim report.
(iii) Copies of all Insurance Holding Company System Regulatory Act filings with Governmental Authorities in the applicable state of domicile, with respect to any occurrence which might reasonably be expected to have a Material Adverse Effect, by the Borrower or any Subsidiary not later than five (5) Business Days after such filings are made, including, without limitation, filings which seek approval of Governmental Authorities with respect to transactions between the Borrower or such Subsidiary and its Affiliates.
(iv) Within five (5) Business Days of such notice, notice of actual suspension, termination or revocation of any material License of the Insurance Subsidiaries by any Governmental Authority or of receipt of notice from any Governmental Authority notifying the Borrower of a hearing (which is not withdrawn within ten (10) days) relating to such a suspension, termination or revocation, including any request by a Governmental Authority which commits the Borrower to take, or refrain from taking, any action or which otherwise materially and adversely affects the authority of the Borrower to conduct its business.
(v) Within five (5) Business Days of such notice, notice of any pending or threatened investigation or regulatory proceeding (other than routine periodic investigations or reviews) by any Governmental Authority concerning the business, practices or operations of the Borrower, including any agent or managing general agent thereof.
(vi) Promptly upon any change in the rating for Index Debt of the Borrower, notice of such change.
(vii) Promptly, such additional financial and other information as the Administrative Agent or any Lender may from time to time reasonably request.
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(viii) Promptly, notice of any actual or, to the best of the Borrower’s knowledge, proposed material changes in the Insurance Code governing the investment or dividend practices of any Insurance Subsidiary.
(ix) Promptly upon effectiveness, notice of any change of accounting or financial reporting practices.
(f) Compliance Certificates . Concurrently with the later to occur of delivery to the Administrative Agent of the GAAP financial statements and delivery to the Administrative Agent of the SAP financial statements under Sections 5.01(a) and 5.01(c), for each Fiscal Quarter and Fiscal Year of the Borrower, and at any other time no later than thirty (30) Business Days following a written request of the Administrative Agent, a duly completed Compliance Certificate, signed by an Executive Officer of the Borrower, containing, among other things, a computation of, and showing compliance with, each of the applicable financial ratios and restrictions contained in Sections 6.01 through 6.03, and to the effect that, to the best of such officer’s knowledge, as of such date no Default has occurred and is continuing.
(g) Reports to SEC and to Shareholders . Promptly upon the filing or making thereof (i) copies of each filing and report made by the Borrower or any of its Subsidiaries with or to any securities exchange or the Securities and Exchange Commission and (ii) of each communication from the Borrower to shareholders generally; provided that only those items described in clauses (i) and (ii) of this Section 5.01(g) which are material to the interest of the Lenders hereunder shall be provided to the Administrative Agent and the Lenders hereunder.
(h) Notice of Litigation, License and ERISA Matters . Upon learning of the occurrence of any of the following, written notice thereof, describing the same and the steps being taken by the Borrower with respect thereto: (i) the institution of, or any adverse determination in, any litigation, arbitration proceeding or governmental proceeding (including any IRS, Department of Labor, or Pension Benefit Guaranty Corporation proceeding with respect to any Plan) which could, if adversely determined, be reasonably expected to have a Material Adverse Effect on the Borrower, or on the Borrower and its Subsidiaries taken as a whole and which is not Ordinary Course Litigation, (ii) the failure of any Person in the Controlled Group to make a required contribution to any Plan in an amount sufficient to give rise to a Lien under section 303(k) of ERISA or 430(k) of the Code, (iii) the institution of any steps by any entity in the Controlled Group to withdraw from a Plan subject to section 4063 of ERISA or from a Multiemployer Plan, or the institution of any steps by any entity in the Controlled Group or any other Person to terminate any Plan (other than in a standard termination within the meaning of section 4041(b) of ERISA), or the taking of any action with respect to a Plan which could result in the requirement that the Borrower or any of its Subsidiaries furnish a bond or other security to such Plan, or the occurrence of any event with respect to any Plan which could result in the incurrence by the Borrower or any of its Subsidiaries of any material liability (other than a liability for contributions or premiums), fine or penalty, (iv) the commencement of any dispute which might lead to the modification, transfer, revocation, suspension or termination of this Agreement or any Loan Document or (v) any event which could be reasonably expected to have a Material Adverse Effect on the Borrower, or on the Borrower and its Subsidiaries taken as a whole.
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(i) Other Information . From time to time such other information concerning the Borrower or any Subsidiary as the Administrative Agent or any Lender may reasonably request.
SECTION 5.02. Corporate Existence; Foreign Qualification . Do and cause to be done at all times all things necessary to (a) maintain and preserve the corporate existence of the Borrower, (b) be, and ensure that each Subsidiary of the Borrower is, duly qualified to do business and be in good standing as a foreign corporation in each jurisdiction where the nature of its business makes such qualification necessary, and (c) do or cause to be done all things necessary to preserve and keep in full force and effect the Borrower’s corporate existence.
SECTION 5.03. Books, Records and Inspections . (a) Maintain, and cause each of its Subsidiaries to maintain, materially complete and accurate books and records, (b) permit, and cause each of its Subsidiaries to permit, access at reasonable times by the Administrative Agent and the Lenders to its books and records, (c) permit, and cause each of its Subsidiaries to permit, the Administrative Agent, the Lenders or their respective designated representatives to inspect at reasonable times its properties and operations, and (d) permit, and cause each of its Subsidiaries to permit, the Administrative Agent and the Lenders to discuss its business, operations and financial condition with its officers.
SECTION 5.04. Insurance . Maintain, and cause each of its Subsidiaries to maintain, Insurance Policies to such extent and against such hazards and liabilities as is required by law or customarily maintained by prudent companies similarly situated.
SECTION 5.05. Taxes and Liabilities . Pay, and cause each of its Subsidiaries to pay, when due all material Taxes, assessments and other material liabilities except as contested in good faith and by appropriate proceedings with respect to which reserves have been established, and are being maintained, in accordance with GAAP if and so long as such contest could not reasonably be expected to have a Material Adverse Effect on the Borrower, or on the Borrower and its Subsidiaries taken as a whole.
SECTION 5.06. Compliance with Laws . Comply, and cause each of its Subsidiaries to comply, (a) with all federal, state and local laws, rules and regulations related to its businesses (including, without limitation, the establishment of all insurance reserves required to be established under SAP and applicable laws restricting the investments of the Borrower), and (b) with all Contractual Obligations binding upon such entity, except where failure so to comply would not in the aggregate have a Material Adverse Effect on the Borrower, or on the Borrower and its Subsidiaries taken as a whole.
SECTION 5.07. Conduct of Business . Engage on a consolidated basis with its Subsidiaries primarily in the same business in which the Borrower and its Subsidiaries are engaged on the date hereof.
SECTION 5.08. Maintenance of Properties . Maintain, preserve and protect and cause each of its Subsidiaries to maintain, preserve and protect, all of its material properties and equipment necessary in the operation of its business in good working order and condition, ordinary wear and tear excepted.
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SECTION 5.09. Use of Proceeds . Use proceeds of the Loans only for general corporate purposes. No part of the proceeds of any Loan will be used, whether directly or indirectly, for any purpose that entails a violation of any Regulations of the Board (including Regulations T, U and X), Anti-Corruption Laws or applicable Sanctions.
SECTION 5.10. Accuracy Of Information . Ensure that any information, including financial statements or other documents, furnished to the Administrative Agent or the Lenders in connection with this Agreement or any amendment or modification hereof or waiver hereunder contains no material misstatement of fact or omits to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, and the furnishing of such information shall be deemed to be representation and warranty by the Borrower on the date thereof as to the matters specified in this Section 5.10.
SECTION 5.11. Anti-Corruption Laws and Sanctions . Maintain in effect policies and procedures designed to ensure compliance by the Borrower, its Subsidiaries and their respective directors, officers and employees with Anti-Corruption Laws and applicable Sanctions, and the Borrower will remain, and shall cause its Subsidiaries and their respective directors, officers and employees to remain, in compliance with Anti-Corruption Laws and applicable Sanctions in all material respects.
ARTICLE VI
Negative Covenants
Until the Commitments have expired or terminated and the principal of and interest on each Loan and all fees payable hereunder have been paid in full, the Borrower covenants and agrees that, unless at any time the Required Lenders shall otherwise expressly consent in writing, it will:
SECTION 6.01. Consolidated Debt to Total Capitalization . Not permit the ratio of (a) the principal amount of Consolidated Debt to (b) the sum of (i) Net Worth plus (ii) Consolidated Debt to exceed 0.35 to 1.0 at any time.
SECTION 6.02. Net Worth . Not permit its Net Worth at any time to be less than the Minimum Net Worth. “ Minimum Net Worth ” means $801,270,400 plus 50% of equity contributions after June 30, 2014; provided that on each June 30, commencing June 30, 2015, if 80% of the consolidated net worth of the Borrower and its Subsidiaries, calculated in accordance with GAAP, is greater than the Minimum Net Worth, the Minimum Net Worth shall be increased to such greater amount.
SECTION 6.03. Minimum Risk Based Capital . The Borrower shall not permit Horace Mann Life Insurance Company or the P/C Subsidiaries (taken as a whole) to maintain, as of the end of any Fiscal Year, a ratio (expressed as a percentage) of (a) Total Adjusted Capital (as defined in the Risk-Based Capital (RBC) for Insurers Act in the applicable state of domicile or in the rules and procedures prescribed from time to time by the NAIC with respect thereto) to (b) the Company Action Level RBC (as defined in the Risk-Based Capital Act or in the rules and procedures prescribed from time to time by the NAIC with respect thereto) of less than 300%.
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SECTION 6.04. Mergers, Consolidations and Sales . Not, and not permit any of its Subsidiaries to, (a) merge or consolidate, or purchase or otherwise acquire all or substantially all of the assets or stock of any class of, or any partnership or joint venture interest in, any other Person, other than mergers or acquisitions where the corporate existence of the Borrower is not affected by such merger or acquisition and, subsequent to such merger or acquisition, the Borrower is in compliance with all the provisions of this Agreement and no Default shall exist, or (b) sell, transfer, convey or lease all or any substantial part of its assets or sell or assign with or without recourse any receivables, other than any sale, transfer, conveyance or lease in the ordinary course of business.
SECTION 6.05. Regulations T, U and X . Not, and not permit any of its Subsidiaries to, use or permit any proceeds of the Loans to be used, either directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of purchasing or carrying margin stock, as defined in Regulation U of the Board.
SECTION 6.06. Restrictive Agreements . Not, and will not permit any of its Subsidiaries to, directly or indirectly, enter into, incur or permit to exist any agreement or other arrangement that prohibits, restricts or imposes any condition upon (a) the ability of the Borrower or any Subsidiary to create, incur or permit to exist any Lien upon any of its property or assets, or (b) the ability of any Subsidiary to pay dividends or other distributions with respect to any shares of its capital stock or to make or repay loans or advances to the Borrower or any other Subsidiary or to guarantee Indebtedness of the Borrower or any other Subsidiary; provided that (i) the foregoing shall not apply to restrictions and conditions imposed by law or by this Agreement, (ii) the foregoing shall not apply to restrictions and conditions existing on the date hereof identified on Schedule 6.06 (but shall apply to any extension or renewal of, or any amendment or modification expanding the scope of, any such restriction or condition), (iii) the foregoing shall not apply to customary restrictions and conditions contained in agreements relating to the sale of a Subsidiary pending such sale, provided such restrictions and conditions apply only to the Subsidiary that is to be sold and such sale is permitted hereunder, (iv) clause (a) of the foregoing shall not apply to restrictions or conditions imposed by any agreement relating to secured Indebtedness permitted by this Agreement if such restrictions or conditions apply only to the property or assets securing such Indebtedness and (v) clause (a) of the foregoing shall not apply to customary provisions in leases and other contracts restricting the assignment thereof.
SECTION 6.07. Transactions with Affiliates . Not, and not permit any Subsidiary to, enter into, or cause, suffer or permit to exist, directly or indirectly, any arrangement, transaction or contract with any of its Affiliates unless such arrangement, transaction or contract is in the ordinary course of business, reasonably intended to satisfy the reasonable business requirements of the Borrower or such Subsidiary, and on terms and conditions at least as favorable to the Borrower or such Subsidiary as the terms and conditions which would apply in a similar arrangement, transaction or contract with a Person or entity not an Affiliate; provided that transactions between the Borrower and any wholly-owned Subsidiary of the Borrower or between any wholly-owned Subsidiaries of the Borrower shall be excluded from the restrictions set forth in this Section 6.07.
SECTION 6.08. Liens . Not, and not permit any of its Subsidiaries to, create or permit to exist any Lien with respect to any assets now or hereafter existing or acquired, except
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the following: (a) Liens for current taxes not delinquent or for taxes being contested in good faith and by appropriate proceedings and with respect to which adequate reserves have been established, and are being maintained, in accordance with GAAP, (b) Liens arising in the ordinary course of business or by operation of law for sums being contested in good faith and by appropriate proceedings and with respect to which adequate reserves have been established, and are being maintained, in accordance with GAAP, or for sums not due, and in either case not involving any deposits or advances for borrowed money or the deferred purchase price of property or services, (c) Liens in connection with the acquisition of fixed assets after the date hereof and attaching only to the property being acquired, (d) Liens incurred in the ordinary course of business in connection with workers’ compensation, unemployment insurance or other forms of governmental insurance or benefits, (e) mechanics’, workers’, materialmen’s and other like Liens arising in the ordinary course of business in respect of obligations which are not delinquent or which are being contested in good faith and by appropriate proceedings and with respect to which adequate reserves have been established, and are being maintained, in accordance with GAAP, (f) Liens securing FHLB Operating Debt, FHLB Liquidity Debt and Securities Lending and (g) other Liens securing Debt which Debt does not in the aggregate exceed $5,000,000; provided , however , that, no Lien shall be permitted to exist on the shares of stock of any of its Subsidiaries.
SECTION 6.09. Subsidiary Debt . Not permit the aggregate amount of Debt of its Subsidiaries at any time outstanding to exceed $20,000,000, plus , solely with respect to any Insurance Subsidiary, FHLB Operating Debt.
SECTION 6.10. Securities Lending . Not permit the aggregate market value of securities subject to Securities Lending at any time to exceed the Threshold Amount less the aggregate amount of FHLB Operating Debt outstanding at such time; provided that for purposes of this Section 6.10, the market value of any security subject to Securities Lending shall be measured as of the time the applicable Securities Lending transaction was entered into.
ARTICLE
VII
Events of Default
If any of the following events (“ Events of Default ”) shall occur:
(a) Non-Payment of Loan . Default in the payment when due of any principal on the Loans;
(b) Non-Payment of Interest, Fees, Etc. Default, and continuance thereof for 3 Business Days, in the payment when due of interest on the Loans or of any other amount payable hereunder or under the Loan Documents;
(c) Non-Payment of Other Debt . (i) Default in the payment when due (subject to any applicable grace period), whether by acceleration or otherwise, of any other Debt of, or guaranteed by, the Borrower or any of its Subsidiaries if the aggregate amount of Debt of the Borrower and/or any of its Subsidiaries which is accelerated or due and payable, or which may be accelerated or otherwise become due and payable, by reason of such default or defaults is
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$20,000,000 or more, or (ii) default in the performance or observance of any obligation or condition with respect to any such other Debt of, or guaranteed by, the Borrower and/or any of its Subsidiaries if the effect of such default or defaults is to accelerate the maturity of any such Debt of $20,000,000 or more in the aggregate or to permit the holder or holders of such Debt of $20,000,000 or more in the aggregate, or any trustee or agent for such holders, to cause such Debt to become due and payable prior to its expressed maturity;
(d) Other Material Obligations . Except for obligations covered under other provisions of this Article VII, default in the payment when due, or in the performance or observance of, any material obligation of, or material condition agreed to by, the Borrower or any of its Subsidiaries with respect to any material purchase or Lease Obligation (except only to the extent that the existence of any such default is being contested by the Borrower in good faith and by appropriate proceedings and the Borrower has established, and is maintaining, adequate reserves therefor in accordance with GAAP) which default continues for a period of 30 days;
(e) Bankruptcy, Insolvency, Etc. (i) (A) The Borrower becomes insolvent or generally fails to pay, or admits in writing its inability to pay, debts as they become due; or (B) the Borrower applies for, consents to, or acquiesces in the appointment of, a trustee, receiver or other custodian or similar Person for the Borrower or any property of any thereof, or makes a general assignment for the benefit of creditors; or (C) in the absence of such application, consent or acquiescence, a trustee, receiver or other custodian or similar Person is appointed for the Borrower or for a substantial part of the property of any thereof, unless (1) the Borrower institutes appropriate proceedings to contest or discharge such appointment within 30 days and thereafter continuously and diligently prosecutes such proceedings and (2) such appointment is in fact discharged within 60 days of such appointment; or (D) any bankruptcy, reorganization, debt arrangement, or other case or proceeding under any bankruptcy or insolvency law, or any dissolution or liquidation proceeding is commenced in respect of the Borrower, unless (1) such case or proceeding is not commenced by the Borrower, (2) such case or proceeding is not consented to or acquiesced in by the Borrower, (3) the Borrower institutes appropriate proceedings to dismiss such case or proceeding within 30 days and thereafter continuously and diligently prosecutes such proceedings, and (4) such case or proceeding is in fact dismissed within 60 days after the commencement thereof; or (5) the Borrower takes any action to authorize, or in furtherance of, any of the foregoing; or (ii) (A) there shall be commenced against any Insurance Subsidiary any case, proceeding or other action (1) under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, supervision, conservatorship, liquidation, reorganization or relief of debtors, seeking to have an order for relief entered with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or seeking reorganization, rehabilitation, conservation, supervision, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts, obligations or liabilities, or (2) seeking appointment of a receiver, trustee, custodian, rehabilitator, conservator, supervisor, liquidator or other similar official for it or for all or any substantial part of its assets, in each case which (x) results in the entry of an order for relief or any such adjudication or appointment or (y) remains undismissed, undischarged or unbonded for a period of 60 days; or (B) there shall be commenced against any of such Subsidiaries any case, proceeding or other action seeking issuance of a warrant of attachment, execution, distraint or similar process against all or any substantial part of its assets which results in the entry of an order for any such relief which shall not have been vacated, discharged, or stayed or bonded pending appeal within 60
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days from the entry thereof; or (C) any of such Subsidiaries shall take any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the acts set forth in clause(ii)(A) or (B) above; or (D) any Governmental Authority shall issue any order of conservation, supervision or any other order of like effect relating to any of such Subsidiaries;
(f) Non-compliance with Certain Provisions . Failure of the Borrower to comply with the provisions of each of Sections 5.01(d), 5.01(h), 5.02(a), 6.01 through 6.03, 6.04, 6.07, 6.08 or 6.09;
(g) Non-compliance With Other Provisions . Failure by the Borrower to comply with or to perform any provision of this Agreement or the other Loan Documents (and not constituting an Event of Default under any of the other provisions of this Article VII) and continuance of such failure for 30 days after notice thereof from the Administrative Agent to the Borrower;
(h) Warranties and Representations . Any warranty or representation made by or on behalf of the Borrower or any Subsidiary herein is inaccurate or incorrect or is breached or false or misleading in any material respect as of the date such warranty or representation is made; or any schedule, certificate, financial statement, report, notice, or other instrument furnished by or on behalf of Borrower or any Subsidiary to the Administrative Agent or the Lenders is false or misleading in any material respect on the date as of which the facts therein set forth are stated or certified;
(i) Employee Benefit Plans . Any of the following occurs: (i) a contribution failure occurs with respect to any Plan sufficient to give rise to a Lien against the Borrower or any of its Subsidiaries under section 303(k) of ERISA or 430(k) of the Code or a Lien arises against the Borrower or any of its Subsidiaries under section 4068 of ERISA, (ii) a withdrawal by one or more entities in the Controlled Group from one or more Plans subject to section 4063 of ERISA or from one or more Multiemployer Plans to which it or they have an obligation to contribute and the withdrawal liability (without unaccrued interest) to such Plans or Multiemployer Plans as a result of such withdrawal or withdrawals (including any outstanding withdrawal liability that any entity in the Controlled Group has incurred on the date of such withdrawal) is in excess of $20,000,000, (iii) the termination of one or more Plans and the liability of the entities in the Controlled Group with respect to such terminated Plan or Plans is in excess of $20,000,000;
(j) Change in Control . A Change in Control occurs;
(k) Litigation . (i) There shall be entered against the Borrower or any of its Subsidiaries one or more judgments, awards or decrees, or orders of attachment, garnishment or any other writ, which exceed $50,000,000, individually or in the aggregate, excluding judgments, awards, decrees, orders or writs (A) for which there is insurance, but only to the extent there is actual insurance coverage, (B) for which there is indemnification (upon terms and from creditworthy indemnitors which are satisfactory to Administrative Agent), but only to the extent there is actual indemnification, (C) which have been in force for less than the applicable period for filing an appeal so long as execution is not levied thereunder (or in respect of which the Borrower or its appropriate Subsidiary shall at the time in good faith be prosecuting an appeal or
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proceeding for review and in respect of which a stay of execution or appropriate appeal bond shall have been obtained pending such appeal or review), (D) which constitute Ordinary Course Litigation, or (E) which are reserved for, to the actual extent of reserves or (ii) there has been a final judgment or final judgments for the payment of money exceeding, in the aggregate, $50,000,000 rendered against the Borrower or any of its Subsidiaries by a court of competent jurisdiction and such judgment(s) remain undischarged for a period (during which execution shall not be effectively stayed) of 60 days after such judgment(s) become final and nonappealable;
(l) Change in Law . Any change is made in the Insurance Code which affects the dividend practices of any Insurance Subsidiary and which is reasonably likely to have a Material Adverse Effect on the ability of the Borrower to perform its obligations under the Agreement and such circumstances shall continue for 120 days; or
(m) Invalidity of Loan Documents . Any Loan Document, at any time after its execution and delivery and for any reason other than as expressly permitted hereunder or thereunder or satisfaction in full of all principal of and interest on each Loan and all fees payable hereunder, ceases to be in full force and effect; or the Borrower or any other Person contests in any manner the validity or enforceability of any Loan Document; or the Borrower denies that it has any or further liability or obligation under any Loan Document, or purports to revoke, terminate or rescind any Loan Document;
then, and in every such event (other than an event with respect to the Borrower described in clause (e) of this Article), and at any time thereafter during the continuance of such event, the Administrative Agent may, and at the request of the Required Lenders shall, by notice to the Borrower, take either or both of the following actions, at the same or different times: (i) terminate the Commitments, and thereupon the Commitments shall terminate immediately, and (ii) declare the Loans then outstanding to be due and payable in whole (or in part, in which case any principal not so declared to be due and payable may thereafter be declared to be due and payable), and thereupon the principal of the Loans so declared to be due and payable, together with accrued interest thereon and all fees and other obligations of the Borrower accrued hereunder, shall become due and payable immediately, without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower; and in case of any event with respect to the Borrower described in clause (e) of this Article, the Commitments shall automatically terminate and the principal of the Loans then outstanding, together with accrued interest thereon and all fees and other obligations of the Borrower accrued hereunder, shall automatically become due and payable, without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower.
ARTICLE
VIII
The Administrative Agent
Each of the Lenders hereby irrevocably appoints the Administrative Agent as its agent and authorizes the Administrative Agent to take such actions on its behalf and to exercise such powers as are delegated to the Administrative Agent by the terms hereof, together with such actions and powers as are reasonably incidental thereto.
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The bank serving as the Administrative Agent hereunder shall have the same rights and powers in its capacity as a Lender as any other Lender and may exercise the same as though it were not the Administrative Agent, and such bank and its Affiliates may accept deposits from, lend money to and generally engage in any kind of business with the Borrower or any Subsidiary or other Affiliate thereof as if it were not the Administrative Agent hereunder.
The Administrative Agent shall not have any duties or obligations except those expressly set forth herein. Without limiting the generality of the foregoing, (a) the Administrative Agent shall not be subject to any fiduciary or other implied duties, regardless of whether a Default has occurred and is continuing, (b) the Administrative Agent shall not have any duty to take any discretionary action or exercise any discretionary powers, except discretionary rights and powers expressly contemplated hereby that the Administrative Agent is required to exercise in writing as directed by the Required Lenders (or such other number or percentage of the Lenders as shall be necessary under the circumstances as provided in Section 9.02), and (c) except as expressly set forth herein, the Administrative Agent shall not have any duty to disclose, and shall not be liable for the failure to disclose, any information relating to the Borrower or any of its Subsidiaries that is communicated to or obtained by the bank serving as Administrative Agent or any of its Affiliates in any capacity. The Administrative Agent shall not be liable for any action taken or not taken by it with the consent or at the request of the Required Lenders (or such other number or percentage of the Lenders as shall be necessary under the circumstances as provided in Section 9.02) or in the absence of its own gross negligence or willful misconduct. The Administrative Agent shall be deemed not to have knowledge of any Default unless and until written notice thereof is given to the Administrative Agent by the Borrower or a Lender, and the Administrative Agent shall not be responsible for or have any duty to ascertain or inquire into (i) any statement, warranty or representation made in or in connection with this Agreement, (ii) the contents of any certificate, report or other document delivered hereunder or in connection herewith, (iii) the performance or observance of any of the covenants, agreements or other terms or conditions set forth herein, (iv) the validity, enforceability, effectiveness or genuineness of this Agreement or any other agreement, instrument or document, or (v) the satisfaction of any condition set forth in Article IV or elsewhere herein, other than to confirm receipt of items expressly required to be delivered to the Administrative Agent.
The Administrative Agent shall be entitled to rely upon, and shall not incur any liability for relying upon, any notice, request, certificate, consent, statement, instrument, document or other writing believed by it to be genuine and to have been signed or sent by the proper Person. The Administrative Agent also may rely upon any statement made to it orally or by telephone and believed by it to be made by the proper Person, and shall not incur any liability for relying thereon. The Administrative Agent may consult with legal counsel (who may be counsel for the Borrower), independent accountants and other experts selected by it, and shall not be liable for any action taken or not taken by it in accordance with the advice of any such counsel, accountants or experts.
The Administrative Agent may perform any and all its duties and exercise its rights and powers by or through any one or more sub-agents appointed by the Administrative Agent. The Administrative Agent and any such sub-agent may perform any and all its duties and exercise its rights and powers through their respective Related Parties. The exculpatory
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provisions of the preceding paragraphs shall apply to any such sub-agent and to the Related Parties of the Administrative Agent and any such sub-agent, and shall apply to their respective activities in connection with the syndication of the credit facilities provided for herein as well as activities as Administrative Agent.
Subject to the appointment and acceptance of a successor Administrative Agent as provided in this paragraph, the Administrative Agent may resign at any time upon 10 business days’ notice to the Lenders and the Borrower. Upon any such resignation, the Required Lenders shall have the right, in consultation with the Borrower, to appoint a successor. If no successor shall have been so appointed by the Required Lenders and shall have accepted such appointment within 30 days after the retiring Administrative Agent gives notice of its resignation, then the retiring Administrative Agent may, on behalf of the Lenders, appoint a successor Administrative Agent which shall be a bank with an office in New York, New York, or an Affiliate of any such bank. Upon the acceptance of its appointment as Administrative Agent hereunder by a successor, such successor shall succeed to and become vested with all the rights, powers, privileges and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations hereunder. The fees payable by the Borrower to a successor Administrative Agent shall be the same as those payable to its predecessor unless otherwise agreed between the Borrower and such successor. After the Administrative Agent’s resignation hereunder, the provisions of this Article and Section 9.03 shall continue in effect for the benefit of such retiring Administrative Agent, its sub-agents and their respective Related Parties in respect of any actions taken or omitted to be taken by any of them while it was acting as Administrative Agent.
Each Lender acknowledges that it has, independently and without reliance upon the Administrative Agent or any other Lender and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon the Administrative Agent or any other Lender and based on such documents and information as it shall from time to time deem appropriate, continue to make its own decisions in taking or not taking action under or based upon this Agreement, any related agreement or any document furnished hereunder or thereunder.
ARTICLE
IX
Miscellaneous
SECTION 9.01. Notices . (a) Except in the case of notices and other communications expressly permitted to be given by telephone (and subject to paragraph (b) below), all notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by telecopy or facsimile (or email with a PDF copy attached), as follows:
(i) if to the Borrower, to it at One Horace Mann Plaza, Springfield, Illinois 62715-001, Attention of Angela Christian (Telephone No. 217.788.5350) (Telecopy No. 217.788.5796) (Email: angela.christian@horacemann.com ) (Website www.horacemann.com );
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(ii) if to the Administrative Agent for purposes of loan administration information, to JPMorgan Chase Bank, 10 South Dearborn, Floor 7, Chicago, Illinois 60603, Attention of Joyce Kind (Telephone No. 312.385.7084) (Telecopy No. 888.292.9533) (Email: joyce.p.king@jpmchase.com );
(iii) if to the Administrative Agent for purposes of covenant compliance/financial information, to JPMorgan Chase Bank, 10 South Dearborn, Floor 9, Chicago, Illinois 60603-2300, Attention of Danielle Babine (Telephone No. 312.325.3261) (Telecopy No. 312.386.7632) (Email: danielle.d.babine@jpmorgan.com ); and
(iv) if to any other Lender, to it at its address (or telecopy number) set forth in its Administrative Questionnaire.
(b) Notices and other communications to the Lenders hereunder may be delivered or furnished by electronic communications (including internet or intranet websites) pursuant to procedures approved by the Administrative Agent; provided that the foregoing shall not apply to notices pursuant to Article II unless otherwise agreed by the Administrative Agent and the applicable Lender. The Administrative Agent or the Borrower may, in its discretion, agree to accept notices and other communications to it hereunder by electronic communications pursuant to procedures approved by it; provided that approval of such procedures may be limited to particular notices or communications.
(c) Any party hereto may change its address or facsimile number for notices and other communications hereunder by notice to the other parties hereto. All notices and other communications given to any party hereto in accordance with the provisions of this Agreement shall be deemed to have been given on the date of receipt.
SECTION 9.02. Waivers; Amendments . (a) No failure or delay by the Administrative Agent or any Lender in exercising any right or power hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of the Administrative Agent and the Lenders hereunder are cumulative and are not exclusive of any rights or remedies that they would otherwise have. No waiver of any provision of this Agreement or consent to any departure by the Borrower therefrom shall in any event be effective unless the same shall be permitted by paragraph (b) of this Section, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. Without limiting the generality of the foregoing, the making of a Loan shall not be construed as a waiver of any Default, regardless of whether the Administrative Agent or any Lender may have had notice or knowledge of such Default at the time.
(b) Neither this Agreement nor any provision hereof may be waived, amended or modified except pursuant to an agreement or agreements in writing entered into by the Borrower and the Required Lenders or by the Borrower and the Administrative Agent with the consent of the Required Lenders; provided that no such agreement shall (i) increase the Commitment of any Lender without the written consent of such Lender, (ii) reduce the principal
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amount of any Loan or reduce the rate of interest thereon, or reduce any fees payable hereunder, without the written consent of each Lender affected thereby, (iii) postpone the scheduled date of payment of the principal amount of any Loan, or any interest thereon, or any fees payable hereunder, or reduce the amount of, waive or excuse any such payment, or postpone the scheduled date of expiration of any Commitment, without the written consent of each Lender affected thereby, (iv) change Section 2.15(b) or (c) in a manner that would alter the pro rata sharing of payments required thereby, without the written consent of each Lender, or (v) change any of the provisions of this Section or the definition of “Required Lenders” or any other provision hereof specifying the number or percentage of Lenders required to waive, amend or modify any rights hereunder or make any determination or grant any consent hereunder, without the written consent of each Lender; provided , further , that no such agreement shall amend, modify or otherwise affect the rights or duties of the Administrative Agent hereunder without the prior written consent of the Administrative Agent.
SECTION 9.03. Expenses; Indemnity; Damage Waiver . (a) The Borrower shall pay (i) all reasonable out-of-pocket expenses incurred by the Administrative Agent, the Arrangers and any of their respective Affiliates, including the reasonable fees, charges and disbursements of counsel for the Administrative Agent, in connection with the syndication of the credit facilities provided for herein, the preparation and administration of this Agreement or any amendments, modifications or waivers of the provisions hereof (whether or not the transactions contemplated hereby or thereby shall be consummated) and (ii) all out-of-pocket expenses incurred by the Administrative Agent or any Lender, including the fees, charges and disbursements of any counsel for the Administrative Agent or any Lender, in connection with the enforcement or protection of its rights in connection with this Agreement, including its rights under this Section, or in connection with the Loans made hereunder, including all such out-of-pocket expenses incurred during any workout, restructuring or negotiations in respect of such Loans.
(b) The Borrower shall indemnify the Administrative Agent, the Arrangers and each Lender, and each Related Party of any of the foregoing Persons (each such Person being called an “ Indemnitee ”) against, and hold each Indemnitee harmless from, any and all losses, claims, damages, liabilities and related expenses, including the fees, charges and disbursements of any counsel for any Indemnitee, incurred by or asserted against any Indemnitee arising out of, in connection with, or as a result of (i) the execution or delivery of this Agreement or any agreement or instrument contemplated hereby, the performance by the parties hereto of their respective obligations hereunder or the consummation of the Transactions or any other transactions contemplated hereby, (ii) any Loan or (iii) any actual or prospective claim, litigation, investigation or proceeding relating to any of the foregoing, whether based on contract, tort or any other theory and regardless of whether any Indemnitee is a party thereto; provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related expenses are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from the gross negligence or willful misconduct of such Indemnitee. This Section 9.3(b) shall not apply with respect to Taxes other than any Taxes that represent losses or damages arising from any non-Tax claim.
(c) To the extent that the Borrower fails to pay any amount required to be paid by it to the Administrative Agent under paragraph (a) or (b) of this Section, each Lender
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severally agrees to pay to the Administrative Agent such Lender’s Applicable Percentage (determined as of the time that the applicable unreimbursed expense or indemnity payment is sought) of such unpaid amount; provided that the unreimbursed expense or indemnified loss, claim, damage, liability or related expense, as the case may be, was incurred by or asserted against the Administrative Agent in its capacity as such.
(d) To the extent permitted by applicable law, the Borrower shall not assert, and hereby waives, any claim against any Indemnitee, on any theory of liability, for special, indirect, consequential or punitive damages (as opposed to direct or actual damages) arising out of, in connection with, or as a result of, this Agreement or any agreement or instrument contemplated hereby, the Transactions, any Loan or the use of the proceeds thereof.
(e) All amounts due under this Section shall be payable not later than 10 Business Days after written demand therefor.
SECTION 9.04. Successors and Assigns . (a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted hereby, except that (i) the Borrower may not assign or otherwise transfer any of its rights or obligations hereunder without the prior written consent of each Lender (and any attempted assignment or transfer by the Borrower without such consent shall be null and void) and (ii) no Lender may assign or otherwise transfer its rights or obligations hereunder except in accordance with this Section. Nothing in this Agreement, expressed or implied, shall be construed to confer upon any Person (other than the parties hereto, their respective successors and assigns permitted hereby, Participants (to the extent provided in paragraph (c) of this Section) and, to the extent expressly contemplated hereby, the Related Parties of each of the Administrative Agent and the Lenders) any legal or equitable right, remedy or claim under or by reason of this Agreement.
(b) (i) Subject to the conditions set forth in paragraph (b)(ii) below, any Lender may assign to one or more Persons (other than an Ineligible Institution) all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans at the time owing to it) with the prior written consent (such consent not to be unreasonably withheld) of:
(A) the Borrower, provided that, the Borrower shall be deemed to have consented to an assignment unless it shall have objected thereto by written notice to the Administrative Agent within five (5) Business Days after having received notice thereof; provided , further , that no consent of the Borrower shall be required for an assignment to a Lender, an Affiliate of a Lender, an Approved Fund or, if an Event of Default has occurred and is continuing, any other assignee; and
(B) the Administrative Agent, provided that no consent of the Administrative Agent shall be required for an assignment of any Commitment to an assignee that is a Lender with a Commitment immediately prior to giving effect to such assignment.
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As used herein, “Ineligible Institution” means a (a) natural person or (b) holding company, investment vehicle or trust for, or owned and operated for the primary benefit of, a natural person or relative(s) thereof; provided that, such holding company, investment vehicle or trust shall not constitute an Ineligible Institution if it (x) has not been established for the primary purpose of acquiring any Loans or Commitments, (y) is managed by a professional advisor, who is not such natural person or a relative thereof, having significant experience in the business of making or purchasing commercial loans, and (z) has assets greater than $25,000,000 and a significant part of its activities consist of making or purchasing commercial loans and similar extensions of credit in the ordinary course of its business; provided that upon the occurrence of an Event of Default, any Person (other than a Lender) shall be an Ineligible Institutions if after giving effect any proposed assignment to such Person, such Person would hold more than 25% of the then outstanding Revolving Credit Exposure or Commitments, as the case may be.
(ii) Assignments shall be subject to the following additional conditions:
(A) except in the case of an assignment to a Lender or an Affiliate of a Lender or an assignment of the entire remaining amount of the assigning Lender’s Commitment or Loans, the amount of the Commitment or Loans of the assigning Lender subject to each such assignment (determined as of the date the Assignment and Assumption with respect to such assignment is delivered to the Administrative Agent) shall not be less than $5,000,000 unless each of the Borrower and the Administrative Agent otherwise consent, provided that no such consent of the Borrower shall be required if an Event of Default has occurred and is continuing;
(B) each partial assignment shall be made as an assignment of a proportionate part of all the assigning Lender’s rights and obligations under this Agreement;
(C) the parties to each assignment shall execute and deliver to the Administrative Agent an Assignment and Assumption, together with a processing and recordation fee of $3,500; and
(D) the assignee, if it shall not be a Lender, shall deliver to the Administrative Agent an Administrative Questionnaire in which the assignee designates one or more Credit Contacts to whom all syndicate-level information (which may contain material non-public information about the Borrower and its related parties or its securities) will be made available and who may receive such information in accordance with the assignee’s compliance procedures and applicable laws, including Federal and state securities laws.
(iii) Subject to acceptance and recording thereof pursuant to paragraph (b)(iv) of this Section, from and after the effective date specified in each Assignment and Assumption the assignee thereunder shall be a party hereto
56 |
and, to the extent of the interest assigned by such Assignment and Assumption, have the rights and obligations of a Lender under this Agreement, and the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Assumption, be released from its obligations under this Agreement (and, in the case of an Assignment and Assumption covering all of the assigning Lender’s rights and obligations under this Agreement, such Lender shall cease to be a party hereto but shall continue to be entitled to the benefits of Sections 2.12, 2.13, 2.14 and 9.03). Any assignment or transfer by a Lender of rights or obligations under this Agreement that does not comply with this Section 9.04 shall be treated for purposes of this Agreement as a sale by such Lender of a participation in such rights and obligations in accordance with paragraph (c) of this Section.
(iv) The Administrative Agent, acting for this purpose as an agent of the Borrower, shall maintain at one of its offices a copy of each Assignment and Assumption delivered to it and a register for the recordation of the names and addresses of the Lenders, and the Commitment of, and principal amount of the Loans owing to, each Lender pursuant to the terms hereof from time to time (the “ Register ”). The entries in the Register shall be conclusive, and the Borrower, the Administrative Agent and the Lenders shall treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement, notwithstanding notice to the contrary. The Register shall be available for inspection by the Borrower and any Lender, at any reasonable time and from time to time upon reasonable prior notice.
(v) Upon its receipt of a duly completed Assignment and Assumption executed by an assigning Lender and an assignee, the assignee’s completed Administrative Questionnaire (unless the assignee shall already be a Lender hereunder), the processing and recordation fee referred to in paragraph (b) of this Section and any written consent to such assignment required by paragraph (b) of this Section, the Administrative Agent shall accept such Assignment and Assumption and record the information contained therein in the Register; provided that if either the assigning Lender or the assignee shall have failed to make any payment required to be made by it pursuant to Section 2.04(b), 2.15(d) or 9.03(c), the Administrative Agent shall have no obligation to accept such Assignment and Assumption and record the information therein in the Register unless and until such payment shall have been made in full, together with all accrued interest thereon. No assignment shall be effective for purposes of this Agreement unless it has been recorded in the Register as provided in this paragraph.
(c) Any Lender may, without the consent of the Borrower or the Administrative Agent, sell participations to one or more banks or other entities (a “ Participant ”), other than an Ineligible Institution, in all or a portion of such Lender’s rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans owing to it); provided that (A) such Lender’s obligations under this Agreement shall remain unchanged, (B) such Lender shall remain solely responsible to the other parties hereto for the performance of
57 |
such obligations and (C) the Borrower, the Administrative Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender’s rights and obligations under this Agreement. Any agreement or instrument pursuant to which a Lender sells such a participation shall provide that such Lender shall retain the sole right to enforce this Agreement and to approve any amendment, modification or waiver of any provision of this Agreement; provided that such agreement or instrument may provide that such Lender will not, without the consent of the Participant, agree to any amendment, modification or waiver described in the first proviso to Section 9.02(b) that affects such Participant. The Borrower agrees that each Participant shall be entitled to the benefits of Sections 2.12, 2.13 and 2.14 (subject to the requirements and limitations therein, including the requirements under Section 2.14(f) (it being understood that the documentation required under Section 2.14(f) shall be delivered to the participating Lender)) to the same extent as if it were a Lender and had acquired its interest by assignment pursuant to paragraph (b) of this Section; provided that such Participant (A) agrees to be subject to the provisions of Sections 2.15 and 2.16 as if it were an assignee under paragraph (b) of this Section; and (B) shall not be entitled to receive any greater payment under Sections 2.12 or 2.14, with respect to any participation, than its participating Lender would have been entitled to receive, except to the extent such entitlement to receive a greater payment results from a Change in Law that occurs after the Participant acquired the applicable participation.. To the extent permitted by law, each Participant also shall be entitled to the benefits of Section 9.08 as though it were a Lender, provided that such Participant agrees to be subject to Section 2.15(c) as though it were a Lender. Each Lender that sells a participation shall, acting solely for this purpose as an agent of the Borrower, maintain a register on which it enters the name and address of each Participant and the principal amounts (and stated interest) of each Participant’s interest in the Loans or other obligations under this Agreement (the “ Participant Register ”); provided that no Lender shall have any obligation to disclose all or any portion of the Participant Register to any Person (including the identity of any Participant or any information relating to a Participant’s interest in any Commitments, Loans or its other obligations under any Loan Document) except to the extent that such disclosure is necessary to establish that such Commitment, Loan or other obligation is in registered form under Section 5f.103-1(c) of the United States Treasury Regulations. The entries in the Participant Register shall be conclusive absent manifest error, and such Lender shall treat each person whose name is recorded in the Participant Register as the owner of such participation for all purposes of this Agreement notwithstanding any notice to the contrary.
(d) Any Lender may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement to secure obligations of such Lender, including any pledge or assignment to secure obligations to a Federal Reserve Bank, and this Section shall not apply to any such pledge or assignment of a security interest; provided that no such pledge or assignment of a security interest shall release a Lender from any of its obligations hereunder or substitute any such pledgee or assignee for such Lender as a party hereto.
SECTION 9.05. Survival . All covenants, agreements, representations and warranties made by the Borrower herein and in the certificates or other instruments delivered in connection with or pursuant to this Agreement shall be considered to have been relied upon by the other parties hereto and shall survive the execution and delivery of this Agreement and the making of any Loans, regardless of any investigation made by any such other party or on its behalf and notwithstanding that the Administrative Agent or any Lender may have had notice or
58 |
knowledge of any Default or incorrect representation or warranty at the time any credit is extended hereunder, and shall continue in full force and effect as long as the principal of or any accrued interest on any Loan or any fee or any other amount payable under this Agreement is outstanding and unpaid and so long as the Commitments have not expired or terminated. The provisions of Sections 2.12, 2.13, 2.14 and 9.03 and Article VIII shall survive and remain in full force and effect regardless of the consummation of the transactions contemplated hereby, the repayment of the Loans, the expiration or termination of the Commitments or the termination of this Agreement or any provision hereof.
SECTION 9.06. Counterparts; Integration; Effectiveness . This Agreement may be executed in counterparts (and by different parties hereto on different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract. This Agreement, the other Loan Documents and any separate letter agreement with respect to fees payable to the Administrative Agent constitute the entire contract among the parties relating to the subject matter hereof and supersede any and all previous agreements and understandings, oral or written, relating to the subject matter hereof. Except as provided in Section 4.01, this Agreement shall become effective when it shall have been executed by the Administrative Agent and when the Administrative Agent shall have received counterparts hereof which, when taken together, bear the signatures of each of the other parties hereto, and thereafter shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. Delivery of an executed counterpart of a signature page of this Agreement by telecopy or any other electronic means that reproduces an image of the actual executed signature page shall be effective as delivery of a manually executed counterpart of this Agreement.
SECTION 9.07. Severability . Any provision of this Agreement held to be invalid, illegal or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such invalidity, illegality or unenforceability without affecting the validity, legality and enforceability of the remaining provisions hereof; and the invalidity of a particular provision in a particular jurisdiction shall not invalidate such provision in any other jurisdiction.
SECTION 9.08. Right of Setoff . If an Event of Default shall have occurred and be continuing, each Lender and each of its Affiliates is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other obligations at any time owing by such Lender or Affiliate to or for the credit or the account of the Borrower against any of and all the obligations of the Borrower now or hereafter existing under this Agreement held by such Lender, irrespective of whether or not such Lender shall have made any demand under this Agreement and although such obligations may be unmatured. The rights of each Lender under this Section are in addition to other rights and remedies (including other rights of setoff) which such Lender may have.
SECTION 9.09. Governing Law; Jurisdiction; Consent to Service of Process . (a) This Agreement shall be construed in accordance with and governed by the law of the State of Illinois.
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(b) The Borrower hereby irrevocably and unconditionally submits, for itself and its property, to the exclusive jurisdiction of the Circuit Court of the State of Illinois sitting in Cook County, Illinois and of the United States District Court for the Northern District of Illinois, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in such Illinois State or, to the extent permitted by law, in such Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement shall affect any right that the Administrative Agent or any Lender may otherwise have to bring any action or proceeding relating to this Agreement against the Borrower or its properties in the courts of any jurisdiction.
(c) The Borrower hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection which it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement in any court referred to in paragraph (b) of this Section. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court.
(d) Each party to this Agreement irrevocably consents to service of process in the manner provided for notices in Section 9.01. Nothing in this Agreement will affect the right of any party to this Agreement to serve process in any other manner permitted by law.
SECTION 9.10. WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION.
SECTION 9.11. Headings. Article and Section headings and the Table of Contents used herein are for convenience of reference only, are not part of this Agreement and shall not affect the construction of, or be taken into consideration in interpreting, this Agreement.
SECTION 9.12. Confidentiality . (a) Each of the Administrative Agent and the Lenders agrees to maintain the confidentiality of the Information (as defined below), except that Information may be disclosed (i) to its and its Affiliates’ directors, officers, employees and agents, including accountants, legal counsel and other advisors (it being understood that the Persons to whom such disclosure is made will be informed of the confidential nature of such
60 |
Information and instructed to keep such Information confidential), (ii) to the extent requested by any regulatory authority, (iii) to the extent required by applicable laws or regulations or by any subpoena or similar legal process, (iv) to any other party to this Agreement, (v) in connection with the exercise of any remedies hereunder or any suit, action or proceeding relating to this Agreement or the enforcement of rights hereunder, (vi) subject to an agreement containing provisions substantially the same as those of this Section, to (A) any assignee of or Participant in, or any prospective assignee of or Participant in, any of its rights or obligations under this Agreement or (B) any actual or prospective counterparty (or its advisors) to any swap or derivative transaction relating to the Borrower and its obligations, (vii) with the consent of the Borrower or (viii) to the extent such Information (A) becomes publicly available other than as a result of a breach of this Section or (B) becomes available to the Administrative Agent or any Lender on a nonconfidential basis from a source other than the Borrower. For the purposes of this Section, “ Information ” means all information received from the Borrower relating to the Borrower or its business, other than any such information that is available to the Administrative Agent or any Lender on a nonconfidential basis prior to disclosure by the Borrower; provided that, in the case of information received from the Borrower after the date hereof, such information is clearly identified at the time of delivery as confidential. Any Person required to maintain the confidentiality of Information as provided in this Section shall be considered to have complied with its obligation to do so if such Person has exercised the same degree of care to maintain the confidentiality of such Information as such Person would accord to its own confidential information.
(b) EACH LENDER ACKNOWLEDGES THAT INFORMATION AS DEFINED IN SECTION 9.12(a) FURNISHED TO IT PURSUANT TO THIS AGREEMENT MAY INCLUDE MATERIAL NON-PUBLIC INFORMATION CONCERNING THE BORROWER AND ITS RELATED PARTIES OR THEIR RESPECTIVE SECURITIES, AND CONFIRMS THAT IT HAS DEVELOPED COMPLIANCE PROCEDURES REGARDING THE USE OF MATERIAL NON-PUBLIC INFORMATION AND THAT IT WILL HANDLE SUCH MATERIAL NON-PUBLIC INFORMATION IN ACCORDANCE WITH THOSE PROCEDURES AND APPLICABLE LAW, INCLUDING FEDERAL AND STATE SECURITIES LAWS.
(c) ALL INFORMATION, INCLUDING REQUESTS FOR WAIVERS AND AMENDMENTS, FURNISHED BY THE BORROWER OR THE ADMINISTRATIVE AGENT PURSUANT TO, OR IN THE COURSE OF ADMINISTERING, THIS AGREEMENT WILL BE SYNDICATE-LEVEL INFORMATION, WHICH MAY CONTAIN MATERIAL NON-PUBLIC INFORMATION ABOUT THE BORROWER AND ITS RELATED PARTIES OR ITS SECURITIES. ACCORDINGLY, EACH LENDER REPRESENTS TO THE BORROWER AND THE ADMINISTRATIVE AGENT THAT IT HAS IDENTIFIED IN ITS ADMINISTRATIVE QUESTIONNAIRE A CREDIT CONTACT WHO MAY RECEIVE INFORMATION THAT MAY CONTAIN MATERIAL NON-PUBLIC INFORMATION IN ACCORDANCE WITH ITS COMPLIANCE PROCEDURES AND APPLICABLE LAW.
SECTION 9.13. Interest Rate Limitation . Notwithstanding anything herein to the contrary, if at any time the interest rate applicable to any Loan, together with all fees, charges
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and other amounts which are treated as interest on such Loan under applicable law (collectively the “ Charges ”), shall exceed the maximum lawful rate (the “ Maximum Rate ”) which may be contracted for, charged, taken, received or reserved by the Lender holding such Loan in accordance with applicable law, the rate of interest payable in respect of such Loan hereunder, together with all Charges payable in respect thereof, shall be limited to the Maximum Rate and, to the extent lawful, the interest and Charges that would have been payable in respect of such Loan but were not payable as a result of the operation of this Section shall be cumulated and the interest and Charges payable to such Lender in respect of other Loans or periods shall be increased (but not above the Maximum Rate therefor) until such cumulated amount, together with interest thereon at the Federal Funds Effective Rate to the date of repayment, shall have been received by such Lender.
SECTION 9.14. USA PATRIOT Act . Each Lender that is subject to the requirements of the USA PATRIOT Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001)) (the “ Act ”) hereby notifies the Borrower that pursuant to the requirements of the Act, it is required to obtain, verify and record information that identifies the Borrower, which information includes the name and address of the Borrower and other information that will allow such Lender to identify the Borrower in accordance with the Act.
SECTION 9.15. No Advisory or Fiduciary Responsibility . In connection with all aspects of each transaction contemplated hereby, the Borrower acknowledges and agrees that: (i) the credit facility provided for hereunder and any related arranging or other services in connection therewith (including in connection with any amendment, waiver or other modification hereof or of any other Loan Document) are an arm’s-length commercial transaction between the Borrower, on the one hand, and the Administrative Agent and the Arrangers, on the other hand, and the Borrower is capable of evaluating and understanding and understands and accepts the terms, risks and conditions of the transactions contemplated hereby and by the other Loan Documents (including any amendment, waiver or other modification hereof or thereof); (ii) in connection with the process leading to such transaction, the Administrative Agent and the Arrangers each is and has been acting solely as a principal and is not the financial advisor, agent or fiduciary, for the Borrower or any of its Affiliates, stockholders, creditors or employees or any other Person; (iii) neither the Administrative Agent nor any Arranger has assumed or will assume an advisory, agency or fiduciary responsibility in favor of the Borrower with respect to any of the transactions contemplated hereby or the process leading thereto, including with respect to any amendment, waiver or other modification hereof or of any other Loan Document (irrespective of whether the Administrative Agent or any Arranger has advised or is currently advising the Borrower or its Affiliates on other matters) and neither the Administrative Agent nor any Arranger has any obligation to the Borrower or its Affiliates with respect to the transactions contemplated hereby except those obligations expressly set forth herein and in the other Loan Documents; (iv) the Administrative Agent and each Arranger and its respective Affiliates may be engaged in a broad range of transactions that involve interests that differ from those of the Borrower and its Affiliates, and neither the Administrative Agent nor any Arranger has any obligation to disclose any of such interests by virtue of any advisory, agency or fiduciary relationship; and (v) neither the Administrative Agent nor any Arranger has provided and will not provide any legal, accounting, regulatory or tax advice with respect to any of the transactions contemplated hereby (including any amendment, waiver or other modification hereof or of any other Loan Document) and the Borrower has consulted its own legal, accounting, regulatory and
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tax advisors to the extent it has deemed appropriate. The Borrower hereby waives and releases, to the fullest extent permitted by law, any claims that it may have against the Administrative Agent and the Arrangers with respect to any breach or alleged breach of agency or fiduciary duty.
[Signature pages follow.]
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written.
HORACE MANN EDUCATORS CORPORATION | ||
By | /s/ Dwayne D. Hallman | |
Name: Dwayne D. Hallman | ||
Title: Executive Vice President and CFO | ||
By | /s/ Angela S. Christian | |
Name: Angela S. Christian | ||
Title: Vice President and Treasurer |
S- 1 |
JPMORGAN CHASE BANK, individually and as
Administrative Agent, |
||
By | /s/ Thomas A. Kiepura | |
Name: Thomas A. Kiepura | ||
Title: Senior Credit Executive |
S- 2 |
PNC Bank, National Association | ||
By | /s/ Nicole Limberg | |
Name: Nicole Limberg | ||
Title: VP |
S- 3 |
[Intentionally Blank]
S- 4 |
The northern trust company | ||
By | /s/ Peter J. Hallan | |
Name: Peter J. Hallan | ||
Title: Vice President |
S- 5 |
comerica bank | ||
By | /s/ Heather Whiting | |
Name: Heather Whiting | ||
Title: Vice President |
S- 6 |
STATE STREET BANK AND TRUST COMPANY | ||
By | /s/ Kimberly R. Costa | |
Name: Kimberly R. Costa | ||
Title: Vice President |
S- 7 |
ILLINOIS NATIONAL BANK | ||
By | /s/ John Wilson | |
Name: John Wilson | ||
Title: EVP |
S- 8 |
Schedule 2.01
Commitments
Lender | Commitment | |||
JPMorgan Chase Bank, N.A. | $ | 36,000,000 | ||
PNC Bank, National Association | $ | 36,000,000 | ||
Northern Trust Company | $ | 30,000,000 | ||
State Street Bank and Trust Company | $ | 25,000,000 | ||
Comerica Bank | $ | 15,000,000 | ||
Illinois National Bank | $ | 8,000,000 | ||
TOTAL: | $ | 150,000,000 |
Schedule 3.01
Jurisdictions
CERTIFICATES OF AUTHORITY BY STATE AND DATE ISSUED
STATE | HMIC | TIC | HMP&CIC | HMLIC | ELICA | HMSC | ||||||
Alabama | 12-19-66 | 04-18-73 | 08-20-03 | 12-15-58 | X | |||||||
Alaska | 01-31-64 | 03-26-73 | 12-22-87 | 02-02-62 | X | |||||||
Arizona | 05-27-59 | 11-12-74 | 06-09-80 | 07-15-59 | 08-21-57 | X | ||||||
Arkansas | 01-31-64 | 10-06-77 | 11-19-75 | 05-06-50 | X | |||||||
California | 01-31-64 | 03-25-65 | 08-18-67 | X | ||||||||
Colorado | 06-05-64 | 09-05-73 | 11-13-81 | 11-02-56 | 12-31-84 | X | ||||||
Connecticut | 06-28-74 | 11-18-99 | 11-18-99 | 11-20-78 | X | |||||||
Delaware | 06-02-59 | 03-02-71 | 09-25-98 | 12-08-55 | X | |||||||
Dist. of Col. | 08-20-59 | 01-30-73 | 05-01-97 | 12-03-65 | X | |||||||
Florida | 09-23-63 | 08-19-76 | 04-02-10 | 07-16-62 | 08-15-66 | X | ||||||
Georgia | 01-31-64 | 02-09-78 | 07-02-07 | 04-05-61 | X | |||||||
Hawaii | 08-25-87 | 02-01-85 | ||||||||||
Idaho | 12-16-68 | 04-16-73 | 05-26-88 | 05-09-60 | X | |||||||
Illinois | 01-31-64* | 03-09-77* | 04-25-75* | 08-09-49* | 12-31-84* | 08-13-73* | ||||||
Indiana | 05-01-68 | 12-01-77 | 01-15-98 | 05-01-57 | X | |||||||
Iowa | 12-29-64 | 05-04-73 | 11-26-74 | 08-01-52 | X | |||||||
Kansas | 01-31-64 | 09-13-96 | 12/21/99 | 11-12-61 | X | |||||||
Kentucky | 01-31-64 | 08-02-64 | 11-01-99 | 02-21-69 | X | |||||||
Louisiana | 12-23-58 | 11-14-73 | 09-30-99 | 05-16-61 | X | |||||||
Maine | 06-01-70 | 05-04-88 | 12-30-98 | 09-02-60 | X | |||||||
Maryland | 01-10-68 | 10-29-91 | 03-31-98 | 06-26-56 | X | |||||||
Massachusetts | 10-25-68 | 02-12-81 | 09-09-68 | X | ||||||||
Michigan | 03-19-59 | 12-14-77 | 02-23-99 | 10-27-59 | X | |||||||
Minnesota | 02-11-64 | 06-01-74 | 08-19-98 | 10-08-56 | X | |||||||
Mississippi | 06-01-58 | 07-19-74 | 06-01-97 | 10- -61 | X |
STATE | HMIC | TIC | HMP&CIC | HMLIC | ELICA | HMSC | ||||||
Missouri | 03-01-64 | 07-19-88 | 11-25-74 | 06-27-60 | X | |||||||
Montana | 01-31-64 | 06-01-73 | 02-26-88 | 01-02-54 | X | |||||||
Nebraska | 08-30-60 | 12-15-76 | 06-24-97 | 10-29-59 | 09-28-61 | X | ||||||
Nevada | 02-12-68 | 06-14-99 | 06-17-99 | 05-10-60 | 02-04-83 | X | ||||||
New Hampshire | 04-09-69 | 11-15-76 | 03-19-01 | 07-13-61 | X | |||||||
New Jersey |
Cancelled
05-30-96 |
X | ||||||||||
New Mexico | 03-01-64 | 08-15-73 | 01-03-03 | 05-21-56 | X | |||||||
New York | 01-31-64 | 06-17-02 | 03-27-00 | X | ||||||||
North Carolina | 10-18-68 | 07-01-74 | 03-05-98 | 07-10-59 | X | |||||||
North Dakota | 05-08-62 | 03-22-73 | 06-21-88 | 05-29-62 | X | |||||||
Ohio | 02-07-64 | 12-03-84 | 12-31-96 | 12-02-59 | 10-09-84 | X | ||||||
Oklahoma | 03-01-68 | 11-25-74 | 11-07-74 | 12-07-60 | 08-02-66 | X | ||||||
Oregon | 07-15-70 | 09-01-73 | 11-15-74 | 11-01-53 | 06-05-57 | X | ||||||
Pennsylvania | 12-29-63 | 04-16-81 | 12-20-99 | 09-01-49 | X | |||||||
Rhode Island | 01-23-70 | 12-13-73 | 01-12-98 | 09-05-61 | 09-10-73 | |||||||
South Carolina | 10-02-58 | 02-08-74 | 05-04-82 | 08-14-61 | X | |||||||
South Dakota | 05-01-62 | 01-22-74 | 09-14-88 | 08-03-53 | X | |||||||
Tennessee | 01-31-64 | 09-07-77 | 11-19-97 | 03-28-56 | X | |||||||
Texas | 01-31-64 | 12-29-78 | 05-29-75 | 07-14-60 | 06-26-68 | 09-10-73 | ||||||
Utah | 03-01-64 | 06-14-73 | 04-05-88 | 11-22-55 | X | |||||||
Vermont | 10-01-68 | 08-25-99 | 08-25-97 | 04-18-56 | X | |||||||
Virginia | 02-03-64 | 03-19-91 | 03-30-99 | 04-18-56 | X | |||||||
Washington | 02-10-64 | 12-28-73 | 12-31-98 | 11-13-58 | 09-20-57 | X | ||||||
West Virginia | 01-23-64 | 10-23-89 | 03-29-99 | 12-28-60 | X | |||||||
Wisconsin | 01-31-64 | 09-14-73 | 06-27-74 | 11-22-68 | X | |||||||
Wyoming | 12-24-58 | 07-23-87 | 01-18-88 | 03-24-53 | X | |||||||
Puerto Rico |
Cancelled
12-17-12 |
HMIC: | Horace Mann Insurance Company |
TIC: | Teachers Insurance Company |
HMP&CIC: | Horace Mann Property & Casualty Insurance Company |
HMLIC: | Horace Mann Life Insurance Company |
HMSC: | Horace Mann Service Corporation |
ELICA: | Educators Life Insurance Company of America |
Schedule 3.02(a)
SAP Exceptions
None.
Schedule 3.04
Litigation
None.
Schedule 3.10
Subsidiaries
Schedule 3.11
Insurance Licenses
None.
Schedule 6.06
Restrictive Agreements
1. Restrictions pursuant to First Supplemental Indenture, dated as of June 9, 2005, by and between Borrower and The Bank of New York Mellon Trust Company, N.A., as trustee (formerly JPMorgan Chase Bank, N.A. was trustee)
The Borrower can not, and it can not permit any Subsidiary, create, assume, incur or permit to exist any indebtedness secured by a pledge, lien or other encumbrance on the voting securities of any “Significant Subsidiary” (as defined in paragraph (w) of Rule 1-02 of Regulation S-X (17 CFR § 210.1-01, et seq. )), or the voting securities of a Subsidiary that owns, directly or indirectly, the voting securities of any “Significant Subsidiary” without making effective provision whereby the outstanding 6.05% Senior Notes due June 15, 2015 shall be equally and ratably secured with such secured indebtedness so long as such other indebtedness shall be secured.
2. Restrictions pursuant to Second Supplemental Indenture, dated as of April 21, 2006, by and between Borrower and The Bank of New York Mellon Trust Company, N.A., as trustee (formerly JPMorgan Chase Bank, N.A. was trustee)
The Borrower can not, and it can not permit any Subsidiary, create, assume, incur or permit to exist any indebtedness secured by a pledge, lien or other encumbrance on the voting securities of any “Significant Subsidiary” (as defined in paragraph (w) of Rule 1-02 of Regulation S-X (17 CFR § 210.1-01, et seq. )), or the voting securities of a Subsidiary that owns, directly or indirectly, the voting securities of any “Significant Subsidiary” without making effective provision whereby the outstanding 6.85% Senior Notes due April 15, 2016 shall be equally and ratably secured with such secured indebtedness so long as such other indebtedness shall be secured.
EXHIBIT A
ASSIGNMENT AND ASSUMPTION
This Assignment and Assumption (the “ Assignment and Assumption ”) is dated as of the Effective Date set forth below and is entered into by and between [Insert name of Assignor] (the “ Assignor ”) and [Insert name of Assignee] (the “ Assignee ”). Capitalized terms used but not defined herein shall have the meanings given to them in the Credit Agreement identified below (as amended, the “ Credit Agreement ”), receipt of a copy of which is hereby acknowledged by the Assignee. The Standard Terms and Conditions set forth in Annex 1 attached hereto are hereby agreed to and incorporated herein by reference and made a part of this Assignment and Assumption as if set forth herein in full.
For an agreed consideration, the Assignor hereby irrevocably sells and assigns to the Assignee, and the Assignee hereby irrevocably purchases and assumes from the Assignor, subject to and in accordance with the Standard Terms and Conditions and the Credit Agreement, as of the Effective Date inserted by the Administrative Agent as contemplated below (i) all of the Assignor’s rights and obligations in its capacity as a Lender under the Credit Agreement and any other documents or instruments delivered pursuant thereto to the extent related to the amount and percentage interest identified below of all of such outstanding rights and obligations of the Assignor under the respective facilities identified below and (ii) to the extent permitted to be assigned under applicable law, all claims, suits, causes of action and any other right of the Assignor (in its capacity as a Lender) against any Person, whether known or unknown, arising under or in connection with the Credit Agreement, any other documents or instruments delivered pursuant thereto or the loan transactions governed thereby or in any way based on or related to any of the foregoing, including contract claims, tort claims, malpractice claims, statutory claims and all other claims at law or in equity related to the rights and obligations sold and assigned pursuant to clause (i) above (the rights and obligations sold and assigned pursuant to clauses (i) and (ii) above being referred to herein collectively as the “ Assigned Interest ”). Such sale and assignment is without recourse to the Assignor and, except as expressly provided in this Assignment and Assumption, without representation or warranty by the Assignor.
1. | Assignor: | ______________________________ |
2. | Assignee: | ______________________________ |
[and is an Affiliate/Approved Fund of [identify Lender]] | ||
3. | Borrower(s): | HORACE MANN EDUCATORS CORPORATION |
4. | Administrative Agent: | JPMORGAN CHASE BANK, N.A., as the administrative agent under the Credit Agreement |
5. | Credit Agreement: | The Credit Agreement, dated as of July 30, 2014, among Horace Mann Educators Corporation, the Lenders parties thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, and the other agents parties thereto |
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6. | Assigned Interest: |
Aggregate Amount of
Commitment/Loans for all Lenders |
Amount of
Commitment/Loans Assigned |
Percentage Assigned of
Commitment/Loans 1 |
||||||||
$ | $ | % | ||||||||
$ | $ | % | ||||||||
$ | $ | % |
Effective Date: _____________ ___, 20___ [TO BE INSERTED BY ADMINISTRATIVE AGENT AND WHICH SHALL BE THE EFFECTIVE DATE OF RECORDATION OF TRANSFER IN THE REGISTER THEREFOR.]
The Assignee agrees to deliver to the Administrative Agent a completed Administrative Questionnaire in which the Assignee designates one or more Credit Contacts to whom all syndicate-level information (which may contain material non-public information about the Borrower and its Related Parties or their respective securities) will be made available and who may receive such information in accordance with the Assignee’s compliance procedures and applicable laws, including Federal and state securities laws.
The terms set forth in this Assignment and Assumption are hereby agreed to:
ASSIGNOR | ||
[NAME OF ASSIGNOR] | ||
By: | ||
Title: | ||
ASSIGNEE | ||
[NAME OF ASSIGNEE] | ||
By: | ||
Title: |
1 Set forth, to at least 9 decimals, as a percentage of the Commitment/Loans of all Lenders thereunder .
A- 2 |
[Consented to and] 2 Accepted:
JPMORGAN CHASE BANK, N.A.,, as | ||
Administrative Agent | ||
By | ||
Title: | ||
[Consented to:] 3 | ||
HORACE MANN EDUCATORS CORPORATION | ||
By | ||
Title: |
2 To be added only if the consent of the Administrative Agent is required by the terms of the Credit Agreement .
3 To be added only if the consent of the Borrower is required by the terms of the Credit Agreement .
A- 3 |
ANNEX 1
STANDARD TERMS AND CONDITIONS FOR
ASSIGNMENT AND ASSUMPTION
1. Representations and Warranties.
1.1 Assignor. The Assignor (a) represents and warrants that (i) it is the legal and beneficial owner of the Assigned Interest, (ii) the Assigned Interest is free and clear of any lien, encumbrance or other adverse claim and (iii) it has full power and authority, and has taken all action necessary, to execute and deliver this Assignment and Assumption and to consummate the transactions contemplated hereby; and (b) assumes no responsibility with respect to (i) any statements, warranties or representations made in or in connection with the Credit Agreement or any other Loan Document, (ii) the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Loan Documents or any collateral thereunder, (iii) the financial condition of the Borrower, any of its Subsidiaries or Affiliates or any other Person obligated in respect of any Loan Document or (iv) the performance or observance by the Borrower, any of its Subsidiaries or Affiliates or any other Person of any of their respective obligations under any Loan Document.
1.2. Assignee. The Assignee (a) represents and warrants that (i) it has full power and authority, and has taken all action necessary, to execute and deliver this Assignment and Assumption and to consummate the transactions contemplated hereby and to become a Lender under the Credit Agreement, (ii) it satisfies the requirements, if any, specified in the Credit Agreement that are required to be satisfied by it in order to acquire the Assigned Interest and become a Lender, (iii) from and after the Effective Date, it shall be bound by the provisions of the Credit Agreement as a Lender thereunder and, to the extent of the Assigned Interest, shall have the obligations of a Lender thereunder, (iv) it has received a copy of the Credit Agreement, together with copies of the most recent financial statements delivered pursuant to Section 5.01 thereof, as applicable, and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Assumption and to purchase the Assigned Interest on the basis of which it has made such analysis and decision independently and without reliance on the Administrative Agent or any other Lender, and (v) if it is a Non-U.S. Lender, attached to the Assignment and Assumption is any documentation required to be delivered by it pursuant to the terms of the Credit Agreement, duly completed and executed by the Assignee; and (b) agrees that (i) it will, independently and without reliance on the Administrative Agent, the Assignor or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Loan Documents, and (ii) it will perform in accordance with their terms all of the obligations which by the terms of the Loan Documents are required to be performed by it as a Lender.
2. Payments. From and after the Effective Date, the Administrative Agent shall make all payments in respect of the Assigned Interest (including payments of principal, interest, fees and other amounts) to the Assignor for amounts which have accrued to but excluding the
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Effective Date and to the Assignee for amounts which have accrued from and after the Effective Date.
3. General Provisions. This Assignment and Assumption shall be binding upon, and inure to the benefit of, the parties hereto and their respective successors and assigns. This Assignment and Assumption may be executed in any number of counterparts, which together shall constitute one instrument. Delivery of an executed counterpart of a signature page of this Assignment and Assumption by telecopy shall be effective as delivery of a manually executed counterpart of this Assignment and Assumption. This Assignment and Assumption shall be governed by, and construed in accordance with, the law of the State of Illinois.
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EXHIBIT B
[FORM OF]
COMPLIANCE CERTIFICATE
To: | The Lenders parties to the |
Credit Agreement Described Below
For the period ended , 20 , this Compliance Certificate is furnished pursuant to that certain Credit Agreement, dated as of July 30, 2014 (as amended, modified, renewed or extended from time to time, the “ Agreement ”), among Horace Mann Educators Corporation (the “ Borrower ”), the lenders party thereto, and JPMorgan Chase Bank, N.A., as Administrative Agent. Unless otherwise defined herein, capitalized terms used in this Compliance Certificate have the meanings ascribed thereto in the Agreement.
THE UNDERSIGNED HEREBY CERTIFIES THAT:
1. | I am a duly elected Executive Officer of the Borrower; |
2. I have reviewed the terms of the Agreement and I have made, or have caused to be made under my supervision, a detailed review of the transactions and conditions of the Borrower and its Subsidiaries during the accounting period covered by the attached financial statements;
3. The examinations described in paragraph 2 did not disclose, and I have no knowledge of, the existence of any condition or event which constitutes a Default or Event of Default during or at the time of the accounting period covered by the attached financial statements or as of the date of this Certificate, except as set forth below; and
4. To the extent that there are any changes from the most recently delivered Schedule 3.10, Schedule I attached hereto sets forth a current Schedule 3.10, setting forth each of the Borrower’s Subsidiaries and indicating which Subsidiaries are Material Insurance Subsidiaries, accurate as of the date hereof.
5. Schedule II attached hereto sets forth financial data and computations calculating each of FHLB Liquidity Debt, FHLB Operating Debt and Securities Lending, all of which data and computations are true, complete and correct.
6. Schedule III attached hereto sets forth financial data and computations evidencing the Borrower’s compliance with certain covenants of the Agreement, all of which data and computations are true, complete and correct.
B- 1 |
Described below are the exceptions, if any, to paragraph 3 by listing, in detail, the nature of the condition or event, the period during which it has existed and the action which the Borrower has taken, is taking, or proposes to take with respect to each such condition or event:
B- 2 |
The foregoing certifications, together with the computations set forth in Schedule II hereto and the financial statements delivered with this Certificate in support hereof, are made and delivered this ___ day of ______, ____.
Name: | |
Title: |
B- 3 |
SCHEDULE I TO COMPLIANCE CERTIFICATE
Updated Schedule 3.10 as of _________, ____
B- 4 |
SCHEDULE II TO COMPLIANCE CERTIFICATE
Calculation of FHLB Liquidity Debt,
FHLB Operating Debt and Securities Lending
B- 5 |
SCHEDULE III TO COMPLIANCE CERTIFICATE
Compliance as of _________, ____ with
Provisions of Sections 6.01, 6.02, 6.03 and 6.10 of
the Agreement
B- 1 |
(3) | Ratio of (1) to (2) (expressed as a percentage): | ______ % | ||||
(b) The P/C Subsidiaries (taken as a whole) | ||||||
(1) | Total Adjusted Capital on date of determination: | $__________ | ||||
(2) | Company Action Level RBC on date of determination: | $__________ | ||||
(3) | Ratio of (1) to (2) (expressed as a percentage): | ______ % | ||||
Section 6.10 – Securities Lending | ||||||
Maximum market value of securities subject to Securities Lending Worth: | $ 4 | |||||
Actual market value of securities subject to Securities Lending Worth ( provided that the market value of any security subject to Securities Lending shall be measured as of the time the applicable Securities Lending transaction was entered into): | $ __________ |
4 Maximum Worth to be set at the Threshold Amount less the aggregate amount of FHLB Operating Debt outstanding at time of reporting.
B- 2 |
EXHIBIT C-1
[FORM OF]
U.S. TAX CERTIFICATE
(For Non-U.S. Lenders That Are Not Partnerships For U.S. Federal Income Tax Purposes)
Reference is hereby made to the Credit Agreement, dated as of July 30, 2014 (as amended, supplemented or otherwise modified from time to time, the “ Credit Agreement ”), among Horace Mann Educators Corporation, and each lender from time to time party thereto.
Pursuant to the provisions of Section 2.14 of the Credit Agreement, the undersigned hereby certifies that (i) it is the sole record and beneficial owner of the Loan(s) (as well as any Note(s) evidencing such Loan(s)) in respect of which it is providing this certificate, (ii) it is not a bank within the meaning of Section 881(c)(3)(A) of the Code, (iii) it is not a ten percent shareholder of the Borrower within the meaning of Section 871(h)(3)(B) of the Code, (iv) it is not a controlled foreign corporation related to the Borrower as described in Section 881(c)(3)(C) of the Code and (v) the interest payments in question are not effectively connected with the undersigned’s conduct of a U.S. trade or business.
The undersigned has furnished the Administrative Agent and the Borrower with a certificate of its non-U.S. person status on IRS Form W-8BEN. By executing this certificate, the undersigned agrees that (1) if the information provided on this certificate changes, the undersigned shall promptly so inform the Borrower and the Administrative Agent and (2) the undersigned shall have at all times furnished the Borrower and the Administrative Agent with a properly completed and currently effective certificate in either the calendar year in which each payment is to be made to the undersigned, or in either of the two calendar years preceding such payments.
Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall have the meanings given to them in the Credit Agreement.
[NAME OF LENDER]
By: | ||
Name: | ||
Title: |
Date: ________ __, 20[ ]
C- 1 -1 |
EXHIBIT C-2
[FORM OF]
U.S. TAX CERTIFICATE
(For Non-U.S. Lenders That Are Partnerships For U.S. Federal Income Tax Purposes)
Reference is hereby made to the Credit Agreement, dated as of July 30, 2014 (as amended, supplemented or otherwise modified from time to time, the “ Credit Agreement ”), among Horace Mann Educators Corporation, and each lender from time to time party thereto.
Pursuant to the provisions of Section 2.14 of the Credit Agreement, the undersigned hereby certifies that (i) it is the sole record owner of the Loan(s) (as well as any Note(s) evidencing such Loan(s)) in respect of which it is providing this certificate, (ii) its partners/members are the sole beneficial owners of such Loan(s) (as well as any Note(s) evidencing such Loan(s)), (iii) with respect to the extension of credit pursuant to this Credit Agreement, neither the undersigned nor any of its partners/members is a bank extending credit pursuant to a loan agreement entered into in the ordinary course of its trade or business within the meaning of Section 881(c)(3)(A) of the Code, (iv) none of its partners/members is a ten percent shareholder of the Borrower within the meaning of Section 871(h)(3)(B) of the Code, (v) none of its partners/members is a controlled foreign corporation related to the Borrower as described in Section 881(c)(3)(C) of the Code, and (vi) the interest payments in question are not effectively connected with the undersigned’s or its partners/members’ conduct of a U.S. trade or business.
The undersigned has furnished the Administrative Agent and the Borrower with IRS Form W-8IMY accompanied by an IRS Form W-8BEN from each of its partners/members claiming the portfolio interest exemption. By executing this certificate, the undersigned agrees that (1) if the information provided on this certificate changes, the undersigned shall promptly so inform the Borrower and the Administrative Agent and (2) the undersigned shall have at all times furnished the Borrower and the Administrative Agent with a properly completed and currently effective certificate in either the calendar year in which each payment is to be made to the undersigned, or in either of the two calendar years preceding such payments.
Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall have the meanings given to them in the Credit Agreement.
[NAME OF LENDER]
By: | ||
Name: | ||
Title: |
Date: ________ __, 20[ ]
C- 2 -1 |
EXHIBIT C-3
[FORM OF]
U.S. TAX CERTIFICATE
(For Non-U.S. Participants That Are Not Partnerships For U.S. Federal Income Tax Purposes)
Reference is hereby made to the Credit Agreement, dated as of July 30, 2014 (as amended, supplemented or otherwise modified from time to time, the “ Credit Agreement ”), among Horace Mann Educators Corporation, and each lender from time to time party thereto.
Pursuant to the provisions of Section 2.14 of the Credit Agreement, the undersigned hereby certifies that (i) it is the sole record and beneficial owner of the participation in respect of which it is providing this certificate, (ii) it is not a bank within the meaning of Section 881(c)(3)(A) of the Code, (iii) it is not a ten percent shareholder of the Borrower within the meaning of Section 871(h)(3)(B) of the Code, (iv) it is not a controlled foreign corporation related to the Borrower as described in Section 881(c)(3)(C) of the Code, and (v) the interest payments in question are not effectively connected with the undersigned’s conduct of a U.S. trade or business.
The undersigned has furnished its participating Lender with a certificate of its non-U.S. person status on IRS Form W-8BEN. By executing this certificate, the undersigned agrees that (1) if the information provided on this certificate changes, the undersigned shall promptly so inform such Lender in writing and (2) the undersigned shall have at all times furnished such Lender with a properly completed and currently effective certificate in either the calendar year in which each payment is to be made to the undersigned, or in either of the two calendar years preceding such payments.
Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall have the meanings given to them in the Credit Agreement.
[NAME OF LENDER]
By: | ||
Name: | ||
Title: |
Date: ________ __, 20[ ]
C- 3 -1 |
EXHIBIT C-4
[FORM OF]
U.S. TAX CERTIFICATE
(For Non-U.S. Participants That Are Partnerships For U.S. Federal Income Tax Purposes)
Reference is hereby made to the Credit Agreement, dated as of July 30, 2014 (as amended, supplemented or otherwise modified from time to time, the “ Credit Agreement ”), among Horace Mann Educators Corporation, and each lender from time to time party thereto.
Pursuant to the provisions of Section 2.17 of the Credit Agreement, the undersigned hereby certifies that (i) it is the sole record owner of the participation in respect of which it is providing this certificate, (ii) its partners/members are the sole beneficial owners of such participation, (iii) with respect such participation, neither the undersigned nor any of its partners/members is a bank extending credit pursuant to a loan agreement entered into in the ordinary course of its trade or business within the meaning of Section 881(c)(3)(A) of the Code, (iv) none of its partners/members is a ten percent shareholder of the Borrower within the meaning of Section 871(h)(3)(B) of the Code, (v) none of its partners/members is a controlled foreign corporation related to the Borrower as described in Section 881(c)(3)(C) of the Code, and (vi) the interest payments in question are not effectively connected with the undersigned’s or its partners/members’ conduct of a U.S. trade or business.
The undersigned has furnished its participating Lender with IRS Form W-8IMY accompanied by an IRS Form W-8BEN from each of its partners/members claiming the portfolio interest exemption. By executing this certificate, the undersigned agrees that (1) if the information provided on this certificate changes, the undersigned shall promptly so inform such Lender and (2) the undersigned shall have at all times furnished such Lender with a properly completed and currently effective certificate in either the calendar year in which each payment is to be made to the undersigned, or in either of the two calendar years preceding such payments.
Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall have the meanings given to them in the Credit Agreement.
[NAME OF PARTICIPANT]
By: | ||
Name: | ||
Title: |
Date: ________ __, 20[ ]
C-4- 1 |
Exhibit 10.11
Summary of Horace Mann Educators Corporation Non-Employee Director Compensation
Compensation Element | Non-Employee Director Compensation |
Board Chairman Annual Retainer | $100,000 |
Board Member Annual Retainer (other than Board Chairman) |
$55,000 |
Committee Chairman Annual Retainer |
$25,000 Audit Committee $15,000 Compensation Committee $12,000 Nominating & Governance Committee $15,000 Customer Experience & Technology Committee $10,000 all other Committees |
Committee Member Annual Retainer (other than Committee Chairman) |
$10,000 Audit Committee $ 7,500 all other Committees |
Share-based Compensation |
Fair value on the date of the respective awards is used to determine the number of Restricted Stock Units (“RSUs”) awarded. An annual award of $90,000 in RSUs following the Annual Shareholder Meeting. $90,000 in RSUs if joining the Board within 6 months after the prior Annual Shareholder Meeting, $45,000 in RSUs if joining more than 6 months after the prior Annual Shareholder Meeting but before the next Annual Shareholder Meeting. All awards have a 1 year vesting period. |
Basic Group Term Life Insurance | Premium for $10,000 face amount |
Business Travel Accident Insurance | Premium for $100,000 coverage |
Annual retainer fees are paid following the Annual Shareholder Meeting each year. The annual retainer fees are prorated to the extent that a non-employee Director joins the Board after the Annual Shareholder Meeting.
Last revision date: May 21, 2014
Exhibit 10.13(a)
Revised Schedule to Severance Agreement
Horace Mann Educators Corporation (“HMEC”) and Horace Mann Service Corporation (“HMSC”) entered into severance agreements for change of control with the following persons on the dates shown. These agreements are substantially similar to the one included as Exhibit 10.13 to HMEC’s Annual Report on Form 10-K for the year ended December 31, 2012 except that the multiple of the highest annual compensation received by the employee in the five preceding years used to determine a one-time cash payment is equal to the duration listed below.
Employee | Duration |
Original
Agreement Date |
Replacement
Agreement Date |
|||||||
Ann M. Caparrós | 2.9 years | March 1994 | December 2011 | |||||||
Bret A. Conklin | 2 years | January 2002 | December 2011 | |||||||
Dwayne D. Hallman | 2 years | January 2003 | December 2011 | |||||||
Ricky A. Renner | 2 years | July 2001 | December 2011 | |||||||
Robert E. Rich | 2 years | February 2001 | December 2011 |
Exhibit 11
Horace Mann Educators Corporation
Computation of Net Income per Share (Unaudited)
For the Three and Six Months Ended June 30, 2014 and 2013
(Amounts in thousands, except per share data)
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Basic: | ||||||||||||||||
Net income | $ | 20,452 | $ | 25,995 | $ | 48,818 | $ | 53,007 | ||||||||
Weighted average number of common | ||||||||||||||||
shares during the period | 41,432 | 39,768 | 41,343 | 39,648 | ||||||||||||
Net income per share – basic | $ | 0.49 | $ | 0.65 | $ | 1.18 | $ | 1.34 | ||||||||
Diluted: | ||||||||||||||||
Net income | $ | 20,452 | $ | 25,995 | $ | 48,818 | $ | 53,007 | ||||||||
Weighted average number of common | ||||||||||||||||
shares during the period | 41,432 | 39,768 | 41,343 | 39,648 | ||||||||||||
Weighted average number of | ||||||||||||||||
common equivalent shares to reflect | ||||||||||||||||
the dilutive effect of common | ||||||||||||||||
stock equivalent securities: | ||||||||||||||||
Stock options | 146 | 420 | 141 | 378 | ||||||||||||
Common stock units related to deferred | ||||||||||||||||
compensation for Directors | - | 117 | - | 117 | ||||||||||||
Common stock units related to deferred | ||||||||||||||||
compensation for Employees | 110 | 112 | 110 | 112 | ||||||||||||
Restricted common stock units related | ||||||||||||||||
to incentive compensation | 622 | 978 | 619 | 964 | ||||||||||||
Total common and common equivalent | ||||||||||||||||
shares adjusted to calculate | ||||||||||||||||
diluted earnings per share | 42,310 | 41,395 | 42,213 | 41,219 | ||||||||||||
Net income per share – diluted | $ | 0.48 | $ | 0.63 | $ | 1.16 | $ | 1.29 |
Exhibit 15
Horace Mann Educators Corporation
Springfield, Illinois
Re: Registration Statements on Form S-3 (No. 333-178898) and Form S-8 (No. 33-47066, No. 33-45152, No. 333-16473, No. 333-74686, No. 333-98917, No. 333-171384 and No. 333-185231)
With respect to the subject registration statements, we acknowledge our awareness of the use therein of our report dated August 8, 2014 related to our review of interim financial information.
Pursuant to Rule 436 under the Securities Act of 1933 (the “Act”), such report is not considered part of a registration statement prepared or certified by an independent registered public accounting firm, or a report prepared or certified by an independent registered public accounting firm within the meaning of Sections 7 and 11 of the Act.
/s/ KPMG LLP
KPMG LLP
Chicago, Illinois
August 8, 2014
Exhibit 31.1
Chief Executive Officer Certification
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Marita Zuraitis, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q for the period ended June 30, 2014 of Horace Mann Educators Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
/s/ Marita Zuraitis | |
Marita Zuraitis, Chief Executive Officer | |
Horace Mann Educators Corporation |
Date: | August 8, 2014 |
Exhibit 31.2
Chief Financial Officer Certification
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Dwayne D. Hallman, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q for the period ended June 30, 2014 of Horace Mann Educators Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
/s/ Dwayne D. Hallman | |
Dwayne D. Hallman, Chief Financial Officer | |
Horace Mann Educators Corporation |
Date: | August 8, 2014 |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Horace Mann Educators Corporation (the “Company”) on Form 10-Q for the period ended June 30, 2014 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Marita Zuraitis, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
/s/ Marita Zuraitis | |
Marita Zuraitis | |
Chief Executive Officer |
Date: | August 8, 2014 |
A signed original of this written statement required by Section 906 has been provided to Horace
Mann Educators Corporation and will be retained by Horace Mann Educators Corporation
and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Horace Mann Educators Corporation (the “Company”) on Form 10-Q for the period ended June 30, 2014 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Dwayne D. Hallman, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
/s/ Dwayne D. Hallman | |
Dwayne D. Hallman | |
Chief Financial Officer |
Date: | August 8, 2014 |
A signed original of this written statement required by Section 906 has been provided to Horace
Mann Educators Corporation and will be retained by Horace Mann Educators Corporation
and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 99.1
Glossary of Selected Terms
The following measures are used by the Company's management to evaluate performance against historical results and establish targets on a consolidated basis. A number of these measures are components of net income or the balance sheet but, in some cases, may be considered non-GAAP financial measures under applicable SEC rules because they are not displayed as separate line items in the Consolidated Statement of Operations or Consolidated Balance Sheets, and in some cases, there is inclusion or exclusion of certain items not ordinarily included or excluded in a GAAP financial measure. In the opinion of the Company's management, a discussion of these measures is meaningful to provide investors with an understanding of the significant factors that comprise the Company's periodic results of operations and financial condition.
Agent - A licensed representative of an insurer in marketing insurance products.
· | Exclusive Agency - A local Horace Mann agency created and owned by an independent contractor who has signed an Exclusive Agent agreement with the Company (an “ Exclusive Agent ”). That agreement states that only the Company's products and limited additional third-party vendor products authorized by the Company will be marketed by the agency. An independent contractor may sign multiple Exclusive Agent agreements with the Company and manage more than one Exclusive Agency. | |
· | Employee Agents - Agents who have employee status with the Company and by contract market only the Company's products and limited additional third-party vendor products authorized by the Company. | |
· | Independent Agents - Non-exclusive independent contractors who are under contract with the Company to market the Company's annuity products but who are not restricted to writing only the Company's products and products authorized by the Company. |
Book value per share excluding the fair value adjustment for investments - The result of dividing total shareholders' equity excluding after tax net unrealized gains and losses on fixed maturities and equity securities, including the related effect on certain deferred policy acquisition costs and value of acquired insurance in force, by ending shares outstanding. Book value per share is the most directly comparable GAAP measure. Management believes it is useful to consider the trend in book value per share excluding unrealized net investment gains and losses in conjunction with book value per share to identify and analyze the change in net worth. Management also believes the non-GAAP measure is useful to investors because it eliminates the effect of items that can fluctuate significantly from period to period and are generally driven by economic developments, primarily financial market conditions, the magnitude and timing of which are generally not influenced by the Company’s underlying insurance operations.
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Catastrophe costs – The sum of catastrophe losses and property and casualty catastrophe reinsurance reinstatement premiums.
Catastrophe losses - In categorizing property and casualty claims as being from a catastrophe, the Company utilizes the designations of the Property Claims Service, a subsidiary of Insurance Services Office, Inc., and additionally beginning in 2007, includes losses from all such events that meet the definition of covered loss in the Company’s primary catastrophe excess of loss reinsurance contract, and reports loss and loss adjustment expense amounts net of reinsurance recoverables. A catastrophe is a severe loss resulting from natural and man-made events within a particular territory, including risks such as hurricane, fire, earthquake, windstorm, explosion, terrorism and other similar events, that causes $25 million or more in insured property and casualty losses for the industry and affects a significant number of property and casualty insurers and policyholders. Each catastrophe has unique characteristics. Catastrophes are not predictable as to timing or amount of loss in advance. Their effects are not included in earnings or claim and claim adjustment expense reserves prior to occurrence. In the opinion of the Company's management, a discussion of the impact of catastrophes is meaningful for investors to understand the variability in periodic earnings.
Insurance premiums written and contract deposits - Premiums written represent (1) the amount charged for policies issued during a fiscal period for property and casualty business, such amounts may be earned and included in financial results over future fiscal periods, and (2) the amount charged for policies in force during a fiscal period for traditional life and group life business. Amounts are reported net of reinsurance, unless otherwise specified. Contract deposits include amounts received from customers on deposit-type contracts, such as annuities and interest-sensitive life policy accounts, including deposit amounts and any related contract or policy fees. Management utilizes this non-GAAP measure, which is based on statutory accounting principles, in analyzing and evaluating the business growth of its operating segments. Insurance premiums and contract charges earned is the most directly comparable GAAP measure.
Net Reserves - Property and casualty unpaid claim and claim expense reserves net of anticipated reinsurance recoverables.
Operating income or Net income before realized investment gains and losses - Net income adjusted to exclude after tax realized investment gains and losses. Net income is the most directly comparable GAAP measure. Management believes the measure provides investors with a valuable measure of the Company’s ongoing performance because it reveals trends in the business that may be obscured by the net effect of realized investment gains and losses. Realized investment gains and losses may vary significantly between periods and are generally driven by business decisions and external economic developments that are unrelated to the insurance underwriting process. Operating income is used by management along with other components of net income to assess their performance and adjusted measures of operating income and operating income per diluted share are used in incentive compensation programs. Management believes that a projection of net income including after tax realized investment gains and losses is not appropriate on a forward-looking basis because it is not possible to provide a valid forecast of realized investment gains and losses, which can vary substantially from one period to another and may have a significant impact on net income.
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Prior Years' Reserve Development - A measure which the Company reports for its property and casualty segment which identifies the increase or decrease in net incurred claim and claim adjustment expense reserves at successive valuation dates for claims which occurred in previous calendar years. In the opinion of the Company's management, a discussion of prior years' loss reserve development is useful to investors as it allows them to assess the impact on current period earnings of incurred claims experience from the current calendar year and previous calendar years.
Property and casualty operating statistics - Operating measures utilized by the Company and the insurance industry regarding the relative profitability of property and casualty underwriting results.
· | Loss Ratio or Loss and Loss Adjustment Expense Ratio - The ratio of (1) the sum of net incurred losses and loss adjustment expenses to (2) net earned premiums. | |
· | Expense Ratio - The ratio of (1) the sum of operating expenses and the amortization of policy acquisition costs to (2) net earned premiums. | |
· | Combined Ratio - The sum of the Loss Ratio and the Expense Ratio. A Combined Ratio less than 100% generally indicates profitable underwriting prior to the consideration of investment income. | |
· | Combined Ratio Excluding Catastrophes and Prior Years' Reserve Development or Underlying Combined Ratio - The sum of the Loss Ratio and the Expense Ratio adjusted to remove the effect of catastrophe costs and prior years' reserve development. The Combined Ratio is the most directly comparable GAAP measure. Management believes this ratio provides a valuable measure of the Company’s underlying underwriting performance that may be obscured by the effects of catastrophe costs and prior years’ reserve development, the amounts of which may be significant and may vary significantly between periods. |
Return on equity - The ratio of (1) trailing 12-month net income to (2) the average of ending shareholders' equity for the current quarter end and the preceding four quarter ends.
Sales or Annualized New Sales - Sales represent the amount of new business sold during the period and exclude renewal of policies sold in previous periods. Sales are measured by the Company as premiums and deposits to be collected over the 12 months following the sale of a new policy for annuity, life, automobile and homeowners business, as well as increases in contributions to annuity and certain life business, and this time period may extend into the following calendar year. In addition, the Company discloses new policy count (units) information for automobile and homeowners business. Sales data pertains to Horace Mann products and excludes authorized products sold by Employee Agents, Exclusive Agents, and their licensed staff which are underwritten by third-party vendors. Sales should not be viewed as a substitute for any financial measure determined in accordance with GAAP, including "sales" as it relates to non-insurance companies, and the Company's definition of sales might differ from that used by other companies. The Company utilizes sales information as a performance measure that indicates the productivity of its agency force. Sales are also a leading indicator of future revenue trends.
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