HORACE MANN EDUCATORS CORP /DE/ - Quarter Report: 2017 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

[x]

QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2017

[ ]

TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________

Commission file number 1-10890

HORACE MANN EDUCATORS CORPORATION

(Exact name of registrant as specified in its charter)

Delaware	37-0911756
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

1 Horace Mann Plaza, Springfield, Illinois 62715-0001

(Address of principal executive offices, including Zip Code)

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes X No

Indicate by check mark the registrant’s filer status, as such terms are defined in Rule 12b-2 of the Act.

Large accelerated filer	X	Accelerated filer
Non-accelerated filer		Smaller reporting company
Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Act. Yes No X

As of April 30, 2017, the registrant had 40,542,562 shares of Common Stock, par value $0.001 per share, outstanding.

HORACE MANN EDUCATORS CORPORATION

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2017

INDEX

PART I - FINANCIAL INFORMATION		Page

Item 1.	Financial Statements

	Report of Independent Registered Public Accounting Firm	1

	Consolidated Balance Sheets	2

	Consolidated Statements of Operations	3

	Consolidated Statements of Comprehensive Income	4

	Consolidated Statements of Changes in Shareholders’ Equity	5

	Consolidated Statements of Cash Flows	6

	Notes to Consolidated Financial Statements
	Note 1 - Basis of Presentation	7
	Note 2 - Investments	12
	Note 3 - Fair Value of Financial Instruments	18
	Note 4 - Derivative Instruments	22
	Note 5 - Property and Casualty Unpaid Claims and Claim Expenses	24
	Note 6 - Debt	25
	Note 7 - Reinsurance	25
	Note 8 - Commitments	26
	Note 9 - Segment Information	26

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	46

Item 4.	Controls and Procedures	47

PART II - OTHER INFORMATION

Item 1A.	Risk Factors	47

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	48

Item 5.	Other Information	48

Item 6.	Exhibits	49

SIGNATURES		54

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders

Horace Mann Educators Corporation:

We have reviewed the consolidated balance sheet of Horace Mann Educators Corporation and subsidiaries (the Company) as of March 31, 2017, and the related consolidated statements of operations, comprehensive income, changes in shareholders’ equity, and cash flows for the three-month periods ended March 31, 2017 and 2016. 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 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, 2016, and the related consolidated statements of operations, comprehensive loss, changes in shareholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated March 1, 2017, we expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP
KPMG LLP

Chicago, Illinois
May 9, 2017

HORACE MANN EDUCATORS CORPORATION

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)

	March 31,				December 31,
	2017				2016
	(Unaudited)
ASSETS
Investments
Fixed maturity securities, available for sale, at fair value (amortized cost 2017, $7,173,235; 2016, $7,152,127)		$	7,510,750			$	7,456,708
Equity securities, available for sale, at fair value (cost 2017, $143,203; 2016, $134,013)			156,975				141,649
Short-term and other investments			456,560				401,015
Total investments			8,124,285				7,999,372
Cash			6,593				16,670
Deferred policy acquisition costs			265,612				267,580
Goodwill			47,396				47,396
Other assets			324,155				321,874
Separate Account (variable annuity) assets			2,011,464				1,923,932
Total assets		$	10,779,505			$	10,576,824

LIABILITIES AND SHAREHOLDERS’ EQUITY
Policy liabilities
Investment contract and life policy reserves		$	5,502,992			$	5,447,969
Unpaid claims and claim expenses			340,033				329,888
Unearned premiums			240,816				246,274
Total policy liabilities			6,083,841				6,024,131
Other policyholder funds			711,395				708,950
Other liabilities			403,714				378,620
Long-term debt			247,273				247,209
Separate Account (variable annuity) liabilities			2,011,464				1,923,932
Total liabilities			9,457,687				9,282,842
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, 2017, 65,215,048; 2016, 64,917,683			65				65
Additional paid-in capital			454,982				453,479
Retained earnings			1,159,532				1,155,732
Accumulated other comprehensive income (loss), net of taxes:
Net unrealized investment gains on fixed maturity and equity securities			198,271				175,738
Net funded status of benefit plans			(11,817	)			(11,817	)
Treasury stock, at cost, 2017, 24,672,932 shares; 2016, 24,672,932 shares			(479,215	)			(479,215	)
Total shareholders’ equity			1,321,818				1,293,982
Total liabilities and shareholders’ equity		$	10,779,505			$	10,576,824

See accompanying Notes to Consolidated Financial Statements.

See accompanying Report of Independent Registered Public Accounting Firm.

HORACE MANN EDUCATORS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(Dollars in thousands, except per share data)

	Three Months Ended
		March 31,
		2017			2016

Revenues
Insurance premiums and contract charges earned	$	195,722		$	185,450
Net investment income		90,711			84,659
Net realized investment losses		(242	)		(154	)
Other income		1,113			1,348

Total revenues		287,304			271,303

Benefits, losses and expenses
Benefits, claims and settlement expenses		144,096			119,513
Interest credited		48,774			46,690
Policy acquisition expenses amortized		24,886			24,052
Operating expenses		48,756			42,796
Interest expense		2,956			2,935

Total benefits, losses and expenses		269,468			235,986

Income before income taxes		17,836			35,317
Income tax expense		2,518			10,164

Net income	$	15,318		$	25,153

Net income per share
Basic	$	0.37		$	0.61
Diluted	$	0.37		$	0.61

Weighted average number of shares and equivalent shares (in thousands)
Basic		41,135			41,297
Diluted		41,342			41,492

Net realized investment gains (losses)
Total other-than-temporary impairment losses on securities	$	(2,797	)	$	(3,673	)
Portion of losses recognized in other comprehensive income		-			-
Net other-than-temporary impairment losses on securities recognized in earnings		(2,797	)		(3,673	)
Realized gains, net		2,555			3,519
Total	$	(242	)	$	(154	)

See accompanying Notes to Consolidated Financial Statements.

See accompanying Report of Independent Registered Public Accounting Firm.

HORACE MANN EDUCATORS CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(Dollars in thousands)

	Three Months Ended
		March 31,
		2017		2016

Comprehensive income
Net income	$	15,318	$	25,153
Other comprehensive income, net of taxes:
Change in net unrealized investment gains and losses on fixed maturity and equity securities		22,533		69,490
Change in net funded status of benefit plans		-		-
Other comprehensive income		22,533		69,490
Total	$	37,851	$	94,643

See accompanying Notes to Consolidated Financial Statements.

See accompanying Report of Independent Registered Public Accounting Firm.

HORACE MANN EDUCATORS CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)

(Dollars in thousands, except per share data)

	Three Months Ended
		March 31,
		2017			2016

Common stock, $0.001 par value
Beginning balance	$	65		$	65
Options exercised, 2017, 33,764 shares; 2016, 84,850 shares		-			-
Conversion of common stock units, 2017, 15,981 shares; 2016, 8,538 shares		-			-
Conversion of restricted stock units, 2017, 247,620 shares; 2016, 165,794 shares		-			-
Ending balance		65			65

Additional paid-in capital
Beginning balance		453,479			442,648
Options exercised and conversion of common stock units and restricted stock units		(750	)		353
Share-based compensation expense		2,253			1,910
Ending balance		454,982			444,911

Retained earnings
Beginning balance		1,155,732			1,116,277
Net income		15,318			25,153
Cash dividends, 2017, $0.275 per share; 2016, $0.265 per share		(11,518	)		(11,114	)
Ending balance		1,159,532			1,130,316

Accumulated other comprehensive income (loss), net of taxes
Beginning balance		163,921			163,373
Change in net unrealized investment gains and losses on fixed maturity and equity securities		22,533			69,490
Change in net funded status of benefit plans		-			-
Ending balance		186,454			232,863

Treasury stock, at cost
Beginning balance, 2017, 24,672,932 shares; 2016, 23,971,522 shares		(479,215	)		(457,702	)
Acquisition of shares, 2017, 0 shares; 2016, 474,277 shares		-			(14,466	)
Ending balance, 2017, 24,672,932 shares; 2016, 24,445,799 shares		(479,215	)		(472,168	)

Shareholders’ equity at end of period	$	1,321,818		$	1,335,987

See accompanying Notes to Consolidated Financial Statements.

See accompanying Report of Independent Registered Public Accounting Firm.

HORACE MANN EDUCATORS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollars in thousands)

	Three Months Ended
		March 31,
		2017			2016
Cash flows - operating activities
Premiums collected	$	172,588		$	177,535
Policyholder benefits paid		(127,823	)		(116,941	)
Policy acquisition and other operating expenses paid		(74,763	)		(71,024	)
Federal income taxes recovered		11			-
Investment income collected		91,840			82,586
Interest expense paid		(63	)		(57	)
Other		11,008			8,258

Net cash provided by operating activities		72,798			80,357

Cash flows - investing activities
Fixed maturities
Purchases		(318,629	)		(317,878	)
Sales		110,872			82,090
Maturities, paydowns, calls and redemptions		190,068			241,233
Purchase of other invested assets		(24,177	)		(10,260	)
Net cash provided by (used in) short-term and other investments		(42,419	)		(41,403	)

Net cash used in investing activities		(84,285	)		(46,218	)

Cash flows - financing activities
Dividends paid to shareholders		(11,518	)		(11,114	)
Acquisition of treasury stock		-			(14,466	)
Proceeds from exercise of stock options		723			1,727
Withholding tax payments on RSUs tendered		(2,532	)		(3,231	)
Annuity contracts: variable, fixed and FHLB funding agreements
Deposits		117,311			112,564
Benefits, withdrawals and net transfers to Separate Account (variable annuity) assets		(99,757	)		(85,411	)
Life policy accounts
Deposits		1,183			489
Withdrawals and surrenders		(1,066	)		(926	)
Change in bank overdrafts		(2,934	)		1,174

Net cash provided by financing activities		1,410			806

Net (decrease) increase in cash		(10,077	)		34,945

Cash at beginning of period		16,670			15,509

Cash at end of period	$	6,593		$	50,454

See accompanying Notes to Consolidated Financial Statements.

See accompanying Report of Independent Registered Public Accounting Firm.

HORACE MANN EDUCATORS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2017 and 2016

(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 March 31, 2017, the consolidated results of operations, comprehensive income, changes in shareholders’ equity and cash flows for the three months ended March 31, 2017 and 2016. 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.

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, 2016.

The results of operations for the three months ended March 31, 2017 are not necessarily indicative of the results to be expected for the full year.

The Company has reclassified the presentation of certain prior period information to conform to the 2017 presentation. See “Adopted Accounting Standards”.

Note 1 - Basis of Presentation-(Continued)

Investment Contract and Life Policy Reserves

This table summarizes the Company’s investment contract and life policy reserves.

	March 31,			December 31,
	2017			2016

Investment contract reserves		$	4,408,288		$	4,360,456
Life policy reserves			1,094,704			1,087,513
Total		$	5,502,992		$	5,447,969

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 investment gains and losses on fixed maturity and equity securities and the after tax change in net funded status of benefit plans for the period as shown in the Consolidated Statement of Changes in Shareholders’ Equity. The following tables reconcile these components.

	Net Unrealized
	Investment
	Gains and
	Losses on
	Fixed Maturity
	and Equity
	Securities (1)(2)				Benefit Plans (1)				Total (1)

Beginning balance, January 1, 2017		$	175,738			$	(11,817	)		$	163,921
Other comprehensive income (loss) before reclassifications			22,330				-				22,330
Amounts reclassified from accumulated other comprehensive income (loss)			203				-				203
Net current period other comprehensive income			22,533				-				22,533
Ending balance, March 31, 2017		$	198,271			$	(11,817	)		$	186,454

Beginning balance, January 1, 2016		$	175,167			$	(11,794	)		$	163,373
Other comprehensive income (loss) before reclassifications			69,971				-				69,971
Amounts reclassified from accumulated other comprehensive income (loss)			(481	)			-				(481	)
Net current period other comprehensive income			69,490				-				69,490
Ending balance, March 31, 2016		$	244,657			$	(11,794	)		$	232,863

(1)

All amounts are net of tax.

(2)

The pretax amounts reclassified from accumulated other comprehensive income (loss), $(313) and $740, are included in net realized investment gains and losses and the related income tax expenses, $(110) and $259, are included in income tax expense in the Consolidated Statements of Operations for the three months ended March 31, 2017 and 2016, respectively.

Note 1 - Basis of Presentation-(Continued)

Comparative information for elements that are not required to be reclassified in their entirety to net income in the same reporting period is located in “Note 2 -- Investments -- Net Unrealized Investment Gains and Losses on Fixed Maturity and Equity Securities”.

Adopted Accounting Standards

Employee Share-based Payment Accounting

Effective January 1, 2017, the Company adopted new accounting guidance for employee share-based payments which simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The recognition and classification of the excess tax benefit provisions were applied prospectively in the results of operations. This adoption resulted in additional excess tax benefits of $2,450 which reduced the current provision for income taxes in the results of operations. The statutory tax withholding classification, which are cash payments made to taxing authorities for withheld taxes funded through tendered shares, were applied retrospectively and the Company reclassified the statutory tax withholding requirements in the statement of cash flows from Other in operating activities to Withholding tax payments on RSUs tendered in financing activities. This statutory withholding reclassification resulted in $2,532 and $3,231 being included in financing activities for the three months ended March 31, 2017 and 2016, respectively. There were no cumulative effect adjustments upon adoption of the new accounting guidance.

Pending Accounting Standards

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 from this updated guidance. The guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those years. Early adoption is permitted only for annual reporting periods beginning after December 15, 2016. The Company plans to adopt the guidance as of January 1, 2018. Management believes the adoption of this accounting guidance will not have a material effect on the results of operations or financial position, and related disclosures, of the Company.

Note 1 - Basis of Presentation-(Continued)

Recognition and Measurement of Financial Assets and Liabilities

In January 2016, the FASB issued accounting guidance to improve certain aspects of the recognition, measurement, presentation and disclosure of financial instruments. Among other things, this guidance requires public entities to measure equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) at fair value with changes in fair value recognized in net income and to perform a qualitative assessment to identify impairment for equity investments without readily determinable fair values. Companies are required to apply this guidance by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the year of adoption and, for the guidance related to equity securities without readily determinable fair values, companies are required to apply a prospective approach to equity investments that exist as of the date of adoption. The guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those years. Early application is permitted. The guidance will not have an impact on the Company’s financial position and management is evaluating the impact that this guidance will have on the Company’s results of operations.

Statement of Cash Flows -- Classification

In August 2016, the FASB issued guidance to reduce diversity in practice in the statement of cash flows between operating, investing and financing activities related to the classification of cash receipts and cash payments for eight specific issues. The FASB acknowledged that current GAAP either is unclear or does not include specific guidance on these eight cash flow classification issues: (1) debt prepayment or extinguishment costs; (2) settlement of zero-coupon bonds (pertains to issuers); (3) contingent consideration payments made after a business combination; (4) proceeds from the settlement of insurance claims (pertains to claimants); (5) proceeds from the settlement of corporate-owned life insurance policies; (6) distributions received from equity method investees; (7) beneficial interests in securitization transactions (pertains to transferors) and (8) separately identifiable cash flows and application of the predominance principle. For public business entities, the guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those years, using a retrospective approach. The guidance allows prospective adoption for individual issues if it is impracticable to apply the amendments retrospectively for those issues. Early application is permitted. Management believes the adoption of this accounting guidance will not have a material effect on the classifications in the Company’s consolidated statement of cash flows. The adoption of this accounting guidance will not have any effect on the results of operations or financial position of the Company.

Note 1 - Basis of Presentation-(Continued)

Accounting for Leases

In February 2016, the FASB issued accounting and disclosure guidance to improve financial reporting and comparability among organizations about leasing transactions. Under the new guidance, for leases with lease terms of more than 12 months, a lessee will be required to recognize assets and liabilities on the balance sheet for the rights and obligations created by those leases. Consistent with current accounting guidance, the recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or an operating lease. However, while current guidance requires only capital leases to be recognized on the balance sheet, the new guidance will require both operating and capital leases to be recognized on the balance sheet. In transition to the new guidance, companies are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those years. Early application is permitted. Management is evaluating the impact this guidance will have on the results of operations and financial position of the Company.

Measurement of Credit Losses on Financial Instruments

In June 2016, the FASB issued guidance to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments, including reinsurance receivables, held by companies. The new guidance replaces the incurred loss impairment methodology and requires an organization to measure and recognize all current expected credit losses (“CECL”) for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Companies will need to utilize forward-looking information to better inform their credit loss estimates. Companies will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. Credit losses related to available for sale debt securities -- which represent over 90% of Horace Mann’s total investment portfolio -- will be recorded through an allowance for credit losses with this allowance having a limit equal to the amount by which fair value is below amortized cost. The guidance also requires enhanced qualitative and quantitative disclosures to provide additional information about the amounts recorded in the financial statements. For public business entities that are SEC filers, the guidance is effective for annual reporting periods beginning after December 15, 2019, including interim periods within those years, using a modified-retrospective approach. Early application is permitted for annual reporting periods, and interim periods within those years, beginning after December 15, 2018. Management is evaluating the impact this guidance will have on the results of operations and financial position of the Company.

Note 1 - Basis of Presentation-(Continued)

Simplifying the Test for Goodwill Impairment

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

Note 2 - Investments

The Company’s investment portfolio includes free-standing derivative financial instruments (currently over the counter (“OTC”) index call option contracts) to economically hedge risk associated with its fixed indexed annuity (“FIA”) and indexed universal life (“IUL”) products’ contingent liabilities. The Company’s FIA and IUL products include embedded derivative features that are discussed in “Note 1 -- Summary of Significant Accounting Policies -- Investment Contract and Life Policy Reserves -- Reserves for Fixed Indexed Annuities and Indexed Universal Life Policies” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. The Company’s investment portfolio included no other free-standing derivative financial instruments (futures, forwards, swaps, option contracts or other financial instruments with similar characteristics), and there were no other embedded derivative features related to the Company’s investment or insurance products during the three months ended March 31, 2017 and 2016.

Note 2 - Investments-(Continued)

Fixed Maturity and Equity Securities

The Company’s investment portfolio is comprised primarily of fixed maturity securities and also includes 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 (“AOCI”) of all fixed maturity and equity securities in the portfolio were as follows:

				Unrealized			Unrealized
	Amortized			Investment			Investment			Fair			OTTI in
	Cost or Cost			Gains			Losses			Value			AOCI (1)
March 31, 2017
Fixed maturity securities
U.S. Government and federally
sponsored agency obligations (2):
Mortgage-backed securities		$	581,346		$	33,904		$	5,443		$	609,807		$	-
Other, including
U.S. Treasury securities			520,718			19,809			9,219			531,308			-
Municipal bonds			1,647,314			148,319			18,206			1,777,427			-
Foreign government bonds			93,845			5,897			56			99,686			-
Corporate bonds			2,683,746			162,602			9,175			2,837,173			-
Other mortgage-backed securities			1,646,266			21,755			12,672			1,655,349			1,538
Totals		$	7,173,235		$	392,286		$	54,771		$	7,510,750		$	1,538

Equity securities (3)		$	143,203		$	15,743		$	1,971		$	156,975		$	-

December 31, 2016
Fixed maturity securities
U.S. Government and federally
sponsored agency obligations (2):
Mortgage-backed securities		$	587,355		$	34,256		$	6,720		$	614,891		$	-
Other, including
U.S. Treasury securities			458,745			18,518			10,120			467,143			-
Municipal bonds			1,648,252			143,733			22,588			1,769,397			-
Foreign government bonds			93,864			5,102			297			98,669			-
Corporate bonds			2,672,818			152,229			14,826			2,810,221			-
Other mortgage-backed securities			1,691,093			21,153			15,859			1,696,387			1,618
Totals		$	7,152,127		$	374,991		$	70,410		$	7,456,708		$	1,618

Equity securities (3)		$	134,013		$	13,210		$	5,574		$	141,649		$	-

(1)

Related to securities for which an unrealized loss was bifurcated to distinguish the credit-related portion and the portion driven by other market factors. Represents the amount of OTTI losses in AOCI which was not included in earnings; amounts also include net unrealized investment gains and losses on such impaired securities relating to changes in the fair value of those securities subsequent to the impairment measurement date.

(2)

Fair value includes securities issued by Federal National Mortgage Association (“FNMA”) of $283,039 and $272,668; Federal Home Loan Mortgage Corporation (“FHLMC”) of $373,017 and $378,683; and Government National Mortgage Association (“GNMA”) of $112,065 and $115,627 as of March 31, 2017 and December 31, 2016, respectively.

(3)

Includes nonredeemable (perpetual) preferred stocks, common stocks and closed-end funds.

Note 2 - Investments-(Continued)

The following table presents the fair value and gross unrealized losses of fixed maturity and equity securities in an unrealized loss position at March 31, 2017 and December 31, 2016, respectively. The Company views the decrease in value of all of the securities with unrealized losses at March 31, 2017 -- which was driven largely by changes in interest rates, spread widening, financial market illiquidity and/or market volatility from the date of acquisition -- as temporary. For fixed maturity securities, management does not have the intent to sell the securities and it is not more likely than not the Company will be required to sell the securities before the anticipated recovery of the amortized cost bases, and management expects to recover the entire amortized cost bases of the fixed maturity securities. 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.

	12 Months or Less							More than 12 Months							Total
					Gross							Gross							Gross
	Fair Value				Unrealized Losses			Fair Value				Unrealized Losses			Fair Value				Unrealized Losses

March 31, 2017
Fixed maturity securities
U.S. Government and federally
sponsored agency obligations:
Mortgage-backed securities		$	169,786			$	5,035		$	3,381			$	408		$	173,167			$	5,443
Other			262,517				9,219			-				-			262,517				9,219
Municipal bonds			325,610				14,754			10,082				3,452			335,692				18,206
Foreign government bonds			1,444				56			-				-			1,444				56
Corporate bonds			285,724				6,492			37,490				2,683			323,214				9,175
Other mortgage-backed securities			444,102				9,060			188,904				3,612			633,006				12,672
Total fixed
maturity securities			1,489,183				44,616			239,857				10,155			1,729,040				54,771
Equity securities (1)			37,554				1,013			8,068				958			45,622				1,971
Combined totals		$	1,526,737			$	45,629		$	247,925			$	11,113		$	1,774,662			$	56,742

Number of positions with a
gross unrealized loss			560							91							651
Fair value as a percentage of
total fixed maturity and
equity securities fair value			19.9	%						3.2	%						23.1	%

December 31, 2016
Fixed maturity securities
U.S. Government and federally
sponsored agency obligations:
Mortgage-backed securities		$	186,439			$	6,176		$	3,235			$	544		$	189,674			$	6,720
Other			219,372				10,120			-				-			219,372				10,120
Municipal bonds			408,163				19,006			9,928				3,582			418,091				22,588
Foreign government bonds			24,182				297			-				-			24,182				297
Corporate bonds			459,402				11,056			57,261				3,770			516,663				14,826
Other mortgage-backed securities			640,691				10,470			229,106				5,389			869,797				15,859
Total fixed
maturity securities			1,938,249				57,125			299,530				13,285			2,237,779				70,410
Equity securities (1)			56,676				4,567			7,956				1,007			64,632				5,574
Combined totals		$	1,994,925			$	61,692		$	307,486			$	14,292		$	2,302,411			$	75,984

Number of positions with a
gross unrealized loss			629							102							731
Fair value as a percentage of
total fixed maturity and
equity securities fair value			26.3	%						4.0	%						30.3	%

(1)

Includes nonredeemable (perpetual) preferred stocks, common stocks and closed-end funds.

Note 2 - Investments-(Continued)

Fixed maturity and equity securities with an investment grade rating represented 90% of the gross unrealized losses as of March 31, 2017. With respect to fixed maturity securities involving securitized financial assets, the underlying collateral cash flows were stress tested to determine there was no adverse change in the present value of cash flows below the amortized cost basis.

Credit Losses

The following table summarizes the cumulative amounts related to the Company’s credit loss component of OTTI losses on fixed maturity securities held as of March 31, 2017 and 2016 that the Company did not intend to sell as of those dates, and it was not more likely than not that the Company would be required to sell the securities before the anticipated recovery of the amortized cost bases, for which the non-credit portions of OTTI losses were recognized in other comprehensive income:

	Three Months Ended
		March 31,
		2017		2016
Cumulative credit loss (1)
Beginning of period	$	13,703		$	7,844
New credit losses		-			1,824
Increases to previously recognized credit losses		726			-
Gains related to securities sold or paid down during the period		(2	)		-
End of period	$	14,427		$	9,668

(1)

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

Note 2 - Investments-(Continued)

Maturities/Sales of Fixed Maturity 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						March 31, 2017
	March 31,			December 31,			Fair			Amortized
	2017			2016			Value			Cost
Estimated expected maturity:
Due in 1 year or less		3.8	%		3.9	%		$	284,164		$	271,394
Due after 1 year through 5 years		28.1			28.7				2,109,683			2,014,879
Due after 5 years through 10 years		34.1			35.2				2,562,229			2,447,089
Due after 10 years
through 20 years		21.1			19.5				1,582,732			1,511,608
Due after 20 years		12.9			12.7				971,942			928,265
Total		100.0	%		100.0	%		$	7,510,750		$	7,173,235

Average option-adjusted
duration, in years		6.0			5.9

Proceeds received from sales of fixed maturity 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
		March 31,
	2017			2016
Fixed maturity securities
Proceeds received	$	110,872		$	82,090
Gross gains realized		2,489			2,476
Gross losses realized		(881	)		(492	)

Equity securities
Proceeds received	$	5,489		$	6,147
Gross gains realized		1,048			520
Gross losses realized		(192	)		(646	)

Note 2 - Investments-(Continued)

Net Unrealized Investment Gains and Losses on Fixed Maturity and Equity Securities

Net unrealized investment gains and losses are computed as the difference between fair value and amortized cost for fixed maturity securities 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
		March 31,
		2017			2016
Net unrealized investment gains and losses
on fixed maturity securities, net of tax
Beginning of period	$	197,978		$	198,714
Change in net unrealized investment
gains and losses		21,891			78,341
Reclassification of net realized
investment gains to net income		(484	)		(674	)
End of period	$	219,385		$	276,381

Net unrealized investment gains and losses
on equity securities, net of tax
Beginning of period	$	4,963		$	2,649
Change in net unrealized investment
gains and losses		3,302			2,188
Reclassification of net realized
investment losses to net income		687			193
End of period	$	8,952		$	5,030

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 are reached.

The following table presents the instruments that were subject to a master netting arrangement for the Company.

Net Amounts

of Assets/

Gross

Liabilities

Gross Amounts Not Offset

Amounts

Presented

in the Consolidated

Offset in the

in the

Balance Sheets

Consolidated

Cash

Gross

Balance

Financial

Collateral

Net

Amounts

Sheets

Instruments

Received

Amount

March 31, 2017

Asset derivatives:

Free-standing derivatives

9,932

10,449

(517

)

December 31, 2016

Asset derivatives:

Free-standing derivatives

8,694

8,824

(130

)

Note 2 - Investments-(Continued)

Deposits

At March 31, 2017 and December 31, 2016, fixed maturity securities with a fair value of $18,089 and $18,119, 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 March 31, 2017 and December 31, 2016, fixed maturity securities with a fair value of $621,544 and $620,489, 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 $575,000 at both of the respective dates. The deposited securities are included in Fixed maturity securities on the Company’s Consolidated Balance Sheets.

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.

Information regarding the three-level hierarchy presented below and the valuation methodologies utilized by the Company to estimate fair values at a point in time is included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, specifically in “Note 3 -- Fair Value of Financial Instruments”.

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 March 31, 2017, Level 3 invested assets comprised 3.1% 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
March 31, 2017
Financial Assets
Investments
Fixed maturity securities
U.S. Government and federally
sponsored agency obligations:
Mortgage-backed securities	$	609,807	$	609,807	$	-	$	605,863	$	3,944
Other, including
U.S. Treasury securities		531,308		531,308		13,619		517,689		-
Municipal bonds		1,777,427		1,777,427		-		1,723,965		53,462
Foreign government bonds		99,686		99,686		-		99,686		-
Corporate bonds		2,837,173		2,837,173		14,173		2,740,505		82,495
Other mortgage-backed securities		1,655,349		1,655,349		-		1,546,499		108,850
Total fixed maturity securities		7,510,750		7,510,750		27,792		7,234,207		248,751
Equity securities		156,975		156,975		102,573		54,396		6
Short-term investments		81,064		81,064		79,859		1,205		-
Other investments		21,432		21,432		-		21,432		-
Totals	$	7,770,221	$	7,770,221	$	210,224	$	7,311,240	$	248,757
Financial Liabilities
Investment contract and life policy
reserves, embedded derivatives	$	236	$	236	$	-	$	236	$	-
Other policyholder funds,
embedded derivatives		64,261		64,261		-		-		64,261

December 31, 2016
Financial Assets
Investments
Fixed maturity securities
U.S. Government and federally
sponsored agency obligations:
Mortgage-backed securities	$	614,891	$	614,891	$	-	$	611,476	$	3,415
Other, including
U.S. Treasury securities		467,143		467,143		13,631		453,512		-
Municipal bonds		1,769,397		1,769,397		-		1,722,900		46,497
Foreign government bonds		98,669		98,669		-		98,669		-
Corporate bonds		2,810,221		2,810,221		13,532		2,736,498		60,191
Other mortgage-backed securities		1,696,387		1,696,387		-		1,595,143		101,244
Total fixed maturity securities		7,456,708		7,456,708		27,163		7,218,198		211,347
Equity securities		141,649		141,649		98,632		43,011		6
Short-term investments		44,918		44,918		44,167		-		751
Other investments		20,194		20,194		-		20,194		-
Totals	$	7,663,469	$	7,663,469	$	169,962	$	7,281,403	$	212,104
Financial Liabilities
Investment contract and life policy
reserves, embedded derivatives	$	158	$	158	$	-	$	158	$	-
Other policyholder funds,
embedded derivatives		59,393		59,393		-		-		59,393

Note 3 - Fair Value of Financial Instruments-(Continued)

During the three months ended March 31, 2017, an equity security was transferred into Level 1 from Level 2 as a result of increased liquidity in the market and a sustained increase in the market activity for this asset. The following table presents 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 (2)				Total Fixed Maturity Securities				Equity Securities			Short-term Investments				Total

Beginning balance, January 1, 2017		$	46,497			$	60,191			$	104,659			$	211,347			$	6		$	751			$	212,104			$	59,393
Transfers into Level 3 (3)			5,214				29,918				15,039				50,171				-			-				50,171				-
Transfers out of Level 3 (3)			-				(6,110	)			-				(6,110	)			-			(751	)			(6,861	)			-
Total gains or losses
Net realized investment gains
(losses) included in net
income related to
financial assets			-				-				-				-				-			-				-				-
Net realized (gains) losses
included in net income
related to financial liabilities			-				-				-				-				-			-				-				2,308
Net unrealized investment gains
(losses) included in other
comprehensive income			1,871				96				(771	)			1,196				-			-				1,196				-
Purchases			-				-				-				-				-			-				-				-
Issuances			-				-				-				-				-			-				-				3,389
Sales			-				-				-				-				-			-				-				-
Settlements			-				-				-				-				-			-				-				-
Paydowns, maturities
and distributions			(120	)			(1,600	)			(6,133	)			(7,853	)			-			-				(7,853	)			(829	)
Ending balance, March 31, 2017		$	53,462			$	82,495			$	112,794			$	248,751			$	6		$	-			$	248,757			$	64,261

Beginning balance, January 1, 2016		$	30,379			$	67,575			$	75,466			$	173,420			$	6		$	-			$	173,426			$	39,021
Transfers into Level 3 (3)			14,751				6,059				11,642				32,452				-			-				32,452				-
Transfers out of Level 3 (3)			-				-				-				-				-			-				-				-
Total gains or losses
Net realized investment gains
(losses) included in net
income related to
financial assets			-				-				-				-				-			-				-				-
Net realized (gains) losses
included in net income
related to financial liabilities			-				-				-				-				-			-				-				674
Net unrealized investment gains
(losses) included in other
comprehensive income			1,484				388				(7	)			1,865				-			-				1,865				-
Purchases			-				-				-				-				-			-				-				-
Issuances			-				-				-				-				-			-				-				3,491
Sales			-				-				-				-				-			-				-				-
Settlements			-				-				-				-				-			-				-				-
Paydowns, maturities
and distributions			(121	)			(3,951	)			(3,280	)			(7,352	)			-			-				(7,352	)			(1,101	)
Ending balance, March 31, 2016		$	46,493			$	70,071			$	83,821			$	200,385			$	6		$	-			$	200,391			$	42,085

(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)

Includes U.S. Government and federally sponsored agency obligations for mortgage-backed securities and other mortgage-backed securities.

(3)

Transfers into and out of Level 3 during the three months ended March 31, 2017 and 2016 were attributable to changes in the availability of observable market information for individual fixed maturity securities and short-term investments. 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 March 31, 2017 and 2016, there were no net realized investment gains or losses included in earnings that were attributable to changes in the fair value of Level 3 assets still held. For the three months ended March 31, 2017 and 2016, net realized losses of $2,308 and $674, respectively, were included in earnings that were attributable to the changes in the fair value of Level 3 liabilities (embedded derivatives) still held.

Note 3 - Fair Value of Financial Instruments-(Continued)

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 described in “Note 3 -- Fair Value of Financial Instruments -- Investments” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. Generally, valuation techniques 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 those used for fixed maturity securities.

The sensitivity of the estimated fair values to changes in the significant unobservable inputs for fixed maturity and equity securities included in Level 3 generally relates 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
March 31, 2017
Financial Assets
Investments
Other investments		$	151,537		$	156,089		$	-		$	-		$	156,089
Financial Liabilities
Investment contract and life policy
reserves, fixed annuity contracts			4,408,288			4,317,991			-			-			4,317,991
Investment contract and life policy
reserves, account values on life contracts			80,484			85,945			-			-			85,945
Other policyholder funds			647,134			647,134			-			575,342			71,792
Long-term debt			247,273			259,698			259,698			-			-

December 31, 2016
Financial Assets
Investments
Other investments		$	151,965		$	156,536		$	-		$	-		$	156,536
Financial Liabilities
Investment contract and life policy
reserves, fixed annuity contracts			4,360,456			4,280,528			-			-			4,280,528
Investment contract and life policy
reserves, account values on life contracts			79,591			85,066			-			-			85,066
Other policyholder funds			649,557			649,557			-			575,253			74,304
Long-term debt			247,209			248,191			248,191			-			-

Note 4 - Derivative Instruments

In February 2014, the Company began offering FIA products, which are deferred fixed annuities that guarantee the return of principal to the contractholder and credit interest based on a percentage of the gain in a specified market index. In October 2015, the Company began offering IUL products, which also credit interest based on a percentage of the gain in a specified market index. When deposits are received for FIA and IUL contracts, a portion is used to purchase derivatives consisting of OTC call options on the applicable market indices to fund the index credits due to FIA and IUL policyholders. For the Company, substantially all of such call options are one-year options purchased to match the funding requirements of the underlying contracts. The call options are carried at fair value with changes in fair value included in Net realized investment gains and losses, a component of Revenues, in the Consolidated Statements of Operations.

The change in fair value of derivatives includes the gains or losses recognized at the expiration of the option term or early termination and the changes in fair value for open positions. Call options are not purchased to fund the index liabilities which may arise after the next deposit anniversary date. On the respective anniversary dates of the indexed deposits, the index used to compute the annual index credit is reset and new one-year call options are purchased to fund the next annual index credit. The cost of these purchases is managed through the terms of the FIA and IUL contracts, which permit changes to index return caps, participation rates and/or asset fees, subject to guaranteed minimums on each contract’s anniversary date. By adjusting the index return caps, participation rates or asset fees, crediting rates generally can be managed except in cases where the contractual features would prevent further modifications.

The future annual index credits on FIA contracts are treated as a “series of embedded derivatives” over the expected life of the applicable contract with a corresponding reserve recorded. For the IUL contracts, the embedded derivative represents a single year liability for the index return.

The Company carries all derivative instruments as assets or liabilities in the Consolidated Balance Sheets at fair value. The Company elected to not use hedge accounting for derivative transactions related to the FIA and IUL products. As a result, the Company records the purchased call options and the embedded derivatives related to the provision of a contingent return at fair value, with changes in the fair value of the derivatives recognized immediately in the Consolidated Statements of Operations. The fair values of derivative instruments, including derivative instruments embedded in FIA and IUL contracts, presented in the Consolidated Balance Sheets were as follows:

	March 31,			December 31,
	2017			2016
Assets
Derivative instruments, included in Short-term
and other investments		$	9,932		$	8,694

Liabilities
FIA - embedded derivatives,
included in Other policyholder funds			64,261			59,393
IUL - embedded derivatives,
included in Investment contract and life policy reserves			236			158

Note 4 - Derivative Instruments-(Continued)

In general, the change in the fair value of the embedded derivatives related to FIA contracts will not correspond to the change in fair value of the purchased call options because the purchased call options are one-year options while the options valued in those embedded derivatives represent the rights of the policyholder to receive index credits over the entire period the FIA contracts are expected to be in force, which typically exceeds 10 years. The changes in fair value of derivatives included in the Consolidated Statements of Operations were as follows:

	Three Months Ended
	March 31,
	2017				2016
Change in fair value of derivatives (1):
Revenues
Net realized investment gains (losses)		$	2,437			$	(218	)

Change in fair value of embedded derivatives:
Revenues
Net realized investment losses			(2,366	)			(676	)

(1)

Includes the gains or losses recognized at the expiration of the option term or early termination and the changes in fair value for open options.

The Company’s strategy attempts to mitigate potential risk of loss under these agreements through a regular monitoring process, which evaluates the program’s effectiveness. The Company is exposed to risk of loss in the event of nonperformance by the counterparties and, accordingly, option contracts are purchased from multiple counterparties, which are evaluated for creditworthiness prior to purchase of the contracts. All of these options have been purchased from nationally recognized financial institutions with a Standard and Poor’s/Moody’s long-term credit rating of “BBB+”/“Baa1” or higher at the time of purchase and the maximum credit exposure to any single counterparty is subject to concentration limits. The Company also obtains credit support agreements that allow it to request the counterparty to provide collateral when the fair value of the exposure to the counterparty exceeds specified amounts.

The notional amount and fair value of call options by counterparty and each counterparty’s long-term credit ratings were as follows:

	March 31, 2017								December 31, 2016
	Credit Rating (1)		Notional			Fair			Notional			Fair
Counterparty	S&P	Moody’s	Amount			Value			Amount			Value

Bank of America, N.A.	A+	A1		$	25,200		$	601		$	38,500		$	1,934
Barclays Bank PLC	A-	A1			80,900			2,332			66,800			1,543
Citigroup Inc.	BBB+	Baa1			-			-			-			-
Credit Suisse International	A	A1			57,700			5,164			65,200			4,281
Societe Generale	A	A2			40,200			1,835			15,600			936

Total				$	204,000		$	9,932		$	186,100		$	8,694

(1)

As assigned by Standard & Poor’s Corporation (“S&P”) and Moody’s Investors Service, Inc. (“Moody’s”).

Note 4 - Derivative Instruments-(Continued)

As of March 31, 2017 and December 31, 2016, the Company held $10,449 and $8,824, respectively, of cash received from counterparties for derivative collateral, which is included in Other liabilities on the Consolidated Balance Sheets. This derivative collateral limits the Company’s maximum amount of economic loss due to credit risk that would be incurred if parties to the call options failed completely to perform according to the terms of the contracts to $250 per counterparty.

Note 5 - Property and Casualty Unpaid Claims and Claim Expenses

The following table is a summary reconciliation of the beginning and ending Property and Casualty unpaid claims and claim expense reserves for the periods indicated. The table presents reserves on both gross and net (after reinsurance) bases. The total net Property and Casualty insurance claims and claim expense incurred amounts are reflected in the Consolidated Statements of Operations. The end of the period gross reserve (before reinsurance) balances and the reinsurance recoverable balances are reflected on a gross basis in the Consolidated Balance Sheets.

	March 31,				March 31,
	2017				2016
Property and Casualty segment
Gross reserves, beginning of year (1)		$	307,757			$	301,569
Less: reinsurance recoverables			61,199				50,332
Net reserves, beginning of year (2)			246,558				251,237
Incurred claims and claim expenses:
Claims occurring in the current year			123,204				103,206
Decrease in estimated reserves for
claims occurring in prior years (3)			(1,000	)			(2,000	)
Total claims and claim expenses incurred (4)			122,204				101,206
Claims and claim expense payments
for claims occurring during:
Current year			52,380				39,081
Prior years			62,013				54,515
Total claims and claim expense payments			114,393				93,596
Net reserves, end of year (2)			254,369				258,847
Plus: reinsurance recoverables			61,804				60,429
Gross reserves, end of year (1)		$	316,173			$	319,276

(1)

Unpaid claims and claim expenses as reported in the Consolidated Balance Sheets also include reserves for the Life and Retirement segments of $23,860 and $24,993 as of March 31, 2017 and 2016, respectively, in addition to Property and Casualty segment reserves.

(2)

Reserves net of anticipated reinsurance recoverables.

(3)

Shows the amounts by which the Company decreased its reserves in each of the periods indicated for claims occurring in previous periods to reflect subsequent information on such claims and changes in their projected final settlement costs.

(4)

Benefits, claims and settlement expenses as reported in the Consolidated Statements of Operations also include amounts for the Life and Retirement segments of $21,892 and $18,307 as of March 31, 2017 and 2016, respectively, in addition to the Property and Casualty segment amounts.

Note 5 - Property and Casualty Unpaid Claims and Claim Expenses-(continued)

Net favorable development of total reserves for Property and Casualty claims occurring in prior years was $1,000 and $2,000 for the three month periods ended March 31, 2017 and 2016, respectively. The favorable development for both of the three month periods ended March 31, 2017 and 2016 was predominantly the result of favorable severity trends in homeowners loss emergence for accident years 2014 and prior.

Note 6 - Debt

Indebtedness outstanding was as follows:

	March 31,			December 31,
	2017			2016
Short-term debt:
Bank Credit Facility, expires July 30, 2019		$	-		$	-

Long-term debt:
4.50% Senior Notes, due December 1, 2025. Aggregate
principal amount of $250,000 less unaccrued discount of
$589 and $603 (4.5% imputed rate) and unamortized
debt issuance costs of $2,138 and $2,188			247,273			247,209

The Credit Agreement with Financial Institutions (“Bank Credit Facility”) and 4.50% Senior Notes due 2025 (“Senior Notes due 2025”) are described in “Notes to Consolidated Financial Statements -- Note 7 -- Debt” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

Note 7 - Reinsurance

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 March 31, 2017
Premiums written and contract deposits	$	301,512		$	5,510		$	730	$	296,732
Premiums and contract charges earned		200,455			5,534			801		195,722
Benefits, claims and settlement expenses		147,271			3,883			708		144,096

Three months ended March 31, 2016
Premiums written and contract deposits	$	287,992		$	5,768		$	945	$	283,169
Premiums and contract charges earned		190,233			5,769			986		185,450
Benefits, claims and settlement expenses		131,240			12,662			935		119,513

Note 8 - Commitments

Investment Commitments

From time to time, the Company has outstanding commitments to purchase investments and/or commitments to lend funds under bridge loans. Unfunded commitments to purchase investments were $140,516 and $135,054 at March 31, 2017 and December 31, 2016, respectively.

Note 9 - Segment Information

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 segment, primarily personal lines automobile and homeowners products; Retirement segment, primarily tax-qualified fixed and variable annuities; and Life segment, life insurance. The Company does not allocate the impact of corporate-level transactions to these operating segments, consistent with the basis for management’s evaluation of the results of those segments, but classifies those items in the fourth segment, Corporate and Other. In addition to ongoing transactions such as corporate debt service, net realized investment gains and losses and certain public company expenses, such items also have included corporate debt retirement costs/gains, when applicable. Summarized financial information for these segments is as follows:

		Three Months Ended
		March 31,
		2017			2016
Insurance premiums and contract charges earned
Property and Casualty	$	158,318		$	152,120
Retirement		6,601			6,068
Life		30,803			27,262
Total	$	195,722		$	185,450

Net investment income
Property and Casualty	$	9,177		$	8,828
Retirement		63,442			58,049
Life		18,288			17,984
Corporate and Other		12			15
Intersegment eliminations		(208	)		(217	)
Total	$	90,711		$	84,659

Net income (loss)
Property and Casualty	$	2,735		$	13,795
Retirement		11,530			10,553
Life		3,885			3,867
Corporate and Other		(2,832	)		(3,062	)
Total	$	15,318		$	25,153

	March 31,			December 31,
	2017			2016
Assets
Property and Casualty	$	1,117,764		$	1,110,958
Retirement		7,622,077			7,449,777
Life		1,941,372			1,912,771
Corporate and Other		126,745			140,104
Intersegment eliminations		(28,453	)		(36,786	)
Total	$	10,779,505		$	10,576,824

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (“MD&A”)

(Dollars in millions, except per share data)

Measures within this MD&A that are not based on accounting principles generally accepted in the United States (“non-GAAP”) are marked by an asterisk (“*”). An explanation of these measures is contained in the Glossary of Selected Terms included as an exhibit to this Quarterly Report on Form 10-Q.

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 this Quarterly Report on Form 10-Q and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. 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, retirement 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 2016 Property and Casualty direct earned premiums, the Company’s ten largest states represented 57% 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, South Carolina, Florida and Louisiana.

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.

The Company’s ability to refinance outstanding indebtedness or repurchase shares of the Company’s common stock.

The Company’s ability to (1) develop and expand its marketing operations, including agents and other points of distribution, (2) maintain and secure access to educators, school administrators, principals and school business officials; and (3) profitably expand its Property and Casualty business in highly competitive environments.

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 can include, among others, teacher layoffs and early retirements, as well as individual concerns regarding employment and economic uncertainty.

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.

Changes in Cybersecurity regulations as a result of state level requirements.

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, 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 March 31, 2017, the Company’s net income of $15.3 million decreased $9.9 million compared to a year ago reflecting a record level of catastrophic losses in the quarter, as well as elevated non-catastrophic weather-related losses.

Property and Casualty segment net income of $2.7 million was $11.1 million lower compared to a year ago with a combined ratio of 105.5%, reflecting a record level of catastrophe losses in the quarter, as well as elevated non-catastrophe weather-related losses. Catastrophe losses of $17.2 million pretax were $4.5 million higher than the first quarter of 2016, representing 2.5 points of the combined ratio increase. Prior years’ reserves continue to develop favorably; however, the favorable development in the current quarter was $1.0 million pretax lower than the amount a year ago, representing 0.7 points of the combined ratio increase.

On an underlying basis, the auto loss ratio of 76.7% was in line with the prior period result on a developed basis, and was in line with full year 2016 results despite the elevated level of weather losses in the first quarter of 2017. The Company remains confident that it is on the right track for 1 point of underlying auto combined ratio improvement for the full year 2017. For property, the increase in the underlying loss ratio from 35.9% for the first quarter of 2016 to 46.9% for the first quarter of 2017 was largely related to the impact of higher non-catastrophe weather-related losses.

Retirement segment net income of $11.5 million increased $0.9 million, or 9%, compared to a year ago which was primarily due to a $3.4 million pretax increase in net interest margin offset by a $2.6 million pretax increase in operating expenses including costs related to the Company’s continued infrastructure and strategic investments. The annualized net interest spread on fixed annuity assets was 183 basis points for the first quarters of 2017 and 2016, which reflects the continued low interest rate environment. Total Retirement assets under management of $6.6 billion increased 9% from a year ago, and total cash value persistency remained strong at approximately 95%.

Life segment net income was $3.9 million for the first quarter of 2017 and comparable to a year ago. In the current quarter, Life segment insurance premiums and contract deposits of $26.5 million increased 11%, or $2.6 million, compared to the prior year period. Life sales of $4.7 million increased $1.7 million, or 57%, compared to the prior year period, primarily due to an increase in single premium sales. Life persistency of 96% was comparable to 12 months earlier.

Premiums written and contract deposits* increased $13.5 million, or 4.8%, compared to a year ago. Property and Casualty premiums written increased $6.2 million, or 4.2%, primarily attributable to rate increases in average premium per policy for homeowners and automobile. Life premiums and contract deposits increased $2.6 million, or 10.9%, compared to a year ago. Annuity deposits received for Retirement increased $4.7 million, or 4.2%, and was attributable to $2.2 million of single premium and $2.5 million of recurring deposits received in 2017.

The Company’s book value per share was $32.60 at March 31, 2017, an increase of 1.4% compared to December 31, 2016 and a decrease of 1.5% compared to a year ago.

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, areas most subject to significant management judgments include: fair value measurements, other-than-temporary impairment of investments, goodwill, deferred policy acquisition costs for investment contracts and life insurance products with account values, 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, 2016, at March 31, 2017, there were no material changes to accounting policies for 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, 2016, 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.

Results of Operations

Insurance Premiums and Contract Charges

	Three Months Ended					Change From
	March 31,					Prior Year
		2017		2016		Percent			Amount
Insurance premiums written and contract deposits
(includes annuity and life contract deposits)
Property & Casualty		$	152.9	$	146.7		4.2	%		$	6.2
Retirement (annuity)			117.3		112.6		4.2	%			4.7
Life			26.5		23.9		10.9	%			2.6
Total		$	296.7	$	283.2		4.8	%		$	13.5

Insurance premiums and contract charges earned
(excludes annuity and life contract deposits)
Property & Casualty		$	158.3	$	152.1		4.1	%		$	6.2
Retirement (annuity)			6.6		6.1		8.2	%			0.5
Life			30.8		27.3		12.8	%			3.5
Total		$	195.7	$	185.5		5.5	%		$	10.2

Number of Policies and Contracts in Force

(actual counts)

	March 31,		December 31,		March 31,
		2017		2016		2016
Property and Casualty
Automobile		483,683		484,915		486,682
Property		219,017		220,137		223,653
Total		702,700		705,052		710,335
Retirement		220,284		219,105		212,397
Life		197,900		197,937		201,480

For the first three months of 2017, the Company’s premiums written and contract deposits* of $296.7 million increased $13.5 million, or 4.8%. The Company’s premiums and contract charges earned increased $10.2 million, or 5.5%, compared to the prior year, primarily due to increases in average premium per policy for both homeowners and automobile.

Total Property and Casualty premiums written* increased 4.2%, or $6.2 million, in the first three months of 2017, compared to the prior year, primarily due to increases in average written premium per policy for both homeowners and automobile. For 2017, the Company’s full year rate plan anticipates high-single digit average rate increases for automobile and mid-single digit average rate increases for homeowners (including states with no rate actions for both automobile and homeowners); average approved rate changes during the first three months of 2017 were consistent with those plans at 9.0% for automobile and 4.4% for homeowners.

Based on policies in force, the current year automobile 12 month retention rate for new and renewal policies was 83.0% compared to 84.5% at March 31, 2016, with the decrease due to recent rate and underwriting actions. The current year homeowner 12 month retention rate for new and renewal policies was 87.5% at March 31, 2017 compared to 88.4% at March 31, 2016 with the decrease due to recent rate and underwriting actions.

Automobile premiums written* increased 5.5%, or $5.7 million, compared to the first quarter of 2016. In the first quarter of 2017, the average written premium per policy and average earned premium per policy increased approximately 5% and 6%, respectively, compared to a year earlier. The number of educator policies represented approximately 85% of the automobile policies in force at March 31, 2017, December 31, 2016 and March 31, 2016.

Homeowners premiums written* increased 1.2%, or $0.5 million, compared to the first quarter of 2016. While the number of homeowners policies in force has declined, the average written premium per policy and average earned premium per policy increased approximately 2% and 4%, respectively, in the first quarter of 2017 compared to a year earlier. The number of educator policies represented approximately 82% of the homeowners policies in force at March 31, 2017, December 31, 2016 and March 31, 2016, and has reflected more moderate declines than the overall homeowner policies in force count. 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. By June 30, 2015, the Company completed a non-renewal program to further address homeowners profitability and hurricane exposure issues in Florida. While this program impacted the overall policy in force count and premiums in the short-term, it reduced risk exposure concentration, reduced overall catastrophe reinsurance costs and is expected to improve homeowners longer-term underwriting results. The Company continues to write policies for tenants in Florida. The Company also authorized its agents to write certain third-party vendors’ homeowners policies in Florida.

For the three months ended March 31, 2017, total annuity deposits* received by Retirement increased 4.2%, or $4.7 million, compared to the prior year period. For the first quarter of 2017, the increase reflected a 4.9% increase in recurring deposit receipts and a 3.6% increase in single premium and rollover deposit receipts.

In the first three months of 2017, new deposits to fixed accounts of $71.9 million decreased 3.7%, or $2.8 million, and new deposits to variable accounts of $45.4 million increased 19.8%, or $7.5 million, compared to the prior year.

Total annuity accumulated value on deposit of $6.6 billion at March 31, 2017 increased 9% compared to a year earlier, reflecting the increase from new deposits received as well as favorable retention. Accumulated value retention for the variable annuity option was 94.7% and 94.5% for the 12 month periods ended March 31, 2017 and 2016, respectively; fixed annuity retention was 94.4% and 94.9% for the respective periods.

Variable annuity accumulated balances of $2.0 billion at March 31, 2017 increased 13.8% compared to March 31, 2016, as positive impacts of deposits and favorable financial market performance offset withdrawals and net transfers to the guaranteed interest rate fixed account option. Compared to the first quarter of 2016, Retirement contract charges earned increased 8.2%, or $0.5 million.

Life premiums and contract deposits* for the first three months of 2017 increased 10.9%, or $2.6 million, compared to the prior year period. The ordinary life insurance in force lapse ratio was 4.5% for the 12 months ended March 31, 2017 compared to 4.2% for the 12 months ended March 31, 2016.

Sales*

For the first three months of 2017, Property and Casualty new annualized sales premiums increased 8.6% compared to the first quarter of 2016, as 9.2%, or $1.9 million, growth in new automobile sales was accompanied by growth in homeowners sales of 5.3%, or $0.2 million, compared to the prior year period.

During the first quarter 2017, the Retirement segment’s 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. Annuity sales by Horace Mann’s Exclusive Distributors increased 7.5% compared to the first quarter of 2016. Sales from the Independent Agent distribution channel, which represent approximately 8.8% of total annuity sales in the current period and are largely single premium and rollover annuity deposits, decreased approximately 21.4% compared to a year earlier. As a result, total Horace Mann annuity sales from the combined distribution channels increased 4.2%, or $4.7 million, compared to the first quarter of 2016. It should be noted that historically, reported annuity sales for HM products were determined based on annualized new recurring deposits as well as single deposits/rollovers. Effective January 1, 2017, reported annuity sales are now determined based on total recurring deposits as well as single deposits/rollovers. All historical annuity sales information presented has been revised to conform to the new reporting methodology.

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, as well as the October 2015 introduction of the Company’s Indexed Universal Life (“IUL”) product have contributed to an increase in sales of proprietary life products. For the current quarter, sales of Horace Mann’s proprietary life insurance products totaled $4.7 million, representing an increase of 56.7%, or $1.7 million, compared to the prior year quarter, including an increase of $1.8 million for single premium sales.

Distribution

At March 31, 2017, there was a combined total of 697 Exclusive Distributors, compared to 683 at December 31, 2016 and 711 at March 31, 2016. The Company continues to expect higher quality standards for Exclusive Distributors to focus on improving both customer experiences and agent productivity in their respective territories. Growth in new automobile sales and life sales reflects improvement in average Exclusive Distributor productivity. The dedicated sales force is supported by the Company’s customer contact center which provides a means for educators to begin their experience directly with the Company, if that is their preference. The customer contact center is also able to assist educators in territories which are not currently served by Exclusive Distributors.

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 273 authorized agents at March 31, 2017. During the three months ended March 31, 2017, this channel generated $10.3 million in annuity sales for the Company compared to $13.1 million for the first quarter of 2016, with the new business primarily comprised of single and rollover deposit business in both periods.

Net Investment Income

For the three months ended March 31, 2017, pretax net investment income of $90.7 million increased 7.1%, or $6.0 million, (6.9%, or $3.9 million, after tax) compared to the prior year period. In addition to reflecting higher asset balances in the Retirement segment, investment results reflected an increase in investment prepayment activity and favorable returns on alternative investments, partially offset by the impact of the current low interest rate environment. Average invested assets increased 5.4% over the 12 months ended March 31, 2017. The average pretax yield on the total investment portfolio was 5.1% (3.4% after tax) for the first quarter of 2017, compared to the average pretax yield of 5.0% (3.3% after tax) a year earlier. During the first quarter of 2017, management continued to identify and purchase 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 (Pretax)

For the first three months of 2017, net realized investment losses were $0.2 million and comparable to a year ago. The net losses in both periods were realized primarily from ongoing investment portfolio management activity and, when determined, the recognition of other-than-temporary impairment (“OTTI”).

For the first three months of 2017, the Company’s net realized investment losses of $0.2 million included $5.0 million of gross gains realized on security sales partially offset by $2.4 million of gross realized losses primarily on disposal of securities and expiration of call options during the quarter and $2.8 million of OTTI charges recorded on certain equity and fixed maturity securities.

For the first three months of 2016, the Company’s net realized investment losses of $0.2 million included $5.6 million of gross gains realized on security sales and calls partially offset by $2.1 million of realized losses primarily on securities that were disposed of during the quarter and $3.7 million of OTTI charges recorded largely on Puerto Rico and energy sector fixed maturity securities.

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.

Fixed Maturity and Equity Securities Portfolios

The table below presents the Company’s fixed maturity 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, 2016, credit spreads were tighter across most asset classes and U.S. Treasury rates declined, which resulted in net unrealized investment gains to be higher in the Company’s fixed maturity securities holdings at March 31, 2017.

	March 31, 2017
									Pretax Net
						Amortized			Unrealized
	Number of		Fair			Cost or			Investment
	Issuers		Value			Cost			Gain (Loss)
Fixed maturity securities
Corporate bonds
Banking and Finance		98		$	707.7		$	676.4		$	31.3
Insurance		54			272.6			248.2			24.4
Energy (1)		47			224.8			212.0			12.8
Technology		32			172.8			168.2			4.6
Healthcare, Pharmacy		42			168.5			160.6			7.9
Real estate		37			165.2			158.2			7.0
Utilities		39			159.0			140.9			18.1
Transportation		24			158.4			151.8			6.6
Telecommunications		27			126.2			118.5			7.7
Natural gas		20			91.3			85.9			5.4
All other corporates (2)		197			590.7			563.1			27.6
Total corporate bonds		617			2,837.2			2,683.8			153.4
Mortgage-backed securities
U.S. Government and federally
sponsored agencies		355			430.0			400.5			29.5
Commercial (3)		127			528.4			531.1			(2.7	)
Other		31			75.4			74.4			1.0
Municipal bonds (4)		601			1,777.4			1,647.3			130.1
Government bonds
U.S.		11			531.3			520.7			10.6
Foreign		17			99.7			93.9			5.8
Collateralized debt obligations (5)		102			583.2			577.4			5.8
Asset-backed securities		109			648.1			644.1			4.0
Total fixed maturity securities		1,970		$	7,510.7		$	7,173.2		$	337.5

Equity securities
Non-redeemable preferred stocks		14		$	62.6		$	62.8		$	(0.2	)
Common stocks		180			74.3			60.4			13.9
Closed-end fund		1			20.1			20.0			0.1
Total equity securities		195		$	157.0		$	143.2		$	13.8

Total		2,165		$	7,667.7		$	7,316.4		$	351.3

(1)

At March 31, 2017, the fair value amount included $11.8 million which were non-investment grade.

(2)

The All other corporates category contains 19 additional industry sectors. Food and beverage, broadcasting and media, consumer products, gaming, lodging and dining, retail and metal and mining represented $426.6 million of fair value at March 31, 2017, with the remaining 13 sectors each representing less than $32.3 million.

(3)

At March 31, 2017, 100% were investment grade, with an overall credit rating of AA, and the positions were well diversified by property type, geography and sponsor.

(4)

Holdings are geographically diversified, approximately 40% are tax-exempt and 78% 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- at March 31, 2017.

(5)

Based on fair value, 96% 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 March 31, 2017.

At March 31, 2017, the Company’s diversified fixed maturity securities portfolio consisted of 2,547 investment positions, issued by 1,970 entities, and totaled approximately $7.5 billion in fair value. This portfolio was 95.9% investment grade, based on fair value, with an average quality rating of A. The Company’s investment guidelines target 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 and equity securities portfolios by rating category. At March 31, 2017, 94.8% 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 and equity securities portfolios as available for sale, which are carried at fair value.

Rating of Fixed Maturity and Equity Securities (1)

(Dollars in millions)

	Percent of Portfolio
	Fair Value						March 31, 2017
	December 31,			March 31,			Fair			Amortized
	2016			2017			Value			Cost or Cost
Fixed maturity securities
AAA		8.3	%		8.6	%		$	645.0		$	630.2
AA (2)		35.5			35.2				2,642.5			2,520.1
A		23.6			23.8				1,786.0			1,686.5
BBB		28.4			28.3				2,124.0			2,029.2
BB		2.4			2.4				176.6			173.5
B		1.0			0.9				70.6			73.3
CCC or lower		0.2			0.1				9.8			9.9
Not rated (3)		0.6			0.7				56.2			50.5
Total fixed maturity securities		100.0	%		100.0	%		$	7,510.7		$	7,173.2
Equity securities
AAA		-			-				-			-
AA		-			-				-			-
A		-			-				-			-
BBB		35.3	%		39.7	%		$	62.4		$	62.7
BB		-			-				*			*
B		-			-				-			-
CCC or lower		-			-				-			-
Not rated		64.7			60.3				94.6			80.5
Total equity securities		100.0	%		100.0	%		$	157.0		$	143.2

Total								$	7,667.7		$	7,316.4

Less than $0.1 million.

(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 March 31, 2017, the AA rated fair value amount included $519.5 million of U.S. Government and federally sponsored agency securities and $517.4 million of mortgage- and asset-backed securities issued by U.S. Government and federally sponsored agencies.

(3)

This category primarily represents private placement and municipal securities not rated by either S&P or Moody’s.

At March 31, 2017, the fixed maturity and equity securities portfolios had a combined $56.7 million pretax of gross unrealized investment losses on $1,775 million fair value related to 651 positions. Of the investment positions (fixed maturity and equity securities) with gross unrealized investment losses, 9 were trading below 80% of the carrying value at March 31, 2017 and were not considered other-than-temporarily impaired. These positions had fair value of $12.5 million, representing 0.2% of the Company’s total investment portfolio at fair value, and had a gross unrealized investment loss of $4.4 million.

The Company views the gross unrealized investment losses of all of the securities at March 31, 2017 as temporary. Future changes in circumstances related to these and other securities could require subsequent recognition of OTTI.

Benefits, Claims and Settlement Expenses

	Three Months Ended								Change From
	March 31,								Prior Year
	2017				2016				Percent			Amount

Property and casualty		$	122.2			$	101.2			20.8	%		$	21.0
Annuity			1.1				0.9			22.2	%			0.2
Life			20.8				17.4			19.5	%			3.4
Total		$	144.1			$	119.5			20.6	%		$	24.6

Property and casualty catastrophe losses, included above		$	17.2			$	12.7			35.4	%		$	4.5

Property and Casualty Claims and Claim Expenses (“losses”)

	Three Months Ended
	March 31,
	2017				2016
Incurred claims and claim expenses:
Claims occurring in the current year		$	123.2			$	103.2
Decrease in estimated reserves for claims
occurring in prior years			(1.0	)			(2.0	)
Total claims and claim expenses incurred		$	122.2			$	101.2

Property and casualty loss ratio:
Total			77.2	%			66.5	%
Effect of catastrophe costs, included above			10.8	%			8.3	%
Effect of prior years’ reserve development, included above			-0.6	%			-1.3	%

For the three months ended March 31, 2017, the Company’s benefits, claims and settlement expenses increased $24.6 million, or 20.6%, compared to the prior year period primarily reflecting increases in Property and Casualty catastrophe costs and current accident year loss frequency -- specifically, in automobile and a $3.4 million increase in life mortality costs.

The current period favorable development of prior years’ Property and Casualty reserves of $1.0 million was the result of actual and remaining projected losses for prior years being below the level anticipated in the immediately preceding December 31 loss reserve estimate. At March 31, 2017, the favorable development was predominantly the result of favorable severity trends in the homeowners loss emergence for accident years 2014 and prior.

For the three months ended March 31, 2017, the automobile loss ratio of 78.3% increased by 6.4 percentage points compared to the prior year period, including (1) the impact of catastrophe costs that resulted in a 0.9 percentage point increase and (2) the impacts of higher current accident year non-catastrophe losses for 2017 primarily driven by an increase in loss frequencies. The homeowners loss ratio of 74.9% for the three months ended March 31, 2017 increased 19.2 percentage points compared to a year earlier, including current accident year catastrophe and non-catastrophe weather-related experience as well as development of prior years’ reserves that had a 2.0 percentage point less favorable impact in the current year. Catastrophe costs represented 29.9 percentage points of the homeowners loss ratio for the current period compared to 23.7 percentage points for the prior year period.

Interest Credited to Policyholders

	Three Months Ended				Change From
	March 31,				Prior Year
	2017		2016		Percent			Amount

Retirement (annuity)		$37.5		$35.6		5.3	%		$	1.9
Life		11.3		11.1		1.8	%			0.2
Total		$48.8		$46.7		4.5	%		$	2.1

Compared to the first three months of 2016, the current period increase in Retirement segment interest credited reflected a 7.0% increase in average accumulated fixed deposits, at an average crediting rate of 3.5%. Life insurance interest credited increased slightly as a result of the growth in reserves for life insurance products with account values.

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 both the three months ended March 31, 2017 and 2016, were 183 basis points.

As of March 31, 2017, fixed annuity account values totaled $4.6 billion, including $4.3 billion of deferred annuities. As shown in the table below, for approximately 87%, or $3.7 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 maturity 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 $543 million of the Retirement 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 Retirement segment net investment income by approximately $2.1 million in year one and $6.3 million in year two, further reducing the net interest spread by approximately 4 basis points and 13 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.

The expectation for future net interest spreads is also an important component in the amortization of deferred policy acquisition costs. In terms of the sensitivity of this amortization to the net interest spread, based on deferred policy acquisition costs as of March 31, 2017 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 $0.30 million and $0.40 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.

	March 31, 2017
							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%		23.8	%		$	1,027.1		49.2	%		13.5	%		$	505.0
Equal to 2% but less than 3%		7.1				308.5		82.9	%		6.8				255.7
Equal to 3% but less than 4%		14.1				610.1		99.8	%		16.3				609.0
Equal to 4% but less than 5%		53.7				2,316.5		100.0	%		61.9				2,316.4
5% or higher		1.3				55.0		100.0	%		1.5				55.0
Total		100.0	%		$	4,317.2		86.7	%		100.0	%		$	3,741.1

The Company will continue to be disciplined 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, 2016, and other factors discussed herein.

Policy Acquisition Expenses Amortized

Amortized policy acquisition expenses were $24.9 million for the first three months of 2017 compared to $24.1 million for the same period in 2016. The increase was largely attributable to increased written premium in the Property and Casualty segment. For the Retirement and Life segments, the unlocking of deferred policy acquisition costs (“unlocking”) resulted in an immaterial change in amortization for the three months ended March 31, 2017 and 2016, respectively.

Operating Expenses

For the first three months of 2017, operating expenses of $48.7 million increased $5.9 million, or 13.8%, compared to the same period in 2016. The first quarter 2017 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 28.3% for the three months ended March 31, 2017 increased 1 point compared to the prior year expense ratio of 27.3%, reflecting additional costs related to the Company’s continued infrastructure investments.

Income Tax Expense

The effective income tax rate on the Company’s pretax income, including net realized investment gains and losses, was 14.0% and 28.6% for the three months ended March 31, 2017 and 2016, respectively. Income from investments in tax-advantaged securities reduced the effective income tax rates 7.8% and 6.8% for the three months ended March 31, 2017 and 2016, respectively. Further, the adoption of a new accounting standard for employee share-based payments on January 1, 2017 reduced the effective income tax rate by 13% for the quarter ending March 31, 2017. The new accounting standard requires that the entire excess tax benefit/deficiency from employee share-based payments be recognized in the income statement rather than allocating the excess tax benefit/deficiency between the equity section of the balance sheet and the income statement.

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 March 31, 2017, the Company’s federal income tax returns for years prior to 2013 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 March 31, 2017, the Company’s net income of $15.3 million decreased $9.9 million compared to the prior year period reflecting a record level of catastrophe losses in the current quarter, as well as elevated non-catastrophe weather-related losses. Additional detail is included in the “Executive Summary” at the beginning of this MD&A.

Net income (loss) by segment and net income per share were as follows:

	Three Months Ended							Change From
	March 31,							Prior Year
		2017			2016			Percent			Amount
Analysis of net income (loss) by segment:
Property and Casualty		$	2.7		$	13.8			-80.4	%		$	(11.1	)
Retirement			11.5			10.6			8.5	%			0.9
Life			3.9			3.9			N.M.				-
Corporate and Other (1)			(2.8	)		(3.1	)		-9.7	%			0.3
Net income		$	15.3		$	25.2			-39.3	%		$	(9.9	)

Effect of catastrophe costs, after tax, included above		$	(11.1	)	$	(8.3	)		33.7	%		$	(2.8	)
Effect of net realized investment gains
(losses), after tax, included above		$	(0.1	)	$	(0.4	)		-75.0	%		$	0.3

Diluted:
Net income per share		$	0.37		$	0.61			-39.3	%		$	(0.24	)
Weighted average number of shares and
equivalent shares (in millions)			41.3			41.5			-0.5	%			(0.2	)

Property and casualty combined ratio:
Total			105.5	%		93.8	%		N.M.				11.7	%
Effect of catastrophe costs, included above			10.8	%		8.3	%		N.M.				2.5	%
Effect of prior years’ reserve development, included above			-0.6	%		-1.3	%		N.M.				0.7	%

N.M. - Not meaningful.

(1)

The Corporate and Other segment includes interest expense on debt, net realized investment gains and losses, corporate debt retirement costs (when applicable), 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, net 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 three months ended March 31, 2017, net realized investment losses after tax were $0.1 million, compared to net realized investment losses after tax of $0.4 million a year earlier.

Return on average shareholders’ equity based on net income was 5.4% and 6.4% for the trailing 12 months ended March 31, 2017 and 2016, respectively.

Outlook for 2017

At the time of this Quarterly Report on Form 10-Q, management estimates that 2017 full year net income before net realized investment gains and losses will be within a range of $1.95 to $2.15 per diluted share. This projection incorporates the Company’s results for 2016 and anticipates continued improvement in the Company’s underlying automobile combined ratio, modeled catastrophe losses as well as modestly lower earnings in the Retirement and Life segments reflecting lower net interest spreads, and approximately $0.10 cents of continued strategic investing in our Retirement business that we expect will accelerate growth momentum related to the Company’s continued modernization of technology and infrastructure. As a result of the continued low interest rate environment, management expects the Company’s overall portfolio yield to decline by approximately 10 basis points over the course of 2017, impacting each of the three business segments. Within the Property and Casualty segment, both approved and planned premium rate increases, as well as underwriting initiatives, are expected to improve profitability margins for the automobile line compared to 2016. The property line is anticipated to produce solid profitability, although at a reduced level that assumes non-catastrophe weather related losses return to a more normalized level than the comparison to 2016; and, catastrophe losses are estimated to be lower than the 2016 level. Net income for the Retirement segment will continue to be impacted by the prolonged interest rate environment and the 2016 net interest spread of 193 basis points is anticipated to grade down to the low 180s through the course of 2017. Assuming mortality costs consistent with the Company’s actuarial models, Life segment net income is expected to decrease compared to 2016, due to net investment income pressure and the increase in expenses. In addition to the segment-specific factors, the Company’s initiatives for customer service and infrastructure improvements, as well as enhanced training and education for the Company’s agency force, all intended to enhance the overall customer experience and support further improvement in policy retention and business cross-sale ratios, will continue and result in a moderate increase in expense levels compared to 2016.

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, 2016 concerning other important factors that could impact actual results. Management believes that a projection of net income including net realized investment gains and losses is not appropriate on a forward-looking basis because it is not possible to provide a valid forecast of net 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 March 31, 2017 and 2016, 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 engaged in such relationships.

Investments

Information regarding the Company’s investment portfolio, which is comprised primarily of investment grade, fixed maturity securities, is located in “Results of Operations -- Net Realized Investment Gains and Losses (Pretax)” 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 and pay dividends to shareholders. 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 three months of 2017, net cash provided by operating activities decreased compared to the same period in 2016, largely due to an increase in Policyholder benefits paid in the current quarter, partially offset by an increase in Investment income collected in the current quarter.

Payments of principal and interest on debt, dividends to shareholders and parent company operating expenses are 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 2017 from all of HMEC’s insurance subsidiaries without prior regulatory approval is approximately $91 million, of which $12.0 million was paid during the three months ended March 31, 2017. 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 10 -- Statutory Information and Restrictions” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

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 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 three months of 2017. For the three months ended March 31, 2017, receipts from annuity contracts increased $4.7 million, or 4.2%, 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 transfers to variable annuity accumulated cash values decreased $14.3 million, or 16.8%, compared to the prior year period.

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 (the “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 10 -- Statutory Information and Restrictions” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

The total capital of the Company was $1,569.1 million at March 31, 2017, including $247.3 million of long-term debt and no short-term debt outstanding. Total debt represented 18.0% of total capital excluding net unrealized investment gains and losses (15.8% including net unrealized investment gains and losses) at March 31, 2017, which was below the Company’s long-term target of 25%.

Shareholders’ equity was $1,321.8 million at March 31, 2017, including a net unrealized investment gain in the Company’s investment portfolio of $198.3 million after taxes and the related impact of deferred policy acquisition costs associated with investment contracts and life insurance products with account values. The market value of the Company’s common stock and the market value per share were $1,664.3 million and $41.05, respectively, at March 31, 2017. Book value per share was $32.60 at March 31, 2017 ($27.71 excluding the net unrealized investment gain*).

Additional information regarding the net unrealized investment gain in the Company’s investment portfolio at March 31, 2017 is included in “Results of Operations -- Net Realized Investment Gains and Losses (Pretax)”.

Total shareholder dividends were $11.5 million for the three months ended March 31, 2017. In March 2017, the Board of Directors announced regular quarterly dividends of $0.275 per share.

During the first three months of 2017, the Company did not repurchase shares of its common stock, under its share repurchase program, which is further described in “Notes to Consolidated Financial Statements -- Note 9 -- Shareholders’ Equity and Common Stock Equivalents” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. As of March 31, 2017, $29.5 million remained authorized for future share repurchases under the 2015 repurchase program.

As of March 31, 2017, the Company had outstanding $250.0 million aggregate principal amount of 4.50% Senior Notes (“Senior Notes due 2025”), which will mature on December 1, 2025, issued at a discount resulting in an effective yield of 4.53%. Interest on the Senior Notes due 2025 is payable semi-annually at a rate of 4.50%. Detailed information regarding the redemption terms of the Senior Notes due 2025 is contained in the “Notes to Consolidated Financial Statements -- Note 7 -- Debt” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. The Senior Notes due 2025 are traded in the open market (HMN 4.50).

As of March 31, 2017, the Company had no balance outstanding under its Bank Credit Facility. The Bank Credit Facility provides for unsecured borrowings of up to $150.0 million and expires on July 30, 2019. Interest accrues at varying spreads relative to prime or Eurodollar base rates and is payable monthly or quarterly depending on the applicable base rate. The unused portion of the Bank Credit Facility is subject to a variable commitment fee, which was 0.15% on an annual basis at March 31, 2017.

To provide additional capital management flexibility, the Company filed a “universal shelf” registration on Form S-3 with the SEC on March 12, 2015. The registration statement, which registered the offer and sale by the Company from time to time of an indeterminate amount of various securities, which may include debt securities, common stock, preferred stock, depositary shares, warrants, delayed delivery contracts and/or units that include any of these securities, was automatically effective on March 12, 2015. Unless withdrawn by the

Company earlier, this registration statement will remain effective through March 12, 2018. The Senior Notes due 2025, described above, were issued utilizing this registration statement. No other 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, A.M. Best Company, Inc. (“A.M. Best”) and Fitch Ratings, Inc. (“Fitch”). 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. These ratings are not a recommendation to buy or hold any of the Company’s securities.

Assigned ratings as of April 30, 2017 were unchanged from the disclosure in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. 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 April 30, 2017
S&P	A	(stable)	BBB	(stable)
Moody’s
Horace Mann Life Insurance Company	A3	(positive)	N.A.
HMEC’s Property and Casualty subsidiaries	A3	(positive)	N.A.
HMEC	N.A.		Baa3	(positive)
A.M. Best	A	(stable)	bbb	(stable)
Fitch	A	(stable)	BBB	(stable)

N.A. – Not applicable.

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, 2016.

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, 2016.

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 (Pretax)”.

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, 2016.

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.

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 March 31, 2017 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.

PART II: OTHER INFORMATION

Item 1A: Risk Factors

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, 2016. The following risk factor is updated to reflect recent developments; however, in general the described risks are comparable to those previously disclosed.

The Department of Labor (“DOL”) fiduciary rule and the possible adoption by the Securities and Exchange Commission (“SEC”) of a fiduciary standard of care could have a material adverse effect on our business, financial condition and results of operations.

On April 6, 2016, the DOL released a final regulation which more broadly defines the types of activities that will result in a person being deemed a “fiduciary” for purposes of the prohibited transaction rules of the Employee Retirement Income Security Act (“ERISA”) and Internal Revenue Code Section 4975. Section 4975 prohibits certain kinds of compensation with respect to transactions involving assets in certain accounts, including individual retirement accounts (“IRAs”).

The DOL rule was originally to be effective on April 10, 2017, but under a delay measure, the fiduciary definition will go into effect on June 9, 2017, with certain conditions for prohibited transaction exemption relief delayed until January 1, 2018. The DOL is continuing its examination of the rule as directed by President Trump.

The DOL regulation will affect the ways in which financial services representatives can be compensated for sales to participants in ERISA employer-sponsored qualified plans and sales to IRA customers, and it will impose significant additional legal obligations and disclosure requirements. The DOL regulation could have a material adverse effect on our business and results of operations. While the regulation does not affect non-ERISA employer-sponsored qualified plans, such as public school 403(b) plans, it could have the following impacts, among others:

	·	It could inhibit our ability to sell and service IRAs, resulting in a change and/or a reduction of the types of products we offer for IRAs, and impact our relationship with current clients.
	·	It could require changes in the way that we compensate our agents, thereby impacting our agents’ business model.
	·	It could require changes in our distribution model for financial services products and could result in a decrease in the number of our agents.
	·	It could increase our costs of doing IRA business and increase our litigation and regulatory risks.
	·	It could increase the cost and complexity of regulatory compliance for our Retirement segment’s products, including our recently introduced fixed indexed annuity product.

Further, in January 2011, under the authority of the Dodd-Frank Act, the SEC submitted a report to Congress recommending that the SEC adopt a fiduciary standard of conduct for broker-dealers. According to the SEC, notice of proposed rulemaking is anticipated in 2017. This regulatory activity by the SEC also has the potential to adversely impact our business, financial condition and results of operations.

Item 2: Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

On December 7, 2011 the Company’s Board of Directors (the “Board”) 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 “2011 Plan”). On September 30, 2015, the Board authorized an additional share repurchase program allowing repurchases of up to $50.0 million to begin following the completion of the 2011 Plan and utilization of that authorization began in January 2016. Both share repurchase programs authorize the repurchase of common shares in open market or privately negotiated transactions, from time to time, depending on market conditions. The current 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 March 31, 2017, the Company did not repurchase shares of HMEC common stock. As of March 31, 2017, $29.5 million remained authorized for future share repurchases.

Item 5: Other Information

The Company is not aware of any information required to be disclosed in a report on Form 8-K during the three months ended March 31, 2017 which has not been filed with the Securities and Exchange Commission (“SEC”).

Item 6: Exhibits

The following items are filed as Exhibits. Management contracts and compensatory plans are indicated by an asterisk (*).

Exhibit
No.		Description

(3)

Articles of incorporation and bylaws:

3.1

Restated Certificate of Incorporation of HMEC, filed with the Delaware Secretary of State on June 24, 2003, incorporated by reference to Exhibit 3.1 to HMEC’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, filed with the Securities and Exchange Commission (the “SEC”) on August 14, 2003.

3.2

Form of Certificate for shares of Common Stock, $0.001 par value per share, of HMEC, incorporated by reference to Exhibit 4.5 to HMEC’s Registration Statement on Form S-3 (Registration No. 33-53118) filed with the SEC on October 9, 1992.

3.3

Bylaws of HMEC, incorporated by reference to Exhibit 3.2 to HMEC’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, filed with the SEC on August 14, 2003.

(4)

Instruments defining the rights of security holders, including indentures:

4.1

Indenture, dated as of November 23, 2015, by and between HMEC and The Bank of New York Mellon Trust Company, N.A., as trustee, incorporated by reference to Exhibit 4.1 to HMEC’s Current Report on Form 8-K dated November 18, 2015, filed with the SEC on November 23, 2015.

4.1(a)

Form of HMEC 4.5000% Senior Notes due 2025, incorporated by reference to Exhibit 4.2 to HMEC’s Current Report on Form 8-K dated November 18, 2015, filed with the SEC on November 23, 2015.

4.2

Certificate of Designations for HMEC Series A Cumulative Convertible Preferred Stock, incorporated by reference to Exhibit 4.3 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)

Material contracts:

10.1

Amended and Restated Credit Agreement dated as of July 30, 2014 among HMEC, certain financial institutions named therein and JPMorgan Chase Bank, N.A., as administrative agent, incorporated by reference to Exhibit 10.1 to HMEC’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014, filed with the SEC on August 8, 2014.

Exhibit
No.		Description

10.1(a)

First Amendment to Credit Agreement dated as of November 16, 2015 among HMEC, certain financial institutions named therein and JPMorgan Chase Bank, N.A., as administrative agent, incorporated by reference to Exhibit 10.1(a) to HMEC’s Annual Report on Form 10-K for the year ended December 31, 2015, filed with the SEC on February 29, 2016.

10.2*

Horace Mann Educators Corporation Amended and Restated 2002 Incentive Compensation Plan (“2002 Incentive Compensation Plan”), incorporated by reference to Exhibit 10.2 to HMEC’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005, filed with the SEC on August 9, 2005.

10.2(a)*

Revised Specimen Employee Stock Option Agreement under the 2002 Incentive Compensation Plan, incorporated by reference to Exhibit 10.6(b) to HMEC’s Annual Report on Form 10-K for the year ended December 31, 2008, filed with the SEC on March 2, 2009.

10.2(b)*

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.

10.2(c)*

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.

10.2(d)*

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.

10.2(e)*

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.

10.3*

First Amendment to the HMEC 2010 Comprehensive Executive Compensation Plan (As Amended and Restated Effective as of May 20, 2015).

10.3(a)*

HMEC 2010 Comprehensive Executive Compensation Plan (As Amended and Restated Effective May 20, 2015) (Section 16 Officer) Non-Qualified Stock Option Agreement - Employee Grantee.

10.3(b)*

HMEC 2010 Comprehensive Executive Compensation Plan (As Amended and Restated Effective May 20, 2015) (Non-Section 16) Non-Qualified Stock Option Agreement - Employee Grantee.

Exhibit
No.		Description

10.3(c)*

HMEC 2010 Comprehensive Executive Compensation Plan (As Amended and Restated Effective May 20, 2015) Service-Vested Restricted Stock Units Agreement - Employee Grantee.

10.3(d)*

HMEC 2010 Comprehensive Executive Compensation Plan (As Amended and Restated Effective May 20, 2015) Performance-Based Restricted Stock Units Agreement - Employee Grantee.

10.3(e)

HMEC 2010 Comprehensive Executive Compensation Plan (As Amended and Restated Effective May 20, 2015) Service-Vested Restricted Stock Units Agreement - Employee Grantee (One-Time Grant Service).

10.3(f)*

Specimen Employee Performance-Based Restricted Stock Units Agreement - Key Strategic Grantee under the HMEC 2010 Comprehensive Executive Compensation Plan incorporated by reference to Exhibit 10.3(e) to HMEC’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016, filed with the SEC on May 6, 2016.

10.3(g)*

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.

10.4*

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.

10.5*

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.

10.6*

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.

10.7*

Summary of HMEC Non-employee Director Compensation, incorporated by reference to Exhibit 10.7 to HMEC’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016, filed with the SEC on August 5, 2016.

10.8*

Summary of HMEC Named Executive Officer Annualized Salaries.

Exhibit
No.		Description

10.9*

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.

10.9(a)*

Revised Schedule to Severance Agreements between HMEC, HMSC and certain officers of HMEC and/or HMSC.

10.10*

HMSC Executive Change in Control Plan, incorporated by reference to Exhibit 10.15 to HMEC’s Current Report on Form 8-K dated February 15, 2012, filed with the SEC on February 22, 2012.

10.10(a)*

HMSC Executive Change in Control Plan Schedule A Plan Participants.

10.11*

HMSC Executive Severance Plan, incorporated by reference to Exhibit 10.16 to HMEC’s Current Report on Form 8-K dated March 7, 2012, filed with the SEC on March 13, 2012.

10.11(a)*

First Amendment to the HMSC Executive Severance Plan, incorporated by reference to Exhibit 10.16(a) to HMEC’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, filed with the SEC on August 9, 2012.

10.11(b)*

HMSC Executive Severance Plan Schedule A Participants.

(11)

Statement regarding computation of per share earnings.

(15)

KPMG LLP letter regarding unaudited interim financial information.

(31)

Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.1

Certification by Marita Zuraitis, Chief Executive Officer of HMEC.

31.2

Certification by Bret A. Conklin, Chief Financial Officer of HMEC.

(32)

Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.1

Certification by Marita Zuraitis, Chief Executive Officer of HMEC.

32.2

Certification by Bret A. Conklin, Chief Financial Officer of HMEC.

(99)

Additional exhibits

99.1

Glossary of Selected Terms.

Exhibit
No.		Description

(101)

Interactive Data File

101.INS

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension Schema

101.CAL

XBRL Taxonomy Extension Calculation Linkbase

101.DEF

XBRL Taxonomy Extension Definition Linkbase

101.LAB

XBRL Taxonomy Extension Label Linkbase

101.PRE

XBRL Taxonomy Extension Presentation Linkbase

SIGNATURES

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	May 9, 2017		/s/ Marita Zuraitis

			Marita Zuraitis
			President and Chief Executive Officer






Date	May 9, 2017		/s/ Bret A. Conklin

			Bret A. Conklin
			Executive Vice President, Chief
			Financial Officer and Principal
			Financial and Accounting Officer

HORACE MANN EDUCATORS CORPORATION

EXHIBITS

FORM 10-Q

For the Quarter Ended March 31, 2017

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 March 31, 2017. Management contracts and compensatory plans are indicated by an asterisk (*).

EXHIBIT INDEX

Exhibit
No.		Description

(3)

Articles of incorporation and bylaws:

3.1

3.2

3.3

Bylaws of HMEC, incorporated by reference to Exhibit 3.2 to HMEC’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, filed with the SEC on August 14, 2003.

(4)

Instruments defining the rights of security holders, including indentures:

4.1

4.1(a)

Form of HMEC 4.5000% Senior Notes due 2025, incorporated by reference to Exhibit 4.2 to HMEC’s Current Report on Form 8-K dated November 18, 2015, filed with the SEC on November 23, 2015.

4.2

(10)

Material contracts:

10.1

Exhibit
No.		Description

10.1(a)

10.2*

10.2(a)*

10.2(b)*

10.2(c)*

10.2(d)*

10.2(e)*

10.3*

First Amendment to the HMEC 2010 Comprehensive Executive Compensation Plan (As Amended and Restated Effective as of May 20, 2015).

10.3(a)*

HMEC 2010 Comprehensive Executive Compensation Plan (As Amended and Restated Effective May 20, 2015) (Section 16 Officer) Non-Qualified Stock Option Agreement - Employee Grantee.

10.3(b)*

HMEC 2010 Comprehensive Executive Compensation Plan (As Amended and Restated Effective May 20, 2015) (Non-Section 16) Non-Qualified Stock Option Agreement - Employee Grantee.

Exhibit
No.		Description

10.3(c)*

HMEC 2010 Comprehensive Executive Compensation Plan (As Amended and Restated Effective May 20, 2015) Service-Vested Restricted Stock Units Agreement - Employee Grantee.

10.3(d)*

HMEC 2010 Comprehensive Executive Compensation Plan (As Amended and Restated Effective May 20, 2015) Performance-Based Restricted Stock Units Agreement - Employee Grantee.

10.3(e)

HMEC 2010 Comprehensive Executive Compensation Plan (As Amended and Restated Effective May 20, 2015) Service-Vested Restricted Stock Units Agreement - Employee Grantee (One-Time Grant Service).

10.3(f)*

10.3(g)*

10.4*

10.5*

10.6*

10.7*

10.8*

Summary of HMEC Named Executive Officer Annualized Salaries.

Exhibit
No.		Description

10.9*

10.9(a)*

Revised Schedule to Severance Agreements between HMEC, HMSC and certain officers of HMEC and/or HMSC.

10.10*

HMSC Executive Change in Control Plan, incorporated by reference to Exhibit 10.15 to HMEC’s Current Report on Form 8-K dated February 15, 2012, filed with the SEC on February 22, 2012.

10.10(a)*

HMSC Executive Change in Control Plan Schedule A Plan Participants.

10.11*

HMSC Executive Severance Plan, incorporated by reference to Exhibit 10.16 to HMEC’s Current Report on Form 8-K dated March 7, 2012, filed with the SEC on March 13, 2012.

10.11(a)*

10.11(b)*

HMSC Executive Severance Plan Schedule A Participants.

(11)

Statement regarding computation of per share earnings.

(15)

KPMG LLP letter regarding unaudited interim financial information.

(31)

Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.1

Certification by Marita Zuraitis, Chief Executive Officer of HMEC.

31.2

Certification by Bret A. Conklin, Chief Financial Officer of HMEC.

(32)

Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.1

Certification by Marita Zuraitis, Chief Executive Officer of HMEC.

32.2

Certification by Bret A. Conklin, Chief Financial Officer of HMEC.

(99)

Additional exhibits

99.1

Glossary of Selected Terms.

Exhibit
No.		Description

(101)

Interactive Data File

101.INS

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension Schema

101.CAL

XBRL Taxonomy Extension Calculation Linkbase

101.DEF

XBRL Taxonomy Extension Definition Linkbase

101.LAB

XBRL Taxonomy Extension Label Linkbase

101.PRE

XBRL Taxonomy Extension Presentation Linkbase