Horace Mann Educators Corporation — Q1 2022 Form 10-Q
Business context and period: The company provides insurance and retirement products primarily to K-12 educators and their families. This unaudited report covers the three months ended March 31, 2022, compared with Q1 2021. KPMG’s interim review found no material modifications needed for GAAP conformity; a review is not an audit.
Financial results and position
- Revenue: $346.8 million, up 7.7% from $322.0 million. Net premiums and contract charges earned rose 12.4% to $255.9 million; net investment income rose 2.5% to $97.9 million.
- Profit: Net income was $14.5 million, down 63.1% from $39.3 million. Diluted EPS was $0.35 versus $0.93. Income before tax fell 63.3% to $17.7 million.
- Claims and expenses: Benefits, claims and settlement expenses increased 31.8% to $177.0 million; operating expenses increased 32.4% to $76.8 million. Total benefits, losses and expenses rose 20.2% to $329.1 million.
- Cash flow: Operating cash flow was $95.7 million versus $142.0 million. Investing activities used $217.7 million, including $164.4 million for the Madison National acquisition; financing provided $37.4 million. Cash declined $84.6 million to $49.1 million.
- Balance sheet and debt: Total assets were $14.43 billion and shareholders’ equity was $1.54 billion at quarter-end. Short- and long-term debt totaled $502.7 million; debt was 24.6% of total capital, below the company’s 25% long-term target. The $249 million bank facility borrowing was outstanding; $248.7 million of senior notes mature in 2025.
- Investment and equity effects: Net investment losses were $15.5 million, mainly reflecting equity-security fair-value declines. Rising rates and wider spreads drove a $270.7 million after-tax other comprehensive loss and a decrease in book value per share to $37.14 from $40.83 a year earlier. Unrealized fixed-maturity losses were described as temporary; management said it did not expect to be forced to sell affected securities before recovery.
- Selected segment results: Property & Casualty net income fell to $8.5 million from $27.9 million; its auto combined ratio increased to 101.8% from 84.2%. Life & Retirement net income was $11.8 million versus $11.4 million. Supplemental & Group Benefits net income was $11.2 million versus $11.3 million, including Madison National.
Material changes and management commentary
- Effective January 1, 2022, Horace Mann acquired Madison National for an adjusted purchase price of $172.3 million. The seller may receive up to $12.5 million in cash if specified targets are met by the end of 2023. Purchase-price allocation remained preliminary. Madison National contributed $40.0 million of revenue and a $0.7 million pretax loss in the quarter.
- Management attributed the earnings decline mainly to auto claim frequency returning toward pre-pandemic levels, inflation-driven claim severity and higher investment losses. Madison National also contributed to higher premiums, claims and operating costs.
- Auto net premiums written declined 4.7%, and auto risks in force declined 5.3%. Management cited new-business volumes below historical levels and described high-single- to low-double-digit auto rate increases in states representing nearly 80% of auto premiums. Property pricing and coverage adjustments were also expected to continue amid inflation.
- COVID-19-related disruption to in-person school sales activity continued to weigh on new sales. The company reported operating in a hybrid work model and monitoring cybersecurity risks.
Outlook, risks and contingencies
- 2022 outlook: Management said core EPS was more likely to be at the lower end of its $3.45–$3.65 guidance range, citing auto inflation and potential market-volatility effects on DAC unlocking. The outlook assumes a 21% federal statutory tax rate and includes expected Madison National accretion and strategic-growth contributions.
- The longer-term Property & Casualty combined-ratio target remained 95%–96%; management assumed catastrophe losses of about 9.5 points. It expected near-term auto losses to be higher than originally anticipated, and segment investment income to be lower than 2021 due to that year’s strong limited-partnership returns.
- Management expected Life & Retirement investment income to be slightly higher than 2021, but warned that market volatility could materially affect DAC unlocking. It expected Supplemental & Group Benefits’ full-year benefit ratios of about 35% for voluntary products and 50% for employer-sponsored products; acquisition-related intangible amortization was estimated at about $13 million pretax.
- Key exposures include inflation and claim severity, catastrophe losses, interest-rate and reinvestment risk, investment-market volatility, credit and valuation uncertainty, and execution of the Madison National integration. The company disclosed $790.4 million of unfunded investment commitments. Insurance-subsidiary dividends are subject to regulatory limits; $82.0 million of the $131.9 million available without prior approval for 2022 had been paid by quarter-end.
- Management stated that operating cash flow should be adequate for operating needs over the next 12 months and that liquidity was sufficient under its assessments. It identified catastrophe losses and ratings downgrades as events that could constrain liquidity. Madison National was excluded from the quarter-end internal-control effectiveness assessment while integration work continued; management reported no material weakness in the controls assessed.
Most important facts for investors to verify
- Whether auto pricing and underwriting actions offset inflation-driven claim frequency and severity, and whether auto risks in force stabilize.
- Whether Madison National meets acquisition assumptions and targets, and how final purchase accounting, potential earn-out payments and integration costs affect results.
- Whether investment losses and unrealized fixed-maturity marks remain temporary, and how market volatility affects capital, book value and DAC.
- Whether the $3.45–$3.65 core EPS guidance range remains achievable, particularly given management’s expectation of results near its lower end.
- Liquidity and capital developments, including cash generation, debt and FHLB funding, regulatory dividend capacity, and the substantial unfunded investment commitments.