Horace Mann Educators Corporation — FY 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual report; the filing also provides unaudited fourth-quarter results. Horace Mann is a multiline insurer focused primarily on educators, with Property and Casualty, Supplemental, Retirement, Life, and Corporate and Other reporting segments. The 2020 results reflect a full year of the Supplemental business acquired in July 2019.
Financial performance and position
| Metric | FY 2020 | FY 2019 |
|---|---|---|
| Total revenue | $1,310.4 million | $1,430.5 million |
| Insurance premiums and contract charges earned | $930.7 million | $898.0 million |
| Net investment income | $357.6 million | $365.1 million |
| Net investment gains (losses) | $(2.3) million | $153.3 million |
| Net income | $133.3 million | $184.4 million |
| Diluted earnings per share | $3.17 | $4.40 |
| Net cash from operating activities | $259.8 million | $127.6 million |
- Revenue declined 8.4% and net income declined 27.7%. The main comparison effect was the $106.9 million after-tax realized investment gain recognized in 2019 from the annuity reinsurance transaction. Premiums and contract charges earned rose 3.6%, including a full year of Supplemental premiums.
- Property and Casualty earned premiums fell 4.9% to $650.1 million; the segment’s net income rose to $76.5 million from $54.4 million. Its combined ratio improved to 92.7% from 96.5%, while catastrophe losses increased to $84.4 million from $52.0 million. Lower auto claim frequency, partly associated with reduced driving during COVID-19, supported results.
- Supplemental reported $43.1 million net income versus $18.0 million for its six-month 2019 contribution. Its 36.4% pretax profit margin benefited from pandemic-related policyholder behavior; sales were affected by limited school access.
- Retirement earned $20.0 million, compared with a $4.9 million loss in 2019; 2020 included $10.0 million of goodwill and intangible impairment charges. Life net income declined to $10.5 million from $17.6 million, reflecting higher mortality costs and lower investment income. Corporate and Other recorded a $16.8 million loss.
- At year-end, total assets were $13.47 billion, investments $7.26 billion, policy liabilities $7.15 billion, and shareholders’ equity $1.79 billion. Book value per share was $43.22, including unrealized investment gains.
- Cash was $22.3 million. Management reported $1.1 billion of cash and specified readily liquid investments under normal market conditions and said operating cash flow was expected to cover near-term operating needs.
- Total debt was $437.3 million: $135.0 million drawn on the revolving credit facility and $302.3 million of long-term debt. Debt was 19.6% of total capital including unrealized gains, below the stated 25% long-term target. Separately, FHLB funding agreements outstanding were $590.5 million.
Material changes, outlook, and risks
- The 2019 annuity reinsurance transaction covered about $2.9 billion of legacy annuity liabilities and reduced retained interest-rate exposure. It is accounted for using the deposit method; related accreted investment income was $97.3 million in 2020.
- 2020 operating cash flow increased to $259.8 million. Investing activities used $406.8 million, while financing activities provided $143.8 million. Shareholders received $1.20 per share in dividends, up from $1.15 in 2019; the company repurchased 52,095 shares.
- 2021 outlook: Management estimated net income of $3.00–$3.20 per diluted share and core return on equity above 9%, assuming a 21% federal corporate tax rate. Expected segment net income: Property and Casualty $54–$58 million; Supplemental $33–$35 million; Retirement $38–$40 million; Life $17–$19 million. Expected net investment income was $370–$390 million, including about $100 million of accreted income on the reinsurance deposit asset.
- Management expected Property and Casualty net written premiums below 2020 levels, with new sales under pressure and a possible return to pre-pandemic sales levels beginning in Q4 2021. It projected a 95%–96% full-year combined ratio, assuming catastrophe losses add approximately 9.5 points.
- Key uncertainties include COVID-19’s duration and effects on school access, sales, claims, and investments; catastrophe severity and geographic concentration; low interest rates and reinvestment pressure; reserve estimation; credit and valuation risk in investments; and regulatory constraints on insurer dividends. Management’s outlook assumed a return to normal operating conditions within 12 months.
- Unusual items included a $2.8 million CARES Act tax benefit and $10.0 million of 2020 impairment charges associated with BCG. The filing reports no pending litigation with a reasonable possibility of material loss, and the company was in compliance with debt covenants.
Important facts for investors to verify
- Whether auto claim frequency normalizes, and how catastrophe losses and reserve development compare with assumptions.
- Whether educator access and new-business sales recover as expected, particularly in Property and Casualty and Supplemental.
- Whether low yields, investment returns, and reinsurance-related income support the stated 2021 earnings outlook.
- Whether BCG integration and wealth-management sales meet expectations and avoid further impairments.
- Liquidity, FHLB funding maturities, debt costs, and the availability of dividends from regulated insurance subsidiaries.
- The sensitivity of reported equity and earnings to investment fair values, claim reserves, and other significant actuarial estimates.
The financial statements received an unqualified audit opinion, and KPMG also gave an unqualified opinion on internal control over financial reporting as of December 31, 2020.