Horace Mann Educators Corporation — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed February 28, 2020. The company sells property and casualty, supplemental health, retirement and life products, principally to educators and their families. The 2019 results include Benefit Consultants Group (BCG) from January 2 and NTA from July 1; the new Supplemental segment therefore reflects only six months of NTA operations.
Financial performance
| Metric | 2019 | 2018 |
|---|---|---|
| Total revenue | $1,430.5 million | $1,191.6 million |
| Insurance premiums and contract charges earned | $898.0 million | $817.3 million |
| Net investment income | $365.1 million | $376.5 million |
| Net investment gains (losses) | $153.3 million | $(12.5) million |
| Net income | $184.4 million | $18.3 million |
| Diluted EPS | $4.40 | $0.44 |
| Operating cash flow | $127.6 million | $200.9 million |
| Cash at year-end | $25.5 million | $11.9 million |
| Total assets | $12.48 billion | $11.03 billion |
| Shareholders’ equity | $1.57 billion | $1.29 billion |
Revenue rose 20.0%, while earned premiums and contract charges increased 9.9%, reflecting the Supplemental acquisition and higher average auto and property premiums. Net investment income fell 3.0%; excluding income accreted on the reinsurance deposit asset, it declined $82.2 million, principally due to assets transferred in the annuity reinsurance transaction and low reinvestment yields. The reported 2019 profit was substantially affected by one-time items and is not directly comparable to 2018.
- Property and Casualty: net income was $54.3 million versus a $14.3 million loss. The combined ratio improved to 96.5% from 109.3%; catastrophe costs were $52.0 million versus $114.1 million. Favorable prior-year reserve development was $7.5 million pretax.
- Supplemental: contributed $18.0 million net income after its July acquisition; reported pretax profit margin was 30.8%, including acquisition-related intangible amortization.
- Retirement: reported a $4.8 million net loss versus $41.7 million net income. Core earnings declined to $23.2 million from $41.7 million, reflecting the reinsurance transaction, lower investment assets and spread pressure; the segment also recorded a $28.0 million noncash goodwill impairment.
- Life: net income was $17.6 million, down from $18.8 million.
Fourth-quarter snapshot: revenue was $331.4 million, net income $33.0 million and diluted EPS $0.78. Fourth-quarter 2018 had a $20.3 million net loss.
Balance sheet, investments and liquidity
- Investments totaled $6.64 billion, down from $8.25 billion, primarily following the transfer of investments in the annuity reinsurance transaction. The $5.79 billion fixed-maturity portfolio was 96.4% investment grade, with average quality A+.
- Total policy liabilities were $6.96 billion, compared with $6.38 billion. Separate-account assets and liabilities were each $2.49 billion.
- Debt totaled $433.0 million: $135.0 million drawn on the revolving facility, $248.0 million of senior notes and $50.0 million of FHLB borrowings. Debt was 21.6% of total capital including unrealized investment gains, below the company’s 25% long-term target.
- Cash from operations fell to $127.6 million. Management said operating cash flow should be adequate for the next 12 months. Insurance-subsidiary dividends without prior regulatory approval are capped at $105.3 million in 2020; this restricts parent-company access to subsidiary cash.
- Annual dividends were $1.15 per share. No shares were repurchased in 2019; $22.8 million remained authorized under the repurchase program.
Material changes, outlook and risks
The company completed two acquisitions and a major annuity reinsurance transaction in 2019. It acquired BCG for $25.0 million and NTA for $425.9 million. Effective April 1, it reinsured a $2.9 billion block of legacy annuity business, including approximately $2.2 billion of fixed annuities with a 4.5% minimum guaranteed crediting rate. The company reported a $135.3 million pretax realized investment gain ($106.9 million after tax) related to the transaction and established a $2.35 billion deposit asset. Management says the transaction reduced interest-rate risk and released capital for growth; it also reduced invested assets and Retirement earnings.
2020 outlook, as of filing: management projected net income of $2.55–$2.75 per diluted share and core return on equity above 8%. It expected pretax net investment income approximately flat with 2019 and an effective tax rate of 17%–19%. Segment net income expectations were $55–$60 million for Property and Casualty, $28–$30 million for Supplemental, $27–$29 million for Retirement and $14–$16 million for Life. Property and Casualty’s projected combined ratio was 95%–97%, assuming catastrophe losses of about 7.5 points. Management cautioned it could not forecast net investment gains and losses, which can materially affect reported net income.
- Key exposures include catastrophe and severe-weather losses, climate-related risks, reserve-estimation uncertainty, low interest rates and spread compression, investment valuation and credit risk, and reinsurer counterparty risk.
- Other identified risks include competition and retention, educator access and school-district budget pressures, acquisition integration and potential impairment, regulatory changes affecting insurance rates and retirement-product sales, cybersecurity, and technology modernization.
- No pending litigation with a reasonable possibility of material loss was reported. Unfunded investment commitments were $306.2 million, up from $145.4 million. KPMG gave an unqualified opinion on the financial statements and internal controls; the internal-control assessment excluded NTA, representing $747.6 million of assets and $65.8 million of revenue.
Important facts for investors to verify
- How much of earnings growth is sustainable after excluding the reinsurance-related gain, goodwill impairment, catastrophe normalization and acquisition effects?
- Whether the NTA and BCG acquisitions deliver expected earnings, integration benefits and returns on acquired goodwill and intangible assets.
- Whether Property and Casualty underwriting results and policy retention remain on track, and how catastrophe losses compare with the 2020 assumption.
- How ongoing low interest rates, reinvestment yields and policyholder crediting guarantees affect Retirement and Life spreads, cash flow and reserves.
- The performance and security of the annuity reinsurance arrangement, including RGA counterparty exposure and the associated trust protections.
- Whether cash generation, debt levels and regulatory limits on subsidiary dividends support parent-company obligations and shareholder distributions.