Horace Mann Educators Corporation — Q2 2015 Form 10-Q
Business context and period: Insurer focused primarily on K-12 educators, offering property and casualty, annuity, and life products. This unaudited quarterly filing covers the three and six months ended June 30, 2015; comparisons are with 2014. KPMG performed an interim review, not an audit.
Financial performance
| Metric | Q2 2015 | Six months 2015 | Comparable 2014 |
|---|---|---|---|
| Total revenue | $268.5 million | $538.6 million | $264.7 million; $526.0 million |
| Net income | $16.2 million | $50.5 million | $20.5 million; $48.8 million |
| Diluted EPS | $0.38 | $1.19 | $0.48; $1.16 |
| Operating cash flow | Not presented separately | $98.3 million | $108.1 million |
- For the first half, premiums and contract charges earned rose 2.1% to $362.1 million; net investment income rose 1.7% to $167.3 million. Premiums written and contract deposits increased 13.1% to $625.1 million, including a $31.2 million increase tied to employee retirement-plan changes.
- Q2 net income declined 20.9%, mainly reflecting adverse weather-related P&C results, higher life mortality costs, and lower realized investment gains. First-half net income increased 3.4%, supported by stronger realized investment gains.
- First-half P&C combined ratio improved to 97.0% from 98.2%. P&C segment net income was $20.9 million, annuity $24.3 million, and life $7.0 million; life earnings declined primarily due to higher mortality losses.
- At June 30, total assets were $9.97 billion, shareholders' equity $1.31 billion, and cash $46.0 million. Fixed-maturity investments were $6.90 billion at fair value. Net unrealized investment gains in equity were $223.8 million, down from $297.6 million at year-end 2014.
- Debt totaled $238.0 million: $113.0 million short-term borrowings and $125.0 million senior notes due April 2016. The $75.0 million notes due June 2015 were repaid using the bank facility. Total debt was 18.0% of capital excluding unrealized investment gains and losses, below the 25% long-term target.
- Cash from operations decreased year over year, primarily due to higher claims and policyholder benefits paid. Investing activities used $154.4 million; financing activities provided $90.4 million. The $150 million credit facility had approximately $37 million undrawn at quarter-end.
Changes, outlook, and risks
- Management projected 2015 net income before realized investment gains and losses of $2.15–$2.35 per diluted share. The outlook assumed modest P&C combined-ratio improvement, lower favorable prior-year reserve development, continued low interest rates, and ongoing technology and infrastructure investment.
- Management expected portfolio yield to decline about 20 basis points in 2015. Approximately 86% of deferred annuity account values were at their minimum guaranteed crediting rate; management anticipated further fixed-annuity spread compression. A 100-basis-point decline in reinvestment rates was estimated to reduce annuity net investment income by about $2.4 million in year one and $7.2 million in year two.
- First-half realized investment gains were $7.5 million, including $13.0 million of impairment charges, largely on Puerto Rico and energy-sector fixed maturities and one equity security. The filing says remaining securities in unrealized-loss positions were considered temporarily impaired; future circumstances could require further charges.
- Catastrophe losses were $31.8 million for the first half, up from $29.8 million. The company identified catastrophe exposure, reinsurance availability and cost, claims severity, low interest rates, investment values, mortality, and educator-market conditions among key risks. Its Florida program had terminated all approximately 4,800 targeted homeowner policies by June 30, 2015.
- An immaterial out-of-period restricted-stock valuation correction reduced incentive compensation expense and increased first-half after-tax net income by $3.0 million: about $2.1 million in P&C and $0.5 million each in annuity and life. Management said controls were effective and reported no material risk-factor changes from the 2014 Form 10-K.
Important facts for investors to verify
- Whether the $2.15–$2.35 per-share outlook is achieved, excluding realized investment gains and losses, and how actual catastrophe and reserve development compare with assumptions.
- Whether annuity spreads and investment income withstand low reinvestment rates, given the large share of contracts at minimum guarantees.
- Credit quality and impairment exposure in Puerto Rico and energy-sector holdings, and the impact of market-rate and credit-spread changes on equity.
- Funding and refinancing plans for the $125 million notes due April 2016, and available capacity under the bank credit facility.
- Underlying performance excluding the $3.0 million out-of-period compensation correction and the $31.2 million employee-plan-related deposit increase.