Horace Mann Educators Corporation — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing also reports fourth-quarter results. Horace Mann is an insurance holding company focused primarily on K–12 educators and their families, offering property and casualty insurance, retirement annuities and life insurance.
Financial results and condition
| Metric | 2017 | 2016 | Change or context |
|---|---|---|---|
| Total revenue | $1,171.6 million | $1,128.9 million | Up 3.8% |
| Insurance premiums and contract charges earned | $794.7 million | $759.1 million | Up 4.7% |
| Net investment income | $373.6 million | $361.2 million | Up 3.4% |
| Income before taxes | $88.7 million | $114.2 million | Down 22.4% |
| Income tax expense (benefit) | $(80.8) million | $30.5 million | Includes a $99.0 million Tax Act benefit |
| Net income | $169.5 million | $83.8 million | Up $85.7 million; materially boosted by tax remeasurement |
| Diluted EPS | $4.08 | $2.02 | Up 102%; 2017 includes the one-time tax benefit |
| Operating cash flow | $256.6 million | $211.4 million | Up $45.2 million |
Fourth-quarter 2017 net income was $125.3 million versus $19.8 million in fourth-quarter 2016; fourth-quarter diluted EPS was $3.00, including approximately $2.37 from the Tax Act. Full-year premiums written and contract deposits were $1,227.1 million, down 2.8%, mainly reflecting lower single-premium annuity sales.
Balance sheet and liquidity: Total assets were $11.20 billion, investments $8.35 billion, policy liabilities $6.18 billion and shareholders’ equity $1.50 billion. Long-term debt was $297.5 million, including $250 million face value of 4.50% senior notes due 2025 and $50 million of FHLB borrowings; there was no balance outstanding under the $150 million revolving credit facility. Cash was $7.6 million. Management said operating cash flow was expected to cover near-term operating needs. Insurance subsidiaries could pay up to $94 million in aggregate dividends to the parent in 2018 without prior regulatory approval; subsidiary dividends are subject to regulatory restrictions.
Book value per share was $36.88, up 14.7% year over year. The company paid $1.10 per share in 2017 dividends. Total capital was $1.80 billion; debt was 16.5% of capital including unrealized investment gains, below the stated 25% long-term target. The total debt-to-capital measure excluding those gains was 19.8%.
Segments and changes versus prior year
- Property and Casualty: Written premiums rose 4.5% to $662.8 million, primarily from higher average premiums. Net income fell to $17.8 million from $25.6 million. The combined ratio deteriorated to 103.3% from 101.5%, reflecting higher loss costs and less favorable prior-year reserve development, alongside catastrophe costs of $61.8 million versus $60.0 million. Auto underlying results improved, while property underlying losses worsened, largely due to non-catastrophe weather losses.
- Retirement: Annuity deposits declined 12.9% to $453.1 million, mainly from lower single-premium sales. Net income increased to $88.4 million from $50.7 million, but included a $39.5 million allocation of the Tax Act benefit. Management’s non-GAAP core earnings were $48.9 million versus $50.7 million. Annuity assets on deposit grew 5.2% to $6.8 billion; fixed and variable persistency were 92.6% and 89.5%, respectively.
- Life: Premiums and contract deposits rose 3.0% to $111.2 million. Net income increased to $77.6 million from $16.6 million, including a $60.3 million Tax Act benefit. Non-GAAP core earnings were $17.3 million, up 4.2%.
Companywide, the effective tax rate was negative 91.1% in 2017 versus 26.6% in 2016, principally due to remeasurement of deferred taxes after enactment of the Tax Cuts and Jobs Act. Net realized investment losses were $3.4 million pretax in 2017, compared with $4.1 million of gains in 2016.
Outlook, commentary and key risks
- Management projected 2018 core earnings of $2.10–$2.30 per diluted share, with an expected effective tax rate of 15%–18%. This is a non-GAAP measure; management said it could not provide a forward-looking net income forecast because realized investment gains and losses are difficult to predict.
- The outlook assumed 6–7 points of catastrophe losses, continued improvement in underlying auto and property combined ratios, and Retirement and Life core earnings broadly comparable to 2017. Management expected pretax annualized investment yield to decline 20–30 basis points and the Retirement net interest spread to trend toward approximately 170 basis points during 2018.
- Management cited continued investment in technology, products, distribution and infrastructure, and expected modestly higher expense levels. A new annuity product series eliminated surrender charges and shifted distributor compensation toward ongoing account-value-based payments. Beginning January 1, 2018, the company ceased expanding independent agents’ legacy annuity books for new customers.
- Major risks include catastrophe and severe-weather losses, reserve estimation uncertainty, low or changing interest rates and spread compression, investment valuation and credit risk, annuity sales and persistency, competition, regulatory or tax changes, and cybersecurity and legacy-technology execution. The company estimated that a 100-basis-point decline in reinvestment rates could reduce pretax net income by about $1.5 million in 2018 and $7.8 million in 2019, before any reduction in credited rates.
- The Tax Act effects were provisional in certain areas, including partnership investments and discounted loss reserves; further guidance or analysis could change the amounts. California rate review activity following the federal tax-rate reduction could also affect rate filings and profitability targets.
- The filing reported no pending litigation with a reasonable possibility of material loss and no material past-due reinsurance recoverables. Management and the auditor reported effective internal control over financial reporting; KPMG issued an unqualified opinion on the financial statements.
Important facts for investors to verify
- Separate underlying operating performance from the $99.0 million one-time deferred-tax remeasurement benefit when assessing 2017 net income and EPS.
- Track Property and Casualty underwriting performance, catastrophe experience, rate adequacy and future reserve development, particularly given the 103.3% combined ratio.
- Monitor annuity deposit trends, persistency and the effect of the new product and compensation model on future Retirement earnings.
- Test the 2018 outlook against reinvestment yields, fixed-annuity spread compression, catastrophe losses and planned expense and technology investments.
- Review final Tax Act calculations, insurance-subsidiary statutory capital and dividend capacity, and the terms and collateral requirements of FHLB funding.