Horace Mann Educators Corporation — Q3 2012 Form 10-Q
Business context and reporting period. Horace Mann is an insurance holding company serving primarily K–12 educators and their families. Its businesses are property and casualty insurance, annuities, and life insurance. This filing covers the quarter and nine months ended September 30, 2012; interim statements were reviewed by KPMG, not audited.
Financial performance
Amounts below are in millions of dollars, except per-share data and ratios.
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total revenue | $256.5 | $260.8 | $755.4 | $750.7 |
| Net investment income | $76.6 | $71.6 | $228.7 | $213.7 |
| Net realized investment gains | $10.8 | $21.1 | $21.1 | $32.7 |
| Net income | $32.3 | $23.6 | $72.0 | $37.6 |
| Diluted earnings per share | $0.78 | $0.57 | $1.74 | $0.91 |
| Benefits, claims and settlement expenses | $106.1 | $124.4 | $344.9 | $398.8 |
- For the first nine months, property and casualty combined ratio improved to 100.3% from 111.4%. The loss ratio was 73.7% versus 85.9%; catastrophe costs were $40.5 million versus $81.3 million.
- Operating cash flow was $150.2 million for the first nine months, compared with $76.1 million a year earlier. Investing activities used $227.0 million and financing activities provided $111.2 million. Ending cash was $41.9 million.
- At September 30, total assets were $8.12 billion, investments $6.17 billion, shareholders’ equity $1.23 billion and total debt $237.8 million ($38.0 million short-term and $199.8 million long-term). Total debt was 22.1% of capital excluding unrealized investment gains and losses, and 16.2% including them.
- Book value per share was $31.30, or $21.24 excluding investment fair-value adjustments. Net unrealized investment gains included in equity were $396.2 million after tax and related DAC effects.
Changes versus the prior comparable period
- Q3 net income rose $8.6 million; nine-month net income increased $34.4 million. Management attributed the gains mainly to lower catastrophe losses and stronger underlying results in all three operating segments.
- Nine-month property and casualty segment income improved to $22.6 million from a loss of $11.5 million, helped by lower catastrophe and Florida sinkhole losses and favorable prior-year reserve development. Annuity income rose to $29.4 million from $20.5 million; life income rose to $16.2 million from $13.7 million.
- Total premiums written and contract deposits declined 1.8% to $788.2 million for the nine months, largely because annuity deposits fell 5.0%. Earned premiums and contract charges were nearly flat at $499.7 million.
- Investment income rose 7.0% for the nine months, largely due to growth in average invested assets; portfolio pretax yield was essentially unchanged at 5.67% versus 5.68%. Realized investment gains declined, including $12.4 million of realized losses on disposals, primarily commercial mortgage-backed securities.
- Unrealized investment gains increased as Treasury yields fell and credit spreads narrowed. The increase supported reported equity and book value but is market-sensitive.
Outlook, commentary and risks
- Management projected 2012 full-year net income, excluding realized investment gains and losses, of $1.85–$1.95 per diluted share. The estimate assumes catastrophe losses and financial-market performance in the remaining quarter are within a normal range.
- Management expects fixed-annuity spread compression as low reinvestment yields persist and credited rates cannot be reduced sufficiently. It noted that roughly 83% of deferred annuity account values were credited at their minimum guaranteed rate.
- Key exposures include catastrophe frequency and severity, reserve estimation and adverse development, low interest rates and investment credit risk, market-driven DAC and variable-annuity fee changes, policy retention and sales, and the availability and cost of catastrophe reinsurance. Management also cited Florida homeowners risk-reduction actions and their potential near-term effect on policy and premium growth.
- The company reported no material change to previously disclosed risk factors. Its insurance subsidiaries’ dividends to the holding company are subject to regulatory limits; approximately $71 million could be distributed in 2012 without prior approval, of which $28 million had been paid by September 30.
- The company adopted revised guidance on insurance acquisition-cost deferrals retrospectively from January 1, 2012. It reduced deferred acquisition costs and beginning equity, with minimal net effect on results and no change to reported comparative EPS.
- Management said there were no material modifications needed to the interim statements based on KPMG’s review. Disclosure controls were considered effective; no material weaknesses were identified.
Important facts for investors to verify
- Whether lower catastrophe losses and favorable prior-year reserve development persist; the filing estimates reasonable reserve variability could affect net income by approximately $11 million.
- How much of earnings and book-value growth depends on investment gains and unrealized fair-value movements, and whether credit losses or impairments emerge. No OTTI write-downs were recorded in the current nine-month period.
- Whether annuity deposit trends, fixed-annuity spreads and the stated EPS outlook hold up under continued low interest rates and market volatility.
- Progress and costs of Florida and other catastrophe-exposure reductions, including the adequacy and collectibility of reinsurance.
- Debt maturities and financing: $38.0 million was drawn under the $150 million credit facility, and senior notes of $75 million and $125 million mature in 2015 and 2016, respectively.