Horace Mann Educators Corporation — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Amounts are in millions except per-share data. Interim financial statements are unaudited; KPMG performed a review, not an audit.
Business context
Horace Mann is an insurance holding company serving educators, public-school employees, and their families. Its reporting segments are Property & Casualty, Life & Retirement, Supplemental & Group Benefits, and Corporate & Other.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $356.4 | $345.9 | $710.3 | $692.6 |
| Net income (loss) | $(12.8) | $(4.2) | $(6.2) | $16.1 |
| Diluted EPS | $(0.31) | $(0.10) | $(0.15) | $0.38 |
| Net investment income | $108.5 | $105.2 | $208.9 | $203.1 |
| Net investment losses | $(17.4) | $(15.5) | $(21.3) | $(31.0) |
For the quarter, revenue grew 3.0%, but total benefits, losses and expenses rose 5.7% to $372.0, resulting in a larger net loss. For the first half, revenue increased 2.6%, while expenses rose 6.6%; the company moved from prior-year net income to a loss. Higher credited interest, DAC amortization, operating costs, and interest expense pressured results. The filing does not provide a consolidated operating-margin measure.
- Segment results, Q2 / first half: Property & Casualty net loss was $21.4 / $33.0, versus $25.4 / $16.9 a year earlier. Life & Retirement net income was $17.4 / $31.4, down from $23.8 / $39.4. Supplemental & Group Benefits net income was $11.8 / $25.8, down from $15.0 / $28.2.
- Insurance ratios: Property & Casualty combined ratio was 114.6% for Q2 and 112.8% for the first half; its underlying combined ratio was 109.2% for both periods. Supplemental & Group Benefits’ benefit ratio was 40.9% for Q2 and 37.1% year to date.
- Cash flow, first half: Operating cash flow was $153.9, versus $80.0; investing cash flow was $(44.6), versus $(296.1); financing cash flow was $(129.0), versus $132.5. Cash declined $19.7 to $23.1. The prior-year investing outflow included the Madison National Life acquisition.
- Balance sheet and capital: Total assets were $13.67 billion and shareholders’ equity $1.10 billion at June 30. Short- and long-term debt totaled $498.1 ($249.0 revolving-facility borrowing and $249.1 carrying value of 4.50% senior notes due 2025). Debt was 31.1% of total capital including unrealized investment losses, or 25.5% excluding specified unrealized items; the latter was slightly above the company’s 25% long-term target.
- Liquidity and shareholder returns: Management reported $968.8 of cash and specified readily liquid securities and said operating cash flow should meet operating needs over the next 12 months. The company paid $27.0 in dividends in the first half; the quarterly dividend was $0.33 per share. It repurchased 163,934 shares in the first half.
Material changes, outlook, and risks
- Management lowered its 2023 full-year core earnings outlook to $1.20–$1.45 per diluted share, primarily because of elevated catastrophe losses. This is a non-GAAP measure; it is not a forecast of GAAP net income.
- 2023 segment outlook: Property & Casualty net loss of $27–$32, with catastrophe losses assumed at $95–$100 (about 15.5 combined-ratio points); Life & Retirement net income of $63–$65; Supplemental & Group Benefits net income of $47–$50. Corporate interest expense is expected at $27–$28.
- Management expects 2023 net investment income of $429–$439, including about $104 of accreted income on the reinsurance deposit asset. Limited-partnership returns are expected below their 10-year average of 8.5%.
- Management cited elevated auto loss frequency and repair, accident-severity, and medical costs; catastrophe and severe-weather exposure; lower fixed-annuity spreads; higher credited rates and borrowing costs; and inflation-related expenses. Planned 2023 rate increases are 18%–20% for auto and 12%–15% for property. The longer-term Property & Casualty combined-ratio target remains 95%–96%.
- Fixed-maturity securities had $537.4 of gross unrealized losses at June 30; management considered them temporary and said it was not more likely than not the company would be forced to sell before recovery. However, interest rates, credit spreads, liquidity, and issuer deterioration could affect valuations or require impairment. The portfolio was 92.6% investment grade by fair value.
- The company adopted long-duration insurance accounting standard ASU 2018-12 in 2023, restating prior-period financial information. Management said adoption did not affect policy cash flows or underlying business economics. The 2022 figures shown are adjusted for adoption.
- Unfunded investment commitments were $554.1. The filing reported no pending litigation with a reasonable possibility of material loss and no material change to previously disclosed risk factors. Moody’s listed negative outlooks for the parent and insurance groups.
Important facts for investors to verify
- Whether catastrophe losses, weather patterns, and auto loss-cost trends track the assumptions behind the revised earnings outlook and planned rate increases.
- Whether fixed-annuity spreads recover, given lower limited-partnership returns, higher credited rates, and the company’s spread guidance.
- Whether elevated unrealized bond losses remain temporary and whether any investment sales, credit deterioration, or impairments emerge.
- How liquidity, debt levels, revolving-facility costs, and the $554.1 of unfunded investment commitments evolve.
- How ASU 2018-12 restatements affect interpretation of historical comparisons, and whether Moody’s negative outlooks or other rating changes affect funding costs or access to capital.