Business context and reporting period
Horace Mann Educators Corporation is an insurance holding company serving primarily K–12 educators and their families. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2020; comparisons below are with the corresponding 2019 periods unless noted. KPMG reviewed the interim financial statements and reported that it was not aware of material modifications needed for GAAP conformity; this was a review, not an audit.
Financial results and position
Amounts are in millions, except per-share data and ratios.
- Third quarter: Revenue was $337.1, up 0.1%; net income was $36.5, up 43.7%; diluted EPS was $0.87 versus $0.60. The earnings increase reflected investment gains and lower expenses.
- First nine months: Revenue was $958.1, down 13.3%; net income was $85.5, down 43.5%; diluted EPS was $2.03 versus $3.61. The comparison was chiefly affected by a $106.9 after-tax realized investment gain in 2019 tied to the annuity reinsurance transaction.
- Revenue and investment income: Nine-month earned premiums and contract charges increased 6.0% to $697.0, including the Supplemental business acquired in 2019. Net investment income decreased 8.2% to $256.4, reflecting lower invested assets after reinsurance and weaker limited partnership returns. Net investment results were a $12.8 loss in the first nine months of 2020, versus a $151.6 gain in 2019.
- Cash flow: Nine-month operating cash flow was $267.8, compared with $207.2; investing cash outflow was $368.9, compared with $65.6; financing cash inflow was $141.0, versus an outflow of $114.2. Cash increased to $65.5 from $25.5 at year-end 2019.
- Balance sheet and debt: At September 30, total assets were $13.0 billion, investments $7.1 billion, and shareholders’ equity $1.72 billion. Short- and long-term debt totaled $437.2, including $135.0 outstanding on a $225.0 revolving facility, leaving $90.0 available. Debt was 20.3% of capital including unrealized fixed-maturity gains, or 24.0% excluding them; the stated long-term target is 25%. Book value per share was $41.45, or $33.52 excluding those unrealized gains.
- Margins and segments: Property and Casualty’s nine-month combined ratio was 85.3% (below 100% indicates underwriting profit); its third-quarter ratio was 83.3%. Nine-month segment net income was $53.7 for Property and Casualty, $30.6 for Supplemental, $16.6 for Retirement, and $6.9 for Life; Corporate and Other recorded a $22.2 loss.
- Shareholder returns: The company paid $37.2 in dividends during the first nine months, including quarterly dividends of $0.30 per share. It repurchased 52,095 shares during that period; $20.6 remained authorized for repurchases at quarter-end.
Material changes and management commentary
- COVID-19 reduced automobile claim frequency and led to $10.7 in policyholder premium credits. Management reported third-quarter auto frequency about 20% below the prior-year quarter, while noting that frequency was expected to moderate and severity could rise. Sales, especially those dependent on access to schools and in-person events, slowed.
- Catastrophe losses increased, particularly in Property and Casualty property coverage. The PG&E bankruptcy emergence generated approximately $5.2 of favorable prior-year reserve development and $3.5 of returned reinsurance reinstatement premiums in the third quarter, largely related to the 2018 Camp Fire.
- The Supplemental segment reflects NTA, acquired July 1, 2019, so nine-month comparisons with 2019 are not directly comparable. Its results also benefited from favorable reserve trends and temporary changes in policyholder behavior.
- Fixed-maturity securities had $496.2 of pretax net unrealized gains at quarter-end, driven mainly by lower Treasury yields. Management characterized unrealized losses as temporary, but future developments could require impairment recognition. The investment portfolio was reported as 91.7% investment grade with an average rating of A+.
Outlook, risks, and contingencies
- Management’s 2020 full-year net income outlook was $2.95–$3.15 per diluted share. Segment outlooks were: Property and Casualty net income $70–$75 and combined ratio 91%–93%; Supplemental net income $37–$39; Retirement $22–$24; and Life $10–$12. Management cautioned that investment gains and losses are difficult to forecast and may materially affect results.
- Management expected capital and liquidity to remain at or near target levels assuming a return to a normal operating environment within 12 months, and said it did not foresee suspending ordinary dividends or seeking additional capital at that time. These expectations depend on uncertain pandemic and economic developments.
- Key risks include prolonged school-access restrictions or public-school budget pressure, changing claim frequency and severity, catastrophe losses, market volatility and credit losses, persistently low interest rates and spread compression, and operational or third-party disruptions. Management estimated a 100-basis-point decline in reinvestment rates could reduce Retirement net investment income by about $1.9 in year one and $5.6 in year two.
- Unfunded investment commitments were $484.9 at September 30, up from $306.2 at year-end 2019. The company had $54.0 of FHLB borrowings outstanding and $135.0 of revolving-credit borrowings. Insurance-subsidiary distributions are subject to regulatory limits.
- The company adopted the expected-credit-loss accounting standard on January 1, 2020, reducing opening retained earnings by $0.5. Management was evaluating the future long-duration insurance-contract accounting standard, effective for the company in 2023 unless adopted earlier.
Important facts for investors to verify
- Whether the full-year EPS and segment forecasts were achieved, and how much results depended on unusually low auto claim frequency, reserve development, and COVID-related behavior.
- Whether school-access limits and public-school finances continued to constrain new sales, particularly in Supplemental and Life.
- How catastrophe losses, including property losses, and reserve estimates developed after quarter-end; the filing identifies claims reserves as a critical estimate.
- Whether investment income, credit quality, unrealized gains or losses, and low-rate reinvestment pressures changed materially.
- The composition and availability of liquidity, covenant headroom and debt maturities, and the regulatory capacity for subsidiary dividends. The filing reports $110.0 of subsidiary dividends paid in the first nine months while also stating a $105.3 2020 amount available without prior regulatory approval; clarify the applicable timing and calculation.