Horace Mann Educators Corporation — Q1 2020 Form 10-Q
Business context and reporting period. The filing reports unaudited results for the three months ended March 31, 2020, compared with Q1 2019. Horace Mann sells property and casualty, supplemental, retirement and life insurance, primarily to educators and public-school employees. The interim financial statements received an independent accountant’s review, not an audit. The Supplemental segment reflects the NTA acquisition completed July 1, 2019, so segment comparisons with 2019 are not directly comparable.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 / prior date |
|---|---|---|
| Total revenue | $307.2 million | $315.9 million; down 2.7% |
| Earned premiums and contract charges | $236.3 million | $209.8 million; up 12.6% |
| Net investment income | $82.3 million | $92.8 million; down 11.3% |
| Net investment gains (losses) | $(18.5) million | $7.4 million |
| Income before taxes | $18.5 million | $38.6 million |
| Net income / diluted EPS | $18.5 million / $0.44 | $32.2 million / $0.77 |
| Operating cash flow | $87.4 million | $124.8 million |
| Cash and total investments, March 31 | $41.2 million / $6.60 billion | Cash was $25.5 million at Dec. 31, 2019 |
| Total debt, March 31 | $433.1 million | $433.0 million at Dec. 31, 2019 |
| Shareholders’ equity, March 31 | $1.48 billion | $1.57 billion at Dec. 31, 2019 |
Net income fell 42.5%, primarily reflecting market-related losses on equity securities and derivatives. The effective tax rate was approximately zero, including a $2.8 million benefit from CARES Act tax provisions. Q1 2020 comprehensive loss was $75.3 million, including a $93.8 million after-tax decline in unrealized fixed-maturity investment gains. Management reported an annualized net income return on equity of 4.9% and book value per share of $35.80.
Segment net income (loss) was $26.6 million in Property and Casualty, $10.5 million in Supplemental, $(0.9) million in Retirement, $0.6 million in Life and $(18.3) million in Corporate and Other. Property and Casualty benefited from lower claims and expenses; Retirement was pressured by lower investment income and unfavorable deferred acquisition cost (DAC) unlocking.
Material changes and liquidity
- Earned premiums rose mainly due to the newly acquired Supplemental business. Net investment income excluding income accreted on the reinsurance deposit asset declined $34.2 million, reflecting fewer invested assets after the 2019 annuity reinsurance transaction and lower alternative-investment returns.
- Net investment losses included a $14.5 million decline in equity-security fair values and $4.8 million of derivative losses. Management attributed the market volatility to COVID-19. Fixed-maturity securities had $161.6 million of gross unrealized losses; management considered them temporary and reported no current expected credit-loss allowance for available-for-sale fixed maturities.
- Operating cash flow was $87.4 million; investing activities used $140.0 million and financing activities provided $68.3 million. Cash increased $15.7 million during the quarter.
- Debt comprised $135 million under the revolving credit facility, $248.1 million carrying value of 4.50% senior notes due 2025 and $50 million of FHLB borrowing. The facility had $90 million unused. Debt was 22.7% of total capital including net unrealized fixed-maturity gains, below the company’s 25% long-term target.
- The company said operating cash flow should meet near-term operating needs and liquidity remained adequate. Insurance-subsidiary dividends available in 2020 without prior regulatory approval were $105.3 million; $46.0 million had been paid through March 31. Unfunded investment commitments were $389.9 million.
Outlook, management commentary and risks
Management maintained its 2020 outlook for net income excluding realized gains and losses of $2.55–$2.75 per diluted share, based on scenarios assuming a return to normal operations within six months. It expected pretax net investment income to be slightly below 2019 and an effective tax rate of 17%–19%. Segment net income outlooks were $61–$66 million for Property and Casualty, $31–$33 million for Supplemental, $22–$24 million for Retirement and $10–$12 million for Life. Management cautioned that COVID-19’s scope and duration were highly uncertain and that Q1 results did not indicate the potential impact for the remainder of 2020.
- COVID-19 disrupted school-based sales and enrollment events; new sales slowed. Management expected sales to move toward more normal levels in Q3, while 2020 net written premiums were expected below 2019. The company provided a 15% credit on two months of auto premiums and payment grace periods through June for several insurance lines.
- Auto claim frequency declined amid stay-at-home behavior, but possible changes in claim severity and future driving patterns create uncertainty. Management’s P&C outlook included catastrophe costs of 7.5 points on the full-year combined ratio.
- Low interest rates, spread compression, lower alternative-investment returns and market volatility could reduce investment income, spreads and annuity-related results; volatility may also affect DAC amortization and asset-based fees.
- Management described the investment portfolio as diversified, 95.3% investment grade and averaging A+. It said capital and reserves were adequate and did not foresee a need to suspend ordinary dividends or raise additional capital at the time of filing.
- Other disclosed exposures include potential credit deterioration, reinsurer and counterparty risk, catastrophe losses, and execution of NTA integration. The filing identifies significant estimation judgments in investment valuations, claims reserves, policy reserves, DAC and goodwill/intangible impairment.
Most important facts for investors to verify
- Whether COVID-19-related school closures and slower new business caused premiums and sales to recover as management expected, particularly by Q3.
- Whether auto claim frequency, severity and catastrophe experience support the P&C outlook and its projected $61–$66 million net income.
- Whether investment income, market valuations and annuity spreads support the full-year EPS outlook; distinguish recurring operating performance from realized investment gains and losses.
- Whether the $161.6 million of fixed-maturity unrealized losses remain temporary and whether portfolio credit quality, liquidity and investment commitments change materially.
- Whether debt, available revolver capacity, statutory dividend capacity and capital remain adequate under a prolonged disruption or results materially below management’s six-month recovery assumption.