Horace Mann Educators Corporation — Q2 2020 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and six months ended June 30, 2020. Horace Mann sells property and casualty, supplemental, retirement and life insurance, primarily to public-school educators and their families. The interim financial statements received an independent accountant’s review, not an audit.
Financial results and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $314.9 million | $454.1 million | $622.2 million | $770.0 million |
| Net income | $30.6 million | $93.8 million | $49.1 million | $126.0 million |
| Diluted EPS | $0.73 | $2.24 | $1.17 | $3.01 |
| Net investment income | $80.4 million | $93.5 million | $162.7 million | $186.3 million |
| Net investment gains (losses) | $3.2 million | $146.3 million | $(15.3) million | $153.8 million |
- Premiums and contract charges earned rose 8.3% in Q2 and 10.5% for the first half, largely reflecting the Supplemental business acquired in July 2019. Lower Property and Casualty premiums, including $9.8 million in COVID-19-related auto premium credits, partly offset growth.
- Operating cash flow was $165.6 million for the first half, compared with $97.8 million a year earlier. Investing activities used $195.0 million; financing activities provided $86.3 million. Cash increased to $82.4 million from $25.5 million at year-end.
- At June 30, total assets were $12.57 billion and shareholders’ equity was $1.64 billion. Investments totaled $6.88 billion, including $6.02 billion of available-for-sale fixed maturities. Net unrealized fixed-maturity gains in equity were $279.1 million after tax.
- Total debt was $437.2 million: $135.0 million drawn on the revolving credit facility and $302.2 million of long-term debt. Debt was 21.0% of total capital including unrealized fixed-maturity gains, below the stated 25% long-term target. The credit facility had $90.0 million unused.
- Book value per share was $39.69, or $32.93 excluding net unrealized fixed-maturity gains. The quarterly dividend was $0.30 per share; $24.8 million of dividends were paid in the first half.
- Property and Casualty’s Q2 combined ratios were 80.3% for auto and 123.9% for property; first-half ratios were 86.3% and 103.3%, respectively. Lower auto claim frequency helped results, while catastrophe losses weighed on property.
Material changes versus the prior period
- Net income fell 67.5% in Q2 and 61.1% for the first half. The primary comparison effect was a $106.9 million after-tax realized investment gain in Q2 2019 from the annuity reinsurance transaction. The prior-year quarter also included a $28.0 million goodwill impairment charge in Retirement.
- Investment income declined as the reinsurance transaction reduced invested assets and limited partnership returns were lower. The investment portfolio’s annualized pretax yield, excluding limited partnerships, was 4.4% in both Q2 and the first half, versus 4.7% and 4.8% in the respective 2019 periods.
- Property and Casualty first-half net income increased to $37.9 million from $20.2 million, benefiting from improved auto loss experience. Supplemental, added following the NTA acquisition, contributed $20.0 million of first-half net income; no comparable 2019 segment period is presented.
- Other comprehensive income was $142.5 million in Q2, mainly reflecting higher unrealized fixed-maturity gains; first-half other comprehensive income was $48.7 million.
Outlook, commentary and risks
- Management forecast 2020 full-year net income of $2.80–$3.00 per diluted share, based on COVID-19 scenarios. It cautioned that the first half may not indicate the remainder of the year and that results depend on the pandemic’s duration and economic effects.
- Property and Casualty outlook: full-year combined ratio of 91%–93%, including catastrophe losses of approximately 10 points; expected segment income of $70–$75 million. Management expects auto frequency to moderate as driving returns toward normal, with severity potentially offsetting some benefit. Net written premiums are expected below 2019 levels.
- Management continued to expect Supplemental net income of $31–$33 million, Retirement of $22–$24 million, and Life of $10–$12 million. School closures were slowing new sales, especially for Supplemental and educator-focused products.
- Following PG&E’s emergence from bankruptcy on July 1, the company expected to recognize approximately $8.3 million pretax in Q3: $4.8 million of favorable prior-year reserve development and $3.5 million of returned reinsurance reinstatement premiums related to the 2018 Camp Fire.
- Key exposures include continued COVID-19 disruption to sales and school access, possible school-system budget constraints, changing claim frequency and severity, catastrophe losses, market volatility, credit risk, and low interest rates pressuring investment income and annuity spreads. Management said capital and liquidity were expected to remain near target levels under its assumption of a return to normal operations within six months.
- The company adopted the expected-credit-loss accounting standard on January 1, 2020, recording a $0.5 million reduction to opening retained earnings. It reported no allowance for expected credit losses on available-for-sale fixed maturities at June 30.
Important facts for investors to verify
- Whether actual 2020 diluted EPS and segment results met the stated outlook, particularly the sensitivity of Property and Casualty results to auto frequency, severity and catastrophes.
- Whether the anticipated $8.3 million PG&E-related Q3 benefit was recognized as expected and whether any related reinsurance recoverables or claims estimates changed.
- How investment income, limited partnership returns, credit quality and unrealized fixed-maturity gains evolved; the filing reported $72.3 million of gross unrealized losses on fixed maturities at June 30.
- Whether COVID-19 affected educator employment, school access, new-business sales, policy retention, claims, or the company’s capital and liquidity beyond management’s assumptions.
- Debt, FHLB funding, regulatory dividend capacity and the availability of the revolving facility. The company reported $103.0 million of the $105.3 million in dividends available without prior regulatory approval had been paid during the first half.