HORACE MANN EDUCATORS CORP quarterly report, Q2 FY2021

Horace Mann Educators Corporation — Q2 2021 Form 10-Q

Reporting period: Three and six months ended June 30, 2021. Horace Mann is an insurance holding company serving primarily K-12 educators and their families through property and casualty, supplemental, retirement and life products. Financial statements are unaudited; KPMG conducted an interim review and reported no material modifications needed for GAAP conformity.

Financial results

Metric	Q2 2021	Q2 2020	Six months 2021	Six months 2020
Total revenue	$347.1 million	$314.9 million	$669.1 million	$622.2 million
Net income	$46.7 million	$30.5 million	$86.0 million	$49.0 million
Diluted EPS	$1.11	$0.73	$2.04	$1.17
Net investment income	$109.2 million	$80.4 million	$204.7 million	$162.7 million
Net investment gains (losses)	$4.9 million	$3.2 million	$(4.1) million	$(15.3) million

Revenue growth was led by investment income, particularly stronger returns from limited partnership interests; fixed-maturity yields remained slightly lower. Six-month earned premiums and contract charges fell 1.8% to $453.4 million.
Six-month income before taxes was $106.3 million versus $55.9 million. The effective tax rate was 19.1%, compared with 12.3% in 2020; the prior-year rate benefited from a $2.8 million tax benefit related to a net operating loss carryback.
Q2 net income rose 53.1%; first-half net income rose 75.5%. Management attributed the increase primarily to higher investment income and lower catastrophe losses.
Q2 property and casualty underwriting gain was $1.1 million, down from $7.1 million. Its combined ratio was 93.3% for automobile and 110.8% for property. For the first half, the total segment underwriting gain was $22.7 million, versus $26.0 million.
Book value per share was $43.78 at June 30, 2021, up 10.3% from $39.69 a year earlier. Last-twelve-month net income ROE was 9.8%; annualized first-half net income ROE was 9.5%.

Cash flow, balance sheet and capital

At June 30, total assets were $14.19 billion, total liabilities $12.37 billion and shareholders’ equity $1.82 billion. Cash was $29.4 million.
For the first half, operating cash flow was $116.6 million, down from $165.6 million; investing cash outflow was $343.1 million, versus $195.0 million; financing cash inflow was $233.6 million, versus $86.3 million. Cash increased $7.1 million to $29.4 million.
Total debt was $413.5 million, down from $437.3 million at year-end 2020. Debt was 18.5% of total capital including net unrealized fixed-maturity gains, or 21.8% excluding them; management’s long-term target is 25%. The $135 million revolving credit balance left $90 million available under the then-current $225 million facility.
Management reported $1.2 billion of cash and specified marketable securities that could be rapidly liquidated under normal conditions. Insurance-subsidiary dividends available without prior regulatory approval in 2021 were $161.9 million; $24.0 million had been paid by June 30.
Shareholders received $25.7 million in dividends during the first half. The quarterly dividend was $0.31 per share. The company repurchased 39,685 shares during the first half; $19.1 million remained authorized for repurchases.
Unfunded investment commitments, primarily limited partnerships, increased to $786.3 million from $571.9 million at year-end.

Changes, outlook and notable items

Management raised full-year 2021 guidance on July 1: net income of $3.50–$3.70 per diluted share and core ROE above 10%. The revision reflected strong Q2 investment income and lower-than-guided catastrophe losses. Expected full-year net investment income was $385–$405 million, including about $100 million from accretion on the reinsurance deposit asset.
Segment 2021 net income guidance: Property and Casualty $66–$70 million; Supplemental $41–$43 million; Retirement $43–$45 million; Life $14–$16 million. Property and Casualty guidance assumes $20–$25 million of second-half catastrophe losses and a 95%–96% full-year combined ratio.
Property and Casualty premiums written fell 4.0% in the first half; automobile and property risks in force were down 7.4% and 5.8%, respectively. Management cited pandemic-related sales pressure, a gradual return toward normal driving, inflation in claims costs and plans for mid-single-digit property rate filings in many geographies during the second half.
Supplemental results continued to benefit from lower policyholder claims activity associated with pandemic behavior; management expected a slower return to historical claims patterns. The segment’s first-half pretax profit margin was 39.4%, above its longer-term target in the mid-20% range.
On July 14, the company agreed to acquire Madison National Life for $172.5 million, with a potential earn-out of up to $12.5 million. Closing was expected early in Q1 2022, subject to regulatory and other conditions. Management expected the deal to be immediately accretive to EPS and ROE. The revolving credit facility was amended effective July 12, increasing capacity from $225 million to $325 million to support the acquisition and general needs.
Key exposures include pandemic uncertainty and slower sales, catastrophe and claims-cost inflation, low interest rates and reinvestment risk, investment-market and credit changes, and estimation risk in reserves, deferred acquisition costs and hard-to-value securities. Management stated fixed-maturity unrealized losses were considered temporary; future conditions could require impairment recognition.
The filing reported no material changes to previously disclosed risk factors, no material control weaknesses, and no material changes in internal control over financial reporting.

Important facts for investors to verify

Whether stronger alternative-investment returns and the raised full-year earnings guidance are sustained, and how results compare with the $3.50–$3.70 diluted EPS range.
Actual catastrophe losses, claims inflation, rate actions and combined ratios relative to the company’s 95%–96% Property and Casualty outlook.
Madison National’s regulatory approvals, closing timing, purchase funding, earn-out terms and realized accretion; the acquisition remained pending at the report date.
Liquidity and capital effects of the acquisition, elevated limited-partnership commitments, and continued reliance on FHLB funding and revolving credit.
Potential effects of market rates, investment valuations and reserve assumptions on investment income, unrealized gains and reported earnings.