Horace Mann Educators Corporation — FY2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. Although the request references 2011 Q4, this is an annual filing; quarterly results are noted separately below. Unless otherwise stated, dollar amounts are in millions.
Business context
Horace Mann is a U.S. insurance holding company focused primarily on educators and their families. Its businesses are property and casualty insurance (mainly auto and homeowners), retirement annuities (primarily 403(b)) and life insurance. The segments contributed 51%, 40% and 9%, respectively, of 2011 premiums written and contract deposits.
Financial performance and position
| Metric | 2011 | 2010 | Change / context |
|---|---|---|---|
| Total revenue | $998.3 | $974.7 | Up 2.4% |
| Premiums and contract charges earned | $667.1 | $672.7 | Down 0.8% |
| Net investment income | $288.3 | $272.1 | Up 6.0% |
| Net realized investment gains | $37.7 | $23.8 | Up $13.9 |
| Net income | $70.5 | $80.9 | Down 12.9% |
| Diluted EPS | $1.70 | $1.97 | Down 13.7% |
| Operating cash flow | $115.9 | $157.8 | Lower, primarily due to higher claims payments |
Written premiums and contract deposits totaled $1,078.4, up 2.5%, led by annuity deposits. Property and casualty premiums fell 2.0%; annuity deposits rose 9.7%; life premiums and deposits declined 0.8%. Operating expenses were $139.9, down 2.0%. The effective tax rate was 25.7%, versus 27.3%.
- Property and casualty: Net income was $5.8, down from $27.0. The combined ratio worsened to 106.7% from 100.9%; catastrophe costs were $86.0 pretax versus $49.2. Prior-year reserve releases were $10.3, compared with $20.5 in 2010.
- Annuity: Net income was $31.4, approximately flat. Deposits reached $433.9; accumulated annuity value was $4.3 billion. Fixed annuity spread improved to 202 basis points from 196 basis points.
- Life: Net income was $19.0, down 5.9%, primarily reflecting higher mortality costs.
Balance sheet at year-end: Total assets were $7.484 billion, investments $5.678 billion, policy liabilities $4.401 billion and shareholders’ equity $1.087 billion. Cash was $7.5. Short-term debt was $38.0 and long-term debt $199.7. Debt was 17.9% of total capital including unrealized investment gains and losses. Book value per share was $27.33, or $20.66 excluding investment fair-value adjustments.
The investment portfolio was predominantly fixed income; 94.8% of fixed maturities were investment grade, with average quality A. Net unrealized investment gains in equity were $265.4 after tax and related adjustments. The filing reports no off-balance-sheet arrangements with unconsolidated entities.
Quarterly data show Q4 2011 net income of $33.2, compared with $15.1 in Q4 2010; Q4 2011 revenue was $247.6. Q2 2011 recorded a net loss of $11.8; the excerpt does not clearly identify the quarter-specific cause.
Material changes and unusual items
- Net income declined mainly because catastrophe costs increased; after-tax catastrophe impact increased $23.9 year over year. Higher realized investment gains partly offset the effect.
- Property and casualty policy count continued to contract: auto and homeowners policies totaled 725,000, down from 760,000. Florida homeowners non-renewals reduced catastrophe exposure but weighed on near-term policies and premiums.
- Investment fair-value improvement lifted book value per share; changes in unrealized gains flow through equity and can be volatile.
- Effective January 1, 2012, new insurance acquisition-cost accounting was expected to reduce deferred acquisition costs and beginning retained earnings by approximately $35 after tax. Management expected the ongoing net income effect to be minimal.
- The annuity reporting unit passed its goodwill impairment test, but fair value exceeded carrying value by a limited margin, indicating greater future impairment risk.
Outlook, liquidity and risks
Management projected 2012 net income before realized investment gains and losses of $1.80–$2.00 per diluted share. The outlook assumed an 8–10 percentage-point improvement in the property and casualty combined ratio, including substantially lower catastrophe losses, and combined annuity and life earnings comparable to 2011. Assumptions included an 8–10% increase in the S&P 500 and a modest decline in fixed annuity spreads. The company cautioned that results could differ materially and did not forecast realized investment gains or losses.
Management said operating cash flow should cover operating needs over the next 12 months. Approximately $71 of subsidiary dividends could be paid to the holding company in 2012 without prior regulatory approval; actual distributions remain subject to regulatory restrictions. The company had a $150 revolving credit facility, with $38 drawn, and reported compliance with debt covenants. A new shelf registration permits up to $300 of securities issuance; none had been issued as of the filing.
Principal risks include catastrophe frequency and severity, reinsurance availability and collectibility, reserve-estimation uncertainty, low interest rates and spread compression, investment credit and valuation risk, competitive pressure, educator-market budget cuts and access to school systems, regulatory and tax changes affecting 403(b) products, and technology modernization. Management estimated a reasonable possible variability in property and casualty reserves of approximately plus or minus 6%, equivalent to about $11 of net income.
No pending litigation was identified with a reasonable possibility of material loss. Management and the auditor reported effective internal control over financial reporting; the audited financial statements received an unqualified opinion.
Important facts for investors to verify
- Whether catastrophe losses and the combined ratio improved as projected, and how much of any change reflects underlying underwriting versus catastrophe experience.
- Auto and homeowners policy retention, premium growth and the continued effects of Florida risk-reduction actions.
- Annuity deposit flows, fixed-spread performance, surrender behavior and sensitivity to market returns and interest rates.
- Loss-reserve development, reinsurance recoverables and the adequacy and cost of catastrophe protection.
- Investment portfolio credit quality, unrealized gains and losses, and the potential for future impairment, particularly in annuity goodwill.
- Holding-company liquidity and debt service capacity, including the availability of regulated subsidiary dividends and use of the credit facility or shelf registration.