Horace Mann Educators Corporation — Q2 2018 Form 10-Q
Business and period. The company sells property and casualty insurance, annuities and life insurance, primarily to K–12 educators and their families. This unaudited quarterly filing covers the three and six months ended June 30, 2018; KPMG performed an interim review, not an audit.
Financial results and key metrics
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $306.3 million | $291.4 million | $601.7 million | $578.7 million |
| Income before tax | $6.8 million | $2.2 million | $30.7 million | $20.1 million |
| Net income | $5.9 million | $2.3 million | $26.1 million | $17.6 million |
| Diluted EPS | $0.14 | $0.05 | $0.63 | $0.42 |
| Net investment gains (losses), pretax | $0.7 million | $2.1 million | $(0.9) million | $1.8 million |
- Revenue drivers: Earned premiums and contract charges rose 5.0% in Q2 and 4.4% year to date, to $205.6 million and $408.6 million, respectively. Net investment income increased to $97.1 million in Q2 and $189.0 million year to date.
- Property and Casualty: Net losses were $10.9 million in Q2 and $1.2 million year to date. Combined ratios improved to 114.7% and 106.8%, respectively, but remained above 100%, reflecting underwriting losses. Catastrophe losses were $26.8 million in Q2 and $36.6 million year to date, below the comparable 2017 amounts of $32.4 million and $49.6 million.
- Other segments: Q2 Retirement net income rose to $14.1 million and Life net income to $5.9 million. For the first half, Retirement earned $25.5 million and Life $9.7 million.
- Cash flow: Operating activities provided $151.3 million in the first half, versus $154.5 million in 2017. Investing activities used $112.4 million and financing activities used $38.3 million. Cash at June 30 was $8.2 million.
- Balance sheet and capital: Total assets were $11.16 billion, total liabilities $9.81 billion and shareholders’ equity $1.35 billion. Investments totaled $8.23 billion, including $7.48 billion of fixed maturities. Book value per share was $32.93, down 10.7% from year-end, primarily due to lower unrealized investment gains amid higher rates and wider credit spreads.
- Debt and liquidity: Long-term debt was $297.6 million: $250 million principal of 4.50% notes due 2025 and $50 million of FHLB borrowings. No bank-facility borrowings were outstanding. The $150 million unsecured credit facility was extended to June 2023. Debt was 19.5% of total capital excluding net unrealized investment gains, below the company’s 25% long-term target. Management said operating cash flows should meet operating needs over the next 12 months.
Changes versus the prior period
- First-half net income increased $8.5 million, chiefly from improved Property and Casualty results and the lower federal tax rate’s benefit to Retirement and Life. Q2 net income increased $3.6 million, with lower catastrophe losses and tax effects contributing.
- Property and Casualty premium growth reflected rate increases, while policy counts declined. First-half approved average rate changes were 10.9% for auto and 3.9% for property.
- Retirement annuity deposits fell 15.0% year to date, mainly from lower single-premium and fixed-annuity sales; fee-based mutual fund deposits increased. Total Retirement sales deposits declined 4.8%.
- First-half comprehensive income was a loss of $148.5 million, compared with income of $85.4 million in 2017, largely because after-tax unrealized investment gains declined by $159.5 million. This market-value movement reduced equity and book value, while net income increased.
- New accounting guidance moved equity-security fair-value changes into earnings. A $15.0 million after-tax amount was reclassified from accumulated other comprehensive income to retained earnings at adoption.
Outlook, risks and unusual items
- Outlook: Management lowered 2018 core earnings guidance to $1.90–$2.10 per diluted share from $2.10–$2.30, citing first-half catastrophe and other weather losses. It expects Property and Casualty net written premium growth of 4%–6%, catastrophe losses at the high end of a previously identified 6–7 combined-ratio-point range, Retirement net income of $49–$51 million and Life net income of $16–$18 million. Expected full-year effective tax rate is 15%–18%.
- Insurance and rate risks: Weather and catastrophe losses, auto bodily-injury severity, underwriting actions and exposure in catastrophe-prone areas could affect results. Management expects the Property and Casualty underlying property loss ratio to be flat with 2017 and the underlying auto loss ratio to improve 1.5–2.0 points.
- Interest-rate and investment risks: Management warned that low reinvestment yields and minimum guaranteed annuity crediting rates may compress fixed-annuity spreads. About 87.8% of deferred annuity account values were at minimum guaranteed rates. The company reported $94.4 million of gross unrealized fixed-maturity losses and considered them temporary; future changes could require impairment recognition.
- Tax and commitments: Accounting for certain Tax Act impacts remained provisional, pending partnership tax schedules and Treasury guidance; adjustments are due no later than year-end 2018. Unfunded investment-purchase commitments were $166.7 million at June 30.
- Other developments: The credit facility maturity was extended to June 2023. The company identified no material changes to previously disclosed risk factors, but noted possible effects from evolving SEC and state standards of conduct for financial services and annuity sales.
Important facts for investors to verify
- Whether catastrophe and non-catastrophe weather losses remain elevated, and whether the revised core earnings guidance and combined-ratio assumptions are achieved.
- Whether auto and property rate actions support premium growth without materially worsening retention or policy counts.
- Whether annuity deposit declines persist, and how fixed-annuity spread compression and reinvestment yields affect Retirement earnings.
- How investment valuations, credit spreads and interest rates affect unrealized gains, equity, book value and potential impairment conclusions.
- Final Tax Act accounting adjustments, alongside the company’s ability to maintain operating cash generation and meet policyholder obligations.