Horace Mann Educators Corporation — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Amounts are in millions of dollars except per-share data and ratios. Interim statements are unaudited; KPMG performed a review, not an audit.
Business context
Horace Mann is an insurance holding company focused primarily on educators and their families, offering property and casualty, life and retirement, supplemental and group benefits products. Madison National Life, acquired effective January 1, 2022, is included in Supplemental & Group Benefits. The company reports three operating segments plus Corporate & Other.
Financial results and key metrics
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $346.3 | $347.1 | $693.1 | $669.1 |
| Net income (loss) | $(12.5) | $46.7 | $2.0 | $86.0 |
| Diluted EPS | $(0.30) | $1.11 | $0.05 | $2.04 |
| Net premiums and contract charges earned | $255.8 | $225.8 | $511.7 | $453.4 |
| Net investment income | $105.2 | $109.2 | $203.1 | $204.7 |
| Net investment gains (losses) | $(15.5) | $4.9 | $(31.0) | $(4.1) |
| Benefits, claims and settlement expenses | $207.6 | $147.1 | $384.6 | $281.4 |
- Six-month operating cash flow was $80.0, down from $116.6; investing cash outflow was $296.1 and financing cash inflow was $132.5. Cash ended the period at $50.1, versus $133.7 at year-end 2021.
- At June 30, total assets were $13,758.5, total liabilities $12,498.4 and shareholders’ equity $1,260.1. Equity fell from $1,807.4 at year-end, primarily reflecting a $511.1 after-tax six-month decline in unrealized fixed-maturity investment gains/losses recorded in OCI. Comprehensive loss for the first half was $509.1.
- Debt totaled $497.8: $249.0 short-term borrowings under the bank facility and $248.8 of senior notes. Debt was 28.3% of total capital including net unrealized fixed-maturity losses, slightly above the company’s 25% long-term target; management also reported 25.2% excluding those losses.
- Management reported $998.2 of cash and specified publicly liquid securities available for rapid liquidation under normal market conditions. It stated operating cash flow should meet operating needs over the next 12 months and that liquidity was sufficient for base and stressed needs.
Material changes and segment performance
- Revenue grew 3.6% for the first half, largely due to Madison National; Q2 revenue was nearly flat. Net income fell by $59.2 in Q2 and $84.0 in the first half versus 2021, reflecting catastrophe losses, auto inflation/severity, and equity-market-related investment losses.
- Property & Casualty: First-half net loss was $16.9 versus $47.2 income. The auto combined ratio rose to 110.6% from 88.7%; the property combined ratio was 116.6% versus 100.5%. Results reflected elevated catastrophe losses, higher auto loss costs and $6.0 of unfavorable prior-year reserve development overall, including $12.0 unfavorable auto development.
- Life & Retirement: First-half net income increased to $29.1 from $27.9. Higher investment income and lower life mortality costs helped; equity market declines caused unfavorable DAC unlocking.
- Supplemental & Group Benefits: First-half net income was $24.4 versus $23.3, with Madison National contributing to substantial premium growth. Results included $7.8 of acquisition-related intangible amortization expense pretax.
- Corporate & Other: First-half net loss was $34.6 versus $12.4, mainly due to investment losses, chiefly fair-value declines in equity securities.
- The fixed-income portfolio’s fair value was $5,688.0, down from $6,239.3 at year-end. Pretax unrealized fixed-maturity losses were $358.5, compared with gains of $441.6 at year-end, largely reflecting sharply higher interest rates and wider spreads. Management characterized the losses as temporary and said it did not expect to be required to sell affected securities before recovery.
Outlook, risks and notable items
- Management lowered its 2022 core earnings outlook to $2.15–$2.35 per diluted share, citing first-half catastrophe losses, auto inflation and severity, and equity-market declines. This is a non-GAAP measure.
- 2022 managed-portfolio net investment income was expected at the low end of the previously guided $310–$320 range. Limited partnership returns were expected below historical averages in the second half.
- Segment core earnings outlook: Property & Casualty $10–$14; Life & Retirement $56–$59; Supplemental & Group Benefits at the low end of $47–$50. P&C guidance assumes $20–$22 of second-half pretax catastrophe losses. Supplemental & Group Benefits expected benefit ratios were about 35% for voluntary and 50% for employer-sponsored products.
- Property pricing actions: auto rate increases in the high-single- to low-double-digit range in states representing nearly 80% of auto premiums; property premium increases in the mid-teens over 12–18 months were planned. Management cited potential underwriting restrictions in catastrophe-prone areas.
- Madison National’s purchase price was $172.3, with a potential cash earn-out of up to $12.5 subject to targets through 2023. Purchase-price allocation remained preliminary. Madison National contributed $73.6 revenue and $0.1 pretax income since acquisition, including purchase-accounting intangible amortization.
- Unfunded investment commitments were $862.0. New reverse repurchase agreements generated $95.8 net financing cash inflow; securities transferred had fair value of $99.5 at quarter-end. Management identified extraordinary catastrophe losses and credit-rating downgrades as events that could constrain liquidity.
- The company expected to adopt long-duration insurance accounting (LDTI) on January 1, 2023. It estimated transition impacts could include an after-tax $450–$550 reduction in AOCI, an increase in AOCI of $65–$75 from DAC changes, and smaller retained-earnings/AOCI adjustments in other areas. It expected no cash-flow or underlying economic impact; post-adoption AOCI and benefit-expense volatility could be material.
- The company reported no material change to previously disclosed risk factors and concluded disclosure controls were effective. Madison National was excluded from the June 30 internal-control assessment while integration continued.
Important facts for investors to verify
- Whether auto loss severity, catastrophe losses and prior-year reserve development improve, and whether planned rate actions adequately offset claim-cost inflation.
- Whether the $2.15–$2.35 core earnings outlook and segment assumptions remain achievable, particularly given market performance and second-half catastrophe experience.
- The recoverability and duration of fixed-maturity unrealized losses, liquidity under stress, and the effect of any forced sales or further spread widening.
- Final Madison National purchase accounting, integration costs and performance against any earn-out targets.
- Actual LDTI transition adjustments and ongoing impacts on AOCI, earnings volatility and reporting controls.
- Debt and capital trends, including the bank facility’s variable-rate exposure, share repurchases, and regulatory limits on subsidiary dividends.