Horace Mann Educators Corporation — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018; comparisons are with the corresponding 2017 periods unless noted. Horace Mann sells property and casualty insurance, retirement products and life insurance, primarily to public-school educators and their families. Dollar amounts below are in millions unless stated otherwise.
Financial results
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $311.3 | $289.8 | $913.1 | $868.6 |
| Income before taxes | $17.0 | $33.5 | $47.7 | $53.5 |
| Net income | $12.5 | $26.6 | $38.6 | $44.1 |
| Diluted earnings per share | $0.30 | $0.64 | $0.93 | $1.06 |
| Net investment income | $99.1 | $92.3 | $288.0 | $275.0 |
| Operating expenses | $51.0 | $44.2 | $149.4 | $139.2 |
Q3 revenue increased 7.4%, but net income fell 52.8%; nine-month revenue rose 5.1% while net income declined 12.5%. Higher catastrophe and other weather-related claims were the principal pressure on earnings. Investment gains were $2.8 million in Q3 versus losses of $3.5 million a year earlier, and $1.9 million for nine months versus losses of $1.7 million.
Segments, claims and operating trends
- Property and Casualty: Q3 net loss was $3.2 million versus income of $13.4 million; nine-month net loss was $4.4 million versus income of $2.2 million. The combined ratio was 110.1% for Q3 (up 14.3 points) and 108.0% for nine months (up 1.5 points). Catastrophe losses were $32.2 million in Q3 and $68.8 million year to date, versus $8.6 million and $58.2 million, respectively, in 2017. Auto results benefited from rate actions and stabilizing loss trends; property results were weighed down by weather losses.
- Retirement: Q3 net income declined 11.0% to $12.1 million, while nine-month income rose 1.9% to $37.6 million. Nine-month total Retirement sales deposits increased 3.1%, helped by fee-based products, while traditional annuity deposits decreased 6.6%. Management cited higher operating expenses and continued low interest rates as pressures.
- Life: Q3 net income rose 10.4% to $5.3 million; nine-month net income rose to $15.0 million. Nine-month sales increased 30.2% to $15.1 million.
- Earned insurance premiums and contract charges grew 3.9% in Q3 and 4.2% year to date. Property and Casualty written premiums increased 3.1% in Q3 and 3.4% year to date, primarily from rate increases.
Balance sheet, cash flow and capital
- At September 30, total assets were $11.28 billion, total liabilities $9.98 billion and shareholders’ equity $1.30 billion. Investments totaled $8.24 billion, including $7.53 billion of fixed-maturity securities available for sale.
- Cash was $6.4 million. Nine-month operating cash flow was $217.5 million, down from $237.2 million; investing cash outflow was $183.8 million and financing cash outflow was $34.9 million. Cash decreased $1.2 million from year-end 2017.
- Long-term debt was $297.7 million: $250 million principal of 4.50% senior notes due 2025 and $50 million of Federal Home Loan Bank borrowings. No amount was drawn on the $150 million unsecured bank facility, whose maturity was extended to June 2023.
- Management reported total capital of $1.602 billion, including debt; debt was 19.5% of capital excluding unrealized investment gains, below its 25% long-term target. Book value per share was $31.78, down 13.8% from year-end, largely reflecting higher interest rates and wider credit spreads. Net unrealized investment gains in accumulated other comprehensive income fell to $76.0 million from $300.2 million at year-end.
- Gross unrealized losses on fixed maturities were $123.6 million, compared with $22.5 million at December 31, 2017. Management characterized the losses as temporary and said it did not intend, nor expect to be required, to sell affected securities before recovery.
Outlook, risks and notable items
- Management cut 2018 core earnings guidance to $1.45–$1.60 per diluted share from $1.90–$2.10, citing significant catastrophe and other weather-related losses in Q2 and Q3.
- For 2018, management expected Property and Casualty net written premium growth of 4%–5%, underlying auto loss-ratio improvement of 1.5–2.0 points, and catastrophe losses contributing about 11 points to the combined ratio. Retirement net income was expected at $49–$50 million and Life net income at $18–$19 million. The expected full-year effective tax rate was 16%–18%.
- Interest-rate and reinvestment risk remain important: 86.9% of deferred annuity account values were credited at their minimum guaranteed rate. Management anticipated future fixed-annuity spread compression and noted that low reinvestment yields or increased prepayments could further pressure investment income.
- The company continued risk-mitigation measures in catastrophe-prone areas, including possible non-renewals, tighter underwriting and limits on new business. It also noted potential effects from evolving SEC and state standards of conduct and annuity-suitability rules.
- On October 30, 2018, after quarter-end, the company agreed to acquire Benefit Consultants Group for $25 million, subject to regulatory approval, with closing expected in the first half of 2019.
- The Tax Act reduced the company’s effective tax rate by 8.8 percentage points for the first nine months. Management said it expected to complete accounting for remaining tax effects in Q4 2018. KPMG performed an interim review and reported no material modifications it believed were necessary; this was a review, not an audit.
Important facts for investors to verify
- Whether weather-related claims and catastrophe losses remain elevated, and whether premium actions improve underwriting results—especially the property combined ratio.
- Whether the reduced $1.45–$1.60 core earnings guidance and segment expectations were achieved; core earnings are a non-GAAP measure.
- How reinvestment yields, prepayments and minimum crediting-rate guarantees affect annuity spreads and investment income.
- Whether unrealized investment losses recover or lead to realized losses, impairment charges or further changes in book value.
- Regulatory approval, final terms and integration outcomes for the proposed $25 million BCG acquisition.
- Availability of subsidiary dividends and capital under insurance regulation, alongside debt service, shareholder dividends and planned business investment.