Horace Mann Educators Corporation — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. Horace Mann markets property and casualty insurance, annuities and life insurance primarily to public-school educators and their families. Dollar amounts below are in millions unless stated otherwise. KPMG performed an interim review, not an audit.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenue | $264.7 | $265.6 | $526.0 | $520.2 |
| Income before taxes | $28.6 | $37.2 | $68.2 | $75.2 |
| Net income | $20.5 | $26.0 | $48.8 | $53.0 |
| Diluted EPS | $0.48 | $0.63 | $1.16 | $1.29 |
| Net investment income | $81.4 | $77.4 | $164.4 | $154.8 |
| Net realized investment gains | $3.5 | $15.4 | $5.2 | $22.3 |
- Six-month premiums and contract charges earned increased 4.1% to $354.5; premiums written and contract deposits rose 7.8% to $552.7, led by annuity deposits, up 15.7%.
- Six-month segment net income: property and casualty $18.9, up 32%; annuity $23.8, up 17%; life $8.9, down 10%. Higher insurance-segment earnings were outweighed by lower realized investment gains.
- The property and casualty combined ratio improved to 98.2% from 100.3%. Catastrophe losses were $29.8, versus $28.2; favorable prior-year reserve development was $7.0, versus $5.9.
- Six-month operating cash flow was $108.1, compared with $85.3 a year earlier. Investing activities used $241.2 and financing activities provided $159.6. Cash ended the period at $44.7.
- At June 30, total assets were $9.45 billion, investments $7.09 billion, shareholders’ equity $1.28 billion and total debt $237.9. Debt was 19.2% of capital excluding unrealized investment gains and losses, below the 25% long-term target. Book value per share was $31.40, or $24.51 excluding investment fair-value adjustments.
- Fixed maturities were $6.68 billion at fair value; 95.8% were investment grade. Net unrealized investment gains were $281.6 after tax. The average pretax portfolio yield for the first half was 5.38%, versus 5.40% a year earlier; the fixed annuity net interest spread was 205 basis points, versus 198.
Changes, outlook and risks
- Management projected 2014 net income before realized investment gains and losses of $2.05–$2.25 per diluted share. It expected continued property and casualty improvement, lower annuity spread and life-income pressure, and expenses comparable to 2013. This is a forward-looking estimate, not a guarantee.
- Low rates and minimum guaranteed crediting rates constrain further reductions in policyholder rates; management anticipates fixed-annuity spread compression. It estimated that a 100-basis-point decline in reinvestment rates could reduce annuity net investment income by about $2.4 in year one and $7.1 in year two.
- In February 2014, the company introduced its own fixed indexed annuity; it represented about one-third of first-half annuity sales. Its call options and embedded derivatives are carried at fair value, with changes recognized in earnings.
- To reduce Florida hurricane exposure and improve homeowners profitability, the company planned to non-renew about 4,800 Florida property policies, approximately 95% of its remaining Florida book. About 1,000 had terminated by June 30, mostly at customer request. Policy counts and premiums may be affected in the near term.
- The bank credit facility was amended July 30, after quarter-end: its termination date was extended from October 2015 to July 2019 and its Eurodollar spread reduced. Outstanding borrowings remained $38.0. Senior notes of $75.0 mature in June 2015 and $125.0 in April 2016.
- Repurchase-agreement obligations rose to $140.0 from $25.9 at year-end; these are collateralized borrowings. The company reported no material changes to previously disclosed risk factors. Key exposures include interest rates, investment values and credit, catastrophe frequency and severity, reinsurance availability/collectibility, reserves, policy persistency and educator-market conditions.
Important facts for investors to verify
- Whether the $2.05–$2.25 full-year earnings outlook is achieved, particularly given lower investment gains and expected spread pressure.
- Trends in annuity deposits, fixed-annuity spreads, minimum-rate guarantees and performance of the new indexed annuity.
- Florida non-renewal progress, policy retention and catastrophe losses, alongside the improved combined ratio and reserve development.
- Investment portfolio valuations, credit quality, unrealized gains and any impairment changes; management considered current unrealized losses temporary.
- Liquidity, repurchase-agreement funding, the 2015 note maturity and the amended credit facility’s terms and covenants.