Horace Mann Educators Corporation — Q2 2019 Form 10-Q
Business and period. The unaudited filing covers the quarter and six months ended June 30, 2019. Horace Mann sells property and casualty insurance, retirement products and life insurance, primarily to public-school educators and their families. Interim financial information was reviewed by KPMG, not audited.
Financial results
Amounts below are in millions except per-share data. Results are for the periods ended June 30.
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $451.5 | $306.3 | $764.7 | $601.7 |
| Net income | $93.8 | $5.9 | $126.0 | $26.1 |
| Diluted EPS | $2.24 | $0.14 | $3.01 | $0.63 |
| Net investment income | $93.5 | $97.1 | $186.3 | $189.0 |
| Operating cash flow | — | $97.8 | $151.3 |
- Reported earnings were dominated by the annuity reinsurance transaction: a $135.3 million pretax realized investment gain, or $106.9 million after tax. A $28.0 million noncash goodwill impairment charge partly offset the gain.
- Premiums and contract charges earned rose 1.2% in Q2 and 2.3% for the first half, supported principally by higher average auto and property premiums. Net investment income fell 3.7% in Q2 and 1.4% year to date; portfolio income excluding reinsurance-deposit accretion declined as invested assets were transferred and new-money yields and prepayments were lower.
- Benefits, claims and settlement expenses decreased 9.3% in Q2 and 6.3% for the first half, reflecting improved auto and property loss experience. Operating expenses increased 10.2% and 11.1%, respectively, including BCG costs and comparison with a prior-year legal expense recovery.
- Property and Casualty first-half underwriting improved: auto combined ratio was 99.2% versus 105.4%, and property was 101.0% versus 110.2%. Prior-year reserve development was favorable by $4.0 million, versus $0.3 million in the prior-year period.
Financial position, debt and liquidity
- At June 30, total assets were $11.78 billion, including $6.42 billion of investments, $2.32 billion of reinsurance deposit assets and $7.6 million of cash. Total liabilities were $10.28 billion and shareholders’ equity was $1.50 billion; book value was $36.41 per share.
- Long-term debt was $297.9 million: $247.9 million carrying value of 4.50% senior notes due 2025 and $50.0 million of FHLB borrowings. Debt was 18.7% of total capital excluding unrealized fixed-maturity gains (16.6% including them), below the company’s 25% long-term target.
- First-half operating cash flow was $97.8 million, down from $151.3 million; investing activities provided $23.2 million versus using $112.4 million, while financing activities used $125.3 million versus $38.3 million. Financing included a $124.1 million initial cash payment for the reinsurance transaction. Management said operating cash flow was expected to cover operating needs for the next 12 months.
- The company replaced its revolver with a five-year $225 million facility in June; none was drawn at quarter-end. It used the facility to partly fund the July 1 NTA acquisition; $135 million was outstanding as of August 1.
Material developments, outlook and risks
- Effective April 1, the company reinsured a $2.9 billion block of legacy fixed and variable annuities with RGA, including approximately $2.2 billion of fixed annuities and $0.7 billion of variable annuities. The transaction transferred about $2.1 billion of investments and policy loans and generated the investment gain. The company uses deposit-method accounting; reinsured separate-account assets and liabilities remain on its balance sheet under modified coinsurance.
- On July 1, after quarter-end, Horace Mann completed its $425 million acquisition of National Teachers Associates Life Insurance Company (NTA), which sells supplemental insurance to the education market. NTA is expected to form a new Supplemental segment. Benefit Consultants Group (BCG), acquired January 2 for a transaction value of $25 million, contributed brokerage and administration operations.
- Management’s 2019 outlook was core earnings of $2.05–$2.25 per diluted share and core ROE of 7.0%–7.5%, with an estimated effective tax rate of 16%–18%. These are non-GAAP measures. Management said it could not provide a meaningful GAAP net-income projection because investment gains and losses can vary substantially.
- For Property and Casualty, management expected underlying auto and property loss-ratio improvement of about 3.0–3.5 points and about 3 points, respectively; it raised the catastrophe-cost estimate 20% to $45–$55 million for 2019. It projected Retirement net income of $25–$27 million, Life net income down 15% from the prior year, and Supplemental net income of $12–$14 million for the second half, partly offset by $2 million of additional Corporate and Other interest expense.
- Key exposures include catastrophe losses, claims and reserve estimates, investment valuation and credit risk, and low interest rates/reinvestment risk. Management estimated a 100-basis-point decline in reinvestment rates could reduce Retirement investment income by about $1.3 million in year one and $3.8 million in year two. The filing identifies concentration risk from the RGA reinsurance arrangement: trust assets secure obligations, but access could be delayed in insolvency and a shortfall could leave the company as a general creditor.
- The fixed-maturity portfolio was 97.1% investment grade with an average A+ rating. Management considered reported unrealized losses temporary, but noted circumstances could change. No material changes to previously disclosed risk factors were reported apart from the RGA counterparty exposure.
Important facts for investors to verify
- How much of reported earnings and future comparability depends on the one-time reinsurance gain, impairment charge and related DAC amortization?
- How the RGA trust is funded and monitored, and what recapture, collateral and insolvency protections apply to the reinsured block.
- NTA integration, acquisition financing, the $135 million revolver balance and the expected Supplemental segment contribution.
- Whether planned rate actions, catastrophe assumptions and favorable reserve development translate into sustained underwriting improvement, while monitoring policy retention.
- Investment income, reinvestment spreads, credit quality and liquidity following the substantial transfer of invested assets.