Horace Mann Educators Corporation — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. Although the request references 2016 Q4, this is an annual filing; selected fourth-quarter results are noted below. Horace Mann is an insurer focused primarily on educators and their families, offering property and casualty insurance, retirement annuities, and life insurance.
Financial performance and position
| Metric | 2016 | 2015 |
|---|---|---|
| Total revenue | $1,128.9 million | $1,080.4 million |
| Insurance premiums and contract charges earned | $759.1 million | $731.9 million |
| Net investment income | $361.2 million | $332.6 million |
| Net realized investment gains | $4.1 million | $12.7 million |
| Income before tax | $114.2 million | $129.5 million |
| Net income | $83.8 million | $93.5 million |
| Diluted EPS | $2.02 | $2.20 |
| Operating cash flow | $207.4 million | $207.0 million |
| Total assets | $10.58 billion | $10.06 billion |
| Shareholders’ equity | $1.29 billion | $1.26 billion |
| Long-term debt | $247.2 million | $247.0 million |
- Insurance premiums written and contract deposits totaled $1.263 billion, up 0.5%. The filing reports no conventional operating margin; Property and Casualty’s combined ratio was 101.5% versus 97.0% in 2015.
- Cash was $16.7 million at year-end. Management said operating cash flow was expected to meet near-term operating needs. Insurance-subsidiary dividends available to the parent without prior regulatory approval in 2017 were approximately $91 million; parent-company liquid assets were $4.1 million.
- Investments totaled $8.00 billion, chiefly investment-grade fixed maturities; 95.6% of fixed maturities were investment grade. Total policy liabilities were $6.02 billion. Debt was 18.1% of total capital excluding unrealized investment gains and losses, below the company’s 25% long-term target.
- 2016 diluted EPS was $2.02. Book value per share was $32.15; cash dividends were $1.06 per share. The company repurchased 701,410 shares for $21.5 million, with $29.5 million of authorization remaining at year-end.
Material changes versus 2015
- Net income fell 10.4%, reflecting weaker Property and Casualty results and lower realized investment gains. After-tax realized investment gains were $2.3 million versus $8.6 million.
- Property and Casualty net income declined to $25.6 million from $40.0 million. Catastrophe costs rose to $60.0 million from $44.4 million, and the combined ratio worsened to 101.5%. The underlying combined ratio rose 1.2 points to 92.9%; auto loss frequency and severity were pressures.
- Retirement net income increased to $50.7 million from $43.4 million, supported by investment income and improved spreads. Annuity deposits declined 5.1% to $520.2 million, largely because 2015 included nonrecurring employee-plan deposits; accumulated annuity value rose 7.2% to $6.4 billion.
- Life net income increased to $16.6 million from $15.0 million. Insurance premiums and contract deposits grew 5.2%.
- Net investment income increased 8.6%; the average portfolio yield was 5.21% before tax. Operating expenses increased 10.0% to $173.1 million, reflecting customer-service, infrastructure and strategic investments.
- Fourth-quarter net income was $19.8 million, or $0.48 diluted EPS, versus $21.0 million, or $0.50, in Q4 2015.
Outlook, risks and unusual items
- Management projected 2017 net income excluding realized investment gains and losses of $1.95–$2.15 per diluted share. It expected a roughly 10-basis-point decline in portfolio yield, lower Retirement and Life earnings, and continued strategic investment; automobile profitability was expected to improve, with catastrophe losses projected below 2016.
- Management anticipated Retirement’s net interest spread to decline from 193 basis points in 2016 to the low 180s during 2017. Approximately 87% of deferred fixed-annuity account values were credited at minimum guaranteed rates, limiting further rate reductions and increasing spread-compression risk.
- Key risks include severe weather and catastrophe exposure, loss-reserve estimation, reinsurance availability and collectability, low interest rates and investment-market volatility, competition, regulatory or tax changes affecting 403(b) and annuity products, educator-market budget pressures, cybersecurity, and execution of legacy-system modernization.
- 2016 included $11.1 million of net other-than-temporary investment impairment charges, largely related to Puerto Rico and energy-sector securities, partly offset by gains on security sales and calls. Catastrophe costs were $60.0 million pretax. Favorable prior-year reserve development was $7.0 million, down from $12.5 million in 2015.
- No pending litigation was identified as having a reasonable possibility of material loss. Unfunded investment purchase commitments were $135.1 million. The filing reports no off-balance-sheet arrangements involving unconsolidated entities. KPMG issued an unqualified opinion on the financial statements and internal controls; management also concluded controls were effective.
Most important facts for investors to verify
- Whether auto claims frequency and severity improve enough to restore Property and Casualty underwriting profitability.
- Actual catastrophe losses, reserve development, and the adequacy and cost of reinsurance relative to the 2017 outlook.
- How low rates affect investment income, guaranteed annuity spreads, statutory capital, and parent-company cash distributions.
- Whether Retirement deposit trends and the planned technology and infrastructure investments deliver expected growth and retention.
- Whether 2017 results fall within the stated EPS outlook, which excludes realized investment gains and losses.