Horace Mann Educators Corporation (HMN) — FY 2014 Form 10-K
Reporting period: Year ended December 31, 2014; filed March 2, 2015. This is an annual report, not a Q4-only filing. The company sells property and casualty insurance, retirement annuities, and life insurance, primarily to U.S. public-school educators and their families.
Financial performance and position
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Total revenue | $1,060.7 million | $1,031.3 million | Up 2.9% |
| Net income | $104.2 million | $110.9 million | Down 6.0% |
| Diluted EPS | $2.47 | $2.66 | Down 7.1% |
| Net investment income | $329.8 million | $313.6 million | Up 5.2% |
| Net realized investment gains | $10.9 million | $22.2 million | Down $11.3 million |
| Operating cash flow | $221.9 million | $205.9 million | Up $16.0 million |
- Premiums written and contract deposits rose 6.7% to $1,167.7 million, led by annuity deposits, up 13.6%. Earned premiums and contract charges increased 3.6% to $715.8 million.
- Segment net income: property and casualty (P&C) $46.9 million, up $2.5 million; annuity $45.3 million, up $0.6 million; life $17.5 million, down $2.9 million; corporate and other loss $5.5 million.
- P&C combined ratio improved to 96.1% from 96.3%; catastrophe costs were $37.5 million, compared with $40.2 million. Favorable prior-year reserve development was $17.0 million, versus $18.0 million.
- Assets were $9.77 billion, including investments of $7.40 billion. Shareholders’ equity was $1.34 billion, up from $1.10 billion; book value per share was $32.65, or $25.38 excluding investment fair-value adjustments.
- Total debt was $237.9 million: $38.0 million under the bank facility and $199.9 million of senior notes. Debt was 18.6% of capital excluding unrealized investment gains and losses, below the company’s 25% long-term target. A $75 million note maturity was due in June 2015 and $125 million in April 2016.
- Cash declined $6.5 million to $11.7 million. Operating cash flow was $221.9 million; investing activities used $565.5 million and financing activities provided $337.1 million. Management said operating cash flow should cover operating needs for the next 12 months. Insurance-subsidiary dividends available to the holding company without prior regulatory approval were approximately $90 million for 2015.
- Fixed-income investments were 96.3% investment grade, with average quality A. Pretax portfolio yield was 5.32%, down from 5.37% in 2013. Annual dividends increased to $0.92 per share from $0.78.
Q4 context: The filing’s unaudited quarterly data reports Q4 2014 net income of $30.1 million and diluted EPS of $0.71, versus $34.3 million and $0.81 in Q4 2013.
Material changes versus the prior year
- Revenue and deposits grew, but net income fell mainly because after-tax realized investment gains declined $7.5 million. Lower catastrophe costs and improved P&C and annuity results partly offset the decline.
- Net investment income rose with growth in average invested assets, although portfolio yield edged lower. Annuity net interest spread increased to 201 basis points from 199 basis points.
- Net unrealized investment gains in shareholders’ equity increased, contributing to the rise in book value. Other comprehensive income was $162.4 million, compared with a loss of $244.9 million in 2013.
- Fixed and variable annuity accumulated value rose 6.2% to $5.7 billion. The new fixed indexed annuity, introduced in February 2014, represented about one-third of full-year annuity sales.
- The company began a Florida homeowners risk-reduction program: about 4,800 policies, approximately 95% of its December 2013 Florida property book, were identified for non-renewal; about 3,400 had terminated by year-end.
Outlook, risks and unusual items
- Management projected 2015 net income excluding realized investment gains and losses of $2.15–$2.35 per diluted share. It anticipated modest P&C combined-ratio improvement, less favorable reserve development, continued investment-yield pressure, and continued infrastructure and technology spending.
- Management expected the overall portfolio yield to decline about 20 basis points during 2015. It forecast slightly lower annuity earnings excluding DAC unlocking, and modestly lower life earnings. Guidance is forward-looking and subject to the risks described in the filing.
- Key risks include persistently low interest rates and spread compression; investment valuation, credit and reinvestment risks; severe weather and catastrophe exposure; reserve-estimation uncertainty; reinsurance availability and collectibility; competition; educator-market budget pressures; regulatory or tax changes affecting 403(b) plans; and execution risk in modernizing legacy technology systems.
- Management estimated a 100-basis-point decline in reinvestment rates could reduce pretax income by about $4.2 million in 2015 and $10.9 million in 2016, before any reduction in annuity crediting rates. About 86% of deferred annuity values were at their minimum guaranteed rates.
- Unusual items included a $6.4 million investment impairment charge, largely related to energy-sector securities, and approximately $1.6 million of pension settlement expense from a one-time cash-out election. No goodwill impairment was recorded. The company reported no pending litigation with a reasonable possibility of material loss.
- State insurance regulators restrict transfers from insurance subsidiaries. The company reported subsidiaries’ statutory capital and surplus above required levels; statutory capital and surplus totaled $861.4 million at year-end. KPMG gave an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective.
Important facts for investors to verify
- Whether 2015 earnings fall within management’s $2.15–$2.35 per-share outlook, and how much results depend on reserve development, catastrophe losses, and investment gains.
- Progress and financial effects of the Florida homeowners non-renewals, including policy retention, premium growth, and catastrophe-reinsurance costs.
- Fixed-annuity spread performance as low rates persist and the company’s capacity to adjust credited rates given minimum guarantees.
- Loss-reserve adequacy: management estimated reasonable reserve variability of approximately plus or minus 6%, equivalent to about $10 million of net income.
- Holding-company liquidity and refinancing of the 2015 and 2016 senior notes, considering limits on insurance-subsidiary dividends.