Horace Mann Educators Corporation — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Dollar amounts are in millions unless noted. The interim financial statements were reviewed by KPMG, not audited.
Business context
Horace Mann sells property and casualty insurance, retirement annuities and life insurance, primarily to K–12 educators, public-school employees and their families.
Financial performance and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenue | $251.9 | $256.5 | $772.1 | $755.4 |
| Net income | $23.6 | $32.3 | $76.6 | $72.0 |
| Diluted EPS | $0.57 | $0.78 | $1.85 | $1.74 |
| Net investment income | $78.5 | $76.6 | $233.2 | $228.7 |
| Net realized investment gains (losses) | $(1.4) | $10.8 | $20.9 | $21.1 |
- Q3 net income fell $8.6 million, primarily reflecting a $7.8 million reduction in after-tax realized investment gains; all three insurance segments remained profitable. Nine-month net income rose $4.6 million.
- For the first nine months, P&C combined ratio was 99.4% versus 100.3%; catastrophe losses were $37.3 million versus $40.5 million. Favorable prior-year reserve development was $9.9 million versus $11.5 million.
- Fixed annuity net interest spread narrowed to 198 basis points from 211 basis points. Management noted that about 87% of deferred annuity balances were credited at their minimum guaranteed rates.
- Nine-month operating cash flow was $150.9 million, compared with $150.2 million. Investing cash outflow was $337.8 million; financing cash inflow was $217.5 million. Cash at September 30 was $45.8 million.
- Total assets were $8.52 billion, total shareholders’ equity $1.09 billion and total debt $237.9 million at September 30. Debt comprised $38.0 million short-term borrowings and $199.9 million long-term debt. Debt was 20.4% of total capital excluding unrealized investment gains and losses.
- Book value per share was $27.15, down 13% from a year earlier, principally because higher Treasury yields reduced unrealized investment gains. Equity included $160.6 million of after-tax net unrealized investment gains.
Changes, outlook and notable items
- Nine-month premiums written and contract deposits increased 3.9% to $818.8 million. Growth reflected higher average auto and homeowners premiums and increased annuity deposits. Annuity assets under management rose 10.6% year over year.
- Q3 P&C segment income declined to $11.0 million from $13.5 million, mainly due to higher catastrophe losses. Nine-month P&C and annuity income improved; life income declined modestly year to date.
- Management estimated full-year 2013 net income before realized investment gains and losses of $1.95–$2.05 per diluted share. Its assumptions included solid but more moderate annuity and life earnings in Q4, P&C loss experience consistent with Q4 2012, and $3–$4 million of full-year pretax customer-service and infrastructure costs.
- Management anticipated further fixed-annuity spread compression under sustained low interest rates. It estimated that a 100-basis-point decline in reinvestment rates could reduce annuity net investment income by about $1.8 million in year one and $6.0 million in year two.
- The company recorded approximately $1.0 million of investment impairment charges year to date, including $0.9 million on a Detroit general-obligation bond following the city’s bankruptcy filing. Management considered other securities with unrealized losses temporarily impaired and recorded no impairment on them at September 30.
- The company began using repurchase agreements in 2013; related obligations were $121.3 million, secured by transferred securities with $123.4 million fair value. The $150 million bank facility had $38 million drawn. No FHLB borrowings were outstanding.
- Principal risks identified include market-value and interest-rate exposure, catastrophe frequency and severity, reinsurance availability and collectibility, insurance reserve estimates, low rates, and competition and economic conditions affecting the educator market. Management reported no material change in risk factors from the 2012 Form 10-K and concluded disclosure controls were effective.
Important facts for investors to verify
- Whether the $1.95–$2.05 full-year EPS outlook, excluding realized investment gains and losses, was achieved, and how actual Q4 catastrophe claims and mortality compared with assumptions.
- Subsequent trends in fixed-annuity spreads, minimum-guarantee constraints, reinvestment yields and annuity deposit and retention levels.
- Development of P&C reserves and catastrophe exposure, including Florida reinsurance coverage and the company’s risk-mitigation actions in catastrophe-prone areas.
- Changes in investment valuations and impairment judgments, particularly after the substantial decline in unrealized gains and the Detroit bond charge.
- Debt maturities, use of repurchase agreements, subsidiary dividend capacity and capital adequacy; the 2015 and 2016 senior notes were outstanding at quarter end.