Business context and reporting period
Horace Mann Educators Corporation is an insurance holding company serving educators and their families, with Property & Casualty, Life & Retirement, Supplemental & Group Benefits, and Corporate & Other segments. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2023; comparisons are with the same 2022 periods. KPMG performed an interim review, not an audit, and reported no material modifications were needed for GAAP conformity.
Financial performance and position
| Metric ($ millions, except per-share data) | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | 378.7 | 342.6 | 1,089.0 | 1,035.2 |
| Net premiums and contract charges earned | 266.0 | 257.4 | 782.6 | 768.6 |
| Net investment income | 118.9 | 97.6 | 327.8 | 300.7 |
| Net investment losses | (8.4) | (12.8) | (29.7) | (43.8) |
| Benefits, losses and expenses | 365.1 | 319.2 | 1,082.9 | 992.8 |
| Income before taxes | 13.6 | 23.4 | 6.1 | 42.4 |
| Net income | 11.7 | 20.4 | 5.5 | 36.5 |
| Diluted EPS | $0.28 | $0.49 | $0.13 | $0.87 |
- Revenue grew 10.5% in Q3 and 5.2% year to date, but net income fell 42.6% and 84.9%, respectively, as claims, credited interest, DAC amortization and interest expense rose faster than revenue.
- Cash from operations was $199.2 million for the nine months, versus $115.8 million a year earlier. Investing activities used $85.6 million (versus $295.9 million); financing activities used $121.9 million (versus providing $82.6 million). Cash ended at $34.5 million.
- At September 30, total assets were $13.41 billion, total liabilities $12.36 billion and shareholders’ equity $1.05 billion. Book value per share was $25.74; adjusted book value per share was $35.57.
- Debt was $546.1 million, comprising the new 2028 notes and the 2025 notes; the $249 million revolving-credit balance was repaid. Debt was 34.2% of total capital including unrealized fixed-maturity losses, or 27.3% excluding those losses and reserve discount-rate remeasurements, versus a 25% long-term target on the latter basis.
- Liquidity: management said operating cash flows should meet operating needs over the next 12 months and reported $971.2 million in cash and specified readily liquid securities. Insurance-subsidiary dividends available without prior regulatory approval in 2023 were $110.3 million; $58.5 million had been paid through September.
Material changes versus the prior comparable period
- Property & Casualty net loss worsened to $11.3 million in Q3 and $44.3 million year to date, versus losses of $2.5 million and $19.4 million. Q3 catastrophe losses were $28.7 million pretax, or 17.5 combined-ratio points; non-catastrophe weather and elevated underlying losses also weighed on results.
- Life & Retirement net income rose 18.1% to $20.9 million in Q3, helped by higher investment income and fixed-annuity spread. Year-to-date income fell 8.4% to $52.3 million, including weaker limited-partnership returns and higher credited interest and DAC amortization.
- Supplemental & Group Benefits net income declined 23.7% to $15.8 million in Q3 and 14.9% to $41.6 million year to date. Premiums declined partly because of runoff of an indemnified block, while investment income increased.
- Net investment income increased with higher rates and returns on floating-rate securities and commercial mortgage loan funds. Higher interest expense, primarily from floating rates on the revolver before its repayment, also reduced results.
- Available-for-sale fixed maturities had a $680.0 million pretax net unrealized loss at quarter end; after-tax unrealized losses in AOCI were $534.7 million. Management attributed the decline primarily to higher interest rates, not credit loss, and said it expected to recover amortized cost.
Outlook, management commentary and risks
- Full-year 2023 core earnings guidance remained $1.20–$1.45 per diluted share. These are non-GAAP earnings; the filing cautions that net income cannot be reliably projected because investment gains and losses can vary substantially.
- 2023 segment outlook: Property & Casualty loss of $32–$37 million, with catastrophe losses estimated at $95–$100 million for the year; Life & Retirement net income of $63–$65 million; Supplemental & Group Benefits net income of $52–$55 million; and Corporate & Other interest expense of $29–$30 million.
- Management projected 2023 net investment income of $429–$439 million, including about $104 million of reinsurance deposit-asset accretion. Limited-partnership returns were expected below their 10-year average of 8.5%. Longer-term targets include a 95%–96% P&C combined ratio, a 220–230 basis-point Life & Retirement spread, and a 43% Supplemental & Group Benefits benefit ratio.
- Management cited planned 2023 rate increases of 12%–15% for property and 19%–20% for auto, alongside non-rate underwriting actions. It is responding to severe weather through rate actions, product changes and enhanced modeling. Rising rates may support future investment income but can depress security values and raise realized losses on sales; guaranteed minimum crediting rates constrain repricing of some policyholder liabilities.
- The company adopted long-duration insurance accounting standard ASU 2018-12 (LDTI) effective January 1, 2023 and restated prior-period comparative results. It changed measurement and presentation of insurance liabilities, market-risk benefits and acquisition costs; management said adoption did not affect policy cash flows or underlying business economics.
- Unfunded investment commitments, primarily to limited partnerships, were $505.9 million. The filing reported no pending litigation with a reasonable possibility of material loss and no material change in previously disclosed risk factors. Disclosure controls were assessed as effective, with no material weaknesses identified.
Most important facts for investors to verify
- Whether P&C rate increases and underwriting changes offset catastrophe and continuing weather-related losses, and whether full-year catastrophe losses remain within the $95–$100 million estimate.
- Whether the $1.20–$1.45 core-earnings outlook is achieved, including the assumptions for investment income, limited partnerships and segment earnings.
- The quality and duration of the fixed-maturity portfolio, the extent and recovery of unrealized losses, and any subsequent security sales or credit impairments.
- Debt-service cost and leverage after issuance of the 7.25% 2028 notes, as well as liquidity and regulatory limits on distributions from insurance subsidiaries.
- Effects of LDTI on reported trends, alongside annuity persistency, credited-rate pressure and claims/reserve experience.