Horace Mann Educators Corporation — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with Q1 2020 unless stated otherwise. The interim financial statements are unaudited and were reviewed by KPMG, which reported no material modifications were needed for GAAP conformity. Horace Mann is an insurance holding company serving primarily educators and public-school employees and their families.
Financial results
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total revenue | $322.0 million | $307.3 million | +4.8% |
| Premiums and contract charges earned | $227.6 million | $236.3 million | -3.7% |
| Net investment income | $95.5 million | $82.3 million | +16.0% |
| Net investment losses | $(9.0) million | $(18.5) million | Losses narrowed |
| Income before tax | $48.2 million | $18.5 million | +160.5% |
| Net income | $39.3 million | $18.5 million | +112.4% |
| Diluted EPS | $0.93 | $0.44 | +111.4% |
| Operating cash flow | $142.0 million | $87.4 million | +62.5% |
Higher investment income, lower investment losses, and reduced deferred acquisition cost (DAC) unlocking and amortization expense drove the earnings improvement. Lower earned premiums partly offset these gains. Total benefits, losses and expenses declined 5.2% to $273.8 million. The effective tax rate was 18.5%, versus 0% in Q1 2020, which included a CARES Act tax benefit.
Comprehensive loss was $83.4 million, compared with a loss of $75.3 million, largely reflecting a $122.7 million after-tax decline in unrealized fixed-maturity investment gains. Book value per share was $40.83, up 14.1% year over year; it was $34.95 excluding after-tax unrealized fixed-maturity gains.
Balance sheet, debt and liquidity
- At March 31, 2021, total assets were $13.75 billion, total investments $7.31 billion, and shareholders’ equity $1.69 billion.
- Cash was $39.4 million. Management reported $1.2 billion of cash, U.S. government and agency securities, and public equity securities that could normally be rapidly liquidated.
- Total debt was $437.4 million: $135.0 million under the revolving bank facility and $302.4 million of long-term debt. Debt was 20.5% of total capital including unrealized investment gains, or 23.2% excluding those gains; the stated long-term target is 25%.
- The $225 million revolving facility had $90 million unused. Total capital was $2.13 billion. The quarterly dividend was increased to $0.31 per share; $12.9 million was paid in the quarter. The company repurchased 39,485 shares for $1.5 million.
- Investing cash outflow was $239.5 million and financing cash inflow was $114.6 million. Management said operating cash flow was expected to cover operating needs over the next 12 months.
Material changes and segment performance
- Property and Casualty: Net income rose to $27.9 million from $26.6 million. Earned premiums fell 6.4%; lower automobile claim frequency supported a 7.5-point improvement in the reported auto combined ratio to 84.2%. The property combined ratio worsened 7.4 points to 90.1%, reflecting higher catastrophe and other weather-related losses.
- Supplemental: Net income increased to $11.4 million from $10.5 million, supported by improved investment income and lower benefits. Sales were $1.0 million versus $3.7 million as virtual-only selling constrained worksite enrollment.
- Retirement: Net income was $10.6 million versus a $0.9 million loss. Higher limited-partnership returns and a swing from unfavorable to favorable DAC unlocking were key factors. Annuity deposits were flat at $105.8 million.
- Life: Net income was $0.7 million versus $0.6 million. Higher investment income and premiums were largely offset by increased benefit expenses and mortality costs.
- Unrealized fixed-maturity gains fell substantially from year-end as rising interest rates more than offset tighter credit spreads. The company considered reported unrealized losses temporary and stated it did not expect to be forced to sell affected securities before recovery.
Outlook, risks and unusual items
- Management maintained its 2021 outlook of $3.00–$3.20 diluted EPS and core return on equity above 9%, assuming a 21% federal statutory tax rate. It said a GAAP net-income forecast was not appropriate because investment gains and losses are difficult to predict.
- 2021 expected segment net income: Property and Casualty $54–$58 million; Supplemental $33–$35 million; Retirement $38–$40 million; Life $17–$19 million. Expected total net investment income was $370–$390 million, including about $100 million of accretion on the reinsurance deposit asset.
- Management expected Property and Casualty premiums written below 2020 levels, sales pressure to continue while vaccines rolled out, and a gradual return toward pre-pandemic sales beginning in Q4. The full-year combined ratio forecast was 95%–96%, assuming catastrophe losses add about 9.0–9.5 points.
- COVID-19 effects remained uncertain. Management cited reduced in-person school sales, changing driving patterns, potential changes in claims and mortality, and ongoing operational and cybersecurity monitoring. Low interest rates create reinvestment and spread risk; management estimated a 100-basis-point decline in reinvestment rates could reduce Retirement investment income by about $1.7 million in year one and $5.2 million in year two.
- Unfunded investment commitments, primarily to limited partnerships, were $752.3 million. The company reported no material change to previously disclosed risk factors and no off-balance-sheet arrangements with unconsolidated entities. It also reported no unrecorded uncertain tax-position liabilities.
Important facts for investors to verify
- Whether premium growth and new sales recover as school-based and worksite sales channels reopen.
- Whether lower automobile claim frequency persists and whether property catastrophe and weather losses remain elevated.
- Performance of limited-partnership investments and the effect of interest rates on investment income, unrealized gains, and annuity spreads.
- Progress against the full-year EPS, segment earnings, combined-ratio, and investment-income outlooks, including the impact of investment gains and losses.
- Liquidity and capital implications of debt maturities, FHLB funding, the $752.3 million in unfunded investment commitments, and insurance-subsidiary dividend restrictions.