Horace Mann Educators Corporation — Q2 2017 Form 10-Q
Business context and period: The filing covers the quarter and six months ended June 30, 2017. Horace Mann markets property and casualty insurance, annuities and life insurance primarily to public-school educators and their families. Interim financial statements are unaudited; KPMG conducted a review and reported no material modifications were needed.
Financial performance and position
Amounts below are in millions of dollars unless noted.
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $291.4 | $283.6 | $578.7 | $554.9 |
| Net income | $2.3 | $11.9 | $17.6 | $37.0 |
| Diluted EPS | $0.05 | $0.29 | $0.42 | $0.89 |
| Net investment income | $92.0 | $91.2 | $182.7 | $175.8 |
| Benefits, claims and settlement expenses | $165.9 | $148.4 | $310.0 | $267.9 |
| Operating expenses | $46.2 | $43.3 | $95.0 | $86.1 |
- For the first half, operating cash flow was $154.5 million, versus $115.8 million in 2016; investing cash outflow was $88.0 million, versus $127.4 million. Financing cash outflow was $67.1 million, compared with $46.6 million of inflow a year earlier. Cash ended the period at $16.0 million.
- At June 30, total assets were $10.88 billion, shareholders’ equity $1.36 billion and total liabilities $9.51 billion. The investment portfolio totaled $8.24 billion, primarily fixed maturities.
- Long-term debt was $247.3 million, consisting principally of $250 million principal amount of 4.50% senior notes due 2025; there were no borrowings under the $150 million revolving facility. Debt was 18.1% of total capital excluding unrealized investment gains and losses, below the company’s 25% long-term target.
- Book value per share was $33.49, up 4.2% from year-end 2016 but down 5.2% year over year. It included $243.5 million of after-tax net unrealized investment gains.
Changes versus the prior comparable period
- Net income fell 80.5% in Q2 and 52.4% for the first half. Management attributed the decline mainly to record catastrophe losses and elevated non-catastrophe weather losses in Property and Casualty.
- Property and Casualty reported a Q2 net loss of $13.9 million, versus a $4.5 million loss; first-half net loss was $11.2 million, versus $9.3 million of income. Its combined ratio rose to 118.5% for Q2 from 111.6%, and 112.0% for the first half from 102.8%.
- Property and Casualty catastrophe losses were $32.4 million pretax in Q2 and $49.6 million for the first half, respectively $5.1 million and $9.6 million higher than the prior-year periods. First-half favorable prior-year reserve development was $1.6 million, down from $3.6 million.
- First-half earned premiums and contract charges increased 4.7%; net investment income increased 3.9%. Benefits, claims and settlement expenses increased 15.7%, while operating expenses rose 10.2%.
- Retirement first-half net income was $23.3 million, down slightly from $23.6 million; Life net income increased to $9.5 million from $8.5 million. Property and Casualty written premiums grew 4.7%, while annuity deposits fell 1.3%.
Outlook, management commentary and risks
- Management projected 2017 full-year net income, excluding net realized investment gains and losses, of $1.45–$1.65 per diluted share. The estimate includes first-half elevated catastrophe and weather losses and assumes second-half weather losses return to historical averages.
- Management expected the full-year auto underlying combined ratio to be similar to 2016 and the property combined ratio, including catastrophe losses, to be around 100%. It anticipated Retirement interest spread would grade down to the low 180-basis-point range, and expected the overall portfolio yield to decline approximately 10 basis points during 2017.
- Management expected continued investment in product, distribution, customer service and infrastructure, with moderate expense growth. It also noted that low rates may compress fixed-annuity spreads: about 86.4% of deferred annuity account values were credited at minimum guaranteed rates. A 100-basis-point decline in reinvestment rates could further reduce Retirement net investment income by about $2.1 million in year one and $6.3 million in year two, based on the company’s estimates.
- Key risks include catastrophe frequency and severity, weather losses, exposure in catastrophe-prone states, reinsurance availability and collectibility, investment-market and credit risk, low interest rates, policy persistency, and regulatory changes. The company was also monitoring the DOL fiduciary rule and possible SEC or state fiduciary standards, which could affect IRA sales, agent compensation and distribution costs.
- The company reported $139.7 million of unfunded investment commitments. It said operating cash flow was expected to meet operating needs over the next 12 months and that subsidiary dividends available without prior regulatory approval were approximately $91 million for 2017, of which $24 million had been paid in the first half.
Most important facts for investors to verify
- Whether catastrophe and non-catastrophe weather losses normalize as assumed in the 2017 outlook, and how Property and Casualty pricing and underwriting affect the combined ratio.
- Whether reserve development remains favorable and whether reinsurance recoverables and catastrophe protection remain adequate.
- Whether low rates further compress annuity spreads, affect investment income, or increase deferred policy acquisition cost amortization.
- Whether Retirement deposits and retention stabilize, and whether strategic spending delivers the anticipated sales, retention and customer-service benefits.
- The performance and credit quality of the investment portfolio, including unrealized losses and potential impairment; management considered unrealized losses temporary, but future changes could require impairment recognition.
- The impact of the fiduciary rule and other regulatory changes on the company’s retirement products and distribution channels.