Horace Mann Educators Corporation — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Horace Mann is an insurer focused primarily on educators and their families, offering property and casualty, life, retirement, supplemental and group benefit products. The interim financial statements are unaudited; KPMG reported that its review identified no material modifications needed for GAAP conformity.
Financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $343.0 million | $329.6 million | $1,036.1 million | $998.7 million |
| Net premiums and contract charges earned | $257.8 million | $225.4 million | $769.5 million | $678.8 million |
| Net investment income | $97.6 million | $103.7 million | $300.7 million | $308.4 million |
| Net investment losses | $(12.8) million | $(6.5) million | $(43.8) million | $(10.6) million |
| Net income | $13.9 million | $16.3 million | $15.9 million | $102.3 million |
| Diluted earnings per share | $0.33 | $0.39 | $0.38 | $2.43 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $115.8 million | $178.1 million |
- For the first nine months, revenue rose 3.7%, while net income fell 84.5%. Management attributed the earnings decline principally to auto loss-cost inflation, equity-market declines and higher investment losses.
- Q3 benefits, claims and settlement expenses were $173.6 million; operating expenses were $75.6 million. Nine-month totals were $558.2 million and $229.7 million, respectively.
- Property & Casualty reported a nine-month net loss of $19.4 million, versus income of $42.5 million a year earlier. Its auto combined ratio was 110.6% for the period, up 18.5 percentage points. Life & Retirement net income was $41.8 million, down 11.1%; Supplemental & Group Benefits net income was $43.6 million, up 25.3%, including Madison National.
- At September 30, total assets were $13.314 billion, total liabilities $12.238 billion and shareholders’ equity $1.077 billion. Book value per share was $26.32; adjusted book value per share was $36.02.
Liquidity, debt and capital
- Cash was $36.2 million, down from $133.7 million at year-end 2021. Nine-month operating, investing and financing cash flows were $115.8 million, $(295.9) million and $82.6 million, respectively.
- Debt was approximately $497.9 million: $249.0 million under the revolving bank facility and $248.9 million of long-term debt, principally 4.50% senior notes due 2025. The filing reports debt at 31.6% of total capital including unrealized fixed-maturity losses, and 25.3% excluding those losses, compared with a long-term target of 25% on the latter basis.
- Management said operating cash flows should be adequate for operating needs over the next 12 months and reported $937.5 million of cash and specified liquid securities under normal market conditions. Unfunded investment commitments were $715.5 million.
- Shareholders received $39.5 million in dividends during the first nine months; the quarterly dividend was $0.32 per share. The company repurchased 670,816 shares for $24.0 million and had $41.3 million remaining under its $50 million 2022 repurchase authorization.
Material changes and unusual items
- Madison National was acquired effective January 1, 2022 for an adjusted purchase price of $172.3 million. It contributed $106.7 million of revenue and $8.8 million of pretax income through September 30. The seller may receive an earn-out of up to $12.5 million if specified targets are met by the end of 2023; purchase accounting estimates remained preliminary.
- Rising interest rates and wider credit spreads drove pretax net unrealized fixed-maturity losses to $632.0 million at September 30, versus unrealized gains of $441.6 million at December 31, 2021. After-tax AOCI included a $396.7 million fixed-maturity unrealized loss, and nine-month other comprehensive loss was $687.4 million. Management considered the fixed-maturity losses temporary and said it did not expect to be required to sell affected securities before recovery; future circumstances could change impairment assessments.
- Auto claims were affected by inflation, greater claim severity and medical treatment costs. Nine-month Property & Casualty prior-year reserve development was $8.0 million unfavorable, with adverse auto trends partly offset by favorable homeowners loss emergence.
- Beginning in Q2, the company used reverse repurchase agreements, recorded as secured borrowings; the obligation was $95.2 million at September 30.
Outlook, risks and contingencies
- Management lowered its 2022 core earnings outlook to $1.70–$2.00 per diluted share, citing year-to-date results, continued inflation effects and equity-market declines. Core earnings is a non-GAAP measure.
- 2022 managed-portfolio net investment income was expected to be $295–$305 million. Property & Casualty core earnings were expected to be a loss of $13–$19 million; Life & Retirement earnings remained projected at $56–$59 million; Supplemental & Group Benefits earnings were projected at $55–$58 million.
- Management expected 2023 property and auto rate increases to rise to the mid-teens, subject to loss trends and other factors. It expected 2022 benefit ratios of approximately 35% for voluntary products and 50% for employer-sponsored products.
- The company planned to adopt long-duration insurance accounting (LDTI) on January 1, 2023, with retrospective adjustments to presented prior periods. Its estimated transition impact included an after-tax AOCI decrease of $475–$525 million, an AOCI increase of $70–$75 million from DAC changes, and smaller potential retained-earnings and AOCI reductions in other areas. The filing says adoption will not affect policy cash flows or underlying business economics, but later discount-rate changes and market-risk-benefit accounting may create material AOCI or earnings volatility.
- Market risks include interest-rate, credit-spread, liquidity and equity-market movements; the company also identified claim-cost inflation and catastrophe exposure. It reported no material change to the risk factors in its 2021 Form 10-K. Disclosure controls were deemed effective; Madison National was excluded from the internal-control assessment while integration continues.
Important facts for investors to verify
- Whether auto pricing and underwriting actions can offset persistent severity inflation, unfavorable reserve development and elevated combined ratios.
- How much of the fixed-maturity portfolio’s unrealized losses remains temporary, and the potential effect of further rate, spread or liquidity changes on capital and AOCI.
- Progress toward the revised core-earnings and investment-income outlook, including Madison National’s contribution and final purchase-price allocation.
- The company’s liquidity and debt trajectory, including investment commitments, revolving-credit borrowings, repurchases and the gap between its debt-to-capital ratio and stated target.
- The final LDTI transition adjustments and subsequent effects on reported earnings, equity and disclosures.