Business context and reporting period
Horace Mann Educators Corporation (NYSE: HMN) is an insurance holding company focused on educators and other public-service employees. This 10-K covers the fiscal year ended December 31, 2022; it is an annual filing, not a standalone fourth-quarter report. The business comprises Property & Casualty, Life & Retirement, Supplemental & Group Benefits, and Corporate & Other.
Effective January 1, 2022, the company acquired Madison National Life for $172.3 million, adding employer-sponsored benefits. Madison National contributed $140.9 million of 2022 revenue and $13.8 million of pretax income, including purchase-accounting intangible amortization.
Financial performance and position
| Metric | 2022 | 2021 |
|---|---|---|
| Total revenue | $1,382.9 million | $1,330.1 million |
| Net income (loss) | ($2.6) million; diluted EPS ($0.06) | $142.8 million; diluted EPS $3.39 |
| Net cash from operating activities | $171.5 million | $204.9 million |
| Cash at year-end | $42.8 million | $133.7 million |
| Shareholders’ equity | $1,088.2 million | $1,807.4 million |
Revenue rose 4.0%, while net premiums and contract charges earned increased 15.7% to $1,029.0 million, primarily reflecting the acquired employer-sponsored business. Net investment income fell 5.1% to $400.9 million; net investment losses widened to $56.5 million from $11.0 million. Benefits, claims and settlement expenses increased 23.3% to $761.6 million, and operating expenses rose 25.6% to $315.9 million. Net income return on equity was (0.2)% versus 8.0%.
Property & Casualty recorded a $44.4 million net loss versus $57.0 million net income in 2021; its combined ratio rose to 119.0% from 96.1%. Life & Retirement net income declined to $48.8 million from $68.4 million. Supplemental & Group Benefits net income increased to $58.5 million from $46.0 million, with 2022 including Madison National. Corporate & Other recorded a $65.5 million net loss, chiefly reflecting investment losses and higher interest expense.
At year-end, total investments were $6.59 billion; the $5.19 billion fixed-maturity portfolio was 92.0% investment grade with average credit quality A+. Pretax unrealized fixed-maturity losses were $571.9 million, compared with gains of $441.6 million a year earlier. After-tax unrealized losses and related DAC effects reduced equity by $356.9 million. Total capital was $1,586.2 million, including $498.0 million of short- and long-term debt; debt was 31.4% of capital including unrealized investment losses and 25.6% excluding them. The revolving facility had $249.0 million drawn and $76.0 million available; $249.0 million of 4.50% senior notes mature in 2025.
Liquidity disclosures include $0.9 billion of cash, U.S. government and agency fixed-maturity securities, and public equity securities described as rapidly liquidable under normal conditions. Insurance-subsidiary dividends without prior regulatory approval were estimated at approximately $110.3 million for 2023; subsidiaries paid $179.9 million in 2022. Shareholders received $52.6 million in dividends in 2022, or $1.28 per share.
Material changes versus 2021
- Net income declined by $145.4 million to a small loss, reflecting higher investment losses, auto claim severity and expenses, unfavorable DAC unlocking, and increased interest credited and interest expense.
- Property & Casualty auto loss experience deteriorated: the auto loss ratio was 91.8% versus 69.4%, and unfavorable prior-year reserve development was $22.0 million overall, including $28.0 million unfavorable auto development, partly offset by $6.0 million favorable property development.
- Catastrophe losses were $80.0 million versus $78.2 million. Rising rates reduced fixed-maturity fair values and contributed to a $647.6 million after-tax decline in comprehensive income from investment-related OCI.
- Madison National expanded Supplemental & Group Benefits. Lower-than-expected BCG revenue led to $4.8 million of goodwill and intangible-asset impairment charges.
- Year-end book value per share fell to $26.60 from $43.66, reflecting losses in accumulated other comprehensive income as well as the year’s net loss.
Outlook, risks and unusual items
Management estimated 2023 net income of $2.00–$2.30 per diluted share and core return on equity near 6%. Segment outlook included Property & Casualty net income of $5–$10 million, Supplemental & Group Benefits of $40–$44 million, and Life & Retirement of $67–$70 million. Management projected 2023 total net investment income of $434–$444 million. It cautioned that investment gains and losses can vary substantially and therefore did not consider a forward-looking net-income projection appropriate beyond the stated estimate.
For 2023, management anticipated Property combined ratio near 100%, with property rate actions of 12%–15% over four quarters, and auto combined ratio of 106%–107%, with auto rate increases of 18%–20%. The longer-term Property & Casualty combined-ratio target remains 95%–96%. Management expected higher claims utilization in supplemental and disability products as experience returns toward pre-pandemic levels, alongside higher Worksite infrastructure expenses.
Key risks include persistent claims inflation and auto severity, catastrophe and climate exposure, reserve-estimation uncertainty, interest-rate and investment-market volatility, reinsurance counterparty exposure, acquisition integration and BCG performance, competition, and operational, cyber and regulatory risks. The company reported no pending litigation with a reasonable possibility of material loss. The auditor issued unqualified opinions on the financial statements and internal control; the internal-control assessment excluded Madison National, which was still being integrated.
The company planned to adopt long-duration insurance accounting (ASU 2018-12) effective January 1, 2023. It estimated a $499.3 million decrease to AOCI at the January 1, 2021 transition date for the future-policy-benefit liability, partly offset by a $71.5 million increase to AOCI for DAC and accompanied by other transition adjustments. These are accounting estimates, not cash-flow changes; the filing notes implementation and controls were still being refined.
Important facts for investors to verify
- Whether 2023 rate increases and underwriting actions improve auto and property combined ratios, and whether claim-cost inflation persists.
- How the $571.9 million pretax unrealized fixed-maturity loss position evolves, including any sales, credit impairments or liquidity effects.
- Whether management’s 2023 earnings and investment-income outlook is achieved, including limited-partnership returns and higher reinvestment yields.
- Madison National integration, distribution concentration, acquisition returns and any additional goodwill or intangible impairment.
- The actual financial-statement and equity effects of ASU 2018-12 adoption, compared with the company’s transition estimates.
- Reinsurance recoverable concentration, especially the $214.1 million receivable from National Guardian Life, and the adequacy and cost of catastrophe coverage.