Horace Mann Educators Corporation — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. Although the request references 2018 Q4, this is an annual filing; it also reports a fourth-quarter net loss of $20.3 million, or $0.49 per diluted share.
Business context
Horace Mann is a U.S. insurance holding company focused primarily on educators and their families. Its businesses are Property and Casualty (auto and property insurance), Retirement (primarily annuities), Life insurance, and Corporate and Other. FY 2018 insurance premiums written and contract deposits were $1.235 billion.
Financial performance and position
| Metric | FY 2018 / year-end | FY 2017 / prior year-end |
|---|---|---|
| Total revenue | $1,191.6 million | $1,171.5 million |
| Insurance premiums and contract charges earned | $817.3 million | $794.7 million |
| Net investment income | $376.5 million | $373.6 million |
| Net income | $18.3 million; $0.44 diluted EPS | $169.5 million; $4.08 diluted EPS |
| Operating cash flow | $200.9 million | $256.6 million |
| Total assets | $11.032 billion | $11.198 billion |
| Shareholders’ equity | $1.291 billion | $1.502 billion |
| Long-term debt | $297.7 million | $297.5 million |
- Net income fell 89.2% year over year. Key drivers were the $99.0 million 2017 tax benefit from remeasuring deferred taxes after the Tax Cuts and Jobs Act, higher catastrophe costs, and increased investment losses. The 2018 effective tax rate was 6.2%, versus a 2017 rate of (91.1)%.
- The Property and Casualty segment posted a $14.3 million net loss. Its combined ratio rose to 109.3% from 103.3%; excluding catastrophes and prior-year reserve development, the underlying combined ratio improved to 92.2% from 94.2%.
- Catastrophe costs were $114.1 million in the company’s catastrophe-cost presentation, versus $61.8 million in 2017. The Camp Fire generated $150 million gross losses and a $37.9 million pretax impact after reinsurance, including reinstatement premiums.
- Retirement net income was $41.7 million, down from $88.5 million; 2017 included a $39.5 million tax benefit. Retirement sales deposits increased 5.5% to $518.7 million, while total accumulated value was $6.713 billion. The fixed annuity net interest spread fell 23 basis points to 171 basis points.
- Life net income was $18.8 million, down from $77.6 million, largely reflecting the 2017 tax benefit. Life sales increased, and insurance in force reached $18.278 billion.
- The investment portfolio had a fair value of $8.251 billion, predominantly investment-grade fixed maturities; 97.3% of fixed maturities were investment grade, with average quality A+. Net unrealized investment gains on securities were $96.9 million after tax and related DAC effects, down from $300.2 million. Book value per share decreased 14.6% to $31.50.
- Cash was $11.9 million at year-end. The company reported a $150 million revolving credit facility with no balance outstanding, and $297.7 million of long-term debt. Separately, HMLIC had $625 million of FHLB funding agreements outstanding. Total debt was 20% of capital excluding net unrealized investment gains, below the stated 25% long-term target.
Changes, outlook, and material items
- Revenue grew 1.7%, but total benefits, losses, and expenses increased 8.2%. Operating expenses rose 9.4%, including $5.1 million pretax of transaction costs for the BCG and NTA acquisitions.
- FY 2018 net investment losses were $12.5 million, including an $18.3 million fair-value decline in equity securities. A new accounting standard effective January 1, 2018 moved equity-security fair-value changes into earnings.
- In January 2019, the company completed its $25 million acquisition of Benefit Consultants Group (BCG). It agreed to acquire NTA for $405 million, with closing expected in mid-2019 subject to regulatory approval and other conditions.
- Management projected 2019 core earnings of $2.00–$2.20 per diluted share and core return on equity of 7.0%–7.5%. It expected pretax net investment income to decline $5–$6 million. Property and Casualty catastrophe costs were estimated at $45–$55 million; Retirement net income was projected at $39–$41 million; Life net income was expected to decline 15%.
- Key risks include severe weather and wildfire losses, reserve-estimation uncertainty, persistent low interest rates and spread compression, investment valuation and credit risk, competitive pressure, acquisition execution, regulatory changes, cybersecurity, and dependence on school-district access and educator distribution relationships. The filing states there was no pending litigation with a reasonable possibility of material loss.
- KPMG issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether the NTA acquisition closed on expected terms and how its financing, integration, and ratings effects compare with management’s plans.
- Actual catastrophe losses and reinsurance recoveries, particularly for wildfire and other catastrophe-prone regions; reconcile catastrophe-cost measures used in different filing disclosures.
- Whether Property and Casualty pricing and underwriting improvements persist, including policy counts, retention, and the underlying combined ratio.
- Retirement spread trends, investment yields, surrenders, and the effect of low reinvestment rates on income and reserves.
- Whether 2019 core earnings and segment outlook were achieved; core earnings and core ROE are non-GAAP measures.
- Changes in investment fair values, credit quality, and unrealized gains, alongside statutory capital, dividend capacity, and debt and FHLB funding obligations.