Horace Mann Educators Corporation — FY2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; the filing was signed February 29, 2016. The company is an insurance holding company focused primarily on public-school educators and their families, offering property and casualty insurance, annuities, and life insurance.
Financial performance and position
| Metric | FY2015 | FY2014 |
|---|---|---|
| Total revenues | $1,080.4 million | $1,060.7 million |
| Income before income taxes | $129.5 million | $146.1 million |
| Net income | $93.5 million | $104.2 million |
| Diluted earnings per share | $2.20 | $2.47 |
| Premiums written and contract deposits | $1,256.5 million | $1,167.7 million |
| Net cash from operating activities | $207.0 million | $221.9 million |
| Total assets / investments | $10.06 billion / $7.65 billion | $9.77 billion / $7.40 billion |
| Shareholders’ equity | $1,264.7 million | $1,336.5 million |
- FY2015 insurance premiums and contract charges earned were $731.9 million, up 2.2%. Net investment income was $332.6 million, up 0.8%; the average portfolio yield fell to 5.06% from 5.32%.
- Property and casualty (P&C) combined ratio was 97.0%, versus 96.1%; loss ratio was 70.5% and expense ratio 26.5%. Catastrophe costs were $44.4 million pretax, up from $37.5 million.
- Segment net income: P&C $40.0 million (down $6.9 million); annuity $43.4 million (down $1.9 million); life $15.0 million (down $2.5 million). Corporate and other was a $4.9 million loss.
- At year-end, short-term debt was zero and long-term debt was $249.3 million. Total debt was 18.6% of capital excluding unrealized investment gains and losses, below the company’s 25% long-term target. The $150 million revolving credit facility had no balance outstanding.
- Cash was $15.5 million. Management said operating cash flow was expected to cover operating needs over the next 12 months. Up to approximately $90 million of subsidiary dividends could be paid in 2016 without prior regulatory approval; parent-company liquidity and distributions depend substantially on regulated insurer subsidiaries.
Material changes versus prior period
- Premiums written and contract deposits grew 7.6%; annuity deposits rose 14.0%, while P&C premiums written increased 3.7% and life premiums and deposits were flat. About $30 million of the annuity deposit increase related to changes in employee retirement savings plans; excluding this item, consolidated growth was approximately 5%.
- Net income declined 10.3%. Higher P&C claims and catastrophe costs, greater life mortality losses, annuity deferred acquisition cost (DAC) unlocking, and debt retirement costs outweighed revenue growth. After-tax catastrophe costs reduced income by $28.9 million, $4.5 million more than in 2014.
- Prior-year P&C reserve releases were favorable by $12.5 million, compared with $17.0 million in 2014. The company reported a $3.0 million reduction in net income versus 2014 from the lower level of favorable reserve development.
- Book value per share fell 5% to $31.18, chiefly reflecting a decrease in unrealized investment gains as credit spreads widened and Treasury rates edged up. Book value excluding investment fair value adjustments rose 6% to $26.86.
- Operating cash flow decreased, largely because policyholder benefits paid increased. Quarterly fourth-quarter net income was $21.0 million, or $0.50 diluted per share, versus $30.1 million, or $0.71, in Q4 2014.
Outlook, risks, and unusual items
- Management projected 2016 net income before realized investment gains and losses of $2.15–$2.35 per diluted share. It anticipated improving underlying P&C underwriting, lower favorable reserve development, lower annuity and life earnings under investment-rate pressure, and moderately higher expenses for technology, infrastructure, customer service, and agent training.
- Management expected the overall portfolio yield to decline about 10 basis points in 2016 and the annuity net interest spread to move down from 184 basis points in 2015 to the low 170s. It also cautioned that fixed annuity spread compression may continue because many contract values are already credited at minimum guaranteed rates.
- Key risks include prolonged low interest rates, investment valuation and credit risk, catastrophe severity and concentration in weather-exposed states, reserve-estimation uncertainty, reinsurance availability and collectibility, competition, educator-market budget pressures, and regulatory or tax changes. The proposed Department of Labor fiduciary rule could affect IRA sales, agent compensation, distribution, costs, and litigation exposure.
- In 2015 the company issued $250 million of 4.50% senior notes due 2025, used proceeds in part to redeem $125 million of 6.85% notes due 2016 and repay its $113 million bank facility balance, and recorded a $2.3 million pretax debt-retirement charge. It also repaid $75 million of notes that matured in June.
- Net realized investment gains were $12.7 million pretax, including $19.5 million of net impairment losses recognized in earnings, largely related to energy-sector and Puerto Rico securities. A $4.6 million pretax reduction in incentive compensation expense from correction of an immaterial out-of-period error increased net income by approximately $3.0 million after tax.
- The company reported no pending litigation with a reasonable possibility of material loss. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Important facts for investors to verify
- Whether P&C auto loss severity and catastrophe claims evolve as expected, and how reserve releases compare with management’s forecast.
- Whether the $2.15–$2.35 2016 earnings outlook is being met, including the assumed interest-rate, spread, mortality, and expense trends.
- Underlying annuity deposit growth and persistency after excluding the employee-plan-related deposit increase; monitor minimum-rate exposure and DAC assumptions.
- Investment portfolio credit quality, unrealized gains and losses, and realized impairments, especially in energy and Puerto Rico holdings.
- Availability of subsidiary dividends, capital adequacy, debt service, and the use of the remaining share-repurchase authorization.