Horace Mann Educators Corporation — Q1 2013 Form 10-Q
Period: Three months ended March 31, 2013; balance-sheet figures are as of March 31, 2013. Horace Mann markets property and casualty insurance, retirement annuities and life insurance, primarily to public-school educators and their families. Interim statements were reviewed by KPMG, not audited; the reviewer reported no material modifications needed for GAAP conformity.
Financial performance
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Total revenue | $254.5 million | $244.6 million; up 4.0% |
| Net income | $27.0 million | $26.7 million; up 1.1% |
| Diluted earnings per share | $0.66 | $0.64 |
| Net realized investment gains | $6.9 million pretax | $0.4 million pretax |
| Net cash from operating activities | $34.4 million | $50.7 million |
| Total assets / shareholders’ equity | $8.46 billion / $1.26 billion | At March 31, 2013 |
Insurance premiums and contract charges earned rose 2.2% to $169.2 million, and net investment income increased 2.2% to $77.4 million. Benefits, losses and expenses increased 4.6% to $216.6 million. The effective tax rate was 28.9%. No impairment charges were recorded in either comparative quarter.
Segment net income: Property and casualty (P&C) $10.2 million, down $3.0 million; annuity $11.1 million, down $0.5 million; life $4.3 million, down $0.9 million; corporate and other $1.5 million, versus a $3.3 million loss. The P&C combined ratio rose to 97.2% from 95.0%; its loss ratio was 69.9% and expense ratio 27.3%.
Balance sheet, capital and liquidity
- Total investments were $6.43 billion, including $6.14 billion of available-for-sale fixed maturities. The portfolio was 94.3% investment grade across fixed maturities and equities, with an average quality rating of A.
- Cash was $49.9 million. Operating cash flow fell year over year, principally due to higher operating-expense payments, including incentive compensation. Investing activities used $110.2 million; financing activities provided $110.5 million, including $87.8 million received under repurchase agreements.
- Total debt was $237.8 million: $38.0 million short-term borrowings and $199.8 million long-term debt. Debt was 21.1% of total capital excluding unrealized investment gains and losses (15.9% including them), below the stated long-term target of 25%.
- Shareholders’ equity included $374.1 million of after-tax net unrealized investment gains. Book value was $31.81 per share, or $22.38 excluding investment fair-value adjustments. The quarterly dividend was $0.195 per share; the company repurchased 89,649 shares for $1.8 million, with $30.4 million remaining under its repurchase authorization.
Material changes and management commentary
- Higher realized investment gains largely offset weaker insurance-segment earnings. P&C results reflected higher automobile current-year losses and less favorable prior-year reserve development; favorable reserve development was $3.3 million, versus $4.0 million a year earlier.
- Premiums written and contract deposits increased 0.9% to $245.1 million. P&C written premiums rose 3.3%, while annuity deposits declined 2.0% and life deposits were nearly unchanged. P&C policy counts were broadly steady, and retention improved year over year.
- Investment income benefited from a larger portfolio, but the average pretax portfolio yield declined to 5.46% from 5.75%. Fixed-annuity net interest spread narrowed to 201 basis points from 211 basis points. Management anticipated further spread compression given low reinvestment yields and the share of deferred annuity balances already at minimum guaranteed rates.
- After-tax other comprehensive income was negative $8.3 million, principally reflecting a reduction in unrealized investment gains during the quarter. Management considered portfolio unrealized losses temporary and recorded no impairment; future changes in circumstances could require impairment recognition.
- The company began using repurchase agreements in 2013 to earn incremental spread income. At quarter-end, the related obligation was $87.8 million, secured by transferred securities with a fair value of $88.8 million.
Outlook and principal risks
Management estimated full-year 2013 net income before realized investment gains and losses of $1.75–$1.95 per diluted share. The outlook assumed improved P&C current accident-year results, lower favorable reserve development, life mortality costs returning to modeled levels, and relatively stable annuity earnings excluding deferred acquisition cost evaluation effects. It also anticipated $3–$4 million of pretax spending on customer-service and infrastructure improvements. Management did not forecast realized investment gains and losses.
Key risks identified include low interest rates and spread compression; investment valuation, credit and liquidity changes; catastrophe frequency and severity and reinsurance availability or collectibility; reserve, mortality and persistency experience; educator employment and school-budget pressures; competitive and distribution challenges; and regulatory, tax and technology changes. The filing reported no material changes to previously disclosed risk factors, no material control weaknesses, and no off-balance-sheet arrangements involving unconsolidated entities.
Important facts for investors to verify
- Whether the P&C combined ratio and automobile loss trends improve, and whether favorable reserve development remains lower.
- Whether fixed-annuity spread compression, minimum-rate guarantees and low reinvestment yields affect annuity profitability as projected.
- How much reported earnings depend on realized investment gains, and whether investment losses remain temporary without impairment.
- Whether operating cash flow, subsidiary dividend capacity, debt maturities and repurchase-agreement activity support planned capital uses.
- Progress against the $1.75–$1.95 full-year earnings outlook and the planned $3–$4 million investment in service and infrastructure.