Business context and reporting period
Horace Mann Educators Corporation is an insurance holding company focused primarily on teachers, public-school employees and their families. Its businesses include Property & Casualty, Life & Retirement, and Supplemental & Group Benefits, alongside Corporate & Other. This Form 10-Q covers the three months ended March 31, 2023. The interim financial statements were reviewed, not audited, by KPMG.
Financial performance and position
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Total revenue | $353.9 million | $346.7 million |
| Net premiums and contract charges earned | $255.9 million | $255.8 million |
| Net investment income | $100.4 million | $97.9 million |
| Net investment losses | $(3.9) million | $(15.5) million |
| Income before tax | $8.1 million | $25.0 million |
| Net income / diluted EPS | $6.6 million / $0.16 | $20.3 million / $0.48 |
| Operating cash flow | $86.4 million | $95.7 million |
At March 31, 2023, total assets were $13.65 billion and shareholders’ equity was $1.14 billion. Cash was $27.4 million. Short- and long-term debt totaled $498.0 million; total debt was 30.4% of capital including net unrealized fixed-maturity losses, or 25.2% excluding those losses and reserve discount-rate remeasurements. The company reported $966.2 million of cash, U.S. government and agency securities, and public equity securities that it said could generally be rapidly liquidated under normal market conditions.
Fixed-maturity securities had a fair value of $5.35 billion and pretax unrealized losses of $453.3 million. After-tax AOCI included $356.4 million of net unrealized fixed-maturity losses. Management attributed the losses mainly to higher interest rates and said it did not intend to sell, and did not expect to be required to sell, the impaired securities before recovery. The quarterly dividend was $0.33 per share; the company repurchased 128,540 shares for $4.4 million.
Material changes versus the prior comparable period
- Net income fell 67.5% and diluted EPS fell from $0.48 to $0.16. Management cited higher catastrophe and underlying auto losses, partly offset by favorable Supplemental & Group Benefits experience and lower investment losses.
- Property & Casualty reported an $11.6 million net loss versus $8.5 million of income. Its underwriting loss was $19.3 million; the auto combined ratio rose to 110.9% from 101.8%, and the property combined ratio rose to 115.8% from 92.3%, principally reflecting catastrophe losses for property and higher auto losses.
- Life & Retirement net income was $14.0 million, down from $15.6 million, as higher investment income was offset by higher credited interest and DAC amortization. Supplemental & Group Benefits net income rose to $14.0 million from $13.2 million, with a lower benefit ratio.
- Interest credited increased 22.7% to $48.7 million, largely due to higher rates on FHLB funding agreements. Interest expense rose 71.8% to $6.7 million, reflecting higher floating rates on the revolving credit facility.
- Net cash from operations declined by $9.3 million, primarily due to higher claims paid. Investing cash outflow was lower than in Q1 2022, which included the Madison National acquisition.
Outlook, risks and unusual items
Management maintained its 2023 outlook for net income of $2.00–$2.30 per diluted share and core return on equity near 6%. Segment expectations were: Property & Casualty net income from breakeven to $5 million; Life & Retirement $67–$70 million; and Supplemental & Group Benefits $45–$49 million. The company forecast total net investment income of $429–$439 million and corporate interest expense of $26–$27 million. Its longer-term Property & Casualty combined-ratio target remained 95%–96%.
Key operating assumptions include catastrophe losses near 10 combined-ratio points, 2023 property rate increases of 12%–15%, and auto rate increases of 18%–20%, supplemented by underwriting actions. Management expects limited-partnership returns below their 10-year average of 8.5%. It also cited inflation, more severe auto accidents, medical-cost trends, catastrophe exposure, interest-rate and credit-market volatility, and potential changes in investment values as risks. A 100-basis-point decline in average reinvestment rates was estimated to reduce Life & Retirement investment income by about $2.6 million in year one and $7.8 million in year two.
The company adopted long-duration insurance accounting standard ASU 2018-12 effective January 1, 2023, with retrospective changes to comparative reporting. Management said adoption did not affect policy cash flows or underlying business economics, though it changed reported balances and earnings presentation. The filing reported no pending litigation with a reasonable possibility of material loss; unfunded investment commitments were $599.4 million. Management said liquidity was sufficient for operating needs over the next 12 months. Insurance subsidiaries could pay $110.3 million of dividends in 2023 without prior regulatory approval, of which $19.0 million had been paid through March 31.
Most important facts for investors to verify
- Whether auto and property rate actions and underwriting changes improve loss and combined ratios, and whether catastrophe experience remains within management’s assumptions.
- Whether the $2.00–$2.30 per-share earnings outlook and segment targets remain achievable, particularly given the Q1 Property & Casualty loss and weaker limited-partnership returns.
- How higher credited rates, FHLB funding costs, and reinvestment yields affect Life & Retirement spreads and profitability.
- Whether fixed-maturity unrealized losses remain temporary and whether liquidity, capital ratios, debt costs, and insurance-subsidiary dividend capacity remain adequate.
- How LDTI adoption affects comparison with prior periods; 2022 results in this filing were restated, so comparisons should use the adjusted figures.