Horace Mann Educators Corporation — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021; comparisons are with the corresponding 2020 periods unless stated otherwise. The interim financial statements are unaudited; KPMG reported that its review found no material modifications needed for GAAP conformity. Horace Mann sells property and casualty, supplemental, retirement and life insurance products, primarily to educators and their families.
Financial performance and position
| Metric | Q3 2021 | Nine months 2021 |
|---|---|---|
| Total revenue | $329.6 million; down 2.2% | $998.7 million; up 4.2% |
| Net income | $16.3 million; down 55.3% | $102.3 million; up 19.6% |
| Diluted EPS | $0.39; versus $0.87 | $2.43; versus $2.03 |
| Net investment income | $103.7 million; up 10.7% | $308.4 million; up 20.3% |
| Net investment losses | $6.5 million | $10.6 million |
| Operating cash flow | Not presented quarterly | $178.1 million; versus $267.8 million |
For Q3, earned premiums and contract charges fell 4.2% to $225.4 million, while benefits, claims and settlement expenses rose 8.9% to $164.8 million. Operating expenses increased 11.1% to $64.3 million. Nine-month income before taxes was $125.3 million, compared with $101.0 million; net income increased despite lower earned premiums, primarily on higher investment income.
At September 30, total assets were $14.265 billion and shareholders’ equity was $1.796 billion. Cash was $40.2 million. Short- and long-term debt totaled $388.6 million, down from $437.3 million at year-end 2020. Debt was 17.8% of total capital including unrealized fixed-maturity gains (20.7% excluding them), below the company’s 25% long-term target. The company reported $1.1 billion of cash, U.S. government and agency securities, and public equity securities that could generally be liquidated rapidly under normal market conditions.
Nine-month investing cash outflow was $351.0 million; financing cash inflow was $190.8 million. Operating cash flow declined mainly because of higher insurance claims paid, partly offset by higher investment income collected. Shareholder dividends paid were $38.6 million in the nine-month period.
Material changes and segment results
- Property and Casualty: Q3 net loss was $4.7 million, versus $15.8 million net income. Nine-month net income was $42.5 million, down 20.9%. The Q3 automobile combined ratio was 99.2%, up 15.9 points; the property combined ratio was 136.1%, up 14.4 points. Higher auto loss costs, catastrophe losses and lower favorable prior-year reserve development weighed on results. Nine-month total premiums written declined 4.4%, and risks in force fell 5.7% year over year.
- Supplemental: Nine-month net income rose 13.7% to $34.8 million, helped by investment returns and favorable policyholder trends. Sales remained affected by limited school access; persistency was 92.2%.
- Retirement: Nine-month net income increased 118.1% to $36.2 million. Net annuity contract deposits rose 5.7% to $344.6 million, and the annualized year-to-date fixed-annuity net interest spread was 272 basis points, up 84 basis points.
- Life: Nine-month net income increased 58.8% to $10.8 million, reflecting higher investment income and premiums, partly offset by higher mortality costs.
Investment income excluding accretion on the reinsurance deposit asset increased $49.0 million for the first nine months, primarily due to stronger limited-partnership returns. Q3 included $6.6 million of credit-loss impairments; the nine-month credit-loss allowance on available-for-sale fixed maturities was $7.7 million. Fixed-maturity unrealized gains declined from year-end, with management attributing the change principally to higher Treasury yields. Management considered reported unrealized losses temporary and stated it did not expect to be required to sell the affected securities before recovery.
Outlook, commentary and risks
- Management estimated Q4 2021 core earnings of $0.65–$0.80 per diluted share, full-year net income of $3.27–$3.42 per diluted share, and core return on equity close to 10%. The forecast assumes a 21% federal statutory tax rate. Management lowered its outlook from the prior quarter, citing higher Q3 catastrophe losses and a higher underlying auto loss ratio, partly offset by higher investment income.
- Management expected Q4 net investment income of $95–$100 million and full-year net investment income of $405–$410 million, including approximately $100 million of accretion on the reinsurance deposit asset. Q4 segment net income outlooks were $10–$13 million for Property and Casualty, $10–$11 million for Supplemental, $10–$11 million for Retirement and $3–$4 million for Life.
- Management said auto frequency was nearing pre-pandemic levels and severity was rising; it anticipated further increases in the underlying auto loss ratio and was pursuing rate filings. Property costs face labor and materials inflation, and the company is considering underwriting actions to reduce catastrophe exposure. Pandemic-related limits on school access continued to constrain sales.
- The company agreed to acquire Madison National Life for $172.5 million, with a possible earn-out of up to $12.5 million. Closing was expected early in Q1 2022, subject to regulatory approval and other conditions. Management expected the deal to be immediately accretive to EPS and ROE and planned to use cash and additional bank borrowings; expected post-close leverage was approximately 25%. The revolving credit facility was expanded to $325 million, with $190 million unused at quarter-end.
- Risks include continued pandemic uncertainty, auto and property claims inflation and catastrophe exposure, low interest rates and reinvestment risk, investment valuation and credit risk, and execution and financing of the planned acquisition. Unfunded investment commitments were $911.4 million, up from $571.9 million at year-end 2020. The company also reinsures a legacy annuity block; its deposit asset was $2.478 billion at quarter-end.
Important facts for investors to verify
- Whether Madison National closes on schedule, meets expected contribution and accretion, and results in leverage near management’s stated target.
- Actual Q4 and full-year results against the earnings, investment-income and segment outlooks, including the assumptions for catastrophe losses and taxes.
- Whether auto loss frequency and severity, property inflation and catastrophe losses develop as management expects, and how rate actions affect premiums and retention.
- The sustainability and composition of limited-partnership investment returns, and further credit impairments or changes in unrealized fixed-maturity values.
- Liquidity and capital adequacy in light of the $911.4 million of unfunded investment commitments, policyholder obligations, and acquisition funding needs.