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HMN > SEC Filings for HMN > Form 10-Q on 7-Nov-2013All Recent SEC Filings

Show all filings for HORACE MANN EDUCATORS CORP /DE/

Form 10-Q for HORACE MANN EDUCATORS CORP /DE/


7-Nov-2013

Quarterly Report


MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in millions, except per share data)

Forward-looking Information

Statements made in the following discussion that are not historical in nature are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995 and are subject to known and unknown risks, uncertainties and other factors. Horace Mann is not under any obligation to (and expressly disclaims any such obligation to) update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. It is important to note that the Company's actual results could differ materially from those projected in forward-looking statements due to a number of risks and uncertainties inherent in the Company's business. For additional information regarding risks and uncertainties, see "Item 1A. Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 2012. That discussion includes factors such as:
The impact that a prolonged economic recession may have on the Company's investment portfolio; volume of new business for automobile, homeowners, annuity and life products; policy renewal rates; and additional annuity contract deposit receipts.
Fluctuations in the fair value of securities in the Company's investment portfolio and the related after-tax effect on the Company's shareholders' equity and total capital through either realized or unrealized investment losses.
Prevailing low interest rate levels, including the impact of interest rates on
(1) the Company's ability to maintain appropriate interest rate spreads over minimum fixed rates guaranteed in the Company's annuity and life products, (2) the book yield of the Company's investment portfolio, (3) unrealized gains and losses in the Company's investment portfolio and the related after-tax effect on the Company's shareholders' equity and total capital, (4) amortization of deferred policy acquisition costs and (5) capital levels of the Company's life insurance subsidiaries.
The frequency and severity of catastrophes such as hurricanes, storms, earthquakes and wildfires and the ability of the Company to provide accurate estimates of ultimate catastrophe costs in its consolidated financial statements.
The Company's risk exposure to catastrophe-prone areas. Based on full year 2012 property and casualty direct earned premiums, the Company's ten largest states represented 57% of the segment total. Included in this top ten group are certain states which are considered more prone to catastrophe occurrences: California, North Carolina, Texas, Florida, Louisiana, South Carolina and Georgia.
The ability of the Company to maintain a favorable catastrophe reinsurance program considering both availability and cost; and the collectibility of reinsurance receivables.
Adverse changes in market appreciation, interest spreads, business persistency and policyholder mortality and morbidity rates and the resulting impact on both estimated reserves and the amortization of deferred policy acquisition costs.
Adverse results from the assessment of the Company's goodwill asset requiring write off of the impaired portion.
The Company's ability to refinance outstanding indebtedness or repurchase shares of the Company's common stock.

The Company's ability to (1) develop and expand its marketing operations, including agents and other points of distribution, and (2) maintain and secure access to educators, as well as endorsements by and/or marketing agreements with education-related associations, including various teacher, school administrator, principal and business official associations.
The effects of economic forces and other issues affecting the educator market including, but not limited to, federal, state and local budget deficits and cut-backs and adverse changes in state and local tax revenues. The effects of these forces include, among others, teacher layoffs and early retirements, as well as individual concerns regarding employment and economic uncertainty.
The Company's ability to profitably expand its property and casualty business in highly competitive environments.
Changes in federal and state laws and regulations, which affect the relative tax and other advantages of the Company's life and annuity products to customers, including, but not limited to, changes in IRS regulations governing
Section 403(b) plans.
Changes in federal and state laws and regulations, which affect the relative tax advantage of certain investments or which affect the ability of debt issuers to declare bankruptcy or restructure debt.
The Company's ability to effectively implement new or enhanced information technology systems and applications.

Executive Summary

Horace Mann Educators Corporation ("HMEC"; and together with its subsidiaries, the "Company" or "Horace Mann") is an insurance holding company. Through its subsidiaries, HMEC markets and underwrites personal lines of property and casualty insurance, retirement annuities and life insurance in the U.S. The Company markets its products primarily to K-12 teachers, administrators and other employees of public schools and their families.

For the three months ended September 30, 2013, the Company's net income of $23.6 million decreased $8.6 million compared to the prior year. Net income in the current quarter reflected solid results across all three business segments partially offset by a $7.8 million decline in after tax realized investment gains. For the property and casualty segment, net income of $11.1 million reflected a decrease of $2.4 million compared to $13.5 million in the third quarter of 2012, largely due to a higher level of catastrophe losses. A modestly higher level of favorable development of property and casualty prior years' reserves was comparable to the combined negative impact of an increase in the overall expense ratio and a decrease in current accident year automobile results. Annuity segment net income of $11.6 million for the current period increased $1.7 million compared to the third quarter of 2012. Annuity assets under management increased 10.6% compared to 12 months earlier, which increased the amount of interest margin earned and offset the modest negative impact of spread compression; deferred policy acquisition cost unlocking also benefitted the quarterly earnings comparison to prior year. Life segment net income of $5.8 million increased $0.9 million reflecting favorable mortality experience in the current period.

For the nine months ended September 30, 2013, the Company's net income of $76.6 million represented an increase of $4.6 million compared to the prior year, also reflecting solid earnings across all three business segments. After-tax net realized investment gains were comparable between the nine month periods. For the property and casualty segment, net income of $25.4 million reflected an increase of $2.8 million compared to the first nine months

of 2012. Catastrophe losses were at modestly lower levels in the current period, representing a $2.1 million after tax improvement compared to the first nine months of 2012. In addition, automobile and homeowner current accident year non-catastrophe underwriting results improved, partially offset by a slightly lower level of favorable development of prior years' reserves. Including all factors, the property and casualty combined ratio was 99.4% for the first nine months of 2013 compared to 100.3% for the same period in 2012. Annuity segment net income of $31.9 million for the current period increased $2.5 million compared to the first nine months of 2012, as an increase in the amount of interest margin earned on fixed annuity assets - driven by the growth in assets under management - more than offset the impacts of modest spread compression; favorable unlocking of deferred policy acquisition costs was a slightly greater benefit to the current period. Life segment net income of $15.7 million decreased modestly compared to the first nine months of 2012. Compared to the prior year, across all of the business segments, operating expenses increased reflecting the Company's various infrastructure and technology investments, which are intended to enhance the overall customer experience and support favorable policy retention and business cross-sale ratios.

Premiums written and contract deposits increased 4% compared to the first nine months of 2012 due to increases in average premium per policy for both homeowners and automobile, as well as growth in annuity deposits received. Bolstered by growth of 12% in the third quarter, annuity deposits received in the first nine months of 2013 increased 5% compared to the prior year, reflecting a 7% increase in single deposit and rollover receipts and a 2% increase in scheduled deposit receipts in the current year. Property and casualty segment premiums written increased 4% compared to the prior year, reflecting the favorable premium impact from increases in average premium per policy for both homeowners and automobile in the current year. Life segment insurance premiums and contract deposits increased 2% compared to the first nine months of the prior year.

The Company's book value per share was $27.15 at September 30, 2013, a decrease of 13% compared to 12 months earlier. This decrease reflected net income for the trailing 12 months which was more than offset by the reduction in net unrealized investment gains due to higher yields on U.S. Treasury securities and virtually unchanged credit spreads across most asset classes, the combination of which resulted in a decrease in net unrealized gains for the Company's holdings of corporate securities, municipal securities, mortgage-backed and asset-backed securities and government securities.

Critical Accounting Policies

The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles ("GAAP") requires the Company's management to make estimates and assumptions based on information available at the time the consolidated financial statements are prepared. These estimates and assumptions affect the reported amounts of the Company's consolidated assets, liabilities, shareholders' equity and net income. Certain accounting estimates are particularly sensitive because of their significance to the Company's consolidated financial statements and because of the possibility that subsequent events and available information may differ markedly from management's judgments at the time the consolidated financial statements were prepared. Management has discussed with the Audit Committee the quality, not just the acceptability, of the Company's accounting principles as applied in its financial reporting. The discussions generally included such matters as the consistency of the Company's accounting policies and their application, and the clarity and completeness of the Company's consolidated financial statements, which include related disclosures. For the Company, the areas most subject to significant management judgments include: fair value measurements, other-than-temporary impairment of investments, goodwill, deferred policy acquisition costs for annuity and interest-sensitive life products, liabilities for property and casualty claims and claim expenses, liabilities for future policy benefits, deferred taxes and valuation of assets and liabilities related to the defined benefit pension plan.

Compared to December 31, 2012, at September 30, 2013 there were no material changes to the accounting policies for the areas most subject to significant management judgments identified above. In addition to disclosures in "Notes to Consolidated Financial Statements" in the Company's Annual Report on Form 10-K for the year ended December 31, 2012, discussion of accounting policies, including certain sensitivity information, was presented in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies" in that Form 10-K.

Results of Operations

Insurance Premiums and Contract Charges

                Insurance Premiums Written and Contract Deposits
                 (Includes annuity and life contract deposits)

                                              Nine Months Ended         Change From
                                                September 30,           Prior Year
                                               2013        2012     Percent     Amount
Property & casualty
Automobile and property (voluntary)         $    426.3    $ 411.4       3.6 %   $  14.9
Involuntary and other property & casualty          2.3        2.2       4.5 %       0.1
Total property & casualty                        428.6      413.6       3.6 %      15.0
Annuity deposits                                 316.8      302.9       4.6 %      13.9
Life                                              73.4       71.7       2.4 %       1.7
Total                                       $    818.8    $ 788.2       3.9 %   $  30.6

                 Insurance Premiums and Contract Charges Earned
                 (Excludes annuity and life contract deposits)

                                              Nine Months Ended         Change From
                                                September 30,           Prior Year
                                               2013        2012     Percent     Amount
Property & casualty
Automobile and property (voluntary)         $    416.4    $ 405.7       2.6 %   $  10.7
Involuntary and other property & casualty          1.8        1.8         -           -
Total property & casualty                        418.2      407.5       2.6 %      10.7
Annuity                                           16.7       16.0       4.4 %       0.7
Life                                              79.6       76.2       4.5 %       3.4
Total                                       $    514.5    $ 499.7       3.0 %   $  14.8

For the three months ended September 30, 2013, the Company's premiums written and contract deposits of $306.0 million increased $20.8 million, or 7.3%, compared to a year earlier, reflecting a 12.0% increase in annuity deposits received and growth of 4.1% for the property and casualty segment, consistent with the year to date growth rate. For the nine months ended September 30, 2013, the Company's premiums written and contract deposits of $818.8 million increased $30.6 million, or 3.9%, compared to the prior year, due to increases in average premium per policy for both homeowners and automobile, as well as growth in annuity deposits received. The Company's premiums and contract charges earned increased $5.9 million, or 3.5%, compared to the third quarter of 2012 and increased $14.8 million, or 3.0%, compared to the nine months ended September 30, 2012, primarily reflecting the increasing favorable impact on earned premium of the automobile and property rate actions taken in the preceding 21 months. Voluntary property and casualty business represents policies sold through the Company's marketing organization and issued under the Company's underwriting guidelines. Involuntary property and casualty business consists of allocations of business from state mandatory insurance facilities and assigned risk business.

Total voluntary automobile and homeowners premium written increased 3.6%, or $14.9 million, in the first nine months of 2013, compared to the same period in 2012. Average written premium per policy for both automobile and homeowners increased compared to the prior year, with the impact partially offset by a reduced level of policies in force in the current period. For the Company's automobile and homeowners business, rate changes approved (including states with no rate actions) during the first nine months of 2013 averaged 6% and 9%, respectively, compared to 5% and 4%, respectively, during the same period in 2012. At September 30, 2013, there were 486,000 voluntary automobile and 236,000 homeowners policies in force, for a total of 722,000 policies, compared to a total of 724,000 policies at December 31, 2012 and 725,000 policies at September 30, 2012. During 2011, the Company developed and began implementing state-specific pricing, underwriting and marketing initiatives designed to improve automobile new sales and retention levels, with favorable results beginning to emerge in the last several months of 2011 and continuing in 2012 and 2013.

Based on policies in force, the current year voluntary automobile 12-month retention rate for new and renewal policies was 85.0% compared to 84.3% at September 30, 2012. The property 12-month new and renewal policy retention rate was 89.2% at September 30, 2013 compared to 89.3% at September 30, 2012. Particularly for voluntary automobile, the retention rate has been favorably impacted by the Company's focus on expanding the number of multiline customers and customer utilization of automatic payment plans.

Voluntary automobile premium written increased 3.2%, or $8.5 million, compared to the first nine months of 2012. In the first nine months of 2013, the average written premium per policy and average earned premium per policy each increased approximately 3%, compared to a year earlier, which was partially offset by the decline in policies in force. Voluntary automobile policies in force at September 30, 2013 decreased 1,000 compared to December 31, 2012 and decreased 2,000 compared to September 30, 2012. Educator policies increased 1,000 compared to both December 31, 2012 and September 30, 2012. The number of educator policies represented approximately 83% of the voluntary automobile policies in force at both September 30, 2013 and 2012. The number of non-educator policies decreased compared to both December 31, 2012 and September 30, 2012.

Voluntary homeowners premium written increased 4.5%, or $6.4 million, compared to the first nine months of 2012. The average written and earned premium per policy increased 4% and 3%, respectively, in the first nine months of 2013 compared to a year earlier. Homeowners policies in force at September 30, 2013 decreased 1,000 compared to December 31, 2012 and decreased 1,000 compared to September 30, 2012. The number of educator policies represented approximately 79% of the homeowners policies in force at September 30, 2013 and 78% at September 30, 2012. Educator policies increased slightly compared to December 31, 2012 and increased 1,000 compared to a year ago. Growth in the number of educator policies that had been consistent sequentially for several years was offset somewhat beginning in the third quarter of 2010 by expected reductions due to the Company's risk mitigation programs, including actions in catastrophe-prone coastal areas, involving policies of both educators and non-educators. The Company continues to evaluate and implement actions to further mitigate its risk exposure in hurricane-prone areas, as well as other areas of the country. Such actions could include, but are not limited to, non-renewal of homeowners policies, restricted agent geographic placement, limitations on agent new business sales, further tightening of underwriting standards and increased utilization of third-party vendor products.

For the nine months ended September 30, 2013, total annuity deposits received increased 4.6%, or $13.9 million, compared to the prior year, with a 6.9% increase in single premium and rollover deposit receipts accompanied by a 1.6% increase in scheduled annuity deposit receipts. In the first nine months of 2013, new deposits to variable accounts of $97.1 million increased 16.7%, or $13.9 million, and new deposits to fixed accounts of $219.7 million were equal to the prior year. In addition to external contractholder deposits, annuity new deposits include contributions and transfers by the Company's employees in the Company's 401(k) group annuity contract.

Total annuity accumulated cash value of $5.2 billion at September 30, 2013 increased 10.6% compared to a year earlier, reflecting the increase from new deposits received as well as favorable retention and financial market performance. Cash value retentions for variable and fixed annuity options were 93.9% and 95.3%, respectively, for the 12 month period ended September 30, 2013, with fixed retention equal to a year ago and variable retention declining modestly compared to a year earlier. At September 30, 2013, the number of annuity contracts outstanding of 192,000 increased 3,000 contracts compared to December 31, 2012 and 6,000 contracts compared to September 30, 2012.

Variable annuity accumulated balances of $1.6 billion at September 30, 2013 increased 15.8% compared to September 30, 2012, reflecting favorable financial market performance over the 12 months (driven primarily by equity securities) partially offset by net balances transferred from the variable account option to the guaranteed interest rate fixed account option. Annuity segment contract charges earned increased 4.4%, or $0.7 million, compared to the first nine months of 2012.

Life segment premiums and contract deposits for the first nine months of 2013 increased 2.4%, or $1.7 million, compared to the prior year. The ordinary life insurance in force lapse ratio was 4.4% for the 12 months ended September 30, 2013 compared to 4.2% for the 12 months ended September 30, 2012.

Sales

For the Company, as well as other personal lines property and casualty companies, new business levels over recent years were adversely impacted by the economy and the overall lower level of automobile and home sales compared to levels preceding the 2008 financial crisis; however, the Company's new automobile sales levels have been improving steadily since the implementation of state-specific pricing, underwriting and marketing initiatives in the latter part of 2011. The Company's strong agency sales momentum carried into the first nine months of 2013. For the first nine months of 2013, property and casualty new annualized sales premiums increased 8.1% compared to the same period in 2012.

For sales by Horace Mann's agency force, the Company's annuity new business levels continued to benefit from agent training and marketing programs, which focus on retirement planning, and build on the positive results produced in recent years resulting in a 12.3% increase compared to the first nine months of 2012. Sales from the supplemental independent agent distribution channel, which are largely single premium and rollover annuity deposits, decreased 25.8% compared to a year ago. As a result, total Horace Mann annuity sales from the combined distribution channels increased 5.2% compared to the nine months ended September 30, 2012. Overall, the Company's new scheduled deposit business (measured on an annualized basis at the time of sale, compared to the reporting of new contract deposits which are recorded when cash is received) decreased 5.7% compared to the first nine months of 2012, and single premium and rollover deposits for Horace Mann annuity products increased 6.9% compared to the prior year. The Company's annuity sales levels in recent years have been impacted as K-12 educators respond to uncertainties regarding employment prospects during the economic recession. For employed educators, uncertainty about their future employment has created challenges for new sales of scheduled deposit business. Alternately, in situations where educator retirements increase, opportunities arise for single premium and rollover deposit business. The current low interest rate environment also is a factor in educators' decisions regarding retirement planning.

The Company's introduction of new educator-focused portfolios of term and whole life products in recent years, including a single premium whole life product, has contributed to the increase in sales of proprietary life products. For the nine months ended September 30, 2013, sales of Horace Mann's proprietary life insurance products increased 50.0%.

Distribution System

At September 30, 2013, there was a combined total of 736 Exclusive Agencies and Employee Agents, compared to 760 at December 31, 2012 and 732 at September 30, 2012. The net increase compared to a year earlier was driven by new Exclusive Agency appointments, partially offset by termination of lower producing agents. The net decrease compared to December 31, 2012 represented the Company's normal seasonality in agent termination and hiring activity.

At September 30, 2013, there were 620 Horace Mann Exclusive Agencies, an increase of 30 compared to September 30, 2012. At September 30, 2013, in addition to the Exclusive Agencies, there were 116 Employee Agents, a decrease of 26 compared to 12 months earlier. See additional description in "Business - Corporate Strategy and Marketing - Dedicated Agency Force" of the Company's Annual Report on Form 10-K for the year ended December 31, 2012.

As mentioned above, the Company also utilizes a nationwide network of Independent Agents who comprise a supplemental distribution channel for the Company's 403(b) tax-qualified annuity products. The Independent Agent distribution channel included 494 authorized agents at September 30, 2013. During the first nine months of 2013, this channel generated $27.3 million in annualized new annuity sales for the Company compared to $36.8 million for the first nine months of 2012, primarily reflecting decreases in single and rollover deposit business in the current year.

Net Investment Income

For the three months ended September 30, 2013, pretax investment income of $78.4 million increased 2.2%, or $1.7 million, (1.9%, or $1.0 million, after tax) compared to the prior year. Pretax investment income of $233.2 million for the nine months ended September 30, 2013 increased 2.0%, or $4.5 million, (1.8%, or $2.8 million, after tax) compared to the prior year. The increase reflected growth in the size of the average investment portfolio on an amortized cost basis, which more than offset a decline in average yield. Average invested assets increased 7.6% over the 12 months ended September 30, 2013. The average pretax yield on the investment portfolio was 5.37% (3.61% after tax) for the first nine months of 2013 compared to the pretax yield of 5.67% (3.82% after tax) a year earlier. During the first nine months of 2013, management continued to identify and secure investments, including a modest level of alternative investments, with attractive risk-adjusted yields without venturing into asset classes or individual securities that would be inconsistent with the Company's overall conservative investment guidelines.

Net Realized Investment Gains and Losses

For the three months ended September 30, 2013, net realized investment losses (pretax) were $1.4 million compared to net realized investment gains of $10.8 million in the same period in the prior year. For the nine months, net realized investment gains (pretax) were $20.9 million in 2013 compared to $21.1 million in the prior year. The net gains and losses in all periods were realized from ongoing investment portfolio management activity. In addition, impairment charges totaling $1.0 million were recorded on three securities in the nine months ended September 30, 2013, primarily recorded in the second quarter and there were no impairment charges in the prior year three and nine month periods.

For the first nine months of 2013, the Company's net realized investment gains of $20.9 million included $27.1 million of gross gains realized on security sales and calls partially offset by $5.2 million of realized losses on securities that were disposed of during the nine months, primarily municipal securities, and the $1.0 million impairment charge noted above. The impairment charge included $0.9 million recorded in the second quarter attributable to a general obligation bond issued by Detroit, reflecting the city's bankruptcy filing.

For the nine months ended September 30, 2012, the Company's net realized investment gains of $21.1 million included $33.5 million of gross gains realized on security sales and calls partially offset by $12.4 million of realized losses on securities that were disposed of during the nine months, primarily commercial mortgage-backed securities and to a lesser extent also corporate securities. There were no other-than-temporary impairment write-downs on securities in the first nine months of 2012. Gains realized on security disposals during the nine months ended September 30, 2012 included $4.6 million related to securities on which the Company had previously recognized other-than-temporary impairment write-downs.

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