Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
HMN > SEC Filings for HMN > Form 10-Q on 8-Aug-2014All Recent SEC Filings

Show all filings for HORACE MANN EDUCATORS CORP /DE/

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


8-Aug-2014

Quarterly Report


MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS ("MD&A")

(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, 2013. 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 events such as hurricanes, storms, earthquakes and wildfires, and the ability of the Company to provide accurate estimates of ultimate claim costs in its consolidated financial statements.
The Company's risk exposure to catastrophe-prone areas. Based on full year 2013 property and casualty direct earned premiums, the Company's ten largest states represented 58% 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, South Carolina, Louisiana 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 public employee retirement programs as a result of federal and/or state level pension reform initiatives.
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 June 30, 2014, the Company's net income of $20.4 million represented a decrease of $5.6 million compared to the prior year, as strong annuity segment results, as well as solid earnings in the property and casualty and life segments, were offset by a decrease in realized investment gains. After-tax net realized investment gains of $2.2 million were $7.8 million less than a year earlier. Annuity segment net income of $11.5 million for the current period increased $2.3 million compared to the second quarter of 2013, largely due to an increase in the amount of interest margin earned on fixed annuity assets - driven by the growth in assets under management and continued solid investment portfolio performance - accompanied by favorable deferred policy acquisition costs unlocking in the current quarter. For the property and casualty segment, net income of $4.9 million reflected an increase of $0.8 million compared to the second quarter of 2013, despite an increase in catastrophe losses which included May and June hail storms in 2014. Life segment net income of $5.0 million decreased $0.6 million compared to the second quarter of 2013 due to a more normal level of mortality costs, compared to the favorable experience in the prior year, partially offset by growth in investment income in the current period.

For the six months ended June 30, 2014, the Company's net income of $48.8 million represented a decrease of $4.2 million compared to the prior year, led by improvement in property and casualty segment and annuity segment results, as well as solid earnings in the life segment which were offset by a decrease in realized investment gains. After-tax net realized investment gains of $3.3 million were $11.1 million less than a year earlier. For the property and casualty segment, net income of $18.9 million increased $4.6 million compared to the first half of 2013. The property and casualty combined ratio was 98.2% for the first six months of 2014, a 2.1 percentage point improvement compared to 100.3% for the same period in 2013, including weather-related losses. Automobile current accident year non-catastrophe underwriting results improved, coupled with a slightly higher level of favorable development of prior years' reserves. Homeowners current accident year non-catastrophe underwriting results were comparable to the first six months of 2013. Catastrophe losses increased modestly in the current period, representing a $1.1 million after-tax decrease to net income compared to the first six months of 2013. Annuity segment net income of $23.8 million for the current period increased $3.5 million compared to the first six months of 2013, due to an increase in the amount of interest margin earned on fixed annuity assets - driven by the growth in assets under management and continued solid investment portfolio performance accompanied by increased security prepayment activity from the first quarter of 2014. For the six months, unlocking of deferred policy acquisition costs had a positive, but minimal, impact on net income in both 2014 and 2013. Life segment net income of $8.9 million decreased $1.0 million compared to the first six months of 2013 due to a more normal level of mortality costs, consistent with actuarial expectations, partially offset by growth in investment income in the current period. Compared to the first half of 2013, 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 8% compared to the first six months of 2013 primarily due to an increase in the amount of annuity single premium and rollover deposits received in the current period, as well as the favorable premium impact from increases in average premium per policy for both homeowners and automobile. Annuity deposits received were 16% greater than the prior year. Property and casualty segment premiums written increased 3% compared to the prior year. Life segment insurance premiums and contract deposits increased 2% compared to the first half of the prior year.

The Company's book value per share was $31.40 at June 30, 2014, an increase of 13% compared to 12 months earlier. This increase reflected net income for the trailing 12 months and an increase in net unrealized investment gains due to narrower credit spreads across most asset classes partially offset by slightly higher yields on U.S. Treasury securities, the combination of which resulted in an increase in net unrealized gains for the Company's holdings of corporate securities and municipal securities. At June 30, 2014, book value per share excluding investment fair value adjustments was $24.51, representing an 8% increase compared to 12 months earlier.

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, 2013, at June 30, 2014 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, 2013, 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



                                              Six Months Ended              Change From
                                                  June 30,                   Prior Year
                                             2014          2013         Percent       Amount
Insurance premiums written and contract
deposits (includes annuity and
life contract deposits)
Property & casualty (1)                     $ 285.4       $ 276.1          3.4 %      $  9.3
Annuity deposits                              218.3         188.6         15.7 %        29.7
Life                                           49.0          48.1          1.9 %         0.9
Total                                       $ 552.7       $ 512.8          7.8 %      $ 39.9

Insurance premiums and contract
charges earned (excludes annuity
and life contract deposits)
Property & casualty (1)                     $ 288.5       $ 277.4          4.0 %      $ 11.1
Annuity                                        12.4          10.8         14.8 %         1.6
Life                                           53.6          52.5          2.1 %         1.1
Total                                       $ 354.5       $ 340.7          4.1 %      $ 13.8

(1) Includes voluntary business and an immaterial amount of involuntary business. Voluntary business represents policies sold through the Company's marketing organization and issued under the Company's underwriting guidelines. Involuntary business consists of allocations of business from state mandatory insurance facilities and assigned risk business.

For the three months ended June 30, 2014, the Company's premiums written and contract deposits of $292.4 million increased $24.7 million, or 9.2%, compared to the prior year, led by the annuity segment. For the first six months of 2014, the Company's premiums written and contract deposits of $552.7 million increased $39.9 million, or 7.8%, compared to the prior year, also led by the annuity segment. The Company's premiums and contract charges earned increased $7.6 million, or 4.4%, compared to the second quarter of 2013 and increased $13.8 million, or 4.1%, compared to the six months ended June 30, 2013, primarily due to increases in average premium per policy for both homeowners and automobile.

Total voluntary automobile and homeowners premiums written increased 3.4%, or $9.4 million, in the first six months of 2014. 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 2014, the Company's full year rate plan anticipates mid-single digit average rate increases (including states with no rate actions) for both automobile and homeowners; rate actions during the first six months of 2014 were consistent with those plans. For full year 2013, the Company's average approved rate changes (including states with no rate actions) for automobile and homeowners were 6% and 9%, respectively. At June 30, 2014, there were 480,000 voluntary automobile and 232,000 homeowners policies in force, for a total of 712,000 policies, compared to a total of 717,000 policies at December 31, 2013 and 724,000 policies at June 30, 2013.

Based on policies in force, the current year voluntary automobile 12-month retention rate for new and renewal policies was 84.5% compared to 85.1% at June 30, 2013. The property 12-month new and renewal policy retention rate was 88.8% at June 30, 2014 compared to 89.5% at June 30, 2013. Although modestly lower than 12 months earlier, the retention rates have been favorably impacted by the Company's focus on expanding the number of multiline customers and customer utilization of automatic payment plans, particularly for voluntary automobile business.

Voluntary automobile premiums written increased 2.4%, or $4.4 million, compared to the first half of 2013. In the first six months of 2014, the average written premium per policy and average earned premium per policy increased approximately 4% and 3%, respectively, compared to a year earlier, which was partially offset by the decline in policies in force. Voluntary automobile policies in force at June 30, 2014 decreased 2,000 compared to December 31, 2013 and decreased 7,000 compared to June 30, 2013. The number of educator policies represented approximately 84% of the voluntary automobile policies in force at June 30, 2014 and December 31, 2013 compared to approximately 83% at June 30, 2013.

Voluntary homeowners premiums written increased 5.5%, or $5.0 million, compared to the first half of 2013. The average written and earned premium per policy increased 6% and 5%, respectively, in the first half of 2014 compared to a year earlier. In addition, reduced catastrophe reinsurance costs benefitted the current period by approximately $2 million. Homeowners policies in force at June 30, 2014 decreased 3,000 compared to December 31, 2013 and decreased 5,000 compared to June 30, 2013. The number of educator policies represented approximately 79% of the homeowners policies in force at June 30, 2014, December 31, 2013 and June 30, 2013. Growth in the number of educator policies and total policies has been, and may continue to be, impacted by 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.

As an example, in 2014 the Company initiated a program to further address homeowners profitability and hurricane exposure issues in Florida. The Company expects to non-renew about 4,800 policies, approximately 95% of its remaining Florida book of property business, starting with June 2014 policy effective dates. As of June 30, 2014, approximately 1,000 of the policies in the non-renewal program have been terminated - most at the client's request - a result that occurred sooner than management's expected timing. While this program will impact the overall policy in force count and premiums in the short-term, it is expected to reduce risk exposure concentration, reduce overall catastrophe reinsurance costs and improve homeowners longer-term underwriting results.

For the six months ended June 30, 2014, total annuity deposits received increased 15.7%, or $29.7 million, compared to the prior year, driven by a 29.0% increase in single premium and rollover deposit receipts accompanied by a 1.9% increase in recurring deposit receipts. As further described in "Sales" below, the Company's recently introduced fixed indexed annuity contract contributed to the current period favorable result. In the first six months of 2014, new deposits to fixed accounts of $150.6 million increased 22.4%, or $27.6 million, and new deposits to variable accounts of $67.7 million increased 3.2%, or $2.1 million, compared to the prior year. In addition to external contractholder deposits, annuity new deposits include contributions and transfers by Horace Mann's employees in the Company's 401(k) group annuity contract.

Total annuity accumulated cash value of $5.5 billion at June 30, 2014 increased 11.0% 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 94.1% and 94.9%, respectively, for the 12 month period ended June 30, 2014, with variable consistent and fixed declining slightly, compared to a year earlier. At June 30, 2014, the number of annuity contracts outstanding of 197,000 increased 2,000 contracts compared to December 31, 2013 and 6,000 contracts compared to June 30, 2013.

Variable annuity accumulated balances of $1.8 billion at June 30, 2014 increased 18.9% compared to June 30, 2013, 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 14.8%, or $1.6 million, compared to the first six months of 2013.

Life segment premiums and contract deposits for the first six months of 2014 increased 1.9%, or $0.9 million, compared to the prior year, due to the favorable impact of new business growth. The ordinary life insurance in force lapse ratio was 4.1% for the 12 months ended June 30, 2014 compared to 4.4% for the 12 months ended June 30, 2013.

Sales

For the first six months of 2014, property and casualty new annualized sales premiums decreased 1.1% compared to the first half of 2013, as growth in new automobile sales was more than offset by a decline in homeowners new business. The current period decline in homeowners new business was largely due to continued risk mitigation initiatives.

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 31.8% increase compared to the first half of 2013. Sales from the independent agent distribution channel, which are largely single premium and rollover annuity deposits, decreased 1.7% compared to a year ago. As a result, total Horace Mann annuity sales from the combined distribution channels increased 26.5% compared to the six months ended June 30, 2013, led by sales of the Company's new fixed indexed annuity product as described below. Overall, the Company's new recurring 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) increased 12.6% compared to the first half of 2013, and single premium and rollover deposits for Horace Mann annuity products increased 29.0% compared to the prior year. In February 2014, the Company expanded its annuity product portfolio by introducing a fixed indexed annuity contract. This new product has been well received by the Company's customers and represented approximately one-third of total annuity sales for the current six months, largely single premium and rollover deposits. Previously, the Company had entered into third-party vendor agreements to offer an indexed annuity product underwritten by the third parties.

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 six months ended June 30, 2014, sales of Horace Mann's proprietary life insurance products totaled $5.0 million, representing an increase of 42.9%, compared to the prior year.

Distribution System

At June 30, 2014, there was a combined total of 707 Exclusive Agencies and Employee Agents, compared to 759 at December 31, 2013 and 736 at June 30, 2013. Within the 12 month decrease, there was a net increase in new Exclusive Agency appointments, offset by termination of lower producing agents. The Company has begun to introduce higher quality standards for agents and agencies focused on improving both customer experiences and agent productivity. These higher standards contributed to the current period turnover.

At June 30, 2014, there were 620 Horace Mann Exclusive Agencies, an increase of 5 compared to June 30, 2013. At June 30, 2014, in addition to the Exclusive Agencies, there were 87 Employee Agents, a decrease of 34 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, 2013.

As mentioned above, the Company also utilizes a nationwide network of Independent Agents who comprise an additional distribution channel for the Company's 403(b) tax-qualified annuity products. The Independent Agent distribution channel included 462 authorized agents at June 30, 2014. During the first six months of 2014, this channel generated $17.4 million in annualized new annuity sales for the Company compared to $17.7 million for the first six months of 2013, with the new business in both periods primarily comprised of single and rollover deposit business.

Net Investment Income

For the three months ended June 30, 2014, pretax investment income of $81.4 million increased 5.2%, or $4.0 million, (5.0%, or $2.6 million, after tax) compared to the prior year. Pretax investment income of $164.4 million for the six months ended June 30, 2014 increased 6.2%, or $9.6 million, (6.0%, or $6.2 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 and continued strong performance in the fixed maturity and alternative investment portfolios accompanied by the effects of increased prepayment activity in the asset-backed securities portfolio in the current six month period. Average invested assets increased 6.5% over the 12 months ended June 30, 2014. The average pretax yield on the investment portfolio was 5.38% (3.61% after tax) for the first six months of 2014, compared to the pretax yield of 5.40% (3.64% after tax) a year earlier. During the first six months of 2014, 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 June 30, 2014, net realized investment gains (pretax) were $3.5 million compared to net realized investment gains of $15.4 million in the same period in the prior year. For the six months, net realized investment gains (pretax) were $5.2 million compared to net realized investment gains of $22.3 million in the prior year. The net gains and losses in both periods were realized primarily from ongoing investment portfolio management activity. Impairment charges of $0.5 million in 2014 and $1.0 million in 2013 were recorded in the six months ended June 30, in both years occurring in the second quarter.

For the first half of 2014, the Company's net realized investment gains of $5.2 million included $6.9 million of gross gains realized on security sales and calls partially offset by $1.2 million of realized losses on securities that were disposed of during the six months, primarily municipal securities, and the $0.5 million impairment charge recorded on five securities.

For the first half of 2013, the Company's net realized investment gains of $22.3 million included $24.2 million of gross gains realized on security sales and calls partially offset by $0.9 million of realized losses on securities that were disposed of during the six months, primarily common stocks, and the $1.0 million impairment charge recorded on two securities. The impairment charge included $0.9 million attributable to one general obligation bond.

The Company, from time to time, sells securities subsequent to the balance sheet date that were considered temporarily impaired at the balance sheet date. Such sales are due to issuer-specific events occurring subsequent to the balance sheet date that result in a change in the Company's intent to sell an invested asset.

Fixed Maturity Securities and Equity Securities Portfolios

The table below presents the Company's fixed maturity securities and equity securities portfolios by major asset class, including the ten largest sectors of . . .

  Add HMN to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for HMN - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.