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Horace Mann Educators Corporation | 29 | Quarterly Report on Form 10-Q |
Consolidated Results of Operations
(All comparisons vs. same periods in 2021, unless noted otherwise)
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($ in millions) | | Three Months Ended September 30, | | 2022-2021 | | Nine Months Ended September 30, | | 2022-2021 |
| | 2022 | | 2021 | | Change % | | 2022 | | 2021 | | Change % |
Net premiums and contract charges earned | | $ | 257.8 | | | $ | 225.4 | | | 14.4 | % | | $ | 769.5 | | | $ | 678.8 | | | 13.4 | % |
Net investment income | | 97.6 | | | 103.7 | | | -5.9 | % | | 300.7 | | | 308.4 | | | -2.5 | % |
Net investment losses | | (12.8) | | | (6.5) | | | N.M. | | (43.8) | | | (10.6) | | | N.M. |
Other income | | 0.4 | | | 7.0 | | | -94.3 | % | | 9.7 | | | 22.1 | | | -56.1 | % |
Total revenues | | 343.0 | | | 329.6 | | | 4.1 | % | | 1,036.1 | | | 998.7 | | | 3.7 | % |
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Benefits, claims and settlement expenses | | 173.6 | | | 164.8 | | | 5.3 | % | | 558.2 | | | 446.2 | | | 25.1 | % |
Interest credited | | 45.9 | | | 51.9 | | | -11.6 | % | | 129.1 | | | 153.7 | | | -16.0 | % |
Operating expenses | | 75.6 | | | 64.3 | | | 17.6 | % | | 229.7 | | | 182.8 | | | 25.7 | % |
DAC unlocking and amortization expense | | 23.3 | | | 22.9 | | | 1.7 | % | | 76.7 | | | 70.5 | | | 8.8 | % |
Intangible asset amortization expense | | 4.2 | | | 3.3 | | | 27.3 | % | | 12.6 | | | 9.8 | | | 28.6 | % |
Interest expense | | 5.3 | | | 3.4 | | | 55.9 | % | | 13.5 | | | 10.4 | | | 29.8 | % |
Total benefits, losses and expenses | | 327.9 | | | 310.6 | | | 5.6 | % | | 1,019.8 | | | 873.4 | | | 16.8 | % |
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Income before income taxes | | 15.1 | | | 19.0 | | | -20.5 | % | | 16.3 | | | 125.3 | | | -87.0 | % |
Income tax expense | | 1.2 | | | 2.7 | | | -55.6 | % | | 0.4 | | | 23.0 | | | -98.3 | % |
Net income | | $ | 13.9 | | | $ | 16.3 | | | -14.7 | % | | $ | 15.9 | | | $ | 102.3 | | | -84.5 | % |
Net Premiums and Contract Charges Earned
For the three and nine months ended September 30, 2022, net premiums and contract charges earned increased $32.4 million and $90.7 million, respectively, primarily due to the inclusion of Madison National partially offset by lower net premiums earned by Property & Casualty and lower contract charges earned by Life & Retirement.
Net Investment Income
Total net investment income decreased $6.1 million and $7.7 million for the three and nine months ended September 30, 2022, respectively. The decreases were primarily attributable to returns below our historical average in our portfolio of limited partnership interests. Investment yields have risen for recent investments due to the rising interest rate environment. The annualized investment yield on the portfolio excluding limited partnership interests* was as follows:
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| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
Investment yield, excluding limited partnership interests, pretax - annualized* | | 4.3% | | 4.3% | | 4.3% | | 4.3% |
Investment yield, excluding limited partnership interests, after tax - annualized* | | 3.4% | | 3.5% | | 3.4% | | 3.4% |
During the three and nine months ended September 30, 2022, we continued to identify and purchase investments with attractive risk-adjusted yields relative to market conditions without venturing into asset classes or individual securities that would be inconsistent with our overall investment guidelines for the core portfolio. We continue to fund commercial mortgage loan funds and limited partnership interests in line with our intent to increase our allocation to these portfolios to increase yields while balancing principal protection and risk.
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Horace Mann Educators Corporation | 30 | Quarterly Report on Form 10-Q |
Net Investment Losses
For the three and nine months ended September 30, 2022, net investment losses increased $6.3 million and $33.2 million, respectively, mainly from changes in fair values of equity securities and impairments. The breakdown of net investment gains (losses) by transaction type were as follows:
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($ in millions) | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
Credit loss and intent-to-sell impairments | | $ | (6.8) | | | $ | (6.6) | | | $ | (10.4) | | | $ | (9.8) | |
Sales and other, net | | (3.9) | | | 2.7 | | | (3.9) | | | 2.2 | |
Change in fair value - equity securities | | (4.4) | | | (1.1) | | | (34.1) | | | 0.4 | |
Change in fair value and losses realized on settlements - derivatives | | 2.3 | | | (1.5) | | | 4.6 | | | (3.4) | |
Net investment losses | | $ | (12.8) | | | $ | (6.5) | | | $ | (43.8) | | | $ | (10.6) | |
From time to time, we may sell fixed maturity securities subsequent to the reporting date that were considered temporarily impaired at such reporting date. Such sales are due to issuer-specific events occurring subsequent to the reporting date that result in a change in our intent to sell a fixed maturity security.
Other Income
For the three and nine months ended September 30, 2022, other income decreased $6.6 million and $12.4 million, respectively, primarily due to the inclusion of Madison National.
Benefits, Claims and Settlement Expenses
For the three and nine months ended September 30, 2022, benefits, claims and settlement expenses increased $8.8 million and $112.0 million, respectively, primarily due to an increase in auto losses and the inclusion of Madison National, partially reduced by an offsetting change in interest credited of $10.3 million and $31.0 million, respectively.
Interest Credited
For the three and nine months ended September 30, 2022, interest credited decreased $6.0 million and $24.6 million, respectively, driven primarily by an offsetting change in benefits, claims and settlement expenses of $10.3 million and $31.0 million, respectively. Under the deposit method of accounting, the interest credited on the reinsured annuity block continues to be reported. The average deferred annuity credited rate, excluding the reinsured annuity block, was 2.4% as of September 30, 2022 and September 30, 2021, respectively.
Operating Expenses
For the three and nine months ended September 30, 2022, operating expenses increased $11.3 million and $46.9 million, respectively, primarily due to the inclusion of Madison National.
Deferred Policy Acquisition Costs (DAC) Unlocking and Amortization Expense
For the three and nine months ended September 30, 2022, DAC unlocking and amortization expense increased $0.4 million and $6.2 million, respectively, due to equity market declines leading to unfavorable DAC unlocking in the Life & Retirement segment, partially offset by reduced amortization expense in the Property & Casualty segment.
Intangible Asset Amortization Expense
For the three and nine months ended September 30, 2022, intangible asset amortization expense increased $0.9 million and $2.8 million, respectively, due to the acquisition of Madison National.
Interest Expense
For the three and nine months ended September 30, 2022, interest expense increased $1.9 million and $3.1 million, respectively, due to an increase in interest rates on the Bank Credit Facility.
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Horace Mann Educators Corporation | 31 | Quarterly Report on Form 10-Q |
Income Tax Expense
The effective income tax rate, including net investment losses, was 2.5% and 18.4% for the nine months ended September 30, 2022 and 2021, respectively. Income from investments in tax-advantaged securities reduced the effective income tax rates by 22.8 and 3.3 percentage points for the nine months ended September 30, 2022 and 2021, respectively.
We record liabilities for uncertain tax filing positions where it is more likely than not that the position will not be sustainable upon audit by taxing authorities. These liabilities are reevaluated routinely and are adjusted appropriately based on changes in facts or law. We have no unrecorded liabilities from uncertain tax filing positions.
At September 30, 2022, our federal income tax returns for years prior to 2017 are no longer subject to examination by the Internal Revenue Service. We do not anticipate any assessments for tax years that remain subject to examination to have a material effect on our financial position or results of operations.
Outlook for 2022
The following discussion provides outlook information for our results of operations and capital position. Horace Mann’s outlook for 2022 reflects accretion from newly acquired Madison National as well as estimates of the initial contributions of strategic growth initiatives.
At the time of issuance of this Quarterly Report on Form 10-Q, we now estimate our 2022 core earnings will be in the range of $1.70 to $2.00 per diluted share. The decrease from the range discussed in our Outlook for 2022 in the Quarterly Report on Form 10-Q for the period ended June 30, 2022, reflects our nine-month results as well as expectations for continued impacts of inflation and effects of equity market declines.
Total net investment income from the managed portfolio for 2022 is now expected to be between $295 million and $305 million. Commercial mortgage loan fund balances are expected to be lower than originally anticipated due to slower capital call activity and limited partnership fund returns are expected to be below historical averages.
Results for each segment reflects the following:
Property & Casualty Segment
Property & Casualty segment 2022 core earnings are now expected to be a loss of $13 million to $19 million, reflecting nine-month results, normal seasonality in auto loss patterns and the continued impacts of inflation on auto loss severity. Catastrophe losses are expected to be in line with the company’s 10-year average of approximately $5 million for this period.
We expect property rate changes and inflation adjustments will rise to the mid-teens in 2023. Rate increases will reflect changes in the level of weather activity. Based on the company’s current expectations for frequency and severity, we expect auto rate increases will also rise to the mid-teens in 2023, supported by non-rate underwriting actions.
Life & Retirement Segment
Life & Retirement segment 2022 core earnings are still expected to be $56 million to $59 million. The full-year net investment spread is expected to be below the 2021 level of 290 basis points due to the revised outlook for net investment income.
Supplemental & Group Benefits Segment
Supplemental & Group Benefits segment 2022 core earnings are now expected to be $55 million to $58 million, reflecting nine-month results. We continue to expect full-year 2022 benefit ratios will be in line with our longer-term targets of approximately 35% for voluntary products and approximately 50% for employer-sponsored products. Amortization of intangible assets is expected to be approximately $13 million, or 30 cents per share (after tax).
As described in Critical Accounting Estimates, certain of our significant accounting measurements require the use of estimates and assumptions. As additional information becomes available, adjustments may be required.
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Horace Mann Educators Corporation | 32 | Quarterly Report on Form 10-Q |
Those adjustments are charged or credited to net income for the period in which the adjustments are made and may impact actual results compared to our estimates above. Additionally, see Forward-Looking information in this Quarterly Report on Form 10-Q as well as Part I - Items 1 and 1A in our Annual Report on Form 10-K for the year ended December 31, 2021 concerning other important factors that could impact actual results. We believe that a projection of net income is not appropriate on a forward-looking basis because it is not possible to provide a valid forecast of net investment gains (losses), which can vary substantially from one period to another and may have a significant impact on net income.
Application of Critical Accounting Estimates
The preparation of consolidated financial statements in conformity with GAAP requires us 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 our consolidated assets, liabilities, shareholders' equity and net income. Certain accounting estimates are particularly sensitive because of their significance to our 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. We have discussed with the Audit Committee the quality, not just the acceptability, of our accounting principles as applied in our financial reporting. The discussions generally included such matters as the consistency of our accounting policies and their application, and the clarity and completeness of our consolidated financial statements, which include related disclosures.
Information regarding our accounting policies pertaining to these topics is located in the Notes to the Consolidated Financial Statements contained in Part II - Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2021. In addition, discussion of accounting policies, including certain sensitivity information, was presented in Management's Discussion and Analysis of Financial Condition and Results of Operations -- Application of Critical Accounting Estimates in that Form 10-K within which we have identified the following accounting estimates as critical in that they involve a higher degree of judgment and are subject to a significant degree of variability:
•Valuation of hard-to-value fixed maturity securities
•Evaluation of credit loss impairments for maturity securities
•Evaluation of goodwill and intangible assets for impairment
•Valuation of annuity and life deferred policy acquisition costs
•Valuation of liabilities for property and casualty unpaid claims and claim expenses
•Valuation of certain investment contract and policy reserves
Except as noted below, as of September 30, 2022, there were no material changes to accounting policies for areas most subject to significant management judgments identified above.
Valuation of Assets Acquired and Liabilities Assumed under Purchase Accounting and Purchase Price Allocation
In accounting for the acquisition of Madison National Life Insurance Company, Inc. (Madison National), assets acquired and liabilities assumed are recognized based on estimated fair values as of the date of acquisition. The excess of the purchase price when compared to the fair value of the net tangible and identifiable intangible assets acquired is recognized as goodwill. A significant amount of judgment is involved in estimating the individual fair values of tangible assets, intangible assets, and other assets and liabilities. We used all available information to make these fair value determinations and engaged third-party consultants for valuation assistance. The fair value of assets and liabilities as of the acquisition date were estimated using a combination of approaches, including the income approach, which requires us to project future cash flows and apply an appropriate discount rate; the cost approach, which required estimates of replacement costs and depreciation and obsolescence estimates; and the market approach. The estimates used in determining fair values were based on assumptions believed to be reasonable but which are inherently uncertain. Accordingly, actual results may differ materially from the projected results used to determine fair value.
The value of business acquired intangible asset (VOBA) represents the present value of the expected underwriting profit within policies that were in force on the date of acquisition. The value of customer
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Horace Mann Educators Corporation | 33 | Quarterly Report on Form 10-Q |
relationships acquired intangible asset was valued based on the actuarial appraisal method net of VOBA. This represents expected future premiums arising from ongoing relationships and includes assumed growth in premium in the first projection year as well as all premiums in projection years two through ten. The state licenses intangible asset represents the regulatory licenses held by Madison National that were valued using the cost approach. The valuation of Madison National's policy reserves represents the present value of expected future benefits and expenses associated with the policies, valued using the actuarial appraisal approach.
The valuation of the assets acquired and liabilities assumed of Madison National noted above required management to make multiple judgments and assumptions to project future cash flows. Assumptions included future policy and contract charges, premiums, morbidity and mortality, and persistency by product, as well as expenses, investment returns, growth rates and other factors. One of the most significant inputs in these calculations is the discount rate used to arrive at the present value of the net cash flows. Actual experience on the purchased business may vary from these projections and the recovery of the net assets recorded is dependent upon the future profitability of the related business.
Results of Operations by Segment
Consolidated financial results primarily reflect the results of three operating segments (Property & Casualty, Life & Retirement, and Supplemental & Group Benefits) as noted in the Introduction and Outlook for 2022 sections of this MD&A, as well as the Corporate & Other reporting segment. These segments are defined based on financial information management uses to evaluate performance and to determine the allocation of resources.
The determination of segment data is described in more detail in Part I - Item 1, Note 9 of the Consolidated Financial Statements in this report. The following sections provide analysis and discussion of the results of operations for each of the reporting segments as well as investment results.
Property & Casualty
(All comparisons vs. same periods in 2021, unless noted otherwise)
For the three and nine months ended September 30, 2022, net loss reflected the following factors:
•Increase in the auto loss ratio due to impact of inflation and other loss cost factors, increased accident severity and increased utilization of medical treatments
•Decrease in net investment income due to lower than historical returns on limited partnership interests in the current year periods versus outsized returns on limited partnership interests in the prior year periods
•Unfavorable prior years' reserve development in the current year periods versus favorable prior years' reserve development in the prior year periods
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Horace Mann Educators Corporation | 34 | Quarterly Report on Form 10-Q |
The following table provides certain financial information for Property & Casualty for the periods indicated.
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($ in millions, unless otherwise indicated) | | Three Months Ended September 30, | | 2022-2021 | | Nine Months Ended September 30, | | 2022-2021 |
| | 2022 | | 2021 | | Change | | 2022 | | 2021 | | Change |
Financial Data: | | | | | | | | | | | | |
Net premiums written*: | | | | | | | | | | | | |
Auto | | $ | 102.5 | | | $ | 103.1 | | | -0.6 | % | | $ | 296.0 | | | $ | 300.1 | | | -1.4 | % |
Property and other | | 63.9 | | | 60.7 | | | 5.3 | % | | 168.0 | | | 161.1 | | | 4.3 | % |
Total net premiums written | | 166.4 | | | 163.8 | | | 1.6 | % | | 464.0 | | | 461.2 | | | 0.6 | % |
Change in unearned net premiums | | (14.0) | | | (10.5) | | | 33.3 | % | | (11.5) | | | 2.9 | | | N.M |
Total net premiums earned | | 152.4 | | | 153.3 | | | -0.6 | % | | 452.5 | | | 464.1 | | | -2.5 | % |
Incurred claims and claims expenses: | | | | | | | | | | | | |
Claims occurring in the current year | | 120.3 | | | 132.5 | | | -9.2 | % | | 372.8 | | | 345.4 | | | 7.9 | % |
Prior years' reserve development(1) | | 2.0 | | | (3.0) | | | N.M. | | 8.0 | | | (7.2) | | | N.M. |
Total claims and claim expenses incurred | | 122.3 | | | 129.5 | | | -5.6 | % | | 380.8 | | | 338.2 | | | 12.6 | % |
Operating expenses, including DAC amortization | | 41.6 | | | 42.1 | | | -1.2 | % | | 121.1 | | | 121.5 | | | -0.3 | % |
Underwriting gain (loss) | | (11.5) | | | (18.3) | | | 37.2 | % | | (49.4) | | | 4.4 | | | N.M. |
Net investment income | | 8.0 | | | 11.3 | | | -29.2 | % | | 22.9 | | | 43.8 | | | -47.7 | % |
Income (loss) before income taxes | | (2.8) | | | (6.3) | | | 55.6 | % | | (23.8) | | | 52.1 | | | -145.7 | % |
Net income (loss) | | (2.5) | | | (4.7) | | | 46.8 | % | | (19.4) | | | 42.5 | | | -145.6 | % |
Core earnings (loss)* | | (2.5) | | | (4.7) | | | 46.8 | % | | (19.4) | | | 42.5 | | | -145.6 | % |
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Operating Statistics: | | | | | | | | | | | | |
Auto | | | | | | | | | | | | |
Loss and loss adjustment expense ratio | | 83.1 | % | | 71.5 | % | | 11.6 | pts | | 84.1 | % | | 66.0 | % | | 18.1 | pts |
Expense ratio | | 27.7 | % | | 27.7 | % | | — | pts | | 26.5 | % | | 26.1 | % | | 0.4 | pts |
Combined ratio: | | 110.8 | % | | 99.2 | % | | 11.6 | pts | | 110.6 | % | | 92.1 | % | | 18.5 | pts |
Prior years' reserve development(1) | | 2.0 | % | | -2.0 | % | | 4.0 | pts | | 4.8 | % | | -1.6 | % | | 6.4 | pts |
Catastrophe losses | | 2.7 | % | | 2.9 | % | | -0.2 | pts | | 2.3 | % | | 1.9 | % | | 0.4 | pts |
Underlying combined ratio* | | 106.1 | % | | 98.3 | % | | 7.8 | pts | | 103.5 | % | | 91.8 | % | | 11.7 | pts |
Property | | | | | | | | | | | | |
Loss and loss adjustment expense ratio | | 75.1 | % | | 108.9 | % | | -33.8 | pts | | 84.2 | % | | 86.0 | % | | -1.8 | pts |
Expense ratio | | 26.8 | % | | 27.2 | % | | -0.4 | pts | | 27.4 | % | | 26.4 | % | | 1.0 | pts |
Combined ratio: | | 101.9 | % | | 136.1 | % | | -34.2 | pts | | 111.6 | % | | 112.4 | % | | -0.8 | pts |
Prior years' reserve development(1) | | — | % | | -1.9 | % | | 1.9 | pts | | -3.7 | % | | -1.4 | % | | -2.3 | pts |
Catastrophe losses | | 21.8 | % | | 67.3 | % | | -45.5 | pts | | 37.8 | % | | 38.4 | % | | -0.6 | pts |
Underlying combined ratio* | | 80.1 | % | | 70.7 | % | | 9.4 | pts | | 77.5 | % | | 75.4 | % | | 2.1 | pts |
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Risks in force (in thousands) | | | | | | | | | | | | |
Auto(2) | | | | | | | | 368 | | | 381 | | | -3.4 | % |
Property | | | | | | | | 172 | | | 178 | | | -3.4 | % |
Total | | | | | | | | 540 | | | 559 | | | -3.4 | % |
(1) (Favorable) unfavorable.
(2) Includes assumed risks in force of 4.
On a reported basis, the 18.5 point increase in the auto combined ratio for the nine months ended September 30, 2022 was mainly attributable to a 11.3 point increase in the auto underlying loss ratio* and a 6.4 point increase in prior years' reserve development. Although frequency continues to trend back up toward pre-
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Horace Mann Educators Corporation | 35 | Quarterly Report on Form 10-Q |
pandemic levels as miles driven continues to increase, higher severity is the primary driver of the increase in auto loss costs. This reflects the challenges being faced by the entire industry, including the unprecedented level of inflation that is driving higher replacement costs; the trend toward more severe accidents; and increased utilization and costs of medical treatments. We continue to implement rate and other underwriting changes that address these trends. Unfavorable prior years' auto reserve development of $14.0 million was reported for the nine months ended September 30, 2022 primarily due to pandemic-related systemic delays that are affecting the settlement of claims from recent accident years that remain open. These open claims are impacted by the higher severities currently being experienced.
The reported property combined ratio and loss ratio decreased 0.8 points and 1.8 points, respectively, for the nine months ended September 30, 2022. Favorable prior years' reserve development of $6.0 million benefited the reported property combined ratio by 2.3 points for the nine months ended September 30, 2022.
For the three and nine months ended September 30, 2022, total net premiums written* increased $2.6 million and $2.8 million, respectively, as rate actions and inflation adjustments to coverage values for property more that offset declines in risks in force. The benefit of stronger retention is being offset by new business volumes that still remain below historical levels due to the lingering effect of the pandemic on sales*.
For the three and nine months ended September 30, 2022, auto net premiums written* decreased $0.6 million and $4.1 million, respectively, primarily due to the continuing decline in auto risks in force partially offset by stabilization of pandemic-related mileage changes. Though average net premium written and average net premium earned were flat for the nine months ended September 30, 2022, average net premium written in the third quarter of 2022 increased sequentially by 4.4% from 1.6% in the second quarter of 2022. The number of educator risks has been over 80% relative to overall auto risks in force over the past two years.
For the three and nine months ended September 30, 2022, property and other net premiums written* increased $3.2 million and $6.9 million, respectively, due to increases in average net premium written and average net premium earned which increased 7.9% and 4.9% for the nine months ended September 30, 2022, respectively, as inflation adjustments to coverage values continue to take effect. With inflationary pressure continuing, adjustments to coverage values and rates are expected to continue to play a role in the coming quarters. The number of educator risks has been at or above 80% relative to overall property risks in force over the past two years.
We continue to evaluate and implement actions to further mitigate our exposure in catastrophe-prone areas of the country. Such actions could include, but are not limited to, non-renewal of property policies, restricted agent geographic placement, limitations on agent new business sales, further tightening of underwriting standards and increased utilization of third-party vendor products.
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Horace Mann Educators Corporation | 36 | Quarterly Report on Form 10-Q |
Life & Retirement
(All comparisons vs. same periods in 2021, unless noted otherwise)
For the three and nine months ended September 30, 2022, net income reflected the following factors:
•A decline of 104 bps in the net interest spread on fixed annuities for the three months ended September 30, 2022 due to lower net investment income
•Substantial volatility in financial markets leading to unfavorable DAC unlocking and lower charges and fees earned on variable annuities and asset-based accounts
•While higher for the current quarter, Life results benefited from lower mortality costs for the nine months ended September 30, 2022
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Horace Mann Educators Corporation | 37 | Quarterly Report on Form 10-Q |
The following table provides certain information for Life & Retirement for the periods indicated.
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($ in millions) | | Three Months Ended September 30, | | 2022-2021 | | Nine Months Ended September 30, | | 2022-2021 |
| | 2022 | | 2021 | | Change | | 2022 | | 2021 | | Change |
Life & Retirement | | | | | | | | | | | | |
Net premiums written and contract deposits* | | $ | 138.0 | | | $ | 150.8 | | | -8.5 | % | | $ | 408.0 | | | $ | 427.4 | | | -4.5 | % |
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Net premiums and contract charges earned | | 37.1 | | | 40.4 | | | -8.2 | % | | 109.7 | | | 118.3 | | | -7.3 | % |
Net investment income | | 81.4 | | | 85.8 | | | -5.1 | % | | 254.0 | | | 247.4 | | | 2.7 | % |
Other income | | 4.1 | | | 5.1 | | | -19.6 | % | | 13.4 | | | 14.9 | | | -10.1 | % |
| | | | | | | | | | | | |
Life mortality costs | | 11.1 | | | 10.3 | | | 7.8 | % | | 31.5 | | | 33.4 | | | -5.7 | % |
Interest credited | | 45.5 | | | 51.8 | | | -12.2 | % | | 128.4 | | | 153.4 | | | -16.3 | % |
Change in reserves | | 21.6 | | | 14.5 | | | 49.0 | % | | 65.8 | | | 44.0 | | | 49.5 | % |
Operating expenses | | 24.2 | | | 25.7 | | | -5.8 | % | | 74.8 | | | 74.0 | | | 1.1 | % |
DAC amortization expense, excluding unlocking | | 6.7 | | | 6.6 | | | 1.5 | % | | 21.3 | | | 20.1 | | | 6.0 | % |
DAC unlocking | | 0.2 | | | (0.8) | | | N.M. | | 6.4 | | | (1.8) | | | N.M. |
Intangible asset amortization expense | | 0.2 | | | 0.4 | | | -50.0 | % | | 0.8 | | | 1.0 | | | -20.0 | % |
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| | | | | | | | | | | | |
Income before income taxes | | 13.1 | | | 22.8 | | | -42.5 | % | | 48.1 | | | 56.5 | | | -14.9 | % |
Income tax expense | | 0.4 | | | 3.7 | | | -89.2 | % | | 6.3 | | | 9.5 | | | -33.7 | % |
Net income | | 12.7 | | | 19.1 | | | -33.5 | % | | 41.8 | | | 47.0 | | | -11.1 | % |
Core earnings* | | 12.7 | | | 19.1 | | | -33.5 | % | | 41.8 | | | 47.0 | | | -11.1 | % |
| | | | | | | | | | | | |
Life policies in force (in thousands) | | | | | | | | 162 | | | 163 | | | -0.6 | % |
Life insurance in force | | | | | | | | $ | 19,815 | | | $ | 19,384 | | | 2.2 | % |
Life persistency - LTM | | | | | | | | 96.0 | % | | 96.2 | % | | -0.2 | pts |
| | | | | | | | | | | | |
Annuity contracts in force (in thousands) | | | | | | | | 227 | | | 229 | | | -0.9 | % |
Retirement Advantage® contracts in force (in thousands) | | | | | | | | 16 | | | 14 | | | 14.3 | % |
Cash value persistency - LTM | | | | | | | | 94.0 | % | | 94.7 | % | | -0.7 | pts |
For the three and nine months ended September 30, 2022, life annualized sales* were in line with prior year periods and life persistency remained strong at 96.0%.
For the nine months ended September 30, 2022, net annuity contract deposits* for variable and fixed annuities decreased $20.3 million from strong prior year levels. Educators continue to begin their relationship with Horace Mann through 403(b) retirement savings products, including attractive annuity products, which provide encouraging cross-sell opportunities. Cash value persistency remained strong at 94.0%.
As of September 30, 2022, annuity assets under management were down $515.3 million, or 9.8%, compared to a year ago primarily due to market depreciation. Assets under administration, which includes Retirement Advantage® and other advisory and recordkeeping assets were down $1.4 billion, or 15.4%, compared to a year ago largely due to the effect of equity market performance on assets under management. The year-to-date annualized net interest spread on fixed annuities, excluding reinsurance, decreased 9 basis points compared to a year ago, primarily reflecting lower net investment income.
We actively manage our interest rate risk exposure, considering a variety of factors, including earned interest rates, credited interest rates and the relationship between the expected durations of assets and liabilities. We estimate that over the next 12 months approximately $710.4 million of the Life & Retirement investment portfolio and related investable cash flows will be reinvested at current market rates.
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Horace Mann Educators Corporation | 38 | Quarterly Report on Form 10-Q |
As a general guideline, for a 100 basis point decline in the average reinvestment rate and based on our existing policies and investment portfolio, the impact from investing in that lower interest rate environment could further reduce Life & Retirement net investment income by approximately $2.7 million in year one and $8.1 million in year two, further reducing the annualized net interest spread on fixed annuities by approximately 9 basis points and 27 basis points in the respective periods, compared to the current period annualized net interest spread on fixed annuities. We could also consider potential changes in rates credited to policyholders, tempered by any restrictions on the ability to adjust policyholder rates due to guaranteed minimum crediting rates.
The expectation for future annualized net interest spreads on fixed annuities is also an important component in the amortization of DAC. In terms of the sensitivity of this amortization to the annualized net interest spread on fixed annuities, based on DAC as of September 30, 2022 and assuming all other assumptions are met, a 10 basis point deviation in the current year targeted annualized net interest rate spread on the fixed annuities assumption would impact amortization between $0.3 million and $0.4 million. This result may change depending on the magnitude and direction of any actual deviations but represents a range of reasonably likely experience for the noted assumption.
We reinsure a $2.4 billion block of in force fixed annuities with a minimum crediting rate of 4.5% which helps mitigate the risk of not being able to generate appropriate spreads on the annuity business. Information regarding the interest crediting rates and balances equal to the guaranteed minimum crediting rates for deferred annuity account values excluding the reinsured block is shown below.
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($ in millions) | | September 30, 2022 |
| | Total Deferred Annuities | | Deferred Annuities at Minimum Guaranteed Rate |
| | Percent of Total | | Accumulated Value (AV) | | Percent of Total Deferred Annuities AV | | Percent of Total | | Accumulated Value |
Guaranteed minimum crediting rates: | | | | | | | | | | |
Less than 2% | | 56.3 | % | | $ | 1,436.9 | | | 65.7 | % | | 47.1 | % | | $ | 943.6 | |
Equal to 2% but less than 3% | | 11.1 | | | 282.2 | | | 81.0 | | | 11.4 | | | 228.6 | |
Equal to 3% but less than 4% | | 24.2 | | | 618.4 | | | 100.0 | | | 30.9 | | | 618.1 | |
Equal to 4% but less than 5% | | 6.5 | | | 165.0 | | | 100.0 | | | 8.2 | | | 165.0 | |
5% or higher | | 1.9 | | | 47.6 | | | 100.0 | | | 2.4 | | | 47.6 | |
Total | | 100.0 | % | | $ | 2,550.1 | | | 78.5 | % | | 100.0 | % | | $ | 2,002.9 | |
We will continue to be disciplined in executing strategies to mitigate the negative impact on profitability of a sustained low interest rate environment. However, the success of these strategies may be affected by the factors discussed in Part I - Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2021 and other factors in this report.
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Horace Mann Educators Corporation | 39 | Quarterly Report on Form 10-Q |
Supplemental & Group Benefits
(All comparisons vs. same periods in 2021, unless noted otherwise)
For the three and nine months ended September 30, 2022, net income reflected the following factors:
•Inclusion of Madison National's results
•Year-to date sales* of voluntary products were up $1.6 million, or 38.1%, and year-to-date sales* of employer-sponsored products added another $5.8 million
•The benefit ratio on employer-sponsored products decreased sequentially due to a lower level of benefits expense reflecting seasonality
The following table provides certain information for Supplemental & Group Benefits for the periods indicated.
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($ in millions) | | Three Months Ended September 30, | | 2022-2021 | | Nine Months Ended September 30, | | 2022-2021 |
| | 2022 | | 2021 | | Change | | 2022 | | 2021 | | Change |
Supplemental & Group Benefits | | | | | | | | | | | | |
Net premiums and contract charges earned | | $ | 68.3 | | | $ | 31.7 | | | 115.5 | % | | $ | 207.3 | | | $ | 96.4 | | | 115.0 | % |
Net investment income | | 8.7 | | | 7.2 | | | 20.8 | % | | 25.4 | | | 19.0 | | | 33.7 | % |
Other income | | (5.2) | | | 0.6 | | | N.M. | | (8.4) | | | 1.9 | | | N.M. |
Benefits, settlement expenses and change in reserves | | 18.6 | | | 10.5 | | | N.M. | | 80.1 | | | 30.7 | | | N.M. |
Interest credited | | 0.4 | | | 0.1 | | | N.M. | | 0.7 | | | 0.2 | | | N.M. |
Operating expenses (includes DAC unlocking and amortization expense) | | 24.5 | | | 11.4 | | | 114.9 | % | | 76.5 | | | 33.1 | | | 131.1 | % |
Intangible asset amortization expense | | 4.0 | | | 2.9 | | | 37.9 | % | | 11.8 | | | 8.8 | | | 34.1 | % |
Income before income taxes | | 24.3 | | | 14.6 | | | 66.4 | % | | 55.2 | | | 44.5 | | | 24.0 | % |
Net income | | 19.2 | | | 11.5 | | | 67.0 | % | | 43.6 | | | 34.8 | | | 25.3 | % |
Core earnings* | | 19.2 | | | 11.5 | | | 67.0 | % | | 43.6 | | | 34.8 | | | 25.3 | % |
| | | | | | | | | | | | |
Benefits ratio(1) | | 27.8 | % | | 33.4 | % | | -5.6 | pts | | 39.0 | % | | 32.1 | % | | 6.9 | pts |
Operating expense ratio(2) | | 34.1 | % | | 28.9 | % | | 5.2 | pts | | 34.1 | % | | 28.2 | % | | 5.9 | pts |
Pretax profit margin(3) | | 33.8 | % | | 37.0 | % | | -3.2 | pts | | 24.6 | % | | 37.9 | % | | -13.3 | pts |
| | | | | | | | | | | | |
Voluntary products benefits ratio | | 31.4 | % | | 33.9 | % | | -2.5 | pts | | 31.7 | % | | 31.8 | % | | -0.1 | pts |
Voluntary premium persistency (rolling 12 months) | | 91.3 | % | | 92.2 | % | | -0.9 | pts | | 91.3 | % | | 92.2 | % | | -0.9 | pts |
Employer-sponsored products benefits ratio | | 25.0 | % | | — | % | | N.M. | | 44.8 | % | | — | % | | N.M. |
(1) Ratio of benefits to net premiums earned.
(2) Ratio of operating expenses to total revenues.
(3) Ratio of income before income taxes to total revenues.
For the three and nine months ended September 30, 2022, total sales* were $4.4 million and $11.6 million, respectively. Sales of voluntary products* were $2.2 million and $5.8 million for three and nine months ended
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Horace Mann Educators Corporation | 40 | Quarterly Report on Form 10-Q |
September 30, 2022, respectively, representing increases of 10.0% and 38.1% compared to the prior year periods. Though persistency was slightly lower, it still remains very strong at 91.3%. Sales of employer-sponsored products* added another $5.8 million for the nine months ended September 30, 2022.
The current periods include the results of Madison National which is driving increases in (1) benefits, settlement expenses and change in reserves, (2) operating expenses (includes DAC unlocking and amortization), and (3) intangible asset amortization expense. The non-cash impact of amortization of intangible assets under purchase accounting reduced net income by $4.0 million and $11.8 million pretax for the three and nine months ended September 30, 2022. Pretax profit margin reflects a combination of voluntary and employer-sponsored products.
Corporate & Other
(All comparisons vs. same periods in 2021, unless noted otherwise)
The following table provides certain financial information for Corporate & Other for the periods indicated.
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($ in millions) | | Three Months Ended September 30, | | 2022-2021 | | Nine Months Ended September 30, | | 2022-2021 |
| | 2022 | | 2021 | | Change % | | 2022 | | 2021 | | Change % |
Interest expense | | $ | (5.3) | | | $ | (3.4) | | | -55.9 | % | | $ | (13.5) | | | $ | (10.3) | | | -31.1 | % |
Net investment losses, pretax | | (12.8) | | | (6.5) | | | N.M. | | (43.8) | | | (10.6) | | | N.M. |
Other operating expenses, net investment income and other income | | (1.4) | | | (2.2) | | | 36.4 | % | | (5.9) | | | (6.9) | | | 14.5 | % |
Net investment losses, after tax | | (10.1) | | | (5.1) | | | N.M. | | (34.5) | | | (8.3) | | | N.M. |
Net loss | | (15.5) | | | (9.6) | | | -61.5 | % | | (50.1) | | | (22.0) | | | -127.7 | % |
Core loss* | | (5.4) | | | (4.5) | | | -20.0 | % | | (15.6) | | | (13.7) | | | -13.9 | % |
For the three and nine months ended September 30, 2022, the net loss increased due to net investment losses which are mainly from changes in fair values of equity securities and investment impairments as well as increases in interest expense on the Bank Credit Facility.
Investment Results
(All comparisons vs. same periods in 2021, unless noted otherwise)
Our investment strategy is primarily focused on generating income to support product liabilities, and balances principal protection and risk. Total net investment income includes net investment income from our investment portfolio as well as accreted investment income from the deposit asset on reinsurance related to our reinsured block of approximately $2.4 billion of fixed annuity liabilities related to legacy individual policies written in 2002 or earlier.
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($ in millions) | | Three Months Ended September 30, | | 2022-2021 | | Nine Months Ended September 30, | | 2022-2021 |
| | 2022 | | 2021 | | Change % | | 2022 | | 2021 | | Change % |
Net investment income - investment portfolio | | $ | 70.9 | | | $ | 78.1 | | | -9.2 | % | | $ | 223.3 | | | $ | 233.3 | | | -4.3 | % |
Investment income - deposit asset on reinsurance | | 26.7 | | | 25.6 | | | 4.3 | % | | 77.4 | | | 75.1 | | | 3.1 | % |
Total net investment income | | 97.6 | | | 103.7 | | | -5.9 | % | | 300.7 | | | 308.4 | | | -2.5 | % |
Pretax net investment losses | | (12.8) | | | (6.5) | | | N.M. | | (43.8) | | | (10.6) | | | N.M. |
Pretax net unrealized investment gains (losses) on fixed maturity securities | | | | | | | | (632.0) | | | 466.4 | | | N.M. |
Net investment income from our investment portfolio decreased $7.2 million and $10.0 million for the three and nine months ended September 30, 2022 respectively. The decreases were primarily attributable to returns below our historical average in our portfolio of limited partnership interests.
For the three and nine months ended September 30, 2022, pretax net investment losses increased $6.3 million and $33.2 million, respectively, which are mainly from changes in fair values of equity securities and
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Horace Mann Educators Corporation | 41 | Quarterly Report on Form 10-Q |
impairments. Pretax net unrealized investment losses on fixed maturity securities as of September 30, 2022 were $632.0 million compared to pretax net unrealized investment gains of $441.6 million as of December 31, 2021 reflecting a 232 basis point increase in the 10-year U.S. Treasury yield and wider credit spreads across most asset classes.
Fixed Maturity and Equity Securities Portfolios
The table below presents our fixed maturity and equity securities portfolios by major asset class, including the 10 largest sectors of our corporate bond holdings (based on fair value).
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($ in millions) | | September 30, 2022 |
| | Number of Issuers | | Fair Value | | Amortized Cost, net | | Pretax Net Unrealized Loss |
Fixed maturity securities | | | | | | | | |
Corporate bonds | | | | | | | | |
Banking & Finance | | 177 | | | $ | 470.5 | | | $ | 534.2 | | | $ | (63.7) | |
Miscellaneous | | 36 | | | 152.3 | | | 154.4 | | | (2.1) | |
Insurance | | 58 | | | 150.7 | | | 170.5 | | | (19.8) | |
Energy | | 81 | | | 134.4 | | | 157.7 | | | (23.3) | |
HealthCare, Pharmacy | | 80 | | | 119.7 | | | 147.9 | | | (28.2) | |
Utilities | | 78 | | | 111.1 | | | 134.5 | | | (23.4) | |
Real Estate | | 46 | | | 105.1 | | | 118.2 | | | (13.1) | |
Transportation | | 50 | | | 89.3 | | | 102.9 | | | (13.6) | |
Food and Beverage | | 32 | | | 72.1 | | | 83.1 | | | (11.0) | |
Consumer Products | | 53 | | | 62.5 | | | 80.6 | | | (18.1) | |
All other corporates(1) | | 305 | | | 460.1 | | | 544.7 | | | (84.6) | |
Total corporate bonds | | 996 | | | 1,927.8 | | | 2,228.7 | | | (300.9) | |
Mortgage-backed securities | | | | | | | | |
U.S. Government and federally sponsored agencies | | 249 | | | 381.6 | | | 425.5 | | | (43.9) | |
Commercial(2) | | 159 | | | 290.9 | | | 322.3 | | | (31.4) | |
Other | | 31 | | | 13.0 | | | 14.1 | | | (1.1) | |
Municipal bonds(3) | | 616 | | | 1,307.9 | | | 1,440.9 | | | (133.0) | |
Government bonds | | | | | | | | |
U.S. | | 44 | | | 345.4 | | | 412.0 | | | (66.6) | |
Foreign | | 7 | | | 35.4 | | | 37.2 | | | (1.8) | |
Collateralized loan obligations(4) | | 218 | | | 679.7 | | | 707.3 | | | (27.6) | |
Asset-backed securities | | 125 | | | 290.4 | | | 316.1 | | | (25.7) | |
Total fixed maturity securities | | 2,445 | | | $ | 5,272.1 | | | $ | 5,904.1 | | | $ | (632.0) | |
| | | | | | | | |
Equity securities | | | | | | | | |
Non-redeemable preferred stocks | | 29 | | | $ | 97.1 | | | | | |
Common stocks | | 5 | | | 1.1 | | | | | |
Closed-end fund | | 1 | | | 15.6 | | | | | |
Total equity securities | | 35 | | | $ | 113.8 | | | | | |
| | | | | | | | |
Total | | 2,480 | | | $ | 5,385.9 | | | | | |
(1)The All other corporates category contains 18 additional industry sectors. Technology, telecommunications, natural gas, broadcasting and media and industry manufacturing represented $236.4 million of fair value at September 30, 2022, with the remaining 13 sectors each representing less than $223.7 million.
(2)At September 30, 2022, 100% were investment grade, with an overall credit rating of AA+, and the positions were well diversified by property type, geography and sponsor.
(3)Holdings are geographically diversified, 45.6% are tax-exempt and 77.4% are revenue bonds tied to essential services, such as mass transit, water and sewer. The overall credit quality of the municipal bond portfolio was AA- at September 30, 2022.
(4)Based on fair value, 93.3% of the collateralized loan obligation securities were rated investment grade based on ratings assigned by a nationally recognized statistical ratings organization (NRSRO - S&P, Moody's, Fitch, Dominion, A.M. Best, Morningstar, Egan Jones and Kroll).
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Horace Mann Educators Corporation | 42 | Quarterly Report on Form 10-Q |
As of September 30, 2022, our diversified fixed maturity securities portfolio consisted of 3,796 investment positions, issued by 2,445 entities, and totaled approximately $5.3 billion in fair value. This portfolio was 90.9% investment grade, based on fair value, with an average quality rating of A+. Our investment guidelines target single corporate issuer concentrations to 0.5% of invested assets for AAA or AA rated securities, 0.35% of invested assets for A or BBB rated securities, and $5.0 million for non-investment grade securities.
Rating of Fixed Maturity Securities and Equity Securities(1)
The following table presents the composition and fair value of our fixed maturity and equity securities portfolios by rating category. As of September 30, 2022, 90.5% of these combined portfolios were investment grade, based on fair value, with an overall average quality rating of A+. We have classified the entire fixed maturity securities portfolio as available for sale, which is carried at fair value.
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($ in millions) | | Percent of Portfolio Fair Value | | September 30, 2022 |
| | December 31, 2021 | | September 30, 2022 | | Fair Value | | Amortized Cost, net |
Fixed maturity securities | | | | | | | | |
AAA | | 10.1 | % | | 10.8 | % | | $ | 567.8 | | | $ | 610.1 | |
AA(2) | | 37.1 | | | 38.6 | | | 2,034.2 | | | 2,299.9 | |
A | | 19.2 | | | 17.9 | | | 944.9 | | | 1,040.2 | |
BBB | | 23.6 | | | 23.6 | | | 1,247.3 | | | 1,436.6 | |
BB | | 3.1 | | | 2.5 | | | 131.7 | | | 148.2 | |
B | | 1.3 | | | 1.0 | | | 52.4 | | | 58.8 | |
CCC or lower | | — | | | 0.1 | | | 2.9 | | | 3.2 | |
Not rated(3) | | 5.6 | | | 5.5 | | | 290.9 | | | 307.1 | |
Total fixed maturity securities | | 100.0 | % | | 100.0 | % | | $ | 5,272.1 | | | $ | 5,904.1 | |
Equity securities | | | | | | | | |
AAA | | — | % | | — | % | | $ | — | | | |
AA | | — | | | — | | | — | | | |
A | | 0.5 | | | 0.5 | | | 0.6 | | | |
BBB | | 67.3 | | | 70.0 | | | 79.7 | | | |
BB | | 12.7 | | | 13.1 | | | 14.9 | | | |
B | | — | | | — | | | — | | | |
CCC or lower | | — | | | — | | | — | | | |
Not rated | | 19.5 | | | 16.4 | | | 18.6 | | | |
Total equity securities | | 100.0 | % | | 100.0 | % | | $ | 113.8 | | | |
| | | | | | | | |
Total | | | | | | $ | 5,385.9 | | | |
(1)Ratings are assigned by an NRSRO when available, If no rating is available from an NRSRO, then an internally developed rating is used. Ratings for publicly traded securities are determined when the securities are acquired and are updated monthly to reflect any changes in ratings.
(2)At September 30, 2022, the AA rated fair value amount included $342.8 million of U.S. Government and federally sponsored agency securities and $570.9 million of mortgage-backed and other asset-backed securities issued by U.S. Government and federally sponsored agencies.
(3)This category primarily represents private placement and municipal securities not rated by a NRSRO.
As of September 30, 2022, the fixed maturity securities portfolio had $661.3 million of pretax gross unrealized investment losses on $4,495.7 million of fair value related to 3,305 positions. Of the investment positions with gross unrealized losses, there were 659 trading below 80.0% of the carrying value as of September 30, 2022.
We view the pretax gross unrealized investment losses of all our fixed maturity securities as of September 30, 2022 as temporary. Future changes in circumstances related to these and other securities could require subsequent recognition of impairment.
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Horace Mann Educators Corporation | 43 | Quarterly Report on Form 10-Q |
Liquidity and Capital Resources
Our liquidity and access to capital were not materially impacted by inflation or changes in interest rates during the nine months ended September 30, 2022. For further discussion regarding the potential future impacts of inflation and changes in interest rates, see Part I – Item 1A - Risk Factors and Part II – Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations - Effects of Inflation and Changes in Interest Rates in our Annual Report on Form 10-K for the year ended December 31, 2021.
Investments
Information regarding our investment portfolio, which is comprised primarily of investment grade fixed maturity securities, is presented in Part I - Item 1, Note 3 of the Consolidated Financial Statements as well as Part I - Item 2 - Investment Results in this report.
Cash Flow
Our short-term liquidity requirements, within a 12 month operating cycle, are for the timely payment of claims and benefits to policyholders, operating expenses, interest payments and federal income taxes. Cash flow generated from operations has been, and is expected to be, adequate to meet our operating cash needs in the next 12 months. Cash flow in excess of operational needs has been used to fund business growth, pay dividends to shareholders and repurchase shares of our common stock. Long-term liquidity requirements, beyond one year, are principally for the payment of future insurance and annuity policy claims and benefits, as well as retirement of debt. The following table summarizes our consolidated cash flows activity for the periods indicated.
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($ in millions) | | Nine Months Ended September 30, | | 2022-2021 |
| | 2022 | | 2021 | | Change % |
Net cash provided by operating activities | | $ | 115.8 | | | $ | 178.1 | | | -35.0 | % |
Net cash used in investing activities | | (295.9) | | | (351.0) | | | 15.7 | % |
Net cash provided by financing activities | | 82.6 | | | 190.8 | | | -56.7 | % |
Net increase (decrease) in cash | | (97.5) | | | 17.9 | | | N.M. |
Cash at beginning of period | | 133.7 | | | 22.3 | | | N.M. |
Cash at end of period | | $ | 36.2 | | | $ | 40.2 | | | -10.0 | % |
Operating Activities
As a holding company, we conduct our principal operations in the personal lines segment of the property and casualty, life, retirement, supplemental and group insurance industries through our subsidiaries. Our insurance subsidiaries generate cash flow from premium and investment income, generally well in excess of their immediate needs for policy obligations, operating expenses and other cash requirements. Cash provided by operating activities primarily reflects net cash flows generated by the insurance subsidiaries.
For the nine months ended September 30, 2022, net cash provided by operating activities decreased $62.3 million, primarily due to higher claims paid on insurance policies.
Investing Activities
Our insurance subsidiaries maintain significant investments in fixed maturity securities to meet future contractual obligations to policyholders. In conjunction with our management of liquidity and other asset/liability management objectives, we, from time to time, will sell fixed maturity securities prior to maturity, and reinvest the proceeds into other investments with different interest rates, maturities or credit characteristics. Accordingly, we have classified the entire fixed maturity securities portfolio as available for sale.
Investing activities includes our acquisition of Madison National for the nine months ended September 30, 2022.
Financing Activities
Financing activities include primarily payment of dividends, receipt and withdrawal of funds by annuity contractholders, changes in the deposit asset on reinsurance, repurchases of our common stock, fluctuations in book overdraft balances, and borrowings, repayments and repurchases related to debt facilities.
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Horace Mann Educators Corporation | 44 | Quarterly Report on Form 10-Q |
For the nine months ended September 30, 2022, net cash provided by financing activities decreased $108.2 million compared to the prior year period, primarily due to a $182.0 million net decrease in cash inflows from advances received under Federal Home Loan Bank of Chicago (FHLB) funding agreements and a $22.3 increase in cash outflows related to acquisitions of treasury stock partially offset by a $95.2 million net increase in cash inflows from reverse repurchase agreements.
The following table shows activity from FHLB funding agreements for the periods indicated.
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($ in millions) | | Nine Months Ended September 30, | | 2022-2021 | | 2022-2021 |
| | 2022 | | 2021 | | Change $ | | Change % |
Balance at beginning of the period | | $ | 782.5 | | | $ | 590.5 | | | $ | 192.0 | | | 32.5 | % |
Advances received from FHLB funding agreements | | 154.0 | | | 446.0 | | | (292.0) | | | -65.5 | % |
Principal repayments on FHLB funding agreements | | (94.0) | | | (204.0) | | | 110.0 | | | N.M. |
Balance at end of the period | | $ | 842.5 | | | $ | 832.5 | | | $ | 10.0 | | | 1.2 | % |
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Horace Mann Educators Corporation | 45 | Quarterly Report on Form 10-Q |
Liquidity Sources and Uses
Our potential sources and uses of funds principally include the following activities:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Property & Casualty | | Life & Retirement | | Supplemental & Group Benefits | | Corporate & Other |
Activities for potential sources of funds | | | | | | | | |
Receipt of insurance premiums, contractholder charges and fees | | ☑ | | ☑ | | ☑ | | |
Recurring service fees, commissions and overrides | | ☑ | | ☑ | | ☑ | | ☑ |
Contractholder fund deposits | | | | ☑ | | ☑ | | |
Reinsurance and indemnification program recoveries | | ☑ | | ☑ | | ☑ | | |
Receipts of principal, interest and dividends on investments | | ☑ | | ☑ | | ☑ | | ☑ |
Proceeds from sales of investments | | ☑ | | ☑ | | ☑ | | ☑ |
Proceeds from FHLB borrowing and funding agreements | | ☑ | | ☑ | | ☑ | | |
Proceeds from reverse repurchase agreements | | ☑ | | ☑ | | ☑ | | |
Intercompany loans | | ☑ | | ☑ | | ☑ | | ☑ |
Capital contributions from parent | | ☑ | | ☑ | | ☑ | | |
Dividends or return of capital from subsidiaries | | | | | | | | ☑ |
Tax refunds/settlements | | ☑ | | ☑ | | ☑ | | ☑ |
Proceeds from periodic issuance of additional securities | | | | | | | | ☑ |
Proceeds from debt issuances | | | | | | | | ☑ |
Proceeds from senior revolving credit facility | | | | | | | | ☑ |
Receipt of intercompany settlements related to employee benefit plans | | | | | | | | ☑ |
| | | | | | | | |
Activities for potential uses of funds | | | | | | | | |
Payment of claims and related expenses | | ☑ | | ☑ | | ☑ | | |
Payment of contract benefits, surrenders and withdrawals | | | | ☑ | | ☑ | | |
Reinsurance cessions and indemnification program payments | | ☑ | | ☑ | | ☑ | | |
Payment of operating costs and expenses | | ☑ | | ☑ | | ☑ | | ☑ |
Payments to purchase investments | | ☑ | | ☑ | | ☑ | | ☑ |
Repayment of FHLB borrowing and funding agreements | | ☑ | | ☑ | | ☑ | | |
Repayment of reverse repurchase agreements | | ☑ | | ☑ | | ☑ | | |
Payment or repayment of intercompany loans | | ☑ | | ☑ | | ☑ | | ☑ |
Capital contributions to subsidiaries | | | | | | | | ☑ |
Dividends or return of capital to shareholders/parent company | | ☑ | | ☑ | | ☑ | | ☑ |
Tax payments/settlements | | ☑ | | ☑ | | ☑ | | ☑ |
Common share repurchases | | | | | | | | ☑ |
Debt service expenses and repayments | | | | | | | | ☑ |
Repayment on senior revolving credit facility | | | | | | | | ☑ |
Payments related to employee benefit plans | | | | | | | | ☑ |
Payments for business acquisitions | | | | | | | | ☑ |
We actively manage our financial position and liquidity levels in light of changing market, economic and business conditions. Liquidity is managed at both the entity and enterprise level across HMEC and is assessed on both base and stressed level liquidity needs. We believe we have sufficient liquidity to meet these needs. Additionally, we have existing intercompany agreements in place that facilitate liquidity management across HMEC to enhance flexibility.
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Horace Mann Educators Corporation | 46 | Quarterly Report on Form 10-Q |
As of September 30, 2022, we held $937.5 million of cash, U.S. government and agency fixed maturity securities and public equity securities (excluding non-redeemable preferred stocks and foreign equity securities) which, under normal market conditions, could be rapidly liquidated.
Certain remote events and circumstances could constrain our liquidity. Those events and circumstances include, for example, a catastrophe resulting in extraordinary losses, a downgrade of our Senior Notes rating to non-investment grade status or a downgrade in our insurance subsidiaries' financial strength ratings. The rating agencies also consider the interdependence of our individually rated entities; therefore, a rating change in one entity could potentially affect the ratings of other related entities.
Capital Resources
We have determined the amount of capital that is needed to adequately fund and support business growth, primarily based on risk-based capital formulas, including those developed by the National Association of Insurance Commissioners. Historically, our insurance subsidiaries have generated capital in excess of such needed levels. These excess amounts have been paid to us through dividends. We have then utilized these dividends and our access to the capital markets to fund growth initiatives, service and retire debt, pay dividends to our shareholders, repurchase shares of our common stock and for other corporate purposes. If necessary, we also have other potential sources of liquidity that could provide for additional funding to meet corporate obligations or pay shareholder dividends, including a revolving line of credit, as well as issuances of various securities.
The insurance subsidiaries are subject to various regulatory restrictions that limit the amount of annual dividends or other distributions, including loans or cash advances, available to us without prior approval of the insurance regulatory authorities. The aggregate amount of dividends that may be paid in 2022 from all of our insurance subsidiaries without prior regulatory approval is $131.9 million, excluding the impact and timing of prior dividends, of which $129.7 million was paid during the nine months ended September 30, 2022. We anticipate that our sources of capital will continue to generate sufficient capital to meet the needs for business growth, debt interest payments, shareholder dividends and our share repurchase programs. Additional information is contained in Part II - Item 8, Note 14 of the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2021.
Total capital was $1,574.5 million as of September 30, 2022, including $497.9 million of short-term and long-term debt. Total debt represented 31.6% of total capital including net unrealized investment losses on fixed maturity securities (25.3% excluding net unrealized investment losses on fixed maturity securities*) at September 30, 2022, which was slightly above our long-term target of 25% for our debt to capital ratio excluding net unrealized investment gains (losses).
Shareholders' equity was $1,076.6 million as of September 30, 2022, including net unrealized investment losses on fixed maturity securities of $396.7 million after taxes and the related impact of DAC associated with annuity contracts and life insurance products with account values. The market value of our common stock and the market value per share were $1,443.3 million and $35.29, respectively, as of September 30, 2022. Book value per share and adjusted book value per share* was $26.32 and $36.02, respectively, as of September 30, 2022.
Additional information regarding net unrealized investment gains on fixed maturity securities as of September 30, 2022 is included in Part I - Item 1, Note 3 of the Consolidated Financial Statements as well as in Part I - Item 2 - Investment Results in this report.
Total dividends paid to shareholders was $39.5 million for the nine months ended September 30, 2022. In March, May and August of 2022, the Board of Directors (Board) approved regular quarterly dividends of $0.32 per share.
For the nine months ended September 30, 2022, we repurchased 670,816 shares of our common stock at an average price per share of $35.82 under our 2015 and 2022 share repurchase programs. See Part II - Item 8, Note 13 of the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2021 for more information. During the second quarter of 2022, our Board authorized $50.0 million of share repurchases under our 2022 share repurchase program. See Part II - Item 2 in this report for further information. As of September 30, 2022, $41.3 million remained authorized for future share repurchases under the 2022 share repurchase program.
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Horace Mann Educators Corporation | 47 | Quarterly Report on Form 10-Q |
The following table summarizes our debt obligations.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
($ in millions) | | Interest Rates | | Final Maturity | | September 30, 2022 | | December 31, 2021 |
|
Short-term debt | | | | | | | | |
Bank Credit Facility | | Variable | | 2026 | | $ | 249.0 | | | $ | 249.0 | |
Long-term debt(1) | | | | | | | | |
4.50% Senior Notes, Aggregate principal amount of $250.0 less unaccrued discount of $0.3 and $0.3 and unamortized debt issuance costs of $0.9 and $1.1 | | 4.50% | | 2025 | | 248.8 | | | 248.6 | |
FHLB borrowings | | 0.00% | | 2022 | | — | | | 5.0 | |
Total | | | | | | $ | 497.8 | | | $ | 502.6 | |
(1) We designate debt obligations as "long-term" based on maturity date at issuance.
As of September 30, 2022, we had outstanding $250.0 million aggregate principal amount of 4.50% Senior Notes (Senior Notes), which will mature on December 1, 2025, issued at a discount resulting in an effective yield of 4.53%. Interest on the Senior Notes is payable semi-annually at a rate of 4.50%. Detailed information regarding the redemption terms of the Senior Notes is contained in the Part II - Item 8, Note 9 of the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2021. The Senior Notes are traded in the open market (HMN 4.50).
As of September 30, 2022, we had no borrowings outstanding with FHLB. The Board has authorized a maximum amount equal to 15% of net aggregate admitted assets less separate account assets of the insurance subsidiaries for FHLB borrowing and funding agreements which is below our maximum FHLB borrowing capacity. The $5.0 million FHLB borrowings that was outstanding as of December 31, 2021 is reported as Long-term debt in the Consolidated Balance Sheet.
Effective July 12, 2021, we, as borrower, amended our Credit Agreement (Bank Credit Facility). The amended Bank Credit Facility increased the amount available on the senior revolving credit facility from $225.0 million to $325.0 million. PNC Bank, National Association and JPMorgan Chase Bank, N.A. serve as joint lead arrangers under the amended Bank Credit Facility, with The Northern Trust Company, KeyBank National Association, U.S. Bank National Association, Illinois National Bank, and Comerica Bank as lenders participating in the syndicate. Terms and conditions of the amended Bank Credit Facility are substantially consistent with the prior agreement, with an interest rate based on LIBOR plus 115 basis points. The amended Bank Credit Facility expires on July 12, 2026.
On December 31, 2021, we utilized $114.0 million of the senior revolving credit facility to fund a portion of the acquisition of Madison National that occurred effective January 1, 2022, resulting in an amount outstanding of $249.0 million under the senior revolving credit facility. We expect that the unused portion of the senior revolving credit facility will be available for ongoing working capital, capital expenditures and general corporate expenditures. The unused portion of the Bank Credit Facility is subject to a variable commitment fee, which was 0.15% on an annual basis at September 30, 2022.
To provide additional capital management flexibility, we filed a "universal shelf" registration statement on Form S-3 with the Securities and Exchange Commission (SEC) on March 10, 2021. The registration statement, which registered the offer and sale from time to time of an indeterminate amount of various securities, which may include debt securities, common stock, preferred stock, depositary shares, warrants, delayed delivery contracts and/or units that include any of these securities, was automatically effective on March 10, 2021. Unless withdrawn by us earlier, this registration statement will remain effective through March 10, 2024. No securities associated with the registration statement have been issued at the time of issuance of this Quarterly Report on Form 10-Q.
On March 13, 2018, we filed a "shelf" registration statement on Form S-4 with the SEC which became effective on May 2, 2018. Under this registration statement, we may from time to time offer and issue up to 5,000,000 shares of our common stock in connection with future acquisitions of other businesses, assets or securities. Unless withdrawn by us, this registration statement will remain effective indefinitely. No securities associated with the registration statement have been issued at the time of issuance of this Quarterly Report on Form 10-Q.
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Horace Mann Educators Corporation | 48 | Quarterly Report on Form 10-Q |
Financial Ratings
Our principal insurance subsidiaries are rated by A.M. Best Company, Inc. (A.M. Best), Fitch, Moody's and S&P. These rating agencies have also assigned ratings to our Senior Notes. The ratings that are assigned by these agencies, which are subject to change, can impact, among other things, our access to sources of capital, cost of capital, and competitive position. These ratings are not a recommendation to buy or hold any of our securities.
All four agencies currently have assigned the same insurance financial strength ratings to our Property & Casualty and Life insurance subsidiaries. Only A.M. Best currently rates our Supplemental & Group Benefits subsidiaries. A.M. Best currently rates our NTA Life subsidiary at the same level as our Property & Casualty and Life & Retirement subsidiaries and our Madison National subsidiary is rated A- (Excellent). Assigned ratings and respective affirmation/review dates as of October 31, 2022 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Insurance Financial | | | | Affirmed/ |
| | Strength Ratings (Outlook) | | Debt Ratings (Outlook) | | Reviewed |
A.M. Best | | | | | | | | | | |
HMEC (parent company) | | N.A. | | | | bbb | | (stable) | | 7/28/2022 |
HMEC's Life & Retirement subsidiaries | | A | | (stable) | | N.A. | | | | 7/28/2022 |
HMEC's Property & Casualty subsidiaries | | A | | (stable) | | N.A. | | | | 7/28/2022 |
HMEC's Supplemental & Group Benefits subsidiaries | | | | | | | | | | |
Madison National Life Insurance Company | | A- | | (stable) | | N.A. | | | | 7/28/2022 |
National Teachers Associates Life Insurance Company | | A | | (stable) | | N.A. | | | | 7/28/2022 |
Fitch | | A | | (stable) | | BBB | | (stable) | | 8/30/2022 |
Moody's | | | | | | | | | | |
HMEC (parent company) | | | | | | Baa2 | | (stable) | | 8/3/2022 |
HMEC's Life Group | | A2 | | (stable) | | | | | | 7/27/2022 |
HMEC's P&C Group | | A2 | | (stable) | | | | | | 8/3/2022 |
S&P | | A | | (stable) | | BBB | | (stable) | | 2/14/2022 |
Reinsurance Programs
Information regarding the reinsurance programs for our Property & Casualty, Supplemental, Retirement and Life segments is located in Part I - Item 1, Reporting Segments in our Annual Report on Form 10-K for the year ended December 31, 2021.