• Household acquisition momentum strengthened with healthy customer retention in back-to-school season
• $19 million in earnings from Supplemental & Group Benefits segment, which includes employer-sponsored benefit products for K-12 school districts added in Madison National Life acquisition
  • Earnings diversification benefit of worksite business offset by ongoing effect of financial market volatility and continuing impact of inflation on Property & Casualty segment results
• Catastrophe losses contributed 9.6% to the combined ratio, in line with guidance and the company’s 10-year average for the third-quarter
• 2022 full-year core EPS guidance revised to $1.70 to $2.00, reflecting third-quarter results and expectations for continued headwinds from inflation and financial market volatility
• Trajectory toward sustainable double-digit ROEs expected to resume in 2023 as share of education market grows; full-year 2023 core return on equity targeted for high-single digits

Horace Mann Educators Corporation (NYSE:HMN) today reported financial results for the three months ended September 30, 2022:

“This year’s back-to-school season brought more agents back into schools to share Horace Mann solutions, meet with teachers, and provide financial wellness education, letting Horace Mann showcase our commitment to educators’ financial success,” said Horace Mann President and CEO Marita Zuraitis. “We’re pleased with this return to a more normal operating environment, even as Horace Mann’s results — along with those of the entire insurance industry — have been impacted by inflation and financial market volatility.

“Better access was key to the improved momentum we saw throughout the quarter,” Zuraitis added. “Agents are reporting strong interest from educators in our financial workshops on topics like Student Loan Solutions and financial wellness. These events often lead to new household relationships that support our sales growth. In addition, we are seeing progress in a variety of ways across the business; for example, voluntary supplemental sales rose 10%, auto sales were also up, largely in states where we are confident in the outlook for pricing, and application counts for individual life policies during back to school have been above last year.

“The 14% year-over-year increase in core EPS also illustrated the importance of the addition of employer-sponsored benefits to complement the value we bring to educators through local, trusted advisors with insurance and financial services solutions,” noted Zuraitis. “Our new Supplemental & Group Benefits segment has delivered $44 million in core earnings in the first nine months of 2022, including $19 million in the third quarter, helping to offset external events affecting our Property & Casualty and Life & Retirement segments.

“In line with the broader industry, the Property & Casualty segment underlying loss ratios reflected inflationary pressures,” Zuraitis said. “As the impact of inflation continues to unfold, our rate plans for auto and property have become more aggressive, both in size and timing, and will continue to evolve as circumstances warrant. In addition to rate action implemented in the first nine months of 2022, we now expect to increase auto rates by 15% to 16% over the next five quarters. We believe this plan - bolstered by non-rate underwriting actions - will result in a seasonally adjusted auto combined ratio under 100 by the fourth quarter of 2023. Further, we expect to increase property rates by 8% to 9% over the next five quarters, on top of increases of 7% to 8% due to higher coverage values. The combination should result in an overall average property premium increase in 2023 in the mid-teens.

“Finally, financial market volatility continues to be a headwind across the entire insurance sector. While each of our segments is benefiting from rising new money yields in our core investment portfolio, this has been offset by returns below our historical average for our limited partnership fund portfolio. In addition, the Life & Retirement segment continues to experience lower charges and fees on variable annuities and asset-based accounts, as well as market-performance related DAC unlocking.

“We now expect full-year 2022 core EPS between $1.70 and $2.00, a wider-than-typical range due to the variability of the current environment,” Zuraitis said. “While it is disappointing that external factors are slowing our progress, we remain as committed as ever to supporting the education market. We remain confident that this dedication, coupled with successful execution of our strategic initiatives, will result in a larger share of the education market over the coming years. As we look to 2023, we expect return on equity to reach the high-single digits as we resume our trajectory toward sustainable double-digit ROEs. Further, our capital generating capacity remains strong, and we remain committed to driving shareholder value. Deploying capital for growth is a key priority. In addition, we provide an attractive shareholder return through our cash dividends and the opportunistic share repurchase program.”

Operating Segment Results

Beginning with first quarter 2022, Horace Mann is reporting financial results in three operating segments: (1) Property & Casualty, (2) Life & Retirement, and (3) Supplemental & Group Benefits. The retail business, consisting of the Property & Casualty and Life & Retirement segments, provides insurance and financial services to individual educators through agency and direct channels. The Supplemental & Group Benefits segment provides voluntary and employer-sponsored benefits through school district employers. These worksite offerings help school districts attract and retain staff. This segment includes the results of Madison National Life Insurance Company, Inc. (Madison National) that was acquired effective January 1, 2022.

Property & Casualty segment results reflect impact of inflation

(All comparisons vs. same period in 2021, unless noted otherwise)

The Property & Casualty insurance segment primarily markets private passenger auto insurance and residential home insurance. Horace Mann offers standard auto coverages, including liability, collision and comprehensive. Property coverage includes both homeowners and renters policies. For both auto and property coverage, Horace Mann offers educators a discounted rate and the Educator Advantage^® package of features. The Property & Casualty segment represented 46% of total revenues for the first nine months of 2022.

The Property & Casualty segment core loss improved over the prior year. The benefit of substantially lower catastrophe losses was partially offset by the impact of inflation and other factors on loss costs, which resulted in a lower segment combined ratio. In addition, segment net investment income was $8.0 million, reflecting the effect of equity market declines on private equity limited partnership fund returns, compared to $11.3 million in last year’s third quarter, when outsized returns in the limited partnership fund portfolio benefited this segment.

The property underlying loss ratio was 53.3% due to higher non-catastrophe water and fire losses. Catastrophe losses were $14.6 million, a significant portion of which was attributable to property damage from wind, thunderstorms and hail in the Midwest and the South. Hurricane Ian losses represented $3.3 million of the total catastrophe losses for the period, including less than $1.0 million in auto losses across all states and $2.5 million in property losses in North and South Carolina. The level of third-quarter catastrophe losses was below the company’s 10-year historical average of $17.2 million.

The auto underlying loss ratio increased 1.5 points sequentially and 7.8 points over last year, due to the ongoing impact of inflation and other loss cost factors that began impacting the insurance sector earlier this year. In addition, auto frequency moved closer to pre-pandemic levels. However, the company continues to implement rate and other underwriting actions that address these trends. Auto prior-accident year reserves were strengthened by $2.0 million due to impact of higher medical costs and social inflation on bodily injury cases, largely from accident-year 2021.

As expected, Property & Casualty net premiums written were slightly above last year’s third quarter. The year-over-year increase in property average net premiums improved sequentially to 9.2% from 7.5% in the second quarter as rate increases and inflation adjustments to coverage values take effect. The company expects the overall impact on average premiums of planned rate changes and inflation adjustments will rise to the mid teens in 2023. Rate increases will reflect changes in the level of weather activity.

Reflecting rate actions taken throughout 2022, the increase in average written premiums for auto policies improved sequentially to 4.4% from 1.6% in the second quarter. Reflecting rate actions in the first nine months of 2023 and the current plan for rate increases through year-end 2023, the rate plan anticipates auto rates rising a minimum of 15% to 16% over the next five quarters supplemented by non-rate underwriting actions.

Life & Retirement segment core earnings of $12.7 million

(All comparisons vs. same period in 2021, unless noted otherwise)

The Life & Retirement segment markets 403(b) tax-qualified fixed, fixed indexed and variable annuities; the Horace Mann Retirement Advantage^® open architecture platform for 403(b)(7) and other defined contribution plans; and other retirement products to educators as well as traditional term and whole life insurance products. Horace Mann is one of the largest participants in the K-12 educator portion of the 403(b) tax-qualified annuity market, measured by 403(b) net premiums written on a statutory accounting basis. The Life & Retirement segment represented 36% of total revenues for the first nine months of 2022.

Life & Retirement segment core earnings were down 33.5%, due to a decline in the net interest margin. In addition, charges and fees on variable annuities and asset-based accounts were lower due to market volatility. Higher mortality was offset by lower operating expenses. Adjusted core earnings, which excludes DAC unlocking, were down 30.3%.

For the Retirement business, net annuity contract deposits increased 3.7% sequentially to $108.1 million. Educators continue to begin their relationship with Horace Mann through 403(b) retirement savings products, including the company’s attractive annuity products, which provide encouraging cross-sell opportunities. Total cash value persistency remained strong at 94.0%. The net interest spread was 193 basis points.

Horace Mann currently has $4.7 billion in annuity assets under management, including $2.2 billion of fixed annuities, $2.0 billion of variable annuities and $0.5 billion of fixed indexed annuities. Assets under administration, which includes Retirement Advantage and other advisory and recordkeeping assets, was down from a year ago as equity market performance affects assets under management.

Supplemental & Group Benefits segment core earnings of $19.2 million

(All comparisons vs. same period in 2021, unless noted otherwise)

The Supplemental & Group Benefits segment markets employer-sponsored group worksite solutions for districts and other public employers, as well as voluntary products typically distributed through the worksite channel. The worksite business provides group term life, disability and specialty health insurance along with voluntary supplemental products including cancer, heart, hospital, supplemental disability and accident coverages. The Supplemental & Group Benefits segment represented 22% of total revenues for the first nine months of 2022.

Supplemental & Group Benefits segment core earnings were up 67.0% with adjusted core earnings up 61.6%, largely due to seasonal fluctuations in benefits and settlement expenses. Adjusted core earnings exclude the non-cash impact of amortization of intangible assets under purchase accounting that reduced core earnings by $4.0 million pretax vs. $2.9 million in the third quarter of 2021. Segment net investment income rose 20.8%, largely due to the addition of the Madison National portfolio in 2022.

The pre-tax profit margin reflected the addition of the newly acquired employer-sponsored products. Year-to-date benefit ratios for the voluntary and employer-sponsored products lines are near longer-term targets, despite expected quarterly fluctuations due to seasonality and other factors.

Total sales for the segment were $4.4 million. Sales of voluntary products were $2.2 million, a 10.0% increase over prior year, with persistency remaining very strong at 91.3%. Sales of employer-sponsored products added another $2.2 million.

Consolidated Results

Horace Mann’s 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 on the investment portfolio managed by Horace Mann, as well as accreted investment income on the deposit asset on reinsurance related to the company’s reinsurance of policy liabilities related to legacy individual annuities written in 2002 or earlier. The Corporate segment reduced total revenues by $43.4 million for the first nine months of 2022.

Net investment income of $98 million

(All comparisons vs. same period in 2021, unless noted otherwise)

Total net investment income was down $6.1 million with net investment income on the managed portfolio down $7.2 million. The decline was almost entirely due to returns below our historical average in the limited partnership funds portfolio. New money yields continue to exceed portfolio yields in the core fixed maturity securities portfolio.

The fixed maturity securities portfolio was in a net unrealized investment loss position of $632 million pretax at September 30, 2022, primarily due to the rising interest rate environment. Realized investment losses were largely due to portfolio repositioning activities to improve book yield as well as declines in the fair value of equity securities and impairments.

Adjusted book value per share* flat year over year

At September 30, 2022, shareholders’ equity was $1.08 billion, or $26.32 per share, as higher interest rates resulted in net unrealized investment losses on fixed maturity securities. Excluding the unrealized losses, shareholders’ equity was $1.47 billion, or $36.02 per share*. During the third quarter, Horace Mann repurchased 295,445 shares of common stock at an average price of $33.87, with year-to-date repurchases totaling 670,816 shares. As of September 30, 2022, $41.3 million remained authorized for future repurchases under the share repurchase program authorized in 2022.

At September 30, 2022, total debt was $497.9 million, with $249.0 million outstanding on the company’s line of credit. Interest expense on the line of credit was $1.6 million in the third quarter compared to $0.4 million last year. The ratio of debt-to-capital excluding net unrealized investment gains/losses* was 25.3% at September 30, 2022, which aligns with levels appropriate for the company’s current financial strength ratings.

Segment outlook for 2022

Horace Mann’s expectation for 2022 core EPS is now $1.70 to $2.00, reflecting third-quarter results and expectations for continued headwinds from inflation and stock market volatility. Total net investment income from the managed portfolio for 2022 is now expected to be between $295 million and $305 million. Fourth quarter commercial mortgage loan fund balances are expected to be lower than anticipated due to slower capital call activity and limited partnership fund returns are expected to be below historical averages.

Revised guidance for each segment reflects the following:

• Property & Casualty segment 2022 core loss now expected to be $13 million to $19 million, reflecting nine-month results and updated fourth-quarter outlook: Fourth-quarter results are expected to reflect the continued impact of inflation, normal seasonality in auto loss patterns and catastrophe losses in line with the company’s 10-year average of approximately $5 million for this period.
• Life & Retirement segment 2022 core earnings still expected to be in the range of $56 million to $59 million, reflecting nine-month results: The company continues to expect the full-year net investment spread will be below the 2021 level of 290 due to the revised outlook for net investment income.
• Supplemental & Group Benefits segment 2022 core earnings now expected to be $55 million to $58 million, reflecting nine-month results: The company continues to expect full-year 2022 benefit ratios will be in line with its longer-term targets of approximately 35% for voluntary products and approximately 50% for employer-sponsored products.

Quarterly webcast

Horace Mann’s senior management will discuss the company’s third-quarter financial results with investors on Nov. 4, 2022 at 11:00 a.m. Eastern Time. The conference call will be webcast live at investors.horacemann.com and archived later in the day for replay.

About Horace Mann

Horace Mann Educators Corporation (NYSE: HMN) is the largest financial services company focused on helping America’s educators and others who serve the community achieve lifelong financial success. The company offers individual and group insurance and financial solutions tailored to the needs of the educational community. Founded by Educators for Educators^® in 1945, Horace Mann is headquartered in Springfield, Illinois. For more information, visit horacemann.com.

Safe Harbor Statement and Non-GAAP Measures

Certain statements included in this news release, including those regarding our earnings outlook, expected catastrophe losses, our investment strategies, our plans to implement additional rate actions, our plans relating to share repurchases and dividends, our efforts to enhance customer experience and expand our products and solutions to more educators, our strategies to create sustainable long-term growth and double-digit ROEs, our strategy to achieve a larger share of the education market, and other business strategies, constitute forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are made based on management’s current expectations and beliefs concerning future developments and their potential effects upon Horace Mann and its subsidiaries. Horace Mann cautions investors that such statements are subject to risks and uncertainties, many of which are difficult to predict and generally beyond Horace Mann’s control, that could cause actual results to differ materially from those expressed in, or implied or projected by, the forward-looking statements included in this document. Certain important factors that could cause actual results to differ, possibly materially, from expectations or estimates reflected in such forward-looking statements can be found in the “Risk Factors” and “Forward-Looking Information” sections included in Horace Mann’s Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q filed with the Securities and Exchange Commission (SEC). The forward-looking statements herein are subject to the risk, among others, that we will be unable to execute our strategy because of market or competitive conditions or other factors. Horace Mann does not undertake to update any particular forward-looking statement included in this document if we later become aware that such statement is not likely to be achieved.

Information contained in this news release include measures which are based on methodologies other than accounting principles generally accepted in the United States of America (GAAP). Reconciliations of non-GAAP measures to the closest GAAP measures are contained in the Appendix to the Investor Supplement and additional descriptions of the non-GAAP measures are contained in the Glossary of Selected Terms included as an exhibit to Horace Mann’s SEC filings.

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