Horace Mann(HMN) - 2021 Q3 - Quarterly Report

PART I Consolidated Financial Statements This section presents the company's financial position, operating results, and cash flows, highlighting asset growth and increased nine-month net income Consolidated Balance Sheets This section details the company's financial position, showing an increase in total assets and liabilities, with stable shareholders' equity Consolidated Balance Sheet Highlights ($ in millions) | Account | Sep 30, 2021 (Unaudited) | Dec 31, 2020 | | :--- | :--- | :--- | | Total Assets | $14,265.0 | $13,471.8 | | Total Investments | $7,531.3 | $7,262.2 | | Separate Account Assets | $3,326.8 | $2,891.4 | | Total Liabilities | $12,468.6 | $11,681.7 | | Total Policy Liabilities | $7,270.5 | $7,148.6 | | Separate Account Liabilities | $3,326.8 | $2,891.4 | | Total Shareholders' Equity | $1,796.4 | $1,790.1 | Consolidated Statements of Operations and Comprehensive (Loss) Income Net income decreased in Q3 2021 but increased for the nine months ended September 30, 2021, primarily due to higher net investment income Key Operating Results ($ in millions, except per share data) | Metric | Q3 2021 | Q3 2020 | Nine Months 2021 | Nine Months 2020 | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $329.6 | $337.1 | $998.7 | $958.1 | | Net Investment Income | $103.7 | $93.7 | $308.4 | $256.4 | | Net Income | $16.3 | $36.5 | $102.3 | $85.5 | | Diluted EPS | $0.39 | $0.87 | $2.43 | $2.03 | | Comprehensive (Loss) Income | $(9.0) | $85.6 | $42.9 | $183.3 | Consolidated Statements of Cash Flows Net cash from operating activities decreased for the nine months ended September 30, 2021, while investing activities used cash and financing activities provided cash Consolidated Cash Flows for Nine Months Ended Sep 30 ($ in millions) | Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net Cash from Operating Activities | $178.1 | $267.8 | | Net Cash used in Investing Activities | $(351.0) | $(368.8) | | Net Cash from Financing Activities | $190.8 | $141.0 | | Net Increase in Cash | $17.9 | $40.0 | | Cash at End of Period | $40.2 | $65.5 | Notes to Consolidated Financial Statements This section details accounting policies, the pending Madison National Life acquisition, investment portfolio composition, fair value measurements, and segment performance - The company entered into an agreement to acquire Madison National Life Insurance Company for $172.5 million, with a potential earn-out of up to $12.5 million The acquisition is expected to close in the first quarter of 2022[32] Investment Portfolio Composition as of Sep 30, 2021 ($ in millions) | Security Type | Amortized Cost, net | Fair Value | | :--- | :--- | :--- | | U.S. Government & Agency | $1,021.9 | $1,102.4 | | Municipal bonds | $1,592.5 | $1,775.5 | | Corporate bonds | $2,268.8 | $2,451.6 | | Other asset-backed securities | $1,122.2 | $1,138.5 | | Total Fixed Maturity | $6,045.6 | $6,512.0 | Net Income by Segment - Nine Months Ended Sep 30 ($ in millions) | Segment | 2021 | 2020 | | :--- | :--- | :--- | | Property and Casualty | $42.5 | $53.7 | | Supplemental | $34.8 | $30.6 | | Retirement | $36.2 | $16.6 | | Life | $10.8 | $6.8 | | Corporate and Other | $(22.0) | $(22.2) | | Total | $102.3 | $85.5 | Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses financial performance, including Q3 net income decrease, nine-month net income increase, the Madison National Life acquisition, COVID-19 impacts, and the 2021 outlook Introduction and COVID-19 Considerations This section introduces the Madison National Life acquisition and discusses the company's operational adjustments and sales impacts due to the COVID-19 pandemic - Entered into a definitive agreement to acquire Madison National Life Insurance Company for $172.5 million, a leading writer of employer-paid benefits for K-12 school districts The transaction is expected to be immediately accretive to EPS and ROE[90][91] - The company has implemented a hybrid work model in response to the COVID-19 pandemic and is using virtual tools to reach customers due to limited in-person access to schools[93][95] Consolidated Financial Highlights and Results of Operations Q3 2021 net income decreased due to investment losses and rising auto costs, while nine-month net income increased, driven by higher net investment income Consolidated Financial Highlights | Metric | Q3 2021 | Q3 2020 | Nine Months 2021 | Nine Months 2020 | | :--- | :--- | :--- | :--- | :--- | | Total Revenues ($M) | $329.6 | $337.1 | $998.7 | $958.1 | | Net Income ($M) | $16.3 | $36.5 | $102.3 | $85.5 | | Diluted EPS | $0.39 | $0.87 | $2.43 | $2.03 | - The nine-month increase in net income was primarily due to a $49.0 million increase in net investment income, largely from favorable returns on limited partnership interests[101] - Benefits, claims, and settlement expenses increased for both the three and nine-month periods, driven by higher automobile loss experience, catastrophe losses, and Life benefits[104] Outlook for 2021 The company projects full-year 2021 net income between $3.27 and $3.42 per diluted share, reflecting higher catastrophe losses and auto loss ratios, partially offset by strong investment income - Full-year 2021 net income is estimated to be between $3.27 and $3.42 per diluted share, with Q4 core earnings projected at $0.65 to $0.80 per share[116] - The Property and Casualty segment's outlook was lowered due to rising automobile loss costs, with the underlying auto loss ratio expected to rise again in Q4[118][119] - Full-year total net investment income is anticipated to be in the range of $405 million to $410 million[117] Results of Operations by Segment This section details segment performance, noting a Q3 net loss in Property and Casualty, and net income growth in Supplemental, Retirement, and Life segments Property and Casualty Net Income (Loss) ($ in millions) | Period | 2021 | 2020 | | :--- | :--- | :--- | | Three Months | $(4.7) | $15.8 | | Nine Months | $42.5 | $53.7 | Supplemental Net Income ($ in millions) | Period | 2021 | 2020 | | :--- | :--- | :--- | | Three Months | $11.4 | $10.6 | | Nine Months | $34.8 | $30.6 | Retirement & Life Net Income ($ in millions) | Segment | Period | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Retirement | Nine Months | $36.2 | $16.6 | | Life | Nine Months | $10.8 | $6.8 | Investment Results Net investment income increased 20.3% for the nine months ended September 30, 2021, driven by limited partnership returns, with the $6.7 billion portfolio remaining investment grade - Net investment income from the investment portfolio (excluding the deposit asset on reinsurance) increased 26.6% to $233.3 million for the nine months ended Sep 30, 2021, mainly due to strong returns on limited partnership interests[156] - The fixed maturity and equity securities portfolio totaled $6.7 billion in fair value as of September 30, 2021, with 85.9% rated investment grade and an average quality rating of A+[162] Liquidity and Capital Resources The company maintains sufficient liquidity, with total capital at $2.185 billion and debt-to-total capital at 17.8%, below its 25% target, supported by an increased credit facility - Total debt was $388.6 million at September 30, 2021, representing 17.8% of total capital, which is below the company's long-term target of 25%[182] - The company's bank credit facility was amended to increase the available amount from $225.0 million to $325.0 million, partly to fund the Madison National acquisition[188] - During the nine months ended September 30, 2021, the company paid $38.6 million in shareholder dividends and repurchased 44,685 shares of common stock for $1.7 million[184][185] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is market value risk, managed by coordinating asset and liability durations, with interest rate changes posing a risk to earnings - The primary market risk is market value risk, stemming from potential decreases in the value of invested assets due to changes in yields, liquidity, or issuer financial health[198] - The company manages risk by matching the projected cash flows of assets and liabilities and maintaining reasonable durations to maximize income without sacrificing quality[201] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2021, with no material weaknesses or significant changes in internal control - Based on an evaluation as of September 30, 2021, the CEO and CFO concluded that the company's disclosure controls and procedures are effective[203] - No material changes were made to the internal control over financial reporting during the third quarter of 2021[204] PART II - OTHER INFORMATION Risk Factors There are no material changes to the risk factors previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2020 - There are no material changes from the risk factors disclosed in the Annual Report on Form 10-K for the year ended December 31, 2020[207] Unregistered Sales of Equity Securities and Use of Proceeds During Q3 2021, the company repurchased 5,000 shares of common stock at $36.88 per share, with $18.9 million remaining for future repurchases Issuer Purchases of Equity Securities (Q3 2021) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | July 1 - 31 | 5,000 | $36.88 | | August 1 - 31 | — | — | | September 1 - 30 | — | — | | Total | 5,000 | $36.88 | - As of the end of the quarter, $18.9 million remained authorized for future share repurchases under the existing program[208] Other Information This item is not applicable for the reporting period - Not applicable[209] Exhibits This section lists all exhibits filed with the Form 10-Q, including governance documents, material contracts, and required CEO/CFO certifications - A list of exhibits filed with the report is provided, including governance documents, material contracts, and required CEO/CFO certifications[210]