SPRINGFIELD, Ill.–(BUSINESS WIRE)–Horace Mann Educators Corporation (NYSE:HMN) today reported financial results for the quarter ended September 30, 2020:

“Educators are facing new challenges in their professional lives as they work to meet students’ needs in a vast array of new structures and environments due to the COVID-19 pandemic,” said Marita Zuraitis, Horace Mann President and CEO. “As a company dedicated to helping educators protect what they have today and prepare for a successful tomorrow, much of our attention this quarter was directed at working with schools to find the best way to serve educators who continue to work remotely. We are uniquely positioned to do this because of our solutions-based approach, which emphasizes relationships over individual transactions and is supported by continued expansion of robust virtual capabilities such as e-Signature and e-applications.

“This quarter, we delivered on this promise by helping customers affected by the numerous catastrophe events across the country repair their homes — which may also be their classrooms — helping to return some sense of normalcy in a challenging time,” Zuraitis added. “In addition, we expanded access to our Student Loan Solutions program, offered more virtual financial wellness seminars and finished integrating Supplemental agents under the Horace Mann umbrella, paving the way for them to offer more solutions to their clients.

“Our third-quarter results were strong in part because Auto frequency remains lower than historic averages due to the pandemic’s impact on driving patterns. But underneath that unusual trend, we are benefiting from a stronger foundation, the result of our long-term strategic plan to enhance our product offerings, strengthen our distribution and modernize our infrastructure — including last year’s addition of our Supplemental segment and our annuity reinsurance transaction,” Zuraitis said. “Annuity contract deposits remain strong, although the impact of the largely remote educator workforce in a pre-vaccine environment is temporarily slowing our top-line growth. However, we are taking what we’re learning about virtual educator engagement and incorporating it into our go-forward plans.

“Based on the strong results as well as a higher expected fourth-quarter contribution from the Supplemental segment, we increased our full-year 2020 core EPS guidance range to $2.95 to $3.15,” Zuraitis added. “These strong results keep us on track to our planned achievement of one full point of ROE improvement this year from our strategic actions. There will also be about one to one and a half points of ROE this year from pandemic-related and other factors that largely won’t repeat. Looking ahead, 2021 ROE will be on the original path we had anticipated, heading toward our double-digit ROE target.”

Property and Casualty written premiums declined as lower new business more than offset the return of the reinstatement premiums related to the PG&E subrogation recovery. The Auto policy retention rate of 80.9% was unchanged from last year, while the Property retention rate of 86.7% was slightly below recent experience.

Overall, segment core earnings for the quarter rose 11.3% due to higher net investment income, driven by favorable limited partnership returns. The combined ratio was essentially flat with last year as unusually low underlying loss ratios and higher favorable prior years’ reserve development overall offset significantly higher catastrophe losses. The underlying auto loss ratio reflected lower frequency related to changing driving patterns due to COVID-19, as well as the ongoing benefit of profitability initiatives. The underlying property loss ratio improved primarily due to the return of the reinsurance reinstatement premium. In addition, the mix of perils this year reflected more frequent, but less severe, non-catastrophe fire losses.

As a result of the emergence of PG&E Corporation and Pacific Gas and Electric Company (together, PG&E) from bankruptcy on July 1, 2020, in the third quarter of 2020, Horace Mann recognized favorable prior years’ reserve development of $5.2 million, pretax and net of reinsurance, along with the return of reinsurance reinstatement premiums of $3.5 million, for a total of $8.7 million, largely related to the 2018 Camp Fire in California. Results reported in 2018 reflected gross losses of $150.0 million and net losses after reinsurance of $37.9 million pretax from the Camp Fire.

Offsetting the improved underlying loss ratio were $34.8 million of catastrophe losses that added 21 points to the combined ratio. Of the 30 catastrophes in the quarter, the most notable were Hurricane Laura and the Midwest derecho, which combined accounted for nearly $20 million of the losses.

Catastrophe losses through the first nine months of 2020 have totaled $78.3 million. The company’s full-year 2020 guidance continues to reflect a catastrophe loss assumption of $85 to $90 million, which could be as much as 13 to 14 points on the full-year combined ratio.

Supplemental Segment Contributes $10.6 Million to Third-Quarter Earnings

On July 1, 2019, Horace Mann acquired NTA Life Enterprises, LLC (NTA), which became the company’s Supplemental segment. The segment continues to provide supplemental insurance products to the education market, building on NTA’s nearly 50 years of experience in the sector. The segment specializes in developing, marketing and underwriting supplemental insurance products, including cancer, heart, limited supplemental disability and accident.

Supplemental segment sales were $1.4 million for the quarter, showing a modest rebound from second quarter but reflecting continued lower sales volume due to limited school access because of COVID-19. Persistency was up slightly at 90.1%.

Strong core earnings reflected continued favorable business trends as well as some short-term benefit from changes in policyholder behavior due to COVID-19. Segment expenses include the non-cash impact of amortization of intangible assets under purchase accounting that reduces quarterly core earnings by $3.1 million pretax. The pretax profit margin remains slightly above management’s longer-term expectations because of the pandemic-related changes in policyholder behavior.

Retirement Segment Sees 6.9% Increase in Annuity Contract Deposits

(All comparisons vs. same period in 2019, unless noted otherwise)

Annuity contract deposits for the quarter rose 6.9% over prior year. Educators continue to find value in our Retirement savings products, including our competitively priced variable annuities with no surrender charges. Total cash value persistency remained strong at 94.8% for variable annuities and 94.5% for fixed annuities.

Reflecting the 2019 annuity reinsurance transaction, Horace Mann currently has $4.5 billion in annuity assets under management, including $2.2 billion of fixed annuities, $1.8 billion of variable annuities and $0.5 billion of fixed indexed annuities. Assets under administration, which includes advisory and recordkeeping assets added through the acquisition of BCG in 2019, were down 2.9% from year-end 2019.

Reflecting the benefits of the reinsurance transaction, the net interest margin on the retained annuity business was essentially unchanged from a year ago despite lower net investment income.

The segment recorded net income of $7.8 million for the quarter, up substantially from last year due primarily to expense savings. Core earnings excluding DAC unlocking for the quarter was also ahead of last year.

Life sales were down $1.7 million for the quarter. Life core earnings* reflected mortality costs in line with expectations; the company had favorable mortality experience in the third quarter of 2019. Life persistency of 95.7% was consistent with the prior year period.

Investment Portfolio Well-Positioned for Potential Market Disruption and Economic Downturn

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 2019 reinsurance of a block of approximately $2.9 billion of policy liabilities related to legacy individual annuities written in 2002 or earlier that was effective April 1, 2019.

Total net investment income rose slightly year-over-year. Net investment income on the managed portfolio was comparable with last year as favorable returns on limited partnership investments offset slightly lower yields on fixed maturity investments.

Third-quarter pretax net investment gains were $2.5 million, including $1.1 million in other-than-temporary impairment charges. The company’s fixed maturity securities portfolio is in a net unrealized investment gain position of $496.2 million at September 30, 2020.

Book Value Excluding Unrealized Investment Gains Up 5% Year Over Year

At September 30, 2020, shareholders’ equity was $1.72 billion, or $41.45 per share. Excluding net unrealized investment gains on fixed maturity securities, shareholders’ equity was $1.39 billion, or $33.52 per share.* The year-over-year improvement in book value excluding unrealized investment gains on fixed maturity securities primarily reflected the realized gain on assets transferred in the 2019 annuity reinsurance transaction, as well as strong earnings.

At September 30, 2020, total debt was $437.2 million, with $135.0 million outstanding on the company’s line of credit. The ratio of debt-to-capital excluding net unrealized investment gains* was 24.0%.

Quarterly Webcast

Horace Mann’s senior management will discuss the company’s third quarter financial results with investors on November 3, 2020 at 9:00 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 providing America’s educators and school employees with insurance and retirement solutions. Founded by Educators for Educators^® in 1945, the company is headquartered in Springfield, Illinois. For more information, visit horacemann.com.

Safe Harbor Statement and Non-GAAP Measures

Statements included in this news release that are not historical in nature are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties. Horace Mann is not under any obligation to (and expressly disclaims any such obligation to) update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Please refer to the company’s Quarterly Report on Form 10-Q for the period ended June 30, 2020 and the company’s past and future filings and reports filed with the Securities and Exchange Commission (SEC) for information concerning important factors that could cause actual results to differ materially from those in forward-looking statements. 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 the company’s SEC filings.