Horace Mann Educators : Fitch Upgrades Horace Mann's Ratings; Outlook Stable

FITCH UPGRADES HORACE MANN'S RATINGS; OUTLOOK STABLE

Fitch Ratings-Chicago-15 May 2014: Fitch Ratings has upgraded Horace Mann Educators Corporation's (Horace Mann) holding company ratings, including the senior debt rating to 'BBB' from 'BBB-'. Fitch has also upgraded the Insurer Financial Strength (IFS) ratings of Horace Mann's insurance subsidiaries to 'A' from 'A-'. The Rating Outlook is Stable. A full list of ratings follows at the end of this release.
KEY RATING DRIVERS
Fitch's rationale for the upgrade of Horace Mann's ratings reflects improved underwriting results, continued solid capitalization, a conservatively managed investment portfolio, and moderate financial leverage. The ratings also consider the company's volatile earnings profile caused by catastrophe exposure, albeit reduced with recent underwriting actions, along with its modest size and scale relative to larger, national peers.
Horace Mann reported a 7% increase in earnings to $111 million for 2013. The improvement was largely attributed to improved underlying results in the P/C segment, modestly lower catastrophe losses and higher earnings in the annuity segment. This was somewhat offset by lower earnings in the life operations. This trend continued in first-quarter 2014 with a 5% increase in net earnings and
21% increase in operating earnings.
Horace Mann reported a combined ratio of 93.7% for first-quarter 2014 compared with 97.2% for the prior-year period. The year-to-year effect of catastrophe losses and favorable reserve development during the quarter was relatively flat. Horace Mann's underlying results improved by 3.3pp on its combined ratio, driven by continued margin expansion in auto with rate increases outpacing loss costs.
Underlying results in the company's homeowners' insurance product was flat for 1Q'14, as non- catastrophe related losses offset rate increases and reductions in catastrophe reinsurance costs. The company continues to reduce coastal exposure and has nearly eliminated its FL homeowners' business. Horace Mann is targeting mid-single-digit rate increases in auto and property in 2014, which exceed the loss cost trend. The company continues to refine its pricing segmentation and strategic investments are expected to slightly offset underwriting actions in 2014 and 2015.
Annuity and life insurance segments posted solid earnings in 2013, following strong 2012 results. The annuity segment benefited from greater account values, which more than offset modest spread compression of 12 basis points (bps) to 199 bps for 2013 on fixed annuity products. However, spreads widened in first-quarter 2014, due to solid investment portfolio performance and increased security prepayment activity. Horace Mann is subject to further spread compression due to low interest rate levels as approximately 87% of its fixed annuities are at the minimum crediting rate.
Horace Mann's life and annuity operations provide consistent, solid statutory gains and a reliable source of upstream dividends for HMEC. Fitch views these segments' products as having favorable risk characteristics. The company has generally avoided profitability, reserving and risk issues related to VA guaranteed living benefit products and universal life with secondary guarantee funding issues.
Fitch believes Horace Mann's sound asset liability management and emphasis on the 'stickier'
403(b) tax qualified retirement savings market reduces its potential above average withdrawal risk.
Approximately 50% of HMLIC's general account annuity reserves could be withdrawn at book value without surrender penalties at year-end 2013.
Horace Mann's life segment earnings declined modestly in 2013, due to higher mortality costs. The company continues to experience favorable persistency in both its annuity and life businesses. Sales of company manufactured life products were strong in 2013 and first-quarter 2014.
The company's investment portfolio is highly rated and very liquid. Performance has been strong with very low credit related impairments in 2013 and a yield above 5.5% for its life operations. The investment portfolio is composed predominately of fixed-income securities with no exposure to directly placed commercial mortgages and roughly 1% exposure to common stocks. Approximately
95% of its fixed-income portfolio is made up of investment-grade bonds with minimal exposure to subprime/Alt-A mortgage loans. More than 95% of the portfolio is comprised of publicly traded bonds.
Horace Mann's shareholders' equity declined in 2013 due to the erosion of unrealized investment gains. Equity increased 9% to $1.2 billion in first-quarter 2014, led by unrealized gains and earnings. Capital metrics remain strong in both P/C and life companies with risk-based capital (RBC) ratios of 557% and 484%, respectively as of March 31, 2014. P/C companies' operating leverage is strong at 1.3x, which is significantly lower than personal lines peers. Additionally, the company scores "strong" under Fitch's P/C Prism capital model as of year-end 2012. Fitch expects improved Prism results in 2013 given the effect of catastrophe exposure management.
Horace Mann's financial leverage ratio is moderate at 19.9% and fixed charge coverage is solid at
11.9x as of March 31, 2014. RATING SENSITIVITIES
Key rating triggers that could lead to a downgrade include a sustained period of weak earnings with GAAP fixed charge coverage below 8x, failure to maintain a P/C Prism capital model score that is comfortably within the 'Strong' category, financial leverage above 25%, adverse reserve development amounting to 5% of prior year surplus, and/or a significant decline in market share or distribution weakness in the 403(b) market.
Fitch views Horace Mann's ratings as limited by its modest size and scale relative to larger, national peers.
Fitch upgraded the following ratings with a Stable Outlook: Horace Mann
--IDR to 'BBB+' from 'BBB';
--$199.8 million senior notes to 'BBB' from 'BBB-'.
Horace Mann Insurance Co. Teachers Insurance Co.
Horace Mann Property & Casualty Insurance Co. Horace Mann Lloyds
Horace Mann Life Insurance Co.
--IFS to 'A' from 'A-'. Contact:
Primary Analyst (Property/Casualty Insurance) Dafina M. Dunmore, CFA
Director
[phone]
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
Primary Analyst (Life Insurance) R. Andrew Davidson, CFA Senior Director
[phone]
Secondary Analyst
Douglas M. Pawlowski, CFA Senior Director
[phone]
Committee Chairperson Jeff Mohrenweiser, CFA Senior Director
[phone]
Media Relations: Brian Bertsch, New York, Tel: [phone], Email:
[e-mail].
Additional information is available at 'www.fitchratings.com'. Applicable Criteria & Related Research:
--'Insurance Rating Methodology' (November 2013).
Applicable Criteria and Related Research: Insurance Rating Methodology http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=723072
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