CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB' Issuer Default Rating (IDR) and 'BBB-' senior unsecured debt rating of Horace Mann Educators Corporation (Horace Mann). Fitch has also affirmed the 'A-' Insurer Financial Strength (IFS) ratings of Horace Mann's insurance subsidiaries. A complete list of ratings follows at the end of this release. The Rating Outlook is Stable.
KEY RATING DRIVERS
Horace Mann's ratings reflect solid capitalization in its operating subsidiaries, conservatively managed, liquid investment portfolio, and reasonable financial leverage. The ratings also consider the company's volatile earnings profile caused by catastrophe exposure and modest size and scale relative to larger, national peers.
Horace Mann reported net earnings of $103.9 million for 2012, which represented a 47% increase from the prior year. The improvement is largely attributed to lower catastrophe losses in 2012 and stronger earnings in its annuity and life segments. The company reported modestly higher earnings for first quarter 2013, which was primarily attributable to investment gains. On an operating basis, the company's earnings declined by 14%.
Horace Mann reported a combined ratio of 97.2% for first quarter 2013 compared with 95.0% for the prior year quarter. The benefit of favorable reserve development declined modestly in 2013 while catastrophe losses remained comparable to the prior year. The higher combined ratio was largely due to lower auto salvage and subrogation recoveries along with an uptick in Horace Mann's expense ratio. Management anticipates that previous rating actions will be sufficient to offset this impact for full year 2013.
The company's homeowners' insurance underwriting results were favorable with a combined ratio of 87.9% as of March 31, 2013, which is relatively flat over the prior year. A benign start to the catastrophe season contributed to the result.
Annuity and life insurance segments reported moderate declines in net income for the first quarter of 2013 versus the prior year's first quarter, but continue to report increases in assets under management and solid spread margins on their fixed annuity book. Fitch believes that these segments will continue to benefit from strong persistency and low credit losses in 2013, although continued low interest rates will pressure margins and fixed annuity sales.
Horace Mann's life insurance operations provide consistency of earnings, diversification of product revenues and risks and consistent upstream dividend capacity. Horace Mann's annuity and life segment reported good levels of profitability in 2012 benefited from effective management of interest rate margins, greater assets under management, low credit lows offset by increased taxes. Persistency for both annuity and life segments remains at favorable levels.
Horace Mann's shareholders' equity increased by 18% in 2012 and an additional 3% during the first quarter of 2013 to $1.3 billion. Unrealized investment gains and solid earnings contributed to the growth. Horace Mann's P/C and life insurance subsidiaries are well-capitalized with Dec. 31, 2012 RBC ratios of 541% and 471%, respectively. The company's financial leverage ratio is within rating guidelines at 21.9% as of March 31, 2012.
On April 24, 2013, Horace Mann announced the hiring of Marita Zuraitis as President and CEO, effective May 13, 2013. Ms. Zuraitis previously held various leadership positions with The Hanover Insurance Group, including President of Property/ Casualty Companies. Fitch views this announcement as neutral to the rating with no expected change to the company's strategy.
RATING SENSITIVITIES
Key rating triggers that could lead to an upgrade include a sustained improvement in underwriting profitability with an average combined ratio below 100%, GAAP fixed charge coverage above 7 times (x) for a sustained period, and/or a continued trend of capital growth with sustained low operating leverage.
Key rating triggers that could lead to a downgrade include a sustained period of weak earnings with GAAP fixed charge coverage below 4x, a reduction in capitalization and/or financial leverage above 30%, 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 has affirmed the following ratings with a Stable Outlook:
Horace Mann
--IDR at 'BBB';
--$199.5 million senior notes at 'BBB-'.
Horace Mann Insurance Co.
Teachers Insurance Co.
Horace Mann Property & Casualty Insurance Co.
Horace Mann Lloyds
Horace Mann Life Insurance Co.
--IFS at 'A-'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria & Related Research:
--'Insurance Rating Methodology' (Jan. 11, 2013).
Applicable Criteria and Related Research
Insurance Rating Methodology - Amended
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=698731
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=790181
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