CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'A' Insurer Financial Strength (IFS) ratings of Horace Mann Educators Corporation's (HMN) insurance subsidiaries. Fitch has also affirmed the following ratings for Horace Mann:
--Issuer Default Rating (IDR) at 'BBB+';
--Senior unsecured notes at 'BBB'.
The Rating Outlook is Stable. A full list of ratings follows at the end of this press release.
KEY RATING DRIVERS
HMN's ratings reflect improved property/casualty (P/C) underwriting results, continued solid capitalization, a conservatively managed investment portfolio, and moderate financial leverage. The ratings also consider the company's exposure to P/C catastrophe risk and spread compression in its annuity and life segments, along with its small size and scale relative to larger, national peers.
HMN's capital metrics remain strong in both P/C and life companies. The P/C companies' operating leverage at 1.3x remains well below personal lines peers and the score on Fitch's Prism capital model remained at 'very strong' at year-end 2014. The life companies' risk-based capital (RBC) ratio was 453% at year-end 2014. HMN's financial leverage ratio (FLR) was moderate at 18.0% at June 30, 2015.
Total borrowings under HMN's $150 million credit facility grew to $113 million at June 30, 2015 as the company drew on the line to repay $75 million in senior notes due June 15, 2015. The company has another $125 million senior notes due April 15, 2016, which creates some near-term financial uncertainty for HMN until a new funding transaction is executed.
HMN reported flat operating income of $45.7 million for the first six months of 2015. Earnings have improved in recent years, however, due to improved underwriting and lower catastrophe risk in the P/C segment as well as growing earnings in the annuity segment. Fixed-charge coverage was solid at 10.1x through six months of 2015.
The company continues to face exposure to weather-related losses, especially in homeowners' insurance. However, the homeowners' loss ratio benefited from three consecutive years of rate increases greater than 5%, the elimination of sinkhole exposure and the full exit from Florida by mid-2015. The overall combined ratio improved to 96.1% in 2014 from 96.3% and 98.3% in 2013 and 2012, respectively. For six months of 2015 the combined ratio was 97.0%.
Annuity earnings improved by 2% during the first six months of 2015 over the prior year period, largely due to higher account values. During the same period, the annualized net interest spread for fixed annuities declined by 16 basis points (bps) to 190 bps and remain under pressure, as approximately 86% of its fixed annuities are at the minimum crediting rate. However, return on assets has remained relatively flat at 120 bps compared with 121 bps in the prior year period. Lower investment yields have been somewhat offset by actively managed crediting rates and favorable spreads on new business.
For the first six months of 2015, HMN's life sales declined 4% over the prior year. Making a smaller contribution overall, life earnings declined by over 20% for the first six months of 2015, largely due to a return to more normalized mortality and the persistent low interest rate environment. The earnings margin (RoP) on life insurance products declined to 21.9% for the first six months of 2015 compared to 27.4% in the prior year period.
Fitch believes HMN's sound asset liability management and emphasis on the 'stickier' 403(b) tax qualified retirement savings market somewhat mitigates 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 2014. HMN's investment portfolio is composed predominately of highly-rated and very liquid fixed-income securities.
Fitch views HMN as having above-average exposure to low interest rates, given its business concentration in fixed annuities, a higher proportion of which were written in a higher interest rate environment and thus have higher guaranteed minimum crediting rates.
Fitch published newly updated insurance notching criteria July 14, 2015, via an update to its master criteria report, 'Insurance Rating Methodology.' Today's affirmation reflects application of the updated notching criteria to HMN's ratings.
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.
The current ratings and Outlook assume the upcoming debt maturity will be refinanced successfully. As the maturity date approaches, Fitch will reassess the ratings and Outlook based on HMN's financing plan and credit market conditions.
Fitch views Horace Mann's ratings as limited by its small size and scale relative to larger, national peers.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings with a Stable Outlook:
--IDR at 'BBB+';
--6.85% senior notes due April 2016 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'.
Insurance Rating Methodology (pub. 14 Jul 2015)
Dodd-Frank Rating Information Disclosure Form