Fitch Affirms Horace Mann's Ratings; Outlook Stable

Fitch Ratings has affirmed the 'A' Insurer Financial Strength (IFS) ratings of Horace Mann Educators Corporation's (HMN) insurance subsidiaries. Fitch has also affirmed Horace Mann's Issuer Default Rating (IDR) at 'BBB+' and senior unsecured notes at 'BBB'.

The Rating Outlook is Stable. A full list of rating actions follows at the end of this press release.

KEY RATING DRIVERS

HMN's ratings reflect its strong property/casualty (P/C) operating 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 within both the P/C and life insurance 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 444% at year-end 2015. HMN's financial leverage ratio (FLR) was moderate at 19% at Dec. 31, 2015.

HMN's net operating income declined to $85 million in 2015, or approximately 12% from the prior year. Earnings were pressured as a result of modestly lower P/C underwriting gains and the impact of a protracted low interest rate environment on P/C segment net investment income as well as annuity and life segment results. Fixed-charge coverage remained solid at 9.9x in 2015.

HMN's P/C segment results were impacted by a modestly higher combined ratio of 97% in 2015, compared with 96.1% the prior period, as well as lower investment income. The homeowners' combined ratio improved 4 points to 87.2% in 2015, benefiting from three consecutive years of rate increases, but was offset by a deterioration in the combined ratio for voluntary auto of 3.2 points to 102.2%.

Annuity segment earnings were lower due to the continued impact of spread compression, offset in part by higher account balances. The annualized net interest spread for fixed annuities declined by 20 basis points (bps) to 184 bps and remain under pressure, as approximately 86% of HMN's fixed annuities are at the minimum crediting rate. Spreads are expected to continue to decline in 2016, mitigated partly by attractive new business spreads. Return on assets declined to 114 bps in 2015 from 123 bps the prior year.

Increased mortality losses contributed towards moderately lower life segment profitability. The earnings margin (RoP) on life insurance products also declined to 20.7% in 2015, from 24.7% over the same period. HMN is aggressively focused on increasing its life sales and expects its new Indexed Universal Life product to be a strong contributor to sales growth in 2016.

Fitch believes HMN's sound asset liability management and emphasis on the 'stickier' 403(b) tax qualified retirement savings market somewhat mitigates the potential for above-average withdrawal risk. Approximately 52% of HMLIC's general account annuity reserves could be withdrawn at book value without surrender penalties at year-end 2015. 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.

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 small size and scale relative to larger, national peers.

FULL LIST OF RATING ACTIONS

Fitch has affirmed the following ratings with a Stable Outlook:

Horace Mann

--IDR at 'BBB+';

--4.5% senior notes due December 2025 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

Insurance Rating Methodology (pub. 16 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=871172

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1001636

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1001636

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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