Some history ... 3Q Release ...
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Third Quarter Letter To Our Shareholders
After a first half in which Horace Mann's results were impacted by record catastrophe losses, weather-related claims fell sharply in the third quarter of 1998 and enabled Horace Mann's positive momentum and underlying strengths to produce the best third quarter in the company's history.
Key performance measures document this success:
Operating income and net income reached record third quarter highs, increasing 16 percent and 46 percent per share, respectively;
Core lines premium written and contract deposits were up 9 percent, with gains achieved across all core product lines; and
Return on shareholders' equity over the last 12 months was 18 percent.
Through nine months, the impact of the first half's record catastrophe losses was tempered by the strong third quarter results: operating income per share was down only 3 percent (and was up 18 percent exclusive of catastrophe losses); net income per share was up 15 percent; and premiums and contract deposits grew 9 percent from a year ago.
Profitable Growth
As always, Horace Mann's exclusive agent sales force remained a key strategic asset and a primary driver of our growth. At quarter-end the agent count stood at 1,059. Significantly, the productivity of our agent force was up 8 percent from a year ago due in large part to a 4 percent increase in the number of experienced agents. Initiatives such as our proprietary agent software and the "Agent on Call" program contributed to productivity gains by enabling agents to service clients more efficiently and allowing them to spend more time selling. Additionally, new products provided agents with effective door openers and enhanced opportunities for multiline sales.
The annuity segment continued to set the standard for growth with deposits increasing 19 percent for the quarter and 16 percent through nine months, the 13th consecutive quarter of double-digit growth. Nearly all of the gain was attributable to higher variable annuity deposits as customers responded positively to our expanded product offerings, including the Roth IRA. Variable annuity funds on deposit at quarter-end were 7 percent higher than a year ago despite the recent decline in market values of the underlying investments. Annuity operating income was up 20 percent in the third quarter and 23 percent after nine months.
Voluntary auto and homeowners insurance written premium increased 7 percent in the third quarter and 8 percent through nine months, continuing the solid growth pattern of recent quarters for these key product lines. The number of auto and homeowners policies in force at September 30 was up 4 percent to 859,000, with the gain divided about equally between the auto and homeowners lines. Third quarter operating income for this segment was up 11 percent from last year. Although year-to-date operating income was down 17 percent from a year ago, the decline narrowed significantly from the 30 percent decline in the first half of the year.
Horace Mann's combined loss and expense ratio, an important measure of the profitability of our auto and homeowners book of business, improved to 90.3 percent for the third quarter from 92.5 percent a year ago. This was more than 10 percentage points better than the second quarter 1998 figure, which reflected that quarter's record catastrophe losses. Through nine months, the combined ratio was 95.1 percent compared to 92.7 percent last year ‹ a very strong result given the impact of the unprecedented weather-related losses in 1998.
Life insurance premiums and contract deposits increased 3 percent in the quarter and 2 percent through nine months. Total life insurance in force grew by 7 percent with an excellent retention rate of 93 percent. Operating income for this segment declined 9 percent in the quarter and 5 percent year-to-date, due to higher mortality costs.
In late October, we announced certain federal tax benefits which Horace Mann has realized in the past will not be available to us after 1998. We also announced we are vigorously contesting an issue with the Internal Revenue Service regarding prior year taxes. All of this is described in the Company's SEC Form 10-Q for the quarter ended September 30, 1998. This disagreement is purely a federal income tax matter and does not impact the insurance operations or the capital management strategy of the Company.
Share Repurchase Program Continues
During the third quarter Horace Mann continued its share repurchase program, buying an additional 327,500 shares for approximately $10 million. At quarter-end, the number of shares repurchased in 1998 totaled 1.7 million for approximately $55 million. Since the share repurchase program began in early 1997, the company has repurchased 5.4 million shares or approximately 11 percent of the shares outstanding on December 31, 1996. An additional $53 million remains authorized for share repurchases. The share repurchases have been financed through cash generated from operations, which has contributed to a reduction in investment income and earnings while having a net positive impact on earnings per share.
Underlying Strength Shines Through
As noted in last quarter's report to shareholders, an insurer's underlying strength is revealed most clearly in times of adversity. Horace Mann has weathered the storm in 1998 - figuratively and literally - because of our solid balance sheet and strong financial condition, our exclusive agent force, our unique market focus on the nation's educators, our ability to control costs, and our skill at managing risk prudently. Collectively, these strengths produced the record results we enjoyed in the most recent quarter. They also will continue to provide the foundation which we will build upon to enhance shareholder value in 1998 and beyond.
I'm pleased that HMEC's Board of Directors and I have agreed to move my anticipated retirement date to August 2001. This decision will give the Board and me ample time to effect an orderly transition to new leadership. As an employee and shareholder, I remain committed to maintaining our success.
Sincerely,
Paul J. Kardos
Chairman of the Board of Directors,
President and Chief Executive Officer
1998 Copyright (C) Horace Mann Educators Corporation.
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