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Rating Action:

Moody's affirms Horace Mann's ratings following announced acquisition of NTA Life; outlook changed to negative

11 Dec 2018

New York, December 11, 2018 -- Moody's Investors Service ("Moody's") has affirmed the Baa2 senior debt rating of Horace Mann Educators Corporation (NYSE: HMN, "HMEC") and the A2 insurance financial strength (IFS) ratings of its property-casualty (P&C) subsidiaries and Horace Mann Life Insurance Company (HMLIC) following the announcement that Horace Mann has entered into a definitive agreement to acquire National Teachers' Associates Life Insurance Company (NTA Life) in an all-cash transaction for $405 million. The companies expect to complete the transaction in the second quarter of 2019, subject to regulatory approvals. The rating agency changed the outlook to negative from stable reflecting higher financial and operational leverage and execution risk.

RATINGS RATIONALE

Horace Mann Educators Corporation:

Moody's said the negative outlook reflects our expectations that the acquisition will increase Horace Mann's financial and operational leverage as well as result in elevated goodwill and intangibles. The acquisition also carriers execution and integration risks. However, the acquisition will help Horace Mann add a complementary product suite including supplemental health insurance and expand its geographical spread with the addition of NTA Life's agency base. The acquisition will also be accretive to Horace Mann's earnings on a pro forma basis.

According to Moody's, the affirmation of Horace Mann's Baa2 senior debt rating reflects the diversified revenues and earnings from P&C and Life companies, healthy dividend capacity, and solid market position in providing insurance products to teachers and school administrators. The company is making ongoing investments in IT infrastructure designed to generate business growth and improve profitability. These strengths are offset by sizable gross catastrophe exposure although the company purchases significant reinsurance, and exposure to interest rate risk and spread compression in fixed annuity liabilities as well as disintermediation risk for non-403(b) annuities. The common distribution force used for both businesses and their common customer segment diminishes the benefits of diversification from the life and P&C operations.

As of September 30, 2018, HMEC's adjusted debt-to-capital ratio was moderate at approximately 20.1%. As a result of the NTA Life acquisition which Horace Mann expects to partially fund with a $250 million senior debt issuance, we expect the company's pro forma financial leverage to increase to about 29% on a Moody's-adjusted basis, which is high relative to peers. Given the proposed transaction, Moody's believes the company will manage its shareholder capital return programs prudently so as to not meaningfully de-capitalize its operating subsidiaries.

Moody's said that the following factors could result in a return to stable outlook: 1) financial leverage below 25% and interest coverage consistently 6x or greater; 2) strong capitalization at the insurance subsidiaries and; 3) successful integration of NTA Life. Factors that could lead to a downgrade include: 1) a downgrade of the financial strength ratings of the company's lead operating P&C and/or life companies; 2) financial leverage consistently above 25% or interest coverage consistently less than 4x; 3) integration challenges with NTA Life.

Life Insurance:

HMLIC's rating affirmation is based on its niche position within the K-12 403(b) retirement plan market, good profitability, growing life sales, and good fee-based pension sales momentum. These strengths are mitigated by HMLIC's relatively modest market presence and scale relative to its much larger peers, and by the company's shift to highly competitive fee-based 403(b)7 products from wider margined 403(b) fixed annuity products, as it enters larger school districts.

The negative outlook for HMLIC reflects higher leverage at the holding company versus current levels, as noted, as well as lower (although still strong) capital adequacy, as measured by the NAIC Risk Based Capital (RBC) ratio as a result of the announced acquisition of NTA Life. Moody's expects Horace Mann to use capital from both the target company and HMLIC to help finance the transaction.

Moody's said that given the negative outlook, an upgrade of HMLIC's rating would be unlikely. However, the following factors could change the rating outlook to stable: 1) expected growth in new and total 403(b) deposits, while maintaining profitability; 2) successful integration of National Teachers Associates Life while growing sales and profits of its supplemental medical products; 3) profitability, as measured by statutory return on capital (ROC), of at least 8%, with continuing earnings stability; 4) financial leverage at the parent company below 25% and interest coverage consistently 6x or greater.

The following factors could lead to a downgrade of HMLIC's rating: 1) weakening of its 403(b) franchise, with a consistent decline in sales and total premiums; 2) declining profitability, with statutory ROCs below 5% on a consistent basis; 3) rising asset risk, including further concentration in structured securities (29% of invested assets at YE 2017) and 4) financial leverage at the parent company consistently above 25% and interest coverage consistently less than 4x; 5) integration challenges with NTA Life.

Property-Casualty Insurance:

According to Moody's, the rating affirmation of the P&C operations reflects the group's strong niche position serving the educator community, very good balance sheet strength with a high quality investment portfolio and sound loss reserves, as well as its ability to cross sell or bundle P&C products with life insurance and annuity products. In addition, educators are an attractive customer segment because they often have conservative risk profiles making them good insurance risks.

Tempering these strengths are the group's significant, albeit reduced, gross exposure to catastrophe losses including frequent weather related events, slow growth in auto, relatively weak but improving performance in personal auto, and its limited size relative to larger competitors with greater financial and technical resources.

The negative outlook reflects lower financial flexibility at Horace Mann Educators Corporation following the announced acquisition of NTA Life. In addition, Horace Mann recently preannounced estimated pretax, net-of-reinsurance losses from the California Camp Fire of $38-39 million, which we expect will lead to a net loss for the company's P&C operations for full-year 2018.

Given the negative outlook, a ratings upgrade for Horace Mann P&C is unlikely. However, the following factors could change the rating outlook to stable: 1) overall combined ratio in the mid to high 90s or lower through the cycle; 2) significant, profitable growth in educator auto policy counts; 3) 1-in-250 year net aggregate modeled loss less than 15% of P&C policyholders' surplus, and; 4) financial leverage at the parent company below 25% and interest coverage consistently 6x or greater. Conversely, factors that could lead to a downgrade of the ratings include: 1) sustained combined ratios above 100%; 2) decline in auto policy counts below 450k; 3) marked increase in the proportion of non-educator policies; 4) financial leverage at the parent company consistently above 25% and interest coverage consistently less than 4x; 5) integration challenges with NTA Life.

The following ratings have been affirmed:

Horace Mann Educators Corporation -- senior unsecured debt at Baa2;

Horace Mann Insurance Company -- insurance financial strength at A2;

Teachers Insurance Company -- insurance financial strength at A2;

Horace Mann Property & Casualty Insurance Co -- insurance financial strength at A2;

Horace Mann Life Insurance Company -- insurance financial strength at A2.

Outlook actions:

Issuer: Horace Mann Educators Corporation

...Outlook Changed to Negative from Stable

Issuer: Horace Mann Insurance Company

...Outlook Changed to Negative from Stable

Teachers Insurance Company

...Outlook Changed to Negative from Stable

Horace Mann Property & Casualty Insurance Co

...Outlook Changed to Negative from Stable

Horace Mann Life Insurance Company

...Outlook Changed to Negative from Stable

The principal methodologies used in rating Horace Mann Educators Corporation were Life Insurers published in May 2018, and Property and Casualty Insurers published in May 2018. The principal methodology used in rating Horace Mann Insurance Company, Teachers Insurance Company, and Horace Mann Property & Casualty Insurance Co was Property and Casualty Insurers published in May 2018. The principal methodology used in the rating Horace Mann Life Insurance Company was Life Insurers published in May 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

Horace Mann Educators Corporation, headquartered in Springfield, Illinois, specializes in the insurance needs of the nation's educators and their families. Its property-casualty subsidiaries offer auto and homeowners insurance while its life insurance subsidiaries have an established niche position in the 403(b) pension market, selling life insurance and pension annuities to educators. For the first nine months of 2018, the company reported consolidated revenues of approximately $913 million and net income of $39 million. Shareholders' equity was $1.3 billion as of September 30, 2018.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

The below contact information is provided for information purposes only. Please see the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody's disclosures on the lead rating analyst and the Moody's legal entity that has issued the ratings.

The person who approved Horace Mann Educators Corporation, Horace Mann Insurance Company, Teachers Insurance Company, and Horace Mann Property & Casualty Insurance Co credit ratings is Sarah Hibler, Associate Managing Director, Financial Institutions Group, 1-212-553-0376, 1-212-553-1653. The person who approved Horace Mann Life Insurance Company credit ratings is Scott Robinson, Associate Managing Director, Financial Institutions Group, 1-212-553-0376, 1-212-553-1653.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Jasper Cooper, CFA
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Sarah Hibler
Associate Managing Director
Financial Institutions Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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