Fitch Ratings has affirmed the ‘BBB+’ long-term issuer rating on Illinois-based Horace Mann Educators Corp. and the ‘BBB+’ senior debt ratings. Additionally, Fitch has affirmed the ‘A+’ insurer financial strength (IFS) ratings on HMN’s five insurance subsidiaries. The Rating Outlook remains Negative.
Fitch’s ratings on HMN reflect the companies’ solid risk-based capitalization, high quality, liquid investment portfolios, and well defined niche in the educators market. Fitch’s affirmation also reflects its heightened comfort with HMN’s reserve adequacy.
Going forward, Fitch believes that HMN’s ratings will be increasingly driven by its property/casualty operation, which Fitch views as generating more volatile results than the company’s life and annuity operation.
Fitch’s Negative Rating Outlook reflects continuing concerns about HMN’s ability to generate run-rate underwriting profitability supportive of its current ratings. Additionally, Fitch believes that HMN’s very large catastrophe-related losses in 2004 raise concerns about the company’s comparatively high operating leverage and risk management capabilities.
Fitch plans on reviewing HMN’s ratings and Rating Outlook within the next six to 12 months. Fitch’s review will focus heavily on HMN’s underwriting profitability relative to industrywide personal lines averages and trends.
If HMN’s underwriting profitability materially lags that of the overall personal lines industry, Fitch will likely downgrade the company’s long-term and IFS ratings one notch to ‘BBB’ and ‘A’, respectively.
HMN’s recent underwriting profitability has improved significantly over prior results as the company benefited from a reduction in prior-accident year reserve development and generally favorable market conditions. HMN’s 2004 calendar year combined ratio was approximately 12 points better than its 2003 combined ratio and its return on equity was a reasonable 10% in 2004.
However, Fitch views HMN’s recent underwriting profitability as continuing to lag that of peers when catastrophe-related losses are included and approximating that of peers when catastrophe-related losses are excluded.
HMN’s profitability suffered in 2004 from $69 million of pretax catastrophe-related losses, primarily from hurricanes that hit Florida in the third-quarter 2004. Fitch views these losses as very large relative to the company’s capitalization.
Additionally, Fitch believes that these losses highlight HMN’s risk management challenges given the company’s high operating leverage and property exposures in catastrophe-prone states.
Fitch’s ratings continue to reflect HMN’s conservative capital structure with a debt-to-capital ratio less than 30% and strong run-rate operating earnings-based interest exceeding 9 times (x) coverage.
The fixed income is rated as follows with a Negative Rating Outlook by Fitch:
Horace Mann Educators Corp:
— Senior convertible debt due 2032 ‘BBB+’;
— Senior debt 6 5/8% notes due 2006 ‘BBB+’.
The insurer financial strength is rated as follows with a Negative Rating Outlook by Fitch:
— Horace Mann Life Insurance Co. ‘A+’;
— Horace Mann Insurance Co. ‘A+’;
— Horace Mann Property & Casualty Insurance Co., ‘A+’;
— Teachers Insurance Co. ‘A+’;
— Horace Mann Lloyds ‘A+’.
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