Release date -30082022

Fitch Ratings has affirmed Horace Mann Educators Corporation's (HMN) Long-Term Issuer Default Rating (IDR) at 'BBB+' and senior unsecured debt rating of 'BBB'.

At the same time, Fitch has affirmed the Insurer Financial Strength (IFS) ratings at 'A' (Strong) of HMN's insurance operating subsidiaries. The Rating Outlook is Stable for all ratings.

The affirmation of HMN's ratings reflects HMN's very strong capitalization; moderate business profile driven by the company's niche position in the K-12 educator market; and relatively stable earnings in the life, retirement and supplemental segments that offset historically volatile results in the property/casualty (P/C) segment.

Key Rating Drivers

Very Strong Capitalization and Leverage: Fitch expects near-term capital and leverage targets to remain in line with rating expectations. As of June 30, 2022, Fitch calculated Horace Mann Educators Corporation's financial leverage ratio (FLR) to be 25.2%, increasing to the high end of Fitch's expectations as a result of additional borrowing for the acquisition of Madison National Life Insurance Company. Fitch expects that financial leverage will be maintained below 25% going forward.

Moderate but Effective Niche: HMN's business profile is moderate and in line with the broader industry, driven by the company's effective niche in the education market through multiple distribution channels and high barriers to entry through its payroll deduction capabilities. While HMN competes with larger insurers with broader distribution, the company's advantages within its niche offset its size. Over the long term, Fitch expects that the company's recent acquisitions could benefit both HMN's diversification and risk profile.

Macro Pressures on Earnings: HMN's financial performance is strong, but the P/C business continues to be affected by weather-related losses and macro pressures in personal auto. In 1H22, the auto segment results deteriorated as a result of sharply rising claims severity, while the property business experienced above-average catastrophe losses, leading to a P/C combined ratio of 112.6%, compared with 92.7% in the prior year. Overall consolidated revenue is expected to grow in 2022 following the Madison National acquisition.

Acquisitions Add Diversity: HMN continues to diversify its liability profile through the acquisition of Madison National and build on its 2019 acquisition of NTA Life Insurance Co., LLC, an established provider of supplemental insurance products. While Fitch expects that near-term benefits may be somewhat limited as HMN integrates the businesses, over the intermediate term the acquisitions positively affect earnings diversification and business risk while reducing the impact of weather-related volatility in the P/C segment.

Conservative Investment Portfolio: Investments and liquidity are viewed as very strong, although of lower influence to the IFS rating. HMN's portfolio consists primarily of high-quality, fixed-maturity investments with manageable levels of risky assets and favorable liquidity. Approximately, 90% of the fixed-income portfolio comprised investment-grade bonds as of June 30, 2022, with an overall weighted average quality of 'A+'.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Fitch's overall assessment of capital and leverage below 'AA-', including FLR sustained at 25% or greater;

A sustained period of underwriting weakness in property/casualty segment, with combined ratio maintained above 105% beyond 2023;

GAAP fixed-charge coverage sustained below 8x and operating ROE below 7%;

Adverse developments or underperformance from the company's recent acquisitions including the acquisition of Madison National;

A significant decline in market share or distribution weakness in the 403(b) market.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

HMN's upgrade potential hinges on a noteworthy change in Fitch's assessment of business profile, which aligns with an 'A-' credit factor score and is considered to have a higher influence on HMN's IFS rating.

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

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