Horace Mann Educators Corporation’s $2.9 billion block of annuity business will be reinsured by a subsidiary of Reinsurance Group of America, Incorporated (RGA - Free Report) .
The $2.9 billion block comprises $2.2 billion of fixed annuities (about 50% of fixed annuity assets under management at Mar 31, 2019) and $700 million of variable annuities. Horace Mann now has $4.8 billion of assets under management, including $2.1 billion in fixed annuities with average deferred crediting rate of 2.5%. Total variable annuities of $2.2 billion include those reinsured by Reinsurance Group.
Following the transaction, effective Apr 1, 2019, Horace Mann will continue to service and administer about 54,000 policies.
The reinsurance transaction is a strategic move by Horace Mann to lower its exposure to interest rate fluctuations. This move should also help release $200 million in capital that can be utilized for growth initiatives and to enhance shareholders value. Of this, the company will utilize $185 million to fund the acquisition of National Teachers Associates Life Insurance Company (NTA).
Also, Horace Mann will record an after tax realized investment gain of $107 million associated with the transferred assets, resulting in 8% increase in book value per share, excluding unrealized investment gains on securities as of Jun 30, 2019.
Meanwhile, this transaction will help Reinsurance Group grow its asset-intensive business.
Concurrently, Horace Mann has entered into a new five-year $225 million revolving line of credit, replacing the prior revolving line of credit. This marks an increase from $150 million available earlier
Horace Mann expects the reinsurance transaction along with its pending acquisition of NTA to help it deliver solid earnings growth, boost shareholder value and lower earnings volatility. The addition of NTA will not only enhance its portfolio, add distribution points and increase cross-selling opportunities but will also be accretive to earnings and return on equity within one year.
Horace Mann retained its 2019 core EPS guidance but expects 2020 core EPS to grow at least 10%. Also, the company estimates debt-to-capital ratio below 25% and RBC ratio at each of its insurance subsidiaries of 425% or greater after the closure of the acquisition.
Shares of Horace Mann have gained 9.6% year to date, underperforming the industry's rise of 12.8%. Nonetheless, strong profitability for Property and Casualty and sustained growth in Life and Retirement segments along with solid position in education markets and growth initiatives should help shares trend higher.
Insurers are increasingly looking for reinsurance transactions to safeguard earnings. Assurant Inc. (AIZ - Free Report) and Axis Capital Holdings Limited (AXS - Free Report) have reinsurance programs to lower exposure to earnings volatility.
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