# Horace Mann Educators Corp: Form 10-Q for the period ended Mar 31, 2023

- Company: [Horace Mann Educators Corp](/companies/hmn.md) (CIK 850141)
- Form: 10-Q
- Filed: 2023-05-10
- Accepted by EDGAR: May 10, 2023, 12:29 ET
- Period: 2023-03-31
- Accession: 0001628280-23-017088
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/850141/000162828023017088/hmn-20230331.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/850141/000162828023017088/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-01-01 to 2023-03-31 | $353.9m | us-gaap:Revenues |
| Interest expense | 3 months, 2023-01-01 to 2023-03-31 | $6.7m | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-01-01 to 2023-03-31 | $1.5m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-01-01 to 2023-03-31 | $6.6m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-01-01 to 2023-03-31 | $0.16 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-01-01 to 2023-03-31 | $0.16 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-01-01 to 2023-03-31 | 41,400,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2023-01-01 to 2023-03-31 | $86.4m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Dividends paid | 3 months, 2023-01-01 to 2023-03-31 | $13.5m | us-gaap:PaymentsOfDividendsCommonStock |
| Cash and equivalents | at 2023-03-31 | $26.6m | us-gaap:Cash |
| Total assets | at 2023-03-31 | $13.65bn | us-gaap:Assets |
| Total liabilities | at 2023-03-31 | $12.51bn | us-gaap:Liabilities |
| Long-term debt | at 2023-03-31 | $249.0m | us-gaap:LongTermDebt |
| Short-term borrowings | at 2023-03-31 | $249.0m | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2023-03-31 | $1.14bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 67,034 characters.

Measures within this MD&A that are not based on accounting principles generally accepted in the United States of America (non-GAAP) are marked with an asterisk (\*) the first time they are presented within this Part I - Item 2. An explanation of these measures is contained in the Glossary of Selected Terms included as Exhibit 99.1 to this Quarterly Report on Form 10-Q and are reconciled to the most directly comparable measures prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) in the Appendix to the Company's First Quarter 2023 Investor Supplement.

Increases or decreases in this MD&A that are not meaningful are marked "N.M.".

Horace Mann Educators Corporation 41 First Quarter 2023 Form 10-Q

### Forward-looking Information

Statements made in this Quarterly Report on Form 10-Q that are not historical in nature are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995 and are subject to known and unknown risks, uncertainties and other factors. Horace Mann Educators Corporation (referred to in this Quarterly Report on Form 10-Q as "we", "our", "us", the "Company", "Horace Mann" or "HMEC") is an insurance holding company. We are not under any obligation to (and expressly disclaim any such obligation to) update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. It is important to note that our actual results could differ materially from those projected in forward-looking statements due to a number of risks and uncertainties inherent in our business. Also, see Part I - Items 1 and 1A in our Annual Report on Form 10-K for the year ended December 31, 2022 for additional information regarding risks and uncertainties.

This MD&A covers the following:

|  | Page |
| --- | ---: |
| Introduction | 42 |
| Consolidated Financial Highlights | 43 |
| Consolidated Results of Operations | 44 |
| Outlook for 2023 | 46 |
| Application of Critical Accounting Estimates | 47 |
| Results of Operations by Segment | 48 |
| Property & Casualty | 48 |
| Life & Retirement | 51 |
| Supplemental & Group Benefits | 54 |
| Corporate & Other | 55 |
| Investment Results | 55 |
| Liquidity and Capital Resources | 58 |

### Introduction

The purpose of this MD&A is to provide an understanding of our consolidated results of operations and financial condition. This MD&A should be read in conjunction with the Consolidated Financial Statements and Notes thereto contained in Part I - Item 1 of this Quarterly Report on Form 10-Q.

HMEC is an insurance holding company focused on helping America’s educators and others who serve the community achieve lifelong financial success. Through our subsidiaries, we market and underwrite individual and group insurance and financial solutions tailored to the needs of the educational community including:

- personal lines of property and casualty insurance, primarily auto and property coverages
- retirement products, primarily tax-qualified fixed and variable annuities
- life insurance, primarily traditional term and whole life insurance products
- worksite direct insurance products, including cancer, heart, hospital, supplemental disability and accident
- employer-sponsored insurance products, primarily long-term disability and short-term disability

We market our products primarily to K-12 teachers, administrators and other employees of public schools and their families, whether they engage with Horace Mann directly or through their district/employer.

We conduct and manage our business in four reporting segments. The three reporting segments representing our major lines of business, are: (1) Property & Casualty (primarily personal lines of auto and property insurance products), (2) Life & Retirement (primarily tax-qualified fixed and variable annuities as well as life insurance

Horace Mann Educators Corporation 42 First Quarter 2023 Form 10-Q products), and (3) Supplemental & Group Benefits (primarily cancer, heart, hospital, supplemental disability, accident, short-term and long-term group disability, and group term life coverages). We do not allocate the impact of corporate-level transactions to these reporting segments, consistent with the basis for management's evaluation of the results of those segments, but classify those items in the fourth reporting segment, Corporate & Other. In addition to ongoing transactions such as corporate debt service, net investment gains (losses) and certain public company expenses, such items also have included corporate debt retirement costs, when applicable. See Part I - Item 1, Note 7 of the Consolidated Financial Statements in this Quarterly Report on Form 10-Q for more information.

Effective January 1, 2023, we adopted ASU 2018-12, Financial Services – Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts (also known as LDTI). We adopted LDTI using the modified retrospective approach where permitted with changes applied as of January 1, 2021. As a result of adoption, our prior period results of operations have been restated in this MD&A. See Part I - Item 1, Note 1 of the Consolidated Financial Statements in this Quarterly Report on Form 10-Q for more information regarding our adoption of LDTI.

### Consolidated Financial Highlights

*($ in millions)*

|  | Three Months Ended March 31, 2023 | 2022 | 2023-2022 % Change |
| --- | ---: | ---: | ---: |
| Total revenues | $353.9 | $346.7 | 2.1% |
| Net income | 6.6 | 20.3 | -67.5% |
| Per diluted share: |  |  |  |
| Net income | 0.16 | 0.48 | -66.7% |
| Net investment losses, after tax | (0.07) | (0.29) | N.M. |
| Book value per share | $27.87 | $32.66 | -14.7% |
| Net income return on equity - last twelve months | 0.5% | 9.8% |  |
| Net income return on equity - annualized | 2.4% | 5.7% |  |

For the three months ended March 31, 2023, net income decreased $13.7 million, primarily due to higher catastrophe losses and elevated underlying auto losses in the Property & Casualty segment partially offset by favorable benefits experience in the Supplemental & Group Benefits segment and lower net investment losses.

Horace Mann Educators Corporation 43 First Quarter 2023 Form 10-Q

### Consolidated Results of Operations

*($ in millions)*

|  | Three Months Ended March 31, 2023 | 2022 | 2023-2022 % Change |
| --- | ---: | ---: | ---: |
| Net premiums and contract charges earned | $255.9 | $255.8 | —% |
| Net investment income | 100.4 | 97.9 | 2.6% |
| Net investment losses | (3.9) | (15.5) | N.M. |
| Other income | 1.5 | 8.5 | -82.4% |
| Total revenues | 353.9 | 346.7 | 2.1% |
| Benefits, claims and settlement expenses | 183.2 | 175.2 | 4.6% |
| Interest credited | 48.7 | 39.7 | 22.7% |
| Operating expenses | 79.8 | 76.7 | 4.0% |
| DAC amortization expense | 23.7 | 22.0 | 7.7% |
| Intangible asset amortization expense | 3.7 | 4.2 | -11.9% |
| Interest expense | 6.7 | 3.9 | 71.8% |
| Total benefits, losses and expenses | 345.8 | 321.7 | 7.5% |
| Income before income taxes | 8.1 | 25.0 | -67.6% |
| Income tax expense | 1.5 | 4.7 | -68.1% |
| Net income | $6.6 | $20.3 | -67.5% |

#### Net Premiums and Contract Charges Earned

For the three months ended March 31, 2023, net premiums and contract charges earned were comparable to the prior year period.

#### Net Investment Income

For the three months ended March 31, 2023, total net investment income increased $2.5 million, primarily due to higher returns on floating rate fixed maturity securities including commercial mortgage loan funds partially offset by negative returns on limited partnership interests in private equity funds. The annualized investment yield on the portfolio excluding limited partnership interests\* was as follows:

|  | Three Months Ended March 31, 2023 | 2022 |
| --- | ---: | ---: |
| Investment yield, excluding limited partnership interests, pretax - annualized\* | 4.7% | 4.3% |
| Investment yield, excluding limited partnership interests, after tax - annualized\* | 3.7% | 3.4% |

During the three months ended March 31, 2023, we continued to identify and purchase investments with attractive risk-adjusted yields relative to market conditions without venturing into asset classes or individual securities that would be inconsistent with our overall investment guidelines for the core portfolio. We continue to fund at levels that allow us to maintain our targeted allocation to commercial mortgage loan funds and limited partnership interests while maintaining balance to principal protection and risk.

#### Net Investment Losses

For the three months ended March 31, 2023, net investment losses decreased $11.6 million, primarily due to a reduction in losses from changes in fair values of equity securities and impairments compared to the prior year period. The breakdown of net investment gains (losses) by transaction type were as follows:

Horace Mann Educators Corporation 44 First Quarter 2023 Form 10-Q

*($ in millions)*

|  | Three Months Ended March 31, 2023 | 2022 |
| --- | ---: | ---: |
| Credit loss and intent-to-sell impairments | $— | $(1.8) |
| Sales and other, net | (2.4) | 1.1 |
| Change in fair value - equity securities | (1.0) | (17.1) |
| Change in fair value and losses realized on settlements - derivatives | (0.5) | 2.3 |
| Net investment losses | $(3.9) | $(15.5) |

From time to time, we may sell fixed maturity securities subsequent to the reporting date that were considered temporarily impaired at such reporting date. Such sales are due to issuer-specific events occurring subsequent to the reporting date that result in a change in our intent to sell a fixed maturity security.

#### Other Income

For the three months ended March 31, 2023, other income decreased $7.0 million in the employer-sponsored business.

#### Benefits, Claims and Settlement Expenses

For the three months ended March 31, 2023, benefits, claims and settlement expenses increased $8.0 million, primarily due to higher catastrophe losses and elevated underlying auto losses in the Property & Casualty segment partially offset by favorable benefits experience in the Supplemental & Group Benefits segment.

#### Interest Credited

For the three months ended March 31, 2023, interest credited increased $9.0 million, driven primarily by higher interest rates on advances received from the Federal Home Loan Bank of Chicago (FHLB). Under the deposit method of accounting, the interest credited on the reinsured annuity block continues to be reported. The average deferred annuity credited rate, excluding the reinsured annuity block, was 2.6% and 2.4% as of March 31, 2023 and March 31, 2022, respectively.

#### Operating Expenses

For the three months ended March 31, 2023, operating expenses increased $3.1 million, primarily due to inflation.

#### Deferred Policy Acquisition Costs (DAC) Amortization Expense

For the three months ended March 31, 2023, DAC amortization expense increased $1.7 million, due to a write-off of DAC in the Life & Retirement segment related to a decrease in annuity premium persistency.

#### Intangible Asset Amortization Expense

For the three months ended March 31, 2023, intangible asset amortization expense decreased $0.5 million.

#### Interest Expense

For the three months ended March 31, 2023, interest expense increased $2.8 million, due to an increase in floating interest rates on the Revolving Credit Facility.

#### Income Tax Expense

The effective income tax rate on our pretax income, including net investment losses, was 18.5% and 17.5% for the three months ended March 31, 2023 and 2022, respectively. Income from investments in tax-advantaged securities reduced the effective income tax rates by 5.3 and 6.3 percentage points for the three months ended March 31, 2023 and 2022, respectively.

In August 2022, the Inflation Reduction Act of 2022 (IRA) was passed by the U.S. Congress and signed into law by the Executive Branch. The IRA includes a new Federal alternative minimum tax (AMT), effective in 2023, that is based on the adjusted financial statement income (AFSI) set forth on the applicable financial statement (AFS) of an applicable corporation. A corporation is an applicable corporation if its rolling average pre-tax AFSI over three prior years (starting with 2020-2022) is greater than $1.0 billion. For a group of related entities, the $1.0 billion threshold is determined on a group basis, and the group's AFSI is generally treated as the AFSI for all

Horace Mann Educators Corporation 45 First Quarter 2023 Form 10-Q separate taxpayers in the group. Except under limited circumstances, once a corporation is an applicable corporation, it is an applicable corporation in all future years.

An applicable corporation is not automatically subject to an AMT liability. The corporation's tentative AMT liability is equal to 15.0% of its adjusted AFSI, and AMT is payable to the extent the tentative AMT liability exceeds regular corporate income tax. However, any AMT paid would be indefinitely available as a credit carryover that could reduce future regular tax in excess of AMT.

HMEC and its controlled group of corporations have determined that it likely will not be an applicable corporation in 2023. In making such determination, the group has made certain interpretations of, and assumptions regarding, the AMT provisions of the IRA. The U.S. Treasury Department is expected to issue guidance throughout 2023 that may differ from the group's interpretations and assumptions and that could alter the group's determination.

We record liabilities for uncertain tax filing positions where it is more likely than not that the position will not be sustainable upon audit by taxing authorities. These liabilities are reevaluated routinely and are adjusted appropriately based on changes in facts or law. We have no unrecorded liabilities from uncertain tax filing positions.

As of March 31, 2023, our federal income tax returns for years prior to 2019 are no longer subject to examination by the Internal Revenue Service. We do not anticipate any assessments for tax years that remain subject to examination to have a material effect on our financial position or results of operations.

### Outlook for 2023

The following discussion provides outlook information for our results of operations and capital position.

At the time of issuance of this Quarterly Report on Form 10-Q, we estimate that 2023 full year net income will be within a range of $2.00 to $2.30 per diluted share, generating a core return on equity\* near 6%. This range is unchanged from our Outlook for 2023 we discussed in our Annual Report on Form 10-K for the year ended December 31, 2022.

### Property & Casualty Segment

In 2023, net income for Property & Casualty is now anticipated to be between breakeven and $5 million, reflecting the negative limited partnership portfolio returns in the first quarter. The primary factors in our full-year outlook include:

- Catastrophe loss assumption of approximately 10 points on the combined ratio, in line with the 10-year average and consistent with historical frequencies and current severities applied to modeled exposures
- Property combined ratio near 100%, anticipating rate actions of 12% to 15% during 2023, reflecting inflation and current loss trends, accompanied by ‘inflation guard’ increases
- Auto combined ratio of 106% to 107%, anticipating auto rates to increase by 18% to 20% during 2023, supplemented by non-rate underwriting actions

Our longer-term Property & Casualty combined ratio target remains at 95% to 96%.

### Life & Retirement Segment

In 2023, net income for Life & Retirement is anticipated to be in the range of $67 million to $70 million, consistent with prior guidance. This guidance includes the adoption of LDTI effective January 1, 2023. The spread on the fixed annuity business is expected to be in the range of 220 to 230 basis points. Mortality is anticipated to remain within actuarial expectations, increasing slightly from 2022.

### Supplemental & Group Benefits Segment

In 2023, net income for Supplemental & Group Benefits is now anticipated to be in the range of $45 million to $49 million due to strong first quarter results. The primary factors in our outlook include:

Horace Mann Educators Corporation 46 First Quarter 2023 Form 10-Q

- Claims utilization for supplemental and disability products returning to near pre-pandemic levels. The longer-term target for the segment benefit ratio remains 43%.
- Higher expenses reflecting investments in the infrastructure for this business as well as a higher allocation of corporate expenses to reflect the segment’s utilization of shared staff, distribution, and other resources.

### Corporate & Other Segment

Corporate interest expense is expected to be in the range of $26 million to $27 million in 2023 due to rising interest rates.

### Investments

For 2023, we now expect total net investment income to be in a range of $429 million to $439 million, including approximately $104 million of accreted investment income on the deposit asset on reinsurance in Retirement. The expectation of full-year net investment income from the managed portfolio in a range of $325 million to $335 million reflects stronger returns from our commercial mortgage loan portfolio as well as the benefits of the rising interest rate environment over the past 12 months. Limited partnership returns are now estimated to be below their 10-year average of 8.5%, reflecting the first quarter lower-than-expected limited partnership portfolio returns in the Property & Casualty segment.

As described in Application of Critical Accounting Estimates, certain of our significant accounting measurements require the use of estimates and assumptions. As additional information becomes available, adjustments may be required. Those adjustments are charged or credited to net income for the period in which the adjustments are made and may impact actual results compared to our estimates above. Additionally, see forward-looking information in this Quarterly Report on Form 10-Q as well as Part I - Items 1 and 1A in our Annual Report on Form 10-K for the year ended December 31, 2022 concerning other important factors that could impact actual results. We believe that a projection of net income is not appropriate on a forward-looking basis because it is not possible to provide a valid forecast of net investment gains (losses), which can vary substantially from one period to another and may have a significant impact on net income.

### Application of Critical Accounting Estimates

The preparation of consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions based on information available at the time the consolidated financial statements are prepared. These estimates and assumptions affect the reported amounts of our consolidated assets, liabilities, shareholders' equity and net income. Certain accounting estimates are particularly sensitive because of their significance to our consolidated financial statements and because of the possibility that subsequent events and available information may differ markedly from management's judgments at the time the consolidated financial statements were prepared. We have discussed with the Audit Committee the quality, not just the acceptability, of our accounting principles as applied in our financial reporting. The discussions generally included such matters as the consistency of our accounting policies and their application, and the clarity and completeness of our consolidated financial statements, which include related disclosures.

Information regarding our accounting policies pertaining to these topics is located in the Notes to the Consolidated Financial Statements contained in Part II - Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2022. In addition, discussion of accounting policies, including certain sensitivity information, was presented in Management's Discussion and Analysis of Financial Condition and Results of Operations - Application of Critical Accounting Estimates in that Form 10-K within which we identified the following accounting estimates as critical in that they involve a higher degree of judgment and are subject to a significant degree of variability:

- Valuation of hard-to-value fixed maturity securities
- Evaluation of credit loss impairments for maturity securities
- Evaluation of goodwill and intangible assets for impairment
- Valuation of annuity and life deferred policy acquisition costs

Horace Mann Educators Corporation 47 First Quarter 2023 Form 10-Q

- Valuation of liabilities for property and casualty unpaid claims and claim expense reserves
- Valuation of liabilities for group benefits unpaid claims and claim expense reserves
- Valuation of certain investment contracts and policy reserves
- Valuation of long-duration contracts under the new accounting guidance in ASU 2018-12

Except as noted below, compared to December 31, 2022, as of March 31, 2023, there were no material changes to accounting policies for areas most subject to significant management judgments identified above.

Effective January 1, 2023, we adopted the new accounting guidance in ASU 2018-12 which changed our accounting policies for the valuation of annuity and life deferred policy acquisition costs (DAC) and the valuation of certain policy reserves (which is now referred to as the liability for future policy benefits or "LFPB"). DAC is now being amortized on a constant-level basis over the expected term of the related contracts. Cash flow assumptions used to measure LFPB must be reviewed at least annually, and if there is a change, must be updated and the discount rate assumption must be updated quarterly. The new accounting policies are described in more detail in Part I - Item 1, Note 1 of the Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

### Results of Operations by Segment

Consolidated financial results primarily reflect the results of the Property & Casualty, Life & Retirement, and Supplemental & Group Benefits reporting segments as noted in the Introduction and Outlook for 2023 sections of this MD&A, as well as the Corporate & Other reporting segment. These segments are defined based on financial information management uses to evaluate performance and to determine the allocation of resources.

The determination of segment information is described in more detail in Part I - Item 1, Note 7 of the Consolidated Financial Statements in this Quarterly Report on Form 10-Q. The following sections provide analysis and discussion of the results of operations for each of the reporting segments as well as investment results.

### Property & Casualty

For the three months ended March 31, 2023, net loss reflected the following factors:

- Higher catastrophe losses
- Elevated underlying auto losses
- Decrease in net investment income due to negative returns on limited partnership interests

Horace Mann Educators Corporation 48 First Quarter 2023 Form 10-Q

The following table provides certain financial information for Property & Casualty for the periods indicated.

*($ in millions, unless otherwise indicated)*

| Financial Data: Net premiums written\*: | Three Months Ended March 31, 2023 | 2022 | 2023-2022 % Change |
| --- | ---: | ---: | ---: |
| Auto | $101.2 | $94.5 | 7.1% |
| Property and other | 47.9 | 45.1 | 6.2% |
| Total net premiums written | 149.1 | 139.6 | 6.8% |
| Change in unearned net premiums | 3.3 | 10.6 | -68.9% |
| Total net premiums earned | 152.4 | 150.2 | 1.5% |
| Incurred claims and claims expenses: |  |  |  |
| Claims occurring in the current year | 128.8 | 108.3 | 18.9% |
| Prior years' reserve development(1) | — | — | —% |
| Total claims and claim expenses incurred | 128.8 | 108.3 | 18.9% |
| Operating expenses, including DAC amortization | 42.9 | 39.4 | 8.9% |
| Underwriting gain (loss) | (19.3) | 2.5 | N.M. |
| Net investment income | 4.0 | 7.2 | -44.4% |
| Income (loss) before income taxes | (14.6) | 10.5 | N.M |
| Net income (loss) | (11.6) | 8.5 | N.M |
| Core earnings (loss)\* | (11.6) | 8.5 | N.M |
| **Operating Statistics:** |  |  |  |
| Auto |  |  |  |
| Loss and loss adjustment expense ratio | 82.5% | 76.0% | 6.5 pts |
| Expense ratio | 28.4% | 25.8% | 2.6 pts |
| Combined ratio: | 110.9% | 101.8% | 9.1 pts |
| Prior years' reserve development(1) | —% | —% | — pts |
| Catastrophe losses | 1.8% | 0.5% | 1.3 pts |
| Underlying combined ratio\* | 109.1% | 101.3% | 7.8 pts |
| Property |  |  |  |
| Loss and loss adjustment expense ratio | 88.1% | 65.0% | 23.1 pts |
| Expense ratio | 27.7% | 27.3% | 0.4 pts |
| Combined ratio: | 115.8% | 92.3% | 23.5 pts |
| Prior years' reserve development(1) | —% | —% | — pts |
| Catastrophe losses | 37.9% | 12.7% | 25.2 pts |
| Underlying combined ratio\* | 77.9% | 79.6% | -1.7 pts |
| Risks in force (in thousands) |  |  |  |
| Auto(2) | 365 | 372 | -1.9% |
| Property | 170 | 175 | -2.9% |
| Total | 535 | 547 | -2.2% |

(1) (Favorable) unfavorable.

(2) Includes assumed risks in force of 4.

On a reported basis, the 9.1 point increase in the auto combined ratio for the three months ended March 31, 2023 was mainly attributable to a 5.2 point increase in the auto underlying loss ratio\*. As expected, auto frequency outpaced levels experienced in the prior year period. The challenges being faced by the entire industry, including the unprecedented level of inflation that is driving higher replacement costs; the trend toward

Horace Mann Educators Corporation 49 First Quarter 2023 Form 10-Q more severe accidents; and increased usage and costs of medical services, also continue. We continue to implement rate and other underwriting changes that address these trends.

The reported property combined ratio increased 23.5 points for the three months ended March 31, 2023, driven by higher catastrophe losses. The underlying loss ratio improved 2.1 points for the three months ended March 31, 2023 due to lower fire losses.

For the three months ended March 31, 2023, total Property & Casualty net premiums written\* increased $9.5 million as rate actions and inflation adjustments to coverage values for property more that offset declines in risks in force. The benefit of stronger retention is being offset by new business volumes that still remain below historical levels due to the lingering effect of the pandemic on sales\*.

For the three months ended March 31, 2023, auto net premiums written\* increased $6.7 million, primarily due to rate actions that began in the second half of 2022. For the three months ended March 31, 2023, average net premium written and average net premium earned increased 8.1% and 4.4%, respectively. We anticipate auto rates to increase by 18% to 20% in 2023 supplemented by non-rate underwriting actions. The number of educator risks has been over 80% relative to overall auto risks in force over the past two years.

For the three months ended March 31, 2023, property and other net premiums written\* increased $2.8 million due to increases in average net premium written and average net premium earned which increased 9.8% and 8.7% for the three months ended March 31, 2023, respectively, as inflation adjustments to coverage values continue to take effect. With inflationary pressure continuing, we anticipate property rates to increase by 12% to 15% in 2023. The number of educator risks has been near or above 80% relative to overall property risks in force over the past two years.

We continue to evaluate and implement actions to further mitigate our exposure. Such actions could include, but are not limited to, non-renewal of property risks, restricted agent geographic placement, limitations on agent new business sales, further tightening of underwriting standards and increased utilization of third-party vendor products.

Horace Mann Educators Corporation 50 First Quarter 2023 Form 10-Q

### Life & Retirement

For the three months ended March 31, 2023, net income reflected the following factors:

- Higher net investment income primarily due to returns on floating rate fixed maturity securities including commercial mortgage loan funds
- Higher interest credited reflecting interest rates on FHLB funding agreements rising more rapidly than net investment income due to timing of interest rate resets
- Lower mortality costs in Life results partially offset unfavorable market risk benefit adjustment in Retirement
- Higher DAC amortization due to a write-off related to a decline in annuity premium persistency

Horace Mann Educators Corporation 51 First Quarter 2023 Form 10-Q

The following table provides certain information for Life & Retirement for the periods indicated.

*($ in millions)*

| Life & Retirement | Three Months Ended March 31, 2023 | 2022 | 2023-2022 % Change |
| --- | ---: | ---: | ---: |
| Net premiums written and contract deposits\* | $136.1 | $136.4 | -0.2% |
| Net premiums and contract charges earned | 37.7 | 35.8 | 5.3% |
| Net investment income | 87.9 | 84.2 | 4.4% |
| Other income | 3.9 | 4.9 | -20.4% |
| Life mortality costs | 19.5 | 21.4 | -8.9% |
| Interest credited | 47.9 | 39.6 | 21.0% |
| Change in reserves | 13.8 | 13.0 | 6.2% |
| Operating expenses | 24.2 | 25.7 | -5.8% |
| DAC amortization expense | 6.8 | 5.7 | 19.3% |
| Intangible asset amortization expense | 0.1 | 0.3 | -66.7% |
| Income before income taxes | 17.2 | 19.2 | -10.4% |
| Income tax expense | 3.2 | 3.6 | -11.1% |
| Net income | 14.0 | 15.6 | -10.3% |
| Core earnings\* | 14.0 | 15.6 | -10.3% |
| Life policies in force (in thousands) | 162 | 163 | -0.6% |
| Life insurance in force | $20,155 | $19,595 | 2.9% |
| Life persistency - LTM | 95.9% | 96.2% | -0.3 pts |
| Annuity contracts in force (in thousands) | 226 | 229 | -1.3% |
| Horace Mann Retirement Advantage® contracts in force (in thousands) | 17 | 16 | 6.3% |
| Cash value persistency - LTM | 93.1% | 94.3% | -1.2 pts |

For the three months ended March 31, 2023, life annualized sales\* increased $0.4 million and life persistency remained strong at 95.9%.

For the three months ended March 31, 2023, net annuity contract deposits\* for variable and fixed annuities decreased $2.8 million from strong prior year levels. Educators continue to begin their relationship with Horace Mann through 403(b) retirement savings products, including attractive annuity products, which provide encouraging cross-sell opportunities. Cash value persistency declined slightly to 93.1%.

As of March 31, 2023, annuity assets under management were down $190.2 million, or 3.7%, compared to a year ago primarily due to market depreciation. Assets under administration, which includes annuity assets under management, Horace Mann Retirement Advantage® and other advisory and recordkeeping assets were down $628.9 million, or 7.0%, compared to a year ago largely due to the effect of equity market performance. The year-to-date annualized net interest spread on fixed annuities, excluding reinsurance, decreased 80 basis points compared to a year ago, primarily reflecting higher interest credited, which includes interest on FHLB funding agreements that rose more rapidly than net investment income due to the timing of interest rate resets.

We actively manage our interest rate risk exposure, considering a variety of factors, including earned interest rates, credited interest rates and the relationship between the expected durations of assets and liabilities. We estimate that over the next 12 months approximately $676.4 million of the Life & Retirement investment portfolio and related investable cash flows will be reinvested at current market rates.

Horace Mann Educators Corporation 52 First Quarter 2023 Form 10-Q

Interest rates rose swiftly throughout 2022. However, the risk of a deep recession or shock to the economy, such as a global pandemic, could result in a return to historically low interest rates. The current environment of higher interest rates have afforded us the opportunity to invest insurance cash flows and reinvested cash flows at higher yields, which could be a benefit to net investment income, but the higher interest rates have caused an increase to both realized investment losses when securities are sold, and to net unrealized investment losses in the remaining portfolios.

As a general guideline, based on our existing policies and investment portfolio, the impact from a 100 basis point decline in the average reinvestment rate would reduce Life & Retirement net investment income by approximately $2.6 million in year one and $7.8 million in year two, reducing the annualized net interest spread on fixed annuities by approximately 9 basis points and 26 basis points in the respective periods, compared to the current period annualized net interest spread on fixed annuities. We could also consider potential changes in rates credited to policyholders, tempered by any restrictions on the ability to adjust policyholder rates due to guaranteed minimum crediting rates.

We reinsure a block of in force fixed annuities with $2.4 billion of assets under management and with a minimum crediting rate of 4.5% which helps mitigate the risk of not being able to generate appropriate spreads on the annuity business. Information regarding the interest crediting rates and balances equal to the guaranteed minimum crediting rates for deferred annuity account values excluding the reinsured block is shown below.

*($ in millions)*

| Guaranteed minimum crediting rates: | March 31, 2023 Total Deferred Annuities Percent of Total | Accumulated Value (AV) | Deferred Annuities at Minimum Guaranteed Rate Percent of Total Deferred Annuities AV | Percent of Total | Accumulated Value |
| --- | ---: | ---: | ---: | ---: | ---: |
| Less than 2% | 57.0% | $1,432.3 | 40.7% | 37.0% | $583.0 |
| Equal to 2% but less than 3% | 10.9 | 272.9 | 69.1 | 12.0 | 188.5 |
| Equal to 3% but less than 4% | 23.8 | 597.4 | 99.9 | 37.8 | 596.9 |
| Equal to 4% but less than 5% | 6.4 | 161.9 | 100.0 | 10.2 | 161.9 |
| 5% or higher | 1.9 | 46.6 | 100.0 | 3.0 | 46.6 |
| Total | 100.0% | $2,511.1 | 62.8% | 100.0% | $1,576.9 |

We will continue to be disciplined in executing strategies to mitigate the negative impact on profitability of a sustained low interest rate environment. However, the success of these strategies may be affected by the factors discussed in Part I - Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2022 and other factors in this Quarterly Report on Form 10-Q.

Horace Mann Educators Corporation 53 First Quarter 2023 Form 10-Q

### Supplemental & Group Benefits

For the three months ended March 31, 2023, net income reflected the following factors:

- Improvement in benefit ratio due to frequency below prior year levels on employer-sponsored products
- Higher net investment income largely due to repositioning of the portfolio for the employer-sponsored business
- Increased level of operating expenses reflecting investment being made in the segment's infrastructure as well as higher allocation of corporate expenses

The following table provides certain information for Supplemental & Group Benefits for the periods indicated.

*($ in millions)*

| Supplemental & Group Benefits | Three Months Ended March 31, 2023 | 2022 | 2023-2022 % Change |
| --- | ---: | ---: | ---: |
| Net premiums and contract charges earned | $65.8 | $69.8 | -5.7% |
| Net investment income | 9.1 | 7.1 | 28.2% |
| Other income | (3.7) | 1.6 | N.M. |
| Benefits, settlement expenses and change in reserves | 21.1 | 32.5 | -35.1% |
| Interest credited | 0.8 | 0.1 | N.M. |
| Operating expenses (includes DAC amortization expense) | 27.9 | 25.3 | 10.3% |
| Intangible asset amortization expense | 3.6 | 3.9 | -7.7% |
| Income before income taxes | 17.8 | 16.7 | 6.6% |
| Net income | 14.0 | 13.2 | 6.1% |
| Core earnings\* | 14.0 | 13.2 | 6.1% |
| Benefit ratio(1) | 33.3% | 46.7% | -13.4 pts |
| Operating expense ratio(2) | 39.2% | 32.2% | 7.0 pts |
| Pretax profit margin(3) | 24.9% | 21.4% | 3.5 pts |
| Worksite direct products benefit ratio | 22.1% | 22.2% | -0.1 pts |
| Worksite direct premium persistency (rolling 12 months) | 90.6% | 92.1% | -1.5 pts |
| Employer-sponsored products benefit ratio | 42.6% | 66.1% | -23.5 pts |

(1) Ratio of benefits to net premiums earned.

(2) Ratio of operating expenses to total revenues.

(3) Ratio of income before income taxes to total revenues.

For the three months ended March 31, 2023, total sales\* were $8.2 million. Sales of worksite direct products\* were $3.7 million for three months ended March 31, 2023, representing an increase of 164.3%. Worksite direct premium persistency (rolling 12 months), while down slightly, remains strong at 90.6%. Sales of employer-sponsored products\* were $4.5 million for the three months ended March 31, 2023, representing an increase of 95.7%.

Horace Mann Educators Corporation 54 First Quarter 2023 Form 10-Q

### Corporate & Other

The following table provides certain financial information for Corporate & Other for the periods indicated.

*($ in millions)*

|  | Three Months Ended March 31, 2023 | 2022 | 2023-2022 % Change |
| --- | ---: | ---: | ---: |
| Interest expense | $(6.7) | $(3.9) | -71.8% |
| Net investment losses, pretax | (3.9) | (15.5) | N.M. |
| Other operating expenses, net investment income and other income | (1.7) | (2.0) | 15.0% |
| Net investment losses, after tax | (3.1) | (12.2) | N.M. |
| Net loss | (9.8) | (17.0) | 42.4% |
| Core loss\* | (6.7) | (4.8) | -39.6% |

For the three months ended March 31, 2023, the net loss decreased $7.2 million due to lower net investment losses partially offset by an increase in interest expense on the Revolving Credit Facility.

### Investment Results

Our investment strategy is primarily focused on generating income to support product liabilities, and balances principal protection and risk. Total net investment income includes net investment income from our managed investment portfolio as well as accreted investment income from the deposit asset on reinsurance related to our reinsured block of approximately $2.4 billion of fixed annuity liabilities related to legacy individual policies written in 2002 or earlier.

*($ in millions)*

|  | Three Months Ended March 31, 2023 | 2022 | 2023-2022 % Change |
| --- | ---: | ---: | ---: |
| Net investment income - managed investment portfolio | $74.7 | $73.0 | 2.3% |
| Investment income - deposit asset on reinsurance | 25.7 | 24.9 | 3.2% |
| Total net investment income | 100.4 | 97.9 | 2.6% |
| Pretax net investment losses | (3.9) | (15.5) | N.M. |
| Pretax net unrealized investment gains (losses) on fixed maturity securities | (453.3) | 16.7 | N.M |

For the three months ended March 31, 2023, net investment income from our managed investment portfolio increased $1.7 million, primarily due to a higher contribution from floating rate fixed maturity securities including commercial mortgage loan funds.

For the three months ended March 31, 2023, pretax net investment losses decreased $ 11.6 million, primarily due to a reduction in losses from changes in fair values of equity securities and impairments compared to the prior year period. Pretax net unrealized investment losses on fixed maturity securities as of March 31, 2023 were down $118.6 million, or 20.7%, compared to December 31, 2022, reflecting a 40 basis point decrease in the 10-year U.S. Treasury yield, which more than offset slightly wider credit spreads in investment grade.

Horace Mann Educators Corporation 55 First Quarter 2023 Form 10-Q

#### Fixed Maturity and Equity Securities Portfolios

The table below presents our fixed maturity and equity securities portfolios by major asset class, including the 10 largest sectors of our corporate bond holdings (based on fair value).

*($ in millions)*

| Fixed maturity securities Corporate bonds | March 31, 2023 Number of Issuers | Fair Value | Amortized Cost, net | Pretax Net Unrealized Loss |
| --- | ---: | ---: | ---: | ---: |
| Banking & Finance | 169 | $471.8 | $523.0 | $(51.2) |
| Misc. | 36 | 184.1 | 185.3 | (1.2) |
| Insurance | 57 | 157.3 | 170.2 | (12.9) |
| Energy | 86 | 144.3 | 158.4 | (14.1) |
| HealthCare, Pharmacy | 73 | 116.6 | 137.5 | (20.9) |
| Utilities | 78 | 114.9 | 132.5 | (17.6) |
| Real Estate | 42 | 97.9 | 107.6 | (9.7) |
| Transportation | 47 | 86.5 | 95.6 | (9.1) |
| Consumer Products | 54 | 69.5 | 83.6 | (14.1) |
| Natural Gas | 15 | 52.9 | 59.1 | (6.2) |
| All other corporates(1) | 295 | 447.8 | 502.5 | (54.7) |
| Total corporate bonds | 952 | 1,943.6 | 2,155.3 | (211.7) |
| Mortgage-backed securities |  |  |  |  |
| U.S. Government and federally sponsored agencies | 239 | 375.0 | 412.5 | (37.5) |
| Commercial(2) | 164 | 302.9 | 327.9 | (25.0) |
| Other | 29 | 14.0 | 15.1 | (1.1) |
| Municipal bonds(3) | 605 | 1,290.9 | 1,363.0 | (72.1) |
| Government bonds |  |  |  |  |
| U.S. | 44 | 367.4 | 428.2 | (60.8) |
| Foreign | 5 | 32.6 | 34.2 | (1.6) |
| Collateralized loan obligations(4) | 252 | 741.2 | 764.5 | (23.3) |
| Asset-backed securities | 128 | 282.4 | 302.6 | (20.2) |
| Total fixed maturity securities | 2,418 | $5,350.0 | $5,803.3 | $(453.3) |
| **Equity securities** |  |  |  |  |
| Non-redeemable preferred stocks | 26 | $80.4 |  |  |
| Common stocks | 6 | 1.0 |  |  |
| Closed-end fund | 1 | 17.4 |  |  |
| Total equity securities | 33 | $98.8 |  |  |
| Total | 2,451 | $5,448.8 |  |  |

(1) The All other corporates category contains 18 additional industry sectors. Food and beverage, technology, telecommunications, broadcasting and media and leisure entertainment represented $230.6 million of fair value at March 31, 2023, with the remaining 13 sectors each representing less than $217.2 million.

(2) At March 31, 2023, 100% were investment grade, with an overall credit rating of AA+, and the positions were well diversified by property type, geography and sponsor.

(3) Holdings are geographically diversified, 44.6% are tax-exempt and 77.6% are revenue bonds tied to essential services, such as mass transit, water and sewer. The overall credit quality of the municipal bond portfolio was AA- at March 31, 2023.

(4) Based on fair value, 93.3% of the collateralized loan obligation securities were rated investment grade based on ratings assigned by a nationally recognized statistical ratings organization (NRSRO - S&P, Moody's, Fitch, Dominion, A.M. Best, Morningstar, Egan Jones and Kroll).

As of March 31, 2023, our diversified fixed maturity securities portfolio consisted of 3,722 investment positions, issued by 2,418 entities, and totaled approximately $5.4 billion in fair value. This portfolio was 92.4% investment grade, based on fair value, with an average quality rating of A+. Our investment guidelines target single corporate issuer concentrations to 0.5% of invested assets for AAA or AA rated securities, 0.35% of invested assets for A or BBB rated securities, and $5.0 million for non-investment grade securities.

Horace Mann Educators Corporation 56 First Quarter 2023 Form 10-Q

#### Rating of Fixed Maturity Securities and Equity Securities(1)

The following table presents the composition and fair value of our fixed maturity and equity securities portfolios by rating category. As of March 31, 2023, 91.9% of these combined portfolios were investment grade, based on fair value, with an overall average quality rating of A+. We have classified the entire fixed maturity securities portfolio as available for sale, which is carried at fair value.

*($ in millions)*

| Fixed maturity securities | Percent of Portfolio Fair Value December 31, 2022 | March 31, 2023 | March 31, 2023 Fair Value | Amortized Cost, net |
| --- | ---: | ---: | ---: | ---: |
| AAA | 10.8% | 11.3% | $605.2 | $634.4 |
| AA(2) | 39.3 | 39.1 | 2,093.6 | 2,303.7 |
| A | 17.8 | 18.2 | 975.3 | 1,038.1 |
| BBB | 24.1 | 23.6 | 1,266.6 | 1,393.2 |
| BB | 1.8 | 1.8 | 95.1 | 104.3 |
| B | 0.9 | 0.9 | 47.8 | 52.0 |
| CCC or lower | — | — | 1.1 | 1.7 |
| Not rated(3) | 5.3 | 5.1 | 265.3 | 275.9 |
| Total fixed maturity securities | 100.0% | 100.0% | $5,350.0 | $5,803.3 |
| **Equity securities** |  |  |  |  |
| AAA | —% | —% |  |  |
| AA | — | — | — |  |
| A | — | — | — |  |
| BBB | 68.7 | 65.4 | 64.6 |  |
| BB | 10.8 | 10.9 | 10.8 |  |
| B | — | — | — |  |
| CCC or lower | — | 2.1 | 2.1 |  |
| Not rated | 20.5 | 21.6 | 21.3 |  |
| Total equity securities | 100.0% | 100.0% | $98.8 |  |
| Total |  |  | $5,448.8 |  |

(1) Ratings are assigned by an NRSRO when available, If no rating is available from an NRSRO, then an internally developed rating is used. Ratings for publicly traded securities are determined when the securities are acquired and are updated monthly to reflect any changes in ratings.

(2) At March 31, 2023, the AA rated fair value amount included $364.8 million of U.S. Government and federally sponsored agency securities and $574.5 million of mortgage-backed and other asset-backed securities issued by U.S. Government and federally sponsored agencies.

(3) This category primarily represents private placement and municipal securities not rated by a NRSRO.

As of March 31, 2023, the fixed maturity securities portfolio had $502.9 million of pretax gross unrealized investment losses on $4,185.9 million of fair value related to 2,921 positions. Of the investment positions with gross unrealized losses, there were 416 trading below 80.0% of the carrying value as of March 31, 2023. See Part II - Item 8, Note 2 of the Consolidated Financial Statements in this Quarterly Report on Form 10-Q for more information

There was a significant increase in interest rates throughout 2022, driven mostly by increases in U.S. Treasury rates, though credit spreads also widened. As of March 31, 2023, the 10-year U.S. Treasury yield increased 196 basis points since January 1, 2022, rising from 1.51% as of January 1, 2022 to 3.47% as of March 31, 2023. Additionally, credit spreads widened during the same time period, with investment grade and high yield wider by 46 and 172 basis points, respectively. These upward movements in rates caused market yields in our investment portfolios to rise sharply, with downward pressure on prices. As of March 31, 2023, investment grade and high yield total returns were down 12.8% and 8.0%, respectively, since January 1, 2022. As of March 31, 2023, the Bloomberg Barclays Index Yield-to-Worst for Investment Grade rose 2.84% since January 1, 2022, ending at 5.2%, while the High Yield Index rose 4.31% to 8.5% since January 1, 2022. Our investment portfolios have generated sizable unrealized investment losses as a result of sharp increases in interest rates.

We view the pretax gross unrealized investment losses of all our fixed maturity securities as of March 31, 2023 as temporary. Future changes in circumstances related to these and other securities could require subsequent recognition of impairment.

Horace Mann Educators Corporation 57 First Quarter 2023 Form 10-Q

### Liquidity and Capital Resources

Our liquidity and access to capital were not materially impacted by inflation or changes in interest rates during the three months ended March 31, 2023. For further discussion regarding the potential future impacts of inflation and changes in interest rates, see Part I – Item 1A - Risk Factors and Part II – Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations - Effects of Inflation and Changes in Interest Rates presented in our Annual Report on Form 10-K for the year ended December 31, 2022.

### Investments

Information regarding our investment portfolio, which is comprised primarily of investment grade fixed maturity securities, is presented in Part I - Item 1, Note 2 of the Consolidated Financial Statements as well as Part I - Item 2 - Investment Results in this Quarterly Report on Form 10-Q.

### Cash Flow

Our short-term liquidity requirements, within a 12 month operating cycle, are for the timely payment of claims and benefits to policyholders, operating expenses, interest payments and federal income taxes. Cash flow generated from operations has been, and is expected to be, adequate to meet our operating cash needs in the next 12 months. Cash flow in excess of operational needs has been used to fund business growth, pay dividends to shareholders and repurchase shares of our common stock. Long-term liquidity requirements, beyond one year, are principally for the payment of future insurance and annuity policy claims and benefits, as well as retirement of debt. The following table summarizes our consolidated cash flows activity for the periods indicated.

*($ in millions)*

|  | Three Months Ended March 31, 2023 | 2022 | 2023-2022 % Change |
| --- | ---: | ---: | ---: |
| Net cash provided by operating activities | $86.4 | $95.7 | -9.7% |
| Net cash used in investing activities | (95.3) | (217.7) | 56.2% |
| Net cash provided by (used in) financing activities | (6.5) | 37.4 | -117.4% |
| Net decrease in cash | (15.4) | (84.6) | 81.8% |
| Cash at beginning of period | 42.8 | 133.7 | -68.0% |
| Cash at end of period | $27.4 | $49.1 | -44.2% |

#### Operating Activities

As a holding company, we conduct our principal operations in the personal lines segment of the property and casualty, life, retirement, supplemental and group insurance industries through our subsidiaries. Our insurance subsidiaries generate cash flow from premium and investment income, generally well in excess of their immediate needs for policy obligations, operating expenses and other cash requirements. Cash provided by operating activities primarily reflects net cash flows generated by our insurance subsidiaries.

For the three months ended March 31, 2023, net cash provided by operating activities decreased $9.3 million, primarily due to higher claims paid on insurance policies.

#### Investing Activities

Net cash used in investing activities for the three months ended March 31, 2023 and 2022 was $(95.3) million and $(217.7) million, respectively. Prior year investing activities included the acquisition of Madison National.

Investing cash inflows consist primarily of proceeds from the sales and maturities of investments. Investing cash outflows consist primarily of payments for purchases of investments. Our investment strategy is to appropriately match the cash flows and durations of our assets with the cash flows and durations of our liabilities to meet the funding requirements of our business and, generally, the expected principal and interest payments produced by our fixed maturity securities portfolio adequately fund the estimated runoff of our insurance reserves. When market opportunities arise, we may sell selected securities and reinvest the proceeds to improve the yield and credit quality of our portfolio. We may at times also sell selected securities and reinvest the proceeds to improve the duration matching of our assets and liabilities and/or rebalance our portfolio. As a result, sales before maturity may vary from period to period. The sale and purchase of short-term investments is influenced by

Horace Mann Educators Corporation 58 First Quarter 2023 Form 10-Q proceeds received from FHLB funding advances, issuance of debt, our reverse repurchase agreement program, and by the amount of cash which is at times held in short-term investments to facilitate the availability of cash to fund the purchase of appropriate long-term investments, repay maturing debt, and/or to respond to catastrophes.

#### Financing Activities

Financing activities include primarily payment of dividends, receipt and withdrawal of funds by annuity contractholders, changes in the deposit asset on reinsurance, repurchases of our common stock, fluctuations in book overdraft balances, and borrowings, repayments and repurchases related to debt facilities.

For the three months ended March 31, 2023, net cash provided by financing activities decreased $43.9 million compared to the prior year period, primarily due to a $34.3 increase in cash outflows from benefits, withdrawals and net transfers to Separate Account variable annuity assets, a $9.8 million increase in cash outflows from the deposit asset on reinsurance and a $8.3 million increase in cash outflows from the change in book overdrafts; partially offset by a $17.0 million net increase in cash inflows from FHLB funding agreements.

The following table shows activity from FHLB funding agreements for the periods indicated.

*($ in millions)*

|  | Three Months Ended March 31, 2023 | 2022 | 2023-2022 $ Change | 2023-2022 % Change |
| --- | ---: | ---: | ---: | ---: |
| Balance at beginning of the period | $792.5 | $782.5 | $10.0 | 1.3% |
| Advances received from FHLB funding agreements | 162.0 | 60.0 | 102.0 | N.M. |
| Principal repayments on FHLB funding agreements | (85.0) | — | (85.0) | N.M. |
| Balance at end of the period | $869.5 | $842.5 | $27.0 | 3.2% |

Horace Mann Educators Corporation 59 First Quarter 2023 Form 10-Q

### Liquidity Sources and Uses

Our potential sources and uses of funds principally include the following activities:

|  | Property & Casualty | Life & Retirement | Supplemental & Group Benefits | Corporate & Other |
| --- | --- | --- | --- | --- |
| **Activities for potential sources of funds** |  |  |  |  |
| Receipt of insurance premiums, contractholder charges and fees | ☑ | ☑ | ☑ |  |
| Recurring service fees, commissions and overrides | ☑ | ☑ | ☑ | ☑ |
| Contractholder fund deposits |  | ☑ | ☑ |  |
| Reinsurance and indemnification program recoveries | ☑ | ☑ | ☑ |  |
| Receipts of principal, interest and dividends on investments | ☑ | ☑ | ☑ | ☑ |
| Proceeds from sales of investments | ☑ | ☑ | ☑ | ☑ |
| Proceeds from FHLB borrowing and funding agreements | ☑ | ☑ | ☑ |  |
| Proceeds from reverse repurchase agreements | ☑ | ☑ | ☑ |  |
| Intercompany loans | ☑ | ☑ | ☑ | ☑ |
| Capital contributions from parent | ☑ | ☑ | ☑ |  |
| Dividends or return of capital from subsidiaries |  |  |  | ☑ |
| Tax refunds/settlements | ☑ | ☑ | ☑ | ☑ |
| Proceeds from periodic issuance of additional securities |  |  |  | ☑ |
| Proceeds from debt issuances |  |  |  | ☑ |
| Proceeds from revolving credit facility |  |  |  | ☑ |
| Receipt of intercompany settlements related to employee benefit plans |  |  |  | ☑ |
| **Activities for potential uses of funds** |  |  |  |  |
| Payment of claims and related expenses | ☑ | ☑ | ☑ |  |
| Payment of contract benefits, surrenders and withdrawals |  | ☑ | ☑ |  |
| Reinsurance cessions and indemnification program payments | ☑ | ☑ | ☑ |  |
| Payment of operating costs and expenses | ☑ | ☑ | ☑ | ☑ |
| Payments to purchase investments | ☑ | ☑ | ☑ | ☑ |
| Repayment of FHLB borrowing and funding agreements | ☑ | ☑ | ☑ |  |
| Repayment of reverse repurchase agreements | ☑ | ☑ | ☑ |  |
| Payment or repayment of intercompany loans | ☑ | ☑ | ☑ | ☑ |
| Capital contributions to subsidiaries |  |  |  | ☑ |
| Dividends or return of capital to shareholders/parent company | ☑ | ☑ | ☑ | ☑ |
| Tax payments/settlements | ☑ | ☑ | ☑ | ☑ |
| Common share repurchases |  |  |  | ☑ |
| Debt service expenses and repayments |  |  |  | ☑ |
| Repayment on revolving credit facility |  |  |  | ☑ |
| Payments related to employee benefit plans |  |  |  | ☑ |
| Payments for business acquisitions |  |  |  | ☑ |

We actively manage our financial position and liquidity levels in light of changing market, economic and business conditions. Liquidity is managed at both the entity and enterprise level across HMEC and is assessed on both base and stressed level liquidity needs. We believe we have sufficient liquidity to meet these needs. Additionally, we have existing intercompany agreements in place that facilitate liquidity management across HMEC to enhance flexibility.

Horace Mann Educators Corporation 60 First Quarter 2023 Form 10-Q

As of March 31, 2023, we held $966.2 million of cash, U.S. government and agency fixed maturity securities and public equity securities (excluding non-redeemable preferred stocks and foreign equity securities) which, under normal market conditions, could be rapidly liquidated.

Certain remote events and circumstances could constrain our liquidity. Those events and circumstances include, for example, a catastrophe resulting in extraordinary losses, a downgrade of our Senior Notes rating to non-investment grade status or a downgrade in our insurance subsidiaries' financial strength ratings. The rating agencies also consider the interdependence of our individually rated entities; therefore, a rating change in one entity could potentially affect the ratings of other related entities.

### Capital Resources

We have determined the amount of capital that is needed to adequately fund and support business growth, primarily based on risk-based capital formulas, including those developed by the National Association of Insurance Commissioners. Historically, our insurance subsidiaries have generated capital in excess of such needed levels. These excess amounts have been paid to us through dividends. We have then utilized these dividends and our access to the capital markets to fund growth initiatives, service and retire debt, pay dividends to our shareholders, repurchase shares of our common stock and for other corporate purposes. If necessary, we also have other potential sources of liquidity that could provide for additional funding to meet corporate obligations or pay shareholder dividends, including a revolving line of credit, as well as issuances of various securities.

The insurance subsidiaries are subject to various regulatory restrictions that limit the amount of annual dividends or other distributions, including loans or cash advances, available to us without prior approval of the insurance regulatory authorities. The aggregate amount of dividends that may be paid in 2023 from all of our insurance subsidiaries without prior regulatory approval is $110.3 million, excluding the impact and timing of prior dividends, of which $19.0 million was paid during the three months ended March 31, 2023. We anticipate that our sources of capital will continue to generate sufficient capital to meet the needs for business growth, debt interest payments, shareholder dividends and our share repurchase programs. Additional information is contained in Part II - Item 8, Note 14 of the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2022.

Total capital was $1,637.2 million as of March 31, 2023, including $498.0 million of short-term and long-term debt. Total debt represented 30.4% of total capital including net unrealized investment losses on fixed maturity securities (25.2% excluding net unrealized investment losses on fixed maturity securities and net reserve remeasurements attributable to discount rates\*) as of March 31, 2023, which was slightly above our long-term target of 25.0% for our debt to capital ratio excluding net unrealized investment gains (losses) and net reserve remeasurements attributable to discount rate).

Shareholders' equity was $1,139.2 million as of March 31, 2023, including net unrealized investment losses on fixed maturity securities of $356.4 million after taxes. The market value of our common stock and the market value per share were $1,368.2 million and $33.48, respectively, as of March 31, 2023. Book value per share and adjusted book value per share\* was $27.87 and $36.16, respectively, as of March 31, 2023.

Additional information regarding net unrealized investment gains (losses) on fixed maturity securities as of March 31, 2023 is included in Part I - Item 1, Note 2 of the Consolidated Financial Statements as well as in Part I - Item 2 - Investment Results in this Quarterly Report on Form 10-Q.

Total dividends paid to shareholders was $13.5 million for the three months ended March 31, 2023. In March of 2023, the Board of Directors (Board) approved regular quarterly dividends of $0.33 per share.

For the three months ended March 31, 2023, we repurchased 128,540 shares of our common stock at an average price per share of $34.01 under our share repurchase program. See Part II - Item 8, Note 13 of the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2022 for more information. As of March 31, 2023, $36.9 million remained authorized for future share repurchases under the share repurchase program.

Horace Mann Educators Corporation 61 First Quarter 2023 Form 10-Q

The following table summarizes our debt obligations.

*($ in millions)*

| Short-term debt | Interest Rates | Final Maturity | March 31, 2023 | December 31, 2022 |
| --- | ---: | --- | ---: | ---: |
| Revolving Credit Facility | Variable | 2026 | $249.0 | $249.0 |
| Long-term debt(1) |  |  |  |  |
| 4.50% Senior Notes, Aggregate principal amount of $250.0 less unaccrued discount of $0.2 and $0.3 and unamortized debt issuance costs of $0.8 and $1.1 | 4.50% | 2025 | 249.0 | 248.6 |
| Total |  |  | $498.0 | $497.6 |

(1) We designate debt obligations as "long-term" based on maturity date at issuance.

As of March 31, 2023, we had outstanding $250.0 million aggregate principal amount of 4.50% Senior Notes (Senior Notes), which will mature on December 1, 2025, issued at a discount resulting in an effective yield of 4.53%. Interest on the Senior Notes is payable semi-annually at a rate of 4.50%. Detailed information regarding the redemption terms of the Senior Notes is contained in the Part II - Item 8, Note 10 of the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2022. The Senior Notes are traded in the open market (HMN 4.50).

As of March 31, 2023, we had no borrowings outstanding with FHLB. The Board has authorized a maximum amount equal to 15% of net aggregate admitted assets less separate account assets of the insurance subsidiaries for FHLB borrowing and funding agreements which is below our maximum FHLB borrowing capacity.

Effective July 12, 2021, we, as borrower, amended our Credit Agreement (Revolving Credit Facility). The amended Revolving Credit Facility increased the amount available on the senior revolving credit facility from $225.0 million to $325.0 million. PNC Bank, National Association and JPMorgan Chase Bank, N.A. serve as joint lead arrangers under the amended Revolving Credit Facility, with The Northern Trust Company, KeyBank National Association, U.S. Bank National Association, Illinois National Bank, and Comerica Bank as lenders participating in the syndicate. Terms and conditions of the amended Revolving Credit Facility are substantially consistent with the prior agreement, with an interest rate based on LIBOR plus 115 basis points. The amended Revolving Credit Facility expires on July 12, 2026.

On December 31, 2021, we utilized $114.0 million of the Revolving Credit Facility to fund a portion of the acquisition of Madison National Life Insurance Company, Inc. that occurred effective January 1, 2022, resulting in a remaining capacity of $76.0 million. We expect that the unused portion of the Revolving Credit Facility will be available for ongoing working capital, capital expenditures and general corporate expenditures. The unused portion of the Revolving Credit Facility is subject to a variable commitment fee, which was 0.15% on an annual basis as of March 31, 2023.

To provide additional capital management flexibility, we filed a "universal shelf" registration statement on Form S-3 with the Securities and Exchange Commission (SEC) on March 10, 2021. The registration statement, which registered the offer and sale from time to time of an indeterminate amount of various securities, which may include debt securities, common stock, preferred stock, depositary shares, warrants, delayed delivery contracts and/or units that include any of these securities, was automatically effective on March 10, 2021. Unless withdrawn by us earlier, this registration statement will remain effective through March 10, 2024. No securities associated with the registration statement have been issued at the time of issuance of this Quarterly Report on Form 10-Q.

On March 13, 2018, we filed a "shelf" registration statement on Form S-4 with the SEC which became effective on May 2, 2018. Under this registration statement, we may from time to time offer and issue up to 5,000,000 shares of our common stock in connection with future acquisitions of other businesses, assets or securities. Unless withdrawn by us, this registration statement will remain effective indefinitely. No securities associated with the registration statement have been issued at the time of issuance of this Quarterly Report on Form 10-Q.

Horace Mann Educators Corporation 62 First Quarter 2023 Form 10-Q

#### Financial Ratings

Our principal insurance subsidiaries are rated by A.M. Best Company, Inc. (A.M. Best), Fitch, Moody's, and S&P. These rating agencies have also assigned ratings to our Senior Notes. The ratings that are assigned by these agencies, which are subject to change, can impact, among other things, our access to sources of capital, cost of capital, and competitive position. These ratings are not a recommendation to buy or hold any of our securities.

All four agencies currently have assigned the same insurance financial strength ratings to our Property & Casualty and Life insurance subsidiaries. Only A.M. Best currently rates our Supplemental & Group Benefits subsidiaries. A.M. Best currently rates our NTA Life subsidiary at the same level as our Property & Casualty and Life & Retirement subsidiaries and our Madison National subsidiary is rated A- (Excellent). Assigned ratings and respective affirmation/review dates as of April 30, 2023 were as follows:

|  | Insurance Financial |  | Affirmed/ |
| --- | --- | --- | --- |
|  | **Strength Ratings (Outlook)** | **Debt Ratings (Outlook)** | **Reviewed** |
| A.M. Best |  |  |  |
| HMEC (parent company) | N.A. | bbb (stable) | 7/28/2022 |
| HMEC's Life & Retirement subsidiaries | A (stable) | N.A. | 7/28/2022 |
| HMEC's Property & Casualty subsidiaries | A (stable) | N.A. | 7/28/2022 |
| HMEC's Supplemental & Group Benefits subsidiaries |  |  |  |
| Madison National Life Insurance Company | A- (stable) | N.A. | 7/28/2022 |
| National Teachers Associates Life Insurance Company | A (stable) | N.A. | 7/28/2022 |
| Fitch | A (stable) | BBB (stable) | 10/18/2022 |
| Moody's |  |  |  |
| HMEC (parent company) |  | Baa2 (negative) | 3/1/2023 |
| HMEC's Life Group | A2 (negative) |  | 3/1/2023 |
| HMEC's P&C Group | A2 (negative) |  | 3/1/2023 |
| S&P | A (stable) | BBB (stable) | 2/7/2023 |

### Reinsurance Programs

Information regarding the reinsurance programs for our Property & Casualty, Life & Retirement and Supplemental & Group Benefits segments is located in Part I - Item 1, Reporting Segments in our Annual Report on Form 10-K for the year ended December 31, 2022.

## Market risk

As filed, 1,920 characters.

Market value risk, our primary market risk exposure, is the risk that our invested assets will decrease in value. This decrease in value may be due to (1) a change in the yields realized on our assets and prevailing market yields for similar assets, (2) an unfavorable change in the liquidity of an investment, (3) an unfavorable change in the financial prospects of the issuer of an investment, or (4) a downgrade in the credit rating of the issuer of an investment. Also see Consolidated Results of Operations in Part I - Item 2 of this Quarterly Report on Form 10-Q regarding net investment losses.

Horace Mann Educators Corporation 63 First Quarter 2023 Form 10-Q

Significant changes in interest rates expose us to the risk of experiencing losses or earning a reduced level of income based on the difference between the interest rates earned on our investments and the credited interest rates on our insurance and investment contract liabilities. Also see Consolidated Results of Operations in Part I - Item 2 of this Quarterly Report on Form 10-Q regarding interest credited to policyholders.

We seek to manage our market value risk by coordinating the projected cash inflows of assets with the projected cash outflows of liabilities. For all of our assets and liabilities, we seek to maintain reasonable durations, consistent with the maximization of income without sacrificing investment quality, while providing for liquidity and diversification. The investment risk associated with variable annuity deposits and the underlying mutual funds is assumed by those contractholders, and not by us. Certain fees that we earn from variable annuity deposits are based on the market value of the funds deposited.

More detailed descriptions of our exposure to market value risks and the management of those risks is contained in Part II - Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2022.

## Controls and procedures

As filed, 1,725 characters.

### Management's Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 as amended (Exchange Act), as of March 31, 2023. Based on this evaluation, the chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to us (including our consolidated subsidiaries) that is required to be included in our periodic SEC filings. No material weaknesses in our disclosure controls and procedures were identified in the evaluation and therefore, no corrective actions were taken. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.

### Changes in Internal Control Over Financial Reporting

Except as noted below, there were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Changes were made to relevant business processes and the related control activities over accounting and reporting for long-duration insurance contracts.

Horace Mann Educators Corporation 64 First Quarter 2023 Form 10-Q

## Risk factors

As filed, 241 characters.

At the time of issuance of this Quarterly Report on Form 10-Q, we believe there are no material changes from the risk factors as previously disclosed in Part I - Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022.

Filed May 10, 2023.
Source: SEC EDGAR, the filing index for accession 0001628280-23-017088. Last ingested by Listed: Nov 3, 2026, 20:11 ET. No prices; not investment advice.