Horace Mann Educators Corp: Form 10-Q for the period ended Sep 30, 2023

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 Third Quarter 2023 Investor Supplement.

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

Horace Mann Educators Corporation 46 Third 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:

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 47 Third 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 8 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

(All comparisons vs. same periods in 2022, unless noted otherwise)

($ in millions)

For the three months ended September 30, 2023, net income declined $8.7 million primarily due to higher catastrophe losses and higher property non-catastrophe weather losses in the Property & Casualty segment and higher benefits incurred in the Supplemental & Group Benefits segment, partially offset by lower net investment losses in Corporate & Other and higher interest spreads in the Life & Retirement segment.

For the nine months ended September 30, 2023, net income declined $31.0 million primarily due to higher catastrophe losses and higher non-catastrophe weather losses in the Property & Casualty segment, higher interest expense in Corporate & Other, and lower net interest spreads in the Life & Retirement segment, partially offset by lower net investment losses in Corporate & Other.

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

Consolidated Results of Operations

(All comparisons vs. same periods in 2022, unless noted otherwise)

($ in millions)

Net Premiums and Contract Charges Earned

For the three and nine months ended September 30, 2023, net premiums and contract charges earned increased $8.6 million and $14.0 million, respectively, as the Property & Casualty segment continues to implement rate and other actions.

Net Investment Income

For the three months ended September 30, 2023, total net investment income increased $21.3 million primarily due to higher returns on floating rate fixed maturity securities including commercial mortgage loan funds and on limited partnership interests in various equity funds. For the nine months ended September 30, 2023, total net investment income increased $27.1 million primarily due to higher returns on floating rate fixed maturity securities including commercial mortgage loan funds partially offset by lower returns on limited partnership interests in various equity funds. The annualized investment yield on the portfolio excluding limited partnership interests* was as follows:

During the three and nine months ended September 30, 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 between principal protection and risk.

Horace Mann Educators Corporation 49 Third Quarter 2023 Form 10-Q

Net Investment Losses

For the three months and nine months ended September 30, 2023, total net investment losses declined by $4.4 million and $14.1 million, respectively. The breakdown of net investment gains (losses) by transaction type were as follows:

($ in millions)

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 and nine months ended September 30, 2023, other income increased $1.8 million and decreased $1.4 million, respectively, in the employer-sponsored business line.

Benefits, Claims and Settlement Expenses

Benefits, claims and settlement expenses are up $32.1 million and $41.9 million, respectively, for the three and nine months ended September 30, 2023, primarily due to higher catastrophe losses and elevated underlying auto and property losses in the Property & Casualty segment.

Interest Credited

For the three and nine months ended September 30, 2023, interest credited increased $7.9 million and $26.2 million, respectively, driven primarily by higher interest rates on advances received from the Federal Home Loan Bank of Chicago (FHLB). The net contribution from FHLB advances remained stable year over year as the higher interest credited rates are offset by higher earnings from the floating rate investments backing the program.

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 2.8% and 2.4% as of September 30, 2023 and September 30, 2022, respectively.

Operating Expenses

For the three and nine months ended September 30, 2023, operating expenses increased 0.1% and 2.7%, respectively, primarily due to inflation.

Deferred Policy Acquisition Costs (DAC) Amortization Expense

For the three and nine months ended September 30, 2023, DAC amortization expense increased $4.1 million and $9.7 million, respectively, due to write-offs of DAC in the Life & Retirement segment related to declines in annuity persistency and premium increases in the Property & Casualty segment driving higher DAC asset levels.

Intangible Asset Amortization Expense

For the three and nine months ended September 30, 2023, intangible asset amortization expense decreased $0.5 million and $1.5 million, respectively.

Interest Expense

For the three and nine months ended September 30, 2023, interest expense increased $2.2 million and $7.6 million, respectively, primarily due to an increase in floating interest rates on the Revolving Credit Facility.

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

Income Tax Expense

The effective income tax rate on our pretax income, including net investment gains (losses), was 9.8% and 13.9% for the years ended September 30, 2023 and 2022, respectively. Income from investments in tax-advantaged securities decreased the effective income tax rates by 35.0 and 8.7 percentage points for the nine months ended September 30, 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 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 September 30, 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 core earnings will be within a range of $1.20 to $1.45 per diluted share. This range is unchanged from the Outlook for 2023 we discussed in our Quarterly Report on Form 10-Q for period ended June 30, 2023 although we have updated our segment outlooks as discussed below to reflect third-quarter results.

Property & Casualty Segment

Net income for Property & Casualty is now anticipated to be a loss between $32 million and $37 million, primarily reflecting third quarter weather losses. We continue to assume a full-year catastrophe loss contribution of $95 million to $100 million, or about 15.5 points to the combined ratio.

Property anticipates rate actions of 12% to 15% during 2023, reflecting inflation and current loss trends, accompanied by ‘inflation guard’ increases. We anticipate auto rates to increase by 19% to 20% during 2023, supplemented by non-rate underwriting actions.

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

Life & Retirement Segment

In 2023, anticipated net income for Life & Retirement continues to be in the range of $63 million to $65 million. The longer-term targeted range for the spread remains 220 to 230 basis points. Mortality is anticipated to remain

Horace Mann Educators Corporation 51 Third Quarter 2023 Form 10-Q within actuarial expectations, increasing slightly from 2022. This guidance includes the adoption of LDTI effective January 1, 2023.

Supplemental & Group Benefits Segment

In 2023, net income for Supplemental & Group Benefits is now anticipated to be in the range of $52 million to $55 million reflecting continued strong performance in the third quarter. The primary factors in our outlook include:

• 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 now expected to be in the range of $29 million to $30 million for the full year.

Investments

For 2023, we continue to 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 strong 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 estimated to be below their 10-year average of 8.5%.

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

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

• Evaluation of credit loss impairments for fixed maturity securities
• Evaluation of goodwill and intangible assets for impairment
• Valuation of annuity and life deferred policy acquisition costs
• 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 September 30, 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

(All comparisons vs. same periods in 2022, unless noted otherwise)

For the three and nine months ended September 30, 2023, net losses reflected the following factors:

• Increases in average written premium per policy
• Higher net investment income on limited partnership portfolio
• Higher catastrophe losses
• No prior years' reserve development in the current year
• Elevated underlying auto and property loss ratios* due to non-catastrophe weather

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

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

($ in millions, unless otherwise indicated)

(1) (Favorable) unfavorable.

(2) Includes assumed risks in force of 4.

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

The Property & Casualty segment net loss for the third quarter largely reflected the impact of elevated catastrophe and non-catastrophe weather activity across the country. Property & Casualty net premiums written were up 13.2% with average written premiums rising for both property and auto. Segment net investment income for the quarter was 50.0% above the prior year.

The third-quarter combined ratio increased 9.1 points over last year, reflecting both the higher level of catastrophe losses this year as well as an increase in non-catastrophe weather losses. Catastrophe losses for the quarter were $28.7 million, pretax, contributing 17.5 points to the combined ratio. In total, there were 25 events designated as catastrophes by Property Claims Services (PCS) in this year’s third quarter, including multiple severe convective storms across the Midwest and South. In the third quarter of 2022, catastrophe losses were $14.6 million, pretax, contributing 9.6 points to the combined ratio, from 17 PCS events.

The year-over-year increase in average written premiums for auto policies improved again in the third quarter to 15.9%, compared to 11.4% in the second quarter and 8.1% in the first quarter. The third-quarter auto underlying loss ratio was 79.7%, improving sequentially from the second quarter as the benefit of rate and non-rate underwriting actions begins to be seen.

The year-over-year increase in average written premiums for property policies was 11.3% in the third quarter, as rate increases taken over the past seven quarters and inflation adjustments to coverage values continue to take effect. The third-quarter property underlying loss ratio was 61.8%, reflecting a year-over-year increase in weather losses not included in designated catastrophe events.

We continue to evaluate and implement actions to further mitigate our exposure and respond to severe weather trends. We are addressing the increased loss costs associated with the more severe weather events in three ways: additional filed rate, product changes and enhanced modeling tools.

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

Life & Retirement

(All comparisons vs. same periods in 2022, unless noted otherwise)

For the three and nine months ended September 30, 2023, net income reflected the following factors:

• Annualized quarterly net interest spread on fixed annuities up 58 bps in the third quarter due to higher net investment income
• Annualized spread for the nine months down 45 bps due to lower returns on the limited partnership portfolio
• Net contribution from FHLB funding agreements remained stable year over year as net investment income reflected higher earnings from the floating rate investments backing the program and interest credited similarly reflected offsetting higher interest expense
• Lower mortality costs offset by a higher change in reserves for the current quarter
• Higher DAC amortization due to write-offs related to declines in annuity persistency

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

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

($ in millions)

Life & Retirement segment net income was $20.9 million for the quarter. The annualized net interest spread in our fixed annuity business rose to 251 for the third quarter compared to 193 last year due to higher net investment income. The net contribution from FHLB funding agreements remained stable year over year although net investment income reflected higher earnings from the floating rate investments backing the program and interest credited similarly reflected offsetting higher interest expense. For the segment, total benefit expenses rose as the change in reserves more than offset lower mortality costs.

For the Retirement business, net annuity contract deposits were up 16.2% to $125.6 million. Educators continue to begin their relationship with Horace Mann through 403(b) retirement savings products, including the company’s attractive annuity products, which provide encouraging cross-sell opportunities. Total cash value persistency was 91.7%, slightly below recent levels due to activity in the non-qualified account portfolio. Life annualized sales were $2.2 million for the quarter and lapse rates remained consistent with prior year.

Horace Mann currently has $4.9 billion in annuity assets under management, including $2.1 billion of fixed annuities, $2.3 billion of variable annuities and $0.5 billion of fixed indexed annuities. Assets under administration, which includes Horace Mann Retirement Advantage® and other advisory and recordkeeping assets, increased from a year ago as equity market recovery affected assets under management. Life insurance in force rose to $20.4 billion at September 30, 2023.

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 $755.2 million of the Life & Retirement investment portfolio and related investable cash flows will be reinvested at current market rates.

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

Interest rates rose swiftly throughout 2022 driven mostly by increases in U.S. Treasury yields, stabilized during the first half of 2023 but have moved higher during the third quarter. 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 $2.9 million in year one and $8.8 million in year two, reducing the annualized net interest spread on fixed annuities by approximately 10 basis points and 29 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)

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 58 Third Quarter 2023 Form 10-Q

Supplemental & Group Benefits

(All comparisons vs. same periods in 2022, unless noted otherwise)

For the three and nine months ended September 30, 2023, net income reflected the following factors:

• Decline in premium due to run-off of an indemnified block of employer-sponsored products
• Higher net investment income for the three and nine months ended September 30, 2023
• Favorable benefits ratio for the third quarter for employer-sponsored products reflects seasonality in both current and prior year
• 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 segment net income was $15.8 million for the quarter. The benefit ratio for the worksite direct product line for the quarter continues to move toward the longer-term target with utilization remaining well below historical levels. The benefit ratio for the employer-sponsored product lines for the quarter reflects seasonality, but increased from last year’s unusually favorable results for this period, and remains in line with expectations. Higher expenses reflect investments in the infrastructure for this business as well as a higher

Horace Mann Educators Corporation 59 Third Quarter 2023 Form 10-Q allocation of corporate expenses reflecting the segment's utilization of shared staff, distribution, and other resources. Net investment income benefited from the higher rate environment.

The non-cash impact of amortization of intangible assets under purchase accounting reduced third quarter 2023 core earnings by $3.6 million pretax vs. $4.0 million in 2022.

Total sales for the segment were $8.1 million. Sales of worksite direct supplemental products were up 59.1% to $3.5 million, with persistency remaining strong at 90.5%. Sales of employer-sponsored products were up 109.1% to $4.6 million, reflecting the progress made in gaining more access to districts and schools through our distribution partners and normal benefit-year seasonality.

Corporate & Other

(All comparisons vs. same periods in 2022, unless noted otherwise)

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

($ in millions)

For the three months and nine months ended September 30, 2023, the net loss decreased $1.8 million and $6.0 million, respectively, primarily due to lower net investment losses partially offset by an increase in interest expense on the Revolving Credit Facility. The outstanding balance on the Revolving Credit Facility was fully paid off on September 15, 2023 following the issuance of the 2028 Senior Notes.

Investment Results

(All comparisons vs. same periods in 2022, unless noted otherwise)

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 the company's reinsurance of policy liabilities related to legacy individual annuities written in 2002 or earlier.

($ in millions)

For the three and nine months ended September 30, 2023, net investment income from our managed investment portfolio increased $20.9 million and $25.7 million, respectively. For the current quarter, total net investment income rose 21.8% and net investment income on the managed portfolio increased 29.5%. The increase reflected the higher overall interest rate environment as well as overall strong returns in our commercial mortgage loan funds and limited partnership portfolios. Limited partnership portfolio contributions were a

Horace Mann Educators Corporation 60 Third Quarter 2023 Form 10-Q significant factor in the higher net investment income in the Property & Casualty and Life & Retirement segments. Investment yield on the portfolio excluding limited partnership interests was 4.78%, with new money yields continuing to exceed portfolio yields in the core fixed maturity securities portfolio.

For the three and nine months ended September 30, 2023, pretax net investment losses decreased $4.4 million and $14.1 million, respectively. The nine month decline is primarily due to an increase in losses from dispositions of invested assets related to yield enhancement activities in the quarter ended June 30, 2023, which were more than offset by changes in fair values of equity securities compared to the prior year periods.

Pretax net unrealized investment losses on fixed maturity securities as of September 30, 2023 were up $108.1 million, or 18.9%, compared to December 31, 2022, primarily due to the elevated interest rate environment.

Horace Mann Educators Corporation 61 Third 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)

(1) The All other corporates category contains 18 additional industry sectors. Food and beverage, broadcasting and media, telecommunications, technology and leisure entertainment represented $198.3 million of fair value at September 30, 2023, with the remaining 13 sectors each representing less than $32.6 million.

(2) At September 30, 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, 43.0% are tax-exempt and 74.0% 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 September 30, 2023.

(4) Based on fair value, 94.3% of the collateralized loan obligation securities were rated investment grade based on ratings assigned by a nationally recognized statistical ratings organization (NRSO- S&P, Moody's, Fitch, Dominion, A.M. Best, Morningstar, Egan Jones and Kroll).

As of September 30, 2023, our diversified fixed maturity securities portfolio consisted of 3,597 investment positions, issued by 2,351 entities, and totaled approximately $5.0 billion in fair value. This portfolio was 92.8% 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 62 Third 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 September 30, 2023, 92.4% 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)

(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 September 30, 2023, the AA rated fair value amount included $364.8 million of U.S. Government and federally sponsored agency securities and $582.3 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 September 30, 2023, the fixed maturity securities portfolio had $702.8 million of pretax gross unrealized investment losses on $4,286.4 million of fair value related to 3,143 positions. Of the investment positions with gross unrealized losses, there were 771 trading below 80.0% of the carrying value as of September 30, 2023. The Company views the decrease in fair value of all of the fixed maturity securities with unrealized losses as of September 30, 2023 as due to factors other than a credit loss. See Part II - Item 8, Note 2 of the Consolidated Financial Statements in this Quarterly Report on Form 10-Q for more information.

Following significant increases in interest rates throughout 2022, driven mostly by increases in U.S. Treasury yields, rates mostly stabilized during the first half of 2023 but have moved higher during the third quarter. As of September 30, 2023, the 10-year U.S. Treasury yield increased 70 basis points since December 31, 2022, rising from 3.87% as of December 31, 2022 to 4.57% as of September 30, 2023. Additionally, credit spreads tightened during the same time period, with investment grade and high yield tighter by 14 and 76 basis points, respectively. As of September 30, 2023, investment grade and high yield total returns were up 0.44% and 5.95%, respectively, since December 31, 2022. Unrealized investment losses remain elevated due to the continued increase in interest rates. Future changes in circumstances related to these and other securities could require subsequent recognition of impairment.

Horace Mann Educators Corporation 63 Third 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 and nine months ended September 30, 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)

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 nine months ended September 30, 2023, net cash provided by operating activities increased $83.4 million.

Investing Activities

Net cash used in investing activities for the nine months ended September 30, 2023 and 2022 was $85.6 million and $295.9 million, respectively. Prior year investing activities included the acquisition of Madison National Life Insurance Company, Inc.

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 64 Third 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 nine months ended September 30, 2023, net cash used in financing activities increased $204.5 million compared to the prior year period, primarily due to a $123.7 increase in cash outflows from benefits, withdrawals and net transfers to Separate Account variable annuity assets, a $46.2 million increase in cash outflows from the deposit asset on reinsurance and a $165.2 million increase in net cash outflows from the change in reverse repurchase agreements; partially offset by a $52.0 million net increase in cash inflows from FHLB funding agreements as noted in the table below and $48.7 million net increase in cash inflows from financing activity described in the following paragraph.

On September 15, 2023, we issued $300.0 million aggregate principal amount of 7.25% Senior Notes due September 15, 2028 (2028 Senior Notes) and used the net proceeds to fully repay the $249.0 million of outstanding borrowings under our Revolving Credit Facility. The remaining net proceeds from the issuance of the 2028 Senior Notes were available for general corporate purposes.

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

($ in millions)

Horace Mann Educators Corporation 65 Third Quarter 2023 Form 10-Q

Liquidity Sources and Uses

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

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 66 Third Quarter 2023 Form 10-Q

As of September 30, 2023, we held $971.2 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 $58.5 million was paid during the nine months ended September 30, 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 $1,597.4 million as of September 30, 2023, including $546.1 million of long-term debt. Total debt represented 34.2% of total capital including net unrealized investment losses on fixed maturity securities (27.3% excluding net unrealized investment losses on fixed maturity securities and net reserve remeasurements attributable to discount rates*) as of September 30, 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 $1,051.3 million as of September 30, 2023, including net unrealized investment losses on fixed maturity securities of $534.7 million after taxes. The market value of our common stock and the market value per share were $1,212.1 million and $29.66, respectively, as of September 30, 2023. Book value per share and adjusted book value per share* was $25.74 and $35.57, respectively, as of September 30, 2023.

Additional information regarding net unrealized investment gains (losses) on fixed maturity securities as of September 30, 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 $40.4 million for the nine months ended September 30, 2023. In March, May, and September of 2023, the Board of Directors (Board) approved regular quarterly dividends of $0.33 per share.

For the nine months ended September 30, 2023, we repurchased 196,934 shares of our common stock at an average price per share of $32.85 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 September 30, 2023, $34.9 million remained authorized for future share repurchases under the share repurchase program.

Horace Mann Educators Corporation 67 Third Quarter 2023 Form 10-Q

The following table summarizes our debt obligations.

($ in millions)

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

On September 15, 2023, we issued $300.0 million aggregate principal amount of 7.25% senior notes (2023 Senior Notes), which will mature on September 15, 2028, issued at a discount resulting in an effective yield of 7.29%. Interest on the 2023 Senior Notes is payable semi-annually at a rate of 7.25%. The 2023 Senior Notes are redeemable in whole or in part, at any time, at our option, at a redemption price equal to the greater of (1) 100% of the principal amount of the notes being redeemed or (2) the sum of the present values of the remaining scheduled payments of principal and interest thereon discounted, on a semi-annual basis, at the Treasury yield (as defined in the indenture) plus 45 basis points, plus, in either of the above cases, accrued interest to the date of redemption. The 2023 Senior Notes are traded in the open market (HMN 7.25).

The net proceeds from the sale of the 2023 Senior Notes were used to fully repay the $249.0 million balance on the Revolving Credit Facility with remaining net proceeds from the sale to be used for general corporate purposes.

As of September 30, 2023, we had outstanding $250.0 million aggregate principal amount of 4.50% Senior Notes (2015 Senior Notes), which will mature on December 1, 2025, issued at a discount resulting in an effective yield of 4.53%. Interest on the 2015 Senior Notes is payable semi-annually at a rate of 4.50%. Detailed information regarding the redemption terms of the 2015 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 2015 Senior Notes are traded in the open market (HMN 4.50).

As of September 30, 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. Terms and conditions of the amended Revolving Credit Facility are substantially consistent with the prior agreement, with an interest rate based on SOFR plus 115 basis points plus the applicable benchmark adjustment spread. 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. As noted above, the outstanding balance on the Revolving Credit Facility was fully paid off on September 15, 2023 from the proceeds of the 2028 Senior Notes. The Revolving Credit Facility is 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 September 30, 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

Horace Mann Educators Corporation 68 Third Quarter 2023 Form 10-Q 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.

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, each of which is rated at the same level as our Property & Casualty and Life & Retirement subsidiaries. Assigned ratings and respective affirmation/review dates as of October 31, 2023 were as follows:

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 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

Horace Mann Educators Corporation 69 Third Quarter 2023 Form 10-Q investment. Also see Consolidated Results of Operations in Part I - Item 2 of this Quarterly Report on Form 10-Q regarding net investment losses.

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.

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 September 30, 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

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.

Horace Mann Educators Corporation 70 Third Quarter 2023 Form 10-Q

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.