Horace Mann Educators Corp: Form 10-Q for the period ended Jun 30, 2025

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.

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 Second Quarter 2025 Investor Supplement.

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

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, 2024 for additional information regarding risks and uncertainties.

Corporate Strategy

Our vision is to be the company of choice to provide insurance and financial solutions for all educators and others who serve their communities, whether they engage with Horace Mann directly or through their district/employer. We believe the unique value of Horace Mann is providing solutions tailored for educators at each stage of their lives, empowering them to achieve lifelong financial success. Our motivation stems from our gratitude for educators: They are looking after our children's futures, and we believe they deserve someone to look after theirs. Our commitment to having a positive impact on our customers' lives extends to all our corporate stakeholders, including employees, agents, investors and the communities where we live and work.

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 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.

Consolidated Financial Highlights

(All comparisons vs. same periods in 2024, unless noted otherwise)

($ in millions)

For the three and six months ended June 30, 2025, net income increased $25.6 million and $37.3 million, respectively, primarily due to improved Property & Casualty segment results reflecting the effect of rate and non-rate underwriting actions as well as the impact of lower catastrophe losses.

Consolidated Results of Operations

(All comparisons vs. same periods in 2024, unless noted otherwise)

($ in millions)

(1) In the second quarter of 2025, the Company recorded a reduction in net investment income due to an immaterial out-of-period correction of an error. See additional disclosure contained in Note 1 of the June 30, 2025 Form 10-Q.

Net Premiums and Contract Charges Earned

For the three and six months ended June 30, 2025, net premiums and contract charges earned increased $21.7 million and $44.8 million, as the Property & Casualty segment continues to implement rate and inflation adjustments to coverage values.

Net Investment Income

For the three and six months ended June 30, 2025, total net investment income increased $2.4 million and $12.9 million. The increase for the quarter is primarily due to continued strong returns from our fixed income portfolio and higher returns from our commercial mortgage loan and limited partnership funds. Excluding the reduction in net investment income due to an immaterial out-of-period correction of an error of $10.2 million, net investment income increased $12.6 million and $23.1 million for the three and six months ended June 30, 2025. The annualized investment yield on the portfolio excluding limited partnership interests* was as follows:

(1) In the second quarter of 2025, the Company recorded a reduction in net investment income due to an immaterial out-of-period correction of an error. See additional disclosure contained in Note 1 of the June 30, 2025 Form 10-Q.

The higher investment yields, excluding limited partnership interests, for the six months ended June 30, 2025 reflected stronger income from the fixed income portfolios.

During the three and six months ended June 30, 2025, 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.

Net Investment Gains (Losses)

For the three and six months ended June 30, 2025, total net investment losses were comparable to prior year and increased by $5.5 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 six months ended June 30, 2025, other income decreased $0.5 million and increased $1.8 million, respectively.

Benefits, Claims and Settlement Expenses

Benefits, claims and settlement expenses decreased $23.8 million for the three months ended June 30, 2025 due to lower catastrophe losses and underlying losses in the Property & Casualty segment as well as lower life mortality. Benefits, claims and settlement expenses decreased $16.9 million for the six months ended June 30, 2025 due to lower catastrophe losses and underlying losses in the Property & Casualty segment which were partially offset by higher benefits for long term disability in Group.

Interest Credited

For the three and six months ended June 30, 2025, interest credited decreased $1.1 million and $1.2 million.

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 3.3% and 3.1% as of June 30, 2025 and June 30, 2024, respectively.

Operating Expenses

For the three and six months ended June 30, 2025, operating expenses increased 16.7% and 12.1%, reflecting inflation, investments being made in growth initiatives and infrastructure, and increased compensation accruals driven by better than expected results.

Deferred Policy Acquisition Costs (DAC) Amortization Expense

For the three and six months ended June 30, 2025, DAC amortization expense increased $2.9 million and $5.5 million, primarily due to premium increases in the Property & Casualty segment driving higher commission and underwriting expenses which increase DAC asset levels.

Intangible Asset Amortization Expense

For the three and six months ended June 30, 2025, intangible asset amortization expense decreased $0.1 million and $0.1 million.

Interest Expense

For the three and six months ended June 30, 2025, interest expense decreased $0.1 million and increased $0.1 million, respectively.

Income Tax Expense

The effective income tax rate on our pretax income, including net investment gains (losses), was 19.5% and 19.4% for the six months ended June 30, 2025 and 2024, respectively. Income from investments in tax-advantaged securities decreased the effective income tax rates by 2.4 and 3.1 percentage points for the six months ended June 30, 2025 and 2024, respectively.

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 June 30, 2025, our federal income tax returns for years prior to 2021 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.

On July 4, 2025, the One Big Beautiful Bill Act was signed into U.S. law, introducing a broad range of business tax reform provisions. The Company has evaluated the law's provisions on our operations and we do not expect the legislation to have a material impact on our financial statements or effective tax rate. Because the law was enacted after the close of the second quarter, no impacts for this legislation are reflected in results for the six months ended June 30, 2025.

Outlook for 2025

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

Consolidated Results

At the time of issuance of this Quarterly Report on Form 10-Q, we estimate that 2025 full year core earnings* will be within a range of $4.15 to $4.45 per diluted share, generating a core return on equity* of 10%+. These results anticipate the following:

• Property & Casualty segment target profitability of Auto in the mid-90s Combined Ratio and Property at a 90 or below Combined ratio with ~$90 million of catastrophe losses, in line with five-year historical averages
• Life & Retirement segment long-term target net interest spread between 220 and 230 bps and mortality in line with actuarial assumptions
• Supplemental & Group Benefits segment target blended benefit ratio of 39%
• Net investment income between $470 million and $480 million pre-tax, or $370-$380 million excluding the accreted investment income on the deposit asset on reinsurance in the Life & Retirement segment
• Approximately $35 million to $40 million in corporate Interest expense and other items included in results for the Corporate & Other 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, 2024 concerning other important factors that could impact actual results. Our projections due not include a 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, 2024. 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 fixed maturity securities
• Valuation of future policy benefit reserves
• Valuation of liabilities for property and casualty unpaid claims and claim expense reserves

Compared to December 31, 2024, as of June 30, 2025, there were no material changes to accounting policies for areas most subject to significant management judgments identified above.

Results of Operations by Segment

Consolidated financial results reflect the results of the Property & Casualty, Life & Retirement, and Supplemental & Group Benefits reporting segments, 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 following sections provide analysis and discussion of the results of operations for each of the reporting segments as well as investment results.

Property & Casualty

The Property & Casualty segment primarily markets private passenger auto insurance and residential home insurance. Horace Mann offers standard auto coverages, including liability, collision and comprehensive. Property coverage includes both homeowners and renters policies. For both auto and property coverage, Horace Mann offers educators a discounted rate and the Educator Advantage® package of features. The Property & Casualty segment represented 51% of total revenues in 2024.

(All comparisons vs. same periods in 2024, unless noted otherwise)

For the three and six months ended June 30, 2025, net income reflected the following factors:

• Increases in average written premium per policy
• Lower underlying loss ratio*
• Catastrophe losses lower than prior year by 7.8 points and 4.4 points for the three and six months, respectively
• Higher net investment income driven by limited partnership portfolio

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

($ in millions, unless otherwise indicated)

(1) (Favorable) unfavorable.

The Property & Casualty segment three and six month net income of $16.5 million and $43.3 million, as well as the three month and six month combined ratio of 97.0% and 93.3%, respectively, reflected the positive effect of rate and non-rate actions as well as catastrophe losses below prior year and recent prior periods.

The current quarter reflects an increase in net premiums written* of 6.1%, with average written premiums* rising for both property and auto. Sales* were steady for the quarter, up 5.5% from the prior year, and household retention remains in line with expectations.

The three and six month loss ratios decreased 16.2 and 13.5 points from last year reflecting higher average premiums and catastrophe losses that were below recent prior periods. In addition, $5.5 million and $10.8 million of net favorable prior years' reserve development for the three and six months reduced the loss ratio 2.8 points for both comparisons. Catastrophe losses for the quarter were $29.7 million, pretax, contributing 15.0 points to the combined ratio. In total, there were 20 events designated as catastrophes by Property Claims Services (PCS) in this year’s second quarter. The lower catastrophe losses are driven by lower frequency and severity of policyholder claims. In the second quarter of 2024, catastrophe losses were $40.9 million, pretax, contributing 22.8 points to the combined ratio, from 28 PCS events.

The year-over-year increase in average written premiums* for auto policies remained elevated in the second quarter at 8.8%, with retention declining slightly, and in line with expectations, given substantial rate increases. The second-quarter auto underlying loss ratio* was 68.7%, improving 5.5 points from the prior year quarter, reflecting the benefit of higher average earned premium. The second quarter reported loss ratio benefited 1.2 points from favorable prior years' reserve development.

The year-over-year increase in average written premiums* for property policies was 11.6% in the second quarter, as rate increases and inflation adjustments to coverage values continue to take effect. Policyholder retention remains strong. The second-quarter property underlying loss ratio* was 36.8%, a 14.1 point decrease from prior year reflecting the increase in average earned premium* and lower frequency and severity.

Life & Retirement

The Life & Retirement segment markets 403(b) tax-qualified fixed, fixed indexed and variable annuities; the Horace Mann Retirement Advantage® open architecture platform for 403(b)(7) and other defined contribution plans; and other retirement products to educators as well as traditional term and whole life insurance products. Horace Mann is one of the largest participants in the K-12 educator portion of the 403(b) tax-qualified annuity market, measured by 403(b) net premiums written on a statutory accounting basis. The Life & Retirement segment represented 32% of total revenues in 2024.

(All comparisons vs. same periods in 2024, unless noted otherwise)

For the three and six months ended June 30, 2025, net income reflected the following factors:

• Benefits expense in Life decreased due to lower mortality in the current year
• Annualized quarterly net interest spread on fixed annuities up 30 basis points
• Higher net investment income from limited partnerships and commercial mortgage loan funds

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

($ in millions)

(1) In the second quarter of 2025, the Company recorded a reduction in net investment income due to an immaterial out-of-period correction of an error. See additional disclosure contained in Note 1 of the June 30, 2025 Form 10-Q.

Life & Retirement segment net income for the three and six months ended June 30, 2025, of $20.0 million and $26.8 million was up 62.6% and 11.7%, primarily due to favorable benefits in the Life segment and higher net investment income. Life benefits reflected lower mortality costs in the current quarter compared to the prior year. On a year-to-date basis, mortality costs remain within our expected actuarial range. The net spread increase reflects lower borrowing costs and increased advances from our FHLB funding agreements compared with 2024. Excluding the reduction in net investment income due to an immaterial out-of-period correction of an error of $6.7 million ($5.3 million after tax), net investment income increased $8.2 million and $11.5 million for the three and six months ended June 30, 2025.

For the Retirement business, net annuity contract deposits were up 7.8% for the quarter at $110.2 million. Educators continue to begin their relationship with Horace Mann through 403(b) retirement savings products, which provide encouraging cross-sell opportunities. Average persistency rose from the prior period to 91.7%.

Horace Mann currently has $5.7 billion in annuity assets under management, including $2.2 billion of fixed annuities, $3.1 billion of variable annuities and $0.4 billion of fixed indexed annuities. Assets under administration, which includes Horace Mann Retirement Advantage® and other advisory and recordkeeping assets, were up due to the effect of equity market performance on assets.

Life annualized sales* were $2.5 million for the quarter. Persistency remains strong. Life insurance in force rose to $21.2 billion at quarter-end.

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 $501.3 million of the Life & Retirement investment portfolio and related investable cash flows will be reinvested at current market rates.

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 $2.4 million in year one and $4.7 million in year two, reducing the annualized net interest spread on fixed annuities by approximately 9 basis points and 17 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.

Supplemental & Group Benefits

The Supplemental & Group Benefits segment markets group solutions for districts and other public employers, as well as individual supplemental products typically distributed through the employer channel. The Supplemental & Group Benefits segment provides group term life, disability and specialty health insurance, along with supplemental products including cancer, heart, hospital, supplemental disability and accident coverages. The Supplemental & Group Benefits segment represented 18% of total revenues in 2024.

(All comparisons vs. same periods in 2024, unless noted otherwise)

For the three and six months ended June 30, 2025, net income reflected the following factors:

• Lower net investment income related to fixed income portfolio
• Lower benefits ratio for group benefits for the quarter and higher benefits ratio for the year
• Higher operating expenses due to investment in growth

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

($ in millions)

(1) In the second quarter of 2025, the Company recorded a reduction in net investment income due to an immaterial out-of-period correction of an error. See additional disclosure contained in Note 1 of the June 30, 2025 Form 10-Q.

Supplemental & Group Benefits segment net income for the three and six months ended June 30, 2025, of $7.9 million and $19.1 million, was down $6.2 million and $6.0 million. The individual supplemental benefits ratio decreased 0.3 points. The group benefits benefit ratio decreased 3.5 points due to favorable policy utilization during the quarter. Operating expense increase reflects inflation and investments being made in growth initiatives and infrastructure.

Excluding the reduction in net investment income due to an immaterial out-of-period correction of an error of $3.5 million ($2.8 million after tax), net investment income increased $0.1 million and $1.7 million for the three and six months ended June 30, 2025.

Total sales* for the three and six months ended June 30, 2025 increased $0.4 million with individual supplemental product sales increasing $1.7 million and group benefits products decreasing $1.3 million. Individual supplemental sales increased 42.5% due to strong customer demand. Variability in sales between comparable periods is typical for Group Benefits given the relatively small scale and the longer sales cycle of this business. Persistency remains strong for the segment.

Corporate & Other

(All comparisons vs. same periods in 2024, unless noted otherwise)

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

($ in millions)

For the three and six months ended June 30, 2025, the net results decreased $1.0 million and $0.8 million, primarily due to lower net investment income in the quarter and higher net investment losses and operating expenses offset by higher net investment income included in revenues for the year.

Investment Results

(All comparisons vs. same periods in 2024, 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)

(1) In the second quarter of 2025, the Company recorded a reduction in net investment income due to an immaterial out-of-period correction of an error. See additional disclosure contained in Note 1 of the June 30, 2025 Form 10-Q.

For the three and six months ended June 30, 2025, net investment income from our managed investment portfolio increased $3.0 million and $14.6 million. The increase was primarily driven by higher returns in limited partnerships, including commercial mortgage loan funds. The investment yield on the portfolio excluding limited partnership interests was 4.5%, with new money yields continuing to exceed portfolio yields in the core fixed maturity securities portfolio.

For the three and six months ended June 30, 2025, pretax net investment losses increased $0.0 million and $5.5 million. The increase was due to realized losses on dispositions of invested assets.

Pretax net unrealized investment losses on fixed maturity securities as of June 30, 2025 were down $77.0 million, or 30.6%, compared to December 31, 2024, primarily due to a decrease of 10 basis points in US Treasury rates and investment-grade credit spreads that were tighter by 10 basis points.

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 20 additional industry sectors. Telecommunications, Food and Beverage, Retail, Broadcasting & Media, and Metal & Mining represented $189.6 million of fair value at June 30, 2025, with the remaining 15 sectors each representing less than $33.9 million.

(2) At June 30, 2025, 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, 39.8% are tax-exempt and 77.3% 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 June 30, 2025.

(4) Based on fair value, 99.8% 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 June 30, 2025, our diversified fixed maturity securities portfolio consisted of 3,942 investment positions, issued by 2,588 entities, and totaled approximately $5.5 billion in fair value. This portfolio was 97.2% investment grade, based on fair value, with an average quality rating of AA-. 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.

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 June 30, 2025, 94.7% 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 June 30, 2025, the AA rated fair value amount included $362.4 million of U.S. Government and federally sponsored agency securities and $602.8 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 June 30, 2025, the fixed maturity securities portfolio had $454.5 million of pretax gross unrealized investment losses on $3,335.6 million of fair value related to 2,294 positions. Of the investment positions with gross unrealized losses, there were 428 trading below 80.0% of the carrying value as of June 30, 2025. The Company views the decrease in fair value of all of the fixed maturity securities with unrealized losses as of June 30, 2025 as due to factors other than a credit loss. Future changes in circumstances related to these and other securities could require subsequent recognition of impairment. See Part II - Item 8, Note 2 of the Consolidated Financial Statements in this Quarterly Report on Form 10-Q for more information.

Unrealized investment losses declined primarily due to a decrease in US Treasury rates. As of June 30, 2025, the 10-year U.S. Treasury yield decreased 34 basis points since December 31, 2024, declining from 4.57% as of December 31, 2024 to 4.23% as of June 30, 2025. Credit spreads were only slightly wider during the same time period, with investment grade and high yield both wider by 3 basis points. As of June 30, 2025, investment grade and high yield total returns were up 4.17% and 4.57%, respectively, since December 31, 2024.

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 six months ended June 30, 2025. 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, 2023.

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. Fluctuations in net cash provided by operating activities primarily reflect seasonality in timing of premium and investment income collections and claims and benefits payments.

For the six months ended June 30, 2025, net cash provided by operating activities increased $157.4 million.

Investing Activities

Net cash used in investing activities for the six months ended June 30, 2025 and 2024 was $(72.0) million and $(87.2) million, respectively.

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 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 six months ended June 30, 2025, net cash used in financing activities increased $154.7 million compared to the prior year period. The change was primarily due to a $57.0 million increase in net cash outflow from reverse repurchase agreements, a $39.9 million increase in cash outflows from the deposit asset on reinsurance, a $39.8 million increase in cash outflows from benefits, withdrawals and net transfers to Separate Account variable annuity assets and a $15.0 million net increase in net cash outflows (advances less repayments) from FHLB funding agreements.

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

($ in millions)

Horace Mann Educators Corporation 57 Second Quarter 2025 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.

As of June 30, 2025, we held $1.0 billion 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, reverse repurchase agreements program, 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 2025 from all of our insurance subsidiaries without prior regulatory approval is $148.8 million, excluding the impact and timing of prior dividends, of which $39.0 million was paid during the six months ended June 30, 2025. 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 13 of the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2024.

Total capital was $1,907.8 million as of June 30, 2025, including $547.5 million of long-term debt. Total debt represented 28.7% of total capital including net unrealized investment losses on fixed maturity securities (25.9% excluding net unrealized investment losses on fixed maturity securities and net reserve remeasurements attributable to discount rates*) as of June 30, 2025, 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 $1,360.3 million as of June 30, 2025, including net unrealized investment losses on fixed maturity securities of $309.9 million after taxes. The market value of our common stock and the market value per share were $1,754.6 million and $42.97, respectively, as of June 30, 2025. Book value per share and adjusted book value per share* was $33.31 and $38.46, respectively, as of June 30, 2025.

Additional information regarding net unrealized investment gains (losses) on fixed maturity securities as of June 30, 2025 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 $28.6 million for the six months ended June 30, 2025. In March and June of 2025, the Board of Directors (Board) approved regular quarterly dividends of $0.35 per share.

For the six months ended June 30, 2025, we repurchased 178,732 shares of our common stock at an average price per share of $40.14 under our share repurchase program. See Part II - Item 8, Note 12 of the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2024 for more information. As of June 30, 2025, $69.2 million remained authorized for future share repurchases under the share repurchase program.

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).

As of June 30, 2025, we had $325.0 million available on the Revolving Credit Facility, with an interest rate based on Term SOFR plus 115 basis points plus the applicable benchmark adjustment spread. The Revolving Credit Facility expires on May 19, 2030. 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 June 30, 2025.

As of June 30, 2025, 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, 2024. The 2015 Senior Notes are traded in the open market (HMN 4.50).

As of June 30, 2025, 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.

We had no obligation for securities sold under reverse repurchase agreements at June 30, 2025 compared to $12.0 million as of December 31, 2024.

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 8, 2024. 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 8, 2024. Unless withdrawn by us earlier, this registration statement will remain effective through March 8, 2027. 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 July 31, 2025 were as follows:

Reinsurance Programs

There have been no material changes in our reinsurance programs for our Property & Casualty, Life & Retirement and Supplemental & Group Benefits segments from that disclosed in Part I - Item 1, Reporting Segments in our Annual Report on Form 10-K for the year ended December 31, 2024.

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.

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, 2024.

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 June 30, 2025. 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.

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, 2024.