| ($ in thousands) | Gross Amount | Ceded to Other Companies | Assumed from Other Companies | Net Amount | ||||||||||||
| Three months ended September 30, 2017 | ||||||||||||||||
| Premiums written and contract deposits | $ | 322,428 | $ | 5,189 | $ | 1,116 | $ | 318,355 | ||||||||
| Premiums and contract charges earned | 202,988 | 5,216 | 1,163 | 198,935 | ||||||||||||
| Benefits, claims and settlement expenses | 135,508 | 1,831 | 1,218 | 134,895 | ||||||||||||
| Three months ended September 30, 2016 | ||||||||||||||||
| Premiums written and contract deposits | $ | 356,155 | $ | 5,555 | $ | 934 | $ | 351,534 | ||||||||
| Premiums and contract charges earned | 195,654 | 5,584 | 980 | 191,050 | ||||||||||||
| Benefits, claims and settlement expenses | 139,114 | 4,642 | 1,238 | 135,710 | ||||||||||||
| Nine months ended September 30, 2017 | ||||||||||||||||
| Premiums written and contract deposits | $ | 940,063 | $ | 16,342 | $ | 2,980 | $ | 926,701 | ||||||||
| Premiums and contract charges earned | 603,794 | 16,415 | 2,996 | 590,375 | ||||||||||||
| Benefits, claims and settlement expenses | 450,997 | 8,899 | 2,772 | 444,870 | ||||||||||||
| Nine months ended September 30, 2016 | ||||||||||||||||
| Premiums written and contract deposits | $ | 960,945 | $ | 17,244 | $ | 2,881 | $ | 946,582 | ||||||||
| Premiums and contract charges earned | 579,283 | 17,305 | 2,882 | 564,860 | ||||||||||||
| Benefits, claims and settlement expenses | 422,352 | 21,748 | 3,027 | 403,631 | ||||||||||||
| Horace Mann Educators Corporation | 34 | First Quarter 2023 Form 10-Q | ||||||
The Company conducts and manages its business throughin four reporting segments. The three operating segments, representing the major lines of business, are: (1) Property and& Casualty primarily(primarily personal lines automobileof auto and homeownersproperty insurance products;products), (2) Life & Retirement primarily(primarily tax-qualified fixed and variable annuities;annuities as well as life insurance products), and Life,(3) Supplemental & Group Benefits (primarily cancer, heart, hospital, supplemental disability, accident, short-term and long-term group disability, and group term life insurance.coverages). The Company does not allocate the impact of corporate-level transactions to these operating segments, consistent with the basis for management’smanagement's evaluation of the results of those segments, but classifies those items in the fourth reporting segment, Corporate and& Other. In addition to ongoing transactions such as corporate debt service, net realized investment gains and losses(losses) and certain public company expenses, such items in Corporate & Other have also have included corporate debt retirement costs/gains,costs, when applicable.
Summarized financial information for these segments is as follows:
| ($ in millions) | Three Months Ended March 31, | |||||||||||||||||||||||||
| 2023 | 2022 | |||||||||||||||||||||||||
| Net premiums and contract charges earned | ||||||||||||||||||||||||||
| Property & Casualty | $ | 152.4 | $ | 150.2 | ||||||||||||||||||||||
| Life & Retirement | 37.7 | 35.8 | ||||||||||||||||||||||||
| Supplemental & Group Benefits | 65.8 | 69.8 | ||||||||||||||||||||||||
| Total | $ | 255.9 | $ | 255.8 | ||||||||||||||||||||||
| Net investment income | ||||||||||||||||||||||||||
| Property & Casualty | $ | 4.0 | $ | 7.2 | ||||||||||||||||||||||
| Life & Retirement | 87.9 | 84.2 | ||||||||||||||||||||||||
| Supplemental & Group Benefits | 9.1 | 7.1 | ||||||||||||||||||||||||
| Corporate & Other | — | — | ||||||||||||||||||||||||
| Intersegment eliminations | (0.6) | (0.6) | ||||||||||||||||||||||||
| Total | $ | 100.4 | $ | 97.9 | ||||||||||||||||||||||
| Net income (loss) | ||||||||||||||||||||||||||
| Property & Casualty | $ | (11.6) | $ | 8.5 | ||||||||||||||||||||||
| Life & Retirement | 14.0 | 15.6 | ||||||||||||||||||||||||
| Supplemental & Group Benefits | 14.0 | 13.2 | ||||||||||||||||||||||||
| Corporate & Other | (9.8) | (17.0) | ||||||||||||||||||||||||
| Total | $ | 6.6 | $ | 20.3 | ||||||||||||||||||||||
| ($ in millions) | March 31, 2023 | December 31, 2022 | ||||||||||||
| Assets | ||||||||||||||
| Property & Casualty | $ | 1,077.0 | $ | 1,083.8 | ||||||||||
| Life & Retirement | 11,085.1 | 10,754.5 | ||||||||||||
| Supplemental & Group Benefits | 1,377.1 | 1,359.3 | ||||||||||||
| Corporate & Other | 169.0 | 173.4 | ||||||||||||
| Intersegment eliminations | (54.3) | (64.9) | ||||||||||||
| Total | $ | 13,653.9 | $ | 13,306.1 | ||||||||||
| ($ in thousands) | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Insurance premiums and contract charges earned | ||||||||||||||||
| Property and Casualty | $ | 163,209 | $ | 155,727 | $ | 481,987 | $ | 461,520 | ||||||||
| Retirement | 7,393 | 6,448 | 20,753 | 18,614 | ||||||||||||
| Life | 28,333 | 28,875 | 87,635 | 84,726 | ||||||||||||
| Total | $ | 198,935 | $ | 191,050 | $ | 590,375 | $ | 564,860 | ||||||||
| Net investment income | ||||||||||||||||
| Property and Casualty | $ | 9,167 | $ | 10,018 | $ | 26,457 | $ | 28,997 | ||||||||
| Retirement | 64,340 | 66,174 | 192,921 | 186,950 | ||||||||||||
| Life | 18,999 | 18,852 | 56,215 | 55,338 | ||||||||||||
| Corporate and Other | 17 | 15 | 47 | 44 | ||||||||||||
| Intersegment eliminations | (203 | ) | (212 | ) | (615 | ) | (644 | ) | ||||||||
| Total | $ | 92,320 | $ | 94,847 | $ | 275,025 | $ | 270,685 | ||||||||
| Net income (loss) | ||||||||||||||||
| Property and Casualty | $ | 13,407 | $ | 6,715 | $ | 2,186 | $ | 16,047 | ||||||||
| Retirement | 13,603 | 15,732 | 36,933 | 39,348 | ||||||||||||
| Life | 4,788 | 4,583 | 14,283 | 13,072 | ||||||||||||
| Corporate and Other | (5,247 | ) | (107 | ) | (9,272 | ) | (4,525 | ) | ||||||||
| Total | $ | 26,551 | $ | 26,923 | $ | 44,130 | $ | 63,942 | ||||||||
| ($ in thousands) | September 30, 2017 | December 31, 2016 | ||||||
| Assets | ||||||||
| Property and Casualty | $ | 1,156,959 | $ | 1,110,958 | ||||
| Retirement | 7,793,727 | 7,449,777 | ||||||
| Life | 1,988,767 | 1,912,771 | ||||||
| Corporate and Other | 135,876 | 140,104 | ||||||
| Intersegment eliminations | (30,981 | ) | (36,786 | ) | ||||
| Total | $ | 11,044,348 | $ | 10,576,824 | ||||
NOTE 8 - Accumulated Other Comprehensive Income (Loss)
AOCI represents the accumulated change in shareholders’ equity from transactions and other events and circumstances from non-shareholder sources. For the Company, AOCI includes the after tax change in net unrealized investment gains (losses) on fixed maturity securities, the after tax change in net reserve remeasurements attributable to discount rates and the after tax change in net funded status of benefit plans for the periods as shown in the Consolidated Statements of Changes in Shareholders’ Equity. The following table reconciles these components.
| ($ in millions) | Net Unrealized Investment Gains (Losses) on Fixed Maturity Securities(1) | Net Reserve Remeasurements Attributable to Discount Rates(1) | Net Funded Status of Benefit Plans(1) | Total(1) | ||||||||||||||||||||||
| Beginning balance, January 1, 2023 | $ | (449.6) | $ | 59.0 | $ | (8.8) | $ | (399.4) | ||||||||||||||||||
| Other comprehensive loss before reclassifications | 91.3 | (41.2) | — | 50.1 | ||||||||||||||||||||||
Amounts reclassified from AOCI(2) | 1.9 | — | — | 1.9 | ||||||||||||||||||||||
| Net current period other comprehensive loss | 93.2 | (41.2) | — | 52.0 | ||||||||||||||||||||||
| Ending balance, March 31, 2023 | $ | (356.4) | $ | 17.8 | $ | (8.8) | $ | (347.4) | ||||||||||||||||||
| Beginning balance, January 1, 2022 | $ | 347.1 | $ | (386.9) | $ | (10.2) | $ | (50.0) | ||||||||||||||||||
| Other comprehensive loss before reclassifications | (335.9) | 181.5 | — | (154.4) | ||||||||||||||||||||||
Amounts reclassified from AOCI(2) | 1.8 | — | — | 1.8 | ||||||||||||||||||||||
| Net current period other comprehensive loss | (334.1) | 181.5 | — | (152.6) | ||||||||||||||||||||||
| Ending balance, March 31, 2022 | $ | 13.0 | $ | (205.4) | $ | (10.2) | $ | (202.6) | ||||||||||||||||||
(1)All amounts are net of tax.
(2)The pretax amounts reclassified from AOCI, $(2.4) million and $(2.3) million, are included in Net investment gains losses and the related income tax benefits, $(0.5) million and $(0.5) million, are included in income tax expense in the Consolidated Statements of Operations for the three months ended March 31, 2023 and 2022, respectively.
Comparative information for elements that are not required to be reclassified in their entirety to net income in the same reporting period is disclosed in Note 2.
| Horace Mann Educators Corporation | 36 | First Quarter 2023 Form 10-Q | ||||||
NOTE 9 - Supplemental Consolidated Cash and Cash Flow Information
| ($ in millions) | ||||||||||||||
| March 31, 2023 | December 31, 2022 | |||||||||||||
| Cash | $ | 26.6 | $ | 42.2 | ||||||||||
| Restricted cash | 0.8 | 0.6 | ||||||||||||
| Total cash and restricted cash reported in the Consolidated Balance Sheets | $ | 27.4 | $ | 42.8 | ||||||||||
| ($ in millions) | Three Months Ended March 31, | |||||||||||||
| 2023 | 2022 | |||||||||||||
| Cash paid (recovered) for: | ||||||||||||||
| Interest | $ | 1.2 | $ | 0.6 | ||||||||||
| Income taxes | 0.1 | (0.3) | ||||||||||||
Non-cash investing activities with respect to modifications or exchanges of fixed maturity securities as well as paid-in-kind activity for policy loans were insignificant for the three months ended March 31, 2023 and 2022, respectively.
NOTE 10 - Contingencies and Commitments
Lawsuits and Legal Proceedings
Companies in the insurance industry have been subject to substantial litigation resulting from claims, disputes and other matters. For instance, they have faced expensive claims, including class action lawsuits, alleging, among other things, improper sales practices and improper claims settlement procedures. Negotiated settlements of certain such actions have had a material adverse effect on many insurance companies.
At the time of issuance of this Quarterly Report on Form 10-Q, the Company does not have pending litigation from which there is a reasonable possibility of material loss.
Assessments for Insolvencies of Unaffiliated Insurance Companies
The Company is contingently liable for possible assessments under regulatory requirements pertaining to potential insolvencies of unaffiliated insurance companies. Liabilities, which are established based upon regulatory guidance, have generally been insignificant.
Investment Commitments
The Company has outstanding commitments to fund investments primarily in limited partnership interests. Such unfunded commitments were $599.4 million and $704.2 million as of March 31, 2023 and December 31, 2022, respectively.
Note 11 - Prior Period Consolidated Financial Statements
Effective January 1, 2023, the Company adopted ASU 2018-12, Financial Services – Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts (also known as LDTI). The Company adopted LDTI using the modified retrospective approach where permitted with changes applied as of January 1, 2021. As a result of adoption, the Company’s prior period consolidated financial statements have been restated.
The following tables summarize the effects of adopting LDTI on our unaudited Consolidated Financial Statements.
| Horace Mann Educators Corporation | 37 | First Quarter 2023 Form 10-Q | ||||||
Note 11 - Prior Period Consolidated Financial Statements (continued)
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED BALANCE SHEET (UNAUDITED)
($ in millions, except share data)
| December 31, 2022 | Effect of the Adoption of ASU 2018-12 | Reclassifications(1) | December 31, 2022 | |||||||||||||||||||||||
| As Reported | As Adjusted | |||||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||
| Total investments | $ | 6,587.6 | $ | — | $ | — | $ | 6,587.6 | ||||||||||||||||||
| Cash | 42.8 | — | $ | — | 42.8 | |||||||||||||||||||||
| Deferred policy acquisition costs | 433.1 | (102.5) | $ | — | 330.6 | |||||||||||||||||||||
| Reinsurance balances receivable | 506.2 | (38.2) | — | 468.0 | ||||||||||||||||||||||
| Deposit asset on reinsurance | 2,516.6 | — | — | 2,516.6 | ||||||||||||||||||||||
| Intangible assets | 185.2 | — | — | 185.2 | ||||||||||||||||||||||
| Goodwill | 54.3 | — | — | 54.3 | ||||||||||||||||||||||
| Other assets | 328.7 | — | — | 328.7 | ||||||||||||||||||||||
| Separate Account variable annuity assets | 2,792.3 | — | — | 2,792.3 | ||||||||||||||||||||||
| Total assets | $ | 13,446.8 | $ | (140.7) | $ | — | $ | 13,306.1 | ||||||||||||||||||
| Liabilities and Shareholders' Equity | ||||||||||||||||||||||||||
| Policy liabilities | ||||||||||||||||||||||||||
| Investment contract and policy reserves | $ | 6,968.0 | $ | (151.9) | $ | (6,816.1) | $ | — | ||||||||||||||||||
| Future policy benefit reserves | 1,718.0 | 1,718.0 | ||||||||||||||||||||||||
| Policyholders' account balances | 5,260.6 | 5,260.6 | ||||||||||||||||||||||||
| Unpaid claims and claim expenses | 585.1 | (2.9) | (18.2) | 564.0 | ||||||||||||||||||||||
| Unearned premiums | 264.2 | 1.9 | — | 266.1 | ||||||||||||||||||||||
| Total policy liabilities | 7,817.3 | (152.9) | 144.3 | 7,808.7 | ||||||||||||||||||||||
| Other policyholder funds | 954.0 | (0.4) | (144.3) | 809.3 | ||||||||||||||||||||||
| Other liabilities | 297.0 | 2.5 | — | 299.5 | ||||||||||||||||||||||
| Short-term debt | 249.0 | — | — | 249.0 | ||||||||||||||||||||||
| Long-term debt | 249.0 | — | — | 249.0 | ||||||||||||||||||||||
| Separate Account variable annuity liabilities | 2,792.3 | — | — | 2,792.3 | ||||||||||||||||||||||
| Total liabilities | 12,358.6 | (150.8) | — | 12,207.8 | ||||||||||||||||||||||
| Preferred stock | — | — | — | — | ||||||||||||||||||||||
| Common stock | 0.1 | — | — | 0.1 | ||||||||||||||||||||||
| Additional paid-in capital | 502.6 | — | — | 502.6 | ||||||||||||||||||||||
| Retained earnings | 1,468.6 | 43.8 | — | 1,512.4 | ||||||||||||||||||||||
| Accumulated other comprehensive income (loss), net of tax: | ||||||||||||||||||||||||||
| Net unrealized investment losses on fixed maturity securities | (356.9) | (92.7) | — | (449.6) | ||||||||||||||||||||||
| Net reserve remeasurements attributable to discount rates | — | 59.0 | — | 59.0 | ||||||||||||||||||||||
| Net funded status of benefit plans | (8.8) | — | — | (8.8) | ||||||||||||||||||||||
| Treasury stock, at cost | (517.4) | — | — | (517.4) | ||||||||||||||||||||||
| Total shareholders’ equity | 1,088.2 | 10.1 | — | 1,098.3 | ||||||||||||||||||||||
| Total liabilities and shareholders’ equity | $ | 13,446.8 | $ | (140.7) | $ | — | $ | 13,306.1 | ||||||||||||||||||
(1) The Company has reclassified the presentation of certain information to conform to the current year's presentation.
| Horace Mann Educators Corporation | 38 | First Quarter 2023 Form 10-Q | ||||||
Note 11 - Prior Period Consolidated Financial Statements (continued)
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS (“MD&A”)AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(Dollars$ in millions, except per share data)
| Three Months Ended | Effect of the Adoption of ASU 2018-12 | Three Months Ended | ||||||||||||||||||
| March 31, 2022 | March 31, 2022 | |||||||||||||||||||
| As Reported | As Adjusted | |||||||||||||||||||
| Statement of Operations | ||||||||||||||||||||
| Revenues | ||||||||||||||||||||
| Net premiums and contract charges earned | $ | 255.9 | $ | (0.1) | $ | 255.8 | ||||||||||||||
| Net investment income | 97.9 | — | 97.9 | |||||||||||||||||
| Net investment losses | (15.5) | — | (15.5) | |||||||||||||||||
| Other income | 8.5 | — | 8.5 | |||||||||||||||||
| Total revenues | 346.8 | (0.1) | 346.7 | |||||||||||||||||
| Benefits, losses and expenses | ||||||||||||||||||||
| Benefits, claims and settlement expenses | 177.0 | (1.8) | 175.2 | |||||||||||||||||
| Interest credited | 40.8 | (1.1) | 39.7 | |||||||||||||||||
| Operating expenses | 76.8 | (0.1) | 76.7 | |||||||||||||||||
| DAC amortization expense | 26.4 | (4.4) | 22.0 | |||||||||||||||||
| Intangible asset amortization expense | 4.2 | — | 4.2 | |||||||||||||||||
| Interest expense | 3.9 | — | 3.9 | |||||||||||||||||
| Total benefits, losses and expenses | 329.1 | (7.4) | 321.7 | |||||||||||||||||
| Income before income taxes | 17.7 | 7.3 | 25.0 | |||||||||||||||||
| Income tax expense | 3.2 | 1.5 | 4.7 | |||||||||||||||||
| Net income | 14.5 | 5.8 | 20.3 | |||||||||||||||||
| Net income per share | ||||||||||||||||||||
| Basic | 0.35 | 0.13 | 0.48 | |||||||||||||||||
| Diluted | 0.35 | 0.13 | 0.48 | |||||||||||||||||
| Weighted average number of shares and equivalent shares | ||||||||||||||||||||
| Basic | 41.9 | — | 41.9 | |||||||||||||||||
| Diluted | 42.1 | — | 42.1 | |||||||||||||||||
| Statement of Comprehensive Income (Loss) | ||||||||||||||||||||
| Net income | 14.5 | 5.8 | 20.3 | |||||||||||||||||
| Other comprehensive income (loss), net of tax: | ||||||||||||||||||||
| Change in net unrealized investment losses on fixed maturity securities | (270.7) | (63.4) | (334.1) | |||||||||||||||||
| Change in net reserve remeasurements attributable to discount rates | — | 181.5 | 181.5 | |||||||||||||||||
| Change in net funded status of benefit plans | — | — | — | |||||||||||||||||
| Other comprehensive loss | (270.7) | 118.1 | (152.6) | |||||||||||||||||
| Comprehensive income (loss) | $ | (256.2) | $ | 123.9 | $ | (132.3) | ||||||||||||||
| Horace Mann Educators Corporation | 39 | First Quarter 2023 Form 10-Q | ||||||
Note 11 - Prior Period Consolidated Financial Statements (continued)
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)
($ in millions, except per share data)
| Three Months Ended | Effect of the Adoption of ASU 2018-12 | Three Months Ended | ||||||||||||||||||||||||||||||
| March 31, 2022 | March 31, 2022 | |||||||||||||||||||||||||||||||
| As Reported | As Adjusted | |||||||||||||||||||||||||||||||
| Common stock, $0.001 par value | ||||||||||||||||||||||||||||||||
| Ending balance | $ | 0.1 | $ | — | $ | 0.1 | ||||||||||||||||||||||||||
| Additional paid-in capital | ||||||||||||||||||||||||||||||||
| Ending balance | 496.6 | — | 496.6 | |||||||||||||||||||||||||||||
| Retained earnings | ||||||||||||||||||||||||||||||||
| Beginning balance | 1,524.9 | 22.1 | 1,547.0 | |||||||||||||||||||||||||||||
| Net income | 14.5 | 5.8 | 20.3 | |||||||||||||||||||||||||||||
Effect of ASU 2018-12(1) | — | (0.8) | (0.8) | |||||||||||||||||||||||||||||
| Dividends,per share; 2022, $0.32 per share | (13.5) | — | (13.5) | |||||||||||||||||||||||||||||
| Ending balance | 1,525.9 | 27.1 | 1,553.0 | |||||||||||||||||||||||||||||
| Accumulated other comprehensive income (loss), net of tax: | ||||||||||||||||||||||||||||||||
| Beginning balance | 280.5 | (330.5) | (50.0) | |||||||||||||||||||||||||||||
Change in net unrealized investment losses on fixed maturity securities | (270.7) | (63.4) | (334.1) | |||||||||||||||||||||||||||||
| Change in net reserve remeasurements attributable to discount rates | — | 181.5 | 181.5 | |||||||||||||||||||||||||||||
| Change in net funded status of benefit plans | — | — | — | |||||||||||||||||||||||||||||
| Ending balance | 9.8 | (212.4) | (202.6) | |||||||||||||||||||||||||||||
| Treasury stock, at cost | ||||||||||||||||||||||||||||||||
| Ending balance | (495.6) | — | (495.6) | |||||||||||||||||||||||||||||
| Shareholders' equity at end of period | $ | 1,536.8 | $ | (185.3) | $ | 1,351.5 | ||||||||||||||||||||||||||
(1) See Note 1 to the Consolidated Financial Statements for information regarding ASU 2018-12.
| Horace Mann Educators Corporation | 40 | First Quarter 2023 Form 10-Q | ||||||
Note 11 - Prior Period Consolidated Financial Statements (continued)
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
($ in millions)
| Three Months Ended | Effect of the Adoption of ASU 2018-12 | Three Months Ended | ||||||||||||||||||
| March 31, 2022 | March 31, 2022 | |||||||||||||||||||
| As Reported | As Adjusted | |||||||||||||||||||
| Cash flows - operating activities | ||||||||||||||||||||
| Net income | $ | 14.5 | $ | 5.8 | $ | 20.3 | ||||||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||||||
| Net investment losses | 15.5 | — | 15.5 | |||||||||||||||||
| Depreciation and intangible asset amortization | 3.8 | — | 3.8 | |||||||||||||||||
| Share-based compensation expense | 2.1 | — | 2.1 | |||||||||||||||||
| Loss from EMA investments, net of dividends or distributions | 1.6 | — | 1.6 | |||||||||||||||||
| Changes in: | ||||||||||||||||||||
| Insurance liabilities | 450.5 | (82.8) | 367.7 | |||||||||||||||||
| Amounts due under reinsurance agreements | (357.7) | 24.7 | (333.0) | |||||||||||||||||
| Income tax liabilities | 3.4 | 51.1 | 54.5 | |||||||||||||||||
| Other operating assets and liabilities | (35.5) | (4.6) | (40.1) | |||||||||||||||||
| Other, net | (2.5) | 5.8 | 3.3 | |||||||||||||||||
| Net cash provided by operating activities | 95.7 | — | 95.7 | |||||||||||||||||
| Cash flows - investing activities | ||||||||||||||||||||
| Net cash used in investing activities | (217.7) | — | (217.7) | |||||||||||||||||
| Cash flows - financing activities | ||||||||||||||||||||
| Net cash provided by financing activities | 37.4 | — | 37.4 | |||||||||||||||||
| Net decrease in cash | (84.6) | — | (84.6) | |||||||||||||||||
| Cash at beginning of period | 133.7 | — | 133.7 | |||||||||||||||||
| Cash at end of period | $ | 49.1 | $ | — | $ | 49.1 | ||||||||||||||
ITEM 2.IManagement's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)
Measures within this MD&A that are not based on accounting principles generally accepted in the United States (“non-GAAP”)of America (non-GAAP) are marked bywith 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 an exhibitExhibit 99.1 to this Quarterly Report on Form 10-Q.10-Q and are reconciled to the most directly comparable measures prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) in the Appendix to the Company's First Quarter 2023 Investor Supplement.
Forward-looking Information
Statements made in the following discussionthis 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 ("HMEC"; and together with its subsidiaries,(referred to in this Quarterly Report on Form 10-Q as "we", "our", "us", the "Company", "Horace Mann" or "Horace Mann""HMEC") is an insurance holding company. Horace Mann isWe are not under any obligation to (and expressly disclaimsdisclaim 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 the Company’sour actual results could differ materially from those projected in forward-looking statements due to a number of risks and uncertainties inherent in the Company’sour business. For additional information regarding risksAlso, see Part I - Items 1 and uncertainties, see “Item 1A. Risk Factors”1A in this Quarterly Report on Form 10-Q and in the Company’sour Annual Report on Form 10-K for the year ended December 31, 2016. That discussion includes factors such as:2022 for additional information regarding risks and uncertainties.
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Introduction
The impact that a prolonged economic recession may havepurpose 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 Company’s investment portfolio; volume of new business for automobile, homeowners, retirementcommunity achieve lifelong financial success. Through our subsidiaries, we market and life products; policy renewal rates;underwrite individual and additional annuity contract deposit receipts.
•retirement products, primarily tax-qualified fixed and variable annuities
•life insurance, in the U.S. The Company markets itsprimarily 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.families, whether they engage with Horace Mann directly or through their district/employer.
We conduct and manage our business in four reporting segments. The three reporting segments representing our major lines of business, are: (1) Property & Casualty (primarily personal lines of auto and property insurance products), (2) Life & Retirement (primarily tax-qualified fixed and variable annuities as well as life insurance
| Horace Mann Educators Corporation | 42 | First Quarter 2023 Form 10-Q | ||||||
products), and (3) Supplemental & Group Benefits (primarily cancer, heart, hospital, supplemental disability, accident, short-term and long-term group disability, and group term life coverages). We do not allocate the impact of corporate-level transactions to these reporting segments, consistent with the basis for management's evaluation of the results of those segments, but classify those items in the fourth reporting segment, Corporate & Other. In addition to ongoing transactions such as corporate debt service, net investment gains (losses) and certain public company expenses, such items also have included corporate debt retirement costs, when applicable. See Part I - Item 1, Note 7 of the Consolidated Financial Statements in this Quarterly Report on Form 10-Q for more information.
Effective January 1, 2023, we adopted ASU 2018-12, Financial Services – Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts (also known as LDTI). We adopted LDTI using the modified retrospective approach where permitted with changes applied as of January 1, 2021. As a result of adoption, our prior period results of operations have been restated in this MD&A. See Part I - Item 1, Note 1 of the Consolidated Financial Statements in this Quarterly Report on Form 10-Q for more information regarding our adoption of LDTI.
Consolidated Financial Highlights
| ($ in millions) | Three Months Ended March 31, | 2023-2022 | ||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | % Change | ||||||||||||||||||||||||||||||||||||
| Total revenues | $ | 353.9 | $ | 346.7 | 2.1 | % | ||||||||||||||||||||||||||||||||
| Net income | 6.6 | 20.3 | -67.5 | % | ||||||||||||||||||||||||||||||||||
| Per diluted share: | ||||||||||||||||||||||||||||||||||||||
| Net income | 0.16 | 0.48 | -66.7 | % | ||||||||||||||||||||||||||||||||||
| Net investment losses, after tax | (0.07) | (0.29) | N.M. | |||||||||||||||||||||||||||||||||||
| Book value per share | $ | 27.87 | $ | 32.66 | -14.7 | % | ||||||||||||||||||||||||||||||||
| Net income return on equity - last twelve months | 0.5 | % | 9.8 | % | ||||||||||||||||||||||||||||||||||
| Net income return on equity - annualized | 2.4 | % | 5.7 | % | ||||||||||||||||||||||||||||||||||
For the three month periodmonths ended September 30, 2017, the Company’sMarch 31, 2023, net income of $26.5decreased $13.7 million, decreased $0.4 million compared to the prior year period including an increase in Property and Casualty net income of $6.7 million offset by a $4.9 million reduction in net realized investment gains.
| Horace Mann Educators Corporation | 43 | First Quarter 2023 Form 10-Q | ||||||
Consolidated Results of Operations
| ($ in millions) | Three Months Ended March 31, | 2023-2022 | ||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | % Change | ||||||||||||||||||||||||||||||||||||
| Net premiums and contract charges earned | $ | 255.9 | $ | 255.8 | — | % | ||||||||||||||||||||||||||||||||
| Net investment income | 100.4 | 97.9 | 2.6 | % | ||||||||||||||||||||||||||||||||||
| Net investment losses | (3.9) | (15.5) | N.M. | |||||||||||||||||||||||||||||||||||
| Other income | 1.5 | 8.5 | -82.4 | % | ||||||||||||||||||||||||||||||||||
| Total revenues | 353.9 | 346.7 | 2.1 | % | ||||||||||||||||||||||||||||||||||
| Benefits, claims and settlement expenses | 183.2 | 175.2 | 4.6 | % | ||||||||||||||||||||||||||||||||||
| Interest credited | 48.7 | 39.7 | 22.7 | % | ||||||||||||||||||||||||||||||||||
| Operating expenses | 79.8 | 76.7 | 4.0 | % | ||||||||||||||||||||||||||||||||||
| DAC amortization expense | 23.7 | 22.0 | 7.7 | % | ||||||||||||||||||||||||||||||||||
| Intangible asset amortization expense | 3.7 | 4.2 | -11.9 | % | ||||||||||||||||||||||||||||||||||
| Interest expense | 6.7 | 3.9 | 71.8 | % | ||||||||||||||||||||||||||||||||||
| Total benefits, losses and expenses | 345.8 | 321.7 | 7.5 | % | ||||||||||||||||||||||||||||||||||
| Income before income taxes | 8.1 | 25.0 | -67.6 | % | ||||||||||||||||||||||||||||||||||
| Income tax expense | 1.5 | 4.7 | -68.1 | % | ||||||||||||||||||||||||||||||||||
| Net income | $ | 6.6 | $ | 20.3 | -67.5 | % | ||||||||||||||||||||||||||||||||
Net Premiums and property policy retention rates of 83.0% and 87.6%, respectively.
For the three month periodmonths ended September 30, 2017, RetirementMarch 31, 2023, net income of $13.6 million decreased $2.1 million or 13.4% compared to the prior year period which is primarily due to a $3.4 million pretax decrease in net interest margin and a $1.0 million pretax increase in operating expenses offset by a $1.1 million pretax increase in contract charges.
| ($ in millions) | Three Months Ended September 30, | Change From Prior Year | Nine Months Ended September 30, | Change From Prior Year | ||||||||||||||||||||||||||
| 2017 | 2016 | Percent | Amount | 2017 | 2016 | Percent | Amount | |||||||||||||||||||||||
Insurance premiums written and contract deposits (includes annuity and life contract deposits) | ||||||||||||||||||||||||||||||
| Property and Casualty | $ | 177.2 | $ | 169.8 | 4.4 | % | $ | 7.4 | $ | 498.0 | $ | 476.3 | 4.6 | % | $ | 21.7 | ||||||||||||||
| Retirement (annuity) | 114.8 | 154.6 | -25.7 | % | (39.8 | ) | 348.9 | 391.9 | -11.0 | % | (43.0 | ) | ||||||||||||||||||
| Life | 26.4 | 27.2 | -2.9 | % | (0.8 | ) | 79.8 | 78.4 | 1.8 | % | 1.4 | |||||||||||||||||||
| Total | $ | 318.4 | $ | 351.6 | -9.4 | % | $ | (33.2 | ) | $ | 926.7 | $ | 946.6 | (2.1 | )% | $ | (19.9 | ) | ||||||||||||
Insurance premiums and contract charges earned (excludes annuity and life contract deposits) | ||||||||||||||||||||||||||||||
| Property and Casualty | $ | 163.2 | $ | 155.7 | 4.8 | % | $ | 7.5 | $ | 482.0 | $ | 461.5 | 4.4 | % | $ | 20.5 | ||||||||||||||
| Retirement (annuity) | 7.5 | 6.4 | 17.2 | % | 1.1 | 20.8 | 18.6 | 11.8 | % | 2.2 | ||||||||||||||||||||
| Life | 28.3 | 29.0 | -2.4 | % | (0.7 | ) | 87.6 | 84.8 | 3.3 | % | 2.8 | |||||||||||||||||||
| Total | $ | 199.0 | $ | 191.1 | 4.1 | % | $ | 7.9 | $ | 590.4 | $ | 564.9 | 4.5 | % | $ | 25.5 | ||||||||||||||
| September 30, 2017 | December 31, 2016 | September 30, 2016 | ||||
| Property and Casualty | ||||||
| Automobile | 482,035 | 484,915 | 486,229 | |||
| Property | 217,377 | 220,137 | 221,094 | |||
| Total | 699,412 | 705,052 | 707,323 | |||
| Retirement | 221,309 | 219,105 | 215,445 | |||
| Life | 196,978 | 197,937 | 197,792 | |||
Net Investment Income
For the three month periodmonths ended September 30, 2017, the Company’s premiums written and contract deposits of $318.4March 31, 2023, total net investment income increased $2.5 million, decreased $33.2 million, or 9.4%, primarily as a result of a decline in annuity deposits due to lower sales of single premium annuity products. The Company’s premiums and contract charges earned increased $7.9 million, or 4.1%, compared to the prior year period, primarily due to increases in average premium per policy for both homeowners and automobile.
| Three Months Ended March 31, | ||||||||||||||||||||||||||
| 2023 | 2022 | |||||||||||||||||||||||||
Investment yield, excluding limited partnership interests, pretax - annualized* | 4.7% | 4.3% | ||||||||||||||||||||||||
Investment yield, excluding limited partnership interests, after tax - annualized* | 3.7% | 3.4% | ||||||||||||||||||||||||
During the second quarter of 2017, the Company introduced Department of Labor compliant annuity products featuring a level commissions structure and flexibility to move between products without surrender charges. The Company continues to focus on agent training and marketing programs which emphasize retirement planning. Annuity sales by Horace Mann’s Exclusive Distributors decreased 9.2% compared to the first nine months of 2016. Sales from the Independent Agent distribution channel, which represent approximately 7.3% of total annuity sales in the first nine months of 2017, which are largely single premium and rollover annuity deposits, decreased approximately 29.0% compared to a year earlier. As a result, total Horace Mann annuity sales from the combined distribution channels decreased 11.0%, or $43.0 million, compared to the first nine months of 2016. It should be noted that historically, reported annuity sales for HM products were determined based on annualized new recurring deposits as well as single deposits/rollovers. Effective January 1, 2017, reported annuity sales are now determined based on total recurring deposits as well as single deposits/rollovers. All historical annuity sales information presented has been revised to conform to the new reporting methodology.
Net Realized Investment Gains and Losses (Pretax)
For the three month periodmonths ended September 30, 2017,March 31, 2023, net realized investment losses were $3.5decreased $11.6 million, primarily due to a reduction in losses from changes in fair values of equity securities and impairments compared to net realized investment gains of $4.0 million in the prior year period. The net realized investment losses for the three month period ended September 30, 2017 included $5.7 millionbreakdown of gross realized gains on disposal of securities offset by $3.1 million of gross realized losses primarily on disposal of securities and expiration of call options during the period and $6.1 million of charges for other-than-temporary impairment (“OTTI”) recorded primarily on fixed maturity securities in the construction sector.
| Horace Mann Educators Corporation | 44 | First Quarter 2023 Form 10-Q | ||||||
| ($ in millions) | Three Months Ended March 31, | |||||||||||||||||||||||||
| 2023 | 2022 | |||||||||||||||||||||||||
| Credit loss and intent-to-sell impairments | $ | — | $ | (1.8) | ||||||||||||||||||||||
| Sales and other, net | (2.4) | 1.1 | ||||||||||||||||||||||||
| Change in fair value - equity securities | (1.0) | (17.1) | ||||||||||||||||||||||||
| Change in fair value and losses realized on settlements - derivatives | (0.5) | 2.3 | ||||||||||||||||||||||||
| Net investment losses | $ | (3.9) | $ | (15.5) | ||||||||||||||||||||||
From time to time, sellswe may sell fixed maturity securities subsequent to the balance sheetreporting date that were considered temporarily impaired at the balance sheetsuch reporting date. Such sales are due to issuer specificissuer-specific events occurring subsequent to the balance sheetreporting date that result in a change in the Company’sour intent to sell an invested asset.
Other Income
For the ten largest sectors of the Company’s corporate bond holdings (based on fair value). Compared to Decemberthree months ended March 31, 2016, credit spreads were tighter across most asset classes and U.S. Treasury rates declined, which resulted in higher net unrealized investment gains2023, other income decreased $7.0 million in the fixed maturity securities portfolio at September 30, 2017.
| ($ in millions) | September 30, 2017 | ||||||||||||||
Number of Issuers | Fair Value | Amortized Cost or Cost | Pretax Net Unrealized Investment Gain (Loss) | ||||||||||||
| Fixed maturity securities | |||||||||||||||
| Corporate bonds | |||||||||||||||
| Banking & Finance | 119 | $ | 704.4 | $ | 661.9 | $ | 42.5 | ||||||||
| Insurance | 56 | 284.5 | 255.4 | 29.1 | |||||||||||
| Energy (1) | 58 | 232.7 | 217.8 | 14.9 | |||||||||||
| Real Estate | 42 | 184.6 | 175.8 | 8.8 | |||||||||||
| Technology | 34 | 180.6 | 172.0 | 8.6 | |||||||||||
| HealthCare, Pharmacy | 51 | 163.1 | 152.3 | 10.8 | |||||||||||
| Utilities | 42 | 153.8 | 134.5 | 19.3 | |||||||||||
| Transportation | 37 | 150.2 | 142.8 | 7.4 | |||||||||||
| Telecommunications | 26 | 110.9 | 102.6 | 8.3 | |||||||||||
| Food and Beverage | 23 | 91.1 | 87.2 | 3.9 | |||||||||||
| All other corporates (2) | 215 | 565.8 | 533.0 | 32.8 | |||||||||||
| Total corporate bonds | 703 | 2,821.7 | 2,635.3 | 186.4 | |||||||||||
| Mortgage-backed securities | |||||||||||||||
| U.S. Government and federally sponsored agencies | 229 | 420.4 | 391.4 | 29.0 | |||||||||||
| Commercial (3) | 125 | 535.1 | 531.4 | 3.7 | |||||||||||
| Other | 28 | 70.1 | 69.0 | 1.1 | |||||||||||
| Municipal bonds (4) | 378 | 1,842.2 | 1,669.3 | 172.9 | |||||||||||
| Government bonds | |||||||||||||||
| U.S. | 38 | 671.0 | 653.2 | 17.8 | |||||||||||
| Foreign | 15 | 100.2 | 93.8 | 6.4 | |||||||||||
| Collateralized debt obligations (5) | 87 | 522.4 | 517.4 | 5.0 | |||||||||||
| Asset-backed securities | 101 | 647.5 | 633.6 | 13.9 | |||||||||||
| Total fixed maturity securities | 1,704 | $ | 7,630.6 | $ | 7,194.4 | $ | 436.2 | ||||||||
| Equity securities | |||||||||||||||
| Non-redeemable preferred stocks | 14 | $ | 64.0 | $ | 61.5 | $ | 2.5 | ||||||||
| Common stocks | 198 | 74.7 | 58.7 | 16.0 | |||||||||||
| Closed-end fund | 1 | 20.6 | 20.0 | 0.6 | |||||||||||
| Total equity securities | 213 | $ | 159.3 | $ | 140.2 | $ | 19.1 | ||||||||
| Total | 1,917 | $ | 7,789.9 | $ | 7,334.6 | $ | 455.3 | ||||||||
| ($ in millions) | Percent of Portfolio | |||||||||||||
| Fair Value | September 30, 2017 | |||||||||||||
| December 31, 2016 | September 30, 2017 | Fair Value | Amortized Cost or Cost | |||||||||||
| Fixed maturity securities | ||||||||||||||
| AAA | 8.3 | % | 7.4 | % | $ | 563.1 | $ | 544.6 | ||||||
| AA (2) | 35.5 | 37.3 | 2,843.3 | 2,690.2 | ||||||||||
| A | 23.6 | 24.2 | 1,845.0 | 1,714.8 | ||||||||||
| BBB | 28.4 | 27.1 | 2,071.9 | 1,951.0 | ||||||||||
| BB | 2.4 | 2.4 | 187.0 | 181.5 | ||||||||||
| B | 1.0 | 0.8 | 64.3 | 63.1 | ||||||||||
| CCC or lower | 0.2 | 0.1 | 4.9 | 4.9 | ||||||||||
| Not rated (3) | 0.6 | 0.7 | 51.1 | 44.3 | ||||||||||
| Total fixed maturity securities | 100.0 | % | 100.0 | % | $ | 7,630.6 | $ | 7,194.4 | ||||||
| Equity securities | ||||||||||||||
| AAA | — | — | — | — | ||||||||||
| AA | — | — | — | — | ||||||||||
| A | — | — | — | — | ||||||||||
| BBB | 35.3 | % | 40.2 | % | $ | 64.0 | $ | 61.5 | ||||||
| BB | — | — | — | — | ||||||||||
| B | — | — | — | — | ||||||||||
| CCC or lower | — | — | — | — | ||||||||||
| Not rated | 64.7 | 59.8 | 95.3 | 78.7 | ||||||||||
| Total equity securities | 100.0 | % | 100.0 | % | $ | 159.3 | $ | 140.2 | ||||||
| Total | $ | 7,789.9 | $ | 7,334.6 | ||||||||||
Benefits, Claims and Settlement Expenses
| ($ in millions) | Three Months Ended September 30, | Change From Prior Year | Nine Months Ended September 30, | Change From Prior Year | ||||||||||||||||||||||||||
| 2017 | 2016 | Percent | Amount | 2017 | 2016 | Percent | Amount | |||||||||||||||||||||||
| Property and Casualty | $ | 114.9 | $ | 116.0 | -0.9 | % | $ | (1.1 | ) | $ | 384.9 | $ | 347.0 | 10.9 | % | $ | 37.9 | |||||||||||||
| Retirement | 1.6 | 1.4 | 14.3 | % | 0.2 | 4.0 | 3.1 | 29.0 | % | 0.9 | ||||||||||||||||||||
| Life | 18.4 | 18.3 | 0.5 | % | 0.1 | 56.0 | 53.5 | 4.7 | % | 2.5 | ||||||||||||||||||||
| Total | $ | 134.9 | $ | 135.7 | -0.6 | % | $ | (0.8 | ) | $ | 444.9 | $ | 403.6 | 10.2 | % | $ | 41.3 | |||||||||||||
Property and Casualty catastrophe losses, included above | $ | 8.6 | $ | 8.4 | 2.4 | % | $ | 0.2 | $ | 58.2 | $ | 48.4 | 20.2 | % | $ | 9.8 | ||||||||||||||
| ($ in millions) | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Incurred claims and claim expenses: | ||||||||||||||||
| Claims occurring in the current year | $ | 115.4 | $ | 116.7 | $ | 387.0 | $ | 351.3 | ||||||||
Decrease in estimated reserves for claims occurring in prior years (2) | (0.5 | ) | (0.7 | ) | (2.1 | ) | (4.3 | ) | ||||||||
| Total claims and claim expenses incurred | $ | 114.9 | $ | 116.0 | $ | 384.9 | $ | 347.0 | ||||||||
| Property and Casualty loss ratio: | ||||||||||||||||
| Total | 70.4 | % | 74.5 | % | 79.8 | % | 75.2 | % | ||||||||
| Effect of catastrophe costs, included above (1) | 5.3 | % | 5.3 | % | 12.0 | % | 10.5 | % | ||||||||
| Effect of prior years’ reserve development, included above (2) | -0.3 | % | -0.4 | % | -0.4 | % | -0.9 | % | ||||||||
(1) Property and Casualty catastrophe losses were incurred as follows: | ||||||||
| 2017 | 2016 | |||||||
| Three months ended | ||||||||
| March 31 | $ | 17.2 | $ | 12.7 | ||||
| June 30 | 32.4 | 27.3 | ||||||
| September 30 | 8.6 | 8.4 | ||||||
| Total year-to-date | $ | 58.2 | $ | 48.4 | ||||
| (2) Shows the amounts by which the Company decreased its reserves in each of the periods indicated for claims occurring in previous years to reflect subsequent information on such claims and changes in their projected final settlement costs. | ||||||||
| 2017 | 2016 | |||||||
| Three months ended | ||||||||
| March 31 | $ | (1.0 | ) | $ | (2.0 | ) | ||
| June 30 | (0.6 | ) | (1.6 | ) | ||||
| September 30 | (0.5 | ) | (0.7 | ) | ||||
| Total year-to-date | $ | (2.1 | ) | $ | (4.3 | ) | ||
For the three month periodmonths ended September 30, 2017, the Company's benefits, claims and settlement expenses decreased $0.8 million, or 0.6%, compared to the prior year period.
Interest Credited to Policyholders
| ($ in millions) | Three Months Ended September 30, | Change From Prior Year | Nine Months Ended September 30, | Change From Prior Year | ||||||||||||||||||||||||||
| 2017 | 2016 | Percent | Amount | 2017 | 2016 | Percent | Amount | |||||||||||||||||||||||
| Retirement (annuity) | $ | 38.8 | $ | 37.4 | 3.7 | % | $ | 1.4 | $ | 114.4 | $ | 109.4 | 4.6 | % | $ | 5.0 | ||||||||||||||
| Life | 11.3 | 11.2 | 0.9 | % | 0.1 | 33.8 | 33.5 | 0.9 | % | 0.3 | ||||||||||||||||||||
| Total | $ | 50.1 | $ | 48.6 | 3.1 | % | $ | 1.5 | $ | 148.2 | $ | 142.9 | 3.7 | % | $ | 5.3 | ||||||||||||||
For the nine month periodthree months ended September 30, 2017,March 31, 2023, interest credited inincreased $9.0 million, driven primarily by higher interest rates on advances received from the Retirement segment increased 4.6% compared toFederal Home Loan Bank of Chicago (FHLB). Under the prior year period reflecting a 5.1% increase in average accumulated fixed deposits, at an average crediting ratedeposit method of 3.5%.
| ($ in millions) | September 30, 2017 | ||||||||||||||||
| Deferred Annuities at | |||||||||||||||||
| Total Deferred Annuities | Minimum Guaranteed Rate | ||||||||||||||||
Percent of Total | Accumulated Value (“AV”) | Percent of Total Deferred Annuities AV | Percent of Total | Accumulated Value | |||||||||||||
| Minimum guaranteed interest rates: | |||||||||||||||||
| Less than 2% | 24.9 | % | $ | 1,083.8 | 51.3 | % | 14.7 | % | $ | 556.5 | |||||||
| Equal to 2% but less than 3% | 7.1 | 307.4 | 83.0 | % | 6.8 | 255.1 | |||||||||||
| Equal to 3% but less than 4% | 14.1 | 614.0 | 99.9 | % | 16.3 | 613.4 | |||||||||||
| Equal to 4% but less than 5% | 52.6 | 2,288.7 | 100.0 | % | 60.7 | 2,288.7 | |||||||||||
| 5% or higher | 1.3 | 55.4 | 100.0 | % | 1.5 | 55.4 | |||||||||||
| Total | 100.0 | % | $ | 4,349.3 | 86.7 | % | 100.0 | % | $ | 3,769.1 | |||||||
Operating Expenses
For the three month periodmonths ended September 30, 2017,March 31, 2023, operating expenses of $44.2increased $3.1 million, were comparableprimarily due to the prior year period as the current period benefitted from decreases in incentive compensation accruals as well as lower employee medical costs.inflation.
For the nine month periodthree months ended September 30, 2017, operating expensesMarch 31, 2023, DAC amortization expense increased $1.7 million, due to a write-off of $139.1DAC in the Life & Retirement segment related to a decrease in annuity premium persistency.
Intangible Asset Amortization Expense
For the three months ended March 31, 2023, intangible asset amortization expense decreased $0.5 million.
Interest Expense
For the three months ended March 31, 2023, interest expense increased $2.8 million, increased $8.5 million, or 6.5%, compareddue to an increase in floating interest rates on the prior year period, consistent with management’s expectations as the Company makes expenditures supporting targeted strategies in product, distribution and infrastructure which are intended to enhance the overall customer experience, increase sales and support favorable policy retention and business cross-sale ratios.
Income Tax Expense
The effective income tax rate on the Company’sour pretax income, including net realized investment gains and losses, was 17.6%18.5% and 26.6%17.5% for the nine month periodsthree months ended September 30, 2017March 31, 2023 and 2016,2022, respectively. Income from investments in tax-advantaged securities reduced the effective income tax rates by 12.5%5.3 and 7.4%6.3 percentage points for the nine month periodsthree months ended September 30, 2017March 31, 2023 and 2016,2022, respectively. Further,
In August 2022, the adoptionInflation 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 accounting standardFederal 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 $1.0 billion threshold is determined on a group basis, and the group's AFSI is generally treated as the AFSI for employee share-based payments on January 1, 2017 reduced the effective income tax rate by 5.3% for the nine month period ended September 30, 2017. The new accounting standard requires that the entire excess tax benefit/deficiency from employee share-based payments be recognizedall
| Horace Mann Educators Corporation | 45 | First Quarter 2023 Form 10-Q | ||||||
separate taxpayers in the group. Except under limited circumstances, once a corporation is an applicable corporation, it is an applicable corporation in all future years.
An applicable corporation is not automatically subject to an AMT liability. The corporation's tentative AMT liability is equal to 15.0% of its adjusted AFSI, and AMT is payable to the extent the tentative AMT liability exceeds regular corporate income statement rather than allocatingtax. However, any AMT paid would be indefinitely available as a credit carryover that could reduce future regular tax in excess of AMT.
HMEC and its controlled group of corporations have determined that it likely will not be an applicable corporation in 2023. In making such determination, the excess tax benefit/deficiency betweengroup has made certain interpretations of, and assumptions regarding, the equity sectionAMT provisions of the balance sheetIRA. The U.S. Treasury Department is expected to issue guidance throughout 2023 that may differ from the group's interpretations and assumptions and that could alter the income statement.group's determination.
| ($ in millions) | Three Months Ended September 30, | Change From Prior Year | Nine Months Ended September 30, | Change From Prior Year | ||||||||||||||||||||||||||
| 2017 | 2016 | Percent | Amount | 2017 | 2016 | Percent | Amount | |||||||||||||||||||||||
| Analysis of net income (loss) by segment: | ||||||||||||||||||||||||||||||
| Property and Casualty | $ | 13.4 | $ | 6.7 | 100.0 | % | $ | 6.7 | $ | 2.2 | $ | 16.0 | -86.3 | % | $ | (13.8 | ) | |||||||||||||
| Retirement | 13.6 | 15.7 | -13.4 | % | (2.1 | ) | 36.9 | 39.3 | -6.1 | % | (2.4 | ) | ||||||||||||||||||
| Life | 4.8 | 4.6 | 4.3 | % | 0.2 | 14.3 | 13.1 | 9.2 | % | 1.2 | ||||||||||||||||||||
| Corporate and Other (1) | (5.3 | ) | (0.1 | ) | N.M. | (5.2 | ) | (9.3 | ) | (4.5 | ) | 106.7 | % | (4.8 | ) | |||||||||||||||
| Net income | $ | 26.5 | $ | 26.9 | -1.5 | % | $ | (0.4 | ) | $ | 44.1 | $ | 63.9 | -31.0 | % | $ | (19.8 | ) | ||||||||||||
Effect of catastrophe costs, after tax, included above | $ | (5.6 | ) | $ | (5.5 | ) | 1.8 | % | $ | (0.1 | ) | $ | (37.8 | ) | $ | (31.5 | ) | 20.0 | % | $ | (6.3 | ) | ||||||||
Effect of net realized investment gains (losses), after tax, included above | $ | (2.2 | ) | $ | 2.7 | N.M. | $ | (4.9 | ) | $ | (0.8 | ) | $ | 3.8 | -121.1 | % | $ | (4.6 | ) | |||||||||||
| Diluted: | ||||||||||||||||||||||||||||||
| Net income per share | $ | 0.64 | $ | 0.65 | -1.5 | % | $ | (0.01 | ) | $ | 1.06 | $ | 1.55 | -31.6 | % | $ | (0.49 | ) | ||||||||||||
Weighted average number of common and common equivalent shares (in millions) | 41.6 | 41.3 | 0.7 | % | 0.3 | 41.5 | 41.4 | 0.2 | % | 0.1 | ||||||||||||||||||||
| Property and casualty combined ratio: | ||||||||||||||||||||||||||||||
| Total | 95.8 | % | 101.5 | % | - | -5.7 pts | 106.5 | % | 102.4 | % | - | 4.1 pts | ||||||||||||||||||
| Effect of catastrophe costs, included above | 5.3 | % | 5.3 | % | - | 0 pts | 12.0 | % | 10.5 | % | - | 1.5 pts | ||||||||||||||||||
Effect of prior years’ reserve development, included above | -0.3 | % | -0.4 | % | - | 0.1 pts | -0.4 | % | -0.9 | % | - | 0.5 pts | ||||||||||||||||||
Outlook for 20172023
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, management estimateswe estimate that 20172023 full year net income before net realized investment gains and losses will be within a range of $1.45$2.00 to $1.65$2.30 per diluted share. Within share, generating a core return on equity* near 6%. This range is unchanged from our Outlook for 2023 we discussed in our Annual Report on Form 10-K for the year ended December 31, 2022.
Property & Casualty Segment
In 2023, net income for Property & Casualty is now anticipated to be between breakeven and Casualty, this projection incorporates$5 million, reflecting the elevated catastrophe losses and non-catastrophe weather-related losses duringnegative limited partnership portfolio returns in the first halfquarter. The primary factors in our full-year outlook include:
•Catastrophe loss assumption of 2017,approximately 10 points on the combined ratio, in line with estimatesthe 10-year average and consistent with historical frequencies and current severities applied to modeled exposures
•Property combined ratio near 100%, anticipating rate actions of 12% to 15% during 2023, reflecting inflation and current loss trends, accompanied by ‘inflation guard’ increases
•Auto combined ratio of 106% to 107%, anticipating auto rates to increase by 18% to 20% during 2023, supplemented by non-rate underwriting actions
Our longer-term Property & Casualty combined ratio target remains at 95% to 96%.
Life & Retirement Segment
In 2023, net income for weather-related losses for the second half of the year returning to historic averages. The full year auto underlying combined ratioLife & Retirement is anticipated to be similarin the range of $67 million to 2016 and$70 million, consistent with prior guidance. This guidance includes the full year property combined ratio, including catastrophe losses, is anticipated to be slightly below 100%. Net income for Retirement will continue to be impacted byadoption of LDTI effective January 1, 2023. The spread on the prolonged low interest rate environment and the interest spread is anticipated to grade down to the low 180s. The Company expects to invest approximately $0.10 per diluted share in Retirement related to the Company's strategic initiatives in product, distribution and infrastructure. Life mortality experience was more favorable than anticipated for the first half of 2017, however, Life net income for the full yearfixed annuity business is expected to be comparablein the range of 220 to 2016,230 basis points. Mortality is anticipated to remain within actuarial expectations, increasing slightly from 2022.
Supplemental & Group Benefits Segment
In 2023, net income for Supplemental & Group Benefits is now anticipated to be in the range of $45 million to $49 million due to strong first quarter results. The primary factors in our outlook include:
| Horace Mann Educators Corporation | 46 | First Quarter 2023 Form 10-Q | ||||||
•Claims utilization for supplemental and disability products returning to near pre-pandemic levels. The longer-term target for the segment benefit ratio remains 43%.
•Higher expenses reflecting investments in the infrastructure for this business as well as a returnhigher allocation of corporate expenses to higher mortality levelsreflect the segment’s utilization of shared staff, distribution, and other resources.
Corporate & Other Segment
Corporate interest expense is expected to be in the range of $26 million to $27 million in 2023 due to rising interest rates.
Investments
For 2023, we now expect total net investment income pressure. Asto be in a resultrange of $429 million to $439 million, including approximately $104 million of accreted investment income on the deposit asset on reinsurance in Retirement. The expectation of full-year net investment income from the managed portfolio in a range of $325 million to $335 million reflects stronger returns from our commercial mortgage loan portfolio as well as the benefits of the continued lowrising interest rate environment management anticipates the Company’s overall portfolio yield to decline by approximately 10 basis points over the coursepast 12 months. Limited partnership returns are now estimated to be below their 10-year average of 2017, impacting each of8.5%, reflecting the three operating segments. In addition tofirst quarter lower-than-expected limited partnership portfolio returns in the segment-specific factors, the Company’s initiatives for customer service and infrastructure improvements, as well as enhanced programs and training for the Company’s agency force, all intended to enhance the overall customer experience and support further improvement in policy retention, sales and business cross-sell ratios, will continue and result in a moderate increase in expense levels compared to 2016.
Property & Casualty segment.
As described in “CriticalApplication of Critical Accounting Policies”,Estimates, certain of the Company’sour 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 management’s estimateour estimates above. Additionally, see “Forward-looking Information”forward-looking information in this Quarterly Report on Form 10-Q as well as Part I - Items 1 and “Item 1A. Risk Factors”1A in the Company’sour Annual Report on Form 10-K for the year ended December 31, 20162022 concerning other important factors that could impact actual results. Management believesWe believe that a projection of net income including net realized investment gains and losses is not appropriate on a forward-looking basis because it is not possible to provide a valid forecast of net realized investment gains and losses,(losses), which can vary substantially from one period to another and may have a significant impact on net income.
The preparation of consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions based on information available at the time the consolidated financial statements are prepared. These estimates and assumptions affect the reported amounts of our consolidated assets, liabilities, shareholders' equity and net income. Certain accounting estimates are particularly sensitive because of their significance to our consolidated financial statements and because of the possibility that subsequent events and available information may differ markedly from management's judgments at the time the consolidated financial statements were prepared. We have discussed with the Audit Committee the quality, not just the acceptability, of our accounting principles as applied in our financial reporting. The discussions generally included such matters as the consistency of our accounting policies and their application, and the clarity and completeness of our consolidated financial statements, which include related disclosures.
Information regarding our accounting policies pertaining to these topics is located in the Notes to the Consolidated Financial Statements contained in Part II - Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2022. In addition, discussion of accounting policies, including certain sensitivity information, was presented in Management's Discussion and Analysis of Financial Condition and Results of Operations - Application of Critical Accounting Estimates in that Form 10-K within which we identified the following accounting estimates as critical in that they involve a higher degree of judgment and are subject to a significant degree of variability:
•Valuation of hard-to-value fixed maturity securities
•Evaluation of credit loss impairments for maturity securities
•Evaluation of goodwill and intangible assets for impairment
•Valuation of annuity and life deferred policy acquisition costs
| Horace Mann Educators Corporation | 47 | First Quarter 2023 Form 10-Q | ||||||
•Valuation of liabilities for property and casualty unpaid claims and claim expense reserves
•Valuation of liabilities for group benefits unpaid claims and claim expense reserves
•Valuation of certain investment contracts and policy reserves
•Valuation of long-duration contracts under the new accounting guidance in ASU 2018-12
Except as noted below, compared to December 31, 2022, as of March 31, 2023, there were no material changes to accounting policies for areas most subject to significant management judgments identified above.
Effective January 1, 2023, we adopted the new accounting guidance in ASU 2018-12 which changed our accounting policies for the valuation of annuity and life deferred policy acquisition costs (DAC) and the valuation of certain policy reserves (which is now referred to as the liability for future policy benefits or "LFPB"). DAC is now being amortized on a constant-level basis over the expected term of the related contracts. Cash flow assumptions used to measure LFPB must be reviewed at least annually, and if there is a change, must be updated and the discount rate assumption must be updated quarterly. The new accounting policies are described in more detail in Part I - Item 1, Note 1 of the Consolidated Financial Statements in this Quarterly Report on Form 10-Q.
Results of Operations by Segment
Consolidated financial results primarily reflect the results of the Property & Casualty, Life & Retirement, and Supplemental & Group Benefits reporting segments as noted in the Introduction and Outlook for 2023 sections of this MD&A, as well as the Corporate & Other reporting segment. These segments are defined based on financial information management uses to evaluate performance and to determine the allocation of resources.
The determination of segment information is described in more detail in Part I - Item 1, Note 7 of the Consolidated Financial Statements in this Quarterly Report on Form 10-Q. The following sections provide analysis and discussion of the results of operations for each of the reporting segments as well as investment results.
Property & Casualty
For the three months ended March 31, 2023, net loss reflected the following factors:
•Higher catastrophe losses
•Elevated underlying auto losses
•Decrease in net investment income due to negative returns on limited partnership interests
| Horace Mann Educators Corporation | 48 | First Quarter 2023 Form 10-Q | ||||||
The following table provides certain financial information for Property & Casualty for the periods indicated.
| ($ in millions, unless otherwise indicated) | Three Months Ended March 31, | 2023-2022 | ||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | % Change | ||||||||||||||||||||||||||||||||||||
| Financial Data: | ||||||||||||||||||||||||||||||||||||||
| Net premiums written*: | ||||||||||||||||||||||||||||||||||||||
| Auto | $ | 101.2 | $ | 94.5 | 7.1 | % | ||||||||||||||||||||||||||||||||
| Property and other | 47.9 | 45.1 | 6.2 | % | ||||||||||||||||||||||||||||||||||
| Total net premiums written | 149.1 | 139.6 | 6.8 | % | ||||||||||||||||||||||||||||||||||
| Change in unearned net premiums | 3.3 | 10.6 | -68.9 | % | ||||||||||||||||||||||||||||||||||
| Total net premiums earned | 152.4 | 150.2 | 1.5 | % | ||||||||||||||||||||||||||||||||||
| Incurred claims and claims expenses: | ||||||||||||||||||||||||||||||||||||||
| Claims occurring in the current year | 128.8 | 108.3 | 18.9 | % | ||||||||||||||||||||||||||||||||||
Prior years' reserve development(1) | — | — | — | % | ||||||||||||||||||||||||||||||||||
| Total claims and claim expenses incurred | 128.8 | 108.3 | 18.9 | % | ||||||||||||||||||||||||||||||||||
| Operating expenses, including DAC amortization | 42.9 | 39.4 | 8.9 | % | ||||||||||||||||||||||||||||||||||
| Underwriting gain (loss) | (19.3) | 2.5 | N.M. | |||||||||||||||||||||||||||||||||||
| Net investment income | 4.0 | 7.2 | -44.4 | % | ||||||||||||||||||||||||||||||||||
| Income (loss) before income taxes | (14.6) | 10.5 | N.M | |||||||||||||||||||||||||||||||||||
| Net income (loss) | (11.6) | 8.5 | N.M | |||||||||||||||||||||||||||||||||||
| Core earnings (loss)* | (11.6) | 8.5 | N.M | |||||||||||||||||||||||||||||||||||
| Operating Statistics: | ||||||||||||||||||||||||||||||||||||||
| Auto | ||||||||||||||||||||||||||||||||||||||
| Loss and loss adjustment expense ratio | 82.5 | % | 76.0 | % | 6.5 | pts | ||||||||||||||||||||||||||||||||
| Expense ratio | 28.4 | % | 25.8 | % | 2.6 | pts | ||||||||||||||||||||||||||||||||
| Combined ratio: | 110.9 | % | 101.8 | % | 9.1 | pts | ||||||||||||||||||||||||||||||||
Prior years' reserve development(1) | — | % | — | % | — | pts | ||||||||||||||||||||||||||||||||
| Catastrophe losses | 1.8 | % | 0.5 | % | 1.3 | pts | ||||||||||||||||||||||||||||||||
| Underlying combined ratio* | 109.1 | % | 101.3 | % | 7.8 | pts | ||||||||||||||||||||||||||||||||
| Property | ||||||||||||||||||||||||||||||||||||||
| Loss and loss adjustment expense ratio | 88.1 | % | 65.0 | % | 23.1 | pts | ||||||||||||||||||||||||||||||||
| Expense ratio | 27.7 | % | 27.3 | % | 0.4 | pts | ||||||||||||||||||||||||||||||||
| Combined ratio: | 115.8 | % | 92.3 | % | 23.5 | pts | ||||||||||||||||||||||||||||||||
Prior years' reserve development(1) | — | % | — | % | — | pts | ||||||||||||||||||||||||||||||||
| Catastrophe losses | 37.9 | % | 12.7 | % | 25.2 | pts | ||||||||||||||||||||||||||||||||
| Underlying combined ratio* | 77.9 | % | 79.6 | % | -1.7 | pts | ||||||||||||||||||||||||||||||||
| Risks in force (in thousands) | ||||||||||||||||||||||||||||||||||||||
Auto(2) | 365 | 372 | -1.9 | % | ||||||||||||||||||||||||||||||||||
| Property | 170 | 175 | -2.9 | % | ||||||||||||||||||||||||||||||||||
| Total | 535 | 547 | -2.2 | % | ||||||||||||||||||||||||||||||||||
(1) (Favorable) unfavorable.
(2) Includes assumed risks in force of 4.
On a reported basis, the 9.1 point increase in the auto combined ratio for the three months ended March 31, 2023 was mainly attributable to a 5.2 point increase in the auto underlying loss ratio*. As expected, auto frequency outpaced levels experienced in the prior year period. The challenges being faced by the entire industry, including the unprecedented level of inflation that is driving higher replacement costs; the trend toward
| Horace Mann Educators Corporation | 49 | First Quarter 2023 Form 10-Q | ||||||
more severe accidents; and increased usage and costs of medical services, also continue. We continue to implement rate and other underwriting changes that address these trends.
The reported property combined ratio increased 23.5 points for the three months ended March 31, 2023, driven by higher catastrophe losses. The underlying loss ratio improved 2.1 points for the three months ended March 31, 2023 due to lower fire losses.
For the three months ended March 31, 2023, total Property & Casualty net premiums written* increased $9.5 million as rate actions and inflation adjustments to coverage values for property more that offset declines in risks in force. The benefit of stronger retention is being offset by new business volumes that still remain below historical levels due to the lingering effect of the pandemic on sales*.
For the three months ended March 31, 2023, auto net premiums written* increased $6.7 million, primarily due to rate actions that began in the second half of 2022. For the three months ended March 31, 2023, average net premium written and average net premium earned increased 8.1% and 4.4%, respectively. We anticipate auto rates to increase by 18% to 20% in 2023 supplemented by non-rate underwriting actions. The number of educator risks has been over 80% relative to overall auto risks in force over the past two years.
For the three months ended March 31, 2023, property and other net premiums written* increased $2.8 million due to increases in average net premium written and average net premium earned which increased 9.8% and 8.7% for the three months ended March 31, 2023, respectively, as inflation adjustments to coverage values continue to take effect. With inflationary pressure continuing, we anticipate property rates to increase by 12% to 15% in 2023. The number of educator risks has been near or above 80% relative to overall property risks in force over the past two years.
We continue to evaluate and implement actions to further mitigate our exposure. Such actions could include, but are not limited to, non-renewal of property risks, restricted agent geographic placement, limitations on agent new business sales, further tightening of underwriting standards and increased utilization of third-party vendor products.
| Horace Mann Educators Corporation | 50 | First Quarter 2023 Form 10-Q | ||||||
Life & Retirement
For the three months ended March 31, 2023, net income reflected the following factors:
•Higher net investment income primarily due to returns on floating rate fixed maturity securities including commercial mortgage loan funds
•Higher interest credited reflecting interest rates on FHLB funding agreements rising more rapidly than net investment income due to timing of interest rate resets
•Lower mortality costs in Life results partially offset unfavorable market risk benefit adjustment in Retirement
•Higher DAC amortization due to a write-off related to a decline in annuity premium persistency
| Horace Mann Educators Corporation | 51 | First Quarter 2023 Form 10-Q | ||||||
The following table provides certain information for Life & Retirement for the periods indicated.
| ($ in millions) | Three Months Ended March 31, | 2023-2022 | ||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | % Change | ||||||||||||||||||||||||||||||||||||
| Life & Retirement | ||||||||||||||||||||||||||||||||||||||
| Net premiums written and contract deposits* | $ | 136.1 | $ | 136.4 | -0.2 | % | ||||||||||||||||||||||||||||||||
| Net premiums and contract charges earned | 37.7 | 35.8 | 5.3 | % | ||||||||||||||||||||||||||||||||||
| Net investment income | 87.9 | 84.2 | 4.4 | % | ||||||||||||||||||||||||||||||||||
| Other income | 3.9 | 4.9 | -20.4 | % | ||||||||||||||||||||||||||||||||||
| Life mortality costs | 19.5 | 21.4 | -8.9 | % | ||||||||||||||||||||||||||||||||||
| Interest credited | 47.9 | 39.6 | 21.0 | % | ||||||||||||||||||||||||||||||||||
| Change in reserves | 13.8 | 13.0 | 6.2 | % | ||||||||||||||||||||||||||||||||||
| Operating expenses | 24.2 | 25.7 | -5.8 | % | ||||||||||||||||||||||||||||||||||
| DAC amortization expense | 6.8 | 5.7 | 19.3 | % | ||||||||||||||||||||||||||||||||||
| Intangible asset amortization expense | 0.1 | 0.3 | -66.7 | % | ||||||||||||||||||||||||||||||||||
| Income before income taxes | 17.2 | 19.2 | -10.4 | % | ||||||||||||||||||||||||||||||||||
| Income tax expense | 3.2 | 3.6 | -11.1 | % | ||||||||||||||||||||||||||||||||||
| Net income | 14.0 | 15.6 | -10.3 | % | ||||||||||||||||||||||||||||||||||
| Core earnings* | 14.0 | 15.6 | -10.3 | % | ||||||||||||||||||||||||||||||||||
| Life policies in force (in thousands) | 162 | 163 | -0.6 | % | ||||||||||||||||||||||||||||||||||
| Life insurance in force | $ | 20,155 | $ | 19,595 | 2.9 | % | ||||||||||||||||||||||||||||||||
| Life persistency - LTM | 95.9 | % | 96.2 | % | -0.3 | pts | ||||||||||||||||||||||||||||||||
| Annuity contracts in force (in thousands) | 226 | 229 | -1.3 | % | ||||||||||||||||||||||||||||||||||
Horace Mann Retirement Advantage® contracts in force (in thousands) | 17 | 16 | 6.3 | % | ||||||||||||||||||||||||||||||||||
| Cash value persistency - LTM | 93.1 | % | 94.3 | % | -1.2 | pts | ||||||||||||||||||||||||||||||||
For the three months ended March 31, 2023, life annualized sales* increased $0.4 million and life persistency remained strong at 95.9%.
For the three months ended March 31, 2023, net annuity contract deposits* for variable and fixed annuities decreased $2.8 million from strong prior year levels. Educators continue to begin their relationship with Horace Mann through 403(b) retirement savings products, including attractive annuity products, which provide encouraging cross-sell opportunities. Cash value persistency declined slightly to 93.1%.
As of March 31, 2023, annuity assets under management were down $190.2 million, or 3.7%, compared to a year ago primarily due to market depreciation. Assets under administration, which includes annuity assets under management, Horace Mann Retirement Advantage® and other advisory and recordkeeping assets were down $628.9 million, or 7.0%, compared to a year ago largely due to the effect of equity market performance. The year-to-date annualized net interest spread on fixed annuities, excluding reinsurance, decreased 80 basis points compared to a year ago, primarily reflecting higher interest credited, which includes interest on FHLB funding agreements that rose more rapidly than net investment income due to the timing of interest rate resets.
We actively manage our interest rate risk exposure, considering a variety of factors, including earned interest rates, credited interest rates and the relationship between the expected durations of assets and liabilities. We estimate that over the next 12 months approximately $676.4 million of the Life & Retirement investment portfolio and related investable cash flows will be reinvested at current market rates.
| Horace Mann Educators Corporation | 52 | First Quarter 2023 Form 10-Q | ||||||
Interest rates rose swiftly throughout 2022. However, the risk of a deep recession or shock to the economy, such as a global pandemic, could result in a return to historically low interest rates. The current environment of higher interest rates have afforded us the opportunity to invest insurance cash flows and reinvested cash flows at higher yields, which could be a benefit to net investment income, but the higher interest rates have caused an increase to both realized investment losses when securities are sold, and to net unrealized investment losses in the remaining portfolios.
As a general guideline, based on our existing policies and investment portfolio, the impact from a 100 basis point decline in the average reinvestment rate would reduce Life & Retirement net investment income by approximately $2.6 million in year one and $7.8 million in year two, reducing the annualized net interest spread on fixed annuities by approximately 9 basis points and 26 basis points in the respective periods, compared to the current period annualized net interest spread on fixed annuities. We could also consider potential changes in rates credited to policyholders, tempered by any restrictions on the ability to adjust policyholder rates due to guaranteed minimum crediting rates.
We reinsure a block of in force fixed annuities with $2.4 billion of assets under management and with a minimum crediting rate of 4.5% which helps mitigate the risk of not being able to generate appropriate spreads on the annuity business. Information regarding the interest crediting rates and balances equal to the guaranteed minimum crediting rates for deferred annuity account values excluding the reinsured block is shown below.
| ($ in millions) | March 31, 2023 | |||||||||||||||||||||||||||||||
| Total Deferred Annuities | Deferred Annuities at Minimum Guaranteed Rate | |||||||||||||||||||||||||||||||
| Percent of Total | Accumulated Value (AV) | Percent of Total Deferred Annuities AV | Percent of Total | Accumulated Value | ||||||||||||||||||||||||||||
| Guaranteed minimum crediting rates: | ||||||||||||||||||||||||||||||||
| Less than 2% | 57.0 | % | $ | 1,432.3 | 40.7 | % | 37.0 | % | $ | 583.0 | ||||||||||||||||||||||
| Equal to 2% but less than 3% | 10.9 | 272.9 | 69.1 | 12.0 | 188.5 | |||||||||||||||||||||||||||
| Equal to 3% but less than 4% | 23.8 | 597.4 | 99.9 | 37.8 | 596.9 | |||||||||||||||||||||||||||
| Equal to 4% but less than 5% | 6.4 | 161.9 | 100.0 | 10.2 | 161.9 | |||||||||||||||||||||||||||
| 5% or higher | 1.9 | 46.6 | 100.0 | 3.0 | 46.6 | |||||||||||||||||||||||||||
| Total | 100.0 | % | $ | 2,511.1 | 62.8 | % | 100.0 | % | $ | 1,576.9 | ||||||||||||||||||||||
We will continue to be disciplined in executing strategies to mitigate the negative impact on profitability of a sustained low interest rate environment. However, the success of these strategies may be affected by the factors discussed in Part I - Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2022 and other factors in this Quarterly Report on Form 10-Q.
| Horace Mann Educators Corporation | 53 | First Quarter 2023 Form 10-Q | ||||||
Supplemental & Group Benefits
For the three months ended March 31, 2023, net income reflected the following factors:
•Improvement in benefit ratio due to frequency below prior year levels on employer-sponsored products
•Higher net investment income largely due to repositioning of the portfolio for the employer-sponsored business
•Increased level of operating expenses reflecting investment being made in the segment's infrastructure as well as higher allocation of corporate expenses
The following table provides certain information for Supplemental & Group Benefits for the periods indicated.
| ($ in millions) | Three Months Ended March 31, | 2023-2022 | ||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | % Change | ||||||||||||||||||||||||||||||||||||
| Supplemental & Group Benefits | ||||||||||||||||||||||||||||||||||||||
| Net premiums and contract charges earned | $ | 65.8 | $ | 69.8 | -5.7 | % | ||||||||||||||||||||||||||||||||
| Net investment income | 9.1 | 7.1 | 28.2 | % | ||||||||||||||||||||||||||||||||||
| Other income | (3.7) | 1.6 | N.M. | |||||||||||||||||||||||||||||||||||
| Benefits, settlement expenses and change in reserves | 21.1 | 32.5 | -35.1 | % | ||||||||||||||||||||||||||||||||||
| Interest credited | 0.8 | 0.1 | N.M. | |||||||||||||||||||||||||||||||||||
| Operating expenses (includes DAC amortization expense) | 27.9 | 25.3 | 10.3 | % | ||||||||||||||||||||||||||||||||||
| Intangible asset amortization expense | 3.6 | 3.9 | -7.7 | % | ||||||||||||||||||||||||||||||||||
| Income before income taxes | 17.8 | 16.7 | 6.6 | % | ||||||||||||||||||||||||||||||||||
| Net income | 14.0 | 13.2 | 6.1 | % | ||||||||||||||||||||||||||||||||||
| Core earnings* | 14.0 | 13.2 | 6.1 | % | ||||||||||||||||||||||||||||||||||
Benefit ratio(1) | 33.3 | % | 46.7 | % | -13.4 | pts | ||||||||||||||||||||||||||||||||
Operating expense ratio(2) | 39.2 | % | 32.2 | % | 7.0 | pts | ||||||||||||||||||||||||||||||||
Pretax profit margin(3) | 24.9 | % | 21.4 | % | 3.5 | pts | ||||||||||||||||||||||||||||||||
| Worksite direct products benefit ratio | 22.1 | % | 22.2 | % | -0.1 | pts | ||||||||||||||||||||||||||||||||
| Worksite direct premium persistency (rolling 12 months) | 90.6 | % | 92.1 | % | -1.5 | pts | ||||||||||||||||||||||||||||||||
| Employer-sponsored products benefit ratio | 42.6 | % | 66.1 | % | -23.5 | pts | ||||||||||||||||||||||||||||||||
(1) Ratio of benefits to net premiums earned.
(2) Ratio of operating expenses to total revenues.
(3) Ratio of income before income taxes to total revenues.
For the three months ended March 31, 2023, total sales* were $8.2 million. Sales of worksite direct products* were $3.7 million for three months ended March 31, 2023, representing an increase of 164.3%. Worksite direct premium persistency (rolling 12 months), while down slightly, remains strong at 90.6%. Sales of employer-sponsored products* were $4.5 million for the three months ended March 31, 2023, representing an increase of 95.7%.
| Horace Mann Educators Corporation | 54 | First Quarter 2023 Form 10-Q | ||||||
Corporate & Other
The following table provides certain financial information for Corporate & Other for the periods indicated.
| ($ in millions) | Three Months Ended March 31, | 2023-2022 | ||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | % Change | ||||||||||||||||||||||||||||||||||||
| Interest expense | $ | (6.7) | $ | (3.9) | -71.8 | % | ||||||||||||||||||||||||||||||||
| Net investment losses, pretax | (3.9) | (15.5) | N.M. | |||||||||||||||||||||||||||||||||||
| Other operating expenses, net investment income and other income | (1.7) | (2.0) | 15.0 | % | ||||||||||||||||||||||||||||||||||
| Net investment losses, after tax | (3.1) | (12.2) | N.M. | |||||||||||||||||||||||||||||||||||
| Net loss | (9.8) | (17.0) | 42.4 | % | ||||||||||||||||||||||||||||||||||
| Core loss* | (6.7) | (4.8) | -39.6 | % | ||||||||||||||||||||||||||||||||||
For the three months ended March 31, 2023, the net loss decreased $7.2 million due to lower net investment losses partially offset by an increase in interest expense on the Revolving Credit Facility.
Investment Results
Our investment strategy is primarily focused on generating income to support product liabilities, and balances principal protection and risk. Total net investment income includes net investment income from our managed investment portfolio as well as accreted investment income from the deposit asset on reinsurance related to our reinsured block of approximately $2.4 billion of fixed annuity liabilities related to legacy individual policies written in 2002 or earlier.
| ($ in millions) | Three Months Ended March 31, | 2023-2022 | ||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | % Change | ||||||||||||||||||||||||||||||||||||
| Net investment income - managed investment portfolio | $ | 74.7 | $ | 73.0 | 2.3 | % | ||||||||||||||||||||||||||||||||
| Investment income - deposit asset on reinsurance | 25.7 | 24.9 | 3.2 | % | ||||||||||||||||||||||||||||||||||
| Total net investment income | 100.4 | 97.9 | 2.6 | % | ||||||||||||||||||||||||||||||||||
| Pretax net investment losses | (3.9) | (15.5) | N.M. | |||||||||||||||||||||||||||||||||||
| Pretax net unrealized investment gains (losses) on fixed maturity securities | (453.3) | 16.7 | N.M | |||||||||||||||||||||||||||||||||||
For the three months ended March 31, 2023, net investment income from our managed investment portfolio increased $1.7 million, primarily due to a higher contribution from floating rate fixed maturity securities including commercial mortgage loan funds.
For the three months ended March 31, 2023, pretax net investment losses decreased $ 11.6 million, primarily due to a reduction in losses from changes in fair values of equity securities and impairments compared to the prior year period. Pretax net unrealized investment losses on fixed maturity securities as of March 31, 2023 were down $118.6 million, or 20.7%, compared to December 31, 2022, reflecting a 40 basis point decrease in the 10-year U.S. Treasury yield, which more than offset slightly wider credit spreads in investment grade.
| Horace Mann Educators Corporation | 55 | First Quarter 2023 Form 10-Q | ||||||
Fixed Maturity and Equity Securities Portfolios
The table below presents our fixed maturity and equity securities portfolios by major asset class, including the 10 largest sectors of our corporate bond holdings (based on fair value).
| ($ in millions) | March 31, 2023 | |||||||||||||||||||||||||
| Number of Issuers | Fair Value | Amortized Cost, net | Pretax Net Unrealized Loss | |||||||||||||||||||||||
| Fixed maturity securities | ||||||||||||||||||||||||||
| Corporate bonds | ||||||||||||||||||||||||||
| Banking & Finance | 169 | $ | 471.8 | $ | 523.0 | $ | (51.2) | |||||||||||||||||||
| Misc. | 36 | 184.1 | 185.3 | (1.2) | ||||||||||||||||||||||
| Insurance | 57 | 157.3 | 170.2 | (12.9) | ||||||||||||||||||||||
| Energy | 86 | 144.3 | 158.4 | (14.1) | ||||||||||||||||||||||
| HealthCare, Pharmacy | 73 | 116.6 | 137.5 | (20.9) | ||||||||||||||||||||||
| Utilities | 78 | 114.9 | 132.5 | (17.6) | ||||||||||||||||||||||
| Real Estate | 42 | 97.9 | 107.6 | (9.7) | ||||||||||||||||||||||
| Transportation | 47 | 86.5 | 95.6 | (9.1) | ||||||||||||||||||||||
| Consumer Products | 54 | 69.5 | 83.6 | (14.1) | ||||||||||||||||||||||
| Natural Gas | 15 | 52.9 | 59.1 | (6.2) | ||||||||||||||||||||||
All other corporates(1) | 295 | 447.8 | 502.5 | (54.7) | ||||||||||||||||||||||
| Total corporate bonds | 952 | 1,943.6 | 2,155.3 | (211.7) | ||||||||||||||||||||||
| Mortgage-backed securities | ||||||||||||||||||||||||||
| U.S. Government and federally sponsored agencies | 239 | 375.0 | 412.5 | (37.5) | ||||||||||||||||||||||
Commercial(2) | 164 | 302.9 | 327.9 | (25.0) | ||||||||||||||||||||||
| Other | 29 | 14.0 | 15.1 | (1.1) | ||||||||||||||||||||||
Municipal bonds(3) | 605 | 1,290.9 | 1,363.0 | (72.1) | ||||||||||||||||||||||
| Government bonds | ||||||||||||||||||||||||||
| U.S. | 44 | 367.4 | 428.2 | (60.8) | ||||||||||||||||||||||
| Foreign | 5 | 32.6 | 34.2 | (1.6) | ||||||||||||||||||||||
Collateralized loan obligations(4) | 252 | 741.2 | 764.5 | (23.3) | ||||||||||||||||||||||
| Asset-backed securities | 128 | 282.4 | 302.6 | (20.2) | ||||||||||||||||||||||
| Total fixed maturity securities | 2,418 | $ | 5,350.0 | $ | 5,803.3 | $ | (453.3) | |||||||||||||||||||
| Equity securities | ||||||||||||||||||||||||||
| Non-redeemable preferred stocks | 26 | $ | 80.4 | |||||||||||||||||||||||
| Common stocks | 6 | 1.0 | ||||||||||||||||||||||||
| Closed-end fund | 1 | 17.4 | ||||||||||||||||||||||||
| Total equity securities | 33 | $ | 98.8 | |||||||||||||||||||||||
| Total | 2,451 | $ | 5,448.8 | |||||||||||||||||||||||
(1)The All other corporates category contains 18 additional industry sectors. Food and beverage, technology, telecommunications, broadcasting and media and leisure entertainment represented $230.6 million of fair value at March 31, 2023, with the remaining 13 sectors each representing less than $217.2 million.
(2)At March 31, 2023, 100% were investment grade, with an overall credit rating of AA+, and the positions were well diversified by property type, geography and sponsor.
(3)Holdings are geographically diversified, 44.6% are tax-exempt and 77.6% are revenue bonds tied to essential services, such as mass transit, water and sewer. The overall credit quality of the municipal bond portfolio was AA- at March 31, 2023.
(4)Based on fair value, 93.3% of the collateralized loan obligation securities were rated investment grade based on ratings assigned by a nationally recognized statistical ratings organization (NRSRO - S&P, Moody's, Fitch, Dominion, A.M. Best, Morningstar, Egan Jones and Kroll).
As of March 31, 2023, our diversified fixed maturity securities portfolio consisted of 3,722 investment positions, issued by 2,418 entities, and totaled approximately $5.4 billion in fair value. This portfolio was 92.4% investment grade, based on fair value, with an average quality rating of A+. Our investment guidelines target single corporate issuer concentrations to 0.5% of invested assets for AAA or AA rated securities, 0.35% of invested assets for A or BBB rated securities, and $5.0 million for non-investment grade securities.
| Horace Mann Educators Corporation | 56 | First Quarter 2023 Form 10-Q | ||||||
Rating of Fixed Maturity Securities and Equity Securities(1)
The following table presents the composition and fair value of our fixed maturity and equity securities portfolios by rating category. As of March 31, 2023, 91.9% of these combined portfolios were investment grade, based on fair value, with an overall average quality rating of A+. We have classified the entire fixed maturity securities portfolio as available for sale, which is carried at fair value.
| ($ in millions) | Percent of Portfolio Fair Value | March 31, 2023 | ||||||||||||||||||||||||
| December 31, 2022 | March 31, 2023 | Fair Value | Amortized Cost, net | |||||||||||||||||||||||
| Fixed maturity securities | ||||||||||||||||||||||||||
| AAA | 10.8 | % | 11.3 | % | $ | 605.2 | $ | 634.4 | ||||||||||||||||||
AA(2) | 39.3 | 39.1 | 2,093.6 | 2,303.7 | ||||||||||||||||||||||
| A | 17.8 | 18.2 | 975.3 | 1,038.1 | ||||||||||||||||||||||
| BBB | 24.1 | 23.6 | 1,266.6 | 1,393.2 | ||||||||||||||||||||||
| BB | 1.8 | 1.8 | 95.1 | 104.3 | ||||||||||||||||||||||
| B | 0.9 | 0.9 | 47.8 | 52.0 | ||||||||||||||||||||||
| CCC or lower | — | — | 1.1 | 1.7 | ||||||||||||||||||||||
Not rated(3) | 5.3 | 5.1 | 265.3 | 275.9 | ||||||||||||||||||||||
| Total fixed maturity securities | 100.0 | % | 100.0 | % | $ | 5,350.0 | $ | 5,803.3 | ||||||||||||||||||
| Equity securities | ||||||||||||||||||||||||||
| AAA | — | % | — | % | ||||||||||||||||||||||
| AA | — | — | — | |||||||||||||||||||||||
| A | — | — | — | |||||||||||||||||||||||
| BBB | 68.7 | 65.4 | 64.6 | |||||||||||||||||||||||
| BB | 10.8 | 10.9 | 10.8 | |||||||||||||||||||||||
| B | — | — | — | |||||||||||||||||||||||
| CCC or lower | — | 2.1 | 2.1 | |||||||||||||||||||||||
| Not rated | 20.5 | 21.6 | 21.3 | |||||||||||||||||||||||
| Total equity securities | 100.0 | % | 100.0 | % | $ | 98.8 | ||||||||||||||||||||
| Total | $ | 5,448.8 | ||||||||||||||||||||||||
(1)Ratings are assigned by an NRSRO when available, If no rating is available from an NRSRO, then an internally developed rating is used. Ratings for publicly traded securities are determined when the securities are acquired and are updated monthly to reflect any changes in ratings.
(2)At March 31, 2023, the AA rated fair value amount included $364.8 million of U.S. Government and federally sponsored agency securities and $574.5 million of mortgage-backed and other asset-backed securities issued by U.S. Government and federally sponsored agencies.
(3)This category primarily represents private placement and municipal securities not rated by a NRSRO.
As of March 31, 2023, the fixed maturity securities portfolio had $502.9 million of pretax gross unrealized investment losses on $4,185.9 million of fair value related to 2,921 positions. Of the investment positions with gross unrealized losses, there were 416 trading below 80.0% of the carrying value as of March 31, 2023. See Part II - Item 8, Note 2 of the Consolidated Financial Statements in this Quarterly Report on Form 10-Q for more information
There was a significant increase in interest rates throughout 2022, driven mostly by increases in U.S. Treasury rates, though credit spreads also widened. As of March 31, 2023, the 10-year U.S. Treasury yield increased 196 basis points since January 1, 2022, rising from 1.51% as of January 1, 2022 to 3.47% as of March 31, 2023. Additionally, credit spreads widened during the same time period, with investment grade and high yield wider by 46 and 172 basis points, respectively. These upward movements in rates caused market yields in our investment portfolios to rise sharply, with downward pressure on prices. As of March 31, 2023, investment grade and high yield total returns were down 12.8% and 8.0%, respectively, since January 1, 2022. As of March 31, 2023, the Bloomberg Barclays Index Yield-to-Worst for Investment Grade rose 2.84% since January 1, 2022, ending at 5.2%, while the High Yield Index rose 4.31% to 8.5% since January 1, 2022. Our investment portfolios have generated sizable unrealized investment losses as a result of sharp increases in interest rates.
We view the pretax gross unrealized investment losses of all our fixed maturity securities as of March 31, 2023 as temporary. Future changes in circumstances related to these and other securities could require subsequent recognition of impairment.
| Horace Mann Educators Corporation | 57 | First Quarter 2023 Form 10-Q | ||||||
Liquidity and FinancialCapital Resources
year ended December 31, 2022.
Investments
Information regarding the Company’sour investment portfolio, which is comprised primarily of investment grade fixed maturity securities, is locatedpresented in “ResultsPart I - Item 1, Note 2 of Operations -- Net Realized Investment Gains and Losses (Pretax)” and in the “Notes to Consolidated Financial Statements -- Noteas well as Part I - Item 2 -- Investments”.
- Investment Results in this Quarterly Report on Form 10-Q.
Cash Flow
| ($ in millions) | Three Months Ended March 31, | 2023-2022 | ||||||||||||||||||
| 2023 | 2022 | % Change | ||||||||||||||||||
| Net cash provided by operating activities | $ | 86.4 | $ | 95.7 | -9.7 | % | ||||||||||||||
| Net cash used in investing activities | (95.3) | (217.7) | 56.2 | % | ||||||||||||||||
| Net cash provided by (used in) financing activities | (6.5) | 37.4 | -117.4 | % | ||||||||||||||||
| Net decrease in cash | (15.4) | (84.6) | 81.8 | % | ||||||||||||||||
| Cash at beginning of period | 42.8 | 133.7 | -68.0 | % | ||||||||||||||||
| Cash at end of period | $ | 27.4 | $ | 49.1 | -44.2 | % | ||||||||||||||
Operating Activities
As a holding company, HMEC conducts itswe conduct our principal operations in the personal lines segment of the property and casualty, life, retirement, supplemental and lifegroup insurance industries through itsour subsidiaries. HMEC’sOur 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 theour insurance subsidiaries.
For the nine month periodthree months ended September 30, 2017,March 31, 2023, net cash provided by operating activities increased compared to the same period in 2016, largelydecreased $9.3 million, primarily due to an increasehigher claims paid on insurance policies.
Investing Activities
Net cash used in Premiums collectedinvesting activities for the three months ended March 31, 2023 and Investment income collected in2022 was $(95.3) million and $(217.7) million, respectively. Prior year investing activities included the current period.acquisition of Madison National.
| Horace Mann Educators Corporation | 58 | First Quarter 2023 Form 10-Q | ||||||
proceeds received from FHLB funding advances, issuance of debt, our reverse repurchase agreement program, and by the amount of cash which is at times held in othershort-term investments with different interest rates, maturities to facilitate the availability of cash to fund the purchase of appropriate long-term investments, repay maturing debt, and/or credit characteristics. Accordingly, the Company has classified the entire fixed maturity and equity securities portfolios as available for sale.
to respond to catastrophes.
Financing Activities
Financing activities include primarily payment of dividends, the receipt and withdrawal of funds by annuity contractholders, issuances andchanges in the deposit asset on reinsurance, repurchases of HMEC’sour common stock, fluctuations in bankbook overdraft balances, and borrowings, repayments and repurchases related to its debt facilities.
The following table shows activity from FHLB funding agreements for the periods indicated.
| ($ in millions) | Three Months Ended March 31, | 2023-2022 | 2023-2022 | |||||||||||||||||||||||
| 2023 | 2022 | $ Change | % Change | |||||||||||||||||||||||
| Balance at beginning of the period | $ | 792.5 | $ | 782.5 | $ | 10.0 | 1.3 | % | ||||||||||||||||||
| Advances received from FHLB funding agreements | 162.0 | 60.0 | 102.0 | N.M. | ||||||||||||||||||||||
| Principal repayments on FHLB funding agreements | (85.0) | — | (85.0) | N.M. | ||||||||||||||||||||||
| Balance at end of the period | $ | 869.5 | $ | 842.5 | $ | 27.0 | 3.2 | % | ||||||||||||||||||
| Horace Mann Educators Corporation | 59 | First Quarter 2023 Form 10-Q | ||||||
Liquidity Sources and Uses
Our potential sources and uses of funds principally include the following activities:
| Property & Casualty | Life & Retirement | Supplemental & Group Benefits | Corporate & Other | |||||||||||||||||||||||
| Activities for potential sources of funds | ||||||||||||||||||||||||||
| Receipt of insurance premiums, contractholder charges and fees | ☑ | ☑ | ☑ | |||||||||||||||||||||||
| Recurring service fees, commissions and overrides | ☑ | ☑ | ☑ | ☑ | ||||||||||||||||||||||
| Contractholder fund deposits | ☑ | ☑ | ||||||||||||||||||||||||
| Reinsurance and indemnification program recoveries | ☑ | ☑ | ☑ | |||||||||||||||||||||||
| Receipts of principal, interest and dividends on investments | ☑ | ☑ | ☑ | ☑ | ||||||||||||||||||||||
| Proceeds from sales of investments | ☑ | ☑ | ☑ | ☑ | ||||||||||||||||||||||
| Proceeds from FHLB borrowing and funding agreements | ☑ | ☑ | ☑ | |||||||||||||||||||||||
| Proceeds from reverse repurchase agreements | ☑ | ☑ | ☑ | |||||||||||||||||||||||
| Intercompany loans | ☑ | ☑ | ☑ | ☑ | ||||||||||||||||||||||
| Capital contributions from parent | ☑ | ☑ | ☑ | |||||||||||||||||||||||
| Dividends or return of capital from subsidiaries | ☑ | |||||||||||||||||||||||||
| Tax refunds/settlements | ☑ | ☑ | ☑ | ☑ | ||||||||||||||||||||||
| Proceeds from periodic issuance of additional securities | ☑ | |||||||||||||||||||||||||
| Proceeds from debt issuances | ☑ | |||||||||||||||||||||||||
| Proceeds from revolving credit facility | ☑ | |||||||||||||||||||||||||
| Receipt of intercompany settlements related to employee benefit plans | ☑ | |||||||||||||||||||||||||
| Activities for potential uses of funds | ||||||||||||||||||||||||||
| Payment of claims and related expenses | ☑ | ☑ | ☑ | |||||||||||||||||||||||
| Payment of contract benefits, surrenders and withdrawals | ☑ | ☑ | ||||||||||||||||||||||||
| Reinsurance cessions and indemnification program payments | ☑ | ☑ | ☑ | |||||||||||||||||||||||
| Payment of operating costs and expenses | ☑ | ☑ | ☑ | ☑ | ||||||||||||||||||||||
| Payments to purchase investments | ☑ | ☑ | ☑ | ☑ | ||||||||||||||||||||||
| Repayment of FHLB borrowing and funding agreements | ☑ | ☑ | ☑ | |||||||||||||||||||||||
| Repayment of reverse repurchase agreements | ☑ | ☑ | ☑ | |||||||||||||||||||||||
| Payment or repayment of intercompany loans | ☑ | ☑ | ☑ | ☑ | ||||||||||||||||||||||
| Capital contributions to subsidiaries | ☑ | |||||||||||||||||||||||||
| Dividends or return of capital to shareholders/parent company | ☑ | ☑ | ☑ | ☑ | ||||||||||||||||||||||
| Tax payments/settlements | ☑ | ☑ | ☑ | ☑ | ||||||||||||||||||||||
| Common share repurchases | ☑ | |||||||||||||||||||||||||
| Debt service expenses and repayments | ☑ | |||||||||||||||||||||||||
| Repayment on revolving credit facility | ☑ | |||||||||||||||||||||||||
| Payments related to employee benefit plans | ☑ | |||||||||||||||||||||||||
| Payments for business acquisitions | ☑ | |||||||||||||||||||||||||
We actively manage our financial position and liquidity levels in light of changing market, economic and business conditions. Liquidity is managed at both the entity and enterprise level across HMEC and is assessed on both base and stressed level liquidity needs. We believe we have sufficient liquidity to meet these needs. Additionally, we have existing intercompany agreements in place that facilitate liquidity management across HMEC to enhance flexibility.
| Horace Mann Educators Corporation | 60 | First Quarter 2023 Form 10-Q | ||||||
As of March 31, 2023, we held $966.2 million of cash, U.S. government and agency fixed maturity securities and public equity securities (excluding non-redeemable preferred stocks and foreign equity securities) which, under normal market conditions, could be rapidly liquidated.
Certain remote events and circumstances could constrain our liquidity. Those events and circumstances include, for example, a catastrophe resulting in extraordinary losses, a downgrade of our Senior Notes rating to non-investment grade status or 22.7%, compared toa downgrade in our insurance subsidiaries' financial strength ratings. The rating agencies also consider the prior year period. Duringinterdependence of our individually rated entities; therefore, a rating change in one entity could potentially affect the nine month period ended September 30, 2017, financing activities included an increaseratings of $77.9 million attributable to fixed account withdrawals due to the transfer of all the Company's 401(k) assets to a third-party provider.
Capital Resources
The insurance subsidiaries are subject to various regulatory restrictions that limit the Company’samount of annual dividends or other distributions, including loans or cash advances, available to us without prior approval of the insurance regulatory authorities. The aggregate amount of dividends that may be paid in 2023 from all of our insurance subsidiaries without prior regulatory approval is $110.3 million, excluding the impact and timing of prior dividends, of which $19.0 million was paid during the three months ended March 31, 2023. We anticipate that our sources of capital will continue to generate sufficient capital to meet the needs for business growth, debt interest payments, shareholder dividends and itsour share repurchase program.programs. Additional information is contained in “Notes toPart II - Item 8, Note 14 of the Consolidated Financial Statements -- Note 10 -- Statutory Information and Restrictions” of the Company’sin our Annual Report on Form 10-K for the year ended December 31, 2016.2022.
Shareholders' equity was $1,139.2 million as of March 31, 2023, including net unrealized investment gains and losses) at September 30, 2017, which was below the Company’s long-term targetlosses on fixed maturity securities of 25%.
$27.87 and $36.16, respectively, as of March 31, 2023.
Additional information regarding the net unrealized investment gain in the Company’s investment portfolio at September 30, 2017gains (losses) on fixed maturity securities as of March 31, 2023 is included in “ResultsPart I - Item 1, Note 2 of Operations -- Net Realizedthe Consolidated Financial Statements as well as in Part I - Item 2 - Investment Gains and Losses (Pretax)”.
Results in this Quarterly Report on Form 10-Q.
Total shareholder dividends were $34.6paid to shareholders was $13.5 million for the nine month periodthree months ended September 30, 2017.March 31, 2023. In March May and September 2017,of 2023, the Board of Directors announced(Board) approved regular quarterly dividends of $0.275$0.33 per share.
For the nine month periodthree months ended September 30, 2017, the CompanyMarch 31, 2023, we repurchased 48,440128,540 shares of itsour common stock or 0.1% of the outstanding shares at December 31, 2016, at an aggregate cost of $1.7 million, or an average price per share of $34.26$34.01 under itsour share repurchase program, which is further described in “Notes toprogram. See Part II - Item 8, Note 13 of the Consolidated Financial Statements -- Note 9 -- Shareholders’ Equity and Common Stock Equivalents” of the Company’sin our Annual Report on Form 10-K for the year ended December 31, 2016.2022 for more information. As of September 30, 2017, $27.8March 31, 2023, $36.9 million remained authorized for future share repurchases under the share repurchase program.
| Horace Mann Educators Corporation | 61 | First Quarter 2023 Form 10-Q | ||||||
The following table summarizes our debt obligations.
| ($ in millions) | Interest Rates | Final Maturity | March 31, 2023 | December 31, 2022 | ||||||||||||||||||||||
| Short-term debt | ||||||||||||||||||||||||||
| Revolving Credit Facility | Variable | 2026 | $ | 249.0 | $ | 249.0 | ||||||||||||||||||||
Long-term debt(1) | ||||||||||||||||||||||||||
4.50% Senior Notes, Aggregate principal amount of $250.0 less unaccrued discount of $0.2 and $0.3 and unamortized debt issuance costs of $0.8 and $1.1 | 4.50% | 2025 | 249.0 | 248.6 | ||||||||||||||||||||||
| Total | $ | 498.0 | $ | 497.6 | ||||||||||||||||||||||
(1) We designate debt obligations as "long-term" based on maturity date at issuance.
As of September 30, 2017, the CompanyMarch 31, 2023, we had outstanding $250.0 million aggregate principal amount of 4.50% Senior Notes (“Senior Notes due 2025”)(Senior Notes), which will mature on December 1, 2025, issued at a discount resulting in an effective yield of 4.53%. Interest on the Senior Notes due 2025 is payable semi-annually at a rate of 4.50%. Detailed information regarding the redemption terms of the Senior Notes due 2025 is contained in the “Notes toPart II - Item 8, Note 10 of the Consolidated Financial Statements -- Note 7 -- Debt” of the Company’sin our Annual Report on Form 10-K for the year ended December 31, 2016.2022. The Senior Notes due 2025 are traded in the open market (HMN 4.50).
As of September 30, 2017, the CompanyMarch 31, 2023, we had no balanceborrowings outstanding under its Bankwith 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 Facility.Agreement (Revolving Credit Facility). The Bankamended Revolving Credit Facility provides for unsecured borrowingsincreased the amount available on the senior revolving credit facility from $225.0 million to $325.0 million. PNC Bank, National Association and JPMorgan Chase Bank, N.A. serve as joint lead arrangers under the amended Revolving Credit Facility, with The Northern Trust Company, KeyBank National Association, U.S. Bank National Association, Illinois National Bank, and Comerica Bank as lenders participating in the syndicate. Terms and conditions of up to $150.0 million andthe amended Revolving Credit Facility are substantially consistent with the prior agreement, with an interest rate based on LIBOR plus 115 basis points. The amended Revolving Credit Facility expires on July 30, 2019. Interest accrues at varying spreads relative12, 2026.
On December 31, 2021, we utilized $114.0 million of the Revolving Credit Facility to prime or Eurodollar base ratesfund a portion of the acquisition of Madison National Life Insurance Company, Inc. that occurred effective January 1, 2022, resulting in a remaining capacity of $76.0 million. We expect that the unused portion of the Revolving Credit Facility will be available for ongoing working capital, capital expenditures and is payable monthly or quarterly depending on the applicable base rate.general corporate expenditures. The unused portion of the BankRevolving Credit Facility is subject to a variable commitment fee, which was 0.15% on an annual basis at September 30, 2017.
To provide additional capital management flexibility, the Companywe filed a “universal shelf”"universal shelf" registration statement on Form S-3 with the Securities and Exchange Commission (SEC) on March 12, 2015.10, 2021. The registration statement, which registered the offer and sale by the Company 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 12, 2015.10, 2021. Unless withdrawn by the Companyus earlier, this registration statement will remain effective through March 12, 2018. The Senior Notes due 2025, described above, were issued utilizing this registration statement.10, 2024. No other securities associated with the registration statement have been issued asat the time of the dateissuance of this Quarterly Report on Form 10-Q.
On March 13, 2018, we filed a "shelf" registration statement on Form S-4 with the SEC which became effective on May 2, 2018. Under this registration statement, we may from time to time offer and issue up to 5,000,000 shares of our common stock in connection with future acquisitions of other businesses, assets or securities. Unless withdrawn by us, this registration statement will remain effective indefinitely. No securities associated with the registration statement have been issued at the time of issuance of this Quarterly Report on Form 10-Q.
| Horace Mann Educators Corporation | 62 | First Quarter 2023 Form 10-Q | ||||||
Financial Ratings
All four agencies currently have assigned the same insurance financial strength ratings to our Property & Casualty and Life insurance subsidiaries. Only A.M. Best currently rates our Supplemental & Group Benefits subsidiaries. A.M. Best currently rates our NTA Life subsidiary at the same level as our Property & Casualty and Life & Retirement subsidiaries and our Madison National subsidiary is rated A- (Excellent). Assigned ratings and respective affirmation/review dates as of October 31, 2017April 30, 2023 were unchanged fromas follows:
| Insurance Financial | Affirmed/ | |||||||||||||||||||||||||||||||
| Strength Ratings (Outlook) | Debt Ratings (Outlook) | Reviewed | ||||||||||||||||||||||||||||||
| A.M. Best | ||||||||||||||||||||||||||||||||
| HMEC (parent company) | N.A. | bbb | (stable) | 7/28/2022 | ||||||||||||||||||||||||||||
| HMEC's Life & Retirement subsidiaries | A | (stable) | N.A. | 7/28/2022 | ||||||||||||||||||||||||||||
| HMEC's Property & Casualty subsidiaries | A | (stable) | N.A. | 7/28/2022 | ||||||||||||||||||||||||||||
HMEC's Supplemental & Group Benefits subsidiaries | ||||||||||||||||||||||||||||||||
| Madison National Life Insurance Company | A- | (stable) | N.A. | 7/28/2022 | ||||||||||||||||||||||||||||
National Teachers Associates Life Insurance Company | A | (stable) | N.A. | 7/28/2022 | ||||||||||||||||||||||||||||
| Fitch | A | (stable) | BBB | (stable) | 10/18/2022 | |||||||||||||||||||||||||||
| Moody's | ||||||||||||||||||||||||||||||||
| HMEC (parent company) | Baa2 | (negative) | 3/1/2023 | |||||||||||||||||||||||||||||
| HMEC's Life Group | A2 | (negative) | 3/1/2023 | |||||||||||||||||||||||||||||
| HMEC's P&C Group | A2 | (negative) | 3/1/2023 | |||||||||||||||||||||||||||||
| S&P | A | (stable) | BBB | (stable) | 2/7/2023 | |||||||||||||||||||||||||||
Reinsurance Programs
Information regarding the disclosurereinsurance programs for our Property & Casualty, Life & Retirement and Supplemental & Group Benefits segments is located in the Company’sPart I - Item 1, Reporting Segments in our Annual Report on Form 10-K for the year ended December 31, 2016. Assigned ratings were as follows (unless otherwise indicated, the insurance financial strength ratings for the Company’s Property2022.
ITEM 3.IQuantitative and Casualty insurance subsidiaries and the Company’s principal Life insurance subsidiary are the same):
Qualitative Disclosures about Market Value Risk
Market value risk, the Company’sour primary market risk exposure, is the risk that the Company’sour invested assets will decrease in value. This decrease in value may be due to (1) a change in the yields realized on the Company’sour assets and prevailing market yields for similar assets, (2) an unfavorable change in the liquidity of thean investment, (3) an unfavorable change in the financial prospects of the issuer of thean investment, or (4) a downgrade in the credit rating of the issuer of thean investment. See also “ResultsAlso see Consolidated Results of Operations -- Net Realized Investment Gains and Losses (Pretax)”.in Part I - Item 2 of this Quarterly Report on Form 10-Q regarding net investment losses.
| Horace Mann Educators Corporation | 63 | First Quarter 2023 Form 10-Q | ||||||
Significant changes in interest rates expose the Companyus to the risk of experiencing losses or earning a reduced level of income based on the difference between the interest rates earned on the Company’sour investments and the credited interest rates on the Company’sour insurance and investment contract liabilities. See also “ResultsAlso see Consolidated Results of Operations -- Interest Creditedin Part I - Item 2 of this Quarterly Report on Form 10-Q regarding interest credited to Policyholders”.policyholders.
More detailed descriptions of the Company’sour exposure to market value risks and the management of those risks is presentedcontained in “Management’s Discussion and AnalysisPart II - Item 7A of Financial Condition and Results of Operations -- Market Value Risk” of the Company’sour Annual Report on Form 10-K for the year ended December 31, 2016.2022.
Under the supervision and with the participation of the Company’sour management, including the Company’s Chief Executive Officerour chief executive officer and Chief Financial Officer, the Companychief financial officer, we conducted an evaluation of the effectiveness of the design and operation of the Company’sour disclosure controls and procedures, as such term is defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 as amended (the “Exchange Act”)(Exchange Act), as of September 30, 2017 pursuant to Rule 13a-15(b) of the Exchange Act.March 31, 2023. Based on this evaluation, the Chief Executive Officerchief executive officer and Chief Financial Officerchief financial officer concluded that the Company’sour disclosure controls and procedures are effective in timely alerting them to material information relating to the Companyus (including itsour consolidated subsidiaries) that is required to be included in the Company’sour periodic Securities and Exchange CommissionSEC filings. No material weaknesses in the Company’sour disclosure controls and procedures were identified in the evaluation and therefore, no corrective actions were taken. There were no significant changes in the Company’sour 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
Changes were made to relevant business processes and the related control activities over accounting and reporting for long-duration insurance contracts.
PART II: OTHER INFORMATION
At the time of issuance of this Quarterly Report on Form 10-Q, management believeswe believe there are no material changes from the risk factors as previously disclosed in the Company’sPart I - Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016. The following risk factor is updated to reflect recent developments; however, in general the described risks are comparable to those previously disclosed.2022.
Issuer Purchases of Equity Securities
On December 7, 2011, the Company’sMay 25, 2022, our Board of Directors (the “Board”) authorized a share repurchase program allowing repurchases of up to $50.0$50 million of Horace Mann Educators Corporation’s Common Stock, par value $0.001 (the “2011 Plan”). On September 30, 2015, the Board authorized an additional share repurchase program allowing repurchases of up to $50.0 million to begin following the completion of the 2011 Plan and utilization of that authorization began in January 2016. Both share repurchase programs authorize the repurchase ofour common shares in open market or privately negotiated transactions, from time to time, depending on market conditions.conditions (Program). The current share repurchase programProgram does not have an expiration date and may be limited or terminated at any time without notice. During the three month periodmonths ended September 30, 2017, the CompanyMarch 31, 2023, we repurchased shares of HMEC common stockunder the Program as follows:
| Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased under the Program | Approximate Dollar Value of Shares that may yet be Purchased under the Program | ||||||||||||||||||||||
| January 1 - 31 | 54,400 | $ | 33.86 | 54,400 | $ | 39.5 | million | |||||||||||||||||||
| February 1 - 28 | 22,121 | 35.27 | 22,121 | $ | 38.7 | million | ||||||||||||||||||||
| March 1 - 31 | 52,019 | 33.64 | 52,019 | $ | 36.9 | million | ||||||||||||||||||||
| Total | 128,540 | $ | 34.01 | 128,540 | $ | 36.9 | million | |||||||||||||||||||
| Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number (or Approximate Dollar Value) of Shares That May Yet Be Purchased Under The Plans or Programs | ||||||||
| July 1 - 31 | — | — | — | $29.5 million | ||||||||
| August 1 - 31 | — | — | — | $29.5 million | ||||||||
| September 1 - 30 | 48,440 | $ | 34.26 | 48,440 | $27.8 million | |||||||
| Total | 48,440 | $ | 34.26 | 48,440 | $27.8 million | |||||||
Not applicable.
The following items are filed as Exhibits. Management contracts and compensatory plans are indicated by an asterisk (*).
| Exhibit | ||||||||
| No. | Description | |||||||
| (3) Articles of incorporation and bylaws: | ||||||||
| 3.1 | ||||||||
| 3.2 | ||||||||
| Horace Mann Educators Corporation | 65 | First Quarter 2023 Form 10-Q | ||||||
| (4) Instruments defining the rights of security holders, including indentures: | ||||||||
| 4.1 | ||||||||
| 4.1(a) | ||||||||
| 4.2 | ||||||||
| 4.3 | ||||||||
| (10) Material contracts: | ||||||||
| 10.1 | ||||||||
| 10.1(a) | ||||||||
| 10.2* | ||||||||
| 10.2(a)* | ||||||||
| 10.2(b)* | ||||||||
| 10.2(c)* | ||||||||
| 10.2(d)* | ||||||||
| Horace Mann Educators Corporation | 66 | First Quarter 2023 Form 10-Q | ||||||
| 10.2(e)* | ||||||||
| 10.3* | ||||||||
| 10.3(a)* | ||||||||
| 10.3(b)* | ||||||||
| 10.3(c)* | ||||||||
| 10.3(d)* | ||||||||
| 10.3(e)* | ||||||||
| 10.3(g)* | ||||||||
| 10.3(h)* | ||||||||
| 67 | First Quarter 2023 Form 10-Q | |||||||
| 10.5* | ||||||||
| 10.6* | ||||||||
| 10.7* | ||||||||
| 10.8* | ||||||||
| 10.9* | ||||||||
| 10.10(a)* | ||||||||
| 10.11* | ||||||||
| 10.11(a)* | ||||||||
| 10.11(b)* | ||||||||
| 10.12 | ||||||||
| 10.13 | ||||||||
| 10.14 | ||||||||
| (31) Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002: | ||||||||
| 68 | First Quarter 2023 Form 10-Q | |||||||
| 31.1 | ||||||||
| 31.2 | ||||||||
| (32) Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002: | ||||||||
| 32.1 | ||||||||
| 32.2 | ||||||||
| (99) Additional exhibits: | ||||||||
| 99.1 | ||||||||
| (101) Interactive Data File: | ||||||||
| 101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | |||||||
| 101.SCH | XBRL Taxonomy Extension Schema | |||||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase | |||||||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase | |||||||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase | |||||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase | |||||||
| Horace Mann Educators Corporation | 69 | First Quarter 2023 Form 10-Q | ||||||
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| HORACE MANN EDUCATORS CORPORATION | |||||||||||
| (Registrant) | |||||||||||
| Date | /s/ Marita Zuraitis | ||||||||||
| Marita Zuraitis | |||||||||||
| President and Chief Executive Officer | |||||||||||
| Date | /s/ Bret A. Conklin | ||||||||||
| Bret A. Conklin | |||||||||||
| Executive Vice President and | |||||||||||
| Chief Financial Officer | |||||||||||
| Date | /s/ Kimberly A. Johnson | ||||||||||
| Kimberly A. Johnson | |||||||||||
| Senior Vice President, Controller and | |||||||||||
| Principal Accounting Officer | |||||||||||
| Horace Mann Educators Corporation | 70 | First Quarter 2023 Form 10-Q | ||||||