We have reviewed the consolidated balance sheetssheet of Horace Mann Educators Corporation and subsidiaries (the Company) as of March 31, 2022,2023, the related consolidated statements of operations, comprehensive lossincome (loss), and changes in shareholders' equity for the three-month periods ended March 31, 2023 and 2022, and 2021, andthe related consolidated statements of cash flows for the three-month periods ended March 31, 20222023 and 2021,2022, and the related notes (collectively, the consolidated interim financial information). Based on our reviews, we are not aware of any material modifications that should be made to the consolidated interim financial information for it to be in conformity with U.S. generally accepted accounting principles.

This consolidated interim financial information is the responsibility of the Company’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our reviews in accordance with the standards of the PCAOB. A review of consolidated interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

 

All intercompany transactions and balances between HMEC and its subsidiaries and affiliates have been eliminated.

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the reporting date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

The most significant critical accounting estimates include valuation of hard-to-value fixed maturity securities, evaluation of credit loss impairments for fixed maturity securities, evaluation of goodwill and intangible assets for impairment, valuation of annuity and life deferred policy acquisition costs, valuation of liabilities for property and casualty unpaid claims and claim expenses,expense reserves, valuation of certain investment contractsliabilities for group benefits unpaid claims and claim expense reserves, valuation of future policy benefit reserves and policyholders' account balances and valuation of assets acquired and liabilities assumedlong-duration insurance contracts under purchasethe new accounting and purchase price allocation.guidance in ASU 2018-12.

In August 2018, the FASB issued targeted improvementsASU 2018-12, Financial Services – Insurance (Topic 944): Targeted Improvements to the accountingAccounting for Long-Duration Contracts, as clarified and amended by (i) ASU 2019-09, Financial Services - Insurance (Topic 944): Effective Date, and (ii) ASU 2020-11, Financial Services - Insurance (Topic 944): Effective Date and Early Application (collectively referred to herein as ASU 2018-12). ASU 2018-12 changed existing recognition, measurement, presentation, and disclosure guidancerequirements for long-duration insurance contracts. Under the new guidance, theASU 2018-12 includes: (1) a requirement to review and, if there is a change, update cash flow assumptions used to measure the liability for future policy benefits for traditional insurance contracts will be required to be updated(LFPB) at least annually, with changes recognized as a benefit expense (i.e., assumptions will no longer be locked-in).

The Company has not yet completedadopted ASU 2018-12 for LFPB and DAC on a modified retrospective basis such that those balances were adjusted to conform to ASU 2018-12 on January 1, 2021. The Company adopted ASU 2018-12 for MRBs on a full retrospective basis, using hindsight where necessary. For variable annuities, actuarial assumptions (mortality, lapse, and premium payment patterns) used to measure MRBs were unobservable for years prior to 2006 and thus, hindsight was used to determine relevant assumptions for transition purposes. The factors used in applying hindsight included internal experience studies, the processhistorical economic environment, actual performance of estimating the fair valuebusiness, and relevant industry information.

The following table summarizes the balance of Madison National assets acquired and changes in LFPB on January 1, 2021 due to adoption of ASU 2018-12. The impact of shifts between deferred profit liabilities assumed, including, but not limited to, intangible assets, policy reserves(DPL) and certain tax-related balances. Accordingly,LFPB for limited-payment products are presented as offsetting line items in the Company’s preliminary estimateseffect of net premiums exceeding gross premiums and the allocationeffect of decrease/increase of DPL.

LFPB, which is the present value of business acquired,estimated future policy benefits to be paid to or on behalf of policyholders and certain related expenses less the present value of customer relationshipsestimated future net premiums to be collected from policyholders, is accrued as premium revenue. The liability is estimated using current assumptions that include discount rate, mortality, lapses, and state licenses.expenses. These current assumptions are based on judgments that consider the Company's historical experience, industry data, and other factors.

For traditional, limited-payment and supplemental health contracts, such contracts are grouped into cohorts by contract type and issue year. The intangible assetsliability is adjusted for differences between actual and expected experience. With the exception of the expense assumption, the Company reviews its historical and future cash flow assumptions at least annually and updates the net premium ratio used to calculate the liability each time the assumptions are changed. The Company has elected to use expense assumptions that are amortizablelocked-in at contract inception and are not subsequently reviewed or updated. At least annually, the Company updates its estimate of cash flows expected over the entire life of a group of contracts using actual historical experience and current future cash flow assumptions. These updated cash flows are used to calculate the revised net premiums and net premium ratio, which are used to derive an updated LFPB as of the beginning of the current reporting period, discounted at the original contract issuance discount rate. This amount is then compared to the carrying amount of the liability as of that same date, before updating cash flow assumptions, to determine the current period change in liability estimate. This current period change in liability estimate is the liability remeasurement gain or loss. The impact of updated cash flow assumptions as well as the periodic liability remeasurement gain or loss is recognized as Benefits, claims and settlement expenses in the Consolidated Statements of Operations and Comprehensive Income (Loss). In subsequent periods, the revised net premiums are used to measure LFPB, subject to future revisions.

For traditional and limited-payment contracts, a standard discount rate is used to measure the liabilities that is equivalent to the yield from an A-rated bond. The discount rate assumption is updated quarterly and used to remeasure the liability at the reporting date, with the resulting change reflected in other comprehensive income. For liability cash flows that are projected beyond the duration of market-observable A- rated bond, the Company uses the last market-observable yield level, and uses linear interpolation to determine yield assumptions for durations that do not have estimated livesmarket-observable yields.

For limited-payment products, gross premiums received in excess of onenet premiums are deferred at initial recognition as a DPL. Gross premiums are measured using assumptions consistent with those used in the measurement of LFPB, including discount rate, mortality, lapses, and expenses.

DPL is amortized and recognized as premium revenue in proportion to ten years. See Note 5insurance in force for further information.life insurance contracts and expected future benefit payments for annuity contracts. Interest is accreted on the balance of DPL using the discount rate determined at contract issuance. The Company reviews and updates its estimates of cash flows for DPL at the same time as the estimates of cash flows for the liability for future policy benefits. When cash flows are updated, the updated estimates are used to recalculate DPL at contract issuance. The recalculated DPL as of the beginning of the current reporting period is compared to the carrying amount of DPL as of the beginning of the current reporting period, and any difference is recognized as either a charge or credit to Net premiums and contract charges earned presented in the Consolidated Statements of Operations and Comprehensive Income (Loss).

The components of net investment income for the following periods were as follows:

Net investment gains (losses) gains for the following periods were as follows:

The Company, from time to time, sells fixed maturity securities subsequent to the reporting date that were considered temporarily impaired at such reporting date. Such sales are due to issuer specificissuer-specific events occurring subsequent to the reporting date that result in a change in the Company's intent to sell a fixed maturity security. The types of events that may result in a sale include significant changes in the economic facts and circumstances related to the invested asset, significant unforeseen changes in liquidity needs, or changes in the Company's investment strategy.

The following table presents changes in the allowance for credit loss impairments on fixed maturity securities classified as available for sale for the category of other asset-backed securities (no other categories of fixed maturity securities have an allowance for credit loss impairments):

The Company's investment portfolio is comprised primarily of fixed maturity securities. Amortized cost, net, gross unrealized investment gains (losses) and fair values of all fixed maturity securities in the portfolio were as follows:

The following table presents the fair value and gross unrealized losses for fixed maturity securities in an unrealized loss position atas of March 31, 20222023 and December 31, 2021,2022, respectively. The Company views the decrease in fair value of all of the fixed maturity securities with unrealized losses atas of March 31, 20222023 — which was driven largely by increasing interest rates, spread widening, financial market illiquidity and/or market volatility from the date of acquisition — as temporary. As of March 31, 2022,2023, the Company has not made the decision to sell and it is not more likely than not the Company will be required to sell the fixed maturity securities with unrealized losses before an anticipated recovery in value. There has been a significant increase in interest rates since January 1, 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 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 the Company's 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. The Company's investment portfolios generated sizable unrealized losses as a result of sharp increases in interest rates. Therefore, it was determined that the unrealized losses on the fixed maturity securities presented in the table below were not indicative of any credit loss impairments as of March 31, 2022.2023.