HORACE MANN EDUCATORS CORP /DE/

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 Consolidated Financial Statements set forth in Part II - Item 8 of this Annual Report on Form 10-K.

We have identified the following accounting estimates as critical in that they involve a higher degree of judgment and are subject to a significant degree of variability:

•Valuation of hard-to-value fixed maturity securities

•Evaluation of credit loss impairments for fixed maturity securities

•Valuation of future policy benefit reserves

•Valuation of liabilities for property and casualty unpaid claims and claim expense reserves

Although variability is inherent in these accounting estimates, we believe the amounts provided are appropriate based upon the facts available during preparation of the consolidated financial statements.

Valuation of Hard-to-Value Fixed Maturity Securities

The fair value of a fixed maturity security is the price that would be received in an orderly transaction between market participants at the measurement date. We obtain prices from third-party valuation service providers, our investment managers, and custodian bank, each of which use a variety of valuation service providers, broker quotes, and modeled prices. When necessary, we also internally model securities to develop a price. Differences in prices between the sources that we consider reliable are researched and we use the price that we consider most representative of an exit price in determining the fair value. Typical inputs used by these pricing sources include, but are not limited to, reported trades, broker quotes, yield curves, and involve the benchmarking of similar securities, rating designations, sector groupings, issuer spreads and/or estimated cash flows, prepayment speeds and default rates, among others, in determining the inputs to the prices. Our fixed maturity securities portfolio is primarily publicly traded, which allows for a high percentage of the fixed maturity securities portfolio to be priced through pricing services using observable inputs. Approximately 92.1% of the fixed maturity securities portfolio, based on fair value, was priced through valuation services or priced using observable inputs as of December 31, 2025.

The valuation of hard-to-value fixed maturity securities (generally 75 - 125 securities) is more subjective because the markets are less liquid and there is a lack of observable market inputs. This may increase the potential that the estimated fair value of an investment is not reflective of the price at which an actual transaction would occur at the measurement date. When the valuation service providers cannot provide prices, the investment managers obtain price quotes from brokers, which may be binding or non-binding price quotes. For those securities where the investment manager cannot obtain broker quotes, or for securities that are internally managed, the manager or the Company's investment professionals will model the security, generally using cash flows discounted at the appropriate current market rate. Valuation service providers' valuation methodologies, as well as investment managers’ modeling methodologies, are sometimes matrix-based, using indicative evaluation measures and adjustments for specific security characteristics and market sentiment. The selection of the market inputs and assumptions used to estimate the fair value of hard-to-value fixed maturity securities requires judgment and may include: benchmark yield, liquidity premium, prepayment speeds and default rates, spreads, weighted average life and credit rating. The cash flows are based on the contractual terms of the individual security and are adjusted for the inputs and assumptions as appropriate, and the cash flows are then discounted by the yield as determined by the assumptions. The extent of the use of each market input depends on the market sector and market conditions. Depending on the security, the priority of the use of inputs may change or some market inputs may not be relevant or additional inputs may be necessary.

As part of determining the fair value of fixed maturity securities, including hard-to-value fixed maturity securities, we address the estimation uncertainty in the fair value estimates through our valuation processes. The uncertainty is caused by the availability and observability of the fair value, and more specifically the inputs to fair value, of individual securities. We assess whether individual prices have become stale, are using appropriate methodologies and assumptions, exceed certain acceptable thresholds as compared to previous prices and alternative pricing sources, and how those prices are developed and assessed when provided by valuation service providers. In addition, we may evaluate prices for individual securities by comparing the prices to third party prices or prices based on internal models.

Individual fixed maturity securities may have variability based on security specific inputs and characteristics, but overall our portfolio duration is approximately 6.0 years, meaning a 100 basis point increase in yield would result in an approximately 6% decrease in the fair value of fixed maturity securities. As of December 31, 2025, Level 3 invested assets comprised 7.8% of our total investment portfolio based on fair value. Invested assets are classified as Level 3 when fair value is determined based on unobservable inputs and those inputs are significant to the determination of fair value.

Evaluation of Credit Loss Impairments for Fixed Maturity Securities

For fixed maturity securities classified as available for sale, the difference between amortized cost, net of a credit loss allowance (i.e., amortized cost, net) and fair value, net of certain other items and deferred income taxes is reported as a component of accumulated other comprehensive income (loss) (i.e., AOCI) on the Consolidated Balance Sheets and is not reflected in the operating results of any period until reclassified to net income upon the consummation of a transaction with an unrelated third party or when a credit loss allowance transaction is recorded. We evaluate fixed maturity securities where fair value is below amortized cost on a quarterly basis to determine if a credit loss allowance is necessary. These reviews, in conjunction with our investment managers’ quarterly credit reports and relevant factors such as (1) has the security missed any scheduled principal or interest payments in the current quarter; (2) has the security been downgraded to below investment grade by rating agencies or if the security was below investment grade at time of purchase, has the security been downgraded by two or more notches since acquisition; (3) has the security declined in value by more than 10% compared to the prior quarter; (4) has the market yield changed by more than 50 basis points; are all considered in the impairment assessment process.

For each fixed maturity security where fair value is below amortized cost, we assess whether management with the appropriate authority has made the decision to sell or whether it is more likely than not we will be required to sell the security before the anticipated recovery of the amortized cost basis for reasons such as liquidity, contractual or regulatory purposes. If a security meets either of these criteria, any existing credit loss allowance is written-off and the amortized cost basis of the security is written down to the fair value, with the losses recorded as a net investment loss.

If we have not made the decision to sell the fixed maturity security and it is not more likely than not we will be required to sell the fixed maturity security before the anticipated recovery of its amortized cost basis, we evaluate whether we expect to receive cash flows sufficient to recover the entire amortized cost basis of the security. We estimate the anticipated recovery based on the best estimate of future cash flows considering past events, current conditions and reasonable and supportable forecasts. The estimated future cash flows are discounted at the security’s effective interest rate and are compared to the amortized cost basis of the security. The determination of whether we expect to received cash flow sufficient to recover the entire amortized cost basis of the security is inherently subjective, and methodologies may vary depending on facts and circumstances specific to the security. Our investment managers will calculate the anticipated recovery value of the security by performing a discounted cash flow analysis based on the present value of future cash flows. The discount rate is generally the effective interest rate of the security at the time of purchase for fixed-rate securities. We will then review the assumptions/methodologies for reasonableness. The information reviewed generally includes, but is not limited to, the remaining payment terms of the security, prepayment speeds, the financial condition and future earnings potential of the issue or issuer, expected defaults, expected recoveries, and the value of underlying collateral. Other information, such as industry analyst reports and forecasts, sector credit ratings, financial condition of the bond insurer for insured fixed maturity securities, and other market data relevant to the realizability of contractual cash flows, may also be considered.

If we do not expect to receive cash flows sufficient to recover the entire amortized cost basis of the fixed maturity security, a credit loss allowance is recorded as a net investment loss for the shortfall in expected cash flows; however, the amortized cost basis, net of the credit loss allowance, may not be lower than the fair value of the security. The portion of the unrealized loss related to factors other than credit remains classified in AOCI. If we determine that the fixed maturity security does not have sufficient cash flows or other information to estimate the anticipated recovery value for the security, we may conclude that the entire decline in fair value is deemed to be credit related and the loss is recognized as a net investment loss. Subsequent changes in the anticipated recoveries, limited by the amount of previous taken credit allowances, are recorded through changes in the allowance for credit losses and recognized through net investment loss.

When a security is disposed or deemed uncollectible and written-off, we reverse amounts previously recognized in the credit loss allowance through net investment loss.

Valuation of Future Policy Benefit Reserves

The Company adopted ASU 2018-12 for Liabilities for future policy benefits (LFPB) on a modified retrospective basis such that those balances were adjusted to conform to ASU 2018-12 on January 1, 2021.

The LFPB represents the cost of claims, minus projected future net premiums, that we estimate we will eventually pay to our policyholders and the related expenses for our traditional and limited-payment long duration contracts. Liabilities for future policy benefits are initially established in the same period in which we issue a policy, and equal the difference between projected future policy benefits and projected future net premiums, allowing a margin for expenses and profit. The liabilities for future policy benefits build up and release over time, based on the emergence of cash flows, including premiums received and claims paid, and updated expectations for future cash flows.

The liabilities are estimated using assumptions that include discount rate, mortality, morbidity, lapses, and expenses. For traditional and limited-payment contracts, a standard discount rate is used to remeasure the liabilities that is equivalent to market level yields for upper-medium-grade (low credit risk) fixed income instruments. The discount rate assumption is updated quarterly. For liability cash flows that are projected beyond the duration of market-observable level yields for upper-medium-grade (low credit risk) fixed income instruments, we use the last market-observable level yield and use linear interpolation to determine yield assumptions for durations that do not have market-observable yields.

The LFPB is sensitive to the discount rate. The potential effect of a decrease of 50 basis points in the discount rate as of December 31, 2025 would result in an increase to the liability for future policy benefits of approximately $85 million and the potential effect of an increase of 50 basis points in the discount rate would result in a decrease to the liability for future policy benefits of approximately $77 million.

Cash flow assumptions are reviewed and updated, as needed, at least annually. Mortality, morbidity, lapse, and expense assumptions used in cash flow modeling are based on judgments that consider our historical experience, industry data, and other factors. On a quarterly basis, cohort level cash flow measures are updated based on the emergence of actual experience. The updated cash flows, based on experience emergence and any assumption updates, are used to determine the updated net premiums, the portion of the gross premium required to provide for all benefits and expenses, excluding acquisition costs or any costs that are required to be charged to expense as incurred. The updated net premium ratio is used to calculate the updated liability for future policy benefits as of the beginning of the quarter, at the original discount rate. To the extent the present value of future benefits and expenses exceeds the present value of future gross premiums, an immediate charge is recognized in net income, such that net premiums are set equal to gross premiums. The potential impact of increasing (decreasing) our long-term mortality assumption by 5% is an increase (decrease) to the LFPB of approximately $12 million. The potential impact of increasing (decreasing) our long-term lapse assumption by 10% is a decrease (increase) to the LFPB of approximately $3 million. The potential impact of increasing (decreasing) our long-term morbidity assumption by 5% in an increase (decrease) to the LFPB of approximately $4 million.

See Part II – Item 8, Note 6 of the Consolidated Financial Statements in this Annual Report on Form 10-K for more information.

Valuation of Liabilities for Property & Casualty Unpaid Claims and Claim Expense Reserves

Underwriting results of Property & Casualty are significantly influenced by estimates of our ultimate liability for insured events. There is a high degree of uncertainty inherent in the estimates of ultimate losses underlying the liabilities for unpaid claims and claim expenses. This inherent uncertainty is particularly significant for liability-related exposures due to the extended period, often many years that transpire between a loss event, receipt of related claims data from policyholders and ultimate settlement of the claim. Reserves for Property & Casualty claims include provisions for payments to be made on reported claims (case reserves), incurred but not yet reported (IBNR) claims and associated settlement expenses (together, loss reserves).

The process by which these reserves are established requires reliance upon estimates based on known facts and on interpretations of circumstances, including our experience with similar cases and historical trends involving claim payments and related patterns, pending levels of unpaid claims and product mix, as well as other factors including court decisions, economic conditions, public attitudes and medical costs. We calculate and record a single best estimate of the reserve as of each reporting date.

In addition, beginning in 2024 property & casualty includes loss and loss adjustment reserves and IBNR related to legacy commercial claims. The claims, which include asbestos, environmental, and sexual molestation claims, are related to legacy, long-tail commercial lines policies that were issued as early as the 1960s, under a previous ownership structure in business lines in which we no longer operate.

Changes to reserves are recorded in the period in which development factor changes result in reserve re-estimates. A detailed discussion of the process utilized to estimate loss reserves, risk factors considered and the impact of adjustments recorded during recent years is included in Part II - Item 8, Note 5 of the Consolidated Financial Statements in this Annual Report on Form 10-K.

Based on our products and coverages, historical experience, and modeling of various actuarial methodologies used to develop reserve estimates, there is the potential of variability of the Property & Casualty loss reserves.

There are a number of assumptions involved in the determination of our property & casualty loss reserves. Among the key factors affecting recorded loss reserves for both long-tail and short-tail related coverages, claim severity and claim frequency are of particular significance. We estimate that a 2.0% change in claim severity or claim frequency for unpaid losses is a reasonably likely scenario based on recent experience and would result in a change in the estimated direct reserves of approximately $4.4 million for long-tail liability related exposures (auto liability coverages) and approximately $1.4 million for short-tail liability related exposures (property and auto physical damage coverages). Actual results may differ, depending on the magnitude and direction of the deviation.

Our actuaries discuss their loss and loss adjustment expense actuarial analysis with management. As part of this discussion, the indicated point estimate of the IBNR loss reserve by line of business (coverage) is reviewed. Our actuaries also discuss any indicated changes to the underlying assumptions used to calculate the indicated point estimate. Any variance between the indicated reserves from these changes in assumptions and the previously carried reserves is reviewed. After discussion of these analyses and all relevant risk factors, management determines whether the reserve balances require adjustment. Our best estimate of loss reserves may change depending on a revision in the underlying assumptions.

Our liabilities for unpaid claims and claim expense reserves for property & casualty were as follows:

(1)These amounts are gross, before reduction for ceded reinsurance reserves.

The facts and circumstances leading to our re-estimate of reserves relate to revisions of the development factors used to predict how losses are likely to develop from the end of a reporting period until all claims have been paid. Re-estimates occur because actual loss amounts are different than those predicted by the estimated development factors used in prior reserve estimates. As of December 31, 2025, the impact of a reserve re-estimation resulting in a 1.0% increase in net reserves would be a decrease of approximately $2.9 million in net income. A reserve re-estimation resulting in a 1.0% decrease in net reserves would increase net income by approximately $2.9 million.

Favorable prior years' reserve re-estimates increased net income in 2025 by approximately $18.8 million pretax, primarily the result of favorable loss trends for auto and property for accident years 2024 and prior. During 2024 the Company recognized favorable prior years' reserve re-estimates of $29.5 million pretax, primarily the result of favorable loss trends for auto and property for accident years 2023 and prior. In addition, during 2024 the Company recognized $17.7 million of losses arising from the legacy commercial line exposures. The Company had no reserves for these liabilities prior to 2024.