HORACE MANN EDUCATORS CORP DE

Net Premiums and Contract Charges Earned

For 2023, net premiums and contract charges earned increased $29.4 million as the Property & Casualty segment continues to implement rate and inflation adjustments to coverage values continue to take effect.

Total net investment income in 2023 increased $43.9 million, primarily due to higher returns on floating rate fixed maturity securities including commercial mortgage loan funds partially offset by lower returns on limited partnership interests in various equity funds. The annualized investment yield on the portfolio excluding limited partnership interests* was as follows:

During 2023, we continued to identify and purchase investments, including alternative investments, with attractive risk-adjusted yields relative to market conditions without venturing into asset classes or individual securities that would be inconsistent with our overall investment guidelines for the core portfolio. We also funded commercial mortgage loan funds and limited partnership interests in line with our intended allocation to this portion of our portfolio to increase yields while balancing protection and risk.

Net Investment Losses

For 2023, net investment losses decreased $32.5 million. The breakdown of net investment gains (losses) by transaction type were as follows:

From time to time, we may sell fixed maturity securities subsequent to the reporting date that were considered temporarily impaired at the reporting date. Generally, such sales are due to issuer specific events occurring subsequent to the reporting date that result in a change in our intent to hold a fixed maturity security.

Other Income

For 2023, other income increased $4.5 million primarily due to an indemnification agreement associated with the employer-sponsored business line.

Benefits, Claims and Settlement Expenses

For 2023, benefits, claims and settlement expenses increased 3% as higher catastrophe losses and non-catastrophe weather losses in the current year offset unfavorable prior year development recorded in 2022 in the Property & Casualty segment.

Interest Credited

For 2023, interest credited increased $32.3 million, driven primarily by higher interest rates on advances received from the Federal Home Loan Bank of Chicago (FHLB). The net dollar contribution from FHLB advances remained stable year over year as the higher interest credited rates are offset by higher earnings from the floating rate securities backing the program, although the net interest spread percentage declined slightly.

Under the deposit method of accounting, the interest credited on the reinsured annuity block continues to be reported. The average deferred annuity credited rate, excluding the reinsured annuity block, was 2.9% for 2023 and 2.5% for 2022.

Operating Expenses

For 2023, operating expenses increased $2.6 million as the impacts of inflation were partially offset by reduced expenses on a run-off block.

DAC Unlocking and Amortization Expense

For 2023, DAC unlocking and amortization expense increased $13.0 million, due to premium increases in the Property & Casualty segment driving higher DAC asset levels as well as write-offs of DAC in the Life & Retirement segment related to declines in annuity persistency.

Intangible Asset Amortization Expense

For 2023, intangible asset amortization expense decreased $2.0 million.

Interest Expense

For 2023, interest expense increased $10.3 million, primarily due to an increase in floating interest rates on the Revolving Credit Facility in the first nine months of the year and interest expense on the 2023 Senior Notes issued in September 2023.

Other Expense - Goodwill and Intangible Asset Impairments

The prior year had other expense representing goodwill and intangible asset impairment charges with regards to Benefit Consultants Group, Inc. (BCG), a reporting unit within the Retirement operating segment. See Part II -

Item 8, Note 9 of the Consolidated Financial Statements in this Annual Report on Form 10-K for further information.

Income Tax Expense (Benefit)

The effective income tax rate on our pretax income, including net investment gains (losses) was 15.6% and (20.0)% for the years ended December 31, 2023 and 2022, respectively. Income from investments in tax-advantaged securities decreased the effective income tax rates by 7.5 and 39.2 percentage points for 2023 and 2022, respectively. The goodwill and intangible asset impairment charges in the Life & Retirement segment decreased the effective income tax rate by 9.3 percentage points as of December 31, 2022.

In August 2022, the Inflation Reduction Act of 2022 (IRA) was passed by the U.S. Congress and signed into law by the Executive Branch. The IRA includes a new Federal alternative minimum tax (AMT), effective in 2023, that is based on the adjusted financial statement income (AFSI) set forth on the applicable financial statement (AFS) of an applicable corporation. A corporation is an applicable corporation if its rolling average pre-tax AFSI over three prior years (starting with years 2020 - 2022) is greater than $1.0 billion. For a group of related entities, the $1.0 billion threshold is determined on a group basis, and the group’s AFSI is generally treated as the AFSI for all separate taxpayers in the group. Except under limited circumstances, once a corporation is an applicable corporation, it is an applicable corporation in all future years.

An applicable corporation is not automatically subject to an AMT liability. The corporation’s tentative AMT liability is equal to 15.0% of its adjusted AFSI, and AMT is payable to the extent the tentative AMT liability exceeds regular corporate income tax. However, any AMT paid would be indefinitely available as a credit carryover that could reduce future regular tax in excess of AMT.

HMEC and its controlled group of corporations have determined that it is not an applicable corporation in 2023. In making such determination, the group has relied upon guidance issued by the U.S Treasury Department during 2023.

We record liabilities for uncertain tax filing positions where it is more likely than not that the position will not be sustainable upon audit by taxing authorities. These liabilities are reevaluated routinely and are adjusted appropriately based on changes in facts or law. We have no unrecorded liabilities from uncertain tax filing positions.

As of December 31, 2023, our federal income tax returns for years prior to 2020 are no longer subject to examination by the Internal Revenue Service. We do not anticipate any assessments for tax years that remain subject to examination to have a material effect on our financial position or results of operations. See Part II - Item 8, Note 11 of the Consolidated Financial Statements in this Annual Report on Form 10-K for further information.