HORACE MANN EDUCATORS CORP DE

Total net investment income includes net investment income from our 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 annuities written in 2002 or earlier.

For the full year, total net investment income rose 11.0% and net investment income on the managed portfolio increased 14.3%. The full-year increase reflected the benefit of the higher interest rate environment on floating rate investments. Investment yield on the portfolio excluding limited partnership interests was 4.9%, with new money yields continuing to exceed portfolio yields in the core fixed maturity securities portfolio.

For 2023, pretax net investment losses decreased $32.5 million primarily due to changes in fair values of equity securities. Pretax net unrealized investment losses on fixed maturity securities as of December 31, 2023 were $417.6 million compared to pretax net unrealized investment losses of $571.9 million as of December 31, 2022, reflecting much tighter credit spreads across most asset classes, as the 10-year U.S. Treasury yield ended mostly flat, up only 1 basis point.

Fixed Maturity and Equity Securities Portfolios

The table below presents our fixed maturity and equity securities portfolio by major asset class, including the 10 largest sectors of our corporate bond holdings (based on fair value).

(1)The All other corporates category contains 18 additional industry sectors. Food and beverage, broadcasting and media, telecommunications, technology and retail represented $212.7 million of fair value at December 31, 2023, with the remaining 13 sectors each representing less than $34.9 million.

(2)As of December 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, 43.3% are tax-exempt and 75.8% 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- as of December 31, 2023.

(4)Based on fair value, 92.3% 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, DBRS, A.M. Best, Egan Jones and Kroll).

As of December 31, 2023, our diversified fixed maturity securities portfolio consisted of 3,587 investment positions, issued by 2,340 entities, and totaled approximately $5.2 billion in fair value. This portfolio was 92.6% investment grade, based on fair value, with an average credit quality rating of A+. Our investment guidelines target single corporate issuer concentrations to 0.5% of invested assets for AA or AAA rated securities, 0.35% of invested assets for A or BBB rated securities, and $5.0 million for non-investment grade securities.

Rating of Fixed Maturity Securities and Equity Securities (1)

The following table presents the composition and fair value of our fixed maturity and equity securities portfolios by rating category. As of December 31, 2023, 92.1% of these combined portfolios were investment grade, based on fair value, with an overall average credit quality rating of A+. We have classified the entire fixed maturity securities portfolio as available for sale, which is carried at fair value.

(1)Ratings are as assigned by a NRSRO when available. If no rating is available from a NRSRO, then a rating provided by the investment manager 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)As of December 31, 2023, the AA rated fair value amount included $388.8 million of U.S. Government and federally sponsored agency securities and $639.6 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 NRSO.

As of December 31, 2023, the fixed maturity securities portfolio had $480.5 million of pretax gross unrealized investment losses on $3,894.7 million of fair value related to 2,500 positions. Of the investment positions with gross unrealized investment losses, there were 405 securities trading below 80.0% of the carrying amount as of December 31, 2023. See Part II - Item 8, Note 3 of the Consolidated Financial Statements in this Annual Report on Form 10-K for more information.

There has been a significant increase in interest rates since December 31, 2021, driven mostly by a rise in U.S. Treasury rates. Credit spreads have been volatile over the same time period, widening by over 60 basis points in October 2022, but only 6 basis points over the two-year period. The 10-year U.S. Treasury yield increased by one basis point at December 31, 2023 compared to December 31, 2022. Additionally, credit spreads tightened during the same time period, with investment grade and high yield tighter by 32 and 146 basis points, respectively. The stability in Treasury yields allowed the significantly tighter credit spreads to drive positive performance across most asset classes. Investment grade and high yield total returns for the year ended December 31, 2023 were up 8.52% and 13.44%, respectively. During the same time period, the Bloomberg Barclays Index Yield-to-Worst for Investment Grade fell 36 basis points, ending at 5.06%, while the High Yield Index fell 137 basis points to 7.59%. The Company's portfolios generated a reduction in net unrealized investment losses as the result of tighter credit spreads.