HORACE MANN EDUCATORS CORP DE

Previous wording

Measures within this MD&A that are not based on accounting principles generally accepted in the United States of America (non-GAAP) are marked with 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 Exhibit 99.1 to this Quarterly Report on Form 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 2024 Investor Supplement.

Current wording

Measures within this MD&A that are not based on accounting principles generally accepted in the United States of America (non-GAAP) are marked with 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 Exhibit 99.1 to this Quarterly Report on Form 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 Second Quarter 2024 Investor Supplement.

Previous wording

Our vision is to be the company of choice to provide insurance and financial solutions for all educators and others who serve their communities, whether they engage with Horace Mann directly or through their district/employer. We believe the unique value of Horace Mann is providing solutions tailored for educators at each stage of their lives, empowering them to achieve lifelong financial success. Our motivation stems from our gratitude for educators: They are looking after our children's futures, and we believe they deserve someone to look after theirs. Our commitment to having a positive impact on our customers' lives extends to all our corporate stakeholders, including employees, agents, investors and the communities where we live and work.

Current wording

Our vision is to be the company of choice to provide insurance and financial solutions for all educators and others who serve their communities, whether they engage with Horace Mann directly or through their district/employer. We believe the unique value of Horace Mann is providing solutions tailored for educators at each stage of their lives, empowering them to achieve lifelong financial success. Our motivation stems from our gratitude for educators: They are looking after our children's futures, and we believe they deserve someone to

Previous wording

For the three months ended March 31, 2024, net income increased $19.9 million primarily due to improved Property & Casualty segment results reflecting the effect of rate and non-rate underwriting actions as well as the impact of moderated catastrophe and non-catastrophe weather activity compared to prior year.

Current wording

For the six months ended June 30, 2024, net income increased $36.5 million primarily due to improved Property & Casualty segment results reflecting the effect of rate and non-rate actions as well as the impact of lower catastrophe weather losses compared to prior year, favorable prior years' reserve development in Auto, and lower net investment losses in Corporate & Other.

Previous wording

For the three months ended March 31, 2024, net premiums and contract charges earned increased $19.3 million as the Property & Casualty segment continues to implement and earn in rate and other actions.

Current wording

For the three and six months ended June 30, 2024, net premiums and contract charges earned increased $20.2 million and $39.5 million, as the Property & Casualty segment continues to implement and earn in rate and other actions.

Previous wording

For the three months ended March 31, 2024, total net investment income increased $5.0 million primarily due to stronger income from the fixed income portfolio partially offset by weaker returns in one commercial mortgage loan fund and two real estate-related limited partnerships. The annualized investment yield on the portfolio excluding limited partnership interests* was as follows:

Current wording

For the three and six months ended June 30, 2024, total net investment income decreased $0.1 million and increased $4.9 million, primarily due to stronger income from all categories except commercial mortgage loan funds which had weaker returns, substantially offsetting the increases in the other portfolios. The annualized investment yield on the portfolio excluding limited partnership interests* was as follows:

Previous wording

The lower investment yields, excluding limited partnership interests, are due to commercial mortgage loan fund returns that were below historic averages in the first quarter of 2024.

Current wording

The lower investment yields, excluding limited partnership interests, are due to commercial mortgage loan fund returns that were below historic averages in the first six months of 2024.

Previous wording

During the three months ended March 31, 2024, we continued to identify and purchase 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 continue to fund at levels that allow us to maintain our targeted allocation to commercial mortgage loan funds and limited partnership interests while maintaining balance between principal protection and risk.

Current wording

During the three and six months ended June 30, 2024, we continued to identify and purchase 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 continue to fund at levels that allow us to maintain our targeted allocation to commercial mortgage loan funds and limited partnership interests while maintaining balance between principal protection and risk.

Previous wording

For the three months ended March 31, 2024, total net investment gains increased by $6.1 million, respectively. The breakdown of net investment gains (losses) by transaction type were as follows:

Current wording

For the three months ended June 30, 2024, total net investment losses decreased by $11.5 million. For the six months ended, June 30, 2024, net investment losses decreased $17.6 million. The breakdown of net investment gains (losses) by transaction type were as follows:

Previous wording

For the three months ended March 31, 2024, other income increased $1.7 million due to lower offsets compared to the prior year from an indemnification agreement associated with the employer-sponsored business line.

Current wording

For the six months ended June 30, 2024, other income increased $1.8 million, due to lower offsets compared to the prior year from an indemnification agreement associated with the employer-sponsored business line.

Previous wording

Benefits, claims and settlement expenses declined $6.9 million for the three months ended March 31, 2024, primarily due to moderated catastrophe and non-catastrophe weather activity compared to prior year in the Property & Casualty segment and a favorable market risk benefit adjustment in the Life & Retirement segment.

Current wording

Benefits, claims and settlement expenses declined $4.8 millionfor the six months ended June 30, 2024, primarily due to lower catastrophe losses compared to prior year in the Property & Casualty segment as well as the impact of favorable prior years' reserve development in Auto.

Previous wording

For the three months ended March 31, 2024, interest credited increased $4.2 million driven primarily by higher interest rates on advances received from the Federal Home Loan Bank of Chicago (FHLB). The net contribution from FHLB advances remained stable year over year as the higher interest credited rates are offset by higher earnings from the floating rate investments backing the program.

Current wording

For the three and six months ended June 30, 2024, interest credited increased $3.1 million and $7.3 driven primarily by higher credited rates on the retained annuity block along with higher interest rates on advances from the Federal Home Loan Bank of Chicago (FHLB). The net contribution from FHLB advances remained stable year over year as the higher interest credited rates are offset by higher earnings from the floating rate investments backing the program.

Previous wording

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 3.0% and 2.6% as of March 31, 2024 and March 31, 2023, respectively.

Current wording

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 3.1% and 2.7% as of June 30, 2024 and June 30, 2023, respectively.

Previous wording

For the three months ended March 31, 2024, operating expenses increased 5.9% reflecting inflation and investments being made in infrastructure.

Current wording

For the three and six months ended June 30, 2024, operating expenses increased 3.6% and 4.8%, reflecting inflation and investments being made in infrastructure.

Previous wording

For the three months ended March 31, 2024, DAC amortization expense increased $3.3 million primarily due to premium increases in the Property & Casualty segment driving higher DAC asset levels.

Current wording

For the three and six months ended June 30, 2024, DAC amortization expense increased $1.6 million and $4.9 million, primarily due to premium increases in the Property & Casualty segment driving higher DAC asset levels.

Previous wording

For the three months ended March 31, 2024, intangible asset amortization expense decreased $0.1 million.

Current wording

For the three and six months ended June 30, 2024, intangible asset amortization expense was flat.

Previous wording

For the three months ended March 31, 2024, interest expense increased $2.0 million due to an increase in the interest rate as well as a $48.2 million increase in the the level of debt associated with the issuance of the 2023 Senior Notes.

Current wording

For the three and six months ended June 30, 2024, interest expense increased $1.8 million and $3.8 million, due to an increase in the interest rate as well as a $48.2 million increase in the level of debt associated with the issuance of the 2023 Senior Notes.

Previous wording

The effective income tax rate on our pretax income, including net investment gains (losses), was 19.7% and 18.5% for the the three months ended March 31, 2024 and 2023, respectively. Income from investments in tax-

Current wording

The effective income tax rate on our pretax income, including net investment gains (losses), was 19.4% and 17.3% for the six months ended June 30, 2024 and 2023, respectively. Income from investments in tax-advantaged securities decreased (increased) the effective income tax rates by 3.1 and (6.0) percentage points for the six months ended June 30, 2024 and 2023, respectively.

Previous wording

At the time of issuance of this Quarterly Report on Form 10-Q, we estimate that 2024 full year net income will be within a range of $3.00 to $3.30 per diluted share, generating a core return on equity* near 9%. This range is unchanged from our Outlook for 2024 we discussed in our Annual Report on Form 10-K for the year ended December 31, 2023. These results anticipate the following:

Current wording

At the time of issuance of this Quarterly Report on Form 10-Q, we now estimate that 2024 full year core earnings will be within a range of $2.40 to $2.70 per diluted share. The decrease from the range discussed in our Outlook for 2024 in the Annual Report on Form 10-K for the year ended December 31, 2023, is primarily due to lower-than expected net investment income in the first half of the year, primarily from valuation adjustments to the company’s commercial mortgage loan funds. These results anticipate the following:

Previous wording

•Net investment income at the low end of the previously disclosed range of $465 million to $475 million, which includes approximately $105 million of accreted investment income on the deposit asset on reinsurance in the Life & Retirement segment

Current wording

•Net investment income now estimated to be in the range of $440 million to $450 million, which includes approximately $105 million of accreted investment income on the deposit asset on reinsurance in the Life & Retirement segment

Previous wording

•Approximately 5.5% increase in total Operating expense

Current wording

•Approximately 6% increase in total Operating expense

Previous wording

In 2024, net income for Property & Casualty is anticipated to be in the range of $36 million to $41 million. Our outlook anticipates:

Current wording

In 2024, net income for Property & Casualty is anticipated to be in the range of $36 million to $39 million. Our outlook anticipates:

Previous wording

We anticipate achieving our longer-term Property & Casualty combined ratio target of 95-96% in 2025.

Current wording

We continue to anticipate achieving our longer-term Property & Casualty combined ratio target of 95-96% in 2025.

Previous wording

In 2024, net income for Life & Retirement is anticipated to be in the range of $77 million to $81 million. Our outlook anticipates:

Current wording

In 2024, net income for Life & Retirement is now estimated to be in the range of $50 million to $56 million. Our outlook anticipates:

Previous wording

•Spread on the fixed annuity business above the target range of 220 to 230 basis points

Current wording

•Spread on the fixed annuity business in the range of 180 to 190 basis points, below the target range of 220 to 230 basis points

Previous wording

In 2024, net income for Supplemental & Group Benefits is anticipated to be in the range of $47 million to $50 million. Our outlook anticipates:

Current wording

In 2024, net income for Supplemental & Group Benefits is anticipated to be in the range of $49 million to $52 million reflecting strong first-half performance. Our outlook anticipates:

Previous wording

•Claims utilization for supplemental and disability products returning to near pre-pandemic levels, leading to a segment benefit ratio closer to longer-term target of 43%

Current wording

•Claims utilization for supplemental and disability products increasing slightly from the first half of the year, leading to a segment benefit ratio closer to longer-term target of 43%

Previous wording

•Pretax profit on revenue of between 20% and 21%

Current wording

•Pretax profit on revenue of between 21% and 22%

Previous wording

•Significantly lower underlying auto and property loss ratios* due to rate actions and a decline in non-catastrophe weather-related losses

Current wording

•Significantly lower underlying auto loss ratio*

Previous wording

•Catastrophe losses lower than prior year by over 5 points

Current wording

•Catastrophe losses lower than prior year by over 4 points

Previous wording

The Property & Casualty segment net income of $10.6 million and combined ratio of 99.9% for the first quarter largely reflected the impact of moderated catastrophe and non-catastrophe weather activity compared to prior year, as well as the effect of rate and non-rate underwriting actions. Property & Casualty net premiums written were up 15.4%, with average written premiums rising for both property and auto. In addition, segment net investment income for the quarter was significantly above the prior year, when limited partnership returns were negative, primarily driven by lower private equity valuation adjustments. Sales were strong for the quarter, up 34.9% from the prior year, and household retention remains stable.

Current wording

The current quarter reflects an increase in net premiums written of 16.6%, with average written premiums rising for both property and auto. Sales* were strong for the quarter, up 36.9% from the prior year, and household retention remains stable.

Previous wording

The first-quarter loss ratio decreased 12.5 points over last year, reflecting both catastrophe losses that were above historical averages, but lower than prior year, as well as a decrease in non-catastrophe weather losses. Catastrophe losses for the quarter were $16.2 million, pretax, contributing 9.3 points to the combined ratio. In total, there were 19 events designated as catastrophes by Property Claims Services (PCS) in this year’s first quarter. In the first quarter of 2023, catastrophe losses were $22.4 million, pretax, contributing 14.7 points to the combined ratio, from 23 PCS events.

Current wording

The three and six month loss ratios decreased 11.3 points and 11.8 points, respectively, over last year, reflecting catastrophe losses that were above historical averages, but lower than prior year. In addition, $6.2 million of net favorable prior years' reserve development reduced the loss ratio 3.5 points. Second-quarter catastrophe losses typically account for approximately half of the Company’s full-year catastrophe losses. Catastrophe losses for the quarter were $40.9 million, pretax, contributing 22.8 points to the combined ratio. In total, there were 28 events designated as catastrophes by Property Claims Services (PCS) in this year’s second quarter. In the second quarter of 2023, catastrophe losses were $41.5 million, pretax, contributing 26.3 points to the combined ratio, from 23 PCS events.

Previous wording

The year-over-year increase in average written premiums for auto policies improved again in the first quarter to 17.5%, with retention declining slightly given the substantial increases in average written premium. The first-quarter auto underlying loss ratio was 71.7%, improving 9.0 points from the prior year quarter, reflecting the benefit of rate and non-rate underwriting actions and less severe weather.

Current wording

The year-over-year increase in average written premiums for auto policies remained elevated in the second quarter at 17.1%, with retention declining slightly despite substantial rate increases. The second-quarter auto underlying loss ratio was 74.2%, improving 7.4 points from the prior year quarter, reflecting the benefit of rate and non-rate actions. The second quarter reported loss ratio benefited 6.2 points from favorable prior years' reserve development.

Previous wording

The year-over-year increase in average written premiums for property policies was 16.1% in the first quarter, as rate increases and inflation adjustments to coverage values continue to take effect and retention remains strong The first-quarter property underlying loss ratio was 45.0%, reflecting the increase in average written premium and a year-over-year decline in weather losses not included in designated catastrophe events.

Current wording

The year-over-year increase in average written premiums for property policies was 18.6% in the second quarter, as rate increases and inflation adjustments to coverage values continue to take effect and retention remains strong. The second-quarter property underlying loss ratio was 50.9%, a 1.1 point increase over prior year reflecting the increase in average written premium offset by an increase in the impact of large losses.

Previous wording

We continue to evaluate and implement actions to further mitigate our exposure and respond to severe weather trends. We are addressing the increased loss costs associated with the more severe weather events in three ways: additional filed rate, product changes and enhanced modeling tools.

Current wording

We continue to evaluate and implement actions to further mitigate our exposure and respond to rising weather trends. We are addressing the increased loss costs associated with the increased frequency of weather events in three ways: additional filed rate, product changes and enhanced modeling tools.

Previous wording

•Annualized quarterly net interest spread on fixed annuities down 83 basis points

Current wording

•Annualized quarterly and six month net interest spread on fixed annuities down 47 basis points and 66 basis points, respectively, due to significantly lower returns on commercial mortgage loan funds along with a higher interest credited rate on our retained block

Previous wording

•Life mortality costs consistent with prior year and a favorable market risk benefit adjustment in Retirement

Current wording

•Life mortality costs consistent with prior year

Previous wording

•Net contribution from FHLB funding agreements remained stable year over year as net investment income reflected higher earnings from the floating rate investments backing the program and interest credited similarly reflected offsetting higher interest expense

Current wording

•Net spread from FHLB funding agreements remained stable year over year as net investment income reflected higher earnings from the floating rate investments backing the program and interest credited reflected offsetting higher interest expense

Previous wording

Life & Retirement segment net income for the quarter of $11.7 million was down 16.4%, primarily due to a lower net interest spread. The spread was affected by lower returns related to valuation adjustments in two real estate-related limited partnership funds and one commercial mortgage loan fund. Benefits and change in reserves benefited from a favorable market risk benefit adjustment. While the net contribution from our FHLB funding agreements remained stable compared with 2023, higher FHLB borrowing costs drove the higher interest credited expense.

Current wording

Life & Retirement segment net income for the three and six months ended June 30, 2024, of $12.3 million and $24.0 million was down 29.3% and 23.6%, respectively, primarily due to a lower net interest spread and unfavorable benefits. The spread was affected by higher interest credited and lower returns related to commercial mortgage loan funds. Benefits and change in reserves reflected a lower favorable market risk benefit adjustment compared to the prior year. While the net spread from our FHLB funding agreements remained stable compared with 2023, higher FHLB borrowing costs and increased advances drove the higher interest credited expense along with a higher interest credited rate on our retained block.

Previous wording

For the Retirement business, net annuity contract deposits were down 4.3% for the quarter at $104.5 million. Educators continue to begin their relationship with Horace Mann through 403(b) retirement savings products, which provide encouraging cross-sell opportunities. Average persistency has declined slightly from the prior year, with the decline in the persistency of non-qualified business more significant than the declines in the qualified business.

Current wording

For the Retirement business, net annuity contract deposits were down 9.4% for the quarter at $102.2 million, while deposits to the retained 403(b) block remained stable. Educators continue to begin their relationship with Horace Mann through 403(b) retirement savings products, which provide encouraging cross-sell opportunities. Average persistency has declined slightly from the prior year.

Previous wording

Horace Mann currently has $5.3 billion in annuity assets under management, including $2.1 billion of fixed annuities, $2.8 billion of variable annuities and $0.4 billion of fixed indexed annuities. Assets under administration, which includes Horace Mann Retirement Advantage® and other advisory and recordkeeping assets, continue to benefit from the strong equity markets.

Current wording

Horace Mann currently has $5.4 billion in annuity assets under management, including $2.2 billion of fixed annuities, $2.8 billion of variable annuities and $0.4 billion of fixed indexed annuities. Assets under administration, which includes Horace Mann Retirement Advantage® and other advisory and recordkeeping assets, continue to benefit from the strong equity markets.