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 Second 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 Third Quarter 2024 Investor Supplement.

Previous wording

For the three months ended June 30, 2024, net income increased $16.6 million primarily due to lower net investment losses in Corporate & Other and improved Property & Casualty segment results reflecting the effect of rate and non-rate underwriting actions as well as the impact of favorable prior years' reserve development in Auto.

Current wording

For the three and nine months ended September 30, 2024, net income increased $22.6 million and $59.1 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 favorable prior years' reserve development and lower net investment losses in Corporate & Other.

Previous 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.

Current wording

For the three and nine months ended September 30, 2024, net premiums and contract charges earned increased $23.1 million and $62.6 million, as the Property & Casualty segment continues to implement and earn in rate and other actions.

Previous 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:

Current wording

For the three and nine months ended September 30, 2024, total net investment income decreased $5.9 million and $1.0 million. The decrease for the quarter is primarily due to lower returns for our limited partnership interests while the nine month variance is due to lower returns in our commercial mortgage loan funds in the first half of the year. 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 six months of 2024.

Current wording

The higher investment yields, excluding limited partnership interests, for the three months ended September 30, 2024 reflected stronger income from the fixed income portfolios. The lower investment yield for nine months ended September 30, 2024 are due to commercial mortgage loan fund returns that were below historic averages in the first six months of 2024 significantly offset by the stronger income from the fixed income portfolio.

Previous 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.

Current wording

During the three and nine months ended September 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.

Previous 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:

Current wording

For the three months ended September 30, 2024, total net investment losses decreased by $12.2 million. For the nine months ended, September 30, 2024, net investment losses decreased $29.8 million. The breakdown of net investment gains (losses) by transaction type were as follows:

Previous 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.

Current wording

For the nine months ended September 30, 2024, other income increased $5.8 million, due to lower offsets compared to the prior year from an indemnification agreement associated with the employer-sponsored business line and the impact of strong financial markets on asset based fees.

Previous 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.

Current wording

For the three and nine months ended September 30, 2024, interest credited increased $2.1 million and $9.4 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 increased year over year as the higher interest credited rates were consistent with the 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 3.1% and 2.7% as of June 30, 2024 and June 30, 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 2.8% as of September 30, 2024 and September 30, 2023, respectively.

Previous 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.

Current wording

For the three and nine months ended September 30, 2024, operating expenses increased 9.5% and 6.3%, reflecting inflation and investments being made in infrastructure.

Previous 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.

Current wording

For the three and nine months ended September 30, 2024, DAC amortization expense increased $1.8 million and $6.7 million, primarily due to premium increases in the Property & Casualty segment driving higher DAC asset levels partially offset by lower levels of write-offs in the Life & Retirement segment as annuity persistency has been stable in the current year.

Previous wording

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

Current wording

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

Previous 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.

Current wording

For the three and nine months ended September 30, 2024, interest expense increased $1.2 million and $5.0 million, due to an increase in the interest rate as well as an 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 19.4% 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.

Current wording

The effective income tax rate on our pretax income, including net investment gains (losses), was 19.6% and 9.8% for the nine months ended September 30, 2024 and 2023, respectively. Income from investments in tax-advantaged securities decreased the effective income tax rates by 2.8 and 35.0 percentage points for the nine months ended September 30, 2024 and 2023, respectively.

Previous 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:

Current wording

At the time of issuance of this Quarterly Report on Form 10-Q, we estimate that 2024 full year core earnings will be within a range of $2.40 to $2.70 per diluted share. This range is unchanged from the Outlook for 2024 we discussed in our Quarterly Report on Form 10-Q for the period ended June 30, 2024. These results anticipate the following:

Previous 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

Current wording

•Net investment income 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

•Catastrophe loss assumption is now anticipated to be approximately $90 million or around 12% of net earned premiums

Current wording

•Catastrophe loss assumption is now anticipated to be around 13% of net earned premiums

Previous wording

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

Current wording

We continue to anticipate achieving a Property & Casualty combined ratio of 95-96% in 2025.

Previous 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:

Current wording

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

Previous 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%

Current wording

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

Previous 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.

Current wording

•Favorable prior years' reserve development in auto and property

Previous wording

•Catastrophe losses lower than prior year by over 4 points

Current wording

•Catastrophe losses lower than prior year

Previous wording

•Higher net investment income driven by limited partnership and fixed income portfolios

Current wording

•Higher net investment income driven by fixed income portfolios

Previous 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.

Current wording

The current quarter reflects an increase in net premiums written of 12.7%, with average written premiums rising for both property and auto. Sales* were strong for the quarter, up 27.8% from the prior year, and household retention remains stable.

Previous 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.

Current wording

The three and nine month loss ratios decreased 18.9 points and 14.3 points, respectively, from last year. In addition, $13.0 million and $19.2 million of net favorable prior years' reserve development for the three and nine months of 2024 reduced the loss ratio 6.9 and 3.6 points, respectively. Catastrophe losses for the quarter were $34.0 million, pretax, contributing 18.1 points to the combined ratio. In total, there were 20 events designated as catastrophes by Property Claims Services (PCS) in this year’s third quarter. In the third quarter of 2023, catastrophe losses were $28.7 million, pretax, contributing 17.5 points to the combined ratio, from 25 PCS events.

Previous 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.

Current wording

The year-over-year increase in average written premiums for auto policies remained elevated in the third quarter at 16.4%, with retention declining slightly despite substantial rate increases. The third-quarter auto underlying loss ratio was 71.5%, improving 8.2 points from the prior year quarter, reflecting the benefit of rate and non-rate actions. The third quarter reported loss ratio benefited 6.7 points from favorable prior years' reserve development.

Previous 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.

Current wording

The year-over-year increase in average written premiums for property policies was 18.2% in the third quarter, as rate increases and inflation adjustments to coverage values continue to take effect and retention remains strong. The third-quarter property underlying loss ratio was 41.4%, a 20.4 point decrease from prior year reflecting the increase in average written premium and the elevated non-catastrophe weather losses in the prior year.

Previous 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

Current wording

•Annualized quarterly and nine month net interest spread on fixed annuities down 46 basis points and 59 basis points, respectively, due to higher interest credited rate on our retained block and lower returns on commercial mortgage loan funds during the first six months of 2024

Previous 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.

Current wording

Life & Retirement segment net income for the three and nine months ended September 30, 2024, of $14.8 million and $38.8 million was down 29.2% and 25.8%, 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 during the first six months of 2024. Benefits and change in reserves reflected a lower favorable market risk benefit adjustment compared to the prior year and higher mortality. 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 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.

Current wording

For the Retirement business, net annuity contract deposits were up 1.0% for the quarter at $126.8 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 $5.4 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.

Current wording

Horace Mann currently has $5.5 billion in annuity assets under management, including $2.1 billion of fixed annuities, $3.0 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.

Previous wording

Life annualized sales* were $2.8 million for the quarter and persistency remains strong. Life insurance in force rose to $20.8 billion at quarter-end.

Current wording

Life annualized sales* were $2.5 million, up 13.6% for the quarter and persistency remains strong. Life insurance in force rose to $20.9 billion at quarter-end.

Previous wording

estimate that over the next 12 months approximately $478.1 million of the Life & Retirement investment portfolio and related investable cash flows will be reinvested at current market rates.

Current wording

estimate that over the next 12 months approximately $520.2 million of the Life & Retirement investment portfolio and related investable cash flows will be reinvested at current market rates.

Previous wording

As a general guideline, based on our existing policies and investment portfolio, the impact from a 100 basis point decline in the average reinvestment rate would reduce Life & Retirement net investment income by approximately $1.8 million in year one and $5.5 million in year two, reducing the annualized net interest spread on fixed annuities by approximately 6 basis points and 19 basis points in the respective periods, compared to the current period annualized net interest spread on fixed annuities. We could also consider potential changes in rates credited to policyholders, tempered by any restrictions on the ability to adjust policyholder rates due to guaranteed minimum crediting rates.

Current wording

As a general guideline, based on our existing policies and investment portfolio, the impact from a 100 basis point decline in the average reinvestment rate would reduce Life & Retirement net investment income by approximately $2.0 million in year one and $6.0 million in year two, reducing the annualized net interest spread on fixed annuities by approximately 7 basis points and 21 basis points in the respective periods, compared to the current period annualized net interest spread on fixed annuities. We could also consider potential changes in rates credited to policyholders, tempered by any restrictions on the ability to adjust policyholder rates due to guaranteed minimum crediting rates.

Previous wording

•Decline in premium due to run-off of an indemnified block of employer-sponsored products; net premiums earned increased 2.0% excluding the run-off for the six months

Current wording

•Decline in premium due to run-off of an indemnified block of employer-sponsored products; net premiums earned increased 2.2% excluding the run-off for the nine months

Previous wording

•Lower benefits ratio for worksite direct products for the three months but higher benefits ratio for the six months reflecting the anticipated increase in utilization

Current wording

•Higher benefits ratio for worksite direct products for the nine months reflecting the anticipated increase in utilization

Previous wording

Total segment sales* for the quarter were $5.9 million, up 34.1% over the prior year, with worksite direct supplemental product sales of $4.0 million and employer-sponsored products of $1.9 million. Both product lines contributed to the favorable comparison to prior year. Employer sponsored sales may vary significantly between comparable periods due to differences in average case size. Persistency remains strong for the segment.

Current wording

Total sales* for the nine months ended September 30, 2024 were $19.4 million with worksite direct product sales of $11.5 million and employer-sponsored products of $7.9 million. Worksite direct sales increased 7.5% and employer sponsored sales decreased 21.0%. Employer sponsored sales may vary significantly between comparable periods due to differences in average case size and specific timing of new cases can result in quarter over quarter variances. Persistency remains strong for the segment.

Previous wording

For the three and six months ended June 30, 2024, the net results improved $6.6 million and $9.6 million, respectively, primarily due to lower net investment losses partially offset by an increase in interest expense.

Current wording

For the three and nine months ended September 30, 2024, the net results improved $7.8 million and $17.4 million, respectively, primarily due to lower net investment losses partially offset by an increase in interest expense.

Previous wording

For the three and six months ended June 30, 2024, net investment income from our managed investment portfolio increased $0.2 million and $5.4 million, respectively. The increase reflected stronger income from the fixed income portfolios, FHLB program, and limited partnership portfolios, significantly offset by weak returns in the commercial mortgage loan fund portfolio. The six month investment yield on the portfolio excluding limited partnership interests was 4.3%, with new money yields continuing to exceed portfolio yields in the core fixed maturity securities portfolio.

Current wording

For the three and nine months ended September 30, 2024, net investment income from our managed investment portfolio decreased $4.6 million and increased $0.8 million, respectively. The decrease for the three months ended September 30, 2024 was primarily driven by lower returns in the limited partnership portfolio. The increase for the nine months ended September 30, 2024 reflected stronger income from the fixed income portfolios and the FHLB program, significantly offset by lower returns in the commercial mortgage loan fund portfolio. The nine month investment yield on the portfolio excluding limited partnership interests was 4.5%, with new money yields continuing to exceed portfolio yields in the core fixed maturity securities portfolio.