# HORACE MANN EDUCATORS CORP /DE/ (HMN) FY 2023 MD&A Verbatim Item 7 Management's Discussion and Analysis from HORACE MANN EDUCATORS CORP /DE/'s 10-K for fiscal year 2023. SEC filing source: https://www.sec.gov/Archives/edgar/data/850141/000162828024007168/hmn-20231231.htm Accession: 0001628280-24-007168 Filing date: 2024-02-27 Report date: 2023-12-31 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Confidence: high Company profile: /company/HMN/ All MD&A years: /company/HMN/mda/ Previous year: /company/HMN/mda/fy2022/ (FY 2022) Next year: /company/HMN/mda/fy2024/ (FY 2024) ITEM 7. I Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) ($ in millions, except per share data) 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 II - Item 7. An explanation of these measures is contained in the Glossary of Selected Terms included as Exhibit 99.1 to this Annual Report on Form 10-K 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 Fourth Quarter 2023 Investor Supplement. Increases or decreases in this MD&A that are not meaningful are marked "N.M.". This MD&A covers the following: [[GREPCENT_TABLE]] [["","","Page"],["Introduction","","40"],["Consolidated Financial Highlights","","41"],["Consolidated Results of Operations","","42"],["Outlook for 2024","","44"],["Application of Critical Accounting Estimates","","45"],["Results of Operations by Segment","","50"],["Property & Casualty","","50"],["Life & Retirement","","53"],["Supplemental & Group Benefits","","56"],["Corporate & Other","","57"],["Investment Results","","57"],["Liquidity and Capital Resources","","60"],["Future Adoption of New Accounting Standards","","66"],["Effects of Inflation and Changes in Interest Rates","","66"]] [[/GREPCENT_TABLE]] Introduction The purpose of our MD&A is to provide an understanding of our consolidated results of operations and financial condition and should be read in conjunction with the Consolidated Financial Statements and Notes thereto contained in Part II - Item 8 of this Annual Report on Form 10-K. Our MD&A generally discusses the results of operations for the year ended December 31, 2023 compared to the year ended December 31, 2022. For a discussion of the results of operations for the year ended December 31, 2022 compared to the year ended December 31, 2021, please refer to Part II - Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2022, which was filed with the Securities and Exchange Commission (SEC) on February 28, 2023. HMEC is an insurance holding company focused on helping America’s educators and others who serve the community achieve lifelong financial success. Through our subsidiaries, we market and underwrite individual and group insurance and financial solutions tailored to the needs of the educational community including: •personal lines of property and casualty insurance, primarily auto and property coverages •retirement products, primarily tax-qualified fixed, variable and fixed indexed annuities •life insurance, primarily traditional term and whole life insurance products [[GREPCENT_TABLE]] [["40 Annual Report on Form 10-K","","Horace Mann Educators Corporation"]] [[/GREPCENT_TABLE]] •worksite direct insurance products, including cancer, heart, hospital, supplemental disability and accident •employer-sponsored insurance products, primarily long-term disability and short-term disability We market our products primarily to K-12 teachers, administrators and other employees of public schools and their families, whether they engage with Horace Mann directly or through their district/employer, as well as other markets of those who serve the community. Effective January 1, 2022, we acquired all the equity interests in Madison National Life Insurance Company, Inc., an insurance company organized under the laws of the State of Wisconsin (Madison National), for $172.3 million which added employer-sponsored products. As a result of the acquisition, Madison National became a wholly owned subsidiary of HMEC. We conduct and manage our business in four reporting segments. The three reporting segments representing the major lines of business, are: (1) Property & Casualty (primarily personal lines of auto and property insurance products), (2) Life & Retirement (primarily tax-qualified fixed and variable annuities as well as life insurance products), and (3) Supplemental & Group Benefits (primarily cancer, heart, hospital, supplemental disability, accident, short-term and long-term group disability, and group term life coverages). We do not allocate the impact of corporate-level transactions to these reporting segments, consistent with the basis for management's evaluation of the results of those segments, but classify those items in the fourth reporting segment, Corporate & Other. In addition to ongoing transactions such as corporate debt service, net investment gains (losses) and certain public company expenses, such items also have included corporate debt retirement costs, when applicable. See Part II - Item 8, Note 17 of the Consolidated Financial Statements in this Annual Report on Form 10-K for more information. Effective January 1, 2023, the Company adopted ASU 2018-12, Financial Services – Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts on a modified retrospective basis. Prior year balances were recast in this Annual Report on Form 10-K to conform to ASU 2018-12 effective January 1, 2021. See Part II - Item 8, Note 1, Note 6, and Note 18 of the Consolidated Financial Statements in this Annual Report on Form 10-K for more information. Consolidated Financial Highlights [[GREPCENT_TABLE]] [["($ in millions)","","Year Ended December 31,","","2023-2022"],["","","2023","","2022","","Change %"],["Total revenues","","$","1,491.9","","","$","1,381.6","","","8.0","%"],["Net income (loss)","","45.0","","","19.8","","","127.3","%"],["Per diluted share:"],["Net income (loss)","","1.09","","","0.47","","","131.9","%"],["Net investment losses, after tax","","(0.45)","","","(1.07)","","","N.M."],["Book value per share","","28.78","","","26.85","","","7.2","%"],["Net income return on equity - last twelve months","","4.0","%","","1.6","%","","2.4","pts"]] [[/GREPCENT_TABLE]] For 2023, net income increased $25.2 million compared the prior year primarily due to lower net investment losses and higher net investment income partially offset by higher interest credited, higher DAC amortization and a higher effective tax rate. [[GREPCENT_TABLE]] [["Horace Mann Educators Corporation","","Annual Report on Form 10-K 41"]] [[/GREPCENT_TABLE]] Consolidated Results of Operations [[GREPCENT_TABLE]] [["($ in millions)","","Year Ended December 31,","","2023-2022"],["","","2023","","2022","","Change %"],["Net premiums and contract charges earned","","$","1,057.1","","","$","1,027.7","","","2.9","%"],["Net investment income","","444.8","","","400.9","","","11.0","%"],["Net investment losses","","(24.0)","","","(56.5)","","","N.M."],["Other income","","14.0","","","9.5","","","47.4","%"],["Total revenues","","1,491.9","","","1,381.6","","","8.0","%"],["Benefits, claims and settlement expenses","","769.1","","","747.0","","","3.0","%"],["Interest credited","","205.7","","","173.4","","","18.6","%"],["Operating expenses","","318.1","","","315.5","","","0.8","%"],["DAC unlocking and amortization expense","","101.2","","","88.2","","","14.7","%"],["Intangible asset amortization expense","","14.8","","","16.8","","","-11.9","%"],["Interest expense","","29.7","","","19.4","","","53.1","%"],["Other expense - goodwill and intangible asset impairments","","\u2014","","","4.8","","","N.M."],["Total benefits, losses and expenses","","1,438.6","","","1,365.1","","","5.4","%"],["Income (loss) before income taxes","","53.3","","","16.5","","","N.M."],["Income tax expense (benefit)","","8.3","","","(3.3)","","","N.M."],["Net income (loss)","","$","45.0","","","$","19.8","","","127.3","%"]] [[/GREPCENT_TABLE]] 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. Net Investment Income 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: [[GREPCENT_TABLE]] [["","","Year Ended December 31,"],["","","2023","","2022"],["Investment yield, excluding limited partnership interests, pretax - annualized*","","4.7%","","4.3%"],["Investment yield, excluding limited partnership interests, after tax - annualized*","","3.8%","","3.4%"]] [[/GREPCENT_TABLE]] 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. [[GREPCENT_TABLE]] [["42 Annual Report on Form 10-K","","Horace Mann Educators Corporation"]] [[/GREPCENT_TABLE]] Net Investment Losses For 2023, net investment losses decreased $32.5 million. The breakdown of net investment gains (losses) by transaction type were as follows: [[GREPCENT_TABLE]] [["($ in millions)","","Year Ended December 31,"],["","","2023","","2022"],["Credit loss and intent-to-sell impairments","","$","(7.1)","","","$","(10.7)"],["Sales and other, net","","(25.0)","","","(17.8)"],["Change in fair value - equity securities","","7.9","","","(33.2)"],["Change in fair value and losses realized on settlements - derivatives","","0.2","","","5.2"],["Net investment losses","","$","(24.0)","","","$","(56.5)"]] [[/GREPCENT_TABLE]] 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 - [[GREPCENT_TABLE]] [["Horace Mann Educators Corporation","","Annual Report on Form 10-K 43"]] [[/GREPCENT_TABLE]]