ITEM 1A. I Risk Factors
Index to Risk Factors
Page
Introduction 23
Risks Related to Economic Conditions, Market Conditions and Investments 24
Strategic Risks 25
Operational Risks 27
Financial Strength, Credit and Counterparty Risks 32
Regulatory and Legal Risks 33
Introduction
We have identified what we believe reflect key significant risks to the organization, and in turn to our shareholders, which are outlined below. Any of the risks described below could result in a significant or material adverse effect on our results of operations or financial condition. In addition to these enumerated risks, we face numerous other strategic, operational and emerging risks that could in the aggregate lead to shortfalls to our long-term goals or add to short-term volatility in our earnings. Additionally, many risk factors are correlated, which could exacerbate the financial impact. The following review of important risk factors should not be construed as exhaustive and should be read in conjunction with the Forward-looking Information section located in Part I - Item 1 of this Annual Report on Form 10-K as well as Part II - Item 8, “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K and other reports and materials we submit to the SEC. The words or phrases believe, anticipate, estimate, project, plan, expect, intend, hope, forecast, evaluate, will likely result or will continue or words or phrases of similar import generally involve forward-looking statements. All of the risks that may affect our financial or operating performance may not be material at this time but may become material in the future.
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Risks Related to Economic Conditions, Market Conditions and Investments
Volatile financial markets and adverse economic environments can affect financial market risk as well as our financial condition and results of operations.
Our business and results of operations are materially affected by conditions in the capital markets and the U.S. economy, as well as by the global economy to the extent it affects the U.S. economy. Actual or perceived stressed conditions, volatility and disruptions in financial asset classes or various capital markets can have an adverse effect on us, both because we have a large investment portfolio and our benefit and claim liabilities are sensitive to changing market factors, including interest rates, credit spreads, derivative prices and availability, and volatility of capital markets. In an economic downturn characterized by higher unemployment and lower family income, the demand for our products could be adversely affected as customers are unwilling or unable to purchase them. In addition, we may experience an elevated incidence of claims, adverse utilization of benefits relative to our best estimate assumptions, and increased lapses or surrenders of policies. Such adverse changes in the economy could negatively affect our earnings and have a material adverse effect on our financial condition, results of operations and our ability to receive dividends from our insurance subsidiaries.
Significant market volatility in reaction to geopolitical risks, changing monetary policy, and uncertain fiscal policy may exacerbate some of the risks we face. Equity and credit market volatility may reduce net investment income from limited partnership interests accounted for using the equity method of accounting, negatively impacting the results of operations. Declining equity markets may also decrease separate account values as well as fixed account values of our retirement products, reducing certain fees generated by these products.
Recent increases in interest rates have increased our cost of borrowing and volatility in U.S. financial markets could impact our access to, or further increase the cost of, financing. Past disruptions in the U.S. credit and equity markets made it more difficult for many businesses to obtain financing on acceptable terms. These conditions tended to increase the cost of borrowing and if they recur, our cost of borrowing could increase and it may be more difficult to obtain financing for our operations.
Changes in interest rates could have a material adverse effect on our financial condition and results of operations.
Some of our products and investments expose us to interest rate risks which may reduce our investment spread and net income or increase our capital requirements.
Low interest rates may reduce income from our investment portfolio and increase our future policy benefit reserves. In addition, during periods of sustained lower interest rates, we may need to reinvest proceeds from certain investments at a lower yield, reducing our investment income. Moreover, borrowers may prepay or redeem the fixed income securities and loans in our investment portfolio with greater frequency. Although we may be able to lower interest crediting rates to help offset decreases in spread on Retirement products, our ability to lower these rates is limited to our products that have adjustable interest crediting rates, which could be limited by competition or contractually guaranteed minimum rates and may not match the timing or magnitude of changes in asset yields. As a result, our investment spread on Retirement products may decrease or become negative.
During periods of declining interest rates, life insurance and annuity products may be more attractive investments to consumers, resulting in increased premium payments on certain products, repayment of policy loans and increased persistency, while our new investments carry lower returns. During periods of declining interest rates, our future policy benefit reserves would increase due to the impact on discount rates.
Interest rate increases may also harm our profitability. During periods of rapidly increasing interest rates, we may not be able to replace the investments in our general account with higher yielding investments needed to fund the higher crediting rates required to stay competitive. This could result in a lower spread, lower profitability, and decreased sales. In addition, policy loans, surrenders and withdrawals may increase as policyholders seek investments with higher perceived returns. This may result in cash outflows requiring the sale of investments on less favorable terms, resulting in investment losses. Interest rate increases may harm the value of our investment portfolio, for example by decreasing the estimated fair values of fixed income securities. Furthermore, if interest rates rise, our unrealized gains on fixed income securities will decrease and our unrealized losses may increase. In addition, our investment borrowings from the Federal Home Loan Bank are secured by collateral, the fair value of which can be significantly impacted by general market conditions. If the fair value of pledged collateral falls
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below specific levels, we would be required to pledge additional eligible collateral or repay all or a portion of the investment borrowings, resulting in reduced investment income. Finally, an increase in interest rates may decrease fee income associated with the decline in the value of variable annuity account balances invested in fixed income funds.
Our investment portfolios are subject to the risk of loss.
The success of our investment strategy is crucial to the success of our business. We are exposed to investment risk through our investments, which primarily consist of public and private fixed maturity securities, equity securities and alternative assets including private equity, commercial mortgage loan and real estate funds.
Investment risk may result from (1) economic conditions, (2) adverse capital market conditions, including disruptions in individual market sectors or a lack of buyers in the marketplace, (3) volatility, (4) credit spread changes, (5) benchmark interest rate changes, and (6) declines in the value of underlying collateral. These factors may impact the credit quality, liquidity, and value of our investments, potentially resulting in higher capital charges and unrealized or realized losses. Also, certain investments we hold, regardless of market conditions, are relatively illiquid and our ability to promptly sell these assets for their full value may be limited.
We report our fixed maturity securities and other financial instruments at fair value. Valuations may include inputs and assumptions that are less observable or require greater estimation, particularly during periods of market disruption, resulting in values which may be higher or lower than the value at which the investments may ultimately be sold. Further, rapidly changing, and unprecedented credit and equity market conditions could materially impact the valuation of securities as reported in our financial statements, and the period-to-period changes in value could vary significantly. Decreases in value may have a material adverse effect on our results of operations or financial condition.
We evaluate our investment portfolio for credit losses. There can be no assurance that we have accurately assessed the level of credit losses taken. Additional credit losses may need to be taken in the future, and historical trends may not be indicative of future credit losses. Any event reducing the value of our securities may have a material adverse effect on our business, results of operations, or financial condition.
Strategic Risks
The personal lines insurance, retirement and supplemental group benefit markets are highly competitive and our financial condition and results of operations may be adversely affected by competitive forces.
We operate in a highly competitive environment and compete with numerous insurance companies, as well as mutual fund families, independent agent companies and financial planners. In some instances and geographic locations, competitors have specifically targeted the educator marketplace with specialized products and programs. We compete in our target market with a number of national providers of personal auto and property insurance, life insurance, retirement products and supplemental group benefits.
The insurance industry consists of a large number of insurance companies, some of which have substantially greater financial resources, more diversified product lines, more sophisticated product pricing, greater economies of scale and/or lower-cost marketing approaches compared to us. In our target market, we believe that the principal competitive factors in the sale of property and casualty insurance products and supplemental insurance products are overall service, worksite sales and service, price, and name recognition. We believe that for our market, the principal competitive factors in the sale of retirement products, life insurance products and supplemental group benefits are worksite sales and service, product features, perceived stability of the insurer, price, overall service and name recognition.
Particularly in the Property & Casualty business, our insurance subsidiaries have experienced pricing and profitability cycles. During these periods of intense competition, they may be unable to add policyholders and increase revenues without adversely impacting profit margins. With respect to these cycles, the factors having the greatest impact include significant and/or rapid changes in loss costs, including changes in loss frequency and/or severity, prior approval and restrictions in certain states for price increases, intense price competition, less restrictive underwriting standards, aggressive marketing, and increased advertising, which have resulted in higher industry-wide combined loss and expense ratios. Competition from direct writers and large, mass market carriers has been particularly aggressive, evidenced in part by their significant national advertising expenditures.
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In addition, advancements in vehicle technology and safety features, such as accident prevention technologies or the development of autonomous or partially autonomous vehicles — once widely available and utilized, as well as expanded availability of usage-based insurance, could materially alter the way that auto insurance is marketed, priced and underwritten. The inability of our insurance subsidiaries to effectively anticipate the impact of these issues on our business and compete successfully in the property and casualty business could adversely affect their financial condition and results of operations and the resulting ability to distribute cash to us.
In the Retirement business, there are several factors driving increased competition. First, the current IRS Section 403(b) regulations have made the 403(b) market similar to the 401(k) market. These changes have increased and could continue to increase the number of competitors in the 403(b) market, as it has become more attractive to some of the larger companies experienced in 401(k) plans, including both insurance and mutual fund companies, which had not previously been active competitors in this business. Further, while not yet widespread, there has been continued pressure in some states to adopt state-sponsored or mandated 403(b) plans with single-provider or limited-provider options; this pressure has come from competitor lobbying efforts and state legislature pension reform initiatives. The inability of our insurance subsidiaries to compete successfully in these circumstances could adversely affect their financial condition and results of operations and the resulting ability to distribute cash to us.
The development and maintenance of our various distribution channels are critical to growth in product sales and profits.
Our success in marketing and selling our products is largely dependent upon the efforts of our independent exclusive agent sales force and the success of their agency operations. If we are unable to recruit additional agents, fail to develop and retain high-producing agents, are unable to maintain the productivity of those agency operations, or are unable to maintain market penetration in existing territories, sales of our products could likely decline and our financial condition and results of operations could be adversely affected.
We also distribute group benefits under agreements with third-party distribution partners with distribution highly concentrated in one partner. If we are unable to retain our critical distribution partner or are unable expand to additional distribution partners, our sales could be adversely impacted.
In addition, a failure to effectively develop new methods of reaching consumers or realize cost efficiencies could impact our ability to grow our business and generate revenues as new sales could suffer.
If we are not able to maintain secure access to educators, our financial condition and results of operations could be adversely affected.
Our ability to successfully increase new business in the educator market is largely dependent on our ability to effectively access educators either in their school buildings or through other approaches. While this is especially true for the sale of 403(b) tax-qualified retirement products via payroll deduction and worksite direct sales, any significant decrease in access, either through fewer payroll slots, increased security measures, impacts of state or federal level pension reform initiatives, or for other reasons, could adversely affect the sale of all lines of business and require us to change our traditional approach to worksite marketing and promotion, as well as contact with potential customers. With the current IRS regulations regarding Section 403(b) arrangements, including retirement products, our ability to maintain and increase our share of the 403(b) market, and the access it gives for other product lines, will depend on our ability to successfully compete in this market. Some school districts and benefit consultants have placed emphasis on the relative financial strength ratings of competing companies, as well as low-cost product and distribution approaches, which may put us at a competitive disadvantage relative to other more highly rated insurance companies.
Our ability to maintain and obtain product and corporate endorsements from, and/or marketing agreements with, local, state and national education-related associations is important to our marketing strategy. In addition to teacher organizations, we have established relationships with various other educator, principal, school administrator and school business official groups. These contacts and endorsements help to establish our brand name and presence in the educational community and to enhance access to educators.
Lack of successful execution on acquisition integration strategies could result in impairment of goodwill and intangible assets that could adversely affect our results of operations.
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We accounted for the NTA and Madison National acquisitions using the acquisition method of accounting, which requires that the assets acquired and liabilities assumed be recognized on our consolidated balance sheet at their respective fair values as of the acquisition date, including recognition of intangible assets. Any excess of the purchase consideration over the fair value of the acquired net tangible and intangible assets is recognized as goodwill.
As of December 31, 2023, the Company's Consolidated Balance Sheet reflected goodwill of $34.9 million and intangible assets of $156.9 million recognized in connection with the recent acquisitions (see Part II - Item 8, Note 9 of the Consolidated Financial Statements for more information). To the extent the acquisitions do not provide the modeled returns, the value of goodwill or intangible assets could become impaired and thus, we may be required to recognize material non-cash charges relating to such impairment, which could adversely affect our results of operations.
Operational Risks
A catastrophe event, a series of multiple catastrophe events or a series of non-catastrophe severe weather events could have a material adverse effect on our financial condition and results of operations.
Underwriting results of property and casualty insurers are subject to weather and other conditions prevailing in an accident year. While one year may be relatively free of major weather or other disasters, not all of which are designated by the insurance industry as a catastrophe, another year may have numerous such events causing results for such a year to be materially worse than for previous years.
Our Property & Casualty insurance subsidiaries have experienced, and we anticipate that in the future they will continue to experience, catastrophe losses. A catastrophe event, a series of multiple catastrophe events or a series of non-catastrophe severe weather events could have a material adverse effect on the financial condition and results of operations of our insurance subsidiaries.
Various events can cause catastrophes, including hurricanes, windstorms, hail, severe winter weather, wildfires, earthquakes, explosions and terrorism. The frequency and severity of these catastrophes are inherently unpredictable. The extent of losses from a catastrophe is a function of both the total amount of insured exposures in the area affected by the event and the severity of the event. Although catastrophes can cause losses in a variety of property and casualty lines, most of the catastrophe-related claims of our insurance subsidiaries are related to property coverages. Our ability to provide accurate estimates of ultimate catastrophe losses is based on several factors, including:
•the proximity of the catastrophe occurrence date to the date of our estimate;
•potential inflation of property and auto repair costs in the affected area;
•supply chain interruptions resulting in cost increases, including availability of services and materials;
•the occurrence of multiple catastrophes in a geographic area over a relatively short period of time; and
•the outcome of litigation which may be filed against us by policyholders, state attorneys general and other parties relative to loss coverage disputes and loss settlement payments.
Based on 2023 direct premiums earned, 58.9% of the total annual premiums for our Property & Casualty business were for policies issued in the ten largest states in which the insurance subsidiaries write property and casualty coverage. Included in this top ten group are certain states which are considered to be more prone to catastrophe occurrences: California, Texas, North Carolina, Minnesota, Georgia, South Carolina, and Louisiana.
Our property and casualty loss reserves may not be adequate.
Our Property & Casualty insurance subsidiaries maintain loss reserves to provide for their estimated ultimate liability for losses and loss adjustment expenses with respect to reported and unreported claims incurred as of the end of each reporting date. If these loss reserves prove inadequate, a loss is recognized and measured by the amount of the shortfall and, as a result, the financial condition and results of operations of the insurance subsidiaries may be adversely affected, potentially affecting their ability to distribute cash to us.
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Reserves do not represent an exact calculation of liability. Reserves represent estimates, generally involving actuarial projections at a given time, of what the insurance subsidiaries expect the ultimate settlement and adjustment of claims will cost, net of salvage and subrogation. Estimates are based on assessments of known facts and circumstances, assumptions related to the ultimate cost to settle such claims, estimates of future trends in claims severity and frequency, changing judicial theories of liability and other factors. These variables are affected by both internal and external events, including changes in claims handling procedures, economic inflation, unpredictability of court decisions, plaintiffs' expanded theories of liability, risks inherent in major litigation and legislative changes. Many of these items are not directly quantifiable, particularly on a prospective basis. Significant reporting lags may exist between the occurrence of an insured event and the time it is reported. Our insurance subsidiaries adjust their reserve estimates regularly as experience develops and further claims are reported and settled.
The rise in inflation in recent periods has significantly increased our loss costs in our auto and property businesses. It is possible that inflation could remain at elevated levels for a prolonged period, or increase from these high levels, which could in turn lead to further increases in our loss costs. The impact of inflation on loss costs could be more pronounced for those lines of business that are considered “longer tail,” such as auto liability, as they require a relatively long period of time to finalize and settle claims for a given accident year. Recent changes in the macroeconomic environment have impacted medical labor and materials costs, the potential persistency of which could result in future loss costs which are higher than our current expectations. The estimation of loss reserves may also be more difficult during extreme events, such as a pandemic, or during volatile or uncertain economic conditions, due to unexpected changes in behavior of claimants and policyholders, including an increase in fraudulent reporting of exposures and/or losses, reduced maintenance of insured properties, increased frequency of small claims or delays in the reporting or adjudication of claims, and supply chain constraints.
Due to the inherent uncertainty in estimating reserves for losses and loss adjustment expenses, we cannot be certain that the ultimate liability will not exceed amounts reserved, with a resulting adverse effect on our financial condition and results of operations.
Actual experience differing significantly from our life pricing and reserving assumptions could negatively affect our results of operations and financial condition.
The profitability of our supplemental insurance, life insurance, and annuity products depends significantly upon the extent to which our actual experience is consistent with the assumptions used in setting prices for our products and establishing liabilities for our future policy benefits and claims. The premiums we charge and the liabilities we hold for future policy benefits are based on assumptions reflecting several factors, including the amount of premiums we will receive in the future, rate of return on assets we purchase, expected claims, mortality, morbidity, lapse rates and expenses. In addition, for our supplemental products, historical results may not be indicative of future performance due to, among other things, changes in our mix of business, regulatory actions or changes in legal doctrine impacting our products or lines of business, or any number of economic cyclical effects including inflation.
Due to the nature of the underlying risks and the degree of uncertainty associated with the determination of the liabilities for unpaid policy benefits and claims, we cannot precisely determine the amounts we will ultimately pay to settle these liabilities, the timing of such payments, or whether the assets supporting the liabilities, together with future premium, will be sufficient to satisfy the liabilities. As a result, we may experience volatility in the level of our profitability and our reserves from period to period. To the extent that actual experience is less favorable than our underlying assumptions, we could be required to increase our liabilities, which my harm our financial strength and reduce our profitability.
A large-scale pandemic, the occurrence of terrorism or military actions may have an adverse effect on our business.
A large-scale pandemic, the occurrence of terrorism or military and other actions may result in loss of life, property damage, and disruptions to commerce and reduced economic activity. Some of the assets in our investment portfolio may be adversely affected by declines in the equity markets, changes in interest rates, reduced liquidity and economic activity caused by a large-scale pandemic. Additionally, a large-scale pandemic or terrorist act could have a material effect on sales, liquidity and operating results.
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The effects of a global pandemic on the U.S. economy, our customers, our agents, our employees, our investments and our communities, as well as any preventative or protective actions that we, our employees and agency force, our third-party service providers and suppliers, or governments may take to mitigate the impact of a global pandemic could have an adverse effect on our ability to conduct business and on our financial condition and results of operations. Impacts to our business have been and could continue to be widespread and may result in the following:
•employees contracting effects from a global pandemic;
•increased competition in hiring and retaining employees and agents;
•sustained lack of access to schools and educators that could materially impact our sales and premium volumes;
•public school systems facing budget constraints due to the economic impacts of the pandemic that could result in educator layoffs;
•unprecedented volatility in financial markets that could materially affect our investment portfolio valuations and returns as well as our ability to generate targeted spreads on indexed products;
•regulatory mandates and/or legislative changes, including premium grace periods and premium credits;
•changes in frequency and/or severity of claims;
•supply chain interruptions resulting in cost increases, including availability of services and materials;
•increased credit risk;
•business disruption for insurance agents who market and sell our insurance products; and,
•business disruptions to third parties at which we outsource certain business functions to or on which we rely for technology.
The full extent to which pandemics or terrorist acts could affect the global economy, the financial markets and our business, our financial condition and our results of operations will depend on future developments and factors that cannot be predicted.
Climate change may adversely affect our financial position, results of operations and cash flows.
Climate change presents risk to us and there are concerns that the increased frequency, severity and geographic spread of weather-related catastrophes and other losses, as well as time of year of occurrence are indicative of changing weather patterns, whether as a result of climate-warming trends (global climate change) caused by human activities or otherwise, which could cause such events to persist. Increased weather-related catastrophes could lead to higher overall losses, which we may not be able to recoup, particularly in a highly regulated and competitive environment, and higher reinsurance costs. Certain catastrophe models assume an increase in frequency and severity of certain weather or other events, which could result in a disproportionate impact on insurers with certain geographic concentrations of risk. This could also likely increase the risks of writing property insurance in coastal areas or areas susceptible to wildfires or hail and wind activity, particularly in jurisdictions that restrict pricing and underwriting flexibility. The threat of rising sea levels or other catastrophe losses as a result of global climate change may also cause property values in coastal or such other communities to decrease, reducing the total amount of insurance coverage that is required.
In the short term, extreme weather conditions cause financial impacts and disruptions in our daily Property & Casualty operations. We have experienced millions of dollars in losses from catastrophes such as hurricanes, wildfires, wind, and thunderstorms. Catastrophes can also impact a property and casualty insurance company's claims and claim adjustment expenses incurred.
In addition, global climate change could have an impact on our fixed maturity securities and limited partnership portfolios, resulting in realized and unrealized losses in future periods that could have a material adverse effect on our financial position, results of operations and cash flows. It is not possible to foresee which, if any, assets,
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industries or markets may be materially and adversely affected, nor is it possible to foresee the magnitude of such effect.
Further, it is also possible that the legal, regulatory and social responses to climate change could have an adverse effect on our financial condition, results of operations and cash flows. In 2022, the SEC proposed a new disclosure rule that would require public companies to disclose on several climate-related factors, including climate-related risk management and greenhouse gas emissions, among others. This rule is expected to be finalized in 2024. We expect that changes in these laws, regulations and proposals could negatively impact our business, including by increasing our legal, compliance and information technology costs. For additional impacts from the regulatory environment, see Part I - Item 1A - Risk Factors - 'Legal, statutory and regulatory developments could adversely impact our business by increasing costs or making our business less profitable."
Cybersecurity breaches could have an adverse effect on our business and reputation.
Cybersecurity threats and incidents have increased in recent years in frequency, levels of persistence, sophistication and intensity, and we may be subject to heightened cyber-related risks. Our business depends on the proper functioning and availability of our information technology platform, including communications and data processing systems, our proprietary systems, and systems of our third-party service providers. We have implemented and maintain what we believe to be reasonable security measures, but we cannot guarantee that the controls and procedures we have in place to protect or recover our respective systems and the information stored on such systems will be effective, successful or sufficiently rapid to avoid harm to our business. Moreover, while we generally perform cybersecurity due diligence on our key service providers, we cannot ensure the cybersecurity measures they take will be sufficient to protect any information we share with them. Due to applicable laws, regulations, rules, standards and contractual obligations, we may be held responsible for cyber-attacks, security breaches or other similar incidents attributed to our service providers as they relate to the information we share with them.
Cybersecurity threats are evolving in nature and becoming increasingly difficult to detect, and may come from a variety of sources, including organized criminal groups, “hacktivists,” terrorists, and nation state-supported actors. These threats include, among other things, computer viruses, worms, malware, ransomware, denial of service attacks, defective software, credential stuffing, social engineering, phishing attacks, human error, fraud, theft, or improper access by employees or service providers, and other similar threats. Any cybersecurity incident, including system failure, cyber-attacks, security breaches, disruption by malware or other damage, with respect to our or our service providers’ information technology systems, could interrupt or delay our operations, result in a violation of applicable cybersecurity, privacy, data protection or other laws, regulations, rules, standards or contractual obligations, damage our reputation, cause a loss of customers or expose sensitive customer data, give rise to civil litigation, injunctions, damages, monetary fines or other penalties, subject us to additional regulatory scrutiny or notification obligations, and/or increase our compliance costs, any of which could adversely affect our business, financial conditions and results of operations.
We may not be able to anticipate all cyber-attacks, security breaches or other similar incidents, detect or react to such incidents in a timely manner, or adequately remediate any such incident. In addition, recent disclosure requirements add additional risk that bad actors might use the information with malicious intent, exacerbating the impacts of a breach. While management is not aware of any cyber-attack, security breach or other similar incident that has had a material effect on our operations, there can be no assurances that such an incident that could have a material impact on us will not occur in the future.
Further, the cybersecurity, privacy and data protection regulatory environment is evolving, and it is likely that the costs of complying with new or developing regulatory requirements will increase. For example, we operate in a number of jurisdictions with strict cybersecurity, privacy, data protection and other related laws, regulations, rules and standards, which could be violated in the event of a significant cyber-attack, security breach or other similar incident affecting personal, proprietary or confidential information or in the event of noncompliance by our personnel with such obligations.
We cannot ensure that any limitations of liability provisions in our agreements with clients, service providers and other third parties with which we do business would be enforceable or adequate or otherwise protect us from any liabilities or damages with respect to any claim in connection with a cyber-attack, security breach or other similar incident. In addition, while we maintain insurance that would mitigate the financial loss under such scenarios, providing what we believe to be appropriate policy limits, terms and conditions, we cannot guarantee that our insurance coverage will be adequate for all financial and non-financial consequences from a
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cybersecurity event, that insurance will continue to be available to us on economically reasonable terms, or at all, or that our insurer will not deny coverage as to any future claim.
Successful execution of our business growth strategy is dependent on effective implementation of new or enhanced technology systems and applications.
Our ability to effectively execute our business growth strategy and leverage potential economies of scale is dependent on our ability to provide the requisite technology components for that strategy. Our ability to replace or supplement dated, legacy business systems — such as our Life & Retirement and Property & Casualty policy administrative systems, as well as our financial system — with more flexible, maintainable, and customer accessible solutions will be necessary to achieve our plans. The inherent difficulty in replacing and/or modernizing these older technologies, coupled with our limited experience in these endeavors, presents an increased risk of failing to deliver these technology solutions in a cost effective and timely manner. Our scale will require us to develop innovative solutions to address these challenges, including consideration of "software as a service" arrangements and other third-party based information technology capabilities. More modern approaches to software development and utilization of third-party vendors can augment our internal capacity for these implementations but may not adequately reduce the operational risks of timely and cost-effective delivery.
Loss of key vendor relationships could affect our operations.
We increasingly rely on services and products provided by a number of vendors in the U.S. and abroad. These include, for example, vendors of computer hardware and software, including on-demand software, and vendors of services such as investment management advisement, third-party administrators of our supplemental group benefit products, information technology services — such as those associated with policy administrative systems — and delivery services for customer policy-level communications. In the event that one or more of our vendors suffers a bankruptcy or otherwise becomes unable to continue to provide products or services, we may suffer operational difficulties and financial losses.
Our ability to attract, develop, engage, and retain top talent, maintain optimal staffing levels, and foster/sustain a highly inclusive and engaging culture is critical to our success.
Competition from within the insurance industry and from other industries, including the technology sector, for qualified employees with highly specialized knowledge in areas such as underwriting, data and analytics, technology and e-commerce, has often been intense and we have experienced increased competition in hiring and retaining employees.
Factors that affect our ability to attract and retain such employees include:
•competitive total rewards; including compensation and benefits;
•robust training and development programs;
•reputation as a successful business with a culture of fair hiring, and of training and promoting qualified employees; and,
•recognition and responsiveness to changing trends (i.e., remote/hybrid work arrangements) and other circumstances that affect employees.
The unexpected loss of key personnel could have a material adverse impact on our business because of the loss of their skills, knowledge of our products and offerings and years of industry experience and, in some cases, the difficulty of promptly finding qualified replacement personnel. The risks to attracting and retaining the necessary talent may be exacerbated by recent labor constraints and inflationary pressures on employee wages and benefits.
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Financial Strength, Credit and Counterparty Risks
Losses due to defaults by others could reduce our profitability or negatively affect the value of our investments.
Third-party debtors may not pay or perform their obligations. These parties may include the issuers whose securities we hold, customers, reinsurers, borrowers under mortgage loans, trading counterparties, derivative counterparties, clearing agents, exchanges, clearing houses and other financial intermediaries. These parties may default on their obligations to us due to bankruptcy, lack of liquidity, downturns in the economy or real estate values, operational failure or other reasons.
During or following an economic downturn, our municipal bond portfolio could be subject to a higher risk of default or impairment due to declining municipal tax bases and revenue. States are currently barred from seeking protection in federal bankruptcy court. However, federal legislation could possibly be enacted to allow states to declare bankruptcy in connection with deficit reductions or mounting unfunded pension liabilities, which could adversely impact the value of our municipal bond portfolio.
The default of a major market participant could disrupt the securities markets or clearance and settlement systems in the U.S. or abroad. A failure of a major market participant could cause some clearance and settlement systems to assess members of that system, including our broker-dealer and Registered Investment Adviser regulatory entities, or could lead to a chain of defaults that could adversely affect us. A default of a major market participant could disrupt various markets, which could in turn cause market declines or volatility and negatively impact our financial condition and results of operations.
Uncollectible reinsurance, as well as reinsurance availability and pricing, can have a material adverse effect on our business volume and profitability.
Reinsurance is a contract by which one insurer, called a reinsurer, agrees to cover a portion of the losses incurred by a second insurer in the event a claim is made under a policy issued by the second insurer. Although a reinsurer is liable to our insurance subsidiaries according to the terms of the reinsurance policy, the insurance subsidiaries remain primarily liable as the direct insurers on all risks reinsured. As a result, reinsurance does not eliminate the obligation of our insurance subsidiaries to pay all claims, and each insurance subsidiary is subject to the risk that one or more of its reinsurers will be unable or unwilling to honor its obligations.
Although we limit participation in our reinsurance programs to reinsurers with high financial strength ratings and also limit the amount of coverage from each reinsurer, our insurance subsidiaries cannot guarantee that their reinsurers will pay in a timely fashion, if at all. Reinsurers may become financially unsound by the time that they are called upon to pay amounts due, which may not occur for many years.
Additionally, the availability and cost of reinsurance are subject to prevailing market conditions beyond our control. For example, significant losses from hurricanes or terrorist attacks, an increase in capital requirements, or a future lapse of the provisions of the Terrorism Risk Insurance Act could have a significant adverse effect on the reinsurance market.
If one of our insurance subsidiaries is unable to obtain adequate reinsurance at reasonable rates, that insurance subsidiary would have to increase its risk exposure and/or reduce the level of its underwriting commitments, which could have a material adverse effect upon the business volume and profitability of the subsidiary. Alternatively, the insurance subsidiary could elect to pay the higher than reasonable rates for reinsurance coverage, which could have a material adverse effect upon its profitability until policy premium rates could be raised, in some cases subject to approval by state regulators, to incorporate this additional cost.
We are subject to the credit risk of our counterparties, including reinsurers who reinsure business from our insurance companies.
Our insurance subsidiaries may cede certain risks to third-party insurance companies through reinsurance. In the event of insolvency of a reinsurer, our financial condition and results of operation could be negatively impacted.
HMLIC entered into a reinsurance agreement with RGA to effectuate the reinsurance of a block of in force fixed and variable annuities on a coinsurance and modified coinsurance basis. The variable portion of the reinsured annuities is reinsured on a modified coinsurance basis and assets supporting the variable account liabilities are still held in separate accounts. Because the reinsurance agreement covers a large volume of our in-force annuity
32 Annual Report on Form 10-K Horace Mann Educators Corporation
business, the transaction exposes us to a concentration of credit risk with respect to this counterparty. RGA's financial obligations for the general account liabilities of the reinsured annuity contracts are secured by its assets placed in a comfort trust for our sole use and benefit. Upon RGA's material breach of the reinsurance agreement, deterioration of its risk-based capital ratio to a certain level, or certain other events, we may recapture the reinsured business. However, in the event of RGA's insolvency, our right to use the assets in the trust account may be delayed. Also, if at the time of its insolvency the comfort trust account is not funded at a level to fully discharge all its obligations, our claims to the extent not covered by the assets in the comfort trust would be those of a general creditor.
Any downgrade in or adverse change in outlook for our claims-paying ratings, financial strength ratings or credit ratings could adversely affect our financial condition and results of operations.
Claims-paying ratings and financial strength ratings have become an increasingly important factor in establishing the competitive position of insurance companies. In the evolving 403(b) retirement market, school districts and benefit consultants have placed an emphasis on the relative financial strength ratings of competing companies. Each rating agency reviews its ratings periodically and from time to time may modify its rating criteria including, among other factors, its expectations regarding capital adequacy, profitability and revenue growth. A downgrade in the ratings or adverse change in the ratings outlook of any of our insurance subsidiaries by a major rating agency could result in substantial loss of business for that subsidiary if school districts, policyholders, distribution partners or independent agents move their business to other companies having higher claims-paying ratings and financial strength ratings than we have. This loss of business could have a material adverse effect on the results of operations and financial condition of that subsidiary.
A downgrade of our debt rating also could adversely affect our cost and flexibility of borrowing, which could have an adverse effect on our liquidity, financial condition and results of operations.
Regulatory and Legal Risks
Changes in tax rates, laws or regulations could adversely impact our financial results.
A significant part of our retirement business involves fixed and variable 403(b) tax-qualified products, which are purchased voluntarily by individuals employed by public school systems or other tax-exempt organizations. Our financial condition and results of operations could be adversely affected by changes in federal and state laws and regulations that affect the relative tax and other advantages of our retirement products to clients or the tax benefits of programs utilized by our customers. As a result of persisting economic conditions, revenue challenges exist at federal, state, and local government levels. These challenges could increase the risk of future adverse impacts on current tax-advantaged products or result in notable reforms to educator pension programs.
Current federal income tax laws generally permit the tax-deferred accumulation of earnings on the premiums paid by holders of retirement and life insurance products. Taxes, if any, are generally payable on income attributable to a distribution under the contract for the year in which the distribution is made. From time to time, Congress has considered legislation that would reduce or eliminate the benefit of such deferral of taxation on the accretion of value within life insurance and non-qualified annuity contracts. Enactment of this legislation, or other tax reform efforts could result in fewer sales of life insurance and retirement products.
Changes in administration could result in initiatives at the federal level increasing the federal corporate income tax from the current rate of 21%. Any future legislative action could increase our costs, the impact of which could be significant. We are unable to predict the outcome or effects of any of these potential actions or any other legislative or regulatory proposals as they relate to our businesses.
Our business is subject to extensive regulation, which limits our operating flexibility and could negatively impact our financial results.
We are subject to extensive regulation and supervision in the jurisdictions in which we do business. Each jurisdiction has a unique and complex set of laws and regulations. Furthermore, certain federal laws impose additional requirements on businesses, including insurers. Regulation generally is designed to protect the interests of policyholders, as opposed to stockholders and non-policyholder creditors. Such regulations, among other things, impose restrictions on the amount and type of investments our insurance subsidiaries may hold.
Horace Mann Educators Corporation Annual Report on Form 10-K 33
Dodd-Frank created the Federal Insurance Office (FIO) within the U.S. Department of the Treasury. FIO studies the current insurance regulatory system and is charged with monitoring and providing specific reports on various aspects of the insurance industry. However, FIO does not have general supervisory or regulatory authority over the business of insurance. FIO has suggested an expanded federal role in some circumstances. Additional federal regulations could adversely affect the efficiency and effectiveness of business processes, financial condition and results of operations of us, insurers of similar size and/or the insurance industry as a whole.
Our insurance subsidiaries are regulated by a department of insurance in each state and territory in which we do business. Certain states have established minimum capital requirements for insurance companies licensed to do business in their state. These regulators have the discretionary authority through licensing to limit or prohibit writing new business within the jurisdiction when, in the state’s judgment, the insurance subsidiary is not maintaining adequate statutory surplus or capital. States also regulate the rates insurers may charge for certain property and casualty products. Legislation and voter initiatives have expanded, in some instances, the states' regulation of rates and have increased data reporting requirements. Consumer-related pressures to roll back rates, even if not enacted by legislation or upheld upon judicial appeal, may affect our ability to obtain timely rate increases or operate at desired levels of profitability. Changes in insurance regulations, including those affecting the ability of our insurance subsidiaries to distribute cash to us and those affecting the ability of our insurance subsidiaries to write profitable property and casualty insurance policies in one or more states, may adversely affect the financial condition and results of operations of the insurance subsidiaries.
Our insurance subsidiaries are subject to a system of assessing minimum capital adequacy, known as risk-based capital (RBC). RBC is used to identify companies that may merit further regulatory action by analyzing the adequacy of the insurer's surplus in relation to statutory requirements. Our insurance subsidiaries could be adversely affected by regulations that change statutory surplus and RBC requirements. If an insurer’s ratio falls below specified levels, the insurer is subject to different degrees of regulatory action depending on the magnitude of the deficiency. This could have a material adverse effect upon the business volume and profitability of the insurance subsidiaries as well as result in increased regulatory scrutiny or action by state regulatory authorities.
Our broker-dealer and investment advisor subsidiaries are subject to regulation and supervision by the SEC, FINRA and certain state regulatory bodies. The SEC, FINRA and other governmental agencies, as well as state securities commissions, may examine or investigate the activities of broker-dealers and investment advisors. It is possible that any examination or investigation could lead to enforcement action by the regulator and/or may result in payment of fines and penalties, payments to customer or both, which could have an adverse effect on the Company’s financial condition or results of operations.
In the event of insolvency, liquidation or other reorganization of any of our insurance subsidiaries, our creditors and stockholders would have no right to proceed against any such insurance subsidiary or cause the liquidation or bankruptcy of any such insurance subsidiary under federal or state bankruptcy laws. The insurance laws of the domiciliary state would govern such proceedings and the relevant insurance commissioner would act as liquidator or rehabilitator for the insurance subsidiary. Creditors and policyholders of any such insurance subsidiary would be entitled to full payment from the assets of the insurance subsidiary before we, as a stockholder, would be entitled to receive any distribution.
Legal, statutory and regulatory developments could adversely impact our business by increasing costs or making our business less profitable.
Because state legislatures remain concerned about the availability and affordability of property and casualty insurance and the protection of policyholders, our insurance subsidiaries expect that they will continue to face expanded regulations to address these concerns. In addition, legislative and regulatory restrictions are constantly evolving and are subject to then-current political pressures. For example, following major events, states have considered, and in some cases have adopted, proposals such as homeowner's 'Bill of Rights" restrictions on storm deductibles, additional mandatory claim handling guidelines, and mandatory coverages. Environmental, Social, and Governance standards (ESG) and sustainability have become major topics encompassing a wide range of issues, including climate change, which are subject to public policy debates and could lead to regulations that increase our cost of doing business. In addition to increased costs, the regulatory environment may not allow us to fully incorporate potential future climate change into our pricing actions.
Further, the Dodd-Frank Act enacted wide-ranging changes in the supervision and regulation of the financial industry providing greater oversight of financial industry participants, enhanced public company corporate
34 Annual Report on Form 10-K Horace Mann Educators Corporation
governance practices and executive compensation disclosures, and greater protections to individual consumers and investors. Certain elements of the Dodd-Frank Act remain subject to implementing regulations that are yet to be adopted by the applicable regulatory agencies. Compliance with adopted regulations could affect the products and services we choose to offer and would likely result in increased compliance costs.
The financial position of our insurance subsidiaries also may be affected by court decisions that expand insurance coverage beyond the intention of the insurer at the time it originally issued an insurance policy.
We expect that changes in these laws, regulations and proposals could negatively impact our business, including by increasing our legal, compliance and information technology costs, and potentially other costs, including greater risks of client lawsuits and enforcement activity by regulators. These changes may also affect the products and services we choose to offer to clients, as well as the compensation that we and our financial professionals receive in connection with such products and services, which could adversely impact our profitability or ability to recruit and retain agents or distribution partners.
Litigation may harm our financial strength or reduce our profitability.
Companies in the insurance industry have been subject to substantial litigation resulting from claims, disputes and other matters. Most recently, they have faced expensive claims, including class action lawsuits, alleging, among other things, improper sales practices and improper claims settlement procedures. Negotiated settlements of certain such actions have had a material adverse effect on many insurance companies. The resolution of similar future claims against any of our insurance subsidiaries, including the potential adverse effect on our reputation and charges against the earnings of our insurance subsidiaries as a result of legal defense costs, a settlement agreement or an adverse finding or findings against our insurance subsidiaries in such a claim, could have a material adverse effect on the financial condition and results of operations of our insurance subsidiaries. See also Part II - Item 8, Note 14 of the Consolidated Financial Statements of this Annual Report on Form 10-K.
Events, including those external to our operations, could damage our reputation.
There are many events which may harm our reputation, including, but not limited to, those discussed in this Item 1A regarding regulatory investigations, legal proceedings, and cyber or other information security incidents. Any negative public perception, founded or otherwise, can be widely and rapidly shared over social media or other means, and could cause damage to our reputation. Damage to our reputation could reduce demand for our insurance products, reduce our ability to recruit and retain employees, or lead to greater regulatory scrutiny of our operations.
As an insurance company, we are paid to accept certain risks. Those who conduct our business, including executive officers and members of management, employees and independent agents, do so in part by making decisions that involve exposing us to risk. These include decisions such as maintaining effective underwriting and pricing discipline, maintaining effective claims management and customer service performance, managing our investment portfolio, delivering effective technology solutions, complying with established sales practices, executing our capital management strategy, exiting a line of business and/or pursuing strategic growth initiatives, and other decisions. Although we employ controls and procedures designed to monitor business decisions and prevent us from taking excessive risks or unintentionally failing to comply with internal policies and practices, there can be no assurance that these controls and procedures will be effective. If our employees and independent agents take excessive risks and/or fail to comply with internal policies and practices, the impact of those events may damage our market position and reputation.
ITEM 1B. I Unresolved Staff Comments
None.
Horace Mann Educators Corporation Annual Report on Form 10-K 35
ITEM 1C. I Cybersecurity
As a multi-line insurance company, our business operations rely upon secure information technology systems for data processing, storage, and reporting. Despite security and controls design, such information technology systems could become subject to cyberattacks. Network, system, application, and data breaches could result in operational disruptions or information misappropriation, which could have a material adverse effect on our business, results of operations and financial condition. Unauthorized access to or unintentional dissemination of confidential, highly-sensitive customer, employee, or company data through breach in our facilities, networks, or databases, or those of our agents or third-party information technology and software vendors, could result in loss or theft of assets or operational disruption.
To address cybersecurity risk, we maintain a cybersecurity risk management program that is overseen by the Chief Information Security Officer (CISO). The CISO is responsible for developing, maintaining, and enforcing cybersecurity and cyber risk-related policies; ensuring the Company and its subsidiaries satisfy requirements of relevant regulations and third-party risk assessments; identifying and keeping abreast of developing security threats; as well as overseeing and implementing regular security awareness training of all employees on cybersecurity. In leading the cybersecurity risk management program, the CISO regularly works with other divisions of the company, including legal, compliance, IT, audit, and others to address potential risk from external threats, internal actions, and relationships with third-party service providers.
Horace Mann’s CISO has more than two decades of experience in IT, including network, infrastructure, and cybersecurity. Before coming to Horace Mann, he led perimeter security at a publicly traded company, and the cybersecurity team of more than 150 members at another publicly traded company. In addition to the CISO, our internal cybersecurity team also works with third-party cybersecurity vendors to both mature the cybersecurity program and assess, monitor, and respond to cybersecurity threats.
The Board of Directors exercises risk management oversight, including cybersecurity risk, through the Audit Committee. The Audit Committee receives regular reports on our risk management program. These include regular reports from the CISO on the state of our cybersecurity risk management program and updates on cybersecurity matters.
The CISO is responsible for identifying and reporting any cybersecurity incidents to the Disclosure Committee. The Disclosure Committee is composed of senior executives from across Horace Mann and has oversight over SEC disclosure controls. After notification, the Disclosure Committee or designated subgroup would review known information and develop an action plan, which would include Board outreach, expert retention, insurance notification, communication plans, and a materiality assessment.
Although we believe we and our IT providers employ appropriate security technologies (including data encryption processes, intrusion detection systems), and conduct comprehensive risk assessments and other internal control procedures to assure the security of our and our customers' data, we can provide only reasonable, not absolute, assurance that these objectives will be met. Further, the design of any cybersecurity risk management program or control system must reflect the fact that there are resource constraints, and the benefits must be considered relative to their costs. As a result, the possibility of material financial loss remains despite our significant and comprehensive cybersecurity efforts. An investor should carefully consider the risks and all other information set forth in this Annual Report on Form 10-K, including disclosures in Part I - Item 1A—Risk Factors.
ITEM 2. I Properties
As of December 31, 2023, we owned three buildings located in Springfield, Ill. comprised of our headquarters of approximately 225,000 square feet, a warehouse of approximately 11,000 square feet and one other building of approximately 12,000 square feet. In addition, we lease office space in suburban Dallas, Tx., Cherry Hill, N.J, and Madison, Wisc. which are utilized by one or more of all four reporting segments, depending on the location. For more information regarding our reporting segments, see Part I - Item 1, Reporting Segments of this Annual Report on Form 10-K. We believe our properties and facilities are suitable and adequate for current operations.
36 Annual Report on Form 10-K Horace Mann Educators Corporation
ITEM 3. I Legal Proceedings
For a description of noteworthy litigation, see Part II - Item 8, Note 14 of the Consolidated Financial Statements of this Annual Report on Form 10-K.
ITEM 4. I Mine Safety Disclosures
Not applicable.
PART II
ITEM 5. I Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information and Dividends
Our common stock is traded on the NYSE under the symbol HMN. The following table provides the high and low bid information of our common stock on the NYSE Composite Tape and the cash dividends paid per share of common stock during the periods indicated.
Market Price Dividends
Fiscal Period High Low Paid
The payment of dividends in the future is subject to the discretion of the Board and will depend upon general business conditions, legal restrictions and other factors the Board may deem to be relevant. Additional information is contained in Part I - Item 1, Cash Flow and in Part II - Item 8, Note 13 of the Consolidated Financial Statements in this Annual Report on Form 10-K.
Horace Mann Educators Corporation Annual Report on Form 10-K 37
Shareholder Return Performance Graph
The graph below sets forth the total five-year shareholder return on our common stock. The graph assumes a $100 investment as of December 31, 2018. The S&P 500 Index and the S&P 500 Insurance Index assume an annual reinvestment of dividends in calculating total return. We assume reinvestment of quarterly dividends when paid.
Comparison of Cumulative Five-Year Total Return to Shareholders
Holders and Shares Issued
As of February 16, 2024, the number of holders of our common stock was approximately 32,000.
For information required by Item 201(d) of Regulation S-K regarding the equity compensation plan, see Part III - Item 12, of this Annual Report on Form 10-K.
Issuer Purchases of Equity Securities
On May 25, 2022, our Board of Directors authorized a share repurchase program allowing repurchases of up to $50 million (2022 Program) to begin following the completion of the $50 million repurchase plan which was authorized on September 30, 2015 (2015 Program). Both Programs authorize the repurchase of our common shares in open market or privately negotiated transactions, from time to time, depending on market conditions. The Programs do not have expiration dates and may be limited or terminated at any time without notice. During the three months ended September 30, 2022, the 2015 Program was completed and we began repurchasing shares under the 2022 Program.
38 Annual Report on Form 10-K Horace Mann Educators Corporation
For the quarterly periods ended 2023 and 2022, we repurchased shares of our common stock under the Programs as follows:
Fourth Quarter — $ — — $34.9 million
Fourth Quarter — $ — — $41.3 million
ITEM 6. I [Reserved]
Horace Mann Educators Corporation Annual Report on Form 10-K 39
ITEM 7. I Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)
($ 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:
Page
Introduction 40
Consolidated Financial Highlights 41
Consolidated Results of Operations 42
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
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
40 Annual Report on Form 10-K Horace Mann Educators Corporation
•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
Per diluted share:
Net investment losses, after tax (0.45) (1.07) N.M.
Net income return on equity - last twelve months 4.0 % 1.6 % 2.4 pts
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.
Horace Mann Educators Corporation Annual Report on Form 10-K 41
Consolidated Results of Operations
Net premiums and contract charges earned $ 1,057.1 $ 1,027.7 2.9 %
Net investment losses (24.0) (56.5) N.M.
Benefits, claims and settlement expenses 769.1 747.0 3.0 %
DAC unlocking and amortization expense 101.2 88.2 14.7 %
Intangible asset amortization expense 14.8 16.8 -11.9 %
Other expense - goodwill and intangible asset impairments — 4.8 N.M.
Income (loss) before income taxes 53.3 16.5 N.M.
Income tax expense (benefit) 8.3 (3.3) N.M.
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:
Year Ended December 31,
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.
42 Annual Report on Form 10-K Horace Mann Educators Corporation
Net Investment Losses
For 2023, net investment losses decreased $32.5 million. The breakdown of net investment gains (losses) by transaction type were as follows:
($ in millions) Year Ended December 31,
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)
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 -
Horace Mann Educators Corporation Annual Report on Form 10-K 43
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.
Outlook for 2024
The following discussion provides outlook information for our results of operations and capital position.
Consolidated Results
At the time of issuance of this Annual Report on Form 10-K, 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%. These results anticipate the following:
•8% to 9% increase in Net premiums and contract charges earned driven by Property & Casualty rate actions
•Between $465 million and $475 million of Net investment income, including approximately $105 million of accreted investment income on the deposit asset on reinsurance in the Life & Retirement segment. This anticipates strong returns from our commercial mortgage loan portfolio as well as returns for our limited partnerships moving toward their historic averages
•Approximately 5.5% increase in total Operating expense
•Approximately $35 million in corporate Interest expense included in results for the Corporate & Other segment
44 Annual Report on Form 10-K Horace Mann Educators Corporation
Property & Casualty Segment
In 2024, net income for Property & Casualty is anticipated to be in the range of $36 million to $41 million. Our outlook anticipates:
•Combined ratio near 100%
•Catastrophe loss assumption of approximately $80 million or around 11% of net earned premiums – in line with five-year average and consistent with historical frequencies and current severities applied to modeled exposures
We anticipate achieving our longer-term Property & Casualty combined ratio target of 95-96% in 2025.
Life & Retirement Segment
In 2024, net income for Life & Retirement is anticipated to be in the range of $77 million to $81 million. Our outlook anticipates:
•Spread on the fixed annuity business above the target range of 220 to 230 basis points
•Mortality modestly higher than 2023
Supplemental & Group Benefits Segment
In 2024, net income for Supplemental & Group Benefits is anticipated to be in the range of $47 million to $50 million. Our outlook anticipates:
•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%
•Pretax profit on revenue of between 20% and 21%
As described in Critical Accounting Estimates, certain of our significant accounting measurements require the use of estimates and assumptions. As additional information becomes available, adjustments may be required. Those adjustments are charged or credited to net income for the period in which the adjustments are made and may impact actual results compared to our estimates above. Additionally, see forward-looking information in Part I - Items 1 and 1A of this Annual Report on Form 10-K concerning other important factors that could impact actual results. Our projections due not include a forecast of net investment gains (losses), which can vary substantially from one period to another and may have a significant impact on net income.
Application of Critical Accounting Estimates
The preparation of consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions based on information available at the time the consolidated financial statements are prepared. These estimates and assumptions affect the reported amounts of our consolidated assets, liabilities, shareholders' equity and net income. Certain accounting estimates are particularly sensitive because of their significance to our consolidated financial statements and because of the possibility that subsequent events and available information may differ markedly from management's judgments at the time the consolidated financial statements were prepared. We have discussed with our Audit Committee the quality, not just the acceptability, of our accounting principles as applied in our financial reporting. The discussions generally included such matters as to the consistency of our accounting policies and their application, and the clarity and completeness of our consolidated financial statements, which include related disclosures. Information regarding our accounting policies pertaining to these topics is located in the Notes to Consolidated Financial Statements set forth in Part II - Item 8 of this Annual Report on Form 10-K.
We have identified the following accounting estimates as critical in that they involve a higher degree of judgment and are subject to a significant degree of variability:
•Valuation of hard-to-value fixed maturity securities
•Evaluation of credit loss impairments for fixed maturity securities
Horace Mann Educators Corporation Annual Report on Form 10-K 45
•Valuation of future policy benefit reserves
•Valuation of liabilities for property and casualty unpaid claims and claim expense reserves
Although variability is inherent in these accounting estimates, we believe the amounts provided are appropriate based upon the facts available during preparation of the consolidated financial statements.
Valuation of Hard-to-Value Fixed Maturity Securities
The fair value of a fixed maturity security is the price that would be received in an orderly transaction between market participants at the measurement date. We obtain prices from third-party valuation service providers, our investment managers, and custodian bank, each of which use a variety of valuation service providers, broker quotes, and modeled prices. When necessary, we also internally model securities to develop a price. Differences in prices between the sources that we consider reliable are researched and we use the price that we consider most representative of an exit price in determining the fair value. Typical inputs used by these pricing sources include, but are not limited to, reported trades, broker quotes, yield curves, and involve the benchmarking of similar securities, rating designations, sector groupings, issuer spreads and/or estimated cash flows, prepayment speeds and default rates, among others, in determining the inputs to the prices. Our fixed maturity securities portfolio is primarily publicly traded, which allows for a high percentage of the fixed maturity securities portfolio to be priced through pricing services using observable inputs. Approximately 87.7% of the fixed maturity securities portfolio, based on fair value, was priced through valuation services or priced using observable inputs as of December 31, 2023.
The valuation of hard-to-value fixed maturity securities (generally 75 - 125 securities) is more subjective because the markets are less liquid and there is a lack of observable market inputs. This may increase the potential that the estimated fair value of an investment is not reflective of the price at which an actual transaction would occur at the measurement date. When the valuation service providers cannot provide prices, the investment managers obtain price quotes from brokers, which may be binding or non-binding price quotes. For those securities where the investment manager cannot obtain broker quotes, they will model the security, generally using cash flows discounted at the appropriate current market rate. Valuation service provides' valuation methodologies, as well as investment managers’ modeling methodologies, are sometimes matrix-based, using indicative evaluation measures and adjustments for specific security characteristics and market sentiment. The selection of the market inputs and assumptions used to estimate the fair value of hard-to-value fixed maturity securities requires judgment and may include: benchmark yield, liquidity premium, prepayment speeds and default rates, spreads, weighted average life and credit rating. The cash flows are based on the contractual terms of the individual security and are adjusted for the inputs and assumptions as appropriate, and the cash flows are then discounted by the yield as determined by the assumptions. The extent of the use of each market input depends on the market sector and market conditions. Depending on the security, the priority of the use of inputs may change or some market inputs may not be relevant or additional inputs may be necessary.
As part of determining the fair value of fixed maturity securities, including hard-to-value fixed maturity securities, we address the estimation uncertainty in the fair value estimates through our valuation processes. The uncertainty is caused by the availability and observability of the fair value, and more specifically the inputs to fair value, of individual securities. We assess whether individual prices have become stale, are using appropriate methodologies and assumptions, exceed certain acceptable thresholds as compared to previous prices and alternative pricing sources, and how those prices are developed and assessed when provided by valuation service providers. In addition, we may evaluate prices for individual securities by comparing the prices to broker prices or prices based on internal models.
Individual fixed maturity securities may have variability based on security specific inputs and characteristics, but overall our portfolio duration is approximately 6.0 years, meaning a 100 basis point increase in yield would result in a 6% decrease in the fair value of fixed maturity securities. As of December 31, 2023, Level 3 invested assets comprised 9.5% of our total investment portfolio based on fair value. Invested assets are classified as Level 3 when fair value is determined based on unobservable inputs and those inputs are significant to the determination of fair value.
Evaluation of Credit Loss Impairments for Fixed Maturity Securities
For fixed maturity securities classified as available for sale, the difference between amortized cost, net of a credit loss allowance (i.e., amortized cost, net) and fair value, net of certain other items and deferred income taxes is reported as a component of accumulated other comprehensive income (loss) (i.e., AOCI) on the Consolidated Balance Sheets and is not reflected in the operating results of any period until reclassified to net income upon
46 Annual Report on Form 10-K Horace Mann Educators Corporation
the consummation of a transaction with an unrelated third party or when a credit loss allowance transaction is recorded. We evaluate fixed maturity securities where fair value is below amortized cost on a quarterly basis to determine if a credit loss allowance is necessary. These reviews, in conjunction with our investment managers’ quarterly credit reports and relevant factors such as (1) has the security missed any scheduled principal or interest payments in the current quarter; (2) has the security been downgraded to below investment grade by rating agencies or if the security was below investment grade at time of purchase, has the security been downgraded by two or more notches since acquisition; (3) has the security declined in value by more than 10% compared to the prior quarter; (4) has the market yield changed by more than 50 basis points; are all considered in the impairment assessment process.
For each fixed maturity security where fair value is below amortized cost, we assess whether management with the appropriate authority has made the decision to sell or whether it is more likely than not we will be required to sell the security before the anticipated recovery of the amortized cost basis for reasons such as liquidity, contractual or regulatory purposes. If a security meets either of these criteria, any existing credit loss allowance is written-off and the amortized cost basis of the security is written down to the fair value, with the losses recorded as a net investment loss.
If we have not made the decision to sell the fixed maturity security and it is not more likely than not we will be required to sell the fixed maturity security before the anticipated recovery of its amortized cost basis, we evaluate whether we expect to receive cash flows sufficient to recover the entire amortized cost basis of the security. We estimate the anticipated recovery based on the best estimate of future cash flows considering past events, current conditions and reasonable and supportable forecasts. The estimated future cash flows are discounted at the security’s effective interest rate and are compared to the amortized cost basis of the security. The determination of whether we expect to received cash flow sufficient to recover the entire amortized cost basis of the security is inherently subjective, and methodologies may vary depending on facts and circumstances specific to the security. Our investment managers will calculate the anticipated recovery value of the security by performing a discounted cash flow analysis based on the present value of future cash flows. The discount rate is generally the effective interest rate of the security at the time of purchase for fixed-rate securities. We will then review the assumptions/methodologies for reasonableness. The information reviewed generally includes, but is not limited to, the remaining payment terms of the security, prepayment speeds, the financial condition and future earnings potential of the issue or issuer, expected defaults, expected recoveries, and the value of underlying collateral. Other information, such as industry analyst reports and forecasts, sector credit ratings, financial condition of the bond insurer for insured fixed maturity securities, and other market data relevant to the realizability of contractual cash flows, may also be considered.
If we do not expect to receive cash flows sufficient to recover the entire amortized cost basis of the fixed maturity security, a credit loss allowance is recorded as a net investment loss for the shortfall in expected cash flows; however, the amortized cost basis, net of the credit loss allowance, may not be lower than the fair value of the security. The portion of the unrealized loss related to factors other than credit remains classified in AOCI. If we determine that the fixed maturity security does not have sufficient cash flows or other information to estimate the anticipated recovery value for the security, we may conclude that the entire decline in fair value is deemed to be credit related and the loss is recognized as a net investment loss. Subsequent changes in the anticipated recoveries, limited by the amount of previous taken credit allowances, are recorded through changes in the allowance for credit losses and recognized through net investment loss.
When a security is disposed or deemed uncollectible and written-off, we reverse amounts previously recognized in the credit loss allowance through net investment loss.
Valuation of Future Policy Benefit Reserves
The Company adopted ASU 2018-12 for Liabilities for future policy benefits (LFPB) on a modified retrospective basis such that those balances were adjusted to conform to ASU 2018-12 on January 1, 2021.
The LFPB represents the cost of claims, minus projected future net premiums, that we estimate we will eventually pay to our policyholders and the related expenses for our traditional and limited-payment long duration contracts. Liabilities for future policy benefits are initially established in the same period in which we issue a policy, and equal the difference between projected future policy benefits and projected future net premiums, allowing a margin for expenses and profit. The liabilities for future policy benefits build up and release over time, based on the emergence of cash flows, including premiums received and claims paid, and updated expectations for future cash flows.
Horace Mann Educators Corporation Annual Report on Form 10-K 47
The liabilities are estimated using assumptions that include discount rate, mortality, morbidity, lapses, and expenses. For traditional and limited-payment contracts, a standard discount rate is used to remeasure the liabilities that is equivalent to market level yields for upper-medium-grade (low credit risk) fixed income instruments. The discount rate assumption is updated quarterly. For liability cash flows that are projected beyond the duration of market-observable level yields for upper-medium-grade (low credit risk) fixed income instruments, we use the last market-observable level yield and use linear interpolation to determine yield assumptions for durations that do not have market-observable yields.
The LFPB is sensitive to the discount rate. The potential effect of a decrease of 50 basis points in the discount rate as of December 31, 2023 would result in an increase to the liability for future policy benefits of approximately $100 million and the potential effect of an increase of 50 basis points in the discount rate would result in a decrease to the liability for future policy benefits of approximately $90 million.
Cash flow assumptions are reviewed and updated, as needed, at least annually. Mortality, morbidity, lapse, and expense assumptions used in cash flow modeling are based on judgments that consider our historical experience, industry data, and other factors. On a quarterly basis, cohort level cash flow measures are updated based on the emergence of actual experience. The updated cash flows, based on experience emergence and any assumption updates, are used to determine the updated net premiums, the portion of the gross premium required to provide for all benefits and expenses, excluding acquisition costs or any costs that are required to be charged to expense as incurred. The updated net premium ratio is used to calculate the updated liability for future policy benefits as of the beginning of the quarter, at the original discount rate. To the extent the present value of future benefits and expenses exceeds the present value of future gross premiums, an immediate charge is recognized in net income, such that net premiums are set equal to gross premiums. The potential impact of increasing (decreasing) our long-term mortality assumption by 5% is an increase (decrease) to the LFPB of approximately $8 million. The potential impact of increasing (decreasing) our long-term lapse assumption by 10% is a decrease (increase) to the LFPB of approximately $1 million. The potential impact of increasing (decreasing) our long-term morbidity assumption by 5% in an increase (decrease) to the LFPB of approximately $4 million.
See Part II – Item 8, Note 6 of the Consolidated Financial Statements in this Annual Report on Form 10-K for more information.
Valuation of Liabilities for Property & Casualty Unpaid Claims and Claim Expense Reserves
Underwriting results of Property & Casualty are significantly influenced by estimates of our ultimate liability for insured events. There is a high degree of uncertainty inherent in the estimates of ultimate losses underlying the liabilities for unpaid claims and claim expenses. This inherent uncertainty is particularly significant for liability-related exposures due to the extended period, often many years that transpire between a loss event, receipt of related claims data from policyholders and ultimate settlement of the claim. Reserves for Property & Casualty claims include provisions for payments to be made on reported claims (case reserves), incurred but not yet reported (IBNR) claims and associated settlement expenses (together, loss reserves).
The process by which these reserves are established requires reliance upon estimates based on known facts and on interpretations of circumstances, including our experience with similar cases and historical trends involving claim payments and related patterns, pending levels of unpaid claims and product mix, as well as other factors including court decisions, economic conditions, public attitudes and medical costs. We calculate and record a single best estimate of the reserve as of each reporting date.
Reserves are re-estimated quarterly. Changes to reserves are recorded in the period in which development factor changes result in reserve re-estimates. A detailed discussion of the process utilized to estimate loss reserves, risk factors considered and the impact of adjustments recorded during recent years is included in Part II - Item 8, Note 5 of the Consolidated Financial Statements in this Annual Report on Form 10-K.
Based on our products and coverages, historical experience, and modeling of various actuarial methodologies used to develop reserve estimates, there is the potential of variability of the Property & Casualty loss reserves.
There are a number of assumptions involved in the determination of our Property & Casualty loss reserves. Among the key factors affecting recorded loss reserves for both long-tail and short-tail related coverages, claim severity and claim frequency are of particular significance. We estimate that a 2.0% change in claim severity or claim frequency for unpaid losses is a reasonably likely scenario based on recent experience and would result in a change in the estimated direct reserves of approximately $6.3 million for long-tail liability related exposures
48 Annual Report on Form 10-K Horace Mann Educators Corporation
(auto liability coverages) and approximately $2.0 million for short-tail liability related exposures (property and auto physical damage coverages). Actual results may differ, depending on the magnitude and direction of the deviation.
Our actuaries discuss their loss and loss adjustment expense actuarial analysis with management. As part of this discussion, the indicated point estimate of the IBNR loss reserve by line of business (coverage) is reviewed. Our actuaries also discuss any indicated changes to the underlying assumptions used to calculate the indicated point estimate. Any variance between the indicated reserves from these changes in assumptions and the previously carried reserves is reviewed. After discussion of these analyses and all relevant risk factors, management determines whether the reserve balances require adjustment. Our best estimate of loss reserves may change depending on a revision in the underlying assumptions.
Our liabilities for unpaid claims and claim expense reserves for Property & Casualty were as follows:
CaseReserves IBNRReserves Total(1) CaseReserves IBNRReserves Total(1)
(1)These amounts are gross, before reduction for ceded reinsurance reserves.
The facts and circumstances leading to our re-estimate of reserves relate to revisions of the development factors used to predict how losses are likely to develop from the end of a reporting period until all claims have been paid. Re-estimates occur because actual loss amounts are different than those predicted by the estimated development factors used in prior reserve estimates. As of December 31, 2023, the impact of a reserve re-estimation resulting in a 1.0% increase in net reserves would be a decrease of approximately $2.5 million in net income. A reserve re-estimation resulting in a 1.0% decrease in net reserves would increase net income by approximately $2.5 million.
No prior years' reserve development was recorded in 2023. Unfavorable prior years' reserve re-estimates decreased net income in 2022 by approximately $22.0 million pretax, primarily the result of unfavorable loss trends in auto for accident years 2021 and prior.
Horace Mann Educators Corporation Annual Report on Form 10-K 49
Results of Operations by Segment
Consolidated financial results primarily reflect the results of Property & Casualty, Life & Retirement, and Supplemental & Group Benefits reporting segments as noted in the Introduction section of this MD&A, as well as the Corporate & Other reporting segment. These segments are defined based on financial information management uses to evaluate performance and to determine the allocation of resources.
The determination of segment data is described in more detail in Part II - Item 8, Note 17 of the Consolidated Financial Statements in this Annual Report on Form 10-K. The following sections provide analysis and discussion of results of operations for each of the reporting segments as well as investment results.
Property & Casualty
2023 net loss reflected the following factors:
•Increases in average written premium per policy
•Higher net investment income on limited partnership portfolio
•Higher catastrophe losses
•No prior years' reserve development in the current year
•Continued elevated underlying auto and property loss ratios* due to non-catastrophe weather
50 Annual Report on Form 10-K Horace Mann Educators Corporation
The following table provides certain financial information for Property & Casualty for the years indicated.
($ in millions, unless otherwise indicated) Year Ended December 31, 2023-2022
Financial Data:
Net premiums written*:
Change in unearned net premiums (38.8) (9.3) N.M.
Incurred claims and claims expenses:
Claims occurring in the current year 557.0 512.3 8.7 %
Prior years' reserve development(1) — 22.0 N.M.
Total claims and claim expenses incurred 557.0 534.3 4.2 %
Operating expenses, including DAC amortization 174.6 166.9 4.6 %
Underwriting gain (loss) (86.0) (93.0) 7.5 %
Income (loss) before income taxes (45.3) (58.2) 22.2 %
Operating Statistics:
Auto
Loss and loss adjustment expense ratio 84.4 % 91.8 % -7.4 pts
Prior years' reserve development(1) — % 7.2 % -7.2 pts
Catastrophe losses 2.7 % 1.8 % 0.9 pts
Underlying combined ratio* 109.0 % 110.0 % -1.0 pts
Property
Loss and loss adjustment expense ratio 89.5 % 80.7 % 8.8 pts
Prior years' reserve development(1) — % -2.8 % 2.8 pts
Underlying combined ratio* 78.8 % 78.2 % 0.6 pts
Risks in force (in thousands)
(1) (Favorable) unfavorable.
(2) Includes assumed risks in force of 4.
Horace Mann Educators Corporation Annual Report on Form 10-K 51
Catastrophe losses incurred were as follows:(1)
($ in millions) Year Ended December 31,
Three months ended
(1) See Part I - Item 1 - Reporting Segments - Property & Casualty for further details regarding catastrophe losses for the past five years.
Including a profit of $8.8 million in the fourth quarter, the Property & Casualty segment’s net loss for the full year 2023 reflected elevated catastrophe and non-catastrophe weather activity for much of the year. Property & Casualty net premiums written were up 10.8% for the year and segment net investment income was up 20.7% for the year.
On a reported basis, the 7.3 point decrease in the auto combined ratio in 2023 was mainly attributable to a 1.1 point decrease in the auto underlying loss ratio* and an 7.2 point decrease in prior years' reserve development. Unfavorable prior years' auto reserve development of $28.0 million was reported in 2022, reflecting the impact on severity of overall inflation, including higher medical costs, increased usage of medical services and the current judicial environment.
The reported property combined ratio increased 7.3 points in 2023, partially driven by catastrophe and non-catastrophe weather activity. In addition, favorable prior years' reserve development of $6.0 million benefited the prior year reported property combined ratio by 2.8 points.
In 2023, total Property & Casualty net premiums written* increased $66.9 million as rate actions and inflation adjustments to coverage values for property more that offset declines in risks in force. Retention remains strong.
In 2023, auto net premiums written* increased $45.1 million, primarily due to rate actions partially offset by the continuing decline in auto risks in force. For 2023, average auto net premium written and average net premium earned increased 13.1% and 8.2%, respectively. Property and other net premiums written* increased $21.8 million due to increases in average net premium written and average net premium earned which increased 11.5% and 9.9% respectively, as rate actions and inflation adjustments to coverage values continue to take effect. The number of educator risks has been at or above 80% relative to overall risks in force over the past two years.
We continue to evaluate and implement actions to further mitigate our risk exposure. Such actions could include, but are not limited to, non-renewal of property risks, restricted agent geographic placement, limitations on agent new business sales, further tightening of underwriting standards and increased utilization of third-party vendor products.
52 Annual Report on Form 10-K Horace Mann Educators Corporation
Life & Retirement
2023 net income reflected the following factors:
•9.3% increase in net investment income due to higher returns on floating rate securities
•Decline of 28 basis points in the annualized net interest spread due to lower returns on the limited partnership fund investments and lower spread on the FHLB funding agreements year over year
•Higher DAC amortization due to write-offs related to declines in annuity persistency
•Flat mortality costs
Horace Mann Educators Corporation Annual Report on Form 10-K 53
The following table provides certain information for the Life & Retirement segment for the years indicated.
Life & Retirement
Net premiums written and contract deposits* $ 573.3 $ 544.8 5.2 %
Net premiums and contract charges earned 151.7 144.0 5.3 %
Intangible asset amortization expense 0.2 1.1 -81.8 %
Life policies in force (in thousands) 162 162 — %
Life persistency - LTM 95.7 % 96.0 % -0.3 pts
Annuity contracts in force (in thousands) 223 228 -2.2 %
Horace Mann Retirement Advantage® contracts in force (in thousands) 19 17 11.8 %
Cash value persistency - LTM 91.5 % 93.7 % -2.3 %
The Life & Retirement segment net income rose 12.1% in 2023 reflecting higher net investment income. Net investment income rose 9.3% for the full-year as higher returns on floating rate securities more than offset lower returns from limited partnerships. The annualized net interest spread in our fixed annuity business was 218 basis points for the full year compared to 246 basis points in 2022, largely due to lower limited partnership returns as well as higher FHLB borrowing costs as credit spreads tightened year over year. The net dollar contribution from our FHLB funding agreements remained stable compared with 2022, with FHLB interest expense reflected in interest credited. In addition, 2022 net income reflected an after-tax impairment charge of $3.8 million for goodwill and intangible assets due to lower than anticipated revenues associated with the BCG business of the Retirement operating segment.
For 2023, net annuity contract deposits* for variable and fixed annuities increased 6.2% for the year to $455.9 million. Educators continue to begin their relationship with Horace Mann through 403(b) retirement savings products, including the company’s attractive annuity products, which provide encouraging cross-sell opportunities. Cash value persistency remained strong at 91.5%.
Life annualized sales were $9.3 million for the year. Life insurance in force rose to $20.5 billion at year-end.
Horace Mann currently has $5.2 billion in annuity assets under management, including $2.2 billion of fixed annuities, $2.6 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, were up 7.0%, benefiting from the strong equity markets.
54 Annual Report on Form 10-K Horace Mann Educators Corporation
We actively manage our interest rate risk exposure, considering a variety of factors, including earned interest rates, credited interest rates and the relationship between the expected durations of assets and liabilities. We estimate that over the next 12 months approximately $494.2 million of the Life & Retirement investment portfolio and related investable cash flows will be reinvested at current market rates.
Interest rates remained high throughout 2023. However, the risk of a deep recession or shock to the economy, such as a global pandemic, could result in a return to historically low interest rates. The current environment of higher interest rates have afforded us the opportunity to invest new insurance cash flows and reinvested cash flows at higher yields, which should be a benefit to net investment income, but the higher interest rates have caused net unrealized investment losses in the portfolios.
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 $1.9 million in year one and $5.7 million in year two, reducing the annualized net interest spread by approximately 7 basis points and 20 basis points in the respective periods, compared to the current period annualized net interest spread. We could also consider potential changes in rates credited to policyholders, tempered by any restrictions on the ability to adjust policyholder rates due to minimum guaranteed crediting rates.
We reinsure a $2.4 billion block of in force fixed annuities with a minimum crediting rate of 4.5% which helps mitigate the risk of not being able to generate appropriate spreads on the annuity business. Information regarding the interest crediting rates and balances equal to the guaranteed minimum crediting rates for deferred annuity account values excluding the reinsured block is shown below.
($ in millions) December 31, 2023
Total Deferred Annuities Deferred Annuities atMinimum Crediting Rate
Guaranteed minimum crediting rates:
Horace Mann Educators Corporation Annual Report on Form 10-K 55
Supplemental & Group Benefits
2023 net income reflected the following factors:
•Decline in premium due to run-off of an indemnified block of employer-sponsored products; net premiums earned increased 1.9% excluding the run-off
•Higher net investment income
•Benefit ratios reflecting utilization closer to pre-pandemic levels
•Increased level of operating expenses reflecting a higher allocation of corporate expenses
The following table provides certain information for Supplemental & Group Benefits for the years indicated.
Supplemental & Group Benefits
Net premiums and contract charges earned $ 259.8 $ 275.5 -5.7 %
Benefits, settlement expenses and change in reserves 88.9 91.2 -2.5 %
Interest credited 3.9 1.3 N.M.
Intangible asset amortization expense 14.6 15.7 -7.0 %
Operating expense ratio(2) 38.4 % 35.0 % 3.4 pts
Pretax profit margin(3) 24.3 % 28.5 % -4.2 pts
Worksite direct products benefits ratio 29.1 % 23.0 % 6.1 pts
Worksite direct premium persistency (rolling 12 months) 91.4 % 90.4 % 1.0 pts
Employer-sponsored products benefits ratio 41.4 % 41.8 % -0.4 pts
(1) Ratio of benefits to net premiums earned.
(2) Ratio of operating expenses to total revenues.
(3) Ratio of income before income taxes to total revenues.
2023 net income for the Supplemental & Group Benefits segment was $54.9 million. Segment net premiums earned and benefits expense declined due to an indemnified block that is in run-off. The full-year benefit ratio for the worksite direct product line continued to increase toward the longer-term target although utilization remains below historical levels. The full-year benefit ratio for the employer-sponsored product lines was in line with the prior year but also remains below the longer-term target. Segment net investment income rose 16.8% for the
56 Annual Report on Form 10-K Horace Mann Educators Corporation
full-year reflecting higher returns on floating rate securities. The non-cash impact of amortization of intangible assets under purchase accounting reduced full-year 2023 core earnings by $14.6 million, pretax, compared to $15.7 million in 2022.
Total segment sales for the year were $26.2 million, up 62.7% over the prior year, with worksite direct supplemental product sales of $15.1 million and employer-sponsored products of $11.1 million. Persistency remains relatively stable for the segment.
Corporate & Other
The following table provides certain financial information for Corporate & Other for the years indicated.
Net investment losses, pretax (24.0) (56.5) N.M.
Net investment losses, after tax (18.8) (44.5) N.M.
For 2023, the net loss decreased $19.6 million, primarily due to lower net investment losses partially offset by an increase in interest expense on the Revolving Credit Facility and the 2023 Senior Notes. The outstanding balance on the Revolving Credit Facility was fully paid off on September 15, 2023 following the issuance of the 2023 Senior Notes.
Investment Results
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.
Net investment income - investment portfolio $ 339.9 $ 297.4 14.3 %
Investment income - deposit asset on reinsurance 104.9 103.5 1.4 %
Pretax net investment losses (24.0) (56.5) N.M.
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 $571.9 million as of December 31, 2022, reflecting much tighter credit spreads across most asset classes, as the 10-year U.S. Treasury yield ended mostly flat, up only 1 basis point.
Horace Mann Educators Corporation Annual Report on Form 10-K 57
Fixed Maturity and Equity Securities Portfolios
The table below presents our fixed maturity and equity securities portfolio by major asset class, including the 10 largest sectors of our corporate bond holdings (based on fair value).
($ in millions) December 31, 2023
Number ofIssuers FairValue AmortizedCost orCost Pretax NetUnrealizedLoss
Fixed maturity securities
Corporate bonds
Mortgage-backed securities
U.S. Government and federally sponsored agencies 236 430.4 472.9 (42.5)
Government bonds
Equity securities
Non-redeemable preferred stocks 20 $ 68.3
Common stocks 4 1.4
Closed-end fund 1 16.5
Total equity securities 25 $ 86.2
(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).
58 Annual Report on Form 10-K Horace Mann Educators Corporation
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 $5.0 million for non-investment grade securities.
Rating of Fixed Maturity Securities and Equity Securities (1)
The following table presents the composition and fair value of our fixed maturity and equity securities portfolios by rating category. As of December 31, 2023, 92.1% of these combined portfolios were investment grade, based on fair value, with an overall average credit quality rating of A+. We have classified the entire fixed maturity securities portfolio as available for sale, which is carried at fair value.
($ in millions) December 31, 2023
Percentof TotalFairValue FairValue AmortizedCost, net
Fixed maturity securities
Equity securities
AAA — —
AA — —
A — —
B — —
CCC or lower — —
Total equity securities 100.0 % $ 86.2
(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
Horace Mann Educators Corporation Annual Report on Form 10-K 59
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.
Liquidity and Capital Resources
Our liquidity and access to capital were not materially impacted by inflation or changes in interest rates during the year ended December 31, 2023. For further discussion regarding the potential future impacts of inflation and changes in interest rates, see Part I – Item 1A - Risk Factors and Part II – Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations - Effects of Inflation and Changes in Interest Rates of this Annual Report on Form 10-K.
Investments
Information regarding our investment portfolio, which is comprised primarily of investment grade, fixed maturity securities, is presented in Part II - Item 7, Results of Operations by Segment, Part I - Item 1, Investments and in Part II - Item 8, Note 2 of the Consolidated Financial Statements in this Annual Report on Form 10-K.
Cash Flow
Our short-term liquidity requirements, within a 12 month operating cycle, are for the timely payment of claims and benefits to policyholders, operating expenses, interest payments and federal income taxes. Cash flow generated from operations has been, and is expected to be, adequate to meet our operating cash needs in the next 12 months. Cash flow in excess of operational needs has been used to fund business growth and acquisitions, pay dividends to shareholders and repurchase shares of our common stock. Long-term liquidity requirements, beyond one year, are principally for the payment of future insurance and annuity policy claims and benefits, as well as retirement of debt. The following table summarizes our consolidated cash flows activity for the periods indicated
Net cash provided by operating activities $ 302.1 $ 171.5 76.2 %
Net cash used in investing activities (107.4) (214.6) -50.0 %
Net cash provided by (used in) financing activities (207.8) (47.8) 334.7 %
Net increase (decrease) in cash (13.1) (90.9) N.M.
Cash at beginning of year 42.8 133.7 N.M.
Operating Activities
As a holding company, we conduct our principal operations in the personal lines portion of the property and casualty, supplemental and life insurance industries through our subsidiaries. Our insurance subsidiaries generate cash flow from premium and investment income, generally well in excess of their immediate needs for policy obligations, operating expenses and other cash requirements. Cash provided by operating activities primarily reflects net cash flows generated by the insurance subsidiaries.
For 2023, net cash provided by operating activities increased $130.6 million. Fluctuations in net cash provided by operating activities are primarily due to timing of premium and investment income collections and benefits and claims payments.
Investing Activities
Our insurance subsidiaries maintain significant investments in fixed maturity securities to meet future contractual obligations to policyholders. In conjunction with our management of liquidity and other asset/liability
60 Annual Report on Form 10-K Horace Mann Educators Corporation
management objectives, we, from time to time, will sell fixed maturity securities prior to maturity, and reinvest the proceeds into other investments with different interest rates, maturities or credit characteristics. Accordingly, we have classified the entire fixed maturity securities portfolio as available for sale.
Investing activities includes our acquisition of Madison National in 2022.
Financing Activities
Financing activities include primarily payment of dividends, receipt and withdrawal of funds by annuity contractholders, issuances and repurchases of our common stock, finance-type reinsurance agreements, fluctuations in book overdraft balances, and borrowings, repayments and repurchases related to debt facilities.
For 2023, net cash used in financing activities increased $160.0 million, primarily due to a $70.2 million cash outflow for reverse repurchase agreements compared to a $70.2 million cash inflow in the prior year. An increase in the net cash inflows from FHLB funding agreements was offset by an increase in net cash outflows on annuity contracts.
On September 15, 2023, we issued $300.0 million aggregate principal amount of 7.25% Senior Notes due September 15, 2028 (2023 Senior Notes) and used the net proceeds to fully repay the $249.0 million of outstanding borrowings under our Revolving Credit Facility. The remaining net proceeds from the issuance of the 2023 Senior Notes were available for general corporate purposes.
The following table shows activity from FHLB funding agreements for the periods indicated.
Principal repayment on FHLB funding agreements (189.5) (149.0) (40.5) 27.2 %
Horace Mann Educators Corporation Annual Report on Form 10-K 61
Liquidity Sources and Uses
Our potential sources and uses of funds principally include the following activities:
Activities for potential sources of funds
Receipt of insurance premiums, contractholder charges and fees ☑ ☑ ☑
Recurring service fees, commissions and overrides ☑ ☑ ☑ ☑
Contractholder fund deposits ☑ ☑
Reinsurance and indemnification program recoveries ☑ ☑ ☑
Receipts of principal, interest and dividends on investments ☑ ☑ ☑ ☑
Proceeds from sales of investments ☑ ☑ ☑ ☑
Proceeds from FHLB borrowing and funding agreements ☑ ☑ ☑
Proceeds from reverse repurchase agreements ☑ ☑ ☑
Intercompany loans ☑ ☑ ☑ ☑
Capital contributions from parent ☑ ☑ ☑
Dividends or return of capital from subsidiaries ☑
Tax refunds/settlements ☑ ☑ ☑ ☑
Proceeds from periodic issuance of additional securities ☑
Proceeds from debt issuances ☑
Proceeds from revolving credit facility ☑
Receipt of intercompany settlements related to employee benefit plans ☑
Activities for potential uses of funds
Payment of claims and related expenses ☑ ☑ ☑
Payment of contract benefits, surrenders and withdrawals ☑ ☑
Reinsurance cessions and indemnification program payments ☑ ☑ ☑
Payment of operating costs and expenses ☑ ☑ ☑ ☑
Payments to purchase investments ☑ ☑ ☑ ☑
Repayment of FHLB borrowing and funding agreements ☑ ☑ ☑
Repayment of reverse repurchase agreements ☑ ☑ ☑
Payment or repayment of intercompany loans ☑ ☑ ☑ ☑
Capital contributions to subsidiaries ☑
Dividends or return of capital to shareholders/parent company ☑ ☑ ☑ ☑
Tax payments/settlements ☑ ☑ ☑ ☑
Common share repurchases ☑
Debt service expenses and repayments ☑
Repayment on revolving credit facility ☑
Payments related to employee benefit plans ☑
Payments for business acquisitions ☑
62 Annual Report on Form 10-K Horace Mann Educators Corporation
We actively manage our financial position and liquidity levels in light of changing market, economic and business conditions. Liquidity is managed at both the entity and enterprise level across HMEC and is assessed on both base and stressed level liquidity needs. We believe we have sufficient liquidity to meet these needs. Additionally, we have existing intercompany agreements in place that facilitate liquidity management across HMEC to enhance flexibility.
As of December 31, 2023, we held $1.1 billion of cash, U.S. government and agency fixed maturity securities and public equity securities (excluding non-redeemable preferred stocks and foreign equity securities) which, under normal market conditions, could be rapidly liquidated.
Certain remote events and circumstances could constrain our liquidity. Those events and circumstances include, for example, a catastrophe resulting in extraordinary losses, a downgrade of our Senior Notes rating to non-investment grade status or a downgrade in our insurance subsidiaries' financial strength ratings. The rating agencies also consider the interdependence of our individually rated entities; therefore, a rating change in one entity could potentially affect the ratings of other related entities.
Capital Resources
We have determined the amount of capital which is needed to adequately fund and support business growth, primarily based on risk-based capital formulas including those developed by the NAIC. Historically, our insurance subsidiaries have generated capital in excess of such needed levels. These excess amounts have been paid to us through dividends. We have then utilized these dividends and our access to the capital markets to service and retire debt, pay dividends to our shareholders, fund growth initiatives, repurchase shares of our common stock and for other corporate purposes. If necessary, we also have other potential sources of liquidity that could provide for additional funding to meet corporate obligations or pay shareholder dividends, which include our Revolving Credit Facility, as well as issuances of various securities. The insurance subsidiaries are subject to various regulatory restrictions which limit the amount of annual dividends or other distributions, including loans or cash advances, available to us without prior approval of the insurance regulatory authorities. The aggregate amount of dividends that may be paid in 2024 from all of our insurance subsidiaries without prior regulatory approval is approximately $112.3 million, excluding the impact and timing of prior year dividends, of which $127.5 million was paid during the year ended December 31, 2023. We anticipate that our sources of capital will continue to generate sufficient capital to meet the needs for business growth, debt interest payments, shareholder dividends and our share repurchase program. Additional information is contained in Part II - Item 8, Note 13 of the Consolidated Financial Statements in this Annual Report on Form 10-K.
Total capital was $1,721.3 million as of December 31, 2023, including $546.0 million of long-term debt. Total debt represented 31.7% of total capital including net unrealized investment losses on fixed maturity securities (26.9% of total capital excluding net unrealized investment losses on fixed maturity securities and net reserve remeasurements attributed to discount rates*) as of December 31, 2023, which was slightly above our long-term target of 25.0%.
Shareholders' equity was $1,175.3 million as of December 31, 2023, including net unrealized investment losses on fixed maturity securities and net reserve remeasurements attributed to discount rates. The market value of our common stock and the market value per share were $1,335.4 million and $32.70, respectively, at December 31, 2023. Book value per share was $28.78 as of December 31, 2023 ($36.29 excluding net unrealized investment losses on fixed maturity securities and net reserve remeasurements attributed to discount rates*).
Additional information regarding net unrealized investment gains (losses) on fixed maturity securities as of December 31, 2023 is included in Part II - Item 7, Results of Operations by Segment and Part II - Item 8, Note 2 of the Consolidated Financial Statements in this Annual Report on Form 10-K.
Total shareholder dividends paid were $53.9 million for the year ended December 31, 2023. In 2023, the Board declared regular quarterly dividends of $0.33 per share. Compared to the full year per share dividends paid in 2022 of $1.28, the total 2023 dividends paid per share of $1.32 represented an increase of 3.1%.
On May 25, 2022, our Board of Directors authorized a share repurchase program allowing repurchases of up to $50 million (2022 Program) to begin following the completion of the $50 million repurchase plan that was authorized on September 30, 2015 (2015 Program). Both Programs authorize the repurchase of our common shares in open market or privately negotiated transactions, from time to time, depending on market conditions. The Programs do not have expiration dates and may be limited or terminated at any time without notice. During
Horace Mann Educators Corporation Annual Report on Form 10-K 63
the third quarter of 2022, the 2015 Program was completed and we began repurchasing shares under the 2022 Program. During 2023, we repurchased 196,934 shares of our common stock at an average price per share of $32.85 under the Programs. In total and through December 31, 2023, 1,907,976 shares have been repurchased under the 2015 and 2022 Programs at an average price of $34.49 per share. The repurchase of shares was funded through use of cash. As of December 31, 2023, $34.9 million remained authorized for future share repurchases under the 2022 Program.
The following table summarizes our debt obligations.
($ in millions) InterestRates FinalMaturity December 31,
Short-term debt
Revolving Credit Facility Variable 2026 $ — $ 249.0
Long-term debt(1)
(1) We designate our debt obligations as "long-term" based on maturity date at issuance.
On September 15, 2023, we issued $300.0 million aggregate principal amount of 7.25% senior notes (2023 Senior Notes), which will mature on September 15, 2028, issued at a discount resulting in an effective yield of 7.29%. Interest on the 2023 Senior Notes is payable semi-annually at a rate of 7.25%. The 2023 Senior Notes are redeemable in whole or in part, at any time, at our option, at a redemption price equal to the greater of (1) 100% of the principal amount of the notes being redeemed or (2) the sum of the present values of the remaining scheduled payments of principal and interest thereon discounted, on a semi-annual basis, at the Treasury yield (as defined in the indenture) plus 45 basis points, plus, in either of the above cases, accrued interest to the date of redemption. The 2023 Senior Notes are traded in the open market (HMN 7.25).
The net proceeds from the sale of the 2023 Senior Notes were used to fully repay the $249.0 million balance on the Revolving Credit Facility with remaining net proceeds from the sale to be used for general corporate purposes.
As of December 31, 2023, we had outstanding $250.0 million aggregate principal amount of 4.50% Senior Notes (2015 Senior Notes), which will mature on December 1, 2025, issued at a discount resulting in an effective yield of 4.53%. Interest on the 2015 Senior Notes is payable semi-annually at a rate of 4.50%. Detailed information regarding the redemption terms of the 2015 Senior Notes is contained in the Part II - Item 8, Note 10 of the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2022. The 2015 Senior Notes are traded in the open market (HMN 4.50).
As of December 31, 2023, we had no borrowings outstanding with FHLB. The Board has authorized a maximum amount equal to 15% of net aggregate admitted assets less separate account assets of the insurance subsidiaries for FHLB borrowing and funding agreements which is below our maximum FHLB borrowing capacity.
Effective July 12, 2021, we, as borrower, amended our Credit Agreement (Revolving Credit Facility). The amended Revolving Credit Facility increased the amount available on the senior revolving credit facility from $225.0 million to $325.0 million. Terms and conditions of the amended Revolving Credit Facility are substantially consistent with the prior agreement, with an interest rate based on SOFR plus 115 basis points plus the applicable benchmark adjustment spread. The amended Revolving Credit Facility expires on July 12, 2026.
As of December 31, 2023 we had no borrowings outstanding on the Revolving Credit Facility. The unused portion of the Revolving Credit Facility is subject to a variable commitment fee, which was 0.15% on an annual basis as of December 31, 2023.
We had no obligation for securities sold under reverse repurchase agreements at December 31, 2023 compared to $70.2 million as of December 31, 2022.
64 Annual Report on Form 10-K Horace Mann Educators Corporation
To provide additional capital management flexibility, we filed a "universal shelf" registration statement on Form S-3 with the SEC on March 10, 2021. The registration statement, which registered the offer and sale from time to time of an indeterminate amount of various securities, which may include debt securities, common stock, preferred stock, depositary shares, warrants, delayed delivery contracts and/or units that include any of these securities, was automatically effective on March 10, 2021. Unless withdrawn by us earlier, this registration statement will remain effective through March 10, 2024 and no securities associated with the registration statement have been issued. At the time of issuance of this Annual Report on Form 10-K, we expect to file another "universal shelf" registration statement on Form S-3 with the SEC in March 2024.
On March 13, 2018, we filed a "shelf" registration statement on Form S-4 with the SEC which became effective on May 2, 2018. Under this registration statement, we may from time to time offer and issue up to 5,000,000 shares of our common stock in connection with future acquisitions of other businesses, assets or securities. Unless withdrawn by us, this registration statement remains effective indefinitely. No securities associated with the registration statement have been issued at the time of issuance of this Annual Report on Form 10-K.
Financial Ratings
Our principal insurance subsidiaries are rated by A.M. Best Company, Inc. (A.M. Best), Fitch, Moody's, and S&P. These rating agencies have also assigned ratings to our Senior Notes. The ratings that are assigned by these agencies, which are subject to change, can impact, among other things, our access to sources of capital, cost of capital, and competitive position. These ratings are not a recommendation to buy or hold any of our securities.
All four agencies currently have assigned the same insurance financial strength ratings to our Property & Casualty and Life insurance subsidiaries. Only A.M. Best currently rates our Supplemental & Group Benefits subsidiaries, with an assigned rating of A (Excellent). Assigned ratings and respective affirmation/review dates as of February 17, 2024 were as follows:
Insurance Financial Affirmed/