Horace Mann(HMN) - 2023 Q4 - Annual Report

PART I ITEM 1. Business Overview Horace Mann Educators Corporation provides insurance and financial solutions to educators through diversified segments and a tailored strategy - Horace Mann Educators Corporation (HMEC) is an insurance holding company, founded in 1945, focused on serving educators and their communities[11][13][19] - The company operates through two divisions (Retail and Worksite) and four reporting segments (Property & Casualty, Life & Retirement, Supplemental & Group Benefits, Corporate & Other)[19][20][59] - HMEC's corporate strategy focuses on being the company of choice for educators, offering tailored insurance and financial solutions leveraging its niche market and over 75 years of experience[24][30] - The company serves approximately 1 million households, with about 80% of its customer base being educators[25] - In 2023, the Property & Casualty segment generated $650.4 million in direct premiums and had 358,215 auto risks and 168,219 property risks in force[69][70] Property & Casualty Catastrophe Losses (Pretax) | Year | Total ($ in millions) | | :--- | :-------------------- | | 2023 | 97.6 | | 2022 | 80.0 | | 2021 | 78.2 | | 2020 | 84.4 | | 2019 | 52.0 | - The Life & Retirement segment reported $610.7 million in direct premiums and contract deposits in 2023, with 223,118 annuity contracts and $20.5 billion life insurance in force[91][97][101] - The Supplemental & Group Benefits segment reported $153.9 million in direct premiums for employer-sponsored products and $120.1 million for worksite direct products in 2023[110][111] Investment Portfolio Composition (December 31, 2023) | Category | % of Total Fair Value | | :------------------------------------------- | :-------------------- | | Publicly Traded Fixed Maturity Securities | 71.6% | | Other Invested Assets (e.g., Limited Partnerships) | 28.4% | | Total Investments | 100.0% | - As of December 31, 2023, the fixed maturity securities portfolio was 92.6% investment grade with an average credit quality of A+ and an average option-adjusted duration of 6.0 years[129] - The aggregate amount of dividends payable from insurance subsidiaries in 2024 without prior regulatory approval is approximately $112.3 million[131] ITEM 1A. Risk Factors The company faces broad, interconnected risks from volatile financial markets, competition, operations, and regulations, potentially impacting its financial condition - Volatile financial markets and adverse economic conditions can negatively impact investment portfolio value, benefit/claim liabilities, product demand, and borrowing costs[157][158][159] - Changes in interest rates can reduce investment income, increase policy benefit reserves, and decrease the fair value of fixed income securities, potentially leading to lower profitability[160][161][163] - The insurance and financial services markets are highly competitive, with larger competitors possessing greater resources and diversified product lines, potentially impacting HMEC's ability to grow and maintain profitability[169][170] - Catastrophe events (e.g., hurricanes, wildfires) and non-catastrophe severe weather events are inherently unpredictable and can lead to significant losses, impacting Property & Casualty underwriting results[181][183] - Property & Casualty loss reserves are estimates with a high degree of uncertainty, and if inadequate, could adversely affect financial condition and results of operations, especially with rising inflation[185][187][189] - Cybersecurity breaches pose a significant risk, potentially leading to operational disruptions, data loss, regulatory violations, reputational damage, and increased compliance costs[200][201] - Defaults by third-party debtors (e.g., security issuers, reinsurers) could reduce profitability or negatively affect investment values, with municipal bond portfolios being particularly vulnerable during economic downturns[211][212] - Downgrades in claims-paying, financial strength, or credit ratings could lead to substantial business loss, increased capital costs, and reduced borrowing flexibility[221][222] - Changes in tax laws, extensive state and federal regulation, and evolving privacy/cybersecurity laws can increase costs, limit operating flexibility, and impact product profitability[223][226][232] ITEM 1B. Unresolved Staff Comments There are no unresolved staff comments - The company has no unresolved staff comments[240] ITEM 1C. Cybersecurity The company maintains a cybersecurity risk management program, overseen by the CISO and Audit Committee, to protect systems and data, acknowledging inherent limitations - The company maintains a cybersecurity risk management program, overseen by the Chief Information Security Officer (CISO), to address network, system, application, and data breaches[242][243] - The Board of Directors, through its Audit Committee, exercises oversight of cybersecurity risk and receives regular reports from the CISO[245] - Despite employing security technologies and conducting risk assessments, the company acknowledges that internal controls provide only reasonable, not absolute, assurance against material financial loss from cybersecurity events[247] ITEM 2. Properties The company owns three buildings in Springfield, Illinois, including its headquarters, and leases additional office space in other states, all deemed suitable for operations - As of December 31, 2023, the company owned three buildings in Springfield, Illinois (headquarters, warehouse, and another building) totaling approximately 248,000 square feet[248] - The company also leases office space in Dallas, Texas, Cherry Hill, New Jersey, and Madison, Wisconsin, which are utilized by its reporting segments[248] - Management believes its properties and facilities are suitable and adequate for current operations[248] ITEM 3. Legal Proceedings The company is involved in legal proceedings, including a lawsuit against HMIC for legacy commercial claims following R&Q Reinsurance's liquidation, with potential material but unestimable financial impact - In 2023, Horace Mann Insurance Company (HMIC) was named as a defendant in a lawsuit and received demands related to legacy, long-tail commercial lines claims (asbestos, environmental, sexual molestation)[729] - These matters arose following the March 23, 2023, Order of Liquidation of R&Q Reinsurance Company, which had assumed obligations under a retrocession treaty[729][730] - The amounts claimed against HMIC, if successful, could be material, but a reasonable estimate of any resultant payment is not possible due to the preliminary nature of the matters[731] ITEM 4. Mine Safety Disclosures This item is not applicable to the company - Mine Safety Disclosures are not applicable to Horace Mann Educators Corporation[251] PART II ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on NYSE (HMN), with historical market and dividend data provided, alongside details of its active share repurchase program - Horace Mann Educators Corporation's common stock is traded on the New York Stock Exchange (NYSE) under the symbol HMN[3][252] Common Stock Market Price and Dividends Paid Per Share | Fiscal Period | High ($) | Low ($) | Dividends Paid Per Share ($) | | :--------------- | :------- | :------ | :--------------------------- | | 2023: | | | | | Fourth Quarter | 33.79 | 28.67 | 0.33 | | Third Quarter | 30.12 | 27.94 | 0.33 | | Second Quarter | 33.85 | 29.04 | 0.33 | | First Quarter | 38.10 | 32.33 | 0.33 | | 2022: | | | | | Fourth Quarter | 40.13 | 35.01 | 0.32 | | Third Quarter | 39.51 | 32.60 | 0.32 | | Second Quarter | 42.62 | 34.22 | 0.32 | | First Quarter | 42.95 | 36.58 | 0.32 | - As of February 16, 2024, the company had approximately 32,000 holders of its common stock[258] Issuer Purchases of Equity Securities (2023) | Period | Total Number of Shares Purchased | Average Price Paid per Share ($) | Approximate Dollar Value Remaining Under Programs ($) | | :------------- | :------------------------------- | :------------------------------- | :---------------------------------------------------- | | Fourth Quarter | — | — | 34.9 million | | Third Quarter | 33,000 | 28.73 | 34.9 million | | Second Quarter | 35,394 | 32.47 | 35.8 million | | First Quarter | 128,540 | 34.01 | 36.9 million | - As of December 31, 2023, $34.9 million remained authorized for future share repurchases under the 2022 Program[260][386] ITEM 6. [Reserved] This item is reserved and contains no content ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) The MD&A analyzes the company's consolidated financial performance for 2023, highlighting increased net income from investment results, detailing segment performance, critical estimates, and a positive 2024 outlook - Net income increased by $25.2 million (127.3%) in 2023 compared to the prior year, primarily due to lower net investment losses and higher net investment income[270] Consolidated Financial Highlights | Metric | 2023 ($ in millions) | 2022 ($ in millions) | Change % | | :-------------------------------------- | :------------------- | :------------------- | :--------- | | Total revenues | 1,491.9 | 1,381.6 | 8.0% | | Net income (loss) | 45.0 | 19.8 | 127.3% | | Net income (loss) per diluted share | 1.09 | 0.47 | 131.9% | | Book value per share | 28.78 | 26.85 | 7.2% | | Net income return on equity - last twelve months | 4.0% | 1.6% | 2.4 pts | - Net premiums and contract charges earned increased by $29.4 million (2.9%) in 2023, driven by Property & Casualty rate and inflation adjustments[274] - Net investment income increased by $43.9 million (11.0%) in 2023, primarily from higher returns on floating rate fixed maturity securities[275] Annualized Investment Yield (Excluding Limited Partnership Interests) | Metric | 2023 | 2022 | | :------------------------------------------ | :---- | :---- | | Investment yield, excluding limited partnership interests, pretax - annualized* | 4.7% | 4.3% | | Investment yield, excluding limited partnership interests, after tax - annualized* | 3.8% | 3.4% | - The company anticipates 2024 full-year net income to be in the range of $3.00 to $3.30 per diluted share, generating a core return on equity near 9%[295] - Property & Casualty segment's net loss for 2023 reflected elevated catastrophe and non-catastrophe weather activity, with net premiums written up 10.8% and net investment income up 20.7%[331][333] - Life & Retirement segment's net income rose 12.1% in 2023, driven by a 9.3% increase in net investment income, though the fixed annuity net interest spread declined to 218 basis points[341] - Supplemental & Group Benefits segment's net income was $54.9 million in 2023, with net investment income rising 16.8% and total segment sales up 62.7%[349][350] - Net cash provided by operating activities increased by $130.6 million (76.2%) in 2023, while net cash used in financing activities increased by $160.0 million (334.7%)[367][369][373] - Total capital was $1,721.3 million as of December 31, 2023, with long-term debt of $546.0 million, resulting in a debt-to-total capital ratio of 31.7%, slightly above the long-term target of 25.0%[381] ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk The company's primary market risk is market value, managed by matching asset and liability durations; sensitivity analysis shows interest rate changes significantly impact shareholders' equity - Market value risk is the company's primary market risk exposure, managed by coordinating projected cash inflows of assets with projected cash outflows of liabilities[402][404] - As of December 31, 2023, the duration of the fixed maturity securities portfolio was approximately 6.0 years, and the duration of insurance liabilities and debt was approximately 6.5 years[408] - A hypothetical immediate decrease of 100 basis points in interest rates could result in an increase in shareholders' equity of approximately $79.0 million after tax (6.5%)[410] - A hypothetical immediate increase of 100 basis points in interest rates could result in a decrease in shareholders' equity of approximately $57.7 million after tax (4.8%)[410] - The company estimates that pretax net income in 2024 and 2025 would decrease by approximately $7.1 million for each 100 basis point decline in reinvestment rates[412] ITEM 8. Financial Statements and Supplementary Data This section presents audited consolidated financial statements for 2021-2023, including balance sheets, income, equity, and cash flows, with detailed notes on accounting policies, investments, and segment information, recast due to ASU 2018-12 adoption - KPMG LLP issued an unqualified opinion on the company's consolidated financial statements and internal control over financial reporting as of December 31, 2023[417][418] - The company adopted ASU 2018-12 (Targeted Improvements to the Accounting for Long-Duration Contracts) effective January 1, 2023, on a modified retrospective basis, with prior year balances recast to conform to the new standard[419][445][531] Consolidated Balance Sheet Highlights (December 31, 2023 vs. 2022) | Metric | 2023 ($ in millions) | 2022 ($ in millions) | | :----------------------------------------- | :------------------- | :------------------- | | Total investments | 6,830.5 | 6,587.6 | | Total assets | 14,049.9 | 13,306.1 | | Total policy liabilities | 7,831.4 | 7,808.7 | | Total liabilities | 12,874.6 | 12,207.8 | | Total shareholders' equity | 1,175.3 | 1,098.3 | Consolidated Statements of Operations Highlights (Year Ended December 31) | Metric | 2023 ($ in millions) | 2022 ($ in millions) | 2021 ($ in millions) | | :----------------------------------------- | :------------------- | :------------------- | :------------------- | | Net premiums and contract charges earned | 1,057.1 | 1,027.7 | 888.8 | | Net investment income | 444.8 | 400.9 | 422.5 | | Total revenues | 1,491.9 | 1,381.6 | 1,329.3 | | Total benefits, losses and expenses | 1,438.6 | 1,365.1 | 1,119.2 | | Net income | 45.0 | 19.8 | 170.4 | Consolidated Statements of Cash Flows Highlights (Year Ended December 31) | Metric | 2023 ($ in millions) | 2022 ($ in millions) | 2021 ($ in millions) | | :----------------------------------------- | :------------------- | :------------------- | :------------------- | | Net cash provided by operating activities | 302.1 | 171.5 | 204.9 | | Net cash used in investing activities | (107.4) | (214.6) | (302.0) | | Net cash provided by (used in) financing activities | (207.8) | (47.8) | 208.5 | | Net increase (decrease) in cash | (13.1) | (90.9) | 111.4 | - 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, primarily due to higher interest rates[355][362][550] - The company issued $300.0 million aggregate principal amount of 7.25% Senior Notes due September 15, 2028, and used the net proceeds to fully repay the $249.0 million outstanding borrowings under its Revolving Credit Facility[374][388][696][697] - Goodwill impairment charges of $2.0 million and intangible asset impairment charges of $2.8 million were recognized in 2022, primarily related to lower than anticipated revenues from the Benefit Consultants Group, Inc. (BCG) reporting unit[286][681][691] - The company's insurance subsidiaries' statutory capital and surplus were above required levels as of December 31, 2023 and 2022[135][725] ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There have been no changes in or disagreements with accountants on accounting and financial disclosure - There were no changes in or disagreements with accountants on accounting and financial disclosure[764] ITEM 9A. Controls and Procedures Management concluded the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2023, with no material changes, affirmed by KPMG LLP's unqualified opinion - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2023[765] - There were no changes in internal control over financial reporting during the quarter ended December 31, 2023, that materially affected or are reasonably likely to materially affect internal control over financial reporting[766] - Management assessed its internal control over financial reporting as effective at December 31, 2023, based on the Internal Control - Integrated Framework (2013) issued by COSO[769][770] - KPMG LLP, an independent registered public accounting firm, issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2023[771][772] ITEM 9B. Other Information This item is not applicable to the company - This item is not applicable[779] ITEM 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - This item is not applicable[780] PART III ITEM 10. Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance, including the code of ethics, is incorporated by reference from the 2024 Proxy Statement - Information on Directors, Executive Officers, and Corporate Governance is incorporated by reference from the 2024 Annual Meeting of Shareholders Proxy Statement[785] - The company has adopted a code of ethics and conduct that applies to its principal executive officer, principal financial officer, principal accounting officer, all other employees, and Board members[785] ITEM 11. Executive Compensation Executive compensation details, including director compensation and equity plans, are incorporated by reference from the company's 2024 Proxy Statement - Information on Executive Compensation, including Director Compensation and Compensation Discussion and Analysis, is incorporated by reference from the 2024 Annual Meeting of Shareholders Proxy Statement[783] ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters Security ownership details for beneficial owners and management, plus equity compensation plan information, are incorporated by reference from the 2024 Proxy Statement - Information on Security Ownership of Certain Beneficial Owners and Management and Equity Compensation Plan Information is incorporated by reference from the 2024 Annual Meeting of Shareholders Proxy Statement[786] ITEM 13. Certain Relationships and Related Transactions and Director Independence Information on certain relationships, related transactions, and director independence is incorporated by reference from the 2024 Proxy Statement - Information on Certain Relationships and Related Transactions and Director Independence is incorporated by reference from the 2024 Annual Meeting of Shareholders Proxy Statement[787] ITEM 14. Principal Accountant Fees and Services Information on principal accountant fees and services is incorporated by reference from the company's 2024 Proxy Statement - Information on Principal Accountant Fees and Services is incorporated by reference from the 2024 Annual Meeting of Shareholders Proxy Statement[788] PART IV ITEM 15. Exhibits and Financial Statement Schedules This section lists all exhibits and financial statement schedules filed with the Form 10-K, including consolidated financials, supplementary insurance data, and corporate governance documents - The report includes consolidated financial statements and supplementary schedules (Summary of Investments, Condensed Financial Information of Registrant, Supplementary Insurance Information, Reinsurance)[790] - Exhibits include the company's Restated Certificate of Incorporation, Amended and Restated Bylaws, Indentures for Senior Notes, Credit Agreement, and various executive compensation plans[811][812][814] - Certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 by the CEO and CFO are included[817][818] ITEM 16. Form 10-K Summary This item indicates that no Form 10-K Summary is provided - No Form 10-K Summary is provided[819] Signatures The Annual Report on Form 10-K is duly signed by the President and CEO, Marita Zuraitis, and other principal officers and directors, affirming compliance - The Annual Report on Form 10-K is signed by Marita Zuraitis, President and Chief Executive Officer, and other principal officers and directors, as required by the Securities Exchange Act of 1934[821][822]