“In the first quarter of 2022, we officially welcomed about 340,000 educator households and 80 employees to Horace Mann with the completion of our acquisition of Madison National Life Insurance Company,” said Horace Mann President and CEO Marita Zuraitis. “Horace Mann can now reach educators through employer-sponsored benefits at the district level, as well as through our direct channels and local, trusted advisors with insurance and financial services solutions.

“In the first quarter, our Supplemental & Group Benefits segment continued its sales momentum with Madison National meeting management’s expectations. We continue to be optimistic about the long-term growth potential of employer-sponsored and voluntary offerings sold through the worksite,” Zuraitis said. “In addition, we saw consistent growth in our Retirement offerings, with annuity contract deposits up 6% over prior year. In fact, April was the strongest sales month we’ve had for P&C products since the beginning of the pandemic and voluntary supplemental sales were double last April.

“While we see continued top-line sales progress that supports our long-term outlook, first-quarter Property & Casualty segment results were lower than a year ago, which was due to several factors,” Zuraitis continued. “First, as expected, frequency is nearing pre-pandemic levels. Second, in line with the broader industry, we are seeing inflation driving higher Property & Casualty loss costs. The impact of inflation was most evident in March, but the effect in April appeared more similar to January and February. As our marketing strategy emphasizes customer cross-sell and retention, we have long focused on offering a fair auto price over the life of a customer relationship. However, to address accelerating inflation, the auto rate plan for 2022 now includes rate increases in the high-single to low-double-digit range in states representing almost 80% of our premiums. Finally, for this segment, net investment income was impacted by a lower return on limited partnerships.

“As we continue to leverage our education market focus, we remain confident that we will increase our share of the education market as we grow through all channels over the course of the next several years,” Zuraitis said. “Due to the impact of inflation on our nearer-term auto results as well as the potential impact of market volatility on DAC unlocking, we now believe our 2022 core EPS is more likely to be at the lower end of the guidance range of $3.45-$3.65 we provided when we announced year-end 2021 results. We continue to assume a full-year limited partnerships portfolio contribution in line with our average historical returns and full-year catastrophe losses in line with our 10-year average.

“Beginning in 2023, we are targeting 10% average annual EPS growth and sustained double-digit ROEs, driven by our profitable growth,” Zuraitis added. “We expect the stronger and more diverse company that Horace Mann has become continues to pay more than $50 million in cash dividends each year while generating an additional $50 million in excess capital. Going forward, we expect to continue to prioritize growth in our capital plans. At the same time, we are committed to our 14-year track record of annual increases in our cash dividend and returning capital to shareholders through repurchases. The board increased our cash dividend payout by 3% in March to an annualized rate of $1.28.”

Operating Segment Results

Beginning with first quarter 2022, Horace Mann is reporting financial results in three operating segments: (1) Property & Casualty, (2) Life & Retirement, and (3) Supplemental & Group Benefits. The retail business, consisting of the Property & Casualty and Life & Retirement segments, provides insurance and financial services to individual educators through agency and direct channels. The Supplemental & Group Benefits segment provides voluntary and employer-sponsored benefits through school district employers. These worksite offerings help school districts attract and retain staff. This segment includes the results of Madison National Life Insurance Company, Inc. (Madison National) that was acquired effective January 1, 2022.

Property & Casualty segment results reflect inflation pressures on auto loss costs
(All comparisons vs. same period in 2021, unless noted otherwise)

The Property & Casualty insurance segment primarily markets private passenger auto insurance and residential home insurance. Horace Mann offers standard auto coverages, including liability, collision and comprehensive. Property coverage includes both homeowners and renters policies. For both auto and property coverage, Horace Mann offers educators a discounted rate and the Educator Advantage^® package of features. The Property & Casualty segment represented 51% of 2021 total revenues and contributed $57.0 million to 2021 core earnings.

Property & Casualty segment core earnings primarily reflected the anticipated increase in auto loss frequency toward pre-pandemic levels and higher auto loss severity due to inflation as well as lower net investment income due to performance of this segment’s limited partnership portfolio. These factors more than offset catastrophe losses below last year’s level.

Policyholder catastrophe losses were $7.3 million, which added 4.8 points to the combined ratio, from 11 events, compared to $11.0 million or 7.0 points in last year’s first quarter, from 13 events. The auto underlying loss ratio was 75.5%, compared to 58.8% in last year’s first quarter. Driving patterns continue their return to historic levels and severity continues to rise, impacted by inflation, and was unusually high in March. Property delivered a strong underlying loss ratio of 52.3%, although higher than last year’s first quarter.

As expected, Property & Casualty net premiums written were slightly below last year’s first quarter as the benefit of stronger retention is being offset by new business volumes that remain below historical levels due to the lingering effect of the pandemic on sales. Auto average net premiums were level with last year as pandemic-related mileage changes have stabilized. Property average net premiums were up over 5% as inflation adjustments to coverage values begin to take effect.

Life & Retirement segment benefits from continued growth in net annuity contract deposits
(All comparisons vs. same period in 2021, unless noted otherwise)

The Life & Retirement segment markets 403(b) tax-qualified fixed, fixed indexed and variable annuities; the Horace Mann Retirement Advantage^® open architecture platform for 403(b)(7) and other defined contribution plans; and other retirement products to educators as well as traditional term and whole life insurance products. Horace Mann is one of the largest participants in the K-12 educator portion of the 403(b) tax-qualified annuity market, measured by 403(b) net premiums written on a statutory accounting basis. The Life & Retirement segment represented 37% of 2021 total revenues and contributed $68.4 million to 2021 core earnings.

Life & Retirement segment core earnings were up 3.5% with total benefits and expenses unchanged. Adjusted core earnings, which excludes DAC unlocking, were up 26.1%.

For the Retirement business, net annuity contract deposits rose 5.9% over last year’s first quarter. Horace Mann’s relationship with educators often begins with 403(b) retirement savings products, including the company’s attractive annuity products, which provide encouraging cross-sell opportunities. Total cash value persistency remained strong at 94.3%. The net interest spread was 286 points, up from a year ago, reflecting strong investment returns.

Horace Mann currently has $5.2 billion in annuity assets under management, including $2.2 billion of fixed annuities, $2.5 billion of variable annuities and $0.5 billion of fixed indexed annuities. Assets under administration, which includes Retirement Advantage and other advisory and recordkeeping assets, was up 1.7% from a year ago, as assets under management rose due to strong equity market performance through the end of 2021.

Life annualized sales were slightly below last year with persistency for life products of 96.2% remaining in line with prior periods.

Supplemental & Group Benefits segment sales up over 2021
(All comparisons vs. same period in 2021, unless noted otherwise)

The Supplemental & Group Benefits segment markets employer-sponsored group worksite solutions for districts and other public employers, as well as voluntary products typically distributed through the worksite channel. The worksite business provides group term life, disability and specialty health insurance along with voluntary supplemental products including cancer, heart, hospital, supplemental disability and accident coverages. The Supplemental & Group Benefits segment represented 12% of 2021 total revenues and contributed $46.0 million to 2021 core earnings.

Supplemental & Group Benefits segment core earnings were down slightly with adjusted core earnings up 4.4%. Adjusted core earnings exclude the non-cash impact of amortization of intangible assets under purchase accounting that reduced core earnings by $3.9 million pretax vs. $2.9 million in the first quarter of 2021.

The pre-tax profit margin declined because of the addition of the newly acquired employer-sponsored products, which are expected to generate a lower margin than voluntary products. In the first quarter, total benefits also reflected normal seasonality for the employer-sponsored products.

Total sales for the segment were $3.7 million. Sales of voluntary products were $1.4 million in the first quarter, a 40.0% increase over prior year, with persistency remaining very strong at 92.1%. Sales of employer-sponsored products added another $2.3 million, in line with management’s expectations.

Consolidated Results

Horace Mann’s investment strategy is primarily focused on generating income to support product liabilities, and balances principal protection and risk. Total net investment income includes net investment income on the investment portfolio managed by Horace Mann, as well as accreted investment income on the deposit asset on reinsurance related to the company’s reinsurance of policy liabilities related to legacy individual annuities written in 2002 or earlier.

Investment income up 3% over prior year
(All comparisons vs. same period in 2021, unless noted otherwise)

Total net investment income was up 2.5%, or $2.4 million. Net investment income on the managed portfolio rose 2.7% due to yield expansion in the core fixed income portfolio and growth in both the commercial mortgage loan and limited partnership portfolios. The company’s fixed maturity securities portfolio is in a net unrealized investment gain position of $16.7 million pretax at March 31, 2022.

Adjusted book value per share* up 5% year over year

At March 31, 2022, shareholders’ equity was $1.54 billion, or $37.14 per share, as higher interest rates resulted in lower unrealized gains in the fixed-maturity portfolio. Excluding net unrealized investment gains on fixed maturity securities, shareholders’ equity was $1.52 billion, or $36.65 per share.* During the first quarter, Horace Mann repurchased 59,746 shares of common stock at an average price of $37.14. As of March 31, 2022, $13.1 million remained authorized for future share repurchases under the share repurchase program.

At March 31, 2022, total debt was $502.7 million, with $249.0 million outstanding on the company’s line of credit. The ratio of debt-to-capital excluding net unrealized investment gains* was 24.9% at March 31, 2022, which aligns with levels appropriate for the company’s current financial strength ratings.

Segment outlook for 2022

Horace Mann’s outlook for 2022 reflects accretion from newly acquired Madison National as well as estimates of the initial contributions of strategic growth initiatives. Due to the impact of inflation on auto loss costs as well as the potential impact of market volatility on DAC unlocking, management’s expectation for 2022 EPS is now at the lower end of the $3.45-$3.65 guidance range previously announced. Full-year net investment income from the managed portfolio is estimated to be in line with 2021, with limited partnership portfolio returns modeled closer to the historical averages. Results for each segment will reflect different considerations:

• Property & Casualty segment 2022 core earnings: In 2022, the underlying auto loss ratio is expected to be higher than original expectations due to inflation. The longer-term combined ratio target remains 95-96%. The assumption for catastrophe losses continues to be approximately 9.5 points on the combined ratio, in line with the 10-year average. Net investment income in 2022 is expected to be lower in this segment, as it benefited from strong limited partnership returns in 2021.

• Life & Retirement segment 2022 core earnings: Net investment income is expected to be up slightly compared to 2021, maintaining the net investment spread near the 2021 level. The assumption for mortality is a return to actuarial expectations.

• Supplemental & Group Benefits segment 2022 core earnings: Claims utilization is expected to be near pre-pandemic levels leading to full-year 2022 benefit ratios of about 35% for voluntary products and about 50% for employer-sponsored products. Amortization of intangible assets is expected to be approximately $13 million, or 30 cents per share (after tax).

About Horace Mann

Horace Mann Educators Corporation (NYSE: HMN) is the largest financial services company focused on helping America’s educators and others who serve the community achieve lifelong financial success. The company offers individual and group insurance and financial solutions tailored to the needs of the educational community. Founded by Educators for Educators^® in 1945, Horace Mann is headquartered in Springfield, Illinois. For more information, visit horacemann.com.

Quarterly webcast

Horace Mann’s senior management will discuss the company’s first-quarter financial results with investors on May 6, 2022 at 11:00 a.m. Eastern Time. The conference call will be webcast live at investors.horacemann.com and archived later in the day for replay.

Safe Harbor Statement and Non-GAAP Measures

Statements included in this news release that are not historical in nature are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties. Horace Mann is not under any obligation to (and expressly disclaims any such obligation to) update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Please refer to the company’s Annual Report on Form 10-K for the year ended December 31, 2021 and the company’s past and future filings and reports filed with the Securities and Exchange Commission (SEC) for information concerning important factors that could cause actual results to differ materially from those in forward-looking statements. Information contained in this news release include measures which are based on methodologies other than accounting principles generally accepted in the United States of America (GAAP). Reconciliations of non-GAAP measures to the closest GAAP measures are contained in the Appendix to the Investor Supplement and additional descriptions of the non-GAAP measures are contained in the Glossary of Selected Terms included as an exhibit to the company’s SEC filings.