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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549 
 
FORM 10-K 
 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
or
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______ 
 
Commission file number 1-10890 
 
HORACE MANN EDUCATORS CORPORATION
(Exact name of registrant as specified in its charter) 
Delaware
37-0911756
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
1 Horace Mann Plaza, Springfield, Illinois 62715-0001
(Address of principal executive offices) (Zip Code) 
  
Registrant's Telephone Number, Including Area Code: 217-789-2500
 
Securities Registered Pursuant to Section 12(b) of the Act:
 
 
Name of each exchange on
Title of each class
Trading Symbol
which registered
Common Stock, par value $0.001 per share
HMN
New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: None 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
Accelerated filer
Non-accelerated filer
 
Smaller reporting company
 
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
 
The aggregate market value of the registrant's Common Stock held by non-affiliates of the registrant based on the closing price of the registrant's Common Stock on the New York Stock Exchange and the shares outstanding on June 30, 2019, was $1,619.7 million
 
As of February 15, 2020, the registrant had 41,266,751 shares of Common Stock, par value $0.001 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's Proxy Statement for the 2020 Annual Meeting of Shareholders are incorporated by reference into Part III Items 10, 11, 12, 13 and 14 of this Form 10-K as specified in those Items and will be filed with the Securities and Exchange Commission within 120 days after December 31, 2019.







HORACE MANN EDUCATORS CORPORATION
FORM 10-K
YEAR ENDED DECEMBER 31, 2019
INDEX
Part
 
Item
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 





PART I
Item 1 I Business
Measures within this Annual Report on Form 10-K that are not based on accounting principles generally accepted in the U.S. (non-GAAP) are marked with an asterisk (*) the first time they are presented within Part I - Item 1 of this report. 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 U.S. (GAAP) in the Appendix to the Company's Fourth Quarter 2019 Investor Supplement.
Forward-looking Information
The Company's actual results could differ materially from those projected in forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in forward-looking statements is contained in Part I - Item 1A and in Part II - Item 7 of this report.
Overview, History and Available Information
Horace Mann Educators Corporation (HMEC; and together with its subsidiaries, the Company or Horace Mann) is an insurance holding company incorporated in Delaware. Through its subsidiaries, the Company markets and underwrites:
personal lines of property and casualty insurance, primarily automobile and property coverages
supplemental insurance, primarily heart, cancer, accident and limited short-term supplemental disability coverages
retirement products, primarily tax-qualified annuities
life insurance, primarily whole life, term and indexed universal life (IUL)
The Company conducts and manages its business through a total of five reporting segments. The four operating segments, representing the major lines of insurance business, are: Property and Casualty, Supplemental, Retirement and Life. The Company does not allocate the impact of corporate-level transactions to the four operating segments, consistent with the basis for management's evaluation of the results of those segments, but classifies those items in the fifth reporting segment, Corporate and Other.
Founded by Educators for Educators®, the Company's business began in Springfield, Illinois in 1945 when two school teachers started selling automobile insurance to other teachers within Illinois. The Company expanded its business to other states and broadened its product line to include life insurance in 1949, 403(b) tax-qualified retirement annuities in 1961 and property insurance in 1965. On July 1, 2019, the Company added its newest segment - Supplemental - when it acquired all of the equity interests in NTA Life Enterprises, LLC (NTA).
 
chart-09e06fc5cb5a95b51ea.jpg

Horace Mann Educators Corporation
 
Annual Report on Form 10-K 1




In November 1991, HMEC completed an initial public offering of its common stock. The common stock is traded on the New York Stock Exchange (NYSE) under the symbol HMN.
Today, the Company markets primarily to K-12 teachers, administrators and other employees of public schools and their families. The Company's more than one million customers typically have moderate annual incomes, with many belonging to two-income households. Their financial planning tends to focus on retirement, security, savings and primary insurance needs. Management believes that the Company is the largest national multi-line insurance company focused on the nation's educators as its primary market.
Horace Mann markets primarily through a dedicated sales force of full-time Exclusive Distributors supported by the Company's Customer Contact Center. These agents sell Horace Mann's products and limited third-party vendor products made available through the Horace Mann General Agency. Some of these agents are former educators or individuals with close ties to the educational community who utilize their contacts within, and knowledge of, the target market.
The Company 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 written premium on a statutory accounting basis. The Company's 403(b) tax-qualified annuities are voluntarily purchased by individuals employed by public school systems or other tax-exempt organizations through employee benefit plans of those entities.
The Company's new Supplemental segment predominantly sells a variety of guaranteed renewable supplemental health insurance products including heart, cancer, accident and limited short-term supplemental disability coverages to the K-12 education market. Approximately 80% of its 150,000 households are individuals employed by educational institutions; the remainder generally are other public sector employees such as firefighters.
Including results for the Supplemental segment since the date it was acquired, the Company's insurance premiums and contract charges earned for the year ended December 31, 2019 were $898.0 million and insurance premiums written and contract deposits* for the year ended December 31, 2019 were $1.3 billion. Net income was $184.4 million. The Company's total assets were $12.5 billion at December 31, 2019. The Company's investment portfolio had an aggregate fair value of $6.6 billion at December 31, 2019 and consisted primarily of investment grade fixed maturity securities.
The Company's annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, and all amendments to those reports, are available free of charge through the Investors section of the Company's website, www.horacemann.com, as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the Securities and Exchange Commission (SEC). The EDGAR filings of such reports are also available at the SEC's website, www.sec.gov.
Also available in the Investors section of the Company's website are its corporate governance principles, code of conduct, code of ethics, and corporate social responsibility reports, as well as the charters of the HMEC Board of Director's (Board) Audit Committee, Compensation Committee, Executive Committee, Investment and Finance Committee, and Nominating and Governance Committee. Copies also may be obtained by writing to Investor Relations, Horace Mann Educators Corporation, 1 Horace Mann Plaza, Springfield, Illinois 62715-0001.
On June 19, 2019, the Chief Executive Officer (CEO) of HMEC submitted the Annual Section 12(a) CEO Certification to the NYSE without any qualifications. The Company filed with the SEC, as exhibits to the Annual Report on Form 10-K for the year ended December 31, 2018, the CEO and Chief Financial Officer (CFO) certifications required under Section 302 of the Sarbanes-Oxley Act.
Corporate Strategy
The Company's vision is to be the company of choice to provide financial solutions for educators and others who serve their communities. Management believes the unique value of the Company is providing solutions tailored for educators at each stage of their lives, empowering them to achieve lifelong financial success.
Education Market
Today, the Company serves approximately 470,000 educator households in roughly half of the of the K-12 public school buildings in its market footprint in the U.S., with significant opportunity to grow in this niche market. The U.S. Department of Education estimates that there are approximately 6.4 million K-12 public school teachers,

2   Annual Report on Form 10-K
 
Horace Mann Educators Corporation


administrators and support staff nationwide, a number that is steadily growing. Adjacent markets such as private education staff offer further opportunity.
Because of the focus on this niche market, the Company has a homogeneous customer set with similar characteristics and preferred risk profiles. This allows for more precise underwriting processes and more targeted marketing operations, amplifying the benefit of successful approaches.
In addition, the Company has taken steps to increase its "business-to-business" value to administrators and business officials who make decisions on financial solution providers at the school district level.
Growth Strategy
Over the past several years, the Company has established its solutions orientation for the education market through a focus on products, distribution and infrastructure (PDI):
Products designed to meet educators’ needs and protect their unique risks;
Knowledgeable, trusted distribution tailored to educator preferences; and,
Modern, scalable infrastructure that is easy to do business with.
In addition, the Company completed three transactions in 2019 that supported its PDI strategy: acquiring NTA and Benefit Consultants Group, Inc. (BCG), as well as reinsuring a $2.9 billion block of legacy annuity business. The annuity reinsurance transaction reduced the Company's interest rate risk while releasing capital that was redeployed into higher-margin products through the acquisition of NTA.
As a result, the Company has become a larger, more diverse company that expects to continue its transformation by leveraging its market leadership to increase its share of the education market.
Relevant Products
At the core of Horace Mann’s value proposition is the commitment to providing relevant products and solutions to address the issues that educators face at each stage of their career and life. For example, for young educators new to the profession, student loan debt often precludes saving for retirement at the point when those savings would have the most time to grow and make a significant impact at retirement age. Through the Company’s Student Loan Solutions program, educators receive complimentary financial guidance to pursue public servant forgiveness or alternate repayment programs, or consolidate loans at a lower rate, freeing up money to begin a savings program.
Other solutions are valuable to educators across all career stages. Many educators are concerned about the rising out-of-pocket expenses stemming from unexpected medical events. Supplemental solutions, like cancer, heart and accident coverages, offer a defined dollar benefit that can be used for medical or non-medical expenses of an accident or health emergency. This can help customers address unexpected issues without needing to draw down retirement or other savings.
Trusted Distribution
The Company aims to provide multiple complementary distribution channels to meet individual educator preferences. The largest component of this strategy is the Company’s agency force, which builds strong relationships at the school and district level. These more than 800 local agents serve as a partner to educational institutions, providing financial wellness workshops in schools, consulting with educators and administrators, and supporting school events and activities. This trusted adviser model builds particularly strong brand loyalty and affinity. With the acquisition of NTA, the Company added approximately 200 captive agents experienced in school worksite marketing in largely complementary geographies.
To build brand awareness, engage with the educator community, and stay abreast of developments and challenges faced by educators, the Company partners with multiple national, state and local associations. Through strategic alliances with a diverse group of educator associations (e.g., the American Association of School Administrators, The School Superintendents Association and the Association of School Business Officials), the Company builds relationships with administrators.  Through partnerships with some state and local National Education Association (NEA) teacher associations and sponsoring the teacher of the year award with the NEA Foundation, the Company has the opportunity to build its brand awareness and discuss issues and challenges faced by individual educators.

Horace Mann Educators Corporation
 
Annual Report on Form 10-K 3


To meet the preferences of customers who prefer "on demand" services, the Company’s direct sales team is available by phone or electronically to respond to questions or bind coverages. Customers can also secure auto, home, supplemental and life quotes and coverage comparisons online.
Modern Infrastructure
The Company is implementing a multi-year effort to upgrade its infrastructure to provide an enhanced customer experience. One current example is the Guidewire property and casualty administrative platform. In 2020, the Company plans to on-board 14 states on to the Guidewire platform -- representing more than 60% of its customer base. This will increase customer convenience through improved digital capabilities, e-signatures, real-time policy issuance and changes, coverage comparison features and consolidated billing. The first phase of the Guidewire implementation, encompassing the claims system completed in 2017, resulted in reduced cycle times and more insight into customer and loss trends.
Through the acquisition of BCG, the Company strengthened its retirement platform to better meet the needs of employers, as well as other worksite capabilities. This strengthened Horace Mann's value proposition and enhanced its retirement plan infrastructure and offerings for school districts.
Reporting Segments
The Company conducts business primarily in five reporting segments: Property and Casualty, Supplemental, Retirement, Life and Corporate and Other.
These segments are defined based on the way management organizes the segments for making operating decisions and assessing performance. Management maintains discrete financial information by these segments to evaluate performance and allocate resources.
The calculations of segment data are described in more detail in Part II - Item 8, Note 18 of the Consolidated Financial Statements in this report. Additionally, the business operations of each segment are explained in this section. The financial performance of each segment is discussed in Part II - Item 7 of this report.
Property and Casualty
The Company's primary Property and Casualty insurance products include private passenger automobile insurance and residential home insurance.
The Company offers standard auto coverages, including liability, collision and comprehensive. Property coverage includes both homeowners and renters policies. For both auto and property coverage, the Company offers educators a discounted rate and the Educator Advantage® package of features. This includes value-added benefits specifically for educators, such as liability coverage for transporting students in an insured vehicle and reimbursement for stolen school fundraising items.
 
chart-17479f56a2203d5ff76.jpg
433,060 auto policies in force and
193,727 property policies in force at December 31, 2019

The Company has programs in a majority of states to provide higher-risk automobile and property coverages. The Company also has a number of other insurance coverages with third-party vendors who underwrite and bear the risk of such insurance. The Company receives commissions on these sales.
Similarly, the Company has increased its offering of third-party vendor products in many areas to meet additional educator needs such as coverage for small business owners or classic/collector automobiles.

4   Annual Report on Form 10-K
 
Horace Mann Educators Corporation


Catastrophe Costs (Pretax) (1) 
The level of catastrophe costs can fluctuate significantly from year to year. The Company's catastrophe costs for the last five years are shown in the following table ($ in millions).
Year
 
Month
 
Event Description
 
States/Region
 
Total
2019
 
 
 
 
 
 
 
$
52.0

 
 
May
 
Wind and Hail
 
CO, IA, IL, IN, KS, MO, NE, OH, OK, PA, WY
 
5.5

 
 
 
 
Other single events less than $5.0 million
 
 
 
46.5

2018
 
 
 
 
 
 
 
$
114.1

 
 
March
 
Winter Storm
 
Northeastern U.S.
 
3.5

 
 
June
 
Wind and Hail
 
CO, UT
 
8.2

 
 
July
 
Carr Fire
 
CA
 
5.9

 
 
September
 
Hurricane Florence
 
Southeast and Mid-Atlantic
 
11.4

 
 
October
 
Hurricane Michael
 
Southeastern U.S.
 
4.5

 
 
November
 
Camp Fire
 
CA
 
31.2

 
 
 
 
Other single events less than $5.0 million
 
 
 
49.4

2017
 
 
 
 
 
 
 
$
61.8

 
 
May
 
Wind, Hail, Tornado
 
CO
 
10.0

 
 
June
 
Wind and Hail
 
MN (primarily)
 
10.0

 
 
August
 
Hurricane Harvey
 
Southeastern U.S.
 
4.8

 
 
August
 
Hurricane Irma
 
Eastern U.S.
 
3.0

 
 
 
 
Other single events less than $5.0 million
 
 
 
34.0

2016
 
 
 
 
 
 
 
$
60.0

 
 
April
 
Wind and Hail
 
FL, TX
 
9.3

 
 
September
 
Hurricane Matthew
 
Southeastern U.S.
 
10.0

 
 
 
 
Other single events less than $5.0 million
 
 
 
40.7

2015
 
 
 
 
 
 
 
$
44.4

 
 
February
 
Winter Storm
 
Midwest & Eastern U.S.
 
8.9

 
 
 
 
Other single events less than $5.0 million
 
 
 
35.5

(1) 
Net of reinsurance and before income tax benefits. Includes allocated loss adjustment expenses and reinsurance reinstatement premiums; excludes unallocated loss adjustment expenses.

Horace Mann Educators Corporation
 
Annual Report on Form 10-K 5


Fluctuations in catastrophe losses impact a property and casualty insurance company's claims and claim adjustment expenses incurred and paid.
Claims and Claim Expenses Incurred(1)(2), 2017-2019 ($ in millions)
chart-8287a9375ee418e6542.jpg
(1) 
Claims and claim expenses incurred include the impact of prior years' reserve development as quantified in Property and Casualty reserves. Catastrophe totals are net of reinsurance and before income tax benefits.
(2) 
Excludes 2018 reinsurance reinstatement premiums.
Property and Casualty Reserves
Property and Casualty unpaid claims and claim expenses (loss reserves) represent management's estimate of ultimate unpaid costs of losses and settlement expenses for reported claims and claims that have been incurred but not yet reported (IBNR). The Company calculates and records a single best estimate of the reserve as of each reporting date in conformity with generally accepted actuarial standards. For additional information regarding the process used to estimate Property and Casualty reserves and the risk factors involved, as well as a summary reconciliation of the beginning and ending Property and Casualty insurance claims and claim expense reserves and prior years' reserve development recorded in each of the three years ended December 31, 2019, see Part II - Item 8, Note 8 of the Consolidated Financial Statements, and Part II - Item 7, Critical Accounting Estimates and Results of Operations for the Property and Casualty Segment for the Three Years Ended December 31, 2019 in this report.
All of the Company's reserves for Property and Casualty unpaid claims and claim expenses are carried at the full value of estimated liabilities and are not discounted for interest expected to be earned on the reserves. Due to the nature of the Company's personal lines business, the Company has no exposure to losses related to claims for toxic waste cleanup, other environmental remediation or asbestos-related illnesses other than claims under property insurance policies for environmental related items such as mold.
Property and Casualty Reinsurance
All reinsurance is obtained through contracts which generally are entered into for each calendar year. Although reinsurance does not legally discharge the Company from primary liability for the full amount of its policies, it does allow for recovery from assuming reinsurers to the extent of the reinsurance ceded. Past due reinsurance recoverables as of December 31, 2019 were not material.
The Company maintains catastrophe excess of loss reinsurance coverage. For 2019, the Company's catastrophe excess of loss coverage consisted of one contract in addition to a minimal amount of coverage by the Florida Hurricane Catastrophe Fund. The catastrophe excess of loss contract provided 95% coverage for catastrophe losses above a $25.0 million retention per occurrence up to $175.0 million per occurrence. This contract consisted of three layers, each of which provided for one mandatory reinstatement. The layers were $25.0 million excess of $25.0 million, $40.0 million excess of $50.0 million and $85.0 million excess of $90.0 million. The Company's 2020 catastrophe excess of loss coverage is unchanged from 2019.

6   Annual Report on Form 10-K
 
Horace Mann Educators Corporation


The Company has not joined the California Earthquake Authority (CEA). The Company's exposure to losses from earthquakes is managed through its underwriting standards, its earthquake policy coverage limits and deductible levels, and the geographic distribution of its business, as well as its reinsurance program. After reviewing the exposure to earthquake losses from the Company's own policies and from what it would be with participation in the CEA, including estimated start-up and ongoing costs related to CEA participation, management believes it is in the Company's best economic interest to offer earthquake coverage directly to its property policyholders.
For liability coverages, in 2019 the Company reinsured each loss above a retention of $1.0 million up to $5.0 million per occurrence and $20.0 million in a clash event. A clash cover is a reinsurance casualty excess contract requiring two or more casualty coverages or policies issued by the Company to be involved in the same loss occurrence for coverage to apply. The Company's 2020 liability coverages are unchanged from 2019.
The Company markets personal lines excess liability policies. The limits of these policies are $1.0 million to $5.0 million in excess of $0.5 million of underlying auto and homeowners liability coverage. The Company reinsures these policies on a quota share basis with General Reinsurance Corporation who assumes 95% of losses, including allocated loss adjustment expenses and premiums for all states except Massachusetts. For business written in Massachusetts, the quota share portion is 75%.
For auto insurance sold in Michigan, Personal Injury Protection (PIP) coverage is unlimited in compliance with Michigan state law. The Company participates in the Michigan Catastrophic Claims Association (MCCA). For policies issued in 2019, MCCA reimburses PIP losses including allocated loss adjustment expenses in excess of $0.6 million.
For property coverages, in 2019 the Company reinsured each loss above a retention of $1.0 million up to $5.0 million per risk, including catastrophe losses. Also, the Company could submit to the reinsurers two per risk losses from the same occurrence for a total of $8.0 million of property recovery in any one event. The Company's 2020 property coverages are unchanged from 2019.
The following table identifies the Company's most significant reinsurers under the catastrophe first event excess of loss reinsurance program, their percentage participation in this program and their ratings by A.M. Best Company (A.M. Best) and Standard & Poor's Global Inc. (S&P) as of January 1, 2020. No other single reinsurer's percentage participation in 2020 or 2019 exceeds 5%. The Company monitors reinsurers' financial strength by reviewing A.M. Best and S&P ratings.
Property Catastrophe First Event Excess of Loss Reinsurance Participants In Excess of 5%
A.M. Best Rating
 
S&P Rating
 
Reinsurer
 
Parent
 
2020
 
2019
A
 
A+
 
Lloyd's of London Syndicates
 
 
 
22%
 
28%
A+
 
AA-
 
Swiss Re Underwriters Agency, Inc.
 
Swiss Re Ltd.
 
10%
 
7%
NR
 
AA-
 
R+V Versicherung AG
 
DZ BANK AG
 
9%
 
8%
A+
 
AA-
 
SCOR Global P&C SE
 
SCOR SE
 
7%
 
7%
NR - Not rated.


Horace Mann Educators Corporation
 
Annual Report on Form 10-K 7




Supplemental
The Company's new Supplemental insurance products include heart, cancer, accident and limited short-term supplemental disability coverages and it also markets life insurance products. A typical supplemental policy offers "HIPAA Excepted" benefits with simplified issuance. Supplemental insurance products are limited benefit products that offer defined benefit amounts paid directly to the insured, and are payable in addition to any other insurance coverages. An insured can use the supplemental payments to cover medical or non-medical costs of a covered injury or illness.
Supplemental products continue to gain popularity in the changing healthcare landscape with higher deductible health care plans and expanded voluntary offerings along with an increasing focus on health and wellness. The Company's supplemental products are well designed, offering indemnity benefits only rather than reimbursement of actual costs. The benefit risk is well controlled with no coverage for pre-existing conditions and specified benefit maximums per occurrence or time period. Diagnosis or treatment is required for benefit payment.
The limited supplemental disability products have elimination and short-term benefit periods. Sound underwriting techniques and significant underwriting expertise help ensure loss experience is commensurate with pricing expectations.
 
chart-3497c890a7cc59b6da6.jpg

297,000 total Supplemental policies in force at December 31, 2019

Supplemental Reserves
Supplemental policy reserves represent management's estimate of the present value of the future ultimate benefits to be provided for heart, cancer, accident and limited short-term supplemental disability claims. Unpaid claims and claim expenses provide provisions for claims reported to the Company plus an estimated accrual for IBNR claims.
Supplemental Reinsurance
The Company retains all of the risk on its supplemental health product lines, including accidental death risk embedded within certain products.  However, the Company’s other accidental death and dismemberment risk issued through all other policies and riders are ceded 100%.  The maximum life insurance risk retained on any individual life by the Company's Supplemental segment is $100,000. The excess risk on the life insurance products issued by the Company's Supplemental segment is ceded to and reinsured by a third party that is rated A (Excellent) by A.M. Best. 
Retirement
Educators in the Company's target market continue to benefit from the provisions of Section 403(b) of the Internal Revenue Code (Code). This section of the Code allows public school employees and employees of other tax-exempt organizations, such as not-for-profit private schools, to utilize pretax income to make periodic contributions to a qualified retirement plan (also see Regulation — Regulation at Federal Level).

8   Annual Report on Form 10-K
 
Horace Mann Educators Corporation




The Company entered the educators retirement annuity market in 1961 and 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 written premium on a statutory accounting basis. Of the Company's annuity contract deposits* in 2019, 51.8% were for 403(b) tax-qualified annuities, and 62.2% of accumulated annuity value on deposit is 403(b) tax-qualified. To further assist registered representatives in delivering the Horace Mann Value Proposition, the Company has entered into third-party vendor agreements to market 529 college savings programs and provide brokerage clearing arrangements.
Annuity Reinsurance
Effective April 1, 2019, the Company reinsured a block of approximately $2.9 billion of policy liabilities related to legacy individual annuities written in 2002 or earlier. The block includes $2.2 billion of fixed annuities with a minimum guaranteed crediting rate of 4.5% that represented approximately 50% of the Company’s fixed annuity assets under management at March 31, 2019, and $700 million of variable annuities. The reinsurance is structured as coinsurance for the fixed annuities and modified coinsurance for the variable annuities with RGA Reinsurance Company, a subsidiary of Reinsurance Group of America, Incorporated (RGA). The Company determined that the reinsurance agreement does not expose the reinsurer to a reasonable possibility of significant loss from insurance risk. Therefore, the Company recognizes the reinsurance agreement using the deposit method of accounting.
Assets under Management
The Company markets both fixed and variable annuity contracts, primarily on a tax-qualified basis. Total accumulated fixed and variable annuity cash value on deposit at December 31, 2019 was $4.4 billion, net of the reinsured block.
Fixed-only annuities provide a guarantee of principal and a guaranteed minimum rate of return. These contracts are backed by the Company's general account investments. The Company bears the investment risk associated with the investments and may change the declared interest rate on these contracts subject to contract guarantees.
The Company also offers fixed indexed annuity (FIA) products with interest crediting strategies linked to the S&P 500 Index and the Dow Jones Industrial Average (DJIA).
 
chart-b0cf41fc4f3dceb4f19.jpg
229,000 annuity contracts in force at December 31, 2019
Variable annuities combine a fixed account option with equity-linked and bond-linked sub-account options. By utilizing tools that provide assistance in determining needs and making asset allocation decisions, contractholders are able to choose the investment mix that matches their personal risk tolerance and retirement goals. As of December 31, 2019, the Company had 110 variable sub-account options including funds managed by some of the larger participants in the mutual fund industry.
In 2017, the Company introduced the Personal Retirement Planner annuity series, which includes a flexible premium deferred variable annuity, a flexible premium deferred fixed indexed annuity, a single premium deferred fixed annuity and a single premium immediate annuity. Consistent across all of these products is the elimination of any surrender charges for early withdrawal.
Assets under Administration
In addition to annuities, the Company markets the Horace Mann Retirement Advantage® open architecture platform for 403(b)(7) and other defined contribution plans. This platform combines a wide array of mutual funds integrated with a group unallocated fixed annuity stable value fund. This platform provides the Company with greater flexibility to offer customized 403(b)(7) and other qualified plan solutions to better meet the needs of school districts and other non-for-profit plan sponsors. After the acquisition of BCG, the Company migrated the administration of its Horace Mann Retirement Advantage® platform from a third-party vendor to the BCG platform. The Company offers its group unallocated fixed annuity, Horace Mann Stable Value Solution, as an option within a number of the 401(k) plans BCG administers. BCG had $1.5 billion of recordkeeping assets and $2.0 billion of advisory assets as of December 31, 2019.

Horace Mann Educators Corporation
 
Annual Report on Form 10-K 9




Retirement Assets Under Administration, 2017-2019 ($ in billions)
chart-40627b20213a776c4f5.jpg

Life
The Company entered the individual life insurance business in 1949. The Company primarily offers traditional term and whole life insurance products as well as IUL products and, from time to time, revises products and product features or develops new products. Additionally, the Company offers educator rates for its customers.
During 2019, the average face amount of ordinary life insurance policies issued by the Company was approximately $199,000 and the average face amount of all ordinary life insurance policies in force at December 31, 2019 was approximately $95,000.
The Company offers a lineup of several product portfolios. Life by Design® is a portfolio of Horace Mann manufactured and branded life insurance products that specifically address the financial planning needs of educators. The Life by Design® portfolio features individual whole life and individual term products, including 10, 15, 20 and 30-year level term policies. The Life by Design® policies have premiums that are guaranteed for the duration of the contract and offer lower minimum face amounts.
 
chart-2721f8a0e27e993649f.jpg
149,887 whole life, term and group policies in force; 50,973 Experience Life and IUL policies in force at December 31, 2019

10   Annual Report on Form 10-K
 
Horace Mann Educators Corporation




The Company offers a combination product called Life Select® that mixes a base of either traditional whole life, 20-pay life or life paid-up at age 65 with a variety of term riders to allow for more flexibility in tailoring the coverage to customers' varying life insurance needs. Additional products include single premium whole life products and Cash Value Term — a term policy that builds cash value while providing the income protection of traditional level term life insurance.
The Company offers an IUL product with interest crediting strategies linked to the S&P 500 Index and the DJIA offering a contingent return based on equity market performance. Along with expanded product offerings, new marketing support tools continue to be introduced to aid the agency force.
Life Reinsurance
The maximum individual life insurance risk retained by the Company's Life segment is $500,000 on any individual life, while either $100,000 or $125,000 is retained on each group life policy depending on the type of coverage. The excess of the amounts retained are reinsured with life reinsurers that are rated A (Excellent) or above by A.M. Best. The Company also maintains a life catastrophe reinsurance program. In 2019, the Company reinsured 100% of the catastrophe risk in excess of $1.0 million up to $35.0 million per occurrence, with one reinstatement. For 2020, the Company's catastrophe risk coverage is unchanged. The Company's life catastrophe risk reinsurance program covers acts of terrorism and includes nuclear, biological and chemical explosions but excludes other acts of war.
Corporate and Other
Corporate and Other includes capital raising activities (including debt financing and related interest expense), net investment gains (losses), certain public company expenses and other corporate-level transactions including expenses related to business acquisition activity. The Company does not allocate the impact of corporate-level transactions to the operating segments, consistent with the basis for management's evaluation of the results of those segments.

Horace Mann Educators Corporation
 
Annual Report on Form 10-K 11




2019 Geographic Composition of Business
The Company's business is geographically diversified. For the year ended December 31, 2019, based on direct premiums and contract deposits for all product lines, the top five states and their portion of total direct insurance premiums and contract deposits were California, 9.6%; Texas, 7.7%; North Carolina, 6.6%; Minnesota, 5.7%; and Pennsylvania, 5.1%.
chart-255e4e0c6cffd239875.jpg
$686.3 million in direct premiums, defined as earned premiums before reinsurance as determined under statutory accounting principles. HMEC's property and casualty subsidiaries are licensed to write business in 49 states and the District of Columbia.

 
chart-9fa6c12cbbfd06e9961.jpg
$580.6 million in direct premiums and contract deposits, defined as collected premiums before reinsurance as determined under statutory accounting principles. HMEC's principal life subsidiary is licensed to write business in 49 states and the District of Columbia.
chart-991d03bb241cdfca9dd.jpg
$65.8 million in insurance premiums and contract charges earned. HMEC's principal
supplemental insurance subsidiaries are licensed to write business in all 50 states,
the U.S. Virgin Islands and the District of Columbia.

12   Annual Report on Form 10-K
 
Horace Mann Educators Corporation




Competition
Horace Mann has 75 years of experience serving the education market and is uniquely positioned to tailor financial solutions for educators at each stage of their lives, empowering them to achieve lifelong financial success. The Company believes this helps it succeed in a highly competitive environment. The insurance industry consists of a large number of insurance companies, some of which have substantially greater financial resources, widespread advertising campaigns, more diversified product lines, greater economies of scale and/or lower-cost marketing approaches compared to the Company. In the Company's target market, management believes that its principal competitive advantages in the sale of Property and Casualty's and Supplemental's insurance products are overall service, worksite sales and service, price, and name recognition. Management believes that its principal competitive advantages in the sale of Retirement products and Life insurance are worksite sales and service, product features, perceived stability of the insurer, price, overall service and name recognition.
With the Company's focus on the educator market it can benefit from a homogeneous customer set that permits more precise underwriting processes and more targeted marketing operations, amplifying the benefit of successful approaches. The Company seeks to provide:
Products designed to meet educators’ needs and protect their unique risks;
Knowledgeable, trusted distribution tailored to educator preferences; and
Modern, scalable infrastructure that is easy to do business with.
Competition in this market is from a number of national providers of personal automobile, property, supplemental and life insurance including State Farm, Allstate, Farmers, Liberty Mutual, Aflac, Unum and Nationwide, as well as a number of regional companies. The Company also competes for automobile business with other companies such as GEICO, Progressive and USAA, many of which feature direct marketing distribution. A number of technology start-ups have also entered the market.
National providers of annuities and other financial service platforms that serve the retirement needs of educators and others that serve the community, include The Variable Annuity Life Insurance Company, a subsidiary of American International Group; AXA; Voya Financial, Inc.; Life Insurance Company of the Southwest, a subsidiary of National Life Insurance Company; Security Benefit; and Teachers Insurance and Annuity Association – College Retirement Equities Fund. Select mutual fund families and financial planners also compete in this marketplace.
The market for tax-deferred retirement products in the Company's target market has been impacted by the revised Code Section 403(b) regulations, which made the 403(b) market more comparable to the 401(k) market than it was in the past. While this change has and may continue to reduce the number of competitors in this market, it has made the 403(b) market more attractive to some of the larger companies experienced in 401(k) plans, including both insurance and mutual fund companies, that had not previously been active competitors in this business.
Investments
The Company's investments are selected to balance the objectives of protecting principal, minimizing exposure to interest rate risk and providing a high current yield. These objectives are implemented through a portfolio that primarily emphasizes investment grade fixed maturity securities that are selected to match the anticipated duration of the Company's liabilities. In addition to these securities, the Company also invests in limited partnership interests, commercial mortgage loans and equity securities to improve overall returns.
The Company has separate investment strategies and guidelines for its Property and Casualty, Supplemental, Retirement and Life portfolios, which recognize different characteristics of the associated insurance liabilities, as well as different tax and regulatory environments. The Company manages interest rate exposure for its portfolios through asset/liability management techniques that attempt to coordinate the duration of the assets with the duration of the insurance policy liabilities. Duration of assets and liabilities will generally differ only because of opportunities to significantly increase yields or because policy values are not interest rate sensitive, as is the case in Property and Casualty and Supplemental.
The investments of each insurance subsidiary must comply with the insurance laws of such insurance subsidiary's domiciliary state. These laws prescribe the type and amount of investments that may be purchased

Horace Mann Educators Corporation
 
Annual Report on Form 10-K 13




and held by insurance companies. In general, these laws permit investments, within specified limits and subject to certain qualifications, in federal, state and municipal obligations, corporate bonds, mortgage-backed securities, other asset-backed securities, preferred stocks, common stocks, real estate mortgages, real estate, and alternative investments.
Investment Portfolio at December 31, 2019
($ in millions)
 
% of Total
Carrying
Value
 
Carrying Value
 
 
 
 
 
Total
 
Life and
Retirement
 
Supplemental
 
Property and
Casualty (7)
 
Amortized
Cost or Cost (8)
Publicly Traded Fixed Maturity Securities, Equity
Securities and Short-term Investments:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government and agency obligations: (1)
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
 
10.9
%
 
$
724.3

 
$
547.9

 
$
130.0

 
$
46.4

 
$
684.5

Other, including U.S. Treasury securities
 
6.9

 
458.9

 
440.7

 
6.6

 
11.6

 
436.7

Investment grade corporate and public utility
bonds
 
17.7

 
1,173.8

 
797.5

 
174.9

 
201.4

 
1,074.8

Non-investment grade corporate and
public utility bonds (2)
 
1.1

 
72.6

 
40.4

 
7.1

 
25.1

 
70.1

Investment grade municipal bonds
 
24.0

 
1,592.9

 
1,105.5

 
78.0

 
409.4

 
1,457.9

Non-investment grade municipal bonds (2)
 
0.5

 
34.5

 
17.1

 

 
17.4

 
32.4

Investment grade other mortgage-backed
securities (3)
 
18.0

 
1,195.4

 
958.6

 
56.3

 
180.5

 
1,188.7

Non-investment grade other mortgage-backed
securities (2)(3)
 
0.5

 
31.0

 
24.4

 
0.5

 
6.1

 
28.4

Foreign government bonds
 
0.7

 
45.4

 
43.9

 

 
1.5

 
42.8

Redeemable preferred stock, all investment
grade
 
0.4

 
24.3

 
23.5

 
0.8

 

 
21.9

Equity securities:
 


 
 
 
 
 
 
 
 
 
 
Non-redeemable preferred stocks,
all investment grade
 
0.9

 
60.4

 
57.9

 
1.4

 
1.1

 
60.4

Common stocks
 
0.3

 
20.1

 
0.1

 

 
20.0

 
20.1

Closed-end fund
 
0.3

 
21.4

 
21.4

 

 

 
21.4

Short-term investments (4)
 
2.6

 
172.7

 
113.6

 
57.5

 
1.6

 
172.7

Total publicly traded securities
 
84.8

 
5,627.7

 
4,192.5

 
513.1

 
922.1

 
5,312.8

Other Invested Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Investment grade private placements
 
5.8

 
385.8

 
377.4

 
8.4

 

 
368.0

Non-investment grade private placements (2)
 
0.8

 
52.8

 
50.2

 
2.6

 

 
50.8

Mortgage loans (5)
 
0.1

 
9.8

 
9.8

 

 

 
9.8

Policy loans (5)
 
2.3

 
153.5

 
152.7

 
0.8

 

 
153.5

Limited partnership interests
 
5.8

 
383.7

 
253.1

 
16.0

 
114.6

 
383.7

Other
 
0.4

 
25.9

 
24.9

 

 
1.0

 
25.9

Total other invested assets
 
15.2

 
1,011.5

 
868.1

 
27.8

 
115.6

 
991.7

Total investments (6)
 
100.0
%
 
$
6,639.2

 
$
5,060.6

 
$
540.9

 
$
1,037.7

 
$
6,304.5

(1) 
All investment grade that includes $494.9 million fair value of investments guaranteed by the full faith and credit of the U.S. Government and $688.3 million fair value of federally sponsored agency securities which are not backed by the full faith and credit of the U.S. Government.
(2) 
A non-investment grade rating is assigned to a security when it is acquired or when it is downgraded from investment grade, primarily on the basis of the S&P rating for such security, or if there is no S&P rating, the Moody's Investors Service, Inc. (Moody's) or Fitch Ratings, Inc. (Fitch) rating for such security, or if there is no S&P, Moody's or Fitch rating, the National Association of Insurance Commissioners' (NAIC) rating for such security. The rating agencies monitor securities and their issuers regularly, and make changes to the ratings as necessary. The Company incorporates rating changes on a monthly basis.
(3) 
Includes commercial mortgage-backed securities, asset-backed securities, other mortgage-backed securities and collateralized loan obligations.
(4) 
Short-term investments mature within one year of being acquired and are carried at cost, which approximates fair value. Short-term investments of $172.7 million are all money market funds and not rated.
(5) 
Mortgage and policy loans are carried at amortized cost or unpaid principal balance.
(6) 
Approximately 7.0% of the Company's investment portfolio, having a carrying value of $462.8 million as of December 31, 2019, consisted of securities with some form of credit support, such as insurance. Of the securities with credit support as of December 31, 2019, municipal bonds represented $349.1 million carrying value.
(7) 
Includes $1.4 million of short-term investments held in Corporate and Other.
(8) 
The values of limited partnership interests are carried using the equity method of accounting which approximates fair value.

14   Annual Report on Form 10-K
 
Horace Mann Educators Corporation




Fixed Maturity Securities
For reporting purposes, the Company has classified the entire portfolio of fixed maturity securities as "available for sale" and the portfolio is carried at fair value. The adjustment for net unrealized investment gains (losses) on securities available for sale is recognized as a separate component of accumulated other comprehensive income within shareholders' equity, net of applicable deferred taxes and the related impact on deferred policy acquisition costs (DAC) associated with investment (annuity) contracts and life insurance products with account values. Fixed maturity securities held for indefinite periods of time include securities that management intends to use as part of its asset/liability management strategy and that may be sold in response to changes in interest rates, resultant prepayment risk and other related factors, other than securities that are in an unrealized loss position for which management has the stated intent to hold until recovery.
Fixed Maturity Securities Portfolio at December 31, 2019
 
 
% of Fixed Maturity
Securities Portfolio
 
% of Total
Investment Portfolio
Investment grade
 
96.4
%
 
84.0
%
Non-investment grade
 
3.6
%
 
3.2
%
 
 
 
 
 
Average quality
 
A+

 
A+

Average option-adjusted duration
 
6.0

 
6.0

Percent maturing in next 5 years
 
31.1
%
 
27.1
%

Cash Flow
Information regarding HMEC's sources and uses of cash, including payment of principal and interest with respect to HMEC's indebtedness, and payment by HMEC of dividends to its shareholders, is contained in Part II - Item 8, Note 14 of the Consolidated Financial Statements and in Part II - Item 7, Liquidity and Financial Resources — Cash Flow and — Capital Resources in this report.
The ability of the insurance subsidiaries to pay cash dividends to HMEC is subject to state insurance department regulations which generally permit dividends to be paid for any 12 month period in amounts equal to the greater of (i) net income for the preceding calendar year or (ii) 10% of surplus, determined in conformity with statutory accounting principles, as of the preceding December 31st. Any dividend in excess of these levels requires the prior approval of the Director or Commissioner of the state insurance department of the state in which the dividend paying insurance subsidiary is domiciled. The maximum amount of dividends that may be paid in 2020 from all of HMEC's insurance subsidiaries without prior regulatory approval is $105.3 million, excluding the impact and timing of prior year dividends.
Notwithstanding the foregoing, if insurance regulators otherwise determine that payment of a dividend or any other payment to an affiliate would be detrimental to an insurance subsidiary's policyholders or creditors, because of the financial condition of the insurance subsidiary or otherwise, the regulators may block dividends or other payments to affiliates that would otherwise be permitted without prior approval.

Horace Mann Educators Corporation
 
Annual Report on Form 10-K 15




Regulation
General Regulation at State Level
As an insurance holding company, HMEC is subject to extensive regulation by the states in which its insurance subsidiaries are domiciled or transact business. Some regulations, such as those addressing unclaimed property, generally apply to all corporations. In addition, the laws of the various states establish regulatory agencies with broad administrative powers, which relate to a wide variety of matters, including granting and revoking licenses to transact business, regulating trade practices and rate setting, licensing agents, requiring statutory financial statements, monitoring insurer solvency and reserve adequacy, and prescribing the type and amount of investments permitted and the manner in which they may be sold. On an ongoing basis, various state legislators and insurance regulators examine the nature and scope of state insurance regulation.
In addition to individual state monitoring and regulation, state regulators develop coordinated regulatory policies through the NAIC. States have adopted NAIC risk-based capital guidelines to evaluate the adequacy of statutory capital and surplus in relation to an insurance company's risks. Based on current guidelines, the risk-based capital statutory requirements are not expected to have a negative regulatory impact on the Company's insurance subsidiaries. At December 31, 2019 and 2018, statutory capital and surplus of each of the Company's insurance subsidiaries were above required levels. States have also adopted the NAIC's U.S. Own Risk and Solvency Assessment which requires insurance companies to submit their own assessment of their current and future risks and provide a consolidated group-level perspective on risk and capital formulated through an internal risk self-assessment process.
Assessments Against Insurers and Mandatory Insurance Facilities
Under insurance insolvency or guaranty laws in most states in which the Company operates, insurers doing business therein can be assessed for policyholder losses related to insolvencies of other insurance companies, and many assessments paid by the Company pursuant to these laws may be used as credits for a portion of the Company's premium taxes in certain states. Also, the Company is required to participate in various mandatory insurance facilities in proportion to the amount of the Company's direct writings in the applicable state. For the three years ended December 31, 2019, the impacts of the above industry items were not material to the Company's results of operations.
Regulation at Federal Level
Although the federal government generally does not directly regulate the insurance industry, federal initiatives often impact the insurance business. Current and proposed federal measures which may significantly affect insurance and retirement business include employee benefits regulation, standards applied to employer sponsored retirement plans, standards applied to broker-dealers and investment advisers, controls on the costs of medical care, medical entitlement programs such as Medicare, structure of retirement plans and accounts, changes to the insurance industry antitrust exemption, and minimum solvency requirements. Also, see Part I - Item 1A of this report. Other federal regulation such as the Patient Protection and Affordable Care Act, Fair Credit Reporting Act, Gramm-Leach-Bliley Act and USA PATRIOT Act, including its anti-money laundering regulations, also impact the Company's business.
The variable annuities underwritten by Horace Mann Life Insurance Company (HMLIC) are regulated by the SEC. Horace Mann Investors, Inc., and BCG Securities, Inc., the broker-dealer and Registered Investment Adviser subsidiaries of the Company, are also regulated by the SEC, the Financial Industry Regulatory Authority, Inc., the Municipal Securities Rule-making Board and various state securities regulators.
Federal income taxation of the build-up of cash value within a life insurance policy or an annuity contract could have a materially adverse impact on the Company's ability to market and sell such products. Various legislation to this effect has been proposed in the past, but has not been enacted. Although no such legislative proposals are known to exist at this time, such proposals may be made again in the future. Changes in other federal and state laws and regulations could also affect the relative tax and other advantages of the Company's annuity and life products.

16   Annual Report on Form 10-K
 
Horace Mann Educators Corporation




Financial Regulation Legislation
The Dodd-Frank Wall Street Reform and Consumer Protection Act (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. In 2017, the executive branch requested a review of financial regulation, including Dodd-Frank. Management will continue to monitor future developments for impact on the Company, insurers of similar size and the insurance industry as a whole.
Employees
At December 31, 2019, the Company had 1,516 non-agent employees and 22 full-time Employee Agents. This does not include Exclusive Distributors that were part of the Company's total dedicated agency force at December 31, 2019. The Company has no collective bargaining agreements with any employees.
ITEM 1A. I Risk Factors
The following are certain risk factors that could affect the Company's business, financial position and results of operations. The risks that the Company has highlighted in the following section of this report are not the only ones that the Company faces.
The Company's business involves various risks and uncertainties which are based on the lines of business the Company writes as well as more global risks associated with the general business and insurance industry environments.
Risks Related to Economic Conditions, Market Conditions and Investments
Volatile financial markets and adverse economic environments can impact financial market risk as well as the Company's financial condition and results of operations.
Financial markets in the U.S. and elsewhere can experience extreme volatility and disruption for uncertain periods of time. During such times, stresses affecting the global banking system can lead to economic volatility which can exert significant downward pressure on prices of equity securities and many other investment asset classes and result in severely constrained credit and capital markets, particularly for financial institutions, and an overall loss of investor confidence. Many states and local governments can also be impacted by adverse economic conditions which could have an impact on both the Company's niche market and its investment portfolio. Like other financial institutions which face significant financial market risk in their operations, the Company has been adversely affected by these conditions and could be adversely impacted by similar circumstances in the future. The Company's ability to access the capital markets to refinance outstanding indebtedness or raise capital could be impaired during significant financial market disruptions.
As discussed further in subsequent risk factors, in addition to the effects of financial markets volatility, a prolonged economic recession may have other adverse impacts on the Company's financial condition and results of operations.
If the Company's investment strategy is not successful, the Company could suffer unexpected losses.
The success of the Company's investment strategy is crucial to the success of its business. Specifically, the Company's fixed maturity securities portfolio is subject to a number of risks including:
interest rate risk, which is the risk that interest rates will decline and funds reinvested will earn less than expected;
market value risk, which is the risk that invested assets will decrease in value due to changes in yields realized on the assets and prevailing market yields for similar assets, an unfavorable change in the liquidity of the asset or an unfavorable change in the financial prospects or a downgrade in the credit rating of the issuer of the asset;

Horace Mann Educators Corporation
 
Annual Report on Form 10-K 17




credit risk, which is the risk that the value of certain investments become impaired due to deterioration in the financial condition of one or more issuers of those instruments or the deterioration in performance or credit quality of the underlying collateral of certain structured securities and, ultimately, the risk of permanent loss in the event of default by an issuer or underlying credit;
market fundamentals risk, which is the risk that there are changes in the market that can have an unfavorable impact on securities valuation such as availability of credit in the capital markets, re-pricing of credit risk, reduced market liquidity due to broker-dealers' unwillingness to hold inventory, and increased market volatility;
concentration risk, which is the risk that the portfolio may be too heavily concentrated in the securities of one or more issuers, sectors or industries, which could result in a significant decrease in the value of the portfolio in the event of deterioration in the financial condition of those issuers or the market value of their securities;
liquidity risk, which is the risk that liabilities are surrendered or mature sooner than anticipated requiring the sale of assets at an undesirable time to provide for policyholder surrenders, withdrawals or claims; and,
regulatory risk, which is the risk that regulatory bodies or governments, in the U.S. or in other countries, may make substantial investments or take significant ownership positions in, or ultimately nationalize, financial institutions or other issuers of securities held in the Company's investment portfolio, which could adversely impact the seniority or contractual terms of the securities. Regulatory risk could also come from changes in tax laws or bankruptcy laws that could adversely impact the valuation and/or after tax yields of certain invested assets.
In addition to significant steps taken to attempt to mitigate these risks through the Company's investment guidelines, policies and procedures, the Company also attempts to mitigate these risks through product pricing, product features and the establishment of policy reserves, but it cannot provide assurance that assets will be properly matched to meet anticipated liabilities or that the investments will provide sufficient returns to enable satisfaction of guaranteed fixed benefit obligations.
The Company's investment strategy and guidelines have resulted in an investment portfolio that is comprised primarily of investment grade fixed maturity securities. Inclusion of alternative investments, although consistent with the Company's overall conservative investment guidelines, could result in some volatility in the Company's financial condition and results of operations.
From time to time, the Company may enter into foreign currency, interest rate, credit derivative and other hedging transactions in an effort to manage risks, including risks that may be attributable to any new products offered by the Company. For instance, the Company utilizes call options to manage interest crediting risk related to its FIA and IUL products. The Company cannot provide complete assurance that it will successfully structure derivatives and hedges so as to effectively manage risks. If the Company's calculations are incorrect, or if it does not properly structure derivatives or hedges, it may have unexpected losses that may require it to draw on surplus, which could adversely affect the Company's financial condition and results of operations.
Although the Company's defined benefit pension plan has been frozen since 2002, declining financial markets could also cause, and in the past have caused, the value of the investments in this plan to decrease, resulting in additional pension expense, a reduction in other comprehensive income and an increase in required contributions to this plan, which could have an adverse effect on the Company's financial condition and results of operations.
The determination of fair value of the Company's fixed maturity securities portfolio includes methodologies, estimations and assumptions that are subject to differing interpretations and could result in changes to investment valuations that may materially impact the Company's financial condition and results of operations.
The determination of fair values is made at a specific point in time, based on available market information and judgments about financial instruments, including estimates of the timing and amounts of expected future cash flows and the credit standing of the issuer or counterparty. The use of different methodologies and assumptions may have a material effect on the estimated fair value amounts. During periods of market disruption, including periods of rapidly widening credit spreads or illiquidity, it may be difficult to value certain securities if trading

18   Annual Report on Form 10-K
 
Horace Mann Educators Corporation




becomes less frequent and/or market data becomes less observable. There may be certain asset classes that were in active markets with significant observable data that become illiquid due to the financial environment. In such cases, fair value determination may require more subjectivity and management judgment and those fair values may differ materially from the value at which the investments could ultimately be sold. Further, rapidly changing and unprecedented credit and equity market conditions could materially impact the valuation of securities and the period-to-period changes in value could vary significantly. The difference between fair value and amortized cost, net of applicable deferred income taxes and the related impact on DAC associated with investment (annuity) contracts and life insurance products with account values, and interest-sensitive life contracts, is reflected as a component of accumulated other comprehensive income within shareholders' equity. Decreases in the fair value of investments could have a material adverse effect on the Company's financial condition and results of operations.
Equity method adjustments on certain investments in limited partnership interests as well as fair value accounting for equity securities may reduce profitability and/or cause volatility in the Company's results of operations.
The Company invests in limited partnership interests, which are accounted for using the equity method of accounting. This means that the Company's proportionate share of the changes in fair value of the underlying net asset values are reported in net investment income in the Consolidated Statements of Operations. As a result, the amount of net investment income recognized from these investments can vary substantially from period to period. Equity and credit market volatility may reduce net investment income from these types of investments and negatively impact the results of operations. Changes in fair value from applying fair value accounting to equity securities that are reported in net investment gains (losses) in the Consolidated Statements of Operations may cause volatility in the Company's results of operations.
Risks Related to Property and Casualty Segment
Catastrophic events, as well as significant weather events not designated as catastrophes, can have a material adverse effect on the Company's 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.
The Company's Property and Casualty insurance subsidiaries have experienced, and the Company anticipates that in the future they will continue to experience, catastrophe losses. A catastrophic event, a series of multiple catastrophic 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 the 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 the Company's insurance subsidiaries are related to property coverages. The Company's ability to provide accurate estimates of ultimate catastrophe costs is based on several factors, including:
the proximity of the catastrophe occurrence date to the date of the Company's estimate;
potential inflation of property repair costs in the affected area;
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 the Company by policyholders, state attorneys general and other parties relative to loss coverage disputes and loss settlement payments.
Based on 2019 direct premiums earned, 57.4% of the total annual premiums for the Company's Property and 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

Horace Mann Educators Corporation
 
Annual Report on Form 10-K 19




more prone to catastrophe occurrences: California, Texas, North Carolina, Minnesota, South Carolina, Florida, Louisiana and Colorado.
The Company's insurance subsidiaries seek to reduce their exposure to catastrophe losses through their underwriting strategies, pooling of losses and the purchase of catastrophe reinsurance. However, reinsurance may prove inadequate under certain circumstances.
Climate change may adversely affect the Company’s financial position, results of operations and cash flows.
Climate change presents risk to the Company and there are concerns that the increased frequency and severity of weather-related catastrophes and other losses is 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 the Company 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 flooding, 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 addition, global climate change could have an impact on the Company’s fixed maturity security and limited partnership portfolios, resulting in realized and unrealized losses in future periods that could have a material adverse effect on the Company’s financial position, results of operations and cash flows. It is not possible to foresee which, if any, assets, 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 the Company’s financial condition, results of operations and cash flows.
The Company's Property and Casualty loss reserves may not be adequate.
The Company's Property and 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 HMEC.
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 actually reported. The Company's insurance subsidiaries adjust their reserve estimates regularly as experience develops and further claims are reported and settled.
Due to the inherent uncertainty in estimating reserves for losses and loss adjustment expenses, the Company cannot be certain that the ultimate liability will not exceed amounts reserved, with a resulting adverse effect on the financial condition and results of operations.


20   Annual Report on Form 10-K
 
Horace Mann Educators Corporation




Risks Related to Supplemental Segment
Actual experience in the Supplemental segment may differ from actuarial assumptions which could adversely affect profitability, results of operations and