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Basis of Presentation and Significant Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2022

Organization, Consolidation and Presentation of Financial Statements [Abstract]

The accompanying audited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) and with the rules and regulations of the Securities and Exchange Commission (SEC).

The Company has reclassified the presentation of certain prior period information to conform to the current year's presentation.

Consolidation

All intercompany transactions and balances between HMEC and its subsidiaries and affiliates have been eliminated.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the reporting date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

The most significant critical accounting estimates include valuation of hard-to-value fixed maturity securities, evaluation of credit loss impairments for fixed maturity securities, evaluation of goodwill and intangible assets for impairment, valuation of annuity and life deferred policy acquisition costs, valuation of liabilities for property and casualty unpaid claims and claim expense reserves, valuation of liabilities for group benefits unpaid claims and claim expense reserves, valuation of certain investment contracts and policy reserves, valuation of long-duration contracts under the new accounting guidance in ASU 2018-12 and valuation of assets acquired and liabilities assumed under purchase accounting.

Investments

Fixed Maturity Securities

The Company invests predominantly in fixed maturity securities. Fixed maturity securities include bonds, asset-backed securities (ABS), mortgage-backed securities (MBS), other structured securities and redeemable preferred stocks. MBS includes residential and commercial mortgage-backed securities. Fixed maturity securities, which may be sold prior to their contractual maturity, are designated as available for sale (AFS) and are carried at fair value of which a portion represent securities that are hard-to-value. See Note 4 – Fair Value of Financial Instruments – Investments for a detailed description of how the Company estimates fair value for its fixed maturity securities portfolio including hard-to-value securities. An adjustment for net unrealized investment

gains (losses) on all fixed maturity securities available for sale and carried at fair value, is recognized as a separate component of accumulated other comprehensive income (loss) (i.e., AOCI) within shareholders’ equity, net of applicable deferred taxes and the related impact on deferred policy acquisition costs (DAC) associated with annuity contracts and life insurance products with account values that would have occurred if the securities had been sold at their aggregate fair value and the proceeds reinvested at current yields. The Company excludes accrued interest receivable from the amortized cost basis of its AFS fixed maturity securities.

Equity Securities

Equity securities primarily include common stocks, exchange traded and mutual funds and non-redeemable preferred stocks. Certain exchange traded and mutual funds have fixed maturity securities as their underlying investments. Equity securities are carried at fair value and have readily determinable fair values.

Limited Partnership Interests

Investments in limited partnership interests are accounted for using the equity method of accounting (EMA) and include interests in commercial mortgage loan funds, private equity funds, infrastructure equity funds, real estate equity funds, infrastructure debt funds and other funds.

Short-Term and Other Investments

Short-term investments, including money market funds, commercial paper, U.S. Treasury bills and other short-term investments, are carried at fair value. Other investments primarily consist of policy loans, Federal Home Loan Bank of Chicago (FHLB) common stock, mortgage loans and derivatives. Policy loans are carried at unpaid principal balances. FHLB common stock is carried at cost. Mortgage loans are carried at amortized cost, net, which represent the amount expected to be collected. Derivatives are carried at fair value.

Variable Interest Entities (VIEs)

The Company invests in fixed maturity securities and alternative investment funds that could qualify as variable interests in VIEs, including corporate securities, ABS and MBS. Such variable interests in VIEs have been reviewed and the Company determined that those VIEs are not subject to consolidation as the Company is not the primary beneficiary because it does not have the power to direct the activities that most significantly impact those VIEs' economic performance.

Net Investment Income

Net investment income primarily consists of interest, dividends and income from limited partnership interests. Interest is recognized on an accrual basis using the effective yield method and dividends are recorded at the ex-dividend date. ABS and MBS interest income is determined considering estimated pay-downs, including prepayments, obtained from third-party data sources and internal estimates. Actual prepayment experience is periodically reviewed, and effective yields are recalculated when differences arise between the prepayments originally anticipated and the actual prepayments received and currently anticipated. For ABS and MBS of high credit quality with fixed interest rates, the effective yield is recalculated on a retrospective basis. For all others, the effective yield is generally recalculated on a prospective basis. Net investment income for AFS fixed maturity securities includes the impact of accreting the credit loss allowance for the time value of money. Accrual of income is suspended for fixed maturity securities when the timing and amount of cash flows expected to be received is not reasonably estimable. Accrual of income is suspended for commercial mortgage loans that are in default or when full and timely collection of principal and interest payments is not probable. Accrued investment income receivables are monitored for recoverability and when not expected to be collected, are written-off through net investment income. Cash receipts on investments on non-accrual status are generally recorded as a reduction of amortized cost or principal. Income from limited partnership interests is recognized based upon the changes in fair value of the investee’s equity primarily determined using its net asset value and is generally recognized on a three month delay due to the availability of the related financial statements of the investee.

The Company reports accrued investment income separately from AFS fixed maturity securities and has elected not to measure an allowance for credit losses for accrued investment income. Accrued investment income is written-off and recognized as a net investment loss at the time the issuer of the security defaults or is expected to default on payments.

Net Investment Gains (Losses)

Net investment gains (losses) include gains and losses on investment sales, changes in the credit loss allowances related to fixed maturity securities and mortgage loans, impairments, valuation changes of equity securities and periodic changes in fair value and settlements of derivatives. Net investment gains (losses) on investment sales are determined on a specific identification basis and are net of credit losses already recognized through an allowance.

Credit Loss Impairments for Fixed Maturity Securities

For AFS fixed maturity securities, the difference between amortized cost, net of a credit loss allowance (i.e., amortized cost, net) and fair value, net of certain other items and deferred income taxes is reported as a component of AOCI on the Consolidated Balance Sheets and is not reflected in the operating results of any period until reclassified to net income upon the consummation of a transaction with an unrelated third party or when a credit loss allowance is recorded. The Company has a comprehensive portfolio monitoring process to evaluate fixed maturity securities (at the cusip/issuer level) on a quarterly basis that may require a credit loss allowance. These reviews, in conjunction with the Company's investment managers’ monthly credit reports and relevant factors such as (1) the financial condition and near-term prospects of the issuer; (2) the Company’s intent to sell a security or whether it is more likely than not that the Company will be required to sell a security before the anticipated recovery in value; (3) the market leadership of the issuer; (4) the debt ratings of the issuer; and (5) the cash flows and liquidity of the issuer or the underlying cash flows for ABS and MBS, are all considered in the impairment assessment.

For each fixed maturity security in an unrealized loss position, the Company assesses whether management with the appropriate authority has made the decision to sell or whether it is more likely than not that the Company will be required to sell the security before the anticipated recovery of the amortized cost basis for reasons such as liquidity, contractual or regulatory purposes. If a security meets either of these criteria, any existing credit loss allowance would be written-off against the amortized cost basis of the asset along with any remaining unrealized losses, with the incremental losses recorded as a net investment loss.

If the Company has not made the decision to sell the fixed maturity security and it is not more likely than not that the Company will be required to sell the fixed maturity security before the anticipated recovery of its amortized cost basis, the Company evaluates whether it expects to receive cash flows sufficient to recover the entire amortized cost basis of the security. The Company estimates the anticipated recovery value based on the best estimate of future cash flows considering past events, current conditions and reasonable and supportable forecasts. The estimated future cash flows are discounted at the security’s current effective rate and are compared to the amortized cost basis of the security. The determination of cash flow estimates is inherently subjective, and methodologies may vary depending on facts and circumstances specific to the security. All reasonably available information relevant to the collectability of the security are considered when developing the estimate of cash flows expected to be collected. That information generally includes, but is not limited to, the remaining payment terms of the security, prepayment speeds, the financial condition and future earnings potential of the issue or issuer, expected defaults, expected recoveries, the value of underlying collateral, origination vintage year, geographic concentration of underlying collateral, available reserves or escrows, current subordination levels, third-party guarantees and other credit enhancements. Other information, such as industry analyst reports and forecasts, sector credit ratings, financial condition of the bond insurer for insured fixed maturity securities, and other market data relevant to the realizability of contractual cash flows, may also be considered. The estimated fair value of collateral will be used to estimate the anticipated recovery value if the Company determines that the security is dependent on the liquidation of collateral for ultimate settlement.

If the Company does not expect to receive cash flows sufficient to recover the entire amortized cost basis of the fixed maturity security, a credit loss allowance is recorded as a net investment loss for the shortfall in expected cash flows; however, the amortized cost basis, net of the credit loss allowance, may not be lower than the fair value of the security. The portion of the unrealized loss related to factors other than credit remains classified in AOCI. If the Company determines that the fixed maturity security does not have sufficient cash flows or other information to estimate a recovery value for the security, the Company may conclude that the entire decline in fair value is deemed to be credit related and the loss is recognized as a net investment loss.

When a security is sold or otherwise disposed or the security is deemed uncollectible and written-off, the Company reverses amounts previously recognized in the credit loss allowance through net investment gains (losses). Recoveries after write-offs are recognized when received.

Deferred Policy Acquisition Costs

The Company's DAC by reporting segment was as follows:


($ in millions)	December 31,
	2022		2021
Property & Casualty	$	24.5	$	24.4
Life & Retirement	403.5		219.4
Supplemental & Group Benefits	5.1		4.2
Total	$	433.1	$	248.0

DAC consists of commissions, policy issuance and other costs which are incremental and directly related to the successful acquisition of new or renewal business, which are deferred and amortized on a basis consistent with the type of insurance coverage. For property and casualty risks, DAC is amortized over the terms of the insurance policies (6 or 12 months). For all annuity contracts, DAC is amortized over 20 years in proportion to estimated gross profits. DAC is amortized in proportion to estimated gross profits over 20 years for certain life insurance products with account values and over 30 years for indexed universal life (IUL) products. For other individual life contracts, DAC is amortized in proportion to anticipated premiums over the terms of the insurance policies (10, 15, 20, 30 years). For supplemental and group benefit policies, DAC is amortized in proportion to anticipated premiums over the terms of the insurance policies (approximately 6 years, based on an estimated average duration across all supplemental and group benefit products).

The Company periodically reviews the assumptions and estimates used in DAC and also periodically reviews its estimations of gross profits, a process sometimes referred to as "unlocking". The most significant assumptions that are involved in the estimation of annuity gross profits include interest rate spreads, future financial market performance, business surrender/lapse rates, expenses and the impact of net investment gains (losses) on fixed maturity and equity securities. For the variable deposit portion of retirement, the Company amortizes DAC utilizing a future financial market performance assumption of a gross 8% reversion to the mean approach with a 200 basis point corridor around the mean during the reversion period, representing a cap and a floor on the Company's long-term assumption. The Company's practice with regard to future financial market performance assumes that long-term appreciation in the financial markets is not changed by short-term market fluctuations, but is only changed when sustained deviations are experienced. The Company monitors these fluctuations and only changes the assumption when long-term expectations change.

The most significant assumptions that are involved in the estimation of life insurance gross profits include interest rates expected to be received on investments, business persistency, and mortality. Conversions from term to permanent insurance cause an immediate write down of the associated DAC.

The most significant assumptions that are involved in the estimation of supplemental gross profits include morbidity, persistency, expenses and interest rates expected to be received on investments. When a supplemental policy lapses, there is an immediate write down of the associated DAC.

Annually, the Company performs a gross premium valuation (GPV) on life insurance policies to assess whether a loss recognition event has occurred. This involves discounting expected future benefits and expenses less expected future premiums. To the extent that this amount is greater than the liability for future benefits less the DAC asset, in aggregate for the life insurance block, a loss would be recognized by first writing-off the DAC asset and then increasing the liability.

In the event actual experience differs significantly from assumptions or assumptions are significantly revised, the Company may be required to recognize a material charge or credit to current period DAC amortization expense for the period in which the adjustment is made.

Intangible Assets, net

The value of business acquired (VOBA) associated with the acquisitions of NTA Life Enterprises, LLC (NTA) and Madison National Life Insurance Company, Inc. (Madison National) represents the difference between the fair value of insurance contracts and insurance policy reserves measured in accordance with the Company's accounting policy for insurance contracts acquired. VOBA was based on an actuarial estimate of the present value of future distributable earnings for insurance in force on the acquisition date. VOBA net of accumulated amortization was $70.5 million as of December 31, 2022 and is being amortized by product based on the present value of future premiums to be received. The Company estimates that it will recognize VOBA amortization of $5.8 million in 2023, $5.4 million in 2024, $5.1 million in 2025, $4.7 million in 2026 and $4.4 million in 2027.

The Company accounts for the value of distribution acquired (VODA) associated with the acquisition of NTA based on an actuarial estimate of the present value of future business to be written by the existing distribution channel. VODA net of accumulated amortization was $38.9 million as of December 31, 2022 and is being amortized on a straight-line basis. The Company estimates that it will recognize VODA amortization of $2.9 million in each of the years 2023 through 2027, respectively.

The Company accounts for VODA associated with the acquisition of BCG Securities, Inc. (BCGS) based on management's estimate of the present value of future business to be written by the existing distribution channel. VODA net of accumulated amortization was $0.5 million as of December 31, 2022 and is being amortized based on the present value of future profits to be received. The cumulative amortization the Company expects to recognize for the years 2023 through 2027 is insignificant.

The Company accounts for the value of agency relationships based on the present value of commission overrides retained by NTA. Agency relationships net of accumulated amortization was $8.8 million as of December 31, 2022 and is being amortized based on the present value of future premiums to be received. The Company estimates that it will recognize agency relationships amortization of $1.6 million in 2023, $1.4 million in 2024, $1.2 million in 2025, $1.0 million in 2026 and $0.9 million in 2027.

The Company accounts for the value of customer relationships based on the present value of expected profits from existing Benefit Consultants Group, Inc. (BCG) and Madison National customers in force at the date of acquisition. Customer relationships net of accumulated amortization was $53.2 million as of December 31, 2022 and is being amortized based on the present value of future profits to be received for BCG and based on the present value of future premiums for Madison National. The Company estimates that it will recognize customer relationships amortization of $4.6 million in 2023, $4.9 million in 2024, $5.2 million in 2025, $5.6 million in 2026 and $6.0 million in 2027.

The trade names intangible asset represents the present value of future savings accruing to NTA, BCG and BCGS by virtue of not having to pay royalties for the use of the trade names, valued using the relief from royalty method. The state licenses intangible asset represents the regulatory licenses held by NTA and Madison

National that were valued using the cost approach. Both the trade names and state licenses are indefinite-lived intangible assets that are not subject to amortization.

Annually, the Company performs a VOBA analysis on supplemental insurance policies to assess whether a loss recognition event has occurred. This initially involves comparing the historical and expected future experience on the block to the assumptions embedded in the original VOBA intangible asset. If both the experience to date and current expected experience are consistently better than the initial VOBA assumptions, the remaining value in the block is sufficient to support the VOBA intangible asset and no loss recognition is necessary. If the historical and current expected assumptions are not uniformly better than the initial VOBA assumptions, a GPV is performed to assess whether a loss recognition event has occurred. This involves discounting expected future benefits and expenses less expected future premiums. To the extent that this amount is greater than the liability for future benefits less the VOBA intangible asset, in aggregate for the supplemental insurance block, a loss would be recognized by first writing-off the VOBA and then increasing the liability. Currently, a GPV is not required for the acquired supplemental block. No such costs were deemed unrecoverable during the year ended December 31, 2022.

Amortizing intangible assets (i.e., VODA, agency relationships and customer relationships) are tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. The carrying amount of an amortizing intangible asset is not recoverable if it exceeds the sum of undiscounted cash flows expected to result from the use and eventual disposition of the asset. If the carrying amount is not recoverable from undiscounted cash flows, the impairment is measured as the difference between the carrying amount and fair value.

Intangible assets that are not subject to amortization (i.e., trade names and state licenses) are tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test consists of a comparison of the fair value of an intangible asset with its carrying amount. If the carrying amount of an intangible asset that is not subject to amortization exceeds its fair value, an impairment loss is recognized in an amount equal to the excess.

As of October 1, 2022, the Company performed a qualitative assessment to determine whether it was necessary to perform quantitative intangible asset impairment tests. Based on the assessment of qualitative factors, there were no events or circumstances that led to a determination that it is more likely than not that the fair value of an intangible asset is less than its carrying amount with the exception of lower than anticipated BCG revenues which triggered a requirement to evaluate the intangible assets associated with BCG. For the evaluation, the fair value of BCG's intangible assets were measured using discounted cash flow methods. The carrying amounts for customer relationships and trade names exceeded the fair values resulting in a $2.5 million intangible asset impairment charge for customer relationships and a $0.3 million intangible asset impairment charge for trade names.

As of October 1, 2021, the Company performed both qualitative assessments and quantitative impairment tests for intangible assets and concluded that no impairments were warranted.

As of October 1, 2020, the Company performed qualitative assessments to determine whether it was necessary to perform quantitative intangible asset impairment tests. Based on the assessments of qualitative factors, there were no events or circumstances that led to a determination that it is more likely than not that the fair value of an intangible asset was less than its carrying amount with the exception of VODA and trade names intangible assets assigned to BCGS, for which quantitative intangible asset impairment tests were performed that resulted in intangible asset impairment charges of $4.4 million in aggregate.

Goodwill

When the Company was acquired from CIGNA Corporation by HME Holdings, Inc. in 1989, goodwill was recognized in the application of purchase accounting. In 1994, goodwill was recognized with respect to the acquisition of Horace Mann Property & Casualty Insurance Company. In 2019, goodwill was recognized with respect to the acquisitions of BCG, BCGS and NTA. In 2022, goodwill was recognized with respect to the acquisition of Madison National.

Goodwill represents the excess of the amounts paid to acquire a business over the fair value of its net assets at the date of acquisition. Goodwill is not amortized, but is tested for impairment at the reporting unit level at least annually or more frequently if events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. A reporting unit is defined as an operating segment or a

business unit one level below an operating segment, if separate financial information is prepared and regularly reviewed by management at that level. The Company's reporting units, for which goodwill has been allocated, are Property & Casualty, Life, BCG, BCGS, Supplemental and Group Benefits. Refer to Note 7 for the allocation of goodwill by reporting segment as of December 31, 2022.

The goodwill impairment test, as defined in GAAP, allows an entity the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an entity determines it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the entity performs a quantitative goodwill impairment test by comparing the fair value of a reporting unit to its carrying amount for purposes of confirming and measuring an impairment. Goodwill impairment is the amount by which a reporting unit’s carrying amount exceeds its fair value, not to exceed the carrying amount of goodwill. Any amount of goodwill determined to be impaired is recognized as an expense in the period in which the impairment determination is made.

Property and Equipment

Property and EquipmentProperty and equipment is carried at cost less accumulated depreciation, which is calculated using the straight-line method and based on the estimated useful lives of the assets. The estimated life for real estate is identified by specific property and range from 20 to 45 years. The estimated useful lives of leasehold improvements and other property and equipment, including capitalized software, generally range from 3 to 10 years.

Separate Account Variable Annuity Assets and Liabilities

Separate Account variable annuity assets represent contractholder funds invested in various mutual funds. The Separate Account variable annuity assets comprise actively traded mutual funds that have daily quoted net asset values that are readily determinable for identical assets that the Company can access. Net asset values for the actively traded mutual funds in which the Separate Account variable annuity assets are invested are obtained daily from the fund managers. Separate Account variable annuity liabilities are equal to the estimated fair value of Separate Account variable annuity assets. The investment income, gains and losses of these accounts accrue directly to the contractholders and are not included in the results of operations of the Company. The activity of the Separate Accounts is not reflected in the Consolidated Statements of Operations and Comprehensive Income (Loss) except for (1) contract charges earned, (2) the activity related to contract guarantees, which are benefits on existing variable annuity contracts, and (3) the impact of financial market performance on the amortization of DAC. The Company's contract charges earned include fees charged to the Separate Accounts, including mortality charges, risk charges, policy administration fees, investment management fees and surrender charges.

Investment Contract and Policy Reserves

Liabilities for future benefits on supplemental, life and annuity policies are established in amounts adequate to meet the estimated future obligations on policies in force.

Liabilities for future policy benefits on certain supplemental and life insurance policies are computed using the net level premium method including assumptions as to investment yields, mortality, morbidity, persistency, expenses and other assumptions based on the Company's experience, including a provision for adverse deviation. These assumptions are established at the time the policy is issued and are intended to estimate the experience for the period the policy benefits are payable. If experience is less favorable than the assumptions, additional liabilities may be established, resulting in recognition of a loss for that period.

Liabilities for future benefits on annuity contracts and certain long-duration life insurance contracts are carried at accumulated policyholder values without reduction for potential surrender or withdrawal charges. The liability also includes provisions for the unearned portion of certain policy charges.

A guaranteed minimum death benefit (GMDB) generally provides an additional benefit if the contractholder dies and the variable annuity contract value is less than a contractually defined amount. The Company has estimated and recorded a GMDB reserve on variable annuity contracts in accordance with GAAP. Contractually defined amounts vary from contract to contract based on the date the contract was entered into as well as the GMDB feature elected by the contractholder. The Company regularly monitors the GMDB reserve considering fluctuations in financial markets.

Reserves for Fixed Indexed Annuities and Indexed Universal Life Products

The Company offers fixed indexed annuity (FIA) products with interest crediting strategies linked to the Standard & Poor's (S&P) 500 Index and the Dow Jones Industrial Average (DJIA). The Company purchases call options on the applicable indices as an investment to provide the income needed to fund the annual index credits on the indexed products. These products are deferred fixed annuities with a guaranteed minimum interest rate plus a contingent return based on equity market performance and are considered hybrid financial instruments under GAAP.

The Company elected to not use hedge accounting for derivative transactions. As a result, the Company accounts for the purchased call options and the embedded derivative related to the provision of a contingent return at fair value, with changes in fair value recognized as Net investment gains (losses) in the Consolidated Statements of Operations and Comprehensive Income (Loss). The embedded derivative is bifurcated from the host contract and included in Other policyholder funds in the Consolidated Balance Sheets. The host contract is accounted for as a debt instrument in accordance with GAAP and is included in Investment contract and life policy reserves in the Consolidated Balance Sheets with any discount to the minimum account value being accreted using the effective yield method. In the Consolidated Statements of Operations and Comprehensive Income (Loss), accreted interest for FIA products and benefit claims on these products incurred during the reporting period are included in Benefits, claims and settlement expenses.

The Company offers indexed universal life (IUL) products as part of its product portfolio with interest crediting strategies linked to the S&P 500 Index and the DJIA as well as a fixed option. The Company purchases call options monthly to economically hedge the potential liabilities arising in IUL accounts. As a result, the Company records the purchased call options and the embedded derivative related to the provision of a contingent return at fair value, with changes in fair value reported in Net investment gains (losses) in the Consolidated Statements of Operations and Comprehensive Income (Loss). IUL policies with a balance in one or more indexed accounts are considered to have an embedded derivative. The benefit reserve for the host contract is measured using the retrospective deposit method, which for Horace Mann's IUL product is equal to the account balance. The embedded derivative is bifurcated from the host contract, carried at fair value, and included in Investment contract and life policy reserves in the Consolidated Balance Sheets.

See Note 4 for more information regarding the determination of fair value for derivatives embedded in FIA and IUL and purchased call options.

Unpaid Claims and Claim Expense Reserves

Liabilities for Property & Casualty unpaid claims and claim expense reserves (reserves) include provisions for payments to be made on reported claims, claims incurred but not yet reported (IBNR) and associated settlement expenses. All of the Company's reserves for Property & 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. Estimated amounts of salvage and subrogation on unpaid Property & Casualty claims are deducted from the liability for unpaid claims. 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 environmentally related items such as mold.

Liabilities for Madison National's unpaid claims and claim expense reserves (reserves) represent management's best estimate of ultimate unpaid costs of losses and settlement expenses for reported claims and claims that are IBNR. All of the Company's reserves for Madison National unpaid claims and claim expenses are carried at the full value of estimated liabilities (i.e., undiscounted) with exception to certain case reserves in Madison National's group disability line of business for which those reserves are carried on a discounted basis. The Company calculates and records a single best estimate of the reserve as of each reporting date in conformity with generally accepted actuarial standards.

Other Policyholder Funds

Other policyholder funds includes payout annuity contracts without life contingencies and dividend accumulations, as well as balances outstanding under funding agreements with the Federal Home Loan Bank of Chicago (FHLB) and embedded derivatives related to FIA products. Except for embedded derivatives, each of these components is carried at cost. Embedded derivatives are carried at fair value. Amounts received and

repaid under FHLB funding agreements are classified as financing activities in the Company's Consolidated Statements of Cash Flows.

Reinsurance

The Company enters into reinsurance arrangements pursuant to which it cedes certain insurance risks to unaffiliated reinsurers. Cessions under reinsurance agreements do not discharge the Company's obligations as the primary insurer. The accounting for reinsurance arrangements depends on whether the arrangement provides indemnification against loss or liability relating to insurance risk in accordance with GAAP.

If the Company determines that a reinsurance agreement exposes the reinsurer to a reasonable possibility of a significant loss from insurance risk, the ceded unearned premiums and reinsurance balances recoverable on paid and unpaid losses and settlement expenses are reported separately as assets, instead of being netted with the related liabilities, since reinsurance does not relieve the Company of its legal liability to its policyholders. See Note 9 for further details.

If the Company determines that a reinsurance agreement does not expose the reinsurer to a reasonable possibility of a significant loss from insurance risk, the Company recognizes the reinsurance agreement using the deposit method of accounting. The assets transferred to the reinsurer as consideration paid is reported as a Deposit asset on reinsurance on the Company's Consolidated Balance Sheets. As amounts are received or paid or received, consistent with the underlying reinsured contracts, the Deposit asset on reinsurance is adjusted. The Deposit asset on reinsurance is accreted to the estimated ultimate cash flows using the interest method and the adjustment is reported as Net investment income. See Note 6 for further details.

Insurance Premiums and Contract Charges Earned

Property & Casualty insurance premiums are recognized as revenue ratably over the related contract periods in proportion to the risks insured. The unexpired portions of these Property & Casualty premiums are recorded as unearned premiums, using the monthly pro rata method.

Premiums and contract charges for life insurance contracts with account values and annuity contracts consist of charges for the cost of insurance, policy administration and withdrawals. Premiums for traditional life and supplemental and group policies are recognized as revenues when due over the premium-paying period. Contract deposits to annuity contracts and life insurance contracts with account values represent funds deposited by policyholders and are not included in the Company's premiums or contract charges earned.

Share-Based Compensation

The Company grants stock options and both service-based and performance-based restricted common stock units (RSUs) to executive officers, other employees and Directors in an effort to attract and retain individuals

while also aligning compensation with the interests of the Company's shareholders. Additional information regarding the Company's share-based compensation plans is contained in Note 13.Stock options are accounted for under the fair value method of accounting using a Black-Scholes valuation model to measure stock option expense at the date of grant. The fair value of RSUs is measured at the market price of the Company's common stock on the date of grant, with the exception of market-based performance awards, for which the Company uses a Monte Carlo simulation model to determine fair value for purposes of measuring RSU expense.

Income Taxes

The Company uses the asset and liability method for calculating deferred federal income taxes. Income tax provisions are generally based on income reported for financial statement purposes. The provisions for federal income taxes for the years ended December 31, 2022, 2021 and 2020 included amounts currently payable and deferred income taxes resulting from the cumulative differences in the Company's assets and liabilities, determined on a tax return versus financial statement basis.

Deferred tax assets and liabilities include provisions for net unrealized investment gains (losses) on fixed maturity securities as well as the net funded status of benefit plans with the changes for each period included in the respective components of AOCI within shareholders' equity.

Earnings Per Share

Earnings Per ShareBasic earnings per share is computed based on the weighted average number of common shares outstanding plus the weighted average number of fully vested RSUs and common stock units (CSUs) payable as shares of HMEC common stock. Diluted earnings per share is computed based on the weighted average number of common shares and common stock equivalents outstanding, to the extent dilutive.

Consolidated Statements of Cash Flows

Consolidated Statements of Cash FlowsFor purposes of the Consolidated Statements of Cash Flows, cash constitutes cash on deposit at banks as well as restricted cash.

Future Adoption of New Accounting Standards

Accounting for Long-Duration Insurance Contracts

In August 2018, the FASB issued ASU 2018-12, Financial Services – Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, further amended by ASU 2019-09, Effective Date, Financial Services – Insurance (Topic 944), and ASU 2020-11, Effective Date and Early Application, Financial Services – Insurance (Topic 944). This update will change existing recognition, measurement, presentation, and disclosure requirements for long-duration contracts. ASU 2018-12 includes: 1) a requirement to review and, if there is a change, update cash flow assumptions used to measure the liability for future policy benefits (LFPB) at least annually, and to update the discount rate assumption quarterly, 2) a requirement to account for market risk benefits (MRBs) at fair value, 3) simplified amortization for DAC, and 4) enhanced financial statement presentation and disclosures. This guidance will be effective for the Company for interim and annual periods beginning after December 15, 2022. The Company will adopt the guidance in the first quarter of 2023 using a modified retrospective approach for LFPB and DAC. MRBs will be adopted utilizing a retrospective method.

LFPB and DAC

When measuring LFPB, long-duration contracts issued by the Company will be grouped into calendar-year cohorts based on the contract issue date and product type. The Company has made an entity-wide election to not update expense assumptions when updating cash flow assumptions. Cash flows will be discounted using duration-specific forward rates from Single-A rated fixed income instruments. For liability cash flows that are projected beyond the duration of market-observable level yields for upper-medium-grade (low credit risk) fixed income instruments, the Company uses the last market-observable level yield and use linear interpolation to determine yield assumptions for durations that do not have market-observable yields.

DAC will be grouped into calendar-year cohorts, consistent with the cohorts utilized in measuring the LFPB for the corresponding contracts. DAC will be amortized on a constant level basis over the expected term of the corresponding contracts.

MRBs

The Company’s existing variable annuity contracts include Guaranteed Minimum Death Benefits (GMDB). GMDBs are MRBs under ASU 2018-12 and will be measured at fair value with changes in fair value recognized in income, except for changes in instrument-specific credit risk which will be recorded in other comprehensive income. The Company’s instrument-specific credit risk will be determined using observable market data for Company debt.

Implementation Progress and Transition Adjustment - LFPB

The Company currently estimates that the January 1, 2021 transition date impact from adoption will result in a decrease in AOCI of $499.3 million. This is due primarily to updating the LFPB discount rate assumptions previously locked-in for reserves held at the transition date to rates determined by reference to the transition date market level yields for upper-medium-grade (low credit risk) fixed income instruments as of December 31, 2020. The Company had five cohorts where the net premium ratio was capped at 100% at the transition date, resulting in a reduction to retained earnings of $0.2 million. The Company estimates the effect from adoption because of the update of underlying assumptions, including the removal of the provision for adverse deviation, will increase income after-tax by $7 million to $17 million and $15 million to $25 million for the years ended December 31, 2022 and 2021, respectively.

Implementation Progress and Transition Adjustment - DAC

The Company currently estimates that the January 1, 2021 transition date impact from adoption will result in an increase in AOCI of $71.5 million. This is due to the removal of amounts previously recognized in AOCI (shadow DAC adjustments). The Company estimates the effect of amortizing on a constant-level basis over the expected term of the related contracts will increase income after-tax by $8 million to $10 million and $3 million to $4 million for the years ended December 31, 2022 and 2021, respectively.

Implementation Progress and Transition Adjustment – MRBs

Under the retrospective method of adoption, the Company currently estimates that the January 1, 2021 transition date impact from adoption will result in a decrease to AOCI of $1.3 million and a decrease to retained earnings of $5.4 million. The effect of changes in the instrument-specific credit risk between the MRBs contract issue date and the transition date is recognized in AOCI. The remaining difference between the fair value and the carryover basis at the transition date is recognized as an adjustment to opening retained earnings. To determine the terms of each MRB at contract issuance, the Company maximized the use of relevant observable information as of contract issuance. However, the Company determined that it did not have relevant observable information as of contract issuance for all individual assumptions for every MRB, particularly related to mortality, lapse and premium payment assumptions for MRBs issued prior to 2006. For those individual assumptions without relevant observable information at contract issuance, the Company used hindsight and historical experience. The Company estimates the change in fair value except for changes in instrument-specific credit risk will increase income after-tax by $0 million to $4 million and $2 million to $6 million for the years ended December 31, 2022 and 2021, respectively. The Company estimates that the change in instrument-specific credit risk will result in increases (decreases) to AOCI of $(3) million to $3 million and $(7) million to $(1) million for the years ended December 31, 2022 and 2021, respectively.

Implementation Progress – Overall

The Company has not completed its implementation process for the years ended December 31, 2022 and 2021, including the finalization of the design and implementation of relevant key controls. The Company expects to continue to refine these key controls until implementation in the first quarter of 2023, which could drive variability

in the effect to income before tax for each of those years, as illustrated by the ranges provided, due to refinements of key assumptions (e.g., discount rates and future cash flow assumptions).