UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q 

☒     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31,September 30, 2020
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)
Delaware37-0911756
(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:
Title of each classTrading SymbolSymbol(s)
Name of each exchange

on which registered
Common Stock, $0.001 par valueHMNNew York Stock Exchange


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 ☑

As of April 30,October 31, 2020, the registrant had 41,291,83341,412,903 common shares, $0.001 par value, outstanding.





HORACE MANN EDUCATORS CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31,SEPTEMBER 30, 2020
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Page
Item 1.
1
Consolidated Balance Sheets as of March 31,September 30, 2020 (Unaudited) and December, 31 2019
2
Consolidated Statements of Operations for the Three and NineMonths Ended March 31,September 30, 2020 and 2019 (Unaudited)
3
Consolidated Statements of Comprehensive Income (Loss) for the Three and NineMonths Ended March 31,September 30, 2020 and 2019 (Unaudited)
4
Consolidated Statements of Changes in Shareholders’ Equity for the Three and NineMonths Ended March 31,September 30, 2020 and 2019 (Unaudited)
5
Consolidated Statements of Cash Flows for the ThreeNine Months Ended March 31,September 30, 2020 and 2019 (Unaudited)
6
Note 1 - Basis of Presentation and Significant Accounting Policies
7
Note 2 - Investments
10
Note 3 - Fair Value of Financial Instruments
15
Note 4 - Derivatives
2021
Note 5 - Deposit Asset on Reinsurance
2122
Note 6 - Goodwill and Intangible Assets, net
2223
Note 7 - Unpaid Claims and Claim Expenses
2425
Note 8 - Reinsurance
2526
Note 9 - Commitments
2526
Note 10 - Segment Information
2627
Note 11 - Accumulated Other Comprehensive Income (Loss)
2728
Note 12 - Supplemental Disclosure of Consolidated Cash and Cash Flow Information
2729
Item 2.
and Results of Operations
2829
Item 3.
4952
Item 4.
5053
Item 1A.
5154
Item 2.
5254
Item 5.
5255
Item 6.
5255
5659




PART I: FINANCIAL INFORMATION
Item 1. I Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Horace Mann Educators Corporation:

Results of Review of Interim Financial Information
We have reviewed the consolidated balance sheet of Horace Mann Educators Corporation and subsidiaries (the Company) as of March 31,September 30, 2020, the related consolidated statements of operations, comprehensive income (loss) and changes in shareholders' equity for the three-month periodand nine-month periods ended March 31,September 30, 2020 and 2019, and cash flows for the three-monthnine-month period ended March 31,September 30, 2020 and 2019, and the related notes (collectively, the consolidated interim financial information). Based on our reviews, we are not aware of any material modifications that should be made to the consolidated interim financial information for it to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of December 31, 2019, and the related consolidated statements of operations, comprehensive income (loss), changes in shareholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated February 28, 2020, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2019, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
Basis for Review Results
This consolidated interim financial information is the responsibility of the Company’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our reviews in accordance with the standards of the PCAOB. A review of consolidated interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
 
/s/ KPMG LLP
KPMG LLP
  
Chicago, Illinois 
May 8,November 6, 2020 


Horace Mann Educators Corporation1Quarterly Report on Form 10-Q





HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED BALANCE SHEETS
($ in thousands, except share data)
September 30, 2020December 31, 2019
(Unaudited)
ASSETS
Investments
Fixed maturity securities, available for sale, at fair value
(amortized cost 2020, $5,672,315; 2019, $5,456,980)
$6,168,558 $5,791,676 
Equity securities at fair value102,303 101,864 
Limited partnership interests418,187 383,717 
Short-term and other investments453,037 361,976 
Total investments7,142,085 6,639,233 
Cash65,475 25,508 
Deferred policy acquisition costs241,981 276,668 
Deposit asset on reinsurance2,402,539 2,346,166 
Intangible assets, net166,287 177,217 
Goodwill49,079 49,079 
Other assets447,414 474,364 
Separate Account (variable annuity) assets2,488,528 2,490,469 
Total assets$13,003,388 $12,478,704 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Policy liabilities
Investment contract and policy reserves$6,402,471 $6,234,452 
Unpaid claims and claim expenses454,516 442,854 
Unearned premiums272,660 279,163 
Total policy liabilities7,129,647 6,956,469 
Other policyholder funds744,494 647,283 
Other liabilities487,794 384,173 
Short-term debt135,000 135,000 
Long-term debt302,247 298,025 
Separate Account (variable annuity) liabilities2,488,528 2,490,469 
Total liabilities11,287,710 10,911,419 
Preferred stock, $0.001 par value, authorized
1,000,000 shares; NaN issued
0 0 
Common stock, $0.001 par value, authorized 75,000,000 shares;
issued, 2020, 66,298,901; 2019, 66,088,808
66 66 
Additional paid-in capital486,763 480,962 
Retained earnings1,399,527 1,352,539 
Accumulated other comprehensive income (loss), net of tax: 
Net unrealized investment gains on fixed maturity securities328,197 230,448 
Net funded status of benefit plans(10,767)(10,767)
Treasury stock, at cost, 2020, 24,902,579 shares;
2019, 24,850,484 shares
(488,108)(485,963)
Total shareholders’ equity1,715,678 1,567,285 
Total liabilities and shareholders’ equity$13,003,388 $12,478,704 
  March 31, 2020 December 31, 2019
  (Unaudited)  
ASSETS
Investments    
Fixed maturity securities, available for sale, at fair value
(amortized cost 2020, $5,653,466; 2019, $5,456,980)
 $5,843,183
 $5,791,676
Equity securities at fair value 87,033
 101,864
Limited partnership interests 389,318
 383,717
Short-term and other investments 281,697
 361,976
Total investments 6,601,231
 6,639,233
Cash 41,247
 25,508
Deferred policy acquisition costs 297,815
 276,668
Deposit asset on reinsurance 2,356,253
 2,346,166
Intangible assets, net 173,531
 177,217
Goodwill 49,079
 49,079
Other assets 498,798
 474,364
Separate Account (variable annuity) assets 1,954,201
 2,490,469
Total assets $11,972,155
 $12,478,704
     
LIABILITIES AND SHAREHOLDERS’ EQUITY
Policy liabilities    
Investment contract and policy reserves $6,273,640
 $6,234,452
Unpaid claims and claim expenses 438,403
 442,854
Unearned premiums 266,247
 279,163
Total policy liabilities 6,978,290
 6,956,469
Other policyholder funds 716,318
 647,283
Other liabilities 412,628
 384,173
Short-term debt 135,000
 135,000
Long-term debt 298,098
 298,025
Separate Account (variable annuity) liabilities 1,954,201
 2,490,469
Total liabilities 10,494,535
 10,911,419
Preferred stock, $0.001 par value, authorized
1,000,000 shares; none issued
 —
 —
Common stock, $0.001 par value, authorized 75,000,000 shares;
issued, 2020, 66,180,077; 2019, 66,088,808
 66
 66
Additional paid-in capital 481,917
 480,962
Retained earnings 1,357,833
 1,352,539
Accumulated other comprehensive income (loss), net of tax:    
Net unrealized investment gains on fixed maturity securities 136,679
 230,448
Net funded status of benefit plans (10,767) (10,767)
Treasury stock, at cost, 2020, 24,902,579 shares;
2019, 24,850,484 shares
 (488,108) (485,963)
Total shareholders’ equity 1,477,620
 1,567,285
Total liabilities and shareholders’ equity $11,972,155
 $12,478,704







See Notes to Consolidated Financial Statements.

Horace Mann Educators Corporation2Quarterly Report on Form 10-Q





HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
($ in thousands, except per share data)
Three Months Ended
September 30,		Nine Months Ended
September 30,
 2020201920202019
Revenues  
Insurance premiums and contract charges earned$235,353 $239,681 $697,049 $657,562 
Net investment income93,718 93,071 256,403 279,329 
Net investment gains (losses)2,469 (2,156)(12,833)151,594 
Other income5,540 6,040 17,478 16,941 
Total revenues337,080 336,636 958,097 1,105,426 
Benefits, losses and expenses
Benefits, claims and settlement expenses151,425 154,191 433,095 446,267 
Interest credited51,030 53,576 153,249 160,092 
Operating expenses57,837 63,632 173,117 175,954 
DAC unlocking and amortization expense24,561 26,344 74,962 82,965 
Intangible asset amortization expense3,558 3,781 10,930 4,863 
Interest expense3,553 4,608 11,722 11,223 
Other expense - goodwill impairment0 0 0 28,025 
Total benefits, losses and expenses291,964 306,132 857,075 909,389 
Income before income taxes45,116 30,504 101,022 196,037 
Income tax expense8,642 5,050 15,498 44,595 
Net income$36,474 $25,454 $85,524 $151,442 
Net income per share
Basic$0.87 $0.61 $2.04 $3.63 
Diluted$0.87 $0.60 $2.03 $3.61 
Weighted average number of shares and equivalent shares
Basic41,916 41,785 41,865 41,715 
Diluted42,058 42,030 42,013 41,911 
Net investment gains (losses)
  Total other-than-temporary impairment losses
on securities		$(1,057)$(5)$(5,272)$(276)
  Portion of losses recognized in other
comprehensive income (loss)		0 0 0 0 
Net other-than-temporary impairment losses
on securities recognized in net income
(1,057)(5)(5,272)(276)
Sales and other, net3,736 608 8,645 147,513 
Change in fair value - equity securities2,242 1,081 (5,644)8,029 
  Change in fair value and gains (losses) realized
on settlements - derivatives		(2,452)(3,840)(10,562)(3,672)
Total$2,469 $(2,156)$(12,833)$151,594 
  Three Months Ended
March 31,
  2020 2019
Revenues  
  
Insurance premiums and contract charges earned $236,265
 $209,785
Net investment income 82,275
 92,800
Net investment gains (losses) (18,464) 7,417
Other income 7,169
 5,874
     
Total revenues 307,245
 315,876
     
Benefits, losses and expenses    
Benefits, claims and settlement expenses 138,660
 139,384
Interest credited 51,545
 52,922
Operating expenses 60,662
 56,175
DAC unlocking and amortization expense 29,975
 24,973
Intangible asset amortization expense 3,686
 541
Interest expense 4,228
 3,303
     
Total benefits, losses and expenses 288,756
 277,298
     
Income before income taxes 18,489
 38,578
Income tax expense 17
 6,412
     
Net income $18,472
 $32,166
     
Net income per share    
Basic $0.44
 $0.77
Diluted $0.44
 $0.77
     
Weighted average number of shares
and equivalent shares
    
Basic 41,827
 41,610
Diluted 42,019
 41,785
     
Net investment gains (losses)    
Total other-than-temporary impairment losses on securities $(3,692) $(236)
Portion of losses recognized in other comprehensive income (loss) —
 —
Net other-than-temporary impairment losses
on securities recognized in earnings
 (3,692) (236)
Sales and other, net 4,557
 4,838
Change in fair value - equity securities (14,486) 3,506
Change in fair value and gains (losses) realized on settlements -
  derivatives
 (4,843) (691)
Total $(18,464) $7,417







See Notes to Consolidated Financial Statements.

Horace Mann Educators Corporation3Quarterly Report on Form 10-Q





HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
($ in thousands)
 Three Months Ended
March 31,		Three Months Ended
September 30,		Nine Months Ended
September 30,
 2020 2019 2020201920202019
Comprehensive income (loss)  
  
Comprehensive income (loss)  
Net income $18,472
 $32,166
Net income$36,474 $25,454 $85,524 $151,442 
Other comprehensive income (loss), net of tax:  
  
Other comprehensive income (loss), net of tax:  
Change in net unrealized investment gains
(losses) on fixed maturity securities
 (93,769) 113,898
Change in net unrealized investment gains
(losses) on fixed maturity securities		49,068 63,304 97,749 169,440 
Change in net funded status of benefit plans —
 —
Change in net funded status of benefit plans0 0 0 0 
Other comprehensive income (loss) (93,769) 113,898
Other comprehensive income (loss)49,068 63,304 97,749 169,440 
Total $(75,297) $146,064
Total$85,542 $88,758 $183,273 $320,882 
 









































See Notes to Consolidated Financial Statements.

Horace Mann Educators Corporation4Quarterly Report on Form 10-Q





HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)
($ in thousands, except per share data)
Three Months Ended
September 30,		Nine Months Ended
September 30,
2020201920202019
Common stock, $0.001 par value
Beginning balance$66 $66 $66 $66 
Options exercised— — — — 
Conversion of common stock units— — — — 
Conversion of restricted stock units— — — — 
Ending balance66 66 66 66 
Additional paid-in capital
Beginning balance483,754 476,353 480,962 475,109 
Options exercised and conversion of common stock
units and restricted stock units		1,319 447 1,587 (1,314)
Share-based compensation expense1,690 1,850 4,214 4,855 
Ending balance486,763 478,650 486,763 478,650 
Retained earnings
Beginning balance1,375,737 1,318,329 1,352,539 1,216,582 
Net income36,474 25,454 85,524 151,442 
Dividends, 2020, $0.30, $0.90 per share;
2019, $0.2875, $0.8625 per share
(12,684)(12,120)(38,027)(36,361)
Cumulative effect of change in accounting principle— — (509)— 
Ending balance1,399,527 1,331,663 1,399,527 1,331,663 
Accumulated other comprehensive income (loss), net of tax:
Beginning balance268,362 190,892 219,681 84,756 
Change in net unrealized investment gains (losses)
on fixed maturity securities		49,068 63,304 97,749 169,440 
Change in net funded status of benefit plans— — — — 
Ending balance317,430 254,196 317,430 254,196 
Treasury stock, at cost
Beginning balance(485,963)(485,963)(488,108)(485,963)
Acquisition of shares(2,145)— — — 
Ending balance(488,108)(485,963)(488,108)(485,963)
Shareholders' equity at end of period$1,715,678 $1,578,612 $1,715,678 $1,578,612 
  Three Months Ended
March 31,
  2020 2019
Common stock, $0.001 par value    
Beginning balance $66
 $66
Options exercised —
 —
Conversion of common stock units —
 —
Conversion of restricted stock units —
 —
Ending balance 66
 66
     
Additional paid-in capital    
Beginning balance 480,962
 475,109
Options exercised and conversion of common stock units and
restricted stock units
 (178) (2,104)
Share-based compensation expense 1,133
 1,331
Ending balance 481,917
 474,336
     
Retained earnings    
Beginning balance 1,352,539
 1,216,582
Net income 18,472
 32,166
Dividends, 2020, $0.30 per share; 2019, $0.2875 per share (12,669) (12,127)
Cumulative effect of change in accounting principle (509) —
Ending balance 1,357,833
 1,236,621
     
Accumulated other comprehensive income (loss), net of tax:    
Beginning balance 219,681
 84,756
Change in net unrealized investment gains (losses) on fixed maturity
securities
 (93,769) 113,898
Change in net funded status of benefit plans —
 —
Ending balance 125,912
 198,654
     
Treasury stock, at cost    
Beginning balance (485,963) (485,963)
Acquisition of shares (2,145) —
Ending balance (488,108) (485,963)
Shareholders' equity at end of period $1,477,620
 $1,423,714
















See Notes to Consolidated Financial Statements.

Horace Mann Educators Corporation5Quarterly Report on Form 10-Q





HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
($ in thousands)
Nine Months Ended
September 30,
20202019
Cash flows - operating activities
Net income$85,524 $151,442 
Adjustments to reconcile net income to net cash provided
by operating activities
     Net investment (gains) losses12,833 (151,594)
     Amortization of premiums and accretion of discounts on
fixed maturity securities, net		4,904 1,023 
     Depreciation and intangible asset amortization17,547 9,751 
     Share-based compensation expense4,578 5,666 
     Other expense - goodwill impairment0 28,025 
     Changes in:
      Accrued investment income(5,476)41,994 
      Insurance liabilities97,952 40,180 
      Premium receivables4,068 (9,671)
      Deferred policy acquisitions(2,546)501 
      Reinsurance recoverables3,265 11,837 
      Income tax liabilities(3,419)34,845 
      Other operating assets and liabilities44,282 56,194 
      Other4,312 (12,957)
           Net cash provided by operating activities267,824 207,236 
Cash flows - investing activities  
Fixed maturity securities  
Purchases(1,093,888)(845,967)
Sales352,766 651,058 
Maturities, paydowns, calls and redemptions525,310 645,946 
Equity securities
Purchases(23,170)(10,510)
Sales and repayments12,368 20,989 
Limited partnership interests
Purchases(59,958)(42,388)
Sales14,594 36,108 
Change in short-term and other investments, net(96,890)(99,702)
Acquisition of businesses, net of cash acquired0 (421,174)
           Net cash used in investing activities(368,868)(65,640)
Cash flows - financing activities  
Dividends paid to shareholders(37,196)(35,477)
   Principal borrowings on Bank Credit Facility0 135,000 
FHLB borrowings4,000 0 
Acquisition of treasury stock(2,145)0 
Proceeds from exercise of stock options2,402 1,105 
Withholding tax payments on RSUs tendered(1,954)(3,560)
Annuity contracts: variable, fixed and FHLB funding agreements  
Deposits462,207 519,636 
Benefits, withdrawals and net transfers to
Separate Account (variable annuity) assets		(284,439)(313,653)
  Principal repayment on FHLB funding agreements0 (275,000)
Life policy accounts 
Deposits6,775 7,143 
Withdrawals and surrenders(2,912)(2,682)
Change in deposit asset on reinsurance(14,797)(130,740)
Change in book overdrafts9,070 (15,925)
           Net cash provided by (used in) financing activities141,011 (114,153)
Net increase in cash39,967 27,443 
Cash at beginning of period25,508 11,906 
Cash at end of period$65,475 $39,349 
  Three Months Ended
March 31,
  2020 2019
Cash flows from operating activities    
Net income $18,472
 $32,166
Adjustments to reconcile net income to net cash provided
by operating activities
    
Net investment (gains) losses 18,463
 (7,417)
Amortization of premiums and accretion of discounts on
fixed maturity securities, net
 953
 504
Depreciation and intangible asset amortization 5,283
 1,357
Share-based compensation expense 1,220
 1,472
Changes in:    
Accrued investment income (9,460) (2,871)
Insurance liabilities 65,676
 95,616
Premium receivables 2,189
 2,796
Deferred policy acquisitions (4,400) (700)
Reinsurance recoverables 272
 19,024
Income tax liabilities 1,057
 6,539
Other operating assets and liabilities (15,743) (17,723)
Other 3,449
 (5,960)
Net cash provided by operating activities 87,431
 124,803
     
Cash flows - investing activities  
  
Fixed maturity securities  
  
Purchases (535,278) (307,451)
Sales 98,158
 59,724
Maturities, paydowns, calls and redemptions 237,939
 136,141
Equity securities    
Purchases (4,114) (3,569)
Sales and repayments 1,457
 15,489
Limited partnership interests    
Purchases (14,120) (8,842)
Sales 2,331
 9,858
Change in short-term and other investments, net 73,632
 (29,341)
Acquisition of business, net of cash acquired —
 (18,198)
Net cash used in investing activities (139,995) (146,189)
     
Cash flows - financing activities  
  
Dividends paid to shareholders (12,383) (11,790)
Acquisition of treasury stock (2,145) —
Proceeds from exercise of stock options 480
 583
Withholding tax payments on RSUs tendered (1,280) (3,311)
Annuity contracts: variable, fixed and FHLB funding agreements  
  
Deposits 192,655
 157,305
Benefits, withdrawals and net transfers to
Separate Account (variable annuity) assets
 (101,688) (109,246)
Life policy accounts    
Deposits 2,562
 2,714
Withdrawals and surrenders (1,194) (904)
Change in deposit asset on reinsurance (13,277) —
Change in book overdrafts 4,573
 (18,590)
Net cash provided by financing activities 68,303
 16,761
Net increase (decrease) in cash 15,739
 (4,625)
Cash at beginning of period 25,508
 11,906
Cash at end of period $41,247
 $7,281

See Notes to Consolidated Financial Statements.

Horace Mann Educators Corporation6Quarterly Report on Form 10-Q





HORACE MANN EDUCATORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31,September 30, 2020 and 2019


NOTE 1 - Basis of Presentation and Significant Accounting Policies
Business
Horace Mann Educators Corporation is a holding company for insurance subsidiaries that market and underwrite personal lines of property and casualty insurance products (primarily personal lines of automobile and property insurance), supplemental insurance products (primarily heart, cancer, accident and limited short-term supplemental disability coverages), retirement products (primarily tax-qualified fixed and variable annuities) and life insurance products, primarily to K-12 teachers, administrators and other employees of public schools and their families (collectively, HMEC, the Company or Horace Mann).
On July 1, 2019, the Company acquired NTA Life Enterprises, LLC (NTA). As a result, the Company’s reporting segments were changed effective in the third quarter of 2019. A newly created Supplemental segment was added to report on the personal lines of supplemental insurance products that are marketed and underwritten by NTA.
Basis of Presentation
The accompanying Consolidated Financial Statements have been prepared in conformity 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). Certain information and disclosures normally included in annual financial statements prepared in conformity with GAAP, but are not required for interim reporting purposes, have been omitted. These Consolidated Financial Statements and Notes should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in Part II - Item 8 of the Company's Annual Report on Form 10-K for the year ended December 31, 2019. The results of operations for the three and nine months ended March 31,September 30, 2020 are not necessarily indicative of the results to be expected for the full year.
The accompanying Consolidated Financial Statements and Notes are unaudited. These financial statements reflect all adjustments (generally consisting only of normal recurring accruals) which are, in the opinion of management, necessary for the fair presentation of the consolidated financial position, results of operations and cash flows for the interim periods. The Company's significant accounting policies are summarized in Part II - Item 8, Note 1 of the Company's Annual Report on Form 10-K for the year ended December 31, 2019.
Effective for the year ended December 31, 2019, the Company decided to change the approach it uses for presentation in its Consolidated Statements of Cash Flows from the direct method to the indirect method as management considers presentation under the indirect method as more comparable to the method used by others in the insurance industry. Accordingly, the Company has recast all prior periods presented in the Consolidated Statements of Cash Flows to conform to the current year’s presentation.
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, disclosure of contingent assets and liabilities at the 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.

Horace Mann Educators Corporation7Quarterly Report on Form 10-Q



NOTE 1 - Basis of Presentation and Significant Accounting Policies (continued)

The most significant critical accounting estimates include valuation of hard-to-value fixed maturity securities (including evaluation of other-than-temporary impairments), evaluation of goodwill and intangible assets for impairment, valuation of supplemental, annuity and life deferred policy acquisition costs, valuation of liabilities for property and casualty unpaid claims and claim expenses, valuation of certain investment contracts and policy reserves and valuation of assets acquired and liabilities assumed under purchase accounting.
Adoption of New Accounting Standards
Measurement of Credit Losses on Financial Instruments
In June 2016, the FASBFinancial Accounting Standards Board (FASB) issued guidance which revisesrevised the credit loss recognition criteria for certain financial assets measured at amortized cost, including reinsurance recoverables. The new guidance replacesreplaced the existingprevious incurred loss recognition model with an expected loss recognition model. The objective of the expected credit loss model is for a reporting entity to recognize its estimate of expected credit losses for affected financial assets in a valuation allowance that when deducted from the amortized cost basis of the related financial assets results in a net carrying value at the amount expected to be collected. A reporting entity must consider all relevant information available when estimating expected credit losses, including details about past events, current conditions, and reasonable and supportable forecasts over the life of an asset. Financial assets may be evaluated individually or on a pooled basis when they share similar risk characteristics. The measurement of credit losses for available for sale debt securities measured at fair value is not affected except that credit losses recognized are limited to the amount by which fair value is below amortized cost and the carrying value adjustment is recognized through a valuation allowance which may change over time but once recorded cannot subsequently be reduced to an amount below zero. The guidance is effective for reporting periods beginning after December 15, 2019, and for most affected instruments must be adopted using a modified retrospective approach, with a cumulative effect adjustment recorded to beginning retained earnings.
The Company’s implementation activities are complete and the impacts relatedrelate to the Company’s commercial mortgage loan portfolio, agent advances, reinsurance recoverables and off-balance-sheet credit exposures for unfunded commercial mortgage loan commitments. The Company adopted the new guidance on January 1, 2020 and recognized a cumulative effect adjustment that decreased retained earnings by $0.5 million.
Future Adoption of New Accounting Standards
Accounting for Long-Duration Insurance Contracts
In August 2018, the FASB issued accounting and disclosure guidance that contains targeted improvements to the accounting for long-duration insurance contracts. Under the new guidance, the cash flow assumptions used to measure the liability for future policy benefits for traditional insurance contracts will be required to be updated at least annually with changes recognized as a benefit expense (i.e., assumptions will no longer be locked-in). Insurance entities will be required to use a standard discount rate to measure the liabilities that will be equivalent to the yield from a high-quality bond. The new guidance also changes the amortization of deferred acquisition costs (DAC) to be on a constant-level basis over the expected term of the related contracts with no interest accruing on the DAC balance. The new guidance also introduces a new category of contract features associated with deposit type contracts referred to as market risk benefits (MRBs). Contract features meeting the definition of a MRB will be measured at fair value. New disclosures will be required for long-duration insurance contracts in order to provide better transparency into the exposure of insurance entities and the drivers of their results. For public business entities, the guidance is effective for annual reporting periods beginning after December 15, 2021, including interim periods within those years. With regards to the liability for future policy benefits and DAC, the guidance applies to contracts in force as of the beginning of the earliest period presented and may be applied retrospectively. With regards to MRBs, the guidance is to be applied retrospectively at the beginning of the earliest period presented. Early adoption is permitted. Management is currently evaluating the impact this guidance will have on the results of operations and financial position of the Company.
Accounting Policies
The following accounting policy has been updated to reflect the Company's adoption of Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments as described above.
The Company conducts a periodic review to identify and evaluate invested assets that may have credit impairments.

Horace Mann Educators Corporation8Quarterly Report on Form 10-Q



NOTE 1 - Basis of Presentation and Significant Accounting Policies (continued)

Credit Impairments of Fixed MaturitiesMaturity Securities
Some of the factors considered in assessing impairment of fixed maturitiesmaturity securities due to credit-related factors include: (1) the extent to which the fair value has been less than amortized cost; (2) the financial condition, near-term and long-term prospects for the issuer, including the relevant industry conditions and trends, and implications of rating agency actions and offering prices; (3) the likelihood of the recoverability of principal and interest; and (4) whether it is more likely than not that the Company will be required to sell the investment prior to an anticipated recovery in value.
Beginning on January 1, 2020, credit losses are recognized through an allowance account. See Note 1 - Adoption of New Accounting Standards - Measurement of Credit Losses on Financial Instruments for additional information.
For fixed maturity securities that the Company does not intend to sell or for which it is more likely than not that the Company would not be required to sell before an anticipated recovery in value, the Company separates the credit loss component of the impairment from the amount related to all other factors and reports the credit loss component in net investment gains (losses). The impairment related to all other factors (non-credit factors) is reported in other comprehensive income (OCI). The allowance is adjusted for any additional credit losses and subsequent recoveries. Upon recognizing a credit loss, the cost basis is not adjusted.
For fixed maturity securities where the Company records a credit loss, a determination is made as to the cause of the impairment and whether the Company expects a recovery in the value. For fixed maturity securities where the Company expects a recovery in value, the constant effective yield method is utilized, and the investment is amortized to par.
For fixed maturity securities the Company intends to sell or for which it is more likely than not that the Company will be required to sell before an anticipated recovery in value, the full amount of the impairment is included in net investment gains (losses). The new cost basis of the investment is the previous amortized cost basis less the impairment recognized in net investment gains (losses). The new cost basis is not adjusted for any subsequent recoveries in fair value.
The Company reports investment income accrued separately from fixed maturity securities, available for sale, and has elected not to measure an allowance for credit losses for investment income accrued. Investment income accrued is written off through net investment gains (losses) at the time the issuer of the fixed maturity security defaults or is expected to default on payments.
Uncollectible available for sale fixed maturity securities are written off when the Company determines that no additional payments of principal or interest will be received.


Horace Mann Educators Corporation9Quarterly Report on Form 10-Q



NOTE 2 - Investments

Net Investment Income
The components of net investment income for the following periods were:were as follows:
($ in thousands) Three Months Ended
March 31,
  2020 2019
Fixed maturity securities $59,446
 $84,316
Equity securities 1,208
 1,198
Limited partnership interests (2,699) 6,451
Short-term and other investments 2,857
 3,388
Investment expenses (2,225) (2,553)
Net investment income - investment portfolio 58,587
 92,800
Investment income - deposit asset on reinsurance 23,688
 —
Total net investment income $82,275
 $92,800

($ in thousands)Three Months Ended
September 30,		Nine Months Ended
September 30,
2020201920202019
Fixed maturity securities$56,420 $59,319 $174,727 $227,196 
Equity securities1,130 1,107 3,520 3,697 
Limited partnership interests11,046 6,859 4,862 22,759 
Short-term and other investments2,774 4,207 8,415 (13,856)
Investment expenses(2,151)(2,179)(7,262)(7,420)
Net investment income - investment portfolio69,219 69,313 184,262 232,376 
Investment income - deposit asset on reinsurance24,499 23,758 72,141 46,953 
Total net investment income$93,718 $93,071 $256,403 $279,329 
Net Investment Gains (Losses)
Net investment gains (losses) for the following periods were:were as follows:
($ in thousands)Three Months Ended
September 30,		Nine Months Ended
September 30,
2020201920202019
Fixed maturity securities$2,656 $206 $3,116 $141,955 
Equity securities3,982 1,478 (3,670)13,311 
Short-term investments and other(4,169)(3,840)(12,279)(3,672)
Net investment gains (losses)$2,469 $(2,156)$(12,833)$151,594 
($ in thousands) Three Months Ended
March 31,
  2020 2019
Fixed maturity securities $1,102
 $201
Equity securities (14,723) 7,907
Short-term investments and other (4,843) (691)
Net investment gains (losses) $(18,464) $7,417


The Company, from time to time, sells invested assets subsequent to the reporting date that were considered temporarily impaired at thesuch reporting date. Such sales are due to issuer specific events occurring subsequent to the reporting date that result in a change in the Company's intent or ability to hold an invested asset. The types of events that may result in a sale include significant changes in the economic facts and circumstances related to the invested asset, significant unforeseen changes in liquidity needs, or changes in the Company's investment strategy.
Net Investment Gains (Losses) by Transaction Type
The following table reconciles net investment gains (losses) pretax by transaction type:
($ in thousands) Three Months Ended
March 31,
  2020 2019
Impairment write-downs $—
 $—
Change in intent write-downs (3,692) (236)
Net OTTI losses recognized in earnings (3,692) (236)
Sales and other, net 4,557
 4,838
Change in fair value - equity securities (14,486) 3,506
Change in fair value and gains (losses) realized
on settlements - derivatives
 (4,843) (691)
Net investment gains (losses) $(18,464) $7,417


($ in thousands)Three Months Ended
September 30,		Nine Months Ended
September 30,
2020201920202019
Credit impairment write-downs$0 $0 $0 $0 
Change in intent write-downs(1,057)(5)(5,272)(276)
Net other-than-temporary impairment losses
on securities recognized in net income
(1,057)(5)(5,272)(276)
Sales and other, net3,736 608 8,645 147,513 
Change in fair value - equity securities2,242 1,081 (5,644)8,029 
Change in fair value and gains (losses) realized
on settlements - derivatives
(2,452)(3,840)(10,562)(3,672)
Net investment gains (losses)$2,469 $(2,156)$(12,833)$151,594 
Horace Mann Educators Corporation10Quarterly Report on Form 10-Q



NOTE 2 - Investments (continued)

Fixed Maturity Securities
The Company's investment portfolio is comprised primarily of fixed maturity securities. Amortized cost, net unrealized investment gains (losses) and fair values of all fixed maturity securities in the portfolio were as follows:
($ in thousands)Amortized
Cost		Unrealized
Gains		Unrealized
Losses		Fair
Value
September 30, 2020
Fixed maturity securities
U.S. Government and federally
sponsored agency obligations: (1)
Mortgage-backed securities$617,856 $85,219 $213 $702,862 
Other, including U.S. Treasury securities341,771 42,683 317 384,137 
Municipal bonds1,621,308 196,317 1,124 1,816,501 
Foreign government bonds40,143 4,644 0 44,787 
Corporate bonds1,802,423 189,986 8,926 1,983,483 
Other asset-backed securities1,248,814 22,353 34,379 1,236,788 
Totals$5,672,315 $541,202 $44,959 $6,168,558 
December 31, 2019
Fixed maturity securities
U.S. Government and federally
sponsored agency obligations: (1)
Mortgage-backed securities$684,543 $41,263 $1,487 $724,319 
Other, including U.S. Treasury securities436,665 22,824 621 458,868 
Municipal bonds1,545,787 141,996 1,580 1,686,203 
Foreign government bonds42,801 2,569 0 45,370 
Corporate bonds1,464,444 118,775 1,795 1,581,424 
Other asset-backed securities1,282,740 20,883 8,131 1,295,492 
Totals$5,456,980 $348,310 $13,614 $5,791,676 
($ in thousands) 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
March 31, 2020        
Fixed maturity securities        
U.S. Government and federally
sponsored agency obligations: (1)
        
Mortgage-backed securities $676,322
 $75,985
 $392
 $751,915
Other, including U.S. Treasury securities 430,193
 38,540
 60
 468,673
Municipal bonds 1,626,005
 151,302
 7,376
 1,769,931
Foreign government bonds 42,802
 1,804
 754
 43,852
Corporate bonds 1,649,405
 77,572
 41,204
 1,685,773
Other mortgage-backed securities 1,228,739
 6,068
 111,768
 1,123,039
Totals $5,653,466
 $351,271
 $161,554
 $5,843,183
         
December 31, 2019        
Fixed maturity securities        
U.S. Government and federally
sponsored agency obligations: (1)
        
Mortgage-backed securities $684,543
 $41,263
 $1,487
 $724,319
Other, including U.S. Treasury securities 436,665
 22,824
 621
 458,868
Municipal bonds 1,545,787
 141,996
 1,580
 1,686,203
Foreign government bonds 42,801
 2,569
 —
 45,370
Corporate bonds 1,464,444
 118,775
 1,795
 1,581,424
Other mortgage-backed securities 1,282,740
 20,883
 8,131
 1,295,492
Totals $5,456,980
 $348,310
 $13,614
 $5,791,676
(1)(1)    Fair value includes securities issued by Federal National Mortgage Association (FNMA) of $390.7 million and $405.1 million; Federal Home Loan Mortgage Corporation (FHLMC) of $322.4 million and $283.1 million; and Government National Mortgage Association (GNMA) of $137.4 million and $147.4 million as of September 30, 2020 and December 31, 2019, respectively.
Fair value includes securities issued by Federal National Mortgage Association (FNMA) of $413.3 million and $405.1 million; Federal Home Loan Mortgage Corporation (FHLMC) of $308.4 million and $283.1 million; and Government National Mortgage Association (GNMA) of $151.1 million and $147.4 million as of March 31, 2020 and December 31, 2019, respectively.

Horace Mann Educators Corporation11Quarterly Report on Form 10-Q



NOTE 2 - Investments (continued)

The following table presents the fair value and gross unrealized losses for fixed maturity securities in an unrealized loss position at March 31,September 30, 2020 and December 31, 2019, respectively. The Company views the decrease in fair value of all of the fixed maturity securities with unrealized losses at March 31,September 30, 2020 — which was driven largely by increasing interest rates, spread widening, financial market illiquidity and/or market volatility from the date of acquisition — as temporary. As of March 31,September 30, 2020, the Company has not made the decision to sell and it is not more likely than not the Company will be required to sell the fixed maturity securities with unrealized losses before an anticipated recovery in value. Therefore, it was determined that the unrealized losses on the fixed maturity securities presented in the table below were not other-than-temporarily impaired as of March 31,September 30, 2020.
($ in thousands)12 Months or LessMore than 12 MonthsTotal
Fair ValueGross
Unrealized
Losses		Fair ValueGross
Unrealized
Losses		Fair ValueGross
Unrealized
Losses
September 30, 2020
Fixed maturity securities
U.S. Government and federally
sponsored agency obligations:
Mortgage-backed securities$8,519 $134 $1,246 $79 $9,765 $213 
Other31,797 317 0 0 31,797 317 
Municipal bonds47,067 1,124 0 0 47,067 1,124 
Foreign government bonds0 0 0 0 0 0 
Corporate bonds203,521 8,444 9,873 482 213,394 8,926 
Other asset-backed securities397,424 24,376 413,159 10,003 810,583 34,379 
Total$688,328 $34,395 $424,278 $10,564 $1,112,606 $44,959 
Number of positions with a
   gross unrealized loss
475 124 599 
Fair value as a percentage of total fixed
   maturity securities at fair value
11.2 %6.9 %18.1 %
December 31, 2019
Fixed maturity securities
U.S. Government and federally
sponsored agency obligations:
Mortgage-backed securities$72,422 $1,282 $2,620 $205 $75,042 $1,487 
Other38,341 619 1,527 2 39,868 621 
Municipal bonds91,195 977 9,160 603 100,355 1,580 
Foreign government bonds0 0 0 0 0 0 
Corporate bonds58,198 886 16,622 909 74,820 1,795 
Other asset-backed securities218,710 1,970 442,791 6,161 661,501 8,131 
Total$478,866 $5,734 $472,720 $7,880 $951,586 $13,614 
Number of positions with a
   gross unrealized loss
330 137 467 
Fair value as a percentage of total fixed
   maturity securities at fair value
8.3 %8.2 %16.5 %
($ in thousands) 12 Months or Less More than 12 Months Total
  Fair Value 
Gross
Unrealized
Losses
 Fair Value 
Gross
Unrealized
Losses
 Fair Value 
Gross
Unrealized
Losses
March 31, 2020            
Fixed maturity securities            
U.S. Government and federally
sponsored agency obligations:		            
Mortgage-backed securities $23,168
 $302
 $1,003
 $90
 $24,171
 $392
Other 15,736
 60
 —
 —
 15,736
 60
Municipal bonds 191,688
 7,376
 —
 —
 191,688
 7,376
Foreign government bonds 13,225
 754
 —
 —
 13,225
 754
Corporate bonds 549,628
 39,268
 5,761
 1,936
 555,389
 41,204
Other mortgage-backed securities 651,595
 71,055
 329,304
 40,713
 980,899
 111,768
Total $1,445,040
 $118,815
 $336,068
 $42,739
 $1,781,108
 $161,554
             
Number of positions with a
gross unrealized loss
 1,080
   104
   1,184
  
Fair value as a percentage of total fixed maturity securities fair value 24.7%   5.8%   30.5%  
             
December 31, 2019            
Fixed maturity securities            
U.S. Government and federally
sponsored agency obligations:
            
Mortgage-backed securities $72,422
 $1,282
 $2,620
 $205
 $75,042
 $1,487
Other 38,341
 619
 1,527
 2
 39,868
 621
Municipal bonds 91,195
 977
 9,160
 603
 100,355
 1,580
Foreign government bonds —
 —
 —
 —
 —
 —
Corporate bonds 58,198
 886
 16,622
 909
 74,820
 1,795
Other mortgage-backed securities 218,710
 1,970
 442,791
 6,161
 661,501
 8,131
Total $478,866
 $5,734
 $472,720
 $7,880
 $951,586
 $13,614
             
Number of positions with a
gross unrealized loss
 330
   137
   467
  
Fair value as a percentage of total fixed maturity securities fair value 8.3%   8.2%   16.5%  

Fixed maturity securities with an investment grade rating represented 89.0%80.8% of the gross unrealized losses as of March 31,September 30, 2020. With respect to fixed maturity securities involving securitized financial assets, the underlying collateral cash flows were stress tested to determine there was no adverse change in the present value of cash flows below the amortized cost basis.

Horace Mann Educators Corporation12Quarterly Report on Form 10-Q



NOTE 2 - Investments (continued)

Credit Losses
The following table summarizes the cumulative amounts related to the Company's credit loss component of other-than-temporary impairment (OTTI) losses on fixed maturity securities held as of March 31,September 30, 2020 and 2019 that the Company did not intend to sell as of those dates, and it was not more likely than not that the Company would be required to sell the securities before an anticipated recovery in value, for which the non-credit portions of OTTI losses were recognized in OCI:
($ in thousands)Nine Months Ended
September 30,
20202019
Cumulative credit loss (1)
Beginning of period$1,529 $1,529 
New credit losses184 0 
Increases to previously recognized credit losses0 0 
Losses related to securities sold or paid down during the period(103)0 
End of period$1,610 $1,529 
($ in thousands) Three Months Ended
March 31,
  2020 2019
Cumulative credit loss (1)
    
Beginning of period $1,529
 $1,529
New credit losses 185
 —
Increases to previously recognized credit losses —
 —
Losses related to securities sold or paid down during the period —
 —
  $1,714
 $1,529
(1)The cumulative credit loss amounts exclude OTTI losses on fixed maturity securities held as of the periods indicated that the Company intended to sell or it was more likely than not that the Company would be required to sell the security before an anticipated recovery in value.
(1)

The cumulative credit loss amounts exclude OTTI losses on securities held as of the periods indicated that the Company intended to sell or it was more likely than not that the Company would be required to sell the security before an anticipated recovery of value.

For the three and nine months ended March 31,September 30, 2020, there was no allowance recognized for current expected credit losses with respect to fixed maturity securities classified as available for sale.
Maturities of Fixed Maturity Securities
The following table presents the distribution of the Company’s fixed maturity securities portfolio by estimated expected maturity. Estimated expected maturities differ from contractual maturities, reflecting assumptions regarding borrowers' utilization of the right to call or prepay obligations with or without call or prepayment penalties. For structured securities, including mortgage-backed securities and other mortgage-backed securities, estimated expected maturities consider broker-dealer survey prepayment assumptions and are verified for consistency with the interest rate and economic environments.
($ in thousands) Percent of Total Fair Value March 31, 2020
  March 31, 2020 December 31, 2019 
Fair
Value
 
Amortized
Cost
Estimated expected maturity:        
Due in 1 year or less 4.0% 3.6% $230,397
 $233,386
Due after 1 year through 5 years 26.3% 27.4% 1,535,965
 1,572,373
Due after 5 years through 10 years 29.4% 29.6% 1,719,303
 1,661,161
Due after 10 years through 20 years 26.5% 26.1% 1,550,562
 1,435,920
Due after 20 years 13.8% 13.3% 806,956
 750,626
Total 100.0% 100.0% $5,843,183
 $5,653,466
         
Average option-adjusted duration, in years 6.1
 6.0
    


($ in thousands)Percent of Total Fair ValueSeptember 30, 2020
September 30, 2020December 31, 2019Fair
Value		Amortized
Cost
Estimated expected maturity:
Due in 1 year or less4.2 %3.6 %$261,323 $258,244 
Due after 1 year through 5 years28.1 %27.4 %1,734,450 1,676,356 
Due after 5 years through 10 years28.9 %29.6 %1,782,261 1,628,583 
Due after 10 years through 20 years24.3 %26.1 %1,496,331 1,309,759 
Due after 20 years14.5 %13.3 %894,193 799,373 
Total100.0 %100.0 %$6,168,558 $5,672,315 
Average option-adjusted duration, in years6.36.0
Horace Mann Educators Corporation13Quarterly Report on Form 10-Q



NOTE 2 - Investments (continued)

Sales of Fixed Maturity and Equity Securities
Proceeds received from sales of fixed maturity and equity securities, each determined using the specific identification method, and gross gains and gross losses realized as a result of those sales for each period were:were as follows:
($ in thousands)Three Months Ended
September 30,		Nine Months Ended
September 30,
202020192020
2019 (1)
Fixed maturity securities
Proceeds received$58,604 $149,319 $352,766 $651,058 
Gross gains realized3,744 1,258 14,029 149,574 
Gross losses realized(31)(1,047)(5,924)(7,128)
Equity securities
Proceeds received$309 $1,367 $12,368 $18,489 
Gross gains realized79 428 2,119 5,562 
Gross losses realized(38)(32)(1,843)(542)
($ in thousands) Three Months Ended
March 31,
  2020 2019
Fixed maturity securities    
Proceeds received $98,158
 $59,724
Gross gains realized 4,779
 542
Gross losses realized (268) (105)
     
Equity securities    
Proceeds received $1,457
 $15,489
Gross gains realized 319
 4,745
Gross losses realized (556) (344)

(1)Gross gains realized presented above include a $135.3 million realized investment gain associated with a transfer of investments to a reinsurer as consideration paid during the second quarter of 2019 in connection with the reinsurance of a $2.9 billion block of in force fixed and variable annuity business. See Note 5 for further information.
Net Unrealized Investment Gains (Losses) on Fixed Maturity Securities
The following table reconciles net unrealized investment gains (losses) on fixed maturity securities, net of tax, included in AOCI,accumulated other comprehensive income (AOCI), before the impact of DAC:
($ in thousands) Three Months Ended
March 31,
  2020 2019
Net unrealized investment gains (losses)
on fixed maturity securities, net of tax
    
Beginning of period $264,410
 $111,712
Change in net unrealized investment gains
(losses) on fixed maturity securities
 (103,773) 140,012
Reclassification of net investment (gains) losses
on securities to net income
 (10,761) (6,405)
End of period $149,876
 $245,319

($ in thousands)Three Months Ended
September 30,		Nine Months Ended
September 30,
2020201920202019
Net unrealized investment gains (losses)
on fixed maturity securities, net of tax
Beginning of period$329,887 $231,087 $264,410 $111,712 
Change in net unrealized investment gains
(losses) on fixed maturity securities		56,901 75,283 128,060 315,988 
Reclassification of net investment (gains) losses
on securities to net income		5,244 (1,330)(438)(122,660)
End of period$392,032 $305,040 $392,032 $305,040 
Limited Partnership Interests
As of March 31,September 30, 2020 and December 31, 2019, the carrying value of equity method limited partnership interests totaled $389.3$418.2 million and $383.7 million, respectively. Principal factors influencing carrying value appreciation or decline include operating performance, comparable public company earnings multiples, capitalization rates and the economic environment. The Company recognizes an impairment loss for equity method limited partnership interests when evidence demonstrates that the loss is other than temporary. Evidence of a loss in value that is other than temporary may include the absence of an ability to recover the carrying amount of the investment or the inability of the investee to sustain a level of earnings that would justify the carrying amount of the investment.
Offsetting of Assets and Liabilities
The Company's derivatives (call options) are subject to enforceable master netting arrangements. Collateral support agreements associated with each master netting arrangement provide that the Company will receive or pledge financial collateral in the event minimum thresholds have been reached.

Horace Mann Educators Corporation14Quarterly Report on Form 10-Q



NOTE 2 - Investments (continued)

The following table presents instruments that were subject to a master netting arrangement for the Company.
($ in thousands)   
Gross
Amounts
Offset in the
Consolidated
Balance
Sheets
 
Net Amounts
of Assets/
Liabilities
Presented
in the
Consolidated
Balance
Sheets


 
Gross Amounts Not Offset
in the Consolidated
Balance Sheets
  
  
Gross
Amounts
   
Financial
Instruments
 
Cash
Collateral
Received
 
Net
Amount
March 31, 2020            
Asset derivatives:            
Free-standing derivatives $2,622
 $—
 $2,622
 $1,688
 $1,060
 $(126)
             
December 31, 2019            
Asset derivatives:            
Free-standing derivatives 13,239
 —
 13,239
 7,687
 6,640
 (1,088)

($ in thousands)Gross
Amounts
Offset in the
Consolidated
Balance
Sheets		Net Amounts
of Assets/
Liabilities
Presented
in the
Consolidated
Balance
Sheets		Gross Amounts Not Offset
in the Consolidated
Balance Sheets
Gross
Amounts		Financial
Instruments		Cash
Collateral
Received		Net
Amount
September 30, 2020
Asset derivatives:
Free-standing derivatives$10,793 $0 $10,793 $7,952 $1,960 $881 
December 31, 2019
Asset derivatives:
Free-standing derivatives13,239 0 13,239 7,687 6,640 (1,088)
Deposits
At March 31,September 30, 2020 and December 31, 2019, fixed maturity securities with a fair value of $27.0$26.9 million and $26.0 million, respectively, were on deposit with governmental agencies as required by law in various states infor which the insurance subsidiaries of HMEC conduct business. In addition, at March 31,September 30, 2020 and December 31, 2019, fixed maturity securities with a fair value of $679.7$697.1 million and $594.2 million, respectively, were on deposit with the Federal Home Loan Bank of Chicago (FHLB) as collateral for amounts subject to funding agreements, advances and borrowings which were equal to $620.0$644.5 million at March 31,September 30, 2020 and $545.0 million at December 31, 2019. The deposited securities are included in Fixed maturity securities on the Company’s Consolidated Balance Sheets.
NOTE 3 - Fair Value of Financial Instruments
The Company is required under GAAP to disclose estimated fair values for certain financial and nonfinancial assets and liabilities. Fair values of the Company’s insurance contracts other than annuity contracts (which are investment contracts) are not required to be disclosed. However, the estimated fair values of liabilities under all insurance contracts are taken into consideration in the Company’s overall management of interest rate risk through the matching of investment maturities with amounts due under insurance contracts.
Information regarding the three-level hierarchy presented below and the valuation methodologies utilized by the Company to estimate fair values at each reporting date is included in Part II - Item 8, Note 4 of the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

Horace Mann Educators Corporation15Quarterly Report on Form 10-Q



NOTE 3 - Fair Value of Financial Instruments (continued)

Financial Instruments Measured and Carried at Fair Value on a Recurring Basis
The following table presents the Company's fair value hierarchy for those assets and liabilities measured and carried at fair value on a recurring basis. During the threenine months ended March 31,September 30, 2020 and 2019, there were no transfers between Level 1 and Level 2. At March 31,September 30, 2020, Level 3 invested assets comprised 5.9%5.0% of the Company’s total investment portfolio at fair value.
($ in thousands)   Fair Value Measurements at
  Carrying Fair Reporting Date Using
  Amount Value Level 1 Level 2 Level 3
March 31, 2020          
Financial Assets          
Investments          
Fixed maturity securities          
U.S. Government and federally
sponsored agency obligations:
          
Mortgage-backed securities $751,915
 $751,915
 $—
 $728,583
 $23,332
Other, including U.S. Treasury securities 468,673
 468,673
 18,557
 450,116
 —
Municipal bonds 1,769,931
 1,769,931
 —
 1,665,039
 104,892
Foreign government bonds 43,851
 43,851
 —
 43,851
 —
Corporate bonds 1,685,773
 1,685,773
 12,147
 1,561,933
 111,693
Other mortgage-backed securities 1,123,040
 1,123,040
 —
 1,005,845
 117,195
Total fixed maturity securities 5,843,183
 5,843,183
 30,704
 5,455,367
 357,112
Equity securities 87,033
 87,033
 42,106
 44,844
 83
Short-term investments 100,208
 100,208
 97,179
 3,029
 —
Other investments 18,147
 18,147
 —
 18,147
 —
Totals $6,048,571
 $6,048,571
 $169,989
 $5,521,387
 $357,195
Separate Account (variable annuity) assets (1)
 $1,954,201
 $1,954,201
 $1,954,201
 $—
 $—
Financial Liabilities          
Investment contract and policy reserves,
 embedded derivatives
 $339
 $339
 $—
 $339
 $—
Other policyholder funds, embedded derivatives $87,506
 $87,506
 $—
 $—
 $87,506
           
December 31, 2019          
Financial Assets          
Investments          
Fixed maturity securities          
U.S. Government and federally
sponsored agency obligations:
          
Mortgage-backed securities $724,319
 $724,319
 $—
 $711,004
 $13,315
Other, including U.S. Treasury securities 458,868
 458,868
 17,699
 441,169
 —
Municipal bonds 1,686,203
 1,686,203
 —
 1,641,912
 44,291
Foreign government bonds 45,370
 45,370
 —
 45,370
 —
Corporate bonds 1,581,424
 1,581,424
 14,470
 1,463,002
 103,952
Other mortgage-backed securities 1,295,492
 1,295,492
 —
 1,161,979
 133,513
Total fixed maturity securities 5,791,676
 5,791,676
 32,169
 5,464,436
 295,071
Equity securities 101,864
 101,864
 49,834
 51,923
 107
Short-term investments 172,667
 172,667
 172,667
 —
 —
Other investments 25,997
 25,997
 —
 25,997
 —
Totals $6,092,204
 $6,092,204
 $254,670
 $5,542,356
 $295,178
Separate Account (variable annuity) assets (1)
 $2,490,469
 $2,490,469
 $2,490,469
 $—
 $—
Financial Liabilities  
  
  
  
  
Investment contract and policy reserves,
 embedded derivatives
 $1,314
 $1,314
 $—
 $1,314
 $—
Other policyholder funds, embedded derivatives $93,733
 $93,733
 $—
 $—
 $93,733

($ in thousands) Fair Value Measurements at
 CarryingFairReporting Date Using
 AmountValueLevel 1Level 2Level 3
September 30, 2020
Financial Assets
Investments
Fixed maturity securities
U.S. Government and federally
sponsored agency obligations:
Mortgage-backed securities$702,862 $702,862 $0 $690,663 $12,199 
Other, including U.S. Treasury securities384,137 384,137 18,446 365,691 0 
Municipal bonds1,816,501 1,816,501 0 1,750,830 65,671 
Foreign government bonds44,787 44,787 0 44,787 0 
Corporate bonds1,983,483 1,983,483 14,076 1,848,222 121,185 
Other asset-backed securities1,236,788 1,236,788 0 1,108,189 128,599 
Total fixed maturity securities6,168,558 6,168,558 32,522 5,808,382 327,654 
Equity securities102,303 102,303 36,274 65,941 88 
Short-term investments254,309 254,309 250,206 4,103 0 
Other investments30,245 30,245 0 30,245 0 
Totals$6,555,415 $6,555,415 $319,002 $5,908,671 $327,742 
Separate Account (variable annuity) assets (1)
$2,488,528 $2,488,528 $2,488,528 $0 $0 
Financial Liabilities
Investment contract and policy reserves,
 embedded derivatives
$1,703 $1,703 $0 $1,703 $0 
Other policyholder funds, embedded derivatives$98,070 $98,070 $0 $0 $98,070 
December 31, 2019
Financial Assets
Investments
Fixed maturity securities
U.S. Government and federally
sponsored agency obligations:
Mortgage-backed securities$724,319 $724,319 $0 $711,004 $13,315 
Other, including U.S. Treasury securities458,868 458,868 17,699 441,169 0 
Municipal bonds1,686,203 1,686,203 0 1,641,912 44,291 
Foreign government bonds45,370 45,370 0 45,370 0 
Corporate bonds1,581,424 1,581,424 14,470 1,463,002 103,952 
Other asset-backed securities1,295,492 1,295,492 0 1,161,979 133,513 
Total fixed maturity securities5,791,676 5,791,676 32,169 5,464,436 295,071 
Equity securities101,864 101,864 49,834 51,923 107 
Short-term investments172,667 172,667 172,667 0 0 
Other investments25,997 25,997 0 25,997 0 
Totals$6,092,204 $6,092,204 $254,670 $5,542,356 $295,178 
Separate Account (variable annuity) assets (1)
$2,490,469 $2,490,469 $2,490,469 $0 $0 
Financial Liabilities     
Investment contract and policy reserves,
 embedded derivatives
$1,314 $1,314 $0 $1,314 $0 
Other policyholder funds, embedded derivatives$93,733 $93,733 $0 $0 $93,733 
(1)    Separate Account (variable annuity) liabilities are equal to the estimated fair value of the Separate Account (variable annuity) assets.



Horace Mann Educators Corporation16Quarterly Report on Form 10-Q



NOTE 3 - Fair Value of Financial Instruments (continued)

Changes in Level 3 Fair Value Measurements
The reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) was as follows:
($ in thousands)Financial Assets
Financial
Liabilities (1)
Municipal
Bonds		Corporate
Bonds
Other
Mortgage-
Backed
Securities(2)
Total
Fixed
Maturity
Securities		Equity
Securities		Total
Beginning balance, July 1, 2020$73,171 $126,292 $200,146 $399,609 $115 $399,724 $93,619 
Transfers into Level 3 (3)
6,209 6,798 8,663 21,670 0 21,670 0 
Transfers out of Level 3 (3)
(16,708)(12,511)(70,950)(100,169)0 (100,169)0 
Total gains or losses
Net investment gains (losses)
 included in net income related
 to financial assets
0 0 (238)(238)(27)(265)— 
Net investment (gains) losses
 included in net income related
 to financial liabilities
— — — — — — 4,406 
Net unrealized investment gains
(losses) included in OCI
3,150 551 6,321 10,022 0 10,022 0 
Purchases0 0 0 0 0 0 0 
Issuances0 0 0 0 0 0 1,951 
Sales0 0 0 0 0 0 0 
Settlements0 0 0 0 0 0 0 
Paydowns, maturities and distributions(151)55 (3,144)(3,240)0 (3,240)(1,906)
Ending balance, September 30, 2020$65,671 $121,185 $140,798 $327,654 $88 $327,742 $98,070 
Beginning balance, January 1, 2020$44,291 $103,952 $146,828 $295,071 $107 $295,178 $93,733 
Transfers into Level 3 (3)
80,686 39,601 95,377 215,664 0 215,664 0 
Transfers out of Level 3 (3)
(62,625)(26,699)(77,335)(166,659)0 (166,659)0 
Total gains or losses
Net investment gains (losses)
 included in net income related
 to financial assets
0 0 (238)(238)(19)(257)— 
Net investment (gains) losses
 included in net income related
 to financial liabilities
— — — — — — 5,330 
Net unrealized investment gains
(losses) included in OCI
3,962 378 (14,780)(10,440)0 (10,440)0 
Purchases0 6,875 1,890 8,765 0 8,765 0 
Issuances0 0 0 0 0 0 5,818 
Sales0 0 0 0 0 0 0 
Settlements0 0 0 0 0 0 0 
Paydowns, maturities and distributions(643)(2,922)(10,944)(14,509)0 (14,509)(6,811)
Ending balance, September 30, 2020$65,671 $121,185 $140,798 $327,654 $88 $327,742 $98,070 
($ in thousands) Financial Assets 
Financial
Liabilities(1)
  
Municipal
Bonds
 
Corporate
Bonds
 
Other
Mortgage-
Backed
Securities(2)
 
Total
Fixed
Maturity
Securities
 
Equity
Securities
 Total  
Beginning balance, January 1, 2020 $44,291
 $103,952
 $146,828
 $295,071
 $107
 $295,178
 $93,733
Transfers into Level 3 (3)
 63,751
 18,833
 22,475
 105,059
 —
 105,059
 —
Transfers out of Level 3 (3)
 —
 (10,022) (2,947) (12,969) —
 (12,969) —
Total gains or losses              
Net investment gains (losses)
 included in net income related
 to financial assets
 —
 —
 —
 —
 (24) (24) —
Net realized (gains) losses
 included in net income related
 to financial liabilities
 —
 —
 —
 —
 —
 —
 (5,042)
Net unrealized investment gains
(losses) included in OCI
 (3,026) (5,481) (24,362) (32,869) —
 (32,869) —
Purchases —
 6,875
 1,890
 8,765
 —
 8,765
 —
Issuances —
 —
 —
 —
 —
 —
 1,354
Sales —
 —
 —
 —
 —
 —
 —
Settlements —
 —
 —
 —
 —
 —
 —
Paydowns, maturities and distributions (124) (2,464) (3,357) (5,945) —
 (5,945) (2,539)
Ending balance, March 31, 2020 $104,892
 $111,693
 $140,527
 $357,112
 $83
 $357,195
 $87,506
               
Beginning balance, January 1, 2019 $47,531
 $80,742
 $120,211
 $248,484
 $5
 $248,489
 $78,700
Transfers into Level 3 (3)
 —
 3,074
 21,934
 25,008
 —
 25,008
 —
Transfers out of Level 3 (3)
 —
 —
 —
 —
 —
 —
 —
Total gains or losses              
Net investment gains (losses)
 included in net income related
 to financial assets
 —
 —
 —
 —
 —
 —
 —
Net realized (gains) losses
 included in net income related
 to financial liabilities
 —
 —
 —
 —
 —
 —
 4,334
Net unrealized investment gains
(losses) included in OCI
 344
 2,549
 (152) 2,741
 —
 2,741
 —
Purchases —
 —
 —
 —
 —
 —
 —
Issuances —
 —
 —
 —
 —
 —
 3,018
Sales —
 —
 —
 —
 —
 —
 —
Settlements —
 —
 —
 —
 —
 —
 —
Paydowns, maturities and distributions (119) (3,883) (6,203) (10,205) —
 (10,205) (1,423)
Ending balance, March 31, 2019 $47,756
 $82,482
 $135,790
 $266,028
 $5
 $266,033
 $84,629
(1)
Represents embedded derivatives, all related to the Company's fixed indexed annuity products, reported in Other policyholder funds in the Company's Consolidated Balance Sheets.
(2)
Includes U.S. Government and federally sponsored agency obligations for mortgage-backed securities and other mortgage-backed securities.
(3)
Transfers into and out of Level 3 during the three months ended March 31, 2020 and 2019Represents embedded derivatives, all related to the Company's fixed indexed annuity products, reported in Other policyholder funds in the Company's Consolidated Balance Sheets.
(2)Includes U.S. Government and federally sponsored agency obligations for mortgage-backed securities and other mortgage-backed securities.
(3)Transfers into and out of Level 3 during the three and nine months ended September 30, 2020 were attributable to changes in the availability of observable market information for individual fixed maturity securities. The Company's policy is to recognize transfers into and transfers out of the levels as having occurred at the end of the reporting period in which the transfers were determined.

For the three months ended March 31, 2020 and March 31, 2019, the Company had 0 net losses on Level 3 securities. For the three months ended March 31, 2020, net investment gains of $5.0 million were included in earnings that were attributable to the changes in the fair value of Level 3 liabilities (embedded derivatives) still held; for the three months ended March 31, 2019, the respective net investment losses were $4.3 million.

Horace Mann Educators Corporation17Quarterly Report on Form 10-Q



NOTE 3 - Fair Value of Financial Instruments (continued)
($ in thousands)Financial Assets
Financial
Liabilities (1)
Municipal
Bonds		Corporate
Bonds
Other
Mortgage-
Backed
Securities (2)
Total
Fixed
Maturity
Securities		Equity
Securities		Total
Beginning balance, July 1, 2019$46,984 $79,222 $128,438 $254,644 $69 $254,713 $85,961 
Transfers into Level 3 (3)
0 18,916 21,004 39,920 1 39,921 0 
Transfers out of Level 3 (3)
0 (2,822)(449)(3,271)0 (3,271)0 
Total gains or losses
Net investment gains (losses)
 included in net income related
 to financial assets
0 0 0 0 46 46 — 
Net investment (gains) losses
 included in net income related
 to financial liabilities
— — — — — — 3,661 
Net unrealized investment gains
 (losses) included in OCI
842 1,744 397 2,983 0 2,983 0 
Purchases0 0 0 0 0 0 0 
Issuances0 0 0 0 0 0 2,033 
Sales0 0 0 0 0 0 0 
Settlements0 0 0 0 0 0 0 
Paydowns, maturities and distributions(121)(387)(2,685)(3,193)0 (3,193)(2,557)
Ending balance, September 30, 2019$47,705 $96,673 $146,705 $291,083 $116 $291,199 $89,098 
Beginning balance, January 1, 2019$47,531 $80,742 $120,211 $248,484 $5 $248,489 $78,700 
Transfers into Level 3 (3)
0 24,798 42,938 67,736 65 67,801 0 
Transfers out of Level 3 (3)
0 (7,698)(449)(8,147)0 (8,147)0 
Total gains or losses
Net investment gains (losses)
 included in net income related
 to financial assets
0 0 0 0 46 46 — 
Net investment (gains) losses
 included in net income related
 to financial liabilities
— — — — — — 8,366 
Net unrealized investment gains
 (losses) included in OCI
649 6,254 3,052 9,955 0 9,955 0 
Purchases0 1,566 0 1,566 0 1,566 0 
Issuances0 0 0 0 0 0 7,482 
Sales0 0 (607)(607)0 (607)0 
Settlements0 0 0 0 0 0 0 
Paydowns, maturities and distributions(475)(8,989)(18,440)(27,904)0 (27,904)(5,450)
Ending balance, September 30, 2019$47,705 $96,673 $146,705 $291,083 $116 $291,199 $89,098 
(1)    Represents embedded derivatives, all related to the Company's fixed indexed annuity products, reported in Other policyholder funds in the Company's Consolidated Balance Sheets.
(2)    Includes U.S. Government and federally sponsored agency obligations for mortgage-backed securities and other mortgage-backed securities.
(3)    Transfers into and out of Level 3 during the three and nine months ended September 30, 2019 were attributable to changes in the availability of observable market information for individual fixed maturity securities. The Company's policy is to recognize transfers into and out of the levels as having occurred at the end of the reporting period in which the transfers were determined.

For the nine months ended September 30, 2020 and September 30, 2019, the Company had $0.3 million and 0 net investment losses on Level 3 financial assets, respectively. For the three and nine months ended September 30, 2020, net investment losses of $4.4 million and $5.3 million were included in net income that were attributable to changes in the fair value of Level 3 financial liabilities; for the three and nine months ended September 30, 2019, the respective net investment losses were $3.7 million and $8.4 million.
Horace Mann Educators Corporation18Quarterly Report on Form 10-Q


NOTE 3 - Fair Value of Financial Instruments (continued)
Quantitative Information about Level 3 Fair Value Measurements
The following table provides quantitative information about the significant unobservable inputs for recurring fair value measurements categorized within Level 3.
($ in thousands)
Financial
Assets
 Fair Value at March 31, 2020 Valuation Technique(s) Unobservable Inputs 
Range
(Weighted Average)
and Single Point Best Estimate (1)
Municipal bonds $104,892
 discounted cash flow 
I spread (2)
 578 bps
Corporate bonds 111,693
 discounted cash flow 
N spread (3)
 762 bps
    discounted cash flow 
T spread (4)
 378 bps
    discounted cash flow 
I spread (2)
 495 bps
    market comparable 
EV / TTM EBITDA (x) (5)
 5.11x
Other mortgage-backed securities 117,195
 discounted cash flow constant prepayment rate 20.0%
    vendor price haircut 3.0%
    market comparable 
EV / TTM EBITDA (x) (5)
 5.11x
    discounted cash flow 
N spread (3)
 732 bps
    discounted cash flow 
PDI interest margin (6)
 7.13%
    discounted cash flow 
SBL interest margin (7)
 4.50%
Government mortgage-backed securities 23,332
 vendor price haircut 3.0%
    discounted cash flow 
N spread (3)
 109 bps
    discounted cash flow constant prepayment yield 100 bps
    discounted cash flow constant default rate 0
Equity securities 83
 Black Scholes equity value low - $43.27; high - $44.53
Financial
Liabilities
 Fair Value at March 31, 2020 Valuation Technique(s) Unobservable Inputs 
Range
(Weighted Average)
and Single Point Best Estimate (1)
Derivatives
embedded in
FIA products
 $87,506
 discounted cash flow lapse rate 5.25%
      
mortality multiplier (8)
 61.00%
      option budget 1.50% - 2.50%
      
non-performance adjustment (9)
 5.00%
($ in thousands)
Financial
Assets		Fair Value at
September 30, 2020		Valuation Technique(s)Unobservable Inputs
Range
(Weighted Average)
and Single Point Best Estimate (1)
Municipal bonds$65,671 discounted cash flow
I spread (2)
When a range of unobservable inputs is not readily available, the Company uses a single point best estimate.578 bps
Corporate bonds121,185 discounted cash flow
N spread (3)
320 - 818 bps
market comparableoption adjusted spread12.54%
(2)Other asset-backed securities
"I spread" is the interpolated weighted average life point on the "on the run" (OTR) point of the curve.128,599 vendor pricehaircut3.00% - 5.00%
(3)
"N spread" is the interpolated weighted average life point on the swap curve.discounted cash flowconstant prepayment rate20.00%
discounted cash flow
T spread (4)
"T spread" is a specific point on the OTR curve.235 - 800 bps
discounted cash flow
PDI interest margin (5)
This represents the enterprise value (EV) for trailing twelve months (TTM) of EBITDA plus multiplier.7.13%
discounted cash flow
SBL interest margin (6)
"PDI" stands for private debt investment.4.50%
Government mortgage-backed securities12,199 vendor pricehaircut3.00% - 5.00%
(7)Equity securities
"SBL" stands for broadly syndicated loans.
88 
(8)Black Scholes
Mortality multiplier is applied to the Annuity 2000 table.equity valuelow - $43.27; high - $44.53
(9)
($ in thousands)
Financial
Liabilities		Fair Value at
September 30, 2020		Valuation Technique(s)Unobservable Inputs
Range
(Weighted Average)
and Single Point Best Estimate (1)
Derivatives
embedded in
fixed indexed annuity products		$98,070 discounted cash flowlapse rate5.25%
mortality multiplier (7)
61.00%
      option budget 1.00% - 2.50%
non-performance adjustment (8)
5.00%
(1)    When a range of unobservable inputs is not readily available, the Company uses a single point best estimate.
(2)    "I spread" is the interpolated weighted average life point on the "on the run" (OTR) point of the curve.
(3)    "N spread" is the interpolated weighted average life point on the swap curve.
(4)    "T spread" is a specific point on the OTR curve.
(5)    "PDI" stands for private debt investment.
(6)    "SBL" stands for broadly syndicated loans.
(7)    Mortality multiplier is applied to the Annuity 2000 table.
(8)    Determined as a percentage of a risk-free rate.

Determined as a percentage of a risk-free rate.

The valuation techniques and significant unobservable inputs used in the fair value measurement for financial assets and liabilities classified as Level 3 are subject to the control processes as described in Part II - Item 8, Note 4 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. Generally, valuation techniques for fixed maturity securities include spread pricing, matrix pricing and discounted cash flow methodologies; include inputs such as quoted prices for identical or similar securities that are less liquid; and are based on lower levels of trading activity than securities classified as Level 2. The valuation techniques and significant unobservable inputs used in the fair value measurement for equity securities classified as Level 3 use similar valuation techniques and significant unobservable inputs as those used for fixed maturity securities.

Horace Mann Educators Corporation1819Quarterly Report on Form 10-Q



NOTE 3 - Fair Value of Financial Instruments (continued)

The sensitivity of the estimated fair values to changes in the significant unobservable inputs for fixed maturity and equity securities included in Level 3 include: benchmark yield, liquidity premium, estimated cash flows, prepayment and default speeds, spreads, weighted average life, and credit rating. Significant spread widening in isolation will adversely impact the overall valuation, while significant tightening will lead to substantial valuation increases. Significant increases (decreases) in illiquidity premiums in isolation will result in substantially lower (higher) valuations. Significant increases (decreases) in expected default rates in isolation will result in substantially lower (higher) valuations.
Financial Instruments Not Carried at Fair Value; Disclosure Required
The Company has various other financial assets and financial liabilities used in the normal course of business that are not carried at fair value, but for which fair value disclosure is required. These financial assets and financial liabilities are further described in Part II - Item 8, Note 4 in the Company's Annual Report on Form 10-K for the year ended December 31, 2019. The following table presents the carrying value, fair value and fair value hierarchy of these financial assets and financial liabilities.
($ in thousands)   Fair Value Measurements at
  Carrying Fair Reporting Date Using
  Amount Value Level 1 Level 2 Level 3
March 31, 2020          
Financial Assets          
Investments          
Other investments $163,360
 $167,127
 $—
 $—
 $167,127
Deposit asset on reinsurance 2,356,253
 2,421,012
 —
 —
 2,421,012
Financial Liabilities          
Investment contract and policy reserves,
fixed annuity contracts
 4,708,953
 4,618,673
 —
 —
 4,618,673
Investment contract and policy reserves,
account values on life contracts
 94,784
 99,601
 —
 —
 99,601
Other policyholder funds 628,812
 628,812
 —
 570,806
 58,006
Short-term debt 135,000
 135,000
 —
 —
 135,000
Long-term debt 298,098
 313,516
 —
 313,516
 —
           
December 31, 2019          
Financial Assets          
Investments          
Other investments $163,312
 $167,185
 $—
 $—
 $167,185
Deposit asset on reinsurance 2,346,166
 2,634,012
 —
 —
 2,634,012
Financial Liabilities  
  
  
  
  
Investment contract and policy reserves,
fixed annuity contracts
 4,675,774
 4,609,880
 —
 —
 4,609,880
Investment contract and policy reserves,
account values on life contracts		 93,465
 98,332
 —
 —
 98,332
Other policyholder funds 553,550
 553,550
 —
 495,812
 57,738
Short-term debt 135,000
 135,000
 —
 —
 135,000
Long-term debt 298,025
 322,678
 —
 322,678
 —


($ in thousands)Fair Value Measurements at
CarryingFairReporting Date Using
AmountValueLevel 1Level 2Level 3
September 30, 2020
Financial Assets
Investments
Other investments$168,500 $172,303 $0 $0 $172,303 
Deposit asset on reinsurance2,402,539 2,925,672 0 0 2,925,672 
Financial Liabilities
Investment contract and policy reserves,
fixed annuity contracts
4,812,911 4,720,941 0 0 4,720,941 
Investment contract and policy reserves,
account values on life contracts
97,522 102,290 0 0 102,290 
Other policyholder funds646,424 646,424 0 590,687 55,737 
Short-term debt135,000 135,000 0 0 135,000 
Long-term debt302,247 331,829 0 331,829 0 
December 31, 2019
Financial Assets
Investments
Other investments$163,312 $167,185 $0 $0 $167,185 
Deposit asset on reinsurance2,346,166 2,634,012 0 0 2,634,012 
Financial Liabilities     
Investment contract and policy reserves,
fixed annuity contracts
4,675,774 4,609,880 0 0 4,609,880 
Investment contract and policy reserves,
account values on life contracts
93,465 98,332 0 0 98,332 
Other policyholder funds553,550 553,550 0 495,812 57,738 
Short-term debt135,000 135,000 0 0 135,000 
Long-term debt298,025 322,678 0 322,678 0 
Horace Mann Educators Corporation1920Quarterly Report on Form 10-Q



NOTE 4 - Derivatives

The Company offers fixed indexed annuity (FIA) products, which are deferred fixed annuities that guarantee the return of principal to the contractholder and credit interest based on a percentage of the gain in a specified market index. The Company also offers indexed universal life (IUL) products which credit interest based on a percentage of the gain in a specified market index. When deposits are received for FIA and IUL contracts, a portion is used to purchase derivatives consisting of call options on the applicable market indices to fund the index credits due to FIA and IUL policyholders. For the Company, substantially all such call options are one-year options purchased to match the funding requirements of the underlying contracts. The call options are carried at fair value with changes in fair value included in Net investment gains (losses) in the Consolidated Statements of Operations.
The change in fair value of derivatives includes the gains or losses recognized at the expiration of the option term or early termination and the changes in fair value for open positions. Call options are not purchased to fund the index liabilities which may arise after the next deposit anniversary date. On the respective anniversary dates of the indexed deposits, the index used to determine the annual index credit is reset and new one-year call options are purchased to fund the next annual index credit. The cost of these purchases is managed through the terms of the FIA and IUL contracts, which permit changes to index return caps, participation rates and/or asset fees, subject to guaranteed minimums on each contract's anniversary date. By adjusting the index return caps, participation rates or asset fees, crediting rates generally can be managed except in cases where the contractual features would prevent further modifications.
The future annual index credits on FIA are accounted for as a "series of embedded derivatives" over the expected life of the applicable contract with a corresponding reserve recorded. For IUL, the embedded derivative represents a single year liability for the index return.
The Company carries all derivatives at fair value in the Consolidated Balance Sheets. The Company elected to not use hedge accounting for derivative transactions related to the FIA and IUL products. As a result, the Company recognizes the purchased call options and the embedded derivatives related to the provision of a contingent return at fair value, with changes in the fair value recognized immediately as Net investment gains (losses) in the Consolidated Statements of Operations. The fair values of derivatives, including derivatives embedded in FIA and IUL contracts, are presented in the Consolidated Balance Sheets as follows:
($ in thousands)September 30, 2020December 31, 2019
Assets
Derivatives, included in Short-term and other investments$10,793 $13,239 
Liabilities
FIA - embedded derivatives, included in Other policyholder funds98,070 93,733 
IUL - embedded derivatives, included in
Investment contract and policy reserves		1,703 1,314 
($ in thousands) March 31, 2020 December 31, 2019
Assets    
Derivatives, included in Short-term and other investments $2,622
 $13,239
     
Liabilities    
FIA - embedded derivatives, included in Other policyholder funds 87,506
 93,733
IUL - embedded derivatives, included in
Investment contract and policy reserves
 339
 1,314


In general, the change in the fair value of the embedded derivatives related to FIA will not correspond to the change in fair value of the purchased call options because the purchased call options are one-year options while the options valued in the embedded derivatives represent the rights of the policyholder to receive index credits over the entire period the FIA contracts are expected to be in force, which typically exceeds 10 years. The changes in fair value of derivatives for FIA and IUL included in the Consolidated Statements of Operations were as follows:
($ in thousands)Three Months Ended
September 30,		Nine Months Ended
September 30,
 2020201920202019
Change in fair value of derivatives: (1)
Net investment gains (losses)$2,666 $(149)$(5,124)$5,280 
Change in fair value of embedded derivatives:
Net investment gains (losses)(5,118)(3,691)(5,438)(8,952)
($ in thousands) Three Months Ended
March 31,
  2020 2019
Change in fair value of derivatives:(1)
    
Net investment gains (losses) $(11,000) $4,054
     
Change in fair value of embedded derivatives:    
Net investment gains (losses) 6,157
 (4,745)
(1)(1)Includes gains or losses recognized at the expiration of the option term or early termination and the changes in fair value for open options.
Includes gains or losses recognized at the expiration of the option term or early termination and the changes in fair value for open options.


Horace Mann Educators Corporation2021Quarterly Report on Form 10-Q



NOTE 4 - Derivatives (continued)

The Company's strategy attempts to mitigate potential risk of loss under these agreements through a regular monitoring process, which evaluates the program's effectiveness. The Company is exposed to risk of loss in the event of nonperformance by the counterparties and, accordingly, option contracts are purchased from multiple counterparties, which are evaluated for creditworthiness prior to purchase of the contracts. All of these options have been purchased from nationally recognized financial institutions with a Standard and Poor's Global Inc. (S&P)/Moody's Investors Service, Inc. (Moody's) long-term credit rating of "BBB+/A3" or higher at the time of purchase and the maximum credit exposure to any single counterparty is subject to concentration limits. The Company also obtains credit support agreements that allow it to request the counterparty to provide collateral when the fair value of the exposure to the counterparty exceeds specified amounts.
The notional amount and fair value of call options by counterparty and each counterparty's long-term credit ratings were as follows:
($ in thousands)September 30, 2020December 31, 2019
Credit RatingNotionalFairNotionalFair
CounterpartyS&PMoody'sAmountValueAmountValue
Bank of America, N.A.A+Aa2$198,100 $9,135 $174,900 $8,523 
Barclays Bank PLCAA198,900 1,658 115,300 3,347 
Citigroup Inc.BBB+A30 0 0 0 
Credit Suisse InternationalA+A10 0 0 0 
Societe GeneraleAA10 0 27,800 1,369 
Total$297,000 $10,793 $318,000 $13,239 
($ in thousands) March 31, 2020 December 31, 2019
  Credit Rating Notional Fair Notional Fair
Counterparty S&P Moody's Amount Value Amount Value
Bank of America, N.A. A+ Aa2 $169,100
 $1,569
 $174,900
 $8,523
Barclays Bank PLC A A1 132,400
 867
 115,300
 3,347
Citigroup Inc. BBB+ A3 —
 —
 —
 —
Credit Suisse International A+ A1 —
 —
 —
 —
Societe Generale A A1 18,400
 186
 27,800
 1,369
Total     $319,900
 $2,622
 $318,000
 $13,239


As of March 31,September 30, 2020 and December 31, 2019, the Company held $2.7$9.9 million and $14.3 million, respectively, of cash and financial instruments received from counterparties for derivative collateral, which is included in Other liabilities on the Consolidated Balance Sheets. This derivative collateral limits the Company’s maximum amount of economic loss due to credit risk that would be incurred if parties to the call options failed completely to perform according to the terms of the contracts to $0.3 million per counterparty.
NOTE 5 - Deposit Asset on Reinsurance
In the second quarter of 2019, the Company reinsured a $2.9 billion block of in force fixed and variable annuity business with a minimum crediting rate of 4.5%. This represented approximately 50% of the Company’s in force fixed annuity account balances. The arrangement contains investment guidelines and a trust to help meet the Company’s risk management objectives.
The annuity reinsurance transaction was effective April 1, 2019. Under the agreement, approximately $2.2 billion of fixed annuity reserves were reinsured on a coinsurance basis for consideration of approximately $2.3 billion which resulted in recognition of an after tax realized investment gain of $106.9 million. The separate account assets and liabilities of approximately $0.7 billion were reinsured on a modified coinsurance basis and thus, remain on the Company's consolidated financial statements, but the related results of operations are fully reinsured.
The Company determined that the reinsurance agreement does not expose the reinsurer to a reasonable possibility of a significant loss from insurance risk. Therefore, 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. As amounts are received or paid, 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 in the Consolidated Statements of Operations.

Horace Mann Educators Corporation2122Quarterly Report on Form 10-Q




NOTE 6 - Goodwill and Intangible Assets, net


The Company conducts impairment testing for goodwill and intangible assets at least annually, or more often if events, changes or circumstances indicate that the carrying amount may not be recoverable. See Part II - Item 8, Note 1 in the Company's Annual Report on Form 10-K for the year ended December 31, 2019 for further description of impairment testing.
There were no changes in the carrying amount of goodwill by reporting unit for the threenine months ended March 31,September 30, 2020. The carrying amount of goodwill by reporting unit as of March 31,September 30, 2020 was as follows:
($ in thousands)September 30, 2020
Property and Casualty$9,460 
Supplemental19,621 
Retirement10,087 
Life9,911 
Total$49,079 
($ in thousands) March 31, 2020
Property and Casualty $9,460
Supplemental 19,621
Retirement 10,087
Life 9,911
Total $49,079

As of March 31,September 30, 2020, the outstanding amounts of definite-lived intangible assets subject to amortization are attributable to the acquisitions of BCGBenefit Consultants Group, Inc. (BCG) and NTA during 2019. The acquisition of BCG resulted in initial recognition of definite-lived intangible assets subject to amortization in the amount of $14.1 million and the acquisition of NTA resulted in initial recognition of definite-lived intangible assets subject to amortization in the amount of $160.4 million. As of March 31,September 30, 2020 the outstanding amounts of definite-lived intangible assets subject to amortization were as follows:
($ in thousands) Weighted Average  
  Useful Life (in Years)  
At inception:    
Value of business acquired 30 $94,419
Value of distribution acquired 17 53,996
Value of agency relationships 14 16,981
Value of customer relationships 10 9,080
Total 23 174,476
Accumulated amortization:    
Value of business acquired   (5,545)
Value of distribution acquired   (2,699)
Value of agency relationships   (2,132)
Value of customer relationships   (2,100)
Total   (12,476)
Net intangible assets subject to amortization:   $162,000

($ in thousands)Weighted Average
Useful Life (in Years)
At inception:
Value of business acquired30$94,419 
Value of distribution acquired1753,996 
Value of agency relationships1416,981 
Value of customer relationships109,080 
Total23174,476 
Accumulated amortization:
Value of business acquired(9,113)
Value of distribution acquired(4,355)
Value of agency relationships(3,417)
Value of customer relationships(2,835)
Total(19,720)
Net intangible assets subject to amortization:$154,756 
In regards to the definite-lived intangible assets in the table above, the value of business acquired intangible asset represents the present value of the expected underwriting profit within policies that were in force on the date of acquisition. The value of distribution acquired intangible asset represents the present value of future business to be written by the existing agency force. The value of agency relationships intangible asset represents the present value of the commission overrides retained by NTA. The value of customer relationships intangible asset represents the present value of the expected profits from existing BCG customers in force at the date of acquisition. All of the aforementioned definite-lived intangible assets were valued using the income approach.

Horace Mann Educators Corporation2223Quarterly Report on Form 10-Q



NOTE 6 - Goodwill and Intangible Assets, net (continued)

Estimated future amortization of the Company's definite-lived intangible assets were as follows:
($ in thousands)  
Year Ending December 31,  
2020 (excluding the three months ended March 31, 2020) $10,802
2021 13,411
2022 12,433
2023 11,577
2024 10,805
Thereafter 102,972
Total $162,000

($ in thousands)
Year Ending December 31,
2020 (excluding the nine months ended September 30, 2020)$3,558 
202113,411 
202212,433 
202311,577 
202410,805 
Thereafter102,972 
Total$154,756 
The value of business acquired intangible asset is being amortized by product based on the present value of future premiums to be received. The value of distribution acquired intangible asset is being amortized on a straight-line basis. The value of agency relationships intangible asset is being amortized based on the present value of future premiums to be received. The value of customer relationships intangible asset is being amortized based on the present value of future profits to be received.
Indefinite-lived intangible assets (not subject to amortization) as of March 31,September 30, 2020 were as follows:
($ in thousands)  
Trade names $8,645
State licenses 2,886
Total $11,531

($ in thousands)
Trade names$8,645 
State licenses2,886 
Total$11,531 
The trade names intangible asset represents the present value of future savings accruing to NTA and BCG 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 that were valued using the cost approach.

Horace Mann Educators Corporation2324Quarterly Report on Form 10-Q




NOTE 7 - Unpaid Claims and Claim Expenses

The following table is a summary reconciliation of the beginning and ending Property and Casualty unpaid claims and claim expense reserves for the periods indicated. The table presents reserves on both a gross and net (after reinsurance) basis. The total net Property and Casualty insurance claims and claim expense incurred amounts are reflected in the Consolidated Statements of Operations. The end of the period gross reserve (before reinsurance) balances and the reinsurance recoverable balances are reflected on a gross basis in the Consolidated Balance Sheets.
($ in thousands)Three Months Ended
September 30,		Nine Months Ended
September 30,
2020201920202019
Property and Casualty  
Beginning gross reserves (1)
$388,491 $367,862 $386,976 $367,180 
Less: reinsurance recoverables116,083 77,345 120,506 89,725 
Net reserves, beginning of period (2)
272,408 290,517 266,470 277,455 
Incurred claims and claim expenses:  
Claims occurring in the current period125,622 122,470 340,243 375,648 
Decrease in estimated reserves for claims occurring
in prior periods (3)
(7,200)(3,500)(9,200)(7,500)
Total claims and claim expenses incurred (4)
118,422 118,970 331,043 368,148 
Claims and claim expense payments
for claims occurring during:
  
Current period91,008 101,499 195,891 230,968 
Prior periods19,280 29,747 121,080 136,394 
Total claims and claim expense payments110,288 131,246 316,971 367,362 
Net reserves, end of period (2)
280,542 278,241 280,542 278,241 
Plus: reinsurance recoverables114,773 76,526 114,773 76,526 
Ending gross reserves (1)
$395,315 $354,767 $395,315 $354,767 
($ in thousands) Three Months Ended
March 31,
  2020 2019
Property and Casualty  
  
Beginning gross reserves (1)
 $386,976
 $367,180
Less: reinsurance recoverables 120,506
 89,725
Net reserves, beginning of period (2)
 266,470
 277,455
Incurred claims and claim expenses:  
  
Claims occurring in the current period 105,454
 118,767
Decrease in estimated reserves for claims occurring
in prior periods (3)
 (1,000) (2,000)
Total claims and claim expenses incurred (4)
 104,454
 116,767
Claims and claim expense payments
for claims occurring during:
  
  
Current period 43,463
 45,714
Prior periods 64,258
 67,135
Total claims and claim expense payments 107,721
 112,849
Net reserves, end of period (2)
 263,203
 281,373
Plus: reinsurance recoverables 119,045
 78,328
Ending gross reserves (1)
 $382,248
 $359,701
(1)Unpaid claims and claim expenses as reported in the Consolidated Balance Sheets also include reserves for Supplemental, Life and Retirement of $59.2 million and $57.5 million as of September 30, 2020 and 2019, respectively, in addition to Property and Casualty reserves.
(1)
(2)Reserves net of anticipated reinsurance recoverables.
(3)Shows the amounts by which the Company decreased its reserves in each of the periods indicated for claims occurring in previous periods to reflect subsequent information on such claims and changes in their projected final settlement costs.
(4)Benefits, claims and settlement expenses as reported in the Consolidated Statements of Operations also include amounts for Supplemental, Life and Retirement of $33.0 million and $102.1 million for the three and nine months ended September 30, 2020, respectively, in addition to Property and Casualty amounts. Benefits, claims and settlement expenses for Supplemental, Life and Retirement were $35.2 million and$78.1 million for the three and nine months ended September 30, 2019, respectively.

Unpaid claims and claim expenses as reported in the Consolidated Balance Sheets also include reserves for Supplemental, Life and Retirement of $56.2 million and $33.8 million as of March 31, 2020 and 2019, respectively, in addition to Property and Casualty reserves.
(2)
Reserves net of anticipated reinsurance recoverables.
(3)
Shows the amounts by which the Company decreased its reserves in each of the periods indicated for claims occurring in previous periods to reflect subsequent information on such claims and changes in their projected final settlement costs.
(4)
Benefits, claims and settlement expenses as reported in the Consolidated Statements of Operations also include amounts for Supplemental, Life and Retirement of $34.2 million and $22.6 million for the three months ended March 31, 2020 and 2019, respectively, in addition to Property and Casualty amounts.

Net favorable development of total reserves for Property and Casualty claims occurring in prior years was $1.0$9.2 million and $2.0$7.5 million for the threenine months ended March 31,September 30, 2020 and 2019, respectively. The favorable development for the threenine months ended March 31,September 30, 2020 was the result of favorable loss trends in auto liabilityautomobile and homeowners loss emergence of $4.0 million for accident years 2019 and prior.prior and $5.2 million of subrogation received largely related to the 2018 Camp Fire in California. The favorable development for the threenine months ended March 31,September 30, 2019 was predominately the result of favorable loss trends in autoautomobile and homeowners loss emergence for accident years 2018 and prior.

Horace Mann Educators Corporation2425Quarterly Report on Form 10-Q



NOTE 8 - Reinsurance

The Company recognizes the cost of reinsurance premiums over the contract periods for such premiums in proportion to the insurance protection provided. Amounts recoverable from reinsurers for unpaid claims and claim settlement expenses, including estimated amounts for unsettled claims, claims incurred but not yet reported and policy benefits, are estimated in a manner consistent with the insurance liability associated with the policy. The effects of reinsurance on premiums written and contract deposits; premiums and contract charges earned; and benefits, claims and settlement expenses were as follows:
($ in thousands)Gross
Amount
Ceded to
Other
Companies (1)
Assumed
from Other
Companies		Net
Amount
Three months ended September 30, 2020    
Premiums written and contract deposits (2)
$368,577 $2,146 $2,422 $368,853 
Premiums and contract charges earned237,193 4,261 2,421 235,353 
Benefits, claims and settlement expenses59,401 (90,161)1,863 151,425 
Three months ended September 30, 2019    
Premiums written and contract deposits (2)
$374,598 $5,968 $2,586 $371,216 
Premiums and contract charges earned245,200 8,181 2,662 239,681 
Benefits, claims and settlement expenses154,718 2,310 1,783 154,191 
Nine months ended September 30, 2020
Premiums written and contract deposits (2)
$1,034,687 $14,835 $6,928 $1,026,780 
Premiums and contract charges earned710,998 20,945 6,996 697,049 
Benefits, claims and settlement expenses342,218 (85,770)5,107 433,095 
Nine months ended September 30, 2019
Premiums written and contract deposits (2)
$988,588 $17,844 $7,557 $978,301 
Premiums and contract charges earned671,871 22,158 7,849 657,562 
Benefits, claims and settlement expenses450,206 9,399 5,460 446,267 
($ in thousands) 
Gross
Amount
 
Ceded to
Other
Companies (1)
 
Assumed
from Other
Companies
 
Net
Amount
Three months ended March 31, 2020  
  
  
  
Premiums written and contract deposits (2)
 $333,731
 $6,310
 $1,337
 $328,758
Premiums and contract charges earned 243,170
 8,377
 1,472
 236,265
Benefits, claims and settlement expenses 139,532
 1,984
 1,112
 138,660
         
Three months ended March 31, 2019  
  
  
  
Premiums written and contract deposits (2)
 $299,093
 $5,848
 $2,149
 $295,394
Premiums and contract charges earned 213,256
 5,822
 2,351
 209,785
Benefits, claims and settlement expenses 142,052
 4,292
 1,624
 139,384

(1)    Excludes the annuity reinsurance transaction accounted for using the deposit method that is discussed in Note 5.
(2)    This measure is not based on accounting principles generally accepted in the United States of America (non-GAAP). An explanation of this non-GAAP measure is contained in the Glossary of Selected Terms included as an exhibit in the Company's reports filed with the SEC.
(1)
Excludes the annuity reinsurance agreement accounted for using the deposit method that is discussed in Note 5.
(2)
This measure is not based on accounting principles generally accepted in the United States of America (non-GAAP). An explanation of this non-GAAP measure is contained in the Glossary of Selected Terms included as an exhibit in the Company's reports filed with the SEC.
NOTE 9 - Commitments
Investment Commitments
From time to time, the Company has outstanding commitments to fund investments in limited partnership interests, commercial mortgage loans and bank loans. Such unfunded commitments were $389.9$484.9 million and $306.2 million at March 31,September 30, 2020 and December 31, 2019, respectively.


Horace Mann Educators Corporation2526Quarterly Report on Form 10-Q




NOTE 10 - Segment Information

The Company conducts and manages its business through 5 segments. See Note 1 for a description of the Company's reporting segments that changed effective in the third quarter of 2019. The 4 operating segments, representing the major lines of insurance business, are,are: Property and Casualty (primarily personal lines automobile and property insurance products), the newly created Supplemental (primarily heart, cancer, accident and limited short-term supplemental disability insurance coverages), Retirement (primarily tax-qualified fixed and variable annuities) and Life (life insurance). The Company does not allocate the impact of corporate-level transactions to these operating segments, consistent with the basis for management's evaluation of the results of those segments, but classifies those items in the fifth segment, Corporate and Other. In addition to ongoing transactions such as corporate debt service, net investment gains (losses) and certain public company expenses, such items also have included corporate debt retirement costs, when applicable. Summarized financial information for these segments is as follows:
($ in thousands)Three Months Ended
September 30,		Nine Months Ended
September 30,
2020201920202019
Insurance premiums and contract charges earned
Property and Casualty$166,070 $170,483 $488,756 $512,626 
Supplemental (1)
32,480 32,921 98,772 32,921 
Retirement7,389 6,624 21,486 22,133 
Life29,414 29,653 88,035 89,882 
Total$235,353 $239,681 $697,049 $657,562 
Net investment income
Property and Casualty$13,632 $10,726 $30,250 $33,587 
Supplemental (1)
4,321 3,691 11,876 3,691 
Retirement58,115 60,770 166,684 188,193 
Life18,244 18,453 49,432 54,829 
Corporate and Other(30)0 (142)(37)
Intersegment eliminations(564)(569)(1,697)(934)
Total$93,718 $93,071 $256,403 $279,329 
Net income (loss)
Property and Casualty$15,810 $14,194 $53,669 $34,347 
Supplemental (1)
10,546 6,943 30,562 6,943 
Retirement7,792 5,915 16,578 (6,979)
Life4,306 5,101 6,869 13,617 
Corporate and Other(1,980)(6,699)(22,154)103,514 
Total$36,474 $25,454 $85,524 $151,442 
($ in thousands) Three Months Ended
March 31,		($ in thousands)September 30, 2020December 31, 2019
 2020 2019
Insurance premiums and contract charges earned    
Property and Casualty $166,474
 $170,840
Supplemental 32,990
 N/A
Retirement 7,380
 8,578
Life 29,421
 30,367
Total $236,265
 $209,785
    
Net investment income    
AssetsAssets
Property and Casualty $10,293
 $10,218
Property and Casualty$1,354,685 $1,327,099 
Supplemental 3,520
 N/A
Supplemental828,760 747,602 
Retirement 53,525
 64,739
Retirement8,609,262 8,330,127 
Life 15,558
 18,052
Life2,108,067 1,964,993 
Corporate and Other (54) (23)Corporate and Other167,697 172,955 
Intersegment eliminations (567) (186)Intersegment eliminations(65,083)(64,072)
Total $82,275
 $92,800
Total$13,003,388 $12,478,704 
    
Net income (loss)    
Property and Casualty $26,570
 $15,052
Supplemental 10,537
 N/A
Retirement (947) 12,151
Life 641
 3,277
Corporate and Other (18,329) 1,686
Total $18,472
 $32,166

($ in thousands) March 31, 2020 December 31, 2019
Assets    
Property and Casualty $1,256,125
 $1,327,099
Supplemental 779,077
 747,602
Retirement 7,851,447
 8,330,127
Life 1,978,346
 1,964,993
Corporate and Other 180,866
 172,955
Intersegment eliminations (73,706) (64,072)
Total $11,972,155
 $12,478,704

(1)    
N/A - The acquisition of NTA closedAcquired on July 1, 2019. The nine month comparison is not meaningful.


Horace Mann Educators Corporation2627Quarterly Report on Form 10-Q



NOTE 11 - Accumulated Other Comprehensive Income (Loss)

Accumulated other comprehensive income (loss) (AOCI)AOCI represents the accumulated change in shareholders’ equity from transactions and other events and circumstances from non-shareholder sources. For the Company, AOCI includes the after tax change in net unrealized investment gains (losses) on fixed maturity securities and the after tax change in net funded status of benefit plans for the periods as shown in the Consolidated Statements of Changes in Shareholders’ Equity. The following table reconciles these components.
($ in thousands) 
Net Unrealized Investment
Gains (Losses)
on
Securities (1)(2)
 
Net Funded Status of
Benefit Plans (1)
 
Total (1)
($ in thousands)
Net Unrealized Investment
 Gains (Losses)
 on
Securities (1)(2)
Net Funded Status of
Benefit Plans (1)
Total (1)
Beginning balance, July 1, 2020Beginning balance, July 1, 2020$279,129 $(10,767)$268,362 
Other comprehensive income (loss) before reclassificationsOther comprehensive income (loss) before reclassifications54,312 0 54,312 
Amounts reclassified from AOCIAmounts reclassified from AOCI(5,244)0 (5,244)
Net current period other comprehensive income (loss)Net current period other comprehensive income (loss)49,068 0 49,068 
Ending balance, September 30, 2020Ending balance, September 30, 2020$328,197 $(10,767)$317,430 
Beginning balance, January 1, 2020 $230,448
 $(10,767) $219,681
Beginning balance, January 1, 2020$230,448 $(10,767)$219,681 
Other comprehensive income (loss) before reclassifications (104,530) —
 (104,530)Other comprehensive income (loss) before reclassifications97,311 0 97,311 
Amounts reclassified from AOCI 10,761
 —
 10,761
Amounts reclassified from AOCI438 0 438 
Net current period other comprehensive income (loss) (93,769) —
 (93,769)Net current period other comprehensive income (loss)97,749 0 97,749 
Ending balance, March 31, 2020 $136,679
 $(10,767) $125,912
      
Beginning balance, January 1, 2019 $96,941
 $(12,185) $84,756
Other comprehensive income (loss) before reclassifications 120,303
 —
 120,303
Amounts reclassified from AOCI (6,405) —
 (6,405)
Net current period other comprehensive income (loss) 113,898
 —
 113,898
Ending balance, March 31, 2019 $210,839
 $(12,185) $198,654
Ending balance, September 30, 2020Ending balance, September 30, 2020$328,197 $(10,767)$317,430 
(1)All amounts are net of tax.
(2)
(2)The pretax amounts reclassified from AOCI, $6.6 million and $(0.6) million, are included in Net investment gains (losses) and the related income tax expenses, $1.4 million and $(0.1) million, are included in income tax expense in the Consolidated Statements of Operations for the three and nine month periods ended September 30, 2020, respectively.
($ in thousands)
Net Unrealized Investment
Gains (Losses)
on
Securities (1)(2)
Net Funded Status of
Benefit Plans (1)
Total (1)
Beginning balance, July 1, 2019$203,077 $(12,185)$190,892 
Other comprehensive income (loss) before reclassifications64,577 0 64,577 
Amounts reclassified from AOCI(1,273)0 (1,273)
Net current period other comprehensive income (loss)63,304 0 63,304 
Ending balance, September 30, 2019$266,381 $(12,185)$254,196 
Beginning balance, January 1, 2019$96,941 $(12,185)$84,756 
Other comprehensive income (loss) before reclassifications292,043 0 292,043 
Amounts reclassified from AOCI(122,603)0 (122,603)
Net current period other comprehensive income (loss)169,440 0 169,440 
Ending balance, September 30, 2019$266,381 $(12,185)$254,196 
(1)    All amounts are net of tax.
(2)    The pretax amounts reclassified from AOCI, $1.6 million and $155.2 million, are included in Net investment gains (losses) and the related income tax expenses, $0.3 million and $32.6 million, are included in Income tax expense in the Consolidated Statements of Operations for the three and nine month periods ended September 30, 2019, respectively.

The pretax amounts reclassified from AOCI, $(13.6) million and $8.1 million, are included in Net investment gains (losses) and the related income tax expenses, $(2.9) million and $1.7 million, are included in Income tax expense in the Consolidated Statements of Operations for the three month periods ended March 31, 2020 and 2019, respectively.

Comparative information for elements that are not required to be reclassified in their entirety to net income in the same reporting period is disclosed in Note 2.
Horace Mann Educators Corporation28Quarterly Report on Form 10-Q


NOTE 12 - Supplemental Disclosure of Consolidated Cash and Cash Flow Information
($ in thousands)September 30,December 31,
20202019
Cash$64,778 $25,206 
Restricted cash697 302 
Total cash and restricted cash shown in the Consolidated Balance Sheets$65,475 $25,508 
($ in thousands) Three Months Ended March 31,
  2020 2019
Cash $40,655
 $7,281
Restricted cash 592
 —
Total cash and restricted cash shown in the Consolidated Balance Sheets and Consolidated Statements of Cash Flows $41,247
 $7,281
     
Cash paid (recovered) during the three months for:    
Interest $1,414
 $399
Income taxes (718) (125)
($ in thousands)Nine Months Ended
September 30,
20202019
Cash paid during the nine months for:
Interest$9,258 $6,948 
Income taxes18,456 12,696 

Non-cash investing activities include $2.1 billion of investments transferred to a reinsurer as consideration paid during the second quarter of 2019 in connection with the Company's reinsurance of a $2.9 billion block of in force fixed and variable annuity business. See Note 5 for further information.
Non-cash investing activities in respect to modifications or exchanges of fixed maturity securities as well as paid-in-kind activity for policy loans were insignificant for the three and nine months ended March 31,September 30, 2020 and 2019, respectively.


Horace Mann Educators Corporation27Quarterly Report on Form 10-Q



ITEM 2. I Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)
($ in millions, except per share data)

Measures within this MD&A that are not based on accounting principles generally accepted in the United States of America (non-GAAP) are marked with an asterisk (*) the first time they are presented within this Part I - Item 2. An explanation of these measures is contained in the Glossary of Selected Terms included as Exhibit 99.1 to this Quarterly Report on Form 10-Q and are reconciled to the most directly comparable measures prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) in the Appendix to the Company's FirstThird Quarter 2020 Investor Supplement.
Increases or decreases in thethis MD&A that are not meaningful are marked "N.M.".
Forward-looking Information
Statements made in the following discussion that are not historical in nature are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995 and are subject to known and unknown risks, uncertainties and other factors. Horace Mann Educators Corporation (referred to in Part I - Items 2 - 4 and Part II of this report as "we", "our", "us", the "Company", "Horace Mann" or "HMEC)"HMEC") is an insurance holding company. We are not under any obligation to (and expressly disclaimsdisclaim any such obligation to) update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. It is important to note that our actual results could differ materially from those projected in forward-looking statements due to a number of risks and uncertainties inherent in our business. See Part II - Item 1A in this Quarterly Report on Form 10-Q as well as in Part I - Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2019 for additional information regarding risks and uncertainties.
Horace Mann Educators Corporation29Quarterly Report on Form 10-Q


Introduction
The purpose of this MD&A is to provide an understanding of our consolidated results of operations and financial condition. This MD&A should be read in conjunction with the Consolidated Financial Statements and Notes thereto contained in Part I - Item 1 of this report.
HMEC is an insurance holding company, and through its subsidiaries, we marketit markets and underwriteunderwrites personal lines of property and casualty insurance products, supplemental insurance products, retirement products, including annuities, and life insurance products in the United States of America (U.S.). We market our products primarily to K-12 teachers, administrators and other employees of public schools and their families.
TheThis MD&A covers our consolidated financial highlights followed by consolidated results of operations, an outlook for future performance, details about critical accounting estimates, results of operations by segment and investment results.
Coronavirus Disease (COVID-19) Considerations
Beginning in March 2020, the global pandemic associated with the novel coronavirus COVID-19 and related economic conditions began to createintroduced unprecedented challenges for our country. Those challenges are ongoing. We relied on our previously developed Corporate Pandemic Plan to address preparation, prevention and response measures specific to COVID-19 while allowing flexibility to quickly react to evolving circumstances and implement varying actions accordingly. Management
As discussed in the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2020, we successfully transitioned the organization, through our employees and agents, from one that relied on in-person experience to one that has become primarily virtual. While the current environment continues to evaluatepresent challenges, our operations are being conducted successfully and updatewe continue to support our responses as necessaryagents and serve our customers in an effective manner.
As of the end of September 2020, approximately 20% of our employees have returned to reactwork in one of our office locations. The majority of our employees continue to changing circumstances.
Horace Mann is focused on continuingwork remotely. The return to service policyholders with minimal business disruptions while keeping employees, educator customers and agents safeoffice plans are being guided by leveraging remote work capabilitiesdata from the Center for employees that allow day-to-day operationsDisease Control. We are limiting office occupancy to continue smoothly. Steps takenno more than 50% of pre-COVID-19 levels to address and minimize the impacts of COVID-19 include, but are not limited to:


Horace Mann Educators Corporation28Quarterly Report on Form 10-Q



Employees:
Deployingenable effective social distancing for some time. We have also implemented other prevention strategies to reduce the potential transmission of COVID-19, such as requiring face masks in common office areas.
Taking into account the workplace, in accordance with recommended guidance from the CDC.
Transitioning employees tovirtual work remotely in a phased approach to ensure the capability of our systems and networks to support and sustain increased remote activity.
Adhering to social distancing requirements and implementing daily employee health screening questionnaires for essential employees continuing to work in the office locations.
Implementingenvironment, we have implemented additional cybersecurity measures including increasing security and network monitoring to proactively identify and prevent potential security threats and vulnerabilities.
Identifying We also are identifying and assessing critical third-party vendors and ensuring their ability to continue to perform as anticipated.
Preparing a phased return to work strategy based on the guidance of the CDC and scientific experts.
Currently, more than 95% of our work force, including virtually 100% of our claims and customer service staff, is working remotely. The remaining 5% perform critical roles required to be carried out in an office location, such as check coding and processing, mail sorting, building maintenance, and limited management to provide on-site supervision.
Educator Customers:
Horace Mann markets primarily to K-12 teachers, administrators and other employees of public schools and their families and we estimate that 80% of our customer base are educators or other individuals employed by the public school system.systems. In our experience, educators generally remain employed during periods of economic disruption and that remains truedisruption. As the country entered the 2020-2021 school year facing continued pandemic-related challenges, educators have largely remained employed, although they may be even busier than before, as many are being asked to devote time to both in-person teaching as well as remote learning to minimize the spread of COVID-19 in this environment as educators are still teaching, albeit remotely. Steps taken to support our educator customers include:
Developing a communication strategy to provide information on how customers could reach Horace Mann or their Horace Mann agent and how they could access policy and account information online.
Providing a 15% credit on two months' automobile premium because our customers are driving less.
Offering a payment grace period through June on auto, property, supplemental and life insurance payments.
Extending personal automobile coverage to those delivering food, medicine and other essential goods.
Agents:communities.
We also are supportingcontinue to work with our network of over 750 exclusive agents with steps including:
Utilizing our Customer Care Centerto make sure they are using virtual tools that can allow them to reach current and potential educator customers when face-to-face interactions are not possible. We are implementing a variety of new and modified forums to provide supportaccess to all agents and policyholders.
Accelerating planned technologythe financial solutions including video meeting software, enhanced e-signature capabilities and dynamic online appointment setting tools.
Offering expanded support as needed to help agents facing COVID-19 related challenges to continue to work efficiently in a virtual environment.
we offer educators. However, growth in new sales has slowed since the pandemic began, particularly sales generated from in-person events at schools. Since March, schools have been forcedThis may be exacerbated if public school systems face budget constraints due to indefinitely postpone planned enrollmentthe economic impacts of the pandemic and/or access to "in school" events remains restricted.
For further discussion regarding the current period and potential future impacts of COVID-19 and related economic conditions on us, see "Outlook for 2020" and other eventscontent within this MD&A as they address COVID-19 closing and other challenges. We anticipate sales levels to return to more normal levels in the third quarter of 2020 when the new school year begins. We are exploring additional ways to reach potential

well as Part II—Item 1A.
Horace Mann Educators Corporation2930Quarterly Report on Form 10-Q




customers and are also seeing very early signs that schools are now ready to tackle developing new forums to give their teachers access to the financial solutions we provide.
Personal automobile loss frequency has declined due to temporary changes in policyholder behavior due to COVID-19 ‘shelter in place’ guidelines implemented across the U.S. We do not offer event cancellation, travel, or pandemic-related coverages which would be negatively impacted by the COVID-19 pandemic. Management believes our potential exposure to losses related to life or supplemental insurance is very low.
In addition, over the past several years, Horace Mannwe proactively de-risked itsour portfolio in anticipation of a recessionan economic downturn and believes it isbelieve we are well positioned for the current dislocation in the markets. Although we have experienced the impacts of market volatility on our fixed maturity security and limited partnership interest valuations in the first quarter ofduring 2020, the investment portfolio is well diversified, is 95.3%91.7% investment grade-rated and has an average rating of A+. The annuity reinsurance agreement, entered into in the second quarter of 2019, which reinsured a $2.2 billion block of in force fixed annuities with a minimum crediting rate of 4.5%, helps mitigate the risk of not being able to generate appropriate spreads on the annuity business.business that meet our return targets. We believe our capital and reserves are adequate to address any unusual loss patterns resulting from COVID-19.
Amid rapidly changing dynamics, we are continuing to evaluate all aspects of our operations and making necessary adjustments to manage our business. Ultimately, the extent of the impact will depend on how long it takes for the economy to return to some degree of normality. To date, these steps have been effective and have maintained business continuity. Based on assumptions that presume a return to a normal operating environment within sixtwelve months, capital and liquidity are expected to remain at or near target levels. We believe we are financially strong despite the potential impact of the COVID-19 pandemic and continued to produce solid operating results in the first quarter.third quarter of 2020.
Consolidated Financial Highlights
(All comparisons vs. same periods in 2019, unless noted otherwise)
($ in millions) Three Months Ended
March 31,		 2020-2019($ in millions)Three Months Ended
September 30,		2020-2019Nine Months Ended
September 30,		2020-2019
 2020 2019 Change %20202019Change %20202019Change %
Total revenues $307.3
 $315.9
 -2.7%Total revenues$337.1 $336.6 0.1 %$958.1 $1,105.4 -13.3 %
Net income 18.5
 32.2
 -42.5%Net income36.5 25.4 43.7 %85.5 151.4 -43.5 %
Per diluted share:      Per diluted share:
Net income 0.44
 0.77
 -42.9%Net income0.87 0.60 45.0 %2.03 3.61 -43.8 %
Net investment gains (losses), after tax (0.34) 0.14
 N.M.
Net investment gains (losses), after tax0.05 (0.04)N.M.(0.24)2.84 N.M.
Book value per share $35.80
 $34.60
 3.5%Book value per share$41.45 $38.30 8.2 %
Net income return on equity - last twelve months 11.3% 2.2% 

Net income return on equity - last
twelve months
7.4 %9.2 %
Net income return on equity - annualized 4.9% 9.5% 

Net income return on equity - annualized6.9 %14.1 %

For the three and nine months ended March 31,September 30, 2020, the Company's net income increased $11.1 million and decreased $13.7$65.9 million, compared torespectively over the prior year periodperiods. The three month increase was primarily due to $15.2 million after-tax of losses on changes in fair value of equity securities as well as derivatives -net investment gains and lower operating expenses across all segments. The nine month decrease was primarily due to COVID-19 related market volatility.

recognition of a $106.9 million after tax realized investment gain in the second quarter of 2019 with respect to the transfer of investments as consideration in connection with the annuity reinsurance transaction partially offset by favorable automobile loss experience in the current year period.
Horace Mann Educators Corporation3031Quarterly Report on Form 10-Q





Consolidated Results of Operations
(All comparisons vs. same periods in 2019, unless noted otherwise)
($ in millions) Three Months Ended
March 31,		 2020-2019($ in millions)Three Months Ended
September 30,		2020-2019Nine Months Ended
September 30,		2020-2019
 2020 2019 Change %20202019Change %20202019Change %
Insurance premiums and contract charges earned $236.3
 $209.8
 12.6 %
Insurance premiums and contract
charges earned
$235.3 $239.7 -1.8 %$697.0 $657.6 6.0 %
Net investment income 82.3
 92.8
 -11.3 %Net investment income93.7 93.0 0.8 %256.4 279.3 -8.2 %
Net investment gains (losses) (18.5) 7.4
 N.M.
Net investment gains (losses)2.5 (2.1)N.M.(12.8)151.6 N.M.
Other income 7.2
 5.9
 22.0 %Other income5.6 6.0 -6.7 %17.5 16.9 3.6 %
Total revenues 307.3
 315.9
 -2.7 %Total revenues337.1 336.6 0.1 %958.1 1,105.4 -13.3 %
      
Benefits, claims and settlement expenses 138.7
 139.4
 -0.5 %Benefits, claims and settlement expenses151.4 154.2 -1.8 %433.1 446.3 -3.0 %
Interest credited 51.5
 52.9
 -2.6 %Interest credited51.1 53.6 -4.7 %153.3 160.1 -4.2 %
Operating expenses 60.7
 56.2
 8.0 %Operating expenses57.9 63.6 -9.0 %173.1 175.9 -1.6 %
DAC unlocking and amortization expense 30.0
 25.0
 20.0 %DAC unlocking and amortization expense24.6 26.3 -6.5 %75.0 82.9 -9.5 %
Intangible asset amortization expense 3.7
 0.5
 N.M.
Intangible asset amortization expense3.5 3.8 -7.9 %10.9 4.9 122.4 %
Interest expense 4.2
 3.3
 27.3 %Interest expense3.5 4.6 -23.9 %11.7 11.2 4.5 %
Other expense - goodwill impairmentOther expense - goodwill impairment— — — — 28.0 N.M.
Total benefits, losses and expenses 288.8
 277.3
 4.1 %Total benefits, losses and expenses292.0 306.1 -4.6 %857.1 909.3 -5.7 %
      
Income before income taxes 18.5
 38.6
 -52.1 %Income before income taxes45.1 30.5 47.9 %101.0 196.1 -48.5 %
Income tax expense —
 6.4
 -100.0 %Income tax expense8.6 5.1 68.6 %15.5 44.7 -65.3 %
Net income $18.5
 $32.2
 -42.5 %Net income$36.5 $25.4 43.7 %$85.5 $151.4 -43.5 %
Insurance Premiums and Contract Charges Earned
For the three and nine months ended March 31,September 30, 2020, insurance premiums and contract charges earned decreased $4.4 million and increased $26.5 million.$39.4 million, respectively. The decrease for the three months was primarily due to lower premiums earned by Property and Casualty. The increase isfor the nine months was primarily due to the addition of earned premiums from Supplemental.the new Supplemental segment partially offset by recognition of $10.7 million of automobile premium credits to our policyholders related to reduced driving activity due to COVID-19.
Net Investment Income
Excluding accreted net investment income on the deposit asset on reinsurance, for the three and nine months ended September 30, 2020, net investment income decreased $34.2 millionwas flat for the three months ended March 31, 2020and decreased $48.0 million for the nine months. The decline was primarily due to a $2.1 billion reduction in invested assets from investments transferred under the annuity reinsurance transaction in the second quarter of 2019 as well as lower than expected returns on alternative investments.limited partnership interests. Investment yields continue to be impacted by the low interest rate environment of recent years. The annualized investment yield on the investment portfolio excluding limited partnership interests* was as follows:
Three Months Ended
September 30,		Nine Months Ended
September 30,
2020201920202019
Investment yield, excluding limited partnership interests,
pretax - annualized*
4.2%4.6%4.4%4.7%
Investment yield, excluding limited partnership interests,
after tax - annualized*
3.3%3.7%3.5%3.8%
  Three Months Ended
March 31,
  2020 2019
Investment yield, excluding limited partnership interests, pretax - annualized* 4.5% 4.8%
Investment yield, excluding limited partnership interests, after tax - annualized* 3.6% 3.9%

During the three and nine months ended March 31,September 30, 2020, we continued to identify and purchase investments, including funding a modest level of alternative investments,limited partnership interests, with attractive risk-adjusted yields relative to market conditions without venturing into asset classes or individual securities that would be inconsistent with our overall conservative investment guidelines.

Horace Mann Educators Corporation3132Quarterly Report on Form 10-Q




Net Investment Gains (Losses)
For the three and nine months ended March 31,September 30, 2020, net investment gains increased $4.6 million and decreased $25.9$164.4 million, comparedrespectively. The increase for the three months can be seen in the table below. The decrease for the nine months is primarily a result of a realized investment gain of $135.3 million recognized during the second quarter of 2019 in connection with the transfer of investments related to the prior year period. The decrease was primarily due to $15.2 million after-tax of losses on changes in fair value of equity securities as well as derivatives - all due to COVID-19 related market volatility.aforementioned annuity reinsurance transaction. The breakdown of net investment gains (losses) by transaction type were as follows:
($ in millions)Three Months Ended
September 30,		Nine Months Ended
September 30,
2020201920202019
Net other-than-temporary impairment losses
on securities recognized in net income
$(1.1)$— $(5.3)$(0.3)
Sales and other, net3.7 0.6 8.6 147.5 
Change in fair value - equity securities2.3 1.1 (5.6)8.0 
Change in fair value and gains (losses) realized
on settlements - derivatives
(2.4)(3.8)(10.5)(3.6)
Net investment gains (losses)$2.5 $(2.1)$(12.8)$151.6 
($ in millions) Three Months Ended
March 31,
  2020 2019
OTTI losses recognized in earnings $(3.7) $(0.2)
Sales and other, net 4.5
 4.8
Change in fair value - equity securities (14.5) 3.5
Change in fair value and gains (losses) realized
on settlements - derivatives		 (4.8) (0.7)
Net investment gains (losses) $(18.5) $7.4

From time to time, we may sell securities subsequent to the reporting date that were considered temporarily impaired at the reporting date. Such sales are due to issuer specific events occurring subsequent to the reporting date that result in a change in our intent to sell an invested asset.
Other Income
For the three and nine months ended March 31,September 30, 2020, other income increased $1.3 million, primarily duewas comparable to the inclusion of Supplemental results in the current quarter.prior year periods.
Benefits, Claims and Settlement Expenses
For the three and nine months ended March 31,September 30, 2020, benefits, claims and settlement expenses decreased $0.7$2.8 million compared to the prior year periodand $13.2 million, respectively, driven primarily by improvedlower benefits in the Supplemental segment for the three months. For the nine months, favorable automobile loss experience andas a result of lower frequency of losses related to reduced driving activity due to COVID-19, is partially offset by higher catastrophe losses offset by the additionand nine months of benefits claims and settlement expenses from the new Supplemental segment.segment compared to three months from Supplemental in the prior year period.
Interest Credited
For the three and nine months ended March 31,September 30, 2020, interest credited decreased $1.4$2.5 million compared to the prior year periodand $6.8 million, respectively, driven primarily driven by a lower interest rate and a lower level of Federal Home Loan Bank (FHLB) funding agreements. Under the deposit method of accounting, the interest credited on the reinsured annuity reinsured block continues to be reported. The average deferred annuity credited rate, excluding the reinsured annuity block was 2.5% at March 31,September 30, 2020 excluding the reinsured block, and 3.6% at March 31, 2019.September 30, 2019, respectively.
Operating Expenses
For the three and nine months ended March 31,September 30, 2020, operating expenses increased $4.5decreased $5.7 million and $2.8 million, respectively, primarily due to expense reduction initiatives that began in 2019 as well as a lower level of expenses realized in 2020 due to COVID-19. The nine month decrease was partially offset by the inclusion of $10.1$29.4 million of operating expenses from Supplemental operations compared to $10.4 million of operating expenses in the current quarter offset by expense reduction initiatives that began in 2019.prior year.
Deferred Acquisition Costs (DAC) Unlocking and Amortization Expense
For the three months ended March 31,September 30, 2020, DAC unlocking and amortization expense increased $5.0decreased $1.7 million compared to the prior year period primarily due to $5.6$0.7 million of unfavorablefavorable DAC unlocking in Retirement for the current quarter (primarily market performance) compared to no DAC unlocking in the prior year quarter. For the nine months ended September 30, 2020, DAC unlocking and amortization expense decreased $7.9 million primarily due to market performance.accelerated amortization of the DAC asset associated with the reinsured annuity block that occurred in the second quarter of 2019. For Life, DAC unlocking resulted in an immaterial change to amortization for the three and nine months ended March 31,September 30, 2020.
Horace Mann Educators Corporation33Quarterly Report on Form 10-Q


Intangible Asset Amortization Expense
For the three and nine months ended March 31,September 30, 2020, intangible asset amortization expense decreased $0.3 million and increased $3.2$6.0 million, respectively. The increase for the nine months was primarily due to the acquisition of NTA inLife Enterprises, LLC (NTA) on July 1, 2019.
Interest Expense
For the three and nine months ended March 31,September 30, 2020, interest expense decreased $1.1 million for the three months due to lower interest rates on our senior revolving credit facility and increased $0.9$0.5 million compared tofor the prior year periodnine months as we utilized our senior revolving credit facility in the third quarter of 2019 to partially fund the acquisition of NTA on July 1, 2019.

Other Expense - Goodwill Impairment
Horace Mann Educators Corporation32Quarterly Report on Form 10-Q



For the nine months ended September 30, 2019, other expense represented a goodwill impairment charge in Retirement resulting from the annuity reinsurance transaction.
Income Tax Expense
The effective income tax rate on our pretax income, including net investment gains (losses), was 0.0%15.3% and 16.6%22.7% for the threenine months ended March 31,September 30, 2020 and 2019, respectively. Income from investments in tax-advantaged securities reduced the effective income tax rates by 7.54.0 and 4.21.8 percentage points for the threenine months ended March 31,September 30, 2020 and 2019, respectively. The goodwill impairment charge in the Retirement segment increased the effective income tax rate by 2.8 percentage points at September 30, 2019.
On March 27, 2020, H.R. 748, the Coronavirus Aid, Relief, and Economic Security Act, “the CARES Act”, was signed into legislation. The CARES Act includes tax provisions relevant to businesses, and some of the significant changes include allowance of a five year carryback of net operating losses for 2018-2020 and the suspension of the 80% limitation of taxable income for net operating loss carryforwards for 2018-2020. The effects of the CARES Act are reflected in our income tax expense calculations as of March 31, 2020. Accounting Standards Codification Topic 740: Income Taxes requires that the impact of the CARES Act be recognized in the period in which the law was enacted. As a result, total income tax expense for the three months ended March 31, 2020 includes a benefit of $2.8 million (that reduced the effective income tax rate by 2.8 percentage points) to reflect a net operating loss carryback to taxable years for which the corporate rate was 35% as compared to the current corporate rate of 21%.
We record liabilities for uncertain tax filing positions where it is more likely than not that the position will not be sustainable upon audit by taxing authorities. These liabilities are reevaluated routinely and are adjusted appropriately based on changes in facts or law. We have no unrecorded liabilities from uncertain tax filing positions.
At March 31,September 30, 2020, our federal income tax returns for years prior to 2014 are no longer subject to examination by the Internal Revenue Service. We do not anticipate any assessments for tax years that remain subject to examination to have a material effect on our financial position or results of operations.
Outlook for 2020
The following discussion provides outlook information for our results of operations and capital position.
The impacts of COVID-19 and related economic conditions on ourthe Company’s results arecontinue to be highly uncertain and outside ourthe Company’s control. The scope, duration and magnitude of the direct and indirect effects of COVID-19 are evolving rapidly andcontinue to evolve in ways that are difficult or impossible to anticipate. In addition, COVID-19 did not begin to affect our financial results until late in the first quarter of 2020. As a result, the impact on results in the first quarter of 2020 is not indicative of the potential impact on results for the remainder of 2020. For additional information on the risks posed by COVID-19, see “Our business may be adversely affected by the recent COVID-19 outbreak” included in “Part II - II—Item 1A - 1A—Risk Factors” in this Quarterly Report on Form 10-Q.
At the time of issuance of this Quarterly Report on Form 10-Q, we continue to estimate that 2020 full year net income excluding realized gains (losses) will be within a range of $2.55$2.95 to $2.75$3.15 per diluted share based on analysis of COVID-19 scenarios which we believe to be conservative.  Althoughshare. The increase in the overall range is unchanged from the Outlook for 2020 we discussed in Part II, Item 7 of our Annualthe Quarterly Report on Form 10-K10-Q for the yearprior quarter ended December 31,June 30, 2020 anticipates an increase in the Supplemental segment results as discussed below.
Horace Mann Educators Corporation34Quarterly Report on Form 10-Q


Property and Casualty
Net written premiums for 2020 are expected to be below 2019 levels due lower levels of new business resulting from the potential contributionpandemic and the recognition of our business segments has changed as a result$10.7 million of COVID-19 related premium credits. Retention remains stable and related economic conditions. We now expect overall pretax net investment incomewe anticipate rates will remain stable in the current environment. The expense ratio is expected to be slightly lower than the 2019 with increases from a full yearexpense ratio of Supplemental net investment income offset by declines in Retirement net investment income and lower returns on limited partnership interests. This projection also reflects an overall effective tax rate of between 17% and 19%.26.9 points.
Net income for Property and Casualty now is anticipated to be in the range of $61 million to $66 million, reflecting conservative estimatesLower levels of automobile loss frequency because ofresulting from temporary changes in policyholder driving patterns due to COVID-19.COVID-19 continued in the third quarter. Frequency was most favorably impacted in the month of April, with May and June levels rising sequentially. Third quarter frequency was approximately 20% below the prior year period. While we anticipate frequency to continue to moderate, we project it will be lower than 2019 levels for the remainder of the year partially offset by an increase in severity. A 10% drop in automobile frequency represents approximately $2 million in pretax earnings per month.  This excludes potential offsets from other factors such asmonth, excluding the potential for higher severity. Net written premiums* for
We experienced an elevated level of catastrophes in the third quarter and as a result, our full year guidance anticipates catastrophe losses of 13 points to 14 points.
In connection with the emergence of PG&E Corporation and Pacific Gas and Electric Company (together, PG&E) from bankruptcy on July 1, 2020, are nowin the third quarter of 2020, the Company recognized favorable prior years' reserve development of approximately $5.2 million, pretax and net of reinsurance, along with the return of reinsurance reinstatement premiums of approximately $3.5 million, largely related to the 2018 Camp Fire in California.
As a result, the Property and Casualty full-year combined ratio is expected to be below 2019 levels as new business has slowed due to the pandemic but retention remains stable.91%-93%. We expect rate increases will continue to averageanticipate net income for Property and Casualty to be in the low- single digits across the automobile and property books with COVID-19 related premium creditsrange of 15% of two months of automobile premiums weighted$70 million to the second half of the year. This outlook includes catastrophe costs of 7.5 points on the full year combined ratio, of which as much as 50% typically occur in the second quarter.$75 million.
Supplemental
Supplemental is anticipated to generate a long-term pretax profit margin in the low to mid 20% range and net investment income should begincontinue to benefit from portfolio repositioning. As a result,Supplemental results reflect favorable trends in reserves and short-term benefit from changes in policyholder behavior due to COVID-19. Because of these factors, net income for Supplemental is now is anticipated to be

Horace Mann Educators Corporation33Quarterly Report on Form 10-Q



between $31 in the range of $37 million and $33to $39 million. New sales*sales are being negatively impacted by school closingslack of access to schools due to COVID-19, delaying the growth of this segment.
Retirement
Retirement net investment income is expected to reflectreflecting further spread compression with rates on new investments below the average portfolio earned rate, lower than anticipated returns on limited partnership interests, as well as the impact of lower invested assets as a result of the 2019 annuity reinsurance transaction and use of capital to purchase NTA. Market volatility may continue to impact DAC amortization and asset-based fees. The impact of lower net investment income is anticipated to be partially offset by a reduced level of operating expenses. As a result, we continue to expect net income for Retirement now is anticipated to be in the range of $22 million to $24 million.
Life now is expected
We continue to expect Life to generate net income between $10 million and $12 million, reflecting a reducedmodeled mortality costs. Sales continue to be negatively impacted by the pre-vaccine environment due to the high level of net investment incomecustomer interaction required for sales of more complex products like indexed universal life and a return to modeled mortality cost levels.larger single premium sales.
As described in Critical Accounting Estimates, certain of our significant accounting measurements require the use of estimates and assumptions. As additional information becomes available, adjustments may be required. Those adjustments are charged or credited to net income for the period in which the adjustments are made and may impact actual results compared to our estimates above. Additionally, see Forward-looking Information and Part II - Item 1A in this Quarterly Report on Form 10-Q as well as Part I - Items 1 and 1A of our Annual Report on Form 10-K for the year ended December 31, 2019 concerning other important factors that could impact actual results. We believe that a projection of net income is not appropriate on a forward-looking basis because it is not possible to provide a valid forecast of net investment gains (losses), which can vary substantially from one period to another and may have a significant impact on net income.
Horace Mann Educators Corporation35Quarterly Report on Form 10-Q


Critical Accounting Estimates
The preparation of consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions based on information available at the time the consolidated financial statements are prepared. These estimates and assumptions affect the reported amounts of our consolidated assets, liabilities, shareholders' equity and net income. Certain accounting estimates are particularly sensitive because of their significance to our consolidated financial statements and because of the possibility that subsequent events and available information may differ markedly from management's judgments at the time the consolidated financial statements were prepared. We have discussed with the Audit Committee the quality, not just the acceptability, of our accounting principles as applied in our financial reporting. The discussions generally included such matters as the consistency of our accounting policies and their application, and the clarity and completeness of our consolidated financial statements, which include related disclosures. Information regarding our accounting policies pertaining to these topics is located in the Notes to the Consolidated Financial Statements contained in Part II - Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2019.
We have identified the following accounting estimates as critical in that they involve a higher degree of judgment and are subject to a significant degree of variability:
•Valuation of hard-to-value fixed maturity securities, including evaluation of other-than-temporary impairments
•Evaluation of goodwill and intangible assets for impairment
•Valuation of lifesupplemental, annuity and annuitylife deferred policy acquisition costs
•Valuation of liabilities for property and casualty unpaid claims and claim expenses
•Valuation of certain investment contract and policy reserves
•Valuation of assets acquired and liabilities assumed under purchase accounting
Compared to December 31, 2019, at March 31,September 30, 2020, there were no material changes to accounting policies for areas most subject to significant management judgments identified above. In addition to disclosures in the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2019, discussion of accounting policies, including certain sensitivity information, was presented in Management's Discussion and Analysis of Financial Condition and Results of Operations -- Critical Accounting Estimates in that Form 10-K.

Horace Mann Educators Corporation34Quarterly Report on Form 10-Q



Results of Operations by Segment
Consolidated financial results primarily reflect the operating results of our four operating segments as well as the corporate and other line. These reporting segments are defined based on financial information we use to evaluate performance and to determine the allocation of resources (see Part I - Item I, Note 1 of the Consolidated Financial Statements in this report for a description of changes to our reporting segments).
•Property and Casualty
•Supplemental
•Retirement
•Life
•Corporate and Other
The determination of segment data are described in more detail in Part I - Item 1, Note 10 of the Consolidated Financial Statements in this report. The following sections provide analysis and discussion of the results of operations for each of the reporting segments as well as investment results.
Horace Mann Educators Corporation36Quarterly Report on Form 10-Q


Property and Casualty
Net income for(All comparisons vs. same periods in 2019, unless noted otherwise)

For the three and nine months ended March 31,September 30, 2020, improved from the prior year period primarily due tonet income reflected the following factors:
5.6Three months ended:
•Claims and claim expenses incurred are flat as a $20.1 million increase in catastrophe losses was offset by lower automobile loss frequency and a $5.2 million subrogation recovery
•Lower operating expenses due to expense reduction initiatives and COVID-19
•Higher net investment income, driven by favorable returns on limited partnership interests
Nine months ended:
•Written premiums* and earned premiums reduced by $10.7 million of COVID-19 related premium credits
•10.4 points of improvement in the Property and Casualty underlying loss ratio for the current quarterratio* due to improvedlower automobile loss ratios for both automobile and propertyfrequency
1.3•Catastrophe losses increased by 6.7 points of improvement in the expense ratio due to actions taken in 2019
•A one-time income tax benefit of $2.8 million in the first quarter of 2020 as a result of the CARES Act
















chart-9e973a451bca70d03b7.jpghmn-20200930_g1.jpg

Horace Mann Educators Corporation3537Quarterly Report on Form 10-Q




The following table provides certain financial information for Property and Casualty for the periods indicated.
($ in millions, unless otherwise indicated)Three Months Ended
September 30,		2020-2019Nine Months Ended
September 30,		2020-2019
20202019Change20202019Change
Financial Data:
Written premiums*:
Automobile$109.5 $118.8 -7.8 %$315.6 $350.2 -9.9 %
Property and other63.3 63.7 -0.6 %166.9 168.3 -0.8 %
Total premiums written172.8 182.5 -5.3 %482.5 518.5 -6.9 %
Change in unearned insurance premiums(6.8)(12.0)43.3 %6.2 (5.9)N.M.
Total insurance premiums earned166.0 170.5 -2.6 %488.7 512.6 -4.7 %
Incurred claims and claims expenses:
Claims occurring in the current year125.6 122.5 2.5 %340.2 375.7 -9.4 %
Prior years' reserve development
7.2 3.5 105.7 %9.2 7.5 22.7 %
Total claims and claim expenses incurred118.4 119.0 -0.5 %331.0 368.2 -10.1 %
Operating expenses, including DAC amortization41.9 45.0 -6.9 %126.0 136.9 -8.0 %
Underwriting gain5.7 6.5 -12.3 %31.7 7.5 N.M.
Net investment income13.7 10.7 28.0 %30.3 33.6 -9.8 %
Income before income taxes19.8 17.4 13.8 %63.7 41.8 52.4 %
Net income/core earnings*15.8 14.2 11.3 %53.7 34.3 56.6 %
Operating Statistics:
Automobile
Loss and loss adjustment expense
ratio
57.6 %65.8 %-8.2 pts59.1 %70.2 %-11.1 pts
Expense ratio25.7 %26.6 %-0.9 pts26.2 %26.8 %-0.6 pts
Combined ratio:83.3 %92.4 %-9.1 pts85.3 %97.0 %-11.7 pts
Prior years' reserve development-0.9 %-3.0 %2.1 pts-0.6 %-1.6 %1.0 pts
Catastrophe losses1.7 %2.1 %-0.4 pts1.6 %1.6 %— pts
Underlying combined ratio*82.5 %93.3 %-10.8 pts84.3 %97.0 %-12.7 pts
Property
Loss and loss adjustment expense
ratio
97.3 %78.2 %19.1 pts84.5 %75.3 %9.2 pts
Expense ratio24.4 %26.1 %-1.7 pts25.1 %26.7 %-1.6 pts
Combined ratio:121.7 %104.3 %17.4 pts109.6 %102.0 %7.6 pts
Prior years' reserve development-10.8 %— %-10.8 pts-4.3 %-1.2 %-3.1 pts
Catastrophe losses57.3 %22.6 %34.7 pts43.9 %25.9 %18.0 pts
Underlying combined ratio*75.2 %81.7 %-6.5 pts70.0 %77.3 %-7.3 pts
Risks in force (in thousands)
Automobile (1)
406 441 -7.9 %
Property187 196 -4.6 %
Total593 637 -6.9 %
(1) Includes assumed risks in force of 4.
Horace Mann Educators Corporation38Quarterly Report on Form 10-Q


($ in millions, unless otherwise indicated) Three Months Ended
March 31,		 2020-2019
  2020 2019 Change %
Financial Data:      
Premiums written*:      
Automobile $109.4
 $116.8
 -6.3%
Property and other 44.2
 44.9
 -1.6%
Total premiums written 153.6
 161.7
 -5.0%
Change in unearned insurance premiums 12.9
 9.1
 41.8%
Total insurance premiums earned 166.5
 170.8
 -2.5%
Incurred claims and claims expenses:      
Claims occurring in the current year 105.4
 118.8
 -11.3%
Prior years' reserve development 
 1.0
 2.0
 -50.0%
Total claims and claim expenses incurred 104.4
 116.8
 -10.6%
Operating expenses, including DAC amortization 43.2
 46.5
 -7.1%
Underwriting gain 18.9
 7.5
 152.0%
Net investment income 10.3
 10.2
 1.0%
Income before income taxes 29.8
 17.8
 67.4%
Net income/core earnings* 26.6
 15.0
 77.3%
       
Operating Statistics:      
Automobile      
Loss and loss adjustment expense ratio 65.8 % 70.8 % -5.0 pts
Expense ratio 25.9 % 27.2 % -1.3 pts
Combined ratio: 91.7 % 98.0 % -6.3 pts
Prior years' reserve development -0.9 % -0.9 % —
Catastrophes 0.2 % 0.8 % -0.6 pts
Underlying combined ratio* 92.4 % 98.1 % -5.7pts
Property      
Loss and loss adjustment expense ratio 56.5 % 62.9 % -6.4 pts
Expense ratio 26.2 % 27.6 % -1.4 pts
Combined ratio: 82.7 % 90.5 % -7.8 pts
Prior years' reserve development — % -1.9 % 1.9 pts
Catastrophes 15.8 % 18.3 % -2.5 pts
Underlying combined ratio* 66.9 % 74.1 % -7.2 pts
       
Risks in force (in thousands)      
Automobile 424
 454
 -6.6%
Property 192
 200
 -4.0%
Total 616
 654
 -5.8%

As a result of the emergence of PG&E Corporation and Pacific Gas and Electric Company (together, PG&E) from bankruptcy on July 1, 2020, in the third quarter of 2020, we recognized favorable prior years' reserve development of $5.2 million, pretax net of reinsurance, as well as return of reinsurance reinstatement premiums of $3.5 million, for a total of $8.7 million, largely related to the 2018 Camp Fire in California. Results reported in 2018 reflected gross losses of $150.0 million and net losses after reinsurance of $37.9 million pretax from the 2018 Camp Fire.
On a reported basis, the 6.311.7 points of improvement in the automobile combined ratio duringfor the first quarter ofnine months ended September 30, 2020 was mainly attributable to 4.4 points of improvementa 12.1 point reduction in the automobile underlying loss ratioratio* reflecting somelower frequency as well as the ongoing benefit of profitability initiatives. We experienced a lower level of automobile loss frequency resulting from temporary changes in policyholder behaviordriving patterns due to COVID-19. The average decline in auto frequency experienced in the COVID-19 pandemic.third quarter was approximately 20% compared to the prior year quarter. The reported property combined ratio improved 7.8increased 7.6 points duringfor the first quarter ofnine months ended September 30, 2020 due to an improved underlying loss ratio*, lower catastrophes and lower expenses.a 18.0 point increase in catastrophe losses. During the first quarter ofnine months ended September 30, 2020, the underlying property loss ratioratio* improved 5.85.7 points, reflecting lower non-catastrophe weather-related and fire losses.

Horace Mann Educators Corporation36Quarterly Report on Form 10-Q



Total premiums written* decreased $8.1 million during the first quarter of 2020 which was primarily due to lower automobile risks in forcethe aforementioned PG&E subrogation recovery.
For the three and partiallynine months ended September 30, 2020, total written premiums* decreased $9.7 million and $36.0 million, respectively, primarily due to a lower levelreduction in automobile written premiums*. For the remainder of 2020, we anticipate the rate increases being implementedenvironment will be relatively stable, resulting in 2020. For 2020, our full year rate plan anticipates low-single digit average rate increases (including states with no rate actions) for both automobile and property;property for full-year 2020; average approved rate changes duringfor the first threenine months ofended 2020 were 1.3%0.5% for automobile and 1.9%1.1% for property. Growth in sales* has slowed due to COVID-19.
For the three and nine months ended September 30, 2020, automobile written premiums* decreased $9.3 million and $34.6 million, respectively, due to lower automobile risks in force and a lower level of rate increases implemented as a resultwell as COVID-19 related premium credits equal to 15% of two months of automobile premiums. While the COVID-19 pandemic.
Automobile premiums written* during the first quarternumber of 2020 were $7.4 million lower than a year ago whileautomobile risks in force has declined, the average written premium per risk and average earned premium per risk increased 3.3% and 4.5%, respectively.remained relatively stable for the nine months ended September 30, 2020. Based on risks in force, the automobile 12 month retention rate for new and renewal risks decreasedwas 80.9% which was comparable to 81.3% from 81.5% at March 31, 2020 and 2019, respectively, with the decrease due to recent rate and underwriting actions.a year ago. The number of educator risks has been stable relative to overall automobile risks as educators represented 85.4%, 85.4% and 85.3%85.5% of the automobile risks in force as of March 31,September 30, 2020, December 31, 2019 and March 31,September 30, 2019, respectively.
PropertyFor the three and nine months ended September 30, 2020, property and other premiums written*written premiums* decreased slightly for the three months ended March 31, 2020.slightly. While the number of property risks in force has declined, the average written premium per risk and average earned premium per risk increased 5.5%3.2% and 5.6%5.1%, respectively, infor the first threenine months ofended 2020. Based on risks in force, the property 12 month retention rate for new and renewal risks decreased to 87.1%86.7% from 87.8%87.3% at March 31,September 30, 2020 and 2019, respectively. The number of educator risks has been stable relative to overall property risks as educators represented 82.4%82.3%, 82.4%82.5% and 82.2%82.1% of the property risks in force as of March 31,September 30, 2020, December��December 31, 2019 and March 31,September 30, 2019, respectively.
We continue to evaluate and implement actions to further mitigate our risk exposure in catastrophe-prone areas of the country. Such actions could include, but are not limited to, non-renewal of property policies, restricted agent geographic placement, limitations on agent new business sales, further tightening of underwriting standards and increased utilization of third-party vendor products.
Horace Mann Educators Corporation39Quarterly Report on Form 10-Q


Supplemental
The following table provides certain information for Supplemental for the periods indicated.
($ in millions, unless otherwise indicated) Three Months Ended
March 31,		 2020-2019($ in millions, unless otherwise indicated)Three Months Ended
September 30,		2020-2019Nine Months Ended
September 30,		2020-2019
 2020 2019 Change %20202019Change20202019Change
Financial Data:   Financial Data:
Insurance premiums and contract deposits* $32.6
 N/A N/AInsurance premiums and contract deposits*$32.0 $32.7 -2.1 %$98.3 $32.7 N/A
Insurance premiums and contract charges earned 33.0
 N/A N/AInsurance premiums and contract charges earned32.5 32.9 -1.2 %98.8 32.9 N/A
Net investment income 3.5
 N/A N/ANet investment income4.3 3.7 16.2 %11.8 3.7 N/A
Benefits and settlement expenses 10.5
 N/A N/ABenefits and settlement expenses10.5 14.7 -28.6 %33.5 14.7 N/A
Operating expenses (includes DAC unlocking and amortization expense) 10.1
 N/A N/AOperating expenses (includes DAC unlocking and amortization expense)10.1 10.5 -3.8 %30.3 10.5 N/A
Intangible asset amortization expense 3.2
 N/A N/AIntangible asset amortization expense3.1 3.2 -3.1 %9.5 3.2 N/A
Income before income taxes 13.4
 N/A N/AIncome before income taxes13.6 8.8 54.5 %39.1 8.8 N/A
Net income / core earnings* 10.5
 N/A N/ANet income / core earnings*10.6 6.9 53.6 %30.6 6.9 N/A
   
Operating Statistics:   Operating Statistics:
Supplemental insurance in force (thousands) 297
 N/A N/ASupplemental insurance in force (thousands)292 297 -1.7 %
Benefits ratio (1)
 31.8% N/A N/A
Benefits ratio (1)
32.3 %44.7 %-12.4 pts33.9 %44.7 %N/A
Operating expense ratio (2)
 27.1% N/A N/A
Operating expense ratio (2)
26.9 %28.2 %-1.3 pts26.9 %28.2 %N/A
Pretax profit margin (2)
 36.0% N/A N/A
Pretax profit margin (2)
36.3 %23.7 %12.6 pts34.7 %23.7 %N/A
Persistency 89.2% N/A N/APersistency90.1 %88.9 %1.2 pts
N/A - The acquisition of NTA closed on July 1, 2019.
(1)    Benefits ratio measured to earned premium.
(2)    Operating expense ratio and pretax profit margin measured to total revenues.

For the three and nine months ended September 30, 2020, Supplemental sales* were $3.7$1.4 million during the first quarter of 2020,and $5.8 million, respectively, reflecting significantly lower sales volume in the last several weeks of the quarterprimarily due to the COVID-19 pandemic as sales are dependent on in-person events at schools. Persistency remains steady at 89.2%90.1%.

Horace Mann Educators Corporation37Quarterly Report on Form 10-Q



For the three and nine months ended September 30, 2020, Supplemental contributed $10.5$10.6 million and $30.6 million, respectively, to net income, during the first quarter of 2020. The first quarter 2020 results reflectedreflecting favorable trends in reserves and some short-term benefit from changes in policyholder behavior due to the COVID-19 pandemic.COVID-19. The non-cash impact from amortization of intangible assets recognized in connection with the purchase accounting of NTA reduced pretax net income by $3.2 million.$3.1 million and $9.5 million for the three and nine months ended September 30, 2020.
Horace Mann Educators Corporation40Quarterly Report on Form 10-Q


Retirement
Net(All comparisons vs. same periods in 2019, unless noted otherwise)

For the three and nine months ended September 30, 2020, net income during the first quarter of 2020 decreased $13.1increased $1.9 million compared to the prior year period due toand $23.5 million, respectively, reflecting the following factors:
Three months ended:
•Lower operating expenses due to expense reduction initiatives and COVID-19
•Reflecting the benefits of the annuity reinsurance transaction, the net interest margin on the retained annuity block was essentially unchanged despite lower net investment income
Nine months ended:
•Prior period results include a $28.0 million pretax goodwill impairment charge related to the annuity reinsurance transaction in the second quarter of 2019
•$3.6 million pretax of unfavorable DAC unlocking in the prior nine months primarily due to accelerated amortization of the DAC asset associated with the reinsured annuity block, compared to $1.3 million of favorable DAC unlocking in the current quarter from equity market volatilitynine months due to lower investment results
lower level•Lower levels of net investment income in the current quarter2020, reflecting lower invested asset levels resulting from the prior year annuity reinsurance transaction and use of capital to purchase NTA as well as lower returns on alternative investmentslimited partnership interests









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Horace Mann Educators Corporation3841Quarterly Report on Form 10-Q




The following table provides certain information for Retirement for the periods indicated.
($ in millions, unless otherwise indicated)Three Months Ended
September 30,		2020-2019Nine Months Ended
September 30,		2020-2019
20202019Change20202019Change
Financial Data:
Contract charges earned$7.4 $6.6 12.1 %$21.5 $22.1 -2.7 %
Net investment income58.1 60.8 -4.4 %166.7 188.2 -11.4 %
Interest credited39.7 42.4 -6.4 %119.4 126.4 -5.5 %
Net interest margin without net investment gains (losses)19.4 19.5 -0.5 %50.2 64.0 -21.6 %
Net interest margin - reinsured block(1.0)(1.1)9.1 %(2.9)(2.2)-31.8 %
Mortality loss and other reserve charges1.3 0.9 44.4 %4.1 2.7 51.9 %
Operating expenses15.1 16.7 -9.6 %44.0 51.0 -13.7 %
DAC and intangible asset amortization expense, excluding DAC unlocking5.1 4.9 4.1 %15.1 15.2 -0.7 %
DAC unlocking(0.7)— N.M.(1.3)3.6 -136.1 %
Income (loss) before income taxes8.9 7.0 27.1 %19.0 (3.2)N.M.
Net income (loss)7.8 5.9 32.2 %16.6 (6.9)N.M.
Core earnings7.8 5.9 32.2 %16.6 21.1 -21.3 %
Operating Statistics:
Annuity contract deposits*
Variable$58.5 $54.6 7.1 %$168.6 $157.5 7.0 %
Fixed78.7 73.7 6.8 %198.1 187.1 5.9 %
Total137.2 128.3 6.9 %366.7 344.6 6.4 %
Single83.9 81.3 3.2 %201.9 193.0 4.6 %
Recurring53.3 47.0 13.4 %164.8 151.6 8.7 %
Total137.2 128.3 6.9 %366.7 344.6 6.4 %
Assets under administration (AUA)
Annuity assets under management (1)
4,508.7 4,215.9 6.9 %
Broker and advisory assets under administration2,124.3 2,259.4 -6.0 %
Recordkeeping assets under administration1,399.6 1,422.4 -1.6 %
Total8,032.6 7,897.7 1.7 %
Persistency
Variable annuities94.8 %94.7 %0.1 pts
Fixed annuities94.5 %93.9 %0.6 pts
Total94.6 %94.2 %0.4 pts
Annuity contracts in force (thousands)230 227 1.3 %
Fixed spread - YTD annualized (basis points)188 198 -10 bps
($ in millions, unless otherwise indicated) Three Months Ended
March 31,		 2020-2019
  2020 2019 Change %
Financial Data:      
Contract charges earned $7.4
 $8.6
 -14.0%
Net investment income 53.5
 64.7
 -17.3%
Interest credited 40.3
 41.7
 -3.4%
Net interest margin without net investment gains (losses) 14.1
 23.0
 -38.7%
Net interest margin - reinsured block (0.9) —
 N.M.
Mortality loss and other reserve charges 1.6
 0.6
 166.7%
Operating expenses 16.2
 18.1
 -10.5%
DAC and intangible asset amortization expense, excluding DAC unlocking 5.2
 5.4
 -3.7%
DAC unlocking 4.0
 (2.0) N.M.
Income (loss) before income taxes (1.1) 14.6
 -107.5%
Net income (loss) / core earnings (0.9) 12.2
 -107.4%
Operating Statistics:      
Annuity contract deposits*      
Variable $57.8
 $48.8
 18.4%
Fixed 59.9
 58.5
 2.4%
Total 117.7
 107.3
 9.7%
Single 62.2
 55.9
 11.3%
Recurring 55.5
 51.4
 8.0%
Total 117.7
 107.3
 9.7%
Assets under administration (AUA)      
Annuity assets under management (1)
 4,026.6
 6,972.7
 -42.3%
Broker and advisory assets under administration 2,093.9
 2,191.9
 -4.5%
Recordkeeping assets under administration 1,260.8
 1,363.8
 -7.6%
Total 7,381.3
 10,528.4
 -29.9%
Persistency      
Variable annuities 94.5% 94.3% 0.2 pts
Fixed annuities 94.0% 94.1% -0.1 pts
Total 94.1% 94.1% 

Annuity contracts in force (thousands) 229
 226
 1.3%
Fixed spread - YTD annualized (basis points) 151
 142
 9bps
(1)    Amounts reported as of September 30, 2020 and September 30, 2019 exclude $660.1 million and $673.1 million, respectively, of assets under management held under modified coinsurance reinsurance
(1)

Amount reported as of March 31, 2020 excludes $539.6 million of assets under management held under modified coinsurance reinsurance.

For the three and nine months ended March 31,September 30, 2020, total annuity contract deposits* increased $10.4$8.9 million primarily driven by an increase in single deposits.and $22.1 million, respectively. Variable annuity and fixed annuity deposits increased $9.0$11.1 million and $1.4$11.0 million, respectively, for the threenine months ended March 31,September 30, 2020 reflecting theas educators continue to find value educators see in our Retirement savings vehicles.products, including our competitively priced variable annuities with no surrender charges.
At March 31,September 30, 2020, annuity assets under management were $2.9 billion below$292.8 million above a year ago driven primarily by the annuity reinsurance transaction.due to positive net inflows and market appreciation. Variable assets under management, excluding amounts held under the modified coinsurance agreement, decreasedincreased by $269.9$193.4 million primarily due to positive net inflows and market performance.appreciation. The year to date annualized net interest spread on fixed annuities, increased 9excluding reinsurance, decreased 10 basis points due to a lower averaged crediting rate following the annuity reinsurance transaction.

points.
Horace Mann Educators Corporation3942Quarterly Report on Form 10-Q




We actively manage our interest rate risk exposure, considering a variety of factors, including earned interest rates, credited interest rates and the relationship between the expected durations of assets and liabilities. We estimate that over the next 12 months approximately $595.3$490.4 million of the Retirement and Life combined investment portfolio and related investable cash flows will be reinvested at current market rates. As interest rates remain at low levels, borrowers may prepay or redeem the securities with greater frequency in order to borrow at lower market rates, which could increase investable cash flows and exacerbate the reinvestment risk.
As a general guideline, for a 100 basis point decline in the average reinvestment rate and based on our existing policies and investment portfolio, the impact from investing in that lower interest rate environment could further reduce Retirement net investment income by approximately $2.3$1.9 million in year one and $6.9$5.6 million in year two, further reducing the annualized net interest spread on fixed annuities by approximately 97 basis points and 2419 basis points in the respective periods, compared to the current period annualized net interest spread on fixed annuities. We could also consider potential changes in rates credited to policyholders, tempered by any restrictions on the ability to adjust policyholder rates due to minimum guaranteed crediting rates.
The expectation for future annualized net interest spreads on fixed annuities is also an important component in the amortization of DAC. In terms of the sensitivity of this amortization to the annualized net interest spread on fixed annuities, based on DAC as of March 31,September 30, 2020 and assuming all other assumptions are met, a 10 basis point deviation in the current year targeted annualized net interest rate spread on the fixed annuities assumption would impact amortization between $0.3 million and $0.4 million. This result may change depending on the magnitude and direction of any actual deviations but represents a range of reasonably likely experience for the noted assumption.
The annuity reinsurance agreement entered in the second quarter of 2019, which reinsured the $2.2 billion block of in force fixed annuities with a minimum crediting rate of 4.5%, helps mitigate the risk of not being able to generate appropriate spreads on the annuity business. Information regarding the interest crediting rates and balances equal to the minimum guaranteed rate for deferred annuity account values excluding the reinsured block is shown below.
($ in millions)September 30, 2020
Deferred Annuities at
Total Deferred AnnuitiesMinimum Guaranteed Rate
Percent
of Total		Accumulated
Value (AV)		Percent of
Total Deferred
Annuities AV		Percent
of Total		Accumulated
Value
Minimum guaranteed interest rates:
Less than 2%54.2 %$1,334.2 51.6 %38.9 %$688.5 
Equal to 2% but less than 3%11.7 %287.5 83.3 %13.5 %239.6 
Equal to 3% but less than 4%25.1 %619.0 99.9 %35.0 %618.5 
Equal to 4% but less than 5%6.9 %170.9 100.0 %9.7 %170.9 
5% or higher2.1 %50.6 100.0 %2.9 %50.6 
Total100.0 %$2,462.2 71.8 %100.0 %$1,768.1 
($ in millions) March 31, 2020
      Deferred Annuities at
  Total Deferred Annuities Minimum Guaranteed Rate
  
Percent
of Total
 
Accumulated
Value (AV)
 
Percent of
Total Deferred
Annuities AV
 
Percent
of Total
 
Accumulated
Value
Minimum guaranteed interest rates:          
Less than 2% 53.4% $1,282.0
 49.2% 37.1% $630.6
Equal to 2% but less than 3% 12.0% 287.7
 83.2% 14.1% 239.4
Equal to 3% but less than 4% 25.4% 610.6
 99.9% 35.9% 610.2
Equal to 4% but less than 5% 7.1% 169.7
 100.0% 10.0% 169.7
5% or higher 2.1% 50.6
 100.0% 2.9% 50.6
Total 100.0% $2,400.6
 70.8% 100.0% $1,700.5

We will continue to be disciplined in executing strategies to mitigate the negative impact on profitability of a sustained low interest rate environment. However, the success of these strategies may be affected by the factors discussed in Part I - Item 1A in our Annual Report on Form 10-K for the year ended December 31,201931, 2019 and other factors in this report.


Horace Mann Educators Corporation4043Quarterly Report on Form 10-Q





Life
(All comparisons vs. same periods in 2019, unless noted otherwise)

For the three and nine months ended March 31,September 30, 2020, net income and core earnings* decreased $2.7$0.8 million and $6.8 million, respectively, reflecting lowerthe following factors:
Three months ended:
•Higher mortality costs
Nine months ended:
•Lower net investment income.income and higher mortality costs (the volume of claims related to COVID-19 remains low, with face values averaging about $40,000)
For the three and nine months ended March 31,September 30, 2020, insurance premiums and contract deposits* decreased $1.6$0.8 million and $3.2 million, respectively, primarily due to a decline in sales* of single premiums. The ordinary life insurance in force lapse ratio was 4.7%4.3% for the 12 months ended March 31,September 30, 2020 compared to 4.6%4.5% for the 12 months ended March 31,September 30, 2019.
The following table provides certain information for the Life segment for the periods indicated.

hmn-20200930_g3.jpg





($ in millions, unless otherwise indicated) Three Months Ended
March 31,		 2020-2019
  2020 2019 Change %
Financial Data:      
Insurance premiums and contract deposits $24.8
 $26.4
 -6.1%
Insurance premiums and contract charges earned 29.4
 30.4
 -3.3%
Net investment income 15.6
 18.1
 -13.8%
Benefits and settlement expenses 22.2
 22.0
 0.9%
Interest credited 11.2
 11.2
 —%
Operating expenses 9.1
 9.4
 -3.2%
DAC amortization expense, excluding unlocking 1.9
 2.0
 -5.0%
DAC unlocking (0.1) —
 N.M.
Income before income taxes 0.7
 4.0
 -82.5%
Net income / core earnings* 0.6
 3.3
 -81.8%
       
Operating Statistics:      
Life insurance in force $19,295
 $18,409
 4.8%
Number of policies in force (thousands) 201
 198
 1.5%
Average face amount in force (in dollars) $96,225
 $92,810
 3.7%
Lapse ratio (ordinary life insurance in force) 4.7% 4.6% 0.1pts
Mortality costs $10.1
 $10.5
 -3.8%





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($ in millions, unless otherwise indicated)Three Months Ended
September 30,		2020-2019Nine Months Ended
September 30,		2020-2019
20202019Change20202019Change
Financial Data:
Insurance premiums and contract deposits*$26.9 $27.7 -2.9 %$79.3 $82.5 -3.9 %
Insurance premiums and contract charges earned29.4 29.7 -1.0 %88.0 90.0 -2.2 %
Net investment income18.2 18.4 -1.1 %49.4 54.8 -9.9 %
Benefits and settlement expenses21.2 19.6 8.2 %64.5 60.7 6.3 %
Interest credited11.2 11.2 — %33.7 33.7 — %
Operating expenses8.4 8.9 -5.6 %25.8 27.5 -6.2 %
DAC amortization expense, excluding unlocking1.9 2.0 -5.0 %5.8 6.1 -4.9 %
DAC unlocking(0.2)— N.M.(0.5)(0.1)N.M.
Income before income taxes5.2 6.4 -18.8 %8.2 17.1 -52.0 %
Net income / core earnings*4.3 5.1 -15.7 %6.8 13.6 -50.0 %
Operating Statistics:
Life insurance in force$19,681 $18,937 3.9 %
Number of policies in force (thousands)201 202 -0.5 %
Average face amount in force (in dollars)$97,712 $93,944 4.0 %
Lapse ratio (ordinary life insurance in force)4.3 %4.5 %-0.2pts 
Mortality costs$28.3 $26.4 7.2 %
Horace Mann Educators Corporation4144Quarterly Report on Form 10-Q





Corporate and Other
(All comparisons vs. same periods in 2019, unless noted otherwise)

The following table provides certain financial information for Corporate and Other for the periods indicated.
($ in millions)Three Months Ended
September 30,		2020-2019Nine Months Ended
September 30,		2020-2019
20202019Change %20202019Change %
Interest expense$3.4 $4.3 -20.9 %$11.3 $10.2 10.8 %
Net investment gains (losses) pretax2.5 (2.1)N.M.(12.8)151.6 N.M.
Tax on net investment gains (losses)0.6 (0.5)N.M.(2.7)32.7 N.M.
Net investment gains (losses) after tax1.9 (1.6)N.M.(10.1)118.9 N.M.
Net income (loss)(2.0)(6.7)70.1 %(22.2)103.5 -121.4 %
Core earnings (loss)*(3.9)(5.1)23.5 %(12.1)(15.4)21.4 %
($ in millions) Three Months Ended
March 31,		 2020-2019
  2020 2019 Change %
Interest expense $4.0
 $3.0
 33.3%
Net investment gains (losses) pretax (18.5) 7.4
 N.M.
Tax on net investment gains (losses) (4.0) 1.6
 N.M.
Net investment gains (losses) after tax (14.5) 5.8
 N.M.
Net income (loss) (18.3) 1.7
 N.M.
Core earnings (loss)* (3.8) (4.1) 7.3%

For the three months ended March 31,September 30, 2020, net income increased primarily due to net investment gains in the current period. For the nine months ended September 30, 2020, net income decreased primarily due to $15.2recognition of a $106.9 million after-taxafter tax realized investment gain in the second quarter of net investment losses on changes in fair value of equity securities as well as derivatives - all due to COVID-19 related market volatility. Core earnings (loss)* increased slightly compared2019 with respect to the prior year period.transfer of investments as consideration in connection with the annuity reinsurance transaction.
Investment Results
(All comparisons vs. same periods in 2019, unless noted otherwise)
($ in millions) Three Months Ended
March 31,		 2020-2019($ in millions)Three Months Ended
September 30,		2020-2019Nine Months Ended
September 30,		2020-2019
 2020 2019 Change %20202019Change %20202019Change %
Net investment income - investment portfolio $58.6
 $92.8
 -36.9 %
Net investment income - Investment portfolioNet investment income - Investment portfolio$69.2 $69.2 — %$184.3 $232.3 -20.7 %
Investment income - Deposit asset on reinsurance 23.7
 —
 N.M.
Investment income - Deposit asset on reinsurance24.5 23.8 2.9 %72.1 47.0 53.4 %
Total net investment income 82.3
 92.8
 -11.3 %Total net investment income93.7 93.0 0.8 %256.4 279.3 -8.2 %
Pretax net investment gains (losses) (18.5) 7.4
 N.M.
Pretax net investment gains (losses)2.5 (2.1)219.0 %(12.8)151.6 -108.4 %
Pretax net unrealized investment gains on fixed maturity securities 189.7
 310.5
 -38.9 %Pretax net unrealized investment gains on fixed maturity securities496.2 386.1 28.5 %

Excluding accreted investment income on the deposit asset on reinsurance, for the three and nine months ended September 30, 2020, net investment income was flat for the three months and decreased $34.2$48.0 million for the nine months. The decline was primarily due to a $2.1 billion reduction ofin invested assets from investments transferred under the annuity reinsurance transaction in the second quarter of 2019 as well as lower than expected returns on alternative investments.limited partnership interests.
For the threenine months ended March 31,September 30, 2020, the pretax net investment loss was primarily due to the change in fair value of equity securities as well as options that we use to hedge our FIAfixed indexed annuity (FIA) and IULindexed universal life (IUL) products somewhat offset by gains in the related derivatives embedded in FIA. Pretax net investment gains for the nine months ended September 30, 2019 reflected a realized investment gain of $135.3 million recognized during the second quarter of 2019 in connection with the transfer of investments related to the annuity reinsurance transaction. Pretax net unrealized investment gains on fixed maturity securities were down $145.0up $161.5 million compared to December 31, 2019, reflecting a decline in the 10-year U.S. Treasury yield of 125124 basis points that was more than offset by wider credit spreads for investment grade and high yield securities.

Horace Mann Educators Corporation4245Quarterly Report on Form 10-Q




Fixed Maturity and Equity Securities Portfolios
The table below presents our fixed maturity and equity securities portfolios by major asset class, including the 10 largest sectors of our corporate bond holdings (based on fair value).
($ in millions)September 30, 2020
Number of
Issuers		Fair
Value		Amortized
Cost or Cost		Pretax Net
Unrealized
Gain (Loss)
Fixed maturity securities
Corporate bonds
Banking & Finance146 $483.9 $439.1 $44.8 
Insurance50 199.4 176.6 22.8 
Energy (1)
75 156.8 143.7 13.1 
HealthCare,Pharmacy76 147.7 134.0 13.7 
Real Estate35 120.5 112.8 7.7 
Transportation45 98.9 92.9 6.0 
Technology40 89.8 82.3 7.5 
Utilities57 87.5 75.0 12.5 
Food and Beverage30 72.4 61.3 11.1 
Broadcasting & Media26 61.6 52.0 9.6 
All other corporates (2)
324 465.0 432.7 32.3 
Total corporate bonds904 1,983.5 1,802.4 181.1 
Mortgage-backed securities
U.S. Government and federally sponsored agencies268 485.7 431.6 54.1 
Commercial (3)
126 351.8 317.5 34.3 
Other41 59.5 59.6 (0.1)
Municipal bonds (4)
589 1,816.5 1,621.3 195.2 
Government bonds
U.S.36 384.1 341.7 42.4 
Foreign7 44.8 40.2 4.6 
Collateralized loan obligations (5)
141 663.2 671.7 (8.5)
Asset-backed securities112 379.4 386.3 (6.9)
Total fixed maturity securities2,224 $6,168.5 $5,672.3 $496.2 
Equity securities
Non-redeemable preferred stocks17 $74.1 
Common stocks95 6.9 
Closed-end fund1 21.3 
Total equity securities113 $102.3 
Total2,337 $6,270.8 
($ in millions) March 31, 2020
  
Number of
Issuers
 
Fair
Value
 
Amortized
Cost or Cost
 
Pretax Net
Unrealized
Gain (Loss)
Fixed maturity securities        
Corporate bonds        
Banking & Finance 123
 $430.4
 $417.4
 $13.0
Insurance 43
 171.4
 163.8
 7.6
HealthCare,Pharmacy 67
 124.9
 119.8
 5.1
Energy (1)
 72
 120.6
 124.4
 (3.8)
Real Estate 37
 114.5
 113.7
 0.8
Technology 39
 88.2
 85.8
 2.4
Transportation 32
 79.4
 78.3
 1.1
Utilities 51
 71.0
 65.6
 5.4
Food and Beverage 29
 64.2
 61.2
 3.0
Broadcasting & Media 26
 56.1
 52.7
 3.4
All other corporates (2)
 298
 365.1
 366.8
 (1.7)
Total corporate bonds 817
 1,685.8
 1,649.5
 36.3
Mortgage-backed securities        
U.S. Government and federally sponsored agencies 275
 534.5
 484.5
 50.0
Commercial (3)
 132
 348.1
 328.1
 20.0
Other 45
 68.2
 72.9
 (4.7)
Municipal bonds (4)
 590
 1,769.8
 1,625.8
 144.0
Government bonds        
U.S. 34
 468.7
 430.2
 38.5
Foreign 9
 43.9
 42.9
 1.0
Collateralized loan obligations (5)
 119
 559.2
 614.8
 (55.6)
Asset-backed securities 109
 365.0
 404.8
 (39.8)
Total fixed maturity securities 2,130
 $5,843.2
 $5,653.5
 $189.7
         
Equity securities        
Non-redeemable preferred stocks 14
 $52.3
    
Common stocks 98
 14.8
    
Closed-end fund 1
 19.9
    
Total equity securities 113
 $87.0
    
         
Total 2,243
 $5,930.2
    
(1)At September 30, 2020, the fair value amount included $10.6 million which were non-investment grade.
(1)
(2)The All other corporates category contains 19 additional industry sectors. Telecom, Retail, Consumer Products, Metal & Mining and Misc. represented $243.4 million of fair value at September 30, 2020, with the remaining 14 sectors each representing less than $38.1 million.
(3)At September 30, 2020, 100% were investment grade, with an overall credit rating of AA+, and the positions were well diversified by property type, geography and sponsor.
(4)Holdings are geographically diversified, 52.1% are tax-exempt and 77.3% are revenue bonds tied to essential services, such as mass transit, water and sewer. The overall credit quality of the municipal bond portfolio was AA- at September 30, 2020.
(5)Based on fair value, 95.7% of the collateralized loan obligation securities were rated investment grade by Standard and Poor's Global Inc. (S&P), Moody's Investors Service, Inc. (Moody's) and/or Fitch Ratings, Inc. (Fitch) at September 30, 2020.
At March 31, 2020, the fair value amount included $8.8 million which were non-investment grade.
(2)
The All other corporates category contains 19 additional industry sectors. Telecom, Retail, Consumer Products, Metal & Mining and Misc. represented $206.2 million of fair value at March 31, 2020, with the remaining 14 sectors each representing less than $30.0 million.
(3)
At March 31, 2020, 100% were investment grade, with an overall credit rating of AA+, and the positions were well diversified by property type, geography and sponsor.
(4)
Holdings are geographically diversified, 51.6% are tax-exempt and 77.5% are revenue bonds tied to essential services, such as mass transit, water and sewer. The overall credit quality of the municipal bond portfolio was AA- at March 31, 2020.
(5)
Based on fair value, 95.3% of the collateralized loan obligation securities were rated investment grade by Standard and Poor's Global Inc. (S&P), Moody's Investors Service, Inc. (Moody's) and/or Fitch Ratings, Inc. (Fitch) at March 31, 2020.

Horace Mann Educators Corporation4346Quarterly Report on Form 10-Q




At March 31,September 30, 2020, our diversified fixed maturity securities portfolio consisted of 3,3423,513 investment positions, issued by 2,1302,224 entities, and totaled approximately $5.8$6.2 billion in fair value. This portfolio was 95.3%92.1% investment grade, based on fair value, with an average quality rating of A+. Our investment guidelines target single corporate issuer concentrations to 0.5% of invested assets for AAA or AA rated securities, 0.4%0.35% of invested assets for A or BBB rated securities, and 0.2% of invested assets$5.0 million for non-investment grade securities.
Fixed Maturity Securities - COVID-19 Related Impacts
In late 2016, we determined the economy was approaching later stages of the credit cycle and began to upgrade portfolio quality. Over the past three years, recessionary expectations were extended due to the fiscal stimulus, which lengthened the credit cycle. In 2019, management determined that it had achieved its investment initiatives and the portfolio was well positioned for any dislocation in the markets.
That proactive effort to improve portfolio quality resulted in a significant reduction in BBB-rated corporate credit, high yield and below-investment-grade structured securities. During this same period, purchases focused on government agency and agency mortgage-backed securities and high quality corporate bonds and municipal securities. Today, that proactive flight to quality has the investment portfolio in all insurance subsidiaries well positioned for market disruptions with ample liquidity.
Further, we believe the investment portfolio is well positioned to withstand an extended period of elevated investment market volatility, and has relatively modest exposure to asset sectors that it expects to be most impacted by the public health response to COVID-19. While we expect other segments of the economy to be disrupted, we believe these effects will be most acute in these sectors.the sectors listed below. These sectors have experienced more pronounced price dislocation due to their perceived exposure to COVID-19 related impacts. Exposure to these sectors totals 6.9%7.1% of the investment portfolio, and as of March 31,September 30, 2020, informed by extensive stress testing and portfolio review, management continues to hold the following securities:
($ in millions)September 30, 2020
Number of IssuersFair ValueAmortized
Cost or
Cost		Pretax Net Unrealized
Investment
Gains (Losses)		Credit
Quality
Fixed maturity securities (1)
Travel and leisure58 $121.7 $120.3 $1.4 BBB
Energy-related88 157.5 141.1 16.4 BBB+
Retail27 67.4 63.3 4.1 A
Aircraft61 157.6 178.1 (20.5)BBB+
Total fixed maturity securities234 $504.2 $502.8 $1.4 BBB+
(1)    Below investment grade and non-rated securities included in this population account for $86.5 million of amortized cost, $86.3 million of fair value, and $0.2 million of net unrealized investment losses. There are 108 issuers with an average rating of BB-. The majority of these securities are concentrated in the sectors that have experienced more pronounced price dislocation due to their perceived exposure to COVID-19 related impacts:
($ in millions) March 31, 2020
  Number of Issuers Fair Value 
Amortized
Cost or
Cost
 
Pretax Net Unrealized
Investment
Gains (Losses)
 
Credit
Quality
Fixed maturity securities (1)
          
Travel and leisure 46
 $79.2
 $82.5
 $(3.3) BBB
Energy-related 77
 137.3
 134.4
 2.9
 BBB+
Retail 21
 54.0
 54.2
 (0.2) A-
Aircraft 55
 150.5
 183.4
 (32.9) A
Total fixed maturity securities 199
 $421.0
 $454.5
 $(33.5) A-
(1)travel/leisure and retail sectors.
Below investment grade securities included in this population account for $34.5 million of amortized cost, $26.6 million of market value, and $7.9 million of net unrealized investment losses.  There are 83 issuers with an average rating of BB-.  The majority of these securities are concentrated in the energy sector.

Horace Mann Educators Corporation4447Quarterly Report on Form 10-Q




Rating of Fixed Maturity Securities and Equity Securities (1)
The following table presents the composition and fair value of our fixed maturity and equity securities portfolios by rating category. At March 31,September 30, 2020, 94.8%91.7% of these combined portfolios were investment grade, based on fair value, with an overall average quality rating of A+. We have classified the entire fixed maturity securities portfolio as available for sale, which is carried at fair value.
($ in millions)Percent of Portfolio  
 Fair ValueSeptember 30, 2020
December 31, 2019September 30, 2020Fair
Value		Amortized
Cost
Fixed maturity securities
AAA11.5 %11.6 %$718.7 $694.1 
AA (2)
42.7 40.2 2,477.5 2,224.4 
A23.3 19.9 1,227.7 1,117.4 
BBB18.9 20.4 1,256.0 1,160.3 
BB1.7 2.7 170.2 167.0 
B0.4 0.9 54.4 54.4 
CCC or lower— 0.1 4.2 4.9 
Not rated (3)
1.5 4.2 259.8 249.8 
Total fixed maturity securities100.0 %100.0 %$6,168.5 $5,672.3 
Equity securities
AAA— %— %$— 
AA— — — 
A— — — 
BBB59.3 69.6 71.2 
BB— 2.8 2.9 
B— — — 
CCC or lower— — — 
Not rated40.7 27.6 28.2 
Total equity securities100.0 %100.0 %$102.3 
Total$6,270.8 
($ in millions) Percent of Portfolio    
  Fair Value March 31, 2020
  December 31, 2019 March 31, 2020 
Fair
Value
 
Amortized
Cost
Fixed maturity securities        
AAA 11.5% 11.6% $676.4
 $695.2
AA (2)
 42.7
 43.3
 2,531.2
 2,343.4
A 23.3
 21.8
 1,276.5
 1,239.2
BBB 18.9
 18.6
 1,084.2
 1,084.9
BB 1.7
 1.8
 104.8
 110.8
B 0.4
 0.9
 49.7
 55.0
CCC or lower —
 —
 1.4
 2.3
Not rated (3)
 1.5
 2.0
 119.0
 122.7
Total fixed maturity securities 100.0% 100.0% $5,843.2
 $5,653.5
Equity securities        
AAA —
 —
 —
  
AA —
 —
 —
  
A —
 —
 —
  
BBB 59.3% 60.1% $52.3
  
BB —
 —
 —
  
B —
 —
 —
  
CCC or lower —
 —
 —
  
Not rated 40.7
 39.9
 34.7
  
Total equity securities 100.0% 100.0% $87.0
  
         
Total     $5,930.2
  
(1)Ratings are as assigned primarily by S&P when available, with remaining ratings as assigned on an equivalent basis by Moody's or Fitch. Ratings for publicly traded securities are determined when the securities are acquired and are updated monthly to reflect any changes in ratings.
(1)
(2)At September 30, 2020, the AA rated fair value amount included $316.4 million of U.S. Government and federally sponsored agency securities and $305.6 million of mortgage-backed and asset-backed securities issued by U.S. Government and federally sponsored agencies.
(3)This category primarily represents private placement and municipal securities not rated by either S&P, Moody's or Fitch.

Ratings are as assigned primarily by S&P when available, with remaining ratings as assigned on an equivalent basis by Moody's or Fitch. Ratings for publicly traded securities are determined when the securities are acquired and are updated monthly to reflect any changes in ratings.
(2)
At March 31, 2020, the AA rated fair value amount included $468.2 million of U.S. Government and federally sponsored agency securities and $736.4 million of mortgage-backed and asset-backed securities issued by U.S. Government and federally sponsored agencies.
(3)
This category primarily represents private placement and municipal securities not rated by either S&P, Moody's or Fitch.

At March 31,September 30, 2020, the fixed maturity securities portfolio had $161.6$45.0 million of pretax gross unrealized investment losses on $1,781.1$1,112.6 million of fair value related to 1,184599 positions. Of the investment positions with gross unrealized losses, there were 10034 trading below 80.0% of the carrying value at March 31,September 30, 2020.
We view the unrealized investment losses of all our fixed maturity securities at March 31,September 30, 2020 as temporary. Future changes in circumstances related to these and other securities could require subsequent recognition of other-than-temporary impairment (OTTI).
Liquidity and Financial Resources
Off-Balance Sheet Arrangements
At March 31,September 30, 2020 and 2019, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or for other contractually narrow or limited purposes. As such, we are not exposed to any financing, liquidity, market or credit risk that could arise if we engaged in such relationships.

Horace Mann Educators Corporation4548Quarterly Report on Form 10-Q




Investments
Information regarding our investment portfolio, which is comprised primarily of investment grade fixed maturity securities, is presented in Part I - Item 1, Note 2 of the Consolidated Financial Statements as well as Part I - Item 2 - Investments Results in this report.
Cash Flow
Our short-term liquidity requirements, within a 12 month operating cycle, are for the timely payment of claims and benefits to policyholders, operating expenses, interest payments and federal income taxes. Cash flow generated from operations has been, and is expected to be, adequate to meet our operating cash needs in the next 12 months. Cash flow in excess of operational needs has been used to fund business growth, pay dividends to shareholders and repurchase shares of our common stock. Long-term liquidity requirements, beyond one year, are principally for the payment of future insurance and annuity policy claims and benefits, as well as retirement of debt. The following table summarizes our consolidated cash flows activity for the periods indicated.
($ in millions) Three Months Ended
March 31,		 2020-2019($ in millions)Nine Months Ended
September 30,		2020-2019
 2020 2019 Change %20202019Change %
Net cash provided by operating activities $87.4
 $124.8
 -30.0%Net cash provided by operating activities$267.8 $207.2 29.2 %
Net cash used in investing activities (140.0) (146.2) 4.2%Net cash used in investing activities(368.8)(65.6)N.M.
Net cash provided by financing activities 68.3
 16.8
 N.M.
Net increase (decrease) in cash 15.7
 (4.6) N.M.
Net cash provided by (used in) financing activitiesNet cash provided by (used in) financing activities141.0 (114.2)N.M.
Net increase in cashNet increase in cash40.0 27.4 46.0 %
Cash at beginning of period 25.5
 11.9
 114.3%Cash at beginning of period25.5 11.9 114.3 %
Cash at end of period $41.2
 $7.3
 N.M.
Cash at end of period$65.5 $39.3 66.7 %
Operating Activities
As a holding company, we conduct our principal operations in the personal lines segment of the property and casualty and life insurance industries through itsour subsidiaries. Our insurance subsidiaries generate cash flow from premium and investment income, generally well in excess of their immediate needs for policy obligations, operating expenses and other cash requirements. Cash provided by operating activities primarily reflects net cash generated by the insurance subsidiaries.
For the threenine months ended March 31,September 30, 2020, net cash provided by operating activities decreased $37.4increased $60.6 million, primarily due to lower netclaims paid on insurance policies in the current year partially offset by lower investment income collected in the current year as a result of a $2.1 billion reduction of invested assets from investments transferred under the annuity reinsurance transaction in the second quarter of 2019.
Investing Activities
Our insurance subsidiaries maintain significant investments in fixed maturity securities to meet future contractual obligations to policyholders. In conjunction with itsour management of liquidity and other asset/liability management objectives, we, from time to time, will sell fixed maturity securities prior to maturity, and reinvest the proceeds into other investments with different interest rates, maturities or credit characteristics. Accordingly, we have classified the entire fixed maturity securities portfolio as available for sale.
Financing Activities
Financing activities include primarily payment of dividends, receipt and withdrawal of funds by annuity contractholders, changes in the deposit asset on reinsurance, issuances and repurchases of our common stock, fluctuations in book overdraft balances, and borrowings, repayments and repurchases related to debt facilities.

Horace Mann Educators Corporation4649Quarterly Report on Form 10-Q




Horace Mann Life Insurance Company (HMLIC) and NTA (both subsidiaries of HMEC) operate under funding agreements with FHLB. DuringFor the first quarter ofnine months ended September 30, 2020, HMLIC and NTA collectively received $75.0$95.5 million from FHLB under funding agreements and infor the first quarter ofnine months ended September 30, 2019, HMLIC received $50.0an additional $175.0 million from FHLB under a funding agreement.agreements as well as repaid FHLB $275.0 of principal. Receipt of these funds are reported in Annuity Contracts: Variable, Fixed and FHLB Funding Agreements, Deposits in the Consolidated Statements of Cash Flows. Advances to HMLIC and NTA from FHLB under funding agreements totaled $570.0$590.5 million as of March 31,September 30, 2020. For the threenine months ended March 31,September 30, 2020, cash inflows from annuity contract deposits (excluding the $75.0$95.5 million received from FHLB in the current quarteryear and the $50.0$175.0 million received from FHLB in the prior year quarter)year) increased $10.4$22.1 million, or 9.7%6.4%, compared to the prior year period. Cash outflows from annuity contract benefits, withdrawals and net transfers to Separate Account (variable annuity) assets decreased $7.6$29.2 million, or 6.9%9.3%, compared to the prior year period.
Capital Resources
We have determined the amount of capital which is needed to adequately fund and support business growth, primarily based on risk-based capital formulas including those developed by the National Association of Insurance Commissioners. Historically, our insurance subsidiaries have generated capital in excess of such needed capital. These excess amounts have been paid to us through dividends. We have then utilized these dividends and our access to the capital markets to fund growth initiatives, service and retire debt, pay dividends to our shareholders, repurchase shares of our common stock and for other corporate purposes. If necessary, we also have other potential sources of liquidity that could provide for additional funding to meet corporate obligations or pay shareholder dividends, which include a revolving line of credit, as well as issuances of various securities. The insurance subsidiaries are subject to various regulatory restrictions which limit the amount of annual dividends or other distributions, including loans or cash advances, available to us without prior approval of the insurance regulatory authorities. The aggregate amount of dividends that may be paid in 2020 from all of our insurance subsidiaries without prior regulatory approval is $105.3 million, excluding the impact and timing of prior year dividends, of which $46.0$110.0 million was paid during the threenine months ended March 31,September 30, 2020. We anticipate that our sources of capital will continue to generate sufficient capital to meet the needs for business growth, debt interest payments, shareholder dividends and our share repurchase program. Additional information is contained in Part II - Item 8, Note 14 of the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2019.
Total capital was $1,910.7$2,152.9 million at March 31,September 30, 2020, including $433.1$437.2 million of short-term and long-term debt. Total debt represented 22.7%20.3% of total capital including net unrealized investment gains on fixed maturity securities (24.4%(24.0% excluding net unrealized investment gains on fixed maturity securities*) at March 31,September 30, 2020, which was below our long-term target of 25%.
Shareholders' equity was $1,477.6$1,715.7 million at March 31,September 30, 2020, including net unrealized investment gains on fixed maturity securities in our investment portfolio of $136.7$328.2 million after taxes and the related impact of DAC associated with investment contracts and life insurance products with account values. The market value of our common stock and the market value per share were $1,510.3$1,382.6 million and $36.59,$33.40, respectively, at March 31,September 30, 2020. Book value per share was $35.80$41.45 at March 31,September 30, 2020 ($32.4933.52 excluding net unrealized investment gains on fixed maturity securities*).
Additional information regarding net unrealized investment gains on fixed maturity securities in our investment portfolio at March 31,September 30, 2020 is included in Part I - Item 1, Note 2 of the Consolidated Financial Statements as well as in Part I - Item 2 - Investment Results in this report.
Total shareholder dividends paid were $12.4$37.2 million for the threenine months ended March 31,September 30, 2020. In March, May and September 2020, the Board of Directors (Board) approved an increase in the regular quarterly dividend todividends of $0.30 per share.
For the threenine months ended March 31,September 30, 2020, we repurchased 52,095 shares of our common stock at an average price per share of $41.17 under our share repurchase program, which is further described in Part II - Item 8, Note 13 of the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2019. As of March 31,September 30, 2020, $20.6 million remained authorized for future share repurchases under the share repurchase program.

Horace Mann Educators Corporation4750Quarterly Report on Form 10-Q




The following table summarizes our debt obligations.
($ in millions) 
Effective
Interest
Rates
 
Final
Maturity
    ($ in millions)Effective
Interest
Rates		Final
Maturity
 March 31, 2020 December 31, 2019September 30, 2020December 31, 2019
Short-term debt    Short-term debt
Bank Credit Facility Variable 2024 $135.0
 $135.0
Bank Credit FacilityVariable2024$135.0 $135.0 
Long-term debt (1)
    
Long-term debt (1)
4.50% Senior Notes, Aggregate principal
amount of $250,000 less unaccrued
discount of $411 and $426 and unamortized
debt issuance costs of $1,491 and $1,549		 4.50% 2025 248.1
 248.0
4.50% Senior Notes, Aggregate principal
amount of $250,000 less unaccrued
discount of $378 and $426 and unamortized
debt issuance costs of $1,375 and $1,549		 4.50% Senior Notes, Aggregate principal
amount of $250,000 less unaccrued
discount of $378 and $426 and unamortized
debt issuance costs of $1,375 and $1,549		4.50%2025248.2 248.0 
Federal Home Loan Bank borrowing 1.99% 2022 50.0
 50.0
Federal Home Loan Bank borrowing0.48%202254.0 50.0 
Total  $433.1
 $433.0
Total$437.2 $433.0 
(1)    We designate debt obligations as "long-term" based on maturity date at issuance.

As of March 31,September 30, 2020, we had outstanding $250.0 million aggregate principal amount of 4.50% Senior Notes (Senior Notes), which will mature on December 1, 2025, issued at a discount resulting in an effective yield of 4.53%. Interest on the Senior Notes is payable semi-annually at a rate of 4.50%. Detailed information regarding the redemption terms of the Senior Notes is contained in the Part II - Item 8, Note 10 of the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2019. The Senior Notes are traded in the open market (HMN 4.50).
As of March 31,September 30, 2020, we had $50.0$54.0 million of borrowings outstanding with FHLB. The Board has authorized a maximum amount equal to 15% of net aggregate admitted assets less separate account assets of the insurance subsidiaries for FHLB borrowings.borrowing and funding agreements. For the total $50.0$54.0 million received, $4.0 million matures on May 17, 2021, $25.0 million matures on October 5, 2022 and $25.0 million matures on December 2, 2022. Interest on the borrowings accrue at an annual weighted average rate of 1.48%0.48% as of March 31,September 30, 2020. The $50.0$54.0 million of FHLB borrowings is reported as Long-term debt in the Consolidated Balance Sheets.
As of March 31,September 30, 2020, we had $135.0 million of short-term debt outstanding under our Bank Credit Facility. On June 21, 2019, we, as borrower, replaced our current line of credit with a new five-year Credit Agreement (Bank Credit Facility). The new Bank Credit Facility increased the amount available on this senior revolving credit facility to $225.0 million from $150.0 million. PNC Capital Markets, LLC and JPMorgan Chase Bank, N.A. served as joint leads on the new agreement, with The Northern Trust Company, U.S. Bank National Association, KeyBank National Association, Comerica Bank and Illinois National Bank participating in the syndicate. Terms and conditions of the new Bank Credit Facility are substantially consistent with the prior agreement, with an interest rate based on LIBOR plus 115 basis points.
On July 1, 2019, we utilized the senior revolving credit facility to partially fund the acquisition of NTA. As of March 31,September 30, 2020, the amount outstanding on the senior revolving credit facility was $135.0 million. The $90.0 million unused portion of the Bank Credit Facility is available for use and subject to a variable commitment fee, which was 0.15% on an annual basis at March 31,September 30, 2020.
To provide additional capital management flexibility, we filed a "universal shelf" registration statement on Form S-3 with the Securities and Exchange Commission (SEC) on March 13, 2018. The registration statement, which registered the offer and sale from time to time of an indeterminate amount of various securities, which may include debt securities, common stock, preferred stock, depositary shares, warrants, delayed delivery contracts and/or units that include any of these securities, was automatically effective on March 13, 2018. Unless withdrawn by us earlier, this registration statement will remain effective through March 13, 2021. No securities associated with the registration statement have been issued at the time of issuance of this Quarterly Report on Form 10-Q.
On March 13, 2018, we filed a "shelf" registration statement on Form S-4 with the SEC which became effective on May 2, 2018. Under this registration statement, we may from time to time offer and issue up to 5,000,000 shares of our common stock in connection with future acquisitions of other businesses, assets or securities. Unless withdrawn by us, this registration statement will remain effective indefinitely. No securities associated with the registration statement have been issued at the time of issuance of this Quarterly Report on Form 10-Q.

Horace Mann Educators Corporation4851Quarterly Report on Form 10-Q




COVID-19 Liquidity and Capital Resources Considerations
The various impacts of the COVID-19 pandemic on the U.S. economy, our operations and our investment portfolio have been material. Nonetheless we believe that the liquidity available to our holding company and its operating subsidiaries remains adequate and we do not foresee a need to suspend ordinary dividends or seek additional sources of capital at this time. Our current forecast assumes a return to a normal operating environment within sixtwelve months, and as such, capital and liquidity are expected to remain at or near target levels during that period.
Financial Ratings
Our principal insurance subsidiaries are rated by S&P, Moody's, A.M. Best Company, Inc. (A.M. Best), Fitch, Moody's and Fitch.S&P. These rating agencies have also assigned ratings to our Senior Notes. The ratings that are assigned by these agencies, which are subject to change, can impact, among other things, our access to sources of capital, cost of capital, and competitive position. These ratings are not a recommendation to buy or hold any of our securities.
All four agencies currently have assigned the same insurance financial strength ratings to our Property and Casualty and Life insurance subsidiaries. Only A.MA.M. Best currently rates our Supplemental segment's subsidiaries. Assigned ratings and respective affirmation/review dates as of April 30,October 31, 2020 were as follows:
Insurance FinancialAffirmed/
Strength Ratings (Outlook)Debt Ratings (Outlook)Reviewed
S&PA(stable)BBB(stable)
Moody’sA2(stable)Baa2(stable)
A.M. Best7/2/2020
HMEC (parent company)N.A.bbb(stable)
HMEC's LifeA(stable)N.A.
HMEC's Property and Casualty subsidiariesA(stable)N.A.
HMEC's Supplemental subsidiariesA-(stable)N.A.
FitchA(stable)BBB(stable)9/22/2020
Moody'sA2(stable)Baa2(stable)10/8/2020
S&PA(stable)BBB(stable)2/19/2020
Reinsurance Programs
Information regarding the reinsurance programs for our Property and Casualty, Supplemental and Life segments is located in Part II - Item 8, Note 9 of the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2019.
Effective April 1, 2019, we reinsured a block of approximately $2.9 billion of individual annuity policy liabilities to AA- S&P rated RGA Reinsurance Company, a subsidiary of Reinsurance Group of America, Incorporated (RGA). The block includes $2.2 billion of fixed annuities reinsured under coinsurance and $0.7 billion of variable annuities reinsured under modified coinsurance. RGA's financial obligations for the general account liabilities of the reinsured annuity contracts are secured by its assets placed in a comfort trust for our sole use and benefit. Upon RGA's material breach of the reinsurance agreement, deterioration of its risk-based capital ratio to a certain level, or certain other events, we may recapture the reinsured business.
ITEM 3. I Quantitative and Qualitative Disclosures about Market Risk
Market value risk, our primary market risk exposure, is the risk that our invested assets will decrease in value. This decrease in value may be due to (1) a change in the yields realized on our assets and prevailing market yields for similar assets, (2) an unfavorable change in the liquidity of an investment, (3) an unfavorable change in the financial prospects of the issuer of an investment, or (4) a downgrade in the credit rating of the issuer of an investment. Also see Consolidated Results of Operations in Part I - Item 2 of this report regarding net investment gains (losses).

Horace Mann Educators Corporation4952Quarterly Report on Form 10-Q




Significant changes in interest rates expose us to the risk of experiencing losses or earning a reduced level of income based on the difference between the interest rates earned on our investments and the credited interest rates on our insurance and investment contract liabilities. Also see Consolidated Results of Operations in Part I - Item 2 of this report regarding interest credited to policyholders.
We seek to manage our market value risk by coordinating the projected cash inflows of assets with the projected cash outflows of liabilities. For all of our assets and liabilities, we seek to maintain reasonable durations, consistent with the maximization of income without sacrificing investment quality, while providing for liquidity and diversification. The investment risk associated with variable annuity deposits and the underlying mutual funds is assumed by those contractholders, and not by us. Certain fees that we earn from variable annuity deposits are based on the market value of the funds deposited.
More detailed descriptions of our exposure to market value risks and the management of those risks is contained in Part II - Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2019.
ITEM 4. I Controls and Procedures
Management's Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 as amended (Exchange Act), as of March 31,September 30, 2020. Based on this evaluation, the chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to us (including our consolidated subsidiaries) that is required to be included in our periodic SEC filings. No material weaknesses in our disclosure controls and procedures were identified in the evaluation and therefore, no corrective actions were taken. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.
Changes in Internal Control Over Financial Reporting
Except as noted below, thereThere were no changes in our internal control over financial reporting during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
On July 1, 2019, we completed our acquisition of NTA. We are in the process of integrating NTA and our controls over financial reporting. As a result of these integration activities, certain controls will be evaluated and may be changed. Therefore, we have elected to exclude NTA from our assessment of internal control over financial reporting as of March 31, 2020.
Concurrent with the NTA acquisition, changes were made to the relevant business processes and the related control activities over purchase accounting in order to monitor and maintain appropriate controls over financial reporting.

Horace Mann Educators Corporation5053Quarterly Report on Form 10-Q





PART II: OTHER INFORMATION
ITEM 1A. I Risk Factors
At the time of issuance of this Quarterly Report on Form 10-Q, we believe there are no material changes from the risk factors as previously disclosed in Part I - Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019. However, the following risk factor has emerged as a result of events that occurred subsequent to year end.
Our business may be adversely affected by the recent COVID-19 outbreak.
The global pandemic caused by the novel coronavirus (COVID-19) was initially reported in December and has developed into a worldwide crisis over the subsequent months, causing significant human suffering and widespread economic damage. By early 2020, COVID-19 spread across the world and efforts to contain the disease intensified. The affects of the outbreak on the U.S. economy, our customers, our agents, our employees, our investments and our communities, as well as any preventative or protective actions that we, our employees and agency force, our third-party service providers and suppliers, or governments may take to mitigate the impact of COVID-19 could have an adverse effect on our ability to conduct business and on our financial condition and results of operations. Impacts to our business could be widespread and material impacts may result, including but not limited to, the following:
•employees contracting COVID-19;
•reductions in our operating effectiveness as our employees work from home;
•sustained lack of access to schools and teachers that could materially impact our sales and premium volumes;
•public school systems facing budget constraints due to the economic impacts of the pandemic that could result in educator layoffs;
•unprecedented volatility in financial markets that could materially affect our investment portfolio valuations and returns as well as our ability to generate targeted spreads on the indexed products;
•regulatory mandates and/or legislative changes, including premium grace periods and premium credits;
•changes in frequency and/or severity of claims;
•increased credit risk;
•business disruption for insurance agents who market and sell our insurance products; and
•business disruptions to third parties at which we outsource certain business functions to or on which we rely for technology.
Any resulting impact on our business, financial condition, and results of operations due to the foregoing cannot be reasonably estimated at this time, although the results may be felt for a significant period of time. The full extent to which COVID-19 could affect the global economy, the financial markets and our business, its financial condition and its results of operations will depend on future developments and factors that cannot be predicted.

Horace Mann Educators Corporation51Quarterly Report on Form 10-Q



ITEM 2. I Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
On September 30, 2015, the Board authorized a share repurchase program allowing repurchases of up to $50.0 million of our common stock, par value $0.001 (Program). The Program authorizes the repurchase of our common stock in open market or privately negotiated transactions, from time to time, depending on market
Horace Mann Educators Corporation54Quarterly Report on Form 10-Q


conditions. The Program does not have an expiration date and may be limited or terminated at any time without notice. During the three months ended March 31,September 30, 2020, we repurchaseddid not repurchase shares of our common stock under the Program as follows:stock. As of September 30, 2020, $20.6 million remained authorized for future share repurchases.
Period 
Total Number
of Shares
Purchased
 
Average Price
Paid Per Share
 
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
 
Maximum Number
(or Approximate Dollar
Value) of Shares
That May Yet Be
Purchased Under The
Plans or Programs
January 1 - 31 —
 —
 —
 $22.8 million
February 1 - 29 52,095
 $41.17 52,095
 $20.6 million
March 1 - 30 —
 —
 —
 $20.6 million
Total 52,095
 $41.17 52,095
 $20.6 million
ITEM 5. I Other Information
We are not aware of any information required to be disclosed in a Current Report on Form 8-K during the three months ended March 31, 2020 which has not been filed with the SEC.Not applicable.
ITEM 6. I Exhibits
The following items are filed as Exhibits. Management contracts and compensatory plans are indicated by an asterisk (*).
Exhibit
No.Description
(3) Articles of incorporation and bylaws:
3.1
Restated Certificate of Incorporation of HMEC, filed with the Delaware Secretary of State on June 24, 2003, incorporated by reference to Exhibit 3.1 to HMEC’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, filed with the Securities and Exchange Commission (the "SEC") on August 14, 2003.
3.2
Bylaws of HMEC, incorporated by reference to Exhibit 3.2 to HMEC’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, filed with the SEC on August 14, 2003.
(4) Instruments defining the rights of security holders, including indentures:
4.1
Indenture, dated as of November 23, 2015, by and between HMEC and The Bank of New York Mellon Trust Company, N.A., as trustee, incorporated by reference to Exhibit 4.1 to HMEC’s Current Report on Form 8-K dated November 18, 2015, filed with the SEC on November 23, 2015.

Horace Mann Educators Corporation52Quarterly Report on Form 10-Q



4.1(a)
4.1(a)
Form of HMEC 4.500% Senior Notes due 2025, incorporated by reference to Exhibit 4.2 to HMEC’s Current Report on Form 8-K dated November 18, 2015, filed with the SEC on November 23, 2015.
4.2
Certificate of Designations for HMEC Series A Cumulative Convertible Preferred Stock, incorporated by reference to Exhibit 4.3 to HMEC’s Annual Report on Form 10-K for the year ended December 31, 2005, filed with the SEC on March 16, 2006.
4.3
Description of Securities, incorporated by reference to Exhibit 4.3 to HMEC's Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on March 2, 2020.
(10) Material contracts:
10.1
Credit Agreement dated as of June 21, 2019 among HMEC, certain financial institutions named therein and PNC Bank, N.A., as administrative agent, incorporated by reference to Exhibit 10.1 to HMEC’s Current Report on Form 8-K dated June 24, 2019, filed with the SEC on June 24, 2019.
10.1(a)Horace Mann Educators Corporation55Quarterly Report on Form 10-Q


10.1(a)
First Amendment to Credit Agreement dated as of June 21, 2019 among HMEC, certain financial institutions named therein and PNC Bank, N.A., as administrative agent, incorporated by reference to Exhibit 10.1(a) to HMEC's Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on March 2, 2020.
10.2*
Horace Mann Educators Corporation Amended and Restated 2002 Incentive Compensation Plan ("2002 Incentive Compensation Plan"), incorporated by reference to Exhibit 10.2 to HMEC’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005, filed with the SEC on August 9, 2005.
10.2(a)*
Revised Specimen Employee Stock Option Agreement under the 2002 Incentive Compensation Plan, incorporated by reference to Exhibit 10.6(b) to HMEC’s Annual Report on Form 10-K for the year ended December 31, 2008, filed with the SEC on March 2, 2009.
10.2(b)*
Specimen Employee Restricted Stock Unit Agreement under the 2002 Incentive Compensation Plan, incorporated by reference to Exhibit 10.6(d) to HMEC’s Annual Report on Form 10-K for the year ended December 31, 2005, filed with the SEC on March 16, 2006.
10.2(c)*
Revised Specimen Employee Restricted Stock Unit Agreement under the 2002 Incentive Compensation Plan, incorporated by reference to Exhibit 10.6(f) to HMEC’s Annual Report on Form 10-K for the year ended December 31, 2008, filed with the SEC on March 2, 2009.
10.2(d)*
Specimen Non-employee Director Restricted Stock Unit Agreement under the 2002 Incentive Compensation Plan, incorporated by reference to Exhibit 10.6(e) to HMEC’s Annual Report on Form 10-K for the year ended December 31, 2005, filed with the SEC on March 16, 2006.
10.2(e)*
Revised Specimen Non-employee Director Restricted Stock Unit Agreement under the 2002 Incentive Compensation Plan, incorporated by reference to Exhibit 10.6(h) to HMEC’s Annual Report on Form 10-K for the year ended December 31, 2008, filed with the SEC on March 2, 2009.
10.3*
First Amendment to the HMEC 2010 Comprehensive Executive Compensation Plan (As Amended and Restated Effective as of May 20, 2015), incorporated by reference to Exhibit 10.3 to HMEC's Quarterly Report on Form 10-Q for the quarter ended March 31, 2017, filed with the SEC on May 9, 2017.
10.3(a)*
HMEC 2010 Comprehensive Executive Compensation Plan (As Amended and Restated Effective May 20, 2015) (Section 16 Officer) Non-Qualified Stock Option Agreement - Employee Grantee, incorporated by reference to Exhibit 10.3(a) to HMEC's Quarterly Report on Form 10-Q for the quarter ended March 31, 2017, filed with the SEC on May 9, 2017.
10.3(b)*
HMEC 2010 Comprehensive Executive Compensation Plan (As Amended and Restated Effective May 20, 2015) (Non-Section 16) Non-Qualified Stock Option Agreement - Employee Grantee, incorporated by reference to Exhibit 10.3(b) to HMEC's Quarterly Report on Form 10-Q for the quarter ended March 31, 2017, filed with the SEC on May 9, 2017.

Horace Mann Educators Corporation53Quarterly Report on Form 10-Q



10.3(c)*
10.3(c)*
HMEC 2010 Comprehensive Executive Compensation Plan (As Amended and Restated Effective May 20, 2015) Service-Vested Restricted Stock Units Agreement - Employee Grantee, incorporated by reference to Exhibit 10.3(c) to HMEC's Quarterly Report on Form 10-Q for the quarter ended March 31, 2017, filed with the SEC on May 9, 2017.
10.3(d)*
HMEC 2010 Comprehensive Executive Compensation Plan (As Amended and Restated Effective May 20, 2015) Performance-Based Restricted Stock Units Agreement - Employee Grantee, incorporated by reference to Exhibit 10.3(d) to HMEC's Quarterly Report on Form 10-Q for the quarter ended March 31, 2017, filed with the SEC on May 9, 2017.
Horace Mann Educators Corporation56Quarterly Report on Form 10-Q


10.3(e)*
HMEC 2010 Comprehensive Executive Compensation Plan (As Amended and Restated Effective May 20, 2015) Service-Vested Restricted Stock Units Agreement - Employee Grantee (One-Time Grant Service), incorporated by reference to Exhibit 10.3(e) to HMEC's Quarterly Report on Form 10-Q for the quarter ended March 31, 2017, filed with the SEC on May 9, 2017.
10.3(f)*
Specimen Employee Performance-Based Restricted Stock Units Agreement - Key Strategic Grantee under the HMEC 2010 Comprehensive Executive Compensation Plan incorporated by reference to Exhibit 10.3(e) to HMEC’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016, filed with the SEC on May 6, 2016.
10.3(g)*
Specimen Non-employee Director Restricted Stock Unit Agreement under the HMEC 2010 Comprehensive Executive Compensation Plan, incorporated by reference to Exhibit 10.17(a) to HMEC’s Current Report on Form 8-K dated May 27, 2010, filed with the SEC on June 2, 2010.
10.4*
Horace Mann Supplemental Employee Retirement Plan, 2002 Restatement, incorporated by reference to Exhibit 10.1 to HMEC’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002, filed with the SEC on May 15, 2002.
10.5*
Horace Mann Executive Supplemental Employee Retirement Plan, 2002 Restatement, incorporated by reference to Exhibit 10.2 to HMEC’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002, filed with the SEC on May 15, 2002.
10.6*
Amended and Restated Horace Mann Nonqualified Supplemental Money Purchase Pension Plan, incorporated by reference to Exhibit 10.9 to HMEC’s Annual Report on Form 10-K for the year ended December 31, 2008, filed with the SEC on March 2, 2009.
10.7*
Summary of HMEC Non-employee Director Compensation, incorporated by reference to Exhibit 10.7 to HMEC's Quarterly Report on Form 10-Q for the quarter ended June 30, 2019,2020, filed with the SEC on August 8, 2019.7, 2020.
10.8*
Summary of HMEC Named Executive Officer Annualized Salaries.Salaries, incorporated by reference to Exhibit 10.8 to HMEC's Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, filed with the SEC on August 7, 2020.
10.9*
Form of Severance Agreement between HMEC, Horace Mann Service Corporation ("HMSC") and certain officers of HMEC and/or HMSC, incorporated by reference to Exhibit 10.13 to HMEC’s Annual Report on Form 10-K for the year ended December 31, 2012, filed with the SEC on February 28, 2013.
10.10*
HMSC Executive Change in Control Plan, incorporated by reference to Exhibit 10.15 to HMEC’s Current Report on Form 8-K dated February 15, 2012, filed with the SEC on February 22, 2012.
10.10(a)*
HMSC Executive Change in Control Plan Schedule A Plan Participants.Participants, incorporated by reference to Exhibit 10.10(a) to HMEC's Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, filed with the SEC on August 7, 2020.
10.11*
HMSC Executive Severance Plan, incorporated by reference to Exhibit 10.16 to HMEC’s Current Report on Form 8-K dated March 7, 2012, filed with the SEC on March 13, 2012.
10.11(a)*
First Amendment to the HMSC Executive Severance Plan, incorporated by reference to Exhibit 10.16(a) to HMEC’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, filed with the SEC on August 9, 2012.
10.11(b)*
HMSC Executive Severance Plan Schedule A Participants, incorporated by reference to Exhibit 10.11(b) to HMEC's Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, filed with the SEC on August 7, 2020.

Horace Mann Educators Corporation57Quarterly Report on Form 10-Q


Horace Mann Educators Corporation54Quarterly Report on Form 10-Q



10.12
10.11(b)*
HMSC Executive Severance Plan Schedule A Participants.
10.12
Stock Purchase Agreement Among Horace Mann Educators Corporation, and Robert Paglione, Paglione Family Irrevocable Trust F/B/O Adam Paglione, Paglione Family Irrevocable Trust F/B/O Lisa and Jorge Arroyo, Beau Adams and Benefit Consultants Group, Inc. dated as of October 30, 2018, incorporated by reference to Exhibit 10.12 to HMEC's Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on March 1, 2019.
10.13
Purchase Agreement By and Among Ellard Family Holdings, Inc., Brian M. Ellard, The JCE Exempt Trust and Horace Mann Educators Corporation dated as of December 10, 2018, incorporated by reference to Exhibit 10.13 to HMEC's Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on March 1, 2019.
10.14
Executive Transition Agreement between HMSC and Wade A. Rugenstein as of December 5, 2018, incorporated by reference to Exhibit 10.14 to HMEC's Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on March 2, 2020.
(11) Statement regarding computation of per share earnings.
(15) KPMG LLP letter regarding unaudited interim financial information.
(31) Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002:
31.1
Certification by Marita Zuraitis, Chief Executive Officer of HMEC.
31.2
Certification by Bret A. Conklin, Chief Financial Officer of HMEC.
(32) Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002:
32.1
Certification by Marita Zuraitis, Chief Executive Officer of HMEC.
32.2
Certification by Bret A. Conklin, Chief Financial Officer of HMEC.
(99) Additional exhibits:
99.1
Glossary of Selected Terms.
(101) Interactive Data File:
101.INSXBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCHXBRL Taxonomy Extension Schema
101.CALXBRL Taxonomy Extension Calculation Linkbase
101.DEFXBRL Taxonomy Extension Definition Linkbase
101.LABXBRL Taxonomy Extension Label Linkbase
101.PREXBRL Taxonomy Extension Presentation Linkbase

Horace Mann Educators Corporation5558Quarterly Report on Form 10-Q





SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
HORACE MANN EDUCATORS CORPORATION
(Registrant)
HORACE MANN EDUCATORS CORPORATION
(Registrant)
DateMay 8,November 6, 2020/s/ Marita Zuraitis
Marita Zuraitis
President and Chief Executive Officer
DateMay 8,November 6, 2020/s/ Bret A. Conklin
Bret A. Conklin
Executive Vice President and
Chief Financial Officer
DateMay 8,November 6, 2020/s/ Kimberly A. Johnson
Kimberly A. Johnson
Senior Vice President, Controller and
Principal Accounting Officer


Horace Mann Educators Corporation5659Quarterly Report on Form 10-Q