Horace Mann Reports Third-Quarter 2019 Net Income of $0.60 Per Share and Core Earnings* of $0.64 Per Share

• Net income per share more than doubled over prior year while core earnings per share* improved 156.0%
• New Supplemental segment added $6.9 million to net income, diversifying sales and earnings while expanding solutions available for educators
• Property and Casualty combined ratio of 96.2% reflected improved auto profitability and lower catastrophe losses
• Retirement results on track and reflected more favorable interest spread following annuity reinsurance transaction
• Annualized quarterly core ROE* at 8.3%, moving closer to double-digit ROE target
• Tightens range of full-year 2019 core EPS guidance to $2.05 to $2.15 to reflect:
  • Flat full-year underlying property loss ratio
  • Fourth-quarter severance charges for previously announced expense reduction initiatives

Horace Mann Educators Corporation HMN today reported financial results for the quarter ended September 30, 2019:

"The positive third-quarter results reinforce that Horace Mann is better equipped than ever before to meet the financial needs of educators. Our transformative efforts, and multi-year initiatives focused on improving our products, distribution and infrastructure, have resulted in a larger, more diverse company with a strong long-term outlook," said President and CEO Marita Zuraitis. "This is the first quarter that National Teachers Associates (NTA) is included in our results as the Supplemental segment, contributing $0.16 per share to earnings. Concurrently, we have significantly reduced our interest-spread risk in our Retirement segment following the annuity reinsurance transaction earlier in the year.

"As we announced several weeks ago, we have streamlined our organizational structure to accelerate profitable growth and strengthen our solutions orientation. We are also making significant progress on expense synergies and efficiency projects that are expected to reduce our annual operating expense run-rate in 2020 and beyond by at least $15 million," Zuraitis noted, "Fourth quarter core EPS will reflect approximately $0.07 per share for severance charges resulting from previously announced expense reduction initiatives.

"As a result, we are tightening the range of our full-year guidance, and now expect 2019 core EPS between $2.05 to $2.15 per share. Illustrating the benefits of our sales and earnings diversification, quarterly annualized core ROE was above 8% in the third quarter.

"We are on a clear path to a 10% ROE over the next two years, reflecting two points of contribution from the new Supplemental segment plus at least another point from the lower operating expense run-rate." Zuraitis continued. "At the same time, we are leveraging our leadership position in the education space to increase our market share, further accelerating long-term shareholder value creation."

Property and Casualty Segment Sees 4.7 Point Improvement in Underlying Auto Loss Ratio; Catastrophe Costs Below 2018 Level

(All comparisons vs. same period in 2018, unless noted otherwise)

For the third quarter of 2019, the Property and Casualty segment was solidly profitable, with a combined ratio of 96.2% driving core earnings of $14.2 million, compared to a loss in the prior year. Underwriting and rate actions contributed to a 4.7 point improvement in the underlying auto loss ratio. The underlying property loss ratio reflected an increase in non-catastrophe fire loss severity with no increase in frequency. The underlying property loss ratio is now expected to be flat for full-year 2019 compared to 2018. Property and Casualty written premiums were flat.

Pretax catastrophe losses of $14.7 million were attributable to 17 weather events, the most costly of which were wind and hail events in the Midwest and Plains states. Pretax catastrophe losses through the first nine months were $47.6 million. The company estimate of full-year 2019 catastrophe losses has narrowed to $50 to $55 million, or about 7.5 points on the combined ratio, more heavily weighting more recent years in forecasting to reflect the impact of sustained elevated catastrophe loss trends.

Auto and property policy retention rates for the current quarter were 80.9% and 87.3%, respectively.

Supplemental Segment Contributes $6.9 Million in New Earnings

On July 1, 2019, Horace Mann acquired NTA. As a part of Horace Mann, NTA will continue to provide supplemental insurance products to the education market, building on nearly 50 years of experience in the sector. NTA specializes in developing, marketing and underwriting supplemental insurance products, including cancer, heart, limited supplemental disability and accident.

Supplemental segment sales for the third quarter were $3.6 million with steady sales in all product categories. The segment contributed $6.9 million to core earnings in its initial quarter with Horace Mann, in line with management's expectations for $12 million to $14 million in earnings in the second half of this year.

The pretax profit margin for the third quarter was 23.7%, reflecting this business' focus on efficient operations and product mix. Supplemental segment expenses reflected the non-cash impact of amortization of intangible assets under purchasing accounting that reduced core earnings by $3.2 million (pretax). Supplemental persistency was 88.9% for the quarter.

Retirement Segment Annualized Net Interest Margin Remained Strong at 224 Basis Points

Effective April 1, 2019, Horace Mann reinsured a block of approximately $2.9 billion of policy liabilities related to legacy individual annuities written in 2002 or earlier. The annuity reinsurance transaction is accounted for under the deposit method. Under the deposit method of accounting, the consideration paid by Horace Mann is reported as a deposit asset on reinsurance that is adjusted consistent with the reinsurance agreement terms, along with recognizing accreted investment income. Accreted investment income is calculated based on the ultimate anticipated cash flows from the annuity reinsurance transaction.

As a result of the transaction, in the second quarter management impaired $28.0 million of goodwill that had been associated with the Retirement segment.

(All comparisons vs. same period in 2018, unless noted otherwise)

Reflecting the annuity reinsurance transaction, Horace Mann currently has $4.2 billion in assets under management, including $2.1 billion of fixed annuities, $1.6 billion of variable annuities and $0.5 billion of fixed indexed annuities. Assets under administration were up from a year ago due to the inclusion of Benefit Consultants Group's (BCG) advisory and recordkeeping assets effective January 2, 2019.

The annuity reinsurance transaction was the primary driver in the year-over-year decline in Retirement core earnings. Core earnings excluding DAC unlocking were $5.9 million, consistent with management's expectation of full year Retirement segment earnings excluding DAC unlocking of $25 million to $27 million. Core earnings excluding DAC unlocking were below the second quarter of 2019 due to the sequential decline in segment invested assets and net investment income following the redeployment of capital in the acquisition of NTA.

The average crediting rate on the retained traditional fixed annuities is 2.5%. The annualized net interest spread was 224 basis points, compared to 233 basis points in the second quarter. In the first quarter, prior to the annuity reinsurance transaction, the averaging crediting rate was 3.6% and the spread was 142 basis points.

Annuity sales deposits* were up slightly in the third quarter, reflecting positive momentum in retirement initiatives and in engaging new households. Total cash value persistency remained strong at 94.7% for variable annuities and 93.9% for fixed annuities.

Life Segment Sales of Recurring Premium Products Remains Strong

(All comparisons vs. same period in 2018, unless noted otherwise)

Demand remains healthy in the education market for life products. Recurring premium product sales were up 13.0%. Lower single premium product sales led to the decline in total Life sales* when compared with last year's strong third quarter.

Life core earnings* were down $0.2 million for the quarter due to lower net investment income. Life persistency of 95.5% was slightly better than the prior year period.

Investment Results Impacted by Annuity Reinsurance Transaction

Total net investment income includes net investment income on the investment portfolio managed by Horace Mann as well as accreted investment income on the deposit asset on reinsurance.

(All comparisons vs. same period in 2018, unless noted otherwise)

Total net investment income declined 6.2% compared with last year's third quarter. Net investment income on the managed portfolio declined sequentially by $1.1 million because returns on alternative investments remained strong but were lower than the second quarter. Pretax investment portfolio yield for the third quarter was below the second quarter yield of 5.14%. Accreted investment income for the deposit asset on reinsurance was $0.6 million higher compared with the second quarter.

Year-to-date net investment gains included $135.3 million, or $106.9 million after tax, related to the second-quarter gain on assets transferred in the annuity reinsurance transaction. Net unrealized investment gains on fixed maturity securities increased significantly from last year due to the decline in interest rates, which has resulted in higher fair values of fixed maturity securities.

Capital Position Supports Business Initiatives

At September 30, 2019, shareholders' equity was $1.58 billion, or $38.30 per share. Excluding net unrealized investment gains on fixed maturity securities, shareholders' equity was $1.31 billion, or $31.84 per share*. The year-over-year improvement in book value excluding unrealized investment gains on fixed maturity securities primarily reflected the realized gain on assets transferred in the annuity reinsurance transaction.

At September 30, 2019, total debt was $433 million with $135 million outstanding on the company's line of credit. The debt-to-capital ratio was 24.8%.

Quarterly Webcast

Horace Mann's senior management will discuss the company's third quarter financial results with investors on November 7, 2019 at 11:00 a.m. Eastern Time. The conference call will be webcast live at investors.horacemann.com and archived later in the day for replay.

About Horace Mann

Horace Mann Educators Corporation HMN is the largest financial services company focused on providing America's educators and school employees with insurance and retirement solutions. Founded by Educators for Educators^® in 1945, the company is headquartered in Springfield, Illinois. For more information, visit horacemann.com.

Safe Harbor Statement and Non-GAAP Measures

Statements included in this news release that are not historical in nature are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties. Horace Mann is not under any obligation to (and expressly disclaims any such obligation to) update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Please refer to the company's Quarterly Report on Form 10-Q for the period ended June 30, 2019 and the company's past and future filings and reports filed with the Securities and Exchange Commission (SEC) for information concerning important factors that could cause actual results to differ materially from those in forward-looking statements. Information contained in this news release include measures which are based on methodologies other than accounting principles generally accepted in the United States (GAAP). Reconciliations of non-GAAP measures to the closest GAAP measures are contained in the Appendix to the Investor Supplement and additional descriptions of the non-GAAP measures are contained in the Glossary of Selected Terms included as an exhibit to the company's SEC filings.