Horace Mann Educators Corporation

Good morning and welcome to the Horace Mann Educators second quarter 2022 investor call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw from the question queue, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Heather Wetzel, VP, Investor Relations. Please go ahead.

Thank you, and good morning, everyone. Welcome to Horace Mann's discussion of our second quarter results. Yesterday, we issued our earnings announcement, investor supplement, and investor presentation. Copies are available on the investors page of our website. Marita Zoraitis, President and Chief Executive Officer, and Brett Conklin, Executive Vice President and Chief Financial Officer, will give the formal remarks on today's call. With us for Q&A, we have Matt Sharp on supplemental and group benefits, Mark DeRocher on property and casualty, Mike Weckenbrock on life and retirement, and Ryan Greenyear on investments. Before I turn it over to Marita, I want to note that our presentation today includes forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. The company cautions investors that any forward-looking statements include risks and uncertainties and are not guarantees of future performance. These forward-looking statements are based on management's current expectations, and we assume no obligation to update them. Actual results may differ materially due to a variety of factors which are described in our news release and SEC filings. In our prepared remarks, we use some non-GAAP measures. Reconciliations of these measures to our most comparable GAAP measures are available in our news release. I'll now turn the call over to Marita.

Thanks, Heather, and good morning, everyone. Last night, we reported second quarter core results near breakeven and ahead of the loss we anticipated in our pre-announcement due to better-than-anticipated segment operating performance. Based on this performance, we made a minor upward revision to our full year core EPS guidance to a range of $2.15 to $2.35. As our preliminary announcement described, the impact on our bottom line from external events was disappointing. We expect 2023 ROE to be in the high single digits as we resume our trajectory towards our goal of a sustainable double-digit ROE. Our operating results clearly benefited from strategic actions we've taken in recent years, while also illustrating the value of diversifying our earnings base with our new worksite division, adding $13.2 million to core earnings in the quarter. Let me cover each of the external challenges individually. First, catastrophe storm activity was outsized. our losses were nearly double our 10-year average for the second quarter. The second quarter is typically our heaviest catastrophe quarter. It has represented about 50% of our full-year catastrophe load since we completed a strategic and multifaceted shift to reduce our coastal exposures five years ago. However, in this year's second quarter, the Midwest and Plains states experienced unusually high thunderstorm, wind, and hail activity. For example, one severe storm that crossed the country in May caused major damage in communities from Texas to Minnesota to Pennsylvania. In light of the breadth and magnitude of the events in the quarter, we do not believe that exposure concentrations were an issue, although our dynamic underwriting and risk mitigation programs monitor this risk closely. Inflation continues to significantly impact the P&C sector. Industry-wide, inflation is driving higher physical damage costs due to higher parts pricing and labor rates, as well as claim resolution timing. Injury claims costs are rising because of trends towards more severe accidents and increased utilization of medical treatments. As we've described in recent quarters, we have been proactively adding rates and taking underwriting actions where needed to address rising loss costs. Our auto rate plan is dynamic through the remainder of 2022 and well into 2023, and we will adjust as needed to address evolving market trends. The current plan reflects rate increases in the high single to low double digit range in states representing almost 80% of our premiums. Keep in mind, 70% of our auto policies are six-month policies. We are also strengthening auto reserves this quarter because it became clear that these industry-wide trends are also affecting claims from recent accident years that remain open because of pandemic-related systemic delays. Like auto, our property pricing strategy is proactive and average premiums have risen almost 8% over last year's second quarter. due largely to inflation adjustments to coverage values. Given that the level of weather activity will support additional rate filings, we expect the overall impact on average premiums rising to the mid-teens over the next 12 to 18 months. Said another way, our property book has been historically profitable and we will adjust our underwriting and pricing as needed to maintain that track record. And lastly, weakness in the equity markets led to unfavorable DACA unlocking. Brett will discuss DACA unlocking in detail later in his remarks. But I want to step back briefly to note that we've been positioning the investment portfolio for a rising rate environment for some time. We expect to benefit substantially over the next several years from the actions the Fed is taking to address inflation and other economic factors behind the equity market volatility. For example, nearly 20% of our portfolio is floating rate, plus our core portfolio new money rate in the second quarter was 4.8%, up over 140 basis points from a year ago. To bring this back to a high-level view, although progress towards our long-term goal of a sustained double-digit ROE has been temporarily interrupted by the impact of external events, we remain as committed as ever to taking care of our educator customers, and as confident in our long-term outlook. To achieve our long-term objectives of an expanded market share and accelerated shareholder value, we implemented a multi-year PDI strategy to enhance our product offerings, to strengthen our distribution, and to modernize our infrastructure. Our transformational phase to position ourselves for market growth culminated in the acquisition of Madison National Life in January. As a result, we now have the capability to provide educators with the products they need, whether purchased individually or through their employer. Under the Horseman umbrella, we have aligned our operations into two focus divisions, retail and worksite, to maximize our potential to respond to the needs of educators and school districts. So let me turn to the momentum we continue to see as we implement strategic growth initiatives in each division, beginning with Worksite. Core earnings for the Worksite segment were up 14% over prior year, and we're seeing continued progress in sales metrics. Second quarter voluntary supplemental sales grew 83% over last year's second quarter, as we steadily move back towards pre-pandemic levels. The employer-sponsored benefits line, which was added with the acquisition of Madison National this year, contributed $1.3 million in quarterly sales, consistent with our expectations for that business. As an aside, employer-sponsored sales do fluctuate by quarter, with first and third quarters generally stronger than second and fourth, aligning with typical benefit year timing for districts. We expanded our marketing of group supplemental products in the second quarter to further meet the needs of school districts interested in providing more comprehensive benefits to their educators and employees. We remain optimistic about the growth opportunity of this business, particularly as we leverage the complementary geographic and product strength of the two acquired businesses. And looking further out, we are encouraged by our preliminary work leveraging district relationships across the retail and worksite divisions. It's good to have early reinforcement of our enthusiasm about the future of the horseman companies. On the retail side of the house, we are seeing steady progress in each of our four strategic growth priorities. First, As we've come out of the pandemic with greater access to educators and growing demand from industry disruption, we are slowly returning to pre-pandemic sales levels. In the auto line, April was the best month for auto sales since the pandemic began. May was similar, even though sales typically start to trail off as the school year winds down. June was even stronger than April and May, with the highest auto sales since fall of 2019. As a multi-line carrier, our relationships with customers often start with an auto policy, but grow to include property insurance, life insurance, and savings products. That's why we are leading with auto in geographies where we are priced appropriately. The second priority is to execute on accelerating the successful cross-selling of our model line customers. It's consistently a strength of our agents and bodes particularly well for our overall customer retention. With over 600,000 incoming calls to our customer care center annually, we wanted to make certain those conversations identified and acted on unmet educator needs. Through a structured approach, the level of new sales coming out of these interactions has grown 160% in the first half of this year. The third priority is to continue to build our digital capabilities to ensure our operations run efficiently and educators connect with us in a manner they prefer. This year, a lot of the focus is on infrastructure evolution to support the household identification work that will be integral to our multichannel distribution and growth capabilities going forward. Finally, and most importantly, We must maintain our distinctive service mindset in every decision and every interaction. We facilitate internal training, discussions, and recognition around keeping the educator at the center of everything we do. Of course, there are examples across the business, but the work of our P&C claims team in the second quarter clearly stands out. They delivered prompt, compassionate, and reliable service to our customers at each step of the process, storm after storm after storm. Informing all of these strategies is our ongoing in-depth education market research to better understand the buying propensities and preferences of the nation's nearly 8 million educators, as well as the districts that employ them. We continue to add our education market knowledge and build those learnings into our existing sales processes. Looking ahead, our agents are excited to engage with educators during the upcoming back-to-school season. Although the environment is dynamic, we are cautiously optimistic about schools being more able to focus on academics with the worst of the pandemic behind us. Likewise, educators have more time to allocate to their personal lives and financial planning. We are seeing positive signs in terms of scheduling events and meetings, utilizing both our traditional in-person strengths and the virtual skills we learned over the past two years. Throughout our growth journey, driving shareholder value through varying economic cycles remains a priority. As Brett will discuss in more detail, our capital generating capacity remains strong. We continue to return capital to shareholders with annual dividend increases and opportunistic share repurchase. In the first seven months of the year, we used $24 million to repurchase almost 671,000 shares, our highest level of repurchase activity since 2016, which is a testament to our confidence and our strategy. Today, there is over 40 million remaining on the board authorization from May. In closing, as schools open for the 2022-2023 school year, we will be there to support educators, providing financial education, enrolling new participants in benefit programs, sponsoring classroom projects, and building relationships. This is what we do best, work as a partner to the educational community, and help provide solutions to the challenges that educators face every day. Thank you, and with that, I'll turn the call over to Brett.