Horace Mann Educators Corporation

Good day and welcome to the Horace Mann Educators Q4 2022 Investor Call. All participants will be in 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 Witzel, Vice President, Investor Relations. Please go ahead.

Thank you, and good morning, everyone. Welcome to Horace Mann's discussion of our fourth quarter and full year results. Yesterday, we issued our earnings release, investor supplement, and investor presentation. Copies are available on the investor page of our website. Marita Zoraitis, President and Chief Executive Officer, and Brett Conklin, Executive Vice President and Chief Financial Officer, We'll give the formal remarks on today's call. With us for the Q&A, we have Matt Sharp, Mark Derochers, Mike Weckenbrock, and Ryan Greenyear. Before turning 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 the most comparable GAAP measures are available in our investor supplement. I'll now turn the call over to Marita.

Thanks, Heather, and hello, everyone. In line with our pre-announcement, last night we reported full year 2022 core earnings per share of $1.09, which included a fourth quarter core loss of $0.11 per share. Inflation's continued pressure has driven escalated industry-wide loss costs and resulted in disappointing results for our property and casualty business. I'll spend much of my time today unpacking how we are meeting the challenges facing the P&C industry. After that, I want to discuss and pivot to the substantial progress we achieved on the growth initiatives we laid out a year ago in conjunction with adding Madison National and expanding our educator value proposition to fully meet the needs of both educators and school districts. Sustained growth across both our retail and worksite divisions will be the most accurate predictor of our company's long-term success. Over the course of 2022, we made important progress against our plan, leveraging our leadership position in the education market to increase sales and build relationships. In other words, to expand our share of the education market. In 2023, we will build on these successes, leveraging our sales momentum and distribution partnerships while resuming our trajectory towards our long-term goal of a sustained double-digit return on equity. Brett will discuss the details of 2023 guidance later in the call, but at a high level, we expect core earnings per share to double over 2022 and be between $2 and $2.30, with return on equity rising to 6%, as we head towards the double-digit ROE we expect for 2024. Our guidance anticipates a solid contribution from the worksite business, with benefit ratios in that business moving closer to our long-term targets. Year-over-year improvement in life and retirement business, even as spreads compress, and a return to profitability for the P&C business, a business that is key to our educator value proposition, and has been a historically profitable line of business for Horace Mann. In fact, before I turn to the way we're addressing the inflationary environment for PNC, let's look again at how we approach this market a bit differently because we are not a model line PNC company. We're an educator company. Horace Mann is built on a deep respect and admiration for our nation's educators. We are proud to take care of the people who take care of our children's futures. Our business strategy is to attract and retain multi-line customers by providing the financial solutions they need at each stage of their lives. Quite honestly, being an educator is tough right now and they need someone in their corner. Coming out of the pandemic, there was hope things would quote unquote return to normal in terms of school schedules and other challenges. However, The pandemic accelerated the national shortage of qualified teachers and support staff. Nearly 80% of educators, Horace Mann surveyed for a recent study, said school understaffing has either a severe or moderate impact on students' ability to learn and teachers' ability to do their jobs well. Staffing shortages are requiring educators to take on more work and generating even more stress. That stress is compounded by financial concerns. Although teachers' primary motivation is not a paycheck, generally teachers are paid less than their private sector peers, but require more academic credentials. This leads to higher student loan debt and can preclude savings for retirement and other life goals. And that's where Horseman can help. Our representatives can provide financial wellness workshops for school staff, on topics like student loan forgiveness and state teacher retirement systems. They can work with educators to create a financial plan, becoming a trusted advisor. Further, we can support administrators looking to augment teacher recruiting and retention by bolstering benefit packages with employer-paid and sponsored coverages. All of that is to say that we value our customers, and our customers value the relationship with Horace Mann. They know we strive to offer a fair price through varied market conditions, creating long-term value for our educators and for our company. Our underwriting, actuarial, and pricing teams continually monitor trends in the personal auto and property markets, and we use their expertise to guide our product pricing and features to achieve our combined ratio targets for auto and property. Similarly, our reserving practices are based on our best estimate of what we believe we will need to pay claims. However, inflation in a post pandemic 2022 didn't reflect anything seen in recent decades. Core inflation over the course of the past year has been the highest we have experienced in 40 years. Costs related to supply chain issues, labor, materials, medical care, and litigation have all risen at unprecedented levels. As we noted in our preliminary announcement, we also have further accelerated both auto and property rate plans for 2023 to build on increases implemented in 2022. About 70% of our auto business is on six month policies. So we will start to see the benefit of these increases in the coming months. We also continue to take other non-rate underwriting actions. So to break this impact down by line, in auto, in addition to the overall 5.4% in rate actions in 2022, we now expect auto rates to increase by 18 to 20% over the next four quarters. As these rates earn in and bolstered by non-rate actions, this should result in an auto combined ratio improving steadily to reach 97 to 98% in 2024. We added a slide in the investor presentation to illustrate how we expect the impact of our rate increases to compound over the course of 2023. It's worth noting that state approvals don't adhere to a quarterly schedule, so there will be some fluidity between quarters, but we're confident in the cumulative outcome of 18 to 20% countrywide rate impact implemented over the next four quarters. In property, In addition to the overall 4.9% in rate actions taken in 2022, we expect rate actions in property of 12 to 15% over the next four quarters. When combined with the impact of inflation guard, these actions should result in average renewal premium increases of 17 to 20% in 2023. We expect property to generate an underwriting profit in 2023, and be at or near our target combined ratio of 92 to 93% in 2024 and beyond. We are managing these plans towards a segment combined ratio of 95% to 96% in 2024. We also are aware these actions may have an impact on retention. However, we suspect the impact will be relatively muted for two reasons. First, Inflation is an industry-wide problem and our actions over 2022 and 2023 will be consistent with the industry over this period. Second, to many of our educator customers, we are more than an auto company. We help them plan for retirement. We help them manage their student loan debt, and we understand the issues they're facing both in and out of the classroom. Stepping back, if you recall a year ago, I spoke about how Horace Mann planned to leverage our leadership position in the education market going forward. We aligned our operations to maximize our potential to effectively respond to the needs of both educators and school districts. We said we were working to maximize the opportunity presented by our worksite division by bringing together the strength of Madison National's group products and distribution relationships with the supplemental businesses, individual product strength, and customer-centric infrastructure we are delivering on that goal. 2022 worksite sales, including the employer-sponsored products added in the Madison National acquisition, increased more than twofold over 2021. The strength of their products and the opportunities of the expanded distribution continue to exceed our expectations. In addition, in the fourth quarter, worksite direct supplemental sales were the strongest they have been since the beginning of the pandemic. And they continued strong in January. In the retail side of the house, we plan to take advantage of industry dynamics to drive sales and to cross sell existing customers. In both life and auto, we saw strong sales. Our inside sales team doubled their cross sales of existing customers over 2021, including strong growth and our sales from service initiative, which resulted in several thousand new sales over the course of the year. In addition, improved access to schools let us ramp up our agent recruiting, which has shown positive results. We achieved our target for new appointments and also added a strong cadre of new insurance specialists who can support an already in place agent with a single product focus. The return to a solid agency pipeline that was interrupted by the pandemic is a positive indicator for 2023 and beyond. Finally, we have seen the strength of our earnings and revenue diversification strategy firsthand in 2022. I don't want to dismiss the impact of PNC short-term volatility on the business, but it is manageable. In addition, we continue to evaluate ways to mitigate volatility while still retaining educator households, such as expanding the use of third-party carriers. The strength and value of our multi-line offerings for our niche market will last far beyond these lost cost trends stabilizing. To sum it up, our focus has never wavered. We want to be the provider of choice for the education market, and we want to provide our shareholders with a sustained double-digit return on equity. Those two goals have to be achieved together, and that is what we are working towards in 2023. Before I turn the call over to Brett, I have two corporate updates to share. First, I'd like to congratulate Ryan Grenier on his recent promotion to Deputy Chief Financial Officer to work with Brett to further build out our strategic finance function and to support initiatives underway across the company. Ryan will continue to serve as our Chief Investment Officer. Second, I want to note Horace Mann's inclusion in the 2023 Bloomberg Gender Equality Index, which recognizes corporate commitment to gender equality and transparency in gender data reporting. Horace Mann has been included in the index since its inception in 2019. The reference index measures gender equality across five pillars, leadership and talent pipeline, equal pay and gender pay parity, inclusive culture, anti-sexual harassment policies, and external brand. At Horace Mann, we strive to nurture an inclusive corporate culture where every employee feels heard, respected, and appreciated. We are proud to be recognized for this commitment to diversity, equity, and inclusion for the fifth consecutive year. Thank you, and with that, I'll turn the call over to Brett.