Horace Mann Educators Corporation

Good morning and welcome to the Horace Mann Educators' Second Quarter 2025 Results Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key 10 on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on your telephone keypad. To withdraw your question, please press star then 2. Please note this event is being recorded. I would now like to turn the conference over to Brandon DeWall, Vice President Investor Relations. Please go ahead.

Thank you. Welcome to Horace Mann's discussion of our Second Quarter 2025 Results. Yesterday, we issued our earnings release, 10Q, investor supplement, and investor presentation. Copies investors page on our website. Merida Zaraitis, President and Chief Executive Officer, and Ryan Grenier, Executive Vice President and Chief Financial Officer, will give the formal remarks on today's call. We also have Steve McEnany, Executive Vice President and Chief Operating Officer with us for Q&A. Before turning it over to Merida, 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. Reconciliation of these measures to the most comparable GAAP measures are available in our investor supplement. I'll now turn the call over to Merida.

Thanks, Brendan, and good morning, everyone. Yesterday, Horace Mann reported Second Quarter earnings per share of $1.06, a nearly threefold increase over prior year. Net premiums and contract charges earned were up 8%, with total revenues up 6%. These results reflect continued strong business profitability and solid growth momentum across the business, as well as property and casualty catastrophe losses that were meaningfully below prior year and recent prior year periods. Core return on equity for the quarter was 11.3%, bringing our trailing 12-month core return on equity to 12.6%. Taking the strong results through the first half of the year into consideration, we are increasing our full-year 2025 core EPS guidance to a range of $4.15 to $4.45. Ryan will provide more color on the full guidance assumptions later in the call. Today, I want to highlight some key takeaways from our very strong Second Quarter, as well as revisit the long-term strategic outlook we introduced at our recent Investor Day. Overall, we had an excellent Second Quarter. Our businesses are all at or near profitability targets, which provide the foundation for driving sustained profitable growth. Let me break it down by segment. In property and casualty, we reported a combined ratio of 97%, a nearly 15-point improvement over prior year. Core earnings were $17 million, a $25 million improvement from the segment loss we recorded a year ago. We are seeing the benefit of non-rate underwriting actions taken to reduce property volatility. These measures, including roof settlement schedules, continue to earn in as expected. In addition, we recorded favorable prior year development in both property and auto in the Second Quarter. Catastrophe losses contributed 15 points to the combined ratio, an 8-point improvement over the prior year. While PCS recorded 20 storm catastrophe events this quarter, our results reflect lower catastrophe losses driven by lower frequency and lower severity of policyholder claims. In the life and retirement segment, core earnings were double last year's results on the strength of higher net investment income returns. Limited partnership and commercial mortgage loan fund returns outpaced last year's results. And for the 14th consecutive quarter, new money yields in the core portfolio exceeded book yield. In addition, we recorded lower mortality costs compared to the Second Quarter 2024. On a -to-date basis, mortality costs remain within our expected actuarial range. In the individual supplemental and group benefits segment, policyholder utilization continues to be favorable. Our results demonstrate that we are successfully delivering on profitability commitments while strategically investing in the business to capture long-term growth opportunities. We are on track to achieve our 2025 goals of record annual core earnings and a sustained double-digit shareholder return on equity. At our recent investor day, we outlined what's next for Horseman. We have two clear strategic financial goals we are focused on. A 10% average compound annual growth rate in core EPS and a sustained 12 to 13% core return on equity by 2028. Now is the time for us to scale our profitable businesses. We're accomplishing this through sales force growth, leveraging cutting-edge marketing tools, and investing in successful value-added brand awareness and lead generation programs. We are realizing steady -single-digit growth in net points of distribution, which encompasses our exclusive agency force and licensed producers that support them in both their agencies and our call center. Our agency force in particular is motivated by the improvements and investments we have made to the agent experience. Our agent net promoter score continues to improve and is top quartile among industry peers. One of the investments we have talked about before is Catalyst, our homegrown technology solution that enhances agent interactions with educators and allows us to engage with more educators at the right time to better convert prospects into customers. At Horseman, we build marketing and support programs around the issues educators face every day and we provide solutions. This not only builds brand awareness and brand loyalty, it provides us with greater access to schools and educators. A few examples. In a spring survey, about 86% of educators once again told Horseman that they spend their own money on supplies for their classrooms. We help educators find solutions to this financial issue in several ways, including hosting educational workshops on how to maximize classroom crowdfunding success and funding projects through a Donors Choose national sponsorship. This month we are partnering with Lakeshore Learning, an educational furniture and materials retailer to stock dozens of classrooms across the country for the new school year, including $125,000 classroom makeover. We also recently announced a strategic partnership with Crayola, a talented brand known for its dedication to education. Together we are expanding access to creative and impactful resources for educators and students nationwide through programs like Crayola Creativity Week. This January celebration includes virtual educational events, creativity speakers, teaching resources, and prizes to help educators care for themselves and their students. It reaches more than 800,000 educators and 13 million students annually. We are seeing traction from our increased focus on partnerships and lead generation programs. Website traffic in the second quarter increased 75% over the prior year. We've thoughtfully built capabilities and programs within our integrated omni-channel approach to customer acquisition and service. This ensures educators can engage with Horace Mann in the way that they choose, through a local agent, digital channels, or our call center, and can seamlessly flow between channels when they need more or less guidance. And we're seeing results. Auto sales are up 10% year to date. At our current sales pace and as retention stabilizes and returns to a more typical level, we expect risks in force to level out and begin to grow. In fact, we are seeing deceleration in the decline of risks in force, with the second quarter down less than 1% compared to the first quarter. Notably, individual supplemental achieved another record breaking quarter. Second quarter sales of 6 million increased 43% over the prior year. On a year to date basis, sales were up over 50%. We are clearly growing this business, which as planned, is an important contributor to our higher ROE targets. The so what for investors is that Horace Mann is a company with a clear and compelling strategy to drive sustained profitable growth and accelerate shareholder value creation. In addition to our plans for profitable growth, the most accretive use of capital, we maintain a strong dividend payout ratio and continue to execute on share repurchase program. In May, the board authorized an additional 50 million of share repurchase. We have returned 13 million of capital to shareholders and share repurchases through July year to date. To close, this is an exciting time for Horace Mann. We are reaching more educators than ever before with a compelling value proposition. On a year to date basis, we are exceeding our 2025 goals of record annual core earnings and a sustained ROE above 10%. Beyond that, we have the products distribution and infrastructure in place to deliver on our vision to be the leading financial services provider for educators in the years to come. We are operating from a position of strength. We have a strong competitive advantage and we have confidence in delivering sustained market leading growth. Over the next three years, we will serve more educators, build scale, and accelerate shareholder returns. Thank you. I'll now turn the call over to Ryan.

Thanks, Marita. Second quarter results reflect strong underlying performance across the business in property and casualty catastrophe losses that were below prior year and our historical averages. We continue to observe encouraging signs of sustained growth momentum and clearly see the earnings power of our multi-line business when operating at target profitability. As Marita mentioned, given strong underlying business performance in the first half, we are increasing our full year 2025 core EPS guidance to a range of $4.15 to $4.45. Our 2025 guidance assumptions remain the same. Roughly $90 million of catastrophe losses assumed for the full year in line with our five-year historical average. Despite the favorable second quarter cap results, we have had significant hurricanes in the second half of the year and three of the five years. As such, we believe it is prudent to continue to use our five-year average when providing cat loss guidance. Total net investment income in the range of $470 to $480 million with managed portfolio income of $370 to $380 million and interest expense and other corporate items of $35 to $40 million. Turning now to the results. Core earnings of $44 million or $1.6 per share was nearly three times the prior year result. Trailing 12-month core return on equity was .6% reflecting continued strong underlying profitability across the business. Total net premiums and contract charges earned were up 8% with total revenues up 6%. In the property and casualty segment, core earnings were $17 million, a $25 million improvement over the segment loss reported in the prior year period. Net written premiums of $211 million increased 6% over the prior year, primarily on higher average written premiums. The P&C reported combined ratio of 97 improved 14.5 points over prior year, reflecting improved underlying results, lower catastrophe costs, and favorable prior year development. The $5.5 million in prior year development included $4 million in property and $1.5 million in auto liability driven by favorable severity. Free tax catastrophe losses of $30 million were $11 million below the prior year period and below our historic averages due to lower claim frequency and severity. In auto, net written premiums of $127 million increased 4% over the prior year. The underlying combined ratio of 96.5 improved 3.8 points, primarily due to higher average premiums. Household retention remained strong at nearly 84% and in line with expectations given the rate actions we've taken. It continues to be in the top core tile relative to industry benchmarks. In property, net written premiums of $84 million increased 10% over the prior year. The underlying combined ratio of 65.1 improved 12.4 points, reflecting higher average premiums and favorable frequency and severity. Lower catastrophe costs contributed 24 points to the -over-year combined ratio improvement. Policyholder retention remained strong at 89%. In life and retirement, core earnings of $25 million were a two-fold improvement compared to the prior year, primarily driven by higher net investment income and lower mortality costs. -to-date mortality remains within our expected actuarial range. Net written premiums and contract deposits of $142 million increased 6% over the prior year. In the life business, persistency remained strong at 96%. In the retirement business, net annuity contract deposits increased by 8% and persistency rose to nearly 92%. In the retirement business, net annuity contract deposits increased by 8%. -to-date deposits into our core 403B products remain strong. Moving to individual supplemental and group benefits, the segment contributed $13 million to core earnings. Net written premiums of $66 million increased 3% over the prior year. In individual supplemental, net written premiums of $31 million increased 4% over the prior year. The benefit ratio of $27.7 was in line with prior year, and we continue to see favorable policyholder utilization trends relative to our long-term expectations. We are clearly seeing returns from our strategic investments in this business to drive profitable growth, with record sales of $6 million in the quarter, a 43% increase over the prior year. Policyholder persistency remained steady, near 90%. In group benefits, net written premiums of $35 million increased 3% over prior year. The benefits ratio of $44.8 was below prior year due to favorable policyholder utilization. As a reminder, the current scale of this business is relatively small and does not significantly impact consolidated results. We continue to see some variability in quarterly sales, which is typical for the group business. Given the longer sales cycle of the business, we have a clear view of sales in the second half of the year. In fact, July was a record sales month for group. As a result, we are expecting third quarter sales to put us ahead of the prior year. Turning to investments. We continue to see very strong results from our core fixed income portfolio, reflecting the benefit of higher average yields. As Marita mentioned, this is the 14th consecutive quarter that new money yields in the core portfolio have exceeded book yield. We anticipate that this trend will continue given the average portfolio duration of seven years. Annualized limited partnership returns were 10%, driven primarily by private equity and infrastructure related funds, and commercial mortgage loan fund returns were 7%, significantly improved over the prior year. Turning to capital management. As we reiterated at our recent investor day, we remain focused on driving shareholder value creation. Our dividend yield remains strong and we continue to actively execute on our share buyback program. We have taken advantage of recent market conditions with year to date repurchases of over 325,000 shares at a total cost of 13 million and at an average price of $40.54 through July month end. Including the additional 50 million authorized by the board in May, we have about 63 million remaining on our current share repurchase authorization. In conclusion, second quarter results highlight our ability to deliver strong results while laying the groundwork for long term sustained profitable growth. We remain on pace to deliver record annual core earnings in 2025, a shareholder return on equity above 10%, and free cash flow generation above 75%. We are confident in our ability to deliver on our longer term financial goals, and we remain firmly focused on accelerating shareholder value creation. Thank you. Operator, we are ready for questions.

We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please stick up the hands up before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Mike with BML. Please go ahead.

Great. Thanks. Good morning. I'll be focusing first on the PNC segment. A lot of helpful commentary and prepared remarks. I heard commentary about lower frequency and severity. Just kind of thinking out, I know that in terms of the cat load, obviously there's plenty of the year left, given we're in hurricane season, et cetera. And maybe it's the early days on some of the terms and conditions changes you've made to some of the policies, such as the higher deductibles. But I guess just longer term or maybe if you're seeing data now, could there be the potential for your cat load guidance? I think you use a five-year average to be a bit different or lower or is that not the right way to think about things?

Hey, Mike, it's Marita. Thanks for your question. Before we tackle the question, and there was a lot in there to unpack, I want to thank you for initiating coverage and your thoughtful note. It's great having you on board. So thanks for that. I'm going to turn it over to Ryan to unpack the cat question because I think that's a great question. And then we'll answer the other pieces in there.

Sure. Okay. So I guess I'll just say real quickly, maybe cat isn't even the right way to think about it. It might be just lost ratio non-cat too. So sorry to interject. Sure.

Why don't I start unpacking just to be clear that philosophically folks understand kind of how we approach guidance. You know, when we looked at this, we looked at our first half outperformance and, you know, we clearly saw favorable P and C underlying results, solid commercial mortgage loan results in second quarter, strong LP results in both individual supplemental benefit utilization favorable. And we adjusted, you know, for the outperformance we saw on a year to date basis. You know, second quarter is typically our highest catastrophe quarter. Our experience this year was favorable compared to recent years. But, you know, the third quarter, like many carriers, is our most volatile quarter. You know, I mentioned in the script, three of our last five years had, you know, hurricanes. Those were $15 million plus events for us. And so when I think about our approach to cat guidance, you know, we can't predict the timing of weather events, but we can look to, you know, historical averages and we exposure weight that five year average. It's $90 million on a full year basis. And, you know, we'll see how that how that plays out. That has been our historic approach. You know, it's too soon to talk about what we'll do for 26, but that has been, you know, how we've thought about cat guidance.

Yeah, when you think about cats, the only thing you know is you're probably going to be wrong. You know, wise people around here have told me we can't predict weather, but we certainly can model it. And our modeling clearly shows us that that number is about the right number for us over the long run. You know, as Ryan mentioned, three of the last five years, we saw some more volatility in the third quarter than we saw in the second quarter. I think if you look to industry weather activity in the beginning of July, it was clearly there. I mean, we've seen a ton of water, whether it's flooding, whether it's rain, whether it's other catastrophe activity in July. We certainly saw some of that as well. Nothing outsized for us in July, but it is an indication that, you know, July can also have cat activity industry wide. That combined with the volatility that we do see in recency in the third quarter, our math shows us that it makes sense to keep that number where it is and not change it and include that in the guidance. Obviously, after the third quarter is done, we'll revisit that, but it doesn't make any sense for us to not continue to follow the math as we always have. The second part of your question is the underlying and we feel really good from an underlying perspective. Ex prior year development, ex-cats, where we sit in the business and feel like the work we've done with rate and our underwriting work has put us where maybe even a little bit ahead of where we would expect us to be. The third part of your question, when you talk about property volatility and the things that we've put in place to level off that property volatility in the long term are clearly working the way we had hoped that they would work, whether that is introducing roof schedules, higher deductibles, the work we're doing in water claim management. The odd thing is a typical second quarter, you would have more claims so that you could actually see the actual benefit of those things come through. The good news is not as many claims to see it, but we feel really good that we are on track with the plans that we've put in place to improve the underlying performance of the business and we will continue to plan for cats around what the math tells us. I hope that answers your great question.

No, yeah, that was comprehensive. I'll make my follow up. I'll stick to the P and C segment. A high level, when we think about growth in auto and home, but especially auto, it looks like the retention ratio probably needs to pick up a bit. That's too simplistic. Where are we in the cycle in terms of pricing and in terms of initial changes? Do you expect to start seeing some additional improvement or acceleration eventually in policy concrete, specifically over the coming quarters or a year?

Yeah, we do. We spent a lot of time in New York at our recent investor day unpacking our plans for what we call sustained profitable growth because we think that's the right way for us to think about it a little more long term. But let's face it, there is increased competition in the monoline auto space. It's clear. We're all seeing it. We're all talking about it. But we are an educator and others who serve the community, but we are an educator carrier. We're a household carrier. We're not a monoline auto carrier. We bundle auto and home. We're able to add life and retirement and supplemental group benefits offering to that total account perspective. Our strategy has never been about being the cheapest price. It's about being a fair price over the life cycle. And that's why we don't talk about now is the time to growth. It's growth on. It's growth off. We don't think about it as a faucet. We think about it as sustained profitable growth over the life cycle. And I think the important thing is the things that we've done over the last several years building the products that are relevant in our space. And we have them. If we believe that it's not the right time for us to write the auto and be on that auto portion of the account, we have great relationships through the horseman general agency. When it's appropriate for us to place that with potentially a monoline auto carrier that, you know, has the right price or the right appetite or the right scale in that particular geography. And that lever has worked very well for us. We also have a lot of work that we've done in modernizing our infrastructure that allow educators to engage with us easier and more modernized as we built that out. Steve can talk a little bit about the work we've done in marketing and distribution to support that sustained profitable growth. But I feel like we've done what we need to do to meet the objectives that we laid out very clearly at investor day. Steve.

Yeah, so Mike, good question. And I think I'll pull back and just sort of point you to the investor supplement. And first thing you can see is for auto because that was your question. You can definitely see that PIF is stabilizing. And I think Merida called this out in her remarks. Almost flat quarter over quarter. And that sort of gives us a pretty good degree of confidence that it's going to stabilize and turn positive in the next handful of quarters. So that's sort of my direct response to what do we see with PIF. If I unpack things and divide divide results into two buckets retention, you can also see the same thing. You see it's stabilizing. And so keep in mind retention did decline a handful of points after three years of taking roughly 40% in rate. So we took we have to be pumped 40% of auto rate through the system. Retention held pretty steady, did decline a little bit. But our expectation is that the rate is moderating. We're going to take rate commensurate more with loss trends. And so our expectation is retention is going to flatten. It'll start to uptick over the next handful of quarters. Merida mentioned new business and sales momentum. So the second piece here around PIF is how are we doing on the new business side? And we talked a lot about this at investor day, but there's really three broad things we're doing. The first is we're driving more leads. And again, I think we did a great job of commenting on the front. And you see that in one of our metrics, which is website activity, I think it was up over 75%. So leads is one. The second is points of distribution. We are growing our points of distribution across the board. And then the last is increased productivity. And that would sort of cover things like Marina reference catalyst, which is really a lead management system that allows agents to sort of handle their leads more effectively and efficiently and increase the likelihood to sale. So I think as new business continues to rise and retention stabilizes, we have a high degree of confidence that we're going to deliver first PIF stability and then PIF growth.

Excellent. Thank you.

Our next question comes from John Barnage with Piper Sandler. Please go ahead.

Good morning. Thank you for the opportunity. Appreciate it. My question is on the group benefits business. I know there's Susan Alley. Can you maybe talk about the volumes on individual supplement and group benefits? How active the company has been in RFP activity? I appreciate the comment you made about your expectations for the year, but curious about the quarter.

Thanks. John, good to hear from you. And so I'll unpack both segments and I'll start with individual supplemental. And so you saw sales are up quite a bit. I think you asked a question last quarter on this as well and asked if it was driven by any one new account or case. And the answer is no. It's really driven by two factors. We have more people selling and the people that are selling. We see their productivity going up and we're really pleased with that. I'll also remind you Q1 of 24 was kind of deflated. We had some weather issues preventing us from getting into schools. And so when you compare some of the numbers year over year, they could be a little distorted because Q because early part of 24 was deflated. I think as we go forward and look at individual supplemental right now, if you look at the supplement, we're writing about five million and change per quarter. And we probably expect that to continue for the certainly for the rest of the year. So we feel pretty good about where individual supplemental is. And we sort of as we look to the horizon, we expect sustained profit of growth, as Maria said. The group one is very different. And I think Ryan did a nice job of covering this up front. Just just for context, group is a relatively small book for us. The case sizes can vary from a few hundred thousand to over a million. And so you have lumpiness in there and then the sales cycle is very long. But given that that sales cycle is long, it gives us a clear view as to what's coming. And I think Ryan referenced this earlier. We feel really good about the forecast and what we're looking at for new business sales group for the remainder of the year. July is an excellent proof point. So we already know what the sales members are. And sort of if we look at July year to date, 25 versus July year to date, 24, we are exceeding 24 growth levels. And so we feel really, really good about what's happening there. You brought up our piece. We have a fair amount of cold activity in the marketplace. And so that's just ongoing. So we feel we feel good about group. Q2 was a little quiet for us, but we knew the Q3 and likely Q4 are going to be pretty good for us.

Steve, thanks for unpacking those details. You did a nice job there. I think it's also important to think about the strategy here. The earnings diversification that both the NTA and M&L acquisition have done for Horace Mann, I think is clear. Think about NTA and the individual supplemental business of Horace Mann now producing new business at a 43% in the quarter and a nice ongoing clip and feel really good about the sustained profitable growth there. M&L was a couple of years later. Feel, as Steve said, very strongly about that business, longer sales cycle, really nice view, as Steve said, into the future and the rest of this year. But I think it also makes sense for that to take a little bit longer to get that ongoing kind of cadence that we now see with the individual supplemental business. And it's clear. And you see that in the numbers. We are investing in what we need from a long term, sustainable growth perspective in both individual supplemental and clearly and clearly group. So I think we unpacked what you needed there.

Thank you both very much. And then my follow up question. PNC sales was nice in the quarter. Sounds like your outlook for PIF has improved. Is this from the core customer, the educator customer? Are we starting to see the signs of the fruit being born from your investor data and new channels? Thank you.

Yeah, I mean, I think we've talked about new channels very clearly in the thoughtful approach that we're taking to concentric growth circles, natural adjacencies. And that work is way too new to be in the numbers in a meaningful way. We are still close to that 80% educator number that we have been. It moves a little bit by a point or two here and there, but it is still the lion's share of our business. And quite frankly, for a long time will continue to be. I wanted to be really thoughtful and I think we were at investor day to make sure we unpack the amount of opportunity we have within the educator space, not just public K through 12, but higher education, homeschooling, trade schools. A lot of the work that we're doing outside of the public K through 12 is still. It still has some educators centricity to it. So I don't think if you're thinking educator versus non educator, we are going to move those percentages greatly in the near term, because a lot of the work that we're doing is still in that 10 gentle educator space.

Thank you.

Thanks,

John. We have a follow up question from Mike with BML. Please go ahead.

Oh, great. Thanks. Just given there was a little bit of noise in the investment portfolio this quarter with the true up. I don't I don't I don't see live transcript, but did you give the new money yield? I think you said it was exceeded the book yield, but I don't know if you wanted to share any kind of quantification of approximately what the new money yields were that kind of the book yield extra true up.

Sure, sure, Mike. No, you didn't miss it. And it's a good result. So I'm glad you asked the question. Five seventy nine for the core fixed maturity portfolio for the quarter. Another encouraging bright spot when I look at net investment income on a go forward basis. This is the first quarter where the accounting yield, the equity method of accounting yield, which is what goes into NII exceeded the cash return for our commercial mortgage loan funds. Simply put, we're recovering some of the unrealized noise that we saw come through earnings over the last couple of years as commercial real estate continues to stabilize. So that's an encouraging leading indicator. There's always idiosyncratic risk with CMLs, but we're buoyed by by that result. LP is also a really strong result. So overall on a trend line basis, if you adjust for the prior period adjustment, the fixed maturity portfolio would have been tracking right in line with prior quarters. Thank you. Thank you.

This concludes our question and answer session. I would like to turn the conference back over to Ryan Grineer, chief financial officer for any closing remarks.

I appreciate everyone joining us on the call this morning. Feel free to reach out to the investor relations team with any additional questions and thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.