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Horace Mann Educators Corporation (NYSE:HMN) Q1 2024 Earnings Call Transcript

Horace Mann Educators Corporation (NYSE:HMN) Q1 2024 Earnings Call Transcript May 12, 2024

Horace Mann Educators Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon, and welcome to the Horace Mann Educators First Quarter 2024 Investor Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Bret Conklin, Chief Financial Officer. Please go ahead.

Bret Conklin: Thank you, and welcome to Horace Mann’s discussion of our first quarter results. Yesterday, we issued our earnings release, 10-Q, investor supplement and investor presentation. Copies are available on the Investor’s page of our website. Marita Zuraitis, President and Chief Executive Officer, and I will give the formal remarks on today’s call. With us for Q&A, we have Matt Sharpe, Steve McAnena, Ryan Greenier, Mark Desrochers, and Mike Weckenbrock. 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 used some non-GAAP measures. Reconciliation of these measures to the most comparable GAAP measures are available in our investor supplement. And now, I’ll turn the call over to Marita.

Marita Zuraitis: Thanks, Bret, and welcome, everyone. Yesterday, we reported first quarter core earnings of $0.60 per diluted share, a nearly 3-fold increase from last year’s first quarter, primarily due to the progress we’ve made in restoring P&C profitability. Total revenues were up 9%, and earned premiums and contract charges were up 8% over prior year. These results reflect strong sales momentum in our retail division, led by a 35% increase in Property & Casualty sales premium. We realized a dramatic improvement in the profitability of our P&C business and continued to benefit from the strength of our diversified business model built to meet the needs of educators and public sector employees. While net investment income on the managed portfolio is up 7% for the quarter, we saw a handful of real estate related funds perform below target levels due to a mark-to-market valuation adjustment consistent with the experience of the broader industry.

This obscured some of the progress we are making in Life & Retirement and the Supplemental & Group Benefits segments. Bret will talk about the outlook for the individual segments later in the call, but at a high level, we remain confident in our 2024 full year outlook of core EPS in the range of $3 to $3.30, net investment income closer to the lower end of the current range of $465 million to $475 million, and return on equity near 9%. Today, I would like to focus my remarks on the progress we are making across the business to reach the profitability targets and gain market share. First and foremost, we are making substantial progress towards restoring P&C segment profitability. Our reported first quarter P&C combined ratio of 99.9% was a 13-point improvement over prior year.

Combined with strong segment net investment income returns, this led to a first quarter segment profit of $11 million, a $22 million increase compared to a year ago. As an aside, first quarter catastrophe losses remain elevated. Industry losses exceeded the 10-year industry average, and Horace Mann’s first quarter losses also exceeded our 10-year and 5-year averages. However, when comparing quarter-over-quarter, our catastrophe and non-catastrophe losses were lower than prior year. The majority of our combined ratio improved improvement is due to the successful execution of our multiyear profitability restoration strategy. From 2022 through the end of 2024, we expect our rate increases and non-rate underwriting actions to equate to total premium increases of nearly 40% in auto and nearly 50% in property.

Despite these increases, policyholder retention has largely remained steady and consistent with our historically strong retention. We attribute this to our loyal customer base, our educator-specific benefits, and the overall value we provide. We strive to offer a fair price over the lifetime of a customer relationship, and we equip our agents with the information to explain the economic context to customers. Over the course of 2024, we are currently planning for a country-wide average of 10% to 15% rate increases in both auto and property. This plan includes recent approvals from California for a 22% increase in homeowners and a 13% increase in auto, both of which are now in effect. In addition, we expect an increase in property average renewal premium in the mid-single-digits attributable to higher home coverage values.

We continuously review emerging trends and will adjust our rate plans as needed to ensure segment profitability. In the property line, we continue to rollout underwriting as well as terms and conditions changes to ensure we continue to accurately price our risk. In particular, we have implemented new roof rating schedules and have received approval with effective dates within the next 90 days in six highly wind prone states with filings pending in three additional states. These schedules set convective storm claim settlement rates that take into account the age and construction materials of roofs. When fully earned in, we expect about a 3-point impact to the property combined ratio. On a normalized basis, our Life & Retirement and Supplemental & Group Benefits segments are near or above target profitability.

However, in the first quarter, segment earnings were impacted by lower than expected net investment income due to mark-to-market adjustments on three commercial mortgage funds and limited partnership real estate investments. This adjustment is valuation driven and has not impacted our cash returns. The Life & Retirement segment remains a steady contributor to earnings and a strategically significant entry point to the education market. A core competency of our agency force is providing financial wellness and retirement planning workshops in schools across the country, building relationships as a trusted advisor with both educators and their employers. The Supplemental & Group Benefits segment is a less capital intensive higher margin business that provides corporate earnings diversification.

As we have talked about in the past, our target blended benefits ratio for this business is 43%, which takes into account pre-pandemic customer utilization levels. We are seeing the benefit ratio continue to trend towards this long-term target. This quarter, the benefit ratio was 36% compared to 33% a year ago. With our profitability targets within reach across the business, we are testing, adjusting, and scaling our strategies to grow educator households. Within the retail division, we are especially well-prepared with strong momentum in our exclusive agency channel. The market has been challenging over the past few years and we’ve worked with our agents to ensure their businesses remain healthy. Over the past year, we’ve seen a steady increase in exclusive agent recruiting, a 16% increase in average agency income, and a 22% increase in agency P&C premium production.

Agent enthusiasm is strong and we’re seeing the impact in solid top-line results. Looking ahead, our efforts are centered around supporting agency new business and cross-sell production, enhancing digital capabilities, and improving the effectiveness of our digital sales funnel to align with educator preferences. In general, educators want to do research and browse online, but when they are ready to buy, they are looking to talk to a trusted advisor. Let me provide a few examples. We have seen success with a hyper-local digital marketing program targeting educators. Through this and other programs, we have driven 15% more traffic to our website this year compared to last. In addition, we recently launched a new version of our website, which increased the number of quotes started by more than 50%.

A senior citizen outside on a sidewalk, using her smart phone to pay her health insurance premiums.
A senior citizen outside on a sidewalk, using her smart phone to pay her health insurance premiums.

Over the past year, getting better leads to agents has helped contribute to an over 20% increase in new P&C business compared to the first quarter of 2023, and that’s in an increasing rate environment. In the worksite division, we’re building on our strong foundation to drive growth in both the employer-sponsored and worksite-direct lines. We continue to refine and improve our product set to meet educator and employer expectations, and to introduce product enhancements to our supplemental policy offerings. These enhanced features meet specific customer demand and provide higher average premiums. We are also seeing strong momentum in sales trends. We continue to add sales and enrollment headcount on the worksite direct side of the business.

On the employer sponsored side, we are working to leverage our existing broker partnerships to expand distribution. Since last year, we grew our number of covered lives to 836,000. Before I turn the call back to Bret, I want to touch on our efforts to have a positive impact on all of Horace Mann’s stakeholders. We are in the midst of Teacher Appreciation Week, but Horace Mann has planned events throughout the entire month of May to thank educators for everything they do. Centered around educators’ desire for work-life balance, we’re hosting contests, an exclusive virtual event for educators with celebrities, musicians, and self-care experts. Locally, we’re announcing the winners of Springfield Public School Educator and Administrator of the Year awards.

We also recently published our 2023 Corporate Social Responsibility reporting, outlined the actions we’ve taken to support educators, our customers, our employees, our agents and our local communities. A few highlights. We contributed nearly $1 million to charitable causes through the Horace Mann Educators Foundation and the Horace Mann Educators Corporation. We reduced our carbon emissions by 55% over base year 2019 and we increased corporate transparency by publishing our U.S. Equal Opportunity Commission, EEO-1, workforce data report. In March, our Board of Directors increased the quarterly shareholder dividend by 3%. This is the 16th consecutive year the board has increased the shareholder dividend, underscoring our commitment to long-term shareholder value creation.

In closing, by successfully executing on our strategic plans, we remain solidly on track to achieve our long-term goals, a larger share of the education market and a double-digit shareholder return on equity in 2025. Thanks. I’ll now turn the call back over to Bret.

Bret Conklin: Thanks, Marita. First quarter core earnings were $24.8 million or $0.60 per diluted share, a nearly 3-fold increase over prior year. Our P&C profitability restoration strategy is making significant progress and we remain on track to be within our full year 2024 core EPS guidance range of $3 to $3.30. Let me break down the results by individual business segment performance. Starting with P&C. First quarter profit of $11 million was a $22 million improvement over the prior year. Net investment income was triple last year’s returns due to solid performance in limited partnerships and higher yields on the fixed income portfolio. Net written premiums rose more than 15% to $172 million, primarily on the premium increases and underwriting actions we implemented over the past year.

The reported combined ratio of 99.9% improved 13 points over prior year. Cat losses added 9 points to the total combined ratio compared to nearly 15 points a year ago. In the first quarter, property claims services designated 19 events as cats compared to 23 a year ago. As Marita mentioned earlier, from 2022 through the end of 2024, we expect total premium increases of nearly 40% in auto and 50% in property, which underscores our confidence that the P&C segment will be profitable for the full year as well as reaching our targeted combined ratio of 95% to 96% in 2025. Turning to auto. Net written premiums of $117 million, increased 15% over prior year, primarily on rate actions. The combined ratio of 100.8% improved 10 points over prior year.

In terms of loss cost trends, we saw lower frequency likely attributable to more mild winter weather and severity generally in line with expectations. Despite the higher premiums, policyholder retention remained strong at 87%. In property, net written premiums were $56 million, a 16% increase over prior year. The combined ratio of 97.7% reflected lower non-cat weather and cat losses. Those cat losses are slightly above our expectations as they are above our 5-year historic average. This is generally in line with the broader industry, which also experienced cat losses above historical averages. Although property average written premiums were significantly higher, our policyholder retention remained strong at 90%. Turning to Life & Retirement, core earnings of $12 million were below prior year by 16% due to lower interest margins.

While net investment income on the segment’s fixed income and FHLB portfolios increased 4% due to higher reinvestment rates, returns on the commercial mortgage loan fund portfolio and limited partnerships were lower than both our expectations in prior year. This was due to negative of returns in one commercial mortgage loan fund as well as two real estate equity limited partnerships. These same funds also impacted results in the Supplemental & Group Benefits segment. In the retirement business, net annuity contract deposits in total were down slightly at $105 million. However, deposits in our core 403[b] products remain strong. Over the first quarter, accounts on our fee-based mutual fund platform retirement advantage reached nearly $20,000.

In addition, the market risk benefit adjustment in retirement was favorable. As Marita mentioned, our retirement products are a cornerstone of Horace Mann’s value proposition and an important entry point to the education market. Annualized life sales increased 5% over prior year. Mortality costs for the quarter were in line with prior year and persistency remains strong at about 96%. In Supplemental & Group Benefits, earnings of $11 million were down from prior year by $3 million due to 14% lower net investment income and a 2.3-point increase in the benefits ratio. Premiums and contract charges earned were $64 million, down slightly from prior year; and sales of $7 million were down 20% from prior year. As a reminder, the employer-sponsored line sales are inherently lumpy depending on case size.

The sales comparison to prior year is unfavorable partially due to a large employer-sponsored sale in the first quarter of 2023. The long-term target for the blended benefits ratio is 43%, which assumes policyholder utilization reverts to pre-pandemic levels. In the first quarter, the benefits ratio was 36% compared to 33% a year ago. Historically, benefits usage in the employer-sponsored line is heaviest in the first quarter. Turning to investments. Overall, net investment income was up 5%, while returns on the managed portfolio were up 7%. Income on the fixed maturities portfolio was up 4% from the prior year, reflecting reinvestment rates that have exceeded portfolio yield for the past 8 quarters. Our core fixed income new money yield in the first quarter was 5.44%, 124 basis points above the average portfolio yield, and had an average duration of 7 years.

The portfolio remains high-quality at A+, and remains concentrated in investment-grade corporates, municipals, and a high-quality agency, and agency MBS securities positioning us well for a potential recessionary environment without sacrificing income. Given the first quarter underperformance related to commercial mortgage loan and real estate related limited partnership funds, we now expect full year net investment income on our managed portfolio to be closer to the low end of our guidance range of $360 million to $370 million. On a segment basis, P&C NII is ahead of expectations with L&R and S&GB below. In summary, we remain focused on long-term shareholder value creation. The year is off to a strong start with profit restoration and sales momentum taking center stage in the P&C segment.

We continue to make solid progress toward our long-term objectives of an expanded market share in a double-digit shareholder return on equity in 2025. We are excited and optimistic about the future. Thank you. And operator, we’re ready for questions.

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