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Horace Mann Educators Corporation (HMN)

Q4 2014 Earnings Call· Tue, Feb 10, 2015

$46.15

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Transcript

Operator

Operator

Greetings and welcome to the Horace Mann Q4 2014 Earnings Call. [Operator Instructions]. This conference is being recorded. It is now my pleasure to introduce your host for today, Mr. Ryan Greenier, VP of Investor Relations. Thank you sir, you may begin.

Ryan Greenier

Analyst

Thank you Watania, and good morning, everyone. Welcome to Horace Mann's discussion of our fourth quarter and full year 2014 results. Yesterday, we issued our earnings release and investor financial supplement. Copies are available on the Investor page of our website. Our speakers today are Marita Zuraitis, President and Chief Executive Officer; and Dwayne Hallman, Executive Vice President and Chief Financial Officer, Bill Caldwell, Senior Vice President of Property & Casualty, Matt Sharpe, Executive Vice President of Annuity and Life, and Steve Cardinal, Executive Vice President and Chief Marketing Officer are also available for the question-and-answer session that follows our prepared comments. Before turning it over to Marita, I want to note that our presentation today includes forward-looking statements as defined in the Private Securities Legislation 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 press release and SEC filings. In our prepared remarks, we may use some non-GAAP financial measures. Reconciliations of these measures to the most comparable GAAP measures are available in the supplemental section of our press release. I'll now turn the call over to Marita Zuraitis.

Marita Zuraitis

Analyst

Thanks, Ryan. Good morning, everyone, and welcome to our call. After yesterday's market close, Horace Mann reported fourth quarter operating income of $0.68 per share, a strong end to a very good year. The quarters P&C results were solid with a 91.9% combined ratio we did see an uptick in auto losses which is not out of line with Horace Mann’s historical fourth quarter results. Property results were favorable with a reported combined ratio of 69. Reserves continue to develop favorably through although at a lower level compared to prior year. Catastrophe activity in the quarter was relatively benign. Importantly auto policies in force continued to grow sequentially and were encouraged by the 13% increase in auto sales during the quarter. Annuity earnings reflected strong spread management and continued growth in assets under management, sales in the quarter increased more than 20% in part due to the success of our new fixed indexed annuity product. Life earnings reflected a more normalized level of a mortality cost and sales continued to grow. Looking at the full year 2014 operating income of $2.30 per share was another very strong result producing nearly 7% growth in book value per share excluding net unrealized gains on investments. P&C profitability continues to improve led by underlying improvement in auto. Within property we believe the actions we have taken to improve home owner’s profitability by reducing coastal exposures are largely complete. And by mid-year 2015, we will have fully eliminated our home owner’s property exposure in Florida. In addition we plan to introduce enhanced roof underwriting pricing and claims practices for certain policies in select markets, which will help reduce the impact of wind and hail exposure overtime. We achieved our rate plan of mid single digit increases in both auto and property and plan a…

Dwayne Hallman

Analyst

Thanks, Marita and good morning everyone. Fourth quarter operating income of $0.68 per diluted share was another strong result reflecting solid performance in all three business segments. In P&C results included prior year’s reserve development and catastrophe losses that were more favorable than originally expected. Annuity results included a modest amount of unfavorable DAC unlocking versus the $0.03 of favorable unlocking in the prior year period. P&C after tax income of $16.2 million was $2.8 million lower than the prior year quarter. On a reported basis the combined ratio of 91.9 was a solid result, and reflected the typical fourth quarter loss seasonality in auto. That said, the auto loss ratio was higher this year as a result of elevated frequency in comp, collision and property damage compared to the prior year. In addition, we experience the lower level of favorable prior year reserve development. Fourth annuity income excluding DAC unlocking was $11.4 million, in line with prior year quarter as was life operating of $4.6 million. On a full year basis, operating income was $2.30 per share, another quality earnings year. Fully year P&C operating income was $46.9 million, a 6% improvement over the prior year. P&C results included a level of favorable prior year reserve development that was similar to 2013, which exceeded the assumptions in our earnings guidance. On an underlying basis, the combined ratio was in line with the prior year at 92.5. We did see a one point improvement in the underlying auto combined ratio as earn rate exceeded our loss cost trends. Property results reflected increased non-cat weather severities we mentioned earlier in the year. This trend resulted in a three-point, five-point increased in our underlying combined ratio which was still a respectable 96.5 points. Continued underwriting and rate actions, reinsurance cost reductions and…

Ryan Greenier

Analyst

Thanks, Dwayne. Tanya, please open up the line to begin Q&A portion of the call.

Operator

Operator

Thank you. [Operator Instructions] Our first question comes from Bob Glasspiegel with Janney Capital. Please proceed with your question.

Bob Glasspiegel

Analyst

Good morning. I got few questions. Number one, how much do you think you’re going to save in reinsurance cost 2013 versus 2014?

Dwayne Hallman

Analyst

2015 going into 2015 is roughly $2 million, Bob.

Bob Glasspiegel

Analyst

Okay. Access – my annual access capital calculation, how much do have at the parent and how much do you have with the subs based on where you want to be for rating purposes?

Dwayne Hallman

Analyst

Bob, the way we calculated we just assume an RBC ratio say roughly 425 in the life company and 500 in the P&C, not that we would take it all the down to 425, but just for consistency purposes keep numbers level from year-to-year. Using those numbers, the combination of P&C and life have about $80 million of excess capital. And then we currently have just north of $20 million of cash at the holding company.

Bob Glasspiegel

Analyst

Okay. And dividend capabilities from the subs to the parent ahead of your share dividend announcement which we think in terms of how you’re going to you’re going want a dividend?

Dwayne Hallman

Analyst

The dividend available without any regulatory pre-approval is roughly $82 million and that’s about 37 out of the life company and roughly 45 out of the P&C companies.

Bob Glasspiegel

Analyst

Any guess in how much you’re going to want a dividend up?

Dwayne Hallman

Analyst

As far as plans, way we operate, we bring up enough dividends to fund the dividends in debt service and holding company expense. Over the last couple of years we’ve had opportunity to build up a low excess cash at the holding company or just in case scenario. So if you added those components you could roughly guess what the dividends would be minus any intercompany tax sharing agreements. And that’s would generally be split evenly between the life and P&C companies.

Bob Glasspiegel

Analyst

Okay. And no preliminary thoughts and what sort of dividend we should be looking for in March?

Dwayne Hallman

Analyst

No, sir, that will occur at our March Board Meeting and will promptly announced.

Bob Glasspiegel

Analyst

Okay. Last question. Personal lines auto, you’ve given sort of a similar speech maybe to what Allstate saw that the frequency uptick in Allstate was sort of not clear on whether they are going immediately price for it or may have to price for it. So I guess question is, was this a left field to you, a blip, a trend and how you’re thinking about in terms of triggering your price increase needs for 2015 in auto?

Bill Caldwell

Analyst

Hey, Bob, it’s Bill Caldwell.

Bob Glasspiegel

Analyst

Hey, Bill.

Bill Caldwell

Analyst

Hey, how are you?

Bob Glasspiegel

Analyst

Doing great.

Bill Caldwell

Analyst

When we look back at prior fourth quarters we have the unfavorable comparison to 2013 which was an exceptional year for Horace Mann industry. But not surprising when we go back further and look our prior fourth quarters. That said, we’re committed to a defensive actions in all of our market. So we’re looking at as that data comes in we’re looking at discipline rate actions, again, mid single-digit for auto, tighten underwriting where appropriate in some markets. And what I like about this model is our agents are Progressive available too, so we’re able to maintain the household. There’s a risk out there where we’re not comfortable with that segment. We’re able to access Progressive and bring that risk back when we’re more comfortable with segmentation.

Marita Zuraitis

Analyst

Yes. And this is Marita. What I’d add to that is, we’re pleased with the full year loss ratio in auto, and continued improvement albeit fractions of loss ratio points as we continue to say, the loss ratio is ahead of the industry, continues to improve on a full year basis. Also because of the fact that we have this homogeneous segment of customers of educators, we’re able to go back in and begin to unpack the fourth quarter. So Bill and his group have spent a fair amount of time looking at the historical fourth quarter being higher, not withstanding unfavorable comparison to a pretty decent 2013. But looking at that fourth quarter pattern and saying what it is about our educator customers that drive a higher loss ratio in the fourth quarter, and seeing what we can learn about that. So that maybe in the fourth quarter result we can even improve that further when we have the learnings, another benefit of having a very homogeneous place over the population. But overall the answer to that question is, the full year loss ratio is decent. And we’re happy with the result.

Bob Glasspiegel

Analyst

To sort of stay tune, is the answer on frequency?

Marita Zuraitis

Analyst

Yes. I’d say, it could be a blip. We’re unpacking it. But on a full year basis we’re not – we’re not concerned and the trends are relatively benign.

Bob Glasspiegel

Analyst

Got you. Thank you.

Dwayne Hallman

Analyst

Thanks, Bob.

Bob Glasspiegel

Analyst

Just one quick follow-up to provide you a benchmark to help with your model is that dividends that came out of the statutory companies during 2014 was roughly $46 million [ph].

Bob Glasspiegel

Analyst

Got you. Thank you.

Operator

Operator

Our next question comes from Sean Dargan with Macquarie. Please proceed with your question.

Sean Dargan

Analyst · Macquarie. Please proceed with your question.

Thank you, and good morning. And thanks for kind of framing the earnings headwinds from lower interest rates. I think you just daggering [ph] your actuarial reserve assumption review. And so, I should take it from your RBC level that there were no reserve additions or any capital impacts from your outlook of lower interest rates?

Dwayne Hallman

Analyst · Macquarie. Please proceed with your question.

That would be a correct assumption.

Sean Dargan

Analyst · Macquarie. Please proceed with your question.

Okay. And just thinking of the mortality expectations based on your life outlook, you did have a string of pretty favorable years there and I just want to make sure that nothing changed in your outlook of mortality. Is there anything in pricing relative to tables that you think has maybe trended more negatively going forward?

Dwayne Hallman

Analyst · Macquarie. Please proceed with your question.

Sean, this is Dwayne. Just the way I would think about it from an actuarial model as you look the trend line, we will have years that will be favorable to that trend line, and as you would expect you ultimately have to catch backup to the trend line. So we had two, three years in a row that were favorable. Couple of years ago, not so favorable and we’re kind of back on trend line, that’s we’re assuming. As far as our internal numbers,[Indiscernible] for that trend line that move more than plus or minus 5%, but given our size, $3 million, $4 million difference would obviously present a little knowledge. As far as into pricing mortality table changes or the business performing basically any different than we’d expected over a long period time with life business. I would say no.

Sean Dargan

Analyst · Macquarie. Please proceed with your question.

Okay. Thanks. Just one last question, can you give us any color around your exposure to the energy sector in your investment portfolio?

Dwayne Hallman

Analyst · Macquarie. Please proceed with your question.

Sure, I’ll be glad to. The energy sector makes up about 4.2% of our portfolio, so it such sort of $300 million and that position has as you would guess, a pretty sizeable unrealized gain associated with it. We have very minimum exposure to oil field services, oil and gas drilling. We do have a very, very small position relative to our portfolio and high yield of roughly $10 million or so, so not big numbers. Now we’ll see that if you follow us in the past we do tend to take pretty hard positions of certain events and this one is no different. We expressed our portfolio at oil prices significantly below the current levels and started doing that in the fourth quarter of last year. And actually they had several trades in the fourth quarter and actually continued some trades into the first quarter. So I think you’ll see by the time we get to the end of the first quarter that 4.2% will down a bit as well. But we were proactively modeling and reducing exposure of any names that we thought could come under stress of oil prices stayed low for a multi month or double-digit month in the 12 and 18-month period versus assuming this was only a three to six-month expectation.

Sean Dargan

Analyst · Macquarie. Please proceed with your question.

Great. Thank you.

Operator

Operator

[Operator Instructions] our next question comes from Vincent DeAugustino with KBW. Please proceed with the question.

Vincent DeAugustino

Analyst · KBW. Please proceed with the question.

Hi. Good morning, everyone.

Marita Zuraitis

Analyst · KBW. Please proceed with the question.

Hey, Vincent.

Vincent DeAugustino

Analyst · KBW. Please proceed with the question.

On the guidance, I’m just curious if you’re giving yourself much credit from some of recent ongoing P&C initiatives and here I’m particularly thinking auto. Or this is something that we should anticipate I guess in light of your conservative nature if some of that benefit won’t work at their way into your initial axing, your pick until there is some proof in the development that you pay claims?

Marita Zuraitis

Analyst · KBW. Please proceed with the question.

Yes. Vincent, it’s early. I mean, I think we’re doing all the right things. We’re encouraged by the momentum in auto and some of the offense that we put in place in some of these better places to do business. We’re encouraged by the defense and some of the pieces of the underlying improvement we’re seeing in the defense. We’re convinced we can provide a nice broad price point for a decent sector of the educators on a state by state basis and we’re happy with the early signs that we’re seeing, but they’re early. So, the answer would be, we’re really pleased with the momentum. We love the uptick in the fourth quarter. We like where it’s coming from. We like the percentage of folks that are choosing electronic funds transfer. We like the productivity in the agency plan. We said from the beginning that we were going to step back and focus on the products, focus on the support of the distribution and focus on the technology and the customer contact center data needed to support the educators and we’re pulling on all three of those levers and its beginning to work and you’re starting to see it come through in the numbers. But this is early for us. We’re going to focus on the same things in 2015. And we believe that it’s going to continue to give us momentum in sales and continue to eat that fractions of ratio points in that auto line. On a full year basis you saw little bit of improvement come through. We expect that to continue as we look to 2015 quantifying it this early is difficult, but we’re pleased with both what we’re seeing on the offense as well as the defense. Its right where we hoped it would be.

Vincent DeAugustino

Analyst · KBW. Please proceed with the question.

Okay. Very good. And just a separate question entirely here. I believe you guys have a pretty tight definition of cats compared to some of your peers that maybe have dollars thresholds. And one of the topics that we all been kind of facing in the industry is just that non-cat and small cat weather has been a bigger. So in light of some of this small cat activity and then turning that with some of your micro concentration risk around whether you have a high performing agent or large school district. I’m just wondering if you shift to $1 threshold on your cat definitions might be more helpful in isolating trends between the core and obviously you pay claims on weather, so it’s still core, but at least showing like underlying trends versus some of that volatility around weather?

Dwayne Hallman

Analyst · KBW. Please proceed with the question.

I’ll take the first part, Vincent. This is Dwayne. As far as our cat definition is, we’ve disclosed. We follow the PCS definitions. So if there’s a cat declared than that’s how we code it and that’s how our reinsurance contract respond as well. The thing about property business, for the most part outside a large fire losses et cetera, it is pretty much all about the weather, whether its cat or non-cat. And we’ll see to go to a dollar amount and others few companies that do that, there is one very, very large company in particular in the Chicago area that has a dollar threshold. And if we were to do something on a same relative basis, the dollar amount for us would be extremely low, I would probably say in the $100,000 to $200,000 level, so we would probably start moving into direction that all of our weather would basically be coded cat and we don’t think that’s necessarily appropriate. Then also from the non-cat weather, that is what gets into the normal flow of business, the pricing and has taken into account in our annual filings as where’s the cat is obviously treated a bit different on a longer term basis. But I’ll turn it over to Marita for the concentration in agent.

Marita Zuraitis

Analyst · KBW. Please proceed with the question.

Yes. I mean, whether it’s no pun intended, whether its cat or non-cat weather, it’s still weather. And for us it is about other wind pricing and underwriting. So rather than spending a lot of time on the dissection of whether it’s a cat, whether it’s a kitty cat or whether it just short wind. We’re doing all the right things from an underwriting in pricing perspective whether its age of proof, whether ACV, whether its re-inspection programs from a property standpoint, I think we have opt our DNA in underwriting and pricing other wind. We’re going to continue more that as we push through 2015. But bringing underwriting in pricing sophistication to the property line, it’s going help there as well. We talked about it in the script, I’m sure you’ll hear more about it as we go through 2015. But we’re not spending a lot of time focusing on the categorization of whether it’s a cat or kitty cat, we’re focused on making sure that we’re doing the right things in our underwriting and pricing to make sure that we’re driving the best profitability that we can drive in the property segment and improving segmentation in pricing even in property so that we can attract a broad spectrum of educators including the more preferred educator clients.

Vincent DeAugustino

Analyst · KBW. Please proceed with the question.

Okay. Thank you for that. One I guess additional question, just around auto. You guys definitely had some comments here on the call this morning around that, on the loss cost side, obviously it’s very early. I guess from my standpoint it’s kind of silly for me to ask anything on January because it’s even earlier yet. But cheap gas is something that we’re watching, we’re hearing some comments, [indiscernible] call, yesterday they had mentioned that might be a potential cost to some of the frequency that they are seeing. Is there anything either in fourth quarter or like you said in January even though its early that makes you think that there is or is not any response in driving trends?

Bill Caldwell

Analyst · KBW. Please proceed with the question.

Hey, it’s Bill Caldwell. I just want to remind the folks that we have a homogeneous list of the market. So we’re not impacted by gas prices like the broad market would be. That said, we do continue to monitor. We use Carfax in the number of states for underwriting and pricing. So that gives us some idea of the educators driving and we really haven’t seen any uptick in annual mileage which would be the impact of lower gas prices. But we do continue to monitor and as it comes into our results we will price for that, but we just haven’t seen it yet.

Vincent DeAugustino

Analyst · KBW. Please proceed with the question.

Okay, Bill. If I could just – I guess relay on your experience here a little bit. Could there will be a situation where your educator might not be driving more, but there could be more vehicles on the road around them that would potentially increase frequency or it might impact you still. So I’m just wondering if that’s…?

Bill Caldwell

Analyst · KBW. Please proceed with the question.

The world around them could change and increase frequency, but again we’ll watch for that in data and respond to it. But I just haven’t seen evidence of that yet.

Marita Zuraitis

Analyst · KBW. Please proceed with the question.

It’s a benefit for us to be into relative short lines of business both with your auto question as well as your property question. The good news is being in such short tail lines you can price for it when you see the trend and built it into the pricing. But I think this is – it’s an interesting topic for us. Again, I think Bill is right, we benefit from a group of people who don’t necessarily change the amount of time they are on the road because of who they are and what they do. But I do agree with you the world changes when there is more vehicles on the road and we’ve seen some of the improvements and trends coming out of an improved atmosphere with auto. This might be one of those that takes it the other way, but to Bill’s point, too early to tell for us, but we clearly think about it, watch it and look for in our trends as well.

Vincent DeAugustino

Analyst · KBW. Please proceed with the question.

Okay. Thank you very much. Thanks a lot.

Bill Caldwell

Analyst · KBW. Please proceed with the question.

Vincent.

Vincent DeAugustino

Analyst · KBW. Please proceed with the question.

Yes, sir.

Dwayne Hallman

Analyst · KBW. Please proceed with the question.

This is Dwayne. Just little part of your question as far as the frequency, obviously is kind of final preparation of our guidance, we’ve been able to see what has been happening in January and it wouldn’t be anything outside of our expectations. And as far as the fourth quarter is concern to your question, this industry is a strange industry. And I would say, our October, November frequency was up, maybe not such as significant fall off to December. But the first two months of the quarter were a bit different than December.

Vincent DeAugustino

Analyst · KBW. Please proceed with the question.

Okay. Appreciate that. Thank you.

Operator

Operator

At this time, I’d like to turn the call back over to Mr. Ryan Greenier for final comment.

Ryan Greenier

Analyst

Well, Tanya, thanks. And thank you to all for joining us this morning on Horace Mann's fourth quarter earnings call. If there's any further questions please don't hesitate to reach out to me or Christie. Thanks.

Operator

Operator

Thank you. This does conclude today's conference call. You may disconnect your lines at this time and have a great day.