Greetings, and welcome to the Horace Mann Fourth Quarter and Full Year 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Ryan Greenier, Vice President of Investor Relations. Thank you sir, you may begin.

Thank you, Kristine, and good morning everyone. Welcome to Horace Mann's discussion of our fourth quarter and full year 2017 results. Yesterday, we issued our earnings release and inventor financial supplement and copies are available on our Inventor’s page of our Web site. Our speakers today are Marita Zuraitis, President and Chief Executive Officer and Bret Conklin, Executive Vice President and Chief Financial Officer. Bill Caldwell, Executive Vice President of Property and Casualty; Bret Benham, Executive Vice President, Life and Retirement; and Matt Sharp, Executive Vice President of Strategy and Business Development 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 Litigation Reform Act of 1995. The Company cautions inventors that any forward-looking statements include risks and uncertainties and are not guarantee 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 measures. Reconciliations of these measures to the most comparable GAAP measure are available in the supplemental sections of our press release. And now, I'll turn the call over to Marita Zuraitis.

Thanks Ryan. Good morning everyone and welcome to our call. Yesterday evening, we reported fourth quarter core earnings of $0.65 and full year 2017 earnings of $1.74 per diluted share, excluding the favorable impact of tax reform. These results underscore our positive momentum as we move into 2018. I am very pleased with our results, particularly in a year largely defined by record level catastrophe losses and industry disruption in the retirement space. For a second consecutive quarter, our auto loss ratio improved significantly over prior year. In the fourth quarter, the auto loss ratio of 77.5 was more than 5 points better than the prior year. This is the result of rate actions combined with weather that was somewhat more favorable compared to our typical fourth quarter experience. Due to this strong result, we were able to achieve 1 point year-over-year improvement in our underlying auto combined ratio and we expect continued improvement in 2018. And while many in the industry experienced another quarter of significant catastrophe impacts, our cat losses of 2.2 points were relatively small. For example, the California wildfire losses in the fourth quarter were about $1 million, significantly lower than our market share would indicate. This strong result was due to our stringent wildfire underwriting protocol that utilizes multiple risk assessment tools. 2016 and 2017 were two of the heaviest catastrophe years in recent history for the PNC industry with multiple firms estimating more than $100 billion in losses in 2017 alone. And for both of these two years, our property results were solidly profitable. We did have higher catastrophe costs than our historic averages but our conservative underwriting standards, use of partner carriers for risks that exceed our underwriting appetite and a continued focus on profitability, resulted in a full year property reported combined…

Thanks, Marita and good morning everyone. Fourth quarter core earnings of $0.65 were $0.13 below prior year, mostly attributable to 5 point improvement in underlying auto loss ratio. Full year results of $1.74 were $0.23 below prior year, primarily due to a high level of adverse non-cat weather in the first half of the year. When looking at full year results, it’s really a tail of two halves. While our first half was heavily impacted by weather, the underlying auto improvement in the second half help drive strong earnings growth. A $1.34 of our full year earnings came in the second half of the year. We except the positive trends we saw in the second half of the year to continue in 2018. Since we introduced our initiative to drive ROE improvement in the third quarter, we’ve improved ROE by 60 basis points. We aim to further increase ROE in 2018 by improving our auto loss ratio another 2 to 2.5 points. In addition, continued focus on expense discipline and growing our fee-based retirement product will also result in higher ROEs over time. For 2018, we are forecasting core earnings between $2.10 and $2.30 per diluted share. This reflects continued improvement in the P&C line led by auto, Retirement and Life results that are largely in line with 2017, and continued investments in strategic initiatives that will drive future profitable growth. In PNC, we are forecasting net written premium to increase by 4% to 6%, largely attributable to rate increases. From a profitability perspective, we are seeing continued stabilization in loss trends in the mid-single digit range. Our 2018 rate plan assumes high-single digit auto rate increases and mid-single digit increases in property. These rate actions coupled with those implemented in 2017, should lead to 2 to 2.5 point improvement…

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

Thank you. We will now be conducting a question-and-answer session [Operator Instructions]. Our first question comes from the line of Bob Glasspiegel with Janney. Please proceed with your question.

I was wondering if you could clarify your flat Life and annuity outlook that’s after tax, so that would be a decent decline on the pretax basis given the tax rate coming down in those two segments?

That would be correct, Bob, all driven by the decline in net investment income, but the numbers that we provided were after tax, correct.

Do you have Life and/or annuity tax rate, because PC -- what your profitability associated there…

Yes, we actually included a new page in the Investor Presentation. I believe it’s on page 38 where you can pick up the various ranges by segment, but for Life, which would traditionally be about 35% effective rate. You could probably use a range of 18% to 21%. And as it relates to the retirement segment what would normally be a 30% effective rate pretax reform that will be in the 17% to 20% range.

So you didn’t talk about Life pretax earnings going down. Is it the same investment income assumption or did you like building a cushion for Q1 mortality for the flu, et cetera?

No, it's strictly the lion shares related to the decline in net investment income.

And, no early read on January mortality?

No, no early read.

Okay….

But not being anything significantly out of line with model trends.

Are you seeing any pushback on rates from any regulators on the tax reform, California Commission has made some public comments. But what's your general read on your ability to get your -- at least at high-single digit rate of your target?

Our target rate plan for 2018 is high-single digits. We're already halfway there from a filing perspective half of our rate is already been filed and approved. And we're following the communications from the various deal-wise and the consumer advocates, but the reality is the industry is still at the highly unprofitable situation right now. So I expect that will be in overtime but we still have ways to go as an industry to get profitable. So we haven't seen any pressure yet.

And California, just specifically where I think the cushion has been most visible here over 100 there, or…

I said it last year in this we don't have the numbers for the industry for this year yet, but last year California was 109 for the industry. We're typically better than the industry by 3 to 5 points, and that's during California's loss over still above 100. But we just had a rate filing approved that's effective in March for 6.8%. So our rates are already in the bag for 2018 for California.

The rate approved was what amount?

6.8%.

6.8%, I thought I heard 28%. 6.8%, I could process that. Thank you very much.

And Bob, even though there has been some discussion as to whether or not the department could go back on prior approved rate increases even if we factored in the new effect of tax, we could actuarially justify the rate increase that we filed. And that's what typically will happen. Companies will begin to put a new tax rate in their filings. So what comes out of the machine will be lower than what it was before that tax rate, but even in California, we can justify what we filed and what we got approved.

And you got approved when, what was the date in California?

Mid-March, March 15th or 16th…

But I mean when did they give you the approval?

Early January.

[Operator Instructions] Our next question comes from the line of Christopher Campbell with KBW. Please proceed with your questions.

Just a few questions on the '18 guidance. My first one was on the P&C expense ratio. I know last night's release and then the earnings script didn't include an explicit assumption here. And if I go back to last couple of years with the investments that you're making in the business, it's been about 27.5%. Is that still a good overall expense ratio assumption, or should we be thinking about this any differently?

With respect to expense ratio, I think I even mentioned on the third quarter earnings call that on a go forward basis, you probably need to bring that down to 27% instead of the 27.5% on a go-forward basis. And we're still doing the balance between strategic and non-strategic initiatives. But we ended both this year and last year around 27%, so I would lower that by 0.5% on a go forward basis.

We included a separate slide, a new slide, on page 17 of our Investor Presentation that summarizes all of the guidance points that were made in either the press release or the commentary. We thought it would just be easier for everybody to get it all at one place.

And then finally, I know the guidance excludes any potential reserve releases. But if I’m thinking about the amount of rate that Horace Mann is putting through its auto book and did last year, coupled with if you’re assuming more moderate more soft inflation with frequency concerns aside. That you would have a potential that you could be building up some auto redundancies that that probability is increased a little bit. And then just even going back to Horace Mann’s history, our model is back 08’, so I can speak to then, consistent positive or consistent favorable releases in the book. So how should we think about any potential upside to guidance? And what's your cadence in terms of just reserve reviews on that line or the PNC book in total?

This is Bret Conklin again. I guess with respect to the reserved position itself, there is actually a schedule in the Inventor Presentation and with respect to where we are at in the independent actuarial reserve range were basically consistent in the upper half of their range, so we really haven’t moved out of our reserve position. I would say fair commentary that you made, the last two years have seen minimal reserve releases, I believe 16’ was about $7.5 million, the current year had about $2.7 million. Obviously, in our guidance estimate, it does not include any reserve releases. And obviously as that book of business on the auto gets more healthy, the likelihood that there would be perhaps some modest reserve, I think that’s a fair comment. But as is always the case, we will book it when we see it, but those loss ratios have been in excess of 100. We are getting the rate that you said and we’ll see what the loss cost due compare to the trends and like I said, we’ll book it if we see it.

I mean I think I would also add that the underlying issues that cause the industry miss in the first place haven’t gone away, increased miles driven the cost to repair, the effects of distracted driving. I mean we’ve all worked pretty hard as an industry to get the price to keep up with those lost trends, but those lost trends really haven’t gone away. And then the question is what else is out there. I mean we haven’t, as an industry, fully contemplated the effect of the legalization and decriminalization of Marijuana, how is that going to affect lost cost trends going forward. I mean, I feel really good about our improvement last year, getting a full point. I feel good about our guidance of another 2 to 2.5 points, but we’re going to stay ahead of this and not declare victory and make sure we stay ahead of these trends.

And then just dovetailing on that response Marita is that, I know there has been -- last couple of days, there has been market concerns about inflation potentially increasing. Can you give us some color on any inflationary trends you could be seeing in any of your auto or property claims cost and how would you be thinking about your current rate plan in the event inflation starts to accelerate in ’18?

Our loss trends for auto we're thinking mid-single digits. That's where the claims costs are going as there is an additional increase due to inflation, that will get baked into our models and will take more rate but we haven’t seen that. And again it's hard to proactively convince the regulator that inflation is coming and take rates in advance of that. But as we see it, we'll react just like frequency and clarity.

And I also wonder whether this is another place where our educator niche is helpful. I mean, our educators may see less of an inflationary trend on either auto or property. I mean, it tends to be a pretty tight segment of the population as far as the cars they drive and the types of homes they live in.

[Operator Instructions] Thank you. Our next question comes from the line of Gary Ransom with Dowling. Please proceed with your question.

On the spreads and retirement, you did mention how there was a spike in prepayments in the fourth quarter. But there has also been a general heightened level of that over the last several years of low interest rates. Have you incorporated the idea that interest rates will be moving higher into your 2018 guidance or that $6 million you mentioned, I am just trying to understand what's in that number?

I think in my prepared remarks, I shared that the actual prepayments that we've received in '17 were $14 million. That comes on $16 million of $11 million. The spike related to, and I'll just say for the fourth quarter, I think we received about $5.5 million of prepayment. So prepayments are lumpy, very hard to predict. Yes, they’ve continued for the last couple of years. But in light of the lumpiness, I would say we're trying to use average in our guidance and not assume too much. The reality is that we ended the year at 194 versus original plan, which we shared with you at the beginning, of '17 of 182. And that difference was primarily related to prepayments, as well as all investment returns. So, on a forward basis we've dropped that down to $8 million in our plan for '18. If it ends up more than that, yes, that's going to benefit our spread. But with rates going up, the spreads have been tightening. So we’re not really anticipating that lift. But yes, we are using a reduced amount of prepayments in '18.

On another subject, on tax reform, the long term implications of this. I'm really just asking for an opinion perhaps. But there is a lot of discussion about who gets it, whether it's the consumer overtime or whether the shareholders get the EBIT or maybe it’s the employee. And I wondered, Marita, if you had a view on what you think the final stickiness of that tax reform to shareholders might be?

I think you mentioned the buckets. I mean first when you think about employees, there obviously have been companies out there talking about returning some of this to employees in the way of bonus. And I would suspect that the majority of those companies don’t have an all employee bonus program where the employees could get to share in the results of the company, we do. I am proud of the fact that our employees have the ability to earn a bonus based on the results of the company, and it keeps all of our employees aligned with our goals and let them share in our success. So for us, we don’t need to announce a one-time employee bonus, because we have an ongoing all-the-time annual employee bonus. When I think about the other pieces, I do think over time, this helps the consumer as we talked about it gets dealt into our rate review process. It certainly begins to over time find its way to the consumer. But for us, I think it is a benefit to our shareholders where now we have more capital that we can put towards the growth efforts that we have been talking about for a while. It’s a very good time for us because we have built the product. We have modernized our systems and we have built better tools for our distributors to serve our customers better. So being able to deploy that capital and working with Matt in the work that we’re doing, I believe that we can take a good work that we’ve done in the individual customer-by-customer game and do it more in hunks and chunks and put that capital to use, which I think ultimately does help the shareholder in the way of improving our stock price and the overall value of the company.

Just following-on on tax implications. Have you thought about how you might restructure any of your portfolios either on the Life or the PC side, but maybe this is more for the PC side with the new tax law there, the switch and attractiveness of corporate versus munies?

I mean, we’re obviously looking at that. There is actually I think some tendency even on the Life side to look at tax exempts, but we’ll become more favorable under the tax law changes. But I guess at the end of the day, we will look for the best after tax yields on the portfolio. So it’s ongoing process in the investment portfolio to get the highest yields possible to benefit all of the segments. So yes, we look at that all the time.

Is there any -- would you be inclined to do any significant swapping over the course of the next few quarters or this is more of just a shift in strategy that you might use on new money coming in?

I would say it’s more maybe of a modest shift, but nothing in the next quarter or two of significance.

Our next question comes from the line of Sam Hofmann with Lincoln Square Capital. Please proceed with your questions.

I just had a question on the California insurance situation and what the impact you think will be on Horace Mann, the intention to pass on some of the tax savings to consumers?

I don’t know how that defers from the previous question. But California in 2016 around 109, I don’t have the 2017 numbers yet that’s an industry number so still unprofitable when you think about annual mileage new vehicles distracted driving, California has been at center of that. We tend to run 3 to 5 points better than industry and that's true in California too, the risk still above 100. So we're not to the point where the tax reform would impact our ability to get rates. And in fact our 2018 rate filing of 6.8% was already approved in March. And again, we're starting from above 100 so the ability for California to roll that back would be unlikely at this point just because of our profit position.

And what we were talking about earlier is even if we included the new tax rate in that filing, we could actuarially justify the rate need that we filed and we've got approved. I think what comes into play is for companies that when they build in the new tax rate, they can't justify the rate increase that they're looking for if they're particularly profitable in the state. I think the state is going to look closely at those rate filings. But because of where we sit in the state, even including the new tax rate in the filing, we certainly can justify the rate that we filed and have already gotten approved.

Do you have any visibility on other states that might follow similar policies?

I haven’t seen anybody release something official like California. But there are barriers that have profits and provisions in their filing requirements that could be impacted like that. But it's too sense to tell, I haven't heard anything outside of California.

And I would say that those states that are prior approval will require companies to include the new tax rate in their filing. And we'll look closely to make sure that folks aren't adding that to the profit margin and keeping the profit margin component consistent, but I think that's appropriate. And to an earlier question, that's where we'll see some of this tax benefit get to the consumer as that get passed us through in the rate filings. But as Bill said, when the industry is sitting where the industry is in auto, there is a long way to go before we can't justify the need for more rate in those filings.

So you don't see, on the competitive side also, you don't see any change in the competitive behavior of other insurers because it's not profitable enough based on tax reform, now that we’ve….

We do have a robust product management structure and we track what our competitors do. So we will see that as it unfolds. But so far I haven't seen that yet. And again, those companies are starting from an unprofitable position and we're ahead of the industry returning to -- before a lot of our competitors. So I don't expect that to be an issue…

Mr. Greeneir, it appears we have no further questions, at this time. I would now like to turn the floor back over to you for closing comments.

Thank you very much, Christine. And thanks to all for joining us this morning on the fourth quarter earnings call. If there are any further questions, don't hesitate to reach out to me. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.