Greetings, and welcome to the Horace Mann second quarter call. At this time all participants are in listen-only mode. A question and answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.I would now like to turn the conference over to your host, Heather Wietzel, Vice President, Investor Relations.

Thank you Darrien, and good morning, everyone. Welcome to Horace Mann's discussion of our second quarter 2019 results. Yesterday, we issued our earnings release and investor supplement. Copies are available on the Investors page of our website, along with our investor presentation, which was posted this morning.Our speakers today are Marita Zuraitis, President and Chief Executive Officer; and Bret Conklin, Executive Vice President and Chief Financial Officer. Also available for the Q&A are Bill Caldwell to comment on P&C topics; Bret Benham on Life and Retirement; Matt Sharpe on business strategy; Wade Rugenstein on Supplementals; and Ryan Greenier on investment.Before I turn 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. 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 use some non-GAAP measures. Reconciliations of these measures to the most comparable GAAP measures are available in the supplemental sections of our press release.I'll now turn the call over to Marita.

Thanks, Heather. Good morning, everyone, and welcome to our call. Last night, we reported second quarter results of $0.17 per diluted share, a 31% increase over last year, driven primarily by improved underlying profitability in the P&C segment as well as catastrophe costs in line with expectations. We achieved these strong results even though the Retirement business is smaller due to our recent reinsurance transaction, and our results do not yet include earnings from our new supplemental insurance business.Before I turn to what we see going forward, I'd like to briefly review the exciting and significant activities of recent months. We reached an agreement with RGA to reinsure a $2.9 billion block of legacy annuity business that had a minimum crediting rate of 4.5%. In addition to reducing interest rate risk for the company, the transaction released $200 million in capital. And I'm particularly pleased with the timing of the transaction as interest rates have declined meaningfully in recent months.We redeployed the capital towards our acquisition of supplemental insurance provider National Teachers Associates, which closed on July 1. This business has higher margins and is less capital-intensive than the reinsured legacy annuity block. Bret will go into detail about the impact of the transactions on second quarter results later in the call. But the long-term upside of improving our earnings mix and reducing our interest rate risk is meaningful to reaching a double-digit ROE and accelerating shareholder value creation. We have entered the second half of 2019 well positioned to capitalize on the opportunities available in the education market, a group of customers we know better and care about more than any other company out there.The recent actions are part of our careful, deliberate planning to enhance our value proposition to the education market. We remain committed to understanding and…

Thanks, Marita, and good morning, everyone. As Marita noted, the $0.17 of second quarter core earnings demonstrated the clear progress we are making on key initiatives to generate more consistent earnings and improve long-term profitable growth, which together will drive our return to double-digit ROE.In the quarter, underlying P&C profitability was very strong, and cat losses were in line with our full year guidance. Retirement results reflected the reinsurance transaction that reduced our exposure to interest rate risks. The reinsurance transaction also provided some of the capital that we used to purchase NTA. That acquisition closed on July 1, so we will begin reporting on the new supplemental segment in the third quarter. Overall, results are consistent with the estimates that we provided when we announced the reinsurance transaction.We recognized $107 million after-tax realized gain on the investments that were transferred to RGA, and we booked several onetime items that I'll review in a minute. As a result, book value, excluding unrealized gains, was up 5%, and total reported book value grew 11% as unrealized gains on the retained portfolio rose significantly given the interest rate environment.I'm going to review our P&C and Life segment results before I dive into Retirement, which has a few additional moving parts this quarter. I will also offer more insights to our guidance for 2019. As we noted in the release, we're modestly increasing our full year 2019 EPS guidance to $2.05 to $2.25.So beginning with the Property and Casualty segment, for the quarter, core earnings were $5 million versus a loss of $11 million last year. The reported combined ratio of 103.8% improved 11 points over last year, reflecting lower cat losses, while the underlying combined ratio improved over 6 points. As Marita noted, the year-over-year delta will likely moderate in the second…

Thank you. Darrien, if you could poll for questions, that'd be great.

Absolutely. At this time we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Gary Ransom of Dowling & Partners.

Yes. Good morning. I wanted to ask a little bit about the early read on NTA. You mentioned back-to-school sales on the products. So I just was wondering, is that a back-to-school time, is that a seasonally strong period for those supplemental products?

Yes. This is Marita. Before I turn it over to Wade to comment if he has a comment here, yes, it typically would be. So we are very excited about the timing.As we mentioned in the script, our first priority was to get our agents trained in NTA products. And one of the benefits, maybe one of the only benefits, of state approvals in places like New York and Texas that take a little bit of time is it gave us time during that period to really get our top agents in the geographies with the most potential up to speed on the products.As an example, we already have some production in the state of Iowa, where we got on it quickly, and we also have a 403(b) endorsement in that state. So although we don't really expect this to add up as we said from a cross-sell perspective until next year, it is nice to see our agents gravitating to the training and already beginning to sell these products.And as we also said, this really was well thought out. This is a situation where our agents have been asked quite often to provide these products, and they really had to turn their customers over to another competitor to get that part of the equation solved. So we're excited about what NTA brings to the table. I don't know if you have anything to add as far as the seasonality.

Yes. No, the only thing I would add is our agents take part in a lot of the back-to-school celebrations, and it's an important time of the year for the educators in making decisions about their benefits.

So are the NTA agents also active in the same way? You kind of were talking about the Horace Mann training and getting those agents up to speed. I assume the NTA agents are doing the same thing and building that up for the back-to-school period.

Not quite yet. I would say thinking about licensing in the P&C space, as you know, these agents are licensed in life and health our...

I was actually just asking specifically about what they don't already do, the supplemental products. They are still pushing on that side as well, yes?

Yes.

And then the timing on what you were just about to talk about on the P&C side, that, I assume, will take a few quarters or something.

Yes. All I was going to say is we intentionally wanted to not disrupt NTA sales volume. They have strong sales plans, as you can imagine. They're hitting those plans. We feel good about that and want to keep that strong. But over time, those agents learning Horace Mann products makes some sense obviously as well, starting with those products that would be easier and make more sense, think about auto, think about some of our life products, and that will be our focus. But we will take our time to do that thoughtfully as to not disrupt their sales momentum.

All right. And I wanted to also ask in if you had any update on your telematics product at all. How that -- I know that was just launched.

Gary, I think last time we talked, we were in 14 states. We're now in 18 states. Certainly, acceptance is increasing over time. But we -- our first customers only have about 90 days on the product. So it's still relatively early. So it's -- we're not really projecting loss cost savings where there's, firstly, not enough; and second, we don't have enough data or enough time, but we are seeing good momentum from a sales perspective as...

On like -- yes, but the take-up rate, though, is doing well or is in line with your expectations?

Yes, it's accelerating over time. Obviously, the sales process with telematics is a little bit more complicated, so we're taking from our best agents and reinforcing that with the rest of our agent force. So we are seeing good momentum with the future of our product.

Our next question comes from John Barnidge of Sandler O'Neill.

Rates have come down materially since then. Is there any way to dimension on a per share basis how much that decline actually lowered your new earnings guidance?

John, could you repeat your question? You were cut off at the very beginning. We want to make sure you -- we've got it correctly.

Sure. So the new guidance is up from June, yet rates have come down materially since then. Is there any way to dimension on a per share basis how much that decline may be lowered your new earnings guidance that is obviously up from where it was in June?

Yes. Actually, John, I think even in my prepared remarks, I mentioned that for the entire year, we actually plan to get back to our original total net investment income amount of $370 million. I think I also mentioned via the couple different ways, obviously, as I mentioned, our new money rate is lower than we had planned, but our alternatives are performing much better to the tune of a 10% return versus, we probably planned about a 6% return on that. So as it relates to '19, we're not coming off of our total net investment income projection.

Okay. And then is your annual actuarial assumption review in the third quarter?

Yes. Yes, it is.

How should we be thinking about that given the decline in rates from a year ago?

I mean there's that's just one piece of the unlocking, if you will. I mean, we'll fully look at expenses, lapse ratios, the spreads going forward. But that, we typically will look at in, the process begins in the third quarter. And I think we actually record that in October. It will be recorded in the fourth quarter. There's many variables to that, but obviously, lowering the spreads, I don't have to tell you, is going to lower the future profits, no doubt about it. But then there are other pieces to the puzzle.

Okay. And then given current valuation multiples and now that the NTA transaction is closed, can you talk about how you think about share repurchases?

Sure. I think leading up to the acquisition, I think, for the past few quarters, I've said we've kind of put a pause, if you will, on share repurchase. Obviously, we used a lot of our excess capital to consummate the transactions of BCG as well as NTA, but I don't think our strategy has changed, whatsoever. We're going to put that to the best use possible.And obviously, with the shares trading at the current levels, it's safe to say that at these levels, I wouldn't anticipate any repurchase in the immediate future there. But here again, as we generate excess capital, which we totally intend to double with the purchase of NTA, we'll take a peek at that and opportunistically buy where the market provides us an opportunity to do so.

All right. My last question, I'll requeue from there. But can you talk about -- you mentioned in the script property, casualty regions that exceeded profitability targets. Can you talk about what those -- where those regions actually are, please?

John, there are various places all over the country. I wouldn't call out a specific region. But we align all of our states with our profit targets, and where they exceed those targets, that's where we're investing in agencies and marketing. But I wouldn't say it's a specific region.I can give you some examples of where are the states that aren't meeting profitability targets. I think we're all pretty familiar with Florida and kind of the environment there, and we shrunk Florida significantly over the past couple of years. Our more recent example's in California.Speaking to our underwriting discipline, we had a relatively pretty, a very large loss in Northern California. That changed the texture of California. So we quickly tightened underwriting guidelines, so that will impact our denominator as well as our numerator for some time. But again, as we double down in those states that are more green, we are seeing growth out of the states where we have exceeded our profitability targets.But again, I wouldn't call out a particular region.

[Operator Instructions] Our next question comes from Christopher Campbell of KBW.

First question is, can you guys share any initial thoughts on how we should be thinking about the benefits and expense ratios for Supplemental?

Sure. I mean, just specifically to Supplemental? Or as part of now the Horace Mann family, I guess? I mean, obviously, well, I'll just make one other comment, Chris. I think NTA, I think as we've mentioned in general, is a very well-run company that generates ROEs that exceed what we had in the past. And that includes a very expense-conscious culture there. So I think our culture here is the same. But as Marita said, as we have now completed the acquisition of NTA and BCG, we've talked about synergies. And yes, we are going to make sure that we look at those things as you would expect. So...

The only thing I'd add to that, Bret, is obviously in the deal economics, we did not bake into the valuation extensive synergies, as a matter of fact, very limited. But yet, we know as we look at these 2 organizations in similar customer bases, there are synergies, and we're working hard to gain those synergies so that we can drop them, quite frankly, straight to the bottom line.

Got it. Yes, I was thinking more like specifically. Like, I mean I know you guys have a $6 million to $7 million quarterly guidance that you're, that you've done for Supplemental. I was trying to think of what the breakout would be in terms of like the loss and expense ratios just in terms of, because I know you guys bought it at a big premium to book, then I was just trying to think of like are you going to have VOBA going through the expense ratio? Or is there going to be kind of noise like that, that we're going to have to see for the next 6 months to a year before we get like a good view on what the expense ratio is?

Chris, this is Bret. Absolutely. I mean we're going to be recording some VOBA. Yes, there will be noise in the system, if you will, but we will have that broken out when they become part of the Supplemental segment. Part of the Horace Mann consolidated results, you'll have key metrics that we'll provide you to guide you with that including amortization of the intangibles. That will be, we're in the midst of that as we speak to try to get our reporting package together for the third quarter.

Okay, great. Next question is on the guidance. So I mean not the 2019. I'm thinking ahead to 2020, where the press release last night said that there would be about, guidance would be at least 10% above the $2 to $2.25 range, which I put at like something around like $2.25 to $2.48. Now I'm just thinking about like the phrase "at least."So where could there be additional upside to this 10% just given, I think, consensus is at like $2.59? So it's already above that range. So what else could drive incremental upside beyond that 10%? And then how much P&C improvement is baked into the 10% assumption at least?

Okay. I guess let me, there's a loaded question there. But with respect to at least, I think one of the things that Marita mentioned in her script that I certainly did on mine was the $5 million to $7 million of cross-sell opportunity with NTA that's not per se baked into that until 2021. If that could happen maybe sooner, that could be a potential upside.I mean I think we're still working through getting the P&C to the levels that we can get the 10% to 12% ROE. We're making significant progress. And to be honest with you, the fully reported combined ratio below 100% at this point that Marita specifically called out would get us to where we need to be, but we're not expecting that in the second half of the year. I think the expense disciplines/synergies will be another thing that we'll look at over the coming years.So I think it's, here again, growth once we get profitable. I mean, there's a lot of levers to that, Chris. But I think we're just trying to, what we know right now, we feel confident that we'll generate at least 10% in 2020.

And maybe a little trite to say it is about profitable growth, but it is about profitable growth. We're growing a profitable Retirement segment by 9% this quarter. We expect that to continue. And we like the traction we're seeing in Retirement. We've had nice profitable growth in Life, double digits, and that's continuing in the quarter.As P&C turns that corner, and we've talked a lot about that, profitable P&C growth at these kind of combined ratios start to be pretty accretive. And then we look at supplemental sales with a very high ROE pattern, and these are all 80% educators.I mean, if you look at NTA, they do what we do in the places that we do it. So now we feel that we have everything that our educators need from a product standpoint. We've built very strong distribution and are looking at about 1,000 points of distribution across the country with all the combined distribution that we've pulled together over the last year.And from an infrastructure perspective, we've got the ability to leverage very efficient chops with BCG and NTA, and we intend to do that and drive some expense synergies as well. So I look at this as a really nice inflection point for us having all the pieces of the strategy that we've talked about when we talk about PDI coming together.So when I think about what that means going forward, we've got the pieces we need to take this out for a spin.

And I would just maybe add on to what Marita just said. Even looking at 2019 with all Horace Mann has accomplished and still to end up $0.05 ahead of the guidance for the year, and you kind of have a mixed bag of tricks. You actually have three quarters of the reinsurance reflected against only two quarters of NTA. So to even get back, we've had some help from P&C. We've had some help from net investment income and some other pockets. But we're just at the initial stages of hooking up these companies to the Horace Mann family. So there's, I think, quite a bit of upside.

Got it. That's very helpful. And then just as you guys pivot towards growth in P&C, I was kind of looking back, back to 2008, as far as my model goes back. And just looking at cumulative PIF count, like auto PIF is only about 84% of what it was back in '08 and 75% in the homeowners book. And then just even looking at growth rates, like homeowners PIF hasn't had like a positive quarter of growth since '08. And there's only been like 9 quarters of positive auto growth in the last 42.So I guess, just what gives you confidence that Horace Mann is going to be able to really grow this P&C business given like the, I'd say, by the last decade, we haven't seen that kind of positive growth?

Yes. Chris, this is Bill. Just a little bit about it, just to go back to 2008 quickly to reflect on those numbers. Before our times in the room, there was a noneducator strategy that was implemented, maybe appropriately, maybe not, in a softer market that we had to clean up over the years. So when you look at our mix of business today, there might be less PIF, but there's more educators in our books, and we're seeing that in the loss results.I don't look at growth as an on or off switch. Our agents are out there quoting. Our competitive position, our strategy is the price to exceed loss costs. I see a lot of, time will tell, but there's a lot of irrational rate decreases out there when there's a lot of questions around where loss trends are actually going. So I prefer to focus on profitability and maintaining the operating income levels, and the growth will come when it comes.That said, we look closely at our year-over-year numbers on a monthly basis. And every month, we get closer to exceeding that prior month of 2018, and we'll see when it exceeds sales on a monthly basis. But the denominator is a tough number to overcome. So we are focusing on growth in profitable geographies. But we do have a lot of defend actions that we're working through. And I mentioned some of them to John, specifically in Florida and California and some other large markets.

Got it. And then, I guess just like has your, have your like quote or conversion rates changed over time that could be changing that? Because we would just see the decline, but I know you guys did work with Florida with getting out of the homeowners book there. So is like the reason for like PIF declines in homeowners different today than it was 3 or 4 years ago?

Yes. Well, 2 things. So on the quote side, yes, quotes were down over a prolonged period because we were fixing profitability. So when we started, we recognized these trends in 2015. We appropriately tightened our underwriting box, which restricts quoting. And now that has expanded over time but not to the point where it was maybe in 2013 or 2014. And yes, there has been an impact on conversion rates as the competitive environment has shifted. But again, we're starting to see both of those metrics increase at the same time.

I'd also add to that, that distribution's a part of this as well. More strong agencies, more income sources for those agents as we add Supplemental as, we improve the products from a retirement perspective like Retirement Advantage, as we build life products that we've built the opportunity for more distributors to have strong income for their agencies and building more stronger agencies, you can imagine that when they have more staff, they can ask to quote the auto on a more frequent basis. So I think stronger distribution's a part of that equation as well. And having almost 1,000 distributors out there across the country with the majority of the geography covered will also help that equation.

And lastly, we have our system, our modernization system launched in October. You saw what we were able to do in claims. Look at our LAE ratios, look at our severities, I mean we've shown that we can implement a system and we get benefits pretty quickly. It may take us a longer time, but these projects are expensive for us. So we're very diligent about how we implement, but we're excited about the Guidewire launch in October in Illinois, and that will be full admin and billing, ease of use of billing for agents and also opens up opportunities for more for online and digital capabilities.

Got it. And there is there an expense ratio benefit for that, that we should be thinking about longer term?

Well, over time. But remember, it's a multiyear project because these states go one by one. So again, this year, it's just one, and that's the most expensive one, but we have 45 other states that need to convert. So we'll stay in that target of 27% plus or minus 0.5 point. But over time, as those states move, we will have efficiencies in our loss ratio I mean our expense ratio.

Got it. And is there like a long-term like target you're looking for? Like, I mean not a few years, but like over like 5 or 10 years?

Yes. Yes, definitely. I mean there's a lot of moving parts here with an acquisition, and there's a lot of things that we have to work through.

Our next question comes from Matthew Carletti of JMP Securities.

I just wanted just a clarifying question. I want to circle back to, I guess, the start of kind of Chris's line of questioning, just on the guidance and specifically the wording. When you say at least 10% in 2020, are you referencing just what the recent transactions will contribute to the 2020 earnings growth? Or are you referencing a minimum level of overall 2020 earnings growth, whether it be transactions or the underlying P&C improvement and everything else that's going on?

It's your former comment, with respect to reflecting the NTA and the reinsurance.

Our next question is a follow-up from John Barnidge of Sandler O'Neill.

Achievement for arm Initial read on cat losses 6 weeks into 3Q that you want to speak to maybe as compared to what you reported a year ago?

Six weeks into Q3? I'd say nothing unusual -- was one of the biggest events of the quarter and close to $1 million for us. So, nothing out of pattern in July.

Ladies and gentlemen, we have reached the end of our question-and-answer session. I would like to turn the call back to management for closing remarks.

Thank you, everyone, for joining us today. This is Heather Wietzel. I'm available for follow-up if there's any other details and we look forward to talking to you again soon.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.