Good morning and welcome to the Horace Mann Educators’ Fourth Quarter and Full Year 2019 Investor Conference Call. All participants will be in a 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 Heather Wietzel, Vice President, Investor Relations. Ms. Wietzel, please go ahead.

Thank you and good morning, everyone. Welcome to Horace Mann's discussion of our fourth quarter and full year 2019 results. Yesterday, we issued our earnings release and investor supplement. Copies are available on the Investor Page of our Web site 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, EVP Product; Matt Sharpe, EVP Distribution and Business Development; Wade Rugenstein, EVP Operations; and Ryan Greenier, SVP Corporate Finance.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 use some non-GAAP measures. Reconciliations of these measures to the most comparable GAAP measures are available in our news release.Finally, we wanted to let you know that we will be attending APA [ph] in early March. We’re hoping to see many of you there.With that, I'll turn the call over to Marita.

Thanks, Heather. Good morning everyone and welcome to our call. Last night, we reported full year 2019 core earnings of $2.20 per diluted share. Surpassing our guidance was strong results across all our business lines.Year-over-year core earnings were up threefold, reflecting lower catastrophe losses, improved underlying profitability in the P&C segment without sacrificing market share, better margins in the retirement business, the addition of the new supplemental segment and we accomplished all of this while funding for our future.Further, 2019's results show the potential of our strategic initiatives. By building on our transformational work in 2020, we expanded our market reach to provide solutions to more educators and further accelerate shareholder value creation. Bret will cover the details of our 2020 guidance later in the call.At a high level, we’re confident that we can grow our core EPS by at least 20% over 2019 without projecting a significant increase in sales. We expect at least a full point of ROE improvement and remain focused on reaching a double-digit return on equity over the next few years.Our strong outlook reflects the investments we had made over the past five years in the company's products, distribution and infrastructure combined with the impact of transformational steps we completed in 2019; the acquisition of National Teachers Associates and Benefit Consultants Group as well as the legacy annuity reinsurance transaction.Before I expand on that outlook, let me touch on a few highlights of our operations in 2019. First, we achieved our best auto combined ratio since 2010. We not only met but exceeded our underlying auto loss ratio goal which was a cumulative 5-point improvement since 2017. We actually achieved 6.6 points of improvement over the three years through a combination of underwriting initiatives and rate actions.At the same time, we’ve been able to retain…

Thanks, Marita, and good morning, everyone. As Marita noted, 2019 results confirm that we are better equipped than ever before to meet the financial needs of educators. We have become a larger, more diverse company on the path to a double-digit ROE. We expect to see the earnings potential of our business even more clearly in 2020, as we build on our transformational work.Marita covered the highlights of 2019 results, so let me dive right into the performance and outlook for each segment. Then I will finish up with a few comments on how it all comes together in our EPS guidance.Let me start with supplemental. NTA has been part of Horace Mann since July 1st and added $65.8 million in premiums with $8.2 million in new business. The segment represented approximately 14% of total second half premiums and contract charges and about 30% of second half core earnings, illustrating the diversification value it brings.Premium persistency was 89.3% with almost 300,000 policies in force. As we've said, premiums for this business are relatively stable quarter-to-quarter. Net investment income on the supplemental portfolio was $7.5 million in the second half. For the six months, the benefits ratio was 37.5% reflecting favorable reserve changes and the operating expense ratio was 27.3%.Operating expenses included $6.6 million in non-cash amortization of intangible assets. The annual run rate for intangible amortization should be $12.5 million to $13 million pre-tax, which should be relatively constant for the foreseeable future.The pre-tax profit margin for the six months benefited from a better-than-expected benefit ratio, so the segment contributed $18 million to core earnings in the second half of the year, ahead of our guidance of $12 million to $14 million.Going forward, we expect the full year pre-tax profit margin to be in the low to mid-20s with supplemental…

Welcome, everyone. We’re ready, Anita, for the Q&A if you want to poll.

Thank you. [Operator Instructions]. The first question today comes from Matt Carletti with JMP. Please go ahead.

Just have a couple of questions. First is, Marita I was hoping you could give us an update on the supplemental business, just a few things. One is just maybe a little more detail on the positive reserve changes in the quarter and how we should think about those, but higher level how the integration has gone so far and kind of how you feel about it and any update or things new about how you think about it going forward in 2020?

Yes, Matt, I couldn’t be more pleased with where we are with NTA. I think the most important point to point out is that despite the distraction that comes with a major transaction like this, the NTA agents actually made their sales plan for the year. I'll let Wade chime in on the specifics to your question. But overall on every front, we're extremely pleased that the transaction is going very well from an integration standpoint and clearly producing the results we expected during our due diligence. Wade?

Yes, Matt, on the comment on the reserves as Bret mentioned, the benefits ratio for the first six months reflected favorable reserve changes that’s driven by better morbidity on some of our products that we’ve seen in the past and in addition we had a non-educator really kind of a non-strategic payroll slot with some older policies that lapsed and that can cause a small favorable spike in reserves also. So that’s really what makes up that change.

Great. And then just my other question actually going to shift to P&C for a second. You’ve made great progress there. Auto is in a very good spot and sounds like you expect it to be stable. Property’s been performing well and it sounds like you expect maybe a little bit better. I’m focused on PIF and I just wanted kind of your thoughts on, that’s been under pressure for a while and that’s not surprising when you’re pushing a lot of rate through a book and kind of re-underwriting it. How do you think about kind of that inflection point or when should we think about the P&C business starting to grow again on a PIF count basis?

Matt, before Bill gets specific with P&C, I think the growth question is the right question and it clearly is our focus. But I think it’s important for us to recap a little bit again what we saw in 2019. We’re really proud of the heavy lifting and the results we had in 2019. Across the board a 5 point increase in ROE, book value up 11%. We added 150,000 educator households, we added 220 new agents from NTA, three major transactions including a reinsurance transaction that derisked our interest rate sensitivity. We added a brand new, new business segment. And despite all that actively, we held market share. I think that’s a pretty strong result. And then when we look at 2020, we have over a 20% increase in earnings without planning for significant growth. I think that’s pretty solid. And with all that said, it really does set a solid foundation for growth. When you think about our PDI strategy, our product game board’s complete. NTA was really – with the addition of the supplemental products, the last big product addition that we wanted to do. From a distribution standpoint, our sales force is much stronger. We mentioned in the script that we’re in half of the school locations across the country, some with relatively low penetration. So we have the opportunity there as well as the ones that we’re not even in. And from an infrastructure standpoint, our Guidewire implementation really positions us well there with decreased expenses and increased efficiencies. So clearly the opportunity is there. We just don’t want to get ahead of ourselves. And with that Bill, with the Guidewire implementation, can talk a little bit about how he’s feeling about P&C.

Matt, just a little bit on the sales front. So we are expecting a significant increase in sales in 2020. As you said, well, some of that is offset by retention. We still have some rate flowing in from prior years, from 2018 into 2019. Also significantly underwriting actions in Colorado – although Colorado had a good year last year, it came off many years of high catastrophe. Certainly California with the wildfire re-underwriting, when the property goes, there goes the auto and a lot of good work in Florida. We shrunk significantly and you’ll hear a lot of our cohorts talk about social inflation and I think we’re somewhat insulated from that due to our smaller Florida book. So despite the increase in sales, we are coming off the bottom of our retention number. On the positive side, we did see three consecutive increases in retention coming into 2020 and we expect that to continue. But the reality is that’s just – we’re just coming out of that retention hole. Lastly on Guidewire, that goes live in the next few weeks, significant improvements into our pricing capabilities, our product offering, ease of doing business, our digital capabilities. So we also expect that to provide growth. But remember the way we’re implementing that system is on a state-by-state, policy-by-policy basis. So our first state is Illinois as those policies expire on our old system but renew onto the new system, but certainly the new business will be available for the whole state when we go live.

Great. And then just one kind of related P&C question. I see the guidance for kind of flat top line overall, and any thoughts on kind of how that might look auto versus property. Would it look maybe a little bit like 2019 where property grew a little bit, auto shrunk a tiny bit, just kind of flat overall – just a question about the component pieces?

I’ll start with looking at my numbers. It won’t be similar to 2019 certainly. We’ve been very steady with rate in property and auto rate is decelerating. So may be a slight change in mix, but not anything significant.

Great. Thank you for the answers and congrats on I think what would be looked back as a very transformational 2019 and best of luck going forward.

We think so too. Thanks, Matt.

Thanks.

The next question comes from John Barnidge with Piper Sandler. Please go ahead.

Thanks. The commentary on the 2020 analyst modeling considerations around a return to model mortality in life, is that more just about favorable mortality in 2019 that you think is prudent to start a base off of or is there any additional commentary?

Yes, that’s exactly 100% accurate, John. We obviously experienced some favorable results in '19 coming down from what we experienced in '18 and basically just kind of getting back to the norm. So, it’s an aging block of business and you’d expect that, so nothing unusual. If you get a favorable one year, you’re most likely to see an increase in the following year.

This is Bill. John, I would just add it’s certainly within our actuarial ranges and our expectations, but just the lower side. So as you plan for next year, we normalize that to account for the favorable mortality in 2019.

Great. And then can you maybe talk about new product development within NTA? Is that something we should expect or really not for the near term?

Yes, I can let Wade chime in if he’d like. But from my perspective I think NTA has the base portfolio of the products that we need. And from our perspective, I wouldn’t expect any heavy lifting from a product development perspective. One of the really cool things in the due diligence is when we looked at what our customers were looking for, when you look at the fact that NTA’s current portfolio is 80% educator just like our portfolio, they obviously have the products that our educator customers are looking for. So we wouldn’t expect a significant amount of product development. I don’t know if you have anything to add to that, Wade?

No, I think that’s fair. We always on a year-by-year basis look for trends around cancer and heart and how those are being treated, and might make some minor adjustments but I agree. We have the products that we feel comfortable with and certainly support the education community.

Great. And then just one quick one. Have you changed the underwriting standards in your life insurance products for teachers that vape or use e-cigs?

No, there’s been no change. It’s a question a lot around marijuana and that’s just considered as tobacco. We have a tobacco rate and that’s included there as with the cigarettes but no significant change.

Okay. Thank you very much. Congrats on the quarter.

Thank you.

The next question comes from Meyer Shields with KBW. Please go ahead.

Great. Thanks. Good morning. One basic question. We’re not seeing it in the numbers, but I’m wondering as the general employment numbers domestically remain very strong, is there any under the surface impact on either new agent recruitment or retention?

No, we don’t really see that. As a matter of fact, when we looked at our agency plan across the bifurcation that we use, we’ve got three swim lanes. We have a new agent segment, we have a growing and developing segment and then we have a well established segment. In our new agent segment, we’ve put a lot of focus on new agent recruiting. Obviously that’s also the place where we’re looking to make sure that the NTA agents over time have the ability to sell Horace Mann products and the Horace Mann agents getting up to speed on the supplemental products. And in that new agent’s swim lane, we have been able to retract the new agents that we want according to our numbers in that model and we feel good about the new agent recruitment there.

Okay, fantastic. And I think we already touched on this. I just want to confirm that the reserve release in supplemental in the fourth quarter, that doesn’t have any implications for current pricing, does it? In other words, doesn’t suggest the current pricing is too high, margins too high or whatever?

That’s correct, yes.

Okay, fantastic.

Related to morbidity which obviously ties into loss ratios.

Perfect. Thank you so much.

The next question comes from Gary Ransom with Dowling & Partners. Please go ahead.

Good morning. I wanted to ask about the supplemental reserve also, just more for a qualitative point of view of whether this is a – the reserve is being run similarly to the way they were under the prior ownership where I viewed it as conservative and maybe overly conservative and I wasn’t sure if that has changed at all or if there’s any way you can describe your strategy of reserving in that category or that segment?

Gary, this is Bret and let me start. And if Wade wants to chime in to add color, I’ll let him do that as well. But kind of a couple of pieces to your question. Certainly with the acquisition of NTA we’re basically required to update the reserve factors, if you will, to reflect experience and I would say similarly to Horace Mann, NTA’s reserving practices in the past have been on the conservative side and we don’t really intend to change that practice at all. We’re not going to run thin reserves. So we did have a portion of the reserves that had to be trued up as required by purchase accounting GAAP on an acquisition. Wade also added some color about losing a non-educator group at our morbidity. So all-in, there were some benefits of '19 and probably expect the factors going forward as we add new business, new products that those would be set with a certain level of conservatism built into those. So, no, we’re not intending to change the reserving practices of NTA in the past. And like the non-NTA reserves here, we intend to carry those on the conservative end of the range.

And just so I understand the nature of this, I think of these products as largely having fixed payments that if you put it in the Property-Casualty terms the severity is fairly well known and we’re just talking about frequency. Is that a reasonable way to think about it or is there more to it than that?

No, I think that’s a very fair description, Gary.

This is Marita. I think that’s why when we were looking to either build, buy or bolt-on a supplement product offering, this 50-year-old company that’s been in the marketplace with educators doing it this way for a very long period of time was a nice clean fit, because of some of the things that we’re talking about now. Very clear understanding of the products. Our educators buy these products because they can’t afford the out-of-pocket expenses from an unexpected event, but it’s very clear-cut and easy for us to get our arms around it.

Thank you for that. Just another question on the frequency and severity trends in Auto also, if you could – I assume your frequency trends are still going down as in what we see in the industry. But on the severity side, there are a lot of signs of acceleration in some of the industry numbers and I just wondered if you could comment on that? I guess I’m thinking both – mostly BI, but there’s a little bit in the auto repair side as well.

Sure. Gary, certainly severities are higher than what I would call inflationary. A lot of that is due to the social inflation that’s being talked about as well as the technology in vehicles, but we are still seeing improved frequencies, which is an offset to that. So I would say I don’t think we’re seeing it as high as much social inflation as some other companies, a lot of that is because of the mixed issues that we’ve enforced over the last couple of years as well as a very tight early identification program with respect to claims. Unlike a lot of our competitors we can engage with our sales force very quickly to get engaged with the clean process early on and it tends to be those small fender-benders that could go sideways pretty fast. So, our agents are engaged. They’re getting us that information faster. The quicker you can document the claim, the less chance that it kind of spirals out of control. So we think we have the processes in place to control, but again at a high level there are some more than inflationary increases in injury.

All right. Thank you. And just one last question on the implementation of Guidewire. As you mentioned a couple of times that this will provide some additional analytics and capabilities and I’m trying to understand how big of a change that is. Will this really be able to give you better selection in pricing power as you market the auto product or is there any qualitative there?

Sure. So I would say our analytics are very strong. A lot of work went into our pricing segmentation. I would say that the translation of that into our technologies we don’t have – I’ll use a simple example of the many fields as you might need so as to have the most sophisticated product and Guidewire just opens that up. The ability to tie in multiple third party data sources on demand, greater discounts around being paperless and things that help expenses. There’s just a whole slew of benefits that we get because the system is just more flexible.

Okay, that’s helpful. Thank you very much.

Thank you.

This concludes our question-and-answer session. I would now like to turn the conference back over to Heather Wietzel for any closing remarks.

Thank you everyone for joining us today. We look forward to seeing many of you in the coming couple of months. And if there are any questions in the interim, feel free to give me a call. I appreciate it. Thank you.

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