Horace Mann Educators Corporation (HMN) Q3 2020 Earnings Report, Transcript and Summary

Good morning, and welcome to Horace Mann Educators Third Quarter 2020 Conference Call. [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. Please go ahead.

Thank you, and good morning, everyone. Welcome to Horace Mann's discussion of our third quarter 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. Marita Zuraitis, President and Chief Executive Officer; and Bret Conklin, Executive Vice President and Chief Financial Officer, will give the formal remarks on today's call. With us for Q&A, we have Matt Sharpe on Distribution; Mark Desrochers on P&C; Wade Rugenstein on Supplemental; Mike Weckenbrock on Life and Retirement; and Ryan Greenier on investments. 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. 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 measure are available in our news release. With that, I'll now turn the call over to Marita.

Thanks, Heather, and good morning, everyone. Before we start today, I'd like to note that Mark Desrochers has accepted the role of leading our Property and Casualty business on a permanent basis. Mark has been a key part of our leadership team for 5 years and has been leading our Property and Casualty business since April. Horace Mann has benefited greatly from his extensive personalized experience and strategic approach to the business, and we're pleased that we will be able to continue to do so. On to the quarter. Last night, we reported third quarter core earnings of $0.82 per diluted share, a 28% increase over prior year. We also increased our full year guidance for the second time this year. We now expect 2020 core EPS will be in the range of $2.95 to $3.15, a roughly 40% increase over last year. These strong results illustrate the benefits of our long-term strategic plan to enhance our product offerings, strengthen our distribution network and modernize our infrastructure to better serve our educator customers. The strong foundation we've laid over the past 6 years, combined with the transformational actions we completed in 2019, continue to serve us well in this pre-vaccine pandemic environment. Our progress towards our long-term objectives has been uninterrupted and will continue pre- and post-vaccine. 2020 results keep us on track to our pre-pandemic plan of achieving 1 full point of ROE improvement this year due to our strategic actions. That gets us to the 8% to 8.5% ROE we had anticipated. We'll also have approximately 1 to 1.5 points of ROE this year from pandemic-related and other factors that largely won't repeat. Looking ahead, 2021 ROE will be on the original path we had anticipated, heading towards the double-digit ROE we can reach through our strategic initiatives. Our confidence is grounded in the strength of our value proposition to provide solutions to the education market. Horace Mann is a company built on a deep appreciation for educators and a commitment to help them protect what they have today and prepare for a successful tomorrow. Even compared to the end of the last school year, educators' jobs have become more difficult. Many are working in a hybrid model where they need to teach in person and remotely, increasing their workload and the challenges of addressing each student's needs. They are concerned about their students' health and well-being as well as their own. Now more than ever, we at Horace Mann are proud to be serving educators, and we continue to look for new ways to do so. This quarter, we expanded access to our suite of student loan management resources to help educators achieve the student loan forgiveness they deserve as public servants. The student loan solutions program has already helped put our customers on the path to more than $250 million in student loan forgiveness. After implementing a more robust online platform earlier this year to scale our capacity to help, we've now made it available to every public school educator in the country free of charge. In addition, our agents and internal subject matter experts are offering more online financial wellness workshops and hosting virtual educator engagement events. And we helped educators across the country put their lives back together after damage to their homes from the many catastrophe events that have occurred in recent months. During the pandemic, our homes have taken on even greater significance. For some educators, that space is now also their classroom. So not only are we helping them put their lives back together, we're helping them get back to their vital work. The investments we have made over the past 6 years in the company's products, distribution and infrastructure, combined with the steps we took in 2019, have positioned us to serve more educators and achieve our target ROE. Reinsuring our legacy annuity block last year released capital that we used to acquire our supplemental business. This diversified our business mix and redeployed capital into higher-margin products. The reinsurance transaction also significantly mitigated future interest spread risk. Further, we have added to ROE by implementing expense optimization and modernization initiatives to drive efficiencies across our entire business. Going forward, we are focused on 3 factors key to achieving a sustained double-digit ROE. The first is sales growth. We entered 2020 with a complete product game board offering solutions for educators at every life stage. We have upgraded our product suite to add features that educators want and solutions that address the unique financial issues they face. Our solutions are ready to support market share expansion with growth across our business accretive to ROE. Disruptions related to the pandemic, such as limited school access, have put our sales under some pressure We've been very pleased to see our established agents leverage their strong relationships to transition almost seamlessly to a virtual environment. We continue to work with newer agents, who tend to depend more on building new relationships in order to grow, to help them develop their books of business. Because of the pandemic-related challenges, we've intentionally accelerated steps that will better prepare us for a post-vaccine environment. First, we accelerated the integration plan for supplemental agents. These agents now can bring a variety of Property and Casualty, and Life and Retirement products to their existing customers. Early results are encouraging. In fact, our September production leader in our new agent segment was a newly integrated supplemental agent, now cross-selling an expanded suite of products. Second, we're beta testing a number of new approaches to reach educators, many of which rely heavily on virtual interactions. The upside will be our ability to take the most successful of these approaches and incorporate them into the sales process across the entire agency force going forward. The second factor that will help us reach a double-digit ROE is further expense optimization and discipline. As I mentioned, this year's results reflect the benefit of initiatives that successfully reduce our ongoing operating expense run rate by more than $15 million. We expect further savings in 2021 and beyond from efficiencies gained through process optimization, integration of NTA and identification of operational synergies. Of course, the pandemic has brought our travel budget close to 0, which is generating savings and is likely to inform our thinking about spending for years to come. Lastly, we continue to expand our alternative investment portfolio to capture additional yield in this sustained low interest rate environment. These investments can be more volatile in general, but we continue to follow a conservative, disciplined strategy. Since we initiated this portfolio, we have seen an average return of over 6.5%. We focus on a diversified mix of income-producing investments run by investment managers with a solid track record, and the approach has been largely successful. This quarter, we recorded over $11 million in alternative investment income. Before I turn the call over to Bret, I want to comment on an investment in the community that I'm particularly proud of. In partnership with the Chicago FHLB this fall, we distributed more than $100,000 to nonprofit organizations in the Springfield, Illinois community, working to address socioeconomic and racial education equity gaps that have been compounded by the pandemic. These solutions include community remote learning sites for children whose parents are working during the day, additional learning opportunities for students who are falling behind and assistance with basic needs for families such as food and housing assistance. At Horace Mann, we believe every student should have the opportunity to reach their full potential. And we're proud to support organizations that are working to make that possible. To summarize, we expect 2020 to be one of our strongest years in our 75-year history. We continue to be successful through economic cycles and changing political climates because we always remain keenly focused on our customers. Over the years, we have evolved our products, distribution and infrastructure with the times to best meet their needs. These times bring new and different challenges for educators, and we're ready to help solve them. Thank you. And with that, I'll turn the call over to Bret.

Thanks, Marita, and good morning, everyone. As Marita noted, Horace Mann reported another excellent quarter. Third quarter core EPS was up almost 30% over last year despite $35 million in third quarter catastrophe losses. 9-month core EPS was up almost 60% to $2.27. We recognized these strong results by increasing our full year EPS guidance for the second time this year to the range of $2.95 to $3.15. We now expect 2020 earnings growth will be near 40% with full year return on equity likely to be above 9%. This strong core performance is bolstered by pandemic-related changes in the subrogation recovery. We remain committed to achieving a sustainable double-digit ROE, driven by significant growth in our education market share. Over recent years, we have executed on our product, distribution and infrastructure initiatives to create a diversified business prepared to grow. Marita described how we are leveraging our transformative actions to identify ways in which we can maximize our market share expansion going forward. As always, our fundamental objective remains unchanged: To reach more educators with solutions that help them meet their financial objectives. Turning back to the quarter, we were very pleased with what we saw overall with Property and Casualty core earnings up on higher net investment income. For the segment, higher catastrophe losses offset the improved auto and property performance and the benefits of the PG&E subrogation recovery. The Supplemental segment made another strong earnings contribution. New sales are still under pressure, but the segment continues to achieve strong profitability, in part because of pandemic-related changes and policyholder behavior. Annuity contract deposits grew again in the Retirement segment as our educator customer base continues to look for ways to secure their financial future. Our managed investment portfolio continues to hold up well despite this year's economic volatility. Favorable third quarter mark-to-market adjustments in the alternatives portfolio primarily benefited the Property and Casualty segment. So let me turn to the details of the results. Looking at the business by segment, for P&C, core earnings were up 11% due to the 28% increase in segment net investment income. Premiums were down about 5%, primarily because lower new business more than offset the return of the reinstatement premiums related to the PG&E subrogation recovery. As we discussed on last quarter's call, PG&E's successful emergence from bankruptcy on July 1 resulted in the recovery of a significant portion of the losses our policyholders had incurred in 2018 California wildfires, primarily the Camp Fire. Third quarter results include favorable prior year reserve development of $5.2 million pretax and net of reinsurance for subrogation on our share of recovered losses, along with a $3.5 million in recovered reinstatement premiums, for a total benefit of $8.7 million. That recovery was one of the reasons the reported combined ratio was essentially flat, even though catastrophe losses added 12.3 points more to the ratio in this year's third quarter than in last year's. The other offsets included, first, a 9.9 point better underlying auto loss ratio. Loss frequency remains below 2019 levels continuing to reflect changes in driving patterns being seen across the country, although it has moved closer to 2019 levels compared to the spring. Over the quarter, the lower loss frequency accounted for the equivalent of about $11 million in reduced losses. In addition, the underlying auto loss ratio reflects the long-term benefits of the progress we've made over several years to enhance our pricing segmentation and improve our auto profitability. Second, a 4.8 point better underlying property loss ratio. The effect of the return of reinstatement premium is the most significant in the property results. Underlying results also improved because of the lower impact of more frequent, but less severe non-cat fire losses compared with last year's third quarter. We're confident this is just normal variation in loss patterns as our analysis found no concentration by geography, by agent or by cause. Third, underwriting results benefited from $1 million in favorable reserve releases in the auto book and $1 million in the property book, in addition to the subrogation recovery. We remain solidly in the upper half of the independent actuaries range for total property casualty. Fourth, a 1.2 point lower expense ratio benefiting from last year's expense reduction initiatives as well as other reduced spending related to the pandemic. The fundamental progress we've made in Property and Casualty continues to support our strong outlook for $70 million to $75 million in full year P&C segment earnings. When we think about auto frequency and severity in the coming months, we expect to see total mileage remain near 2019 levels, which it had again reached by late summer. That said, industry commentary and our proprietary data on driving patterns from our telematics app, HMDrive, supports that driving patterns have changed due to the pandemic. For example, there has been more long distance driving and less concentration during to-school and home- from-school hours. Those differences have kept frequency low enough to offset some upward movement in severity. As a result, we have planned for an underlying auto loss ratio modestly below pre-pandemic levels for the fourth quarter. Offsetting some of that benefit, as we said in September, our full year guidance now anticipates 13 to 14 points of catastrophe impact on the full year combined ratio or about $85 million to $90 million. Through 9 months, catastrophe losses totaled $78.3 million. Excluding the Camp Fire in 2018, fourth quarter catastrophe losses have averaged just shy of $7 million over the past 5 years. Policyholder retention remains strong and there has been some rebound in new business. However, rates are likely to be very stable in the current environment, so net written premiums for 2020 will be below 2019, even before the $10 million impact of premium credits that we recognized in the second quarter. Turning to Supplemental. This quarter, the segment added $32.5 million in premiums. Segment core earnings were $10.6 million, reflecting favorable trends in reserves and some short-term benefit from changes in policyholder behavior due to COVID-19. Net investment income on the Supplemental portfolio reflects the solid progress we are making in improving the Supplemental investment yields. Supplemental sales were $1.4 million in the third quarter. Supplemental products across the industry have traditionally been sold through a worksite enrollment model, and we expect sales to begin to return to a more normal trajectory over the coming quarters. Premium persistency remained stable at about 90% with over 290,000 policies in force. As we've said, policyholder retention for this business is relatively stable. The segment margin continues to benefit from the changes in policyholder behavior, and we have increased our outlook for Supplemental's full year core earnings to the range of $37 million to $39 million from the previous $31 million to $33 million. This largely accounts for our increased EPS guidance and dramatically illustrates the diversification value it provides. For the Life segment, sales were below last year's third quarter, although policy count remained stable with pre-pandemic levels. While we had fewer sales of complex products such as Indexed Universal Life and larger single premium policies -- which require more customer interaction to complete the sales process -- application counts rose for recurring term and whole life policies. These products help us continue to reach more educator customers. Core earnings reflected mortality trends in-line with expectations. We continue to expect the segment to deliver $10 million to $12 million in ex-DAC earnings in 2020. The volume of claims related to COVID-19 remains very low with face values averaging about 40,000. For the Retirement segment, we now have comparable year-over-year results for this quarter following last year's annuity reinsurance transaction. That agreement addressed the interest rate risk of a legacy block of individual annuities with a minimum crediting rate of 4.5%. This quarter results clearly display the value of that strategic action. Segment core earnings, ex-DAC unlocking, improved $1.4 million over last year's third quarter. The net interest margin on the retained business was stable at $19.4 million, while operating expenses declined $1.6 million due to the expense initiatives put in place last year and savings related to the pandemic. We continue to expect core earnings for 2020 will be in the range of $22 million to $24 million. We continue to see Retirement segment growth as our solutions for augmenting retirement savings remain a core need for educators. Annuity contract deposits were up about 7% for the quarter, and they continue to be an important part of the product set. Annuities appeal to the financial objectives of our educator customers while complementing our growing suite of fee-based products. Turning to investments. Total net investment income was up slightly year-over-year and up more than $13 million over second quarter as we benefited from the second quarter market recovery and valuations for our alternatives portfolio, which generally reports on a one-quarter lag. We experienced positive marks due to the recovery across different fund types, including private equity, infrastructure and structured security funds. We remain confident in the long-term returns from these investments and are comfortable with our expectation for alternative investment income of $5 million to $10 million on a full-year basis below our longer-term return expectation for this asset class. Further, our core fixed maturity portfolio remains well positioned to weather the near-term market volatility in COVID-19 induced economic downturn. The core portfolio had a yield of 4.18% in the third quarter compared to 4.62% a year ago. The addition of the supplemental portfolio on July 1 last year continues to reduce the yield on the consolidated core portfolio, but we are making solid progress in improving the supplemental yield. Through the third quarter, we continued to focus our purchases on high-quality municipals, corporate and government agency securities. The core new money rate was about 3.25% in the quarter, and based on current market conditions, we anticipate purchases near that level for the remainder of the year. Net realized investment gains of $2.5 million in the third quarter included $1.1 million of impairment losses. In addition, we had mark-to-market gains of $2.3 million on equity securities. We continue to expect total 2020 net investment income will be between $340 million and $345 million, including accreted investment income on the deposit asset on reinsurance. You will recall, this amount is an actuarial driven calculation and should not be affected in the short-term by market volatility or prevailing interest rates. This expectation for investment income is captured in the segment-by-segment outlook summarized in our investment presentation and in our new core EPS guidance range of $2.95 to $3.15. Our strong financial results, combined with our conservative capital management, means that we will be able to move forward with accretive uses of excess capital when the time is right. Our priorities remain, first, growing our business at returns that meet or exceed our ROE targets. Second, returning a significant portion of annual earnings back to shareholders via a compelling dividend. And finally, buying back shares opportunistically when market conditions warrant. To summarize, we continue to see the positive impact of our transformational actions and profitability initiatives, particularly the addition of Supplemental segment and the annuity reinsurance transaction in our Retirement segment. As Marita said, there are 3 go-forward keys to achieving a sustained double-digit ROE. First is sales growth. Second is business optimization and expense discipline. And finally, continued expansion of our alternative investment portfolio to capture additional yield in the sustained low interest rate environment. We believe we are on the right track with all 3, despite the challenges of this unusual environment, and we are excited about what's ahead. Thank you. And with that, I'll turn it back over to Heather.

Thank you, Bret. Operator, I think we're ready for questions.

[Operator Instructions] Our first question comes from John Barnidge of Piper Sandler.

I wanted to go back a little bit to your comment on the call about expenses that might not return ever. Can you expand on that? And have you identified an amount?

John, this is Bret. I think the comment is actually the fact that, obviously, we've been able to reduce our, specifically, travel budgets substantially in the current year. But obviously, you've participated in investor calls where we've done the Zoom calls quite effectively with yourself and investors. I think that's just one example as we look to next year. There are probably going to be some combination of Zoom and travel-related expenses. I mean, we're in the midst of putting together our preliminary 2021 plan. But we would anticipate of not returning back to the same levels that we started out the year. So I don't think that's going to be unique to Horace Mann. All companies, I think, are revisiting how they are structured and how they're working in this new environment. But we definitely anticipate benefits in our expenses to continue in 2021.

Yes. And John, this is Marita. What I'd add to that is what's interesting for Horace Mann -- and you know this in how we laid out our ROE improvement plans -- we actually had a pillar of that ROE improvement that was focused on optimization and expense discipline, including the integration with NTA. And what's interesting about that pillar is while we were improving processes and really taking a very keen look at how we do things in a more optimized way going forward -- including 2 pretty big projects, both on the P&C and the L&R side, improving our systems on a go-forward basis -- we're able to take the learnings from COVID-19 in that while you're looking under the hood, what are we learning. What are -- what can we build into our go-forward optimization, and include that. So I think it's a really good time that the patient's on the table, you're looking at every piece of what you do and how you do it. Now you can do it with a whole new eye of what were the tools that you put out there to drive virtualization, to not rely as much on physicality, and build it into those processes going forward. So although no one would want this or look for it, we are looking for those silver linings and finding a way to build them into a much more efficient process going forward. The comment in the script was really about travel specifically, as Bret said. And what we're also learning about travel, as the whole world is, there are some things that we can do very efficiently by not being there. And then when you can add physicality back to that much more efficient way of doing things, it's icing on the cake.

Okay. And a follow-up. There have been a lot of annuity block transactions in the last months. I know you guys did one about 15 months ago. But given market activity, can you talk about interest in additional transactions and possibly doing 100% flow reinsurance to move it to more of a fee-based business?

Yes. I mean, Bret, I'm sure we'll have a follow-up with the numbers in mind. But I think when we did the transaction that we did, we were thoughtful like we always are, and we probably picked the optimal time for us to do that, and you're seeing that come through in the numbers. I mean, we're -- we are smart about these things. We see transactions that have occurred recently, and we look at that, and we learn from it But we feel really good about what we did, when we did it, and we'll continue to look at what's out there. But for us, our company isn't just the mathematical sum of the parts, right? It's a total value proposition for our educator clients. And it's about the economic value of the household. It's about the cross-sell that we do within those households. But most importantly, it's about our total value proposition and that convenience for the educator of one-stop shopping and helping protect what they have today and secure their retirement. I don't know if you have anything to add to that, Bret.

Yes. I would just add that, John, as you recall, to achieve a double-digit ROE in the Retirement segment, we'd need a spread of about 200 bps. And as you probably saw in the investor supplement, when you look at the quarter-by-quarter, we actually achieved 225 bps in the third quarter. So we are actually above the target spreads. So as Marita said, it's something we would maybe look at in the future, but we've accomplished exactly what we set out to do with that reinsurance transaction that was actually done at a very favorable time for us, and we couldn't be more pleased with that transaction being executed.

Okay. And my last comment -- sorry, question -- and I'll requeue. With reduced sales growth this year, how does this make you think about allocating more capital, let's say, share repurchases given where shares are currently trading on book?

Yes, John, this is Bret again. I think as I spoke on several earnings call, our capital management strategy has been and it remains focused on the most accretive uses of capital. As Marita has talked extensively, growth is first on the docket, if you will. We want to grow our core businesses when they're at or above our ROE targets. And I think we've talked about getting all of our lines back to that profitability level. Secondly, providing a compelling dividend, which we've done utilizing basically a payout ratio of 50%. And finally, to your question with opportunistically buying back shares, this is really the first quarter in 2020 that we've actually achieved the 425 RBC levels in all of our segments. So this is the first time where we have roughly about $15 million of excess capital that we could potentially buy back some shares. We haven't decided to do that quite yet. I think we talked last quarter, we were in the midst of the hurricane season, and wanted to be prudent with letting any capital go. So we may nibble around the edges here as we get later into the year. But obviously, it's something we look at. We actually ended up at 425 levels in all of our segments, probably a quarter earlier than we otherwise would have anticipated. We were targeting that to happen more towards year-end. So here again, the year continues to achieve earnings above our plans and our revised forecast. So we'll take a peek at that as we go later into the year.

The next question is from Matt Carletti of JMP Securities.

Marita, a lot of your commentary is just focusing on the path to the double-digit ROE, #1 is sales growth. I was hoping you could help us with just kind of the current environment. And talk around -- I know we have in past quarters, but we're getting kind of further and further into the pandemic world -- kind of how you view the tools for success there, the digital adoption? And really in the near-term, do you think that Horace Mann can be successful in driving sales growth in the environment we're in? Or are the tools that you have kind of really help you fight the headwind, but we need a little more normalized environment maybe for true growth to come out?

Yes. As usual, Matt, the answer to your question is in the question, as it often is when you ask it. But we spent an awful lot of time in our script trying to unpack this because this is the thing that, obviously, we're the most focused on. It's the first pillar of that ROE for a reason. We really did position ourselves for setting the company up so that our business is accretive to ROE: the auto profitability, the reinsurance transaction, using that capital for a higher ROE business and the purchase of NTA. So we positioned ourselves for right where we are. We certainly didn't position ourselves for a pandemic. But I think we've navigated that extremely well and take -- and we're taking advantage of the time that this is giving us. We wouldn't have wished for it, make no mistake, but we're really learning a ton. Our existing legacy Horace Mann agents are leveraging their strong relationships with their clients to cross-sell, to have those retirement conversations, and you're seeing that with the increase in retirement that we saw in the quarter. And for the new agents on the NTA side, we're really -- when they join us, obviously supplemental, as we have said over and over again for the industry, is very worksite-based. So there's no doubt that the lack of physicality does put some pressure on that sales environment. But what we did is we took that time to accelerate the integration, to accelerate the training, to complete the P&C licensings that needed to be complete, so that those NTA agents could begin to sell in this environment other than supplemental. And after this passes, and it will, they'll be ready to go and hit the ground running. So getting through the few territorial issues we had to get through, giving them the tools and the training they need to be successful, building their repeatable sales process. And we said in the script, I mean, the proof point is a brand-new NTA agent in that new agent segment was the production agent of the month last month. So we are seeing that come through. And let's face it, we're learning a lot. We completely virtualized our sales process. We built online financial wellness seminars. We're piloting many new digital engagement strategies and events, and many of these are working. So the beauty -- and never waste a crisis -- the beauty is the acceleration of the digital and virtual capabilities that we would have built, and we would have added to our repeatable sales process over time. There's this great acceleration, this great forcing mechanism for us to build those, get those out there and for agents to learn adoption. And I really believe that we'll take the best of these things and continue them on a go-forward basis. And then when we have physicality to add to these, we're going to have a nice boost to our rhythm there. And at the end of the day, the educators are still there. They still need what we offer. And those opportunities aren't going away. We built a complete product set with the addition of NTA. We're adding the benefit of making our distributors even better during this time. And the infrastructure improvements with optimization and modernization really get us ready for that post pandemic environment when it emerges, and it certainly will. So I feel good about what we're doing. We're learning. We're getting stronger. And we're going to take advantage of that. And our growth during this time, we -- it is starting to ramp up. It was better in August and July. It was better in September than August. It's better in October than September. And we are starting to see folks emerge just like you did across almost every business. Restaurants had to figure out a way to operate more effectively. And we're all finding strategies that work in this environment and then what of those will work well in a post pandemic environment. So I mean, we took advantage of the fact that we had some time to accelerate some things, and we feel good about our ability to be even stronger when physicality comes back.

Okay. Great. That's helpful. And then one other -- I think probably just quicker numbers question. Can you help us -- I mean obviously, supplemental has been a very good story, a great addition to the company. And while we could see the sales headwinds that I agree will get back to normal at some point, it helps the bottom line. Can you help us unpack maybe when you look at the recent quarter's bottom line performance there, how much of that might be pandemic-related? And how much of that might be core run-rate to the extent you have the insights?

Sure, Matt. This is Bret. I mean, I'll give you a rough estimate. I mean, obviously, supplemental, just like auto has experienced some favorable results, claims related due to the COVID using a rough estimate, probably $1 million to $1.5 million a quarter for the last 2. So if you kind of wrapped around the impact to the benefits ratio, probably around 4 points, I think, is a rough estimate that you could use for that. Obviously, Supplemental is receiving some onetime benefits that most likely won't repeat to the extent next year. But I think that would give you a rough estimate to use.

The next question is from Gary Ransom of Dowling & Partners.

You did give us some insight on frequency trends in auto. I was wondering if severity trends, which may have been elevated before, are also showing signs of returning to normal so that the whole package of loss cost is moving in a direction that might look like normal?

Gary, this is Marita. Since Mark Desrochers tracks this on a daily, weekly and monthly basis, I'm going to let him respond to that.

Sure, Gary. Actually, yes, you're right. We talked in the second quarter that we were seeing somewhat elevated severity trends relative to our expectations in the mid- to high single-digit range. And what we've seen in Q3, I would say, is more of a return to our normal kind of expectation of a low to mid-single-digit change in severity. So it's pretty much in line with our normal expectations at this point.

Okay. And just on the frequency trends themselves, are they -- do you still detect movement meaning return to normal August or September, September, October? Or I mean, is it still going that way?

Well, yes. It's interesting, Gary. What we've seen is the -- clearly, frequency has been increasing since the lows we saw in the second quarter, but not quite proportionately with the change in miles that we track in HMDrive. So we've seen mileage return to near pre-pandemic levels, but the sort of return on the frequency has lagged. And we continue to see it lower than we saw in 2019, which as Bret mentioned in the script, we would attribute primarily to the continued changes in driving patterns that we've seen. And probably to a lesser extent, I think the hard work we did to improve the overall profitability profile of the book of business. And I have some expectation, as Bret also mentioned, that we'll continue to see that through the end of the year and probably into 2021 until we reach the point where there's a widely available vaccine, then we'll have to, at that point, evaluate what the long-term impacts will be on driving behaviors.

And Gary, this is Marita. Thanks, Mark. The only thing I'd add to that is we did add a more detailed ROE slide to the investor presentation intentionally. We wanted to point out that one of the key drivers of the ROE improvement for 2020 over 2019 was the work that we began in 2017 on the auto loss ratio and really improving our pricing segmentation and our profitability in that line. And that was one of the key drivers of taking that core ROE from 7.3% to about 8%, 8.5%. And that clearly is in there. And you can see the 9.5% that we sit today predominantly because of the frequency benefit in auto that you're talking about here, but a really nice trend even without the frequency benefit driven by COVID of 7.3% to 8%, 8.5%. And then a clear path of what those levers are going forward in improving that ROE. And some of that might be a slight systemic benefit of frequency going forward, even post pandemic as not everybody returns to the way they did things before. Because they're going to take those learnings, which may also include more flexibility in work hours, maybe changing systemically the commuting patterns we have as a country -- how long, how much, who knows? But there might be some go forward benefit there as we look to see how driving changes, if at all. But we really did want to take the time to say, make no mistake, that ROE improvement even without the benefit of COVID-19 is there the way we laid out that it would be.

Just a bigger picture question. You've talked a little bit about what's permanent versus what's temporary on the COVID impact. But I was kind of wondering the impact actually on the teachers themselves and how they're behaving, reacting to your sales. Because their lives have changed and this hybrid approach may be permanent. In my neck of the woods, for example, there's no more snow days as far as I understand it. But has that change affected what the teachers want? What the products they're looking for? The needs they feel are being fulfilled by what you have. Or maybe there's additional needs that you might need to provide in the future?

Yes. Gary, I think that's a really good question. And I think back to the question about what you learn in this environment. I think we're learning a ton. I mean, when you think about the fact that 80% of our client base and, quite frankly, 80% of NTAs prior to the acquisition were educators, we've got a lot of data. We know a lot about them. We know what their needs are. We spend a lot of time with them -- contact centers, salespeople -- and this is no different. And this time we're learning about what's changing in their environment and what they're learning. And what we're finding out is many of the things that we've known for a very long time stay the same. They're conservative. They're loyal. Our retention numbers holding the way they have been holding. But this is a really tough time for them. If you think about our increase in Retirement in the quarter, that tells you a lot about their conservative nature, it tells you a lot about do they spend or do they save in these types of times. When you think about our ability to get to them from an auto or a supplemental perspective during these times, maybe a little harder, maybe not first on their list, if you will. But I think about life insurance, for example, and our life numbers as it relates to PIP count, as it relates to the individual typical life products that teachers buy, those have continued. Those sales have gone just fine. What's more complicated and what we're not seeing as much of are those bigger cases. And we've talked about the lumpiness of that before where it might take a longer conversation, it might take a more complicated conversation to sell that particular case, we see a little less of that. And I think that's probably typical in everybody's lives, right? There's not the time to do things the same way you've done them before. And then we think about post pandemic. The propensity to buy Supplemental products. The propensity to think about, after a pandemic, do you want to have the risk of out-of-pocket expenses? Do you want to make sure that you've got your life insurance needs taken care of? I think those things bode really well for our sales environment post pandemic. So long answer to a short question, but we're learning a lot in this environment. It's reconfirming that everything we knew about this very loyal, very conservative set of clients is true and then learning in a hybrid environment, how we navigate that sales environment.

The next question is from Meyer Shields of KBW.

I wanted to start with a question on P&C reinsurance. I guess factoring in on the negative side, more frequently, adverse weather and on the positive side, the more diversified overall company operations. How are you thinking about reinsurance, how the current reinsurance program worked out and expectations for next year?

Yes, Meyer, this is Bret. I mean, I think we feel very good about the reinsurance program. I think our reinsurers feel very good about the reinsurance program. Obviously, the recoveries that we recently received, we treated those dollars as our own. And obviously, were able to give back to the reinsurers. Certainly, the number of catastrophes, even for us, there was 30 of them in the third quarter. But they were all on our nickel, if you will. They didn't hit any of the reinsurance tower limits, if you will. We do know that, obviously, most likely, the -- as an industry, they're going to be looking at rate increases, maybe higher than normal as we go into 2021. But like we've done today, we are trying to differentiate ourselves from the rest of the pack. I mean, we didn't sell our subrogation rights like other folks did last year. So here again, we don't tend to operate just like everybody else. But I think at this juncture, we'll look at different aspects of reinsurance, just like we do every year. And I think Marita and Mark have talked about that in the past. But as we -- I'm not aware of any wholesale changes that we would make. It served us well through the years. It's not a one-shot pony, if you will. But at the end of the day, we feel good about the coverages that we have. We'll be up probably against a little bit of rate pressure as we go into 2021. But here, again, we will try to differentiate ourselves from the pack to yield probably something less than the pack.

Yes. The only thing I'd add to that is you can't have a year like this with 60-something cats, 30 something of which occur in the quarter and not step back and do what we always do. Take one more set of numbers and add it to our good math on this issue. I think you think about pricing. I think pricing has to firm in the homeowners market when you have this many catastrophes and this kind of loss activity. I think you think about underwriting. I think you think about aggregation management and whether -- we've got a pretty strong conservative drill that we've talked about in the past. What do you take from this data that you now build into your aggregation management and your underwriting drill that might be different? And you take those learnings. And then you think about mitigation through reinsurance. And every year, we price aggregate covers. We look at what they are and what they're worth and do they make sense. Right now, I agree with Bret. Our reinsurance program has served us well for what it is. But then underneath that, I think we've got to look at pricing. I think we have to continue to look at underwriting. And I think we have to continue to look at aggregation management. And when you think about underwriting, it's exactly what we did when we underwrote wildfire risk. And I think it served us well. Our decision in the Camp Fire was the right decision. But the Camp Fire was not a typical wildfire event. It was a man-made event to which we got the reinsurer's money back and then ultimately, our reinstatement premium. But you learn from these things. And the recent wildfires that have been more typically in areas where they would normally be, we're not seeing losses from those events other than a few smoke damage claims and an occasional fire claim, but certainly not our issue. You look at drought. You look at changes in weather patterns. And we build that into our underwriting, our pricing and our aggregation management. We're underwriters. It's kind of what we do.

Okay. No, that's very helpful. Second question on auto. Basically, when we look at the pricing environment, it seems to become -- to be becoming a little bit more competitive. And I'm trying to figure out how that impacts two issues directionally as we look into 2021. One would be less new business and therefore, a smaller new business penalty. And second, maybe an increased opportunity to write business on other insurance companies' paper, which would be good for the expense ratio. So can you give us -- I'm not looking for numbers, but directionally, are either of those big enough to make a difference?

Yes. Two things that I think of when I think of your question. First, we do have strong auto results, no doubt about it. But with strong -- increased cat costs, prolonged lower interest rate environment, I think that, for the most part, the rate environment is going to be relatively flat. And then I think about two things when I think about that, and I call that kind of both ends of the spectrum. The first one is a handful of places where we can take some intentional actions in really good places to drive some profitable growth in household acquisition. We're at that point. And then on the other side of the coin, there may be a handful of places that aren't as profitable. And in those places using other markets that have scale, like we do now with Progressive, makes some sense for us. So the answer to your question is, yes, but I think we'll do both. Where we have scale, where we like our pricing, where we have the right agents, creating a competitive environment where we can drive growth makes sense, and that's how we think about it. And then in other places where we can leverage companies that do have strong scale and generate some fee and help with the household acquisition, we can do that, too. And we do a lot of that today.

Our next question is a follow-up from John Barnidge of Piper Sandler.

AIG is spinning off their Life and Retirement business. And I know they're a big participant in the education market. How do you view them being a stand-alone business change in dynamics in that market?

Yes. I don't think it changes the way we feel about the world. I -- to me, I think it may potentially give us even some more opportunities. I mean, we focus on ourselves. Like I said earlier, we focus on that total value proposition for educators and where we find ourselves now with the addition of Supplemental, being able to have that complete conversation that says, you take care of educating the kids -- now more than ever, complicated -- we'll take care of you. We'll do your auto. We'll do your home. We'll do your life. We'll do your retirement. We'll take care of your supplemental needs. And it's that all-in total conversation. We have an annual policy review process where we go through the right questions, where we can get all the boxes checked and then through payroll deduction, through our optimization efforts, we can kind of pull it all together and make it easy for the educator because they only, as we know, have a certain amount of time to focus on themselves. So for us, we focus on ourselves and that's how I would think about it.

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

Thank you, everyone, for joining us today. We look forward to talking with you over the coming weeks and months. And don't hesitate to reach out if you have a follow-up. Have a great day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.