Good morning and welcome. The Horace Mann Educators First Quarter of 2021 Investors' Call Please note that this event is being recorded. I'd like to turn the call over to Ms. Heather Wietzel, Vice President of Investor Relations. Please go ahead.

Thank you, and good morning, everyone. Welcome to Horace Mann's discussion of our first quarter results. Yesterday, we issued our earnings release and investors supplement. Copies are available on the Investor's 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, Tyson Sanders on Supplemental, Mike Weckenbrock on Life and Retirement, and Ryan Greenier on Investment. 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 used some non-GAAP measures. Reconciliations of these measures to the most comparable GAAP measures are available in our news release.

Thanks, Heather, and good morning, everyone. Before we start today, I want to welcome Tyson Sanders to our quarterly investor calls. Tyson has been a part of our supplemental team for seven years, and has run day-to-day operations for the past year. He joined my senior team in March, and I know you'll appreciate his knowledge of the business. On to earnings. Last night, we reported Horace Mann's highest first quarter results ever, with core EPS of $1.10. All 4 segments had higher year-over-year core earnings, with our property and casualty segment recording an 86.2% combined ratio, despite 7 points of catastrophe losses. We saw encouraging signs of sales momentum in March, particularly in retirement, that continued into April. As many educators start their relationship with Horace Mann through retirement savings enrollment, this bodes well for future cross-sell opportunities. Bret will go through the results in detail, but the highlights of the quarter also included 21% growth in investment income for our managed portfolio, and a 7.6% increase in book value, excluding unrealized gains. This strong start positions us to meet our full year 2021 core earnings guidance, and demonstrates further progress towards our long-term goal of a sustainable double-digit return on equity. Our annualized core return on equity for the first quarter was nearly 13%, although pandemic-related policy holder behavior changes in the auto and supplemental lines added about 2.5 points. We are committed to and confident in our ability to achieve a double-digit return on equity that extends into the post-vaccine world. We expect to see benefits in 2021 from the 3 drivers we are pushing to sustain ROE at our target level. First, benefiting from additional net investment income by increasing the allocation to alternative investments, which have a higher return profile. In the first quarter, annualized returns in our alternative portfolio were very strong, at nearly 11%, primarily from private equity limited partnership investments. Considering the strong global economic outlook, we remain confident in continued strong contributions from this asset class. Second, expense management. Beyond the shorter term pandemic-related expense reductions, we continue to realize savings from actions such as the full integration of the supplemental segment in 2020, as well as the benefits from continued infrastructure improvements. Third, cross-sell and new sales. We are seeing encouraging signs of sales growth, bolstered by the rollout of COVID-19 vaccines across the country. Educators want help identifying strategies to plan for their futures. March was the highest month for annuity contract deposits in several years, and April was another strong month. March and April were good months for life sales, with applications submissions trending up. In auto, although written premiums are down compared to pre-pandemic first quarter of 2020, we are seeing signs of progress. We've been more aggressive in pricing for new business in several key profits states, which has driven a jump in new business auto production. We're planning additional investments in new business in more states, where our profitability outlook supports those moves.

Thank you, Marita, and good morning, everyone. First quarter EPS was a record $1.10, 41% over last year our second consecutive record quarter, and a solid step toward achieving our full year EPS guidance of $3 to $3.20. Further, core ROE for the first quarter was nearly 13%, and 11.2% for the 12 months, which was up from 7.6% for the prior 12 months. Although the pandemic and other unusual factors clearly contributed to the improvement, our strategic initiatives were equally as important, and we remain on track to our long-term target of sustainable double digit ROE. As we said last quarter, our current year guidance presumes a gradual recovery from the lingering effects of the COVID-19 pandemic on results. We're encouraged by initial signs of momentum and sales as a vaccine rollout is accelerated.

Operator, we're ready for questions.

Our first question comes from John Barnidge at Piper Sandler. I think we lost Mr. Barnidge. So Gary Ransom, you're up at this time.

I was wondering if you could talk a little bit about frequency and severity in auto. I'm looking across various companies and it seems to be coming back at different paces for different companies as we reopen. I wonder if you could just also talk about it in terms of your geography. California might be one thing, other parts of the country might be another, and just comment generally on how you see that trajectory of frequency returning to normal over the next few months.

Gary, before I turn it over to Mark, one of the things that we always try to remind everyone is the educator segment that we're in, and we always talk about that segment. We're not immune to trends, but somewhat insulated. So with that as a backdrop drop, I'll let Mark go a little bit deeper on the details. Mark?

Given some of the changes we've seen in the nature of accident frequency, most notably that we're seeing a lot fewer fender-bender type events, we tend to focus a lot more right now on what's going on with the overall loss costs. And our loss costs, they do remain below pre-pandemic levels but, as we expected, they're moving slowly back towards what we saw prior to the pandemic. Each month, the overall loss costs are closing in towards that pre-pandemic level. And as Bret mentioned in the script, we expect that to normalize as we get to the end of this year, early next year, the loss cost compared to pre-pandemic levels are pretty consistently down across most of the accident-related coverages. The one exception I would note is UM/UIM, where we're actually seeing loss costs that are at or above pre-pandemic levels.

I get that you're talking about the overall loss costs, but if we focus in a little bit on severity, there definitely are certain components of the cost of repair and medical costs are going up, and I wonder if you could comment on what you're seeing there, whether there's any acceleration or change in the kind of cost you're seeing in the last few months

Yes, there's definitely an increase in severity, but I'd say it falls into a couple of different areas, or a few different areas. One, there's just the normal rate of inflation. Two, we are certainly seeing some impact of supply chain issues driving up costs of repairs. But one of the biggest factors we're seeing from digging into the data is, when you take out some of the smaller events, what's left is just -- has a larger average severity. And that's accounting for a lot of what we're seeing in the increased severity.

And Gary, this is Marita. One thing I'd add to that, again, back to the educator segment, when you think about variability in the data across the industry, and you think about swings, whether it's loss costs, whether it's severity trends, whether it's pricing, our range is not quite as wide as the industry. I mean we tend not to have large pricing increases, and therefore not large pricing decreases. Obviously, when the industry was trying to write the profitability scenario, we all saw some pretty big pricing increases, and we've talked about that over the quarters, but with the exception of those times, we tend to be pretty tight. We did restore the profitability of our book of business. We did increase pricing for that profit restoration, and that worked. I mean we see our profitability, our trends, much more similar to our historic averages. We have a profitable auto book. It speaks to the nature of the clients that we have in our educator book. And a lot of the profitability that underlies this is the work that we've done over the last couple of years on restoring the profitability of that book. And it was heavy lifting, and I think we did a very good job. So I do think we have to remember that we tend not to swing, and have a wide range of variability. The one exception to this is the frequency trends. When the world came to a stop for a while there, we all saw a pretty big drop as, as we all know, in frequency. And that's a trend that even educators weren't going to escape.

Just looking at how the educators behave, particularly, there was a lot of shopping going on for auto insurance over the last year, probably up. And this is a general statement, rather than an educator's statement. But did you see that, at all, in educators? Was there anything in, as you go out, agents trying to do it? Are you getting any more quote opportunities at all or was it just subdued and stable?

I mean, Gary, I would say generally what we saw, and we see it in our sales trends as well is, we saw a very busy group of people focused on educating kids in a real tough time. They had fully virtual, they had back to the school, they had hybrid, and they had constant change. And I think their focus was on trying to create an education environment in the worst possible scenario any of us could imagine. What we saw is, we were able to get a hold of them and we were able to have the retirement conversations that we needed to have with them. And you saw a pretty constant retirement enrollment, and numbers in retirement, through the pandemic. And certainly, as Bret said in his script, with our March and April activity in the retirement line, then you saw life sales, as educators thought about life insurance, as we all did, questioned the environment that we were in. We saw pretty steady life sales, with March and April for life being very strong, and with application counts now being up. And then, when you go past that, when you think about auto, I'm not sure our educators thought that quoting their auto was the most important thing they needed to do over the last couple of months. And in supplemental, what we found was, across the whole industry, that is something that's typically done in the school systems. And we spent our time focusing on getting ready for the fall season, getting ready for enrollment and improving our virtual tools, getting our supplemental agents up to speed and integrated, and doing the things that we could do in that space to get ready for the sales momentum that we feel is coming. But even in auto, when you think about auto, what we saw was March of 2021 being stronger than March of 2020. We saw April of 2021 being much stronger than April of 2020. So they're back in the game, they're back -- start to think about a broader set of questions, but I don't think auto insurance was educators' top priority over the last 10 to 12 months.

Next question from John Barnidge, Piper Sandler.

Apologize, I didn't take the mute off fast enough. Like to hear more about your thoughts around supplemental sales, maybe vaccine distribution ramped through the quarter, lots of schools reopened, maybe sales activity and expectations between now and school opening. I'm really just trying to triangulate and think through if this summer dynamic, this time around, may be different, given the return.

Yes, I talked a little bit about that, John, and we tried the best we could to give you some color in both of our scripts. This is a work site sale, right? This is truly a sold product. And we took time to ramp up. We built platforms, we improved our approaches. We taught the historic supplemental agents our full value proposition and our other lines of business. We put these agents in previously uncovered territories, and taught them our full value proposition. We really positioned ourselves for growth towards the second half of the year, and it was thoughtful. It's what we planned for. It's what we assumed. It's what we even told the world was going to be the case. When we looked at sales very early in the pandemic, we looked at 2021 being very similar to 2020, as far as the total size, and ability to grow, but in reverse. And we expected that growth would ramp up towards the second half of the year, mostly in the supplemental business, we knew it would be the business most affected by this. And we also knew that we would improve the profitability because of folks' maybe hesitancy to seek care, and have the activities necessary to have a claim in that business. But we also knew that the sales would be soft until agents across the industry were back in the game in the schools, doing the enrollments that need to be done. We are very well positioned for the benefits enrollment cycles for the 2021-'22 year, and we have really shored up our products. Our filings in these states are in really good shape. We talked about the filing of group products and building of platforms. We feel like we took the time we needed to position this very profitable business for growth in the latter half of this year, and certainly into 2022 and beyond.

Within that vein, you made a fair point about getting the agents meeting with the teachers and educating on supplemental. We're really only 3 months out, right now, from return to school for the academic year. Can you talk about what you've maybe been told, and I know it differs between urban, rural states, around physical access to schools expected for the fall, maybe as it relates to this, as compared to this current academic year and a pre-pandemic year.

Yes, it's a great question, and one that we think about and talk about all the time, and it's not just a question we ask ourselves as it relates to a pandemic, although that certainly magnifies it. Access is always a question for us, and we have various levels of access across our footprint today. I mean, first, I'm really proud of the company, our agents, our employees, what we did during this time period. They got creative. When I think about how our agents accessed educators in parking lots, and anywhere where they could, to make this work, just like everybody else adapted in this kind of an environment, they found new ways to support their educator clients. And as a company, we built new tools and new platforms, we tested new sales practices. So as we move forward, what I know is we will have the benefit of physicality again, combined with all the virtual and platform changes and improvements we made during the pandemic. When I think about, a lot of folks say, what's the permanent change going to be in the post-vaccine world? Is it going to mean no access? And I don't think that's the case. We lived through various degrees of access in the past, and we're finding what we did during the pandemic actually improved our relationships with schools. We were there when they needed technology, we were there when they needed internet access. We were there supporting educators with our student loan solutions platform, with their retirement needs, all through this pandemic environment. And I think it's only strengthened how the districts feel about our value proposition, and the company, that we are supporting them through this. We, for example, in our Section 125 work, we transformed our Section 125 platform for these schools to a much more robust platform, and have the ability to sell our supplemental products through many of those Section 125 platforms. I really think we spent a lot of time getting ready for a much stronger second half of the year for us. And we are not seeing signs of, where we had access in the past, the school districts not allowing us back. And I know that because even during the pandemic, they allowed us to be in the parking lot. They allowed us to do many of the things that we did outside, and in small groups, that we used to be able to do in large meeting settings.

Thank you. Next question comes from Matt Carletti of JMP.

Marita, I was hoping to follow on, on just the general observations on growth returning, and wondering if there's anything you've been able to observe from, there's been a real split in kind of the pace at which individual states are reopening. Texas and Florida on one end, places like California and New York on others. Have you guys been able to see any takeaways at a more granular level, on a state-by-state basis, in terms of, as geographies reopen, kind of the activities you're seeing, and maybe that tells us something about the future?

Yes, I think it mirrors the world that we live in, right? We're all in a pretty odd time. What do you do? When do you do it? How fast can you get there? Hesitancy. We're humans, And I think we're seeing that clearly in our space as well. It's not only on a state-by-state basis, but it's on a district-by-district basis. And I think it's going to be fast in some places, gradual in other places, and slow in other places, just like we see how the world opens up generally, and how people respond to the work environment, returning to the office, hybrid situations. And our situation is the same. And in many cases, we're using tools and techniques to help agents get back in the game. Whether it is different incentive programs in the supplemental space, whether it is providing unique opportunities for agents to take advantage, to stick their toe back in. I mean think about the world that we're in, and how this reopening will happen. It's happening the same thing here. We're pushing hard, and in some cases it will be gradual, in some cases it's going to be pretty quick, and in other cases, it may take a little bit of time, and that's probably appropriate. I mean we've been following the appropriate guidelines. We have been very careful. And when you have a sales process, that includes physical interaction, you've got to be thoughtful about how you do it, and how you transition back, but make no mistake, it's happening. The trends that we're seeing in March and April are real. We expected them to happen. And in some places I think they're going to be fast, and in other places, I think it's going to be gradual. But we have a, what we call, back to school calendar. We have back to school activities. And this year, although it's going to be a little bit different and our groups will be a little bit smaller, we are doing back to school events. Our agents are ready to get back in the game. We've talked a lot about, will the summer look like a regular summer? Will we see some pent-up demand in the summer that maybe you wouldn't typically see in our trends in a normal summer? So what we know about our data, it's going to move around a little bit over the next few months, and not be a typical year, just like last year wasn't a typical year, but we are encouraged with the momentum that we're seeing. And we said that this year was going to be a little soft, and in total, it probably will, but we feel good about the trajectory that we're seeing and it's clearly in the data.

And then one quick, other one, just, you want to ask a question on the uptick and the life mortality trends in the quarter. I know it's not specific to Horace Mann, we've seen it at other companies across the industry. Just if you have any thoughts on, for your book, what might be driving that. Is there a COVID impact there? Is it something completely unrelated to COVID? Just any thoughts you might have there?

Let me take it up, and if Mike wants to add a little color, he can, but I think you described it well. One quarter doesn't make a trend, and certainly we've seen a little bit of an uptick in our mortality. I think, as you recall, we had a very strong 2019 and we had an elevated level, compared to that year, last year. Yes, we're running a little bit ahead of what we had anticipated, but nothing that we haven't seen before. Here again, the COVID impact is very small, with what we've seen today. So, Mike, if you want to add any other color to that?

I think you covered it. I think, as you mentioned before, our COVID volume, related to claims, is relatively small. And even with face amounts averaging around 35,000, average duration's still around 30 years for the first quarter. So, we continue to monitor, we don't see a permanent shift. And to that end, we are seeing positive signs of return to normal in April, and we'll continue to monitor it, but not a permanent shift.

The only other thing I'd add is we've had a fair amount of discussion as it relates to the potential of the lack of people seeking treatment, and whether or not you talk about COVID impact as it relates to cause of death, but you also look behind the numbers and although we are not seeing it in the data, we know that there's a fair amount of conversation out there, other folks have commented and talked about it. We're not seeing it in the data, but yet you know intellectually that there may be some underlying trends where potentially someone putting off a test or putting off treatment, although it might not be indicated as COVID, could be finding its way into the numbers. But I think Bret and Mike are both right. When we look at what we saw in mortality in the quarter, we know our April number and what we're seeing in April, and that did not continue in April. So we feel pretty confident, we have a long track record in this business. The actuaries have their quarter of what they expect in the data. And when we look at it through four months, it's not unusually outside.

The next question comes from Meyer Shields of KBW.

So we talked a little bit about supply chain influencing severity on the auto side, and I guess we've been getting some questions about what you're seeing and what you're expecting on the property side.

Yes, you broke up a little bit there, Meyer. But for Mark's benefit, in case he didn't hear the question, you had asked about supply chain, and we've heard a little bit of it in the auto space and you asked about property and I'm assuming you're talking about the cost of lumber and building supplies and what we're seeing there. So I'll turn it over to Mark and see if he has any additional comments.

No, we're absolutely seeing the impact of lumber costs, definitely more than doubled over the past year. The thing you've got to remember is that generally speaking, the lumber-related costs are about probably 20% of our overall costs within homeowners. So it's a significant impact but at the same time we have things like inflation guard that we've adjusted to deal with the fact that there's rising replacement costs.

A couple of other really small questions. One, when you talk about building a pipeline of recruitment for supplementals, that can have an observable impact on operating expenses?

I'm sorry, Meyer. You broke up and we couldn't hear the beginning of that question. You want to try again for us?

So the supplemental recruitment, is that expected to meaningfully impact expenses over the remaining three quarters of a year?

I think you said supplemental recruitment?

Yes.

Was that the question?

It is, yes.

I'm sorry. you were breaking up there a little bit. Do you mean of agents?

You had talked about building a pipeline of recruitment, which is clearly the right strategy…

I don't know why it was breaking up, but we got you now. Again, we spent a fair amount of time in 2020, both in our traditional agency plant, and certainly with the NTA agents that were previously supplemental, only agents made a conscious decision in this environment that our best use of resources would be to accelerate their integration, get their training, get their licensing, get them ready to do the full Horace Mann value proposition. What we saw in the first quarter, and we haven't spoken a lot about that, was beginning to pivot that time and attention back into the pipeline, back into organic recruiting. And we did add agents in the first quarter and are ramping up our recruitment throughout 2021 because it makes sense to do it now, right? You can imagine recruiting in a pandemic environment is difficult. A lot of people are talking about the war for talent and trying to hire people in this environment. We had some decent success in the first quarter and our pipeline is full for the rest of the recruitment cycle. But I think it was wise for us to look internally and put our resources in places where we thought it would bear fruit and that's worked really well for us.

And then final question and I don't know enough about the world of education to ask this intelligently, but would the addition of the desired paraprofessionals add meaningfully to your target market base?

Whether it's that survey question or the answers to other survey questions that we asked. Another thing I think we did really well in this environment was connecting with our educator base, asking them these questions, learning even more about the segment that we already knew. I think that, combined with the potential of public education being extended 2 years, potentially with pre-K to 14, certainly does extend the amount of public employees that we could add into our database, and thinking about our bullseye target, if you will. I mean we certainly look to pre-K now, we certainly look to community colleges now, but the ability to increase the amount of educators, and I think in this political environment and certainly post pandemic, we're increasing the amount of public educators we have in our target, and spending a fair amount of time getting to know where and how we would think about that expanded opportunity. So clearly, yes.

And our next question comes from Alex Bolton of Raymond James.

I'm calling in on behalf of Greg Peters. Want to make sure you can hear me okay.

We can.

I kind of want to go back to conversations about frequency and COVID driving habits possibly persisting beyond the pandemic. As I think about the educators, it seems work-from-home initiatives may not be able to persist as well as in other industries. Is that a right way to think about it or is it just a volume of cars on the road, could be lower due to work from home?

I think that I'll go back to my insulated but not immune comment. From the very beginning, we did talk about the frequency benefit from the type of miles driven and the fact that roads would be a little less congested. The fact that commuting patterns will change. So I think the rest of the world going to hybrid environments, the rest of the world stretching out or changing the workday does change the amount of people that are on the road when educators typically go to work and return. So we do expect that we will see a gradual return to more normal frequency. But make no mistake, we do believe there is some element of permanency or at least semi-permanency there when we think about frequency trends. I don't know if you have anything to add to that, Mark?

Yes, what I would add is, as we track our educators today, we look at mileage compared to accident frequency. Our mileage is pretty close to pre-pandemic levels, not quite back yet, but the accident frequency change still trails then. So I think it is evidence that even as our teachers, many of whom, while the students may be in a hybrid environment, the teachers are there every day. Their mileage has returned to normal, but the accident frequency hasn't, which I think is an indicator of the fact that there's just less traffic volume, even if our teachers are going back and forth to work every day, they're going to be involved in less accidents. And you also have to remember that our teachers have spouses and quite often those spouses are in other type of professional environment where they may not be driving as much either. So we have kind of that, both of those impacts playing into the frequency equation.

I appreciate you clearing up my thought process there. And then, maybe thinking about persistency, retention, lapse it seems to be improving over the past couple of quarters, maybe if I was to think about kind of initiatives cross selling, maybe just clientele loyalty, how do those play into that persistency? Does the virtual sales process, is that helping now or would help, maybe beyond the pandemic?

Yes, we think so, and I appreciate the question and this may also connect to the earlier question. When I think about auto retention, and you did see that increase in auto retention, the shopping commentary that we had earlier, our customers are pretty loyal. We tend not to give them reasons to leave us. We try to be a consistent, fair market for their auto. And what we also know is property does tend to follow auto sales. So when we see an uptick like we did in March and April, we would expect that property would eventually follow some of those new customers, as well. But this is a loyal group of people. The retention certainly is helpful. Another comment is, think about the uptick in retirement through the year. And certainly what we saw in April. Many people start their relationship with Horace Mann through a retirement plan. And those are eventual clients that we can cross out. We also have a client base in Horace Mann that maybe didn't have any supplemental products with previously NTA. And we have the ability to sell supplemental products to those customers as well. So the pandemic may have helped from a frequency perspective, but it really did at least temporarily suspend some of those cross-sell activities that we could do in a more robust way. And we're anxious and looking forward to taking some of the tools that we've built, taking advantage of the time and the opportunity we took to affect the things that we could affect during this time and put our whole value proposition forward. We tend to cross-sell better than the industry cross-sells. And I think that speaks to this homogeneous niche of educators that we have.

And then maybe just lastly, on catastrophe and catastrophe reinsurance. I'm just wondering if there's anything else that could have counted towards the catastrophe re-insurance retention, or if you have any comments there.

You mean in the first quarter -- we didn't have any events that would come close to hitting our retention level in the first quarter.

We have a follow-up question from John Barnidge from Piper Sandler.

Mark made a comment about non-educator's spouses. I obviously slept at 50%, but is there any way to dimension what percent of auto PIFF are those educators spouses that are non-educators just trying to sense like how much of that frequency benefit could actually permanently somewhat remain.

We can get you those numbers. We have full household makeup. We know how many multi-car policies we have. We know the makeup of the household. It's going to differ by state. It's going to differ by district, but yes, we have clear data on that and we can give you a deep dive on that.

Nick, I think we're set for the Q&A, if I'm not mistaken.

Yes. Q&A is all done. No other questioners are in the queue, so we'll go back to Heather Wietzel for closing remarks.

Great. Thank you everyone for joining us today. I look forward to talking in the coming months and feel free to reach out if there's any new questions.

Conference is now concluded. Thank you for attending today's presentation. You may now disconnect.