Good day, and welcome to the Horace Mann Educators first quarter 2022 Investor call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions Please note this event is being recorded, I would now like to turn the conference over to Heather Wietzel, Vice-President of Investor Relations. Please go ahead heed.

Thank you and good morning, everyone. Welcome to Horace Mann's discussion of our first-quarter results. Yesterday, we issued our earnings release, investor supplement, and investor presentation. Copies are available on the Investor page of our website. 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 Supplemental and Group Benefit, Mark Desrochers on Property & Casualty, Mike Weckenbrock on Life & Retirement, and Ryan Greenier on Investments. Before turning to 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. I'll now turn the call over to Marita.

Thanks, Heather. And good morning, everyone. Last night we reported first quarter c ore earnings of $0.64, a decrease from prior year. While external events affected our bottom line, we are pleased with the sales momentum we continue to see. In fact, April was the strongest sales month we've had for P&C products since the beginning of the pandemic, and supplemental product sales were double last April. We're also pleased to have Madison National fully onboard and working with us to fulfill our long-term objectives of a sustained double-digit return on equity and a larger education market share. Today, I'll first briefly touch on the quarterly results, which Bret will discuss in more detail later in the call. Then, I'll talk about how our commitment to educators and our stakeholders continues to inform our strategic vision, and I'll summarize the work we are doing to realize our long-term objectives. For the quarter, Life & Retirement and Supplemental and Group Benefit segments had steady performance, and annuity contract deposits were up 6%. Our total net investment income was up 3%, and the current higher interest rate environment bodes well for our portfolio going forward. Our auto combined ratio improved 6.6 points in the first quarter of 2022 over the fourth quarter of 2021. However, in line with the broader industry, our Property & Casualty earnings continue to be affected by inflation, particularly for auto parts and labor costs. The impact of inflation was most pronounced in March, but our early read of April appears more consistent with January and February. Despite the impact on our near-term P&C earnings, we remain confident in the profitability and opportunity for the auto line over the long-term. This confidence stems from our auto position pre -pandemic, our strategic pricing choices during the pandemic, and our…

Thanks Marita, and good morning everyone. As Marita noted, Horace Mann reported core EPS of $0.64 below last year because of inflation and other factors affecting P&C results. The value of the revenue in earnings diversification we've accomplished in recent years was demonstrated with steady results in both our Life & Retirement and Supplemental and Group Benefits segments. The results of newly acquired Madison National are included in the worksite Supplemental and Group Benefits segment. And as Marita said, this business is performing within management's expectation. One technical note, starting this quarter, we've added adjusted Core earnings, intangible book value to our materials along with related ROE calculations. We're defining adjusted as Core earnings excluding DAC unlocking and amortization of intangible assets, both non-cash items. We believe these metrics are useful when evaluating our capacity for capital generation. Also, I will touch on our full-year EPS guidance later in my remarks. But first, let me run briefly through the results and outlook considerations for each segment. As expected, P&C net written premiums were slightly below last year's first quarter. The benefit of stronger retention is being somewhat offset by new business volumes that remained below historical levels due to the lingering effect of the pandemic on sales. Segment earnings reflected a year-over-year decline in underwriting income, as well as lower first quarter net investment income due to the performance of the limited partnership funds allocated to this segment's portfolio. Looking at auto and property results separately, the change in the auto loss ratio primarily reflected the anticipated increase in frequency toward pre -pandemic levels. Over the past year, miles driven has steadily moved closer to pre -pandemic levels and the impact of that change comes as no surprise. Similar to others in the industry, we're also seeing higher auto loss…

Thank you. Operator, we're ready for questions.

We will now begin the question-and-answer session. At this time, we will pause momentarily to assemble our roster. And our first question will come from Gary Ransom with Dowling & Partners. Please go ahead.

Good morning. I wanted to ask about the loss trends a little bit more. I wonder if you could just give us a sense of the typical type of car the educators own, are they new cars with lots of technology where chip shortages are involved, are they older cars? I don't know. I just wondered if you can give us a sense of how your mix might be different in any way from others.

Probably it makes sense, Gary, for me turn it over to our resident expert. Mark, do you want to take that.

Sure. Gary. Our book is probably typically a little bit older than the average for the fleet across the country in general. So not anything significant in terms of the impact of high-priced cars or anything like that or lots of newer cars. But I still think that we're certainly not immune from some of the trends in terms of overall used car pricing, the labor shortage issues, any issues around products being available. That has a broad impact, even if our fleet is slightly older than the countrywide fleet.

Can you clarify what you were talking about when you said March was a little bit higher and then January, February, and April were more similar? What was the difference there?

Yes. So when we look at March, what we're seeing, it was an unusual uptake in what I would say is more severe accident so that -- you have the impact of inflation driving up the severity. But we also saw higher impact losses that we would associate with longer trips being taken during March that I -- we speculated associate it with people traveling during spring break. And our early view, when we look at April, confirms that this appears to be an anomaly in April, looks more like we would expect.

All right. Okay. And then over on the liability side, is there anything going on in the social inflation that's evident to you or attorney rep or anything like that?

Yes. I do think we are seeing more increased social inflation as courts open up. There's definitely been an up take in both attorney representation and I think the aggressiveness, some of those attorneys in terms of going after settlement. So I think that we, like the rest of the industry, we're starting to see some of that return to what we might have saw at the latter end of time just before the pandemic kicked in.

And just one other question on this topic. What has basically happened when you look at used cars, you had a couple of step functions up in summer of last year and fall of last year, and things have leveled out. Are you actually seeing a leveling in the sense of sequential, even though it's up year-over-year by a substantial amount? Are we -- being things flattening out at this point?

Yes, I mean, we are starting to see a little bit of that flattening out I think like others are seeing, but I think there was another period of time maybe in the fall where we saw that for a short period, and then it spiked again. So I am cautious, cautiously optimistic that that we'll continue to see it level out and start to normalize a little bit. But yeah, we're certainly seeing those same trends.

All right. Thank you. And I would like to ask a different subject for Marita. You mentioned in your prepared remarks about studying what the educator market is doing, how they're thinking, and how to cross-sell. Have you learned anything or is there any way you can describe how your customer views the Horace Mann brand in any dimension across products or the dimension across service? If you could share anything that would be helpful in understanding what's going on out there?

Gary, I really appreciate your thoughtful questions first in auto and then the one you just asked on strategy. I do feel compelled on the auto strategy question to go back a little bit, and I think I probably said it over and over again in the script with a lot of words, but I think it's important. We did the hard work to set a solid profitability foundation in auto, and that's really working out quite well for us. We'll react to these trends as we are now appropriately and will ensure ongoing solid results in our auto segment as we always had. And I appreciate Mark's answers. I think he gets this well and we're lucky to have his expertise here in our company and that serves us well. On the strategy question, we tried in the investor deck on Page 17 to begin to give you a glimpse into the answer -- question. I think it's remarkable that we actually closed on Madison National in this quarter. And you're asking that question and that does say a lot about us. We just, like NTA before it, spent an awful lot of time with these people. We're in the same space. NTA was 80% educators, MNL is 80% educators. So we have learned a lot even before the close. So for us beginning to show you how we think about our total addressable market and working up, at the top of that page, there's obvious cross-sell opportunities between our retail products, our retail segment, P&C and L&R, with individual supplemental products. And we're seeing that today. When you look at April, the first sign of us being able to have a little more access, the world's start to open up a little bit, we're seeing that momentum in…

That was terrific. I appreciate it, Marita. Thank you very much.

You're welcome.

Our next question will come from Matt Carletti with JMP. Please go ahead.

Hey. Thanks. Good morning. I just wanted to follow on -- the very last question there actually was what I was going to ask. But like I should dig in a little deeper there. I'm looking at Page 22 on your slide deck and it's clear that, at least at a state level, there's a lot of overlap between Madison National's footprint and the core P&C Life & Retirement businesses at Horace Mann. If we were to dive in deeper into a lot of those darker blue states at a school district level, is there a lot of overlap at that level, or are they -- or is more of it Madison National has the school district that maybe legacy Horace Mann doesn't have a lot of access into? I'm just trying to get an idea of how much overlap already exists there versus potential opportunity to your -- Marita, to your comments on your brand affinity and name recognition to open a door and maybe get you in there on the other side of it.

And we can certainly provide -- you know that we give you the tip of iceberg and then we give you more and more data over time to support it. And because again, want us to remind everyone that this transaction did take place in the quarter, so we're giving you an early lead here. But for us when we -- it's all across the board. We have some places where we have very strong presence in a given state with long-standing agencies and good penetration like we have talked about before with PnC and L&R. And many of those states, we also have both in MNL and an NTA relationship, and you can see that. Then there's other places where maybe from a Horace Mann traditional perspective, we didn't have a strong presence and lo and behold, NTA does or Madison National does. So the dissection of we can double down in places where we've got the triple whammy and everybody has a very strong relationship and we can leverage those. But then we also have the benefit of entrants in places with either starting with an NTA relationship and we've already seen that over the course, over the last year, year-and-a-half. And now with M&L, we can start with an M&L relationship where maybe we did not have in NTA or Horace Mann relationship. So for me, it really is about all these things coming together, all with a homogeneous understanding of our niche in the educator space. So it is about that dissection. It's about several different ways to go about this and starting with your strength and leveraging the ultimate cross-sell. And I don't know if you have anything to add to that, Matt. Matt has been front and center in the integration, first acquisition and integration of NTA, and then where we are with M&L. I don't know if you have any color to add on top of that, Matt. If you don't, it's okay, but I wanted to give you the opportunity to comment.

Yes. Sure Marita. Thanks for the opportunity. And that takes for the question. There's one other thing I just wanted to clarify or just go a little bit deeper on. When you look at the maps on the topic Page 22, you're looking at two different distribution models. The left-hand side is the worksite model over selling individuals from the bottom up. And on the right-hand side you're dealing with the top down sales process using independent benefit consultants that are coming into the districts. So they -- whether they line up or not, the two approaches are different and they can live in the same environment together. And the key is being able to integrate those two sales models so that we can maximize our ability to sell on the ground through the sales environment, as well as maximize a number of districts that we get that are employer sponsored and give us a much broader access to the district that can then be leveraged by the retail side of the house for all our traditional products.

Great. Thank you. That's great color. My next question is unrelated to Madison National Life in particular, but Marita, you -- in your press release and your comments, you provided some statistics on a few of the businesses for production in April that was encouraging. Can you give us a sense of -- we did see the quarter numbers in your Q1? But how did that production go, January, February, March across the quarter? I'm just trying to get a feel for it it kind of built across the quarter or if you are seeing -- just April just sprung up a little more in -- each month within the quarter look more like the average in Q1?

Yeah. It's really been pretty gradual, and pretty sequential until April. So basically, the way I think about it is if you remember our pre-pandemic numbers that first quarter of the ROE running together 2019 or 2020. Okay. Yes. Too many years. But the first quarter of 2020, we saw some pretty good momentum in that first quarter from a growth perspective. And then through the pandemic, obviously, with the ebbs and flows of closures and masks and distraction in our teacher market, it was a tough slog from a sales perspective. I think we navigated it quite well and concentrated on what we could concentrate on, getting ready, ramping up, doing a lot of the internal work that we certainly did. And over the course of the last 5-6 months, really seeing a nice gradual uptick, pretty sequential across the board. And then when we look at April, it looks very different. And that makes some sense, you had variance in a certain things occurring during the first quarter that made it sometimes a little more difficult as things we're opening, closing, but clearly in April, the world changed a bit and I think our agents clearly combined what they learned during the pandemic and want to keep that going from an ease of dealing with customers in a more virtual way, but also had the added benefit of being a little more connected live and in-person with those educators. And we saw that in April, I think as it relates to individual supplemental sales where those things tend to be more in in-person, more enrollment related, more getting back to the additive effect of doing those things the way they're normally done pretty much across the industry. We saw a really nice ramp up with individual supplemental sales in April as well. And from a retirement standpoint, where our customers have been engaged in retirement discussions for obvious reasons throughout the pandemic, that was really more consistent throughout the pandemic. And we're happy to see that it's continuing because we took the opportunity to remind them how important it is and did a lot of work around retirement planning, financial literacy and I think Mike and his team did a really good job doubling down and making sure we were having those conversations and that momentum continues.

Thank you very much for the answer is very helpful.

Thank you.

Our next question will come from Greg Peters with Raymond James. Please go ahead.

Hey. Good morning, everyone. Most of my questions have been answered. So I'd like to focus in on the comment in your segment outlook around market volatility. And it's two-part. I realize it's not relevant to all the products in Life & Retirement Supplemental group, but I'm curious about the impact of market volatility on sales, if there is any. And then the second piece -- or the second part of the question would be just if you can provide us any benchmarks about what the volatility means to DAC unlocking now that Madison National's part of your footprint, and there is obviously in the marketplace increased volatility. So any color there would be helpful.

Sure, Greg. This is Bret. Good question. Certainly, we did see some of the volatility that we're referring to show up in the first quarter. We did record about just a little bit over $2.5 million of negative DAC unlocking. Obviously, that is confined, if you will, to our Life & Retirement segment, which has now combined for the first time in this quarter. But specifically, it relates to our variable annuities and the largest factor, if you will, that comes into full that's usually the market performance, which is you're comparing the actual performance of the underlying mutual funds to our underlying assumption in the profits. Obviously, the markets were down, specifically the S&P 500 I believe was down about 5% plus in the first quarter. Obviously, we would assume it's embedded in our critical accounting estimates in our Q or Ks, where we would typically assume an 8% return. So the delta between the two for the quarter resulted in that negative unlocking. Obviously, the equity markets continue to go down in the month of April, so we're just signaling that as the markets go down, we will have some additional negative unlocking to record. So that it really doesn't relate to sales per se with respect to that. But obviously, rates going up as they have done help us with respect to the investment yields on the portfolio. And certainly we're seeing, as we highlighted in my comments for the quarter, what our new money rate was. It was hovering above our plan of 350. I think the actual results for the quarter were just slightly above 4% and the money we're putting to work certainly in April and May are even higher than that. So that doesn't bode well for net investment income. But really my comment and the talking points of the volatility and it was in the release was solely related to the DAC unlocking in the Life & Retirement segment.

You know, Bret, that's well said. I'd add one thing to that and that is, we're an educator company. And the complexity is we have a P&C segment, we have a Life & Retirement segment, and we have a Supplemental and Group Benefits segment. And the complicating factor in there is, on any given quarter, whether it's DAC unlocking, whether it's auto trends, whether it's cats, whatever it is, there could be something that would affect one of those individual pieces that you are right to ask about, we are right to talk about, but the value of this Company is the sum of its parts. And what I look at it is, I look at the trajectory of our increased shareholder return, our total return over a long period of time, and the ability to really build and grow this Company over a long period of time and not the quarter-over-quarter discussions on some of the smaller pieces. I like the way that line looks. I like the earnings power that we've built in this Company and we're building it for the long haul. But on any given quarter, because we have the sum of the parts, there will be a piece that you will ask about and we will talk about. Those pieces are important. We need to manage them, and we do, but we are focused on growing our market share in this segment, and doing it profitably for the long haul.

Your messages make sense, Marita, but I just wanted to just clarify, is it -- in the answer I think you said 5% decline in the market and two-and-a-half million dollar DAC. And I realize it's a non-cash issue. Is that of a good benchmark to use in terms of ratios?

No. I think you're getting wrong. If you -- as I referred to earlier, I think in our -- I don't have it in front of me, in our 10-K, I want to say for every 100 bps difference between our underlying assumption, the actual results it's about 300,000 to $400,000 pretax. So obviously if we're assuming 8% for the year, that's assuming a positive 2%, the markets were negative five, 7 times 400 -- between 300 and 400 that gets you to that $2.5 million number. So hopefully that helps, but we do disclose that in our critical accounting estimates with the sensitivities for the bigger pieces of the assumptions.

Makes complete sense. Thank you for the answer.

Sure. Thanks for the question.

Our next question will come from John Barnidge with Piper Sandler. Please go ahead.

Thank you very much. Can you maybe talk about your floating rate portfolio, whether it repriced completely in 1Q’22 and the upside we should be expecting perceptively from that? Thank you.

Sure, John, this is Ryan. Thanks for the question. So I'll start with our core fixed income portfolio was nearly all fixed rate, which is aligned with our liability driven investment strategy that's focused on book yield. So a rising rate environment certainly helps with the about -- we put about a billion dollars to work on an annual basis. So Bret, alluded to the new money yields, but just to put some color around it, we're putting money to work about 50 basis points higher than our current portfolio yields. We're hitting for 450, 475 at this point in time and I'm encouraged by that. And like I said, we put about a billion-dollars to work in that fixed income portfolio. But specifically to your question on floating rate, we do have a commercial mortgage loan portfolio that is almost entirely floating rate tied to labor so afar depending on when the loan was originated. And so obviously we will see an income lift there as we move through a higher rate environment. Our longer-term target for that portfolio is 10% of the portfolio -- of the total portfolio, which would be about say, $600 million, $700 million. But where we sit today, we've got $430 million in the ground funded. We've talked about our expectations there of a mid single digit return, but with the repricing and rates, I think you can comfortably move that up to about 6% at this point in time for that portfolio. And finally, I will touch on. We do run an FHLB spread lending program. We take fixed, predominantly floating-rate advances and invest in very high-quality CLO floating rate securities. But we're matched. It's floating to floating. So the opportunity there really is spread. So while the portfolio is -- floating rate component of that portfolio was meaningful, it really the return profile of spread based. So to put a finer point on it, just the CML exposures where we're going see it you pick up. One other comment before I turn it over back to you. The CML portfolio was in our life and Retirement and Supplemental and Group Benefits segments. We've talked a little bit about our investment strategy of where we deploy limited partnership and commercial mortgage loan investments and we focused on capital efficiency. And so from a statutory RBC charge perspective, it's more efficient to put them in L&R and Supplemental and Group. Now I will say more of the P&C, LP exposure is more equity sensitive. So you're going to see more volatility in the P&C Net investment income line during periods of equity market volatility and you saw that this quarter. So just wanted to put a finer point on that for you.

Thanks, Ryan. I appreciate that. My follow-up question is, I'm looking at slide 14, the supplemental, I'm talking about the supplemental and group benefits voluntary products. I see the benefit ratio actually declined year-over-year, and so I was curious if you could talk maybe about the claims utilization trends in the quarter, and whether we should think of that product having it normalized exiting the quarter. Thank you very much.

I can start with that and then I can turn it over to Matt. But I think it's important to remember what we told you about the difference between those two businesses and how they run from a benefits ratio perspective. So as it relates to both NTA and M&L, it is different. The M&L benefits ratio does tend to run higher and we've shared those numbers with you. So when you look at the division on a blended basis, you'll see that blended number, but we have provided a lot of disclosure before the deal closed in the first quarter and certainly as we go on those benefit ratios just for us and the industry are different and for the group business it is higher than the individual business. But I don't know if you have any more color to put on that, Matt.

Yeah. Somehow I have to. If you look at the benefits ratio, I'll talk about it from both perspectives, both the individual product and the group perspective.

So in the individual product we saw a little bit higher benefit payment on the short-term disability. And that's mostly seasonality, which is similar to the way the seasonality works in the group business. There might also be some deferred procedures that are part of that elevation that we saw in the quarter, which resulted in some increased utilization on the individual short-term PDI block, which is not a surprise given the fact that there may have been deferred procedures embedded within it. So that is as expected, or at least not a surprise. On the group side, the long-term disability claims were slightly elevated, but it was consistent with the historical seasonality that we've seen. There's also a little noise in that number because of P gap and potentially a little from claims backlog. But overall it's performing the way we would have expected it to perform overall. So I don't know if that -- if you had any follow-up to that John, or if that answered your question.

No, that was helpful. My follow-up really is persistency in the voluntary products improved 60 basis points year-over-year. And I know persistency in the voluntary business is something not you but other participants that actually seen pressured is at the labor market has become more competitive and people have lapsed. So can you maybe touch there on the improvement and persistency year-over-year, which is great to see.

Yes. So the persistency on the individual products, you're correct it continues to improve. I don't know that I have an exact explanation for why the persistency is continuing to perform other than we see a similar persistency trend in the group business, and I think it is unique to the segment that we serve. We've got very strong persistency both in the individual and on the group side.

Yeah, I do think, Mark, that's very well said. I think it's another place we're insulated but not immune, where our market segment does help us. And that stickiness has been pretty consistent over the years when we go back and historically look at both NTA and MNL's trends. And I think that's right. The work that we did, this has really come out pretty much as expected.

Our next question will come from Meyer Shields with KBW. Please go ahead.

Great. Thanks. Good morning all. Two I think . I guess this is for Ryan. As we see interest rates rise, does that impacts the planned allocation to alternatives or should we expect that to stay constant?

Good morning. Thank you for the question. We take a longer-term view of the investment portfolio, and we balance a number of considerations. Obviously, rates are one of them, but capital efficiency, risk parameters. And at the end of the day, it's a liability-driven investment strategy. Our longer-term targets are about 5% allocation to the limited partnership bucket. But remember, Meyer, when I talk about limited partnerships, it's a variety of different strategies there. 2/3 of them are fixed income like with lower volatility in returns, and so a higher rate environment, in general, will impact in a positive way, the returns that we get out of those. And like I said, about a 1/3 of them are equity sensitive. We've been pushing a little bit more into real estate equity as of late. It's a nice hedge against inflation. We like the dynamics of the U.S. real estate markets. And so that's an area where current market environment and events have shifted our allocation somewhat, but longer-term allocation targets are generally within an acceptable range. But that 5% target is probably right. I will comment on the core fixed income portfolio. The rise in rates allows us to invest up in credit quality. We're actually marginally -- we're putting money to work in a marginally higher credit quality position today than, say, where we were a couple of quarters ago. And so that dynamic is nice to be able to put into the portfolio.

Okay. No, that's very helpful. And maybe broader question, I guess, for Marita. It seems clear to me that the trajectory of rate increases in PnC is going to catch up with losses. Should we understand from the comments you made about April sale that you're comfortable growing at current rates with expected retention -- renewal retention holding up simply because that's where the entire market is going?

Yeah, I think it's a great question because it's one that we ask ourselves every day and monitor every day. When you have this many states and a portfolio, you obviously have many states that are at or beating our hurdle rate from loss perspective. And we're very pleased its planned to see the growth in those places. So when you're growing in the right places, it's actually a double whammy, right? It helps your top-line perspective for all the reasons, why we want that to, but it also helps the bottom line from a mix perspective. So we've been very thoughtful and I think a lot of this emanates from all that really good basic blocking and tackling to understand and improve our profitability that we undertook in the last phase of this journey. So we know very well where we're at rate adequate. And one of the benefits and we talk about this a lot of our approach is by having the Horace Mann general agency and by leveraging other companies who have a price point or believe their price point is where they want to set it to write business. If ours isn't, we can rely on those strong third-party relationships we have for them to grow the auto. And we do a lot of back and forth there. So the combination of those things make me feel really good about where we're getting the growth, how we're getting the growth, the cross-sell numbers with that growth. Trust me, in places where we feel we need more rate in our filing, more rate, we have not put our pedal on the metal. We are all underwriters at our core, understand this well and have all the levers we need not to have to do it. And we talked about this a lot. We're not a market share grab company. We didn't lower rates to gain market share and then have a bigger gap between what we need and what we have. As a matter of fact, we got out of places that we thought were systemically flawed or harder to do auto business. Florida's probably the best example. So we've done a lot of work to make sure that we can grow where it makes sense to grow when it makes sense to grow. I think it's a great question. We look at that all the time.

That's very helpful clarification. Thank you so much.

You're welcome.

That's all the time we have for questions. I would like to turn the conference back to Heather Wietzel for any closing remarks.

Thank you, and thank you, everyone for joining us today. I know will be speaking with many of you over the coming weeks and look forward to those conversations. And of course, if you have any detailed questions you want to follow up on, feel free to reach out. I'm available, in particular, next now, that earning season is winding down. So thank you.

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