Good morning, and welcome to the Horace Mann Educators Second Quarter 2022 Investor Call. Please note, this event is being recorded. I would now like to turn the conference over to Heather Wietzel, VP, Investor Relations. Please go ahead.

Thank you, and good morning, everyone. Welcome to Horace Mann's discussion of our second quarter results. Yesterday, we issued our earnings announcement, investor supplement, and investor presentation, copies are available on the Investors 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 Benefits, Mark Desrochers on Property & Casualty, 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 our 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 second-quarter core results near breakeven and ahead of the loss we anticipated in our preannouncement due to better-than-anticipated segment operating performance. Based on this performance, we made a minor upward revision to our full-year core EPS guidance to a range of $2.15 to $2.35. As our preliminary announcement described, the impact on our bottom line from external events was disappointing. We expect 2023 ROE to be in the high single digits as we resume our trajectory towards our goal of a sustainable double-digit ROE. Our operating results clearly benefited from strategic actions we've taken in recent years, while also illustrating the value of diversifying our earnings base with our new worksite division, adding $13.2 million to core earnings in the quarter. Let me cover each of the external challenges individually. First, catastrophe storm activity was outsized. Our losses were nearly double our 10-year average for the second quarter. The second quarter is typically our heaviest catastrophe quarter. It has represented about 50% of our full-year catastrophe load since we completed a strategic and multi-faceted shift to reduce our coastal exposures five years ago. However, in this year's second quarter, the Midwest and Plains states experienced unusually high thunderstorm wind and hail activity. For example, one severe storm that crossed the country in May caused major damage in communities from Texas to Minnesota to Pennsylvania. In light of the breadth and magnitude of the events in the quarter, we do not believe that exposure concentrations were an issue, although our dynamic underwriting and risk mitigation programs monitor this risk closely. Second, inflation continues to significantly impact the P&C sector. Industry-wide inflation is driving higher physical damage costs due to higher parts pricing and labor rates as well as claim resolution timing,…

Thanks, Marita, and good morning, everyone. External events had a significant impact on our quarter, although earnings came in slightly ahead of our preannounced range with the core loss at $0.01 per diluted share. Based on the results, we updated our full year 2022 core EPS guidance to $2.15 to $2.35 per diluted share. We expect 2023 ROE to be in the high single digits as we resume our trajectory toward our goal of a sustainable double-digit ROE. I'll go into more detail on the guidance later in my remarks. But first, let me run briefly through the results and outlook considerations for each segment. Property & Casualty results were significantly affected by cat losses and inflation with a segment core loss of $25.4 million. In addition to the initial impacts of our pricing actions, policy counts were relatively flat as new sales strengthen and retention continue to rise, leading to average written premiums up 1.6% for auto policies and 7.5% for property. Total written premiums were up slightly for the quarter and the rate of increase should continue to improve. We are looking forward to seeing this momentum reflected in total earned premiums later this year or early in 2023. So let's turn to the key drivers of the second quarter underwriting results. First, catastrophe losses, in line with our July 13th announcement, cat losses were $45.7 million, contributing 31 points to the combined ratio, well above our 10-year average for the second quarter of $26 million and bringing year-to-date cat losses to $53 million. Our losses from 22 events designated as cats by PCS in the quarter, primarily severe thunderstorm, wind inhale events were concentrated in the Midwest and Plains states. Because of the hail events, auto cat losses contributed about one point more to the loss ratio…

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

And the first question today will be from Meyer Shields from KBW. Please go ahead.

Thank you. Good morning. One, I guess, brief math - sorry, I hope one as well. I don't think this is a mathematical question. But if we're seeing inflation running hot and we're not quite at rate levels to response reflect that yet. Wouldn't it make sense to anticipate sort of a second-half catastrophe loss ratio that's above average rather than in line?

And there, you mean from a property cat perspective, we do a plan every year looking at 5- and 10-year averages. We look at whether the most recent year has increased that per claim level higher. So we would take into consideration some of the things that we anticipated for increased material costs, for example, an estimation of supply chain, for example. So our planning originally, when we put that number together for this coming year, for the full year would have included many of the trends that you see to the extent that those trends continue longer get will there be a need next year when we do our plan to think about it. Sure. But it would be small. Remember that the second quarter by far is our biggest quarter for cat. Obviously, we saw in the second quarter with nearly double what our 10-year average would tell us. But the second quarter tends to be pretty small for us, and our numbers reflect that. So to the extent that there was a creep, it would be on a much smaller number than it would be if it was the first half.

Yes, Meyer. This is Bret, just to add to what Marita just shared. I think in my remarks, I talked about our planned cat second half being $20 million to $22 million. So just throwing out a 10% increase, it's a couple of million bucks. And I also mentioned in my prepared remarks that we didn't see anything outsized in July.

Yes. And I would add too, and maybe Mark has a comment, but I'll probably steal his thunder, so we won't need to come in. But we are seeing some of the actual cost of materials level off a little bit, i.e., lumber. So it might not be as clippy as maybe it was in the first half.

Yes. I was going to just jump in. This is Mark. I would say that what we're seeing in terms of some of the changes and for example, in things like lumber, gives us perspective that the trend over the second half of the year, the inflationary trend is going to be quite similar to what we had originally thought in our plans when we put forth our original cat plan for the year.

Okay. No, that's all very helpful. Completely unrelated question, I guess, for Ryan. As we kind of move into a period of lower - I'm sorry, higher interest rates, how does that impact the allocation to alternative investments?

Thanks for the question, Meyer. This is Ryan. Higher interest rates for us, the biggest benefit is on the core portfolio. And as Marita said in her remarks, 20% of that portfolio is floating rate. That's primarily within high-grade, AAA, AA CLOs, and commercial mortgage loans. The impact of a 100 basis point move on floaters is about $12 million pretax for us. When I think about how that impacts the limited partnership portfolio allocation, higher interest rates bode well for private credit, and we have a sizable allocation to private credit funds. Those are primarily in the life retirement, supplemental, and group segments. But as rates reprice, those new originations of loans in those funds will price at a higher rate. To put it in perspective, they typically generate a return in the high single digits to about 10% for that strategy. And you could see a little bit more of a widening of that improvement in that, if you will, as the rate environment moves up.

Yes, Meyer. This is Bret. I would also add that as of June, we're basically at our 5% allocation to that asset class. And that's kind of the level that we're comfortable with and that we have talked about. We shared with everyone that the LP allocation would be around 5% of the total portfolio and CMLs would be about 10%, but we're not quite to that level on the CMLs yet. So I just wanted to add that.

Okay. That's perfect. Thank you so much.

And the next question will come from Gary Ransom with Dowling & Partners. Please go ahead.

Yes, good morning. I wanted to ask about the adverse development in auto. When you told us it was 6, I guess I didn't realize until last night that it was really 12 and 6 favorable in property. But I was wondering if you could help us understand how that manifested over the course of the second quarter. Obviously, you saw something in the first quarter, and then you saw more of it in the second quarter. I wonder if you could describe what you've seen and maybe particularly note any changes in subro delays that might have contributed on the physical damage side?

Sure, Gary. This is Bret. Let me start, and I would say if Mark wants to follow up with any additional comments. But I think you and others are well aware that we've had a long-standing reputation for maintaining conservative loss reserve levels. That's not a new thing for Horace Mann. And as you said, in the second quarter, we did strengthen the auto BI reserves specifically to the tune of $12 million. And you're right, they were offset by some favorable development in the property line. And obviously, yes, it was looking at how things were developing and seeing a trend. And I think we even noted it in our prepared remarks that they were mainly related to probably the vast majority of the last two accident years, '21 and '20 where if you think about it, these related to open claims that obviously when those were set up, they did not anticipate the inflationary pressures that when we actually go to settle those claims and pay them in the current year, obviously, we're coming in heavier than that. And obviously, homeowners, I would say, is separate issue altogether, no different than in prior years where, I would say, reserving on a conservative level, we've had favorable releases through certainly the last 5-plus years and that so. So we just felt the prudent thing to do. I think you're well aware, we set reserves so that we're basically at the upper half of the range, and that strengthening that we did in the second quarter, basically let us maintain those same levels. Mark, I don't know if you wanted to add anything there.

No. I mean I think Bret hit on all the key points. I mean I think part of what we've seen, I think many in the industry you're seeing is during the pandemic, there was a slowdown in receiving demand packages where the return is involved in a lot of these older claims that are open, have some attorney involvement. And now that we're finally starting to see those come through, you're seeing much higher levels of treatment, more increased treatment, and things like that. I think that's why we've kind of had this manifestation of recognizing it probably started to see it a little bit in the first quarter to some extent, but more so in the second quarter and acknowledging that.

So am I correct about - I was going to ask about physical damage. Is there nothing significant on the physical damage side?

No. On the physical damage side, when you asked about the sub, obviously, that's - the subrogation is a little bit slower, but we are still getting it. We still anticipate getting it, and that's not really a factor in what's happening with the reserve development.

Okay. It's - yes, it's just interesting because across the industry with all the companies that have reported so far, the differences are a little bit checkered. And even though I understand what you're saying, I don't see - it sounds like a universal effect on everybody and yet only some are experiencing it. So I don't know in that context, I don't know, do you have any view of how widespread what you're seeing? Does it seem environmental across the board? Or is it perhaps coming in certain states or certain regions?

I mean - go ahead, Mark.

I'm sorry, Marita, I was just going to say, I think to an extent, it is environmental. When we look at the close rates of some of the key peers in terms of what percentage of their claims are still open. We see pretty similar patterns in this kind of slowdown in the liability side. And so I have to believe that most of what we're seeing is a macro effect that everybody is experiencing to some extent.

Yes. Okay. If I could just change the subject to marketing to the teachers, I know the new year is coming up, and I think you kind of mentioned that there's a little bit of activity going on. Maybe it's a little too early to describe everything you're doing. But I was wondering if you have any metrics or anything you could share with us that suggest you're really getting back to normal with the upcoming start to the school year?

Yes, absolutely. And we put the remarks in our script to try to give you a little bit of color on that. And I would tell you that when we look at July, July is following a similar pattern, and we feel good about the momentum that we're seeing in July is strong. I mean for us, July tends to be a pretty small quiet month, and you can imagine it's vacation time for teachers, for sure, and maybe for some of our agents as well. But this July, it looks like they may have continued to use some of the things that they learned during the pandemic, and they've ramped up there, what I'd say, early back-to-school activity. And what we're seeing to back-to-school is, like we said in our script, appointments are being made. We keep track of our leads. We keep track of the activity that our agents have. We know where our salespeople are pulled in, where we're holding seminars and back-to-school rallies and all those numbers look quite good as we get back to more pre-pandemic levels on that activity. I mean we have more opportunity to touch base with our customers than we've had in a long time. So I would say all of the metrics that we follow are all pointing in a pretty good direction.

And I guess when we think about growth rates in those businesses and maybe it's new sales, - is it - is that - I guess I'm trying to think about how this might unfold in the next year and actually into the third and fourth quarter. And just how much growth we can expect and trying to think about what's happening now versus perhaps what was happening a year ago. What - how much change has actually happened?

Well, I mean, I'd say a lot of change. I mean, when you think about trying to do what we do in a pandemic environment when schools are, if not closed, certainly distracted. The environment is quite different when the majority of the pandemic-related issues are behind us. Not only is access significantly opened up, but our educators have more time and more interest in engaging with us. They're not as consumed as students being in and navigating a hybrid environment. The world has settled down a little bit for them and for us so that we can get back to what we would normally be doing this time of year, but even more excited that we can combine it with much of the work that we did during the pandemic that drove efficiency that allowed us to use Zoom, that allowed us to use food trucks and parking lots and all the other things we did. We think there's a magnifying effect by being able to do what we always did historically and combine it with what some really good new tools that we used during the pandemic. I mean when I look at take the supplemental sales numbers, it is a worksite product that works its bond open, and you see those numbers in there. Take our retirement trajectory. Retirement looks good. People are having conversations engaging in retirement. We're excited about the cross-sell discussions at least between retail and work site and the other way around, the momentum seems good.

Thank you for all that. That's good commentary.

And the next question will come from John Barnidge from Piper Sandler. Please go ahead.

Thank you very much. My first question, another life provider for Individual Life reported an actuarial charge and reduced life earnings go forward. It was related to lapse assumptions and a mortality improvement assumption change. Can you maybe talk about lapse assumptions versus experience and then mortality improvement that's embedded assumed versus maybe experience?

Yes, John, this is Bret. I can start and if Mike wants to chime in, but I believe the life carrier that you're referring to is on a product that we don't even sell or market. So I think maybe there could be some confusion does that relate to the new accounting pronouncement versus the unique specificity of the product at hand. So I can't sit here and comment on another company's assumptions. Obviously, we true up our assumptions on a regular basis. We haven't seen any dramatic changes in our persistency or lapse rates and usually don't, whether we're in the financial crisis. In the past, I think we've commented our customers are sticky when the mass markets aren't. But that's all I can comment on as it relates to Horace Mann.

Bret, I appreciate that clarify around the product mix difference. And maybe a question around the pricing program. touching 80% of auto premiums, I believe. Now that it's - the time frame is being pushed out, would geographies in that remaining 20% eventually see rate? Or can you maybe talk about the areas that aren't seeing rating that 20%?

Mark, you can go ahead and take that one.

Yes. The most significant area that isn't seeing rate is obviously California. I think there's been a lot published in the last couple of weeks what's going on there. I would say that we have very recently in the last couple of days, we have made a filing in California for one of our companies. That represents about 20% of our premium. We anticipate making a filing in the other company within the next several weeks. Obviously, given what's going on in the environment there, we do anticipate that to be a challenge. However, we have the luxury, I think, of the partnerships we have through our general agency to be able to place business with other partner carriers when necessary. And if we don't ultimately get the rate that we need, then we may need to restrict some of the new business growth in that particular geography.

Yes, that's right, Mark. This is Marita. I'd also say that we start all this with a profitable book of auto business in California and its educators, right? A homogeneous market niche, a vegetated business appropriately rated. I mean to the extent that over time, these trends continue and we're not able to get the rate that we need and others need in the state, we may need to restrict new business growth. We're not at that point. But as Mark said, restriction of new business growth for us would mean that we place it with another carrier that might be comfortable writing that business. We're not at that point. We work really hard. We'll see how this works out. But on the majority of our book, we're getting the rate increases that we need, and we feel good about being able to put the rate in that we need to cover these trends in the majority of the places that we are. And if we need more rate, we'll push more rate.

Just to clarify, Mark, you said your rate filing company in California that represents 20% of premiums. Is that 20% of California premium - what you were talking about?

That's correct. 20% of the California premiums, we have two different underwriting companies in California. One is about 20% of the California premium and the other is 80%. We within the last few days made the initial filing on the first company, and we anticipate a similar filing in the next few weeks of the other company.

Great. Thank you very much. Best of luck.

Thank you. Appreciate the question.

The next question is from Greg Peters from Raymond James. Please go ahead.

Good morning. Just a follow-up on the pricing question. Approximately how much Pro Forma premium in the way of price increase in auto and home do you see coming through the pipeline over the next 12 to 18 months?

Yes, you can go ahead, Mark.

Yes. So as we said on the auto side, we anticipate rates across that 80% of the market in the high single digit, low double-digit, a lot will depend on what we get when and if we get rate in California and how much that will change. And as you think about it, part of what you have to remember is these are rates that are just going into the system now or going in over the next couple of quarters. When we talked originally at the fourth quarter call, we talked about at that point, a mid-single-digit rate increase across auto. And at that point, we would have expected about half of that premium to earn in, in the latter half of this year and the other half to earn in, in early next year. As we've increased that number, that pushes that earnings out a little bit more into the earlier to mid-part of 2023. On the property side, and I think we talked about this a little in the script, we have been taking increases through inflation card. We've taken two increases over the past year that helped our average premiums jump up almost 8%. We had anticipated the combination of rate and inflation to be in the low double digits. But given what we've seen with the continuing native inflation and more so on the long-term view of weather, and it sort of impact on our overall profitability because we feel good about ex-cat once we address the inflation issues that we really need to take a more aggressive approach on the rate side to address what we've seen with increased weather. And so that's why we anticipate over the next 12 to 18 months, starting to push more towards that mid-teens level of overall premium change on the property side.

Okay. A lot of the other questions I had were answered. I guess I'm just going to pivot to a broader macro challenge for so many companies that just with inflation, and the tight labor market retention, employee retention has become an issue. So Marita, maybe you could step back and give us some perspective on not only what's going on internally with the employees of your company but also within your producer agency channel. Is it still seeing the same retention levels, same producer retention levels or historical? Or has there been a change, et cetera?

Yes. You know it's a great question. And I know I sound like a broken record when I say insulated but not immune. But I think one of the key attraction and retention points to Horace Mann is our mission, our vision, and our value proposition. People come to Horace Mann and stay at Horace Mann because we serve one of the most deserved set of customers on the planet, and people are attracted to that mission set value proposition. So when I look at the stats across our peer set and companies across the U.S., I'm proud of our retention stats for sure. But we're not immune from the trends that you see out there. People make different choices these days. And what we see is our open position count tends to be a little higher than what we have seen in the past, but our retention is quite strong. And I think we're bucking the tide a little bit in that regard. Our agent retention numbers are also decent. We're excited about our ability to attract new agents to the value proposition. And recently, I think we mentioned this on the last call as well, our agent recruiting numbers are beginning to trend up. You can imagine how difficult that is during a pandemic-related kind of environment, and we don't see that as much now as we're beginning to see access open up. We're beginning to see our agents higher licensed producers, and those numbers are starting to go back as well. So again, insulated but not immune, clearly, we see the trends, but I'd stack our retention numbers up against most of what we're hearing and seeing out there in the marketplace.

Got it. Thank you for the detail.

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Heather Wietzel for any closing remarks.

Thank you, everyone, for joining us today. If there's any follow-up questions, feel free to reach out. I'll be available obviously, today and next week. I also wanted to just let everyone know we will be meeting with investors in conjunction with all five of our covering sell-side firms over the next month or two. So you've got - anybody you're dealing with just feel free to reach out, we'll figure some out. I do have to make - highlight, however, we will be at the KBW conference in September, along with many of our peers, as we all know that's one of the big events. So I look forward to talking to folks and thank you for your time.

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