Good day, and welcome to the Horace Mann First Quarter 2023 Investor Call. [Operator Instructions] 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.

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, Mark Desrochers, Mike Weckenbrock and Ryan Greenier. 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 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 investor supplement. I'll now turn the call over to Marita.

Thanks, Heather, and hello, everyone. Last night, we reported first quarter core earnings of $0.23 per share in line with our preannouncement. As we noted then, outsized catastrophe losses affected our quarter's bottom line, consistent with the experience of others in the industry. The first quarter results also confirm that we remain on pace toward our business objectives for the year. In particular, we are very pleased with our top line sales momentum across all segments as well as what that growth momentum means for our progress towards increasing educator household acquisition and gaining a larger share of the education market. Bret will talk about the details later in the call, but at a high-level, we continue to expect core EPS in the range of $2 to $2.30 for the full year with lower first quarter P&C net investment income being offset by higher-than-expected supplemental and Group Benefits first quarter earnings. Today, I want to talk about the progress we are seeing as a result of the transformational actions we've taken over the past few years. Our diversified business model provides more stable earnings and revenues in a quarter like this one, but more importantly, it broadens the solutions and value we can provide to educators and school districts. In the year since we integrated the worksite division, our team has made substantial progress building a solid foundation for growth by serving educators through their school district employers. This provides value not only to the educators who receive more coverage, but also to school districts that can provide more robust benefit packages to attract and retain staff. While the sales pipeline in this business is longer than in the retail division, we are seeing positive outcomes. This year, we expect the Supplemental and Group Benefits segment to contribute 25% of…

Thanks, everyone, for joining our call today. As Marita described, 2023 has started very well for Horace Mann despite the early arrival of some spring storms. I want to turn to the details of the segment performance and how we adjusted segment guidance to reflect first quarter results even as we continue to expect full year core EPS in the $2 to $2.30 range. So let's start with P&C. Catastrophe losses were $22.4 million for the quarter, in line with our preannouncement and the primary reason for the segment's quarterly loss. In addition, segment net investment income was below the prior year, largely due to the negative return on the limited partnership portfolio in the first quarter. Cat losses for the quarter contributed 14.7 points to the combined ratio versus 4.8 points from last year's first quarter. The 23 cat events in the period included two severe storms very late in March that combined to contribute more than a quarter of the cat losses in Q1. Over the past 10 years, second quarter events have typically resulted in almost half of full year cat losses and first half events have resulted in almost 60% of the total. With April cats coming in below our historic average, we think timing is definitely a factor in the above average first quarter cat losses. We are continuing to use a cat loss assumption that equals about 10 points on the full year combined ratio in our 2023 guidance. As we said at year-end, 10 points is our 10-year average and also aligns with the calculation based on historical frequency and a modeled increase in severities due to inflation, partially offset by a model decrease in exposures. Turning to the underwriting results. Total written premiums rose 6.8% this quarter compared to the fourth quarter's…

Thank you. Operator, we are ready for questions.

[Operator Instructions] Our first question comes from Matt Carletti with JMP. Please go ahead.

Good morning.

Good morning, Matt.

Good morning.

You guys gave a lot of great color on the rate actions you're taking and there were some really slides in the deck on that and kind of how that will flow through. My question is, can you talk a little bit about what non-rate actions you might be taking to kind of address the issues in auto and home to the extent you are taking any that are noteworthy?

Yes, Matt, it's a great question. I'll turn it over to Mark Desrochers for in a minute. But one of the things I would say upfront is I think this is clearly a place where our distribution helps us. Remember, we have captive distribution. And right now, our distribution runs about 80% educators. Our ability to say to our agents now is the time where you should proactively focus on educators. And right now, they're not soliciting a lot of non-educator business. It's a time when we can talk about our non-rate actions to our agents. And quite frankly, for those agents who follow the script, which the majority of them do, we're good to go. For those that don't, we can restrict their writings. We can talk to them about what they can and can't do. So I think the control issue over the distribution, and that's very different than independent distribution and how you would control non-rate underwriting actions there is something that is very helpful to us as we navigate this kind of environment. That, combined with our third-party strategy where we have good third-party strategies that we can lever as well and good partners. Now we're not naive. We know that we're all in the same soup here. Everybody is pushing rate, everybody is tightening the underwriting on their book appropriately in this type of environment. So our third parties have some of those same constraints as well, and we would probably leverage those third parties more in a softer environment, but they're still there, and we still use them just not to the same extent that you would see when times are different. But I'll turn it over to Mark, and he can talk specifically about some of those non-rate underwriting actions that have been underway for quite some time.

Sure, Marita. Matt, in addition to what Marita mentioned around using our distribution plan to help us manage the business we are writing, there are several things we have in play. First, there's a lot of work that's being done around both discount verification and mileage verification. So in a lot of States, mileage is a big rating factor, and we've got a pretty aggressive program to go back and revalidate that mileage. And while that's not necessarily a rate increase, it is a premium level increase as we make adjustments to either the discounts or the mileage factors that are being used. Also, from a renewal underwriting standpoint, our underwriters are taking a more aggressive view of folks with poor driving experience, accident experience, and we've increased our nonrenewal rate a little bit above what we might normally do in our marketplace. And lastly, there's several claims initiatives that we've been working on to try to improve the indemnity outcomes of claims, most notably trying to drive more appraisals to our more preferred methods, whether it be internal adjusters or to our preferred direct repair shops.

Mark, that was very clearly said. And you didn't ask this, Matt, but despite our clear laser focus on P&C rate and profitability, we're really firing on all cylinders. I'm very excited about our long-term strategic plan to diversify our earnings stream to focus on total household acquisition. And maybe they're not all starting by driving through the garage. We have other levers to start that educator household acquisition with the company. And I think that our plan is working, and it's working out pretty close to as we had expected despite the fact that we are laser-focused on P&C rate and profitability.

That's very helpful. And you led me right to my second question, which was a household question. As you -- the past several years, you've gotten kind of all the pieces of the puzzle together. And I see in the slides, you've got about 1 million households, and it sounds like you view the market as being about 7.5 million or so in total. As you look out long-term, now that you have kind of the product board filled and as you think about kind of the presence of the size or the right fit for Horace Mann in that market, how should we think about where Horace Mann could end up in that broader $7.5 million total? And I'm not asking to put a time frame on it, just kind of what's kind of your fair share as you view it now with what you have?

Yes, Matt, I think that's absolutely the right question in how we think about it as well. Going to the conversation that we just had, one of the first things I think about, and I'll ask Mike to talk about life insurance in a minute because I think it's a perfect example is our ability for our agents to pivot a little bit. I mean we take a total account approach to educators acquisition. When we get them, we're really good at cross-sell. And when we have the cross-sell, you see it in the retention numbers. So starting that household acquisition, whether it's with auto or something else is important. And Mike has been driving an awful lot in the Life space about potentially starting with Life potentially pushing on the retirement side of the house, and you're seeing good solid results in retirement. You're seeing big increases in the life space and even a little cross-sell on the supplemental and group benefit side with Life. So I think that ability for our captive distribution to pivot is a key lever for us that maybe others don't have. The other thing is that $7.5 million, I round it to $8 million, and Heather gives me a hard time, at least in the K-12 public space, I don't think about it as $8 million. When you think about the worksite division, the strong relationship that we have with firefighters, the building relationship we have with others who serve the community, I think about that number broader than our K-12 public educator space. And as we build out this divisional focus, you're going to see that begin to push on the worksite side. And then the question for us is going to be what participants within that worksite business have similar attributes to educators, and we can push on the retail side, and I really think about that as a big future growth lever for Horace Mann. But Mike, do you want to talk a little bit about the success we are seeing in Life and some other pivot you've seen.

Sure. I appreciate it. Just starting off, 22% up in the Q1 over last year, we've really hit the ground running coming off a strong finish in '22. Just another piece that Marita mentioned around cross-sell and integration with our acquisitions, 15% of that is coming from our worksite division. And so that says a lot about the opportunity of expanding life distribution. I got to give a lot of credit to our team, Christian, who is really focused on the fundamentals. The life insurance is undersold or undervalued by some of our educators and it's our job to get out there and express the need that they have. And so that's what we're doing. That's what we're focusing on. It's the protection that needs to be in place. And so a lot of emphasis on Life, making sure they get the right protection in place and working with our partners to expand that opportunity.

And, Matt, if your next question was why other than hard work and focus, which I do think our strategic plan really drives us here, a lot of this has to do with access post-pandemic, combined with lessons learned during the pandemic, our agents are much better prepared for household acquisition than they were pre-pandemic, and we are seeing that come through. Look at recruiting on the agency side, the speed to productivity, the mentoring programs that I mentioned in the script. You think about our Head of Sales and Distribution, Heather Kabra, she joined us a few months before the pandemic hit. This is the first year where she is actually physical with her distribution. This is the first time that we are able to hold meetings in large groups with our agents and really see the benefit of a strong team that she's built and what this company looks like when we're firing on all cylinders. I think about the Supplemental & Group Benefits space and the teacher shortage that we see and that you read about and see on the television almost every night, it's a great retention tool for districts to build out robust benefit plans and really provide financial support in seminars and state retirement conferences that we build. So we are invited in because those schools desperately want to keep the teachers they have and want us help educating the new replacements that they have to hire to fill the seats. So we feel good about our relationships with the districts and they're only growing with this two divisional structure that we've built.

Great. Thank you very much for the answers. It's very helpful.

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

Thank you very much, and good morning. My question is around the meaningful lift in covered lives and employer sponsored. I know there's a first quarter weighting to this given kind of open enrollment and stuff like that. But can you talk about the ability to capture that lift in covered lives in cross-sold products and how quickly that can get addressed? Thank you.

John, it's a great question, and I think I started to answer it, but I'll leave some of the specifics to Matt, who's on the line and who runs that worksite division. Matt?

Sure. Let me start by just kind of reminding everybody how we go to market -- we go to market in three distinct ways. The first piece is the employer paid side of the house, which was the acquisition we made of Madison National that closed January last year. Our worksite direct channel, which is the former NTA channel. That's also the channel that also sells the Horace Mann life product that Mike referred to a minute or two ago. And then we have the employer-sponsored side of the house, which is our voluntary group product. That's actually a joint venture between the two sales channels, and that's how we bring that product to market and we cross-sell it within our distribution teams. So when you think about how the -- how those teams interface or interact, that's where we get to how we think about the covered lives or the number of participants or a number of folks that we have to see every year in order for us to be able to obtain the sales plans that we have. And you can see in the first quarter in the way that the sales came through in the first quarter, we've been gaining momentum all the way through last year and into this year, you started to see that momentum play through. So we hit on both divisions, both the employer-sponsored side of the house and on the worksite direct side of the house, we doubled sales between the same time period of the prior year. So we have really strong momentum, and that momentum continues, and it is in line with our expectations that we outlined last year. So on the employer-sponsored side, our business is a little bit lumpy. That's just kind of how it works. And we've had some key wins in the quarter, and we continue to build that momentum as the year goes, thanks to our key distribution partners and their continued and expanded support. And we expect that momentum to continue along with the voluntary product adoption. On the individual side, very proud and thankful of the team. The sales results reflect our continued confidence and significant progress to build back to the pre-pandemic levels. And significantly, policy count is growing for the first time since the onset of COVID. So that's a huge momentum shift for us. So as we add employers, as we add eligibles, as we add the opportunities for us to make our case, we're having great success.

Yes, Matt, that's right on. Plus when you think about the amount of folks that we're adding and the building of the sales team and the investment that you're making in this business, it's intentional, and we're seeing it come through the numbers. So, thanks, Matt.

Thank you for that. My follow-up question, I can't help but notice the hiring of a COO role, market share expansion in the retail channel called out and then you talk about firefighters. If we kind of talk about immediate adjacencies, how do you size that 7.5 million going higher? And what are some of these adjacencies besides firefighters potentially?

Yes, a good question. I mean, the hiring of Steve in the COO role, make no mistake, when you look at that resume, we are talking about an accomplished leader here with some pretty significant technical expertise. When you think about the background, P&C, Life, Financial Services, Distribution, it's kind of ideally suited to who we are at Horace Mann. We have a solid long-term strategy. We've got the right priorities in place. We're excited about the future. And I think Steve is the guy to help us accelerate our momentum. It is more about the strategies that we have in place and not new strategies. It's more about hands on deck because of the opportunities that we see in front of us because of that strategy. So when I think about this, I obviously think that although his short-term focus is retail and the priorities that we have in retail and building out complementary distribution and our third-party strategies and some of the things beyond how we had historically done business in P&C. But I also think it's about working with Matt in doubling down on the cross-sell opportunities between worksite and retail. You mentioned firefighters. That's a really good example of future growth as we peel back the onion, but there are other pockets of folks who are similar to educators in wage, in dedication and financial needs that we certainly can tap into. And we see some of that in the benefit space. It will be hard work to determine what and if. Across that, we can leverage into the retail space. And I think Steve will be front and center in a lot of that work with Matt. We obviously have opinions of what those buckets are. We obviously have opinions of how high we could -- what the numbers look like there. And we'll talk about those as we build them into part of the long-term strategy, and they're not just in the design phase, if you will.

Thank you very much.

Yes.

Our next question comes from Derek Han with KBW. Please go ahead.

Thank you. Just going at the personal auto, I think I was a little surprised to see that the planned auto rate increases haven't changed since last quarter, just given what's going on with other peers' severity trends. Can you just talk about what you're seeing and maybe why you're different from peers, maybe just your preferred driver base or whatever else you think might be explaining the differences.

Yes. Good question. Some of that has to do with our assumptions and our picks, obviously, but I can turn it over to Mark for a little more of the detail.

Yes. I mean, I think when we look at the frequency and severity trends for the quarter, would the exception of frequency in the month of March, which was elevated a bit from our assumptions and over last year, and we attribute much of that to the severe weather we saw over the latter part of the quarter. But when we step back and we look at overall frequency and severity with that one exception, everything is very much in line with what our assumptions were coming into the year. We had assumptions that overall loss costs would remain above the long-term average, but would that rate of increase in loss costs would start to temper from what we saw throughout the year in 2022. And so far, everything is pretty consistent with those expectations, obviously, with the one exception of March, which, again, seems like an anomalous event due to some of the weather. And in fact, our early read of April frequency is right back on level with what our expectations were. So we will continue to watch that. And if anything changes, we will adjust our rate plan as necessary. But right now, we are not seeing anything that gives us any strong indication that we need to veer off our current plan.

Yes. Thanks, Mark. That's really helpful. Mark mentions the more normalized frequency in April. That's one of the benefits we have at this point in the call. We know with April "in" the bank what it looks like and frequency certainly mitigated in April. We also saw that from a cap perspective. We did get some questions regarding why didn't you think about annualized cats and changing that number as many in the industry did. Well, we had the benefit of seeing our April results and whether those storms occurred on March 27 or 28 or occurred on April 2 or 3, it really is that spring storm activity that we count on, if you will, in our second quarter plan. And what we saw in March is our actual cats were less than what we would put in the plan for an April number. So we will wait until after the second quarter to take a look at that full year cat number. But for us, it really is about spring storms, not whether they occur on the last day of March or the first day of April.

Okay. That's really detailed and helpful. My second question is on Supplemental. You had really good earnings there and you raised the full year guidance as a result of that. I think you previously talked about benefit ratio kind of moving towards 43%, which is the longer term average. But do you see any enduring changes post-pandemic that you might find sticky and maybe allow you to see a lower benefit ratio going forward?

Let me start. This is Bret. Obviously, in that space, we did guide at year-end to a higher benefits ratio. And I think Matt has mentioned in prior calls that the first quarter, I think we even headed in our talking points for the color commentary that traditionally, the first quarter certainly for the employer-sponsored is typically higher. We finished, as we said, better or a lower benefits ratio. I would say similar to Marita's comments on cats, it's one quarter, so we don't want to get overly excited about that remaining at that lower level for the year. As you acknowledged, we did increase our guidance $5 million in that segment. But both the worksite direct and employer-sponsored components of that segment are certainly performing at lower benefits ratios as we would expect. We've been saying this for the past couple of years, we would anticipate the further we get out of the pandemic, those ratios will revert to a more normalized ratio, if you will. So here again, we will look at those ratios at the end of the second quarter and see if we need to adjust the guidance. But certainly, we took $5 million of credit and increased our earnings in that segment.

Got it. Thank you very much.

Sure.

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

Thank you, and we appreciate everyone making time on a busy earnings day, available through the remainder of the week, if there's any additional follow-up questions. We do have plans to be meeting with investors over the next couple of months. Feel free to reach out. But we do hope to connect with everyone and talk again. Thank you.

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