Hello and welcome to the Horace Mann Educators Q2 2023 Investor Call. [Operator Instructions] Please note today’s event is being recorded. I’d now like to turn the conference over to Heather Wietzel, Vice President, Investor Relations. Please go ahead, ma’am.

Thank you and good morning everyone. Welcome to Horace Mann’s discussion of our second 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 today’s formal remarks. With us for Q&A, we have Matt Sharpe, Mark Desrochers, Mike Weckenbrock, Ryan Greenier and Steve McAnena. 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. The 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 investor supplement. I’ll now turn the call over to Marita.

Thanks, Heather and hello everyone. Last night, we reported second quarter core earnings of $0.03 per share, in line with our preannouncement. Despite the severe weather losses, Horace Mann continues to see the benefits of the earnings and revenue diversification efforts we’ve completed over the past 5 years. Both the supplemental and Group Benefits in the Life and Retirement segments provided solid core earnings contributions again this quarter. Before we start, I want to welcome our new Chief Operating Officer, Steve McAnena, to the call. Steve joined us in May, bringing his more than 25 years of experience overseeing large personal lines, financial services and worksite businesses to Horace Mann. In his first months with us, he has already been an asset to the team as we look to build on our growing momentum in household acquisition and market share expansion. Back to the quarter. As Bret will discuss in more detail later in the call, we now expect full year core EPS of $1.20 to $1.45, primarily due to higher catastrophe losses. Our confidence in our long-term business strategy and the results Horace Mann can deliver remains unchanged. We continue to expect 2024 core ROE near 10%. We believe educators deserve a partner who is looking out for their financial wellness, one that will help them protect what they have today and prepare for a successful tomorrow. And we believe educators want a partner that has solutions tailored to educators’ needs, delivered through knowledgeable distribution and built on customer-friendly infrastructure. Our multiline approach sets us apart not only for customers, but as a business as well. Our business diversification allows us more flexibility as a larger entity when challenges arise in one of the segments. Before I talk about the actions we are taking to address external factors facing…

Thanks, everyone, for joining our call today. Marita provided a solid overview of the value of our diversification as well as the ways we are addressing the unprecedented pressures on the P&C personal lines industry, so let me turn to the details of the segment performance starting with P&C. Catastrophe losses in the quarter were in line with our pre-announcement at $41.5 million, leading to the segment’s quarterly loss. Segment net investment income was approximately 40% above the prior year with limited partnership portfolio returns at targeted levels compared with declines last year. Although there were 19 catastrophe events in this year’s second quarter, including multiple severe convective storms across the Midwest and Texas in June, the impact of catastrophe losses on our results was actually 4.2 points lower than last year. As we continue to address post pandemic loss trends, our analysis confirms that we took the appropriate reserve actions throughout 2022. Turning to the results. Total written premiums rose again this quarter by 8.2%, reflecting the accelerating impact of the rate actions that we have implemented to date. With the rate environment rising across the industry, we’re pleased to see very stable retention. The sales growth we’re seeing is coming largely from states where we’re most confident in the outlook for pricing. Marita covered the rate and non-rate underwriting actions we are taking in both auto and property, but let me add a few details on each business. For auto, the rate we’ve implemented translated into a year-over-year increase in average written premiums of 11.4%, up from 8.1% in the first quarter and 4.8% in the fourth quarter. Largely due to weather-related frequency, the auto combined ratio for the full year is now expected to be above the 107 we had originally targeted, but we expect to return…

Thank you. Operator, we are ready for questions.

Yes. Thank you. At this time, we will begin the question-and-answer session [Operator Instructions] And the first question comes from Matt Carletti with JMP.

Hey. Good morning.

Good morning Matt.

Marita and Bret, you both touched on a bit about market share growth and kind of picking up share as we go forward. And I was hoping you could expand on that a little bit. Just – you have spent a good chunk of the last several years, really growing your product set. And when you think about that and the kind of the geographies you are in and what you are doing with distribution, can you give us a little bit of an idea as you look forward like a reasonable investable timeframe, 3 years to 5 years, maybe something like that. Where do you think that I think got 15%-ish market share today of the 7.5 million K-12 educators, where do you think that could be, what the current kind of strategy of Horace Mann supports longer term?

Matt, I really appreciate you asking the question because this quarter for us, really wasn’t anything new other than I think it solidifies the strategy that we have laid out. And this was a weather quarter that the entire P&C industry saw not only cats, but underlying weather as well. So, really nothing new or nothing in the numbers that take us away from that strategy that we have had now for a very long period of time. We built the products relevant to our educator space. We feel really good about the distribution momentum that we have, recruiting is back on track. Our agents are excited about the future and feel really good about a lot of the modernization efforts we have put into place in our infrastructure. So, we are more confident than ever on our ability to build market share in the educator space and also thinking about others who serve that community. In the script, we talked about how many individual supplemental and group benefits customers that we gained with Madison National and NTA and certainly new business since that point in time and building on the cross-sell momentum that we started. When you think about Madison National and NTA certainly was about earnings diversification. We saw that in this quarter. We are not a mono-line P&C carrier, we are an educator company, and we have built a resilient multiline company that helps us in times like this. We talk a lot about insulated but not immune. We are not immune from the P&C industry trends that are out there. I think we manage them well, but we also have other businesses that are working really well for us and provide that ballast. But product expansion in the K-12 niche, which we did with the acquisitions…

That’s super helpful. And then just kind of just digging into one of the numbers a little bit, so I am looking at Slide 18 in the presentation and you break down some industry numbers, the 7.5 million K-12 educators and how many are teachers versus kind of a structural and support staff. It’s kind of even a little more teachers, but pretty even split. I am curious, would Horace Mann’s current book of business look similar to that split, or do you lean more heavily to a teacher versus a support staff or an administrator, or does your book look like the industry?

Yes. I would say our – and we know that our split would lean more towards the teacher space. A lot of our research, a lot of our outreach, a lot of where our agents came from, a lot of them from the principal and superintendent ranks, I would say that when you look at our teacher base, it would be skewed towards the teachers themselves, but also the administrators. We have a fair amount of principal, a fair amount of superintendents in our book. We certainly don’t dissuade our agents from talking to support staff. But I think the models that we bring to bear the financial planning, the student loan solutions, the donors choose and classroom grants, a lot of our solutions really gear more towards the teacher and the administrator vertical.

That makes sense. Thank you very much for the color. I appreciate it.

Yes.

Thank you. And the next question comes from John Barnidge with Piper Sandler.

Thank you for the opportunity today. Question about the core EPS for ‘24. So, I would ask what’s the run rate catastrophe loss load? I know run rates and catastrophe losses really don’t seem to go hand-in-hand anymore. But how do you think about that as we look forward to next year? Thank you.

Yes. Obviously, it would probably be premature to answer that question for ‘24. You saw what we did in our estimates for the second half and how we thought about second half catastrophes. The only thing you know about this number when you put it out there, John, is it’s going to be wrong. You are either going to be too high or too low. So, you got to rely on the math, right. You take recently, you take 5-year, 10-year averages, you run it out, everybody is doing the same thing right now. This second quarter was, I won’t say biblical, but it was certainly historic in many ways, right. So, we look at that and we say it’s probably prudent for us to assume in the second half of this year that those weather patterns will continue, but we haven’t said yet how we think about what we will put in our plans for 2024. But it’s real. So, I think the real question is what’s everybody doing about it. And I think we were very clear in our script that it’s about rate-rate and more rate. The days of a $700 homeowner policy are gone, right. It’s about sophisticated models and taking advantage of every piece of science that’s out there in your underwriting, and it’s about coverage changes. This issue has become certainly an affordability issue in many places. And as you know, when you read, it’s becoming an availability issue in some of the more problematic states as well. So, I think the industry is very concentrated on this, and we will figure this out. We will get the right coverage. We will get the right price. But make no mistake, this is something that we are and everybody is focused on.

Yes. And John, this is Bret. I would add. I think you have been tracking us long enough to know that over the – even in the past few years, I think it’s not too far looking back that you could see a 7.5% cat load, then I think we took it to 9%. And this year, we guided to 10%. So, it’s something we always factor in to our year-end guidance that will include like we always do in our fourth quarter earnings release.

Thank you. And then on the follow-up, is there a level of the expense ratio that’s elevated that we should be thinking about if we do get normal cat that might go away, or how should we think about expense ratios as a result?

John, this is Bret again. I mean our expense ratio is actually running at what we would expect, I believe for both the quarter and the full year, we are up about 4%, and that’s consolidated. We have guided to around 27% to 27.5% historically and really don’t see any significant changes there. So, we are – the increase we are seeing in the expenses as a corporation are consistent with inflation.

Thank you very much. Appreciate the answers.

Thank you. And the next question comes from Meyer Shields with KBW.

Thanks. A similar question and I am not looking for a number, but more in terms of how you are thinking about this. I guess it’s a little less than 10 years, and we had a – the unexpected frequency spike in about 2015 and now severity spiking. And I am wondering how – maybe there is a question for Mark. How do you think about the profit and contingency provision in rates. Does that need to go up completely because it seems like there are more sound [ph] out there?

Yes. I don’t know if you have a specific answer to that, Mark. I think it’s an interesting way to ask the questions since everything has to be factored in. I mean on the expense side of it, and then I will turn it over to Mark on the trends because I think there might be a more general trend to answer to that question. On the expense side, keep in mind that we have got a fair amount of strategic growth built into our thought process going forward. We didn’t do the acquisitions that we did. We didn’t build the product. We didn’t pay for the infrastructure. We didn’t build out the distribution to not grow. So, our plans clearly are around growing this place, and you expect the structure reflects that. I mean I am very proud of the fact that we were able to hold our expenses relatively flat while we did a lot of heavy lifting and building this place, so it was ready for the growth that we are very confident will come. But I will turn it over to Mark and let him answer anything around the trend question there.

Yes. I mean Meyer, I think we – I mean, we already do to some extent factor in a higher profits and contingencies load in the property side to address this. But I think you do make a good point. It’s something that we need to continue to look at as an industry because I believe and I think Marita believes as well, and she said this several times that. If we look at auto, auto has been clearly a severity issue. It’s a short-tailed line. I think everyone is eventually going to catch up to the severity side there. But on the property side, there is this question about the long-term impact of weather. And are we taking enough rate to keep up. Our profit targets are now high enough vis-à-vis our combined ratio targets low enough. And I think that’s a legitimate question that we all need to answer as an industry. And I think as we have said in the script and Marita reiterated that we will take an aggressive look at property rates, we have already doubled our expectation for next year in terms of rate. So, we are looking at another year in 2024 similar to this year, because we are trying to address, I think some of the issues that we are all experiencing throughout the industry with the continued impact of weather.

Okay. That’s very helpful. Second question, maybe this is a little bit more yes or no. But can you talk about the tools that you have to ensure that if you are implementing these necessary rate increases in P&C that you are able to retain customers that have policies in the other segments that are doing pretty well?

Yes. That’s – it’s not just a yes or no. But if you want, yes or no, I will give you a yes, but I will go a little bit further. I think that’s where our third-party strategy comes into play. We know that our retention is stronger when we have a multiline customer. The majority of our customers are multiline customers. When it makes sense for us to place a particular line of business with another carrier, we have a stable of many strong third-party relationships that we have had now for some time, and they like our educator business as much as we do. I mean we understand that it’s a little bit more difficult in a harder market because we may all be thinking the same things at the same time, but make no mistake. We have a fair amount of business with third-parties, and that works out quite well for us. So, with or without a third-party, our retention numbers, I think speak for themselves. And I have said that earlier that we are continuing to see those numbers hold.

Yes, we know. Thanks so much.

Thank you.

Thank you. And the next question comes from Greg Peters with Raymond James.

Hey. Good afternoon. This is Sid on for Greg. We hear commentary on the difficult states in personal auto, but just curious outside of the difficult states, if you could give us a sense on how you feel about where the rest of your book is, or if there was anything you can give us on how much of the book you feel is closer to the longer term combined ratio target?

Yes. I mean I can turn that over to Mark, but we think about all the states the same way, right. You are going to price to a combined ratio target and work with the department to get the rate you need to get there. So, in that respect, they are not all that different. It’s just some states are more difficult to get that rate than other states. But I will see if Mark has anything to add to that.

Yes. I think a couple of points here. I think when we look at what we have been able to achieve and what we think we can achieve, we have a very high level of confidence to the path of getting the right rate level in just about every state. California is the one that does stand out there for everybody. I think we have seen very recently that the Department of Insurance has been more proactive in working with carriers on their rate need, which is why we have both on the property side and the auto side, made recent filings that are substantially more than we have historically done. And we are hopeful and somewhat confident in our ability to get that rate over the next six months to nine months and get that into the book, which will make us feel a lot better about that particular problem state. The other problem states that I hear a lot of the competitors talking about are just places that we don’t have any presence or a little presence. So, New York and New Jersey, we don’t have presence there. Florida has been particularly problematic for many in the industry. It is I think driving or at least others have commented on its impact on prior year development. Our Florida book for all intents and purposes is almost inconsequential at this point. It was at one point 6 years, 7 years, 8 years ago, maybe 10%-plus of our auto book, it’s now far less than 1%. So really, outside of California, which, again, I am more optimistic about than I probably would have been six months ago. We have a fairly high degree of confidence in our ability to get to the level we need to get at to be profitable.

That was very helpful, Mark. Thank you for that. And I would say we are growing in the right places. We have said it in the script, and more states are falling into that bucket as we get to rate adequacy in those states. And I think it’s also important to remember that we have got control over our distribution. We have captive distribution. So, when we want to tighten the underwriting wheel, when we want to put underwriting changes in place, when we want to put any of those levers to drive non-rate underwriting actions, it’s immediate, we can go out to our agency plant and say, this is how we are managing this particular issue in this state, and that’s what they do. We are not in an independent agent world where that timeline might be a little bit longer to control behavior. So, that’s helpful as well.

Alright. Got it. Thanks for the answers.

Thank you.

[Operator Instructions] And we do have a follow-up question with Matt Carletti with JMP.

Hey. Thanks. Hello again. I just had a question probably for Ryan, maybe for Bret. This has this been focus in the market kind of year-to-date on commercial real estate and so forth. And I was hoping maybe you can give us an update on your guys’ investments there. I know you have been very thoughtful and have a very good view of the market. And maybe while at it, touch on the limited partnership funds as well.

Sure. Thanks for the question, Matt. This is Ryan. So, when I think about total real estate exposure in the portfolio, it’s about 12%, and the vast majority of that, over 80% of it is senior commercial mortgage loan exposure. And if we want to dive right into the asset class, the exposure to office that folks tend to be the most concerned about right now, that total exposure across our entire portfolio is less than 3%. So, it’s under $200 million, and it’s mainly in your commercial mortgage loan funds. The average LTV on those office properties is 68%. We have got a strong debt service coverage ratio on them as well. And we are doing monitoring. We know what’s in the portfolio. We know line-by-line, building-by-building, lease roll-by-lease roll, and we feel pretty confident in our exposure there. The bulk of the portfolio is skewed towards multifamily, which historically has performed very well through various economic cycles. And you saw some pressure in our commercial mortgage loan funds last year, which is the function of the fact that the majority of our commercial mortgage loan exposure is equity method of accounting, it’s in funds. That’s a little bit different than peers. But we took our valuation adjustments early. We marked that portfolio to market basically quarterly. And so you can see the rebound in returns this year, this quarter’s annualized return for our CML funds for Q2 alone was over 6%. And these are mainly floating rate securities, and they are going to serve us well in the rate environment we are in. Stepping back and looking at the limited partnership portfolio, again, the second quarter was a nice rebound from the negative returns we saw in the first quarter. LPs by nature of what they are, will be lumpy, the quarter-to-quarter performance will be somewhat volatile, but we put up a mid – high-5% return in this quarter. And when I dissect that, our private credit and our infrastructure strategies continued to deliver solid, steady returns. This past quarter, they were low-double digits, and that offset some of the valuation pressure that you are going to get from the more volatile equity investments. And so when I think about LP returns for the full year, we are guiding to being under our historic 8.5% level for that portfolio, and that’s really reflective of the first half performance. But to sum it up, we feel confident. We like our exposure and we feel pretty good about the prospects as we move through this economic cycle.

Thanks Ryan. Appreciate it.

Thanks Matt.

Thank you. And this concludes the question-and-answer session. I would like to return the floor to Heather Wietzel for any closing comments.

Thank you and thank you everyone for joining us today. We realize it’s a very busy day, and I will be available to arrange additional follow-up conversations as people maybe there is something we want to touch based on. Just also flagging, we will be at the KBW Conference in September, and we will be in Chicago the following week on for a day that Raymond James is helping us put together. And then looking at into November, there is a number of conferences and other trips with Piper, JMP, Dowling, lots on the road, lots of chances to talk to people. So, I look forward to connecting and I wish everyone a good day. Thank you.

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