Q3 2019 Earnings Call
Good morning, and welcome to Horace Mann's third quarter Investor call.
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I would now like to turn the conference over to have their Whetsell Vice President Investor Relations. Please go ahead.
Thank you and good morning, everyone welcome to Horace Mann's discussion of our third quarter 2019 result.
Yesterday, we issued earnings release, an investor supplement copies are available on the Investor page of our website, along with our Investor presentation, which was posted this morning.
Our speakers today I'm worried as right as President and Chief Executive Officer, and Bret Conklin Executive Vice President and Chief Financial Officer, there in two different location.
Joining me read it in Bermuda for the Q and as Bill Caldwell easy product.
Brett is here in Springfield, along with Matt Sharpe easy piece strategy and business development Wade Rubinstein, MVP operation and Ryan Greenier VP corporate finance.
Before turning it over to Merida and 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 NFCC filing.
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.
Now I'll turn the call over to Marietta.
Thanks, Heather good morning, everyone and welcome to our call last night, we reported third quarter core earnings of 64 cents per diluted share more than double last year's results. Our annualized core are are we was 8.3%. These results show that our deliberate actions.
To enhance our value proposition to the education market, including important strategic transactions are taking hold.
We are on a path to accelerating shareholder value creation and substantially growing our education market share.
I will talk more in a minute about how we're leveraging our leadership position in the education market to become the financial services company of choice for all educators, but first let me touch on a few highlights of this transformative year, most notably anti became a part of Horace Mann at the start of the.
Third quarter as the supplemental segment in its first three months and Ta contributed 6.9 million in earnings with a solid pre tax profit margin inline with the level of profitability, we anticipated as we've discussed at the stable contribution of the supplemental segment will provide important.
Sales and earnings diversification.
We're very pleased with the first stages of our integration efforts, which have been bolstered by the fact that both companies are working from the same foundation.
Missions centric culture dedicated to serving educators.
As we've noted before we are undertaking a thoughtful staged approach to our cross sell strategy to ensure we are building sustainable growth.
More than half of the Horace Mann agents have been appointed to sell supplemental products and are working to integrate the new products into the sales process.
We expect an additional five to 7 million of incremental annual earnings by 2021 from cross selling the supplemental products to Horace Mann households.
We're also kicking off the first steps to reach some of the enterprise customers with PNC products during the fourth quarter.
The all in PNC combined ratio was 96.2 for the quarter and 98.5 year to date, a testament to the work we've done to improve profitability.
The quarter benefited from a 4.7 point improvement over the prior year in the underlying auto loss ratio in fact, since we announced our auto profitability initiative in 2017, we have improved our auto underlying loss ratio by more than seven points, surpassing our original goal of five.
Thanks.
This segment was profitable despite an uptick in non catastrophe fire loss severity in the quarter. Our analysis of the losses found no concentration by geography by agent or buy cars and frequency was unchanged from last year.
Finally, the annualized net interest spread for our retirement segment was 224 basis points in the third quarter.
The annuity reinsurance transaction dramatically improved to the return profile of this segment.
We are able to achieve a spread in line with our profitability targets. Despite the challenging interest rate environment.
Our retirement book is positioned for growth in both fee and spread based products, allowing our customers to select the product the best suits their needs.
Annuities continue to be a preferred savings option for many educators and our annuity sales increased again in the third quarter compared with a very strong third quarter of 2018.
Before I move onto our outlook I wanted to briefly comment on recent news coverage of the four Threepi marketplace. Horace Mann is not subject to recently reported inquiries from the FCC or the New York Department of financial services, but as a company dedicated to helping educators achieve lifelong.
Success, we appreciate efforts to provide greater transparency into the varied ways in which retirement solutions are offered in the K through 12 education market.
Our retirement solutions include fixed annuities variable annuities and Nonproprietary mutual fund products, we offer competitive transparent for threed product pricing with no loads and dose surrender charges.
We take into account each educators financial goals and savings preferences to help find this solution that is right for them, that's what Horace Mann's all about.
Now turning back to our outlook as we discussed in September at the KBW Insurance conference, we have a clear defined path to a 10% return on equity from three distinct drivers.
First we expect to gain a full point of our ROE we from the end Ta acquisition in the first 12 months of bringing our companies together.
Second over the past several years, we've streamlined our organizational processes to accelerate profitable growth and strengthen our solution orientation.
We are now beginning to realize savings from these initiatives. In addition, we're making significant progress on additional expense synergies and efficiency projects that will reduce our annual operating expense run rate by at least 15 million, which will add another point to our OE fourth quarter core.
EPS will refresh reflect approximately seven cents per share for severance charges, resulting from staffing reductions already made as part of this effort.
This is one of the primary reasons, we have tightened our guidance for full year 2019, EPS to between two o'five into 15.
Brett will give more color on the details of our guidance changes later in the call.
Third by 2021, we expect to realize in additional point of our ROE, we threw elements of the end Ta integration.
Higher net investment income from aligning that portfolio with our current investment strategies and cross sell of supplemental products to Horace Mann policyholders.
Those three drivers all currently underway will get us to the double digit our OE threshold and thats before any contribution from additional growth.
From this solid foundation return on equity will benefit as we gain market share.
Five years ago, we started making substantial improvements to our products distribution and infrastructure to be able to continue to help more educators achieve lifelong financial success today with our recent transactions we have the pieces in place to fulfill that vision.
From a product perspective, we've built out a complete product game board with solutions for educators that every life stage.
We've upgraded our product suite to add features that educators want and solutions that address the unique financial issues. They face in terms of our distribution strategy with the addition of end Ta is 200, plus agents and successful Worksite marketing operation, we have the opportunity to share data.
Encourage cross sell and adopt best practices from each other.
This led to our national building by building analysis of coverage in sales opportunities combined our company has a presence in roughly half the school buildings in the country. This includes anywhere from one policy to thousands of policies. So our growth strategy will vary accordingly.
On the infrastructure front, we've upgraded our systems across every segment to be more customer and agent friendly while gaining systemic advantages that can reduce our costs and improve our efficiencies.
We've just launched the second phase of our Guidewire implementation with the introduction of the New PNC administration system, and our first state, Illinois.
The benefits of the upgrade our substantial in terms of data segmentation and analysis digital capabilities and ease of use weve stage, our rollout to pickup larger states with the best growth opportunities earlier in the process by the end of 2020, we plan to have states, representing about 60% of our customers on the guy.
And wire platform.
As we move into this next phase of our growth strategy, we evaluated our organizational strategy against these key elements of our solution orientation as we announced two weeks ago, we have aligned our resources behind the Threepd strategic pillars, with Bill Caldwell, leading product and Matt Sharpe leading distribution.
In Wade Rubinstein will lead to infrastructure and operations as well as maintaining responsibility for the integration of the supplemental segment.
This streamlined structure will allow us to prioritize and accelerate growth opportunities.
To close we are heading into 2020 with a full product game Board and expanded agency force and an experienced talented leadership team. The transformational changes we've made gives us a clear path to accelerating shareholder value creation and substantially increasing our market share in the education space.
Thanks, and with that I'll turn the call over to Brett.
Thanks, Maria and good morning, everyone.
As Maria noted the 64 cents of third quarter core earnings demonstrate that we are better equipped than ever before to meet the financial needs of educators are transformative efforts in multiyear initiatives focused on improving our products distribution in infrastructure have resulted in the larger more diverse company.
With a clear path to a double digit arotech.
This is the first quarter that national teachers Associates Brinci. Eight is included in our results as the supplemental segment contributing 6.9 million or 16 cents per share to core earnings. This aligns with our expectations for a 12 to 14 million contribution in the second.
Half of this year.
Although we are not providing historical earnings information for NTT. These results do aligned with their performance before becoming part of Horace Mann.
And our ongoing business segments results were solid underlying PNC profitability remains on track. We also continue to benefit from the significantly reduced interest spread risk in a retirement segment. Following the reinsurance transaction earlier in the year.
In life profitability remained strong.
Im going to begin with a review of segment results and outlook before I summarize the details of our updated EPS guidance for 2019.
Let me start with the new supplemental segment.
Supplemental added 32.9 million in premiums and contract charges or 14% of our third quarter total net investment income on the supplemental portfolio was 3.7 million.
Due to its strong profit margin the segment contributed 25% of core earnings illustrating the diversification value with brings.
Premium persistency was 88.9% with almost 300000 policies in force as we've said premiums for this business are relatively stable quarter to quarter.
The benefits ratio was a healthy 44.7% for the quarter with the operating expense ratio at 28.2%.
These ratios generally aligned with our go forward expectations, but we'll give color on specific metrics. When we provide detailed 2020 guidance on our year end investor call.
Operating expenses excluded 3.2 million in noncash amortization of intangible assets.
Our preliminary estimate of intangible assets being amortized is $160 million, which will be broken down in the 10-Q between the value of business acquired the value of distribution acquired in the value of agency relationships.
Due to the nature of the supplemental business the useful life for these assets has been determined to be as much as 35 years for the value of business acquired in about 17 years for distribution relationships.
As a result, the annual run rate for intangible amortization should be 12, and a half to 13 million pretax which should be relatively constant for the foreseeable future.
The pretax profit margin was 23.7% for the quarter and we anticipate a will remain north of 20% on an ongoing basis.
Turning to the property and casualty segment for the quarter core earnings were $14.2 million versus a loss of $3.2 million last year.
Both the underlying combined ratio of 89.7% and the reported combined ratio of 96.2% improved substantially over last year.
The reported combined ratio benefited from Q3 cat losses that were about half of those a year ago 17 events, primarily wind and hail in the Midwest and plain States total about 14.7 million in losses pre tax.
Year to date pretax cat losses at 47.6 million, we believe full year cat losses should be between 50 to 55 million a tightening of the range. We've used in our guidance this year.
At the high end cat losses would be slightly more than 7.5 points on the full year combined ratio.
Turning to auto performance for the quarter. The reported combined ratio improved 7.1 points year over year to 92.4 points.
Rate increases averaging in the middle single digits across the book continued to keep US ahead of loss costs.
Loss trends remain consistent.
Severity is elevated compared to historical levels, although the pace of the increases continues to moderate somewhat.
Frequency declined again in Q3.
As we discussed last quarter the year over year Delta in the underlying loss and combined ratios has moderated slightly as we are now comparing to a very strong second half 2018 underlying results.
Auto was expected to remain profitable for the full year with three to 3.5 points of improvement in the underlying loss ratio for the year and about seven points of cumulative improvement. Since 2017 is merida noted that's well ahead of our original objective and a key driver of our OE improvement.
Turning to property the reported combined ratio improved almost 30 points because of lower catastrophe losses. However, the underlying loss ratio rose more than seven points because of higher non catastrophe fire losses that Murray dimension.
These temporarily offset the benefits of homeowner rate increases tied to the higher cat and non cat weather that we've seen in many geographies over the past few years.
Due to the fire losses, we now expect the full year underlying property loss ratio to be flat compared with 46.2% in 2018.
Underwriting results benefited from three and a half million in favorable reserve releases in the auto book.
And we remain solidly in the upper half of the independent Actuaries range for total PMC reserves.
The PMC expense ratio was 26.4 points for the quarter and we expect the full year ratio will remain in line with our guidance.
Our target for the combined ratio for the PNC business for the full year remains at the high Ninetys with the nine month ratio at 98.5%.
Underlying auto combined ratio should be below 100% in underlying property combined ratio in the low seventies.
Net written premiums for the year should be up slightly reflecting rate increases overall retention is down from 2018 button key geographies that are above our profitability targets. We are seeing positive trends in new business and expect this will accelerate overtime.
For the life segment third quarter sales of recurring premium products were up 13%, although lower single premium product sales resulted in a decline in total sales for the quarter.
As a result of lower net investment income core earnings were down slightly for the quarter.
With lower single premium sales. This year, we now anticipate full year total life sales to be down slightly although we still expect this segment to deliver 15 to 17 million and ex DAC earnings our agents continue to help more of our customers see how life insurance can contribute to the financial well being over there.
Families and we continue to expect long term sales growth.
Before I turn to the retirement segment, let me quickly revisit the reinsurance transaction, we completed in the second quarter. It address the interest rate risk of legacy block of annuities with a minimum crediting rate of 4.5%.
The transaction release $200 million of capital 185 million of which was redeployed to purchase and Ta reducing retirement segment invested assets effective July onest.
The required accounting treatment for the transaction was the deposit method, which means some of the elements of the transaction continued to flow through our financials, even though they are the responsibility of RG. In addition, our balance sheet now shows a deposit asset on reinsurance in total net investment income incur.
Lose an entry for accreted investment income.
The Investor supplement shows some of the retirement metrics, excluding the reinsured block to more clearly illustrate the results of ongoing operations.
For the retained business segment at September Thirtyth, We had 4.2 billion in assets under management, and 7.9 billion and assets under administration.
Annuity sales deposits were up this quarter, even comparing against a very strong third quarter in 2018.
Annuities continue to be an important part of our product set as they appeal to the financial objectives of our educator customers, while complementing our growing suite of fee based products.
The annualized net interest spread for the quarter was 224 basis points compared with 233 basis points in the second quarter.
Ill talk more about the interest rate environment in a moment, but we expect that the net interest spread will remain in the low two hundreds in the fourth quarter.
Our spread guidance of 190 to 200 basis points for the full year includes first quarters pre reinsurance spread of 142 basis points.
Retirement had no deck benefit in the third quarter.
Due to higher than anticipated returns on alternative investments retirement core earnings of 5.9 million for the quarter were slightly ahead of the approximately $5 million run rate, we had expected for the third and fourth quarter. This year.
Nonetheless, our guidance for full year 2019 after tax retirement earnings excluding DAC unlocking remains at $25 million to $27 million briefly on investments the pre tax yield on the portfolio was down slightly year over year at 483 basis points in the third quarter.
There are.
Our new money rate in the third quarter was slightly below 4%.
The overall credit rating of the portfolio is consistent with the prior periods in remains very high with an average rating of a plus total income on the management investment portfolio was $69.2 million in the third quarter down 1.1 million sequentially as returns on alternative investments remained strong.
Wrong, but were slightly below Q2.
The fair value of the alternatives portfolio was 355 million at September Thirtyth with year to date returns above 9%.
Yields in the public fixed income market continued to be challenging and we see more compelling risk adjusted returns and private credit commercial mortgage loans and infrastructure.
As a result, we continue to increase allocation to these asset classes via alternative funds.
With the fed reducing rates by another 25 basis points last week, we believe our new money rate for both the fourth quarter and 2020 should be around 375 basis points slightly lower than the new money rate we saw in Q3.
We still expect net investment income from the managed investment portfolios, including entrada to be around $300 million for the full year 2019.
The quarterly go forward run rate of accreted investment income on the deposit asset on reinsurance should be within $1 million plus or minus of the levels reported in Q2 in Q3 as a result total 2019 net investment income should be inline with our previous.
Guidance of down slightly to $370 million for the full year.
Before I turn to the outlook as we had indicated last quarter corporate segment expenses increase in Q3 to the new quarterly run rate of 6.5 million due to additional interest expense on the line of credit.
As we noted in the release, we have $135 million outstanding on the line and our total debt to cap ratio is 24.8% consistent with our current ratings. We continue to target at for 25 RBC for all of the insurance subsidiaries.
Turning back to our guidance as we noted yesterday in the release, we tightened our full year core EPS range to $2.05 to $2 in 15 sets.
We're taking into account the uptick in third quarter fire loss severity and its effect on the full year property loss ratio as well as anticipated onetime severance costs.
We will give detailed 2020 guidance on our yearend call in early February but the three drivers articulated by Merida give us confidence we will reach a 10% are are we in the next year or two.
To recap first we expect a full point of our OE from the accretive acquisition of end GA.
Second we expect another point from reducing our annual operating expense run rate by at least 15 million in 2020 and beyond reflecting the synergies and efficiency efforts we discussed.
Third the end to integration effort should add another point as we fulfill our cross sell objectives and align their investment portfolio with our current strategies. The solid foundation. We've built in the past few years will support market share expansion with our we benefiting from growth across the businesses.
Our intent for the excess capital generated by our stronger organization remains focused on the most accretive uses.
This includes growing our business and in our turns that meet or exceed our our Roe targets.
Returning a significant portion of annual earnings back to shareholders via compelling dividend and opportunistically buying back shares when market conditions warrant.
To close we see three key proof points in our third quarter results that set the stage for continued improvement in 2020 and beyond.
First our PNC profitability initiatives have been successful second. The addition of the supplemental segment has delivered the intended benefits a revenue and earnings diversification for our company and finally, the ROI profile of this combined business is strong and more than capable of reaching.
Double digits in the next two years.
Thank you and with that I'll turn it back to Heather for acuity.
Allison I think we're ready to Paul's question.
Thank you.
We will now begin the question and answer session.
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At this time, we will pause from December our roster.
My first question today will come from Matt Carletti of JMP. Please go ahead.
Hey, Thanks, good morning.
Good morning, good morning.
Merida I was hoping you might be able to just remind us or kind of walk us through your updated thoughts now with NT a closing on board of more of a logistics and how we should expect to see the cross sell start to take place in terms of.
The the ease of licensing or additional licensing or lack thereof.
Legacy Horace Mann agents to sell and Ta products.
And vice versa.
Yes, if you don't mind, Matt Im going to let Wade jump in on that he has been front and center on our integration efforts and I know he has some specific cities like to share and then.
And come back on and add anything for the top if necessary.
Great.
And this is way down as far as integration.
The expression, we continue to use as a thoughtful sales integration in the first priority is to get the Horace Mann agents appointed within da and start that process and in the second phase of that we'll be getting into agents.
The speed on the Horace Mann project, So I think Thats gone really well, we made a lot of progress since since closing so now and still work to be done, but a lot of energy within the sales force I don't know, Matt if you want to comment on that little bit more.
Thanks weighted yet management shop or is one of the.
The the.
One of the things to consider was we already had an established salesforce within NTS. They have a couple of hundred agents that are already selling so the priority of the integration was to make sure that we didnt disrupt that salesforce in any way and maintain the sales momentum that we had going on with the.
The second phase of it was licensing and planning all of our agents educating them on the products and starting to integrate those products into the sales process and thats going to take some time as Maria mentioned in her opening comments about half of our agents are already appointed and the vast majority of already possess the license to sell the products. So it's just a matter of.
Working our way through the field force doing that training and integrating that product into their sales process.
Okay, great very high the only I'd add the only thing I'd add Matt if I can just add to that when we think about the role that we put weighed in early on some of the benefit there was by having him initially over all technology for the.
Organization and now over all operations I think we got a running start on connecting the wires that need to take place in most integration efforts having done many of these in my past.
Theres, a fair amount of time in connecting companies.
Because we're both in a common space with a common mission doing.
Worksite marketing in the schools for as long as we both have.
Connection of the value propositions, and the culture were easy, but theres still a fair amount of infrastructure and systems and operational synergies in connections that need to take place in any integration by having Wade involved in that early quite frankly, even right before and during close.
We had time to do a lot of that works. So I think we get a running start so that to your question. We can immediately focus on how we drive that cross sell and Matt said it well. The idea was first do no harm right, we want to continue to grow and do.
Well in the supplemental products, but quickly turning it to how do we take advantage of the cross sell opportunity, but it's exciting to me that.
We did we did get a running start on the integration.
Okay, Great and then just more of a numbers question.
So on and today I mean, we obviously got the quarterly financials can you give us a little bit of color on kind of what we could just order of magnitude kind of what sort of sales growth has been kind of the baseline there since we don't have the year agoda compare against.
Yes, I think from a historical perspective, we've had a little growth from 2018 to 2019 in the third quarter continue to have a very healthy sales pop pipeline and interest in the product. So.
Third quarter was very normal quarter for us and.
Continue to have good momentum going into the fourth quarter and maybe just this is breadth to tack on though what weighed shared obviously the first time for the supplemental coming out party. If you will and very pleased that what we've been talking.
About two.
Analysts investors is actually showing up in the numbers and you can literally see the diversification in the in the business mix at that brings to the Horace Mann consolidated financial picture. So.
Increase in the topline in the our release at that segment provides as exactly where we had hoped to be.
With more related to come.
Okay and then one last just clarification question to so I make sure I think about this right way the when you and you guys give your OE guidance.
The basis or the denominator and not that we should use so reported not tangible book, but.
Unrealized gains within fixed income portfolio is that correct.
Thats correct Matt.
Great wonderful congrats on having entail on board and best of luck on form.
Thanks, Matt Thanks.
Our next question today will come from John Barnidge of Sandler O'neil. Please go ahead.
Thanks I appreciate your comments.
Sorry, excuse me the New York in FCC inquiries and you have no low no surrender charge transparent pricing can you kind of talk a little bit about how we should be thinking about this is actually an opportunity to accelerate some of the consolidation thats been going on the education market, obviously, Horace Mann does multiple products across the spectrum.
Yes, John its marine I'm glad you asked the question the way you asked it because that's exactly how we think about it obviously, we're well aware of the articles that appeared in the Wall Street Journal they seem to describe the inquiries into compensation in sales practice you mentioned it.
We've had no inquiries from the FCC or New York Horace Mann is in most states offering for three the business, but we're not in New York and we actually as I said very clearly in the script, we actually appreciate.
Efforts that provide what we consider greater transparency into a multiple ways in which retirement products are offered.
In our education market.
Yes man has offered tax deferred annuities since 1961, that's actually when Congress first.
Allowed those products to be sold.
We recently introduced as you know a floor Threepi seven open architecture to mutual fund platform, we called it retirement advantage two thirds of our annuity account values are actually in six accounts, which I think speaks to the nature.
Of our conservative retirement planners and the education space.
We have over 75 years' worth the history.
And changes to products and process in response to regulatory changes are kind of natural for us and we evolved we saw with the deal well we saw with the FCC changes and we'll continue to.
To do that if necessary, but I think what's really key is the horse fans sales approach, we work with educators holistically on solutions and not just providing in individual product.
Our agents are paid on an asset based fee for enrolling the educators, we don't offer proprietary mutual funds.
Our only proprietary product is a stable valued.
Fixed account investment option.
We offer in that in the four three be retirement platform, you mentioned no loads no surrender charges and our fees for the product are well under 2%. So we believe that positions US well. This is what we do this is what we've always done.
We believe the way, we sell our products and the transparency that we bring.
Is important there and we believe in choice for educators.
Maybe a little tried to say when companies compete the consumer wins, but in this case, we think that we stack our product on our approach up well against the competitors and we're glad that theres choice and potentially more transparency out there.
A lot to unpack, but it's an important questions I'm glad you asked it.
Okay, and we will move on to the next question and we have Gary Ransom Dowling and partners. Please go ahead.
Yes, good morning, I wanted to ask about the underlying auto loss ratio, which if I look at past trend, maybe even consider seasonality is.
Much better than you might have expected and I just wondered if there was something going on there.
Yes, Gary It's Bill I'd say, we've been working on this for quite some time.
When I when I unpack the frequency and severity frequency is down slightly.
We would have expected that to be more flat sourcing variable frequency.
It's a verity although elevated.
Over prior years isn't as high as some of the other companies our competitors talking about social inflation again, we work in a niche or not selling commercial auto policies. We don't have a ton of Super high limits and we've taken a lotta actions in the states where.
This is originating from namely, Florida, and Georgia are our Florida basis shrunk nearly two thirds in terms of policies over the last couple of years.
So yes, we are above.
We are up beyond where we thought we would be.
But.
Because of the strategies that we put in place over the last couple of years.
So it sounds like the underlying loss trends were good size contributor as well.
Correct.
Yes, yes, yes, yes, the combination of the of the favorable frequency and little better than expected severities.
Thank you.
Another question is on catastrophe guidance.
You gave us some guidance that didn't seem to include a real big number for the fourth quarter.
Just wanted to make sure you had in your mind all the stores that happened in October and what.
Anything and why that happened in the wildfires.
The war recently about that was all in consideration when you gave that guidance.
Also tree yet clearly we know what happened in October that does not change our guidance. When you think about the wildfires and have recently occurred I will put these in the bucket of.
Typical wildfire losses, you know tend to be more rural.
Educators don't live our underwriting drill has been strong historically on the campfire was obviously a lot different we're seeing that play out in the courts, but.
But as far as the recent fires were talking about for the industry.
Hundreds of losses low hundreds.
Versus you know thousands in the campfire. So it's just.
Im more typical year for wildfire, we typically don't have losses in U.S dollars.
And there was there was a storm and Dallas, but I would note that was immaterial to our.
Through our earnings in October so that is in our consideration for the guidance.
All right I guess, that's all I have thank you.
Thank you.
Our next question is a follow up from John Barnidge of Sandler O'neil. Please go ahead.
Okay.
Sorry, I was on speaker.
Going back to slide six of the deck you talked about double digit core early 2021 and beyond that suggests an earnings power well above current consensus apps and the special dividend am I thinking about that correctly.
You want to repeat your exact comments again, John this is Brad so slide six potential double digit core or we 2021 to 2025.
Consensus exhibit consensus exist for 2021, the double digit core or we would be suggestive of an earnings power of the company that's well above what consensus is expecting am I thinking correctly. No. I think you are in a couple of couple things obviously, we've got some as we.
We came out as the.
Our last dividend notice with the expense synergy goals that were.
Hey.
Baked into our future guidance, that's one piece of the obviously.
Just bringing and ta aboard into the family in in of itself doing nothing with that was going to add an additional 1% of our we but I think there's there's several things that come into play out in the 2021 to 2025, obviously, we're not content was just cooking the company up if you will there's cross sell.
All opportunities that as Maria mentioned in her prepared remarks, the five to 7 million for 2021, I would say that probably on the conservative side and Thats just.
As Matt was talking about and Wade having our agents if you will sell the end.
Products first but then there is ultimately and ta selling the Horace Mann product. So there's.
I think that that aspect of going out in the future and then also just growing.
Our current book of business now that is Bill mentioned, we've been working on the profitability of the auto book for several years and we've got back to a point that it is generating the 10% are a week, which had not been in the past so kind of combining you can certainly see what the ROI, we have the supplemental segment coupled with.
The PNC segment, and then future growth of of the book that we have today is going to going to get us to that.
Double digit are we in the future.
Yes. This is merida the only thing I'd add Brad that Brett that was a good unpacking of the ROI picture in the Investor presentation that directional Aro, we slide only included those components that we have already in slate that directional slide include.
No growth and as Brad said now that we look at our products being accretive to that Aro. We growth is on top of that trajectory that we included.
That we that we didnt include in that in that chart. So we feel that when we think about the phases of our strategy that first stays being the fix and build phase, where we built product, where we improve solutions to our agents, where we modernized our infrastructure and drove some efficiencies that we're now able to see some of those.
Fences coming out.
Allowed us to really look at 2019.
And into 2020 asked that transformative stage, where we take advantage of the acquisition of anti and BCG the reinsurance transaction to de risk the portfolio in fund for the entity transaction and obviously the work that we're doing to improve.
Our infrastructure I think it proposed positions us extremely well for that next phase, which we refer to as the growth phase.
And when we look at Unpacking. This are are we in includes all that hard work, we've done and doesn't yet anticipate the growth that we know is clearly there at that nest next phase of our journey.
And again, if you would like to ask a question. Please press Star and then one our next question will come from Friday Slifer of KBW. Please go ahead.
Okay.
Good morning. My first question is just on auto and apologies if I Miss this earlier, but what average rate increases are you still putting through that you see these accelerate or decelerate quarter over quarter.
Our rate plan for this year is mid single digits in auto and we will meet that plan.
And I would say categorizing next year, we're starting to see deceleration and raise rates will be less than 5% next year.
Okay, Great and then just moving onto a supplemental the morbidity in operating expense ratios command much lower than we are expecting said. These are good run rates model going forward or should we expect some seasonality and results.
No I think what what was included in the results are are the run rates I think even in my prepared remarks, the pre tax profit margins.
20 plus percent so.
No no significant changes there with respect to the run rate of supplemental.
Okay, and then just following up on that given the strong loss expense ratios is there a regulatory limit on how low these can be.
This is why I know, it's something we monitor the reserves theres not a limit.
In terms of.
Of our products something that we keep an eye on and.
Please with the results in there's a lot of good work that goes into getting those results all the way through the sales process and to how we administer the policies.
Okay, great. That's it thanks to the ounces.
Next we have a follow up thanks Fred.
And we have a paula from John Barnidge of Sandler O'neil. Please go ahead.
Yes, just going back to your answer on the FCC in New York I'm. Just curious do you think this could accelerate consolidation as slots in the schools.
Yes, John we obviously have been doing this for a long period of time and it does tend to come in waves we've seen.
Some our merchants to single product providers, and then back to more of an open enrollment more providers, we have not seen a decrease in our slots it's been relatively.
Consistent we don't have a problem opening slots.
In schools, we again, we have a.
Very clear way of bringing our for all three business into schools that hasn't changed it remains the same.
Again, I think this is a positive for educators and potentially positive for us on in that more folks we will think more the way, we think which is transparency.
And is about.
Bringing clearer pretty clear product capabilities and choice.
To the educators to supplement their retirement.
What I'm trying to get added do you think it could actually be something with which you could.
Benefit.
Okay.
Yes, I mean, I think potentially where we benefit is the educators benefit.
I think that when there is more transparency I think when there is more choice there are less situations, where we might be blocked from a particular school that has a single provider.
But for US we keep on doing what we're doing we have not seen a decrease in enrollments we've seen an increase.
We're happy about our retirement trajectory the more we build capability the more we build solutions. The more we provide transparency the more we provide choice I think the more we'll be able to continue to grow our enrollments and therefore.
Our assets under management.
Very much for answers.
You're welcome.
Ladies and gentlemen, this will conclude our question and answer session. At this time I'd like to turn the conference back over to Heather Whetsell.
For closing remarks.
As in thank you and thank you everyone for joining us today I'll be available by selling if there any follow up questions and we.
We look forward to seeing thoughts over the next couple of months are our next trip will be engineered next week, where the JMP conference will also be filing with any other folks. So let me now if you're interested in a visit as well. Thank you.
The conference has now concluded and we thank you for attending today's presentation. You may now disconnect your lines.