Q3 2020 Horace Mann Educators Corp Earnings Call
Good morning, and welcome to Horace Mann educators third quarter 2020 conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
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I would now like to turn the conference over to hover Wetsel Vice President Investor Relations. Please go ahead.
Thank you and good morning, everyone welcome to Horace Mann's discussion of our third quarter without.
Yesterday, we issued our earnings release Investor supplement copies are available on the investors page of our website, along with our Investor presentation, which was posted this morning.
Right its right its president and Chief Executive Officer, Bret Conklin Executive Vice President and Chief Financial Officer will give the formal remarks on today's call with US today, we have Matt sharpen distribution, Mark Thrashers PNC Wade Rudenstein, a supplemental like Wecan, Brock and life and retirement, Ryan Greenier on investment.
Let me turn it over to Maria I want to note that our presentation. Today includes forward looking statements as defined in the private Securities Litigation Reform Act of 995.
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 FCC filing.
Our prepared remarks, we use some non-GAAP measures reconciliations of these measures to the most comparable GAAP measure are available in our news release.
With that I'll now turn the call over to Maria.
Thanks, Heather and good morning, everyone before we start today I'd like to note that Mark to Rocher has accepted the role of leading our property and casualty business on a permanent basis.
Mark has been a key part of our leadership team for five years and has been leading our property and casualty business since April.
Worst man has benefited greatly from his extensive personal lines experience and strategic approach to the business and.
And we're pleased that we will be able to continue to do so.
Onto the quarter last night, we reported third quarter core earnings of 82 cents per diluted share a 20% increase over prior year.
We also increased our full year guidance for the second time. This year, we now expect 2020 core area.
We'll be in the range of $2 to 95 cents.
The $3.15, a roughly 40% increase over last year.
These strong results illustrate the benefits of our long term strategic plan to enhance our product offerings strengthen our distribution network and modernize their infrastructure to better serve our educator customers a strong foundation, we've laid over the past six years combined with the.
Transformational actions, we completed in 2019 continue to serve us well in this pre vaccine pandemic environment.
Our progress towards our long term objectives has been an uninterrupted and we'll continue pre and post vaccine.
2020 results keep us on track to our pre pandemic plan of achieving one full point of our we improvement this year due to our strategic actions.
That gets us to the 8% to 8.5% are are we we had anticipated.
Well also have approximately one to one and a half point of are we this year from pandemic related and other factors that largely won't repeat look.
Looking ahead 2021 are we will be on the original path, we had anticipated heading towards the double digit our or we can reach through our strategic initiatives.
Our confidence is grounded in the strength of our value proposition to provide solutions to the education market.
First man as a company built on a deep appreciation for educators and a commitment to help them protect what they have today and prepare for a successful tomorrow.
Even compared to the end of the last school year educators jobs have become more difficult. Many are working in a hybrid model, where they need to teach in person and remotely increasing their workload and the challenges of addressing each student's needs. They are concerned about their students hello.
And well being as well as their own.
Now more than ever we at Horace Mann are proud to be serving educators and we continue to look for new ways to do so.
This quarter, we expanded access to our suite of student loan management resources to help educators achieved the student loan forgiveness, they deserve as public servants.
The student loan solutions program has already helped to put our customers on the path to more than 250 million in student loan forgiveness. After.
After implementing a more robust online platform earlier this year to scale our capacity to help we've now made it available to every public school educator in the country free of charge.
In addition, our agents an internal subject matter experts are offering more online financial wellness workshops, and hosting virtual educator engagement event.
And we helped educators across the country put their lives back together after damage to their homes from the many catastrophe events that have occurred in recent months during the pandemic our homes have taken on even greater significance for some educators that space is now also their classroom. So not only are we.
Helping them put their lives back together, we're helping them get back to their vital work.
The investments we have made over the past six years in the company's products distribution and infrastructure combined with the steps. We took in 2019 have positioned us to serve more educators and achieve our target are are we.
Reinsuring, our legacy annuity block last year release capital that we used to acquire our supplemental business.
This diversified our business mix and redeployed capital into higher margin products.
The reinsurance transaction also significantly mitigated future interest spread risk further we have added to our are we by implementing expense optimization and modernization initiatives to drive efficiencies across our entire business.
Going forward, we are focused on three factors key to achieving a sustained double digit are are we.
The first is sales growth.
We entered 2020 with a complete product game board offering solutions for educators at every life stage, we have upgraded our product suite to add features that educators want and solutions that address the unique financial issues they face.
Our solutions are ready to support market share expansion with growth across our business accretive or are we.
Disruptions related to the pandemic such as limited school access have put our sales under some pressure we've been very pleased to see our established agents leveraged their strong relationships to transition almost seamlessly to a virtual environment. We continue to work with newer agents who.
Tend to depend more on building new relationships in order to grow to help them develop their books of business.
Because of the pandemic related challenges, we've intentionally accelerated steps that will better prepare us for a post vaccine environment first we accelerated the integration plan for supplemental agents. These.
These agents now can bring a variety of property and casualty and life and retirement products to their existing customers. Early results are encouraging in fact, our September production leader and our new agent segment was a newly integrated supplemental agent now cross selling an expanded suite of products second.
We're beta testing a number of new approaches to reach educators, many of which rely heavily on virtual interaction.
The upside will be our ability to take the most successful look these approaches and incorporate them into the sales process across the entire agency force going forward.
The second factor that will help us reach a double digit are are we is further expense optimization and discipline.
As I mentioned this year's results reflect the benefit of initiatives that successfully reduce our ongoing operating expense run rate by more than $15 million.
We expect further savings in 2021 and beyond from efficiencies gained through a process optimization integration events yesterday and identification of operational synergies of course, the pandemic has brought our travel budget close to zero, which is generating savings and is likely to inform our thinking about.
<unk> spending for years to come.
Lastly, we continue to expand our alternative investment portfolio to capture additional yield in the sustained low interest rate environment.
These investments can be more volatile in general, but we continue to follow a conservative disciplined strategy. Since we initiated this portfolio. We have seen an average return of over 6.5%. We focus on a diversified mix of income producing investments run by investment managers with a solid track record.
And the approach has been largely successful this quarter, we reported over 11 million in alternative investment income.
Before I turn the call over to Brad I want to comment on an investment in the community that I'm, particularly proud of in partnership with the Chicago FHLB. This fall, we distributed more than $100000 to nonprofit organizations in the Springfield, Illinois community working to address socioeconomic and.
Racial education equity gaps that have been compounded by the pandemic.
These solutions include community remote learning sites for children, whose parents are working during the day additional learning opportunities for students who are falling behind and assistance with basic needs for families such as food and housing is systems at.
At Horace Mann, we believe every student should have the opportunity to reach their full potential.
And we're proud to support organizations that are working to make that possible.
To summarize we expect 2020 to be one of our strongest years in our 75 year history, we continue to be successful through economic cycles, and changing political climates, because we always remain keenly focused on our customers over.
Over the years, we have evolved our product distribution and infrastructure with the time to best meet their needs. These.
These times bring new and different challenges for educators, and we're ready to help solve them. Thank you and with that I'll turn the call over to Brett.
Thanks, Maria and good morning, everyone as Maria noted Horace Mann reported another excellent quarter.
Third quarter core EPS was up almost 30% over last year, despite $35 million in third quarter catastrophe losses.
Nine month core EPS was up almost 60% to $2.27.
We recognize these strong results by increasing our full year EPS guidance for the second time this year to the range of $2 or 95 cents to $3.15.
We now expect 2020 earnings growth will be near 40% with full year return on equity likely to be above 9% is strong core performance is bolstered by pandemic related changes and the subordination recovery.
We remain committed to achieving a sustainable double digit our OE driven by significant growth in our education market share.
Over recent years, we've executed on our product distribution and infrastructure initiatives to create a diversified business prepare to grow.
Marina described how we are leveraging our transformative actions to identify ways in which we can maximize our market share expansion going forward.
As always our fundamental objective remains unchanged to reach more educators with solutions that help them meet their financial objectives.
Turning back to the quarter, we were very pleased with what we saw overall with property and casualty core earnings up on higher net investment income.
For the segment higher catastrophe losses, offset the improved auto and property performance and the benefits of the PG any subordination recovery.
The supplemental segment made another strong earnings contribution new sales are still under pressure, but this segment continues to achieve strong profitability in part because of pandemic related changes and policyholder behavior.
Annuity contract deposits grew again in the retirement segment as our educator customer base continues to look for ways to secure their financial future.
Our managed investment portfolio continues to hold up well despite this year's economic volatility.
Favorable third quarter, Mark to market adjustments in the alternatives portfolio, primarily benefited the property and casualty segment.
So let me turn to the details of the results look.
Looking at the business by segment for PNC core earnings were up 11% due to the 28% increase in segment net investment income.
Premiums were down about 5%, primarily because lower new business more than offset the return of the reinstatement premiums related to the PG any super geisha in recovery.
As we discussed on last quarter's call PG any successful emergence from bankruptcy on July 1st resulted in the recovery of a significant portion of the losses, our policyholders have incurred in 2018, California wildfires, primarily the campfire.
Third quarter results include favorable prior year reserve development of 5.2 million pre tax and net of reinsurance for substation on our share of recovered losses, along with the $3.5 million in recovered reinstatement premiums for a total benefit of 8.7 million.
That recovery was one of the reasons the reported combined ratio was essentially flat, even though catastrophe losses added 12.3 points more to the ratio in this year's third quarter than in last years.
The other offsets included first.
9.9 point better underlying auto loss ratio.
Loss frequency remains below 2019 levels continuing to reflect changes in driving patterns being seen across the country. Although it has moved closer to 2019 levels compared to the spring.
Over the quarter, the lower loss frequency accounted for the equivalent of about $11 million in reduce losses.
In addition, the underlying auto loss ratio reflects the long term benefits of the progress we've made over several years to enhance our pricing segmentation and improve our auto profitability.
Second a 4.8 point better underlying property loss ratio.
The effect of the return of reinstatement premium is the most significant in the property results.
Underlying results also improved because of the lower impact of more frequent but less severe non cat fire losses, compared with last years third quarter.
We're confident this is just normal variation in loss patterns as our analysis found no concentration by geography by agent or by costs.
Third underwriting results benefited from $1 million in favorable reserve releases in the auto book and $1 million in the property book in addition to the subordination recovery.
We remain solidly in the upper half of the independent Actuaries range for total property casualty reserves.
For a one point to point lower expense ratio benefiting from last year's expense reduction initiatives as well as other reduced spending related to the pandemic.
A fundamental progress we've made in property and casualty continues to support our strong outlook for $70 million to $75 million in full year PMC segment earnings.
When we think about auto frequency and severity in the coming months, we expect to see total mileage remain near 2019 levels, which it had again reached by late summer.
That said industry commentary and our proprietary data on driving patterns from our telematics App HM drive supports that driving patterns have changed due to the pandemic.
For example, there has been more long distance driving in less concentration during two school in home from school hours. Those differences have kept frequency low enough to offset some upward movement and severity.
As a result, we have planned for an underlying auto loss ratio modestly below pre pandemic levels for the fourth quarter.
Offsetting some of that benefit as we said in September our full year guidance now anticipates 13 to 14 points of catastrophe impact on the full year combined ratio or about $85 million to $90 million.
Through nine months catastrophe losses totaled $78.3 million, excluding the campfire and 2018 fourth quarter catastrophe losses have averaged just shy of $7 million over the past five years.
Policyholder retention remains strong and there has been some rebound in new business. However rates are likely to be very stable in the current environment. So net written premiums for 2020 will be below 2019, even before the 10 million dollar impact of premium credits that we recognize in the second quarter.
Turning to supplemental this quarter this segment added $32.5 million and premiums.
Segment core earnings were $10.6 million, reflecting favorable trends in reserves and some short term benefits from changes in policy holder behavior due to cope at 19.
Net investment income on the supplemental portfolio reflects the solid progress we are making in improving the supplemental investment yield.
Supplemental sales were $1.4 million in the third quarter supplemental products across the industry have traditionally been sold through a worksite enrollment model and we expect sales to begin to return to a more normal trajectory over the coming quarters premium.
Premium persistency remained stable at about 90% with over 290000 policies in force as.
As Weve said policyholder retention for this business is relatively stable.
The segment margin continues to benefit from the changes in policy holder behavior, and we have increased our outlook for Supplementals full year core earnings to the range of $37 million to $39 million from the previous $31 million to $33 million. This largely accounts for increased EPS guidance and dramatically.
Rates the diversification value it provides.
For the life segment sales were below last year's third quarter, Although policy count remained stable with pre pandemic levels.
While we have fewer sales of complex products, such as index Universal life in larger single premium policies, which require more customer interaction to complete the sales process.
Location counts rose for recurring term and whole life policies. These products help us continue to reach more educator customers.
Core earnings reflected mortality trends in line with expectations. We continue to expect the segment to deliver $10 million to $12 million in ex DAC earnings in 2020.
The volume of claims related to COVID-19 remains very low with face values, averaging about 40000.
For the retirement segment, we now have comparable year over year results for this quarter. Following last year's annuity reinsurance transaction that agreement address the interest rate risk of a legacy block of individual annuities with a minimum crediting rate of 4.5%.
This quarter results clearly display the value of that strategic action.
Segment core earnings ex DAC unlocking improved $1.4 million over last year's third quarter then.
The net interest margin on the retained business was stable at $19.4 million, while operating expenses declined $1.6 million due to the expense initiatives put in place last year and savings related to the pandemic.
We continue to expect core earnings for 2020 will be in the range of $22 million to $24 million.
We continue to see retirement segment growth as our solutions for augmenting retirement savings remain a core need for educators annuity contract deposits were up about 7% for the quarter and they continue to be an important part of the product set.
Annuities appeal to the financial objectives of our educator customers, while complementing our growing suite of fee based products.
Turning to investments total net investment income was up slightly year over year and up more than $13 million over second quarter as we benefited from the second quarter market recovery and valuations for our alternatives portfolio, which generally reports on a one quarter lag.
We experienced positive marks due to the recovery across different fund types, including private equity infrastructure and structured security funds.
We remain confident in the long term returns from these investments and are comfortable with our expectation for alternative investment income of $5 million to $10 million on a full year basis below our longer term return expectation for this asset class.
Further our core fixed maturity portfolio remains well positioned to weather the near term market volatility in COVID-19 induced economic downturn.
The core portfolio had a yield of 4.18% in the third quarter compared to 4.62% a year ago.
The addition of the supplemental portfolio on July 1st last year continues to reduce the yield on the consolidated portfolio, but we are making solid progress in improving the supplemental yield through.
Through the third quarter, we continue to focus our purchases on high quality municipal corporate and government agency Securities. The core new money rate was about 3.25% in the quarter and based on current market conditions, we anticipate purchases near that level for the remainder of the year.
Net realized investment gains of two and a half million dollars in the third quarter included $1.1 million of impairment losses. In addition, we had mark to market gains of $2.3 million on equity securities.
We continue to expect total 2020 net investment income will be between 340 and $345 million, including accreted investment income on the deposit asset on reinsurance you will recall. This amount is an actuarial driven calculation and should not be affected in the short term.
By market volatility or prevailing interest rates.
This expectation for investment income is captured in the segment by segment outlook summarized in our investment presentation and in our new core EPS guidance range of $2 or 95 cents to $3.15.
Our strong financial results combined with our Conservative capital management means that we will be able to move forward with accretive uses of excess capital when the time is right.
Our priorities remain first growing our business at returns that meet or exceed our ROI targets second returning a significant portion of annual earnings back to shareholders via a compelling dividend.
And finally buying back shares opportunistically when market conditions warrant.
To summarize we continue to see the positive impact of our transformational actions and profitability initiatives, particularly the addition of supplemental segment and the annuity reinsurance transaction and our retirement segment.
As Maria said there are three go forward keys to achieving a sustained double digit arotech.
First is sales growth.
Second as business optimization and expense discipline, and finally continued expansion of our alternative investment portfolio to capture additional yield in the sustained low interest rate environment.
We believe we are on the right track with all three despite the challenges of this unusual environment and we are excited about whats ahead. Thank you and with that I will turn it back over to Heather.
Thank you, Brad and operator, I think we are ready for questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
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First question comes from John Barnidge of Piper Sandler. Please go ahead.
Okay.
Thank you.
I wanted to go back a little bit to your comment on the call about expenses that might not return ever can you expand on that and have you identified in a mile.
Hey, John This is Brad I think the comment is is actually.
The fact of that obviously, we've been able to reduce our specifically travel but.
Budget substantially in the current year, but obviously you've participated investor calls, where we've done the zoom call.
Called quite effectively with yourself and investors I think Thats. Just one example, as we look to next year, there are probably going to be some combination of zoom and travel related expenses I mean, we're in the midst of putting together our preliminary 2021 plan, but we would anticipate.
Not returning back to the same levels that we started out the year. So.
I don't think thats going to be unique to.
Horace Mann all companies I think are revisiting how they are structured and how they are working in this new environment, but we definitely anticipate benefits and our expenses to continue in 2021, Yeah and John This is Marie to what I'd add to that is what's interesting for Horace Mann.
And you know this in how we've laid out our IRA we improvement plans, we actually had a pillar of that early improvement that was focused on optimization and expense discipline, including the integration with and EA and whats interesting about that pillar.
As while we were improving processes and really taking a very keen to look at how we do things in a more optimized way going forward, including two pretty big projects, both on the PMC and the Ellen our side improving our arses.
On a go forward basis, we're able to take the learnings from COVID-19 in that while you're looking under the Hood. What are we learning what's what's what are what can we build into our go forward optimization and include that so I think it's a really good time.
So that the patients on the table you are looking at every piece of what you do in House Garrett now you can do it with a whole new eye of what were the tools that you put out there to drive virtualization to not rely as much on physicality and build it into those processes going forward. So.
So although no one would want this for look for it we are looking for those silver linings, and finding a way to build them into.
A much more efficient process going forward the comment in the script was really about travel specifically.
As Bret said and what we're also learning about travel as the whole world as there are some things that we can do very efficiently by not being there and then when you can add physicality back to that much more efficient way of doing things, it's icing on the cake.
Okay.
Hello.
But a lot of annuity block transactions in the last month I know you guys did what about 15 months ago given market activity can you talk about interest in additional transactions and possibly.
Doing 100% flow reinsurance to move into more of a fee based business.
Yes, I mean, Brett I'm sure, we'll have a follow up with the numbers in mind, but I think when we did the transaction that we did we were thoughtful like we always are and we probably picked the optimal time for us to do that and you're seeing that come through and then.
Numbers I mean, we're we are smart about these things we see transactions that have occurred recently and we look at that and we learn from it but we feel really good about what we did when we did it and we will continue to look at what's out there but for US our company.
And just a mathematical sum of the parts right. It's a total value proposition for our educator clients and it's about the economic value of the household it's about the cross sell that we do within those households, but most importantly, it's about our total value proposition that convenience for the educator.
Of one stop shopping in helping protect what they have today and secure their retirement I don't know if you have anything to add to that I would just add that John as you recall to achieve a double digit are are we in.
In the retirement segment, we'd need a spread of about 200 bips.
And as you probably saw in the Investor supplement when you look at the quarter by quarter, we actually achieved 225 bips in the third quarter. So we are actually above the.
The target spreads so as Maria said, it's something we would maybe look at it in the in the future, but we've we've accomplished exactly what we set out to do with that reinsurance transaction that was actually done in a very.
Favorable time for us and.
We couldn't be more pleased with.
That transaction being executed.
Okay, and my last comment sorry question and I'll re queue with reduced sales growth. This year. How does this make you think about allocating more capital was say share repurchases given more shares are currently trading book.
Yes, John this is Brad again.
I think as I've spoke on several earnings call. Our capital management strategy has been and it remains focused on the most accretive uses of capital.
As Murray this talked extensively growth.
His first on the.
On the docket, if you will we want to grow our core businesses when they are at or above our ROE targets and I think we've talked about getting all of our lines back to that profitability level.
Secondly, providing.
Providing compelling dividend, which we've done.
Utilizing basically a payout ratio of 50% and finally to your question.
With Opportunistically buying back shares. This is really the first quarter in 2020 that we've actually achieved the 425 RBC levels in all of our segments. So this was the first time, where we have roughly about $15 million of Xx excess capital.
That we could potentially buy back some shares we haven't decided to.
To do that quite yet I think we talked last quarter, we were in the midst of the hurricane season and wanted to be prudent with.
Letting any capital go so we may nibble around.
The edges here is we get later into the year, but obviously its something we look at we actually ended up at 425 levels in all of our segments, probably a quarter earlier than we otherwise would have anticipated.
We were targeting that to happen more towards year end. So here again the year continues.
To achieve earnings above our plans and our revised forecast so.
We'll take a peek at that as we go later into the year.
The next question is from Matt Carletti of JMP Securities. Please go ahead.
Hey, Thanks, good morning.
Hi, Good morning, Greta meet a lot of your commentary.
Just focusing on the path to the double digit are we number one is sales growth I was hoping you could help us with just kind of the current environment and.
Yes talk around I know, we have in past quarters, but we're getting kind of further and further into this pandemic world.
So kind of how you view you know the tools for success there the digital adoption and really in the near term do.
Do you think that Horace Mann can be successful in driving sales growth in the environment. We're in.
Or the tools that you have kind of really help you fight the headwinds, but but.
We need a little more normalized environment, maybe score for true growth to to come out.
Yes as usual Matt the answer to your question is in the question.
As it often is when you ask yet, but we spent an awful lot of time in our script trying to unpack that because this is the thing that obviously, we're the most focused on it's the first pillar of that are are we for a reason, we really did position ourselves for.
On setting the company up so that our business is accretive to our we the auto profitability the reinsurance transaction using that capital for a higher ROI, our only business in the purchase event. So we positioned ourselves for right, where we are we certainly didnt position ourselves.
For a pandemic, but.
But I think weve navigated extremely well and take and we're taking advantage of the time that this is giving us we wouldn't have wished for it but make no mistake, but we're really learning it on.
Our existing legacy Horace Mann agents are leveraging their strong relationships with their clients to cross sell to have those retirement conversations and you're seeing that with the increase in retirement that we saw in the quarter and for the new agents on the NPK side, we're really win win nature.
Joining us obviously supplemental as we have said over and over again for the industry is very Worksite site based so there's no doubt that the lack of physicality does put some pressure on that sales environment, but what we did is we took that time to accelerate the integration to accelerate the training to compete.
The PMC license things that needed to be complete so that those NT agents could begin to sell in this environment other than supplemental and after this past isn't it will they will be ready to go and hit the ground running so getting through the few territorial issues, we had to get through giving them the tools and the training.
I need to be successful building. They are repeatable sales practice than we said in the script I mean, the proof point is a brand new NT agent in that New age agent segment was the protection protection agent of the month lag.
Last month, so we are seeing that.
Through and let's face that we're learning a lot we completely virtualized our sales process. We built on line financial wellness seminars, we're piloting many new digital engagement strategies and events in many of these are working so the beauty and you never never waste a crisis the Butte.
It is the acceleration of the digital and virtual capabilities that we would have built and we would have added to our repeatable sales process over time. There's this great acceleration this great, forcing mechanism for us to build those get those out there and for agents to learn.
Auction and I really believe that we'll take the best of these things and continue them on a go forward basis, and then when we have physicality that add to these we're going to have a nice boost.
Two our rhythm there and at the end of the day. The educators are still there they still need what we offer and those opportunities aren't going away. We built a complete products that with the addition event EA, we're adding the benefit of making our distributors even better during this time.
Okay.
And the infrastructure improvements with optimization and modernization really get us ready for that you know that post pandemic environment when it emerges and it certainly and it's certainly well so I feel good about what we're doing we're learning, we're getting stronger and we're going to take advantage of that and.
Growth. During this time, we it is starting to ramp up it was better in August in July It was better in September than August it's better in October than than September and we are starting to see folks.
George just like you did you know across almost every business restaurants had to figure out a way to operate more effectively and were all finding strategies that work in this environment and then what of those will work well in a post and dynamic environment. So I mean, we took advantage of.
The fact that we had some time to accelerate some things and we feel good about our ability to to be even stronger when physicality comes back.
Okay, Great Thats helpful. Thank you for that color and then one other I think probably.
Quicker a numbers question.
Can you help us obviously supplementals Ben.
Very good story, a great addition to the company and while we could see that sales headwinds that.
Agree with we will get back to normal at some point.
Helped the bottom line can you help us unpack, maybe when you look at the recent quarters bottom line performance there.
How much of that might be pandemic related and how much of that might be core run rate to the extent you have the insights.
Sure sure Matt. This is Brad I mean, I'll give you a rough estimate I mean, obviously supplemental just like auto is experienced some favor.
Favorable results claims related due to the cold bid.
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Using a rough estimate probably $1 million million and a half quarter.
For the last two so if you kind of.
Wrapped around the impact of the to the benefits ratio probably around four point I think is a is a rough.
Estimate that you could use for that obviously supplemental is receiving some onetime benefits that most likely won't repeat to the extent you know next year, but I think that would give you.
Rough estimate to use.
Great. Thank you very much the answer is in the best of luck.
Sure. Thank you.
The next question is from Gary Ransom of Dowling and partners. Please go ahead.
Yes. Good morning, Hi, you did give us some insight on frequency trends in auto I was.
Wondering if.
Severity trends, which may have been elevated before are also showing signs of returning to normal so that.
The whole package of loss cost is.
Moving in.
In a direction that might look like normal.
Hey, Gary This is marie to sense, Mark to Rooster track that on a daily weekly and monthly basis Im going to let him respond to that.
Sure sorry, Gary actually yes, you're right we've talked in the second quarter that we were seeing.
Somewhat elevated.
Severity trends relative to our expectations in that mid to high single digit range than what we've seen.
In Q3, I would say, it's more of a return to our normal expectation of a low to mid single digit.
Agent severity, so with that it's pretty much in line with our normal expectations at this point.
Okay, and just one on the frequency trends themselves are they do you still detect Lou.
Meaning we returned to normal August to September September October I mean is it still knowing that way. This thing it's interesting what we've seen is that.
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Clearly frequency has been increasing since the lows we saw in the in the second quarter, but not quite proportionally with the change in miles that we track in PJM drive. So we've seen mileage returned to near pre pandemic levels, but for sort of.
Our return on the frequency has has lacked and we continue to see it lower.
Than we saw in 2019, which as Bret mentioned in the script, we would attribute primarily to the continued changes in driving patterns that we've seen in probably to a lesser extent I think that the hard work we did.
To improve the overall profitability profile of the book of business and I have some expectation as Brad also mentioned that.
We'll continue to see that.
Through the end of the year and probably into 2021 you know.
Until we reach the point, where there is a widely available vaccine that will have to at that point evaluate what the long term impacts.
He will be on driving.
Behaviors.
And Gary This is Maria Thanks Fiona.
The only thing I'd add to that is we did add some more details are are we slide to the investor presentation intentionally we wanted to point out that one of the key drivers that the hourly improvement.
For 2020 over 2019 was the work that we began in 2017 on the auto loss ratio and really improving our pricing segmentation on our profitability in that line and that was one of the key drivers of taking that core hour a week from seven three to about eight.
Yes.
And that clearly is in there and you can see the nine and a half that we sit today predominantly because of the frequency benefit in auto that you are talking about here, but a really nice trend even without the frequency benefit driven by co bed.
Even three to 885, and then a clear path of what those levers are going forward in improving that ROI, we and some of that might be a slight systemic benefit of frequency going forward, even post pandemic as not everybody returns to the way they did things before.
Because theyre going to take those learnings, which may also include more flexibility and work hours, maybe changing systemically that compete commuting patterns, we have as a country how long how much who knows but there might be some go forward benefit there as we look to see how driving on chase.
Changes if at all but we really did want to take the time to say make no mistake that are are we improvement even without the benefit of COVID-19 is there the way we laid out on that it would be.
Thank you.
Just.
Bigger picture question, you've talked a little bit about what is permanent versus what's temporary on the.
Cobot impact.
But I was kind of wondering the impact actually on the teachers themselves and how they're behaving reacting to your sales.
Because their lives have changed and.
This hybrid.
Roche maybe per minute of.
In my neck of the Woods. For example, there is no more snow days as far as I understand it but.
But.
Has that has that change affected what the teachers want what they are with the products. They are looking for the.
Needs they feel.
Are being fulfilled by what you have or maybe theres additional needs that you might need to provide in the future.
Yes, Gary I think Thats, a really good question and I think back to the.
The question about what you learned in this environment I think we're learning a ton I mean, when you think about the fact that 80% of our client base and quite frankly, 80% event days prior to the acquisition where educators. We've got a lot of data we know a lot about them. We know what their needs are we spent a lot of time with.
Contact Center salespeople.
And this is no different and this time, we're learning about whats changing in their environment and what they're learning and what we're finding out is many of the things that we've known for a very long time stay the same.
They're conservative there and Bleyl, our retention numbers holding the way they have been holding but this is a really tough time for them if.
If you think about our increased in retirement in the quarter that tells you a lot about their conservative nature. It tells you a lot about do they spend or do they save in these types of of times. When you think about our ability to get to them from an auto where a supplemental perspective. During these times, maybe a little harder maybe not one.
On their list, if you will but I think about life insurance for example, and our life numbers as it relates to Pip count as it relates to the individual typical life products that keep teachers by those have continued those sales have gone just fine what's more complicated and what we're not seeing it.
Much of our those bigger cases, and we've talked about the lumpiness of that before where it might take a longer conversation it might take a more complicated conversation.
To sell that particular case, we see a little less of that and I think thats probably typical in everybody's lives right. There is not the time to do things the same way you've done them before and then we think about post pandemic there.
The propensity to buy supplemental products the propensity to think about after a pandemic do you want to have the risk of out of pocket expenses do you want to make sure that you've got your life insurance needs taking care of.
I think those things bode really well for our sales environment post pandemic. So long answer to a short question, but we're learning a lot in this environment. It's reconfirming that everything we knew about this very loyal very conservative set of clients is true and then.
Learning in a hybrid environment, how we navigate that that that sales environment.
Terrific. Thank you very much. Thank you. Thanks.
The next question is from Meyer Shields KBW. Please go ahead.
Great. Thanks, good morning.
I wanted to start with a question on PNC reinsurance.
Factoring in on the negative side more frequently adverse weather on the positive side the more diversified.
Overall company operations, how are you thinking about reinsurance how the current reinsurance program worked out.
And expectations for next year.
Yes. They are this is Brad I mean I.
I think we feel very good about the reinsurance program I think our reinsurers feel very good about.
The reinsurance program, obviously the recoveries.
We recently received we treated those dollars as our own and obviously were able to give back.
To to the reinsurers certainly.
The number of catastrophes, even for US there were 30 30 of them in the in the third quarter, but they were all on our our nickel if you will they didnt hit any of the.
Reinsurance tower.
Our limits if you will.
We do know.
That obviously most likely the.
As an industry, they're going to be looking at rate increases may be higher than normal as we go into 2021, but like Weve done today, we are trying to differentiate ourselves from the rest of the pack I mean, we didnt.
Well, our subordination Reits like other folks did last year. So here again, we don't tend to operate just like everybody else, but.
I think at this juncture will look at different aspects of reinsurance just like we do every year and I think meridian Mark have talked about that in the past, but as we.
Im not aware of any wholesale changes that we would make it served us well.
Through the years, it's not a one.
Shot Pony, if you will but at the end of the day, we feel good about the coverages that we have.
We'll be up probably against a little bit of rate pressure as we go into 2021, but here again, we will try to differentiate ourselves from the pack to yield probably something less than the pack, yes. The only thing I'd add to that is you can't have a year like this with.
60, something cats on 30, something of which occur occur in the quarter and not step back and do what we always do take one more set of numbers and add it to our good math on this issue I think you think about pricing I think pricing on has to firm in the <unk>.
Homeowners market when you have this many catastrophes and this kind of loss activity. I think you think about underwriting I think you'd think about aggregation management and weather, we've got a pretty strong conservative drilled that we've talked about in the past what do you take from this data that you now build into your aggregation management and your underwriting drilled.
It might be different and you take and you take those learnings and then you think about mitigation through reinsurance and every year. We priced aggregate covers we look at what they are and what they're worth and do they make sense right now I agree with Brad Our reinsurance program has served us well for what it is but then.
Underneath that I think we've got to look at pricing I think we have to continue to look at underwriting and I think we have to continue to look at aggregation management and when you think about underwriting it's exactly what we did when we underwrote wildfire rest and I think it's served us well on our decision in the campfire was the right decision, but the camp.
Fire was not a typical while fire that there was a man made event to which we got the reinsurers money back and then ultimately.
Our reinstatement premium.
Premium, but you learn you learn from these things and the recent wildfires that have been more typically in areas, where they would normally be we're not seeing.
Losses.
From you know from those events other than a few spoke.
Damage claims and occasional in.
An occasional fire claim, but certainly not not.
Not our issue you look at drought you look at changes in weather patterns and we you know we build that into our underwriting our pricing and our aggregation management. We're underwriters, it's kind of what we do.
Okay. No that's very helpful. Thank you second.
Second question on auto.
Basically we look at the pricing environment seems to be Tom to be becoming a little bit more competitive.
And.
Im trying to figure out how that impacts two issues directionally as we look into 2021 would one would be less new business.
The fourth smaller new business penalty in seconds, maybe an increased opportunity to.
Right business on other insurance companies.
Paper.
Which would be good for the expense ratio. So can you give us I'm not looking for numbers, but directionally are either with big enough to make a difference.
Yes.
Two things that I think of when I think of your question first we do have strong.
Auto results no doubt about it but with Comcast increased tax.
Prolonged lower.
Lower interest rate environment, I think that for the most are the rate environment is going to be relatively flat and then I think about two things when I think about that and I call that kind of both ends of the spectrum. The first one is a handful of places where we can take some intel.
Additional actions in really good places to drive some profitable growth and household acquisition, we're at that point.
And then on the other side of the coin there may be a handful of places that aren't as profitable and in those places using other markets that have scale.
On like we do now with progressive makes some sense for us. So the answer to your question is yes, but I think we'll do bolt on where we have scale, where we like our pricing where we have the right agents, creating a competitive underpinned environment, where we can drive growth makes sense and that's how we think about it and then in other places where we.
We can leverage on companies that do have strong scale and generate some fee and help with the household acquisition. We can do that too and we do we do a lot of that today.
Okay, great. Thank you so much.
Welcome.
The next question is a follow up from John Barnidge of Piper Sandler. Please go ahead.
Thank you.
Spinning off their life and retirement business and I I know, they're a big participant in the education markets. How do you view them being a standalone business changing dynamics in that market.
No I don't think it changes the way.
You know we feel about the world I to me I think it it may potentially give us even some more opportunities I mean, we focused on ourselves like.
Like I said earlier, we focused on that total value proposition for educators, and where we find ourselves now with the addition of supplemental.
Being able to have that complete conversation that says you take care of educating the kids now more than ever complicated we'll take care.
We will do your ratable through your home of your life with your retirement and take care of your supplemental needs and it's that all in total conversation. We have an annual policy review process, where we go through the right questions, where we can get all the boxes checked and then through payroll deduction through.
Through our optimization efforts, we can kind of pull it all together and make it easy.
For the educator, because they only as we don't have a certain amount of time to focus on themselves. So for US we focused on you know on ourselves and now that's how that's how I would think about it.
[music].
This concludes our question and answer your question I would like to turn the conference back over to Heather Westphal for closing remarks.
Thank you everyone for joining us today, we look forward to talking with you over the coming weeks and months and that don't hesitate hesitate to reach out if you follow up have a great day.
The conference has now concluded. Thank you Craig Hettenbach presentation, you may now disconnect.