Q4 2020 Horace Mann Educators Corp Earnings Call
Good morning, and welcome to the Horace Mann educators fourth quarter and year end 2020 investors 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. After today's presentation there'll be an opportunity to ask questions.
Please note. This event is being recorded and now I'd.
Like to turn the conference over to Heather Wetzel, and Vice President of IR. Please go ahead.
Thank you and good morning, everyone and welcome to Horace Mann's discussion of our full year and fourth quarter results yesterday, we issued our earnings release and Investor supplement copies are available on the Investor page of our website, along with our Investor presentation, which was posted this morning.
Where does the REIT is president and Chief Executive Officer, and Bret Conklin Executive Vice President and Chief Financial Officer will give the formal remarks on today's call with us for the Q&A, we have Matt Sharpe and distribution, Mark Desrochers, and P&C laid Rubinstein and supplemental my question Bracken life and retirement and Ryan Greener on investment before turning it over to Marie.
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.
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 and SEC filings.
And our prepared remarks, we use some non-GAAP measures reconciliations of these measures to the most comparable GAAP measures are available and our news release.
I'll now turn the call over to Marita.
Thanks, Heather Good morning, everyone last night, we reported fourth quarter core earnings of $1 13 per diluted share a significant increase over prior year. This contributed to full year 2020 core earnings of $3 40 per diluted share more than 50% higher than the prior year and our highest.
Annual core earnings ever.
Core return on equity was 10, 5% up from seven 3% in 2019.
In 'twenty and 'twenty, we were not alone in facing difficult challenges COVID-19, a record number of catastrophe events and a sustained low interest rate environment. The.
And the fact that in this environment our company not only survived but thrived underscores the strength of Horace Manns mission and strategies, the dedication of our employees and agents to support our customers and the importance of the solutions, we provide to help educators protect what they have today and prepare for a successful tomorrow.
We are seeing the tangible benefits of our multiyear strategic plan to better serve the education market by enhancing our product offerings strengthening our distribution and modernizing our infrastructure.
Cause of this strong foundation, we were able to stay focused on our mission and used 2020 to make progress and accelerating the integration of key transactions, including making major strides toward full integration of our supplemental segment.
Horace Mann has been successful for 75 years, because our business is centered around the relationships. We have with the education community. We understand the issues that educators are facing and we provide solutions our business model evolves in tandem with the changing educational environment. So while we certain.
He couldn't have predicted that a global pandemic would reshape the way schools function for almost a year. Our structure is flexible enough to address new needs of educators and school districts as they arise.
2020 was a particularly tough year for educators students and their families alike educators are worried that the difficult combination of in person and virtual learning environments with little time for them to prepare for changes or lean on establish best practices will mean students fall.
Hind academically students without a stable home environment already at a disadvantage may fall even further behind.
Try to address these concerns educators are overwhelmingly working more in and November Horace Mann Research survey, 77% said they are putting in more hours than a year ago.
At the same time educators are working to balance this reality with concerns for their own health and finances.
Although educators have had more job security relative to some other professions during the pandemic their families are collectively feeling the financial impact in the November study, 64% of educators told Horace Mann that they have put less in or stopped paying into non retirement.
<unk> <unk> due to COVID-19, and only 34% we're confident that their employer benefits would cover unplanned time off for a health issue.
In 2020, delivering on our promise to educators men addressing these concerns and supporting them both personally and professionally in this new work environment.
As the COVID-19 pandemic began closing schools across the country and this spring we accelerated adoption of technology solutions that made it easier for agents and educators to work together online and this included transitioning programs like our financial wellness seminars to a webinar format utilizing the.
Same technology, many educators are using for teaching.
We also partnered with curriculum and providers to get educators additional remote learning resources as we shared at the time, we also proactively supported educators, our communities and employees as they face the pandemic related challenges outside of classrooms.
In addition, we rolled out the next generation of our student loan solutions program, which helps educators receive the public service loan forgiveness. They deserve.
Long with other resources to help manage student loan debt through online accounts and we provide these accounts for free for every public school educators nationwide in 2020 alone, we helped to put educators and the path to $100 million and student.
Loan forgiveness.
Recently, we launched our virtual Speaker series, featuring nationally known speakers presenting on topics curated specifically for and educate our audience.
Some events were designed to educate like a session on financial security with Jean Chatzky of the today show, while others were meant to inspire like a session with Adam Welcome Fellow for the National Association of Elementary School principals in the center for innovative leadership.
As a company we learned a lot and 2020, we tested a number of new virtual approaches and virtual events that may not have been pursued and a typical year. The ones that worked well will be integrated and our playbook going forward and a post vaccine environment. These will be valuable tools to complement in school.
And in person activities Bret.
Brett will break down the details of our performance and outlook later in the call, but we are guiding to 2021 core earnings per share in the range of $3 to $3 20.
And our return on equity and the range of nine to nine and a half. This reflects continued progress on our strategic initiatives and keeps us on track to our long term goal of sustainable double digit Roe.
It also reflects that 'twenty and 'twenty results included several items that added to core EPS that will not repeat in 2021, including the effect of policyholder behavior changes due to COVID-19.
The $8 7 million campfire, subrogation recovery and lower corporate expenses due to the pandemic put more simply our strategic initiatives drove about one third of the improvement in 2020 over 2019, essentially tracking with our original guidance, which would itself have been a record.
We will continue to live and work and are largely pre vaccine environment. During the first part of 2021, but expect to see momentum. Returning later in the year. We are focused on leveraging the strategic enhancements. We've made over the past several years to optimally position ourselves for growth for example, we plan to leverage our new P.
And C administration system rollout in states, where we have the strongest prospects for growth. The guidewire system offers substantial benefits and the ability to implement insights into customer segmentation and our pricing structure and.
In addition by accelerating the integration of supplemental agents. During 2020, we were able to fill uncovered territories with successful agents experienced and working with school district officials and educators. These agents now have the opportunity to provide auto property life and retirement products to their customers.
Even more importantly, it aligns our entire agency force well ahead of our original schedule, we expect to benefit from this alignment as we enter the post pandemic environment.
And upgrade and our section 125 benefits platform also provides potential for growth and.
School districts can use of section 125 platform to provide different types of voluntary benefits to employees and their district, such as retirement savings and supplemental insurance products or pre tax withholdings from medical expenses.
We recently moved to a unified section 125 enrollment technology platform for Horace Mann offerings and are currently migrating existing school districts to the new platform as part of the migration process, we are making our supplemental products available and a number of districts, where we already have a strong relationship providing.
Retirement and other products. Additionally.
Additionally, we continue to test and develop other channels of communication and distribution to serve educators, including web and social media inside sales and direct marketing. This omni channel approach strives to integrate with and leverage the strong foundation provided by the agency force with the <unk>.
<unk> of meeting the customer where they are and making Horace Mann is easy to do business with as possible.
Before I turn the call over to Brett I want to take a moment to touch on another topic that is just is integral to who we are as a company our commitment to diversity equity and inclusion we.
We haven't always called it that but recognizing respecting and appreciating differences has always been a part of how our company operates like the educators. We serve we are a diverse group and we are dedicated to continually assessing and improving our inclusive culture. So that horseman and continues to be a great place to.
Work for all in 2020, we took a number of steps to enhance our diversity equity and inclusion efforts, including establishing and employee day I counsel to help guide company initiatives and identify areas for improvement. In addition, we began to rollout unconscious bias train.
To all company leaders, starting with the board of Directors Senior staff and dei Council members.
I am pleased to report that for the third year in a row Horace Mann has been named to the Bloomberg gender equality index, which recognizes corporate commitment to transparency and gender reporting and advancing women's equality.
Only 380 companies worldwide are included and the reference index, which measures gender equality across five pillars female leadership and talent pipeline equal pay and gender pay parity inclusive culture sexual harassment policies and pro women brand <unk>.
Normally believe that Horace Mann's commitment to offering and inclusive work environment, one where diversity of thought is highly valued and individual differences are recognized respected and appreciated continues to be an important factor and our company's success 2020 was a remarkable year in many ways and we.
<unk> continued to advance the strategic plan for Horace Mann on all fronts. Thank you and with that I'll turn the call over to Brett.
Thanks, Marita and good morning, everyone as Marita noted fourth quarter core EPS was up 51% over last year.
Full year core EPS was up 55% to $3 40.
Compared with $2 20.
And 2019.
That put us well ahead of the guidance, we offered last quarter and even further ahead of our original 2020 guidance range of $2 55 to $2 75.
We estimate our strategic initiatives drove about one third of the improvement over 2019, essentially tracking with our original guidance. The remaining two thirds of the improvement was attributable to pandemic related and other factors that largely won't repeat such as the campfire subrogation recovery.
Our 2021 EPS guidance of $3 to $3 20.
Presumes, we will see recovery from the lingering effects of the pandemic on sales later in the year as well as another year of progress on the product distribution and infrastructure initiatives that support our market share expansion with.
The guidance range reinforces that we expect to see another year of progress towards sustainable long term double digit Roe.
I'm going to dive right into the performance and outlook for each segment and then I'll finish up returning to what 2021 and beyond hold for Horace Mann.
For property and casualty core earnings were up 49% for the year, reflecting a three eight point improvement and the reported combined ratio pre.
Premiums for the year were down about 7% as lower new sales and the $10 $2 million and pandemic related premium credits and the second quarter more than offset the return of the reinstatement premiums related to the <unk> subrogation recovery and Q3.
Policyholder retention remained stable for the year with rates generally stable as well.
Looking to 2021, we expect new sales will remain pressured while COVID-19 vaccines are being rolled out across the country with a return to pre pandemic sales levels, starting in the fourth quarter as the country moves closer to a post vaccine environment.
P&C investment income for the year was up two 2% it was very strong and the fourth quarter, reflecting favorable limited partnership returns.
Underwriting income and the combined ratio improved for the full year, despite the $32 $4 million increase and catastrophe losses above last year's level, which added 13 points of the combined ratio compared with seven six points last year.
The losses were in line with our implied market share as the industry experienced a record number of PCF catastrophe events in 2000 2061 of these catastrophes affected our policyholders.
Putting the 2020 catastrophe loss activity and the context, our average catastrophe loss impact has been nine 6% over the past 10 years, we took that into accounts and the nine 5% catastrophe load assumption, we have incorporated into our 2021 guidance.
Offsetting the higher catastrophe losses, we saw progress across the board and the other factors contributing to P&C improved underwriting income and combined ratio.
Briefly full year reserve development was a favorable $10 $2 million, which included $5 2 million pretax and net of reinsurance for the campfire subrogation recovery and the third quarter.
And the fourth quarter, we recorded a favorable $1 million recovery from prior period ex cat property loss reserves, we ended the year solidly and the upper half of the independent Actuaries range for total P&C reserves.
Most significantly for the year the underlying auto loss ratio was 10 two points better than 2019, primarily because loss cost continued to reflect changes and driving patterns due to the pandemic.
We also continue to see benefits from the progress we've made over several years to enhance our pricing segmentation and improve our long term model profitability.
The impact of the pandemic on loss costs reflects lower frequency related to the new driving patterns as well as a partial offset because of the anticipated uptick in U M. UI and claims. In addition, we're receiving fewer small claims.
Over the course of 2021, we anticipate loss ratio gradually rising toward our long term target levels.
We are presuming some changes to driving patterns become permanent but those would be offset by some of the factors that increased severity and 2020, we anticipate fairly stable rates and 2021.
In addition, the underlying property loss ratio improved two nine points for the full year, primarily due to the return of reinsurance reinstatement premiums and the third quarter.
Over the course of 2020, the mix of perils reflected higher non weather water and fire losses, including four larger fire losses, and the fourth quarter.
We're confident we're seeing normal variations and loss patterns as our analysis continues to find no concentration by geography by agent or by cost.
For 2021, we anticipate the underlying property loss ratio will be stable with rates expected to rise and the low single digits.
Finally, the full year expense ratio improved by half a point benefiting from expense reduction initiatives as well as lower spending due to the pandemic the slight uptick and the ratio and the fourth quarter was due to normal year end accruals.
The fundamental progress we've made and P&C supports our outlook for $54 million to $58 million in 2021 segment earnings with a full year combined ratio in line with our longer term targets of 95% to 96%.
Turning to supplemental and its first full year as part of Horace Mann, the segment added $137 million and premiums and $43 $1 million to core earnings, reflecting favorable trends and reserves and the short term benefit of changes and policyholder behavior due to COVID-19 net.
Investment income on the supplemental portfolio reflects the solid progress, we are making and improving the supplemental investment yield.
Supplemental sales were $1 $4 million and both the third and fourth quarters. They remained well below last year, because supplemental products have traditionally been sold through a worksite enrollment model across the industry.
We expect sales to begin to return to a more normal trajectory over the coming quarters per.
Persistency rose to 95% in this environment with about 287000 policies and force as we've said policyholder retention for this business is relatively stable.
Our outlook for supplemental 2021 core earnings of $33 million to $35 million reflects the expectation that the full year pre tax profit margin will move closer to our longer term target of mid 20%.
The segment continues to illustrate the diversification benefit it has brought to Horace Mann.
For the life segment sales were below last year and the fourth quarter, although the lapse ratio improved slightly and policy count remains consistent with pre pandemic levels. The.
The number of issued recurring term and whole life policies was in line with pre pandemic levels. Although sales declined of complex products, such as index Universal life, and larger single premium policies, which require more customer interaction to complete the sales process.
Core earnings reflected mortality trends that were in line with actuarial expectations versus the favorable mortality trends we saw in 2019 the.
The volume of claims related to COVID-19 remains very low with face values, averaging below 40000.
In addition, operating expenses reflected the ongoing benefits of our expense optimization efforts as well as lower expenses due to the pandemic declining six 6% from 2019.
2020 core earnings ex Tac were on track with our expectations at $10 $2 million.
Al will cover in a moment, we expect the alternative portfolio to deliver mid to high single digit returns in 2021, which supports our expectation for life 2021 core earnings to rise to the range of $17 million to $19 million.
For the retirement segment full year core earnings ex DAC unlocking improved almost 1 million over last year operating.
Expenses declined $8 $7 million, reflecting expense initiatives put in place last year and savings related to the pandemic.
Those savings were largely offset by the lower net interest margin on a retained annuity portfolio.
However, the net interest spread improved to 212 bps for the year, reflecting the benefit of the reinsurance transaction and is above our threshold for double digit returns and this business.
Fourth quarter results reflected strong investment returns driven by the limited partnerships.
We continue to see retirement segment growth as our solutions for augmenting retirement savings remain a coordinated for educators.
Annuity contract deposits were up four 5% for the year and essentially flat and the fourth quarter was slightly less single premiums rollover activity than in last year's fourth quarter.
Our educator customers continue to see annuities is an important way to achieve their financial objectives and they are complemented by our suite of fee based products.
Based on our outlook for 2021 alternative portfolio performance and our expectations that we will see higher fees on our annuity business. We anticipate next years retirement core earnings ex DAC unlocking will be and the range of $38 million to $40 million.
Turning to investments total net investment income on the managed portfolio was $263 million per the year. This was above our most recent guidance as the market recovery continued to drive improving valuations for our alternatives portfolio, which generally reports on a one quarter lag and result.
Good and 17, 9% growth and net investment income and the fourth quarter.
The strong equity market resulted in positive marks across various private equity funds. In addition, valuations continue to recover and the structured security funds that were most impacted earlier and the year.
We remain confident and continuing to allocate to this asset class even though this year's return of 5% was below our longer term target for the alternatives portfolio.
Our core fixed maturity portfolio remains well positioned to weather market volatility and any additional COVID-19 induced economic downturns. The core portfolio had a yield of 425% and the fourth quarter compared with $4 three 6% a year ago from.
For most of the second half of 2020, we focus our core portfolio purchases on high quality municipals and corporate and government agency Securities. The core new money rate was 375% for the year and 335% and the fourth quarter.
Based on current market conditions, we anticipate our core new money rate of about 3% and 2021.
On a full year basis net realized losses of $2 3 million included $5 3 million of impairment losses related to intent to sell decisions those reflected our proactive responses throughout the year to COVID-19 related pressure on various travel related and energy issuers.
For 2021, we expect total net investment income will be between 370 and $380 million, including approximately $100 million of accreted investment income on the deposit asset on reinsurance.
This expectation for and investment income is captured in the segment by segment outlook summarized in our investor presentation, and and our core EPS guidance range of $3 to $3 20.
Before I turn the call over to Heather for Q&A I wanted to reiterate what we believe is the most significant takeaway from today's call that our targets for 2021 represent another step on a steady upward trajectory we've been on for the past several years toward our long term objective of <unk>.
Sustainable double digit Roe.
Our strong performance is translating into capital generation that we will use to accelerate shareholder value creation. When the time is right.
Our priorities remain first growing our business at returns that meet or exceed our Roe targets.
Second returning a significant portion of annual earnings back to shareholders via compelling dividend and finally buying back shares opportunistically when market conditions warrant.
We are on the right track despite the challenges of this unusual environment and we are excited about what lies ahead.
Thank you and with that I'll turn it back to Heather.
Thank you Brett operator, we're ready for questions.
Thank you we will now begin the question and answer session.
I'll ask a question you May press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question.
Please Chris stores and two at this time, we will pause momentarily to assemble our roster.
Our first question is from.
Uh huh.
Our first question is from met and <unk> from JMP Securities. Please go ahead.
Thanks, Good morning.
Turning now.
Marita I wanted to ask you a question about growth I mean, it was pretty clear from your your and Brett to comment.
Throughout the opening that Theres, a focus on growth returning to growth as we get past the pandemic and back towards a little more normality.
Can you help us put together the bigger picture, just maybe I'll walk from pre pandemic to pandemic and post pandemic just in terms of.
And there hasn't been kind of cash.
<unk> growth for a while.
Understand that maybe pre pandemic.
And we're working on getting the places pieces in place and that it made sense to grow.
Obviously, the pandemic you spoken about bit about but maybe the biggest challenges there and then what I sense, your optimism and and your confidence about growth post pandemic.
And what gives you that confidence that once these conditions clear.
Horace Mann will be growing again.
Yeah, Thanks, Matt and I Love the way you sometimes answer your question, while you're asking it but we spent a lot of time, putting together and investor presentation that I think is pretty transparent and includes all of our thinking. So if you look at page six in the investor deck or page eight.
In the Investor deck six tries to take you through the phases of the of our strategic progress of our journey. If you will even before we even thought about a pandemic.
Environment and if you look at the ROE slide on a it really does track again ex 2020, how we thought about those.
Phases going forward and putting 2020 aside for a minute.
We'll go back and you think about that fixed and build.
<unk> that was really about addressing the PDI gaps that we had product tools and our portfolio strengthening the tools for distribution modernizing our infrastructure and the work that we had to do and that phase originally in 19, and 20 and we expanded that by a year if you will become.
<unk> of what occurred in 2020 that was really about the strategic initiatives. The transformational stage, how we thought about the levers and that page so that we could ultimately.
Leverage our leadership position within the education market and grow this franchise and if you go back and think about what we executed in 2019, the three strategic transactions. If you will the addition of the supplemental segment, adding 150000 households, bringing.
Those agents, who knew our education market and we're in the education marketplace already we all know that recruiting is difficult. We all know that onboarding is difficult, having those and ta agents that know our space to work with wound up being even more essential than than we thought.
Adding <unk> capabilities with BCG and doing the reinsurance transaction I mean, we've talked about this we assumed a lower for longer I don't know if we were as.
As brilliant and enough to assume it would be this low for this long, but that proved to be just the right transaction for us maybe before.
Many others have quite frankly jumped on that bandwagon worked really well.
And for us, but also underneath that during that phase, we improved our auto loss ratio, we saved more than $15 million and expenses I feel like we actually very specific Lee laid out for you and the street, what we were going to do and what the economic reality of that phase would be and it's come through.
And while almost exactly.
The way, we the way we thought about it so when I step back from that I think about what we earned in 2019 at about $2 20, what we earned in 2020 without non reoccurring pandemic benefit call. It the midpoint of our range at about $2 66, that's a 20%.
And earnings take the midpoint of the range for 2021, and that's another 20% ish.
I think thats pretty good earnings trajectory and pretty close to what we told you.
We were thinking that translates again looking at page eight to that seven five ROE go into and $8 five ROE go into about a nine and a half.
ROE now when I step back and I Unpack 2020, and I think about what occurred for us in 2020, we talk about these non reoccurring things, but think about the campfire subrogation, yes that was in our numbers that got us to the $3 40.
But for me I saw.
Net back and I say, we had record earnings obviously with all the positives the benefits the financial benefits of Covid, but we had record earnings without it but I think about that non reoccurring campfire subrogation, although that isn't going to happen again, we got a lot of benefit from that we thought.
On behalf of our reinsurers, we made the right choice and I think because of that I know because of that we got below market pricing on our reinsurance renewals. So that is something that did come through when we look at 2021 and helps us.
And there as well.
Obviously, the bigger biggest part of that non reoccurring is auto frequency.
In 2021, we will still get the benefit of driving behavior patterns being different.
And a pandemic environment and that will gradually increase as we go through.
The year.
The premium credit in 2020 never been done we did it we did it well we did it state by state by state, which wasn't an easy thing to do but we did it.
And I think we did it without skipping a beat we had 61 cats and our NPS scores and claims actually went up we integrated the supplemental agents and <unk> accelerated that integration. So that when we come out of this pandemic environment. They are better prepared to serve our educators.
We virtualized, our sales process and I think we connected with our educators more and in different ways than maybe we ever have so I come out of that saying where are we.
We did what we said we would do the numbers came through the way we thought they would come through and we're better positioned at the end of this period than we were going into it and we took the time to really work hard internally to accelerate anything that we could accelerate so that when we come.
And back to a more physical.
World, We've got all of that virtualization and that we built all of those virtual touches with our clients and then we add our physicality on top of it and I think Thats why we do get excited and you can sense that when we think about how we take advantage of I think a pretty well laid out strategy and a very.
Current financial plan that came through almost exactly the way we said it would come through.
Alright. Thank you that color is very helpful.
One other quick one just kind of tagging onto that you hit on the ROE.
The walk if you will and slide eight you gave great color on it.
Yeah could I could ask around that row. One is just kind of how you define ROE I'm, assuming it kind of ex fixed income realized gains and average equity across the year, but more importantly, Brett I caught your comment about.
It kind of considerations with excess capital and potential for opportunistic share repurchases across the year is there any assumption of that built into to the Roe guidance.
Yes, so Matt.
<unk>, absolutely correct with the ROE being calculated ex <unk>.
<unk>.
I, probably should mention too that our ROE guidance reflects our targeted capital levels, which you are well aware at $4 25. So we ended up finishing this year with about approximately $40 million of excess capital that we generated this year and I think as we've communicated with the addition.
And of MTA that gives us the ability to generate double what we had prior to that acquisition, but I think.
Maybe I'll tap dance around your question, a little bit, but we've shown our willingness to effectively use capital whether that is as Marita said first and foremost as it was the case last year and and it's again the case this year and its first and foremost focus on growth.
And a compelling dividend to our shareholders and if opportunities present themselves to buy back shares we will do that so.
Those levers remain the same.
But I think were where we were a year ago with we definitely want to focus on growth and.
And we've shown we are willing to do that organically oriented organically.
Great. Thank you and best of luck going forward. Thanks.
Thanks Pat.
And.
The next question is from Meyer Shields from K B W. Please go ahead.
Thanks.
Good morning.
And I just wanted to make sure I understand the I guess and supplemental and the property casualty.
Guidance.
Are you cutting sort of like a linear recovery and claim frequency over the course of the year or is it a little bit more.
Steve from the back half of the year, assuming that the virus vaccines are distributed effectively.
Yeah, I think and both P&C and supplemental and the way we think of both return of growth as well as loss patterns is its gradual right. If you think first from a topline perspective, when we look at 2020, we had day.
<unk> momentum and growth in the first quarter, and obviously that began to slow with the onset of the pandemic and the loss of physicality and then we did see a little bit of improvement towards.
And of the year, we look at 2021, similarly, only and reverse so we would expect the fourth quarter of 2021 to begin to show some momentum and our guidance and our plan includes almost a repeat of topline numbers in 2021 over two.
'twenty, just in and opposite way and we would expect that to be gradual just as we would expect.
The return to a more normal life in the U S to be gradual and I think loss patterns will be similar when you think about.
When will people feel more comfortable draw.
Driving not only the same amount of miles, but during a similar pattern as before I think that will be gradual when will people.
Return to care and how they will use supplemental coverage will be as gradual.
As our return to a more normal life. So I mean, thats really how were thinking about it Brett and and mayor I don't know if youre hitting on frequency as well and Mark can maybe jump and thereafter I make a couple of comments, but certainly we experienced about overall for the year and certainly not linear.
The second quarter was about a 40% drop I think the third quarter was about a 25% drop and then fourth quarter around 20%. Yes, we are factoring in a reduction and auto frequency and 2021 and I'll, let mark talk about that certainly not to the extent.
And that we.
So in 2020 and supplemental as well.
We are going to most likely benefit from some.
Covid behavior in 2021, but here again not to the same level as 2020 and and as you step back and look at 2021 really.
Its P&C and supplemental yes. The earnings are reduced from the current year, but still rock solid and then life and retirement improving from 2021 that largely attributable to.
The increase and alternative investment income.
And in 2021, so Mark I don't know if you wanted to perhaps add a little color on on the frequency and maybe touch upon severity as well.
Yeah, absolutely Bret.
It's important when we look at how things are playing out well.
Over 2021 debt that it's not just about looking at frequency. It's about looking at overall loss costs and we've really shifted our focus to be on what's happening with loss cost because we believe some of what we're seeing is actually a little bit of an inverse relationship between the frequency and.
So as we see the drop and frequency, we know that part of it is at least to ribbon.
And why.
And we partially by the removal of smaller Fender Bender type losses.
Now that being said.
And as Brett said that.
As we finished out the year, we did continue to see frequency.
Hello.
<unk> level is pretty consistent with the third quarter.
Tom.
And as we examine some of the driving data that we get out of each and drive.
Regarding our educator customers, we certainly continue to see them driving safely during the pandemic, especially.
And as to what we might hear anecdotally about the general population and.
This is most notably true around speed and that we continue to not see those speeding events, but we are certainly not immune.
From the impact from shifting driving behaviors.
Or the economy for that matter and.
As a result, we have seen higher severities, which and partially offset the continued decrease we're seeing and accident frequency.
Okay. No that's helpful and I did mean, both sides of it in terms of production and frequency. So that was tremendously helpful.
On supplemental so we've seen obviously behavioral changes impacting profitability.
And you talk a little bit about the product flexibility.
Right.
Educators decided that maybe there was some.
And from some parts of the policy that maybe they can live without as we've seen over the course of the pandemic.
Maybe let me start and maybe I'll have Wade Wade jump and as well, but as it relates to.
The pandemic.
Related impact on the benefits paid ratio.
We ended the year down roughly about five percentage points or benefits paid ratio is just under 33. It was about 37 and a half.
Last year and really.
The majority of that is related to probably approximately $6 million in <unk>.
Covid related benefits paid people just not going to.
Two to go get the care and get reimbursed for those expenses as if they had had the.
Pandemic not been in place, but as far as pieces of policies that they could.
Perhaps not I don't think Thats the case, but I'll have.
<unk> chime in on that on that item.
Sure Brett Yes, when I look at the policies I think theres a lot of flexibility and how they're designed I think the behavior that has changed this lag last year is just <unk>.
People aren't going into the hospital for maybe an accident, where they would and the past or maybe some some disability type claims, but I don't see.
Instead of a gradual return to that and 2021.
A lot of our coverages are around.
Cancer and heart.
Coverages and I think those cuts.
We certainly have the flexibility to adjust them up and down in terms of the benefits, but I think the usage will.
And we'll be pretty stable as we move forward yes.
Yes, I think thats, absolutely right Wade I think the products are very straightforward and the expenses that they cover will be needed just as much and a post pandemic environment as they were before we also believe that in this kind of environment the propensity to buy both.
Both supplemental and life insurance is probably heightened.
Yes that makes sense, okay, great. Thank you very much.
Thanks, Matt.
The next question is from John Barnidge from Piper Sandler. Please go ahead.
Thank you and congrats on the record quarter.
And the last stimulus there was a noted uptick and inflows and $2 20, and <unk> 20, do you expect a similar level of behavior and <unk> 21, and $2 21, as a result and retirement.
John This is breath, and perhaps Mike work and Brian can chime in here too.
Pink.
As it relates to Horace Mann, we traditionally do not see.
And the drops and flows that when theres been.
Financial crisis, if you will or turmoil out there.
Think this year is a prime example.
I think it was in my prepared remarks.
We saw an increase and our contract deposits.
For 2020 up four 5% and I think thats going to.
Run contrary to the to the industry I don't know, Mike if there's anything you want to add to that comment.
I think you hit it on that and Brent.
So decrease and withdrawal transactions as well so very strong year I think it speaks to the educators continuing.
And the workplace and.
And the long term planning.
Okay.
And under consideration.
Okay and then another question if I could.
And again it may be scale, but what percentage of schools are currently physical versus virtual and your distribution footprint and then do you have an expectation and a.
Post pandemic world at some schools will actually just remain hybrid.
And maybe specifically high schools.
Yes, John I think it's a good question and I think we've all been hearing I think what's becoming a prevailing fact and that is there isn't a replacement for physicality.
All of the studies that are being done.
Drops and scores and it just a fewer virtual environment doesn't provide the level of what.
Public physical education, and the U S provides.
We have been keeping track because we have to take different approaches just like our schools are taking different approaches whether it's virtual whether it's physical whether it's hybrid.
And we are operating and all of those environments and all of those environments and are constantly changing environment, because even a school that has chosen a 100% virtual goes hybrid. The next week and then goes physical and we've all seen that but I think what this is telling all of us is that.
Our educators, our education system works and that there isn't a replacement for physicality I hope that our school system will do the same thing is what companies are doing across the U S and figuring out what are they learning.
What are we for example will snow days change right I mean, all of the discussion around if the snow happens do we just go remote that day as opposed to having a school day I'm, hoping we take the benefit of what we're learning on many fronts and applying it to our new our new <unk>.
<unk> post pandemic.
I have no I have no doubt that the majority of our school systems will be predominantly physical as soon as they can be when you think about a lot of the political discussion about keep the schools open and close the buyers that was probably right.
And I and I and I believe that we will work really hard to get physicality in as many as schools as quickly as possible and then eventually go back to something hopefully even better than what we had prior to the pandemic.
Great. Thank you very much and if I could sneak possibly one more and.
Historically it seems your initial guidance is around 7% seven five points from cats. This year, it's nine five points.
And is that just a realization that over the last five years. Its averaged about 10 to 11 points or is it based on one key 21 catwalk experience so far not at all not at all we didn't when we first put that together we didn't know anything about.
January so it has absolutely nothing to do with that it's just the math when you run five year averages 10 year averages and look at the amount of cash obviously the last two years does push that number.
It could be conservative the only thing you know about that number as you don't know what that number is going to be.
But you add two more pretty heavy years to that number and the actuarial number that spits out is higher and that's all of that is and John.
I think I, even noted that in my prepared remarks that that actually does represent the 10 year average cat load.
So that the math does support that like Marita said will that occur like she said it won't be right, but we feel.
That it's appropriate.
Given what's happened recently, all we know is and it won't be right right.
And.
Thank you very much for your answers.
Sure. Thanks, Jeff.
The next question is from Gary Ransom from Dowling and partners. Please go ahead.
Good morning, if I look across the sweep of the underlying loss ratios and auto across the quarters.
There's a lot of things different things going on and I'm, what I'm, what I'm trying to get out is that the fourth quarter seems a little bit high.
Higher than I would've expected and the sequence you told us that it was 20% I think it was 20 per cent frequency and it was 25 last quarter and <unk>.
And there may be other things going on and there's some seasonality I know there may be some impact from the prior efforts to improve the results I was just wondering if you could kind of unpack that what we were seeing over the course of the year and and what's happening and the fourth quarter loss ratio.
Yes, I think you hit upon a lot of things Gary This is Bret and I'll I'll I'll hand, it off to Mark here in a minute, but certainly from quarter to quarter. We can have seasonality and obviously this year, we've got a few other extra.
Things going on with.
Covid et cetera, but I as you look at the full year I tend to from quarter to quarter, you can have some variability but to end the year.
10 points.
Below on and under lying basis has a great day obviously.
We would certainly target and all in total P&C 95.
Combined ratio to get at our targeted ROE, but as it relates to the fourth quarter and I'll, let mark comment on some of the.
<unk> per specific coverages, if you will that we saw.
A little bit of uptick and.
Yeah, absolutely Bret.
And so.
No I think you made a couple of good points and certainly some effect of seasonality and thats pretty normal and when we look at.
All of the fourth quarter played out.
Relative to what we thought.
Coming into the fourth quarter. It was it was actually reasonably close to our expectations, but certainly the frequency probably played out a little bit better than we thought and the severity probably played out.
A little bit higher and I think some of what we're seeing.
What I mentioned before about.
Some of the smaller losses, continuing to kind of disappeared.
From the from the lost distribution and then we've also seen and I think Greg alluded to this and the script.
Certainly seen an uptick in you and you I am.
Related claims so if we look at loss cost for the year and our.
Accident based coverage is most of the coverages are down about say about 20%, but you and I am is actually flat.
So the op, even a little bit so we've definitely seen that which is sort of what we predicted early on and the pandemic that the long term effects and the economy would have.
And on you and you I am and also to us.
A lesser extent.
We have seen and <unk>.
Increase over the last half of the year and a little bit more so and the fourth quarter with increased death claims.
But that's that's.
Mall impact, we don't get a lot of steps to begin with but we certainly seen those impacts so I think there and some effect of what's going on and the economy, that's driving severity.
And so somewhat offset what we might see and pure accident frequency.
Frequency.
Yeah, and I think Gary I would add and I think you may have noted in your.
Note that even though elevated from the third quarter, it's still below.
Roughly four points from the fourth quarter, a year ago, and I know as Mark said fourth quarter auto can be not our strongest quarter for the year were kind.
And the opposite way property, sometimes can be very very good and the fourth quarter, but there was nothing we saw in that fourth quarter analysis that concerned us to the point, where it would affect how we thought about the profitability of the line the restoration of the profitability and the strong guidance that we put forward for 'twenty one.
And I to take from the U M U I am claim activity that there is a lot more uninsured drivers out on the roads.
At this point.
Is that why that happening I think it's somewhat uninsured, but it's a lot of under insured Gary right. So people are.
And this environment, perhaps buying less coverage.
But our drivers are not right.
Our teachers are employed they still have higher <unk>.
<unk> limits entire U M limit so.
And they're struck by someone with a minimum limit policy, whereas maybe Dave more typically would be struck by someone with a higher limit policy and that creates more UI and claims.
Alright. Thanks.
Can I get some and expansion.
Sorry, your question on the expense ratio.
You said, Brett and your script that it was up for normal approvals can you remind us what those normal accruals are at year end.
Certainly one is with the results for the year, we true up our incentive compensation accruals as part of it and just any.
And with some of the initiatives that we have going on just expenses for.
Modernization consulting it et cetera, so nothing out of the normal I would say certainly we true up all of our incentive comp and the fourth quarter to reflect actual results. Okay.
Fair enough.
Changing subjects on the supplemental.
Business is performing very well can you give us a little bit of a view of how you thought about that business at the time of the acquisition and what.
What you expected from it versus what you're seeing now and I'm not.
And I asking the question and the context that it seems like it's turning out better than you thought but.
Maybe it's as you expected, but can you give us some thoughts on that.
Yeah, I mean, I think when we.
Looked at potential inorganic activity to advance our strategy, we went back to our PDI strategy and and Ta was an organization that hit on all three of those pillars.
And it brought a product that our educators needed and bought that we didn't offer it.
And it brought distribution in.
And that these were agents with relationships in schools and.
Selling and almost a virtual work site environment similar to the way the product is sold and the rest of the industry, which is why we saw some softness and the sales due to due to COVID-19.
And from an infrastructure standpoint, interestingly enough. It brought some opportunities for example.
And our integration of our life systems, using the same life and health system across both organizations the ability to.
Not have to investment arms, the ability to not have to HR operations, So when I thought about and Ta it.
And at advance and advance the P. The D and the I and all of those things are coming through exactly the way we thought they would come through you know we are conservative when we think about our financials. We didn't get ahead of our skis as far as what the benefits of that business.
Would be but we knew they would be there and when I get very excited about is we haven't even begun to scratch the surface on the cross sell opportunity I mean look we we cross sell about 50% better than the industry. There is no reason to believe that we won't be able to build this.
Into our repeatable sales process and offer supplemental and we're seeing it and we took this acceleration opportunity during this year and we're seeing the MTA agents that joined US and know Horace Mann agents with their own territories, writing auto.
<unk> retirement, writing life as a matter of fact, our November agent of the months in auto was a previous and Ta supplemental agent. So we are seeing that start to come through and the Horace Mann agents are now including supplemental in their annual policy reviews and offering.
That coverage so.
Yes, it is it performing better than we financially modeled it is.
But make no mistake, we knew what the benefit of this would be when we built it into our strategy and our repeatable sales processes and organization.
Alright. Thank you very much you are welcome.
The next question is a follow up from John Barnidge from Piper Sandler. Please go ahead.
Last question per care, but thanks a lot.
Yeah.
Youre welcome.
This concludes our question and answer session I would like to turn the conference back over to Heather Wetzel for any closing remarks.
Thank you everyone for joining us today and I'll be available to the rest of the week. If there's additional follow ups and I will remind all that we will be continuing to do virtual investor meetings over the course of the coming months in particular will be participating and the Eva virtual events. So we look forward to talking to people.
The months go on so thank you again.
Thanks, everybody. Thank you.
The conference has now concluded. Thank you for attending today's presentation Mentation you may now disconnect.
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