Q2 2021 Horace Mann Educators Corp Earnings Call
Good day and welcome to the Horace Mann educators Q2, 2021 investor call. All participants will be on listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero.
After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then 1 on your telephone keypad.
To withdraw your question. Please press Star then 2 please note. This event is being recorded I would now like to turn the conference over to other Wetzel Vice President of Investor Relations. Please go ahead.
Thank you and good morning, everyone welcomed the Horace Mann's discussion of our second quarter results yesterday, we issued our earnings release Investor supplement and Investor presentation copies of all 3 are available on the investors page of our website.
On today's call, where it is right as the President and Chief Executive Officer, and Bret Conklin Executive Vice President and Chief Financial Officer will give the from 1 remark.
Well, that's the Q&A, we have Matt Sharpe on business development and distribution market of Russia, and P&C tightened standards on supplemental and my work and Brock on life and retirement with Ryan Greener available on the investment.
Before turning it over to Marita I want to note that our presentation. Today includes forward looking statements as defined in the private Securities Litigation Reform Act of 1995 the.
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 SEC filings.
In our prepared remarks, we use from non-GAAP measures reconciliations of these measures to the most comparable GAAP measures are available on our news release now I'll turn the call over to Marita.
Thanks, Heather and good morning, everyone last night, we reported second quarter core earnings of $1 <unk>, our highest second quarter result ever we benefited from particularly strong investment income in our alternatives portfolio and lower than guided catastrophe losses.
As previously announced this led us to raise our full year core EPS guidance to a range of $3.50.
The $3.70.
With an expected return on equity above 10%.
We saw strong earnings growth in each segment in the second quarter and solid sales momentum in the retirement line of annuity contract deposits increased by double digits over the prior year.
Bret will go over the quarterly results in more detail later in the call I want to focus on our progress towards our long term objectives of of sustainable double digit Roe.
And significant expansion in the education market.
Over the past year on a half through unprecedented disruption in all aspects of our day to day life. Horace Mann has continued to be successful.
Tribute the success to 2 factors first our unwavering dedication to the deserving education market.
We know our customers, we know them well and we respond to the issues they face.
Second our multi line model, we have the premium and the earnings risk diversification that enables us to remain focused on our long term objectives throughout occurrences of weather volatility market volatility and mortality and morbidity trend changes.
While the COVID-19 pandemic added an extra year to the transformational stage of our growth journey. It also gave us time to analyze and improve the ways. We can fulfill our value proposition for the education market.
Examples of the outcomes of this focus include an accelerated integration of MTA agents.
Initiating key improvements in infrastructure and expansion of our student loans solutions program nationwide.
It also set the stage for the entry into the employer paid benefits market with the planned acquisition of Madison National Life Insurance company.
This acquisition brings together 2 educators centric companies with complementary strengths and product distribution and infrastructure.
Horace Mann's most established channel for serving educators has always been individual products sold through our agency force of local trusted advisors in recent years, we invested in upgrading our section 125 benefits administration program, which enable school districts to offer voluntary worksite plans.
Benefits, including our individual supplemental products are provided or introduced through the school district, but paid for by individual educators in some cases educators can fund these purchases with pre tax dollars.
<unk> the national represents a new third way for us to serve educators in line with emerging workplace trends school districts are increasingly adding and enhancing employee benefits to attract and retain educators for hard to fill positions Madison nationals employer paid and sponsor group products.
We will enable us to provide educators with solutions like short and long term disability, while helping school districts improved recruiting and retention efforts.
Districts generally work with independent benefit brokers to purchase Madison National's group products and educators staff are automatically enrolled.
With this addition, Horace Mann will now have complementary distribution capabilities in each of the ways. The countries $6.5 million public K through 12 educators receive insurance solutions dramatically, increasing our addressable market.
In terms of scope Horace Mann has at least 1 educator household located in 75% of the roughly 12000 K through 12 school districts and our market footprint. When we bought NPA, we added approximately 120000 educator households.
With the acquisition of Madison National regain a solid base in this growth segment as they serve 1200 districts that provide the employer paid and sponsored products 2 of about 350000 educators.
There is some overlap between Horace Mann's presence and those of MTA in Madison National but each of the transactions has clearly added to our market share.
And with the Madison National transaction, our total addressable market expands to include a portion of the 160 billion that school district spend annually on employer paid benefits of market sector that has grown more than 30% over the past 5 years.
As we look at ways in which Madison National aligns with our business strategy from a product perspective, Madison National brings 60 years of experience designing and underwriting a portfolio of group products. These products can offer educators peace of mind debt their families will be able to respond to unexpected events without <unk>.
Leading their savings.
From a distribution perspective independent brokers are key in the complex public sector benefit space, where districts, particularly large loans rely on their assistance to design plans and offerings that are typically offered to every employee in the district.
Working with independent brokers is completely complementary to our established distribution through local trusted advisors.
We have already signed a long term distribution agreement with National insurance services and employee benefit brokerage subsidiary of assured partners that has been a key distribution partners from Madison National per nearly 40 years. It will take effect concurrently with the acquisition, giving us immediate access to the.
The employer paid and sponsored portion of the market.
After the transaction closes we will be complimenting Madison National's current group offerings, which includes supplemental products with enhanced offerings.
Our product development team has been leveraging and Tas 50, plus years of success in supplemental market.
To accelerate filings for group products customized for educators, such as cancer and hospitalization. These will allow us to work with Madison National and Nif's to provide a comprehensive group product suite.
In terms of infrastructure Madison National brings an exceptional experienced team focused on delivering great educator customer experiences.
Ported by modern and scalable infrastructure, they are ready to add scale and we're the right partner to help them do so.
In 2022, we expect to Madison National to add 50 basis points of ROE with upside potential in future years, we remain focused on 3 additional drivers of higher Roe across the entire business.
First driving higher net investment income by increasing the allocation to alternative investments.
Alternative portfolio returns can be volatile recent performance clearly illustrates the value of this asset class Springs.
<unk> expense initiatives, we continue to realize savings from actions such as the full integration of the supplemental segment in 2020 as well as benefits from continued infrastructure improvements.
Third market share expansion through cross sell and new sales through each of our distribution channels.
Before I turn the call over to Brett I want to add that as educators across the country prepare to return to in person learning environments. This fall we of similarly prepared to support them during the back to school season, we bring the ability to combine the new virtual marketing approaches we tested in <unk>.
Find over the past year and a half with our traditional in person activities. We look to build on the sales momentum we established in the first half of the year and are seeing a lot of optimism in the agency force around scheduling meetings and events in their schools. This fall.
The 2021 'twenty 2 school year will certainly be more normal than the previous 1. However, there is concern about new COVID-19 variance. We believe most schools will avoid a return to a hybrid or remote environment, notably nearly 90% of educators are vaccinated against COVID-19.
A far higher rate than the general population further educators have overwhelming when he made the case that the best educational environment for students is in person.
And Horace Mann this past year on a half has provided us an ever growing list of reasons and reminders of why we do what we do.
It is an honor to serve the educators, who have gone above and beyond to reach every students through the COVID-19 pandemic their dedication and selflessness to our country's children continues to inspire us to do more and this year we will.
Thank you and with that I'll ask Brett to take you through the results.
Thanks, Marita and good morning, everyone second quarter core EPS was $1 <unk> up 52% over last year, and our third consecutive record quarter.
6 month core EPS was $2.12.
More than halfway to the increased full year EPS guidance of $3.50.
The $3.70.
As we said last quarter, our outlook has always presumed a gradual recovery from the effects of the COVID-19 pandemic on results and that's largely what we've seen so far this year.
In that context, we're encouraged by the signs of momentum we are seeing with the vaccine rollout and continued strong performance across the business.
As a result on July 1 we brought guidance to a level of it aligned with the strong second quarter net investment income returns and the lower than historical average level of second quarter catastrophe losses.
As I talk through the segments I will address the changes we've made to align full year segment outlooks with the updated guidance I'll finish up with the recap of how we continue to think about allocating capital to maximize value for our shareholders.
When we raised EPS guidance. We also raised our expectation for 2021 core return on equity to greater than 10% for the year.
Core return on equity for the second quarter was 11, 7% and it was 12, 1% for the 12 months up from 9% from the prior 12 months on.
Although the pandemic and other unusual factors continued to contribute to the improvement our strategic initiatives are equally as important and we remain on track to our long term target of a sustainable double digit Roe.
And as we look ahead of the Madison National transaction will be of strategic use of capital to accelerate our shareholder value creation in.
In addition to the strong fit of Madison National This is another business with predictable and stable underwriting profitability as well as strong capital generation that serves the further diversify our business profile in.
In 2020, Madison National had net premiums of approximately of $108 million in statutory income of approximately $14 million.
Madison National's premiums have grown in the mid single digits over the past 5 years with the trailing 5 year loss ratio below 50%.
The transaction is expected to be accretive by mid single digits to Horace Mann's earnings from the level, we would anticipate for 2022, taking into account of normal cat load we.
We will see that benefit even though amortization of intangibles related to purchase accounting means the GAAP earnings will be somewhat lower than statutory income the.
The transaction also will deliver about 50 points of ROE improvement in the first 12 months after closing.
We expect that contribution to grow over time, as we leverage the new opportunities that Madison national and its independent distribution bring the Horace Mann.
Turning to segment results for the quarter and property casualty core earnings for the quarter were up about $8 million or 78% due to the strong contribution from net investment income, which was driven by the returns on the alternatives portfolio do.
Due to a higher underlying loss ratio underwriting income was down by about $6 million, despite significantly lower catastrophe losses, and an improved expense ratio that reflected our continued focus on expense optimization.
Premiums for the quarter were $156 million with new business volume the remaining below historical levels as we worked through the impact of the pandemic on sales.
<unk> average premiums were down slightly in the quarter, while property average premiums are starting to rise.
In line with our July 1st announcement cat losses for the quarter were $17.5 million contributing 11.3 points to the combined ratio significantly below last year and below what we anticipated when the year started the.
The 2017 event designated as cash in the second quarter were generally less severe than not as widespread as the 'twenty declared cat events in last year's second quarter.
Our revised full year 2021 guidance reflects our assumption the second half cat losses will be between 20 million and $25 million, which is unchanged from what we guided to at the beginning of the year and is in line with the 10 year average per second half cat losses.
Turning to the underlying loss ratios are experienced in the second quarter and the first half aligns with overall industry trends driving is returning to more normal patterns, while inflationary trends in labor and materials are driving costs higher across all businesses.
Let's look first at auto where the loss ratio has been 1 of the most pandemic impacted metrics for the entire P&C industry.
Even as miles driven ramps back up through the first 6 months of 2021, our underwriting discipline is key to why we are reporting and underlying auto loss ratio below the 76% we reported for full year 2019, however, because of the inflationary component of the increase in loss of <unk>.
Cost of over 2020, we are initiating appropriate rate filings in selected geographies to help keep us at our targeted loss ratio. We're confident of our agents will remain competitive on the business. They quote even as these filings begin to take effect.
For property not only as inflation of concern, but similar to others. We are seeing increased frequency of fire and non weather water losses in our case with several larger claims from those causes.
To address we're now planning to file for property rate increases in the mid single digits in many geographies in the second half of the year a bit above our original rate plan for this year.
We're also making sure the insured values of covered properties remain in line with data on the rising value of homes across the country.
Finally, we released $4.2 million in prior period reserves during the second quarter with approximately $3 million from 2019 and prior auto liability.
With our 6 month combined ratio at 92, 7%. We are still on track to achieve of full year combined ratio in line with our longer term target of $95 to 96%.
Our updated guidance for 2021 core earnings of $66 million to $70 million reflects the strong contribution of net investment income in the first half.
Turning to supplemental the segment contributed $31.6 million on premiums and $12 million to core earnings supplemental continues to experience favorable trends in reserves and are still seeing the benefit of changes.
And policyholder behavior due to the pandemic.
Net investment income on the supplemental portfolio reflects the solid progress we are making in improving the supplemental investment yield.
Supplemental sales were $1.2 million in the second quarter up from both this year's first quarter and the year ago period, as we've said the individual supplemental products that we currently offer have traditionally been sold through a consultative enrollment model that has been among the most impacted by the worksite.
Access limitations of the past year and a half.
As we prepare for a more normal back to school season, Horace Mann agents continue to sell our individual supplemental products with steady sales metrics and more open geographies premium persistency remains above 90% of testament to the value educators place on these coverages with them.
282000 policies in force.
Our revised outlook for supplemental of 2021 core earnings of $41 million to $43 million reflects the higher contribution from net investment income we.
We are also seeing the return to historical policyholder claims behavior occur more slowly than we had anticipated in this business. We now expect of full year 2021, pre tax profit margin better than our longer term target of mid 20%.
In the life segment June was the highest month for life sales since the pandemic began annualized sales for the second quarter were ahead of first quarter with retention steady. We also saw an increase on single premium life sales the sales tend to be lumpy, but they are a reflection of improving access as these are more comp.
<unk> of sales typically requiring multiple contacts with the customer.
Core earnings more than doubled from last year to $5 million as mortality cost returned to within actuarial expectations total benefits and expenses returned to targeted levels and net investment income rose 26, 9% never.
Nevertheless, because of the higher mortality cost from the first quarter, we modestly lowered our outlook for full year 2021 life segment core earnings to the range of $14 million to $16 million.
For the retirement segment second quarter core earnings ex DAC unlocking were up 88, 3%, reflecting the strong net interest margin.
DAC unlocking was favorable by about 200000, compared with $3.7 million in last year's second quarter.
The net interest spread improved 79 basis points over last year's second quarter to 265 bps in part due to strong returns on the alternatives portfolio. This was above our threshold to achieve a double digit Roe.
In this business.
Our solutions for augmenting retirement savings remain a core need for educators.
Annuity contract deposits were ahead of last year's second quarter by 15, 6% with the June beating out March the previous record as the highest month for deposit for several years on.
Our educator customers continued to see annuities is an important way to achieve their financial objectives and these products are complemented by our suite of fee based products.
Based on the strong results through the first half we increased our full year 2021 outlook for retirement core earnings ex DAC unlocking to the range of $43 million to $45 million.
Turning to investment total net investment income on the managed portfolio was up almost 50% to $84.1 million with total net investment income up 35, 8%.
The increase in NII on the managed portfolio was largely because our alternatives portfolio generated outsized returns in the second quarter as we've said driving higher investment income through increasing our allocations to the alternative investment portfolio will be of strategic driver of.
The sustained double digit return on equity.
Year to date private equity returns have been quite strong given the relative strength of the equity markets and the act of IPO window. As a result second quarter alternative results were significantly above expectations. In addition to the private equity returns are other alternative strategies such as private.
Credit infrastructure and commercial mortgage loan funds posted solid performance in the quarter.
We expect to reach our targeted 15% allocation to alternative investments within the next 2 years and expect this diversified portfolio to generate high single digit annual returns on average overtime.
The fixed income portfolio had a yield of 4.3% in the second quarter compared with 439% of year ago.
Second quarter purchase activity was largely opportunistic and focused on triple B corporate and high yield securities with attractive relative yields.
The core new money rate was 335% in the second quarter and based on current market conditions. We continue to anticipate of core new money rate of about 3% for the year.
Our updated guidance reflects the higher assumption for total net investment income of 385 million to $405 million, including approximately $100 million of accreted investment income on the deposit asset on reinsurance.
This expectation for investment income is captured in the segment by segment outlook I've summarized in our core EPS guidance range of $3.50.
To $3.70.
In closing we are very pleased with our business progress through the first half of 2021 and excited about the potential of this year's back to school as well as the progress we anticipate in 2022 and beyond.
As we stated last quarter, our top priority for the use of excess capital remains growing our business at returns that meet or exceed our Roe targets.
The acquisition of Madison National is an ideal of use of capital to accelerate our path to sustained double digit Roe.
Further after the transaction Horace Mann should generate more than $50 million in excess capital annually, assuming normalized property and casualty results.
We're committed to prudently using that capital to create additional value for shareholders beyond growth initiatives, our capital generation provide scope for repurchase as well as maintaining our track record of annual increases in our cash dividend, which is currently generating yield slightly above 3%.
And with that I'll turn it back to Heather.
Thanks, Brett and operator, we're ready for questions.
Thank you we will now begin the question and answer session.
To ask a question you May Press Star then 1 on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then 2 at this time, we will pause momentarily to assemble our roster.
Our first question comes from Gary Ransom with Dowling and partners. Please go ahead.
Yes, good morning, I wanted morning, Gary.
Dig a little deeper into the inflation topic.
And the you know.
On the labor material costs Youre talking about the.
The effect of auto and home I just.
Wondered if you could talk a little bit about how your how you've seen it emerge I mean is it still accelerating or are we at a point, where it seems more persistent as opposed to everyone's talking about it transitory or your views on that and then I guess I was also wondering if I could get a sense of how much.
Fewer homeowners automatic inflation increases how much more of that has been ticked up versus what it might be over the long run.
Yeah, Gary it's marita thanks for the question.
Right Theres been an awful lot of industry discussion on the topic lots of questions asked and answered and I think it's clear that we're all seeing it because it's there I will turn the call over to Mark.
In a minute, but at a real high level.
2 of degree it's a reflection of the healthy economy, and therefore, a shortage in supply.
That's somewhat likely to be temporary.
And to the extent that it could drive interest rates up that would obviously favorably impact our investment yields but.
But I assume you really want to hear more about its effect on P&C and obviously, we've been on spending an awful lot of time digging through the numbers and looking at this not just this quarter, but for many quarters.
So I'll turn it over to Mark to talk about that as well as the effect on rate actions that we might take to address the inflation. Some market share. Thanks, Yes, yes, as you pointed out consistent with what the broader industry is seeing we certainly see on the impact of inflation on.
On both of the auto and property lines I think.
Digging further into auto.
It's primarily been cost of labor constant parts moving to a lesser extent, some return to normalization and social inflation in the attorney involvement.
1 additional thing I would point out on the auto side with the severity is we have continued to see.
A little bit less impact of Fender benders that phenomenon of less vendor vendors driving kind of.
On the math of it.
The increased severity is still there.
Switching over to the property.
And I think more of your question was focused on the property side.
We again, we've seen the cost of labor cost of materials.
1 other thing that we've seen is <unk>.
Losses on our more severe because.
Customers are slower to mitigate some of the losses either because the.
Aren't reacting and getting folks into the 60 issues or they are having trouble finding contractors of water mitigation companies coming in.
The deal with the mitigation of therefore, some of the losses of growing from that in terms of the transitory impact I mean, I think some of it clearly is I don't think lumber prices will remain double or triple forever, but we're seeing.
Really increases in that kind of mid to high single digit low double digit across many aspects of.
On the various components of materials and labor so.
While it may be transitory in nature for some factors some things I think I do see continuing longer into the future.
I'm also not sure that once something comes up in cost how much will it come down and we need to be able to address that so to your question on inflation factors Thats certainly something that we are in the process of.
Making adjustments to what we normally would make adjustments once a year.
We're probably going to make the second adjustments of those factors and the next.
A few weeks to few months to increase coverage values commensurate with what we're seeing with increased replacement costs. Additionally, I think of global lines of business.
We'll be looking at rate actions so on.
On the auto side.
Had an expectation.
Coming into the year that we would be at our target combined run rate.
Hopefully by the end of this year beginning of next year, we're pretty satisfied with where we are year to date is right on with with what we thought but certainly were concerned with the increasing severity.
Coupled with inching back frequency towards the pre pandemic level. So we're probably going to accelerate rate actions on the auto side.
Probably more normal long term inflationary type increases up by a quarter or 2 and starts of file some of those and then on the property side.
We already had plans for low single digit rate increases and we'll probably be looking to push those more towards mid single digit as they come up the.
Mark Thanks for that of well said and I think that thinking about the absolute <unk>.
Loss ratios that we have as a starting point. The book has historically and continues to be very profitable. So when I think about our current auto loss ratios being even better than what they were in 2019 before the pandemic started it's a good place to start on our property book has been historically profitable.
So as Mark said.
We did anticipate and this just means that the normal rate increased environment happens a little sooner.
Could I get a little bit of a sense of the automatic homeowners increases.
Sort of guessing here, but maybe it's usually 3 per cent or 2 or 3% is that going to be 5 or 6 now or just sort of the ore.
Magnitude how much is that changing.
Yes.
At the beginning of the year, we actually increased to about 5% and now we're looking at potentially pushing into the 7% to 8% range with what we're seeing more recently.
Some of the replacement cost.
Estimates, we're seeing in claims.
Interesting okay.
Oh, yeah. Thank you and I just just you mentioned the along the way also on the other little bit of the social inflation and other.
Yes, the lawyers getting involved a little bit more of their was it at least 1 other auto company talking about lawyers.
I'm getting more interested in smaller limits and maybe going.
Getting involved in more auto claims even though the limits are not as high as the.
Elsewhere is that something you're seeing as well.
No I wouldn't say I wouldn't say that I would call it more of.
Returning to closer to what we saw pre pandemic.
Obviously during the during the pandemic of course was shut down.
Louise we're anxious to settle things.
And as much of that happening that was on.
Kind of a positive phenomenon during the pandemic and we've certainly seen.
You start to normalize this of course of open and so forth. The other thing I'd point out is.
Some of the the states, where the business more significantly of Florida.
Our market position is.
Deliberately.
Over the last 4 to 5 years, and so I think it's a factor for us, but it's not a big factor.
It's something we are we are noticing that thats starting to return more towards normal very true and the other thing that I would add is we do tend to have a pretty standard book.
So as far as limits coverages I think that's another place where our homogeneous market segment on <unk>.
Certainly not as we say not immune but somewhat insulated.
Its helpful and as Mark said, the underwriting actions, we took and drove prior to this timing worked out really well we started at a at a really good place and as it relates to Florida very intentional very clear on.
<unk> saw that 1 coming if you will.
Thank you just 1 last question on the inflation is there any.
Product within the supplemental where rising medical costs might have the b factor or are those all controlled by the.
Daily limits and other things you might have in place there.
Yes, I'll turn it over to Tyson.
To answer that question go ahead, Tyson I don't believe that I think right of the comment that we're not completely insulated or immune but insulated I think is appropriate here, we're not impacted by the inflationary measures that are in place right now on the supplemental products.
And I'd also share.
Add to that as we've said in the script and as we've said all along the margin improvement that we're seeing in supplemental is certainly aided.
Bye folks being a little more reluctant to seek treatment and to be out there in some of the places where we would see those expenses come through were not seeing them. We do expect that to begin to return. So we have an interesting offsetting.
Maybe less propensity for our agents out there because of school closures, but we're getting the benefit of not seeing it on the claim side, we would expect that to begin to reverse a little bit where the claims would start to come through as sales begin to increase and as we said in the script. We are seeing some nice momentum in the supplemental.
The quarter over quarter on month over month. So we are starting to see sales increase and we would expect.
James to begin to come back.
As the world opens up a little bit so pretty much as we thought it would come through.
That's great. Thank you very much.
You're welcome.
Our next question comes from Matt <unk> with JMP. Please go ahead.
Hey, Thanks, good morning.
Just wanted to follow up on some of the.
Kind of Gary.
The questions there in Mark's commentary on per.
Particularly property can you can you help us in the quarter of the of the elevated losses, you guys cited both frequency and severity of fire and water losses.
What would the particularly 1 of the other I'm thinking the severity side as more of these loss cost issues. The equation youre talking about will be dealt with.
With price, whereas frequency can bounce around a bit.
Much more 1 of the other.
Fairly evenly both.
Yeah.
And then I'll turn it over to Mark starting with fire remember.
This is very lumpy for us due to the size of the book.
On a few flyer of losses, 1 way or another can have an unusually good quarter or an unusually lumpy quarter from of fire perspective, but from a water perspective, you obviously have people at home using using their plumbing and their water more frequently I don't know what you might want to add to that Mark Yeah, I think we read.
Just kind of right I'd say that the.
The fires are kind of net normal lumpiness, if you will from from quarter to quarter, a few big buyers can make a significant difference.
On the water losses are certainly the 1 that's the new phenomenon.
That's part of what I was referring to my earlier response with <unk>.
We believe that some of those are getting worse, because it's it's customers of slower to mitigate them and if you slow to mitigate them. The problem just gets worse.
And net.
I think it's partly a factor of.
The demand out there on the supply of the labor to come in to do that whether you get some of the water mitigation companies in to stop the problem and that's something that we've seen in net.
The state is 1 bigger than the other probably not but I would again reiterate that the the fires of lumpy and the water losses of the thing that is kind of a new phenomenon that we're seeing yes. When you look at fire on an annual basis, and we do year over year over year again very profitable for that portion of that.
Line of business, but.
But when we look at the water you are seeing an uptick and I think it's similar to what the industry seeing on I think mark explained it well.
Okay, great. Thank you and then Marita I just want to go back to your comments you gave some some good numbers on kind.
The growth in the number of household relationships.
I was hoping I mean, obviously you guys get picked by segment then I think that obviously can skew things right. I mean, when you look at P&C or auto and it's been going down, but I know you guys have a relationship with I believe it's progressive where it doesn't capture of that right. It's more of the household level I was hoping can you give us any color on.
Taking out those acquisitions over even a few year period.
You can exclude last year, what sort of organic growth would you estimate even ballpark you guys had been achieving in and household relationships not a particular lines pit, but with the broader Horace Mann relationship of the educator.
Yeah, Matt it's of Great question, we would love to be able to report on a household basis and I'm looking at the team in the room smiling at me because they know how I feel about debt.
And eventually we will be able to give you some decent household stats, what I know and I think Gary actually said desk and a question on the last call. The total addressable market for US has increased pretty substantially over the last 24 months.
I am proud of the place when you think about.
The work site drill closed up pretty dramatically and instead of on.
Having that effect our success as a company it really propelled us to address the things we could address addressed during that time period and that was completing the integration of the MTA agents.
Working really hard on closing the agreement with Madison National and what that did for US is both the increase in households that we saw from NPA than we had estimated that to be approximately of 150000 households, with the additional districts from Madison National which was 200 districts and 350.
On households, that's more <unk>.
Folks under the umbrella where rather than just being leads now there are customers and when we think about our cross sell history. When we think about our persistency and retention getting them in the house and then cross selling them, we tend to keep them. So I feel really good about what we did during this year and a half.
It does increase the opportunity to do what we're really good at and that is cross sell households, and retain households, So for me that addressable market really did change substantially during this time period. So we do know we have an increase in households.
And for US I think of the work that we did to improve our profitability in P&C. Some of that was sticking to our knitting, maybe using progressive for some of the non educators using progressive for what they're good at and some of the non standard areas of our books and that allowed us to come from.
<unk> of <unk>.
A place of strength. So I think you are right for us. It is about the households is about penetration of the household and I look at the significant increase in retirement deposits and we saw it again this quarter I see the success in our life business and we're selling life business through the pandemic and I know that will trans.
Late to an increase in the other lines over time, so I feel very optimistic about about where we are.
Great and then 1 last question if I could read I appreciate your comments on.
Hopeful with Delta and everything we don't go the school systems don't go back to hybrid it.
I think thats, probably the case.
I guess my question is.
As you can as we came out of the pandemic last year or at any point during the school year because of the pandemic.
Did you see.
School districts that were physically in session, maybe still not let kind.
Of outsiders or your agents in the they might hold school in the educators are there, but have more strict practices on visitors coming in or generally would you expect that.
We'd be back to fairly business as usual.
Yeah, I think we saw a little bit of that during the Lockdowns right on.
And for our business there are some districts, where we've never been in where are they don't allow anyone in and I would imagine that would continue and in those places there is different ways for us to conduct our business I am excited about our back to school efforts and what our agents are seeing and reporting this.
The annual time, where from a sales perspective, we do our rallies.
Our agents have been engaged in the school districts many of them have physical appointments, where they didn't have physical appointments last year, we're seeing some very encouraging signs from our agents and I think that comes from the fact that as the population educators are more highly vaccinated than the rest of the <unk>.
<unk>.
The NDA reports that and this was as of a couple of weeks ago and I'm sure. The numbers have increased 88, 6% of their members of vaccinated, 89% per cent of the AF team members are vaccinated and that compares to a much lower number in the <unk> for the general population.
The efficacy of vaccines kids 12, and over whether there'll be able to do that for all elementary.
School Kids in this school year.
I think will be important as well a lot of discussion on masks or no masks, but not of lot of discussion about not coming back it's almost to the point where everyone realizes on the studies have been done that in classroom learning is the best way to go so folks are saying, we're going to be back what's the best.
Way to be back and whether that staggered whether thats with masks, whether thats, what the appropriate social distancing distancing, depending on what the school districts.
Can do so our agents feel like this is much more normal not completely normal there will still be there.
Still be some access issues, but we feel very good about the efforts that we've put into this back to school and our agents seem quite optimistic.
Great. Thank you very much on the inside I appreciate it.
Yes.
Our next question comes from John Barnidge with Piper Sandler. Please go ahead.
Thank you very much.
You've had meaningfully better.
Mineral claims utilization trends for probably longer than anticipated.
It's not something the Sip.
All of the Horace Mann, but have you been start.
Starting to think through maybe some of these claims trends could they be somewhat semi permanent in nature. The peoples behaviors are changing and how they use some of the products.
Yeah, potentially I mean like all of this who knows the psyche, who knows whether it's changed what people will do how they'll do it how often they will do it or their lifestyle changes will return to office working from home versus being in the Worksite will that change potentially some.
Accidents or those types of things you might see some semi permanent C. But we are anticipating that the majority of this <unk>.
Come back I don't know if you have anything to add Tyson, yes, I think as you think about the different product lines. There are some where have been more of drastically impacted in the pandemic environment on accident is a really easy example, folks of the reward of those those optional activities that they would've done on the prepayment environment.
Fully expect that those types of claims will come back from full force in the.
Post pandemic environment, but there is going to be behavior change and I think that is indicative of the society of that we're in right now.
Yes, John This is Brad I would also add that you saw in our guidance change page on the Investor presentation. We did take the the guidance up for the year of about $8 million and to your point.
The experienced through the first half was better than planned in the second half of the year. We actually did anticipate the claims activity claims activity going up but certainly not to the level of our original plan for the year. So there is some built in.
Favorable experience in the second half below what our original plan was but I would agree with marita theres, probably going to be potentially some permanent benefit.
Consistent with our conservative nature of our share I would.
1 other thing to add there would be the educators are going to be back in the classrooms that are not going to have the option of work remotely. So the behavior that we've seen over the last 18 months is not going to be long term for our niche right.
That's a very good point.
Within that vein.
Obviously, the educators of spices that are non educators is there any way to capture the size of the supplemental.
If market, that's actually ensuring people that actually our spouses of educators and that educators themselves.
It is.
Not necessarily an easy thing to do a lot of our products are built on covering the entire family.
There are measures that we could get to there I don't have it handy, but it's something that we could certainly present in the future. Yes, I mean, we would note of that across our whole book for auto for home for life, We clearly code it that way.
So I mean, if you're interested we can get you that that breakdown.
Yeah that would be interesting and then my last question on alternative investment income. It's been remarkably strong can you talk a little bit about real time reporting versus 1 quarter lag within that $330 million of alternative investments you have thank you.
Sure John This is Bret.
To your to your question on almost all of our all of its report on a quarter lag and certainly we've had outsized performance in the first quarter to the tune of the return of about the just south of 11% and I think the second quarter was just south of 20%.
So year to date and I think it's on the Investor presentation.
We had a return of almost 15%, which is certainly outsized in comparison to typical plan of about the.
High single digits, but as it relates to the second quarter, Let me turn it over to Ryan and he can provide some color on spin.
Specifically, what drove the outperformance of the count for the quarter sure. John This is Ryan.
As Brett mentioned, a lot of that outperformance was really episodic and tied to IPO realizations and a handful of private equity funds.
Obviously of rising equity market does bode well for continued strong performance.
But I will flag that if we isolate for just the LP component of of the alternatives. The return was over 30% on an annualized basis for the quarter. So we will absolutely take it.
We certainly didn't reflect that level of continued performance into the updated guidance.
Thank you for your answers and best of luck of the quarter ahead.
Thanks, John.
Our next question comes from Greg Peters with Raymond James. Please go ahead.
Good morning, Thanks for squeezing me on.
On the pivot back to the Madison National acquisition.
Looking at your slide deck.
Page 6.
And.
1 of the points to highlight here is that you're able to leverage long standing relationships with K 12 districts.
And the effectively cross sell.
This product into your relationships so.
And then I also listen to your comments about assured partners and the new relationship or the the reaffirmation of the relationship there. So 2 questions on this first.
As you go on the cross sell is it is it sort of a big switching cost as it relates to getting.
Of getting your product and replacing whoever the legacy the provider is and then secondly, with assured or there are other distribution partners out there that you think you can.
Bringing into the fold in.
Strike similar deals with going forward.
Yes, great Great question on the first on the switching cost of the answers now.
But what I would say as it relates to.
Madison National life right out of the get go is and we made this very clear on our initial call is that this is completely complementary for us so what's really exciting as we go back.
2 our PDI strategy building products that are relevant to educators.
Growing our distribution, having educators find us any way they choose.
On building, our infrastructure Madison National checked all 3 of those boxes and what's interesting about the distribution for us is whether educators get individual products from our eas or they get it at school in of benefits package from their school district through.
Madison National we can cover the whole educator, and what's interesting about having.
B the provider with the district and the superintendent is that builds credibility to build the reputation. It builds purpose. So if youre, an educator and youre getting.
<unk> products at school, and then euro approached by a local trusted advisor at the point of sale with other Horace Mann products that connectivity that reputation I think really does help that individual sale as well. So we're really excited.
That matched the national has been working with NHS.
Who is as you mentioned of Division if you will of Assurant partners for over 30 years. This is a relationship that's been built where together they go into the school.
And they do what they do and they do it very well for us taking that relationship that they've built over 30 years with 200 districts and expanding around that relationship.
What we do and how we do it is 1 thing but then there's also the other side of the house, where we've got relationships with many more of districts, where we can introduce Madison national in NIF and their offerings to those districts. So for US I really do think it's back to that total addressable market, it's back to our <unk>.
<unk> genius.
Market niche, where it's focusing on bringing educators everything they need whether they buy it themselves or they get the network and we are very excited about it working both ways and the fact that it's completely complementary as far as going anywhere beyond the relationship with NIH, we don't need to at this.
<unk> the relationship is strong they are good at what they do in line I'd like to spend some time harvesting that and seeing together on what we can do because we think it's pretty powerful.
Got it the the other question I had.
Is based off of slide 31.
And you spoke about the lift you had for net investment income from the alternative portfolio and I think you also mentioned that you plan to allocate more.
Towards the alternatives going forward and so I'm.
I'm looking at the slide and 14, 9.7% return year to date and all of them thinking of statistics and reversion to the mean.
And I look at the rest of the year's worth of results are less less per.
Found it I'm just wondering.
Going forward.
Certainly the first half of next year it seems like the setup for some headwinds just from a really.
Really strong performance certainly seems very real but.
Maybe you could comment there.
Sure. Let me let me start Gregg this is Brett on the prime wants to chime in he can he can do so but I guess of couple of things certainly that would not be our long term yield assumption of return for that asset class. However, we are going to have.
A larger number of dollars invested so that the contribution to net investment income, let's call it between 25% and $30 million. Prior to this year that was kind of our plan from this asset class. So we're at 8% of our.
Invested assets from this asset class.
This campaign on that slide we are targeting to take that up to 15%, yes. This asset class can be.
Lumpy from time to time, but from a pure contribution.
Standpoint, <unk> will be a larger contributor to the bottom line, even though of the yield may be less in and as you saw on our ROE.
On slide this is of strategic lever of our growth in the row.
Not just today, but certainly in the future Ryan I don't know if you wanted to add anything there yes. The only the only additional commentary I would provide is that long term target is in line with many of our other larger like peers.
When I think about it I break it into 2 pieces of 10% allocation to commercial mortgage loan and investment great infrastructure funds.
Those have a much steadier less volatile return and we're targeting a mid single digit return for that asset class performed well during the pandemic. It's a good source of cash flow.
In addition to that the other 5% again is in line with life peers, but that is more volatile, but that is where youll see more outsized returns.
Periods like we just saw this quarter I will point out we have about $600 million in commitments in the pipeline right now and we expect to put that capital to work over the next 12 to 24 months. So the contribution of the absolute dollar contribution of alternatives should ramp up meaningfully over the next few years.
And the majority of the capital commitment is in the commercial mortgage loans space. We think it's a very attractive time to put money to work there.
Got it thank you for your answers.
Thank you thanks.
Yes.
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. Thank you everyone for joining us today, and we expect to be available to meet with investors.
Ramping back up into the fall of the Florida being the kw conference in particular feel free to reach.
Most of the scheduled time and thank you again.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.