Q3 2022 Horace Mann Educators Corp Earnings Call
[music].
Good day and welcome to the Horace Mann educators third quarter, 2022 investor call.
All participants will be in listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions. Please note. This event is being recorded.
I'd now like to turn the conference over to Heather whatsoever, Vice President of Investor Relations. Please go ahead.
Thank you and good morning, everyone welcome to Horace Mann's discussion of our third quarter results yesterday, we issued our earnings release Investor supplement and Investor presentation copies are available on the Investor page of our website.
Where it is right as president and Chief Executive Officer, and Bret Conklin Executive Vice President and Chief Financial Officer will give the formal remarks on todays call well that's for Q&A, we have Matt Sharpe and supplement on good benefits marquee rusher on property and casualty like working Brock and life and retirement and Ryan Green Your Uninvested.
Or 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.
<unk> 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 some non-GAAP measures reconciliations of these measures to the most comparable GAAP measures are available in our news release.
I'll now turn the call over to Marita.
Thanks, Heather and good morning, everyone last night, we reported third quarter core earnings of 24 million or <unk> 57 per share up 14% over last year in this challenging environment. Those results clearly show how we are benefiting from the revenue and earnings diversification of our <unk>.
Your line business model.
Providing employer sponsored coverages personal lines insurance and savings products enables us to build strong and lasting relationships with our educator customers. It also makes our company more resilient.
Consistent with the external environment financial market volatility in inflation continued to affect our financial results in the third quarter, and we expect them to impact fourth quarter results as well. These effects are most prominent in the P&C segment, but remember the PNC is only a portion of what we do.
And because of educator risk characteristics are market is insulated, although certainly not immune from the full impact of broader external pressures.
Brett will cover the details of guidance later in the call, but at a high level. We now expect full year core EPS of $1 70 to $2.
It's a wider than normal range at this point in the year, but this is an unusually variable external environment.
We remain confident we are properly positioned to address the headwinds and to achieve our long term objectives of a larger share of the education market and a sustained double digit return on equity we expect will be back on our trajectory towards that target in 2023, as we leverage <unk>.
All facets of our multiline business and add educator relationships. In fact, we had an encouraging back to school season from a household acquisition perspective, which I'll discuss later in my remarks, but first as I discussed last quarter three major external factors severe weather finance.
Market volatility and inflation are challenging the insurance and financial services sectors in ways not seen in recent memory.
First weather activity for Horace Mann, our strategic actions over recent years mean that weather wasn't an outsize factor in the third quarter results, but hurricane Ian was certainly a problem for the industry and is likely to contribute to the industry's challenges going forward.
We do think and is indicative of how the increase in weather volatility tilde is a growing concern for our industry.
Ian was the most destructive U S weather event in almost 20 years and one of the largest auto catastrophe events in history further the demand surge related to Ian recovery is likely to intensify already unusually adverse inflationary trends affecting both property and auto carriers.
The second factor is financial markets volatility.
Prior to the pandemic, we had seen the longest bull market in history for both equities and bonds. Unfortunately recovering from the pandemic has been choppy with the S&P 500 declining nearly 25% through the first three quarters of 2022 before some recovery in October .
Investors are having to adjust to significantly higher and less predictable interest rates as well as considerable uncertainty around the underlying trends in inflation and growth.
Putting valuations under significant pressure however.
However, as we said last quarter, our portfolio is certainly well positioned nearly 20% of our portfolio was floating rate.
Our core portfolio, new money rate approached 5% in the third quarter up nearly 150 basis points from last year, which will certainly be a positive as we invest over the coming quarters.
But in the short term the uncertainty is having a negative impact with returns below our historical average for our limited partnership portfolio.
Further our life and retirement segment continues to experience lower charges and fees on variable annuities and asset based accounts as well as unfavorable market performance related to DAC unlocking.
And finally inflation continues to run at a pace not seen since the 19 eighties, we were in a position of relative strength in auto due to the strategic decisions over multiple years and began 2022 with a solid plan to address what turned out to be just the first wave of inflation impacts.
As the year has progressed our responses have become more aggressive both in size and timing as the inflationary trends have worsened.
In auto escalating cost are requiring even further rate increases in addition to rate actions implemented in the first nine months of 2022 we expect to increase auto rates by approximately 15% to 16% between now and the end of 2023.
Bout, 10% to 11% of that rate will earn in during 2023, plus the higher rates will be bolstered by non rate underwriting actions.
By the end of 2020 three we are confident our underlying rate level will be at our targeted pricing in nearly every state as a result, we expect to be at a seasonally adjusted combined ratio under 100 by the fourth quarter of 2023.
Of course, if future loss cost trends emerge that are different than our current assumptions, we will adjust our rate plan as necessary.
In property, we expect to increase rates by 8% to 9% over the next five quarters on top of the 7%, 8% and increases we will see from inflation guard, which raises coverage values.
Combination should result in an overall average premium increase in 2023 in the mid teens.
Our long term combined ratio target remains in the low nineties for property.
As we said last quarter. These external events have clearly interrupted our progress towards our long term goal of a sustained double digit Roe.
But the objective remains unchanged and our plans will have us back on the trajectory of achieving that objective next year.
Our confidence stems in part from the characteristics of the seven and a half million educators nationwide, who make up our target market. They are preferred risks conservative savers and loyal customers.
These factors lead to lower loss costs and higher retention compared to the broader population. That's why we often say that our market is insulated, but not immune from the worst of the external trends.
We've spent most of the last decade positioning Horace Mann to be able to significantly increase our share of this market by expanding our product set and strengthening our distribution and modernizing our infrastructure. Our transformation included the addition of employer sponsored and voluntary worksite benefits over.
The past several years rounding out our product game board.
The 2022 back to school season was a showcase of all that we bring to the education market with Horace Mann agents returning to school buildings at a level, we haven't seen since 2019.
With COVID-19 vaccines readily available for students of all ages schools are generally settling into a post pandemic cadence. So in most geographies. Our agents are attending more education events, providing more in school financial wellness workshops and are better able to build new relationships.
With in person interactions.
We're seeing strong growth in our student loan solutions program.
The broader student loan forgiveness discussions in the news have driven increased interest in the topic and and program specific to educators.
We've had about 75% more accounts created in 2022 than in 2021.
Since the program's launch in 2016, we've helped educators identify more than $450 million in student loan forgiveness opportunities primarily through the federal public service loan forgiveness program our.
Our program is complementary for educators increases our brand affinity and our niche market and build strong prospecting opportunities that we can leverage to accelerate household acquisition.
What's most important it means that we can help districts retain educators, who appreciate support with the intricacies of the forgiveness program.
And this year is more normal operating environment. We're also hearing from our independent benefit consultant partners that school administrators are more attuned to addressing staff recruitment and retention challenges. They appreciate the spectrum up solutions under the horsemen umbrella in fab.
Checked this week Mark to the first full K through 12 district implementation using our new benefit enrollment platform.
With our team working in partnership with the benefit consultant to support the district.
Policy application counts one of our key leading indicators for individual life sales with strong running above last year's back to school season.
That growth continued in October .
Further educators continue to begin their relationship with Horace Mann through four O <unk> retirement saving products, including our attractive annuity products. These options continue to appeal to the straightforward financial objectives of our educator customers, while complementing our growing suite of fee based.
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The improved access also contributed directly to the 10% higher quarter over quarter sales in voluntary supplemental products.
The momentum continued into October with sales for the month, well above last year and at the highest level of any month since February 2020.
We see the trend of year over year improvements in knee sales continuing throughout 2023.
Access was a factor in more than 20% growth in sales from new auto customers. This growth is coming largely from states, where we are confident in the outlook for pricing.
That said, we're fully aware of the risks inherent in today's competitive auto market.
Because we are an educator company not a mono line auto carrier, we are maintaining our long term approach we offer a fair price over the life of a customer relationship. These relationships are with educators, who are inherently preferred risks.
Further full.
Fully 70% of our auto policies are six month policies.
I commented during the height of the pandemic that we werent surprised educators work focused on shopping for auto insurance.
Given their frequently changing work environment and concerns about their own families.
Those concerns are now abating with the vast majority of insurers increasing rates by double digits. Many educators are more likely to consider a new carrier. Our exclusive agents are there often in the schools to provide a horse man quote.
The result is an increase in sales in states, where our pricing is adequate.
Stepping back whether it is through a new auto policy, a new life policy or any of our other interactions each new touch point with an educator has the potential to be the beginning of a lifetime relationship.
And they often become package customers not just for homeowners, but potentially also buyers of savings products.
Our customer cross sold percentage is far higher than the industry average and our retention rates for cross sold customers grow the more products they own put more simply the lifetime value of an educator customer with multiple lines of business is higher than a mono line customer.
In summary, while our results in the short term had been affected by very challenging external factors. We have many reasons to be optimistic about the opportunities to leverage our leadership position in the education market in 2023 and beyond. The addition of the supplemental and group benefits segment provides.
Our earnings and revenue diversification and our educator market focus keeps us insulated.
Even if we arent fully immune from all impacts of external events.
We are seeing improved school access and a growing sales pipeline, we have a strong investment strategy that is aligned with our long term objectives.
And we have a shared dedication to serving this deserving education market. All of these factors will persevere past short term economic pressures.
And with that I'll turn the call over to Brett.
Thanks, Marita and good morning, everyone as Marita mentioned inflation in financial market volatility impacted our results again this quarter as we reported core earnings of $24 million or <unk> 57 per share.
In light of the results, we made two adjustments to our full year segment guidance. One we now expect the P&C segment will see a core loss for the year of between 13 and $19 million. This is below our prior guidance due to third quarter results and our expectation that the fourth quarter.
We'll reflect the continued impact of inflation as well as the normal seasonal pattern, where Q4 can be our highest auto loss ratio quarter.
Our cat loss expectation for the fourth quarter is unchanged at $5 million, our 10 year average for the period.
And two we now expect the supplemental and group benefits segment will see core earnings between 55 and $58 million. This is above our prior guidance, reflecting the strength of third quarter results.
The net effect of those changes is an update to our full year EPS guidance to a range of $1 70 to $2 on one hand, it's certainly disappointing to see external impacts interrupting our trajectory toward our long term performance objectives on the other hand this year is clearly.
Instructing the value of the earnings diversification that the new Worksite focus business is brain.
They represented almost a quarter of revenue in the first nine months of 2022 and provided $43 6 million and core earnings let's.
Let's look at the results and outlook for each segment, starting with P&C, where the segment core loss was $2 5 million net.
Net investment income for the segment continues to reflect lower returns on our limited partnership portfolio largely due to the equity market volatility.
The underwriting loss improved from last year's third quarter due to substantially lower cat losses.
$14 6 million of Cat losses were in line with our historical average, although auto losses, where a larger portion of the total than we might've expected due to hurricane Ian.
Total written premiums were up a bit more this quarter than they were last quarter and we're certainly going to see that rate of increase continue to accelerate the.
The year over year increase in average written premiums for auto policies improved sequentially to four 4% from one 6% in the second quarter, while the increase in average written premiums for property policies improved to nine 2% from seven 5%.
Policyholder retention continues to rise.
Turning to third quarter underwriting results excluding catastrophe.
Auto where the underlying loss ratio rose to 78, 4% from 76, 9% in the second quarter and 76% in last year's third quarter, although frequency continues to trend back up towards pre pandemic levels is miles driven continues to increase.
Higher severity is the primary driver of the increase in loss costs.
This reflects the challenges being faced by the entire industry, including the unprecedented level of inflation that is driving higher replacement costs the trend towards more severe accidents and increased utilization and cost of medical treatments.
In the third quarter. We also continued our longstanding approach of a proper response to trends that have an impact on open claims from prior periods with reserve strengthening adding 2 million pretax two auto reserves in.
In property, the third quarter underlying loss ratio rose to 53, 3% from 43, 5% last year mid.
Mid teens increases in severity are having impact as well as an increase in the number of non cat water and fire claims, which can fluctuate period to period.
The nine months underlying loss ratio was up only slightly over last year, largely due to higher severity.
As Marita described in line with industry experience, we have been more aggressive with our rates and other underwriting actions as the environment has worsened we are confident in our plans to address rising severity in both auto and property.
Turning to life and retirement core earnings were down 33, 5% inline with expectations. We discussed last quarter similar to P&C. This segment is feeling the impact of lower returns in our limited partnership portfolio and other effects of equity market volatility. However, the net.
Spread is in line with our guidance, we continue to expect the full year spread will be below the 2021 level of 290 bps, but still comfortably above our threshold to achieve a double digit ROE in this business.
Operationally the third quarter saw solid growth for both life and retirement.
Life sales rose year over year, while persistency remained strong mortality costs for the quarter were above last year, but are down year to date and remain in line with actuarial expectations.
Net annuity contract deposits increased sequentially and we had another strong quarter for retirement advantage. The fee based mutual fund platform that we believe creates long term opportunity for this business segment.
Our outlook for full year core earnings for the segment is unchanged at $56 million to $59 million.
Now, let me turn to supplemental and group benefits segment, you'll recall that Madison National's results were added effective January one of this year, which makes some of the comparisons to 2021 performance less useful.
Overall this business continues to perform very well and we are excited about its potential and the clear earnings diversification that brings we raised our 2022 guidance for this segment to $55 million to $58 million due to the strong performance in the third quarter for.
For the full segment third quarter premiums and contract charges earned were $68 $3 million of which Madison National's employer sponsored products represented $38 million segment sales of $4 $4 million were evenly split between the voluntary supplemental and employer sponsored products.
Net investment income for this segment reflected the addition of Madison National portfolio effective January one.
Seasonality also affected the level of benefits and expenses, which were $19 million in the third quarter down from $27 million in the second quarter and 35 million in the first quarter, we expect the seasonal fluctuations to be a permanent fixture of this segment's results, but in addition to seasonality we benefited.
About $1 million from a couple of minor adjustments for example, updating social security offsets and disability reserves.
On an annual basis, our long term benefit ratio targets remain about 35% for voluntary products and about 50% for employer paid products. We continue to expect the ratios will be near those levels for full year 2022.
Amortization of intangible assets is expected to be approximately $13 million or <unk> 30 per share after tax for the year.
Now to investments looking at the performance of our consolidated portfolio net investment income was down slightly largely due to the 3% annualized return on limited partnerships in the quarter.
Private equity valuations were challenging offsetting solid results in private credit and real estate equity strategies.
On a year to date basis LP returns are now slightly below our historical average which is in the range of 8%.
We expect L. P returns will be below historical average again in the fourth quarter combined with this quarter's underperformance. This was the primary reason, we slightly lowered guidance for net investment income on the managed portfolio to $295 million to $305 million.
The new money rate on fixed income investments has continued to exceed portfolio yields this year, although our investing activity for portions of the summer with somewhat limited by the outsized P&C claim activity plus opportunistic share repurchases.
As we mentioned in the earnings release, we are incurring modest realized losses in the quarter, primarily due to portfolio repositioning to improve book yield due.
Due to the significant rise in interest rates unrealized losses on the portfolio have risen to $632 million.
Changes in unrealized gains and losses do not affect statutory capital or our view of the high quality securities that make up our core portfolio.
In closing inflation financial market volatility and severe weather are clearly, making this a challenging year.
We're addressing each of these challenges and continue to benefit from actions that have made Horace Mann, a stronger and more diverse organization.
Our long term objectives remain the same first sustained double digit ROE and second 10% average annual EPS growth, our life and retirement and supplemental and group benefits segments are a stable source of earnings, which mitigates the occasional volatility of P&C.
This in turn creates a stable source of capital, which in a more typical year means we would generate at least $50 million in excess capital above what we pay and shareholder dividends.
While our priority is and will continue to be growth, we are committed to using available excess capital for steady shareholder dividend increases and opportunistic share repurchases.
In 2023, our diversified business model will be key in getting us quickly back on our trajectory towards those objectives focus on providing strong returns to shareholders. Thank you and with that I'll turn it back to Heather.
Thank you 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 one 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 two at this time, we will pause momentarily to assemble the roster.
Our first question comes from.
Gary Ransom from Dowling and partners. Please go ahead.
Good morning.
I'm going to carry.
Auto loss trends.
That's no surprise them on the severity side.
I'm trying to discern how much the trend line has changed in the middle of the year and you know you mentioned, a few things that might be causing it but.
Is this is this claims that are that were dormant say during the pandemic and our.
Revived and now look worse than they did before or is there something more recent where you're getting just worse.
Whereas hips and where severe accidents, you know more attorney representation in those kinds of things can you give us some color on that.
Yeah sure Gary there's a lot wrapped up in that question and before I hand it over.
Mark to answer your specific auto question I do think it's important to put this whole auto question in perspective, and I think it's important to remind us all that were unusual in the auto space right and we talk about it all the time are homogeneous customer set the preferred risk characteristics.
Of our educator clients, we've been doing it for a long time, we have a lot of data we have long term relationships.
The cross selling of all of our products driving high retention. We also have the benefit of our exclusive agents, which I think's give us.
A lot more control in the Piceance in P&C space more than a broader IAA distribution channel. If you will and it's important to remember when we make choices. We can leverage the third party distribution that we've built over a long time, where its where its appropriate and where its available or <unk>.
Strategy the way, we've always talked about it to offer a fair price over the life lifestyle sites cycle really has you know we're sticky.
We have long term relationships, we don't play a market share game, where we ramp rates down to drive market share and then ramp them back up.
And hope that that retention will hold its a different it's a different approach than the broader market and I do think that context is important when we unpack where we are today as an industry in the auto space, but make no mistake about it these inflationary trends and their timing or.
Clearly they're on their unprecedented there they're very very unique at least in my I hate to say it out loud 40 years of doing this but I'll turn it over to Mark to answer your specific question and probably a little more mark.
Yes, sure Marie I think.
Before I get to the specific question.
I would like to spend a few minutes just kind of unpack and the overall view of where we are in auto and how we're reacting to what we've been saying I think as we've come out of the pandemic.
We and the industry, you're experiencing do you know what I spoke of where your bread said unprecedented inflationary changes.
And I'd say, it's been quite a challenge to project.
Loss cost trends, even in the near future periods. All we can do is evaluate the experience.
React with adjustments to our rate and non rate actions and do the best we can to predict how we think the trends will continue to emerge.
When we look at this quarter.
It's no different we continue to see the rising.
Repair and replacement costs.
Kris number and the cost of medical treatments and certainly I think some re emerging social inflation issues.
You know with courts, starting to open back up.
And we expect those these.
These loss trends.
We continue to.
To exceed our long term averages both in the fourth quarter and I think throughout 2023.
To that end as we mentioned, we're adjusting our rate plans to be more aggressive both in the size and the timing of rate changes in the fourth quarter and through 2023.
In Q4, we are actually expecting to increase rates in 16 states, representing 48% of our business are buying.
By an average of about 7% to 8% in Q1 2023.
Planning increases in 22 states, representing 41% of our business with an average increase of nearly 10% and what I'd say is many of these increases were.
Kyle.
Several months back so as the trends have continued to emerge we're reevaluating and I expect.
Given the continued elevated inflationary impact that in many of those places we'll take a look to take additional rate in the second half of 2023.
So in aggregate, we expect auto rate increases will total approximately 20%.
Over the seven quarters.
And then through the fourth quarter of 2023 that does reflect.
Rate increases that we've implemented over the last few quarters plus.
Plus the additional rate, we expect to take over over the next five quarters.
In addition to these rate actions.
We have.
They need to make certain that our both our new business and renewal underwriting remains appropriately tight.
We've also <unk>.
Implemented and will continue to implement non rate actions, such as discount and mileage verification actions.
As well as looking to maximize the use of our own internal claims team and photo estimating which compared.
Compared to the use of independent adjusters results in that as severity outcomes.
We think with these actions, we expect that we will be rate adequate.
Nearly all states by the end of 2023.
This includes some rate even in California.
We filed for rate in both our underwriting companies in California, and we're confident that we can demonstrate our rate need.
And that we're optimistic that we'll retain approval in the near future.
Because of the position that we're in.
And nearly all states.
B, where you adequate by the end of the year we're comfortable.
Growing new business.
Because we know that.
Even in places we may not be rate adequate yet we see line of sight to getting there and if we can't get there then we'll slow down.
Or stop writing new business and in some cases, we can rely on some of our third party relationships.
To continue to serve the educator needs for auto in those places however, we do yes.
That knowledge in the short term debt.
Some of those partners may have some of the same pressures that.
That may create some availability issues even in those places we look to partner with those third parties.
Lastly, I would say if the trends emerge differently than we think then we'll evaluate will react and will make changes.
Getting back to your specific question, Gary on kind of the changes that we're seeing from an inflationary standpoint.
As you know things were kind of quiet during the pandemic.
Some of what we had seen coming into the pandemic with some of the social inflation cost of medical medical treatments that slowed down and it was a little difficult to see at the time, you know how things would emerge and I think as things open back up.
Clearly seen as I pointed out earlier the cost.
Some of these medical treatments going up the number of medical treatments happening. It's certainly we have seen.
Some return or increase in the level of attorney involvement I think when we look at our overall loss cost.
For Q3 were kind of mid single digits over where we were.
For Q3 2021 however.
It's kind of a tale of two stories here when you break it down.
We've actually experienced frequency.
That's <unk>.
Probably mid single digits lower than it was in Q3 of 2021, the frequency has been actually running lower throughout the year, probably a little bit lower in the first half and it's crept up a little bit in the third quarter as Brett talked about in the script, but it still is below where we were.
And in 2021, so when we look at that you know where we are.
Probably seeing overall severity inflation kind of in the high single digits when compared to Q.
Q3 of 2021.
Thanks Mark.
Can we just dig in a little bit on that on your frequency club in there that it's down I.
So when I look at industry data is it actually just if I didn't know anything else other than thinking that the economy is opening up a little bit more people are driving at least 22 versus 21 I might expect frequency to go up you're obviously seeing some decrease do you are there pockets of the country are kind of re.
Well, that's decreasing and I'm just wondering if you had any color there.
No I don't think I have a lot of specific color, but I think the I think the one thing that is a challenge when you look at our book is obviously because we are educated dominant the patterns can be different, especially when you look at.
You know where people return to school how are they return into the school so.
So the timing of changes can be different you know quite frankly.
It's.
You know I think been a little bit of a surprise for us. This year that we did see that kind of turn earlier in the year, where frequency was actually a little bit lower than last year, maybe that could be somewhat gas price related.
And as I said more recently.
It has been picking up but remains still below last year, if that makes sense.
Yes, okay.
Thank you for that very thorough answer I'll I'll leave it there for now.
Thanks, Gary.
The next question comes from John Barnidge from Piper Sandler. Please go ahead.
Could you please talk and thank you very much for the opportunity.
Yeah.
Brett mentioned opportunistic buybacks.
How should we juxtapose that commentary in the backdrop of macro uncertainty.
Think about our activity in the market in that regard.
Yes. Thanks for your question I mean, I I would answer it with and I'll see if Brent wants to add anything on to this with a it depends.
I mean, it's still a thought a part of our thought process, but we think about this holistically as part of the holistic capital management process and strategy as we've talked about before.
For US you know underlying with the strategic moves we made as a company we generate more excess capital than we did before and that is first and foremost for profitable growth.
And also our strong increasing dividend position that we've had for a very long period of time and where it when it makes sense for us to do share repurchases. We will it's still an important part of our capital management thought process, Yes, I think that's well well said merida John obviously, it's a.
Thing Act.
Based on results based on where the stock is trading and I think you know through through the third quarter I think we've shown that when there were opportunistic.
<unk> Apo <unk>, we certainly did that in within the quarter I think we bought back about 300000 shares which brought the total year to $24 million of share repurchases and we happen to hit those levels since 'twenty.
<unk> 15 in 2016, and those were around the 'twenty, one 'twenty $2 million Mark. So obviously with results certainly below where we had originally had planned them for the excess capital is not where we would like it to be but as we indicated when we get those lines performing at.
Our targeted returns will generate that 50 million dollar level of excess capital after dividends.
Great. Thank you for that and then well.
Volatility of the business this year, but maybe I'm gonna supplemental group benefits business strong results guidance went higher.
Is there any.
Lack of utilization benefit that is.
One time in nature that we shouldn't be thinking about recovery next year I'm just trying to dimension, how we think about this strong sales and distribution.
That show.
With margins that are strong too.
Yeah. John This this is Brett let me let me let me take this and you know Matt may want to chime in here as well, but obviously.
From both a sales and benefits ratio perspective, there is seasonality in this segment more so than our other segments I mean, they the other segments do have seasonality, but obviously with this being a new segment to the Horace Mann family, we're still learning, but if you.
Look at I would say the sales for the year.
As it relates to kind of the the Madison National or group benefits piece, both have been steady all year long you know as well as the seasonality. We've seen has come through in the and the benefits ratio I've got them right here in front of me, but the first quarter was 66% the second.
Quarter was 43 and as you saw we had a very favorable third quarter, which tends to be a better quarter for their business, but I would have you probably focus more on the year to date benefit ratio of 45% and I think it was either covered in my prepared remarks are marinas, we would target long term up about 50.
Per cent, so that'll be you know there'll be some fluctuation in that but I think as it relates to Madison National that will have I think inherently more seasonality than the other half being the MTA business. Yeah, I think that's right, but while we're on this supplemental and group benefit subject, we couldnt be more pleased.
With where we are I mean, we have to remember that we closed on Madison National This calendar year. So it hasn't been part of the family for that long and we've said it before that if we bought MTA in Madison National on the same day. This is the structure.
That we would have put in place and now have in place. It's one division. So you know it may be a little bit of a marketing spend but whether an educator buys their products individually or gets them from their school district, we've got them covered and that certainly is playing out broadening our reach.
Each within this edgy.
Educator segment that we're in and there's no doubt and I think this quarter is.
Is a is a good example of that it's giving us the earnings diversification that we can.
Clearly had strategically planned for I I couldn't be more optimistic about the sales momentum and you're seeing that coming back in as we're back in the schools face.
Face to face and I think we're just we're just scratching the surface.
And then lastly.
On the premium persistency unrelated maybe inflation.
We've seen persistency declined.
The news as well.
John We can't we can't hear we can't hear your question you went in and out could you try to repeat it.
Yes, absolutely. Thank you very much.
Premium persistency for voluntary was 91, three that's been trending down as the year progressed.
Some other supplemental writers have also seen persisting.
Persistency declined I was curious about if you could dimension that with <unk>.
Inflation dynamics impacting that at all.
Yeah, Matt I don't know if you want to.
Respond from a persistence standpoint.
Yeah happy to Marina. Thanks, Sidney Thanks for the question. So we've seen persistency dropped slightly throughout the year I don't know that we can draw a direct connection between inflation and the premium persistency number more so as an increase in the overall business.
We're bringing in into supplemental as our as our.
Our.
As we start to add new business, the new business has a different persistency metric.
The business season, so I think what youre actually seeing in that number.
Our new business is kicking up and as our new business kicks up the premium persistency number comes down until we get back to the pre pandemic sales levels and I think that's what you're seeing that's actually making its way through the premium persistency number.
Yeah. John This is Brad I would just add that you know we're down less than a point year to date 91, three versus 92, two so still very very strong persistency percentages.
Thank you very much yeah, Jonathan I think it's another place when you look at the rest of the market those big guys that youre, probably referring to this is another place where we can say that insulated, but not immune comment that you are probably all sick of it.
But it does play out in our educator space this tends to be a much stickier segment.
Yeah.
The next question comes from Matt <unk> from JMP. Please go ahead.
Thanks, Good morning.
Good morning.
Brett I guess first question for you.
I'm looking at the book value and the adjusted book value and just noticing kind of what a difference a year makes with them kind of inverting with what's happened with interest rates. So I was hoping you could just help us with kind of the maturities com or kind of timing and duration.
How should we think about kind of.
But baked in losses there.
<unk> back into reported book value as bonds mature.
Yeah, Let me, let me start and maybe Ryan will want to chime in here as well, but obviously, we're not alone with a drop in book value as it relates to the.
The increase in the unrealized losses on the portfolio and the rising interest rates and you know just to put things in perspective, I believe our unrealized capital loss position.
At 930 is more in the range of I think about a $450 million unrealized loss versus a year ago. We were basically I think around about a $350 million gain so the delta between.
The periods is pretty pretty large and I think youre seeing that.
<unk> really threw out a lot of.
The earnings releases I hope that helps I don't know if you wanted to add anything to that Ryan Yeah, Yeah, Matt specifically to your question on duration.
We're at about six and a half year duration, that's down about a quarter over year tactically down you know as I look back a year ago.
But you need to remember its a liability driven investment strategy. So we are we have liability we have target liability durations.
That are in a band that give us a little bit of flexibility and we're moving towards the lower end of those targeted bands have been over the last year, but I'll point out you need to remember the asymmetry. If you will in the accounting treatment you see the mark to market. If you will on the asset side go through unrealized gain loss through a OCI impact that total reported.
Book value number, but you don't see the same on the liability side. So my point I think of the portfolio as looking at.
I think our book value looking at it excluding the unrealized gain loss because of that asymmetry and because you know I don't expect to realize many of those unrealized losses, we have a.
A stable highly liquid portfolio.
And we have good ongoing new business cash flow so.
Our profile our liability profile does enforce us to monetize those those losses.
From either a claim or surrender activity perspective, so I hope that additional color helps because the book value.
<unk> is basically flat year over year old.
Yeah, Yeah, no very helpful and that makes a lot of sense.
And then a second one if I could.
Marita, just maybe kind of the forest from the trees sort of question.
Sit here.
For several quarters now you've had all your puzzle pieces in place.
Schools are back open so you've been able to kind of goes through your kind of kind of that cycle.
You know, what what sort of what sort of report card you'd give yourself on kind of how things are going versus.
How you would hope they would go.
When youre barked on some of the acquisitions and putting the pieces together.
You know, Matt it's a great question and certainly a hard quarter to ask that question. So the response might surprise you, we're right where we hoped we'd be when we talked about our PDI strategy building the products that are relevant in this educator space expanding our distribution and our reach not only.
To individual educators, but in the school districts as well as well as funding for modernizing our infrastructure.
We are doing those things and are right on track.
The good news is the things that affect us and the industry right now are clearly fixable, we have the pieces in place to do exactly what we need to do to restore and drive profit profitability within the P&C space and we have the earnings diversification.
That we set out to gain by the strategic moves.
That we've made I'm very excited about the momentum in the business. We had our first in person meeting with our exclusive agency plant in a long time to kick off our back to school and our year and the interest the enthusiasm the energy.
You could just feel it and we see it in the numbers, we put the information in the script, so folks could see how much more we're doing in the schools and the really good news is everything they learned over a very strange two years has a multiplicative effect on the reach they.
And the things that they learn so our agents are doing both our recruiting numbers are up.
Its benefits consultants on the supplemental group benefit side or its E days on the retail side, we're seeing a lot of interest in joining Horace Mann. Some of that we know is our market niche and folks want to wanting to be a part of that mission of serving educators, but you can feel the end.
G in the place and we're very optimistic.
Being back doing things the way, we do it but with a whole new set of learnings for when we can so I'm I'm very bullish and very excited that all the moves we made were the right moves.
And pricing in a short tail auto line is something we know we understand and we've put the pieces in place to rectify it everything else is looking like we had hoped it would look and we feel really good going forward, which is why we tried to give you as much information as we could.
That's great to hear.
You very much for the insights.
Yes. Thank you.
The next question comes from Greg Peters from Raymond James. Please go ahead.
Oh, Hey, good morning, this is actually on for Greg.
Just a quick question on the auto rate increases as their estimated pro forma premium you guys are expecting to come with those rate increases and maybe how are you expecting to see retention trend as the rate increases go a little bit more aggressive so you're talking probably about average premium on the auto and then the resulting retention.
I'll, let mark comment on that I mean, I think it's important to go back and look at our retention characteristics as a company, which tend to be quite strong and quite frankly have been increasing this.
This year in holding even with the.
The rate increases.
Staticity is something that I think we're all changing our thought process on since we're all in the boat at the same time, but go ahead mark.
Yeah I.
I think the Merida makes a good point on the elasticity side and the impact of retention clearly we've seen our retention come up.
Considerably over the last couple of years since we've been in a stable rate environment and in a in a.
A normal world when you were pushing as much as.
You know 20 points of rate over a seven quarter period of time.
You would expect to take some hit to retention you know I'd say that there is there's two things going on right now that one.
Obviously, the market is moving generally in sync.
So that you know as customers go out and shop may not find.
Find greener pastures are lower rates someplace else and the second thing I think just the general dynamic.
The country and what people are seeing with price increases and their expectation. So I expect that we will see.
Tom.
You know very moderate impact on retention, but it is likely to be less.
Then.
We have seen traditionally given the size of the rate increases that we're going to have and therefore I expect to yield.
Most of the rate that we're pushing through the book.
Especially given that it's it's more across the board as opposed to a small set of customers getting very large increases in a number of customers getting smaller, but its a pretty level playing field here.
Alright got it thank you.
Thank you.
The next question comes from Meyer Shields from K B W. Please go ahead.
Great. Thanks, Good morning, all good.
Good morning.
Oh, sorry, hi.
I wanted to dig into a topic, we've discussed before and that's basically reinsurance purchasing.
Now that we have a better sense of what reinsurance rates will look like.
And.
Now that we've also gone through.
With maybe some unusual characteristics like the significant flooding that we saw with hurricane Ian I was hoping you could maybe wrap that up and share with how you think about share with us how you're thinking about that now.
Sure Amir let me, let me start and then if mark wants to maybe add a little color. He can do that as well, but I mean, there's no doubt about it that the reinsurance.
<unk> markets are gonna be hardening certainly lot of things you read the.
The straw that broke the camel's back probably but we're obviously still in the process of negotiating as we do.
At this time every year, it's too early to pin down.
Our rate increases would be I think it's pretty safe that it will be a rate increase however, I would say that we faired even over the past few years better than most just because we're.
We're really not costing the reinsurers anything with not hitting the the layers on a on a frequent basis and I think we brought this up when it happened, but I think we have very good partnerships with our reinsurers and you know you don't have to go too far back for the campfire, where we were a very good steward.
<unk> of their capital.
We didn't sell.
Sell out the sub rural rights, but I you know I think last year. It's old news I think most were anticipating 10% rate increases and ours with south of that we certainly will negotiate tough just because we were paying the majority of those losses I think.
For a lot of reasons, where a we're a very good risks for the reinsurers as well so.
I know I didn't tell you exactly what we think our rate increases we're going to be there, but they will be up from the prior year, but I think we will manage those.
Accordingly, yeah, and historically as Brett said our reinsurance.
<unk> tends to be better than the market, just because of our experience and our profitability in the line Mark I don't know, whether you want to comment specifically on auto and flooding I mean, obviously in the end we did see some auto loss from flood losses with vehicles.
But again tends to be pretty pretty.
Pretty spread out in these events and any comment on auto and flooding there.
No I mean, obviously.
The industry was that I think going to be a surprisingly large event I mean.
We did still have some auto exposure in Florida, we did experience some losses.
But I think you know it's.
Ian as a whole for us on a direct basis is relatively benign event I think the bigger concern from our standpoint is what does it do.
Potentially.
Caused some demand surge not only amongst what could happen on the property side, but now you have hundreds of thousands of autos that where people are going to be out.
Seeking new cars and that's just going to put more pressure I think in the short term on some of the potentially used car pricing.
Thanks for that Mark Okay.
No that's perfect one last nuance on that if I can just I'm trying to get maybe a clearer sense of the balance on the one hand, you're unusually diversified which I think means you can handle a little bit more PNC volatility on the other work on the other hand, maybe you should expect fundamentally more pnp volatility.
I'm not sure I'm not sure I'm following you.
I'm just what I'm.
I'm, hoping to get a better understanding of how you're thinking about those two components.
With regard to either raising or lowering maybe reinsurance attachment points for next year.
I don't know which of those Oh, I see I see what you're saying I mean, you know it's interesting every year, we look at alternative structures for reinsurance.
And for the most part we've said this before but for the most part the reinsurers are really good at pricing those alternative structures. So if you don't need them and youre not looking for balance sheet smoothing. If you will they tend to not make sense over the long haul and with.
Our property business when you take.
The appropriate longer term look at our block of business, it's profitable and has been profitable for us obviously with each year of increasing volatility that changes a bit and with each year. We look at those structures, we priced those structures, we make sure that we have the right reinsure.
<unk> program in place and don't have any immediate plans.
To change that and there was nothing about this cycle and breaths work with the reinsurers and their pricing that makes us think any differently about the property line I don't know if you want to add yeah, I would say in those alternatives that are out there the price of that poker.
Gone up a lot as we come into the new renewal season versus our traditional cat.
Cat coverage that we have yes, I mean theres no doubt that in this environment, we all need more rate and we'll all get more rate and eventually.
You know that that that helps that helps a lot.
Okay perfect. That's very helpful. Thank you very much. Thank you. Thanks.
Okay.
Time constraints. This concludes our question and answer session I would like to turn the conference back over to Heather Watson for any closing remarks.
Thank you and thank you everyone for joining US today, we are definitely looking forward to responding to any questions and having additional conversations we will be meeting with investors, including a variety of conferences in particular, a virtual event with Piper in the next few weeks and an in person event with JMP and New York will be in New York, So let us.
Now if you wanted to see us and we'll be glad to talk I. Appreciate your time.
Conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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