Q2 2023 Horace Mann Educators Corporation Earnings Call
Hello, and welcome to the Horace Mann educators, Q2, 'twenty twenty-three investor call.
All participants will be on listen only mode. So do you need assistance. Please signal a conference call first followed by the Starkey followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your Touchtone phone to.
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Please note today's event is being recorded.
And now I'd like to turn conference over to Heather Weisel, Vice President of Investor Relations. Please go ahead ma'am.
Thank you and good morning, everyone welcome to Horace Mann's discussion of our second quarter results yesterday, we issued our earnings release Investor supplement and Investor presentation copies are available on the Investor page of our website.
He does the REIT as President and Chief Executive Officer, and Bret Conklin Executive Vice President and Chief Financial Officer will give today's formal remarks.
With us for Q&A, we have Matt Sharpe, Mark dress yours, Mike working back Ryan Grenier and Steve Mcenany.
Before turning it over to Marita and want to note that our presentation. Today includes forward looking statements as defined in the private Securities Litigation Reform Act of 1995.
The company cautions investors that any forward looking statements include risks and uncertainties and are not guarantees of future performance.
The 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 investor supplement.
Now turn the call over to Marita.
Thanks, Heather and Hello, everyone last night, we reported second quarter core earnings of three cents per share in line with our pre announcement. Despite the severe weather losses, Horace Mann continues to see the benefits of the earnings and revenue diversification efforts, we've completed over the past five years.
Both the supplemental and group benefits in the life and retirement segments provided solid core earnings contributions again this quarter.
Before we start I want to welcome our new Chief operating Officer, Steve Makinen are to call Steve joined US in May bringing his more than 25 years of experience overseeing large personal lines financial services and worksite businesses to Horace Mann.
This first months with us he has already been an asset to the team as we look to build on our growing momentum in household acquisition and market share expansion.
Back to the quarter.
Brent will discuss in more detail later in the call. We now expect full year core EPS of $1 20 to $1 45, primarily due to higher catastrophe losses.
Our confidence in our long term business strategy and the results Horace Mann can deliver remains unchanged. We continue to expect 2024 core or are we near 10%.
We believe educators deserve a partner who is looking out for their financial wellness, one that will help them protect what they have today and prepare for a successful tomorrow and we believe educators want a partner that has solutions tailored to educators needs delivered through knowledgeable distribution and built on customer.
Or friendly infrastructure.
Our multi line approach sets us apart not only for customers, but as a business as well our business diversification allows us more flexibility as a larger entity when challenges arise in one of the segments.
Before I talk about the actions we are taking to address external factors facing the property and casualty industry I would like to talk about how our multi line approach is enabling us to serve more educator households, with more products through more channels.
Our Worksite division, which encompasses our employer sponsored products.
As well as our Worksite direct products allows us to reach educators through their school district employers.
We're expanding on the infrastructure that we gained with the N T a life and Madison national acquisitions to support accelerated growth.
Including a unified product platform, we introduced this year in our employer sponsored lines alone we offer coverage to more than 750000 employees.
The division continues to perform above our expectations in the first half of the year Worksite direct product sales doubled while employer sponsored products sales increased by 50% we.
We are actively introducing enhanced group supplemental product line this fall, bringing to bear the strengths of both acquired businesses.
The products are chosen by the employer and underwritten at the group level to provide employees options for purchase employers appreciate our long standing reputation in the educator niche and educators value our solutions orientation.
To accelerate the pace of growth in this segment. We are also investing and expanding our distribution reach recruiting agents to support the worksite direct business and expanding our relationships with benefit brokers that brings solutions to employers, we're making strides in both fronts and continue to build brand.
<unk> recognition in this space.
Turning to the retail side of the business. We're also seeing successful agent recruiting with new agents, reaching key milestones at a piece, we havent seen since before the pandemic.
Sales growth in our life and retirement segment remains encouraging with net annuity contract deposits, increasing 8% for the quarter and life sales up here year to date, we continue to see a nice contribution to life sales from the Worksite direct agents, an early indicator of the cross sell potential across divisions.
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The value of our diversification is clear Horace Mann can remain profitable in 2023 despite the unprecedented pressure on the personal lines P&C industry.
Our life and retirement earnings continue to be solid and we are benefiting from growing contributions from the worksite business with that context, Let me give you an update on the actions, we're taking to address the challenging loss cost environment.
That being the property and casualty industry.
In auto the rate plan, we have been implementing since the beginning of 2022 to address inflation and the return to pre pandemic levels of frequency is proceeding as we planned with up to 25 points of cumulative rate expected by year end 2023 as a result, the underlying loss ratio.
Approaching the inflection point, we anticipated and based on this trajectory, we will generate an underwriting profit during 'twenty 'twenty four on our path to a long term combined ratio target of 97% to 98%.
We have filed and are continuing to file for rate is needed to address anticipated loss cost trends. For example, we have filed for a California auto rate increase of 20%, reflecting our loss experience in that state for the past three years, we are hopeful that we'll be able to put that right.
And to use in the first half of 'twenty 'twenty four.
We are pleased that retention is holding across our auto and property books, but we also know that pricing changes can have an impact on our customers. We will continue to be thoughtful about balancing customer impact with the reality of current loss cost trends, we have equipped our agents with the data and resources for discussions with Paul.
IC holders.
For property the increase in adverse weather frequency intensity and geographic reach means we need to take a multifaceted approach. We are addressing the increased loss costs associated with the more severe weather events in three ways additional filed rate product changes and enhanced modeling.
First rate, we expect to meet our rate plan of 12% to 15% increases nationwide by the end of the year. In addition, we continue to implement inflation guard increases that allow us to make adjustments for higher home coverage values at renewal.
So the impact on average renewal premium through year end is closer to a 17% to 20% increase.
As we evaluate the impact of continued elevated weather losses, we've already doubled our planned rate increases for property for 'twenty 'twenty four we now expect the impact on average written premiums next year, we'll be approaching this year's levels one important.
An example is the property rate increase of about 25% we have pending in California will work closely with the department to bring that filing to resolution with the impact expected on renewals in 2024.
Second we are looking to modify policy terms and conditions to mitigate the cost of damages. For example in several key states. We are implementing an age of roof life settlement process that will result in significant savings to offset higher loss cost and catastrophe volatility in those states.
Lastly, we are continually updating and enhancing our modeling sophistication.
We have brought in new tools, specifically to help us better understand the impact of severe convective storms, and we will integrate that data into our future rate and underwriting actions.
These actions to further address severe weather will start to contribute in 'twenty 'twenty four but the full benefit can be expected in 2025 as Bret will discuss these actions keep us on track to our combined ratio targets and we will respond with further actions if external factors require.
As our business grows more diversified the property and casualty segment becomes a smaller part of the larger business, but retains its strategic importance. For example, as the most broadly purchased personal lines product auto remains a key entry point to educator households.
Turning to the current financial concerns facing educators student loan repayments will resume this fall after a three year federal pass this milestone disproportionately affects teachers, who often have higher educational requirements for their jobs and lower salaries than workers in the private sector.
And while some borrowers may have counted on 10 or $20000. One time loan forgiveness assistance that isn't likely to be broadly available anytime soon.
To be clear the Baidu administrations plan that was blocked by the Supreme Court is completely separate from the public service loan forgiveness program that is the bedrock of our student loan solutions program.
Yeah.
We're in the midst of an awareness campaign to encourage educators, who may have been counting on one time forgiveness to engage with us instead, our free online accounts connect educators with resources and support to navigate the often confusing process of obtaining the public service loan forgiveness that they deserve.
To date, we've helped educators identify more than 600 million of loan forgiveness solidifying our value as a true partner to the education community.
Back to school preparations are underway across the company, we are engaging with our agents both in person and online to prepare for the school year last month I traveled to South Carolina to meet with many of our Worksite agents and I was encouraged by the amount of enthusiasm from veteran and new agents alike before.
I turn the call over to Brett I want to take a step back to reiterate our confidence in our long term strategy to gain market share and achieve a sustained double digit return on equity on occasion external challenges may slow our progress, but we are clearly building a more resilient company with a more diversified earned.
<unk> profile.
This has clear benefits for investors employees agents and most importantly, our educator customers and with that I'll turn the call over to Brett.
Thanks, everyone for joining our call today Merida provided a solid overview of the value of our diversification as well as the ways. We are addressing the unprecedented pressures on the P&C personal lines industry. So let me turn to the details of the segment performance starting with P&C.
Catastrophe losses in the quarter were in line with our pre announcement at 41.5 million leading to the segment's quarterly loss.
Segment net investment income was approximately 40% above the prior year with limited partnership portfolio returns at targeted levels compared with declines last year.
Although there were 19 catastrophe events in this year's second quarter, including multiple severe convective storms across the Midwest and Texas in June the impact of catastrophe losses on our results was actually 4.2 points lower than last year.
As we continue to address post pandemic loss trends our analysis confirms that we took the appropriate reserve actions throughout 2022.
Turning to the results total written premiums rose again this quarter by eight 2%, reflecting the accelerating impact of the rate actions that we have implemented today.
With the rate environment rising across the industry, we're pleased to see very stable retention.
The sales growth, we're seeing is coming largely from states, where we're most confident in the outlook for pricing.
Marita covered the rate and non rate underwriting actions, we are taking in both auto and property, but let me add a few details on each business.
Oh the rate we've implemented translated into a year over year increase in average written premiums of 11, 4% up from eight 1% in the first quarter and four 8% in the fourth quarter.
Largely due to weather related frequency the auto combined ratio for the full year is now expected to be above the 107, we had originally targeted but we expect to return to an underwriting profit in 2024.
We continue to take rate actions that are designed to get us to our long term target level of 97% to 98%.
Turning to property second quarter average written premiums were also up 11.4% year over year.
Rate increases country wide continue to be bolstered by inflation adjustments to coverage values.
The property underlying loss ratio was 49, 8% in line with the first quarter.
Due to the severe weather, we've doubled our rate plan for 'twenty 'twenty four the additional contribution from those actions keep us on track to achieve our long term combined ratio target of 92% to 93% in this business.
Taking into account the impact of cat losses. The P&C segment core loss is now expected to be between 27 and $32 million for the full year.
We adjusted our full year cat loss contribution to 95 to 100 million or about $15 five points to the combined ratio acknowledging the potential for continued outsized weather losses through the second half.
The longer term combined ratio target for the segment remains at 95% to 96%.
Turning to life and retirement the segment performed largely as expected with adjusted core earnings at 17.5 million net.
Net investment income was negatively impacted by lower limited partnership portfolio returns.
As a result, the annualized net interest spread on our fixed annuity business was 203 bps for the second quarter down from 303 bps last year.
Year over year, the net contribution from our F. H L. B funding agreements remained stable, although net investment income reflected higher earnings from the floating rate investments backing the program.
Interest credited similarly reflected offsetting higher interest expense.
For the segment total benefit expenses, the total of mortality cost and change in reserves declined again this quarter as favorable market risk benefit adjustments for retirement more than offset a marginal increase in life mortality experience.
For the retirement business net annuity contract deposits were up 8.3% to 113 million for the second quarter.
Cash value persistency was down a bit to 92.2% largely outside of our core 403 be accounts we.
We had another good quarter for retirement advantage the fee based mutual fund platform that we believe creates long term opportunity for this business segment.
Life annualized sales were flat for the quarter, but up 10% year to date with persistency remaining strong.
We continue to look for life sales as a way to initiate and solidify educator relationships and we are very pleased with the progress.
We updated our core earnings guidance for the segment to 63% to 65 million to reflect the lower than anticipated fixed annuity spread in the first half.
The longer term targeted range, but the spread remains at 220 to 230 bps.
Now, let me turn to the supplemental and group benefits segment, where we are reaping the rewards of the investments we have made and will continue to make in diversifying into this higher growth higher Roe and less capital.
Capital intensive business for.
For the segment second quarter core earnings were 11.8 million with the blended benefit ratio at 49% remaining ahead of our long term target of 43%.
The benefit ratio for the Worksite direct product line again moved toward our target for that business, although utilization remains below historical levels.
The benefit ratio for the employer sponsored product line, which is normal seasonal fluctuations increased from last year's relatively low results for this period and remains in line with expectations.
Second quarter premiums and contract charges earned were $66 million with segment sales at $4.4 million sale.
Sales levels in our Worksite direct business the supplemental products acquired in the N T. A transaction in 2019 have reached the pre pandemic run rate and we're looking forward to growing from here.
Sales of employer sponsored products are seasonal typically highest in the first and third quarters when benefit years begin.
We continue to gain traction with our distribution partners and are pleased with the momentum we are seeing.
As we noted last quarter seasonal fluctuations in sales patterns and the benefit ratio are anticipated in our full year guidance for worksite.
But based on the strong first half we again raised our guidance for this segment to the range of $47 million to $50 million.
We continue to expect this segment will represent about 25% of total premiums and contract charges earned for the year.
Total net investment income on the managed portfolio rose, 3.9% to $82.5 million is floating rate investments benefit from the higher rate environment, including our commercial mortgage loan funds.
Pretax investment yield on the portfolio, excluding limited partnership interests was $4 five 2% with new money yields continuing to exceed portfolio yields in the core fixed maturities securities portfolio.
The a plus rated core portfolio remains concentrated in investment grade corporates, municipals and highly liquid agency and agency MBS securities positioning us well for a potential recessionary environment later in 2023 in fact, we've recently seen opportunity.
These to by double a plus rated agency securities it yields above 5%.
Following the valuation adjustments taken last year the higher rate environment is also benefiting from commercial mortgage loan fund returns. This is offsetting lower limited partnership portfolio returns compare with the last year's second quarter.
Due to the elevated interest rate environment, the net unrealized investment loss position of the fixed maturity securities portfolio Rose to 501 million pretax at quarter end compared to $453 million at the end of the first quarter.
As you'll recall, unlike a pure play P. M C P or nearly 90% of our asset portfolio supports longer term liabilities in the LNR and S and G b segments with asset durations around seven years.
We don't expect to realize many of those unrealized losses as the portfolio is high quality, we have steady cash flow and our liability profile doesn't typically require us to monetize those positions from either a claim or surrender activity standpoint.
As a corollary. This is the primary reason we focus more on adjusted book value the metric that adjust for both unrealized investment losses, and net reserve re measurements attributable discount rates.
At June 30th adjusted book value per share was $35.55.
This is the book value, we use when we talk about core return on equity.
We also had $17 million and net investment losses in the second quarter as we again took opportunities to reposition the portfolio to improve book yield.
Our net investment income guidance is unchanged as we continue to expect full year net investment income from the managed portfolio to be between 325 and $335 million and approximately 26 million quarterly from the deposit asset on reinsurance.
In closing despite the challenges facing the P&C industry I want to reiterate how clearly first half results demonstrate the progress we are making to leverage the stronger and more diverse organization that horse man has become we remain confident in our path to sustainable double digit Roe.
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Our life and retirement and supplemental and group benefits segments provide earnings and capital to mitigate volatility and P&C. The growth we anticipate over the next several years will lead to an increasing share of the education market.
And we see a clear path to our longer term profitability targets in P&C.
As a result, we believe 'twenty 'twenty four core arrow will be near 10%, which is now the equivalent of about $3 50 in core EPS.
We continue to target, 10% average annual EPS growth in 'twenty, 'twenty five and beyond.
And our targeted profitability across the segments, we know Horace Mann is capable of generating approximately $50 million in excess capital above what we pay and shareholder dividends, we remain committed to maintaining our financial leverage and capital ratios at levels appropriate for our current financial strength.
Ratings, but continue to expect to use excess capital in line with our priorities first to support growth second for shareholder dividends and third for opportunistic share repurchases.
We continue to expect our progress toward our objectives will accelerate over the coming quarters as we remain focused on providing strong returns to shareholders. Thank.
Thank you and with that I'll turn it back to Heather.
Thank you operator, we're ready for questions.
Yes. Thank you at this time, we will begin the question and answer session.
Rushing you May Press Star then one on your Touchtone phone.
Using a speaker phone please pickup your handset before pressing the keys.
Your question. Please press Star then two.
At this time, we will pause momentarily to assemble the roster.
And the first question comes from Mac holiday with J M P.
Hey, good morning.
Good morning morning.
Merida and Brett you both touched on it a bit about market share growth and kind of picking up share as we go forward I was hoping you could expand on that a little bit just you've spent.
A good chunk of the last several years you know we'd be growing your product set and when you think about that and the kind of the geographies you're in and what you're doing with distribution can you give us a little bit of an idea as you look forward like a reasonable investable timeframe three to five years, maybe something like that you know where do you think that I think.
They've got 15 ish percent market share today of the seven and a half million K 12 educators.
Where where you think that could be what the current kind of you know strategy of Horace Mann supports longer term.
You know, Matt I really appreciate you asking the question because this quarter for us really wasn't anything new other than I think it's the <unk>. The strategy that we've laid out and this was a weather quarter that the entire P&C industry saw not only cats, but <unk>.
Buying whether as well, so really nothing new or nothing in the numbers that take us away from that strategy that we've had now for a very very long period of time, we built the products relevant to our educator space, we feel really.
Good about the distribution momentum that we have recruiting is back on track. Our agents are excited about the future and feel really good about a lot of the modernization efforts, we put into place and our infrastructure. So we're more confident than ever on our ability to build market share in the educators.
And also thinking about others, who serve that community in the script, we talked about how many individual supplemental and group benefits customers that we gained with Madison National and N T. A and certainly new business since that point in time and building on the <unk>.
Ross cell momentum.
You know that we started you know when you think about Madison National and N. T. A certainly was about earnings diversification, we saw that in this quarter.
You know, we're not a model I P&C carrier, where an educator company and we've built a resilient multiline company that helps us in times like this we talk a lot about insulated but not immune.
Immune from the P&C industry trends that are out there I think we manage them well, but we also have other businesses that are working really well for us and provide that ballots.
Product expansion in the K through 12 niche, which we did with the acquisitions and continue to do as we expand what we can bring to that educator niche not only products, but the solution orientation, we said it in the script.
How many student loan conversations we have had that drove that $600 million of student loan.
Forgiveness for those educators that solidifies that relationship and I think we're seeing that work I mean think about the trends in P&C right now any actuary would expect with those kind of trends with that much rate, we would see a retention going down we're not.
You know, obviously here and there you know you'll see it. These are big numbers, we don't assume that we'll hold exactly the way. It is but during you know these types of times are our retention in P&C in our retirement deposits, it's pretty sticky.
Our customers stick with us because of the types of things that we do.
For them and with them. So I am very confident in our strategy and where we're going and feel good about that market expansion.
You say, 15% you know you say, how we think about that growth I think we're just scratching the surface of what we can do with educators and then how we expand that to other groups that look very similar to our educator niche.
That's super helpful. And then just this.
Just digging into one of the numbers a little bit so I'm looking at slide 18 in the presentation and you break down some industry numbers at a seven and a half million in K 12, educators and how many are you know teachers versus kind of a structural and support staff. Its its kind to even a little more teachers, but pretty even split I'm I'm curious horse would Horace Mann.
Man's current book of business look similar to that split or do you lean more heavily to a teacher versus a a sport support staff on administrator or does your book look like the industry.
Yeah, I would say are and we know that our split would lean more towards the teacher space a lot of our research a lot of our outreach.
A lot of where our agents came from a lot of them from the principal and superintendent ranks are I would say that when you look at our teacher base it would be skewed towards the teachers themselves, but also the administrators, we have a fair amount of principles a fair amount of superintendents.
Our book, we certainly don't dissuade our agents from talking to support staff, but I think the models that we bring to bear the financial planning the student loan solutions. The donors choose in classroom grants a lot of our solutions really gear more towards.
The teacher and the administrator.
Article.
That makes sense. Thank you very much for the color I appreciate it.
Yep.
Thank you and the next question comes from John <unk> with Piper Sandler.
Thank you for the opportunity today.
Question about the core EPS for 2004.
No I would ask what's the run rate catastrophe loss load I know run rates in catastrophe losses.
Really don't seem to go hand in hand anymore, but how do you think about that as we look forward to next year. Thank you yeah, I, obviously, it would probably be premature to answer that question for 'twenty. Four you saw what we did.
In our estimates for the second half and how we thought about second half catastrophes.
The only thing you know about this number when you put it out there John is it's gonna be wrong, you're either going to be too high or too low. So you got to rely on the math right. You take recently you take five year 10 year averages you run it out everybody is doing the same thing right now this second quarter was.
You know I won't say biblical but it was certainly historic in many in many ways right. So we look at that and we say, it's probably prudent for us to assume in the second half of this year that those weather patterns will continue but we haven't said yet how we think about what we will put in our plans for 2024.
But it's real so I think the real question is what's everybody doing about it and I think we were very clear in our script that it's about rate rate and more rate. The days of a 700 dollar homeowner policy are gone right. It's about sophisticated sophisticated models models and taking advantage of every piece of science that's out there.
In your in your underwriting and it's about coverage changes.
This issue has become certainly an affordability issue in many places and as you know when you read it's becoming an availability issue in in some of the more problematic states as well. So I think the industry is very concentrated on this and we will figure. This out we will get the right coverage, we will get the right price.
But make no mistake. This is something that we are and everybody is focused on yeah. John This is Brad I would add I think you've been tracking us long enough to know that over the past few years, you know I think it's not too far looking back that you could see a seven 5% cat load that I think we took it to China.
And this year, our got we guided the 10. So it's something we always you know factor in to our yearend guidance that will include like we always do.
And our fourth quarter earnings release.
Thank you and then on the follow up is there a level.
The expense ratio, that's elevated that we should be thinking about if we do get normal cats that might go away.
Or how should we think about expense ratios as a result.
John This is Bret again, I mean, our our expense ratio is actually running at what we would expect I believe for both the quarter.
And the full year were up about 4% and that's consolidated them you know we've guided to around 27 to 27 and a half historically and really don't see any.
Significant changes there. So were you know the the increase we're seeing in the expenses are as a corporation are consistent with inflation.
Thank you very much I appreciate the answers.
Thank you and then last question comes from Meyer Shields with K B W.
Oh, Thanks, a similar question and I'm not looking for a number but more in terms of how you're thinking about this.
I guess, it's a little less than 10 years, and we had a V unexpected frequency spike in about 2015.
Now severities biking, and I'm wondering how maybe that's a question for Mark how are you thinking about the profit and contingency provision.
Provision in rates does that needs to go up simply because it seems like there are more platforms out there.
Yeah, I don't know if you have a specific answer to that Mark I think it's an interesting way.
Asked the questions everything has to be factored in I mean on the expense side of it and then I'll turn it over to Mark on the trends because they think there might be a more general trend to answer to that question on the expense side, you know keep in mind that we've got a fair amount of strategic growth built into our thought process going forward we do.
Do the acquisitions that we did we didn't build the product we didn't pay for the infrastructure, we didn't build out the distribution to not grow so our plans clearly are around growing this place.
Yes.
Structure.
Reflect that I'm very proud of the fact that we were able to hold our expenses relatively flat, while we did a lot of heavy lifting and building. This place. So it was ready for the growth that we're very confident will come but I'll turn it over to Mark and let him answer anything around the trend.
Question there.
Yeah, I mean, Matt.
I think we I mean, we already due to some extent factor in our higher profit and continued cheap.
Load and the property side to address it but I think you do make a good point, it's something that we need to continue to look at as an industry.
Because I believe that I think marita believes as well and she said this several times that you know if we look at auto.
Auto has been clearly a severity issue. It's a short tailed line I think everyone's eventually going to catch up to the.
The severity.
<unk> there, but on the property side. There you know there is this question about the long term impact of weather and are we taking enough rate to keep up with it and R. R.
No profit targets are not high enough.
V. Our combined ratio targets low enough and I think that's a legitimate question that we all need to answer.
As an industry and I think you know.
As we said in the script and Rita.
Reiterated that we will take an aggressive look at property rates, we've already doubled.
Our expectation for next year in terms of rate. So we're looking at another year in 2024 similar to this year because we're trying to address I think some of the issues that we're all experiencing throughout the industry with the continued impact of weather.
Yeah.
Okay. No. That's very helpful. Second question, maybe this is a little bit more yes, or no but.
Can you talk about the tools that you have to ensure that if you're implementing the necessary rate increases in P&C.
You were able to retain customers that have policies in the other segments that are doing pretty well.
Yeah, that's a that's just a yes or no, but if you want it yes or no I'll give you a yes, but I'll go a little bit a little bit further I think that's where our third party strategy comes into play.
We know that our retention is stronger when we have a multi line customer the majority of our customers our multiline customers when it makes sense for us to place a particular line of business with another carrier we have a stable of many strong third party relationships that we've had.
Now for some time and they like our educator business as much as we do I mean, we understand that it's a little bit more difficult in a harder market because we may all be thinking the same things at the same time, but.
But make no mistake, we have a fair amount of business with third parties and that works out quite well for us so with or without a third party our retention numbers I think speak for themselves and.
And I said that earlier that were considered where we're continuing to see those numbers.
Those numbers hold.
Yes that was way better than a yes or no. Thanks, so much.
Thank you.
Thank you and the next question comes from Greg Peters with Raymond James.
Hey, good afternoon. This is sid on for Greg.
Weird commentary on the difficult states in personal auto, but I'm just curious outside of the difficult states. If you could give us a sense on how you feel about where the rest of your book is or if there's anything you can give us on how much of the book you feel is closer to the longer term combined ratio target.
Yeah, I mean, I can I can turn that over to Mark, but you know we think about all the state the same way right you're going to price to a combined ratio target and work with the department to get the rate you need them to get there. So in that respect they're not all that different. It's just some states are more difficult to get that.
Right then other states, but I'll I'll see if mark has anything to add to that.
Yeah, I think a couple of points here I think when when we look at what we've been able to achieve and what we think we can achieve we have.
A very high level of confidence.
To the path of getting the right rate level and just about every state.
You know, California is the one that does stand out there for everybody.
I think we have seen a very.
Certainly.
That the department of insurance and spend more proactive in working with carriers on their rate need which is why we have both on the property side and the auto side made recent filings that are substantially more than we have historically done and we.
We are we are hopeful and somewhat confident in our ability to get that.
Right over the next six to nine months and get that into the book, which will make us feel a lot better about that particular <unk>.
<unk> state.
The other problem states that are.
I hear a lot of the competitors talking about are just places that we don't have any presence or a little presence in New York and New Jersey, We don't have presence there.
Florida has been particularly problematic.
For many in the industry and as I think drew.
Driving or at least others have commented on its impact on prior year.
Development of our Florida book for.
For all intents and purposes is is it's almost inconsequential at this point it was at one point.
678 years ago, maybe 10 plus percent of our of our auto book is now far less than 1%, so really outside of California, which again I'm more optimistic about than I, probably would have been six months ago.
We have a fairly high degree of confidence in our ability to get to the level, we need to get out to be profitable.
That was very helpful Mark thank.
Thank you for that and you know I would say we're growing in the right places we said it in the script and more states are falling into that bucket as we get to rate adequacy in those states and I think it's also important to remember that we've got control over our distribution, we have captive distribution. So when we want to.
Tightening the underwriting wheel when we wanted to put underwriting changes in place when we wanted to put.
Any of those levers to drive non rate underwriting actions.
Its immediate we can go out to our agency plant and say this is how we're managing this particular issue in this state and that's what they do or not in an independent agent world, where that timeline might be a little bit longer to control behavior. So that's helpful as well.
Alright got it thanks for the answers.
Thank you.
Thank you and once again, please press star and then one if you would like to ask a question.
Okay.
And we do have a follow up question with a Mac holiday with JMP.
Hey, Thanks, Hello again.
I just had a question probably for Ryan maybe for Brett.
So there's it's been focused in the market you know kind of year to date on commercial real estate and so forth I was hoping maybe you could give us an update on your guys as investments there I know you've been very thoughtful and have a very good view of the market and maybe while at it touch on the the limited partnership floods as well.
Sure. Thanks for the question. Matt. This is this is Ryan so when I think about total real estate exposure in the portfolio, it's about 12% and the vast majority of that over 80% of it is senior commercial mortgage loan exposure and if we wanted to dive right into the <unk>.
Asset class the exposure to office that folks tend to be the most concerned about right now.
That total exposure across our entire portfolio is less than 3%. So it's under $200 million and it's mainly senior commercial mortgage loan funds. The average LTV on those office properties to 68%. We've got a strong debt service coverage ratio on them as well and we're doing you know monitoring.
We know what's in the portfolio, we know line by line building by building lease roll by lease roll and we feel pretty confident in our exposure there.
The bulk of the portfolio was skewed towards multifamily, which historically has performed very well through various economic cycles and.
You saw some pressure in our commercial mortgage loan funds last year, which was the function of the fact that the majority of our commercial mortgage loan exposure is equity method of accounting. It's in funds, that's a little bit different than peers, but we took our valuation adjustments early mark that portfolio to market basically quarterly and so you can see the REIT.
Bounded returns this year this quarter's annualized return for CML funds for Q2 alone was over 6% and you know these are mainly floating rate securities and they are going to serve us well in the rate environment. We're in.
Stepping back and looking at the limited partnership portfolio again in the second quarter was a nice rebound from the negative returns we saw in the first quarter Lps by nature of what they are will be lumpy quarter to quarter performance.
It will be somewhat volatile, but we put up a mid.
Hi, 5% return this quarter and when I dissect that our private credit and our infrastructure strategies continue to deliver solid steady returns.
This past quarter. They were they were low double digits and that offset some of the valuation pressure that youre going to get from the more volatile equity investments and so when I think about LP returns for the full year, we're guiding to being under our historic eight 5% level for that portfolio and that's really reflective of the first half performance.
But to sum it up we feel confident we like our exposure and we feel pretty good about the prospects as we move through this economic cycle.
Thanks, Ryan I appreciate it.
Thanks, Matt.
Thank you.
And this concludes our question and answer session I would like to return to Florida, Heather what sorry for any closing comments.
Thank you and thank you everyone for joining us today, we realize it's a very busy day and I will be available to arrange additional follow up conversations as people thought.
That's based on just also flagging, we will be at the kw conference in September and will be in Chicago. The sampling we've gone out for a day that Raymond James is helping us put together and then looking out into November Theres, a number of conferences. Another trip with with Piper Dam P. Dowling lots on the road lots of chances to talk to people so with Florida.
That dean and I wish everyone a good day. Thank you.
Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.