Q1 2024 Horace Mann Educators Corp Earnings Call
Good afternoon, and welcome to the Horace Mann educators first quarter 'twenty 'twenty four Investor Conference call.
Operator: and welcome to the Horace Mann Educators first quarter 2024 investor conference call. All participants will be in listen-only mode.
Operator: All participants will be in listen only mode.
Operator: Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then 1 on your telephone keypad. To withdraw your question, please press star, then 2. Please note, this event is being recorded. I would now like to turn the conference over to Bret Conklin, Chief Financial Officer. Please go ahead.
Operator: Should you need assistance. Please signal a conference specialist by pressing the Starkey followed by zero.
Bret Alan Conklin: After today's presentation there'll be an opportunity to ask questions.
Bret Alan Conklin: To ask a question you May press Star then one on your telephone keypad to withdraw your question. Please press Star then two.
Bret Alan Conklin: Please note this event is being recorded.
Operator: I would now like to turn the conference over to Bret Conklin Chief Financial Officer. Please go ahead.
Operator: Yeah.
Bret Alan Conklin: Thank you and welcome to Horace Mann's discussion of our first quarter results. Yesterday, we issued our earnings release, 10-Q, Investor Supplement, and Investor Presentation. Copies are available on the investors page of our website. Marita Zuraitis, President and Chief Executive Officer, and I will give the formal remarks on today's call. With us for the Q&A are Matt Sharpe, Steve McAnena, Ryan Greenier, Mark Desrochers, and Mike Weckenbrock.
Bret Alan Conklin: Thank you and welcome to Horace Mann's discussion of our first quarter results yesterday, we issued our earnings release, 10-Q, investor supplement and Investor presentations.
Bret Alan Conklin: Copies are available on the investors page of our website.
Bret Alan Conklin: Marine is a writers president and Chief Executive Officer, and I will give the formal remarks on today's call.
Bret Alan Conklin: With us for Q&A, we have Matt Sharpe, Steve Mac, and Anna Ryan Grinning ear, Mark Desrochers, and Mike weapon Brock before turning it over to Marita I want to note that our presentation. Today includes forward looking statements.
Bret Alan Conklin: Before turning it over to Marita, I want to note that our presentation today includes forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995. The company cautions investors that any forward-looking statements include risks and uncertainties and are not guarantees of future performance. These forward-looking statements are based on management's current expectations, and we assume no obligation to update them. However, 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 used some non-GAAP measures. Reconciliation of these measures to the most comparable gap measures is available in our investor supplement. And now, I'll turn the call over to Marita.
Marita: As defined in the private Securities Litigation Reform Act of 1995.
Marita: The company cautions investors that any forward looking statements include risks and uncertainties and are not guarantees of future performance.
Marita: These forward looking statements are based on management's current expectations and we assume no obligation to update them.
Marita: Actual results may differ materially due to a variety of factors, which are described in our news release and SEC filings.
Marita: In our prepared remarks, we use some non-GAAP measures reconciliation of these measures to the most comparable GAAP measures are available in our investor supplement.
Marita: And now I'll turn the call over to Maria.
Marita Zuraitis: Thanks Bret and welcome everyone. Yesterday we reported first quarter core earnings of 60 cents per diluted share, a nearly threefold increase from last year's first quarter, primarily due to the progress we've made in restoring PNC profitability. Total revenues were up 9%, and earned premiums and contract charges were up 8% over the prior year. These results reflect strong sales momentum in our retail division, led by a 35% increase in property and casualty sales.
Marita: Thanks, Bret and welcome everyone yesterday, we reported first quarter core earnings of 60 cents per diluted share.
Marita Zuraitis: Nearly three fold increase from last year's first quarter, primarily due to the progress we've made in restoring P&C profitability.
Marita Zuraitis: Total revenues were up 9% and earned premiums and contract charges were up 8% over prior year.
Marita Zuraitis: These results reflect strong sales momentum in our retail division led by a 35% increase in property and casualty sales premium.
Marita Zuraitis: We realized a dramatic improvement in the profitability of our PNC business and continued to benefit from the strength of our diversified business model built to meet the needs of educators and public sector employees. While net investment income on the managed portfolio was up 7% for the quarter, we saw a handful of real estate-related funds perform below target levels due to a mark-to-market valuation adjustment, consistent with the experience of the broader industry. This obscures some of the progress we are making in life and retirement and the supplemental and group benefits segment.
Marita Zuraitis: We realized a dramatic improvement in the profitability of our P&C business and continued to benefit from the strength of our diversified business model built to meet the needs of educators and public sector employees.
Marita Zuraitis: Well net investment income on the managed portfolio was up 7% for the quarter. We saw a handful of real estate related funds performed below target levels due to a mark to market valuation adjustment.
Marita Zuraitis: Consistent with the experience of the broader industry. This obscured some of the progress we are making in life and retirement and the supplemental and group benefits segments.
Marita Zuraitis: Bret will talk about the outlook for the individual segments later in the call, but at a high level, we remain confident in our 2024 full-year outlook of core EPS in the range of $3 to $3.30, net investment income closer to the lower end of the current range of $465 to $475 million, and return on equity near 9%. Today, I would like to focus my remarks on the progress we're making across the business to reach the profitability targets and gain market share.
Marita Zuraitis: Brett will talk about the outlook for the individual segments later in the call, but at a high level, we remain confident in our 'twenty 'twenty four full year outlook of core EPS in the range of $3 to $3.30 net investment income closer to the lower end of the current range of 465.
Marita Zuraitis: $475 million and return on equity near 9%.
Marita Zuraitis: Today I would like to focus my remarks on the progress, we're making across the business to reach the profitability targets and gain market share first and foremost we are making substantial progress towards restoring P&C segment profitability.
Marita Zuraitis: First and foremost, we are making substantial progress towards restoring PNC segment profitability. Our reported first quarter PNC combined ratio of 99.9% was a 13-point improvement over the prior year. Combined with strong segment net investment income returns, this led to a first quarter segment profit of $11 million, a $22 million increase compared to a year ago. As an aside, first-quarter catastrophe losses remain elevated. Industry losses exceeded the 10-year industry average, and Horace Mann's first-quarter losses also exceeded our 10-year and five-year averages.
Marita Zuraitis: Our reported first quarter P&C combined ratio of 99, 9% was a 13 point improvement over prior year combined with strong segment net investment income returns. This led to a first quarter segment profit of $11 million or 22 million dollar increase compared to a year ago.
Marita Zuraitis: As an aside first quarter catastrophe losses remain elevated industry losses exceeded the 10 year industry average and Horace Mann's first quarter losses also exceeded our 10 year and five year averages, however, when comparing quarter over quarter, our catastrophe and non.
Marita Zuraitis: However, when comparing quarter over quarter, our catastrophe and non-catastrophe losses were lower than the prior year. The majority of our combined ratio improvement is due to the successful execution of our multi-year profitability restoration strategy. From 2022 through the end of 2024, we expect our rate increases and non-rate underwriting actions to equate to total premium increases of nearly 40% in auto and nearly 50% in property. However, despite these increases, policyholder retention has largely remained steady and consistent with our historically strong retention.
Marita Zuraitis: Catastrophe losses were lower than prior year.
Marita Zuraitis: The majority of our combined ratio improvement is due to the successful execution of our multi year profitability restoration strategy from 'twenty to 'twenty two through the end of 'twenty 'twenty four we expect our rate increases and non REIT underwriting actions to equate to total premium increases of.
Marita Zuraitis: Nearly 40% in auto and nearly 50% in property.
Marita Zuraitis: Despite these increases policyholder retention has largely remained steady and consistent with our historically strong retention.
Marita Zuraitis: We attribute this to our loyal customer base, our educator-specific benefits, and the overall value we provide. We strive to offer a fair price over the lifetime of a customer relationship, and we equip our agents with the information to explain the economic context to customers. Over the course of 2024, we are currently planning for a countrywide average of 10 to 15% rate increases in both auto and property. This plan includes recent approvals from California for a 22% increase in homeowners and a 13% increase in auto, both of which are now in effect.
Marita Zuraitis: We attribute this to our loyal customer base, our educators specific benefits and the overall value. We provide we strive to offer a fair price over the lifetime of a customer relationship and we equip our agents with the information to explain the economic context customers.
Marita Zuraitis: Over the course of 'twenty 'twenty four we are currently planning for a country wide average of 10% to 15% rate increases in both auto and property. This plan includes recent approvals from California for a 22% increase in homeowners and a 13% increase in auto both of which are.
Marita Zuraitis: Now in effect in.
Marita Zuraitis: In addition, we expect an increase in property average renewal premium in the mid-single digits attributable to higher home coverage values. We continuously review emerging trends and will adjust our rate plans as needed to ensure segment profitability. In the property line, we continue to roll out underwriting, as well as terms and conditions changes, to ensure we continue to accurately price our risk. In particular, we have implemented new roof rating schedules and have received approval with effective dates within the next 90 days in six highly wind-prone states, with filings pending in three additional states. These schedules set convective storm claim settlement rates that take into account the age and construction materials of roofs.
Marita Zuraitis: In addition, we expect an increase in property average renewal premium in the mid single digits attributable to higher home coverage values, we continuously review emerging trends and will adjust our rate plans as needed to ensure segment profitability.
Marita Zuraitis: In the property line, we continue to rollout underwriting as well as terms and conditions changes to ensure we continue to accurately price our risk in particular, we have implemented new roof rating schedules and have received approval with effective dates within the next 90 days and six highly win.
Marita Zuraitis: Prone states with filings pending in three additional states.
Marita Zuraitis: These schedules set convective storm claim settlement rates that take into account the age and construction materials of Bruce when fully earned in we expect about a three point impact to the property combined ratio.
Marita Zuraitis: When fully earned in, we expect about a three-point impact on the property combined ratio. On a normalized basis, our life in retirement and supplemental and group benefits segments are near or above target profitability. However, in the first quarter, segment earnings were impacted by lower-than-expected net investment income due to mark-to-market adjustments on three commercial mortgage funds and limited partnership real estate investments.
Marita Zuraitis: On a normalized basis, our life and retirement and supplemental and group benefits segments are near or above target profitability. However.
Marita Zuraitis: However in the first quarter segment earnings were impacted by lower than expected net investment income due to mark to market adjustments on three commercial mortgage funds and limited partnership real estate investments. This adjustment is valuation driven and has not impacted our cash returns.
Marita Zuraitis: This adjustment is valuation-driven and has not impacted our cash return. The life and retirement segment remains a steady contributor to earnings and a strategically significant entry point into the education market. A core competency of our agency force is providing financial wellness and retirement planning workshops in schools across the country, building relationships as a trusted advisor with both educators and their employers. The Supplemental and Group Benefits segment is a less capital-intensive, higher-margin business that provides corporate earnings diversification.
Marita Zuraitis: The life and retirement segment remains a steady contributor to earnings and a strategically significant entry point to the education market.
Marita Zuraitis: Core competency of our agency force is providing financial wellness and retirement planning workshops in schools across the country building relationships as a trusted advisor with both educators and their employers.
Marita Zuraitis: The supplemental and group benefits segment is a less capital intensive higher margin business that provides corporate earnings diversification.
Marita Zuraitis: As we have talked about in the past, our target blended benefits ratio for this business is 43%, which takes into account pre-pandemic customer utilization levels. We are seeing the benefit ratio continue to trend towards this long-term target. This quarter, the benefit ratio was 36% compared to 33% a year ago.
Marita Zuraitis: As we have talked about in the past our target blended benefits ratio for this business is 43%, which takes into account pre pandemic customer utilization levels.
Marita Zuraitis: We are seeing the benefit ratio continue to trend towards this long term target this quarter the benefit ratio was 36% compared to 33% a year ago.
Marita Zuraitis: With our profitability targets within reach across the business, we are testing, adjusting, and scaling our strategies to grow educator households. Within the retail division, we are especially well prepared with strong momentum in our exclusive agency channel. The market has been challenging over the past few years, and we've worked with our agents to ensure their businesses remain healthy. Over the past year, we've seen a steady increase in exclusive agent recruiting, a 16% increase in average agency income, and a 22% increase in agency P&C premium production.
Marita Zuraitis: With our profitability targets within reach across the business, we are testing adjusting and scaling our strategies to grow educator households.
Marita Zuraitis: Within the retail division, we are especially well prepared with strong momentum in our exclusive agency channel. The market has been challenging over the past few years and we've worked with our agents to ensure their businesses remain healthy over the past year, we've seen a steady increase in exclusive agent recruiting.
Marita Zuraitis: <unk>, a 16% increase in average agency income and a 22% increase in agency P&C premium production agent enthusiasm is strong and we're seeing the impact in solid topline results. Looking ahead. Our efforts are centered around supporting agency new business.
Marita Zuraitis: Agent enthusiasm is strong, and we're seeing the impact in solid top-line results. Looking ahead, our efforts are centered around supporting agency new business and cross-sell production, enhancing digital capabilities, and improving the effectiveness of our digital sales funnel to align with educator preferences. In general, educators want to do research and browse online, but when they are ready to buy, they are looking to talk to a trusted advisor. Let me provide a few examples.
Marita Zuraitis: <unk> and cross sell production enhancing digital capabilities and improving the effectiveness of our digital sales funnel to align with the educator preferences in general educators wanted to do research and browse online, but when they are ready to buy they are looking to talk to a trusted adviser let me.
Marita Zuraitis: Provide a few examples we have seen success with a hyper local digital marketing program targeting educators through this and other programs, we have driven 15% more traffic to our website. This year compared to last in addition, we recently launched a new version of our website, which increased the <unk>.
Marita Zuraitis: We have seen success with a hyper-local digital marketing program targeting educators. Through this and other programs, we have driven 15% more traffic to our website this year compared to last. In addition, we recently launched a new version of our website, which increased the number of quotes started by more than 50%. Over the past year, getting better leads to agents has helped contribute to an over 20% increase in new PNC business compared to the first quarter of 2023. And that's in an increasing rate environment.
Marita Zuraitis: <unk> quote started by more than 50% over the past year getting better leads to agents has helped contribute to an over 20% increase in new P&C business compared to the first quarter of 'twenty two 'twenty three and that's at an increasing rate environment.
Marita Zuraitis: In the worksite division, we're building on our strong foundation to drive growth in both the employer-sponsored and worksite-direct lines. We continue to refine and improve our product set to meet educator and employer expectations and to introduce product enhancements to our supplemental policy offerings. These enhanced features meet specific customer demand and provide higher average premiums.
Marita Zuraitis: In the Worksite Division, we're building on our strong foundation to drive growth in both the employer sponsored and Worksite direct lines, we continue to refine and improve our product set to meet educator and employer expectations and to introduce product enhancements to our supplemental policy offerings.
Marita Zuraitis: Yeah.
Marita Zuraitis: These enhanced features meet specific customer demand and provide higher average premiums. We are also seeing strong momentum in sales trends.
Marita Zuraitis: We are also seeing strong momentum in sales trends. We continue to add sales and enrollment staff on the worksite direct side of the business. On the employer-sponsored side, we are working to leverage our existing broker partnerships to expand distribution. Since last year, we grew our number of covered lives to 836,000.
Marita Zuraitis: We continue to add sales and enrollment head count on the Worksite direct side of the business on the employer sponsored side, we are working to leverage our existing broker partnerships to expand distribution since last year. We grew our number of covered lives to 836000.
Speaker Change: Before I turn the call back to Bret I wanted to touch on our efforts to have a positive impact on all of Horace Mann stakeholders.
Marita Zuraitis: Before I turn the call back to Bret, I want to touch on our efforts to have a positive impact on all of Horace Mann's stakeholders. We are in the midst of Teacher Appreciation Week, but Horace Mann has planned events throughout the entire month of May to thank educators for everything they do. Centered around educators' desire for work-life balance, we're hosting contests, an exclusive virtual event for educators with celebrities, musicians, and self-care experts.
Marita Zuraitis: We are in the midst of teacher appreciation week, but horseman has planned events throughout the entire month of May to think educators for everything they do.
Marita Zuraitis: Centered around educators desire for work life balance, we're hosting contests and exclusive virtual event for educators with celebrities musicians and self care experts locally we're announcing the winners of Springfield Public school educator and administrator of the year Awards. We also recently <unk>.
Marita Zuraitis: Locally, we're announcing the winners of the Springfield Public School Educator and Administrator of the Year Awards. We also recently published our 2023 Corporate Social Responsibility Reporting, outlining the actions we've taken to support educators, our customers, our employees, our agents, and our local communities. Here are a few highlights.
Marita Zuraitis: <unk>, our 2023 corporate social responsibility reporting outlined the actions we've taken to support educators, our customers our employees our agents and our local communities. A few highlights we contributed nearly $1 million to charitable causes through the Horace Mann educators Foundation.
Marita Zuraitis: We contributed nearly $1 million to charitable causes through the Horace Mann Educators Foundation and the Horace Mann Educators Corporation. We reduced our carbon emissions by 55% over base year 2019, and we increased corporate transparency by publishing our U.S. Equal Opportunity Commission EEO-1 Workforce Data Report.
Marita Zuraitis: And the Horace Mann Educators Corporation, we reduced our carbon emissions by 55% over base year 2019, and we increased corporate transparency by publishing our U S equal opportunity Commission E O. One workforce data report in March our board of directors increased the <unk>.
Marita Zuraitis: In March, our board of directors increased the quarterly shareholder dividend by 3%. This is the 16th consecutive year the board has increased the shareholder dividend, underscoring our commitment to long-term shareholder value creation. In closing, by successfully executing on our strategic plans, we remain solidly on track to achieve our long-term goals, a larger share of the education market, and a double-digit shareholder return on equity in 2025. I'll now turn the call back over to Bret.
Marita Zuraitis: Orderly shareholder dividend by 3%. This is the 16th consecutive year. The board has increased the shareholder dividend underscoring our commitment to long term shareholder value creation.
Marita Zuraitis: In closing by successfully executing on our strategic plans, we remain solidly on track to achieve our long term goals a larger share of the education market and a double digit shareholder return on equity in 2025.
Bret: I'll now turn the call back over to Brett.
Bret Alan Conklin: Thanks, Marita. First quarter core earnings were $24.8 million, or $0.60 per diluted share, a nearly three-fold increase over prior years. Our PNC profitability restoration strategy is making significant progress, and we remain on track to be within our full year 2024 core EPS guidance range of $3 to $3.30. Let me break down the results by individual business segment performance, starting with P&C. First quarter profit of $11 million was a $22 million improvement over the prior year.
Bret: Thanks, Marita first quarter core earnings were $24 8 million or <unk> 60 per diluted share a nearly threefold increase over prior year.
Bret Alan Conklin: Our P&C profitability restoration strategy is making significant progress and we remain on track to be within our full year 2024 core EPS guidance range of $3 to $3 30.
Bret Alan Conklin: We break down the results by individual business segment performance starting with P&C.
Bret Alan Conklin: First quarter profit of $11 million with a 22 million improvement over the prior year net.
Bret Alan Conklin: Net investment income was triple last year's returns due to solid performance in limited partnerships and higher yields on the fixed income portfolio. Net written premiums rose more than 15% to $172 million, primarily due to the premium increases and underwriting actions we implemented over the past year. The reported combined ratio of 99.9% improved 13 points over prior years. Cat losses added 9 points to the total combined ratio compared to nearly 15 points a year ago. In the first quarter, Property Claims Services designated 19 events as cats, compared to 23 a year ago.
Bret Alan Conklin: Net investment income was triple last year's returns due to solid performance in limited partnerships and higher yields on the fixed income portfolio.
Bret Alan Conklin: Net written premiums rose more than 15% to $172 million, primarily on the premium increases and underwriting actions, we implemented over the past year.
Bret Alan Conklin: The reported combined ratio of 99.9% improved 13 points over prior year.
Bret Alan Conklin: Cat losses added nine points to the total combined ratio compared to nearly 15 points a year ago.
Bret Alan Conklin: In the first quarter property claims services designated 19 events as cats compared to 23 a year ago.
Bret Alan Conklin: As Marita mentioned earlier, from 2022 through the end of 2024, we expect total premium increases of nearly 40% in auto and 50% in property, which underscores our confidence that the PMC segment will be profitable for the full year, as well as reaching our targeted combined ratio of 95 to 96% in 2025. Turning to auto, net written premiums of $117 million increased 15% over the prior year, primarily due to rate action. The combined ratio of 100.8% improved 10 points over prior years. In terms of lost cost trends, we saw lower frequency, likely attributable to more mild winter weather and severity, generally in line with expectations.
Bret Alan Conklin: As Marita mentioned earlier from 'twenty to 'twenty two through the end of 'twenty 'twenty four we expect total premium increases of nearly 40% in auto and 50% in property, which underscores our confidence that the P&C segment will be profitable for the full year as well as reach.
Bret Alan Conklin: Our targeted combined ratio of 95% to 96% in 2025.
Bret Alan Conklin: Turning to auto net written premiums of $117 million increased 15% over prior year, primarily on rate actions. The combined ratio of 108% improved 10 points over prior year.
Bret Alan Conklin: In terms of loss cost trends, we saw lower frequency likely attributable to more mild winter weather and severity generally in line with expectations.
Bret Alan Conklin: Despite the higher premiums, policyholder retention remains strong at 87%. In property, net written premiums were $56 million, a 16% increase over prior years. The combined ratio of 97.7% reflected lower non-cat weather and cat loss.
Bret Alan Conklin: Despite the higher premiums policy holder retention remained strong at 87%.
Bret Alan Conklin: And property net written premiums were 56, million% to 16% increase over prior year.
Bret Alan Conklin: The combined ratio of 97, 7% reflected lower non cat weather and cat losses.
Bret Alan Conklin: Those catastrophe losses are slightly above our expectations, as they are above our five-year historic average. This is generally in line with the broader industry, which also experienced catastrophe losses above its historical average. Although property average written premiums were significantly higher, our policyholder retention remained strong at 90%.
Bret Alan Conklin: Those cat losses are slightly above our expectations as they are above our five year historic average.
Bret Alan Conklin: This is generally in line with the broader industry, which also experienced cat losses above historical averages.
Bret Alan Conklin: Although property average written premiums were significantly higher our policyholder retention remains strong at 90%.
Bret Alan Conklin: Turning to life and retirement core earnings of $12 million were below prior year by 16% due to lower interest margins.
Bret Alan Conklin: Turning to life in retirement, core earnings of $12 million were below the prior year by 16% due to lower interest margins. While net investment income on the segments Fixed Income and FHLB portfolios increased 4% due to higher reinvestment rates, returns on the Commercial Mortgage Loan Fund portfolio and limited partnerships were lower than both our expectations in prior years. This was due to negative returns in one commercial mortgage loan fund, as well as two real estate equity limited partnerships. The same funds also impacted results in the Supplemental and Group Benefits segment. In the retirement business, net annuity contract deposits in total were down slightly at $105 million.
Bret Alan Conklin: While net investment income on the segment's fixed income and FH L. B portfolios increased 4% due to higher reinvestment rates returns on the commercial mortgage loan fund portfolio and limited partnerships were lower than both our expectations and prior year.
Bret Alan Conklin: This was due to negative returns in one commercial mortgage loan fund as well as two real estate equity limited partnerships.
Bret Alan Conklin: These same funds also impacted results in the supplemental and group benefits segment.
Bret Alan Conklin: In the retirement business net annuity contract deposits in total were down slightly at 105 million. However deposits in our core 403 B products remained strong.
Bret Alan Conklin: However, deposits in our core 403B products remain strong. In the first quarter, accounts on our fee-based mutual fund platform, Retirement Advantage, reached nearly $20,000. In addition, the Market Risk Benefit Adjustment in retirement was favored. As Marita mentioned, our retirement products are a cornerstone of Horace Mann's value proposition and an important entry point to the education market. Annualized life sales increased 5% over prior years. Mortality costs for the quarter were in line with the prior year, and persistency remained strong at about 96%.
Bret Alan Conklin: Over the first quarter accounts on our fee based mutual fund platform retirement advantage reached nearly 20000. In addition, the market risk benefit adjustment in retirement was favorable.
Bret Alan Conklin: As Marita mentioned, our retirement products are a cornerstone of Horace Mann's value proposition and an important entry point to the education market.
Bret Alan Conklin: Annualized life sales increased 5% over prior year.
Bret Alan Conklin: <unk> costs for the quarter were in line with prior year and persistency remains strong at about 96%.
Bret Alan Conklin: In supplemental and group benefits, earnings of $11 million were down from the prior year by $3 million due to 14% lower net investment income and a 2.3 point increase in the benefits ratio. Premiums and contract charges earned were $64 million, down slightly from the prior year, and sales of $7 million were down 20% from the prior year. As a reminder, employer-sponsored line sales are inherently lumpy, depending on case size. The sales comparison to the prior year is unfavorable, partially due to a large employer-sponsored sale in the first quarter of 2023.
Bret Alan Conklin: In supplemental and group benefits earnings of $11 million were down from prior year by $3 million due to 14% lower net investment income and a 2.3 point increase in the benefits ratio.
Bret Alan Conklin: Premiums and contract charges earnings were 64 million down slightly from prior year and sales of $7 million were down 20% from prior year. As a reminder, the employer sponsored wine sales are inherently lumpy depending on case size. The sales comparison to prior year is unfavorable.
Bret Alan Conklin: Partially due to a large employer sponsored sale in the first quarter of 2023.
Bret Alan Conklin: The long-term target for the blended benefits ratio is 43 percent, which assumes policyholder utilization reverts to pre-pandemic levels. In the first quarter, the benefits ratio was 36% compared to 33% a year ago; historically, benefits usage in the employer-sponsored line is heaviest in the first quarter. Turning to investments, overall net investment income was up 5%, while returns on the managed portfolio were up 7%. Income on the fixed maturities portfolio was up 4% from the prior year, reflecting reinvestment rates that have exceeded portfolio yield for the past eight quarters.
Bret Alan Conklin: The long term target for the blended benefits ratio is 43%, which assumes policyholder utilization reverts to pre pandemic levels in the first quarter the benefits ratio was 36% compared to 33% a year ago.
Bret Alan Conklin: Historically benefits usage in the employer sponsored line.
Bret Alan Conklin: Is heaviest in the first quarter.
Bret Alan Conklin: Turning to investments overall net investment income was up 5% while returns on the managed portfolio were up 7%.
Bret Alan Conklin: Income on the fixed maturities portfolio was up 4% from the prior year, reflecting reinvestment rates that have exceeded portfolio yield for the past eight quarters are.
Bret Alan Conklin: Our core fixed income new money yield in the first quarter was 5.44%, 124 basis points above the average portfolio yield, and had an average duration of 7 years. The portfolio remains high-quality at A+, and remains concentrated in investment-grade corporates, municipals, and high-quality agency and agency MBS securities, positioning us well for a potential recessionary environment without sacrificing investment. Given the first-quarter underperformance related to commercial mortgage loan and real estate-related limited partnership funds, we now expect full-year net investment income on our managed portfolio to be closer to the low end of our guidance range of $360 to $370 million.
Bret Alan Conklin: Our core fixed income new money yield in the first quarter was 544% a 124 basis points above the average portfolio yield and had an average duration of seven years.
Bret Alan Conklin: The portfolio remains high quality at a plus and remains concentrated in investment grade corporates Municipals and high quality Agency and agency MBS Securities positioning us well for a potential recessionary environment without sacrificing.
Bret Alan Conklin: Income.
Bret Alan Conklin: Given the first quarter underperformance related to commercial mortgage loan and real estate related limited partnership funds. We now expect full year net investment income on our managed portfolio to be closer to the low end of our guidance range of $360 million to $370 million on a segment basis.
Bret Alan Conklin: On a segment basis, PNC-NII is ahead of expectations, with L&R and S&GB below. In summary, we remain focused on long-term shareholder value creation. The year is off to a strong start with profit restoration and sales momentum taking center stage in the PNC segment. We continue to make solid progress toward our long-term objectives of an expanded market share and a double-digit shareholder return on equity in 2025. We are excited and optimistic about the future. Thank you, and Operator, we're ready for questions. We will now begin the question and answer session.
Bret Alan Conklin: P&C NII is ahead of expectations with LNR and S and G b below.
Bret Alan Conklin: In summary, we remain focused on long term shareholder value creation, the year's off to a strong start with profit restoration and sales momentum taking center stage in the P&C segment.
Bret Alan Conklin: We continue to make solid progress toward our long term objectives of an expanded market share in a double digit shareholder return on equity in 2025, we are excited and optimistic about the future.
Speaker Change: And operator, we're ready for questions.
Bret Alan Conklin: We will now begin the question and answer session.
Operator: To ask a question, you may press star, then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. Our first question comes from Meyer Shields on KBW. Please go ahead.
Speaker Change: To ask a question you May press Star then one on your telephone keypad.
Meyer Shields: If you were using a speakerphone please pick up your handset before pressing the keys.
Meyer Shields: To withdraw your question. Please press Star then two.
Operator: At this time, we will pause momentarily to assemble our roster.
Operator: Our first question comes from Meyer Shields with K B W. Please go ahead.
Meyer Shields: Thanks for taking my questions. First, Marita, in your comments, you talked about lower frequencies attributable to benign weather in the winter, and I'm wondering whether, for your book of business, we're seeing any impact from rising gasoline prices on frequencies.
Meyer Shields: Cool, thanks, and thanks for taking my questions.
Meyer Shields: In your comments you talked about.
Meyer Shields: Lower frequency attributable to.
Meyer Shields: Benign weather in the winter and I'm wondering whether for your book of business, we're seeing any impact from rising gasoline prices on frequency.
Meyer Shields: Yeah, Hey, Mary. This is this is Marc I'll take that question.
Mark Richard Desrochers: Yeah, hey, Mary, this is this is Mark. I'll take that that question. You know, when we look at the first quarter, when we look at the overall frequency, we are down from an accident frequency standpoint by about three or four percent. I would say one third of that, more or less, is weather related. Probably about another third is actually some mix and underwriting changes that we've made. And when we look at the other third, we are seeing some reduced driving activity that we would attribute some of that lower frequency to.
Mark Richard Desrochers: When we look at the.
Mark Richard Desrochers: The first quarter, we you know when we look at the overall frequency we are down.
Mark Richard Desrochers: From an accident frequency standpoint about three years to 4% I would say one third of that more or less is weather related.
Mark Richard Desrochers: About another third is actually some mix and underwriting changes that we've made and when we look at the other third we are seeing.
Mark Richard Desrochers: Some reduced driving activity that that we would attribute.
Speaker Change: Some of that lower frequency too. So I think the you know when you look at the weather impact.
Mark Richard Desrochers: So I think when you look at the weather impact, you know, that's likely to not be recurring. I think that the underwriting and mixed actions, you know, we expect that benefit to continue to roll through. In terms of the driving behavior, it's a little harder to predict. You know, what that will run for the rest of the year, but certainly it had an impact in the first quarter.
Mark Richard Desrochers: That's likely to not be recurring I think that the underwriting and mix actions, we expect that benefit to continue to roll through in terms of the the driving behavior, it's a little harder to predict.
Mark Richard Desrochers: You know what that will run for the rest of the year, but certainly it had an impact in the first quarter, Yeah, and when you think about the type of weather activity in the first quarter, whether it's us or anyone else in the industry. The buckets between cat and non cat always gets interesting right, how many tip over and fall into a we use the Pcs definition.
Marita Zuraitis: Yeah, when you think about the type of weather activity in the first quarter, whether it's us or anyone else in the industry, the bucketing between CAT and non-CAT always gets interesting, right? How many tip over and fall into it?
Marita Zuraitis: We use a PCS definition, fall into that definition of CAT, or whether you have weather activity that doesn't quite meet that definition. But I agree with what Mark had said as far as overall frequency trends. We're not going to assume anything from that, but we're certainly pleased with what we're seeing in the auto book, for sure.
Marita Zuraitis: Fall into that definition of cat or whether you have.
Marita Zuraitis: Weather activity that doesn't quite meet that definition, but I agree with what Mark had said as far as overall frequency trends, we're not going to assume anything in that but we're certainly pleased with what we're what we're seeing in the auto book for sure.
Speaker Change: Okay, that's very helpful, but I guess, it's about.
Marita Zuraitis: Okay, perfect. That's very helpful. But I guess, but I guess, and I guess, in terms of follow-up, how rapidly, assuming that some of these favorable trends persist, and I know you're not counting on it, which I think is the right call, but if these favorable trends persist, how quickly can you sort of change the pricing approach and maybe shoot for 5 to 10 instead of 10 to 15 for price adequacy, which is a little bit more competitive?
Marita Zuraitis: And I guess in terms of a follow up.
Marita Zuraitis: Hum rapidly assuming that some of these favorable trends persist and I know youre not counting on it because I think it's the right call, but if these favorable trends.
Speaker Change: Uh huh.
Marita Zuraitis: How quickly can you sort of changed the pricing approach and maybe shoot for five to 10.
Marita Zuraitis: Dean.
Marita Zuraitis: For price adequacy, that's a little bit more competitive.
Speaker Change: Yeah, it's interesting I with the team of actuaries that we have in the organization. This is all real time.
Marita Zuraitis: Yeah, you know, it's interesting. With the team of actuaries that we have in the organization, this is all in real time. I mean, Mark and his folks will take the information from the first quarter, and the first quarter of last year rolls off, and the first quarter of this year rolls on. And obviously, in this dynamic pricing environment that we've been in for a couple of years, this has been real time. So it is pretty quick at being able to react.
Marita Zuraitis: Mark and his folks will take the information from the first quarter and the first quarter of last year rolls off in the first quarter of this year rolls on and obviously in this dynamic pricing environment that we've been in it a couple of years. This has been a.
Marita Zuraitis: Real time. So it is it is pretty pretty quick in being able to react and obviously you have a handful of states, where that's a longer timeline. We certainly saw that in California, very pleased with getting that rate filing you've heard about the property in the past, but we mentioned.
Marita Zuraitis: Obviously, you have a handful of states where that's a longer timeline. We certainly saw that in California, and we were very pleased with getting that rate filing. You've heard about the property in the past, but we mentioned in the script getting our auto rate filing approved in California. As soon as that happens, the team gets working on that next rate filing and thinks about what that data looks like when a quarter's rolling off and a new quarter's rolling on. So it's pretty real time. I don't know if you have anything to add to that, Mark. Yeah, I would add a couple of points, Marita.
Mark: In the script getting our auto rate filing approved in California as soon as that happens. The team gets worked you know gets working on that next rate filing and thinking about what that data looks like when a quarters rolling off and a new quarters rolling on so it's pretty real time I don't know if you have anything to add to that yeah I would add.
Mark: A couple of points Merida I think first of all we in addition to.
Marita Zuraitis: I think, first of all, we, in addition to tracking our loss ratio and our rate changes relative to the competitors, we take a pretty close look at our close rates in terms of what's our success rate in issuing a policy for every policy we quote. Some of the competitors have gotten a little bit more aggressive over the last quarter. We've not seen any drop off in that, so we certainly don't see it yet.
Marita Zuraitis: Tracking our loss ratio and our rate changes relative to the competitors, we take a pretty close look at our close rates in terms of what sort of success rate in issuing a policy for every policy, we quote and even as <unk>.
Marita Zuraitis: Some of the competitors have gotten a little bit more aggressive over the last quarter, we've not seen any drop off in that so we certainly don't see it yet we have some flexibility in terms of underwriting actions that we can lift or a shift between which companies we may be offering new business quotes on it.
Marita Zuraitis: Some flexibility in terms of underwriting actions that we can lift or shift between, you know, which companies we may be offering new business quotes on, and, you know, clearly, if we have to be more aggressive from a pricing standpoint or slow down the aggressiveness of some of our rate actions, we expect the various regulatory agencies to be slightly more receptive than they might be when we're taking rate increases.
Marita Zuraitis: And clearly if we have to be more aggressive from a pricing standpoint or slow down the aggressiveness of some of our rate actions.
Marita Zuraitis: We expect the various regulatory agencies to be slightly more receptive than they might be.
Marita Zuraitis: When we're taking rate increases, yes, and your question seemed to hint are we prepared for any increase in competitiveness across the market and clearly I really believe that we are and we fully expect competition to to pick up I mean when I.
Marita Zuraitis: Yeah, Mayor, and your questions seem to hint at, "Are we prepared for an increase in competitiveness across the market?" And clearly, I really believe that we are, and we fully expect competition to pick up. I mean, when I look at what we're seeing, the dynamics across our distribution, our EA plant is in really good shape.
Marita Zuraitis: I look at what we're seeing the dynamics across.
Marita Zuraitis: Our distribution our EAA plant is in really good shape. We've had good success in hiring producers good retention in the producers that we've had for quite some time.
Marita Zuraitis: We've had good success in hiring producers, and good retention in the producers that we've had for quite some time. You know, we have the ability to offer a lot more than many of our competitors. We're not just a model line market. Our retention is holding new business, with sales up 35% in the right places. We're making the right investments, and I feel good about us being prepared for an eventual increase in competitiveness in PNC. I don't know if, Steve, you want to provide any more detail on some of the new enhancements that are starting to show some signs of life.
Steve: We have the ability to offer a lot more than many of our competitors were not just a model line market or a retention is holding at the new business with sales up 35% in the right places, we're making the right investments and I feel good about us being <unk>.
Marita Zuraitis: Prepared for an eventual increase in the competitiveness in P&C I don't know if Steve you want to provide any more detail on some of the new enhancements that are starting to show some signs of of life.
Steve McAnena: Yeah, sure. Happy to. But no, I'll kind of pull back.
Steve: Yes, sure happy to.
Steve McAnena: Now I'll kind of pull back I kind of feel like the upfront comments.
Steve McAnena: I kind of feel like the upfront comments that were made about the health of the agency force and associated sales momentum just really nailed it. I'll try to sprinkle a little color as to what else is happening, and I guess I'll start with Marita mentioning agent recruiting and her opening remarks. Recruiting is having a big impact today, but it's going to have an even bigger impact as we go forward into 25 and into 26.
Steve McAnena: That were made about the health of the agency force and associated sales momentum.
Steve McAnena: Just really nailed it.
Steve McAnena: I'll try to sprinkle, a little color as to what else is happening and I guess I'll start with.
Steve McAnena: Marina mentioned strategic recruiting in her opening remarks.
Steve McAnena: Recruiting is having a big impact both today, but it's going to have an even bigger impact as we move forward into 'twenty five 'twenty six in terms of recruiting this year.
Steve McAnena: In terms of recruiting this year, it's going really well. We increased our internal recruiting staff, and as a result, we've appointed about 70% more agents, 7-0 more agents than last year. So we're absolutely fueling the pipeline of agents.
Steve McAnena: Really well.
Steve McAnena: We increased our internal recruiting staff.
Steve McAnena: And as a result, we've appointed about 70% more agents seven zero.
Steve McAnena: <unk> from last year, So we would absolutely fueling the pipeline of agents.
Steve McAnena: An interesting kind of side note, about half of the recruiting comes from referrals and educators, and Marita talked about the quality of who we're hiring. To me, that just means we're hiring people that really understand both the role and the space that we're in, and I think we've had really good success with the appointed agent population. I think the second thing is productivity, and Mark said this, and I'll kind of build on it. Virtually all the new business growth has come from activity, i.e. more quotes. Conversion, as Mark said, is effectively flat.
Steve McAnena: Interesting side note about half of the recruiting comes from referrals and educators have never even talked about the quality of who we're hiring to me that just means we're hiring people that really understand both the role and the space that we're in and I think we've had really good success with the appointed agent population I think the second thing.
Steve McAnena: It is productivity and Mark said this kind of build on it.
Steve McAnena: Virtually all of the new business growth.
Steve McAnena: This come from activity I E more coolants conversion as Mark said effectively flat.
Steve McAnena: So this means we're getting all the sales through activity, not through price. In terms of what's driving the quotes, a lot of it is coming from increased leads. Marita mentioned our new lead generation capabilities. We kind of observed a pretty sizable increase in leads, and for me, the most interesting slash exciting part is that a lot of what we're doing right now hasn't even been scaled. What that means is we're seeing pretty meaningful green shoot opportunities that I think are good indicators for some future growth potential.
Steve McAnena: So this means we are getting all of the sales through activity not from price.
Steve McAnena: In terms of what's driving the quotes.
Steve McAnena: A lot of it is coming from increased leads from Merida mentioned, our new lead generation capabilities.
Steve McAnena: We observed a pretty sizable increase in leads and for me. The most interesting slash exciting part is a lot of what we're doing right now hasnt even been scale what that means is we're seeing pretty meaningful green shoot opportunities.
Steve McAnena: That I think are good indicators for kind of future growth potential if I get into specifics on what we're doing to drive leads.
Steve McAnena: If I get into specifics on what we're doing to drive leads, I'll just give you two. One tactic that we've tested and has worked really well, co-branded marketing with education partners, really, really successful. The other one, without getting too technical, is a technology we use to tag and digitally market educators while they're at school.
Steve McAnena: I'll just give you two one tactic that we've tested and has worked really well co branded marketing with education partners really really successful the other one without getting too technical is a technology, we use to tag to digitally market educators, while they're at school again really really effective results and all of this we do.
Steve McAnena: Again, really, really effective results, and all this we do in partnership with our agency. I think, as I sort of pull back, Mayor, we continue to add our agents, agent productivity is on the rise driven by activity, and lead volume is rising because of the digital marketing tests. The last thing I'll mention, reinforcing something from Marita's remarks, is our website. Our goal is really to serve educators where and whenever they want.
Steve McAnena: With our partnership with our agents.
Steve McAnena: So as I sort of pulled back.
Steve McAnena: We continue to add our agents agent productivity on the rise driven by activity lead volumes rising because of the digital marketing tests.
Steve McAnena: The last thing I'll mention reinforcing something from his remarks on our website.
Steve McAnena: Our goal is really to serve educators, where whenever they want.
Steve McAnena: For me, kind of supporting that objective, we made changes that both, you know, simplified the look-feel of the landing page and also streamlined some of the quoting process. And I'd say it was similar to the lead generation efforts that we referenced. We've made pretty good progress, about a 50% increase in the number of quotes started. And I think there's even room to get better. And so I think we continue to make changes to the landing page, by the way, I think almost every month.
Steve McAnena: For me kind of supporting that objective, we've made changes that both simplified the look feel of the landing page and also streamlining some of the quoting process.
Steve McAnena: And I'd say like the lead generation efforts that we referenced.
Steve McAnena: Pretty good progress in about a 50% increase in the number of quote started and I think there's even room to get better and so I think we continue to be changes to the landing page by the way I think almost every month, just kind of driving continuous improvements so I kind of say in summary.
Steve McAnena: It's kind of driving continuous improvement. So I kind of say, in summary, we've been, and we continue to invest in our agency and the ecosystem around it with the goal of driving sustained profitable growth in support of all of our educators. I really like what we've seen and learned in the first quarter and really expect to build on this as we head into the rest of 24 and beyond. So thanks for the question.
Steve McAnena: We have been and we continue to invest in our regions.
Steve McAnena: Ecosystem around them.
Steve McAnena: With the goal of driving sustained profitable growth and support of all of our educators I really like what we've seen and learned in the first quarter and really expect to build on this as.
Steve McAnena: As we head into the rest of 'twenty four and beyond so thanks for the question.
Steve McAnena: Alright.
Operator: All right, fantastic. That was very, very helpful.
Speaker Change: Very helpful.
Operator: The next question is from John Barnidge with Piper Sandler. Please go ahead.
Operator: The next question is from John Barnidge with Piper Sandler. Please go ahead.
John Bakewell Barnidge: Good afternoon, and thank you for the opportunity.
John Bakewell Barnidge: Good afternoon, and thank you for the opportunity. My question's around supplemental and group benefits distribution.
John Bakewell Barnidge: My question's around supplemental group.
John Bakewell Barnidge: I believe you called out in your prepared remarks a copy of a year ago from the Big Win, a very sponsored one. Are there any big wins from a year ago that will not be reoccurring that we should be keeping in mind? I know three Qs typically have heavy distribution with back to school. Thanks.
John Bakewell Barnidge: I believe you called out in your prepared remarks, the comp a year ago.
John Bakewell Barnidge: Big win.
John Bakewell Barnidge: Sponsored space.
John Bakewell Barnidge: Are there any.
John Bakewell Barnidge: Ooh occurring big win from a year ago that will not be reoccurring, but we should be keeping in mind I know <unk> typically have heavy distribution with back to school.
Bret Alan Conklin: John, thanks for the question. Thanks for the way you asked it. I think you, as usual, included the answer in your question. You know, due to the size of this business and the nature of the business, you said it yourself, it can be quite lumpy. I'll turn it over to Matt to see if he has any additional... Things that he wants to add, Matt?
John Bakewell Barnidge: John Thanks for the question. Thanks, The way you asked it I think you as usual included the answer in your question you know due to the size of this business and the nature of the business you said it yourself it can be quite lumpy I'll turn it over to Matt to see if he has any additional.
Bret Alan Conklin: Things that he wants to add Matt.
Matt: Sure can't help myself.
Matthew Peter Sharpe: Sure. I can't help myself.
Matt: As Brett indicated we're pretty happy with the way the supplemental group benefits segment performed this quarter. We also to be continue to be excited about the growth potential for these businesses over the next several quarters or several years.
Matthew Peter Sharpe: As Bret and Marita indicated, we're pretty happy with the way the supplemental and group benefits segment performed this quarter. We also continue to be excited about the growth potential for these businesses over the next several years. For the first quarter, overall sales were lower on a year-over-year comparison. As noted, this is partly due to the lumpy nature of the group business. In addition, a very solid but slower start to the year on the individual side, due in part to weather-related closings early in the quarter.
Matthew Peter Sharpe: For the first quarter, our overall sales were lower on the year over year comparison as noted this is partly due to the lumpy nature of the group business. In addition.
Matthew Peter Sharpe: Very solid but slower start to the year on the individual side due in part to weather related closings early in the quarter. So that's not going to repeat.
Matthew Peter Sharpe: So, that's not going to repeat on the, at least we hope it's not going to repeat. On the group side, the year-over-year comparison was a 1-1 start date. But I don't see another one on the horizon for the rest of the year. And it wasn't a non-renewal; it was actually a win from last year. And the nature of the business is lumpy, so we might get a win that offsets that later in the year. It's really, it's an unknowable fact at this point.
Matthew Peter Sharpe: On the at least we hope it's not going to repeat on the group side the year over year comparison was a one one start date that I don't see another one on the horizon for the rest of the year and it wasn't a non renewal it was actually a win from last year and the nature of the business is lumpy. So we might get a win that offsets.
Matthew Peter Sharpe: That later in the year, it's really it's an unknowable fact at this point, but the momentum is still very positive on the individual side, we continue to be very optimistic for the year on the group side, we continue to be optimistic that recognize that the business is lumpy and a case or two in either direction can really move the numbers.
Matthew Peter Sharpe: But the momentum is still very positive on the individual side, and we continue to be very optimistic for the year. On the group side, we continue to be optimistic and recognize that the business is lumpy, and a case or two in either direction can really move the numbers.
Matthew Peter Sharpe: <unk>.
Bret Alan Conklin: Yeah, thanks Matt. I mean, we're getting the earnings diversification we planned. We remain very optimistic about the growth prospects, and when we look at the pipeline report, it's still quite robust.
Speaker Change: Yeah. Thanks, Matt I mean, we're getting the earnings diversification. We planned we remain very optimistic about the growth prospects and when we look at the pipeline report it is still quite robust.
Speaker Change: Great. Thank you for that my follow up question can you talk about your assumption around VII in the balance of the year and where your LP marks with concentrated maybe from a sector perspective. Thank you.
John Bakewell Barnidge: Great, thank you for that. My follow-up question, can you talk about your assumption around VII and the balance of the year and where your LP marks are concentrated, maybe from a sector perspective?
Ryan Edward Greenier: Sure, John. This is Ryan Greenier.
Ryan Edward Greenier: Thank you. Sure, John. This is Ryan Greenier.
John Bakewell Barnidge: Sure John This is Ryan Green here, Thanks for the question.
Ryan Edward Greenier: Thanks for the question. You know, as we said in our prepared remarks, the underperformance in the first quarter was real estate related, and it was really driven by three specific funds. Two of them were real estate equity, and you saw valuation marks giving up some of the strong performance that we've seen in that space over the last couple of years. However, we're still ahead from an inception to date return perspective on those particular funds.
Ryan Edward Greenier: You know as we said in our prepared remarks, the underperformance in the first quarter was real estate related and it was really driven by three specific.
Ryan Edward Greenier: Specific funds.
Ryan Edward Greenier: Two of them were real estate equity and you saw valuation marks giving up some of the strong performance that we've seen in that space.
Ryan Edward Greenier: Over the last couple of years, we're still ahead from an inception to date return perspective on those particular funds.
Ryan Edward Greenier: And the CML fund that took a negative mark this quarter is one of our smaller funds. It plays more in the mezzanine lending space and had a handful of more recent vintage transitional multifamily properties that came in with some adverse valuations on the mortgage loans. You know, we believe these are idiosyncratic. They're isolated.
Ryan Edward Greenier: And the CMO fund that took a negative mark this quarter is one of our smaller funds.
Ryan Edward Greenier: It plays more in the mezzanine lending space and had a handful of more recent vintage transitional multifamily properties that came in with some adverse valuations on the mortgage loans. We believe these are these are idiosyncratic they're isolated that's the nature of commercial real estate and real estate investments.
Ryan Edward Greenier: That's the nature of commercial real estate and real estate investments. And our overall outlook for LPs and CMLs for the rest of the year, you know, we do believe our full-year returns for CMLs, in particular, will be below our historic averages because of this slow start. But we remain optimistic about not only the investment income diversification benefits of the asset class but the longer-term value that it provides. I'll point to the strength in the core fixed income portfolio.
Ryan Edward Greenier: And our overall outlook for Lps and <unk> for the rest of the year. We do believe our full year returns for CMS in particular will be below our historic averages because of this slow start.
Ryan Edward Greenier: But we remain optimistic about not only the investment income diversification benefits of the asset class, but the longer term value that it provides.
Ryan Edward Greenier: We've seen a nice tailwind because of sustained higher interest rates. We're putting money to work at well over 100 basis points wider than what's rolling off. We like that dynamic. We've seen it for the past two years now, and that is a tailwind to our original expectations. So net-net, we think we can make up some of the ground similar to how we started last year. You know, as a reminder, last year, our first quarter LP performance was actually negative, and we ended up coming in ahead of expectations. So we'll see how it goes. One quarter doesn't make an annual trend, but I remain pretty comfortable in our positioning.
Ryan Edward Greenier: Ill point to the strength in the core fixed income portfolio, we've seen a nice tailwind because of sustained higher interest rates.
Ryan Edward Greenier: We're putting money to work at well over 100 100 basis points wider than what's rolling off.
Ryan Edward Greenier: Like that dynamic we've been we've seen that for the past two years now and that is a tailwind to our original expectations. So net net we think we can make up some of the ground similar to how we started last year. As a reminder, last year first quarter LP performance was actually negative and we ended up coming in ahead of expectations.
Ryan Edward Greenier: So we'll see how it goes one quarter doesn't make a annual trend, but I remain pretty pretty comfortable in our in our positioning.
Speaker Change: Thank you.
Speaker Change: Thanks, John.
Operator: The next question is from Matt Carletti with Citizens JMP. Please go ahead.
Ryan Edward Greenier: The next question is from Matt Karaleti with citizens JMP. Please go ahead.
Matthew John Carletti: Hey, Thanks, good morning.
Matthew John Carletti: Actually, I want to follow up on the real estate fund question. Ryan, it sounds like you're pretty comfortable, but can you help us with maybe how many other kinds of real estate-focused funds you're invested in, if you feel that most of those are kind of through the mark process, at least from where they stand now, or if you do expect some further marks, are those kind of in your annual guidance already?
Matthew John Carletti: Actually I want to follow up on the real estate fund question.
Speaker Change: Ryan can you it sounds like you're pretty comfortable but can you help us with.
Matthew John Carletti: You know maybe how many other kind of real estate focused funds you're invested in.
Matthew John Carletti: If you feel that most of those are kind of through the process at least from where they stand now or.
Matthew John Carletti: You do expect some further marks are those.
Matthew John Carletti: In your annual guidance already.
Ryan: Sure Matt. Thanks again for the question so to start with our allocations to commercial real estate are skewed towards the life retirement supplemental group portfolios, which you would expect and is consistent with the broader life industry.
Ryan Edward Greenier: Sure, Matt. Thanks again for the question. You know, our so. To start with, our allocations to commercial real estate are skewed towards the life retirement supplemental and group portfolios, which you would expect and is consistent with the broader life industry. Our total commercial real estate fund exposure, or total commercial real estate exposure, I should say, is about 12% of the portfolio, and over 80% of that is senior commercial mortgage loan funds. The average LTV there still remains strong at 71%.
Ryan Edward Greenier: Our total commercial real estate fund exposure.
Ryan Edward Greenier: Our total commercial real estate exposure I should say is about 12% of the portfolio and over 80% of that is senior commercial mortgage loan funds.
Ryan Edward Greenier: The average LTV there still remains strong at 71% we've seen some degradation, but again, we remain comfortable with that the area of concern for the industry is obviously office our office exposure is less than $200 million in total.
Ryan Edward Greenier: We've seen some degradation, but again, we remain comfortable with that. The area of concern for the industry is obviously office. Our office exposure is less than $200 million in total.
Ryan Edward Greenier: Of that, we have taken more severe marks, if you will, on our real estate, on our mortgage loans related to the valuation declines in office. To put it in perspective, we've marked that portfolio down, reflecting about a 30% decline in the underlying office equity values. Peak to trough estimates, NAICREF estimates, are estimating about a 35% decline overall for the better Class A, well-positioned, highly amenitized properties, which represents the base of what we're lending against.
Ryan Edward Greenier: That we have taken more severe marks if you will on our real estate on our mortgage loans related to the valuation declines in office to put it in perspective.
Ryan Edward Greenier: Mark that portfolio down, reflecting about a third 30% decline in the underlying office equity values.
Ryan Edward Greenier: Trough estimates may creep estimates are estimating about a 35% decline overall.
Ryan Edward Greenier: For the better class, a well positioned highly or monetize properties, which represents the base of what we're lending against.
Ryan Edward Greenier: Overall, we feel like right now, given our practice of marking these to market quarterly due to the equity method of accounting, we feel like we've taken the bulk of our marks. We've stressed-tested the portfolio. We're comfortable with the outcomes. A lot of this is property-dependent and interest rate-dependent. As higher interest rates stay high, it prolongs the valuation pressure that the sector is experiencing. Like I said, we feel largely comfortable with where we were marked today, and we're monitoring the office in particular very closely.
Ryan Edward Greenier: So overall, we feel like right now given our practice of marking these to market quarterly due to equity method of accounting, we feel like we've taken the bulk of our marks.
Ryan Edward Greenier: We've stress tested the portfolio, we're comfortable with the outcomes a lot of this is property dependent and interest rate dependent as higher interest rates.
Ryan Edward Greenier: Stay high it prolongs the valuation pressure the sector is experiencing but like I said, we feel largely comfortable with where we were marked today.
Ryan Edward Greenier: We're monitoring office in particular very closely.
Speaker Change: Okay, great. Thank you and then one quick follow up really just a definitional.
Ryan Edward Greenier: Great, thank you. And then one quick follow-up, really just a definitional question, kind of want to reconfirm when you guys talk about kind of getting to a sustainable double-digit ROE next year, that the kind of denominator is X, fixed income realized gains and losses, is that correct? Yeah, the only thing we take
Ryan Edward Greenier: Kind of want to reconfirm when you guys talk about.
Ryan Edward Greenier: Kind of getting to a sustainable double digit ROE next year.
Speaker Change: That's the kind of denominator is.
Ryan Edward Greenier: Ex fixed income realized gains and losses is that correct.
Ryan Edward Greenier: Yeah, the only thing we could take out of that map would be real ice game losses, so yeah, it's a gap ROE metric.
Speaker Change: Yeah. The only thing we take out of that map would be realized gain losses.
Ryan Edward Greenier: So.
Ryan Edward Greenier: Yes, it's a GAAP Roe metric.
Speaker Change: Okay got it thank you.
Ryan Edward Greenier: Again, if you have a question. Please press Star then one.
Operator: Again, if you have a question, please press star then 1. The next question is from Greg Peters with Raymond James. Please go ahead.
Operator: The next question is from Greg Peters with Raymond James. Please go ahead.
Operator: Yeah, hey, good morning. This is Sid on for Greg.
Operator: Hey, Good morning, this is Sid on for Greg.
Sidney Schultz: Just wanted to go back to some of the comments on the PNC segment and look at risk and force. Should we expect that to begin to grow over time as the underwriting results get back to targeted levels? Or, you know, maybe I'm not looking at it correctly. So any comments you can provide there would be helpful.
Sid: Just wanted to go back to some of the comments on the P&C segment and.
Sidney Schultz: Looking at risk in force should we expect that to begin to grow over time as the underwriting results get back to targeted levels are.
Sidney Schultz: Maybe I'm not looking at it correctly. So any comments you can provide there would be helpful.
Bret Alan Conklin: No, absolutely not. We talk about it a lot. I'm going to let Mark give you some details on that. Yeah, sure.
Speaker Change: No absolutely we do we talk about it a lot I'm going to let Mark give you some detail on that yes sure.
Mark Richard Desrochers: We've originally been projecting that, you know, we would expect to start to see substantial Policy Enforce growth by early 26. I think with what we've seen with our new business momentum and the fact that our retention rates are actually holding better than we would have expected given our normal kind of price elasticity equations, we would probably move that up to somewhere between mid to late 2025, when we'd expect to start to see, you know, hopefully meaningful growth.
Mark Richard Desrochers: We've been originally projecting that.
Mark Richard Desrochers: We would expect to start to see substantial.
Mark Richard Desrochers: Policy in force growth by early 26, I think with what we've seen with our new business momentum and the fact that.
Mark Richard Desrochers: Our retention rates are actually holding better than we would have expected given our normal kind of price elasticity equations that.
Mark Richard Desrochers: We've probably moved that up to somewhere between mid to late 'twenty 2025 is when we'd expect to start to see hopefully meaningful growth and obviously with coming quarter second quarter third quarter.
Mark Richard Desrochers: And obviously, with the coming quarters, second quarter, third quarter, if we continue to see sales like they are up 35% in PNC and retention virtually holding, that could also be sooner, but based on what we know right now, I agree with Mark that towards the end of 2025 is when you'd expect that to turn around.
Mark Richard Desrochers: If we continue to see sales like it is up 35% in P&C and retention virtually holding.
Mark Richard Desrochers: Certainly better than what we would put in our internal plans.
Mark Richard Desrochers: That could also be sooner, but based on what we know right now I agree with mark that towards the end of 2025 is when you'd expect that to turn around.
Speaker Change: Okay. Thanks, and then as my follow up you called out a benefit in the prepared remarks from product changes in property and just wanted to confirm if you expect to realize the full benefit in 2024 or if it could go into 2025 before.
Operator: Okay, thanks. And then, as my follow-up, you called out a benefit in the prepared remarks from product changes and property, and I just wanted to confirm if you expect to realize the full benefit in 2024 or if it could go into 2025 for, I think you said a full three points. Right, I think Marita was referring.
Operator: I think you said a full three points.
Mark Richard Desrochers: Right, I think Marita was referring to the roof schedule, which is probably the most substantial product change that we've made that we expect to drive that three-point improvement, and as that earns its way in, you know, we kind of expected maybe between a quarter and a third of that benefit in 2024 with most of the rest of it coming in 2025 and then, just the very nature of the fact that Homeowners policies are 12 months, Okay, thank you. You're welcome.
Marita Zuraitis: Right I think merida was referring to the the roof schedule is probably the most substantial.
Mark Richard Desrochers: To change that we've made that we expect to drive that three point improvement and as.
Mark Richard Desrochers: As that earns its way in we kind of expected maybe between a quarter and a third of that benefit in 2024.
Mark Richard Desrochers: With most of the rest of it coming in 2025, and then just the very nature of the fact that.
Mark Richard Desrochers: Homeowners policies of 12 months some of it will work its way all the way into 2026 before it's fully earned.
Speaker Change: Okay. Thank you.
Speaker Change: Youre welcome.
Speaker Change: Once again, if you have a question. Please press Star then one please standby as we poll for questions.
Operator: Once again, if you have a question, please press star, then 1. Please stand by as we poll for questions. Since there are no further questions, this concludes our question and answer session. I would like to turn the conference back over to Bret Conklin for any closing remarks.
Operator: Showing no further questions. This concludes our question and answer session I would like to turn the conference back over to Bret Conklin for any closing remarks.
Bret Alan Conklin: Just wanted to thank everyone for your participation on today's call and we look forward to talking with everyone again next quarter. Thanks.
Bret Alan Conklin: Just want to thank everyone for your participation on today's call, and we look forward to talking with everyone again next quarter. Thanks. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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Operator: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Operator: Yeah.
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