Q2 2024 Horace Mann Educators Corp Earnings Call

August 8, 2024

Operator: Good morning, and welcome to the Horace Mann second quarter of 2024 results conference call. All participants will be in a listen-only mode for the duration of the call. And should you need any assistance, please signal a conference specialist by pressing the star key followed by zero. To ask a question, you may press star, then one on your telephone keypad. And to withdraw a question, you may press the star key then. Also, please be aware that today's call is being recorded. I would now like to turn the call over to Brendan DeWall, Vice President, Investor Relations. Please go ahead.

Operator: Good morning, and welcome to the Horace Mann second quarter of 2024 results conference call. All participants will be in a listen-only mode for the duration of the call. And should you need any assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will also be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. And to withdraw a question, you may press star again. Also, please be aware that today's call is being recorded. I would now like to turn the call over to Brendan DeWall, Vice President, Investor Relations. Please go ahead.

Operator: After today's presentation, there will also be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. And to withdraw a question, you may press star, then two. Also, please be aware that today's call is being recorded.

Brendan Dawal: I would now like to turn the call over to Brendan Dawal, Vice President and Vester Relations. Please go ahead.

Brendan DeWall: Thank you. Welcome to Horace Mann's discussion of our second quarter results. Yesterday, we issued our earnings release, 10-Q, investor supplement, and investor presentation. Copies are available on the Investors page on our website. Marita Zuraitis, President and Chief Executive Officer, and Brent Conklin, Executive Vice President and Chief Financial Officer, will give the formal remarks on today's call. With us for Q&A are Matt Sharpe, Steve McAnena, Ryan Greenier, and Mark Desrochers.

Brendan DeWall: Thank you. Welcome to Horace Mann's discussion of our second quarter results. Yesterday, we issued our earnings release, 10-Q, investor supplement, and investor presentation. Copies are available on the Investors page on our website. 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.

Operator: Thank you.

Maria Zeritis: Welcome to Horace Mann's discussion of our second quarter results. Yesterday, we issued our earnings release, 10-Q, Investor Supplement, and Investor Presentation. Copies are available on the Investors page on our website.

Brendan Dawal: Maria Zeritis, President and Chief Executive Officer, and Brent Conklin, Executive Vice President and Chief Financial Officer, will give the formal remarks on today's call. With us for Q&A, we have Matt Sharp, Steve McAnina, Ryan Grenier, and Mark Deroscher.

Brendan DeWall: 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 use some non-GAAP measures. Reconciliations of these measures to the most comparable GAAP measures are available in our Investor Supplement. I'll now turn the call over to Marita.

Brendan Dawal: Before turning it over to Maria, 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. Actual results may differ materially due to a variety of factors, which are described in our news release and SEC filings.

Brendan Dawal: In our prepared remarks, we use some non-GAAP measures. Reconciliation of these measures to the most comparable GAAP measures is available in our Investor Supplement.

Maria Zeritis: I'll now turn the call over to Maria. Thanks, Brendan, and good morning, everyone. Yesterday, we reported second-quarter core earnings of $0.20 per diluted share, a significant improvement over prior year and in line with our pre-announcement. Total revenues were up 9% with net premiums and contract deposits earned up 8%. Our property and casualty profitability restoration strategy remains on track to reach an underwriting profit in 2024 and target profitability in 2025. Our agency force is driving profitable growth in both our retail and work site divisions. Property and casualty sales were up 37%; supplemental and group benefit sales were up 20.

Marita Zuraitis: Thanks, Brendan, and good morning, everyone. Yesterday, we reported second-quarter core earnings of $0.20 per diluted share, a significant improvement over the prior year and in line with our pre-announcement. Total revenues were up 9%, with net premiums and contract deposits earning up 8%. Our property and casualty profitability restoration strategy remains on track to reach an underwriting profit in 2024 and target profitability in 2025. Our agency force is driving profitable growth in both our retail and worksite divisions. Property and Casualty Sales were up 37%. Supplemental and Group Benefit Sales were up 20%.

Marita Zuraitis: Our agency force is driving profitable growth in both our retail and worksite divisions. These results underscore our confidence in achieving our objective of a double-digit shareholder return on equity in 2025. At the end of the second quarter, our pre-tax investment yield rose to 4.46 percent, and new money rates exceeded the portfolio book yield by 163 basis points. Even with the revised outlook for commercial mortgage loan funds in 2024, we expect higher total net investment income for the full year on the strength of our core managed portfolio performance. We are able to partner with employers to bring financial wellness and retirement planning resources to educators, including 403B Plans and our Retirement Advantage Mutual Fund platform.

Maria Zeritis: These results underscore our confidence in achieving our objective of a double-digit shareholder return on equity in 2025. As we noted in our pre-announcement in the first half of 2024, we recorded some mark-to-market valuation adjustments related to our commercial mortgage loan fund portfolio. The CML portfolio is roughly 9% of our total investments and is held within our life and retirement and supplemental and group benefits portfolios. Brett will give more details as well as the specific accounting requirements later in the call.

Marita Zuraitis: These results underscore our confidence in achieving our objective of a double-digit shareholder return on equity in 2025. As we noted in our pre-announcement, in the first half of 2024, we recorded some mark-to-market valuation adjustments related to our commercial mortgage loan fund portfolio. The CML portfolio is roughly 9% of our total investments and is held within our Life in Retirement and Supplemental and Group Benefits portfolios.

Marita Zuraitis: Bret will give more details as well as the specific accounting requirements later in the call. But first, I want to take a step back to provide some perspective on our year-over-year investment results. In the first half of 2024, total net investment income on the managed portfolio rose more than 3% over the prior year, despite returns on commercial mortgage loan funds that were meaningfully below historical averages. The Core Fixed Maturity Portfolio is performing very well in the high interest rate environment.

Maria Zeritis: First, I want to take a step back to provide some perspective on our year-over-year investment results. In the first half of 2024, total net investment income on the managed portfolio rose more than 3% over prior year, despite the returns on commercial mortgage loan funds that were meaningfully below historical averages. The core fixed maturity portfolio is performing very well in the high interest rate environment. At the end of the second quarter, our pre-tax investment yield rose to 4.46%, and new money rates exceeded the portfolio book yield by 163 basis points. Even with the revised outlook for commercial mortgage loan funds in 2024, we expect higher total net investment income for the full year on the strength of our core managed portfolio performance.

Marita Zuraitis: At the end of the second quarter, our pre-tax investment yield rose to 4.46 percent, and new money rates exceeded the portfolio book yield by 163 basis points. Even with the revised outlook for commercial mortgage loan funds in 2024, we expect higher total net investment income for the full year on the strength of our core managed portfolio performance. While the valuation pressure in the commercial mortgage loan portfolio has impacted reported investment income, we do expect to see a tailwind in investment income as market factors impacting the commercial real estate sector begin to recover. Most importantly, these valuation marks have not impacted cash returns on this portfolio, which remains strong at about 7.5%.

Maria Zeritis: While the valuation pressure in the commercial mortgage loan portfolio has impacted reported investment income, we do expect to see a tailwind in investment income as market factors impacting the commercial real estate sector begin to recover. Most importantly, these valuation marks have not impacted cash returns on this portfolio, which remains strong at about 7.5%.

Maria Zeritis: Today, I want to focus my remarks on the strength of our underlying business. The results we are seeing from a fully engaged and more productive agency force, and the value we are providing to our educator and employer customers. In property and casualty, we continue to make progress towards our objective of an underwriting profit in 2024. Our reported combined ratio of 111.5%, which reflects expected second quarter seasonality, improved 13 points over prior year. We also recorded favorable prior year development, a net 6.2 million reserve release primarily related to lower than expected severity in auto physical damage claims from accident year 2023.

Marita Zuraitis: Today, I want to focus my remarks on the strength of our underlying business, the results we are seeing from a fully engaged and more productive agency force, and the value we are providing to our educator and employer customers. In property and casualty, we continue to make progress towards our objective of an underwriting profit in 2024. Our reported combined ratio of 111.5 percent, which reflects expected second quarter seasonality, improved 13 points over the prior year.

Marita Zuraitis: We also recorded favorable prior year development, a net 6.2 million reserve release primarily related to lower than expected severity in auto physical damage claims from accident year 2023. The auto combined ratio for the quarter was 97.2%, which includes 6.2 points from the favorable prior year development.

Maria Zeritis: The auto combined ratio for the quarter was 97.2%, which includes 6.2 points from the favorable prior year development. We continue to see physical damage trends moderating and feel confident in our ability to reach target profitability in 2025. We continue to successfully implement our auto and property rate plans and will monitor and respond to trends as necessary. We are at rate adequacy in the vast majority of our book and have line of sight to reach rate adequacy in the remainder. In addition, we continue to react to state level loss trends with additional rate filings as necessary.

Marita Zuraitis: We continue to see physical damage trends moderating, and feel confident in our ability to reach target profitability in 2025. We continue to successfully implement our auto and property rate plans, and will monitor and respond to trends as necessary. We are at rate adequacy in the vast majority of our book and have a line of sight to reach rate adequacy in the remainder. In addition, we continue to react to state-level loss trends with additional rate filings as necessary.

Maria Zeritis: As we have noted before, the second quarter historically comprises about half of our full-year catastrophe load. The 41 million in losses from 28 PCS declared catastrophes in the second quarter stemmed primarily from records severe convective storm activity across the country. These losses were slightly lower compared to catastrophes in the second quarter 2023, but continue to trend above our five and ten year historical averages in line with industry experience. We have implemented new roof rating schedules, which are effective at policy renewal in six of our most win-prone states. Our first look at the potential impact this quarter appeared favorable, with close to 1 million in estimated cost savings.

Marita Zuraitis: As we've noted before, the second quarter historically comprises about half of our full-year catastrophe load. The $41 million in losses from 28 PCS declared catastrophes in the second quarter stemmed primarily from record severe convective storm activity across the country.

Marita Zuraitis: These losses were slightly lower compared to catastrophes in the second quarter of 2023 but continue to trend above our five and ten-year historical averages in line with industry experience. We have implemented new roof rating schedules which are effective at policy renewal in six of our most wind-prone states. Our first look at the potential impact this quarter appeared favorable, with close to $1 million in estimated cost savings. As a reminder, we expect the full impact of this program to be about three points on the property loss ratio when earned through all applicable 12-month policies.

Maria Zeritis: As a reminder, we expect the full impact of this program to be about three points on the property loss ratio when earned in through all applicable 12-month policies.

Maria Zeritis: In life and retirement, we continue to see educators respond positively to our value proposition and our core product offerings. This segment remains a cornerstone of our value proposition for educators to protect what they have today and prepare for a successful tomorrow. We are able to partner with employers to bring financial wellness and retirement planning resources to educators, including 403(b) plans and our Retirement Advantage mutual fund platform. 403B plans are how many educators are introduced to Horace Mann and enable us to cross-sell complimentary products to new customers. These core 403B product deposits have increased 6% year to date and have a healthy sales pipeline.

Marita Zuraitis: In life and retirement, we continue to see educators respond positively to our value proposition and our core product offerings. This segment remains a cornerstone of our value proposition for educators to protect what they have today and prepare for a successful tomorrow. We are able to partner with employers to bring financial wellness and retirement planning resources to educators, including 403B Plans and our Retirement Advantage Mutual Fund platform. 403B plans are how many educators are introduced to Horace Mann and enable us to cross-sell complementary products to new customers.

Marita Zuraitis: These core 403B product deposits have increased 6% year-to-date and have a healthy sales pipeline. Against this backdrop, we're realizing improvements in the number and quality of leads our internal teams are providing to agents. We upgraded our website, improved our online quoting functionality, and tested a number of digital marketing programs.

Maria Zeritis: Against this backdrop, we are realizing improvements in the number and quality of leads our internal teams are providing to agents. We upgraded our website, improved our online quoting functionality, and tested a number of digital marketing programs. We are now working to scale up the most successful approaches in the back half of the year and into 2025. Taking all together, the result is strong retail sales growth from an engaged agency plan. Auto sales were up 29% in the second quarter. Life sales were up 27%. Our closed ratios remain consistent with historic levels. The growth is coming from more agencies, writing more policies, and writing higher premium policies.

Marita Zuraitis: We're now working to scale up the most successful approaches in the back half of the year and into 2025. Taken all together, the result is strong retail sales growth from an engaged agency plant. Auto sales were up 29% in the second quarter. Life sales were up 27%. Our close ratios remain consistent with historic levels.

Marita Zuraitis: The growth is coming from more agencies writing more policies and writing higher-premium policies. In the first half of 2024, average agency income increased 14% over the prior year. Our retail distribution recruiting is strong and slightly ahead of our plans. We are seeing more new agents reach key milestones faster, which speaks to the quality and productivity level of our agency force. Similar to retail, our worksite division has realized productivity increases in the agency force.

Maria Zeritis: In the first half of 2024, average agency income increased 14% over prior year. Our retail distribution recruiting is strong and slightly ahead of our plans. We are seeing more new agents reach key milestones faster, which speaks to the quality and productivity level of our agency force. Similar to retail, our worksite division has realized productivity increases in the agency force. Worksite direct sales are up 14%. Notably, recent sales results have even surpassed NTA's pre-pandemic levels. Customers and agents are responding well to recent product enhancements to our offerings, and we continue to update our product set to meet customer needs.

Marita Zuraitis: Worksite direct sales are up 14%. Notably, recent sales results have even surpassed NTA's pre-pandemic levels. Customers and agents are responding well to recent product enhancements to our offerings, and we continue to update our product set to meet customer needs. Benefits utilization continues to remain below pre-pandemic levels but is trending towards our long-term target of 43% on a sequential basis. In the employer-sponsored business, our number of covered lives is 830,000, a 2% increase over the prior year. As we've noted before, this business has a longer sales cycle, up to 18 months, and sales from quarter to quarter can be lumpy.

Maria Zeritis: Benefits utilization continues to remain below pre-pandemic levels but is trending towards our long-term target of 43% on a sequential basis. In the employer sponsored business, our number of covered lives is 830,000, a 2% increase over prior year. As we've noted before, this business has a longer sales cycle of up to 18 months, and sales quarter to quarter can be lumpy. We continue to leverage our existing broker partnerships to expand distribution and are focused on adding more partners.

Operator: Good morning, and welcome to the Horace Mann Second Quarter of 2024 Results Conference Call. All participants will be in a listen only mode for the duration of the call. Should you need any assistance, please sign my conference specialist by pressing the star key followed by zero.

Marita Zuraitis: We continue to leverage our existing broker partnerships to expand distribution and are focused on adding more partners. Before I turn the call over to Bret, I want to reiterate how well-positioned Horace Mann is to reach our goals of an expanded share of the education market and a sustainable double-digit ROE in 2025 and beyond. Our diversified business model provides strong, steady earnings. With the broader P&C earnings pressure facing the industry over the past few years, we've been able to consistently report income on a consolidated basis. And while life and retirement earnings have been lower in the first half of 2024 due to lower net investment income, we anticipate eventual recovery of most of the CML mark-to-market valuation adjustment.

Maria Zeritis: Before I turn the call over to Bret, I want to reiterate how well-positioned Horace Mann is to reach our goals of an expanded share of the education market and a sustainable double-digit ROE in 2025 and beyond. Our diversified business model provides strong, steady earnings with the broader PNC earnings pressure facing the industry over the past few years. We've been able to consistently report income on a consolidated basis. And while life and retirement earnings have been lower in the first half of 2024 due to lower net investment income, we anticipate the eventual recovery of most of the CML mark-to-market valuation adjustments.

Operator: After today's presentation, there will also be an opportunity to ask questions. To ask a question, you may press star, then one, on your telephone keypad. And to withdraw a question, you may press star, then two. Also, please be aware that today's call is being recorded.

Brendan Dawal: I would now like to turn the call over to Brendan Dawal, Vice President and Vester Relations. Please go ahead. Thank you.

Brendan Dawal: Welcome to Horace Mann's discussion of our second quarter results. Yesterday, we issued our earnings release, 10Q, Investor Supplement and Investor Presentation. Copies are available on the Investors page on our website. Maria Zeritis, President and Chief Executive Officer, and Brent Conklin, Executive Vice President and Chief Financial Officer, will give the formal remarks on today's call. With us for Q&A, we have Matt Sharp, Steve McAnina, Ryan Grenier, and Mark Deroscher. Before turning it over to Maria, I want to note that our presentation today includes forward-looking statements as defined in the Private Security's Litigation Reform Act of 1995.

Maria Zeritis: To put it more simply, we have a clear line of sight to target profitability in all segments in 2025, and we are growing profitably across the business. This is the basis of our current view of company value.

Marita Zuraitis: To put it more simply, we have a clear line of sight to target profitability in all segments in 2025, and we are growing profitably across the business. This is the basis of our current view of company value. One of the levers to create further shareholder value is to buy back shares when we believe market conditions are favorable, and we believe that has been the case recently. So far in 2024, we've bought back 230,987 shares at a total cost of $7.7 million.

Brendan DeWall: This is the basis of our current view of company value. One of the levers to create further shareholder value is to buy back shares when we believe market conditions are favorable. And we believe that has been the case recently. So far in 2024, we've bought back 230,987 shares at a total cost of $7.7 million. In addition, I want to touch on some of the activities we've been doing in schools to end the summer.

Brendan Dawal: The company cautions investors that any forward-looking statements include risks and uncertainties and are not guarantees of future performance. These forward-looking statements are based on management's current expectations, and we assume no obligation to update them. Actual results may differ materially due to a variety of factors which are described in our news release and SEC filings. In our prepared remarks, we use some non-GAP measures. Reconciliation of these measures to the most comparable GAP measures are available in our Investor Supplement.

Maria Zeritis: One of the levers to create further shareholder value is to buy back shares when we believe market conditions are favorable, and we believe that has been the case recently. So far in 2024, we've bought back 230,987 shares at a total cost of $7.7 million.

Maria Zeritis: In addition, I want to touch on some of the activities we've been doing in schools to bookend the summer. Before the school year ended, we completed an entire month of teacher appreciation activities, including exclusive virtual events with celebrities and entertainers who thanked teachers directly. Our website traffic doubled over the beginning of the year, and we were able to follow up with thousands of educators who wanted to hear more about horseman. As our educators head back to school this month, our agents will be there right alongside them. Our aim for the third quarter is to help educators be set for success both professionally and personally.

Brendan DeWall: Before the school year ended, we completed an entire month of teacher appreciation activities, including exclusive virtual events with celebrities and entertainers who thanked teachers directly. Our website traffic doubled over the beginning of the year, and we were able to follow up with thousands of teachers who wanted to hear more about Horace Mann.

Marita Zuraitis: In addition, I want to touch on some of the activities we've been doing in schools to bookend the summer. Before the school year ended, we completed an entire month of teacher appreciation activities, including exclusive virtual events with celebrities and entertainers who thanked teachers directly. Our website traffic doubled over the beginning of the year, and we were able to follow up with thousands of educators who wanted to hear more about Horace Mann.

Maria Zeritis: I'll now turn the call over to Maria. Thanks, Brendan, and good morning, everyone. Yesterday, we reported second-quarter core earnings of $0.20 per diluted share, a significant improvement over prior year, and in line with our pre-announcement. Total revenues were up 9% with net premiums and contract deposits earned up 8%. Our property and casualty profitability restoration strategy remains on track to reach an underwriting profit in 2024 and target profitability in 2025. Our agency force is driving profitable growth in both our retail and work site divisions.

Marita Zuraitis: As our educators head back to school this month, our agents will be there, right alongside them. Our aim for the third quarter is to help teachers be set for success, both professionally and personally. We are confident in our ability to increase our share of the education market precisely because we're here for educators and we know how to help them succeed better than anyone else. Thanks, and with that, I'll turn the call over to Bret. Thanks, Marita.

Maria Zeritis: We are confident in our ability to increase our share of the education market precisely because we're here for educators, and we know how to help them succeed better than anyone else.

Maria Zeritis: Thanks, and with that, I'll turn the call over to Brett.

Bret Conklin: Thanks, Maria. Second quarter court earnings were 8.4 million or 20 cents per diluted share, a significant increase from three cents a year ago. Our P and C profitability restoration strategy remains on track to return underrating profit in 2024 and reach target profitability in 2025. We're also seeing strong growth momentum across the segments.

Bret Conklin: Thanks, Marita. Second quarter core earnings were $8.4 million, or $0.20 per diluted share, a significant increase from $0.03 a year ago. Our P&C Profitability Restoration Strategy remains on track to return an underrating profit in 2024 and reach target profitability in 2025. We're also seeing strong growth momentum across the segment. As we noted in our pre-announcement, we now expect a full-year core EPS of $2.40 to $2.70, primarily due to lower-than-anticipated income on our commercial mortgage loan funds, as well as first-half catastrophes that were above our five-year exposure weighted average.

Maria Zeritis: Property and casualty sales were up 37%, supplemental and group benefit sales were up 20%. These results underscore our confidence in achieving our objective of a double-digit shareholder return on equity in 2025. As we noted in our pre-announcement in the first half of 2024, we recorded some mark-to-market valuation adjustments related to our commercial mortgage loan fund portfolio. The CML portfolio is roughly 9% of our total investments and is held within our life and retirement and supplemental and group benefits portfolios.

Bret Conklin: As we noted in our pre-announcement, we now expect a full year core EPS of $2.40 to $2.70, primarily due to lower than anticipated income on our commercial mortgage loan funds, as well as first half catastrophes that were above our five year exposure weighted average. Today, I'll start my remarks with more detail on investments and then speak to the performance of each of the three segments. Within our $7 billion investment portfolio, over 80% of our assets are invested in our fixed income portfolios, which have a weighted average credit rating of a plus. These portfolios have clearly benefited from the higher interest rate environment and are performing above our expectations.

Maria Zeritis: Brett will give more details as well as the specific accounting requirements later in the call. First, I want to take a step back to provide some perspective on our year-over-year investment results. In the first half of 2024, total net investment income on the managed portfolio rose more than 3% over prior year despite the returns on commercial mortgage loan funds that were meaningfully below historical averages. The core fixed maturity portfolio is performing very well in the high interest rate environment.

Bret Conklin: Today, I'll start my remarks with more detail on investments and then speak to the performance of each of the three segments. Within our $7 billion investment portfolio, over 80% of our assets are invested in our fixed income portfolios, which have a weighted average credit rating of A+. These portfolios have clearly benefited from the higher interest rate environment and are performing above our expectations. At the end of the second quarter, our core new money yield was 5.88%, well above the core pre-tax yield of 4.25%.

Maria Zeritis: At the end of the second quarter, our pre-tax investment yield rose to 4.46%, and new money rates exceeded the portfolio book yield by 163 basis points. Even with the revised outlook for commercial mortgage loan funds in 2024, we expect higher total net investment income for the full year on the strength of our core managed portfolio performance. While the valuation pressure in the commercial mortgage loan portfolio has impacted reported investment income, we do expect to see a tailwind in investment income as market factors impacting the commercial real estate sector begin to recover. Most importantly, these valuation marks have not impacted cash returns on this portfolio, which remains strong at about 7.5%.

Bret Conklin: At the end of the second quarter, our core new money yield was 5.88 percent, well above the core pretext yield of 4.25 percent. The portfolio is concentrated in investment grade corporates, municipals, and high quality agency and agency MBS securities. We have 627 million, or about 9 percent of our portfolio, in commercial mortgage loan funds. We hold these assets in fund structures across the diverse group of managers to provide access to broader markets, geographies, property types, borrowers, and loan types versus the direct loan origination strategy used by many of our life industry peers. We therefore follow the equity method of accounting for these funds.

Bret Conklin: The portfolio is concentrated in investment-grade corporates, municipals, and high-quality agency and agency MBS securities. We have $627 million, or about 9% of our portfolio, in commercial mortgage loan funds. We hold these assets in fund structures across a diverse group of managers to provide access to broader markets, geographies, property types, borrowers, and loan types versus the direct loan origination strategy used by many of our life industry peers. We therefore follow the equity method of accounting for these funds.

Bret Conklin: Essentially, we're booking quarterly adjustments based on current real estate property valuations that have a 1-quarter lag and can be impacted by market factors like interest rates in the level of real estate transactions. Most of the underlying loans within these funds have maturities of 5 years or less. If loans that have been marked a market mature and potentially pay off, or as Maria mentioned, these valuation marks have not impacted cash returns on this portfolio, which remains strong at about 7.5 percent. The majority of our total commercial real estate exposure is in multi-family and industrial, both of which are generally performing well.

Bret Conklin: Essentially, we're booking quarterly adjustments based on current real estate property valuations that have a one-quarter lag and can be impacted by market factors like interest rates and the level of real estate transactions. Additionally, most of the underlying loans within these funds have maturities of five years or less. If loans that have been marked to market mature and potentially pay off or refinance at par, we would expect to see a tailwind in investment income.

Maria Zeritis: We also recorded favorable prior year development, a net 6.2 million reserve release primarily related to lower than expected severity in auto physical damage claims from accident year 2023. The auto combined ratio for the quarter was 97.2%, which includes 6.2 points from the favorable prior year development. We continue to see physical damage trends moderating and feel confident in our ability to reach target profitability in 2025. We continue to successfully implement our auto and property rate plans and will monitor and respond to trends as necessary.

Marita Zuraitis: Most importantly, as Marita mentioned, these valuation marks have not impacted cash returns on this portfolio, which remains strong at about 7.5%. It is primarily well-amenitized, well-located, and generally newer construction Class A exposure.

Bret Conklin: Most importantly, as Marita mentioned, these valuation marks have not impacted cash returns on this portfolio, which remains strong at about 7.5%. The majority of our total commercial real estate exposure is in multifamily and industrial, both of which are generally performing well. We continue to monitor office exposure closely, which represents less than 3% of the total investment portfolio. These investments are concentrated in Senior Commercial Mortgage Loan Funds. It is primarily well-amenitized, well-located, and generally newer construction Class A exposure.

Bret Conklin: We continue to monitor office exposure closely, which represents less than 3 percent of the total investment portfolio. These investments are concentrated in senior commercial mortgage loan funds. It is primarily well-ammanitized, well-located, and generally newer construction Class A exposure. What this means for 2024 is overall net investment income that is slightly higher than 2023, compared to the high single-digit increase we assumed in our original guidance. As I previously mentioned, valuations are based on market factors, and we see the potential for an investment's tailwind in the future. The commercial mortgage loan funds report on a 1-quarter lag, so we have some early insight into Q3 returns.

Maria Zeritis: We are at rate adequacy in the vast majority of our book and have line of sight to reach rate adequacy in the remainder. In addition, we continue to react to state level loss trends with additional rate filings as necessary. As we have noted before, second quarter historically comprises about half of our full year catastrophe load. The 41 million in losses from 28 PCS declared catastrophes in the second quarter stemmed primarily from records severe convective storm activity across the country.

Bret Conklin: What this means for 2024 is overall net investment income that is slightly higher than 2023 compared to the high single-digit increase we assumed in our original guidance. As I previously mentioned, valuations are based on market factors, and we see the potential for an investment's tailwind in the future. The Commercial Mortgage Loan Funds report on a one-quarter lag, so we have some early insight into Q3 returns. Right now, we expect $10 to $12 million of net investment income from CMLs in the second half of 2024, a notable increase from the $4 million of net investment income in the first half of the year. This is due to a lower level of negative valuation adjustments across the funds. As a result, we expect CML income to remain below historical averages for the full-year.

Maria Zeritis: These losses were slightly lower compared to catastrophes in second quarter 2023, but continue to trend above our five and ten year historical averages in line with industry experience. We have implemented new roof rating schedules which are effective at policy renewal in six of our most win-prone states. Our first look at the potential impact this quarter appeared favorable with close to 1 million in estimated cost savings. As a reminder, we expect the full impact of this program to be about three points on the property loss ratio when earned in through all applicable 12 month policies.

Bret Conklin: Right now, we expect 10-12 million of net investment income from CMS in the second half of 2024, a notable increase from the 4 million of net investment income in the first half of the year. This is due to a lower level of negative valuation adjustments across the funds. As a result, we expect CMS to remain below historical averages on a full-year basis.

Marita Zuraitis: As a result, we expect CML income to remain below historical averages on a full-year basis. The reported combined ratio of 111.5 improved 13 points over the prior year, including 3.5 points of favorable prior year reserve development. Catastrophe losses of 41 million added almost 23 points to the reported combined ratio compared to over 26 points a year ago. We have mentioned before that the second quarter typically accounts for about half of our full-year catastrophe load. Second quarter losses were above our 5-year and 10-year historic average. This is consistent with the broader industry, which experienced record levels of severe convective storm activity.

Bret Conklin: We expect further improvement in 2025. 5. Turning to the business segment performance, property and casualty net written premiums rose nearly 17 percent to $199 million, primarily on premium increases implemented over the past 18 months. The reported combined ratio of 111.5 improved 13 points over a prior year, including 3.5 points, a favorable prior year reserve development. The 6.2 million reserve release is primarily related to autophysical damage claims from accident year 2023. The catastrophe losses of 41 million added almost 23 points to the reported combined ratio compared to over 26 points a year ago. We have mentioned before that second quarter typically accounts for about half of our full year cataloged.

Bret Conklin: We expect further improvement in 2025. Turning to the business segment performance, property and casualty net written premiums rose nearly 17% to $199 million, primarily due to premium increases implemented over the past 18 months. The reported combined ratio of 111.5 improved 13 points over the prior year, including 3.5 points of favorable prior year reserve development. The $6.2 million reserve release is primarily related to auto-physical damage claims from accident year 2023.

Maria Zeritis: In life and retirement, we continue to see educators respond positively to our value proposition and our core product offerings. This segment remains a cornerstone of our value proposition for educators to protect what they have today and prepare for a successful tomorrow. We are able to partner with employers to bring financial wellness and retirement planning resources to educators, including 403B plans and our retirement advantage mutual fund platform. 403B plans are how many educators are introduced to Horace Mann and enable us to cross sell complimentary products to new customers.

Bret Conklin: Catastrophe losses of 41 million added almost 23 points to the reported combined ratio compared to over 26 points a year ago. We have mentioned before that second quarter typically accounts for about half of our full-year cat load. Second quarter losses were above our 5-year and 10-year historic average. This is consistent with the broader industry, which experienced record levels of severe convective storm activity.

Maria Zeritis: These core 403B product deposits have increased 6% year to date and have a healthy sales pipeline. Against this backdrop, we are realizing improvements in the number and quality of leads our internal teams are providing to agents. We upgraded our website, improved our online quoting functionality and tested a number of digital marketing programs. We are now working to scale up the most successful approaches in the back half of the year and into 2025.

Bret Conklin: Second quarter losses were above our five-year and 10-year historic averages. This is consistent with the broader industry, which experienced record levels of severe convective storm activity. In auto net written premiums of 122 million increased 15 percent over prior year, primarily on rate actions. The combined ratio of 97.2 improved 17 points over prior year. In terms of loss cost trends, we saw favorable severity trends in the quarter. Frequency was unfavorable on a quarterly basis, but flat year to date. Policyholder retention remained strong at 86.6 percent despite substantial rate increases. In property, net written premiums were 77 million, a 20 percent increase over prior year.

Bret Conklin: In auto, net written premiums of $122 million increased 15% over the prior year, primarily on RAIDX. The combined ratio of 97.2 improved 17 points over the prior years. In terms of loss cost trends, we saw favorable severity trends in the quarter. Frequency was unfavorable on a quarterly basis, but flat year to date. Policyholder retention remains strong at 86.6% despite substantial rate increases. In property, net written premiums were $77 million, a 20% increase over the prior year. The combined ratio reflected catastrophe losses that were below the prior year but elevated compared to our historical average. However, despite higher premiums, our policyholder retention remains strong at 90%.

Marita Zuraitis: The combined ratio of 97.2 improved 17 points over prior years. Despite higher premiums, our policyholder retention remains strong at 90%. We continue to expect to reach a segment underwriting profit in 2024. For the full year outlook, we have adjusted life and retirement segment earnings down to a range of $50 million to $56 million due to lower expected net investment income related to the commercial mortgage loan fund. For the full year, we have adjusted our supplemental and group benefits segment up to an earnings range of $49 to $52 million, which is mostly due to lower benefits utilization in the first half of the year. Second, we are committed to increasing the annual shareholder dividend as we have for the past 16 years. We have about $28 million remaining on our current share repurchase authorization.

Maria Zeritis: Taking all together, the result is strong retail sales growth from an engaged agency plan. Auto sales were up 29% in the second quarter. Life sales were up 27%. Our closed ratios remain consistent with historic levels. The growth is coming from more agencies, writing more policies and writing higher premium policies. In the first half of 2024 average agency income increased 14% over prior year. Our retail distribution recruiting is strong and slightly ahead of our plans.

Bret Conklin: The combined ratio reflected cat losses that were below prior year but elevated compared to our historical averages. Despite higher premiums, our policyholder retention remained strong at 90 percent. Looking ahead to the full year, we slightly narrowed our higher cat costs. We continue to expect to reach a segment underwriting profit in 2024.

Maria Zeritis: We are seeing more new agents reach key milestones faster, which speaks to the quality and productivity level of our agency force. Similar to retail, our worksite division has realized productivity increases in the agency force. Worksite direct sales are up 14%. Notably recent sales results have even surpassed NTA's pre-pandemic levels. Customers and agents are responding well to recent product enhancements to our offerings and we continue to update our product set to meet customer needs.

Bret Conklin: Looking ahead to the full year, we slightly narrowed our P&C earnings guidance range to $36 to $39 million to adjust for first-half results, primarily on higher CAD costs. We continue to expect to reach a segment underwriting profit in 2024. Turning to life in retirement, core earnings of $12 million were below the prior year by 29% due to lower than anticipated income on our commercial mortgage loan funds and higher interest credit. In the retirement business, deposits in our core 403B products have increased 6% year-to-date, and accounts on our fee-based mutual fund platform, Retirement Advantage, surpassed $20,000.

Bret Conklin: Turning to life and retirement, core earnings of 12 million were below prior year by 29 percent due to lower than anticipated income on our commercial mortgage loan funds and higher interest credit. In the retirement business, deposits in our core 403B products have increased 6 percent year to date, and accounts on our fee-based mutual fund platform Retirement Advantage surpassed 20,000. As Marie mentioned, our retirement products are a cornerstone of Horseman's value proposition and an important entry point to the education market. Analyze life sales increased 27 percent over prior year. Mortality costs for the quarter were comparable to the prior year, and persistency remained strong at about 96 percent.

Maria Zeritis: Benefits utilization continues to remain below pre-pandemic levels but is trending towards our long-term target of 43% on a sequential basis. In the employer sponsored business, our number of covered lives is 830,000, a 2% increase over prior year. As we've noted before, this business has a longer sales cycle up to 18 months and sales quarter to quarter can be lumpy. We continue to leverage our existing broker partnerships to expand distribution and are focused on adding more partners.

Bret 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. Annualized life sales increased 27% over the prior year. Mortality costs for the quarter were comparable to the prior year, and persistency remained strong at about 96%.

Maria Zeritis: Before I turn the call over to Bret, I want to reiterate how well-positioned Horace Mann is to reach our goals of an expanded share of the education market and a sustainable double digit ROE in 2025 and beyond. Our diversified business model provides strong steady earnings with the broader PNC earnings pressure facing the industry over the past few years. We've been able to consistently report income on a consolidated basis. And while life and retirement earnings have been lower in the first half of 2024 due to lower net investment income, we anticipate eventual recovery of most of the CML Mark-to-Market valuation adjustments.

Bret Conklin: For the full year outlook, we have adjusted Life and Retirement segment earnings down to a range of 50 to 56 million due to lower expected net investment income related to the commercial mortgage loan fund. Turning to the work site in the Supplemental and Group Benefits segment, earnings of $14 million were above prior year by 19% on higher net investment income in lower policyholder benefits utilization. Premiums and contract charges earned were $64 million, down slightly from prior year. The blended benefits ratio of 39% was below prior year but trending toward our target of 43% on a sequential basis.

Bret Conklin: For the full year outlook, we have adjusted life and retirement segment earnings down to a range of $50 million to $56 million due to lower expected net investment income related to the commercial mortgage loan fund. Turning to Worksite, in the Supplemental and Group Benefits segment, earnings of $14 million were above the prior year by 19% on higher net investment income and lower policy holder benefits utilization. Premiums and contract charges earned were $64 million, down slightly from the prior year.

Bret Conklin: The blended benefits ratio of 39% was below the prior year but trending toward our target of 43% on a sequential basis. Sales were up 20%, mostly on the strength of the worksite direct line. Our employer-sponsored sales were up as well, but like the broader group benefits industry, our second quarter generally is a light sales quarter. For the full year, we have adjusted our supplemental and group benefits segment up to an earnings range of $49 to $52 million, which is mostly due to lower benefits utilization in the first half of the year. While we continue to expect utilization to return to pre-pandemic levels, the pace is slower than we originally anticipated.

Maria Zeritis: To put it more simply, we have a clear line of sight to target profitability in all segments in 2025 and we are growing profitably across the business. This is the basis of our current view of company value. One of the levers to create further shareholder value is to buy back shares when we believe market conditions are favorable and we believe that has been the case recently. So far in 2024, we've bought back 230,987 shares at a total cost of $7.7 million.

Bret Conklin: Sales were up 20%, mostly on the strength of the work site direct line. Our employer-sponsored sales were up as well, but like the broader group benefits industry, our second quarter generally has light sales volume. For the full year, we have adjusted our supplemental and group benefits segment up to an earnings range of $49 to $52 million, which is mostly due to lower benefits utilization in the first half of the year. While we continue to expect utilization will return to pre-pandemic levels, the pace is slower than we originally anticipated.

Maria Zeritis: In addition, I want to touch on some of the activities we've been doing in schools to bookend the summer. Before the school year ended, we completed an entire month of teacher appreciation activities including exclusive virtual events with celebrities and entertainers who thanked teachers directly. Our website traffic doubled over the beginning of the year and we were able to follow up with thousands of educators who wanted to hear more about horseman. As our educators head back to school this month, our agents will be there right alongside them.

Bret Conklin: As we move into the back half of the year, we continue to prioritize long-term shareholder value creation. At our targeted profitability across the segments, Horace Mann is capable of generating about 50 million in excess capital above what we pay in shareholder dividends in interest expense annually. Our first priority remains on funding profitable growth. Second, we are committed to increasing the annual shareholder dividend, as we have for the past 16 years. Third, we opportunistically buy back shares when market conditions are favorable. Year to date, through August 2nd, we have repurchased approximately 231,000 shares at a cost of $7.7 million.

Bret Conklin: As we move into the back half of the year, we continue to prioritize long-term shareholder value creation. At our targeted profitability across the segments, Horace Mann is capable of generating about $50 million in excess capital above what we pay in shareholder dividends in interest expense annually. Our first priority remains on funding profitable growth. Second, we are committed to increasing the annual shareholder dividend as we have for the past 16 years. Third, we opportunistically buy back shares when market conditions are favorable.

Maria Zeritis: Our aim for the third quarters to help educators be set for success both professionally and personally. We are confident in our ability to increase our share of the education market precisely because we're here for educators and we know how to help them succeed better than anyone else.

Bret Conklin: Year to date, through August 2nd, we have repurchased approximately 231,000 shares at a cost of $7.7 million. We have about $28 million remaining on our current share repurchase authorization. In closing, Horace Mann has a clear line of sight to target profitability across our segments, a strong balance sheet, and solid growth momentum. With these pieces in place, we are well-positioned to expand our market share and achieve a 10% shareholder return on equity in 2025. Thank you. Operator, we're ready for questions.

Bret Conklin: Thanks and with that, I'll turn the call over to Brett. Thanks, Maria. Second quarter court earnings were 8.4 million or 20 cents per diluted share a significant increase from three cents a year ago. Our P and C profitability restoration strategy remains on track to return underrating profit in 2024 and reach target profitability in 2025. We're also seeing strong growth momentum across the segments.

Bret Conklin: We have about $28 million remaining on our current share repurchase authorization.

Bret Conklin: In closing, Horace Mann has a clear line of sight to target profitability across our segments, a strong balance sheet, and solid growth momentum. With these pieces in place, we are well-positioned to expand our market share and achieve a 10% shareholder return on equity in 2025. Thank you.

Bret Conklin: As we noted in our pre-announcement, we now expect a full year core EPS of $2.40 to $2.70 primarily due to lower than anticipated income on our commercial mortgage loan funds, as well as first half catastrophes that were above our five year exposure weighted average. Today, I'll start my remarks with more detail on investments and then speak to the performance of each of the three segments. Within our $7 billion investment portfolio, over 80% of our assets are invested in our fixed income portfolios which have a weighted average credit rating of a plus.

Operator: Operator, we're ready for questions.

Operator: We will now begin the question and answer session. To ask a question, you may press star, then one on your telephone keypad. If you're using a speaker phone, please pick up your handset before pressing the keys. And to withdraw a question, please press star, then two.

Operator: We will now begin the question and answer session. To ask a question, you may press star, then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. And to withdraw a question, please press star, then two. At this time, we will pause just momentarily to assemble our roster. And our first question will come from Meyer Shields on KBW. Please go ahead.

Operator: If you are using a speakerphone, please pick up your handset before pressing the keys. And to withdraw a question, please press star, then two. At this time, we will pause just momentarily to assemble our roster.

Operator: At this time, we will pause just momentarily to assemble our roster.

Meyer Shields: And our first question will come from Meyer Shields with KVW. Please go ahead. Great.

Meyer Shields: Great. Good morning, everyone.

Meyer Shields: Good morning, everyone. I wanted to ask a question based on Brett's comments, because when we look at, I guess, the rate of earned rate increase, or the pace of earned rate increase, and what seems to be decelerating severity trends, I guess I would have expected the underlying vaccine or loss ratio in auto to improved by a little more than it had. I was hoping you could talk to, I think it's the frequency issue, that probably opposed that. I was hoping you could add a little detail to what's going on there.

Bret Conklin: These portfolios have clearly benefited from the higher interest rate environment and are performing above our expectations. At the end of the second quarter, our core new money yield was 5.88 percent, well above the core pretext yield of 4.25 percent. The portfolio is concentrated in investment grade corporates, municipals, and high quality agency and agency MBS securities. We have 627 million or about 9 percent of our portfolio in commercial mortgage loan funds. We hold these assets in fund structures across the diverse group of managers to provide access to broader markets, geographies, property types, borrowers, and loan types versus the direct loan origination strategy used by many of our life industry peers.

Meyer Shields: I wanted to ask a question based on Bret's comments because when we look at, I guess, the rate of earned rate increase, or the pace of earned rate increase, and what seems to be decelerating severity trends, I guess I would have expected the underlying accident or loss ratio in auto to improve by a little bit more than it has. I was hoping you could talk through it. I think it's the frequency issue that probably opposes that. I was hoping you could add a little detail to what's going on here.

Mark Desrochers: Sure, this is Mark.

Mark Desrochers: Sure, Mayor. This is Mark.

Mark Desrochers: I'll take that question. When we look at auto frequency, the accident frequency in the quarter was a bit elevated compared to 2023. I think it's primarily attributable to the fact that spring break across much of the country was a little bit later this year, so some of what would normally come as accident frequency in the first quarter leak into the second quarter. I think that's a little bit exacerbated by the fact that we have our educator niche. But if you look at the first half of the year in aggregate, accident frequency is pretty much flat year over year, and if we look at severity, the metal coverages are definitely coming down. I think on the bodily injury in UM side, we continue to see trends in the kind of mid to high single digits, you know, somewhat a function of continued social inflation.

Mark Desrochers: I'll take that question. You know, when we look at auto accident frequency, the accident frequency in the quarter was a bit elevated compared to 2023. I think it's primarily attributable to the fact that spring break across much of the country was a little bit later this year. So some of what would normally come as accident frequency in the first quarter leaked into the second quarter. I think that's a little bit exacerbated by the fact that, you know, we have our educator niche.

Bret Conklin: We therefore follow the equity method of accounting for these funds. Essentially, we're booking quarterly adjustments based on current real estate property valuations that have a 1-quarter lag and can be impacted by market factors like interest rates in the level of real estate transactions. Most of the underlying loans within these funds have maturities of 5 years or less. If loans that have been marked a market mature and potentially pay off or as Maria mentioned, these valuation marks have not impacted cash returns on this portfolio which remains strong at about 7.5 percent.

Mark Desrochers: But if you look at the first half of the year in aggregate, accident frequency is pretty much flat year over year. And if we look at severity, you know, metal coverage is definitely coming down. I think on the bodily injury and UM side, we continue to see trends in the kind of mid to high single digits, you know, somewhat a function of continued social inflation. But in the aggregate, auto loss costs for the first half of the year were about 5% over where they were in 2023, which is pretty much dead on to what we expect.

Mark Desrochers: But in the aggregate, on a lost cost or the first half of the year, about 5% over where they were in 2023, which is pretty much dead on to what we expected.

Mark Desrochers: Okay, that's very helpful. I guess the follow-up question on that is the file. I guess the delta between filed rate increases on the liability side and on the metal side of the physical damage side. Is that changing as we see the physical damage trends of eight? I think it likely will, Mayor, but right now, I mean most of our rate has been, you know, primarily across the board, across all coverages. There are some differences, but not material differences as of yet. But I think as we get into next year and we feel strong about our profitability trajectory, and you get to more kind of inflationary type rate changes, you'll see it match up.

Mark Desrochers: Okay, that's very helpful. I guess a follow-up question on that is the... I guess the delta between file rate increases on the liability side and on the metal side of the physical damage side, is that changing as we see the physical damage trends abate?

Bret Conklin: The majority of our total commercial real estate exposure is in multi-family and industrial, both of which are generally performing well. We continue to monitor office exposure closely which represents less than 3 percent of the total investment portfolio. These investments are concentrated in senior commercial mortgage loan funds. It is primarily well-ammanitized, well-located, and generally newer construction class A exposure. What this means for 2024 is overall net investment income that is slightly higher than 2023 compared to the high single-digit increase we assumed in our original guidance.

Mark Desrochers: I think it likely will, Mayor, but right now, I mean, most of our rates have been, you know, primarily across the board, across all coverages. There are some differences, but not material differences as yet. But I think as we get into next year and we feel strong about our profitability trajectory, and you get to more kind of inflationary type rate changes, you'll see it match up, I think, much more closely with the underlying coverage inflation. Certainly, as this year's data gets worked into the pipeline.

Meyer Shields: I think much more closely with the underlying coverage inflation. Certainly, as this year's data gets worked into the pipes. Go ahead, Mayor.

Bret Conklin: As I previously mentioned, valuations are based on market factors and we see the potential for an investment's tailwind in the future. The commercial mortgage loan funds report on a 1-quarter lag so we have some early insight into Q3 returns. Right now, we expect 10-12 million of net investment income from CMS in the second half of 2024, a notable increase from the 4 million of net investment income in the first half of the year. This is due to a lower level of negative valuation adjustments across the funds. As a result, we expect CMS to remain below historical averages on a full-year basis. We expect further improvement in 2025.

Mark Desrochers: Certainly, as this year's data gets worked into the pipeline, yes.

Meyer Shields: A timeline of the market creating back to par, I guess maybe the way to ask is the duration of the other real estate portfolio.

Unidentified Analyst: A timeline of the marks-to-market accreting back-to-par, I guess, may be the right way to ask about the duration of the real estate portfolio.

Meyer Shields: A timeline of the marks-to-market accreting back-to-par, I guess, may be the right way to ask about the duration of the real estate portfolio.

Ryan Grenier: Sure, Mayor, this is Ryan. I think you're asking about the timeline, you know, of when we think we're going to see some of that recovery in the unrealized. You know, we put a little more detail in the investor presentation on the commercial mortgage loan portfolio this quarter, time slides 36 and 37, and you can see that about two thirds of our CML portfolio will mature over the next 18 months. So, as a reminder, with the equity method of accounting, we've taken evaluation adjustment real time, you know, one quarter lag to every single loan in that limited mortgage loan fund portfolio.

Ryan Greenier: Sure, Mayor. This is Ryan.

Ryan Greenier: I think you're asking about the timeline of when we think we're going to see some of that recovery in the unrealized. We put a little more detail in the investor presentation on the commercial mortgage loan portfolio this quarter. It's on slides 36 and 37.

Bret Conklin: 5. Turning to the business segment performance, property and casually net written premiums rose nearly 17 percent to $199 million, primarily on premium increases, implemented over the past 18 months. The reported combined ratio of 111.5 improved 13 points over a prior year, including 3.5 points, a favorable prior year reserve development. The 6.2 million reserve release is primary related to autophysical damage claims from accident year 2023. The catastrophe losses of 41 million added almost 23 points to the reported combined ratio compared to over 26 points a year ago.

Ryan Greenier: And you can see that about two-thirds of our CML portfolio will mature over the next 18 months. So as a reminder, using the Equity Method of Accounting, we've taken a valuation adjustment, real-time, you know, one-quarter lag, to every single loan in that limited mortgage loan fund portfolio. That's 249 of them.

Ryan Grenier: That's 249 of them. And clearly many of them, the vast majority continue to perform well. And you can see that in the cash yield statistics that we put out on that slide for you. There's a significant delta between the cash yield and the net investment income, and that investment income reflects those unrealized adjustments. So with two thirds of them maturing over the next 18 months, we feel good that there's, you know, a tailwind there, you know, that will play in our estimate for second half is conservative. And so I think you're going to see more of that, you know, in 2025 or later, but we feel confident about the trajectory.

Ryan Greenier: And clearly, many of them, the vast majority, continue to perform well. And you can see that in the cash yield statistics that we put out on that slide for you. There's a significant delta between the cash yield and the net investment income, which reflects those unrealized adjustments.

Ryan Greenier: So with two-thirds of them maturing over the next 18 months, we feel good that there's, you know, a tailwind there that will play in. Our estimate for the second half is conservative. And so I think you're going to see more of that, you know, in 2025 or later. But we feel confident about the trajectory. Thank you.

Bret Conklin: We have mentioned before that second quarter typically accounts for about half of our full year cataloged. Second quarter losses were above our five year and 10 year historic averages. This is consistent with the broader industry which experienced record levels of severe convective storm activity. In auto net written premiums of 122 million increased 15 percent over prior year, primarily on rate actions. The combined ratio of 97.2 improved 17 points over prior year.

Meyer Shields: Okay, fantastic.

Meyer Shields: Okay, fantastic. Thank you so much, and I apologize for my phone.

Meyer Shields: Thank you so much, and I apologize for my phone. No problem, thank you.

Wilma Burdis: And our next question will come from Wilma Burdis with Raymond James. Please go ahead. Hey, good morning. Could you just talk about the, can you hear me? Yes, yes.

Operator: And our next question will come from Wilma Murtis with Raymond James. Please go ahead.

Wilma Murtis: Hey, good morning. Could you talk about the... Oh, can you guys hear me? Yes, yes. Could you just talk about the trajectory of the interest rates that are factored into the current CML portfolio evaluation and maybe just talk about the expectation for rate cuts that's baked into that assumption? Thanks.

Bret Conklin: In terms of loss cost trends, we saw favorable severity trends in the quarter. Frequency was unfavorable on a quarterly basis, but flat year to date. Policy holder retention remained strong at 86.6 percent despite substantial rate increases. In property, net written premiums were 77 million, a 20 percent increase over prior year. The combined ratio reflected cat losses that were below prior year but elevated compared to our historical averages. Despite higher premiums, our policy holder retention remained strong at 90 percent. Looking ahead to the full year, we slightly narrowed our higher cat costs. We continue to expect to reach a segment underwriting profit in 2024.

Wilma Burdis: Could you just talk about the trajectory of the interest rates that are factored into the current CML portfolio evaluation? And maybe to talk about the expectation for rate cuts was baked into that assumption. Thanks. Sure, Wilma. This is Ryan. Thanks again for the question. You know, our commercial mortgage loan portfolio is primarily floating rate exposure; over 80% of the loans, close to 85% are floating rate. And, you know, that has certainly helped cash yields. But the inverse of that is it puts pressure on the valuation, you know, on cap rates of the underlying portfolio, the underlying loans, the properties supporting the loans. You know, as we move into what will likely be a moderating interest rate environment, that will be a tailwind for the commercial real estate market.

Ryan Greenier: Sure, Wilma. This is Ryan. Thanks again for the question. You know, our commercial mortgage loan portfolio is primarily floating rate exposure; over 80% of the loans, close to 85% are floating rate. And, you know, that has certainly helped cash yields. But the inverse of that is it puts pressure on the valuation of the assets, you know, on the cap rates of the underlying portfolio, the underlying loans, the properties supporting the loans. As we move into what will likely be a moderating interest rate environment, that will be a tailwind for the commercial real estate market.

Ryan Greenier: It'll provide some relief on the debt service coverage numbers, as well as help support cap rates for the underlying properties. But we're not necessarily counting on that. We have a lot of confidence in the underlying fundamentals of the properties. And, you know, as I just said to Mayor, we expect a lot of these unrealized marks to come back as they mature, which is over the next, you know, two-thirds of the portfolio matures over the next 18 months.

Bret Conklin: Turning to life and retirement, core earnings of 12 million were below prior year by 29 percent due to lower than anticipated income on our commercial mortgage loan funds and higher interest credit. In the retirement business, deposits in our core 403B products have increased 6 percent year to date and accounts on our fee-based mutual fund platform retirement advantage surpassed 20,000. As Marie mentioned, our retirement products are a cornerstone of horseman's value proposition and an important entry point to the education market.

Ryan Grenier: And, you know, as I just said to Mayor, we expect a lot of this unrealized marks to come back as they mature, which is over the next, you know, two-thirds of the portfolio matures over the next 18 months. Okay, thank you.

Unidentified Analyst: And then could you talk about what drove the favorable prior year development and is that something that we could see continuing into the second half of the year?

Wilma Murtis: And then could you talk about what drove the favorable prior year development and is that something that we could see continuing into the second half of the year?

Wilma Burdis: And then could you talk about what drove the favorable prior your development? And is that something that we could see continuing into the second half of the year? Thanks.

Bret Conklin: Sure, Wilma. This is Bret.

Bret Conklin: Sure, one more. This is this is Brett. And, you know, as usual, let me just start out by, as it relates to the PNC reserves, I think most know that we take a very conservative stance as it relates to our PNC reserving, withholding our reserves at the upper half of the actual real range. You know, I would also add that we remain very comfortable with our aggregate reserve levels, and to your point on the PYD that we recorded in the second quarter. Obviously, we were encouraged by the emerging favorable trends that we were beginning to see.

Bret Conklin: Analyze life sales increased 27 percent over prior year. Mortality costs for the quarter were comparable to the prior year and persistency remained strong at about 96 percent. For the full year outlook, we have adjusted life and retirement segment earnings down to a range of 50 to 56 million due to lower expected net investment income related to the commercial mortgage loan fund. Turning to work site in the Supplemental and Group Benefits segment, earnings of $14 million were above prior year by 19% on higher net investment income in lower policy holder benefits utilization.

Bret Conklin: And, you know, as usual, let me just start out by saying that, as it relates to the PNC reserves, I think most know that we take a very conservative stance as it relates to our PNC reserves, withholding our reserves at the upper half of the actuarial range. And, I would also add that we remain very comfortable with our aggregate reserve levels. And to your point on the PYD that we recorded in the second quarter, obviously, we were encouraged by the emerging favorable trends that we're beginning to see.

Bret Conklin: And I think it was in my prepared remarks about the auto claims development pattern, specifically in the auto physical damage coverage. So with that, let me turn it over to Mark, who can kind of talk about the trends that we're seeing more specifically. Absolutely.

Bret Conklin: And I think it was in my prepared remarks in the auto claims development pattern, specifically in the auto physical damage coverage.

Mark Desrochers: So, with that, let me turn it over to Mark, who can kind of talk about the more specifically about the trends that we're saying.

Bret Conklin: Premiums and contract charges earned were $64 million down slightly from prior year. The blended benefits ratio of 39% was below prior year but trending toward our target of 43% on a sequential basis. Sales were up 20%, mostly on the strength of the work site direct line. Our employer sponsored sales were up as well but like the broader group benefits industry our second quarter generally has light sales volume. For the full year we have adjusted our supplemental and group benefits segment up to an earnings range of $49 to $52 million which is mostly due to lower benefits utilization in the first half of the year. While we continue to expect utilization will return to pre-pandemic levels the pace is slower than we originally anticipated.

Mark Desrochers: Absolutely. I mean, all that development essentially came out of, you know, essentially collision and auto property damage, you know, which are short, short-tailed lines. And the, as those claims are closing, what we're finding is the severity on them has dropped, you know, precipitously from where we thought it was at the time when reserves were set. So, you know, at that time we were still dealing with the tail end of mid to high single-digit severity trends. And now, you know, as they're settling out, you know, we're seeing trends that are more in the very low single digits, and that's really what's driving that prior year development.

Mark Desrochers: I mean, all that development essentially came out of, you know, collision and auto property damage, which are short. Short-tailed lines and, as those claims are closing, what we're finding is the severity on them has dropped precipitously from where we thought it was at the time when reserves were set. At that time, we were still dealing with the tail end of mid to high single-digit severity trends. Now, as they're settling out, we're seeing trends that are more in the very low single digits, and that's really what's driving that prior development.

Unidentified Speaker: Short-tailed lines and

Bret Conklin: So we have a very high level of confidence that we're right on these numbers.

Mark Desrochers: We have a very high level of confidence that we're right about these numbers. Yeah, and I can't sit here and guarantee what's going to happen in the second half of this year, but I would just say this: if the trends continue to be favorable, as Mark just described, it would not surprise me if we have development. But to say that we will or we won't, I can't do that, but we feel very good about where we are currently and the trends that we're seeing.

Bret Conklin: Yeah, and I can't sit here and guarantee what's going to happen in the second half of this year. But I would just say this: if the trends continue to be favorable, as Mark just described, it would not, you know, surprise me if it would have development. But to say that we will or we won't, I can't do that. But we feel very good about where we're at currently in the trends that we're seeing.

Bret Conklin: As we move into the back half of the year we continue to prioritize long-term shareholder value creation. At our targeted profitability across the segments, Horace Mann is capable of generating about 50 million in excess capital above what we pay in shareholder dividends in interest expense annually. Our first priority remains on funding profitable growth. Second, we are committed to increasing the annual shareholder dividend as we have for the past 16 years. Third, we opportunistically buy back shares when market conditions are favorable. Year to date, through August 2nd, we have repurchased approximately 231,000 shares at a cost of $7.7 million. We have about 28 million remaining on our current share repurchase authorization.

Wilma Murtis: And if I could sneak one more in, could you just talk a little bit about share repurchases? They were a bit higher in the quarter. You know, CAHPS came in on line, but just maybe talk about that and what we could see in the second half of the year and maybe even 25% as P&C operations normalized. Thanks.

Wilma Burdis: Thank you.

Wilma Burdis: And if I could take one more end, could you just talk a little about sharing purchases? They were a bit higher in the quarter. You know, cats came in line, but just today we talked about that and what we could see in the second half of the year and maybe even 25 is P&C operations and we'll let things.

Bret Conklin: Yeah, thank you. I'll let Ryan go through the details, but as we always say, share repurchase is just one piece of a very thoughtful capital management strategy. Ryan, do you want to take it? Sure. Thanks for the question, Wilma.

Bret Conklin: Yeah, thank you. I'll let Ryan go through the details, but as we always say, sharing purchases is just one piece of a very thoughtful capital management strategy.

Ryan Grenier: Ryan, do you want to take it? Sure, thanks for the question, Wilma. You know, as we have a clear line of sight to returning to target profitability in 2025, you know, that translates into about 50 million of excess capital production. And that's on top of the interest expense and a pretty compelling dividend.

Ryan Greenier: Sure. Thanks for the question, Wilma.

Ryan Greenier: As we have a clear line of sight to returning to target profitability in 2025, that translates into about $50 million of excess capital production, and that's on top of the interest expense and a pretty compelling dividend. Our capital management priorities are, number one, to fund profitable growth. Number two, to support that dividend. We've got a bit over 4% right now in dividend yield, and we've increased that annually over the past 16 years.

Ryan Grenier: You know, our capital management priorities are number one to fund profitable growth. Number two, to support that dividend, we've got a bit over 4% right now of the dividend yield, and we've increased that annually over the past 16 years. Our approach to buybacks has historically been opportunistic and will continue to be. Like I said, we have a clear line of sight to target profitability. We feel confident in our excess capital production capabilities, and we clearly feel shares are undervalued. Through yesterday, you know, on a year-to-date basis, we bought back, you know, $7.7 million at an average price of $33.30.

Operator: Operator, we're ready for questions. We will now begin the question and answer session. To ask a question, you may press star, then one on your telephone keypad. If you're using a speaker phone, please pick up your handset before pressing the keys. And to withdraw a question, please press star, then two.

Ryan Greenier: Our approach to buybacks has historically been opportunistic and will continue to be. As I said, we have a clear line of sight to target profitability. We feel confident in our excess capital production capabilities, and we clearly feel that shares are undervalued. And through yesterday, on a year-to-date basis, we bought back $7.7 million at an average price of $33.30, so a pretty opportunistic approach to what we feel is an undervalued stock price. Great, thank you.

Operator: At this time, we will pause just momentarily to assemble our roster.

Meyer Shields: And our first question will come from Meyer Shields with KVW. Please go ahead. Great.

Ryan Grenier: So, you know, pretty opportunistic approach to what we feel is an undervalued stock price.

Wilma Burdis: Thank you.

Mark Desrochers: Good morning, everyone. I wanted to ask a question based on Brett's comments, because when we look at, I guess, the rate of earned rate increase, or the pace of earned rate increase, and what seems to be decelerating severity trends, I guess I would have expected the underlying vaccine or loss ratio in auto to improved by a little more than it had. I was hoping you could talk to, I think it's the frequency issue, that probably opposed that. I was hoping you could add a little detail to what's going on there.

Operator: As a reminder, you may press star them one to join the question queue. At this time, we will pause to assemble a roster.

Operator: As a reminder, you may press star, then one to join the question queue. At this time, we will pause to assemble Roscoe.

Operator: As a reminder, you may press star, then one to join the question queue. At this time, we will pause to assemble a Roscoe. And with no further questions, this will conclude our question and answer session. I'd like to turn the conference back over to Brendan DeWalt for any closing remarks. We'd like to thank you for joining our call today.

Operator: They would know further questions.

Operator: This will conclude our question and answer session.

Brendan Dawal: I'd like to turn the conference back over to Brendan DeWal for any closing remarks. We'd like to thank you for joining our call today. Please reach out if there are any additional questions, and have a great day. Thank you.

Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.

Brendan DeWall: We'd like to thank you for joining our call today. Please reach out if there are any additional questions, and have a great day.

Mark Desrochers: Sure, this is Mark. I'll take that question. When we look at auto frequency, the accident frequency in the quarter was a bit elevated compared to 2023.

Mark Desrochers: I think it's primarily attributable to the fact that spring break across much of the country was a little bit later this year, so some of what would normally come as accident frequency in the first quarter leak into the second quarter. I think that's a little bit exacerbated by the fact that we have our educator niche. But if you look at the first half of the year in aggregate, accident frequency is pretty much flat year over year, and if we look at severity, the metal coverages are definitely coming down I think on the bodily injury in UM side, we continue to see trends in the kind of mid to high single digits, you know, somewhat a function of continued social inflation. But in the aggregate, on a lost cost or the first half of the year, about 5% over where they were in 2023, which is pretty much dead on to what we expected.

Operator: The conference is now concluded. Thank you for attending today's presentation.

Operator: You may now disconnect your line.

Mark Desrochers: Okay, that's very helpful. I guess the follow-up question on that is the file, I guess the delta between filed rate increases on the liability side and on the metal side of the physical damage side. Is that changing as we see the physical damage trends of eight? I think it likely will, Mayor, but right now, I mean most of our rate has been, you know, primarily across the board, across all coverages there are some differences, but not material differences as of yet.

Mark Desrochers: But I think as we get into next year and we feel strong about our profitability trajectory and you get to more kind of inflationary type rate changes, you'll see it match up. I think much more closely with the underlying coverage inflation. Certainly as this year's data gets worked into the pipes. Go ahead, Mayor.

Meyer Shields: A timeline of the market creating back to par, I guess maybe the way to ask is the duration of the other real estate portfolio.

Ryan Grenier: Sure, Mayor, this is Ryan. I think you're asking about the timeline, you know, of when we think we're going to see some of that recovery in the unrealized. You know, we put a little more detail in the investor presentation on the commercial mortgage loan portfolio this quarter, time slides, 36 and 37, and you can see that about two thirds of our CML portfolio will mature over the next 18 months. So as a reminder, with equity method of accounting, we've taken evaluation adjustment real time, you know, one quarter lag to every single loan in that limited mortgage loan fund portfolio.

Ryan Grenier: That's 249 of them. And clearly many of them, the vast majority continue to perform well. And you can see that in the cash yield statistics that we put out on that slide for you. There's a significant delta between the cash yield and the net investment income and that investment income reflects those unrealized adjustments. So with two thirds of them maturing over the next 18 months, we feel good that there's, you know, a tailwind there, you know, that will play in our estimate for second half is conservative.

Ryan Grenier: And so I think you're going to see more of that, you know, in 2025 or later, but we feel confident about the trajectory.

Meyer Shields: Okay, fantastic. Thank you so much and I apologize for my phone. No problem, thank you.

Wilma Burdis: And our next question will come from Wilma Burdis with Raymond James. Please go ahead. Hey, good morning. Could you just talk about the, can you hear me? Yes, yes. Could you just talk about the trajectory of the interest rates that are factored into the current CML portfolio evaluation? And maybe to talk about the expectation for rate cuts was baked into that assumption. Thanks.

Ryan Grenier: Sure, Wilma. This is Ryan. Thanks again for the question. You know, our commercial mortgage loan portfolio is primarily floating rate exposure over 80% of the loans, close to 85% are floating rate. And, you know, that has certainly helped cash yields. But the inverse of that is it puts pressure on the valuation, you know, on cap rates of the underlying portfolio, the underlying loans, the properties supporting the loans, you know, as we move into what will likely be a moderating interest rate environment, that will be a tailwind for the commercial real estate market.

Ryan Grenier: And it will provide some relief on the debt service coverage numbers as well as help support cap rates for the underlying properties. So we're not necessarily counting on that. We have a lot of confidence in the underlying fundamentals of the properties. And, you know, as I just said to Mayor, we expect a lot of this unrealized marks to come back as they mature, which is over the next, you know, two-thirds of the portfolio matures over the next 18 months.

Bret Conklin: Okay, thank you. And then could you talk about what drove the favorable prior your development? And is that something that we could see continuing into the second half of year? Thanks. Sure, one more. This is this is Brett. And, you know, as usual, let me just start out by, as it relates to the PNC reserves, I think most know that we take a very conservative stance as it relates to our PNC reserving, withholding our reserves at the upper half of the actual real range.

Bret Conklin: You know, I would also add that we remain very comfortable with our aggregate reserve levels and to your point on the PYD that we recorded in the second quarter. Obviously, we were encouraged by the emerging favorable trends that we were beginning to see. And I think it was in my prepared remarks in the auto claims development pattern specifically in the auto physical damage coverage. So with that, let me turn it over to Mark who can kind of talk about the more specifically about the trends that we're saying.

Bret Conklin: Absolutely. I mean, all that development essentially came out of, you know, essentially collision and auto property damage, you know, which are short, short tailed lines. And the, as those claims are closing, what we're finding is the severity on them has dropped, you know, precipitously from where we thought it was at the time when reserves were set. So, you know, at that time we were still dealing with the tail end of mid to high single digit severity trends.

Bret Conklin: And now, you know, as they're settling out, you know, we're seeing trends that are more in the very low single digits and that's really what's driving that prior year development. So we have a very high level of confidence that we're right on these numbers. Yeah, and I can't sit here and guarantee what's going to happen in the second half of this year. But I would just say this, if the trends continue to be favorable as Mark just described, it would not, you know, surprise me if it would have development. But to say that we will or we won't, I can't do that. But we feel very good about where we're at currently in the trends that we're seeing.

Ryan Grenier: Thank you. And if I could take one more end, could you just talk a little about sharing purchases? They were a bit higher in the quarter. You know, cats came in line, but just today we talked about that and what we could see in the second half of the year and maybe even 25 is P&C operations and we'll let things. Yeah, thank you. I'll let Ryan go through the details, but as we always say, sharing purchases is just one piece of a very thoughtful capital management strategy.

Ryan Grenier: Ryan, you want to take it? Sure, thanks for the question, Wilma. You know, as we have a clear line of sight to returning to target profitability in 2025, you know, that translates into about 50 million of excess capital production. And that's on top of the interest expense and a pretty compelling dividend. You know, our capital management priorities are number one to fund profitable growth. Number two, to support that dividend, we've got a bit over 4% right now of the dividend yield and we've increased that annually over the past 16 years.

Ryan Grenier: Our approach to buybacks has historically been opportunistic and will continue to be like I said, we have a clear line of sight to target profitability. We feel confident in our excess capital production capabilities and we clearly feel shares are undervalued and through yesterday, you know, on a year-to-day basis, we bought back, you know, $7.7 million and an average price of $33.30. So, you know, pretty opportunistic approach to what we feel is an undervalued stock price.

Operator: Thank you. As a reminder, you may press star them one to join the question queue at this time we will pause to assemble a roster. They would know further questions.

Operator: This will conclude our question and answer session.

Operator: The conference is now concluded. Thank you for attending today's presentation.

Operator: You may now disconnect your line.

Q2 2024 Horace Mann Educators Corp Earnings Call

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