Q2 2019 Earnings Call
Ladies and gentlemen, thank you for holding we will be starting just momentarily again, we thank you for holding we will be starting momentarily.
Greetings and welcome to the Horace Manns second quarter call. At this time all participants are in listen only mode. A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded I would now like to turn the conference over to your host Heather Wetsel, Vice President Investor Relations.
Thank you Dan and good morning, everyone welcome to Horace Mann's discussion of our second quarter 2013 results yesterday, we issued our earnings release Investor supplement copies are available on the investors page of our website, along with our Investor presentation, which was posted this morning.
Our speakers today I read this right President and Chief Executive Officer, Bret Conklin Executive Vice President and Chief Financial Officer.
Also available in Q, an air cooled called comment on PSC topic, [laughter] denim in life and retirement that sharpened strategy played resting on supplemental Ryan Greenier on indefinitely.
Before I turn 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.
How many cautions investors that any forward looking statements include risks and uncertainties 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 press release filings.
In our prepared remarks, we use some non-GAAP measures reconciliations of these measures to comparable GAAP measures are available in the supplemental sections of our press release.
I'll now turn the call Maria.
Thanks, Heather good morning, everyone and welcome to our call last night, we reported second quarter results or 17 cents per diluted share a 31% increase over last year, driven primarily by improved underlying profitability in the PNC segment.
As well as catastrophe costs in line with expectations. We achieved these strong results, even though the retirement business. This smaller due to our recent reinsurance transaction and our results do not yet include earnings from our new supplemental insurance business.
Before I turn to what we see going forward I'd like to briefly review the exciting and significant activities of recent months, we reached an agreement with RG age or reinsure a 2.9.
Billion dollar block of legacy annuity business that had a minimum crediting rate of 4.5%. In addition to reducing interest rate risk for the company. The transaction released 200 million in capital and I'm, particularly pleased with the timing of the transaction as interest rates have declined meaningfully in recent months, we redeployed the capital towards our acquisition of supplemental insurance provider National teachers Associates, which closed on July 1st.
This business has higher margins than is less capital intensive intensive than the reinsured legacy annuity block.
Brett will go into detail about the impact of the transactions on second quarter results later in the call, but the long term upside of improving our earnings mix and reducing our interest rate risk is meaningful to reaching a double digit our lee and accelerating shareholder value creation. We have entered the second half of 2019, well positioned to capitalize on the opportunities available in the education market a group of customers, we know better and care about more than any other company out there.
The recent actions are part of our careful deliberate planning to enhance our value proposition to the education market remain committed to understanding and solving the issues facing educators, helping them achieve lifelong financial success. These transactions made financial sense for Horace Mann and were aligned with the aspects of our PD growth strategy that drives our success in the education market first we need products designed to meet educators needs to protect their unique risks supplemental insurance products. Our solution. We've lost often asked about by educators, they're concerned that the cost of it on its unexpected medical emergency or accident could derail their long term savings plans and CA is a leading provider of these products.
Second we rely on knowledgeable trusted distribution tailored to educate our preferences with the addition of antigay, we add to our base of 700, plus exclusive agents with 220 additional points of distribution with strong work district site marketing expertise and third.
We must be able to leverage modern scalable infrastructure that is easy to do business with this quarter. We successfully migrated our retirement advantage policies to recently acquired PCGS platform, eliminating the need for a third party administrator.
Our deep niche marketing knowledge and expertise is key to our industry, leading cross sell ratio of nearly 20% for our educator customer base versus 12% seen in the broader industry. Our retention metrics clearly illustrate that these customers are more loyal our model line auto retention percentage of 76% increases to as much as 95% for customers also have life and retirement products.
We will build on this competitive advantage with the addition of supplemental insurance products.
We are implementing a thoughtful staged approach to our cross sell strategy between the two agency forces to ensure a smooth transition for both our customers and our agents. Our first priority has been to train Horace Mann agents to sell the high margin supplemental insurance products more than 200, Horace Mann agents in territories with the highest growth potential will be selling supplemental products for this back to school season, we plan to take the first steps to reach 20, 850000 households, with Horace Mann's PNC products in the fall.
As we've said, we do not anticipate any meaningful benefit from cross sell this calendar year, but we do expect it will account for an additional $5 million to $7 million of incremental annual earnings by 2021.
These new opportunities will build upon the progress we've made on prior on profitability initiatives over the past few years in particular, we're very confident that we will not only meet but exceed our multiyear goal of five points of improvement in the auto underlying loss ratio over 2000, seventeens loss ratio of 77.2.
Our second quarter underlying loss ratio of 72.8 was 5.9 points better than prior year in the second half of 2019, we expect this to moderate somewhat in comparison to a strong second half of 2018.
It's also noteworthy given our historical catastrophe loss distribution that our combined ratio year to date is 99.7. The last time, we were under a 100 at this point in the year was back in 2015.
Given these improvements we are accelerating our focus on PMC growth in regions that meet profitability targets.
And although our retirement focused smaller going forward it is more profitable and better positioned for growth in both fee and spread based products, allowing our education market customers to select the product that best suits their needs.
Annuities continue to be a preferred savings option for many educators and our annuity sales increased 9% in the second quarter.
We will also continue to exercise expense discipline, including capitalizing on integration synergies with both antigay Nvcjd and we expect expense savings to emerge over time.
Finally, as we've stated before we expect a point of hourly accretion in the next 12 months attributable to the anti acquisition.
The sum of these strategic decisions provides more opportunity to drive growth in the education market, which accelerates the path to a double digit are we for shareholders.
Both our organic and inorganic initiatives have positioned us incredibly well to deliver on our vision to be the company of choice to provide financial solutions for all educators to help them protect what they have today and prepare for a successful tomorrow. Thanks to now up from the call over to breadth.
Thanks, Marina and good morning, everyone. As Maria noted 17 cents of second quarter core earnings demonstrated the clear progress we are making on key initiatives to generate more consistent earnings and improve long term profitable growth, which together will drive a return to double digit our OE.
In the quarter underlying PMC profitability was very strong and capital Alfs losses were in line with our full year guidance retirement results reflected the reinsurance transaction that reduced our exposure to interest rate risk.
The reinsurance transaction also provided some of the capital that we used to purchase on Ta.
That acquisition closed on July Onest. So we will begin reporting on the new supplemental segment in the third quarter.
Overall results are consistent with the estimates we provided when we announced the reinsurance transaction, we recognized a $107 million after tax realized gain on the investments that were transferred to our GA and we booked several onetime items that ill review in a minute.
As a result book value, excluding unrealized gains was up 5% in total reported book value grew 11% as unrealized gains on the retained portfolio rose significantly given the interest rate environment.
Im going to review, our PNC and life segment results before I dive into retirement, which has a few additional moving parts this quarter.
I will also offer more insights to our guidance for 2019.
As we noted in the release, we are modestly increasing our full year 2019, EPS guidance to $2.05 to $2.25.
So beginning with the property and casualty segment for the quarter core earnings were $5 million versus a loss of $11 million last year.
The reported combined ratio of 103.8 improved 11 points over last year, reflecting lower cat losses, while the underlying combined ratio improved over six point.
As Maria noted the year over year Delta will likely moderate in the second half of the year as we will be comparing to a very strong second half 2018 underlying result.
The rate increases and other underwriting actions, we have implemented were the primary factors driving better underlying underwriting performance. The underwriting performance was complemented by a 23% increase in PMC investment income due to very strong returns on our alternative portfolio.
For the quarter the auto combined ratio improved 8.5 points to just over 100. The underlying combined ratio was 99.4 in auto we continue to file rate increases to keep US ahead of loss cost. These increases average in the middle single digits across the book, we're seeing the same trends here as in recent quarters severity remains elevated compared to historical levels. Although the pace of the increases has moderated somewhat and frequency is lower.
We expect auto to remain profitable on an underlying basis for the full year and that we will be ahead of our objective of a cumulative five points of improvement in the underlying ratio since 2017.
That loss ratio improvement is a key driver of our early.
And property the combined ratio improved almost 16 points in the quarter with a cat loss contribution improving 6.5 points in the underlying ratio improving more than seven points.
Homeowner rate increases tied to the higher cat and non cat weather, we saw in many geographies over the past few years, where the primary reason for the improved profitability.
We continue to expect the full year underlying property loss ratio to improve three or so points over 2018.
In total we believe rate increases will drive a low single digit increase in net written premium for the year overall retention is down slightly from 2018, but in key geographies that are above our profitability targets. We are beginning to see positive trends and new business and expect this will accelerate over time.
Underwriting results benefited from $2 million and favorable reserve releases evenly divided between property and auto.
The expense ratio was 26.5% inline with our target.
Q2 cat losses from 17 storm spread across most of the country were 22 million pretax inline with the update we provided in late June .
Thats about 5 million lower than in last year's second quarter and as expected about half of what we had estimated for the full year 2019 cat losses.
With the first half cat losses at $33 million, we're on track to our full year guidance for cat losses in the range of seven to 7.5 points on the combined ratio.
Our total combined ratio for the first half of the year was 99.7, a strong result, considering the seasonal pattern, we typically see in cap losses, our target for the combined ratio for the PMC business for the full year remains in the high Ninetys with an underlying auto combined ratio below 100, and the underlying property combined ratio in the low seventies.
Turning to the life segment second quarter sales of recurring premium products were even with last year's strong second quarter. Our agents continue to work to help more of our customers see how life insurance can contribute to the financial well being of their families and we expect continued sales growth.
As a result of lower net investment income core earnings were $5.2 million compared with $5.9 million last year.
For the full year, we continue to expect earnings excluding DAC unlocking of 15 to 17 million with full year sales growth in the double digits.
Before I turn to the retirement segment I want to walk through the details of the reinsurance transaction with our GA and how the various aspects are being reported in our financial statements.
The transaction was the ideal way to address the interest rate risk of our legacy annuities, particularly taking into consideration how capital intensive this business was.
The agreement was effective April onest for a block of approximately 54000 individual annuities written in 2002 and earlier with a minimum crediting rate of 4.5%.
The transaction was structured as co insurance for the fixed annuities, which represent about 75% of the total and modified coinsurance for the variable annuities and separate accounts that make up the remainder.
The total capital release was $200 million, which was primarily redeployed into the higher margin and Ta business.
The required accounting treatment for the transaction is the deposit method because of the annuities are functionally investment contracts that do not transfer morbidity or mortality risk.
On the balance sheet the transferred investment assets now are being reported as a deposit asset on reinsurance.
The receivable will be adjusted quarterly consistent with the reinsurance agreement terms, along with an accretive return.
The offsetting reinsured fixed annuities will continue to be included in total policy liabilities, while the reinsured variable annuities will remain in separate account liabilities.
On the income statement all results of operations related to the reinsured annuities are the responsibility of our GA.
Fee income is reduced by the charges and fees transferred to our GA on the variable annuity block.
Total net investment income includes an entry for a pretax investment income, which is calculated based on effective yield to accrete the deposit asset on reinsurance to the ultimate anticipated cash flows from the annuity transaction and is not based on income from specific assets.
Interest credited to policyholders related to the reinsurance block continues to be reported offsetting the accrued for the accreted income.
In our Investor supplement we are showing some of the retirement metrics, excluding the reinsurance block to more clearly illustrate the results of ongoing operations.
This quarter. We also had several significant onetime items associated with the transaction that are not included in core earnings first was the after tax realized gains of $107 million on the investments that we are transferred to the dedicated trust managed by our GA second was the $28 million write off of all legacy goodwill associated with the retirement segment. As a result of these two non cash items book value, excluding unrealized gains rose, 5% as a goodwill write off offset a portion of the realized gains.
Turning to the retained portion of the retirement business at June Thirtyth, we had $2.2 billion and fixed assets fixed annuity assets under management more than 50% of the traditional fixed annuities, we retained have minimum crediting rates of 2% and lower as a result, our average fixed annuity crediting rate dropped to 2.5% down from 3.6% before the transaction. We also have $1.6 billion of variable annuities and $400 million of fixed index annuities. In addition to the annuities assets under administration includes 3.6 billion in assets of our brokerage advisory and record keeping business, which generate fee income.
Annuity sales deposits were up 9% again this quarter annuities continue to be an important part of our product set as the they as they appeal to the financial objectives of our educator customers, while complementing our growing suite of fee based products.
The annualized net interest spread for the quarter was 233 basis points compared with 142 basis points in the first quarter benefiting from the lower average deferred crediting rate on the retained block of fixed annuities.
I will talk more about interest rate environment in a moment, but we expect the net interest spread will be in the low two hundreds in the third and fourth quarters.
Unfavorable DAC unlocking for the quarter was primarily due to the onetime 5 million or 10 cents per share right off of the remaining DAC balance associated with the reinsurance block. This write off is included in core results.
Consistent with what we said when we announced the reinsurance transaction. We expect full year 2019 after tax retirement earnings excluding DAC unlocking of $25 million to $27 million.
Retirement segment core earnings excluding DAC unlocking were $7.4 million in the second quarter down from $10.6 million in the first quarter because of the reinsurance transaction.
Beginning in the third quarter, the redeployment of capital to purchase NPPA will further reduce retirement net investment income and core earnings by approximately $1.5 million per quarter for a new retirement earnings run rate of about 5 million per quarter at current yield.
So let's look at investments.
After the transfer of assets to our GA the investment portfolio is $6.4 billion of assets that align with our strategy, which remains unchanged.
$5.4 billion of these assets support life and retirement with the remaining 1 billion supporting property and casualty.
With the addition of NT, we'll also have about 600 million supporting the supplemental segment beginning in Q3.
We're in the process of repositioning that portfolio to improve risk adjusted returns overtime.
Pre tax yield on the portfolio was down slightly year over year at 5.14% in the second quarter.
Duration was close to six years essentially unchanged from prior periods, our new money rate in the second quarter was around 415 basis points. The overall credit rating of the portfolio also was consistent with prior periods.
For securities in the event of a spread widening event.
This would improve investment returns in the future.
Income on the investment portfolio was $70.3 million better than expected alternative investment returns led to higher net investment income for PNC and retirement the fair value of the alternatives portfolio was $351 million at June Thirtyth up about $20 million from March 30, Onest with year to date returns over 10%. We are continuing to increase allocation to this asset class in response to the challenging yield environment.
The recent 25 basis point fed reduction, we will further pressure yields and now we are anticipating a sustained low interest rate environment, making the timing of the reinsurance transaction even more valuable.
We also now expect our new money rate for the second half of the year to be closer to 4% below our current portfolio yield.
We expect net investment income from the managed investment portfolios, including anti rate to be around $300 million for full year 2019.
The quarterly go forward run rate of accretive investment income on the deposit asset on reinsurance should be within $1 million plus or minus of the $23 million reported for Q2.
As a result total 2019 net investment income should be in line with our previous guidance of roughly $370 million for the full year.
Turning back to our consolidated results as we said in June going forward PNC should represent about 35% of earnings it normalize cats mortality and morbidity based businesses will grow to about 45% while retirement declined to about 20%.
For 2019, we are comfortable with core EPS in the $2 or five to $2 25 range.
In the third and fourth quarters, the new supplemental segment should add $6 million to $7 million to core earnings each quarter, while the run rate of corporate expenses will increase by about 1 million per quarter due to additional interest expense on the line of credit.
As we noted in the release, we have $135 million outstanding on the line of credit as of August Onest and our debt to cap ratio was about 24.6% consistent with our current ratings.
All of our insurance subsidiaries will be at or above our target for 25 RBC by year end.
In summary, the benefits of our ongoing organic initiatives on our improved business mix should move our OE closer to double digits over the next several years.
Maria talked about the initiatives underway, including accelerating growth in PMC to leverage continue profitability improvements higher sales of spread based and fee based retirement products and expense discipline.
We also expect the benefits of bringing together and Ta days and Horace Mann's products and distribution forces will continue even beyond 2020.
Approximately $7 million in incremental run rate after tax operating earnings as about half a point to our early.
Finally, we also stand to gain some synergies and efficiencies through our combined infrastructure.
All in we are excited about Horace mann's ability to generate excess capital.
Our intent for that capital remains unchanged focusing on the most accretive uses.
This includes growing our business at returns at or above our hourly targets.
Returning a significant portion of annual earnings back to shareholders via compelling dividend and opportunistically buying back shares when market conditions warrant.
Horace Mann is moving ahead with an even stronger more diverse earnings base with an increased level of capital generation capacity, we're driving shareholder value and improving our only we are redeploying capital into higher return and less capital intensive businesses, while staying true to our fundamental mission serving the needs of the education market.
We expect our progress will continue and we're excited about what the future holds for Horace Mann's. Thank you and with that I'll turn it back over to Heather for doing that.
Thank you.
There is a difficult question.
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One moment, please while we poll for questions.
Our first question comes from Gary Ransom with Dowling and partners.
Please proceed with your question.
Yes, good morning.
Hi.
Wanted to ask a little bit about the early read on and Ta you mentioned back to school sales on the products that I. Just was wondering is that a.
Is back to school time is that a seasonally strong period for those supplemental products.
Yes. This is Maria before I turn it over to Wade to comment if he has.
A comment here, yes, it typically would be so we are we're very excited about the timing.
As we mentioned in the script, our first priority was to get our agents trained in NT a products and one of the benefits may be one of the only benefits of state approvals in places like New York in Texas that take a little bit of time is it gave us time during that.
Period to really get our top agents in.
In the geographies with the most potential up to speed on the products. As an example, we already have some production in the state of Iowa, where we got on it quickly and we also have a four three be endorsement in that state.
So although we don't really expect this to add up as we said on from a cross sell perspective until next year. It is nice to see our agents gravitating to the training and already beginning to sell these products and as we also said this really was well thought out. This is a situation where our agents have been asked quite often to provide these products and they really had to turn their customers over to another competitor to get that part of the equation solved. So we're excited about.
What what end team brings to the table I don't know if you have anything to add as far as the seasonality, yes. The only thing I would add is our agents take part in the log the back to school celebrations and it's an important time of year for the educators and making decisions about their benefits.
So are the are the NT agents also active in the same way you kind of what we're talking about the Horace Mann training and getting those agents up to speed I assume the NT.
Agents are doing the same thing and.
Building that up for the back to school period, not not quite yet I would say thinking about licensing into PNC space. As you know these agents are licensed in life and health is actually to us asking specifically about what they'd already do the supplemental products that are still pushing on on that side as well Jeff.
Yes.
And then the timing on what you were just about to talk about on the PMC side that I assume we will take.
A few quarters or something yes, all I was going to say as we intentionally wanted to not disrupt and sales volume.
They have strong sales plans as you can imagine they're hitting those plans we feel good.
About that and want to keep that strong but over time those agents learning course, NAND products makes some sense, obviously as well starting with those products that would be easier and make more sense think about auto.
Think about some of our life products and that will be our focus, but we will take.
We will take our time to do that thoughtfully as to not disrupt their sales momentum.
Alright, Thank you and I I wanted to also ask and if you had any update on your telematics product at all how that I know that was just.
Launch Yeah, Gary I think last time, we talked we were in 14 States were announced 18 states.
Certainly.
Acceptances, increasing over time, but the our first customers only have about 90 days on the product. So it's still it's still relatively early so it's or not really projecting.
Lost cost savings for others for us there's not enough and second we don't have enough data or enough time, but we are seeing good momentum from a sales perspective is on that yet, but the take up rate. Though is is doing well or is in line with your respective expectations. Yes, it's it's accelerating over time.
Obviously, the the sales process with telematics is a little bit more complicated. So we're taking from our best agents and reinforcing that with a reservation for so we're seeing good momentum with.
The future of our product.
Okay. Thank you very much.
Our next question comes from John Barnidge of Sandler Oneill. Please proceed with your question.
Okay.
Rates have come down materially since then.
Is there any way to dimension on a per share basis, how much of that decline actually lowered your new earnings guidance.
John can you repeat your question you were cut off its very beginning we want to make sure you got it correctly.
Sure. So the new guidance up from June yet rates have come down materially since then.
Is there any way to dimension on a per share basis, how much that decline maybe lowered your new earnings guidance that is.
Obviously up from where it was in June .
Yes, actually Jon I think even in my prepared remarks, I mentioned that for the entire year, we actually plan to get back to our original.
Total net investment income amount of $370 million.
I think I also mentioned vs. A couple of different ways, obviously as I mentioned, our new money rate is lower than we had planned but our alternatives are performing.
Much better to the tune of a 10% return versus we've probably plan about a 6% return on that so as it relates to 19, we're not coming off of our.
Our total net investment income projections.
Okay, and then is your annual actuarial assumption review in the third quarter.
Yes, yes. It is how should we be thinking about that given the decline in rates from a year ago.
I mean, there is that's just one piece of the.
The the unlocking if you will I mean will fully look at expenses lapse ratios.
The spreads going forward, but that we typically.
We'll look at in the process begins.
In the in the third quarter and I think we actually record that in October and there will be recorded in the fourth quarter.
But there's many variables to that but obviously.
The lowering the spreads don't have to tell you is going to lower the future profits no doubt about but then there is other theres other pieces to the puzzle.
Okay, and then given current valuation multiples and now that then TJ transaction is closed can you talk about how you think about share repurchases.
Sure.
I think you know leading up to.
The acquisition I think on for the past few quarters, I've said, we've kind of put a.
Pause if you will on share repurchase obviously, we used to a lot of our excess capital.
To consummate the transactions of BCG as well as on T.A.
But I don't think our strategy has changed whatsoever, we're going to put that to the to the best use possible and obviously with the shares trading at the current levels, it's safe to say that at these levels.
I wouldn't anticipate any repurchasing in the immediate future there, but here again, as we generate excess capital, which we totally intend to double with the purchase of venture we'll take we'll take a peek at that and Opportunistically buy where the market provides us an opportunity to do so.
All right My last question I'll re queue from there, but can you talk about you mentioned in the script property casualty regions that exceeded profitability targets can you talk about what those were those regions actually are please.
There there.
There are various places over there all over the country I wouldn't call out a specific region, but we align all of our states with our profit.
Profit targets and where they see those targets as were investing and agencies in marketing, but I wouldn't say, it's a specific region I can give you. Some examples of where they are states that aren't meeting profitability targets I think we're all pretty familiar with Florida and kind of the environment, there and we shrunk, Florida significantly over the past couple of years, our more recent examples in California.
Speaking to our underwriting discipline, we had a relatively pretty very large loss in northern California that that change the texture of California.
So we quickly tightened underwriting guidelines, so that will impact our denominator as well as our numerator for some time, but again as we as we double down in those states that are more green, we are seeing growth out of the states, where we we have exceeded our profitability targets, but again I wouldn't I wouldn't call. It a particular region.
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Our next question comes from Christopher Campbell of KBW. Please proceed with your question.
Yes, hi, good morning, congrats on the quarter.
Thanks.
Hi, My first question is can you guys share any initial thoughts on how we should be thinking about the benefits of expense ratios for supplemental.
Sure I mean, just specifically to the supplemental or he does is as part of now the Horace Mann Mann family I guess I mean, obviously.
Well I'll just make one other comment Chris you know I think.
And T.A. I think as we've mentioned in general is a very well run.
Company that generates our OE is that that exceed what we had in the past and that includes a very expense conscious culture. There. So.
I think our culture here is the same but as Maria said as we have now completed the acquisition of NT a in BCG, we've talked about synergies and yes, we are going to make sure that we look at those things as you as you would expect.
So.
The only thing I'd add to that Brett is obviously in the deal economics, we did not bake.
Into the valuation on extensive synergies on as a matter of fact very limited, but yet we know as we look at these two organization in similar customer bases. There are synergies and we're working hard to gain those synergies. So that we can drop them quite frankly straight to the bottom line.
Got it yeah I was just thinking more like specifically like I mean, I know you guys have the six to 7 million quarterly guidance that you're that you've done for for supplemental I was trying to think what the breakout would be in terms of like the loss and expense ratios just in terms of because I know you guys bought it at a big premium to book that I was just trying to think of like are you going to have overall going through the expense ratio.
They're going to be kind of noise like that that were going to have to see for the next six months to a year before we get like a good view on what the expense ratio, Yes, Chris Chris. This is Brent absolutely I mean, we're going to be recording some voba.
Yes, there will be.
No ways in the system, if you will but we will have that broken out when when they become part of the.
The supplemental segment part of the Horace Mann Consolidator results you'll have.
Key metrics that we will provide you too to guide you with that including amortization of the intangibles that will be we're in the midst of that as we speak to try to get our reporting package together for the third quarter.
Okay, great. Thanks, Brett.
Next question is on the guidance so I mean.
Not the 2019 I'm thinking ahead to 2020.
We're in the press release last night said that there would be about.
Guidance would be at least 10% above the $2 to 225 range, which I'd put it like something around like to 25% to 48.
No I'm just thinking about like the phrase at least so where could there be additional upside to this 10%.
Just given I think consensus is out like 259, so its already above that range. So what else could drive incremental upside beyond that 10% and then how much PNC improvement is baked in to the 10% assumption at least.
Okay I guess.
Let me Theres a loaded question there, but with respect to at least I think one of the things that Maria mentioned in her script and I certainly did on mine was the five to 7 million of cross sell opportunity within two years, it's not per se baked into that until 2021, if that could happen may be sooner that could be a potential upside I mean, I think we're still working through getting the PMC.
To the levels that we can get the 10% to 12% our OE, we're making significant progress and to be honest with you. The fully reported combined ratio below 100 at this point that Murray is specifically called out what would get us to where we need to be but we're not expecting at that in the second half of the year I think the expense.
Disciplined slash synergies.
We will be another thing that we'll look at over.
The the coming years, so I think it's here again growth growth once we get profitable.
I mean, there is a lot of levers to that Chris, but I think we're just trying to what we know right now we feel confident that we will generate at least.
10%.
In 2020.
And it may be a little tried to say it is about profitable growth, but it is about profitable growth.
We're growing on a profitable retirement segment by 9% this quarter, we expect that to continue and we like the traction we're seeing in retirement Weve had nice profitable growth in life.
Double digits and Thats continuing in the quarter as PNC turns that corner and we've talked a lot about that profitable PMC growth at these kind of combined ratios.
Start to be pretty accretive and then we look at supplemental sales with a very high ROI, we pattern and these are all.
80% educators I mean, if you look at and T.A. They do what we do in the places that we do it.
So now we feel that we have everything that our educators need from a product standpoint, we've built very strong distribution and are looking at about a thousand points of distribution across the country with all the combined distribution that we pull together over the last year and from an infrastructure perspective, we've got the ability to leverage very efficient shops with BCG, an MTD and we intend to do that and drive some expense synergies as well. So I look at this as a really nice inflection point for us having all the pieces of the strategy that we've talked about.
When we talk about PD coming together, so when I think about what that means going forward. We've got the pieces we need.
To take this out for a spin and I would just maybe.
Add on to what Maria just said, even even look even looking at 2019 with all Horace Mann has accomplished in still to end up.
Five cents ahead of the guidance for the year and you kind of have a mixed bag of tricks you actually have three quarters of the reinsurance reflected against only two quarters of NTD eight so to even get back.
We've had some help from PNC, we've had some help from.
Net investment income and some other pockets but.
We're just at the initial stages of of hooking up these companies.
To the to the Horace Mann family. So there is a.
I think theres quite a bit of upside.
Got it. Thanks, that's very helpful. And then just as you guys pivot towards growth in PMC I was kind of looking back.
Back to 2008 as far as my model goes back and just looking at cumulative five Cali auto TANF is only about 84% of what it was back in a way and 75% in the homeowners book and then even looking at growth rates like homeowners Pip happened have like a positive quarter of growth since all eight and there's only been like nine quarters of positive auto growth in the last 42. So I guess, just what gives you confidence that that Horace Mann's is going to be able to really grow. This PNC business given like the I'd say, probably the last decade, we haven't seen that kind of positive growth.
Yes, Chris This is bill just a little bit about just to go back to 2000 and they quickly to reflect on those numbers.
Before our times in the room, there was a non educators strategy that was implemented may be appropriately maybe not in a softer market.
We had to clean up over the years. So when you look at our mix of business today, there might be less pip, but theres more educators on our books and we're seeing that in the last results I don't look at growth as an on or off switch.
Our agents are out there quoting our competitive position our strategy is the price to exceed loss cost.
I see a lot of.
Time will tell but theres a lot of irrational rate decreases out there. When there is a lot of questions around where loss trends are actually going so I prefer to focus on profitability and maintaining the operating income levels and the growth will come when it comes that said, we will be look closely at our year over year numbers on a monthly basis and every month, we get closer to exceeding that.
Prior month of 2018 and will soon exceed sales on a on a monthly basis.
But the denominators as a tough number to overcome so we are focusing on growth and profitable job, Jeff geographies, but we do have a lot to defend the actions that we're working through and I mentioned some of them to John This specifically in Florida, and California, and some other large markets.
Got it and then I guess, just like has sure have heavier like quote on conversion rates changed overtime that can be.
Jane do that because we have to see the decline, but I know you guys did work with Florida with getting out of the homeowners' book there. So it's like the reason for like Pip decline.
Yes, and homeowners different today than it was.
Three or four years ago.
Well two things so on on the quote side, yes, close were down over a prolonged period, because we are fixing profitability. So when we started we recognize these trends in 2015, we appropriately tightened our underwriting box, which restricts quoting now that has expanded over time, but not to the point, where it was maybe in 2013 or 2014 and yes. There has been an impact on conversion rates.
As the competitive environment has shifted but again, we're starting to see both of those metrics.
Increase at this at the same time.
I'd also add to that that distributions of part of this is as well more strong agencies more income sources for those agents as we had supplemental as we improve the products from a retirement perspective like retirement advantage as we build life products that we build the opportunity for more distributors to have strong income.
For their agencies and building more stronger agencies.
You can imagine that when they when they have more staff. They can asks to quote the auto on a more frequent basis. So I think stronger distributions are part of that equation as well and scrapping almost a thousand distributors out there across the country with the majority of the geography covered will also help that equation and lastly, we have our system our monetization system launched in October .
You saw what we were able to do in claims look at our alley ratios look at our severities I mean, we've shown we've shown that we can implement a system when we get benefits pretty quickly. It may take us a longer time, but these projects are expensive for us. So we're we're very diligent about how we implement but we're excited about the guy wire launch in October in Illinois, and that will be full admin and billing ease of use of doing for agents and also opens up opportunities for more from our online and digital capabilities.
Got it and there is there an expense ratio benefit for that that we should be thinking about longer term.
Well over time, but remember it's a multiyear project because these dates go one by one so again this year, it's just one and thats. The most expensive one, but we have 45, others that they need to convert so we'll we'll stay in that target of 27, plus or minus a half a point, but overtime as those debts movie will we will have.
Efficiencies in our loss ratio on our expense ratio.
Okay and is there like a long term like target you're looking for like I mean, not few years, but like over like five or 10 years.
Yes.
Yes.
And there is a lot of moving parts here was this an acquisition there is a lot of things that.
We have to work through.
Okay, great. Thanks for the answers back to lock on the two acquisitions in the next quarter.
Thanks, a lot thanks, Chris.
Our next question comes from Matthew Carletti of JMP Securities. Please proceed with your question.
Hi, Thanks, good morning.
Hi, Matt.
I just wanted to just a clarifying question want to circle back to I guess, the start or kind of Chris is line of questioning just on the guidance and specifically the wording when you say.
At least 10% in 2020 are you referencing just what the recent transactions will contribute to the 2020 earnings growth are you referencing a minimum level of overall 2020 earnings growth, whether it be transactions or the underlying PNC improvement and everything else that's going on so your former comment.
Okay with respect to reflecting the entity in the reinsurance Greg just wanted to clarify that that's all I got thanks, and best of luck going forward. Thanks for the better patient Matt.
Our next question is a follow up from John Barnidge of Sandler Oneill. Please proceed with your question.
Yes, thanks, any initial read on cat losses, six weeks into Threeq you.
You want to speak to maybe as compared to.
Turning to the year ago.
Sixtyl extending into Q3.
I'd say nothing unusual Barry was.
One of the biggest events of the quarter includes $2 million for us So nothing nothing out of pattern in July .
Okay, Great Thats, all I got thanks.
Alright. Thanks.
Ladies and gentlemen, we have reached the end of our question and answer session I would like to turn the call back to management for closing remarks.
Thank you everyone for joining us today. This is how the west will have available for follow up if there is any other details and we look forward to talking to you again soon.
This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.