Horace Mann Educators Q1 2025 Earnings Call Transcript

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May 7, 2025

There are 8 speakers on the call.

Operator

Good day, and welcome to the Horace Mann Educator First Quarter twenty twenty five Investors Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Brendan DeWall, Vice President, Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you. Welcome to Horace Mann's discussion of our first quarter twenty twenty five results. Yesterday, we issued our earnings release, 10 Q, investor supplement and investor presentation. Copies are available on the Investors page of our website. Marita Zareidis, President and Chief Executive Officer and Ryan Grineer, Executive Vice President and Chief Financial Officer, will give the formal remarks on today's call.

Speaker 1

We also have Steve McAnenna, Executive Vice President and Chief Operating Officer, with us for Q and A. 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, including 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.

Speaker 1

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.

Speaker 2

Thanks, Brendan, and hello, everyone. Yesterday, we reported first quarter core EPS of $1.7 a sizable increase over prior year and a record first quarter. The results reflect solid business profitability and strong growth momentum, highlighting the ability of our multiline business model to deliver consistent and reliable earnings. We are well on track to achieve our 2025 goals, including a shareholder return on equity above 10% for the year. Today, I'm going to discuss how our business continues to deliver strong profitability as we execute on our strategy to drive sustained profitable growth.

Speaker 2

In the first quarter, Property and Casualty segment performance was particularly strong with a reported combined ratio of 89.4%, a 10.5 improvement over prior year. This reflects the profitability restoration work we completed in 2024, lower property frequency and favorable prior year development in both auto and property. As we noted last quarter, our exposure to California wildfires was limited. We estimate the impact of the wildfires to be $3,700,000 which includes $1,000,000 in fair plan assessments. Excluding California wildfires, first quarter catastrophe losses were below both prior year and our historical averages.

Speaker 2

In Property, we experienced lower than typical ex cat claim frequency. Additionally, we are seeing the benefit of our roof settlement schedule and specific initiatives in claims to control costs of non weather perils. In Life and Retirement, earnings were below prior year, primarily due to higher mortality, which was within our expected actuarial range. In Individual Supplemental and Group Benefits, earnings were slightly above prior year due to lower policyholder benefits utilization in individual supplemental as well as higher segment net investment income. Total net investment income of $116,000,000 was a 10% increase over prior year, while income on our internally managed portfolio increased by 15%, driven by higher limited partnership returns and continued strong returns from our growing fixed income portfolio.

Speaker 2

Turning to top line results. First quarter sales were strong, individual supplemental sales up 61%, auto sales up 8% and annuity net contract deposits up 6%. This momentum is being driven through more points of distribution, improved agent productivity and more efficient and consistent lead generation. The investments we have made in our omnichannel distribution capabilities are advancing our efforts to drive sustained profitable growth. A few examples.

Speaker 2

Over the past year, we have realized a 40% increase in website visitors and recently added individual supplemental products to our online quoting capabilities. Higher website activity, supplemented by growth in our agency force, is fueling strong new business sales and reinforcing the momentum behind our growth strategy. Our recent launch of Catalyst, our proprietary customer relationship management system built specifically for Horace Mann, is already showing signs of early success. Agents are embracing the improved tool as well as the increased lead volume. Empowering our sales force leads directly to better customer experience, and we've seen agent Net Promoter Scores improve significantly.

Speaker 2

We just wrapped up our customer campaign highlighting the eightieth anniversary of Horace Mann and kicked off efforts for Teacher Appreciation Month in May. These initiatives connect deeply with the education community through virtual events, giveaways and local activities designed to energize, inspire and show our gratitude. Across both events, we expect more than 300,000 educators to engage with us, a clear demonstration of how we're building lasting relationships in the communities we serve. Next week, at our Investor Day, we plan to take a deep dive into the activities underway that will further our efforts to drive sustained profitable growth. Before I turn the call over to Ryan, I want to touch on our efforts to address the issues that are important to our stakeholders.

Speaker 2

Supporting our educators, employees and agents and strengthening local communities remain a cornerstone of who we are. Last month, we published our 2024 Corporate Social Responsibility reporting. Highlights from the year include a 61% reduction in Scope one and Scope two emissions from our 2019 baseline, surpassing our initial targets ahead of the 02/1930 deadline integration of climate risk considerations into our underwriting and investment decisions to proactively address environmental challenges and contributions of nearly $1,000,000 to support education community focused nonprofit organizations across both our philanthropic and corporate giving efforts. We are equally committed to delivering long term value to our shareholders. In March, our Board of Directors approved an increase to the quarterly shareholder dividend, the seventeenth consecutive year we have done so.

Speaker 2

In addition, we continue to execute on our share repurchase program. Year to date through May 2, we returned $7,000,000 to shareholders in share repurchases. As we have mentioned before, the most accretive use of our capital is to drive profitable growth. Our strong start to the year reinforces our confidence and our ability to execute on this initiative. We recognize the road ahead may be shaped by macroeconomic uncertainty.

Speaker 2

However, I'd like to highlight Horace Mann's strong financial foundation and our eighty year history succeeding in a number of economic environments, including times of economic disruption. Our business is operating from a position of strength. We are profitable, and our high quality investment portfolio is positioned to deliver consistent returns through various economic environments. We have an in demand suite of products tailored to our customer base that has more job security than other occupations in times of economic downturn, and we have the resources to make strategic investments in our business to grow and adapt to best meet the needs of our stakeholders. In closing, our first quarter results illustrate the earnings power of our multiline business.

Speaker 2

We are on track to achieve our 2025 goals of a larger share of the education market, record core earnings and a sustainable double digit shareholder return on equity. The opportunity is even greater as we move ahead. As we continue to drive sustained profitable growth, we are positioned to achieve an even higher double digit ROE while successfully serving our customers and delivering superior long term value to our shareholders. Thank you. And with that, I'll turn the call over to Ryan.

Speaker 3

Thanks, Marita. First quarter results are in line with our expectations and reflect solid business profitability and encouraging growth momentum. Before I review the quarterly results, I would like to cover our updated core earnings guidance. Beginning this quarter, we revised our core earnings definition to exclude certain non core items, including intangible asset amortization and changes in market risk benefits to better reflect the true operating earnings of our business. In the past, we've reported this number as adjusted core earnings.

Speaker 3

We still expect the same business performance we laid out earlier this year and our updated core EPS range of $3.85 to $4.15 reflects that. Our supporting materials have been restated to reflect the year over year comparisons on this basis. Our 2025 guidance assumptions remain the same, roughly $90,000,000 of catastrophe losses in line with our five year historical average total net investment income in the range of $470,000,000 to $480,000,000 with managed portfolio income of $370,000,000 to $380,000,000 and interest expense and other corporate items of 35,000,000 to $40,000,000 Turning to the results. Core earnings of $45,000,000 or $1.07 per share was a 73% increase over the prior year. Court return on equity of 10.6% was a 4.9 improvement over prior year, reflecting the profitability restoration work we completed in 2024.

Speaker 3

Total net written premiums and contract deposits were up 7% with total revenues up 8%. In the Property Casualty segment, core earnings were $27,000,000 more than double the prior year. Net written premiums of $185,000,000 increased 8% over prior year, primarily on higher average written premiums. Of note, we recently received approvals for both auto and property rate increases in California. The auto rate increase of 14.5% went into effect in mid April.

Speaker 3

We are starting to see a marginal impact on auto new business as a result of the cumulative rate increases in California over the last two years in line with our expectations. The property increase of just under 20% will go into effect July 1. The P and C reported combined ratio of 89.4% improved 10.5 points over prior year reflecting improved underlying results and favorable prior year reserve development partially offset by higher catastrophe costs. The 5,300,000 in prior year development included $3,000,000 in property reflecting favorable severity trends. The remaining $2,300,000 in auto reflects better than expected physical damage loss costs.

Speaker 3

Catastrophe losses of $16,400,000 were slightly above prior year. Excluding the California wildfires, first quarter catastrophe losses were below prior year and our historical averages. As a reminder, our second quarter is typically our highest quarter for catastrophe costs. E and C sales were strong at $25,000,000 a 9% increase over prior year. In auto, net written premiums of $122,000,000 increased 4% over prior year.

Speaker 3

The combined ratio of 95% improved 5.8 points primarily due to higher average premiums. Household retention decreased slightly to 84% in line with our expectations. In property, net written premiums were $64,000,000 a 15% increase over prior year. The combined ratio of 79.9% improved 17.8 points reflecting lower non weather losses. Policyholder retention remained steady at 89%.

Speaker 3

In Life and Retirement, core earnings of $8,000,000 were below prior year primarily due to higher mortality which was within our expected actuarial range. Net written premiums and contract deposits of $140,000,000 were an increase of 7% over prior year. In the Retirement business, net annuity contract deposits increased by 6% on the strength of our core four zero three products. Persistency rose to 91.6%. In the life business, annualized life sales increased 4% over prior year and persistency remained steady at nearly 96%.

Speaker 3

Moving to individual supplemental and group benefits. This segment contributed $14,000,000 of core earnings, a slight increase over prior year. Net written premiums of $67,600,000 were an increase of 5% over prior year. In individual supplemental, net premiums of $31,000,000 were a slight increase over prior year. The benefits ratio of 28.4% is below prior year as we continue to see favorable policyholder utilization trends relative to our longer term expectations.

Speaker 3

We also continue to see very strong customer demand for these products with sales of $5,000,000 in the quarter, 61% increase over prior year. Policyholder persistency is 90%. In Group Benefits, covered lives modestly increased over the prior year. Net written premiums of $37,000,000 increased 7% over prior year. The benefits ratio of 53.3% reflected typical first quarter seasonality, which we did not see in the prior year quarter.

Speaker 3

Keep in mind for both individual supplemental and group benefits that our book size is relatively small. This can lead to outsized quarter over quarter variances on a short term basis, while we continue to grow these businesses. Total net investment income on the managed portfolio of $92,000,000 was a 15% increase over the prior year. We continue to see very strong results from our core fixed income portfolio. The annualized pretax investment yield on the portfolio was 5.09% in the first quarter with core new money yields of 5.51%.

Speaker 3

This is the thirteenth consecutive quarter that new money yields in the core portfolio have exceeded average book yield. With the duration of about seven years in this portfolio, we expect to see continued yield expansion from this trend. Annualized limited partnership returns were 10% driven by infrastructure and private equity funds. Turning to capital management. As Marita mentioned, we remain focused on driving shareholder value creation.

Speaker 3

We increased our annual dividend by 3% in March, which was the seventeenth consecutive year of dividend increases and we remain actively engaged in executing on our share buyback program. Year to date through May 2, we repurchased 179,000 shares at a total cost of $7,000,000 at an average price of $40.12 We have about $19,000,000 remaining on our current share repurchase authorization. In closing, first quarter results underscore our ability to deliver strong results while positioning the company for sustained profitable household growth. Our multi line business model provides earnings diversification and allows us to be profitable in a number of economic environments. We delivered a record first quarter and are on track to deliver record core earnings in 2025 and a shareholder return on equity above 10%.

Speaker 3

As we execute on our profitable growth strategy, we will accelerate shareholder value creation. Thank you. Operator, we are ready for questions.

Operator

We will now begin the question and answer session. Our first question comes from Wilma Burdis with Raymond James. Go ahead.

Speaker 4

Hey, good morning. Could you talk a little bit about the run rate earnings power of the Life and the Supplemental Group Benefits segments? Was 1Q twenty twenty five a good level? Thanks.

Speaker 5

Morning, Wilma. It's Ryan. If I think about the Life Retirement business, we use the word ballast a lot to describe that business. Occasionally, you'll see a mortality blip, if you will, within actuarial expectations, and you saw that this quarter. So mortality was a little elevated.

Speaker 5

In addition to that, this quarter for Life and Retirement, the commercial mortgage loan funds that are predominantly in that segment, we had underperformance related to one specific fund. We can talk more about that if you'd like. But if you normalize and take a mid single digit, I think 6%, seven % annual return assumption for the $600,000,000 of CMLs, that gives you kind of a run rate, if you will, for that contribution. And that's mostly in Life and Retirement, a little bit in Supplemental and Group. Turning to Supplemental and Group, Wilma, the benefit ratio overall was close to the blended benefit ratio that we would expect longer term.

Speaker 5

First quarter, we have seasonality, particularly in the group business. But over a longer period of time, if you take like a run rate on that and you take multiple quarters and average it out, I think that gives you a good sense of where that business is. Does that answer your question?

Speaker 4

Yes, it does. And then could you talk about the cat activity in 2Q twenty twenty five year to date and also remind us how we should account for seasonality going into the second quarter? Thanks.

Speaker 6

Thanks for the question Wilma. This is Steve. So for context, I think you're aware the major event for Q1 was California wildfires and Ryan and Marita mentioned this in their opening remarks, ultimate loss was $3,700,000 and that includes $1,000,000 in fair plan assessment. We looked at April CATs, and I'd say CATs were in line with expectations, nothing outsized. And then I'd say, as we sort of look ahead for the full year, we're going to maintain our full year CAT estimate.

Speaker 6

So we feel pretty good about what we've seen thus far, feel good about what we saw in California wildfires. And hopefully that answered your question.

Speaker 5

I'm going to just add on one thing, Wilma. It's Ryan. Just as a reminder for folks, second quarter has historically been our heaviest cat. About 50% of our cat load is typically has historically been coming through in the second quarter. And in my script, I gave you our annual guidance, dollars 90,000,000 for catastrophes.

Speaker 7

Yes. And this would be the first year where we would see the full effect of the roof schedules and other things that we have begun to put in place and have been working on to mitigate that property volatility and keep that number in check.

Operator

Thank you. Our next question comes from John Barnidge with Piper Sandler. Please go ahead.

Speaker 4

Thank you for the opportunity. Curious about the individual supplemental distribution Were there any new school districts added that drove that growth in the quarter?

Speaker 6

Hey, John, it's Steve. Thanks for the question. It's a big number, the 61%. So, I guess first thing I'd say is we're having pretty good success with our benefit specialists and their selling is up and we feel pretty good. I think the comparison to Q1 twenty twenty four is kind of interesting.

Speaker 6

If you sort of look at the investor supplement and go quarter by quarter, I think what you'll note is Q1 of twenty twenty four was actually a relatively light sales quarter for us in the individual supplemental space. And so the comparison year over year looks massive. We tend to sort of look at we'll look at quarter over quarter, but then we'll look at things on a twelve month rolling basis. And when we looked at things on a twelve month rolling basis, I think the math is around 12% new business growth. And our expectation is that something around the number we're going to see for the remainder of the year.

Speaker 6

So there were no new districts or schools. This was sort of good continued momentum, strong activity from the benefit specialist coupled with sort of an interesting Q1 of twenty twenty four that was a little light making the year over year comparison a little challenging to look at.

Speaker 4

Thanks for that Steve. And my follow-up question is sticking with supplemental group benefits. We've seen other companies begin to talk about increasing the reserves for supplemental group benefits products to assume some level of macro deterioration that would lead to increased utilization. Is that something you've begun to reserve for? Or how do you think through that?

Speaker 4

Thank you.

Speaker 6

So I'll let Ryan handle the reserving part of the question. What I'll tell you is, and I'll keep my remarks to group benefits. Again, it's a similar story to what I just described on individual supplemental sales. Q1 of twenty twenty four was abnormally favorable for us. And so when you compare it to Q1 twenty twenty five, it looks like there is a big increase, but we think 2025 is within expectations.

Speaker 6

When we looked at utilization for the quarter, we sort of looked at it by month. We saw January was slightly elevated. The book is small. The numbers are small. So all you need is a couple of extra claims to sort of distort some of the numbers.

Speaker 6

But January was elevated. February and March looked pretty good. And so from our perspective, we feel good about the our expectations for group benefits and don't really see anything on the horizon that's going to sort of change our opinion on that. I'll let Ryan comment on how we reserve.

Speaker 5

Sure, John. This is Ryan. Thanks for the question. On the reserving side of things, a lot of the quarterly changes in supplemental and group reserves are related to claim counts, frequency, etcetera. We do an annual reserve assumption review where we're looking at more of the longer term trends.

Speaker 5

There's nothing in our current utilization trends that gives us any cause for concern. Historically, the public sector has performed well compared to other professions in recessionary environments. We'll watch it and respond accordingly, but there's not like I said, there's nothing that has us changing our assumption. Yes.

Speaker 7

I think that's said well, guys. When you run the tapes on previous calls, we've said over and over again that our assumption is that utilization will increase and we had not seen that increase up to our expectations even in the numbers. So none of this is unexpected for us. None of this is not contemplated in our planning. And as Steve said, some of it this business is small.

Speaker 7

Comparisons on any given quarter can be odd. But we are not surprised with what we're seeing and feel good about the earnings diversification that this business has brought to us and the way it has been performing. So we feel good about where we are in individual supplemental as well as group benefits.

Speaker 6

Thanks.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Brendan DeWall for any closing remarks.

Speaker 7

I would just like to say before we close the call, I want to reiterate that this has been a record quarter for us and an excellent start to the year and we're really looking forward to our Investor Day next week in New York. Brendan?

Speaker 1

Yes. Again, a reminder, it's next Tuesday. Details are available on our website. Thanks and we hope you have a great day.

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Earnings Conference Call
Horace Mann Educators Q1 2025
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