Horace Mann Educators Corporation (NYSE:HMN) Q4 2023 Earnings Call Transcript
Horace Mann Educators Corporation (NYSE:HMN) Q4 2023 Earnings Call Transcript February 8, 2024
Horace Mann Educators Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Hello, and welcome to the Horace Mann Fourth Quarter and Year End Result Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] I would now like to hand the call to Heather Wietzel, Vice President of Investor Relations. Please go ahead.
Heather Wietzel: Thank you. Welcome to Horace Mann's discussion of our fourth quarter and full year results. Yesterday, we issued our earnings release investor supplement and investor presentation. Copies are available on the Investor page of our website. Marita Zuraitis, President and Chief Executive Officer; and Bret 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 Sharpe, Steve McAnena, Ryan Greenier and Mike Weckenbrock, Mark Desrochers had an unavoidable conflict, and he's not on the line today. 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 as 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.
Marita Zuraitis: Thanks, Heather, and welcome, everyone. Yesterday we reported full year 2023 core earnings of $1.54, which included fourth quarter earnings of $0.84. We are clearly seeing the value of our strategy to diversify earnings to drive market share growth and to support a sustainable double-digit ROE. I'll give an update on our strategic progress in a moment, but let me start with a look at 2023 across all three of our segments. Sales for the year were strong. Total revenue rose 8% for the year with net premiums and contract deposits up 6% in total, including 11% growth in full year P&C premiums, all segments benefited from the 11% increase in net investment income to a record $445 million. Looking more closely at the results by segment in P&C, there were many signs of progress for the fourth quarter segment earnings were $9 million.
We saw average written premium growth. That reflects the actions we've taken since the beginning of 2022. In auto, the cumulative rate impact of 23% through year end, including almost 19% in 2023, drove 16.7% growth in fourth quarter average written premiums over the prior year in property. The cumulative impact of rate actions and inflation adjustments of 25% through year end, including about 15% in 2023, drove 13.2% growth in fourth quarter average written premiums, we continued to see auto earned premium growth ahead of loss cost growth, an inflection point reached in the third quarter and weather activity in the quarter was more typical for the full year results were in line with our updated guidance, reflecting the elevated weather losses experienced in the first nine months of 2023.
Life and Retirement was a solid contributor in 2023, delivering earnings of $72 million ahead of our updated guidance on strong net investment income. Net annuity contract deposits were up 6% for the year. Educators continue to begin their relationship with Horace Mann through for oh three b. retirement savings products, which provide encouraging cross-sell opportunities. Life sales were consistent year over year. Worksite agents, enrolling educators and others who serve their communities and individual supplemental products are continuing to cross sell our life products contributing nearly 15% of sales for the full year supplemental and Group Benefits segment, full year net income was $55 million at the top end of our updated guidance, providing valuable earnings diversification benefit ratios for both the worksite direct and employer-sponsored product lines still reflect lower than historic utilization, but continue to move closer to our long-term targets.
Total segment sales were up 63% with improved persistency. Our relationship with the International Association of Firefighters remains strong, with sales in this segment almost doubling from 2022. In addition, our momentum with group business has started to show signs of acceleration. As we saw, the total number of covered lives increased by more than 6% in 2023. And we introduced Horace Mann Group Benefits to over 65 new school districts, about half of which came from a newly developed relationship with an association of districts. In summary, we are pleased with the progress we saw throughout the year and are very confident with what comes next although Bret will discuss the details of our 2024 outlook later in the call. Let me give you a high level overview.
First, we expect the business to deliver core earnings of $3 to $3.30 more than double this year. This takes into account an incrementally higher level of interest expense of $5 million because of our new senior debt. Second full year core ROE should be around 9% on track to achieving a sustained 10%-plus ROE in 25 and beyond. Year-over-year improvement in the P&C segment is the key to our continued progress rate and non-rate actions already implemented or approved as well as stabilizing auto loss trends gives us a high level of confidence in our outlook for this segment. Both auto and property are on track to underwriting profits in 2024 and to our target combined ratios in 2025. Our filing plan for 2024 adds 10% to 15% of additional rate for both auto and property.
And we will continuously review emerging trends and adjust appropriately just like we did in 2023 in property, there will also be 4% to 5% of additional premium impact from the change in coverage amounts related to this year's inflation factor. The most significant non-rate impact in 2024 will be our roof rating schedule's, a change occurring across most of the industry to mitigate the volatility of convective storm activity. We've already introduced our roof schedules in both Minnesota and Texas, and we will continue to rollout in other states throughout the year. Once in place, roof claims are settled using a predetermined schedule based on the age and construction material over the roof, about one-third of the ultimate benefit of this change will be earned in 2024.
In addition, to introducing the roof settlement schedules in our most win prone states, we will be increasing all peril deductibles and requiring percentage based wind deductibles in selected markets. We are also leveraging some of the insights from more advanced modeling to take specific underwriting actions for very aggressive price increases at a local market level. Taken together, the impact of these non-rate actions will be important to reaching our targets in 2024 and beyond with a profitable P&C book on the horizon, we're very excited about the ways we're working to increase our share of the educator market. First is the strength of our exclusive agent network in the schools online or in their communities. Our agents help us reach and retain educator customers.
Auto, quote, activity from our agents was up more than 15% in the fourth quarter over last year as we are encouraging more sales-driven activity in states where we have a clear line of sight to target profitability. And importantly, more than 95% of our 2023 P&C new business has been in these geographies, combined with our multi-line approach, RY. a distribution model allows us to work with our agents in more challenging markets to maintain their focus on educator clients as well as shift their focus to Life and Retirement opportunities our agents' role as trusted financial adviser in the schools and districts they serve clearly distinguishes them from the agents representing many of our peers and aligns well with our advancing digital strategy.
Among his many contributions, Steve McKenna and his team are focused on improving our digital capabilities to align with customer preferences. Research shows that about 60% of the time consumers prefer to speak with a trusted adviser before making insurance related financial decisions. Although many consumers have to explore options online. First, one of the first areas of emphasis for Steve's team is funneling educators interested in our solutions to our exclusive agents and when appropriate, we can also send interested educators to our inside sales team to build on the successful sales to service initiatives of the past several years. The team recently enhanced the Horace Mann website. Although it's still early, we have seen an uptick in the number of people who start a quote online among the changes our enhanced ways to learn about our broad suite of product offerings as well as the value added offerings of our educator Advantage program.
A recent update alerted customers to added discounts on home monitoring and security products. Worksite Division is also enhancing digital capabilities rolling out the WISE benefits website several months ago. This site addresses the information needs of districts and municipal representatives working with brokers and benefit consultants. These decision makers investigate Horace Mann offerings to learn more about our suite of employer paid or sponsored products and our company, the new website enhances their experience. And finally, another reason why I am confident in continued acceleration of our growth momentum is the success we're seeing in agent recruiting across the business. Retail agent recruiting was up 30% in 2023 as we are successfully bringing onboard a diverse group to our unique value proposition.
Our multi-line product offering and homogeneous customer set are attractive to potential retail agents. And on the worksite side, we've added new relationships with key brokers and benefit consultants as well as increased our individual supplemental agent team by over 20%, which bodes well for continued strong sales growth in this segment. As we look into 2024 and beyond, we're very confident in our outlook for each segment and the value of our multi-line business model. Property and Casualty is on track to return to historic profitability for Life and Retirement to continue to provide a solid earnings contribution and supplemental and group benefits to deliver the diversification value we have created further. We're augmenting the way educators can interact with us making certain we're meeting the needs with solutions that help them protect what they have today and prepare for a successful tomorrow.
We will continue to strive to offer a fair price through varied market conditions, creating long-term value for our customers and for our company. But our work goes even further. Our representatives continue to provide financial wellness workshops on topics like student loan forgiveness and state teacher retirement systems. They also help our customers create financial plans, which places our representatives firmly in the role of trusted adviser on a larger scale. We also support administrators in municipal employers looking to augment recruiting and retention by bolstering benefit packages with employer paid and sponsored coverages as we continue to meet the needs of customers and all of our stakeholders. The strength of our value proposition, combined with the outlook for each segment gives us confidence that we will reach our targets in 2024 and beyond.
Thank you. And with that, I'll turn the call over to Bret
Bret Conklin: Thanks, everyone, for joining our call today. Marina highlighted the value of our diversified business model and the momentum that we are seeing across our businesses. Now I'd like to walk you through the details of the business segment performance and specifics of our outlook for 2024, starting with P&C, including a profit of $8.8 million in the fourth quarter, the P&C segment's 2023 results were in line with our recent guidance, which reflected the elevated cat and non-cat weather activity in the first nine months although weather activity was more typical in the fourth quarter, cat losses for the full year contributed 15 points to the total combined ratio. Our guidance for 2024 includes a cat load of approximately $80 million or about 11 points on the combined ratio.
This estimate is in line with our five-year average. It clearly shows the impact of the inflation driven increases in weather related losses over the past several years. It also reflects the expected benefit of our new road schedules and other underwriting actions we are taking to mitigate convective storm volatility. As a reminder, our cat losses tend to be weighted to the second quarter, which typically represents about half of our annual cat losses for 2024. We are expecting a segment combined ratio near 100% with segment earnings of $36 million to $41 million. Both auto and property continued to benefit from our rate and non-rate underwriting actions and are on track to achieve underwriting profitability in 2024. Let me walk through a few details for each line, along with the factors driving our confidence in our outlook for 2024.
For auto, net written premiums rose 11% in 2023, with retention flat versus 2022. The underlying loss ratio improved 1.1 points for 2023 and a solid 15.1 points in this year's fourth quarter versus a year ago. Those improvements reflect our cumulative rate increases over the past two years of 23% with an additional 10% to 15% currently anticipated in 2024 as those rates earn in during 2024. And keep in mind about two thirds of our auto book is on six month policies. We're confident we can reach our targeted combined ratio of 97% to 98% in 2025 as we noted last quarter earned premium growth moved ahead of loss cost growth in the late summer of 2023. Turning to property, net written premiums rose 10% in 2023, with retention improving slightly versus 2022.
The cumulative two year premium impact of our rate increases in inflation adjustments was 25% through year end 2023, and we are also planning an additional 10% to 15% in this line in 2024. To address the loss environment, the underlying loss ratio improved three points in the fourth quarter over last year's fourth quarter, but was up slightly in 2023 over 2022 due to the elevated non-CAT weather losses during the first nine months of 2023. Weather frequency was 10% higher in 2023 than the 10-year average as rate, certainly in along with the additional benefit from this year's inflation guard change, we're confident we will reach our target property combined ratio of 92% to 93% in 2025. Just a quick note that the renewal process for our 2024 property cat treaty was more orderly this year.
Our 2024 retention is slightly higher at $35 million, about in line with our one and 10-year model events as well as inflationary trends. Risk adjusted reinsurance costs are up about 1.7% for 2024 versus 2023. Turning to Life and Retirement segment continues to deliver a strong performance with 2023 core earnings of $72 million. Our guidance is for the segment earnings of $77 million to $81 million in 2020 for net investment income increased by 9% compared to 2022, benefiting from the higher returns on floating rate securities. The 2023 net interest spread on our fixed annuity business declined to 218 bps compared to 246 bps in 2022. It remains near our longer-term target range of 220 bps to 230 bps. The spread was affected by lower limited partnership returns as well as higher FHLB borrowing costs as credit spreads tightened year over year.
The net dollar contributions from our FHLB funding agreements remained stable compared with 2022, with FHLB borrowing costs reflected in interest credited Our 2024 outlook anticipates the spread will be above our targeted range. Commercial mortgage loan returns are expected to exceed our historic averages, driven by higher floating rates and stabilized valuations. While limited partnership returns are expected to move back towards their historic averages for the segment. Total benefit expenses, the total of mortality costs and change in reserves was stable in 2023 versus 2022. Results reflect the relatively modest impact of the required LDTI. assumption review in 2024. Our outlook reflects mortality rising modestly from the levels of the past several years for the retirement business.
Net annuity contract deposits were up 6% to $456 million at year end 2023. Persistency in our core for all three b. account portfolio remains very strong, with total cash value persistency stabilizing at a solid 91.5%. We also had another good quarter for Retirement Advantage fee, fee-based mutual fund platform that we believe creates long-term opportunity for this business segment. Life annualized sales and persistency remain consistent with 2022. We continue to look for life sales as a way to initiate and solidify educator relationships, and we are very pleased with the progress. Now let me turn to supplemental and Group Benefits segment, where we are continuing to see the earnings diversification, value of this higher growth, higher ROE and less capital-intensive business.
Full year 2023 premiums and contract charges earned were $260 million with total segment sales of $26 million, up 63% over 2022. Full year earnings were $55 million at the top end of our guidance range with the blended benefit ratio at 36%. Benefit ratios for both the worksite direct and employer-sponsored product lines continue to reflect utilization below historic levels. For 2024, we expect core earnings to be between $47 million and $50 million, taking us another step closer to our blended long-term benefit ratio target of 43% compared with 2023 We also anticipate full year 2024 pretax profit margin for the segment at a strong 20% to 21%. However, this segment does have a fair amount of seasonality both in sales and benefit costs. The first quarter of any year can be expected to be the highest sales quarter for employer sponsored products to align with the start of annual benefit years, but is potentially the lowest earnings quarter because of the timing of benefit utilization in our markets.
Benefit ratio for employer-sponsored products should typically be at its lowest in the third calendar quarter for this segment's business lines, 2023 sales in our worksite direct business, the supplemental products were up 64% to $15 million. We expect growth to continue in 2024 and beyond. For the employer-sponsored business line, full year 2023 sales were up 61% to $11 million. We continue to make progress gaining more access to districts and schools through our distribution partners. For 2023, total net investment income rose 11% and net investment income on the managed portfolio increased 14% ahead of recent guidance due to strong fourth quarter results. Full year increase reflected the benefit of the higher interest rate environment on floating rate investments, which benefited all segments pretax investment yield on the portfolio, excluding limited partnerships, was 4.74% for 2023, rising to 4.94% in the fourth quarter with new money yields continuing to exceed portfolio yields in the core fixed maturity securities portfolio.
Our A. plus rated core portfolio remains concentrated in investment grade corporates, municipals and highly liquid agency and agency MBS securities, positioning us well for a potential recessionary environment without sacrificing income. Looking at 2024, we expect total net investment income to increase to between $465 million and $475 million and between $360 million and $370 million for the managed portfolio. The increase reflects the continued benefit of the higher interest rate environment and our expectations for limited partnership in commercial mortgage loan portfolio returns. At year end 2023 adjusted book value was $36.29 adjusted book value adjusts for both unrealized investment losses and net reserve remeasurements attributable to discount rates and shows the intrinsic value of our business.
We use adjusted book value when we talk about four return on equity, the ratio of debt to capital on a similarly adjusted basis was 26.9% at year end. It remains at a level appropriate for our current financial strength ratings, even after the issuance of $300 million of five-year fixed rate senior debt in September of 2023. As a reminder, we used $249 million of the proceeds from that issue to pay down the outstanding balance on our floating rate revolving credit agreement. The remainder was downstreamed to our P&C subsidiaries, as we generally do not keep significant excess capital at the holding company. The new senior debt does result in a $5 million increase in interest expense in the corporate segment, which is about $0.1 per share. In summary, we're pleased with the progress we've made in 2023, putting us on track to our long-term target of sustainable double-digit ROEs. Fourth quarter 2023 core earnings of $35 million or $0.84 per share offer to look at the earnings potential of the business adjusted book value at year end 2023 was $36.29.
Net premiums written and contract deposits reached a record $1.5 billion for the year sales grew in all operating segments, supplemental in group benefits and Life and Retirement segments made solid contributions and managed net investment income rose by 14%. Taking into account the $0.1 of incremental interest expense, our full year 2024 EPS guidance of $3 to $3.30 is solidly in line with current Street expectations. Our guidance also shows our confidence in our outlook with earnings expected to be about twice what we reported for 2023 and on track to our long-term objectives More significantly, we continue to expect our progress toward our objectives will accelerate over the coming quarters as we remain focused on providing strong returns to shareholders.
We're excited about Horace Mann's future. Thank you. And with that, I'll turn it back to Heather.
Heather Wietzel: Thank you. Operator, we're ready for questions.
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