HORACE MANN EDUCATORS CORP /DE/ Q4 FY2024 earnings call

Management Statement and Operational Highlights

• Property Casualty: Restored profitability with a 98% full-year combined ratio, implemented roof rating schedules in wind and hail-prone states, double-digit sales growth in auto, individual supplemental, and lifelines. Focus to reach mid-90s combined ratio in 2025.
• Life and Retirement: Steady earnings expected from strong fixed income yields. Managed portfolio net investment income expected $370M-$380M, benefiting from higher interest rates.
• Supplemental and Group Benefits: Pretax profit margin above target, expecting utilization to trend back to normal. Plan to introduce next-generation cancer product in individual supplemental line, modernize P&C pricing processes, and invest in agency force and CRM platform (Catalyst).

Segment Performance

• Property Casualty: Full-year core earnings were $49.1 million, an $85 million improvement over the prior year. Annual net written premiums were $779.3 million, up 13.9%. The combined ratio was 97.9%, improving 15.4 points. Net written premiums in auto were $490.7 million (+11.8%), combined ratio 98.4% (improved 13.3 points). Property net written premiums were $288.6 million (+17.7%), combined ratio 96.4% (improved 19.7 points). Revenue contribution: Significant as it showed profitability restoration.
• Life and Retirement: Core earnings were $56.3 million, below prior year due to lower net interest margins. Net written premiums and contract deposits were $573.9 million, slight increase over prior year. Revenue contribution: Steady earnings from fixed income yields.
• Supplemental and Group Benefits: Contributed $60.4 million to core earnings, a 10% increase over the prior year. Individual supplemental: net written premiums $121.3 million, pre-tax profit margin 35.7%. Group benefits: net written premiums $133.2 million, pre-tax profit margin 17.4%. Revenue contribution: Pretax profit margin above target, expecting utilization to normalize.

Guidance

• 2025 core earnings expected in the range of $3.60 to $3.90 per share with a shareholder return on equity of at least 10%.
• Total net investment income expected $470 million to $480 million, managed portfolio net investment income $370 million to $380 million.
• Catastrophe losses estimated at $90 million (about 11% of net earned premium), with California wildfires estimated to cause $5 million to $10 million in direct policyholder losses in Q1 2025.

Risks

• Catastrophe Losses: Variability in catastrophe losses, with cat losses weighted to the second quarter and potential impacts from weather events.
• Commercial Mortgage Loan Portfolio: Returns on commercial mortgage loan and limited partnership portfolios remain below historic averages, though improving from 2024.
• Earnings Volatility: Uncertainty in property casualty earnings volatility despite mitigation efforts.

Question and Answer

Q: Could you talk a little bit about what gives you confidence in the CML returns improving? And then could you help us think about maybe quantifying the potential drag on the 2025 EPS guide based on those lower returns?

A: Morning, Wilma. It's Ryan. On CMLs, we think we are at an inflection point. We loaded a 6.25% assumption in 2025. Our cash returns are in the low eight's, and we feel confident we're moving in the right direction but won't recover all adjustment in 2025.

Q: Ninety million for 2025 versus kinda eighty-ish in 2024. Understand there's the California wildfires in there. It seems pretty manageable, but maybe just talk about how much that changed from business growth versus some of the cat mitigation efforts you put in place?

A: The cat losses are actually down a little bit from 2024. Our estimate is exposure-adjusted, including five-and-ten-year averages and mitigation efforts. We feel confident about property underwriting and mitigation efforts.

Q: Can you give us some updates on how you're thinking about growth, just more specifically on how you plan to execute on growing the different lines of businesses?

A: We're quite excited about our Investor Day in May. We'll unpack growth plans in detail. We have strong growth numbers, and our tools and capabilities are built for long-term growth.

Q: With industry pricing kind of approaching rate adequacy, personal lines, does this put more options on the table, particularly on the property side where results are left less differentiated versus auto, where there the educator base is more of a differentiator?

A: We've been insuring educators for 80 years. Our intimate understanding of educators helps us navigate cycles. We focus on bundling products and managing volatility, differentiating from commodity auto products.

Q: Any updates on changes to deductibles and roof schedules and impact you're starting to see on the business there? Can't help but notice the meaningful prior-year reserve development the last couple of quarters?

A: We're seeing the impact of wind deductibles, roof schedules (in most meaningful states), lighter weather, tempering of inflationary impact, and claims team efforts on claim severity. Prior-year reserve development is due to improved claim settlement and reduced reopening activity.

Q: Is the fact that there's less utilization than you'd model having any impact on demand in supplemental?

A: In supplemental and group business, we saw favorable morbidity experience. We purchased MNL a couple of years ago with a conservative reserving approach. Demand remains strong with record sales in the fourth quarter.

Q: You guys have spent a bit of time talking about kind of profitability restoration in PNC and Ryan, you talked a bit about kinda commercial real estate and a little better there. Feels like we're in a much better spot today than the past couple of years. I guess, if we zoom out and we think about kind of the guidance of the $3.60 to $3.90 EPS for 2025, can you talk a bit about your confidence level in getting to that number versus 2024 and 2023, which felt like there was a lot more variability, both in the industry and kind of what's going on at Horace Mann?

A: We're very confident in our 2025 guidance. PNC profit restoration is complete, life and retirement has steady earnings, and individual supplemental and group benefits are strong earners. We're confident in the range due to improved cat science and predictability in earnings streams