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Text: Copies of all three are available on the Investors page of our website.
With us for Q&A, we have Matt Sharpe on Business Development and Distribution; Mark Desrochers on P&C, Tyson Sanders on Supplemental, and Mike Weckenbrock on Life and Retirement, with Ryan Greenier available on investments.
Actual results may differ materially due to a variety of factors, which are described in our news release and SEC filings.
Reconciliations of these measures to the most comparable GAAP measures are available in our news release.
Last night, we reported second quarter core earnings of $1.02, our highest second quarter result ever.
We benefited from particularly strong investment income in our alternatives portfolio and lower than guided catastrophe losses.
As previously announced, this led us to raise our full-year core earnings per share guidance to a range of $3.50 to $3.70 with an expected return on equity above 10%.
We saw strong earnings growth in each segment in the second quarter and solid sales momentum in the retirement line.
Annuity contract deposits increased by double digits over the prior year.
Bret will go over the quarterly results in more detail later in the call.
I want to focus on our progress toward our long-term objectives of a sustainable double-digit ROE and significant expansion in the education market.
Over the past year and a half, through unprecedented disruption in all aspects of our day-to-day life, Horace Mann has continued to be successful.
I attribute this success to two factors.
First, our unwavering dedication to the deserving education market.
We know our customers, we know them well and we respond to the issues they face.
Second, our multiline model, we have the premium and earnings risk diversification that enables us to remain focused on our long-term objectives throughout occurrences of weather volatility, market volatility and mortality and morbidity trend changes.
While the COVID-19 pandemic added an extra year to the transformational stage of our growth journey, it also gave us time to analyze and improve the ways we can fulfill our value proposition for the education market.
Examples of the outcomes of this focus include an accelerated integration of NTA agents, initiating key improvements and infrastructure, and expansion of our student loan solutions program nationwide.
It also set the stage for the entry into the employer paid benefits market with the planned acquisition of Madison National Life Insurance Company.
This acquisition brings together two educator-centric companies with complementary strength in product distribution and infrastructure.
Horace Mann's most established channel for serving educators has always been individual products sold through our agency force of local, trusted advisors.
In recent years, we invested in upgrading our section 125 benefits administration program, which enable school districts to offer voluntary worksite plans, benefits including our individual supplemental products are provided or introduced through the school district, but paid for by individual educators.
In some cases, educators can fund these purchases with pre-tax dollars.
Madison national represents a new third way for us to serve educators.
In line with emerging workplace trends, school districts are increasingly adding and enhancing employee benefits to attract and retain educators for hard-to-fill positions.
Madison National's employer paid and sponsor group products will enable us to provide educators with solutions like short and long-term disability, while helping school districts improve recruiting and retention efforts.
Districts generally work with independent benefit brokers to purchase Madison National's group products and educator staff are automatically enrolled.
With this addition, Horace Mann will now have complementary distribution capabilities in each of the ways the country's $6.5 million public K-12 educators receive insurance solutions, dramatically increasing our addressable market.
In terms of scope, Horace Mann has at least one educator household located in 75% of the roughly 12,000 K-12 school districts in our market footprint.
When we bought NTA, we added approximately 120,000 educator households.
With the acquisition of Madison National, we gain a solid base in this growth segment as they serve 1200 districts that provide employer paid and sponsored products to about 350,000 educators.
There's some overlap between Horace Mann's presence and those of NTA and Madison National, but each of the transactions has clearly added to our market share and with the Madison National transaction, our total addressable market expands to include a portion of the $160 billion that school districts spend annually on employer paid benefits, a market sector that has grown more than 30% over the past five years.
As we look at ways in which Maddison National aligns with our business strategy from a product perspective, Madison National bring 60 years of experience designing and underwriting a portfolio of group products.
These products can offer educators peace of mind that their families will be able to respond to unexpected events without depleting their savings.
From a distribution perspective, independent brokers are key in the complex public sector benefit space, where districts, particularly large ones rely on their assistance to design plans and offerings that are typically offered to every employee in the district.
Working with independent brokers is completely complementary to our established distribution through local trusted advisors.
We have already signed a long-term distribution agreement with National Insurance Services, an employee benefit brokerage subsidiary of Assured Partners that has been a key distribution partner for Madison National for nearly 40 years.
It will take effect concurrently with the acquisition, giving us immediate access to the employer paid and sponsored portion of the market.
After the transaction closes, we will be complementing Madison National's current group offerings, which includes supplemental products with enhanced offerings.
Our product development team has been leveraging and NTA's 50 plus years of success in supplemental market to accelerate filings for group products customized for educators such as cancer and hospitalization.
These will allow us to work with Madison National and NIS to provide a comprehensive group product suite.
In terms of infrastructure, Madison National brings an exceptional experienced team focused on delivering great educator customer experiences supported by modern and scalable infrastructure.
They're ready to add scale and we're the right partner to help them do so.
In 2022, we expect Madison national to add 50 basis points of ROE with upside potential in future years.
We remain focused on three additional drivers of higher ROE across the entire business.
First, driving higher net investment income by increasing the allocation to alternative investments.
While our alternative portfolio returns can be volatile, recent performance clearly illustrates the value this asset class brings.
We continue to realize savings from actions such as the full integration of the supplemental segment in 2020, as well as benefits from continued infrastructure improvements.
Third, market share expansion through cross-sell and new sales through each of our distribution channels.
We bring the ability to combine the new virtual marketing approaches we tested and refined over the past year and a half with our traditional in-person activities.
We look to build on the sales momentum we established in the first half of the year and are seeing a lot of optimism in the agency force around scheduling meetings and events in their schools this fall.
The 2021, 2022 school year will certainly be more normal than the previous one.
However, there is concern about new COVID-19 variants.
We believe most schools will avoid a return to a hybrid or remote environment, notably, nearly 90% of educators are vaccinated against COVID-19, a far higher rate than the general population.
Further, educators have overwhelmingly made the case that the best educational environment for students is in-person.
At Horace Mann, this past year and a half has provided us an ever growing list of reasons and reminders of why we do what we do.
It is an honor to serve the educators who have gone above and beyond to reach every student through the COVID-19 pandemic.
Their dedication and selflessness to our country's children continues to inspire us to do more and this year we will.
And with that, I'll ask Brett to take you through the results.
Second quarter core earnings per share was $1.02, up 52% over last year and our third consecutive record quarter.
Six-month core earnings per share was $2.12, more than halfway to the increased full year earnings per share guidance of $3.50 to $3.70.
As we said last quarter, our outlook has always presumed a gradual recovery from the effects of the COVID-19 pandemic on results and that's largely what we've seen so far this year.
In that context, we're encouraged by the signs of momentum we are seeing with the vaccine rollout and continued strong performance across the business.
As a result, on July 1, we brought guidance to a level that aligned with the strong second quarter net investment income returns in the lower than historical average level of second quarter catastrophe losses.
As I talk through the segments, I will address the changes we've made to align full year segment outlooks with the updated guidance.
I'll finish up with a recap of how we continue to think about allocating capital to maximize value for our shareholders.
When we raised earnings per share guidance, we also raised our expectation for 2021 core return on equity to greater than 10% for the year.
Core return on equity for the second quarter was 11.7% and it was 12.1% for the 12 months up from 9% for the prior 12 months.
Although the pandemic and other unusual factors continue to contribute to the improvement, our strategic initiatives are equally as important and we remain on track to our long-term target of a sustainable double-digit ROE.
And as we look ahead, the Madison National transaction will be a strategic use of capital to accelerate our shareholder value creation.
In addition to the strong fit of Madison National, this is another business with predictable and stable underwriting profitability, as well as strong capital generation that serves to further diversify our business profile.
In 2020, Madison National had net premiums of approximately $108 million and statutory income of approximately $14 million.
Madison National's premium have grown in the mid-single digits over the past five years with the trailing five-year loss ratio below 50%.
The transaction is expected to be accretive by mid-single digits to Horace Mann's earnings from the level we would anticipate for 2022, taking into account a normal cat load.
We'll see that benefit even though amortization of intangibles related to purchase accounting means that GAAP earnings will be somewhat lower than statutory income.
The transaction also will deliver about 50 points of ROE improvement in the first 12 months after closing.
We expect that contribution to grow over time as we leverage the new opportunities that Madison National and it's independent distribution bring to Horace Mann.
Turning to segment results for the quarter.
In Property Casualty, core earnings for the quarter were up about $8 million or 70.8% due to the strong contribution from net investment income, which was driven by the returns in the alternatives portfolio.
Due to a higher underlying loss ratio, underwriting income was down by about $6 million despite significantly lower catastrophe losses and an improved expense ratio that reflected our continued focus on expense optimization.
Premiums for the quarter were $156 million with new business volume remaining below historical levels as we work through the impact of the pandemic on sales.
Auto average premiums were down slightly in the quarter, while property average premiums are starting to rise.
In line with our July 1 announcement, cat losses for the quarter were $17.5 million, contributing 11.3 points to the combined ratio, significantly below last year and below what we anticipated when the year started.
The 17 events designated as cat in the second quarter were generally less severe and not as widespread as the 20 declared cat events in last year's second quarter.
Our revised full-year 2021 guidance reflects our assumption that second half cat losses will be between $20 million and $25 million, which is unchanged from what we guided to at the beginning of the year and is in line with the 10-year average for second half cat losses.
Turning to the underlying loss ratios, our experience in the second quarter and the first half aligns with overall industry trends.
Driving is returning to more normal patterns while inflationary trends in labor and materials are driving costs higher across all businesses.
Let's look first at auto where the loss ratio has been one of the most pandemic-impacted metrics for the entire P&C industry.
Even as miles driven ramps back up, through the first six months of 2021, our underwriting discipline is key to why we are reporting an underlying auto loss ratio below the 70.6% we reported for full year 2019, however, because of the inflationary component of the increase in loss costs over 2020.
We are initiating appropriate rate filings in selected geographies to help keep us at our targeted loss ratio.
We're confident and our agents will remain competitive on the business they quote even as these filings begin to take effect.
For Property, not only is inflation a concern, but similar to others, we are seeing increased frequency of fire and non-weather water losses in our case with several larger claims from those causes.
To address, we're now planning to file for property rate increases in the mid-single digits in many geographies in the second half of the year, a bit above our original rate plan for this year.
We're also making sure the insured values of covered properties remain in line with data on the rising value of homes across the country.
Finally, we released $4.2 million dollars in prior period reserves during the second quarter with approximately $3 million from 2019 in prior auto liability.
With our six-month combined ratio at 92.7%, we are still on track to achieve a full-year combined ratio in line with our longer-term target of 95% to 96%.
Our updated guidance for 2021 core earnings of $66 million to $70 million reflects the strong contribution of net investment income in the first half.
Turning to Supplemental, the segment contributed $31.6 million in premiums and $12 million dollars to core earnings.
Supplemental continues to experience favorable trends in reserves and is still seeing the benefit of changes in policyholder behavior due to the pandemic.
Net investment income on the Supplemental portfolio reflects the solid progress we are making in improving the Supplemental investment yield.
Supplemental sales were $1.2 million in the second quarter, up from both this year's first quarter and the year ago period.
As we've said, the individual Supplemental products that we currently offer have traditionally been sold through a consultative enrollment model that has been among the most impacted by the worksite access limitations of the past year and a half.
As we prepare for a more normal back-to-school season, Horace Mann agents continue to sell our individual Supplemental products with steady sales metrics in more open geographies.
Premium persistency remains above 90%, a testament to the value educators place on these coverages with about 282,000 policies in force.
Our revised outlook for Supplemental's 2021 core earnings of $41 to $43 million reflects a higher contribution from net investment income.
We are also seeing the return to historical policyholder claims behavior occur more slowly than we had anticipated in this business.
We now expect a full year 2021 pre-tax profit margin better than our longer-term target of mid 20%.
In the Life segment.
June was the highest month for Life sales since the pandemic began.
Annualized sales for the second quarter were ahead of first quarter with retention steady.
We also saw an increase in single premium Life sales.
These sales tend to be lumpy, but they are a reflection of improving access as these are more consultative sales, typically requiring multiple contacts with the customer.
Core earnings more than doubled from last year to $5 million as mortality costs returned to within actuarial expectations, total benefits and expenses returned to targeted levels and net investment income rose 26.9% Nevertheless, because of the higher mortality costs in the first quarter, we've modestly lowered our outlook for full year 2021 Life segment core earnings to the range of $14 million to $16 million.
For the Retirement segment, second quarter core earnings ex-DAC unlocking were up 88.3% reflecting the strong net interest margin.
DAC unlocking was favorable by about $200,000 compared with $3.7 million in last year's second quarter.
The net interest spread improved 79 basis points over last year's second quarter to 265 bps in part due to strong returns on the alternatives portfolio.
This is above our threshold to achieve a double-digit ROE in this business.
Our solutions for augmenting retirement savings remain a core need for educators.
Annuity contract deposits were ahead of last year's second quarter by 15.6% with the June beating out March, the previous record as the highest month for deposit for several years.
Our educator customers continue to see annuities as an important way to achieve their financial objectives and these products are complemented by our suite of fee-based products.
Based on the strong results through the first half, we increased our full-year 2021 outlook for Retirement core earnings ex-DAC unlocking to the range of $43 to $45 million.
Turning to investments, total net investment income on the managed portfolio was up almost 50% to $84.1 million with total net investment income up 35.8%.
The increase in NII, on the managed portfolio, was largely because our alternatives portfolio generated outsized returns in the second quarter.
As we've said, driving higher investment income through increasing our allocations to the alternative investments portfolio will be a strategic driver of a sustained double-digit return on equity.
Year-to-date, private equity returns have been quite strong given the relative strength of the equity markets and the active IPO window.
As a result, second quarter alternative results were significantly above expectations.
In addition to the private equity returns, our other alternative strategies, such as private credit, infrastructure and commercial mortgage loan funds posted solid performance in the quarter.
We expect to reach our targeted 15% allocation to alternative investments within the next two years and expect this diversified portfolio to generate high single-digit annual returns on average over time.
The fixed income portfolio had a yield of 4.3% in the second quarter compared with 4.39% a year ago.
Second quarter purchase activity was largely opportunistic and focused on BBB corporate and high yield securities with attractive relative yields.
The core new money rate was 3.35% in the second quarter and based on current market conditions, we continue to anticipate a core new money rate of about 3% for the year.
Our updated guidance reflects the higher assumption for total net investment income of $385 million to $405 million including approximately $100 million of accreted investment income on the deposit asset on reinsurance.
This expectation for investment income is captured in the segment by segment outlook I've summarized and in our core earnings per share guidance range of $3.50 to $3.70.
In closing, we are very pleased with our business progress through the first half of 2021 and excited about the potential of this year's back to school, as well as the progress we anticipate in 2022 and beyond.
As we stated last quarter, our top priority for the use of excess capital remains growing our business at returns that meet or exceed our ROE targets.
The acquisition of Madison National is an ideal use of capital to accelerate our path for sustained double-digit ROE.
Further, after the transaction, Horace Mann should generate more than $50 million in excess capital annually, assuming normalized property and casualty results.
We're committed to prudently using that capital to create additional value for shareholders.
Beyond growth initiatives, our capital generation provides scope for repurchase, as well as maintaining our track record of annual increases in our cash dividend, which is currently generating yield slightly above 3%.

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compname reports second-quarter 2021 net income of $1.11 per share and record core earnings* of $1.02 per share.
reaffirming updated 2021 core earnings per share guidance of $3.50 to $3.70, with roe above 10%.

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