Horace Mann Educators Corp /De/ Q3 FY2020 Earnings Call

Good morning, and welcome to Horace Mann Educators Third Quarter 2020 Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Heather Wietzel, Vice President, Investor Relations. Please go ahead.

Thank you, and good morning, everyone. Welcome to Horace Mann's discussion of our third quarter results. Yesterday, we issued our earnings release and investor supplement. Copies are available on the Investors page of our website, along with our investor presentation, which was posted this morning. 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 on Distribution; Mark Desrochers on P&C; Wade Rugenstein on Supplemental; Mike Weckenbrock on Life and Retirement; and Ryan Greenier on investments. Before I turn 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. 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 measure are available in our news release. With that, I'll now turn the call over to Marita.

Thanks, Heather, and good morning, everyone. Before we start today, I'd like to note that Mark Desrochers has accepted the role of leading our Property and Casualty business on a permanent basis. Mark has been a key part of our leadership team for 5 years and has been leading our Property and Casualty business since April. Horace Mann has benefited greatly from his extensive personalized experience and strategic approach to the business, and we're pleased that we will be able to continue to do so. On to the quarter. Last night, we reported third quarter core earnings of $0.82 per diluted share, a 28% increase over the prior year. We also increased our full year guidance for the second time this year. We now expect 2020 core EPS will be in the range of $2.95 to $3.15, a roughly 40% increase over last year. These strong results illustrate the benefits of our long-term strategic plan to enhance our product offerings, strengthen our distribution network and modernize our infrastructure to better serve our educator customers. The strong foundation we've laid over the past 6 years, combined with the transformational actions we completed in 2019, continue to serve us well in this pre-vaccine pandemic environment. Our progress towards our long-term objectives has been uninterrupted and will continue pre- and post-vaccine. 2020 results keep us on track to our pre-pandemic plan of achieving 1 full point of ROE improvement this year due to our strategic actions. That gets us to the 8% to 8.5% ROE we had anticipated. We'll also have approximately 1 to 1.5 points of ROE this year from pandemic-related and other factors that largely won't repeat. Looking ahead, 2021 ROE will be on the original path we had anticipated, heading towards the double-digit ROE we can reach through our strategic initiatives. Our confidence is grounded in the strength of our value proposition to provide solutions to the education market. Horace Mann is a company built on a deep appreciation for educators and a commitment to help them protect what they have today and prepare for a successful tomorrow. Even compared to the end of the last school year, educators' jobs have become more difficult. Many are working in a hybrid model where they need to teach in person and remotely, increasing their workload and the challenges of addressing each student's needs. They are concerned about their students' health and well-being as well as their own. Now more than ever, we at Horace Mann are proud to be serving educators, and we continue to look for new ways to do so. This quarter, we expanded access to our suite of student loan management resources to help educators achieve the student loan forgiveness they deserve as public servants. The student loan solutions program has already helped put our customers on the path to more than $250 million in student loan forgiveness. After implementing a more robust online platform earlier this year to scale our capacity to help, we've now made it available to every public school educator in the country free of charge. In addition, our agents and internal subject matter experts are offering more online financial wellness workshops and hosting virtual educator engagement events. And we helped educators across the country put their lives back together after damage to their homes from the many catastrophe events that have occurred in recent months. During the pandemic, our homes have taken on even greater significance. For some educators, that space is now also their classroom. So not only are we helping them put their lives back together, we're helping them get back to their vital work. The investments we have made over the past 6 years in the company's products, distribution and infrastructure, combined with the steps we took in 2019, have positioned us to serve more educators and achieve our target ROE. Reinsuring our legacy annuity block last year released capital that we used to acquire our supplemental business. This diversified our business mix and redeployed capital into higher-margin products. The reinsurance transaction also significantly mitigated future interest spread risk. Further, we have added to ROE by implementing expense optimization and modernization initiatives to drive efficiencies across our entire business. Going forward, we are focused on 3 factors key to achieving a sustained double-digit ROE. The first is sales growth. We entered 2020 with a complete product game board offering solutions for educators at every life stage. We have upgraded our product suite to add features that educators want and solutions that address the unique financial issues they face. Our solutions are ready to support market share expansion with growth across our business accretive to ROE. Disruptions related to the pandemic, such as limited school access, have put our sales under some pressure. We've been very pleased to see our established agents leverage their strong relationships to transition almost seamlessly to a virtual environment. We continue to work with newer agents, who tend to depend more on building new relationships in order to grow, to help them develop their books of business. Because of the pandemic-related challenges, we've intentionally accelerated steps that will better prepare us for a post-vaccine environment. First, we accelerated the integration plan for supplemental agents. These agents now can bring a variety of Property and Casualty, and Life and Retirement products to their existing customers. Early results are encouraging. In fact, our September production leader in our new agent segment was a newly integrated supplemental agent, now cross-selling an expanded suite of products. Second, we're beta testing a number of new approaches to reach educators, many of which rely heavily on virtual interactions. The upside will be our ability to take the most successful of these approaches and incorporate them into the sales process across the entire agency force going forward. The second factor that will help us reach a double-digit ROE is further expense optimization and discipline. As I mentioned, this year's results reflect the benefit of initiatives that successfully reduce our ongoing operating expense run rate by more than $15 million. We expect further savings in 2021 and beyond from efficiencies gained through process optimization, integration of NTA and identification of operational synergies. Of course, the pandemic has brought our travel budget close to 0, which is generating savings and is likely to inform our thinking about spending for years to come. Lastly, we continue to expand our alternative investment portfolio to capture additional yield in this sustained low interest rate environment. These investments can be more volatile in general, but we continue to follow a conservative, disciplined strategy. Since we initiated this portfolio, we have seen an average return of over 6.5%. We focus on a diversified mix of income-producing investments run by investment managers with a solid track record, and the approach has been largely successful. This quarter, we recorded over $11 million in alternative investment income. Before I turn the call over to Bret, I want to comment on an investment in the community that I'm particularly proud of. In partnership with the Chicago FHLB this fall, we distributed more than $100,000 to nonprofit organizations in the Springfield, Illinois community, working to address socioeconomic and racial education equity gaps that have been compounded by the pandemic. These solutions include community remote learning sites for children whose parents are working during the day, additional learning opportunities for students who are falling behind and assistance with basic needs for families such as food and housing assistance. At Horace Mann, we believe every student should have the opportunity to reach their full potential. And we're proud to support organizations that are working to make that possible. To summarize, we expect 2020 to be one of our strongest years in our 75-year history. We continue to be successful through economic cycles and changing political climates because we always remain keenly focused on our customers. Over the years, we have evolved our products, distribution and infrastructure with the times to best meet their needs. These times bring new and different challenges for educators, and we're ready to help solve them. Thank you. And with that, I'll turn the call over to Bret.

Thank you, Marita, and good morning, everyone. As Marita mentioned, Horace Mann had another strong quarter. Our core EPS for the third quarter increased by nearly 30% compared to last year, even with $35 million in catastrophe losses. For the first nine months, core EPS rose nearly 60% to $2.27. In light of these strong results, we have raised our full-year EPS guidance for the second time this year to between $2.95 and $3.15. We expect earnings growth for 2020 to be around 40%, with a return on equity likely exceeding 9%. This solid core performance has been supported by changes related to the pandemic in our subrogation recovery efforts. We remain dedicated to achieving a sustainable double-digit return on equity, fueled by significant growth in our education market share. Over recent years, we've worked on our product offerings, distribution channels, and infrastructure to develop a diversified business poised for growth. Marita explained how we’re using our transformative actions to find ways to maximize our market share expansion in the future. Our primary goal continues to be reaching more educators with solutions that assist them in achieving their financial goals. Returning to the quarter, we were very pleased with our overall results, particularly in Property and Casualty, where core earnings increased due to higher net investment income. Although higher catastrophe losses affected the segment, there were improvements in auto and property performance as well as benefits from the PG&E subrogation recovery. The Supplemental segment also contributed significantly to our earnings. New sales are still facing challenges, but profitability remains strong, partly due to pandemic-related changes in policyholder behavior. Annuity contract deposits increased again in the Retirement segment as our educator customers continue to seek ways to secure their financial future. Our managed investment portfolio has remained stable despite this year's economic fluctuations. Favorable adjustments in the alternatives portfolio during the third quarter chiefly benefited the Property and Casualty segment. Now, let's look at the results in detail. For the Property and Casualty segment, core earnings increased by 11% due to a 28% rise in segment net investment income. Premiums decreased by about 5%, mainly because lower new business more than offset the reinstatement premiums from the PG&E subrogation recovery. As we discussed last quarter, PG&E's successful emergence from bankruptcy on July 1 enabled us to recover a significant amount of the losses our policyholders suffered from the 2018 California wildfires, primarily the Camp Fire. The third quarter results include favorable reserve developments from prior years totaling $5.2 million before tax and net of reinsurance from our share of recovered losses, along with a $3.5 million recovery of reinstatement premiums, amounting to a total benefit of $8.7 million. This recovery helped keep the combined ratio relatively flat, even with the fact that catastrophe losses added 12.3 points more to this year's third-quarter ratio compared to last year's. Other positive factors included a 9.9 point improvement in the underlying auto loss ratio, where loss frequency remains below 2019 levels due to shifts in driving patterns nationally, though it has gotten closer to 2019 levels since spring. During the quarter, lower loss frequency accounted for approximately $11 million in reduced losses. Additionally, the underlying auto loss ratio reflects the long-term advantages of the progress made in recent years to enhance our pricing segmentation and improve profitability. There was also a 4.8 point improvement in the underlying property loss ratio. The return of reinstatement premiums significantly impacted property results. Underlying results improved due to fewer, but less severe non-catastrophe fire losses compared to last year's third quarter. Our analysis indicates this reflects normal variations in loss patterns with no geographical, agent, or cause concentration. Furthermore, underwriting results benefited from $1 million in favorable reserve releases from both the auto and property books, in addition to the subrogation recovery. We remain well within the upper half of the independent actuaries' range for total property casualty. Additionally, we experienced a 1.2 point reduction in the expense ratio, thanks to last year's expense reduction initiatives and decreased pandemic-related spending. The ongoing progress in the Property and Casualty segment supports our strong outlook for full-year earnings in the range of $70 million to $75 million. Looking forward, we expect total mileage to remain close to 2019 levels, which it recently approached again by late summer. However, industry insights and our proprietary data about driving patterns from our telematics app, HMDrive, suggest changes in driving behaviors due to the pandemic. For instance, there has been increased long-distance driving and reduced concentration during school travel hours. These shifts have kept frequency low enough to counterbalance some upticks in severity. Consequently, we anticipate an underlying auto loss ratio that is slightly below pre-pandemic levels for the fourth quarter. That said, as we noted in September, our full-year guidance now factors in an anticipated 13 to 14 point impact from catastrophe losses on the combined ratio, translating to about $85 million to $90 million. Through the first nine months, total catastrophe losses amounted to $78.3 million. Excluding the Camp Fire in 2018, fourth-quarter catastrophe losses have averaged nearly $7 million over the last five years. Our policyholder retention has remained strong, and new business is gradually rebounding. However, given the current market conditions, we expect rates to remain stable, leading to net written premiums for 2020 being lower than in 2019, even before considering the $10 million impact of premium credits recognized in the second quarter. In the Supplemental segment, this quarter saw an addition of $32.5 million in premiums. The segment's core earnings reached $10.6 million, reflecting favorable reserve trends and some short-term advantages from changes in policyholder behavior related to COVID-19. Net investment income in the Supplemental portfolio reflects our ongoing improvement in yields. Sales in this segment reached $1.4 million in the third quarter. Historically, Supplemental products have been sold through worksite enrollments, and we anticipate sales will begin to normalize over the upcoming quarters. Premium persistency has remained stable at around 90%, with over 290,000 policies in force. As we have stated, retention in this market segment is relatively stable. The segment margin has also benefited from shifts in policyholder behavior, leading us to elevate our full-year core earnings outlook for Supplemental to between $37 million and $39 million, up from the previous forecast of $31 million to $33 million. This adjustment contributes significantly to our increased EPS guidance and highlights the diversification benefits it offers. In the Life segment, sales were lower than those in last year's third quarter, although the policy count is stable relative to pre-pandemic figures. We experienced fewer sales of complex products like Indexed Universal Life and larger single premium policies, which require more customer interaction, but we saw increased applications for recurring term and whole-life policies. These offerings enable us to connect with more educator customers. Core earnings reflected mortality trends that align with our expectations. We still project the segment will generate $10 million to $12 million in earnings excluding DAC for 2020. The volume of claims associated with COVID-19 remains low, with average face values around 40,000. Regarding the Retirement segment, we now have comparable year-over-year data for this quarter following last year's reinsurance transaction. This agreement mitigated the interest rate risks of a legacy block of individual annuities with a minimum crediting rate of 4.5%. The results this quarter clearly emphasize the significance of this strategic decision. Segment core earnings, excluding DAC unlocking, increased by $1.4 million over the previous year's third quarter. The net interest margin on retained business held steady at $19.4 million, and operating expenses saw a decrease of $1.6 million, thanks to expense initiatives from the previous year and savings resulting from the pandemic. We continue to anticipate core earnings for 2020 to fall within the range of $22 million to $24 million. The Retirement segment continues to grow, as our solutions for enhancing retirement savings remain a crucial need for educators. Annuity contract deposits rose approximately 7% this quarter and remain an essential component of our product offerings. In terms of investments, total net investment income increased slightly year-over-year and rose by over $13 million from the second quarter, reflecting the market recovery and improved valuations in our alternatives portfolio that usually reports a quarter later. We noticed positive valuation changes across various fund types, such as private equity, infrastructure, and structured security funds. We remain confident in the long-term returns from these investments and anticipate alternative investment income of $5 million to $10 million for the full year, below our longer-term expectations for this asset class. Furthermore, our core fixed maturity portfolio is well-positioned to endure near-term market volatility stemming from the COVID-19 economic downturn. The core portfolio's yield was 4.18% in the third quarter, down from 4.62% a year earlier. The addition of the supplemental portfolio last July continues to reduce the consolidated core portfolio yield, but we are making solid strides in enhancing the supplemental yield. Throughout the third quarter, we prioritized purchasing high-quality municipals, corporate, and government agency securities. The core new money rate was about 3.25% during the quarter, and based on current market conditions, we expect to maintain purchases near this level for the rest of the year. Net realized investment gains of $2.5 million in the third quarter included $1.1 million in impairment losses, along with mark-to-market gains of $2.3 million on equity securities. We continue to expect total net investment income for 2020 will fall between $340 million and $345 million, including the accreted investment income on the deposit asset from reinsurance. This amount is based on an actuarial calculation that should remain unaffected by market volatility or prevailing interest rates in the short term. Our projections for investment income align with the segment-by-segment outlook detailed in our investment presentation and the newly revised core EPS guidance range of $2.95 to $3.15. Our robust financial results, paired with our prudent capital management practices, ensure that we will be ready to pursue value-accretive uses of excess capital when the timing is appropriate. Our priorities include: first, growing our business at returns that meet or exceed our ROE targets, second, returning a significant portion of annual earnings to shareholders through an appealing dividend, and third, opportunistically repurchasing shares when market conditions permit. In conclusion, we continue to experience the positive effects of our transformational actions and profitability initiatives, particularly the Supplemental segment addition and the annuity reinsurance transaction in our Retirement segment. As Marita highlighted, we see three key factors for achieving sustained double-digit ROE moving forward: first, sales growth, second, optimization of our business and maintaining expense discipline, and third, ongoing expansion of our alternative investment portfolio to enhance yield in a consistently low-interest-rate environment. We believe we are on the right path with all three, despite the challenges presented by this unique environment, and we are looking forward to what lies ahead. Thank you. Now I'll hand it back to Heather.

Thank you, Bret. Operator, I think we're ready for questions.

Our first question comes from John Barnidge of Piper Sandler.

I wanted to go back a little bit to your comment on the call about expenses that might not return ever. Can you expand on that? And have you identified an amount?

John, this is Bret. I think the comment is actually the fact that, obviously, we've been able to reduce our, specifically, travel budgets substantially in the current year. But obviously, you've participated in investor calls where we've done the Zoom calls quite effectively with yourself and investors. I think that's just one example as we look to next year. There are probably going to be some combination of Zoom and travel-related expenses. I mean, we're in the midst of putting together our preliminary 2021 plan. But we would anticipate not returning back to the same levels that we started out the year. So I don't think that's going to be unique to Horace Mann. All companies, I think, are revisiting how they are structured and how they're working in this new environment. But we definitely anticipate benefits in our expenses to continue in 2021.

Yes. And John, this is Marita. What I'd like to add is that what's interesting for Horace Mann is that we laid out our plans for improving return on equity, which included a focus on optimization and expense discipline, particularly with the integration of NTA. This aspect involved improving our processes and examining how we can operate more efficiently going forward, including two significant projects in both the P&C and the L&R sectors to enhance our systems. We were able to apply the insights gained from COVID-19 to identify what we can learn and how we can incorporate that into our future optimization efforts. It's a good opportunity to evaluate everything we do and how we approach it, particularly with a fresh perspective on the tools we've implemented to enable virtualization and reduce our reliance on physical presence. We're seeking those silver linings to incorporate into a more efficient process moving forward. The remark in the script was specifically about travel, as Bret mentioned, and we are discovering that some tasks can be performed efficiently without being there. When we do add physical presence back into this more efficient approach, it enhances the overall outcome.

Okay. And a follow-up. There have been a lot of annuity block transactions in the last months. I know you guys did one about 15 months ago. But given market activity, can you talk about interest in additional transactions and possibly doing 100% flow reinsurance to move it to more of a fee-based business?

Yes. I mean, Bret, I'm sure we'll have a follow-up with the numbers in mind. But I think when we did the transaction that we did, we were thoughtful like we always are, and we probably picked the optimal time for us to do that, and you're seeing that come through in the numbers. I mean, we're smart about these things. We see transactions that have occurred recently, and we look at that and we learn from it. But we feel really good about what we did, when we did it, and we'll continue to look at what's out there. But for us, our company isn't just the mathematical sum of the parts, right? It's a total value proposition for our educator clients. And it's about the economic value of the household. It's about the cross-sell that we do within those households. But most importantly, it's about our total value proposition and that convenience for the educator of one-stop shopping and helping protect what they have today and secure their retirement. I don't know if you have anything to add to that, Bret.

Yes. I would just add that, John, as you recall, to achieve a double-digit ROE in the Retirement segment, we'd need a spread of about 200 bps. And as you probably saw in the investor supplement, when you look at the quarter-by-quarter, we actually achieved 225 bps in the third quarter. So we are actually above the target spreads. So, as Marita said, it's something we would maybe look at in the future, but we've accomplished exactly what we set out to do with that reinsurance transaction that was actually done at a very favorable time for us, and we couldn't be more pleased with that transaction being executed.

Okay. And my last comment is a question. With reduced sales growth this year, how does this influence your approach to capital allocation, specifically regarding share repurchases given the current trading levels of shares?

Yes, John, this is Bret again. I think as I spoke on several earnings calls, our capital management strategy has been and it remains focused on the most accretive uses of capital. As Marita has talked extensively, growth is first on the docket, if you will. We want to grow our core businesses when they're at or above our ROE targets. And I think we've talked about getting all of our lines back to that profitability level. Secondly, providing a compelling dividend, which we've done utilizing basically a payout ratio of 50%. And finally, to your question with opportunistically buying back shares, this is really the first quarter in 2020 that we've actually achieved the 425 RBC levels in all of our segments. So this is the first time where we have roughly about $15 million of excess capital that we could potentially buy back some shares. We haven't decided to do that quite yet. I think we talked last quarter, we were in the midst of the hurricane season and wanted to be prudent with letting any capital go. So we may nibble around the edges here as we get later into the year. But obviously, it's something we look at. We actually ended up at 425 levels in all of our segments, probably a quarter earlier than we otherwise would have anticipated. We were targeting that to happen more towards year-end. So here again, the year continues to achieve earnings above our plans and our revised forecast. So we'll take a peek at that as we go later into the year.

The next question is from Matt Carletti of JMP Securities.

Marita, much of your commentary is centered on achieving double-digit ROE, with sales growth as the top priority. Can you provide insight into the current environment? Specifically, I know we've discussed this in previous quarters, but as we progress further into the pandemic, how do you perceive the tools for success, particularly digital adoption? In the short term, do you believe Horace Mann can effectively drive sales growth in our current environment, or do you think the tools at your disposal are more about mitigating challenges until we return to a more normalized situation for significant growth?

Yes, Matt, the answer to your question is often in the question itself. We've dedicated significant time to unpacking this in our script because it's our primary focus. It's the first pillar of our ROE for a reason. We've positioned ourselves to enhance our business's contribution to ROE through various strategies, including auto profitability and a reinsurance transaction, while also using capital to support higher ROE business and the purchase of NTA. While we didn't anticipate a pandemic, I believe we've navigated the situation very effectively and are leveraging the opportunities it presents. Our legacy Horace Mann agents are using their strong client relationships to cross-sell and engage in retirement conversations, which has resulted in an increase in retirement activities this quarter. For our new agents on the NTA side, while the worksite-based model does pose challenges due to the lack of physical presence, we took this time to enhance training, integration, and complete necessary licensing, enabling those agents to sell in other areas beyond supplemental insurance. Once the pandemic subsides, they'll be well-prepared to hit the ground running. We’ve managed some territorial issues and provided the necessary tools and training for success, establishing a repeatable sales process. A new NTA agent recently achieved significant production, indicating progress. We're learning a great deal through this experience. We’ve fully virtualized our sales process, developed online financial wellness seminars, and are piloting new digital engagement strategies, many of which are proving effective. The key takeaway during this crisis is the accelerated development of our digital and virtual capabilities, which we aim to integrate into our ongoing sales processes. I believe that when physical interactions resume, we’ll see a substantial boost in our operations. Educators still require our offerings, and those opportunities remain. Our complete product set, enriched by NTA, along with the enhancements made to our infrastructure, puts us in a strong position for the post-pandemic environment. I’m optimistic about our progress and growth during these times, which has been improving month-over-month. Just like other industries, we're finding effective strategies that will serve us well both now and in the future. We've effectively utilized this time to strengthen our capabilities, and I’m confident we’ll emerge even stronger when in-person interactions return.

Okay, that's helpful. I have another quick question about the numbers. Can you help us understand the recent quarter's bottom line performance? Specifically, how much of that might be related to the pandemic and how much is part of the core run-rate, if you have those insights?

Sure, Matt. This is Bret. I mean, I'll give you a rough estimate. I mean, obviously, supplemental, just like auto has experienced some favorable results, claims related due to COVID using a rough estimate, probably $1 million to $1.5 million a quarter for the last two. So if you kind of wrapped around the impact to the benefits ratio, probably around 4 points, I think, is a rough estimate that you could use for that. Obviously, Supplemental is receiving some one-time benefits that most likely won't repeat to the extent next year. But I think that would give you a rough estimate to use.

The next question is from Gary Ransom of Dowling & Partners.

You did give us some insight on frequency trends in auto. I was wondering if severity trends, which may have been elevated before, are also showing signs of returning to normal so that the whole package of loss cost is moving in a direction that might look like normal?

Gary, this is Marita. Since Mark Desrochers tracks this on a daily, weekly and monthly basis, I'm going to let him respond to that.

Sure, Gary. Actually, yes, you're right. We talked in the second quarter that we were seeing somewhat elevated severity trends relative to our expectations in the mid- to high single-digit range. And what we've seen in Q3, I would say, is more of a return to our normal kind of expectation of a low to mid-single-digit change in severity. So it's pretty much in line with our normal expectations at this point.

Okay. Regarding the frequency trends, are you still seeing a return to normal in August or September, or is that still changing?

Yes, Gary, it's interesting. We have observed that frequency has been increasing since the lows in the second quarter, but not quite in line with the increase in miles tracked in HMDrive. Mileage is approaching pre-pandemic levels, but the frequency has not returned to those levels and remains lower than what we experienced in 2019. As Bret mentioned, we believe this is mainly due to changes in driving patterns, along with our efforts to enhance the overall profitability of our business. I expect, as Bret noted, that we will continue to see these trends through the end of the year and likely into 2021 until a widely available vaccine is introduced. At that point, we will need to assess the long-term effects on driving behaviors.

And Gary, this is Marita. Thanks, Mark. I just want to add that we included a more detailed ROE slide in the investor presentation on purpose. We aimed to highlight that one of the main factors contributing to the ROE improvement from 2019 to 2020 was our efforts that started in 2017 to enhance the auto loss ratio, improve our pricing segmentation, and increase profitability in that area. This was a key factor in raising core ROE from 7.3% to about 8% to 8.5%. This is clearly shown in the presentation. Currently, we see a ROE of 9.5%, largely due to the frequency benefits in auto. There's a positive trend, even without the frequency benefits related to COVID, showing an increase from 7.3% to 8% to 8.5%. We also have a clear plan for how we can further improve ROE moving forward. Some of this may involve slight ongoing benefits from frequency changes even after the pandemic, as not everyone will revert to their previous habits. They will carry forward some lessons, which could mean more flexible work hours or potential shifts in commuting patterns that we can't fully predict. However, we want to emphasize that the improvement in ROE is evident, even without considering the effects of COVID-19, as we previously outlined.

Just a bigger picture question. You've talked a little bit about what's permanent versus what's temporary on the COVID impact. But I was kind of wondering the impact actually on the teachers themselves and how they're behaving, reacting to your sales. Because their lives have changed and this hybrid approach may be permanent. In my neck of the woods, for example, there's no more snow days as far as I understand it. But has that change affected what the teachers want? What the products they're looking for? The needs they feel are being fulfilled by what you have? Or maybe there's additional needs that you might need to provide in the future?

Yes, Gary, that's a really good question. Reflecting on what we’ve learned in this environment, we are gaining a lot of insights. Given that 80% of our client base and about 80% of NTAs before the acquisition were educators, we possess significant data and understanding of their needs. We spend ample time with them through contact centers and sales personnel, and we are currently learning about changes in their environment. What we’re discovering is that many longstanding aspects remain unchanged. They are still conservative and loyal, as reflected in our strong retention numbers. However, this is a challenging time for them. The increase in Retirement this quarter highlights their conservative nature and indicates whether they opt to spend or save during these times. Our ability to reach them regarding auto or supplemental products is possibly more difficult now, as these might not be their top priority. In contrast, life insurance sales related to PIP count and typical life products for teachers have continued to perform well. The more complicated cases, which typically require longer conversations, are less frequent now. This is something many can relate to; people have less time to do things as they traditionally have. Considering the post-pandemic period, there’s an increased inclination to purchase supplemental products and ensure that out-of-pocket expenses are managed and life insurance needs are met. Overall, we're learning a lot in this environment, reinforcing that our loyal and conservative clients' traits are consistent while also figuring out how to navigate the sales landscape in a hybrid situation.

The next question is from Meyer Shields of KBW.

I wanted to start with a question on P&C reinsurance. I guess factoring in on the negative side, more frequently, adverse weather and on the positive side, the more diversified overall company operations. How are you thinking about reinsurance, how the current reinsurance program worked out and expectations for next year?

Yes, Meyer, this is Bret. I believe we have a strong reinsurance program, and our reinsurers are confident in it as well. The recoveries we received recently are treated as our own, and we were able to return funds to the reinsurers. In the third quarter, we experienced 30 catastrophes, but they were fully covered by us and did not affect the reinsurance limits. Looking ahead, it's likely that the industry will see rate increases, potentially higher than usual as we move into 2021. However, we aim to stand out from the competition. Unlike some others last year, we did not sell our subrogation rights, which is part of our distinct approach. We will evaluate different reinsurance aspects as we do every year, but I am not aware of any major changes we plan to implement. The current program has served us well over the years. While we may face some rate pressure in 2021, we remain committed to differentiating ourselves to achieve better results than our competitors.

Yes. I would like to emphasize that having a year with over 60 catastrophes, with around 30 occurring in the quarter, necessitates a thorough review of our data. It’s important to analyze pricing, especially in the homeowners market, as we experience significant loss activity from these events. We need to consider our approach to underwriting and aggregation management, incorporating a strong, conservative strategy that we've previously discussed. It's crucial to learn from the data and adjust our aggregation management and underwriting processes accordingly. Additionally, we need to evaluate our mitigation strategies through reinsurance. Each year, we assess our aggregate covers to determine their value and effectiveness. Currently, I agree with Bret that our reinsurance program is functioning well, but we must remain focused on pricing, underwriting, and aggregation management. When it comes to underwriting, our approach with wildfire risk has been effective, and we made the right decision during the Camp Fire. Although that event was unique, we are not experiencing significant losses from recent wildfires that follow typical patterns, aside from minor smoke damage claims. We also take into account factors like drought and changing weather patterns in our underwriting, pricing, and aggregation management processes. At our core, we are underwriters, and that’s a key aspect of our business.

Okay, that's very helpful. My second question is about the auto sector. When we examine the pricing environment, it appears to be becoming more competitive. I'm trying to understand how this might affect two key issues as we move into 2021. One is the potential for reduced new business, which would lead to a smaller new business penalty. The other is the possibility of greater opportunities to write business using other insurance companies' policies, which could benefit the expense ratio. Can you provide insight, even if not in specific numbers, about whether either of these factors could have a significant impact?

Yes. There are two main considerations I have in response to your question. First, we are seeing strong results in the automotive sector. However, due to rising catastrophic costs and a prolonged low-interest rate environment, I believe that the overall rate environment will remain relatively stable. On one hand, we have opportunities to actively pursue profitable growth in household acquisition in certain areas. On the other hand, there are some less profitable regions where it makes sense to leverage markets with scale, such as our current collaboration with Progressive. So, to answer your question, yes, we will pursue both strategies. In markets where we have scale, favorable pricing, and the right agents, creating a competitive environment for growth is our focus. Additionally, in areas where we can partner with companies that possess strong scale to help with household acquisition, we are already doing that, and we plan to continue.

Our next question is a follow-up from John Barnidge of Piper Sandler.

AIG is spinning off their Life and Retirement business. And I know they're a big participant in the education market. How do you view them being a stand-alone business change in dynamics in that market?

Yes. I don't think it changes our perspective on the world. I believe it may actually provide us with more opportunities. We concentrate on our core mission, focusing on delivering a comprehensive value proposition for educators. With the addition of Supplemental, we can engage in meaningful discussions that emphasize our commitment: you manage the education of the kids, especially now when things are more complex, and we will handle everything else—your auto, home, life, retirement, and supplemental needs. It's an all-encompassing conversation. We implement an annual policy review process where we address the necessary questions to ensure everything is in order. Through payroll deduction and our optimization efforts, we can streamline the process, making it easy for educators, who, as we know, have limited time to focus on their own needs. Therefore, our attention remains on our own goals, and that's how I would frame this.

This concludes our question-and-answer session. I would like to turn the conference back over to Heather Wietzel for closing remarks. Thank you, everyone, for joining us today. We look forward to talking with you over the coming weeks and months. And don't hesitate to reach out if you have a follow-up. Have a great day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.