Earnings Call Transcript - HMN Q1 2022

Operator, Operator

Good day, and welcome to the Horace Mann Educators first quarter 2022 Investor call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Heather Wietzel, Vice-President of Investor Relations. Please go ahead.

Heather Wietzel, Vice-President of Investor Relations

Thank you and good morning, everyone. Welcome to Horace Mann's discussion of our first-quarter 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 on Supplemental and Group Benefit, Mark Desrochers on Property & Casualty, Mike Weckenbrock on Life & Retirement, and Ryan Greenier on Investments. 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. 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 news release. I'll now turn the call over to Marita.

Marita Zuraitis, President and CEO

Thanks, Heather. And good morning, everyone. Last night we reported first-quarter core earnings of $0.64, a decrease from the prior year. While external events affected our bottom line, we are pleased with the sales momentum we continue to see. In fact, April was the strongest sales month we've had for P&C products since the beginning of the pandemic, and supplemental product sales were double last April. We're also pleased to have Madison National fully onboard and working with us to fulfill our long-term objectives of a sustained double-digit return on equity and a larger education market share. Today, I'll first briefly touch on the quarterly results, which Bret will discuss in more detail later in the call. Then, I'll talk about how our commitment to educators and our stakeholders continues to inform our strategic vision, and I'll summarize the work we are doing to realize our long-term objectives. For the quarter, Life & Retirement and Supplemental and Group Benefit segments had steady performance, and annuity contract deposits were up 6%. Our total net investment income was up 3%, and the current higher interest rate environment bodes well for our portfolio going forward. Our auto combined ratio improved 6.6 points in the first quarter of 2022 over the fourth quarter of 2021. However, in line with the broader industry, our Property & Casualty earnings continue to be affected by inflation, particularly for auto parts and labor costs. The impact of inflation was most pronounced in March, but our early read of April appears more consistent with January and February. Despite the impact on our near-term P&C earnings, we remain confident in the profitability and opportunity for the auto line over the long term. This confidence stems from our auto position pre-pandemic, our strategic pricing choices during the pandemic, and our long-standing approach for customer cross-sell and retention. Simply put, we are focused on offering a fair price for our loyal customers through varied market conditions. We want to keep and cross-sell our auto customers. If you recall, between 2017 and 2019, we undertook an auto pricing and underwriting initiative to improve profitability, which resulted in a seven-point improvement in our underlying auto loss ratio. Throughout the pandemic, we chose not to lower rates under the assumption that auto frequency would return to normal sooner rather than later. As auto loss trends returned to more historic levels over the course of 2021, we began the process of adding rate where needed to address rising severity. With inflation accelerating, we have updated our rate plan and filing schedule to move ahead with higher single-digit to low double-digit rate increases in most states. We will continue to evaluate loss cost trends throughout the year, taking rate and underwriting actions as needed. Minimizing the impact to our educator customers remains a priority. We have equipped our agency force with tools and resources to have conversations with our customers on the current industry environment, allowing our agency more opportunities to quote auto to our educator client base. We do expect the ongoing inflationary pressure on auto loss costs to impact our full-year results. With that said, we now expect our 2022 core EPS to be at the lower end of our $3.45 to $3.65 range. We continue to expect 10% average annual EPS growth and sustained double-digit ROEs in 2023 and beyond. Turning to the long-term outlook under our new divisional structure, we are working in tandem to serve educators, however they receive their insurance and financial solutions. Whether educators are receiving benefits through work, buying solutions from a trusted local advisor, or using our convenient direct channels, Horace Mann can help them achieve lifelong financial success. It's a mission that is especially relevant this week, which is Teacher Appreciation Week. Our employees and agents are offering their heartfelt thanks to the educators who made a difference in their lives and in communities across the country and recognizing the educators who are dedicated to making sure each student is supported and given the opportunity to reach their full potential. A natural extension of this commitment to our educator customers is a desire to have a positive impact on all our stakeholder groups. We do this through the integration of ESG factors into both our day-to-day operations and long-term planning. We recently updated our corporate social responsibility reporting, which includes a commitment to cut our absolute scope one and scope two carbon emissions in half by 2030 and achieve net-zero carbon emissions by 2050. We've already reduced our emissions by about a third since 2019 through initiatives like the installation of a more efficient HVAC system and more than 500 solar panels at our Springfield, Illinois headquarters. We also undertook an updated materiality assessment to ensure our direction remains aligned with the priorities of our stakeholder groups. In late 2021 and early 2022, we solicited feedback on the ESG topics of most importance to investors, employees, agents, customers, and community leaders. What we found was that while issues like business ethics and data security remain top priorities across stakeholder groups, human capital topics such as diversity, equity, and inclusion, and employee development grew in importance since our last stakeholder engagement survey. We will take this stakeholder input into account as we continuously update our long-term ESG plan. It is against this backdrop that we enter the leadership phase of Horace Mann's growth journey. In our foundational phase, we implemented a multiyear strategy that included enhancing our product offerings, strengthening our distribution, and modernizing our infrastructure. In our transformational phase, we added capabilities and scale with our acquisitions and improved our overall profitability through the improvement in our underlying auto loss ratio, and by reinsuring a legacy annuity block. During the pandemic, we virtualized our sales processes and invested in agency support to enable agents to reach educators wherever they were. Our two goals remain unchanged. First, capturing an expanded education market share. There is substantial opportunity within the K-through-12 educator space of 7.5 million individuals. Slide 17 in our investor presentation breaks down how we're thinking about our short- and long-term opportunities here. We consider our retail and voluntary supplemental customers as a natural cross-sell space for us. We have proven effective cross-sell processes in place for this group. With our newest customers in the worksite space, we have the opportunity over the next several years to test and learn how to cross-sell individual insurance and financial services products to educators reached through employer-sponsored products. Looking through a wider lens beyond Horace Mann customers, we have relationships with roughly 1 million educator households. This includes participants in our Student Loan Solutions program, which helps educators take advantage of the Federal Public Service Loan Forgiveness program. Broader still, we have engaged with far more educators through financial wellness workshops, social media, previous quotes, and more. With nearly 80 years of history in the educator space, we know a lot about our nation's educators, but we have yet to fully understand the buying propensities and preferences of those 7.5 million individual educators, as well as the districts that employ them. We're currently undertaking even more in-depth research into the education market to better understand educator demographics around financial service needs, further refine sales processes, and maximize cross-sell opportunities. Second, we remain committed to accelerating shareholder value through a sustained double-digit return on equity. This year and beyond, we expect to generate $50 million in excess capital annually. While our first priority for excess capital remains supporting profitable growth, which further drives shareholder value, we continue to return capital to shareholders through dividend increases and share repurchases. In March, our Board of Directors approved a 3% increase in the annual dividend. This is the 14th consecutive year we've increased the dividend. In closing, we're excited about the future as one company supporting educators in achieving lifelong financial success through both individual insurance and financial solutions and employer-sponsored group coverages. Thank you. And with that, I'll turn the call over to Bret.

Bret Conklin, Executive Vice President and CFO

Thanks Marita, and good morning everyone. As Marita noted, Horace Mann reported core EPS of $0.64 below last year because of inflation and other factors affecting P&C results. The value of the revenue in earnings diversification we've accomplished in recent years was demonstrated with steady results in both our Life & Retirement and Supplemental and Group Benefits segments. The results of newly acquired Madison National are included in the worksite Supplemental and Group Benefits segment. And as Marita said, this business is performing within management's expectation. One technical note, starting this quarter, we've added adjusted Core earnings, intangible book value to our materials along with related ROE calculations. We're defining adjusted as Core earnings excluding DAC unlocking and amortization of intangible assets, both non-cash items. We believe these metrics are useful when evaluating our capacity for capital generation. Also, I will touch on our full-year EPS guidance later in my remarks. But first, let me run briefly through the results and outlook considerations for each segment. As expected, P&C net written premiums were slightly below last year's first quarter. The benefit of stronger retention is being somewhat offset by new business volumes that remained below historical levels due to the lingering effects of the pandemic on sales. Segment earnings reflected a year-over-year decline in underwriting income, as well as lower first-quarter net investment income due to the performance of the limited partnership funds allocated to this segment's portfolio. Looking at auto and property results separately, the change in the auto loss ratio primarily reflected the anticipated increase in frequency toward pre-pandemic levels. Over the past year, miles driven has steadily moved closer to pre-pandemic levels, and the impact of that change comes as no surprise. Similar to others in the industry, we're also seeing higher auto loss severity due to inflation, which was the other factor in the increase in the auto loss ratio. As we've said, Horace Mann is well prepared to leverage the disruptions underway in the auto market, and we believe the three-point improvement in auto retention since last year's first quarter is one sign that we're on the right track. As Marita noted, we had achieved our targeted auto profitability prior to the pandemic and did not respond to its early stages with rate decreases to gain market share, a strategy used by direct marketers. Instead, we remain committed to our long-term strategic approach of providing our policyholders with a fair price over the life of their policy. Further, auto average premiums are level with last year, and pandemic-related mileage changes have stabilized. With inflationary pressures raising costs associated with claims, our auto rate plan now includes rate increases in the high single to low double-digit range in states representing almost 80% of our premiums. For property, the first quarter underlying loss ratio was strong at 52.3%, although higher than last year's first quarter due to elevated fire losses. There was no pattern or trend to report. And as noted in the past, this line can be lumpy on a quarterly basis. The increase in the underlying loss ratio was partially offset by cap losses below last year's level, with the property combined ratio at 92.3%. Household retention has risen 2.1 points for property, even as average premiums have risen 5% due to inflation adjustment to cover values made in recent months. We expect renewal pricing increases should move closer to high single digits over the course of the year. Briefly on the P&C segment outlook, as we look to the remainder of 2022, we will be continuing to file and implement our rate plan for auto and monitor coverage values in rate needs and property. We expect to see those actions influencing underwriting profitability over the course of the year. In the combined life and retirement segment, core earnings were up 3.5% with total benefits and expenses unchanged. Adjusted core earnings, which exclude DAC unlocking, were up 26.1%. Both the retirement and life businesses continued to perform in line with the trends we saw during 2021. Retirement net annuity contract deposits rose 5.9% over last year's first quarter with total cash value persistency strong at 94.3%. We continue to see how our solutions for augmenting retirement savings remain a coordinate for educators and how retirement products are an important entree into districts in this environment. The net interest spread was 286 basis points, up from a year ago, reflecting strong investment returns. The spread on our fixed annuity business is comfortably above our threshold to achieve a double-digit ROE in this business. We had another quarter of progress with Retirement Advantage where contracts in force increased to about 16,000. Retirement Advantage is the fee-based mutual fund platform that we believe creates long-term potential for this business segment. Life sales continued at a steady pace, albeit slightly below a year ago, and persistency remains consistent. Mortality costs were below last year's first quarter. Our outlook for the L&R segment continues to anticipate higher net investment income with the spread remaining near the 2021 level, and mortality consistent with actuarial expectations. Now, let me turn to the new supplemental and group benefit segment. This segment combines the results from the supplemental segment we created when we acquired NTA in 2019 with the results for Madison National. Madison National's results were added effective January 1 of this year, which makes some of the comparisons to 2021 performance less meaningful. For the full segment, first-quarter premiums and contract charges earned were $69.9 million, of which the new employer-sponsored products represented $39.8 million. Total sales for the segment were $3.7 million. Sales of voluntary products were $1.4 million in the first quarter, a 40% increase over the prior year, with persistency remaining very strong at 92.1%. Sales of employer-sponsored products added another $2.3 million in line with our expectation for Madison National's first quarter as part of Horace Mann. Amortization of intangible assets under purchase accounting reduced core earnings by $3.9 million pre-tax, versus $2.9 million pre-tax in the first quarter of 2021. Therefore, core earnings were down slightly, with adjusted core earnings up 4.4%. Net investment income for this segment reflected the addition of the Madison National portfolio effective January 1. We expect to see investment yield improve for this segment over the remainder of this year and into 2023 as we optimize that portfolio. The pre-tax profit margin declined because of the addition of the newly acquired employer-sponsored products, which are expected to generate a lower margin than voluntary products. In the first quarter, total benefits also reflected normal seasonality for the employer-sponsored products. The benefit ratio for the voluntary products continues to reflect some benefit of changes in policyholder behavior due to the pandemic. Our full-year outlook for the Supplemental and Group Benefits segment assumes claims utilization will move closer to pre-pandemic levels, leading to full-year benefit ratios of about 35% for voluntary products and about 50% for employer-paid products. Amortization of intangible assets is expected to be approximately $13 million, or $0.30 per share after-tax for the year. Turning to Investments, total net investment income on the managed portfolio was up almost 3% to $73 million, with total net investment income up 2.5%. The increase in net investment income on the managed portfolio was partially due to a higher contribution from our commercial mortgage loans fund portfolio. The return on our limited partnership portfolio of 7.69% was below the record-setting returns we saw last year but still a strong return given market volatility. The traditional fixed-income portfolio had a yield of 4.26% in the first quarter compared with 4.16% a year ago. With the increase in interest rates, we continue to find good opportunities to add high-quality corporate exposure into the portfolio at rates north of 4%. The core new money rate was 4.04% in the first quarter, and based on current market conditions, we continue to anticipate it will remain above 4% for the year in light of the current outlook for interest rate increases. Our allocation to commercial mortgage loans and limited partnership funds are expected to generate a higher income contribution than could be generated through traditional fixed-income investments in today's markets without any meaningful shift in the risk profile of the overall portfolio. Overall, we expect these strategies will combine to generate high single-digit annual returns on average over time. As we look to the full year, we continue to expect net investment income from the managed portfolio will be in line with 2021 with the underlying assumption that limited partnership portfolio returns are closer to our historical average for the full year after last year's outperformance. And that's a good segue to our expectation that 2022 core EPS is more likely to be at the lower end of the guidance range of $3.45 to $3.65 we provided when we announced year-end 2021 results. This view is largely due to the impact of inflation on our near-term auto results, although it's also influenced by the potential impact of market volatility on DAC unlocking. A long-term view of our potential remains fundamentally unchanged. We continue to target 10% average annual EPS growth and sustained double-digit ROE, driven by our profitable growth beginning in 2023. Every day, we see the value of the strategies we have been implementing for a number of years to make Horace Mann an even stronger and more diverse organization, better able to serve educators while also providing solid returns to shareholders. Further, we continue to see Horace Mann generating at least $50 million in excess capital each year, and that's in addition to the more than $50 million we already pay in cash dividends. Beyond supporting growth opportunities, we have several ways we can use capital to enhance shareholder value, in particular, opportunistic share repurchases. Thank you. And with that, I'll turn it back to Heather.

Heather Wietzel, Vice-President of Investor Relations

Thank you. Operator, we're ready for questions.

Operator, Operator

We will now begin the question-and-answer session. At this time, we will pause momentarily to assemble our roster. And our first question will come from Gary Ransom with Dowling & Partners. Please go ahead.

Gary Ransom, Analyst

Good morning. I wanted to ask about the loss trends a little bit more. I wonder if you could just give us a sense of the typical type of car the educators own, are they new cars with lots of technology where chip shortages are involved, are they older cars? I don't know. I just wondered if you can give us a sense of how your mix might be different in any way from others.

Marita Zuraitis, President and CEO

Probably it makes sense, Gary, for me to turn it over to our resident expert. Mark, do you want to take that?

Mark Desrochers, Analyst

Sure. Gary. Our book is probably typically a little bit older than the average for the fleet across the country in general. So not anything significant in terms of the impact of high-priced cars or anything like that or lots of newer cars. But I still think that we're certainly not immune from some of the trends in terms of overall used car pricing, labor shortage issues, and any issues around products being available. That has a broad impact, even if our fleet is slightly older than the countrywide fleet.

Gary Ransom, Analyst

Can you clarify what you were talking about when you said March was a little bit higher and then January, February, and April were more similar? What was the difference there?

Mark Desrochers, Analyst

In March, we noticed an unexpected increase in severe accidents, likely influenced by inflation raising severity. Additionally, we observed more significant losses connected to longer trips, which we believe were related to people traveling during spring break. Our initial assessment of April suggests that the situation in March was unusual, as April appears to align more closely with our expectations.

Gary Ransom, Analyst

All right. Okay. And then over on the liability side, is there anything going on in the social inflation that's evident to you or attorney rep or anything like that?

Mark Desrochers, Analyst

Yes. I do think we are seeing more increased social inflation as courts open up. There's definitely been an uptake in both attorney representation and I think the aggressiveness of some of those attorneys in terms of going after settlements. So I think that we, like the rest of the industry, are starting to see some of that return to what we might have seen at the latter end of time just before the pandemic kicked in.

Gary Ransom, Analyst

And just one other question on this topic. When looking at used cars, you experienced a couple of sharp increases in the summer and fall of last year, and now things have stabilized. Are you actually noticing a stabilization in the sense of sequential data, even though it is significantly higher year-over-year? Is it accurate to say that things are leveling out at this point?

Mark Desrochers, Analyst

Yes, I mean, we are starting to see a little bit of that flattening out, I think like others are seeing, but I think there was another period of time maybe in the fall where we saw that for a short period, and then it spiked again. So I am cautiously optimistic that we'll continue to see it level out and start to normalize a little bit. But yeah, we're certainly seeing those same trends.

Gary Ransom, Analyst

All right. Thank you. And I would like to ask a different subject for Marita. You mentioned in your prepared remarks about studying what the educator market is doing, how they're thinking, and how to cross-sell. Have you learned anything or is there any way you can describe how your customer views the Horace Mann brand in any dimension across products or the dimension across service? If you could share anything that would be helpful in understanding what's going on out there?

Marita Zuraitis, President and CEO

I appreciate your thoughtful questions about auto and strategy. Regarding the auto strategy, I want to reiterate that we've established a solid foundation for profitability in our auto segment, which is yielding positive results. We will continue to respond to market trends as we have been and maintain strong performance in this area. I also value Mark's insights and expertise, which benefit our company greatly. In terms of strategy, our investor deck on Page 17 provides some insights. It's noteworthy that we closed on Madison National this quarter, indicating our strength. Similar to NTA, which served mainly educators, MNL also targets a largely educational demographic. We have gained significant knowledge even before this acquisition. We're identifying cross-selling opportunities among our retail and individual supplemental products, and we're beginning to see positive sales momentum as the market opens up. Although it's still challenging, we're encouraged by the signs we're observing. We're leveraging relationships across different segments and mapping out how we can strengthen these connections in our Educators segment. Furthermore, we've invested time building brand affinity with superintendents and business officials who recognize Horace Mann, especially through initiatives like DonorsChoose that support schools. Our focus remains on helping educators throughout their careers and into retirement, which has strengthened our reputation and allowed us to address more needs in the market. Page 8 outlines the stages of our journey. We have shared our intentions during the fixed and build phase, emphasizing the importance of product development and distribution strengthening. In the transformational stage, we added capabilities and built scale, and now in the growth phase, we plan to be transparent about our progress and the factors driving our success. While this is a lengthy response, our commitment to learning and executing on these strategies remains strong.

Gary Ransom, Analyst

That was terrific. I appreciate it, Marita. Thank you very much.

Marita Zuraitis, President and CEO

You're welcome.

Operator, Operator

Our next question will come from Matt Carletti with JMP. Please go ahead.

Matt Carletti, Analyst

Hey, good morning. I wanted to follow up on the last question, which was what I was going to ask as well. I should explore this further. Looking at Page 22 of your slide deck, it's evident that there's significant overlap between Madison National's coverage area and Horace Mann's core P&C Life & Retirement businesses at the state level. If we examine the darker blue states at the school district level, is there a substantial overlap there, or does Madison National cover districts that Horace Mann doesn't have much access to? I'm trying to understand how much overlap currently exists compared to potential opportunities based on your brand affinity and name recognition that could help open doors for you.

Marita Zuraitis, President and CEO

We can definitely provide additional information as we progress, as this transaction occurred during the quarter and we're giving you an initial insight. Overall, we have a strong presence in several states, supported by long-standing relationships with agencies, particularly in Property & Casualty and Life & Retirement. In those states, we have partnerships with both MNL and NTA that are evident. There are other areas where, historically, Horace Mann did not have a strong presence, but NTA or Madison National does. This gives us the ability to focus on regions where we have robust relationships and maximize our cross-selling opportunities. We also have the advantage of entering new areas, either starting with an NTA relationship or establishing a new relationship with M&L, even where we previously did not have ties with Horace Mann or NTA. The key is integrating all these elements to enhance our position in the educator market. It's about exploring various strategies and leveraging our strengths. Matt has been instrumental in the integration process of NTA and M&L, and I would like to give him a chance to add any insights he might have on this topic.

Bret Conklin, Executive Vice President and CFO

Yes, thanks for the opportunity to clarify. On Page 22, the maps depict two distinct distribution models. The left side illustrates the worksite model that sells to individuals from the ground up, while the right side showcases the top-down sales approach using independent benefit consultants who engage with the districts. Even if they don't align perfectly, these two strategies are different and can coexist. The focus is on integrating these sales models to enhance our ability to sell in person through the sales environment and increase the number of employer-sponsored districts, which in turn broadens access for our retail side across all traditional products.

Matt Carletti, Analyst

Thank you for the information. My next question is not specifically about Madison National Life, but Marita, in your press release and comments, you shared some encouraging statistics regarding production in April for several businesses. Can you give us an overview of the production trends in January, February, and March throughout the quarter? I'm trying to determine if production gradually increased over the quarter or if April showed a significant boost while the other months were more in line with the Q1 average.

Marita Zuraitis, President and CEO

Yeah. It's really been pretty gradual, and pretty sequential until April. So basically, the way I think about it is if you remember our pre-pandemic numbers, that first quarter of the ROE running together in 2019 or 2020. Okay. Yes. Too many years. But the first quarter of 2020, we saw some pretty good momentum in that first quarter from a growth perspective. And then through the pandemic, obviously, with the ebbs and flows of closures and masks and distraction in our teacher market, it was a tough slog from a sales perspective. I think we navigated it quite well and concentrated on what we could concentrate on, getting ready, ramping up, doing a lot of the internal work that we certainly did. And over the course of the last 5-6 months, really seeing a nice gradual uptick, pretty sequential across the board. And then when we look at April, it looks very different. And that makes some sense; you had variance in certain things occurring during the first quarter that made it sometimes a little more difficult as things were opening and closing, but clearly in April, the world changed a bit, and I think our agents clearly combined what they learned during the pandemic and want to keep that going from an ease of dealing with customers in a more virtual way, but also had the added benefit of being a little more connected live and in-person with those educators. And we saw that in April; I think as it relates to individual supplemental sales where those things tend to be more in-person, more enrollment related, more getting back to the additive effect of doing those things the way they're normally done pretty much across the industry. We saw a really nice ramp up with individual supplemental sales in April as well. And from a retirement standpoint, where our customers have been engaged in retirement discussions for obvious reasons throughout the pandemic, that was really more consistent throughout the pandemic. And we're happy to see that it's continuing because we took the opportunity to remind them how important it is and did a lot of work around retirement planning, financial literacy, and I think Mike and his team did a really good job doubling down and making sure we were having those conversations and that momentum continues.

Matt Carletti, Analyst

Thank you very much for the answers; it's very helpful.

Marita Zuraitis, President and CEO

Thank you.

Operator, Operator

Our next question will come from Greg Peters with Raymond James. Please go ahead.

Greg Peters, Analyst

Good morning, everyone. Most of my questions have been addressed, so I'd like to focus on your comments regarding market volatility in your segment outlook. My inquiry has two parts. I understand this may not apply to all products in the Life & Retirement Supplemental group, but I'm interested in how market volatility affects sales, if at all. The second part of my question is whether you can share any benchmarks regarding the implications of volatility on DAC unlocking now that Madison National is part of your operations, especially given the increased volatility in the marketplace. Any insights you can provide would be appreciated.

Bret Conklin, Executive Vice President and CFO

Sure, Greg. This is Bret. Good question. Certainly, we did see some of the volatility that we're referring to show up in the first quarter. We did record about just a little bit over $2.5 million of negative DAC unlocking. Obviously, that is confined, if you will, to our Life & Retirement segment, which has now combined for the first time in this quarter. But specifically, it relates to our variable annuities and the largest factor, if you will, that comes into full is usually the market performance, which is you're comparing the actual performance of the underlying mutual funds to our underlying assumption in the profits. Obviously, the markets were down, specifically the S&P 500 I believe was down about 5% plus in the first quarter. Obviously, we would assume it's embedded in our critical accounting estimates in our Q or Ks, where we would typically assume an 8% return. So the delta between the two for the quarter resulted in that negative unlocking. Obviously, the equity markets continue to go down in the month of April, so we're just signaling that as the markets go down, we will have some additional negative unlocking to record. So that it really doesn't relate to sales per se with respect to that. But obviously, rates going up as they have done help us with respect to the investment yields on the portfolio. And certainly, we're seeing, as we highlighted in my comments for the quarter, what our new money rate was. It was hovering above our plan of 350. I think the actual results for the quarter were just slightly above 4%, and the money we're putting to work in April and May are even higher than that. So that doesn't bode well for net investment income. But really my comment and the talking points of the volatility and it was in the release was solely related to the DAC unlocking in the Life & Retirement segment.

Marita Zuraitis, President and CEO

You know, Bret, that's well said. I'd add one thing to that and that is, we're an educator company. And the complexity is we have a P&C segment, we have a Life & Retirement segment, and we have a Supplemental and Group Benefits segment. And the complicating factor in there is, on any given quarter, whether it's DAC unlocking, whether it's auto trends, whether it's catastrophes, whatever it is, there could be something that would affect one of those individual pieces that you are right to ask about, we are right to talk about, but the value of this company is the sum of its parts. And what I look at it is, I look at the trajectory of our increased shareholder return, our total return over a long period of time and the ability to really build and grow this company over a long period of time and not the quarter-over-quarter discussions on some of the smaller pieces. I like the way that line looks. I like the earnings power that we've built in this company we're building it for the long haul. But on any given quarter, because we have the sum of the parts, there will be a piece that you will ask about, and we will talk about. Those pieces are important, we need to manage them, and we do, but we are focused on growing our market share in this segment and doing it profitably for the long haul.

Greg Peters, Analyst

Your messages make sense, Marita, but I wanted to clarify something. In your answer, I believe you mentioned a 5% decline in the market and a two-and-a-half million dollar DAC. I understand this is a non-cash issue, but is that a good benchmark to use in terms of ratios?

Bret Conklin, Executive Vice President and CFO

No, I think there's a misunderstanding. As I mentioned earlier, I don't have the specific document in front of me, but in our 10-K, I believe that for every 100 basis points difference between our underlying assumption and the actual results, it translates to approximately $300,000 to $400,000 pretax. So if we're assuming 8% for the year, that means we're expecting a positive 2%, while the markets experienced a negative five, which multiplied by 400 gives you a figure between 300 and 400 that totals around $2.5 million. I hope that clarifies things, but we do include this information in our critical accounting estimates, along with the sensitivities related to our major assumptions.

Greg Peters, Analyst

Makes complete sense. Thank you for the answer.

Operator, Operator

Our next question will come from John Barnidge with Piper Sandler. Please go ahead.

John Barnidge, Analyst

Thank you very much. Can you maybe talk about your floating rate portfolio, whether it repriced completely in 1Q’22 and the upside we should be expecting perceptively from that? Thank you.

Ryan Greenier, Investments

Sure, John, this is Ryan. Thanks for the question. I'll start by saying that our core fixed income portfolio is primarily fixed rate, which aligns with our liability-driven investment strategy focused on book yield. A rising rate environment certainly benefits us as we invest about a billion dollars annually. Bret mentioned the new money yields, and to elaborate, we're currently investing at about 50 basis points higher than our existing portfolio yields, aiming for yields of around 450 to 475. I'm optimistic about that. We've invested approximately a billion dollars in the fixed income portfolio. Regarding your question about floating rates, we have a commercial mortgage loan portfolio that is almost entirely floating rate, dependent on when the loans were originated. This will provide an income boost as rates increase. Our long-term goal for that portfolio is 10% of the total, roughly $600 million to $700 million. Currently, we've funded $430 million and expect a mid-single digit return, which we believe can be adjusted to about 6% due to repricing in rates. Lastly, we also manage an FHLB spread lending program where we take fixed, mostly floating-rate advances and invest in high-quality CLO floating rate securities, maintaining a floating-to-floating setup. Thus, the opportunity here primarily revolves around the spread. Though the floating rate part of this portfolio is significant, its returns are mostly spread-based. Specifically, the commercial mortgage loan exposures will show improvement. Additionally, this CML portfolio is part of our Life and Retirement and Supplemental and Group Benefits segments. We've discussed our investment strategy regarding the deployment of limited partnership and commercial mortgage loan investments, emphasizing capital efficiency. From a statutory RBC charge perspective, it's more efficient to include them in the Life and Retirement and Supplemental and Group Benefits. However, the P&C limited partnership exposure tends to be more sensitive to equity movements, leading to higher volatility in the P&C net investment income during times of equity market fluctuations, which was evident this quarter. I wanted to clarify that point for you.

John Barnidge, Analyst

Thanks, Ryan. I appreciate that. My follow-up question is, I'm looking at slide 14, the supplemental, I'm talking about the supplemental and group benefits voluntary products. I see the benefit ratio actually declined year-over-year, and so I was curious if you could talk maybe about the claims utilization trends in the quarter, and whether we should think of that product having it normalized exiting the quarter. Thank you very much.

Marita Zuraitis, President and CEO

I can start with that, and then I can turn it over to Matt. But I think it's important to remember what we told you about the difference between those two businesses and how they run from a benefits ratio perspective. So as it relates to both NTA and M&L, it is different. The M&L benefits ratio does tend to run higher and we've shared those numbers with you. So when you look at the division on a blended basis, you'll see that blended number, but we have provided a lot of disclosure before the deal closed in the first quarter and certainly as we go on those benefit ratios just for us and the industry are different for the group business. It is higher than the individual business. But I don't know if you have any more color to put on that, Matt.

Mark Desrochers, Analyst

Yeah. Somehow I have to. If you look at the benefits ratio, I'll talk about it from both perspectives, both the individual product and the group perspective.

Bret Conklin, Executive Vice President and CFO

In the individual product, we experienced a slight increase in benefit payments for short-term disability, largely due to seasonality, similar to trends seen in the group business. There may also be some deferred procedures contributing to the rise we observed this quarter, which led to increased usage of the individual short-term PDI block. This was predictable given the potential for deferred procedures. On the group side, long-term disability claims were somewhat higher, but this aligns with the historical seasonality we've noted. Some fluctuations in that number can be attributed to P gap and possibly to a backlog of claims. Overall, it is performing as we anticipated. I'm not sure if you have any follow-up to that, John, or if that addressed your question.

John Barnidge, Analyst

No, that was helpful. My follow-up really is persistency in the voluntary products improved 60 basis points year-over-year. And I know persistency in the voluntary business is something not you but other participants have actually seen pressured as the labor market has become more competitive and people have lapsed. So can you maybe touch there on the improvement and persistency year-over-year, which is great to see.

Mark Desrochers, Analyst

Yes. So the persistency on the individual products, you're correct; it continues to improve. I don't know that I have an exact explanation for why the persistency is continuing to perform other than we see a similar persistency trend in the group business, and I think it is unique to the segment that we serve. We've got very strong persistency both in the individual and on the group side.

Marita Zuraitis, President and CEO

Yeah, I do think, Mark, that's very well said. I think it's another place where we're insulated but not immune, where our market segment does help us. And that stickiness has been pretty consistent over the years when we go back and historically look at both NTA and MNL's trends. And I think that's right. The work that we did has really come out pretty much as expected.

Operator, Operator

Our next question will come from Meyer Shields with KBW. Please go ahead.

Meyer Shields, Analyst

Great. Thanks. Good morning all. Two I think . I guess this is for Ryan. As we see interest rates rise, does that impact the planned allocation to alternatives or should we expect that to stay constant?

Ryan Greenier, Investments

Good morning. Thank you for your question. We maintain a long-term perspective on our investment portfolio and consider various factors. While interest rates are important, we also focus on capital efficiency and risk parameters. Ultimately, our strategy is driven by liabilities. Our long-term target is around a 5% allocation to limited partnerships, which encompass a range of strategies. Approximately two-thirds of these are focused on fixed income, which tends to have lower volatility in returns. In a higher rate environment, we generally expect these returns to improve. About a third are sensitive to equity markets, and we've recently increased our investments in real estate equity, seeing it as a good hedge against inflation. We are optimistic about the trends in the U.S. real estate markets, and while current events have adjusted our allocations slightly, our long-term targets remain within a reasonable range, with the 5% target being accurate. Regarding our core fixed income portfolio, the increase in rates allows us to invest in higher credit quality. We're currently allocating funds to slightly higher credit quality positions compared to a few quarters ago, which is a positive development for our portfolio.

Meyer Shields, Analyst

Okay, that's very helpful. I have a broader question for Marita. It seems clear that the trajectory of rate increases in property and casualty insurance is going to align with losses. Should we interpret your comments about the April sale to mean that you're comfortable growing at current rates, with expected renewal retention stabilizing, simply because that's the direction the entire market is heading?

Marita Zuraitis, President and CEO

Yeah, I think it's a great question because it's one that we ask ourselves every day and monitor every day. When you have this many states and a portfolio, you obviously have many states that are at or beating our hurdle rate from loss perspective. And we're very pleased to see the growth in those places. So when you're growing in the right places, it's actually a double whammy, right? It helps your top-line perspective for all the reasons, why we want that to, but it also helps the bottom line from a mix perspective. So we've been very thoughtful, and I think a lot of this emanates from all that really good basic blocking and tackling to understand and improve our profitability that we undertook in the last phase of this journey. So we know very well where we're at rate-adequate. And one of the benefits, and we talk about this a lot, of our approach is by having the Horace Mann general agency and by leveraging other companies who have a price point or believe their price point is where they want to set it to write business. If ours isn't, we can rely on those strong third-party relationships we have for them to grow the auto. And we do a lot of back and forth there. So the combination of those things makes me feel really good about where we're getting the growth, how we're getting the growth, and the cross-sell numbers with that growth. Trust me, in places where we feel we need more rate in our filing, more rate, we have not put our pedal on the metal. We are all underwriters at our core, understand this well, and have all the levers we need not to have to do it. And we talked about this a lot. We're not a market share grab company. We didn't lower rates to gain market share and then have a bigger gap between what we need and what we have. As a matter of fact, we got out of places that we thought were systemically flawed or harder to do auto business. Florida's probably the best example. So we've done a lot of work to make sure that we can grow where it makes sense to grow when it makes sense to grow. I think it's a great question. We look at that all the time.

Meyer Shields, Analyst

That's very helpful clarification. Thank you so much.

Marita Zuraitis, President and CEO

You're welcome.

Operator, Operator

That's all the time we have for questions. I would like to turn the conference back to Heather Wietzel for any closing remarks.

Heather Wietzel, Vice-President of Investor Relations

Thank you, and thank you, everyone for joining us today. I know will be speaking with many of you over the coming weeks and look forward to those conversations. And of course, if you have any detailed questions you want to follow up on, feel free to reach out. I'm available, in particular, now that earning season is winding down. So thank you.

Operator, Operator

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