Horace Mann Educators Corp (HMN) 2003 Q2 法說會逐字稿

Good morning, ladies and gentlemen. And welcome to your Horace Mann Educators Corporation second quarter conference call. (CALLER INSTRUCTIONS). It is now my pleasure to turn the floor over to your host, Duane Hallman (ph). Sir, the floor is yours.

Good morning and welcome to Horace Mann's second quarter earnings release conference call. Yesterday after the market closed we released our second quarter earnings including financial statements, as well as supplemental business segment information. If you need a copy of the release, it is available on our website, HoraceMann.com. We will cover our results for the second quarter in our prepared remarks. The following senior management members will make presentations today, and as usual will be available for questions later in the conference call, Lou Lower, President and Chief Executive Officer, Pete Heckman, Executive Vice President and Chief Financial Officer, Doug Reynolds, Executive Vice President Property and Casualty, George Zock, Executive Vice President Service and Technology Operations and Financial Services, and Dan Jensen, Executive Vice President and Chief Marketing Officer.

The following discussion may contain forward-looking statements within the meaning of the United States security laws. Our actual results may differ materially from these protected in the forward-looking statements. These forward-looking statements are made based on management's current expectations and beliefs as of the date of this conference call. For a discussion of the risks and uncertainties that could affect actual results, please refer to the Company's public filings with the Securities and Exchange Commission, and in the earnings press release issued yesterday. We undertake no obligation to publicly update or revise such forward-looking statements to reflect actual results or changes in assumptions, or other factors that could affect these statements. As a reminder, this call is being recorded and is available live on our website. An Internet replay will be available on our website until September 5th, 2003.

Now we'll turn the call over to Lou Lower for his comments.

Welcome everybody, and thanks for joining us. This morning in addition to our regular review of quarterly results we are going to be providing you details surrounding last week's earnings warning, focusing primarily on the property casualty reserve actions we've taken. I want to make sure you fully understand what we have done and why. As part of that discussion, we will update you on the progress we have made in our claims environment, the emerging positives that will benefit Horace Mann into the future, as well as some of the challenges that we've had. Finally, in light of the noise in the quarter from both weather and reserving, we will share with you our view of the underlying pace of the business.

As you know, the Company has experienced a pattern of prior year reserves strengthening despite management's best estimates and despite holding reserves at least equal to the select levels of our outside consulting actuaries. While we have seen excellent trends in the frequency, the need for prior year reserve strengthening emerged again in the recently completed June 30th reserve analysis. Given that occurrence, and taking into consideration the impact of the redesign of our claims operations on estimating ultimate claims costs, we both strengthened prior year's reserves and put more conservatism into our current accident year PICs (ph). And Pete and Doug will provide further detail in their remarks.

While we are obviously disappointed with the impact on the quarter's income, the action reflects our commitment to maintain the strength of the balance sheet and to help us achieve more consistent reported results going forward.

As we have also reported, and in line with industry experience, cats which were nearly three times what we experienced last year were well above expectations, and impacted us adversely by 6 cents in the quarter over planned levels. In addition, noncat weather was greater than normal for the period. But having said that, our new claims organization was able to deliver at this critical moment of truth for our customers with greater speed, quality and caring than ever before.

To provide some appropriate balance, we will also be discussing favorable trends in the quarter. You will remember from our last call that sales were down in the first quarter. As you will hear from Dan, career agent sales this quarter were up 7 percent, with strong annuity sales leading the way. Agent counts are up 6 percent, and are on track to meet our year end growth objective. In addition, this year's monthly pace of independent agent annuity sales is accelerating. And all of those positive trends have carried forward into July.

As you will hear from Doug, property casualty written premium is up 8 percent. Improvements in underlying accident year loss and combined ratios make us feel good about underwriting income prospects for the second half of this year. While overall property casualty PIF is flat for the quarter, educator PIF is increasing. At the same time we continue to see more of our new business coming from the higher quality tiers. In addition retention in the educator book and the higher quality tiers is better than noneducator and the lower quality tiers. So in short, our key statistics indicate that the quality of the overall book, as measured by both percent educator and preferred tiers continues to improve.

As George will describe, life and annuity met our operating income expectations for the first half, although we continue to experience spread compression in our fixed annuity block. Offsetting that somewhat was an increase in M&E fees over the first quarter as we benefited from stock market performance in our fee-based variable annuity book. And finally, as you will hear from Pete, the impact of deteriorating credits on our bond portfolio has subsided. For the first half, net realized gains and losses improved 41 million pretax as compared to last year. And gross unrealized losses in our investment portfolio has declined to almost insignificant levels as of June 30th. While the turnaround on the capital loss front resulted in significant improvements in net income, we clearly recorded a disappointing quarter for operating earnings. However, the underlying trends in the business, most notably in property casualty, lead us to feel relatively positive about the second half.

And now I will turn it over to Pete, who will along with Doug, comment on property casualty reserve actions in the quarter and our revised earning guidance for the year.

Thanks, Lou. I would like to give you a little more detail on the P&C reserve actions we took this quarter. I will talk briefly about investments, both from a balance sheet and an income perspective, and provide some thoughts on our revised earnings guidance for the year.

First, with regard to property casualty reserves, we have been in the process of making changes in our claims operations for a little over a year. Among other things, our 17 offices have been consolidated into six, with all but one of those new offices in a different location. We have new leadership in the claims department. And a fair amount of hiring has occurred in the field claims organization, both in the management and adjustor ranks.

New claims practices are being implemented, and training is an ongoing process. Additional changes along with a new technology platform will be installed beginning later this year. And while we have begun to realize tangible benefits from these changes, some of the improvements have not come as quickly as we had anticipated. Doug will discuss our progress, and some of the operational challenges we have worked through in just a moment.

These factors contributed to the need to strengthen prior years' reserves in the third and fourth quarters of last year, and again in the first quarter of 2003. When both our internal actuarial analysis and the independent review performed by our outside actuary at June 30th, indicated further adverse development, we concluded it would be prudent to become more conservative in our reserve estimates, particularly in the more recent less developed accident years. The action we have taken this quarter strengthens prior years reserves by approximately $10 million. About 6 million of that is in the 2002 accident year for voluntary auto, primarily in the liability coverages and in our provision for salvage recoveries.

Loss adjustment expense reserves have also been strengthened. These actions reflect the ongoing and (inaudible) estimates of our liability case reserves, and a more conservative assessment of the anticipated improvement in loss adjustment expense and salvage as a result of the claims changes we are making.

In addition to the 2002 accident year, we're being more cautious in our 2003 selections to reflect the degree of change occurring in our claims operation, as a result in complexity introduced in introduced in the reserving process. We also established a somewhat higher provision than normal for property physical damage reserves at the end of the second quarter in anticipation of additional developments and late reported claims resulting from the heavy weather we experienced near the end of June.

Our outside property casualty actuaries performed independent analyses of our reserves at both June 30th and December 31st. Internal Company analysis has generally resulted in carrying reserves at or slightly in excess of those independent estimates. Our $285 million of total reserves at June 30th, 2003, while within a reasonable range of possible outcomes, is meaningfully above Ernst & Young's select estimate. While additional adverse development may occur in the future, we feel this more conservative reserve level is appropriate in light of the factors I have mentioned, and is consistent with our philosophy of maintaining a strong balance sheet.

On the asset side, we have dealt aggressively with the credit issues that emerged in the latter half of 2002, and believe our investment portfolio currently represents another area of balance sheet strength. Before getting into some of the investment numbers, I wanted to mention that we recently completed the transfer of our high yield bond portfolio to Shickman (ph) Capital, a high yield specialist who manages a total of approximately $9 billion for some ninety clients. Shickman and Blackrock, Inc, with whom you may recall we consolidated our fixed income investment grade portfolio in the first quarter, will be our outside money management team going forward. They both have excellent performance records and strong disciplined investment processes. And we're excited to be working with them.

Our investment results were rather behind in the second quarter which was both expected and welcomed. Net realized gains were $1.5 million after-tax for the quarter. We impaired one asset-backed security, realizing a $1.2 million after-tax loss, which was more than offset by portfolio gain activity. Year-to-date, net realized losses totaled 1.6 million after-tax.

Impairments and credit related losses have moderated significantly since the third quarter of last year, which reflects both the improving credit environment and the aggressive approach we have taken in recognizing our investment evaluation issues on a timely basis. Although down quite a bit from where we ended the quarter, net unrealized gains in the portfolio totaled $230 million at June 30, which was comprised of 239 million of gross gains and only 9 million of gross losses, which speaks to both the credit quality of our holdings, as well as the level of interest rates. Obviously, the corresponding challenge created in this rate environment is the pressure on investment income.

Even factoring in the recent uptick in interest rates, which helps mitigate the problem to some degree, our revised investment income outlook for the year calls for us to fall short of the expectations underlying our previous earnings guidance by approximately 8 cents per share for the year. As a result, we're looking for investment income in the second half of 2003 to to be about flat, give or take, with the first six months of year, with life and annuity results coming under a bit more pressure in that regard than on the P&C side. In terms of how that plays into our overall earnings outlook, yesterday's press release provided revised guidance for the full year 2003 net income, excluding realized gains and losses of between 90 cents and $1.00 per share, essentially reducing our product guidance range by 35 cents.

The math here is fairly straightforward with the primary drivers of the decrease being the year-to-date P&C reserve strengthening of 14.2 million pretax, which equates to about 21 cents. The excess catastrophe losses in the second quarter is 6 cents. And the investment income shortfall I just mentioned of approximately 8 cents per share. Achieving the midpoint of the revised range would result in second half income of 67 cents per share, excluding realized gains and losses. This is slightly below, but not too far from, the implied second half 73 cents based on the consensus estimate in existence prior to our earnings warning. The remaining difference would be attributed to second half pressure on investment income and our more conservative stance on P&C current accident year results.

And now to provide additional commentary on property and casualty, I would like to turn it over to Doug Reynolds.

Thanks, Pete. In the second quarter we continue to address prior year reserve issues and also experienced the highest catastrophe quarter in a few years. My comments will deal was both of these issues, as well as how our current year business is operating.

Regarding reserves, we're trying to address a number of areas at the same time with a number of moving parts. In our last quarter call, we discussed the consolidation of our claims offices and the impact that had on reestimating prior years' ultimate loss levels. As a result of the logistics, we ended up with slightly higher carryover of physical damage claims in the first quarter. This, as expected, proved to be a onetime occurrence. We are now seeing closure ration on these claims that are in line with expectations.

As we also mentioned, we embarked on a process of redoing older claims and insuring correct case reserving, while also working these claims more vigorously. That process has continued and contributed to the need to address our prior year reserve position including 2002. In addition, with the benefit of hindsight, a few of our reserve assumptions, including improvements in loss adjustment expense and salvage recoveries, didn't materialized as fully as anticipated. Although we are seeing improvements, they are occurring at a slower rate than anticipated.

In addition, our claims workstation initiative has been delayed by approximately six months. We do however, fully anticipate achieving the ultimate benefits that we set out to capture. Overall, we are in a stronger reserve position for accident years 2002 and prior, as well as 2003.

In 2003 we're intentionally holding a higher reserve level than we had previously. Although results continue to improve, we are at this point not fully recognizing the early 2003 accident year trends in current years reserves. Despite the higher level of conservatism, we are encouraged by the continuing improvement we're seeing in claims process and performance. We're currently implementing a number of software products designed to better manage severity and expenses. While the claims workstation delays has hindered our ability to obtain some of the improvements targeted, many of the new programs are contributing to improved results.

Pete mentioned a number of items that have had an impact on our claims operations, such as our office consolidation. Our staffing at all six offices is now at expected levels. Our overall loss adjustment expense is down 5 percent to prior year, but as mentioned earlier, not at expected levels. We're processing a greater percentage of claims in-house versus utilizing independent adjusters as we have grown the number of employee appraisers threefold from year-end levels.

Our direct repair shop strategy is another area in which we have made significant progress having signed up almost 400 shops in six months. Finally, we have completed in-depth review of all offices to ensure compliance with new procedures and practices. Overall, are claims processes are beginning to produce benefits, although the full impact of many of these initiatives will accrue to us over the next twelve to eighteen months.

Catastrophes for the quarter had a major impact on results as we exceeded $11 million in the second quarter, almost three times as much as prior year quarter, bringing the year to over $13 million in catastrophe losses. At the same time our new claims office organization served us well as we're able to respond to our customers' needs far more quickly and settle claims at lower levels of utilization of outside adjusters than in the past. All of this helped us control severities and expenses associated with the losses experienced and provide a higher level of customer service.

Our combined ratio for all lines, excluding cash and prior year reserve development, improved by approximately 6 points for the quarter and year to date. Our expense ratio improved for the quarter, while year-to-date we're up slightly over prior year. Our total combined ratio for voluntary auto, excluding catastrophes and prior year actions, has improved 10 points for the quarter and year-to-date by 8 points. That comparison also includes a more conservative reserve position at June 30, 2003.

On a calendar year basis, our written premium is up for the quarter, while our pure premium is flat. On a year-to-date basis, our written is up 7.5 percent and pure premium is down slightly. Our new business units are up slightly for the quarter and down year to date. At the same time, we are beginning to see slight improvement in our retention ratio of approximately half a point.

As I stated earlier, property had a difficult quarter as a result of catastrophes. It was also a difficult period for non-catastrophe related weather. At this point in the year we're also taking a more conservative approach on property reserves, reflecting a higher level of seasonality as a result of weather-related losses in the second quarter versus 2002. The property combined ratio for the quarter and year-to-date, for the reasons mentioned earlier, is higher than 2002. However, when we reconcile our 2003 results for a number of factors, such as catastrophe losses, expense ratio, loss adjustment expense, weather impact and reserve adjustments, our combined ratio is approximately 10 points better than 2002 on a year-to-date basis. A similar reconciliation for the quarter results in an approximate 7 point improvement as compared to 2002.

Over the course of the first half of 2003 we have continued our property inspection programs, implemented additional underwriting changes where needed, and achieved approved rate filings in excess of 17 percent. Overall, our trends have continued towards the better quality book of business. For the auto line, our three best tiers are up 9 percent over prior year quarters. Our percent educator and percent of customers selecting electronic funds payments are also continuing to increase. We are experiencing similar quality improvements improvements in property with more business from the better tiers, a growing percent educator, and customers opting for higher deductibles.

For both auto and property, we're seeing similar trends on renewals. On auto, percentage educator retention is up about 2 percent, while non-educator is down 3 percent. Property retention for educators has increased slightly, and non-educators has fallen by about 6 percent. Both of these factors point to better retention in our target market.

Although the quarter had its challenges, our underlying trends continue to show improvement. We are in a stronger reserve position, our current accident year trends for both auto and property are improving, and our quality measures continue to reflect improvement. At the same time, we will capture more gains in claims by implementing the new claims workstation technology and continuing to leverage the many changes we have already put into place.

And now I would like to turn it over to George Zock.

Thanks, Doug. For the first half of 2003, total life and annuity operating income met our expectations. The timing between the quarters was different than what we anticipated due to the volatility of the financial markets and the impact on our DAC and zip (ph) amortization. But in total for the six months, we are where we expected to be.

A few comments on the life segment. Second quarter 2003 pretax earnings were below second quarter 2002 by $2.5 million. Compared to second quarter 2002, in the second quarter 2003 we experienced a decline in investment income of $1.7 million due to the difficult credit market in 2002, and the lower interest rate environment over the last 18 months.

Expenses were up about $1 million over second quarter 2002, primarily due to a favorable VAC unlocking adjustment in the second quarter of last year 2002. Slightly better mortality was experienced this year compared to the second quarter of 2002. The second quarter 2003 pretax earnings were comparable to the first quarter of 2003 and in line with our full year expectation for 2003.

And now the annuity segment. Our second quarter 2003 pretax operating earnings of 5.3 million after unlocking adjustments in VAC and (inaudible) were in line with the annuity segment earnings forecast given at our last conference call of $4.5 to $5 million pretax per quarter, which assumed a normal or expected mortality environment, a normal or expected market performance, and no additional bond default. For the quarter we had normal mortality and a favorable increase in DAC and zip unlocking of $500,000.

Current quarter pretax earnings of 5.3 million are 1.7 million below second quarter 2002. The change is primarily due to fixed interest margin compression of 2.8 million, and a reduction in variable margin and fee of $200,000, which were partially offset by a decrease in expenses of 800,000, primarily due to DAC and zip favorable unlocking that was $500,000 greater than last year, and more favorable mortality of $500,000.

When compared to the first quarter of '03 second quarter '03 variable fees ticked up. After four straight quarters of year-over-year decline, variable cash value on deposits grew over the previous year, primarily due to the equity market performance. And it is now greater than June 30th, 2002 balances.

Now I will review, as I've done in previous quarters, some additional information on the deferred acquisition costs and value of business in force amortization and the guaranteed minimum death benefit reserve. First DAP and zip. The company amortizes DAC and zip utilizing the 10 percent reversion to the mean approach with a 200 basis point corridor around the mean. Our current DAC and zip balances for the annuity line represents 4 percent of account value.

While an exact rule of thumb will not work under all market conditions, I will give you an idea of the sensitivity of the amortization to market decline. There are a lot of moving parts to the DAC and zip calculation, including fund performance, fixed margin persistency, and realized investment gains and losses. But generally, if all other assumptions are met, a 1 percent deviation from the targeted market performance would impact pretax earnings approximately $150,000.

Moving onto the guaranteed minimum death benefit reserve. The total GAAP reserve for guaranteed minimum death benefit at 6/30/2003 is 600,000. That is 400,000 below first quarter 2003. The comparable statutory reserve is 1.1 million. The Company has a relatively low exposure to guaranteed minimum death benefits as approximately 25 percent of contract value have no guarantee. Approximately 70 percent of contract values have only a return of premium guarantee. And the remaining five percent of contract values have a guarantee of premium and an annual interest rate of between 3 to 5 percent. The total aggregate in the money death benefits under the guaranteed minimum death benefit provision totaled $74 million at end of June. And that compares to $136 million at the end of March 2003.

Again, to give you an idea of the sensitivity to market declines, a rough rule of thumb for the impact on the guaranteed minimum death benefit reserve is that for each 1 point of negative market performance, the guaranteed minimum death benefit reserve would increase approximately $ 100,000. Positive market performance will begin to have a smaller impact on the favorable change in reserve due to the decline in the number of contracts requiring a death benefit reserve.

And I will turn it over to Dan Jensen.

Thanks, George. Second quarter continued our favorable higher year comparisons in agent counts. We ended the second quarter with 883 agents, up 6 percent for the same period last year. The growth in agents was helped by better than expected recruiting results, and hurt by slightly lower new agent retention. The number of recruits for the first half of the year is up 18 percent compared to the same time last year. Experienced agent retention also decreased slightly for the same period last year, while overall agent retention for the first half of the year compared to the same time last year was down 2 percent.

Year-to-date, the average career agent productivity is down 5 percent compared to the first half of 2002. We saw career agent productivity start to gain momentum in the second quarter. Average career agent productivity for the second quarter was up 3 percent compared to the same period last year. That momentum has continued into the beginning of the third quarter. Combining the increased productivity and growth in career agents, career agent sales for the second quarter was up 7 percent compared to the second quarter of last year. Year-to-date sales for career agents is flat compared to the same period. Driving the growth in career agent sales in the second quarter was annuity, which was up 11 percent compared to the same time last year.

Independent agent sales for the second quarter were down compared to second quarter sales last year due to a tough prior year comparison because of more than a $500 million hop in June of 2002 from Chicago public schools. Year-to-date independent agent sales are comparable to last year, and have consistently increased month for month all year, and appear to be on pace to hit our full year sales plan for independent agents. We currently have 322 independent agents appointed with Horace Mann the end of the second quarter. This is up from 230 at the end of the first quarter.

The second quarter continued the positive trend from previous quarter with regards to quality of business. The percent of new auto business that was written in our top credit tiers has has grown to 59 percent compared to 52 percent at the end of last year, while the percent of business written in our bottom two tiers has gone from 25 percent down to 18 percent of the business issue. This improvement reflects the efforts of underwriting, pricing and improved agent prospecting.

Our auto book of business has grown from 20 percent electronic funds transfer payments in June of 2002 to 26 percent EFT at the end of June 2003. Auto business paid by EFT has a significantly better retention than does auto insurance where clients mail in their payment. As we continue our focus on educators, the percent of our book of business that is educator has grown from 50 percent at the end of 2001 to 53 percent at the end of 2002, to over 54 percent at the end of the second quarter.

In summary, on the career side we're growing the number of agents, while improving agent productivity. The quality of new businesses is continuing to improve. And on the independent agent front, we've seen a real pickup in sales and a good momentum going into the third quarter. Overall, the second half of 2003 is looking good. And now I will turn it back over to Duane.

Thank you. Ashley, at this time we will be pleased to take questions.

(CALLER INSTRUCTIONS) Alain Karaoglan from Deutsche Bank.

A couple of questions. With respect to the catastrophe losses, the cat load, what should we think of in terms of a yearly low for catastrophes and for the second half of this year?

Well the annual planned event that we would use is about 3.5 to 4 percent of premium. And that would be what we would be using for the second half of the year.

Okay. And what would -- Doug, what would the goals be now for auto? Given the reserve additions from a combined ratio point of view, where do you think you are? Have your goals changed from what they are today in terms of combined ratio for auto and homeowners?

Well, taking all of that into consideration for the full year, all of the first half, we would expect the total combined ratio to be in the 100 to 102 range. On the automobile, it would obviously be a little bit -- well, let me try to think here. It would be in time to think year. It would actually be right around the same level for both auto and property.

But that would be with the reserve additions. Where do you think the auto and homeowners should be running at without the reserve additions and normalized catastrophes?

Okay. Well for the automobile we would expect it to be running without the catastrophes at around a 95. And the combined ratio and the property to be running around the 96, 97 mark.

Just one clarification. Is that today, or that is what is it running up today, or that is what you would like it to run up?

No, that is what we would like it to be running at.

And when do you think you'll reach that?

Well, in the second half of year, we expect the second half of the year to run at those levels.

Okay. The other question is on the corporate expense line and corporate and other there was a jump from the first quarter. With anything behind that?

Well, we recorded some additional expenses related to the life insurance tax issue that we had announced several quarters ago, about $500,000 or so after-tax for further expenses related to the remediation of that issue. That would be the only unusual item I can think of, Alain.

Okay. And going forward we should not have that?

That's correct.

Alison Jacobowitz of Merrill Lynch.

It is actually Jay Cohen (ph) (inaudible). A couple of questions. I guess following up on Alain's question, the property combined ratio you guys suggested kind of underlying what you would expect the 96 to 97, was that including catastrophes or excluding cats?

No, that would be including our expected catastrophe load for the second half of year.

Okay. But given the relatively short tail of that business, is that adequate to earn the kind of returns you want to earn?

Well, obviously there is two parts to that. One is what we're expecting as we go into the rest of year. I think as we move forward our intended property combined ratio would be into the low 90s at an average catastrophe year.

Okay. The second question. I'm wondering if you guys have sort of looked at why the benefits from the claims restructuring didn't come in as expected? Was there any issues, any lessons you learned, any changes you made?

That is a very good question. There is really a couple of things. One is why they haven't come in, and I would say that some of the targets that we had set, really going back and looking at them, were a little bit too aggressive for the amount of change that was being implemented.

The second component, and I mentioned this in my comments, is the -- is our claims technology that we had anticipated being able to get in and begin to implement in the first quarter is being delayed until the end of the third quarter. So some of those benefits that we would have anticipated were also not there.

The third thing is as we went through the office consolidation, we covered this at the end of year, there were just a number of issues around hiring, getting the people in, getting them staffed, the telephone systems, the technology, components to support those offices, really just proved a little bit more problematic than we had anticipated. I will tell you that the activities that we're undertaking in the claims offices where we have gone out and done -- completed reviews in each one of the claims offices, and are very much driving a compliance to process. In other words, as we are handling bodily injury claims or handling physical damage claims or salvage collections, we're expecting processes to be complied with and to be managed appropriately, as well as having the various software components used. And that is -- that will continue to drive benefits to us as we go through the year.

I do think that as we have hired the number of new people that we have had and bringing those into teams in the six offices, again is probably just taking us a little bit longer than what we had anticipated.

Okay. Just a numbers question. You guys have the statutory surplus of the property casualty business handy? I might've missed it in the release?

Jay, I think it is approximately $215 million, give or take a million.

So you guys are writing at about, call it 2.5 to 1 at this point?

That is pretty reasonable. There is no need for capital? No. As matter-of-fact that has been our capital target, or leveraged target, for the P&Z (ph) business, as well as obviously keeping our RBC ratio above 300 percent. And that is tracking consistent with where we were at the end of last year and so on. Our debt to capital ratio is right on where we were at the end of last year. So we don't see any capital issues.

Just one last question, I don't want to hog the call here. The second half of the year looks like on a reported book value your ROE will be between 9 and 10 percent based on the 67 cents, maybe closer to 10 percent. Do Do you guys have any firm goals at this point as you go into next year what your ROE should be?

I guess not to be flip, we're looking for it to improve. But again as far as '04 guidance and getting specific on any of the numbers, we are not prepared to do that at this point. We will sharpen our pencil obviously as things develop, and consistent with past practice give you some updated guidance either in late October or early November in our third quarter call, or in early February after our fourth-quarter call.

Stephan Petersen from Cochran, Caronia Securities.

My first question is for Mr. Jensen. You have given us the number of independent agent appointments. It was north of 300. I just want to get that number?

320.

Now going into sort of the key fall selling season, should we expect that number to continue to increase, or in terms of your independent distribution, are you fairly happy kind of with the buildup that you have done there? And I guess I would like to ask the same thing about sort of your agent -- your captive agent outlook going into the fall?

On the independent side, I don't want the number to increase too much. We are adding independents, but we're trying to weed out some at the same time. We're trying to make it fairly selective, producing in school business, focused independents. So we are adding some, but not looking to grow the total number by a lot.

On the career side, we have a target that is right about -- we're right on pace for. We're looking for that 5.5 to 6 percent growth through the year, and that is our objective for the year.

Okay.

If I could just add to that, we are in conversation with three key marketing organizations, whose results have not been reflected in the first or the second quarter, and hope to have those folks in place for the back to school selling season.

Okay. And then just a technical question. On your guidance for the rest of '03, what was your P&C net premiums written growth assumption?

Hang on. (multiple speakers) We are looking at some of the numbers here. We can get back to you, Stephan, rather than delay the call.

No problem. And then second of all, in the information that you delivered to analysts earlier this year, you had indicated that you were likely to be installing, or were in the process of installing, part of a new MIS system. And I'm wondering how much of what we saw sort of in the second quarter related to some of the general ledger changes that you are making versus the changes that you are making in claims, if there was any at all?

You're right. We did install a new general ledger and financial reporting system in the second quarter. But that installation had no impact on any of our claims data or reserving information.

Seth Faler (ph) from Bank of America.

I had a couple of questions. The first is on the annuity side, has there been any significant change in terms of the margin? I think you were running at about 185 basis points last quarter?

Yes, there has been some additional compression over the last 30 days between March and the end of June, as we reached a well there in market interest rate. The end of June we were at 172 basis points.

I see, and that might've shifted again in July given what we are seeing in the markets?

That's correct.

And second question was regarding the reserve study that you completed, you indicated that you were now above the level recommended by Ernst & Young. Was that their minimum or their midpoint?

It is what they call their select estimate, which is if they had to recommend a single point of held reserves, that is what they would be recommending.

I see.

And you're right. We had -- our internal analysis had resulted in our being not too far away from that, usually a little bit above. Given the fact that we've had adverse development over the last two or three quarters and continue to have it again this quarter. It became apparent to us that it was just a prudent measure to be a little bit higher in the range given all of the changes being made in the claims organization and the complexity of the estimation process as result of all that.

I guess we characterize the select as generally being midway between the high and the low.

I see. And did that include second quarter as well, or is that just through the first quarter?

No, that was June 30th.

Through June 30th?

Right.

Thomas Denslow(ph) from Hamilton Investments.

It is been three years since you increased the dividend given the tax laws of...

Thomas, if you could speak up a little bit, we are having trouble hearing you.

Yes, sure, is that better?

Yes. Thank you.

Okay. I was asking about the dividends as kind of stated the 10.5 cents per quarter. And given that tax laws have changed do you think that makes more sense now than continuing with stock buy back? And also where do you stand on the stock buy back at the moment?

We haven't repurchased shares for a couple of years anyway. And as we had mentioned back then, we had a variety of strategic initiatives where we felt we could place our capital or invest our capital more profitably. So we really have not bought back any stock, and we are not intending to.

As far as the dividends, we are not uncomfortable with the current level. We obviously always look at that. But we would assess our payout ratio that we attempt to grow into to be reasonable at this point.

Ladies and gentlemen, there appears to be no further questions in the queue at this time. I would like to turn the floor back over to Mr. Hallman for any closing remarks.

Thanks for participating this morning.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. And have a wonderful day.

(CONFERENCE CALL CONCLUDED)