Horace Mann Educators Corp (HMN) 2004 Q1 法說會逐字稿

Good morning and welcome to the Horace Mann first quarter earnings conference call. At this time all participants have been placed in a listen only mode and the floor will be open for questions following the presentation. It is now my pleasure to turn the floor over to your host, Mr. Dwayne Hallman. Sir, you may begin.

Good morning and welcome to our conference call. Yesterday after the market closed, we released our first 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 under 'investor relations'.

Today we will cover results for the first 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 in Property and Casualty and Butch Joyner, Senior Vice President of Marketing.

The following discussion may contain forward looking statements within the meaning of the United States securities laws. Our actual results may differ materially from those projected 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 SEC and in the earnings release issued yesterday.

We undertake no obligation to publicly update or revise such forward-looking statements to reflect actual results or changes and assumptions or other factors that could affect these statements.

As a reminder this call is being recorded and is available on our website. An Internet replay will be available on our website until June 7th, 2004. Now I will turn the call over to Lou Lower for his comments.

Good morning and thanks for joining us. As Dwayne noted Butch Joyner, Senior Vice President of Marketing, is going to be reporting today and in the future on marketing and sales. He's replaced Dan Jensen who resigned from Horace Mann in March. Butch, for those of you who haven't met him is a seasoned Horace Mann veteran who has occupied all the marketing chairs, beginning his career as an agent and most recently running the entire field organization. We look forward to his strong leadership with the Company's marketing and sales strategies and tactics.

As you're going to hear from Butch we had another strong quarters for sales in both of our distribution channels. Despite some weakness and finance agent retention total career agent sales were up 17 percent including solid double-digit growth in annuity, life and properties with overall career agent productivity increasing more than 20 percent. The only sales pressure point is auto new business growth which is still being dampened by the effects of the aggressive changes we've made in auto underwriting and pricing to restore that line to acceptable levels of profitability.

Independent agent sales and annuities were sevenfold that of a year ago but comparable to the first fourth quarter of last year. We do anticipate a slowdown in the rate of increased comparisons to prior year in this channel as we shipped our mix of business emphasis more towards variable annuity sales and away from fixed, which we think is appropriate in today's low interest rate environment.

As you're going to hear Doug describe in some detail property casualty underwriting income is substantially better than prior year, and the main contributor to our earnings improvement. While admittedly benefiting from the weather as others in the industry have reported to you, we are delivering meaningful gains across the board in property casualty's key metrics of success.

The quality actions we have taken in both pricing and underwriting continue to increase the proportionate business we are writing in the more desirable educator underwriting tiers. That in turn continues to drive improving trends in frequency. They're also benefiting from the claims initiatives deployed last year with meaningful contributions accruing to us from both severity and loss adjustment expense from claims technology, and process improvements which continue to gain operational traction.

In addition Companywide focus on expense management has clearly benefited our personal lines expense ratio and for that matter expense ratios in all of our business lines.

As you will hear from Pete, in the life company, our pretax income our annuity pretax income is greater than prior year and off to a good start compared to our expectations. While life pretax income is less than last year it is tracking our current year expectations.

From a balance sheet perspective, our property casualty reserve position is strong. And in addition the actions we have taken in the past to improve the quality and diversification of our invested assets is showing up in no defaults or impairments for the quarter, a shrinking watch list and a healthy unrealized gain position. So all in all we feel good about having achieved a solid start to the year. The initiatives that we've launched are coming together, their paybacks are kicking in, the underlying improvement trends we have described to you in the past are now being reflected in reported results and no longer being masked by prior year reserve strengthening.

As I described during our fourth quarter call, our preliminary guidance for 2004 of $1.20 to $1.30 was cautious on the lower end of that range and we committed to pursuing upside opportunity throughout the course of the year.

First quarter results placed us solidly on that road. Since it is, though, one quarter we are maintaining the guidance provided three months ago. However as we see evidence after six months of results that affirmed the continuation of these early improvement trends it would be our intent to revisit guidance for the year and adjust it at that time as may be appropriate.

In the meantime, the team here at Horace Mann is keenly focused on the execution of high-impact items to deliver the positive, consistent, and improving results we all want for this excellent franchise. Pete.

Thanks Lou. In light of a rather noise-free quarter my remarks this morning will be relatively brief and will include a high-level assessment of first quarter operating earnings, plus comments on property casualty reserves and investment results.

Net income, excluding net realized investment gains, was 43 cents per share in the first quarter compared to the First Call consensus of 33 cents and a prior year result of 26 cents per share. Certainly as Lou indicated a very good start to the year.

Our increased earnings were driven primarily by property and casualty, which benefited from a relatively low level of catastrophe losses and an absence of prior year's property casualty reserve charges in the current period compared to prior year.

However on a pro forma basis, adjusting both the 2003 and 2004 quarters to exclude catastrophes and reserve developments, income excluding realized gains and losses improved from 36 cents to 45 cents per share, reflecting a very solid 25 percent increase in underlying earnings.

Doug will comment on the key drivers contributing to those results in just a moment.

With regard to property and casualty reserves, our internal actuarial analysis found development of prior years claims to be generally consistent with our expectations, which resulted in no reserve adjustments in the period. The Lloyd's first quarter review was consistent, overall, with our internal assessment.

We also had favorable investment results during the quarter. Pretax net capital gains were 5.3 million and included no impairment charges. Our securities watch list is minimal and pretax unrealized gains were approximately $180 million at March 31st.

Investment income exceeded our expectations in the first quarter by about $2 million in large part due to prepayments on a structured mortgage-backed security and tender offer consensuses. With rates moving up, however, we expect those benefits to be short-lived.

As a result, it seems likely that our 2004 investment income will be front ended or somewhat skewed toward the first half of the year. In any event, we are off to a good start towards achieving or exceeding our investment income objectives. Consistent with our intention to review full year 2004 earnings guidance at the end of next quarter, we will incorporate any update to our year-end investment income outlook if warranted at that time.

And now here's Doug Reynolds to comment further on our property casualty result.

Thanks, Pete, and good morning. I can tell you it's nice to discuss a quarter with good results. Before I go over my comments I did want to point out that in the press release our 10-Q and in my remarks for today and in the future we have switched from statutory to GAAP operating ratios. The property and casualty division achieved a combined ratio of 93.5 percent in the quarter, six points better than our 99.5 percent combined ratio a year ago. Both our auto and property lines showed very strong gains in operating results with improvements in loss experience and expense ratios for both auto and property.

Voluntary auto had a very good quarter. The auto combined ratio was 95.4 percent for the quarter as compares to a combined ratio of 99.6 percent in the first quarter of last year. Our auto loss and LAE ratio declined from 76.3 percent in 2003 to 73.4 percent this year. Our auto expense ratio declined to 22 percent, 1.3 points lower than last year, demonstrating our active expense controls are working.

Likewise we have seen a decline in auto (indiscernible) premium, confirming the impact of our underwriting and claim enhancements as well as the favorable weather in the first quarter.

Average auto written premium increased over 4 percent in the quarter, reflecting our pricing activity raised aimed at rate adequacy. Our implemented rate changes averaged just over 8 percent for auto in the quarter taking in eight states representing 14 percent of our countrywide premium.

Auto policies in force declined about 1 percent from first quarter of 2003. However our educator policies in force has increased over 4000 units in this same time period. Our overall renewal rate and our total auto book was basically flat. However, our educator renewal rate continues to improve.

Reflecting our pricing and underwriting focus on growing our educator book of business educators represented over 70 percent of our 2004 new business compared to 67 percent for the first quarter of 2003. We continue to see improvements in our auto quality measures. Educators as a percent of our in force business is close to 68 percent and our better experienced tiers represent an increasing percentage of our business.

Clients paying via automatic payments methods represent 25 percent of our in force book. This is an increase of approximately 1 point from year end and an increase of 4 points from a year ago. So far this year 35 percent of our new business has selected automatic payment options which continues to have our highest retention rates.

Our property line also had an outstanding quarter with a combined ratio of 82.4 percent for the quarter versus 100.1 during the first quarter last year. Excluding catastrophes, the combined ratio is below 80 at 79.4 percent compared to first quarter 2003 results of 94.4. Our expense ratio declined from 26 in the first quarter last year to 22.4 this year. Again, this reflects our average premium growth and expense controls.

Property loss and loss adjustment expense ratios excluding catastrophes was 57 percent, 11.4 points better than last year. For the quarter pure premium declined substantially from the first quarter of 2003. We see this as not only a function of favorable weather but also affirmation of our underwriting, pricing, and reinspection programs as well as our renewed focus on the educator market.

Our new business educator percentage is 69 percent for the first quarter 2004, compared to 66 percent at the same time last year. Our property educator policies in force is up 2500 units from first quarter of 2003.

Our property average written premium for policy increased 7 percent, reflecting our commitment to achieving adequate pricing. New business production is up nearly 7 percent showing that we remain competitive for the business we're interested in writing. We have continued our pricing policy within average implemented rate change in the first quarter of over 20 percent in eight states.

As in auto, we see positive trends in our quality measures of our property business. Compared to the end of the first quarter of last year, educators as a percentage of our in force business increased almost 2 points to 61 percent. We also saw the percentage of business we ensure and our three most profitable rating tiers increase over 3 points.

Very importantly, we're seeing more positive results of our claims initiatives. As you may recall we consolidated 17 claim locations into six larger more efficient regional claim offices. At the same time, we introduced a new organizational structure and needed technology, principally in the form of plane (ph) workstation.

Over the past few quarters I have discussed the staff of the new plane platform and I'm pleased to report it is now operational in all of our claims offices. This was a huge undertaking but it's been tremendously received and is already driving benefits. As we have discussed in the past our efforts over the last 18 months have been to build a solid foundation directed towards our planes operation. As expected we are beginning to reap benefits in both expense savings and severity controls.

One of the goals of ACE -- our Advance Claims Environment -- was to adjust more of our claims using our own employees rather than independent adjustors. This process is taking hold with over 65 percent of our auto claims under employee control during the first quarter of this year versus 35 percent for all of 2003. We have also seen a 41 percent decline in allocated adjusting expenses which is even better than the improvement we expected.

Total loss adjusting expense ratio has decreased 7/10ths of a point in 2004 compared to the first quarter of last year. Another challenge was our need to improve results in subrogation and salvage. Compared to the first quarter of last year, auto subrogation is up 28 percent to March this year. Property subrogation is three times higher than 2003 although on admittedly small numbers.

Auto salvage has had a strong start to the year and is up 32 percent over the first quarter of 2003. We have had a good first quarter but there is still much to do. We intend to increase auto production in the educator market and we're working to enhance our educator segmentation model. These changes will further refine our segments and pricing tiers to take greater advantage of our knowledge of the educator market.

We will also drive further improvements in claims via better execution of ACE.

Although 2004 has had a solid start, the work to get here began sometime ago. Our pricing, underwriting, and claims processes have been improving quarter after quarter and it's nice to see the underlying improvement we told you about flow through to reported bottom-line results.

Despite a solid quarter our journey is not complete. Our goals continue to be predictable and sustainable results, increase in our educator market share with solid earnings growth. And now back to Pete.

Just a few brief comments on life and annuity. In our life segment while premiums and contract deposits in the first quarter were down slightly compared to 2003, life sales including universal life and long-term care partner products increased 16 percent.

Reported first quarter life pretax earnings were below prior year by $1.1 million. Adjusting for the impact of DAC (ph) unlocking in both periods pretax income was down 800,000, primarily due to a decline in group insurance earnings and lower investment income.

With regard to the annuity segment, first quarter of 2004 total cash values grew by 18 percent over prior year. Driven by a 32 percent increase in variable deposit values due primarily to the strong equity market performance over the past twelve months. Variable annuity funds flows have been positive over that period as well, with the current quarters net flow more than two times 2003's level.

Total contracts and forest (ph) grew by four percent and cash value retention for both variable and fixed business increased by about a point.

Annuity segment pretax income of 5.8 million reported in the current quarter was $2.5 million higher than the first quarter of 2003. 1.7 million of that positive variance was due to the difference in impact between the quarters from DAC biz (ph) unlocking and change in guaranteed minimum death benefit reserves. The remaining favorable income variance was largely due to the increase in variable annuity contract charges earned.

In summary both annuity and life segment pretax earnings excluding unlocking were within our range of expectations in the first quarter, with both businesses benefiting from the previously mentioned impact of prepayments and tender offers on investment income. And now I'll turn it over to our Senior VP of Marketing, Butch Joyner.

Banks Pete and good morning. Nice to have the opportunity to visit with you. We had a very strong quarter for sales in the first quarter of 2004. Overall sales were up 39 percent over the first quarter of 2003. As Lou mentioned sales increased in three of our four core lines of business led by an excellent increase in annuity sales which were up 77 percent over the corresponding quarter of 2003. Career agent annuity sales were up 35 percent while independent agents were seven times the level of sales as produced in the first quarter of the previous year and slightly ahead of fourth quarter sales in 2003.

On the career agent side, life sales were up 16 percent as we began to see our relationship with Jefferson Highway produce increased sales results in marketing. Property sales continued strong with a 13 percent increase in the quarter over the previous year.

Auto sales were down 8 percent in the first quarter reflecting the actions taken in pricing and underwriting but with the majority of the decrease in the non educator market. We are working across the Company to regain the pace of auto sales and are beginning to see improving trends.

Overall on the career agent side sales for all lines combined were up 17 percent and agent productivity showed an increase of 22 percent.

As reported earlier, we have implemented a new agent retention program. This program includes fewer planned hires, improved selection, longer free contract training and increased mentoring. As a result, in the first quarter we hired 42 fewer agents than in the first quarter of 2003. The productivity of our 2004 hires is up 29 percent over the hires in the first quarter of 2003. Our base force retention increased 1.4 points with terminations in the total agency force decreasing by 15 percent.

Our experienced agent count has remained flat while our total agent count is down 6 percent reflecting the transition to the new agent retention program which we expect will improve our total agent counts in the second half of the year. We continue to gain momentum in our high priority market initiative while total sales in these markets were comparable to the remainder of the country, the educators sales and our cross selling results in the high priority markets outperformed.

In summary, we experienced a very strong quarter from our career agents which, coupled with a record sales quarter from our independent annuity agents, resulted in a 39 percent increase in sales over the first quarter of 2003. At the same time high priority markets is gaining strength each quarter. Given this, we feel we are positioned for a strong and solid sales year in 2004. Now I'll turn it back over to Dwayne.

That concludes our prepared remarks. Lisa, please move to the question-and-answer session.

+++ q-and-a.

(OPERATOR INSTRUCTIONS)

Bob Glasspiegel with Langen McAlenney.

Lou, you give a pretty optimistic commentary about where you are and where the environment is and how '04 is shaping up from an underwriting perspective. Could you just add a little bit more color on what you're seeing in the competitive landscape out there? I know State Farm has cut some rates and are things getting more competitive or do you feel like you can navigate through with 95-ish combined ratios in the current environment for the quarter share?

I don't think we're going to have any problem navigating through the competitive environment in the target market that we are after. And as we look at where we are relative to the competition in the educator marketplace in the better tiers, there's no reason why that has to impede our agent growth. I will say where the main pressure point has been as we've gone through the book of business to make sure we have more acceptable risk and it's priced appropriately when you get to the non educator market and particularly those that are in the less desirable underwriting tiers, we're not going to be competitive nor do we ever intend to be. So I think we've got a little different set of facts and circumstances surrounding our future prospects and you may see in the mass market just because of our niche market focus. But as you all know our focus has been overall in both property casualty lines before we start growing significantly to fix the margins in the business which obviously we've made a significant amount of progress on. Doug, anything you'd like to add to that?

Does that conclude the question?

I had one follow-up. (inaudible)

I'm sorry. I thought we did a very fine job. (MULTIPLE SPEAKERS)

What's had the combined ratios of your seasoned educators block of business compared to your non educator's market? It sounds like on the margin perhaps growing the non educators was a mistake and you're going back to your knitting?

Without question the refocus on the educator is what we know. The results for the educator business, especially in the professional side of that, are quite a bit better than the market as a whole or the non educator market. And what we're trying to do as we go through that and segment the educator market, obviously, the combined ratios reach a certain quality because you're reflecting that in the lower price point for the educator business. So we're seeing the educator business -- runs certainly over a 10 percent benefit over the no educator, lost ratios standpoint.

Bob, if I could just add to your comment about getting back to our knitting. In 2000, which was when I first got here and we began building the team that is now in place, less than 50 percent of the new property casualty business coming in the door was educator which, frankly, shocked me at the time. But notwithstanding that, we've been doing a lot of things to get back to our knitting, get our agents back in school, focus on the educator market across all of our lines and right now the new business coming in the door is 70 percent educator. We're always going to have some portion that's non educator, just because of our agents being in the community, being highly regarded.

And we're willing to write that as long as it's high-quality profitable business but to be less than a 50-50 split between the two made absolutely no sense and there's absolutely no reason for Horace Mann to be a competitor in the broad mass market.

J. F. Tremblay, Credit Suisse.

Nice to see some good news in the press release, congratulations, first of all, I was curious to hear from Butch what you think are the main areas of focus in your marketing strategy and what exactly needs to be done differently, if anything?

I think we need to continue to focus on addressing the issues surrounding the auto sales. We're in the process of addressing issues that we think will have an impact on increasing sales for our agents. I think that's a priority and then, of course, addressing the issues that pertain to new agent retention and growing our agency force. I would say those are the major factors while we continue to pursue increasing sales and life, annuity, and property.

And, Doug, can you refresh our memory in terms of how your tiering plan is structured? How many classes you work with and to what extent can you be flexible in your pricing with categories of risk you're most entrusted in?

This is Doug Reynolds. At this point what we basically have in the states are three companies. To that we place new business into and one that's more of a leftover renewal business. And one is predominantly educator and one is predominantly non educator or those educators that don't quite meet our better prized underwriting criteria. So maybe accidents, violations, within each one of those companies we have -- we use a tiering mechanism up to and it depends by state but up to seven or eight different tiers, pricing tiers and that's, obviously, using an insurance score to place those. So once business is -- meets the underwriting criteria for the Company then we use the insurance score to place it in the proper tier. And the tiering model is similar for both companies.

Okay and then finally on the agent recruitment and the retention it affords, to what extent do you think an improving economy might make it more difficult for you to reach retention and recruitment goals?

I, really, I think that the economy has not been a major factor in our retention either currently or in the past so I really don't see that as a factor. I think addressing some of the issues that we have identified that agent retention and particularly new agent retention and those are being implemented through our new agent retention program will have much greater impact than the economy.

So basically it's coming down to training, mentoring, who's initiated.

Selection training, yes, additional mentoring several parts of the program that I think will have a greater impact yes.

I'd just like to make clear when you asked Butch the question about what changes might be made that the overall strategy from a distribution perspective of expanding where we are geographically through high priority markets, deepening customer relationships, focusing on improving agent productivity, growing the number of agents and also driving growth in annuity sales through independent agents. None of that has changed. It's just what Butch has focused on is turning up the burners on the execution of those. So no strategy shift if you will. It's just putting more power behind the tactics that support those strategies.

Mark Finkelstein with Cochran Caronia.

Couple quick questions. Firstly in looking at the partner program on UL and LTC product it seems to be particularly successful and I am just curious if there's any thought of rolling this out to new products whether it's products currently being offered by Horace Mann or alternatively new products that aren't being offered? That's the first question.

I think we would consider doing that in the future in circumstances where there's where we see a strong consumer need for and also where we don't have the scale or the skills to manufacture those products. Having said that we have introduced a lot of new things to our agents over the course of 2003 and, frankly, their plates are pretty full adjusting all of the changes that we've given them.

So, while we are experiencing some early positive results particularly from the Jefferson Pilot Universal Life, they're not as totally comfortable with that product and all the software that surrounds it as they need to be. So we need to get more of our agents involved in that before we try to roll out something else so the answer is that we consider broadening the financial footprint and looking elsewhere for outsourced products the answer to that is yes but the timing would be critical. We got plenty to do with what we have right now on the product front.

Thank you. Second question is just going back to the agent retention program. Was there any change in the comp structure for the agents as a result of these new programs?

Has there being any change is the question?

Yes.

There have not been any changes in the compensation program for new agents in the last couple of years. We are currently reviewing agent compensation and that's an old bowling thing. You always have to monitor the income of agents and particularly your new agent -- you have to factor in retention.

Alain Karaoglan with Deutsche Bank.

Nice results. I have a few questions. On the property casualty side in terms of the investment balance, it seems to have increased significantly from the fourth quarter to the first quarter by 6 1/2 percent which suggests a 27 percent annualized rate. Is there anything -- what's the reason behind that?

This is the Pete Heckman. You talking PNC investment. (MULTIPLE SPEAKERS)

PNC investment -- actually investment balances. They went up from 656 to 699 round numbers.

Well, we had positive cash flow certainly given our results in the quarter. As I believe I mentioned in the fourth quarter we also did make capital contribution to the PNC Company at the end of last year which increased the balance.

How much was that.

Little short of $25 million.

Could you also repeat your comments about that $2 million I believe on prepayments.

Right, yes, we have a structured mortgage-backed security that began prepaying more aggressively at the end of '03 and into '04 so it resulted in recognition of income beyond our expectations in total about $2 million in the quarter and my comments were to say that with rates now moving up we expect that prepaying activity to come down a fair amount, but as a result would expect the pattern of quarterly net investment income to be more front ended in the year than we would have normally predicted. So I think there will be a skew of dollars of investment income more into the first and second quarters than you would normally expect as we build assets through the year.

And that 2 to million is pre tax?

Yes. Correct.

The third question relates to the loss ratio on the property business seem to have increased significantly from the fourth quarter. Could you give us a little bit more information on that? If we look at it ex cats it seems to have increased by 27 points sequentially. Ex cats and ex for our reserve release.

I think that one of the things on the property side is as we went through the fourth quarter with some of the catastrophes but would have impacted some of those numbers as well as the year end. Searching here for the number on it.

May I ask my next question? (MULTIPLE SPEAKERS) could you remind us of the components in terms of the lines of business for the guidance that you have given you are giving in terms of combined ratio and personal auto property and your thoughts on investment income on the PNC side?

I'll answer the first part. The lines of business as far as on the PNC side is the auto, property and the involuntary and other liabilities which would be the personal liability as well as the educator liability that we have. And that would be the total lines of business and that would incorporate all of that into the combined ratio guidance that we had given at the 95 to 97. Does that answer that question for you or... ?

Yes you have the components of that what that auto and property will be... or... ?

No we've included all those together and as we've looked at that the -- both the auto and property in that 95 to 97 would really both fall into that range at again with property at a normal catastrophe level as well as -- as well as the normal catastrophe level for auto.

As we said, we will after six months of results take a look at that combined ratio guidance along with our review of the overall earnings per share guidance.

If I could just make a comment on your previous question for the quarter while we were looking around for the numbers 'cause didn't see what you're seeing so we wanted to see if we had missed something but on the fourth quarter what we're showing would be with the ex cats. That is a year end ... (MULTIPLE SPEAKERS)

Mark Sarafin (ph) with Bank of America Securities.

Couple of just numbers -- questions might have missed them on the beginning of the call. What was the net AOCI number at the end of the quarter?

(MULTIPLE SPEAKERS)

You got another question, Mark?

Yes I guess while you guys are digging through a couple of pieces of paper there maybe what helps identify the inflection point in the life segment? I mean, you guys have been working on a number of initiatives but the drag is still continuing. I mean at what point are you expecting this business to start moving in the other direction?

Well again as we focus on primarily driving partner products I think the Horace Mann portfolio is going to not grow as rapidly as you would expect and premium therefore that we don't count toward our books when we sell partner products will be languishing a bit as well. But that will be made up in terms of less capital requirements through selling those products and through the income. As far as when that inflection point will come and earnings will begin to turnaround obviously interest rate and investment income will have something to say there but as we grow our -- continue to grow our sales of partner products fee income supporting what is otherwise a flat trend on Horace Mann products.

The OA (ph) question Mark? The ending balance was 17 million. There was no change from year-end.

And then one other numbers question for comparability purposes, could you give us the change in DAC (ph) for the quarter? On the P&C business?

P&C?

Yes we will have to get that. About half a million higher.

J. F. Tremblay.

I'd like to get back to your investments. You mentioned that your watch list is clearly shrinking. What's left on your watch list and how concerned are you and then could you address your exposure to mortgage backed securities and what your expectations are there?

I think we have either only one or two securities on our watch list none are under 80 percent of book value or neither of those two are under 80 percent of the value. We put basically everything under 90 percent on our watch list and we have a couple between 85 and 90 percent. One of those is as much interest rate driven as anything else. And the other is just something we're keeping our eye on. So the bottom-line answer is we're not concerned at this point at all with regard to our watch list. Mortgage-backed securities are something that we do have an allocation to somewhere around 30 percent or so as our -- I believe as our allocation target. That has come down a bit because of prepays so we've been opportunistically putting new money into mortgage-backed if it makes sense from a return standpoint.

At this time I am showing no further questions.

Maybe I'll -- along with regard to your question on the property combined ratio perhaps I could just get back to you off line if that is okay?

Thank you for joining us on our conference call this morning and we look forward to visiting with you next quarter. Thank you.

Thank you, this does conclude today's teleconference. Please disconnect your lines at this time and have a wonderful day.