Horace Mann Educators Corp (HMN) 2004 Q3 法說會逐字稿

Good morning and welcome to your Horace Mann Educators sponsored third quarter earnings release conference call. At this time all participants have been placed on a listen only mode and the floor will be open for questions following the presentation. At this time I would like to turn the floor over to your host for today’s conference Dwayne Hallman. Sir you may proceed.

Good morning and welcome to Horace Mann third quarter third quarter earnings release conference call. Yesterday after the market closed we released our third 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 web site under investor relations. Today we will cover our results of the third 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 the executive vice president, 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 security law our actual results may differ materially from those projected in the forward looking statements. These forward looking-statements were 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 companies public filing with SEC in an earnings press release issued yesterday. We undertake no obligation to publicly update or advise 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 live on our web site. An internet replay will be available on our website until December 6th 2004. Now I will turn the call over to Lou Lower for his comments.

Good morning everyone and thanks for going us. As we pre announced back at the end of September,the impact of hurricanes Charlie, Frances, Ivan and Jean had a dominant impact on Horace Mann’s third quarter results which clearly made it a difficult period from an earnings perspective. More importantly and of greater concern however is that the period was both traumatic and trying for many of our customers, particularly in Florida where they have endured damage and disruption from an unprecedented four hurricanes during a six week period of time. We are extremely proud of how our new claims organization has responded marshalling resources to deliver our promise to our customers at this critical moment of truth helping them to restore and regain their lives. I’ll ask Doug to provide you with a fair amount of details surrounding these events as well as our response. In order to demonstrate how we have gotten our arms around the operational challenges of claims volume. That volume as you can well imagine was well beyond anything that could be predicted or even imagined. Also as you will hear from Pete, despite the unprecedented frequency and severity of those events, they are digestable from a balance sheet perspective and our commitment to a strong balance sheet with prudent loss reserves remains intact.

While the losses experienced from hurricanes overwhelmed positive results else where when we exclude the abnormal impact of those catastrophes, the very positive improvement trends that we reported in both first and second quarters continued into the third quarter. All of us at Horace Mann are up beat about the solid and sustainable underlying results which are substantially better than prior year and improving sequentially in our property casualty segment. On page 3A of the numerical exhibits to our earnings release we have provided you with supplemental information on key operating ratios that excludes the impact of catastrophes and prior year reserved development recorded in 2003 in an effort to facilitate your understanding and analysis of our improving operating trends.

As you will also hear from Doug, our improving results continue to be driven by the multiple initiatives that we have undertaken including greater percentage of business from educators and from the more favorable underwriting tiers coupled with aggressive pricing and underwriting actions. Additionally results also reflect consistent progress and claims where improvements in both severity control and expense management continue with steady momentum. As you will hear from Pete in out Life Company, pretax operating income from the total of your life and annuity segments is running ahead of prior year periods and our expectations. Highlights in marketing in the quarter include a record level of career agent annuity sales, life sales were also very strong while property increased somewhat over last year.

The key opportunity area going forward is an auto new business which has declined but now that we have engineered the much needed turn around in P&C margins we have the breathing room to dedicate more resources to the growth side of the auto equation while maintaining our pricing discipline. With the right economics now in place auto new business and PIF growth has become a key focus for us. Despite the decline in auto new business the income of our agents as measured by both first year and total commissions has increased as the sales of the other lines have more than made up for the decrease in auto and that’s clearly one of the benefits of being an agent for a multi line company. New and career agent retention as you will hear from Butch as well as productivity in both of those groups continues to improve, all of which we believe are positive signs for agent growth in 2005.

Finally I would like to comment that it was disconcerting for all of us to see the valuation of the company as reflected in the price of the shares being impacted by the headlines and publicity concerning law suits and investigations alleged bid rigging, fictitious growth and contingent commissions that steer business. Just to be clear we are not the subject of any investigations or subpoenas from the attorney general of the state of New York or related investigations for any other state for that matter. While I understand that investors may have been wary of uncertainty in the entire insurance sector it is difficult for any of us to imagine that Horace Mann could be the target of such a law suit. To begin with ours is a retail franchise, targeting consumers in the educator market. We have a personal lines focus not a commercial or business to business operation as is the case with the main company.

The vast majority of our distribution relies on our career agents who represent Horace Mann exclusively- they do not offer multiple quotes from competing companies. While we do distribute a portion of our annuity business to independent agents, we only pay standard commissions and do not offer or pay bonuses or additional incentives for their business. While we engage the commercial marketplace in purchasing D&O, E&O and reinsurance for us, we do not believe that we have been a victim of the alleged practices. We have and will continue to take a disciplined and vigilant approach in our dealing with commercial insurance brokers to mitigate the potential damage of less than competitive pricing to Horace Mann. Shifting back primarily to the arena in which Horace Mann does operate as you will hear on the commentary to follow, the execution in our operations continues to improve with each passing quarter producing solid gains and underlying profitability. In particular we are driving sales growth in three of our lines of business, while delivering improving property casualty underwriting expense management and claims efficiency. Our team here is confident in our strategy, proud of how our execution continues to improve and pleased with the sound fundamentals that we put in place to support sustainability of the positive trends being delivered. And now I’ll turn it over to Pete Heckman.

Thanks Lou. With regards to third quarter earnings, net income excluding net realized investment gains was a loss of 37 cents per share compared to the mean FirstCall consensus of a 39 cent loss and the prior year loss of 44 cents per share. The current quarter included approximately 90 cents per share of catastrophe cost. The two primary story lines in the quarter were the hurricanes, their unprecedented frequency and severity and the continued improvement in our underlying non-catastrophe P&C results. My remarks this morning will include some high level commentary on these two items along with some perspective on the strength of our balance sheet and observations on our current 2004 earnings guidance.

With regards to the hurricanes, the four storms that hit Florida in South Eastern US have been described in a number of different terms by a number of different constituencies. But in my opinion, the fact that these four events which occurred over a relatively compressed time period, were among the top six most costly hurricanes to ever hit the US says it all. In our third quarter financial results we recorded an estimated total net cost related to the hurricanes of $57.7 million including $4 million of reinstatement premiums which was consistent with the range of $50 to $65 million we preannounce at the end of September. Issues including the large volume of claims, the fact that some policy holders had claims for more than one event and the inter-relationships between the four events and our reinsurance coverages are but a few of the challenges involved in estimating a series of losses as significant and complex as these.

But as Doug will expand on in a moment, our loss estimates and our customers have benefited from our new claims organization’s response to these catastrophic events in terms of the high percentage of the claims reported to us having been physically inspected and what we believe to be a relatively high rate of closed claims, particularly on hurricanes Charlie and Francis. With regard to reinsurance based on our current estimate of gross losses and loss adjustment expenses, we would anticipate having upwards of $80 million of reinsurance recoveries related to these storms. A little over half from the Florida hurricane catastrophe fund and the remainder from carriers who participate in our property catastrophe treaty. We do not anticipate any significant problems any with timely recovery, however, give the current financial capacity FHCF and the financial strength ratings of our catastrophe reinsurers. Coupled with the fact that we have already billed and collected approximately $20 million in reinsurance payments.

In spite of the magnitude of the third quarter catastrophe losses, the most significant of the company’s history, the strength of the balance sheet remains in tact. Our adjusted capital in property casualty premium to surplus ratios at September 30th, has in fact improved compared to year end 03. We’ve increased P&C statutory surplus by approximately $16 million or about 8% over the last nine months and book value per share excluding FAS115 has grown 3% over the same period as well. Our ability to digest the financial impact of these storms in the third quarter was due to the significant improvements that have been made in the underlying P&C results over the last several quarters which have begun flowing through to the bottom line in 2004. Doug will be updating you on these terms in just a moment. But before reading the balance sheet I wanted to touch on two related items.

First in terms of P&C reserves, our internal analysis of September 30th 2004 indicated reserved development in the third quarter to be consistent in total with our expectations and those findings were support by Deloitte’s quarterly review as well. So we continue to feel good about the adequacy of the reserve strengthening we did last year and the improved claims processes and procedures that are in place. And also with regards to asset valuation and the underlying quality of our investment portfolio, Horace Mann had another quarter with no investment impairments or write downs and our September 30th securities watch list remains insignificant. And finally, in the preannouncement of our hurricane Francis, Ivan and Jean loss estimates we revised our full year 2004 guidance range for net income excluding realized investment gains and losses from $1.45 to $1.55 down to 85 cents to a dollar per share. We did not reflect the full amount of our hurricane loss estimate in the reduced guidance in light of the favorable underlying P&C results which had continued into the third quarter. That trend is reflected in the sub 90% third quarter and year to date P&C ex-cap combined ratios and has been the primary driver of Horace Mann’s strong underlying 2004 earnings improvement.

In terms of our year end outlook, September year to date reported net income before realized investment gains and losses was $0.51 per share. Excluding above normal or excess catastrophes this figure would have been approximately $1.20 to $1.25. Assuming a normalized forth quarter equal to the average of the first three or something around 40 to 42 cents per share, would yield a year end estimate close to the mid point of our current guidance range. And with regards to 2005 earnings guidance, we do plan to provide that with our fourth quarter of earnings releases in February consistent with FAS practice and our internal planning process. And now here is Doug Reynolds to comment on our property casualty results.

Thanks Pete and good morning everyone. This morning my comments will be a little longer than usual as I share with you both the impact of the hurricanes as well as the continuing positive underlying results from the quarter. As I cover the results, I would like to remind you that all operating ratios are on a GAAP basis. As you’ve seen, the financial impact on our net income as a result of the hurricanes were substantial for the quarter. Reported in our earlier press release, the expected impact on income pre tax from the hurricanes is in the range of 50-$65 million. Within this range, we’ve booked approximately $58 million which includes loss, loss adjustment expense and reinstatement premiums. In total, this added approximately 43 points to our combined ratio in the quarter resulting in a combined ratio of 130.5% for the property and casualty group.

With that said, let me give you a little more flavor on what’s behind the numbers. While we shared the wrath of the four hurricanes with our customers, we also had the opportunity to help over 9,000 of our clients who suffered damages to their property. The investments we’ve made in strengthening our claims organization over the past two years, the reorganization implementation of new software, process and procedure improvements certainly were instrumental in our ability to manage the hurricane losses out of our South Carolina office. We complimented our own loss handling efforts with an external adjusting company. As a result of this relationship, we had 140 field adjusters on the front line all coordinated by our cat team professionals. These professionals we have physically inspected and begun settlement process for 100% of the claims submitted for all four of the hurricanes and over 75% of them are now closed through October 31st.

Charlie is over 95% closed with 58% handled in less than 30 days. Francis, 85% closed with 66% handled in less than 30 days. Ivan is over 60% closed with 36% settled in less than 30 days and the last storm Jeanne is also over 50% closed. Our employees, agents, claim reps and client service reps by any measure have performed capably, professionally and compassionately in ensuring that our customers were taken care of. Looking ahead, it is clear that these events will necessitate a closer look at the Florida property marketplace.

Over the past few years, we have taken a number of steps to mitigate some of our loss potential in Florida. We have over 90% of our Florida homeowner book of business with either a 2% or 5% hurricane deductible, implemented underwriting requirements for coastal exposure, have minimal exposure in Dade and Broward counties and have driven more of our growth towards the interior of the state. Unfortunately, as these four hurricanes showed, even in the middle of the state was not safe from severe damage. Our market share around the Orlando, Lakeland and Winterhaven area is almost two times our statewide average. This general area was hit by three of the four hurricanes. The fourth hurricane hit Pensacola, another area where we had good penetration of our educator market.

Over the past 18 months we’ve also been working with the state of Florida to address what we felt was an inadequate rate for current business within five miles of the coast. Although we have received a rate increase early in 2004, it was insufficient to justify retention of this business. As we stated in our second quarter 10-Q, we are begining a non-renewal process of this business which represents more than 5,300 policies, this action has been postponed by the states emergency order halting all homeowner cancellations. But we will continue this program as planned once the order expires.

Now moving beyond catastrophes, in yesterdays’ release we included an exhibit on page 3A that extracted all of the unusual impacts of catastrophes, reinsurance reinstatements, and prior year development in order to compare the true run rates of our business. I’ll direct the balance of my comments for those key operating ratios. We continue to drive improvement in our underlying results, as a matter of fact the third quarter was one of the best we’ve experienced in both auto and property. I should point out that in the first three quarters of this year, we had no additional reserve to prior years development.

Starting with a broad view of P&C, we posted in 87% combined ratio for all lines. Almost the 13 point improvement over last years’ quarter. On a year to date basis our combined ratio comes in at 89.6%, a 7 point improvement over 2003. Voluntary auto had another solid quarter continues to show improvement. The adjusted combined ratio was 91.9, a 10 point improvement over last years’ quarter. On a year to date basis, our auto combined ratio improved over 2 points. But as we stated in the first two quarters, a better barometer to use at the year end 2003 results due to the exiting year strengthening that took place over the course of 2003. Using that or a more appropriate measure, auto results so far in 2004 have improved approximately 4 points.

Auto average written premiums increased 4.5% in the quarter. Approved rate changes implemented in the quarter averaged 5 1/2%. This reflects the improved loss experienced from pricing underwriting transactions. We’ve also continued to improve the quality of our auto book of business. The percentage of new auto policies from educators increased 3.2 points year to date to almost 71%. We are turning our auto book of business to a position where we can realized consistent profitability as some of the cost. Our aggressive pricing and underwriting actions have caused the decline in our over all new business production. As a result, we have seen a reduction in our overall policy counts since the first quarter of this year. Our renewal ratio has remained relatively constant compared to prior year but the decline in new business production has caused our overall policy counts to be lower with the largest decreases occurring in the non-educated portion.

During 2004, we have continued to write an increasing percentage of our business in the better experienced tiers. The majority of the new business reduction continues to be driven by those tiers with more experience where we did not have adequate pricing. Now that we have our combined ratio under control, we can begin to drive more new business production in the educator marketplace while challenging the positive combined ratio.

On the property side of the business, underlying results continue to show strong improvement. In the quarter, the combined ratio was 72%, a 17 point improvement over the prior year quarter. On a year to date basis, the property combined ratio improved by 21 points to 76. However, as with auto, a better barometer is to look at the four year property results for a more relevant comparison. Viewed from that perspective, our combined ratio improvement so far this year has been approximately 10 points. We continue to see improvement in the quarter on percent of educator new business now over 70% and 2.7 points higher than a year ago. The underlying results of our property business are continuing to reflect the benefits of our underwriting pricing and re-inspection programs as well as our renewed focus on the educator market.

For the quarter our average written premium for property policy increased 10.7% reflecting our commitment to adequate pricing. We have continued to aggressively price where needed with an average implemented rate change of 12%. The numbers reflect the positive trend that continue in the quality of our property business. Compared to same period a year ago, educators as a percentage of our in force business increased 2 points to 62% and we’ve continued to increase the percentage in our best tiers. As you can see, we are continuing to drive solid combined ratio results and feel very good about the levels we have achieved. Through all the challenges in this quarter, we continue to post excellent results in our underlying business. Our employees show that they were up to the task of dealing with an unprecedented event while keeping their eye on the ball in managing day to day results. We received further validation that the investments we’ve made in claims, provided superior returns given the large number of customers who suffered devastating impact on their lives. A few more words on our claims operations. We continue to drive improvement and follow the strategy we established with ACE, our advanced claim environment. Even with the challenge of the four hurricanes, we have moved further with our plan to bring first notice of loss in-house. We have implemented a pilot in our St. Louis office and will introduce the program to our remaining five regional claim offices over the next 60 days. This change allows are our clients to speak directly with us versus a vendor when they need to report a claim. This process will enable us to obtain all necessary information at the time the claim is reported. It also allows our adjustors to start handling the claim at time of first contact. We are confident this process will drive further improved plan satisfaction and operational improvements.

In summary, due to the hurricane, the quarter was not what we would have wanted from a financial standpoint. But we take great pride in the continuing improvement in our underlying results and what we have accomplished. We look forward to continuing to execute on a strategies we’ve designed to produce and sustain strong, consistent results.

Now, I would like to bring back Pete Heckman to share his thoughts on Life and Annuity.

Thanks, Doug. Just a few brief comments on Life and Annuity. First, with regards to the Annuity segment, September 30th total cash value grew by 11% over prior year. Total contracts and in force grew by 4%. And cash value retention remains strong in the 93 to 95% range.

Annuity segment pre-taxed income of $3.7m in the third quarter, although half-a-million lower than the prior year, was generally consistent with our expectations. Increases in the interest margin and in contract charges and fees were more than off-set by the adverse impact of DAC and PIF unlocking and change in guaranteed minimum death benefit reserves in the quarter.

Year-to-date, excluding the impact of unlocking MGMDB, Annuity pre-taxed income was up approximately 12%, or $1.5m over last year, driven primarily by increased contract fees.

In our Life segment, while premiums and contract deposits showed modest decline in both the third quarter and nine months compared to 2003, Life sales continue to be strong. Driven by the success of our Universal Life partner product, manufactured by Jefferson Pilot, total Life sales were up 18% in the quarter and 23% year-to-date.

In terms of the bottom line, life segment profitability exceeded ours in the quarter. Pre-taxed earnings of $7.4m were ahead of prior year by a wide margin. Excluding the impact of DAC unlocking in both periods, the positive variance was approximately $3.7m with a number of factors contributing. In addition to the expected increase in fee income from partner product sales, unanticipated benefits were also realized in the quarter from unusually strong group insurance results and favorable mortality. Year-to-date Life pre-taxed income was up about $2.4m compared to 2003. About half of that variance was due to higher partner product fee income with favorable mortality and group earnings also contributing.

So, in total, the underlying profitability of our Life and Annuity businesses in the quarter was generally consistent with our expectations for the second half of the year, with the Life segment providing some unexpected upside margin.

And now I’ll turn it over to our Senior VP of Marketing, Butch Joyner.

Thanks, Pete. Good morning. I am pleased to report that our strong sales results recorded in mid-year continued in the third quarter. During the third quarter, new sales premium posted a robust 17% year-to-date increase over the same period a year ago. That increase is reflected in career agent sales which are 15% higher than the first three quarters of 2003. And career agent productivity also improved, growing 24% year-to-date versus the same period a year ago. Sales have been especially notable in the Life and Annuity lines, both experiencing solid increases. Annuity sales for career agents in the third quarter grew 26% over the same period in 2003. That makes me quite proud of our sales team because it represents a new company sales record for annuities in one quarter, exceeding our previous best quarter by 19%. Annuity sales increased 34% over the first three quarters of 2003. This growth included a career agent sales increase of 31% and an independent agent sales increase of 52%.

I should note that the mix of business in the independent agents has shifted as we have re-emphasized variable and qualified sales. While this has had some impact on overall sales in the short term, I have great confidence that in the long run that it will help us solidify our presence in the educator market.

Life also enjoyed a very strong quarter with sales increasing 18% over the third quarter of 2003 and 21% over the full three quarters of 2003. This strong performance was driven by the improved productivity of our agency force and the increasing use of our partner company products.

We expect to see continued in both Life and Annuity for several reasons, including the accelerated implementation of our new sales tool solutions. The solution software package allows agents to produce powerful, customized, need-based plans rather than focusing on the traditional transaction-based model. Solutions has been introduced to 20% of our career agents. And beginning in the fourth quarter, all new hires will be trained to use the new selling system.

Turning to Property and Casualty, we have more a mixed bag. Through the third quarter, new business premiums from Property increased 10% over 2003 while Auto sales were down 12% for the same period. As Doug mentioned, there is no doubt that the aggressive pricing and underwriting actions we have taken have impacted new sales. The good news, however, is that the resulting improvement in our margin places us in a much improved position to identify growth opportunities in the educator market. These growth opportunities are supported by our new agent compensation plan, which not only places a premium on new sales but on the retention of in force business as well.

Let me add brief comments about our agency force. We are seeing expected returns from the new agent retention program initiated at the beginning of the year. Retention of 2004 hires is up almost three points over a year ago. And the productivity of our 2004 hires is 40% higher than the 2003 hires a year ago. Here our new agents were hired in the first nine months of 2004 compared to a year ago, contributing to an overall decrease in the total agent count. However, our experienced agent count is 4% higher than one year ago and base force retention has improved by four points for the same period.

Additionally, we have recently restructured our field organization to allow for a broader on-site support in each of our regions, as well as more focused efforts in our high-priority markets. This is designed to support agent growth efforts while bringing greater efficiency to sales process. This new structure will also permit the agency managers of our high-priority markets to focus exclusively on those markets, thus supporting brand and growth initiatives in these areas.

All in all, I am excited about what we have accomplished through the first three quarters and expect that we will continue to build momentum in the fourth quarter to help carry our strong performance into 2005.

Now, I’ll turn it back over to Dwayne.

Thanks, Butch. At this time, that concludes our preferred remarks. Karen, if you will proceed to the question and answer session.

Thank you, sir. The call is now open for questions. If you do have a question, please press star one on your touchtone telephone at this time. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound sign. Once again, if you do have a question, please press star one on your touchtone telephone at this time. Please hold while we post our first question. Our first question is coming from Brad Glasspiegel (ph) of Langen McAlenney.

Good morning. Butch, those comments on what you are doing on agent are helpful. Just wondering if you could share with us when you would expect to see that your total agent count starts to grow and be up year-over-year. Are we in position now where that’s a goal over the near term?

Yes. We have yet to see our agency force stabilize in count over the third quarter and we would expect to see growth beginning in the fourth quarter and more accelerated growth in 2005.

You’re talking sequentially when you say growth or—

Yes

And year over year would start to grow middle of next year or …?

I think we would begin to see the growth beginning in the fourth quarter and continuing on a quarterly basis throughout 2005.

Okay and translating that in combination with the fact that you’re done re-underwriting Lou, when do you think we should start to see PIF growth in your property casualty area?

Let me kind of give you a broad overview of all the things that we are putting in place to support auto growth because it’s not just the number of agents and then we can drill a little deeper if you want to with Doug and Butch, because it’s a combined effort between our property casualty organization and our marketing organization but just by way of back ground I think you can appreciate that our first priority was to deliver acceptable margins and as we increased prices, gone through re-underwriting, the price we paid is our agents have viewed auto as a very difficult proposition for them. As you might, imagine their phones have been ringing off the hook as we’ve gone through this and frankly in many taken the path of less resistance and you can see that our sales of the other lines have gone up, but having said that, I think we’re beginning to stabilize in terms of price increases. We’ve got the margins where we want. We’re not going to go through the aggressive re-underwriting so the environment to get their heads back in the auto game is going to be there. I’d also note that despite all of the actions that we’ve taken, we are competitive in the educator and the best underwriting tier so the prices we’re pricing and re-underwriting has been the most significant, has been in non-educator and the less desirable underwriting tier.

So what do we do to go forward? First of all in property casualty, Doug and his team are developing a new pricing model, we call it Educator segmentation in which will be a more sophisticated pricing model using more variables, more finely segmenting the marketplace, giving us more pricing point so frankly, allowing us to write business today that our current pricing model is probably missing and disadvantaged in those segments. We’re going to be transitioning our property casualty group to a product management organization so we have folks that are dedicated to focus on both growth and profitability at the local market level working with the field so without compromising the margins that we’ve been able to achieve. We are adjusting agent auto commissions that will create a better balance between new and renewal comp. They will have higher renewal commission so they’ll focus on retention where we think we have significant opportunities to increase PIF but it will still place a lot of emphasis on new business production, particularly since the level of new business production of an agent will determine the level of renewals that we receive. As Butch mentioned, there’s going to be more focus in the field than ever on auto including how, for example our agency managers are rewarded. An intense focus on our high priority markets where we believe we have significant growth opportunities not only in agents but in the auto business and we’re beginning to see some very positive trends in those and then just overall agent growth, which Butch mentioned.

And then finally we’re continuing the improve the ease of doing business in auto so that auto is less of a hassle for our agents from a quoting and issuing perspective which we believe will allow them to have more time to sell auto. So that’s kind of a high level of all the things that we’re working on. Now that we have the breathing room to do that and now that we’ve gotten our margins where they need to be and happy to answer any follow-up questions and have Doug and Butch jump in as they would like to.

As the strategy sounds interesting but when you sort of synthesize it all out, can you grow PIF in middle of next year or is it really sort of an ’06 game plan?

I would say that as we go forward, really being able to grow the PIF based on what we’ve put in this year would be a big challenge in 2005. I would say as we move toward the end of the year, we would start to realize some of that but we certainly would expect that to be more as we move out into 2006.

Thank you.

Bob we can give you a better feel for that as we go through our guidance for 2005 and have our plans put in place.

Appreciate it Lou, thank you.

Thank you. Our next question is coming from Allison Jacobowitz of Merrill Lynch.

Thanks. I was wondering if you could some about getting your initiatives particularly with expenses and agency compensation cost and things like that. Where you see your expenses going, going forward on the property casualty side and the life side?

As you may have noticed Allison, we had some relatively favorable prior year comparisons this quarter in expenses that was a fair amount of noise from items that benefited the quarter that were not necessarily recurring. Having said that, we have been focused on expense control broadly across the organization for a couple of years and have made some substantial progress and we’re going to continue to do that. So overall expense management is and has been and will continue to be a high priority for the company.

I would also add that on the agent compensation side, a lot of that was restructuring the compensation versus the adding substantial amount of dollars into it so as a percentage to our premium. We really don’t expect that to move very much. The second thing would be that we will continue to make investments in the business, especially on the technology side where we need to that will provide really longer term gains but on the short term, a good example would be looking at some of the things. Lou mentioned the ease of doing business in the property and casualty administration system so although that’s a long term move and the benefits are certainly there, you do get some short term impact as you incur some of those expenses in front of the benefits being incurred.

Okay thank you.

Our next question is coming from JF Tremblay of CSFB

Good morning. Lou could you elaborate on your comment regarding your pricing models, you mentioned that you will be developing a new pricing model. I think you said that your current pricing model that prevents you from writing more business?

I’m not blaming everything on the current pricing model because that was a huge step forward from where the company had been but it doesn’t have the degree of sophistication that we need to go forward. We’re going to be in our new pricing model, introducing more variables that will allow us to reach out to more customers and Doug maybe you want to add a few comments about the pricing model and when they might anticipate that we’ll begin to see that rolling out.

Jeff what we are trying to do is really create more segments that are more adequately priced. I would say right now, although we separate between the educator and the non-educator and we use insurance as part of our churning process we still have – the pockets are still too large. And we believe that by analyzing more factors, cutting maybe for example ages groups more finely than what we do today. That would just provide us a more accurate price and opportunity to write the educators where maybe we’re missing some of that today. As well as creating, putting us in a more competitive market with some of the better educators experience wise than what we can get today.

What we’re looking to do is to roll that out to our first stake in first quarter of 2005 and then continuing that through the year. It is a rather sophisticated model but our early indications are that it will help us tremendously on both a production side as well as managing the overall combined ratio for the auto book of business.

And then on separate topic, I think you pointed currently to your own distribution system relative to what other companies do in light of this regulatory scrutiny of the industry. And in particular I was wondering if you expect that the current action taking place in California for instance and where it seems that the focus is really on the retail part of the business and to some extent benefit organization like yours with there own distribution force.

I suppose that’s a possible. We obviously wouldn’t build a strategy on that nor would we engage in the practice of integrating other companies. But it’s possible but not something that we’d want to bet our strategy on.

Okay so maybe some marginal gain but nothing very substantial?

Right and I also you know I just somewhat troubled on the other side by the entire insurance industry rightly or wrongly in different sectors getting a black eye. And you know the public may not appreciate the differences so I don’t think any of this is good for the industry in general.

Okay thank you.

Thank you our next question is coming from Alain Karaoglan of Deutsche Banc.

Good morning I have several questions the first one is obviously the hurricane the series of hurricanes were very unusual, is that causing you to think and review either the amount of re-insurance or type of re-insurance you’re buying, your exposure in other states such as the Carolina’s and their susceptibility to be hit by several hurricanes in one year. Clearly in Florida you’d already made some decision in the second quarter that the pricing was inadequate and it stopped. Could you talk about that and in your pricing what do you think is going to happen to your re-insurance cost in 2005 and are you taking into account any potential increase in re-insurance costing in your pricing? And I have a couple of other questions.

Well a couple of things on the re-insurance program obviously with the hurricanes hitting Florida – 4 in that period of time and as I mentioned we’re working to re-look at how we do business in Florida. We are taking our re-insurance program now to market and it’s – the format of it is very similar to what we had in the past year. There is probably a couple other things that we’re looking at but at this juncture I really wouldn’t want to talk about those seeing as we haven’t decided and we haven’t priced -- out look those -- what the cost is versus the benefit. Our pricing model we certainly have anticipated price increases as a result of what we think re-insurance cost will do in Florida, as far as across the rest of the country we’re not anticipating an impact on the cost of our re-insurance. So we do think that will be more focused on the Florida market. But certainly looking at opportunities or ways to protect from the multiple hits is that we are reviewing.

Well I’ll just add that you know this is the obviously a large market a lot of teachers in it, it’s growing, we do want to be there for our educator customer base but also obviously have a strong obligation to our share holders. I’m hopeful that over time in longer term maybe not in time for 2006 that the industry in the state of Florida can develop some creative solutions and mechanisms. And I know that you’ll recall that after hurricane Andrew some very good things were put in place and hopefully we can all join together to achieve the same thing now that we understand the potential impacts of 4 hurricanes in a 6-week period of time.

My second question relates to normalized sort of catastrophes could you remind from a catastrophe load on a combined ratio basis? What should we think of on a yearly basis whatever normalized mean, and what it would have been on a third quarter basis?

Okay for the annualized we look at about 3.5 to 4 points on the combined ratio for catastrophe and in the third quarter we would have been you know if we look at it quarter by quarter basis would have been right around I guess that same level. Though obviously the results were quite a bit higher. But that’s typically what we would do. You know for our size we don’t fluctuate it too much quarter-by-quarter. Obviously the second and the third quarter are up a little bit more than the first quarter. But it’s not a huge fluctuation on a quarter basis from a planning standpoint.

Okay and does the fact that you’re growing the homeowners business more than the auto does that mean that we ought to increase that tax load over time?

Right in really the growth has come from rate increases not unit growth. So as we look at that out into the future that certainly is some thing that we look at every year if it’s at the right catastrophe load for us. And at this point I’m not anticipating a change in 2005 but again that is something that we would look at on an annual basis and take into consideration what happened in the current period of years. You know I would say that 2003 we had the fires, which were somewhat unique event and certainly in 2004 having 4 hurricanes in one year is – that intensity is not something that we would expect to have to deal with in 2005.

Okay and the last question relates to the annuity on life side. What caused the un-locking and should we look at that Pete as a one time item and the profitability should go better the margins on the annuity side going forward? And on the life side obviously we had better margins than expected. What should we think of going forward?

Alan the deck unlocking in the annuity line was really driven by 2 factors. One the market return in the quarter was below our expectations and the other piece was we had some realized capital gains in the quarter, which also triggered unlocking in the other direction. So in large part those are 2 of the key drivers in the annuity segment relative to unlocking. We would expect if the market were to increase in the 2, 2.5% range for quarter, which is what our unlocking is basically penetrated on. I would expect a bit of an up kick in annuity earnings in the fourth quarter compared with the third. But again that’s driven largely by external forces.

With regard to the life results in the quarter as I mentioned we had some unexpected positive results which we would not bank on continuing. And it might be somewhere in the neighborhood of reduced run rate of maybe a couple million dollars below where the third quarter was pre-tax would be a range I might provide.

Thank you very much.

Thank you once again the floor is open for question, if you do have a question please press star one on your touch-tone telephone at this time. Our next question is coming from Ron Bargman of Capital Return.

Hi a quick question about the storms I’m not sure you’ve release this but maybe I missed it, could you give us the gross losses for the storms and the number of claims corresponding to that figure?

Yes let me just say that the 4 storms right now total gross losses that underline our estimates and this includes not just the Florida losses although those were certainly predominant. But a little bit of auto and non-Florida property as well as loss adjustment expenses. In the $135m range and again that gets you to about the $80m of recovery number that I mentioned. A little more than a half of which we’re looking to get from the Florida and the remainder from our Caps trading. With regard to claim counts reported to a few days ago we were charting at about 9500 reported claims for all 4 storms. And Doug mentioned the closure rates, which obviously we feel pretty good about.

Okay and with the $135m number just for my education is the LAE component of that you know less than 10%? Just sort of what typically is the mix when you, and there is a pretty – there is obviously a pretty big sample size so unfortunately. How meaningful is the LAE components of total payments?

It’s some where around 5% or so.

5% okay thanks a lot, appreciate it and good luck.

Thank you.

Thank you Mr. Hallman there appear to be no further questions coming from the phone lines at this time. I’ll turn the floor back over to you for any closing remarks you may have.

Thank you for participating in our call this morning we look forward to visiting with you on year end, thank you.

Thank you this does conclude the teleconference. You may disconnect your lines at this time and have a wonderful day.