Horace Mann Educators Corp (HMN) 2005 Q1 法說會逐字稿

Good morning and welcome to the Horace Mann Educators Corporation First Quarter Earnings Conference Call.

[Operator Instructions]

It is now my pleasure to turn the floor over to your host, Mr. Dwayne Hallman. Sir, you may begin.

Good morning, everyone, and welcome to our first-quarter 2005 earnings conference call. Yesterday, after the market closed, we released our earnings report, 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'll cover our results for the first quarter and our prepared remarks. The following senior management members will make the presentations today and, as usual, will be available for questions later in the conference call. Lou Lower II II, President and Chief Executive Officer; Pete Heckman, Executive Vice President and Chief Financial Officer; Doug Reynolds(ph), Executive Vice President of Property & Casualty; Frank D'Ambra III(ph), Senior Vice President of Life & Annuity; and Butch Joyner (ph), Senior Vice President of Marketing. Following the call, please feel free to contact me, if you need further clarification on our results.

The following discussion may contain forward-looking statements regarding Horace Mann Educators Corporation. 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 and time of this call. For a discussion of the risks and uncertainties that could affect actual results, please refer to the Company's public filings with SEC 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 web site. An Internet replay will be available on our web site, until June 6th 2005.

Now, I will turn the call over to Lou Lower II for his comments.

Good morning and thanks for joining us. As we reported yesterday on our release, Horace Mann is off to a solid start for the year with net income before realized gain of 23.5 million, or 51 cents per share. That's a healthy increase of 28% over prior year and above the consensus of 41 cents per share. As you'll recall, per share data now includes additional dilution from the new coco accounting convention -- the impact of which for both quarters is approximately 3 cents per share in operating income. The positive earnings results we are delivering are attributable to continuing improvements in our Property & Casualty segment.

We are realizing benefits from multiple sources, pricing and underwriting actions, transformation of our claims organization, and very importantly more and more of our new and in-force business coming from our target market in the preferred underwriting tiers. As we discussed last quarter, our challenge in personal lines, going forward, is clear. Having achieved very acceptable levels of profitability, our efforts are now directed at growing PIF through a combination of increased new business and improved retention of the in-force.

The first light of the growth equation is to expand our agency force. As you may remember, last year, we called the time out with reduced hiring of new agents to short up our new and career agent retention. Having now achieved positive retention improvements, we are in a position to increase the hiring of quality agents, while continuing to improve new and career agent retention. While our agent count is down compared to a year ago, we have grown sequentially from 800 to 820 since yearend. Thanks primarily to ongoing improvement in retention. And we do anticipate further growth over the balance of the year.

The second light of the growth equation is improving agent auto productivity. Again, as we indicated a few months ago, it's going to take some time and considerable effort over the course of the year, as we work to win our agents back to the auto line. For the past couple of years, they and their higher risk customers experienced aggressive but appropriate pricing and underwriting actions, as we focused on improving our loss ratios. With that largely behind this, we are in the early stages of a process of winning our agents back to selling more auto in an environment, which now has stability and consistency.

Now, to be clear, the first-quarter auto sales were below last year's levels. But the gap is beginning to close month by month, and we are seeing more pace starting to pose positive variances to prior year. So, in short, we are seeing early signs of progress but still have much to accomplish to transition to levels of growth that are commensurate with our franchise opportunity.

Sales and earnings in the annuity line are off last year's pace, as we along with the industry face very challenging financial markets. For one, we are in a difficult interest rate environment. Below absolute interest rates, and ever flattening yield curve, and tight credit spreads continue to work against new fixed annuity sales as well as in-force spreads. New sales of single premium and rollover business have been adversely impacted, as you might expect with crediting rates of 3 to 3.25%. But we do feel good about sales increases in our bread-and-butter periodic premium or flow business, which is really the gust of the flow 3B (ph) business. Similarly, our variable business has increased, but poor equity market performance is hurting accounting balances, the fee income we earn of them, and DAC amortization charges.

The other thing you should note in our call today includes stable life segment earnings and solid company-wide expense control disciplines helping all operating ratios.

From a balance sheet perspective, we continue to feel very good about the strength of our P&C reserves, which had no adverse development. Investments remained well-diversified and high quality with no impairments during the quarter. Our key capital ratios continue to improve on both the GAAP and stat basis at operating and holding company levels while a reduced level of unrealized gains produced a decline in book value, pre-FAS 115 book value increased 9.6% year-over-year and 4.5% sequentially.

So, in short, we are of to a good start with solid financial puttings, attractive property and casualty margins and some leading indicators of future personal lines growth beginning to gain traction. And now here's Pete with some additional information on the first quarter financials.

Thanks, Lou and good morning. As Lou just mentioned, Horace Mann started the year with a strong first quarter. P&C results were ahead of our expectations and were, once again, the real strength of the quarter. The total ExCap combined ratio of approximately 85% was some 7 points below the first quarter of 2004 and a point or two better than the full year of 2004 results, which given the release of 2004 accident year reserves in the fourth quarter, is probably the more meaningful comparison.

Catastrophes in the quarter were worth about a point on the combined ratio and were generally consistent with our expectations and comparable to prior year. In aggregate, there were not adjustments to prior year's P&C reserves in the first quarter and we continue to remain very comfortable with our reserve position, including our provision for future of net claims and claim expenses related to the third quarter '04 Florida Hurricanes. Life and Annuity segment earnings, absent the net adverse impact of DAC unlocking adjustments were consistent in total with our expectations. While the results of our expense management efforts were better than anticipated.

Total net investment income in the quarter, met our expectation in spite of being $1 million pre-tax less than prior to year. We have approximately $2.2 million of pre-payment income in the first quarter of 2004 compared to the anticipated minimal amount in the current quarter. Adjusting for that difference, current period investment income was up slightly versus prior year, as growth in assets offset the decline in portfolio yield.

So net-net, we are tracking in the first three months somewhat ahead of the pace that we anticipated in our full year guidance on the $1.55 to $1.65 per share with the 13 to 15% pre-FAS 115 operating ROE. We're certainly encouraged, but believe it's premature to adjust our guidance at this time with most of the year ahead of us. We will, of course, review guidance after second quarter results and if warranted, adjust our outlook at that time. And with that, let me turn it over to Doug Reynolds to review property and casualty.

Thanks, Pete and good morning. The first quarter of 2005 continued the trend of solid quarterly results for property and casualty in both our auto and property business. For the quarter, we posted a total combined ratio of 85.3% excluding catastrophes, a solid improvement over prior year's first quarter and over our 2004 annual results.

Using this same measurement, voluntary auto achieved a combined ratio of 90.9%, a substantial improvement over first quarter 2004 and about equal to 2004 full year result. Similar trends also hold true in property. During the quarter, average earned premium increases continue to outpace loss cost for both auto and property. Frequencies trended slightly upward in auto, which was a direct result of the winter weather we experienced in January in a few key states. Conversely, we continue to see frequency reductions on the property side.

Auto case severities remained relatively flat during the quarter. While on property, we experienced increases. All indications are that the property increases are in industry phenomenon, driven largely by the countywide cost increases attributable to the Florida Hurricane. These favorable trends are supported in part by solid improvements we are driving in our claims operations. The personal loss process, which I covered in our last call continues to drive a faster and more professional response to our customers. Currently 85% of the initial calls we receive during Florida loss are either settled immediately or returned directly to one of our adjustors. This allows us to fully expand the claim process, set customer expectations and move quickly to handle the loss. This process results in greater customer satisfaction and better loss cost results.

Overall, claims had a solid first quarter and we continue to drive improved processes and customer satisfaction, while managing the loss adjustment expense. The quality of our book of business continues to improve. As you know over the past few years we've made a number of changes to refocus on our educator target markets, while ensuring adequate pricing. Although these changes have adversely impacted our policies in force and challenge our agents in the writing of new business, we strongly believe and our results show, that our business is now stronger and more stable with the solid foundation to support future growth.

The business we are writing in our educator target market continues to represent an increasing percentage of our business. Auto educators, as a percentage of total new business, has increased over 4 points and property educator over one point versus prior year. Property and casualty new business is now over 70% educator with almost 75% educator auto new business. And on renewal, the educator percentage for both auto and property has increased about 2 points over prior year. These same trends also hold true for our better performing lower priced tiers.

While we are pleased with the trends and the quality of our book, policies in force for both auto and property have continued to decline, driven by reduced new business flows, but with that said, the renewal rate for property has started to increase and auto has remained relatively level. In both lines of business, we continue to see a higher percentage of deflectors in the non-educator segment. The upside is that auto educators now represent over 69% of our policies in force, an increase of 1.5 points over prior year. Another encouraging sign was the growth of total property educators in the quarter. Overall was a strong quarter for property and casualty. Although the new business auto growth continues to be a challenge, we are working diligently and creatively to address it while maintaining the positive combined ratios.

And now let me turn over to our newest member of the senior management team, Frank D'Ambra III for his commentary on Life and Annuity.

Thanks Doug and good morning. As Lou discussed earlier, the climate for annuity sales has been less than ideal for both Horace Mann and the industry. This is reflected in an 18% decline in total annuity sales for the quarter versus first quarter 2004. Bear in mind that 2004's first quarter was a record setter for annuity sales for the company. In a market that was particularly difficult for single or rollover deposit, our sales declined in that area 28%. This result was also impacted by our commitment to writing new fixed rate business at appropriate spreads.

On the other hand, I am encouraged by the sales of our core recurring premium deposit business, which advanced 23%. This growth reflects both increase market penetration as reflected in a 3% growth in our policy count and increased contribution levels from existing customers. Additionally, total annuity assets under management grew 9% with fixed annuity assets increasing 9.5%, and variable assets 8.3%. Looking at the bottom-line, pre-tax income for the annuity segment of 3.4 million represented a decline of $2.4 million. However, excluding the impact of GMDB reserves and DAC unlocking for both periods, earnings were flat when compared to 2004.

Life segment sales in the quarter were down 9% year-over-year. A small increase in product sales was more than offset by a decline in sales of Horace Mann products. Total premiums declined by 5%, which is consistent with increased partner product sales. Total policy count declined slightly by 2%, but which has stabilized over the last four months.

Going forward, based on business submitted in the second quarter but not yet issued, we do expect life segment to resume a positive sales growth rate, as we move on into the year. Pre-tax income for the life segment was essentially flat, increasing a modest 200,000 over the prior year period. Earning benefited from an increase in partner fee income, DAC unlocking, lower expenses and improved group results offset by higher life claims.

Having completed my first 90 days, I want to take a movement to share with you some key initiatives we have began to drive future growth and profitability in our Life and Annuity business. First, we're actively engaged in developing an enhanced product management process, which will be applied to all Life and Annuity product lines. We want to insure that we build the right product solutions for our customers and increase our speed to market. As an output of this process, we expect to launch new or enhanced product offerings across all three primary lines, variable annuity, fixed annuity and life in the first quarter of 2006.

As we prepare this next generation of products, we are looking at ways to fine-tune our current products and services to increase their appeal in the current economic and investment environment. Specifically, we're focusing on process improvements, increase the easy doing business, improved customer service, increase productivity and reduce costs. At the same time, we are assessing opportunities to offer enhancements to our current product offerings.

Second, we're seeking additional partner relationships to ensure that our distribution channel has a full suite of product and services they require to meet customer needs. Effective February 1, we begin selling an equity index annuity series manufactured by Jefferson Pilot, who also provides our universal life product. Given the current climate of low interest rates and low equity markets, this product is an attractive compliment to our Horace Mann annuity products. The product is being well received by our agents and educators clients. Sales and increase fees will begin to show up for this product in the second quarter. We're also currently reviewing potential new long-term care partners and we're initiating discussions with our current partners to identify opportunities to leverage our relationships through activities such as co-branding and sharing an underwriting profits.

Third, Life and Annuity is working closely with marketing, to further identify, quantify and expand our relationships with independent distribution organizations, who are focused on the 403(b) qualified market and embrace a consultative approach to clients.

Looking forward, I know the challenges remains, but with those challenges my team and I see exciting opportunities to continually create value for our customers and to realize the full potential of Horace Mann franchise.

And now, I'd like to turn it over to our Senior Vice President of Marketing, Butch Joyner.

Thanks, Frank and good morning. As you heard in prior calls and again this morning, we are in the agency force and increasing our agent out of productivity is the primary focus of our efforts in the first quarter and throughout 2005. Though still early we are encouraged with the success we have enjoyed, but that is tampered with reality of continued challenges.

I am happy to tell you that our agent retention problem, initiated early last year is beginning to bare fruits. While agent count is down 1% from a year ago, the number of experienced agents has grown by 11% and they are in same time period. And total agent count has grown by 2.5% from the beginning of this year with the major contributor being a seven point improvement in base Horace retention compared to end of the first quarter of 2004.

With retention initiatives paying off, we are now positioned to increase hiring levels of qualified agents. As those factors play out we anticipate additional powerful growth of the agency force over the remainder of the year (inaudible). The quarterly rate of growth would not be expected to match the rapid growth of the first quarter.

You've already heard about the solid bottom-line auto results. New auto sales premium decreased by 8% during the first quarter of 2004. As reported in earlier calls, getting our agents back to full participation in the auto line of business is not a short-term project. Over the past couple of years, our agents have endured pricing and underwriting actions that generated a large volume of service work. That environment factored in their electing to shift more of their focus to our financial service products.

Now, with a more stable auto pricing environment and added marketing support for the line of business, agents are coming back to the auto line. That's reflected in the number of states exceeding previous year's sales with each passing month of the first quarter. And when comparing sales in the first quarter of 2005 to the corresponding month in 2004, the negative variance has narrowed each month. Our average agent auto productivity in March was the best in the past seven months. As Lou stated, we've made some good progress but there is still much to accomplish.

Average agent productivity in this year's first quarter compared to the first quarter of 2004 was flat, but overall new sales premium decreased by 14%. The majority of the decrease in new sales premium was in the annuity line of business. Contributing factors included a continuing shift of the independent agent business focus coupled with significant reduction in single premium business, both in the independent and career channels result of low levels of interest rates in a flat yield curve environment.

On the positive side, at the same time, we posted increases in the sales of schedule premium business of 23%, which is the heart and soul of our 403(b) efforts. And we enjoyed the increases in the available line as well. I remain encouraged by what we've seen in the first quarter. Again, we understand the right course of action is to aggressively pursue change that will help us powerfully grow our agency force and our auto book over the long term.

Certainly growing the agency force is key to the second part of the equation topline auto growth. Well, we're not really where we want to be, we are well positioned to achieve our goals. Thanks, and now back to Dwayne.

Thanks, Butch. And that concludes our prepared remarks. So, now, please move to the question-and-answer session.

Thank you.

[Operator Instructions]

Our first question comes from Bob Glasspiegel of Langen McAlenney. Sir, please pose your question.

Good morning. And before I get to my question, let me appreciate -- express my appreciation for the new expanded format in your press release, I actually founded very helpful. Lou, the question is for you. It seems to me your interesting decision node as a CEO today; the Company has fixed its underwriting and is in position to report very favorable results over the short and immediate term. And I guess you could, on one decision perhaps would have knocked the business, generate very good returns, excess capital and able to implement a pretty aggressive capital management program. Or conversely you can invest for growth and try to attract a lot of new agents and new business in using your underwriting standards, and I suspect you're going to take your path somewhere in between those two approaches. But I was wondering, if you could just tell me how you, sort of, balance those two potential decisions that you can make and really what's the right approach?

Yes. That's a very good question Bob. I would tell you just to - that I joined the company and what attracted me to joining Horace Mann from the outset was the tremendous growth opportunity entrapping into the potential of a franchise. And I would tell you that everyone who in the new management team, who joined me in the following years and those who are Horace Mann veterans are absolutely committed to pursuing the great growth opportunity that we see in the franchise.

We just haven't been able to get to that because of all the actions that we've had to take to write the shift. But our pursuit right now is focused on growth, however, you're absolutely right, we don't want to -- we are not going to loosen our underwriting standards and get the company back in the soup that it was before. So, we are going to maintain the very strong underwriting and pricing disciplines that we have, albeit, becoming more sophisticated so we can reach out to more customers profitably, but grow our agency force, as Butch says, we'll do it thoughtfully with high-quality agents.

So, we continue to maintain the improvements in retention that we have that we've enjoyed and the improvement that are put in place a new agent model that we're working on for, beginning to rollout, that will allow our agents to build support personnel to support them, which will make them more productive. So, I guess, the answer is, we are investing in growth for pursuing what we think is a great franchise opportunity as a niche marketing company, but we're going to maintain the profitability and the strength in the balance sheet that we have worked so hard to achieve over the past few years.

If I get clearing the question a little bit more prudently, Lou, how much does it get under your report minus 2% written premium growth? Would you be satisfy to report numbers like that for next couple of years recognizing -- just to try to recruit -- just to try to get new business today is challenging, not that much business is getting shopped, and rates are going up, and maybe minus 2 is the number for the next couple of years?

No. I don't think any of us would be satisfied with that. We are -- that number in this quarter, and for the next few quarters is not going to be where we want to be. And that's an impact of having it re-underwritten, the book of business, getting off risk, particularly in the non-educative marketplace that the company -- for the benefit of hindsight never should have been long.

So -- but I think that given the niche market that we have that we can turnaround the growth equation. We see ourselves when it comes to the educative market in the better underwriting tiers having being very competitive and/or having good price proximity. For us, its not necessary, we are not competing against the mass market companies; we just got to work hard to get our agents back prospecting, ex-dating and expanding their operations and using order of the bill there, the foundation of their operations. So, I think, maybe, we're aware of all the environmental issues that are out there, and certainly there's some more difficult environment then it might have been five years ago, for example. So, we think there are unique circumstances in the educative market place that will allow us to turnaround the growth equation.

Thank you very much.

Thank you. Our next question comes from Alain Karaoglan of Deutsche Bank. Please pose your question.

Good morning. A few questions. Do you have the impact of non-catastrophe weather related losses this quarter versus prior? Was that beneficial, was it as you expected?

Yes. Alain, let me just -- It was actually right around what we would have expected for the quarter, maybe slightly above and probably compared to the prior year, we would have been just slightly over where we were in the first quarter of 2004. So, as far as the catastrophe losses for the quarter, they were right around what we have planned and just slightly -- the non-cat weather view, and just slightly above where we would have been over prior year

Okay. And expense ratio has moved nicely down. Did you expect to be able to hold it at 21.2, or is it going to creep up, or anything that let it to be lower than the prior quarters?

Well, there's really two things. One is we've continued our focused on managing the expense components, so we had some carryover from number of the programs that we've put in place in 2004. And secondly, our acquisition costs were obviously lower in the first quarter than what we would have anticipated. So, going forward, I would not expect us to stay at that level. I would still expect the expense ratio to be closer to 22 range.

Okay. The -- you've mentioned the acquisition costs lower. Was that because you didn't settle enough policy or was there something else?

Yes. No, it was really the new business productions lower than what we would have expected.

Okay. The -- in terms of price increases, what are you putting through in this, both personal auto and homeowners, and how does that compares to the loss trends that you are seeing?

Well, right now in the first quarter on auto, we -- our average increase was just slightly less than 1% and on property it was slightly over 2%. Obviously, the environment to take the rate increases is more difficult simply because of our results. And I think what we've said in the past, that at this juncture, we are continuing to outpace our lost cost, and it's really through a number of things.

One is the continued controls in claims and severity management, and the second is frequencies, as I indicated, up slightly in January, but since that point above what we would have expected on auto and down a little bit on property. So, if those things continue, then the run rate of our business will stay about where it is. Our anticipation is that that will start to see some frequency increases, especially on the auto side. As you know, there's a number of external factors that impact that.

An I think from standpoint of what we would expect in a little bit longer term is that we would expect the combined ratio to float up a little bit just because inflationary pressures over a period of time, and the rate changes normally are a little bit behind some of those upward pressures.

And are you satisfied with your combined ratio? I mean it was a good one on property, but is that -- do you think it solved any of the property issues, and you are comfortable with all the actions that you've taken, and where do you stand now?

Yes, overall on the property side, we are very pleased with the combined ratio. I think a number of the programs that we've implemented over the last couple of years have continued to payoff for us. We do continue to look at exposure and concentrations. As you know, in Florida, we had announced a period of time ago that we were reducing coastal exposure there. We've worked with the States on that program, and we are non-renewing about 3200 policies in Florida that are coastal exposures, non-educator, which was one of the things that we had worked with the State to achieve.

Okay. And last question on the fixed annuity side. What is the spread that you are achieving on that business? And what are the -- what's the average crediting rate that you are giving on that policy. What are your thoughts of interest rate increased, what sort of -- are you concerned about that, or how would you manage that?

In terms of the spread that was crediting on new business has been written right now. For the most part we're achieving our spread goals, which is in the range of 200 and 225 basis point. We do have some continuing contributions that go into existing products where the spreads are narrower, but on long-terms of the new business, new product issue, we're getting the spreads that we're looking for.

In terms of interest rates moving higher, did that concern us? No, actually, we think that would be probably a good thing as long as that movement isn't particularly sudden or dramatic. But, I think some increased rates are going to obviously help our portfolio yields and help us in terms of managing the spread issue for the entire block of business that we have, which obviously both the new -- new business coming end of the existing business, that's already there.

So if I could just, expand on that a little bit Alain, it would on the in force a raise in interest rates would help us and we wouldn't be increasing the crediting rate on the in force, so we would get the entire benefit of the spread.

All right. Thank you very much.

Thank you.

[Operator Instructions]

Mr. Hallman, I'm showing no further questions at this time.

Thank you. We appreciate you joining us this morning. And look forward to next quarter.

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