Horace Mann Educators Corp (HMN) 2005 Q4 法說會逐字稿

Good morning, Ladies and Gentlemen, I'll be your conference facilitator. At this time I'd like to welcome everyone to the Horace Mann Educators Corporation fourth quarter earnings conference call. [OPERATORS INSTRUCTIONS] It is now my pleasure to turn the floor over to the your host, Dwayne Hallman, sir, you may begin your conference.

Good morning, everyone, welcome to our fourth quarter and year-end, 2005 earnings conference call. Yesterday, after the market closed, we released 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 web site under "Investor Relations." Today we'll cover our results for fourth quarter and the year in our prepared remarks.

Following senior management members will make presentations today and as usual will be available for questions later in conference call. Lou Lower, President and Chief Executive Officer, Pete H Heckman, Executive Vice President and Chief Financial Officer, Doug Reynolds, Executive Vice President , Property and Casualty, Frank D'ambra, Senior Vice President of Life and Annuity, Butch Joyner, Senior Vice President of Marketing. The following discussion may contain forward-looking statements regarding Horace Mann and its operations. 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. Per discussion "Risk and Uncertainties" that could affect actual results please refer to the Company's public filings with the SEC and in the earnings press release issued yesterday.

We entertain an 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 recorded and available live on the web site, an internet replay will be available on our web site until March 9, 2006. Now, I'll turn the call over to Lou Lower for his comments, Lou?

Welcome everyone to our fourth quarter year-end earnings call. As you read, Horace Mann's net income before realized capital gains and losses of $ 0.34 for the quarter brought the full-year to a $1.54, and that result is in the middle of the guidance range that we provided following our initial claims evaluation of Hurricane Wilma. Despite a devastating hurricane season our underlying results were able to absorb the significant cat losses and still produce an REO in excess of 13%, with book value growth pre-FAS115 of over 12% for the year. I don't, however, want to minimize in anyway the impact of hurricanes on the customers and agents we're very proud, once again, of the response of the claims' organization serving customers in a significant time of need. Before Pete, Doug and Frank and Butch go into the specific details of the quarter, I'd like to spend a few moments commenting on results in the context of what the Horace Mann Team accomplished over the course of the year and our expectations for 2006.

As you may recall, a year ago at this time, I described 2005 to you as a transition year dedicated to turning the corner on auto and agent growth while maintaining P&C margin adequacy, life and annuity sales momentum and realizing continued benefits from disciplined expense control. With the exception of life and annuity sales, which were moderated by both external and internal factors we do feel good about our progress and the positive pace that we've developed as we enter the current year. Our focus on agent retention, which improved significantly, and a quality of new agents, paid off as we grew our field force from 800 to 855 over the course of the year.

While we fully anticipate continued agent growth this coming year, I would caution that we could follow a different pattern than 2005 as the number of agents we have in Florida and Louisiana may well decline as a result of underwriting restrictions from our coastal exposure reduction programs. Our focus on auto line improved sales results sequentially throughout the year. In the first half of the year, auto sales closed the gap to prior year with each passing month. Sales rallied in the second half and we began exceeding prior year results month by month, ending with a 23% increase in new units in the fourth quarter. We benefited from both productivity and agent count gains as we placed more direct emphasis on auto sales through sales campaigns, new training programs and new agent compensation plan and a strengthened field organization. Plus, we've supported auto growth across the Company through our new product management organization, ease of doing business initiatives, and ESM, our educator segmentation pricing model, which we piloted in two states. As initiatives, like our product management organization and ESM are deployed and take hold in more states over the course of 2006, we're looking for continued improvement in auto sales growth.

Now, at the same time the quality of business for both auto and property as measured by percent educator and percent in the preferred underwriting tiers continue to improve, over the course of the year, for both new and enforce. Both lines also showed steady increases in retention throughout the year, educator, auto, PIF growth term positive in 2005, and we believe total auto PIF, which bottomed out in 2005, will turn the corner in '06. The year was also on a continued improvement in EXCAP P&C underwriting margins thanks not only to the quality of the book but also to ongoing improvement in both loss adjustment expense and severity control delivered by our restructured and redesigned claims' organization. We're committed to delivering further lost cost improvements on the claims' front this year to help mitigate lost costs inflation, and also believe our improving claims' service levels will add to further increases and retention over time. The increase consistency and stability of P&C claims and underwriting operations resulted in favorable reserve development for both the quarter and year. At the same time, we remain sufficiently conservative in our held reserves at year-end appropriately reflecting the newest of 2005 accident year. Elsewhere on the balance sheet investment portfolio is solid, performed as expected with modest impairments, and watchless concerns, those being primarily related to the auto sector where we have substantially reduced credit exposure. While, combined life and annuity profitability excluding DAC and FIF charges, [better] expectations, sales in those lines did not achieve our objectives and I attribute a large part of life and annuity shortfall to environmental forces that have dampened sales for the industry.

In addition I should note that our strong emphasis on auto has redirected agent attention to the short-term determent of life and annuity productivity. But looking forward we do anticipate a return to a more balance emphasis with life and annuity sales growth in 2006. In support of that, we've already designed, and are rolling out a series of new life and annuity products, with contemporary features and writers, which our agents are eagerly awaiting. In summary, we delivered positive results 2005, as we hit our stride we can now allocate more resources to the gross equation this year while sustaining profitability levels and continuing to increase our financial strength. Taking into account the pace of the business, and the initiatives that we're putting in place to drive future growth, our earnings guidance range for net income, excluding capital gains and losses for the coming year, is $1.65 to $1.80.

While the mid point of that guidance still proximates the current consensus, please note that it does include increased cap reinsurance expense of about $0.16 per share above the level reflected in our initial 2005 guidance. And as you'll hear, reinsurance program provides new coverage elements to better mitigate the volatility of multiple and larger cat events. Finally, the mid point of our EPS guidance range will deliver book value growth of 12% an ROE of 14%, and continued improvement of capital ratios at the both the operating and holding company levels. Now, for the financial overview, I'll turn it over to Pete Heckman.

Thanks, Lou. Good morning. Horace Mann's earnings in the fourth quarter were impacted by many of the same factors that have been in play over recent quarters and prior year. On balance, that's positive news; unfortunately, however, the overriding theme in the quarter, once again, was catastrophes with the industry experiencing the highest level of fourth quarter insured losses in the last 10 years. With Hurricane Wilma producing a lion's share of those losses.

Horace Mann catastrophe costs in the quarter were estimated, approximately, $20 million, pretax. Toward the high-end but within the range provided in our early December preannouncement. Of note, within that total amount was estimated $15 million of loss and loss adjust the expenses related to Hurricane Wilma and absence of significant change in our estimate of net losses related to catastrophes incurred in prior periods. Excluding cash, underlying property and casualty results in the quarter adversely impacted by a spike in auto claims experienced in the first half of December, which was partially offset by bitter than expected property loss experience.

For the full year, the combined ratio, excluding caps and prior year reserve reestimates was just under 86%, a few tenths lower than prior year's excellent result. Continued favorable development of prior year's property and casualty reserves was recognized in the fourth quarter in the amount of $5.3 million, bringing full the year total to $13 million. These development trends along with reduced volatility in our claims' data, have provided increased confidence in our reserving process and level of reserves over the last couple of quarters. Relative to the independent year-end review performed by DNT, Horace Mann's held reserves at [123105] remained toward the high end of [lowest ] range.

As Frank will describe in more detail, fourth quarter pretax income for the combined annuity and life segments, excluding DAC unlocking and change in GMBD reserves, was slightly better than expected. For both the quarter and full year, 2005, total pretax earnings for these two businesses were comparable to prior year. Including a $1.8 million impairment recognized in the current period on our Ford Motor Company, fixed income securities, realized capital gains were $700,000 pretax in the fourth quarter; and 9.8 million for the year. Total net investment income in the quarter was up, close to 4% over prior year and just under 2% year-to-date. Generally consistent with the expectations.

Looking ahead to 2006, total net investment income is anticipated to increase by 4 to 6%. With annuity and life investment income growth expected to be toward the high end of that range, and income on the P&C portfolio anticipated to be relatively flat. Reflecting the impact of net catastrophe cash flows. So, in conclusion, with regard to observations on 2005, in spite of the significant catastrophe losses experienced, we're encouraged by the fact that Horace Mann recorded a profit in each quarter, that book value per share excluding FAS 115 increased over 2% sequentially in the quarter, and more than 12% for the full year. That operating ROE, ex- FAS 115, grew to over 13%, and that both statutory capital growth and operating leverage improvement in our P&C business have been substantial over the last two years. In terms of 2006 guidance for the net income before realized investment gains and losses, I would offer a couple of observations -- Our guidance range $1.65 to $1.80 per share is identical to the current range of analysts first-call estimates.

However, in light of enhanced CAT reinsurance program I would suggest it might be a stronger or higher quality estimate due to the additional reinsurance costs included in our guidance, along with the corresponding expectation of reduced earnings volatility related to the catastrophes. And in terms of how one might view guidance range compared to 2005, if you adjust 2005 reported operating earnings, to reflect a CAT load of between 4 and 4.5% of earned premium, add the additional catastrophe reinsurance costs, exclude the tax refund benefits and favorable reserve development, our adjusted EPS would be around $1.63 per share. So, on an apples to apples basis the mid point of our range for '06 equates to about a 6% EPS growth rate with the top end at a little over 10%. So, with that, let me turn it over to Doug Reynolds for his comments on property and casualty.

Thanks, Pete. Good morning. Simply stated we're very pleased with the 2005 results. We achieved consistent results throughout the year, month to month, and quarter to quarter. Let me say, that in spite of repeat of 2004 with more than enough major catastrophes our claims' department, agents and service staff once again stepped up to the challenge of three major storms and exceeded our customers' expectations.

Let's start with a view of the expense and combined ratios. Combined ratio excluding catastrophes and prior year development was 86.2% for the quarter and 85.7 for the year. The 85.7 combined for the year represents an improvement over prior year of almost one point. Conversely,the expense ratio continued to exert upward pressure due to reduced earned premiums and focus on business improvement investments aimed at yielding greater efficiencies in future years. On a year-over-year basis, the expense ratio added two points to the total combined ratio in the quarter and a point for the full year. Breaking down our business results by line, our full year auto combined ratio is 92.4%, excluding impacts of catastrophe and prior year development.

Full year result increased slightly less than two points versus prior year primarily driven by the increased expense ratio. We had two weeks in the first part of December where our frequency of loss spiked resulting in fourth quarter combined ratio of 97.8 , excluding catastrophes and prior year development. This was due to severe winter weather that hit in Florida, our top seven states, and impacting quarterly auto loss results by, approximately, four points. The remaining weeks of the quarter were in line with our expectations and reflected nothing out of pattern, which we've seen continue into 2006.

Our property business continued to post strong underlying results, excluding caps and prior year development and we posted a combined ratio of 57.6 for the quarter and 67.3% for the year. These results represent a substantial improvement over prior year by, approximately, 3 and 5 points, respectively.

Looking at other significant metrics we drove continued quality improvements in our book of business, both new and renewal over the course of 2005, just as we did in 2004. The percentage of our new business in the better quality auto tiers improved by 3 points and almost 2 points in property and our percentage of educator new business increased almost 6 points in auto and 2 points in property. The same trend is reflected in our renewal book as the educator percentage increased over 2.5 points for both auto and property. Virtually all of our quality indicators for both lines saw improvements over prior year.

Our existing book of business saw declines in the auto educator household accounts and educator auto policies enforced throughout 2004. This trend, however, was reversed in 2005, starting a second quarter and continuing through year-end. We retained over 90% of our educator auto households. In the fourth quarter, and for the third quarter in a row, educator policies in force increased sequentially for both auto and property. Retention results can be attributed to specific programs designed to expand the relationship with our educator clients. Along with the touch point programs we implemented a TRI-line discount, piloted an add-a-line program and focused on the best long term auto appliance by moving them to preferred company.

As circumstances in 2004 and 2005 warranted, we'll spend a substantial amount of time on 2006 on exposure management, taking a four-pronged approach. One, reduce hurricane costal exposure; two, grow in the heartland, basically non coastal exposed areas; three, identify additional reinsurance opportunities; and four, continue to aggressively go after price.

As regards coastal exposure we have substantially limited the opportunity to write new business in such states as Florida and Louisiana. At the same time, we have identified other costal markets where we're controlling new business and identifying opportunities to reduce our concentration, via exposure management strategies.

Balancing these actions we're targeting property growth opportunities and non-coastal markets. Our heartland growth strategy. Another facet of our PML management process is reinsurance. In 2006, we're our implementing a number of changes to the catastrophe reinsurance program that we believe substantially strengthen our program and will also stabilize earnings. We have increased our top end coverage limit by $30 million from $80 million to $110 million.

In Florida, this takes us to, approximately, $165 million of reinsurance coverage when you include the Florida Hurricane Catastrophe Fund. We also broadened our catastrophe protection by purchasing an annual aggregate cover. This aggregate component provides $20 million of coverage above the $20 million annual retention. The first $10 million of loss from any catastrophe is subject to the treaty.

Due to market condition and cost increases, we've raised our excess of loss attachment point to from 10 million to 15 million, however, somewhat offsetting this change we purchased a 5 million excess of 10 million layer for second and third event storms. The cost of entire catastrophic reinsurance program has more than doubled for 2006, from 9.5 million to 21 million. And as Lou already stated, these costs have already been included in the 2006 guidance.

While the past two years of results has dictated a number of changes, we believe the overall reinsurance program is much stronger in 2006 and will also assist the more earning stability, admittedly with a higher price tag.

Finally, we'll pursue rates in the catastrophe-prone markets to match price with increased risk and reinsurance costs. Now, taking a look at 2006. We are forecasting a slight decrease in written premiums driven by the increase in reinsurance seeded premiums as well as quality improvements in our book, which present fewer opportunities for rate increases and places pressure on our average written premium. We are also protecting 2006 to be a transaction year in terms of auto policy growth, as we begin to achieve quarterly sequentially growth in the second quarter. Our expense ratio will also continue to rise modestly due to flat premiums and continued business investments, such as the new property and casualty administration system and other growth initiatives. We're anticipating our combined ratio will increase slightly in 2006, with auto remaining in the low 90s and property in the mid 80s, as more catastrophes. [inaudible] Both reflect flat frequency, the severity increasing slightly, but staying below CPI and industry trends.

Although total premiums will take a modest downturn, we are projecting an increase in our pure new business in 2006, as well as continued increases in our educator household retention. One of the key drivers is ESM, educator segmentation pricing model, which is now in two states with about another 10 to be added in 2006. Early results both Virginia and Colorado look very good as sales, retention, and quality of business has exceeded our expectations in both states. Overall, we had a strong 2005 with consistent results throughout the year. 2006 will present a number of challenges but we strongly believe the groundwork we laid will allow us to achieve goals over both the short and long term with continued focus on profitable growth. Now, let me turn it over to Frank D'ambra for comments on life and annuity.

Thanks, Doug, good morning. Let me begin by saying that the trends that have impacted annuity sales during the course of 2005, continued in the fourth quarter. However, like the third quarter, the fourth quarter did turn in a sales gain. Total annuity sales in the fourth quarter increased by 1%, driven by a 39% gain in the independent agent channel. For the year 2005, total annuity sales decreased 4%, from last year's record sales. Our single deposit or rollover business lagged 2004 by 6%, which was offset in part by an increase in 5% in our core recurring deposit business. Our policy count advanced at a 2% rate, with strong catch value retention in the range of 92 to 95%. Additionally, for year-end 2005, total annuity assets under management, grew year-over-year by 7%. With fixed annuity assets increasing 7.4% and variable assets increasing 6.3%. Looking at the bottom line, fourth quarter pretax income r for the annuity segment of $4.5 million represents 55% gain over fourth quarter 2004. With favorable DAC and FIF unlocking partially offset by decreased interest margins and increased GMVB reserves. For the year, pretax income for the annuity line 16.3 million or flat in comparison to the prior year. Increase the contract charges and fees, and favorable resolutions of prior year, tax liabilities, were offset by decreased interest margins and scheduled amortization of prior acquisition costs.

Turning to the life segment, sales of life products in the fourth quarter declined 19% versus 2004. With Horace Mann products down 13%; and partner products down 24%. For the year sales decreased 16%, with Horace Mann products down 15%; and partner products down 17%. The reduction in partner sales was all attributable to a decline in universal life sales of 31%, while variable universal life sales increased 21%. Fourth quarter premiums written for Horace Mann's proprietary products, were down 4.6% compared to the fourth quarter 2004, and we're down 3.2% year-over-year. Pretax income for the life segment increased in the fourth quarter from a year-ago, by $500,000 or 10.4%. Earnings benefited from the improved mortality experience and group experience refund. For the year, life pretax earnings grew slightly, again, 300,000 or 1.4%. A favorable change in DAC unlocking and the group line experience refund were partially offset by lower net investment income.

Looking ahead to 2006, we anticipate the slide in both annuity and life sales and premiums to stop and positive growth to begin due to the successful launch on February 1, of our new series of terms and whole life products and the March 1 release of our new fixed and variable annuity products. These new products come with Horace Mann having secured approvals in over 40 states. These product launches are the first in a series to significantly strengthen and enhance both competitiveness and value of the product offerings to the educator marketplace. With respect to earnings, we would expect pretax annuity income, excluding unlocking, to show solid gains above 2005, aided by growth and assets and contract fees and spread stabilization. For the life segment we anticipate moderate increase in pre tax income adjusting for the DAC unlocking and reflecting improved sales of Horace Mann product. Here's Butch Joyner to discuss marketing and sales.

Thanks, Frank, good morning. As Lou discussed, we focused on growing our agency force, increasing sales in auto line of business in 2005. I'll pleased to report that we made significant forward progress on both of those objectives. Let me now share details on agent growth, unit sales, and our overall sales results. Starting 800 agents last January we increased agent count by 7% in 2005, with agent growth increasing each quarter over the previous year as well as sequentially quarterly growth throughout the year. These positive results are attributable to 11 point improvement over 2004, and based force retention. The new agent retention program put in place by the 2004 hires plays a major role in retention improvement. Additionally, the number of experienced agents, increased by 11%, thanks to improved training program, enhanced compensation opportunities, and the expansion of a number of individual agents operations. Our 2006 plans called for continued agent growth. However, growth will come at a more moderate rate due to two factors -- Increased selectivity and agent placement; and the likely decline in the number of agents in areas of coastal risk.

There's good news in auto sales, fourth quarter, auto unit says increased by 23% over the same quarter of a year-ago. This was driven by the growth in the number of agents, and a 16% increase in agent auto productivity in the fourth quarter. In spite of our slow start, you'll recall auto sales were down 13% in the first quarter our strong finish contributed to overall auto unit sales increase, of just over 2%. While the year's results were modest, we believe we're carrying very positive momentum from 2005 into the new year.

Focused sales campaigns, productivity-driven renewal compensation, and the training of all agents on a new-value-based selling system, all contributed to help move our results in a positive territory in the second half of the year. Property sales, while virtually flat for the year showed similar sales pattern as auto. In the fourth quarter, property unit sales were up 19% over the corresponding quarter in 2004. That equates to 12% increase in agent-product productivity in the quarter. Fourth quarter results were accomplished in spite of underwriting restrictions in place for much of the quarter and both Louisiana and Florida. The strong showing in auto and property led to a 4% increase in total new sales premium in the fourth quarter, compared to same quarter in 2004. For the full year, 2005, total new sales premiums declined 3%, compared to 2004, due mainly to the annuity line of business. Coming off a record sales year in 2004, annuity sales decreased 4% in 2005. While we enjoy a 5% increase in regularly scheduled premium deposits, the heart and soul of business in the educator market single premium sales decreased by 6%, a result of a current interest rate environment. Even with the slow sales start in 2005, we are encouraged by the proved quarterly results and sales momentum built over the course of the year and we'll stay the course in 2006 maintaining focus on agency force growth and increased auto sales. We also look forward to expanding the product portfolio with new competitive products, in both the life and annuity lines of business, where we anticipate a return to sales growth as well. Now, I'll turn it back over to Dwayne.

Thank you, Butch. That concludes our prepared remarks. Please move to the question-and-answer session.

[ OPERATOR INSTRUCTIONS ] Our first question from Bob Glasspiegel from Langen McAlenney.

Bob Glasspiegel from Langen McAlenney good morning. If I understand reinsurance costs, it looks like about a couple of points in the combined ratio? Is that a fair calculation?

Yes, it would be. Yes, a couple of points. Increase.

Increase by a couple of points.

Increase couple points and embedded low 90 combined ratio projection?

Yes, it, average catastrophe with all of the costs in there.

So, if I'm looking at things correctly, looks like you're able to absorb the hit in reinsurance costs, expense ratio pressures, which you didn't comment on, but sounds like it might continue in '06, and the absence of any pricing increases, and still have improved or stable underwriting? I mean, implies improved underlying underwriting just a makeshift, more educators getting out of coastal, is that a fair, general characterization of your crystal ball?

Yes. That's a fair characterization of what we see happening. We do feel that the shift, continued shift toward the better quality business and the educator will continue to stabilize the overall combined ratio.

And you're envisioning a favorable industry frequency trends continuing in that forecast? Or?

Not projecting increase in frequency in our forecast and we are projecting that they'll continue to stay flat.

Okay. I could switch to capital? With a couple of years of no premium growth, I mean, you're sort of building capital, when do you get to an excess capital position where share repurchase, which was important element of Horace Mann's historic game plan, becomes an option? Are we more than a year away? Or? When would share repurchase be something you could consider?

Well, you know, Bob, something we always look at. We talked about it in the past. We obviously prefer to grow the business. While year-over-year we see the coming year not having the growth that would absorb that capital as we look out into '07 and beyond, we think we will need that capital. To grow our own business organically. I think we also want to make sure that before we would consider any kind of a share repurchased program, that we understand any emerging new requirements that might come from the rating agencies.

I guess I was asking a slightly different question. I appreciate the answer, my question was -- When do you think buy back could be something you consider not your rejecting it for growth versus capital retirement? When when do you think you'd be comfortable in the overall capital position so that you could at least consider it.

Certainly wouldn't be in 2006.

Right.

Wouldn't build that into your thinking. But, you know, when we get into, as we move into '07 and see the pace of our own internal growth, it's something we could look at then.

Okay. Thank you.

Our next question is coming from Mark Finkelstein from Cochran, Caronia Securities.

Good morning.

Good morning.

Couple of questions here you talked about some new products being offered on the on the life side, One, if you could just elaborate on what those are and two, indicate if those are going to be manufactured or through partners?

Products we referred to on the life side all manufactured by Horace Mann and they're what I consider to be basic or core products, a new term series. Which in the past we've had a term offering at 10 and 20 years, we now have the expanded series of a loss of products for 10, 20, and 30. And we made substantial enhancements to the products, features and the pricing. We also have a new whole life product that is being offered, offered both on a single-life and joint-life basis. Those are the things that just been released. We also have a single premium whole life that we got scheduled for release later in the year.

Okay. And I want to go back to a comment, I think made on the third quarter call, with respect to the universal life product sold to a partnership arrangement. There was a comment made alluding to potentially service issues that needed worked out, as part of the explanation for kind of sales challenges. Has there been any progress in adjusting those? Or, what is the current status? I'm wanting to follow-up on that comment.

We've had ongoing discussions with our partner on that regard, and, yes, there has been some changes made. We now have a mentor program that they're launching to assist our agents, particularly as they sell the product for the first time, and then really going on for a 12-month period to get more comfortable with the business processes and things partners are using. Also got them to commit whole saying capability to us, to further enhance their ability to support our field. It is a little early to tell whether those will be the proof that we want, we're hopeful that they will.

Okay. Moving over to the property and casualty side. I may have missed a comments if you made them earlier, but you announced a series of rate cuts in December, I think 13, 14 states, whatever. Can you just kind of go over, again, what trends you're seeing from the submitted application count? Following the rate cuts in those states?

Okay. I'll -- yes. Let me take part of that and then I'll see if Butch wants to make any comments on the sales side. But, the announcements [Inaudible] over a period of time throughout the certainly the second half of the year. And they are all virtually aimed at the educator market, the better-quality business. And so that really has been the focus. Ab they are, obviously, only in states where we are performing well below our targeted loss ratios. So those are the two things that I would say that, overall, we've seen success with that in the educator -- in the educator marketplace, which, you want to make comments?

Yes. I think the right actions were taken in the educator market, certainly, factor increased sales. But I think even more so the emphasis that we placed on the product, the sales campaigns that we had, and, most important of all was the training of all of our agents on a new value-based selling system. I think it's really a combination of all of those factors. Our agents see the value of selling auto, using auto as a lead product, and the impact it has on their, not only their compensation, but overall operation.

Okay. And, then, just one final question. Given the comments made regarding kind of the carried reserves relative to the [Deloitte] range, what are the carried reserves, met carried reserves at year-end?

I think that should be in the release.

Is it?

311.

311.

311, last page of the attached exhibits to the release. 311 million.

311 million. Okay. Okay, perfect, that's all I have.

[OPERATOR INSTRUCTIONS] Our next question from Dan Farrell from Fox-Pitt, Kelton.

Good morning.

Good morning.

A question on the DAC unlocking can you talk about some of the factors that were going into that and how should we think about the DAC amortization run rate? Going forward? Off of this quarter?

As far as the things that enter into it from an annuity perspective is capital gains, is changes in the market value, and we, also, look at our expense studies and that can also have an impact as well. All three of those came into play this year. Obviously, for next year, when we talk about the pretax earnings we do build in to our forecast some level of capital gains and we have an amount built in for next year, 2.5 or 3 million of gains and factor into the DAC calculation. As far as the overall run rate, obviously, the more business we put on the books, the -- we have an increase in the DAC costs. So we're looking at what the normal runoff of that would be. This year, that increased by, about, a million 8. And then depending for next year I think we'd probably be looking at something, probably similar to that. That's already factored into the -- the earnings we've given out.

Okay. Great, just one other quick item. Do you happen to know the statutory book value at year-end for the P&C and Life business?

We haven't finalized statutory numbers, yet, but generally I would expect the life statutory capital to be relatively flat. And P&C capital to have continued to increase reasonably strongly.

Okay. Great, thanks, guys.

Our next question is coming from Robert Rodriguez from First Pacific Advisor.

I'm curious when you talk about the '06 plans and talking about reduces coastal exposure, could you kind of quantify that for us what that really represents in terms of business that you would be reducing?

On the, yes. On the overall of what we've got really a couple of things going on. One, we had embarked on coastal exposure reduction program in Florida that, basically, reduced Florida policies in force by about 12 to 15%. What we're looking at is along Louisiana and other parts of Florida to equate to something that would be close to that. Really, looking at other pockets along the coast where we just have a little bit higher concentration that what we'd prefer. So, really as we're getting into it we're looking for opportunities to reduce it, partner opportunities, et cetera. And then working with the states. So, but I would say, in the range of what we already done, and looking to be right around that same level.

And so if we take those policies that you're reducing out there and move to the Heartland could you size that to the total shift would mean to the Company as a whole?

What we're really trying to do is to be able to shrink percentage-wise the amount of business that we have our property business that's coastally exposed. So, the growth objectives are really to look at the interior of the country and say what do we have opportunities to grow the business more effectively? It is where we currently have a presence, just becoming larger, Illinois, Indiana, Ohio, states such as that. Certainly, we won't be offsetting that completely in 2006, but as we move into the future years we'd expect to see a higher percentage of our growth, certainly a higher percentage of our growth coming in the non-coastal areas.

I appreciate that, I'm just trying to get a size of whether this represents a 5% number, what in terms of magnitude of what it means to your written premium?

At this point I really don't have a number that I could share with you to say this is what we expect to get out of the Heartland growth strategy that this is how much it would add.

Okay. Thank you very much.

Our next question is a follow-up from Bob Glasspiegel.

A lot of moving parts in the reinsurance shift and you have increased retention at the front end, higher limits, a second new cover in reduced, Florida coastal, writings on your part. If you sort of summed it all up, what's the rate increase online in an apples-to-apples basis that this would represent?

Well .

I know you can't do that. What's the reinsurance people telling you? You have the old plan the rates would have gone up.

Yes, if we took just our old plan they would have gone up, approximately, 50%. And two things that, obviously, all of the layers went up, but one of the components that we did run into was that that first 5 million of cover would have been -- we had very little interest in that, in that first level of coverage. So, obviously, that would have been the bigger percentage.

Just a follow-up on that, Bob, whereas we don't have on the first occurrence, coverage starting at the 10 million level, we'd move that to 15. We did purchase second and third event cover on that 5 million a piece.

Right.

Right.

It would be giving up the first 5 million

Well, when you say "second and third event" could you define that a little bit more clearly to me? What's a "second and third event"?

First event that would go up to the 15 million retention would be countered as the first event. If there's a second one, that got above 10, then we'd be kicking into the additional coverage we bought.

Is this an a quarter, in a year? Year. One storm? Or.

Calendar year.

Calendar year.

Calendar year. I got you. Okay. Thank you very much.

You're welcome.

At this time we have no further questions. I'd like to turn the floor back over to Dwayne Hallman for any closing comments.

Thank you for joining us this morning. We look forward to talking to you at the end of the next quarter.

This does conclude today's teleconference. You may disconnect your line. Have a wonderful day.