Horace Mann Educators Corp (HMN) 2007 Q4 法說會逐字稿

Good morning. My name is Pam and I will be your conference operator today. At this time, I like to welcome everyone to the Horace Mann Educators Corporation fourth-quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS)

Thank you. It is now my pleasure to turn the floor over to your host, Dwayne Hallman, Senior Vice President of Finance. Sir, you may begin your conference.

Thank you. Good morning, everyone, and welcome to our fourth-quarter 2007 earnings conference call. Yesterday after the market closed, we release our earnings report, including the financial statements, as well as supplemental business segment information. If you need a copy of the release, it is available on our Website under Investor Relations.

Today, we will cover our results for the fourth quarter in our prepared remarks. The following management members will make presentations today, and as usual, will be available for questions later in the conference call. Lou Lower, President and Chief Executive Officer; Pete Heckman, Executive Vice President and Chief Financial Officer; Doug Reynolds, Executive Vice President, Insurance Operations; Frank D'Ambra, Senior Vice President of Life & Annuity; and [Rick Schulenberg], Vice President of Sales.

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. For a discussion of the risks and uncertainties that could affect actual results, please refer to the Company's public filings with the SEC and in the earnings press release issued yesterday.

We undertake no obligation to publicly update or revise such forward-looking statements to reflect actual results or changes, assumptions or other factors that could affect these statements. As a reminder, this call is being recorded and is available live on our Website. An Internet replay will be available on our Website until March 6, 2008.

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

Welcome, everyone, and thanks for joining us. Horace Mann delivered fourth-quarter net income before realized capital gains and losses of $0.49 a share, completing a solid year of profitability. At $1.91 per share for the full year, we delivered at the upper end of our guidance for the year and $0.07 per share above consensus expectations.

Book value per share pre-FAS 115 grew 10% year-to-date, closing at $16.47. And along with that, all of our key financial ratios continue to strengthen.

Focusing on the year in total, Property/Casualty profitability was somewhat less than our expectations. Current accident year results were under pressure compared to 2006, led by frequency in Auto and Property, but offset somewhat by increasing investment income.

We had significant growth in combined Life and Annuity income relative to both prior year and our expectation thanks to improved spreads in fixed annuities, contractees and variable, and favorable life mortality experience. Those positives, along with very disciplined expense control, were the primary contributors to results exceeding the midpoint of our guidance range.

We continue to be comfortable with the strength of Property/Casualty reserves. While favorable development over the full year was comparable to prior year, we don't anticipate the same level of favorable development in 2008. But having said that, our year-end reserve position remains near the high end of the range determined by independent evaluation.

Elsewhere on the balance sheet, the investment portfolio is solid. As reported in the past, we have relatively small exposure to subprime issues. we've evaluated the portfolio and have been both thorough and aggressive in terms of assessing other than temporary impairments, which resulted in a capital loss after-tax of $3.6 million for the quarter, or about $0.08 a share. While those capital losses are reflective of uncertainty and volatility in the financial markets, our continued commitment to a conservative, well-diversified investment portfolio with disciplined risk control is serving us very well. Pete will expand this commentary on our investment portfolio this morning to provide you with a thorough understanding of where we are so that you can have the same level of comfort in our invested assets as we do.

As you will remember from our last call, we do have a share repurchase program authorization of $50 million. It's opportunistic in nature, which is just what the market has presented to us. Through year end, we repurchased 1.1 million shares at an average cost of $18.66. Through the end of January of this year, we've spent a little over $39 million of the authorization, retiring a total of almost 2.2 million shares since inception at an average cost of $18.24, or roughly 1.1 times year-end book value x FAS 115. And we anticipate completing our current capital management program during this first quarter.

So what do we expect for 2008? First, for Property/Casualty, the headwinds of the underwriting cycle will continue to present challenges, particularly in the auto line. We are counting on our claims organization to continue to produce favorable results in severity control. But we do recognize the need to take rates over the course of the year, subject of course to regulatory constraints.

We fully expect a year of solid profitability, with the midpoint of our guidance range equating to an increase in our combined ratio of about 2 points. We would also anticipate that pretax operating income contributions from Life and Annuity will be off slightly in 2008 as compared to 2007, a year in which almost everything broke our way to deliver a 30% increase in combined pretax income.

At the same time, however, our plans are to deliver strong, organic top-line growth in our niche market, led by auto unit sales, as we build on the momentum we've established with those agents, who have been through our training for their transition to our new Agency Business Model. And as that growth takes hold, we anticipate delivering low single digit Property/Casualty premium growth in 2008, which should further accelerate in 2009.

Taking into account the pace of the business and the initiatives we are putting in place to drive future growth, our earnings guidance range for net income, excluding capital gains and losses, for 2008 is $1.70 to $1.90. While the midpoint of that range is down about 6% from the year we've just completed, we believe it appropriately reflects the competitive environment, the challenge of the underwriting and credit cycles we are in, and the additional investments we are making to grow the business. We also believe that with what we will accomplish in 2008, we will return to the EPS growth track in 2009.

And then finally, with the retirement of Butch Joyner at year end, we do have a search underway for a Chief Marketing Officer. And while that effort is in process, our field organization is in the very capable hands of Rick Schulenberg, who was recently promoted to Vice President of Sales. While Rick leads the entire field organization countrywide, his partner in creating a more powerful distribution model is [Tom Hookstein], who leads our Agency Business Model initiative.

Both Rick and Tom began their professional careers as teachers, became top-performing Horace Mann agents and highly productive leading agency managers and regional marketing officers, and we are indeed fortunate to have these two very capable leaders with proven records of success on our team. And you'll be hearing from Rick in our marketing report later this morning.

So, in summary a solid performance for the quarter and full year of 2007, with a strong foundation in place for future profitable growth in our educator target market. And now here is Pete.

Thanks, Lou, and good morning. A good fourth quarter capped off another solid year for Horace Mann in 2007. Consolidated operating income of $0.49 per share, while somewhat below prior year, was a bit better than we expected. Property and Casualty earnings were down in the quarter in spite of a higher level of favorable prior-year reserve development due to increased catastrophes and pressure, primarily frequency-driven, on current accident year loss ratios.

Partially offsetting the prior-year comparison in P&C was a continuation of strong quarterly earnings results in our Annuity and life Segments, with income in both of those businesses once again above prior year and ahead of our expectations. Expanded investment margins in both segments, as well as positive growth in annuity contract charges and favorable life mortality, were the primary drivers.

In terms of the investment portfolio, as Lou mentioned, we thoroughly evaluated our portfolio at 12/31 and have been conservative, we believe, in terms of assessing other than temporary impairments, recording a pretax charge of $5.9 million for the quarter, the largest component of the charge related to the Company's one and only subprime residential mortgage-backed security with an amortized cost of $4.9 million, which was impaired to a fair value of $1.1 million.

The write-down was the result of our assessment that permanent impairment had occurred due to the deterioration of a significant portion of the underlying collateral, and our expectation that not all of the contractual principal and interest would be paid.

The remaining $2.1 million of the impairment charge in the quarter was attributable to non-mortgage-related securities, primarily corporate high-yield bonds and preferred stocks, which we had plans to sell.

Our exposure to Alt-A mortgage-backed securities, as noted in the press release, was approximately $8.4 million at 12/31, nearly 90% of which are rated AAA, with a total unrealized loss of only $100,000 and no exposure to the more troubled 2005, 2006 and early 2007 vintages. Our combined subprime and Alt-A exposure represents only 2/10 of 1% of our total portfolio, and is essentially being carried at fair value. Our remaining residential mortgage portfolio of approximately $920 million is comprised of government agency pass-through securities and agency CMOs, all AAA-rated, of course.

Two other asset classes I'd like to comment on are commercial mortgages and municipal bonds. With regard to commercial mortgages, Horace Mann had approximately 4.5% of its investment portfolio, or $184 million, in commercial mortgage-backed securities at the end of the year. The portfolio consists of well-diversified, fixed-rate CMBS, backed by the cash flows of mortgages on commercial properties. This portfolio is 100% investment grade, with an overall credit quality of AA and a current fair value of 97% of amortized costs. While we believe the fundamentals of the commercial mortgage market are sound, with delinquencies near historical lows, we remain relatively defensive in the current environment.

In terms of municipal bonds, we have approximately $540 million invested in our P&C portfolio. The overall credit quality of the portfolio is AAA, with approximately 65% of the portfolio insured. That translates into 9% of the Company's total investments that are guaranteed by the monoline credit insurers.

With regard to security selection, we focus primarily on the quality of the underlying security and do not place significant reliance on the additional insurance benefit. Excluding the effect of insurance, the credit quality of the underlying muni portfolio is a solid AA. We had an unrealized gain in this portfolio of approximately $6 million at year end, and we would not expect a significant impact on our holdings should the monoline insurance companies experience rating downgrades.

I might also add, given the recent investment loss disclosures of some of the large life insurance companies, that Horace Mann is not involved in any hedging or derivative programs.

So all in all, we are very pleased with the overall positioning of our portfolio and believe our conservative investment philosophy will continue to serve us well in the current financial environment.

Total net investment income increased 6% in the fourth quarter and 7% for the full year compared to 2006. We anticipate this growth rate to moderate significantly however, increasing only about 2% to 3% in 2008, due in large part to the effect of our $50 million stock repurchase program, which we expect to be completed in the next few weeks. With the majority of that program being funded with excess capital from our P&C insurance subsidiaries, we're expecting Property and Casualty investment income to bear the brunt of the impact and actually decline by about 3% to 4% over the next 12 months.

Now, with regard to 2008, the midpoint of our earnings guidance range $1.70 to $1.90 per share is comparable to the current consensus estimate. At the midpoint of the range, earnings are expected to decline by approximately 10% to 12% compared to 2007, with the resulting drop in EPS mitigated by about a 5% to 6% reduction in average diluted shares outstanding.

We expect the projected decline in consolidated earnings to be manifested in our P&C segment through the decline in investment income I just mentioned and a reduced level of favorable prior year's reserve development, along with the potential for a continuation of the adverse frequency trends that have emerged over the last few months.

In our Annuity and Life segments, we're anticipating a moderate reduction in earnings compared to the unusually strong 2007 levels, due to the recent adverse financial market performance, slower growth in investment income, and a return to more normal mortality experience. In addition, all segments will be impacted in 2008 by a reduced level of FAS 106 benefit plan cost savings compared to 2007.

While our initial guidance range is a bit wider than we have traditionally provided, I would anticipate we will be able to narrow it down as we move through the year and the direction of the financial markets and P&C frequency trends become more apparent.

So with that, let me turn it over to Doug Reynolds for more detail on our P&C results.

Thanks, Pete, and good morning. This morning I will take you through what is behind the combined ratio, a view of our overall book of business, our approach to retention, written premium, several core strategies, and the 2008 outlook.

Total Property & Casualty combined ratio for the quarter and for the year was 91.9, with the fourth-quarter 6 points higher than a year ago. There were several major drivers of the quarterly variance. First, 4 points are due to catastrophe losses. With losses of almost $6 million, the quarter was more than $5 million higher than a year ago. The California wildfires at $4.5 million is the largest cat, but we also had three other events totaling $1.5 million.

There was some help with favorable prior-year reserve development of a little bit more than $5 million, which equated to 2.3 points in the quarter when compared to last year. Our underlying accident year combined ratio, excluding catastrophes and prior year's reserve development, was 91.4% in the quarter, up 4.4 points over 2006.

For the year, the combined ratio was up 4.3 points compared to full-year 2006. Similarly, the current accident year underlying combined ratio is up 3.3 points. Catastrophes are up almost 1 point and prior year's reserve development essentially equal to prior year.

Now looking at the combined by line. In the quarter, our auto accident year combined ratio excluding catastrophes of 100.8% was up almost 5 points, and property at 72.2% was up 9 points compared to prior year. In both lines, claim frequency increased over prior year. We, as many in the industry, have experienced an increase in claim frequency for the first time in several years. Contributing factors in 2007 include adverse winter weather in key Midwest in Northeast states in both the first and fourth quarters. Additionally, our new business and total policy growth in some of our key Western states that typically experience higher frequency levels than countrywide have added to the upward pressure.

On the other hand, for the quarter and the full year, auto and property claim severity trends are favorable and within our expected ranges.

Looking at our book of business, we continue to improve the quality and distribution of our P&C book. At year end, Auto and Property are now at 77% and 71% educator, respectively. Percent to educator in both lines is up about 2.5 points over prior year, and both lines are up 8 points in the last three years, benefiting from our continued focus and commitment to the educator community.

We also continue to improve the educator percentage in our preferred underwriting tiers, along with the percentage of customers who have three or more lines with us. These results are driven by the expansion of our new auto pricing plan, or ESM, the Educator Segmentation Model, to 30 states at year end, representing 70% of our auto premium volume.

Moving on to retention, our customer retention ratios continue to increase, with Auto up 0.5 point, while Property's improving almost a full point for the year. Policies in-force grew over 2000, or plus 0.3%. All the growth occurred in Auto, as Property policies were flat for the year.

Property growth was impacted by tighter underwriting guidelines in coastal markets and our continuing coastal nonrenewal programs, especially in Florida. In Florida, we have reduced Property policies in-force approximately 15% since 2004 and have started another program that will reduce exposures another 20% by the start of the 2008 hurricane season. As mentioned in prior calls, we are working with Property partner companies in coastal markets and now have three partners in Florida, allowing our agents to continue to provide multi-line service to the educator community.

Specifically, the current Florida nonrenewal program is a transfer program to one of our partners, which allows our agents to maintain the relationship and the opportunity to retain all lines of insurance in the household.

Finally, our countrywide educator policies in-force continues increasing, an additional 4% for both Auto and Property policies.

Total reported Property & Casualty written premium was even with prior-year quarter and down almost 1% for the year. However, when you adjust the percentage changes for the increasing catastrophe reinsurance cost and the discontinuation of the NEA EEL program, our premium growth rate would be modest, but nonetheless positive, at plus 0.9% in the quarter and a positive 1.2% for the full year.

We continue to pursue several strategies that are yielding results. Our auto payroll deduct program continues to contribute to sales growth and retention, serving to differentiate us in the marketplace, while allowing us to offer a unique service to educators. In 2007, we more than doubled the number of school district with auto payroll capabilities and have increased auto customers on payroll by 86%. For the full year, we wrote almost 11% of true new auto business on payroll. In the fourth quarter, this measure increased to 14%.

As mentioned last quarter we have implemented identity theft resolution services as an endorsement to the Property policy for educators at no additional cost. Both auto payroll and identity theft provide convenience and value to our target educator market.

The outlook for 2008 calls for Property & Casualty combined ratio in the 92% to 95% range. We are anticipating that the frequency decline for the past few years will slow and that the severity trends managed by our ace advance claims environment group will continue to better the CPI indicators. We also anticipate that prior year's reserve development will be favorable, but at much lower level than 2007, and we anticipate an average catastrophe year.

We will be increasing our pricing actions to align with pure premium trends. We anticipate continued formidable competition in the marketplace, with a continued high level of advertising spend and competitors continuing to refine their pricing models. Our strategy calls for us to continue implementation of auto ESM and development of homeowner ESM in 2008, with the rollout starting in 2009.

Now I would like to turn it over to Frank D'Ambra to cover Annuity and Life results.

Thanks, Doug, and good morning. As Lou and Pete both remarked, the Annuity and Life lines of business experienced significant income growth relative to prior year and our expectations, as well as increases in total revenues. However, sales growth continues to be a challenge.

Total annuity sales decreased by 17% in the fourth quarter and 10% for the full year. As we discussed on the third-quarter earnings call, many school district did place a moratorium on Participant 403(b) transfers industrywide, which impacted our fourth-quarter and full-year single deposit and rollover sales. This, in combination with the anticipated decline in independent agent sales resulting from our narrowing their focus to 403(b) and qualified sales, accounts for the annuity sales decline in 2007.

However, total annuity deposits for the year grew by almost 4%, driven by an increase in recurring deposits, which is a key benefit of our 403(b) market focus. Our total policy count continues to grow, with cash value retention in the 91% to 92% range. Total annuity assets under management increased by nearly 4% compared to a year ago, with fixed annuity assets increasing over 3% and variable annuity assets increasing 4.5%.

Fourth-quarter pretax income for the annuity segment was $5.9 million, up $2 million compared to prior year. Quarterly earnings benefited primarily from improved interest margins, increased contract charges and fees, and a refinement in the guaranteed minimum death benefit reserve calculation, but were reduced by an unfavorable change in DAC and BIF unlocking.

For the year, pretax income of $25.9 million reflected the significant $8 million increase over 2006, with the key drivers being improved interest margins and increased contract charges and fees. Looking to 2008, annuity pretax operating earnings, adjusted for the impact of DAC and BIF unlocking, are expected to be moderately lower than in 2007, primarily due to the performance of the financial markets in the latter part of 2007 and early 2008 and its impact on associated charges and fees.

Turning to the Life segment, fourth-quarter individual Life sales were down 8% compared to last year. Total sales for 2007 were down nearly 4% compared to a strong 2006. Fourth-quarter Life premiums and contract deposits for Horace Mann's proprietary products were down slightly, while the full-year comparison also showed a slight decline.

In terms of the bottom line, Life pretax income for the quarter was $7 million, up $1.7 million compared to the prior year. Quarterly earnings benefited from increased investment income, favorable mortality experience, and a favorable change from DAC unlocking. For the year, pretax income of $26.6 million was a $4.3 million increase over 2006, reflecting growth in investment income and favorable mortality experience. Looking ahead for 2008, we expect Life pretax operating earnings, adjusted for the impact of DAC unlocking, to be somewhat less than 2007, reflecting normalized mortality.

School districts are now in a process of analysis and review, which will ultimately lead to implementation of their new 403(b) plans. While the mandatory compliance state is January 1, 2009, we expect many schools will act to have their plans in place for back-to-school of 2008. During this transition period, we expect a continuing impact on single deposit sales.

With the expansion of our product and service offerings, including group annuity contracts, 403(b)(7) mutual funds, plan level administration, and online enrollment and other Web-based services, we see this market change as one of opportunity for Horace Mann to expand our presence and penetration.

And now, to discuss marketing results and progress on our ABM initiative, is Rick Schulenberg.

Thank you, Frank. Good morning to everyone. Today, I'll focus on sales results, distribution and the traction we're gaining in the Agency Business Model, or ABM. So let me starts by focusing on some positive initial results we are seeing with Agency Business Model.

The Agency Business Model initiative continues to take hold among our agents as we have phased in the model over the past five quarters. As a reminder, ABM agents conduct business from an outside professional office with licensed producers and/or support staff and employ embedded, documented, repeatable processes in their operation. This model, coupled with other key corporate initiatives designed to support ABM, will sustain our agents' profitable growth of educator multi-line business.

So, after not quite 18 months, where do we stand? We now have 191 of our agents in an outside office with licensed producers, an 82% increase from the end of 2006. Agents now utilize 253 licensed producers, representing an increase of 11% from just three months earlier and 116% compared to a year ago. This now gives Horace Mann 1043 total points of distribution.

Equally important, in 2007 we decreased the number of agents working out of their home by 19% to a group now numbering 305.

We have supported our ABM initiative with additional training and support, the core of that support coming from our agency business school. This is a four-day seminar that focuses on agents utilizing their base of operation, licensed producers and designing or refining a business plan. Through December, 196 agents, or 25% of our current sales force, have completed the agency business school. Of these agents, more than 60% have implemented the model by securing commercial office space and utilizing licensed producers and/or support staff.

But with that said, it takes time to fully embed and maximize all the ABM processes and concepts. As a group, these agents have experienced a marked shift in their sales over the prior-year sales levels. Of particular note is the increase in sales by agents who have graduated from our Agency Business School, when compared with those agents who have not yet attended the School. ABS agents have seen a lift in their sales across all lines over their non-ABS counterparts. In true new auto sales, our ABS graduates have seen a 3% to 4% lift. And excluding Florida, where we have our coastal management programs in place, they've experienced a 10% to 11% lift.

As far as our total agent force is concerned, we ended the fourth quarter with 790 agents, down 7% from a year ago. Several factors led to the decline. We plan to reduce agent count in several markets, again including Florida. We asked our field management to assess current agents' strengths, assess needed areas of development as it relates to adopting the Agency Business Model, and to begin migrating those agents who are ready for the new model. As a result, we have lost some agents who were not up to the standards necessary to survive in our present model or to transition to ABM. The vast majority of the agents who have left were less productive and still working out of their homes.

And as a sign that we are moving in the right direction with the balance of the agency force, combined experienced and financed agent Auto unit productivity increased 2% for the year. By the way, financed agents are those agents in their first two years of production.

Now let's look at sales results. Total Auto sales -- that is our new and add-car units -- were down 6% in the quarter compared to the fourth quarter a year ago and virtually flat for the year. Our true new auto sales -- sales to customers who did not previously have Horace Mann auto insurance -- were also down on a quarter-to-quarter basis 8%. Like total Auto, they were essentially flat for the year. Similarly, Property sales units saw a decline of 13% for the quarter and 2% for the year.

So why are the auto sales flat for the year? In part, the general softening of the auto insurance marketplace, and as previously mentioned, our continued coastal management programs. For example, if you look at sales results, excluding Florida, we saw the fourth-quarter Auto declines cut nearly in half, with total auto sales units decreasing 3%, and true new down 4%.

Similarly, with annual Auto results, when you exclude Florida, you'll see a 2% increase in total Auto units and a 3% increase in our true new. We saw similar results in Property sales units, x Florida, a decrease of 5% for the quarter and a gain of 4% for the year.

With Life sales, we were down 8% compared to the fourth quarter of 2006 and down 3% for the year. The pending IRS 403(b) regulations changes have had some impact on annuity sales, especially single premium and rollovers, and that is reflected in our total annuity sales, with new business off 17% in the fourth quarter compared to the same quarter in '06 and down 10% for the year.

We did see a bright spot in the fourth quarter when our bread-and-butter flexible annuity sales, primarily ongoing new 403(b) sales, posted a 9% increase in the quarter.

A final thought on ABM. 2007 represented the completion of our first calendar year with our ABM strategy. The early results are most encouraging and have reaffirmed our strong conviction and commitment to this strategy in the interest of our long-term success. While we are early in the process, we are pleased with the results we are seeing so far.

Now, not all of our agents have seen the same level of sales lift, but that does not surprise us, as we recognize that additional development needs to take place to help our agents build expertise in all the ABM systems and turn them into repeatable processes. And we recognize more opportunity exists with the licensed producers our agents are utilizing. Again, this is a new concept for many of our agents, and we will continue to provide the training and resources to help them maximize their selling opportunities.

Thank you and with that, I'll turn it back to Dwayne.

Thanks, Rick. And that concludes our prepared remarks. Pam, if you would please move to the question-and-answer session.

Thank you. (OPERATOR INSTRUCTIONS) Rohan Pai with Banc of America.

Good morning and congratulations on the quarter. First question was on reinsurance. I guess first of all, did the aggregate reinsurance contract of $21 million, did it come into play at all in limiting your cat losses or was the $4 million California wildfire your gross and net loss?

This is Pete Heckman. The way we recorded the quarter was to not assume that the aggregate came into play. Obviously, that kicks in $21 million of 2007 paid losses, and we will likely exceed that number. But -- and the entire cost of the wildfires would have been covered by our catastrophe treaty, but the particular language in our aggregate treaty limited those events to PCS-declared catastrophes. And as you may have seen, the PCS only declared the one fire, the Witch Fire, as a catastrophe. So at this point we are not assuming recoveries. We will be pursuing those in the year -- in the months ahead. But we've booked the year rather conservatively in that regard.

Okay. And could you remind us, did you property cat program renewal at January 1?

Yes, it did.

And could you give us the details for that, please?

Yes, this is Doug Reynolds. The 2008 program, a couple things. One is we raised our top-end limit of coverage from $130 million to $150 million. And I might point out that that is equal to about the 1-in-250-year event. And over the last four years, we've raised that each year from $80 million to $110 million to $130 million and now to the $150 million.

We also have retained our attachment point at $25 million, which was the same as we had in 2007. And we've purchased second- and third-event coverage as well, but at an attachment of $15 million, with no limit on industry-related storms, which is what we had in 2007.

We've also eliminated the aggregate this year. And really the reason behind it was we had some -- we had a very favorable program the first two years. As we tried to renew it this year, the cost and the attachment points grew quite a bit, and we decided that that was not a good move for us to do based on the price (multiple speakers).

Sorry. As a quick follow-up, then, did you get any cost benefit for reducing your Florida exposures on your Property catastrophe?

Yes, we did, based on the actions that we've taken. We also had reduced our expected average annual loss in Florida substantially due to the actions that we've taken over the last couple of years. And what we have embedded in the contract for 2008 is that the pricing will be adjusted based on the activity that we take in 2008 with the nonrenewal program.

Okay, great. And if I can ask just one more question. If you could elaborate on the Auto loss trends that you are seeing. I know you've cited higher frequency, and you said it was weather-related. Could there be anything else that is causing the higher frequency, or did you think that it was mostly just more severe weather?

And also, if you could just give us your thoughts on bodily injury severity. I think a couple of other companies have cited higher loss trends in that line. Just want to know what you are seeing there.

Okay, a couple things. First, on the frequency trends that we saw in 2007, as I indicated, the weather in the Midwest and the Northeast definitely contributed to an increasing frequency in 2007. But additionally, some of the new business writing, as well as retention policy growth, that we saw out in some of the Western states impacted that. And really, that was a distribution shift; just some of those states have a higher frequency than our countrywide average. So the fact that they were making up a higher percentage of our total book resulted in upward pressure on the frequency. So those are really the two things that we saw occurring.

We did not see anything else in any other segments of the book that would have pointed to really an issue that we would have to deal with.

On the BI side, the frequency followed through a little bit on BI side, where it was up a little bit. But on the severity side, we have not seen -- we've seen some increase, which is basically in line with the CPI, but we have not seen anything on the severity side that would point to something that was greater than our expectations going into 2007.

Great. Thanks for the detailed answers.

(OPERATOR INSTRUCTIONS) Rohan Pai with Banc of America Securities.

Since I'm the only one asking the questions, I guess I will ask a follow-up. What was the price increases in personal auto that you were contemplating? I know you did mention that you may be raising prices this year. But what kind of magnitude were you thinking?

Yes, what we have -- what we are anticipating is something in the 3% to 4% range on Auto, and actually, that would be the same on Property as well.

Okay, good. Those are the only questions I had. Thank you.

Pam, this is Dwayne Hallman. If we have no more questions, we'd like to thank everyone for participating today and look forward to visiting with you at the end of the next quarter. Have a good day.

Thank you. And this concludes today's Horace Mann Educators Corporation fourth-quarter earnings conference call. You may now disconnect your lines and have a pleasant afternoon.