Horace Mann Educators Corp (HMN) 2008 Q2 法說會逐字稿

Good morning, my name is Cee, and I will be your conference operator today. At this time I would like to welcome everyone to the Horace Mann Educators Corporation Second 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. Sir, you may begin your conference.

Good morning everyone, and welcome to our Second Quarter 2008 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 second 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; 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 and 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 September 1, 2008. Now I'll turn the call over to Lou Lower for his comments.

Thank you, Dwayne. Good morning, everyone, and thanks for participating on our call. As we reported after the market closed yesterday, Horace Mann reported net income before realized net capital losses of $0.23 per share for the second quarter, $0.30 per share less than prior year, with $0.28 of that adverse variance attributable to the catastrophes which we had pre-announced. At $22 million, those cats were the worst in the Company's history for the second quarter.

Notwithstanding the loss to the Company, our claims employees are hard at work doing their usual superb job of restoring the lives of our customers who suffered personally during the season of abnormally high number of tornadoes and other damaging weather events. We also, but as expected, have less in the way of favorable prior-year reserve developments, accounting for about $0.04 per share of negative variance to prior year.

Despite those factors, we're encouraged by the underlying fundamentals relative to our expectations, given where we are in the underwriting cycle and the current state of the financial markets. Year to date, our P&C loss ratio ex cats and prior year development is only a point over prior year, with most of that deterioration coming from non-cat weather losses in the property lines. Similarly, our combined life and annuity earnings are ahead of last year in spite of the adverse impact of the bear market on our variable annuity business.

Given our actual cat experience in the first half and allowing for normal second half catastrophes plus no improvement in the financial markets, we have revised our full year guidance for operating EPS to a range of $1.30 to $1.45. And as noted in our press release, that range anticipates a $0.05 per share charge for consolidation of our claims organization. And as you're going to hear from Doug a little later on, this initiative will allow us to leverage the technology infrastructure that we've already put in place, create additional scales, reduce LAE, further improve severity control and customer satisfaction, with a payback over a relatively short time frame.

Turning to revenue measures for the quarter, property casualty and voluntary auto and property written premiums increased 2%. Looking at the components that drive that revenue line, new business growth was being adversely impacted by the economy with its reduced auto and home sales, as well as our own risk reduction programs. True new auto sales were off 5% for the second quarter, certainly not where we want to be, but it was an improvement compared to the first quarter, with sequential growth in unit sales.

We're holding onto more of our in-force business with retention improvements in both auto and property. At the same time, average written premium for auto increased over prior year for the first time in a few years and should continue to do so as our rate filings and price increases continue to take hold.

In the annuity line, our core flexible premium flow business through Horace Mann agents has increased 4% year to date for new flex in sales, but the IRS 403(b) transition rules are producing their expected impact on new single-premium rollover business, which is down 8% for our captive agency force for the first half.

Negative returns in the financial markets have taken their toll on variable annuity account values, down about 14% year over year and reducing fee income. Partially offsetting that decrease, fixed annuity account values were up about 5%. Over the past 18 months, we've been able to increase spreads on the entire fixed block about 25 basis points as we continue to grow and work our way out of the drag on profitability that spread compression has created on our legacy block of fixed business.

As you'll hear from Rick, our key long-term growth initiative, the Agency Business Model, continues to make good progress. We're using agencies back from their field experience to modify and strengthen the model's processes and how we embed them. Agents transitioning to the model continued to outperform their peers, and productivity increases and absolute sales levels in all lines of business, as well as growth in first-year earned commissions, which is obviously important to their financial success in the new model.

Turning to the balance sheet, as you'll hear from Pete, property casualty reserves remain strong and stable, and in the turmoil of today's credit market, our conservative, well diversified investment portfolio is allowing us to prudently increase investment income with only a moderate level of impairment write-downs. We've also maintained solid financial ratios while judiciously managing capital through share repurchase activities.

So with that as an overview, let me now turn the call over to Pete Heckman.

Thanks, Lou, and good morning. As Lou just mentioned, Horace Mann's second quarter operating EPS variance to prior year can essentially be attributed to a significantly higher level of catastrophe losses and a smaller amount of favorable prior year's P&C reserve development. The latter was generally consistent with our expectations. The former, of course, was not.

The remaining relatively small negative prior year variance in P&C was due primarily to a higher level of non-cat weather losses in our property line. This was more than offset by higher annuity and life segment earnings, where increased fixed annuity and life investment spreads, along with lower mortality, more than offset the adverse financial, or the adverse impact of the financial markets on our variable annuity fees and DAC unlockings.

For the first half of the year, operating EPS of $0.61 fell short of our expectations, primarily due to two factors--cash and the impact of the financial markets on our annuity business. Those factors in turn are the primary drivers of our revised full year earnings guidance. The midpoint of our updated guidance range of $1.30 to $1.45 is consistent with the current consensus and reflects three primary components of variance relative to our prior guidance range midpoint.

First, approximately $0.30 due to an increased level of catastrophe losses, which simply reflects the excess level of cats in the first six months; about $0.07 in reduced annuity earnings due to market performance, which we assume will be flat for the remainder of the year; and approximately $0.05 of current year expenses related to our 2008 and 2009 P&C claims office consolidation initiative. Other than those items, we expect our underlying profitability to be consistent overall with our initial expectations.

Turning to investments, net investment income was up approximately 4% over prior year for both the quarter and year to date, including the impact of our share repurchase activity over the last eight months. The increase in portfolio yield over the last several quarters has contributed to the widening investment spreads in our annuity and life businesses, which has helped mitigate the adverse impact of the financial markets on those segments' earnings.

Before we get into some of the detail on investment gains and losses, I thought it might be both useful and timely to review the composition of Horace Mann's investment portfolio. Approximately 98% of our invested assets are fixed maturity securities, 95% of which are investment grade with an overall average quality rating of A+. We hold immaterial amounts of many of the more volatile asset classes, such as common stock, mortgage whole loans, private placements, and owned real estate, and have no derivatives in the portfolio.

As a result of this relatively vanilla portfolio composition, less than 0.1 of 1% of the total portfolio fair value is subject to so-called level three pricing, which significantly reduces the subjectivity involved in our asset valuation process.

With that said, the persistent uncertainty and volatility in the financial markets continued to have an adverse impact on our portfolio in the second quarter, although the diversification and high quality of our holdings continued to make those impacts very manageable. Pre-tax net realized investment losses were $8.1 million in the quarter. Included in this amount were $11.2 million of impairment write-downs on securities determined to have had other than temporary declines in value, and $300,000 of losses on impaired securities that were sold during the quarter. Those impairments were partially offset by $3.4 million of realized gains on investment sales.

The $11.2 million of impairment write-downs was primarily related to seven securities. Two CDOs accounted for approximately $6 million, and five equity securities--including four financial industry preferred stock issues--accounted for a little over $5 million. All of the impaired securities were performing, and are continuing to perform, consistent with contractual obligations. And in all but one case, our credit analysis and/or analysis of the underlying collateral cash flows indicated only a very remote likelihood of default, even under severe stress testing. The decision to impair these issues was instead based on our conclusion that recovering in fair value, given current and expected market conditions, would likely not occur for an extended period of time. On average, the fair value of securities impaired in the second quarter was approximately 57% of their book value.

Looking at the distribution of our total gross unrealized losses at June 30, less than 3% of our total portfolio had a fair value below 80% of book, with a corresponding unrealized loss of approximately $28 million pre-tax, which of course is already reflected in book value through other comprehensive income. Of that amount, securities with fair values less than 70% of book represented only 0.7 of 1% of our investment portfolio, with a corresponding pre-tax unrealized loss of $10 million. That equates to only about $0.15, or 1% of June 30 book value per share.

So again, while the financial markets continue to challenge most, if not all, participants in the financial services industry, those challenges have, and we feel will continue, to be very manageable for Horace Mann. And to that point, in a quarter that saw record catastrophe losses in addition to a higher-than-normal level of realized investment losses, our book value per share, excluding FAS 115, increased sequentially and was up more than 5% over prior year.

And now let me turn it over to Doug Reynolds for more details on our operating segment results.

Thanks, Pete, and good morning. This morning I will cover both property and casualty results as well as annuity and life. As Lou and Pete have already indicated, catastrophes were the big story for the second quarter earnings results. And as you have seen in our release, the weather, both catastrophe and non-catastrophe, impacted our financial results, resulting in a 106.7 total property and casualty combined ratio for the quarter, up over 17 points from the second quarter 2007.

Catastrophes in the quarter totaled over $22 million, up $17 million over prior year and approximately five times our expected level for the second quarter. Total catastrophe costs represented 16.6% of earned premium, up almost 13 points over last year. The second quarter storm activity--mainly wind and tornadoes--was the highest second quarter in our history.

Also in the quarter, we had favorable prior year reserves re-estimates of $2.4 million, or 1.8% of premium, which was 2.4 points lower than prior year. Our underlying combined ratio, excluding catastrophes and the effect of prior year reserve re-estimates, was 91.9% in the quarter, 2.3 points higher than last year and up 0.5 point sequentially compared to first quarter. Year to date, total property and casualty combined ratio was 100.2%, up 10.9 points over the first half of 2007. Catastrophe costs account for 7.7 points of the increase, and the difference in prior year reserve re-estimates contribute 2.3 points to this increase.

Our first half underlying accident year combined ratio, excluding catastrophes, was 91.7% and 0.9 point higher than last year. Excluding catastrophes, this quarter's auto accident year combined ratio of 95.9% was up 1.2 points over prior year, while property posted an accident year combined ratio of 83.1%, an increase of 7.3 points when compared to the second quarter of last year.

In auto, frequency trends were below prior year, potentially receiving a favorable impact by decreases in miles driven this quarter. Our auto severity trends remained favorable, consistent with our expectations.

Property non-catastrophe loss costs increased in the quarter due to the unfavorable spring weather patterns. We experienced a nearly 50% increase in non-catastrophe wind and hail losses driven by activity in the Midwest and the Carolinas. In both lines, we are projecting continued price increases consistent with others in the industry to match increasing loss costs.

Our new business quality trends are excellent with a continued focus on educator, preferred underwriting tiers, and cross-selling. In addition, we continue to focus on auto payroll deductions with more schools adopting the program, and new auto business written via payroll is up over last year, 18% in the quarter and 15% year to date.

We continue to focus on managing our coastal exposure, especially in Florida, where we have decreased the number of property policies on our books. In the last year we have decreased Florida property policies by 3,800. Including expected reductions in the last half of 2008, we will have reduced Florida property policies by approximately 37% from our high water mark, with the majority of the reduction in the last couple of years.

Along with coastal reduction strategies in other states, we have reduced our property policies in coastal areas by about one-third since 2005, resulting in an overall 12% reduction in total insured value along the coast.

Our customer retention levels continue to improve on both auto and property, increasing 0.3 of a point and 1 point, respectively. Educator policies in force continue to grow, increasing almost 3% over prior year and by approximately 1% over this year's first quarter. These results are driven by continued quality improvements, increased customer contact programs, and a commitment to customer satisfaction.

The commitment to our customers is embedded in our processes across the Company. Recently, our property and casualty claims department earned a prestigious customer service award, not just for the insurance industry, but across all industries. The award recognizes the implementation and maximization of results from an online, real-time customer service survey conducted during the key moments of truth in the claims process. The award, Best Use of the Voice of the Customer, became the fourth award received by our Claims Group since the implementation of ACE, our advanced claims environment. We were recognized for our use of real-time listening posts through all aspects of our customer experiences.

This moves us beyond just making sure our customers are happy and enlists them to become an advocate for the Company. We feel this approach will be reflected in future retention and cross-sell opportunities. This process, developed by our Claims Group, has also been installed in our P&C and life and annuity call centers.

As you may recall, in 2002, we embarked on a claim redesign process called ACE--Advanced Claims Environment. At that time, we consolidated offices and began a process of developing a new claims technology platform. In addition, we implemented consistent claims handling procedures and processes across the country in our six regional claims offices.

Approximately two years ago, we started a joint development of a claims desktop. Basically, this is a technology that brings different vendors together under one platform while also providing a rules-type approach to certain claim situations. All of these changes have worked extremely well, as we have improved severity, lowered pending, substantially improved customer satisfaction, and reduced loss adjustment expense by more than three points.

As a result of all of these changes, and specifically the technology gains we have made, we are implementing a further consolidation of our claims organization. In 2009, we will begin operating with two regional auto claims offices and one national property office. These changes will allow us to leverage the technology and processes even more effectively than we have in the past. We believe we'll be able to further improve a number of our processes as well as deliver greater customer satisfaction while also being increased benefits out of the technology platforms.

Over the last four years, we have outperformed the industry in (inaudible) in virtually all coverages. These changes will allow us to improve our results even further with a relatively short payback period on our investment in the office consolidation.

In summary, catastrophe losses as well non-cat weather-related losses had a significant impact on our results and the rest of our industry. Our unit count and written premium trends are essentially flat in a very competitive market, as evidenced by continued high levels of advertising spend in our industry. Our coastal property reduction strategy, especially in Florida, had limited our growth to some degree, but are protecting our bottom line by reducing catastrophic exposure and reinsurance costs. We will continue to focus on programs that differentiate ourselves from the competition in our target market, the educator community.

And now turning our attention to annuity and life. Our total annuity sales continued to face pressure due to the changing 403(b) marketplace. Although we have a number of strategies in place to maintain a rollout position within the schools, there have been shifts in the market, and I will address some of our actions in a few minutes.

Overall, our annuity sales are down approximately 12% for the quarter and about the same year to date. As anticipated, the primary drivers are reduced single premium and rollover business, which is down 13% in the quarter and 17% year to date, including partner sales.

As mentioned in prior calls, many school districts have placed restrictions on participant 403(b) transfers. As a result, our qualified single-deposit sales have decrease about 17% for the quarter and slightly less on a year-to-date basis. We do expect the restrictions on transfers and our focus on qualified sales from the independent agents to continue to impact our single-premium and rollover sales through the rest of the year.

On the other hand, our scheduled premium deposits are running closer to prior year, down 8% in the quarter and 2% year to date. The Horace Mann agent flex business is down a couple of percent in the quarter but up over 4% for the year.

As I mentioned, regulatory changes to the 403(b) market, although not fully effective until January 1 of 2009, have impacted our annuity production as compared to prior year. However, at the same time, we have employed a number of strategies to solidify our position and grow our business. We have implemented numerous contact programs, participated in joint indication packages, mailed informational packages to all schools, and trained our agents so they can provide a high level of expertise to their schools.

While there have been a number of headlines regarding the changes, our experience has been that a relatively small number of schools have utilized outside consultants with RFP processes to significantly pare down the number of providers that belong to a single-provider network. Most schools are not rushing to adopt the new 403(b) regulations. As of June, we have heard from approximately 15% of our over 5,000 current schools with payroll slots, with a vast majority of those notifying schools allowing Horace Mann to continue as a 403(b) provider after January 1, 2009.

Most schools are focused on the regulatory requirement to develop a written plan and are simply maintaining their current major providers, at least for 2009. We expect the majority of the remaining schools to also develop plan documents maintaining the status quo. Although we have lost out on a very small percentage of our schools, we have also won a few new districts. As the year moves along, we will get a far better view of what we can expect as we move into 2009.

And wrapping up my comments on annuity results, our total annuity assets under management decreased 3%, with fixed annuity assets increasing 5% and variable annuity assets decreasing 14% due to market performance. In addition, total policy count continues to grow a little slowly with cash value retention in the 91% to 92% range.

Annuity pre-tax income for the second quarter was up slightly while down $1 million year to date. Key drivers of the earnings for the quarter and year to date are increased interest margins, which have been offset by decreased charges and fees, as well as unfavorable changes and DAC and VIF unlocking driven by market performance.

Now turning to the life segment. Second quarter and year-to-date life premiums with contract deposits, which consists of Horace Mann products only, were basically flat compared with last year. Total second quarter and year-to-date sales were down 18%, primarily driven by a decrease of partner product sales, with Horace Mann proprietary products down 8%.

Looking at the bottom line for life, second quarter pre-tax income increased $2.2 million when compared to the prior year due to an increased investment income and lower mortality. On a year-to-date comparison, pre-tax income was up $1.1 million, mainly due to increased investment income.

Overall, a pretty good quarter from an earnings perspective, with positive signs as our interest margins continued to improve.

And now let me turn it over to Rick Schulenberg for his comments on our new model.

Thanks, Doug, and good morning to everyone. Today I'll focus on the momentum we continue to build with the Agency Business Model initiative, the changes in our agents' status relative to the model and the quarter and year-to-date sales results. Results for our agents working in the Agency Business Model, or ABM, have been very encouraging. ABM agents have gone through our Agency Business School and have adopted or are in the process of adopting documented, repeatable processes in their operations that include conducting business in outside offices with licensed producers and other support staff.

We continue to grow the number of agents operating in outside offices with licensed producers while decreasing the number of agents working out of their homes. We have also had additional Agency Business Schools with now nearly 30% of our existing agents having completed this four-day business seminar. On average, ABM agents are collectively outperforming all other agents in all four lines, especially in our two lead lines--true new auto sales and flexible annuity sales. These lines serve as a barometer of our success with the ABM initiative.

Overall, our agents' average true new auto productivity increased by approximately 6% for the second quarter over 2007, driven predominantly by our ABM agents. Their average true new auto productivity has increased approximately 9% in the second quarter.

Flexible annuity average productivity is up around 9% for the second quarter and 15% for the year, and again, our ABM agents had the most influence on this increase. Their average flexible annuity sales increased by approximately 10% in the second quarter and 22% for the year. In fact, productivity has increased for the ABM agents in the second quarter in true new sales, property sales, and flexible annuity sales in the 9% to 10% range.

One last point--ABM agents' first-year commissions continue to grow, a key factor in their belief to be successful in the model. And overall, our ABM agents produced substantially more business in all categories than their non-ABM counterparts.

We continue to bring agents who are showing potential of operating in the model through our Agency Business School. We are also continuing to focus on our previous Agency Business School graduates, providing them with individualized coaching sessions. Additionally, we've developed a second Agency Business School designed to support and reinforce the repeatable business practices and processes to ensure that they are embedded in the respective operations.

We have just begun our Agency Business School II for past ABM graduates. We are also conducting workshops to build the sales effectiveness of our agents' licensed producers. The workshops are aimed to embed the same repeatable processes core to our ABM model into the producers' day-to-day activities.

Now let's look at our changing agent force profile. We ended the quarter with 721 agents, and during the first six months of the year grew our licensed producers engaged by our ABM agents from 253 to 322. These numbers are the result of a shift in our emphasis, focusing on agents working in the Agency Business Model and distributing our products through total points of distribution--that is, agents and their licensed producers.

Our terminations are relatively consistent compared to our second quarter of 2007. The majority of our terminations were agents working inside their homes with substantially lower productivity. Earlier in the year, we installed a more rigorous new agent hiring standard that establishes the characteristics of an agent who we believe will be successful in the Agency Business Model. Initially, this significantly reduced the number of new candidates we hired, but gradually, the number of hires has increased, and although it is still short of our traditional monthly hiring patterns, we're encouraged. The initial indications show our quality has improved, and we're pleased with the progress that our agents hired in 2008--even in 2007--are making so far. We expect the number of hires will continue to build as our field management becomes more familiar with the processes that brings the right candidate in the door.

This staffing strategy, by the way, calls for working with transitioning our existing agents and recruiting new agents capable of operating and performing into the Agency Business Model.

And now moving on to sales results. Although this has been a difficult year, thanks to our ABM efforts, we are on par with many of our peer companies. No doubt everyone is feeling the economic effects of much lower auto and home sales nationwide, which reduced sales opportunities for our agents. In general, all of our sales results are down compared to the same period of 2007.

But let's look at our two lead lines, true new auto and flexible annuity sales. True new auto was down 5% for the quarter. While still not on par with last year, we saw less of a decline than in the first quarter and had a 6% improvement in unit sales sequentially. Property sales followed a similar trend. They were down 6% for the second quarter, but again, less than a decline in the first quarter and a 9.5% improvement sequentially. If you take into account that we are shifting our Florida property sales to partner companies, we are only off by less than 2% nationally compared to the second quarter of 2007.

Flexible annuity sales for our career agents are up approximately 4.5% for the year and down only slightly--3%--compared to the second quarter of last year. And as mentioned earlier, agent productivity has improved.

In conclusion, we certainly have seen challenges in sales in this economy, but we are very encouraged by the impact we are receiving for our ABM agents and positive about this transformation to our distribution strategy. We will continue to transition those agents who are capable of operating in outside offices, engaging licensed producers, and embedding repeatable processes that are core to being successful in our niche market.

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

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

(OPERATOR INSTRUCTIONS.) Your first question comes from Bob Glasspiegel of Langen McAlenney.

Good morning. The cat losses in this quarter, you did a good job of explaining that you've been reducing your coastal exposure and that we shouldn't be nervous that this is representative of a trend that may unfold prospectively. But with your property growing pretty continuously better than your auto over the last several quarters, perhaps the question might be, are you thinking about stepping up your reinsurance purchases, particularly given that pricing has started to come down?

Thanks, Bob. This is Doug Reynolds. Every year, we really go through a process of looking at our total reinsurance package and different opportunities and try and balance that against the loss potential, our exposure that we have to not only hurricanes but others. And as we see opportunities, we obviously would take advantage of those. We do think that even though there's been a lot of activity this year in what's called the middle of the country, the pricing opportunity is there for us to really keep pace with those over a period of time. Obviously, if this year becomes the norm, then we'll have to take a look at some different opportunities. But right now, we really look at the entire package for opportunities to mitigate our risk at reasonable cost.

Okay, and switching gears, just on the auto side, your numbers and your text sort of were not as positive about gas prices and frequency as Hartford and Progressive to date. Why do you think you're not seeing any frequency positives yet? Is it the book that you're selling into, perhaps, or--?

Yes, I would say that we've started to see some of the frequency benefits, but it has trailed a few of the other companies, and I do believe that it's really targeted at our niche, which the educator, which we have such a large percentage of the book, over 80% that is out there driving every day. And they really don't have an option to change some of those patterns, whether it's to school or to other activities and events that are going on with the schools. I think we typically have seen us trail maybe some of the general market trends in that regard, but we are seeing that.

So your guidance doesn't factor any frequency felt as post the first five months? I guess June was when we really started to see it.

No, not specifically towards that. We would have to really see that for just a little bit longer to really ascertain that that's something that we should be reading into our year-end projections as well as as we move into 2009.

And last question--excess capital position's apparent. I mean, if the stocks stayed at these levels, how much repurchase would you be capable of doing if you thought that was your best option?

Yes, Bob, this is Pete Heckman. We continue to have what I would call a modest level of excess capital available following the $75 million repurchase that we did over the last eight months. At this point in time, especially with the hurricane season approaching, et cetera, we're probably going to keep our powder dry, but your point is well taken. The stock price is a pretty attractive one for a buyback scenario.

Okay. You're saying ex the cap season, how much--I mean, what your forecast is and how much excess capital are you generating in the second half?

Well, it's, let's just say it's a modest amount, certainly nothing in the order of magnitude that we utilized in the last several months.

Okay. Thank you very much.

Your next question comes from Dan Farrell of Fox-Pitt Kelton.

Hi. Good morning.

Good morning.

First thing, do you happen to have the statutory equity for the life companies at the end of the second quarter?

The statutory numbers are still preliminary. I can give you a ballpark, and don't hold me to it.

Okay.

It's about $280 million, including ABR, so adjusted capital and surplus is about in the $280 million range.

Okay, great. And then, can you just talk a little bit more about your agent force and agent count? You gave a lot of detail in your commentary, but do you feel you're getting to an inflexion point in agent count now, or when you think you'll hit that and start to see the growth come through?

This is Rick Schulenberg. Dan, obviously, we hope our agent distribution will begin to grow. But with that said, we're going to hold firm on our strategy, and that's really putting resources into those agents who are capable of going into ABM, and really putting a firm stand on our hiring standards and identifying agents who are able to come and join our Company and grow their business with business plans. And those agents who are unable to migrate over, having performance plans in place and if this is not the right future for them, we're willing to go with the people that will grow their business and help us capture the education market.

Okay. And I apologize if I missed this, but what percentage of the agents have now been sort of migrated to the new operating platform?

We have today over 200 agents who are in the platform, and we're seeing increases. But obviously, as we make increases, the future increases are going to come from those new hires that we identify. We still have some of our agents in our agent ranks who we're identifying and helping to get to that, to the ability to move to an outside office, invest in their business. So we have a couple more schools that will at least progress through this year. So we'll try to bring people through and help them get into that model.

And Dan, I think the other thing on the agent count component, and Rick talked about this, is the build that we're getting with the licensed producers. So the overall points of distribution, we do see growth in that, and that's really one of the things that one of our key drivers is. We look to make the agents stronger and expand in the various markets.

Okay, great. Thanks, guys.

Your next question comes from Rohan Pai of Banc of America Securities.

Hey, good morning. The first question has to do with the personal auto line. The accidents here combined ratio, I guess ex-cap, was 95.9. Was there any non-cat weather in that number?

On the auto?

On the auto, yes, impacted one way or the other?

Probably not. Nothing that we really saw that would have pointed to any of the coverages, for example, cars being flooded or hail damage to the vehicle that is anything that would really typically be out of the ordinary or would have that much of an impact.

And your guidance, just to check, I guess. It's for improvement year over year, right, in the underlying combined ratio for the auto book, given business mix shift?

Well, for 2008, we are expecting the auto combined ratio accident year to increase. That was built into our target combined ratios. As we start to take the rate activity in the second half of the year, we would expect to be able to move that, either flat or to move that in the other direction. But in 2008, based on the results that we're seeing, we would expect that accident year combined ratio to increase.

Okay. And in terms of the year forecast, when you're taking rate, what kind of loss trends are you forecasting? Are you assuming improvement in frequency?

At this point, we have not put that into our loss trends for the auto changes. If that starts to show up, then obviously we will. But I would say that our loss trend estimates, we try not to be--to move them too far one way or another and be either overly conservative or overly aggressive with the trends, but to actually see them show up in our results before we would move them into our loss trends.

Okay. And I think in the first quarter you said that in terms of the ABM migration that you were slowing down the process to focus on agents that had gone to the school. Is there any update on that? Is that still the case, or are you starting to again focus on getting people through?

Again, this is Rick Schulenberg. We're actually doing both. We have had an additional couple of schools for those agents capable, new schools, and we'll have a couple more as we go through the year. But we have continued to focus on those agents who have gone through the Agency Business School and into the model itself. So we started conducting a second school that reinforces all the business trends. I mean, it's been, for some of our agents, almost two years since they've gone through the initial time. So it's a reschooling and helping them really refine. And we've started to conduct our schools for their licensed producers, which is a real, as Doug said, that's a real key for us--giving them the skills and helping those licensed producers begin to sell and have an impact on both our results as well as their agents' results.

Okay, good. And I guess the final question for Pete, in the net realized losses in this quarter. I guess to what level have you written down the two CDOs that you had and what percent of cost is it now?

For the pricing? One was, I believe, around a 28 or so, and one was in the mid-40s.

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

Thank you.

Thank you.

(OPERATOR INSTRUCTIONS.) Your next question comes from Robert Rodriguez of First Pacific Advisors.

Yes. Could you please quantify for me, when you were talking about the pressures from the 403 transition, exactly what the revenue levels we're talking about? And secondly, I'm unfamiliar with that transition. Exactly what are the issues that you or the industry are facing there, and why will this be better next year?

Well, I'll go on and take the latter part of your question first. The 403(b) market, basically the IRS issued regulations that require the schools to have plan documents and accountability for how the money is moved or invested. It's very similar to the 401(k) marketplace in regards to that. And as a result, all the schools and the districts are going through changes to implement and comply with those regulations. And as a result, there is a number of schools that put in, really stopped the ability for their employees to transfer monies from one company to another until they had their plan documents filed. So that's why you see some of the single premium numbers down substantially more than the flow premium.

Secondly, as schools are dealing with that, we've been working with them to really develop their plan documents and be able to administer the programs fully. So that's, it sort of just put the market in a little bit of a turmoil, and we feel that as we move into 2009, because the schools will have to have complied to keep their plans in place, we will know a little bit more about what's going to happen in that marketplace in the next year. And we'll also add that part of this is that because of that turmoil, we'll also see that withdrawals are down in the industry as well, which sometimes is a generator for new business for other companies.

And in terms of quantifying the magnitude of what this revenue decline was in dollars?

I think I've got something on that. When we're looking up how far the single premium sales were down compared to prior year, let me just emphasize that the slowdown in withdrawal in single premium sales and the improvement in persistency is industrywide, so it's not just a Horace Mann phenomenon, as everyone is being impacted with fewer rollovers in the schools. Once the plan documents are in place and things are kind of back to normal on January 1 of this year, then you would expect withdrawals and single premium sales to return to their normal levels across the industry.

And then, as I indicated in the comments, that we're down about 15% or so on a year-to-date basis for the single qualified, which is approximately $7 million to $8 million.

All right. And then a second question here. In terms of the investment portfolio, you gave good granularity there. But in light of a transaction that recently occurred at Merrill Lynch, did you have anything that would be analogous to that? And secondly, are there any other issues like this in the portfolio? This is something I asked last year.

In terms of the transaction? You mean Merrill selling off some of their--?

I don't know if you'd call it a sale, of $0.22 on the dollar, but financing 75% and getting 5.5% cash and being retaining, being at risk. I'm not sure that really qualifies as a sale.

Right. I agree, and the answer is no. We did nothing like that and have no plans to.

Okay. Thank you very much.

There appears to be no questions at this time. I would now like to turn the floor back over to your host for any closing comments.

Thank you, everyone, and we certainly appreciate the fact that you participated on our call this morning. We look forward to visiting with you at the end of the third quarter. Thank you and have a good day.

Thank you. This concludes today's Horace Mann Educators Corporation Conference Call. You may now disconnect.