Horace Mann Educators Corp (HMN) 2008 Q3 法說會逐字稿

Good morning, my name is Pam, and I will be your conference operator today. At this time I would like to welcome everyone to the Horace Mann Educators Corporation Third Quarter Earnings Release 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 and good morning everyone. Welcome to our Third Quarter 2008 Earnings Conference Call. Yesterday after the market closed, we released our earnings report, including financial statements, as well as supplemental business and investment 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 third 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; Tom Wilkinson, Executive Vice President - Property & Casualty; 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 November 30, 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. Sizeable catastrophe losses from 11 events including hurricanes Ike and Gustav plus the impact of world wide financial crisis resulted in a net loss for Horace Mann in the quarter of $0.79 per share and that's made up of operating EPS of $0.17 per share more then offset by net realized capital losses of $0.96 per share. Our net realized capital losses of $45 million per tax was some what less then our preannouncement while catastrophe losses were right at the midpoint of the range that we disclosed.

Given what transpired in the financial markets since we last spoke we are going to organize our commentary this morning around two topics our financial strength and our operations. I'll provide an overview of both and following that Pete Heckman will very appropriately spend more time with you then normal discussing our investment portfolio, capital position, operating and leverage ratios. As part of this discussion Pete is going to walk you through a supplemental exhibit that we've added to our earnings release so that you have greater detail upfront but as always our 10-Q will provide full transparency for your further analysis. Following Pete's review we'll turn to our more traditional review of operations but as we do that we will try to give a flavor of our business how it is behaving in the challenging economic environment.

So first to the balance sheet and financial strength. The realized losses we recorded in this quarter as we preannounced are largely from the third quarter headline credits of Fannie and Freddie, Lehman and AIG. The meaningful increase in our unrealized position is predominantly a result of the extreme and unprecedented widening of corporate bonds spreads. Our considered judgment is that our realized positions almost exclusively reflect a remarkably disruptive credit market that in a crisis mode where liquidity is virtually non existent resulting in spreads and prices being disconnected from rational valuation. After conducting a thorough analysis long with our institutional investment advisors and managers we assured ourselves that we do not have fundamental credit quality issue. We have always had a very conservative, straightforward approach to our invested assets, and as you will hear in a detailed review of our 930 holdings insignificant amounts of sub-prime and Alt-A, no auto manufacturers, no home builder exposure. Somewhat of an overweighting to financials, but largely those who are going to tap in the tarp becoming stronger credit.

We do believe that as the coordinated worldwide rescue efforts stay cold they should unclog the credit market, restore rationality, reduce spreads and moderate our unrealized position. In the meantime we fully have the ability and intent to hold to recovery. The structure of our liability is associated with most of the taxable fixed income portfolio, and that's primarily annuities, is performing better than expected. Persistency actually improved again this quarter and we have positive funds flow which, I believe, speaks volumes about the nature of our product, our customer base, the strong relationships our Horace Mann agents have with their clients, and the great service our customer service reps provide, and in addition the PMT segment will continue to be a strong source of operating cash flows from underwriting and investment income.

Now having said all of that, there's no denying that the double whammy of catastrophes in the financial market meltdown hurt us in the quarter. Given that one-two punch we believe we took appropriate action to ensure having a strong capital position to protect our customers, employees and shareholders. We have always viewed our line of credit as an additional source of capital for unprecedented and unexpected circumstances, which we are clearly in now.

We made the decision to draw down part of our facility prior to the announcement of Tarp because we were, frankly, most concerned that if we needed it that key piece of contingent capital might not be available. Our concern was never about Horace Mann's liquidity, it was solely about liquidity available in the financial markets. And just by way of further clarification, that $75 million draw down remains at the holding company and has not been used as a capital contribution to our insurance subsidiaries. Even without a contribution, as Pete will describe our risk-based capital and premium to surplus ratios are solid and consistent with our ratings. As to our own liquidity, there are no issues. We have no commercial paper obligations. Operations are funded, as they always have been, through operating cash flow, which remains strong. The company has no refinancing needs for several years at the earliest and only very modest at that time.

Senior debt doesn't mature until 2015 and 2016. There are no extracurricular activities at the holding company like credit default swaps. We have no outstanding security [funding], and even with the addition of $75 million from the credit facility our debt to capital ratio on a pro forma basis at 930. Incorporating the borrowing which occurred after 930 would be approximately 31%, certainly consistent with our ratings.

So now let me shift gears and hit the highlights of our operations, which Tom Wilkinson, Pete and Rich Schulenberg will cover in greater detail. In property casualties, the headline story is clearly the third worst third quarter for catastrophes in the Company's history, right on the heels of the worst second quarter for catastrophes. On a very positive note, however, the underlying profit fundamentals are solid. Current accident year results ex cap improved sequentially and are better than prior year. As significant improvement in auto led by a decline in frequency more than made up for an unfavorable comparison in property, largely the result of non-cap weather. While auto educator PIF continues to increase, overall PIF is flat, but high quality new and enforced business, along with positive retention trends, continues to benefit our results.

In life and annuity combined, excluding VAT and GMDB reserve changes, earnings were comparable to the very strong results recorded in the first nine months of last year. Now obviously, while variable account values and fees have decreased, fixed account values are up over prior year and sequentially with positive funds flow and improved persistency.

Turning to sales and distribution, as you well know, the economy has thrown a wet blanket over new car and home sales, which in turn has continued to pressure applications for both auto and property insurance industry wide. For our two lead lines, [True New] Auto sales declined 6%, roughly comparable to the second quarter on a percentage basis, although up sequentially in total units. Flexible annuity sales increased 9% for the quarter for Horace Mann agents, while they also delivered an increase of 4% in single premium business.

More importantly for the future growth of the company, during the third quarter our ABS agents further elevated their productivity, increasing it over 10% in True New Auto, 28% in flex annuity and 18% in single premium annuity and that rate of growth, especially in this economy, is a most positive indicator of our future growth prospects as we continue to transition to our new distribution model.

Finally, with Doug Reynolds departure you'll be hearing from Tom Wilkinson during the in-depth review of PNC. Tom joined Horace Mann six years ago from All State. He's been a key leader in the turnaround of our PNC operations, assuming greater responsibility every year. Prior to his promotion to Executive Vice President of PNC he had accountability for all aspects of our property casualty business, excluding claims, which now also reports to him. So let me now turn the call over to Pete Heckman.

Thanks, Lou and good morning. The unprecedented uncertainty and volatility in the financial markets continues to have an impact on both realized and unrealized investment losses. Pre-tax net realized losses were $45 million for the third quarter. Included in this amount was $33 million of impairment write-downs on securities which we continue to hold but determined to have had other than temporary declines in market value as of quarter end. Of this amount, approximately $23.7 million relates to impairments for which the issuer's ability to pay future interest on principal where the value of contractual terms have been compromised, namely Lehman Brothers, Fanny, Freddie and AIG. The remaining amount relates to impairments, primarily on financial institution securities and high yield bonds where we no longer have the intent to hold the security for the period of time necessary to recover a substantial portion of the decline in value.

Also included is $14.2 million of realized losses on impaired securities that were disposed of during the quarter, primarily related to financial names such as Freddie, Fannie, Wachovia, Morgan Stanley, Goldman Sachs and Washington Mutual. The impairments were partially offset by $2.3 million of realized gains on investment sales. The spread widening and interest rate volatility in the quarter, much of it occurring in the month of September, had a significant adverse effect on the fair value of our investments. We provided a supplemental exhibit at the end of our press release package this quarter, I believe it's page number 6, which provides additional disclosure on our net unrealized loss trends and September 30's balance.

Then under realized investment losses at the end of the third quarter totaled approximately $271 million pre-tax, up substantially from the $106 million recorded at June 30th. As you can see in the data, the change was spread over numerous asset classes, but investment grade bonds, CMDS and financial institution securities, bonds and preferred stocks were most impacted, accounting for $140 million of the $165 million increase. More detail on our financial institution holdings is provided on the lower half of the supplemental exhibit. The total fair value of our financial holdings, including both debt and preferred, was $250 million at 9/30, just under 7% of the total invested assets.

That sector has been on the bleeding edge of the financial markets meltdown, and with the current market to book of 82%, clearly remains under stress, but there is growing evidence that this sector has been stabilized, at least in relative terms due in large part to worldwide government intervention and support, including the TARP program in the US. If you scan down the financial institution's names in our supplement you'll find the list broadly populated with clear or most likely survivors which have, or will receive government support through TARP or a comparable international rescue program. By virtue of the preponderance of quality names and the clear indication of ongoing external support, we are comfortable with our holdings in this sector and feel that recovery, while probably slower than anyone would like, will indeed occur.

Horace Mann had approximately $305 million of CMBS book value exposure at the end of the third quarter, representing about 7 % of the total portfolio. While this asset class has seen significant spread widening over the last nine months, increasing our unrealized loss to $47 million at 9/30, we continue to feel good about the overall quality and performance of that portfolio. The overall credit quality of the CMBS portfolio is a solid AA and it is 100% investment grade. As of September 30th approximately 80% of the portfolio was comprised of the higher quality 2005 and prior vintages, and 70% of the remainder of the portfolio is AAA rating. All of the securities in the portfolio are currently performing in line with contractual terms and did not experience any deterioration in delinquencies or foreclosures during the quarter. For our CMBS portfolio we regularly analyze available market information, including underlying credit quality, anticipated cash flows, credit enhancements, default rates, loss severities and position in the capital structure, and at this point do not believe that the available prices are indicative of the future performance of the securities.

And finally, our non-financial institution investment grade bond holdings comprised a little over one third of our total investments at the end of the third quarter. This is a well diversified A+ rated portfolio representing over 300 issuers across some 30 industry sectors. This component of the portfolio accounted for almost half of the increase in unrealized losses in the third quarter, as average spreads for US intermediate credit expanded from 256 basis points in June to 427 at 9/30, clearly a reflection of the panic and irrationality in the marketplace spreading to the broader economy, rather than an indication of deteriorating portfolio quality.

As further evidence that the increase in unrealized losses is more indicative of recent spread lightening as opposed to inherent credit quality issues in Horace Mann's portfolio, consider that over 80% of the securities with fair values below 80% of book value at 9/30 have been below 80% for only three months or less. And we continue to have less than one tenth of 1% of our portfolio pricing based on so-called level 3 imports - another element of conservatism in transparency in our evaluations.

So in terms of an overall assessment of our investment portfolio, we believe the credit quality to be strong. We view the current pricing in the market to be irrational and a temporary phenomenon, and currently have the intent and ability to hold all securities to maturity or a substantial recovery in value.

I'd like to use the remainder of my time to provide some commentary on Horace Mann's capital and liquidity position. While our capital was adversely impacted in the quarter by the combination of significant catastrophe losses and the unprecedented challenges of the financial markets, our leverage and operating ratios remain strong, both at the insurance company's subsidiary and holding company levels, and more than adequate in our view to support current ratings. In spite of the high level of investment losses in the third quarter, we estimate our life company RVC to be approximately 430% at 9/30. Current flows, persistency and liquidity are all strong and increasing, which I will elaborate on in a few moments.

We expect PMC's RVC ratio to be about 350% and the premium to surplus ratio to be under 2 to 1 at September 30th, both measures better than they stood at the end of 2005.

Furthermore, our bank line of credit, $75 million of which is drawn and being held at the holding company, provided more than adequate flexibility, should the need exist, to contribute additional capital to our insurance subsidiaries in support of their ratings. And their current debt to capital ratio, including the $75 million of borrowing, is a little under 31%, excluding 51.15 and within a range consistent with our current ratings.

There are no liquidity issues at the statutory NV level. Our liabilities are extremely vanilla and stable. Cash or cash equivalent balances currently stand at $150 million, 90 in the life company and 60 in PNC, and we expect the life and annuity investment portfolios to throw off over $90 million in cash in the fourth quarter alone. In addition, we have a substantial amount of highly liquid assets available if needed. $840 million of agency-passed through our MVS and $150 million of U.S. government agencies in the life company, and some $440 million of community bonds, $35 million of agency pass-through's and $12 million of U.S. government agency securities in PNC.

At the holding company, as Lou mentioned, there are no business operations or extracurricular activities of any type, no credit default swaps, security blending, etc. Our bank credit facility doesn't expire for three years and our senior debt doesn't begin to mature until 2015, so our capital and liquidity positions remain strong in spite of the challenging environment we are in, and the difficult quarter we and the rest of the industry have experienced.

The catastrophe in investment losses were material but very manageable. While the financial markets and investment performance were by default the headline issues of the third quarter, Horace Mann continued to experience positive underlying trends in our insurance operations. I'll come back in a few moments to talk about Life and Annuities, but first here's Tom Wilkinson to come in on our PNC results. Tom.

Thanks Pete, and good morning. As Lou mentioned, weather patterns and catastrophes continue to significantly impact on our PNC results. Total catastrophe cost for both the quarterly and year to date are of three times our expected amount. The third quarter saw the continuation of increased tornado activity across the Midwest, with almost twice as many storms as last year, and the impact of Hurricanes Gustav and Ike. Let me say that our claims staff has responded to these events exceptionally well, delivering timely and caring service to our customers. We are currently 97% closed for Gustav and about 92% closed for Hurricane Ike.

As I said, all that activity has impacted our key profitability measures. The total PNC combined ratio for the quarter was 109.7, up 13 points over third quarter last year. Catastrophe costs in the quarter totaled $36 million and represented 19 points above prior year levels. We had favorable prior year reserve re-estimates of $6.3 million, or 4.7% of premium, which is almost 2 points better than the prior year.

Our underlying combined ratio, which excludes catastrophes and the effects of prior year reserve re-estimates, was 87.5%, about 4 points lower than the third quarter of last year, and not surprisingly, year to date, total PNC combined ratio was 103.3, plus 11.5 points over last year. Catastrophe costs accounted for 11.5 points of the increase and the difference in prior year reserve re-estimates contributed an additional 0.9 to the increase. Our year to date underlying accident and combined ratio, again excluding catastrophes, was 90.2% and 0.9 lower than prior year.

On the auto side, this quarter's auto accident year combined ratio, excluding catastrophes, was 89%, or 7.1 points better than the prior year. Frequency was below prior year for the second consecutive quarter, favorably impacted by continued decreases in miles driven. Severity trends remain favorable and consistent with our expectations. Year to date our auto underlying combined ratio was 93.7, 2 points below prior year.

Looking at property, our accident year combined ratio, excluding cash, was 83.7 for the quarter, almost 3 points above last year. Consistent with that, the year to date property underlying combined ratio was 82.2%, 3.7 above prior year. Non-cat weather impact since the beginning of the year is a major contributor to these increases. On both lines we continue to project price increases consistent with others in the industry to match our lost costs trend.

Our new business quality trends remain favorable, with continued focus on educator preferred-underwriting tiers and cross-selling, and we continue to expand our auto-payroll deduction program with new schools adopting the program up 35% and total policies on payroll deduct up almost 60% when compared to prior year.

Now looking at some of the basic metrics around our books, our policy-holder retention levels continue to improve in a very competitive environment. Auto retention is up 0.1 and property is up 0.5 over prior year. Total policies in force are flat in auto and down slightly, minus 1.0% or 3,000, in property. The decrease in property is attributable to catastrophe exposure management actions the last few years along the East and Gulf Coasts. Our total coastal property policy count is down 13% in the last year, and down 34% since 2005. And when we focus solely on educators in our book, we see total educator PIF continue to increase countrywide, with auto up 2,700 sequentially this quarter, now 2.5% above prior year, and property is up 500 compared to last quarter, and is 2% above prior year.

As we introduced in last quarter's call, we are on pace to implement the claim consolidation of six field offices into three. Beginning in the first quarter of 2009, we will operate with two regional auto claim offices and one national property office to make our operations more scalable to further leverage investments in our technology platforms and key work processes. This will enable us to continue to make operational gains in claim severities, expenses, and customer satisfaction. The current economic climate, with significantly declining car and home sales, combined with increasing industry advertising spend, makes for a challenging and competitive PNC marketplace. Our focus has been and will continue to be working with our partners in marketing to develop and implement product and service enhancements that further differentiate ourselves from the competition in our educator market.

Now I would like to turn it back to Pete to talk about our Life and Annuity results.

Thanks, Tom. Total annuity sales were down 1% in the third quarter compared to prior year, and down 9% year to date; however, 2008 annuity sales are exceeding our expectations, and those prior year comparisons mask what I think is a pretty positive picture in this line of business, especially as far as our Horace Mann agents are concerned. As expected, the IRS 403(b) transition rules have had a negative impact throughout the year on single-premium and rollover deposits due to interim restrictions on [prohibiting] fund transfers.

Our independent agent channel, which accounts for only about 10% of our annuity sales, has been impacted more significantly, but Horace Mann agents had a strong quarter, increasing total sales by 5% over prior year, which reduced their year to date sales deficit to 1%. And in our bread-and-butter flexible premium business, employee agents grew sales 9% in the third quarter, and 6% year to date. We also began to see some recovery in Horace Mann agents single premium rollover sales, with that component increasing 4% in the current quarter, as more and more school districts completed their transition to the new 403(b) regulations.

As we've discussed on previous calls, the new IRS regulations become effective on January 1 of next year, and 2008 has been a year of transition in the marketplace, as this process sorted itself out. During the last 12 to 18 months, we have deployed a number of strategies to solidify our position and grow our business. We have implemented numerous contact programs, participated in joint communications, and distributed informational packages to all of our school districts, and trained our agents so they can provide a high level of expertise to school administrators. While there was some concern that the level of market disruption would be significant, our experience has been that only a relatively small number of schools have utilized outside consultants and/or RFP processes to significantly cut back on the number of providers, or moved to single-provider networks. At this point, we've heard from approximately 60% of the over 5,000 school districts having Horace Mann payroll slots, and the vast majority have selected us to continue as a 403(b) provider in 2009. Similarly, we expect the overwhelming majority of our remaining schools to also maintain Horace Mann on their list of authorized providers going forward. So overall, the initial transition has been much less disruptive than expected, and very importantly, the impact on Horace Mann has been generally positive.

Back to the financial results. Total annuity assets under management decreased 6% compared to prior year due to a 21% market performance related decline in variable annuity assets. General account fixed annuity assets, on the other hand, increased by 6% over the last 12 months. The stability and loyalty of our educator customer base, and the quality of our employee agent force, are among the Company's most valued assets, and that has been very evident in this difficult market environment. Annuity net fund flows, defined as premium less surrendered debts and maturities, have been positive throughout 2008, with sequential increases in each quarter, and our 12 month account value persistency of 93% is up 1.5 points over prior year, with third quarter persistency hitting the 94% level. So our liabilities continue to be extremely stable and present absolutely no liquidity issues.

Annuity pre-tax income was slightly above prior year through nine months, and up about $1.4 million for the quarter. In the third quarter, favorable DAC unlocking of $2.4 million pre-tax was comprised of the positive impact related to investment losses recognized in the quarter, which more than offset the adverse impact of the financial markets on variable-deposit fund performance. The underlying earnings in both the quarter and year to date were favorably impacted by increased fixed annuity margins, which have been offset by decreased variable annuity charges and fees.

As a final comment on our annuity business, I wanted to mention that while our variable annuity results are impacted by financial market performance, Horace Mann's variable products are only exposed to so-called equity market guarantee risk. Approximately 70% of our in force VA account value has a simple return of premium death benefit. Nearly 25% of the business has no death benefit guarantee at all. The remaining 5% has a modest 3% or 5% roll-up benefit, and our current GAAP GMDB reserve balance of only $350,000 reflects that conservative risk profile. We offered no other guarantees and have no hedging or derivative program exposure whatsoever.

Now turning to the Life segment, third quarter and year to date sales were down over 10% compared to prior year, reflecting the impact of the economy on discretionary spending, along with perhaps a greater relative emphasis on auto and annuity sales. Life premiums and contract deposits were slightly ahead of last year. In terms of earnings, Life segment pre-tax income was down $1.5 million in the quarter, and $400,000 year to date compared to prior year.

Mortality costs were $2 million greater than last year in the quarter, and $3 million higher year to date, which offset the growth in investment income and earned premiums in both periods. As mentioned in our press release, excluding the impact of DAC unlocking and change in the minimum death benefit reserves, year to date pre-tax income for the combined Life and Annuities segments was comparable to a very strong prior year, and is exceeding our expectations.

So with that, let me turn it over to Rick Schulenberg for his comments on sales and distribution. Rick?

Thank you, Pete, and good morning to everyone. Today, I'll focus on the momentum we continued to build with the agency business model initiative, the changes in our agent status relative to the model, and our quarter and year to date sales results.

As we've reported in the past, results of our agents working in the agency business model, or ABM, continues to gain traction. ABM agents have gone through our agency business school, and have adopted or are in process of adopting documented, repeatable processes in their operations that includes conducting business in an outside office, with licensed producers, and other support staff. We continue to grow the number of agents operating in outside offices with licensed producers, while continuing to decrease the number of agents working out of their homes. We now have over 450 agents operating in an outside office, and over 250 with licensed producers, and 200 graduates of our agency business school. On average, ABM agents are collectively outperforming all other agents in all core lines, especially in our two lead lines, True New Auto Sales and Flexible Annuity Sales. These lines serve as a barometer for our success with the ABM initiative.

Taking a look at our third quarter results, overall average True New Auto productivity increased by approximately 8%, with our ABM agents leading the increase with an approximate 11% increase as a group. For the year, average productivity increased 1%, with our ABM agents up 4%. Flexible Annuity average productivity is up around 25% for the third quarter, and 18% for the year. Again our ABM agents had the most influence on this increase. Their average Flexible Annuity sales increased by approximately 20% in the third quarter, bringing the year to date results to 24%. And Single Annuity sales productivity is up approximately 20% for the quarter and 9% for the year for all agents, with our ABM agents improving their productivity nearly 18% for the quarter and 4% for the year.

Again, this quarter, ABM agents first-year commissions continue to grow, a key factor in their ability to be successful in the model. In addition to greater gains in productivity, as you'll recall, ABM agents produced substantially more business in all categories than their non-ABM counterparts.

While we continue to bring our agents to the agency business school who are willing to begin operating in the agency business model, we are also bringing graduates from our first agency business school into a new agency business school too. We have build an advanced curriculum and learning experience for them designed to reinforce the repeatable business practices an processes and help them fully embed these processes in their respective operations.

At the same time, we have also developed and introduced workshops for a licensed producer who work for agents to elevate their skill sets and prove their effectiveness and sales ability and increase their economic benefits that they deliver for our agents.

While still very early, indications are agents who have attended ABM 2 and/or had their licensed producers attend workshops have seen an initial increase in their productivity.

We ended the quarter with 690 agents, down from 721 agents at the end of the second quarter. But during that time our agents have increased their licensed producers, some 322 producers to 360 for a total increase in points of distribution from 1043 to 1050. Our terminations are relatively consistent compared with 2007, as is the makeup of our terminations; with the majority coming from agents working inside their homes with substantially lower productivity.

As you will recall, we install the more rigorous standards to our hiring process earlier in the year which initially reduced the pipeline of new agent candidates and hires. As our new process has become embedded in how our field sales leaders operate, we have begun to rebound to more normalized monthly hiring numbers but with an increased degree of confidence that our new hiring classes will have a higher degree of success and retention in the future.

Now moving on to sales results, in spite of our reduction in agent counts and in face of challenging economic times with fierce competition, we have held out our own, thanks predominately to our ABM initiative. While total auto sales decreased 2% in the quarter, (inaudible) auto was down 5.9%. While still not on par with last year, the results are less adverse than the first six months and an improvement sequentially. Annuity sales were up slightly from last year third quarter, down 1.3% and up 9% for the year which showed a significant improvement sequentially. Up over 40% compared to this year's second quarter.

Looking just at Horace Mann career agents in the third quarter, they delivered an increase of 4.6% and within that a 9% increase in flexible annuity sales; an encouraging sign that our core [flow 3B] business is on solid footing.

Property sales were up approximately 9% for the third quarter and year, but almost a 19% improvement sequentially. If we exclude Florida property sales, we are off pace for 2007 by only 6%.

In conclusion, in spite of challenges with the economy and a dip in agent count, we continue to be encouraged by positive gains being made by our ABM agents and the overall positive impact this distribution strategy contributes to our growth. We will continue to transition those agents who are capable of operating in outside offices, engage their licensed producer staff and embed repeatable processes that are core to being far more successful in our niche market.

And thank you. And with that I will turn it back to Dwayne.

Thanks Rick. And that concludes our prepared remarks. Obviously we allocated some additional time to our remarks, but given the current environment we certainly believe that it was warranted. So Pam if you would please move to the question and answer session.

Thank you. (Operator Instructions). We will pause for just a moment to compile the Q and A roster. Thank you. Your first question is coming from Bob Glasspiegel with Langen McAlenney.

Good morning. Could you refresh me again where your RBC ratios are relative to your target. I know you gave the number but I missed it.

Yes, Bob. The estimated September 30 numbers, and we haven't finalized statutory results yet, but these are pretty close, is about 350% for PNC and about 430% for Life.

And where is your target?

Well we certainly want to have the life RBC ratio above the 400 mark, although I think our current ratings could be supported with something a bit below that. PNC, we looked at probably as much to the premiums and surplus ratio in combination with RBC and again the premium surplus ratio is going to end up being about 1.9 or so, just a little bit above 1.9 and we have been as high as 2.5 in fact 3 or 4 years ago and supported the current ratings.

So we feel both are comfortably within our targets.

If the market grew and you could actually raise rates and grow units, let's say it tightened for whatever reason, if you got the balance sheet to be able to support growth here?

Yes we do.

Okay. On the investment side, now obviously you farm it out to a third party and you sort of went through sort of what went wrong in the quarter, but I think you seemed to suggest you are comfortable with the overall risk profile of the portfolio. You are comfortable with outsourcing it, or were there some mistakes in how much risk was taken and is there a move to file it back?

Hey Bob, this is Dwayne Hallman. Obviously an excellent question. In our environment we utilize three outside managers, Blackrock and Guggenheim for our core plus [side] accounts and [Shankman] for the high yield portfolio. Obviously in our realized gains we did have some exposure to Lehman; that accounted for a substantial of loss for us and it was a high exposure.

Although we were able to reduce that exposure by about $8 million over a 3 to 4 month period with basically no gain or loss. We did attempt to continue to sell out some [short] paper leading up to the demise of Lehman; but in the marketplace we were just not able to move that paper.

Having said that, I believe overall the managers were comfortable with Lehman with the idea that either they would be purchased and the debt would go with an acquire. There was some speculation in the marketplace that they could result in bankruptcy. But I believer overall it was felt there would be some residual value left once prices became sort of depreciated. But it was one of our higher exposures; we do have policy guidelines that result in significantly less exposure per issuer and I think it was one of our managers would somewhat have an opinion that it is a bit low. But given that we are comfortable with our issuers, our exposure. We are in trying times but we work very close with our investment managers and in our risk analysis and exposure.

So no plans to de-risk the portfolio from here?

Not substantially. As you can see from some of the investment details that were supplied, we do not exposure, very minimal exposure to a lot of the toxic buckets, but to the extent of our financial institution exposure that has been decreased over the last year. But at this point, [volatility] again makes sense too, realized losses on theoretically good gains that depressed prices.

How much annualized lost investment income has it been the PC and the life with the hits you have taken so far?

On an annual basis, approximately $2 million to $2.5 million.

That's company wide or --

That's correct.

So the PC would get whatever the percentage or is that filtered more to the life companies?

Bob, you could assume that it is still more to the life companies.

Okay, and last question is, that was a pretty phenomenal underlying results X, I guess that was deployed, this is (inaudible), but are you going to factor that into underwriting. I mean, we are in a little bit of a different environment and I know we had sort of third quarter you had the higher gas prices. Fourth quarter you are going to have a weaker economy in theory and most people driving to work, although teachers may not be impacted in that, but I guess they will be dodging fewer [cars]; what are your underwriters doing in the market?

Excuse me, Bob. This is Tom Wilkinson. We feel pretty good about the quality of our business. A lot of the programs we did over the last couple of years has refocused us back on the educator market and we think that frequency trends still look pretty good. I doubt that given the gas prices have already changed, they are trending a little bit, I don't know if the frequency trends are going to be as good going forward, but we still look pretty favorable there. We think the, unfortunately I think the economy might have some impact on everybody who is driving and you might have less cars to hit out there. We feel pretty optimistic going forward. We increased our rate activity over the last few quarters; not exorbitant, not a lot, but enough to help us with our costs and we are still investing heavily in the claims department and our claims results have been pretty good.

Okay, you are not going to factor in the pricing it sounds like.

No, not exactly. Not yet.

Okay, thank you very much.

Thank you. Your next question is coming from Rohan Pai with Banc of America. Please go ahead.

Hey, good morning. First question has to do with the auto combined ratio; I think a couple of quarters ago you said that you don't expect the benefits of frequency to be that much because teachers tend to keep driving to work regardless. I think the 89% ratio was one of the largest sequential improvements we have seen. Was it just the frequency, or is there anything that maybe one time that helped in the third quarter that might not be ongoing?

Well, in the third quarter, in addition to this, declines in frequency, we also got some benefit from prior quarter's developments also hitting us, helping us out in the third quarter.

Yes, I was talking about the underlying, so excluding caps and reserves adjustments. Did the underlying combined ratio, seems to improve at 5 or 6 points sequentially.

It was the current accident year; it was just a couple last quarter and a quarter ago that helped the third quarter underlying results as well.

They were adjustments from the price two quarters that came in?

Yes.

Okay.

Probably the place to look is more to the year to date numbers, Rohan.

Okay, that is helpful, very helpful. Thank you. The expense ratio on the PNC side seems to be a little better than we were expecting and better sequentially. Anything that -- one time nature there or is that something that might be ongoing.

Well we certainly look to our expense control programs, but there was an adjustment, an incentive [comparables] in the quarter that was more along the lines of a one-time adjustment that helped that ratio.

Okay, great.

-- that is the kind of offense we would like to see on an ongoing basis as you might imagine.

That's right. And on the capital position, do you have the stat surplus for the life operation?

Yes, again this is going to be preliminary, but we think adjusted capital and surplus will end September between $250 and $260 million.

And what was it at the and of the second quarter, if you can just remind me?

$275 million.

Okay. And now Fitch had some negative comments a week or two ago. What are the rating agencies saying. Are they bothered about the unrealized losses in any way or do they agree with your views that this is not only good, at some point it has to all come back?

Obviously we have been in contact with the rating agencies since the draw down on our bank lines and also communicated not only the rational behind that borrowing which they totally agreed with but also communicated our third quarter projections for operating results and investment results as well and those projections we provided were consistent with our actual third quarter results.

We recently provided them as you can imagine with extensive additional detail on our investment portfolio which we understand is being requested of most or all life insurers and are proactively providing supplemental information and responding to their questions.

At this point in time we are not aware of any specific ongoing concerns they have with Horace Mann, although their review of our information and the significant volume of industry data is clearly still a work in process. But again, I think agencies such as Fitch have come out with overall negative outlooks on the life industry in general and I think their downgrade of us was generally reflective of that as much as anything specific with regard to Horace Mann.

Okay, and then on the, thanks for the investment disclosure, that was helpful. Just looking at the unrealized marks, the corporate bond portfolio seems to have been written down by about 7 percentages, just (inaudible) in the third quarter. We would have expected a AA or A portfolio to be down maybe 5%. Is there something that was different about your portfolio that we should have possibly taken into consideration?

Not aware of anything, Rohan.

Okay, and then --

Obviously the financial institution over weighting is there.

Oh, that's right. Yes.

Beyond that it is fairly diversified.

Okay, and then I guess is it fair to assume that October unrealized losses were negative so far?

Yes, I think that is a fair assumption. You will recall I quoted in my comments the movement in kind of aggregate US intermediate credit spreads going from 256 basis points at the end of June to 427 at the end of September. Earlier this week they moved up to 545 so you are certainly right that October would see an additional growth in the unrealized.

And we expect the unrealized in this environment to be bouncing around quite substantially.

One rule of thumb that is generally something that is probably usable is that the sensitivity of our unrealized to changes and spreads basically or generally for each 50 basis point change in overall spread, our unrealized would change maybe by a little over $100 million.

Okay, that is helpful. Thanks a lot. Those are the questions I had.

Thank you.

Your next questions is coming from --

Hello Pam? This is Dwayne Hallman. We couldn't hear the question. Pam? If anyone is on the line we are going to be checking out what appear to be some technical difficulties. Hopefully we will get back online momentarily.

Mr. Hallman, can you hear me?

Yes, Pam, you are back online. Okay, Mr. Rothman, can you hear me? Just a moment please. Mr. Rothman, can you hear me?

Yes, hello?

Mr. Hallman, can you hear me?

Yes, Pam we can.

Thank you. I apologize for the inconvenience. Mr. Rothman of Millennium Partners you may begin your question.

Can you talk about where you are seeing fixed annuity spreads in the current environment?

Well the spreads we are getting on our new policies issued are up in the 220 to 225 basis point range. As far as the overall portfolio, we do have a substantial amount of our import business with 4% or 4.5% guarantees which is putting some pressure on enforced spreads. But having said that those have definitely widened over the last couple three years and spreads on the entire fixed annuity block were 126 basis points in '06, 143 in '07 and year to date in '08 they are up to 156; so that is creating the widening interest margins that I referred to in my comments.

Okay great. And then you said the new spreads were in the 200s?

220 to 230.

Okay, great. And then following up on Rohan's question. Looking at your disclosure here and some of the marks you took, J.P. Morgan, for example, it looks like you took a 25% mark up from the third quarter based on the spreads. And it just seems very conservative, frankly because J.P Morgan mostly they seem trading in the 90's and I don't know, maybe you have some of the very long dated stuff? Can you just talk about who you're using to determine these marks and maybe if you can kind of clarify what type of debt you're holding?

Hi, this is Dwayne Hallman. As far as the marks are concerned, that is from Pricing Services. I would agree with you that some of the pricings are actually suspect. I think they've been referred to as vapor pricing in some cases. But those are the available and quoted prices from different dealers and/or other pricing services. So as far as the market is concerned, the disclosure that would be consistent with what we received from our investment managers as a result of those services. In the case of J.P. Morgan, there might be some longer dated paper there. But, unfortunately, at this point in time that is the public price, the level 2 type price.

Okay. And then of the $45 million in unrealized losses, how much of that was in the Life sub?

I think ballpark, probably about 70% or so.

Okay so how much more in unrealized losses could you take in the Life sub before you needed to move some of the capital down from the holding company?

Well it's hard to tell what at this point what amount that is without getting a better sense of where the rating agencies are heading with capital requirements. Again we--the Life statutory surplus, as I mentioned in response to a prior question decreased about $20 million between quarters and the ratio—the RBC ratio is still well above 400. So I guess it's my perspective we've got a way to go still.

Okay. And then worse case scenario, I guess would be way down the road, but have you guys ever looked at even more capital by using some reinsurance on the Life side?

Well, we actually did have a surplus reinsurance transaction dating back to the 2003 - 2004 timeframe, which was, I think unwound around '05 or thereabouts and in kind of talking through that with the rating agencies, at least a couple of them, they frankly admitted to us they didn't really give that too much credibility. So in light of that, well they just understand that it's—or they felt that it was kind of artificial as opposed to real solid capital for whatever reason, but so in light of that, if it's not going to serve a rating agency purpose or get full credit, we're a little bit maybe thinking twice about that if we were to need something, but again we're a ways away from needing additional help like that.

Okay, thanks a lot guys.

You bet.

Thank you. (Operator Instructions). Thank you. You have a follow up question coming from Bob Glasspiegel from Langen McAlenney. Please go ahead.

Lou, where do you see your new cash flow going? Just going to continue to build equity at holding company? Are you going to pay down any of the commercial paper your borrowing?

Well, we don't have any commercial paper borrowing, but we could--we would build a credit facility, we would use it for a combination of building more capital at the holding company and/or to the extent that we don't need it, and we don't need it right now, reducing the letter of credit, paying that back. But if the question was should you anticipate a continuation of share repurchase activity in the immediate future, I would say the answer to that is no.

That wasn't where I was going. It was, prepaying what you're borrowing here--

I think you understand the rationale behind that. We were just—we just wanted to make sure that that money which we have always viewed as our contingent capital was on our side of the fence.

Right. And what's the rate on that?

It's LIBOR plus about 0.6, so I think the effective rates for three months is 4.7 or so.

Okay, and what are you doing with it?

It's at the holding company.

Bob Glasspiegel It's at the holding company?

Yes.

How are you investing it at the holding company?

Treasuries primarily.

Okay. What duration?

Relatively short duration. It's a time [where your wife is going home], and time we drew down the facility, obviously, there was still quite a bit of turmoil in money markets and such.

So your grabbing some of those juicy minus .05% yields where they were available?

And loving it.

You're keeping it really short, I take it?

We are.

Okay. Thank you.

You bet.

Thank you. There are no further questions at this time. The Q & A session has now concluded. I'd like to now turn the floor back over to Mr. Lou Lower for any closing or additional remarks.

Well, just to wrap it up, let me reiterate first that we have a strong capital position with solid RBC ratios backed up by financial flexibility at the holding company if needed. Second, the increase in the unrealized position in our investment portfolio is driven by the systemic widening of spreads in a dysfunctional market, not risky assets. Third, while the market sorts itself out and returns to more rational valuations, the nature of our liabilities and cash flow from operations absolutely backs up our ability and intent to hold our investments to recovery. Fourth , there is no liquidity issue at Horace Mann. Fifth, underlying profitability in both PNC and Life and Annuity are solid. And finally and very importantly for our future prospects, our strategic growth initiatives to make our marketing and distribution more powerful are improving every day. And that concludes our call. Thanks for joining

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