Horace Mann Educators Corp (HMN) 2008 Q4 法說會逐字稿

Good morning, ladies and gentlemen. My name is Stephanie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Horace Mann Educators Corporation fourth-quarter 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 session. (Operator Instructions)

I would now like to turn the call over to Dwayne Hallman, Senior Vice President, Finance. Please go ahead, sir.

Thank you and good morning, everyone, and welcome to our fourth-quarter and year-end 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 will cover our results for the fourth quarter and year-end in our prepared remarks. The following management members will make presentations today, and as usual will be available for questions later in this conference call.

Lou Lower, President and Chief Executive Officer; Pete Heckman, Executive Vice President and Chief Financial Officer; Tom Wilkinson, Executive Vice, President, Property and Casualty; and Steve Cardinal, Executive Vice President, Marketing.

The following discussion may contain forward-looking statements regarding Horace Mann and its anticipated or expected results of operations for 2008 or subsequent periods. 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 risk and uncertainties that could affect actual results, please refer to the Company's public filings with the SEC, and in the earnings press release issued yesterday. We undertake no obligation to publicly update or revise such forward-looking statements to reflect actual results or changes in assumptions, or other factors that could affect these statements.

Since this is year-end, we would like to remind everyone that the Company's financial statements are subject to an annual audit process and will not be considered complete until the filing of the Company's 10-K. While some audit procedures are not yet complete, management does not anticipate any material changes to the earnings report being discussed today.

Finally, this call is being recorded and is available live on our website. An Internet replay will be available on our website until March 5, 2009.

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

Thank you, Dwayne, good morning, everyone, and welcome to our call.

Yesterday we reported fourth-quarter net income before realized capital gains and losses of $0.51 a share. Despite catastrophe costs for the year of $74 million, the second-worst in our history, we did close out the full year at $1.29 per share. For both the quarter and year, final results exceeded our revised guidance as well as consensus.

While clearly not a year that we would like to repeat, it did demonstrate Horace Mann's ability to absorb the 1-2 punch that 2008 delivered to us and the industry in the form of significant catastrophes and a meltdown of the financial markets. All in all, we feel very good about the underlying fundamentals of profitability of our operations and the resiliency and strength of our balance sheet.

Most importantly, despite the very difficult economic climate anticipated in 2009, we believe that the nature and characteristics of our target market will not only benefit us but allow us to continue to move forward with continuing and greater success in the transformation of our distribution system. I'm not suggesting that we'll be immune to recessionary forces, just that our market niche has characteristics that will serve to mitigate the impact of some of the broad environmental forces at work.

Looking first at our balance sheet and financial strength, you'll note that absent the third-quarter headlines of Freddie, Fannie, Lehman, and AIG, realized losses were significantly less sequentially as we had anticipated. And just to reiterate what we communicated during our last call, the meaningful increase in our unrealized position over the course of last year was overwhelmingly a result of frozen credit markets where spreads and prices have become disconnected from rational valuation. After conducting a thorough analysis along with our institutional investment advisors and managers, we have assured ourselves that we do not have fundamental credit quality issues. Rather, we believe that over time rational pricing will return to the credit markets, reducing spreads and moderating our unrealized position.

In the meantime, we fully have the intent and ability to hold to recovery. With structure of the liabilities associated with most of the taxable, fixed income portfolio -- and that's primarily annuities -- continues to demonstrate very strong persistency and continued positive funds flow, which I think speaks volumes about the nature of our products, our customer base, the strong relationships our Horace Mann agents have with their clients, and the great service our customer service reps provide.

Now, just as important as all of those positive balance sheet attributes which actually reflect how we operate in the market we serve, is what we have avoided while the world's appetite for risk increased in this decade. We have no extracurricular activities at the holding company, such as credit default swaps and securities lending. We have de minimus exposure to sub-prime and Alt-A, and no hedge funds. Our product guarantees are simple, straightforward and non-toxic. And as you will hear again, our investment portfolio is conservative, high-quality, and not exotic.

Also, as we discussed, we have no refinancing needs for some time, our senior debt issues don't mature until 2015 and '16, and our credit facility, which was paid out in the $38 million prior to year-end, doesn't expire until 2011.

We continue to be very comfortable with the strength of the Company's P&C reserves. While favorable development over the full year was modestly less than prior year, we don't anticipate the same level in 2009. But having said that, our year-end reserve position remains solid and near the high end of the range determined by independent evaluation.

Just to complete the balance-sheet highlights, our critical capital ratios are all well within our target ranges, with debt to CapEx FAS 115 at 27%, while both life and P&C RBC ratios are comfortably within our target ranges.

While book value with FAS 115 decreased 30% year-over-year -- and that's primarily attributable to unrealized losses in the investment portfolio -- for the quarter the rate of decrease moderated to 3%. Excluding FAS 115, the year-over-year decline in book value was 2%, while it did increase 2% sequentially.

So now let me shift gears and hit the highlights of our operations, which Tom Wilkinson, Pete Heckman and Steve Cardinal will cover in greater detail.

In property-casualty, both reported and underlying profit fundamentals are solid. Despite another quarter of higher catastrophe losses that did include additional development from hurricanes Ike and Gustav, the all-in combined ratio of 93 increased just 1 point as compared to last year's fourth quarter. Current accident-year results, ex-cat, are better than prior year for both the quarter and year by about a point. A significant improvement in auto, led by declining frequency, more than made up for unfavorable comparison in property, largely as a result of non-cat [levers].

Auto educator PIS continued to increase, but overall were flat, while high quality new and imports business along with positive retention trends continues to benefit our results.

In our life and annuity business the financial markets reduced our VA account values and resulting fee income. Additionally, they created adverse stock DAC unlocking as our planned long-term market return assumptions obviously didn't come to pass in 2008. That said, excluding DAC and GMBB reserve changes, combined life and annuity pretax earnings were only modestly less than the very strong results recorded last year.

While variable account values and fees have obviously decreased, fixed account values are up both over prior year and sequentially, with overall positive funds flow and improved consistency.

Turning to sales and distribution, the recession's adverse impact on new car and home sales continues to pressure applications for both auto and property insurance coverage industry-wide. For us, true new auto sales declined 8% in the most recent quarter, although they did increase sequentially. Offsetting sales pressure in the auto line, property sales increased close to 6%, retention improved in both lines, and average written premium increased, all combining to deliver positive gains on total written premium.

Horace Mann agent annuity sales decreased 12% in the fourth quarter, but both new sales and total premium and deposits for the year were actually better than what we had anticipated, given the impact that we expected from changing IRS regulations that we've previously discussed with all of you. And speaking of those regulations, you're going to hear some very positive news from Pete regarding our success in protecting the Company's current 403(b) payroll slots, while capturing opportunities for expansion in new markets. And very importantly for the future growth of the Company, during the fourth quarter our ABS agents again outperformed their peer active agents in productivity in all lines.

In addition, as you'll hear from Steve, we offered a contract conversion opportunity to our newly developed exclusive agent contract to roughly 120 qualifying agents, and now have 71 as of January 1 operating in that status, which we believe bodes very well for making our agency system more powerful in our market as we go forward.

So what do we expect for 2009? Well, first of all, despite taking some hits in 2008 we entered this year well capitalized with the full complement of resources we need to pursue our strategic growth initiatives.

For property and casualty, the headwinds of the underwriting cycle are going to continue to present challenges, particularly in the auto lines where we are anticipating some upward pressure on frequencies as compared to the second half of 2008. We are counting on our claims organization to continue to produce favorable results in severity control, but at the same time we recognize the need to take rates over the course of the year, and Tom as you will hear has plans fully in place to do just that.

We do expect a year of solid profitability, with a combined ratio range of 96 to 98, which incorporates an increased cat load compared to previous years' expectations, and less in the way of favorable prior-year development than we experienced in 2008.

Also, assuming a return to more normal market appreciation, we are also anticipating solid pre-tax operating income growth from life and annuity, despite a challenging economic environment. And you know, even with that challenging environment, we plan to deliver organic top-line growth in our niche market, led by auto unit sales as we build on the momentum that we've already established with those agents who are transitioning to our new agency business model, as well as new agents that we are going to be hiring directly into the model. As that growth takes hold, we anticipate delivering low single-digit property casualty premium growth in 2009, which should further accelerate in 2010.

Taking into account the pace of the business and the initiatives that we are putting in place to drive future growth, our earnings guidance range for net income, excluding capital gains and losses for 2009, is $1.45 to $1.65. That range considers and reflects the economic environment we face, the competitive environment, the challenges of the underwriting cycle we're in, and the additional investments we're making to grow the business.

And speaking of growing the business, at the end of last year we announced a key addition to the Horace Mann leadership team with Steve Cardinal joining us as Executive Vice President and Chief Marketing Officer. Steve joins us from Countrywide Financial where he served as Executive VP of personal lines distribution and President of Countrywide Insurance Service. In that role, he designed and built an exclusive agent program from scratch, including recruiting and appointing 250 agents in eight states in less than two years.

He also brings an extensive and very successful sales and marketing experience from his tenure at Allstate and MetLife, advancing through the ranks from agent to district manager, to territory manager, and ultimately regional distribution leader, where he was responsible for five states that produced $1.5 billion in premium through about 1000 exclusive agencies.

His experience working with a number of distribution models, exclusive, employee, and independent is going to serve us very well in the continuing transformation of our distribution system.

So, just to wrap it up, 2008 was a tough, tough year for all, but we have emerged intact with a strong balance sheet, with solid capital ratios backed up by financial flexibility at the holding company if we need it. The increase in the unrealized loss position in our investment portfolio is driven by the systemic widening of spreads in a dysfunctional market, not risky assets. While the market sorts itself out and returns to more rational valuations, the nature of our liabilities and cash flow from operation backs up our ability and intent to hold our investments to recovery.

Cash flow from operations is strong, and backed up by excellent liquidity. Our underlying profitability in both P&C and life annuity is solid and sustainable as we go forward.

Our target market will serve to mitigate, but not eliminate, recessionary forces. And finally and very importantly for our future prospects, the results of our strategic growth initiatives to make our marketing and distribution more powerful, are improving every day.

And now I will turn it over to Pete Heckman for some further elaboration on our results.

Thanks, Lou. I would like to provide some commentary this morning on Horace Mann's investment results and portfolio, our capital and liquidity position, the 2008 operating results, and our 2009 earnings guidance.

But before I get into the details, let me first summarize by saying that our investment portfolio, capital levels and ratios, and liquidity position remains strong and in good shape despite the persistent uncertainty and volatility in the financial markets. Our underlying operating results continue to be solid, with 2008 operating income finishing the year above the top end of our guidance range, which will provide a strong foundation to build upon in 2009.

So turning first to our investment results, the performance of our $3.5 billion investment portfolio remains strong, with an overall quality rating of AA, and is well diversified across industries, investment types, and individual issuers.

That being said, our portfolio is certainly not immune from both realized and unrealized investment losses.

Pretax net realized capital losses were $8.2 million for the fourth quarter. Included in this amount was $5.8 million of impairment write-downs on securities which we continue to hold but determined to have other-than-temporary declines in market value as of quarter end. Of that amount, approximately $2.2 million relates to impairments for which the issuer's ability to pay future interest and principle based upon contractual terms, has been compromised -- including Lehman Brothers, Fannie Mae and Freddie Mac, which we initially impaired last quarter.

The remaining $3.6 million relates to impairments of primarily high-yield bonds and preferred stock, where we no longer have the intent to hold the security for a period of time necessary to recover a substantial portion of the decline in value.

We also realized $4.6 million of losses on impaired securities that we sold during the quarter, mostly from our high-yield bond portfolio, which was partially offset by $2.2 million of realized gains on investment sales.

The volatility in credit spreads and interest rates during the last three months of the year was extreme. Although ending with a more positive trend, the total fair value of our investments experienced a further decline in the fourth quarter. We've provided a supplemental exhibit at the end of our press release package again this quarter -- I believe it's page number six -- which contains additional disclosure related to our net unrealized loss trends and December 31 balances.

Net unrealized investment losses at the end of the fourth quarter totaled $327 million pre-tax, up from the $271 million recorded at September 30. As you can see in the data, the direction and magnitude of the changes varied widely by asset class, but the CMBS portfolio was the most significantly impacted, accounting for more than all of the total increase.

Horace Mann had approximately $330 million of CMBS book value exposure at the end of the fourth quarter, representing about 8.5% of our total investment portfolio. Although CMBS spreads widened significantly in the third quarter, spread widening accelerated further at the end of the year, increasing our unrealized loss to $109 million at December 31. While this asset class has experienced unusual pressure, we remain comfortable with the overall quality and performance of our holdings.

Additional information on the composition of this portfolio is disclosed at the bottom of the exhibit on page six. You'll note that the CMBS portfolio is 100% investment-grade, and the overall credit quality is a solid AA.

At December 31, approximately 55% of the portfolio's book value was comprised of the higher-quality 2005 and prior vintages, and of the remaining securities, 60% are rated AAA. And, the portfolio is well diversified across 128 investment positions with an average carrying value of $1.7 million.

All of the securities in Horace Mann's CMBS portfolio are currently performing in line with contractual terms and did not experience any unusual deterioration in delinquencies or foreclosures during the quarter.

For this portfolio we regularly analyze available market information, including underlying credit quality, anticipated cash flows, credit enhancements, default rates, loss severities, and our position in the capital structure. We also utilize a variety of third-party analytical models to evaluate various stress scenarios in order to ascertain the conditions that could ultimately result in potential losses in our holdings.

Based on our current analysis, we do not believe that the available fair value prices are indicative of the quality and future performance of the securities.

The other asset class I'd like to comment on this morning is high yield. That market endured a dismal fourth quarter, with spreads widening to all-time highs. As a result, the unrealized loss in Horace Mann's portfolio increased by $21 million during the last three months of the year, to a total of $38 million at December 31.

Our high-yield manager is conservative and has an excellent track record, particularly in difficult market environments such as this. Our holdings are concentrated in the higher single- and double-B-rated securities and are well diversified across 32 industry classifications and 138 issuers. The average issue size is just over $1 million, with our largest high-yield holding being $2.5 million.

As a final comment on the quality of our overall investment portfolio, and as further evidence that the recent increase in unrealized losses is more indicative of spread widening than inherent credit issues, consider that over 82% of the securities with fair values below 80% of book value at December 31, have been below 80 for only three months or less, and we continue to have less than 0.1% of our portfolio pricing based on so-called level three inputs, another element of conservatism and transparency in our valuations.

So, in terms of an overall assessment of our investment portfolio, we believe the credit quality to be strong, view the current pricing in the market to be irrational and not indicative of the underlying quality, and currently have the intent and ability to hold all securities to maturity or a substantial recovery in value.

Next, I'd like to spend a few moments discussing Horace Mann's capital and liquidity position.

In spite of the catastrophe loss emergence and the continuing challenges presented by the financial markets, our leverage and operating ratios remain strong, both at the insurance company subsidiary and holding company levels, and continue to be more than adequate to support our operations and current ratings.

In spite of the high level of investment losses during 2008, we estimate our life company risk based capital ratio will end the year comfortably above our target level of 400% once the statutory results are finalized.

We also expect our year-end P&C capital ratios to be favorable relative to our target levels, with both RBC and premium to surplus ratios better than where they were just three years ago.

Furthermore, our $125 million bank line of credit provides more than adequate flexibility should the need exist to contribute additional capital to our insurance subs. We currently have $38 million drawn on the credit facility, the majority of which remains at the holding company. And our current debt to capital ratio, including the outstanding bank borrowing, is approximately 27% excluding FAS 115, in a range consistent with our current ratings.

There are no liquidity issues at the statutory entity level. Our liabilities are extremely vanilla and stable. In the annuity and life segments, fund flows, persistency and liquidity measures are all favorable, which I will elaborate on in a few moments.

Cash and cash equivalent balances currently stand at $246 million, and we expect the life and annuity investment portfolios to throw off over $400 million in cash in 2009.

In addition, should the need arise, the life company investment portfolio includes approximately $1.4 billion of highly liquid assets in an unrealized gain position, consisting of $750 million of agency pass-throughs, $130 million of US government agencies, and $390 million of corporate securities.

The P&C portfolio contains $260 million of comparable assets, including $190 million of municipal bonds.

At the holding company, as we mentioned there are no business operations or extracurricular activities of any kind -- no credit default swaps, securities lending, derivatives or hedging programs, etc.

Our bank credit facility doesn't expire until the end of 2011, and our earliest senior debt maturity isn't until 2015. So our capital and liquidity positions remain strong, in spite of the challenging financial markets and economic environment.

And finally, some thoughts on our operating results. There were certainly a lot of moving parts in our 2008 operating earnings. Rather than attempting to normalize last year's results, which is often a slippery slope to begin with, let me simply try to highlight some of the key factors that impacted our operating income in 2008 and offer some perspective on the key drivers underlying our 2009 guidance range.

Earnings in all of our segments benefited rather significantly in 2008 from the impact on expenses of lower incentive compensation, which was further exacerbated by the decline in Horace Mann's stock price during the year.

In the fourth quarter, our federal income tax expense, primarily affecting in annuities segment, benefited from a release of contingent tax reserves. We are not assuming those expense benefits will reoccur in 2009.

In our P&C business we were of course negatively impacted by the record level of catastrophe losses in 2008. Our guidance anticipates a return to more normal catastrophe levels in 2009, although we have increased our cat load assumptions somewhat.

Partially offsetting the impact of catastrophes was a much higher level of favorable prior year reserve development than we expected. While we would not be surprised to see some level of favorable development in '09 given our conservative reserving approach, we are certainly not anticipating anything close to the level we experienced last year.

In our life and annuity segments, we are anticipating modest growth in operating income in 2009, excluding DAC unlocking and change in the guaranteed minimum death benefit reserve.

Specifically in our annuity business, we are assuming market appreciation of between 8% to 10%, more consistent with historical return levels. We anticipate a reduced level of variable annuity contract charges and fees in 2009 to be more than offset by increased fixed annuity interest margins, and a reduced level of amortization related to our VIF block.

On the life side, we're anticipating a return to more normal mortality.

Putting all of that together results in our guidance range of $1.45 to $1.65 for 2009 net income excluding realized investment gains and losses, which is generally consistent with current consensus estimates.

So, while the financial markets and investment performance remain headline issues, Horace Mann continued to experience positive underlying trends in our insurance operations. I will come back in a few moments to talk more about life and annuity, but first, here is Tom Wilkinson to comment on our P&C results. Tom?

Thanks, Pete, and good morning.

This morning I will discuss what's behind our combined ratio for the quarter and the full year, cover results by line, review trends in our book of business, and finally take a look at the year ahead.

Starting with the combined ratio, the combined ratio for the quarter increased one point from the fourth quarter of 2007, moving to 92.9%. Total catastrophe costs were almost $10 million in the quarter, with $7 million due to additional development and new estimates for the two third-quarter hurricanes, Gustav and Ike.

The total cat cost contributed three points more to the combined ratio than prior-year cat costs. On the other hand, favorable prior-year reserve re-estimates of $6.7 million were a point better than a year ago period. So when you exclude cats and prior-year activity, we posted an underlying combined ratio of 90.5%, which was a point better than last year.

Looking at the full year, a combined ratio of 100.7% was 8.8 points above 2007 combined. Catastrophe net cost of $74 million, the second-highest year in our history, equaled 13.7% of premium, up 9.3 points over last year.

Favorable prior-year reserve re-estimates of $18 million were less than prior year, contributing a slight combined ratio increase of 0.4 point.

Our year-to-date underlying accident year combined ratio, ex-cat, was 90.3%, about a point below prior year and we had favorable -- and we had a favorable expense ratio variance of 0.7 point, and an underlying loss ratio of about equal with prior-year.

Moving on to results by line, the auto accident year combined ratio excluding cat was 97.3% for the quarter, 3.8 points below prior year. Reported frequency was once again lower than prior year, favorably impacted by the continued decrease in miles driven, but not as favorable as last quarter.

In addition, we were impacted by the bite of winter storm activity, specifically in the Midwest and Northeast. Our severity results remain favorable and consistent with our expectations.

Looking year-to-date, our auto underlying combined ratio of 94.7% reflected improvements of 2.4 points better than prior year, with the loss ratio 1.4 points better.

Turning to property results, the underlying accident year combined ratio, excluding catastrophes, for both the quarter and year-to-date was about four points above last year's levels. All year, non-cat weather, specifically spring wind, hail, tornado activity and the winter storms, were major contributors to these increases.

Now a look at our growth trends. Total P&C net written premium was up 3.8% in the quarter. On a direct basis, before reinsurance costs, total P&C premium increased 2% with auto up 1.9% and property up 2.5%, quarter over quarter. For the full year, total P&C direct premium was up 1% with auto increasing 0.7 and property rising 1.3% compared to the previous year.

Auto rate activity increased significantly in the quarter, with the number of rate changes doubling compared to prior quarters, and the average amount of change also increasing significantly. Auto policies in force were flat year-over-year. However, educator PIF continued to increase for the fourth consecutive year, increasing sequentially by about 1700, ending the year 9600 units or 2.3% above the 2007 year-end level.

Property PIF declined in 2008 by 1%, or about 3000 units, as a result of our continued coastal exposure reduction program.

In Florida, we decreased total policy count by 3500 as we completed a major nonrenewal program [though] offered affected customers the opportunity to obtain coverage from one of our partner companies, to keep the policy with the Horace Mann agents.

In 2008 we decreased our total country-wide coastal property policies by 13%, and by 35% since 2005. We anticipate continued reductions in Florida as well as other coastal territories, as we continue to mitigate our coastal exposure.

Like auto, property educator PIF continues to grow, increasing by about 1000 units sequentially, and for the year by almost 3000 units or a 1.6% increase over 2007 year-end.

Our new business quality trends remained favorable with our continued focus on the educator market, preferred underwriting tiers, and cross-sell opportunities. Our auto in force book is now almost 80% educator, over 75% in preferred tiers, and over 70% cross-sold.

Additionally, over 20% of our auto customers have at least three lines of business with Horace Mann. Each of these book of business quality metrics improved in 2008, driven by favorable new business quality trends and we continued to experience our auto payroll deduction program with new schools joining the program increasing 25%. Total policies on payroll deductions are up almost 50% in 2008. And, policyholder retention rates continue to increase in a very competitive environment. We posted retention increases for the fourth consecutive year. We finished the year up 0.1 in auto and 0.2 point in property.

So what does 2009 look like? Well, 2009 calls for a P&C combined ratio in the 96% to 98% range. There are several significant changes that have affected our expectations for 2009, and that is driving our expected combined ratio higher than previous ranges.

As is customary, we are assuming an average catastrophe year. However, based on recent trends and weather patterns and industry catastrophe loss results, we are increasing our expected cat load as a percent of premium to the 6% to 7% range, a 1- to 2-point increase over prior expectations.

These higher cat expectations are also included in our pricing indication process, and should be earned over the next couple of years.

Our second change is assuming much lower levels of prior-year development. The past two years we have had over 3 points of favorable impact from prior years. For 2009 we are assuming, as are others in the industry, much less in the way of favorable development of prior year reserve levels.

In addition, we expect frequency to flatten out next year after the declines of this year, which were impacted by sharp increases in gas prices and a resulting decrease in miles driven. We expect severity trends managed by our reorganized advanced claim environment group, to continue to beat consumer price index indicators. We have started and will continue to increase our pricing actions to align with loss cost trends. We anticipate that our P&C underlying loss ratio, excluding catastrophe, will be flat in 2009.

We expect the P&C market, especially auto insurance, to remain highly competitive in 2009. Competitors will continue refining their pricing model, and will continue with high levels of advertising spend. We plan to complete full implementation of our auto educator segment model, ESM, this year and will pilot our homeowners ESM model in the second half of 2009.

Our expense ratio will increase next year as the benefits realized in 2008, which Pete discussed earlier, return to normal levels and we continue to invest in our growth initiatives. We expect the ratio to come down in future years as the programs deliver our growth plan.

And finally, we anticipate that in future years as we earn current planned rate activity and premium from the change to the cat load, along with meeting our growth objectives, our target combined ratio should decrease to be consistently in the mid-90s.

Now, I would like to turn it back over to Pete to cover life and annuity results.

Thanks, Tom.

Total annuity sales were down 11% in the fourth quarter compared to prior year, and down 9% for the full year. However, 2008 annuity sales exceeded 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 we expected, the IRS 403(b) transition rules had a negative impact throughout the year on single premium and rollover deposits due to interim restrictions on participant fund transfers. This resulted in total single premium sales being down 11% for both the quarter and year. Our independent agent channel, which accounts for only about 10% of our annuity sales, was impacted more significantly.

However, Horace Mann agent sales in our core flexible-premium business remained comparable to prior year in 2008, in spite of the 403(b) transition and difficult economic environment. Furthermore, our agents sales of new flexible-premium contracts purchased primarily by new Horace Mann annuity customers, increased more than 8% during the year, a very positive result as far as market penetration is concerned.

As we've discussed on previous calls, the new IRS regulations generally became effective on January 1 of this year, and 2008 was clearly a transition year in the marketplace. Over the last 18 to 24 months, we deployed a variety of strategies to solidify our position and grow our business. We implemented numerous contact programs with our schools, including direct mail campaigns and distribution of compliance kits, and established a website to facilitate information exchange.

We also supplemented our agents' training so they could provide a high level of consultative support to school administrators.

At this point in the process, we've heard from virtually all of the more than 5000 school districts where Horace Mann has payroll slots, and I'm pleased to report that we have retained 90% of those slots and have won a fair number of new slots along the way. So overall, the initial transition was much less disruptive than some had expected, and very importantly, the outcome for Horace Mann was extremely positive.

And, with regard to the financial results, total annuity assets under management decreased 12% compared to prior year, due to a 38% market performance-related decline in variable annuity assets.

General account fixed annuity assets, on the other hand, increased by 7% over the last 12 months. The stability and loyalty of our educator customer base, and the quality of our dedicated agency boards, 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 surrenders, deaths and maturities, were positive each quarter throughout 2008, and our 12-month account value persistency of 93% is up 2 points over prior year. So our liabilities continue to be extremely stable, and present no liquidity issues.

Annuity pretax income was down $5.7 million in the quarter, and 5.3 million for the year. In the fourth quarter, unfavorable tax DAC and VIF unlocking of $4.1 million, pretax, was the result of the financial markets' impact on variable deposit fund performance, partially offset by the positive unlocking impact related to investment losses realized in the quarter.

The poor market performance in the fourth quarter also resulted in a $1 million increase in our GAAP guaranteed minimum death benefit reserve. The underlying earnings in both the quarter and year-to-date were favorably impacted by increased fixed annuity interest margins, which were offset by a decline in variable annuity charges and fees.

As a final comment on our annuity business, I wanted to reemphasize that, while our variable annuity results are impacted by financial market performance, Horace Mann's variable products are only minimally exposed to so-called equity markets' guarantee risk. Approximately two-thirds of our in-force variable annuity account value has a simple return of premium death benefit, while over 25% of the business has no death benefit guarantee at all. And our current GAAP GMBB reserve balance of only $1.3 million reflects that conservative risk profile.

We offer no other guarantees, and have no hedging or derivative program exposure whatsoever.

Now, turning to the life segment, fourth-quarter and full year sales were down approximately 15% to 20% compared to prior year, reflecting the impact of the economy on discretionary spending, along with perhaps a greater relative emphasis by Horace Mann in 2008 on auto and annuity sales, while premiums and contract deposits were comparable to last year.

In terms of earnings, life segment pretax income was down $600,000 in the quarter, and down $1 million for the year. Mortality costs were slightly greater than last year in the quarter, but were nearly $3 million higher for the full year, which offset the growth in investment income and earned premium.

As mentioned in our press release, excluding the impact of DAC unlocking and change in the minimum death benefit reserve, full-year pretax income for the combined life and annuity segments was only modestly below a very strong 2007, and was consistent with our expectations in spite of the extraordinary level of volatility and decline in the financial markets during the year.

Looking ahead to 2009, both annuity and life pre-tax operating earnings are expected to be moderately higher than 2008, adjusted for the impact of DAC unlocking and change in the GMBB reserve, reflecting an anticipated return to historical market appreciation levels and more normal mortality.

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

Thanks, Pete, and good morning.

I'd like to start by saying I'm excited about the opportunity I have with the Horace Mann franchise, and I'm equally excited to be working in an attractive market niche with a great team.

So with that said, I will focus my balance of my remarks in three areas -- the status of the agency business model or ABM, and the agency force, the exclusive agent agreements, and sales results for both the quarter and the year.

So to start with the ABM, as we've reported in the past [the model] will continue to expand (technical difficulty) value of the concept and working from an outside office with support help and most importantly licensed producers.

By transforming the operation, and the ABM agents have become more productive and our average career agent is far more productive than the home-based agent. The attractiveness of this model is evident in the percentage of agents conducting business in outside offices, which grew in 2008 to nearly 75% from 60% of the total agency force. Conversely, home-based agents decreased by 40%, with the majority of agent terminations from 62% (technical difficulty) agent group.

There's more evidence that our agency force is changing. The number of agents who are working in outside offices with licensed producers grew from less than 200 over 300 during 2008. The majority of these agents in these outside offices have attended our Agency Business School. ABS, you'll recall, helps agents focus on recognizing industry best practices that help them run their businesses in an outside office. As a result of their dedication (inaudible) grow their businesses, we've seen the number of licensed producers continue to grow. Licensed producers grew to 394 from 360 in the quarter.

While we've had a number of positive results, the agent count declined in the quarter to 670 from 690. As I mentioned before, the terminations are predominately coming from our lowest-producing agents. The terminated agents' productivity was approximately 1/3 that of our average agent. Regardless, the total points of distribution have increased and now number 1064.

We introduced a new program to provide flexibly the to agents that have adopted their (inaudible) agency business model, and I am most pleased to say that in the fourth quarter we introduced an exclusive agent agreement which is designed to place agents in the position to become business owners and invest their own capital to grow their agencies. They have the ability to design marketing plans that make sense for their business and can be aggressively executed.

By the end of December, 71 Horace Mann agents elected to migrate from employee status and become our [knowledgeable] exclusive agent class. As of January 2 they were open for business, functioning as independent exclusive agents. To better support these independent business owners, we have reorganized our field management structure to emphasize the consulting role that will now be played by our field sales leaders. By better focusing their span and control, the field sales leaders can spend more time on delivering their sales plan and recruiting new talent in the exclusive agent opportunities. And by the way, all agents recruited from this time forward will either come on board as exclusive agents or convert to the exclusive agent agreement within two years.

I'm also happy to say we've been able to recruit highly talented sales managers from the industry who have experience working and leading the exclusive agent world. The combination of new sales management talent and experience holds great promise for the team, and it creates successful results for our agents.

Okay, let's move on to the sales results.

As Lou mentioned, the economy has impacted new business results as auto and home sales moving to a crawl. But in spite of these challenges, our agents have continued to communicate with their customer, which has helped retention levels. This increased retention, coupled with an increase of average productivity has helped agents maintain their income levels.

Now let's look at sales productivity first. Average true new auto productivity increased 7% in the quarter and 2% for the year. Flexible annuity productivity increased 4% in the quarter and 12% in 2008. And single annuity sales productivity was essentially flat, with a 1% increase in the quarter, but up to a respectable 7% for the year.

As you might guess, based on earlier comment, ABM agents produced substantially more business across the board than their non-ABM peers. And on the sales side, total auto unit sales decreased 9% in the fourth quarter versus the same period in 2007, with true new auto (multiple speakers) sales down just over 8%. Property unit sales were up in the quarter by about 6% compared to a year ago, and up 3% sequentially.

For the year, property was consistent with other lines, down 6%.

[Results improved and quotas excluded] decreasing about 3% for the year, and annuity results are a similar story, down 11% in the fourth quarter from the prior year.

While the economy will present challenges, I'm encouraged by the positive gains made by the growing ranks of our ABM agents, the trends in the mix of agent types and the enthusiasm of agents who elected to become exclusive agents.

Our distribution strategy has been evolving these past few years with an eye on building a more productive, highly professional agency force. And I believe we are well positioned with the right leadership team to take full advantage of serving this attractive niche market by engaging their agents and their licensed staff and [abetting] with people, processes that create success.

Thank you, and now back to Dwayne.

Thank you, Steve. That concludes our prepared remarks. Obviously, we expanded our remarks considerably but believe it is certainly prudent in the current environment. So Stephanie, if we could please move to the question-and-answer session.

(Operator Instructions). Robert Rodriguez, First Pacific Advisors.

Good morning. I really appreciate the details on the balance sheet disclosures that you had, but could you go in a little bit more on some aspects in terms of your commercial mortgage-backed securities, as to the types of securities those may be, whether they are strip centers, or any details you can go into that?

And secondly, in terms of your financial institutions investments, whether you could describe a little bit more about what's gone into both the preferred as well as the corporate bonds?

Yes, Bob, this is Pete Heckman. Our CMBS are primarily conduit fusion securities, certainly in that class of half of those with really minimal exposure to any single borrower sorts of issues. The detail we provided on page six of the exhibit kind of lays that out by rating and by vintage year.

We have some cell towers, some military housing, which are all AA and above, but again most of them are concentrated in the conduit fusion category.

With regard to financial institutions, again as you see in total on page six, that portfolio is about I think 7% or so of our total holdings, and it's certainly still under stress, although improved somewhat down the corporate bond side in the fourth quarter. We've got about $60 million of financial institution of preferred stocks through a variety of holdings, including some European firms, but again feel as though with the broad US and international support for financial institutions, including the TARP program and the like, that given the solid names that we possess in our portfolio that we are in reasonably good shape at this point.

Okay. In terms of the CMBS, beyond cell towers, are these in residential, or I should say into condominiums, into commercial strips or anything? Why can't you give any detail there?

Hi, this is Dwayne Hallman. Overall, there's no significant concentration in any one class. Obviously we do have some retail exposure, some office tower exposure, but as far as condominium-type projects, very limited exposure.

Just FYI, just for you, it's one of the areas that I've highlighted since it seems like there's not that many people on the call -- it's one of the areas I've highlighted for 2009 that's going to hit the financial institutions fairly severely, and on the financial institutions securities investment area. If I was that sanguine, then the (inaudible) bank index would not be setting a new all-time low today. So, I'd just continue to caution that I've mentioned before in prior calls.

Okay, well, thank you very much.

(Operator Instructions)

All right, Stephanie?

Yes, sir?

This is Dwayne Hallman. It sounds like we don't have another caller at this time, but we certainly appreciate everyone participating and listening in. If you have any follow-up questions, please feel free to give me a call.

Have a good day, everyone.

This concludes today's conference call. You may now disconnect.