Horace Mann Educators Corp (HMN) 2009 Q2 法說會逐字稿

Good morning. I will be your conference operator today. At this time I would like to welcome everyone to the Horace Mann Educators Corporation second 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). Mr. Hallman, you may begin your conference.

Thank you, and good morning, everyone, and welcome to our second quarter 2009 earnings conference call. Yesterday after the market close, 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 second quarter in our prepared remarks, and then be available for questions. I am here today with the following management members. Lou Lower, President and Chief Executive Officer, Pete Heckman, Executive Vice President and Chief Financial Officer, Tom Wilkinson, Executive Vice President Property Casualty, Brent Harman, Senior Vice President Annuity and Life, and Steve Cardinal, Executive Vice President Marketing.

The prepared remarks and responses to questions during today's presentation may contain forward-looking statements regarding Horace Mann and its anticipated or expected results of operations for 2009 or subsequent periods. Our actual results may differ materially from those projected in the forward-looking statements. Those 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 effect 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, changes or assumptions, or other factors that could affect these statements.

Finally, this call is being recorded and is available live on our website. An internet replay will be available on our website until August 28, 2009.

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

Thanks, Dwayne, good morning, all. And welcome to our call.

In my opening remarks today, I want to take things in a somewhat different order than is our normal practice, given some fairly significant positive changes to our balance sheet. Though the financial markets have stabilized and begun to improve, the confidence that we have had and expressed to you in past calls, relative to the quality of our investment portfolio, has been substantiated by the early stages of a return to normalcy in the financial markets.

As the tone of the credit markets have improved of late, and spreads have narrowed, we have experienced meaningful improvement in our unrealized capital loss position, with reported book value per share increasing 26%, sequentially, to 1434. At the same time, book value per share excluding FAS 115 is actually a little bit better than it was a year-ago prior to the meltdown in the financial markets that commenced in September.

In addition to that favorable development on the capital front, we continue to be comfortable with all of our key balance sheet ratios including rbc levels, all of which are consistent with our ratings which have now been reaffirmed by all three primary rating agencies. As we await further improvements in the financial markets, and are already improved on realized loss position, we have the intent and full capability to hold our invested assets to recovery and maturity.

The structure of the annuity liabilities, which is associated with most of the taxable fixed income portfolio, is very stable, and continues to demonstrate strong and continuing improvements and persistency, while ongoing operations are producing positive bonds flow.

That said, we have been opportunisticly repositioning the investment portfolio in the interest of reducing individual issue or concentration risk. As you will hear from Pete, we have been able to accomplish that objective while realizing some capital gains as a byproduct of that effort, without sacrificing investment income.

Elsewhere on the balance sheet, our team remains very comfortable with the strength of the Company's P&C reserves with a solid position that remains on the high end of our range. Perhaps the best example of how our financial and market position are working together to create opportunity, is in the significant sales growth we are capturing in the annuities segment.

As customers in our educator and ed-seeker Company with a strong recognized brand providing personalized advice through agents with a local presence, our annuity sales increased 50%, a repeat of the growth rate that we reported to you in the first quarter. As a result, contract deposits in the annuity line reached a high-water mark this quarter, increasing 22%.

You should note that our elevated sales results are not the result of a promotional fire sale. New money coming in the door is being invested conservatively at rates that are achieving above target spreads, which in turn is helping to increase spreads on the entire in force fixed annuity block. And as you will learn from Brent, the combination of all those positive drivers has produced pre-tax operating income in the combined life and annuities segment that is 10% greater than prior year.

Now more than offsetting those favorable variances, our property casualty results were negatively impacted by weather. While catastrophes were below prior year both cat and non-cat weather substantially exceeded average second quarter experience for Horace Mann, and were predominantly responsible for the overall shortfall in operating earnings per share relative to our expectations and analysts' consensus. However as you will learn from Tom in his report, underlying results are generally consistent with our expectations, and we are taking pricing and underwriting actions to further mitigate the two weather spoilers.

As we look to the future, we are encouraged that key elements of our growth strategies are taking hold despite adverse macroeconomic circumstances. For one, our agent count again increased sequentially, thanks to a steady level of new appointment, improved installation of more qualified agents into territories with the greatest opportunities, and a reduction in terminations relative to 2008.

As Steve is going to report, based on a continuation of those trends, we fully expect agent count to show a year-over-year increase at the end of next quarter. Recruiting experience confirms that our new exclusive agent contract design is both competitive in the market and represent a superior value proposition, resulting in improved agent appointment activity, with substantially elevated qualities. That growth in agent count was once again accompanied by continuing growth in total points of distribution, as well as increases in average agent productivity, in three of our four product lines.

So just to wrap it up, taking into account the headwinds of a serious recession, we are encouraged by where we are at mid-year, acknowledging however that mother nature has not been kind to us, or the industry. Operating fundamentals are solid, as is our financial strength.

Cash flow from operations is strong, and backed up by excellent liquidity, our target market continues to afford us growth opportunities well into the future. And very importantly, the results of our strategic initiatives are making Horace Mann's marketing and distribution stronger every day.

And now let me turn it over to Pete for some further elaboration.

Thanks, Lou. The second quarter was a positive one for Horace Mann, in spite of the unfavorable impact of catastrophe and non-catastrophe weather on our P&C property results, which generated the entire operating income shortfall relative to both our expectations and the analysts' consensus. As you will hear from Tom and Brent in a moment, earnings in the auto, annuity and life lines of business were comparable to or slightly better than prior year, and well ahead of our expectations. Investment income was a bit better than we anticipated, as well.

We remain comfortable with our current full-year 2009 operating income guidance range of $1.45 to $1.65 per share. Similar to the first six months of the year, we anticipate our property results will be under some pressure in the second half, but expect the other segments of our business to continue to outperform. We will of course provide another update on our year-end outlook during next quarter's earnings report with the added benefit of having most of the hurricane season behind us.

But as Lou mentioned, the headline story in the quarter was the improvement that occurred in the credit and equity markets. And the resulting positive impact on our investment portfolio and book value. And some degree of normalcy finally returned to the financial environment.

The performance of our $3.7 billion investment portfolio remains strong with an overall quality rating of A plus, and is well diversified across industries, investment types and individual issuers. Pre-tax net investment income was up 5.5% over prior year for the quarter, and as I mentioned slightly exceeded our expectations, both in total and by segment.

With regard to realized investment gains and losses, we extended the opportunistic security sales program that we initiated in March when the recovery in the markets began, into the second quarter. $19 million of gross realized gains was generated this quarter, of which $6.1 million was related to previously impaired securities.

We also recorded credit-related impairment write downs of $3.8 million, which included $2.9 million related to a collateralized debt obligation comprised of high yield bank loans. In addition, $4.1 million of impairment losses, primarily financial and telecommunications venture holdings was recognized on securities sold during the quarter.

Before getting into more detail on the portfolio, I wanted to point out that the gains program completed over the last two quarters was accomplished with minimal if any investment income give-up. The program had a positive impact on our capital position, now enabling us to selectively reduce our issuer and sector concentration levels, and further diversify the portfolio. And even with the gains that were taken, nearly $100 million of gross unrealized gains remains in the portfolio, at June 30.

In terms of unrealized gains and losses, the volatility in credit spreads and interest rates continued during the second quarter, although with a much more positive impact on our investment portfolio than experienced in the first three months of the year. We provided a supplemental exhibit at the end of our press release package again this quarter, which contains additional disclosure related to our net unrealized loss trends and June 30 balances.

Net unrealized investment losses at the end of the second quarter totaled approximately $171 million pre-tax. Balance from the $360 million level recorded at March 31, an improvement of $188 million. Positive movement occurred across virtually all asset classes, but as you can see in the data, investment grade corporate bonds and preferred stocks benefited most significantly, as risk aversion in the fixed income markets eased, and demand for spread assets gained momentum.

Turning now to commercial mortgage-backed securities. We did see some improvement during the quarter in our portfolios and unrealized loss position, although it was primarily concentrated in the higher rated tranches based on the news of potential government support for some older higher rated securities.

Our cnbf portfolio continues to be 100% investment grade, with an overall credit rating of AA, and is well diversified by property type, geography and sponsor. Over 14% of the portfolio is comprised of multi-family projects that are directly backed by (inaudible). Another 14% is made up of fully amortizing loans to finance military housing projects where rental payments are appropriated by the US government. And 8% of the portfolio is composed of the the cell tower revenue and timberland securitizations, which offer further diversification.

The traditional conduit fusion portion of the cnbf portfolio represents a little over 60% of our holdings, with more than 70% of those securities in the more seasoned 1997 through 2005 integers. And of the remaining 2006 through 2009 vintage loans, over three-fourths are AAA rated.

In spite of some issues beginning to develop in the broader market, all of our cnbf securities are performing in line with contractual terms, did not experience any unusual deterioration in delinquencies or foreclosures during the quarter, and continue to hold up well under a variety of economic stress test scenarios.

Our financial institutions holdings, both bonds and preferred stocks performed extremely well during the quarter amid stress test disclosures, significant capital raising efforts, in line or better than expected earnings, and improving economic data. The June 30 per value of our total fi portfolio was 90% of book, with the bond components priced at over 95. The portfolio includes a preponderance of quality names which have generally been supported by government intervention. We believe that support will continue. We expect that the issuers will have ongoing access to the capital markets, and therefore remain comfortable with our holdings in this sector.

And very briefly I wanted to mention that in terms of our high yield bond holdings, the impact of fallen angels masked the improvement in the underlying portfolio during the second quarter. Excluding the formal investment grade securities, unrealized improved $12 million in the quarter, and our traditional high yield portfolio was priced over 90 at June 30, up from 78 at the end of last year.

As a final comment on the quality of our investment portfolio, and as further evidence that the volatility in unrealized losses, outside of the structured securities markets, is more indicative of spread widening than inherent credit issues, consider that as of June 30, only 12 of our non-cnbf securities with just $21 million of book value, have had fair value below 80% for more than 12 months. And we continue to have only about 1% of our portfolio pricing based on so-called level 3 inputs. Another element of conservativism and transparency in our valuations.

So to summarize my comments on our investment portfolio, we believe the credit quality to be strong. We view the current pricing in the market to be improving, but in some cases still not indicative of the underlying quality. And currently have the intent and ability to hold out securities to ensure (inaudible) substantial recovery and value.

I would like to conclude my remarks this morning with some comments on Horace Mann's capital and liquidity position. Horace Mann's liquidity position remains extremely strong and there continues to be absolutely no issues on the liability side. Our insurance liabilities are extremely (inaudible) and stable. In the annuity and life segments, flows, persistency and liquidity measures all continue to be extremely favorable and trending positively.

And at the holding company there are no business operations or extracurricular activities of any kind. No cds, securities lending, derivative or hedging programs, et cetera,. Our bank credit facility doesn't expire until December of 2011. And our next senior debt maturity isn't until 2015.

Meanwhile, our $125 million bank line of credit provides more than adequate capital flexibility, and our current debt to capital ratio of approximately 26% excluding FAS 115, is comfortably in a range consistent with our current ratings.

Other capital measures also remain favorable, relative to our capital management targets and ratings levels. While our statutory books won't be closed for another week or so, we estimate our June 30, life rbc ratio, to be at or slightly above 500%. With the P&C equivalent between 400% and 425%. Both ratios consistent with year-end 2008 levels, and at or above the high-end of the range for our current ratings.

As you may have noticed, our financial strength and debt ratings, along with our ratings outlooks, were reaffirmed earlier this year by Moody's, S&P and AM Best. None of the rating agencies expressed significant concern regarding Horace Mann's capital adequacy, even under stress scenarios. To paraphrase a comment in one of the agency's ratings opinion, while asset losses and investment portfolio ratings transitions are expected in 2009, they are likely to be relatively modest and manageable, given Horace Mann's strong capital cushion.

We absolutely concur with that assessment, and view our favorable investment results and book value growth to be supportive of that position.

Now as I mentioned at the beginning of my commentary, we also continue to experience positive underlying results in our insurance operations. Speaking of which, here is Tom Wilkinson to comment on our P&C operations. Tom?

Thanks, Pete, and good morning. This morning I will summarize the key components of our combined ratio and growth trends for both the second quarter and the first half of 2009.

The total P&C combined ratio for the second quarter was 103.8% compared to 106.7% a year-ago. Weather again, impacted our quarterly results, both cat and non-cat. A total of 12 storms reached catastrophe status in the quarter totaling $15 million with one mid-June storm lasting nine days and impacting 13 states across the midwest, mid Atlantic and southeast. While not as costly as last year's $22 million second quarter catastrophe total, this quarter's cat costs were about 70% higher than our second quarter historical average.

Favorable prior-year reserve re-estimates of $2.1 million, were $300,000 less than 2008, for the underlying combined ratio, excluding cats and prior year reserve re-estimates, was 94.3%, 2.4 points higher than last year's second quarter of 91.9%.

Our total P&C first half combined ratio was 99.2%, one point below prior year. Our six month catastrophe cost totaled $20 million, $8 million lower than prior year. And favorable fire year reserve re-estimates of $5.5 million were $400,000 more than 2008.

Last quarter we discussed the financial impact of our claims consolidation and marketing distribution initiatives on our results. These initiatives represented an additional $4.4 million in expenses. Their impact on the second quarter, as expected, was substantially lower at $200,000. So year-to-date we have incurred $3.4 million, or 1.2% of premium, related to our claim department reorganization, and $1.2 million, or one half of 1% of premium, for expenses related to our distribution initiative.

On a year-to-date underlying accident year combined ratio, excluding cat and expense initiatives, was 92.3%, six tenths above the first half of 2008.

Breaking down our results between auto and property, in the second quarter, our auto underlying accident year combined ratio excluding cats in the expense item, was 96.1%, about even with last year's results of 95.9%. On a year-to-date basis our underlying combined ratio was 95.4%, nine tenths of a point lower than prior year. Both frequency and severity results remain consistent with our expectations.

For property, our underlying accident year combined ratio in the quarter, again excluding cats in the expense items, was 89.1%, six points higher than last year. Nearly hall of the variance was driven by increased re-insurance costs compared to prior year. And as in recent quarters, non-catastrophe weather was a major driver in the increase in losses. For the first six months, our underlying combined ratio was 85.1%, 3.6 points above prior year. Similar to the quarter variance to last year, about half of the increase was due to increased re-insurance costs.

To address the increase in our property combined ratio, we are implementing several operational initiatives to improve results. First, in our national property claims office we will be adding additional resources to address the current loss trend and also to increase preparedness for the second half of the year's catastrophe season. Next, we will be increasing re-inspection activity for targeted segments.

And finally, we will be increasing rate actions where needed. Our property rate action so far this year, in over a third of our states, averaged about 5.5%. In addition to earnings, the majority of these rates in future periods, we will be filing rates that should average in the 7% to 8% range over the next 12 months. These actions are focused on improving our underlying profitability results.

In addition, specific state and market coastal exposure management programs will continue, to reduce the number of coastal properties and the percentage of our property book that is coastal.

Now turning to the top line, total voluntary P&C written premium on a direct basis before re-insurance costs, increased 2.3% compared to prior year in the quarter. Auto was up 1.6% and property before re-insurance increased 3.5%. Continued increases in average premium per policy, and policy holder retention rates in both our auto and property lines, contributed to this top line growth.

New business and enforced quality trends remain favorable for both auto and property. Our targeted segments, educator, preferred underwriting peers and cross sold business are all equal to or better than prior year. The percent of our in force, tri-line business, that is policy holders with at least three Horace Mann business lines, continues to increase sequentially and is up half of a point compared to last year.

Also, we continue to increase our auto presence in schools. With auto payroll slots increasing 18%, and additional policies on payroll up 36% over prior year. And contributing to the auto payroll policy growth this quarter, with an 11.2% increase in auto payroll (inaudible) units.

Total P&C policy reports were below prior year by almost 6,000 units, down eight tenths of 1%. Auto policies were down about 4,000, seven tenths of 1%, and property decreased about 2,000 policies, also down eight tenths of 1%, with the majority of that reduction in Florida and other coastal territories. However, our favorable trend in educator policy holder growth continues, with each line increasing sequentially from prior quarter, and each up about 2% when compared to June, 2008.

In summary, our P&C underlying results are generally tracking consistent with our expectations. Our top line growth is being driven by increases in educator policies in force, by steadily increasing policy retention rates and by continued premium rate increases. Our auto profit fundamentals are solid, and as mentioned we have a game plan to address our property trends. We will focus on profit improvement initiatives to improve our short term underlying results, and will continue to implement exposure management programs to reduce our longer term exposure to major catastrophic events.

And now I would like to turn it over to Brent Harman for his comments on our annuity and life results.

Thanks, Tom, and good morning, everyone. I will spend the next few minutes going over the results of our annuity and life segment.

As Lou mentioned earlier, our annuity sales saw healthy increases again in the second quarter. Following on our solid first quarter performance. Sales increases in the second quarter were driven primarily by our single premium sales through both Horace Mann and independent agents, although our flexible premium sales also showed substantial increases.

We continue to see benefits of becoming a stronger player subsequent to the industry shakeup post the new IRS regulations which took effect at the beginning of 2009. Our recurring deposit business increased 32% for the quarter, and 68% for the first half as compared to prior year. While our single premium rollover deposit business, including our partner product sales, increased 54% for the quarter and 44% for the half-year, respectively.

Independent agents made significant contributions to the increase in single premium sales this quarter, and also brought in a higher level of recurring deposit business in the first half of 2008. These strong sales were also the major contributor to increasing annuity contract deposit receipts in the quarter. Total annuity premiums and deposits increased 22% for for the quarter, and 8% year-to-date. As we discussed in last quarter's call, both sales and new contract deposits are exceeding our expectations.

In many school districts we find ourselves among a more selective list of approved providers, which is leading to growth in our customer base. There are indications that resetting of the competitive landscape will continue, albeit at a more moderate pace throughout 2009, we feel we are positioned to capitalize on any such opportunities as they arise.

With regard to financial results, total annuity assets under management declined 5.5% compared to prior year. Primarily due to a 27% market performance-related decline in our variable annuity assets. In contrast, our general account fixed annuity assets increased 8% over prior year.

As we have noted in prior quarters, the stability and loyalty of our educator customer base, and also the quality of our agents and their relationships within our niche markets, are among the Company's most valued assets. And reflective of that, our annuity net fund flows, defined as premiums less surrendered debts and maturities, were again positive in the second quarter of 2009 as they were throughout 2008.

And our second quarter, excuse me our 12 month account value persistency of nearly 94%, is about 2 points over this point last year. So our liabilities continue to be extremely stable and present absolutely no liquidity issues.

Annuity pre-tax income was up $1.7 million in the quarter, as compared to prior year. Market performance in the second quarter had a favorable impact on both the valuation of annuity, deferred policy acquisition costs and also the level of our guaranteed minimum death benefits.

Underlying earnings in the quarter were also favorably impacted by increased fixed annuity margins, which were offset by a decline in variable annuity charges and fees.

As we have discussed in prior quarters, while our variable annuity results are impacted by financial market performance, as compared to other industry players, Horace Mann's variable products are only minimally exposed to so-called equity market guarantee risk. Approximately two thirds of our in force via account value has a simple return premium death benefit, while over 25% of the business has no death benefit guarantee at all.

In our GAAP GMVB reserve balance of only $1.1 million reflects that conservative risk profile. We offer no other guarantees, and have no hedging or derivative program exposure.

Turning to the life segment, total second quarter sales decreased 15%. Horace Mann proprietary product sales were down 7% for the quarter and 11% year-to-date, while partner products were up 20% for the quarter and 16% year-to-date. Life premiums and contract deposits, which consist only of Horace Mann products, were down 2.3% for the quarter and 2% year-to-date as compared to last year.

While these results are reflective of the overall industry trend for the life insurance category, we're launching new initiatives to improve both our life product competitiveness including a new discount specifically for our core educator market, as well as new marketing support tools. We believe these actions will better position us for improving market environments.

In terms of earnings, second quarter life segment pre-tax income was comparable to prior year, reflecting increased mortality costs which were offset by growth in investment income. On a year-to-date basis, pre-tax income increased $1 million due to growth in investment income, which was somewhat offset by increased mortality costs.

So in closing, we continue to be encouraged by our annuity results, and we believe there are opportunities to further capitalize on both our annuity and life insurance payroll. The reaffirmation of our ratings and our continuing focus on our core educator market niche will further strength both our annuity and life value propositions.

With that let me turn it over to Steve Cardinal for his comments on sales and distribution.

Thanks, Brent, and good morning. Today, I will discuss three key areas of sales and marketing. First, the continued success of our agent migration including the increase in exclusive agencies. Second, the success in growing our sales force, and third, our sales results.

As background, we traditionally offered insurance through agents working out of their homes. We have spent the last several years building programs and training our agents to migrate to outside offices with support staff, to enable them to grow their book of business more rapidly and so they will educate our customer base in a more professional manner. The agents showed productivity gains over agents that continue to work from their home.

This year, we offer top-rated producers the opportunity to work as exclusive agents with a new sales agreement. Additionally, we started recruiting agents with a new exclusive agent agreement, and added a more deliberate and thorough new agent education platform. We're encouraged by the number of agents who accepted a new exclusive agent agreement and who are now operating as exclusive independent business owners. And we're encouraged by the early results of attracting and retaining high quality candidates to sell our products.

During the quarter, we increased the number of agents moving to outside offices, the number of licensed producers and total agents. We did this while improving the productivity of agents who adopted our agency business school techniques, and in addition we continued the successful implementation of our exclusive agent agreement.

As evidence of the successful migration of agents into our business model, the number of agents who work in outside offices, and hired a licensed producer grew from 334 to 378 during the second quarter. Agents opened a total of 22 additional outside offices during the quarter, bringing that total to 546. Horace Mann now has 80% of our agents operating in outside office, compared to 66% last year. These agents are either operating as planned in the agency business model with producers, or positioned to add licensed producers in the future.

Additionally, 13 agents elected to migrate to exclusive agent agreements during the quarter, with another 39 executing an agreement during the quarter, to become exclusive agents July 1. As a result, we continue to be excited about the early success of the agents who transitioned to be entrepreneurial agent owners.

From a staffing view, our agent count increased from 675 to 684 during the quarter, as we reverse a multi-year trend in declining agent count. For the first time since 2005, we have grown agents in consecutive quarters. This was helped by a reduction in agent termination, and an increase in new appointments compared with the second quarter of last year. Also, agents and agency owners continue to on board license producers.

The new exclusive agent agreement, allows us to recruit and grow our distribution channel to serve our educator marketplace. With an expectation that agents invested in an office and licensed staff soon after they get started, we are confident that they will be both more productive and have increased retention than agents hired in the past.

From a recruiting standpoint, we appointed 35 new agents during the second quarter. Thirty more became exclusive agents immediately, and the others will migrate to exclusive agent status within the first two years.

Now let's talk about some of our results. We felt the impact of a weak economy. For example, with (inaudible) auto and home sales. That along with the fact that we averaged nearly 50 fewer producing agents during the quarter than in the comparable quarter of 2008, had a negative effect on P&C sales.

Looking at total property casualty sales, total auto unit sales were down 5% in the second quarter versus the same period in 2008, with true new auto unit sales down 3%. Property unit sales decreased 6% compared to prior year. While we can't predict the impact the economy will have on our lines of business, we are confident that we will continue to increase our agent count throughout the end of the year, positioning us to accelerate new sales growth.

As Lou mentioned, we produced a healthy increase in annuity sales during the second quarter. With increases coming from both flexible and single premium annuities, in both our captive and independent agency force. Our strong local presence, and strong relationships with our customers, drove sales results up 49% compared to prior year second quarter and 19% sequentially from first quarter.

This increased production comes from several states, but we had great success in retaining our 403D payroll deduction slots, and consequently saw competition reduced. In addition, we saw an increase in single premium deposits, and believe this reflects the trust our customers have on our agency force and Horace Mann.

While we expect the activity to level out, we are optimistic that we will continue to see elevated sales compared to prior years. From a productivity standpoint, our employee agents and exclusive agency productivity increased in three out of four lines compared to prior year second quarter. Our average agent increased productivity, in auto, property units, and new annuity sales compared to prior year. Although our life insurance productivity was down compared to prior year, it did increase over 10% sequentially.

While the economy may continue to present challenges, we continue to be encouraged by the strides made by our agency force and sales leadership team. We noted positive signs in the following. One, sales in (inaudible) and single annuities. Two, productivity growth in three lines of business. Three, agency force growth. Four, acceptance in our new exclusive agent agreement.

So, with a strong agency force dedicated to serving our nation's educators, coupled with momentum in agent count and productivity, we remain positive about our ability to grow our customer base and our business in the future.

Thank you, and now back to Dwayne.

Thanks, Steve. And that concludes our prepared remarks. So Crystal, if you could please move to the question-and-answer session, we would appreciate it.

(Operator Instructions). You have a question in queue. It comes from the line of Rob Glasspiegel with Langen McAlenney.

Good morning, everyone. If you execute your plan, how many quarters do you think it is before you could consider share repurchase as an option?

Bob, you know that is a very difficult question to answer because we don't have a perfect crystal ball about what the future is going to bring. Obviously, just on a pure theoretical or mathematical calculation, we do have excess capital today above and beyond what we might have to hold to support our ratings.

But I just think it is so important given the uncertainty in today's markets to hold what I would call contingency capital or cushion capital for unforeseen events. I think we need to let the future play out a little bit here.

We obviously -- you can tell from our comments, feel very positive that the markets have vindicated our belief in the creditworthiness of our investment holdings, and we're very comfortable with them. But we just want to give the current situation a chance to firm up a little more, improve a little further, before we even go through that process.

So I would love to provide with you an answer of an exact time that we might do that, we will obviously consider it, and clearly believe that today's stock valuations are in their depressed state are very attractive, but I think we need to keep our powder dry just to be prepared for anything that might come our way.

The conundrum is when you feel better and the rating agencies feel better, and the world feels better, you're stock will be a lot higher, and it won't be as effective of a tool to increase asset value. That's an observation, not a question.

The, with the rally in sort of distressed assets, is there any sort of desire, ability, to sort of, re-risk the portfolio, and take some losses and -- maybe get yourself for a position where rating agencies will feel more comfortable?

We continue to look at that, Bob. Again, we remain somewhat cautious on the environment. We are encouraged with the improvement since March. We have realized gains as I mentioned --

Right.

And have done that to derisk the portfolio by way of reducing sector and issuer concentrations. We certainly are taking some steps along those lines, and will continue to look for opportunities as well.

Yes I think, if there is -- it it makes sense to take some losses and reduce risk, we will consider that, we certainly have room at this point to do such a thing.

You talked about the rate increases you're targeting, seem pretty aggressive in homeowners and auto, to a lesser extent, how much do rates have to go up, in some of the normalized out, how much would rates have to go up before you would be comfortable growing units?

Well, I think if we were targeting 7% to 8% on the property side, and most of that is to address the issues we have with our own results and our own books, but we're also monitoring the competition, Bob, and we're seeing rate increases to the same level across the country at some of our key markets as well. So --

What about auto?

Auto? Auto is, the competition is also taking rate increases--

No, I mean how much would you need rates to go up before you would want to grow units?

Yes. If -- probably -- consistent with our current plans, 3%, 4% on a consistent basis. We're comfortable on auto, fairly comfortable with the profit position we're in. We're targeting to improve it a little bit but we feel in pretty good shape there.

Okay. Thank you.

(Operator Instructions). And at this time, there are no questions in queue.

Thank you, Crystal. And thank you for participating in our call this morning. If you have any further questions, please feel free to contact me. Have a good day.

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