Horace Mann Educators Corp (HMN) 2009 Q3 法說會逐字稿

Good morning. My name is Tamara, and I will be your conference operator today. At this time, I would like to welcome everyone to the Horace Mann Educator Corporation's Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions).

Thank you. Mr. Mann, you may begin your conference.

Good morning, everyone, and welcome to our Third Quarter 2009 Earnings Conference Call. Yesterday after the market closed, we released our earnings report including financial statements as well as supplemental business segment information. If you need a copy of the release, it is available on our website under Investor Relations.

Today, we'll cover our results for the third quarter in our prepared remarks and then be available for questions. I'm 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 and Casualty, Brent Hamann, 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 operation for 2009 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 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 take 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. Finally, this call is being recorded and is available live on our website. And Internet replay will be available on our website until November 27th, 2009.

Now, I'm pleased to turn the call over to Lou Lower for his comments.

Thank you, Dwayne. Good morning, all, and welcome to our call. At yesterday's market close, Horace Mann reported third quarter net income of $0.48 a share and net income, excluding realized capital gains, of $0.29 per share, both of which are greater than prior year for the quarter and on a year-to-date basis as well.

As you'll recall, last year's now notorious third quarter included the investment impact of the implosions of Fannie Mae, Freddie Mac, Lehman and AIG, plus for us Hurricanes Gustav and Ike. Those were the headlines back then. Today's headline story is the positive effect, strengthened confidence in the financial system that it's had on our financial market performance and in turn, Horace Mann.

As fear has given away to reason, most notably reflected in narrowing pricing spreads in the credit markets, the solid quality of our investment portfolio has once again allowed us to fully participate in the reversal of the dysfunctional bond market trends of 2008.

The unrealized capital loss position that we've reported for some time now has turned positive, contributing to reported book value per share, increasing 30% sequentially to $18.59 as compared to less than $12.00 a year ago. Also, book value per share excluding FAS 115 increased 9% as compared to the third quarter of last year.

In addition to those favorable developments on the balance sheet front, we continue to be very comfortable with our key balance sheet ratios and RBC levels. Our capital position is more than adequate to support our ratings, which we believe is prudent given continuing uncertainties about the pace and pattern of economic recovery.

As we've noted before, the structure of the annuity liabilities, which is associated with most of Horace Mann's taxable fixed income portfolio, is very stable and continues to demonstrate strong improving persistency while ongoing operations are producing record levels of positive fund swell. There's never been any question of having to liquidate securities. Rather, we've had complete ability to hold our conservative investment assets, allowing a dysfunctional market to repair itself and once again recognize quality in the process.

Despite our absolute conviction as to our investment quality, the economic recovery is likely to proceed in fits and starts, and with that view we'll not only adhere to our strict tested risk management discipline, but have also extended our opportunistic program to further reduce individual issuer concentration risk during the quarter. And as you're going to hear from Pete, we've been able to accomplish that objective, realize some capital gains as a by-product and reinvest funds with minimal give-up of investment income, which in fact increased 8% in the quarter over prior year.

Our capital strength and market position continue to work together to allow us to capture significant sales growth in the annuity segment. As customers in our educator niche seek personalized service from a strong, established enterprise with a recognized brand, annuity sales have increased 38% year-to-date. As you'll hear from Brent, third quarter premium and contract deposits in the annuity line increased 21% compared to prior-year with total account values turning the corner into positive growth territory for the first time since the equity markets began their precipitous decline.

New money coming in the door is being invested conservatively and at rates that are achieving margins in excess of pricing targets. That, in turn, is helping to increase spreads on the entire in-force fixed annuity block. So, putting all of those positive drivers together, we produced pretax operating income in the annuity segment that's 18% greater than prior year's third quarter with combined annuity and life up 10% in the quarter.

While property-casualty net income increased relative to 2008 thanks to reduced levels of catastrophe losses, the current quarter was adversely impacted by a combination of sink-hole losses in Florida and a difficult prior-year comparison to last year's unusually favorable auto loss results. As you'll hear in some detail from Tom in his report, we are taking pricing and underwriting actions to mitigate the weather and sink-hole result spoilers that have pressured year-to-date results.

Looking forward, we'd expect all else in the full year to perform as we expected with property creating a shortfall to what we originally anticipated as we entered the year. Apart from those adverse variances in the quarter, we remain encouraged the key elements of our growth strategies are taking hold, even in the face of macroeconomic head winds.

Our agent count increased again sequentially thanks to a steady level of new appointments and a reduction in terminations, which compared to 2008. As Steve will report, the expansion of Horace Mann's agency force was once again accompanied by continuing growth in licensed producers and total points of distribution along with average agent productivity increases in both life and annuity.

What's particular to note, agents operating under our exclusive agent agreement, which was only introduced this past January, now number over 200 and represent 30% of our total agency force and we fully expect all of those positive trends to continue. So, not withstanding some adverse factors this quarter in the property/casualty segment, all of which are being addressed, 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.

Combining our year-to-date results with expectations for our fourth quarter, it would have normal weather impacts and solid underlying performance as we close out the year. We are narrowing our guidance range for the full year to a range of $1.37 to $1.47 per share, the midpoint of which is consistent with current consensus expectations.

So with that, let me now turn it over to Pete for his commentary.

Thank you, Lou, and good morning. The third quarter was on balance, a positive one for Horace Mann with the headline story being the return of our investment portfolio to an unrealized gain position. It was one heck of a round trip, to be sure, but ultimately validated the underlying quality of our portfolio.

Meanwhile, our book value per share measures continued to show significant sequential and year-over-year growth, ending the quarter at $18.59 on a recorded basis and $17.30, excluding FAS 115, in both cases representing by a wide margin the highest level the company has recorded since its 1997 stock split. In terms of operating earnings, favorable P&C catastrophe experience, the lack of hurricanes really drove the prior year beat, although both the third quarter and year-to-date cat losses were not that far below our expectations due to continuing higher than normal levels of non-hurricane weather events.

The property line continued to be impacted by a high level of non-cat weather and a significant number of sink-hole losses in the quarter, which Tom will discuss in more detail along with the actions we're taking to address those issues. Our auto line, on the other hand, is performing consistent with our expectations, and the year-to-date loss ratio is only modestly above prior year.

Our operating results continue to benefit from good expense management discipline across all of our business segments with overall operating expenses continuing to track below our expectations in 2009. The adverse prior-year variance you may have noticed in the current quarter, both in our consolidated results and in the P&C expense ratio, is in large part due to a significant reduction of our incentive compensation expense accrual that occurred in the third quarter of last year.

Our annuity business from the top to the bottom line continues to be one of the bright spots for us this year. The fixed annuity business is thriving with deposits up significantly, account values growing nicely and spreads widening compared to prior year. And on the variable side, the total account value at September 30th is now higher than last year's fourth quarter average. So, we're poised to have favorable prior-year comparisons in contract charges and fees starting next quarter.

Growth in investment spreads is also helping our life segment earnings keep pace with a very strong prior year in spite of generally unfavorable mortality experience thus far in 2009. And speaking of investments, pretax net investment income was up 8% over prior year for the quarter and 5% year-to-date, slightly exceeding our expectations both in total and by segment.

With regard to realized investment gains and losses, we extended into the third quarter the opportunistic security and sales program that we initiated back in March when the recovery in the financial markets began. Approximately $13 million of gross realized gains was generated this quarter, which combined with impairment losses of $1.8 million resulted in a net realized gain of $11.5 million for the period.

As I mentioned during last quarter's call, I wanted to point out again that the gains program completed over the last two-plus quarters was accomplished with minimal investment income give-up. The program had a positive impact on our capital position while enabling us to selectively reduce our issuer and sector concentration levels and further diversify the portfolio. And even with the gains that have been taken this year, over $200 million of gross unrealized gains remained in the portfolio at September 30th.

Speaking of unrealized, we've once again provided a supplemental exhibit at the end of our press release package this quarter, which contains additional disclosure related to our net unrealized gain and loss trends along with September 30th balances by asset class. As I mentioned earlier, net unrealized investment gains at the end of the third quarter totaled $84 million pretax, representing an improvement of over $250 million in the last three months.

Positive movement occurred across virtually all asset classes during the quarter. But as you can see in the data, investment grade corporate bonds benefited most significantly with muni bonds and our CMBS portfolio also experiencing meaningful improvement. While the worst is almost certainly behind us, it's clear that some sectors of the economy remain under a fair amount of stress, and some degree of heightened financial market volatility is likely to persist for a period of time.

However, given the underlying quality and proven resiliency of our portfolio along with our conservative balance sheet and strong capital position, we are confident that any future investment losses relating to the current economic environment will be very manageable. To that point, as -- and, as Lou has mentioned, our key balance sheet measures and capital ratios remain favorable relative to our capital management targets and rating levels.

While statutory results will not be finalized for another week or so, we estimate our September 30th Life RBC ratio to be approximately 500% with the P&C equivalent between 400% and 425%. Both ratios are consistent with year-end 2008 levels and are at or above the high end of the range for our current ratings.

And finally, as mentioned in the press release, we've updated and narrowed the range of our full-year 2009 operating income guidance to $1.37 to $1.47 per share. The revised range incorporates year-to-date results and anticipates a normal fourth quarter in total, with Property results remaining under pressure, offset by continued strong annuity earnings. The mid point of the range called for a $0.50 per share fourth quarter, which is consistent with the last three years reported results, and with our historical seasonal earnings pattern.

And now, let me turn it over to Tom Wilkinson for his commentary on our P&C operation.

Thank you, Pete. Good morning. This morning, I will be talking about our P&C profit and growth results for the third quarter and for the first nine months of 2009. In discussing our profitability trends, I will focus on a couple of major issues in the third quarter, summarize key year-to-date ratios, and how we anticipate finishing the year.

Let's start with a look at the combined ratio. Our total P&C combined ratio for the third quarter was 104.1% compared to 109.7% a year ago. We had total catastrophe cost of about $12 million without a hurricane event, compared to $36 million last year primarily due to Hurricanes Gustav and Ike.

Continuing the trend of adverse weather impacts of the last two years, cat losses were about double what we would have expected from a non-hurricane cat in the quarter. Additionally, favorable prior years' reserve re-estimates of $2.8 million was $3.5 million less than last year. So, the underlying accident year combined ratio, excluding cats, was 97.2%, almost 10 points above last year with Auto and Property each up about 10 points above last year.

There are a couple of major drivers of this 10 point combined ratio variance that I'll highlight. First, excluding cats, the third quarter of 2008 was the most profitable quarter we have had in the last few years. There were a few environmental and economic issues favorably impacting our 2008 results.

Gas prices had risen to over $4.00 a gallon, leading to a reduction in miles driven, contributing to a lower auto business use and loss ratio. At the same time, annuity impact of the declining economy on the stock market and our investments, we reduced incentive and bonus accruals lowering our expense ratio. Due to these unique situations last year, we were expecting about a nine point higher auto combined ratio in the quarter.

The next issue is an emerging trend in our Property book of business. In the third quarter, we experienced a spike in large homeowner losses in Florida due to sinkholes. This is a low frequency, but high severity peril with a number of new reported claims more than double compare to our run rate.

In light of this recent activity, we reviewed prior sinkhole claim activity and strengthened our 2009 first and second quarter reserve levels in the third quarter. This reserve action, coupled with the increase in new claims in the quarter, increased our Property combined ratio by approximately eight points in the quarter, when compared to prior year.

Sinkhole losses are a growing industry issue in Florida. The state of Florida has recently authorized changes that can modify homeowner sinkhole coverage. The changes are not available yet. But public awareness of the issue has heightened, with increased local media coverage and increased advertising by public adjusters and attorneys for their services in potential claim situations. This is an expensive issue. Even if the claim does not result in a loss payment, the cost to investigate the claim includes an expensive engineering report.

Last quarter, I discussed our Property profitability initiative, which also applies to this situation. In our National Property office, we have specific large loss adjusters assigned to these claims, along with detailed policy and procedures for handling them. We have recently completed a re-inspection program targeting areas with high loss ratios in Florida, and have filed for increased rates. We will continue to review claim, pricing, and underwriting opportunities to manage our business profitably in this market. These were the major areas impacting the third quarter's 10 point variances to prior year.

I would now like to focus on our year-to-date results which represent a more meaningful prior year comparison and our outlook for the year by line. Our year-to-date Auto combined ratio was 96.3%. The underlined current accident year combined ratio excluding cats, and excluding the expense impacts of our claim consolidation and marketing reorganization that we detailed in previous calls, was 96.2%.

It's an increase compared to 2008 on a comparable basis of 2.7 points. That is 1.2 points on loss and 1.5 points on the expense ratio and it is consistent with our expectations that we set at the beginning of the year. Similarly, our current year-end outlook for the Auto combined ratio also was consistent with our original expectation.

Our year-to-date Property combined ratio was 110.6%. The underlying accident year combined ratio, again excluding cats and the claim and marketing expense adjustments, was 87.7%. It's an increase over last year on a comparable basis of 5.7 points. About half of that increase is attributable to the impact of non-cat weather losses, and about half due to the recent sinkhole activity. These increases were not included in our original Property profitability expectation, but have now been factored into our updated year-end earnings estimate.

Now to recap our top line results, top line premium growth remained favorable as total P&C direct premium before reinsurance increased 2.4% in the quarter, and is up over prior year by 2.2% year-to-date. Auto premium was up 1.9% in the quarter, and is up 1.6% year-to-date. Property direct premium increased 3.5% in the quarter, and is up 3.4% on a year-to-date basis. Both lines continue to post increases in the average premium per policy, and policy holder retention rates, and contributes to the overall top line premium growth.

Total P&C policies in force were below prior year by 1% or 8,000 units. Auto and property policies were down 6,000 and 2,000 respectively, both lines down about 1%. Educator PIS continues with sequential growth from prior quarter, with each line about 1% over prior year. Both new business and in force quality trends remain favorable. Our key book of business quality measure, that's percent Educator, preferred underwriting tiers and crossover business, all continue to trend equal to or better than the prior year.

In summary, our Auto results are tracking consistent with our expectations. Our challenge continues to be with our Property line. As detailed last quarter, we'll continue to focus on Property profit improvement initiatives, including raising our rate expectations where appropriate.

And now, I would like to turn it over to Brent Hamann for comments on our Annuity and Life results.

Thanks, Tom, and good morning. I will spend the next few minutes going over the results of the Annuity and Life segment. Our Annuity sales saw solid increases again in the third quarter, driven by growth in Single Premium and rollover sales through both Horace Mann and independent agents. Our Single Premium business benefited from rollovers and retirement opportunities in our core educator market, increasing 31% for the quarter and 38% for the first nine months of the year respectively.

While our Flexible Premium sale softened somewhat in the quarter compared to a strong prior year, they are up 39% on a year-to-date basis. As in the prior quarters of 2009, independent agents made significant contribution to the increase in Single Premium sales, both for the quarter and for the first nine months. And these continuing healthy Single Premium sales from all sources were the major contributors to increasing Annuity contract deposit receipts in the quarter. Total Annuity premiums and deposits increased 21% for the quarter and 13% year-to-date, and both sales and new contract deposits are exceeding our expectations.

Our customer base also continued to grow, largely driven by opportunities to capture market share in light of the changing regulations in the 403D market. And while there are indications of restudying of the market place, as a result of the implementation of these new regulations continues, the competitive landscape has largely taken shape, and Horace Mann has clearly proven its ability to compete in this new environment.

Annuity net fund flows, defined as deposits received less surrendered debts and maturities, were again positive in the third quarter of 2009 as they were throughout 2008. And our total 12-month account value persistency of nearly 94% is up about a percentage point over prior year. As we went upside in cat, our liabilities continue to be extremely stable and present absolutely no liquidity issues.

Whole Annuity account values increased 2% and they are finally back in positive territory for the first time since the market began its downward spiral. Account values drive two key components of Annuity income, namely net interest margins and contract charges.

Net interest margin improved as fixed account values increased 8% and also benefited from increasing spreads, as new money is being invested at attractive rates as compared to current rates. While variable Annuity account balances are still less than prior year by 9%, they did increase sequentially, with commensurate sequential growth in M&E charges earned.

Consistent with the second quarter, market performance also had a favorable impact on both evaluation of deferred policy acquisition costs, and the level of guaranteed minimum death benefit reserves. Combining all of these drivers, Annuity pre-tax operating income increased 18% in the quarter over prior year results.

We've emphasized in prior quarters that Horace Mann's variable products are only minimally exposed to equity market guaranteed risk. Reflective of this is our current GAAP GMBB reserve balance of only $600,000, which improved $500,000 in the quarter. Approximately two-thirds of our import to accountability has a simply return of premium death benefit, while over 25% of the business has no death benefit guarantee at all. We offer no other guarantees and have no hedging for derivative program exposure.

Turning to the Life segment, total third quarter sales increased a strong 33% as compared to the prior year quarter. Horace Mann Individual Life proprietary product sales were up 12%, while partner product sales were up 48% for the quarter. Life premiums and contract deposits, which consist only of Horace Mann products, were down 2% for both the quarter and the year-to-date as compared to prior year.

As we referenced last quarter, we launched new initiatives in the third quarter to improve our Life product competitiveness, including a new discount specifically for educators, as well as new marketing support tools. These actions have helped to reverse declining life insurance sales trends and we believe will better position us for improving market environment.

In terms of earnings, third quarter Life segment pre-tax income was comparable to prior year, reflecting increased investment income, which was offset by mortality costs. On a year-to-date basis, pre-tax income increased $1 million due again to growth and investment income from more offset by increased mortality costs.

So in closing, the improving results in both our Annuity and Life Insurance businesses reaffirm our belief that there are opportunities to further capitalize on our Annuity and Life Insurance payroll slots. And also in the power of our core value proposition, the development of product and services tailored to the needs of our educator market.

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

Thanks, Brent, and good morning. Once again, I'll focus my remarks on three key areas of sales and marketing, first, the continuing success of our agent migration, including exclusive agencies, second, the success in growing our sales force and third, sales results.

You'll recall that we began the transformation of our distribution program several years ago. Traditionally, we offered insurance through a captive employee agent force working out of their home. We've spent the past few years building programs, and training our agents, to migrate to outside offices, adding life and staff which would in turn, allow them to grow their book of business more rapidly, while serving our educator customer base in a more professional manner. Agents who have made the transformation have increased their productivity compared to their peers.

At the 1st of the year, we offered top performing agents the opportunity to work as exclusive agents with a new sales agreement. We also started recruiting directly into each group of agent model. We are encouraged by the number of agents who accepted the new agreement, and who are now operating as exclusive, independent business owners. And we continue to be encouraged by the quality of the individuals we have recruited from the outside to operate as new exclusive agents.

Success factors for the quarter were defined by increases in the number of agents moving to outside offices, the number of licensed producers, and a total number of agents. Also, we continue along the path of a successful transformation of our distribution system. For example, we saw the continued adoption by agents choosing to work in our agency business model. We now have 208 exclusive agents, or 30% of our agent population, who have adopted the new contract we introduced in January.

We also have about 200 employee agents who operate from an outside location, and have licensed producer support. Taken together, these two groups represent nearly 60% of our agency force, and an increase in the total number of agents operating in our agency business model of 378 to 407 during the quarter.

In addition, we have over 150 other agents that work in outside offices that have not yet hired a licensed producer. That gives us a pool of agents who are well-positioned to grow their business. With all that considered, we're excited about -- that so many of our agents are continuing to change and evolve their business operations to become even more productive.

Our overall agent count increase from 684 to 694 during the quarter as we continue to reverse a multi-year trend in declining agent counts. For the first time since 2005, we have grown agents in three consecutive quarters. We have increased new appointments, and decreased terminations in each quarter of 2009 compared to 2008. And as Lou mentioned, we have more agents at the end of September than we did a year ago.

Now, as I've mentioned before, the new exclusive agent agreement has allowed us to recruit directly into the model, helping us grow our distribution channel to serve our customer market place. With the requirement that agents invest in an office and licensed staff soon after they get started, we are confident that they will be more productive and have increased retention than agents in the past.

With that said, we appointed 42 new agents during the third quarter. 35 became exclusive agents immediately, and the others will migrate to exclusive agent status within the next two years. And as of September, we are only recruiting agents who become exclusive agents upon appointment.

Now, turning to results. We continue to feel the impact of the weak economy, with slower auto and home sales impacting our new business results. Within property and casualty sales, full auto unit sales were down 6% in the third quarter, versus the same period of 2008, with true new auto unit sales down 3%. Property unit sales decreased 3% compared to prior years.

While we cannot predict the impact the economy will have on all of our lines of business, we can continue to increase our agent count through the end of the year, positioning us to accelerate new sales growth. As Lou mentioned, we once again produced a healthy increase in overall new lease sales during the third quarter, with sales coming primarily from single premium annuities, in both our captive and independent agency forces. Our single annuity sales and roll over deposits increased over 31% from prior years during the quarter, and up 38% year-to-date.

As anticipated, we had few flexible sales this back to school season after the significant increases we saw during the first and second quarters right after the 403D regulation changes. For the quarter, our flexible annuity sales were below prior year by 15%. However, we are encouraged that our flexible premium sales remain above prior year by 39% in the third quarter. Altogether, our total annuity sales are up over 23% for the quarter, and almost 38% year-to-date.

And looking at productivity, our employee agents and exclusive agent productivity increased in two out of four lines compared to prior year third quarter. Our average agent increased productivity in new annuity sales and life sales compared to last year, while our auto and property productivity decreased slightly compared to a year ago. To sum it up, even with the challenges we face with the economy, we believe our recruiting efforts are paying off. We're attracting the right people for the right opportunities and their enthusiasm and commitment to building a successful, growth oriented agency make for a bright future.

And the adoption of the agency business model by existing agents, whether they continued as employee agents or elect to become independent exclusive agents, is proof that the agents recognize the value and potential of the model. Together recruiting and migration have helped us continue to make progress in building our agency force, and as we finish the year, we believe will be well positioned to take advantage of all the opportunities the educator marketplace holds for us in 2010.

Thank you, and now back to Dwayne.

Thanks, Steve, and that concludes our prepared remarks. Cameron, please move on to the question-and-answer session.

(Operator Instructions).

Your first question comes from the line of Dean Evans.

Yes, thanks, guys, I guess I had a couple of questions. First off, sort of a quick one. Both the cat and non-cat weather seemed a bit high to me in the quarter. And I know you did talk about sink holes, but was there anything else driving that other than the Florida sink hole issues?

No -- excuse me. No, Dean, as we stated, those are the two major drivers of the bearings.

Okay.

The non-cat weather is a continuation from earlier in the year, and actually it started last year, and it just keeps continuing.

Okay. Second, I guess is a bit more of a theoretical question. But given the strong book value growth that you saw in the quarter, and sort of rebounding to, I guess what you'd call normalized levels, the ROE outlook based on your guidance is kind of a 9% to 10% range, and I think if you look back historically, you were typically in the low to mid-teens range, as far as ROE. So, how are you thinking -- really, you're going to make up that gap and kind of improve the results to get back to the historical ROE run rate?

That's certainly an objective, to get back to the low to mid-teens being what we've discussed in the past. We'll do that through a combination of margin improvement and the Property and Casualty business. Further improvement in interest rate spreads, and key income in our annuity line, which is beginning to happen now, as the financial markets are healing themselves.

So, those would be the primary levers, and as we grow the book of business, we would hope to benefit from leverage in the way of leveraging scale in the business, and reducing our expense ratios. And then finally, we are making pretty significant investments right now, and, while the expense ratio will never go back to what it was in the late '90s, I do think there's some room for continuing improvement there as well.

Okay, great, and I guess one last question that sort of ties in a bit, but while you did sort of mention you're very comfortable with the balance sheet ratios and what the RBCs, and what the P&C capital ratios are at, have you given any thought, or I guess can you update us sort of on your thoughts with regard to capital management, both on the dividend side as well as potentially buy backs, given the low valuation that stock is trading at here?

Sure, I'd be happy to do that. In terms of share repurchases, we obviously how the math would work, and we'd be remiss if we didn't examine that, but we do remain cautious with respect to the macroeconomic environment. Like you, and everyone else, we've lived through a period of incredible financial stress. We don't have the view that we're necessarily out of the woods yet in terms of an economic recovery, despite the GDP releases today.

So, we think at least at this point in time it is prudent to maintain capital shock absorbers that we have today, which clearly served us well beginning in the third quarter of last year. Is there an opportunity at some point in time to take that theoretical excess capital and think of doing something else with it? Sure, but I just -- it would be premature, and we think, not prudent, to do so today.

With respect to the dividend policies, you may recall the dividend was reduced at our -- I think it was our fourth quarter Board meeting last year, and if we think back to that point in time, those were some pretty dark days, and we wanted to have -- insure that we have financial flexibility to go forward.

Obviously, circumstances have changed significantly for the better, our Board does evaluate, and we have conversations with them about dividend policy on a quarterly basis, and no doubt it will be a conversation at our upcoming fourth quarter meeting in December, and that would be in conjunction with the presentation of our operating and financial plans for 2010 and '11. But I would think that generally. our philosophy has been, excluding what we had to do at the end of last year, to have a dividend policy that's consistent with the median of our peer group relative to our stock price.

Okay, great. Thanks for all the well thought answers.

Your next question comes from the line of Jason Busell with KBW.

Good morning.

Good morning.

Thanks for taking my question. I wanted to first commend the company on the strong book value growth, of all the growth in agents. Dean basically asked two of my major questions. One issue that you talked about in the call, if you could expand on, is the issue of sink holes in Florida, and we have heard a lot of insurers talk about this, as a major loss. And I'm wondering if this is a function of Horace Mann's specific geographic mix, or if this is something that the industry will be talking more about as we go forward?

Excuse me. Yes, this is Tom Wilkinson. I think the biggest part of it is, it's really a new issue, a relatively recent issue, anyway, and it appeared on our radar screen because we had, in the quarter, we had a significant increase in new reported claim counts. So, we've been working, the last few months, anyway, to try to analyze the situation and get our handle on it the best we possibly can.

And it sounds like, with our feet on the ground in the field, that it is a growing industry issue, and maybe it will grow at other companies the same way it did for us, where it just popped up real recent. It is a small volume of claims, and it is -- it can be pretty volatile. We don't have a ton of history with the coverage, so we're trying to act as prudent as we possibly can with it.

This is mostly in Florida?

It's all in Florida, yes.

And this is obviously, being a covered peril, would these typically result in full losses, or is there an ability to subfurcate from a title insurer? I acknowledge that these are novice questions, but I'm really -- I'm curious.

Yes, we are, too, and we're doing as much analysis and investigation as we possibly can. There really is not -- they're not -- not many of them are total losses, because there's usually some structural damage and it turns into a good sized severity, a good size of loss after we do all the investigation and take a look at them.

It's a pretty, at least for now, anyway, it's pretty focused in about four or five counties so that there's a definite geographic bias to this, and we're putting additional resources on it, because we've mentioned prior that the property line of business is our top priority, and then this comes along and it moves to the top of the list in terms of our property priority until we get it figured out.

And which counties are those?

Well, they're Pascoe, Hernando, Polk, it's generally, a little east of Tampa, and a little north of Tampa. There's about four or five counties in that general vicinity.

Great, thank you very much.

As Tom mentioned, in his comments, a lot of this claim activity is being tolerated by virtue of the fact that there is a potential policy form change in the state of Florida, and we have attorneys who are advertising, and have billboards on highways, and as you might expect, they're people who live in Florida who are upside down in their mortgages, and other people who are out of work, and it's unfortunately a sad commentary on our legal system and some of the people who practice law in this country, but it is a -- that's really the big driver right now.

My expectation would be, given that you focus on a market niche, being educators, which is a little bit more insulated from the economic ups and downs, as well as what you've proven to be conservative underwriters. My perception would be that you're ahead of the ball on this one, versus the industry. Is that an accurate statement?

We think so. We hope so.

Great, thank you.

Your next question comes from the line of Dan Farrell, with Fox-Pitt Kelton.

Hi, good morning. Just a numbers question. You mentioned you had preliminary statutory capital. What were those numbers for the Life and P&C on the capital numbers?

Yes, Dan, we're looking at approximately 500% RBC for life, plus or minus five points. Things aren't quite finalized yet, but we feel that's a reasonable midpoint of a fairly narrow range.

Not the RBC, the actual capital number.

Oh, yes, I can grab that for you here. The life adjusted capital and surplus is about $287 million, and P&C capital and surplus is about [$303 million] statutory.

That's good.

Your next question comes from the line of Craig Rothman with Millennium Partners.

Hey, guys, thanks for taking the question. I just wanted to echo Jason's comments on the strategy in place, and the level of conservatism, but the non-cat weather is, I guess, you say, getting pretty frustrating from a shareholder's perspective. I'm sure you guys are thinking the same thing. But can you elaborate a little bit on what, exactly it was, what states it was in, because it's a little bit confusing this quarter. We haven't really seen it much from some of your peers, where they were putting up decent numbers related to the property losses.

It mainly was in the Midwest, and it really is -- the majority of it was in July. It tailed off in August and September, had some wind, and some tornadoes -- probably not full blown tornadoes but wind and hail and those type of events in July, and I think Colorado hit a couple of times, Iowa, the Dakotas, some of those areas.

Okay.

I know it is frustrating to us, and as we saw before, as those results work through our experience, and even before, in some cases, we're looking at underwriting action in some of the areas as well as raising our rates, expectations going forward.

Okay, and, as far as you can tell right now, it just still seems random, kind of from the quantitative perspective? I mean, that's I guess, what Allstate is saying as well, even though they've been seeing it quarter after quarter, too.

Yes, I would have to agree with that.

Yes?

Especially given, in the quarter, we saw 80% of the activity was in one month.

Yes, okay.

So Craig, it is random, but when you have random events that occur for six, seven quarters in a row, you can't just, at least we're not of a mind that we sit there and be happy with our pricing and other matters, so we have a significant rate plan increase in place for property, and a whole series of other issues that Tom has underway to at least help in the randomness and make sure that we're getting paid for the risk in that randomness.

Okay, can you just remind us when we get the price increases earning through in the majority of the states, or the higher price increase, I guess is --.

Yes, some of our higher price activity has already started, so we'll earn some of it in 2010. The bulk of the higher increases will be in the first half, or first three quarters of 2010. So, we'll start to earn some in '10, and earn the full impact of it in 2011.

Okay, and I probably just missed this, but did you guys talk about retention numbers across the products?

We didn't talk about it. It's in our release. In brief, they must mentioned that retention for both auto and property continue to be up above prior year.

Okay, good. And on the -- I'm sorry.

We did talk about it for life and annuity as well.

Okay, got you. And on the sink holes, is there any sort of recourse, if a home builder is constructing homes on a sink hole? I guess you guys are on the hook for the payment to the policy holder, but do you have any sort of recourse to the home builder?

No, at this point in time, we don't think we do, Craig.

Really?

And we're investigating the contract and the policy language, as is probably everybody else, and if we can find that to be the case, we will take action appropriately. The state is addressing the issue a bit. They've allowed for some change in the policy language, and we're in the course of analyzing that and seeing how that would impact us going forward, because it's scheduled to be effective January 1, 2010.

Yes, when we get notice of these losses, we obviously go through a fairly detailed engineering report, and where we do determine, as a result of that report, that it's not sink hole, we obviously deny the claim. But as Tom said, those engineering studies cost $10,000 $15,000 each. So, we have rejected, or denied a few of them, but when we do find earth movement is related to sink holes, we do feel we're on the hook.

Okay, so in the engineer's report, does it state that it's built on a sink hole? How does that work?

Well, it just confirms whether the loss was due to sink holes, or ground movement, or something like that.

I guess what I'm asking is, it wouldn't -- when there's construction of that house is done, there's approval from the engineers. And is the approval from the engineer, does that include some sort of indication about the foundation that was wrong, if there's a sink hole issue?

Well, Craig, it may be happening today with new home starts, but it certainly wasn't available 20, 30, 40 years ago when some of these homes were -- most of these homes were built.

Oh, got you. Is there any way to quantify the ROE drag right now, from the capital position you're holding, because I commend you on your conservatism, just given the current environment, and I think there will be a time and place for buy-backs, and you guys will certainly have the capital level, but just, if we think about what the, kind of the ROE would be, based on your ideal capital structure, versus the seemingly excess capital you're holding right now, is there any way to quantify the ROE impact on that?

I guess I go back to Lou's response to, I think it was Dean's question, historically we've been in the low to mid teens, we certainly aspire and feel as though we can return to those levels, so maybe one way to look at this, the "drag" is looking at current levels compared to what a loaded routine level would be.

Okay, got you, but you haven't really quantified -- I guess I'm just trying to understand what your target capital structure is in a more normal environment, versus where you're at now.

Well, I'm not sure if the prior normal will ever be normal again, is one issue, so we're certainly trying to maintain, and ultimately improve our ratings, so we're looking at rating agency requirements, and that sort of thing. Certainly no real need to carry a 500 RBC, for example, on the life side. Our capital management target has been to keep that at 400 or above. Realistically I wouldn't expect we'd have very difficult rating agency conversations till we got down into the mid-300s, frankly, but again, that past normal is questionable as to whether we'll get back to there.

So, part of our comfort in holding some excess capital for a period of time, in addition to believing we're not totally through the woods on the economic front, but just also want to be sure that rating agencies, as they start to rethink their requirements, we don't kind of run through the stop light on those.

Okay. All right, thanks a lot, guys. Good luck, and hopefully get past these weather issues.

Thanks, Craig.

(Operator Instructions).

Your next question comes from the line of Robert Glasspiegel, with Langen McAlenney.

Hey, guys, I guess I'll probably be guilty for a 15 yard penalty for piling on with another sink hole question, but you guys are way ahead of the learning curve relative to me on this one, so I need to pick your brains. Do you have your arms completely around it, or is this something that's sort of a work in motion, stay tuned?

Well, it's definitely a work in motion, stay tuned. We are learning about this every day, just like you are, and but we're also not going to -- we're working on some programs, we're working on some products, we're working on some actions, but we're not going to wait too long before we implement or make some changes as necessary.

Remind me when you have your outside actuarial review of the reserves?

We have a full independent review at December 31st, at the end of next quarter, Bob, but Deloitte reviews our internal actuaries work every quarter, and so we're continuing that process over the last couple of years.

Okay, and last question is, we're all in favor of you paying your ROE check dues, and I mean, well if there's someone out there that just allows everyone to execute their plans, that would be great, but you do have the macro environment. Does the macro environment in property allow you to raise rates sufficiently to achieve your ROE objectives? Or, to put it another way, are your current rate increases sufficient to overcome lost cost growth and get the -- drive the arrow any higher?

Yes, I think we would say that we -- there's a lot more head room in the property line than in the auto line for sure, and we absolutely think that we can attain our pricing increase objectives and so, be competitive and offer a good value proposition in the marketplace.

So, you think in 2010, you will hit your, I mean, if weather is normalized, and there's no, sort of, left fielders, you're in position to hit your ROE objective in property and auto for that matter?

Well, certainly, as Tom said, Bob, it will take some time to earn the rates we're talking about, so 2010, 2011, we certainly feel that that will be realized. And, as you know, there are some states that it's more difficult to get a rate in, although at least it's a little bit easier on property than auto, so there will be some challenges there, but pricing is not the only lever we're looking at as well. There's obviously some things on the underwriting front that Tom and his team are looking at.

Okay, that's all I got. Good luck.

Thanks.

We do have a final question from Dan Farrell of Fox-Pitt Kelton.

Hi, guys, just on the question of cat versus non-cat losses. Can you tell us what your threshold is for classifying stuff as cat? Some companies use different levels and I'm not sure if yours is $2 million, $5 million, of that?

Well, we use the PCF definitions of catastrophe, so when they hit their threshold and they declare it a cat, then that's how we keep score.

So, I think what they look at is an event of $25 million or more, I believe, in industry losses, and then they also say, a significant number of claims. So, there's not a threshold that we, at Horace Mann look at in terms of losses that we incur, we look at it from an industry standpoint.

Okay, thank you.

You bet.

At this time, there are no further questions. Are there any closing remarks?

Well, thanks, Cameron, we appreciate everyone joining the call today, and asking questions, and we look forward to visiting with you next quarter. Have a good day.

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