Horace Mann Educators Corp (HMN) 2009 Q4 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 fourth quarter 2009 earnings conference call. All lines have been placed on mute to prevent 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. Welcome to our fourth quarter and year end 2009 earnings conference call.

Yesterday, 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 the conference call. Lou Lower, President and Chief Executive Officer; Pete Heckman, Executive Vice President and Chief Financial Officer; Tom Wilkinson, Executive Vice President, Property & Casualty; Brent Hamann, Senior Vice President, Annuity and Life; and Steve Cardinal, Executive Vice President, Marketing.

The following discussion may contain forward-looking statements regarding Horace Mann, and anticipated or expected results of operations for 2009 or subsequent periods. Actual results may differ 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 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.

Finally, this call is being recorded, and is available live on our website. An internet replay will be available on our website until March 9th, 2010.

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

Thanks, Dwayne. Good morning all, and welcome to our year end call.

At yesterday's market close, Horace Mann reported fourth quarter net income of $0.54 per share, and net income excluding realized investment gains of $0.47 per share. This quarter's $0.47 was adversely impacted by a $0.06 per share write-off of accumulated surplus in the North Carolina beach plan, as a result of recent legislative changes negotiated by the industry's trade group. Excluding that unanticipated outcome, we would have been at the upper end of the full year guidance range that we provided to all of you on our last call. Even including it, we still exceeded consensus expectations.

With continuing stability in the credit markets, our confidence in the solid quality of our investment portfolio continues to be validated. We ended the year with a net unrealized gain position of $36 million, as compared to the net unrealized investment loss position of $327 million we reported to you a year ago at this time. That change, along with solid contributions from operations, resulted in reported book value per share increasing 60% year-over-year to $18.36, as compared to less than $12 a year ago. In addition, book value per share, excluding the fair adjustment for investments, increased 10% to $17.79 as compared to prior year.

In other balance sheet metrics, we continue to be comfortable with our key capital ratios and RBC levels. Our capital position is more than adequate to support our ratings, and we're of the firm belief that having a capital cushion as a shock absorber is prudent today, given continuing uncertainties about the pace and pattern of economic recovery.

As we mentioned on previous calls, the structure of our annuity liabilities, which is associated with most of Horace Mann's taxable fixed income portfolio, continues to be very stable, as evidenced by strong improving persistency, while ongoing operations produced near-record levels of positive fund flow in 2009. We view those attributes as additional sources of financial strength and flexibility.

As our performance over the past year-and-half was clearly demonstrated, the intersection of our conservative capital management, high-quality diversified investments, low-risk product features, and the conservative nature of our consumer base, has served us very well in a period of stress; that's a fundamental of Horace Mann that we would consider and expect to continue, giving us great confidence in our financial stability. Educator confidence in Horace Mann, and our market position, continue to work together to allow us to capture significant sales growth in the annuity segment, with total annuity sales increasing 31% for the full year.

As you are going to hear in a moment from Brent, fourth quarter premium and contract deposits in the annuity line increased 11% compared to prior year, with total account values up 14% year-over-year, thanks to new sales, continuing flow of business, and improved equity markets. New money coming in the door is being invested at margins at or above our pricing targets, significantly increasing spreads on the entire [in-force] block. As all of those positive drivers have come together over the course of the year, the annuity segment produced full year pretax operating income $12 million greater than prior year, for a better than 50% increase.

The life segment was also a solid contributor, with pretax operating income increasing 13%, over 2008. For the most recent quarter, the favorable net income variances for combined annuity life were largely offset by unfavorable comparisons in P&C, attributable to a combination of the North Carolina beach plan write-off, continuing sinkhole losses in Florida, an increase in auto frequency, and less in the way of favorable reserve development. As you will hear in some detail from Tom in his report, we are taking pricing, underwriting and nonrenewal actions to restore future margins back to our combined ratio targets.

As you will hear from Pete, while that work is underway in property & casualty, the benefits of diversification that we have between P&C and annuity life will continue to be demonstrated in our financial results. Combined annuity and life will contribute more than its fair share to earnings growth in 2010, while P&C profit improvement actions take hold in 2010 also, and then subsequently take the lead in further earnings momentum into 2011.

Very importantly for our future prospects, the key elements of our growth strategies continue to take hold, even in the face of economic headwinds. Our agent count increased again sequentially, thanks to a continuing and steady level of new appointments and a reduction in terminations as compared to 2008. The expansion of Horace Mann's agency force was once again accompanied by continuing growth in license producers and total points of distributions, with 35% of our agency force now operating under our exclusive agent contract, which we only launched a year ago.

As you are going to hear from Steve, we ended the year with solid sales growth, with our lead lines of true new auto and annuity increasing nicely in the quarter 4% and 10%, respectively. Property unit sales also increased 6% in the quarter, along with Horace Mann manufactured life products, which increased 27%.

So what do we expect for 2010? For property, first of all, we entered the year well capitalized, with the full complement of resources that we need to pursue our strategic growth initiatives, and they are on board and in (inaudible). Even with the challenging low to no growth external economic environment, we plan to deliver organic top line growth in our niche market, led by auto unit sales and rates. We will deliver that by building on the momentum that we have established, with the ever-increasing number of agents who are operating in our new agency business model. As that growth gains more attraction, we anticipate delivering 3% to 4% property & casualty premium growth in 2010, with mid single-digit growth in annuity assets under management.

For property & casualty specifically, the headwinds of the underwriting cycle will continue to present challenges. We're counting on our claims organization to continue to beat industry fast track data and severity control, while reducing loss adjustment expense, as we leverage our consolidated operations and technology platform. At the same time, we are already taking higher rate increases in the past few years in auto, and even more so in property. We are combining that with very material exposure reduction actions now underway in property, most notably in Florida. We expect an improving year of profitability, with our combined ratio progressing toward our target range of 93 to 95 over the next two to three years.

For annuity and life, we will benefit from solid sales, a continuation of widening spreads, and growing fee income. As a result, we are projecting very healthy pretax operating income growth of 15% to 20% in those combined segments, on top of the strong increase that we achieved last year. So taking all of those factors into account, including the initiatives we're putting in place to drive future growth and improve margins, our earnings guidance range for net income excluding investment gains and losses for 2010 is $1.65 to $1.85, with book value excluding the fair value investments in the $19 range. And as we build to delivering that earnings guidance range for this year, we will be establishing momentum for continuing earnings improvement beyond the current year.

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

Thanks Lou, and good morning, everyone.

As an opening comment on the quarter, let me just say what a difference a year makes. Horace Mann recorded fourth quarter operating income of $0.47, and net income of $0.54 per share. On a reported basis, that was $0.04 less than comparable results in 2008. However, the significant improvement in underlying results is apparent when you consider that the prior year's fourth quarter included nonrecurring income tax benefits of $0.10 in operating income, and a total of $0.30 in net income. While fourth quarter 2009 earnings were reduced by the $0.06 per share write-off of our equity in the North Carolina beach plan.

In terms of pretax income, our annuity and life segments had a breakout quarter, driven by strong growth in investment income and increased spreads, along with favorable financial market performance. This more than offset the impact in property & casualty of the beach plan write-off, and the increases in auto frequency and property sinkhole losses versus the prior year. Relative to our expectations, operating results in the quarter, excluding the nonrecurring North Carolina charge, put us in the upper end of our guidance range for the year, and well above consensus estimates. The uptick in auto frequency was not anticipated, but was more than offset by a minimal level of catastrophe losses and the strong annuity and life income results, which you will hear more about when I comment on our 2010 earnings guidance in just a moment.

Those solid operating results, along with the relative stability of the financial markets, resulted in growth in book value, excluding the fair value adjustment for investments, of nearly 3% sequentially and 10% year-over-year. On a reported basis book value of $18.36 per share was up 60% compared to the highly-stressed investment environment of a year ago. With the improved market conditions, our confidence in the quality and performance of our investment portfolio continues to be borne out.

In spite of the brief uptick in Treasury rates at year end, we finished the quarter once again in a net unrealized gain position. We continue to feel good not only about the quality of the investments we do own, but also about the securities and asset classes that we consciously avoided, including commercial real estate whole loans and equity real estate, among others. Even if another market downturn were to occur, we would not expect to realize excessive losses in our portfolio. And in any event, with our year end 2009 risk-based capital ratios expected to increase further compared to the strong levels we recorded a year ago, we are holding sufficient excess capital to easily absorb any losses that may occur, even in a highly stressed scenario, without impacting our current ratings.

Now in terms of our investment performance in the quarter, we realized $4.6 million of net gains, with only a de minimis level of credit-related write-downs. Meanwhile, total pretax net investment income grew by more than 12%. The P&C portfolio benefited from a higher mix of tax exempt holdings, and posted an after tax increase of 7%, while the annuity and life segments showed investment income growth in the mid-teens for the quarter. We reduced our cash and short-term investments by about $100 million in the fourth quarter, which contributed to the those increases. But in spite of that reinvestment activity, we still held a short-term balance of approximately $300 million at year end. As we work that balance down to a more normal level over the first couple of quarters in 2010, our investment income will continue to benefit, along with annuity and life interest margins.

So as we think about 2010, and our operating income guidance range of $1.65 to $1.85, we're looking for a moderation of auto frequencies, and the initial effects of rate actions in property & casualty, to offset an expected continuing high level of sinkhole losses, and a reduced amount of favorable reserve development, along with a somewhat higher cat load than we experienced in 2009. All of which, in total, are expected to result in a modest reduction in the calendar year loss ratio.

In terms of expenses, with the claims reorganization costs behind us, and the benefits of that office consolidation process beginning to emerge, the resulting expected decline in the loss adjustment expense ratio in 2010 should more than offset a modest increase in the underwriting expense ratio. Perhaps more significant, however, is the anticipated continuation of the very positive trend in annuity and life segment earnings. In our fixed annuity business, interest spreads grew from 154 to 169 basis points in 2009. And with the investment of our excess short-term funds and new higher-yielding assets during the first part of the year, 2010 spreads are estimated to increase to about 200 basis points. That, coupled with the anticipated growth in variable annuity charges and fees, should result in an increase in annuity segment pretax income in the mid-20% range. At the same time, life segment earnings are projected to grow in the mid to high single digits, also fueled by the continued strong growth in investment income.

So to sum up, we are looking for annuity and life to continue delivering strong earnings growth over the next several quarters, with P&C rate increases and coastal exposure management actions gaining traction during 2010, and then generating further margin expansion in 211. Those dynamics, which illustrate the benefit of having diversified sources of earnings, coupled with the expected growth in the number and productivity of our exclusive agencies, should prove to be a winning formula for Horace Mann going forward.

So with that, let me now turn it over to Tom Wilkinson for his commentary on our P&C operations. Tom?

Thanks, Pete.

This morning I will discuss what is behind our combined ratio for the quarter and the full year, cover the results by line, review premium and quality trends in our book of business, and finish with a look at the year ahead.

Starting with the combined ratio, the total P&C combined ratio was 95.6% for the fourth quarter, compared to 92.9% a year earlier. Total catastrophe costs were $1.2 million, compared to $10 million in catastrophes in 2008, with $7 million of that due to re-estimates of the third quarter hurricanes, Gustav and Ike, in the fourth quarter. Favorable prior year reserve re-estimates of $3.4 million were $3.3 less than the prior years; that's 2.4 points on the combined ratio. Favorable current year reserve re-estimates in the quarter were 1.8 points less than prior year. Finally, the impact on claim expenses of our recent regional office consolidation, discussed in previous calls, was 2.9 points less than fourth quarter 2008. So when you exclude cats, both prior and current reserve re-estimates, and the impact of the claims consolidation, our underlying total P&C combined ratio for the quarter was 98.4%, compared to 90.7% in 2008. On a comparable basis, our fourth quarter auto combined ratio was 105.2%, up almost 6 points over prior year; and property was 83.6%, an increase of just over 10 points.

There are a couple of major drivers of the increased combined ratio in the quarter. First, in auto, frequency was up about 10%, driven by double-digit increases in the Northeast and Mid-Atlantic states, due to winter weather; and we had a spike in auto bodily injury frequency that generally impacted the entire country. While we have seen others in the industry with BI frequency increases in 2009, our BI results had not exceeded our expectations until the fourth quarter. In addition, our preliminary information for January 2010 frequency, BI and total coverages, showed both below January 2009, below the fourth quarter level, and within our expected range. While we are glad to see it begin returning to levels consistent with what we'd expect, we'll continue to monitor and analyze our results, and take pricing actions to address as needed.

There are two issues that continue to negatively impact our property results. In the quarter, consistent with the last two years, we experienced non-cat weather losses above the prior year and above our expectations. Next, as discussed on our last call, sinkhole losses in Florida continued at a high level. In the quarter, new sinkhole losses reported were approximately the same as third quarter, but at a level significantly higher than the fourth quarter of 2008. The impact of weather and sink holes contributed over 4 points each to the property combined ratio increase. For the full year, our total P&C combined ratio was 99.5%, compared to 100.7% for the prior year, with the underlying accident year combined ratio, which excludes cat and the impact of the claim consolidation of 94.8%, 5.3 points above prior year. On a similar basis, auto was 98.4%, up 4.6 points, and property was 86.5%, and up 6.4 points. The most significant impacts to our combined ratio were some increase of auto frequency, a full year of increased property non-cat weather, and sinkhole losses.

As discussed on prior calls, our property profitability improvement initiatives are underway to address our underlying loss issues. We have increased claim staffing, accelerated reinspection activity, and raised our rate targets for 2010 and 2011. We are also addressing our Florida property profitability and hurricane exposure issues. Horace Mann is no longer accepting new homeowner policies in the State of Florida. However, our Florida agents have the ability to place property business with other companies, as well as citizens. Additionally, we received approval for 14.7% rate increase, effective April 1st. Finally, we have just begun a program to non-renew 9,600 homeowner policies, over half of our Florida book of property business, starting with August 2010 effective dates. These policies are in areas with unfavorable loss experience or hurricane exposure, that we are not able to price adequately. Our agents will work closely with our customers to find coverage with companies underwriting property risk in Florida. This program should enable us to fully achieve our property non-cat target loss ratio by 2012, and reduce our overall catastrophe reinsured costs.

Now to recap our growth trends, our total policy count of 790,000 is equal to third quarter. For the full year, it is down 8,000 or 1%. However, our total educator policy count continues to grow, up 2,700 in the quarter, and 7,200 policies above year end 2008, with each line increasing 1% to 2% for the year. Our book of business key quality indicators, which include percent educator, preferred underwriting tiers, cross-sold and try line, all improved again in 2009. Policy retention also continues to increase in a very competitive environment, as both lines reach up 0.02 compared to 2008. Top line premium trends remain favorable, driven by retention improvement and continued increases in average premium per policy. Total P&C direct written premiums, before reinsurance costs, posted increases above prior year of 1.9% in the quarter and 2.1% for the year. On the same basis, auto grew 0.9% in the quarter and 1.4% for the year, while property increased 3.9% and 3.5% in the quarter and full year, respectively.

Now for a look at 2010, where we are expecting a P&C combined ratio in the 97% to 99% range. That would be an improvement compared to 2009 results, and trending towards our 93% to 95% target range which expect to achieve over the next two to three years. We are assuming an average catastrophe year, using a cat load in the range of 6% to 7% of premium, which is consistent with our recent cat loss history and our model cat results, as well as our 2009 actual cat losses. The impact of prior year reserve re-estimates is projected to be favorable again in 2010; but continuing an industry and Horace Mann trend, it should be lower than 2009's level. We are anticipating slight decreases in frequency this year, as the quality of our book of business continues to improve. That said, we are not expecting levels to return back to historic averages, but a small reduction is projected as our quality and reinspection programs take hold. And we expect the severity trend, managed by our consolidated advanced claim environment group, to continue to outperform consumer price indicators and industry fast track data.

In addition, our projections anticipate a slight increase to our sinkhole loss ratio in 2010, followed by significant reduction in 2011. Our expense ratio is projected to increase about a point in 2010, as we continue to invest in key growth initiatives, but will come down in future years as those programs deliver our growth goals and increase in scale. At the same time, we expect a decrease in our LE ratio, as we gain efficiencies from the claim office consolidation.

We will continue to pursue and take increasing rate actions in both lines to align with loss cost trends. Based upon recent and project loss costs, we are expecting rate increases in the high single-digit range in each of the next two years to consistently lower the combined ratio to our 93% to 95% target level. So far, in 2010, we are on pace in both lines to achieve this year's targeted rate action.

Now I would like to turn it over to Brent Hamann to cover annuity and life results.

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

As Lou referenced earlier, our annuity sales in the fourth quarter once again increased over prior year results. This despite challenging comparisons as a result of increasing market activity in the prior year quarter, associated with schools coming into compliance with the new 403(b) regulations. Total annuity sales increased 10%, driven by increases in single premium and rollover sales of Horace Mann products through both Horace Mann and independent agents. As in the third quarter, single premium business benefited from rollovers and retirement opportunities in our core educator market, increasing 22% for the quarter and 34% for the full year, respectively. Our flexible premium sales continued to soften, in particular as compared to a relatively strong prior year quarter. However, they are up 22% on a full year basis.

The growth in sales during 2009 was produced by our dedicated agents, as well as our educator-focused independent agent channel, which both made significant contributions to the increase in single premium sales, both for the quarter and for the full year. Total annuity premiums and deposits received increased 11% for the quarter and 12% year-to-date. Both sales and new contract deposits exceeded our expectations for 2009.

In addition to sales growth, we had healthy increases in the number of annuity contracts in force. We are confident Horace Mann is well positioned to continue to capture market share in the new 403(b) environment. Annuity net fund flows, defined as deposits received less surrenders, deaths and maturities, were positive in the fourth quarter, as they were throughout 2008 and 2009. Our total 12-month account value persistency of 94% is up about 1 percentage point over prior year. As a result, our liabilities continue to be extremely stable, and present absolutely no liquidity issues. Total annuity account value increased 14% compared to a year ago, reflecting positive sales and persistency results, as well as improvements in the fair value of the variable annuity balances. This is the first time in over a year that both our fixed and variable account balances are up as compared to the balances 12 months earlier.

Account values drive two key components of annuity income; namely, net interest margin and contract charges. In 2009 fixed account values increased 8%, mainly due to a 34% increase in contract deposits. The net interest margin improved significantly as a result of achieving spreads on new business, and improving spreads on existing business. As noted in the press release, net interest spreads reached 169 basis points for the full year, an increase of 15 basis points over 2008. Variable annuity account balances are also above prior year by 27%, continuing their sequential growth, with a commensurate increase in M&E charges earned. As in the past two quarters, market performance had a favorable impact on both the valuation of deferred policy acquisition costs and the level of guaranteed minimum death benefit reserves. Combining all those drivers, annuity pretax operating increased $10.2 million in the quarter over prior year results.

Horace Mann's equity market guarantee exposure on our variable annuity product line continues to be minimal. Approximately two-thirds of our in-force [account] value has a simple return of premium death benefit, while over 25% of the business has no death benefit guarantee at all. Our current GAAP GMDB reserve balance is only $500,000, and that decreased $100,000 in the quarter. We do not offer other guarantees, and have no hedging or derivative program exposure.

Within our life segment, fourth quarter sales of Horace Mann individual life proprietary products were up 27%, driven by the launch of new initiatives in the third quarter to improve our life product portfolio, including a new discount specifically for educators, as well as new marketing support tools. Third-party product sales down 27% for the quarter as compared to prior year, after coming off 49% quarter-over-quarter increase in the third quarter of this year. In total, since the launch of our new educator discounts in July of this year, both Horace Mann and third-party product sales are up, 20% and 8%, respectively.

Life premiums and contract deposits, which consist only of Horace Mann products, were down 2% for both the quarter and full year as compared to the prior year. In terms of earnings, fourth quarter life segment pretax income increased 36% compared to prior year, reflecting increased investment income. On a year-to-date basis, pretax income increased $3.3 million, due to growth in investment income, somewhat offset by increased mortality loss.

So in closing, 2009 has been a year of significantly improved fundamentals and results in both our annuity and life insurance business. We have strengthened our position within our annuity payroll slots, and reinvigorated our life insurance products and support. These fundamentals will serve us well as we continue to execute on our core value proposition, the development of products and services tailored to the needs of our educator market.

Looking ahead to 2010, annuity pretax operating earnings are expected to increase 20% to 30% over those reported in 2009, while life pretax operating earnings are expected to increase 5% to 10%. These improvements are driven primarily by increased investment income, and also 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 distribution and sales.

Thanks, Brent, and good morning, everybody.

This morning, I will focus on two key areas of marketing. First, I will spend time on a theme we have addressed throughout 2009; the continued success in transforming our agency force. And, of course, I'll cover our sales results.

The transformation of sales force has been in progress for the past few years, with a strategy of a migrator sales force but employee agent force, working predominantly from their homes, to a force of independent exclusive agencies based in professional office locations, with operations comprised of staff and licensed producers. The why behind this was simple; agents who moved into outside locations and hired staff were more productive and had fewer limitations on their ability to grow their client base and in-force business. At the beginning of January last year we took a significant step in transforming our agency force, by offering our highest-producing agents the opportunity to operate as exclusive agents, and by recruiting only into the exclusive agent model. I am pleased to say the results for the year exceeded our expectations. Agents operating in our agency business model are either exclusive agents, or employee agents work working out of a professional office setting with licensed staff. Agents operating in this model have increased, while other agents operating out of their home or without licensed staff have decreased.

As evidence of our success, we finished the year with 465 agents operating in our agency business model. This was an increase of 58 during the quarter, and 156 during the full year. The number of agents working out of their home had decreased from 184 to 113 throughout 2009. We are also very pleased by the number of migrations to our exclusive agent opportunity. Of those eligible, 69% of the agents offered the opportunity accepted the contract in 2009, with additional migrations occurring and expected in 2010. At the same time, we were able to recruit more individuals directly into the exclusive agent contract than we anticipated. As of December 31st, 249 out of our 715 agents were operating as exclusive agents. As we turn to a new year, we are confident in our ability to continue to increase the number of agents operating in our agency business model.

The numbers are important of course, but we are also excited about the high quality of the candidates we are attracting to the exclusive agency opportunity. And as a result of attracting quality individuals, we exceeded expectations by appointing 55 more individuals than in 2008. On the other side of the equation, 115 fewer agents terminated during the year than in 2008. Combined, these results enabled us to grow combined employee and exclusive agency force from 670 to 715 during the full year. This was the first time we produced year-over-year growth in agent count since 2005, and we look to continue growth in 2010.

In addition to the number of Horace Mann agents, agents operating in the model continue to increase the number of total licensed producers. At the end of the year, there were 571 of these licensed producers, an increase of 52.25, and 177 for the full year. That increased our total points of distribution from a 1,064 to 1,286 during 2009. This enabled us to not only access more of our market, but helped our agencies become more productive.

I think it's important to spend time on the agency strategy, because growing our sales force had a positive impact on our sales results. Throughout the year, we faced the challenges of a rough economy; but in spite of these challenges, we increased production during the fourth quarter in three out of four of our lines of business compared to prior year. That includes true auto, property, and total annuity sales. Our true auto unit sales ended the year almost 2% below 2008; still, we increased 4% over fourth quarter 2008. Our property unit sales finished the year about 1% below prior year results; but again, increased almost 6% during the quarter compared to prior year. We kept our edge with annuity sales, which increased by 10% in the quarter compared to last year. That brought our full year results to a 31% increase over 2008 sales.

Given the economy, life insurance in particular proved a challenge. On an overall basis, which includes sales of third-party vendor products along with Horace Mann products, life sales decreased 6% to 2008's fourth quarter, which brought life sales for the year to slightly less than prior year. But sales of Horace Mann life products increased 27% in the quarter over fourth quarter 2008, and were up 4% for the year. These life results were supported by the mid-year introduction of new educator-focused portfolio of Horace Mann term and whole life products. In summary, I would have to say our sales performance was successful during the quarter, and given the environment, for the year.

You may recall that we reorganized the marketing function during the first quarter, to better support our exclusive agent model. It meant bringing in a number of experienced, highly talented individuals, and driving some long-term costs out of the organization. I believe these actions also contributed to our success in growing our agency force, and achieved some key sales metrics, especially in the fourth quarter. Finally, this is the first year since 2005 that we have more agents at the start of the year compared to prior year. So the increase in our agency force, combined with the continued migration of agents to a productive model, makes me confident that we will continue to see positive results in 2010.

Thank you, now back to Dwayne.

Thanks, Steve. And that concludes our prepared remarks. Simon, if you would please move to the question-and-answer session.

(Operator Instructions). Your first question comes from the line of Dean Evans with KBW. Your line is open.

First, congratulations on a good quarter.

Thanks.

My first question, I just wanted to circle back to the sinkhole losses. If I'm doing the math right, you did say I think 4 points on the property book; that gets about $1.8 million in the quarter. I guess I'm kind of looking and trying to think, is that a fair run rate to think about going forward, or what are you guys anticipating as far as -- how you said increased sinkhole losses that's baked into your guidance, is that about right? Which leads me to about $7 million annually?

Dean this is Tom Wilkinson, the 4 points that I mentioned in my narrative is the increase over prior year. So it's a $4 million -- it's a 4-point change Q4 quarter 2008 to Q4 2009.

Okay. So I guess, how high was the level in 2008? Or should we just sort of think about 2009, the last few quarters as a good run rate to use going forward?

Yes. I think that's what we are using going forward, the last couple of quarters from 2009 rolling into 2010.

Okay.

We had approximately $12 million in incurred losses in sinkhole for the full year. We are projecting in 2010 a slight -- an increase over that number going forward.

Okay, so slightly more even?

Yes, because the non-renewal actions won't really start to take effect until the latter part of 2010.

Okay.

The first non-renewal notices for the entire 9,600 in Florida just went out this week, and the earliest effective dates are around August 1st.

I guess moving on, sort of touching on -- you know, based on your guidance, obviously you're expecting pretty substantial growth in earnings; that would lead me to believe that your capital position should also grow with that. At what point do you give thought to some capital management actions, and I guess particularly share buy backs, given where the stock is trading, significantly below book value? It would seem to be a financially accretive thing to do, given the sub-70% multiple.

Obviously, Dean, that's attractive, and we think about it and talk about it, and we are not necessarily wedded to holding the levels of excess capital that we have today forever. But I guess I would just tell you as a fundamental point of view, we believe it's prudent at this point, given economic uncertainty, to maintain a cushion; and hopefully, as we move forward, we will becomes as confident about the economy and the financial markets as we are about Horace Mann, and then think about the reducing that capital cushion.

But I will tell you that in the meantime, I really do believe that what we are working on, both in terms of growing the topline and improving the margins, is far more powerful in terms of EPS and ROE improvement than the one-shot benefit of share repurchase programs. So we view that as being the primary way that we are going to drive both earnings growth and ROE improvement. And when we get a little more confident about the economy, and we were starting to get there but what happened of late hasn't been the most reassuring input for us to consider, but we will look at that. It's not something that we will take off the table forever.

But we do like having that shock absorber now, and we don't want to be in a position where something happens in the economy, and it would derail our ability to deliver on the more important things, which are the fundamental attributes of growing the business and growing it profitably.

Okay. With that sort of -- that in mind, I guess, thinking -- or looking back to past calls, you've highlighted a low-teens ROE target I guess over the long term; is that something you see as possible over the next few years?

I do, for sure. We've got two engines, two primary engines of earnings and ROE expansion this year and beyond. Those engines are both fueled by, very simplistically, volume and margin. So in the case of annuity, as you heard Brent talk about, and Pete and myself, we had significant sales growth in 2009 with commensurate increases in account values or assets under management, which will set the stage for further account value growth in 2010 and 2011. Then spreads, which were up 15 basis points in 2009, should be increasing to the high 190 to 200 zip code. It had been as low as 125, five or six years ago. So annuity was the biggest contributor in 2009, and it will be somewhat ahead of property & casualty in 2010, in terms of both volume and margin expansion.

Property & casualty on the other hand, and it will be a contributor to an improvement in EPS and ROE in 2010, with volume that we project, as I said, of premium growing by 3% to 4% and the combined ratio to the 97% to 99% range, but in 2011 -- and I don't want you to take this as guidance, but we believe it's directionally accurate, we see net premium written in the 5% to 6% range, with the combined ratio continuing to make progress down to the 93% to 95%.

So if we take what we see annuity doing over a two to three-year period of time, with volume and margin improvements, same with property & casualty, although a little bit of a lag, and look at capital, which hopefully over that period of time we see an improvement in the overall economy and financial markets, which gives us greater confidence, we think that by improving volume and margin -- and doing some capital margin, we haven't ruled that out -- that we can achieve those levels that we've discussed on past calls.

Great. Really helpful, thank you.

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

Good morning, thank you for taking my call. Would really just like to maybe follow-up and rehash what Dean had just asked, maybe ask it in a different way. If you're -- currently the Street consensus has flat to down earnings for Horace Mann from 2010 to 2011, a low-teens ROE would -- at this point on this book value would put you north of $2 in EPS, and if I understood your answer to Dean correctly, what you are saying is what the Street is underestimating is not your capital management, but the broader earnings power of your businesses over next few years; is that an accurate statement?

Jason, none of us here are of a mind to provide guidance for 2011, but i will tell you that we don't have plans that would take us backwards from what we intend to achieve in 2010. We would -- I would never have as an objective to achieve the Street consensus for 2011. But I would say that 2010 was a pop and a return back to where we are in -- were in 2009 or a little better, that's not where we are headed.

Okay. Having said that, and entirely understanding the need for a capital cushion and the need to support what looks to be very good growth prospects, do you take the risk -- I guess the Company, would the risk the Company is taking is that when economic conditions improve, and the comfort around the capital position improves, the stock price may in fact be substantially higher, which would make the buy back less -- a potential buy back less accretive?

Sure. I would agree with that. But if we look at what the drivers are of improving ROE and EPS, and you line them up, driving -- improving our margins and driving earnings growth is more critical than a share repurchase.

I would agree with you. Separate question on the Florida homeowners moratorium. Is there any stipulation that the replacement coverage has to be with a carrier with an equivalent or better rating?

No, there is not.

Okay.

The group of companies that we are talking and working with today, we've been placing business with them since late 2008, early 2009, and everything has been going pretty good from that perspective so far.

Thank you, I appreciate it.

Next question comes from the line of Bob Glasspiegel with Langen McAlenney. Your line is open.

Seems like we have to get in your head lou to get your economic compass to sort of handicap what capital management will start, so maybe instead of trying to do that I would ask you, do you have a bias towards, if all things were equal, buy backs versus dividends? It seems like a lot of the insurance industry hasn't gotten buy back down well, and I didn't know whether you migrated to thinking about dividends being a better or worse option than buy back?

Well, as you know, Bob, after reducing our dividend, cutting it in half at the end of 2008, we increased it not all the way in 2009, but we're going through a process right now with our Board of evaluating the trade-off between consistent, repeatable dividend increases over time versus share repurchase, and we will work through that, and that will -- whatever we end up will be reflected in what we do going forward.

But we do think there is some -- possibly some greater power in doing that, just because if I look back historically, not just Horace Mann but others, it just appears that the capital that went into share repurchase in the longer term really didn't do a whole lot of anything. But I'm not saying that we should -- obviously, that was in a different period of time, when the share repurchases were being done in multiples, positive multiples, of book value, as opposed to a fraction of book value.

Fair point. Are you nervous that you're growing property more than auto, after several quarters of sort of non-cat weather whacking you? Is that something you feel comfortable to continue to grow faster -- you mentioned Florida, obviously, being perhaps depressed prospectively in the property mix.

That growth you are seeing is -- and Tom can give you the exact details of it, I think you are seeing more the impact of rates than units. So we want to take those -- we've got to take those rates, and the market is letting us do that. Tom, you want to --

So far through the first quarter, we are able to -- we have been able to get all of our planned auto rates and property rates as well. But yes, the growth for the next couple of years will be driven more on the average premium side on homeowners than it will be in units.

We are -- as Tom mentioned, we are going to -- as we have that non-renewal program in Florida, we will have a significant coastal cat exposure reduction, which will take our take our -- take us down -- I mean, it will be a significant reduction in Florida, but it will bring the overall countrywide average down considerably as well.

Okay. Last question. On the sinkhole, is there a review of the reserves or external review or -- that may need to be done or you feel comfortable with the overall reserves, and don't need to take a look there?

Bob, Pete Heckman. We have am independent review every year, and we completed that, and as we've said in the past calls, we've generally over the last four or so years been towards the high end of the range of the independent actuary. They came in, obviously, again at the year end, looked at our reserves, and we remain in the high end of the range in total. So we are very comfortable with our reserve position.

They looked at sinkhole specifically, or is this sort of an aggregate top-down review?

We and they looked at every line and coverage, and sinkholes specifically as well.

Thank you, guys.

(Operator Instructions). Your next question comes from the line of Craig Rothman with Millennium Partners. Your line is open.

Hey, guys. Sorry if I missed this, did you give the RBC numbers for the life and P&C subs?

We haven't finalized statutory books yet, Craig, but we finished 2008 on the life RBC at about 500, and I think we were in the high 300s, almost 400 in P&C. It looks like we will be in the -- north of 500 in life, so an increase, could be in the 5 to 10 to maybe 15-point range, somewhere there, but certainly we expect it to be at least equal to the 500, and P&C we expect to be over 400. So increases in both, but again haven't finalized our numbers yet.

Okay, got you. Then the book value in the quarter was down little bit sequentially; was that interest rate impact, or was there any sort of ratings migration in there that you could talk about?

Yes, it was primarily the uptick in Treasuries at the very end of December. In fact, based on preliminary pricing, our unrealized gains are probably about where they were in September right now.

Okay.

But Treasury's coming down a bit.

Yes. Okay. In your guidance for 2010, is there any assumption on interest rates or investment yields?

Well, we are looking at generally putting new money too work in the life side, somewhere in the mid 5% range pretax.

In addition to that, managing to the spreads that we talked about.

Yes, exactly.

Is there any sort of assumption that interest rates go up in your guidance, or -- I know some companies are doing that, it might be a little dangerous.

No, we generally, at least in our base case, unless we really feel strongly one way or the other, assume a relatively flat interest rate environment, at least for the forward-looking year.

Okay, good. Then the auto frequency assumption for 2010, can you kind of elaborate on what your assumption is for the year there?

The assumption is for it not to continue the trend that happened in the fourth quarter of 2009; and for the full year, just a slight decrease in 2010 compared to 2009.

Slight decrease in 2010 versus 2009, okay.

Full year comparison.

Okay. And you mentioned the 10% increase in frequency; can you give us a better sense of how much of that was actually the weather, or non-cat weather or whatever, just so we can get comfortable that there weren't more issues there?

The majority of it was non-cat weather from Northeast and Mid-Atlantic. In addition to that, as I mentioned, we did have a spike in bodily injury frequency, and we hadn't had any kind of movement all year in BI frequency. We had seen some increases from others in the industry, and it finally caught up to us, perhaps, in the fourth quarter. For 2010, we are not projecting that spike that we had in the fourth quarter to continue, but it's mixed in overall with our overall assumption of being slightly down in frequency year-over-year.

Okay. Did you pin that down to any specific cause on that?

Not yet. We continue to look at it. It looks like it's across the board, Craig. It doesn't appear to be geographic, it doesn't appear to be a lot of the other things that we look at.

More fraud claims because of the environment?

That could be. That could be. We are encouraged by what happened in January. BI frequency came down to below prior year, below the quarter, and back within our expectation.

Okay. And then just thinking about this sinkhole issue in Florida, you started seeing it I think in the third quarter or so. Can we assume that the majority of the 12-month policies, that we'll really have our arms around the losses by the third -- or through the third quarter of 2010, is that safe to say that you can kind of account for by what -- you know, if your lapses in these policies are increasing the pricing on them?

Well the had seen the increase in sinkhole claims before the third quarter of 2009. The third quarter of 2009 is when we took a re-review of everything that we had seen, and tried to be sure that we had a good handle on everything, because it was increasing at quite a good rate. By the third quarter of next year, we will for sure have a handle on it. We will also be starting to non-renew part of it -- a good chunk of the 9,600 is in the sinkhole area, so they will be starting to non-renew. You are right, the extra 15% rate increase that we finally got approved is also going to help on the loss ratio side.

Okay.

I think we got a pretty good handle on it now. Unfortunately, it drove us to our decision to include that in our entire review of exposure management in the State of Florida; not only sinkholes, but we have coastal issues and some concentration issues that we are dealing with as well.

Okay. And are you guys successful in getting rate increases through still and -- whether it's auto or home?

We have been so far.

[Besides] regulatory.

Correct. We -- so far through the first quarter of 2010, we've gotten all our file rate changes approved and through.

Okay. Great. All right, guys, thanks a lot, good luck.

(Operator Instructions). There are no further questions at this time. Mr. Hallman, are there any closing remarks?

Thank you, Simon. We appreciate everyone participating on our call this morning. If you have any further questions, please feel free to give me a call. Have a good day.

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