Horace Mann Educators Corp (HMN) 2010 Q2 法說會逐字稿

Good morning. My name is Lynne, and I will be your conference operator today. At this time, I would like to welcome everyone to the second quarter 2010 earnings conference call. (Operator Instructions). Thank you. Mr. Dwayne Hallman, you may begin your conference.

Thank you and good morning, everyone, and welcome to our second-quarter 2010 earnings conference call. Yesterday, we released our earnings report, including financial statement, 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 from the second quarter in our prepared remarks. The following management members will make presentations today and, as usual, will be available for questions later in the conference call. Lou Lower, President and Chief Executive Officer, Pete Heckman, Executive Vice President and Chief Financial Officer, Tom Wilkinson, Executive Vice President of 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 its anticipated or expected results of operations for 2010 or a subsequent period. Our actual results may differ materially from those projected in these forward-looking statements. The forward-looking statements are made based on management's current expectations and belief as of the date and time of this call.

For a discussion of the risks and uncertainties that could affect actual results, please refer to the Company's public filings with the SEC, and in the earnings press release issued yesterday. We undertake no obligation to publicly update or revise such forward-looking statements to reflect actual results and changes 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 the end of August. Now, I will turn the call over to Lou Lower for his comments.

Thank you, Dwayne. Good morning and welcome, everyone. At yesterday's market close, Horace Mann reported net income for the second quarter of $0.56 per share as compared to $0.46 per share in last year's comparable quarter. Net income excluding realized investment gains was $0.43 a share, well above last year's $0.28 per share, and led by favorable comparisons in the auto line.

At the same time, thanks to continued improvement in the market value of our investment portfolio, plus solid contributions from operations, reported book value increased 55% year-over-year to just over $22 per share, which was also a 12% increase sequentially.

Book value per share, excluding unrealized gains and losses, increased 11% year-over-year. As you have no doubt anticipated for Horace Mann and for others, in fact, who are in similar lines of business, external forces created a fair amount of noise in the past quarter. However, despite another second quarter of significant catastrophes, coupled with adverse financial market impacts, the underlying key drivers of Horace Mann's profitability were both positive and encouraging to us, particularly in our lead lines of auto and annuity.

Profitability in our P&C segment is the tale of two very different cities, with Property remaining our number one challenge, while Auto is improving. The second quarter combined ratio for property included 33 points of catastrophes, which was comparable to last year's result. Excluding those catastrophes, property actually improved by 2 points, even while absorbing more in the way of sinkhole losses.

To address our margin issues in property, we're taking significant country-wide rate actions which are tracking ahead of the plans that we've described to you on prior calls. At the same time, we're successfully executing on the strategy that we laid out for you to reduce catastrophe and sinkhole exposure in Florida, and are also running ahead of our game plan there.

Given favorably underlying property results, and that would be ex-cat and ex-sinkhole, we are confident that being on the right track to restore the property line to acceptable levels of profitability, which will support achievement of our overall combined ratio targets.

Voluntary auto is not only a less complicated story, but a far more positive one, showing a 6 point improvement to a combined ratio below 90 for the quarter. Reported results did benefit from favorable prior-period reserve development, as it has for some time now, which was slightly more than last year's second quarter.

Our annuity segment was adversely impacted in the quarter by $4 million pre-tax of DAC unlocking attributable to financial market performance, principally the decline in equity markets. That said, all other elements of the annuity financial equation were very positive, with annuity pre-tax income ex-unlocking and change in GMDB reserve increasing substantially over prior years, thanks to a combination of solid growth in account values and widening spreads, which delivered very positive net interest margins, plus M&E income, up 34% and 32%, respectively. Meanwhile, the Life segment net income increased 9%, benefitting from investment income growth, which more than offset higher mortality costs.

So, all in all, putting aside the course of the financial markets, Annuity and Life segment results are strong, and living up to our expectations. On the agency front, we continue to increase the number of agents we have operating under our new, exclusive agency contract. They now represent roughly 50% of the agency force, and while our total agency count is slightly less than a year ago, we do expect modest growth over the balance of the year as we increase appointments of new agents while moderating terminations.

We continue to be pleased with the ramp-up of our new agents and the overall productivity levels of agents operating on our new model as compared to those who have yet to adopt it. While we view progress in our agency transformation as positive, we are operating in a tough economy with strong, competitive forces in a very low-growth P&C market, and, at the same time, declining consumer confidence is creating headwinds for the sale of financial products.

In addition to our insurance operations, we will also highlight in this call our positive trends in invested asset growth, strong investment income and continuing improvement in our unrealized gain position. We also remain very comfortable with all of our key capital ratios, which are more than supportive of our rating, providing sufficient shock absorbers to deal with financial market uncertainties.

So, all in all, considering that neither Mother Nature nor the markets treated us very well this past quarter, we do feel good about overall profitability results and underlying trends year-to-date, as well as progress being made to restore the property lines to acceptable margin levels.

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

Thanks, Lou, and good morning. Operating income of $0.43 per share in the quarter was significantly ahead of the prior year in spite of an even higher level of catastrophe this year, a significant adverse change in DAC unlocking and the GMDB reserve compared to 2Q '09, and an increase in Florida sinkhole claims.

More than offsetting those headwinds were the positive underlying loss trends in our Auto lines coupled with favorable current and prior-year reserve development in that line, continued strong growth in interest margins, along with a tax-contingency reserve release from our reserve business, and substantially better underlying loss experience in the property line.

Year-to-date, operating EPS of $0.91 per share was $0.28 better than the first half of last year. P&C earnings accounted for about $0.8 of that increase, with the balance being driven by our Annuity and Life segments, in spite of the weak financial market performance in the second quarter.

Tom and Brent will provide more detail behind the P&C and Annuity and Life results in just a moment. First, though, I'd like to elaborate a bit on our investment results, which have been, and should continue to be, a major contributor to our 2010 earnings growth, particularly in Annuity and Life.

Pre-tax net investment income grew by 13% in the quarter and 14% year-to-date compared to last year. This magnitude of increase was consistent with our expectations, as we've invested a sizeable portion of our excess short-term and cash balances over the last three quarters into our more traditional asset class mix, picking up a fair amount of incremental yield in the process.

That, coupled with the more rational competitive environment in the fixed annuity marketplace has enabled us to realize interest spreads in excess of 200 basis points year-to-date, a 30% increase from where we were through six months of last year. Of course, the growth and investment income has also benefitted life segment earnings.

In the second quarter, we realized net investment gains of $8 million, including less than $1 million of impairment writedowns, and $5 million of realized losses on security dispositions, $3 million of which was related to a risk reduction program we implemented in our commercial mortgage-backed security portfolio during the quarter.

Our CMBS holdings have performed extremely well, as evidenced by no impairment writedowns throughout the financial market crisis, and by the steady improvement in this portfolio's market value over the previous four quarters. Nonetheless, from a risk management standpoint, we wanted to reduce our overall exposure to the asset class and the potential future volatility in the commercial real estate market that could accompany a prolonged recovery or a double-dip recessionary scenario.

We accomplished that by disposing of $46 million [TAR] value, or approximately 14% of our total CMBS holdings, primarily A and BBB-rated securities from the more risky 2005 vintage year. This group of assets had clear value marks in the low 20s during the height of the financial crisis 12 to 18 months ago.

By taking advantage of the (inaudible) in recovery and market pricing, we were able to sell those securities at an average price of 93. Consequently, as you can see, on the last data exhibit accompanying our press release, the June 30th book value of CMBS holdings has been reduced to under $300 million, with the associated net unrealized loss declining to just $24 million.

Speaking of unrealized, we ended the quarter with a total net unrealized gain of $223 million across the entire portfolio, with that balance more than doubling over the last three months. While CMBS led the charge from a percentage-improvement standpoint and virtually all asset classes participated, residential mortgage-backed and municipal bond portfolios were also strong contributors to the overall increase during the quarter.

The nearly $400 million improvement in the value of our investment portfolio over the last twelve months has been the primary driver of Horace Mann's 55% increase in reported book value to over $22 per share at the end of the second quarter.

While the potential for continued volatility in the financial market certainly exists, we remain confident in the quality and resilience of our investment portfolio, which has certainly been validated over this recent period of extreme stress.

Meanwhile, our steady, underlying 9% to 11% annualized increase for each of the last seven quarters in book value per share excluding FAS 115, which is now closing in on $19 per share, speaks to our diverse but complimentary business operations, and the strength and consistency of their combined earnings power.

And now, to review the current results and trends in our P&C business, let me turn it over to Tom Wilkinson.

Thanks, Pete, and good morning. This morning, I will summarize the key components of our profitability and growth results for both the second quarter and the first half of 2010. Our total P&C combined ratio in the quarter was 99%, compared to 103.8% a year ago. Total pre-tax catastrophe costs were $16.2 million, the third-highest second-quarter cat loss in our history, compared to $15.1 million in 2009.

Favorable prior-year reserve re-estimates of $2.8 million were $700,000 more than last year. In addition, favorable reserve re-estimates of the auto current accident near first quarter of $1.5 million lowered this quarter's combined ratio by 1.1 points. So, if you exclude cats and the impact of current and prior-year reserve re-estimates, our underlying combined ratio for the second quarter was 90.5%, about 3 points lower than last year.

Our year-to-date total P&C combined ratio was 97.7% compared to 99.2% last year. The underlying year-to-date results excluding cats, reserve re-estimates and the impact of last year's client consolidation and marketing initiatives, which we have detailed on previous calls, was 92%, about three-tenths lower than last year.

Our auto combined ratio was 88.2% in the quarter, six points lower than last year. In the quarter, increased catastrophe losses as a percent of premium were six-tenths above prior year. The impact of prior-year reserve re-estimates was a favorable three-tenths compared to last year, and in addition, favorable re-estimates of the current accident year first quarter lowered this quarter's combined ratio by 1.6 points.

So, our underlying auto combined ratio, excluding cash and the impact of prior and current-year reserve re-estimates is 91.3%, about five points lower than 2009's second quarter. From year-to-date results, our Auto underlying combined ratio on this same basis was 93.9%, about a point and a half lower than last year, when also excluding the impact of the 2009 expense initiatives.

We continue experience increases in auto bodily injury losses, which are being offset by favorable experience in all other coverages and increases in the average premium per policy. All in, a pretty solid result so far in the Auto line, with a positive trend building in the second quarter.

Property continues to be our biggest challenge, with a combined ratio of 121.4% in the quarter, 2.4 points lower than the prior-year quarter. Over 33 points of the combined ratio are catastrophe losses. 14 different isolated catastrophe events impacting almost all of the country except for the far Western states resulted in almost $15 million of property cat losses.

This is a slight increase of $500,000 compared to a very active catastrophe quarter last year. Similarly, our non-catastrophe weather losses were also up nearly a point compared to last year. Our underlying property combined ratio, excluding cats and reserve re-estimates was 88%, about the same as last year.

For year-to-date property results, our underlying combined ratio, again, excluding cats, the impact of prior-year reserve re-estimates and the 2009 expense initiatives was 87.7%, almost 3 points above last year.

Current year-to-date sinkhole losses of $8 million, which is an increase of about $5 million over last year is contributing nearly 6 points to the combined ratio entry. Losses in both the first and second quarter of 2010 were consistent with our sinkhole losses in the last two quarters of 2009.

Offsetting that increase, underlying profit results, excluding the Florida sinkhole losses, continue to improve as a result of the profit initiatives outlined in previous calls, namely, claims, staffing and programs, property re-inspection, and increased rate action.

At the beginning of the year, we introduced our Florida Profitability and Exposure Management program, designed to significantly improve our loss experience, including sinkhole losses and to continue to reduce our coastal exposure. In Florida, we stopped writing additional new property business, and have begun the process to non-renew 9600 policies in order with unfavorable loss experience and hurricane exposure.

Our agencies had the ability to place new property business with other companies in Florida, and they are also working closely with our current customers affected by the non-renewal program to find coverage with these companies.

We began mailing non-renewal notices in February with August effective dates. We were expecting to see small policy reductions before August, and then consistent monthly reductions after that, aligning with the program effective date.

However, through the end of the second quarter, we are down approximately 1800 property policies in Florida. That's a reduction of more than 10%, compared to year-end 2009, with an 18% policy reduction in the high-loss areas of Hernando, Pasco and Hillsborough Counties.

We are ahead of schedule on this program, and are projecting that over 90% of these policies will be non-renewed before the 2011 hurricane season begins, with the program complete by mid-August 2011.

Now, turning to the topline, our premium growth trends remain favorable, driven by increases in average premium per policy. For the quarter, total P&C premium increased 2.6%, with voluntary auto up 1.1% and property 5% above the prior year. Year-to-date total P&C is up 2.1%, driven by auto increasing 0.8%, and property up 4.4%.

A strong auto retention ratio continues to support our topline growth, while we are seeing a six-tenth reduction in property retention compared to a year ago, mainly as a result of our Florida action. New business and enforced quality trends remain favorable for both auto and property.

Our targeted segments, educator, preferred underwriting tiers, cross-sold business, and business on automatic payment plans are all equal to or better than prior year. A percent of our in-force tri-line business, that is, P&C policy holders with at least three Horace Mann business lines, continues to increase sequentially, and is up almost a half a point compared to last year.

In summary, the major P&C headlines for the quarter and for the first half of 2010 are that we have improving profitability results in auto but continue to experience significant levels of weather losses and continuing sinkhole losses in Florida.

However, our property profitability initiatives are working, and we are seeing improvements in our underlying property profitability results. In addition, we are ahead of schedule on our Florida non-renewal program, which will reduce our exposure to future sinkhole and hurricane losses, and finally, we are on-pace to achieve a 10% property rate increase this year, a couple points higher than our original expectation.

Now, I would like to turn it over to Brent Hamann, to cover Annuity and Life results.

Thanks, Tom, and good morning, everyone. I'll spend the next few minutes going over the profitability and growth results for the Annuity and Life segments. As noted in our release, and by Lou, in his remarks, the major headlines for our Annuity and Life businesses in the quarter is continued under-- improvement in underlying earnings.

Starting with the annuity segment, we saw healthy increases in two key drivers of profits, account values and margins. Fixed-account values increased 8% and the associated net interest margin improved significantly, reflecting improvements in the Company's investment portfolio yields.

Net interest spread reached 202 basis points, an increase of 46 basis points compared to 2009's first half. Variable annuity account balances increased 18% over the past 12 months, with associated M&E fee income up over 30% for the same period. Combined total annuity and comp value increased 11% compared to a year ago.

Despite these positive prior-year comparisons, variable-annuity balances did experience a 6% sequential decline compared to the end of the first quarter 2010. As a result, market performance had a negative impact on both the valuation of deferred policy acquisition cost and the level of guaranteed minimum definite reserves for the quarter.

Specifically, deferred-policy acquisition cost resulted in $4 million of additional amortization, while guaranteed minimum death benefit reserves increased by $200,000.

Combining all of these factors, annuity pre-tax operating income decreased $1.3 million in the quarter compared to prior-year results, while still up over $8 million as compared to the first half.

Excluding the impact of increased tax amortization and CMDB reserve changes, annuity pre-tax earnings increased significantly, both for the quarter and the first half. Supporting those results is the continuing stability of our annuity liability. Annuity net funds loans, defined as deposits received, (inaudible), deaths and maturities were again positive in the second quarter, as they have been for the past 10 quarters.

Our total 12-month account value persistency of 94% is up slightly over the prior year. We also continue to have minimal equity-market guarantee exposure on our variable-annuity product line. Over 90% of our in-force account value has either a simple return-of-premium death benefit, or no death-benefit guarantee at all.

With the few hundred thousand dollar quarterly increase in our GAAP CMDB reserve balance I just referenced, our total balance now stands at $600,000. We do not offer any guarantees, and have no hedging or derivative program exposure. As for revenues, the uncertain economic environment, volatile markets and strong prior-year results created challenging comparisons for both our annuity sales and receipts in the quarter.

We had anticipated that the sales spike in 2009's first half, up 50% over 2008 results, would not be repeated, as it was largely driven by implementation of the new 403(B) regulations at the beginning of 2009. Deposit results in the current quarter were largely driven by changes in our single premium and rollover business, where new deposits declined 22% compared to the prior quarter.

While total annuity deposits received decreased 13% in the second quarter, they are in positive territory for the first half of the year, up a couple of percentage points. Now, turning to our Life segment, second-quarter pre-tax income increased 9% for the quarter and 18% for the first half, as compared to prior-year results.

Strong growth in investment income and lower expenses were somewhat offset by increased mortality cost in both periods. Life total premiums and contract deposits, which consist only of Horace Mann products, were down about 2% for the quarter and 1% for the first half as compared to prior years.

As we mentioned last quarter, we are strengthening our Horace Mann life insurance portfolio with a July launch of a new suite of products and associated support services. Our [Life Collect] suite of products allows educators to combine specific levels of whole life and term coverage in a single policy. The Life Collect suite also includes discounted rate for educators, a unique feature we launched successfully last year.

So, in closing, the second quarter of 2010 has again continued to demonstrate the strong improvement in underlying earnings power that we expected in both our annuity and life insurance businesses, and while the current economic environment creates challenges on the sales front, we are focusing our resources on gaining traction with the expansion of our life insurance portfolio, as well as our new annuity marketing programs for the back-to-school season.

And 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'll update you on a couple of fronts, the migration of agents to the exclusive-agent agreement, and then I'll address sales results. You may recall we've had agents working on the new model for some-- for some years now, and that we launched the exclusive-agent program about 18 months ago.

Today, we have 343 exclusive agencies, which account for about 50% of the agency force. We also have 130 employee agents who operate from an outside office with licensed producers. Together, these two segments, the agency-work and the agency-business model account for almost 70% of our agency force. This has grown from only 12% of the agency force at the beginning of 2007 when we were very early in the transformation of our model.

We also have another 93 agents working from outside offices who have not yet hired licensed staff. So, we continue to be in a good spot with another group of agents who are well-positioned to grow their business, and since we started hiring into the model 18 months ago, we've been able to attract talented individuals to Horace Mann with our exclusive agent agreement.

Overall, we've made great progress with transforming our agency force from agents predominantly working out of their home to the majority of our agents working in the agency business model. Now, let's take a look at staffing in the second quarter.

As I mentioned last quarter, we made some changes to our agent program to ensure an even greater alignment between our growth objectives and our agents' sales results during 2010. These changes impacted the turnover rate, and that continued in the second quarter. Overall, our total agency count, combined employee agents and exclusive agencies is flat, down two agents compared to first quarter of 2010 and compared to a year ago.

The total agency count decreased from the year-end 2009 count of 716 to 682 as of June 30th. The agents terminating during the quarter were predominantly agents who didn't operate on the agency business model, and, generally speaking, were low performers. We expect that the turnover rate in the second half of the year will be lower than what we experienced in the first half of the year.

In addition, we've been successful in recruiting new agency business owners, and are pleased with our most successful results yet, appointing 44 new exclusive agents during the second quarter. We are comfortable that our recruiting activity has remained strong, and expect the second half of the year showing agency growth for the balance of the year.

Now, let's take a look at sales results for the quarter, beginning with Property and Casualty. As I've said before, we are not immune to the effects of this economy, with its weak automobile and home sales. New business sales were also impacted by our decision to cease writing new homeowners business in the state of Florida.

Country-wide, total auto sales units decreased 5% in the quarter compared to prior year, and our true new units decreased 7% during the quarter. However, when we exclude the results from Florida, our true new (inaudible) unit sales were down 4%.

Turning to property, country-wide sales decreased 2% in the quarter compared to a year ago, again, excluding Florida, sales increased 2% for the same time period. As we have noted on previous calls, agents who operate in the agency-business model continue to perform at a higher production level than those operating outside of it, and agents hired directly as exclusive agents are achieving productivity levels that match our longer-term employee agents in the agency-business model on average by their six months, and exceeding the production of those agents by the end of their first year.

Looking at annuity and life sales, the large favorable spike we saw last year in flexible annuity sales was partly the result of changes in 403(B) regulations, so, as we anticipated, we have seen fewer flexible annuity sales during the quarter, heading down 42% compared to prior-year. The results were within our expectations based upon the unique circumstances that helped drive our sales last year.

Our total annuity sales during the quarter were down 23% compared to the year-ago (inaudible). For the six months, we are down 16% in total annuity sales. Our Horace Mann agents have produced single premium annuity sales above 2009 results for the first half of the year by 2%.

The single premium sales comprised of a 28% decrease in our third-party vendor products, and an increase in Horace Mann annuity sales of 10%. We are optimistic that the flexible and single-premium sales will increase in the back-to-school season during the third quarter.

On the life insurance side, our agency force increased their sales by 16% during the quarter. This reflected a 32% increase in our third-party vendor products, and relatively flat Horace Mann individual life insurance product sales during the quarter. For the six months, combined life sales are about 2%.

As Brent already mentioned, we are excited about the introduction of some annuity programs and the rollout of our new life insurance product. We are encouraged by the feedback from the agents that they expect these new products will lead to increases in sales this year.

Last quarter, I spoke to you about Client 360, the client and lead management tool we are in the process of introducing. Were in the process of introducing. It's now deployed and being utilized by our agency force. The feedback from the agents has been very positive as they see the benefit of the tool in helping them run their respective businesses.

In addition, we're creating a new look and feel for our website, horacemann.com. The new website will include some major improvements to our customer care center, allowing more functionality. We will also update the design to be far more customer-friendly. We anticipate going live with the first phase of the project in the fourth quarter, and will continue to make improvements in 2011.

To sum it up, we've made excellent projects transitioning agents into our agency-business model, and while the economy has impacted sales, our core group of agents who work in the agency business model continue to do well. In addition, we have been successful recruiting agents to start new agencies and our impressed with the results so far.

We are focused on continuing to increase the number of agents operating on the agency-business model because they are more stable and productive than our other agency segments. We expect that, combined with our ability to successfully recruit new agents in the exclusive-agent agreement with Horace Mann will accelerate sales as we move ahead. Thank you, and now back to Dwayne.

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

(Operator Instructions). Your first question comes from the line of Paul Sarran with Macquarie.

Hey, good morning. A couple of questions. We'll start with a question on the auto combined ratio. Even backing out prior-year and current-year developments, as you suggested, the combined ratio is still down about 5 points year-over-year. Is there anything kind of one-time or one-off that contributes to this improvement, or can we think about this as a sustainable improvement going forward?

There isn't any really one-time major adjustment that we might want to do to get the results on an apples-to-apples basis. If there were, we would have included them in the remarks. We have seen some consistent improvements in the (inaudible) book of business. We've talked in prior calls about VI losses, our VI losses are still trending a little high above prior-year and above our expectations. At this point in time, the other coverages are trending very well, offset that increase in the bodily injury.

I think we'll have an improved trend going forward. Historically, our combined ratios in the second half of the year are a little higher than the first half of the year, so we may see a level increase, but I think we'll be-- we'll continue to trend better than prior-year for the rest of the year.

Okay, and then, on P&C, can you update us on what you expect for overall written premium growth for, say, the back half of this year?

Yes, I think-- I don't think it's going to be as strong as the first half of the year. I don't have the exact numbers in front of me, but I think it's going to moderate down a little bit because of the policy-- the PIF declines that we've had.

Do you still see it up on a year-over-year basis?

I think it will be by the end of the year, yes. We still have strong average premiums for policy growth. We talked in prior calls, our rate plan this year was 6% on the auto side, and we are achieving that, we are on pace to achieve that through the end of the year, so we should still have some revenue growth because of that.

Because that will offset the PIF declines?

Yes.

Okay, and then one last one, and then I'll drop back. This is on the life side. For every dollar of sale, can you compare the profitability of Horace Mann selling a third-party vendor product versus the sale of a Horace Mann product?

Yes, Paul, this is Brent. On our third-party vendor situations, we retain some level of (inaudible), the marketing support that we obviously provide to our agents, but it is, obviously, a third-party product, so it would really be just that marketing profit that we're seeing, unlike a Horace Mann-issued product where obviously we're seeing traditional, like, possibility.

Okay, thank you.

The next question comes from the line of Bob Glasspiegel with Langen McAlenney.

Good morning. I was just wondering if you could give me your statutory earnings in your PC and Life companies, either year-to-date or in the quarter, if you have them?

Bob, I'm just trying to get to the page here.

I mean, while you're doing it, I calculate for your PC company, looking at the balance sheet, that your fixed investments at cost are up $55 million year-to-date, which is about a 14% increase doing your profitable underwriting, seems like it ought to be up a decent--

I guess, Bob, statutory results aren't final quite yet, but preliminary, the first half of 2010, June year-to-date, looks like P&C statutory net income was around $24 million.

$24 million year-to-date?

Yes.

And do you have Life?

Yes. Before capital gains, net income for the six months was $23 million.

Okay. (inaudible) out of the PC Life year-to-date?

I'm sorry?

Have there been any dividends, either out of the PC or Life subs?

Yes, we've taken $8 million out of Life and $6 million out of P&C, I believe.

I assume you want to get through hurricane season before you think about capital management, but remind me just sort of where your priorities are and just the likelihood of the timing to capital management plans being implemented this year?

Okay, let me try and tackle that, Bob, and I know it's a recurring conversation that you and I have had, but as I've told you in the past, we are absolutely not wedded to holding the excess levels of capital that we have today, but we have believed that it's been prudent, at least at this point, given economic uncertainty, to keep it where it is.

We are confident about Horace Mann, but we just want to be equally confident about the broad economy and financial markets, but all of that said, our board does periodically review with us capital management, which includes both share repurchase and dividend policy. You're absolutely right that we would think it would be premature to do anything prior to getting through the hurricane season, and possibly by the end of the hurricane season, we might also have greater clarity as to the economy and the financial markets, and I think it would be fair to say that both the management team and the Board do believe that today's market price, certainly compared to both measures of book value is very attractive.

And we do understand the arguments for repurchasing shares and/or increasing dividend policy, and we're having conversations as we move forward about all of that, but I would say that as we've indicated in the past, we think that in terms of improving earnings per share and return on equity, the two most powerful elements are improving margins in property/casualty and improving-- which are underway, and improving our margins in the annuity business, which is strongly taking hold, and we're delivering on that with the capital management piece being the frosting on the cake.

But we heard your message and the message of others, and we'll be having those conversations later in the year.

Thanks for the thoughtful answer. Last question, Steve, you teased us with a morsel that the exclusive agents are much more productive than the non-exclusive. Do you have-- what numbers are you looking at, anything you can share with us, or--

Yes, as we look at our exclusive agents compared to the employee agents, if I look at, like, true new auto is really one of our lead lines that we work with them. Our employee agents that are working in the model, they average in about their six months exactly where our brand-new agents are, and our employees that aren't in the model are about less than half of that.

So, every time we lose some of the agents that aren't in the model, on average, when we get to replace them with a new agent, it's somebody that, within six months, is twice their production, and they're about as productive as the agents that are in the agency-business model that are not exclusive agents.

Our exclusive agents are 40% to 50% more productive than our employee-agents that are in the model. So, every time we work through that migration, and it's a transformation, it's a transition of agents, a full agency force that was pretty low in that type of agency force three years ago into 70% of them now.

So, in our sales for-- I just want to make sure I get the number on that, 40% or 50% on sales, or premiums, or, what are we looking at?

That's sales. Sales. So, we-- I track them as units so if we have a-- I'm not taking into account the premium which we-- if we have an increase of average premium, which would go in, the unit sales.

Okay, gotcha. Thank you.

Your next question comes from the line of Dean Evans with KBW.

Yes, thanks, guys. I was wondering, first, if you could give a little bit more color on the Florida sinkhole issue? I guess, first off, how should we think about what your loss expectations are going forward, and maybe just a little bit more detail on some of the moves you're taking to counteract that as an issue?

Well, I think the high-level summary, Dean, as-- some of the comments that I made in my remarks about at the beginning of the year we stopped writing property Horace Mann new business, so that has worked to lower our exposure a bit in Florida. We have introduced our non-renewal program which-- we got it in as quick as we possibly could, but it doesn't really start taking in formal effect until August, given the six-month notice that we gave to our customers.

However, our agents have been working with our customers in Florida so this affected the folks that are going to lose coverage with us and are able to place some of them early with some of the other companies that we do business with in Florida.

So, in total, we're down 1800 policies in Florida, the majority of that being in this 9600 targeted non-renewal grouping. We feel-- we're running ahead of schedule on that program. The official start of the non-renewal program effective dates is in a couple weeks, it's in the second week of August.

So, once we get to that date, in addition to the policies we've already reduced, we're going to be dropping between 150 and 200 policies a week off of our books, and you recall that there's a big chunk of that that's in the three-county area that has the heavy sinkhole exposure for us.

In terms of how are the losses going? You know, we expected to start this year with losses consistent with the third and fourth quarter of last year, not necessarily with the losses for the full year on a full-year basis, and we have. We're looking for some moderation of those losses. For sure, next year, hopefully in the-- hopefully there will be some in the third and fourth quarter of this year as our exposure base starts to drop off more dramatically than it has already.

So, with that, the reduced exposure base, it is probably likely that you should see less than the $8 million year-to-date of losses in the second half?

You know, we're not really sure, Dean. That's kind of like what we're shooting for, but given-- there's still a lot of publicity down there about the issue. Our customers are getting non-renewal notices and we're doing a great job talking to them, but experts down there told us you might want to expect to get additional claim activity when these notices go out.

So, I think we're going to get some, but we're not really planning on a lot for the second half of the year. We're banking on more of that starting in 2011 and subsequent.

Okay, that's helpful.

If I could, Dean, just for the benefit of those of you who have published some reports on Horace Mann, there might be a little confusion about sinkholes, and I just want to make sure that everyone understands that they're not in our cat numbers. So, they would be in property ex-cats.

Yes, so we define catastrophes as per ISO's definition of industry catastrophes, and sinkholes is not a catastrophe to them, and therefore we don't consider our losses to be catastrophe losses in sinkholes.

Okay, that's helpful. Thank you. My second question, I guess, I was wondering-- I think, previously, you've made some commentary that you had expected PIF counts to maybe flatten to turn positive by the end of next year, but it does seem like we've had some higher declines of late. Any kind of update on that commentary? Do you still expect to be able to see some PIF growth in the next 18 months or so?

I really don't think we're going to see PIF growth in the next 18 months, 2010 or 2011. The economic impact on new business production on the P&C business has slowed that down based upon some prior estimates that we may have been using. The economy has really hurt add cars, new car sales are way down, so we're not seeing as many add cars to our auto policies.

The Florida non-renewal program, that's almost 10,000, that's going to be more than 10,000, given some of the new business programs that we're doing in Florida, so we're going to see growth-- we're going to see reduction in policies there.

Florida was a very strong auto state for us, and while they're still producing, and pretty well given the current conditions, it's not to the levels that they were used to able to produce.

Okay. That makes sense, and I guess my last one, if I could, and I apologize if I missed the numbers, but you could you kind of give us your refreshed RBC ratios, both by Life and P&C?

Yes, Dean, not quite final, but the Life RBC is preliminarily up to 550 at June 30th. P&C RBC is 459, so at the end of '09, P&C was 457 and now it's 459 six months later, and at the end of '09, Life was 540, and now it's 550.

Okay, great. Perfect. Thank you.

You bet.

There are no further questions at this time, so I would like to turn this conference back over to Mr. Hallman for any closing remarks.

Thank you, Lynne, and thanks, everyone, for participating in our call this morning. If you have any further questions, please feel free to contact us. Thank you, and have a good day.

This concludes today's conference. You may disconnect your lines at this time.