Horace Mann Educators Corp (HMN) 2010 Q3 法說會逐字稿

Good morning. My name is brandy an I will be your conference operator today. At this time I would like to welcome everyone to the Horace Mann's third quarter 2010 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. If you would like to ask a question during this time (Operator Instructions). Thank you, Mr. Todd Nelson you may begin your conference.

Thank you and good morning everyone and welcome to Horace Mann third quarter 2010 earnings conference call. Yesterday we released our earnings report including financial statements as well as supplement at business segment information. If you needs a copy of this press release it is available on the investors page of our website. This morning we will cover our results for the third quarter in our prepared remarks the following management members will make presence today an be available for questions later in the call, Pete Heckman President and Chief Executive Officer, Dwayne Hallman, Executive Vice President and Chief Financial Officer, Tom Wilkinson Executive Vice President property and casualty, Brent Hamann Senior Vice President of Annuity & Life and Steve Cardinal Executive Vice President marketing.

As a reminder the following discussion may contain forward-looking statements regarding Horace Mann and its anticipated or expected results of operations for 2010 or subsequent period. Our actual results may differ materially from those projected in theforward-looking statements. These forward-looking statements are made based on management's current expectations and please as ofthe date and time of this call. For discussion of the risk and uncertainties that could affect actual statements please refer to the Company's public filing with the SEC app 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 assumption or other factors that could affect these. Also, in our prepared remarks and responses to questions we may make fence to non-GAAP finance measures. Reconciliation of such non-GAAP financial measures are available on the investors page of our website. Finally, this call is being recorded and Internet replay will be available on our website until November 26, 2010. Now I will turn the call over to Pete Heckman for his comments.

Thanks, Todd. Good morning everyone and being to our call. Before begin willing my commentary on the quarter I wanted to reaffirm that not withstanding the change we've had at the top the same Horace Mann senior management team and same core strategy that we've had for some now continue to be in place.

Dwayne Hallman who has been with the company as Senior Vice President finance for seven years has moved into CFO position and we congrats him on that well deserved promotion. Todd Nelson who you just heard from joined the Company earlier this year Vice President Finance reporting to Dwayne. Prior to Horace Mann Todd spent three years in investment banking at Goldman Sachs in their financial institution group. Todd is responsible for Investor Relations and will be a regular participant on our calls going forward. I know many of you have already had a chance to speak with him and will join me in welcoming Todd to the Horace Mann familiar team. Third quarter net income of $0.49 per share and operating income which excludes net realized investment gains of $0.30 per share. Results were a penny better than a prior year. In addition we saw continued improvement in the market value of our investment portfolio which drove reported book value to over $24 per share. A growth of 11% sequentially and 33% year-over-year. And book value per share excluding FAS 115 increased 11% compared to a year ago.

Dwayne will be commenting further on our trends an investment asset growth an investment income, the strength of our investment portfolio and continuing improvement in our unrealized gain position. We remain very comfortable with all of our key capital ratios which are more than supportive of our current ratings and we continue to believe that having some capital cushion is prudent given the persistent uncertainty about the pace an pattern of economic recovery much in terms of capital management as we have indicated on past earnings calls we've had ongoing dialogue with our board over the last several months regarding both the amount and best uses of our excess capital. We plan to continue those discussions at our December meeting which has traditionally been the time when we have announced dividend and other capital management decisions. Now with regard to insurance operations profitability in our PNC segment continues to be a tale of two very different cities with property remaining our number one challenge while auto continues to improve. Invites of a benign hurricane season we recorded nearly $16 million in property losses in the third quarter substantially greater than prior year. In addition, the impact of non-cat weather accounted for nearly eight point he was of the quarter's property combined ratio variance to prior year and Florida sink hole losses increased some what sequentially as well all of which a made this one of the worst quarters for property profitable hurricanes in several years.

We continue to aggressively address this situation with both pricing and underwriting actions along with our Florida nonrenewable program. All of which are ahead of schedule. And we remain confident in our ability to restore the property line to acceptable levels of profitability in the latter part of 2011 with the completion of our Florida nonrenewable program in August and with our rate increases more fully reflected in earned premiums. On a positive note in PNC favorable prior year comparison in the auto combined ratio or continuing. In the current calendar quarter the ratio is more than six points better than prior year while the accidents year exclusive cap combined ratio improved by about 3 points for both the yet and year-to-date. In facts our margin improvement in auto is running a bit head our contamination as we have been rate increases in this line as well. We've been out in front competition in a number of states and have begun to see a some what greater than expected impact on retention and sales activity in states where we have taken the most.

Although we expect those trends to moderate as industry rate activity increase, we will be looking to tech our auto pricing action as we move into 2011 in order to ensure an appropriate growth profit balance while continuing to make progress toward our long term combined ratio target.

Meanwhile as I have throughout the year our a new and live segments continue to perform extremely well and consistent with our expectations during the third quarter posting double-digit earns increases prior year. Annuity net income benefited back from unlocking in the quarter as the favorable impact of financial market performance more than offset the negative unlocking related to realized gains. All other elements of the financial equation were also very positive with annuity pre tax unlocking the change in GMBB reserves are increasing more than 30% over prior year thanks to a combination of solid growth in account values an increased spreads which had favorable impacts on interest margins and M and E fee and income. In terms of revenue growth annuity deposits increased 18% in the quarter compared to prior year. Educator confidence everyone Horace Mann and our market position continues to work in our favor as we enjoyed a record quarter in annuity sales driven by single premium and rollover deposits.

Funds flows hit a record level as well persistence owe of over 94% continue to be very strong and we'll be launching a drinks Al strategic initiatives to maintain and increase the positive mow we have generates I in our annuity business over the last 12 to 18 months in order to multi line sales platform and expand our presence in the 403 B market. Steve will talk a little more about those initiatives in just a moment. Meanwhile live segment increased nearly 25% in the third quarter benefiting from growth in investment income and lower mortality. So with combined a new he a and life segment earns up 20% in the quarter and over 38% year-to-date our financial services businesses are strong and are living up to our high expectations. In terms of the agencies board the increased number of agencies and agents by 19 in the third quarter to a total of 701. We expect that growth to continue in the fourth quarter which should enable us to exceed the year end 2009 agency count. In addition to growth in number of agencies the transformation of the agency board is also continuing.

At September 30th nearly knee fourths of our agents were operating on our agency business model with outside officers an 55% of our 701 agencies were owned by agents operating under our Exclusive Agent contract. And while we're operating in a tough economy with strong competitive forces that are creating challenges for all of our agents we continue to be pleased with the production ramp up of our new agents an the overall productivity levels of agents operating under the new model as compared to those who have yet to adopt it, and finally to wrap things up as you saw in the press release we are reducing our full year 2010 guidance for net income excluding net unrealized investment gains and losses to between $1.55 and $1.65 per share primarily reflecting three items. First, the adverse loss experienced in the property line, a combination of caps, non-cat weather and sink hole losses. Second, the previously disclosed software development costs related to our property administration system and, third, the previously disclosed fourth quarter charge related to the acceleration of CBO retirement costs. The latter two are one time items, while the property profitability issue as I described earlier is in the process of being addressed on multiple fronts with acceptable margins expected to be achieved within the next several quarters.

That expectation coupled with the positive results being delivered across the rest of our business gives us confidence regarding our abilities to continue to increase shareholder value in 2011 and beyond. And with that let me turn it over to Dwayne for some further elaboration.

Thank you, Pete, and good morning, everyone. The third quarter was a positive one for Horace Mann in spite of the under favorable impact of catastrophe weather off from the current quarter as well as adverse developments from the first half of the year. An increase in Florida sink hole claims and a charge related to our property systems software development. Offsetting positive underlying long in our other lines coupled with favorable prior year reserve development continue strong spread margin an favorable impact unlocking. Operating income of $0.30 per share for the quarter was consistent with prior year despite the items just mentioned and was in total generally consistent with our expectations but reflected the short fault relative to analyst consensus. We reported a significant increase in book value per share as of the end of the quarter primarily driven by our investment portfolio which performed very well during the quarter. With continuing improvement in the financial markets as well as the unrealized gain was approximately $361 million at the end of September pushing book value to $24.69 dollars per share, up 33% over the level of a year ago and the 11% over prior quarter end. The book value per share excluding net unrealized gain is $19.19, an increase of 11% over prior year. Investment results we produced solid you would for during the quarter. We realized investment gains of approximately $12.1 million pretax in the quarter, net of just over $4 million in impairment in the apartment write downs related to commercial mortgage backed security and we no longer have the intent to hold and in fact sold over this month. Our CBS holdings continue to perform extremely well with steady improvement in the portfolio's market value while the market continues to offer both opportunities and liquidity to reduce overall exposure.

As mentioned during our last quarterly call we implement aide risk reduction program related to our during the second quarter. Primarily focusing on traditional holdings and just over $54 million of par value on the program. Social security depressed levels during the height of the financial crisis but being patient during the recovery period has provided the opportunity to dispose of the securities level that we believe represents more than adequate risk adjustment exit price. As the end of September our traditional holdings represents just 33% in total holding with an associated net unrealized loss of $29 million. While the remaining amount (inaudible) portfolio is primarily focused in military, project loans and unrealized gain of nearly $18 million. As mentioned earlier we ended the quarter with a total net unrealized gain of $361 million across the entire portfolio with the balance of 62% last quarters. All assets prices that participated in the rail Lee is the chapping has been primarily driven by corporate, municipal, and US government bonds but it should be noted that all asset classes with the exception of CBS are in a net unrealized gain position as of the end of the quarter.

In fact, the growth unrealized losses in the total portfolio excluding the CBS is what's less than $15 million, quite a turnaround. Pretax net investment income was up over 9% in the quarter and 12% year-to-date compared to last year and it's consistent with our expectation of both by total and by segment with annuity and life business segments being the primary beneficiary. The increase has been driven by our efforts to increase excess cash and short term balances that built up during the financial crisis an efforts that was initiated in the fourth quarter of 2009. Although going forward the quarter-over-quarter growth percentages are expected to decrease due to more comparable cash and short term balances and the low interest rate environment, we expect to achieve investment income growth rate in the 10% range for the full year 2010. Looking forward to 2011 and 2012, we recognize that a continued low interest rate environment could pressure that investment income and as you would expect we've been modeling a variety of interest rate scenarios in order to quantify any possible impact on future earnings particularly with regard to in our annuity line.

The recent scenario that we looked assumes the reinvestment rate of over the next two years of approximately 4.5% which is more than 150 basis points below the portfolio deal and less than our current reinvestment rate. Under this scenario the growth earnings-per-share impact in 2011 and 2012 will be approximately $0.07 and $0.14 per share respectively. Before any reduction in annuity crediting rates on in forcemeat assuming reduction in credit rates the impact in 2011 can be reduced to a penny per share while the impact of 2012 could be cut in half to about $0.07 per share obviously if the low rate two years a more significant earnings impact would develop but absent that the impact on our annuity margins as you can see would be very manage ability. Turning to operations as I mentioned at the gaining of my remarks operating earnings for quarter contained some fairly significant items primarily impacting PNC results. Our auto line is popping better than our expectations with the year-to-date loss ratio over two below prior year excluding tax fee in prior Ye reserve development. However, the property line continues to be impacted by high level of catastrophe an Monica task fee weather and a significant amount of sink hole losses in the quarter. Under required to the losses we recorded a total of $17.5 million dollars in the quarter consisting of just under $10 million of losses for the current active quarter and $7.5 primarily related to second quarter events mostly occurring in the month June.

This was an unusual occurrence for us but in this states the developments of and dollars significantly exceeded our historical pattern and was unprecedented in our book of business. Benefiting current year we saw significant improvement in our prior development trend. The reserve development is $7.3 million for the quarter benefited the both auto and property but was primarily concentrated in our auto liability line, an area that was developing quite favorably in the first two quite and continues in the third quarter. Sink hole losses impacted the third quarter by $6.9 million, $6 million for the current quarter and $1.5 million adverse development from the first and second quarters partial' offset by $600,000 of favorable develop. While the number of reported sink hole claims continues to above our initial expectations it is not totally unexpected given our exposure reduction activity under way in the state of Florida. Although the level of reported losses spiked knit third quarter it appears that the number of reported sink hole claims has leveled off during the last two quarters but until we see evidence of a declining trend we would anticipate an amount similar to the third quarter of $6 million being incurred in the fourth quarter.

The PNC reported pretax charge of $2.2 million related to write-offs, related to the upgrade of the property insurance administration system. Annuity and live business segments continue to perform above prior years generating double-digit earning combination of higher interest margins, growth in account values and related and improved mortality. As we anticipated our financial services business segment have been a real bright spot for us in 2010 and demonstrate the benefits of diversification and our multi line business model.

Brent will elaborate on annuity and life results in just a moment. Touching to the subject of earnings guidance as noted in the press release we have update the and narrowed the range of our full year 2010 operating income guidance to $1.55 to $1.65 per share. Primarily reflecting the higher level of property catastrophe and sink hole losses and also incorporating in approximately $0.07 per share of one time charges. The revised range starts year-to-date results and we anticipate a normal fourth quarter in total the property results remaining under pressure from sink holes. Continue the strong performance from annuity and life of. Anticipate the $0.42 per share fourth quarter which is consistent with our historical seasonal earnings pattern that a normal little of weather losses recognize the increased leg of sink hole activity and $0.03 per share charge is related to the retirement of our former CEO. And finally as Steve mentioned Todd Nelson is now leading our Investor Relations activities. Please feel free to reach out to Todd with any questions you may have in the future. His contact information is included in the press release issued yesterday and now to review the results in terms of our PNC business let me turn it over to Tom Wilkinson.

Thank you, Dwayne and good morning. This morning I will talk about our PN truest an gross results for the first and for the first mean of 2010. Our profit results in the quarter were mixed. We posted solid auto results that were better than last year yet we continued to struggle as did others in our industry with property profitable, with increases in catastrophe costs, non-cat weather losses and Florida sink hole losses. Addition ally our property expense ratio increase as the result of a one time write-off of software costs related to the development of a new policy administration system. Our auto combined ratio in the quarter was 91.5%, 6.5 points better than the same period last year. In the quarter increased cat losses as a percent of premium were four tens more than last an improvement in the reserve was almost four points better in the third quarter of 2009. So the underlying auto combined ratio excluding cats and the impact of prior yes receive estimates is 95.4%, about 3 points lower than 2009 third quarter. On a year-to-date basis auto results are similar to the quarterly results. We had a reported combined ratio of 91.6 nearly a 5 point improvement this year. The favorable impact of prior year reserve re-estimates contributed 1.4 points of improvement while the year-to-date impact of catastrophes was comparable between the years.

The underlying current accidents year combined ratio again excluding cat and the impact from prior years is 94.3%, 3.5 better than last year through nine months. For both the quarter and year-to-date auto loss trends are running slightly better than our expectations with average premium per policy results in line with our expectations. Now to summarize our property results. We posted a 138% property combined ratio in the quarter, up about 22 points compared to prior year. Even without a hurricane catastrophe costs of $16 million or $5 million or 10 points of premium above last year. The number of cat events and property losses in the third quarter were comparable prior year. As Dwayne explained we had a large number of late reported claims primarily from second quarter cat events that were totaling almost $6 million in additional property cat losses. Now on cat weather losses spike in the quarter with an increase in the frequency of wind and water losses mainly in the Midwest and Southeast causing about an eight point increased in combined ratio. Also in the quarter we continue to experience increase in sink hole losses compared to both prior year and our expectations. Incurred losses related to the current accidents quarter were $6 million based upon recent experience we also increased first and second quarter losses to 4 and $5.5 million respectively an aggregate increase of $1.5 million. Additionally we reduced estimated sink hole losses for the prior years by $600,000. As you know from prior calls, we are in the process of lowering our overall policy count in Florida by 9600 which should eliminate the majority of our exposure to sink hole losses in the state.

Notice to our customer started in February for those with August effective dates. Our agents have been proactively talking to our customers and working with them to look for over coverage options. In Florida we are seeing an increase inattention by media, regulators an other companies to the ever growing sink hole issue. Citizens insurance company and some of the Florida property domestic are reporting large amounts of sink hole losses that are threatening their profitability and solvency. Citizens recently reported $97 million of sink hole losses last year, five times the amount of premium they collected through the coverage. I believe that with all the sinkhole information available in the market and aggressive advertising by lawyers an public adjusters it is increasing the number of sink hole claims for the entire property insurance market in Florida. Getting back to our program we are ahead of schedule with about 3200 or one third of the policies having already none through October. We are scheduled to complete the entire program by mid August of 2011 and will have reduced 90% percent of the policies before the start of the next hurricane season.

Finally with regard to property profitability in the quarter our property expense ratio is up almost 5 points all due to a one time accounting write-off of about $2.2 million. This represents the initial investment in the software development costs for the property front end of our auto and property modernization program which is a multi-year project replacing our entire PNC administration system. After extensive testing and review we have determined that it is not the best solution for our property line. All of our implementation efforts are now focused on completing the implementation of auto front end and rating which should be complete next year. Our new property solution will be in corporate the into the new billing and administration system phase of this project.

Our year-to-date property combined ratio of 120%, 9 points above prior year is driven by the same issues discussed for the quarter. At a high level cat and non-cat weather drive 7 the increase, sink holes about 5 points and the expense issue 2 points on a year to date basis. In addition, none weather related loss is and prior year reserve estimates made favorable contributions to these bearing's. Looking forward we expect cat and other weather to return to normal levels based upon recent experience we will be raising our definition of normal by increasing the expected cat and weather impact in our price plan. As detailed we have an aggressive re-inspection program under way and it will continue into 2011. We also have increased our property rate actions in 2010. We will have implemented 37 rate increases this year with the country wide average about 9.5% compared to an original expectation of 8%.

We will be earning the impact of the inspections and the rates over the next couple years. Also we fully expect that sink hole losses will slowdown next year as our current run rate of Florida nonrenewable is about 100 to 150 policies per weak an as I said earlier we should finish by mid August 2011. The Florida reduction along with other state specific coastal specific management programs should reduce the percentage of our property policies in coastal counties to 7.5% by the end of next year.

Now turning to top line results. Total PNC written premium in the quarter was about even with last with auto down 28% and property up 1%. Year-to-date total PNC is up 1.3% with auto about even an property 3% above prior year. Both lines driven by increases in average premium per policy. Quality measures for both our new business and total in force book remain favorable for both auto and property, our targeted segment of educator sold business and customers on automatic payment plans are trending well. Overall policy holder retention is down in the quarter. Auto highly continuing at a high level declined to two Tenths and property with a continued impact of the Florida is down 1.5 compared to a year ago. Policy and force counts are below prior year leaves for both lines of business. The reductions are difficult bin declines you in new business over the last few years improvement in the band paid weak economy and increased competition. Also in the mix are property exposure management program limiting new business increasing re-inspection activity none renewals in our Florida program. In addition, we are increasing rates at a higher clip than the last few years to address profitable trends. In summary the major PNC head lines for the quarter into the first nine non-cat weather, cat and Florida sink holes continue to pressure property profitability. We have Amish at this in place to address these property issue action. The results should improve as we rate increases and inspections and as we reduce our expose to sink hole and hurricane losses. Finally, with the improvement in the first on our auto profitable results we feel comfortable that in 2011 we will met overall auto rates in 2010and we are in a position to fine tune our price to go better support growth while maintaining margins. We will be working with marketing in support of our agency business not he will to target profitable PNC growth opportunities. Now I would like to turn it over to Brent Hamann to cover results.

Thanks Tom and good morning everyone. Going over the profitable and growth results for the annuities and life segments. As noted by Pete in results for the re command consistent with our second quarter the major head line for both our annuity and lie I have businesses in the quarter is continued improvement in the P in underlying earnings. Starting with the annuity segment we again saw healthy increase in two key metrics account values and margins. Fixed account values increased 9% compared to a year ago an the associated net interest margin improved significantly reflecting improvements in the company's investment portfolio yields. Net interest spreads were 198 basis points, an increase of 38 basis points compared to the first nine months of 2009. Variable account balances increased 10% over the past 12 months with associated M and E income up over 30% year-to-date. Two additional factors also driving support our annuity results. First is the continuing stability of our annuity. Annuity net funds were again positive in the third quarter as they have been for the past 11 quarters. Our total 12 month account value quiescence of 94% is up slightly over prior year. Secondly, we maintain a very conservative product risk profile in particular we have minimal equity right market exposure on our variable annuity product line. Over 90 percent of our import account value have either a simple return of premium benefit or no death benefit at all. We do not offer other guarantees and have no hedging or derivative program exposure.

Improvement in the of proved market performance also had a positive impact on both the Val investor relations of deferred policy acquisition cost an the allele of guaranteed minimum death benefit reserves for the quarter. So seeing all of those factors a new knee pretax operating income increased $1.7 million in the quarter and is up over $9.8 million for the first nine months as compared to the same prior year period. As for new business the uncertain economic environment continues to impact our flexible premium sales. However, single premium sales achieved record levels for the company. Sales annuity products in the current quarter were largely driven by significant increases in single premium and rollover business where new de poise positive its increased 33% compared to a strong prior year quarter. Flexible premium sales increased 8% during that same time period. However, total sales products increased 28% in the quarter and are up 2% for the first nine months as compared to 2009. Turning now to our light segment pretax income increased 29% for the quarter and 22% for the first nine months as compared to prior year results. These earnings reflect strong growth in investment income for both periods. For the quarter the current period also reflected lower incurred claims.

Life premium an contract deposits which consistent of only Horace Mann products were down about 1% for the quarter and for the tries nine as paid to the prior year. Our consistently strong life persistence owe increase slightly in the quarter to 95%. As we launched a new Keith he have Horace Mann live products support services in July. Our light select series of products allow educators specific levels of whole live and term coverage in a single policy. In addition produced last year.

While we have received a presidents response from our agencies we will need to continue to build our Horace Mann life insurance product line and associated training and support services in order to show consistent growth on life sales. So in closing the third quarter continued a strong improvement in underlying earns power that we expect end both our a few fee and life insurance businesses. While the current economic environment is creating some challenges on the sales front we are gaining solid annuity profile and the expansion of our life insurance product line. In addition, as Steve referenced earlier and as Steve will comment in results for the remarks launching new strategic initiatives to more full any develop our payroll slots and better position Horace Mann as a powerful advisor sore for our educator retirements an protection needs. With that let me turn it over to Steve for his comments on distribution and sales.

Thanks, Brent and good morning. This morning I'll focus my comments on agent staffing and sales results. We introduced under a agency business model a few years ago because agents working in the model were more productive than agents working from their home. The process evolved and we create and Exclusive Agent agreement in January of 2009. Since then we have enjoyed success in migrating and recruiting agents into the Exclusive Agent model. By quarter end we had 387 Exclusive Agencies which account for about 55% of our agency force. Almost half of those happenings migrated from an employee relationship with the other half coming onboard as new appointments.

In addition to that group we have 128 Employee Agents operating in the model with an outside office and license producers. Together these two segments all who work for the agency business model account for nearly 75% of our agency force. And here's how that looks in our presents staffing numbers. As I mentioned last quarter, we noted see queens decline during first two quarters the year after making changes to our agent program. We made the changes to ensure alignment between our growth objectives an the agent sales results during 2010. In the end these changes impacted our turnover rate but as I said last quarters we expected the turnover rate to decrease during the second half of the year and in fact we did see turnover decrease in the quarter and we reached a new appointment high of 51 new exclusive close you have agency agreements effective during the third quarter.

Overall our total agency account Employee Agents and exposure close I have agencies increased in the quarter up 19 to 701 compared to the second quarter and up 7 compared to September 30th, 2009. However, we remain below the 2009 year end counts of 716. We are comment with the strong of our recruiting actual results extent expect a strong fourth quarter resulting in another increase to the agent count. Now let's take a look at sales results for the quarter beginning with property and casualty. As I said before, our educator customer base is not immune to the head with this economy with it's weak automobile and home sales and the effects of taking rate actions on both property and auto. Additionally, new business sales continue to be improvement in the poked by our decision to squeeze and part ever other coastal regions. With that said total auto sales units decreased 8% in the quarter compared to prior year and our true new decreased 10% during the quarter and it's a similar story with the property. Sales units decreased 40% in the quarter compared to a year ago. On a positive note annuity sales as we expected saw some positive sales trends during the quarter. In the critical back to school season we recorded record levels in the third quarter. Up 32% compared to the third quarter of 2009.

That means year-to-date through September we are up 2% in total annuity sales and remember these increases come on top of an exceptionally strong first nine months of 2009 as expected flexible annuity sales continue to trail 2009 volume though we hit unusually strong first half benefiting from the change in IRS 403 B regulations that were effective in January 2009. However, single premium and retirement rollover sales more than made up the difference registering at 38% increase during the quarter. We believe this is evident that educators have trust in our agents an the Horace Mann brands and make critical decisions about their retirement. As a result we continue to be excited about the growth prospects in our annuity business. On a life insurance side sales decreased by 24% during the quarter. This reflected a 32% decrease in third-party vendor products and 10% decrease on Horace Mann individual life product sales during the quarter. For the nine months the combined life sales were down 9% which consistent with industry trends over the past few years as reported by -- we do have two projects under way that will positively impact our brands and our business. During the fourth quarter we launch our newly refreshed teacher censored website featuring an updated designed and improved functionality for our users. Simply put our site will be far more customer friendly an this is just the starts as we will continue to make improvements through 2011. And as you will recall when we started the business model back in 2006 we said it would be a multi-year effort requiring a significant investment of resources. We have less than 15% of the happenings working in the model at that time. Well, now that we have almost three quarters of our agents working in the mode he will we are in a position to take the next step. We are launching a strategic initiative that will further support Horace Mann Exclusive Agencies in growing their businesses, particularly in the retirement planning and 403 B market.

We will be looking to leverage the you meek programs of some of our best agencies out lied today and compliment them with additional innovative marketing approach he is. At the same time we will be working on strengthening our relationships with key gate keepers in the school. Improvement in the excited at the prospect evidence this two effort and will be cable to share more details with you on our next call. To sum it up we continue to make great progress in transitioning our agency force with a number of the agencies increasing do you remember the quarter an with consider continued agency growths. We continue to magazine our sales through challenging economic environments and while this environment has had a negative impact on PNN sales aura new tea sales reached near record levels during the quarter. Thank you and now back to Todd.

Thank you, Steve. An that concludes our prepared remarks. Brandy, please move to the question-and-answer session.

Thank you. (Operator Instructions). Yours first question is from Bob Glasspiegel of Langen McAlenney.

Good morning. Quick question. Your -- I think your outlook was pore a 93 to 95 ratio yes by 2012. Does the sink hole developments this quarter cause you to either revise the timing of getting there or the confidence that you will get there?

No. Bob, no. We think we're going to be out of the sink hole loss exposure early -- 2011 so we're on pace for those target combines by 2012 still.

I thought you might have said on a call that you could get there by late 2011. You know, that this was a chance that you could get there stunner. Has that been changed at all?

No. I think I was talking shall probably -- I was probably more talking about on an annual basis.

Right.

You know, when -- we're out of the sink hole exposure time period in the second half of 2011 it could still happen.

Okay.

But it won't be for the full year 2011.

Okay. Pete, I bet you were waiting for this one. What are the factors on going into the December board meeting that would push in favor or against share repurchase?

Well be Bob, you know, I think certainly where the stock price is relative to book value is a key consideration. Also, you know, the board has continued to weigh the value -- relative values of a consistent steady increasing dividend versus kind of the one time hit that a took repurchase program can generate and so all those factors are certainly in play. In addition, you know, we continue to look at rate agency changes and their capital requirements look at other investor opportunities that we have at the Company including some. Initiatives that we mentioned around the marketing program in our 403 B market as well as some systems development opportunities. So all of those both demands on capital internally as well as external environment will factor in, but we've been talking to the board as I said over the last couple of board meetings about both dividends and -- share repurchase and certainly both are on the table.

Your next question comes from Paul Sarran of Macquarie.

Good morning.

Morning.

Just I guess to start on the annuities. What -- what's the crediting rate that you're offering on new fixed annuities and that is has that come down with lower interest rates an then have you lowered your tread target or expectations for new business at all?

Paul, this sub rents. Our base credit I guess rate on our new business coming in the door is at 2% rights right now. Now there are variations on this depends some of them have bonus features but the base crediting rate is at 2%. That has come down really in conjunction with what's going on in the market. Infants we have taken two pretty significant moves recently but as far as our spread targets no they haven't changed and over looking that in terms ever looking into the future with what's going on with interest rates but no we have not reduced our spreads targets.

Okay. So looking at your interest spread which declined a little bit sequentially and then at the same time you had kind of record fixed Amy tea sales. Those are -- we shouldn't necessarily see a connection between the two? One leading to another higher fix in the sales at lower margins?

No. Those spread numbers or going to obvious reinvestment rate move around from quarter to quarter, but no they aren't tied to what's going on. We continue to be confident that with our spread targets.

Okay. An then a question on the -- on the legacy annuity block. Can you share how much is held against that block an then what the lapse experience has been as these contracts come out a-sudden render or guarantee periods and how that paid to your debt model assumptions?

Yes. Again, that's a legacy block, Paul, so it's closed and it has been close IS for some time so we're looking to backing up but my questions is it's very small in terms of being held on that block. From a surrender charge standpoint we do have surrender charge protection on -- in excess of 60% of that lock. It's kind of got a unique if you he fee fur re ups with each margins sure tea either five or ten years an then there is a 30day window at which time the sure render charge which is a 5% level charge re ups. Sort of really probably the most important at that time particular regarding that block is it is a I net obviously being very low today we are seeing some in knows but they are more than offset by out flows. In facts we're in a $28 million year-to-date net out know position on that block. And we would expect to see that continue because most of the clients who own those policies are either in or very near retirement.

Your next question comes from Dean Evans of KBW.

Yes. Thanks I guess first I want today say congratulations both Pete and Dwayne and you did make comments that really no strategic changes and most of the rest of the senior management has tads the same but I guess just coined of wonder if you would sort of elaborate a bit on that. Is there anything you plan to differently, anything -- else kind of along that -- line?

Yes, well, thanks, dean. As you know, we've been on the road a little bit attending the investor conferences overrode past couple of years including yours and the same management team other than the change at the top as I mentioned that has been conferences at the last Kim of years remains in place. You know, Dwayne has moved up into a chair and I ever' moved as well, but everything he is here an has been here for a couple, three year san the basic core strategies around our distribution system, transformation and -- all the accompanying strategies to support that remains intact. We're continuing to look foreign Hansments to that strategy which is one of the things we will be talking to you more about. We kind of alluded to in a couple of our comments today around even further strengthening and leveraging our success in the annuity line of business and our position notice 403 B market. So I don't envision any -- major deviations at all from where our strategic project radio has been heads he had but just doing more of the same and with the same team in place.

Okay. My second question I was wondering you sort of gave some detail on what you expect for Florida sink holes for the fourth quarter and you did say you would expect some -- bleed through for the early part of the next year. Any has to how -- you know what is your occupation type of an impact you would expect for the first of half of next year. Would it be comparable to what we have seen this half of the year or half of that? Any sort of anecdotal help there?

Well, Dean, we're -- you know we're working on that now and we'll -- we generally share more detail projections at our next call so we don't really -- we don't really have kind of the did he tails to show share. You know, we're -- you know, the two quarters at $6 million kind of feels like it might be at the height, but we're not 100% sure yet.

Dean, this is Hallman. We need to gets through the fourth quarter and see if that claim count level remains the same or if we do in fact see the decline and just given the number of policies that are exiting on our nonrenewable program just from a frequency standpoint of how they start to give for us any way abetter indication ever what the first and second quarter might look like.

Okay. I guess given that my next question may be a bit hard but previously you sort of stated the ROE progression that you wanted was the kind of 10% level and then really into the lower teens. What are your expectations at this point for 2011 where you think that could pan out?

Well, dean again we're in the middle of putting to the our 2011 projection : and by the way that -- is shared with our boards at the December board meeting so that certainly is part and parse he will of the capital management decision, but if you just look at the mid point of our updated guidance range for 2010, at least my -- quick math would show an operating ROE of around 9% and then just taking what has been the consensus estimate for 2011 I think it was $1.92, I think that gets you to about a 10% ROE in 2011. Now, again, $1.92 don't take that as any kind of a guidance but it's just a public number I throw out there to give you a sense of direction any way. Again, we haven't completed our '11 projection and don't traditionally do that until the fourth quarter call.

Your next question kiss a follow-up from Bob Glasspiegel.

Can you remains what the RBC ratios into subs what your are?

Sure thing Bob. This is Dwayne. Obviously the set numbers are aren't faced yet but in regards to the life company is an the PNC companies 462. As far as assets in the holding companies you know we don't run a lot of extra curricular activities there but the cash balance is just mortgage of $20 million or so.

And there are no other questions at this time. Are there any closing remarks?

Yes, brandy. Thank you to all for participating in our annuity our conference call this morning if you have any further questions please 217-788-5738. This concludes our third quarter 2010 earnings conference call. Thank you.

Thank you. That concludes today's call you may now disconnect.