Horace Mann Educators Corp (HMN) 2010 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the fourth-quarter 2010 earnings conference call. All lines are on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. (Operator Instructions) I would like to turn the conference over to Mr. Todd Nelson, Vice President of finance. Please go ahead, sir.

Thank you and good morning, everyone, and welcome to Horace Mann's fourth-quarter 2010 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 this press release it is available on the investors page of our website. This morning we'll cover our results for the fourth quarter in our prepared remarks. The following management members will make presentations today and be available for questions later on 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, Annuity and Life; and Steve Cardinal, Executive Vice President.

As a reminder, the following discussion may contain forward-looking statements regarding Horace Mann and its anticipated or expected results of operation. Our actual results may differ materially from those projected in these 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 refer to the Company's public filings with the SEC. 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. Also, in our prepared remarks or responses to questions we may make mention non-GAAP financial measures. Reconciliations of such non-GAAP financial measures are available on the investors page of our website.Finally, this call is being recorded and an internet replay will be available on our website until March 8, 2010.

Now I will turn the call over to Pete Heckman for his comments.

Thanks, Todd. Good morning, everyone, and welcome to our call. At yesterday's Market close Horace Mann reported operating income, which excludes net realized investment gains and losses, of $0.39 per share for the fourth quarter, with was consistent with our expectations. Within that result and relative to our expectations, we experienced a high level of P&C catastrophe losses, for us primarily related to the severe windstorm that hit the upper midwest in October, and earnings in our Life segment was impacted by adverse mortality experience. Offsetting those negative factors were favorable prior-years P&C reserve development, a positive impact from annuity deck unlocking, and a somewhat lower level of Florida sinkhole losses, all of which were more favorable than we anticipated.

While it was pretty much an inline quarter for us, from a normalized or run-rate perspective our earnings were suppressed by catastrophe and sinkhole losses and an elevated level of expense accruals related to incentive compensation and the previously-disclosed accelerated retirement benefits earned by our prior CEO. Operating income for the full year of $1.60 per share was a result that we feel very good about given the fact that three of our four lines of business, primarily our lead auto and annuity lines met or exceeded our earnings expectations during the year. Unfortunately, that accomplishment was offset by the highly unfavorable results we experienced in the property line in 2010. We reported a property combined ratio for the year 116%, which, while clearly unacceptable, was impacted by record level of non-hurricane catastrophe losses, approximately $20 million of sinkhole losses in the state of Florida and a write-off of systems development costs in the third quarter. Absent those items, the adjusted property combined would have been approximately 78%. Adding back a normal CAT load would have resulted in a combined ratio of the mid-90s.

The fact that our Florida non-renewal program, currently ahead of schedule and to be completed in August, will reduce our property PIF to zero in the most highly-exposed sinkhole counties and that more of our rate increases, 9% countrywide in 2010 and 7% planned in 2011, will build into earned premium this year supports our expectation that the property line will return to an acceptable level of profitability in the fourth quarter of this year. The improvement we anticipate in the property combined ratio over the next four quarters is the primary driver of our projected operating earnings growth in 2011 and is reflected in the full-year guidance range of $1.75 to $1.95 per share. Dwayne, Tom and Brent will provide additional detail on our earnings outlook in just a moment.

In terms of top-line growth, annuity contract deposits lead the way as they have the last few quarters, increasing 31% in the fourth quarter and 13% for the full year compared to 2009. Those increases were driven by strong annuity sales, which up 65% in the quarter and 15% for the full year, as record levels of single premium and rollover sales offset a decline in flex premium results. For both P&C and life, premium comparisons to prior year were relatively flat for both the fourth quarter and full year. Auto, property and life new sales continued to be below prior year in the quarter due to both the continuing overhang of the national and state economic environments and the highly-competitive marketplace, particularly for auto insurance. Meanwhile, we had a nice increase in our distribution for us during the quarter and posted the second straight full year of agency-force growth. With 80% of our agency force now in outside offices with one or more licensed producers, we're in the final stages of our agency force transformation and are very satisfied thus far with the productivity ramp-up and retention of our newer agents.

With regard to the balance sheet, our reported book value per share of $22.19 declined 10% sequentially during the quarter due to impact of rising interest rates on the fair value of our investment portfolio, but was up a strong 21% from a year ago. Excluding FAS 115, book value grew 9% over the last 12 months. Net unrealized gains totaled $186 million at year end and the performance and quality of our investment portfolio continued to be very strong. Dwayne will be commenting further on investments, including additional actions we took in the fourth quarter to further de-risk our CMBS portfolio. Our P&C reserves remain very strong and we ended 2010 with held reserves toward the high end of our independent actuary's range, as we have the last several years. And we continue to be very comfortable with all of our key capital ratios, which are more than supportive of our current ratings.

In terms of capital management, as was announced following our December Board meeting, we increased shareholder dividends by 38% to a level above where we were prior to the financial crisis. Also in December we moved a portion of our excess capital in the life company to our P&C companies in order to further improve our underwriting leverage and AM Best capital ratios on that side of our business, with the objective of most solidly positioning Horace Mann for potential positive ratings action in the future. So while we continue to acknowledge an excess capital position, the level has been reduced by -- to some degree by the actions I mentioned. And, yes, we and our board continue to believe that having some capital cushion is prudent in the current environment. The Board remains sensitive to and engaged in these issues and although I certainly can't speak for them or read their minds, my sense is that no significant additional capital management action is on the horizon, at least in the near term. And consistent with that outlook, 2011 earnings per share guidance does not contemplate share repurchase activity.

To wrap things up, Horace Mann is coming off a very good year in spite of some formidable economic and competitive challenges, a year that demonstrated the value of our multi-line business model. With regard to the coming year, the mid-point of our 2011 guidance range calls for a strong 15% increase in operating income on top of the 15% we recorded in 2010. As I mentioned during the call last quarter, our focus this year will be on four key objectives; continuing to expand our agency force while increasing agent productivity and income; improve the profitability of our property line to an acceptable level by the fourth quarter; implement state-specific action plans to address and turn around the new business and retention trends in the auto line, the results of which we expect to see taking hold in the second half of the year; and sustain the positive growth and profit results we've achieved the last 18 months in our annuity line. Accomplishing those objectives will not only result in an outstanding year in 2011 but will also set the stage for shareholder value creation in 2012 and beyond.

And with that, let me turn it over to Dwayne for some further elaboration.

Thank you, Pete, and good morning, everyone. Horace Mann recorded fourth-quarter operating income of $0.39 per share, which was $0.08 less than the comparable results in 2009, the difference primarily driven by the $7.5 million increase in pretax catastrophe claims partially offset by favorable prior-years P&C reserve development that was $2.5 million more than a year ago. Relative to our expectation, operating results of $1.60 per share for the full year was at the midpoint of our guidance range and slightly favorable to analyst consensus despite some fairly significant items reflected in the fourth quarter, as Pete just referenced in his opening remarks.

We reported a 21% increase in book value per share year over year, driven by our solid operating results and investment portfolio, which continues to perform very well. With continued improvement in the financial markets, as well as narrowing the spreads, the unrealized gain was $186 million at the end of December, an increase of approximately $150 million over a year ago but decrease of about $175 million from last quarter, driven primarily by the uptick in treasury rates in the fourth quarter and spread widening in the municipal bond market. The book value per share, excluding net unrealized gains, was $19.42 per share, an increase of 9% over prior year.

First focusing on investment results, we realized net investment losses of $1.5 million pretax in the quarter, including $14.7 million in gross gains on securities, more than offset by a $15.2 million of realized losses on security disposals, primarily related to commercial mortgage-backed securities, risk reduction actions and $1 million credit-related impairments on securities. Our CMBS 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 our overall exposure. As mentioned during previous earnings calls, we have from time to time implemented risk reduction programs related to our CMBS holdings, primarily focusing on traditional CMBS holdings, and as of September of this year, we disposed of approximately $75 million of par value under the programs. During the fourth quarter we initiated further sale activity and disposed of $43 million of par value, realizing a loss of approximately $12 million.

The most-recent program was driven by both the pricing improvement in the marketplace, as well as potentially negative implications to both statutory net income and regulatory capital ratios, primarily risk-based capital, related to the NAIC's CMBS capital requirements that is now based on financial modeling provided by a third party rather than NAIC credit ratings. The full-year results of our risk reduction efforts resulted in the disposal of over $118 million of par value, realizing a loss of $19 million. The disposed securities were priced at very depressed levels during the height of the financial crisis, but continuing to be patient during the last year has provided the opportunity to dispose of securities at price levels that we believe represent a more-than-adequate risk-adjusted exit price. At the end of December traditional holdings represent just 33% of our total CMBS holdings with an associated net unrealized loss of $5.3 million, while the remaining loss of the CMBS portfolio is primarily focused in military housing, Ginnie Mae project loans and cell towers and the unrealized gain of $4.7 million.

As mentioned earlier, we ended the quarter with a total net unrealized gain of $186 million across the entire portfolio, with the balance up $150 million since the end of last year. Generally, all asset classes participate in the rally, but through the year the change has been driven primarily by corporate, commercial mortgage and asset-backed securities. But it should be noted that all asset classes, with the exception of USgovernment securities and CMBS, are in a net unrealized gain position as of the end of the year. As we stated in the past, we remain confident in the quality of our investment portfolio, which has certainly been validated over the last couple of years. However, we recognize that municipal bonds have received a significant amount of negative press lately, primarily centered on the potential default risk by municipal borrowers.

We, along with our investment managers, Guggenheim and BlackRock, remain focused on the municipal bond market and continue to monitor the market issues closely. Our holdings are well diversified and have an average underlying credit rating of AA minus. We are currently heavily weighted in revenue bonds, which tied to essential services, such as mass transit, water, sewer and airports, representing approximately 67% of the portfolio. Pre-refunded bonds account for 6% of our munis and the remaining 27% of the portfolio is invested in state and local government general obligation bonds, which are diversified between states, school districts, enterprise funds and essential services. As of year end, our municipal portfolio had an unrealized gain of $8 million, down from previous quarters, obviously impacted by credit spread movement in the fourth quarter. In summary, we believe the credit quality of our municipal portfolio to be strong and well managed.

Pretax net investment income was up over 5% in the quarter and 10% year to date compared to last year. Growth that was consistent with our expectation, both in total and by segment, with annuity and life business segments being the primary beneficiaries. The increase is driven by our efforts to reduce excess cash and short-term balances that built up during the financial crisis, an effort that was initiated in the fourth quarter of 2009. Looking forward, we would expect the quarter-over-quarter growth percentages to moderate due to more comparable cash and short-term balances and the low interest rate environment.

Turning to operations, our auto line is performing better than our expectations, with the year-to-date loss ratio over two points below prior year, excluding catastrophes and prior-year reserve developments. However, the property line continued to be impacted by a high level of catastrophic weather and a significant sinkhole losses in the quarter. In regards to catastrophe losses we recorded a total of $8.7 million of losses in the quarter, which was notably higher than historic averages. The current quarter catastrophe losses were due primarily to storms occurring in Minnesota and Arizona. Benefiting current period earnings we saw continued improvement in our prior accident-year loss development trends. The favorable reserve development of $5.9 million for the quarter was concentrated primarily in our auto liability line, an area that was developing quite favorably throughout the year.

Sinkhole losses, excluding LAE, impacted the fourth quarter by $5.2 million, which is less than the third quarter impact of $6.9 million. While the number of reported sinkhole claims for the year ended above our initial expectation, it was not totally unexpected given our aggressive exposure reduction activities underway in the state of Florida. That being said, we are encouraged by the reduction in the reported claim levels during the fourth quarter and believe it's an indication of the start of a declining trend.Looking ahead to 2011, we would still expect elevated sinkhole losses in the first half of the year totaling between $7 million and $8 million for six months and then materially falling off the remainder of the year.

The annuity and life business segments continued to perform above the prior year, with annuity generating double-digit earnings increases of 39% and 49% for the quarter and full year, respectfully, driven by a combination of higher interest margins and growth in account values along with related fee income. As we anticipated, our financial services business segments have been a bright spot for us in 2010 and demonstrate the benefits of diversification in our multi-line business model. Brent will elaborate on our continued strong annuity results in just a moment.

Turning to the subject of earnings guidance for 2011, as noted in the press release, the range for the full-year 2011 operating income guidance is $1.75 to $1.95 per share, primarily reflecting a lower level of property catastrophe and sinkhole losses offset, somewhat, by a reduced amount of favorable reserve development. Annuity segment operating earnings are expected to be strong in 2011; however, relatively flat compared to 2010, reflecting a slightly lower spread offset by growth in variable annuity charges and fees. We also anticipate the life segment operating earnings to be relatively comparable to 2010. For purposes of our 2011 operating income per share guidance, we presumed average number of diluted shares of approximately 41.9 million.

In terms of our capital position, we estimate that our year-end life RBC ratio will approximate 510%, a decrease of 30 points from year-end 2010 -- 2009 -- excuse me -- primarily reflecting an increased level of dividends to the holding company and the negative impact of the CMBS capital requirements modeling by the NAIC. On the P&C side, our premium-to-surplus ratio finished 2010 at about 1.5 to 1, and we expect the RBC ration to approximate 475%, solidly positioning the P&C companies for growth while maintaining an appropriate level for capital for our risk profile.

In regards to risk profile I'd like to mention a couple of changes we made to our P&C catastrophe reinsurance program for 2011. The program structure changed to $175 million, excess of $20 million, compared to $170 million, excess of $25 million, we had in place in 2010. The opportunity to purchase coverage at a lower attachment point was possible due to the significant reduction in the number of coastal exposure policies, which only represent about 8% of the policies in force, post the Florida non-renewal program, compared to 15% a few years ago. So, to sum it up, we're looking for property results to significantly improve over the course of 2011, driven by a reduction in sinkhole losses, due to our Florida exposure management actions, and a reduced level of catastrophic claims more consistent with our historical and modeled results, and continued strong performance from annuity and life. As 2010 clearly demonstrated, the value of our multi-line product offer -- offering is a winning formula and we expect it to continue going forward.

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

Thanks, Dwayne, and good morning. This morning I will discuss what's behind our combined ratio results for the quarter and the full year. I'll also cover top-line trends and finish with a look at 2011. Our profit results in the fourth quarter were mixed. Auto results were slightly better than prior year, while property was negatively impacted by increased catastrophe cost and higher Florida sinkhole losses. Additionally, our expense ration increased 2 points in the quarter, primarily due to the previously-mentioned incentive comp and retirement expense accrual impact, along with some quarterly fluctuation. For the full year, the expense ratio increased just 0.5 a point, slightly better than our expectation.

Starting with total P&C results, we posted a 101.7 combined ratio in the quarter, 6 points above last-year's fourth quarter. Of the 6-point increase in the combined ratio 5.4 were due to increased cash,0.7 of a point were due to increased sinkhole losses, while 2 points were from the expense items. In addition, the combined ratio comparison benefited 1.8 points from an increase in favorable prior-year reserve re-estimate. For the full year our combined ratio was 109% compared to 99.5% for 2009. Similar to the quarter results, the auto combined ratio was better than prior year, with the property combined ratio above last year, again driven by increased CAT costs and sinkhole losses.

Now reviewing the results by line, our auto combined ratio in the quarter 99.8%, 1.2 points better than last year. In the quarter increased CAT costs as a percent of premium were 0.5 more than last year and the impact of prior-year reserve re-estimates was 3.4 points better than the fourth quarter of 2009. Excluding the impact of the expense ratio increase of 2 points, the underlying combined ratio, ex CAT, and the impact of prior-year reserve re-estimate was 101.3, 0.2 better than the fourth quarter of last year. For the full year, our auto-combined ratio was 93.7%, 3.8 points better than 2009. Total CAT costs were up 0.2, the impact of prior-year reserve re-estimates 1.9 points better than last year, and we had a favorable comparison of 0.8 of a point due to the 2009 claim reorganization cost, which did not repeat in 2010. So our underlying combined ratio, again excluding cats, the impact from prior-year reserve and the claim reorganization, was 97.1%, 1.3 points better than 2009.

Now to summarize property results, we posted a 105.8% combined ratio in the quarter, up over 22 points compared to last-year's fourth quarter. In the quarter we had four CAT events totaling just over $8 million for the property (inaudible), compared to just over $1 million last year, an increase of about 15 points on the combined ratio. Also in the quarter we had $5.2 million of sinkhole losses compared to $4.2 million the same time last year, or an increase in the combined ratio of 2 points. In addition, the property expense ratio increased a little over 3 points, primarily due to the expense items already discussed. The fourth quarter sinkhole losses of $5.2 million represent a reduction from our third-quarter level.

We are starting to see the expected sinkhole loss reductions from our Florida non-renewal program. We are currently ahead of schedule with this program, with over 5,200 out of the targeted 9,600 policies having been non-renewed, and this week the final round of non-renewal notices will be sent out. This should eliminate the majority of our exposure to sinkhole losses in the state by mid-August. Our total Florida property policy count should be down below 6,000 by the end of 2011, which also further reduces our exposure to future Florida hurricane losses. Our full-year property combined ratio of 116.1% is 12.6 above prior year. Increased CAT cost drive 8 points of the variance, and increased sinkhole losses add approximately 4 points. In addition, increases in 2010 expenses, which include the one-time accounting write-off of software development costs discussed last quarter, are being offset by slightly-favorable underlying non-CAT, non-sinkhole loss trends.

Now a look at top-line results. In the quarter, total P&C written premium was down 1.3%, with auto slightly below prior year by 0.3% and property down 3.5%, primarily a result of the Florida non-renewal program. For the full year, auto was slightly above prior year by 0.1% and property was above by 1.5%. Policy in force counts are below prior year for both lines of business. The reductions are driven by declines in auto new business and add cars over the last few years, which were impacted by a weak economy and increased competition. Also in this mix are our property exposure reduction programs, which include increased re-inspection activity and non-renewals, as well as our Florida property program. In addition, we have been increasing rates at a higher clip the last few years to address profitability trends. All of these items impacted our policy retention trend. Auto, while continuing at a high level, is down 0.8 and property is down about 2 points compared to year-end 2009, with the property decrease primarily driven by the Florida non-renewal program.

Now for a look at 2011. We are expecting a P&C ratio in the 97% to 99% range. That would be an improvement compared to 2010 results and trending toward our 93% to 95% target range, which we expect to achieve over the next 2 to 3 years. We expect our auto-combined ratio to trend up as we invest in growth initiatives and lower our rate expectation to low single digits. Our auto growth strategy includes state and local-specific initiatives, leveraging pricing and marketing opportunities to increase new business. The initiatives are tailored to each local market and we'll begin implementations on a state-by-state basis starting next month and continuing through the balance of the year.

We will be focusing on programs to improve policyholder retentions. This summer we plan to implement an electronic delivery option for policyholder communications and documents for our auto customers. This enhancement, when coupled with planned improvements to our customer care center on our website, along with improvements to our EFT and auto payroll capabilities, should improve our customers' ease of doing business with us. These initiatives, along with significantly lower rate actions, should improve policyholder retention beginning in the second half of the year.

Our property combined ratio should improve significantly, with reduced exposure to the Florida sinkhole claims and another year of mid to high single-digit rate increases, continued re-inspection activity and the reduced amount of catastrophe losses. We are expecting an average catastrophe year, using a CAT load in the range of 6% to 7% of total P&C premium, which is consistent with both and historical and modeled CAT loss results. We anticipate flat frequency trends this year and we expect the severity trend, managed by our advanced claim environment group, to continue to outperform the consumer price indexes and industry fast-track data. In addition, while the impact of prior-year reserve re-estimate is predicted to be favorable again, we expect it to be well below the 2010 level. Compared to a full-year 2010, our expense ratio is expected to increase about a point in 2011 as we continue to invest in key growth initiatives. We then expect it to come down in future years as these programs deliver and increase scale.

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 segment. As noted by Pete in his remarks, fourth-quarter headlines for our annuity and life businesses were first, continued strength in underlying earnings and second, historic sales for Horace Mann annuity products. Focusing first on earnings for the annuity segment, we again saw healthy increases in two key metrics; account values and margins. Fixed account values increased 10% compared to a year ago and the associated net margin improved significantly for the full year, reflecting both investment portfolio yield and [credit rating] actions. The resulting net interest spread was 196-basis points for the full year, and increase of 27-basis points compared to 2009.

Variable account balances increased 12% over the past 12 months, with associated M&E fee income up significantly compared to the full-year 2009. Combined fixed and variable account balances now exceed $4.1 billion. Our annuity liabilities continue to be very stable, with net fund (inaudible) again positive in the fourth quarter as they have been for the past 12 quarters. Our total 12-month account value persistency of 94% is comparable to prior year. As noted in prior quarters, we maintain a very conservative product risk profile.

We have minimal equity market guarantee exposure on our variable annuity product line. In fact, 94% of our in-force account value had either a simple return of premium death benefit or no death benefit guarantee at all. We do not offer other guarantees and have no hedging or derivative program exposure. Improved market performance also had a positive impact on both the valuation of deferred policy acquisition costs and the level of guaranteed minimum death benefit reserves for the quarter and the year. So combining all of these factors, annuity pretax operating income increased 24% in the quarter and was up over 38% for the full year.

As Pete will comment in his remarks, annuity new business results for the quarter continued at record levels, and those sales contributed to strong growth in our total annuity premiums and deposits. This growth was driven by our single premium and rollover business. Specifically, single premium deposits for the quarter were more than double the prior year and were up 32% the full year. This more than offset the flexible premium deposit results, which decreased 8% for the quarter and 1% for the full year. In total, annuity deposit receipts increased 31% in the quarter and 13% for the full 12 months as compared to the 2009 period.

Turning to our life segment, pretax operating income for the quarter declined 25% due to mainly higher mortality costs, but full-year earnings were up 8% as compared to 2009. Full-year earnings reflected strong growth in investment income, which more than offset higher mortality costs. Life premiums and contract deposits, which consist only of Horace Mann products, were even with the prior year for the quarter and down 1% for the full year. Our consistently-strong life persistency increased slightly in the quarter to 95.2%.

As we noted last quarter, we launched a new suite of Horace Mann life products and associated support services during the back-to-school season last fall. Our life select series allows educators to design coverage specific to their needs and also features the educator discounts, which we introduced last year. While we have received a positive response from our agencies, there's no doubt that the current economic environment is creating some challenges on the sales front. To gain traction we are focusing our resources on further expansion of our Horace Mann life insurance product line in 2010, along with its associated training and support services, in order to show renewed growth in life sales.

So in closing, 2010 has been a year of significantly-improved performance in both our annuity and life [insurance] businesses.We have strengthened the underlying earnings power for each business and these fundamentals will be further enhanced as we implement new strategic initiatives to fully develop our payroll [slots] and better position Horace Mann as a powerful advisor for educator retirement and protection needs. Looking ahead to 2011, annuity pretax operating earnings are expected to remain strong, comparable on a reported basis to the level achieved in 2010. Excluding the impact of DAC unlocking and changes in the [GMPD] reserve, however, adjusted annuity earnings are expected to increase in the high single digits, reflecting some moderation in spreads and market returns consistent with historical market appreciation. Life segment earnings are expected to be comparable to prior years.

And 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 once again focus my comments on agency staffing and sales results. We've enjoyed success in both migrating and recruiting agents into the exclusive agent contract, which we introduced 2-years ago. At year end, we had 457 exclusive agencies, which accounts for over 60% of our agency force. In addition to that group, we have 130 employee agents operating in the agency business model with an outside office and licensed producers. Together, these two segments, all working in the model, account for approximately 80% of our agency force. Here's how that shows up in the present staffing numbers.

We noted sequential declines in total agency count during the first two quarters of 2010 after making changes to our agent compensation programs. However, we expected the turnover rate to decrease during the second half of the year, and in fact it did. Overall, our total agency count, employee agents and exclusive agencies, increased to 741, a gain of 25 or about 3% compared to 2009 year end. Given a new EA agreement and the attractive nature of our marketplace, we are pleased to report a second consecutive year of agency growth.

Now let's take a look at the sales results for the quarter, beginning with property and casualty. As I've said before, our educator customer base is not immune to the headwinds of this economy, with its weak automobile and home sales. These factors, combined with appropriate rate actions in both auto and homeowners, impacted our sales results. Additionally, overall new business sales continue to be impacted by our decision to cease writing new homeowners business in the state of Florida and other coastal regions. Total auto sales units decreased 14% in the quarter compared to prior year and our true new units decreased 21% during the quarter. It's a similar story with property as sales units decreased 28% in the quarter compared to a year ago.

On a positive note annuity sales, as we expected, saw positive trends during the quarter. We recorded excellent sales levels in the fourth quarter, up 65% compared to fourth quarter of 2009, and at year end we were up 15% in total annuity sales. Remember, those increases came on top of an exceptionally strong 2009. As expected, our flexible annuity sales continued to trail 2009 volume; however, single premium and retirement rollover sales made more -- made them -- made up more than the difference, registering a 95% increase during the quarter. There's no doubt that this is a reflection of the trust educators have in the Horace Mann brand and our agents when they make critical decisions about their retirement. Going into 2011, we continue to be excited and encouraged about the growth prospects in our annuity business.

On the life inside, sales of both Horace Mann and third-party vendor products decreased by 4% during the quarter. For 12 months -- for the 12 months, total life sales were down 8%, which was consistent with industry trends. Let me mention that our new website was introduced in the fourth quarter and has received excellent feedback from clients and agents, and we're already at work building added functionality and new features for both of these audiences. Additionally, we've introduced several strategic marketing initiatives designed to support the 80% of agents who have moved into the agency business model, as well as bolster and reinforce the agent's brand in their local marketplace. The programs have recently been rolled out to the field and we have an aggressive training schedule during the first and second quarters for all of the agents operating in our agency business model.

The training focuses on three specific initiatives. The first is DonorsChoose.org, an online not-for-profit that works to drive dollars in the classrooms by matching individual classroom teachers' project needs with both corporate and citizen philanthropists. And our agents will be introducing DonorsChoose.org to their schools, helping train teachers and administrators to make DonorsChoose.org work for them and in setting through the distribution of gift cards. Additionally, Horace Mann will offer a $250,000 corporate match for projects in our agents' school districts beginning February 1. We are excited about the positive impact this will have on our agent relationships in their schools and the teacher's ability to enhance the education of their students.

Second, we'll further leverage the local expertise of our agents as state teacher retirement experts by making the state teacher retirement segment a marketing core competency.Agents who use the seminar as part of their regular marketing program generally enjoy a higher penetration in their school, not only in the annuity line but all lines. And third, we'll be introducing ideas on how agents can best leverage the strategic alliance we've entered into with the Association of School Business Officials, or ASBO. With payroll slots and other points of access to our marketing -- to our market become more and more centered in the school business offices, we see this partnership as key to maintaining an increase access to schools.

And finally, as Tom mentioned, we've been working with P&C on the development of a series of state-specific growth initiatives in order to appropriate balance growth and profitability in the auto line. In spite of the competitiveness of this market, we have identified opportunities and will be implementing targeted programs at the state level designed to improve both auto sales and retention. To sum it up, we continue to make great progress in transitioning and expanding our agency force and we're well positioned for continued agency growth and productivity. As we enter a new year we're optimistic that we'll see continued improvement in the economy and increased opportunities to grow our business.

Thank you and now back to Todd.

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

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

Hi, good morning.

Morning.

So, the prepared remarks were pretty detailed but I do have a couple of questions. I guess first, just thinking about growth and the agency system, you have pretty good growth coming through in terms of agent counts and agents in the agency business model, then I look at P&C policies in force down 4% year over year, auto and property sales down double digits, life policies are down year over year. Obviously annuity sales are quite strong and I know that the Florida non-renewal program probably has -- is a big reason for the declines in the other lines. But can you give any metrics, maybe ex Florida, that would give an indication of what the growth looks like, or maybe just comment on when you would think growth in the agency count -- agent counts or agency counts would start to show up in terms of policy counts or written premium?

Yes, Paul, this is Pete Heckman. We've experienced both competitive pressures in the auto line, in particular. Property has been impacted by Florida, but also our auto writings have been somewhat impacted by Florida.Although we have grown agents, agent productivity in those lines has declined and retention has also just begun to move down in the auto side and that really is the target of the state-specific actions that both, I guess, Tom and Steve and I talked about. We probably got a little bit ahead of the competition in some states, as we acknowledged last quarter with auto rates. We're going to back off rates a bit, as we mentioned, to kind of more appropriately balance growth and profit. So, we are anticipating that those programs will begin to take hold in the second half of the year and we should begin to see agent productivity and retention turn in the later part of the year.

If you look countrywide, excluding Florida, are policies in force up or down for the year, do you have that metric?

Paul, this is Tom. I don't have it in front of me but it's -- Florida isn't the only state with decreasing policy in force. The majority of our states are declining in PIF.

Okay. And then to turn to the question of capital management, I think you were pretty clear that it's not likely in the near term, although by most any measure it seems that you are pretty well capitalized and I think by my estimates you should be in the position to generate positive capital, at least over the next year or so. Can you give a little bit more color on how you think about what the right level of a capital cushion is, maybe what you're looking at in terms of broader macro factors or indications from the rating agencies that are important in your decision about capital management?

Yes, I'll take that, as well. We certainly do have excess capital in the Life Company, as Dwayne and I indicated. We did move some of that excess capital at the end of the year to our P&C operations. We are hopeful and targeting some positive rating actions at some point in the near future from A. M. Best and that move was to further strengthen what we already felt was a pretty strong P&C capital position but feel that this additional action will make it even more supportive of potential rating action. We haven't closed the books yet for the year but we are estimating life RBC around 510. That clearly is in excess of what's needed to support our ratings. But as Dwayne mentioned, the CMBS change took some of that excess capital away, so our margin is a little bit less than it was.

At the board we continue to talk about capital management and expect we will regularly going forward. The board focused, obviously, on dividend increases, which was reflected in the actions that were taken in December, and we're going to continue to look at the ability to increase dividends steadily going forward as a primary use of our capital management. We talked about rating agency capital. We still think we're stronger than we need to support our ratings but perhaps not as significantly as in the past.

But, in terms of other alternative uses of capital, which we talk about regularly at the board, as well, we've got any number of possibilities that we're looking at, including a variety of IT projects. Obviously, like many insurance companies, we have legacy systems that we need to invest in. But probably more interesting and exciting are a number of initiatives, some of which Steve talked about, particularly to support our growth in the annuity business.

So, there are some capabilities we're just beginning to research, which we think could require some capital investment along the lines of Section 125 programs and then capabilities -- third-party administrator capabilities in that 403(b) space and other business-to-business IT-related investment opportunities. In addition, we are continuing to do and look at more ease of doing business, service enhancements, both on our website, looking to customers and our agents, which, again, could require additional capital investment. So, there are a number of things we're looking at besides just dividends and share repurchase and we'll continue to do that.

Okay, that was a pretty thorough answer so I appreciate that and understand the areas for reinvesting in the business. But not to oversimplify it too much, but should we think of buy backs essentially being off the table until A. M. Best comes through with an upgrade?

I don't think that would be unreasonable assumption but, again, we continue to talk about it at the board level and it is the board's call, but I don't think you'd be too far off base if I said in the near term not including any share repurchase in any projections.

Okay, and then just one last one. You gave a pretty detailed description of what's in the guidance but I don't know if you mentioned what you're assuming for reinvestment rates or average new money yields. Do you have something you can share for that?

Sure, this is Dwayne. On our life side -- the life and annuities side of the business, assuming about 5%. P&C, roughly 4.5%.

Okay, thanks.

Sure.

(Operator Instructions)Your next question comes from the line of Peter Seuss with Surveyor Capital.

Hey, guys, just one quick question on the guidance. Did you change your methodology because I think last year you got it for a combined ratio of 97% to 99%, as well, yet in 2011 you should have less losses from sinkholes?And also, you did take rate increases in 2010.

Yes, I think what we're looking for in 2011, as we said, most of the decrease in the total P&C combined is going to be driven by the property improvements that you saw, assuming more normal catastrophes and a diminished level of sinkholes. We expect the auto combined, however, to tick up a bit as we slow rates down and reinvest in some growth programs that we've talked about, so that's kind of going a little bit the opposite direction unlike what we were thinking about last year. But in total, again, the approximately three-point decline is what we're looking at.

Okay. And did you quantify the amount of -- I think you said you had elevated incentive accruals in the fourth quarter?

Yes, we had expense accruals related to incentive compensation and the accelerated retirement benefits. The combination of those two was maybe $4 million. I would say, something in that range. But, again, the total -- as Tom mentioned, for the full year the total expense ratio was up about half a point, which was pretty much as we expected. So, there was some fourth-quarter seasonality, I guess you'd say, or a little bit of a bubble in the fourth quarter that we expected.

Okay, great. Thank you.

(Operator Instructions)There are no further questions.

Thank you, Raquel, and thank you all for participating in our conference call this morning. If you have any further questions, please feel free to contact me directly at 217-788-5738. Thanks, again.

Thank you. This concludes Horace Mann Educators fourth-quarter 2010 earnings conference call. You may now disconnect.