Horace Mann Educators Corp (HMN) 2011 Q2 法說會逐字稿

Good morning, my name is Beverly and I will be your conference operator today. At this time, I would like to welcome everyone to the Horace Mann second-quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session, (Operator Instructions). I will now turn the floor to Mr. Todd Nelson, Vice President of Finance.

Thank you and good morning, everyone, and welcome to Horace Mann's second-quarter 2011 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 will cover our results for the second 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 & Casualty; and Steve Cardinal, Executive Vice President, Marketing.

As a reminder, the following discussion may contain forward-looking statements regarding Horace Mann's anticipated and expected results of operations. 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 risk and uncertainties that could affect actual results, please 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 to non-GAAP financial measures. Reconciliation 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 August 26, 2011. 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 an operating loss, which excludes net realized investment gains and losses, of $0.39 per share for the second quarter. The primary driver of that loss was the unprecedented level of P&C catastrophe costs, which totaled $55 million pretax during the quarter.

Cat losses in April and May were consistent with our pre-unannounced range of $45 million to $50 million, and we incurred another $7.5 million in June. Not only the frequency, but the severity, of the tornadoes and hail storms in the quarter was extraordinary and caused devastation across significant portions of the Midwest and southeastern United States. The human impact, including loss of lives was unimaginable, and our thoughts and prayers continue to be with the affected families.

Through all of this, we acknowledge the responsiveness, dedication and empathy that Horace Mann's claims organization has demonstrated during this extended and highly stressful period of time, and thank them for taking such good care of our customers.

In spite of the magnitude of losses we incurred during the quarter, our overall financial strength and capital position remain solid, as Dwayne will expand upon in just a moment. In fact, our reported book value per share of $23.35 at June 30 was up 3% during the quarter as a result of the increased value of our investment portfolio. And even if we exclude FAS 115, book value per share was slightly higher at June 30 than it was at the end of last year.

In our property and casualty business, we continued to experience favorable prior years reserve development in the quarter, but at a lower level than in 2010, which was consistent with our expectations.

Excluding catastrophes and reserve development, our underlying P&C margins in 2011 have been a tale of two quarters, with the very favorable first quarter offset by adverse results in the second. Given the wide disparity of quarterly property and casualty results, I think it is most appropriate to focus on our year-to-date performance. And on that basis, the total P&C accident year combined ratio ex-cats was 93.2%, up about a point from prior year and generally consistent with our expectations. Tom and Dwayne will provide additional detail in their commentaries.

P&C written premium was down 4% in the second quarter and 3% year to date. But, as we mentioned in the press release, a significant portion of the decline in both periods was due to the impact of our Florida property risk mitigation program, aimed primarily at reducing our exposure to sinkhole losses. That non-renewal program, which will be completed in a couple of weeks, certainly had the desired effect in the second quarter, with sinkhole losses decreasing to under $2 million.

Auto and property sales increased sequentially in the second quarter, but remained soft, with adverse prior-year comparisons continuing. As we have indicated on recent calls, we are in the process of implementing, on a state-by-state basis, pricing, underwriting and marketing programs to improve new business volume and retention in our auto line. The initial results have been encouraging, but with the majority of the targeted states scheduled for rollout in the third and fourth quarters, we are expecting most of the impact to occur in the latter half of the year.

While adverse weather and quarter-to-quarter volatility have affected the P&C side of the business this year, our annuity and life operations have continued to perform at a relatively consistent and high level in 2011, which has been the case over the last several quarters. Combined annuity and life earnings were ahead of prior-year for both the second quarter and six months. And the underlying profitability, excluding DAC unlocking and the change in GMDB reserves, has exceeded our expectations in both segments.

Annuity sales continue to be strong, up over prior year by 27% in the quarter and 25% year to date, with single premium and rollover deposits continuing to lead the charge. And for the first time in two years, we have seen flexible premium sales begin to accelerate as well, exceeding prior-year in each of the last two quarters. Those strong sales results have, in turn, contributed to an increase in total annuity contract deposit receipts of 12% in the quarter and 11% year to date, with assets under management up 12% year over year.

With the recent challenges we and others in the industry have encountered in the P&C business, the very positive results in our annuity and life segments illustrate the power of our multi-line business model and the benefit of diversification, both for the Company and our exclusive agents. And we intend to further capitalize on the opportunities in financial services through investments in marketing programs and related product and service capabilities.

Finally, while our number of agencies declined during the quarter with an uptick in terminations, we remain well ahead of prior-year. And as you will hear from Steve, we fully expect to show an increase in agent count again in 2011, for the third year in a row.

So in conclusion, in spite of record levels of weather-related losses and a difficult quarter in our P&C business, Horace Mann's capital position and financial strength remain solid, and the underlying results in all segments of the business remain on track through the first half of the year. And we are confident that the programs we have in place, coupled with our unique business model, will continue to drive profitable growth and shareholder value going forward.

With regard to the rest of our program this morning, Dwayne will provide some further elaboration on our financial results and Tom will follow with his comments on our P&C business. Steve has been managing our annuity and life business on an interim basis for the last three months and will provide his commentary on those operations, and then wrap things up with a discussion of our marketing results. So with that, let me turn it over to Dwayne.

Thanks, Pete, and good morning. Horace Mann reported the second-quarter operating loss of $0.39 per share compared to operating income of $0.43 per share in the prior year, the difference largely driven by an increase in property and casualty cat losses. In addition to the previously announced April and May catastrophe losses, second-quarter earnings were adversely impacted by additional cat losses in the month of June, increased severity on our auto liability coverages and non-cat weather.

Year-to-date operating earnings per share of $0.16 were $0.75 less than the first half of last year. P&C cat claims accounted for $0.62 per share. The remaining difference was primarily due to an increased underlying auto combined ratio and a lower level of favorable P&C prior-year reserve development, both somewhat offset by favorable interest margins in our annuity business. That said, our underlying operating results, excluding cats, were generally consistent with our expectations for the six months.

Book value per share, excluding unrealized gains, decreased 2% sequentially but increased 4% over prior year. With the relative stabilization, although volatile within a range, in the credit markets, our net unrealized gains were approximately $257 million at the end of June, an increase of 43% over March 2011, driving reported book value to $23.35 per share, up 5% compared to a year ago.

Net unrealized gain or loss balances improved across nearly all asset classes compared to prior quarter-end. Our confidence continues in the quality of our conservative investment portfolio, but we certainly remain cautious in the midst of a slow economic recovery, uncertainty in the European markets and the US government's continued debates over difficult budget issues.

Looking at investment results within earnings, we realized net investment gains of $5.7 million pretax in the quarter, with no impairment write-downs. Pretax net investment income was up nearly 4% in the quarter versus prior-year, growth that was consistent with our expectations, both in total and by segment, with the annuity segment continuing to be the primary beneficiary, reflecting previous efforts to reduce excess cash in short-term balances over the last year.

Looking forward, we would expect the quarter-over-quarter growth percentages to continue to moderate due to more comparable cash in short-term balances and the continued low interest rate environment.

Turning to operations, our auto line experienced a challenging quarter, with the second-quarter loss in LAE ratio, excluding cats and prior-year reserve development, about 7.5 points above prior-year and 4.4 points above a very favorable first quarter of 2011. Given our size, we can experience volatility between quarters, seasonality aside, but the first and second quarters of 2011 were quite different in both severity and frequency, which Tom will discuss in more detail in a few minutes. That said, our year-to-date combined ratio results, excluding cats and prior-year reserve development, are generally consistent with our expectations.

The property headlines for the quarter featured the adverse impact of cats, non-cat weather, sinkhole losses and the loss development on first-quarter 2011 claims. Our property line, excluding cats and prior-year reserve development, experienced a current quarter loss in LAE ratio of less than 1 point higher than prior-year, despite the current quarter including $1.6 million or 3.6 points of adverse development from first-quarter non-cat weather claims.

The year-to-date loss in LAE ratio, excluding cats and prior-year development, is 1.2 points below prior year. The year-to-date improvement was primarily driven by continued increases in earned premium of 1.3%, despite a PIF reduction of about 6% compared to a year ago. The decline in PIF has been driven by our aggressive exposure reduction activities, primarily those underway in the state of Florida. Although we are pleased with the improvement in the underlying performance, the property line continued to be impacted by sinkhole losses and a high level of catastrophic weather losses in the quarter.

In regards to cat losses, we recorded a total of $55 million of losses in the quarter, which was approximately $39 million higher than second quarter last year. We've previously disclosed a range of $45 million to $50 million for cat losses related to tornado storm activity occurring in April and May. While our estimates for the storms remain within that range, additional cat activity was experienced in the month of June, which increased the total amount for the quarter.

The current quarter storm losses were primarily due to a number of severe storms impacting policyholders in Missouri, Minnesota, North and South Carolina, Tennessee and Texas, including significant tornadoes crossing into highly populated areas, such as Joplin, St. Louis, Raleigh, Minneapolis and the suburbs of Birmingham. The year-to-date losses reported are $63 million compared to $23 million last year, an increase of $40 million. The number of natural catastrophes impacting our industry, as well as the severity of several of them in the first half of the year, is unusually high compared to historical data.

Sinkhole losses, excluding LAE, impacted the second quarter by $1.9 million. That is $2.6 million less than prior-year and less than the last three sequential quarter impacts of $4.7 million, $5.2 million and $6.9 million. The second-quarter calendar year dollar impact and reported claim counts for the current accident quarter were favorable to our expectations.

Looking ahead to the second half of the year, we continue to expect sinkhole losses to be minimal, reflecting the elimination of policies in sinkhole-prone areas of Florida.

Despite the nonrecurring tax benefit recorded in the second quarter of 2010, the annuity segment performed better than prior-year, generating an earnings increase of 8.7% for the quarter. The current quarter benefited from higher interest margins and growth in account values, along with fee income, as well as a smaller negative impact due to the valuation in deferred policy acquisition costs.

The increased level in investment income has enabled us to realize a 4.8% increase in the earned margin from last year, with a year-to-date interest spread of 203 bps, comparable to the first half of 2010, but up 7 bps from full-year 2010. Our life segment earnings were 5.5% higher than second quarter of 2010 due to lower mortality costs.

Finally, I would like to point out that our capital and liquidity positions remain favorable relative to our capital management target and rating levels, both at the insurance company subsidiary and holding company levels, in spite of the significant catastrophe losses we just experienced.

While the statutory results will not be finalized for a few more days, we estimate the 6/30 life RBC ratio to be approximately 510 and the P&C equivalent to be roughly 490. Both ratios, as well as our total statutory surplus, are comparable to year-end 2010 levels.

Now to review the current results in our P&C business, here is Tom Wilkinson.

Thanks, Dwayne, and good morning. This morning I will summarize the key components of our profitability and growth results for both the second quarter and the first half of 2011.

As Pete and Dwayne have already mentioned, the major headline this quarter continues to be the impact of adverse weather on our industry, with record-setting tornado, hail and wind losses. Our total P&C combined ratio was almost 135% in the second quarter, with $55 million of total catastrophe costs, which represented 40 points of the combined ratio.

This was the second-highest cat cost quarter in our history and the highest non-hurricane loss quarter. Total cat costs were $39 million more than last year and 4 times what we expected to incur.

In addition, we experienced significant increases in the amount of non-cat weather-related losses in both property and auto in the quarter. Our year-to-date combined ratio was almost 115%, with $63 million in cat costs, which was 23 points of the combined ratio.

Favorable prior-year reserve re-estimates of $1 million in the quarter were $1.8 million less than last year. Year-to-date, favorable re-estimates of prior years totaled $3.7 million, $3.6 million less than the same period last year and in line with our expectations.

Our total P&C underlying combined ratio, excluding cat costs and prior years' impact, was 95.1% for the quarter, 5.7 points above prior-year.

The quarter was impacted by increases in non-cat weather in both lines and an increase in auto liability severity. We do not expect either of these trends to continue the rest of the year. On a year-to-date basis, our total P&C underlying combined was 93.2%, 1.2 points above last year through six months and consistent with our year-to-date expected results.

Our auto combined ratio in the quarter was 102.3%, with cat costs of almost $4 million, an increase of $2.5 million over last year, equaling 4.3 points of our combined ratio. The underlying combined ratio, excluding cats and the impact of prior-year development, was 98%, 8 points above last year.

In the quarter, we experienced a modest increase in auto liability losses, primarily driven by BI and uninsured motorist coverage severity. In addition, we saw increases in auto physical damage accident frequency, primarily coming from regions impacted by the adverse weather conditions.

We are satisfied with our auto results for the first half of the year. The recent uptick in non-cat weather and liability loss trends were countered by favorable trends in the first quarter, so that on a year-to-date basis, we are right in line with our profitability expectations with a 96.1% underlying combined.

Property profitability continues to challenge us and the industry as we posted a 202% combined ratio in the quarter. We had $51 million of total cat costs, representing 115 points of the combined ratio. We also had $1 million of favorable prior-year reserve re-estimates. This gave us an underlying combined ratio of 89.2%, 1.2 points above last year's second quarter. In the quarter, increased non-cat wind losses were offset by favorable experience for sinkhole losses.

Year-to-date, our underlying property combined ratio, again excluding cats and prior year's impact, was 86.8%, 1 point better than last year through six months. Year-to-date, sinkhole losses represent approximately 8 points of the combined ratio. And if we take sinkholes out of our current combined ratio in anticipation of completion of our Florida non-renewal program, our underlying combined ratio would be about 79%, a few points higher than our expectations.

We still have a few points to go to achieve our property target combined ratio, but we are trending in the right direction with our current property profitability programs in place. Additionally, we will continue to earn recent rate increases of over 7% this year.

Pete and Dwayne have commented about our Florida non-renewal program already. Our Florida agents and product support staff have done an admirable job with customer service in difficult circumstances, and we have received no formal insurance department customer complaints during this entire process. As a reminder, in addition to eliminating sinkhole exposures, our program also included further coastal policy reductions, which have significantly reduced our Florida hurricane exposure. Our total Florida property policy count should be below 6000 by the end of the year, down from about 21,000 in 2007.

Now a look at our top-line trends and results. Unit growth continues to be a challenge. External indicators, while improving, have not fully recovered yet, and competitor advertising spend continues to increase, creating an extremely competitive auto insurance market. In addition, our internal property profitability programs the overall increased rate actions to maintain profitability levels have impacted both new business growth and policyholder retention.

Through June, our total policy count was down about 5% to 6% in both lines. Written premium was down 3% in auto and almost 2% in property, as top-line revenue trends were favorably impacted by increases in average premium per policy.

Excluding the state of Florida from our year-to-date premium comparisons to prior-year, auto premium would be down 2%, while property would be up 7% and total P&C would be even with prior year.

As discussed last quarter, we have started to implement our auto profitable growth strategy. It includes state and market-specific new business initiatives, as well as national programs focused on improving customer retention. New business initiatives are jointly developed by marketing and P&C product management and are tailored to local market conditions. They are being implemented on a state-by-state basis throughout the remainder of the year.

Early results are encouraging, but it is only a handful of states. Our focus is on getting key states implemented in the third quarter for the important back-to-school sales period.

To improve customer retention, we are targeting an increase in the number of electronic or e-customers. Our goal is to increase the number of policyholders paying their premiums electronically, either via electronic funds transfer from their checking account or payroll deducted directly from their school paycheck.

To support this initiative, we are improving the customer interactions available on our website, the functionality of our easy-pay EFT system and introducing an electronic delivery option. We expect these electronic improvements to make it easier for our customers to interact with us, and when combined with reduced expected auto rate actions, should have a favorable impact on retention in the second half of the year. While still very early, recent trends regarding policyholders accessing our website, selecting an automatic payment method and choosing e-delivery are encouraging.

In summary, our second-quarter profitability results were significantly impacted by the weather. We had record catastrophe losses for a second-quarter period and increased losses from non-cat weather activity. When combined with a solid first quarter and with improving sinkhole losses, our underlying profit picture is consistent with our expectations.

We will continue to focus on property profitability programs until we achieve our target and increased focus on our auto profitable growth strategy for the remainder of this year.

Now I will turn it over to Steve Cardinal to cover annuity and life results, and then a marketing update.

Thanks, Tom, and good morning. I will start out by spending the next few minutes going over the profitability and growth results for the annuity and life segments. After that, I will discuss the marketing results.

As noted in our press release and by Pete in his remarks, the second quarter of 2011 continued to demonstrate the strength of our underlying earnings of our annuity and life businesses that has been exhibited over the past couple of years. In addition, we continue to see robust sales growth for our annuity products.

Focusing first on earnings for the annuity segment, we again saw healthy increases in both account values and margins. Fixed account values increased 11% as compared to a year ago and the associated net interest margin improved 10% compared to the first six months the last year. The resulting net interest spread was 203 basis points for the year to date, comparable to the level achieved in the first half of 2010.

Variable account balances increased 14% as compared to the prior year, with the associated fee income up 10% compared to the first six months of 2010.

Combined fixed and variable account balances exceeded $4.2 billion at the end of the quarter. Our annuity liabilities continue to be very stable, with net fund flows again positive in the second quarter. Our total 12-month account value persistency of 94% is comparable to prior-year. We continue to maintain a very conservative product risk profile in total, and specifically have minimal equity market guaranty exposure on our variable annuity product line. 94% of our in-force variable account values have either a simple rate of premium or death benefit or no death benefit guarantee at all.

While market performance had a negative impact on the evaluation of deferred policy acquisition costs for the quarter, the negative impact was considerably smaller than that experienced in the prior year. As compared to the prior year, the evaluation of total deferred policy acquisition costs increased annuity segment earnings $3.2 million for the quarter and $3 million for the first six months.

Combining all of these factors, annuity pretax income increased $3.2 million or 40% in the quarter and $5.1 million or 27% for the first half as compared to prior-year results.

Another excellent quarter in annuity sales contributed to continued strong growth in our total annuity contract deposits received. In total, annuity deposit receipts increased 12% in the quarter and 11% in the first half over prior-year, driven by our single premium and rollover business.

Turning to our life segment, pretax income for the quarter increased 5%, primarily due to lower mortality costs. Year-to-date pretax income was down slightly compared to prior year. Life premiums and contract deposits, which consist only of Horace Mann products, were down 1% for the quarter and down 1.5% for the first half as compared to prior year. Our consistently strong life persistency increased slightly as compared to prior year to 95.3%.

We are encouraged by the continuing strong performance in both our annuity and our life insurance businesses. We have improving the operating fundamentals for each business and expect that the performance for each segment will be further enhanced as we continue to gain sales momentum.

With that, I will now address the agency force, sales results and our marketing programs.

Let me start with some comments on our agency force. As you saw in the press release, our June 30 total agency count was down nine from year-end 2010 and 15 from the end of the first quarter. But we remain 50 agents or 7% ahead of where we were a year ago.

We introduced some changes to our production standards in the first part of this year, which impacted our termination rate during the second quarter. Our goal is to continue to increase our total agency count year-over-year. Our pipeline of qualified agency candidates continues to be strong, so I remain confident that we will increase our total agency count again in 2011, for the third year in a row.

Moving on to sales results, the key theme in the first quarter continued in the second, strong annuity sales continued, while P&C sales remained soft. Starting with auto, total auto sales units for the quarter decreased 10% compared to prior-year and true new units decreased 13% for the quarter.

As I stated last quarter, marketing and P&C have been working on a state-by-state auto growth strategy. The data for the first few states launched earlier this year remain encouraging. As I mentioned last quarter, the majority of the states we are addressing will be rolled out in the second half of the year, so I remain optimistic that we will begin to see a turnaround as early as next quarter.

Property sales were a similar story this quarter, as new units decreased 16% compared to the second quarter of 2010. On the other hand, annuity sales remain strong, with sales up 27% in the quarter compared to last year's second quarter. That 27% reflects a 43% increase in flex sales and 25% increase in single premium and retirement rollover sales. Single premium and rollover sales have been strong for several quarters, but it is encouraging to see the flexible premium sales up for the second quarter in a row. Year-to-date, flexible annuity sales increased 20% and single premium sales increased 26%. Given the continuing opportunities in this market, I am excited and encouraged about our growth prospects in this line of business.

While combined sales of Horace Mann and third-party vendor life products declined 13% in the current quarter compared to prior-year, the life sales were up 7% year to date. The Horace Mann life insurance portfolio was enhanced starting July 1 with the introduction of a single-premium whole-life policy, a level term to 65 product, a preferred plus term underwriting class and improved pricing for high face amount term policies. The associated training and support services have also been updated to reflect these portfolio enhancements.

To follow up on our last call, we introduced several strategic marketing and training initiatives designed to support our agencies and bolster the agents' brand in their local market place. These initiatives, aimed primarily on the financial services side of the business, made an immediate positive impact on our business, as evidenced by strong annuity sales growth again this year on top of record-breaking sales in 2010.

You may recall that the foundation for the training called for leveraging our agents' knowledge, positioning them as local specialists in the state teacher retirement systems. Or agents have now conducted over 2200 seminars this year, compared to approximately 400 seminars conducted all of last year. We believe that this has contributed substantially to driving annuity sale and, equally important, it is allowing our agents to position their personal brand as state teacher retirement advisers. That is why we have confidence that the momentum will continue through the balance of the year and will support sales in all lines of business.

We also trained agents on ways to increase educator awareness of and participation in donorschoose.org, an online not-for-profit that works to drive individual donor contributions into the classroom. This effort was supported by a matching grant Horace Mann made to the organization. I am pleased with our initial efforts, as the partnership has proven quite effective in introducing agents to news schools, new administrators and teachers within those schools, and in each case, helping cement new relationships.

And we will continue to leverage our donors choose relationship with a new back-to-school program. We will be cooping donors choose donations with our agents, who will continue to reach out to help drive dollars directly into the classroom. Additionally, we'll use our Facebook page to attract donors choose participants and ask them to become Horace Mann fans. Participants who fan us will be entered into a random drawing for additional Horace Mann funding of their respective classroom projects.

To close, we recognize the challenges we continue to face on the P&C side and the opportunities we continue to pursue on the annuity and life side of the business. We feel that the state-by-state marketing programs being rolled out in the auto line will increase new business and retention, and the marketing investments made in donors choose and the state teacher retirement seminars will continue to drive financial services sales and multiline production.

We have seen some lift from these efforts over the short-term and remain confident in the payoff we will have over the long haul. Thank you and now back to Todd.

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

(Operator Instructions) Bob Glasspiegel, Langen McAlenney.

Good morning, everyone. I can tell you your agent recruiting is leaving no stones unturned. I think I have gotten three or four solicitations to become an agent year to date, so you clearly are working hard.

That won't say anything about the quality, Bob.

I don't know whether Pete could take managing me (laughter). Capital -- help me out a little bit with some numbers. I know this isn't where you want to be, but if you were willing to write a 350% RBC in life and P&C, how much excess capital would you have on that calculation?

Hi, Bob. This is Dwayne. First, I think in today's environment and just knowing how companies are looking at it, but also rating agencies, I am not sure if 350% would be an appropriate level anymore. Obviously, the new 350% is probably 425%. So in the life company, at 425%, roughly $50 million to $60 million of excess capital.

At 425%, you have $50 million?

Roughly $50 million of excess capital on the life company.

And that doesn't include the $20 million you got at the parent, right?

Right, that is just the life company. Any cash that would be at the holding company wouldn't be included in that.

Okay, what about 425% for P&C?

425% on the P&C, we are roughly at 490% right now. Maybe $10 million to $15 million. But in the P&C operations, we wouldn't deem to have excess capital right now. We have always said our excess capital has been in the life company and it continues to be there.

Okay. Could you review with me your thoughts on reinsurance? We have had now in the last year some choppy cat quarters, and I know the tornado experience is tough to reinsure. But how much -- are you looking to get more reinsurance, less, and how are you thinking about it?

Bob, this is Dwayne again. As far as reinsurance and trying to protect frequency of events as we experienced in the first and second quarter is actually quite difficult and pretty expensive. We look at a number of different reinsurance options and have over the years, and to protect those kind of losses or the level of losses, the expected loss frequency is about a one-in-three year type event. So unless you are hitting them every three years, you quickly go in the hole.

So it is purely a capital rental process versus trying to protect the balance sheet. But we will continue to look at those going forward.

As far as our reinsurance retention right now, as you know, it is $20 million. Any of the events that we experienced in the first and second quarter, none of them hit that $20 million, and the closest one was probably $4 million to $5 million below that attachment point.

As far as going forward and starting to look at the impact of the models that are affecting the industry, primarily RMS, we haven't concluded yet that we are going to close our eyes to the new model and just start buying up old reinsurance. We are going to continue to do our analysis, see where our PMLs are truly being impacted by state.

One of the areas RMS model is impacting the industry greatly is, say, North Carolina. The far western edges of North Carolina is basically all deemed cat-exposed areas now. In our case, North Carolina, that is our strongest area versus the coastal area.

We will continue to look at it. We have recently visited with our reinsurers, and actually, at this point quite encouraged with how they are looking at our program, all of our exposure reductions we have done, especially in Florida. So the jury is still out, but I would say I think the last two weeks in December are going to be very exciting for January 1 renewals.

Okay, one follow-up. Just your answer on reinsurance and your wording in the text, it seems to imply that you think this tornado events of Q2 is sort of a one-off issue, that this doesn't need to result in any change in underwriting or pricing. I mean, you are pushing pricing, just like you have. It did seem like you are going to step it up. So are we looking at it as just a one-off event or is there some behavior change in how you run the Company in response?

Bob, this is Tom Wilkinson. It is not going to cause any significant change in our strategy. We will continue to look at maybe concentration issues in the Midwest a little tighter than maybe we did before. We still have a strategy to get the rate -- the proper rate needed to achieve our targeted combined ratios in those areas. And we will just maybe intensify the focus a little bit, but no real major change.

We are continuing to take sizable rates in the property line, Bob. Cat weather, non-cat weather, there is clearly a heightened level of weather impacting all of the industry. And, Tom, I don't know what our average rates have been in property -- 7%, 8%, 9%, something like that?

Yes, last year, full year, 10% -- 9% to 10%; and this year, we are projecting to be 7% in rates taken.

So you don't see any change in the market place in the last five weeks in pricing for homeowners?

Well, nothing across the board. We have noticed some competitors taking bigger than average rate increases in a few states, but both of those states were in the Midwest. So we think that it is the continuation of getting the proper price on the exposure all across the country.

We have seen the rates hardening for the last couple of years, and I think in certain markets, other people are keeping up with the double-digit increases that are out there.

I would expect to see some change in Joplin, but maybe not. Okay, thank you very much.

(Operator Instructions) Dean Evans, KBW.

Good morning, guys. This is actually [Frank Lee] from KBW on behalf of Dean. It was good to see sinkhole losses down in the quarter. Is it a good run rate going forward, and when can we possibly see sinkhole losses come to an end?

This is a good run rate. This is what we expected, what we planned for. We anticipate probably a few more losses through the remainder of the year. As you know, we are on some of the exposure still through the month of July and for a couple of weeks in August. But all of the exposures in the sinkhole-prone counties will be off our books in just two weeks. We are not anticipating very many new sinkhole claims at all going forward from -- a couple of weeks from now.

So probably first quarter 2012, then?

For sure first quarter 2012, yes.

Okay. And then you talked a bit about decline in agency force because of lower producing agents. These terminations are pretty much completed?

This is Steve Cardinal. There are still some that happened in there, but within the course of our year, we did see a little bit more. But for some perspective, last year and the first six months of the year, it is kind of traditional to lose some. We were down over 38 against the first six months of last year and we still grew the agency force. This year, we are down just nine through the first six months, so we still look at growing our agency force this year.

Okay, great. Then just one quick numbers question. You mentioned there were some slight property additions. I think you said $1.6 million, is that right?

This is Dwayne. That is correct. That is the property development on the first quarter 2011.

Okay.

There are no further questions at this time. I'll turn the floor back to management for closing remarks.

Thank you, and thank you for participating in our conference call this morning. If you have any further questions, please call myself, Todd Nelson, directly at 217-788-5738.

Thanks very much. Have a good day and we will talk to you next quarter.

Thank you for joining today's conference call. You may now disconnect.