Horace Mann Educators Corp (HMN) 2011 Q3 法說會逐字稿

Good morning. My name is Tasha and I will be your conference operator today. At this time, I would like to welcome everyone to the third quarter 2011 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).

Thank you. I would now like to turn the call over to our host, Mr. Nelson. Sir, you may begin your conference.

Thank you, and good morning, everyone, and welcome to Horace Mann's third-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'll cover our results for the third quarter and our prepared remarks. The following management members will make presentations today and 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; and Steve Cardinal, Executive Vice President, Marketing.

As a reminder, the following discussion may contain forward-looking statements regarding Horace Mann. 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, 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 and responses to questions, we may make mention to non-GAAP financial measures. Reconciliations of such non-GAAP financial measures are available in the Investors page of our website. Finally, this call is being recorded, and an Internet replay will be available on our website until November 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 operating income, which excludes net realized investment gains and losses of $0.23 per share for the third quarter, which was $0.07 below prior-year. The main drivers of that variance was the poor performance of the financial markets and the resulting adverse impact on annuity DAC unlocking in the current quarter, and a lower level of favorable prior-year's P&C reserve development, which was consistent with our expectations.

In addition to the DAC unlocking charge, the $18 million of catastrophe losses incurred in the third quarter were greater than we had anticipated. Primarily, as a result of those two factors, we have reduced our full-year 2011 operating income guidance range to between $0.90 and $1.00 per share. Dwayne will comment further on that change in just a moment. In spite of those external factors, however, we continued to generate strong underlying business results in the quarter that were on balance better than prior year, and generally consistent with our expectations.

Our investment portfolio also continued to perform well during the third quarter, generating a 5% increase in total investment income for both the quarter and year-to-date, with fixed annuity spreads holding steady in the 200 basis point range. While our current new money investment yields are obviously under some pressure due to the low interest-rate environment, sensitivity analysis supports our expectation that the portfolio will hold up well in a modestly prolonged, low interest rate scenario, without a significant adverse impact on earnings. Dwayne will also provide more detail on that analysis during his commentary.

Meanwhile, as a result of some actions we've taken to shorten the duration of our investment portfolio, we realized a meaningful level of capital gains during the quarter. At the same time, the increased market value of our portfolio resulted in $428 million of unrealized gains at quarter-end. Reported book value per share of $26.44 at September 30 increased 7% compared to prior-year and 13% since the end of June. Excluding FAS 115, book value (technical difficulty) [was 4% above] prior year and increased 2.5% sequentially in the quarter.

Our capital ratios have remained strong and are more than supportive of our current ratings, in spite of a record annual level of catastrophe losses we've already recorded in 2011 through just nine months of the year. Although our growth in total statutory capital has been inhibited somewhat this year, due to those weather-related losses, we remain in an excess capital position in our life company.

Horace Mann's Board of Directors is continuing to review and consider capital management alternatives, including share repurchase and dividend actions. As a part of that process, we are also currently evaluating some significant technology-related capital expenditures in the context of our 2012 planning process. We expect to conclude that evaluation, and will continue to discuss capital management options at our upcoming Board meeting in early December. The December meeting has traditionally been the time when we've announced dividend and other capital management actions, and I fully expect that to be the case again this year.

Now, with regard to our operating results, I'll defer to Dwayne, Tom, and Steve for the details, but in terms of some highlights, I thought I'd refer back to the four key performance priorities that we established early in the year as our focus in 2011.

The first objective is to continue to expand our agency force while increasing agent productivity. We ended the third quarter with about 5% more agents and agencies than prior-year. While we expect that margin to decrease somewhat by year-end, we are anticipating modest growth in our agency force for the full year. In terms of agent productivity, third-quarter sales increased compared to prior-year for true new auto, flex and single annuity, and Horace Mann life products. On a year-to-date basis, annuity and life sales remained in positive territory, while the prior-year percentage declines in auto and property sales were reduced during the quarter.

Our second key focus area during the year is on improving the profitability of our property line to an acceptable level by the fourth quarter. Our underlying property results were actually a bright spot for us in the current quarter, due to the level of rate increases we've taken in the last 12 to 18 months and to the completion of our Florida nonrenewal program during the third quarter. We had a minimal level of sinkhole losses in the quarter, by virtue of now having essentially no property PIF in the counties most prone to those losses. So we're definitely on track to reach an acceptable underlying loss ratio run rate as we move into 2012.

Another critical priority for us this year is implementing state-specific action plans to turn around our declining auto and new business sales, and retention trends. We began rolling out selective pricing, underwriting, and marketing programs in a few states in the second quarter, but the majority of the rollouts were targeted in the third and fourth quarters. We expected to see new auto sales levels improve starting this quarter -- and that's, in fact, what happened, with true new auto units up 7% over prior-year. It's still a very competitive marketplace, and we have more work to do, but I'm very pleased with how our agency force has responded. And I believe we're definitely getting back in the auto game.

Our final 2011 performance priority is to sustain the positive growth and profit results we've achieved over the last year and a half in our annuity line. And notwithstanding the poor financial markets' performance, that segment of our business continued to perform extremely well again in the third quarter. For both the quarter and year-to-date compared to prior-year, sales were up 20%; contract deposits received increased 10%; interest margins grew 9%; and underlying pretax income, excluding DAC unlocking and GMDB reserve increases, was up 10% to 11%.

So, as I said earlier, I am pleased with our underlying performance, particularly in light of the weather, and the challenging economic and competitive environment we're operating in. We still have more work to do, but I'm confident in our strategic direction and very encouraged by the progress we're making on our key initiatives. I believe we're well-positioned to address the challenges and take advantage of the opportunities that lie ahead.

And with that, let me now turn it over to Dwayne to provide additional detail on the quarter.

Thanks, Pete, and good morning, everyone. Horace Mann recorded third-quarter operating income of $0.23 per share compared to operating income of $0.30 per share in the prior year, falling short of our expectations primarily due to three factors -- the unfavorable impact of the financial markets on our annuity business; catastrophe losses; and increased auto claim frequency. Offsetting the unfavorable items were continued strong interest margins in our annuity business, and improved property results, led by a marked decline in sinkhole losses.

Year-to-date operating earnings per share of $0.39 was $0.82 less than last year. P&C catastrophe claims accounted for $0.63 per share of the decrease. The remaining difference was primarily due to a lower level of favorable P&C prior-year's reserve development, and increased underlying auto combined ratio, and DAC unlocking. That said, our underlying operating results, excluding tax and DAC unlocking, were generally consistent with our expectations for the nine months.

We reported a notable increase in book value per share, primarily driven by our investment portfolio, which performed very well during the quarter. With the continued decline in treasury yields, which was somewhat offset by widening spreads, the unrealized gain was approximately $428 million at the end of September, pushing book value to $26.44 per share, up 7% over the level a year ago, and 13% over prior-quarter-end. The book value per share excluding net unrealized gains was $20, an increase of 4% over prior-year.

First focusing on investments, we produced another quarter of solid results. We realized investment gains of approximately $21 million pretax in the quarter with no impairment write-downs. The realized gains resulted primarily from strategic sales, driven by the significant drop in treasury rates during the quarter, and a minimal level of portfolio rebalancing, reflecting a slight bias towards shortening the duration in our annuity portfolio.

As mentioned earlier, we ended the quarter with a total net unrealized gain of $428 million, up 67% since the end of last quarter. Nearly all of the heavier weighted asset classes in our portfolio improved compared to prior-quarter-end, with the largest changes driven by municipal, corporate, and US government bonds. Our confidence continues in the quality of our conservative investment portfolio, but we continue to remain cautious as economic recovery continues, albeit at a slow pace.

Pre-tax net investment income was up nearly 5% in the quarter versus prior-year, with the annuity segment continuing to be the primary beneficiary, reflecting previous efforts to reduce excess cash and short-term balances over the last year. The Property and Casualty segment investment income was down roughly 3% for the quarter compared to prior-year, primarily due to the increased level of claim payments related to catastrophe losses in the current year. That said, the P&C segment investment income is up 1% year-to-date.

Looking forward, we would continue to expect the overall growth in investment income to continue to moderate, particularly in the annuity line, due to more comparable cash and short-term balances, and the continued low interest rate environment. As we look to 2012 and 2013, we recognize that a continued low interest rate environment could pressure net investment income. We continue to model a variety of interest rate scenarios in order to quantify possible impacts on future earnings, particularly with regard to spread compression in our annuity line.

A reasonable, but very conservative scenario that we looked at, assumes a reinvestment rate over the next two years of approximately 3.25%, which is more than 275 basis points below the current portfolio yield and significantly less than our current reinvestment rate. Under this scenario, the gross earnings per share impact in 2012 and '13 will be approximately $0.04 and $0.12 per share, respectively, before any reduction in annuity crediting rates on our in-force contracts.

Assuming reduction in crediting rates to contract minimums, however, the impact in 2012 could be totally offset, while the impact of 2013 can be cut in half, to about $0.06 per share. Obviously, if the low rate scenario were to persist beyond two years, the more significant earnings impact would develop; but absent that, the impact on our annuity margins, as you could see, would be very manageable.

Moving on to operations. Our auto line experienced a tough quarter with the third quarter loss in LE ratio, excluding cats and prior-year reserve development, about 3.6 points above prior-year, and 3.4 points above the first half of 2011. During 2011, we've experienced volatility between quarters -- each quarter unique as to frequency, severity, and coverage, but the third quarter was primarily driven by loss frequency, which Tom will discuss further in a few minutes. That said, our year-to-date auto combined ratio results, excluding cats and prior-year reserve development, are just slightly above our expectations.

The property headlines for the quarter feature the adverse impact of cats more than offset by improving underwriting results led by a reduction in sinkhole losses. Our property line, excluding cats and prior-year reserve development, experienced a current quarter loss in LE ratio that was almost 26 points lower than prior-year.

The year-to-date loss in LE ratio, excluding cats and prior-year development, is 9.5 points below prior-year. The year-to-date improvement reflected a reduction in sinkhole losses and continued increases in earned premium of 1%, despite a PIF reduction of over 5% compared to year-ago. The decline in PIF has been driven by our aggressive exposure reduction activities, primarily those in the state of Florida. The property line reported combined ratio also reflects an improvement in the expense ratio of 4.3 points, which was the result of a pretax charge of $2.2 million for software development write-off included in the third quarter of last year.

In regards to catastrophe losses, we recorded a total of $18.3 million of losses in the quarter, which was comparable to the third quarter of last year. The current quarter cat losses were primarily due to Hurricane Irene and Tropical Storm Lee, which are currently estimated at $8 million and $1 million, respectively. The year-to-date cat losses recorded are $81.3 million, more than double the $40.5 million incurred last year.

Sinkhole losses, excluding LE favorably -- yes, favorably -- impacted the current-year third quarter by $900,000 as a result of favorable claim emergence on prior-year's reserves. That's $7.8 million better than prior-year and compares to $1.9 million recorded in the second quarter of this year. Looking ahead, we would expect the impact of sinkhole losses to be minimal.

(technical difficulty) -- segment performed better than prior-year after excluding the DAC adjustment, generating pretax earnings increase of 7.5% for the quarter. The current quarter benefited from higher interest margins and growth in account values along with fee income. The increased level of investment income has enabled us to realize a 9% increase in the interest margin from last year, with a year-to-date interest spread of 199 bps, up slightly compared to prior-year spreads but up 3 bps from full-year 2010.

Our life segment net income was about $2 million lower than third quarter of 2010, primarily due to higher mortality costs, which, given our size, can be volatile from quarter to quarter.

Turning to the subject of earnings guidance, as noted in the press release, we've updated and narrowed the range of our full-year 2011 operating income guidance to $0.90 to $1.00 per share from the previous guidance of $1.10 to $1.30, primarily reflecting the higher level of third-quarter property catastrophe losses and unfavorable financial market performance.

The revised range starts with year-to-date operating income per share of $0.39 and a range of $0.51 to $0.61 per share for the fourth quarter. The range anticipates a normal fourth quarter in total, anticipating a slightly elevated loss ratio not inconsistent with prior fourth-quarter seasonal loss patterns; a normal level of weather losses; improving financial market performance, some of which we've experienced in October; and continued strong profits, and underlying annuity and life operation.

In regards to our capital structure, I'd like to point out just a couple of items, one quite significant. First, we replaced our expiring five-year, $125 million bank credit facility with a new four-year, $150 million bank credit facility effective October 7. We are quite pleased with the outcome and very encouraged by the receptiveness of the markets, and the continued support of our key financial partners.

And second, our capital and liquidity positions continue to remain favorable relative to our capital management targets and rating levels, both at the insurance company subsidiaries and holding company levels, in spite of the significant catastrophe losses we've experienced this year. While statutory results will not be finalized for a few more days, we estimate that both the life and P&C RBC ratios will approximate 500% as of September 30. The RBC ratios, as well as our statutory surplus, are comparable to or slightly higher than year-end 2010 levels.

Lastly, I'd like to make a few comments regarding the adoption of new accounting guidance related to the accounting for deferrable costs associated with the successful acquisition of new and renewal insurance contracts. Although we've completed a significant amount of analysis, we still have work to do, especially related to the annuity and life operations.

That said, our preliminary results indicate an impact on a reported book value, excluding unrealized gains of less than 5%. We currently anticipate electing the retrospective application of the new guidance in the first quarter of 2012, resulting in a downward adjustment to current deferred amounts, with a corresponding adjustment to beginning of retained earnings. On a go-forward basis, we would expect the impact of lower net expense deferrals and amortization on operating earnings to be minimal.

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

Thanks, Dwayne, and good morning. This morning, I will talk about our P&C property growth results for the third quarter and for the first nine months of 2011.

For the quarter, our total P&C combined ratio was 104.6%, about 2 points better than last year's third quarter. Total catastrophe costs were $18.3 million, which included $9 million from the combination of Hurricane Irene and Tropical Storm Lee. Total cat costs were almost $1 million more than last year, and about 25%, or $3.5 million more than our expected cat loss for the third quarter. Favorable prior-year reserve re-estimates of $2 million in the quarter were $5.3 million less than last year.

The reduced levels of favorable development from prior years continues to be in line with our expectations. So our total P&C underlying combined ratio, after excluding cats and prior-year's impact, was 92.7%, almost 7 points better than last year. Our auto underlying combined ratio was 4.6 points higher than prior year, while property was 30 points better, primarily due to minimal sinkhole losses in the quarter.

Now for details by line of business. Our auto underlying combined ratio in the quarter was 100%, with the expense ratio up 0.9 points and the loss ratio up 3.7 points compared to last year. The expense ratio has been consistently above prior-year, as we invest in auto profitable growth initiatives, and is in line with our expectations.

In the quarter, we experienced additional losses from increases in accident frequency, primarily from regions impacted by the adverse weather conditions. Our year-to-date auto underlying combined ratio was 97.3%, 3 points above prior-year, and due to the recent frequency trends, running slightly above our expectations.

Our property underlying combined ratio in the quarter was 77.6%, our best quarter since the fourth quarter of 2008. The expense ratio contributed a favorable 4.3 points to the 30 point reduction, benefiting 5 points from a one-time write-off of software development costs last year in the third quarter. The loss ratio improvement of nearly 26 points was primarily due to favorable sinkhole loss experience. With the completion of our Florida nonrenewal program in mid-August, we incurred only a few new sinkhole claims in the quarter, and anticipate minimal sinkhole activity in the future. Our year-to-date property underlying combined ratio was 83.7%, almost 11 points lower than prior-year and slightly better than our expectations.

Now turning to the topline results. Compared to last September, our total policy count was down about 5% to 6% in both lines, with year-to-date written premium down 3% in auto; down 0.4% in property; and down 2% in total when compared to prior-year. Excluding the state of Florida from the premium comparison, due to the effects of our nonrenewal program, auto premium would be down 3% with property up 6%, and total P&C would be even with prior-year. Our topline premium results were favorably impacted by increases in average premium, average premium per policy, due to the rate actions in 2010 and 2011.

The lead indicator of future policy count growth is increased new business. Earlier this year, marketing and P&C product management teams began implementing targeted local growth initiatives on a state-by-state basis. Prior to this quarter's back-to-school selling season, we had introduced these growth initiatives in about 60% of the country. We are encouraged by significantly increased quote activity and true new auto sales that were 7% higher than the prior year in the quarter.

In addition to increases in new units, improvements in customer retention are needed for policy count growth. Our retention initiatives began rolling out in the third quarter, and are focused on increasing the number of electronic, or e-Customers, to improve our overall customer retention over time. Our goal is to increase the number of policyholders paying their premiums electronically, either through automatic payroll deduction from their school paycheck or via electronic funds transfer from their checking account. Currently, policyholders with these automatic payment methods retain at a much higher rate than direct bill payment customers.

To support this initiative, we have recently improved the customer interactions and transactions available on our website; introduced in electronic or e-Delivery option for customer communication and documents; and we are introducing improved functionality for Easy Pay EFT System. We expect these electronic improvements to make it easier for educators to do business with us and improve overall customer retention. Early results indicate that our policyholders are increasing their use of our website, and are increasing their participation in auto payroll, auto Easy Pay EFT, and auto e-Delivery.

In summary, we are encouraged by the early returns of our auto growth initiatives with increases in new business and electronic customers in the quarter. Weather, again, impacted our profit results, as we saw increases in both cat and non-cat weather losses in both property and in auto. Even with the weather impacts, we feel good about our underlying profitability trends, especially in property, as we are now realizing the favorable impacts of our reinspection programs, rate increases, and the completion of our Florida nonrenewal program. We are on pace to achieve our property financial targets as we finish 2011 and move into 2012.

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'm going to take the next few minutes to cover the profitability and growth results of our annuity and life segments, followed by an update on our sales results and our marketing programs.

As Pete mentioned, and as noted in our earnings release, the strength of our underlying earnings of our financial services businesses, exhibited over the past few years, was again demonstrated in the third quarter of 2011. And we're strongly encouraged by the continued annuity sales growth, which I'll cover in more detail shortly.

Starting with earnings for our annuity segment, we continue to see healthy increases in both fixed account values and margins. Fixed account values increased 11% compared to a year ago, and the associated net interest margin improved 9.5% compared to the first nine months of last year. The resulting net interest spread was 199 basis points year-to-date, a basis point above the first nine months of 2010.

Although variable account balances decreased 7.5% compared to September 30 of last year, the associated fee income still increased 11% compared to the first nine months of 2010. Combined fixed and variable account balances exceeded $4.1 billion at the end of the first quarter -- at the end of the third quarter.

Our annuity liabilities continue to be very stable, with net fund flows again positive in the third quarter. At 94%, our total 12-month account value persistency is strong and comparable to prior-year. Overall, we continue to maintain a very conservative product risk profile, and have minimal equity market guarantee exposure on our variable annuity product line. In fact, 94% of our in-forced variable account values have either a simple return of premium death benefit or no death benefit guarantee at all.

Unfortunately, market performance had a sizable negative impact on the evaluation of deferred policy acquisition costs for the quarter, compared to a positive impact experienced in 2010. Compared to prior-year, the valuation of total of deferred policy acquisition costs decreased annuity segment earnings $7.7 million for the quarter and $4.7 million for the first nine months.

Combining all of these factors, annuity pretax income decreased $6.9 million or 55% in the quarter, and $1.8 million or 6% for the first nine months as compared to the prior-year results. Excluding the impact of increased deferred policy acquisition costs, amortization, and guaranteed minimum death benefit reserve changes, the underlying annuity pretax earnings posted double-digit increase for both the third quarter and the first nine months of 2011.

As I mentioned earlier, another excellent quarter of annuity sales contributed to strong growth in our total contract deposits received. Our annuity deposit receipts increased 10% in the quarter and 10.5% in the first nine months over prior-year, driven by our single premium and rollover business.

Now turning to our life segment -- pretax income for the quarter decreased $2.6 million, primarily due to higher mortality costs. Year-to-date, pretax income was down $2.9 million compared to the prior year, also due to mortality costs. Life premiums and contract deposits, which consist only of Horace Mann products, were comparable for the quarter and down 1% for the first nine months, as compared to prior year. Our consistently strong life persistency increased slightly to 95.2% as compared to prior year.

Overall, we continue to be encouraged by the strong underlying performance in our financial service businesses. With solid operating fundamentals in place, we fully expect the performance of both segments to continue to improve as we gain additional sales momentum.

Now I will review our agency force, sales results, and marketing programs for the quarter.

Starting with our agency numbers, I've stated that our goal is to continue to increase our total agency count year-over-year. And as you saw in the press release, our (technical difficulty) total agency count was down six from the end of 2010 and up three over the second quarter. We continue to have a strong pipeline of qualified agency candidates, and I remain confident that we will increase our total agency count again in 2011 for the third year in a row.

Taking a look at sales results, our agency force started hitting on more cylinders in the quarter. We saw continued strength in our annuity business, and, as we anticipated, we saw a significant change in our P&C production trends.

Let me break down our sales results down by line, starting with auto.

Our true new unit sales, which represent business from brand-new Horace Mann auto customers, increased 7% in the quarter. Our total auto units, which include add cars, or additional units from existing Horace Mann customers, were essentially flat, down 0.2% during the third quarter. Our true new results were due in part to our marketing and P&C teams executing on their state-by-state auto growth strategy.

So, we're encouraged by the quarter's production as well as our quote volume, which increased dramatically during the back-to-school selling season. And we're seeing improvement with property, as new units decreased only 3% compared to the third quarter of 2010, moderating the year-to-date decline to 10%.

Annuity sales remain strong, up 20% in the quarter compared to last year. At 20%, reflect a 24% increase in flex sales and a 19% increase in single premium and retirement rollover sales. Single premium and rollover sales have been strong for several quarters, but it's encouraging to see flexible premium sales up for the third quarter in a row. Year-to-date, flex annuity sales increased 21% and single premium sales increased 22%. Given the additional opportunities in this market, I continue to be very excited about our growth prospects in this line of business.

Turning to life insurance, Horace Mann life product sales also increased, up 12% during the quarter. Our total life sales, which include our third-party vendor products, were up 7%; and year-to-date, our life insurance sales are also up 7%. As I mentioned last quarter, we enhanced our Horace Mann life insurance portfolio July 1 with the introduction of a single premium whole life policy, a level of term 65 product, a preferred-plus term underwriting class, and improved pricing for [high spacing] on a term policy. We're optimistic about both the activity and results our agents continue to implement and achieve in our local markets.

As we've discussed in previous calls, our agency force has made significant changes in the way they market and build their personal brands. For example, our state teacher retirement system workshops are designed to educate teachers on the retirement system, and our agents are leveraging these opportunities to successfully write all lines of business following the workshop. Through nine months of 2011, 70% of our agency force has conducted more than 3,100 workshops across the country, compared to 10% of our agency force who conducted an estimated 400 workshops in all of 2010. Additionally, our agents continued to increase their insurance and financial knowledge through courses from the American College as well as our own course offerings.

Our continuing partnership with DonorsChoose.org has been mutually beneficial, as we've taken a nontraditional advertising approach with our niche market to support classroom projects. Our agents have explained the program in thousands of schools this year, creating interest, increased awareness of the program, while at the same time building relationships with key administrators, which is key to growing their business. This cause-related marketing effort works particularly well with our market, and has allowed us to help over 350,000 students in 7,300 schools throughout the country. Our fall DonorsChoose campaign combined a matching donation program with our agents and a Facebook campaign (technical difficulty) -- our first steps in building a social media presence.

Finally, we are excited about the new emerging opportunities to support our agents in relationships with their local school districts. We've built great partnerships with various associations at the national, state, and local levels. And this year, we entered into a national partnership with the Association of School Business Officials, which is valuable as we evolve in working directly with school districts, to offer distinctive services offered by our agency force.

Our competitive advantages include relationships with school districts in which we offer a school payroll program, which takes contributions and payments directly from a school employee's paycheck. Currently, nearly one-third of the public K-12 school districts in the United States offer our program for 403(b) deductions. Over 1,200 districts use our life insurance program. Over 800 school districts offer our auto payroll deduction programs that also offer an automatic discount. And over 200 districts are utilizing Horace Mann to manage their Section 125 Flexible Benefit Programs. Our school payroll program, along with our state teacher retirement system workshops, in support of DonorsChoose.org, are very unique to our agents and our marketplace, and are definitely proving successful.

In summary, all of these efforts helped place agents directly in the schools where they serve, and position them as trusted advisors who add value to the retirement savings and insurance sales production equation for our educator customers. Overall, we are encouraged by the successful sales and staffing results for the quarter. We're starting to hit on more cylinders, as we exceeded prior-year sales in our lead lines of business, and increased the size of our agency force. We have positive leading indicators that make us optimistic that we will continue to elevate sales in the fourth quarter.

Thank you, and now back to Todd.

That concludes our prepared remarks. Tasha, please move to the question-and-answer session.

Tasha, that concludes our prepared remarks. Please move to the question-and-answer session.

(Operator Instructions). Bob Glasspiegel, Langen McAlenney.

A quick question on statutory earnings year-to-date. Do you have that number?

Hi, Glass. This is Dwayne. On a preliminary statutory basis, the year-to-date income for the life companies is $34 million, almost $35 million. The P&C with the cats is in a loss position, about $11 million, and in total about $23.5 million.

Okay. But fourth quarter, if you're in the $0.50 to $0.60, that would generate a little less than that in stat earnings? Or you're not growing --?

Right, also keep in mind, Bob, in the fourth quarter, some anticipation of market performance improvement, which is just a GAAP measure versus stat. So, although we didn't have the unlocking impact in stat, we wouldn't have the benefit coming back either in the fourth quarter.

Okay. As you look at the buyback option versus dividends, what would move the needle one way versus the other? When you talk to your shareholder base, what sort of feedback are you getting on what they would prefer?

Bob, hi, Peter Heckman. I think we get a variety of feedback from our shareholder base, depending on their investment horizon and so forth. Clearly, with our stock trading as low as it has been, repurchases become obviously more compelling. But still we look at capital management as a long-term proposition and we continue to evaluate that; and will, as I said, be doing that again in December, which is normally the time we reach some conclusions with regard to action plans.

I think, as you pointed out, as we moved into the first -- or past the first quarter of the year into the second quarter, and saw the first half cats that were sizable, before any hurricane season approached, we were a little bit thankful, as you pointed out, to have the capital cushion. Now that the wind season is pretty much behind us and it looks like maybe the -- yes, knock on wood -- looks like perhaps the European crisis is a little bit more stable. I think those are all factors that will enter into the Board's deliberations and ultimate decision that I think we'll reach in December.

Okay. What -- are you getting enough rate to keep up with loss cost growth in auto and property for margins to expand in 2012? And do you need more -- are you going to take more in light of the cat experience and property?

Yes, Bob, this is Tom Wilkinson. We haven't had any issues in achieving -- in getting the rate in 2011, and we don't really anticipate any issues in 2012, especially on the property side, given with what we're seeing in the marketplace, with everybody else's cat activity and the conversations they're having about increased rate levels.

We are in the middle of the planning process now and looking at what we would need for rates next year. We don't -- right now we don't project it to be any more or any less than it really has been the last couple of years. So we don't really anticipate any huge problems there.

Okay, thank you, guys.

(Operator Instructions). There is an actual participant actually I'm not able to execute at the same time, but we do have [Nat Warman].

Pardon, Nat Warman?

Yes, ma'am, with (multiple speakers) --

Tasha, you're on the public line.

Thank you.

Tasha, this is Todd. Are there any more questions?

Thank you, everyone, for participating in our call this morning. If you have any questions, please feel free to contact me, Todd Nelson, at 217-788-5738. Thanks again.

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