Horace Mann Educators Corp. Q4 2008 Earnings Call Transcript

| About: Horace Mann (HMN)

Corporate Executive Board Company (NYSE:HMN)

Q4 2008 Earnings Call

February 5, 2009 10:00 am ET


Louis G. Lower, II - Chief Executive Officer and President

Peter H. Heckman - Chief Financial Officer and Executive Vice President

Tom Wilkinson - Executive Vice President of Property and Casualty

Steve Cardinal - Executive Vice President and Chief Marketing Officer

Dwayne D. Hallman, Sr. - Senior Vice President of Finance


Robert Rodriguez - First Pacific Advisors


Good morning, ladies and gentlemen. My name is Stephanie and I will be your conference operator today. At this time, I would like to welcome everyone to the Horace Mann Educators Corporation fourth quarter conference call.

(Operator instructions). I would now like to turn the call over to Dwayne Hallman, Senior Vice President of Finance.

Please go ahead, sir.

Dwayne Hallman

Thank you. And good morning, everyone, and welcome to our fourth quarter and year-end 2008 earnings conference call. Yesterday after the market closed, we released our earnings report including financial statements, as well as supplemental business segment information. If you need a copy of the release, it is available on our website under Investor Relations.

Today we will cover our results for the fourth quarter and year-end in our prepared remarks. The following management members will make presentations today, and as usual, we'll be available for questions later in the conference call, Lou Lower, President and Chief Executive Officer; Pete Heckman, Executive Vice President and Chief Financial Officer; Tom Wilkinson, Executive Vice President of Property and Casualty; and Steve Cardinal, Executive Vice President of Marketing.

The following discussion contains forward-looking statements regarding Horace Mann and its anticipated or expected results from operations for 2008 or subsequent period. Our actual results may differ materially from those projected in the forward-looking statements.

These forward-looking statements were made based on management’s current expectations and beliefs as of the date and time of this call. For discussions of the risk and uncertainties that could affect actual results, please refer to the company’s public filings with the SEC and in the earnings press release issued yesterday.

We undertake no obligation to publicly update or revise such forward-looking statements to reflect the actual results or changes, assumptions, or other factors that could affect these statements. Since this is year-end, we'd like to remind everyone that the company's financial statements are subject to an annual audit process that will not be considered complete until the filing of the company's 10-K.

While some audit procedures are not yet complete, management does not anticipate any material changes to the earnings report being discussed today. Finally, this call is being recorded and is available live on our website. An Internet replay will be available on our website until March 5, 2009.

Now I'll turn the call over to Lou Lower for his comments.

Louis G. Lower, II

Thank you, Dwayne. Good morning, everyone and welcome to our call. Yesterday we reported fourth quarter net income before realized capital gains and losses of $0.51 a share.

Despite the tax rate costs for the year of $74 million, the second worse in our history, we did close out the full year at $1.29 per share. For both the quarter and year, final results exceeded our revised guidance as well as consensus.

While clearly not a year that we'd like to repeat, it did demonstrate large profitability to absorb the one-two punch that 2008 delivered to us and the industry in the form of significant catastrophes and a meltdown of the financial markets.

All in all, we feel very good about the underlying fundamentals of profitability our operations and resiliency and strength of our balance sheet. Most importantly, despite the very difficult economic climate anticipated in 2009, we believe that the nature and characteristics of our target market will not only benefit us, but allow us to continue to move forward with continuing and greater success in the transformation of our distribution system.

I'm not suggesting that we'll be immune to recessionary courses, just that our market did show characteristics that will serve to mitigate the impact of some of the broad environmental forces at work.

Looking first at our balance sheet and financial strength, you'll note that absent the third quarter headlines of Freddie, Fannie, Lehman, and AIG, realized losses were significantly less sequentially as we had anticipated.

Just to iterate what we communicated during our last call, the meaningful increase in our unrealized position over the course of last year was overwhelmingly resolved, a frozen credit markets where spreads and entices have become disconnected from rational valuation.

After conducting a thorough analysis, along with our institutional investment advisors and managers, we have assured ourselves that we do not have fundamental credit quality issues, rather we believe that over time, rational pricing will return to the credit markets, reducing spreads, and moderating our unrealized position.

In the meantime, we fully have the intent and ability to hold to recovery. The structure of the liabilities associated with most of the taxable fixed income portfolio, and that’s primarily annuities, continues to demonstrate very strong persistencies in continued positive funds flow, which I think speaks volumes about the nature of our products, our customer base, the strong relationships our Horace Mann agents have with their clients, and the great service our customer service reps provide.

Now just as important as all those positive balance sheet attributes, which actually reflect how we operate in the market we service, is what we have avoided while the world's appetite for risk increased in this decade.

We have no extracurricular activity with the holding companies, such as credit default slots and securities lending. We have minimalist exposure to the sub-prime and Alt-A and no hedge funds.

Our product guarantees are simple, straight forward, and nontoxic and, as you'll hear again, our investment portfolio is conservative, high quality, and not exotic. Also as we discussed, we have no refinancing needs for some time.

Our senior debt issues on the turn until 2015 and 16 and our credit facility which was paid down from 38 million prior to year-end doesn’t expire until 2011. We continue to be very comfortable as the strength of the company C&C reserves, while favorable development over the full year was modestly less than prior year, we don't anticipate the same level in 2009.

But having said that, our year-end reserve position remains solid and near the high end of the range determined by independent evaluation.

Just to complete the balance sheet highlights, our critical capital ratios are all well within our target ranges with debt to CapEx as 115 to 27%, while both licensing and P&P RBP ratios are comfortably within our target ranges. While book values was as 115, decreased 30% year-over-year and that's primarily attributable to unrealized losses in the investment portfolio.

For the quarter, rate of decrease moderated to 3%, excluding as 115, the year-over-year decline in book value was 2%, while it did increase 2% sequentially.

So now let me shift gears and hit the highlights of our operations, which Tom Wilkinson, Pete Heckman, and Steve Cardinal will cover in greater detail.

In property casualty both reported and underlying process fundamentals are solid. Despite another quarter of higher catastrophe losses that did include additional developments in Hurricanes Ike and Gustav, the all-in combined ratio of 93 increased just one point as compared to last year's fourth quarter.

Current accident year results CapEx are better than prior years for both the quarter and year by about a point.

A significant improvement in auto, led by declining frequency, more than made up for unfavorable comparison in property, largely as a result of non-cat weather. Auto Educator PIF continues to increase but overall was flat while high quality new and import business, along with positive retention trends, continues to benefit our results.

In our life and annuities business, the financial markets reduced our VA account values and resulting fee income. Additionally they created adverse stock DAC unlocking as our planned long-term market return assumptions obviously didn’t come to pass in 2008.

That said, excluding DAC & GMDB reserve changes, combined life and annuity pre-tax earnings were only modestly less than the very strong results reported last year. All variable account values and fees have obviously decreased. Fixed account values are up both over prior years and sequentially the overall positive fund scroll (ph) and improved consistency.

Turning to sales and distribution, the recession's adverse impact on new car and home sales continues to pressure applications for both auto and property insurance coverage industry wide. For us, true new auto sales declined eight percent in the most recent quarter although they did increase sequentially.

Offsetting sales pressure in the property sales increased close to six percent retention improved in both lines and average written premium increased all combining to deliver positive gains in total written premiums.

Horace Mann annuity sales decreased 12 percent in the fourth quarter but both new sales in total premium and deposits for the year were actually better than what we had anticipated, given the impact that we expected from changing IRS regulations that we previously discussed with all of you.

And speaking of those regulations, you are going to hear some very positive news from Pete regarding our success in protecting the company's current 403(b) payroll slots while capturing opportunities for expansion in new markets. And very importantly, for the future growth of the company during the fourth quarter our ABS agents again outperformed their peer active agents in productivity in all lines.

In addition, as you will hear from Steve, we offered a contract conversion opportunity to our newly developed exclusive agent contract to roughly 120 qualifying agents and now have 71 as of January 1st, operating in that status which we believe bodes very well for making our agency system more powerful in our market as we go forward.

So what do we expect for 2009? Well first of all despite taking some hits in 2008, we enter this year well capitalized with a full compliment of resources we need to pursue our strategic growth initiatives.

For property and casualty, the headwinds of the underwriting cycle are going to continue to present challenges particularly in the auto line where we anticipating some upward pressure on frequencies, as compared to the second half of 2008.

We're counting on our claims organization to continue to produce favorable results into severity control. But at the same time, we recognize the need to take rates over the course of the year, and Tom, as you'll hear, has plans fully in place to do just that.

We do suspect a year of solid profitability with a combined ratio range of 96 to 98, which incorporates an increase cat-load, compared to previous year's expectations and less in the way of favorable prior year developments than we experienced in 2008.

Also assuming a return to more normal market appreciation, we're also anticipating solid pre-tax operating income growth from life and annuity, despite a challenging economic environment.

And you know even with that challenging environment, we plan to deliver organic top line growth in our niche market led by auto unit sales as we build on the momentum that we've already established with those agents who are transitioning to our new agency business model, as well as new agents that we are going to be hiring directly into the model.

As that growth takes hold, we anticipate delivering low single digits property cash return and growth in 2009, which should further accelerate in 2010. Taking into account the pace of the business and the initiatives that we're putting in place to drive future growth, our earnings guidance range for net income, excluding capital gains and losses, for 2009 is a $1.45 to a $1.65. That range considers and reflects the economic environment we face, the competitive environment, the challenges of the underwriting cycle we're in, and the additional investments we're making to grow the business.

And speaking of growing the business, at the end of last year, we announced the key addition to the Horace Mann Leadership Team with Steve Cardinal joining us as Executive Vice President and Chief Marketing Officer.

Steve joins us from Country Wide Financial where he served as Executive VP of Personal Line Distribution and President of Country Wide Insurance Service. In that role he designed and built an exclusive agent program from scratch, including recruiting and appointing 250 agents in eight states in less than two years.

He also brings extensive and very successful sales and marketing experience from his tenure at AllState and MetLife advancing through the ranks from agent to district manager, to territorial manager, and ultimately regional distribution leader, where he was responsible for five states that produced 1.5 billion in premium through about a 1000 exclusive agencies.

His experience working with a number of distribution models, exclusive, employee, and independent, is going to serve us very well in the continuing transformation of our distribution system.

So just to wrap it up, 2008 was a tough, tough, tough, year for all but we have emerged intact with a strong balance sheet, with solid capital ratios, backed up by financial flexibility at the holding company, if we need it.

The increase in the unrealized loss position in our investment portfolio is driven by the systematic widening of spreads in a dysfunctional market, not with the assets. While the market sorts itself out and returns to more rational evaluations, the nature of our liabilities and cash flow from operations backs up our ability and intent to hold our investments to recovery.

Cash flow from operations is strong and backed up by excellent liquidity. Our underlying profitability in both PNC and life annuity is solid and sustainable as we go forward.

Our target market will serve to mitigate, but not eliminate recessionary forces. Finally and very importantly for our future prospects, the results of our strategic growth initiatives to make our marketing and distribution more powerful our improving every day.

Now I will turn it over to Pete Heckman for some further elaboration on our result.

Peter Heckman

Thanks, Lou. I would like to provide some commentary this morning on Horace Mann's investment results and portfolio, our capital and liquidity position, the 2008 operating results, and our 2009 earnings guidance.

But before I get into the details, let me first summarize by saying that our investment portfolio, capital levels and ratios, and liquidity position remain strong and in good shape, despite the persistent uncertainty and volatility in the financial market.

Our underlying operating results continue to be solid with 2008 operating income finishing the year above the top end of our guidance range, which will provide a strong foundation to build upon in 2009.

So turning first to our investment results, the performance of our $3.5 billion investment portfolio remains strong, with an overall quality rating of AA and is well diversified across industries, investment types, and individual issuers. That being said, our portfolio is certainly not immune from both realized and unrealized investment losses.

Pre-tax net realized capital losses were 8.2 million for the fourth quarter, included in this amount was 5.8 million of incumbent write-downs on securities, which we continue to hold, but determined to have had other than temporary declines in market value as of quarter end.

Of that amount, approximately 2.2 million relates to impairments for which the issuer's ability to pay future interest and principle based upon contractural terms has been compromised, including Lehman Brothers, Fannie Mae and Freddie Mac, which we initially impaired last quarter.

The remaining 3.6 million relates to impairments of primarily high yield bonds and preferred stock, where we no longer have the intent to hold the security for a period time necessary to recover a substantial portion of the decline in value.

We also realized 4.6 million of losses on impaired securities that we’ve sold during the quarter, mostly from our high yield bond portfolio, which was partially offset by 2.2 million of realized gains on investment sales.

The volatility and credit spread and interest rates during the last three months of the year was extreme, although ending with a more positive trend, the total fair value of our investments experienced a further decline in the fourth quarter.

We’ve provided a supplemental exhibit at the end of press release package again this quarter, I believe it’s page number six, which contains additional disclosure related to our net unrealized loss trends and December 31st balances.

Net unrealized investment loss at of the end of the fourth quarter totaled $327 million pre-taxed, up from the 271 million recorded at September 30th. As you can see in the data, the direction of magnitude of the changes vary widely by asset class, but the CMBS portfolio was the most significantly impacted, accounting for more than all of the total increase.

Horace Mann had approximately $330 million of CMBS book value exposure at the end of the fourth quarter, representing about 8-1/2% of our total investment portfolio. Although CMBS spreads widened significantly in the third quarter, spread widening accelerated further at the end of the year increasing our unrealized loss to 109 million at December 31st.

While this asset class has experienced unusual pressure, we remain comfortable with the overall quality and performance of our holdings. Additional information on the composition of this portfolio is disclosed at the bottom of the exhibit on page six. You’ll note that the CMBS portfolio is 100% investment grade and the overall credit quality is a solid AA.

At December 31st, approximately 55% of the portfolio showed value, was comprised of a higher quality in 2005 and prior exhibitures and of the remaining securities, 60% are rated AAA, and the portfolio is well diversified across a 128 investment positions with an average carrying value of $1.7 million.

All of the securities in Horace Mann CMBS portfolio are currently performing in line with contractural terms and did not experience any unusual deterioration in the delinquencies or foreclosures during the quarter.

For this portfolio, we regularly analyze available market information, including underlying credit quality, anticipated cash flows, credit enhancements, default rates, loss severities, and our position in the capital structure.

We also utilized a variety of third-party analytical models to evaluate various stress scenarios in order to ascertain the conditions that could overly result in potential losses in our holdings.

Based on our current analysis, we do not believe that the available fair value prices are indicative of the quality and future performance of the securities. The other asset class I’d like to comment on this morning is high yield, that market endured a dismal fourth quarter which spread lightening to all-time highs.

As a result the unrealized loss in Horace Mann’s portfolio increased by $21 million during the last three months of the year to a total of 38 million at December 31st. Our high yield manager is conservative and has an excellent track record, particularly in difficult market environments such as this.

Our holdings are concentrated in the higher single and double B-rated securities and are well diversified across 32 industry classifications and 138 issuers. The average issue size is just over $1 million with our largest high yield holding being a 2.5 million.

As a final comment on the quality of our overall investment portfolio and as further evidence that the recent increase and unrealized losses is more indicative of spread widening than inherent credit issues, consider that over 82% of the securities with fair values below 80% of book value at December 31st have been below 80 for only three months or less, and we continue to have less than 1/10 of 1% of our portfolio price enter, based on so called level three inputs.

Another element of conservatism and transparency in our valuations. So in terms of an overall assessment of our investment portfolio, we believe the credit quality to be strong, view the current pricing of the market to be irrational and not indicative of the underlying quality and currently have the intent of ability to hold all securities to maturity or substantial recovering in value.

Next I’d like to spend a few moments with Horace Mann’s capital and liquidity position. Inside of the catastrophe loss emergence and the continuing challenges presented by the financial markets, our leverage and operating ratios remain strong, both at the insurance company subsidiary and holding company levels and continue to be more than adequate to support our operations and current ratings.

In spite of the high level of investment losses during 2008, we estimate our life company risk space capital ratio will end the year comfortably above our chartered level of 400%, once the statutory results are finalized.

We also expect our year-end PNC capital ratios to be favorable relative to our target levels, with both RBC and premier to surplus ratios better than where they were just three years ago.

Furthermore, our $125 bank line of credit provides more than adequate flexibility should the need exist to contribute to additional capital to our insured subs. We currently have $38 million drawn on the credit facility and the majority of which remains at the holding company.

And our adjusted capital ratio including the outstanding bank borrowing is approximately 27%, excluding tax 115, in a range consistent with our current ratings. There are no liquidity issues are the statutory MB level.

Our liabilities are extremely vanilla (ph) and stable. In the annuity and life segments, funds closed, persistency, and liquidity measures are all favorable, which I'll elaborate on in a few moments.

Cash and cash equivalent balances currently stand at 246 million, and we expect the life and annuity investment portfolios to throw off over 400 million in cash in 2009. In addition, should the need arise the life company investment portfolio includes approximately $1.4 billion of highly liquid assets in an unrealized gain position consisting of 750 million in agency pass-throughs, 130 million of U.S. government agencies, and 390 million of corporation securities.

The P&P portfolio contains $260 million of comparable assets, including a $190 million of municipal bonds. At the holding company, as Lou mentioned, there are no business operations our experts with their activities of any kind. No credit default slots, security lending, derivative, or hedging programs, et cetera.

Our bank credit facility doesn’t expire until the end of 2011 and our earliest senior debt maturity isn't until 2015. So our capital and liquidity position remains calm in spite of the challenging financial markets and economic environment.

Finally, some thoughts on our operating results. There were certainly a lot of moving parts in our 2008 operating (inaudible) temporarily normalized last year results, which dropped a slippery slope to begin with.

Let me simply try to highlight some of the key factors that impacted our operating income in 2008 and offer some perspective on the key drivers underlying our 2009 guidance range.

Earnings in all of our segments has played rather significantly in 2008 from the impact on expenses of lowering some of the compensation which was further exacerbated by the decline in Horace Mann's stock price during the year.

In the fourth quarter, our credible income tax expense, primarily affecting the (inaudible) segment, benefited from a release of contingent pack reserves. Now not assuming those expense messages will recur in 2009.

In our P&C business we were, of course, negatively impacted by the record level of catastrophe losses in 2008. Our guidance anticipates a return to more normal catastrophe levels in 2009, although we have increased our cat-load assumption somewhat.

Partially offsetting the impact of catastrophes was a much higher level of favorable prior years of reserve development than we expected. While we would not be surprised at the thumb-level of favorable development in '09, given our conservative reserving approach, we are certainly not anticipating anything close to the level we incurred (ph 0:30:39) last year.

In our life and annuity segments, we're anticipating modest growth in operating income in 2009, excluding DAC unlocking and change in the guaranteed minimum death benefit reserve.

Specifically in our annuity business we are assuming market appreciation of between 8% to 10%, more consistent with historical return levels. We anticipate a reduced level of the variable annuity contract charges and fees in 2009 to be more than offset by increased fixed annuity interest margins and a reduced level of amortization related to our VITH (ph) block.

On the life side, we're anticipating a return to more normal mortality.

Putting all of that together, we've built in our guidance range of $1.45 to $1.65 for 2009 net income, excluding realized investment gains and losses, which is generally consistent with current (inaudible) estimates.

So while the financial markets and investment performance remain headline issues, forest land continues to experience positive underlying trends in our insurance operations. I'll come back in a few moments to talk more about life and annuity, but first, here's Tom Wilkinson to comment on our P&C results. Tom?

Tom Wilkinson

Thanks, Pete, and good morning. This morning I'll discuss what's behind our combined ratio for the quarter and the full year, cover results by line, review trends in our book of business and finally, take a look at the year ahead.

Starting with the combined ratio, the combined ratio for the quarter increased one point from the fourth quarter 2007 (inaudible) of 92.9%. Total catastrophe costs were almost $10 million in the quarter, with $7 million due to additional development and new estimates for the two third quarter hurricanes, Gustav and Ike.

The total cat-cost contributed three points more to the combined ratio than prior year cat-costs. On the other hand, favorable prior year reserve re-estimates of $6.7 million were a point better than a year ago.

So when you exclude cats and prior year activity, we posted an underlying combined ratio of 90.5%, which was a point better than last year.

Looking at the full year, a combined ratio of 100.7% was 8.8 points above 2007 combined. The cat-serving net cost of $74 million, the second highest year in our history, equal a 13.7% of premium, up 9.3 points over last year.

Favorable prior year reserve re-estimates of $18 million were less than prior year, contributing a slight combined ratio increase of 0.4% of a point. Our year-to-date underlying accident year combined ration ex-cat was 90.3%, about a point below prior year. And we had a favorable expense ratio variance of 0.7% of a point, and an underlying loss ratio about equal with prior year.

Moving on to results by line, the auto accident year combined ratio excluding cats was 97.3% for the quarter, 3.8 points below prior year. Recorded frequency was, once again, lower than prior year, favorably impacted by the continued decrease in miles driven, but not as favorable as last quarter.

In addition, we were impacted by the bite of winter storm activity, specifically in the Midwest and the Northeast. Our severity results remain favorable and consistent with our expectations.

Looking year-to-date, our auto underlying combined ratio of 94.7% reflected an improvement of 2.4 points better than prior year, with the loss ratio 1.4 points better.

Turning to property results, the underlying accident or combined ratio, excluding catastrophes, for both the quarter and year-to-date was about four points above last year's level. All year, non-cat weather, specifically spring wind, hail, tornado activity, and the winter storms, were major contributors to these increases.

Now a look at our growth trends. Total P&C net written premium was up 3.8% in the quarter. On a direct basis, before re-insurance costs, total P&C premium increased 2%, with auto up 1.9% and property up 2.5% quarter-over-quarter.

For the full year, total P&C direct premium was up 1%, with auto increasing seven tenths, and property rising 1.3% compared to the previous year. Our auto rate activity increased significantly in the quarter, with the number of rate changes doubling compared to prior quarters, and the average amount of change also increasing significantly.

Auto policies in force were flat year-over-year. However, educator PIF continued to increase for the fourth consecutive year, increasing sequentially by about 1,700, ending the year 9,600 units or 2.2% above the 2007 year-end level.

Property PIF declined in 2008 by 1% or about 3,000 units, as a result of our continued coastal exposure reduction programs. In Florida we decreased total policy count by 3,500, as we completed a major non-renewal program, though we offered affected customers the opportunity to obtain coverage from one of our partner companies, to keep the policy with the Horace Mann agents.

In 2008 we decreased our total countrywide coastal property policies by 13% and by 35% since 2005. We anticipate continued deductions in Florida, as well as other coastal territories, as we continue to mitigate our coastal exposure.

Like auto, property educator PIF continues to grow, increasing by about 1,000 units sequentially, and for the year by almost 3,000 units, or a 1.6% increase over 2007 year-end.

Our new business quality trends have been favorable. We have continued focus on the educator market, deferred underwriting tiers, and cross-sell opportunities.

Our auto in-force work is now almost 80% educator, over 75% in preferred tiers, and over 70% cross-sold. Additionally, over 20% of our auto customers had at least three lines of business with Horace Mann. Each of these book of business quality metrics improved in 2008, driven by favorable new business quality trends.

And we continue to expand our auto payroll deduction program, with new schools joining the program increasing 25%. Total policies on payroll deduction are up almost 50% in 2008.

And policy holder retention rates continue to increase in a very competitive environment. We posted retention increases for the fourth consecutive year. We finished the year up a tenth of a point in auto and three-tenths of a point in property.

So what does 2009 look like? Well, 2009 calls for a P&C combined ratio in the 96% to 98% range. There are several significant changes that have affected our expectations for 2009, and that is driving our expected combined ratio higher than previous ranges.

As is customary, we are assuming an average catastrophe year. However, based on recent trends in weather patterns and industry catastrophe loss results, we are increasing our expected cat-load as a percent of premium to the 6% to 7% range, a one to two point increase over prior expectation.

The entire cat expectations are also included in our pricing indication process, and should be earned over the next couple of years. A second change is assuming much lower levels of prior year development. The past two years, we have had over three points of favorable impact on prior years. For 2009 we are assuming, as are others in the industry, much less in the way of favorable development of prior year reserve levels.

In addition, we expect frequency to flatten out next year, after the declines of this year, which were impacted by sharp increases in gas prices and a resulting decrease in miles driven. We expect severity trend, managed by our reorganized advanced claim environment group to continue to be consumer price index indicators.

We have started, and will continue to increase our pricing actions to align with loss cost trends. We anticipate that our (inaudible) underlying loss ratio, excluding catastrophe, will be flat in 2009.

We expect the P&C market, especially auto insurance, to remain highly competitive in 2009. Competitors will continue refining their pricing models, and will continue with high levels of advertising spent.

We plan to complete (inaudible) limitation of our auto educator segmentation model, ESM, this year, and will pilot our homeowners USM model in the second half of 2009.

Our expense ratio will increase next year as the benefits realized from 2008, which Pete discussed earlier, return to normal level and we continue to invest in our growth initiatives. We expect the ratio to come down in future years as the programs deliver our growth plans.

And finally, we anticipated that in future years as we turned current planned late activities and premiums from the change to the cat-load, along with meeting our growth objectives, our target combined ratios should decrease to be consistently in the mid 90s.

Now I would like to turn it back to Pete to cover life and annuity results.

Peter H. Heckman

Thanks, Tom. Total annuity sales were down 11% in the fourth quarter, compared to prior year, and down 9% for the full year. However, 2008 annuity sales exceeded our expectations and those prior year comparisons masked what I think is a pretty positive picture in this line of business, especially as far as our Horace Mann agents are concerned.

As we expected, the IRS 403(b) transition rules had a negative impact throughout the year on single premium and rollover deposits due to interim restrictions on participate fund transfers, which resulted in total single premium sales being down 11% for both the quarter and year.

Our independent agent channel, which accounts for only about 10% of our annuity sales, was impacted more significantly. However, Horace Mann agents' sales, in our core flexible premium business remained comparable to prior year in 2008, in spite of the 403(b) transition and difficult economic environment.

Furthermore, our agent sales of new flexible premium contracts purchased primarily by new Horace Mann annuity customers increased more than 8% during the year, a very positive results as far as market penetration is concerned.

As we discussed on previous calls, the new IRS regulations generally became effective on January 1st of this year and 2008 was clearly a transition year in the marketplace. Over the last 18 to 24 month, we deployed a variety of strategies to solidify our position and grow our business.

We implemented numerous contact programs with our schools, including direct mail campaigns and distribution of compliance kits and established a website to facilitate information exchange.

We also supplemented our agents' training so they could provide a high level of consultative support to school administrators. At this point in the process we've heard from virtually all of the more than 5,000 school districts where Horace Mann had payroll slots and I'm pleased to report that we have retain 90% of those slots and have won a fair number of new slots along the way.

So overall the initial transition was much less disruptive than some had expected and, very importantly, the outcome for Horace Mann was extremely positive. And with regard to the financial results, total annuity assets under management decreased 12% compared to prior year due to a 38% market performance related decline in variable annuity assets.

General accounts 60 million assets on the other hand increased by 7% over the last 12 months. The stability and loyalty of our educator customer base and the quality of our dedicated agency boards are among the company's most valued assets and that has been v very evident in this difficult market environment.

Annuity net fund flows defined as premium less surrender his debts and maturities were positive each quarter throughout 2008. Our 12-month account value persistency of 93% is up two points over prior year. So our liabilities continue to be extremely stable and present no liquidity issues.

Annuity pre-tax income was down $5.7 million in the quarter and $5.3 million for year. In the fourth quarter, unfavorable DAC and zip unlocking of $4.1 million pre-tax was a result of the financial market impact on variable deposit fund performance, partially offset by the positive unlocking impact related to investment losses realized in the quarter.

The poor market performance in the fourth quarter also resulted in a $1 million increase in our GAAP guaranteed minimum debt (inaudible ) reserve. The underlying earnings in both the quarter and the year-to-date were favorably impacted by increased fixed annuity interest margins, which were offset by a decline in variable annuity charges and fees.

As a final comment on our annuity business, I wanted to reemphasize that while our variable annuity was real are impacted by financial market performance, Horace Mann variable products are only minimally exposed to so called equity markets guarantee risk.

Approximately 2/3 of our in force were able annuity account value has a simple return of premium death benefit, while over 25% of the business has no death benefit guarantee at all. Our current GAAP GMDB reserve balance of only $1.3 million reflects that conservative risk profile.

We offer no other guarantees and have no hedging or derivative program exposure whatsoever. Now turning to the life segment, fourth quarter and full year sales were down approximately 15 to 20%, compared to prior year, reflecting the impact of the economy on discretionary spending, along with perhaps a greater relative emphasis by Horace Mann in 2008 on auto and annuity sales.

Life premiums and contract deposits were comparable to last year. In terms of earnings, life segment pre-tax income was down $600,000 in the quarter and down a $1 million for the year.

Mortality costs were slightly greater than last year in the quarter but were nearly $3 million higher for the full year, which offset the growth in investment income and earned premium.

As mentioned in our press release, excluding the impact of DAC on locking and change in the minimum death benefit reserve, full year pre-tax income for the combined life and annuity segments was only modestly below a very strong 2007 and was consistent with our expectations in spite of extraordinary level of volatility and decline in the financial market during the year.

Looking ahead to 2009, both annuity and life pre-tax operating earnings are expected to be moderately higher than 2008, adjusted for the impact of DAC unlocking and change in GMDB reserve, reflecting an anticipated return to historical market appreciation levels and more normal mortality.

So with that, let me turn it over Steve Cardinal for his comments on sales and distribution. Steve?

Steve Cardinal

Thanks, Steve and good morning. I'd like to start by saying that I'm excited about the opportunity I have with the Horace Mann franchise and I'm equally excited to be working in an attractive market niche with a great team.

With that said, I'll focus and balance my comments in three areas the status of the agency business model, or AMB, the agency force, exclusive agent agreement, and sales results in both the quarter and the year.

So I'll start with the AMB. It was reported in the past and I'll continue to expand the four agents (inaudible) wrapped in the value of the concept and working from an outside office which is full house and most importantly licensed for research for transforming the operation, the AMB agents have become productive and our average clear rates are more productive than the home based agents.

The entrapments of this model is evident in the percent of agents conducting business in outside offices, which grew in 2008 to nearly 75% from 60% of the total agency force. Conversely home based figures decrease by 40% with a majority of determination from 62% while (inaudible).

There's more evidence our agency force is changing. The number of agents who are working in outside offices would like to producers group from less than 200 over 300 during 2008. The majority of these agents in these outside offices have attended our agency business school.

ADF you'll recall updated focused and recognize industry best practices that help in other businesses in announcing office. As a result of that, their dedication is absent as well as we've seen in a number of license producers continue to grow.

Licensed producers grew at 394 from 350 in the quarter. Although we've had a number of positive results the agents have declined in the quarter to 670 from 690. And as I mentioned the before the determination of predominantly (inaudible) for our lowest producing agents, determine that agents productivity was approximately one-third of that of our average agent.

Regardless, the total points of distribution have increase and now number 1,064. We introduced a new program to provide flexibility the agents that have adopted their own business model and in some cases, stayed.

In the fourth quarter, we introduce an exclusive agent agreement which is designed to put agents in a position to become business owners and invest their own capital to grow their agencies, gives the ability to design marketing planning that makes sense for the business that can be aggressively executed.

And at the end of December, 71 Horace Mann agents elected migrate from employee stat and become our novel exclusive agent class. As of January 2nd , they were open to business, functioning as independent exclusive agents.

To better support these independent business owner, we have reorganized our field management structure, downsizing a consultant role that will be played by field self leaders. In better focusing and expanding control of field self leaders system, more time in delivering their sales plan and recruiting new talent in the exclusive agent opportunities.

And by the way, all agents recruited from this time forward will either come on board as exclusive agents or convert to the exclusive agent within two years. I'm also happy to say we're able to recruit highly sales and sales managers from the industry experience working and leading the exclusive agent world.

The combination of new self management talent experience hold great promise to the team and creates successful results for our agents.

Okay, let's move onto to the sales results. As Lou mentioned, the economy has impacted new business results as auto and home sales have moved into a crawl. In spite of these challenges our agents are continued to communicate with their customer and have helped (inaudible) level.

This increased retention coupled with an increase of average productivity helped agents maintain their income level.

Now let's look at sales productivity first. Average turn-to-lock of productivity increased 7% in the quarter and 2% for the year. Flexible annuity productivity increased 4% in the quarter and 12% in 2008. In single annuity sales, productivity was essentially flat with 1% increase in the quarter but up to a respectable 7% for the year.

As you might guess, based on earlier comments ABM agents produced substantially more business across the board than their non-ABMs. And on the sales side, both our limit sales decreased 9% in the fourth quarter versus the same period in 2007 with true new auto sales down just over 8%.

Property unit sales were up in the quarter by about 6% compared to a year ago and up 3% sequentially. For the year property expenses put other lines down 6%. Results improved and employees excluding increase about 3% for the year. We believe these results are similar story in our long-term fourth quarter from the prior year.

While the economy will present challenges I'm encouraged by the (inaudible) made by the growing rank of our ABM agents, the trend of the mix of the agent types, and the enthusiasm of agents who elected to become an exclusive agents.

Our distribution strategy has been evolving these past few years with an eye on building a more attractive, highly professional agency force. And I believe we are well positioned for the right leadership team to take full advantage serving this attractively edged market by engaging our agents and their licensed staff and abetting with people processes a great success.

Thank you and now back to Dwayne.

Dwayne Hallman

Thank you, Steve. That concludes our prepared remarks. Obviously, we expand our remarks considerably but believe it is certainly prudent in the current environment. So, operator, if we could please move to the question and answer session.


Thank you. (Operator instructions).

Question-and-Answer Session


At this time, you have no audio questions. I'm sorry you do have an audio question from the line of Robert Rodriguez of First Pacific Advisors.

Robert Rodriguez – First Pacific Advisors

Good morning. Really I appreciate the details on the balance sheet disclosures that you had but could you go in a little bit more on some aspects. In terms of your commercial mortgage back securities, as to the types of securities those maybe or whether they are strip centers, or any detail that you can go into that?

And secondly, in terms of your financial institution investments whether you could describe a little bit more about what's gone into both the preferred as well as the corporate bonds?

Peter Heckman

Yes, Bob, this Pete Heckman. Our CMBS our primarily conduit fusion securities certainly in excess of half of those with really minimal exposure to any single borrowers (inaudible) issues.

The detail we provided on page 6 of the exhibit kind of lays that out by rating and by vintage year. We have some sell powers, some military housing, which are all AA and above, but again most of them are concentrated in the conduit fusion category.

With regard to financial institutions again as you see in total on page 6 that portfolio is about I think 7% or so of our total holdings. And it's certainly still under stress although it's improved somewhat on the corporate bond side in the fourth quarter.

We've got about a $60 million of financial institutions preferred stocks to a variety of holding including some European firms, but again feel as though with the broad U.S. and international support for financial institutions, including the TARP program and the like that, given the solid names that we posses in our portfolio that we are in good shape at this point.

Robert Rodriguez – First Pacific Advisors

Okay, in terms of TNBS beyond sell towers, are these in residential – I should say into condominiums, commercial strips, or anything like – can you give any detail there?

Dwayne Hallman

Hi, this is Dwayne Hallman. Overall there is no significant concentration in any one class. Obviously we do have some retail exposure, some office tower exposure, but as far as condominiums type projects very limited exposure.

Robert Rodriguez – First Pacific Advisors

Just FYI just for you, it's one of the areas that I have highlighted since seems like there's not that many people on the call. It's one of the areas I have highlighted for 2009. It's going to hit the financial institutions fairly severely.

And on the financial institutions, security investments area, if I was that (inaudible) then bank index would not be setting an all time low today. So I just continue to caution as I have mentioned before in prior calls.

Okay, thank you very much.

Unidentified Company Representative.

Thanks, Bob.


(Operator Instructions)

Dwayne Hallman



Yes sir.

Dwayne Hallman

This is Dwayne Hallman. Sounds like we don’t have another caller at this time but we certainly appreciate everyone that participating and listening in and if you have any follow up questions, please feel free to give me a call.

Have a good day everyone.


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

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