Good morning, my name is Kristal and I will be your conference operator today. At this time, I would like to welcome everyone to the Horace Mann Educators Corporation second quarter 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. Mr. Hallman, you may begin your conference.
Thank you and good morning, everyone and welcome to our second quarter 2009 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’ll cover our results for the second quarter in our prepared remarks and then be available for questions. I’m here today with the following management members. Lou Lower, President and Chief Executive Officer; Pete Heckman, Executive Vice President and Chief Financial Officer; Tom Wilkinson, Executive Vice President, Property and Casualty; Brent Hamann, Senior Vice President, Annuity and Life; and Steve Cardinal, Executive Vice President, Marketing.
The prepared remarks and responses to questions during today's presentation may contain forward-looking statements regarding Horace Mann and its anticipated or expected results of operations for 2009 or subsequent periods. 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 a discussion of the risks 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 actual results, changes or assumptions or other factors that could affect these statements.
Finally, this call is being recorded and is available live on our website. An Internet replay will be available on our website until August 28th, 2009.
Now, I'm pleased to turn the call over to Lou Lower for his comments.
Thanks, Dwayne. Good morning, all, and welcome to our call. In my opening remarks today, I'm going to take things in a somewhat different order than is our normal practice given some fairly significant positive changes to our balance sheet. Though the financial markets have stabilized and begun to improve, the confidence that we've had and expressed to you in the past calls relative to the quality of our investment portfolio has been substantiated by the early stages of a return to normalcy in the financial markets.
As the tone of the credit markets has improved of late and spreads have narrowed, we've experienced meaningful improvement in our unrealized capital loss position with reported book value per share increasing 26% sequentially to $14.34. At the same time, book value per share excluding FAS 115 is actually a little bit better than it was a year ago, prior to the meltdown in the financial markets that commenced in September.
In addition to that favorable development on the capital front, we continue to be comfortable with all of our key balance sheet ratios including RBC levels, all of which are consistent with our ratings, which have now been reaffirmed by all three primary rating agencies.
As we await further improvement from the financial markets and our already improved unrealized loss position, we have the intent and full capability to hold our invested assets to recovery and maturity. The structure of the annuity liabilities, which is associated with most of the taxable fixed income portfolio, is very stable, and continues to demonstrate strong and continuing improvements and persistency, while ongoing operations are producing positive bonds flow.
That said, we have been opportunistically repositioning the investment portfolio in the interest of reducing individual issuer concentration risk. As you'll hear from Pete, we've been able to accomplish that objective while realizing some capital gains as a byproduct of that effort without sacrificing investment income.
Elsewhere on the balance sheet, our team remains very comfortable with the strength of the company's P&C reserves with a solid position that remains on the high end of our range. Perhaps the best example of how our financial and market position are working together to create opportunity is in the significant sales growth we are capturing in the annuity segment.
As customers in our educator and ed-seeker [ph] company with a strong recognized brand providing personalized advice through agents with a local presence, our annuity sales increased 50%, a repeat of the growth rate that we reported to you in the first quarter.
As a result, contract deposits in the annuity line reached a high watermark this quarter, increasing 22%. You should note that our elevated sales results are not the result of a promotional fire sale. New money coming in the door is being invested conservatively at rates that are achieving above target spreads, which in turn is helping to increase spreads on the entire in force fixed annuity block.
And as you'll learn from Brent, the combination of all of those positive drivers has produced pretax operating income in the combined life and annuity segment that's 10% greater than prior year. Now, more than offsetting those favorable variances, our property casualty results were negatively impacted by weather. While catastrophes were below prior year, both cat and non-cat weathers substantially exceeded average second quarter experience for Horace Mann and were predominantly responsible for the overall shortfall in operating earnings per share relative to our expectations and analysts consensus.
However, as you will learn from Tom in his report, underlying results are generally consistent with our expectations and we are taking pricing and underwriting actions to further mitigate the two weather spoils.
As we look to the future, we are encouraged that key elements of our growth strategies are taking hold despite adverse macroeconomic circumstances. For one, our agent count again increased sequentially thanks to a steady level of new appointments, improved installation and more qualified agents in the territories with the greatest opportunities and a reduction in terminations relative to 2008. As Steve is going to report, based on a continuation of those trends, we fully expect agent count to show a year-over-year increase at the end of next quarter.
Recruiting experience confirms that our new exclusive agent contract design is both competitive in the market and represents a superior value proposition, resulting in improved agent appointment activity with substantially elevated quality. That growth in agent count was once again accompanied by continuing growth in total points of distribution, as well as increases in average agent productivity in three of our four product lines.
So just to wrap it up, taking into account the headwinds of a serious recession, we are encouraged by where we are at midyear, acknowledging however that Mother Nature has not been kind to us or the industry. Operating fundamentals were solid, as is our financial strength, cash flow from operations is strong and backed up excellent liquidity, our target market continues to afford us growth opportunities well into the future, and very importantly, the results of our strategic initiatives are making Horace Mann's marketing and distribution stronger every day.
And now, let me turn it over to Pete for some further elaboration.
Thanks, Lou. The second quarter was a positive one for Horace Mann in spite of the unfavorable impact of catastrophe and non-catastrophe weather on our P&C property results, which generated the entire operating income shortfall relative to both our expectations and the analysts' consensus. As you'll hear from Tom and Brent in a moment, earnings in the auto, annuity, and life lines of business were comparable to or slightly better than prior year and well ahead of our expectations. Investment income was a bit better than we anticipated as well.
We remain comfortable with our current full-year 2009 operating income guidance range of $1.45 to $1.65 per share. Similar to the first six months of the year, we anticipate our property results will be under some pressure in the second half but expect the other segments of our business to continue to outperform. We will of course provide another update on our year-end outlook during next quarter's earnings report with the added benefit of having most of the hurricane season behind us.
But as Lou mentioned, the headline story in the quarter was the improvement that occurred in the credit and equity markets and the resulting positive impact on our investment portfolio and book value as some degree of normalcy finally returned to the financial environment.
The performance of our $3.7 billion investment portfolio remained strong with an overall quality rating of A plus and is well diversified across industries, investment types, and individual issuers. Pretax net investment income was up 5.5% over prior year for the quarter and as I mentioned, slightly exceeded our expectations, both in total and by segment.
With regard to realized investment gains and losses, we extended the opportunistic security sales program that we initiated in March when the recovery in the markets began into the second quarter. $19 million of gross realized gains was generated this quarter, of which $6.1 million was related to previously impaired securities.
We also recorded credit related impairment write-downs of $3.8 million, which $2.9 million related to a collateralized debt obligation comprised of high-yield bank loans. In addition, $4.1 million of impairment losses, primarily financial and telecommunication sector holdings was recognized on securities sold during the quarter.
Before getting into more detail on the portfolio, I wanted to point out that the gains program completed over the last two quarters was accomplished with minimal, if any, investment income give-up. The program had a positive impact on our capital position by enabling us to selectively reduce our issuer and sector concentration levels, and further diversify the portfolio.
And even with the gains that were taken, nearly $100 million of gross unrealized gains remained in the portfolio at June 30th. In terms of unrealized gains and losses, the volatility in credit spreads and interest rates continued during the second quarter although with a much more positive impact on our investment portfolio than experienced in the first three months of the year.
We provided a supplemental exhibit at the end of our press release package again this quarter, which contains additional disclosure related to our net unrealized loss trends and June 30th balances. Net unrealized investment losses at the end of the second quarter totaled approximately $171 million pretax, down from the $360 million level recorded in March 31st, an improvement of $188 million.
Positive movement occurred across virtually all asset classes, but as you can see on the data, investment-grade corporate bonds and preferred stocks benefitted more significantly as risk aversion in the fixed income markets eased and demand for spread assets gained momentum.
Turning now to commercial mortgage-backed securities, we did see some improvement during the quarter in our portfolio's unrealized loss position, although it was primarily concentrated in the higher rated tranches based on the news of potential government support for some older higher rated securities.
Our CMBS portfolio continues to be 100% inventory-grade with an overall credit rating of AA and is well diversified by property type, geography, and sponsors. Over 14% of the portfolio is comprised of multifamily projects that are directly backed by Ginnie Mae. Another 14% is made up of fully amortizing loans to finance military housing projects where rental payments are appropriated by the U.S. government. And 8% of the portfolio is composed of cell tower revenue and timberland securitizations, which offer further diversification.
The traditional conduit fusion portion of the CMBS portfolio represents a little over 60% of our holdings with more than 70% of those securities in the more seasoned 1997 through 2005 integers. And of the remaining 2006 through ’09 vintage loans, over three-fourths are AAA rated.
In spite of some issues beginning to develop in the broader market, all of our CMBS securities are performing in line with contractual terms, did not experience any unusual deterioration in delinquencies or foreclosures during the quarter, and continue to hold up well under a variety of economic stress test scenarios.
Our financial institution holdings, both bonds and preferred stocks, performed extremely well during the quarter amid stress test disclosures, significant capital raising efforts, in line or better than expected earnings, and improving economic data. The June 30th fair value of our total FI portfolio was 90% of book with the bonds component placed at over 95%.
The portfolio includes a preponderance of quality names which have generally been supported by government intervention. We believe that support will continue. We expect that the issuers will have ongoing access to the capital markets and therefore, we remain comfortable with our holdings in this sector.
And very briefly, I wanted to mention that in terms of our high-yield bond holdings, the impact of Fallen Angels masked the improvement in the underlying portfolio during the second quarter. Excluding the formal investment-grade securities, unrealized improved $12 million in the quarter and our traditional high-yield portfolio was priced over 90 at June 30th, up from 78 at the end of last year.
As a final comment on the quality of our investment portfolio and as further evidence that the volatility in unrealized losses outside of the structured securities markets is more indicative of spread widening than inherent credit issues, consider that as of June 30th only 12 of our non-CMBS securities with just $21 million of book value have had – had fair value below 80% for more than 12 months. And we continue to have only about 1% of our portfolio pricing based on so-called level three inputs, another element of conservatism and transparency in our evaluations.
So to summarize my comments on our investment portfolio, we believe the credit quality to be strong due to the current pricing in the markets should be improving, but in some cases still not indicative of the underlying quality and currently have the intent and ability to hold our securities to maturity on a substantial recovery and value.
I'd like to conclude my remarks this morning with some comments on Horace Mann's capital and liquidity position. Horace Mann's liquidity position remains extremely strong and there continues to be absolutely no issues on the liability side. Our insurance liabilities are extremely benevolent and stable. In the annuity and life segments, fund flows, persistency and liquidity measures all continue to be extremely favorable and trending positively.
And at the holding company, there are no business operations or extracurricular activities of any kind, no CDS, securities lending, derivative or hedging programs, et cetera. Our bank credit facility doesn’t expire until December of 2011 and our next senior debt maturity isn’t until 2015.
Meanwhile, our $125 million bank loan of credit provides more than adequate capital flexibility and our current debt-to-capital ratio of approximately 26% excluding FAS 115 is comfortably in a range consistent with our current ratings. Other capital measures also remain favorable relative to our capital management targets and rating levels.
While our statutory books won’t be closed for another week or so, we estimate our June 30th life RBC ratio to be at or slightly above 500% with the P&C equivalent between 400% and 425%, both ratios consistent with year-end 2008 levels and at or above the high end of the range for our current ratings.
As you may have noticed that our financial strength and debt ratings along with our ratings outlook were reaffirmed earlier this year by Moody's, S&P, and AM Best. None of the rating agencies expressed a significant concern regarding Horace Mann's capital adequacy even under stress scenarios.
To paraphrase the comment in one of the agencies' rating opinion, "while asset losses and investment portfolio rating transitions are expected in 2009, they are likely to be relatively modest and manageable due to Horace Mann's strong capital position." We absolutely concur with that assessment and view our favorable investment results and book value growth to be supportive of that position.
Now, as I mentioned at the beginning of my commentary, we also continue to experience positive underlying results in our insurance operations. Speaking of which, here is Tom Wilkinson to comment on our P&C operations. Tom?
Thanks, Steve and good morning. This morning I will summarize the key components of our combined ratio and growth trends for both the second quarter and the first half of 2009. The total P&C combined ratio for the second quarter was 103.8% compared to $106.7% a year ago. The weather again impacted our quarterly results both cat and non-cat. A total of 12 storms reached catastrophe status in the quarter, totaling $15 million with one mid-June storm lasting nine days and impacting 13 states across the Midwest, Mid-Atlantic, and Southeast.
While not as costly as last year's $22 million second quarter catastrophe total, this quarter's cat costs were about 70% higher than our second quarter historical average. Favorable prior-year reserve re-estimates of $2.1 million was $300,000 less than 2008. For the underlying combined ratio, excluding cats and prior-year reserve re-estimates was 94.3%, 2.4 points higher than last year's second quarter of 91.9%.
Out total P&C first half combined ratio was 99.2%, 1 point below prior year. Our six months catastrophe costs totaled $20 million, $8 million lower than prior year. And favorable prior-year reserve re-estimates of $5.5 million were $400,000 more than 2008.
Last quarter, we discussed the financial impact of our claims consolidation and marketing distribution initiatives on our results. These initiatives represented an addition of $4.4 million in expenses. The impact on the second quarter, as expected, was substantially lower at $200,000.
So year-to-date, we have incurred $3.4 million or 1.2% of premium related to our claims department reorganization and $1.2 million or one half of 1% of premium for expenses related to our distribution initiative. On a year-to-date, underlying accident year combined ratio, excluding cat and expense initiative, was 92.3%, six-tenths above the first half of 2008.
Breaking down our results between auto and property, in the second quarter, our auto underlying accident year combined ratio excluding cats in the expense item, was 96.1%, above even with last year's results of 95.9%. On a year-to-date basis, our underlying combined ratio was 95.4%, nine-tenths of a point lower than prior year. Both frequency and severity results remain consistent with our expectations.
For property, our underlying accident year combined ratio in the quarter, again excluding cats in the expense item, was 89.1%, 6 points higher than last year. Nearly half of the variance was driven by increased re-insurance costs compared to prior year. And as in recent quarters, non-catastrophe weather was a major driver in the increase in losses. For the first six months, our underlying combined ratio was 85.1%, 3.6 points above prior year. Similar to the quarter variance to last year, about half of the increase was due to increased re-insurance costs.
To address the increase in our property combined ratio, we are implementing several operational initiatives to improve results. First, in our national property claims office, we will be adding additional resources to address the current loss trend and also to increase preparedness for the second half of the year's catastrophe season. Next, we will be increasing re-inspection activities for targeted segments.
And finally, we will be increasing rate actions where needed. Our property rate actions so far this year, in over a third of our space, averaged about 5.5%. In addition to earnings in majority of these rates in future periods, we will be filing rates that should average in the 7% to 8% range over the next 12 months. These actions are focused on improving our underlying profitability results.
In addition, specific state and market coastal exposure management programs will continue to reduce the number of coastal properties and the percentage of our property book that is coastal.
Now, turning the top line, total voluntary P&C written premium on a direct basis before re-insurance costs, increased 2.3% compared to prior year in the quarter. Auto was up 1.6% and property before re-insurance increased 3.5%. Continued increases in average premium per policy and policyholder retention rates in both our auto and property lines contributed to this top line growth.
New business and in force quality trends remain favorable for both auto and property. Our targeted segments, educator, preferred underwriting peers, and cross-sold business are all equal to or better than prior year. The percent of our in force tri-line business, that is policyholders with at least three Horace Mann business lines, continues to increase sequentially and is up 0.5 compared to last year.
Also, we continue to increase our auto presence in schools with auto payroll slots increasing 18% and additional policies on payroll up 36% over prior year. And contributing to the auto payroll policy growth this quarter was an 11.2% increase in auto payroll true new units.
Total P&C policy reports were below prior year by almost 6,000 units, down eight-tenths of 1%. Auto policies were down about 4,000, seven-tenths of 1% and property decreased about 2,000 policies, also down eight-tenths of 1% with the majority of that reduction in Florida and other coastal territories. However, our favorable trend in educator policyholder growth continued with each line increasing sequentially from prior quarter and each up about 2% when compared to June 2008.
In summary, our P&C underlying results are generally tracking consistent with our expectations. Our top line growth is being driven by increases in educator policies in force, by steadily increasing policy retention rates and by continued premium rate increases.
Our auto profit fundamentals are solid as mentioned, we have a game plan to address our property trend. We will focus on profit improvement initiatives to improve our short-term underlying results and will continue to implement exposure management programs to reduce our longer-term exposure to major catastrophic events.
And now, I would like to turn it over to Brent Hamann for his comments on our annuity and life results.
Thanks, Tom and good morning, everyone. I'll spend the next few minutes going over the results of our annuity and life segment. As we mentioned earlier, our annuity sales saw healthy increases again in the second quarter, following on our solid first quarter performance.
Sales increases in the second quarter were driven primarily by our single premium sales through both Horace Mann and independent agents, although our flexible premium sales also showed substantial increases. We continue to see benefits of becoming a stronger player subsequent to the industry shakeup post the new IRS regulations which took effect at the beginning of 2009.
Our recurring deposit business increased 32% for the quarter and 68% for the first half as compared to prior year, while our single premium rollover deposit business, including our partner product sales, increased 54% for the quarter and 44% for the half year, respectively.
Independent agents made significant contributions to the increase in single premium sales this quarter and also brought in a higher level of recurring deposit business in the first half of 2008. These strong sales were also the major contributor to increasing annuity contract deposit receipts in the quarter. Total annuity premiums and deposits increased 23% for the quarter, and 8% year-to-date.
As we discussed in last quarter call, both sales and new contract deposits are exceeding our expectations. In many school districts we find ourselves among a more selective list of approved providers, which is leading to growth in our customer base. And there are indications that resetting of the competitive landscape will continue, although at a more moderate pace throughout 2009. We feel we are positioned to capitalize on any such opportunities as they arrive.
With regard to financial results, total annuity assets under management declined 5.5% compared to prior year, primarily due to a 27% market performance related decline in our variable annuity assets. In contrast, our general account fixed annuity assets increased 8% over prior year.
As we’ve noted in prior quarters, the stability and loyalty of our educator customer base and also the quality of our agents and their relationships within our niche markets are among the company's most valued assets. And reflective of that, our annuity net fund flows, defined as premiums less surrendered debts and maturities, were again positive in the second quarter of 2009 as they were throughout 2008 and our second quarter – our 12 month account value persistency of nearly 94% is about 2 points over this point last year.
So our liabilities continue to be extremely stable and present absolutely no liquidity issues. Annuity pretax income was up $1.7 million in the quarter as compared to prior year. Market performance in the second quarter had a favorable impact on both evaluation of annuity, deferred policy acquisition costs, and also the level of our guaranteed minimum death benefit. Underlying earnings in the quarter were also favorably impacted by increased fixed annuity margins, which were offset by a decline in variable annuity charges and fees.
As we've discussed in prior quarters, while our variable annuity results are impacted by financial market performance, as compared to other industry players, Horace Mann's variable products are only minimally exposed to so-called equity market guarantee risk.
Approximately two-thirds of our in force via account value has a simple return premium death benefit. While over 25% of the business has no death benefit guarantee at all. And our GAAP GMDB reserve balance of only $1.1 million reflects that conservative risk profile. We offer no other guarantees and have no hedging or derivative program exposure.
Turning to the life segment, total second quarter sales decreased 15%. Horace Mann proprietary product sales were down 7% for the quarter and 11% year-to-date while partner products were up 20% for the quarter and 16% year-to-date. Life premiums and contract deposits, which consist only of Horace Mann products, were down 2.3% for the quarter and 2% year-to-date as compared to last year.
While these results are reflective of the overall industry trends for the life insurance category, we are launching new initiatives to improve both our life product competitiveness including a new discount specifically for our core educator market, as well as new marketing support tools. We believe these actions will better position us for improving market environment.
In terms of earnings, second quarter life segment pretax income was comparable to prior year, reflecting increased mortality costs, which were offset by growth in investment income. On a year-to-date basis, pretax income increased $1 million due to growth in investment income, which was somewhat offset by increased mortality costs.
So in closing, we continue to be encouraged by our annuity results and we believe there are opportunities to further capitalize on both our annuity and life insurance payroll slots. The reaffirmation of our ratings and our continuing focus on our core educator market niche will further strengthen both our annuity and life value propositions.
And with that, let me turn it over to Steve Cardinal for his comments on sales and distribution.
Thanks, Brent and good morning. Today, I'll discuss three key areas of sales and marketing. First, the continued success of our agent migration including the increase in exclusive agencies. Second, the success in growing our sales force. And third, our sales results.
As background, we traditionally offered insurance through agents working out of their homes. We've spent the last several years building programs and training our agents to migrate outside offices with support staff to enable them to grow their book of business more rapidly and serve our educator customer base in a more professional manner.
The exclusive [ph] agents showed productivity gains over agents that continue to work from their home. This year, we offered top-rated producers the opportunity to work as exclusive agents with a new sales agreement. Additionally, we started recruiting agents with a new exclusive agent agreement and added a more deliberate and thorough new agent education platform.
We are encouraged by the number of agents who accepted the new exclusive agent agreement and who are now operating as exclusive independent business owners. And we are encouraged by the early results of attracting and retaining high quality candidates that sell our products.
During the quarter, we increased the number of agents moving to outside offices, the number of licensed producers and total agents. We did this while improving the productivity of agents who adopted our agency business school technique. In addition, we continue the successful implementation of our exclusive agent agreement. As evidence of the successful migration of agents into our business model, the number of agents who work in outside offices and hired a licensed producer grew from 334 to 378 during the second quarter.
Agents opened a total of 22 additional outside offices during the quarter, bringing net total to 546. Horace Mann now has 80% of our agents operating in outside offices compared to 66% last year. These agents are either operating as planned in the agency business model with producers or they are positioned to add license producers in the future.
Additionally, 13 agents elected to migrate to exclusive agent agreement during the quarter with another 39 executing an agreement during the quarter to become exclusive agents July 1st. As a result, we continue to be excited about the early success of the agents who transitioned to be entrepreneurial agent owners.
From a staffing view, our agent count increased from 675 to 684 during the quarter as we reverse a multi-year trend in declining agent count. For the first time since 2005, we have grown agents in consecutive quarters. This was helped by a reduction in agent termination and an increase in new appointments compared to the second quarter of last year. Also, agents and agency owners continue to on-board license producers.
The new exclusive agent agreement allows us to recruit and grow our distribution channel that serves our educator marketplace. With an expectation that agents invested in an office and licensed staff, soon after they get started we are confident they will be both more productive and have increased retention than agents hired in the past. From a recruiting standpoint, we appointed 35 new agents during the second quarter. 31 became exclusive agents immediately and the others will migrate to exclusive agent status within the first two years.
Now, let's talk about some of our results. We felt the impact of the weak economy, for example with (inaudible) auto and home sales. That, along with the fact that we averaged nearly 50 fewer producing agents during the quarter than in the comparable quarter of 2008 had a negative effect on P&C sales.
Looking at total property casualty sales, total auto unit sales were down 5% in the second quarter versus the same period in 2008 with true new auto unit sales down 3%. Property unit sales decreased 6% compared to prior year. And while we can’t predict the impact the economy will have on our lines of business, we are confident that we will continue to increase our agent count throughout the end of the year, positioning us to accelerate new sales growth.
As Lou mentioned, we produced a healthy increase in annuity sales during the second quarter with increases coming from both flexible and single premium annuity in both our captive and independent agency force. Our strong local presence and strong relationships with our customers drove sales results up 49% compared to prior year's second quarter and 19% sequentially from first quarter. This increased production comes from several states, but we had great success in retaining our (inaudible) payroll deduction slots, and consequently saw the competition reduce.
In addition, we saw an increase in single premium deposits and believe this reflects the trust our customers have in our agency force and Horace Mann. While we expect the activity to level out, we are optimistic that we will continue to see elevated sales compared to prior year.
From a productivity standpoint, our employee agents and exclusive agency productivity increased in three out of four lines compared to prior year's second quarter. Our average agent increased productivity (inaudible), property units, and new annuity sales compared to prior year.
Although our life insurance productivity was down compared to prior year, it did increase over 10% sequentially. While the economy may continue to present challenges, we continue to be encouraged by the strides made by our agency force and sales leadership team. We noted positive signs in the following. One, sales in flex and single annuities. Two, productivity growth of in three lines of business. Three, agency force growth. Four, acceptance in our new exclusive agent agreement.
So with a strong agency force dedicated in serving our nation's educators coupled with momentum in agent count and productivity, we remain positive about our ability to grow our customer base and our business in the future.
Thank you. And now, back to Dwayne.
Thanks, Steve. And that concludes our prepared remarks. So Kristal, if you can please move to the question-and-answer session, we'd appreciate it.
(Operator instructions). And we'll pause for just a moment to compile the Q&A roster. We have a question in queue that comes from the line of Bob Glasspiegel with Langen McAlenney.
Bob Glasspiegel – Langen McAlenney
Good morning, everyone. If you execute your plan, how many quarters you think it is before you could consider share repurchase as an option?
Bob, that's a very difficult question to answer because we don’t have a perfect crystal ball about what the future is going to bring. Obviously, just on a pure theoretical or mathematical calculation, we do have excess capital today above and beyond what we might have to hold to support our ratings, but I just think it's so important given the uncertainty in today's markets to hold what I would call contingency capital or cushion capital for unforeseen events that – I think we need to let the future play out a little bit here.
We obviously from – you can tell from our comments, we are very positive. As the markets have indicated, our belief in the creditworthiness of our investment holdings and we are very comfortable with them, but we just want to give the current situation a chance to firm up a little more, improve a little further, before we even go through that process.
So I would love to provide you with an answer of an exact time when we might do that. We obviously consider it, and clearly believe that today's stock valuations are – in their depressed state are very attractive, but I think we need to keep our powder dry just to be prepared for anything that might come our way.
Bob Glasspiegel – Langen McAlenney
The conundrum is when you feel better and the rating agencies feel better and the world feels better, your stock will be a lot higher and it won’t be as effective of a tool to increase asset value. That's an observation, not a question.
With the rally in sort of distressed assets, is there any sort of desire, ability, to sort of re-risk the portfolio and take some losses and maybe get yourself to the position where the rating agencies will feel more comfortable?
We continue to look at that, Bob. Again, we remain somewhat cautious on the environment. We are encouraged with the improvement since March. And we have realized gains as I mentioned and have done that to de-risk the portfolio by way of reducing sector and issuer concentrations. So we certainly are taking some steps along those lines and we will continue to look for opportunities as well. Yes, I think if there is – if it makes sense to take some losses and reduce risk, we will consider that. We certainly have room at this point to do such a thing.
Bob Glasspiegel – Langen McAlenney
You talked about – you talked about the rate increases you are targeting would seem pretty aggressive in homeowners and auto, to a lesser extent. How much do rates have to go up, some of the economy normalized – how much would rates have to go up before you would be comfortable growing units?
Well, I think if we – we are targeting 7% to 8% on the property side and part of – most of that is to address the issues we have with our own results and our own book, but we are also monitoring the competition, Bob, and we are seeing rate increases to the same level across the country at some of our key markets as well.
Bob Glasspiegel – Langen McAlenney
So what about auto?
Auto? Auto, the competition is also taking rate increases.
Bob Glasspiegel – Langen McAlenney
No, I mean how much would you need rates to go up before you would want to grow units?
Yes. Probably, consistent with our current plans, 3%, 4% on a consistent basis. We are comfortable on auto, fairly comfortable with the profit position we are in. And we are targeting to improve it a little bit, but we are feeling pretty good shape there.
Bob Glasspiegel – Langen McAlenney
Okay, thank you.
(Operator instructions). And at this time, there are no questions in queue.
Thank you, Kristal. And thank you for participating in our call this morning. If you have any further questions, please feel free to contact me. Have a good day.
This concludes today's conference call. You may now disconnect.
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