Horace Mann Educators Corp. (NYSE:HMN)
Q4 2007 Earnings Call
February 07 2008 10:00 am ET
Dwayne Hallman - SVP of Finance
Lou Lower - President and CEO
Pete Heckman - EVP and CFO
Doug Reynolds - EVP, Insurance Operations
Frank D'Ambra - SVP of Life & Annuity
Rich Schoenberg - VP of Sales
Rohan Pai - Banc of America Securities
At this time I would like to welcome everyone to the Horace Mann Educators Corporation fourth quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer period. (Operator Instructions). Thank you. It is now my pleasure to turn the floor over to your host, Dwayne Hallman, Senior Vice President of Finance. Sir, you may begin your conference.
Thank you. Good morning, everyone. Welcome to our fourth quarter 2007 Earnings 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 in our prepared remarks. The following senior management members will make presentations today and as usual will 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; Doug Reynolds, Executive Vice President, Insurance Operations; Frank D'Ambra, Senior Vice President of Life & Annuity; and [Rich Schoenberg], Vice President of Sales.
The following discussion may contain forward-looking statements regarding Horace Mann and its operations. Our actual results may differ materially from those projected in the forward-looking statements. These forward-looking statements or made based on management's current expectations and beliefs as of the date and time of this call. For a discussion of the risk and uncertainties that could affect actual results, please refer to the company's public filings with the SEC 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 or changes, assumptions or other factors that could affect these statements. As a reminder, this call is being recorded, and it is available live on our website. An Internet replay will be available on our website until March 6, 2008. Now I will turn the call over to Lou Lower for his comments.
Welcome everyone and thanks for joining us. Horace Mann delivered fourth quarter net income before realized capital gains and losses of $0.49 per share completing a solid year of profitability. At $1.91 per share for the full year, we delivered at the upper end of the guidance for the year and $0.07 per share above consensus expectations.
Book value per share pre-FAS 115 grew 10% year-to-date closing at $16.47 and along with that all of our key financial ratios continued to strengthen.
Focusing on the year in total, Property Casualty profitability was somewhat less than our expectations. Current accident year result were under pressure compared to 2006, led by frequency in Auto and Property, but offset somewhat by increasing investment income.
We had significant growth in combined Life and Annuity income, relative to both prior year and our expectations, thanks to improved spreads in fixed annuities, contract fees and variable and favorable life mortality experienced.
Those positives along with very disciplined expense control were the primary contributors to results exceeding the midpoint of our guidance range.
We continue to be comfortable with the strength of Property Casualty reserves. While favorable development over the full year is comparable to prior year, we don’t anticipate the same level of favorable development in 2008. But having said that our yearend reserve position remains near the high end of the range, determined by independent evaluation.
Elsewhere on the balance sheet, the investment portfolio was solid. As reported in the past we have relatively small exposure to subprime issues. We have evaluated the portfolio and have been both thorough and aggressive in terms of assessing other than temporary impairments, which resulted in a capital loss after tax of $3.6 million for the quarter or about $0.08 a share.
While those capital losses are reflective of uncertainty and volatility in the financial markets, our continued commitment to a conservative well diversified investment portfolio with disciplined risk control is serving us very well.
People expand this commentary on our investment portfolio this morning to provide you with the through understanding of where we are, so that you can have the same level of comfort in our invested assets as we do.
As you remember from our last call we do have a share repurchase program authorization of $50 million. It's opportunistic in nature, which is just what the market has presented to us. Through yearend we repurchased 1.1 million shares at an average cost of $18.66. Through the end of January of this year we spent a little over $39 million of the authorization, retiring a total of almost 2.2 million shares, since inception at an average cost of $18.24 or roughly 1.1 times yearend book value ex FAS 115.
And we anticipate completing our current capital management program during this first quarter. So what do we expect for 2008? First for Property Casualty the head-wins of the underwriting cycle will continue to present challenges particularly in the Auto line. We're counting Auto claims organization to continue to produce favorable results in severity control. But we do recognize the need to take rates over the course of the year, subject of course to regulatory constraints.
We fully expect a year of solid profitability with the midpoint of our guidance range equating to an increase in our combined ratio of about two points.
We would also anticipate the pretax operating income contributions from Life and Annuity will be off slightly in 2008, as compared to 2007, a year in which almost everything broke our way to deliver 30% increase in combined pretax income.
At the same time, however, our plans are to deliver strong organic top line growth in our niche market led by Auto unit sales, as we build on the momentum we have established for those agents who have been through our training for their transition to our new agency business model. And if that growth takes off, we anticipate delivering low-single-digit Property Casualty premium growth in 2008, which you should further accelerate in 2009.
Taking into account the pace of the business and the initiatives we are putting in place to drive future growth, our earnings guidance range for net income excluding capital gains and losses for 2008 is a $1.70 to a $1.90. While the midpoint of that range is down about 6% from the year we just completed, we believe it appropriately reflects the competitive environment, the challenge of the underwriting and credit cycles we are in and the additional investment we are making to grow the business. We also believe that with what we will accomplish in 2008 we will return to the EPS growth track in 2009.
And then finally with the retirement of Butch Joyner at yearend we do have a search underway for Chief Marketing Officer and while that efforts is in process, our field organization is in the very capable hands of [Rich Schoenberg] who was recently promoted to Vice President of Sales. While Rick leads the entire field organization countrywide, his partner in creating a more powerful distribution model is [Tom Holstein] who leads our ABM initiative.
Both Rick and Tom began their professional carriers as teachers, became top performing Horace Mann agents and highly productive leading agency managers and regional marketing officers and we are indeed fortunate to have these two very capable leaders, with proven records of success on our team. And you will be hearing from Rick in our marketing report later this morning.
So in summary, a solid performance for the quarter and full year of 2007, with a strong foundation in place for future profitable growth in our educator target market. And now here is Pete.
Thanks, Lou, and good morning. A good fourth quarter capped of another solid year for Horace Mann in 2007. Consolidated operating income of $0.49 per share, while somewhat below prior year was a bit better than we expected. Property and Casualty earnings were down in the quarter in spite of a higher level of favorable prior year's reserve development, due to increase catastrophes and pressure, primarily frequency driven on current accident year loss ratios.
Partially offsetting the prior year comparison in P&C was a continuation of strong quarterly earnings results in our Annuity and Life segments. With income in both of those business once again above prior year and ahead of our expectations. Expanded investment margins in both segments, as well as positive growth in Annuity contract charges and favorable life mortality were the primary drivers.
In terms of the investment portfolio, as Lou mentioned, we fairly evaluated our portfolio at December 31 and have been conservative we believe in terms of assessing other than temporary impairments, recording a pre-tax charge of $5.9 million for the quarter.
The largest component of the charge related to the company's one and only sub-prime residential mortgage-backed security with an amortized cost of $4.9 million, which was impaired to a fair value of $1.1 million. The write-down was the result of our assessment that permanent impairment had occurred due to the deterioration of a significant portion of the underlying collateral and our expectation that not all of the contractual principal and interest would be paid. The remaining $2.1 million of the impairment charge in the quarter was attributable to non-mortgage related securities, primarily corporate high-yield bonds and preferred stocks, which we had plans to sell.
Our exposure to Alt-A mortgage-backed securities as noted in the press release was approximately $8.4 million at December 31, nearly 90% of which are rated AAA with the total unrealized loss of only a $100,000 and no exposure to the more troubled 2005, 2006 and early 2007 vintages.
Our combined subprime and Alt-A exposure represents only 2/10th's of 1% of our total portfolio and is essentially being carried at fair value.
Our remaining residential mortgage portfolio of approximately $920 million is comprised of government agencies pass-through securities and agency CMO's, all are AAA rated of course.
Two other asset classes I would like to comment on, are commercial mortgages and municipal bonds. With regard to commercial mortgages, Horace Mann had approximately 4.5% of its investment portfolio or $184 million in commercial mortgage-backed securities at the end of the year. The portfolio consists of well diversified fixed grade CMBS backed by the cash flows of mortgages on commercial properties.
This portfolio is a 100% investment grade with an overall credit quality of AA and a current fair value of 97% of amortized cost. While we believe the fundamentals of the commercial mortgage market are sound with delinquencies near historic lows, we remain relatively defensive in the current environment.
In terms of municipal bonds, we have approximately $540 million invested in our P&C portfolio. The overall credit quality of the portfolio is AAA with approximately 65% of the portfolio insured. That translates into a 9% of the company's total investments that are guaranteed by the monoline credit insurers.
With regard to security selection, we focus primarily on the quality of the underlying security and do not place significant reliance on the additional insurance benefit. Excluding the effective insurance, the credit quality of the underlying muni portfolio is a solid AA. We had an unrealized gain in this portfolio of approximately $6 million at yearend and we would not expect a significant impact on our holdings, should the monoline insurance companies experience rating downgrades.
I might also add, given the recent investment loss disclosures of some of the large life insurance companies that Horace Mann is not involved in any hedging or derivative programs. So all in all, we are very pleased with the overall positioning of our portfolio and believe our conservative investment philosophy will continue to serve us well in the current financial environment.
Total net investment income increased 6% in the fourth quarter and 7% for the full year compared to 2006. We anticipate this growth rate to moderate significantly. However, increasing only about 2% to 3% in 2008, due in large part to the effect of our $50 million stock repurchase program, which we expect to be completed in the next few weeks.
With the majority of that program being funded with excess capital from our P&C insurance subsidy areas we are expecting Property and Casualty investment income to bear the brunt of the impact and actually decline by about 3% to 4% over the next 12 months.
Now with regard to 2008, the midpoint of our earnings guidance range of $1.70 to $1.90 per share is comparable to the current consensus estimate. At the midpoint of the range, earnings are expected to decline by approximately 10% to 12% compared to 2007. With the resulting drop in EPS mitigated by about a 5% to 6% reduction in average diluted shares outstanding.
We expect the projected decline in consolidated earnings to be manifested in our P&C segment through the decline in investment income I just mentioned. And the reduced level of favorable prior years reserves development along with the potential for a continuation of the adverse frequency trends that have emerged over the last few months.
In our Annuity and Life segments, we are anticipating a moderate reduction in earnings compared to the unusually strong 2007 levels, due to the recent adverse financial market performance, slower growth in investment income, and the return to more normal mortality experience.
In addition, all segments will be impacted in 2008 by a reduced level of FAS 106 benefit plan cost savings compared to 2007. While our initial guidance range is a bit wider than we have traditionally provided, I would anticipate we will able to narrow it down as we moved through the year and the direction of the financial markets and P&C frequency trends become more apparent.
So with that let me turn it over to Doug Reynolds for more detail on our P&C results.
Thanks Pete. Good morning. This morning, I will take you through what’s behind the combined ratio, a view of our overall book of business, our approach to retention, written premium, several core strategies and 2008 outlook.
Total Property and Causality combined ratio for the quarter and for the year was 91.9, with the fourth quarter six points higher than a year ago. There were several major drivers of the quarterly variance. First, four points are due to catastrophe losses with losses of almost $6 million, the quarter was more than $5 million higher than a year ago.
The California wildfire at $4.5 million is the largest Cat, but we also had three other events totaling $1.5 million. There was some help with favorable prior year reserve development of a little bit more than $5 million, which equated to 2.3 points in the quarter when compared to last year.
Our underlying accident year combined ratio excluding catastrophes and prior year's reserve development was 91.4% in the quarter up 4.4 points over 2006. For the year, the combined ratio was up 4.3 points compared to full year 2006. Similarly the current accident year underlying combined ratio is up 3.3 points. Catastrophes are up almost a point and prior years reserve development essentially equal to prior year.
Now looking at the combined by line. In the quarter, our Auto accident year combined ratio excluding catastrophes of 100.8%, was up almost 5 points and Property at 72.2% was up 9 points compared to prior year. In both lines claim frequency increased over prior year. We as many in the industry have experienced an increase in claim frequency for the first time in several years.
Contributing factors in 2007 include adverse winter weather in key Midwest and Northeast states in both the first and fourth quarters. Additionally, our new business and total policy growth in some of our key Western states had typically experienced higher frequency levels than countrywide, have added to the upward pressure.
On the other hand for the quarter and the full year, Auto and Property claim severity trends are favorable and within our expected ranges.
Looking at our book of business, we continue to improve the quality and distribution of our P&C book. At yearend Auto & Property are now 77% and 71% of educator respectively. The percent educator in both lines is up about 2.5 points over prior year and both lines are up 8 points in the last three years, benefiting from our continued focus and commitment to the educator community.
We also continue to improve the educator percentage in our preferred underwriting tiers along with the percentage of customers who have three or more lines with us. These results are driven by the expansion of our new Auto pricing plan or ESM, the educator segmentation model to thirty states at yearend representing 70% of our Auto premium volume.
Moving on to retention. Our customer retention ratios continue to increase with Auto up a 0.5 point while Properties improving almost at full point for the year. Policies enforced grew over 2000 or plus 0.3%. All the growth occurred in Auto, as Property policies were flat for the year.
Property growth was impacted by tighter underwriting guidelines in coastal markets and our continuing coastal non-renewal programs especially in Florida. In Florida, we have reduced Property policies enforced approximately 15% since 2004 and have started another program that will reduce exposures another 20% by the start of 2008 hurricane season.
As mentioned in prior calls, we are working with property partner companies in coastal market and now we have three partners in Florida, allowing our agents to continue to provide multiline service for the educator community. Specifically the current Florida non-renewal program is a transfer program to one of our partners, which allows our agents to maintain the relationship and the opportunity to retain all lines of insurance in the household.
Finally, our country wide educator policies enforced continues increasing an additional 4% for both Auto and Property policies. Total reported Property and Casualty written premium was even with prior year quarter and down almost to 1% for the year. However, when you adjust the percentage changes for the increasing catastrophe reinsurance cost and the discontinuation of the NEA EEL program, our premium growth rate would be modest but nonetheless positive at plus point 9% in the quarter and a positive 1.2% for the full year.
We continue to pursue several strategies that are yielding results. Our Auto Payroll deduct program continues to contribute to sales growth and retention, serving to differentiate us in the market place, while allowing us to offer a unique service educators. In 2007, we more than doubled the number of schools districts with Auto Payroll capabilities and have increased Auto customers on payroll by 86%.
For the full year we wrote almost 11% of true new Auto business on payroll. In the fourth quarter this measure increased to 14%. As mentioned last quarter, we have implemented Identity Theft Resolution services as an endorsement to the Property policy for educators at no additional costs. Both Auto Payroll and Identity Theft provides convenience and value to our target educator market.
The outlook for 2008 calls for Property and Casualty combined ratio in the 92% to 95% range. We are anticipating that the frequency declines of the past few years will slow and that the severity trends managed by our ACE, advanced claims environment group will continue to better the CPI indicators.
We also anticipate that prior year's reserved development will be favorable but at much lower levels than 2007 and we anticipate an average catastrophe year. We will be increasing our pricing actions to align with pure few premium trends. We anticipate continued formidable competition in the marketplace with the continued high level of advertising spend and competitors continuing to refine their pricing models. Our strategy calls for us to continue implementation of Auto ESM and development of homeowner ESM in 2007 with the rollout starting in 2009.
Now I would like to turn it over to Frank D'Ambra to cover Annuity and Life results.
Thanks Doug. And good morning. As Lou and Pete both remarked, the Annuity and Life lines of business experienced significant income growth, relative to prior year and our expectations, as well as increases in total revenues. However, sales growth continues to be a challenge. Total annuity sales decreased by 17% in the fourth quarter and 10% for the full year.
As we discussed in the third quarter earnings call, many school districts did place a moratorium on participant 403-B transfers industry wide, which impacted our fourth quarter and full year single-deposit and roll-over sales.
This in combination with the anticipated decline in independent agent sales, resulting from our narrowing our focus to 403-B in qualified sales accounts for the annuity sales decline in 2007. However, total annuity deposits for the year grew by almost 4%, driven by an increase in recurring deposits, which is a key benefit of our 403-B market focus.
Our total policy count continues to grow with cash value retention in the 91% to 92% range. Total annuity assets under management increased by nearly 4%, compared to a year ago. With fixed annuity assets increasing over 3% and variable annuity assets increasing 4.5%.
Fourth quarter pretax income for the annuity segment was $5.9 million, up $2 million compared to prior year. Quarterly earnings benefited primarily from improved interest margins, increased contract charges and fees and a refinement in the guarantee minimum death benefit reserve of calculation that were reduced by an unfavorable change in DAC and VIF unlocking. For the year pretax income of $25.9 million reflected a significant $8 million increase over 2006, with the key drivers being improved interest margins and increased contract charges and fees.
Looking to 2008, annuity pre-tax operating earnings, adjusted for the impact of DAC and VIF unlocking, are expected to be moderately lower than in 2007. Primarily due to the performance of the financial markets in the later part of 2007 and early 2008 and it's impact on associated charges and fees.
Turing to the Life segment, fourth quarter individual Life sales were down 8% compared to last year. Total sales for 2007 were down nearly 4%, compared to a strong 2006. Fourth quarter life premiums and contract deposits for Horace Mann’s proprietary products were down slightly, while the full year comparison also showed a slight decline.
In terms of the bottom line, life pretax income for the quarter was $7 million, up $1.7 million compared to the prior year. Quarterly earnings benefited from increased investment income, favorable mortality experience and a favorable change from DAC unlocking
For the year pretax income of $26.6 million was a $4.3 million increase over 2006, reflecting growth in investment income and favorable mortality experience. Looking ahead, for 2008, we expect Life pretax operating earnings adjusted for the impact of DAC unlocking to be somewhat less than 2007, reflecting a normalized mortality.
School districts are now in a process of analysis and review, which will ultimately lead to implementation of their new 403-B plans. While the mandatory compliance date is January 1st, 2009, we expect many schools will act to have their plans in place for back -to-school 2008.
During this transition period we expect a continuing impact on single deposit sales. With expansion of progress of our [partners] service offerings including [variable] annuity contracts or  mutual funds, planned level of administration and online enrollment and other web-based services, we see this market change as one of our opportunity for Horace Mann to expand our presence and penetration.
And now to discuss marketing results and progress on our ABM initiative, here is [Rich Schoenberg].
Rich Schoenberg Thank you Frank, good morning to everyone. Today I'll focus on sales results, distribution and the traction we're gaining in the agency business model or ABM. So let me start by focusing on some positive initial results we're seeing with ABM. The Agency Business Model initiative continues to take hold among our agents, as we have faith in the model over the past five quarters.
As a reminder ABM agents, conduct business from an outside professional office with license producers and/or support staff and employee embedded, documented reputable processes in their operations. This model, coupled with other key corporate initiatives designed to support ABM, will sustain our agents’ profitable growth of educator multiline business. So, after now 18 months where do we stand? We now have a 191 of our agents in an outside office with license producers. An 82% increase from the end of 2006. Agents now utilized 253 license producers representing an increase of 11% from just three months earlier and a 116% compared to a year ago. This now gives Horace Mann 1043 total points of distribution.
Equally important, in 2007, we decreased the number of agents working out of their home by 19% to a group now numbering 305. We have supported our ABM initiative with additional training and support, the core of that support coming from our agency business school. This is a four day seminar that focuses on agents utilizing their base for operation license producers and designing or refining a business plan.
Through December 196 agents or 25% of our current sales force have completed the agency business school. Of these agents more than 60% have implemented the model by securing commercial office space and utilizing license producers and/or support staff. But with that said, it takes time to fully embed and maximize all the ABM processes and concepts.
As a group these agents have experienced a marked shift in their sales over the prior year sales levels. Of particular note is the increase in sales by agents who have graduated from our agency business school when compared with those agents who have not yet attended the school.
ABS agents have seen a lift in their sales across all lines over their non-ABS counterparts. In [true new] Auto sales our ABS graduates have seen a 3% to 4% lift and excluding Florida, where we have our close to management programs in place, they have experienced a 10% to 11% lift.
As far as our total agent force is concerned, we ended the fourth quarter with 790 agents down 7% from a year ago. Several factors led to the decline. We plan to reduce agent count in several markets, again, including Florida. We asked our field management to access current agents strengths, assess needed areas of development as it relates to adopting the agency business model and to begin migrating those agents who were ready for the new models.
As a result, we have loss some agents who were not up to the standard necessary to survive in our present model or to transition to ABM. The vast majority of the agents who have left were less productive and still working out of their homes.
And as a sign that we are moving into right direction with the balance of the agency force, combined experience and finance agent auto unit productivity increased 2% for the year. By the way, finance agents are those agents in their first two years of production.
Now, let's look at sales results. Total Auto sales that is our new and add car units were down 6% in the quarter compared to the fourth quarter a year ago and virtually flat to the year. Our true new Auto sales, sales to customers who didn’t previously have Horace Mann auto insurance were also down on a quarter-to-quarter basis 8%. Like total Auto they were essentially flat for the year. Similarly Property sales units saw a decline of 13% for the quarter and 2% for the year.
So, why are the Auto sales flat for the year? In part, the general softening of the auto insurance market place and as previously mentioned our continued coastal management programs. For example, if you look at sales result excluding Florida, we saw the fourth quarter Auto declines nearly in half with total Auto sales units deceasing 3% and true new down 4%.
Similarly, with annual Auto results when you exclude Florida you will see a 2% increase in total Auto units and a 3% increase in our true new. We saw similar results in property sales unit ex Florida, a decrease of 5% for the quarter and a gain a 4% for the year.
With Life sales we were down 8% compared to the fourth quarter of 2006 and down 3% for the year. The pending IRS 403(b) regulation changes have had some impact in Annuity sales especially single premium and rollovers and that’s reflected in our total Annuity sales with new business of 17% in the fourth quarter compared to the same quarter in '06 and down 10% for the year.
We did see a bright spot in the fourth quarter when our bread and butter, flexible Annuity sales primarily ongoing new 403(b) sales posted a 9% increase in the quarter.
A final thought on ABM. 2007 represented the completion of our first calendar year with our ABM strategy. The early results are most encouraging and have reaffirmed our strong conviction and commitment to this strategy in the interest of our long-term success. While we are in early in the process, we are pleased with the results we are seeing so far.
Now, not all of our agents have seen the same level of sales lift. But that does not surprise us. As we recognize that additional development need to take place to help our agents build expertise in all the ABM systems and turn them into repeatable processes.
And we recognize more opportunity exist with the license producers our agents are utilizing. Again this is a new concept for many of our agents and we will continue to provide the training and resources to help them maximize their selling opportunities.
Thank you and with that I will turn it back to Dwayne.
Thanks Rick, and that concludes our prepared remarks, Tam if you would please move to the question answer session.
Thank you. (Operator Instructions) Your first question is coming from Rohan Pai with Banc of America. Please go ahead
Rohan Pai - Banc of America Securities
Good morning and congratulations on the quarter. First question was on the reinsurance. I guess, first of all did the aggregate reinsurance contract of $21 million, did it come into play at all in limiting your Cat losses or was the $4 million California wildfire your gross and net loss.
This is Pete Heckman, the way we recorded the quarter was to not assume that the aggregate came in to play. Obviously that kicks in at $21 million of 2007 paid losses and we will likely exceed that number, and the entire cost of wildfires would have been covered by our catastrophe treaty. But the particular language in our aggregate treaty limited those events to PCS declared catastrophes and as you may have seen the PCS only declared the one fire, the [bush] fire as a catastrophe. So at this point we are not assuming recoveries, we will be pursuing those in the year, in the months ahead but we've booked the year rather conservatively in that regard.
Rohan Pai - Banc of America Securities
Okay. And then could you remind us did your property Cat program renew at Jan 01.
Yes it did.
Rohan Pai - Banc of America Securities
And could you give us the details for that please?
This is Doug Reynolds, the 2008 program, a couple of things, one is we raised our top end limit of coverage from a $130 million to a $150 million and I might point out that’s equal to about the one in 250 year event and over the last four years we've raised that each year from $80 million to $110 to $130 and now to the $150.
We also have retained our attachment point at $25 million, which is the same as we had in 2007 and we purchased second and third event coverage, as well but, at an attachment of $15 million with no limit and industry-related storms, which is what we had in 2007.
We've also eliminated the aggregate this year and really the reason behind it was we had some we had a very favorable program in the first two years. As we tried to renew it this year the cost and the attachment points grew quite a bit and we decided that that was not a good move for us to do, based on the price.
Rohan Pai - Banc of America Securities
Sorry, a quick follow up and did you get any cost benefit for reducing your Florida exposures on your property catastrophe?
Yes we did based on the actions that we've taken we also have reduced our expected average annual loss in Florida substantially, due to the actions that we've taken over the last couple of years and what we have embedded in the contract for 2008 is that the pricing will be adjusted based on the activity that we'd taken in 2008 with the non renewal program.
Rohan Pai - Banc of America Securities
Okay great. Then if I can ask just one more question I say. If you could elaborate on the Auto loss trends that you are seeing, I know you have cited the higher frequency and then you said it was weather related. Could there be anything else that’s causing the higher frequency or did you think that it was mostly just more severe weather?
And also if you could just give us your thoughts on bodily injuries severity, I think a couple of other companies have cited higher lost trends in that line. Just want to know what you are seeing there?
Right. Couple of things, first on the frequency trend that we saw in 2007. As I indicated the weather in the Midwest and the Northeast definitely contributed to all of the increase in frequency in 2007. But additionally, some of the new business writing, as well as retention policy growth that we saw in some of the western states impacted that. Only that was distribution shift, just some of those states have a higher frequency than our countrywide average. So, the fact that they were making up a higher percentage of our total book resulted in a -- and put pressure on the frequency. So, those are really the two things that we saw occurring. We did not see anything else in any other segments of the book that would have pointed to really an issue that we would have to deal with. On the BI side, we’ve -- the frequency followed through a little bit and the BI side it was up a little bit, but on the severity side we have not seen -- we have seen some increase, which is basically inline with the CPI, but we have not seen anything on the severity side that would point to something that was greater than our expectations going into 2007.
Rohan Pai - Banc of America Securities
Great. Thanks for the detailed answer.
Thank you. (Operator Instruction). You have a question coming from Rohan Pai with Banc of America Securities.
Rohan Pai - Banc of America Securities
I sensed something while asking a question; I guess I’ll have to follow up. What was the price increases in Personal Auto that you were contemplating? I know you did mention that you maybe raising prices this year, but what kind of magnitude were you thinking?
Yeah, what we have -- and what we are anticipating is something in the 3% to 4% range in Auto and actually that would be the same as Property as well.
Rohan Pai - Banc of America Securities
Okay, guys those were the only questions I had. Thank you.
Tam, this time if we have no more questions we'd like to thank everyone for participating today and look forward to visiting with you at the end of next quarter. Have a good day.
Thank you and this concludes today's Horace Mann Educators Corporation fourth quarter earnings conference call. You may now disconnect your lines, and have a pleasant afternoon.
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