Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Horace Mann Educators Corporation (NYSE:HMN)

Q2 2008 Earnings Call Transcript

July 31, 2008 10:00 am ET

Executives

Dwayne Hallman – SVP, Finance

Lou Lower – President and CEO

Pete Heckman – EVP and CFO

Rick Schulenburg – VP, Sales

Doug Reynolds – EVP, Insurance Operations

Analysts

Robert Glasspiegel – Langen McAlenney

Dan Farrell – Fox-Pitt Kelton

Rohan Pai – Banc of America Securities

Robert Rodriguez – First Pacific Advisors

Operator

Good morning. My name is Kee, 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 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (Operator instructions) Thank you. It is now my pleasure to turn the floor over to your host, Dwayne Hallman. Sir, you may begin your conference.

Dwayne Hallman

Good morning, everyone. Welcome to our second quarter 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 second quarter in our prepared remarks. The following 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; and Rick Schulenburg, 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 are 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 actual results or changes and assumptions, or other factors that could affect these statements. As a reminder, this call is being recorded and is available live on our website. An Internet reply will be available on our website until September 1, 2008.

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

Lou Lower

Thank you, Dwayne. And good morning everyone and thanks for participating on our call. As we reported after the market closed yesterday, Horace Mann reported net income before realized net capital losses of $0.23 per share for the second quarter, $0.30 per share less than prior year, with $0.28 of that adverse variance attributable to the catastrophes, which we had pre-announced. At $22 million, those cats were the worst in the company's history for the second quarter. Notwithstanding the loss to the company, our claims employees are hard at work doing their usual superb job of restoring the lives of our customers who suffered personally during the season of abnormally high number of tornadoes and other damaging weather events.

We also, but as expected, had less in the way of favorable prior-year reserve developments, accounting for about $0.04 per share of negative variance to prior year. Despite those factors, we are encouraged by the underlying fundamentals relative to our expectations, given where we are in the underwriting cycle and the current state of the financial markets.

Year-to-date our P&C loss ratio ex cats and ex prior year development is only a point over prior year, with most of that deterioration coming from non-cat weather losses in the property line. Similarly our combined Life and Annuity earnings are ahead of last year in spite of the adverse impact of the bear market on our variable annuity business. Given our actual cat experience in the first half and allowing for normal second half catastrophes plus no improvement in the financial markets, we’ve revised our full year guidance for operating EPS to a range of $1.30 to $1.45. And as noted in our press release, that range anticipates a $0.05 per share charge for consolidation of our claims organization.

And as you are going to hear from Doug a little later on, this initiative will allow us to leverage the technology infrastructure that we’ve already put in place create additional scale, reduce LAE, further improve severity control and customer satisfaction with a payback over a relatively short time frame.

Turning to revenue measures for the quarter, property casualty voluntary auto and property written premium increased 2%. Looking at the components that drive that revenue line, new business growth is being adversely impacted by the economic with this reduced auto and home sales as well as our own risk reduction programs. True new auto sales around 5% for the second quarter, certainly not where we want to be, but it was an improvement compared to the first quarter with sequential growth in unit sales.

We are holding onto more of our in-force business, with retention improvements in both auto and property. At the same time, average written premium per auto increased over the prior year for the first time in a few years and should continue to do so as our rate filings and price increases continue to take hold. In the annuity line, our core flexible premium flow business through Horace Mann agents has increased 4% year-to-date for new flex in sales, but the IRS 403(b) transition rules are producing their expected impact on new single premium rollover business, which was down 8% for our captive agency force the first half.

Negative returns in the financial markets have taken their toll on variable annuity account values down about 14% year-over-year in reducing fee income. Partially offsetting that decrease, fixed annuity account values rose about 5%. Over the past 18 months, we’ve been able to increase growth on the entire fixed block about 25 basis points as we continue to grow and work our way out of the drag on profitability that spread compression has created on our legacy block of fixed business.

As you’ll hear from Rick, our key long-term growth initiative, the agency business model continues to make good progress. We are using agency back from their field experience to modify and strengthen the model’s processes and how we embed them. Agents transitioning to the model continue to outperform their peers in productivity increases, in absolute sales levels, in lines of business, as well as growth in first year earned commission, which is obviously important to their financial success in the new model.

Turning to the balance sheet, as you’ll hear from Pete, property casualty reserves remain strong and stable. And in the turmoil of today’s credit market, our conservative well-diversified investment portfolio is allowing us to prudently increase investment income with only a modest level of impairment writed-owns. We’ve also maintained solid financial ratios while judiciously managing capital through share repurchase activity.

So with that as an overview, let me now turn the call over to Pete Heckman.

Pete Heckman

Thanks, Lou, and good morning. As Lou has mentioned, Horace Mann’s second quarter operating EPS variance to prior year can essentially be attributed to a significantly higher level of catastrophe losses and a smaller amount of favorable prior year’s P&C reserve development. The latter was generally consistent with our expectations, the former of course was not.

The remaining relatively small negative prior year variance in P&C was due primarily to a higher level of non-cat weather losses in our property line. This was more than offset by higher annuity and life segment earnings or increase fixed annuity and life investment spreads along with lower mortality, more than offset the adverse financial – or the adverse impact of the financial markets on our variable annuity fees and DAC unlocking.

For the first half of the year, operating EPS of $0.61 fell short of our expectations primarily due to two factors; cats and the impact of the financial markets on our annuity business. Those factors in turn are the primary drivers of our revised full year earnings guidance. The midpoint of our updated guidance range of $1.30 to $1.45 is consistent with the current consensus and reflects three primary components of variance relative to our prior guidance range midpoint.

First, approximately $0.30 due to increased level of catastrophe losses, which simply reflects the excess level of cats in the first six months; about $0.07 in reduced annuity earnings due to market performance, which we assume will be flat for the remainder of the year; and approximately $0.05 of current year expenses related to our 2008 and 2009 P&C claims office consolidation initiative. Other than those items, we expect our underlying profitability to be consistent overall with our initial expectations.

Turning to investments. Net investment income was up approximately 4% over prior year for both the quarter and year-to-date, including the impact of our share repurchase activity over the last eight months. The increase in portfolio yield over the last several quarters has contributed to the widening investment spreads in our annuity and life businesses, which has helped mitigate the adverse impact of the financial markets on those segments earnings.

Before we get into some of the detail on investment gains and losses, I thought it might be useful and timely to review the composition of Horace Mann’s investment portfolio. Approximately 98% of our invested assets are fixed maturity securities, 95% of which are investment grade with an overall average quality rating of A+. We hold immaterial amounts of many of the more volatile asset classes, such as common stock, mortgage whole loans, private placements, and owned real estate, and have no derivatives in the portfolio.

As a result of this relatively vanilla portfolio composition, less than one-tenths of 1% of the total portfolio fair value is subject to so-called level three pricing, which significantly reduces the subjectivity involved in our asset valuation process. With that said, the persistent uncertainty and volatility in the financial markets continued to have an adverse impact on our portfolio on the second quarter, although the diversification and high quality of our holdings continue to make those impacts very manageable.

Pretax net realized investment losses were $8.1 million in the quarter. Included in this amount were $11.2 million of impairment write-downs on securities determined to have had other than temporary declines in value and $300,000 of losses on impaired securities that were sold during the quarter. Those impairments were partially offset by $3.4 million of realized gains on investment sales.

The $11.2 million of impairment write-downs was primarily related to seven securities. Two CDOs accounted for approximately $6 million and five equity securities including four financial industry preferred stock issues accounted for a little over 5 million. All of the impaired securities were performing and are continuing to perform consistent with contractual obligations.

And in all but one case, our credit analysis and/or analysis of the underlying collateral cash flows indicated only a very remote likelihood of default, even under severe stress testing. The decision to impair these issues was instead based on our conclusion that recovery in fair value, given current unexpected market conditions, would likely not occur for an extended period of time. On average, the fair value of securities impaired in the second quarter was approximately 57% of their book value.

Looking at the distribution of our total gross unrealized losses at June 30, less than 3% of our total portfolio had a fair value below 80% of book with a corresponding unrealized loss of approximately $28 million pretax, which of course is already reflected in book value through other comprehensive income. Of that amount, securities with fair values less than 70% of book represented only seven-tenths of 1% of our investment portfolio, with a corresponding pretax unrealized loss of $10 million. That equates to only about $0.15 or 1% of June 30th book value per share.

So again, while the financial markets continue to challenge most and not all participants in the financial services industry, those challenges have and we feel will continue to be very manageable for Horace Mann. And to that point, in the quarter, that’s our record catastrophe losses in addition to a higher than normal level of realized investment losses. Our book value per share, excluding FAS 115 increased sequentially and was up more than 5% over prior year.

And now let me turn it over to Doug Reynolds for more detail on our operating segment results.

Doug Reynolds

Thanks, Pete, and good morning. This morning I’ll cover both property and casualty results as well as annuity and life. As Lou and Pete have already indicated, catastrophes were the big start for the second quarter earnings results. And as you have seen in our release, the weather, both catastrophe and non-catastrophe, impacted our financial results, resulting in 106.7 total property and casualty combined ratio for the quarter, up over 17 points from second quarter 2007. Catastrophes in the quarter totaled over 22 million, up 17 million over the prior year and approximately five times our expected level for the second quarter.

Total catastrophe cost represented 16.6% of earned premium, up almost 13 points over last year. This second quarter strong activity, mainly wind and tornadoes, was the highest second quarter in our history. Also in the quarter we had favorable prior year reserves re-estimates of $2.4 million or 1.8% of premium, which was 2.4 points lower than prior year. Our underlying combined ratio, excluding catastrophes and the effect of prior year re-estimates, was 91.9% in the quarter, 2.3 points higher than last year and up one-half of a point sequentially compared to first quarter.

Year-to-date total property and casualty combined ratio was 100.2%, up 10.9 points over the first half of 2007. Catastrophe costs account for 7.7 points of the increase and the difference in prior year reserve re-estimates contribute 2.3 points for that increase. Our first half underlying accident year combined ratio, excluding catastrophes, was 91.7%, and nine-tenths of a point higher than last year.

Excluding catastrophes, this quarter's auto accident year combined ratio of 95.9% was up 1.2 points over prior year, while property closed with an accident year combined ratio of 83.1%, an increase of 7.3 points when compared to the second quarter of last year. In auto, frequency trends were below prior year, potentially receiving a favorable impact by decreases in miles driven this quarter. Our auto severity trends remained favorable consistent with our expectations.

Property non-catastrophe loss cost increased in the quarter due to the unfavorable spring weather patterns. We experienced a nearly 50% increase in non-catastrophe wind and hail losses driven by activity in the Midwest and the Carolinas. In both lines, we are projecting continued price increases consistent with others in the industry to match increasing loss costs.

Our new business quality trends are excellent with a continued focus on educator, preferred underwriting tiers, and cross-selling. In addition, we continue to focus on auto payroll deductions with more schools adopting the program, and new auto business written via payroll is up over last year, 18% in the quarter and 15% year-to-date. We continue to focus on managing our coastal exposure, especially in Florida, where we have decreased the number of property policies on our books. In the last year, we have decreased Florida property policies by 3,800. Including expected reductions in the last half of 2008, we will have reduced Florida property policies by approximately 37% from our high water mark, with the majority of the reduction in the last couple of years.

Along with coastal reduction strategies in other states, we have reduced our property policies in coastal areas by about one-thirds in 2005, resulting in an overall 12% reduction in total insured value along the coast. Our customer retention levels continued to improve on both auto and property, increasing three-tenths of a point and one point respectively.

Educator policies in force continue to grow increasing almost 3% over the prior year by approximately 1% over this year’s first quarter. These results are driven by continued quality improvement, increased customer contact programs, and a commitment to customer satisfaction. The commitment to our customers is embedded in our processes across the company.

Recently, our property and casualty claims department earned a prestigious customer service award, not just for the not just for the insurance, but across all industries. The award recognizes the implementation and maximization of results from an online, real-time customer service survey conducted during the key moments of truth in the claims process. The award, Best Use of the Voice of the Customer, became the fourth award received by our Claims Group since the implementation of ACE, our Advanced Claims Environment.

We were recognized for our use of real-time listening posts through all aspects of our customer experiences. This moves us beyond just making sure our customers are happy and enlists them to become an advocate for the company. We feel this approach will be reflected and cross-sell opportunities. This process developed by our Claims Group has also been installed in our P&C and life and annuity call centers.

As you may recall, in 2002 we embarked on a claim redesign process called ACE, Advanced Claims Environment. At that time, we consolidated offices and began a process of developing a new claims technology platform. In addition, we implemented consistent claims handling procedures and processes across the country in our six regional claims offices.

Approximately two years ago, we started a joint development of a claims desktop. Basically this is a technology that brings different vendors together under one platform while also providing a rules type approach to certain claim situations. All of these changes have worked extremely well, as we have improved severity, lowered pending, substantially improved customer satisfaction, and reduced loss adjustment expense by more than three points. As a result of all of these changes, and specifically the technology gains we’ve made, we are implementing a further consolidation of our claims organization.

In 2009, we will begin operating with two regional auto claims offices and one national property office. These changes will allow us to leverage the technology and processes even more effectively than we have in the past. We believe we will be able to further improve a number of our processes as well as delivery greater customer satisfaction and also gaining increased benefits out of the technology platforms.

Over the last four years, we have outperformed the industry and best track [ph] data in virtually all coverages. These changes will allow us to approve our results even further with a relatively short payback period on our investment in the office consolidation.

In summary, catastrophe losses as well as non-cat weather related losses had a significant impact on our results and the rest of our industry. Our unit account and written premium trends are essentially flat in a very competitive market, as evidenced by continued high levels of advertising spend in our industry. Our coastal property reduction strategies, especially in Florida, had limited our growth to some degree but are protecting our bottom line by reducing catastrophic exposure and reinsurance costs. We will continue to focus on programs that differentiate ourselves from the competition in our target market, the educator community.

And now turning our attention to annuity and life. Our total annuity sales continued to face pressure due to the changing 403(b) marketplace. Although we have a number of strategies in place to maintain or grow our position within the schools, there have been shifts in the market. And I will address some of our actions in a few minutes.

Overall, our annuity sales are down approximately 12% for the quarter and about the same year-to-date. As anticipated, the primary drivers are reduced single premium and rollover business, which is down 13% in the quarter and 17% year-to-date including partner sales. As mentioned in prior calls, many school districts had placed restrictions on participant 403(b) transfers. As a result, our qualified single deposit sales have decrease about 17% for the quarter and less on a year-to-date basis. We do expect the restrictions and transfers and our focus on qualified sales from the independent agent to continue to impact our single premium and rollover sales for the rest of the year.

On the other hand, our scheduled premium deposits are running closer to prior year, down 8% in the quarter and 2% year-to-date. The Horace Mann agent flex business is about a couple of percent is the quarter, but up over 4% for the year. As I mentioned, regulatory changes for 403(b) market, although fully affected until January 1, 2009, has impacted our annuity protection as compared to prior year.

However, at the same time, we have put forward a number of strategies to solidify our position and grow our business. We’ve implemented numerous contact programs, participated in joint communication packages, mailed informational factors to all schools, and trained our agents so they can provide a high level of expertise to their schools. While there are many number of headlines regarding the changes, our experience has been that a relatively small number of schools have utilized outside consultants with RFP processes to significantly pare down the number of providers that belong to a single provider network.

Most schools are not rushing to adopt the new 403(b) regulations. As of June, we have heard from approximately 15% of our over 5,000 current school payroll slots, with a vast majority of those not applying schools allowing Horace Mann to continue as a 403(b) provider after January 1, 2009. Most schools are focused on their regulatory requirement to develop a written plan and are simply maintaining their current major providers, at least for 2009.

We expect the majority of the remaining schools will also develop plan documents maintaining the status quo. Although we have lost out on a very small percentage of our schools, we have also won a few new districts. As the year moves along, we will get a far better view of what we can expect as we move into 2009.

In wrapping up my comments on annuity results, our total annuity assets under management decreased 3%, with fixed annuity assets increasing 5% and variable annuity assets decreasing 14% due to market performance. In addition, total policy count continues to grow although slowly with cash value retention in the 91% to 92% range.

Annuity pretax income for the second quarter was up slightly, while down $1 million year-to-date. Key drivers of the earnings for the quarter and year-to-date are increased interest margins, which have been offset by decreased charges and fees as well as unfavorable changes in DAC and VIF unlocking driven by market performance.

Now turning to the life segment. Second quarter and year-to-date life premiums with contract deposits, which consist of Horace Mann products only, were basically flat compared with last year. Total second quarter and year-to-date sales were down 18%, primarily driven by a decrease in partner product sales, with Horace Mann proprietary products down 8%.

Looking at the bottom line for life, second quarter pretax income increase $2.2 million when compared to the prior year due to increased income and lower mortality. On a year-to-date comparison, pretax income was up $1.1 million, mainly due to increased investment income. Overall, a pretty good quarter from an earnings perspective with positive signs as our interest margins continued to improve.

And now let me turn it over to Rick Schulenburg for his comments on our development [ph].

Rick Schulenburg

Thanks, Doug, and good morning to everyone. Today I’ll focus on the momentum we continued to build with the agency business model initiative, the changes in our agent status relative to the model and the quarter and year-to-date sales results. Results of our agents working in the Agency Business Model or ABM had been very encouraging. ABM agents have gone through our agency business school and have adopted or in the process of adopting documented repeatable processes in their operations that include conducting business in outside offices with licensed producers and other support staff.

We continue to grow the number of agents operating in outside offices with licensed producers while decreasing the number of agents working out of their home. We have also had additional agency business schools with now nearly 30% of our existing agents having completed this four-day business seminar. On average, ABM agents are collectively outperforming all other agents in all core lines, especially in our two lead lines, true new auto sales and flexible annuity sales. These lines serve as a barometer of our success with the ABM initiative.

Overall, our agents average true new auto productivity increase by approximately 6% for the second quarter over 2007, driven predominantly by our ABM agents. Their average true new auto productivity has increased approximately 9% in the second quarter. Flexible annuity average productivity was up around 9% for the second quarter and 15% for the year. And again, our ABM agents have the most influence on this increase. Their average flexible annuity sales increased by approximately 10% in the second quarter and 22% for the year. In fact, productivity has increased with the ABM agents in the second quarter and true new sales, property sales and flexible annuity sales in a 9% to 10% range.

One last point. ABM agents’ first year commissions continue to grow, a key factor in the belief to be successful in the model. And overall, our ABM agents produced substantially more business in all categories than their non-ABM counterparts. We continue to bring agents who are showing potential of operating in the model through our agency business school. We are also continuing to focus on our previous agency business school graduates, providing with individualized coaching sessions. Additionally, we developed a second agency business school, designed to support and reinforce the repeatable business practices and processes to ensure that they are embedded in the respective operations.

We have just begun our Agency Business School II for past ABM graduates. We are also conducting workshops to build the sales effectiveness of our agents’ licensed producers. The workshops aim to invest the same repeatable processes, core to our ABM model into the producers’ day-to-day activities.

Now let’s look at our changing agent force profile. We ended the quarter with 721 agents and during the first six months of the year, grew our licensed producers engaged by our ABM agents from 253 to 322. These numbers are the result of the shift in our emphasis, focusing on agents working in the Agency Business Model and distributing our products through total points of distribution. That is, agents and their licensed producers.

Our terminations are relatively consistent compared to our second quarter of 2007. The majority of our terminations were agents working inside their home with substantially lower productivity. Earlier in the year, we installed a more rigorous new agent hiring standard that establishes the characteristics of an agent who we believe will be successful in the Agency Business Model. Initially this significantly reduced the number of new candidates we hired. But gradually the number of hires have increased and although it is still short of our traditional monthly hiring patterns, we're encouraged.

The initial indications show our quality has improved and we are pleased with the progress that our agents hired in 2008 and even 2007 are making so far. We expect the number of hires will continue to build as our field management becomes more familiar with the processes that brings the right candidate in the door. This staffing strategy, by the way, calls for working with transitioning our existing agents and recruiting new agents capable of operating or performing into the Agency Business Model.

Now moving on to sales results. Although this has been a difficult year, thanks to our ABM efforts, we are in part with many of our peer companies. No doubt, everyone is feeling the economic effects of much lower auto and home sales nationwide, which reduced sales opportunities for our agents. In general, all of our sales results were down compared to the same period of 2007.

Let’s look at our two lead lines. True new auto and flexible annuity sales. True new auto was down 5% for the quarter. While still not on par with last year, we saw less of a decline than in the first quarter and had a 6% improvement in unit sales sequentially. Property sales followed a similar trend. They were down 6% for the second quarter, but again less than a decline in the first quarter and the 9.5% improvement sequentially.

If you take into account that we are shifting our Florida property sales to partner companies, we are only off by less than 2% nationally over 2007. Flexible annuity sales for our career agents are up approximately 4.5% for the year and down only slightly 3% compared to the second quarter of last year. And as mentioned earlier, agent productivity has improved.

In conclusion, we certainly have seen challenges in sales in this economy, but we are very encouraged by the impact we are receiving for our ABM agents and positive above this transformation to our distribution strategy. We will continue to transition those agents for capable of operating in outside offices, engaging licensed producers, and embedding repeatable processes that are core to be successful in our niche markets.

Thank you. And with that, I’ll turn it over to Dwayne.

Dwayne Hallman

Thank you, Rick. And that concludes our prepared remarks. Kee, if you would please move to the question-and-answer session.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from Robert Glasspiegel of Langen McAlenney.

Robert Glasspiegel – Langen McAlenney

The cat losses in this quarter, you did a good job of explaining that you have been reducing your coastal exposure and that we shouldn’t be nervous that this is representative of a trend that may unfold prospectively. But with your property growing pretty continuously better than your auto over the last several quarters, but perhaps the question might be, are you thinking about stepping up your reinsurance purchases, particularly given the pricing has started to come down?

Doug Reynolds

Thanks, Bob. This is Doug Reynolds. Every year we really go through a process of looking at our total reinsurance package and different opportunities and try and balance that against the last potential, our exposure that we have to – not only in hurricanes but others. And as we see opportunities, we obviously would take advantage of those. Reducing that, even though there has been a lot of activity this year in the, let’s call it, the middle of the country, the pricing opportunity is there for us to really keep pace with those over a period of time. Obviously if this year becomes the norm, then we will have to take a look at some different opportunities. But right now we really look at the entire package for opportunities to mitigate our risk at reasonable cost.

Robert Glasspiegel – Langen McAlenney

Okay. And switching gears, just on the auto side, your numbers and your checks sort of were not as positive about gas prices and frequency as Hartford and Progressive to date have been – why do you think you are not seeing any frequency positives yet? Is it the book that you are shown into perhaps or–?

Doug Reynolds

Yes. I would say that we’ve started to see some of the frequency benefits, but it has trailed a few of the other companies. And I do believe that it’s really targeted at our niche, which the educator, which we have such a large percentage of the book, over 80%. That is out there driving every day and they really don’t have an option to change some of those patterns, whether it’s the school or to other activities and events that are going on with the schools. So I think we typically have seen us trail maybe some of the general market trends in that regard, but we are seeing that.

Robert Glasspiegel – Langen McAlenney

So your guidance doesn’t factor any frequency deltas post the first five months? Let’s say – I guess June was one we already started to see it.

Doug Reynolds

No, we are not – not specifically towards that. We would have to really see that for just a little bit longer to really ascertain if that’s something that we should be reading into our year-end projections as well as, as we move into 2009.

Robert Glasspiegel – Langen McAlenney

And last question. Excess capital position is apparent [ph]. I mean, if the stocks stayed at these levels, how much repurchase would you be capable of doing that you thought that was your best option?

Pete Heckman

Yes, Bob, this is Pete Heckman. We continue to have I guess what I would call a modest level of excess capital available following the 75 million repurchase that we did over the last eight months. At this point in time, especially with the hurricane season approach and such, we are probably going to keep our powder dry. But your point is well taken. The stock price is a pretty attractive one for a buyback scenario.

Robert Glasspiegel – Langen McAlenney

Okay. You are saying that – actually cat season, how much – I mean, what your forecast is? I mean, how much excess capital are you generating in the second half?

Pete Heckman

Well, it’s – let’s just say it’s a modest amount, certainly nothing in the order of magnitude that we utilized in the last several months.

Robert Glasspiegel – Langen McAlenney

Okay. Thank you very much.

Operator

Your next question comes from Dan Farrell of Fox-Pitt Kelton.

Dan Farrell – Fox-Pitt Kelton

Hi, good morning.

Lou Lower

Good morning.

Dan Farrell – Fox-Pitt Kelton

First thing, if you happen to have the statutory equity for the life companies at the end of the second quarter?

Lou Lower

The statutory numbers are still preliminary. I can give you a ballpark and don’t hold me to it, but –

Dan Farrell – Fox-Pitt Kelton

Okay.

Lou Lower

It’s about $280 million, including ABR, so adjusted capital and surplus is about in the $280 million range.

Dan Farrell – Fox-Pitt Kelton

Okay, great. And then can you just talk a little bit more about your Asian force and Asian cap? You gave a lot of detail in the commentary, but do you feel you are getting to an inflection point in agent count now? When do you think you get that and start to see the growth come through?

Rick Schulenburg

This is Rick Schulenburg. Dan, obviously we hope our agents distribution will begin to grow. With that said, we are going to hold firm on our strategy and that’s really putting resources into those agents who were capable of going into ABM. And really putting a firm stand on our hiring standards and identifying agents who are able to come and join our company, grow their business with business plans. And those agents who are unable to migrate over having performance plans in place, and this is not the bright for them. We are willing to go with the people that will grow their business and help us capture the education market.

Dan Farrell – Fox-Pitt Kelton

Okay. And I apologize if I missed this. But what percentage of the agents have now been sort of migrated to the new operating platform?

Rick Schulenburg

We have today over 200 agents who are in the platform and we are seeing increases. But obviously as we make increases, the future increases are going to come from those new hires that we identify. We still have some of our agents in our agent rings who are identifying and hoping to get to that – to the ability to move to an outside office, invest in their business. So we have a couple more schools that will at least progress this year progress this year. And we will try to bring people through and help them get into that model.

Lou Lower

And Dan, I think the other thing on the agent count component and Rick talked about this is the growth that we are getting with the licensed producers. So the overall point of this distribution, we do see growth in that. That’s really one of the things that one of the key drivers as we look to make the agents stronger and expand in the various markets.

Dan Farrell – Fox-Pitt Kelton

Okay, great. Thanks guys.

Operator

Your next question comes from Rohan Pai of Banc of America Securities.

Rohan Pai – Banc of America Securities

Hi, good morning. The first question has to do with the personal auto line. The accident year combined ratio, I guess, ex cap is 99.9. Was there any non-cat weather in that number?

Lou Lower

On the auto?

Rohan Pai – Banc of America Securities

On the auto, yes, have impacted one way or the other?

Lou Lower

Probably not. I mean, nothing that we really saw that would have pointed to any of the coverages, for example, cars being flooded or hail damage to the vehicles that if anything that would really typically be out of the ordinary or would have that much of an impact.

Rohan Pai – Banc of America Securities

And your guidance, just to check I guess, it's for improvement year-over-year, right, in the underlying combined ratio for the auto book, given business mix, shifts and things?

Lou Lower

No, for 2008 we are expecting the auto combined ratio accident year to increase. So that was built into our target combined ratios. As we start to take the rate activity in the second half of the year, we would expect to be able to move that – either flatten or move that in the direction. But in 2008, based on the results that we are seeing, we would expect that accident year combined ratio to increase.

Rohan Pai – Banc of America Securities

Okay. And in terms of your forecast, when you are taking the rate, what kind of loss trends are you forecasting? Are you assuming improvement in frequencies?

Lou Lower

At this point, we have not put that into our loss trends for the auto changes. If that starts to show up, then obviously we will. But I would say that our loss trend estimates we try not to be – to move them too far one way or another and be either overly conservative or overly aggressive with the trends, but to actually see them show up in our results before we would move them into our loss trend.

Rohan Pai – Banc of America Securities

Okay. And I think in the first quarter you’ve said that in terms of the ABM migration, you are slowing down the process to focus on agents that had gone through the school. Is there any update on that? I mean, is that still the case or are you starting to again focus on getting people through?

Rick Schulenburg

Again, this is Rick Schulenburg. We are actually doing both. We have had an additional couple of schools for those agents capable and new schools and we have a couple more as we go through the year. But we have continued to focus on those agents who have gone through the agency business school and into the model itself. So we started conducting a second school that reinforces all (inaudible) some of our agents, almost two years since they've gone through the initial time. So it’s a retooling and helping them really refine. And we’ve started to conduct our schools for their licensed producers, which is a real – as Doug said, that’s a real key for us, giving them the skills and helping those licensed producers begin to sell and have an impact on both our results as well as their agents’ results.

Rohan Pai – Banc of America Securities

Okay, great, And I guess the final question is for Pete, in the net realized losses in this quarter, I guess to what level have you written the two CDOs that you had, like what percent of cost is it now?

Pete Heckman

Well, the pricing, one was I believe around 28 or so, and one was in the mid-40s.

Rohan Pai – Banc of America Securities

Okay. Okay, great. Those are the questions I have. Thank you.

Lou Lower

Thank you.

Operator

(Operator instructions) Your next question comes from Robert Rodriguez of First Pacific Advisors.

Robert Rodriguez – First Pacific Advisors

Yes. Could you please quantify for me when you were talking about the pressures from the 403 transition exactly what the revenue level were you talking about? And secondly, like – I’m familiar with that transition, exactly what are the issues that you or the industry are facing there, and why will this be better next year?

Well, I will go on with the later part of your question first. The 403(b) market, basically IRS issued regulation that require the schools to have plan documents and accountability for how the money is moved or invested. It’s very much – very similar to the 401(k) marketplace in regards to that. And as a result, all the schools in the district regard to changes to implement and comply with those regulations. And as a result, there is a number of schools that put in, really stopped the ability for their employees to transfer monies from company to another until they have their plan documents filed. So that’s why you see some of the single premium numbers down substantially more than the flow premium. Secondly, as schools are dealing with that, we’ve been working with them to really develop the plan documents and be able to administer the programs fully. So that’s – it’s sort of just put the market in a little bit of a turmoil and we feel that as we move into 2009, because the schools will have to have complied to keep their plans in place, we will know a little bit more about what’s going to happen in that marketplace in the next year. And also as a part of this is that, because of that turmoil, we’ll also see that withdrawals are down in the industry as well, which sometimes is the generator for new business for other companies.

Robert Rodriguez – First Pacific Advisors

In terms of quantifying the magnitude of what this revenue decline was in dollars?

Lou Lower

Just to – I think I’ve got something on that, but –

Pete Heckman

Well, we are looking at how far the single premium sales were down compared to prior year. Let me just emphasize that the slowdown in withdrawal in the single premium sales and the improvement in persistency is industry-wide. It’s not just a Horace Mann phenomenon, as everyone is being impacted with fewer rollovers in the schools. Once the plan documents are in place and things are kind of back to normal January 1 of this year, then you would expect withdrawals and single premium sales to return to their normal levels across the industry.

Lou Lower

And I’ve indicated in the comments that we’ve done about 15% or so on a year-to-date basis for the single qualified, which is approximately 7 million to 8 million.

Robert Rodriguez – First Pacific Advisors

All right. And then second question here, in terms of the investment portfolio, you gave good granularity there. But in light of a transaction that recently occurred at Merrill Lynch, did you have anything that would be analogous to that? And secondly, are there any other issues like this in the portfolio? This is something I asked last year.

Lou Lower

In terms of the transaction, you mean Merrill selling off some of their–?

Robert Rodriguez – First Pacific Advisors

I don’t know if you'd call it a sale, of $0.22 on a dollar, but financing 75% and getting 5.5% cash and being retaining – being at risk. I’m not sure that really qualifies as a sale.

Lou Lower

Right, I agree. And the answer is, no, we did nothing like that and have no plans to.

Robert Rodriguez – First Pacific Advisors

Okay. Thank you very much.

Operator

There appears to be no questions at this time. I will now like to turn the floor back over to your host for any closing comments.

Lou Lower

Thank you everyone and we certainly appreciate the fact that you’ve participated on our call this morning. We look forward visiting with you at the end of the third quarter. Thank you and have a good day.

Operator

Thank you. This concludes today’s Horace Mann Educator Corporation conference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Horace Mann Educators Corporation Q2 2008 Earnings Call Transcript
This Transcript
All Transcripts