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Article Excerpt
OPERATOR: Good morning, ladies and gentlemen. My name is Stephanie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Horace Mann Educators Corporation fourth-quarter conference call. 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)
I would now like to turn the call over to Dwayne Hallman, Senior Vice President, Finance. Please go ahead, sir.
DWAYNE HALLMAN, SVP - FINANCE, HORACE MANN EDUCATORS CORP.: Thank you and good morning, everyone, and welcome to our fourth-quarter and year-end 2008 earnings conference call.
Yesterday after the market closed, we released our earnings report including financial statements as well as supplemental business segment information. If you need a copy of the release, it is available on our website under investor relations.
Today we will cover our results for the fourth quarter and year-end in our prepared remarks. The following management members will make presentations today, and as usual will be available for questions later in this conference call.
Lou Lower, President and Chief Executive Officer; Pete Heckman, Executive Vice President and Chief Financial Officer; Tom Wilkinson, Executive Vice, President, Property and Casualty; and Steve Cardinal, Executive Vice President, Marketing.
The following discussion may contain forward-looking statements regarding Horace Mann and its anticipated or expected results of operations for 2008 or subsequent periods. 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 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 in assumptions, or other factors that could affect these statements.
Since this is year-end, we would like to remind everyone that the Company's financial statements are subject to an annual audit process and will not be considered complete until the filing of the Company's 10-K. While some audit procedures are not yet complete, management does not anticipate any material changes to the earnings report being discussed today.
Finally, this call is being recorded and is available live on our website. An Internet replay will be available on our website until March 5, 2009.
Now I will turn the call over to Lou Lower for his comments.
LOU LOWER, PRESIDENT, CEO, HORACE MANN EDUCATORS CORP.: Thank you, Dwayne, good morning, everyone, and welcome to our call.
Yesterday we reported fourth-quarter net income before realized capital gains and losses of $0.51 a share. Despite catastrophe costs for the year of $74 million, the second-worst in our history, we did close out the full year at $1.29 per share. For both the quarter and year, final results exceeded our revised guidance as well as consensus.
While clearly not a year that we would like to repeat, it did demonstrate Horace Mann's ability to absorb the 1-2 punch that 2008 delivered to us and the industry in the form of significant catastrophes and a meltdown of the financial markets. All in all, we feel very good about the underlying fundamentals of profitability of our operations and the resiliency and strength of our balance sheet.
Most importantly, despite the very difficult economic climate anticipated in 2009, we believe that the nature and characteristics of our target market will not only benefit us but allow us to continue to move forward with continuing and greater success in the transformation of our distribution system. I'm not suggesting that we'll be immune to recessionary forces, just that our market niche has characteristics that will serve to mitigate the impact of some of the broad environmental forces at work.
Looking first at our balance sheet and financial strength, you'll note that absent the third-quarter headlines of Freddie, Fannie, Lehman, and AIG, realized losses were significantly less sequentially as we had anticipated. And just to reiterate what we communicated during our last call, the meaningful increase in our unrealized position over the course of last year was overwhelmingly a result of frozen credit markets where spreads and prices have become disconnected from rational valuation. After conducting a thorough analysis along with our institutional investment advisors and managers, we have assured ourselves that we do not have fundamental credit quality issues. Rather, we believe that over time rational pricing will return to the credit markets, reducing spreads and moderating our unrealized position.
In the meantime, we fully have the intent and ability to hold to recovery. With structure of the liabilities associated with most of the taxable, fixed income portfolio -- and that's primarily annuities -- continues to demonstrate very strong persistency and continued positive funds flow, which I think speaks volumes about the nature of our products, our customer base, the strong relationships our Horace Mann agents have with their clients, and the great service our customer service reps provide.
Now, just as important as all of those positive balance sheet attributes which actually reflect how we operate in the market we serve, is what we have avoided while the world's appetite for risk increased in this decade. We have no extracurricular activities at the holding company, such as credit default swaps and securities lending. We have de minimus exposure to sub-prime and Alt-A, and no hedge funds. Our product guarantees are simple, straightforward and non-toxic. And as you will hear again, our investment portfolio is conservative, high-quality, and not exotic.
Also, as we discussed, we have no refinancing needs for some time, our senior debt issues don't mature until 2015 and '16, and our credit facility, which was paid out in the $38 million prior to year-end, doesn't expire until 2011.
We continue to be very comfortable with the strength of the Company's P&C reserves. While favorable development over the full year was modestly less than prior year, we don't anticipate the same level in 2009. But having said that, our year-end reserve position remains solid and near the high end of the range determined by independent evaluation.
Just to complete the balance-sheet highlights, our critical capital ratios are all well within our target ranges, with debt to CapEx FAS 115 at 27%, while both life and P&C RBC ratios are comfortably within our target ranges.
While book value with FAS 115 decreased 30% year-over-year -- and that's primarily attributable to unrealized losses in the investment portfolio -- for the quarter the rate of decrease moderated to 3%. Excluding FAS 115, the year-over-year decline in book value was 2%, while it did increase 2% sequentially.
So now let me shift gears and hit the highlights of our operations, which Tom Wilkinson, Pete Heckman and Steve Cardinal will cover in greater detail.
In property-casualty, both reported and underlying profit fundamentals are solid. Despite another quarter of higher catastrophe losses that did include additional development from hurricanes Ike and Gustav, the all-in combined ratio of 93 increased just 1 point as compared to last year's fourth quarter. Current accident-year results, ex-cat, are better than prior year for both the quarter and year by about a point. A significant improvement in auto, led by declining frequency, more than made up for unfavorable comparison in property, largely as a result of non-cat [levers].
Auto educator PIS continued to increase, but overall were...
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