Greetings and welcome to the Horace Mann Third Quarter 2015 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ryan Greenier, Vice President Investor Relations. Thank you, sir. You may begin.

Thank you, Christine, and good morning, everyone. Welcome to Horace Mann's discussion of our third quarter results. Yesterday we issued our earnings release and investor financial supplement, and copies are available on the Investor page of our website. Our speakers today are Marita Zuraitis, President and Chief Executive Officer, and Dwayne Hallman, Executive Vice President and Chief Financial Officer. Bill Caldwell, Executive Vice President of Property and Casualty, and Matt Sharpe, Executive Vice President of Annuity and Life, are also available for the question-and-answer session that follows our prepared comments. Before turning it over to Marita, I'd like to note that our presentation today includes forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. The company cautions investors that any forward-looking statements include risks and uncertainties and are not guarantees of future performance. These forward-looking statements are based on management's current expectations, and we assume no obligation to update them. Actual results may differ materially due to a variety of factors which are described in our press release and SEC filings. In our prepared remarks, we may use some non-GAAP financial measures. Reconciliations of these measures to the most comparable GAAP measures are available in the supplemental sections of our press release. And with that, I'll turn the call over to Marita Zuraitis.

Thanks, Ryan, and good morning, everyone, and welcome to our call. After yesterday's market close, Horace Mann reported third-quarter operating income of $0.50 per share. This was a solid result, considering challenging external trends, including industry-wide increases in auto loss trends, equity market volatility, lower returns on alternative investments and impacts of continued low interest rates. Looking at the trends that were within our control, we like what we're seeing. The third-quarter reported P&C combined ratio improved by almost 1 point to 95.4. And on an underlying basis, we saw 1.4 points of improvement to 93.9. On a year-to-date basis, the reported combined ratio improved by 1 point to 96.5, which moves us closer to our goal of a mid-90s combined ratio. Top-line metrics in P&C are strong, with auto sales up 7% in the quarter. Importantly, we like the type and mix of business we're attracting, and we see an increase in educator PIF count. Equity market declines resulted in $0.03 of negative DAC unlocking in the annuity segment this quarter. Ex-DAC earnings reflected some pressure on returns from alternative investments. We also generated modestly lower fee income on the variable annuity book as a result of a lower average account value. In the life segment, we were pleased to see a more normalized level of mortality in the quarter. Reoccurring premium sales were similar to the prior year, but we did see a modest increase in single-premium whole life sales. On a year-to-date basis, operating income was $1.58 per share. As we typically do in the third quarter, we revised our annual earnings per share guidance and now expect full year 2015 operating income to be $2.10 to $2.20 per share. From a capital management perspective, we returned over $25 million to shareholders in the quarter. In addition…

Thanks, Marita, and good morning, everyone. Third quarter operating income was $0.50 per diluted share, $0.05 lower than the prior year, largely due to higher auto loss severities, lower investment income and negative DAC unlocking in annuity. P&C after tax income of $11.2 million was $0.6 million lower than the prior year quarter, largely due to a higher auto loss ratio, a reduced level of favorable prior-year reserve development and lowered net investment income. Included in this quarter's results was $5 million pre-tax, or 3.4 points of catastrophe losses. Weather in the quarter was favorable, and both cat and non-cat property losses were lower than the prior year. The auto results for the quarter included 1 point of unfavorable current accident year development, largely related to the second quarter. The development was mainly in physical damage, resulting from the emerging severity patterns. If you adjusted the quarterly results for such, you'd see that the second and third quarter underlying auto loss ratios were very similar on an accident year basis. On a year-to-date basis, the underlying auto combined ratio is up about 1.5 points, largely due to the macro trends in auto frequency and severities. As Marita said, we are accelerating our rate actions and looking closely at underwriting opportunities to ensure we remain on track to improve profitability. In the property line, we continue to see the benefit of rate actions, lower reinsurance cost, and the impact of our underwriting actions. As I mentioned last quarter, our initial loss picks for the more recent accident years continue to develop favorably and obviously influences the initial picks for the current accident year. All of these factors are contributing to the significant improvement in the underlying combined ratio. On a year-to-date basis, it has improved by more than 7 points and…

Thanks, Dwayne. Christine, please open the lines to begin the Q&A portion of the call.

Thank you. [Operator Instructions] Thank you. Our first question comes from the line of Bob Glasspiegel with Janney Montgomery Scott. Please proceed with your question.

Good morning, Horace Mann, and congratulations, Marita, on your two-year anniversary.

Thanks, Bob, and good morning.

On your modernization plan for 2016 that you were referring to, maybe a little bit of color on what you're, what are the highlights and how much on the expense ratio it might cost.

Yes. Before I pull it, turn it over to Bill to see if Bill wants to comment. You saw what we did in the life and annuity space, very thoughtful approach to infrastructure improvement over a multi year and we still have yet to complete the annuity portions of that. As that rolls off, we're rolling into modernizing our P&C systems. And as we've said before, we elevated our expense ratio projections and still expect to see some of these expenses come through in the fourth quarter and what we believe we can do over time is update our P&C infrastructure, the way we have life and annuity at that new run rate that we talked about. So I feel good that we took a thoughtful approach to a multi year effort to improve our infrastructure. And I often talk internally about premium being fuel, and by having momentum in all of our businesses. It's worked out the way we had hoped where our increase in momentum can fund some of these infrastructure projects that we've talked about. But it is fundamentally a modernization of our administration and billing and claims platform over a multiple of years.

Bob, this is Dwayne. If I could just add one point. Several years ago, we made some pretty significant investments on P&C, implementing new software for both on the front end -- the rating end, et cetera. And about the time that comes to an end from a depreciation standpoint, if we time this right would be the time that the new expense would begin to roll in for new claims, admin, et cetera systems. So you won't see a big jump in the expense ratio, given the timing of the projects.

That's a great point, Dwayne. We made a conscious effort that we would do a full infrastructure upgrade in ALG, life and annuity right out of the box, but we haven't done nothing from a P&C perspective. From a technology perspective, things like Property Portal, Auto IQ and these are internal names for us. But think about it as friendly front ends to make it easier for our customers and agents to use our systems. So we're not waiting for full modernization. We're pulling forward those things that help our customers and our agents work with us. But we will then turn that over as ALG rolls off, using those funds for full P&C modernization.

Okay. Thank you. On the - great to see the property results improving. Of course my questions are going to be on auto. The - you've been pushing mid-single-digit rate increase through and results are deteriorating. And this is something we're seeing with a lot of competitors, the trends that you're highlighting, actually more on the frequency side than the severity side which you're highlighting. But there seems to be a bifurcation of some companies are holding in and reporting stable results and the others are struggling. Is there something more significant going on, it’s just an industry thing? Is there - you need intelligent devices in cars. Is it something about your book of business? Is there adverse selection going on? Because you would think mid single digit rate increases for a year would be enough to be able to stabilize margins.

Hi, Bob. It's Bill Caldwell.

Hi, Bill.

Hi. How are you?

Hanging in there.

Obviously we're closely monitoring the trends for auto, both for Horace Mann and for the industry. I'll take a shot at unpacking some of this for you. There was a lot in that question and hopefully I can hit most of it. So when we break it down by frequency, we do think there is a benefit of our book. When you consider all of these macro trends around annual mileage and gas prices, we're certainly not completely insulated from them. And as Marita said in the script, we did see a modest increase in property damage over the summer. Fortunately, that was a decreasing trend so July was high, August was lower and then September was at a more normalized rate. So obviously we'll continue to watch that going into October. On the severity side, this was the majority of our deviation from prior Q3 loss ratio. As we mentioned in the last quarter, the dual effect of more newer cars with expensive technology, as you mentioned, combined with older cars on the road, they just total more easier because their values are so low. A small rear-end in a parking lot with the technology, even in an 8 or 9 year-old car, could cause that car to be totaled because of the estimate to repair that technology compared to the relative value of the car. Average vehicle age on the road is increasing. We're seeing the oldest fleet that we've ever seen. It's about 11.5 years old, I believe, now for the industry. Our age is increasing as well. We do have a slightly younger book. But that does impact the severities on the growing segments of our book, which would be newer cars and older cars. Also, bodily injury and severity was up modestly. Medical costs are…

And Bob, you mentioned in your question, you used the word struggle. I think you can tell from Bill's comments that it's really not a struggle for us, but it is a game of inches. And when we think about auto, it's just a series of dials and this is a time where you've got to tighten some of those dials. But I do know that we've got good data and good analytics and we'll be tightening some of those dials. You also mentioned the rate plan. 2016 will obviously have more rate in it than we had in 2015 because that's one of the dials that you can tighten. I'd also remind you, and Bill brought it up at the end there, that our educator niche segment is unique, and this is a time when our total account sale really pays off for us. We don't think about ourselves as an auto carrier exclusively. We think about ourselves as a total account provider. We've got home and auto and in this quarter, home helped. We've got annuity and life, and in many quarters, annuity and life help. So that total account sale not only brings value to our customer and also increases our retention, and you see that in our retention numbers being better than industry averages. It also helps us from a mix perspective in our finances that we have all those lines working in our favor. So I'm not overly concerned about the auto line. We'll tighten up our dials. And as you know, auto tends to be relatively short and price certainly will help. But we have other dials to tighten as well.

And Bob, just a little bit more on the rate. We obviously did recognize this in the second quarter. We're a pretty nimble company. When we say our highest effective rates will be in the fourth quarter that really isn't a small feat when you consider the analysis, recognizing, analyzing it, filing and that becoming effective. So we did recognize it last quarter and we're able to react within the calendar year, which is pretty unusual.

Well, that's encouraging and thoughtful answer. It sounds like you're not worried about adverse selection at all being an issue?

No. I think that would be a frequency problem, Bob. And again, we look at our new business coming in. We're excited about the trajectory. We understand there is a new business penalty associated, but we look at the lifetime value of the customer. So I would be concerned if I started to see a frequency problem, but we're just not seeing it yet.

Thank you.

Our educator niche also helps us from an anti-adverse selection, if you will. We are dealing with a homogenous set of customers here. We're not into broad populous.

Fair point. Thank you.

You're welcome.

Thanks, Bob.

Our next question comes from the line of Meyer Shields with KBW. Please proceed with your question.

Thanks. I'm going to focus on auto also, if that's okay. When you look at the most relevant competitors, are you seeing a change in their pricing dynamics? In other words, as you push more rate? Does that impede your competitive position?

Thanks, Meyer. We obviously follow our competitors closely. Rates are filed, so it's public information. We have an internal tracking system so we are watching rates. We feel the increase that we're taking right matches the industry. We also know the elasticity of our customers, which again, tend to be more cross-sold. So we understand where that inflection point is when we tend to impact retention and we try to stay outside of those bounds. But considering that we're moving in line with the industry at about the same rate at about the same time. I don't expect material impacts to retention or even new business sales.

Okay. That's helpful. Also, you mentioned that one of the drivers of severity are older cars that are more easily totaled. Do you have a sense - when you talk about older cars, I guess its sort like a rule of thumb that it's not worth buying physical damage for cars more than 7 years old because the premiums outweigh any payments you would get. Does that hold for your book or is there a greater propensity for older vehicles to carry physical damage coverage?

Yes. Keep in mind we have a very conservative base. We tend to see more physical damage. Sometimes we tend to see lower deductibles in our EMI pass [ph] book. Of course we price for that. But there's also the issue of these cars are , you know, they are running longer because they weren't used during the recession, so they do have more perceived value to the customer. So a lot of customers are carrying physical damage and sometimes that's just the momentum they've had or inertia and as the case may be, they just haven't taken it off. But we are considerate of that and we reflect that in our pricing.

Okay. And then final question, I guess. On the property side, I think Dwayne mentioned that there was a little bit of a true-up of second quarter losses on the auto side. Would there be any sort of opposite impact in property?

This is Dwayne. No, in property there wasn't an impact between the second and third quarter.

Okay. Perfect. Thanks so much, guys.

Our next question comes from the line of Sean Dargan with Macquarie. Please proceed with your question.

Thanks and good morning. I'll leave auto aside.

Thank you.

I'm just wondering, as you revisit your actuarial assumptions, has anything changed in your long-term interest rate view? With some other life companies, we've seen some DAC charges related to the interest rate piece on their life and annuity books. Just wondering if anything has changed in your assumptions as it regards to interest rates?

Sean, its Matt. How are you? No, there hasn't been a change in the assumptions. The DAC experience you're seeing this quarter is driven by the equity market performance. Other than that, we haven't changed any assumptions.

Okay.

As far as our total review of our DAC, as you mentioned, some companies performed that review during the third quarter and begin to book some adjustment to that, depending on what their underlying book is. As you can guess, with Horace Mann, is we consistently are conservative in our estimates. Our actuary is in the midst of doing the same exercise. We do it as of the end of 9/30 going into the fourth quarter. At this point, we would not anticipate any sizeable DAC adjustment like you're beginning to see with some other carriers.

Okay. So that DAC amortization on annuities was related to variable annuities then?

Yes. It's the performance of the market that drove the [indiscernible].

Okay. And then you mentioned that mortality experience returned to a normalized range, but it's still unfavorable compared to the experience of the past several years. I'm just wondering what's going on in that book. Is it that the average policyholder is now older and is dying more frequently and you don't have enough premium to, I guess, offset the pressure on the benefit ratio?

Yes. The mortality was in line with expectations for this quarter, moderated a little bit from the prior couple of quarters, but it was in line with our expectations. Our book is a relatively mature book, and over time, the mortality is going to track with that - with the aging of that book. We're not seeing any early duration mortality issues. It's all coming in the late durations, in the later durations in the book. So that's to us, it's just normal mortality.

Okay. I guess the concern is, are you putting enough new premium on the books to moderate the trend toward older-age mortality?

Let me add a little bit more color there. So we've been emphasizing the growth in the Horace Mann life insurance sales for the last four years or so. Over time, we moved away from proprietary products and went towards third party products. Over the last four years, we've been pulling all those third party products back on to our own paper and trying to re-grow the life insurance book. Marita refers to it as putting life back into the life insurance business. That's what she's getting at, is we want to continue to grow that book at a double-digit growth rate to try and offset the older book, as well as the fact that we went away from selling our own product to selling third party products in the past.

Okay. Got it. Thanks.

Our next question comes from the line of Tim Hasara with Kennedy Capital.

What percent of your portfolio is in alternatives exactly?

Hi, Tim. This is Dwayne Hallman. Just to give you an idea, we have about $165 million in alternatives, and that's made up of real estate, private equities, structured, corporate credit and infrastructure. So to the portfolio as a whole, I would put it in the immaterial bucket. But when you have a reported performance like we did experience, it does tend to pop its head out every once in a while.

Can you explain exactly what occurred in the poor performance there? Do you have - and do you have hedge funds in that allocation?

Yes. We have a hedge fund, a couple of hedge funds in the allocation. One was still performing positive during the quarter but substantially less than our run rate. And as I mentioned in our opening comments on the P&C side, there was one that actually experienced some negative returns during the quarter. But if I recall correctly, it's been positive performance for every quarter probably over a 2.5 year period and this is really the first quarter we've seen. So you're familiar with the markets and it was a tough quarter and these are arenas where it would certainly show up outside of just the pure equity market.

And one other, are you anticipating any investment allocation changes in that particular sector or any other material changes?

Tim, not at this time.

Okay. Thank you.

Mr. Greenier, we have no further questions at this time. I would now like to turn the floor back over to you for closing comments.

Thank you for joining us this morning on Horace Mann's third quarter earnings call. If there are any further questions, please don't hesitate to reach out to me or Kristi Niles. Thanks.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.