Good morning. My name is Brandy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Horace Mann third quarter 2010 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Mr. Todd Nelson, you may begin your conference.
Thank you. Good morning, everyone, and welcome to Horace Mann's third quarter 2010 earnings conference call. Yesterday, we released our earnings report, including financial statements as well as supplemental business segment information. If you need a copy of this press release, it is available on the investors page of our website. This morning, we'll cover our results for the third quarter in our prepared remarks. The following management members will make presentations today and be available for questions later in the call. Peter Heckman, President and Chief Executive Officer, Dwayne Hallman, Executive Vice President and Chief Financial Officer, Thomas Wilkinson, Executive Vice President, Property and Casualty, Brent Hammond, Senior Vice President, Annuity and Life, and Steve Cardinal, Executive Vice President, Marketing. As a reminder, the following discussion may contain forward-looking statements regarding Horace Mann and its anticipated or expected results of operations for 2010 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 statements, 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. Also, in our prepared remarks or responses to questions, we may make mention to non-GAAP financial measures. Reconciliations of such non-GAAP financial measures are available on the investors page of our website. Finally, this call is being recorded, and an internet replay will be available on our website until November 26, 2010.
I will turn the call over to Peter Heckman for his comments.
Thanks, Todd. Good morning, everyone. Welcome to our call. Before beginning my commentary on the quarter, I wanted to reaffirm that notwithstanding the change we've had at the top, the same Horace Mann senior management team and same core strategies that we've had for some time now continue to be in place. Dwayne Hallman, who has been with the company as Senior Vice President, Finance for seven years, has moved into the CFO position, and we congratulate him on that well-deserved promotion. Todd Nelson, whom you just heard from, joined the company earlier this year as Vice President, Finance, reporting to Dwayne. Prior to Horace Mann, Todd spent three years in investment banking at Goldman Sachs in their financial institutions group. Todd is responsible for investor relations and will be a regular participant on our calls going forward.
I know many of you have already had a chance to speak with him and will join me in welcoming Todd to the Horace Mann team. At yesterday's market close, Horace Mann reported third quarter net income of $0.49 per share and operating income, which excludes net realized investment gains of $0.30 per share. Both results were $0.01 better than prior year. In addition, we saw continued improvement in the market value of our investment portfolio, which drove reported book value to over $24 per share, a growth of 11% sequentially and 33% year-over-year. Book value per share, excluding FAS 115, increased 11% compared to a year ago. Dwayne will be commenting further on our positive trends in invested asset growth and investment income, the strength of our investment portfolio, and continuing improvement in our unrealized gain position.
We remain very comfortable with all of our key capital ratios, which are more than supportive of our current ratings, and we continue to believe that having some capital cushion is prudent given the persistent uncertainty about the pace and pattern of economic recovery. In terms of capital management, as we have indicated on past earnings calls, we've had ongoing dialogue with our board over the last several months regarding both the amount and best uses of our excess capital. We plan to continue those discussions at our December meeting, which has traditionally been the time when we've announced dividend and other capital management decisions. Now with regard to insurance operations, profitability in our P&C segment continues to be a tale of two very different cities, with property remaining our number one challenge while auto continues to improve.
In spite of a benign hurricane season, we recorded nearly $16 million in property CAT losses in the third quarter, substantially greater than prior year. In addition, the impact of non-CAT weather accounted for nearly eight points of the quarter's property combined ratio variance to prior year. Florida sinkhole losses increased somewhat sequentially as well, all of which made this one of the worst quarters for property profitability ex hurricanes in several years. We continue to aggressively address this situation with both pricing and underwriting actions, along with our Florida non-renewal program, all of which are ahead of schedule. We remain confident in our ability to restore the property line to acceptable levels of profitability in the latter part of 2011 with the completion of our Florida non-renewal program in August and with our rate increases more fully reflected in earned premiums.
On a positive note in P&C, favorable prior year comparisons in the auto combined ratio are continuing. In the current calendar quarter, the ratio was more than six points better than prior year, while the accident year ex CAT combined ratio improved by about three points for both the quarter and year-to-date. In fact, our margin improvement in auto is running a bit ahead of our expectations as we've been taking a fairly aggressive approach to rate increases in this line as well. We've been out in front of the competition in a number of states and have begun to see a somewhat greater than expected impact on retention and sales activity in states where we've taken the most rate.
Although we expect those trends to moderate as industry rate activity increases, we'll be looking to temper our auto pricing actions as we move into 2011 in order to ensure an appropriate growth profit balance while continuing to make progress toward our long-term combined ratio target. Meanwhile, as they have throughout the year, our annuity and life segments continued to perform extremely well and consistent with our expectations during the third quarter, posting double-digit earnings increases compared to prior year. Annuity net income benefited from DAC unlocking in the quarter as the favorable impact of financial market performance more than offset the negative unlocking related to realized gains.
All other elements of the financial equation were also very positive, with annuity pre-tax income excluding unlocking and the change in GMDB reserves increasing more than 30% over prior year, thanks to a combination of solid growth in account values and increased spreads, which had favorable impacts on interest margins and M&E fee income. In terms of revenue growth, annuity contract deposits increased 18% in the quarter compared to prior year. Educator confidence in Horace Mann and our market position continues to work in our favor as we enjoyed a record quarter in annuity sales driven by single premium and rollover deposits.
Fund flows hit a record level as well, while total annuity persistency of over 94% continued to be very strong. We'll be launching additional strategic initiatives to maintain and increase the positive momentum we've generated in our annuity business over the last 12 to 18 months in order to further leverage our multi-line sales platform and expand our presence in the 403 market. Steve will talk a little more about those initiatives in just a moment. Meanwhile, life segment net income increased nearly 25% in the third quarter, benefiting from growth in investment income and lower mortality costs. With combined annuity and life segment earnings up 20% in the quarter and over 38% year-to-date, our financial services businesses are strong and are living up to our high expectations.
In terms of the agency force, we increased the number of agencies and agents by 19 in the third quarter to a total of 701. We expect that growth to continue in the fourth quarter, which should enable us to exceed the year-end 2009 agency count. In addition to growth in number of agencies, the transformation of the agency force is also continuing. At September 30th, nearly three-fourths of our agents were operating in our agency business model with outside offices and one or more licensed producers, and 55% of our 701 agencies were owned by agents operating under our exclusive agent contract.
While we're operating in a tough economy with strong competitive forces that are creating challenges for all of our agents, we continue to be pleased with the production ramp-up of our new agents and the overall productivity levels of agents operating in the new model as compared to those who have yet to adopt it. Finally, to wrap things up, as you saw in the press release, we are reducing our full year 2010 guidance for net income, excluding net unrealized investment gains and losses to between $1.55 and $1.65 per share, primarily reflecting three items. First, the adverse loss experience in the property line, a combination of CATs, non-CAT weather, and sinkhole losses. Second, the previously disclosed third quarter write-off of software development costs related to our property administration system. Third, the previously disclosed fourth quarter charge related to the acceleration of CEO retirement costs.
The latter two are one-time items, while the property profitability issue, as I described earlier, is in the process of being addressed on multiple fronts with acceptable margins expected to be achieved within the next several quarters. That expectation, coupled with the positive results being delivered across the rest of our business, gives us confidence regarding our ability to continue to increase shareholder value in 2011 and beyond. With that, let me turn it over to Dwayne for some further elaboration.
Thank you, Pete, and good morning, everyone. The third quarter was a positive one for Horace Mann in spite of the unfavorable impact of catastrophe weather losses, both from the current accident quarter as well as adverse development from the first half of the year, an increase in Florida sinkhole claims and a charge related to our property systems software development. Offsetting the unfavorable items were positive underlying loss trends in our auto lines, coupled with favorable prior years reserve development, continued strong spread margin in our annuity business, and the favorable impact from DAC unlocking. Operating income of $0.30 per share for the quarter was consistent with prior year despite the items just mentioned and was, in total, generally consistent with our expectations, but reflected a shortfall relative to analyst consensus.
We reported a significant increase in book value per share as of the end of the quarter, primarily driven by our investment portfolio, which performed very well during the quarter. With continued improvement in the financial markets as well as narrowing spreads, the unrealized gain was approximately $361 million at the end of September. Pushing book value to $24.69 per share, up 33% over the level of a year ago and 11% over prior quarter end. The book value per share excluding net unrealized gains is $19.19, an increase of 11% over prior year. First, focusing on our investment results, we produced solid results during the quarter. We realized investment gains of approximately $12.1 million pre-tax in the quarter, net of just over $4 million in impairment write-down related to commercial mortgage-backed securities we no longer had the intent to hold, and in fact, sold earlier this month.
Our CMBS holdings continue to perform extremely well with steady improvement in the portfolio's market value, while the market continues to offer both opportunities and liquidity to reduce our overall exposure. As mentioned during our last quarterly call, we implemented a risk reduction program related to our CMBS holdings during the second quarter, primarily focusing on traditional CMBS holdings, and have disposed of just over $54 million of par value under the program. The disposed securities were priced at very depressed levels during the height of the financial crisis, but being patient during the recovery period has provided the opportunity to dispose of the securities at price levels that we believe represent a more than adequate risk-adjusted exit price. As of the end of September, our traditional holdings represent just 33% of the total CMBS holdings, with an associated net unrealized loss of $29 million.
While the remaining amount of the CMBS portfolio is primarily focused in military housing, Ginnie Mae project loans, and cell towers and carrying an unrealized gain of nearly $18 million. As mentioned earlier, we ended the quarter with a total net unrealized gain of $361 million across the entire portfolio, with a balance up 62% since the end of the last quarter. All asset classes have participated in the rally, but the change has been primarily driven by corporate, municipal, and U.S. government bonds. It should be noted that all asset classes, with the exception of CMBS, are in a net unrealized gain position as of the end of the quarter. In fact, the gross unrealized losses on the total portfolio, excluding CMBS, is less than $15 million. Quite a turnaround.
Pre-tax net investment income was up over 9% in the quarter and 12% year-to-date compared to last year, and is consistent with our expectations both in total and by segment, with annuity and life business segments being the primary beneficiaries. The increase is a result of our efforts to reduce excess cash and short-term balances that built up during the financial crisis, an effort that was initiated in the fourth quarter of 2009. Although going forward, the quarter-over-quarter growth percentages are expected to decrease due to more comparable cash and short-term balances and the low interest rate environment, we expect to achieve an investment income growth rate in the 10% range for the full year 2010. Looking forward to 2011 and 2012, we recognize that a continued low interest rate environment could pressure net investment income.
As you would expect, we've been modeling a variety of interest rate scenarios in order to quantify any possible impact on future earnings, particularly with regard to spread compression in our annuity line. The reasonable scenario that we look at assumes a reinvestment rate over the next two years of approximately 4.5%, which is more than 150 basis points below the current portfolio yield and less than our current reinvestment rate. Under this scenario, the gross earnings per share impact in 2011 and 2012 would be approximately $0.07 and $0.14 per share respectively before any reduction in annuity crediting rates on in-force contracts. Assuming reductions in crediting rates to contract minimums, however, the impact in 2011 could be reduced to $0.01 per share, while the impact in 2012 could be cut in half to about $0.07 per share.
Obviously, if the low rate scenario were to persist beyond two years, a more significant earnings impact would develop. Absent that, the impact on our annuity margins, as you can see, would be very manageable. Turning to operations, as I mentioned at the beginning of my remarks, operating earnings for the quarter contained some fairly significant items, primarily impacting P&C results. Our auto line is performing better than our expectations with the year-to-date loss ratio over two points below prior year, excluding the catastrophe and prior year reserve development. However, the property line continues to be impacted by a high level of catastrophe and non-catastrophe weather and a significant amount of sinkhole losses in the quarter.
In regards to catastrophe losses, we recorded a total of $17.5 million in the quarter, consisting of just under $10 million of losses for the current accident quarter and $7.5 million of adverse development from activities primarily related to second quarter events, mostly occurring in the month of June. The prior quarter adverse development was an unusual occurrence for us, but in this case, the development of claims counts and dollars significantly exceeded our historical loss development patterns and was unprecedented in our book of business. Benefiting current period earnings, we saw a significant improvement in our prior accident year loss development trends. Favorable reserve development of $7.3 million for the quarter benefited both auto and property, but was primarily concentrated in our auto liability line, an area that was developing quite favorably in the first two quarters and continued through the third quarter.
Sinkhole losses impacted the third quarter by $6.9 million, comprised of $6 million for the current accident quarter and $1.5 million of adverse development from the first and second quarters. Partially offset by $600,000 of favorable prior year development. While the number of reported sinkhole claims continues above our initial expectations, it is not totally unexpected given our aggressive exposure reduction activities underway in the state of Florida. Although the level of reported losses, lost dollars spiked in the third quarter, it appears that the number of reported sinkhole claims has leveled off during the last two quarters. Until we see evidence of a declining trend, we would anticipate an amount similar to the third quarter accident quarter or $6 million to be incurred in the fourth quarter.
The P&C reported results also included a pre-tax charge of $2.2 million related to write-off software development costs related to the upgrade of a property insurance administration system. The Annuity and Life business segments continue to perform above prior years, generating double-digit earnings increases driven by a combination of higher interest margins, growth in account values and related fee income, and improved mortality. As we anticipated, our Financial Services business segment has been a real bright spot for us in 2010 and demonstrates the benefits of diversification and our multi-line business model. Brent will elaborate on our continued strong Annuity & Life results in just a moment.
Turning to the subject of earnings guidance, as noted in the press release, we've updated and narrowed the range of our full year 2010 operating income guidance to $1.55-$1.65 per share, primarily reflecting the higher level of property catastrophes and sinkhole losses, and also incorporating approximately $0.07 per share of one-time charges. The revised range starts with year-to-date results and anticipates a normal fourth quarter in total, with property results remaining under pressure from sinkholes, offset by continued strong performance from Annuity & Life. The midpoint of the range anticipates a $0.42 per share fourth quarter, which is consistent with our historical seasonal earnings patterns at a normal level of weather losses, recognizing the increased level of sinkhole loss activity and $0.03 per share after-tax charge related to the retirement of our former CEO.
Finally, as Pete mentioned, Todd Nelson is now leading our investor relations activities. Please feel free to reach out to Todd with any questions or other requests you may have in the future. His contact information is included in the press release issued yesterday. Now to review the current results and trends in our P&C business, let me turn it over to Thomas Wilkinson.
Thank you, Dwayne, and good morning. This morning I'll talk about our P&C profit and growth results for the third quarter and for the first nine months of 2010. Our profit results in the quarter were mixed. We posted solid auto results that were better than last year, yet we continued to struggle, as did others in our industry, with property profitability, with increases in catastrophe costs, non-CAT weather losses, and Florida sinkhole losses. Additionally, our property expense ratio increased as the result of a one-time write-off of software costs related to the development of a new policy administration system. Our auto combined ratio in the quarter was 91.5%, six and a half points better than the same period last year.
In the quarter, increased CAT losses as a percent of premium were $0.04 more than last year, and the impact of prior year reserve re-estimates was almost four points better than the third quarter of 2009. The underlying auto combined ratio, excluding CAT and the impact of prior year reserve re-estimates, is 95.4%, about three points lower than 2009 third quarter. On a year-to-date basis, auto results are similar to the quarterly results. We had a reported combined ratio of 91.6%. Nearly a five-point improvement this year. The favorable impact of prior year reserve re-estimates contributed 1.4 points of improvement, while the year-to-date impact of catastrophes was comparable between the years. The underlying current accident year combined ratio, again, excluding CAT and the impact from prior years, is 94.3%, 3.5 points better than last year through nine months.
For both the quarter and year-to-date, auto loss trends are running slightly better than our expectations, with average premium per policy results in line with our expectations. To summarize our property results. We posted a 138% property combined ratio in the quarter, up about 22 points compared to prior year. Even without a hurricane, catastrophe costs of $16 million were $5 million, or 10 points of premium above last year. The number of CAT events and property losses in the third quarter were comparable to prior year. As Dwayne explained, we had a large number of late reported claims, primarily from second quarter CAT events, that we reported in the third quarter, totaling almost $6 million in additional property CAT losses.
Non-CAT weather losses spiked in the quarter with an increase in the frequency of wind and water losses, mainly in the Midwest and Southeast, causing about an eight-point increase in the combined ratio. In the quarter, we continued to experience increases in sinkhole losses compared to both prior year and our expectations. Incurred losses related to the current accident quarter were $6 million. Based upon recent experience, we also increased first and second quarter losses to $4 million and $5.5 million respectively, an aggregate increase of $1.5 million. Additionally, we reduced estimated sinkhole losses for the prior years by $600,000. As you know from prior calls, we are in the process of lowering our overall policy count in Florida by 9,600. We should eliminate the majority of our exposure to sinkhole losses in the state. Notices to our customers started in February for those with August effective dates.
Our agents have been proactively talking to our customers and working with them to look for other coverage options. In Florida, we are seeing an increase in attention by media, regulators, and other companies to the ever-growing sinkhole issue. Citizens insurance companies and some of the Florida property domestics are reporting large amounts of sinkhole losses that are threatening their profitability and solvency. Citizens recently reported $97 million of sinkhole losses last year, five times the amount of premium they collected for the coverage. I believe that with all of the sinkhole information available in the market and aggressive advertising by lawyers and public adjusters, it is increasing the number of sinkhole claims for the entire property insurance market in Florida. Getting back to our non-renewal program, we are ahead of schedule with about 3,200, or one-third of the policies, having already non-renewed through October.
We are scheduled to complete the entire program by mid-August of 2011, and we'll have reduced 90% of the policies before the start of the next hurricane season. Finally, with regard to property profitability in the quarter, our property expense ratio is up almost five points, all due to a one-time accounting write-off of about $2.2 million. This represents the initial investment in core development cost for the property front end of our auto and property modernization program, which is a multi-year project replacing our entire P&C administration system. After extensive testing and review, we have determined that it is not the best solution for our property line. All of our implementation efforts are now focused on completing the implementation of auto front end and rating, which should be complete next year. A new property solution will be incorporated into the new billing and administration system phase of this project.
Our year-to-date property combined ratio of 120%, nine points above prior year, is driven by the same issues discussed for the quarter. At a high level, CATs and non-CAT weather drive seven points of the increase, sinkholes about five points, and the expense issue is worth nearly two points on a year-to-date basis. In addition, non-weather-related losses and prior year reserve re-estimates made favorable contributions to the variance. Looking forward, we expect CATs and other weather to return to normal levels. Based upon recent experience, we will be raising our definition of normal by increasing the expected CAT and weather impact in our pricing plan. As detailed in previous calls, we have an aggressive re-inspection program underway, and it will continue into 2011. We also have increased our property rate actions in 2010.
We will have implemented 37 rate increases this year with a countrywide average of about 9.5%, compared to an original expectation of 8%. We will be earning the impact of the inspections and the rates over the next couple of years. Also, we fully expect that sinkhole losses will slow down next year as our current run rate of Florida non-renewals is about 100 to 150 policies per week. As I said earlier, we should finish by mid-August 2011. A Florida reduction, along with other state-specific coastal exposure management programs, should reduce the percentage of our property policies in coastal counties to 7.5% by the end of next year. Now turning to top-line results. Total P&C written premium in the quarter was about even with last year, with auto down 28% and property up 1%.
Year-to-date, total P&C is up 1.3%, with auto about even and property 3% above prior year, both lines driven by increases in average premium per policy. Quality measures for both our new business and total in-force books remain favorable for both auto and property. Our targeted segments of educator, preferred underwriting tier, cross-sold business, and customers on automatic payment plans are trending well. Overall, policyholder retention was down in the quarter. Auto, while continuing at a high level, declined a few tenths, and property with the continued impact of the Florida non-renewal program was down 1.5 points compared to a year ago. Policy in-force counts are below prior year levels for both lines of business. The reductions are driven by declines in new business and add cars over the last few years, impacted by a weak economy and increased competition.
Also in the mix are property exposure management programs limiting new business, increasing re-inspection activity and non-renewal in our Florida program. We are increasing rates at a higher clip than the last few years to address profitability trends. The major P&C headlines for the quarter and for the first nine months of the year are that non-CAT weather, CATs, and Florida sinkholes continue to pressure property profitability. We have initiatives in place to address these property issues. Results should improve as we earn the impact of rate increases and inspections and as we reduce our exposure to sinkholes and hurricane losses. With the improvements in our auto profitability results, we feel comfortable that in 2011, we'll need less overall auto rates than 2010, and we're in a position to fine-tune our pricing to better support growth while maintaining margins.
We'll be working with marketing in support of our agency business model to target profitable P&C growth opportunities. I would like to turn it over to Brent Hammond to cover Annuity and Life results.
Thanks, Tom, and good morning, everyone. I'll spend the next few minutes going over the profitability and growth results for the Annuity and Life segments. The major headlines for both our Annuity and Life businesses in the quarter is continued improvement in underlying earnings. We again saw healthy increases in two key metrics, account values and margins. Fixed account values increased 9% compared to a year ago, and the associated net interest margins improved significantly, reflecting improvements in the company's investment portfolio yields. Net interest spreads were 198 basis points, an increase of 38 basis points compared to the first nine months of 2009. Variable account balances increased 10% over the past 12 months, with associated M&E fee income up over 30% year to date.
Two additional factors also drive and support our annuity results. The continuing stability of our annuity liabilities. Annuity net fund flows were again positive in the third quarter, as they have been for the past 11 quarters. Our total 12-month account value persistency of 94% is up slightly over prior year. We maintain a very conservative product risk profile. We have minimal equity market guarantee exposure on our variable annuity product line. Over 90% of our in-force account value have either a simple return of premium death benefit or no death benefit guarantee at all. We do not offer other guarantees and have no hedging or derivative program exposure. Improved market performance also had a positive impact on both the valuation of deferred policy acquisition costs and the level of guaranteed minimum death benefit reserves for the quarter.
Combining all of those factors, annuity pretax operating income increased to $1.7 million in the quarter and is up over $9.8 million for the first nine months as compared to the same prior year period. As for new business, the uncertain economic environment continues to impact our flexible premium sales. However, single premium sales achieved record levels for the company. Growth in sales of Horace Mann annuity products in the current quarter was largely driven by significant increases in single premium and rollover business, where new deposits increased 33% compared to a strong prior year quarter. Flexible premium sales decreased 8% during that same time period. However, total sales of Horace Mann products increased 28% in the quarter and are up 2% for the first nine months as compared to 2009.
Turning now to our life segment, pretax income increased 29% for the quarter and 22% for the first nine months as compared to prior year results. These earnings reflect strong growth in investment income for both periods. For the quarter, the current period also reflected lower incurred claims. Life premiums and contract deposits, which consist only of Horace Mann products, were down about 1% for the quarter and for the first nine months as compared to the prior year. Our consistently strong life persistency increased slightly in the quarter to 95%. As we noted last quarter, we launched a new suite of Horace Mann Life products and associated support services in July. Our Life Select series of products allows educators to combine specific levels of whole life and term coverage in a single policy, in addition to our educator discounts, which we introduced last year.
While we have received a positive response from our agencies, we will need to continue to build out both our Horace Mann life insurance product line and associated training and support services in order to show consistent growth in life sales. In closing, the third quarter continued the strong improvement in underlying earnings power that we expected in both our annuity and life insurance businesses. While the current economic environment is creating some challenges on the sales front, we are focusing our resources on gaining further traction with our solid annuity portfolio and the expansion of our life insurance product line. In addition, as Steve referenced earlier and as Steve will comment in his remarks, we'll be launching new strategic initiatives to more fully develop our payroll plus and better position Horace Mann as a powerful advisor for our educators' retirement and protection needs.
With that, let me turn it over to Steve for his comments on distribution and sales.
Thanks, Brent, and good morning. This morning, I'll focus my comments on agent staffing and sales results. We introduced the agency business model a few years ago because agents working in the model are more productive than agents working from their homes. The process evolved. We created an exclusive agent agreement in January 2009. Since then, we've enjoyed success in migrating and recruiting agents into the exclusive agent model. By quarter end, we had 387 exclusive agencies, which account for about 55% of our agency force. Almost half of those agents migrated from an employee relationship, with the other half coming on board as new appointments. In addition to that group, we have 128 employee agents operating in the model with an outside office and licensed producers. Together, these two segments, all who work for the agency business model, account for nearly 75% of our agency force.
Here's how that looks in our present staffing numbers. As I mentioned last quarter, we noted sequential declines in total agent count during the first two quarters of the year after making changes to our agent program. We made the changes to ensure alignment between our growth objectives and the agent sales results during 2010. In the end, these changes impacted our turnover rate. As I said last quarter, we expected the turnover rate to decrease during the second half of the year. In fact, we did see turnover decrease in the quarter, and we reached a new appointment high with 51 new exclusive agency agreements effective during the third quarter.
Overall, our total agency count, employee agents, and exclusive agencies increased in the quarter, up 19 to 701 compared to the second quarter and up seven compared to September 30th, 2009. However, we remain below the 2009 year-end count of 716. We are comfortable with the strength of our recruiting activity and expect a strong fourth quarter resulting in another increase to the agent count. Now, let's take a look at sales results for the quarter, beginning with property and casualty. As I've said before, our educator customer base is not immune to the headwinds of this economy, with its weak automobile and home sales and the effect of taking rate actions in both property and auto. Additionally, new business sales continue to be impacted by our decision to cease writing homeowners business in the state of Florida and parts of other coastal regions.
With that said, total auto sales units decreased 8% in the quarter compared to prior year. Our true new units decreased 10% during the quarter. It's a similar story with property, as sales units decreased 14% in the quarter compared to a year ago. On a positive note, annuity sales, as we expected, saw some positive sales trends during the quarter. In the critical back-to-school season, we recorded record levels in the third quarter of 32% compared to the third quarter of 2009. That means year-to-date through September, we are up 2% in total annuity sales. Remember, these increases come on top of an exceptionally strong first nine months of 2009. As expected, flexible annuity sales continued to trail 2009 volume, where we had an unusually strong first half, benefiting from the change in IRS 403 regulations that were effective in January 2009.
Single premium and retirement rollover sales more than made up the difference, registering a 38% increase during the quarter. We believe this is evidence that educators have trust in our agents and the Horace Mann brand when they make critical decisions about their retirement. As a result, we continue to be excited about the growth prospects in our annuity business. On the life insurance side, sales decreased by 24% during the quarter. This reflected a 32% decrease in third-party vendor products and 10% decrease in Horace Mann individual life product sales during the quarter. For the nine months, the combined life sales are down 9%, which is consistent with industry trends over the past few years, as reported by LIMRA. We do have two projects underway that will positively impact our brand and our business.
During the fourth quarter, we'll launch our newly refreshed teacher-centric website, featuring an updated and improved functionality for our customer care center users. Simply put, our site will be far more customer friendly, and this is just the start as we'll continue to make improvements through 2011. As you'll recall, when we started the agency business model back in 2006, we said it would be a multi-year effort requiring a significant investment of resources. We had less than 15% of the agents working in the model at that time. Well, now that we have almost three-quarters of our agents working in the model, we are in a position to take the next step. We are launching a strategic initiative that will further support Horace Mann exclusive agencies in growing their businesses, particularly in the retirement planning and 403 markets.
We'll be looking to leverage the unique programs that some of our best agencies utilize today and complement them with additional innovative marketing approaches. At the same time, we'll be working on strengthening our relationships with key gatekeepers in the school. I'm excited at the prospect of this new effort, and we'll be able to share more details with you on our next call. To sum it up, we continue to make great progress in transitioning our agency force with the number of agencies increasing during the quarter, and we're well positioned for continued agency growth. We continue to manage our sales through a challenging economic environment. While this environment has had a negative impact on P&C sales, our annuity sales reached near record levels during the quarter. Thank you. Now back to Todd.
Thank you, Steve. That concludes our prepared remarks. Brandy, please move to the question and answer session.
Thank you. At this time, to ask an audio question, please press star 1 on your telephone keypad. Your first question comes from Bob Glasspiegel of Langen McAlenney.
Good morning. Quick question. I think your outlook was for a 93%-95% combined ratio by 2012. Does the sinkhole developments this quarter cause you to either revise the timing of getting there or the confidence that you will get there?
No. We think we're going to be out of the sinkhole loss exposure early 2011. We're on pace for those target combines by 2012 still.
Okay. I thought you might have said on a call that you could get there by late 2011, that there was a chance you could get there sooner. Has that been changed at all?
I think I was probably more talking about it on an annual basis.
Right.
We're out of the sinkhole exposure time frame in the second half of 2011, it could still happen.
Okay.
It won't be for the full year 2011.
Pete, I bet you were waiting for this one. What are the factors going to the December board meeting that would push you in favor or against a share repurchase?
Well, Bob, I think certainly where the stock price is relative to book value is a key consideration. Also, the board has continued to
Weigh the relative values of a consistent, steady increasing dividend versus the one-time hit that a stock repurchase program can generate. All those factors are certainly in play. In addition, we continue to look at rating agency changes in their capital requirements, look at other investment opportunities that we have as a company, including some of the initiatives that we mentioned around the marketing programs in our 403 market, as well as some systems development opportunities. All those, both demands on capital internally, as well as external environment, will factor in. We've been talking to the board, as I said, over the last couple of board meetings about both dividends and share repurchase and certainly both around the table.
Your next question comes from Jean-Paul Ceron of Macquarie.
Hi, good morning.
Morning.
I guess, start on annuities. What's the crediting rate that you're offering on new fixed annuities, has that come down with lower interest rates? Have you lowered your spread target or expectations for new business at all?
Paul, this is Brent. Our base crediting rate on our new business coming in the door is just at 2% right now. There are variations on that depending on the specific product design, length of surrender charge. Some of them have bonus features. The base crediting rate is at 2%. That has come down really in conjunction with what's going on in the market. In fact, we've taken two pretty significant moves recently. As far as our spread targets, no, they haven't changed. Dwayne expressed earlier some of what we're looking at in terms of looking into the future with what's going on with interest. No, we have not reduced our targets.
Looking at your interest spread, which declined a little bit sequentially, at the same time, you had kind of record fixed annuity sales. We shouldn't necessarily see a connection between the two, one leading to another, higher fixed annuity sales at lower margins?
Those spread numbers are going to obviously move around from quarter to quarter, no, they aren't tied to what's going on. We continue to be confident with our spread targets.
Okay, a question on the legacy annuity block. Can you share how much DAC is held against that block? What the lapse experience has been as these contracts clear or guarantee periods and how that compares to your DAC model assumptions?
Yeah. Again, that's a legacy block, Paul, so it's closed and it has been closed for some time. We'll look into the DAC amount, but my guess is it's very small with what DAC is being held on that block. From a surrender standpoint, we do have surrender charge protection in excess of 60% of that block. It's kind of got a unique feature. The surrender charge re-ups with each maturity. The maturities are either five or 10 years, and then there's a 30-day window, at which time the surrender charge, which high % level charge re-ups. Sorry, really probably the most important statistic regarding that block is it is in a net outflow position. Even though interest obviously being very low today, we are seeing some inflows, but they're more than offset by outflows. In fact, we're in a $28 million net outflow position on that block.
We would expect to see that continue because most of the clients whose policies are either in or very near retirement.
Your next question comes from Dean Evans of KBW.
Thanks. I guess first I wanted to say congratulations, both Peter and Dwayne. You did make some comments early on in the call that really there's no strategic changes, and most of the rest of senior management has stayed the same. I was just kind of wondering if you'd sort of elaborate a bit on that. Is there anything you plan to do differently? Anything else kind of along that line?
Well, thanks, Dean. As you know, we've been on the road a little bit, attending investor conferences over the past couple of years, including yours and the same management team, other than the change at the top, as I mentioned, that has been at those conferences the last couple of years remains in place. Dwayne has moved up into my chair, and I've moved as well, but everybody else is here and has been here for couple, three years. The basic core strategies around our distribution system transformation, and all the accompanying strategies to support that remains intact. We're continuing to look for enhancements to that strategy, which is one of the things we'll be talking to you more about.
We kind of alluded to in a couple of our comments today around even further strengthening and leveraging our success in the annuity line of business and our position in the 403 market. I don't envision any major deviations at all from where our strategic trajectory has been headed. Just doing more of the same, and with the same team in place.
Okay. My second question, I was wondering, you sort of gave some detail on what you expect for Florida sinkholes for the fourth quarter. You did say you'd expect some bleed through for the early part of next year. Any thoughts as to what type of an impact you'd expect for the first half of next year? Would it be comparable to what we've seen this half a year or half of that, any sort of anecdotal help there?
Well, Dean, we're working on that now. We generally share more detailed projections at our next call. We don't really have a ton of the details to share. These two quarters at $6 million kind of feels like it might be at the height, but we're not 100% sure yet.
Dean, this is Dwayne Hallman. I would say we'd need to get through the fourth quarter and see if that claim count level remains the same, or if we do, in fact, see the decline. Just given the number of policies that are exiting on our non-renewal program, just from a frequency standpoint, will probably start to give us, for us anyway, a better indication what the first and second quarter might look like.
Okay. I guess, given that, my next question may be a bit hard. Previously, you sort of stated the ROE progression that you wanted was to first get to the 10% level and then really into the lower teens. What are your expectations at this point for 2011, where you think that could pan out?
Well, Dean, again, we're in the middle of putting together our 2011 projections. By the way, that is shared with our board at the December board meeting, that certainly is part and parcel of the capital management decision. If you just look at the midpoint of our updated guidance range for 2010, at least my quick math would show an operating ROE of around 9%. Then just taking what had been the consensus estimate for 2011, I think it was $1.92. I think that gets you to about a 10% ROE in 2011. Now, again, $1.92, don't take that as any kind of a guidance, but it's just a public number that I throw out there to give you a sense of direction, anyway. Again, we haven't completed our 2011 projections and don't traditionally do that until the fourth quarter call.
Your next question is a follow-up from Bob Glasspiegel.
Can you remind me what the RBC ratios are at the end of the third quarter for your subs and what your hold co assets are?
Sure, Bob, this is Dwayne. Obviously, the stat numbers aren't finalized yet, but in regards to RBC, the life company is up to 530, and the P&C company is 462. As far as the assets of the holding companies, as you know, we don't run a lot of extracurricular activities there, but the cash balance is just north of $20 million or so.
There are no other questions at this time. Are there any closing remarks?
Yes, Brandy. Thank you to all for participating in our conference call this morning. If you have any further questions, please feel free to contact me directly at 217-788-5738.