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OPERATOR: Welcome to the Assurant first quarter 2007 fiscal results
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. (OPERATOR INSTRUCTIONS) Thank you, I
would now like to turn the call over to Ms. Melissa Kivet, Senior
Vice President, Investor Relations. Please go ahead, Ms. Kivet.
MELISSA KIVET, SVP, INVESTOR RELATIONS, ASSURANT, INC.: Thank you
operator. Welcome to Assurant's first quarter 2007 earnings
conference call. Joining me are Rob Pollock, our President and Chief
Executive Officer, Bruce Camacho, our Chief Financial Officer, Mike
Peninger, President and CEO of Assurant Employee Benefits and Chris
Pagano, our Chief Investment Officer. Today's prepared remarks will
last approximately 20 minutes, after which time we will off the call
to questions. Last night we issued a press release announcing our
first quarter 2007 financial results. The press release, as well as
corresponding supplementary financial information, may be found on
our web site at assurant.com. Some of the statements we make during
this call may contain forward-looking information. Our actual results
may differ materially from such statements. We advise you to read the
the discussion of risks and uncertainties contained in our SEC
filings. Additionally, this presentation will contain non-GAAP
financial measures, which we believe are meaningful in evaluating the
company's performance. For more detailed disclosures on these
non-GAAP measures, the most comparable GAAP measures and a
reconciliation of the two please refer to the supplementary financial
information. Now I would like to turn the call over to Rob Pollock.
ROB POLLOCK, PRESIDENT & CEO, ASSURANT, INC.: Thank you Melissa, good
morning everyone. We are pleased to share with you Assurant's first
quarter 2007 financial results. Assurant continues to build on its
strong financial track record. Our net operating income increased 7%
over the first quarter of 2006. This increase in earnings was driven
primarily by the strong results from Assurant specialty property and
additional real estate investment income. I'm also pleased to
announce that our annualized operating return on equity for the first
quarter was 18.6% and 16.6% on a rolling fourth quarter basis. We
continue to make progress in our targeted growth areas and we are
cultivating those areas of our business with the best potential for
long-term profitable growth. We have gotten off to a good start in
2007 and we are focused on the ongoing execution of our specialty
strategy. Our diversified insurance strategy allows us to make the
right decisions for the long term in each of our businesses rather
than taking actions that produce near term results, but hurt the
long-term prospects for the business.
Today Mike Peninger, CEO of Assurant Employee Benefits, will provide
you with a progress report on how the benefits team is delivering
good results and favorable loss ratios, while at the same time,
realigning their business to address the unmet needs of the small
employer market. Assurant Health continues to focus resources on the
growing individual medical market through break-through innovations,
like Advantage Agent, which set new industry standards with quick
underrating answers for our customers and agent. Although the first
quarter net operating income and net earned premiums were down
compared to the same period a year ago, we are pleased with both the
31% increase in first quarter individual medical sales compared to
the first quarter 2006 and the continued favorable combined ratio.
Turning to Solutions, we see two key elements of an Assurant's
strategy being executed, namely to align with market leaders and to
reach untapped markets through capabilities that address customer
needs. Solutions is applying the expertise of serving market-leading
clients and consumers domestically to selected markets
internationally. For example, in the last 18 months, we have extended
our global reach in several untapped markets by entering Germany,
Italy and Spain. Our targeted growth strategy is translating into
strong quarterly year-over-year growth in gross written premiums for
service contracts domestically and internationally, as well as credit
insurance internationally. Over the long term, our investments will
help us continue growing while improving the solutions ROE.
In early April, we made an acquisition reflecting our opportunistic
approach to M&A. We acquired Retail Power Support Management
Group, which supports solution service contract business in
recreational vehicles and power sports. While the purchase price for
this all cash deal was modest in size, at under $5 million, it
broadens our distribution in this niche area by providing us access
to over 300 leading power sports dealers across the country to market
our service contracts. The benefit of our strategy to focus on niche
products is evident at Assurant Specialty Property. First quarter
results were outstanding, as both revenues and profits were the the
best we have achieved in the segment. In order to provide further
understanding of the creditor place business, we have scheduled a
deep dive on the business with investors on June 7th at our operation
center in Springfield, Ohio. For those who can't make it, we will
also web cast this event.
Turning to corporate matters, we continue to exercise disciplined
management of our capital. During the first four months of this year,
we repurchased 2 million shares for $113 million. $460 million of
remaining repurchase capacity is available under our current
authorization. Share repurchase remains an active part of our capital
management toolbox. Our focus on disciplined long-term profitable
growth, has enabled Assurant to establish a very strong financial
track record, demonstrated by our 33% annualized total return since
we went public in February, 2004.
On April 9th Assurant was added to the S&P 500. We are proud of
this important milestone, because it recognizes not only our strong
financial performance, but it also affirms our strategy. In addition,
this milestone highlights the efforts of our 13,000 employees, who
deliver value to our customers and shareholders. Looking ahead, we
will continue to leverage our core capabilities of managing risk,
managing large distribution partnerships and integrating complex
administrative systems to pursue targeted growth opportunities within
each of our specialty insurance businesses. Now I'd like to turn the
call over to Mike Peninger, President and CEO of Assurant Employee
Benefits. Following Mike, Bruce will review the detailed financial
results for our other businesses.
MIKE PENINGER, PRESIDENT & CEO, ASSURANT EMPLOYEE BENEFITS: Thanks
Rob. You heard Rob refer to the word discipline a number of times.
It's a quality reflected in Employee Benefits approach to executing
our specialty strategy. I'm very happy to be here today, to talk
about our unique approach to employee benefits in the small employer
marketplace and how we have executed our strategy over the past year.
When I visited with you on last year's first quarter call, I outlined
our efforts to align our business around small employers, which we
define as employers with fewer than 500 employees. Today, I'm pleased
to report that we have made good progress over the past 12 months and
that progress can be seen in our first quarter results.
The solid performance during the quarter was driven by increased real
estate investment income and very good loss ratios. We also saw
positive sales momentum, with total new sales up over 50% from the
first quarter of 2006. Importantly, 98% of the new cases written and
three-quarters of our new sales premium were in the under 500 market.
This is an increase in small case sales of more than 65% over first
quarter 2006. In addition, sales from our key brokers more than
doubled over the first quarter of 2006. Our goal now, is to maintain
the sales momentum and translate it into increased revenue. We
believe long-term success is a process that requires investment,
patience and persistence. The disciplined approach to customer
acquisition and retention that we have maintained throughout our
deliberate transition is reflected in our good results.
Despite a decrease in total revenues, our net operating income grew
in the first quarter. Loss ratios continued to run favorably, most
notably in Disability where results were positively impacted by
favorable incidence rates and by our efforts to help people return to
work. Our expense ratio increased during the quarter, primarily due
to the decrease in total revenues and the shift to smaller cases,
which have higher expenses associated with distribution. Results were
significantly assisted by a $9.2 million after-tax increase in real
estate investment income. Our overall loss ratio improved to 71.6%
from 75.3% in the first quarter of 2006, reflecting our discipline
pricing approach and the ongoing shift in our business mix. In
addition to the disability results I noted earlier, life mortality
experience continued to be favorable and dental loss ratios remained
reasonable despite a highly competitive market.
It's important to bear in mind, that quarter-to-quarter comparisons
may show variability due to the low frequent and high severity of
life and disability claims. Our top line continued to reflect pricing
tactics and the changes in our sales organization. While net earned
premiums were $296.7 million, down 9% from the same period last year,
the rate of decline is slowing and, combined with our solid new
business sales, this should begin to generate premium growth by next
year. Our first quarter sales reflect not only the top notch sales
organization we're building, but also the impact of our recent dental
network alliance with Aetna. Even though the network was not
available until January 1st this year for our customers. we have
already seen the benefit of a larger network on both sales activity
and close ratios. The close ratio for our dental business doubled in
the first quarter in a number of our larger market, for example,
Philadelphia, and in a number of our larger market, for example,
Philadelphia and Chicago, we more than doubled the number of new
dental cases written compared to the first quarter of 2006.
We also continue to grow our own dental network, Dental Health
Alliance, adding more than 1,600 new referable locations to our
network in the first quarter. We have seen solid growth in DHA over
the past several years and expect to benefit from ongoing network
growth in the years to come. We're also pleased with the performance
of our alternate distribution channel, Disability Reinsurance
Management Services, which distributes turn-key disability products
through more than 30 other insurance carriers. As in our direct
channel, we continue to see good loss ratios and an overall shift in
business mix towards small case. More than two thirds of this
quarter's DRMS premiums were in our core under 500 market. Growth in
DRMS is derived not only from the addition of new partners, but also
from organic growth from existing clients, as they write new
business. We also believe there are opportunities for to distribute
other products and services in addition to the disability, life and
critical illness lines it currently markets.
Overall, I'm excited with the progress we've made during the first
quarter in our pursuit of long-term growth in the small employer
market. We believe that our expertise in small group risk management,
strong distribution relationships and flexible administration
systems, make it easy to do business with Assurant Employee Benefits
and truly differentiate us as a leading provider of employee benefits
for small businesses. Thank you and now I'd like to turn the call
over to Bruce. Bruce.
BRUCE CAMACHO, CFO, ASSURANT, INC.: Thanks Mike. Your team's
disciplined efforts to align your business to meet the needs of the
small employer are certainly bearing fruit. As Rob mentioned,
Assurant is off to a good start in 2007, as we execute our specialty
insurance strategy and remain committed to building a strong
financial track record, focused on our profitable growth
opportunities. Net operating income increased 7% to $175.8 million or
$1.42 per diluted share. From $163.8 million or $1.24 per diluted
share in the same period last year. Net earned premiums were up 5% to
$1.8 billion, driven primarily by the continued growth in our Credit
Place homeowners insurance. Net investment income for the first
quarter of 2007 increased 13% to $216.9 million, mainly the result of
an additional $18.8 million pre-tax of real estate investment income,
compared to the first quarter of 2006. We continue to be
opportunistic with respect to investments in real estate joint
ventures.
This quarter's activity, while significant, reflects our ability to
generate income consistently from this asset class. Mike provided you
an update on Assurant Employee Benefits, so let me provide some
details on results of our other leading specialty insurance
businesses. Assurant Specialty Property continues to execute on its
proven strategy and posted excellent results once again this quarter.
Results were driven mainly by strong top-line growth and an
exceptional combined ratio. Net operating income was $74.4 million,
up 16% compared to the first quarter of 2006. And remember, the first
quarter of 2006 included $5.2 million, after tax, in fee income from
reimbursements under the national flood insurance program. Assurant
specialty property net earned premiums increased 45% during the
quarter to a record $367 million, despite an increase in reinsurance
premiums of $27 million compared with the first quarter of 2006.
The rise in net earned premiums resulted from continued strong
organic growth, primarily by higher policy placement ratios in our
subprime tract portfolios and increasing insured values on property.
Net investment income increase 30% to $21.9 million, as average
invested assets have grown along with the book of business. Fee
income increased 33% to $12.6 million, primarily by the growth in
Credit Place loan tracking fees. Risk management continues to be a
central tenant of our specialty property business. We are pleased to
report that we've maintained our geographic spread of risk by
targeting national loan servicers. In addition, when necessary we
manage voluntary coverage to balance our geographic spread. We have
also applied the appropriate capital support outgrowth. In the fourth
quarter we an announced, that we reinvested $230 million of the $241
million of 2006 earnings back in the business, as a result of
significant premium growth we achieved in 2006.
Assurant Solutions reported net operating income of $44.1 million in
the first quarter, up 11% from the first quarter of 2006. Results
were favorably impacted during the quarter by additional $7.8
million, after tax, of real estate investment income. Our combined
ratios have increased as a result of the following two factors.
First, we continue to make investments to support our international
expansion efforts, which in the short term will put increased
pressure on international combined ratios. This is in support of our
strategy to expand our diverse specialty business model. The strategy
is designed to create opportunities it in the new global landscape.
Second, we continue to see pressure on our domestic combined ratios,
due to unfavorable loss experience on two domestic service contract
clients, as mentioned on last quarter's call. Our risk management
focus includes monitoring key early warning indicators and, as a
result, we have taken various corrective actions, which include
increasing rates and changing certain terms and conditions associated
with these two clients to improve profitability. We expect it to take
an additional three to five quarters as we work through these
changes. Net earned premiums for the quarter were up 2% to $583
million. This was driven by the 27% increase in our international
business, both from the strong growth in service contracts and credit
insurance. And by the 5% increase in domestic service contracts. This
was offset, somewhat, by the expected decline in pre-need premiums
due to the sale of the U.S. independent pre-need franchise and the
continued runoff of domestic credit insurance.
Insurance Solutions net investment income grew 15% to $112 million
for the quarter, mainly due to an additional $11.9 million, pre-tax,
of real estate investment income. Fee income was up 11% during the
quarter to $38.1 million, driven by the growth of the domestic and
international service contract business. Despite the decline of debt
deferment fees, due to the previously discussed loss of a client,
MBNA. Turning to Assurant Health, our leading individual medical
insurance business's first quarter 2007 net operating income of $40.5
million, down 10% from the same period last year, as a result of the
continued decline in small group and short-term medical insurance.
Nevertheless, we maintained a favorable combined ratio of 91.7%, our
key profitability metric in this business, as we maintain strategic
focus on individual medical insurance.
First quarter 2007 net earned premiums decreased 2% to $512.8
million. Individual medical net earned premiums grew 6% during the
quarter, driven by higher premiums per member, as more people
purchased our full suite of individual medical products. This was
offset by 12% decline in small group and short-term medical premiums,
given our focus to only write these products if we can do so
profitably. Overall, medical membership declined during the quarter,
driven primarily by the decline in small group membership.
Capitalizing on the growing individual health market, individual
medical sales were up 31% during the quarter, due to the continued
strength of Advantage Agent and more consumers purchasing our new
products. Our goal is to provide accessible and affordable health
insurance to the individual market. We remain focused on persistency
improvements with customers, who continue to look for an affordable,
individual medical plan and are not returning to a group employer
plan.
Finally our comment on our Corporate and Other segment, where we
reported a net operating loss of $7.6 million in the first quarter
compared to a loss of $400,000 during the same period last year.
Corporate and Other results reflect an increase of tax expense of
$5.8 million, resulting from changes in certain tax liabilities, and
a reduction of $2.4 million, after tax, from real estate investment
income compared to the first quarter of 2006. The adoption of
insurance accounting rule SOP 501 reduced retained earnings by $4.3
million after tax. This statement's impact, impacts the recording of
deferred acquisition cost in certain situations. The adoption had a
very minor impact, as a result of our prudent accounting practices of
using short deferral periods in the effective businesses.
Our balance sheet remains strong, our total assets at March 31st,
2007 were $25.5 billion. Total shareholders' equity at the end of the
first quarter, excluding accumulated other comprehensive income was
$3.8 billion. Book value per share, excluding AOCI, grew 4% during
the quarter to $31.14 at March 31st, 2007. In summary, we're seeing
disciplined growth in a number of our targeted growth areas. We're
pleased we have provided our shareholders with strong earnings
growth, impressive ROE's and continue to focus on executing our
unique strategy. Now, I would like to turn things back to Rob to open
the floor for questions.
ROB POLLOCK: Thanks Bruce. Operator, we're ready for questions.
OPERATOR: (OPERATOR INSTRUCTIONS) We will pause for just a moment to
compile the Q&A roster. Your first question is coming from David
Lewis of SunTrust Robinson.
DAVID LEWIS, ANALYST, SUNTRUST ROBINSON: Thank you, good morning.
BRUCE CAMACHO: Morning David.
DAVID LEWIS: Bruce, you talked about some of the benefits in the
Credit Place homeowners coming from the shifts in the subprime
market. I would like to dig into the sector a little bit more to try
to understand, how much of the growth is potentially coming from new
tract mortgages versus maybe more business coming to the subprime
versus somewhat easier comparisons in the first quarter and maybe
second quarter and how that's probably going to evolve. And secondly,
if you could maybe think about if the public and private markets are
successful in slowing down foreclosures is that a potential negative
for growth in that business?
BRUCE CAMACHO: Okay. The growth of our business is actually the
majority of it's coming organically. The first quarter, we also had a
bit of growth coming because of the acquisition of Safeco, which
occurred in the second quarter of 2006, so we're getting an impact in
the first quarter of '06 from Safeco's acquisition, as well. But we
outlined the growth in our business, pretty much it's -- the majority
of it we saw as higher policy placement ratios in the subprime track
portfolios, so we are seeing higher placements in those portfolios
that we track on the subprime side. But we're also seeing a continued
increase in the insured values of the properties. And as we rate of
off the insured values of properties, we automatically get a lift in
our premiums from that standpoint. Then the last factor as, you
mentioned, is we have continued to be successful rolling up, because
we have targeted strategically the leaders in the industry and those
leaders are the ones that are still continuing to buy loan portfolios
and we're benefiting from that, I think, as John even mentioned, when
we were at investor day in late March. So all those factors are
there. We foresee that we will continue to see benefits of increasing
insured values. It might be a slight slow down on the placement side,
but we haven't really seen that yet. We are getting placements on
both the prime side and the subprime side, it's just we noted the
subprime as being the bigger driving factor.
ROB POLLOCK: And your last point, David, on the foreclosures, the
property remains insured and we're usually the carrier in that
situation. We have a slightly different policy covering things, the
combined ratios on that business are very similar to our regular
business, so that we don't see as impacting us in any way other than
we may have more top line.
DAVID LEWIS: I guess what I was looking at, foreclosures actually
slow on the subprime market, would that potentially be a negative for
business, because it sounds like you're benefiting currently.
ROB POLLOCK: I think the real question is you can think about the
factors Bruce outlined. One is how many loans are outstanding, okay?
The second is what are the placement ratios within different
categories and the third is total insured values. What we're seeing,
particularly in the subprime portfolios today, is an uptick in that
placement rate. And that's from just a couple quarters back when we
still hadn't really seen any increase in the placement ratio.
BRUCE CAMACHO: Always a follow-on David, to just deal with the
foreclosure, yes, if foreclosures are high, we would get more
placement in those portfolio that we track. But foreclosure, the
properties that are basically real estate owned has always been a
very, very small amount of our overall placement or overall premium
production in the Credit Place space. So it's not the only factor
and, certainly has not been the only factor, driving placements in
subprime, okay.
DAVID LEWIS: Can you just quantify what Safeco added in the first
quarter?
BRUCE CAMACHO: I think it was around, I want to say $57 million or
so, in premium. That's excluding any premium we put against the
reinsurance premium we put against that, that's a gross number.
DAVID LEWIS: Very good, thank you.
OPERATOR: Thank you. Your next question is coming from Jimmy of Bular
(ph) JPMorgan.
ROB POLLOCK: (Multiple speakers) Morning Jimmy.
JIMMY BULAR, ANALYST, JPMORGAN: Hi. I just have a couple questions.
The first one is just on real estate income. I realize it's difficult
to sort of model that, but is there seasonality in that number, and
what do you expect run rate going forward, because this first quarter
is higher than what it's been the last couple years, I think, for the
whole year. And then secondly, on margins in Specialty Property was
there anything unusual or nonrecurring in this quarter that might
have helped results, because margins obviously were very strong?
what's your outlook for that going forward?
ROB POLLOCK: First, there were no one-timers during the quarter, so
that's easy. The big variable going on in Specialty Property is going
to be, you know, catastrophe exposure. So we're fortunate to have
Chris Pagano with us today and Chris can give you a fill-in on the
real estate side.
CHRIS PAGANO, CHIEF INVESTMENT OFFICER, ASSURANT, INC.: Yes, hi
Jimmy. Just a couple comments. First of all, in general, what
occurred during the investment activity in the first quarter was
consistent with our approach to the asset class, which is again to be
opportunistic and to let the economics dictate the purchase and sales
addition. One of the sales during the quarter, which was roughly $13
of the $33 million was a little bit unusual in the timing of the
sale. This was an asset, an office building we owned in Florida, that
was actually scheduled and under contract for sale back in the fourth
quarter of 2005, but a week before closing was damaged during
Hurricane Wilma. And we spent the better part of 2006 negotiating the
insurance claim with our carrier, which we learned shows us that not
everybody is as quick at settling claims as we are at Specialty
Property. But now, having said that -- so that's the one piece of the
activity in the first quarter that was unusual. The other thing to
keep in mind, we also made progress on two of our goals, which is to
grow the portfolio over the long-term and also to create a smoother
income stream it at the segment level. There, we sold roughly $26
million of book value with the net book value in the portfolio only
down $6 million, so we were active on the purchase side. Those
purchases will be allocated to all of the segments. And then, two of
the sales that occurred in the first quarter were actually in
individual portfolios, so that the six individual-owned portfolios in
the segments, which we outlined on investor day is now down to four.
But for us to run rate this for you, is -- we don't want to
compromise the opportunistic approach, but we think that this shows
our ability to consistently generate income from real estate on an
annual basis.
JIMMY BULAR: Could there be a seasonality in this, because this year
and last year the first quarters were actually the highest, last year
also I think the first quarter was the highest.
CHRIS PAGANO: You know, I would not suggest any seasonality. It's
hard for us to control the quarter in which a sale occurs, these
deals typically take 60 to 90 days to close, that's if nothing goes
wrong. In the case of this building in Florida, it took 18 in months
to close, which is an unusual situation. For us to time on a
quarterly basis or seasonal basis, is beyond our control.
JIMMY BULAR: Then finally, I just have a follow-up on the health
business. Your individual sales seem to be turning around, small
group, you have talked about for awhile that the outlook is
improving, but still results are still relatively weak. Can you
discuss what you expect for that, and that's it.
ROB POLLOCK: Sure. You know, again, our specialty business here is
the individual medical business. We have said we will write the group
business opportunistically. We do feel that that, Jimmy, will bottom
out at some point had in time. I'd point out that, the first quarter
is probably when a lot of groups go for renewal and our last
experience was consistent with that and a bit higher during the first
quarter. We're hoping that will moderate over the remainder of the
year.
JIMMY BULAR: Thank you.
OPERATOR: Thank you. Your next question is coming from Keith Walsh of
Citigroup.
KEITH WALSH, ANALYST, CITIGROUP: Good morning everyone, how are you.
ROB POLLOCK: Hi Keith, good.
KEITH WALSH: A couple questions on Solutions, then a follow up to
Jimmy's question on Health. Just first on Solutions, with earned
premiums in domestic and international service contracts, they look
like they're down about 5% sequentially. Is there some seasonality
with that number? Then secondly, what's the impact that Circuit City,
they released some results this week saying that their sales look
very bad in April, what's the impact on that contract, on your
domestic service contract business? Thanks.
BRUCE CAMACHO: Okay. First of all, yes, there is seasonality in the
service contract business, just like there's seasonality in the
credit insurance business, nationally and domestically. The fourth
quarter and third quarter are normally stronger quarters, because
it's a selling season. It's the height of the retail season, so we
can tend to get higher placement of warranty, along with higher
placement of just -- higher sales of consumer electronics. Comparing
first to first is much more relevant than comparing fourth to first,
that's number one. Number two, regarding Circuit City, the good and
bad of it is that, yes, Circuit City is going through issues
themselves as a retailer, that's going to affect the production from
Circuit City. But our strategic focus and our lining with the major
retailers in the space, when we have a broad swath of retailers, will
allow us to have, at the same time, other retailer clients of ours
that are growing. So, we will get impacted obviously by the expected
production we wanted to get from Circuit City because of their
issues, but hopefully that will be tempered somewhat by growth in
other clients as ours as we strategically focus on the larger ones.
KEITH WALSH: It that a material impact, as far as their production
level as a percent of your total premiums in that space?
BRUCE CAMACHO: It will be an impact only on -- if it has an impact,
it going to be the impact on the gross written side. Don't forget,
it's not going to on the net earned side, because we are writing new
business with Circuit City and it's going to take three to four years
to earn out. In the first year to 18 months, there's not much
earnings at all in the P&L on Circuit City.
ROB POLLOCK: I think, just an anecdote here as well, we're working
with Circuit City in the stores where we have been able to go in and
help improve penetration ratios, are not the stores that are being
closed. So it's a reinforcement for them to work with us and, again,
that's always part of what we're trying to do within the Solution
segment.
KEITH WALSH: Okay. And then on the health side, sales look really
strong again just specifically on individual piece. Can you just talk
about the mechanics of this, how that will flow through to premium
growth? I mean, you got about 24% upside on the sales, premiums up
like 5% on individual, how does that flow through there over time?
ROB POLLOCK: These are annualized sales numbers, Keith, so those
annualized sales then start earning out on a monthly basis. I think
an important thing to remember is what Bruce pointed out, the buyers
of this product kind of fall into categories of first-time and repeat
buyers. Many of those first-time buyers can return to a group plan
and get coverage, in which case they will drop their coverage on the
individual side. But if someone buys that policy in January with a --
let's say a $2,400 annual premium, and persists with us, we're going
to earn $200 a month.
KEITH WALSH: Thanks a lot.
OPERATOR: Thank you. Your next question is coming from Beth Malone of
KeyBanc.
BETH MALONE, ANALYST, KEYBANC: Thank you, good morning.
ROB POLLOCK: (Multiple speakers) Good morning, Beth.
BETH MALONE: Can you just give me a little more understanding, on the
real estate gain that you have reported, are we supposed to look at
that as if it's like a capital gain and nonrecurring because -- or
it's not predictable or is this really all part of the ongoing
operational profit of those divisions in which the real estate
appears?
ROB POLLOCK: Yes, I'm going to turn it back to Chris in a minute, but
one of the things I want to point out is, this is one of our
specialty classes of investment that uniquely match up with how we
run the business and the fact that Chris and his team do try and
match their whole investment thesis on how the business operates. And
I'd point out, Beth, that we're not in a situation where we have a
lot of callable liabilities in any of our products, which gives us a
little bit more discretion in terms of how we want to think about
things. In terms of the variability, I'll turn it back to Chris.
CHRIS PAGANO: A couple things about the asset class, the way we have
set it up from an accounting perspective, the way we structure the
partnerships, the profit from sale is treated as income at the time
of sale. Now, some of that profit is actually recouped depreciation
which, over the life of the asset, reduces the GAAP income. So,
instead of recognizing the cash income from the asset, you're going
to see a lower GAAP number, then the cap to book value of the asset
goes down. The only way we can recapture the depreciation is through
the sale. So just to give you some idea, the last two years, the book
value of the portfolio has gone down by $8 million each year from
depreciation. So again, that's the type of thing, that's maybe how
you want to think about it. Now, in terms of -- what the risks are,
well the risk is the market value of the asset going down. What do we
see as the driver for that, well, for us we right now, we've got
strong rents, we've got tons of institutional demand. The only thing
we can see happening to raise cap rates, and therefore drop the mass
market value and the unrealized profit, is a rise in interest rates.
So interest rates could drive cap rates. If that happens, then we've
got $12 or $13 billion of portfolio and additional operating cash
flow that we can reinvest at higher yields than we're getting now.
Again Rob mentioned specialty assets there's a nice counter-cyclical
diversification benefit from real estate, vis-a-vis the rest of the
portfolio.
BRUCE CAMACHO: So, just to throw the loop back on the question. Yes,
it's definitely not realized gain, it is -- we consider it to be core
to our investment income, core to the profitability of our segments.
The reason we disclose it on any particular quarter is just because
of the lumpy nature of how the income comes through. But, it's
definitely what we would consider to be core to our -- to the income
levels of our businesses.
BETH MALONE: Okay. And just one more are clarification on that, when
you talk about lumpy, is there a seasonality that we should
anticipate with this or is it lumpy without a lot of predictability
as to when the lumps appear?
CHRIS PAGANO: You know, again, if you look back over the last eight
quarters you've got $9.5 million, $3 million, nothing, $4.75 million,
nothing, $3 million, $600,000, then this quarter of $33 million,
which you could if it had gone the way we had planned, it would have
been a $13 or so million number in the fourth quarter of '05. So it's
difficult to have seasonality. One thing we are not faced with, is
sort of the annual profitability measure that some of the REITs and
other sellers in the market -- so, typically you will see that as a
fourth quarter event. So if ever there were seasonality, it might be
higher than expected sales during the fourth quarter, but that's not
something we concern ourselves with. In fact. from time to time, on
the buy side we can take advantage of that.
BETH MALONE: Okay, thank you.
OPERATOR: Thank you. Your next question is coming from Dan Johnson of
Citadel Investments.
DAN JOHNSON, ANALYST, CITADEL INVESTMENTS: Thank you very much and
good morning. A couple questions please, maybe a little more color
around the real estate portfolio in terms of looking on the balance
sheet, what are we carrying these assets at, in book, in aggregate?
CHRIS PAGANO: Sure, let me give you some numbers, maybe I'll
reference the Investor Day slide so you can get a sense of the change
in the value after the activity in the first quarter. At year-end, we
had a total of 23 properties, with a total book value of about $136
million, the market value, at the time, was just under $237 million,
so roughly $100 million in unrealized profits. Of those 23
properties, six of them were shared, excuse me, six of them were held
in individual portfolios, 17 of them were shared amongst all the
segments. So again, the idea we are trying to address the segment
level lumpiness of the income stream. After the activity in the first
quarter, which involved five different properties, the book value
went from $136 million to $129 million, so again, we were both buying
and selling during the quarter. The unrealized profit, or the
difference between the market value and the book, was about $72
million. So again, we went from $100 million, took $33 plus million
of profits, and the remaining assets appreciated during the quarter
to the tune of about $6 million. The other thing, again, part of the
idea of addressing the uneven cash flows at the segment level, we've
got 16 properties that are shared and four properties are held
individually. So going forward, that number will, again,
opportunistically depending on the economics, all purchases will go
into the share properties. And then, to the extent that we see
opportunities on the property sales individually, you will see that
number drop over time.
DAN JOHNSON: Great, that was exactly what I was looking for. On the
solution side, could we talk a little bit about the gross written
premium growth, which has sort of hovered around very low single
digits, even just a few quarters ago, and is now 15 to 20% depending
on whether we're talking international or domestic. I realize you
have added lots of clients in these segments, but can you just give
us some sense of the visibility you have around these numbers for the
rest of the year and, are these sort of numbers even remotely
sustainable to the sort of growth numbers they're putting up now.
ROB POLLOCK: Well, you know, I guess a couple things. First, the --
if we think about this, when we write an extended service contract,
it's not going to earn out for awhile. We have had some client
additions that are producing and causing the gross written numbers to
grow. A big part of that solution strategy, is obviously aligning
with market leaders and I can tell you that Craig and his team are
out trying to call on others and our strategy is to have continued
success there and they're working hard at it. But, you know, we're
not going to provide any guidance on the actual sales numbers
themselves.
DAN JOHNSON: But it would be fair to say these are the -- these gross
written -- the gross written premium growth will become earned growth
sometime probably next year.
ROB POLLOCK: As the manufacturers warranty expires, yes, I mean it's
written, then it depends on the product, Dan. If it's one year
manufacturer warranty, then they'll start earning after a year, if
it's a 6-month or 18-month -- but yes, it will translate into earned
premium growth.
BRUCE CAMACHO: Yes, a good way to look at it, Dan, too is, when you
look at the balance sheet given by segment, you can compare the gross
written growth and the UPR growth, understand that you've got a UPR
but got the DAC on the other side of it, just looking at that type of
combination, so it's normally, it's a good half year convention, it's
almost like you will see UPR grow and stay up almost twice what the
premium is growing on written side. A lot of the growth, as Rob
mentioned, is again because of discipline execution that Craig and
his team are focused on. It can also, if you get focused on a large
acquisition, that has a huge impact on, on the growth in the
particular quarter and that first year of bringing that big client
on. Versus a multiple number of small clients that you bring on or
smaller clients you bring on will have less of an impact. So we can
have jumps in our gross written premium, as we bring on a client.
Then the second factor that Craig's team works on is when you close a
new client, you also have the ability depending on, again, the
profitability and pricing -- is to pick up their book of business
from their previous carrier and that would have a tremendous big
impact on any particular quarter, if you picked up a book of
business, in other words, already in-force block of business in any
particular quarter. So we have -- you have to look at those type of
things. And we would try to disclose those things, if we saw a big
jump in a particular quarter in gross written premiums, it would
normally be because we have actually, not only picked up a new
client, but we might have picked up their existing book of business.
DAN JOHNSON: Thank you very much for that description.
OPERATOR: Thank you. Your next question is coming from Yugo Vaughnan
(ph) of KBW.
YUGO VAUGHNAN, ANALYST, KBW: Good morning. Going right back to the
same question, besides the impact of not earning the premiums right
away in the service contract and the impact of the DAC, is there any
other factor that's impacting the fact that if you look at the growth
in gross premiums it was 28% for the domestic service contract this
quarter compared to the 5% growth in the earned premiums.
ROB POLLOCK: I don't believe so. I mean, I think remember when we
bring on a new client, we usually get the money, we can generate
investment income from those funds. We may be doing some servicing of
the block, if we have picked up servicing, which would cause some
fees to generate through, but we can't -- we're not going to earn
those premiums until the manufacturers warranties expire.
YUGO VAUGHNAN: And what's affecting the fact when I look at the
growth in international credit gross premiums, that was 19% in this
quarter, but the growth in net premiums was 10%.
BRUCE CAMACHO: Again, the mix of business internationally, Yugo, in
the U.S. the old domestic business is dominated by monthly pay credit
insurance, normally on credit cards, whereas international growth is
coming primarily from single premium installment lending. So you pick
up a single premium on credit and it's the same sort of -- it
obviously runs out quicker, because it starts earning immediately,
but it could be a four-year loan, you pick up a single premium, and
then you're earning it over a four year period evenly. So it's a mix
and, in this case, the majority of the growth in international is
coming from installment lending credit versus credit card.
ROB POLLOCK: Right. But again that's a perfect example of where we're
taking that experience from the U.S., exporting it internationally.
We know how things operate and how they work best in the different
areas. It's a perfect leveraging of our core capabilities.
YUGO VAUGHNAN: My other question is regarding the Health Insurance
combined ratio. You obviously been very clear that with the
selectively more competitive pricing in individual medical to
increase the top line, obviously we're seeing the impact on the sales
growth. But then that will have an offsetting impact to some extent
lowering the ROE, and obviously driving the loss ratio a little
higher. The loss ratio ticked up in the fourth quarter, looking at it
sequentially now it actually went down. How should we sort of think
about, I guess, at least in terms of order of magnitude and the time
that it takes for that -- for those numbers to move, based on what
you have been telling us.
ROB POLLOCK: Yes, well, first I'd say that we have tried to describe
it as a gradual change over, you know, probably a couple year period
of time. Remember, there's lots of things going on that can impact
the loss ratio. And I think our discipline risk management, and the
way Don and his team analyze that business on a monthly basis, really
try and keep us on top of early warning trends that could be
developing in the business. I would also say, that our pricing is --
when we, when we anticipate, or when we see a problem from those
early warning indicators we put it right into the pricing. When we
have things that could lead to favorable results, we're not going to
take them in pricing until we see them actually translating through
results. But lots of factors going on that can move things. I think,
again, we want to generate a bigger profit pie coming from Individual
Health and we will take appropriate actions to try and make that
happen.
YUGO VAUGHNAN: When you talk about the 25 to 30% unlevered ROE target
that we will be moving to over time, does that assume that the
earnings that are being generated, in the meantime, are kept in the
health segment or should we assume the equity -- the dollar amount of
equity is going to remain sort of unchanged.
ROB POLLOCK: No, we capitalize these businesses to the, to the
required capital of AM Best, we're going to move the excess capital
out.
BRUCE CAMACHO: The only capital we would keep in the Health business
is depending on the growth rate that's going on in Health that's
needed to support it, but most of the earnings of Health, the plan is
to take most of that earnings and dividend it out.
YUGO VAUGHNAN: Thank you.
BRUCE CAMACHO: Uh-huh.
OPERATOR: Thank you. Your next question is coming from Ed Spehar of
Merrill Lynch.
ROB POLLOCK: (Multiple speakers) Morning, Ed.
ED SPEHAR, ANALYST, MERRILL LYNCH: Good morning. Two questions.
First, I was wondering if there have been any changes, since your
Investor Day, on how you're thinking about the two troubled clients
in Solutions and the workout. Then I have one follow-up.
ROB POLLOCK: Well, first, I would say that -- no changes, other than
it's going through our normal monthly process with Craig and his
team. We've put actions in place. They have set up a process every
month to review those actions. Are we getting the desired impact from
those results, if yes, continue, if no, what else needs to be done.
This is a monthly dialogue that goes on with the clients. Realizing
that your assumptions never perfectly match up, but I think it points
out the partnership we have built with the clients, that we can sit
down and have those discussions. So we're monitoring it every month,
against what we expect to happen, and we make adjustments, if need
be, if experience is developing differently.
BRUCE CAMACHO: It's a very disciplined approach Ed. The one point to
take in mind is that we -- that's why we have mentioned additional 3
to 5 quarters -- is that when you've priced, if the pricing issue or
terms and condition issue, you can't go back and change what's
already been in place in the process and it takes you a lot to flush
that through. We can only make changes to the prices going forward or
to the terms and conditions going forward to hopefully correct what
we think needs to be corrected, to make sure that our profitability
that we're expecting on the business, and to have that true
partnership between the client and ourselves is maintained. So it
just takes us a while to get that in place. As Rob mentioned, this is
a very disciplined approach by the team, Craig and his team, monthly
progress, going to each one of the trigger indicators and insuring
that that actions we have taken in the previous month, we're seeing
desired effect on the results. And if it's even moving in an approved
way, but not at the same pace, then we will turn it up a notch or
dial it down a notch, depending on what's going on in the business.
ED SPEHAR: So, Bruce, in terms of the performance of the in-force
book, has there been any change in your thoughts about that today as
when you had the Investor Day?
BRUCE CAMACHO: No.
ED SPEHAR: And then one last question. On the international
investments. Can you give us any color on the magnitude and timing of
this type of spend and is there a loading in the First Quarter or is
this just something that's going to continue at a similar pace for
the foreseeable future? Anything on that would be helpful.
BRUCE CAMACHO: Okay, yes. There is no loading in the First Quarter. I
think the indication is we have definitely stepped up from the
opportunities that we feel we've stepped up our expansion plans. I
think, Craig mentioned on Investor Day, that he has got a team
working on an entry into China as well, so that's got spend. But
we've got -- Mexico was started a couple years back and that's got
spend going on in Mexico. We've got Germany, Spain, Italy, so there's
a number of countries now, that are all in this, what I would call
infancy stage, so what we are trying to indicate is that we know the
rationale is high growth potential, higher profitability potential.
That's still very much the hypothesis, is that the expense side of
the combined is going to continue to be driven and it's probably
going to be staying above that 100 level, although we're targeting
mid 90 combined when it's in a mature phase. We just want to kind of
signal that we are trying to -- when we see the opportunity, which we
see now strategically, we're expanding to really take advantage of a
global landscape that we that see our products can really fit into in
that specialty model.
ED SPEHAR: Okay, thank you very much.
OPERATOR: Thank you. Your next question is coming from Adam Klauber
of CCW.
ROB POLLOCK: (Multiple speakers) Good morning, Adam.
ADAM KLAUBER, ANALYST, CCW: Good morning, thank you. Two questions.
One, on the specialty property. What are the placement rates like in
the prime book of business? Are they moving up or are they staying
stable?
BRUCE CAMACHO: They have moved up slightly as well.
ROB POLLOCK: But not to the magnitude we've seen in subprime.
BRUCE CAMACHO: Right.
ADAM KLAUBER: Right, but you are seeing a bit of an upward drift?
ROB POLLOCK: Yes.
ADAM KLAUBER: Okay, another question. We're hearing a lot more
interest from private equity in the insurance business. Are you
getting any calls, receiving any of that interest?
ROB POLLOCK: You know, we've talked to private equity firms about how
to partner on deals. That's an active area Bill Grider (ph) and his
M&A team are looking at that. They are obviously always looking
for expertise and understanding in an area. We want to make sure
that, if we're going to provide them with any of that expertise,
we're getting fair trade in return.
ADAM KLAUBER: Thank you very much.
OPERATOR: Thank you. Your next question is coming from Joseph France
of Banc of America.
ROB POLLOCK: Good morning, Joe.
SCOTT GREEN, ANALYST, BANC OF AMERICA: Hi, Scott Green here for Joe.
ROB POLLOCK: Hi, Scott.
SCOTT GREEN: Hi. At your Investor Day, you were confident you could
grow enrollment in '07. Do you still think this goal is achievable?
And then also could you talk about where these lines are
geographically?
ROB POLLOCK: First, I think what Don pointed out is, we're hopeful of
growing enrollment in individual medical and I think we still feel
that way. In terms of where -- we're in 43 different states, Joe, and
I think one of the keys that we've always been very successful at, in
that specialty business, is our ability to identify opportunities and
then react to them. So if something happens in a particular
geographic area with, say, a Blue player who decides to lower rates
to get share, we're going to find a different place to play and
that's always been a big part of our specialty strategy in individual
and part of our risk management, because we always want to write the
business on a profitable basis. My understanding -- I don't think
there's been any major changes in our geographic acquisition of
clients.
SCOTT GREEN: Okay, great. And one other question, could you actually
quantify the unfavorable development in Assurant Solutions?
BRUCE CAMACHO: I think the best way to look at it -- we won't
quantify a specific client. The best way to look at it is just the
impact it has on the combined ratio and that's a pretty good
thermometer of what the impact was.
SCOTT GREEN: Okay, thank you.
OPERATOR: Thank you. Our final question is coming from Joan Zief of
Goldman Sachs.
JOAN ZIEF, ANALYST, GOLDMAN SACHS: Thank you.
ROB POLLOCK: Good morning, Joan. How are you doing?
JOAN ZIEF: Just fine. Just a couple of follow-up questions. First, in
the solutions, you talked about the issues of the earnings trends in
the service contract area, issues with some problem clients and extra
investments in international. Can you go through what the earnings
trends are, just again for pre-need and what we should expect there
and the credit insurance, what we should expect there as well?
BRUCE CAMACHO: Okay, pre-need, I think, is very stable. We are
strategically aligned with the leader in that industry. That's where
with we got out of the independent funeral home, aligned with SGI,
the leader in the business domestically. So we expect the earnings
from pre-need to be very stable going forward and we don't see any
issues there whatsoever on the pre-need side. On the run-off of a
domestic credit side, that will continue to impact us, and it's not
just the domestic credit side is that the debt deferment
administration, which is also domestic, with the loss of MBNA, which
we announced last year because they were acquired by Banc of America,
we saw, obviously, the drop -- and you can see on the supplement the
drop and you can see on the supplement, the drop in debt deferment
fees.
That has an impact, as well, because both the credit insurance
run-off and the debt deferment, not debt deferment fees domestically
are not growing, as well, has an impact on their combined ratio. But
we didn't really feel it in the First Quarter, the impact is going to
be felt a little bit more in the Second Quarter. Regarding the
extended service contract business, I think we've taken the
appropriate discipline actions, we believe, to address those
particular clients.
This is kind of a natural in the business. That's why we have the
early warning indicators, to understand what are the triggering
events that are causing an issue on profitability in a particular
client. We take those actions and it just takes us four to six
quarters to work out of them, but that should be a very stable,
should be much more stable going forward, the effect on the combined
ratio. We didn't see the combined ratios pick up because of it, but
it should have more of a stable effect going forward. We just have to
-- just want you to understand on the credit side, debt deferment
side, that could impact the combined ratio going forward.
ROB POLLOCK: I guess I'd just add that Joan, again, a big part of our
strategy, we see growth opportunities with SCI. That was the selected
opportunity versus on the independent channel side, we saw that as
not being a good place to funnel Resource. Very similar thing on the
domestic credit side. We said there's better opportunities
internationally and then service contracts, the long term
opportunities don't look as good in domestic credit so let's be
disciplined and lets get our resources deployed where they can make a
difference for the shareholder.
JOAN ZIEF: Okay. I and have just one other follow-up. And that is,
you align yourself with the very largest companies within the
businesses. Should we be concerned about diversification in, say, the
retailers in the extended service contracts or health insurance
distribution. Are there any concentrations that, if something goes
wrong with any one or two distributors, that will have an overly
noticeable impact on the results?
ROB POLLOCK: No, no one client represents a big share of our
business, Joan. I think the important other thing to think about with
all of this is, if you think about that overall strategy again,
number one, we're helping these clients generate more revenue, as
opposed to being a part of their cost of goods sold chain. So I think
that sets us apart and it is very positive. I think second, we're in
a situation here, where we've got numerous ones of the clients and
we've worked hard to integrate systems in a way that make renewal a
renegotiation process on terms and conditions, but very rarely do we
lose these clients. So it really is an integration of our overall
strategy on how we deal with things.
BRUCE CAMACHO: And second point, Joan, I think the impact is a very
smooth impact. The impact from a client, a particular client, it's
really more of a loss of a distribution, right? So it's really of a
gross written premium. What's already on the books is going to earn
off exactly as we expected it to and the profitability pattern is
going to be very, very stable and actually can improve in times like
that. So it's a very -- the impact from anyone one particular action
of a client having a problem or going out of business, is really on a
top line but our continuous sales funnel and continuous growing of
the business, in a very disciplined approach, and the diversity of
the portfolio, what's happening from the health side of the employee
benefits side or the Specialty Property side, they're so -- that's
how we mitigate the volatility in these particular markets, because
what's happening to affect the retailer is not going to be at the
same time affecting what's going on with a large big insurance
distribution partnership in health or large mortgage tracking
partnership in property, so that mitigation and diversity of the
portfolio is what really takes care of that issue for us.
JOAN ZIEF: Great. Thank you.
OPERATOR: Thank you. There are no more questions. I would now like to
turn the floor back over to Robert Pollack for any closing remarks.
ROB POLLOCK: In closing, we're very pleased with the solid results
we've been able to generate for our shareholders. We will continue to
apply our core capabilities to address unmet needs in the
marketplace. Our diversified business model allows us to focus on the
long-term growth of our business, and we are committed to that
strategy. We're also committed to improving the transparency of our
business model and hope you will join us on June 7th at our
operations center in Springfield, Ohio, or via the webcast, for a
deeper review of our Specialty Property business. Thank you again for
joining us, and we look forward to updating you on our progress.
OPERATOR: Thank you. This concludes today's call. You may now
disconnect.
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