Assurant Inc (AIZ) 2005 Q1 法說會逐字稿

Welcome to the Assurant’s First Quarter 2005 Financial Results Conference Call.

[OPERATOR INSTRUCTIONS.]

I would now like to turn the call over to Mr. Larry Cains, Senior Vice President of Investor Relations. Please go ahead, Mr. Cains.

Thank you, Operator.

Welcome to Assurant’s first quarter 2005 earnings conference call. Joining me are Kerry Clayton, our President, CEO, and Rob Pollock, our CFO. Many of you were at our recent Investor Day and met our business unit CEOs and Chief Investment Officer. We are planning to have one of the CEOs and our CIO at each quarterly conference call. This morning, Mike Peninger, CEO of Assurant Employee Benefits, and Chris Pagano (ph), our CIO, are also with us.

Today’s prepared remarks will last approximately 20 minutes, after which time we will open the call to questions.

Before we get underway, I’d like to make the following remarks. Last night, we issued a press release announcing our first quarter 2005 financial results. The press release, as well as corresponding supplementary financial information, may be found on our website at www.assurant.com.

Now, a word about forward-looking statements. Some of the statements we may make during this call may contain forward-looking information. Our actual results may differ materially from such statements. We advise you to read the discussion of risks and uncertainties associated with our business and results of operations contained in our SEC filings, which can be accessed from our website. Additionally, this presentation will contain non-GAAP financial measures, which we believe are meaningful in evaluating the company’s performance. For more detailed disclosures of these non-GAAP measures, most comparable GAAP measures and a reconciliation of the two, please refer to the supplementary financial information posted on our website.

Now, I’d like to turn the call over to Kerry.

Thank you, Larry. Good morning, everyone, and thank you for joining us today. we are pleased with Assurant’s first quarter performance. All four of our businesses contributed to our strong growth in net operating income. We continue to demonstrate the strength of our diversified specialty insurance strategy, and continue to deliver shareholder value and profitable growth.

Our net operating income for the first quarter was $115.1 million, or $0.82 per share, an increase of 32% over the first quarter of 2004. Our annualized operating return on equity for the first quarter was 13.8%. Assurant Solutions had a very strong quarter, due in large part to outstanding loss experience in our specialty property businesses. Of particular note was Assurant Solution’s significant growth internationally in both extended service contracts and credit insurance. Expanding off our base in the U.K. and Canada, we’ve made progress landing new client relationships in Argentina and Brazil, and, last week, we had a formal launch of our operations in Mexico, and hosted a reception to introduce Assurant to prospective clients. Over 120 guests, including senior officers and managers from many of Mexico’s leading financial institutions and retailers, attended. Overall, we’re making strides in building our international platform, and we believe it will result in continued growth.

With a long-term focus on risk management, Assurant Health delivered a record low combined ratio this quarter. Market conditions continued to be very difficult for writing new business. A modest rate increase environment from competitors, particularly the Blues, resulted in slight membership decline in our individual business. We are pleased with our second-generation HSA product. However, due to a number of new entrants, our HSA sales dropped slightly from 41% of individual sales in the fourth quarter of 2004 to 38% for the first quarter of 2005.

During our last call, we discussed our pilot program of marketing direct to consumers for our individual health products. Unfortunately, we have seen a lower-than-expected rate of converting interested applicants to sold policies. As a result, we reduced our marketing spending during the first quarter, and we are evaluating modifications to our approach before we invest additional resources.

However, we remain focused on growing sales through our existing diverse channels, as well as adding new, exclusive channels in this competitive environment. We’re also pursuing our rollout of Right Start, our new lower-price limited benefit product aimed at the uninsured market. Right Start has been well received in the states where it has been introduced, and, this week, we will be announcing the rollout to three more states – Delaware, Maryland and North Dakota.

Mike Peninger will discuss our improved results in Employee Benefits, focusing on the small case market and our disciplined underwriting approach. We believe our focused approach to the market will continue to produce growth in our target markets. Assurant Pre-Need, the market leader in pre-need funeral insurance, benefited from pricing actions taken over the last two years. However, these pricing actions continue to affect new sales activity.

Earlier this week, we announced that we received a subpoena from the SEC requesting information about loss mitigation insurance products. We will cooperate with the SEC. The subpoena is confidential and prohibits us from speculating or discussing any details relating to this matter.

Turning to our overall corporate matters, we have increased our focus on corporate development and opportunities to further build our businesses through acquisitions, and we are delighted to have re-hired Bill Greider (ph), a talented and experienced former senior manager, to head this area. Taking advantage of the improved lending environment, we were recently successful in re-negotiating our revolving line of credit, generating cost savings and more favorable borrowing terms.

Our share repurchase plan was suspended last November because of the secondary offering but, as part of our disciplined capital management strategy, we were able to re-institute this program in late February, and we bought back 710,000 shares, or $24.3 million, during the first quarter. In April, we repurchased an additional 1.1 million shares for $34.9 million, for a 2005 total of 1.8 million shares for $59.2 million through April 30.

Since the inception of the program, we have repurchased 4.2 million shares for a total of $122 million. The program authorization is for 14.1 million shares and $400 million. Our Board approved a 14% increase in our quarterly cash dividend to $0.08 per share effective with the dividend payable in June, demonstrating our long-term commitment to increasing our dividend steadily over time.

In summary, we are pleased that our first quarter demonstrated the success of our diversified specialty insurance strategy, with four out of four of our businesses adding to the increase in earnings. We are well positioned to continue to deliver value and to pursue a broad spectrum of profitable growth opportunities through our leading positions in specialty insurance businesses, and the application of our core capabilities.

Now, I would like to turn the call over to Mike Peninger, CEO of our market-leading Employee Benefits business based in Kansas City, Missouri, and a 20-year member of our management team. Following Mike, Rob Pollock will review the detailed financial results of our other three businesses.

Mike?

Thanks, Kerry. I'm pleased to be here and have the opportunity to talk about our employee benefits business, as well as take any questions at the end of our prepared remarks. As we continue to leverage our core capabilities in the small case market, delivering customized benefit plans to employers who have less than 500 employees remains the key strategic focus for Assurant Employee Benefits.

I'm pleased to report that we delivered improved results in first quarter. We offer a full suite of dental, disability, and life insurance products, and a full range of funding options for employers and their employees. We target the small case market, and we've built our business to ensure that we can effectively meet its unique needs. For example, we've created online, user-friendly, hassle-free billing and census administration tools that are a big plus for small employers without full-time benefit departments. In the first quarter of 2005, nearly 50% of our service transactions were conducted online. A benefit of this focus is improved customer satisfaction and persistency, which we saw in all of our products this quarter. Our sales force understands the unique needs of the small employer, and has built strong relationships with the local brokers that focus on this market.

As a preface to my remarks on financial results, please recall that quarter-to-quarter comparisons may show variability, given the low frequency and high severity of claims in the life and long-term disability businesses. Assurant Employee Benefits had strong growth in net operating income in the first quarter of 2005, increasing 24% to $16.4 million compared to $13.3 million in the first quarter of 2004. While we are very pleased with that result, our quarterly results benefited from some one-time expense items. Without these items, our earnings would have been approximately comparable to the first quarter of 2004. This reflects a challenging competitive environment, particularly in our dental products.

Net earned premiums were $345.9 million, up 9% from the same period a year ago. After excluding impact of single premiums related to closed box of disability claims in the first quarters of 2004 and 2005, our premium growth was 5%. We experienced growth in grew life and disability premiums, particularly in the disability products sold by Disability RMS, our subsidiary that offers turnkey disability solutions to other insurance companies. Sales this quarter totaled $77 million, an increase of 6.3% over the first quarter of 2004. Most importantly, small case sales below 500 lives continued to grow, and represented 98% of our fully insured cases sold.

Our full suite of products helped us this quarter, with strong sales of disability and life products offsetting the slowing of dental sales resulting from competitive pressures. Our loss ratio, which is typically highest in the first quarter, rose from 76.8% in the first quarter of 2004 to 77.4% in the first quarter of 2005. Looking at this result by product, we had excellent mortality experience on our life insurance block this quarter. We continued to see favorable disability new claims incidence, but a decrease in the number of people returned to work led to a slight increase in the disability loss ratio compared to 2004.

Dental experience deteriorated in an environment where we are seeing extremely aggressive marketplace pricing. Our expense ratio dropped from 30.2% in the first quarter of 2004 to 27.6% in the first quarter of this year. As I noted earlier, we benefited from some one-time expense items. Also, the sale of the workability division, which took place in the second quarter of 2004, contributed to this decrease.

Overall, we had a solid first quarter. We were pleased with the growth of our small case sales and our total premium growth. We had good experience in our disability and life products, but we remain concerned with the pricing environment we are seeing in the dental business. We continue to believe that the size of the small to midsize market and the relative under-penetration of our products translates to growth opportunities.

As the economy continues to improve, sustained employment growth will increase employees covered, which will contribute to top line growth. As noted in a recent government publication entitled, "The Small-Business Economy: A Report to the President," we not only see the establishment of smaller firms outpacing larger ones, but smaller companies are creating more jobs. Our experience in small-group risk management, specialized and flexible administration systems and strong distribution networks position us as a leader in the ancillary employee benefits business. This position, combined with the continued focus on disciplined and profitable growth, is a foundation on which we operate.

Now, I'd like to turn it over to Rob to review the results of our other three businesses.

Thanks, Mike.

Success was not limited to Assurant Employee Benefits this quarter, as we had strong contributions from each of our four specialty businesses, producing excellent overall operating results. In the first quarter, net operating income, defined as net income excluding investment gains or losses and other unusual items, increased 32% to 115.1 million from 87.5 million in the first quarter of 2004. As Kerry mentioned, net operating income per share was $0.82 in the first quarter. Although we've seen very strong growth in profits, net earned premiums were relatively flat at 1.6 billion for the first quarter. We did see growth in most of the product segments we have targeted for growth. Net investment income increased 6.7% to 164.2 million for the quarter. Mike provided an update on our employee benefits business, so I'll focus my comments on the other three businesses which make up our diversified specialty insurance platform.

Assurant Solutions reported strong net operating income of 54.8 million in the first quarter of 2005, up 37% from the first quarter of 2004. The mild winter resulted in reduced incidents of property claims. This helped drive lower loss ratios. I should mention there were no catastrophes during the quarter. We've begun a comprehensive review of our catastrophic reinsurance program in conjunction with our June 1 renewal date. Early discussions with our re-insurers indicate we will be able to renew our reinsurance on terms and conditions that will provide us the protection we are seeking.

In our manufactured housing business, loss ratios are at an historic low level. Part in this results from underwriting and pricing actions we took on certain policies. In addition, the continued low level of manufacture home deliveries continued to reduce the percentage of our revenues from the sale of new homes, and increased the percentage of manufactured housing revenues from creditor-place business, which has lower loss ratios. Also, our results were bolstered from a one-time reduction in commissions of $7 million.

Net earned premiums for the quarter decreased 1% to 615 million. However, as we have previously mentioned, we are seeing good growth in gross written premiums from businesses that take longer to convert to earned premiums. Details on gross written premiums can be found in our statistical supplement. Gross written premiums have shown strong growth internationally in both our extended service contract and credit insurance businesses, and in our domestic extended service contract business. This growth was partially offset by the continued runoff in domestic credit insurance. In addition, gross written premiums were level in our specialty property business, where we have reduced the emphasis on certain non-core specialty property products that add higher combined ratios.

Net investment income grew as a result of greater assets from our growing consumer protection business, and a slightly higher portfolio yield. B income was up 24% for the quarter, at 36 million as a result of growth in our consumer protection business.

Turning next to Assurant Health, our leading individual medical insurance business, we again posted very strong results. Net operating income in the first quarter of 2005 grew 35% to 49.7 million compared to 36.7 million in the first quarter of 2004. Net operating income growth was a result of several factors. Our excellence in risk management led to a medical loss ratio of 62.8%, and a record low combined ratio of 89.7% for the quarter. Our expense ratio dropped to 28%, primarily due to lower commission expenses as a result of a decline in new business sales.

The overall health insurance market is showing slow enrollment growth, and continues to remain highly competitive in both the individual and small group markets. Net earned premium of 550 million this quarter were essentially flat compared to last year. Small group premiums continued to decline, as we remain focused on writing only profitable new business.

Overall, sales have slowed. Individual medical sales with an HSA represented 38% of new sales for the quarter, an increase in the prior year, but a slight leveling off from 41% in the fourth quarter of 2004. We've introduced our second-generation HSA, including mutual fund investment options. And if the popularity of HSA's role and more companies offer them, we hope to maintain a significant share of the growing pie. We are also hopeful that HSAs will provide a proved persistency as account values grow. Account values on HSA are now in over $65 million.

Individual medical membership has declined slightly from a high in the third quarter of 2004. Some of the individual medical membership declines are a result of higher lapse rates at people return to work and get insurance through their employer.

Finally, at Assurant Pre-Need our long-term focus on managing policy crediting rates and expenses during this low interest rate environment resulted in first quarter net operating income of $7 million, up 8% compared to the first quarter of 2004. Assurant Pre-Need have taken pricing actions to focus on profitable customers. This caused net earned premiums to decrease 9% to 121.2 million compared to 2004. However, reductions in policy crediting rates and a consistent portfolio yield resulted in an improved investment spread.

Next, I'll briefly comment on our corporate and other segment. Corporate and other reported a net operating loss of 10.5 million for the first quarter, compared to a loss of 10.4 million in the first quarter of 2004. Corporate expenses include costs of being a public company, including Sarbanes Oxley cost. Also, until new regulations take effect regarding the expensing of stock appreciation rights, we continue to follow the accounting guidelines that require the variable expenses based on movements in our stock price be recorded in our income statement. Since our stock performance was strong in the first quarter, the corporate segment includes high expenses related to stock appreciation rates.

For the first quarter, the pre-tax charge was 9.1 million compared to a first quarter charge of 7 million in 2004. Amortization of deferred gains and businesses sold through reinsurance declined consistent with the runoff of policies associated with these businesses, and represented an after-tax decrease of 1.7 million in net income compared to last year's first quarter.

Interest expense in the first quarter 2005 increase by 2 million after-tax compared to the first quarter of 2004 when our balance sheet was recapitalized. Our balance sheet remains strong. Total assets were 24.4 billion. Our total shareholders equity at the end of the first quarter was 3.6 billion, 3.4 billion excluding accumulated other comprehensive income. Annualized return on average equity was 13.8% for the first quarter of 2005. Our book value per share grew 3% to $24.27 from $23.57 at year-end, again excluding accumulated other comprehensive income.

Our disciplined capital management has us well positioned to grow our specialty businesses. As promised, we've added several new additional data elements to our statistical supplement for each of our four businesses, and added to our website the 10 statutory statements which represent the majority of our business. We hope this added detail will not only assist you in your analysis of our business, but further support our strategic focus on our specialty insurance businesses.

Now, I'd like to turn it back to Kerry to open the floor for questions for Mike, Kerry, Chris or me.

Thanks, Rob. Operator, we’re ready for questions.

Thank you. The call is now open for questions.

[OPERATOR INSTRUCTIONS.]

Jimmy (ph) Bhullar of J.P. Morgan.

First, could you talk about whether -- or how much first quarter results benefited from any favorable development past to prior year reserves? And then, second, if you could just comment on market conditions in the health business. We’ve heard comments that many of the large-case companies are moving downstream, and competition is getting more aggressive in the small-case market, if you could just comment on that. Thank you.

Sure. Jimmy, first related to favorable developments, I think if you look in our K, you will see how we’ve consistently had favorable development in our reserves year-over-year for the past several years.

Yes, we’ve seen that.

Right. I don’t think there’s anything in the first quarter numbers that would be ...

Different from before?

... Exactly right.

Related to market conditions in small case, as we’ve been saying, competition is quite intense. What we’ve typically seen from the large case players is, when conditions are difficult for growth in the larger case segment, they’ll look for other areas to enter. We’ve seen that. They’ll come at the small case, but it is a different business. The individual business in particular is a specialty business, and when market conditions change in the larger case, they’ll move back there. So this is very consistent with things we’ve seen in prior times.

David Lewis of Suntrust Robinson.

Rob, can you talk about some of the one-time expense savings? I think Mike Peninger indicated $3 million roughly in the employee benefit side, a little more detail on that? And then, $7 million commission reduction in solutions, and whether that’s ongoing?

Sure. Let me start with the solutions, and then I’ll let Mike comment on the employee benefits. At Solutions, we actually had a combination of two accounts that put us in a situation that led to the one-time reduction in that commission item, OK? So, it was a positive benefit, actually, to us that came about. It won’t recur, but we were quite pleased that the accounts combined, and again, fits very well with our strategy of being aligned with market leaders who often gobble things up, if you will.

And was that adjustment related to profitability from those accounts?

I don’t quite know, David. I don’t have the answer to that.

In benefits, we just had a series of somewhat unusual items that all kind of broke in our favor that we just wanted to flag that because we don’t think they’re recurring.

If so, as far as an expense ratio goes, it’s somewhere in the low 30, 31% range is probably realistic, going forward?

Certainly higher than what we saw in the first quarter, David.

John Nadel (ph) of Fox-Pitt Kelton.

Kerry, I guess I get your comment in the opening remarks that the confidentiality aspects of the subpoena, but I’m wondering if you can just -- if you can comment at all as to whether you think this is similar to what other insurance companies have been receiving?

I have several lawyers sitting here in the room with me, so I can’t really comment. Obviously, there were other companies that made press releases this week, but, for that, I only know what I read in the paper.

Looking inside the Solutions segment -- and I appreciate some of the new disclosures, because I think it really helps outline where your growth is -- in the domestic extended service contracts, there was a comment in the press release about maybe a difficult comp and some one-time impact in the first quarter of 2004 from a new account. And the year-over-year comparison maybe is tough, and it’s down as a result. Could you give a sense as to what the growth rate would have been on a more normalized basis?

The growth rate under -- I won’t give you exact numbers because I don’t have them with me, John, but what I’d say is that, when you put a new client on, there sometimes is a bit of a backlog of business that comes on the books, and we experienced that in the first quarter of 2004. We’ll experience those again, hopefully, in the future as we acquire additional comments. So, I think what you’ve got to do is kind of maybe plot a line through the data points to figure out the growth, but I think it’s there.

Just in terms of distribution relationships and the pipeline there, and kind of acquisition pipeline and things you might be looking at both in solutions, as well as just kind of overall acquisition opportunities, could you give us an update?

Yes. Well, we -- I don’t have anything specific that I can disclose, but we have ramped up our effort. As I mentioned, we hired Bill Greider. We are always looking at various opportunities, and we are certainly hopeful that we’ll have some opportunities that come up as the year progresses.

And new relationships on the Solutions side for extended service contract warranty?

Well first of all, we’re seeing great receptivity internationally in a number of markets. We’re feeling quite good about that. I would say that our integrated approach to the whole extended service contract market is being well received with clients domestically as well, and we’re talking to lots of folks.

Could you just update us on excess capital?

I think that what we reported on on Investor Day is that, because of our disciplined capital management, we have a fair amount of excess capital. We think that will build over the course of the year, which well positioned us to build our businesses, and we’ll continue to work hard at that. But there’s nothing new from the Investor Day on that side.

I think the estimates that we gave you then are -- this was only about six weeks ago -- are pretty much unchanged.

Charles Gates of Credit Suisse First Boston.

I guess perhaps two people have asked this question. It relates to the employee benefits. Now, would earnings essentially have been flat if $13 million, X the favorable expense items?

Approximately level, Charlie.

So it would have been about $13 million in the first quarter of ’05. What was the lion’s share of that favorable expense item, sir?

We had a number of just unusual items. It’s hard to detail them all, Charlie. There were just several things, and they kind of all broke in the same direction this quarter.

So the net impact of that was about $3.1 million?

After-tax in that range, yes.

I think one of you said that there was some reduction in commissions, basically as a result of the combination.

Yes. Charlie, here we’re talking about the Health business.

What happened there? I guess that was the question.

On the Health side? OK. Well, Health, as we write less first-year business in individual medical, there’s a higher first-year commission, so commissions have come down there. In the -- and by the way, I should mention that we don’t DAC (ph) any of that business on the Health side, so it just flows through. Over on the Solutions side, we got two clients combining that resulted in our being able -- getting a one-time commission reduction from the combination. Again, being aligned with the market leaders often puts us in a situation of, if there is a combination, we benefit from that, and that’s what’s happened here.

What you say, basically, we would very much like to retain this account, and, as evidence of that, we’ll cut the commission?

No, it’s a little bit different than that, actually. It really resulted from the two clients being in different situations, and, when we put them together, we were able to get a one-time savings.

How much was that savings?

I think we’ve said $1 million pre-tax.

Joshua Shanker of Smith Barney

I’m calling to -- looking at the trends in the Health line, or the Health segment, I should say. I realize that the business just is changing over time and people are chasing some of your small employer group business. Given the shift towards HSAs and the competitive environment in the small business, what is the steady-state in terms of where you see membership going in those businesses, and what kind of effect will it have overall in the trends in terms of benefits? Do you -- over time, do you think benefits go down as the business mix changes, or do benefits correlate in line with the changes in business mix?

I think the small group business is quite a bit more volatile than the individual business, and, as you see over time, we have shifted the mix of our business much more towards the individual side. That volatility on the small group side has occurred several times in history, and again, we’re very disciplined about our pricing. We don’t chase price, and we’ll maintain our margins, and let the premium flow go with it. I think on the individual side we have many more tools to use. We have our exclusive distribution relationships, we do extensive medical underwriting, it’s a smaller competitor set, and we feel much more comfortable, although, as we mentioned previously, we are seeing competition on that side, as well.

In terms of the HSA product, if you have an individual who has a high deductible medical plan and they also have an HSA, is that in terms of the way you calibrate, is that two members, or is that one member?

No, that’s -- the member is the insured, from our point of view. The HSA is, in essence, a wrapper that goes around that high deductible medical plan, and, in the individual market, our average deductible is generally already at the level that’s required for an HSA plan. I mean, I will say HSAs are not for everyone. Some people -- you can’t have separate carve-outs, for example a separate drug plan that a lot of people like with a lower co-pay, for example. In an HSA, it’s all services are covered the same, and so I think, in terms of why doesn’t everybody have an HSA, well, some people just don’t like the product design, they worry they may deal with an agent that’s not comfortable selling it, or other reasons or so forth. That’s really a lot of why we’re constantly introducing different products. We mentioned our Right Start, which is a new product innovation, and constantly looking at different ways to get into the market and be the leaders in the individual medical business.

Is there any way you can tell us what percentage of members have an HSA wrapper, and how that trend is moving over time?

Well, we certainly have a history of new sales, and that has gone from starting in the 30 -- I think it was the 37% range in the first quarter of last year. It moved up. It dropped a little in the first quarter of this year, but we think the whole move toward consumer-driven healthcare is going to continue in a variety of different ways, and we’re going to try and respond to that. What we reported -- have reported in terms of HSAs, in terms of new sales, were 25% in the first quarter of ’04, 33, 40, 41 and the 35% in the first quarter of -- excuse me, I read these wrong -- 38 in the first quarter of ’05, yes.

Steven Schwartz of Raymond James.

I just wanted to ask about the pre-need business. Now, I know you’ve been raising prices in order to deal with the low interest rate environment, but it did look like things just fell apart this quarter, in terms of sales on the independent side, both in the U.S. and Canada. I was wondering if you had taken a particularly large rate increase in the quarter?

No, but I think what we mentioned is we’ve targeted Canada, and I think we actually saw nice growth year-over-year in the Canadian market, and continue to see that as a growth opportunity for us. There was a drop-off in that independent channel, part of it related to our decision to not renew a couple of contracts that just weren’t meeting our profit targets.

And with Service Corp, is that a -- just looking at it vis-à-vis the fourth quarter, is there some seasonality there, or do they maybe have their act together?

I don’t want to comment upon their act, but I think there is a bit of seasonality.

Kelly Nash of Keybanc Capital.

First, regarding the HSAs, I know you indicated it is becoming increasingly competitive. Can you give us an idea of how your HSA sales break out in terms of your various distribution channels, and then also just kind of indicate the early impact of your new HSA product and how that compares in the market.

I don’t think we have information, per se, on our new HSA product because it is so new. I mean, I think there are people who are taking that as that option, so we view it as another way to bring people into that marketplace who are attracted there. In terms of HSAs by channel, they’ve been popular really across the spectrum of a number of our different channels.

I don’t think we have the data by channel right here, but I think all the channels have been selling considerable amounts of the HSA product. And as we enhance the product with each generation, I mean, the second generation that we introduced the first of this year included features like the debit card and online access and so forth, and then we’re further enhancing the offering, with offering some mutual fund options. I think that comes on the second quarter. So it’s a constant process of improving the offering and making it more attractive, trying to use the capabilities that we have in administration and technology to really stay ahead of the pack in what we do with the product.

Yes. I will say as well, Kelly, that this new generation is certainly -- those features can be adopted by existing HSA holders, or wrapper holders, if you will, and so we’ve seen some of that conversion, too, of, gee, when we’ve got the new feature they wanted added to their HSA.

And it sounds like the new features that you’re offering are relatively unique in the market, at least at this point?

Yes, but again, I think we’ve got some first-to-market capability, but others will come with the same features if they prove to be popular.

And then can you help us to better understand the transition from the gross written premiums to the earned premiums in the solution? It was helpful to see that detail, but just to get a little bit better understanding of when that starts to really flow through.

Sure. A big piece of that is obviously the extended service contract business, and we sell these on a variety of different consumer electronic products, as well as home appliances. Our product takes effect after the manufacturer’s warranty expires. That manufacturer’s warranty can run anywhere from six months to two years, let’s say, and our product can have a one, two, three-year duration associated with it. So, as you’ll see, depending on the particular product, we can be earning after a year, and then might earn for one, two or three years. It really depends on the particular good. So, I think that if you look at that overall gross written premium number and see it growing, it’s going to turn around and translate into earned premium as those manufacturer warranties expire.

And then finally, on the sustainability of the specialty property loss ratio, obviously you did benefit from some milder weather patterns. But in terms of how -- what’s really a sustainable level in that segment going forward?

We think we benefited from low frequency in that business. It will move around, depending on frequency movement. We’ve done a lot to try and deal with severity. I think we mentioned the fact that we’re trying to do much more of the claim adjudication in-house as part of our overall risk management, and we’ve benefited from that, and hope to continue. In terms of sustainability, it depends on frequency and severity.

Edward Spehar of Merrill Lynch.

I have a number of questions on the Solutions business, and most of them I guess are around the gross written premiums. If we look at this -- first of all, I wanted to understand that this trend in gross written premiums, is this indicative, if we just think about this over the long-term, of the earnings growth we’d see for the segment without any change in margins, understanding that the contracts can be very different and that they can flow through in various lines in the revenue -- various revenue lines. But is that a way to think about it?

I guess I’d start and say that, if we reached the steady state, Ed, then gross written should equal earned, OK, which then if the margins are equal, yes, you’d see it translate into growing earnings. Now, there’s lots of things that can cause it to go up or down from that, but, over time, as you grow the block, as gross written grows, it’s going to translate into increasing earned premiums over time.

Well, how does it work with the C income line, though? I mean, is the C income line only going to be related to debt protection?

No, there’s also some administration on extended service contracts that goes through that line, as well.

But that should track with whatever the gross written would be for that related business?

Correct. No, no, take that back. It’s probably current.

These I think are current, whereas the gross written -- and, of course, you then have to translate the gross into net because of reinsurance and so forth. But there’s sort of a lag effect between when the business is written and then when it earns, and, again, that depends on the product and the length of the manufacturer’s warranty, or the length of -- if its an annual, or -- in our manufactured home, we have some multi-year products, so it depends on that term. But there’s some kind of a lag effect between when the products are -- the premium is written, and then when it earns.

Is the retention similar -- generally similar if we go down these various categories that you’ve showed up? I mean, the net premiums written?

It’s going to depend -- on the fee income line, it’s going to depend on what services we’re providing.

I’m sorry, I’m talking about the written premium. You’ve given us gross. On a net basis, is it similar by line?

No, it’s going to vary.

So, I guess I’m still confused. It’s better disclosure, but I’m still confused how I use this to get to a revenue line.

Well, I don’t think we’re there yet on a direct translation, but I think what you’ll get from gross written is an indication of the trends within our business, OK? So, as you see gross written growing, you’re going to, with the lag, see earned premiums grow on the associated line. It will depend on the, as Kerry mentioned, the particulars of a contract with our partner.

OK, and then just looking at a couple of these categories, I think there’s been some feeling among the management team here that the domestic credit was stabilizing.

No, I think what we’ve tried to indicate on prior calls, if you take domestic and international credit together, you’ll see that number stabilizing, Ed. If you think about that domestic credit, it largely is comprised of credit card portfolios that are going to slowly atrit (ph) over time.

But that premium is written each month, written and earned each month. And so, it will decline as the credit cards atrit.

OK. And then, in terms of the specialty property, you made reference to de-emphasis of some higher combined ratio business.

Yes, these are just little kind of special deals we may have written in the past, and we’re just going to de-emphasize those. In the creditor place business, we’ve seen a bit of a slowdown in the gross written. We’re investigating cause on that. I think a lot of it may just be where the voluntary market is, but we don’t have a definitive conclusion on that yet.

But could you help us, maybe just give some sense of what portion of the 299 million that you had this quarter in specialty property would be related to whatever businesses you’re de-emphasizing?

I’d say -- I’ll get you the figures. I don’t have them right now, Ed.

But I mean, is it a relatively small piece of that?

Yes.

OK. And then, any other unusual items? I mean, you detailed two. Anything else you’d consider unusual this quarter from an earnings standpoint? Just for the whole company.

I think the only other one would be the spending on the direct-to-consumer on individual health. We slowed that down considerably. The SARS (ph) we mentioned, we gave you the details on how that related year-over-year. and then, we talked about the benefits and the one-time commission in the solutions.

But you had expected that the spending on the direct-to-consumer would be a little -- would be significantly less of a drag this quarter than it was last quarter.

We did, and we spent even -- but we did plan to spend during the quarter, and I’d say we just spent less than that, Ed.

Adam Klauber of Cochran Caronia

Growth in the international extended service is obviously impressive. On a run rate, it looks like that business is up to almost 200 million. When we look at your other four businesses and solutions, on an annual basis, they range from 600 million to 1.2 billion. Does the international business have a chance of reaching that critical mass, and would it be more 600 million or 1.2 billion?

Well, we certainly think there’s lots of opportunity internationally. I think that we’re seeing a lot of receptivity there, and positive trends on both the extended service and contract credit side. So, we’d like to hope it’s the bigger number, but we’re going to have to execute and have -- be relevant to customers and clients to make that happen.

I think you can see the gross written has grown as a percentage. I mean, if you just take the international as a percentage of the totals, you add the items together, I think we had -- it was about 15% a year ago, and about 22% in the first quarter of this year. And we do expect international to comprise an increasingly larger percentage of our total business over time.

On the health business, Rob, you had mentioned that lapses have increased somewhat. Could you just give us a range, on an annualized basis, what lapses run in that business?

It’s quite a mixture, depending on the particular product. But I think one of the keys is that, particularly in the individual market, a big driver of lapse is people just going back to work with an employer who provides health coverage. I’d say that that comprises a significant 25% plus of all the lapses. Now, that’s me making this up as opposed to having the actual measure, but it’s a big contributor.

In the small group side, one of the big contributors is they can no longer afford to provide coverage to their employees, and they just stop providing medical coverage, so we get some of that, too. Nevertheless, particularly in the small group side, the competition will come in and make a proposal, and, if it’s cheaper, the business can move, and that increased competition has led to increased lapse. Historically, lapses can run in the 25 to 30% range.

With new sales dropping in both individual and particularly group, and lapse rates ticking up a little, is there a negative -- is there going to be negative GAAP where the sales can’t keep up with the lapses?

We hope not, but that certainly is a possibility. I mean, Kerry mentioned the new product activities we’re working hard to introduce there to try and bring in new customers. But by that same token, we are going to be disciplined on our pricing, and if there’s going to be totally irrational competition, we will walk away from business.

But again, I think part of our whole specialty strategy is to constantly, rather than just fighting competition head-to-head to come to market with variations that may be more appealing or may differentiate us in some way, we mentioned the Right Start, and that we were the first company out with the HSAs. Again, none of these things give you a permanent advantage. It’s a constant stream of new product, and kind of that risk management design mentality that we think will keep us ahead in the market.

You mentioned there were no catastrophes this quarter. What was the catastrophe number the first quarter of last year?

First quarter we didn’t have any last year, either.

Bill Wilt of Morgan Stanley.

In the health segment, could you talk about the extent to which regulatory pressures are building or not, I guess, as the profitability of that line continues to look quite strong? Are there new challenges in implementing rate changes, setting aside rate? Any pressures or items to share on the underwriting side, whether it changes an underwriting guideline, plan design, etc., that would be a notable?

I would say that there haven’t been any changes during the quarter. As you know, the small group market has more rating corridors by state, etc., that we’re attempting to deal with. But I wouldn’t say we’ve seen an increased incidence, Bill.

Do you have a sense that regulators on a whole are inclined to just let competition take care of what may or may not be perceived to be excess levels of profitability, or are they more inclined to begin tinkering?

I think the regulatory front on the individual and small group size has been pretty stable for a while. Again, we have a lot of expertise in developing rate filings that are required in individual market in presenting our data, and so forth, and we haven’t really seen any change in regulatory stance.

A question for Mike. Anything you could speculate on that would slow the level of competition in the dental segment? Do you have a sense for -- I mean, are competitors producing profitable results, and perhaps have scale that gives them a competitive advantage and allows them to price what may be perceived as aggressively, or are they burning their way into the market?

I think as always, Bill, there’s a combination of things. There are some large competitors in the business that may have some scale advantage. I don’t think that accounts for all the variance in pricing we see. Dental is a real desirable employee benefit. There’s a lot of interest in it. a lot of companies see it as an opportunity to leverage into the employee benefits business, I think. So, there’s just lots of things going on there, so I think it’s going to stay competitive for a while.

I will now turn the call over to Kerry Clayton, CEO, for closing remarks.

Thanks for your questions. in closing, we’re very pleased with our successes in the first quarter, and continue to focus on disciplined and profitable growth in our specialty insurance businesses. Already this year, we’ve had the opportunity to meet with many of our shareholders, and we continue to be encouraged by your support.

Thank you again for joining us, and we look forward to updating you on our progress.

Thank you. This does conclude this morning’s teleconference. You may disconnect your lines, and enjoy your day.