Assurant Inc (AIZ) 2005 Q2 法說會逐字稿

Welcome to the Assurant second quarter 2005 financial results conference call. At this time, all participants have been on a listen only mode and the floor will be open for questions following today's presentation. I would now like to turn the call over to Mr.Larry Cains, Senior Vice President, Investor Relations. Please go ahead Mr. Cains.

Welcome to Assurant's 2005 Second Quarter Earnings Conference Call. Joining me are Kerry Clayton, our Chief Executive Officer; Rob Pollock, our President and Chief Operating Officer; Bruce Camacho, our Chief Financial Officer; and Don Hamm, CEO of Assurant Health. Chris Pagano, our Chief Investment Officer is also with us. Today's prepared remarks will last approximately 25 minutes after which time we will open the call to questions. This morning, we issued a press release announcing our second quarter 2005 financial results. The press release as well as corresponding supplementary financial information may be found in our website at www.assurant.com.

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 on these non-GAAP measures, the 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 our CEO Kerry Clayton.

Thank you, Larry. Good morning, everyone, and thank you for joining us today. We are pleased with Assurant's improved overall performance in the second quarter driven by strong growth in net operating income, particularly from the businesses we previously called Assurant Solutions and from Assurant Health. We continue to demonstrate the strength of our Diversified specialty Insurance Strategy and continue to deliver shareholder value and profitable growth. During the second quarter, we made some key executive changes to further strengthen our management team, including the election of Rob Pollock to President and Chief Operating Officer, Bruce Camacho to Executive Vice President and Chief Financial Officer, and Jerome Atkinson to Executive Vice President and Chief Compliance Officer.

The promotions of these highly tenured executives will insure our continued success for the future. To further sharpen our focus, we are in the process of splitting Assurant's specialty property and Assurant Solutions to allow the two separate specialty businesses to concentrate needed resources in focus on continued growth.

Craig Lemasters was elected President and CEO of Assurant Solutions, the division formally called Consumer Protection Solutions which will encompass the Company's credit insurance and debt protection administration products, extended service contracts and warranty's, and our international operations. John Owen was elected President and CEO of Assurant Specialty Property, which will include the Company's credit replaced homeowners insurance, manufactured housing insurance, and other specialty and property products.

Streamlining our reporting structure, Craig and John along with CEO's of our other businesses will now report to Rob. All of our financial staff will now report to Bruce. And all of our legal regulatory compliancing government affair staff will now report to Jerome.

We continue to take a very disciplined approached to capital management, as we continually evaluate the most effective use of our access capital. We have continued our share repurchase program, and we bought back 2.8 million shares for $96 million, during the second quarter. And an additional 1 million shares for $37 million in July. For 2005, total of 4.5 million shares for about a $157 million through the end of July. Since the inception of our $400 million authorized program, we have repurchased 6.9 million shares for a total of $220 million. Excluding any repurchases after July 31 and any acquisition opportunities, we currently estimate year-end available capital will be approximately $500 million.

Our results and strength in management team advance our ability to continue to deliver value to our shareholders and to continue the broad spectrum of profitable growth opportunities to our leading positions in specialty insurance businesses. We're going to put our strength and management roster to work on the next part of today's call. Rob will be reviewing Assurant's overall results as well as the results of Assurant employee benefits, Preneed and Corporate. Don Hamm will review the results of Assurant Health and Bruce Camacho will review Assurant Specialty Property and Assurant Solutions. Rob?

Thanks, Kerry. One key goal we are focused on is achieving and sustaining ROEs that are in the top quartile the insurance industry. I'm pleased to report our annualized operating ROE for the first six months was 14.2%, on a four quarter rolling average basis, our ROE was 12%. These ROEs are calculated excluding accumulated other comprehensive income from shareholders equity. We're pleased with the improvements to our ROE and we will continue to strive to move it higher. In the second quarter, net operating income defined as net income excluding investment gains or losses and other unusual items increased 28% to 125 million, and for the first six months increased 30% to 240 million. Net operating income per diluted share was $0.90 in the second quarter, an increase of over 30% over last year. On a year-to-date basis, net operating income per diluted shares was $1.71, a 29% increase over pro forma net operating income per share in 2004.

The second quarter included a couple of one-time or unusual items that increased income. Investment income in the Preneed segment included a pre-tax income of 9.4 million, realized from a real-estate partnership. In the Corporate segment, we recorded a tax benefit of 5.2 million, resulting from an IRS technical correction to the tax calculation on repatriation of dividends under the American Jobs Creation Act. The net impact of these two items is an increased net income of 11.3 million, or $0.08 per share. Although, we've seen very strong growth and profits, net earned premiums were relatively flat at 1.6 billion for the second quarter. However, we did see growth in many of the product segments we've targeted for growth, especially in the Solutions and Specialty Property segments.

Net investment income increased 12% to 177 million for the quarter and 10% to 341 million year-to-date due to increased assets under management. Excluding the real-estate transaction, I mentioned, the quarter and six month increases are both about 7%. Key drivers of this quarter's success include Assurant's specialty property, which had a very strong quarter due in large part to the continued outstanding loss experience and also to good premium growth. Assurant Solutions had significant premium growth internationally in both extended service contracts and credit insurance, good growth in fee income and good growth in investment income resulting from increased assets in the extended service contract business. Our proven expertise in risk management was again demonstrated at Assurant Health, where we delivered another quarter of record low combined ratios and strong profitability.

However, due to competitive pricing, we continue to see a slow down in new sales and membership. Later, Don will provide more details about the strong financial results of Assurant Health. Assurant Employee Benefits had 30% decrease in net operating income in the second quarter of 2005 to 9.8 million. The decrease is primarily from the disability business, which can show fluctuations from quarter-to-quarter. Although new clients incidence continues to be acceptable and much better than during the 2001 to 2003 timeframe, we had a slow down in the number of claims closed. This was largely driven by fewer deaths among disabled insureds. The number of claims closed for other reasons including returned to work, continues in line with our recent experience. We do not believe our disability results this quarter are a change in trend, but we are vigilantly analyzing our experience.

Our total premium grew 2% to 316 million compared to the same period in 2004, driven by growth in our group disability earned premiums. The dental market place remains highly competitive. We've targeted the small case market and voluntary products for growth. We are pleased by the steady increase in the number of applications from smaller groups, which should translate into future sales. In addition, the growth in voluntary product sales continues to outpace those of traditional employer paid products. Assurant employee benefits would benefit from increasing interest rates as well as the stand employment growth in the small to mid-sized employer market. Assurant Pre-Need, the market leader in Pre-Need funeral insurance had net operating income of 12.8 million for the quarter, up 27%.

Year-to-date net operating income of 19.8 million was up 19%. Investment income includes 9.4 million that came from a real-estate partnership. This item added 6.1 million to net operating income for the quarter and year-to-date. Net earned premiums continue to decline with the decrease of 8% in the quarter and 6 months. We have targeted our FCI business in Canada for growth. We continue to see good sales growth in Canada, where earned premium increased 30% and new sales increased 19% over the second quarter of 2004. Although FCI sales and premiums are down, we are piloting several programs to improve production. At a macro level, Pre-Need results continue to be negatively impacted by the low interest rate environment. The corporate and other net operating loss was 3.3 million for the second quarter compared to 3.8 million last year. Corporate improved due to a $5.2 million benefit related to the tax clarification on the repatriation of capital from overseas.

Corporate expenses include cost of being a public company such as Sarbanes-Oxley 404 clause and the variable expense of our stock appreciation rights plans. Driven by the 7% increase in our stock price this quarter, Sar's expense was 5.8 million pre-tax, compared to 1.1 million last year. We will be adopting a fixed accounting methodology for Sar's at the beginning of 2006. Amortization of deferred gains from business sold through reinsurance declined consistent with the run-off of policies associated with these businesses and represented an after-tax decrease of 1.6 million in net income, compared to last year second quarter. Measures of our improved performance are also evident in our strong balance sheet, where our debt-to-capital ratio declined to 22%, our invested assets and cash and equivalents grew to 13.1 billion and our book value per diluted share excluding AOCI grew 6% to $24.99 from $23.57 at year-end. Kerry?

Thanks, Robert. Showing continued momentum, the drivers of our results this quarter were Assurant Health and Assurant Specialty Property and Solutions. Don will review our Assurant Health results and then Bruce will review Assurant Specialty property and Assurant Solutions results. Don?

Thank you, Kerry. Our strategic focus on Assurant Health for more than 100 years has been to provide leading health insurance products and services to individuals and small groups. Our core strength and acumen is focused on risk management. Our strength, that is a necessity unique to the individual medical segment of the health insurance market. Our focus has once again paid off with another quarter of strong results.

Assurant Health's net operating income in the second quarter of 2005 grew 24% to 49.4 million and climbed 29% to 99 million year-to-date. Growth in net operating income was a result of our excellence in risk management, which led to a record low combined ratio of 89.5%. We continue to see enrollment go slow throughout the market. The competitive dynamics of both individual medical and small group continue to be intense with national and regional players entering new markets and offering lower rates as well as high commission bonuses for HSA sales. Net earned premiums of 544 million this quarter were down almost 3% compared to last year. Small group premiums continue to decline as we remained disciplined to sell only profitable new business. In the individual medical, which is our primary focus, premiums grew more than 6% as a result of high renewal rates and higher average premiums per member, offset by fewer first year members.

Our Right Start product is one of the bright areas where we are seeing fast growing individual medical sales. This is a lower cost, lower benefit product that is aimed at the sizable uninsured market. Right Start was developed as a result of our consumer research to learn what these customer's want in a health policy. We began introducing this product in late 2004. Even though it is still not available in all states, Right Start represented 20% of new individual medical sales in the quarter.

During the second quarter, we added an HSA option to our Right Start product. Individual medical sales with a Health Savings Account continued to represent about one-third of new sales. At the beginning of the quarter, we added investment, option features to our HSA product offering and we continue to work with agents to ensure they have the tools to educate consumers on this new product. As HSA account balances grow, we are optimistic that HSAs will also provide improved persistency. For example, although it is too early to draw a conclusion, early experience indicates a five-percentage point improvement and persistency for polices having a Health Savings Account.

So, individual medical is often an infrequent sale, being sold only one or two times a year by an insurance agent, both breadth and depth of the distribution is critical. During the past five years, we have developed exclusive relationships with several national insurers, like State Farm, to distribute our products to their members. In addition, we have expanded both direct and Internet sales. Over our long history, we have expanded our distribution to now reach more than 165,000 agents. After a long relationship, USAA has changed their strategic direction and decided to no longer offer medical insurance to their members. USAA currently represents only about 2% of our earned premium. We will continue to service existing business, and we will receive informal referrals for a new business.

In summary, Assurant Health continues to deliver an excellent combined ratio. These results once again validate our strong risk management capabilities. Our challenge is to grow the individual medical business in a competitive marketplace. We will maintain our pricing discipline to generate revenue growth, while maintaining attractive returns. We expect future profitable revenue growth we generated as to innovative new products, such as Right Start, the continued expansion of Health Savings Accounts, and new distribution opportunities. These distribution opportunities include marketing our individual medical products directly to consumers. This new approach to distribution appears to have the potentials to make a meaningful contribution to new sales. We are refining and optimizing our marketing approach and expect to complete the test before the end of the year. Our Assurant Health has a strong foundation built upon our continuous focus on risk management, broad distribution, and an experienced management team.

Now, I'll turn the call over to Bruce.

Thank Don. It's great to be here and join the executive management team, in my new role as CFO. Let's jump right in and finish all prepared remarks with a review of Assurant Specialty Property and Assurant solutions, the businesses I was a president of for the past five years. While the splitting of the two businesses, Assurant Specialty Property, and the new Assurant solutions will not be complete until some time in '06, I am excited to highlight some aspects of the two businesses. These businesses are firing on all cylinders with strong net operating income of 58.6 million in the second quarter of '05 up 52% from the second quarter of '04 and up 44%, to 113.3 million year to date.

This was our best quarter ever. Net earned premiums for the quarter increased 4% to 637 million. Excluding the continued run off of our domestic credit insurance premiums, net earned premiums for the quarter increased almost 9%, comparing second quarter of '05 to the second quarter of '04. We are seeing good growth in our specialty property businesses with gross return premiums up 6.4% in the quarter compared to the same period last year. Our other areas of focus are the domestic extended service contract business, which increased almost 14% compared to the second quarter of last year and our international operations increasing almost 38% comparing second quarter of '05 to the second quarter of '04. Domestic credit premiums continues to decline but at a slower pace down 8% compared to the same quarter last year. Net investment income grew as a result of greater assets primarily from our growing extended service contracts product lines.

Fee and other income was up 14% for the quarter to 40.9 million and 18% to 77 million for the six months. These fee increases are from the steady growth in debt deferment fees and from the extended service contract product lines. In Assurant Specialty Property, all of our products had excellent loss experience. This is partly attributable to the generally mild weather and having no catastrophes during the first half, as well as several actions implemented over the past two years that are generating positive results. For example, moving claims adjusted in-house has sped up the claims process which results in happier customers and ultimately lower claims.

July is a very early time to see major hurricanes but we have already seen two and eight main storms. Hurricane Dennis struck the Gulf Coast but fortunately did not impact areas where we have large exposure. At this time, we predict total losses from Dennis would be less than 10 million pretax. Hurricane Emily did very little damage in the US and we expect very few claims. As of June 1st, we renewed all the cash fee reinsurance programs with greater protection and at only a slightly higher cost.

I'm looking forward to my new roll as CFO of Assurant and I hope to meet many of our investors in the coming quarters. I'm very pleased to be trading over the Solutions and Specialty Property businesses to Craig and John. They have been running these product lines for several years and know that businesses. I am confident that they will both do an excellent job of growing these businesses profitably. Kerry?

Thanks Bruce. We think the numbers are saying a picture of real value for investors and sustained value for the future.

Now, operator we are ready for questions.

Thank you, the floor is now opened for questions. [OPERATOR INSTRUCTIONS] Jimmy Bhullar, J.P. Morgan.

I just have a couple of questions. First if you could just address what do you regard as maybe unusual or non-recurring items in this quarter, I counted about $0.08, so if you could talk about that? And second Don, if you could just speak about competition in the health business, we've heard comments from you and from competitors that the Blues are getting aggressive in the business and also some other national players are trying to move into the individual health business. If you are seeing more competition, how long do you think you can sustain margins at this level without sacrificing topline growth? That's it.

Rob, you want to take the first question.

Sure, Jimmy we talked about two unusual items during the quarter that accounted for about 11.3 million of net income. Those two items were investment income and the pre-need segment of 9.4 million on a real estate partnership, that's a pretax number. And then the tax benefit of 5.2 million from the correction under the Americans Jobs Creation Act. Yes, Jimmy, as you commented it is a challenging competitive environment and we do see the national players and the Blues being more aggressive. Assurant Health has a track record of success. That indicates we are disciplined and conservative, and the thing is all the competitors are facing the same challenges, but we feel we are well positioned, we are focused only on individual medical and small group, we have less distractions, we have an advantage in risk management, and we have broader distribution particularly having that national scale. And what we are doing to increase our revenue growth is, we are looking at new products such as RightStart. We are looking into new distribution approaches such as direct. And in particular, we have a very rigorous pricing process, every other month we pull together all the information, claim experience, sales trends, competitive position, and from that we target locations where we believe we have the opportunity for profitable growth. So, we are responding, we believe, appropriately to this competitive environment, and we will keep our discipline and do our best to grow profitable business.

Okay. And just as a follow-up, if you could just talk about the direct-to-consumer campaign again a little bit. And also there was an article in the press during the quarter that you were lowering rates in HSAs and I think that was a misrepresentation, but if you could just talk about how rates are holding up in HSAs? And that's all I have.

Direct-to-consumer, this was a pilot that we began late last year. And we wanted to test out how much additional business we could drive through going direct-to-consumer with television ads, and we think that this distribution channel has potential. What we are doing is we are analyzing the results to determine how best to optimize our investments. It takes a while to have the experience work its way through as far as determining what advertising leads to what sales. We expect to continue the test throughout this year and make a decision at the end of the year as to how we are going to invest in this in the future. We are optimistic that we can see -- that we see potential from this channel. With respect, your second question, once again Jimmy?

Just on the HSA pricing, I think there was something in the press in the second quarter saying that you had lowered rates, and you mentioned during -- you had mentioned that there was actually a misrepresentation but I just wanted to ask you how rates are holding up in the HSA business?

Oh! yes. There was, we believe, a misrepresentation. At Assurant Health, we are very disciplined. Every other month, we go through our pricing where we look at our clients' experience, our sales, our competitive position, and we make adjustments throughout the -- nearly 1000 different zip codes that we sell our products in, and it's inevitable as we look at this that we see opportunities to take rate down where we can generate profitable growth, and this place is where we take rates up a little bit. That article just identified a few areas where we took rates down in the quarter but didn't mention all the places where we took rates up. Generally, our pricing is following our medical trend and we just periodically make adjustments to refine how we are approaching the market in these locations.

David Lewis, SunTrust Robinson.

Good morning, thank you. A couple of questions on solution side for Bruce. I guess you are starting to see the impact of the GE extended warranty business coming through. Can you give us an idea if we should anticipate the extended warranty business growth to continue to accelerate off that 12%? That's number one. Two, the investment yield was up 41 basis points since solutions, what was driving that, is it just the rise in short-term rates? And lastly, can you indicate whether you're close to bringing on any new major US retailers?

Okay. First of all, the growth in the ASC, it's -- yes, definitely we have got GE coming on board but it's still not, it's probably not even halfway there yet, so we still have a lot more to go on the earnings side, because it's a slow earnings. But there's also a lot more business, a lot more than just GE on the ASC side, there is a lot more business coming in from our retailers overall. We have seen tremendous good consumer spending and that definitely bodes well for us in the extended service contract business. (indiscernible) is full. Regarding bringing in line large new retailers, we really don't comment on that, but we are -- obviously continuing to work on that continuously. Regarding investment income, it's definitely the short-term rates, you know, we have a much shorter portfolio than most of the other portfolios and the short-term rates, definitely the change from last year versus this year, I guess almost 2 points, and it definitely has really helped us a lot and our portfolio.

Septimo, Goldman Sachs.

In general, what is your view on the new perpetual preferred securities that other life insurance companies have issued, and would you consider issuing perpetual preferred securities to buy back stock?

Rob, you want to handle that.

Sure, certainly we have carefully viewed and analyzed this new class of security which we know has equity credit within you know, the spectrum of different offerings that are available. As Kerry mentioned we are -- we have a very strong balance sheet right now with excess capital we're projecting at year-end. We constantly are monitoring all the different alternatives that are available, and if the time were right, we would consider this in our tool kit.

Steven Schwartz, Raymond James.

A couple of questions, on the health side, was the reserve release in the quarter, was that anything really different that it's been in the past?

We disclose annually in our 10-K the history of our claim reserve development. And over the past three years it has consistently been favorable. The first half of this year appears to be developing consistently with prior year, with slightly lower development in first half of 2005, compared to the first half of 2004.

On the Assurant Solutions side and the restructuring, if I remember correctly, you have got operations in Atlanta, that was the old American security and operations in Miami, that was American Bankers. Does the restructuring that you are doing on a reporting basis, is that going to affect physical properties at all and might we see some charges coming out of that?

Steven, it's Bruce. No, it does not, it does not affect physical properties. We have got, we have retooled those locations from when you knew it. Basically, in the solutions segment you have got the extended service contract business domestically. You have got the debt protection, and credit insurance business domestically. That's the primary locations for those two, the SG business is primarily located in Atlanta, but it does have some people in Miami. The primary location for the debt protection and the credit insurance business is in Miami, although we do have some people as well in Atlanta, and, we have really stepped those operations up. And then all the international, basically, obviously it's run primarily out of Miami's support, but it's obviously overseas. In specialty property, you have got the -- most of our manufactured housing type of business is out of Miami. And, then we have got most of our creditor-placed homeowners businesses out of Atlanta, although we have got service centers throughout the country. So, we are not going to expect much in terms of expenses at all. We have been moving down that path ever since we went public in '04. So, this is just more of a natural progression to ensure that we sharpen our focus and we get ourselves better positioned for growth.

And, just a last question for Rob, the press release would suggest that ex the -- I guess you would call adverse mortality and employee benefits that the numbers would have been about the same, versus a year ago. Is that correct?

I think they would have been in line more with -- yes, I would say that's in the ballpark, absolutely.

Okay, I just -- as a comment, I would give yourself little bit of a break. A number of companies would report that as kind of incremental non-operating and non-fundable stuff.

We have a very conservative orientation.

John Nadel, Fox-Pitt.

Just in follow up to that. I guess, you don't want me to take my numbers up any higher. I guess, I got a couple of questions for you, Kerry, I think in your opening remarks, you said that you think that excess capital, ex any additional redeployment past, you know, at the end of July would total above 500 million at the end of the year. And, I think if I recall your comments from your Investor Day the target was 500 million and that was ex any spending. So, if I look at the share repurchases you have done, you are at about a $100 million or so in the second quarter. Does that mean we are generating excess capital a little bit faster than you otherwise thought, or is that just reflective of the repatriation from Brazil?

You know, your are exactly right, we are generating excess capital more than we had estimated back in March, at the Investor Day. And again I think it reflects our efficient capital management. We extract the excess capital out of the Companies quickly whenever it comes available. This was not related to the repatriation; it was actually Puerto Rico at the end of last year.

Okay. Terrific, and if I look at the Solutions gross written premiums, is it fair or unfair to compare June 30 to March 31. Is there seasonality in how that gross written premium comes in? Should we be focusing solely on year-over-year comparisons there?

I will ask Bruce to answer that. But let me just first say that looking at any single quarter, particularly in the Solutions and specialty property businesses can be a little misleading, because when new arrangements are implemented, a number of weeks in the quarter can have an impact. There can be sort of blips from quarter-to-quarter associated with customers catching up and so forth.

Yes. John, absolutely the best way to look at it is quarter-over-quarter, because the business that we do both at Solutions and Specialty property, because it is more cooperation to cooperation. (indiscernible) put on a new client. We expect that to continue (indiscernible) their production so if you look quarter-over-quarter, year-by-year you will see that the addition of new business which we continue to do because of the growth has been stimulated from both internationally extended service contract as well as the specialty property. We will continue to build quarter-over-quarter. As Kerry said, there is seasonality in every quarter. So quarter-over-quarter is the best comparison.

That is really helpful and I guess just one last subject, since we got done on the call. I guess I have got a couple of questions about the health side. I guess the biggest question I have for you is if we think about the commissions that you guys are willing to pay for new sales and I think Donald in your commentary, you talked about some bonuses and higher commissions from some of the competition. How big is that differential and how meaningful do you think that is to the overall profitability of sales that are being achieved by your competition and that you are avoiding?

One of the unique things about Assurant Health is our broad distribution. We have nine different distribution channels and each channel has a different pattern of distribution. Some of our distribution we are using aggregators such as mansion generations (ph) and they receive an overwrite on top of the writing agent commission and different channels, like direct channel for instance we are paying people salaries with bonuses as they achieve sales. So, it is really hard to generalize. We have seen more people becoming more aggressive writing products. They are using rate and they are using commission. We are going to evaluate the best way to proceed as we always do every other month; we look at our pricing, competitive situation and if we think adjustments and commissions make sense for a particular channel, we will definitely do that.

I would add that, again we think is specializing wins in markets. We are focused on the individual medical business. A number of the recent entrants over the last few years are not specialists in individual medical. We do all flavors, companies and they may cause some disruption in the market. But we think in the long run, our sound approach, the specialized nature of the individual business with its rating, its individual medical underwriting; again our skills we are expert in that, a lot of the competitors I think have a long way to go.

And I guess just one thing. I would love to see going forward; if you don't have it that is okay. But we would love to see this data point going forward and that is, maybe if you give us the policy counts, especially as we think about rate start and if that starts to take over in terms of your sales growth with a lower premium. I think that would be helpful to see how that is growing versus maybe other medical products that you are selling.

Okay. We will take that under consideration. We are always evaluating, you know what we should be adding to our financial supplement that would be the most meaningful and that the largest number of people are interested in and we will consider that, thanks.

Adam Klauber, Cochran Caronia

Good morning, thank you. Number of questions. On the Health segment the loss ratio obviously came down and you said reserve releases were lower than they have been previously. What's driving that overall loss ratio, is there, you know, the possibility of shift in the mixed more individual and also how sustainable is loss ratio in the 60 to 63% range in the near term?

Yes, there definitely is a shift in mix towards more individual and that does impact it, because particularly the early business, first couple of duration individual medical business, does have a lower loss ratio than the ultimate individual, the more typical small group. So, you know, definitely as we increasingly have proportionate individual medical that does drive down the loss ratio. As I said in my prepared remarks, it's just managing the business with a lot of focus on understanding the math. We have a very impressive multi-financial cycle, where we analyze every business, piece of business every month, pulling apart by location, duration, benefit type of the products we are doing and making sure we are pricing appropriately and that we keep our renewal business, the good renewal business in force. So, it's really a ongoing nature of our way of doing business that keeps those loss ratios managed. As far as the sustainability, that is tough, we are attempting to do that, and we will see how it unfolds.

Okay. Also, on the Health expense ratio, I thought a sale slow down expense ratio tends to come down initially with the sales, that seemed to pop up this quarter compared to last quarter?

We do not deck any expenses. So, when we do so, new individual medical business, we incur the underwriting expense right away. We reflect a higher first year commission that's typical of those products. So, actually I think there is a slight (indiscernible) expenses based on the amount of new business, but not dramatically so.

I might add, it's one of the reasons we emphasize the combined ratio as opposed to the loss ratio or the expense ratio separately because the mix of business, the duration that the business is in, all of those are an influence on in a specific loss ratio or expense ratio, but when you put it all together, the expense, the combined ratio tends to be much more of a level, normalized indicator.

Okay, questions on the solutions business. The extended credit -- extended service contract business was obviously strong, fee revenue has again pulled up a pretty good number. Are those two linked, if we see strong expended service, growth in the future, will we continue to see a high-level fee growth in solutions?

Adam, yes, absolutely, it's one of the drivers of fee income on the extended service contract or warranty business, part of it goes through that line but also goes through the net and premium line but you have also got debt protection, administration is also growing in the US, and that goes to the sealine well. So, it's a big -- it's firing on all cylinder and it's really good overall growth.

Okay. And last question. Rob you had mentioned that the Sar's expense jumped up for the quarter. Could you give us some idea what we could expect going forward, was it higher than usual, you said it in 2000 you will try and do it on an even basis.

Sure. Let me just run you through what our Sar's charges have been on the last six quarters.

That would be great.

All right. First quarter of '04 was 7.1 million, followed by 1.1 million in the second quarter, in the third quarter our stock price actually dropped a little bit and we got a $200,000 benefit, these are all pre-tax numbers. In the fourth quarter, the charge was 11.2 million, this year first quarter $9.2 million charge, second quarter $5.8 million charge. Now, the way you can think about this is well, we made some changes and went to a stock settle plan, so people now when they decide to exercise things will have stock settled to them and you can think about this that for every dollar our stock price goes up, we will incur a $2 million pre-tax charge.

Jukka Lipponen, KBW.

First of all in the Employee benefits segment -- for that segment, how we should we think about the expense and loss ratios going forward?

Within our Employee Benefits segment, we have a mixture of different products, as well on the disability side we sell business both through our own sales representatives and through DRMS, which is our turnkey disability operation. When you look at the turnkey disability operation it should have higher benefit ratios but lower expense ratios. When you look across the different products, I would say that the dental life and disability products all have slightly different components of benefit loss ratio versus expense ratios and again this is something we've looked at for the next expansion as the statistical supplement as how can we covey that more fully to you and I would anticipate that's something we would consider next year.

So the message at this point is we should focus more on the combined ratio.

I think that's right.

And then my other question for Kerry is in terms of the M&A environment are you seeing acquisition opportunities or can you comment on that?

We are active in the M&A environment. We're always looking at various items. Again our focus is trying to build our existing businesses either through investing further in them, acquiring small competitors, acquiring closely related businesses that would give us new capability or new distribution or sell forth. We're looking primarily in the 100 to $300 million range. We have looked at a number of things this year, as you know we've not executed anything yet, but are still optimistic on that front. We're very cautious, we're conservatively oriented and when we do make a deal we want it to be a good one.

Kelly Nash, KeyBanc Capital Markets.

In Solutions, I wonder if you could comment about any new contracts that you happen to add in the quarter on the extended service contracts side.

Kelly, I don't think I want to comment on any of the new contracts, but we have added business not only on extended service contracts but across all fronts, Solutions and Specialty property.

And I would comment, we're seeing a lot of growth internationally in extended service contract as well. So, we're very optimistic about the prospects there.

Okay and then on the favorable results, could you discuss -- was there any prior year reserve developments in there, and then also I know you mentioned there was no cap losses in the quarter. I think that compares to about 2 million in the second quarter of '04?

Yes we had very little caps last year at the same -- for the first 6 months a couple of million, but no favorable loss development there, we just -- basically just good results, it's good -- all the premiums are up on the property side from new business, and continued growth in the existing business, we just really are -- an overall, improved overall performance across all the property segments, as well as, when you look at the new solutions segment, it's international, service contracts domestically, and debt protection and administration, the fees, it's also improved the overall performance and also we're just really are focusing on our areas, the areas that we've kind of laid out in the past. We continue to look in the solutions area primarily at the extended service contract business domestically, that's a clear area of focus and its coming through clear with the fee income, premium growth, and internationally both for credit insurance and for ESC, its coming through very clear, those are the focus areas. On Specialty property, we continue to have good growth in our Creditor-Placed Homeowners and our Manufactured Housing lines, which are our clear focus areas of growth.

Let me add, this is Donald. On the health side, we did have a favorable development that did occur in the second quarter as has been typical for us over the last several years.

Thanks. And then, just following up, are you seeing any increase in competition in the extended service contract business?

No, not really. It's a very fragmented market. Our business model is very unique. We look at the entire value chain, and we clean all aspects of it, both the marketing side and sales distribution side, the underwriting side, the administration side, and in the whole logistics and parts side. We really don't see players doing all that we do under one shop and one of the benefits I think we give based on our business model that really positions us better for growth is that we are very much laser-like focused on this area for our clients, so they only have to deal with one party, so it's a corporation-to-corporation that can bring all the expertise of extended service contracts to them with one management team. And we really haven't seen it, we have seen a lot of disarray right now in the competitive landscape, which we like.

And I'd add to that, you know, we really are the only major competitor that uses the sort of fully integrated model, be it both the administrator and the insurer, number of competitors, or only administrators and use somewhat passive insurers to write their business. And we feel the integrated model is superior and certainly we mentioned the future shop in Canada thus by operation which we use to have on an administration-only basis and now do on a completely integrated basis, based on I think the appeal and advantage of that to the customer. So, we are very optimistic about the way we do this, our focus on it, and the growth potential. And I think it's a great example of our specialty businesses and the skills that we bring to the table and administration and risk management and managing client relationships.

And then finally, could you give us a sense on voluntary products and employee benefits, kind of how much they are up, maybe either year-to-date or on a quarter basis. And then, on the health side, what kind of impact we are really going to see as USAA kind of rolls off in terms of how, what kind of growth had there been or how should we think about that impacting revenues going forward?

Bob, you want to comment on the voluntary --?

Sure, if we look at our voluntary sales on a quarter-over-quarter basis, they are up about 22%, year-to-date they are up about 6%. So, we have seen continued growth in the voluntary arena. Don?

With USAA, they decided to pursue a new strategic direction, decided to cut back a number of services they are offering your members. We are going to keep managing the renewal block and currently the total block of USAA business is less than 2% of our earned premium. We realize the situations like that do occur periodically whatever reason, our partner goes in a different direction and that's one of the reasons we have more than 14 different ongoing national accounts, including such companies is Trivent (ph), American Express, Mutual of Omaha, New York Life, and Western & Southern. And also, we are constantly sourcing some new opportunities. For instance, we are right in the midst of filing a new program. We are starting to work with Edward Jones and we are having a referral program for their -- our brokers, investment reps, and there is more than 9000 investment reps for Edward Jones. So, we are optimistic that this title will work well and that will allow a good source of business.

In fact, Bruce, USAA has some business for solutions, doesn’t it?

Yes, one of our new (indiscernible) with USAA this quarter was we did, we just got awarded the debt protection and administration business for USAA this quarter.

Great. Thanks for the information.

Edward Spehar, Merrill Lynch.

Good morning everyone. A few quick questions, I guess. On the health side, the reference to better persistency -- early indications of better persistency in HSA, was that 5 points or 5%?

It was 5 points, Edward. The actual numbers are for people having a health savings account on top of a high deductible plan, 77% of those people persisted during the first year. For those same high deductible plans without a health savings account, we do have some of that business, 72% of those people persisted. So, it was a 5-percentage point improvement in persistency.

And have you factored this in pricing yet?

We are now - not yet. This is an early trend. We want to analyze some more data before we conclusively take that into our pricing. But as we get more, more experience, we will gradually reflect that in our pricing.

Remember that we just started and HSA is at the very beginning of 2004 and we were the first to market with the product but those first HSA's just going through their first renewals and it takes a few months. So, at this point, there is a limited number of months of data available but we had suspected all along that there would be improved persistency and I think certainly if this 5 percentage point differential holds, it will be somewhat greater than we would have expected. But again, it is very early data and some of those people certainly the far early, you know, were people who would well inform their agents, were well informed but we will be excited to see that trend develop.

And then on the employee benefit side, related to the worse than expected mortality, was there any adjustment for future quarters or was this just experience in the current quarter. I think you said there was no change in the long-term expectation?

That is correct. It is just when we analyzed all of our claim closures, we kind of expect that there will be people either going back to work or benefits expiring or claims clubbed because people buy and in this quarter, we've just didn't have any of our current claimants die at rates we've seen in prior quarters.

And then on the solution side, two quick questions. In terms of changes referenced in the reinsurance little more coverage, could you give us some indication of what you would think that means for normal cats for a year and perhaps in your heavy season in the third quarter?

Surely. We hold the first 25 million retention and the models that we run is -- there are different models, so depending on what models you look out. We bought coverage depending on what models you look at anywhere (indiscernible) 1 in 300 year event and a 1 in 500 year event and last year, we were probably around 1 in 250 to 1 in 350 event. So, we are looking at those same models. We moved up our cat overall reinsurance program, the top ends of it by layer. We've got only in the first 25, we got -- the layers that go all the way up to 210. That's depending on the models you are getting, 300 or 500-year event. And if you are in Florida, we have the benefit also with the Florida cat fund, and with the Florida cat fund we have another, although it is by structured entities by another 100 million there if (indiscernible) in Florida.

And just in terms of how you would think about just the dollar impact on sort of annual basis and instead of (indiscernible) quarter? It is normal cats obviously and what--?

The last couple of years (Multiple Speakers). It is quite hard to have a normal cat year, what is a normal cat year you know. But we kind of modeling, we expect these in our book of business to be anywhere between 20 and $30 million worth of cash. The last couple of years obviously have been quite, you know, obviously it is always the third quarter and the fourth quarter that really impacts us. But in 2003, the third quarter was quite light, it was 6.5 million of impacts. In '04, it was 49 million, because we got that on unprecedented (ph) season and then we had continued development even in the fourth quarter of another 10.5, I mean in '04 and in '03, it was only 7.3. So, when we look at our book, it is unusually (indiscernible) book. We know we are basically taking risk from all of our portfolio clients anywhere they have exposures. So, we model that in but we obviously don't expect -- you can't take all results for property and just extrapolate and go times forward. You always have to be prepared for the third and fourth quarter event which we are and it is in our results that we kind of expect that and that is how we kind of forecast internally

Okay, thank you, and final question, do you -- can you give us just any sense of how much of the GE extended service contract business is already recognized in the revenue this quarter?

It's only about half of it, it's only about half of it going through this quarter, because when it's up fully and running would probably be towards the end of ' 06, and this is considering it being a just a steady book of business, and obviously we are hoping that it will continue to grow as well, so it's only about half of the business that's kind of earning out right now the rest of it is hung up in UPR (ph

Any range of dollars that you want to give?

No, we don't really get that out on any one account.

Thank you.

Joshua Shanker of Smith Barney

Hello gentlemen. Thank you for hearing my question. Every thing has mostly been answered, first question I have pertained to sales in the Preneed business, what's driving sales declining in Preneed, I realize that income is one thing, but sales in general I'm more concerned with?

This kind of breaks out by channel a bit, if we look on the independent side of the business, we took action against some accounts, where last year that were not meeting our pricing targets, and so we stopped producing with them. That's all part of our very disciplined focus on profitability. On the SCI side, you know SCI obviously is a very valued client of ours, they have had some of their own priorities that took some of their attention away from our products. However, we are very encouraged with the meetings we have had with them recently, and hope to restimulate that production moving forward. On a positive side we've had excellent growth in Canada as I've mentioned. So there is a variety of different factors here and interest rates being down can have an impact as well.

Why is that?

Well it can relate to substitute products that the funeral home, may or may not choose to use.

All right, very good. And then the other question, regarding the greater disclosure, you guys are terrific. In your calculation of investment yield, I'm just trying to figure out exactly what is that calculation for each of the segments? Is that based on the average of two invested asset groups during a quarter or is that trailing 12 months number? what is that investment yield number you have given out?

We have Chris Pagano over here, and we will let him answer that.

Yes, the calculation of investment yield is exactly as you have suggested, which is we take the average asset at the beginning and end of the quarter and divide by that the actual income earned during the quarter.

Terrific. Thank you for the disclosure, it's wonderful.

Thank you, at this time there are no further questions. I would like to turn the floor back over to the presenters for any closing remarks.

Thank you, everyone for your questions. In closing we are very pleased with our successes in the second quarter, and the actions we've taken to further strengthen our management team and to insure continued focus on our disciplined and profitable growth in our specialty insurance businesses. Thank you for joining us and we look forward to updating you on our progress.

Thank you, that does concludes today's teleconference. You may disconnect your lines at this time and have a wonderful day.