Assurant Inc (AIZ) 2005 Q3 法說會逐字稿

Good morning, ladies and gentlemen. My name is Elsa and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Assurant Third Quarter 2005 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a Q&A period. [Operator Instructions.]

It is now my pleasure to turn the floor over to your host, Mr. Larry Cains, SVP, Investor Relations. Please go ahead, Mr. Cains.

Thank you, Elsa. Welcome to Assurant’s Third Quarter 2005 Earnings Conference Call. Joining me are Kerry Clayton, our CEO; Rob Pollack, our President and COO; Bruce Camacho, our CFO; John Owen, CEO of Assurant Specialty Property; and Chris Pagano, our CIO. 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 third quarter 2005 financial results. The press release, as well as corresponding supplementary financial information, may be found on our website at 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 contained in our SEC filings. Additionally, this presentation will contain non-GAAP financial measures, which we believe are meaningful in evaluating the Company’s performance. For more detailed disclosures on these non-GAAP measures, the most comparable GAAP measures, and a reconciliation of the two, please refer to the supplementary financial information.

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

Thank you, Larry. Good morning everyone, and thank you for joining our third quarter call today. Assurant had an excellent third quarter, despite the worst hurricane season on record, including excellent NOI from every one of our Specialty Insurance businesses. The hurricanes had a devastating impact on the lives of many people throughout the Gulf. It’s during challenging times like this that I am most proud of the efforts of my colleagues to help ease the burdens of our customers. Our employees have been working long hours to examine damaged homes and provide support. They also generously contributed their own time and money to help hurricane victims get back on their feet.

During the third quarter, Assurant demonstrated strength in profitability, while continuing to build selected areas for the future growth of both profits and revenues. We will continue to pursue profitable growth that delivers shareholder value through our diversified Specialty Insurance strategy.

I wanted to bring to your attention developments on a discontinued line of business that we inherited as part of our acquisition of American Bankers Insurance Group in 1999. This business involved excessive loss reinsurance written in the London market between 1995 and 1997. After several years of very little tangible activity, the third quarter took a charge of $35 million, after tax, as a result of 3 developments. First, we recently settled one of our largest reinsurers in the program; second, we lost an arbitration with a large reinsurer; and third, we strengthened reserves for remaining exposures in the program.

To provide greater transparency, we also reclassified the second quarter $5 million after-tax charge that was reflected in the Assurant Solutions and Assurant Specialty Property segment to non-operating. As a result, the year-to-date total is $40 million, after tax, or $0.29 per diluted share. We are hopeful that our remaining issues relating to this program will be resolved in the near future.

Our capital management strategy is disciplined, focused, and continually evaluates the most effective use of our excess capital. Our priorities for redeploying capital continue to be first, reinvesting capital in our businesses to finance their growth; second, making prudent and opportunistic add-on acquisitions to build our Specialty Insurance businesses; and third, entering a new niche business. If we are unable to deploy capital in these ways, then we will return capital to our shareholders through share buybacks and/or dividends.

We have just about reached the end of our current $400 million share repurchase authorization. Since the inception of the program in 2004, we have repurchased 11.6 million shares for a total of $395 million. This total includes third quarter repurchases of 3.9 million shares for $145 million, and an additional 1.8 million shares for $67 million in October. I expect the Board to consider an additional authorization at their next meeting. Excluding any future stock repurchases and any acquisition opportunities, we estimate year-end available capital to be about $400 million.

I’m also pleased that we were able to bring Bud Koch, former Chairman, President, and CEO of Charter One Financial, onto our Board of Directors. Bud’s background in the banking industry should provide valuable insights to our Board.

As I mentioned earlier, I’m extremely pleased with our results. We remain very focused on future growth in identifying and developing the areas in which we have the greatest growth potential. I am optimistic about Assurant’s future and our ability to deliver profitable growth through our leading positions in Specialty Insurance businesses.

Now, Rob Pollack will review our operations; Bruce Camacho will review the financial results; and John Owen, CEO of Assurant Specialty Property, will review his business. Rob?

Thanks, Kerry. Despite the losses from catastrophes in the quarter, our diversified Specialty Insurance business delivered very good results in the third quarter, with NOI of $125.6 million, an increase of 71% over the third quarter 2005, and an increase of 43% to $370.8 million for the first 9 months. All businesses contributed to profit growth for the year, and most notably this quarter Assurant Solutions, Specialty Property, and Employee Benefits.

We committed to our investors that we would strive to generate ROEs in the top quartile of the insurance industry. I’m pleased to report for the first 9 months our annual operating ROE, excluding AOCI, was 14.8%. On a 4-quarter rolling average basis, our ROE was 13.8%. We believe this positions us in the top quartile of the insurance industry and we are striving to continue to improve our ROE as we grow our business.

We continue to see outstanding growth in profits and are focused on growing revenues and net earned premiums, which were up 1% to $1.6 billion for the third quarter. We’re working hard to generate growth in the core areas we’ve targeted for growth and we’re particularly encouraged by the results we are seeing in both Specialty Property and Solutions. Although we again weathered 4 hurricanes in the third quarter, Assurant Specialty Property and Assurant Solutions delivered strong profits. Excluding the hurricanes, our property loss ratios were excellent. We also had good premium growth of 8%, driven by the strong momentum in our extended service contract, creditor placed homeowners, and international operations.

Although they experienced a 5% quarterly decline in profit, Assurant Health continues to achieve strong profit because of its low combined ratio. Membership, premium, and sales continue to flatten, as pricing competition persists in our core individual medical market. We remain disciplined in our pricing and continue to see competitors lowering prices to attract business. Top-line growth remains our key challenge. We are responding by continuing to develop innovative products and services directed at the consumer-driven health care market. Examples include HSAs and Right Start. Over the long term, we believe our approach will generate consistent revenue growth.

Assurant Employee Benefits continues to take steps to align its core capabilities to be strategically focused on the growing small case market or companies with less than 500 employees. During the quarter, Assurant Employee Benefits had excellent profitability, primarily related to favorable experience in our group life business and continued good disability new claims incidents.

Our strategic focus on the more profitable small case market resulted in the termination of a number of underperforming large cases and the corresponding premium on those cases. We continue to enhance our products and services to meet the unique needs of smaller employers, their employees, and their advisors. For example, during the third quarter, we introduced substantial upgrades to our Internet administration system, which is being used today by over 50% of our customers. This percentage continues to grow, resulting in higher customer satisfaction at a lower cost. Growth and disability premiums were primarily driven through our partnerships with other insurance companies in which we provide turn-key disability products to their distribution systems.

Assurant Preneed also experienced growth in profits, primarily due to higher investment income, including income realized from a real estate partnership in the second quarter of 2005. We continue to work closely with our partner, SCI, the largest chain of funeral homes in North America, to pilot new Preneed sales programs across the country.

In Canada, we continue to see strong sales growth.

To summarize, our number one priority is to grow our businesses profitably. We are working to capitalize on opportunities we have identified in our targeted growth areas.

Now, Bruce will review our financial results.

Thanks, Rob.

Our third quarter numbers demonstrate our focus on profitable growth that Rob just referred to. Third quarter NOI, defined as net income, excluding investment gains or losses and other unusual items, increased 71% to $226 million and 43% to $371 million for the first 9 months. NOI per diluted share was $0.92 in the third quarter, an increase of 77% over last year. For the first 9 months, NOI per diluted share was $2.67, a 47% increase over the same period in ’04.

While we are very pleased with our results this quarter, net earned premiums were up only 1% to $1.6 billion for the third quarter compared to the same period last year. We are very focused on growing revenues but want to do so prudently. Net investment income increased to $175 million for the quarter and to $516 million year-to-date, due to increased asset under-management and a slightly higher average yield, as a result of the continued rise in short and intermediate term interest rates. Excluding real estate partnership income of $12.6 million, the average yield for the 9 months was 5.6% compared to 5.5% in 2004.

Assurant Solutions and Assurant Specialty Property reported very strong NOI of $53.1 million in the third quarter, up significantly from $3 million in the third quarter of ’04. Year-to-date, NOI of $172 million was up 110%. Growth in NOI is primarily due to lower net catastrophe losses, which were $20.2 million after tax, compared to $49.1 million after tax in the third quarter of ’04. Higher net earned premiums and excellent property loss experience, excluding hurricane losses, were significant contributors to higher NOI.

We also saw an increase in investment income and fee income. NOI was also positively impacted by approximately $6.5 million, after tax, in the quarter, and $11.1 million for the 9 months, related to favorable settlements in commissions and claims payable, associated with 3 clients, 2 of which had previously declared bankruptcy.

In these businesses, we had a solid increase of 8% in net earned premiums for the quarter to $648 million. Net earned premiums were reduced by $17 million for additional reinsurance premiums related to the hurricanes. Excluding this item, net earned premiums grew a very strong 10%. This increase is primarily due to growth in our extended service contract, international, and creditor placed homeowners lines, where we added several small new clients and benefited from overall growth in home prices.

Net investment income grew as a result of increased assets under-management, primarily from our growing extended service contract product lines. Fees and other income were up 4% for the quarter to $40 million, and 13% to $117 million for the 9 months. These fee increases are from the steady growth in extended service contract products and debt deferment fees.

John will provide more detail on the key strategies and ongoing financial success of Assurant Specialty Property.

This quarter, Assurant Solutions also delivered strong gross written premium growth of 26% in domestic extended service contracts. On international credit and extended service contracts, gross written premium grew 37%.

Assurant Health had NOI of $45.7 million in the third quarter, a 5% decline from the same period last year. For the first 9 months, NOI is up 16% to $145 million. Strong operating performance is a result of our consistent application of risk management skills to the individual’s health insurance market. Our combined ratio for the quarter was 90.6%, compared to 90.1% for the same period last year. Our combined ratio for the first 9 months was 89.9%, compared to 91.8% for the first 9 months last year.

Net earned premiums of $539 million this quarter were down 4%, compared to last year. Competition remains intense and we continue to see declines in membership in both individual medical and small group. However, in individual medical, which is our primary focus, premiums grew 4% as a result of higher average premiums per member. Small group premiums continue to decline, as we remain disciplined to sell only profitable new business.

Assurant Employee Benefits had an impressive 53% increase in NOI in the third quarter of ’05 to $22.8 million. The increase was led by favorable mortality in our group life business and continued favorable trends in disability incidents.

Investment income increased by approximately 12% to $41.9 million, including $2.6 million of income from a real estate partnership.

The expense ratio is up in the quarter, due to planned investments in technology that continued to enhance our customer service capabilities.

Total premiums of $307 million for the quarter were essentially unchanged. Premiums for the 9 months increased 4% from $933 million to $969 million. We continue to see growth in our disability business, written through alternative distribution channels as well as improved persistency in group disability and group life.

The sales environment continues to be competitive, particularly in the dental marketplace. As we maintain pricing discipline in this market and sharpen our focus on smaller cases, we expect to see some shrinkage in the amount of revenue coming from our larger cases, which will be reflected in our overall revenue growth rate.

Assurant Preneed. Our Preneed funeral insurance business had NOI of $10.5 million for the quarter, up 17%, due to higher investment income. Year-to-date, NOI of $30.3 million was up 19%, due to strong investment income, which includes $6.1 million, after tax, from a real estate partnership. Net earned premiums continue to decline with a decrease of 3% in the quarter and 7% for the 9-month period. We continue to focus on growing our Preneed business through SCI. Although SCI sales and premiums are down, we are piloting several programs to improve production, as SCI seeks to reinvigorate their Preneed sales.

We continue to see good sales growth in Canada, another area of focus, with an increase in sales of 27% for the first 9 months of ’05.

In the Corporate and Other segment, our net operating loss was $4.1 million for the third quarter, compared to $1.2 million last year. Corporate expenses include Sarbanes-Oxley 404 costs, as well as the variable expense of our stock appreciation rights plan. Our stock appreciation rights expense was $4.9 million, after tax, driven by the 5.4% increase in our stock price during this quarter. We will be adopting a fixed accounting methodology at the beginning of 2006, which should reduce the quarterly fluctuations in these expenses.

Amortization of deferred gains from businesses sold through reinsurance declined, consistent with the runoff of policies associated with these businesses and represented an after-tax decrease of $1.8 million in net income compared to last year’s third quarter.

In summary, we’re standing on a very solid financial foundation. Our balance sheet at the end of the third quarter is strong. Our debt-to-capital ratio is 22.6%, and stockholders equity, excluding AOCI, is $3.4 billion. We continue to see growth in our investment portfolio, growth in book value per diluted share, excluding AOCI, which was up 8% to $25.37 from $23.57 at year-end.

Now, let me turn it over to John.

Thanks, Bruce.

As the leading Specialty Property insurer, catastrophes are what keep us up at night. With 2005 being the most active hurricane season ever on record, we’ve had a lot of sleepless nights. During the third quarter, our employees worked many long days and remain committed to the communities we serve throughout the Gulf Coast. They all bring relief to thousands of Americans who were impacted by the devastation of the hurricanes.

After Hurricane Katrina, having spent 3 days driving 1,200 miles and meeting with many people in the Gulf Coast region, I can tell you firsthand that I’m very proud of our dedicated field claim staff. They left their families and entered the hurricane-ravaged areas within 24 hours of the storm so they could help our customers. Our home office staff continues to log many hours so our affected clients can reach us not only during the week but throughout the weekend.

The magnitude of this effort was unprecedented. 2004’s hurricanes generated about 22,000 claims, about 3 times the normal level. This year through September, we have already processed 25,000 claims, even before Hurricane Wilma. We have also been able to resolve over 70% of reported claims in the first 30 days. This is possible because of about 90% of our claims were handled by our own staff. This is a testament to our investment in people, process, and web-based technology.

You might ask how with record hurricanes, including the largest ever on U.S. soil, did we continue to see such good growth in profits compared to the same quarter last year. Well, our strategic focus on strong risk management insured that our reinsurance coverage, effective June 1st, was enhanced with greater protection. Our reinsurance was enhanced to include coverage up to $210 million of total loss, or $185 million in excess of a $25 million deductible per event. We had an automatic reinstatement of the same coverage for a second event. Immediately after Katrina, and prior to Rita, we proactively sought and purchased coverage for a third event, which also has an automatic reinstatement feature for a fourth event, if needed.

We also implemented a larger aggregate stop loss cover than last year to protect us against deductibles from multiple catastrophic events. The additional coverage was well worth it, as the Gulf was hit by Hurricanes Dennis, Katrina, and Rita, and the Southeast Coast was impacted by Ophelia. Most recently, Florida was hit by Wilma. So despite the fact that expected gross losses of $225 million in the third quarter were larger than the third quarter of 2004’s gross losses of $102 million, we retained losses of $31 million for the third quarter of ’05, compared to $75 million in 2004, $44 million less.

Due to our foresight in purchasing reinsurance for a third storm, our maximum net losses for Wilma should be limited to $15 million in the fourth quarter. We’ll pay an additional reinstatement premium for a fourth event cover.

I would also like to bring to your attention our future results will be favorably impacted by fees that we expect to receive from the U.S. government during the next 2 quarters for being an administrator of the federal government’s flood program.

As part of our risk management focus, we have worked hard to ensure a broad geographic spread of risk through client selection, and when necessary, limiting coverage availability on our voluntary coverages. We also have the history and experience to ensure that our rates are fair. I’m particularly pleased with the overall growth in net earned premiums of 8% for the quarter. A lot of this growth in our creditor placed homeowners insurance is driven by several new clients and the overall growth in home values.

Our business continues to innovate and is focused not only on the success of today, but building a pipeline of products to ensure profitable future growth. One example is our collateral protection insurance product for the automobile lending industry. We successfully launched a pilot in 2004. It validates our business model and our ability to leverage our current infrastructure and technology. We’ve added new clients in 2005 and are optimistic about the future of this and other new products.

In summary, our strategy is sound, our business continues to grow, and despite the ravaging impact of hurricanes this quarter, our business was a strong contributor to the success of Assurant. Our core strength of risk management will continue to ensure future success for the Company and provides a bright future for Assurant Specialty Property.

Thanks, John. And my personal thanks to you and all of our employees across the country who committed themselves to helping thousands of Americans who were in need of our assistance.

We’re delighted that our diversified Specialty Insurance strategy was able to deliver such positive results in light of some of the challenges we encountered this quarter.

Now, Operator, we are ready for questions.

[Operator Instructions.] David Lewis, Suntrust Robinson Humphrey.

Bruce, just to make sure I have it, kind of the unusual items in the quarter, the real estate partnership gains have been going, I guess, for the last 2 quarters. Are they more likely to come in the fourth quarter and into ’06? And what is the total, to make sure that I have that, is that just the $3.2 million in the third quarter? And then, secondly, the $0.05 from the settlement, are those the only unusual items?

I’ll let, I think, Chris handle the one on the real estate partnerships within the investment portfolio.

The gains from the sale of the real estate partnerships that flow through income totaled $3.2 million for the third quarter and $9.4 million for the second quarter. Going forward, our commitment is to grow the real estate portfolio, and we have made year-to-date 6 acquisitions against 3 dispositions, and our expectation is that we will continue to make some acquisitions throughout the rest of the year. We do, however, and will continue to be opportunistic as we see -- as the economics justify sales in some of our existing real estate holdings. And to the extent that that happens going forward, we will see some unusual items in [inaudible].

And, David, regarding the other kind of -- for this quarter, in exclusion Specialty Property, the only thing I highlighted was the $6.5 million that we picked up from some of the commissions and accounts payable and some plants that have declared bankruptcy in the past and we were holding reserves up for those, so that was an unusual item. And that would have been -- for the year-to-date, would be about $11.1 million for that same group of items and then, obviously, whatever you guys normally do with CATs or with the reinstatement premiums that we also disclosed.

Right, okay, just wanted to make sure. And on the catastrophes, Wilma $15 million max, but that does not include reinstatement fees, correct?

Correct.

And do you have an idea of what that might be and any thought on reinsurance pricing going into your next June renewal?

John, do you want to comment on that?

Sure. On the 2004 hurricane season, you know a book came out after the 2004 called “The Mean Season.” I think 2005 is going to have a sequel that is even worse than “The Mean Season.” Having said that, our primary focus has been on taking care of our insureds first and getting out there promptly and quickly and resolving our claims. At the same time, we are proactively out there working on our reinsurance for next year, and looking forward to 2006 and 2007 to see what we can put in place.

The reinstatement premiums, it’s a little bit early at this point in time to put a good number out there because we’re still getting claims as we speak. So I think it will be in that probably, if I had to put a number out there, $3 to $5 million range for reinstatement. But, again, that depends on the ultimate cost of the storm.

I understand. Thank you.

Jimmy Bhullar, JP Morgan.

Just on the unusual, if you could, do you consider this a normal quarter in the Employee Benefits business, because you did have favorable mortality and morbidity? But the earnings are much higher than you’ve had in the past. And if you could just talk about how much you think is excess from just favorable loss ratios. And then I have a follow-up.

Sure. Second quarter, our earnings were down a little bit. This time, they are up a little bit. What we want to make sure investors focus on is the longer-term trends, because you are going to see fluctuations in results from quarter-to-quarter, given some of these coverages are low frequency, high severity coverages. That being said, I think if you look at the overall trends, Bruce summarized it quite well. Our disability results continue to improve. That, combined with a continued emphasis on the smaller case end of the market, we think is quite a positive trend. On the other side, we’ve seen lots of competition in the dental business, which has put pressure on sales and revenues in that business. We are very focused on profitable growth and have not chased price, where we’ve seen competitors come in and buy share. That’s a constant issue going on in that business.

Our group life mortality, group life is what we term a complimentary product. We’ll write it and we’ll write it at our price, or we won’t write it at all. We have very favorable mortality experience in the group life line that contributed to our results, Jimmy. That whole combination, we’re optimistic about the Benefits business and its profitability, but it will see period-to-period fluctuations.

Okay, and just what’s your outlook for growth in the Health business? You have seen decent margin improvement, but the top line is slowing down. And just given declining membership in sales, what do you expect growth there to be over the next few years?

I think we’re very disciplined in the Health business. Again, our focus is on the individual market. We’ve talked about increasing competition there, which has led us to develop new product, such as Right Start, trying to tap into the uninsured market, which is 40 million people, about twice the size of the individual market of about 20 million. And we are seeing good sales at Right Start, which is not even in all of our states yet. We are also putting more emphasis on outside the urban areas where competition is less intense and continue to develop our HSA products. So, again, we’re optimistic about the prospects in that business and believe that some of our actions there are continuing to take hold. But we will certainly not let up on our discipline in pricing with the competition, particularly in some of the metro areas.

Okay, and just finally, have you seen any other -- how has the competition in the HSA market evolved over the last few quarters? Are more companies entering the business? And are they, like, entering below your pricing points or is the competition generally [inaudible]?

Well, remember the HSA is a wrapper to the major medical product. I think where you might see a big lift in HSA is actually adoption at the large case level. I don’t think there was much of that that went on in early 2005. But we believe there will be much more adoption with larger cases in 2006. I think the indirect benefit to us will then be publicity, which will make much higher awareness for individuals and I would anticipate we may see a pickup in the first quarter of next year.

John [Nadle], Fox Pitt.

A question for you on the tax rate. It appeared a little loaded to me this quarter. Am I reading something wrong or is that accurate?

It’s accurate. What we do is we true up our tax rate. It’s actually done year-to-date. It’s actually a true-up. So, I guess, it’s pretty normal. If you look at actual year-to-date, the 9 months, it’s probably much more indicative of the actual rate.

Got it. And just to clarify, what is that rate on the 9-month that you are accruing to?

I think it’s 31. I haven’t got it right in front of me.

Okay. I can do the calculation.

It’s probably off by a couple of -- 31.5. I’ll give it to you.

The taxes are accrued at a lower level and then they just happen to aggregate up. So your mix can also change.

Okay.

Let me give it to you. It’s 32.4 versus 33.2 last year.

Got it. Okay, 32.4 is what we’re looking at. Okay. And then just on the reinstatement premiums, just a quick question. So, the $17 million in this quarter, would that essentially be fully accruing the reinstatement premiums or do -- you know, ex Wilma and the impact of potentially reinstating the second cover, is the first cover reinstatement premium fully accrued this quarter?

Yeah, it’s actually a very -- $17 million, you should view as excess, although we normally would prorate. Because when we buy on reinsurance cover, we normally just prorate it over the 12-month period. And we buy from -- it’s June 1 to May 31st at some period. So, the $17 million is really the excess over the normal accrual rate.

Okay, great. And then just a third question. I think John had mentioned some potential for some fee income associated with administering the flood program. Can you give us a sense for what the size of that might be?

John?

Yeah, let me give you a little background. We participate in the National Flood Insurance Program, which is managed by FEMA. Insurance companies are participating in that, write your own flood program, acting in a fiduciary capacity, which utilizes the federal funds to administer the policies. We have agents that sell the write-your-own policies directly to the insurer. The rates are set by the Federal Insurance Agency. And then we are liable for the administration and production expenses and the taxes and agent commissions.

Also, under the agreement, we receive a fee or an expense reimbursement from FEMA for settled claims. Such expense reimbursements are recorded as a reduction in incurred losses. Our estimate at this point in time is this will be somewhere in the neighborhood of $20 million, which will show up in the fourth and first quarter time period. But, again, our primary focus has been let’s get out and take care of our insureds. We’ve got, as you can tell, several thousand insureds out there that need our help and we’ve been very diligent in getting that done as our primary focus.

Yeah, no question. And then the last question I have is just in thinking about the excess capital, maybe relative to M&A opportunities. I believe, Kerry, maybe last quarter, you were talking about that the M&A guys internally were very busy and they had been looking at a lot of different things, but given some discipline, especially in terms of price that you would be willing to pay, certainly nothing has transpired at this point. But can you give us a sense for, I guess, just maybe an update on what’s happening on that front? Are you optimistic? Are you less optimistic than maybe you were last quarter?

Right. They are still busy. We continue to look to grow our businesses with focus on acquisitions, really targeting the $100 to $300 million range. We are very disciplined in what we look at and the criteria that we use. However, we are seeing probably more activity than ever. My sense is that will continue for at least several more quarters. I would say we are optimistic about prospects for actually bringing something to the table sometime in the future. But we’re disciplined. We are not going to do a deal just to do a deal and we’re looking for the right opportunities.

Okay. And then just one follow-up question. Excellent underwriting results, I guess, in Specialty Property, ex the CATs; frankly, even including the CATs. But just a question, how much do you think is sustainable there? I mean, can we get a sense for a combined ratio ex CATs in the property business and what you’re thinking about, how you are thinking about that relative to what’s kind of a normalized level?

We don’t give specific guidance on that, but let me ask John to give you --

I thought maybe you’d give a little hint, since we’re going to get that segment in a couple of quarters.

Let me give you a little insight. I mean, our primary focus has really been around 3 things that are driving the growth. First being, strong risk management approach. We have a good spread of risks out there with our book of business, we’ve got fair and adequate rates in place, and we have a very strong reinsurance program, which has helped us through this process as well. Second is around the solid performance and growth in our creditor placed business, our extended service contract business, and international. And then thirdly, our focus on our insureds and our focus on taking care of our clients helps us renew business and keep the business we have and go get some more. So I think these 3 things together are what are showing the good results in our segment.

Okay, excellent quarter, thanks guys.

Steven Schwartz, Raymond James.

I just want to go over a couple of things to make sure I understand them. I think they’ve been touched on. The real estate partnership income, you had, I think it was $2.6 million in Employee Benefits. Where was the remainder?

$600,000 was in the Health segment.

In Health, okay. The LTD morbidity ratio, obviously that wasn’t so good in the second quarter. Did the third quarter make up for that or just give us a sense did the third quarter come back to kind of normal?

I think it kind of made up for it. I think what we highlighted was in the second quarter were fewer recoveries for a couple of situations. I think that that was normalized and incidents continued to be very favorable.

As Rob highlighted before, I mean, this low frequency business like this, it’s a little dangerous to look at just one quarter. So you really have to, as you know, have to look at the trends over time and year-to-date number is probably more meaningful.

Okay, sure. Looking at the $17 million of reinsurance premium in Specialty Property, I know you said it was ex’s, but I just want to get a handle on what that is. That includes reinstatement premium; that includes -- does that include for the premium on the second policy?

Yeah, that’s the reinstatement.

No, no, no, no, no. There was reinstatement --

There were several aspects of this.

Right. That’s what I wanted to get to.

All right. You had the first premium that was paid, all right? And that was being amortized over a period of time.

Right.

And we had to buy a reinstatement.

Right.

We had to buy a third cover.

Right.

We followed all the appropriate accounting guidelines related to that, and as a result, we have the $17 million addition.

Okay. But the amortization -- did the first premium -- that was an interesting discussion, what you did with the first premium, because that was an asset. And the question was whether that asset should be written off. Was the first premium written off?

Okay. Well, it all depends, right? You have the premium for the first cover, which is phased back in on June 1st.

Right.

And only those portions of the layers that were utilized do you charge off.

Okay.

The other portions are still going to be amortizing. Then the second cover that you have to amortize, the deposit premium you put in, you then, obviously, we another event right after we put the deposit, in came Rita. So a large chunk of that got charged off because a large chunk of that was used by Rita. And then we bought -- a third event came up, totally voluntarily, basically for a 9-month period of time, which basically went ahead of time and very proactively leveraging our risk management. Look, you know, this is a pretty bad season; we should go ahead and proactively look for a third cover, went ahead and got one well ahead of anything coming up with Wilma. So very pleased we got that and put that in place. And that was effective basically in September. And that also expires May 31, so that’s just being amortized over that period of time.

Okay, so there is some portion of the $17 million that will continue through May of next year. Is that correct?

Oh, yes, yes, yes.

Okay. How much is that?

Well, it all depends -- the $17 is charge of reinsurance premiums.

Yes.

Yeah, then there is a portion of the original premium, which continues to be amortized monthly over the 12-month period.

Right.

It’s a relatively small number - $1 million a month or something like that.

Okay, but what was the number of the $17 million that will continue?

The $17 --

Wait, wait, wait. Bruce, calm down.

It’s all gone.

The $17 million is all gone, okay.

[Voices overlap] is gone.

The excess amount, it had to be paid to restore coverage to full level. For all the different events, each time cover was used and so forth.

Okay. And then just on the subject of reserve releases, anything out of the ordinary there in terms of Health or any of the other areas?

No.

Kelly Nash, Keybanc Capital Markets.

Actually, this is Jerry Pfizer in today for Kelly Nash. I had a quick question on -- I was wondering if you could comment on any new business for both domestic and international, since there was contract business. Were there any new contracts signed last quarter that you can comment on? Is there any new business in the future that you are going to be working on?

Sure. Rob?

Yep. We’ve signed numerous new clients in both the extended service contract and Specialty Property businesses this year. Really, the pipeline continues to be quite robust. We have entered the German marketplace, so we’re optimistic that we may land some clients there. And all of this is, again, built on that strong foundation we’ve set up for leveraging key capabilities and adjacencies that should set us up for long-term profitable growth.

Okay. Can you give a quick update, if you were involved in the bidding process for the recently announced Wal-Mart service plan?

First of all, we don’t comment on any particulars. What I would say about the Wal-Mart situation is that NEW had the Sam’s Club account for a long time and I think this is just an extension of that relationship.

Okay. And finally, you gave a comment on your retention of expired contracts in the ESC line.

I’m sorry. What is that?

If you can comment on retention on any expired contracts in the ESC line. What your ability is to retain those expired contracts?

I’m sorry, I’m not sure we know what you mean by expired contracts.

If any contracts are coming up, when they expire, you are able to retain those.

Oh. It’s coming up for renewal?

Right, right, right.

We have a terrific track record on retaining clients. But I don’t think we have any --

Most of these relationships are 3- to 5-year contracts that come up periodically for renewal. Obviously, we’re all over any renewals that might be coming up and don’t anticipate that any of them are in danger of being lost.

Joan Zief, Goldman Sachs.

You’ve talked about some very strong gross premiums in the Solutions area, your extended service contracts, warranty, things like that, but can you just give me a flavor of what might be the underlying growth rate of the gross margins, I mean, after the commissions are adjusted for exactly how much that client wants to charge their customers, and bringing it down to what the inherent growth rate is of that marketplace that you are thinking about?

I think we’re seeing in the extended service contract arena, we’re seeing quite a bit of growth. I think part of that is our model, which is an integrated model where we are both the administrator and the insurance underwriter, is somewhat unique in that market and we’re the only major player who uses that model. We think it is a superior model to the predominant model of the separate administrator together with what I would term a passive insurer. We’ve had good success in making additional inroads with existing clients and getting additional products and so forth. We, obviously, benefit from increased sales of the products that these contracts are based on in those organizations. And in the international side, we see as quite a fertile arena where a number of the retailers don’t currently even offer extended service contracts.

I guess what I’m really trying to get at is, is it fair for me to look at your gross premium growth, which is huge, and say that’s the kind of earnings growth that you should be generating?

Joan, this is Rob. Just a couple of things. First, I would say that, as you know, we provide a net price to our retailers and they can mark it up however they want. Our profit margin is going to work off the net price we charged. So if you get a retailer who marks it up, let’s say, 150% versus 75%, our margin will be larger or smaller, depending on which type of client we have. We also look to structure our arrangements with retailers to look at a broad portfolio of things we may be offering. So we try and manage the relationship at the overall level and at the product level. We are looking to sell additional products into existing clients. And we think that risk management technique bodes very well. As Kerry mentioned, we’re looking to participate in various profit pools on these different products.

I guess what I’m trying to get at is, when you think of your longer-term, a long-term growth goal, I mean, would you -- I mean is that business to you growing 10%, 20%, 30%? I mean, what would you expect so that I can just get a feel for the kind of growth rate that just the growth in the market and your expansions should be generating?

Okay, Joan, this is Bruce. I think certainly it’s going to be double-digit, but I think the question you are getting at -- Rob was showing you the net versus gross issue. The fact of the matter is, when you do the gross written premium as well, this is a premium that’s going to be normally a 3- or 5-year. It’s a one-time premium. So, obviously, when we’re growing, which we are, significantly, we can have a very big increasing gross written premium. When it starts to earn out after the first year of the manufacturer, it’s going to be spread over 3 years. So, you are obviously seeing very high growth rates, high 30’s, so it’s definitely going to be expected to see double-digit when it starts to earn out.

And I guess what I --

But not at the level as it’s written at.

Fair enough. So I guess then the last question, which relates to this, but on a total Company basis is, you highlighted the fact that you weren’t satisfied with your revenue growth for the total Company. And I guess how much more margin improvement do you think there is in your operations given your risk management and expense focus and things like that, that we’ll be able to feel really comfortable about continued growth in the earnings if the revenue growth of the Company is not picking up?

I think this quarter was an excellent demonstration of the diversification of our group, where we had strong earnings coming from not just Specialty Property but from the Employee Benefits business as well, with continued good earnings from Health and Preneed. So, again, we have a diversified mix of businesses. They each are driven by different factors, different economic factors. Underlying that, we have actual growth in our investment income and in our portfolio rate of return, which has, through the third quarter, mainly been helped through the short end of the yield curve going up. Although, again, we benefit quite a bit from increase in interest rates since there is almost no inter-sensitivity in our liabilities. So, we feel like we have a lot of drivers in the organization that can fuel growth in both revenues and profits.

Ed Spehar, Merrill Lynch.

I had a few questions. First, one really simple one I think is that the $3.2 million of the partnership income that you talk about, is that a pre- or post-tax number?

Some of it is pre-taxed.

Pre-tax, okay. And then on Solutions, if I’m doing the math correctly here, which is, you had $53 million of earnings. The impact of CAT losses and the reinstatement premium, I’m assuming those are pre-tax numbers, right? The 31 and the 17?

That’s correct, Ed.

So, if I just -- tax affecting those, you are down to, let’s say, $31 million.

Right.

Okay. And then you had the $6.5 million related to these commission settlements. So, if we think about sort of a number ex CATs, adjusted for these commission settlements, you have a $78 million number. And I guess what I’m trying to figure out is, your run rate earnings in the first couple of quarters in Solutions were in the $55 to $59 million range.

Right.

And I don’t believe there was much in the way of CATs affecting those numbers, correct?

Correct.

Okay. So, what I’m trying to figure out is, how do we think about getting back to this normalized number? You have a $78 million number, which is up 33%, let’s say, sequentially on about 4.5% earned premium growth sequentially, if we adjust for the reinstatement premium. What could possibly cause the earnings to sort of breakout, I think that’s a fair word to use, on a sequential basis like that?

I think we mentioned that we had particularly good experience in the property loss ratio and in our Employee Benefits business. And, again, it’s dangerous to take any one quarter’s experience like that and try to annualize it. So you really have to look at, I think, the overall trends in the business.

I mean, if you compare, Ed, last year’s catastrophes to this, if we happened to get multiple smaller storms where we were paying more deductibles versus this year kind of one big storm, you would have seen the results quite a bit more like last year, all right? One of the key questions moving forward, because it is -- we’re obviously happy with the results, is what is going to happen in the reinsurance market next year? I think John already mentioned that we’re working hard at that. But it’s going to be a much harder reinsurance market next year. We’re going to probably have to take additional price and we’ll probably have to take additional exposure next year. And, again, you lay that against what happened this year, we would have had more losses.

I guess, though, I think I understand that, but what I’m trying to look at here is just an ex-CAT kind of number. So, not ignoring the fact that you have catastrophe losses, I mean, I know that that’s a recurring part of the business, but just looking at the underlying earnings power, excluding catastrophes, is the property loss ratio this quarter so much better than normal or was the property loss ratio in the first half of the year significantly worse than normal?

It’s Bruce. You’ve got 2 things going on. Number one is a continuous focus on the product lines that we have targeted for growth, okay, and specifically, and especially, property. Obviously, you have different property lines. But if you target certain property lines, and we’ve certainly targeted the creditor placed homeowners property line, and we’ve seen -- when you look at the overall net earned premiums, there are a lot of products inside that net earned premiums. So, the one thing we had this quarter was we had very good growth in our net earned premiums on the creditor placed homeowners lines. That, by itself, is a very profitable line of business for us and will drive profitability in the quarter.

The second thing is what we mentioned, what Rob and I both mentioned, I think Kerry as well, we did have very, very good, exceptionally good, so much better than we’ve had in any quarter in the past. We’ve been mentioning this quite a long trend of very good loss ratios, specifically in the creditor placed homeowners line, but even in our manufactured housing lines too, because of the mix of business that’s going there. We have a lot more creditor placed, even manufactured housing as well, and they’re attracting lower portfolios. And the loss ratio has just continued to improve and this one was an exceptionally good quarter.

Maybe if I ask it this way, and this is all helpful, I’m wondering if I look at then, again, just looking at ex-CAT kind of numbers here, if my math is correct and this 3Q was more like $78 million on that basis, and I add to it sort of the $59 million in the second quarter, the $55 million in the first, if I take that number and divide by 3, is that a more normal representation of the earnings power of this segment or --

I think, I mean, we’ve had excellent experience in the property business all year. I mean, the first quarter, you typically get winter weather losses. We got a sort of below average amount of that. Second quarter is typically good unless there are some kind of early catastrophes, which we’ve had some years. And then third quarter, you have the catastrophes. So, each of the quarters this year have been pretty good for us. So, it’s continued to be a very good year in terms of property loss ratios.

And then one thing that John highlighted as well, obviously, there are a lot of moving parts, as Kerry says, and in the fourth quarter, we are going to be expecting to pick up -- in the loss ratio again, it’s going to come through the loss side, you know, fees from the government flood program. And that’s going to, obviously, help fourth quarter. So, that’s going to make fourth quarter look kind of -- depending on what we do with Wilma and everything, we’ve got good reinsurance in place there. We are going to get some fees that are unprecedented. We’ve been writing several government flood programs for quite a long while. We’ve never really had fees of that magnitude come through.

Okay, and if I could, just one final thing on the top line here in Solutions. You talked about 10% growth ex the reinstatement. Bruce, I think you just said that you would expect gross premiums written, kind of a normal growth rate in the double digits. The net premium growth this quarter, the net premiums earned this quarter, is there anything that would be unusual because of block of businesses or anything else or is this a number that we kind of grow off of?

There is nothing of an unusual nature in that earned premium that I can think of. But the growth rate I was mentioning double-digits is on the extended service contract side.

Okay. Yeah, that was my next question. I mean, in terms of overall, considering all of your businesses, you wouldn’t necessarily say double-digit on a secular basis, would you, for gross premium written?

No, that’s correct.

You have to look at it from the businesses earned decline.

Jukka Lipponen, KBW.

A couple of questions. First, quick ones. When is the next Board meeting?

It’s in a few weeks.

And the Wilma loss of $50 million, is that pre-tax or after-tax?

That is the deductible; that would be pre-tax.

And so the Solutions segment loss ratio again, is that being driven significantly by the mix shift?

I’m sorry. Are you referring to the Specialty Property?

I’m referring to just looking at the Solutions segment, if I just look at the segment overall and look at the combined ratio, is that on an ex-CATs basis? Is that being driven by the mix shift?

It’s being driven by the Specialty Property.

Okay. And I don’t know if you already quantified it, but the favorable impact of the group life mortality, did you quantify that at all?

We did not.

Then will you?

No. I don’t think we give specific quantifications.

Again, I think looking at that rolling trend is the important thing to look at in the Employee Benefits business, and we think the trend is favorable.

Thank you. At this time, I’d like to turn the floor back over to Mr. Clayton for any further or closing remarks.

Thank you for all your questions. In closing, we are very pleased with our successes in the third quarter and the actions we’ve taken to build a foundation for continued success in our Specialty Insurance businesses. Thanks for joining us and we look forward to updating you on our continued progress next quarter.

Thank you. This concludes today’s Assurant Conference Call. You may now disconnect your lines and have a wonderful day.