Assurant Inc (AIZ) 2006 Q1 法說會逐字稿

Welcome to the Assurant’s first quarter 2006 financial results conference call.

At this time all participants will be in a listen-only mode and the floor will be open for questions after the presentation.

I would now like to turn the call over to Ms. Melissa Kivett, Vice President Investor Relations.

Please go ahead, Ms. Kivett.

Thank you Sandra.

Welcome to Assurant’s 2006 first quarter earnings conference call.

Joining me are Rob Pollock, our President and Chief Executive Officer;

Bruce Camacho, our Chief Financial Officer;

Mike Peninger, President and Chief Executive Officer of Assurant Employee Benefits; and Chris Pagano, our Chief Investment Officer.

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

This morning we issued a press release announcing the first quarter of 2006 financial results.

The press release, as well as corresponding supplementary financial information, may be found on our website at www.assurant.com.

Some of the statements we make during the call today 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 measure, and a reconciliation of the two, please refer to the supplementary financial information posted on our website.

Now, I would like to turn the call over to Rob.

Thank you Melissa, our new head of Investor Relations.

And after working behind the scenes for the past two years, welcome to the call.

Good morning everyone and thank you for joining us today.

We are very pleased to share with you Assurant’s first quarter of 2006 financial results.

Assurant had its best quarter ever as our diversified Specialty insurance strategy continues to deliver strong profitability and we remain focused on generating long-term profitable growth.

Our net operating income for the quarter was $163.8 million, or $1.24 per diluted share, an increase of 42% over the first quarter of 2005.

We’re also pleased to report that our annualized operating return on equity for the first quarter was 18.6%, which places us well within our targeted range of the insurance industry’s top quartile.

On a rolling four-quarter basis, our operating ROE was 16.2%.

Excluding the sale of PreNeed U.S. independent franchise, our net earned premiums for the quarter increased 5% to $1.7 billion compared to the first quarter of 2005.

Driving the premium growth were the excellent results in our Solutions and Specialty Property businesses, particularly in creditor-placed Homeowners, Domestic Extended Service contracts, and our International business, three areas we have targeted for growth.

Specialty Property had strong net earned premium growth in all product lines, up 26% compared to the same period last year, which was specifically driven by significant growth in creditor-placed Homeowners insurance.

In Solutions, premium growth of 17% continues to be good, both domestically and internationally from existing clients, as well as new clients.

An example of those few new large clients overseas include Banco de Brazil, the second largest bank in Brazil, and [Banarte], the fifth largest bank in Mexico.

We continue to be optimistic about Solutions’ long-term growth prospects overseas as we continue our expansion into Germany, Italy and Spain.

Our strong profitability was a result of both pipeline expansion and favorable claim trends.

On the revenue side, we experienced a 20% net earned premium growth in the Solutions and Specialty Property businesses, a 20% increase in fee income, and a 22% increase in investment income.

Our underwriting results were driven by favorable combined ratios in Specialty Property, resulting from the mild winter weather and a $7.8 million pre-tax receivable from the National Flood Program.

For some time we’ve been talking about our prudent and opportunistic approach to acquisitions as a key component of our disciplined capital management strategy.

On Monday we announced the acquisition of Safeco Financial Institution Solutions, the fourth largest provider of creditor-placed Homeowners insurance coverage for mortgage lenders and servicers nationwide.

This acquisition is a great strategic fit.

The purchase price was below the range we previously identified of 100 to $300 million for acquisitions.

This transaction is an example of the type of strategic acquisition we are likely to make.

Why is this such a good fit?

First, it builds our leading position in the creditor-placed Homeowners business.

Second, it significantly increases our client base, including notable clients such as HSBC.

Third, it compliments our current geographic spread of risk.

And finally, this transaction increases our management depth in the Specialty business.

We’re very pleased with the organic growth in our Specialty Property business and we’re optimistic about future growth through this strategic acquisition.

With a focus on leveraging its leadership position in consumer-directed healthcare to individuals, Assurant’s Health continues to pursue long-term profitable growth.

Despite membership declines, primarily driven by the decline in small Group membership, we are pleased that our core individual market sales are up and our combined ratio remains low at 91.6% for the quarter.

We continue to enhance our technological platform and on April 1st we rolled out Advantage Agent, new services and tools that should further grow our individual medical sales.

Initial reaction has been very favorable and we are excited about the growth prospects.

Mike Peninger will discuss the results from Assurant’s Employee Benefits, focusing on growth opportunities in the small [inaudible] market.

We continue to take the necessary steps to reorient our business around the small employer.

Our strategic decision to realign our PreNeed business into Assurant Solutions continues on schedule.

We are pleased with SCI’s announcement of its intention to purchase Alderwoods, the second largest operator of funeral homes in North America.

This is another example of the benefit of our strategy to align with leaders who are often consolidators in their industry.

When consolidation occurs it is usually a source of organic growth for us.

Turning to corporate matters, we continue our share repurchase program, and during the first four months of this year we repurchased 1.9 million shares for $87 million.

Since the inception of the program, we repurchased 13.7 million shares for $491 million.

We continue to align our interests with those of our shareholders.

Our proxy statement recently announced new ownership guidelines that will increase ownership among executive management and directors.

In summary, we believe the benefits of our diversified Specialty insurance strategy are becoming more and more apparent.

We continue to leverage our core capabilities -- managing risks, integrating complex administrative systems, and managing large distribution relationships to pursue targeted growth opportunities within each of our businesses.

We are pleased that our diversified platform is allowing us to implement strategies for the long term within each of these businesses, strategies we believe will allow us to achieve long-term profitable growth on behalf of our shareholders.

Now, I’d like to turn the call over to Mike Peninger, President and CEO of Employee Benefits.

Following Mike, Bruce will review the detailed financial results for our other businesses.

Mike?

Thanks Rob.

I’m happy to be here today to talk about our Employee Benefits business and our strategic transition.

During the first quarter, we continued to tightly align our business around the small employer market, which we define as employers with 500 or fewer employees.

Throughout our deliberate transition we’ve remained disciplined in our customer acquisition and retention, which is reflected in our strong profitability.

We anticipate seeing more visible results of our renewed focus through accelerated top-line growth as well.

Assurant Employee Benefits had solid growth and net operating income in the first quarter, increasing by 17% to $19.2 million versus $16.4 million in the first quarter of 2005.

The earnings were driven by good loss ratios in all of our product lines, reflecting disciplined pricing and renewal actions in a competitive market.

In our Disability business, incident rates remained relatively unchanged from 2005 experience, while claim closure rates improved over 2005.

Dental loss experience improved in the first quarter.

While the dental market remains highly competitive, we continue to maintain our disciplined approach to new business and renewal pricing.

Our overall loss ratio, which is usually highest in the first quarter, improved to 75.3% from 77.4% in the first quarter of 2005, again reflective of our disciplined pricing actions and the ongoing shift in our business mix from large case to the more profitable smaller case market.

While we feel very confident in the quality and management of our [block], it is prudent to bear in mind that quarter-to-quarter comparisons may show variability due to the low frequencies and high severity of claims in the Life and Disability lines.

Our results this quarter were also favorably impacted by an increase in net investment income of 8%, resulting from both an increase in the average portfolio yield and the amount of average invested assets.

While we were pleased with our profit increase during the quarter, our top-line also reflected our pricing discipline and the changes we are making to support our small case strategy.

Net earned premiums were $326 million, down 6% from the same period one year ago.

Both sales and persistency were lower during the period.

The decline in sales and persistency are the cumulative effect of the changes instituted in our sales organization, including our shift away from large cases and the reorientation of our field force.

We expect significant pressure on revenues to continue throughout 2006 as we continue to execute our strategy.

Our sales organization is the focal point of our efforts to grow our small employer business.

While down, our sales activity is primarily focused on our core market of less than 500 Life groups.

Despite the short-term challenges, we did have several positive signs during the quarter.

Nearly 99% of new cases submitted were in our core small case market, reflecting the strong actions we implemented to focus our sales organization on this segment.

We also saw a sharp increase in both quotes and new sales in our voluntary Disability line, reflecting the innovative products we launched last year to target new industries for Disability insurance.

Our sales force is continuing to grow, both in size and experience.

We added 18 new hires in the first quarter and the number of reps with 18 or more months of experience jumped 17% from March 2005 to March 2006.

As the newer reps get up to speed the natural result will be an increase in new sales.

I’m also pleased to report that our broker development efforts resulted in 18 new key brokers joining us during the first quarter.

We routinely have seen close ratios double the norm from this group, a trend which we expect to continue.

Overall, we made significant progress during the first quarter in our pursuit of profitable growth in the small employer market.

Over the long term our expertise in Small Risk Management, flexible administration systems, and strong distribution relationships solidly position us as a leading provider of Employee Benefits for small businesses.

The key takeaway from Assurant Employee Benefits that I would like to leave you with today are -- first, we are focused and committed to the small case market and the Employee Benefit brokers serving them.

This is not a small part of a larger strategy for us.

To paraphrase an old advertising slogan, the small case market is not just everywhere we want to be, it’s exactly where we want to be.

Second, we have taken significant steps, particularly within our sales organization, to support top and bottom line growth in this segment.

And third, we believe momentum is building.

We expect to come out of our transition as a business firmly positioned to contribute to the greater Assurant growth story.

Now, I’d like to turn the call over to Bruce Camacho, Assurant’s Chief Financial Officer, to review the results of our other businesses.

Bruce?

Thanks Mike.

As Rob mentioned, Assurant had its best quarter ever, driven primarily by the very strong results in Assurant Solutions and Assurant Specialty Property.

Our net operating income, defined as net income, excluding investment gains or losses and other unusual items, increased by 42% to $163.8 million from $115.1 million in the first quarter of 2005.

And our net operating income per share was $1.24 in the quarter.

Net earned premiums were up 2% to $1.7 billion.

Excluding the impact of the sale of PreNeed’s U.S.

Independent Franchise, net earned premiums increased 5%.

Fee income grew 12%, primarily as a result of growth in revenues from Extended Service contracts.

Net investment income increased 17% to $192.6 million for the quarter, compared to $164.2 million in the first quarter of 2005, driven primarily by higher yields and $14.7 million of investment income from a real estate partnership.

Mike provided you with an update on Assurant’s Employee Benefits, so let me turn now to the results of our other leading Specialty insurance businesses.

Assurant Solutions and Assurant Specialty Property reported record net operating income of $97.3 million in the first quarter, up 17% from $64.8 million in the same period last year.

Net earned premium for the quarter were up 20% to $739.2 million compared to $615.2 million in the same period last year.

This increase is driven by strong growth in both Solutions and Specialty Property as we continue to gain market share through new clients and increased production to our existing client base.

We continue to see significant gross written premium growth in most of our core product areas, including a 39% increase in International Extended Service contracts, a 13% increase in Domestic Extended Service contracts, and a 19% increase overall in our Property businesses, driven primarily by the growth in creditor-placed Homeowners.

Net investment income for Assurant Solutions and Assurant Specialty Property grew 22% to $15.8 million for the quarter, compared to $48.2 million for the same period last year, primarily due to the improvement in short-term investment yields.

Due to the continued growth of our Extended Service contract business, fee income grew 20% to $43.4 million during the quarter, compared to $36.1 million in the first quarter of 2005.

While we are pleased with our progress in attracting new clients, including the new International clients Rob mentioned earlier, we’re also pleased with the growth we are generating through our existing client base.

Historically, we’ve benefited from industry consolidation by being aligned with the market leaders.

And earlier you heard where we [inaudible] benefits from consolidation in the PreNeed market.

On occasion we lose business because of an industry consolidation and we have been informed that effective January 1, 2007, Banc of America will be consolidating its debt deferment business that we previously administered on behalf of MBNA with its current incumbent provider.

While we are disappointed to lose MBNA as a debt deferment client, we will continue to retain their credit insurance business.

All Specialty Property lines showed improved loss experience as a result of the mild winter.

In addition, we received $7.8 million pre-tax from the National Flood Insurance Program.

The improved loss experience drove record low combined ratios, which was a primary contributor to the excellent results of Assurant Specialty Property.

A key focus of our Risk Management is our reinsurance program to mitigate our exposure to catastrophe losses.

We are finalizing discussions with our reinsurers to implement a catastrophe reinsurance program in conjunction with our June 1 renewal date.

While it is too early to determine the exact cost of our reinsurance program, we know that total reinsurance costs will significantly increase for two reasons.

First, our book of business has grown; and second, the increased catastrophe activity of the past several years has driven the expectation of projected catastrophe losses for the industry.

We will be retaining a higher deductible, moving our retention per event from $25 million in 2005 to a 55 to $65 million range in 2006.

We will also be buying additional top-end coverage for a mega-storm.

Our Risk Management expertise will ensure that we have the appropriate protection in place to mitigate our overall catastrophe exposure.

Turning now to Assurant Health, our leading Individual Medical insurance business, first quarter net operating income decreased 9% to $45.1 million from $49.7 million for the same period last year, primarily as a result of the decline in Group net earned premiums and the increase in expenses in that growing of our Individual Medical business.

Net operating income benefited from $7.4 million pre-tax of investment income from a real estate partnership.

Although higher than the 89.7% in the first quarter of ’05, our Risk Management focus led to a continued favorable combined ratio of 91.5%.

This was driven by a higher expense ratio while loss ratios remained stable.

The overall Health insurance marketplace remains highly competitive.

Net earned premiums of $523.4 million for the quarter increased 5% from $549.5 million for the same period last year.

The decline was due to the drop in small Group premiums as we maintain our focus on writing only profitable new business.

The Individual market, new sales increased slightly by 1% over the first quarter of last year.

We are very encouraged by the early April rollout of Advantage Agent, a new portfolio of services, tools and products designed to grow our Individual Medical sales by making it easier for our agents to do business with us.

Advantage Agent, combined with targeted reactions we’re making in selected markets, should support our continued growth in our Individual Medical business.

Turning to Assurant PreNeed, we continued to make progress in aligning and transitioning this business segment into our Assurant Solutions business.

Net operating income decreased 1% to $6.9 million for the quarter from $7 million in the same period last year.

First quarter results include $1.9 million pre-tax in transactions costs related to the sale of the PreNeed U.S.

Independent Franchise.

Net earned premiums decreased 31% to $84 million from $121.2 million, primarily as a result of this sale.

Next, I’ll cover our Corporate and Other results where we reported a net operating loss of $400,000 in the first quarter, compared to a loss of $10.5 million during the same period last year.

The improvement in Corporate and Other results is primarily due to the adoption of FAS-123R, which requires [safe value] occurring to stop [competition] plan at the time of grant.

This [inaudible] resulted in a decrease of $8 million pre-tax in Corporate and Other expenses.

Total stock appreciation [inaudible] expense in 2006 are expected to be $17 million pre-tax, but half of which will be in Corporate and Other.

Corporate and Other results were also positively impacted by $4.9 million pre-tax of investment income from a real estate partnership.

Our balance sheet remains strong.

Our total assets at March 31, 2006 were $24.7 billion.

Total [inaudible] of equity at the end of the first quarter, excluding accumulated other comprehensive income, was $3.6 billion.

And our book value per diluted share, excluding AOCI, grew 4% through the quarter to $27.18 at March 31, 2006.

Beginning next quarter we will be providing separate segment information on Assurant Solutions and Assurant Specialty Property.

And Assurant PreNeed will be incorporated into Assurant Solutions.

We will also be providing condensed balance sheets for each of our business segments.

In summary, we are seeing disciplined growth, both organically as well as through acquisitions in a number of our targeted growth areas.

We are pleased we have provided our shareholders with strong earnings growth and impressive ROEs, well within the top quartile of the insurance industry.

Now, I would like to turn things back to Rob to open the floor for questions.

Thanks Bruce.

Sandra, we’re ready for questions.

Certainly. [OPERATOR INSTRUCTIONS].

David Lewis with SunTrust Robinson.

A couple of questions on Solutions and Specialty Property.

First, can you give us an idea why you’re seeing a spike in creditor-placed Homeowner coverages?

Does that relate to the turmoil relating to the hurricane issues and the lack of capacity out there?

That’s one.

Two, were there any storm losses materially different from a year ago in the first quarter and/or expected in April?

Let’s just talk about why we’re seeing the growth in premiums and it’s really a growth in just overall portfolios of our clients, so we haven’t seen a tremendous change in penetration rates.

It’s just that their long portfolios have grown and we’ve benefited from that.

I’d say that’s the primary driver there, David.

David, I think that answer what Rob said, the map that John Owen had showed [inaudible] spread of risk, we have not seen a significant change in that either.

The spread has been pretty well across the country in all the areas of [inaudible] population trend, as Rob mentioned, the loan trend and the portfolio size of our clients.

So, we’ve just benefited from having new clients and the growth in our existing clients’ portfolios.

And the second part of your question regarding catastrophe losses in the first quarter of ’05 versus the first quarter of ’06, really, there’s been no change.

We just had a very mild winter.

I think that’s one of the main drivers is that we would normally get certain losses, not necessarily on catastrophes, but [inaudible] winter weather and this was such a mild winter we really did not see any -- we really had a very, very good loss ratio in the Property business because of that.

Right.

And the last point I think you alluded to April and we really don’t provide forward, David, but we’d also have to wait for ISO designation of any of the tornados, but that hasn’t occurred yet.

Assuming activities have been higher than what you’ve previously seen in other April periods.

Yes, but to any great extent for our book of business, David.

Just finally, on the Extended Warranty business, I guess the way you account for it because you don’t really book the premiums or fees until the manufacturer warranty is gone, is there a better way for us to kind of look at how that is flowing through based on business that you put on 12 or 18 months ago?

Well, I’d say first of all that you spelled out the accounting as we do it, which is we have to wait for the manufacturer’s warranty to expire.

I think expansion in both our top and bottom line is a result of some of the clients we’ve written in the past where we’re now on the risk, David.

John Nadel with FPK.

A couple of questions for you.

One is just -- follow it up maybe a little bit on Solutions.

If I look at the Solutions operating earnings and take out the real estate partnership, I assume that the flood reimbursements are done now, so we shouldn’t expect those going forward.

Looking at quarterly earnings of about $90 million adjusted, can you give us a sense for -- how much -- where is the Specialty Property combined ratio this quarter?

I mean, we’ve seen great results from many of the Personal lines carriers, but I suspect you wouldn’t want us to run rate $90 million.

John, and we know all the analysts have their own models and that forward projection is a function of your model, but we indeed had a very favorable combined ratio and our combined ratio during the quarter was better than the combined ratio we experienced for all of last year.

Can you -- how about this?

I mean, without necessarily giving us the number, because I know you don’t want to give us that, if you looked at that combined ratio in Specialty Property what you’d typically expect on average, whatever that number is, can you give us a sense for how much better it was this quarter relative to your average?

John, it’s Bruce.

I think, first of all, you will be able to see the combined ratios in the second quarter because once we [split] our Specialty Property and Solutions you will be able to see it, so you can track back.

So, how about a sneak peek?

How about a sneak peek? [Laughter].

I will tell you that it was -- it’s very hard for us to look at it right now on a historical basis because, as we mentioned before, because we have such a unique Specialty niche in the Property sector we had always priced [inaudible] a low 90 combined ratio.

And last year we had done a lot of stuff in our claims [inaudible] to administer our claims and handle our volume of sales [inaudible] customer service analogy if you think that drove a lot of the improvement in the combined ratio last year.

And, as Rob mentioned earlier, the combined ratio this quarter was that much better, much better than what we wrote for the entire ’05.

And I don’t -- it’s hard for us to tell, but I’d say a trend that we know that the first quarter is normally a good quarter [inaudible] winter weather; the second quarter is normally pretty good, and then you’re going to [inaudible] in which could drastically affect our results third and fourth quarters.

Well, maybe that’s a good way to [segway] into the reinsurance side.

Just one other point, John.

You identified the $7.9 million of flood fee reimbursement.

We’ll get a small trickle in the second quarter, a million or two.

Okay, that’s helpful.

I know you guys are in the process, Bruce, from your comments on finalizing the program, the new reinsurance program.

Can you remind us -- I’m not sure if you’ve given this in the past;

I can’t remember.

I can go back to my notes -- but, can you remind us what your costs were for the mid-year ’05 to mid-year ’06 and just maybe order of magnitude, some kind of a ballpark, what you expect the costs to increase over that number?

John, we have not actually disclosed in the past the reinsurance costs.

We have disclosed the reinstatement premium costs, which were actually very significant last year.

I guess all I can tell you is that, first of all, the increase -- the stocks June 1, so the impact of the increase will affect the third and fourth quarters and it will be, I would say, double the [inaudible] impact of reinsurance premiums and that would be including the reinstatement premiums we had in ’05.

The reinsurance -- the premium impact is going to be double what it was last year.

We’re going to have double costs.

But again, our book of business is growing substantially.

Premiums are up, and so --

Right.

And so premiums should be offsetting some of that given the growth of your business.

Okay.

I think the other issue there is part of our Risk Management is to evaluate programs offered by the reinsurers and at the lower deductibles, the cost of the program we didn’t feel were a good buy.

Okay.

And final question for you is just to go to the Safeco acquisition.

I appreciate that the commentary on the below the 100 to $300 million in terms of purchase price, can you give us a sense -- I mean, I don’t think Safeco provides the detail in any of their supplements and I’m not sure if you’d be speaking out of school here, but is there -- can you give us a sense for what multiple to earnings without necessarily giving us the earnings, what multiple to earnings you’ve paid?

Just to give us a sense for how you value that business.

I couldn’t do that, John, but let me tell you what I can tell you, which is I believe we talked quite a bit about the returns we believe we can earn in the Specialty Property business on an ROE basis, which was in the 20 to 25 range.

Once the dust settles on the acquisition, because there will be some moving accounting [inaudible] just because the rules have changed on the acquisition a bit, we think over the long term we can earn those same type of returns on this business.

And I think, John, you just have to -- pretty well and you’ll know it as well how we did it.

That’s helpful.

And just last thing, just -- sorry to take so long -- just what were the buybacks specifically in the first quarter in number and dollar amount?

In the first quarter we bought back 1.4 million shares, $64 million.

Ed Kroll with SG Cowen & Company.

A couple of questions for you.

On the Assurant Health, I wonder if you could, well hopefully, break it out, but it’s not just directionally or off some more color on the consumer-directed accounts, the sales that you had in the first quarter or the number of Health savings accounts, any color on the Right Start product you could give us, how that did sequentially and year over year in Q1.

Sure.

On the consumer-directed side you’ve identified the two areas that we think are -- what we’re classifying as consumer-directed plans today, which are HSAs and Right Start.

There is a slight difference in the two plans.

The Right Start plan is more directed at people who previously haven’t had coverage, okay?

Whereas, the HSA [inaudible] our higher deductible plan.

We’ve been rolling out the Right Start product to -- it was first introduced in the third quarter of ’04 in five states.

In the fourth quarter rollouts increased to 39 states and we’re planning for two more states in the second quarter of this year.

Right now Right Start is about 22% of our issued premium for Individual Medical that was sold in the first quarter and that compares to a smaller percentage in ’05.

We’re still evaluating a lot of the statistics around Right Start.

On HSA, we did have a bit of a drop-off in HSA from that early adapter, but continued to sell a number of the HSA policies and feel that the promotion that’s come about in that marketplace has been favorable for us.

And I’d mention that Don Hamm, the Head of our Assurant Health business actually was in visiting with White House staff and we’ve kind of become a consultant to the administration around HSAs because we have a lot of information they find useful.

Okay.

So, would you say you’re on track relative to the growth prospects that were discussed at your Analysts Day in March?

Indeed we believe we are and we think the Advantage Agent program we alluded to is central to that.

Why we are getting such wonderful reception from agents is that we are demonstrating that we can turn applications around and underwrite within 48 hours on their best business.

And this just puts us way out in front of the industry.

And I’d add that we’re doing that without compromising any of our Risk Management standards in the business.

Very good.

And then just one more thing on that.

So, the comments that you made, Rob, and some of your colleagues there at the Analysts Day regarding deployment of capital, wanting to grow the Health business, seeing the favorable ROE mix shift from that, as a consequence of that, that whole strategy is still in place?

Absolutely!

Okay, great!

And then one more question on the -- can you tell us what the operating cash flow on a GAAP basis was for Q1?

I don’t have that with me, I’m sorry.

Bill Wilt with Morgan Stanley.

A question of the Health.

The Medical loss ratio has been quite good and stable for several quarters now.

Are there -- and I think I’m right in saying that at least some other carriers in Q1 began to see a deterioration in their Medical loss ratio.

Are there costs -- so, the question is, the cost driver dynamics.

Are there different dynamics, different sources of inflationary pressure is cost drivers that are unique to your Medical business, maybe because of the high deductible nature of it that lessen the rate across from other maybe more traditional Health carriers?

Sure.

Well, the first thing is we believe that Individual Medical business is a Specialty business with different dynamics going on in terms of the Medical underwriting than your traditional Group writer will experience.

So, we’ve talked about the fact that we’ve seen new entrants come into our marketplace and we’ve tried to maintain our discipline on the pricing side when we see people who perhaps aren’t showing that same discipline.

This requires intensive monitoring.

I think Don referred to how we look at experience by zipcode, by product around the country and are making minor adjustments to our rates all the time.

Anecdotally, we’re seeing a number of competitors make adjustments to their rates and raising them, which obviously makes us more competitive.

On the other side of that we’re still seeing certain markets where they’re lowering rates.

So, it’s that individual local game.

You’ve really got to be in, analyzing it on a very detailed basis and that’s at the core of our business, Bill.

That’s helpful.

As to the, I guess spoke mostly to the revenue side, which is great.

On the cost side are there different, meaningful differences that we can kind of keep an eye on from 30,000 feet, whether prescription does grow just perhaps or less meaningful or costs?

If it’s really a function of the plan design, so, for instance, when you’re in an HSA plan, prescription drugs are a much smaller percentage of the total costs than they might be in a first [inaudible] coverage plan.

It’s a bit different with Right Start.

And understanding that, again, it’s at the heart of our business, understanding the Risk Management around plan design, underwriting.

That’s what makes us successful and that’s why we think this is such a unique market.

Kelly Nash with Keybanc Capital Markets.

I wonder if you could first talk about on the reinsurance coverage side, give us an idea of how much additional [inaudible] coverage you’re looking for relative to your current coverage.

Sure.

Bruce, do you want to take that?

Yes, Kelly, last year we had -- we took [inaudible] deductible over $25 million and it would be bought 185 excess of 25.

And we’re probably looking at -- at least another $100 million on top of that in ’06 because of the growth of our business and also the models that the reinsurers are using.

Everyone is in the process of refining their models because their activity is [inaudible] seen over the last few years.

We’re expecting or we’ve anticipated and planned for in our Risk Management to buy a lot more top-end cover and then we’re exploring other mitigation factors as well, other programs to mitigate our overall top-end exposure from multiple [inaudible].

And are you making any changes on the underwriting side to address any of the expected changes in the model?

Yes, absolutely!

First of all, as you know, the first and primary target that gets our focus and gets primary, it would be [inaudible] because we are protecting our lenders’ interests and that’s the one we focused on primarily.

And therefore, all the voluntary coverages that we might do in other lines we curtailed significantly their production in those CAT-prone areas to allow for capacity and that’s part of our mitigation again, part of our Risk Management of the overall program that we look at.

We know that we have to watch the voluntary Homeowners market; we have to watch what we’re doing for our clients and make sure that their portfolios are protected on the [inaudible] side and as such anything that’s on the voluntary side is curtailed by large [inaudible] capacity and that’s [inaudible].

In addition, Kelly, we will review policy provisions on all our contracts to try and again mitigate risks on things that are more storm-exposed, if you will.

I mean, you could look at something like, I don’t know, a screened-in patio and we could perhaps put a policy provision to limit exposure around the things that are most storm-proned.

And we look at those as part of our Risk Management on a periodic basis as well.

To make those changes you go through a contract file and perhaps it takes a bit of time, but we’re looking at all those as well.

And I missed the few comments as to whether or not you had any reserve development in the quarter.

Our reserving policy has been consistent, and as you know, we’re quite prudent in terms of our approach to reserves, but no change in policy.

I guess maybe -- was there a meaningful contribution in terms of -- we look at the overall loss ratio performance in the quarter, was reserve development a notable factor there?

No, I don’t believe so.

No, not at all.

Okay.

And then finally, I wonder if you could just talk about the acquisition pipeline.

You’ve had a couple of them.

Are there a number of other opportunities out there that you’re currently looking at?

Or, maybe you’ll a little bit more quiet on the acquisition front at this point.

As you know, we brought in an additional resource last year to look at M&A.

The activity picked up quickly late last year and continues at a strong level.

Steven Schwartz with Raymond James and Associates.

A bunch of little ones.

We’ll start with going back to the Safeco acquisition, it’s been reported that the book of business, which was $140 million, had about $55 million of CAT losses last year and your book of business is four times that, pretty close, three to four times that, your CAT losses weren’t all that much higher.

I’m wondering if the difference in the Safeco book had to do with a geographic spread or maybe the reinsurance programs that they pursued.

Yes, a couple of things, Steven, because I can’t really comment on their losses or their program.

We’re quite pleased that the Safeco spread of risk is quite complimentary to ours and actually has more exposures in some areas we are lesser weighted toward and less in some of the areas we’re more weighted toward, which is going to bring about a broader diversified spread of risk in total.

That would be point one.

Point two would be we obviously, in putting our reinsurance program together for this year, Bruce and his team have all looked at the impact of bringing those additional exposures in and that’s one of the contributors toward our buying more top-end coverage.

Okay.

Looking at PreNeed segment, the SCI buying Alderwoods, how does that affect you?

I mean, will that -- will your exclusive agreement with SCI move across to Alderwoods?

And I believe you did have a relationship with Alderwoods, did you not?

Right.

Well, first, two things.

When that transaction completes all those homes will be out of the same arrangement we have with SCI.

When we look at the Alderwoods business we continued -- after we sold our Independent franchise we continued to do business with Alderwoods in Canada, okay?

So, that won’t change, per se, but we will pick up all the U.S. Alderwoods.

Okay, in other words [inaudible] just in Canada, okay.

Then, just a couple on Health.

What you’re calling Advantage now, that was [inaudible], right?

Correct.

Okay, just making sure.

And then, just so it all ties in here, the Health strategy that you talked about in the Investor conference call was kind of to give up a little on rates, but with the idea that the ROE would come down a bit, but the overall business would grow enough to more than make up for that.

Yet there was no growth really in the first quarter.

Is that strategy not implement yet?

Is that the issue?

Or, is something going on there?

Right.

Well, first, we saw a very slight increase in new Individual market sales in the first quarter over the first quarter of last year.

And new sales are the thing we need to get going to really generate top-line revenue growth, Steven.

And so, 1) I think that strategy is underway and started; 2) There are selected markets I mentioned earlier that we’re looking at, each market and product and plan design from a pricing standpoint.

And then certain selected areas, we’ve taken some action to make ourselves more competitive and lowered our rates a little bit with the idea that it will produce more revenue.

I think that combination of the ease of Advantage Agent and some selective rate action will build momentum over the course of ’06.

Ed Spehar with Merrill Lynch.

I have two questions.

The first just to clarify, Bruce, on the stock-based compensation, did you state $17 million pre-tax for year and half of it in Corporate and Other?

That’s correct.

And can I just assume that a quarter of that was what was reflected in the first quarter?

A little bit less because our grant’s already done, actually was done in April, so a little bit less than that, about $3 million of the $17 million was in the first quarter, about half of that being Corporate.

Okay.

And on the [B of A], can you give us any sense on the significance of that contract?

It’s MBNA.

We never had Banc of America, so as Banc of America approaches MBNA that’s why they consolidated it into their incumbent, the credit card side.

And we don’t disclose any particular client, but all I can tell you is none of them are that significant to us.

And with the growth that’s being experienced at Solutions, specifically on Extended Service contracts, both domestically and internationally, I think we’ll be able to handle it because we have the business for the rest of this year.

And then if we continue to keep the credit insurance business in the U.S. and in -- we also do business at MBNA in Canada.

So, we don’t like losing it, but the incumbent, it’s very hard when -- we would normally have been the beneficiary of the [inaudible] consolidation.

This is the just one case where we were not.

And I’m assuming that the debt deferment piece is probably a lower profitability than your other line.

Well, it’s in the fee income side, so it won’t affect the premium side, the premium income numbers.

It’s in the fee -- it comes from fee income.

And then there is offsetting variable expenses that will [inaudible] both sides of the fence.

So, it’s not as profitable as a good ROE.

No better ROE.

There’s no capital charge for that business, Ed.

Okay.

And then, Rob, going back to the acquisitions, I think you had made the comment a couple of times about acquisitions, saying it’s not of matter of ‘if’, it’s ‘when’.

And I’m just curious if that statement still holds, or if that specifically a Safeco Financial Institution?

No, I’m confident that the statement still holds.

Okay.

And then, that’s good to hear.

And then I guess, also, on the Safeco deal, you said that you’re confident about the 20 to 25% ROE.

I guess the question is 20 to 25% ROE on the acquisition, or 20 to 25% ROE in terms of the marginal returns you get from the business you’re acquiring?

I guess first, Ed, I’d say on the long-term it would be on the business we’re acquiring, okay, and in the business.

I also know that there will be some changes that have been implemented on the accounting side that will have to work their way through in the first couple of quarters.

I guess the question is, you didn’t price -- I’m assuming you priced the book for something lower than a 20 to 25% rate.

I do not -- I’m really not at liberty to disclose that.

Okay.

And how about just, in terms of your view on how quickly any acquisition has to be accretive.

Well, sooner is better.

And, no, I mean, we’re going to work hard on that.

Again, we’re working through with [PWC] on just how various things will be categorized -- intangibles, et cetera -- and we’ll have a bit more to disclose on that in future quarters.

Okay.

And then one quick final question.

The Employee Benefits side, I think you prepared us all at the Analysts Day for maybe some transition of that business this year.

If you look at the first quarter, the first quarter results looked pretty good, and I’m just wondering, are those in line with your plan?

Were those better?

Or, is the transition something that was more likely to start happening in the next two to three quarters?

Sure, Mike do you want --?

Yes, I think the transition we’ve talked about has really been more focused on the mix of business and kind of on positioning ourselves for top-line growth and we certainly haven’t had that.

Bottom line, we feel real good about where our loss ratios are in all of our product lines and that really was the primary driver of the good earnings for the quarter.

So, we just need to get that top line growing and in the light of the things I alluded to, both here and on Investor Day, with the small case focus and changing the profile of our reps and several of the other things, our new products are going to help drive that top-line growth.

Jukka Lipponen with KBW.

Congratulations on a great quarter!

A couple of questions.

First of all, the Health sales, how did those stack against your internal plan?

We don’t really share internal plans, but I do think our results tracked with what Don had spoken about at Investor Day.

Okay.

And then, in Extended Service contracts how does some of the pipeline for potential new relationships look at this point?

The pipeline is still very good.

I mean, especially internationally we’ve seen a very full pipeline and continue to see a good pipeline domestically as well.

And most of our -- and the good news is also most of our existing client base is also seeing good growth in their business, which is excellent.

We’ve been very fortunate with the relationship with [inaudible] to pick up a number of new client relationships, with Home Depot and [HH Craig], to name a couple of them.

That will benefit our business going forward.

And in the [force-placed] Auto business, you’re working to try to really get that business going.

Can you give us some color on that, how that is looking at this point?

As you just mentioned it, it is trying to get it going.

Just continue to look at new niches that really focus right of leverage, all of our core capabilities in Risk Management and integrating our systems and relationships.

So, right now, nothing new to tell you.

The team is working very hard on trying to make sure we’ve identified the right prospects, the right market, and we’re actively out there reactively selling.

We have a few smaller accounts, but really we want to go after the market leaders and that’s where the game is at.

That’s always been the focus of the business at Solutions and Specialty Property, is to go after the market leaders who are going to consolidate the industry and try to really gain a foothold in that business.

So, nothing really new to report since we last reported.

And Bruce, can you remind us the reinsurance, the CAT reinsurance premiums, how those flow through so we can correctly think about the impact in ’06 and ’07 from the high reinsurance cost?

Well, seven months goes into -- it’s June 1 to May 31st, so seven months will go into ’06 and a large impact in the third and fourth quarter, plus it’s really mapping against the Florida hurricane CAT fund and that’s why we have our program starting in June 1.

It’s because we map against the Florida hurricane CAT fund, which starts June 1, and it’s a hurricane period, CAT period.

So, I guess you should expect the impact in the third and fourth quarter.

This was our best quarter ever and the second quarter pretty likely to have some CAT activity, but going to be the third and fourth quarter that’s going to dictate it, and plus the other expense inside this.

So, we’re cautious about the future, but continue to be focused on growth opportunities there.

Joe France with Banc of America.

I just had a couple of really short questions on the Health business.

Could you walk through the price and cost trends on the Individual business?

And also, new complication, the nature of it.

Is it just price, or is it different products?

Sure.

First, on the pricing and cost trends, if you look at the same policy year over year, Joe, we’re seeing trends in the low to mid-teens on same plan over same plan.

Typically what we see people do is buy down their plan or take a plan that’s a little bit less rich to hold down their cost increase.

We’ve seen lots of complication enter in our high deductible space and in the HSA space where we’re not sure they’ve been prudent on price, but they’ve been coming in and trying to gain a foothold.

In this Individual market, in particular, being able to adapt and change and bring new products to market on a regular basis is very important to success and we are spending -- we’re rolling out as part of Advantage Agent also a whole new series of products, which we think provides a broader spectrum of choices for individuals.

And again, we think this whole package, we’re quite excited about.

Thank you.

And just lastly, could you give me the renewal -- the percentage of the renewals for this [inaudible] by quarter?

I’m sorry, I’m not sure --?

What I mean, does your business renew evenly throughout the year?

Thank you.

I’d say that for small Group it’s a little more on the January, April, July, with January being the strongest.

But I’d say much less pronounced than you’ve seen a larger case market, Joe.

Thank you.

At this time I would like to turn the floor back to management for any closing comments.

In closing, we’re very pleased with the results we’ve been able to generate for our shareholders this quarter, results achieved through our unique diversified Specialty insurance strategy and the continued application of core capabilities.

We believe we are well positioned to take advantage of emerging opportunities within each of our Specialty niches, but know that we must stay focused and disciplined if we are to achieve consistent success and long-term profitable growth for our shareholders, retain our customers, and provide opportunities for our employees.

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

Thank you.

This does conclude today’s teleconference.

You may disconnect your lines.

Have a wonderful day!