Assurant Inc (AIZ) 2006 Q2 法說會逐字稿

Welcome to the Assurant Second Quarter 2006 Financial Results Conference Call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question and answer period. [OPERATOR INSTRUCTIONS] I would now like to turn the floor over to Mrs. Melissa Kivett, Senior Vice President, Investor Relations.

Please go ahead Mrs. Kivett.

Thank you operator.

Welcome to Assurant's 2006 Second Quarter Earnings Conference Call.

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

Bruce Camacho, our Chief Financial Officer;

Don Hamm, President and Chief Executive Officer of Assurant House; and Chris Pagano, our Chief Investment Officer.

Today's prepared remarks will last approximately 20 minutes.

After which time, we will open the call to questions.

This morning we issued a press release announcing our second quarter 2006 financial results.

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

Some of the statements we make during this call may contain forward-looking information.

Our actual results may differ materially from such statements.

We advise you to read the discussion of risks and uncertainties associated with our business and results of operations contained in our SEC filings, which can be accessed from our website.

Additionally, this presentation will contain non-GAAP financial measures, which we believe are meaningful in evaluating the company's performance.

For more detailed disclosures on these non-GAAP measures, the most comparable GAAP measures and a reconciliation of the two, please refer to the supplementary financial information posted on our website.

Now, I'd like to turn the call over to Rob.

Thank you Melissa.

Good morning everyone and thank you for joining us today.

We had a solid second quarter and first half of 2006, driven by good growth in net operating income as our diversified specialty insurance strategy continues to deliver strong profitability.

We're especially pleased by the growth and profitability of Assurant Specialty Property.

Our net operating income, defined as net income excluding investment gains or losses and other unusual items, increased by 15% to $149.7 million.

Our net operating income per diluted share was $1.15 in the quarter.

For the first half of 2006, net operating income increased 28% to $313.5 million or $2.39 per diluted share.

Assurant Specialty Property and Assurant Employee Benefits contributed most significantly to the growth in profits.

Net earned premiums were up 4% to $1.7 billion for the quarter and up 3% to $3.4 billion for the first half of 2006, driven by the excellent results in both Assurant Specialty Property and Assurant Solutions.

Net investment income was $180.4 million for the quarter and $373 million year to date.

Excluding income from real estate partnerships that occurred in the second quarter of 2005 and the first quarter of 2006, net investment income was up 7.5% for the quarter and 8% year to date.

This increase resulted from a combination of higher invested assets and a rise in interest rates.

Our annualized operating return on equity for the first half of 2006 was a strong 17.7% and on a rolling four quarter basis, our operating ROE was 16.5%.

These ROEs placed us well within our targeted range of the insurance industry's top quartile.

At the segment level, Assurant Solutions net earned premiums increased 7% both in the quarter and the first half of 2006, as a result of continued steady growth in domestic and international extended service contracts.

This is despite the anticipated decline in premiums as a result of the sale of the U.S. independent preneed franchise.

We continue to invest in new country development to support our international expansion strategy and we've begun investing for our next country launch in Italy.

We're pleased with our progress in both Argentina and Brazil, where we have been operating for several years.

Assurant Specialty Property strong results were positively impacted by several factors including strong net earned premium growth, both organically and through acquisition as well as continued favorable combined ratios during the first half of 2006.

We are reaping the benefits of our market-leading position in creditor-placed homeowners, allowing us to achieve scale economies from our administrative operating platform.

This is an excellent example of how we leverage our core capabilities.

In this case, integrating complex administrative systems to generate value for our shareholders.

We're encouraged by the progress we're making in integrating the recently acquired Safeco creditor-placed insurance business.

We've met with many clients and the early feedback is very positive about how we can better meet their needs with additional products and services for the benefit of both parties.

We have a demonstrated track record of successful acquisition integration.

And although we are still early in the process, to date we are ahead of schedule on our integration plan.

Assurant Specialty Property has achieved significant growth and I'm pleased to point out that our geographic spread of risk has not changed as we continue to emphasis our risk management discipline.

At Assurant Health, while we experienced a quarterly decline in profits, we continue to make progress in growing our core individual medical business.

In addition, we are pleased with our continued low combined ratios as we invest to stimulate growth.

Don Hamm will provide more details in a few minutes on Assurant Health.

The results from Assurant Employee Benefits this quarter demonstrates the continued focus and disciplined underwriting philosophy that we're applying to the small group benefits market.

A significant increase in net operating income during the quarter and the 52% increase in the first half are the result of favorable loss ratios in all of our products and the growth in investment income.

Our Employee Benefits management team continues to focus efforts on growing our business profitably in support of our small case strategy.

Mindful of our focus on profitable growth, yesterday we announced a partnership with Aetna, which will enhance and expand our dental PTO network.

This partnership brings many benefits including providing our small employer customers with increased choices of dentists.

It also should improve our competitive position in the dental marketplace.

As you can see, we continue to pursue opportunities to improve our specialty insurance platform in a highly selective manner.

We are achieving disciplined growth through disciplined performance.

As part of our overall capital management strategy, we continue to repurchase shares with excess capital.

Year to date through July, we've repurchased 4.6 million shares for $217.8 million.

In addition, we increased our quarterly dividend 25% to $0.10 per share in the second quarter.

To give a clearer picture of our specialty company, we provided you condensed balance sheets for each of our businesses.

We also presented separate income statements for Assurant Specialty Property and Assurant Solutions, which now include the preneed business.

In summary, we're very pleased with the solid quarter, representing a strong first half and our disciplined focus on top and bottom line growth.

Now I would like to turn the call over to Don Hamm, President and CEO of Assurant Health.

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

Don.

Thanks Rob.

At Assurant Health, we continue to leverage our core capabilities; risk management, distribution partnerships and integrating complex administrative systems.

We are encouraged about the recent rollout of Advantage Agent for the individual medical market.

We have taken this step and others to position us to grow our high return on equity business.

Total net earned premiums in the second quarter were down 5%, as growth in individual medical net earned premiums was offset by declines in small group premiums.

Individual medical premiums, our core growth focus, are up 4% for the quarter as a result of higher premiums per member.

In addition, individual membership is stabilizing.

Small employer group premiums which we write only when we can do so profitability are down 14% and membership continues to decline.

Individual medical sales in the second quarter of 2006 were more than 12% higher than the second quarter of 2005.

Our individual medical sales have now increased for the past five quarters.

Short-term medical, the smaller component of individual markets, was down sequentially and for the year.

As a result, total individual market sales were down slightly for the first quarter of 2006 but increased 5% over the second quarter of 2005.

The individual market continues to be competitive.

Yet we continue to believe that we have competitive advantages.

Our advantages include our distribution, our underwriting, both its ease and effectiveness as well as our full suite of products.

We have a broad range of consumer-directed healthcare products for the individual medical customers.

Assurant Health can meet each individual's unique needs from those who want rich benefits to those who want lower price.

We also have the capability to have more precision in pricing in targeted geographical areas.

The recent rollout of Advantage Agent has been well received by customers and agents.

Advantage Agent is our new portfolio of services, tools and products, which makes selling our individual medical products easier, faster, and more profitable for our agents.

Advantage Agent was launched to 31 states in the second quarter and we expect to rollout the remaining 12 states within the next six months.

States with our new portfolio products in express underwriting are experiencing greater growth.

We expect that this unique combination of products and innovations will make us easier to do business with and this will help us grow a profitable individual medical business.

Assurant Health's net operating income in the second quarter of 2006 was $41 million and $86.1 million for the first half of 2006.

This includes $4.8 million of after-tax income from real estate partnership in the first quarter of 2006.

This is a decrease in income from the previous periods and is primarily due to a decline in small group revenue and higher individual medical expenses.

Nevertheless, the combined ratio of 91.5% for the first half of 2006 led to the return on equity exceeding 34%.

Our focus on Assurant Health is to grow a profitable, individual medical business and we have made investments to grow this business.

In closing, I am very proud of the focused efforts of everyone at Assurant Health.

We work hard every day in support of our mission and that is to protect people from financial hardship due to unforeseen illness or injury.

We continue to make investments which lead to added growth and profitability while maintaining a strong ROE.

Thank you for your attention today.

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

Thanks Don.

Assurant had a solid second quarter, driven primarily by the strong profitably in Assurant Specialty Property and Assurant Employee Benefits and continued top line growth from Assurant Solutions and Specialty Property.

Don told you about Assurant Health, so let me turn now to the results of our other leading specialty insurance businesses.

At Assurant Solutions, net operating income of $37.1 million was down 12% in the quarter.

Excluding $6.1 million after-tax of investment income from a real estate partnership recognized during the last year's second quarter, net operating income was up 2.4%.

Net operating income for the first half of 2006 was up 17% driven primarily by the growth in domestic and international extended service contracts.

Net earned premiums were up 7% in both the quarter and first half of 2006.

This increase is being driven by the continued growth in our domestic and international extended service contract business, offset by the anticipated decline in preneed premiums due to the sale of our U.S. independent preneed franchise.

Gross written premium is a key measure in tracking Solutions growth and we continue to see significant growth in gross written premiums from our targeted growth areas.

Domestic extended service contracts, gross written premiums were up 21% in the quarter, primarily due to growth with existing clients.

International extended service contracts were up 41% primarily driven by the continued growth from Future Shop, based in Canada.

International credit was slightly off compared to the prior year due to the transitioning of our UK business production from single premium to monthly premium.

Fee income increased 29% during the quarter and 24% for the first half of the year, primarily as a result of the growth in service fees associated with extended service contracts.

Excluding investment income from real estate partnerships recognized during the first quarter of 2006 and the second quarter of 2005, Assurant Solutions net investment income increased 9% during the quarter and for the first half of the year due to increase in both invested assets and interest rates.

At Assurant Specialty Property, second quarter net operating income was up 73% to $59.3 million and grew 71% for the first half of 2006 to $123.7 million.

Higher net operating income is attributed to top line growth, combined reissue improvements, and the Safeco acquisition.

Driving the combined reissues lower were the benefits of scale on our expenses as well as favorable loss experience despite $6.8 million pre-tax, the catastrophe losses in the second quarter.

The last reissue was favorably impacted during the quarter by $1.9 million pre-tax in reimbursements received for administering claims under the National Flood Insurance Program, related to Hurricane Katrina and $9.7 million pre-tax for the first half of the year.

Net earned premiums increased 40% to $291 million for the second quarter and 33% for the first half of the year primarily from the growth of credit-placed homeowners, of which Safeco's book of business contributed $30 million in net earned premiums in the quarter representing two months of business.

Fee income during the quarter increased 34% to $13.6 million and 26% to $23 million for the first half of the year due to growth in credit-placed homeowners and the Safeco acquisition.

Safeco contributed approximately $3 million to the rise in fee income as a result of tracking fees for the months of May and June and also for a one-time contribution to fee income representing the net profits on the business for the first four months of this year.

We anticipate that the profit margin and ROE after the full integration of the Safeco book of business will be comparable to our existing creditor-placed business.

Results were also favorably impacted by 21% increase in investment income during the second quarter and a 16% increase for the first half, due primarily to an increase in invested assets, fueled by positive cash flows generated by the business.

A key focus of our risk management is our reinsurance program to mitigate our exposure to catastrophe losses.

In June we released the details relating to our catastrophe reinsurance program which went into effect June 1, 2006.

We increased our retention and limits as a result of a significant growth in our business both organically and through the Safeco acquisition as well as changes in catastrophe risk models used to estimate potential catastrophe loss levels.

But as Rob mentioned, our geographic spread of risk has not changed as we continue to emphasis our risk management discipline.

Second quarter 2006 pre-tax reinsurance premiums were $12 million.

In the third and fourth quarters, pre-tax reinsurance premiums are expected to be $26 million, excluding any potential reinstatement premiums.

Assurant Specialty Property had a very strong first half.

However be cognizant of the seasonal timing of catastrophes which could occur in the second half of the year.

At Assurant Employee Benefits, net operating income jumped 110% during the second quarter to $20.6 million driven by good loss experience across all product lines.

Disability loss experienced in particular continued to be very favorable.

As a result of lower sales and persistency, net earned premiums decreased 11% to $282.6 million in the second quarter of 2006.

We continue to see a highly competitive market for all products especially dental.

However we are pleased that our new network arrangement with Aetna will further strengthen our competitive position in the dental market.

We also saw increased core activity for our voluntary disability products and continued growth in our preferred broker program.

We continue to maintain our pricing discipline as we implement our small case strategy.

We remain hopeful that we will begin to see net earned premium growth in 2007 driven by accelerating small case sales.

Next I'll comment on our corporate and other results.

Where we reported a net operating loss of $4.9 million in the second quarter of 2006 compared to a loss of $3.3 million in the same period last year.

The second quarter of 2005 included a tax benefit of $5.2 million on repatriated capital under the American Job Creation Act.

Corporate and other net operating loss for the first half totaled $5.4 million compared to a loss of $13.7 million in the first half of 2005.

The net operating loss at corporate and other improved due to the adoption of FAS 123(R) which requires fair value accounting for stock compensation plans at the time of grant.

This resulted in a $12 million reduction, pretax in expenses compared to the first half of 2005.

Our balance sheet remains strong.

An indication of this strength is that A.M.

Best recently reaffirmed all of our ratings.

Our debt-to-capital ratio improved to 21.6%, another indication of our financial strength.

Total shareholders' equity at the end of the second quarter excluding accumulated other comprehensive income was $3.6 billion.

Book value per diluted share excluding AOCI grew 6% year to date to $27.95 at June 30th, 2006, even though we repurchased $168 million of our shares.

In summary, we continue to see disciplined growth both organically as well as through acquisition in a number of our targeted growth areas.

We are pleased with the results we've been able to generate this quarter.

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

Thank you Bruce.

Operator, we're ready for questions.

[OPERATOR INSTRUCTIONS] Our first question comes from John Nadel of Fox-Pitt Kelton.

Hey good morning everybody.

Good morning John.

Just a couple of quick questions, it seems like a pretty straightforward quarter to me.

Can you give us a sense for the $3 million of higher fee income from Safeco and Specialty Property and the $30 million contribution for the two-month period, for the two months in earned premiums?

Can you give us just a sense overall for the net sort of bottom line impact of Safeco in the earnings?

Sure.

You know to me John, Safeco was the perfect acquisition for us in that it leveraged all of our core capabilities.

So when we sit down, what we can say about the Safeco acquisition is it's been accretive to earnings during the quarter.

In terms of the reporting, there's really two pieces to the deal.

I'm going to let Bruce talk about that a little bit cause I think he mentioned that.

But I think the thing to take away is we feel that this business will generate the type of returns that all our other creditor-placed business does.

And we feel quite good about it.

Bruce, you want to provide a little color on the numbers?

Yes, John the way we struck the deal with Safeco we, the first four months was under separate deals.

So that's kind of a, we have a net pickup there.

And that all comes through the fee income line?

That all comes through the fee income line.

Okay.

So what will happen going forward now is the production will come through just like, as Rob mentioned, like the normal property business.

You know pretty much in line and the profitability being in line with all of the property business that you've got there.

Okay.

And the $30 million of production is the two months.

It's May and June.

Yes.

Their end, so it's obviously ahead of schedule we thought.

But again two months don't make a trend so we're not willing to say.

We're obviously very pleased with the integration.

We're very pleased with how things have come on track.

Everything is ahead of schedule.

So it's perfect for our, for where we were with the disciplined growth and this had been performance.

Yes, no it sounds good.

I, any one-time costs that we ought to expect in let's say the second half of the year around that?

I know that I can't remember exactly when this was, maybe a month, two months ago or so.

It was shortly after you announced the deal.

You announced the closing of one of the claim centers or something.

Right.

Are those costs already in the numbers or is that something that comes in the back half?

They'll be a [diminimous] amount in the second half of the year John.

Okay, okay.

But nothing that'll show up per say.

I think the one other thing is given the structure of this deal it's a part of it is, of the purchase price is dependent on retention of clients and renewal of contracts.

So that'll roll out over time.

Okay, the, just sticking on creditor-placed just overall, have you seen any signs especially in the southeast of any sort of anti-selection.

Are you seeing an increase for instance in the, in the amount of the business that you track actually being force placed?

A couple of points here.

First, as part of our overall risk management, we traditionally see a pickup around storm season in placement.

In anticipation of that, we have other business within our specialty property line that's on a voluntary basis.

So anticipating that, what we did is we decreased our exposure there and, what we're seeing come on board on the creditor-placed is exactly what we'd expected and that's why we've been able to maintain our overall risk profile.

Great.

And second to that John, I think we've seen a growth throughout all the regions.

It's very consistent across all the regions.

So not only did we do what Rob said, we took the right risk management discipline on the voluntary side to offset anything that we actually lumped the business on the creditor-placed side.

But the growth has really been across the book of business, across all regions.

So it's, that's what we really want to see.

That's great.

Just one quick data point, you used to provide this.

Now you don't.

Can we get gross written premium for Specialty Property?

Yes we can.

We just haven't done it this quarter.

We're still looking at and obviously improving more of our disclosure on this business.

Yes, no I'm just wondering if you had it with you.

No we don't have it with me.

Okay.

And then the last thing, since we've got Don available, just the outlook on the individual medical sales side.

I mean you know there was pretty bullish statements if we go back to March and the investor day.

You still feel reasonably comfortable with the expectation for continued sort of sequential growth.

I mean I know we've now got four or five quarters.

I'm very encouraged by the response to our Advantage Agent.

I've had many agents talk to me and making very clear that we have the best issue and application system in the industry.

And that we're going to be receiving more of their business.

And just achievement in the second quarter is particularly noteworthy because traditionally the second quarter is our lowest sales quarter of the year.

Now for instance last year, our second quarter was 8% lower than the first quarter.

And I think it's important to acknowledge that we're getting this growth and remaining very disciplined with our pricing.

We're not taking rates down to where we don't think they're going to be highly profitable for us.

We're focused on using our competitive edge of distribution and our ability to be faster and more efficient with our underwriting to generate profitable growth for Assurant Health.

Okay.

Great quarter guys.

Thanks.

Thank you John.

Your next question comes from Ed Spehar of Merrill Lynch.

Morning Ed.

Good morning everyone.

Good morning Ed.

A few questions.

First you mentioned a couple things that we might consider to be unusual items or one-time items.

Could you maybe sort of give us a list of what you would consider to be, I mean the Safeco, the four-month earnings benefit, could you, did you quantify that or could you quantify that?

Was there more than just the real estate partnership in Health?

Sure.

I think first, the ones I think about are the flood fees, okay, which I think Bruce mentioned.

Yes, by $1.2 million after tax.

Right.

We had some costs on the transition from the independent preneed.

So we had a positive on the flood fees of about $1.9 million pre tax.

On Solutions, we had about a million of additional expenses we just transaction or as we transition away from the independent preneed channel.

Is that after tax or pretax Rob?

Pretax, about a million pretax Ed.

You know the Safeco, you know they're, I guess you could look at it and say there's some additional earnings in there but we don't, we haven't split out a separate Safeco P&L just because it's all combined in there.

So there's a little bit of extra earnings in there, but I wouldn't say real material.

Yes cause we look at that Safeco being just like acquiring a new client except it was just a bunch of new clients.

So I think we, although it came through one line item, the fee income for that first four months, it was not abnormal to us, but it's just growth in business.

And then obviously the SAR expenses I mentioned in corporate which is about, just for the particular quarter is about $1.2 million less in expenses for our stock appreciation plans.

Right, but is that, is that, but that's at a sustained level or is that $1.2 million less than a normal level?

Well it's, our level is now much lower because adopting the new FAS 123(R) our, we don't have to do what we were doing, which was always market to market.

So the expense level throughout the year will continue to be lower.

It's lower in the first quarter.

It will continue to be lower than the previous year.

And then on the real estate partnerships Ed, I mean we did not have any real estate partnership income in the second quarter.

I think if you look at some of the detail in the financial supplement, we've tried to break out the real estate income by quarter in each of the segments as it's appeared.

You know Rob I'm sorry.

Did the number that Don gave on the $4.8 million after tax, was that 2Q last year?

No, that was the first quarter of '06.

First quarter of '06.

Yes.

Okay and then in terms of the Specialty Property business, obviously the combined ratio is very low.

I think you've been sort of looking at this internally and trying to understand maybe how much is sustainable, how much is just really good, really good experience in the current environment.

Do you have any better sense of how sustainable these ratios are?

Sure.

Well the first thing I go back as part of our risk management here, Ed.

I'd start with we're in the property business.

We're not in the casualty business.

That's part of what we do to control risk in this business.

Second, we've got an overwhelming leadership position in this business now with the number of loans we're tracking.

That gives us scale economies on the administrative side.

Third, we've taken a number of actions to better control our claims cost with inside adjusters.

This year we've actually put together an even faster ability to get to catastrophes, which is a key to getting claims settled out early.

We've looked at how to get capacity by entering into arrangements to help get properties rebuilt by putting relationships in place with people who do that to control costs.

So we really like this business quite a bit.

Obviously we're going to get some variability around catastrophes.

But catastrophes is the key area we're focusing on to control cost and mitigate risk as well.

Okay, that's helpful.

And I guess in Solutions the growth rate of net premium earned of, or is it the, was it net premium earned of, or was it of 2.4%.

That was the bottom--

I'm sorry bottom line.

Yes.

The bottom line, 2.4%, excluding the real estate.

That's correct.

Partnership in 2Q.

What was the source of slower growth there?

Why I think there's a couple things Bruce mentioned.

First that independent preneed franchise going away caused some of the earned premium to disappear.

Okay, second if you look internationally within the UK, we've gone from-- I'm sorry, you asked about income Ed.

I'm sorry.

That wouldn't have an impact.

I was talking about the premium side of things.

We did have some one-timers there as well, if you look at things on the real estate partnerships.

So that would be a contributor.

And we have a little bit of costs that I mentioned related to exiting the independent channel.

Yes and then just we continue to grow internationally Ed.

So we're going to continue to invest there.

And we've moved into a number of countries.

Mexico was started last year but it's still in development stage.

We've moved into Italy and Germany.

So we're starting to spend more in establishing a beach head in Europe.

So we'll have a little bit more spend on the international front.

But we think that's a wise investment because the margins are there and it's not something that we have to do, it's something that we want to do with the models that we've got in creditor-placed and extended service contract.

And that's likely to continue for the balance of the year or is it more heavily weighted in the second quarter?

No I think it's going to be, it's going to be continuous.

I mean as we continue to expand, we'll try to, we're going to do it in a very methodical, disciplined manner.

We're planning on moving to Poland and Eastern Europe that will probably be next year sometime.

So we'll continue to have countries coming online and it takes about three to five years.

We're very pleased as Rob mentioned with Argentina and Brazil.

They've been up and running now for about three to five years.

So they're turning profitable.

And they'll start really contributing to the Solutions.

But it takes us a while to get these countries like Mexico, like Germany, like Italy up to speed.

So there will be a spend there which will have a pressure on their, you'll have top line, but top line will come on slowly.

Okay, just final quick question.

Do you have any sense for what first half statutory operating earnings were?

Any guesstimate?

Not off the top of my head Ed.

Okay, thank you.

Our next question comes from Steven Schwartz of Raymond James & Associates.

Hi guys.

How you doing?

Morning Steven.

How are you?

Good, good.

Hey I do want to follow up on the, on the Solutions side with regards to the effects of Future Shops.

If you can give us a sense of maybe ex Future Shop, how much the extended service contract line is going up?

And as well if you can somehow give us some type of guesstimate I guess of kind of how international credit would be growing, if England hadn't been going through the transformation I guess that it's going through.

Sure.

What, you know on the Solutions side, this is a business that is heavily dependent on those large client relationships.

We added some smaller clients over the course of the quarter and also added some in the first quarter.

And I had mentioned that our pipeline continues to look quite good there.

Future Shop obviously was a very big client for us in Canada and has led to quite a bit of our growth.

I don't have the particulars on separating that account out Steven.

But I would say we're getting growth elsewhere.

It's you know that was just one we highlighted cause it's one we've talked about previously.

Okay, hey Rob just as a quick follow up on that.

Sure.

Future Shop came on line and started producing premium when?

Fourth quarter of '04 I believe.

But remember on the extended service contracts side, we get some fee income but it's not until manufacturer warranties expire that we start earning premiums.

Okay so that's finally coming through.

Yes, exactly.

Okay.

On the international credit side, I think we have signed up a number of deals.

I think we reported on a couple of those in the first quarter of last, or the first quarter of this year [Banorte] and--

[inaudible – microphone] Brazil.

Exactly.

Those, there's a ramp up that comes with those.

First it's getting the clients signed up.

Then it's the training etc.

But we're encouraged that we're building our base of clients and we think that'll turn into nice growth similar, a little bit different to that whole play in the extended service contract.

There it's the manufacturer's warranty expiring.

Here it's a matter of us getting in, training the clients on how the product gets sold and added on to their base coverage.

Bruce, you have anything to add?

Yes, the supplement will show you Steven as you can see the international credit side is obviously much larger than the ESE side.

Right.

And obviously Future Shop as Rob mentioned was a large, a large win for us.

So it's continuing to grow.

So it is the primary driver of the international ESE cause it's the largest account we have outside of the U.S.

Okay, hey Bruce while I have you, just a quick question.

The tax rate in Solutions?

Yes.

It looked kind of weird in the quarter.

And was that just an offset to a low tax rate in the first quarter or was something going on there?

Well we're also putting the preneed business in there too now.

So that changes everything?

Right.

Okay.

Changes everything.

No, but even on a pro forma basis I think.

No it's just, it's just where the profits.

If it's more, it will change depending on where the profits are coming from.

So I think, it's higher and it's probably going to continue that way with the preneed business being inside there now.

Okay.

Our next question comes from Adam Klauber of CCW.

Morning Adam.

Good morning thank you.

Morning Adam.

Were there material or reserve releases in the Health and Employee Benefits this quarter?

You know we, our basic approach is to be very conservative in our balance sheet, how we look at things.

And in terms of releases, I would say no.

Our methodology has not changed.

As experience develops obviously you get restatements, all kinds of things.

I, Don you want to comment on the Health side?

We've maintained a very consistent approach and consistent methodology.

And there were no unusual events so far this year.

Right and on the Benefits side, Bruce spoke of the good disability experience and in essence what we've seen there is favorable incidence and favorable recoveries.

Yes I think that the, our strategic shift away from the larger case market to the smaller case market has definitely benefited us.

And that's why the focus of Employee Benefits is continuing in that segment of the marketplace.

But nothing has really changed in the reserve side.

Okay.

And also on the reserve topic, I noticed that in the Special Property reserves obviously came down.

Have you been paying off claims on the hurricanes?

Again any [several] development in that number or is that all claim payments?

That's pretty much all claim payment because of a lot of things are in, if there was additional development would actually go to our reinsurers since on most of those storms we've penetrated the reinsurance.

Yes, it's basically claim reserves and is, and then with the flood business from the NFIP, you know we have it grossed up both on the asset side and the liability side.

And that was paid off obviously through going through handling their claims for them.

Okay.

On the Special Property, the growth even excluding the Safeco book was very strong.

I calculate around 25%.

Could you give us an idea of the components, what's the rate maybe unit, new clients or just some idea of what that breakdown look--?

Sure, I mean we definitely landed some new clients last year that have come on.

A couple of our clients increased the size of their loan portfolio by buying that.

And we filed for rate increases in certain areas.

And then the last thing I'd add is, as housing prices go up in general, we benefit from that when someone gets placed cause they're typically taking a current insured value, which goes up 4 to 6% a year.

Yes and Adam as you can see when we look at the supplement, you'll see that it really is coming from the homeowner's side and not from the manufactured housing side.

And it's a little bit in some of the other products that we are trying to also grow in the property business, some of the other [incubation] products.

So it is really a combination of new clients.

It's all of the above that you've mentioned before earlier.

It's new clients as well as production in the old clients.

I mean it's very disciplined in how we go about growing the book of business across spread risk.

And I think it's across all those lines that you said, new product, new clients and existing clients.

Okay and just one final one.

Should we worry, I mean we see headlines about slowing retail sales.

Should we worry about that impact on the extended warranty business?

Well you know first of all we're, we've got a very diversified group of businesses here.

And as we've analyzed the risks in the business, we've found that they're not correlated to one another.

You can get in and look at a variety of these different things, but I would say slowdowns in one can benefit others.

What we've seen in the extended service contract business is when they sell less units, we actually tend to get a higher penetration of extended service contracts into the sales block, cause they're looking to make more income.

But there's lots of different ways to look at this.

Chris, maybe you'd want to make a comment on how it impacts our investment portfolio?

Sure.

You know from the standpoint of a slowdown in the consumer, we're, our base case scenario and we think the market's base case scenario is that the Fed manages to engineer a soft landing.

In that situation, we've got a nice cushion of reinvestment yield relative to the portfolio, book yield.

If in fact they've over tightened, which would potentially affect the consumer more significantly, our base case there is that while rates may drop, we would expect that credit spreads will either drift or potentially gap wider, in which case we will benefit on the reinvestment side because of the conservative portfolio and our ability to reinvest at potentially lower overall rates but higher spreads.

And that's a huge component of the profitability of our ESE business.

Right.

Thank you very much.

Sure.

Our next question comes from Jukka Lipponen of KBW.

Good morning.

Hi Jukka.

How are you?

It's good, thanks and congratulations on another great quarter.

Thank you.

First question, just a clarification Bruce, just to make sure the cap reinsurance premiums for the third and fourth quarters are $20 million pretax in each of the third and fourth quarter?

$26.

Right.

$26.

Yes.

But in each quarter?

Yes, each quarter.

And second question to Don, can you talk about the competitive environment in the health insurance business?

And I apologize if you've commented on it on your opening remarks.

I got on the call a little late.

You know the individual medical business, a very local, locally driven.

Each local market is a little different.

Assurant Health has a big advantage in that we're a national company, so we're not dependent upon any one situation.

And I would say over the first half of this year, we have had no new significant new entries.

And I would say a slight improvement in our relative position in some locations.

So I see a slight gain in that regard.

And I'd just add to what Don said there.

He's maintained that same discipline, so why would our competitive position have improved.

And the answer is, in certain markets we're seeing competitors take rate action.

This is very consistent with what we've seen historically when people have entered our specialty business.

They get in looking for growth.

They, some results develop and then they realize that perhaps they haven't priced the product properly cause it's a different specialty business and doesn't necessarily relate to their other business.

And Rob how does the acquisition environment look at the moment?

We are evaluating many different things.

We continue to have an active set of things we're looking at, but we're going to be very disciplined on what we buy and make sure we don't over pay.

You know acquisitions, we used, we talked about them originally in a size range of $100 to $300 million.

But we've kind of realized that given what we look for, they could be smaller.

And we're often looking to buy a block of business or we're looking to add a capability.

I don't know.

You look at the Aetna deal we've just put together.

To me, we just acquired a capability of a broader network.

Okay?

And that's an arrangement that benefited both parties.

I think it's going to translate into our ability to sell more dental.

But it wasn't the traditional acquisition.

Okay and then lastly for Bruce I guess, how should we think about the buyback activity going forward?

And secondly, if I look at the real estate partnership income say in the last six quarter average for example, is that kind of a reasonable expectation on an average base, obviously it can fluctuate and it's lumpy on a quarterly basis.

Okay so let, Jukka let's have Bruce comment on repurchase and the, you know how we deploy our capital.

And then we'll turn to Chris and let him comment a little bit on how we look at our investments in real estate.

Bruce?

Yes, Jukka nothing's really changed on how we look at excess capital and the share buyback program.

First of all with the excess capital, it's going to be to look and make sure that we acquire property to investing in high return businesses.

Second, is to obviously to make sure that anything that's come along in the pipeline, any new niches or any add-on acquisitions that's the second approach.

And then we return to shareholders like we've done in the first half of the year with increased dividend.

As Rob mentioned, increasing by 25% at $0.10 a share and then the share buyback.

So we, our dividends from our segments are skewed toward the second half of the year, so we haven't brought a lot of dividends up.

So stay tuned and nothing I can really report to you on that front on share buyback.

We've gone through about just over half of our allotment from the buyback program that was approved by the board late last year.

And we consider this a tool in our capital management RS&O and we'll continue to use it effectively.

Chris, you want to talk a little about our real estate portfolio.

Sure.

The long-term goal for us on the real estate side is to grow the portfolio.

And we've done that consistently over the last 12 to 18 months.

The second thing we look to do with respect to real estate is to act opportunistically.

And that's both from the purchase and the sale side.

So in each case when we make a decision to buy or sell a property, it's based upon the economics.

Real estate itself by definition can be lumpy.

Things tend to have long lead times on both the sale and purchase side.

So I guess I would not necessarily want to run rate something because of the opportunistic approach that we take to the asset classes.

Thank you.

Our next question comes from Ed [Roll] of Cowen and Company.

Hi Ed.

Hi Ed.

Good morning, it's Kroll from Cowen and Company.

Got it.

A couple of questions on the Health side.

The, Don could you repeat that sales growth met the, corresponding June '05 year-over-year number.

I think it's plus 12% this time and what was that a year ago on the individual sales?

Well the sales in the second quarter of 2006 for individual medical were 12.4% higher than the same quarter a year ago.

And you cited what that was I think a year ago, year over year as a--?

Well I refer to that typically, well last year, our second quarter was 8% lower than the first quarter.

So the fact that we have so little more in the second quarter over the first quarter was a positive.

And let me reinforce a thought that came out earlier.

I still do believe that our individual medical sales will increase this quarter, will increase this year every quarter over the previous quarter.

And I do believe every quarter we'll sell more than the previous year ago quarter.

Got it, okay, so now I'm clear.

So last year from Q1 to Q2 sequentially you had a decline in the sales.

Right, of 8%.

Got it.

Now, I'm with you.

And that, for us monitoring this or for you as you monitor the progress of your team, is this the best gauge to use for the growth of the Health individual health business?

Yes it is.

Okay.

That's what we focus on and that will increase excellent shareholder value.

Right.

And then on the healthcare ROE, which is outstanding relative to the other companies that I cover anyway, the health-oriented companies, is that, you know you had talked about a recalibration or maybe you and Rob talked and Bruce, a recalibration of that healthcare ROE feeling you could give a little on the price and have a lower ROE but a higher earnings growth rate.

Can you give us an update on the philosophy or what you see going forward on that metric?

Sure let me start then I'll turn it over to Don and Bruce may want to chime in here as well.

But the first thing to understand is the health business is a relatively lower capital intensive business than some of our other businesses.

So that means the amount, how much premium can we write per dollar of equity is higher than say our property business.

Okay?

Now with that as a starting point, Don and Bruce made some comments at investor day and I'll let them amplify on them a little bit that I think will put that into context.

Yes Bruce commented at investor day that the returns in the health business were in the mid 30's, 30 to 35% range.

And that we expected to see those gradually decline to be in the mid-20's and that we thought this would create excellent shareholder value by growing the very profitable overall book of business.

This will be a gradual process.

And we're maintaining our discipline and our pricing to make sure that we aren't pricing more then we have in the past.

And I think we'll see it primarily in the 25 to 30% range.

A little bit, ROE over the next couple of years and also that this is unleveraged.

There is some leveraging that occurs and Bruce you might want to comment on that.

Yes I mean the ROEs of all our segments are unleveraged.

So that's a very important factor as well.

And the indications I gave at investor day was really try to give you really a three to five year look.

And now obviously when I showed you the range of Health being in the 30 to 35% range and actually that's the top end of that range.

It's going to take them a while.

It was just, the idea was the fact that we want the individual business to grow and there is expenses associated with that investment to grow it.

And it's not just a price issue.

It's really an expense issue, especially on first year on the individual side.

But it's really not something that's going to happen as Don mentioned over night.

It's going to take a few years for that to occur.

Let me point out for instance that our loss ratio for our [indiscernible] in the first half of 2006 was 62.0%.

And in the first half of 2005 was 62.0%.

Our combined ratio increased by 1.9% because of spending that we did to support the Advantage Agent initiative earlier this year.

So that's right along the lines of where we see the business heading.

Great.

Thanks for that color.

And then just quickly on the, that Aetna, new Aetna relationship on the dental side, is there any costs to you for that relationship?

Or is that kind of almost a barter deal where each side gets access to the other side's network but there's no real cost involved?

Well the terms haven't really been disclosed on anything, but I think the best way to look at it is that both sides will have an increased panel coming out of it.

Okay, fair enough.

Thank you.

Our next question comes from Kelly Nash of Keybanc Capital Markets.

Morning Kelly.

Hi, good morning.

The first question I have is with the Safeco acquisition, how has your geographic risk spread changed from the map that you provided us in early March or at the investor day?

Overall it's quite similar to what we provided Kelly.

That's really the result of a couple different things.

Safeco's, the book we acquired was, had a little more actually Midwest and Western exposure associated with it.

Then of course we mentioned we've taken some actions on our voluntary business to reduce exposure in some of the coastal areas.

The net result of all that is our overall block is unchanged.

If not, would look very similar to what John showed you at investor day.

Okay and what is your market share look like now in that market?

In the creditor-placed market, higher.

Obviously of the, I guess there's a couple ways to think about it.

The way we've tended to describe it is that of the people who use someone for tracking, the outsource market, I would say we're probably north of 70% in that market now.

Yes.

Okay and then can you discuss any cat losses that you have in the third quarter to date given some of the storms we've seen in July?

We really don't provide forward-looking but I, I'm just trying to think if there's, you could go and look if there's been iso events in the third quarter.

I'm not sure that there have been, but I'm not up to speed on that Kelly.

And then just finally, can you provide any more specific metrics on the growth in the states with the Advantage Agent versus the growth in the other states?

Don?

Unfortunately at this time the data is so early that it'd be, wouldn't be too meaningful to present that to you.

But we have seen very positive response in those states that have the Advantage Agent for longer.

We are seeing better growth and so we do definitely feel we're gaining momentum from that introduction.

And is there anyone else out there that you're seeing that has something similar?

No, no we, I believe have by far the best issue and application system.

It's important to recognize that we're issuing policies in hours versus weeks and months from our competitors.

You know from the perspective of the customers, they get more certainty and that's less time that they'll shop around looking at alternatives.

And for our agents, less time that they spend in the application process gives them more time to sell.

And also they get paid sooner from their commissions being paid when a policy is issued.

So we're, we really are so pleased with the response and I think we're building some good momentum.

And it's important to keep our discipline as we grow and this way we're doing it in a way that we're not taking our pricing down to a level that we can't grow and make money.

Thanks.

The next question comes from Bill Wilt of Morgan Stanley.

Morning Bill.

Hi, good morning.

Ought to be a--

Hi Bill.

Hi there, to be quick given the time.

But first just wanted to confirm a number you just gave that market share in your creditor-placed homeowners business is 70% or north of 70%.

Yes again given how we measure that, that's people who outsource their tracking.

Got it, got it.

Some people still do that themselves Bill.

Got it.

Thanks.

And I guess coming back to the idea of growth in Specialty Property, a question was asked if you could break down growth by units versus rate and just observing that in a homeowners, creditor-placed homeowners business, if I think adjusting for I guess all of the Safeco premium or most of it is attributable to that segment, so it looks like growth is in the, is upwards of 38% year on year, which versus, is quite high.

Can you break that down by rate versus unit?

I can't per say, but I, there may be a way to think about this is we track 29 million mortgage loans.

And we place a very small percentage of them, probably less than 2%.

When a placement takes place, what we're in essence doing is replacing the amount of coverage for the structure.

That structure tends to go up as home prices go up.

You know a lot of people have perhaps an inflation-adjusted policy.

So when we make a placement on a $100,000 home last year, that same home this year might be at $105,000.

In addition, every year we look at our experience, which includes the cats by the way and file for rate action where necessary in each of the different states.

So we're looking at all the different components Bill.

I don't have that split in the way you requested but we haven't seen a big change in our placement rates per say as a result of the Safeco acquisition.

Okay, can you, so you maybe used other homeowners' insurers and their rate increases as a proxy for the inflation adjustment component of the overall premium increase perhaps?

It's very different Bill from the standpoint of a regular homeowner's coverage, they're worrying about the liability side, the content side, the temporary living expense side.

We have none of those coverages at all.

Ours is strictly on structure.

And our rate to start with is significantly higher than where they're starting from in the first place.

Understood.

And then in terms of from a risk management perspective, levers to control growth.

What are the primary levers to control growth?

You talked about not writing any more voluntary homeowners business.

Are there, are there other levers for controlling growth?

Sure.

Well I guess a couple different things.

First of all, if you look at the promise we're making to the lender or tracker, it's to insure that their portfolio has coverage.

So we've got to provide that coverage.

Now, what the coverage, what the particular policy is, that's a lever we can pull.

In other words, we can change the policy that's offered to those people.

And that can make a difference.

We as Bruce mentioned in some of the voluntary areas, we can slow down capacity if necessary and we've obviously done that in the areas we were most concerned about, anticipating we'd pick up some exposure in those areas.

Okay?

But we like this business and we think the results speak for themselves.

Yes, they'll be some volatility but those numbers we're pretty happy with.

And I'll add one final comment Bill in the sense that we look at, you know we are the leaders in the business and we look at the type of clients that we do business with.

And we focus on the large mortgage lenders that have a very, very broad spectrum of risk.

But obviously that portfolio's going to be where the population is.

But we've got portfolio, quite large portfolios in Michigan and Ohio as well.

And so it's all over the country and we stay away from a particular lender that's only doing business in one geographic area like all they do is issue loans in Florida.

Well that's not one of our clients.

Because then you cannot have the dispersion of risk that we want from a risk management standpoint with that particular client.

So not only do we look at the product, we look at the client production as well.

What clients we do business with.

Thanks very much.

Sure.

Our next question comes from Dan Johnson of Citadel.

Morning Dan.

Morning Dan.

Hello gentlemen.

Most of these have been answered but I wanted to talk a little bit about governmental changes in the flood program.

I believe they've been passed if you will.

Can you talk a little bit about what the expansion has been in terms of coverage per unit?

And then what are you seeing on the side of your banking clients in terms of their possibly increased interest to do better monitoring of the, of those policies for their mortgage clients?

Sure.

Well you know Bruce is actually on the, what is it?

The PCIA?

PCIA.

And this has been a topic of discussion.

So I'll let him talk about a little bit.

Yes so Dan I'm not sure everything that's, what [laws] has been passed yet at all in the flood side.

They're trying to get that through but it really hasn't gone anywhere.

Nothing has really gone on.

It's still like basically the same program that was approved in October.

And so I guess if by next October, next few months they'll try to get something done for the following year, but it's pretty much the same program, same kind of fee income structure.

But we are monitoring it and we do think there should be changes to the structure and we're there.

With our big lender clients, the second part of your question, a number of them have been tracking flood and we've been doing that for them.

But we are seeing an increase in that arena.

And then just our normal business, we have the sixth largest and administrator for the federal government and we have seen a continued increase in our production of business, which doesn't show up on a net earn obviously.

It shows up on gross.

But it's gone by net.

We just get a fee for actually doing the placement and then a fee if floods occur.

Okay great.

And then the premium growth that was derived from Safeco was $30 million for two months.

I think before I had been working under the, well obviously if you annualize that you'd be looking at $180.

If you and that excludes whatever other fees or investment income would be derived off that.

Is that probably a better run rate to be using going forward for that block of business versus the, we expected $140?

Well we have the same question Dan.

You know whenever you do an acquisition, there, things are in transition.

Your processes versus how the acquire, or the company you acquired from did things, can be different.

So we reported on the numbers.

I think Bruce used the term one or two data points does not make a trend.

We think we're going to be able to tell you a lot more on that on the next quarter's call.

Great.

Thanks very much.

Thank you.

Our final question comes from Greg [Lapin] of Tribeca Global.

How you doing?

Greg, good, yourself?

I'm very good.

Congrats on a great quarter.

I'm, I have all my questions answered.

Terrific.

Good.

All right.

All right, thanks very much.

Thanks.

In closing, we're 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 are well positioned to take advantage of emerging opportunities within each of our specialty insurance niches and believe we are achieving disciplined growth through disciplined performance.

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

Thank you.

This does conclude today's teleconference.

You may now disconnect.