Assurant Inc (AIZ) 2006 Q3 法說會逐字稿

Welcome to the Assurant Third 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 session. (OPERATOR INSTRUCTIONS).

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

Please go ahead, Ms. Kivett.

Thank you, Markita.

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

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

Bruce Camacho, our Chief Financial Officer;

John Owen, President and Chief Executive Officer of Assurant Specialty Property; 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.

Yesterday, we issued a press release announcing our third quarter 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 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 may 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.

Assurant posted solid results and excellent profitability through the first nine months of 2006.

Our results illustrate the strength of our diversified specialty strategy and our focus on products we believe offer the best opportunity for long-term profitable growth.

Benefiting from a benign storm season to date, our diverse mix of specialty insurance businesses delivered strong performance in all four business segments this quarter.

Our net operating income increased 22% to $153 million or $1.20 per diluted share.

For the first 9 months of 2006, net operating income increased 26% to $467 million or $3.59 per diluted share.

Our annualized operating return on equity for the first 9 months of 2006 was 17.6%.

On a rolling 4 quarters basis, our operating ROE was 17.4%.

This places us well within our range of the industry's top quartile, one of our targeted metrics for performance.

Let me highlight the result of our different businesses.

With favorable claims experience and a relatively quiet storm season to date, Assurant Specialty Property continues to have a very strong year.

Top line growth, both organically and through acquisition, was strong during the quarter.

Continued low combined ratios have delivered excellent profitability, and our market-leading position in creditor-placed homeowners is indicative of our specialty strategy.

John Owen, CEO of Assurant Specialty Property, will provide more details on this unique business following my comments.

Assurant Employee Benefits continues its strategic transition to focus on the more attractive small employer market and it continued to deliver a strong contribution to profits.

We are pleased to report that sales increased nicely over the second quarter of this year, driven by sales in our core small employer market, a positive indication that the strategic alignment of our sales organization is gaining traction.

Additionally, sales in our core market grew more than 10% compared to the third quarter of 2005.

Our recent network access arrangement with Aetna, which will expand our Dental Network beginning in 2007, will help position our sales force for a strong start next year.

We expect to see sales growth beginning in 2007, ultimately leading to earned premium growth in the core business by 2008.

Assurant Solutions continues to demonstrate both good growth and profitability, most notably in extended service contracts.

Assurant Solutions is growing in targeted areas to offset three factors; the runoff of our domestic credit insurance, the reduction in fee income we expect in 2007 from the loss of a large debt deferment client we mentioned in the first quarter, and the loss of revenue associated with the sale of our US independent pre-need channel.

Leveraging our core capability of strong risk management, Assurant Health continues to deliver excellent combined ratios.

In the second quarter, Assurant Health launched a unique initiative in the industry, Advantage Agent.

Advantage Agent is an array of products, tools, and capabilities aimed at making it easier and more efficient for agents to do business with us in our core individual major medical product.

We've gotten great feedback from agents on how delighted they are with this new initiative.

We are pleased that our individual medical sales have increased and we are again experiencing growth in our individual major medical membership, a direct result of Advantage Agent.

Turning to our capital management, I wanted to update you on our capital position, our expected sources and uses of funds at the corporate level, and our share repurchase program.

We anticipate ending 2006 with approximately $400 million of excess capital, assuming no additional acquisitions or share repurchase.

Two non-recurring factors contributing are the sale of a rental PPO network, PHCS, which closed in October, and our continued legal entities streamlining.

These items will boost 2006 cash flow by about $210 million.

Previously, we've indicated that our businesses generate $120 to $180 million of free cash flow.

Given our strong results, free cash flow is now in the range of $170 to $230 million annually.

In 2006 through October, we've repurchased 7.7 million shares at a cost of $378 million.

Given that we have only $16 million of remaining repurchase authorization, we anticipate the Board will discuss an additional authorization.

In summary, you can see from our strong results this quarter and for the first 9 months that we remain focused on pursuing targeted top and bottom line growth opportunities within each of our businesses, and we continue to prudently build upon the strength of our diversified specialty insurance platform.

Now, I'd like to turn the call over to John Owen to review our Specialty Property business in more detail.

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

John?

Thanks, Rob.

I'm very pleased to be here with you today.

Last year by this time, we had already experienced four main storms totaling more than $220 million of gross catastrophe losses and catastrophe losses net of reinsurance of $31.1 million for the 9 months.

Many of our associates were deployed throughout the devastated Gulf Coast region helping our customers with processing over 13,000 claims in the aftermath of a record hurricane season.

What a difference a year makes!

We have enjoyed an unusually low level of storm activity so far this year.

That's good news for the industry, good news for our shareholders, and most importantly, great news for the customers we serve.

Assurant Specialty Property net earned premiums increased to nearly $314 million in the third quarter of 2006, our best quarter ever, up 43% compared to the same period last year.

For the first 9 months of 2006, net earned premiums were up 36% to $857.4 million.

Net earned premiums increased despite an increase in catastrophe reinsurance.

In 2006, total catastrophe reinsurance premiums, including reinstatement, increased by $2 million in the third quarter and by $14 million for the 9 months.

Gross written premiums, which can be found in our financial supplement, increased 28% for the quarter and 27% for the 9 months.

We also experienced strong fee income of $13.3 million for the quarter and $36.4 million for the 9 months, an increase of 35% and 29% respectively.

The primary contributor to our growth was creditor-placed homeowners insurance, one of the products we've targeted for expansion.

A key component of Assurant's long-term profitable growth strategy has been to align itself with market leaders.

We have benefited from the loan portfolio growth of these leaders and through the recent acquisition of Safeco's creditor-placed business.

The third quarter net earned premiums for this business were $43 million bringing the year-to-date total to $73 million.

We currently track 29 million loans, up from 24 million loans at this time last year.

Underlying our growth is higher premiums per home represented by the increase in total insured values of homes.

This has been fueled by higher replacement and building costs.

In addition, our growing sub-prime block of business has a higher rate of insurance placement.

We remain focused on disciplined risk management, and I'm pleased to point out that while our business has grown our geographic spread of risk has not changed since the presentation at Investor Day this past March.

Our risk management strategy continues to target large national partners and selective actions to manage exposure in other voluntary product lines.

Assurant Specialty Property's third quarter 2006 net operating income was $53.4 million, up 69% from the third quarter and up 70% to $177.2 million for the 9 months.

Obviously, 2006 results benefited from the low level of storm activity, and as such, our combined ratios continue to be very favorable.

We have taken proactive steps to employ our own claims adjustors.

In addition, we have made changes to policy provisions to mitigate risk.

While we had some near-term increases in expenses due to the acquisition of Safeco's creditor-placed business, in the long run, we'll benefit from scale economies as our business grows.

Finally, remember our 2006 results benefited from the $10.5 million of reimbursement collected under the National Flood Insurance Program, which reduced our policyholder benefit in the first 9 months.

As the 2006 hurricane season enters its last month, we've already formed a catastrophe risk team comprised of experts hard at work to pursue our 2007 catastrophe program.

Its goal is to proactively investigate the best options for mitigating our exposure to catastrophe.

We are very proud of our continued strong results we have been able to deliver.

We are committed to pursuing long-term profitable growth opportunities in markets where we can leverage our core strengths, such as our creditor-placed auto and renters insurance.

Our performance is a testament to the efforts of our employees all across the country, who work hard to take care of our clients and our customers.

Thanks for your time, and I'll now turn the call over to Bruce to review the results of our other businesses.

Thanks, John.

Assurant had a great third quarter.

All of our diverse specialty businesses performed well this quarter as we demonstrate growth in many of our targeted areas.

Third quarter net operating income increased 22% to $153 million or $1.20 per diluted share.

For the first 9 months, net operating income increased 26% to $466.5 million or $3.59 per diluted share.

Net earned premiums grew 6% for the quarter to $1.7 billion and 4% year-to-date to $5.1 million, primarily driven by the growth of our Specialty Property business.

We saw an increase in investment income, mainly driven by the growth in assets under management.

Net investment income increased 3% to $180.7 million for the quarter and 7% to $553.7 million for the first 9 months.

We had a significant increase in fee income, up 33% to $79 million for the quarter and 23% to $210.2 million for the 9 months.

This is mainly the result of steady growth in extended service contracts, which included a one-time pickup of $7.8 million from a closed block of business in the third quarter of 2006.

John reviewed Assurant Specialty Property, so let me turn to our other businesses.

Assurant Employee Benefits' third quarter net operating income increased 7% to $24.4 million and was up a strong 31% to $64.2 million for the nine months, driven by very good loss experience across all product lines.

Remember, quarterly fluctuations of loss ratios are inherent in the Employee Benefits business.

Our disability loss ratios in particular have really been quite extraordinary, driven by favorable trends in both incidence and recoveries.

We continue to improve our dental loss ratios as a result of our disciplined underwriting and renewal pricing action.

Life loss ratios continue to be good.

However, by comparison, third quarter 2005 loss ratios were at an even lower level.

Net earned premiums decreased 5% during the quarter to $291.2 million and 7% to $900 million for the nine months.

The decrease is being driven by low sales and persistency, relating to the continued transition of our business towards a smaller employer market.

This was partially offset by the growth in disability premiums sold through disability RMS, our alternate distribution channel.

The third quarter includes $12.4 million of single premiums received from a closed block of disability business.

The year-to-date includes $46.3 million of single premiums, compared to $26.7 million in 2005.

Our Assurant Solutions' net operating income of $41.7 million was up 31% for the quarter.

Excluding $7.8 million of one-time fee income from a closed block of extended service contract business, net operating income for the quarter increased 14%.

Net operating income for the first nine months of 2006 increased 21% to $118.6 million.

This was primarily due to increased investment income and higher fee income, mainly the result of growth in extended service contracts.

Our continued investments as we expand internationally was an offset to this.

Net earned premiums were up 6% to $591.2 million during the quarter and up 7% to $1.8 billion for the first 9 months of 2006.

The increases are being driven by the growth in extended service contracts, offset by the decline in pre-need premiums, resulting from the sale of our US independent pre-need franchise in 2005.

Gross written premiums across our key targeted growth areas, with the exception of pre-need sales with SCI, are showing good progress.

Note that there can be quarterly fluctuations in gross written premiums, mainly based on new client additions.

We are making progress internationally.

For example, international extended service contracts grew 46% to $91.4 million for the quarter.

This result was driven mostly by growth in Canada.

Net investment income was up 5% for the quarter and the year, as our invested assets have increased.

Fee income was up 47% during the quarter to $47.3 million, and up 32% to $121 million for the 9 months.

The growth continues to come from our extended service contract business, while debt deferment fee income was flat.

Excluding the one-time income from the closed block of extended service contract business, fee income was up 23% for the quarter and the year-to-date.

Let me provide a little more color on Solutions' fee income.

As we mentioned previously, on occasion, we lose business because of industry consolidation.

Effective January 1, 2007, we will no longer administer MBNA's debt deferment business because of their being acquired by Bank of America.

This represents $18 million in 2006 of annualized fee income.

Occasional variations like this can occur, and this is why we continue to focus our resources on targeted areas that give our shareholders the best value and leverage the benefits of our diverse business model.

Turning to Assurant Health, third quarter net operating income was $44.8 million, a 2% decrease from third quarter of 2005.

Net operating income for the first 9 months of 2006 was $131 million, a 10% decrease from the first 9 months of 2005.

In our targeted growth area of individual medical, we have seen membership increase sequentially from the last quarter, and with the roll-out of Advantage Agent now nearly complete, we are pleased with the individual medical sales increases.

However, as anticipated, we continue to see declines in small group membership as our transition continues to target growth in individual medical.

Earnings while slightly less than the third quarter of 2005 continued to be strong as a result of continued low 90.2% combined ratio for the third quarter and a 91.1% combined ratio year-to-date.

The combined ratio in the third quarter was positively impacted by approximately $4 million of expense reduction, mainly associated with favorable legal settlement.

Net operating income for the first 9 months was also favorably impacted by 12% increase in investment income, mainly as a result of income from real estate partnerships.

Assurant Health's third quarter net earned premiums decreased 3% to $521.5 million in the quarter and 4% to $1.56 billion for the 9 months.

Core individual medical net earned premiums grew 5% for the quarter as a result of higher premium per member.

This was offset by a 13% decline in small group premiums, which we only write if we can do so profitably.

Let me turn to results in Corporate and Other.

The net operating loss was $7.5 million in the third quarter of '06 compared to $4.1 million for the third quarter of 2005.

Net operating loss for the first 9 months of 2006 was $13 million, compared to $18 million for the same period last year.

The 9-month decline was primarily due to reduction in expenses associated with the adoption of FAS-123R, which requires fair value accounting for stock compensation plans at the time of grant.

Our balance sheet remained strong.

Total assets at September 30, 2006 were $25 billion.

Our debt-to-capital ratio, excluding Accumulated Other Comprehensive Income, improved to 21.6%.

Total shareholder equity at the end of the third quarter excluding AOCI was $3.6 billion.

Book value per diluted share excluding AOCI grew 8% to $28.47.

In summary, results this quarter once again reflect our focus on diverse products, which we believe offer the best opportunity for long-term profitable growth.

Now, I'd like to turn things back to Rob.

Thanks, Bruce.

We're having a terrific year with notable progress in executing our diversified business strategy.

Let me reflect on some of the 2006 highlights thus far.

We're achieving growth in the targeted areas of creditor-placed homeowners, extended service contracts, individual major medical via Advantage Agent, and international expansion.

We're in the process of retooling our sales platform in our benefits business to target our core market.

We've completed the successful acquisition of Safeco FIS.

We strengthened our capital position with the sale of PHCS.

We returned money to our shareholders through share repurchase and a dividend increase, and we enhanced our financial disclosures to improve transparency to our shareholders.

Our goal is to continue to execute on our strategy in the fourth quarter while recognizing that we have current and anticipated pressures that we need to address.

If we do so, we will enter 2007 in a good position to continue to create value for our shareholders.

Operator, we're ready for questions.

(OPERATOR INSTRUCTIONS).

David Lewis, SunTrust Robinson.

John, I've got actually a couple of questions for you.

First of all, on the creditor-placed homeowners business, the tracking loans are up 21%.

You had earned premiums up 43%, I believe, in the quarter.

And my understanding is, when you place that, it's really only covering the mortgage, so you're really not getting inflated values, are you?

Well, if you look at what drives our growth in creditor-placed homeowners, you go back to kind of the business model there.

As our loans track increases, and if you look at our loan growth portfolio, growing from 24 million loans tracked to 29, and you look at that growth, about half of that growth comes from the Safeco book of business and about half of that growth is organic growth.

Now, when you get back to your question on how does the total insured value is impacted, the coverage is placed on a last known value.

If you look at what's happened in the industry over the last several years with [refis] and the actual amount of movement in loans, the last known insured value has been updated as those home loan portfolios have gone through refis, because they've actually gone out and done new appraisals.

So, we have benefited from the new, last known insured values, which have been updated fairly frequently in the last several years.

Just one other point to add on that, David, is I think that a number of the voluntary carriers have gotten much better at updating values regularly in their own renewal process to replacement cost and we're benefiting from that trend as well.

And on the Safeco, what were the actual premiums in the third quarter and 9 months?

The premiums for Safeco were -- we have the first full quarter's premium, it was 43 million.

In the Safeco acquisition, if you look at that business, it fits in nicely with our overall creditor-placed, which is a targeted growth area for us and we've been very, very happy with how that's integrated in.

It leverages all of our core strengths around our technology.

It leverages core strengths around where we're looking to grow our creditor-placed book of business.

The other pickup we got on Safeco, which has been a real homerun for us, is around -- we not only picked up good premium, but we also picked up some solid addition in bench strength; we picked up some very talented senior managers and it's helped us complement our overall book of business.

And just finally, excluding CATs in the third quarter a year ago, do you know what the estimated combined ratio would have been in the third quarter versus third quarter a year ago?

We could probably dig that out of the supplement, David, but not right with us.

John Nadel, Fox-Pitt Kelton.

If you want, I have the answer to that question.

I have a few questions for you guys this morning.

I think, Rob, did you mention buybacks year-to-date through October?

I did.

What was that number again?

I missed it.

The buyback through October, let's see, would be -- I think it was -- hang on just a second.

Sorry about that.

7.7 million shares and 378 of repurchase.

Question for you.

Safeco contributed to the earned premium.

Not that I want you to -- I don't think you'll quantify whether it was, what it added to earnings, but did it add to earnings in the quarter?

Yes.

And going back to Don Hamm's comments from Investor Day and then I think you reiterated them last quarter or the quarter before about individual health sales being up sequentially every quarter this year.

Certainly, I wasn't looking for 18% sequential growth in individual this quarter.

Is that something where you think you can still grow sequentially off of that?

Well, I think we're very pleased with our results in the third quarter.

I think it reflects our rollout of Advantage Agent largely across the country now, John.

I know a quarter or two ago that was only in, I don't know, 40% or 50% of the States.

It was rolled out in seven states in the second quarter and expanded in, I think, late May to a broader number.

We're largely there now.

So, I think the rollout is largely complete from Advantage Agent.

Is it in State Farm yet?

It's not.

It's going in in the fourth quarter, but I think an important thing to remember with State Farm is that we're already -- we're already getting all their business.

So with State Farm, if you think about what's going on with some of our other channels, we've attracted a number of people back in.

We're already getting all of State Farm's business, so you can think about it more as a shelf space issue.

And then, I guess, two sort of bigger picture questions.

One, is there any reason why your investors should be concerned about the rate of growth in individual medical sales accelerating this fast, this quickly?

I think that if you look at Advantage Agent, we've characterized this as taking our risk management capabilities, our world class capabilities and trying to apply them offensively.

But, of course, I think Don uses the terminology health as a skeptic's business, which means we are all over evaluating the results of, have we had any kind of a loss or diminution in our underwriting effectiveness.

So, we are analyzing cases every week to try and determine, have we seen any degradation in underwriting.

It's early yet, but the experience seems to indicate that we're in good shape there.

Terrific.

And then, two real quick questions.

Just one is, you mentioned the MBNA contract coming off and about $18 million of fee income in '06.

Is there any expense offset?

Yes, there's some of that, John, but what we are trying to indicate there is on our fee income line, that for Solutions, they're going through some short-term pressures on that front because same service contracts are growing.

On the other hand, we had a flat debt deferment fee quarter-over-quarter this quarter and MBNA will obviously come off next year and will affect the debt deferment fee component of that line.

I think, John, we've kind of said that we know we have pressures related to that domestic credit and debt deferment business.

We've mentioned those to you, and we just wanted to make sure you understood things and that's why we've targeted other areas within Solutions as Bruce mentioned for expansion.

Listen, for me, it just means you need to go get Best Buy.

I mean, that's up there in '07, right?

I'm working on it.

And then the last question for you.

From here, if domestic credit, which appears to be troughing here, the year-over-year decline in premium was essentially flat, is the ROE improvement story for Solutions from today of about, I don't know, 8% to 9% sort of annualized, to your targeted range of 14% to 16%, is that more driven by earnings, sort of top line growth and earnings growth or equity coming down?

Can you give us a sense for what's the driver there from here?

I think it's a combination of those factors, John.

Some of that entity streamlining is largely in the Solutions sector, so we're getting capital release coming out of that.

But, we do have that pressure of the credit business, is going to decline.

I know, as Bruce points out, that credit business has seasonality associated with it.

So, it's best to measure quarter-over-quarter of the prior year versus a sequential quarter.

So, that's a business that is going to continue to run off as we move out.

Okay, we'll continue.

John, when you look at Solutions as well, you've got -- the focused growth area is our international expansion and we are going to invest -- continuing to invest internationally, whereas we've got -- and the other focus growth area is on the ESC side and the SCI side of pre-need.

And those two have got more scale already built in it.

So as we get that -- continue to get that moving forward, those are three areas of Solutions, whereas if they've got also the runoff of the old pre-need book and now the runoff of the credit book as well compensating that.

So, it's going to take them a little bit longer as they move forward to that 14 to 16 versus what you can do with the other segments.

Jamminder Bhuller, J.P. Morgan.

Thank you.

My questions have been answered, but I just have a couple.

First, if you can just talk about acquisitions, M&A activity, your appetite, and where you're seeing opportunities.

And then second, I think in the past you've spoken about your creditor-placed auto initiatives, if you can just discuss that.

That's it.

Okay.

On the M&A side, Jimmy, we continue to evaluate opportunities in all of our different segments.

It's a very active market.

Part of the benefit of our strategy of being specialized helps us on returns, but there's not easy companies to go buy there, so we're often looking to acquire either a block of business or a capability to add on.

We have dedicated, engaged resource at both the holding company level and within the business looking at things, and we're evaluating opportunities across all segments.

With that said, you got to turn over and look at a lot of different things, and we are financially prudent and have passed on some deals that didn't make economic sense to us.

You've also been able to add a few actually at relatively attractive prices.

Is the market more or less competitive, or have you seen any change in the dynamics in terms of competing [people].

Yes.

It really, Jimmy, varies on a deal-by-deal basis.

When we can find a deal and there aren't as many people looking at it, that presents a bit better opportunity obviously.

I don't want to -- I'm going to turn things over to John and let him comment a bit on how we're progressing on the creditor-placed auto.

If you look at our creditor-placed auto, if you think about it in the context of our business model, our business model says align with proven industry leaders, talks about risk management and it also talks about leveraging our core capabilities.

And if you look at creditor-placed auto, it shares the same model that we have for our creditor-placed homeowners.

So, to me, you take creditor-placed auto and share the same people, process, technology, and we've taken that and extended that to a different market.

Now, the actual market we still think is somewhere in the $500 to $600 million range.

We have signed up, you know, we have five customers that are out there with our creditor-placed auto.

But, again, I'll go back to a key point in our business model, which is align with industry leaders.

The next thing that we really need to do, the next major milestone for us is we need to get some of those large players that we have on the creditor-placed homeowners side to get back into the market on the creditor-placed auto, and we continue to diligently work with those partners and we're optimistic that we can make that happen, but it will be a slow process and it goes back to something we've said before, it's kind of the whale hunting analogy.

You have to work hard and you have to go after them, but they're large and it will take time to bring the large accounts in.

And the banks have been reluctant in the past to sign on to that type of product.

Are you seeing a change in their attitude or not yet?

Well, one of the things we're doing to basically get them comfortable with reentering this market is we've started a process that we call collateral assessment and tracking.

And what we do in this process is we make proposals to several of the large clients for us to go in and track their auto portfolios and go through and basically make them comfortable that we can actively track their portfolio, minimize false placements and get them comfortable with that whole process before we start the process of actually placing policies.

And along with that, Jimmy, I think that what we found is the value proposition to the bank is they're worried, as John just mentioned, on the customer service side.

The other thing is they don't really have a good handle, as best we can tell, on what they're losing by not having this in place.

And I think John's process will, one, demonstrate the customer service value proposition, and two, be able to outline the economics that might be in the deal for them.

A key part of this, since we already tracked those loans, we know who the insurance carrier is, we can also assist them in getting recoveries from other carriers as well.

Okay.

Thanks.

Keith Walsh, Citigroup.

Good morning, everyone.

Good morning, Keith.

Just two quick questions.

First, on Employee Benefits, it seems like you're getting some nice traction with the small case strategy there.

Can you talk about the loss ratio differentials you're seeing between your large case and small case business?

And then, for Bruce, with the acceleration of free cash flow that you're seeing, are you going to revisit the dividend strategy?

Thanks.

On the Employee Benefits side, we don't disclose that, Keith, but I would say that -- most people look at loss ratio and are relating the benefits to a premium.

When you look at large case, we've kind of concluded the problem is on the premium side more than on the benefits side.

In other words it's hard to get the premium you need to cover things.

There's probably a bit higher incidence and sometimes a lower recovery rate in large case as well.

We think all those dynamics are reasons that the large case market is not for us, okay?

And, again, it really -- it's a pressure we're having in the business, it's a pressure on top line, but, I think it's an execution of our strategy to play where we can really apply our core capabilities more effectively.

Bruce, you want to comment on the dividend side of things?

Again, with our capital and free cash flow standpoint increasing, we still have always said that our first use of capital would be to forward back into businesses that we've targeted for growth.

And that's our first and primary use of capital, and the second, obviously would be in the M&A arena.

And third obviously, if it's not being utilized effectively in those two, is then to obviously give it back to our shareholders either in repurchase or increased dividend.

So, I think that's really something that the Board will review at their next meeting.

Sometime next year.

Jukka Lipponen, KBW.

Couple of questions.

First of all, on the Specialty Property, for John, if I understood it correctly, the expenses were up because of the Safeco business and I'm a little curious why it went up this quarter but not last quarter.

And then also the combined ratio was up as a result of that.

If you look at Safeco, again, Safeco is a great fit into our overall business strategy.

It complements everything we do.

A lot of the expenses for Safeco resulted around closing of our Indianapolis facility.

When we acquired that book of business, we had three primary facilities that came with it.

One was in Tustin, one was in Santa Ana, and one was in Indy.

The biggest part of the expense increase would be around the Indy closure and the cost of going along with that.

How much was that?

We don't disclose that, Jukka, but I mean -- I'd say that a way to think about this is this really resulted from change in accounting policy.

We obviously reflected that all in our purchase price, in buying the business, but change in accounting rules said you could no longer put that up on the balance sheet and you'd need to expense it when it was incurred.

And then, in the health insurance business, did I hear it correctly that the expenses were helped by legal settlement?

On the health business, yes, just like normal run rate on the health side, [it's more because of] the conservative nature of how we set up reserves for legal settlements and what happened this quarter in particular, just we took one particular reserve down in that business.

In essence, we no longer had potential obligation -- right, exactly, a potential exposure for a couple of litigation situations, and I think Bruce said it real well.

Conservative on the front side, and when there was no exposure, then we were in a position to take that accrual down.

And did you quantify that?

Yes, we did.

It's about $4 million pre-tax.

Great.

And then what's the current competitive environment in the health business, the individual in particular?

Yeah.

I think that individual health, as Don has pointed out, is a growing marketplace, so it attracts competition.

People have seen it grow from 16.5 to 19 million people, I believe, in some of the [inaudible] publications that have come out.

That being said, I think Don said it's always very competitive.

So you're basically, Jukka, evaluating relative competitiveness.

And I think his comment was that we saw even more intensity a year ago than we're seeing today.

What I would translate that to mean is that in some markets we're finding we're more competitive than we were a year ago, but it's a very competitive market.

Lastly, when is your next Board meeting?

Our next Board meeting is next week.

Kelly Nash, KeyBanc Capital Markets.

I wonder if you could give us a little bit more color on the extended service contracts, particularly on the domestic side.

We do see some fluctuations there, but if you could just give us an idea of maybe new contracts in the quarter or kind of how -- what your thoughts are on the pipeline there?

On the ESC side again, there's -- we've obviously closed some new business, but it's really again going back to what John mentioned earlier in his business as well with the big financial institutions.

It's really all about the quarterly fluctuations that we'll experience in that business due to the addition of new clients, which are normally the [big wheel] clients.

So, what's happened in the past is when you've added clients, we've mentioned in previous quarters and previous years, like adding a GE or a Home Depot within a GE, or H.H.

Gregg, that affects obviously the production very quickly in a particular quarter.

And then, once you get through that, over a year-over-year basis, it's hard to have a good comparison of growth.

So, it really depends on how the business people are able to land a particular large account in any particular quarter.

So, pipeline is still full, they're very active across all fronts, consumer electronics, wireless fronts.

So, I think we have a very full pipeline.

It just, when it occurs, when the big retailers are landed.

We don't have a big closure report during the quarter, Kelly.

And then, my other question is on -- did you have any material impact from prior year reserve developments?

I think that if you look at our whole process on reserve setting, Kelly, it's -- you can kind of think about it as [emblematic] of our conservative financial nature, okay?

So, we set reserves to develop redundantly.

The actuaries have been told to set them so they'll develop redundantly 80% of the time.

So, I kind of think about this as, yes, we've had favorable development and yes, we've set up conservatism in our current reserves and there's been no real change in our methodology over periods.

So, in terms of the impact in this quarter versus a different quarter, we're seeing pretty consistent impact from prior year reserve developments?

That's correct.

Our reserves are reviewed quarterly by our external auditors, and we really, as Rob mentioned, have not changed our methodology.

Bill Wilt, Morgan Stanley.

Most of my questions have been asked and answered.

I guess since John is on the line, early days, no doubt, but if growth in Specialty Property continues at even roughly a comparable pace over the next few quarters, have you put thoughts into cap management strategy in '07?

If you look at our growth, our growth in our creditor-placed has been driven out of our core business around increase in loan trackings, our subprime business, we've won several new accounts over the last 18 months, which have fueled that growth as well.

And if we kind of go there and get to the CAT part of your question, when we think of CATs, we look at our overall business model and go back to, do we have good spread of risk, have we maintained adequate rate, and then we get to the CAT program.

And when we look at our CAT program, we've been very proactive, as I mentioned earlier with my comments, in getting a catastrophe team in place that has been out proactively looking at different alternatives for our 2007 CAT program.

So, we feel very good that we will have the right alternative CAT coverages in place and we'll be ready for 2007, and our portfolio has grown and will continue to grow, so coverage amounts will be larger as we continue to grow, but we feel good about the activity we have underway to get our coverage.

Bill, we've had very disciplined growth in that business.

Specifically, as John mentioned earlier, when we look at the creditor-placed business, we definitely look at the overall portfolio of all our product lines and manage the voluntary side of the business very carefully in these CAT prone areas and that's why we've been able to keep the very consistent geographic spread of risk.

But absolutely knowing the season we had in '06 and the reinsurance program we put in place in '06, we established a team across company to look at our '07 program and look at all alternatives to CAT protection for Assurant.

And one of the big keys here, Bill, is given the scale we've now built in the business, other options become viable for us that maybe weren't when we were smaller.

And I think that's an important thing to understand.

At the same time, there's a lot going on in solutions being offered in the market, more solutions than maybe you would have seen a few years back.

Thanks for that.

I take all those references to mean looking at options to perhaps lessen the reliance on the traditional property --

I think we are looking at the panoply of options.

Understood.

And I guess same vein, have you had success and if so could you quantify how much of the '06 reinsurance costs you've been able to pass along to policyholders?

What we said previously on that, Bill, is that we had an anticipation when we filed last year what costs would go up.

We undershot that, and John, and he can comment upon it, has a very active program in terms of seeking greater policy adjustment.

John, you want to talk about that?

What we do on an ongoing basis, we're constantly looking at the different products we have, the different parts of the US that we're in with that property, and we're going after rate increases and policy changes that make sense on a constant basis.

So, it's not really we wait until after the hurricane season is over and then we make a lot of adjustments.

It's an ongoing process, it's part of our normal risk management process, and we've been very diligent about getting frequent rate increases where we need to and making changes to policy terms and conditions as we need to.

We just look at that as an ongoing basis and we are continuing that.

We do have some rate increases in motion right now.

As you know, those take -- those can take quite a time depending on the state and depending on what's happening in that state.

It can take quite some time to get those through the process, but we are very diligent about pursuing them.

Understood.

I haven't seen one competitor that offered, this is probably on their part kind of a making a crude measure out of something more complex, but a competitor has suggested that they were recovering about a third of their costs now and anticipate that they might be recovering about 50%, I think they suggested, by the end of '07.

Do you have any -- could you point your dial in a direction equal to, south or north of that level?

No, but that's something we can certainly look to provide in the future, Bill.

Ed Kroll, Cowen and Company.

I want to go back to somebody earlier was noting that you had such nice sequential growth in the annualized individual medical premium, and it looks great to me as well.

And I just wonder if you could reconcile, the growth in the individual medical membership was up about 1% sequentially, but the annualized premium sold was up 18%.

Is that mix, or is there something else, some other moving part there?

Sure.

Part of Advantage Agent, Ed, was we mentioned it was a series of products, tools and capabilities.

And in that we rolled out a, Don called it a broader spectrum of product offerings.

I would say that one of the things we're seeing it a take rate at a little bit higher premium with a segment of the market because we've come with a value proposition that's better resonating with them.

So, I think Don identified these as people coming out of group situations who have money and are willing to spend on maybe a lower deductible product than has been our traditional market and we are indeed selling into that.

I think another dynamic, when you look at membership, really relates to -- individual is such a specialized market, you got to remember that a lot of people are leaving the market too because they may go and get an employed situation where they get coverage, and if they do that, they'll drop our coverage.

So, again, that's something that's kind of very unique to this market that can cause an inventory situation that I think you're addressing here with the new sales and the membership growth.

Got it.

Thanks.

That's very helpful.

And then I wonder, you've alluded to a couple of things on the cost side that sound like one-timers to me.

I think you mentioned that closing of the Safeco facility in Indianapolis.

Just, I don't know, if you can sum it all up, the puts and takes, one-timers at the cost line in the quarter, is it a wash, or is it a plus or minus?

There's really only two items that we would actually highlight and that is one in health, the $4 million of release of legal settlement pre-tax, and then on the fee income side was the $7.8 million of fee income we recognized on the closed block of business on Solutions.

The transition of Safeco is just a normal thing that occurs when we do an acquisition.

We have transition costs.

So, we haven't disclosed that, the closing of the Indianapolis facility, the transferring of employees, the transferring from their systems to our systems.

With the accounting literature, it's changed to -- it's a period cost.

When it's incurred, you book it, so you no longer can set it up on acquisition and amortize.

So, basically you will have, as we said, when we acquire, although, as Rob mentioned, it was accretive for the quarter, we still have transition costs going through for that acquisition.

Right, and they don't end in the quarter we just reported.

John could have those until the whole transition is completed, Ed.

Adam Klauber, CCW.

Could you give us an idea what newer products or at least what areas we could see some new products come out in the next 12 to 18 months?

Sure.

John, you want to start in your area?

I mean, these are ones we've talked about, Adam, but let's start on the Specialty Property side.

What we continue to do is we look at our business model and go back to where can we leverage the things that are already working today, like in our creditor-placed model we have that's working very well for us today.

I mentioned the creditor-placed auto already.

That is an area where we put a lot of focus in.

We have good systems in place, good process in place.

We've got the team in place.

We're just out now trying to land some large accounts.

I also have an area, which is our renters liability and property insurance business, which again the key to that business growing further than it is today, we're off to a great start.

We already have five of the top ten property management companies under contract.

What we're after there though and the key to the pace at which that company, that business will grow is around how many of the property management companies are going to mandate coverage.

And that's a trend that has been slowly evolving over the last 12 to 18 months and continues to gain a slow head of steam, but it is building.

So, those are two primary areas that we're using for future growth that are leveraging our existing business model that we have today.

If we turn to the health side, we mentioned Advantage Agent and that broader product portfolio, Adam.

If you really look at the health business, there's a lot of innovation that goes on here regularly.

We think we've come up with a portfolio today that will attract a broader spectrum of people in the marketplace, but we're going to have to do that regularly.

If we go over to the Employee Benefits side, we mentioned the broader dental network that will come about from Aetna, which I think could help us on both an employer and voluntary basis.

We have some products on the disability side with serious disability, which we think could be more attractive in the smaller employer, first-time buyer market.

Bruce, you want to comment a little on --?

On Solutions side, I mean, again, we'll still focus everything around the targeted growth area.

So, it's all around extended service contracts, and it's really more looking at various distributions and distributions we're not getting to.

So, for instance, leveraging relationships with the GEs and trying to get into the home warranty, the home reliance type of market.

As [Craig] mentioned at Investor Day, we're not doing the actual structure, but it's actually in the home, kind of appliances within the home itself, and other things like that.

So, it's a twist on the extended service contract and distribution.

And with pre-need, it's really -- we're waiting for the -- we've got SCI in the process of trying to acquire Alderwoods, focusing again on getting that production back to the level it was when we first had the relationship with SCI and building upon that relationship and building upon the addition of the Alderwood Homes to the SCI franchise to continue to build the pre-need business within Solutions.

And just one follow-up.

On the reinsurance, it sounded like you're looking at different types of alternatives.

Is your goal to reduce the cost or just make sure you have adequate coverage going into 2007?

I think our goal, Adam, starts with we need to -- actually, I'm going to have Chris talk about this because he's been engaged in this and probably will say it better than I.

Well, I mean, we've taken -- there are sort of three things to think about with respect to that, recognizing that the portfolio, as the business has grown significantly from prior years, are three focal points here.

One is to start early, even though the existing program doesn't end until June of next year, we've already begun to explore all the alternatives.

The second thing, as we mentioned earlier, is to consider all the options, whether it's direct reinsurance or all of the other products that have evolved around this product.

And then finally to put something together that is consistent with our disciplined approach to risk management that we apply throughout the business.

So, we'll continue to keep you updated as we move through the process, but the goal here is not necessarily to save money, but a combination of putting in the appropriate amount of protection at the right price.

Right.

And, I mean, we know we need to protect the enterprise, and so it starts with making sure the solvency of the enterprise is protected.

Then, the rest of it really is just what Chris said, relative tradeoff between evaluating cost versus earnings volatility.

Couple of other things.

The other thing we do know is the book of business continues to grow, so we are continuing to grow, which is a great thing for us; however, we need to provide higher levels of coverage.

So, we're looking at, yes, we're growing, we are going to provide the higher levels of coverage to take care of that as well.

And I know it's early, but do you think you'll be paying more or less [inaudible] compared to --?

Yes.

More or less would be -- probably be -- we really don't know yet, Adam.

I know it's early.

Yes, it's a little early.

The one thing we're doing though to try to help our sales is we are making sure we manage our spread of risk.

And I'll go back to that spread of risk chart and say we're managing our coastal exposure and we're keeping our proportion the same.

And the other thing I would say is just our strategic focus in our specialty business line, specifically we like that risk.

We think it's very different from the regular market.

Watching our geographic exposure, as John just mentioned, that whole focus, which includes the risk management aspect of catastrophe protection, I think we're very pleased with where we will be next year.

Dan Johnson, Citadel Investment.

Would you mind touching back again on the free cash flow numbers?

I'm most interested in the source of the delta, if you would.

Yes, I mean, I guess the -- previously, we've kind of identified what can we dividend out from the businesses on a regular basis, Dan, and then what are our uses at the holding company.

So, let me separate those into two pieces, okay?

We think that going forward, our dividends from the subsidiaries are in the 310 to 370 range, let's say, and that's up from what we -- I think we used to say 240 to 300, all right?

Now, the uses, we used to identify by the famous 40/40/40, which were 40 for interest, 40 for dividends and 40 for kind of corporate expenses and capital expenditures for software.

We think that number has probably gone up a tad too as we've raised our dividend, and we think that uses numbers now more in the 140 range.

So, your difference, that's where the numbers came from.

And the higher sub dividend, does this have anything to do with legal entity collapse, or is there some --?

Yes, I mean, some of it came that way, although some of those were one-timers, but again, when you get into the larger legal entities from consolidation, you'll have just a more efficient use of capital going on within the business.

Right.

It's a legal entity consolidation as well as the unstacking to allow us to have more free flow of dividend.

I just don't want to get confused or double count, but you still had something like 100 to 150 million more as of the middle of this year from the legal entity collapse.

Actually, I think we identified 50 to 100, Dan.

I'm sorry.

That's okay.

Let's call it 100.

How much of that would you say has already been realized, how much of it is this year and how much of it is next?

Right.

What we've tried to do is identify where we are going to be at year-end, when we gave -- we think we'll have 400 million in excess at year-end.

That will be comprised of 100 million having come out from streamlining and 110 from PHCS and then our normal dividends from the operating companies, which we take over the course of the year.

There could be a smidgen left next year, but it's decidedly more complicated, so we're making no promises there.

And that 400 was based, you said, on no share repurchases as of September or as of October, since you've already bought back, whatever, 50 some odd million.

October.

October.

Okay, so that includes the million you've already bought in October?

And it assumes no additional share repurchase after October and no acquisitions.

Understood.

Thank you very much.

John Nadel, Fox-Pitt Kelton.

I just had so much to ask, I just wanted to come back in.

Okay.

My question for you is on the real estate partnership income.

It's lumpy, but you guys have had some every year.

What sort of a normal rate that you would say we can't necessarily determine exactly what quarter it's going to come in, but we expect it?

Chris, you want to talk about what you're doing with the real estate portfolio and how that may translate?

John, a couple of things about our approach to real estate.

The first thing is the goal is to grow the portfolio.

The book value is up another 10% this quarter, it's probably doubled in the last two years.

The second thing is, again, we're going to be opportunistic with the asset class, that means both purchases and sales.

Unfortunately, from the standpoint of run rate, that means it's still going to be a little bit uneven quarterly, annually, et cetera.

The key here, if we're going to begin forecasting even an annual number on real estate, that's going to compromise our ability to be opportunistic, which has been a major factor in our success with the asset class.

The one thing you will start to see now is though that the income when it does come in will be spread more evenly across the segments.

One of the things we've done -- started doing the last several years is, as part of our diversification approach, purchases are now being allocated across portfolios.

So, this quarter was a good example of it, where we saw income in three of the four segments.

There's still a handful of priorities in the portfolio that are located in single segment.

So that's going to be something that evolves over time, but for us to run rate this or to come up with some sort of forecast is going to take us out of our comfort zone, out of what we do best, which is to implement this asset class opportunistically.

I mean, not necessarily with the focus on which segment it gets reported in, but I mean obviously you must have some targeted yield when you're investing in this asset class and so --?

Yes, I mean, as the portfolio itself grows, I think what I would say is we'll have some of this.

It will be -- it may become less lumpy annually than it is quarterly, but it's still, I think as Chris points out, it's opportunistic.

That's all just part of the risk management they're employing over in the investment department.

Maybe I can just sum it up a different way.

I mean 3.2 million I think was the amount this quarter.

I guess I'd have to go back and look, but I don't think there's been any other partnership income year-to-date?

We've had -- this year, the first 9 months of '06, we've had about 18 million compared to the first 9 months of '05, which was 12.5 million.

That '05 number is actually the annual because there was none in the fourth quarter.

It's in the supplement, John, by segment.

The last question for you is just, I know this has been tough because there's so many underlying products in Solutions, but unearned premium is -- it continues to show such good growth.

It's up 4% sequentially.

It's well over $3 billion.

I mean, can you give us any help in terms of sort of an average earning period for that liability account?

It is a mix of business now inside that because it's got -- that's the one segment as you know that's got more product lines than the other three, but for the extended service contract, which is one of the biggest drivers of the UPR, it probably is an average over three to four years.

That goes from -- sometimes when you have two-year contracts or five-year contracts, sometimes even seven years, but it's normally an average of about three to four years.

How much of the unearned premium reserve is service contract?

Well, again, the way we book that business, it's really -- if you look at the deferred acquisition cost on that same balance sheet of Solutions, we book it on what we call the retail price.

We actually receive what we call the net rate.

So the unearned premiums does have, what I would call, the commissions, that the retailer earns on that business and he offsets that.

You need to look at the UPR and the [dark] asset and how that goes consistently together to have a better projection of what -- you're really talking about the net flowing through the P&L.

That's helpful.

And I'll follow up with you offline on that.

That's great.

Thank you.

There appear to be no further questions at this time.

I'll turn the floor back to management for closing remarks.

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're well positioned to take advantage of emerging opportunities within each of our specialty niches.

Thanks 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.