Assurant Inc (AIZ) 2006 Q4 法說會逐字稿

Welcome to the ASSURANT fourth quarter 2006 financial results conference call. [OPERATOR INSTRUCTIONS]

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

Please go ahead, Ms. Kivett.

Thank you, Rich.

Welcome to ASSURANT's fourth quarter and year end 2006 earnings conference call.

Joining me are Rob Pollock, our President and Chief Executive Officer, Bruce Camacho, our Chief Financial Officer, Craig Lemasters, President and CEO of ASSURANT Solutions, 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.

Last night we issued a press release announcing our fourth quarter and full year 2006 financial results.

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

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

Our actual results may differ materially from such statements.

We advise you to read the discussions of risks and uncertainties contained in our SEC filings.

Additionally this presentation will contain nonGAAP financial measures which we believe are meaningful in evaluating the Company's performance.

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

Now, I'd like to call over to Rob Pollock.

Thank you, Melissa.

Good morning everyone and thank you for joining us today.

Since the IPO, ASSURANT's results demonstrate three years of steady execution, paying off in strong growth in earnings per share and attractive ROEs, consistent with our goal of top quartile insurance industry performance.

We continue to focus on selective areas in our specialty insurance businesses that represent the best deployment of our resources towards profitable growth.

In addition, we are making progress in our goal of becoming a recognized leader in managing a diverse specialty insurance platform that is right for the new global economic landscape.

For the fourth quarter of 2006, each of our diversified specialty insurance businesses delivered an increase in earnings.

Net income surpassed $717 million for 2006.

We've benefited from an unusually benign hurricane season.

Net income was positively impacted from the sale of our ownership interest in PHCS.

This sale produced an after tax gain of $63.9 million.

We also reported $40.5 million of after tax income from an ASSURANT Solutions legal settlement.

Operating return on equity, excluding AOCI was 16.7%, in line with our goal of top quartile performance in the insurance industry.

Specialty Property and Health continued to perform well above their targeted ROEs, while Employee Benefits and Solutions have moved closer to their targeted ranges.

Now, let me highlight at achievements from each of our specialty insurance businesses.

ASSURANT Specialty Property delivered strong results in 2006.

Revenues and net operating income were at their highest in our history.

Operating income benefited from a mild hurricane season, contrasting sharply with the heavy storms we've experienced in recent years.

Continued record low combined ratios delivered excellent profitability.

The acquisition of Safeco FIS in the second quarter, not only strengthened our market leading position and credit-placed homeowners but also helped to accelerate the pace of top and bottom line growth.

Recognizing this growth, we've already taken prudent risk management steps to protect the capital base of the Company by purchasing additional reinsurance coverage for 2007 at what we believe are improved terms.

ASSURANT Solutions 2006 profits were up, stimulated by growth in domestic and international extended service contracts.

Craig Lemasters, President and CEO, of ASSURANT Solutions is here today and will provide more details following my comments.

ASSURANT Health continues to focus resources on profitable opportunities in the growing individual medical market by applying its core capabilities.

In 2006, earnings were down 6%, primarily as a result of the decline in our small group business.

The fourth quarter individual medical sales are up 23% year-over-year in a competitive market place.

In addition, individual medical membership is also up for the second consecutive quarter.

Through the successful launch of innovative new initiatives like advantage agent, we've combined tools and capabilities that make it easier for agents to write business with ASSURANT.

We've also introduced a new product portfolio with offerings tailored to meet the needs of different consumer segments.

Our results reflect our disciplined approach to underwriting, combined with targeted rate actions to improve our competitive position in selective markets.

ASSURANT Employee Benefits continues to make a strong contribution to profits while continuing the transition to reorient its business around the small employer.

While overall sales are down, sales in our target market of under 500 lines are up 12% year-over-year.

Our dental network partnership with Aetna makes us one of the largest dental PPO networks in the country.

We began selling this expanded network in January 2007, and we believe it will strengthen our competitive position in the group dental market place.

Turning to our disciplined capital management approach, we closed the year with $450 million in excess capital.

Our priorities remain the same.

First, we invest funds in the organic growth of our businesses and make prudent and opportunistic strategic acquisitions.

For example, in 2006, the growth and credit-placed homeowners combined with the Safeco FIS business led to $230 million in capital being committed to the Specialty Property business.

We will continue to return excess capital to shareholders through dividends and share buybacks.

In 2006, we increased the quarterly dividend per share by 25% in May, and repurchased 8.5 million shares at a cost of $422 million over the course of the year.

Additionally, in January 2007, we've repurchased an additional 360,000 shares at a cost of $20.2 million.

Looking to 2007, we are confident our specialized insurance strategy will continue to provide value to our shareholders.

Our results demonstrate that we are leveraging our core capabilities and investing in targeted growth areas to continue the strong momentum we've established over the last three years.

I'd now like to turn the call over to Craig Lemasters, President and CEO of ASSURANT Solutions.

Craig?

Thank you, Rob, and good morning, everyone.

It's great to be here with you today.

At Solutions we continue to focus on long term profitable growth in three key areas, extended service contracts, PreNeed insurance, focused on our relationship with the leading funeral home chain SCI and international expansion, specifically around our credit insurance and extended service contracts.

Net operating income increased by 13% in the quarter to $39.8 million and 19% for the year to $158.4 million.

The strong results are primarily attributable to the growth in our extended service contract client base.

That, in turn, allowed to us report higher investment income as we grew invested assets associated with both domestic and international extended service contract business.

Turning to the top line, net earned premiums for Solutions were up 8% to $617.8 million for the quarter, and 7% to $2.4 billion for the year.

The growth is being driven by extended service contracts, but offset primarily by the decline in premiums as we exited the U.S. independent PreNeed channel and the continued runoff of our domestic credit insurance business.

We've had strong quarterly and year-over-year increases in profits.

Let me now give you a little more detail on some of our opportunities and challenges and how they affected our results this quarter as well as how they may impact future results.

Overall, I'm very pleased with the progress in our targeted growth areas.

Examples include growth in our domestic extended service contracts, international credit insurance and extended service contracts, and particularly in Canada, Argentina and Puerto Rico.

We've made excellent progress in new extended service contract distribution channels particularly in the recreational vehicle and power sports industries.

In less than three years we have produced strong double-digit top line growth in both of these channels.

Our success in these niches is another great example of how we constantly look for adjacencies where we can leverage our core service contract capabilities to tap into underserved markets.

I'm also pleased to announce that we have extended our existing contract with Circuit City, and strengthened our relationship with them by adding additional products.

We're also very excited about strengthening our existing relationship with SCI through the three year extension of our exclusive distribution agreement.

We announced in the fourth quarter our intention to buy the PreNeed insurance company Mayflower.

This transaction is pending state approval.

The Mayflower acquisition is expected to generate returns consistent with our targeted range for the Solutions business over time.

We remain optimistic that we can also help SCI increase organic PreNeed insurance growth to their 1600 funeral homes.

We're implementing numerous sales and marketing strategies that we have employed in other large institutions to improve sales.

We continue to invest in growth opportunities internationally as we entered both Germany and Italy in 2006.

We're also on track to launching Spain in the second quarter of 2007.

Combined with our recent entries into Mexico and Brazil, we know have five countries where we are investing dollars today to generate better growth and margins over the long term.

Argentina is our latest example of achieving these goals.

After several years of hard work, our Argentina team is achieving double-digit top line growth and ROEs that exceed targets for the Solutions segment.

Next I want to share some of our challenges with you.

First we're experiencing margin pressure with two specific ESC clients.

The first client involves an assumption of a block of business.

New clients often bring with them existing blocks of business that are not performing within our targeted returns and require modifications.

By analyzing our extensive data base on product repair incidents we can implement changes, often on a very granular level, to make the program successful for us and more profitable for our client.

This process can take four to six quarters before our returns move up to our targeted range.

Our next challenge is related to a new product launch in mid-2006.

Our creativity in generating new product ideas occasionally produces a product that is underpriced or that has terms and conditions issues which require us to take actions to improve profitability.

Our early warning indicators quickly identified this problem and we're taking appropriate action.

It will take several quarters before we are fully meeting profit targets on this particular product.

I want to emphasize that these issues are specific to two clients and are not systemic problems to the book of extended service contract business.

Both of these issues are manageable and certainly fall within our core capability of managing ESC risks.

Our next challenge relates to short term ROE pressure.

The previously announced loss of MBA's debt to [firm] account, which will reduce 2007 fee income by $18 million, had higher ROEs than credit insurance.

In response to these challenges we continue to stream line our legal entities to free capital and cut expenses to right size our credit insurance operation.

We remain committed to achieving our long term ROE goals for Solutions.

Overall despite some of the short term challenges we see in 2007, I remain optimistic about our long term opportunities.

We continue to make expellant progress in our targeted growth areas, extended service contracts, PreNeed and international expansion.

I'm also comfortable with the margin pressure I mentioned in our ESC business is well within the scope of our risk management core capabilities.

Thank you very much for your time today.

I'd now like to turn the call over to Bruce to review the results of our other specialty businesses.

Thanks, Craig.

ASSURANT had a strong quarter and an excellent year.

Our success continues to demonstrate growth in many of our key targeted areas.

For the quarter, net operating income decreased 4% to $136.2 million.

Each business reported quarter-over-quarter earnings growth, however, the corporate and other segment reported a decrease, primarily attributable to $39.4 million tax benefit reported in the fourth quarter of 2005.

For the year, net operating income increased 17% to $602.7 million or $4.68 per diluted share.

Net earned premiums increased during the quarter to $1.8 billion, up 8%.

And 2006 net earned premiums increased 5% to $6.8 billion.

Net investment income during the quarter and the year grew 7% to $183 million and $736.7 million respectively.

The increase is being driven by an increase in yields and growth in average invested assets.

By all accounts, ASSURANT Specialty Property had a great quarter and an outstanding year, driven primarily by the strong growth in our credit-placed homeowners business and significantly less catastrophe activity for the year.

This drew a record low combined ratios for the year.

Fourth quarter 2006 net operating income was $64 million, up 64% for the -- from the quarter of 2005.

Fourth quarter results were aided by $5.5 million after tax of income from the settlements with two former clients.

For the year, net operating income grew 68% to $241 million.

Net earned premiums increased 52% to $350.9 million for the quarter and 41% to $1.2 billion for the year.

This strong growth was driven by credit-placed homeowners both organically and through acquisition offset somewhat by the continued decline in manufactured housing premiums.

Organic growth in credit-placed homeowners can be attributed to a rise in total insured values, growth in a number of loans we are tracking and greater placement rates as our clients lower portfolios include more sub-prime loans.

Safeco FIS credit-placed business which we acquired in the second quarter contributed $123.8 million of premium in 2006. 2006 net investment income increased 20% to $74.5 million and fee income increased 30% to $49.4 million driven primarily by the growth in loan tracking fees.

An important element of our disciplined approach to risk management is partnering with large national players to help maintain a broad spread of geographic risks.

Despite our continued strong growth, our overall geographic spread of risk has not changed since we first updated you in March of 2006.

However we have see an increase in insured values and exposures in Florida offset by reduced exposures in other southeastern states.

Our business in Florida consists of a better mix of business, as we've taken pro-active steps to limit our voluntary manufactured housing exposure.

As Rob mentioned we've already placed the top end of our catastrophe reinsurance program for 2007 to protect the capital base of the Company.

Effective January 1, we have secured additional coverage protecting the Company for up to a $550 million storm from last year's $400 million level.

This provides coverage, commensurate with our growing book of business.

We will update you once a complete program has been placed.

ASSURANT Health delivered strong operating performance in 2006, although down from 2005.

Fourth quarter 2006 net operating income was $37 million, up 11% from the fourth quarter of 2005.

Full year 2006 net operating income decreased 6% to $167.9 million.

The fourth quarter of 2006 net earned premiums decreased 2% to $519.4 million.

For the year, net earned premiums decreased 4% to $2.1 billion.

Individual medical net earned premiums increased 4% for the year, driven by the continued strength of the advantage agent initiative with more consumers purchasing our full range of new products.

This was offset by continued declines in small group premiums, which we will continue to write only if we can do so profitably.

Our combined ratios for the quarter improved to 92.3% from the 93.7% in the fourth quarter of 2005.

The fourth quarter of 2005 included higher technology and marketing costs of about $10 million.

The combined ratio for the year was very good at 91.4%, only slightly higher than the 90.8% in 2005.

Loss ratios are likely to move up as we continue to take selective pricing action in certain markets to continue growth in the individual medical business.

Over the long term, we believe focusing on the profitable growth in individual medical will benefit the profitability of the entire enterprise.

ASSURANT Employee Benefits continues strategically transitioning to the small employer market and made a strong contribution to profit in the quarter and for the year.

Net operating income was slightly up for the quarter to $19.4 million.

Full year 2006 net operating income was up 22% to $83.6 million, driven by favorable loss experience, most notably disability.

ASSURANT Employee Benefits net earned premiums decreased 9% during the fourth quarter of 2006 to $280 million.

Full year 2006 net earned premiums decreased 8% to $1.2 billion.

The decreases are primarily the result of lower sales and persistency as the business continues to implement its small group strategy.

Turning now to corporate and other, net operating loss for the fourth quarter of 2006 was $19.9 million, compared to net operating income of $20.7 million in the fourth quarter of 2005.

The fourth quarter of 2005 would have reported a net operating loss of $18.7 million, when we adjust for the $39.4 million tax benefit recorded in that quarter. 2006 fourth quarter expenses include funding of $3.3 million after tax for our charitable foundation, along with $6.2 million associated with an increase in certain tax liabilities.

Adjusting for these two items, corporate and other expenses will be approximately $10 to $11 million.

And it's worth noting that fourth quarter expenses can be higher due to compensation expenses associated with Company performance.

This is consistent with what we've told you regarding our corporate uses of cash, which includes interest expense of approximately $40 million, dividends of approximately $50 million, and corporate expenses around the $50 million range.

Turning to our financial supplement, we've listened to your suggestions and we've added a new table that summarizes disclosed items in our press release and earnings call to provide greater transparency in our results.

Our balance sheet remains strong.

Total assets at December 31st, 2006 were $25.2 billion.

Total stockholders equity was $3.7 billion excluding accumulative other comprehensive income, AOCI.

Our debt to capital ratio excluding AOCI declined to 21%.

And our booked value per diluted share, excluding AOCI, grew 14% to $29.97 per share.

In summary we're pleased with the results of the quarter and the steady execution of our specialty insurance strategy.

Now let me turn things back over to Rob.

Thanks Bruce.

Operator we're ready for questions.

[ OPERATOR INSTRUCTIONS ] Your first question comes from Jimmy Bhullar of JPMorgan.

Hi, thank you.

I just have a couple of questions.

The first one, you mentioned the couple of contracts within your domestic extended service contract business that are underperforming.

Would you quantify how much the losses or the -- how much the losses are in addition to what you normally expect, what sort of an impact they're having?

And I think you mentioned that it's a-- the impact is going to last about six to eight quarters, is that right?

Yes let me share a couple--

Then I have a follow-up.

Let me share a couple of thoughts on the two ESC issues.

First and foremost are as I mentioned our early warning system worked and we were able to identify these problems and that's really key to our core strategy within the ESC business and what that allows us to do is focus on the fixes in this case, it's the terms and the conditions of the contracts, it's rating and we've implemented those fixes.

And you're right, our estimate is that takes anywhere from four to six quarters or so to work through those changes and get back to the profitability that, that we really are looking for.

The other key point is our contractual arrangements with our clients.

And the way our contracts work is that ultimately, we are protected.

Our job is to fix the program and help our clients get this correct.

But ultimately, we will make our expected return on these products.

So in this case, as I said, once these fixes begin to take hold, then we would look for a anywhere from four to six quarter time frame to get to that profitability where we need to be.

And then what's the difference in profitability?

Is it a couple of points on the loss ratio?

Is it-- can you quantify?

Is it a $1 million, $2 million, or is it $5 to $10 million, if you just some sort of-- give us some sort of an idea on how much the loss ratio would improve once this issue is settled?

Yes, I really can't quantify it to that agree.

I'll tell you, again, a couple of things.

It actually related to obviously it's to the product and assumption to be a bit of a competitive disadvantage if we go to that level of detail and there's also client confidentiality issues.

But I will tell you that a large part of this issue is already reflected in the fourth quarter.

So obviously when we find one of these problems, it's already reflected in those results that we've reported.

And, again, while there will be more issues with it as we work out through the next four to six quarters not the magnitude of the fourth quarter.

Okay.

And then just on the same business, you mentioned you extended your contract with Circuit City, you're adding additional products.

Could you give us an idea on what sort of a pick up you expect from that?

Again I can't quantify the pick up.

I think the important part there is, and we mentioned this before with these large clients, it's always a huge competitive win to get extensions on these contracts.

So to get, and unfortunately I can't disclose the exact time line, but to get a multiple year extension with a client like Circuit City it's terrific and we also did picked up the servicing and underwriting on additional business there.

So it is significant to us.

Okay.

And then just the last one on excess capital.

You mentioned a $450 million I think at year end '06, beyond -- if you don't do any deals, should we expect the entire amount to be used for buybacks?

And what sort of flexibility do you have beyond that $450 in terms of free cash flow coming off of-- coming out of the business?

Sure.

I mean, again, our capital management strategy, Jimmy, is consistent.

We want to grow the businesses organically and through acquisition.

If we don't do that, we will return money to shareholders.

Bruce, do you want to comment a little bit on just free cash because I know you mentioned that.

Yes we, Jimmy, we--I think we've indicated to you in the past and I think it's still applicable, our free cash from operations is still in -- after taking care of the interest expense dividends and corporate needs, it's certainly in the $170 to $230 million range.

So that's still very consistent, and we have stepped up, obviously on the corporate side and on the expense side, we spent a lot of time on the M&E activity that's going on right now.

So we'll continue as Rob said, the first priority is to deploy back into our businesses and as Rob even mentioned we deployed over $230 million to support the growth that's going on on the Property side.

Okay.

Thank you.

Thank you.

Your next question comes from David Lewis of SunTrust Robinson.

Good morning, David.

Good morning.

Thank you.

Bruce, just to follow up on Jimmy's last question.

You have $170 to $230 million of free cash flow, obviously some use internally.

But are you not going to also see $100 million plus out of potential capital out of collapsed subsidiaries still in '07?

David, we took a lot of that in-- a lot of that flow came in in certainly '06.

And we have a lot of movement also with -- obviously we collected with the sale of PHCS, you have more cash flow came in as well the fourth quarter.

There is some more to be done but not to the same extent as we mentioned last year at this time, when we gave you that range of about $100 million.

We've done a lot of the corporate streamlining.

There is still some more to be done on the Solutions side but not the same magnitude.

Maybe $50 million?

No, I think a lot of it's going to take a little bit longer because now we're dealing with more of our larger, larger statuary entities so it's going to take us a longer time.

And there might be a couple of large entities, in the $20 to $30 million range.

But that's going to take a much longer time just to get out.

Okay.

And Bruce can you review again the corporate and other spike in losses.

You made some comment that I missed about $10 to $11 million and I know you have, I guess, some incentive comp, true ups in the fourth quarter, and what -- how should we look at that as we kind of move forward?

Well corporate and other is a segment where we have a number of things that flow through our segments.

So I'm trying to normalize for what I recall.

There's normal kind of stock appreciation REIT plans.

We have changes when we implemented 123R, which actually helped us, not market-to-market.

The corporate-- our corporate expenses run in that $10 to $11 million range per quarter and it goes back to what we said before about the uses of cash.

About $50 million being kind of corporate uses of cash.

And a lot of that in the fourth quarter, typically there is a little bit of a difference in the run rate only because that's where, depending on Company performance, and obviously the Company performance has been very strong over the last three years, there is some adjustments to compensation expense in the fourth quarter.

But apart from that, I was trying to give you, knowing that there's a lot of things that go in and out of corporate and the tax reserve releases and true ups that go on, we wanted to give you kind of a run rate of $10 to $11 million in the corporate for expenses.

So you wouldn't look at any other unusual negatives in the quarter other than the $0.03 that you outlined in the press release, is that correct?

Yes, that's correct.

We gave you the two -- the funding of the ASSURANT foundation and the -- some tax [write down] liabilities.

Right.

And Craig, just a quick question for you.

Can you give us what premium growth would have been in the fourth quarter and/or full year if you can take the PreNeed run out--runoff?

I don't have that in front of me.

But we'll get that for you David.

Yes, I think that'd be helpful to break that out so we can just kind of see what's actually happened with the core business.

And then lastly, would you not expect Solution to continue seeing acceleration and revenue growth as you go through 2007, particularly if you take the PreNeed out?

Certainly looking for revenue growth.

Again if you look at sort of where we are with both the domestic ESC business and new business with, with Circuit City, as mentioned, we feel pretty comfortable there and really looking at it from a couple of angles.

Organically there's growth potential, as well as we're looking at some of the smaller mid-sized acquisitions that Rob mentioned as well.

Very good.

Thank you.

Thank you.

Your next question comes from John Nadel of Fox-Pitt Kelton.

Hi good morning guys, I have a few questions for you this morning.

Good morning John.

The first one is just on expenses overall sort of Companywide.

We sort of saw this same sort of trend last year as we went from 3Q to 4Q.

If I sort of measure your expense ratio X a couple of one timers, it looks like it's up a couple hundred bases points in the fourth quarter versus sort of the trendable rate for the first nine months as -- is that sort of something you'd expect to happen similarly going forward?

Do you expect sort of a return to that first nine month sort of level as you look out to '07?

I mean, John, we've -- we've outlined some of the things that I think you've identified that increased expenses during the quarter.

New client acquisitions drive expenses up in a particular quarter.

So what Craig mentioned had the acquisition there, obviously, in addition to writing of the business and the commissions, we have that additional integration set up on the -- on the new product stream there.

So, yes, I think it's up a bit in the quarter but I don't think you should look at that as a trend moving forward.

Was there also some new client acquisition on the Specialty Property side?

Because it looks like gross rate and premium really jumped up, but, but the expense ratio is there.

So maybe it's sort of --

Yes, I think there probably was a combination of organic growth with our existing clients and the Safeco business continues to grow.

Okay.

Turning to Health, I know Bruce, and you guys have mentioned this for a while, since your investor day that the ROEs would come down a little bit but probably be driven by the loss ratio as you make some pricing changes in a few markets.

I guess I'd like to ask you it this way, is do you think the, the commentary about expecting the loss ratio to move up modestly moving forward, would, would you say that's more reflective of your outlook for business growth and expectations around some pricing changes?

Or is it more related to perhaps a deterioration of the enforce?

It's a good question, John, I think again our strategic focus in this area is on risk management.

So we think we are on top things and I'd say it's an attempt to grow the overall profitability of the Health business versus the deterioration in the block.

Okay.

The last question for me is just on the Solutions side.

I know, Craig, it sounds like you're sort of reluctant to give us some sizing of what the drag might be from these two issues that you, that you sort of cited this quarter.

I guess if I could ask you this way, in March you laid out a Solutions ROE target with a three to five year sort of horizon of 14% to 16%.

It was roughly 8.5% in '05.

It looks like it's about 10% in '06.

So certainly tracking in the right direction.

Is there any reason to view the longer term target of 14% to 16% as changed in any way or delayed?

No, John, I mentioned that in my comments that we're still committed to the long term ROE for Solutions and that's what we're still committed to.

The-- obviously the two opportunities for improvement on these ESC clients are what we're good at and the fixes are in place and we're comfortable that we'll manage through those and also as I mentioned the [off sets] of the MB&A drain on the R side of that calculation will begin in '07 but the long term, we're still committed to the ROE goal.

I'm going to try to sneak one more last one in here.

Any meaningful or material changes in year-over-year reserve developments across any of the businesses this quarter or for 2006, for that matter?

To start John, as you know, we're very financially prudent and we're conservative in terms of how we look at things here.

I'll let Bruce comment just a little bit on some of the reserving methodology.

Our methodologies are very consistent, John, across all the units.

I don't think you'll see any change there.

Obviously, the 10K will be out in the next three weeks and you'll see the reserve development from our Property and our Health business, and the only changes that would be there is the business -- as the reserve -- as the overall level of reserves move, there might be a slight reduction in redundancy, without a specific amount against the reserve side.

But the methodology has been very consistent.

Okay so-- yes so sort of thinking about it in percentage terms as a percentage of beginning reserves, no material changes?

That's correct.

Okay.

Terrific.

Thanks, guys.

Thank you.

Your next question comes from Jukka Lipponen of KBW.

Good morning, Jukka.

Good morning.

Going back to the Health insurance loss ratio.

There wasn't anything unusual in this quarter, was there?

No.

No.

And then can you quantify at all how much do you expect it to move up and sort of how quickly?

Jukka, I think that this is really a situation where we see an opportunity to grow our overall presence in that individual major medical market, which would lead to an overall growth in profits for both the Health business and the enterprise and it's that balance between generating top line growth and giving a little bit more competitiveness on the rate side.

So we're balancing that, but I think you see with us three years of steady execution around implementing our core capabilities to deliver results and we think there's opportunities to continue to do that to grow our individual Health business.

Yes, I understand it's about growing the aggregate amount of earnings, even if it's at a slightly lower margin, but any sense in terms of, is it going to move up another 100 basis points 200 basis points?

I think what-- if you translate things, it'll move up a bit over time, over the long term.

We, we've given that three to five year projection, Don Hamm did at last year's investors day.

You can see the movement that took place this year was very small and I -- certainly we're not expecting any kind of an acceleration there.

Okay.

And then the-- in Specialty Property, anything unusual in the expenses in this quarter?

Just associated with business growth.

Yes I mean we have issued with Safeco in terms of we're continuing with our integration there and we're making excellent progress on that integration to move everything to a common platform.

Again, I think it's really leveraging what we're very good at there, which is getting everything on to our common tracking system, which will benefit us in the long term as we continue with the integration Jukka.

And last question, on the Employee Benefits, I read your comments to suggest that the premium declined, there's probably some larger cases that you sort of allowed to lapse.

Correct.

I mean, you'll-- there's a -- we are renewing cases only at premium levels that we think are appropriate in that market, given that it is such a competitive market, many of those cases have gone away and we are not unhappy about that.

And 1/1 is heavy, large case renewal.

We may see some more of that in January.

On the other hand, we're very excited about the growth we have going on in our target market segment and with the introduction of the -- our expanded PPO panel in dental, we're very optimistic about our sales momentum.

Thank you very much.

Thank you.

Your next question comes from Julie Oh of UBS.

Hi looks like--

Good morning, Julie.

Hi how are you.

I guess most of my questions have been answered but I do have a couple of nitpicks.

One in the Solutions segment, I was just wondering why the income was down 6% year-over-year?

I'm sorry --

The fee income, Julie, the fee income in Solutions had a one timer last quarter due to closed book of our [inaudible] service contract business which we disclosed, I think it was about $5.4 million.

$5.4 million.

Yes, it's on the schedule, the new schedule that we just put out in our supplemental.

Okay.

Made it out there for you.

Okay, great.

And then one other question with respect to your new reinsurance terms, I was wondering if is there any way that you can kind of quantify how much better your terms are for '07, versus '06?

We will lay that all out-- I'd prefer to wait until we have the entire program in place, Julie, and as soon as we have the entire program in place, which will be effective for our June 1 renewal for the hurricane season, we'll put out a complete announcement on the--

But it's, yes but it's part, Julie, as part of our core capability of risk management here, what we said is we were going to look at accessing the market at multiple times during the year, and we were going to look at additional alternatives.

And we have a committee set up to go after both of those things and are feeling very good about the progress we are making there.

Okay.

And one last question actually has to do with your double-digit international credit insurance written premium growth.

It was up about 15% in the fourth quarter, but only up about 2% in the first nine months of 2006.

So I was wondering if you had anything unusual, like a new client or something that was driving that strong growth?

Not anything specific, Julie.

I mean part of the lower growth during the year, I think we talked about, particularly in the U.K operation where we just had a tremendous slowdown in lending growth in the U.K., and a lot of regulatories things going on in that market place.

And so that was probably the big driver.

But we're also, are bringing on new clients and seeing nice growth now in international.

As you know we've started, as I mentioned, in a lot of new countries in the last two years.

So as they begin to get traction and really bring on new business, we're starting to see that impact of the growth start to take hold.

Okay great.

Thank you very much.

Thank you.

Your next question comes from William Wilt of Morgan Stanley.

Good morning, Bill.

Hi, good morning.

A couple of numbers questions, or at least one -- two numbers questions.

Bruce you'd given the Safeco premium in Specialty Property for the year at, looking through my notes, at $123.8 million.

Do you have it by quarter?

I think we updated you as we went along.

But that's pretty much about eight quarters of premium -- eight months of premium, sorry.

Perfect.

That's great.

The Specialty Properties, the $5.5 million benefit, or favorable whatever it was, $5.5 million after tax, how does that roll through the loss or expense ratio or does it?

That is -- it's on the new exhibit that we just put out that tells you exactly where it flows through.

So that would have gone through the [inaudible] of assets.

I see, okay got it, yes perfect.

And then the, I guess same scene, the Specialty Property, the subprime markets and all the news flow in the subprime markets, higher default rates and so forth.

How does that, how does-- what's the interplay between problems, delinquencies in the subprime market and the force placed property?

For instance, if a bank takes, takes possession of a home on a delinquent mortgage, does ASSURANT stay on the risk, or if it was on the risk, or does ASSURANT go on the risk if it hadn't been previously?

Well, in the subprime, it varies by type of loan, but on a subprime, if we're already on the, on the risk, we already got that particular property insured, then we would stay on the risk but a lot of the terms and conditions change when it becomes real estate owned, with regards to deductibles and that type of stuff of what's covered and what's not covered but it doesn't change our risk necessarily at all.

We have not seen any difference in our risk or profile because of that phenomena.

I guess two questions to follow up on that.

One is just directionally or broadly, how do the terms and conditions change?

I recall under the current force placed homeowners, it's the structure only, no content, various other protective measures for ASSURANT.

Is it-- do they change -- how do they change just broadly speaking?

Yes, obviously the basic structure does not change from the stand point of we only cover [five] dwelling, we don't ever cover content or anything like that.

What changes is because it moves over to the institution away from the actual insured.

The deductible gets higher so that we are just nickel and dimed on certain small damages, it's just that the deductible gets raised because it's covered by the contractor we have with our client.

That's helpful.

And then so that was a scenario where if ASSURANT was already the insurer of record on a property, if ASSURANT wasn't the insurer of record on a property were the loan becomes delinquent and is taken back by the bank, does that trigger anything?

Well obviously the voluntary insurance carrier will-- if they're not being paid the premium by the homeowner separately, if it's an escrowed account, and the payment would get stop, and they cancel, then we would be obviously insuring the house and the same sort of policy that we would place to cover the -- to protect our clients' portfolio, we would -- we would place a policy on it to protect that with just a higher deductible.

See I think one of the big keys here is, Bill, we've got a specialty business.

If you think about a soft homeowners market for premiums, we're not impacted by that.

Our premiums aren't going to change because there's more competition in the market place.

We have additional protections on the back side that Bruce was outlining, for things like a takeover by an institution, so that small dollar claims are not our claims.

And we think that's one of the unique things about our model that leaves us in very good stead.

That's helpful.

Thank you.

Thank you.

Your next question comes from Beth Malone of KeyBanc.

Thank you.

Good morning.

Good morning, Beth.

Just have a couple of questions. could you just comment, is there any impact from what's going on in Florida with your markets?

Or are you looking at that change, anything that you do in the Specialty area as a result?

Sure.

Well, obviously Florida is an area that we are very focused on as part of our risk management activities in the Specialty Property area, and we're dealing with a fluid, evolving situation with still, I'd say, numerous unanswered questions.

I think Bruce probably has some -- some points he can share with you that is kind of our outlook more than a total known yet as we see the situation.

Bruce?

Beth, I think the first thing I would say is, again, because of our Specialty business model, our -- our credit-placed business is very different from the voluntary homeowners market which is really the market that's impacted here.

That's number one.

What we have seen is some of the key points that's going on and as Rob mentioned, it is a fluid environment right now in Florida.

They are expanding the reinsurance capacity.

So potentially that's good because if there is more reinsurance capacity being supplied by the Florida market for the regular -- by the Florida-- by the state of Florida for the regular voluntary homeowners market, we feel it might give us more capacity for our reinsurance program in the regular market to get capacity for our program.

Number two, Citizens, which is the carrier that is also in the state of Florida, they're providing more affordable rates because obviously they've rolled back Citizens' rates and therefore they're increasing their ability to write more voluntary business in the state of Florida.

And that's sort of when if they're affecting the voluntary market, it'll give more capacity inside there for the regular homeowner in the state of Florida.

The whole asking for rate rollbacks, not that stuff has really not affected us right now and just looking, our model is just so different.

But it's a very fluid situation, we're monitoring it and we're trying to decide what's the place for us to be.

We have taken very proactively the prudent action well over a year ago, or actually probably more like two years ago to really limit our voluntary exposure in the state of Florida as we were ranking our very specific Specialty business model there, which is the credit-placed homeowner.

That's our focus and that's where we've been playing.

Okay.

Thank you.

And then a question on the extended warranty market, especially in the international.

Are these situations where you're going in and replacing another competitor that's offering extended warranties or are these like virgin accounts where you have to educate the company as to the benefits of being in the extended warranty market?

I'm going to have Craig answer that, Beth.

But I want him to start with just setting up why are we there internationally because I think that really speaks well to your question.

Yes if we go back to the original sort of hypothesis that we created six years ago on international expansion.

It was all around could we go places and get better growth and better margins?

And so that's what we're out to validate in all of these markets and countries that we're picking.

Specifically on the ESC side, it's a little bit of both, but much more on the new client acquisition or as you said virgin account.

Very few of the markets that we're in, and they'd be the obvious ones, Canada, the U.K., some of the more mature markets have an established, if you will, warranty market place.

Most of the places we're going, it's really educating the industry on what we do, which is really a unique proposition.

For us, it's very much rolling the clock back 15 years when we really got into this business in a big way.

So it's quite exciting on one hand.

The other hand, it does sometimes take longer because we really are starting from scratch educating the industry.

Some of the markets are quite surprising.

Germany would be a good example where you think typically in electronics area, this would be a well-established product line, and it really isn't.

So we're pretty excited about the possibilities there.

And obviously one of the big reasons why this is a real targeted growth area for us.

And the great thing here is that Craig can leverage his expertise from the U.S. and port it into these countries.

And that's been a huge benefit to us to get up and running in new countries, and being able to rely on, if you will, that knowledge base that we have resident here.

One of the things, just now quick with it, we spent the last two years creating something called global client management, where we've really built what we think is a pretty unique collaborative strategic planning process with prospects.

And one of our motivations, we believe that as we got these flags planted in these countries, that our footprint would very much mirror both financial institutions and our retail clients.

And we're pretty excited about this.

We've really rolled out-- just rolled out the data in the third and the fourth quarter and the three clients and prospects we have testing it looks very, very promising.

And we think this will get us to sort of the next level in really thinking about it and selling this business globally.

And just one other question on that.

And as you go in -- and these are new markets and you're introducing this product, does that also allow for better margins or better pricing than the established U.S. market, where there's a little bit more competition and maturity in the relationships?

Absolutely.

And, again, that goes right back to our original hypothesis.

And we've really tried to create a very disciplined approach to, one, how we go into countries, but also a lot of discipline around our long-term viability there.

And the key to that is, again we have to get better margins and we have to have better growth than domestically, because it's hard.

I mean this is not an easy thing to do.

And we're spending a lot of time and resource on it.

What we've seen so far is pretty significant validation to that, particularly in the warranty space.

Certainly in the markets where, again, the product essentially doesn't exist, we educate the industry and start and then we can get better margins.

The example I used earlier I think is an excellent one where Argentina, we spent a number of very hard years there building the company and the people and transferring the knowledge and now we're seeing that company break out and very much validate, both the top line and the bottom line and the ROEs, which I mentioned exceed these Solutions goal.

Okay great and just one last question on the Specialty Property casualty market.

You mentioned it a couple of times.

In terms of, we're hearing obviously, that we're starting to see softening in pricing in a lot of different sectors and your unique niche probably insulates you somewhat from the overall kind of commodity-type pricing environment that we're seeing.

But is there a -- are you changing your strategy or is there a different way that you're approaching this market due to the softening that we're seeing in the overall market?

Or can you kind of move under the radar because of the Specialty stitch nature?

Yes, I think if you look at how our business gets written, it gets written when someone decides that they're not going to pay their insurance premium.

And we send them a notification that they need to do it to keep their -- their loan, if you will, up to term.

If, Beth, they don't respond to that, we'll place a policy on them and it is a policy we place on terms and conditions that have been established with the lending institution.

Okay?

Bruce?

And I think, Beth, I think why we are positioned so well is because being the leaders, we have aligned ourselves with the leaders in the mortgage industry.

So we've got a very, very significant share of the people who are consolidating this industry both on the prime and the subprime space and therefore having that relationship, first of all, and tracking as many loans as we do,over 29 billion loans allows us to do exactly that.

Watch what is going on in the voluntary market but our pricing is based off of our premiums are all filed and the premium is based off the insured value and the property, the last known insured value and that's been increasing as well.

So what's also helped Specialty Property grow their premiums significantly is the fact that not only have we had loan growth but we've had insured value growth.

And our premiums are rating off the last known insured value.

And therefore, we're getting premium growth not just from loan growth and penetration, but from the insured value growth.

Okay.

Thank you.

Sure.

Thank you.

Your next question comes from Vinay Misquith of Credit Suisse.

Hi good morning.

Good morning Vinay.

Most of my questions have been asked and answered, but just going back to the previous question.

The-- on premium growth, I think your-- the Safeco acquisition probably has added $50 million worth of loan payments this quarter in my math is correct.

The growth [inaudible] appears to be about 25% in the Specialty Property segment, this seems awfully high.

And I understand that home values are increasing, but if we look at the past few years, growth has been, what, 7%, 8%, maybe 9%.

I'm just curious from your perspective why it's so high?

And do you think a certain part of that was because of the lack of capacity in the Florida market place and what will the new Florida legislation with Citizens writing more business and homeowners insurance being more available easily there, will that have on the growth in that line item?

Okay the-- if we look again at this business, remember how our policy comes into effect.

It comes into effect when there's a tightness in the market and they can't get insurance, but our belief is that an active insured calls their agent and if they do that, they can find coverage.

The people we're talking about here, for whatever reason, are not responding and they don't respond and our obligation to the lender is to contact and notify them that they need to have insurance.

And we contact them on behalf of the financial institution.

When they do not respond, we then send them a policy in the mail.

Okay now I think the point that Bruce brought up is a very important one from several dimensions.

The first is we've aligned ourselves with industry leaders in a consolidating industry, all right?

So we started that in the, the prime market place.

We've now been seeing a lot of our growth take place in subprime.

And in the subprime space, placement ratios or people who don't respond is a higher percentage, so that's led to growth.

Our premium is calculated as a function of the value of the home, last reported value.

The voluntary carriers have gotten much better at constantly updating home values.

So that's worked in our favor as well.

So I think we're in a very good position.

I think we're operating in a different segment of the market than the voluntary homeowners are and we're very pleased at the growth we've been able to demonstrate.

Sure.

My sense for the loan start is you're up 1% excluding the Safeco acquisition, yet you're premium growth extent is about 25%.

So I'm just trying to sort of match the two numbers.

Anyway --

No, no, I think you're right.

The key, though, is that the growth in loans have come in the market where we have higher placements.

All right.

So the softening -- so you are saying that the --

No, I'm sorry, it's the subprime, growth in the subprime number of loans where the placement rate for insurance is higher.

I think the biggest phenomenon we have seen and people-- they call it home value, but it's not the home value that-- that helps, but that's not what we're talking about here.

We're talking about insured value.

What's happened to the voluntary market, if you track voluntary-- the voluntary homeowner market, they have substantially changed their models and increased their insured value, their TIV up.

That's been a big impact, where because of the massive hurricane season that went on in '04/'05 and [inaudible], when the voluntary market had to go in and actually fix homes and the replacement costs, they found that their cost of replacement, their claims costs were much higher than they thought.

So they've really moved up their own models of total insured value.

And as we track and find an exposed loan, we go back to the last known total insured value.

That's gone up and that's been a big driver because our premium is just rated off the last known total insured value.

That, coupled with the penetration that Rob talked about on our planned portfolio is shifting more to subprime has helped, and then we just had an overall growth in our business.

We've added small accounts as well and more organic growth.

Well that's great.

And I wonder if I can just slide in one last question on the loss ratio.

The loss ratio this quarter in that segment ticked down about one or two points.

Was there any reason for that?

Did you release any reserves in this quarter?

No just, no catastrophe activity whatsoever-- the other quarters-- we only look at catastrophes and report on catastrophes when they could cost us more than like $5 million on any particular isolated event.

But we had no events this quarter in -- in the -- plus you have to understand that also in the quarter, on that new exhibit we gave you, we have that $5.5 million credit going through there--

Sure.

After tax for the client related settlement for the former client.

Sure.

That's high [inaudible] as well.

Sure.

And on the Florida tornadoes in general, no significant loss here, correct?

Because you write mobile homeowners insurance, correct?

It's early in the reporting out of things but I believe we've had 35 claims to date.

That number will probably drift up but I don't think that will be of any significance.

Sure.

Thank you very much.

Thank you.

Your question comes from Steven Schwartz of Raymond James.

Good morning Steven.

Hey good morning, guys.

I want to touch on going to Solutions and I want to touch on a couple -- and maybe they're related.

Domestic extended service contract business, I don't think we've touched on this, you talked a little bit about international-- was up significantly.

It was up significantly year-over-year.

It was up significantly vis-a-vis the third quarter.

It looks as if there's some seasonality, which would make some sense to Christmas holiday season, what have you.

But that increase is huge.

And I'm wondering if this is somehow related to the block of business that Craig referred to that was having some type of difficulties?

Was that a new block of business that was just taken on, and did that effect this number?

That was not the biggest impact on that number, Steve.

I think you hit on the real impact, it was a good holiday season.

I mean if you look at retail numbers we're good and we do have seasonality there, so it was a strong fourth quarter in terms of the holiday season.

We also began production on the additional stuff we added with Circuit City that I mentioned.

So those were really the two biggest factors.

Okay so Circuit City was in there as well.

Just to follow up on that -- on that block of business that you referenced, in general, I understand what you're saying.

You pick up a new client, you take it from somebody else, they have a block of business, you take over that block of business.

It may not be as good as you would like.

Do you -- do you go in there, just -- this is kind of a general question.

Do you go in there knowing this and you do it anyway because you're looking at the long run, or kind of what's the decision there in taking over that new block of business?

Yes, no, we typically would know Steven.

And that is-- again it's a core capability of ours and I think what has allowed us and certainly will allow us to sustain in this business is the fact that we understand what we're getting into.

But, again at times like in this situation, we know going in, that there's changes that have to be made.

And that's what we, I think developed again a real core expertise in making those changes.

And you can imagine that's a very valuable proposition to the client, because if they're left with a portfolio that is not performing and no fix, that's a-- that can be a big financial problem.

So we've become very, very good at fixing it and our clients, again it gets back to the relationship with the client.

We have very strong relationships with these clients, both just in general and contractually to allow us to make the fixes.

Okay so you know going ahead of time.

Just on Health, just a more general question.

Rob maybe you can discuss a little bit.

Sure.

There was some HSA legislation at the end of last year, if I remember correctly, maybe you want to touch on that?

As well how does-- I mean how do you think, I guess is a better question, some of the state moves will do, you have kind of mandatory insurance in Massachusetts, I guess it's coming in California.

They're talking about it in Pennsylvania.

Our Governor in Illinois has proposed something, I believe, yesterday.

How -- how do you think this affects your individual medical business?

Sure well I think a couple of different things here.

First, starting with the HSA legislation, we -- we obviously like the fact -- the new legislation has increased contribution limits.

We think it's broadened the appeal of HSAs and we think that's a good thing because we think this whole movement in the consumer-directed healthcare space is one of the keys to having cost controls within medical.

The state, all the state initiatives that are underway, we are monitoring these on a regular basis.

We try and work with officials as we did on the HSA legislation to get our points of view across, and make sure that they understand that if they're trying to address, for instance an issue of access, is the legislation going to achieve what they want?

So our folks are chatting with people in all the states.

We like some proposals more than others.

I think that the -- where things start out and where they end up are often different, so what we really need to do is stay on top and try and influence the final development, but I think there's a growing recognition, Steven. that consumer directed healthcare is here to stay and we need to broaden the offerings and we see that all as being a good thing for individual medical.

Okay.

Great.

Thank you.

Thank you.

Your next question comes from Adam Klauber of CCW.

Good morning, Adam.

Good morning, thanks.

Just a follow up on the changes in Florida.

Do you buy-- when you buy your insurance, do you buy Florida specific cover or is it part of the aggregate or part of the overall cover?

It's part of the overall cover Adam.

Okay.

But that's been historically and we're looking at all those kind of alternatives.

And these changes may put us in the situation of considering separate purchase for the state.

So Bruce is right in terms of what we've done historically, but as he's mentioned we have this team focused on looking at managing our catastrophe risk and we've got all options out and on the table, Adam.

I know it's tough when it's part of the cover, but could you make or give us an idea of how much -- what percentage of the reinsurance dollar in 2006 was for the Florida cover?

We actually don't break it down that way.

We really don't break it down that way because what happens with the reinsurance cover for the '06 program, the Florida hurricane cap fund, [renews] first of all to the benefit of our normal reinsurers.

So participating as we do right now in the Florida cap fund, that pricing, which is obviously a very good pricing for the reinsurance coverage we get there, that goes first for our reinsurers.

So our reinsurers certainly look at that.

So it's very difficult.

We do know that obviously that Florida is one of our big exposed areas and obviously they look at the models and that's where the big PMLs are, but-- and that's taking into consideration the program, but it is the overall balance targeting as we do the major national players and giving us that broad spread of geographic risk is really what the reinsurers really like about our business, but it isn't specific to any one particular area.

Okay.

And again, I know you usually renew around -- in June for the southeast win.

Given that there are so many changes going on, do you think you'll wait a little longer to renew or do you think you'll try and take advantage earlier of some of the changes?

We actually have taken advantages, as Rob has mentioned.

We've already placed in our upper levels over $320 up to $550 million, so we've a;ready placed our upper levels.

So now it's just a matter of filling in, looking at our exposures and then looking at all our alternatives.

We're looking at all the alternatives right now for catastrophe protection in the market place.

Okay.

Thank you very much.

All my other questions have been answered.

Thank you.

Thank you.

Thank you, I would now like to turn the floor over back to Management for any closing remarks.

Thank you.

We believe our 2006 results demonstrate our diverse specialty business model can produce excellent results for shareholders through steady execution and application of our core capabilities.

There's much more to do, but we're optimistic about our prospects.

Thank you again for joining us today.

We look forward to updating you on our progress on future calls.

This concludes today's ASSURANT conference call.