Assurant Inc (AIZ) 2007 Q1 法說會逐字稿

Welcome to the Assurant first quarter 2007 fiscal results conference call.

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

After the speaker's remarks, there will be a question and answer session.

(OPERATOR INSTRUCTIONS) Thank you, I would now like to turn the call over to Ms.

Melissa Kivet, Senior Vice President, Investor Relations.

Please go ahead, Ms.

Kivet.

Thank you operator.

Welcome to Assurant's first quarter 2007 earnings conference call.

Joining me are Rob Pollock, our President and Chief Executive Officer, Bruce Camacho, our Chief Financial Officer, Mike Peninger, President and CEO of Assurant Employee Benefits and Chris Pagano, our Chief Investment Officer.

Today's prepared remarks will last approximately 20 minutes, after which time we will off the call to questions.

Last night we issued a press release announcing our first quarter 2007 financial results.

The press release, as well as corresponding supplementary financial information, may be found on our web site at 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 the discussion of risks and uncertainties contained in our SEC filings.

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

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

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

Thank you Melissa, good morning everyone.

We are pleased to share with you Assurant's first quarter 2007 financial results.

Assurant continues to build on its strong financial track record.

Our net operating income increased 7% over the first quarter of 2006.

This increase in earnings was driven primarily by the strong results from Assurant specialty property and additional real estate investment income.

I'm also pleased to announce that our annualized operating return on equity for the first quarter was 18.6% and 16.6% on a rolling fourth quarter basis.

We continue to make progress in our targeted growth areas and we are cultivating those areas of our business with the best potential for long-term profitable growth.

We have gotten off to a good start in 2007 and we are focused on the ongoing execution of our specialty strategy.

Our diversified insurance strategy allows us to make the right decisions for the long term in each of our businesses rather than taking actions that produce near term results, but hurt the long-term prospects for the business.

Today Mike Peninger, CEO of Assurant Employee Benefits, will provide you with a progress report on how the benefits team is delivering good results and favorable loss ratios, while at the same time, realigning their business to address the unmet needs of the small employer market.

Assurant Health continues to focus resources on the growing individual medical market through break-through innovations, like Advantage Agent, which set new industry standards with quick underrating answers for our customers and agent.

Although the first quarter net operating income and net earned premiums were down compared to the same period a year ago, we are pleased with both the 31% increase in first quarter individual medical sales compared to the first quarter 2006 and the continued favorable combined ratio.

Turning to Solutions, we see two key elements of an Assurant's strategy being executed, namely to align with market leaders and to reach untapped markets through capabilities that address customer needs.

Solutions is applying the expertise of serving market-leading clients and consumers domestically to selected markets internationally.

For example, in the last 18 months, we have extended our global reach in several untapped markets by entering Germany, Italy and Spain.

Our targeted growth strategy is translating into strong quarterly year-over-year growth in gross written premiums for service contracts domestically and internationally, as well as credit insurance internationally.

Over the long term, our investments will help us continue growing while improving the solutions ROE.

In early April, we made an acquisition reflecting our opportunistic approach to M&A.

We acquired Retail Power Support Management Group, which supports solution service contract business in recreational vehicles and power sports.

While the purchase price for this all cash deal was modest in size, at under $5 million, it broadens our distribution in this niche area by providing us access to over 300 leading power sports dealers across the country to market our service contracts.

The benefit of our strategy to focus on niche products is evident at Assurant Specialty Property.

First quarter results were outstanding, as both revenues and profits were the the best we have achieved in the segment.

In order to provide further understanding of the creditor place business, we have scheduled a deep dive on the business with investors on June 7th at our operation center in Springfield, Ohio.

For those who can't make it, we will also web cast this event.

Turning to corporate matters, we continue to exercise disciplined management of our capital.

During the first four months of this year, we repurchased 2 million shares for $113 million.

$460 million of remaining repurchase capacity is available under our current authorization.

Share repurchase remains an active part of our capital management toolbox.

Our focus on disciplined long-term profitable growth, has enabled Assurant to establish a very strong financial track record, demonstrated by our 33% annualized total return since we went public in February, 2004.

On April 9th Assurant was added to the S&P 500.

We are proud of this important milestone, because it recognizes not only our strong financial performance, but it also affirms our strategy.

In addition, this milestone highlights the efforts of our 13,000 employees, who deliver value to our customers and shareholders.

Looking ahead, we will continue to leverage our core capabilities of managing risk, managing large distribution partnerships and integrating complex administrative systems to pursue targeted growth opportunities within each of our specialty insurance businesses.

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

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

Thanks Rob.

You heard Rob refer to the word discipline a number of times.

It's a quality reflected in Employee Benefits approach to executing our specialty strategy.

I'm very happy to be here today, to talk about our unique approach to employee benefits in the small employer marketplace and how we have executed our strategy over the past year.

When I visited with you on last year's first quarter call, I outlined our efforts to align our business around small employers, which we define as employers with fewer than 500 employees.

Today, I'm pleased to report that we have made good progress over the past 12 months and that progress can be seen in our first quarter results.

The solid performance during the quarter was driven by increased real estate investment income and very good loss ratios.

We also saw positive sales momentum, with total new sales up over 50% from the first quarter of 2006.

Importantly, 98% of the new cases written and three-quarters of our new sales premium were in the under 500 market.

This is an increase in small case sales of more than 65% over first quarter 2006.

In addition, sales from our key brokers more than doubled over the first quarter of 2006.

Our goal now, is to maintain the sales momentum and translate it into increased revenue.

We believe long-term success is a process that requires investment, patience and persistence.

The disciplined approach to customer acquisition and retention that we have maintained throughout our deliberate transition is reflected in our good results.

Despite a decrease in total revenues, our net operating income grew in the first quarter.

Loss ratios continued to run favorably, most notably in Disability where results were positively impacted by favorable incidence rates and by our efforts to help people return to work.

Our expense ratio increased during the quarter, primarily due to the decrease in total revenues and the shift to smaller cases, which have higher expenses associated with distribution.

Results were significantly assisted by a $9.2 million after-tax increase in real estate investment income.

Our overall loss ratio improved to 71.6% from 75.3% in the first quarter of 2006, reflecting our discipline pricing approach and the ongoing shift in our business mix.

In addition to the disability results I noted earlier, life mortality experience continued to be favorable and dental loss ratios remained reasonable despite a highly competitive market.

It's important to bear in mind, that quarter-to-quarter comparisons may show variability due to the low frequent and high severity of life and disability claims.

Our top line continued to reflect pricing tactics and the changes in our sales organization.

While net earned premiums were $296.7 million, down 9% from the same period last year, the rate of decline is slowing and, combined with our solid new business sales, this should begin to generate premium growth by next year.

Our first quarter sales reflect not only the top notch sales organization we're building, but also the impact of our recent dental network alliance with Aetna.

Even though the network was not available until January 1st this year for our customers.

we have already seen the benefit of a larger network on both sales activity and close ratios.

The close ratio for our dental business doubled in the first quarter in a number of our larger market, for example, Philadelphia, and in a number of our larger market, for example, Philadelphia and Chicago, we more than doubled the number of new dental cases written compared to the first quarter of 2006.

We also continue to grow our own dental network, Dental Health Alliance, adding more than 1,600 new referable locations to our network in the first quarter.

We have seen solid growth in DHA over the past several years and expect to benefit from ongoing network growth in the years to come.

We're also pleased with the performance of our alternate distribution channel, Disability Reinsurance Management Services, which distributes turn-key disability products through more than 30 other insurance carriers.

As in our direct channel, we continue to see good loss ratios and an overall shift in business mix towards small case.

More than two thirds of this quarter's DRMS premiums were in our core under 500 market.

Growth in DRMS is derived not only from the addition of new partners, but also from organic growth from existing clients, as they write new business.

We also believe there are opportunities for to distribute other products and services in addition to the disability, life and critical illness lines it currently markets.

Overall, I'm excited with the progress we've made during the first quarter in our pursuit of long-term growth in the small employer market.

We believe that our expertise in small group risk management, strong distribution relationships and flexible administration systems, make it easy to do business with Assurant Employee Benefits and truly differentiate us as a leading provider of employee benefits for small businesses.

Thank you and now I'd like to turn the call over to Bruce.

Bruce.

Thanks Mike.

Your team's disciplined efforts to align your business to meet the needs of the small employer are certainly bearing fruit.

As Rob mentioned, Assurant is off to a good start in 2007, as we execute our specialty insurance strategy and remain committed to building a strong financial track record, focused on our profitable growth opportunities.

Net operating income increased 7% to $175.8 million or $1.42 per diluted share.

From $163.8 million or $1.24 per diluted share in the same period last year.

Net earned premiums were up 5% to $1.8 billion, driven primarily by the continued growth in our Credit Place homeowners insurance.

Net investment income for the first quarter of 2007 increased 13% to $216.9 million, mainly the result of an additional $18.8 million pre-tax of real estate investment income, compared to the first quarter of 2006.

We continue to be opportunistic with respect to investments in real estate joint ventures.

This quarter's activity, while significant, reflects our ability to generate income consistently from this asset class.

Mike provided you an update on Assurant Employee Benefits, so let me provide some details on results of our other leading specialty insurance businesses.

Assurant Specialty Property continues to execute on its proven strategy and posted excellent results once again this quarter.

Results were driven mainly by strong top-line growth and an exceptional combined ratio.

Net operating income was $74.4 million, up 16% compared to the first quarter of 2006.

And remember, the first quarter of 2006 included $5.2 million, after tax, in fee income from reimbursements under the national flood insurance program.

Assurant specialty property net earned premiums increased 45% during the quarter to a record $367 million, despite an increase in reinsurance premiums of $27 million compared with the first quarter of 2006.

The rise in net earned premiums resulted from continued strong organic growth, primarily by higher policy placement ratios in our subprime tract portfolios and increasing insured values on property.

Net investment income increase 30% to $21.9 million, as average invested assets have grown along with the book of business.

Fee income increased 33% to $12.6 million, primarily by the growth in Credit Place loan tracking fees.

Risk management continues to be a central tenant of our specialty property business.

We are pleased to report that we've maintained our geographic spread of risk by targeting national loan servicers.

In addition, when necessary we manage voluntary coverage to balance our geographic spread.

We have also applied the appropriate capital support outgrowth.

In the fourth quarter we an announced, that we reinvested $230 million of the $241 million of 2006 earnings back in the business, as a result of significant premium growth we achieved in 2006.

Assurant Solutions reported net operating income of $44.1 million in the first quarter, up 11% from the first quarter of 2006.

Results were favorably impacted during the quarter by additional $7.8 million, after tax, of real estate investment income.

Our combined ratios have increased as a result of the following two factors.

First, we continue to make investments to support our international expansion efforts, which in the short term will put increased pressure on international combined ratios.

This is in support of our strategy to expand our diverse specialty business model.

The strategy is designed to create opportunities it in the new global landscape.

Second, we continue to see pressure on our domestic combined ratios, due to unfavorable loss experience on two domestic service contract clients, as mentioned on last quarter's call.

Our risk management focus includes monitoring key early warning indicators and, as a result, we have taken various corrective actions, which include increasing rates and changing certain terms and conditions associated with these two clients to improve profitability.

We expect it to take an additional three to five quarters as we work through these changes.

Net earned premiums for the quarter were up 2% to $583 million.

This was driven by the 27% increase in our international business, both from the strong growth in service contracts and credit insurance.

And by the 5% increase in domestic service contracts.

This was offset, somewhat, by the expected decline in pre-need premiums due to the sale of the U.S.

independent pre-need franchise and the continued runoff of domestic credit insurance.

Insurance Solutions net investment income grew 15% to $112 million for the quarter, mainly due to an additional $11.9 million, pre-tax, of real estate investment income.

Fee income was up 11% during the quarter to $38.1 million, driven by the growth of the domestic and international service contract business.

Despite the decline of debt deferment fees, due to the previously discussed loss of a client, MBNA.

Turning to Assurant Health, our leading individual medical insurance business's first quarter 2007 net operating income of $40.5 million, down 10% from the same period last year, as a result of the continued decline in small group and short-term medical insurance.

Nevertheless, we maintained a favorable combined ratio of 91.7%, our key profitability metric in this business, as we maintain strategic focus on individual medical insurance.

First quarter 2007 net earned premiums decreased 2% to $512.8 million.

Individual medical net earned premiums grew 6% during the quarter, driven by higher premiums per member, as more people purchased our full suite of individual medical products.

This was offset by 12% decline in small group and short-term medical premiums, given our focus to only write these products if we can do so profitably.

Overall, medical membership declined during the quarter, driven primarily by the decline in small group membership.

Capitalizing on the growing individual health market, individual medical sales were up 31% during the quarter, due to the continued strength of Advantage Agent and more consumers purchasing our new products.

Our goal is to provide accessible and affordable health insurance to the individual market.

We remain focused on persistency improvements with customers, who continue to look for an affordable, individual medical plan and are not returning to a group employer plan.

Finally our comment on our Corporate and Other segment, where we reported a net operating loss of $7.6 million in the first quarter compared to a loss of $400,000 during the same period last year.

Corporate and Other results reflect an increase of tax expense of $5.8 million, resulting from changes in certain tax liabilities, and a reduction of $2.4 million, after tax, from real estate investment income compared to the first quarter of 2006.

The adoption of insurance accounting rule SOP 501 reduced retained earnings by $4.3 million after tax.

This statement's impact, impacts the recording of deferred acquisition cost in certain situations.

The adoption had a very minor impact, as a result of our prudent accounting practices of using short deferral periods in the effective businesses.

Our balance sheet remains strong, our total assets at March 31st, 2007 were $25.5 billion.

Total shareholders' equity at the end of the first quarter, excluding accumulated other comprehensive income was $3.8 billion.

Book value per share, excluding AOCI, grew 4% during the quarter to $31.14 at March 31st, 2007.

In summary, we're seeing disciplined growth in a number of our targeted growth areas.

We're pleased we have provided our shareholders with strong earnings growth, impressive ROE's and continue to focus on executing our unique strategy.

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

Thanks Bruce.

Operator, we're ready for questions.

(OPERATOR INSTRUCTIONS) We will pause for just a moment to compile the Q&A roster.

Your first question is coming from David Lewis of SunTrust Robinson.

Thank you, good morning.

Morning David.

Bruce, you talked about some of the benefits in the Credit Place homeowners coming from the shifts in the subprime market.

I would like to dig into the sector a little bit more to try to understand, how much of the growth is potentially coming from new tract mortgages versus maybe more business coming to the subprime versus somewhat easier comparisons in the first quarter and maybe second quarter and how that's probably going to evolve.

And secondly, if you could maybe think about if the public and private markets are successful in slowing down foreclosures is that a potential negative for growth in that business?

Okay.

The growth of our business is actually the majority of it's coming organically.

The first quarter, we also had a bit of growth coming because of the acquisition of Safeco, which occurred in the second quarter of 2006, so we're getting an impact in the first quarter of '06 from Safeco's acquisition, as well.

But we outlined the growth in our business, pretty much it's -- the majority of it we saw as higher policy placement ratios in the subprime track portfolios, so we are seeing higher placements in those portfolios that we track on the subprime side.

But we're also seeing a continued increase in the insured values of the properties.

And as we rate of off the insured values of properties, we automatically get a lift in our premiums from that standpoint.

Then the last factor as, you mentioned, is we have continued to be successful rolling up, because we have targeted strategically the leaders in the industry and those leaders are the ones that are still continuing to buy loan portfolios and we're benefiting from that, I think, as John even mentioned, when we were at investor day in late March.

So all those factors are there.

We foresee that we will continue to see benefits of increasing insured values.

It might be a slight slow down on the placement side, but we haven't really seen that yet.

We are getting placements on both the prime side and the subprime side, it's just we noted the subprime as being the bigger driving factor.

And your last point, David, on the foreclosures, the property remains insured and we're usually the carrier in that situation.

We have a slightly different policy covering things, the combined ratios on that business are very similar to our regular business, so that we don't see as impacting us in any way other than we may have more top line.

I guess what I was looking at, foreclosures actually slow on the subprime market, would that potentially be a negative for business, because it sounds like you're benefiting currently.

I think the real question is you can think about the factors Bruce outlined.

One is how many loans are outstanding, okay?

The second is what are the placement ratios within different categories and the third is total insured values.

What we're seeing, particularly in the subprime portfolios today, is an uptick in that placement rate.

And that's from just a couple quarters back when we still hadn't really seen any increase in the placement ratio.

Always a follow-on David, to just deal with the foreclosure, yes, if foreclosures are high, we would get more placement in those portfolio that we track.

But foreclosure, the properties that are basically real estate owned has always been a very, very small amount of our overall placement or overall premium production in the Credit Place space.

So it's not the only factor and, certainly has not been the only factor, driving placements in subprime, okay.

Can you just quantify what Safeco added in the first quarter?

I think it was around, I want to say $57 million or so, in premium.

That's excluding any premium we put against the reinsurance premium we put against that, that's a gross number.

Very good, thank you.

Thank you.

Your next question is coming from Jimmy of Bular (ph) JPMorgan.

(Multiple speakers) Morning Jimmy.

Hi.

I just have a couple questions.

The first one is just on real estate income.

I realize it's difficult to sort of model that, but is there seasonality in that number, and what do you expect run rate going forward, because this first quarter is higher than what it's been the last couple years, I think, for the whole year.

And then secondly, on margins in Specialty Property was there anything unusual or nonrecurring in this quarter that might have helped results, because margins obviously were very strong?

what's your outlook for that going forward?

First, there were no one-timers during the quarter, so that's easy.

The big variable going on in Specialty Property is going to be, you know, catastrophe exposure.

So we're fortunate to have Chris Pagano with us today and Chris can give you a fill-in on the real estate side.

Yes, hi Jimmy.

Just a couple comments.

First of all, in general, what occurred during the investment activity in the first quarter was consistent with our approach to the asset class, which is again to be opportunistic and to let the economics dictate the purchase and sales addition.

One of the sales during the quarter, which was roughly $13 of the $33 million was a little bit unusual in the timing of the sale.

This was an asset, an office building we owned in Florida, that was actually scheduled and under contract for sale back in the fourth quarter of 2005, but a week before closing was damaged during Hurricane Wilma.

And we spent the better part of 2006 negotiating the insurance claim with our carrier, which we learned shows us that not everybody is as quick at settling claims as we are at Specialty Property.

But now, having said that -- so that's the one piece of the activity in the first quarter that was unusual.

The other thing to keep in mind, we also made progress on two of our goals, which is to grow the portfolio over the long-term and also to create a smoother income stream it at the segment level.

There, we sold roughly $26 million of book value with the net book value in the portfolio only down $6 million, so we were active on the purchase side.

Those purchases will be allocated to all of the segments.

And then, two of the sales that occurred in the first quarter were actually in individual portfolios, so that the six individual-owned portfolios in the segments, which we outlined on investor day is now down to four.

But for us to run rate this for you, is -- we don't want to compromise the opportunistic approach, but we think that this shows our ability to consistently generate income from real estate on an annual basis.

Could there be a seasonality in this, because this year and last year the first quarters were actually the highest, last year also I think the first quarter was the highest.

You know, I would not suggest any seasonality.

It's hard for us to control the quarter in which a sale occurs, these deals typically take 60 to 90 days to close, that's if nothing goes wrong.

In the case of this building in Florida, it took 18 in months to close, which is an unusual situation.

For us to time on a quarterly basis or seasonal basis, is beyond our control.

Then finally, I just have a follow-up on the health business.

Your individual sales seem to be turning around, small group, you have talked about for awhile that the outlook is improving, but still results are still relatively weak.

Can you discuss what you expect for that, and that's it.

Sure.

You know, again, our specialty business here is the individual medical business.

We have said we will write the group business opportunistically.

We do feel that that, Jimmy, will bottom out at some point had in time.

I'd point out that, the first quarter is probably when a lot of groups go for renewal and our last experience was consistent with that and a bit higher during the first quarter.

We're hoping that will moderate over the remainder of the year.

Thank you.

Thank you.

Your next question is coming from Keith Walsh of Citigroup.

Good morning everyone, how are you.

Hi Keith, good.

A couple questions on Solutions, then a follow up to Jimmy's question on Health.

Just first on Solutions, with earned premiums in domestic and international service contracts, they look like they're down about 5% sequentially.

Is there some seasonality with that number?

Then secondly, what's the impact that Circuit City, they released some results this week saying that their sales look very bad in April, what's the impact on that contract, on your domestic service contract business?

Thanks.

Okay.

First of all, yes, there is seasonality in the service contract business, just like there's seasonality in the credit insurance business, nationally and domestically.

The fourth quarter and third quarter are normally stronger quarters, because it's a selling season.

It's the height of the retail season, so we can tend to get higher placement of warranty, along with higher placement of just -- higher sales of consumer electronics.

Comparing first to first is much more relevant than comparing fourth to first, that's number one.

Number two, regarding Circuit City, the good and bad of it is that, yes, Circuit City is going through issues themselves as a retailer, that's going to affect the production from Circuit City.

But our strategic focus and our lining with the major retailers in the space, when we have a broad swath of retailers, will allow us to have, at the same time, other retailer clients of ours that are growing.

So, we will get impacted obviously by the expected production we wanted to get from Circuit City because of their issues, but hopefully that will be tempered somewhat by growth in other clients as ours as we strategically focus on the larger ones.

It that a material impact, as far as their production level as a percent of your total premiums in that space?

It will be an impact only on -- if it has an impact, it going to be the impact on the gross written side.

Don't forget, it's not going to on the net earned side, because we are writing new business with Circuit City and it's going to take three to four years to earn out.

In the first year to 18 months, there's not much earnings at all in the P&L on Circuit City.

I think, just an anecdote here as well, we're working with Circuit City in the stores where we have been able to go in and help improve penetration ratios, are not the stores that are being closed.

So it's a reinforcement for them to work with us and, again, that's always part of what we're trying to do within the Solution segment.

Okay.

And then on the health side, sales look really strong again just specifically on individual piece.

Can you just talk about the mechanics of this, how that will flow through to premium growth?

I mean, you got about 24% upside on the sales, premiums up like 5% on individual, how does that flow through there over time?

These are annualized sales numbers, Keith, so those annualized sales then start earning out on a monthly basis.

I think an important thing to remember is what Bruce pointed out, the buyers of this product kind of fall into categories of first-time and repeat buyers.

Many of those first-time buyers can return to a group plan and get coverage, in which case they will drop their coverage on the individual side.

But if someone buys that policy in January with a -- let's say a $2,400 annual premium, and persists with us, we're going to earn $200 a month.

Thanks a lot.

Thank you.

Your next question is coming from Beth Malone of KeyBanc.

Thank you, good morning.

(Multiple speakers) Good morning, Beth.

Can you just give me a little more understanding, on the real estate gain that you have reported, are we supposed to look at that as if it's like a capital gain and nonrecurring because -- or it's not predictable or is this really all part of the ongoing operational profit of those divisions in which the real estate appears?

Yes, I'm going to turn it back to Chris in a minute, but one of the things I want to point out is, this is one of our specialty classes of investment that uniquely match up with how we run the business and the fact that Chris and his team do try and match their whole investment thesis on how the business operates.

And I'd point out, Beth, that we're not in a situation where we have a lot of callable liabilities in any of our products, which gives us a little bit more discretion in terms of how we want to think about things.

In terms of the variability, I'll turn it back to Chris.

A couple things about the asset class, the way we have set it up from an accounting perspective, the way we structure the partnerships, the profit from sale is treated as income at the time of sale.

Now, some of that profit is actually recouped depreciation which, over the life of the asset, reduces the GAAP income.

So, instead of recognizing the cash income from the asset, you're going to see a lower GAAP number, then the cap to book value of the asset goes down.

The only way we can recapture the depreciation is through the sale.

So just to give you some idea, the last two years, the book value of the portfolio has gone down by $8 million each year from depreciation.

So again, that's the type of thing, that's maybe how you want to think about it.

Now, in terms of -- what the risks are, well the risk is the market value of the asset going down.

What do we see as the driver for that, well, for us we right now, we've got strong rents, we've got tons of institutional demand.

The only thing we can see happening to raise cap rates, and therefore drop the mass market value and the unrealized profit, is a rise in interest rates.

So interest rates could drive cap rates.

If that happens, then we've got $12 or $13 billion of portfolio and additional operating cash flow that we can reinvest at higher yields than we're getting now.

Again Rob mentioned specialty assets there's a nice counter-cyclical diversification benefit from real estate, vis-a-vis the rest of the portfolio.

So, just to throw the loop back on the question.

Yes, it's definitely not realized gain, it is -- we consider it to be core to our investment income, core to the profitability of our segments.

The reason we disclose it on any particular quarter is just because of the lumpy nature of how the income comes through.

But, it's definitely what we would consider to be core to our -- to the income levels of our businesses.

Okay.

And just one more are clarification on that, when you talk about lumpy, is there a seasonality that we should anticipate with this or is it lumpy without a lot of predictability as to when the lumps appear?

You know, again, if you look back over the last eight quarters you've got $9.5 million, $3 million, nothing, $4.75 million, nothing, $3 million, $600,000, then this quarter of $33 million, which you could if it had gone the way we had planned, it would have been a $13 or so million number in the fourth quarter of '05.

So it's difficult to have seasonality.

One thing we are not faced with, is sort of the annual profitability measure that some of the REITs and other sellers in the market -- so, typically you will see that as a fourth quarter event.

So if ever there were seasonality, it might be higher than expected sales during the fourth quarter, but that's not something we concern ourselves with.

In fact.

from time to time, on the buy side we can take advantage of that.

Okay, thank you.

Thank you.

Your next question is coming from Dan Johnson of Citadel Investments.

Thank you very much and good morning.

A couple questions please, maybe a little more color around the real estate portfolio in terms of looking on the balance sheet, what are we carrying these assets at, in book, in aggregate?

Sure, let me give you some numbers, maybe I'll reference the Investor Day slide so you can get a sense of the change in the value after the activity in the first quarter.

At year-end, we had a total of 23 properties, with a total book value of about $136 million, the market value, at the time, was just under $237 million, so roughly $100 million in unrealized profits.

Of those 23 properties, six of them were shared, excuse me, six of them were held in individual portfolios, 17 of them were shared amongst all the segments.

So again, the idea we are trying to address the segment level lumpiness of the income stream.

After the activity in the first quarter, which involved five different properties, the book value went from $136 million to $129 million, so again, we were both buying and selling during the quarter.

The unrealized profit, or the difference between the market value and the book, was about $72 million.

So again, we went from $100 million, took $33 plus million of profits, and the remaining assets appreciated during the quarter to the tune of about $6 million.

The other thing, again, part of the idea of addressing the uneven cash flows at the segment level, we've got 16 properties that are shared and four properties are held individually.

So going forward, that number will, again, opportunistically depending on the economics, all purchases will go into the share properties.

And then, to the extent that we see opportunities on the property sales individually, you will see that number drop over time.

Great, that was exactly what I was looking for.

On the solution side, could we talk a little bit about the gross written premium growth, which has sort of hovered around very low single digits, even just a few quarters ago, and is now 15 to 20% depending on whether we're talking international or domestic.

I realize you have added lots of clients in these segments, but can you just give us some sense of the visibility you have around these numbers for the rest of the year and, are these sort of numbers even remotely sustainable to the sort of growth numbers they're putting up now.

Well, you know, I guess a couple things.

First, the -- if we think about this, when we write an extended service contract, it's not going to earn out for awhile.

We have had some client additions that are producing and causing the gross written numbers to grow.

A big part of that solution strategy, is obviously aligning with market leaders and I can tell you that Craig and his team are out trying to call on others and our strategy is to have continued success there and they're working hard at it.

But, you know, we're not going to provide any guidance on the actual sales numbers themselves.

But it would be fair to say these are the -- these gross written -- the gross written premium growth will become earned growth sometime probably next year.

As the manufacturers warranty expires, yes, I mean it's written, then it depends on the product, Dan.

If it's one year manufacturer warranty, then they'll start earning after a year, if it's a 6-month or 18-month -- but yes, it will translate into earned premium growth.

Yes, a good way to look at it, Dan, too is, when you look at the balance sheet given by segment, you can compare the gross written growth and the UPR growth, understand that you've got a UPR but got the DAC on the other side of it, just looking at that type of combination, so it's normally, it's a good half year convention, it's almost like you will see UPR grow and stay up almost twice what the premium is growing on written side.

A lot of the growth, as Rob mentioned, is again because of discipline execution that Craig and his team are focused on.

It can also, if you get focused on a large acquisition, that has a huge impact on, on the growth in the particular quarter and that first year of bringing that big client on.

Versus a multiple number of small clients that you bring on or smaller clients you bring on will have less of an impact.

So we can have jumps in our gross written premium, as we bring on a client.

Then the second factor that Craig's team works on is when you close a new client, you also have the ability depending on, again, the profitability and pricing -- is to pick up their book of business from their previous carrier and that would have a tremendous big impact on any particular quarter, if you picked up a book of business, in other words, already in-force block of business in any particular quarter.

So we have -- you have to look at those type of things.

And we would try to disclose those things, if we saw a big jump in a particular quarter in gross written premiums, it would normally be because we have actually, not only picked up a new client, but we might have picked up their existing book of business.

Thank you very much for that description.

Thank you.

Your next question is coming from Yugo Vaughnan (ph) of KBW.

Good morning.

Going right back to the same question, besides the impact of not earning the premiums right away in the service contract and the impact of the DAC, is there any other factor that's impacting the fact that if you look at the growth in gross premiums it was 28% for the domestic service contract this quarter compared to the 5% growth in the earned premiums.

I don't believe so.

I mean, I think remember when we bring on a new client, we usually get the money, we can generate investment income from those funds.

We may be doing some servicing of the block, if we have picked up servicing, which would cause some fees to generate through, but we can't -- we're not going to earn those premiums until the manufacturers warranties expire.

And what's affecting the fact when I look at the growth in international credit gross premiums, that was 19% in this quarter, but the growth in net premiums was 10%.

Again, the mix of business internationally, Yugo, in the U.S.

the old domestic business is dominated by monthly pay credit insurance, normally on credit cards, whereas international growth is coming primarily from single premium installment lending.

So you pick up a single premium on credit and it's the same sort of -- it obviously runs out quicker, because it starts earning immediately, but it could be a four-year loan, you pick up a single premium, and then you're earning it over a four year period evenly.

So it's a mix and, in this case, the majority of the growth in international is coming from installment lending credit versus credit card.

Right.

But again that's a perfect example of where we're taking that experience from the U.S., exporting it internationally.

We know how things operate and how they work best in the different areas.

It's a perfect leveraging of our core capabilities.

My other question is regarding the Health Insurance combined ratio.

You obviously been very clear that with the selectively more competitive pricing in individual medical to increase the top line, obviously we're seeing the impact on the sales growth.

But then that will have an offsetting impact to some extent lowering the ROE, and obviously driving the loss ratio a little higher.

The loss ratio ticked up in the fourth quarter, looking at it sequentially now it actually went down.

How should we sort of think about, I guess, at least in terms of order of magnitude and the time that it takes for that -- for those numbers to move, based on what you have been telling us.

Yes, well, first I'd say that we have tried to describe it as a gradual change over, you know, probably a couple year period of time.

Remember, there's lots of things going on that can impact the loss ratio.

And I think our discipline risk management, and the way Don and his team analyze that business on a monthly basis, really try and keep us on top of early warning trends that could be developing in the business.

I would also say, that our pricing is -- when we, when we anticipate, or when we see a problem from those early warning indicators we put it right into the pricing.

When we have things that could lead to favorable results, we're not going to take them in pricing until we see them actually translating through results.

But lots of factors going on that can move things.

I think, again, we want to generate a bigger profit pie coming from Individual Health and we will take appropriate actions to try and make that happen.

When you talk about the 25 to 30% unlevered ROE target that we will be moving to over time, does that assume that the earnings that are being generated, in the meantime, are kept in the health segment or should we assume the equity -- the dollar amount of equity is going to remain sort of unchanged.

No, we capitalize these businesses to the, to the required capital of AM Best, we're going to move the excess capital out.

The only capital we would keep in the Health business is depending on the growth rate that's going on in Health that's needed to support it, but most of the earnings of Health, the plan is to take most of that earnings and dividend it out.

Thank you.

Uh-huh.

Thank you.

Your next question is coming from Ed Spehar of Merrill Lynch.

(Multiple speakers) Morning, Ed.

Good morning.

Two questions.

First, I was wondering if there have been any changes, since your Investor Day, on how you're thinking about the two troubled clients in Solutions and the workout.

Then I have one follow-up.

Well, first, I would say that -- no changes, other than it's going through our normal monthly process with Craig and his team.

We've put actions in place.

They have set up a process every month to review those actions.

Are we getting the desired impact from those results, if yes, continue, if no, what else needs to be done.

This is a monthly dialogue that goes on with the clients.

Realizing that your assumptions never perfectly match up, but I think it points out the partnership we have built with the clients, that we can sit down and have those discussions.

So we're monitoring it every month, against what we expect to happen, and we make adjustments, if need be, if experience is developing differently.

It's a very disciplined approach Ed.

The one point to take in mind is that we -- that's why we have mentioned additional 3 to 5 quarters -- is that when you've priced, if the pricing issue or terms and condition issue, you can't go back and change what's already been in place in the process and it takes you a lot to flush that through.

We can only make changes to the prices going forward or to the terms and conditions going forward to hopefully correct what we think needs to be corrected, to make sure that our profitability that we're expecting on the business, and to have that true partnership between the client and ourselves is maintained.

So it just takes us a while to get that in place.

As Rob mentioned, this is a very disciplined approach by the team, Craig and his team, monthly progress, going to each one of the trigger indicators and insuring that that actions we have taken in the previous month, we're seeing desired effect on the results.

And if it's even moving in an approved way, but not at the same pace, then we will turn it up a notch or dial it down a notch, depending on what's going on in the business.

So, Bruce, in terms of the performance of the in-force book, has there been any change in your thoughts about that today as when you had the Investor Day?

No.

And then one last question.

On the international investments.

Can you give us any color on the magnitude and timing of this type of spend and is there a loading in the First Quarter or is this just something that's going to continue at a similar pace for the foreseeable future?

Anything on that would be helpful.

Okay, yes.

There is no loading in the First Quarter.

I think the indication is we have definitely stepped up from the opportunities that we feel we've stepped up our expansion plans.

I think, Craig mentioned on Investor Day, that he has got a team working on an entry into China as well, so that's got spend.

But we've got -- Mexico was started a couple years back and that's got spend going on in Mexico.

We've got Germany, Spain, Italy, so there's a number of countries now, that are all in this, what I would call infancy stage, so what we are trying to indicate is that we know the rationale is high growth potential, higher profitability potential.

That's still very much the hypothesis, is that the expense side of the combined is going to continue to be driven and it's probably going to be staying above that 100 level, although we're targeting mid 90 combined when it's in a mature phase.

We just want to kind of signal that we are trying to -- when we see the opportunity, which we see now strategically, we're expanding to really take advantage of a global landscape that we that see our products can really fit into in that specialty model.

Okay, thank you very much.

Thank you.

Your next question is coming from Adam Klauber of CCW.

(Multiple speakers) Good morning, Adam.

Good morning, thank you.

Two questions.

One, on the specialty property.

What are the placement rates like in the prime book of business?

Are they moving up or are they staying stable?

They have moved up slightly as well.

But not to the magnitude we've seen in subprime.

Right.

Right, but you are seeing a bit of an upward drift?

Yes.

Okay, another question.

We're hearing a lot more interest from private equity in the insurance business.

Are you getting any calls, receiving any of that interest?

You know, we've talked to private equity firms about how to partner on deals.

That's an active area Bill Grider (ph) and his M&A team are looking at that.

They are obviously always looking for expertise and understanding in an area.

We want to make sure that, if we're going to provide them with any of that expertise, we're getting fair trade in return.

Thank you very much.

Thank you.

Your next question is coming from Joseph France of Banc of America.

Good morning, Joe.

Hi, Scott Green here for Joe.

Hi, Scott.

Hi.

At your Investor Day, you were confident you could grow enrollment in '07.

Do you still think this goal is achievable?

And then also could you talk about where these lines are geographically?

First, I think what Don pointed out is, we're hopeful of growing enrollment in individual medical and I think we still feel that way.

In terms of where -- we're in 43 different states, Joe, and I think one of the keys that we've always been very successful at, in that specialty business, is our ability to identify opportunities and then react to them.

So if something happens in a particular geographic area with, say, a Blue player who decides to lower rates to get share, we're going to find a different place to play and that's always been a big part of our specialty strategy in individual and part of our risk management, because we always want to write the business on a profitable basis.

My understanding -- I don't think there's been any major changes in our geographic acquisition of clients.

Okay, great.

And one other question, could you actually quantify the unfavorable development in Assurant Solutions?

I think the best way to look at it -- we won't quantify a specific client.

The best way to look at it is just the impact it has on the combined ratio and that's a pretty good thermometer of what the impact was.

Okay, thank you.

Thank you.

Our final question is coming from Joan Zief of Goldman Sachs.

Thank you.

Good morning, Joan.

How are you doing?

Just fine.

Just a couple of follow-up questions.

First, in the solutions, you talked about the issues of the earnings trends in the service contract area, issues with some problem clients and extra investments in international.

Can you go through what the earnings trends are, just again for pre-need and what we should expect there and the credit insurance, what we should expect there as well?

Okay, pre-need, I think, is very stable.

We are strategically aligned with the leader in that industry.

That's where with we got out of the independent funeral home, aligned with SGI, the leader in the business domestically.

So we expect the earnings from pre-need to be very stable going forward and we don't see any issues there whatsoever on the pre-need side.

On the run-off of a domestic credit side, that will continue to impact us, and it's not just the domestic credit side is that the debt deferment administration, which is also domestic, with the loss of MBNA, which we announced last year because they were acquired by Banc of America, we saw, obviously, the drop -- and you can see on the supplement the drop and you can see on the supplement, the drop in debt deferment fees.

That has an impact, as well, because both the credit insurance run-off and the debt deferment, not debt deferment fees domestically are not growing, as well, has an impact on their combined ratio.

But we didn't really feel it in the First Quarter, the impact is going to be felt a little bit more in the Second Quarter.

Regarding the extended service contract business, I think we've taken the appropriate discipline actions, we believe, to address those particular clients.

This is kind of a natural in the business.

That's why we have the early warning indicators, to understand what are the triggering events that are causing an issue on profitability in a particular client.

We take those actions and it just takes us four to six quarters to work out of them, but that should be a very stable, should be much more stable going forward, the effect on the combined ratio.

We didn't see the combined ratios pick up because of it, but it should have more of a stable effect going forward.

We just have to -- just want you to understand on the credit side, debt deferment side, that could impact the combined ratio going forward.

I guess I'd just add that Joan, again, a big part of our strategy, we see growth opportunities with SCI.

That was the selected opportunity versus on the independent channel side, we saw that as not being a good place to funnel Resource.

Very similar thing on the domestic credit side.

We said there's better opportunities internationally and then service contracts, the long term opportunities don't look as good in domestic credit so let's be disciplined and lets get our resources deployed where they can make a difference for the shareholder.

Okay.

I and have just one other follow-up.

And that is, you align yourself with the very largest companies within the businesses.

Should we be concerned about diversification in, say, the retailers in the extended service contracts or health insurance distribution.

Are there any concentrations that, if something goes wrong with any one or two distributors, that will have an overly noticeable impact on the results?

No, no one client represents a big share of our business, Joan.

I think the important other thing to think about with all of this is, if you think about that overall strategy again, number one, we're helping these clients generate more revenue, as opposed to being a part of their cost of goods sold chain.

So I think that sets us apart and it is very positive.

I think second, we're in a situation here, where we've got numerous ones of the clients and we've worked hard to integrate systems in a way that make renewal a renegotiation process on terms and conditions, but very rarely do we lose these clients.

So it really is an integration of our overall strategy on how we deal with things.

And second point, Joan, I think the impact is a very smooth impact.

The impact from a client, a particular client, it's really more of a loss of a distribution, right?

So it's really of a gross written premium.

What's already on the books is going to earn off exactly as we expected it to and the profitability pattern is going to be very, very stable and actually can improve in times like that.

So it's a very -- the impact from anyone one particular action of a client having a problem or going out of business, is really on a top line but our continuous sales funnel and continuous growing of the business, in a very disciplined approach, and the diversity of the portfolio, what's happening from the health side of the employee benefits side or the Specialty Property side, they're so -- that's how we mitigate the volatility in these particular markets, because what's happening to affect the retailer is not going to be at the same time affecting what's going on with a large big insurance distribution partnership in health or large mortgage tracking partnership in property, so that mitigation and diversity of the portfolio is what really takes care of that issue for us.

Great.

Thank you.

Thank you.

There are no more questions.

I would now like to turn the floor back over to Robert Pollack for any closing remarks.

In closing, we're very pleased with the solid results we've been able to generate for our shareholders.

We will continue to apply our core capabilities to address unmet needs in the marketplace.

Our diversified business model allows us to focus on the long-term growth of our business, and we are committed to that strategy.

We're also committed to improving the transparency of our business model and hope you will join us on June 7th at our operations center in Springfield, Ohio, or via the webcast, for a deeper review of our Specialty Property business.

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

Thank you.

This concludes today's call.

You may now disconnect.