Assurant Inc (AIZ) 2007 Q2 法說會逐字稿

Welcome to the Assurant second quarter 2007 financial results conference call.

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

After the speakers' remarks, there will be a question-and-answer session.

(OPERATOR INSTRUCTIONS)

I would now like to turn the call over to Ms.

Melissa Kivet, Senior Vice President, Investor Relations.

Please go ahead, Ms.

Kivet.

Thank you, Operator.

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

Joining me with prepared remarks are Kerry Clayton, our interim president and Chief Executive Officer, Mike Peninger, our interim Chief Financial Officer, and Don Hamm, President and Chief Executive Officer of Assurant Health.

I'm also pleased to be joined by the other members of our strong leadership team.

We have the heads of all of our businesses here today who will be available for questions, including Gene Mergelmeyer, President and CEO of Assurant Specialty Property, with whom many of you recently met at our specialty property workshop in Springfield, Ohio, Craig Lemasters, President and CEO of Assurant Solutions, John Roberts, interim president and CEO of Assurant Employee Benefits.

In addition, Chris Pagano, our Chief Investment Officer and newly named treasurer is here.

It's interesting to know that this team's average Assurant experience is nearly 20 years.

Prepared remarks will last approximately 20 minutes, after which time we will open the call to questions.

This morning, we issued a press release announcing our second quarter 2007 financial results.

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

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

Our actual results may differ materially from such statements.

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

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

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

Before I turn the call over to Kerry, let me first mention that the SEC's industry investigation of loss mitigation insurance products is still ongoing.

Five Assurant employees remain on leave following receipt of Wells notices from the SEC last month.

We still believe the inquiry relates to a catastrophic reinsurance contract that expired in 2004.

And while there is no additional information we can provide to you at this time regarding this ongoing investigation, we can tell you that Assurant takes this matter very seriously and is continuing to cooperate with the SEC in resolving this matter in a timely manner.

Now I'd like to turn the call over to our interim CEO, Kerry Clayton.

Thank you, Melissa.

Good morning everyone, and thank you for joining us today.

Assurant had a solid second quarter and first half of 2007, with growth and EPS, premiums, and book value per share.

This performance demonstrates the continuing reinforcement of the Company's strong financial position, and our diverse specialty insurance model.

I'm glad to be with you today to highlight the quarter and this six months.

I do want to assure you that regardless of what's going on, our focus is clear, to build upon Assurant's strong financial foundation.

I also want to emphasize that we have a strong leadership team, uniquely equipped to execute the company's diverse specialty insurance strategy.

After having spent 35 years with Assurant until my retirement 14 months ago, I can also attest to the Company's commitment to strong corporate governance.

As Melissa has said, we take the SEC's investigation very seriously, and the Assurant board of directors working hard to act in the best interest of shareholders, customers, and employees.

I'm honored to be here today to lead this great company and it's 13,000 employees.

Our leadership team is proud to continue to advance our targeted growth strategy.

The quality and the experience of the team clearly demonstrates the Company's depth of talent, which contributed to our second quarter performance.

Assurant's net operating income during the second quarter increased 12% to $168 million, or $1.37 per diluted share, led by continued strong performance of Assurant Specialty Property.

For the first six months, net operating income increased 10% to $344 million, or $2.79 per share.

Net earned premiums were up 7% to $1.8 billion for the quarter, and up 6% to $3.6 billion for the first half, driven by strong premium growth in Assurant Specialty Properties, particularly the creditor placed homeowners business.

We continue to make steady progress in our targeted growth areas by cultivating those parts of our business with the best long-term potential, and applying our core capabilities.

Managing risk, managing distribution relationships with market leaders, and utilizing our skills to integrate complex administrative systems to benefit our clients.

Our patient approach to growth remains deeply ingrained in our culture, and it allows us to make the right long-term decisions for our business.

Assurant Solutions' targeted growth strategy continues to provide solid gross written premium increases, and domestic and international service contracts and international credit.

Assurant Solutions continues to invest opportunistically in international development.

Accelerating our business in the U.K.

during the quarter, we announced the acquisition of Swansure Group, which allows us to broaden distribution of our protection products and extend our servicing capabilities in the U.K.

and Europe.

Last month we took a step to position ourselves for growth in the pre-need business, with the closing of our acquisition of Mayflower National Life Insurance Company and the extension of our exclusive pre-need distribution partnership with SCI through 2013.

Assurant Specialty Property continues to deliver outstanding top and bottom line performance by leveraging its leadership position in creditor placed homeowners insurance.

The business produced record quarterly profits and net earned premiums, as well as an excellent combined ratio.

As we enter peak hurricane season, we have a broad geographic spread of risks and a comprehensive catastrophic reinsurance program.

Assurant Health net operating income and net earned premiums are both down compared to a year ago.

However, in our targeted growth area, individual medical, sales, net earned premiums, and membership have all increased.

Don Hamm is here today and will further discuss the results of Assurant Health in a few minutes.

Assurant employee benefits continues to build sales momentum and focus on its strategic market segment of small employers, those with less than 500 employees.

While net earned premiums decreased during the quarter, reflecting our de-emphasis of larger cases, this business delivered solid profitability due to continued favorable loss experience.

We are now benefiting from the seasoning of our sales force, as well as our recent dental network sharing arrangement with Aetna.

We continue to be encouraged by the progress in new case sales as the investments we have made take hold.

Turning to corporate matters, Assurant continues to maintain a solid balance sheet and a strong capital position.

Our book value is growing, and we have a low debt-to-capital ratio.

We continue to demonstrate our disciplined approach to capital management.

During the first and second quarters of 2007, we repurchased 1.4 million shares at a cost of $77 million, and 2 million shares at a cost of $116 million, respectively.

In addition, in July we repurchased nearly 1 million shares at a cost of $53 million, for a total for 2007 repurchases of 4.4 million shares at a cost of $247 million.

We have $326 million remaining under our current authorization.

Assurant continues to execute on its proven specialty insurance strategy, servicing millions of customers through our 13,000 employees.

Our focus on disciplined, long-term profitable growth has enabled Assurant to establish a very strong financial track record and positions us well for the future.

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

Don?

Thank you, Kerry.

Good morning everyone.

It's a pleasure to be talking with you today.

At Assurant Health, we continue to make significant strides in our key targeted growth area, individual medical, a business where we believe we continue to have significant competitive advantages.

These advantages include our wide depth and breadth of distribution, our risk management capabilities, our national presence, as well as a full suite of products targeted to meet the diverse needs of individuals.

We re pleased with the success of Advantage Agent, our series of individual medical tools, products, and capabilities designed to make it easier for agents and their customers to do business with Assurant Health.

Our rapid and easy underwriting process provides advantages to both our applicants and agents.

Total net earned premium in the second quarter of 2007 was down 1% compared to the second quarter of 2006.

Individual medical net earned premium grew by 7%.

This was offset by a 12% decline in small group premiums.

Net earned premium in the first six months 2007 decreased 2% to $1.03 billion.

Continued growth in individual medical premiums during the first six months was offset by a decline in small group premiums.

Individual medical membership grew 1.4% sequentially.

Individual medical revenues, our core growth focus, increased as a result of higher premiums per member and higher new sales.

Individual medical sales grew 31% over the second quarter of 2006, primarily as a result of Advantage Agent.

Small group sales, which we continue to only write opportunistically, were down 13%, and membership declined faster than we had anticipated.

This is due to an increasingly competitive marketplace and fewer small employers offering coverage.

Later this year we will begin applying many of the Advantage Agent capabilities to our small group business to help stabilize small group revenue.

Assurant Health net operating income in the second quarter of 2007 was $33.8 million and $74.4 million for the first half of 2007, down 18% and 14% respectively, compared to the same periods last year.

The decreases in income reflect the decline in small group revenue and higher small group loss experience.

Our combined ratio for the first half of 2007 of 92.4%, while up 90 basis points, is till excellent compared to the rest of the industry.

This is due primarily to increasing small group loss experience, while individual medical loss experience remained favorable.

In closing, Assurant Health remains on track to deliver long-term profitable growth in our individual medical business through leveraging our impressive capabilities, distribution, risk management, and administration.

We continue to make investments and take the steps necessary to achieve prudent, long-term revenue growth while maintaining a strong ROE.

Thank you for your attention today.

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

Thanks, Don.

It's my pleasure to be here this morning and to be able to step in as interim CFO.

As many of you know, I have worked with Assurant for over 20 years, and it's great to be reunited with Kerry and to continue to advance the Company's successful specialty strategy.

Once again this quarter, we've seen the benefits of our diverse business model.

As Kerry mentioned, Assurant had a solid second quarter, driven primarily by the strong profitability and top line growth in Assurant Specialty Property.

Don has given you details on how Assurant Health continues to demonstrate the patience and persistence that it takes to achieve long-term success in a competitive marketplace.

Now let me turn to our other specialty businesses.

Assurant Solutions net operating income of $30.2 million was down 19% in the quarter versus the second quarter of 2006.

Net operating income for the first half of 2007 was $74.3 million, down 3% over last year's first half.

The declines for the quarter and six month periods were primarily due to higher combined ratios.

Domestically, combined ratios continue to be negatively impacted by poor loss experience in two previously disclosed service contracts.

As a result of steps we've taken with these clients over the past two quarters to improve profitability, we continue to believe their loss experience is on track to improve over the next two to four quarters.

We had two items that positively impacted domestic results in the quarter.

First, we received a final cash payment of $3.5 million after tax from the sale of marketing rights for the independent U.S.

pre-need business.

And second, we recognized $4.5 million after tax stemming from the completion of a project to improve the reconciliation of client Commission payable accounts.

Internationally, combined ratios increased due to two factors.

First, we incurred $4.4 million after tax of unfavorable experience in a new credit life product designed specifically for the Brazilian market.

Our early warning signals caught the problem quickly, and allowed us to re-price the product for two clients and discontinue it with another.

And second, we continued to make investments to support national expansion.

We currently have six countries in the development phase.

They are Spain, Germany, Italy, Denmark, Mexico, and China.

Solutions net earned premiums were up 4% in the quarter and 3% in the first half of 2007.

This increase was driven by the continued growth in our domestic and international service contract business, offset by the anticipated decline in pre-need premiums due to the sale of our U.S.

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

Domestic gross written premiums were up 9% in the quarter and 12% for the year, primarily due to strong growth in service contracts.

International gross written premiums were up 25% in the quarter and 21% for the year, primarily due to the continued strong growth in service contracts and credit insurance in Canada.

Fee income increased 4% during the quarter and 7% for the first half of the year, primarily due to the growth in service contract fees and the adjustments and sale of marketing rights of the U.S.

independent pre-need business, which amounted to $5.4 million pre-tax.

Note that the second quarter death protection fee income now fully excludes fee income from our former debt protection client, MBNA.

Assurant Solutions' net investment income increased 2% for the quarter and 9% for the first half of the year, due to an increase in invested assets resulting from the growth of our service contract business as well as increased real estate investment income.

Results at Assurant Specialty Property were once again outstanding.

Second quarter net operating income was up 52%, to a record $90.2 million, and grew 33% for the first half of 2007 to $164.6 million.

Growth in net operating income can be attributed to the continued growth in our credit placed homeowners business, including the second quarter 2006 acquisition of Safeco's creditor placed homeowners business.

Combined ratios continue to be favorable, reflecting excellent loss experience, partially offset by higher reinsurance costs, which increased to $40 million pre-tax in the quarter from $14 million in the same period 2006, and to $73 million pre-tax for the six months versus 20 million in the same period last year.

We had no reportable catastrophe losses in the first half of 2007, and as we enter the third quarter, we are well positioned with our 2007 CAT reinsurance program.

We have significantly increased coverage to accommodate our business growth at a lower price point, which reflects lower cost reinsurance through the Florida hurricane CAT funds and improved industry pricing.

Details of the catastrophe reinsurance program including a comparison to last year are available in a press release we issued on June 6th.

Specialty Property net earned premiums increased 35% to $393.6 million for the second quarter, and 40% to $760.7 million for the first half of the year, primarily from the growth and creditor placed homeowners insurance, including the acquired block.

This was partially offset by higher reinsurance costs.

The growth in its creditor placed homeowners for the quarter and year can be attributed to continued growth in total insured values as well as an increase in the total number of loans for servicing.

We continue to benefit from an increased insurance penetration in the subprime loans we service, and consolidation in that market.

Fee income was down 7% in the second quarter to $12.7 million.

The second quarter of 2006 included $3 million of fees related to the Safeco acquisition.

Fee income was up 10% in the first half of 2007, driven primarily by the increase in loans tracked.

Specialty Property results were also favorably impacted by a 32% income in investment income during the second quarter, and a 31% increase in the first half, due to the increase in invested assets that was fueled by the growth of the business.

Assurant Specialty Property had a very strong first half.

We would remind you, however, to be cognizant of the seasonal timing of catastrophes which could occur in the second half of the year.

At Assurant Employee Benefits, net operating income increased 4% during the second quarter to $21.5 million, driven by good loss experience in the disability and life product lines.

Disability loss experience, and incidents in particular, continued to be very favorable.

Net earned premiums decreased 4% to $272.5 million for the second quarter of 2007.

This is due primarily to the continuing implementation of the business's small [cape] strategy and adherence to our pricing discipline.

Our dental product continues to benefit from our strategic network sharing arrangement with Aetna.

YTD sales of our dental PPO product were double the sales in the first half of 2006, and we believe this arrangement will further solidify our competitive position moving forward.

Next, in our corporate and other results, we reported a net operating loss for the second quarter of $2.9 million, compared to a loss of $4.9 million for the second quarter of 2006.

The improvement in the operating loss was primarily due to $2.9 million of income recognized with the change in certain tax liabilities.

The corporate and other operating loss for the first six months of 2007 totaled $10.5 million, compared to a net operating loss of $5.4 million during the first six months of 2006.

The increase in the operating loss was mainly due to $2.9 million of expense recognized from the change in certain tax liabilities and a reduction of $2.4 million in after-tax real estate investment income.

Our balance sheet remains strong.

As of June 30, 2007, total assets were $25.8 billion, and total shareholders' equity, excluding accumulated other comprehensive income, was $3.9 billion.

Book value per diluted share, excluding AOCI, grew 6% YTD to $31.81 at June 30, 2007.

Our debt-to-capital ratio, excluding AOCI, improved to 20.5%, another indication of our financial strength.

In summary, we are pleased with the results we generated for our shareholders, and the disciplined progress we're making in several of our key targeted growth areas.

We remain focused on continuing to make progress in these targeted areas, as well as addressing issues [prompting] short-term pressures.

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

Thanks, Mike.

Operator, we're ready for questions.

Thank you.

(OPERATOR INSTRUCTIONS) Our first question is coming from Keith Walsh with Citigroup.

Good morning, everyone.

A couple questions for Gene.

I guess if we could start in Specialty Property, obviously the premiums are accelerating well above what I was looking for, at least.

Now, you made it clear when we were down there in Ohio that the subprime and increased foreclosures really can help the placement rates on this business.

Is this something we're seeing flowing through already, or is that something that is really going to help the business 6, 12 months from now?

And then I have a follow up.

As we discussed in Springfield, the growth factors around subprime have been driven by delinquency as well as foreclosure.

And as we've pointed out, we are providing real estate owned for many of our lenders.

That has continued the trend in a similar fashion to what we talked about in Springfield.

I leave it to you to predict what might occur in the future, but I think general industry belief is that it's going to continue and probably continue to rise.

I guess what I'm getting at is if you foreclose on a house, when does that flow through on your income statement?

What kind of a lag are we talking about?

Well, I think the penetration occurs at a number of different points.

It can occur while a property is in foreclosure, or it can occur after it happens in foreclosure.

A lot of that depends on when the established policy term, the voluntary policy, what that term is in place today.

I think that's the biggest driver around that.

Just a follow up for you, Gene.

With your CFO, chief actuary, and risk manager on leave, who's watching the store here?

It seems like your financial team is basically not there.

Why should we be comfortable?

Maybe you can talk to that a little bit.

We have an incredible leadership and management team within our organization.

As I've pointed out to you at Investor Day, my direct reports themselves have over 20 years of experience in this industry.

We have our own business CFOs, and each one of the individual business that makes up Specialty Properties that are experts in their field.

We have a corporate CAT committee that consists of both corporate as well as business individuals that are constantly monitoring our capacity programs our exposures and things of that sort.

And quite frankly, the people backing up some of the people that left were very strong, and we've got strong actuarials support, strong financial support.

And I'm confident we have the players to play.

I would add to that that the rather seamless transition that you've seen at the corporate level with our ability to, on very short notice, fill gaps and bring in very talented people, most of whom you already know, is really just the beginning of the process of the strength and management in this company going down into the ranks, many of whom, for obvious reasons, you haven't had an opportunity to meet yet.

So what's indicative of what you've seen at the top flows all the way down through this company.

Thanks a lot.

Thank you.

Our next question is coming from Jukka Lipponen with KBW.

First of all, I wanted to express my appreciation.

I think many shareholders would agree with me, Kerry, that you being willing to come back and take over on an interim basis under the circumstances.

Thank you.

A couple of questions.

First of all, what was happening with the small group health loss ratio in this quarter?

And were there any [reserve] movement that were also affecting the loss ratio?

Sure, Jukka.

This is Don.

I'll be glad to talk about it.

We've always looked at our small group business as being opportunistic.

Individual medical is our growth engine.

But small group, less risk management is allowed Since it's guaranteed issue, and it's a more competitive marketplace.

The decline that we had this year is really due to two factors.

It's due to less revenue in small group, and it's due to higher loss ratios.

And they're both connected, since they're both related to having lower sales and higher lapses.

And when you have less first year business, you have an overall increased loss ratio because the first year business still is a little bit better loss ratio.

And we did find that our lapse rates increased, so we lost more of the existing business that had a little better loss ratio.

Later this year, we're going to be introducing the Advantage Agent to our small group products, and we're hopeful that that will start increasing the sales and allow us to stabilize our revenue.

And also keep in mind, I recall Kerry several years ago referring to our loss ratios as spectacular.

Although there is an increase in loss ratio in small group, this is still a very profitable business for us with ROEs in the mid-30s.

In specialty property, the expenses seem to drop quite a bit in this quarter.

Is there anything unusual in there in the level that we saw in this quarter?

Is that sustainable going forward?

Well, as we look at expenses, I think if you go to the release, there was about $5.5 million of non-recurring balance that was related to agent commission.

Beyond that, we are seeing some advantages of scale.

Certainly, the Safeco acquisition continues to be successful, and the integration of that continues to be successful.

It's allowed us to continue to build our leadership position in creditor placed homeowners, and we are getting some efficiencies surrounding that as well.

I'd have to add that this quarter is a great example of the diversity of the companies that comprise Assurant.

We've talked ever since we've been public about the diverse nature of our businesses, the fact that they have uncorrelated risks.

There certainly was a time when health seemed to be the big driver of Assurant, the questions about was it too concentrated in health.

And I think what you see-- as I've said before-- all the businesses are not necessarily up at the same time, but they're not all down at the same time.

So that we have this balance in the diversity of our group that gives us, in aggregate, a kind of stability.

And this is a great demonstration of it this quarter.

And lastly, can you give us an update on your not only subprime exposure, but also all the exposure?

And where are the values for the securities that you're holding at this point?

Chris?

Sure.

Our current subprime exposure is about $92 million, including all the various categories that are in the press at this point.

That's less than 1% of the total portfolio, and it's also over $40 million lower than we reported to you on Investor Day.

All but a couple hundred thousand of those holdings are still rated AAA by Moody's and S&P, and there's a minimal unrealized loss based upon our last marks.

So we're continuing to monitor this very carefully.

Obviously, it's a very changing landscape, and we'll take additional actions if necessary, but as it stands right now, we're very comfortable with our current position.

In terms of the ALT-As, we have no ALT-A exposure in the portfolio.

Thank you.

I think as we've told you over the years, we're conservative investors.

And I think this demonstrates that point well.

Thank you.

Thank you.

Our next question is coming from Ed Spehar with Merrill Lynch.

That sounds kind of exotic.

I had a couple questions.

First, if I look at the things you've highlighted in the release, in terms of unusual items, I'm assuming that this is sort of a $12 million, that's all you would throw in as something to think about adjusting out?

Yes.

Those are things that we thought were worthy of disclosing specifically, Ed.

Are any of these things that occur from time to time that are lumpy, or are these all things that just happen to be fairly unusual?

I think, in general, in the interest of really full disclosure in trying to highlight items that are unusual or certainly not expected to recur with any particular frequency to make clear to investors and those looking at us so that our underlying results can be clearly understood.

So we have established a pattern of trying to disclose those items, and these are certainly the ones that we've brought to bear this quarter.

And just a more substantive question.

On the Specialty Property, when you look at the strength in this quarter, I think it's a lot better than some of us were thinking.

But when you look at how you were thinking about this business internally, is this a kind of an off-the-charts quarter from your standpoint, or are we starting to see some of the benefits from any of the things going on in subprime and the positives that that might have for you in that segment?

Before I turn it over to Gene, I would say you are seeing, really, the seasoning of the Safeco acquisition of their business.

And I think, quite obviously, the success of that acquisition, the economies of scale that have developed through that, which I think, again, is evidence of our sound acquisition strategy and the carefulness with which we go after this.

Again, we have a very specialized focus.

We look for these market segments where we can have good, strong market positions, bring our particular skills to bear.

And I think this is a great example of it.

Gene, if you want to add specific comments on that?

Ed, we certainly have seen some of the growth opportunities coming from some of the subprime.

A lot of the penetration has increased, and it has increased due to some of our subprime accounts.

As we discussed literally, though, probably all four of the growth factors that we talked about at Investor Day, being loans tracked, loans tracked are up.

Outside of the Safeco acquisition, insured values continued to rise at a comparable rate, as we talked about before, placement rates being up with the subprime opportunities.

And then we still anticipate increased premiums from things like Florida, that should start occurring in the third and fourth quarter.

We're looking forward to the acquisition of loans from the ABN AMRO portfolio that we'll be adding later this year, and will really be more of a 2008 effect.

Thanks.

And just one more question on the health side.

I was wondering if you look at the business as it is today, and you think about the range of combined ratios that we might see for the business as it is today versus what we've seen historically-- because I think if you go back historically, there have been times when the combined ratios got up to 99%.

Is there any indication in the competitive environment or in terms of your business mix that would suggest that the trough margins this time will be much different?

Thanks.

Yes, Ed, this is Don.

You know, it's not appropriate for me to speculate at this time as to where the combined ratio is going, but I'll give you some of the thought process to make your determination.

First of all, we are on track with individual medical.

This was our core growth area, still is.

We're encouraged by the response to Advantage Agent to see the growth in sales.

Our loss ratios, as I commented, are right in line.

So we do see individual medical being the growth engine.

It's a growing market, and we're well positioned.

It's going to be the combination of small group and individual, and we've commented before that we will have a gradual change in our ROEs from the mid to low 30s to the mid to high 20s, and we expect that to occur over time with the resulting increase in total premium driven by our growth in individual medical.

We remain on that track.

Thank you.

Thank you.

Our next question is coming from Vinay Misquith with Credit Suisse.

Good morning.

On the extended service order to contract business, this quarter on the domestic side was pretty good.

And I believe some of that came because of the Circuit City transaction that you guys said, I think it was in fourth quarter of last year.

Are you seeing some sort of slowdown in your extended service warranty contract business, given the slowdown in consumer spending in the U.S.?

This is Craig Lemasters.

Not in total, we've seen it in a [offset] of selected client bases and we've talked about a couple of our clients, including Comp USA, where they have closed some stores.

But it hasn't had any material impact.

If you look at our domestic ES unit year-over-year, service contracts domestically were up 19%.

So we're still on a good growth trajectory there, as well as outside of the U.S.

with the year-over-year looking at like 26% now.

Wasn't the Circuit City deal because now you have more products versus in the past you only had the computer business?

That's correct.

We picked up the other part of that business at the end of last year.

On the specialty property side, could you let me know how much the Safeco acquisition added to premiums this year versus how much it added to premiums in the second quarter of last year?

Well, Vinay, I can tell you that premiums increased in the second quarter of this year by about $29 million over where they were last year.

And it was actually $87 million increase for the first six months over last year.

Does that help?

Well, what I was looking for is, in the second quarter of last year, I think $30 million [on] premiums came from the Safeco acquisition.

And I was curious how much came from the Safeco acquisition this year, because trying to [x out] the Safeco acquisition, how much was it growth because of the other reasons like subprime, and just no more organic growth?

That's what I was trying to get at, actually.

I think last year had-- two months of Safeco were in the first six months.

And, of course, this year we have a full six months in our experience.

And I think that's all the data that we really have today on that.

And I can tell you, Vinay, that the Safeco business is also experiencing growth similar to what we've achieved in our organic portfolio around things like you know, they had the subprime clients and the penetration has increased on those.

They're experiencing increases also in average insured value, so we're seeing growth similar in that Safeco portfolio to what we've seen in our total portfolio.

One last question on this segment is, I saw you had a small reduction in your margin or other small increase in your loss ratio this quarter versus last quarter.

Was that because you had higher reinsurance costs this quarter versus the last quarter?

And do you expect those reinsurance costs to fall for the next four quarters because of the new reinsurance program?

I think in terms of comparing this quarter to the first quarter there's a normal trend for the second quarter to be slightly higher, I think.

Just in general, that's been the case.

And a couple points swaying, I think it's going to just realistically happen.

We still had a very light second quarter in terms of any sort of weather activities.

Your second comment, I'm sorry, was a question around?

The reinsurance costs.

My sense was that you had higher reinsurance costs this year but because of your new program you'll have lower reinsurance costs as a percentage of your own premium.

We did disclose in the second quarter that our reinsurance costs were $40 million.

Which was quite an increase over last year and is expected to be our highest quarter.

We should see some reductions coming in the third and fourth quarter reflective of our new reinsurance program for the '07 year.

I think if you go back to the June 6th press release, we laid out the numbers for both '06 and '07 that we expected from the reinsurance.

Thank you.

Thank you.

Our next question is coming from Steven Schwartz with Raymond James and Associates.

Good morning, guys.

First, since Craig is there, I want to ask a couple of questions about solutions, and then a general question about the business.

Craig, maybe I was wrong or didn't understand.

Exclusive of the sale of the pre-need independent franchise, fees were down in the quarter versus the second quarter.

Was there MBNA in the first quarter?

There was a little bit carrying over into the first quarter, Steven, and so that was Mike's comment, that you see the full impact of what we had disclosed last year in terms of the MBNA impact.

So net net, that was enough to cause that decline?

That's right.

Craig, just asking here.

You've got this issue in Brazil, whatever that is.

You had an issue a few quarters ago in the U.S.

that is taking its time to work its way out.

Is the Brazil situation different so that this doesn't go on for a while?

Yes, it really is quite different, Steven.

If you remember the issue domestically is the service contract business, and as I've talked about, we have a number of levers that we can work on to fix that.

And as Mike said in his opening comments, we feel like it's very much on track.

In the last two quarters, particularly, we've made great progress there.

So I'm conference that we will be back on the profitability track in the next two to four quarters that we need to, domestically.

The Brazil issue is completely different.

It's related to a credit insurance program that we wrote in a new distribution.

And it was simply underrated.

And the reason it was underrated is we got a higher average age than we originally predicted.

I think it's a couple of important points there, is that one, it was a program designed specifically for Brazil, so it is isolated to that country and to that specific product.

And the important note there is, again, our early warning worked.

It's really made up of the investment that we made in technology for International Data, and then great people looking at it.

So we've made the changes we've needed to.

We believe that we've taken the corrective action in this quarter and we don't anticipate any significant financial impact in the future quarters.

But I also want to make certain that we realize that as we run into challenges and grow internationally, it doesn't deter our commitment to this part of our growth strategy.

We're still committed to this.

And again, it's all about having great controls to catch these things early and fix them.

The other thing I talked about for the last two years is as we build scale in international and we run into challenges, are, of course, magnified.

So again, it's great motivation for us.

We continue to build scale so when we do have challenges it doesn't have as material of an impact.

And then just looking (inaudible), international expenses were very high in the quarter.

You've got six countries going here.

My assumption would be going forward that we should continue to see a very high level of investment spending internationally.

When we talked at Investor Day, if you go back to the slide I used, and we tried to give more disclosure on what this cost us by country and then the timelines, [then the] mature.

But clearly, we're making a substantial investment.

As Mike mentioned, we look at it in terms of pure developing countries right now.

We really have six in that phase.

The newest, of course, is China.

And we talked about that Investor Day.

So it's prudent for a long-term investment in China to go ahead and do that, and those expenses so far are running a little bit higher than the other countries that we've started.

So you will continue to see international spending.

And let me just add to that that this is, again, another great example of the diversity of our group.

And the fact that within our mix of businesses, we have mature businesses, we have ones that are established that are less entrepreneurial or in earlier stage.

So that, in fact, we can afford to make these investments to experiment with new products and new markets and still, overall, produce the kind of results that we have been able to.

And one more comment on that, Steven.

I think what we are seeing a trend in international, which I think is quite positive, is we are closing business sooner in new countries than we have before.

And as I've talked about, it's one of our goals to obviously shrink the timeline of profitability to these new investments, and we're really seeing that.

Really, in Germany, Italy, Spain, and Mexico, we've closed business far sooner than we have had in the past.

And then the other part of that is, as Kerry mentioned earlier, the Swansure M&A activity and the close there is real important to us.

We're going to continue a very intentional strategy of finding nice niche acquisitions in these new countries.

Again, the whole goal being just to accelerate the time to profitability of these new countries.

One final question, touching the third rail here.

For the company overall, has there been an effect one way or another in how your distribution and your distribution partners are thinking about you, given what happened vis a vis the SEC investigation?

I think we have very strong relationships with our clients and our customers.

Many of those relationships date back decades.

Our clients are used to getting the kind of product and service from us that they've been accustomed to.

We've obviously talked to a great number of clients at this point, and they are assured that the company remains solid.

Our commitment to service them is strong.

We are an ethical company committed to strong corporate governance.

We obviously want to bring the SEC matter to a close and resolution as quickly as we can, and I think our indications are certainly that all of our clients are behind us.

And as long as we continue to give them the products and services that they are accustomed to, we have no indication that any of them intend to leave us in any way.

This is Craig.

Obviously, this is an important topic for us, since our clients are large financial institutions, large retailers, et cetera.

And we've spoken to all of them, either me personally or our senior team in Solutions, and I can tell you that it's been really quite overwhelming, the feedback from our clients.

They're extremely supportive of us.

They understand how serious the issues are, and they understand our commitment to true, responsible corporate governance.

But they've been very, very supportive of us.

And again, I think it's a real testament to our overarching strategy, which is to partner with leaders in the industry.

And they get it that our day-to-day great service that we provide, and our commitment to their business has not and will not change.

Thanks, guys.

Thank you.

Our next question is coming from Bill Wilt with Morgan Stanley.

Good morning.

A few quick ones, if I may.

Craig, going back to Solutions in Brazil, does the $4.4 million after-tax charge, does that contemplate a charge for the earnings tail of that business or the IE for the future?

Or if not, what is the tail of the business that was written?

Bill, there's actually two pieces to it.

One piece is the write off on the back and the other piece is an increase in IB&R which, again, is our projection for any payoff business.

And the other thing we've done there is on a piece of that business, we were able to switch it to monthly pay business, it's a single premium.

And by doing that, it gives us flexibility to correct things, literally, within a 60-day timeline.

So we feel pretty good about that.

Great.

Thanks for that.

Two more, one's quick.

The specialty property, the current number of loans that you're servicing?

I think you've given that out in different presentations.

Currently, I think we were at $30 million.

If we're going to add that ABN AMRO portfolio, that's going to bring us up to somewhere around 31.5.

I'm sorry, Gene, I missed that.

Adding the ABN AMRO portfolio will bring us up to somewhere around $31.5 million.

Thanks for that.

And then, John, with you on the line, could you give some color on the individual medical, the higher average premiums per policy?

I guess I'm curios to know how that trended over the last handful of quarters, and whether that's consistent with the broad demographic trends in that business.

Is that a general industry trend or is that something that's unique to Assurant with the markets you're targeting?

There are three factors causing the higher premium per member.

First of all, we redesigned our portfolio a year ago with Advantage Agent.

And we have products now for several of the segments that are within the individual business.

And one new product we introduced is called MaxPlan, which was specifically designed for those people coming off a group coverage, and it has a richer benefit structure than we had sold in the past.

So our mix of business, I believe that's 16% of our sales now is MaxPlan.

And so that's a little higher premium per sale.

Also we do have medical inflation, which does increase the premium per member.

We turned our new business quarterly, but our existing business, we change that upon renewal so there's always an upward slope of premium.

And further, I think the age is increasing slightly.

As I mentioned at Investor Day, one of the trends are more early retirees as baby boomers hit that stage.

And there is a slight increase in issue age, and that does increase our premium.

A couple of these trends are the same for other companies.

Ours may be a little higher because of the redesigned portfolio.

That's helpful, thanks.

And these roundabout numbers for the medical inflation trend?

What would that be on an annualized basis?

About a mid-teen number.

Thanks very much.

Thank you.

Our next question is coming from Dan Johnson with Citadel Investments.

Thank you.

Welcome back, Kerry.

Thank you.

A couple questions.

On the health side first.

The production on the individual side looks like it hit a new record with a little bit over $100 million.

The gross has been very good, both sequentially and a year-over-year basis.

Where are we in terms of rolling out Advantage Agent in all the states?

I know there's some special things going on with State Farm.

I'm just trying to figure out what sort of duration this growth has?

We began the process in the third quarter, and as of early this year, we completed a rollout to Allstate.

And it's a continual process, though, of helping our agents get comfortable with the changes, encouraging their adoption.

So there is a bit of a tilt upward, but it is completely introduced.

And we do periodically introduce enhancements to the package, to help continue to improve our ability to work well with our agents and customers.

I would also say, as part of this question, that the individual market has gotten a bit more competitive.

Some of the bigger players are moving aggressively, and our chief abilities with Advantage Agent, our strong distribution relationships, have allowed us to stabilize.

And we're pleased with our sales in the second quarter, and we'll be working hard to keep rolling this wonderful line of business for us.

And the other piece is the international gross written premium.

Six quarters ago it was modestly negative, and probably every quarter since then it's gone up by 500 basis points or so in growth rate sequentially now.

At least my numbers show about 25%.

I know that it looks like there's strength across most of these lines, and I know that you've talked a little bit about some of the drivers that-- the growth sort of continues to accelerate.

So I'd be interested, if you wouldn't mind just putting a little more detail on two things.

If there's anything significant singly driving that growth, and at what point in time will that growth begin to show up on the net earned premium, which I do realize is growing nicely internationally, but obviously doesn't reflect the stuff that's been written here recently.

Dan, this is Craig.

You really said it well.

The growth in international really is about traction.

And we've been asked this now for a little over six, almost seven years in terms of really, an intentional international growth strategy so that there's a couple of factors.

Some of our more mature countries like Canada, for example, is experiencing very nice growth and it has for a number of quarters.

We expect that to continue, maybe not at the same height.

But what really is going on there is we see nice growth in average balances on our credit card clients, so that's encouraging.

So we've got it in sort of the existing larger countries.

And then we see the developing countries start to build some top line, and we've talked about Brazil and Argentina, in particular, are starting to get to that point.

And as I said earlier, I think we're getting better at getting more business flowing in these countries sooner on.

And one of the examples.

Even in the U.K., where, again, we've been for a number of years, we really have honed in on this niche.

Our core niche strategy in the U.K.

market, where we're identified as intermediary broker market, a financial industry there.

And that's, of course, why we bought Swansure, to really beef that up.

And we can really go in and focus on these niches.

So we're starting to see some of the results from that.

And additionally, in that region, we did install really what should play out to be one of our larger European clients, the Irish Credit Union, as we've just entered the Irish market.

So that was a very nice win for us, and we'll see that develop in coming quarters as well.

So in summary, I think the encouraging part of our international expansion is that I think our sort of disciplined, methodical approach to this is now starting to pay off in terms of we've got a great footprint.

And we've really brought in strong people and we're starting to see the top line build nicely.

Was there anything unusual in the quarter related to the items you highlighted in Solutions that would have influenced the tax rate?

It shows up about five points higher than it was the last three quarters.

I think, Dan, the tax rate is kind of a complicated calculation, but there were a couple of factors that drive it.

One was that I think our mix of domestic versus international pre-tax income changed because of the investments we're making internationally.

That also reflects the amount of tax-exempt income from munis in the portfolio.

I think there was a change there.

So those are a couple of factors there.

There may be others.

Do you have a sense of the sort of normalized tax rate for this segment?

It was running 30, now it says 35.

Probably low 30s.

I would think somewhere in there would be a reasonable assumption.

Thank you very much.

Thank you.

Our next question is coming from Adam Klauber with CCW.

Thank you.

Good morning.

Just some additional questions around the domestic service contract business.

Two or three questions, I guess.

How is competition in that market?

Has it increased over the last, say, six to 12 months?

Is there more pricing pressure over the last 6 to 12 months?

And the third one is, I know that's always an evolving business where new products take off.

Are there maybe two or three products over the last 6 to 12 months that have had higher than average growth rate?

Are you really seeing a pick up in market?

Thanks.

Adam, as far as competition, we have not seen any new entrants.

It's been pretty stable.

I think that the big change on that front is a lot of our competitors have been sold mostly to private equity, so we see a sort of shift in the market in that regard, but no new entrants.

And really haven't seen a change in the pricing pressure either.

Again, our business model is a little bit different in that again, I've talked a lot about the value chain, and really we want to take a much more holistic approach with the clients, in terms of not just being the underwriter or the administrator.

We help them on the front end in terms of sales, and the back end in terms of client retention, so it is a little bit different.

And so we really haven't seen any unusual pricing pressure domestically.

In terms of product growth, it's still been around, and we would see this certainly continuing, based on retail industry statistics.

Sort of the flat screen, large TV monitor kind of space has been where a large part of the growth has just been coming from.

But the other thing I would note in terms of some of our growth and our approach-- and again, I spoke about this at Investor Day-- we're getting quite a bit of traction in some additional niches where what I really like is taking or core competency and its value chain and finding other distribution.

So things like jewelry, I talked about power sports and motorcycle niches, things like the RV industry.

But we can go into these niches and really leverage our core, and go in and do quite well in those.

So we're seeing nice growth in some new niches.

Thanks, Craig.

Thank you.

Our next question is coming from John [Niddell] with Riva Capital.

Good morning everybody, how are you doing?

A couple quick questions, and I guess I'll echo the comments that I've already shared.

Thank you very much for making the return, Kerry, and we appreciate it.

Could we get the current level of excess capital?

I think it's in the $450 million or so dollar range.

And that's ex-debt capacity?

Yes.

Two other questions, and one is maybe a bit more high level.

Kerry, I know, and I think most of us who know the company for a while know that you and Rob primarily set the strategy, share the vision.

You're coming back.

Are there any significant changes that you would see to the strategy?

And even in addition to that, Rob had become somewhat fond of telling us that it wasn't a matter of if, but when on additional M&A opportunities.

Does that change in the interim period here?

Well, I think first, on the strategy, you're right.

Rob and I really had the strategy together.

When I left, the strategy became Rob's.

And I'm back, and it's mine.

So there's no real change in that our strategy, I think, is solid.

It's more proven than ever.

It's been working well, and you've heard many examples of how it's worked well here today.

So I don't see any changes in strategy for Assurant on the horizon.

As far as M&A, M&A is a big part of executing our strategy.

We have probably as well a staff, or perhaps the best staffed M&A function that we've ever had.

We're quite active, we're always looking at different potential acquisitions, that's certainly true at the moment.

And I would see continued activity on that front.

Of course, you never know when you're going to do a deal, but we certainly would expect that M&A will be an important part of our growth in the future.

Thank you.

The last question is maybe one for Craig.

Most of us in financials probably didn't take much note of Microsoft's huge charge this quarter for X-Box and warranties and repairs.

But I assume that you did.

And I wonder if that has presented any additional opportunities for you to highlight your expertise?

Yes, John.

That's true with a lot of product introductions out there that we've seen over the years, is that it does tend to highlight our services.

And obviously, we think that is a very positive thing.

And we see that continuing.

Particularly in the mobile phone area.

And as phones become more like computers and sophisticated devices, PDAs, et cetera, we just see that as a great opportunity (inaudible) them and serve as part of our business.

And the speed of replacement and repair, we think just becomes more and more critical.

I appreciate that.

Thank you very much.

Thank you.

Our next question is coming from Greg Lappin with Tribeca.

Good morning.

My questions were asked.

I wanted to make sure, then, on the medical side, that there have been no surprises in terms of how you track the most recent months' actual to expected loss ratios?

Right, Greg.

We've been consistent in our reserve methodology, and we've been that way for several years.

And our ADs we continue to look at each month.

And as I mentioned earlier, the individual is behaving well, and the increase in small group, we talked about previously.

Okay.

All else is covered.

I'm pleased that you came back, Kerry.

Good to hear you.

Thank you, Greg.

Thank you.

Our next question is a follow up from Jukka Lipponen with KBW.

Actually two follow ups, if I may.

First of all, Kerry, what can you tell shareholders, why should they be comfortable that you won't receive a Wells notice?

Well, of course, I can't predict what the SEC might do, but I certainly have no indication that I would receive one.

And obviously, the board would not have asked me to come back if they had any indication of that.

So that's the only assurance I can give you.

We certainly are cooperating with the SEC in this matter, it's a very serious matter, obviously.

The board, as well as management is devoting a lot of time and effort to resolving the matter as quickly as we can.

Beyond that, we are committed to continuing to execute our strategy and manage the company and continue to produce the kind of results that you've seen in the past.

My second follow up.

Craig, as I was looking at the numbers, I'm noticing that international credit, you had 26% growth in gross premiums but 5% decline in net premiums.

In international service contracts, you had 22% growth in gross, but 156% year-over-year growth in net premiums.

Can you give us a little color there?

The biggest part of that [new] growth, the difference there would be recontracted clients in Canada, where we switched from retrospective to reinsurance structure.

So you'd see the change in the net earned line.

So that would tend to normalize over the quarters and the years.

Because as we said earlier, we feel pretty comfortable with the traction we have now on the top line, international.

And what was added in terms of contractor credit, the Canadian?

I'm sorry.

On service contracts?

Could you repeat the question?

One was the recon in the international credit and the other one, international service contracts.

So the Canadian, was this impacting international credit or international service contracts?

That was on the credit.

And how about the service contract business, where the net growth was many multiples over the growth that was in the gross premiums?

That would be more just of a timing issue, because again, as we ramp up the growth you'll see the net catch up to that over time.

Thank you.

Thank you.

At this time, there appears to be no further questions.

I'd now like to turn the floor back over to Kerry Clayton for any closing remarks.

Thank you, Operator.

Again, we're pleased with the progress we continue to make in our targeted growth areas and with the results we've been able to generate for our shareholders so far this year.

Our focus remains clear, to build upon Assurant's strong financial foundation, successfully execute the Company's diverse specialty insurance strategy on behalf of shareholders, customers, and employees, and reinforce the Company's longstanding commitment to corporate governance.

All supported by a deep leadership chain and 13,000 very capable and professional employees.

Thanks for being with us today.

Operator.

Thank you.

This does conclude today's Assurant second quarter 2007 earnings conference call.

You may now disconnect.