Assurant Inc (AIZ) 2008 Q1 法說會逐字稿

Welcome to the Assurant first quarter 2008 financial results conference call.

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

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

(OPERATOR INSTRUCTIONS).

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

Melissa Kivett, Senior Vice-President, Investor Relations.

Please go ahead, Ms.

Kivett.

Thanks, Markita.

Welcome to Assurant's 2008 first quarter earnings conference call.

Joining me with prepared remarks are Rob Pollock, President and Chief Executive Officer of Assurant, Mike Peninger, our interim Chief Financial Officer, and John Roberts interim President and Chief Executive Officer of Assurant Employee Benefits, I'm also pleased to be joined by the other members of our senior leadership team who will be available for questions you have.

Don Hamm, President and CEO of Assurant Health, Gene Mergelmeyer, President and CEO of Assurant Specialty Properties, Craig Lemasters, President and CEO of Assurant Solutions and Chris Pagano, our Chief Investment Officer, and Treasurer.

Prepared remarks will last approximately 25 minutes after which time we'll open the call to questions.

This morning we issued a press release announcing first quarter 2008 financial results.

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

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

Our actual results might differ materially from those projected in these forward-looking statements.

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

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

For more detailed disclosures of these non-GAAP measures, the comparable measures and a reconciliation of the two, please refer to this morning's earnings press release and the supplementary financial information posted on our website.

Now I'd like to turn things over to Rob.

Thank you, Melissa, good morning everyone, and thank you for joining us today.

We're pleased to share with you Assurant's financial results for the first quarter of 2008.

I'm pleased to report that Assurant has delivered the best quarterly net operating income and operating earnings per share in our history despite the slowing economy and uncertainties impacting the capital markets.

We have maintained a conservative investment philosophy.

Our businesses continue to deliver healthy cash flows and we've maintained a strong balance sheet.

We reported growth in net income, but our results show we are not immune to the volatile capital markets.

First quarter results include $28.2 million in after-tax capital losses related to other than temporary impairments in our investment portfolio.

At the same time, capital market dislocations have created opportunities, widening credit spreads have largely offset declining treasury yields, allowing us to invest on more favorable terms.

Our capital management strategy is focussed, first, on growing our businesses organically and, second, through acquisition.

In 2007 the M&A environment was characterized by access liquidity and abundant low cost financing.

Nevertheless, we successfully completed acquisitions of about $200 million aligned with our targeted growth strategy.

Today the M&A environment is characterized by diminished capital positions and scarce higher cost financing.

We believe we are well-positioned for this environment.

Overall growth in our business has been driven by our disciplined execution of our diversified specialty insurance model.

Our results delivered strong operating ROEs and we achieved nice growth in operating earnings per share and book value.

We are pleased with our ability to deliver strong results in a slowing economy and we feel we are well-positioned for 2008.

The mortgage market has experienced unprecedented changes which have had ripple effects across the entire economy.

The market is dynamic and Assurant continues to support initiatives that might bring additional stability.

Examples include our membership in the financial services roundtable and our participation in their housing policy council.

We are also participants in the Hope Now program, focussed on financial counseling for homeowners in need.

In this turbulent market, Assurant Specialty Property delivered strong profitability and growth in net earned premiums.

Our strategy of aligning with market leaders has been integral to our growth over the last five years, and we believe it positions us well for the future where consolidation is likely to continue.

Our results in the first quarter were achieved despite the loss at year-end of 630,000 sub prime loans due to consolidation.

Over the long-term, we continue to focus on growing our share of trackable mortgage loans.

Let me move next to solutions.

Net earned premiums grew nicely quarter-over-quarter.

We recently held a workshop to provide investors a deep dive into our solutions business model.

At the workshop, we identified key drivers of growth and how they would help us to temper the impact of a slowing economy, particularly for service contracts.

These drivers include establishing relationships with new distribution partners, such as dealerships and recreational vehicles, developing new warrantable new product mixes like jewelry, adding new clients and increasing sales from existing clients.

Solutions results this quarter were positively impacted by $11.7 million of after-tax income from service contract clients.

I mention this because it demonstrates our ability to work closely with our partners to improve client account performance, when results are not meeting our targets.

Internationally, we continue to see strong growth in both service contracts and credit insurance.

One contributor has been our global client management strategy.

Using this program, we've been able to add multi-national clients in several countries.

In addition, our two acquisitions in the UK have helped us to build our position in the niche mortgage payment protection market.

The dynamics of the health care marketplace continue to change rapidly, and we remain focussed on executing our core capabilities.

Our disciplined risk management approach to the specialty business has enabled us to continue to deliver favorable combined ratios.

Although Assurant Health's net operating income and net earned premiums for the quarter are both down compared to the same period last year, we continue to focus on growing our Individual Medical business by leveraging our strengths in product development and broad distribution.

Assurant Employee Benefits is well positioned for the small-employer benefits market.

John Roberts, who leads our employee benefits business, will talk about how we are successfully executing our strategy within this market.

So in summary, even in the context of a slowing economy, our results continue to demonstrate the enduring quality of our diversified specialty insurance strategy.

Our financial foundation is strong and our capital position provides the flexibility to capitalize on emerging opportunities.

Now I'd like to turn the call over to John Roberts.

John?

Thanks, Rob, and good morning, everybody, I'm very pleased to be here to update you on our quarterly results and the progress we've made toward our goal of being a small employer's carrier of choice when it comes to employee benefits.

At Assurant Employee Benefits, we have chosen to become a specialty carrier in this market and have transformed themselves to focus on the needs of the small employer.

We are executing on growth strategy by building a sales force for the small market and developing alternate distribution networks like disability R & S.

Now moving forward, our growth strategy will expand to include increasing voluntary sales and acquiring blocks of business.

Now, let me turn to the results for the first quarter.

Assurant Employee Benefits net operating income was $16.3 million, down 44% from the first quarter of 2007.

This was primarily due to no investment income from real estate joint venture partnerships in the first quarter of 2008 compared to $9.2 million after-tax during the first quarter of 2007.

That said , the underlying business results continue to reflect the benefits of our new strategy.

Group disability experience continues to be very favorable, while life and dental experience were not as favorable as last year.

The net effect was continued overall improvement in our loss ratio.

Our targeted small-case market has distinct advantages.

Historically, small employers appreciate and are more willing to pay for benefit choices.

Additionally in the disability business, small cases have on average lower claim costs per person covered.

Small cases also less prone to fluctuation and claim incidents during these tough economic cycles.

As we continue to focus on growing, we expect a lower loss experience associated with the small case, will be partially offset by higher sales expenses until we build scale.

Turning to top line, first quarter net earned premiums decreased 5% to $280.4 million.

The decrease is due to $22.8 million in single premiums from closed blocks of business, recognized during the first quarter of 2007, compared to only $5.5 million in the first quarter of 2008.

Absent the effect of these single premiums, net earned premiums during the first quarter of 2008 increased slightly.

We're encouraged by our sales momentum as we look to 2008 and beyond.

Overall sales for the first quarter of 2008 were flat relative to the first quarter of 2007.

Sales in our under 500 life target market have increased.

Sales are up 57% over the first quarter of 2006 when we were in the early stages of implementing our small case strategy.

Distribution is a key ingredient to successfully implementing a strategy and one that we believe differentiates us from our peers.

Our sales force is now 164 members strong, serving markets through over 30 group sales offices located strategically across the country.

When we adopted our small case strategy we implemented a sales compensation plan that focussed on driving small group sales.

Sales rep compensation is capped at 500 lives, sending a clear message that small cases are our focus.

This bold move set in place a redesign of our sales organization.

Our new sales force is primarily life experience hires, meaning they have sales experience from other industries.

We build upon their strengths and tailor training programs for them to maximize their sales effectiveness in the employee benefit market.

We believe the challenge in opportunity working with small case is reflected in our lower turnover rate, which in 2007 was approximately one-half of what we saw in 2006.

Additionally, we're continuing to strengthen relationship with brokers who share our focus on the small employer.

Especially through initiatives like the program we have developed for our key brokers.

The number of brokers involved in this program has now grown to nearly 250, because they recognize the value of our business tools, such as cross-selling opportunities, our marketing and business planning development.

All of which help them grow their business.

And collectively, these key brokers account for 25% of our annual sales.

Business written through approximately 30 disability RMS clients provides another avenue to distribute our products and services in the small-case market.

When you combine the AEB sales force with that of disability RMS, nearly 500 sales reps offer disability products, which Assurant holds in risk.

The next chapter for Assurant Employee Benefits is growth, and in these tough economic times there are a number of factors including the breadth of our product portfolio that makes us attractive to the small employer.

Our growth will focus on four key areas.

First, even better executing our small-case strategy.

Second, growing alternate distribution.

Third, growing voluntary sales.

And, fourth, acquiring blocks of business.

These past few years have been an important transition for employee benefits from a traditional employee benefit carrier to one focussed as a specialty provider.

We are demonstrating Assurant core strengths, primarily with industry leaders, expertise in risk management capability, and our advanced administrative systems that allow for mass customization in this market.

These strengths are focussed on the small group market puts us in a position to deliver top line growth and target ROE.

Now I'd like to turn the call over to

Thanks, John.

It is exciting to see how you and your team have advanced AEB's strategy and positioned the company for leadership in the small employer market.

Now, let's review the consolidated results and the results from each of our other businesses, which in aggregate demonstrate strong performance and position us well for 2008.

Assurant's net operating income during the first quarter of 2008 was up 22% to $214.9 million or $1.80 per diluted share, led by the continued strong performance of Assurant Specialty Property.

Net earned premiums increased 10% for the quarter, key contributors were Assurant Specialty Properties creditor homeowners business and Assurant Solution's service contracts and pre-need businesses.

International net earned premiums reported benefited from favorable foreign exchange rates.

While yields have declined, total invested assets have increased by 6% or nearly $1 billion since the first quarter of 2007.

Net investment income decreased 9% during the quarter to $197.8 million.

This is due mainly to $33.5 million of investment income from real estate joint venture partnerships recognized during the first quarter of 2007.

The current real estate market provides more opportunities for investments, and as we move forward our strong cash position should allow us to take advantage of these opportunities.

Net income in the first quarter of 2008 increased 4% to $186.8 million, or $1.57 per diluted share.

We recorded $28.2 million in after-tax realized losses due to other than temporary impairments in our investment portfolio.

These included an additional $2.5 million after-tax out of our $40 million aggregate sub prime ABS holdings of 2006 vintage.

The remaining impairments are primarily concentrated at issuers within the finance sector who are affected by market volatility and credit market conditions at the end of the first quarter.

We've seen no significant further deterioration in these positions and many of our impaired holdings have improved along with overall market sentiment since quarter end.

Assurant Solutions' first quarter net operating income of $47.6 million was up 8% versus the first quarter of 2007.

There was no investment income from real estate joint venture partnerships in the first quarter of 2008 compared with $9.4 million after tax during the first quarter of 2007.

2008 results included $11.7 million of after-tax income from the accrual of contractual receivables established from certain domestic service service clients.

As we discussed at our workshop in our past earnings calls we continually work with our clients to analyze emerging experience and make necessary adjustments.

For example, we may change rates, change administrative practices or adjust client commissions.

In this case, certain clients who have not previously met the minimum performance threshold specified in their contracts have agreed to explicit reductions in their future commissions.

We set up a receivable to reflect amounts we will receive over the next two quarters.

Accounting rules require us to recognize them in our financial statements this quarter since they can now be reasonably estimated and the likelihood of recovery is high.

While this receivable improves our domestic combined ratios for the quarter, we continue to experience less favorable overall results in our domestic service contracts and will work to continue to improve results.

Our international combined ratios continue to reflect our investments in developing countries and continuing improvement in loss experience in certain countries.

First quarter expenses for developing countries were $7.9 million, compared with $6.7 million in the first quarter of 2007.

Expenses in developing countries were 41% of gross written premiums in the quarter, down 14 points from the first quarter of 2007.

Solutions net earned premiums were up 17% to $683.5 million in the first quarter of 2008.

This increase was driven by the continued growth in our domestic and international service contract business.

Excluding the impact of foreign currency exchange, net earned premiums are up 15%.

We continue to see growth in premiums from SCI's acquisition of Alderwoods which added $17 million of net earned premiums during the quarter.

Overall, domestic growth written premiums were down 12% over the prior year due to slow-downs in the retail sales environment and the closure of all CompUSA stores gross written premiums for our domestic service contracts were down 13% in the quarter.

In addition, domestic credit growth written premiums continue to decline and were down 6% quarter-over-quarter.

International growth written premiums were up nearly 18% in the first quarter, excluding the impact of foreign currency exchange rates they were up 6% primarily due to continued strong growth in service contracts, particularly from Canada, Brazil and Argentina.

We are also seeing growth in our international credit business.

Since international is an increasing part of our solutions business, we'll be including more information on foreign exchange impact in our financial supplement beginning in the second quarter.

Fee income was up 16% for the quarter partially due to the growth in fee income from our 2007 acquisitions, Swansure and Center Point in the UK.

Assurant Solutions' net investment income decreased 5% for the quarter.

The decrease is due to $14.4 million of investment income from real estate joint venture partnerships recognized during the first quarter of 2007.

Absent this income, net investment income would have increased 9% due to higher invested assets from the growth in domestic service contracts, our international business and the Mayflower transaction.

Assurant Specialty Property delivered record net earned premiums and strong profitability with no reportable catastrophes during the quarter and continued growth in creditor placed homeowners insurance, excellent combined ratios and an increase in investment income, net operating income was up 68% to $124.7 million.

These results include $4.6 million after-tax from a client-related settlement.

Net earned premiums driven by the continued organic growth in the creditor place business increased 31% to $481.4 million in the first quarter.

While the sequential growth has slowed this quarter due in part to seasonality and the loss of 630,000 sub prime loans to consolidation, we continue to see our primary growth drivers increasing and we believe we are well positioned over the long term.

Average insured value for property rose to $164,000 in the first quarter of 2008, compared to $139,000 the first quarter of 2007 and $157,000 in the fourth quarter of 2007.

Average insured values are increasing primarily as a result of increases in replacement cost coverage being placed in the primary homeowners insurance markets and due to the geographic mix of business.

Policy in force penetration percentages have also increased in both our prime and sub prime portfolios and continue to run in the general range of 6 to 15% per sub prime accounts and 1% to 2% for our prime accounts.

While the majority of our creditor placed premiums are non-real estate owned, real estate owned premiums continue to increase to 21% of written premiums for the first quarter of 2008.

The growth in real estate owned properties has improved and broadened our geographic spread of risks.

Specialty properties results also reflect 34% increase in investment income to $29.4 million for the quarter, due to higher invested assets and an 8% increase in fee income to $13.6 million during the quarter.

Assurant Health maintained a very favorable combined ratio during a period of intense competition.

First quarter of 2008 net operating income was $37.3 million, down 8% compared to the same period of 2007.

The decline reflected $2.3 million of after tax income from real estate joint venture partnerships recognized during the first quarter of 2007.

Continued growth and individual net earned premiums during the quarter was offset by the continued decline in small group medical premiums.

Our combined ratio for the first quarter of 2008 was 91.7%, the same as it was in the first quarter of 2007.

Very favorable by industry standards and indicative of our disciplined risk management.

Net earned premiums in the first quarter of 2008 decreased 3% compared to the first quarter of 2007, to $496.1 million.

Individual Medical net earned premiums grew by 2%, primarily by higher premiums per member.

This was offset, however, by a 13% decline in small group premiums.

Individual Medical sales were down 20% compared to the prior year, however, we believe recent turmoil in the market will work to our benefit and allow us to take advantage of our strengths.

These strengths include disciplined risk management, broad distribution and a comprehensive product portfolio.

Next on our corporate and other results, we reported a net operating loss of $5.9 million for the first quarter of 2008, compared to a loss of $7.6 million in the first quarter of 2007.

This improvement was primarily as a result of $5.8 million of changes in certain tax liabilities recognized in the first quarter of 2007.

Partially offset by lower investment income in the quarter.

The quarter includes $1.6 million aftertax of expenses related to the ongoing SEC investigation of loss mitigation products.

Our balance sheet remains strong.

As of March 31st, 2008, total assets were $26.4 billion, and total shareholders equity, excluding accumulated other comprehensive income was $4.2 billion.

Book value per diluted share, excluding AOCI, grew 5% in the quarter to $33.73.

Our debt-to-capital ratio excluding AOCI improved to 18.9%.

In summary, Assurant's focus on the disciplined execution of our proven diverse specialty business strategy continues to deliver strong results for shareholders by leveraging our core capabilities and expertise in the specialized markets we operate, we continue to make steady progress in our key targeted growth areas.

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

Thanks, Mike.

Operator, we're ready for questions.

(OPERATOR INSTRUCTIONS).

We'll pause for a moment to compile the Q&A roster.

Our first question comes from Kevin Walsh of Citi.

Morning, Keith.

First question for Gene, couple questions on specialty property.

If you could just remind us why we see seasonality in the gross written premiums from fourth quarter to first, why they declined.

And, secondly, just more broadly, when I think about originations in the mortgage industry, they're down pretty sharply across the board but more so for Countrywide.

Now, are you seeing relative migration to your book to your book away from Balboa.

And then I have a follow-up for Mike.

Great.

Yes, let me try and address seasonality.

I think one of the things you can look at, too, is if you look at--there was a similar pattern that occurred in the fourth quarter of '06 versus the first quarter of '07.

Really what that relates to, if you look at our book, a number of the expirations, let's say, do kind of expire in the middle of the year, kind of consistent with when most people were buying their homes, and that's when their insurance was kind of set up and the expirations occur.

So there is a tendency to run to that and there is a little cyclicality into how premiums are processed, as well.

As it relates to the origination side of the business, we do feel that, again, our core competency around aligning ourselves with the industry leaders, has us well positioned.

Certainly, I mean, there was a couple of our large lenders that in the first quarter actually did announce that despite all of the problems and all of the press around originations being down, that their originations were up, and some significantly over the first quarter of last year in this first quarter.

So we do see some of that happening.

We also do believe, you know, that as the Banc of America group takes over for Countrywide, to the extent that does go through, they already announced that they do plan on cutting back both their warehouse lending as well as their sub prime lending and so we kind of believe our partners are in a good position to probably take advantage of that market.

Great.

And then just for Mike, if you could remind us of what your excess capital position today?

We usually update that later in the year, Keith.

We were in the, I think, the 220 or so range at year-end, and we'll give you an update then as the year progresses.

Okay.

Thank you.

Our next question comes from Mark Hughes of SunTrust.

Anything you can say in terms of how much the loss of those 630 sub prime loans affected premium in the quarter?

Can you ballpark it?

Well, that's really not something I can disclose.

However, what I can say is that we do see continued growth momentum.

So, when you look at, you know, our average insured value, we reported that.

I think you'll see that has continued to increase consistently with what we've seen in the previous year.

But also as delinquencies and foreclosures have continued to increase, we have seen increased penetrations .

And so both in the sub-prime market and a little bit in the prime market, as well.

We have seen increases again this quarter consistent with what we were incurring last

Got you.

And any improvement in the pricing environment in the health given the poor performance of some of your competitors.

Health remains very intensely competitive marketplace, particularly in the individual market where there is a lot of growth and more competition.

And I'm actually quite encouraged by our sales in the first quarter being up 18% over the previous quarter.

I think a number of factors were involved.

I do believe our relative head of position had improved a bit.

Additionally we introduced a new product and introduced new capability.

I will be talking more about those as part of our second quarter.

This reinforces our long term perspective on the business, our discipline in risk management.

We stay on top of the business every month and we make sure we price our products properly for the risks we're taking, and the recent changes and turmoil I think may gave us some limit of sales as we look towards the second quarter and the rest of the year.

I think it just points out the nature of Individual Medical being a specialty business, and, I know that people talk all the time about competitors coming in, but it is different and it operates with a different dynamic than you see in the general large-case health marketplace.

Thank you.

Our next question comes from Ed Spehar of Merrill Lynch.

Good morning, Ed.

Good morning.

And a couple of questions.

First, on Specialty Property, the--I think you said the average insured value was up from 139,000 to $164,000 year-over-year.

Is that correct?

Yes.

I guess that is an 18% increase.

I'm wondering at what point--at what point do we start to see those--those increases stop?

I know that there isn't a direct connection between insured values and home prices, but is this something where we can--we have some way to sort of gauge when we would think this would normalize, and does it normalize in terms of a sort of gradual decline?

Or is it something--I guess I would think maybe it's something that could drop significantly in a quarter when it stops.

But can you help us understand that?

That is obviously a key driver of the growth.

Sure, Ed.

Let me try to do my best to address that issue.

First of all, we continue to see increases in the average insured, and it is being driven as we look at the new policies that are being put on the books, they are at much higher values and we're continuing to see that increase.

So, again, we're replacing some of the older policies that have been on the books for quite a long time, and we've also instituted, some processes in our policies that are going to increase our renewal amounts, based on inflation, as well, which will continue to add to that trend.

Secondly, the other thing we're seeing is that it is being driven a bit by geography, and so as we have added particularly in the real estate owned area, there have been an increase in policies in the west, particularly in California, which are having some higher values, and while we believe that trend is going to continue.

Okay.

And I guess the other questions, just some clarifications.

Could you -- in Solutions.

What, Mike, did you see the expenses for developing countries were this quarter, versus 1Q '07.

7.9 I think was the number, and let me try to find it for you.

It is Craig.

It was 7.9 but we also gave it as a percentage of gross written premium, which was 41%, and that was down 14% from the prior quarter.

So we wanted to not just give you the absolute number but we talked a little bit at the workshop about as we built scale then that percent should drop, so we started reporting both this quarter.

And really the spend is pretty much in line with what we talked about, the workshop, and at about $8.9 million in the fourth quarter so overall I'm real comfortable we're coming in on plan as far as the spend.

And making good progress there.

6.7 in the first quarter of '07.

Okay.

And then what did you say the growth in international written premium was ex currency?

The growth written was up 6%.

Gross written but earned was up substantially.

Earned was up 15 ex foreign exchange.

Is that a material slow-down from where we had been running on an ex currency basis?

I mean, a way to think about all of these things, Ed, is, you know, the especially with the service contracts, you write the business and then it earns out after the manufacturer's warranty expires.

So, you can see things go up or down in a particular quarter from the economy, et cetera, but we feel quite good about our positioning internationally as we're adding more clients.

Yes, I just add to that, Ed, that I'm still very comfortable with our growth trajectory in international, you know, one of the things that is interesting, if you look at the U.S.

economy, and obviously what is going on here, obviously two of our bigger locations internationally are Canada and the UK, which tend to more closely mirror the U.S.

So our longer term vision as I talked about, is as we build scale in other markets around the world, and it will insulate us a lot more to any of the down-turns in any particular region.

And a good example of that would be Latin America.

I would love to have more scale already in countries like Mexico and Brazil, and we're working real hard to do that because, those economies are the things we care about consumer spending, consumer borrowing, are growing very nicely.

So we're working real hard to build a scale in those other regions.

But I'm still very comfortable with where we are in terms of growth, yes.

Thank you.

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

Hey, good morning, everybody, I've got a few here.

First, Mike, can you talk more about not even so long the receivables that--I don't know you reversed them, or whatever you did with them in Solutions?

What were those, and what line items might they have affected?

Yes, we set up a receivable for payments we'll get over the next six months, Steven, and Craig, I think, can give you a kind of more of the business context, but really this is a normal part of the business and, Craig, do you want to--

Absolutely.

Steven, what this is is a great example of the risk management process that we employ here that I talked about for several quarters, as I discussed, there is several ways we can improve client performance, we can change rates, we need to change terms and conditions of the contract, we help clients get higher attachment rates and ultimately we typically would have some type of contractual ability to do what we've done here, which is to change prospective commissions.

So that's really what the $11.7 million receivable represents this quarter, where we're recognizing six months of agreed-upon reduction in commission by several of our clients.

And, again, we're required by accounting rules to put that up in this quarter, as a receivable of, again, reduction of future commissions.

So, yes, I think the bottom line for me here it is a great example of when we need to do these things.

We have excellent relationships with our clients.

And, our clients generally get it that these programs need to be sustainable and viable long-term, and work very closely with us on really all of these ways to improve performance, but that is what the 11.7 represents this quarter.

I think, Steven, that it is a perfect example of our dual vision we have operating here.

In the short-term we have people with our core capabilities Craig mentioned focusing on the details of the business, where at the same time we have our vision on the long-term horizon of how can we do more with these clients, how can we bring in additional clients?

How can we identify more warrantable good niches?

And I think Craig and his team have demonstrated that they can operate with that dual vision.

No, no, I understand that.

I understand the risk management.

What I'm trying to get to is the mechanics of this.

Are these commissions that were already paid that haven't been amortized into expense yet that you will be getting back?

They're not paid yet but already accrued for them and now you're unaccruing for them?

No, we have an agreement with these clients that will receive a stream of payments over the next six months, and so because the stream of payments is definite and we can estimate it, we set up the receivable now.

So we'll get the money in over the next six months.

Okay.

But this does not reflect commissions that were, you know, retrospective commission basis--

No, no.

All right.

That is where I was going.

To fill out Keith's discussion of mortgage originations, it seems to me that mortgage originations have kind of a conflicting effect, if you will, and tell me if this is right.

Do more originations mean there will be new insurance which means that the TIV is going to go up on what you all are tracking.

On the other hand, it would seem to me that more originations, particularly refis might take people out of situations where you would be insuring them.

Before I turn it over to Gene, just a comment.

Long-term, if we look over this over the long-term, Steven, we think the social policy in this country is going to continue to be focussed on home ownership.

And so our eye is on the number of trackable loans, the number of mortgages outstanding, and how we get our fair share.

Okay?

So, right now that number we've identified for you is about 45 million trackable loans.

We think that number will grow historically over time.

You know, with that as context, I'll let Gene make a few comments.

We also believe that it is important that confidence be regained in the mortgage process, and we certainly believe that it is going to happen and there are going to be changes in business practices.

We've already seen that in the underwriting side, and that underwriting side, though, has limited significantly the number of new originations, and we think it is going to take some time before those come back and I don't think at this point we're too concerned that that's going to have a significant effect, certainly in the short-term around our continuing growth factors.

Okay.

And then just a quick one for Don just to fill in the topic of health turmoil.

I mean, I am actually a little bit surprised.

I thought more people were getting into your business, your sales were up.

You say that they benefited from health turmoil which is as an insurance analyst means to me that people are leaving because of poor profitability.

So what exactly do you mean by health turmoil here?

Well, I just think that, and I'll turn this over to Don, but I would make this comment, Steven, we have our approach has been to focus on a specialty business.

We've seen a number of players who are in a variety of markets in health care.

Okay?

Seniors, all that.

And they see the individual market as interesting and they enter.

They enter with the skills they've applied in the large case market.

Those do not work of and by themselves.

And so as a consequence I think that, I would define they've had a denominator problems versus a numerator issue.

In other words, they haven't been charging enough premium.

And I think what Don's folks have seen is that they're now making premium adjustments which make us relatively more competitive.

That is exactly right, Rob.

In the first quarter several of the large national players announced disappointments and referred to their difficulties in the risk-based businesses.

And so, therefore, we have seen some recent changes in the rates, and it reinforces insurance longer term perspective on the business that we have this intense monitoring cycle that occurs monthly and we stay on top of the emerging business.

Okay.

Great.

Thanks, guys.

Our next question comes from Adam Klauber of Fox-Pitt.

Morning, Adam.

Morning, Rob.

Thank you.

On the specialty property, the expense ratio seems like it settled in around 39%.

As volume continue to increase, is there potential improvement there, or are we at 4 right now?

Well, again, as I've kind of mentioned in previous quarters, we do believe that this is a scaled business, and we do believe that as we continue to ramp up premiums we will continue to achieve the benefits of scale, and certainly believe that there spa possibility that we could continue having good expense ratios and potentially improving.

Okay.

Thank you.

On the solutions business the premiums earned have rolled through as you ex-planed last year and at the workshop.

So that is good to see.

Now that we're seeing a reversal in gross premiums, which is somewhat expected, as we look at 2009, with the wag inherent in the contracts of this business, even if--even if the growth stays moderately negative this year, will the earns still be relatively positive next year?

Yes.

Craig, go ahead.

It should be, Adam.

You remember, we talked about particularly on the service contracts that these tend to be up to three to four-year contracts.

So, we have a nice bucket of unearned that despite some down-turn in the gross written premium you will see nice earnings flow through on the net-earned side.

Obviously our mission here is to--is to really focus on that top line, and as we talked about the service contract business, they really are four key growth drivers.

Rob mentioned it earlier.

We want to keep growing our existing clients, and we have seen some of that.

We had some of our clients in the first quarter, domestic service contract clients, that grew in the first quarter, largely because of our strategic program management, helping them at the point of sale.

If I look at our top line, Mike mentioned CompUSA had a big effect year-over-year on our top line.

Everyone is aware of Circuit City's downturn.

When we normalize those, we actually had some bright spots in the quarter in terms of top line.

But we want to get new clients and penetrate the market deeper, keep adding new products in the warranty space and, we're excited about new distribution channels.

We talked about jewelry, we're looking at the furniture business now, OEMs, lot of interesting niches that keep pushing out on the top line and the international piece.

Again, we still see great growth opportunities around the various international regions, and as I mentioned earlier we're particularly excited about some of the Latin American countries, particularly Mexico and Brazil.

Roll that up, while we certainly have pressures from the economy here, and as I mentioned, Canada and the UK tend to mirror us a little bit.

I'm still pleased our progress in the overall growth.

Our goal is to build a real stable-long-term growth platform.

I think Craig says it very well, one of the ways you can look at the numbers is to relate the growth written to the earned for the service contracts in particular, where, you know, written and earned tend to mirror over time and our written is substantially ahead of our earned in the service contract business.

Right.

Okay.

And finally, I know you prefer to do acquisitions, if the right ones come along.

If they don't, at what point are you going to turn around and start doing share buy-backs again?

Sure, well, I mean, as we've seed, we're-- on advice from counsel, we've concluded until the investigation is finished with the SEC, we're not doing buy-back, we are not exercised by that at although today, because we see plenty of acquisition opportunities and we think shareholders would prefer that we acquire businesses where we can grow earnings at attractive returns for them.

And so our M&A area is probably busier than it has been in some time, and, we hope that we're able to make things work on that side of things.

Great.

Thank you very much.

Our next question comes from Beth Malone with KeyBanc.

Morning, Beth.

Good morning and congratulations on the quarter.

Couple things, on the real estate partnership you had last year but not this year, is that part of the marketing conditions of real estate or is it a timing issue.

Let me let Chris talk about that.

He's best positioned to talk about that, Beth.

Hi, Beth, a couple of things, when we think about the real estate, the specialty asset class, there are two things that we're trying to accomplish right now.

The first is to grow the portfolio, and, again, the objective here is to perhaps maybe as much as double the existing 150 or so million we've got in exposure.

But the second thing is, and the key to the profitability of this asset class for us over the long-term, is our ability to be opportunistic.

And when you think about, the first half of 2007, the opportunities were clearly on the sell side, we sold into what we thought was an aggressively big market, carrying back in particular a lot of our office exposure.

A second half went through a period of what I call price discovery and that sort of spilled over to the first quarter of '08, where sellers are looking for 2007 prices and that is just not where the market is.

But we feel now given the strong operating cash flow, and the deal flow that we're seeing, which are really better properties on better terms, that we'll be able to take advantage of the opportunities on the buy side, further distribute the property, the exposure of the partnerships across the segments and down the road continue to deliver well-distributed investment income from sales.

Okay.

Thank you.

And then one last question on the solutions division.

Can you talk a little bit about your efforts to work with situations--it is obvious the economy is slowing, there is less demand for consumer products that is forecast, and how are you managing that like in the case of Circuit City, where, it is under some stress, how do you all manage that?

Craig, want to talk about that?

Absolutely, Beth.

There is a couple of ways and specific to Circuit City, obviously, they are a great partner and we're working real hard.

We believe that increasing service contract sales can be a big part of their rebuilding the company, and they believe that, so we work very closely together to help them.

So we generally view this as an opportunity with these type of clients right now.

But again I go back to these four growth drivers where we, I don't want to just ebb and flow with the economy, and we work very hard at penetrating our existing clients, even farther, which is working.

We have clients that are up in the first quarter, which is encouraging.

There is a lot of share we don't have out there, particularly in some of the niches.

We talked about our new wireless close with Cricket wireless at the workshop.

We're doing some new testing with people like Wal-Mart and some new markets, Canada, Argentina, et cetera.

Again, we're excited about new distribution, we're making headway into the jewelry space.

Furniture, RV, power sports, OEM, so we're pushing hard at all of these and not just waiting on the economy.

And I think Rob talked about dual vision earlier.

I talked to my group and we call it telescoping in that we try to focus in real hard in times like this on the profitability and making sure that we're constantly improving client profitability but pull the telescope back and look at the horizon out there for these other opportunities and niches and ways to grow the business.

Okay.

Thank you.

Our next question comes from Jukka Lipponen from KBW.

Back to the solutions and the growth outlook, can you discuss your expectations now for the domestic service contract business in terms of the gross premium trend, and I think in the past you felt like in prior recessions your business necessarily didn't decline.

Now we saw some of the premiums on the gross basis down in this quarter.

So can you give us color on that.

And also as a part of that, does the weaker economy improve or hinder your opportunities in winning new domestic service contract clients?

Craig, you want to comment on that?

Absolutely.

The two big impacts on our top line, the gross written, domestic service contracts are really Comp USA and the slow-down in Circuit .

As I just mentioned, at Circuit we're encouraged by, they're great partners, we're working hard to help them improve results.

Obviously that is good for both of us.

Comp I can't do anything about it.

It was a 130 stores, it was a big producer.

They closed those stores, and that will be a drain on us for this year.

It is hard to make up for that level of volume.

What is important for us is to peel back the onion and say what is happening beyond those two events we talked about publicly and, again, that is where I see encouragement.

We see clients up this quarter, which is encouraging.

Joe talked a little bit at the workshop about, there is parts of the service contract business that are still pretty healthy.

Flat panel TV being a great example where sales on those are still strong and it appears they will continue to be throughout the year.

So what we do in a situation like that is to really--is to really push at those product items specifically and how can we help our clients improve results on stuff that is moving.

The other big factor for us is the wireless space.

We're very interested in the wireless space.

We're obviously in it now.

I think gaining some momentum.

The good news is that we don't have much of that share, so we're going to continue to pursue the wireless phase real diligently.

On your second question in terms of the economy, and does that improve our position in terms of new clients, we really haven't seen that right now.

I mean, we have strong competitors, domestically, so, we haven't really seen a lot of opportunistic sort of things going on right now in terms of the economy.

At the client level, I tell you, one of the things that is interesting right now, we're anticipating some help here, but these tax rebates that are now getting in people's hands we're hopeful that people will buy more flat-screens with those.

We'll see how that

One point to add because, you know, I think we've been very diligent at applying those core capabilities while Craig has had all of this going on, he's also taken that global client management capability, and applied it internationally, which is going to help us.

But he has also held something to leverage that across the enterprise.

We just had a meeting with leaders at all of the different companies in how can we share those core capabilities and that is a good example.

We're getting people together on the call center side and seeing if we can improve our productivity there.

That is something that can help in Craig's area.

So we're always looking to tighten things down as much as we can.

To service our clients better during these times.

And Craig, can you give us an effort on your efforts in China?

Yes, it has actually been an exciting quarter for us.

We opened our service contract office in China and actually I believe just two weeks ago welcomed our new general manager to run our service contract company in China, and terrific candidate with lot of great experience.

It is exciting.

I mentioned this before.

What we see happening our ability to attract talent now in our international expansion is really improving.

It is hard when you're a start-up and not a known brand and new to the expansion.

Now we've been at it for six or seven years and starting to build scale and excitement around it and we're able to attract some talent.

We're in an active conversation with China with a number of retailers.

It is very early in the game so it is hard to predict when those clients will start to come our way.

But we're using the same template we used in other countries where we're going in on a very organized basis building our service network, putting our systems in, and basically getting organized.

So I'll look forward to updating you in the coming quarters on our progress there.

Lastly, Rob, any update you can give us on the SEC front?

Well, Jukka we continue to work work toward resolution there.

Obviously what we can do is focus on the things we can control.

I think we are being responsive there.

The SEC, we cannot control, and obviously they have lots of items, I'm sure, for consideration, and we need to understand that in terms of the things that they have on their docket.

Thank you.

Our next question comes from Vinay Misquith with Credit Suisse.

A few questions.

First on the number of loans, can you give us an update on how many prime and sub prime loans you track right now?

It remained relatively consistent with the previous quarter.

We're up--we're at about 26.5 million prime loans and around 4.125 sub prime loans.

That excludes the 630,000 lost--

That is correct.

And you need to plan to get 170,000 new sub primes on April 1.

That actually includes those 170 sub prime loans as well.

Sure.

And that you got on April 1 versus January 1.

We have loaded them into our systems as of now and we're starting to send letters and start produce premiums.

Okay.

Great.

And could you remind me as to whether you have agreements with the banks and the servicers for full displacement on the prime loans like you have on the sub prime policies?

I'm not quite sure I understood that.

Are you talking about real estate owned?

Yes, yes, because on your audio properties you have contracts with services to force place them for sub prime.

But I was wondering about on the prime side do you have similar contracts?

Right.

That really is somewhat of a mixed bag.

I'm not going to say we don't have contracts, because we actually do have contracts with some producers.

Generally, though, a lot of the sub prime loans may be loans that are held actually by Fannie and Freddie who kind of have their own programs.

And some of those that are still prime loans that could be securitized with other third parties, yes, we might have their REOs.

But in general most of the REO programs we have are related to our sub prime producers.

So if we see up tick on the prime side we shouldn't presume that, you know, that you guys are going to benefit significantly from that.

Correct?

Well, I--as we have seen, we have seen some increases in penetration, and it is one of our growth drivers, even on the prime side, so as delinquencies and foreclosures rise, we are getting some foreclosure activity, but even as delinquencies rise, we're getting some increases in penetration, not likely to the extent that we have seen it, though, on the sub prime side.

Fair enough.

And one last question.

On the extent of the warranty business, what is the combined ratio on the domestic side, excluding the favorable client settlement?

I believe the number is right around 100.

Say the question again, excluding the settlement it was about 100.6.

Sure, and your target is high 90's, so you're pretty close to your target and maybe you have one or two contracts underperforming but that should be sort of back to normal pretty soon?

Yes, Vinay, this is Craig, that's right.

We still, I mean, I think about our risk management process on the service contracts, it is a continual process, and it is the nature of this business.

I mean, you have to be really good at this to hit your profitability of targets over time in this business and that is what we do.

There will always be clients that are performing better than expected and others worse than expected.

It is our ability to identify those things, work on them and quickly get plans in place to resolve it.

Obviously.

So a big example this quarter with a big receivable we put up but we're constantly looking at the rates, the terms and conditions, how can we improve the administrative process, expenses, how can we help with penetration, at the point of sale.

All of these factors really build into the ultimate profitability and so that is a continual process for us, and, again, just a big part of our core competency is to continue to invest in the risk management component.

Thank you.

Our next question comes from Tom Cholnoky of Goldman Sachs.

Morning, Tom.

Good morning, everybody.

Just a couple of small questions and I don't know if you've disclosed this in the past, but can you give us some sense of how much Comp USA may have hurt you in the quarter and what kind of comparisons are we going up against in terms of the business you had with them?

Yes, Tom, we don't disclose the client-specific percent but what I can tell you they were a nice-sized client.

Obviously with 130 stores, that is a meaningful, piece of business and they had been a good client for a long time.

What I will tell you, when I peel back the onion in the quarter, if I saw it normalize Comp USA still being here and sort of where we , Circuit was and where we hoped they would be in the future as we continue to work with them, when I peel those two back, there is a lot of encouraging signs even on our top line.

So, again I don't want to discount the pressure of the economy out there and obviously retail sales have slowed, but I go back to those four drivers and, you know, our service contract team, and a number of you got to meet some of the team at our workshop, they are very energized around these four drivers and working hard to make all of them

But let me try to ask maybe a question differently then.

As we go through the next couple of quarters, did your Comp USA business steadily decline in the latter half of '07 so that it should be less of a headwind for you in terms of comparisons?

It did decline in the latter half of the year but, obviously when--

I know when you go to a full closing.

Right.

So, no, it is out there for certainly the rest of this year.

Okay.

Year-over-year basis.

I think the other thing, Tom, is again, just like with Gene's business, Craig is aligned with a lot of the industry leaders and what we hope is that the people who were going to Comp stores go to one of our other client stores and purchase something.

I hope so, too.

The other two questions I have, Rob, I think you've mentioned in passing that, you know, Balboa might be an interest.

Is there anything there, any update potentially?

Yes, I mean, certainly that is a business we would be interested in, saying that, I think until, things between B of A and Countrywide close, I don't think there is going to be a focus by B of A on what they might do with that.

Gene, you want to comment on anything further?

Yes, I would just tend to agree with that.

I think, even in that case, though, we still have to evaluate what we would have to pay for that business, versus our ability to win the business.

Yes.

And we'll continue to do that, certainly.

Right.

And then I guess, finally, I know you're coming up to your cap program.

Any kind of initial census from your broke curse on what you might expect in terms of the renewal process?

Well, yes, certainly.

I would love to comment on that.

We're actually very excited about our reinsurance program this year and, again, kind of our disciplined execution around risk management, and that's a big component of it.

As I've mentioned, we did place about half of our program as of January 1, and we were very happy, because we were able to, you know, not only fill out our top end, but we were able to keep the retentions at similar levels to what we had previously.

Coming up June 1 now, we will be going out for the rest of our program, both on the per-occurrence, as well as any sort of cat aggregate we may get.

Again, protecting our core balance sheet, but then opportunistically buying to the extent wee feel like we're getting good pricing for the risk transfer.

Again, I think we're excited about that.

We've had meetings with many of our current reinsurance, as well as some further prospect reinsurers.

We believe the capacity is available, and we believe that the pricing is going to be good, flat to better.

So I think we're excited about the reinsurance prospects, excited about our program, and I think, you know, we'll be able to share that with you, you know, sometime in June consistent with what we've done with you, and in previous years.

Right, just as a reminder, where is your per-occurrence right now.

Per-occurrence net has been at 90 million.

90 million.

Great.

Thank you.

Our next question comes from John Hall with Wachovia.

Good morning, John.

Morning, Rob.

Real quick, I was wondering if there were any reserve releases to speak of in specialty property line of business, and I've got a couple follow-ups.

No, there is nothing out of the the ordinary, John.

Great.

There has been a few stories out there in the press, mostly anecdotal, about the condition of properties that are coming in or out of foreclosure.

Are you seeing anything out there to support what they're talking about in terms of appliances leaving and properties being treated or mistreated?

Go ahead, Gene.

This was a product we have been writing for a number of years, and again I think our primary focus there is to, again, focus on maybe the combined ratios associated with that product.

So we will run slightly higher loss ratios in that product line, but we have less expenses associated with it, as well.

And we have many triggers that we can pull.

Number of these policies are monthly policies, what gives us the opportunity to adjust rates.

We also have numerous programs associated with the deductibles, and we can increase deductibles to the extent that we need to, and, lastly, we're actually not covering contents, so some of those issues that you're hearing about would not be our liability, to begin with.

Got you.

So appliances with legs.

Yes, there are certain things.

The copper pipes we cover.

Got you.

And then this finally, the loss experience in that business has been very good.

Obviously there has been some favorable catastrophe experience along as well.

You address sort of a scale factor around the expense ratio.

Is there any scaling, positive scaling issues associated with the loss side of the equation?

Well, I think that when it comes down to losses, I think obviously we've been very pleased with the results.

Again, I think around our risk management capabilities and our strengths there, we focus a lot on the spread of risk, and I think that has helped us, particularly in light of even some of the weather events that we had here in the first quarter.

So I think that has helped.

Great.

Thank you very much.

Thank you.

Our final question comes from Dan Johnson of Citadel Investments.

Morning, Dan.

Good morning.

Let's see, couple remaining questions related to the economy, John already asked about the vacant house losses.

Let's look at two others, please.

How do you see the environment, higher unemployment scenario, impacting two areas.

The first one is what have we seen historically with individual health sales?

And then secondly, within solutions, you have some products that are sensitive to unemployment trends that are some level of concern that as unemployment ticks up that you could see some--some increased losses from those products.

Could you talk a little bit about sensitive those products are to unemployment trends.

Thank you very much.

Certainly.

I'll start out, this is Don.

Historically there has been a slight positive impact on the Individual Medical business from increasing unemployment that does tend to generate a few more people starting their own business, moving to new companies.

Although it is not a significant driver it seems to be a slight positive as the economy gets a little bit worse.

Health care is one of those products that people are really focussed on maintaining the coverage for.

It is Craig.

Let me talk about the solutions piece and I think what you're referring to is that we include in our bundled credit insurance debt the product and unemployment coverage component and historically that has not moved a lot with unemployment trends.

It would have to be a very dramatic shift in that to really move the needle a lot on the loss ratio there.

And really for a couple of reasons.

One, what we tend to do, our general trend has been to get higher penetration rates where people are more aware of the economy and more concerned about losing their jobs.

We also see balances going up on credit cards which drives more premium obviously through our system.

But then ultimately, these are pretty mature product lines, and most of this business is reinsured, so we're not really on the risk of most of this business.

Most of it reinsured back to the issuer or third party--

Typically to the financial institution, yes.

Okay.

And, Dan, you know obviously our benefits business is--can be impacted by unemployment as well.

John, do you want to comment on that, as well.

Sure, Rob.

His historically the disability business has been impacted by changes in unemployment .

If you look back over the prior two recessionary periods, most of the impact, change in claim incidents, occurred in large cases, cases in over 1,000 lives.

And I believe that our focus on the small-case business is going to insulate us a lot from that.

The other thing that we pay a lot of attention to, too, is not having much exposure in any particular SIC code or geographic area.

And our two largest exposures, and again they're small, in the low teens, are in education and the health care area.

Both of which should not be impacted by these trends.

So I feel like the strategy is working for

Dan, it is Craig.

Let me jump in on solutions real quick because I think an interesting point on we call it IUI coverage here.

It is a real big product horse of our global strategy and while it is not really growing domestically, our knowledge, as I was just talking about, what happens in these trends is real helpful to us as we take this product to new countries and be able to price it where there is concern and uncertainty about how to do that.

We're able to leverage 50 years of data and experience on this, in other countries.

Great, thanks very much for the answers.

Okay.

Well, we're pleased to be off to a strong start in 2008.

The enduring quality of our diversified specialty insurance model continues to produce excellent results for our shareholders.

We will manage our short-term challenges while we continue to focus on pursuing growth opportunities with our eyes on the long-term horizon.

We thank you for joining us today and look forward to updating you on our progress.

This does conclude Assurant's first quarter conference call.

You may disconnect at this time.