Assurant Inc (AIZ) 2008 Q3 法說會逐字稿

Welcome to the Assurant third 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 session.

(OPERATOR INSTRUCTIONS) Thank you.

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

Melissa Kivett, Senior Vice President, Investor Relations.

Please go ahead, Ms.

Kivett.

Thank you, operator.

Welcome to Assurant 2008 third quarter earnings conference call.

Joining me with prepared remarks are Rob Pollock, President and CEO of Assurant; Mike Peninger, our Interim Chief Financial Officer; and Gene Mergelmeyer, President and Chief Executive Officer of Assurant Specialty Properties; I'm also pleased to be joined by the other members of our senior leadership team, Don Hamm, President and CEO of Assurant Health; Craig Lemasters, President and CEO of Assurant Solutions; John Roberts, President and interim CEO of Assurant Employee Benefits; 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 our third quarter 2008 financial results.

The press release, as well as corresponding supplementary financial information may be sound 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 caution you about relying on these forward-looking statements and direct you to consider the discussions of risks, and uncertainties associated with our business, and results of operations contained in our 2007 Form 10-K and subsequently filed Forms 10-Q and 8-K including this morning earnings release which all can be accessed from our website.

The Company undertakes no obligation to update or revise any forward-looking statements.

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

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

Now I would like to turn things over to Rob.

Thank you, Melissa.

Good morning, everyone.

Thank you for joining us today.

During a period of unprecedented capital markets volatility, and a massive hurricane season Assurant demonstrated resilience and served its customers by staying the course and executing its diversified specialty strategy.

Our business model anticipates hurricane activity and we mitigate risk with a comprehensive reinsurance program.

In comparing results to last year, remember, that both Gustav and Ike were significant storms, and we had no reportable hurricane activity in 2007.

We continue to focus on building long-term value for our shareholders.

Saying that, we are happy to have the third quarter behind us.

Assurant is not immune to the volatility experienced in the credit markets or the economy.

Rest assured we are taking steps to minimize the down side impact with an eye towards maximizing opportunities that may develop to better position the Company moving forward.

Before I provide an overview of the businesses, let me begin by reviewing our conservative investment philosophy and our solid capital position.

The investment portfolio experienced losses due to sales and impairments on certain issuers.

Rising credit spreads led to significant increases in unrealized losses.

Our losses are consistent with the performance of the overall credit market, and the portfolio remains fundamentally solid.

Going forward, there are several reasons we believe our portfolio is well positioned to weather the current market volatility.

First, we have little exposure to many of the asset classes that have contributed to the ongoing credit crisis.

For example, we own no credit default swaps.

Second, our mix of business is dominated by non-callable liabilities, reducing the risk that we have to sell assets at today's market prices.

And third, our asset leverage is low in comparison with traditional life insurance companies.

This quarter, we have introduced additional disclosure on our investment portfolio in our financial supplement.

We believe it highlights our conservative investment philosophy.

Turning to our capital position, we began the year with $250 million of excess capital.

We believe we will end the year with about $200 million of excess capital.

This estimate does not include fourth quarter activities, such as acquisitions, hurricanes, or change in credit markets.

It does reflect changes in dividend capacity related to portfolio losses through October 24.

Our capital management strategy will continue to follow the course we have charted for you.

That is, we will use our excess capital to make acquisitions or return it to our shareholders in dividends or the repurchase of our shares.

Our diversified businesses continue to generate earnings that provide dividend capacity after meeting any requirements that support their growth.

In addition to our excess capital, our low debt to capital ratio provides us additional flexibility.

Recent market conditions contributed to our decision to complete acquisitions with cash.

But future acquisitions could be financed, and our balance sheet can support a higher debt to capital ratio.

Like others, we hope the credit spreads return to historical norms or at least closer than they are today.

Our revolving credit facility and our commercial paper program have not been used, but provide $500 million of capacity.

So although we are currently in an excess capital position, we continue to evaluate all options so we maximize our capital flexibility as the market and opportunities evolve.

Now let me provide some color on this quarter's business results.

In Solutions despite the pressures of the retail environment, net earned premiums continue to grow for this quarter and nine months.

Earnings for the quarter were below our expectations due to less favorable loss experienced domestically and internationally.

The global economic environment is translating into a slowdown in the sale of goods to which we can attach a service contract.

We are working hard to soften the impact of this trend by acquiring new clients and helping current clients increase sales.

This quarter, we announced two acquisitions in areas we have targeted for growth within Solutions.

The acquisitions of GE's Warranty Management Group, and Signal Holdings, a leading wireless logistics and repair company will enhance our competitive positions in their respective markets.

Moving to Specialty Property, our results reflect an active storm season, which reduced net operating income.

However, employees once again responded quickly and compassionately to the thousands of customers affected by the hurricanes during the quarter.

Gene Mergelmeyer will provide a detailed review of Specialty Properties quarter and outlook shortly.

At Assurant Health, we continue to operate in a challenging environment.

Historically, the individual market is grown when people lose coverage under group plans.

However, due to the severity of the current economic environment, we have not yet seen the growth in the insured individual medical market.

We are pleased that our new individual medical product portfolio has been well received as demonstrated by our individual medical sales increasing over the second quarter.

We continue to focus on improving the strength of our comprehensive product portfolio and extensive distribution capabilities.

We were very pleased to announce a two 10-year contract with State Farm for exclusive distribution of Assurant's individual and short-term medical products.

Assurant Employee Benefits delivered strong results and continues to build momentum by delivering value in the small Employer Benefits market.

Despite the economic slowdown, Employee Benefits experienced favorable loss experience and good persistency.

We are also pleased that premiums excluding the impact of closed block acquisitions, have increased over 2007 levels in each quarter of 2008.

So in summary, despite a challenging quarter, we demonstrated resilience enabled by our diversified specialty strategy.

We continue to focus on building long-term value for our shareholders.

I will now turn the call over to Gene Mergelmeyer to discuss Specialty Property.

Following Gene, Mike Peninger will review our other businesses for the quarter.

Gene?

Thanks, Rob, and good morning, everyone.

The level of net income for the quarter, despite the high level of catastrophes demonstrated the value of our risk management expertise and the strength of our differentiated business model.

Assurant Specialty Property net in operating income was $30.9 million for the quarter.

Results were driven by an active hurricane season resulting in $86.2 million after tax of reportable catastrophe losses, net of reinsurance from hurricanes Gustav and Ike, and $8.6 million after tax of reinsurance, reinstatement premiums.

The decline over prior years was magnified by the fact that 2007 was an exceptionally mild hurricane season.

We also experience related increases in general expenses, including state catastrophe assessments and increased costs associated with hurricane-related services.

Underlying results excluding the catastrophes were strong.

Despite hurricane losses of $97.7 million, net of reinsurance for the nine months, and no reportable cat activity in 2007, net operating income was up 3% to $286.7 million for the first nine months of 2008.

As a result of growth in current or placed insurance, we have increased our invested assets, resulting in higher investment income.

The hurricane activity demonstrated the value and effectiveness of our 2008 cat reinsurance program, and our core capability of risk management.

Our reinsurance coverage provided for $61 million of recoveries on an estimated $194 million of gross losses.

In addition, the storm activity recorded in the third quarter was sufficient to satisfy the frequency and deductible requirements of the third layer of our reinsurance program.

Our catastrophe aggregate reinsurance program will now generally provide first dollar coverage of up to $40 million of claims for each of the next two hurricane events that could result in more than $10 million loss.

Obviously, we're hopeful we won't use this coverage, but hurricane season does run through November 30, and this demonstrates the come press release comprehensive risk management programs that we put in place.

Let me now discuss the positive results we continue to see from the primary growth drivers.

Average insured values rose to $173,000 in the third quarter of 2008.

Compared to $151,000 in the third quarter of 2007, and $170,000 in the second quarter of 2008.

This increase was partially driven by an increase in real estate-owned premiums, which now represents 23% of our creditor-placed premiums.

We continue to see growth in placement rates with both the prime and sub prime penetration rates increasing.

Albeit, at a lower level.

Both remain within the overall ranges we have previously provided, namely 6 to 15% for subprime accounts, and 1 to 2% for our prime accounts.

Our average policy premium has grown to $1,800.

This is a very dynamic time in the mortgage market as you know.

And we have seen changes in the ownership and consolidation of many service loans.

We estimate that with our strong market position, that we'll be able to maintain tracking and placement of over 5 million loans that are currently going through market consolidation.

While we did lose a net 130,000 prime loans, and 60,000 subprime loans in the third current quarter due solely to market consolidation, we strongly believe our alignment with market leaders should continue to position us well in the long run as these services are likely to be in the best position to purchase and originate loans in the marketplace in the future.

Specialty Properties net earned premiums increased 15% for the quarter, and 27% for the first nine months of 2008 despite additional reinsurance costs of $26.6 million for the quarter, and $17.5 million for the year, including the $13.2 million of catastrophe reinsurance reinstatement premiums, compared to none in 2007.

Gross written premiums in the quarter increased 16% in the third quarter, and 22% from the first nine months of 2007, driven by the growth factors that I discussed.

If you are watching our growth trends sequentially, let me point out that it there can be variability in both net earned premiums, and gross written premiums due to the timing of new clients or loan losses and premiums written or cancellations we recorded on the loans that are gained and lost.

Absent these events, we did see sequential growth in net earned and gross written premiums, consistent with our increase in the growth drivers, but at a lower rate than in previous quarters.

The third quarter demonstrated the vital protection provided by our products.

We believe that we provided industry-leading service on claims resulting from hurricane activity by quickly responding to and settling claims reported.

We have currently closed over 94% of claims related to hurricane Gustav, and 90% related to Ike in our credit placed home owners business.

I'm very proud of all of the Specialty Property employees who were there for our clients and their customers in their time of need.

We continue to monitor and participate in industry discussions on how to help stabilize the mortgage markets.

While it is difficult to predict the timing and impact of various changes in government programs that are currently underway, Assurant Specialty Properties unique business model is still well positioned.

We can benefit from our alignment with industry leaders, and are continuing to see growth in our business.

Working closely with your clients we focus on applying our risk management expertise, and leveraging our smart core knowledge to benefit our clients and their customers.

Now I would like to turn the call over to Mike Peninger.

Thanks, Gene.

In the face of a quarter characterized by heavy catastrophe losses Assurant Specialty Property performed admirably and maintained its leading position in the creditor-placed market.

Before I turn to the operating results of our remaining businesses, since portfolio questions are on everyone's mind in the current environment, let me add a few moments on our portfolio to supplement Rob's earlier remarks.

Our new investment disclosure breaks out our exposure by issuer and industry type.

As of September 30, our investment portfolio had an average quality of 8.2, and a duration of just over six years.

We have maintained a consistent investment philosophy that emphasizes matching our portfolio characteristics with those of our liabilities, and have avoided many risky asset categories like credit default swaps.

As of September 30, 2008, 98.4% of our financial assets were classified as either level 1 or level 2 under GAAP accounting rules which means that they have observable market prices and are easily valued.

That is consistent with our conservative investment philosophy and adds transparency to our balance sheet.

To further reduce the risk in our portfolio, we scaled back our securities lending program by nearly $200 million to $343 million or 2.5% of our investments at September 30.

Since the end of the quarter, we have continued to reduce the program and it currently stands at about $250 million.

Now let's review our consolidated results and the results from each of our other specialty businesses.

Overall net operating income for the quarter declined by 58% versus the third quarter of 2007, driven primarily by the catastrophe losses in specialty property that Gene discussed.

Net earned premiums increased 5% for the quarter compared to 2007 due largely to growth in several of our key targeted growth areas, including creditor-placed home-owners, extended service contracts, and (inaudible).

Our net loss of $111.4 million for the quarter was primarily driven by net realized losses on investments as well as the catastrophe losses.

At Assurant Solutions, net operating income declined by 45% versus the third quarter of 2007 to $20.4 million.

Results for the first nine months of 2008 included $0.8 million after-tax of investment income from real estate partnerships compared to $10.2 million after tax in the same period of 2007.

The domestic combined ratio rose 380 basis points to 104.7% for the quarter.

Roughly two-thirds of this increase relates to the acquisition of the Warranty Management Group, from GE, which we purchased during the quarter for $140 million.

In a separate transaction GE paid us $115 million for the assumption of certain contractual obligations arising from our prior relationships.

As a result of these transactions we acquired intangible assets of about $126 million, established about $15 million of goodwill on our balance sheet, and recorded a $7.7 million after-tax charge to third quarter earnings.

While we have had excellent working relationships with GE for a number of years we are very excited about the new opportunities resulting from the Warranty Group acquisition.

We can now work directly with clients and control the underwriting, servicing, and administration of the warranties, and the long-term GE marketing agreement gives us a strong marketplace presence.

By eliminating the commission previously paid to GE, we expect to improve our combined ratio on the business which will help drive toward our targeted domestic combined ratio that's in the high 90s.

Internationally the combined ratio increased 330 basis points to 105.6% in the quarter.

240 basis points of the increase was caused by additional expenses in our developing countries, which increased to $13.1 million, compared with $7.4 million in the third quarter of 2007.

Expenses increased due to additional staff hires, systems development expenses, and marketing costs to support our local operations.

Over $1 million of the increase reflects increased activity in China.

Our international operations faced economic challenges during the quarter that were similar to those in the United States.

We saw less favorable experience in the United Kingdom in particular, driven by deterioration of the economy and spiking unemployment rates.

In spite of the economic difficulties in the UK, we are pleased to report that the 2007 acquisitions of Swansure Centerpoint are performing in line with our expectations.

As a reminder, these companies were acquired to expand our presence in the underwriting and distribution of mortgage payment protection and building and contents insurance in the UK.

Integration activity is proceeding faster than we had planned and we have been able to reduce annual operating expenses accordingly.

While sales are down due to economic difficulties, our profit expectations are being met and the business is modestly profitable this year.

The increase in solutions net earned premiums for the quarter and nine months were driven by the continued growth in our domestic and international service contract business, and growth in preneed.

Primarily driven by a tough retail sales market, including the closing of CompUSA stores, domestic gross written premiums declined for the quarter and nine months.

International gross written premiums were up primarily due to strong growth in several countries, with Canada showing particularly good results.

Our acquisition of Signal Holdings, which closed in early October, gives us a great opportunity to expand into the wireless market.

This is a growing market with only one large competitor, and we feel that our value proposition is compelling.

We purchased this business for $250 million in cash, and are finalizing the valuation of intangible assets acquired.

We expect the transaction to be accretive to earnings starting in 2010 and we will give you more information on it during our fourth quarter call.

The Signal acquisition demonstrates our ability to strength our specialty businesses by deploying our capital in a targeted growth area.

The recent acquisitions have strengthened Solutions marketplace position both domestically and internationally and give it the tools to compete successfully even in a slowing retail sales environment.

Assurant Health results this quarter reflect a challenging marketplace.

Net operating income was down versus 2007 due to continued premium declines for small group and less favorable loss experienced in individual medical.

Individual medical membership declined 8% from a year ago, and was flat from the previous quarter.

Lapse rates have been slightly higher in a market that looks as though it is not expanding coverage.

We were pleased that individual medical sales are up 12% over the second quarter.

We believe this increase indicates a positive reception for our new product portfolio, which focuses on allowing individuals to take control of their own health decisions.

We believe that one of our competitive advantages is our strong national distribution system, which reaches more than 165,000 agents.

The expansion of our exclusive national alliance with State Farm, whose dedicated agents reach one in every four households in the United States will benefit both partners over the long term.

We also continue to enhance our direct to consumer capabilities.

We have increased our television commercials, and Internet advertising, and have recently seen sales increase in this distribution channel.

We believe that Assurant Health has the right risk management distribution and administrative capabilities to create long-term value for our customers and shareholders in the dynamic healthcare environment.

Assurant Employee Benefits had a solid quarter.

Results for the third quarter of 2008 improve due to more favorable loss experience compared to last year.

Strong disability and life results were partially offset by less favorable dental experience.

Results for the first nine months of 2008 are down versus 2007 due to lower investment income from Real Estate joint ventures, and less favorable loss experience.

Investment income from real estate joint venture partnerships declined $9.2 million after tax in the first nine months of 2008, compared to the first nine months of 2007.

Total net earned premiums decreased for the quarter and nine months, however, excluding single premiums from closed blocks of business, net earned premiums increased for the third quarter and for the first nine months of 2008 due to continued strong sales and improved persistency as we focus on our small case strategy.

In corporate and other, the net operating loss increased for the third quarter primarily due to $4 million of expenses due to a change in certain tax liabilities, along with lower investment income.

Changes in tax liabilities in this segment can very substantially from quarter-to-quarter.

We incurred $2.1 million of after-tax expenses related to the SEC investigation during the quarter.

However, we also received a reimbursement of $2.1 million after-tax for certain previous SEC investigation expenses covered by our D&O insurance policies.

Net operating losses increased for the nine months as a result of a decline in investment income, an increase in severance and previously disclosed plant expenses and an increase in expenses related to the ongoing SEC investigation.

Turning next to our balance sheet.

Our total assets as of September 30, 2008, were $25.4 billion, and total shareholders equity, excluding accumulated other comprehensive income or AOCI was $4.2 billion, up 4% from year end.

Book value per diluted share excluding AOCI from 6% to $35.60.

Our debt to capital ration excluding AOCI was 18.9% versus 19.7% at year end 2007.

Our ratio of investment assets excluding cash and equivalents to shareholders equity including AOCI, an important measure in the current climate is 3.4 to 1.

In summary, this was an extremely challenging quarter.

While the challenges are not likely to abate quickly, they also offer significant opportunities.

We will continue to take steps to minimize our risk while maximizing performance as we execute our specialty business strategy, which will deliver strong results for our shareholders over the long term.

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

Thanks, Mike.

Operator, we're ready for questions.

(OPERATOR INSTRUCTIONS).

Your first question comes from the line of Jukka Lipponen.

Good morning.

Good morning, Jukka.

Couple of questions.

I'm sorry if I missed this, I had to step off the call for a second, but in Solutions the expanses in your developing countries, can you review how high were we running and how much higher than sort of the normal run rate?

Yes, they were $13 million, $13.1 million, Jukka, and I talked in my comments about systems expenses and we're adding staff in those countries, and marketing, and in particular, the expenses in China increased during the quarter because we're -- we're gaining some traction there.

I'll maybe let Craig amplify on that a little bit.

That compares a year ago third quarter to $7.4 million and I believe $10.1 million last quarter.

I talked about in the past, one of our challenges as we expand into new countries is really the timing of our expense and our spend to really gear up for business versus that business coming on, that's what you are seeing now, so a lot of this has resolved around good news, where we see opportunities in some of these developing countries and are adding staff more quickly now and as Mike said spending money to get the system work finalized, and then the final piece of it is the incremental spend in China.

And again, that's all around the fact we can gear up in the service contract business faster, as we prepare our insurance license which will still take some time.

So we're really gearing up there for the services business in China.

And Gene, the loss ratio in specialty property ex cats moved up a few points sequentially.

Can you give us some color on what was going on there?

Sure Jukka.

In addition to the reportable cats, this was a pretty active season in general.

I'll remind you that we also had some smaller storms like Dolly, and Faye, and actually some other ISO-activities that did elevate that reportable cat loss ratio a bit as well.

The other thing to mention is the numerator -- or denominator -- excuse me Jukka, has been brought down because of the reinsurance reinstatement premiums we pay.

And lastly, what is the current excess capital position?

And can you give us an update on -- you had previously talked about AMBest reducing the capital charge for growth, but you were going to look at that sort of once we get a better handle on the cats.

Sure, I covered a bit of this in mine, Jukka, but in essence what we said is we anticipate we'll end the year with slightly over $200 million in excess capital.

I believe that in those numbers, we have reflected activity that's taken place on the acquisitions to date, and we have also tried to reflect issues around dividend capacity related to the -- to the realized capital losses.

Actually through last Friday.

Chris, do you want to expand on that a little bit?

Well, yes.

Jukka, the -- as you can imagine, not only was the third quarter the worst quarter for the bond market in 20-something years, but it's become -- it's been no less challenging since then, and what we're attempting to do here is make sure that we reflect that in the dividend capacity as some of the -- of the entities.

The other thing that your comment about property, based on our conversations with AMBest and the discussion of how to appropriately measure growth on the property side, we estimated that we'll be able to access, roughly 50% of the after-tax profit in that entity on a regular basis.

Now having said that, as you can imagine, the -- with the difficulties in the investment environments, all of the rating agencies are reviewing the capital charges associated with the investment side, and, it's possible, though, we don't know at this point, but it's entirely possible we'll see some changes in that going forward.

As you know, AMBest who we capitalize to adjusts their models on an annual basis, and we would expect some time either late this year or early '09 that we'll see some changes, which we'll adjust to as well.

Thank you.

Your next question comes from the line of Keith Walsh with Citigroup.

Good morning, everybody, how are you?.

Good.

I'm just a little unclear to follow-up on Jukka's question.

When you guys mention the $200 million of excess capital, is that including the, roughly, half of earnings from Specialty Property that we were expecting to be dividended out?

Yes.

Let me talk you through it, Keith, and -- from the beginning of the year.

Maybe this will help.

We started the year 250.

We said from the other businesses after all of the expenses we had given a range of 170 to 230, so let's just choose 200 there.

For illustration we have used 200 out of property, so that puts us at 650.

Okay?

Yes.

We made a couple of acquisitions that we talked about that represent 250 and 25, we have done some share repurchase.

That gets us somewhere in the neighborhood, I believe, of 315.

All right?

We're now saying 200 because we have looked at all of the capital market activity through last Friday and have adjusted the number down.

Okay.

So that's including losses as of?

Last Friday.

Last Friday.

Okay.

And then -- so I guess the capital position, to be fair, going forward, that 200 could potentially shrink if we continue to see what we have been seeing through the end of the fourth quarter?

Or it could go up if you see a recovery in credit markets.

And then just maybe a broader question, with your stock off 20% right now and trading at 75% of book, which I think is the lowest multiple it has ever been at since you have been a public Company.

Maybe thinking about what is the philosophy buying back stock versus acquisitions going forward, number one?

And number two, in what kind of scenario could you picture you guys not earning a 15% ROE on the mix of businesses that you have?

Thanks.

Okay.

In terms of share buyback, we like having share buyback in the tool kit, we did buy back during the quarter under a private transaction, and, we want to be in the position to buy back shares when we think it is appropriate.

Our capital priorities on the other hand, as we have outlined, are first to build the businesses, and we have executed on that with a couple of acquisitions this quarter, and we are mindful that there are going to be more opportunities available to our -- to us, given just the disruption in the markets.

I think your last question related to the 15%, I think that -- if we look at a year to date ROE number, I think we're still above that threshold, Keith, including the hurricane activity that's taken place in the quarter.

I guess, Rob, just to follow-up on the acquisition, it just -- I don't understand why you would even consider doing deals right now over share repurchase with your stock where it is?

If you could just address what any -- maybe getting in to a little more color, what the incremental return on $1 of cash buying your stock versus doing a deal right now?

It's an excellent point, Keith.

I think we have been focused, and we'll go back and I'll have Chris comment on it, because we do have a way of looking at these things.

I guess that our capital priority order has been focused on building the value of the enterprise.

You point out correctly at these levels that the stock is very, very attractively priced, and we'll certainly take a look at all of that.

Chris?

Yes, I guess the way I kind of think about it in broad terms is we just think about our stock as, potentially as currency, and the ability to buy a Company at a lower exchange rate, if you will, priced to book relative to where our stock is trading is going to factor in to our decision as to whether to implement -- go with the current priorities, which is to do acquisitions ahead of share buyback, but if that changes, we'll adjust our capital strategy accordingly.

Maybe if I can amplify, when we look at any acquisition activities, we looked at cash returns first, Keith, and try to make sure we're doing good deals there, and we would certainly compare returns on both a cash and a GAAP basis to the economics of repurchasing shares when we do that.

Okay.

Thanks.

Your next question comes from the line of Mark Hughes, SunTrust.

Thank you.

Good morning, Mark.

Anything relative to persistency in the specialty property business?

Are any subgroups rolling off faster recently?

And maybe just as part of that, of the bank, the ROEs, have they picked up the pace in terms of their sales of those properties that they are stuck with?

Yes, let me make just a couple of high-level comments and then I'll turn it over to Gene, but one of the things I start with is, the way our model operates first is, we're placing a policy today on something that may have become effective a month or two prior, so our business model is a bit of a logging indicator in terms of how things work, Mark, and we've -- we've kind of identified different groups of people who get the policy.

Some of them when notified work hard and work out as quickly as possible.

Others stay on the policy for longer periods of time.

So all of that can factor into the mix, some.

Gene, do you want to amplify further?

Just for -- a little color around that, Mark.

The average duration of our expired policies is continuing to increase, so we're continuing to see an average duration increase as well as on our in force, the life to date is continuing to increase.

In terms of banks and REO, it's being treated differently on a case-by-case basis.

We did see some slowdown in some of the foreclosure activity.

Some of it may be temporary.

I think a number of states enacted a 30-day waiting period.

So we are seeing some get more aggressive and doing some more sales through auction.

But others are actually starting to rent out some of their REO properties, so it is across the board, it remains to be just exactly what is going to happen going forward.

Thank you.

Your next question comes from the line of Steven Schwartz with Raymond James.

Yes.

Good morning, Steven.

Hey, good morning, everybody.

A number of them, if I can.

Following-up on just quickly the foreclosure slowdown, if you will, is that necessarily a -- I don't want to say good thing, because you don't want to profit from people's misery, but is this necessarily a good thing or a bad thing?

It would seem to me that once in foreclosure, you have a better chance of losing that loan than if it just remains out but remains delinquent.

Maybe you can talk to that.

Well, we continue to really monitor all of this closely.

It's certainly difficult to predict exactly what is going on.

We -- in terms of -- there's conflicting effects that are going on by a number of the macroeconomic factors, as well as some of the initiatives that are being put in place today by some of the governmental entities.

We are trying to just stay focused on our clients.

We believe we're well positioned.

With our industry-leading -- and our industry leadership.

So, we're working with them.

We're working with the housing policy council, Fannie and Freddie, and really trying to support them through these troubled times.

We think that that is ultimately just going to continue to improve our relationships with them and continue to set us up for the future.

Following-up on the Fannie and Freddie comment, there has been some discussion that maybe the government winds up owning a ton of homes, a ton of homes more than they already own.

And what the government does vis-a-vis insuring those homes?

Is that an accurate statement?

Have you thought about it?

Have you been in contact with anybody?

Well, again, we're continuing to monitor all of this closely.

Particularly -- if you just look at some of the recent actions with the TARP program, for example.

They seem to change what they plan to do every day.

We're continue -- we're working daily with Fannie and Freddie on a lot of their insurance requirements.

We are trying to stay close to it.

There's a number of questions that are potentially concerning out there in terms of determining what may happen, whether they are buying mortgage-backed securities, whether they are buying whole loans.

All of those things create different situations.

Again, offsetting factors are going to be things like rises in unemployment that are going to put way more pressure on a lot of the foreclosure activity and things of that sort.

So, again, it's very difficult to estimate what is going to happen, we're focusing on the things that we can do, which is, again, focusing on the clients, focusing on our risk management, and just trying to improve our relationship with the leaders in the industry.

Okay.

One more and then I'll just get back in line.

Gene, maybe you can talk to the -- you talked to the -- to the -- sequential decline in gross premium earned, but how about in home owners to creditor placed involuntary, the sequential decline, obviously I understand that the -- the number of loans has decreased slightly, 200,000.

But you said placement rates were up.

I just -- just -- just thinking about it, you would think that maybe the placement rates could offset a -- what is --you know, $29 million of loans, actually a very, very small percentage.

Yes, as I commented, I think, what is important and what we continue to look at is really the growth drivers.

So, you look to the insured values.

It is continuing to grow, albeit as a slower pace as we kind of discuss when we look to penetration, we are still increasing in the penetration rates.

Again, it is slowing a bit, if you look to some -- but we tend as Rob mentioned to be a bit of a lagging indicator, so, some of the sub prime delinquency rates took a little bit of a dip there in the second quarter.

We have seen some things recently that show that maybe they are creeping back up again.

I think we are lagging behind some of those indicators.

As we look forward, again, difficult to judge where the thing is going, but we see growth in our main primary growth drivers.

Okay.

Here is what I'm not getting.

Placement rate is up, loans being tracked down from the second quarter just 1%, and yet -- and yet pre -- and your insured value is up over the second quarter, yet your gross premium written are down, something like 8% sequentially.

I just don't get how 1% tracks in to 8%.

Okay.

Steven.

Now I get where you are going.

I apologize.

Okay.

Yes, let me comment on that a bit, because it is difficult when you are looking at consecutive quarter-over-quarter, particularly on gross written, but always on gross earned -- or net earned.

As we add -- say, for example, new portfolios into our tracking, those are going to be going through tracking processes, and quite frankly the new written premium gets relayed because there's maybe a 60-day cycle and then we're placing policies after that period.

There has been a lot of turnover in the portfolio, as we mentioned, so when loans are lost, for example, and -- whether it's -- we talked about the 130,000 on the prime side as an example.

Yes.

The way those are being treated, they are actually -- the policies are going to remain in force and run off over time.

Yes.

The 60,000 sub prime loans that we mentioned, they were actually canceled, and so we got a large effect to the gross written premium related to those loans, and those are completely off our books as of the third quarter.

So you just see with the differences of loans coming in, and the timing of different placements, you get a wide variability on those indicators, and that's why we have tried to focus, particularly, on the growth drivers.

Okay.

Does that have a -- because you did point out -- but you did point out the gross premium earned, does that have even an bigger effect on gross premium earned than gross premium written?

Let me try it one different way to just add to Genes.

We -- when we get in to an RFP process, we are very good at winning and keeping clients, in this environment there are portfolios that are moving around for different reasons, often the financial condition of the mortgage processor or servicer.

We lost some clients in the first quarter of the year, Steven.

Yes

As Gene pointed out, some of them the premium went right away, others we continued to earn premium over time.

So some of the loans that we lost earlier in the year have continued to earn premium in the first quarter, second quarter, third quarter, that at lower and lower levels.

Okay.

And ultimately are going to be all gone.

Right.

All right.

Okay.

I'll get back in line to ask some more.

Thanks.

Okay.

Your next question comes from the line of Beth Malone with KeyBanc Capital Markets.

Does this mean that the SEC's, your lawyer's concerns about share repurchase are no longer a factor?

No, we actually bought those, Beth, in a private transaction, so, we're conservative, and we have determined that we're not going to buy back shares while things are underway, but we'll review that policy, and we'll buy back when we think it is appropriate.

And then on the Solutions business, obviously economic pressures, both Europe and domestically are having an impact.

How is that changing the strategy of your expansion?

Are you accelerating the expansion to try and capture new business from new -- from new product lines or something to offset the slowing of demand for the warranty-based product?

Craig, do you want to talk a little bit about that and maybe go back to when we had the workshop and some of your growth driver areas.

Sure, Beth.

Internationally, to answer your question, we are pushing very hard, and you are exactly right.

I mean, the vision of our international expansion, really is all around getting scale and in several regions around the world to hopefully insulate us more in the future for these downturns in any given region.

So we are pushing hard.

As I mentioned, earlier, it's a timing on what some of these investments are what they are.

We want to make sure we are properly staffed, we've got the systems in, we are obviously incrementally spending out in China to gear up for the services.

You are exactly right.

We see an opportunity, a time to really maximize our opportunities in these marketplaces.

There's a lot of disruption in these markets we serve, and a lot of people, or some of our competitors getting back to core things, and not so much in our space, so we really want to maximize the opportunity.

With that said, still seek opportunities domestically, and really, it's what drove our two acquisitions that Rob and Mike spoke about earlier, both the GE and the Signal, but we just think this positions us much better domestically particularly in the wireless space which is really dominated by one competitor, and we think the Signal acquisition gives us real unique positioning there to take advantage taken of that.

And again, really maximize the opportunities in these uncertain times.

Okay.

And then on the specialty property, I know you all have a pretty significant market share there, and I understand there's a lot of movement in the market as you have described, but shouldn't we anticipate -- I mean, isn't the whole idea that as the economy and mortgage problems continue, that -- we should anticipate that your business should grow?

Or does this indicate that we are seeing the peaking of the deterioration in the mortgage market for you, and that maybe growth will moderate going forward?

Gene?

Well, it -- I'm trying to address that by basically looking at, I think, our primary growth drivers, so we do tend to be a lagging indicator.

We are continuing to see growth.

It has moderated a bit, but it remains to be seen.

There are some balances going on here.

There is certainly some macroeconomic factors that are driving a lot of this economy, and are expected to continue, and then there's some offsetting factors with people trying to do some things, whether it be the Treasury or the FDIC, so it's very difficult to predict at this point in time.

We're monitoring it closely, and again, trying to focus on the things that we can do, and just making sure that we're aligning ourselves with the right players, we're continuing to invest in our model, and creating things that are benefiting our customers and trying to help them through these troubled times.

Okay.

Thank you.

Your next question comes from John Hall from Wachovia.

Good morning, John.

Good morning, Rob.

I was just wondering first with a small geography -- the reinstatement premium, where does that show up in the Special Property business?

Gene?

Yes, the reinstatement showed as an offset in the net earned premium.

That's what I thought.

Okay.

I wanted to talk about the investment portfolio and the bond losses that we saw coming.

Sure.

Was there any concentration among the losses, via, I guess, statutory entity?

Sure.

I -- and I'll turn that over to Chris, but, again, I think hopefully you'll see what our mix of credits are.

We tried to outline that as we gave the industry breakdown, so that would give you a geography there and compare it against, just issuers in general, then as we have mentioned previously, each of our different businesses have separate asset liability benchmark durations, et cetera, and we manage around that, and, Chris, maybe you could provide a little bit more color.

Yes, hi, John.

Maybe I'll just give you have some breakdowns in terms of -- unfortunately I don't have the specific breakdowns, but I'll give you some sense of that almost $300 million total loss number for the quarter.

$229 million of it were in writedowns.

$130 million of that were in the names we disclosed in our release back in mid-September.

Another 115 of that -- the remaining portion of that was in the bank and finance sector.

These are situations where we felt that the prices and the yields and -- that were being quoted on these bonds were indicative of fundamental deterioration in the credit quality and we decided to realize the losses in the form of impairment or in sale.

The concentration that you are talking about with respect to various debt, a lot of that is a function and it goes back to the AOCI component, the unrealized loss component where we're seeing significant increases in risk premiums in the longer duration entities, you are going to see a bigger change in AOCI as a result of that.

The problem here and our biggest challenge right now is we're trying to distinguish between what portion of that increase in risk premium is due to deteriorating credit fundamentals and how much of it is a function of deleveraging, lack of transparency and the like.

Fortunately we have the ability to make that assessment.

We're not forced to sell into this because of our business mix.

We can take a step back and say, well, this particular issue -- and again you see the list of our top 30 issues, although there's an unrealized loss there, some of which may be concentrated in some of our longer-duration portfolios, we feel as though we have the flexibility to not sell into that, and allow us to get through this based upon the long-term fundamentals of the credit market.

I appreciate the additional disclosure that you offer on the investment portfolio and in looking at it, it seems that -- maybe in an overall context, the exposures to financials is within the range of asset-allocation models, but looking at that list of top 30 holdings, there seems to be a very clear overconcentration in terms of sizing with financials.

I was just wondering what the thought process around that is.

Well, we have a detailed investment policy that -- really outlines how we think about how much we'll invest in any one issuer, okay?

So it starts with a policy that's based on that.

I think if you look at the relative amount that's issued within the financial sector, they have tended to be big issuers of corporate debt.

What I look at and take some comfort on is a number of those names have recently gotten capitalize infusions under the TARP program that obviously have improved their position from where they were there from a capitol standpoint in September.

Chris, you want to comment any furtherer?

Yes, maybe just general comments, we have issuer limits that are applied at the total portfolio level.

AAA righted is 1.5%, A is 1%, BBB 0.75% and so on, so what you are seeing here, when you think about an it in the context of a 12 billion or $13 billion portfolio are relatively small exposures on an individual issuer basis.

The issue of where the concentration of unrealized losses, again, goes back to the issue related to our asset-liability management, where we will match up the duration of various issuers with the duration of our various liabilities.

So I think in context, I think what you are seeing here may feel like an unnecessarily high concentration, but on the broader scheme of things, factoring in the total size of the portfolio, you'll see that is within our issuer guidelines.

Thank you very much.

Your next question comes from John Nadel with Sterne, Agee.

Good morning, John, how are you doing?

Good.

A couple of quick ones, and then one maybe one a little bit more involved.

The international expenses for new development at about $13 million, is that expected to continue at that level?

In the near term I would say absolutely.

And what we should see going along with that, John, and then I'll have Craig comment is obviously we were expecting revenues to start coming forth because that's why we're doing the spend.

Yes.

That's exactly right, John, and a lot of this is people related to those who stay with us.

Any given quarter we can have some one-time expenses build out of offices, some of the system expenses, that sort of thing, but certainly the people-related one, it's really key to the model of course, those would stay with us.

Again, as Rob said, I mean, the whole goal here is really a gear-up mode.

And the goal would be, we'll see on the percent of the gross written premiums start to go done, so we will -- as we add top line internationally.

I would also add that, Craig has the metrics around each of these countries that we look at, monitor on a regular basis, to make sure we're making progress along the lines, that, you know, he's comfortable with.

Again, the volatility in some of these markets is challenging, but, again, we see it as an opportunity, really, to maximize some things that we have been working on and really push even harder, so that's what our international team is doing right now.

Okay.

Second question is in the Health division, is the higher expense ratio entirely related to higher commissions due to higher sales?

Hey, John, this is Don.

Hi, Don.

Partly, but primarily it's due to a little bit technology trend in the third quarter supporting interruption of our new product portfolio.

If you look at the year to date numbers, they are exactly the same for 2008 as 2007.

Okay.

And -- okay.

And consolidated basis, do you guys have an estimate for your statutory capital?

I just don't have it with me, John.

Okay.

And then the last one is just sort of to go back and maybe beat a little bit of a dead horse here on the property side.

It's my sense that while we have been worried about capital on balance sheet and investment portfolios for everybody and it's not to say that we shouldn't be focused here as well, but I think the stock is trading today, more as a result of a surprise slowdown in the growth rate on both the net earned and the gross written premium lines in Specialty Property, right?

And so I guess I'm struggling with the idea of a loss of a couple of customers and 130,000 loans, and 60,000 subprimes.

I mean, if I think about the placement rates and the average premium of $1,800, I mean, that doesn't seem to explain to me the slowdown here, and I guess I'm sort of surprised that we saw this slowdown as much as we did in a single three-month period, especially since delinquencies and foreclosure rates, really have done nothing but continue to go higher.

So I don't know exactly how you can explain it.

But I -- I'm struggling to get there with you guys on this.

Yes.

Especially on the gross written premium line.

Yes, well, Gene, go ahead, then I'll add.

Again, we tried to focus on the growth drivers.

When you look -- it is very difficult to look at consecutive quarter, and quarter-over-quarter when you are looking at the gross written premium because of the wide fluctuations.

And, subprime loans in particular that are producing lots of premium volume can have some big swings, so we did see that impact occurs.

Can you give us, Gene, can you give us a sense -- I mean, if you have the data, what proportion of the swing was that -- I mean, was that a third of it, was it half of it?

Again looking at the swing in decline in the gross written premium?

Yes, I'm thinking more sequentially.

I'm thinking about looking -- I'm looking at the creditor placed involuntary homeowners, gross written premium, and the growth rate year-over-year in the second quarter was 39% and in the third quarter I got 17%.

If I'm -- I think I'm looking at the right numbers.

Yes.

And so if we think about, stair stepping down like that from near 40 to, mid-teens, I mean that's a dramatic change in the three-month period of time obviously, and -- and -- and just sort of trying to understand you are sort of focussed a little bit on some swings in subprime, how much of that could that be?

And is that -- and I guess along the same lines is -- is that something that can come back real quick?

I mean, if it is swinging one way, is it just as possible that it could swing the other?

Yes.

I'm sorry to put you on the spot like this it's just that that's such a surprising change in a three-month period, and I think it is the reason why people are selling your stock today.

Well, let me speak a little bit to it.

First of all, again, looking at it over a period of time.

So focusing on, last quarter there were actually some activities in that quarter that probably bumped up that a bit.

Yes.

And then you have got some negative activities occurring in this quarter that brought it down a bit.

So particularly, gross written premium is one that you are going to get some varying factors again, because -- again, because based on the timing of kind of adding new portfolios in and any delay that might occur as a result of that, and with some loss accounts how quickly some of that can occur.

Gross written -- I mean, the net earned premium is a little bit of a more stable and better factor.

One of the biggest contributors to some of the decline in net earned premium, I'll just kind of remind you had to do with the reinsurance costs, so.

Yes, yes.

No.

I think -- that makes perfect sense to me.

If we adjust for that, we have a pretty stable growth rate on the -- on the income statement line item.

Right.

And I'm thinking more about what the future pretends from the gross written premium.

Right.

So -- what -- I think Gene is -- if you stay on the gross written, I think that because of how our model works, okay, the second quarter had some written premium, some gross written premium in it that may have belonged in the first quarter, so sequentially, because we didn't get it in time to know that's where it may have been.

Okay.

So if you think about first quarter was understated a little, because of how the model works.

Second quarter then got overstated and on a client it was then at run rate, John.

Okay.

That -- those kind of things can contribute.

Okay.

We -- we talked about the -- the 130,000 in the quarter, but remember, we mentioned a big block of loans that was lost earlier in the year, in consolidation.

Okay?

Okay.

Those things have impact where -- they -- depending on the particulars of how the client was taken over, we may continue to get some written, and for certain we continued to get some earned on those, but at a declining rate, so those things are all contributing to a little bit of the noise, and it's why we have tried to focus on the growth drivers.

Okay.

All right.

Thanks, I'll follow up with you guys later.

Thanks.

Okay.

Your next question comes from Dan Johnson with Citadel.

Good morning.

Most of mine have been addressed for now, but the placement rates have been static, at least as the ranges have been static year to date.

Can you talk specifically in the prime category and talk a little bit about what you are seeing sequentially within that 1 to 2% range as well?

Again, consistent with some of the increases in the delinquencies, and the foreclosures on the prime side, we continue to see -- albeit at smaller rates, we're seeing continued increases in the penetration on the prime side.

As we have pointed out in prior quarters we're typically not writing real estate-owned properties related to those prime loans, so we do see, a slower growth associated with those.

Yes.

And to take your words from earlier, you said you see growth in your growth drivers.

Average premium, placement rates, not really monitored units at the moment, but if we have growth in your growth drivers, is there a scenario where that does not turn out to be growth in premium?

Typically not.

Other -- other than for some of the nuances that we have been trying to explain for on the rest of this call.

Right.

But those nuances sound more like quarter early comparison issues, but just as you look out not necessarily next quarter, but anywhere that we call the reasonably near term future, if you have growth in average premium, if you have growth in placement rates and growth in TIVs can you do anything but have growth in premium?

That is what we would expect, yes.

Your next question comes from Adam Klauber, Fox-Pitt.

I want to focus on the capital again.

The $200 million you mentioned, is that over rating agency standards?

Yes, because that's what we capitalized to Adam.

We capitalize to the (inaudible) ratios.

And in line with that, seems like the rating agencies are getting more stringent on excess capital requirements.

Have they talked to you about that?

Or because your businesses are somewhat different than some of the other insurers have they said that you're okay or we're not going to be more stringent on you?

Let me make a comment and I'll turn it over to Chris, but remember they have a regular process where they adjust their capital formulas on an annual basis.

And we have regular dialog with them and as we pointed out, in Gene's business in particular this year we got them to recognize our model was different and as a result make an adjustment to how their normal factor works.

Chris, you want to just talk about recent conversations or anything that would add any more color here?

We have a regular dialog with all the rating agencies, AMBest in particular, because that's who we capitalize to.

And it's entirely possible as part of their review process in '09 that they're going to make some adjustments to the asset charges associated with the various companies that they monitor for us.

Having said that, we don't have a lot of asset intensive businesses.The diversified business mix is such that, where we do have some, for example, our prem E block is a very asset intensive business, the flip side is the total assets to capital in the aggregate is less than 4.

So it's going to vary by that entity and we're going to -- we capitalized a certain credit rating based upon the VCAR and we'll make adjustments as need be.

We've not had any indication from Best recently that there's something coming out imminently but that could change, and we'll again react from a capital perspective to whatever they come out with.

What I'd anticipate on this is, okay, you can break down, and if they decide to make, for instance, asset class adjustments, I think they're probably going to go after the classes that have caused the most problems.

And again, we're not in a lot of those asset classes.

One follow-up.

On the solutions business, given, obviously tougher economic environment, you're still expanding internationally, is it too optimistic to think that you would have material margin expansion next year in that business?

I can't give you specific guidance on that but I can tell you we're very comfortable with the progress that we're making internationally.

Again, Europe has been affected, we see unprecedented volatility in Europe and much like here, Latin America, South America, has not been as much affected so we're pushing very hard there.

Again, I think our team is very energized around these opportunities in these uncertain times.

Again, we want to try to maximize some of these opportunities while there is uncertainty in some of these marketplaces.

The other piece that we're getting traction, and it's up to our global client management process, where we have a pretty intensive collaborative planning process that we're doing with both retailers and banks and credit card companies that have a similar global footprint as ours and we're getting traction around there.

So we're pushing very hard to drive those combineds down internationally.

Then of course, on the domestic front, the GE transaction we think is just an outstanding investment and really positions us domestically much better but we'll also have an impact as we go forward of driving down our loss ratio and our domestic combineds.

Still very committed to the high 90 long term domestic combined as well sa the mid 90s in the international piece.

So it sounds like it's still a focus and that we might see some progress next year; is that correct?

On the margin?

That's correct, again, that's absolutely what we're pushing at.

Again, keep it in mind, this is still an international long-term investment but absolutely are driving towards progress in the coming quarters.

Or last question comes from Vinay Misquith with Credit Suisse.

Hi, good morning.

The loss of loans, would that include the Merrill Lynch audio (inaudible) sold to Banc of America?

I don't think we disclosed particular client related activity Vinay, and I'm not even sure that I -- well, we know what the contract terms are, maybe you could, Gene?

Yes.

Well, I have received this question before, so let me just address that.

We do service Merrill Lynch loans but we don't service all of the loans that are processed by Merrill Lynch.

We do have those under continuing contracts through the end of '09 and the numbers do not include any of those.

Again, there's going to be changes.

We can win some and we can lose some, but we still believe again, that alignment with industry leaders is what really positions us well.

The other thing, I still feel really good about our business model.

It's been a good business model and it will continue to be a good business model.

I think a lot of the investments that we continue to make are paying off.

We're very pleased with things like our other premium.

It's still small but we're incubating some smaller businesses and we've seen some terrific growth out of them.

We still like the auto collateral protection market.

It's a specialty insurance market where there are a few competitors and we think it's a very strong adjacency for us.

We continue to receive interest in -- from prospects in that area as well and we believe it's a compelling business model for the lenders that are out there.

Again, we think that model is going to take some time but we still think like we're very well positioned in that model.

Fair enough.

And when the payment from the foreclosed properties start to roll off do you think that you could speak to the regulators and ask to pull out the capital that you have in the business because of that?

I think we will be very agressive at making sure that we right-size our capital despite -- I mean in conjunction with wherever our growth goes.

Again, focusing on making sure that we're making returns.

I'd just point out, first, I want to appreciate everyone for being with us today and just point out that in changing market conditions it's often painful but it creates opportunities and we're going to continue to take actions to minimize the down side impact of the changing markets with an eye toward maximizing opportunity that may develop to better position the Company moving forward.

And we'll continue to update you on our progress and look forward to doing that next quarter.

This does conclude Assurant's third quarter conference call.

You may now disconnect.