Assurant Inc (AIZ) 2010 Q1 法說會逐字稿

Good day, everyone.

Welcome to the Assurant first quarter 2010 financial results conference call.

Today's call is being recorded.

All lines will be in a listen only mode for the duration of the call and there will be an opportunity to ask questions following the prepared remarks.

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

Please go ahead Ms.

Kivett.

Great.

Thanks so much.

Welcome to Assurant's 2010 first quarter earnings conference call.

Joining me with prepared remarks are Rob Pollock, our President and Chief Executive Officer, Mike Peninger, our Chief Financial Officer.

Prepared remarks will last about 20 minutes and then we'll open the call to questions.

Chris Pagano, our Chief Investment Officer and Treasurer, is also here for questions.

Yesterday we issued a news release announcing our first quarter 2010 financial results.

The news release, as well as the corresponding supplemental financial information, is available on our website at assurant.com.

Some of the statements we make during today's call may contain forward-looking information and our actual results may differ materially from those projected in the 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 2009 Form 10-K and subsequently filed Forms 10-Q, and 8-K which also can be found on 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.

For more detailed disclosures on these non-GAAP measures the most comparable GAAP measures and a reconciliation of the two please refer to yesterday's earnings release and the supplementary financial information that we posted on our website.

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

Thanks Melissa and good morning everyone.

2010 is off to a good start for Assurant.

We reported solid results for the first quarter across our mix of businesses.

Specific actions initiated in 2009 are gaining traction and improving profitability.

We continue to create opportunities for growth instead of waiting for economic recovery.

Our strong financial position allows us to deploy corporate capital.

At the same time, we remain mindful of the challenges of the sluggish economy in many parts of the world and healthcare reform legislation that was recently enacted.

Let me begin by providing some financial highlights on the quarter, as well as our 2010 business outlook.

In the first quarter, we generated an annualized operating return on equity of 12.9%.

Results were driven by strong performance at Assurant Specialty Property and favorable operating results at Assurant Employee Benefits.

We grew our book value per diluted share by 3% from year-end.

This excludes the impact of accumulated other comprehensive income, or AOCI.

We have repurchased shares at what we believe are very attractive prices and below book value per share.

Through last Friday, April 23, we have repurchased 4.8 million shares for about $157 million.

These actions are consistent with our capital management strategy and highlight the free cash flow we are able to generate.

Now let me make a few comments on the businesses.

Specialty Property had a terrific quarter.

We achieved an excellent combined ratio, driven by both favorable expense and loss ratios.

Although our top line results were good, we continue to expect pressure on our revenues looking ahead for three reasons.

First, the overall number of mortgage loans outstanding is declining, particularly subprime since new loan originations are at low levels.

Second, we expect placement rates to peak soon and return to more normal levels in the years ahead.

And finally, portfolio consolidation will tighten margins, requiring us to be even more vigilant in managing expenses.

The team at Specialty Property continues to execute at a high level and maintains its leading position in the creditor place business.

At Assurant Solutions we were satisfied with our growth in target areas under difficult market conditions.

Our business continues to be impacted by high unemployment in the UK.

In addition, the European economy is struggling to recover.

We were pleased to see sequential improvement in the international combined ratio.

We have made solid progress in reshaping our European business during the past several months and we expect international combined ratios to continue to improve on average by one to 200 basis points per quarter for the rest of the year.

In the US, Assurant Solutions continues to create opportunities to grow rather than wait for economic recovery.

We were pleased to enter into a contract with Lowe's, the home improvement retailer, which will begin later this year.

Our strategy to partner with original equipment manufacturers is also gaining traction and we are benefiting from our pre-need partnership with SCI which continues to add new funeral homes.

We are on track to offset revenues that were lost from client bankruptcies and the slowdown in consumer spending.

Assurant Employee Benefits provided a good example of how we are creating our growth opportunities as well.

Our top line benefited from the block of business we acquired from Shenandoah Life, as well as new clients at Disability RMS, our turnkey distribution channel.

High levels of unemployment continue to limit small employer payrolls which drive premiums.

Expense management and continued improvement of dental results will remain key elements of our efforts ahead.

At Assurant Health, it was good to see core results improve in line with our expectations.

Of course the issue at the forefront of everyone's mind is the impact of healthcare reform.

The legislation signed by President Obama on May 23 reshapes the health insurance industry.

Since detailed implementation regulations have not yet been issued, the full extent of the impact on our business is still being assessed.

However, we know modifications in how we operate will be necessary.

In particular, we will need to operate with a lower expense structure at both the business unit and enterprise level.

As we prepare for the future, we have begun a comprehensive review of all the options for Assurant Health.

A steering committee co-chaired by our CFO, Mike Peninger, and Assurant Health CEO, Don Hamm, is leading the effort.

We are completing a thorough evaluation of our options in the individual medical market.

We are also assessing the impact on the enterprise including all intangible assets on our balance sheet.

The analysis is well under way and we expect to present our findings and make recommendations to our Board of Directors this summer.

Assurant has a long history of successfully adapting to changes in the marketplace and this legislation will test our ability to do so again.

We will take the best course of action to benefit our shareholders and our customers.

And now, I'd like to turn things over to Mike who will give a more in depth review of the businesses.

Mike?

Thanks, Rob.

Let's now take a more in depth look at the results for each of our businesses.

I'll begin with Assurant Health which is beginning to take -- which is continuing to take corrective actions to improve the underlying business results in the near term.

For the quarter, net operating income decreased significantly versus that reported in the first quarter of 2009.

However, as we discussed on several calls last year, first quarter 2009 results did not fully reflect the increased medical benefit utilization that began in late 2008.

First quarter 2010 results developed consistent with our assumptions and reflect pricing and benefit design changes, as well as expense reduction initiatives we implemented.

Sales of both individual medical and small employer group policies increased versus 2009.

Sales growth continues to come primarily from our affordable healthcare plans that provide more first dollar coverage, but continued high lapse rates offset sales growth leading to a drop of about 1% in net earned premiums for the quarter.

In summary, the changes we've made to pricing and plan designs over the past year have us on track to return our book to a 4% after-tax margin by the fourth quarter, though, of course this may be impacted by changes made in response to healthcare reform.

The team at Assurant Health continues to work toward that goal even as they begin to make the changes necessary for future success.

I'll turn next to Assurant Employee Benefits where net operating income was at its highest level since the third quarter of 2008.

Very favorable disability incidents and life mortality rates drove the improved earnings.

In addition, just as in medical, pricing and plan design actions are producing improvement to dental loss ratios.

Net earned premium growth was driven by the block of business acquired last year from Shenandoah Life and two new clients at Disability RMS.

These additions brought an additional $35 million in net earned premiums in the quarter and we expect their full year 2010 contribution to be around $100 million.

Although overall sales were flat, voluntary product sales continued to be a bright spot, increasing by 21% to $21.8 million for the quarter.

While we were pleased with the first quarter results, remember the low frequency, high severity nature of our life and disability products can cause loss ratios to vary from quarter to quarter.

Also, organic growth in small employer payrolls will require job creation.

Until then, we'll continue to work to increase voluntary product sales.

Now I'll turn to Assurant Solutions where overall earnings were down about 5% versus the first quarter of 2009, but where there were also several signs of improvement.

The decline was primarily due to a one-time tax charge of $2.8 million resulting from the restructuring of the European business and a $4 million after-tax change in the value of assets used to protect against inflation risk in our pre-need business.

Net operating income benefited from favorable domestic service contract loss experience and improved pre-need experience.

Our domestic combined ratio continued to reflect favorable loss experience from both new business and run-off clients.

Gross written premiums for our domestic service contract business increased by about 12% versus 2009, driven mostly by non-recurring items.

Absent these items, written premiums were flat which we view as a good thing since first quarter 2009 results included about $20 million of gross written premiums from Circuit City.

We saw modest organic growth with several current retail clients as we saw consumer spending showing possible signs of improvement.

As Rob noted, we were pleased to enter into an agreement to provide service contracts for Lowe's, which will begin to produce gross written premium in the fourth quarter of this year.

Because Lowe's retains most of the risk and performs the service functions under the contract, it will add only modestly to our net earned premiums and earnings over the next few years.

We hope to expand the relationship over time as we demonstrate the value we can add to Lowe's.

Despite a positive impact from foreign exchange, our first quarter international results are down versus 2009 due in part to the $2.8 million tax charge I mentioned earlier.

Going forward, the effective tax rate should decline to normal levels.

Sequentially, we saw improvement in our UK underwriting experience that was consistent with our expectations.

The international combined ratio decreased by 670 basis points from the fourth quarter of 2009, and was down by about 180 basis points excluding the impact of the fourth quarter restructuring charges.

We continue to expect an average of 100 to 200 basis point per quarter reduction in this ratio over the rest of 2010, as our pricing and underwriting changes take effect.

While overall net earned premiums for Solutions were level with the prior year, international net earned premiums increased 26% due to favorable impact of foreign exchange rates and growth from new and existing clients in Canada, Brazil, Argentina and Mexico.

International gross written premiums increased by over 30% due to favorable foreign exchange and new client growth in several countries.

Our service contract relationship with Whirlpool in Italy will start producing premium in the second quarter and our wireless business with TIM, Brazil's third largest wireless carrier, is expected to produce premium by year-end.

We added a new page to our financial supplement this quarter that breaks out our pre-need business and shows its steady contribution to Solutions' results.

The exhibit also illustrates the impact of our CPI caps, which are financial instruments purchased several years ago to protect against inflation risk on certain pre-need policies.

These caps, which were valued at about $8.5 million at quarter end, are important parts of our risk management strategy for the pre-need products, but they are mark-to-market each quarter and thus create some variability in earnings.

Pre-need earnings grew for the quarter despite a negative impact from the cap and sales were up sequentially.

We expect further growth as the funeral homes acquired in 2009 by SCI, our sales partner, begin to sell our pre-need policies.

In summary, Solutions is adding new clients and growing in key target areas such as wireless, service contracts and pre-need while looking for new niche market opportunities.

We need to see continued improvement in the UK results and to reach revenue and profit targets in our developing countries.

Our domestic combined ratios are likely to drift back toward our target in the high 90s over time, but sales are improving and we believe that our growth expense control and risk management initiatives are beginning to take hold.

I'll now turn to Assurant Specialty Property, which produced another very strong quarter and drove our overall financial results.

The business benefited from a $7.6 million after-tax adjustment in our creditor placed unearned premium reserves, but even absent this item, net operating income increased 6% versus 2009 due to lower expense and loss ratios.

Combined ratios were the lowest we have reported since the fourth quarter of 2008.

As we stated last quarter, we continue to expect earnings to reflect margin compression of $10 million to $20 million from client consolidations.

However, due to more favorable contracting and slower run-off of loans lost, there was minimal impact on earnings in the first quarter.

We now expect the impact will begin in the second quarter, but will not be fully realized until the middle of 2011.

Our net earned premiums rose by 3%, primarily due to the change in unearned premium reserves which increased earned premiums by $13.6 million.

Excluding this item, net earned premiums were flat with last year.

Real estate owned premiums declined from 20% of creditor placed premiums in 2009 to 12% in 2010.

However, premiums from non-REO business kept total earned premiums level.

We benefited from the fact that the policies on the 230,000 subprime loans lost in January 2010 that we mentioned on our year-end call were not cancelled upon client termination.

The premium on existing policies is therefore running off more slowly, which favorably impacted both earned premiums and earnings in the first quarter.

In the short run, it appears that REO premiums have stabilized as loan servicers have developed more programs to modify loans and hopefully avoid foreclosures.

Placement rates have continued to increase and based on our analysis of delinquent loans, we anticipate that they will continue to stay near the current levels for the remainder of this year.

75,000 new subprime loans that we gain through consolidation modestly raised written premiums in the first quarter.

We'll see further growth beginning in the third quarter of this year from a previously disclosed new 80,000 subprime loan account.

Specialty Property continues to manage expenses and capital levels carefully, while also looking for new growth opportunities in the creditor place market and increasing sales of adjacency products such as renters insurance and creditor placed flood insurance.

Turning now to our investment portfolio and balance sheet, our investment portfolio continues to perform well.

At the end of the first quarter, net after-tax unrealized gains were $267 million, an increase of $89 million since year-end.

During the quarter, we realized $4.5 million in pre-tax gains from the portfolio, despite a $6.7 million increase in our mortgage reserve and under $1 million in other than temporary impairments.

Since we took minimal dividends from the businesses during the quarter, our holding company capital position declined from $710 million at year-end to about $480 million at March 31, or about $230 million of deployable capital after subtracting our $250 million buffer.

Our debt-to-capital ratio was a low 16.9%, down from 18% a year ago.

These metrics and the free cash flows our businesses generate are all indicative of our solid financial position, a position that continues to provide us with capital management flexibility.

So in summary, we were pleased with our first quarter results and continue to remain focused on the macroeconomic challenges and post healthcare reform market ahead of us.

And with that I'd like to open the floor for questions.

Operator, we're ready for questions.

Thank you.

(Operator Instructions) Our first question today comes from Ed Spehar of Bank of America Merrill Lynch.

Good morning, Ed.

Thank you, good morning everyone.

A couple questions.

First, when we look at Specialty Property, the fact that maybe things are not reverting to normal as quickly, at least as I had thought, but I'm still struggling with how to think about what is normal revenue for this business, and I think specifically on the subprime loans, I guess you're saying you added 75,000 new loans in the first quarter and another 80,000 in the second, is that correct?

I think it's 75 in the first quarter and 80 in the third, Ed.

Oh, in the third.

They will start producing in the third quarter, sorry.

Okay.

I guess the question though is how do we look at this, given the placement rates are so high on subprime, with no originations, how quickly does this number go to zero and if it does, does that mean we should start thinking about higher placement rates on a normal basis for prime because some of that stuff somehow ends up in the prime category?

How do we think about sort of a normalized revenue level?

Well a couple different things, Ed.

First, I think if you go back and we provided a history that splits the business out over time, subprime has always been a portion of the marketplace and maybe it grew more than the market did in particular vintage years, probably the 2006, 2007, 2008 years, okay?

But subprime has always been 10%, 15% of the overall market.

Now, remember what's reported to us by our clients, they classified the loans, and we have some suspicion that prime loans may get reclassified to subprime when they start having problems with the loans, but I think if you go back and look at placement rates in an '06 time frame, you can get a feel for what more normal subprime placement rates are and then the real issue is when is there going to be new loan originations coming back in the market.

I think the key for us is Gene and his team have continued to find opportunities to grow.

When we can get clients in RFP situations, we typically do very well and we are aligned with market leaders, who as the consolidation takes place, has us well positioned as portfolios move around.

Okay, and I guess--

When I look at the overall revenues, I very much look at it as placement rates and some estimate of what's going on in the overall number alone.

So when we look out over the long term, you think there's still going to be something that is subprime in terms of loans outstanding, whatever that may be?

Yes.

Okay, and then on capital, I guess could you give us a little bit of an update of -- I think it's the ordinary dividend capacity this year is $560 million from your subs.

Can you tell us how much you took so far, if any?

Sure.

And just first we have a strong capital position.

We generate a lot of free cash flow out of the businesses.

It's one of the things we really like.

Actually, I'll let Chris run through and just give you an update on where the capital was at year-end and where we are at the end of the first quarter.

Sure, hi, Ed.

Just to get us from the 715 I guess to the 480 roughly, so $235 million of reconciliation and $127 million of that, again was returned to shareholders, the repurchase plus the dividend.

We took -- we had an interest expense February and August our debt payments, so that's about $30 million.

About $50 million on a net basis, plus or minus, was put back into the segments.

Half of that was in health in response to the increase in the litigation reserve and the other half went back into Solutions due to client growth, and then the balance of it was what I would call normal course operating expenses for the Company.

The [inc] operating expenses are front loaded in the first quarter.

A lot of that is just related to compensation expense.

We pay our year-end bonus in the first quarter of the following year and then we have a 401(k) match.

So get to -- now the flip side we did not take any dividends of consequence from the subs in the first quarter.

We will look to be taking the dividends in the second quarter going forward.

I think that gives you an example of the advantage of being in such a strong capital position.

We were able to go out and repurchase shares at attractive levels, both relative to current market and as a percent of book, but without having significant upstreaming of dividends from the segments and above average operating expenses at the corporate level.

So what's the total for the year expected in terms of interest expense and operating expense?

We've kind of given you, and again there's a difference between cash in and out and we think about interest expense for example, we would tell you it's roughly $40 million.

That's an after-tax number.

The dollars that go out the door though in the first and third quarters are pre-tax numbers.

That comes back later on.

Operating expenses typically run around $50 million and then the other piece of it is recurring dividends, which run rate right now is about $70 million.

Okay, thank you very much.

Our next question comes from John Nadel of Sterne Agee.

Good morning, John.

Good morning, everyone.

How you doing?

So Rob, I guess the question for you is understanding from your opening remarks that a lot of stuff has yet to be, regs have yet to be sort of determined under healthcare reform, but can you dive into that a little bit more deeply in terms of what the steering committee, Mike, and Don, and their team are coming up with at this point, sort of maybe walk through what the range of potential options or outcomes might look like?

Sure.

Again, this is -- I'd almost put a little bit of a discontinuous change to the business.

We have a history of adapting to changes when they occur, John, but we've gone to -- and I'm going to let Mike comment on this a little bit too, but we've kind of gone to the team and said look, it's a new world, we want you to look at all of the possible considerations in evaluating things, but remember, we're looking at a set of legislation that is probably as comprehensive as anything that's gone on in history, John.

It's long.

We are finding places where we're generating a lot of questions.

We're interacting with the NAIC HHS to get clarity around how things work that are unknown.

At the same time we have some things that are known that we need to respond to and start dealing with, such as covering children up to up to age 26, etc.

So there's a lot of detail here.

The devil is in the details on how this operates and I think the team is looking at all the potential options that are out there.

Mike, do you have a few comments?

Yes, I'd just say that exact thing.

It's hard to talk about all the options we're looking at, but we're trying to take a very comprehensive look.

We have fundamental, we have a long history.

We've been in this business for over 100 years.

We have 750,000 I think customers and 600,000 plus of individual health customers.

So they have a vested interest in this and we're trying to look at, as Rob said, the details of healthcare reform, the regs are not written yet, how will the MLR calculation actually work, etc.

And some of the answers to those really state what kind of opportunities are going to be available.

We know that the business will look different.

We know that certain strengths of ours that have benefited us historically, underwriting for example, would be less important, but other things that we have will be useable in other ways.

So we don't want to take any options off the table at this point.

Understood, and just as a quick follow-up.

The medical loss ratios, sort of the 80% MLR, obviously at this point very loose in terms of what goes into that ratio, but is there some timing, I thought I might have read something somewhere recently that there's some timing on when the definition of what goes in the numerator and the denominator is going to come out?

HHS has requested I believe from the NAIC that the NAIC gives them some recommendations by -- in the June time frame I think might be June 1, which was earlier than it was originally they had until the end of the year, but HHS asked them to move that up, and so the NAIC is developing and I've seen I think some list of questions that they are starting to ask and raise.

So I think in the second quarter we'll start to hopefully get a little more clarity on this.

But one of the things we do know, John, is that it's not an apples-to-apples comparison against our loss ratio today.

Yes, that's the point, right?

Yes, so they've already made some statements about things that can be excluded, such as income taxes, premium taxes, assessments, etc.

So again, there's lots of details here.

We're in the midst of trying to get answers to all those things.

Again, the details will help us formulate what the best option is and we're not pre-disposed toward any option today.

We're just looking at them all.

Got it, and in the meantime feel comfortable that pricing actions and lapse rates and the various other expense initiatives etc.

Have you on track for your targeted margin improvement?

Yes.

We took those actions starting in the middle of last year.

They continue to roll through the block.

As I said, the development in the first quarter was consistent with what we expect.

So in the absence of any healthcare reform unusual impact we definitely feel like we're on track for those actions to have the desired results.

Okay.

So if we just look here, John, all of it was assumption based when we took all of the actions and at the end of each quarter we've reported out, we're getting a pretty good line of sight that our actions are doing just what we would expect.

Excellent.

Thank you very much.

I'll get back in the queue.

Okay.

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

Good morning, Steven.

Good morning, everybody.

Both Ed and John got to some of the questions I wanted to ask.

Just one of the possibilities here with the health business is a sale.

That is not off the table, right?

We're looking at everything and so obviously, we will consider all the options.

As I said, we're not pre-disposed toward any one particular option.

Just making sure that everything was everything.

The balance sheet has a GAAP equity there of $300 million in that business.

Would that be, I guess accurate on a statutory basis things are different obviously with health insurance than they are with life insurance.

Yes, there's, if the question I think you're raising is our staff capital similar to our GAAP equity, I believe they are in this business.

So there's some intangibles that are also associated with the health business.

Again that will all be part of the analysis as we look at things Steven.

Like I said John got most of what I wanted to ask, so that's really all I wanted to add there, thanks.

Sure.

(Operator Instructions) Our next question comes from Mark Hughes of SunTrust.

Thank you.

Any perspective you can share on the typical duration of the policies in the Specialty Property business say Q1 versus this time last year?

When you look at what characterizes our policyholder groups, Mark, I tended to put this into some different buckets and obviously, the duration has gone up, we believe a little bit.

It's largely related to people who have run into problems making payments on their homes.

Right, I guess the typical time that your policies are in force under those circumstances, when you say up a little bit, is that what you're suggesting?

Yes, absolutely.

So I guess I'd characterize it as people who -- I'd put our customers into three different buckets.

Those who stay with us for a long time because they tend to get a policy from us and just keep it in force, people who get the policy in the mail from us and decide they're going to pursue another option and they are with us a short period of time.

And then this group who've come about really because they run into trouble making payments and that's the one where we're seeing a movement out in how long the policy is held.

All right.

The Lowe's business, could you talk about what your experience has been historically with taking a big retailer like that and moving it potentially fully on to your platform and if you did so, how meaningful would that be?

Well, I think we've got a long track record in this business Mark of working with large clients and what we try to do is our offerings in the service contract business, we have the full range, we cover the full gamut of the value chain of that business from issuing it to doing the administration to taking the underwriting risk, etc.

So we've got kind of the full package and I'd say it's fairly typical in this business that we would start with a piece, sometimes a fairly small piece of that total value chain and what I think we've been able to do typically is work with the retail customer, show how we can add value and help them improve their own business and that makes them, over time get increasingly receptive to giving more of that value chain toward us.

And we would certainly hope that we can demonstrate or make that case to Lowe's.

We're excited to have sort of the start of the relationship and hopefully over time, we'll increase it.

Thank you.

Our next question comes from Mark Finkelstein of Macquarie.

Good morning.

A couple questions.

I guess Ed brought up the question on capital and you talked about the $560 million of dividend capacity for 2010.

I guess how should we think about free cash flow generation overall for 2010 going into 2011 for dividends, and I guess what I'm getting at is you've got Specialty Property that theoretically is going to shrink in size, you probably get capital release from that.

Is there any way of thinking about this?

Should we assume that kind of free cash flow should be somewhat close to operating earnings for 2010?

I think that's a good way to think about it, Mark.

And in addition to that, we've talked about we're going to try and free capital in the Solutions business.

We think we can do that to the tune of $75 million to $150 million over really a 2010 to 2011 time frame.

When property comes down, and it hasn't, but if it were, we would have a little bit of additional capital that would free up there as well, but I think thinking about our earnings plus that amount within Solutions is a good way to think about things.

Okay.

And Mark this is Chris.

If I could maybe make a couple other comments, one I just want to make a clarification.

I think, and I could be wrong, but I believe the ordinary dividend capacity is $525 million, but I do want to point out that that is a regulatory number and does not necessarily indicate what we can or cannot take out of the businesses.

I think when I think about dividend capacity I think about earnings plus minus.

The minuses would be held back for growth, and as we've seen in years past sometimes the portfolio effect will cause us to have to retain more capital and not be able to access it from the operating companies.

So and of course on the plus side, you mentioned potential shrinking of the business on a property side and again also, our efforts to take some excess capital out of Solutions over the next 12 to 18 months.

The other thing I would point out, and again Ed asked the question and I provided a reconciliation.

Some of the infusions and dividend, taking dividends out of the subs are a timing issue, so this past quarter, we did put some money into Solutions in response to some additional client growth.

That doesn't change the fact that over time we think we can get out the earnings and then some from the Solutions product -- from the Solutions segment over the next several years.

The other thing we've got to keep in mind in a variable that we've talked about in the past is the AM Best capital requirements, we do capitalize the best to the extent those change from one year to the next, it might have some effect.

We're in regular dialogue with the rating agencies, have not gotten any indication there will be material changes there, but we'll know that as the year progresses.

Okay, and then one other question on benefits.

Clearly a very good quarter.

I think you highlighted low mortality.

I'm curious what the dental block is doing.

Are you starting to see kind of incidents come down at all or are the results kind of even without the trend improvement in the incidents?

I think what we're seeing is sort of an interesting comparison with the medical business where we had some changes in incidents and costs that happened -- started in that late 2008 timeframe and those have started to sort of maintained at that level.

So what we've done is gone into the block and instituted the pricing plan design changes very much like the folks in our health business have done in medical, and so what we're seeing now is those changes working through the block.

So I'd say the improvement that we're seeing really reflects the actions that we're taking, rather than some sort of reversion.

The incidents has kind of stayed at that more elevated level and we're pricing accordingly.

Okay, thank you.

Our next question comes from Sam Hoffman of Lincoln Square Capital.

Good morning, I have a couple of questions.

First in Specialty Property, gross earned premiums exceeded our expectations because they were about 100% of the trailing four quarters gross written premiums and that's something that hasn't happened since about 2007, the ratio dropped to 95% last year in 2008.

So I guess can you help us out in terms of how to best model earned premiums as a ratio to written premiums, understanding that you have some new policies coming on that improve that ratio going forward?

Sure.

To me, again I start, Sam, looking at placement rates on loans and if you think about the written premium representing the annual premium on a policy, a placement rate times the number of loans times an average amount of the policy gets you to a written premium number.

Of course when you think about how our business model works, the written premium number is a bit tricky because it comes about in arrears.

In other words we go through a cycle, we send letters giving the potential policyholder the right to submit that they've gotten coverage elsewhere and when we go through that 30, 60, 90 day cycle and don't get a response back, we place a policy that originates back to the date their coverage stopped.

So I think gross -- I think the earned premium number is perhaps a better way to model.

We've provided the written.

There's a lot of movements in the written over time caused by that, but I think it's just a big part of it is how our model operates in that it's looking in arrears to know when our coverage comes into effect.

Then if you look at the number of portfolios that have moved around over the last couple years, which are unprecedented, those exacerbate all of the numbers as well, so I'd be more focused on the earned premium number.

Okay, and then also on Specialty Property, can you comment on your reinsurance policy this year?

It looks like you issued some CAT funds and just generally should it have the same impact on the financials as it did last year?

Sure.

Well this is a big part of our risk management program at the enterprise level, CAT risk is something we're quite focused on.

We typically buy our program in pieces and we place part of it in January, part of it in June.

It involves the Florida Hurricane CAT Fund as well.

Several years ago, we said we were also going to look at different pools of capital other than just the reinsurance market.

We looked at a CAT bond transaction and placed one last year.

We've recently just entered another CAT bond arrangement.

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

Sure, a couple things.

Again, the apples-to-apples comparison versus last year is probably best done by looking at last year's CAT bond and where it's trading in the secondary market and the two tranches replaced last year are somewhere between 5% and 6% lower in terms of spread.

So we saw that comparable pricing validated in our second issue this year.

We were very pleased with the results, clear evidence of available capacity and more attractive pricing versus prior year.

The flip side though is that it's not apples-to-apples.

The other thing we have to keep in mind is how the reinsurance program has changed, the exposures have changed from a geographic perspective, and also the tower has grown, our reinsurance needs have grown since last year.

So I think what we'll typically do -- what we typically do is provide you with an update some time around mid June once we've placed the balance of the traditional program where we're out in the market right now with our reinsurers.

Okay, and then on the Health business, can you just frame what the minimum return on equity would be in order for you to retain that business and in what time frame you would need to achieve that ROE?

Sure.

Again, if we look historically, the healthcare business has produced very strong ROEs.

A lot of that driven, Sam, by the fact that there's not a high equity requirement in the business and you can write premium to equity at six, 7:1.

So we've had a history of returns that have been in the 20% and 30% range.

Obviously, we look and I'd say we would want to be at 15% or better in this business.

Obviously, we would look at what are the issues to deal with that.

We didn't have those returns last year, but we have with the corrective actions we implemented last year, they are all paying off.

We see us returning, as Mike mentioned, to a 4% after-tax margin by the fourth quarter absent healthcare reform and that will put us well in excess of that.

And do you currently see any options under healthcare reform that would enable a 15% ROE?

Well, again, we've got that comprehensive study under way and I'm sure that will all be part of the analysis that group provides us.

Okay, and finally, just at a high level.

There were a couple of moving parts in the quarter, but more or less it was a clean quarter and so would you say that now excluding CATs that you're kind of at the 12% ROE currently and that's kind of where you are for the foreseeable future until any major changes might occur excluding CATs?

A couple different things I'd look at there.

First is the balance sheet drives the enterprise ROE, but the businesses are out and pricing products every day in the marketplace.

So I think as all the -- if we're able to grow, business should be written that is in the target ranges and if we can grow the business it will be at higher ROE's than the 12% on the incremental piece of business.

We have the correction actions we took in our business last year that are raising ROE's in a number of our businesses as well.

And as we deploy capital, clearly we've got deployable capital that today is sitting at the enterprise level earning low rates of return.

So if we can figure out how to deploy that better that's another opportunity.

Saying all that, we're in businesses that have variability associated with them, so the pricing is at levels we think can be higher.

It requires that we grow.

We've talked about each of the businesses and some of the challenges we're facing in them, but we are trying to move to those higher returns.

Okay, so as long as revenue remains flat, you should be at least a 12% return on equity excluding CATs?

Well that would depend on our business results, Sam.

Okay, thank you.

We'll go next to a follow-up from John Nadel of Sterne Agee.

Hi there.

So Rob, last quarter you indicated that buybacks that you would expect to use about half of your existing authorization through the end of 2011.

I think I said at least, John.

You did, you did, I'm sorry, you said at least.

In the first four months here, at least what you've reported through the 23rd of April, you've used half of that half.

That's correct.

I applaud it.

I'm just looking for a little bit of help on pace from here.

Sure.

Understanding that I think you typically will -- at least historically, you would typically slow down a little bit in front of hurricane season, but --

Yes, well let's first start with -- in looking at anything we start with we've got to be able to deploy in excess of our cost of capital.

We think that is somewhere in the 12% range.

We try and evaluate that against all alternatives with a couple of --

Rob, I'm sorry.

Can I interject?

Sure.

You think your cost of capital is around 12%.

Is that, I'm interested in that only because I've got some other companies that I cover --

I think it's lower than that, John but we're using it as a rough rule of thumb.

Okay.

And also just I'd point out, and Chris has done a lot of work in this area.

It obviously moves around as capital markets move around, so when we looked at it last year it was higher than that, okay?

Yes.

But again, we're just trying to give a rough rule of thumb in terms of how we think about it.

Understood, okay, okay, and one more.

If you took your current debt-to-cap, which is very, very low relative to most of my coverage universe anyway at 16% or 17%, if you took that more to a typical single A rated companies debt-to-cap of 25ish, how much would that take your cost of capital down?

Your weighted average cost of capital.

I assume it would take it -- if you were talking about 12, I would assume that would take it down to 10 to 11.

Right.

It's a blend of equity and debt and it would take it down.

Again, I think it just reinforces our strong financial position that we're in.

Okay.

We certainly realize we have the capability to structure the balance sheet differently.

Chris and his team are looking at that in depth, but if we go back to how do we evaluate things.

It's relatively -- first we've got to invest, as Chris mentioned, in the business to generate and deal with organic growth and we have some of that going on and then we evaluate the alternatives.

And I think the first quarter demonstrates we've seen the attractive nature of buying back our shares.

And your valuation essentially with the sequential add to book value per share from your net income, your valuation effectively if I think about the first four months of buyback and, frankly it's just the last couple months because you were blacked out until February, the valuation hasn't really changed, right?

The market to book is that what you're referring to, John?

That's exactly what I'm referring to.

We can do a lot of different things here.

The combination of a strong balance sheet to start the year, operating cash flows that we think we'll be able to get and then some up in the form of dividends.

The attractive share price, we can do a lot of different things with the cash flows the businesses are generating and it's, frankly a nice position for us to be in and we do think the share price continues to be attractive.

We expect to be back in the market.

Our goal is to be in there consistently.

Typically in a 10b5-1 structure, which we think makes the most long term sense.

And do you have one in place right now?

A 10b5, or no?

Yes, we do.

Again, the nature of the 10b5-1 is typically -- we put one in place that allows us to continue to repurchase shares through blackout periods, the fact we were in the market this past month suggests it is still in place.

That's fair, and last one for you, just going back to Solutions in the international combined ratio improvement.

Can you give us a sense for the actions that you've taken in the UK business, how much maybe in terms of the 180 basis points of combined ratio improvement in international, how much of that was UK improvement driven, if you will?

Yes, I don't have the specific UK piece on the top of my head, John, but I can tell you that our sort of key metric is our overall combined ratio internationally going down by that 100-200 basis points per quarter.

We've done a variety of things in the UK ranging from exiting certain distribution channels to redesigning products to repricing products, etc.

etc.

And we've got specific metrics on each of those things that we're watching and those are -- the results of those actions are sort of unfolding in line with our expectations.

Okay.

I was going to say again, think of the analogy to health.

Think of the analogy to our dental business.

Again, we had assumption -- we've taken actions, they were assumption based.

To me, John, they've unfolded consistent, as Mike pointed out, with the correction actions we've taken.

The caveat we would add-on the UK is where we're exposed is if we get an upward spike in unemployment.

Understood, understood.

Okay.

Listen, I applaud the progress on all those fronts.

They are very evident this quarter, so thank you.

Sure.

Our next question comes from Ed Spehar of Bank of America Merrill Lynch with a follow-up.

Hi, thanks.

I guess, Rob, I just want to go back to this cost of capital thing.

When you're saying 12% are you saying that's what you think your weighted average cost of capital is or your equity cost of capital?

Again, I would say we just are using it as a rough rule of thumb, Ed, for -- think about what we've done with the businesses first in pricing products.

We want them pricing at 14% to 16% or better returns in the businesses, okay?

Levered?

We're using this as a rule of thumb as they look at maybe we want to go do a deal.

Maybe we want to do that.

There's obviously inherent risk with it.

So we're trying to just be mindful of let's not look at things right on the margin of our cost of capital, because there will be unknowns there and we're just using it as a place holder.

We have the actual calculation.

We look at it regularly.

The big move -- you know what the -- I was going to say the debt component is.

It's the equity component we look at periodically and it moves around.

Yes, I guess first of all I guess I would argue, you've found the right use for your capital this quarter and in April, but the second thing I would say is that going back to the point I think Sam was making, you've got a 12% ROE this quarter.

Understand this is not a normal quarter from a CAT standpoint, if we spread that out it may be different, but stock is at 80% of book value.

So the question about your equity cost of capital, I guess I would argue your equity cost of capital is higher than -- maybe higher than the numbers that you're suggesting just because the stock is trading below your equity value.

Sure, absolutely.

That's a classic capital market assessment, Ed.

Couldn't argue that.

And then just one real quick one on the Health side.

When we talk about wanting to get at least a 15% ROE or better, two things, how do you sort of think about the importance of the health business from an overall enterprise standpoint of capital relief or credit that you're going to get in either from the rating agencies or the RBC ratio and is that going to change going forward given the uncertainty about health?

And then also just because you point out the unclear nature of exactly how you implement this sweeping legislation and how do you handicap just sort of the risk when you think about somebody decides that something will be included in the MLR or then a year later they say it's not included?

There's obviously not just the question of how it's interpreted today, but how do we get confident in how to be interpreted over the long term?

Well, we certainly as we think about that you're raising great questions Ed and certainly there are a lot of uncertainties.

That's why we're trying to take time and do a very comprehensive and thorough analysis of all of the options, because each of the options entails making certain assumptions.

We're not going to have definitive information for quite some time until all of the changes start to work through the system.

So we try to make reasonable assumptions about the key drivers of any particular scenario.

The modeling capability we have as part of our enterprise risk management analysis enables us to look at a range of options depending on -- to see how sensitive a particular scenario's returns might be to changes in the assumptions.

So we're trying to do that really comprehensive and thorough look, all with the back drop of, again, this is a business that we've been in a long time, we think we understand it as well or better than anybody else in it, so we've got that going for us.

We've got all our customers, I mentioned earlier, and we're trying to make the best decision as we analyze all these options.

Thank you.

Our last question comes from Mark Finkelstein of Macquarie with a follow-up.

Thanks.

This is a little bit of a philosophical question on the health side and you may defer the question which is fine, but I guess if you were forced today to kind of underwrite excluding pre-existing conditions, I know that doesn't go into place until I think 2014, but would you be able to do that without a degree of certainty that you're getting at least close to right knowing the data we have today?

That's my first question.

So yes, do I think, Oh, get them all and I'll answer them, sorry.

Okay.

The second question is again, we don't have great transparency around this, but do you think the penalty that's been put in place, or at least discussed, on the individual side not even withstanding whether it gets enforced or not, I mean that's a whole other issue, but do you think the penalty for non-compliance with the rule is enough to compel the risk group to be a cross section as you would kind of need it to be?

Right.

Okay, so pre-ex, the two are linked, right?

So pre-ex is not an issue if everyone is in the game and we can deal with that as you point out, the real issue comes when people can selectively enter or exit.

We know a number of markets, we have history in Maine, Massachusetts, New York, New Jersey, to evaluate what happens when people can opt in and out of the market, which I think is the whole point you're raising around the penalty.

I think it's certainly an issue that continues to be voiced by lots of players and things that if you really want to make things work we're going to have to get tighter here, so we can deal with pre-existing.

We're going to have to see how well the regulations ultimately unfold to figure out if the penalty is enough to provide protection there and we'll do all that.

Again, early stages not sure quite how all this works.

We do have models to look at in markets where these kind of practices have been in place.

So to me, this all just points out that we have the ability to pivot and respond quickly to changes.

We've done it in the past.

We'll continue to do so as we move forward.

Okay, all right, thank you.

Sure.

In closing, while we see encouraging signs in the economy, we are not content to wait for a full recovery.

We have initiated actions to create opportunities for growth and to increase profitability.

We are pleased with the new business momentum we are building.

Our cost saving measures we have implemented will yield benefits in 2010 and going forward and our strong capital position improves our flexibility to build shareholder value for the long term.

Thanks for your interest today.

We look forward to updating you on our second quarter 2010 performance on July 29.

This does conclude Assurant's first quarter 2010 conference call.

Please note that a replay will be available as of 12 PM Eastern Time.

You may now disconnect.