Assurant Inc (AIZ) 2011 Q2 法說會逐字稿

Good day and welcome to the Assurant second-quarter 2011 financial results conference call.

Today's conference is being recorded.

(Operator Instructions)

Later, we will conduct a question-and-answer session.

Instructions will be given at that time.

At this time, I would like to turn the conference over to Ms.

Melissa Kivett, Senior Vice President, Investor Relations.

Please go ahead, Ms.

Kivett.

Thanks, Dave.

Welcome to Assurant's second-quarter 2011 earnings conference call.

Joining me with prepared remarks are Rob Pollock, President and Chief Executive Officer of Assurant, and 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 second-quarter 2011 financial results.

The news release, as well as 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.

Our actual results may differ materially from those projected in the forward-looking statements.

Additional information concerning factors that could cause actual results to differ materially from those projected in any forward-looking statements can be found in our 2010 Form 10-K, which can also 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.

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's posted on our website at Assurant.com.

Now, I'm glad to turn the call over to Rob.

Thanks, Melissa, and good morning everyone.

Midway through the year, we are delivering on the commitments we outlined at our 2011 Investor Day.

These commitments include profitable growth, reducing expenses, and improving ROEs.

Here's some examples from the quarter.

Profit improvement continues at Assurant Solutions, as we grow our wireless service contracts and pre-need businesses.

At Specialty Property, we are increasing loans tracked in our lender-placed business and expanding our offerings to rental property managers.

Our new strategy at Assurant Health is gaining traction as we sell new affordable products to provide consumers access to the healthcare system.

We are also demonstrating strong expense management.

And at Assurant Employee Benefits, sales of voluntary products are gaining momentum, as we help employers provide more benefits for their employees.

Now, I will highlight our progress at each business.

I'll begin with Assurant Solutions.

Results continue to improve.

The global economy continues to be a headwind for Assurant Solutions, but we are winning new clients.

This demonstrates our products and services are meeting customer needs.

We are setting the stage for longer-term profitable growth.

Combined ratios are improving, pre-need space sales remain at healthy levels and our sales pipeline is strong for service contracts, including wireless.

New sales help offset the continued runoff of Circuit City, and the decline in the domestic credit insurance business.

Overall, Solutions' 2011 earned premiums will be similar to 2010.

We expect earned premiums to grow in 2012.

We are well-positioned to deliver on our commitment of a double-digit ROE in 2012, with continued improvements expected in the out-years.

Moving to Assurant Specialty Property, quarterly results reflect the impact of unprecedented weather-related events.

We are helping our customers affected by the severe storms, and will continue to do so as they rebuild and repair their properties.

Our business model leverages a sophisticated tracking system that ensures structures are covered for damage.

Our strategic focus on aligning with market leaders in mortgage servicing is again paying dividends.

During the quarter, one of our clients acquired a portfolio of 200,000 loans.

We will begin tracking these loans later in 2011, with premium production beginning in 2012.

Adjacency growth opportunities look promising.

We are building our niche renters business, focused on distribution through property managers.

In June, we acquired Sure Deposit, the market leader in rental security deposit alternatives.

The Sure Deposit product is offered by property managers serving 1.5 million apartments in 4,500 communities.

This product is beneficial to both renters and property managers.

Early feedback from Sure Deposit clients reinforces there are opportunities to grow revenue with our full product suite.

We are pleased that Sure Deposit's management team and employees are now part of the Assurant family.

For the remainder of 2011, we expect Properties' premiums will be consistent with year-to-date results.

Earnings will be dependent upon catastrophes, particularly hurricanes.

Next, I'll turn to Assurant Health.

Second-quarter results reflect continued progress in implementing our strategy.

Both consumers and distribution partners are recognizing the value and affordability of our health access and supplemental products.

We also improved efficiency in our operations, as evidenced by a reduction in quarterly expenses of almost $24 million from a year ago.

This is a tremendous accomplishment.

It demonstrates our ability to adapt to changing markets.

For the balance of 2011, we must continue to generate sales and drive further expense efficiencies.

A better customer experience and a simplified business model will help us achieve these goals.

We are achieving early success with our revamped strategy.

As a result, we are raising our 2011 net operating income outlook from breakeven to between $15 million and $20 million after tax.

Assurant Employee Benefits continues to be challenged by a lack of job creation.

This hurts revenue and creates a difficult environment for returning claimants to work.

While we are disappointed with overall profit results, we are encouraged by the improvements we are achieving in our dental business.

During the quarter, overall sales increased, led by the growth in our voluntary products.

Local and regional brokers are increasingly interested in voluntary products in the aftermath of healthcare reform.

We are providing them with marketing and training support to help them generate sales as part of our key broker program.

Remember, the voluntary products are a targeted growth area for benefits.

For the remainder of 2011, we expect modest sequential improvement, primarily driven by our dental business, at Assurant Employee Benefits.

I'll now turn to corporate matters.

During the quarter, we took approximately $160 million in dividends from our operating companies.

We continue to exercise discipline in managing our capital.

We repurchased 3 million shares of our stock, increased our quarterly dividend by 13%, and acquired Sure Deposit.

Capital at the end of the quarter was $650 million, including the $250 million buffer for tail event risks.

For the full year, we expect operating Company dividends will roughly equal their earnings.

We believe further buybacks are appropriate, given our share price, and we expect to continue share repurchases throughout the year.

Now, Mike will walk you through the operating results for each business.

Mike?

Thanks, Rob.

Let's start with Assurant Solutions, where second-quarter 2011 net operating income was just under $40 million, a 31% increase versus the second quarter of 2010.

Improved underwriting results in Canada, Europe and domestic service contracts drove the year-over-year increase.

Domestic net earned premiums increased in the wireless, retail and automotive channels.

These increases were offset by declines from the continued runoff of Circuit City, and our domestic credit business.

The domestic combined ratio was 96.6% for the quarter, due to improved seasonal loss experience in our wireless business, and lower general expenses versus last year.

We expect this ratio to move slightly higher in the second half of the year, but it should be less than its 98% long-term target for the full year.

Internationally, net earned premiums increased 16% versus the second quarter of 2010, driven by growth in Latin America from both new and existing clients.

Premiums and fees were up slightly in Europe as we focus on wireless opportunities.

The international combined ratio decreased 320 basis points from the second quarter of 2010.

The improvement was driven by better loss experience in Canada, and profitable growth in Latin America.

Improved results in Europe, due to the pricing actions taken in the UK, and growth in the rest of the region positively affected the combined ratio as well.

The international results improved, despite the increase in new wireless client implementations, which temporarily pressure the combined ratio.

For 2011, we remain on track for a 200 to 600 basis point improvement in the international combined ratio versus the fourth quarter of 2010.

Pre-need's net operating income increased 11% versus the second quarter of 2010.

Our partnership with SCI continues to generate strong sales for the business.

Base sales in excess of $200 million during the quarter led to higher invested assets and a corresponding increase in investment income.

Turning now to Assurant Specialty Property.

Net operating income was approximately $43 million.

This includes nearly $43 million of after tax reportable catastrophe losses, versus approximately $5 million of such losses in the same period last year.

As a reminder, we define a reportable catastrophe loss as an ISO event that results in a loss of $5 million or more.

The addition of new lender-placed clients and loan portfolios during 2010, and an increase in the overall placement rate, continued to sustain gross earned premiums in our lender-placed business.

Second quarter net earned premiums declined slightly due to additional premiums ceded to clients and increased catastrophe reinsurance premiums.

Excluding the reportable catastrophe losses, the combined ratio increased for the quarter due primarily to an increase in the frequency of weather-related losses.

During the second quarter, we announced the completion of our catastrophe reinsurance program.

Although the rates were comparable to last year, we bought additional coverage since our exposure has grown, so our reinsurance premiums will be approximately $25 million higher this year.

Complete details are available on our website.

Turning next to Assurant Health, please remember that current results are not directly comparable to prior-year results due to changes in our business model and the premium rebate accruals required under healthcare reform.

Second quarter 2011 net operating income was $5.2 million.

The sequentially-lower effective tax rate in the second quarter was driven by the improved profit outlook for the year.

Higher expected pre-tax profits mean that the new limits on certain tax deductions will have a smaller impact on our effective tax rate.

Earned premiums for the quarter were $425 million, net of a premium rebate accrual of $17 million.

We now estimate that the full-year premium rebate liability will be in the $70 million to $80 million range.

Delivering on our commitment to reduce expenses was an important driver of results.

During the quarter, we cut expenses by 17% or $24 million from a year ago.

We've made significant progress in putting Assurant Health on a path to profitability in this challenging environment.

Future profitability will be impacted by the pace of our evolving product mix as we modify our business model to serve the needs of consumers.

At Assurant Employee Benefits, net operating income was $8.5 million.

The year-over-year decrease was due primarily to less-favorable disability and life experience, including the previously discussed impact of lowering the reserve discount rate.

Improved dental results partially offset the decline.

Disability incidence rates remain in line with expectations, however, disability experience in the second quarter continued to reflect lower claimant recovery rates.

Second quarter net-earned premiums were down compared to the second quarter of 2010, and we expect full year 2011 premiums to be down as well.

The decrease reflects pricing actions on a block of previously assumed disability business, and lower prior year sales.

Growth in voluntary and supplemental products improved persistency in our primary book and signs of organic growth are partially offsetting the overall premium declines.

Turning now to corporate matters.

As part of our ongoing investment portfolio management activities, the Company executed a number of transactions during the quarter that modestly shortened the duration of our portfolio.

The tax treatment of some of these transactions allowed us to release a tax valuation allowance associated with deferred tax assets.

This increased our net income and book value per share, and will add to corporate capital as we file future tax returns.

We were very pleased to announce the Sure Deposit acquisition during the second quarter for $45 million.

We expect the internal rate of return on this investment to be well in excess of our cost of capital, and we have the potential for even higher returns as we market our expanded product offering to our customers and those of Sure Deposit.

Annualized net earned premiums for the acquired business are approximately $35 million.

In 2011, we expect to earn about $10 million of premiums in fee income, since it will take several months to transfer existing business and begin writing new business on our insurance paper.

Approximately $26 million of the purchase price was recorded as intangible assets, and the remaining $19 million was allocated to goodwill.

The intangible assets will be amortized through our income statement over approximately nine years.

We expect the transaction to be accretive to our earnings this year.

As Rob mentioned, during the second quarter we repurchased 3 million shares for $110 million, bringing the total of the first half of 2011 to 7.4 million shares, at a cost of $284 million.

In the third quarter, through July 22nd, we repurchased an additional 512,000 shares for approximately $18 million.

We continue to view our share price as undervalued and expect to continue to repurchase shares during the remainder of the year.

And with that, I'll ask the operator to open the call for questions.

Thank you.

Ladies and gentlemen, the question-and-answer session will be conducted electronically.

(Operator Instructions).

And our first question will come from Ed Spehar with Banc of America.

Good morning, Ed.

Hi, Ed.

Good morning.

Thank you.

Mike, you were going a little bit quick there.

I was just wondering if you could sort of go back in Solutions and could you cover again some of the drivers in domestic and what you had said?

And then I wanted to ask a question on the dividends that have been taken so far in the year-to-date from the subsidiaries, and how you're thinking about sort of the capital structure, debt issuance or anything else in terms of if you happen to find other acquisition opportunities.

Thanks.

Okay.

I'll talk about Solutions and then turn it over to Chris.

But what I mentioned, Ed, was that earned premiums are increasing in wireless and retail and domestic.

We continued to get nice growth in Latin America, and then in terms of the overall premiums, you've got the offsetting decline that we've talked about in the past from Circuit City and the domestic credit business.

And the improvement, Ed, if you recall, we have been working hard on our risk management efforts in Solutions and so, business that they wrote in 2009 and 2010 was better than earlier years and is now earning off the balance sheet.

We feel good about that.

But as Mike pointed out, our target on that is 98.

Right.

And that's what we believe is kind of our price for levels there.

And if we turn -- Chris, you want to comment a little bit on operating Company dividends?

Sure, Ed.

Let me maybe start and give you a couple of reconciliations and then I'll talk a little bit more about the outlook and some of the other elements of capital management.

But, we started the first -- we ended the first quarter, excuse me, with $585 million of holding Company capital in aggregate.

We took $160 million of dividends.

We spent or returned about $127 million to shareholders, $17 million in the form of shareholder dividends and then $110 million of repurchases.

That leaves you at about $620 million.

Then corporate had some cash in-flows which is really just a reflection of timing differences of about $30 million.

Keep in mind, in the first quarter that cash outflows were about $60 million.

So, you're looking at, again, the difference between cash and accruals.

That leaves you with the $650 million at the end of the second quarter.

What's not in there is the $45 million purchase price of Sure Deposit.

What we did there, was rather than take a dividend from Specialty Property from earnings and then send the money back down to buy Sure Deposit.

Specialty Property just wrote the check out of their first half earnings.

Now, if you think about -- let's talk about first half results and then on a go forward basis, got about $250 million of net operating income in aggregate for the first half.

$160 million of dividends.

That leaves $90 million of earnings that are still at the segments, available for dividends.

We spent -- Specialty Property spent $45 million of that.

So, we've got to think about it as the first half earnings that are available for dividends in the second half, about $45 million.

Now, in terms of kind of the outlook and Rob and Mike both mentioned that we are expecting to be in the market, repurchasing shares for the balance of the year, which includes through CAT season.

We feel very good about the capital position, $400 million of deployable capital, some additional earnings available from the first half, as I mentioned.

On the M&A front, there's nothing imminent.

And given our process and our rigor around M&A, it's more likely that the deals that will meet our criteria are going to be smaller deals, similar in size to Sure Deposit, which are not going to affect our ability to buy back shares.

On top of that, we've got shares that are very undervalued.

We're trading at $11 below book value.

So, share repurchase is an appropriate use of deployable capital.

We expect to be doing that t throughout the rest of 2011.

I have to follow up.

Because I want you to keep saying all this stuff.

But, when you talk about the willingness to buy back stock through CAT season which is a pretty significant change, I think, for you guys, is it same kind of -- thinking about buybacks in the third quarter the same way you think about buybacks in any other quarter, or is there still a little bit different view?

Yes.

Well, I think we look every quarter at what's going to happen in the quarter, you know, looking forward, Ed, and evaluate what our capital position is relative to what we see going on.

Now, Chris and his team did a tremendous amount of work on the risk management side to help us better qualify tail event risk.

That was a big part of our risk management process over the last couple years, which has given us a better line of sight on our capital position and understanding of where we sit as we move into things.

Other thing I'd point out is, our method of buying stock is a 10B5-1 plan and we have flexibility around how we set up and structure that program.

1 last 1.

What do you consider to be the debt capacity today?

Again, it's similar numbers that we have said in the past, $300 million to $350 million of opportunistic debt capacity.

We're at just under 18% debt to total cap, so gives us a lot of room there.

The other thing on the financial flexibility side, and one thing that we're looking at carefully right now is the possibility of extending the maturity of our credit facility.

The current facility is due to expire at the end of 2012.

We believe we can put another facility in place that goes out to 2015.

It will just give us a little bit more flexibility on that front as well.

The other thing I would point out --

Thank you.

Sorry, Ed.

No, no, go ahead.

Okay.

The question around capital and on a go-forward basis, Rob's point about us reassessing it every quarter, which we continue to do and I think the way we looked at this quarter is that with $400 million of deployable capital and a share price trading where it is, this is a good time to deploy capital and return it to shareholders via share repurchase.

Thank you.

(Operator Instructions).

Our next question comes from Chris Giovanni with Goldman Sachs.

Good morning, Chris.

Good morning.

Thanks so much.

1 follow-up just on the capital.

I mean, is the CAT reinsurance program where you guys bought more coverage maybe giving you guys a little more comfort to purchase shares, maybe earlier than you would have originally expected?

Well, I think certainly the ability or our decision to buy the program, the CAT program in 2 steps allowed us to take advantage of the CAT market earlier in the year, which gave us I think more cover, or perhaps a better program than we might had we bought it all at once in June.

I think the issue around CAT and what's going to happen with the reinsurance market on a go-forward basis is really going to be a 2012 event.

But the issue around being able to buy back through CAT season I think is really about having $400 million of capital above and beyond the buffer which is what we set aside to protect us against tail risks such as CAT.

So, again, it's the strong capital position, a good feel for the ability to get earnings out as dividends from the operating segments, and a share price that's, as I said, very undervalued.

Okay.

And then in the health segment, Rob, you mentioned sort of $24 million of expense saves to date.

Can you talk about sort of how much room you have left there?

And then also, I know in 1Q you guys expressed some optimism around seeing a sequential improvement in sales.

And that sort of receded here in 2Q.

Could you comment if that's sort of seasonal or is there something else going on there?

Sure.

Couple things.

And then I'll let Mike make some comments as well.

But first, Chris, the $24 million is a quarter-over-quarter compared to the 2010 number, And as we outlined last year, we took some expense actions last year to reflect the new environment.

We've made changes to our commission structures.

We're pleased with the progress, but we know that more will be required going forward as the models change, because we're just operating off a different model.

The old model was get to the lowest combined ratio you can.

The new model is, you want to manage that loss ratio to the required level, and then you're operating off the difference and that's where our profits have to come from.

So, we're pleased with the progress we're making.

It demonstrates we can adapt as the market changes and we feel quite good about the progress we're making.

Related to the sales side of things, there is a bit of seasonality.

I'd also say, though, we're working through adoption by the brokers to the change in the landscape.

We're pleased.

We're holding seminars on that to get them up-to-speed on that.

We're doing integration with our enrollment system.

Actually, we've had some very good progress with our supplemental products and attachment rates there.

So, we feel good about that.

Mike?

I was basically going to say the same thing.

When you look at our sales, we've got sort of the traditional core products and then we've got the affordable products that we're selling that we think are meeting.

So, we think we cover the gamut of consumer needs out there and we're seeing solid results, as Rob said, in the adoption of our affordable plans that we feel quite good about, actually.

Okay.

Thank you.

Then just 1 last 1.

In Specialty Property, have your sort of steady state scenario that you provided at Investor Day, has the time line on any of that changed given maybe some of the more lackluster macro and housing data that's come out recently?

I'll start and say I think Gene provided a really good outline in the Investor Day and our view on what could happen.

Obviously, we had a little pickup in placement rates again during the quarter.

I think our belief is still that those will peak sometime this year, but we acquired clients in 2010.

That's helped lift our -- we're quite focused on that gross earned premium number and those have grown some.

We mention that we will have another client coming on-board late in the year that will produce next year.

That, again, will ameliorate that track level that Gene's outlined.

The big 1 obviously is going to be the economy and government policy relating to supporting housing, and we don't have a clear line of sight on that, Chris.

Okay.

Thank you very much.

Next we'll hear from Mark Hughes with SunTrust.

Thank you.

The 200,000 loans that are coming over, are you getting all of the existing premium on that, or are you going to start to build once they get transferred?

We believe that 1 is going to be a flat cancel, Mark.

Okay.

So, you would get all the premium in that case?

Yes.

What that means is that beginning in the first quarter, we will get the premium on the policies that exist today and then new placements will be ours as well.

Nice.

The gross written premium in Solutions, quite strong.

You talked about the wireless, retail, automotive.

Were there new relationships there that helped give you a nice boost?

How sustainable is that momentum as we look at the next few quarters?

Yes, we feel that Solutions is developing some good momentum, and some of the growth is coming from our Lowe's relationship, Mark, and that 1, remember, is top line, but heavily reinsured, so, not all of that drops through to the bottom.

And we kind of provided that outlook for this year.

The earned premiums will be level, despite the credit and Circuit City declines, but we should see net earned premium growth next year.

I think you can look on the balance sheet a little bit at the unearned premium within Solutions and that's growing.

Again, as Mike pointed out, the Lowe's account is heavily reinsured right now, but we're working hard to figure out how we can add additional value to that account.

Solutions is definitely finding some opportunities out there we feel, like that momentum is starting, so that's good.

And then any regulatory updates on the Specialty Property side, anything you see that's changed?

No.

Again, we think we have a very compliant program.

We think that we're operating within all the rules.

We're really not a party to any of the discussions that are going on with the state AGs and the servicers.

But, obviously, we look forward to resolution of the issue because we think that it's certainly something that is weighing on us.

Thank you.

And our final question will come from Ed Spehar with Banc of America.

My question was answered.

Thanks.

Sure.

This concludes Assurant's second-quarter 2011 call.

Please note that a replay will be available as of 11.00 AM.

You may now disconnect.