Assurant Inc (AIZ) 2012 Q1 法說會逐字稿

Welcome to the Assurant first quarter 2012 financial results conference call.

All participants will be in a listen-only mode throughout today's call until after our prepared remarks and then we will conduct a question-and-answer session.

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

Please go ahead, Ms Kivett.

Thanks, Lauren.

Good morning, everyone.

We look forward to discussing our first quarter 2012 results with you.

Joining me for Assurant's conference call are -- Rob Pollock, our President and Chief Executive Officer; Mike Peninger, our Chief Financial Officer; and Chris Pagano, our Chief Investment Officer and Treasurer.

Yesterday afternoon, we issued a news release announcing our first quarter results.

Both the release and corresponding supplemental financial information are available at Assurant.com.

Please note that all prior period financial information presented in the release, supplement and on this call reflects the new accounting guidance for deferred acquisition costs which the Company adopted as of January 1, 2012.

We will start today's call with brief remarks from Rob and Mike and Chris participating in the Q&A.

Some of the statements we make on today's call may be forward-looking and actual results may differ materially from those projected in these statements.

Additional information on the factors that could cause actual results to differ materially from those projected can be found in yesterday's news release, as well as our SEC reports including our 2011 Form 10-K available at Assurant.com.

Today's call will also contain non-GAAP financial measures which we believe are meaningful in evaluating the Company's performance.

For more details on these measures, the most comparable GAAP measures and a reconciliation of the two, please refer to the news release and the financial supplement posted on our website at www.Assurant.com.

Now, I will turn the call over to Rob.

Thanks, Melissa.

Good morning, everyone.

We are pleased with our results in the first quarter, with each business increasing earnings compared to the first quarter of 2011.

We also continued to return capital to shareholders while maintaining a strong capital position.

We measure our performance against three important financial metrics.

First, we reported an annualized operating return on equity excluding AOCI of 14.6% during the first quarter.

Second, growth in book value per diluted share excluding AOCI was 3.5% during the quarter.

Third, revenue defined by net earned premiums and fee income grew by over 1.5% year-over-year to $1.9 billion.

Despite economic challenges, we are producing profitable growth.

In solutions, the areas identified for growth are service contracts, pre-need, international and mobile, which we previously described as wireless.

The term mobile recognizes the proliferation of smartphones and tablets in the lives of consumers.

Pre-need and our domestic mobile and service contract businesses are delivering returns above our ROE targets.

In international operations, profitability improved and we continued to see revenue grow in Latin America.

In China, we were pleased to add a prominent client, Jiangsu Five Star Ltd, a wholly owned affiliate of Best Buy.

We expect this partnership to generate more than $100 million in annual revenue in three to four years.

Moving to Europe, the continuing financial crisis has triggered greater levels of austerity and a recession.

Although our results there have improved, we are taking a hard look at our performance versus expectations to ensure we can achieve our return targets in what we believe will continue to be a difficult environment.

In Specialty Property, we maintain the number of loans tracked despite the overall shrinking market.

We were able to do so by winning new loan portfolios for tracking and by our clients acquiring additional loans.

We continue to expect placement rates to return to more normal levels as seriously delinquent loans start to resolve.

Assurant Health continues to make great progress in implementing its strategy.

We've been successful in expanding our distribution this year and are pleased to announce a partnership with American Family Insurance Company.

American Family's broad network of agents will now exclusively sell our individual health policies to their customers.

We have a Specialty strategy that can be successful no matter how the Supreme Court rules on the healthcare reform case.

We are focused on meeting the needs of individuals with a range of affordable product offerings.

At the same time, we are finding ways to operate more efficiently.

Small employers, the primary customers of Assurant Employee Benefits, continue to face challenging economic times.

We are further tailoring our business model to focus more sharply on voluntarily products which are increasingly important to our customers and their employees.

We believe our specialized Voluntary enrollment and customer service capabilities already give us a competitive advantage in the small employer market.

We are investing in tools and technology to expand this advantage.

With that, I will turn to Mike for more comments on the quarter.

Thanks, Rob.

I will discuss a few first quarter highlights and priorities for each of our business segments, starting with Assurant Solutions.

During the first quarter, Solutions growth in net earned premiums and fees was again led by Latin America and we also saw growth in our domestic service contract business.

The profitability of our domestic mobile pre-need and extended service contract businesses was above our ROE targets.

The international combined ratio improved by about 230 basis points versus the first quarter of last year, after adjusting for a nonrecurring premium tax benefit in Canada, with all international regions contributing to the improvement.

Solutions annualized ROE in the first quarter was just over 12% after adjusting for this disclosed item.

And we were pleased with the continuation of the improvement we saw last year.

Profitability is, however, still short of the overall 14% to 16% ROE target for the business.

A major driver of the short fall continues to be Europe, which as Rob indicated is an area of particular focus.

Let me offer a few comments on our results there, beginning with the UK, where we have taken many actions to improve profitability.

We have adjusted prices, modified contract terms and discontinued the sale of several products.

While results have steadily improved, we still do not expect the UK to reach break-even profitability until mid 2013.

More broadly in Europe, the poor economy has made it difficult to write new business in our other countries.

We have reduced expenses to reflect the lower growth outlook.

The major 2012 priorities for Solutions are to continue the profitable growth in our targeted areas that we saw in the first quarter, while accelerating the improvements in European profitability.

We expect these efforts, along with rigorous expense control, to lead to an ROE in our target range of 14% to 16% for Solutions in 2014.

Specialty Property's results in the first quarter were strong aided by growth from new loan portfolios and very mild winter weather, with no significant storm activity.

Recently, we were awarded 2.1 million new loans in a competitive bidding process and expect to move them on to our system in the second quarter.

Premium production will begin in the third quarter.

Our policies will replace existing policies at renewal, so implementation will be completed by the third quarter of 2013.

These loans today have an average placement rate of about 1%.

We were pleased by progress in our multi-family housing products, which achieved double-digit growth in net earned premium and fees, as our SureDeposit acquisition continues to perform well.

Assurant Health continued its focus on reducing operating expenses and expanding distribution.

For the first quarter, expenses were down year-over-year by $17.4 million, as we continued to simplify our operations and improve our service to customers and agents.

Compared to the same period a year ago, total individual medical sales were up due to growth of Health access and supplemental products.

Our new network agreement with Aetna Signature administrators and marketing agreement with American Family should improve sales of all of our individual products.

At Assurant Employee Benefits net operating income improved primarily due to better life insurance mortality experience.

Disability incidence rates improved slightly from the elevated levels we saw in the fourth quarter, but recovery experience remains challenging.

We continue to see significant lengthening of the social security decision making process for disability claim adjudication, which negatively impacts our results.

Our Dental experience was slightly better than last year, as the trend for improved loss ratios continued.

Overall, earned premiums declined due to pricing actions on an assumed block of disability insurance and the loss of a disability client.

However, the Voluntary business again demonstrated growth.

Our strategic focus on distribution through key brokers and our expanded offerings, continue to improve sales of Voluntary products.

Moving on to corporate matters, we ended the first quarter with $600 million in total holding Company capital after returning roughly $115 million to shareholders through repurchases and dividends.

We continue to believe that our shares are attractively priced.

Our investment portfolio continues to perform well.

We remain focused on preserving the portfolio's overall book yield in the low interest rate environment and we continue to monitor events in Europe where our exposures are modest and manageable.

With that, I will turn it back to Rob.

Thanks, Mike.

I want to spend a few moments to provide you with some comments on our lender placed business in light of the regulatory inquiries.

Let me start by outlining our key messages.

We utilized consumer focused processes in our notification of borrowers, when there may be a potential lapse in insurance.

Of the properties identified with a potential lapse, our process resolves 85% of them.

This ultimately has resulted in an overall placement rate of less than 3% of the loans tracked.

Unlike conventional carriers, we cannot underwrite or exclude individual properties.

Major catastrophes are infrequent, but when they do occur, the claims we pay on behalf of homeowners could be significant.

Industry models have projected increased frequency and cost of catastrophes, particularly along the Eastern seaboard.

Along with other factors, this is causing conventional carriers to raise rates and limit exposures, which impacts our business.

To update you on developments in New York, we continue to cooperate with the Department of Financial Services.

Along with other companies, we will participate in their upcoming hearings.

Overall, we continue to effectively run the business and focus on the needs of our customers and clients.

Last week, we rang the closing bell at the New York Stock Exchange to recognize our 120th anniversary and affirm the enduring values of Assurant.

Common sense, common decency, uncommon thinking and uncommon results.

Those values also are reflected in our track record of adapting to changing markets.

Our priorities are clear, to make Assurant more efficient, to focus on long-term profitable growth and to generate superior returns for our shareholders.

And with that, we can move in to the Q&A portion of our call.

Operator, first question, please.

(Operator Instructions) Ed Spehar, Bank of America.

A few questions.

First, a clarification.

The partnership with American Family, is that the Aflac American Family?

No it is American Family in Wisconsin.

Okay.

Madison, Wisconsin, Ed.

Okay.

Then the second question is, with regard to Europe and Solutions.

The concern about the profitability there, is it concern to the extent of a decision about whether or not it makes sense to stay in those markets -- all or some of those markets?

When we look at Europe, we have had a few problems that we outlined in the UK.

We're in the process of correcting those blocks of business, Ed.

We also thought there were opportunities to write new business, to help improve our profitability there and I think we're just looking at things saying, look, with all the austerity moves, let's make sure we have a sharp eye on that, and can write the new business that is going to required to get to our hurdle returns.

So the goal of 14% to 16% ROE for Solutions in 2014 assumes that we generally are in the markets that we're in today, but we just get to our targeted margins?

We see improvement or are in a position to take other actions that can get us there, Ed.

Okay.

Then the final question is on Specialty Property.

You had a strong first quarter.

You have a significant new, couple million loans coming on, understanding the placement rate is lower than the 2.8% you have on the overall, but still a significant new customer -- or a significant new block of loans.

The outlook for Specialty Property, flattish revenue and I think slight deterioration in the combine ratio, is that just an overly conservative outlook for this year because of the uncertainty on the regulatory front?

Or is there something else that we're missing?

Look, if you look at our history, on projecting what is going to happen in the housing market, Ed, we haven't been the best at understanding what is going to happen to placement levels.

We do feel that the seriously delinquent loan portfolios have built up, and if you just read everything out there, I think that servicers, the government, everybody is looking for ways of dealing with that issue and we think that will probably start to happen this year, which will reduce the placement ratios some.

And we look -- as we've talked previously, Ed, we still believe that the overall long-term trend in the lender place market is going to that steady-state that we've talked about in the past, so the question really is just the pace at which that happens.

And that's reflected in our outlook, too.

Yes.

So, again, what we outlined at Investor Day last year is, this is clearly a Specialty business.

We think we will return very good returns in the business.

But ultimately, the placement rates are going to be lower and our ability to predict that is not very good.

But we certainly believe that with all the issues around seriously delinquent loans, there is going to some resolution coming.

Jimmy Bhullar, JPMorgan.

Just to follow up on the placement rates, when they do level off, where do you expect them to level off?

Will it be more like a 1.5%, 1%?

And recognizing that they held up better than you expected.

The other question I had was just on your excess capital.

You have got $350 million above your $250 million risk buffer.

Should we assume that most of that would end up being used for share buybacks?

Or are you looking at acquisitions?

And related to that, is there a possibility that given all this regulatory noise, that something comes up that could cause you to temporarily suspend the buybacks?

Okay, so if we start and go back, Jimmy, first to the steady-state, I believe at Investor Day, we said we think our placement rate, steady-state, is more in the 1.6% to 1.8% range.

Okay?

We will look at that again.

But that would be our best guess today, as to what the steady-state looks like.

Second, very consistent with our capital management, we want to take capital and invest it in the business.

If it grows -- we saw a little bit of growth this quarter.

I wouldn't say -- I mean we're pleased with that, obviously.

But I don't think that causes any kind of a material change in capital requirements today unless the growth accelerates.

We also are looking for, can we find acquisitions that help us build out these models.

I think as we've said in the past, they're likely to be smaller acquisitions that could build out the businesses.

Ultimately, it is the shareholder's money and we have a pretty good track record of getting money back to the shareholder.

We find things -- we find our shares as Mike mentioned, attractively priced.

Chris, you want to provide some insight into capital movements during the quarter?

Sure.

Let me walk you through a little bit of the capital flows for the quarter.

Just a bit of a reconciliation here.

We started the quarter with about $760 million of total capital.

We were able to take some dividends in the quarter, about $55 million or so which took us up to $815 million.

We returned $115 million in the form of dividends and share repurchases.

We paid a coupon payment on our bonds which is a $30 million pre-tax.

Then the balance, which is about $70 million, were some capital outflows at the corporate level.

Keeping in mind that the first quarter is typically a higher cash outflow, corporate sector, which then most of which gets billed back to the segments over the course of the year.

The big contributor to that $70 million was an estimated tax payment of $27 million.

So that leaves us with the $600 million.

In terms of the dividends that we took, those dividends were taken out of the Health and the Employee Benefits segments.

We were conservative in our dividend plan in Q4.

We had some excess capital at Benefits and Health that we were able to take up in addition to their earnings for the quarter.

So going forward, we have about -- both the Earnings and Solutions and Specialty Property are both now available for dividends, so you're talking about $155 million or so at the operating Companies that we feel comfortable we'll be able to get over the course of the year.

I think the important message about the deployment issues is that nothing has changed.

We continue to think the share price is attractive.

The repurchases have continued through April.

If you look at the press release, you will see we bought another 650,000 shares for another $25 million and we're continuing to buy via 10b5-1, which is our preferred method, because it allows us to buyback through blackouts, in most cases, related to earnings.

Then the regulatory inquiries and noise doesn't concern you in any way to slow down buybacks?

Again, there can be situations that could cause us to not buy back.

It could be regulatory.

It could be acquisition, et cetera.

But you can see there has been nothing that has caused us to not buy back during this period of time, Jimmy.

Okay.

Just one more, if I look at your Specialty Property results, in terms of catastrophe losses and you compare that to the normal homeowners insurance companies, the frequency of cat losses is a lot higher with the All State, State Farm's of the world than it is with you guys.

I'd assume you would have more quarters with the catastrophe than those guys -- or cat losses, given that you've got more of an exposure to cat prone areas or your placement rates are higher there.

So, do you have any comments on that, on why you seem to have fewer quarters where there are any cat losses?

I think that, first, you're absolutely right.

We have more exposures along the hurricane cat corridors, I would say, maybe, Jimmy.

I would say that if you look at things, like the tornadoes, et cetera, that's just going to be a function of where our footprint is compared to where the cat happens to hit.

But otherwise, I think it is going to be a function of our concentration in the state, and where the catastrophe happens.

Yes, the catastrophes obviously can happen anywhere and as one of the core principles of the business that we've talked about over time, Jimmy is trying to make sure we're affiliated with national lenders and servicers.

Because that geographic spread of risk is important.

I would also point out, as Rob said, in some cases, we're seeing some of the conventional carriers pulling back from some of the coastal areas.

Things like that can impact our exposure, too.

Mark Finkelstein, Evercore Partners.

I've got a whole bunch of little ones.

Firstly, can you just give an update on the California rate situation?

In connection with that, could the rate changes that you ultimately agree to be retroactively applied?

Sure.

So we've had a rate filing submitted in California.

We're in discussions with the Department of Insurance out there.

I think that most of you know, we filed for a slight rate decrease, which we've mentioned, we do periodically.

They've asked us to look at it harder and refile, so we're doing that.

Mike, can you give a little background?

Yes, we previously disclosed our total net earned premiums last year in California.

We're about $240 million.

About half of that premium in California is subject to the rate review discussions that Rob mentioned.

In terms of the retroactive, again, I wouldn't think so.

Okay.

Obviously, California does things very publicly and other states don't really follow that same approach necessarily.

Can you maybe just give an update on maybe outside of California, outside of New York, what exactly is happening on the rate side?

Are you getting similar types of inquiries and pressures given all of the headlines that you've seen?

Or are those out layers?

Again, we have regular interactions with the State Insurance Departments everywhere.

It is part of the process.

Remember, in 49 of the 50 states, we're an admitted carrier.

So we file rates.

We don't -- the exception is the State of Texas.

So I would not say that other than the couple you've mentioned we've seen anything out of the ordinary.

I'm not even sure with California and New York this is out of the ordinary, either.

Okay.

Just moving topics slightly, RMS-11 is having some impact on Company's PMLs.

Can you give us a flavor for how that has changed your underlying exposures?

And what does that mean for reinsurance buying?

Sure.

So I will let Chris comment on our reinsurance program, which we can give a bit of an update on, but won't be fully placed until June.

But RMS-11 had obviously looked at things and said there was more inland exposure than might have been represented in previous models.

And also looked at how flooding impacted some of those models in a bit different way than previous models had.

Of course, our business is a little different in terms of how it operates.

So we've had the dialogues with rating agencies, and reinsurers so that they understand how our model works.

Chris, you want to amplify on that a little bit?

Sure.

Just a couple of things.

On the cat program again, keep in mind, we placed 70% of our program already, combined with the January placement in our -- the cat fund we issued in the first quarter.

We are having and have had ongoing dialogue with our reinsurance partners regarding the June placement.

We feel very good about the capacity being available.

What we do see with regard to the modeling is that most reinsurers and we are taking a multi-model approach, with adjustments based upon our views on the changes that took place in RMS-11.

As Rob mentioned, we will update you when we finally complete the placement, but we do feel very good that we will potentially have some slight increases in rate.

What I can tell you, though, is that the program has grown.

Given that we have exposures in cat-prone areas, that means we will be buying more reinsurance and will also probably lead to a change in our retention.

So these are all factors that we are going to work into the program.

We will keep you updated when we complete the placement.

Okay.

Just one final question.

Just on the -- in the medical segment, I mean obviously there is a lot going on with the Supreme Court and what happens with the individual mandate, what happens with the entire law altogether.

You talked about -- it sounds like have you strategies to cover each of those and it sounds like the outcomes -- certain ones are better than others.

Could you just walk through the scenario that would probably be most troublesome which would be the individual mandate gets removed but the inability to underwrite around pre-existing conditions is held in place?

And anything else on that topic would be helpful.

Sure.

Mike, do you want to --

I was just going to say, Mark, I think certainly, you could envision scenarios where the rules are written in a way that if your risk can't be managed and you can't manage the pricing to be with that, you can get some negative scenarios.

However, I think what I like to think about is healthcare costs are continuing to go up.

We don't see any clear evidence that healthcare costs are going to turn any time soon.

So our focus on affordable products that fit the needs of a wide range of consumers, are going to work, along with the expense control that we alluded to in our prepared remarks, that is going to make us more competitive.

So really, the key linchpins of our strategy are going to be valuable to us, we believe, in any scenario that comes out of the Supreme Court decision.

Yes, just a couple of other things.

If you recall, under state regulation, we had some of the same variations you're talking about, Mark.

Whether it was in small group, et cetera.

And we have that ability to analyze and decide, where do we want to play?

How are the rules going to work?

This will also create perhaps -- if something happens, a different interaction with the states, but I think what you should take comfort in is we have the ability to move quickly.

We're thinking about the issues.

Of course, until you know what the issues are and how they interrelate, it is difficult to try and isolate a single issue and say what is going on.

But saying that, the mandate itself is a fairly weak mandate, okay?

In our minds to begin with.

Because it is still probably allows a lot of people to buy insurance when they need it.

Chris Giovanni, Goldman Sachs.

Question for you, on the RFP process, with the Fannie loans.

Can you comment around premiums charged for those RFPs maybe relative to some of your existing book of business with them?

We don't go into specifics, but let me tell you what we can say, Chris, is that Fannie, and I think this probably relates to the growing seriously delinquent loans.

They're focused on how can they reduce insurance costs, related to that business.

And we think we have solutions.

We've responded to the RFP.

We think we have ways to deal with that.

But we also know that we've got to work it in conjunction with our servicing partners, and we're going to try and do that.

Mike, I know that you probably have some of the numbers that can shape what that looks like.

Yes, just to remind you, Chris, that we've talked about -- of the loans that we can track, the investor codes on our systems, which is most of them, about a third, we think we have about 8 million Fannie loans that we're tracking.

Yes, and remember, when they move to REO status, Chris, then Fannie self insures that business.

Okay.

Then do you know a timetable in terms of when you expect to get -- hear back from them?

Again, I think that we have had some dialogues.

I think that you've got probably the servicers weighing in on some of this as well.

Because this has an impact on how -- they want to make sure they're fulfilling servicing requirements that are discussions they have with Fannie themselves.

But in all this, remember, we've got about a 1% placement rate on those loans that are out with Fannie.

And we've got some solutions that require that different parties work together.

I think they were -- the original RFP, they were looking for something this summer.

Our best guess, it is going to take a little longer than that, but we don't know.

Okay.

And then in terms -- sorry, in terms of capital management, historically you haven't been active in the market during hurricane season.

But last year, you diverted from that a bit.

Chris just gave us some pretty good color around thinking about the reinsurance program coming up.

So as you think about that, how does that impact your decision around share repurchases and would you expect to be active during this wind season?

Well, Chris, our goal is to be in the market consistently.

In the past, we've dialed back because taking a conservative approach as it relates to when we move into wind season.

I think we will calibrate every quarter.

That's been the policy over the last nine quarters.

I think one of the things that we calibrate around is the cat program which we will have a better feel for in the next month or so.

But I think the goal would be, even adjusting for what we would like to think of as a seasonal buffer, so additional capital held back as we move into wind season, I think our goal would be to be in the market consistently throughout the entire year.

Okay.

So should we take the consistency meaning roughly the level of share repurchases you've had in 1Q?

Or just meaning you will consistently have some activity in the quarter?

I think, again, consistent activity, throughout the entire year, I think what I would discourage you from doing is attempting to extrapolate quarterly activity but really look at the body of work, if you will.

And when you start to think about the purchase, the last two years of purchases, the last nine quarters, and including, if you include April as well, it is 32 million shares and almost $1.2 billion.

So the way I think about it is, over the course of time, we will after applying our capital management priorities, we will return capital to shareholders.

And with the price as attractive as it is to us now, on a percentage of book, we feel that capital deployment through share repurchase is a prudent approach.

Steven Schwartz, Raymond James & Associates.

I've got a few, I think mostly quickies.

Just on the Specialty Property loss ratio for the quarter.

Very good, obviously no cat losses.

Are we also looking at a situation where -- call it large weather events that generally happen but might not be considered cats, didn't happen either because of the mild weather?

I think we had a real mild winter and we've had some of those in the past and then we've had some more severe ones and I think that is what causes the variation, Steven.

Okay.

And then just looking at the guidance for the loss ratio and the expense ratio, moving higher, obviously, versus last year, ex cats.

Is this a function of captives, that market possibly driving margin down a little bit?

I think it is really a function of what we saw, the product mix changing a little bit, which would be -- gee, we thought placement rates might start to go down a little bit.

We would have a little bit more of our other business, the multi-family housing, which includes the renters, and SureDeposit in it.

But it was really predicated on there being lender-placed placement rates coming down a little bit, Steven.

Okay.

Great.

Then on American Family, are they currently writing business for somebody else in the Health market?

I believe that they have had a relationship but I don't know who it is, Steven, that they were with.

So you don't know how much they were writing to begin with?

I don't, but they're in I think 14 or 15 states and they have written some small group insurance business with us for a number of years.

Okay.

Then just one last one.

I'm interested in the comment with regards to the Social Security adjudication.

Very interested in that.

A while ago, the New York Times had an article about some guy in Kentucky who never saw a disability case that he didn't like.

I'm sure you remember that.

Yes, we do.

Is this a response to that?

Is this a potential response to budget pressure?

What do you think is driving this?

I think there could be lots of reasons.

I think what we can observe, Steven, is just that it is taking Social Security a longer time to come to decisions.

And whether that is because they're taking a different approach, or just shear volume of applications, or whatever, the fact is, the way reserves in disabilities, at least our disability reserves, is we assume the longer time it takes, the lower the probability that a claimant is going to get Social Security.

So -- and if they get Social Security, of course that offsets our liability.

So the fact that these things are taking longer -- what is hard to tell, because you just need so much data to be credible in disability, is whether we're going to change the ultimate answer.

In other words, is it just a timing difference?

Or is the rate at which Social Security approves is going to change and it is going to take more time to see that.

But in the meantime that longer time frame actually feeds into our reserves a little bit.

So that is the impact that we mentioned.

That is because you're getting a couple of months extra where you're not getting the offset?

I would say it just a little different than that.

Mike pointed out that our reserves assume we're not going to get the offset, if we get it, then that will come back as a positive.

But right now, we're assuming we're not going to get it on some of those claims.

Jeffrey Schuman, KBW.

One follow-up.

I didn't quite follow, on the California rate review, why is only half the premium subject to the rate review?

We write a variety of different kinds of business, Jeff.

So that is just the portion of it, we have different legal entities and in our California businesses, just half of it is what's associated with the products California is looking at.

Yes, so I mean think about our renters business.

That is not something that is under review or our manufactured housing could or couldn't be.

So it is the business that we filed for a rate change on.

Okay.

That's helpful.

Thanks.

Then back on the Fannie RFP, can you give us a little more, a better sense of what that whole process looks like?

Is it mostly a discussion between Fannie and the traditional sources of capacity and loan tracking, or is this a much broader, outside of the box, process that could involve other sources of capacity and other types of solutions?

Well, again, I can't comment on the latter part, because I just don't know.

Because they put out an RFP.

And my nephew could have bid on it, Jeff and I don't know what he would have said.

But if you think about the processes that will be required to work on this, we think it will require an ability to track an integration with the mortgage servicers who also are performing a number of activities around things.

So we've responded.

It is a comprehensive detailed RFP, as you would expect.

That goes into a lot of things.

We think we understand what's driven this and we think a lot of it does relate to those seriously delinquent loans.

If you just think about the fact that were these in an REO status, Fannie would be self insuring them.

And these may be some loans that for whatever reason haven't moved to REO yet.

You start to understand their rationale behind looking at all this.

Okay.

That's helpful.

Thanks.

Then over on Health, I think the gap loss ratio last year was 74% for the year.

I think it was about 74% this quarter.

Can you update us on how we should conceptually map between the 80% requirement and then gap?

I think at one point, you were thinking maybe mid to high 70%s?

Should we think maybe a little lower is compatible with that?

Now, how should we think about that?

I think that is a reasonable range still, Jeff, when you think about credibility adjustment, you think about some of our business being subject to the MLR and some not.

So I think you would get into that middle 70%s range, to your point.

Okay.

So --

There is also transition relief.

There is changes in credibility.

There's just lots of factors that go into that calculation of the MLR.

Okay.

So some of the 74%-ish type numbers we've seen, we should view as being on the favorable end of what we should expect.

Is that fair?

I think it is likely to move up a little from there over time, yes.

Okay.

Then it seems like you've made really good progress on taking the expenses down.

The other part of course -- of the shift is really trying to get the volumes up.

Is it fair that the expense improvements have been sufficient, that maybe it takes a little bit of pressure on your requirements to scale up aggressively?

Or do you still need to scale up quite aggressively, do you think?

And if that is the case, do you maybe need to shift back and spend a little more money on marketing?

Yes, Good questions.

Where I would start is if you look at our emphasis on our Health Access products, we are pleased with the fact that we are writing quite a bit of that business, but remember, it is at a lower premium rate.

And is replacing higher premium, major medical coverages.

So we want to write more of that Health Access business.

We also feel that the Aetna relationship, which we're really expecting is going to kick in, in the second half of the year, will help us in that individual major medical side.

Wow, that was a mouthful.

And the point is, we've spent a lot of time during the first quarter on implementation, of just putting that in place, which was no small task.

So we think that we're well-positioned with that and the American Family deal to see our business, new business pick up in the second half of the year.

Again, in all this, we're looking to focus on meeting that affordability need of our consumers.

But I think we have talked and I think you're picking up -- you're thinking about it like we are, Jeff, is that we need both.

We've done a lot of great work, as you said, on expenses, we've got some more to do that and most of that continues to be in the infrastructure.

Then we've got a basis that we can leverage some of our distribution things.

We need to do both those things.

We need to continue to work on the expense side and with Aetna and American Family, and our other distribution partners to ramp up the sales too.

Mark Hughes, SunTrust.

On the healthcare reform, if the entire thing were to get tossed, how much change has there been at state level regulation, which is to say, how much could you go back to your former way of operating the business, if the Supreme Court throws out the whole thing?

Or are there other changes, regulations at the state level perhaps, that would still impact your business going forward?

Well, again, the states have involvement in the process.

I think they would adapt their thinking about things a little bit.

And we have good relationships with the insurance departments in the states we operate.

So again, we're sitting down and trying to analyze things, but it is -- there are so many variables involved in all of this, Mark, it is very difficult to be able to figure out exactly which pieces are going to impacted.

You brought that they just say throw out the whole thing.

I don't think we'd put a high likelihood on that.

It could.

But I don't think we'd put a high likelihood on that.

But regardless, we have a strategy we think will work either way and can be quickly adapted.

Because the cornerstone of all of it is affordability.

And the products we've designed that meet what consumers want.

Okay.

On disability, how much longer is that claims process, if you can say?

Then how important is that to your recoveries, or what proportion of your recoveries come from those Social Security approvals?

I can't give you a specific number on -- like number of months.

All I can say, Mark, is we're just seeing it take longer and that just complicates the challenge of just analyzing the business and things like that.

The fundamental issue is we need to get people, whether they get Social Security or not, we need to get them back to work.

And then the challenging economic environment, that is just proving harder that it has been by our historic standards.

Is that a smaller piece of your recovery?

20%, is it bigger?

It is hard, without having all the specifics.

So let's just take a very simple example, Mark.

Let's assume that in the first year, 70% of our claims, we assume are going to get Social Security.

After the first year and between years one and two, a 0.25 of them are going to get a Social Security recovery.

I'm totally making these numbers up.

After two years, nobody is going to get one, okay?

Now, if you think about the reserves that Mike mentioned, in that first year, we set up a gross reserve, but assume that we're going to get 70% of that reserve paid for by the reimbursement.

Not perfect, but if we were paying at the Social Security level.

You start looking at what happens as the payments are slowed.

You can see that we're increasing our reserves, as a result.

Now, if it turns out we actually get the money back, then we're going to have a positive flow in our financial statements.

But that is not what is going on right now.

John Nadel, Sterne Agee.

Rob, I'm curious about the pace of buybacks in the first quarter.

I think historically, this tends to be one of your bigger buyback quarters, historically.

Is there anything that we should read into the pace of 1Q buybacks?

Then also relatedly, could you discuss your expectations for a new buyback authorization, since it seems like the remaining amount on your current authorization is getting somewhat low?

Sure.

So, well first, I wouldn't read anything into the quarterly buyback.

I think Chris covered that in some detail.

I like the term you used, you've got to look at the body of our work as opposed to looking at a particular point in time.

I know you guys have to do that, but the answer is, don't read anything into it.

Our capital deployment strategy is consistent with what it has always been.

And I think both Mike and Chris mentioned, we think our shares are attractively priced.

I think you will see that reflected, moving forward in whatever we do with our buybacks.

I forgot the second part of your question.

Authorization.

That's a Board action, John.

So it is something we talk about regularly, with the Board.

We also talk to them annually about our dividend.

Chris, you want to comment on that?

John, just again, as Rob mentioned, I don't think it makes sense to speculate on anything that requires Board action.

But what I can tell you is we have regular dialogue with the Board on both the share repurchase and our dividend policy.

We have support from the Board and alignment on the approach that we've been taking.

So again --

Okay.

That is fair enough.

I understand you don't want to get out in front of the Board.

Rob, has anything changed on the M&A outlook?

I mean obviously a lot of financial companies out there are under some stress, particularly overseas, a lot of the kinds of things that I think you guys would have interest in or likely smaller pieces of bigger companies that may or may not be viewed as core?

So I'm just wondering if anything has changed on the M&A outlook.

We're continuing to look at things.

We're looking at lots of things, John.

Remember, as well, that things have to hit our hurdle rates to buy.

We've got to be able to buy in excess of our cost capital.

We said we're likely to buy things that are smaller.

I think you're referring to things that could be tuck-in acquisitions.

We would love to do tuck-in acquisitions.

I would say right now, the number one thing available in the market is something we're not too interested in, which is variable product stuff and there's a fair amount of it.

We're not going to interested in that.

But if you look at our record, the SureDeposit acquisition -- they're likely to be smaller things that are niche and fit in with what we want to do.

And if we can find the tuck-in that is something in excess of our cost of capital, absolutely we will consider it.

Very happy to hear no interest in the variable products.

(Laughter) Just -- and then two more quick ones.

What is the timing of this New York public hearing on the lender place business?

I think it is in mid May.

Okay.

Then what is your current assessment, Rob, of the -- what you're calling the mobile business now.

What we used to think of as wireless.

What is your current status of how that business is performing?

Clients up -- new client opportunities, competitive situations, that sort of thing.

We've got a lot of activity in the area.

Again, this is an area we like a lot.

Because we've mentioned that there's new business and new profit pools emerging all the time.

This is a business that is already exceeding our ROE targets.

We've mentioned a few of the -- the Sprint deal -- that we did with them on tablets, a small deal, but a huge learning opportunity for us in terms of where things might go.

We've got Telefonica, which we've been running hard at the implementation for a number of quarters here, feel good about that.

This is now going to give us the ability to test some new ideas -- in particular the pre-paid market.

So we feel good about that market.

And we think it is going to continue to grow, moving forward.

And it is a big part of where we expect to see growth.

Thanks.

Then the last quick one.

So I get it, that a lot could change on the healthcare reform, particularly with the Supreme Court reviewing it.

But if we just assume that the healthcare reform as it stands today remains in place, what is your best guess currently on the timing for getting to that 4% after tax margin target?

I think it is -- the way we've characterized it in the past is we have to have all the healthcare reform issues, which are coming in over the years.

John, we have to deal with all those.

I would suspect that 2014 time frame, things are fully implemented.

I'd look toward the later part of the year there for that to happen.

Again, the big key is that we have success with our affordable products in the Health Access portfolio and the supplemental products there, which again are performing well, but we've got to write more of that as well.

Steven Schwartz, Raymond James & Associates.

Just a few more if I may.

Rob, can you maybe explain something I'm not getting?

I saw the Aetna announcement, when it happened, you get to use their facilities, their network.

I mean that is nice, that is great that you have this, but how does that feed customers to you?

Only, we can then work their Tier One discounts into the pricing of our major medical products.

That has been an inhibitor for us in this business for a long time.

Because it has put us at a cost of goods sold disadvantage.

Because we've got to charge more.

Okay.

Got it.

Then just one more follow-up on the Social Security thing.

The way you described it to Mark Hughes, I think it was, was great.

Are you saying that -- okay, so let's say we're in year two here and you get an approval, that is going to be retroactive, back to the start of the claim.

That's what I didn't understand when I asked about the timing difference.

That's correct.

Yes, that's exactly right.

You're thinking about it the right way, Steven.

Thanks for joining us today.

We look forward to updating you on our progress on our next quarterly call.

This concludes Assurant's first quarter 2012 call.

Please note that a replay will be available as of 11 AM.

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