Assurant Inc (AIZ) 2012 Q2 法說會逐字稿

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

Today's call is being recorded.

At this time, all lines are in a listen-only mode.

At the end of the presentation, we will conduct a question-and-answer session.

Instructions will be given at that time.

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

Please go ahead, Ms Kivett.

Thanks so much.

Good morning, everyone.

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

Joining me on 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 second quarter results.

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

As a reminder, 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'll start today's call with brief remarks from Rob and Mike and Chris participating in the Q&A session.

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 these factors that could cause actual results to differ materially from those projected can be found in yesterday's news release as well as in 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 financial supplement posted at Assurant.com.

Now, I'll turn the call over to Rob.

Thanks, Melissa.

Good morning, everyone.

Our results in the second quarter were strong.

Our strategy to focus on growth in four targeted areas is working, despite continued economic headwinds.

We continue to return capital to shareholders via dividends and repurchase.

Our activity demonstrates the long-term value we believe our shares represent at current prices.

We are pleased with our performance against the three important financial metrics we've highlighted before.

First, we reported an annualized operating return on equity excluding Accumulated Other Comprehensive Income or AOCI of 14.4% for the quarter.

This includes $19 million of income from real estate joint ventures and $10 million of losses from reportable catastrophes.

Year-to-date annualized results stand at 14.6%.

Second, growth in book value per diluted share excluding AOCI was 5.3% during the quarter.

This brings the year-to-date growth to 9%.

Third, revenue, defined by net earned premiums and fee income grew by over 2% year-over-year to $1.9 billion.

Year-to-date, the increase is 1.9%.

Now, let me comment on the businesses.

In Solutions despite a challenging global retail sales environment, our business continued to grow through the addition of new clients.

We were pleased to announce our Mobile Protection program will be offered to T-Mobile's 4G prepaid customers.

In combination with Telefonica and the Sprint tablet program, it demonstrates our ability to find creative solutions for clients and consumers in this fast-growing segment.

In International operations, we saw a modest improvement in our combined ratio.

We continue to monitor European results carefully, given the economic uncertainty in that region.

In Specialty Property, we continue to see growth in both multifamily housing products and lender-placed insurance.

While the overall inventory of mortgage loans again declined modestly, we continue to add new loan portfolios.

The programs and activities to prevent property foreclosures have caused our coverage to remain in effect far longer than we have seen historically or expected.

As these loans resolve through foreclosure and short sale, which could accelerate, our premiums and earnings will decline.

Lender-placed returns will be lower than in the past, but as a Specialty business, they will continue to be attractive.

After Mike reviews the financial highlights for the quarter, I'll provide additional details and an update on the actions underway in our lender-placed business.

Assurance Health continues to make great progress in the post reform environment.

Health is offering affordable choice products for consumers, expanding distribution and reducing operating expenses.

As medical costs continue to increase, we believe consumers will find our affordable choice plans even more attractive.

We are seeing the number of individuals covered under our programs growing.

At Assurant Employee Benefits, net operating income improved as all product lines had favorable experience.

Our new agreement with United Concordia, announced in June, will expand our Dental network which is now one of the largest in the industry.

Our growth priority at Benefits is on voluntary products which represented more than half of our sales for the quarter.

Overall, we were pleased with our results and believe we are well-positioned.

With that, I'll turn it to Mike for more comments on the second quarter.

Thanks, Rob.

I'll discuss a few second quarter highlights and priorities for each of our businesses starting with Assurant Solutions.

During the second quarter, Solutions growth and net earned premiums and fees was led by Latin America and our domestic service contract business.

The International combined ratio improved slightly versus the second quarter of 2011, after adjusting for nonrecurring client settlement payments.

The improvement was primarily due to better European underwriting results.

We previously announced the loss of a domestic Mobile client.

We now know that this contract which accounted for about $100 million of annualized earned premium, will end on October 1, 2012.

As Rob mentioned, we are very pleased to add new accounts which will begin the process of replacing the lost business.

Solutions remains very focused on achieving an annual return on equity of at least 14% by 2014, up from what's currently running at about 10.5% excluding disclosed items.

In this quarter's financial supplement, we've included additional information as an exhibit on Page 23, to give you more insight into Solutions domestic, international and pre-need returns.

Reaching the 14% ROE goal requires growth as well as rigorous expense control.

The main drivers will be our ability to grow our Mobile business and improve profitability in Europe.

We also expect to be able to grow our pre-need and domestic service contract products while maintaining their attractive margins.

Specialty Property's results in the second quarter were strong.

We added a new lender-placed client, saw our existing clients expand and continued to see increased placement rates year-over-year.

Reportable catastrophe losses of $9.8 million this quarter were down substantially compared to the second quarter of 2011 as was our non-catastrophe loss ratio due to less severe spring weather.

During the quarter, we on-boarded the $2.1 million new loans we announced in the first quarter.

These will begin to produce premiums in the third quarter.

An additional 275,000 loans will be added in the third quarter due to a loan portfolio acquisition by one of our Specialty servicer clients.

Since these policies will be flat canceled, they will also begin producing premiums in the third quarter.

Placement rates remain elevated, reflecting experience on seriously delinquent loans.

As the market resolves the backlog of delinquencies, placement rates will decline and reduce premiums and their contribution to our earnings.

Our lender-placed products currently account for about 70% of Specialty Property's premiums and in the first six months of 2012, they accounted for just under 90% of the segment's income.

Their percentage of total income can vary significantly depending on catastrophe experience and other factors.

We saw good progress in our multifamily housing products, which achieved double-digit growth in net earned premiums and fees.

The results of our SureDeposit acquisition continue to exceed our purchase assumptions.

Assurant Health benefited from $13.9 million of after-tax real estate joint venture investment income.

Results were strong even without this income, as the business continued to focus on reducing operating expenses and expanding distribution.

Loss ratios declined due to favorable loss experience and a change in product mix, as affordable choice plans become a bigger proportion of the business.

Second quarter expenses were down year-over-year by $12.9 million, as we continued to streamline operations and improve our service to customers and agents.

Sales of supplemental products improved as more consumers expanded their health insurance coverage.

Individual market sales were up slightly, as we continued to execute our network partnership with Aetna.

Small-group sales continued to be slow as small employers remained cautious about changing carriers while the market adapts to healthcare reform.

Health had an excellent first half of the year, going forward certain provisions of the Patient Protection and Affordable Care Act will make the business more challenging but we are very encouraged by our progress.

At Assurant Employee Benefits, net operating income improved in all major product lines driven by very favorable loss experience in Disability and $1.9 million of after-tax real estate joint venture investment income.

While we were pleased to see improvement in our recoveries this quarter, we caution that incidents and recovery rates can be volatile from quarter to quarter.

The Disability environment remains difficult and maintaining this quarter's level of claim recoveries will be challenging.

Our Dental experience improved this quarter continuing the trend of the past two years.

Life results were also good during the second quarter, driven by favorable mortality.

Earned premium decreased due to the previously announced loss of two assumed Disability clients.

Overall sales were down 2% as increases in Dental sales were offset by decreases in Life and Disability sales.

Our strategic focus on partnering with key brokers and our expanded product offerings continue to improve voluntary sales.

Moving on to Corporate matters, we ended the quarter with $632 million in total holding Company capital after returning $180 million to shareholders through repurchases and dividends.

During the second quarter, we took more than $183 million in dividends from our operating Companies and we expect our full-year 2012 operating Company dividends to at least equal operating Company earnings.

We believe our shares are a compelling buy at the current price and expect to continue our share repurchases during the second half of the year, though as always, our decisions around capital deployment will reflect a number of factors including our risk exposure and experience during hurricane season.

Our investment portfolio continues to perform well.

We reported $29.8 million in pretax income during the quarter from two real estate joint venture partnerships.

These investments demonstrated our continuing ability to find value in this Specialized asset class.

Our low turnover investment strategy has helped us maintain yields, but like all insurers, we will continue to see yields decline in the current interest rate environment.

With that, I'll turn it back to Rob.

Thanks, Mike.

Since our first quarter earnings call, regulatory attention on the lender-placed industry has escalated.

We welcome the dialogue and understand the benefits that greater clarity on these matters will provide.

There is no single industry issue of greater priority for Assurant.

We take to heart our responsibility as the industry leader in lender-placed insurance.

That is why we are pursuing every opportunity to share our best practices, offer ideas to improve the product and processes and incorporate input from regulators.

The ongoing mortgage crisis in the US continues to cause problems and concerns for many homeowners.

But even during the crisis, it has been widely recognized that lender-placed insurance serves an important role in helping the mortgage industry operate more effectively.

Lender-placed products provide protection when voluntary coverage lapses or is unavailable to the borrower.

Ensuring that appropriate insurance coverage is maintained on properties is critical.

Perhaps more so than at any other time in the history of industry.

Today, we want to share as much information as we can about actions we are taking to ensure that Assurant remains the leader in lender-placed insurance and the current status of regulatory discussions.

Let me begin with the actions we have underway.

To meet the changing needs of the lending and housing industries, we are working with regulators to introduce a next generation lender-placed product to address some of the unanticipated issues that have developed during housing crisis.

This product will combine flexibility and best practices to address the concerns of various parties including expanded geographic ratings within each state to further differentiate rates for properties more exposed to catastrophe damage from those where the risk is lower.

Added premium rating flexibility from deductible options that can be modified based on factors such as coverage amount and delinquency status.

And continued enhancements to our already extensive customer notification process to make it absolutely clear to borrowers when they have lender-placed insurance.

As a proven leader with the systems and capacity to provide unique servicing capabilities for millions of loans, we want to help set the pace for a comprehensive next generation lender-placed solution.

This is a message we are sharing with our clients as well as policymakers and regulators.

Let's move to updates on our discussions.

At the national level, we have had several productive conversations with the staff at the Consumer Financial Protection Bureau.

We have shared details of our operation and the practices we currently follow along with additional ideas for improvement.

By September of this year, the CFPB expects to issue proposed regulations resulting from Dodd-Frank which will address lender-placed insurance disclosures, as well as other servicing issues.

We've met with the FHFA, Fannie Mae and Freddie Mac to understand their views and have provided detailed analysis and recommendations for lender-placed programs.

We've continue to speak with Fannie Mae regarding the RFP issued earlier this year.

Based on our discussions with the GSEs, the FHFA and the mortgage servicers, we believe we can help create a sustainable solution that meets the needs of all interested parties.

In August, we will participate in the public forum on lender-placed insurance being held by the National Association of Insurance Commissioners as part of its annual summer meeting.

We will join other industry experts to explain the important role lender-placed insurance plays in safeguarding both homeowners and investors.

At the state level, in California, we have made the requested rate filings and have continued our dialogue with the Department of Insurance about our proposed rates.

While we originally expected the decision in July regarding our filing, this process is now expected to take a little longer and at this time we do not expect a final approval until September.

In New York, we have submitted our next-generation product and met with the Department of Financial Services since the May hearings.

With their input, we believe we can tailor a new lender-placed program to address specific issues pertaining to New Yorkers.

As I hope is clear, there is an enormous amount of work underway.

We recognize that all the changes and ultimately a more normal housing market will mean that our lender-placed revenues will decline and so too, will our profits in this business.

But we believe the returns, although lower than recent years, will continue to be attractive.

The Specialty Property team is engaged at every level.

We are doing everything possible to -- initiate in dialogue with regulators; provide value to mortgage servicers; protect homeowners and investors; and ensure we remain recognized leader in the lender-placed industry.

No one in the industry has the expertise, market presence and operational capabilities to do what Assurant's lender-placed team does.

Every day, we help homeowners and mortgage servicers by providing exceptional levels of quality and efficiency.

With that, we can move into the Q&A portion of the call.

Operator, first question please.

(Operator Instructions)

Chris Giovanni, Goldman Sachs.

Rob, thanks so much for those additional comments.

Regarding the product change, is this a proactive decision?

Or sort of a directive decision?

Then in terms of the delayed response from California, has there been back-and-forth discussions between you and them?

Or are you just waiting for a response on their part?

Sure.

So, I think in context, Chris, we've been looking and recognize that there have just been changes caused by the housing crisis and we are trying to take steps to adapt and it's things we been working on for a period of time to do that.

So we've been proactive, things always take a little longer maybe than you'd like them to take, but it's things we've been working on for a while.

All the things we look at are set up to address and provide flexibility to a variety of different things we've seen as well as have been provided from -- the GSEs, the regulators, et cetera.

We're trying to take all those into account and fortunately, I think we've got a new filing with the flexibility to do that.

With California, again, we're engaged in the process, it's just taken a bit longer than we thought, but I don't think there's anything you should read into the fact that it's been moved back a bit.

Okay.

Then the additional disclosure within Solutions, I think very helpful.

The International piece is the one area that obviously doesn't look like it's earning the types of ROEs that you guys would like and you clearly have indicated a focus on improving that area.

But curious in your confidence given some of the pressures we're seeing in Europe in terms of one, growth and then two, in improving the International combined ratio?

Right.

I can take a shot at that, Chris.

I think when we think about International, clearly we've focused on Europe as being the most challenging from a growth standpoint given the economic issues there.

We have seen excellent growth over time in Latin America and in Canada.

So our International business is a blend of all those places, so we have added new clients.

The improvement that's going to drive that International ROE up is disproportionately going to come from Europe as we continue to address the underwriting and pricing issues there and hopefully add some new clients.

We're very focused on getting clients in our target areas, but if that doesn't happen, then we'll take the necessary actions on the expense side.

So yes, I would just add to that Chris, because I think that was an excellent summary Mike provided.

Remember, our near-term goal is to get the UK to break even by mid 2013, so we've got a business that is dragging ROE there.

That's Step One in correcting that overall and that will help quite a bit.

Steven Schwartz, Raymond James and Associates.

A few questions here.

It was mentioned that you've got a new portfolio coming onboard in the lender-placed business, 275,000 new loans; that's a flat cancel?

Did you mention what the placement rate is on that?

I don't believe we did, but I think the important point is the one you hit on that it will be a flat cancel versus on renewal and we're going to see premium producing in that portfolio in the third quarter, Steven.

We'll have a good idea on what the placement rate will look like, because we haven't boarded those loans yet.

Okay, all right.

In contrast, we've boarded 2.1 million loans, and they show up in our totals, but those are going to produce business on renewal.

Because we've boarded them, we have an idea that their placement rate will be in that 1% range.

Right.

Yes, okay.

That's the same number that you gave at the first quarter.

Then moving on, Rob, you made a statement -- ACA, some ACA Regs coming onboard will make the second half more challenging?

Could you detail what those are?

Sure.

Actually, Mike made the comment.

I'll let him talk a little bit.

PPACA has got some provisions relating -- primarily relating around experienced credibility, Steven.

You've got, in our -- remember the MLR calculation is state-by-state and legal entity by legal entity, so there is an enormous number of cells in that calculation and there is credibility factors in the calculation, if you have a relatively small amount of premium in any cell.

That has an impact on -- if your experience is better you get the benefit of that to the certain extent when it is not credible but as the PPACA -- as the years go on, there are provisions in the law where the credibility adjustment changes, making the target -- the MLR requirement higher.

So, sorry it's a relatively complicated calculation.

Hopefully that's a little bit clearer.

Yes, it is.

But on that business, I think the important thing to remember that Mike's listed is, we're ultimately going to have to -- our margin has got to come out of the difference between the loss ratio we need to provide and the premium we collect and that will be a bound on what we can earn.

Right.

Then one more, then I'll get back in the queue as well.

Mike, the recoveries were good in DI, how was incidence in the quarter?

Incidences remained pretty stable for us.

We've seen that trend in the recent couple of years, Steven, that our incidences remained relatively stable.

It's been the recoveries that have been more of a challenge for us over time.

We had very good experience this quarter.

I just reiterate what I said, that results on recoveries particularly can be volatile from quarter to quarter.

Mark Finkelstein, Evercore Partners.

I have a few.

You mentioned that the CFPB should have something out in September.

I'm just curious, is it your view that based on the discussions that you have held them that this will have fundamental changes in how this business is operated?

Remember, the CFPB is very focused on the RESPA Guidelines, Steven --

Right.

-- which may well influence how servicers present information, et cetera.

I think it's fundamentally going to be around the disclosures and we feel pretty good that our disclosures are good and we have some ideas on how to make them better.

Okay.

New York and California are the two very public states, Can you just give us a feel for what's happening in some other states?

For example, Florida or other states that maybe aren't quite as public as New York and California in terms of lender-placed business and rate filings?

Sure.

We have regular filings and discussions with all the different states.

Over time, I think we've tried to highlight the issues where -- we're having discussions around rate right now, so I don't see anything on the horizon particularly in Florida.

We certainly have the issues of where lender-placed is going to be discussed at the NAIC meetings.

We welcome that opportunity, because we think it'll be an opportunity for all parties to present how the product works, the essential nature of the product and it will be able -- it will allow us to show how we've been an innovator in other areas within the lender-placed industry at prior times.

Okay.

Maybe just moving on.

To go back to, I think it was Chris's question, on the International ROE of 2%, you have the profit strain of the UK and some other underperforming businesses.

You also have investment spend in Latin America and Asia, wherever.

How do you think about that path of 2%?

How much is contributed from -- in terms of getting back to call it, double-digit returns or getting to double-digits returns?

What is the path in terms of the pieces of the business that are underperforming versus the investment spend starting to subside?

Okay.

Mike, do you want to start?

Again, Mark, we've got the issues in Europe that we're very focused on there.

We've got targeted sales efforts at very targeted areas, Mobile, for example.

We're looking at expenses very closely in conjunction with that.

So, to the extent we're able to find clients in those targeted areas, that's great.

That'll help us and we can get some growth there.

To the extent that growth isn't there, then we need to address expenses in Europe.

So, those are the primary focus in Europe where growth is the most challenging for us.

In Latin America, we've added new clients.

There, to your point, we have added some -- or made investments and expenses to build up the capability to service that business.

Remember also that we've got -- to the extent we sell service contracts, we've got the delayed nature of the revenue recognition because we don't recognize revenue on extended service contracts until the manufacturer's warranties wear off.

So, that business is going to slowly ramp up there.

So the challenge in Latin America then is to keep finding those new clients and then start to leverage that infrastructure that we've built there.

So, I think those are the main things that I'd point to.

Yes, I think that the Latin America situation -- if you turn and look at China.

China, we've had pure investment for a number of years.

We announced the five-star deal.

It's mostly service contract business, but we now have what we believe is an embedded set of contracts on the business that are going to earn in the future.

I think Mike detailed how we've made a lot of progress on that in Latin America.

We now have that going on in China as well.

So, we have some very developed markets, Canada and Puerto Rico.

We have Lat Am that we're making lots of progress on.

We've got Europe that we've got to get to breakeven first.

We've got China that I think is also going to start being a future add to our earnings.

So, we've got every one of these buckets moving in a positive direction in that International area.

John Nadel, Sterne Agee.

A couple of questions.

So, all these conversations with -- boy, it sounded like so much alphabet soup -- but with the GSEs that you've been having, I'm just wondering if you can give us any sense for where things may be headed there.

For instance, I've heard that there had been some discussions about the GSEs potentially taking on near REO properties, in addition to the already fully foreclosed properties that we know they already self-insure.

I was wondering if you had any thoughts on that?

I think the big thing as we've talked to the different people, John, is just getting an alignment among the GSEs, as they're -- the FHFA is the regulator over both of those, if you will, or sets direction over both.

The first thing they're looking to do is just, how do we get alignment and make sure some consistency is going on here.

I think that, we've got a lot of unique capabilities that can help them with whatever solution they want to land on.

We've proposed a number of things to do that, in terms of sitting down and showing them things we might do.

So I think the real key is for them to just decide what they want to do and we're trying to help them in that process.

Okay.

Along those lines, Rob, in terms of some of the potential solutions or ways that it could change, I wonder, do you think there's any real potential that Assurant could be an insurance provider for the GSEs?

I know they've been self-insuring now for -- I don't know, for at least the history that I know about.

I'm wondering if there's a chance that could shift?

Well, it's certainly something we've tried to talk to them about historically.

I think they're focused on other things right now, John.

We don't want to give up on that, but I wouldn't put that probably as what we've seen as the top of their list.

Okay.

Then separately, but still related to lender-placed, I'm just wondering -- given the New York division seems so focused on the reinsurance arrangements with your servicer clients.

It seemed, I think, if memory serves, JPMorgan at the hearing indicated that they reinsure 75% of the premiums in your contract.

I'm just wondering if there's been any movement toward terminating those reinsurance arrangements?

Again, we don't disclose particulars of relationship with clients.

All the deals are unique, that would require JPMorgan saying they want to do something different, John.

As it relates to the Department itself, remember, we've had our discussions.

There were others who were at the hearings, I'm sure they've had discussions, but we've not been privy to any of those.

Okay.

So would be your expectation that ultimately reinsurance arrangements are terminated?

Or just don't know?

I wouldn't speculate on that.

Okay.

Then finally, turning to Health.

Obviously, a terrific quarter, even if we take out the real estate income, it looks like achieving that 4% or darn close to it, 4% after-tax margin and north of 15% ROE.

Mike, you mentioned in your opening remarks, some additional provisions that were going to be coming on from the reform that might mean that this level of earnings is not necessarily sustainable.

Could you just give us a little bit more help in understanding what's coming on in the near-term?

How much of a pullback in earnings we should expect before we ramp back toward that 4%?

Mike can give the details, but I want to go back and just provide a little color here, John.

Remember, what we've said is, we think we can get to that 4% after-tax margin once PPACA is fully implemented which is after 2014.

We said, along the way we have a lot to do but we can make progress as we go there.

But understand the way that the PPACA legislation implements on a year-by-year basis.

We've got to make progress and the legislation will push back at things a little bit.

Yes.

So we'll have that to overcome.

Again, I want to put it in the broad context of -- we're quite pleased with the progress we're making, but we've got more progress to make.

Then Mike, you want to talk a little bit about --

Yes, just maybe in a little more.

I mentioned the credibility issues earlier, John.

But if you look at our loss ratio this quarter, I think it was in the 73% range in Health.

If you think about -- I think we've talked on past calls, this idea that the MLR is 80% and that translates into something lower than that on a GAAP basis because GAAP and MLR calculations are somewhat different.

But if you think about business subject to the MLR is going to run probably a little bit higher than 75%, 76%, 77%, somewhere in that range.

Then you've got non-MLR business.

That's where some of the affordable options that we talked about is going to run probably a bit lower loss ratio.

You start to look at a blend.

Then the challenge going forward -- relating, that I referred to on the call, is primarily the credibility adjustment to the extent that we have non-credible business, we're currently getting the benefit of some of that lower loss ratio if it runs better.

But over time, we get less benefit from that as PPACA rolls out over -- further over time.

So, when you've got to -- you've got to look at the blend of all of these things when you think about what our loss ratio is going to be going forward -- I think the bottom line is it's going to be higher than say, the 73%.

Yes.

But that's why it is so important that we continue to sell new sales of the non-MLR products and continue the work we are doing to ratchet down expenses, that's how we sustain the returns.

What proportion -- just as a quick follow-up -- what proportion of the in force premiums or Health segment reserves or -- I'm not sure what way you might be willing to talk about this, but what proportion of that is the newer Health access and non-MLR type products, at this point?

Yes, we haven't disclosed that, John.

It's relatively modest at this point, because these products are starting -- we've started to really focus on them the last couple of years in the post reform environment.

Yes.

So they're growing nicely.

But they started from a small base.

Understood.

But at some point in the future that is something we will figure out how to disclose.

Okay.

I think the other one that just goes along with it, again, is we're also pleased with the progress we're making with the Aetna networks in the comprehensive or PPACA world, as well.

We think we'll have more of those sales in the second half of the year too.

That's helpful.

No, it's solid progress in Health, absolutely.

Thank you.

Sean Dargan, Macquarie Securities.

In Special Property, I realize that the revenue guidance for the year is going up.

But when we think about the steady state estimate that you put out earlier of combined ratio of 84% to 88% and expense ratio of 44% to 46%.

Is that still the way we should be thinking about this business in the out years?

I think that's a reasonable way to think about it.

Let's just reflect for a second on all the changes we've seen that have been caused in the last few years, because I think it's important and we're trying to deal with all these factors as well.

So, if you would have gone back three years ago, we saw a huge consolidation of loan portfolios with the big players.

Now, we're seeing a deconsolidation and move to the Specialty players.

So, that's a fundamental difference that's taken place.

Second, we're in a situation where delinquent loans have remained high, causing placements to be high.

Third, we've seen voluntary carriers reducing their exposure in cat prone areas.

We're seeing our exposure in cat prone areas increase.

So all these factors are causing us to look at the business a little bit differently than we have in the past.

We do feel the big issue on resolution of these delinquent loans and their movement to either foreclosure or short sale is likely going to cause our revenues to come down.

I've not been very good at estimating that via the placement rate on what's -- when that's going to happen because it's just very difficult to predict.

But we do understand that ultimately a normalized housing market will lead to lower earnings.

But we're still going to have good returns in the business.

Now, I realize those -- you said those returns will be lower than they have been.

Can you give us any --

We tried to provide that guidance, Sean, with that look at the combined ratios.

Okay, yes.

Combined ratios are going to go up a little bit.

You can think of that in a couple different ways.

One is, our other products don't have as attractive a combined ratios as the lender-placed product has had.

The second thing is, some of our expenses in lender-placed are fixed.

Our tracking system, the costs of running that tracking system are not going to go down when we have fewer policies in force.

Okay, thank you.

Just a follow-up about the real estate JV income.

I think that's the first time it showed up in a number of years.

Yes.

Do you expect to see more of that in the near future?

I'm going to turn it over to Chris, because I think he can provide some good color here.

Sure.

Hi, Sean.

Let me make just a couple comments, because as you mentioned, we haven't talked about the real estate portfolio in quite awhile.

We think about real estate -- we think of it as a specialty asset class for us.

We've been in the business for the better part of the last 20 years.

It's a very small part of the portfolio.

If you look at the end of the second quarter, the book value of the real estate portfolio is a little less than $240 million.

It doesn't produce consistent quarterly GAAP income.

You see that in the supplement, it's the main reason we don't include it when we give you investment yield calculations.

The approach that we take is very bottoms up, opportunistic.

We don't have set timetables around acquisitions and dispositions.

The two partnerships that made up the $29 million of income this quarter, one was in the portfolio less than two years, the other one was in the portfolio almost 12 years.

What we do focus on though is long-term value, cash on cash return and we've been very successful at it over the years.

Going forward, just to give you an estimate, there's probably about $60 million -- $55 million or $60 million of value in the current portfolio that over time we'll be able to monetize.

But there's no set time frame around how long that's going to take.

Again, we want to be opportunistic.

We want to let market conditions dictate the investment strategy.

The other thing to remember though is, it's cash return, $19 million plus of after-tax profit came into the Company last quarter.

I look at that as deployable capital, which will ultimately be able to get up to the holding Company and use either for buybacks or to fund profitable growth opportunities.

Ed Spehar, Bank of America.

A few questions, I guess, specifically on New York.

Are you going to provide us, at some point do you think, any time soon in terms of what type of rate reduction or targeted margins you might be thinking about on this new generation of your product?

The first thing we've tried to do, Ed, is bound the premium that will be subject to things.

I think we've identified that as $63 million in the state of New York.

Obviously, we are having discussions and when we have resolution, we definitely will let people know where things have landed.

Do you get any sense -- you've given us some good detail on the timeline or expectations around California.

Do you have anything similar that you can provide at this point for New York?

I don't believe I do, Ed, but when we have something, we'll certainly provide it.

Okay.

Then a related question is the NAIC meeting, is there any specific agenda that they have or any proposals that have been put forth by anyone to be discussed there?

Or is a pretty open-ended type of --

Yes, I think it's an open forum.

Both sides will be represented in the discussions.

I think that there's just been a general interest to learn more about the lender-placed industry.

The good news to me is, we have a number of people within the NAIC who are quite impacted and see the need for capacity of lender-placed insurance.

They'll be there as well.

Okay.

So, no -- there's not -- it's not like yes or no minimum loss ratios or anything like that?

No.

Okay.

Then, one last question.

With regard to the International ROE in Solutions, can you give us any sense just roughly where that ROE would be if we thought about Europe in sort of a normal economy or economic recovery type of scenario?

So, excuse me, not necessarily targeted ROEs in Europe or anything else, but if the environment was a little more normalized?

Well, I think the improvement in Europe is going to come from a combination -- some combination of growth and expenses, Ed.

I don't think we're prepared at this point to tell you, to split the equity -- the International equity with the sort of, I think what you're asking.

But we can say that the bulk of -- if we think about and you can see from our disclosure and do the numbers, how -- that the International ROE has to come up from this current 2% if we're going to get to the 14% target.

Most of that I think is going to come out of International.

That in turn, most of that is going to come from Europe.

Maybe a way to think about it Ed, is we previously provided the losses we had in the UK.

I can't remember where that was, but I think we said about $35 million, just think about that going to breakeven.

Okay.

So something similar type of magnitude to that?

Right.

Now recognize, we've made progress.

It's not at $35 million anymore, but there is still -- we're not going to breakeven until the middle of next year.

Jeff Schuman, KBW.

I was wondering if we could talk a more about the concepts you've mentioned for the next generation lender-placed product?

I'm a little slow, so I could use a little help there.

For example, you expanded geographic rating.

I guess the idea is you would -- the rating would be more sensitive to levels of cat exposure, is that the basic idea?

That would be one of them.

Let's start and go back historically.

This has been a very simple product.

One of the things, one of the reasons for it is, we wanted to be differentiated from the voluntary market.

We take all comers and the basic genesis of it was in a different time in the housing industry.

When we sit down and look at things, there are things we can do differently and a lot of it really relates to an ability to do things in concert with our mortgage servicers.

So, for instance, we've got to have interface and system capabilities to address different things.

You brought up geographic rating and we think that's one of them.

Clearly, if you look at some of our coastal areas, being able to offer different rates on the coast than inland, that certainly makes sense to us.

Okay?

But you can also get in to, well, maybe they want something else different.

Maybe they want deductibles that vary by the value of the home.

Or delinquency status.

Or delinquency status.

These are all things, we've looked to figure out how to build into the product in response to just things we've heard from different constituents.

It's not immediately clear to me.

It sounds like some of this responds more to some things that services are looking for.

Does this somehow also address some of the regulator concerns?

Do these changes have an obvious directional bias to your revenues and earnings?

Well a couple different things we're trying to respond to everyone.

So the servicers are our clients.

First, we've got to have enabling capabilities to respond to what's going on.

The good news is, we have the systems and infrastructure that can deal with a lot of these things.

That's quite important.

In some cases, the servicers may have limitations with how their systems operate to deal with things.

Then you have ideas being offered in by the GSEs or the regulators.

We're trying to provide a comprehensive solution that can respond to all those things.

Again, when that housing market normalizes, when we put the new product out there, that we know in total our earnings are going to be smaller.

But our returns are still going to be good.

Okay, that's helpful.

Just one other thing, on the state-by-state regulatory read, it sounds like outside of New York and California you're not having the same types of conversations.

I'm wondering if that, at this point, is more of a reflection that those states have reviewed the issue and are fine with the rates.

Or is it more the situation, as we see in some cases that the smaller department sometimes deferred to the leadership of California and New York and might draft off the outcome there?

Again, let's take a starting point here.

The starting point to me is, there is a recognized thought process, that there is an essential need for this product, okay?

How it prices can be debated, but the need for the product is uniform.

Everyone sees that it's essential to making mortgage lending and the housing industry work.

We've had conversations with many regulators, I couldn't name them.

I'm sure -- that's not the point, but these are the two that are front and center.

We're trying to engage in active dialogue with them and get to a solution here.

We think the new product can be a big part of that.

Mark Hughes, SunTrust.

I don't know if you'd care to throw out a number, but if you did give full credibility to some of these loss numbers in the various states, how much would that impact the overall loss ratio, say, if all this was kicked in immediately?

I think you've got to look at the loss ratio that we present, Mark, the 73%.

As I said, if you think about fully credible MLR business running somewhere in that above 75% as I said, you're going to have -- our overall aggregate loss ratio is then going to be a blend of that MLR business and the non-MLR business so, the number would move depending on the mix.

Then, if I did all that math, where would I come up at?

We don't have that with us right now, Mark.

We can try and look to provide further insight on that in future calls.

But I think the more important thing is to remember, that fully comes into effect in 2014.

Mike pointed out, we're doing 260 calculations to calculate all the rebates because they very by legal entity, they vary by state, small group, individual, it would take a fair amount of work to do that.

We just don't have it with us right now.

Exactly.

Understood.

Then, how about in the Benefits business.

Any comment on underlying pricing, assuming your employee count or customer count stayed steady?

What are the pricing trends generally?

I think that certainly, the market is raising prices on Disability, Mark, in response to the interest rate environment and some of the challenges in incidents and recovery that various carriers are seeing.

I think we probably started a little bit earlier than some others but I think the renewal rates are definitely going up.

I hesitate to put out a number, but we're getting meaningful increases in renewal pricing.

Chris Giovanni, Goldman Sachs.

Thanks so much for the follow-up.

Just a question on capital management.

You had mentioned $380 million of deployable capital.

When we look back over the past couple years and the periods where concerns around regulatory inquiries in Specialty Property prop up going back to the fall of 2010 with the banker article last summer, then the second quarter of this year.

You look at the corresponding activity that you guys did with share repurchases.

You were purchasing $160 million at share prices in the, call it, $32 to $34 range.

So when we think about the pace of share repurchases going forward, should we be thinking when shares are at this level, that's the level of share buybacks we should be assuming?

Or should we say, this is a sustainable rate, just given how much deployable capital you guys currently have?

Yes.

Just a quick comment.

First, we've tried to reiterate, we see the share price as very attractive.

I think Mike and I both said that.

I think Chris said it too.

We tend to buy through 10b5-1 programs.

We try and take into account the current situation when we set that 10b5-1 program into effect.

Chris, do want to provide a little more color there?

Yes.

Just a couple comments.

Again, when I think about share repurchase, certainly buying back at current prices is a prudent use of deployable capital.

There's no question about that.

But the goal here is to be disciplined about returning capital, be in the market consistently and also as we head into cat season be careful about maintaining what we've talked about and called a seasonal buffer.

So as we head into wind season, we're going to probably -- we're going to likely to hold more than the $250 million capital buffer that we've talked about.

In terms of the pace or the degree at which we're buying relative to share price, we're not trying to market time.

The goal in the use of the 10b5-1 program is to allow us to be in there consistently through blackout periods, and again, returning the capital to shareholders.

The other thing to keep in mind is that even given the significant amount of repurchase activity over the last 18 months or so, shareholders equity ex-AOCI has not changed at all.

This is as much a cash flow profitability story as it is a repurchase story.

Okay.

Then just as a quick follow-up.

Is there anything going -- a lot's going on in the regulatory side, is there anything that you guys see on the horizon that could preclude you from repurchasing stock?

Or does your 10b5-1 program basically diminish the risk there?

The way we like to run the repurchase program is put 10b5-1 programs in place to get us through blackout.

When we go into the next open period, we recalibrate our outlook for capital and then put another program in that will take us to the next blackout period.

Now, again, keep in mind that also spans quarter-end, so it's difficult to link quarterly repurchase activity to the programs that we put in place.

But if we do find ourselves in an open period blacked-out for a reason other than earnings, then that's going to affect what's going on.

Thank you for joining us today.

We look forward to updating you on our progress next quarter.

This concludes Assurant's second quarter 2012 call.

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

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