Assurant Inc (AIZ) 2012 Q3 法說會逐字稿

Welcome to Assurant's third quarter 2012 earnings conference call and webcast.

At this time, all participants have been placed in a listen only mode and the floor will be open for your questions following the management's prepared remarks.

(Operator Instructions)

It is now my pleasure to turn the floor over to Francesca Luthi, Senior Vice President of Investor Relations.

You may begin.

Thank you, Clint, and good morning everyone.

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

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 third quarter results.

Both the release and corresponding financial supplement are available at assurant.com.

As a reminder, all prior period financial information presented in the release, financial supplement, and on this call reflects a new accounting guideline 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 with Chris participating in the Q&A session.

As a reminder, 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 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, second quarter 2012 form 10-Q, and the upcoming third quarter Form 10-Q 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 on assurant.com.

And, with that, I will turn the call over to Rob.

Good morning everyone, and thanks, Francesca.

We are pleased to have you on the Assurant team and appreciate the seamless transition you have provided investors because of the broad experience you bring to the job.

I also want to congratulate and thank Melissa Kivett as she moves to her new role as Senior Vice President, Business Development and Strategy.

This is an excellent example of how we develop the leadership team at Assurant.

Our results for the third quarter of 2012 were strong and in line with our expectations.

We are pleased with our continued progress in executing our strategy as we gain traction in the areas we have targeted for profitable growth.

We are committed to creating long-term value for shareholders and our capital management strategy is a key driver.

For the first nine months of 2012, we have returned approximately $420 million to shareholders via dividends and share repurchases.

And, we did this while maintaining a strong balance sheet.

Let me outline our performance against the three key operating metrics we use to track our progress.

First, we reported an annualized operating return on equity, excluding accumulated other comprehensive income or AOCI, of 11.8% for the quarter.

Year to date, annualized operating return on equity is 13.6%.

This includes $20 million of income from real estate joint ventures and $28 million from reportable catastrophe losses.

Second, book value per diluted share, excluding AOCI, grew by 4% in the quarter and by 13% year to date.

Solid earnings and continued share repurchases drove the increase.

Third, revenue, defined as net earned premiums and fee income, grew by 4% to $2 billion compared to the third quarter of 2011 with solutions in specialty property leading the increase.

Year to date, revenue increased by about 3% compared to last year.

In 2012, our focus has been on achieving profitable growth and we are making solid progress.

But, the macro environment is challenging.

Unemployment remains elevated, interest rates are at record lows, and regulatory change is pervasive throughout the financial services sector in general, and the insurance industry in particular.

Now, let me comment on the businesses and the key trends influencing our results.

In Assurant Solutions, both revenue and net operating income increased in the quarter compared to 2011.

Improved performance in our domestic service contract business, and across our Latin American operations including mobile, were the primary contributors.

As sales have begun to rebound in the US automotive sector, our vehicle service contract business is gaining renewed momentum.

In addition, the continued growth in the use of mobile devices has expanded the market opportunity for our products worldwide.

Our pre-lead business continues to perform well as we work closely with the industry leader, SCI.

As we look ahead we are focused on achieving a 14% ROE in solutions in 2014.

This will require a continued organizational focus on our strategic growth areas and reduce resources on non- growth areas.

Turning to Assurant Specialty Property, our track record of great client service continues to generate success.

We expanded our lender placed business with new and existing clients.

In the third quarter, we signed a contract with a new client for a portfolio of 1 million loans, with expected placement rates around 1%.

We expect to earn premiums on this business after the loans are on-boarded in the first quarter of 2013.

Including this win, our total loans tracked are up more than 7% since 2010.

We have benefited in recent years from loan movements toward the specialty servicers.

We have won portfolios in competitive bidding.

Placement rates have remained at elevated levels instead of declining.

The timing of the housing recovery is difficult to predict.

But, we do believe that when the business normalizes, we will continue to have an attractive lender placed specialty business albeit with lower capital requirements and earnings.

We continue to grow our multifamily housing business comprised mainly of renters insurance and resident bond products.

Together, they have grown to over $145 million of annualized revenue and we believe they have the potential to deliver double-digit revenue growth for the next several years.

After Mike reviews the financial highlights for the quarter, I will offer an update on various actions underway in our lender placed business including the recent California rate reduction.

Assurant Health's third quarter performance reflects continued success in 2012 in reducing expenses and tailoring our product offerings to consumer preferences for affordability and choice.

We are encouraged by the growing interest in our Assurant health access and supplemental coverages products as Americans look for affordable alternatives.

Our network agreement with Aetna further improves the affordability of the individual major medical products and offers a broader choice of network providers.

Health will face additional challenges as the implementation of the Patient Protection and Affordable Care Act continues to unfold.

With the health exchanges beginning to take shape for 2014, we will need to further adapt our business model in what will be an evolving and likely quite different individual medical insurance marketplace than we have seen before.

While we work to address these near-term challenges, we remain confident in the long-term prospects of our business as the healthcare market opportunity expands.

Assurant Employee Benefits continues to navigate through a challenging environment, characterized by low interest rates and continued economic uncertainty among small businesses.

Voluntary products remain our growth engine in Employee Benefits.

And, accounted for nearly 50% of new sales and more than one-third of earned premiums in the quarter.

These results demonstrate the success of our distribution approach that emphasizes key brokers as well as our expanded voluntary offerings and capabilities.

Overall, I am pleased with our progress this year.

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

Thanks, Rob.

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

During the third quarter, Solutions delivered double-digit growth in net earned premiums and fees driven by our domestic service contract and Latin American business.

Growth in Latin America was primarily generated from service contracts sold through mobile and retail clients.

As a reminder, net earned premiums in the fourth quarter will reflect the previously disclosed loss of a domestic mobile client effective October 1 which accounted for about $100 million of annual gross -- annual earned premiums.

Solutions also generated strong sales particularly in our domestic service contracts from both retail and automotive clients.

In the third quarter, we assumed a block of automotive warranty business which added about $40 million to gross written premiums.

This block, along with improved auto sales over the past year, has led to strong growth in our vehicle service contract business.

Solutions new business pipeline remains strong, particularly in the mobile segment.

Our previously announced wins, both domestically and abroad, demonstrate our ability to compete in the fast-growing mobile marketplace.

The international combined ratio decreased to about 102% excluding a charge related to a recent Tax Court decision impacting certain products sold by insurance companies in Germany.

The improvement was driven by more favorable results in Europe and Latin America.

For the full year, we expect the international combined ratio to be near our target of 102% excluding disclosed items.

Solutions remains focused on its goals of breaking even in the UK by mid-2013 and achieving an overall return on equity of 14% in 2014.

While we expect growth across the business, we will need expense reductions to achieve these targets particularly in areas experiencing market pressures such as Europe and the domestic credit business.

Specialty Property posted strong results in the third quarter.

Reflecting revenue growth in lender placed homeowners insurance and multifamily housing products.

Catastrophe losses were lower compared to the same period last year.

Placement rates remain elevated compared to historic averages reflecting the continued impact of seriously delinquent loans.

We did, however, see a ten basis points sequential decline in the third quarter.

This was driven in part by the 2.1 million loans we added last quarter which have about a 1% placement rate.

But, it may be further evidence of seriously delinquent loans moving to resolution.

We anticipate that placement rates will continue to decline at a pace which largely depends on the state of the economy, housing policy, and client specific portfolio characteristics.

For 2013, we expect lender placed premiums and returns to be lower primarily reflecting a continued reduction in placement rates and lower premiums including the impact of the California rate reduction.

This will be partially offset by the recent growth in the number of loans we track.

We intend to mitigate the impact of lower premiums and higher combined ratio's by managing expenses and freeing up capital as the business moves to a normalized steady state over the next few years.

At Health, net operating income increased due to continued expense management and favorable loss experience.

The higher effective tax rate in the quarter reflects healthcare reform restrictions on deductible expenses.

Revenue declined due to ongoing product mix shifts and challenging economic conditions particularly in our small group business.

Our target market in Health's group business is employers with less than ten employees.

We're seeing fewer businesses of that size adding employees or looking for coverage.

In the quarter, Health continued to tightly manage expenses.

We will continue to look for additional expense savings opportunities over the course of the next year, but they are likely to come at a slower pace.

Looking forward, we expect our loss ratio to increase as we continue to adjust our pricing to reflect minimum loss ratio targets.

We also expect continued weak sales in our small group segment as employers grapple with understanding the full impact of healthcare reform.

These trends, combined with the expenditures required to prepare for 2014 requirements, will lead to a decline in Health's earnings next year.

Despite the near-term hurdles, we are focused on generating sales, driving further expense savings, and managing capital efficiently as we position our Health business for long-term success under healthcare reform.

At Employee Benefits, net operating income declined by about 3% compared to the third quarter of last year reflecting slightly higher disability loss experience which can often be volatile from quarter to quarter.

Overall disability incidence rates remained stable and dental experience was excellent, consistent with recent trends.

Looking ahead, persistent high unemployment, low payroll growth, and low interest rates continue to present challenges which we will have to navigate.

However, our broad product suite and robust administrative and enrollment tools make our voluntary products attractive options for businesses with less than 500 employees.

Moving to corporate matters, our capital position remains strong.

We ended the quarter with approximately $370 million in deployable capital in addition to our $250 million buffer.

Share repurchases totaled $110 million in the quarter compared to $76 million in the same period last year.

We anticipate that full year operating company dividends will at least equal operating earnings.

We continue to believe our share price is attractive and expect to continue our repurchase activity during the remainder of the fourth quarter subject, as always, to market conditions.

Despite persistently low interest rates, our investment portfolio continued to perform well.

Our conservative investment philosophy and low asset turnover helped to moderate the pace of the yield decline in our portfolio.

In line with our accounting policy, we will perform our annual goodwill impairment testing during the fourth quarter.

While we hold our goodwill in the corporate segment, testing is done at the business segment level.

We will carefully consider the impact of the economic environment on each business and will report the results of our goodwill testing on our fourth quarter call.

Overall, we are pleased with our third quarter results and progress in creating long-term value for our shareholders.

And, with that, I will turn the call back to Rob.

Thanks, Mike.

Now, I want to update you on what has transpired in our lender placed business since our last call.

I will start with California.

In 2012 we expect to record approximately $108 million of net earned premiums for policies subject to the rate reduction, compared to $124 million earned in 2011.

The agreement we reached to reduce rates by about 30% reflects continued favorable loss experience since we first filed for a decrease nearly two years ago.

It also uses different assumptions about future experience than we used in our previous filings.

These rates will be implemented on new policies beginning sometime in January and on policies that renew after that date as well.

The estimated impact of the rate reduction on net earned premiums and net operating income will be about $33 million and $18 million respectively on an annual basis.

Let me provide some background on these estimates.

They assume that our block of business and placement rates in California remain at current levels in the future.

For context, California placement rates are down this year compared to 2011.

The ultimate impact from the reduction will depend on future placement rates and many other factors such as lapse rates, when policies renew, and average insured values of homes.

I should also point out we are pursuing operating improvements which have not been considered in the net operating income impact provided.

It's important to remember that the rate setting approval process varies in each state.

Regulations and rating variables such as coastal and catastrophe exposure, loss experience, prospective claim cost trends, and the availability of insurance coverage are state specific.

That is why our state by state outreach is critical.

We regularly engage in discussions with the different insurance department.

Right now, these discussions are centered on how to best implement our next-generation product.

For example, in Florida, we are in discussions with the insurance department and are preparing to file our new product in the fourth quarter.

Florida continues to be our largest state and also bears a large proportion of our catastrophe exposure.

Therefore, to fully understand our business there, it's important to consider net earned premiums before the cost of catastrophe reinsurance.

In the first nine months of the year, this amount totaled about $270 million.

We have begun to implement our next-generation lender placed product in 14 other states where it has been approved.

We plan to follow a multi-phased rollout that will continue throughout the next year.

In New York, we continue to be in dialogue with the Department of Financial Services but do not have any further updates at this time.

At the federal level, the Federal Housing Finance Agency has stepped up efforts to get input from the mortgage servicers and align the views of Fannie Mae and Freddie Mac.

We have supported our servicer clients with information as they have provided input to this agency.

The Consumer Financial Protection Bureau proposed mortgage servicer guidelines issued in August.

The guidelines largely reflect many of our current lender placed practices.

We expect them to announce their final rules in January 2013.

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

Operator, first question please.

The floor is now open for questions.

(Operator Instructions)

Mark Finkelstein, Evercore Partners.

Actually, I just want to go back firstly to the last comment that you made, Rob.

I think you said Florida premium was $270 million before the cat load.

How much is it with fully baked?

What we're trying to provide, Mark, is a way to think about the premium subject to a rating action.

So, what we did is outline the earned premium plus the reinsurance premiums related to cat exposures in the state of Florida.

Okay.

I just think that just knowing how important Florida is, and most people having estimates that are meaningfully higher than that would imply.

I'm trying to get a feel for whether the book is 25% in total, fully loaded, 30%, 35%, 40%.

Remember, that's a nine-month --.

Yes, that's a nine-month number, Mark.

If you annualize it that maybe helps.

You talked a lot about capital release in Special Property.

I'm trying to get a handle around how to think about that.

On the one hand, you have placement rates that are clearly going to go down over time and therefore your exposures go down.

At the same time, you also have likely rate compression that arguably affects the ability to cross-fund losses.

How should we think about capital release as both of those factors work together?

Let's start with our capitalization for the business, for all our businesses, start with the BCAR models for Best.

And, those models are what we use to maintain ratings which are quite important to our clients.

All of our ratings are at the A minus or higher level.

And, so, when you look at those formulas as they relate to the statutory entities where we write this business, the capital requirement is in the mid-40% of premium level.

That's a simplification because there are a lot of factors that work into that, Mark, but that is just a way to think about things.

Clearly, we agree that as the business moves toward a steady state, we're going to earn a little bit less money.

But, the returns will still be attractive.

And we are going to be in a position to still have an attractive specialty business when we return to more normal levels.

Maybe I'll ask it more simplistically, which is as placement rates go down, should we -- in just knowing that there are rate pressures, would we assume that the ability to leverage the business is actually not as favorable because of the rate actions?

Or is it more in line with how placement rates should go down?

If I'm understanding the question, I think it is more in line.

Again, you have got to think about the process of capital requirements and what they are a function of.

We will earn a little bit less, we will get some, but not all the same, kind of expense efficiencies because some of the costs are related to that tracking system.

Which, in the near term, are pretty fixed.

Okay, and then, just on expenses and you talked about as the business declines, cutting expenses etc.

I'm trying to get a framework on how to think about that as well.

Because, again, you have the total platform of Specialty Property declining fairly meaningfully given where placement rates are, etc.

The question is can you actually scale down the operating expenses?

Not the variable expenses, but the fixed costs, in line with how premium goes down or do you end up with negative leverage?

Okay, a couple different points.

Number one, the reason we have been so successful in this business is our customer service, which we're not going to cut back on that.

In fact, I would say many of our servicing clients are asking for more services from us, and we are able to provide them.

So, we're not going to give up on anything that might impact the customer.

We have had quite a bit of growth in the business.

We've talked about placement rates going down for several years, they in fact have gone up.

They are still at elevated levels.

We don't know what that actual steady-state level is, but we have compared back to 2006, okay?

And, we have said we believe that is probably where things will return when the mortgage market recovers.

We have had a lot of growth, Gene and his team are always working on operational improvements.

We will find ways to reduce expenses.

In the near term, there are some of the expenses that are more fixed.

We can look at those two, but I would keep that first point I made in mind here.

The customer services a big part of what delivers our value proposition to the servicer and we don't want to give up on those things.

So, we will work our way to finding out how we can get to lower expenses.

Right now remember, we're still acquiring loans.

Our loan portfolio is growing and placement rates are at higher levels.

So, we've got to deal with the business as it exists today.

Okay, all right, thank you.

Chris Giovanni, Goldman Sachs.

Follow-up for Mark's question on the expense side.

Rob, you mentioned '06.

If we go back to that time frame, your -- the administrative expenses were running, around $550 million.

Today, we are closer on an annual basis of $825 million.

If we think about that as a steady-state for a revenue side, should we be thinking about the same level of expenses?

Or is some of the customer service initiatives you guys are implementing going to maybe drive up that number a bit higher?

That's an interesting way to look at it.

I can't speak to all the numbers right away.

But, I think a couple things that are important to think about, Chris, are we have some -- a mix of business shift going on.

We mentioned our renters business and multifamily housing product business is growing.

That has a different expense structure associated with it than the lender placed business does.

When you look at premiums, premiums that are generated have some variable components.

Those expenses will go away as premiums do.

And, we are working with him efficiencies in the business and we hope to reap those as well.

Again, I think what we need to do is allow a number of things to settle out here.

And, we will be in a position to provide you an update on our belief on where things will be.

We just don't have that right now because, again, we are adding new business and the market is growing for us right now.

Okay, understood.

And then, you had mentioned the 14 states that you have seeked and gotten approval for on the next-gen product.

Can you maybe talk about the differences in price and maybe the terms and conditions of the new policy versus the previous policy?

And then, roughly if you do have what percentage of premiums these 14 states represent?

Yes, a couple different things.

As we have talked about this next-generation product, the features that go along with that, they are not rocket scientist type variables.

We are going to do a little more expansion of geo rating, okay?

We are going to have more deductibles -- more options on deductibles.

We can deal with different blocks of loan differently.

That is not where the work is.

The work is being in a position to service programs for each of the mortgage servicers differently.

That is where we have spent quite a bit of time and effort in our system area to make sure our systems can accommodate that.

And so, that is why we are very focused on the implementation, because that's the most important thing.

Now, in terms of trying to figure out how any of this is going to work, it is way too early.

We just are starting this process in a few states and it is going to be dependent on who the particular policyholders are and their characteristics.

When we have a line of sight on that we will provide information.

In the initial rollout of something that is reasonably different, we would naturally, I think, start with our smaller states.

And so, the 14 that we are working on now tend to be on the smaller side.

Plus, it is going to take some time to actually roll out and go through the letter cycle and all the other things that go along with the policies.

So, that's another reason it is difficult to give you an estimate of the premium impact now.

I would also say, Rob mentioned the flexibility.

I think that's a pretty important point, because our servicers then can have more choices in how they administer their own programs, which means the impact on us will be somewhat dependent on client decisions too.

Okay.

And then, with the implementation of that, I guess based on that last comment the answer would be no, but would the implementation be similar to California where all new and existing business would go in this next-gen product?

Or would people still be staying in the existing LPI products?

So, they will go to the new for all new business and as business renews it will move to the new product as well.

Okay, very helpful.

And then, just lastly, on capital, obviously you mentioned you are going to continue to be in the market.

But, obviously there are some headwinds for some of the businesses as you go forward.

As you think about acquisitions, specialty business lines, along with incremental debt capacity here how are you balancing buybacks versus M&A?

First I'm going to take one step back and say I think we have identified targeted areas in each of the businesses for growth.

Whether that is multifamily housing in the Property business, the voluntary business in Benefits, affordable choice medical products in Health, the mobile and international business in Solutions, particularly in Latin America.

Those are places that we are more likely to look for organic growth as well as things that could help us on the M&A side.

So, we're looking at those.

I am going to switch over and let Chris talk a little bit about, okay, so we're looking at all that, how do we evaluate M&A opportunities versus buyback?

I think the methodology is still quite consistent.

And, Chris, you want to just elaborate on that a little?

Sure.

I don't think anything has changed in the way we're looking at profitable growth opportunities.

I think our capital priorities are the same.

Capitalize the operating companies and then look to deploy capital either organically or through M&A using what is a significant amount of deployable capital currently at the holding company.

And, to the extent that there aren't opportunities in the near term, we have been very disciplined about returning the capital to shareholders.

Most of the return of capital in the last three years has been via share repurchase.

And, we continue to think that will play a role, given where we think -- how attractive we think the share price is right now.

But, ultimately it's about maintaining flexibility and that's where your comment around debt capacity comes in.

We do think given that our debt to total cap is just over 18% we do have the ability to go to the market for probably $300 million to $350 million of opportunistic debt.

We also have the 2014 issue that matures in February which we will realistically need to address between now and the end of 2013.

But again, the main source of capital is going to be what we have at the holding company now, which is about $370 million.

And then, being able to access operating earnings in the form of dividends gives us a lot of options with regard to both M&A and share repurchase.

Thank you, very much.

Jeff Schuman, KBW.

I was wondering first of all, a very basic question about the lender placed.

How does renew?

Does it typically renew annually or how does it renew?

Yes, it's typically annually.

Okay.

Then, in California, as you talk to them about the rate decrease, did you also talk to them about any aspects of the next-gen product?

Is it going to be more geographic rating or any other changes?

I think that our hope is to now sit down and talk to them.

We've certainly mentioned the issue.

I think we are now positioned to move toward that product and we hope to do that as quickly as we can make that happen.

And also, as part of those discussions were there any agreements about captive reinsurance or commission practices?

I don't think so, Jeff.

I think these were primarily around the pricing of the product.

Okay.

And then, lastly, I think coming out of the NEIC hearings it seems as if some other states might be more actively looking at rates.

You talked about the fact that you do have ongoing discussions.

But, are there any other any particular states outside of California, Florida, and New York that are maybe a little more active than they had been in pursuing the rate issues?

None that come to mind.

Again, the process on this is we have a dialogue regularly, that process on how the state goes through and reviews things is different.

I will say that we are engaged in dialogue with all of them because we are focused on getting this next generation product up and activated in all the states.

Okay, that's it for me.

Thank you.

John Nadel, Sterne, Agee.

I was hoping we might be able to take a slightly different approach to thinking about steady state for the lender placed business.

About 18 months ago at your investor day you laid out a view of how this business might be impacted as the housing market heals and placement rates drop.

And, I think that essentially suggested that the Specialty Property segment would see revenues down to $1.5 billion, combined ratios would rise, placement rates would fall.

And, it seemed to suggest, doing all the math, about $180 million to $200 million of earnings from this segment once you got to that steady state, whenever that was.

My question for you is this.

As we think about it 18 months later, with a lot of the things that are changing -- rate pressure, CFPB proposed changes that might take placement rates lower all that sort of stuff, growth in the business maybe as a slight offset.

Can you give us some help in just understanding order of magnitude?

How some of those assumptions that you previously laid out for us might change?

First, we thought that placement rates were going to start coming down.

They actually went the other way, John.

Again, I think that's a function of the broader housing market.

Pretty difficult for us to predict, given all the variables going on.

A lot of that -- as that has evolved, a lot of it has led to the development of this new product that can be more flexible and more responsive to today's housing market.

We embarked on that process starting in late '10.

And, as I mentioned, it's not that the product filing, per se, is so complicated.

It is all about do we have the administrative system set up to deal with things on a servicer-by-servicer basis dealing with all the different things that have been raised by the GSEs, different things that servicers might want.

And, we're really proud that we have a system that can actually deal with all these things.

We are going to provide -- and, the market has clearly evolved in a way that we couldn't have imagined.

But, we're going to -- when we get through a few more of these things, because I think we're getting to resolution, close to resolution, on a number of them, we will put together an updated re-forecast of what we now see the steady state being moving forward.

But we just don't have it right now because a number of the variables, I think, they are just all in motion, exactly.

All right, listen, I understand there is a lot going on.

I think that commitment to update everybody is really important because this is, clearly, just a very important issue for the shareholders to think about.

I just have a question for you on the capital in Specialty Property.

Maybe it's a bit along the lines of Mark's question.

I understand how the BCAR, the Best Capital Ratio or model works, but should we expect if premiums drop because of a rate reduction versus premiums dropping because a placement rate falls, should we expect the same level of capital release from the business under either of those scenarios?

In the first case your exposures don't change but in the second, they clearly do.

You are on an interesting point.

I guess I would say two things, John.

The formulas themselves are somewhat mechanical that get applied.

And, of course then they look at and apply judgement to a broader set of issues.

Could it conceivably be different?

It could.

When I look at all the stuff though, if you look at our business, placement rate change, which we have said for long time is going to be the biggest driver on what happens to the business, we believe.

Oh, I agree, too.

So, that's where we are focused.

And, we are very focused on having a product that can meet what is clearly a different marketplace today than one we had three or four years ago.

And, I would also just say we have very regular dialogue with A.M. Best.

They have a very thorough understanding of our business, John.

They make their own decisions, but it's not -- and I'm sure we will be talking with them as things go forward.

Just maybe one other comment and I think Mark was touching on this earlier as well.

Capital is going to be going forward about risk and the smaller the block, the lower the placement rate, which is our expectation, the lower the risk.

Now, the rules of thumb that we have given you in the past may change.

And, that's what we will address with regard to our discussions with the rating agencies.

Keep in mind it also has to do with the amount of catastrophe reinsurance that we buy, which is a critical piece of our risk management.

But, ultimately I think our updated view around steady state and our updated view around -- can also include an updated view around capital and what the lender placed products are going to represent going forward.

Okay, thanks.

Is there a way to help us understand -- I think you mentioned that you're going to be filing your next-generation product in Florida next month.

I don't know if this is going to be easy or not, but it is there a way to help us understand on an apples-to-apples basis what the premium rate will look like on the next-gen product versus what you've already got in place?

I think just a couple things to think about there, John.

I think the most important thing is we will provide an update when we know we have reached a resolution with the state.

That is number one.

Okay.

Number two is I look at that next generation product, and if you think about all of the things that product is looking to address, I can't think of a state that has all of them operating more than Florida does.

So, it is going to be the perfect test case for how all these flexible variables could be put into play.

But, they are going to be put in play by the servicer.

The complexity of trying to estimate what is going to happen I think is real difficult.

But, when we know something, we will report it out.

Okay.

Are you seeing ceded premiums to your lenders or servicer partners decline yet?

Each of the servicers that has reinsurance makes their own decisions.

We did have a client this quarter that made a change in their program, John.

You probably saw that in our numbers.

But, that is something that is a client-specific issue.

Okay.

And then, are commissions being cut yet?

Again, if you think about the way we've talked about this, this will be a servicer-specific issue on how they want things to work.

So, I don't know that I can say that, John.

But, when we know we'll --.

It's another one that each client makes their own decisions.

Each client makes their own decisions, yes.

Okay, thank you, very much.

Sean Dargan, Macquarie.

I am just wondering if you can tell us about the experience you are seeing in placement rates in different states.

Their different foreclosure processes and different hoops that lenders have to jump through.

Would be safe to say that you see placement rates coming down more in California than say Florida?

I haven't looked at the Florida experience so I can't really make a statement on that.

But, I think the issue you outlined is an important one.

If you think about issues like the economy in the area, how does the process work to move a property foreclosure, these are all things that will have impact on the placement rates.

In addition, how many loans are seriously delinquent is going to be a driver there, too.

Every state really is different depending on those factors.

And, they will ultimately play out based on all those different conditions.

Thanks.

If I can just shift to Assurant Health, I think you mentioned that you expect premiums and earnings to come down in 2013.

Can you give us any sensitivity or the degree to which they will come down?

The MLR requirement is the big thing that we have to adjust our pricing to over time, Sean.

If you look at our loss ratios, they are in the low 70%s.

I think we have said before that you can't compare an MLR loss ratio calculation and a GAAP loss ratio directly.

Because there is different rules for the MLR calculation.

But, overall -- and then you've got to think about the mix of our products that are subject to the MLR and some aren't.

You've got a variety of factors going.

I think its fair to say that our loss ratios will be rising as we adjust the pricing.

And, it takes time for rate changes, just like when you need to increase prices it takes time to roll increases through your block.

When you are changing in the other direction it takes time for that to roll through.

Over time, that is going to start impacting our loss ratio.

You will see those rising.

Then you've got the other offsetting factor is that we've got a lot of growth going on in our Health access and supplemental products.

We've also got our Aetna arrangement that is helping with the sales of our more tradition individual major medical products.

So, you've got a lot of different things -- and then, as I mentioned in our prepared remarks you've got this freeze in the small-group market.

So, you've got a lot of different factors there.

But, I think the primary thing that leads us to say earnings will go down is that loss ratios will go higher.

Great, thank you.

Steven Schwartz, Raymond James.

Mark mentioned the $270 million in Florida that annualizes is to $360 million, or whatever it is.

Is it the importance of that number that any rate cut that occurs, the reinsurers aren't going -- the cat re guys are going to take a cut.

They've got their exposure, it doesn't matter what happens to your rates.

Is that the importance of that number?

That's correct.

That's why we tried to present it that way.

Okay, good.

Just making sure.

Sticking with that you've got this new client, 1 million loans, just so I'm clear here.

Once that's on your books you will get the policies currently in force.

This isn't one of these deals where it rolls over, over time?

In that sense, we are going to get the new business that is written, but we will not get the in force --.

This is not a flat cancel.

It's not a flat cancel.

That was the term I am looking for.

Okay, not a flat cancel, I'm glad I asked that.

And then, going back onto the discussion of new -- of the next-gen product, probably this is what we are all dealing with here.

I'm going to make up the number, let's say you have a 75 combined ratio in a state.

And, the regulators for political reasons or whatever are saying that is too low.

Introducing the next-gen product isn't going to make a 75 combined okay.

Right?

I think we're talking about apples and oranges here a little bit, Steven.

Okay.

Let's first talk about what that next-generation product does.

It allows lots of flexibility.

For instance, let's take an example.

You could vary the deductible offered based on the value of the home.

Right now, decisions tend to be made uniformly for a portfolio.

Wow, that's a big difference and has the ability to change rates if you are at a $2,000 deductible versus a $200 deductible.

Those things can make a big difference.

Second, if we look at just -- we're going to put in some difference in geographic rating.

That says to me if you are closer to the coastline, those rates may be going up a little bit, but the other side of that is people away are going to pay less.

We don't do any underwriting.

That has to be recognized and presented.

The historical look is obviously one place they look.

But, the more interesting thing that we have to talk about is what is our exposure and what do we think costs are going to be prospectively?

A lot of this really relates to -- you have seen it just looking at the reinsure models.

People think the cost of catastrophes are going up.

That's difficult when, in the last -- this last year, for instance, we didn't have many.

And, that's where a lot of the dialogue needs to take place in my mind with actuary to actuary, looking at the reasonability of assumptions.

All right.

And then, just to get off this, this question might be one for an investor day.

But, while we're at it, the access products in the health area that are doing so well for you, how do you see those products working in 2013?

And then, in particular in 2014 once ACA is implemented?

The first thing I would say is these products are resonating around affordability and choice.

Everyone would like to have a Cadillac plan.

But they don't all have a Cadillac budget.

The way we can put these products together allows them to say this is what I really need and can afford.

And, that combination has proven to be wildly successful as we talk to consumers.

I think you're raising a great question.

And, it probably would be worth a more in-depth conversation at some point.

But, there's a lot of question about who exactly will be buying on an exchange starting in 2014.

And, given that the rules around exchanges really haven't been defined yet exactly how the subsidies will work et cetera.

There is a school of thought that says most of the buyers on the exchanges will be heavily subsidized.

But, that remains to be seen.

That's another thing that will impact.

But, I think overall our belief is that healthcare costs are going to keep going up.

As Rob said, we've got products that help people that don't have the Cadillac budgets deal with that reality.

And, we don't think that's likely to change even as the New World unfolds.

Okay, well let me ask this.

These products, if my understanding is correct, if somebody post-2014 wants to buy these products, that person will be subject to the penalty/tax, is that correct?

They are, theoretically, but already, at least what I have read, is there are signals that it's not going to be strongly enforced.

Okay.

All right.

Thank you very much.

We have time for one more question.

Mark Hughes, SunTrust Robinson Humphrey.

Are you seeing much progress on the health exchanges?

Are they communicating with the industry?

Are you getting some insight as to how they're going to work?

What is going on there?

There are all kinds of different working groups on this.

I would say that the federal exchange is furthest ahead.

We have our own committee with Assurant Health looking at all these things.

But, state-by-state they have got to make decisions around do I want to build my own exchange or be part of the federal exchange?

And, they are trying to make those decisions.

They're trying to -- at the federal level, it is a complicated process.

They want to be able to, if you will, tap into tax returns and figure out subsidies that Mike was talking about earlier for the population.

You can imagine there is a fair amount of complexity.

But, I think there is a lot of resource being put to bring this to fruition.

I think it is another one, though, as Rob said, Mark.

Every state is really different and is going through their own calculus about do they want to build, do they want to tap into the federal, certain -- there's philosophical differences about exchanges, etc.

Lot of discussion, but the reality is we don't have clear rules or definitions yet.

But, saying all that, we are prepared to get ready to plan the exchanges if we deem that is the place to be.

And, as rules are clarified we will make that decision.

Am I right in assuming that the products are going to be uniform across the state?

No, I don't think so.

Again, open question.

All that has really been outlined is a certain actuarial value of what is offered on the -- we call them the metallic plans, gold, silver, bronze.

They have to have a certain level of value, benefit value.

There is, my guess is, lots of different ways to put those benefit values together with the constraints of how some of the regulation is written.

Right.

In California, I think you touched on some of this.

But, where you took those rate decreases how did the economic -- how are they impacted for the servicers or others in the value chain let's say?

You have obviously laid down -- or laid out the impact that you are feeling.

What is happening with others?

Not to name names, but just generally speaking in those markets?

If you talk about the servicers I can't speak to other insurers.

For instance, if there is a commission being paid to the servicer they're going to get a commission on a smaller premium.

If they are participating on a reinsurance basis, it is going to operate a little bit differently.

It's going to be very client specific in terms of how those issues operate.

Right.

And, of the decline in premium, what portion of that are you bearing the brunt of it?

We try to outline in our estimates the impact on net OI -- NOI, Mark, in a fully implemented state with a number of caveats.

Obviously, we put an estimate together based on the size of assumptions.

I tried to outline those assumptions in my prepared remarks.

That might be worth taking a look at rather than going through again.

But, we also said we're working on operating improvements so that we minimize the number.

But again, as Rob said, Mark, if the policyholder premium goes down, then a client who is reinsuring will get the pro rata reduction in their ceded premium too.

Right, okay.

All right, thank you very much.

Thanks for joining us this morning.

We encourage you to reach out to Francesca and Suzanne with additional questions.

We look forward on updating you on our progress in the months ahead.

This does conclude today's teleconference.

Please disconnect your lines at this time, and have a wonderful day.