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Assurant Inc. (NYSE:AIZ)

Q4 2010 Earnings Call

February 3, 2011 8:00 am ET

Executives

Melissa Kivett - SVP, IR

Rob Pollock - President and CEO

Mike Peninger - CFO

Chris Pagano - CIO and Treasurer

Analysts

Mark Finkelstein - Macquarie

Steven Schwartz - Raymond James & Associates

Jeff Schuman - KBW

Ed Spehar - BofA Merrill Lynch

Mark Hughes - SunTrust

Chris Giovanni - Goldman Sachs

John Nadel - Sterne, Agee

Operator

Good day, everyone, and welcome to the Assurant fourth quarter 2010 financial results conference call. (Operator Instructions)

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

Melissa Kivett

Thanks so much. Welcome to Assurant's fourth quarter and full year 2010 earnings conference call. Joining me with prepared remarks are Rob Pollock, our President and Chief Executive Officer of Assurant; and Mike Peninger, our Chief Financial Officer. Prepared remarks will last about 20 minutes and then we'll open up the call to questions. Chris Pagano, our Chief Investment Officer and Treasurer, is also here for questions.

Yesterday, we issued a news release announcing our fourth quarter and full year 2010 financial results. The news release as well as corresponding supplemental financial information is available on our website at assurant.com.

Some of the statements we make during today's call may contain forward-looking information and our actual results may differ materially from those projected in those forward-looking statements. We caution you about relying on these forward-looking statements and direct you to consider the discussions of both risks and uncertainties associated with our business and results of operations contained in our 2009 Form 10-K and subsequently filed Forms 10-Q and 8-K, which can also be accessed from our website. The company undertakes no obligation to update or revise any forward-looking statement.

Additionally, this presentation will contain non-GAAP financial measures, which we believe are meaningful in evaluating the company's performance. For more detailed disclosures on these non-GAAP measures, the most comparable GAAP measures and a reconciliation of the two, please refer to yesterday's earnings release and the supplementary financial information that we have on our website at assurant.com.

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

Rob Pollock

Thanks, Melissa, and good morning everyone. As I reflect on the quarter and full year 2010, I'm pleased that we again delivered strong operating results. We expanded our customer base, reduced expenses, broadened our product portfolio and carefully managed our capital.

For the full year of 2010, net operating income increased 20%. Our operating return on equity was 12%. Our diluted book value per share, excluding AOCI, increased 6%. This is after taking a goodwill impairment charge resulting principally from healthcare reform.

Our strong capital position provides us with a great deal of financial flexibility. We ended the year with $880 million in corporate capital, an increase of nearly 24% from the end of 2009, even after returning more than $600 million to shareholders in repurchases and dividends.

During 2010, we were able to take more than $800 million in dividends from our operating companies as both Specialty Property and Solutions provided dividends that exceeded their operating earnings. Excluding our $250 million capital buffer against tail-event risks, we began 2011 with more than $600 million in deployable capital. We anticipate that operating dividends in 2011 will be at least equal to operating company earnings.

We increased our dividend for the seventh consecutive year. During the year, we repurchased 15.2 million shares of our stock or 13% of shares outstanding at 2009 yearend. Through January 31, we have repurchased an additional 1.7 million shares. These actions demonstrate the ability of our specialty platform to generate free cash flow.

With that as background, let me provide a few trends and market insights for each of our businesses. Assurant Solutions continued to focus on developing new client relationships and distribution channels. Their efforts generated solid improvement in gross written premiums during the year. The full year 2010 combined ratio in our international business improved by 480 basis points versus 2009, led by improvements in the U.K.

Our Preneed life insurance business continued to deliver strong results with double-digit increases in new sales and operating profits over 2009. We expect Preneed will continue its good performance in 2011.

Moving to Solutions' other businesses, we continue to invest in new business opportunities while managing our expenses. Domestically, we are diversifying our client base by the original equipment manufacturer or OEM channel. Internationally, we've added new wireless clients during 2010. We continue to find the wireless market filled with growth opportunities. We also added clients in Latin America for both service contracts and credit insurance. We expect this will continue in 2011.

Growth is more challenging in Europe, but our product offerings are well positioned for when the European economy recovers. In 2011, earned premiums will be affected by the continued run-off of domestic credit insurance and certain large service contract clients that are no longer in business.

Remember, service contract revenue is deferred through the manufacturer's warranty period. But our new client additions have set the stage for Solutions to deliver revenue growth over the longer term.

Let's turn to Assurant Specialty Property, which produced another terrific quarter and year. The foundation of our business is the specialty processing platform. Our loan tracking technology and our risk management expertise allow us to deliver superior service to our clients and enable us to provide insurance protection for client portfolios without underwriting individual properties.

During the last two years, the lack of major storm activity improved our results. However, during the fourth quarter of 2010, we experienced about $15 million in pre-tax catastrophe-related losses due to the wind and hailstorms in Arizona. I'm proud to say that we again responded quickly for our customers in their time of need.

At a macro level, we continue to believe that total placement rates and loan inventories will decline to historical levels over the next several years. The clients we've added, combined with our alignment with leading mortgage servicers will help offset these trends.

Specialty property implemented many process improvements in 2010 that allowed us to control expenses, while adding new clients and tracking more loans. In 2011, we expect this business to continue to generate strong results. We are enhancing our processing platform to better serve our clients, while maintaining our risk discipline.

Next, Assurant helped deliver good results while preparing to operate in an environment with new regulations and changing dynamics. Improved financial performance versus 2009 was driven by pricing actions, plan design changes and substantial cost reductions.

Healthcare reform has altered the health insurance marketplace. The transformational actions implemented by the business during 2010 position us to compete looking ahead. But we will continue to adapt our strategy as we more fully understand how consumers, providers, and distributors adjust to the new healthcare environment.

2011 will be a transition year at Assurant Health. We are expecting breakeven results, as we accrue for rebates as an offset to premiums and continue to streamline operations. For Assurant employee benefits, the fourth quarter was much like the previous quarters in 2010.

Strong results were driven by favorable claim experience and excellent expense management. Loss ratios improved for all our products. Employee benefits continues to emphasize worksite and voluntary products. These products provide affordable solutions that meet the needs of employers and employees. However, until employment picks up and payrolls expand revenue growth will be challenged.

Finally, turning to product experience, our dental business should continue to improve from the actions we have taken. We see life and disability loss experience reverting to more traditional levels. We plan to lower our discount rate for new LTD claims in 2011, as interest rates remain at low levels.

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

Mike Peninger

Thanks, Rob. I'll start with Assurant Solutions, where fourth quarter net operating income was $11.7 million. This includes a previously announced $31 million after-tax intangible asset write-off resulting from the non-renewal of a domestic service contract client relationship.

While this will obviously affect our sales over the longer term, it will not materially affect our 2011 revenues or profits. The fourth quarter of 2009 included $8.4 million of restructuring charges, primarily in International.

Net operating income, absent the adjustments, improved versus the fourth quarter of 2009, primarily due to improved international results and continued favorable Preneed results. Improvement in international was driven by more favorable underwriting experience and cost reductions, primarily in the U.K.

Domestically, net earned premiums declined for the quarter and the year. This was primarily due to the discontinuation of extended service contract sales from Circuit City in early 2009, the absence of premium from the one-time Ford Advantage Campaign during 2009 and the continued decline in credit insurance.

The run-off of Circuit City and credit insurance will continue to pressure earned premiums going forward. We expect premiums from these two sources to drop from $420 million in 2010 to about $250 million in 2011.

Fourth quarter domestic gross written premiums increased 18% versus the fourth quarter of 2009, driven by growth in vehicle service contracts and sales from a new retail client. This client is heavily re-insured, and vehicle service contracts have longer manufacturer's warranties than our average client portfolio, so the impact of these items, our net earned premiums will be modest in 2011.

The 2010 domestic combined ratio, excluding the asset write-off was 97.7% compared with 97.2% in 2009. Both years benefited from favorable experience on the run-off of business from former clients. Our long term target for this ratio remains at 98%.

International gross written premiums were up 3% for the quarter and 13% for the year, due primarily to increased sales from existing and new clients in Latin America. We expect net earned premiums to increase during 2011, as the business written in prior years is earned.

The fourth quarter international combined ratio improved versus the prior year due to improved underwriting and the absence of restructuring charges. Though there has been variability in quarterly experience, we believe the underlying trends of the international business have improved and we expect to see further improvement in 2011 as we continue to streamline the organization structure. Our long-term targets for international combined ratio remain at 95%.

Preneed insurance continued to be a strong performer for the quarter and the year. Face sales for the quarter increased 7% versus the fourth quarter of 2009, and full year face sales were up 43% versus 2009, driven primarily by elevated sales in Canada ahead of the provincial tax changes last summer.

Our partnership and continued alignment with SCI, the largest funeral provider in North America, remained strong and customers continue to see value in prefunding their funeral expenses.

Turning now to Specialty Property, net operating income was approximately $95 million, including just under $10 million of after-tax reportable catastrophe losses during the quarter. Operational improvements along with lower commissions due to increases in client-ceded premiums drove the expense ratio down.

The combined ratio excluding catastrophe losses was 73.1%, roughly flat with the fourth quarter of 2009. Net earned premiums for the quarter decreased slightly versus 2009 primarily due to a decrease in lender-placed homeowners premiums caused by previously disclosed additional ceding activity.

Key indicators such as loan counts increased slightly year-over-year due primarily to new client acquisitions. Prime placement rates during the fourth quarter of 2010 were at their highest levels ever, and we expect them to remain elevated through 2011. Subprime placement rates on the other hand declined to their lowest levels since September of 2008. In the aggregate, placement rates continued to increase.

It's important to note that loan portfolio movement within the industry and inconsistent classification by lenders is blurring the distinction between prime and subprime. In recognition of this trend, we added a new line to our supplement illustrating our consolidated placement rates. This may prove to be a more reliable predictor of revenues than the separate pieces.

Turning next to Assurant Health, net operating income was $15 million for the quarter compared to a loss of nearly $30 million in the prior year. Fourth quarter 2010 results include charges from facility lease write-offs and previously announced workforce reductions totaling $3.8 million after-tax. Excluding these charges, net operating results were in line with our targeted after-tax margin.

Our sales like those of most of the industry have slowed as consumers and agents adjust to the post-reform environment. Market disruption will likely continue for some time.

During the fourth quarter, we announced compensation changes for our distributors. We're encouraged by their initial response and by market reaction to our new product offerings. We believe that our products offer cost-effective insurance options for consumers. Our distribution partners are helping consumers to find the right balance of protection and cost for their unique needs.

As Rob noted, 2011's reported results will reflect a business in transition. Loss in expense ratios will not be directly comparable to 2010 results due to the rebate accruals.

We began to adjust product pricing for healthcare reform and reduced expenses substantially in 2010, but continued diligence is required. In 2011, the Health team will continue to streamline and simplify operating processes while enhancing service for our customers.

At Assurant Employee Benefits, net operating income increased to approximately $18 million. Both loss experience and expense management contributed to the improvement.

We completed our annual life and disability reserve studies during the fourth quarter. The results were consistent with prior years and are reflected in our reported experience.

Fourth quarter net earned premiums were down slightly compared to 2009. Prolonged high unemployment continues to make topline growth challenging, but our broad product suite is helping to minimize the impact.

Interest rates increased since last quarter, but the low rate environment will continue to pressure investment income for Employee Benefits in 2011. It will also lead to a reduction in the reserve interest rate assumption for new long-term disability claims.

Our reserve discount rate for claims incurred prior to 2011 is 5.25%. The rate for new claims will be determined during the first quarter. Our current estimate is that it will be 50 to 100 basis points lower, which will increase policyholder benefits by $8 million to $16 million pre-tax for the year.

Turning now to corporate items, the low level of interest rates remains challenging. While yields rose in the fourth quarter, they're still below fourth quarter 2009 levels. We continue to manage our investment portfolio to preserve yield and minimize credit losses.

As we previously disclosed following our annual goodwill testing, we incurred a $306 million impairment charge during the fourth quarter of 2010. The charge reflects 100% write-off of the goodwill allocated to our Health and Employee Benefits segments. The impairment resulted from the effects of healthcare reform, the low interest rate environment, continuing high unemployment and the slow pace of the economic recovery. The goodwill written of relates to acquisitions made well before we became a public company, and the charge does not affect our view of either business.

As of January 31, 2011 we are authorized to repurchase up to $772 million of company stock. Even our current share price and our outlook for operating company dividends, we expect to continue to repurchase shares during 2011. However, our top priority remains to deploy capital for profitable growth opportunities, both internally and through acquisitions.

With over $600 million in deployable capital, and businesses that continue to produce substantial cash flows, we have the flexibility to use our capital in a variety of ways that will increase long-term shareholder value.

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

Rob Pollock

To recap 2010, it was a successful quarter and year for the company. As we turn to 2011, our priorities are clear: Focus on growth by creating new revenue streams; find additional operating efficiencies while developing enhanced capabilities valued by our customers; leverage our risk management expertise in all we do; continue to manage our capital to create value for our shareholders.

I am confident we will be successful because of our employees. They are a very committed group, united by our shared values of common sense, common decency, uncommon thinking and uncommon results. This is our recipe to continue generating value for our customers and shareholders.

And with that I would like to open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) And we will go first to Mark Finkelstein with Macquarie.

Mark Finkelstein - Macquarie

I guess a couple of questions. Just on the health outlook for 2011, maybe just a few more thoughts on that. I guess what I am interested in knowing is, should we be thinking about decent-sized losses earlier in the year, returning to profitability in the back half of the year as expenses scale down, rate increases where applicable come into play. How should we think about the trajectory in 2011?

Rob Pollock

It's a good question, and a lot of it, Mark will deal with how we do the rebate calculation. And although we've got pretty good line of sight on that, we are still waiting for a few things to unfold there. But I would anticipate, and I'll Mike talk about it in a little more detail, that we're going to continue to manage the expenses carefully, so we can start being in a position to make profits.

Right now our loss ratio is below the threshold. So we've got to add benefits, which we're doing; reduce prices a little bit to get that loss ratio moving up. And I think we'll try and have it set-up based on how we project what the rebates will be every quarter.

And I'll let Mike provide just a little bit more detail on how the accounting mechanics might work.

Mike Peninger

We're still working on those mechanics, Mark, but I think there are a lot of different things going on. The pricing changes, as Rob mentioned, will sort of flow through over the course of the year. Expense savings we'll likely achieved over the course of the year.

If you think about the margins and the reserves that we hold at year-end 2010, those sort of get released in the first part of the year, but at the same time then, we're setting it up the rebate accruals, which will dampen that release. And you also I think have to remember that the rebate calculation will not really reflect margins in the year-end '10 reserves, the way it's set up as you look for actual run-off through I think the first quarter of 2012.

So there are lots of different pieces. I think we're likely to see maybe more profits towards the front of the year, and then the rebate liability will grow over the course of the year.

Mark Finkelstein - Macquarie

Okay. And then I know a part of the strategy in health is a newer product. Is there anything you can say about the traction of the new product that you rolled out, kind of a few months ago?

Rob Pollock

Well, the first thing is, over the last several years, Mark, we've been very focused on customer needs. We've done extensive customer research, and overwhelmingly what comes back is, I want something that's tailored toward my particular needs, combined with the affordability issue. So a lot of our efforts have been structured around that, realizing as well that in all the plans that are subject to the new regulation, we've added benefits, we've complied with all the regulations so that those offerings as well will be profitable for us going forward as we kind of transition and restructure.

The new products are focused on affordability. And we see that even in the reform world as we've mentioned before as a continuing unmet need, if you will in the marketplace. And we will be offering things that play to that.

Results to-date, I think a lot of it is engagement with distribution. I'd say that obviously distributors have had disruption as well. The ones that are sitting down and spending the time with us are seeing opportunities. But it takes a bit of time to get traction there.

Chris Pagano

Yes, and I understand that there is no doubt there is still a lot of confusion out there both on the part of consumers and agents. So sort of everybody is adapting to the new environment and there is learning curves on a number of fronts I think, which adds to all the comments Rob made.

Mark Finkelstein - Macquarie

And then just finally, you finished the year at 600 plus of, call it net deployable cash at the holding company or capital at the holding company generate another 500-plus, around 511. What kind of capital deployment outlook can you give us whether it's in terms of buybacks or what have you.

Rob Pollock

Couple of different things here. I think we've pointed out, and Mike mentioned that we anticipate we'll continue buying. We have in January, but I think what you see is a very disciplined execution of our capital management strategy of we would like to find opportunities that can build additional income streams. And we're focused on that as well, but realizing we see good value in the share price.

And I'm going to just have Chris comment a little bit on our whole disciplined management around evaluating capital deployment opportunities.

Chris Pagano

Couple of things, and I think Rob touched on a lot of them, but the key here is discipline. You've highlighted where we are to start the year and we feel like we're in a very good position, a better position than we were at the beginning of 2010, even after returning all the capital that we did to shareholders. But what we're going to do in 2011 is look to grow earnings, but deploy capital to do that in a disciplined fashion. So the willingness or the ability to do deals, but the willingness not to do the ones that don't make sense.

And then, where we do not see opportunities, we will as we did in '10 and have already begun doing in '11, we churn capital to shareholders. We still think the share price is attractive and we will also consider our dividend as we do typically in the second quarter of the year.

Operator

We'll go next to Steven Schwartz with Raymond James & Associates.

Steven Schwartz - Raymond James & Associates

If I can just follow up quickly on Mark's question about health insurance, is there anything in the ACA that changes in 2012 and 2013 to your benefit, or do we have to wait till 2014 when everybody is in the pool and presume there might be some serious economies of scale?

Rob Pollock

A couple of things; remember that things happen on a transition basis, Steven. So let's just take the new benefits that have been added, all right?

Those are going to come in for all new policies we sell, and they are going to be added to current policies on renewal. So that will create things that move over time. Some of the underwriting rules move and change over time in terms of, obviously, we're going to provide full guaranteed issue at the end. We can still do some modified underwriting in the interim. And so, you are going to have a lot of things in transition until you get to 2014.

Mike mentioned issues around the calculation of the rebates. There are credibility issues that we're going to have to work through and see how the calculations work. Remember, the rebates are done on a state-by-state basis.

And so, we're going to have to develop a rhythm around all of this. I'm confident we'll do it. We're looking at all of it. But we, in effect need to just run the playbook on this a little bit and see how it unfolds.

Steven Schwartz - Raymond James & Associates

Specialty Property Reinsurance, should we expect the use of captives to increase in 2011 over 2010? I'm also wondering about the discount rate decrease if you will and what you are basing that off of the new money rates, (four-month) rates, the portfolio?

Rob Pollock

So first let's start with Specialty Property and Reinsurance. I'm going to have Chris talk first a little bit about the reinsurance market in general. Then where we placing reinsurance, I know you are looking in particular at clients, but traditionally a lot of our work on our captive set up, they are in essence buying at our reinsurance buy for CAT coverage.

So Chris, why don't you just talk about the where the reinsurance market is first.

Chris Pagano

Sure. As a reminder, we've place our program in two separate placements, the first in January, the second in June. We've placed the 2011 program slightly more than half as part of the January placement.

We also have two CAT bonds that make up about a quarter of our program that are already in place. So we have effectively got 75% of the program in place. The June placement, we feel good about that as well. Capacity is there. Pricing is slightly softer, all other things equal than it was in January and June of last year. And we'll update you once we get the program placed and give you some descriptions about what the program looks like once we're done in June.

Now keep in mind though that, again all other things equal, rates online are lower, but the program has grown so that the all-in dollar cost may or may not be lower than it was last year.

Rob Pollock

So with that as a background Steven, then if we look at, are we anticipating more clients using reinsurance? At this time, no, but as can happen in both this and as well in our solutions business, if they bring that up and it's something they want to do, we have the ability to accommodate that. None that I'm aware of that we are anticipating right now.

If we move over and talk about considerations on discount rate side, Mike, do you want to comment?

Mike Peninger

The discount rate in the employee benefits reserves, and really what we've tried to do there Steven, it's more of a forward-looking thing. We tried to look at what new money rates we expect to earn in 2011 in this case. So we sort of come up with a gross yield that we think that we can make. And then we subtract off allowance for expenses and credit risk and things like that and end up with the difference being the discount rate. And as I said, we expect that to be 50 to 100 basis points less than our current 5.25.

Operator

And our next question is from Jeff Schuman with KBW.

Jeff Schuman - KBW

Wanted to come back once again to (inaudible) and continue to try to connect the dots here. I guess the great news in the fourth quarter was, the loss ratio was 70%; I guess the bad news is, 70% loss ratios are going to be terribly (inaudible) going forward.

In terms of modeling, I'm assuming we should not be thinking of an 80% GAAP loss ratio. Do you have any kind of ballpark that we can sort of think about?

Mike Peninger

It's an excellent point, Jeff, and there are a number of things that are different in terms of the MLR calculation that don't make it directly comparable to the GAAP number. The first is, obviously taxes. Bottom line, we think that maybe a good way to think about it is three, maybe four points lower than the loss ratio we've published.

Rob Pollock

In terms of the MLR. So an MLR of an 80 would be comparable to our published number of say a 76, 77.

Jeff Schuman - KBW

That's helpful. But then I guess still the disconnect is, what that would seem to imply for the expense ratio. Because if you look at 2010, you did a lot of hard work and lot of heavy lifting, took some restructuring charges, and you're talking about having some diligence going forward and some streamlining. But you need to take off a whole lot of points out of the expense ratio.

Mike Peninger

Again, we will go into more detail on this, but if you take the fourth quarter numbers and take out some of the restructuring charges, the number's probably in the 26'ish, 27 range. And then as Mike mentioned, we are making commission changes, and we think those commission changes start getting us close to the numbers.

Jeff Schuman - KBW

Okay, so the commission is a big piece of it.

Rob Pollock

Again, it's been a partnership, and we've told the distribution that we're not putting this all on their backs. This is something that needs to be shared between the company and distribution, and that we have ideas for distribution that can help them in maintaining and serving their customers and making a living.

Mike Peninger

So a lot of that then would come true to some extent in 2011, which is the breakeven year.

Jeff Schuman - KBW

In 2012, what needs to continue to happen? Is it that absolute levels of expenses still come down further, or then do you become more dependent on really scaling at a different level?

Mike Peninger

I think there is additional expense things we'll need to get, but I think that operating and understanding just how all the calculations work etcetera will help us hone the model a bit too Jeff. And remember, people talk about scale, and scale has importance, there is no doubt about that. The other side of things, remember, is scale historically we've thought about it and everyone has in the business as scale translating to lower price. But if you translate to lower price, you are also then restricted in what you can spend on the expense.

And I think that's a dynamic that all providers are wrestling with a little bit. So again, we've been out; we have adapted our strategy, we're working. We feel very good that we're in a first-to-market situation with some of our ideas. But these will continue to develop as we move forward, and I am confident that we're going to have a winning strategy here.

Jeff Schuman - KBW

Okay. Thank you for that. Let's go to one other area; that shall be property. I think, you've talked about this in the past that it might be good to have an update. You talked about placement rates. And then another thing that's probably influenced your results there has been the unusual kind of mechanics in the foreclosure pipeline. The foreclosure pipeline has been gummed-up. You've probably gotten somewhat better persistency in some of the policies.

Can you give us an update on how the foreclosure pipeline is functioning at this point and maybe kind of where we go from here?

Rob Pollock

Sure. So I think when we start and look at foreclosures which you might think as real estate owned coverage we might provide, it's important to remember that Fannie and Freddie self-insure all their REO loans. So if you look at a policy today, the first question if it's in the pipeline that you have discussed is to ask the question, do we have a policy on it today?

If the answer is yes, and it's a Fannie and Freddie loan and moves to foreclosure, we are no longer going to be providing coverage. If we're not providing coverage today, there is no difference.

If it's a non-Fannie and Freddie loan, then it's a function of, do we have an REO program with that client? Many of our clients, we have REO programs with I'd say the majority, but not all. So we can be in a situation in, if you will, a subprime category where things move to REO and we could lose coverage too.

Now in terms of when things actually move to foreclosure, there are lots of issues around that right now. And I would anticipate, if things move through, you could see some decline, but we have already seen our REO placement rates go down quite a bit from four or five quarters ago.

Operator

And we'll go next to Ed Spehar with BofA Merrill Lynch.

Ed Spehar - BofA Merrill Lynch

I guess, two questions, the first is on the health side. It seems a little odd to me that you guys put out a target from margins by the end of this year, and you achieved that target. But typically when that occurs, I think the expectation is that that's sort of setting you up for what you are going to do going forward

I am just wondering, why set a target for the fourth quarter and then come out on the fourth quarter call and say, we are going to breakeven in 2011. That's the first question.

The second question is on the discount rate. I guess I could see a 50 basis point reduction in the discount rate, but I guess when you talk about a 100 basis points, I mean going to a 4.25 discount rate, especially Mike, my interpretation of your remarks was, you are looking at something like a forward curve when you considering what your new money yield is going to be.

Rates have come up 100-plus basis points, 100 basis points maybe since your last call. And if you look at a forward curve for let's say the 10-year treasury, the expectation is that if we are looking one year out it's something of a 50 basis points and you are looking beyond that it's up even more. So it's hard for me to see how you would come up with a 100 basis point reduction and maybe even a 50 basis point reduction.

So I am wondering if you could delve into that a little bit more.

Rob Pollock

So let's start on the healthcare side. I think that what we really just have is, you've got a new scorekeeping system and roles of play that start January 1, 2011. So if we operated under the rules and reporting at fourth quarter 2010, we think we'd kind of be there on the 4% margin. But starting in 2011, things change and we have to start hitting and complying with the new MLR requirements, which basically say, if your medical loss ratio is below a certain threshold then you take money and set it aside to pay rebates to your policyholders.

And so, a different way of looking at that, and we didn't do the calculation, but we would not have reported a 4% after-tax margin in the fourth quarter if that legislation had been in effect in the fourth quarter, because a lot of the margin would have gone to rebate. So you just got to discontinue this change. Mike.

Mike Peninger

I think another thing, if we go back 12 to 18 months, we had two phenomenon sort of going on at the same time. We had poor experience starting in late '08 into '09 that we had to correct. And I think some of our intent in saying that we could correct that underwriting problem, and we are going to do that and we are attempting to get that done by the fourth quarter of '10, which we did.

But sort of a separate question then is what was happening to prepare for healthcare reform. So I think there were two very different sort of things we were trying to communicate there.

Rob Pollock

So now, if we move to the discount rate, I'm going to go back to Mike in a minute, but just start with, traditionally we've used a portfolio rate method. And we're going to start blocking off by incurral year if you will, disability claims and rates.

Mike Peninger

I think that's exactly right. And I don't know exactly where we'll end up. We'll make a determination before the first quarter reporting, where we'd like to see sort of where rates are, get a little more data on where they'll be.

I don't know if Chris will want to comment on his view of rates, but clearly they are going to be lower. And the intent in giving you a range is to just say we're going to be somewhere in there, but we'll certainly look at as much data as we can prior to reporting for the first quarter and then we'll have a 'then current' sort of projection for the rest of the year.

The point is, you want a discount rate that's somewhat relative to what you're going to earn. That's important obviously.

Chris Pagano

Just one comment on rate. You are absolutely right that off the lows, which were sort of end of third, early fourth quarter, treasury rates are a percent higher. But when you look at what credit spreads have done, which is the driver of our reinvestment yield, you don't see as much of an increase.

Now, ideally we'd like to give back some more unrealized gains in exchange for high reinvestment yields. And we are hopeful the trend will continue that way. And we will assess where we are at the time we set the discount rate.

But it is volatile, and again the trend certainly is moving in our direction. But we can't count on that when we go to set the discount rate.

Ed Spehar - BofA Merrill Lynch

One follow up. Can you just tell us roughly, what kind of spread you look for when you are thinking about what your portfolio yield is versus your discount rate?

Mike Peninger

We take sort of a gross yield. We try to adjust for the fact that we've got tax exemption in the portfolio. We try to get a taxable equivalent yield. Then we would take up a spread, I would say in the 75 basis points or so to cover expenses and risk.

Operator

And our next question comes from Mark Hughes with SunTrust.

Mark Hughes - SunTrust

In the Solutions segment, you talked about the drop-off related to some specific items, talked about 420 going to 250 in 2011. How much of that is already reflected in the fourth quarter run rate of business, or shall we say that's incremental from the fourth quarter?

Mike Peninger

Well, I'd say both of them have been declining over the course of the year. So clearly, we'd be closer to that. But you've got to almost go linearly, probably from '09 through '11 or something like that.

Mark Hughes - SunTrust

We're maybe halfway there?

Rob Pollock

Let us get back to you on that Mark. I think that the point Mike's making is, the clients left and things started declining in '09. So that is a headwind we had starting in '09, continued in '10 and will continue in '11.

Mike Peninger

And I think maybe another way is, just take the numbers or the decline, the 420 to the 250, so you've got, that amount of decline is not going to be probably straight over the course of the year. You could see a downward sloping line during the quarters. So it would continue on through each quarter on a downward sloping line during 2011.

Mark Hughes - SunTrust

So it hasn't bottomed yet so to speak.

Mike Peninger

Right.

Mark Hughes - SunTrust

Then in the subprime, the placement rates, how much of the decline in the subprime placements was related to the new client wins, or how are you doing on a same-client basis in terms of placement rates?

Rob Pollock

Yes, I think Mike pointed out the vagaries of how things are reporting. And what we think has happened here Mark is, some of our clients have moved loans from what had been in prime to subprime. And an example might be, maybe they've moved for instance Alt-A that they might have had in their prime portfolio to subprime. And the placement rate on Alt-As is lower than the subprime loans themselves. And so Mike has worked with the property team etcetera and looked at things at that aggregate level because we think it might just be, given they're moving the loans around, a better representation on the numbers.

Mark Hughes - SunTrust

Do you think apples-to-apples, maybe it's steady?

Rob Pollock

That's why we're doing the aggregation of prime and subprime placement, Mark. Because if you'd gone back a few years, we got lots of questions on why was prime not moving when subprime was. Now we have a situation where prime placement is continuing to go up, where subprime is flat to down. So we've merged the two together for our analysis, and it seems to be providing some insight.

Mark Hughes - SunTrust

One follow-up question. If the healthcare reform gets tossed out, are there any state-level regulations that would still necessitate rebates or does this whole thing go out the window?

Rob Pollock

I don't believe there is rebate per se. What you have in a number of the states is filing requirements around loss ratio that must be met and impact minimum loss ratio requirements. But we are proceeding forward that the legislation's going to be there, and we want to be ready to play in that environment.

Mike Peninger

Your question is a very state-specific one I think. Some of the states have made modifications to sort of line their own regs up with the healthcare reform. Notably California, recently I think adjusted their minimum loss ratio to be consistent with the federal law. So that's just an example of where there would be some after effect if some healthcare reform went away.

So suffice it to say there would be a lot of confusion around if that gets repealed.

Operator

We will go next to Chris Giovanni with Goldman Sachs.

Chris Giovanni - Goldman Sachs

One quick one on employee benefits. You loss (exchange) there has been significantly better than peers, and you really haven't seen many negative (books) there, again, sort of different than peers. Can you talk some about what you are seeing in that book of business from your underwriting standpoint?

Rob Pollock

I'll start with, this is all part of our strategy, Chris, where, when we decided to focus on the smaller employer, we focus there because we felt that experience over long periods of time were better largely because some of the more subjective claims that might show up in larger employers don't come to the small employer's market.

And a good example would be, in a large employer, when there is a program announced that there is going to be layoffs, you see incremental increase in marginal claims. Small employers tend to go out of business. And you don't see that same phenomenon going on. So I think that is a big part of the driver.

Mike, you want to comment on any of the particulars related to incidence of recovery?

Mike Peninger

I think what we have seen in our block over many years, and the reason, as Rob said that we sort of chose to focus on the small employer is just that for whatever reason, there seems to be a tighter linkage between the employee and the employer. If somebody in a small employer group goes out, it's a noticeable impact on the employer. We find them generally to be very willing to work with us, to try to accommodate a partial return to work and things like that.

So there just seems to be, we've just had better success in working with employers to get people back to work which is the ultimate key to this business.

Chris Giovanni - Goldman Sachs

And then, quickly on capital management, you alluded to potential acquisitions. Can you talk some about what specialty businesses you would look for? And presumably, Balboa was one that you guys are now shying away from. But where else would sort of acquisitions fit in with the specialty strategy?

Rob Pollock

First, we don't comment on any particular situation, but we do look at things where we think our particular skill sets can match with what we see as an unmet set of market needs. So it can be a variety of different things that could build adjacencies within our existing business, and we've done some of those over time. And they could be block acquisitions that help us build.

And Chris has done a good job with this of trying to say, we're going to assign that responsibility to the business; we're going to spend a little more time looking at what new niche opportunities might be.

And all of this is predicated on a background in my mind of being disciplined about how we're deploying the capital. So maybe Chris, you could talk a little bit about how we think about returns, capital thresholds, evaluation, and also talk about some of the things we're just looking at.

Chris Pagano

Rob talked about, the first criteria is, what is the strategic significance of the opportunity that we're looking at. But the second one, and where the discipline comes into play is, the evaluation of whether or not it makes financial sense. And there, we focus on cash flow. The goal is to look into IRRs for the particular opportunity. Do these IRRs meet, on a risk-adjusted basis, our required threshold? The minimum we think about is our cost of capital, which is in the 10% to 11% range. But we like to think we can get above that, targeting sort of mid-teens to the extent that's possible.

But again, the important issue there being, on a risk-adjusted basis. And the other key is the discipline around that; understanding when a deal does or does not make sense. And despite the fact that we have significant holding company capital, debt capacity, tremendous financial flexibility, just the willingness to walk away from a deal if it doesn't make sense. Because undisciplined M&A is a way you destroy shareholder value, and in my mind I'd rather have holding company capital accumulate, return some of that to shareholders, which we have been doing rather than go out and do a deal just because I can.

Operator

Our next question is from John Nadel with Sterne, Agee.

John Nadel - Sterne, Agee

Couple of quick questions for you, one on Solutions. If I adjust for the impairment charge this quarter, look like the quarter produced an ROE around 11%. That seems like pretty solid improvement. I guess the question for you is, is that sustainable? Should we expect to see continued improvement in international combined ratio for instance, in 2011? Can you give us a sense on that?

Rob Pollock

Sure. On the International side, we are pleased with the progress we have made, but we need to do more. So we think that should continue. Remember, it comes from a couple of different sources, John. One is new countries getting up to scale, the second is, continuing to see improvement in the U.K. situation, which we anticipate we will.

So we have got a combination of different things that make us optimistic. We will continue to see improvements in the International Solutions realm.

John Nadel - Sterne, Agee

Just to interject, last year going into 2010 you guys were pretty specific about sort of a 100 to 200 basis points of quarterly improvement in that international combined ratio. Is there some way of thinking about that as we head into 2011?

Mike Peninger

I don't know, it will be 100 to 200.

Rob Pollock

There will be noise of course, John.

John Nadel - Sterne, Agee

There was in 2010.

Rob Pollock

Yes, that bounces around. But we still, as I said earlier, the long term target is in that 95% range. So we clearly want to see it moving in that direction.

The other one, I think I mentioned that on the wireless side we've had some wins internationally, John. And the good news about that business is that we have got work to do around implementation. But if we are successful on the implementation and able to bring customers in if you will, that business will earn a little bit faster, and that will help as well.

The last one I'd just point out, and maybe Chris can speak about this for you. Second is, I mentioned that we took obviously more than just our earnings out of Solutions. So remember, we talked about streamlining our capital base within Solutions. We made quick progress on that.

Chris, maybe you'd just want to provide a few more comments there.

Chris Pagano

The dividends we took out of Solutions were about $200 million more than the GAAP earnings.

Again, a third of that or half of that $200 million was the capital streamline that we identified. So $100 million to $120 million of the $150 million we targeted. And then the balance of that were just other pockets of capital, which as part of our ongoing process of capitalizing to invest and then getting the balance of the capital up to the holding company where it's most flexible, we are able to find another $80 million to $100 million there. So again, that will also help the ROE picture going forward.

John Nadel - Sterne, Agee

My other question for you is just that Rob, thinking bigger picture now, for the overall enterprise we've got the transition year for health, and maybe more than one year for health. But if I look at overall 2010, adjusting for some one-time items, maybe favorable CATs relative to a normal year, it looks like you're down to 10% to 11% ROE for the organization in 2010. Should we expect, even considering the pressure in health, should we expect 2011 to show progress upward from there as well?

Rob Pollock

We certainly hope so, John.

John Nadel - Sterne, Agee

Aside from health and higher CATs is there anything you look out and you say, we have some kind of significant fear or risk to ROE coming down from here?

Rob Pollock

I think you highlighted the big ones. And again, we're focused on what we see the opportunity's been. And we see opportunities within Solutions. If we get a pick-up in the economy, again, that helps a number of our businesses. We think line-of-sight clarity on health will help with the revenue side. That's a story that will unfold this year, and won't have a big impact on ROE in 2011, but certainly will in the years out and I think will validate that we have a strategy that can win in that marketplace.

John Nadel - Sterne, Agee

Thank you very much, guys.

Rob Pollock

Thanks for joining us today, and we look forward to updating you on our progress on our next call.

Operator

This does conclude Assurant's fourth quarter 2010 call. Please note that a replay will be available as of 11 am. You may now disconnect.

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