Welcome to Assurant's Fourth Quarter 2014 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 management's prepared remarks. [Operator Instructions] It is now my pleasure to turn the floor over to Francesca Luthi, Senior Vice President, Investor Relations and Corporate Communications. You may begin.

Thank you, Tiffany, and good morning, everyone. We look forward to discussing our fourth quarter and full-year 2014 results with you today. Joining me for Assurant's conference call are Alan Colberg, our President and Chief Executive Officer; and Chris Pagano, our Chief Financial Officer and Treasurer. Yesterday afternoon we issued a news release announcing our fourth quarter and year-end 2014 results. The release and corresponding financial supplement are available at www.Assurant.com. We'll start today's call with brief remarks from Alan and Chris before moving to Q&A. Some of the statements 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 2013 form 10-K and third-quarter 2014 form 10-Q. Today's call also will contain non-GAAP financial measures which we believe are meaningful in evaluating the Company's performance. For more details on these measures, the most comparable GAAP measures and a reconciliation of the two, please refer to the news release and financial supplement posted at Assurant.com. Now I will turn the call over to Alan. Alan?

Thanks, Francesca, and good morning, everyone. In 2014 we made progress as we adapted to the changing marketplace and built additional capabilities to drive profitable long-term growth. While we are disappointed by weaker-than-expected earnings in the fourth quarter, we're taking decisive actions to improve profitability. We see great opportunities ahead as we pursue our aspiration of sustained out-performance for our customers, employees and shareholders. In 2014 we generated strong free cash flow. In support of our strategy to grow and produce attractive shareholder returns, we invested $162 million to complete four acquisitions. We returned $296 million to shareholders through buybacks and dividends, and we ended the year with $560 million of holding company capital. For the year, we delivered 9.7% operating ROE excluding AOCI, below our target due largely to an operating loss at health. Book value, excluding AOCI, grew by 9% compared to year-end 2013. We are pleased with our top line results. Revenues increased 16% to $9.7 billion through a combination of organic growth and acquisitions. The key drivers of this performance were our targeted growth offerings, which now account for a quarter of total revenue. More importantly, earnings from these product lines tripled year over year. We will continue to shift resources toward these targeted areas, as we believe they will drive growth in earnings and cash flow longer term. Our recent divestiture of American Reliable Insurance Company is another example of our actions to realign capital to support our long-term profitability objectives. I want to thank the American Reliable employees for their service and the seamless transition to Global Indemnity. During 2014 we also broadened our specialty insurance products with additional adjacent fee-based services related to a variety of risk events. Across Assurant we generated more than $1 billion of fee income for new and existing…

Thanks, Alan. I'll start with Solutions, which delivered another strong quarter. Net operating income was $58 million, $36 million higher than the prior year. Continued growth in covered mobile devices and favorable domestic loss experience drove results. We also recognized $5 million of income from client marketing programs, a decrease from prior years. Results also benefited from operational efficiencies due to the restructuring efforts that we began in 2013. Net earned premiums and fees were nearly $1 billion as we delivered more integrated services in mobile, an area that we have targeted for growth. In our core business, higher revenue from vehicle service contracts and production at a domestic service client also contributed to the strong quarter. Declines in non-growth areas such as domestic credit tempered growth and overall Solutions revenue was partially offset by foreign exchange pressures in Canada and Latin America. For the full year Solutions delivered record top-line and earnings, far exceeding our expectations. In 2015 we expect revenue and earnings to remain level with the prior year. Growth in our mobile and vehicle service contract businesses will offset the loss of a tablet program which accounts for roughly $100 million of annualized premiums and fees. In addition, there is potential for a decline in client marketing income. As we continue to expand our business globally, we also anticipate near-term foreign exchange headwinds. We will continue to invest in mobile and other core products to enhance our competitive position as non-growth areas contract. Now let's look at Specialty Property. In the quarter net operating income was $71 million. This compares to $108 million in 2013, which was a near record quarter due to higher-than-average renewals and new Lender-Placed portfolios. There were several factors contributing to the year-over-year earnings decline, including lower placement and premium rates, margin compression…

The floor is now open for questions. [Operator Instructions] Thank you. Our first question is coming from John Nadel with Sterne Agee. Your line is open.

Good morning, John.

Hey, John.

Good morning, everybody. I guess the first question for you, Alan, on Health. In your outlook commentary and in your prepared remarks as well as Chris', we should see improved results in 2015. I'm just wondering how we should think about quantifying that? Last year Management said that the Health segment would be modestly profitable in 2014, and yet it lost $64 million. I recognize a lot has changed, but I'm trying to understand in terms of order of magnitude what kind of improvement you are actually expecting to see in 2015? Should that loss be cut in half? Should all the actions taken get this business back to modestly profitable back quickly? How do we think about that?

Hey, John, I appreciate the question. Let me start with the commentary on what happened in 2014. Yes, you are correct, that was our expectation going into the year with the pricing that we put in place. As we've talked about, the rules changed after we set pricing, and after the whole industry set pricing. That dramatically altered the risk pool in 2014 and made the market much sicker than had been expected.

No question, yes.

That's what really influenced 2014 results. The good news about 2015 is it's a new cohort. We were able to raise our prices aggressively and appropriately to reflect the experience we expect will happen in 2015. We've made significant plan design changes really by analyzing what happened in 2014 and trying to address any adverse selection effects. You saw the commission reductions we took to moderate sales. And with on our ongoing expense discipline, we think results will improve in 2015 with the goal of profitability.

Okay. Maybe to help folks, Alan, maybe a weighted average or some way of thinking about, you said significant rate increases for 2015. Can we get a sense for that, even if it's a ballpark?

Well it's early to know what will happen in 2015, but our rate increases on average were in the double digits and closer to 20%.

Thank you. And then a couple questions on Specialty Property. I'm curious how we should be thinking about the non-cat loss ratio. I'm asking because there's actually been quite a bit of volatility on a quarterly basis in that non-cat loss ratio during 2014. Maybe a couple of quarters it looked like it was pretty favorable, a couple of quarters maybe unfavorable. How do we think about what a reasonable run rate is? Or a starting point as we start to think about the negative consequences of further premium rate reductions working through the book?

Hi, John, it's Chris. A couple things. Remember, the ratio is going to be a function of lower premiums coming through, so we're going to see that drift a little bit higher. When I think about cat versus non-cat, there are some weather events that don't qualify for cat. In the fourth quarter in particular we had some hailstorms that did not meet our definition of cat, but were weather nonetheless. So $5 million to $7 million in the quarter in particular. And then again, as we move through the normalization of Lender-Placed and properties are in foreclosure for longer, you're going to see slight drifts higher in the non-cat loss ratio.

Okay. All right, that's helpful. And then one last one for you on Specialty Property. The placement rate, I'm curious, this fourth quarter was the quarter you lost that 600,000, loans track. It seemingly had up pretty high placement rate. I think we were estimating somewhere around 7.5%, 8% placement rate on that block that left you in the quarter. And yet the overall segment placement rate only dropped 5 or 6 basis points on a sequential basis. Is there some catch-up we should expect to see as we move into calendar 2015? Is there something else at play there?

Yes, I think so, a couple things. There's always going to be a little bit of mismatch that's a point-in-time estimate with respect to the placement rate. The block will flow through over time, so you will start to see it drift a little bit lower. But again, going back and in context, it's the normalization of the Lender-Placed business that's going to produce this decline in placement rate. I think we've talked about 1.8% to 2.1% longer-term. And again, if you look at the continuum, you're starting to see that come into play.

Okay. And then one last overarching question on Lender-Placed. There is seemingly no end to the turmoil at Auckland and some of its related affiliates. I understand you guys have a pretty deep relationship with them on the Lender-Placed side. I'm just wondering, can you give us any color on what kind of impact, if any, you believe, any outcomes, radical outcomes with Auckland could place upon you?

John, we are not going to comment on a specific client. I think the important thing to remember as you think about our Lender-Placed business, is we play across all of the different parts of that industry and all the different types of servicers. So we are well aligned with whatever might happen in the marketplace and well positioned to be still the provider of choice in Lender-Placed.

Okay. I appreciate that comment. Thanks.

Your next question comes from the line of Mark Hughes with SunTrust. Your line is open.

Good morning, Mark

Good morning. How much capital would you anticipate might come free in the Specialty Property business on top of earnings?

So we've given some long-term guidance around that, 52% to 57% of net earned premium over time. Again, keep in mind as you think about the Specialty Property business in aggregate, you're going to see the freeing up of capital from Lender-Placed, redeployment in the targeted growth areas around Mortgage Solutions in particular, multi-family housing. And then don't forget ARIC. The sale of ARIC released a significant amount of capital. I think long-term even with goodwill being held at Property, the $300 million, we still think 20% ROEs are possible, and are targeting that. And I think that, again, meets our definition of Specialty.

Mark, let me add on to Chris's comments, just a couple of thoughts on capital management the way I think about. Which is, we have a very strong a portfolio of businesses that generate substantial free cash flow. And as you saw, we expect that to approximate segment earnings this year for us. That combination creates real value for our shareholders. And we have, I think, a good track record of deploying that capital effectively. And as I said in the prepared remarks, I'm committed, we are committed, to continuing to balance returning capital to shareholders with appropriately investing in future growth. And I think you see evidence of that over time.

Thank you for that. And then the $400 million that's a receivable from the government, could you talk about your confidence that you've done this properly? Is there some question about that? Are there some assumptions that you've had to make? How much confidence do we have that, that money will come to you?

So again, that $400 million has got two pieces to it. So you've got $275 million or so in the reinsurance recoverable, which is a mathematical calculation, $45,000 retention and then the co-participation up through $250,000 on claims. Feel a high degree of confidence in that number. The risk adjuster, we have confidence in our own number, but it is our risk score relative to the market. I think that's where there is a little more of an estimation process that we have to go through. Every quarter that goes on we get more information, not only on our own block but the rest of the market, as third-party providers are aggregating data. Again, the number is our best estimate as of year-end.

Thank you.

Your next question comes from the line of Seth Weiss with Bank of America Merrill Lynch. Your line is open.

Good morning, Seth

Hi, good morning, everybody. First, I want to ask a couple questions on Health. First, Alan, you mentioned the goal of profitability in 2015. Is this the same as a target of profitability? And I don't mean to split hairs here, I'm just trying to level set for 2015.

I think the decisive actions we've taken so far are we expect results to improve. We're going to monitor very closely with Health, how things develop as the year go by. We will take additional decisive action, but it is a goal of profitability.

Okay, thank you for that. And my biggest question on Health is the question of the risk adjusters. I understand the pressure from the extenders on 2014 and how that gets corrected on 2015. This quarter it seemed to be that the accrual of the adjuster was a large reason of the under-performance. That is seemingly a very difficult thing to predict when you're trying to predict the health of the broader risk pool. How critical is that adjuster accrual in your pricing and goals for 2015?

Well again, the risk adjuster in terms of the aggregate recoverable we've got for 2014, it's a little more than a quarter. So the reinsurance recoverable is the larger piece where we have a higher degree of confidence, since there's no market estimation involved there. But again, the way I think about it is all of the participants have an interest in understanding the market risks so that they can properly estimate their risk relative to the market. But there is some estimation in there. We feel pretty good, but again, it's the first time through. And then again, 2015 is a different story.

Seth, I think it's important to tell this tale of the two years because they are different. 2014 when the industry had an expectation of a risk pool, that was changed after the fact by the extenders. 2015, we're able to look at an expected risk pool. There hasn't been any intervention to change that expected risk pool so far. So again, it's an estimation, but 2015 maybe a very different year for market morbidity than 2014 was.

Is it fair to assume that within your pricing assumptions, given the pricing action that you've taken and the change in cohort that you described, is it fair to assume that your reliance on the risk adjusters next year is significantly less than what you had assumed the reliance would be in 2014?

Yes, it's hard to say for sure. There are a couple things going on with the risk programs that we need to be careful, as we think about 2015. One is the reinsurance program is gradually phasing out. It phases out completely after 2016. With the risk adjuster it really is going to be a function of what the market morbidity is. Now our ACA block is substantially bigger in 2015 as the market switches is to the metallic plans. So the risk adjuster program remains very important to us as we go through the year.

Okay, thank you. And then one question on the increased insurance fees. I just want to make sure I'm understanding this correct. This is a direct hit to the tax line, right? So that's after-tax impact that you've given and no impact to the expense ratio. Am I thinking about that right?

The fee is not tax-deductible but we are allowed to price for in our rates.

Okay, thanks a lot.

Your next question comes from the line of Sean Dargan with Macquarie. Your line is open.

Good morning, Sean

Good morning, thank you. I have a big-picture question about Health. You have a target for profitability in 2015. It's not generating cash flow that's being dividended up to the holding company. I'm wondering, how hard would it be to walk away from this business? Is there a political pressure to stay in this business? What's preventing you from just stopping renewals and freeing up capital?

Sean, I'm not going to speculate on what we might or might not do with Health over time. We have a commitment to our shareholders though, that we're going to be Specialty businesses that can generate Specialty returns. We are constantly looking at Health and whether we can achieve it under the new reality of the ACA world. We're going to take action. You've seen us take action. We're going to continue to take action. We'll take the appropriate action if it's not a specialty business over time.

Okay. That's all I had, thank you.

Thank you.

The last question is coming from the line of Steven Schwartz with Raymond James & Associates. Your line is open.

Hey, good morning, everybody I got a few.

Hi, Steven.

Staying on the risk adjusters, do you have -- what did you base this on? Do you have industry data already that you can look at and use, not only to figure out for this year but use for next year?

Yes, there's a company called Wakely, a third-party provider who's been aggregating the industry data over the course of 2014 and providing it to those participants. We have been adjusting our accrual based upon how our estimate of our risk score relative to the market data, as provided by Wakely.

Okay, presumably the extenders coming in, they're going to be more healthy. On the other hand, you have this big push, there are healthcare.gov ads on every day here in Illinois. You see that offsetting? More people that were in the program last year, probably less healthy, you got the extenders, they are probably more healthy?

I guess our basic premise is the first people to participate in healthcare were the least healthy. And as the block grows it will become, in aggregate, healthier. And that's been the promise that we've operated under since the beginning.

I think it's important, Stephen, just one other comment. I think it's important as we've thought about that, we've really worked hard on the plan design and with the pricing to reflect what we think is going to happen. And then we've used the commission changes that we made to try to get the sales in the places where we want them to be.

Okay. I guess, the one thing I'm looking at is, who knows how things work out this year with all the new people coming in. But at some point you get to a stable market. Everybody is in who is going to be in. At that point these things become much easier, no?

We expect, I think the industry expects, the market to normalize beginning more -- it should normalize somewhat in 2015 just without the extenders. By 2016, 2017 it should become a more predictable, more normalized market.

All right. And then one more on Health before I move to something else. The Health membership was down. It wasn't down last year in the fourth quarter, individual Health membership. This is not making sense to me.

A couple things. There's just a little bit of attrition that goes on during the course of every calendar year. And then more importantly, when we record sales in a quarter, the insureds [ph] do not go into the count until they pay their first premium. These are all Jan 1 effective dates, so the first-quarter, fourth-quarter lag is what you're going to see. And then you will also see the effect in the first quarter of the fact that open enrollment continues on through February 15. So just a timing issue there.

No, I get that. And that was explained last year, how there were the big sales and there wasn't that much growth in membership. But here was an actual decline which did not happen last year. Where did these people -- what products did they leave from and where did these people go? They didn't stay naked for a couple months.

Keep in mind, the other thing you got to remember first quarter of 2014, significant number of sales that offset the normal course attrition. And then there are other events. People who are unemployed find a new job, they go into a group plan, et cetera. I think the volatility in this is really normal course. But again, the trend here is increased sales of individual medical in the metallic plans. And that's what you're going to see coming into play in 2015.

Okay. Do these people leave? What plans did these people mostly leave from? Was it mostly the access health and they are going to healthcare.gov?

You know, we don't have that information, sorry.

Okay. And then one more. The tablet loss in Specialty Property. I don't know a whole lot about this business, but I think of tablets, I think of Apple, I think of Samsung, I think of Microsoft, whoever. Is that the case here? And you said to a sister company, an affiliated company? Do they have captives that they are reinsuring this themselves? Is that what's is going on?

Yes, effectively. This was not competitive, which is the important point. And it's being moved to an affiliated insurance company of one of our former clients.

Okay, so is this a trend? Do a lot of these companies have captives that can and will do this?

No, I think the reality has been over time the market is moving the other way. And you see that with the success of our mobile business. We have made real progress over the last few years. I think we've built a very strong franchise there. Our pipeline of potential new clients is very robust. You do get into special circumstances occasionally, and that's what this was. But again at the end of the day, we feel good about the momentum in the mobile business and how it's going.

Okay. All right, thank you guys.

Thanks, everyone, for participating in today's call. We look forward to updating you on our progress throughout the year. And as always, please reach out to Francesca, Suzanne and Jisoo with any follow-up questions. Thanks

Thank you. This does conclude today's teleconference. Please disconnect your lines at this time and have a wonderful day.