Assurant Inc (AIZ) 2013 Q1 法說會逐字稿

Welcome to Assurant's first-quarter 2013 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.

You may begin.

Thank you, Zach.

And good morning, everyone.

We look forward to discussing our first-quarter 2013 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 first-quarter 2013 results.

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

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

Some of the statements we make on today's call may be forward-looking.

And actual results may differ materially from those projected in these statements.

Additional information on factors that could cause actual results to differ materially from those projected are provided in yesterday's news release, as well as in our SEC reports, including our 2012 Form 10-K and upcoming first-quarter 2013 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 Rob.

Thanks, Francesca.

And good morning, everyone.

In the first quarter, we continued to build our foundation for profitable growth.

While earnings were down, we expanded and further adapted our business in several areas to address market needs.

For example, at Assurant Solutions, we're growing premiums and taking expense actions in under-performing areas to further improve efficiency.

At Specialty Property, we're growing our track loan portfolio, moving ahead with the implementation of our new product, and resolving lender-placed matters.

At Health, we're executing on our strategy centered on affordable and accessible products, as details of healthcare reform are finalized.

And at Employee Benefits, we're gaining momentum in our voluntary products through targeted distribution.

These represent several of the actions we're taking to advance long-term growth, enhance profitability, and help consumers protect what matters most to them.

Let me now update you on our key performance metrics for the quarter.

Annualized operating return on equity, excluding accumulated other comprehensive income, or AOCI, was 10%.

Book value per diluted share, excluding AOCI, increased by 2%.

And, net earned premiums and fees increased by 4%, driven by growth at Solutions and Specialty Property.

Our capital position provides us great flexibility, which was further enhanced by our recent debt offering.

We continue to regard our stock as attractively priced, and believe repurchases are a prudent use of capital.

Through April 19, share buybacks for 2013 totaled $96 million.

Share repurchase activity in the first quarter was affected by settlement discussions with the New York Department of Financial Services.

We resumed buybacks following the agreement.

Returning cash to investors is an integral part of our disciplined approach to capital management.

Our segments generate free cash flow that will allow us to both return capital to shareholders, and make ongoing investments to build our business.

Now, I will offer some updates on each of our businesses.

Assurant Solutions remains focused on achieving a 14% ROE in 2014.

Returns in domestic service contracts continue to exceed our target.

On the new business front, our vehicle service contract business benefited from a rebounding US auto market.

Looking ahead, we expect mobile to become an increasingly important contributor to our results.

We are making steady progress in growing our mobile franchise by developing innovative offerings and expanding relationships with existing clients.

During the quarter, we launched a small but important program with TIM, the largest mobile carrier in Italy, allowing us to broaden our mobile footprint in Europe.

In Latin America, the rollout of our Telefonica partnership continues, and is going well.

Achieving our 14% ROE goal will require continued expense management.

While the UK narrowed its operating loss in the first quarter, macroeconomic conditions remain challenging.

We are committed to meeting our goal of UK profitability in the third quarter, but it will require further expense reductions.

At Assurant Specialty Property, we are pleased by the continued progress in our multi-family housing business.

We now provide our renters and resident bond products through many of the nation's largest property managers.

We believe we can expand this business even further in the future.

Revenues also increased in our lender-placed business.

We now provide insurance and related services for nearly 33 million loans.

This represents a 16% increase from the first quarter of last year, even though we believe the nationwide inventory of mortgage loans declined over that period.

Our strategy of aligning with market leaders continues to pay off.

In the next two quarters, we will add another 900,000 loans from portfolio acquisitions by two of our clients.

Our growth is a testament to our robust capabilities, rigorous processes, and high-quality service.

The rollout of our new lender-placed product is on track, and will be implemented in 28 states by the end of the second quarter.

Our new product forms and rates submitted to New York in March are pending review.

In Florida, we will participate in a rate review next month to discuss our previously submitted filing.

During the quarter, the FHFA issued a notice of several potential changes to lender-placed insurance on GSE loans, such as the elimination of commissions and client reinsurance.

We anticipate FHFA will publish final regulations later this year.

We believe our new product offers solutions to the issues that emerged in the wake of the housing crisis and provides additional flexibility for mortgage servicers.

As a leader, we have the capacity, expertise, and capabilities to support both our clients and the GSEs as the housing market evolves.

At Assurant Health, we posted a net operating loss for the quarter that was driven by an increased tax liability related to healthcare reform.

At the same time, health total sales grew for the 4th consecutive quarter, affirming that choice and affordability are important to consumers.

Major medical product sales increased as we benefited from our network partnership with Aetna.

Sales of health access and supplemental products now comprise an increasing portion of total sales.

We are encouraged by our sales momentum.

We are moving ahead with a new suite of products to cover the essential health benefits required in 2014.

We continue to believe our broad product portfolio allows us to meet a variety of consumer preferences.

At Assurant Employee Benefits, our easy-to-use administrative and enrollment systems give us a competitive advantage in the small employer market.

We were encouraged that new business sales increased 19% over the first quarter 2012.

Key drivers of this growth were our enhanced demo network and expanding relationships with key brokers, including those focused on voluntary offerings.

Looking ahead, we remain committed to achieving steady improvements across each of our businesses by meeting the needs of consumers and clients.

And, in turn, delivering long-term value to our shareholders.

And with that, I will turn to Mike for more detailed comments on our results.

Thanks, Rob.

I will start with Assurant Solutions, where net operating income declined by $6 million year over year, excluding a $2.4 million disclosed item in the first quarter of 2012.

Higher mortality in our preneed business, and the previously disclosed loss of a mobile client, contributed to the decline.

Mortality experience can vary by quarter and we expect preneed's results to improve during the rest of the year.

Domestic net earned premiums and fees increased significantly, primarily due to accelerated growth at a large service contract client.

Our vehicle service contract business also grew as auto sales continued to rebound.

This premium growth offset declines in other accounts, including the lost mobile account.

We continue to expect modest growth in domestic premiums and fees over the rest of the year.

Continued expansion in Latin America across all products, and the previous expense management efforts in Europe, drove a 90-basis-point improvement in the international combined ratio, excluding the first-quarter 2012 disclosed item.

Our international operations remain on track to deliver a 100- to 200-basis-point improvement in the combined ratio for the full year, excluding disclosed items.

In the US, our combined ratio was 96.9% for the quarter, a slight increase from the prior year, but well below our long-term target of 98%, as expense actions taken last year are improving results.

At Specialty Property, net operating income declined year over year.

The decrease was driven by the $14 million settlement agreement in New York, $5.6 million of losses from hail storms in the southeast, and $4.4 million of unfavorable loss development from Superstorm Sandy.

Significant loan volume growth during the past year contributed to higher expenses in the quarter, as we expanded capacity to service new loans.

Excluding these factors, Specialty Property's underlying results were solid, demonstrating our leading market position.

Net earned premiums and fees increased by 9% due to premium production from lender-placed loan portfolios added in 2012, and contributions from multi-family housing products.

Our placement rate in the first quarter remained elevated at 2.89%, largely driven by loan portfolios acquired in the fourth quarter of 2012.

Absent these loans, placement rates would have declined slightly.

We onboarded 1.7 million loans in the first quarter.

And, as Rob mentioned, we expect to add another 900,000 loans over the next two quarters.

These 2.6 million new loans will produce premiums starting later this year.

The changing composition of our loan portfolio, combined with macro trends, will lead to lower placement rates in the future.

However, the new loans will help sustain our revenues over the course of 2013.

Given the increase in loan volume, we now expect our expense ratio, excluding disclosed items, to increase versus 2012, as we further expand capacity to support this growth and continue to enhance our customer service capabilities.

We will update you later on our further progress at Specialty Property once we roll out our new lender-placed insurance product in other states, and see the FHFA's final regulations.

Assurant Health reported a net operating loss for the quarter, reflecting the continued impact of healthcare reform.

We increased our estimate of compensation expenses that are non-deductible under the Affordable Care act.

This change in estimate resulted in a $10 million addition to our income tax expense in the first quarter.

Pretax earnings were in line with our expectations.

In the first quarter, Health earned $14.5 million compared to $19.5 million in the first quarter of 2012.

The decrease was driven by the continuing decline in individual major medical premiums and fewer small group lives.

We are pleased with recent sales momentum, which has moderated the rate of revenue decline compared to past quarters.

Also, total insured lives continues to grow.

Going forward, we expect our effective tax rate to remain very high during the rest of 2013.

This is primarily due to higher non-deductible compensation expenses and comparatively lower pretax earnings in 2012.

For the full year, we now expect a modest after-tax profit in Health.

In the near term, we consider pretax earnings a better gauge of underlying potential of the business than after-tax results.

We continue to believe that the long-term prospects for Health are favorable.

We are building a product and distribution platform that will enable us to serve markets that should grow significantly as reform unfolds.

At the same time, we will continue to manage our expenses and capital efficiently.

As the business grows and pretax earnings increase, effective tax rates will moderate, leading to attractive after-tax returns for shareholders.

At Employee Benefits, investment income declined due to continued low yields and fewer invested assets.

This decrease, along with the reduction in the discount rate for new long-term disability claim reserves, reduced segment profitability.

As in preneed, we experienced higher mortality in the first quarter.

But this was entirely offset by continued strong dental experience.

Disability incidents and recovery rates remained stable during the quarter.

Net earned premiums and fees declined modestly due to the residual impact of the previously disclosed loss of two disability clients last year.

For 2013 overall, we still expect net earned premiums and fees to be in line with 2012 due to continued growth in voluntary products.

Expense and capital management will remain a focus throughout the year.

Turning to corporate matters, we recently issued $700 million of debt at attractive yields.

We set aside $500 million of the proceeds to repay our 2014 notes when they mature next February.

The additional debt will increase our after-tax interest expense by $11 million in 2013.

However, after the 2014 notes mature, our after-tax interest expense will decrease by about $3 million a year, even with the additional $200 million of debt.

We continue to manage our capital prudently.

Consistent with prior years, we took a modest $21 million of dividends from the operating companies in the first quarter.

We still anticipate that dividends for the full year will equal operating earnings.

As always, dividends may vary depending on the capital needs of the businesses and rating agency requirements.

For the full year, we continue to expect our corporate segment operating loss to be in the range of $65 million to $70 million, excluding $50 million of after-tax interest expense, and roughly $11 million of after-tax benefit from amortization of deferred gains.

In summary, while we had some challenges in the quarter, the underlying results in our targeted growth areas are encouraging.

Profitable growth, ongoing expense management, and prudent capital deployment remain key priorities.

We look forward to continued progress over the rest of the year.

With that, I will ask the operator to open the floor for questions.

(Operator Instructions)

Chris Giovanni with Goldman Sachs.

Good morning.

Thanks so much.

First question, just on health.

Obviously there is a lot going on with reform and moving pieces.

I just wanted to get your assessment of this business in terms of it continuing to be a specialty focus for you guys.

Or what other opportunities you would consider with that segment.

Sure.

So, let's go back to when the Affordable Care Act was passed.

We evaluated options for the business and concluded our best option was to modify our strategy, focus on affordability and choice.

And, quite frankly, I think we have been pleased with our results today.

We said that things were going to be somewhat discontinuous on the results side because the Affordable Care Act provisions would come in over time.

But we still feel very positive about where we are in that progression.

Sales are up quite a bit, which shows that our product suite is resonating with buyers.

I think the other thing we said is we believe that once all reform is through, and that really won't be done until the end of '14, we're going to have a business that we think we can grow and we think we can earn attractive returns in.

And I would say to date we are pleased with the results.

Remember, in this business, this is not a capital intense business, and, so, the returns we need to earn on the capital base can produce quite good returns in this segment.

And I think we feel quite good about where we are.

Okay.

Then on the debt offering, obviously you have a fair amount of capital already, and you are putting some of that to work here in April.

The incremental $200 million of debt, recognizing opportunistic in terms of the cost of that.

How should we be thinking about the avenues you are exploring to put that debt to work?

Sure.

Let me make a couple of comments and I will turn it over to Chris.

I think we have demonstrated that we are very disciplined in our approach to capital management, and take deployment very seriously.

We obviously had debt that matures in 2014, and we needed to look at how we deal with that going forward.

Chris, maybe you can provide some perspective on that.

Yes, hello, Chris.

The important point to make here is nothing has really changed with respect to our strategy around capital.

As we mentioned in the remarks earlier, the incremental $200 million is not leading to an increase in our after-tax interest expense.

So there is no expense-related component of having the extra debt.

We have talked about having the opportunity to put on incremental leverage.

We saw an opportunity in the market.

We felt we got some very long-term attractive yields on the debt.

But I don't think, and as Rob mentioned, we're going to continue to be disciplined.

We have deployable capital in the form of cash on the balance sheet.

We've got operating earnings that we believe we can get at over the course of the year.

So, tremendous amount of financial flexibility.

In terms of deployment, again, the priorities haven't changed.

Capitalize the operating companies, look for profitable growth opportunities, either organically or through M&A, and return capital to shareholders which we have demonstrated that we are willing to do over the last several years.

And, given where the stock is trading right now, we believe it's very attractive, and that it continues to be a prudent use of our deployable capital.

So, again, those are messages that we have reiterated over the last dozen or so quarters, and it continues to be our strategy going forward.

Okay.

So, it would be opportunistic around the price versus an imminent need to do a transaction or anything like that at this point.

I think, again, we looked at the market.

At the time, we felt like there was an opportunity to put some modest leverage at no incremental cost in terms of interest expense.

And view that capital as just an additional amount of capital on the balance sheet for deployment.

Okay.

Thank you very much.

Seth Weiss from Bank of America.

Good morning.

Thanks a lot.

I wanted to ask a few questions just on Specialty Property, and what guidance contemplates in terms of rate action, just to get clarity on that.

If you have 28 states with new product filed, and you have rate reviews coming up in New York and Florida, when we look at the guidance that you have in place right now for modestly rising premium increases, what does that contemplate in terms of all those moving parts?

We certainly factored the change that went into effect in California.

We have rate discussions, as the normal course, in many states.

Those are state-specific.

I think the important thing is we try to balance all that we know about volume growth from new loans, rates, various other factors.

All those things go into our overall outlook that revenue is going to be up a bit this year.

I would just add to all of that, what Mike said.

We filed in each of the states.

We certainly have tried to reflect the experience of the states which, in some cases, means there were probably modest declines that were filed through in some of those states.

But a key component, Seth, is who actually ends up with our product.

And that is something that changes over time.

We have seen that over the last few years.

Okay.

And just in terms of Florida, I think this is the one that a lot of us are specifically watching out for.

I believe you filed for a flat rate in your March filing.

That is obviously different than what QBE was eventually able to push through on their side.

I know it's a little bit of a different situation but I'm curious if you could just comment on QBE's eventual 19% rate decline there versus what you filed with.

We really can't comment on QBE's filings.

What we do, as we do in every state, is go through a lot of actuarial analysis around the specifics of our exposure and the various components of our rate filings.

So, we feel good about the rates we filed for.

We have seen over time, when we've acquired new loans, that our rates in Florida have been quite competitive in the marketplace.

So, overall we certainly will be going through the review process with Florida but we feel like we have given a -- we have a very solid analysis behind the filing.

Okay, thanks.

And then just one more, if I could.

This is just a numbers question.

If we think about how much has been filed and approved for versus what is still in the pipeline with, I believe, about 14 states still in the pipeline, and, of course, New York and California.

In terms of the total premium base, how much of that rate is now more in a final state versus how much more will be pushed through the next couple quarters, if we think about it in terms of the premium base?

A couple of points here, I think, that we've said.

We are not done in Florida.

Florida is our biggest state.

New York is a sizable piece of our volume, as well.

But I think the other key thing is implementation is the key here versus approval.

Because there is a lot of work required to be able to administer these new rates across a servicer's portfolio, and provide them with the flexibility our new product provides.

So, again, we have to do that in stages.

And we are going to introduce those additional states in the second quarter.

We plan to have them all done by the end of the year.

As we pointed out previously, we think our revenues will be up during 2013.

Great, thanks a lot.

Mark Finklestein with Evercore Partners.

Good morning.

Just going back to Health, the question is, you alluded to focusing on pretax as a gauge for the earnings.

I'm trying to understand that comment in the context of, does something structurally happen beyond '13 that maybe mitigates the longer-term impact of this tax implication?

I think what I was trying to get at Mark, is, when you think about the effective tax rate for the business, you really think about a couple of things.

One is the pretax earnings and then what are the expenses that are non-deductible under the Affordable Care Act.

While pretax earnings are lower than ultimately they will be, once the business is through the reform transition, the effective tax rate will be lower at that point.

So that's why we really think pretax is a better gauge in the near term as opposed to saying after-tax with these very high effective tax rates that we are reporting.

And just to add to what Mike said, if we think about this a little bit, our sales are up, but we are still seeing a decline in year-over-year premiums.

We think that -- we are optimistic we can get that to shift.

We think when all the provisions are implemented, the market will grow.

And, therefore, right to what Mike said, we're going to have the opportunity to increase our pretax earnings, which will help alleviate this whole issue.

So the take away is that there is nothing that structurally or otherwise can be done to moderate this $4 million or $5 million impact a quarter, other than growing into this bigger nut.

We have chosen to illustrate it in the Health segment.

If we were an all health company it would be spread over the whole thing.

We could have spread it over all our segments.

We just happened to put it in Health.

But that is -- we are applying the provisions of the Affordable Care Act, Mark.

So there will be this element of non-deductible expenses.

And, as Rob said, I do want to emphasize that if we were entirely a health company of our same overall size, the effect of this would be much less noticeable.

Because it adds -- I think, if you think about our corporate effective tax rate overall, this adds somewhere in the vicinity of 50 basis points, or 50 to 100 basis points or something like that.

But we choose, just to give you better insight, to apply the whole cost of that in the Health segment.

Okay.

So, this doesn't in any way change your view of the business model going forward in terms of participation and exchanges, continuing to offer major medical versus the affordable product, et cetera.

That's correct.

We think it's an attractive market.

We think it will grow.

And, again, we will point out again the capital requirements in this business are not that much.

Okay.

Just my final question is, can you just talk a little bit about the Employee Benefits segment?

Earnings were a little bit soft, expenses high.

What is the outlook on this?

Is there anything in the quarter that we should be paying attention to outside of the discount rate adjustment?

As we've commented, our life mortality was high.

And we see that periodically.

Mortality on a life block of our size can vary.

We had a fair amount of life claims in the quarter.

I don't infer any kind of a trend for that.

Dental, we continue to be very pleased with the earnings and the growth in that product.

The other thing, I think actually expenses for benefits -- they are pretty carefully managed there.

You are seeing a little bit of impact on the expense ratio because of the continued impact of we lost a couple of large disability clients that we've talked about in the past.

So the top line is suffering the impact of that, which affects the expense ratio.

But overall we expect life to normalize.

We continue to think dental is going very well.

Voluntary sales are growing.

So lots of reasons to feel optimistic about benefits outlook.

Okay.

Thank you.

John Nadel with Sterne Agee.

Good morning.

I have a question, a little bit following up on Seth's question on the premiums, that you expect, anyway, to be approved or to be rolled out through the 28 states by the end of the second quarter.

I'm just wondering if you can give us some help.

Without specifically knowing what servicers are going to choose to do with the more flexible product, if we just look at it on your premium base today, about what percentage of your premiums is reflected with these 28 states?

As we mentioned in the fourth quarter, we started with smaller states.

I think that continued.

John, you know that our biggest states are pending.

Clearly, Florida.

That all being said, I think that we will have them all implemented by the end of the year.

I think that we will have resolution on where we are in Florida by the end of the second quarter.

And we will be able to provide more fuller details as the market unfolds.

In terms of provisions with servicers, one of the great things about the new product is it affords servicers choices.

And we're going to have to see how those unfold.

It also provides us with the capability to handle things that are contemplated, both in the New York settlement and FHFA.

The last thing I would just say there is, the servicers do a lot of things around the process, including performing important billing and collection features.

So we will work with them as this all works through to provide a smooth transition to everyone involved.

Okay.

And I have a hypothetical for you.

The New York settlement is obviously saying no more of these reinsurance or coinsurance arrangements with the lenders or servicers.

The FHFA seems to be moving in that direction.

And, obviously, New York is lobbying hard every other state to incorporate a couple of these items, including that elimination of the sharing of premiums, I guess they call it.

To the extent that that gets passed all the way through, in your entire book you are no longer able to share those premiums or coinsure with your servicers, how much premium comes back from that?

Because I know you commingle that amount with the flood program, with the government.

And it's just we don't know what portion relates to the lender-placed business.

Can you give us some help on that?

Sure.

First, we only have, as we've mentioned previously, reinsurance with a small handful of clients.

It's full risk transfer that they participated in.

I will let Mike amplify, but this will have implications on capital requirements in the business.

It's a subset of the total you mentioned, John.

Mike, do you just want to talk about --?

Really, we haven't chosen to break that out, John.

I think once all these regs come clear it will play out.

Okay.

And is it enough in terms of dollars of premiums that if this did play out that way and you recaptured all those premiums, is it enough that it would, perhaps, change your reinsurance program significantly?

I assume there is still more than enough capacity from a pure catastrophe reinsurance program perspective that this wouldn't really be a problem?

Chris, do you want to comment on that?

Yes.

I think from the perspective of the program, I don't anticipate this leading to any changes in how we structure our program.

And we will comment more on that in the second quarter once we finish the placement.

But, as Mike mentioned, this would affect our capital holding.

We would need to hold incremental capital at the property segment.

The rule of thumb is 50% of premium.

And, again, as this unfolds, we will adjust accordingly.

But it's fair to assume that if this is really true full risk transfer, then, frankly, your margin on those premiums that you recapture shouldn't really change, correct?

That's correct.

Okay.

Last question for you is this.

You touched on it a little bit in terms of pace of buybacks earlier.

And obviously a ton of capital flexibility.

I know we've got a reset over time on the size of the Specialty Property business, but can you help us with some insights maybe into how you and the Board have thought about or discussed dividend policy?

Because it seems to me that there is a real opportunity at Assurant to create a -- well, I guess I'll say it this way, more succinctly -- to put a significant yield on the stock that can very well be supported by free cash flow, even if or even when Specialty Property earnings reset lower.

Okay.

The first thing is, we have increased our dividend every year since we have been a public company.

And I believe when we first went public that dividend was $0.07 a quarter.

It's now $0.21 a quarter.

I think if you look at all the players in the financial services area, we are one of a small handful who have increased their dividend every year.

So we have not been shy about increasing our dividend over time.

Chris, you could just elaborate on how you view the use of cash dividend versus other deployment.

Sure.

And again, John, just another comment on the dividend policy.

That is typically, per policy, we have that conversation in the second quarter with the Board.

We're going to do that at the upcoming meeting.

Other alternatives, a one-time special dividend is certainly out there.

Might have some short-term benefit.

But our capital management policy is focused on the long term.

And when we have the opportunity to repurchase stock at a 15% discount to book value, which is roughly where it's trading right now, we think that is the better use of deployable capital.

And will contribute to the growth and long-term shareholder value.

We consider all the things that you are talking about.

We feel comfortable, though, with our policy at this point.

And, again, we believe the stock is attractive and have been back in the market.

And continue to believe it's a good use of the capital we have at the holding company.

Okay.

Thank you.

Sean Dargan with Macquarie Securities.

Good morning, thank you.

I have a couple of questions about Specialty Property.

The uptick in the expense ratio, which you attribute to the new loan portfolios, is that a run rate expense ratio we should expect throughout the rest of the year?

There is a lot of expenses associated with onboarding the loan, Sean.

We've got a couple of things going on.

Just adding the loans, getting them on to the system.

And then you've got, going forward you've got the service requirements for those.

And we are certainly committed to maintaining the highest levels of service that we've had in the past.

So that requires a certain amount of staff to do that.

We have a very sophisticated system that helps us in this.

They are not all purely variable costs but there are certainly some of those.

And we want to be sure that we are maintaining our customer service levels.

And some of those expenses come before the premium shows up.

That has always been how this business has worked, and I think will continue to.

These portfolio additions are not coming from existing clients, which is a little bit different than if they come from someone we have already.

There's expenses if we lose from one of our clients but it goes to another.

We know all the processes, procedures, we know something about the loans.

When they come from a portfolio we don't have, there is more work involved.

Okay, thank you.

That's helpful.

Then, why did gross written premiums and net earned premiums decline sequentially?

I would have thought, given the onboarding, that that line would have ticked up.

The onboarding, the premium results can vary as you are adding loan portfolio, Sean, because it depends on whether the loans are flat canceled versus coming on at renewal.

And, also, since our coverage is effective when the date the prior policy, the voluntary policy, lapsed, sometimes you get extra premium when it comes on board, which distorts the quarterly pattern of premiums.

But we have that over time.

And I think one of the things to remember is we've added 1.7 million loans that you see in our totals here that have not yet produced premium but will later in the year.

Okay.

Thank you.

Mark Hughes with SunTrust.

Good morning.

Along that same line, the 900,000 loans that you are going to be bringing on, are those going to be flat canceled?

Yes, they are.

Okay.

Then in the voluntary business you've had a couple of very strong quarters in a row.

What is the sustainability of that?

Is that because the brokers are charged up to sell those products?

Is there underlying demand that that's strong?

What is happening there?

We think that there's a couple of things.

One, I would say that our brokers are, in fact, more interested in voluntary.

Because a lot of this is driven by the continued and relentless increase in medical costs, which have small employers and brokers actually more interested in the voluntary benefits -- or the voluntary platform as a way to provide their employees with a good solid benefit package.

We really think that in addition to having a broad product suite, we have the systems capabilities and the technology to interface with the employers' systems to make voluntary a very easy-to-offer package for small employers.

Because one of the real challenges in the voluntary business is the administrative complexity of it.

We think that is where we have a better mousetrap.

And I think that is starting to resonate in the market.

Thank you.

Steven Schwartz with Raymond James & Associates.

Good morning, everybody.

Going back on -- actually, the last two questions were what I wanted to get to.

The growth in the loans track in Specialty Property in the quarter was substantial, more than I was expecting.

That increase came from where?

We added 1.7 million in the quarter.

I think we had talked about 1.3 million.

We had another 400,000 that came in.

And then we had the 900,000 portfolio that Rob alluded to in his prepared remarks.

And just remember that we have not had premium on those loans yet come through.

Okay.

I'm getting a little bit confused here.

Flat cancel, they cancel, and give them to you.

Is that accurate?

Yes.

In essence, the policy and new offering will go out.

We will have to make sure that they don't have coverage elsewhere.

And if that is the case, then we will start earning immediately.

You just told me you weren't earning immediately.

That's right.

That's because we have included the things, but we have got to run things through our letter cycle.

So we know that those loans are there but they have got to run through our letter cycle.

We have to verify that they don't have coverage elsewhere.

And when that happens, we'll start earning the premium.

Okay.

So, the new loans do not affect your -- they artificially lower the placement rate?

Is that an accurate statement?

No, we've adjusted for that in the rate we've provided.

Okay.

And then the placement rate on the new 900,000?

Did you say that, Mike?

Those are coming from clients where we don't really have a line of sight, Steven.

So, we will onboard them.

And once we have done that, we should have a line of sight on what will happen.

Okay, thank you.

And then on the discount rate adjustment in Employee Benefits, the drag on earnings from that was how much in the quarter?

It was about $1 million.

About $1 million, okay.

Time for Investor Day -- I will just leave it at that.

We heard you.

Bye, guys.

John Hall from Wells Fargo.

Good morning, guys.

I have a longer-view question.

Something that I have been wrestling with as I look farther out '13 into '14 is really how to understand the rate at which the placement rate ultimately comes down on the Specialty Property book of business.

It was 2.89% this quarter, up as a result of the new loans brought on.

But how should we think about, as the real estate market recovers, is there any period in time historically that you can point us back to where you have some data that says as foreclosures improve, and the like, the rate came down from X to Y over some period of time?

Yes.

If you go back and look at our 2011 Investor Day, we tried to provide some insight into that, John.

I would say, at that point in time, we thought it would be over a five-year period and you would see placement rates trend back to 2006 levels.

Now, what has changed since then?

Because there is a couple of things here that, in my mind, are macro factors that are difficult to predict.

And one is unemployment in the economy.

As that remains elevated, I think placement rates stay up.

I think the second is the number of seriously delinquent loans, some of which just relates to government policy and how they want to deal with those things.

There have been a lot of policy around preventing foreclosure.

I don't think we could have foreseen that.

I think that has probably kept our placement rates up a bit, too.

I think the other one we are seeing, that we didn't at the time, however, is also how voluntary carriers are dealing with their business in cat-prone areas.

Because we do have an over-representation in the cat-prone areas because often coverage isn't available.

I think those are three factors that are driving things.

I would also point back to the comment Mike made which is, if you took out those loans we didn't have in 2012, our placement rate was down modestly in the quarter.

So, we are seeing signs that that is happening, and we expect it will happen as the economy improves.

As we think about what you provided back at the Analyst Day, that five-year time frame, is that still the time frame over decline that you would be thinking about now?

I haven't been very good at predicting this, John.

Let's start with that.

To me, it's been up, and I think one of the reasons it's up is that last factor I brought up.

So, I think it's very difficult for us to be able to assess how it will come down.

The other way I look at that is, we have also added quite a few loans to the portfolio since we rolled that information out.

Great, that's all I've got.

Thanks very much.

Great.

I want to thank everyone for joining us this morning.

We look forward to updating you on key milestones in the months ahead.

And please feel free to reach out to Francesca and Suzanne with any additional questions you might have.

Thank you.

This does conclude today's teleconference.

Please disconnect your lines at this time.

And have a wonderful day.