Assurant Inc (AIZ) 2013 Q3 法說會逐字稿

Welcome to the Assurant third-quarter 2013 earnings conference call and webcast.

(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, Steve.

And good morning, everyone.

We look forward to discussing our third-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 third-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 can be found in yesterday's news release, as well as in our SEC reports, including our 2012 Form 10-K, and our first-quarter 2013 10-Q.

Today's call will also contain non-GAAP financial measures, which we believe are meaningful in evaluating the Company's performance.

For more details on these measures, the most comparable GAAP measures, and a reconciliation of the two, please refer to the news release and financial supplements posted on Assurant.com.

Now, I will turn the call over to Rob.

Thanks, Francesca.

And good morning, everyone.

During the third quarter, we delivered good overall operating results, driven once again by Specialty Property.

Earnings at Solutions and Employee Benefits were below our expectations.

Strong sales across all our businesses demonstrated that our specialty products and services are connecting with our customers and clients.

Now I will summarize our performance against our three key financial metrics.

Annualized operating return on equity, excluding AOCI, was 11% year to date.

Book value per diluted share excluding AOCI, increased by 8.2%, since year end.

And revenue, defined as net earned premiums and fees, increased by 6.2%, compared to the first nine months of 2012, driven by specialty property and solutions.

Throughout Assurant, our focus remains on increasing operating income, by driving profitable growth in targeted areas, reducing expenses, and aligning resources with our best opportunities.

During the quarter, we announced three strategic acquisitions.

All were in areas we have identified for expansion.

At Solutions, the acquisition of Lifestyle Services Group supports our growing mobile platform, by providing protection products, logistics support, and customer service in Europe.

In Specialty Property, we bolstered our capabilities in home restorations, and preservation, by acquiring Field Asset Services.

And we strengthened our position as a leading administrator of the National Flood Insurance Program by purchasing renewal rights on a block of policies from Travelers.

We also returned $124 million to shareholders in the quarter, through buybacks and dividends.

Our strong free cash flow enabled us to make these strategic acquisitions while also returning capital to shareholders.

Now, I will provide updates for each of our business segments.

At Assurant Solutions, earnings for the quarter were lower than expected.

Increased loss experience with an established mobile program drove the short fall.

We also incurred additional expenses to support new mobile programs.

We are pleased with the enthusiastic response to T-Mobile's JUMP offering, where enrollments are exceeding our expectations.

In addition, our new programs with Boost and Virgin Mobile are generating good results.

As we build our mobile business for this growth, we will take actions elsewhere to reduce expenses and improve profitability.

For example, in the US, we are further streamlining our credit and service contract businesses in response to market conditions.

In Europe, we will reduce expenses as we integrate with Lifestyle Services Group.

After incurring one-time charges, these actions and others should produce between $20 million and 25 million of annualized pre-tax savings.

In combination with our mobile expansion, we expect Solutions will earn about $50 million in the fourth quarter of 2014.

We believe this earnings milepost is another way to track our progress.

It translates into approximately 14% return on equity in the fourth quarter of 2014.

We acknowledge this has been slower than expected, but we remain committed to improving profitability and returns at Solutions.

I will now move to Specialty Property which again reported very good results due to the lack of hurricane activity in the third quarter.

The strength of our lender-placed business, and our growing footprint in multi-family housing, allowed us to grow net earned premiums and fees in the quarter by 18%.

In our lender-placed business, we now provide loan tracking services on 34.5 million loans nationwide.

This represents an increase of more than 3 million loans since year end, during a time when we believe the overall number of loans in the marketplace actually declined.

The combination of superior tracking and customer service capabilities contributed to our growth.

The changes we put in place with our new product, along with expenses related to new servicing requirements, will reduce future returns.

To help offset the impact, we launched a major initiative to achieve greater operating efficiency, and further enhance service.

Overall, we expect lender-placed to remain in the track of specialty business.

We continue to view the multifamily housing market as a growth opportunity.

Recent enhancements to our products should allow us to grow revenues at a double-digit pace over the next several years.

Our acquisition of Field Asset Services expands our specialty strategy within the mortgage value chain.

Its strong operating platform, broad vendor network, and extensive property preservation offerings provide attractive growth potential.

In addition, the transaction with Travelers makes Specialty Property the second largest National Flood Insurance Program administrator.

It will provide us added insight into the broader residential flood insurance market.

These acquisitions further diversify Specialty Properties' revenues and should produce attractive returns with modest capital requirements.

Now, turning to Assurant Health, during the third quarter, sales increased by 31% year over year, driven by strong results in individual medical and small group.

Through our multichannel distribution network, in 43 states we offer major medical products that provide the required essential health benefits.

More, we believe, that any other insurer.

Now that the public exchange marketplace is open, we are focused on helping consumers and our distribution partners understand the options available to them.

Assurant Health access and supplemental products are proving to be valuable resources for consumers looking for affordable alternatives to major medical coverage.

We continue to manage expenses carefully, as additional elements of the Affordable Care Act are implemented.

We're encouraged by Health's progress this quarter and remain optimistic that the business will provide attractive returns it to shareholders over time.

Assurant Employee Benefits continued to make progress scaling our voluntary products and services, another key targeted area for long-term profitable growth.

Total sales increased by 41% from the third quarter of 2012.

This demonstrates that our streamlined enrollment capabilities and broad product portfolio are attractive to small employers and their employees.

Macro economic trends continue to pressure results in long-term disability.

Low interest rates, along with modest job and wage growth, will continue to challenge this business.

We're accelerating expense management efforts to improve disability returns as we continue to grow our voluntary business.

In summary, we remain committed to driving profitable growth across Assurant.

We will continue to scale our targeted growth areas and reduce expenses even more aggressively in non-growth businesses.

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

Thanks, Rob.

I will begin with Solutions where net operating income decreased by $6.6 million year over year, after adjusting for disclosed items, including a $5.8 million net tax benefit this quarter.

The decline was primarily due to higher-than-expected loss experienced at an established domestic mobile client, where we saw substantially higher claim frequency and severity on certain models of smartphones.

We have been working closely with the client to implement pricing and plan design changes, and expect experience to normalize by the first quarter of 2014.

It is important to note that growth in our mobile business, and the rapid pace of new product introductions in the mobile industry, make it likely that we will see some volatility in our experience from quarter to quarter.

Solutions' net earned premiums and fees increased 5%, driven primarily by growth in Latin America, and from the mobile programs launched earlier this year.

As a reminder, in our expanded relationship with T-Mobile, they retained the risk on the insurance protection component of the JUMP program.

Solutions will earn fee income and share the risk on the device upgrade option.

The relationship will generate gross written premiums, fee income and profitability as the enrolled subscriber base grows.

The jUMP program began in July, and there is a six-month waiting period before customers can trade in their devices.

Upgrade experience will begin to emerge in January of 2014.

Domestic net earned premiums reflected sales growth at a large service contract client.

Our vehicle service contract business also continued to grow after adjusting for the impact of a block of assumed business on third-quarter 2012 premiums.

These increases were partially offset by the mobile client we lost in 2012, and lower production for most retail clients.

In addition, effective September 1, we stopped writing new business for a retailer which had been generating approximately $100 million of net earned premiums annually.

Unearned premiums for this client will earn over the next 18 to 24 months.

The domestic combined ratio increased as a result of the higher mobile loss experience.

We expect the combined ratio excluding the disclosed items to remain above 98%, until the corrective actions take full effect.

Previous expense management actions in Europe drove a 110 basis point improvement in our international combined ratio excluding disclosed items.

We were pleased that our UK operations posted a small pre-tax profit.

For the full year, we still expect to deliver a 100 to 200 basis points reduction to our international combined ratio on an adjusted basis.

At pre-need, results continued to be pressured by lower investment yields.

We recently received regulatory approval in the UK for the Lifestyle Services acquisition and we plan to close tomorrow.

We will immediately begin the integration process.

As we combine the two organizations, we expect to substantially reduce expenses across Europe.

For the remainder of 2013, we continue to expect modest top-line growth for Solutions, driven primarily by mobile, both in the US and abroad.

Based on the ramp-up costs for T-Mobile, and the loss experience I mentioned, we now expect fourth-quarter net operating income excluding disclosed items to be consistent with quarterly results so far this year.

While we are lowering our near-term earnings expectation for Solutions, we expect growth in revenue and earnings from mobile and our Latin American operations, combined with expense reductions, to drive improved profitability in 2014.

Specialty Properties' third-quarter results benefited from no reportable catastrophes, as well as continued growth of our lender-placed and multifamily housing businesses.

During the quarter, woe onboarded 700,000 of the 1 million new loans that we expected to add in the second half of 2013.

The remaining 300,000 will come onboard in the fourth quarter.

Expenses were up in the quarter due to volume growth in our lender-placed business, and the additional services we are now performing for our clients.

Our placement rate declined sequentially from the second quarter, to 2.75%, reflecting attrition in our legacy block of business, partially offset by higher placements on recently added loan portfolios.

During the third quarter, we continued our proactive outreach with state regulators.

Our new lender-placed product is now available in 38 states, with implementation underway in another 4 states where it has been approved.

Based on our recent agreement with Florida, we will file for a 10% rate reduction on our lender-placed hazard program in the state.

We expect the rates to be formally approved prior to year end, with implementation beginning in the first quarter of next year, on policies issued or renewed.

We also expect Florida to eliminate commissions and quota-share arrangements for lender-placed providers in the state, by the end of 2014.

Looking ahead, contributions from the newly-added loan portfolios and elimination of a client quota-share arrangement will help offset declines and placement rates and premium rates as we implement our new product.

Continued growth in our multi-family housing business, along with the acquisition of Field Asset Services, will also help sustain revenues.

At Assurant Health, we reported $6.6 million of net operating income in the quarter.

This reflects less favorable loss experience, partially offset by a lower effective tax rate compared to the third quarter of 2012.

For the full year, we still anticipate that our effective tax rate will be very high, as a result of nondeductible expenses related to healthcare reform.

Pre-tax earnings declined by $10 million largely due to less favorable loss experience.

Our loss ratio increased by 200 basis points, primarily because of the pricing changes on major medical insurance we made to meet minimum loss ratio requirements.

Expenses increased modestly in the quarter.

However, we will take additional restructuring actions in the fourth quarter, largely due to the elimination of underwriting for major medical policies effective in January, 2014, as required under the Affordable Care Act.

Revenues remained above $400 million for the second consecutive quarter, driven by strong sales across individual medical and small group products.

We are pleased that Assurant Health received accreditation from URAC, a leading independent nonprofit organization that establishes quality standards for the healthcare industry.

This accreditation affirms our strong commitment to providing access to quality products and services.

It also makes us eligible to participate on the public exchanges, should we choose to do so.

At Employee Benefits, less favorable disability experience decreased earnings.

The reduction was largely driven by lower claimant recovery rates, but incidence levels also increased over the prior year.

Experience across all other product lines ran as expected.

Net earned premiums and fees were level with the third quarter of 2012.

Growth in voluntary was offset by premium declines in our employer-paid business, particularly long-term disability.

We continue to maintain strict pricing discipline for both new and renewal business.

For the full year, we expect continued growth in our voluntary business, and additional expense actions are already underway to improve returns.

Turning to Corporate, we ended the quarter with $370 million of deployable capital at the Holding Company.

This is after the $55 million paid for Field Asset Services, and $160 million set aside for the Lifestyle Services acquisition.

Operating Company dividends totaled $110 million for the quarter and $316 million, or 71% of segment operating income, year to date.

We continue to anticipate that business segment dividends for full-year 2013 will equal operating earnings.

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

Our capital management priorities remain unchanged.

We will continue to evaluate selective investments in areas we are targeting for long-term profitable growth.

At the same time, we will maintain the flexibility to return capital to shareholders through share repurchases and dividends.

In the quarter, our Corporate segment operating loss totaled $22 million, reflecting the funding of several growth initiatives, and additional employee-related costs.

We now expect our full-year corporate operating loss to be approximately $75 million.

For 2014, however, we expect a lower run rate, due to expense savings initiatives underway, and reduced pension costs.

As a reminder, consistent with our accounting policy, we will perform our annual goodwill impairment testing during the fourth quarter.

We are pleased with our progress in 2013 and we are hard at work on the additional steps that are necessary to support profitable growth in 2014 and beyond.

And with that, we will ask the operator to open the call for questions.

(Operator Instructions)

Chris Giovanni from Goldman Sachs.

Good morning.

First question, I just wanted to ask about the expenses within property, which continue to grow, as you alluded to onboarding the track loans.

I wanted to first see if there are any litigation reserves being built into those numbers.

And then how should we think about the growth of expenses here?

The growth there is outpacing the top-line growth at a time when clearly that top line is going to, at some point, recede based on the changes in the rate actions, normalization of placement rates.

So can you pivot the other way on the expense side when you start to see that roll over?

And any order of magnitude around what, of the pickup in these expenses that we're seeing, is variable versus fixed?

Sure, I can take a shot at that, Chris.

Maybe to start with, certainly litigation expenses are included in our expenses.

We regularly evaluate our reserves and we feel good about where the levels of reserves are.

In terms of the rest of the factors that you alluded to, we're certainly onboarding a lot of loans, and that drives expenses up.

We're also, as we mentioned in our prepared remarks, the things we have to do for the loans, the service requirements are going up, and all of that is costing more.

So, as the onboarding pace slows, or the loan growth pace slows, there will be a certain amount of variable expense reduction.

We're also working on a broad initiative to improve our efficiencies in lender plays.

So we have a lot of things going on that will help manage expenses going forward, but right now, we're definitely dealing with a lot of things coming at us.

Okay.

And if you tried to break down the 20% or so growth in expenses here year to date, any order of magnitude in terms of portion related to the increase in loans versus litigation, or just other refinements in terms of investing in the business?

It is hard to give you an exact breakout, Chris, but certainly, I think you are getting meaningful contributions to the growth from the addition of the new loans and the increased service requirements.

I think I would point to those as the primary drivers.

Okay.

And then the 14% ROE in Solutions in 4Q '14, obviously you haven't pointed to any accretion from LSG in terms of '14.

Most of that is coming through in '15.

But in terms of the denominator of the calculation, is the equity from LSG included within that 14% calculation?

Equity is a noisy number for us, Chris, as we do the acquisition accounting, and things like that.

So, we're really focusing on that $50 million of earnings.

We expect the increase in Solutions ROE to come from growth in earnings more than, say, reductions in equity or things like that.

Okay.

And then just one last quick one for Rob.

Obviously an active quarter in terms of M&A.

How are you thinking about capital returns going forward?

Do you feel like with the two deals you've done, you are going to take a breather and get things integrated?

Or do you think there is opportunities still in the near term to get deals done to work alongside buybacks?

The first thing is, we're pleased.

We've talked about an active pipeline in M&A.

I will let Chris comment a little bit on how we thought about those acquisitions.

When they come in, they're lumpy, and we happened to get a few done this quarter, and feel quite good about it.

Now, at a high level, what we're focused on here is increasing net operating income, diversifying our sources of income, because obviously within lender plays, that has been the big flywheel to the operation.

We think these acquisitions set up a more diversified source of earnings across our business.

So, when we can find that, we are going to do it.

We have told you the areas we have targeted for growth.

And I will let Chris comment just a little bit on how we think about the capital deployment.

Hi, Chris.

Just a couple of things on the capital deployment.

Specifically related to these two deals, they were exactly the kind of deals we like to do, and would like to do going forward.

They're moderate in size.

As Rob mentioned, strategic deals that were by-products of negotiation and a long period of sourcing on our part, as opposed to deals that come in auction form.

And then also, these are deals that met our targeted return thresholds based upon a cash flow, internal rate of return analysis.

Now, how that relates to our decisions around share repurchase, we applied the same analytical framework to the decisions around buying back stock, versus deploying capital in profitable growth opportunities.

We continue to think the shares are attractive.

We've got significant amounts of deployable capital and a pretty good line of sight on operating dividends going forward.

So, now have the flexibility to execute on all of our capital management priorities.

Great, thanks so much for the comments.

Jeff Schuman from KBW.

Good morning, how are you?

A couple of questions about Solutions.

First of all, can you just give us a little bit of reminder on how mobile works?

In other words, one thing I'm wondering about is, is there ever moral hazard in the business?

In other words, if I file a mobile claim, do I typically just get a reconditioned version of the same model?

Or are there times that I can actually be advantaged by filing a claim?

I think the first thing to recognize in the business is that all of the programs are different that we set up.

They all involve a set of terms and conditions that we want to have them placed so that both our partner and we are winning together.

So, to your specific question, is there a moral hazard?

Of course.

We try and protect for that as best we can.

There is obviously, as Mike mentioned, a lot of things going on within the space, within new models, et cetera, coming out.

The great thing is we think we have robust risk management capabilities and early detection around that.

So, the higher claims you are seeing currently, are they more related to theft, or people breaking devices, or devices malfunctioning?

What is really the source of --?

Generally, the increased costs that we're dealing with tend to be damage -- screen breakage and things like that.

That has been the primary issue for us, as opposed to theft or something like that.

And I would also note that this is -- we're seeing this at one client primarily.

And we have also got corrective actions underway.

And those -- reference to a couple of your earlier points -- they involve both pricing and plan design changes, a la deductible increases, particularly on certain models and things like that.

Okay.

And I wanted to come back, if we could, to the solutions ROE, push back a little bit on trying to dig in on the denominator there.

But I think you have had this 14% ROE goal for a long time.

And I think we would all like to understand how the business is going to return.

I think the arithmetic suggests if $50 million of earnings was going to get you 14% ROE, that implies $1.4 billion of capital, which, I think, is actually less than you have to date despite the business growing.

So, is there something about the business that we should expect that capital tends to decline as you --?

Let's try and marry a couple of different ideas here.

The first, as Chris mentioned, is we look at acquisitions, and we look at generating cash-on-cash returns with the business.

And if you look at things, what we have said is we've got to make sure we acquire those in excess of our cost of capital.

We need to look at them against our share price as another potential use of the funds.

We think we've done that.

We've also said we think we can write new business at returns in that 14% to 15% area for Solutions.

And I think that when we talked about things in the second quarter of '11, we demonstrated that in our growth areas, we are meeting or exceeding those returns.

Now, the accounting and where things get set up, as Mike mentioned on the capital side, we've got to get that sorted out, and will.

But I think we're going to be in the ballpark with that 14% return in the fourth quarter by making the $50 million.

Okay.

Thank you.

Mark Finkelstein from Evercore.

Good morning.

Let me actually maybe take another crack at the $50 million and the Solutions 14% ROE.

How much of the $20 million to 25 million of annualized savings will be fully in the numbers by the fourth quarter?

We are going to try to get these expenses as fast as possible.

Certainly as we start into the integration of LSG in Europe, that will give us some opportunities to take some out.

We've also got some actions underway on the domestic side, particularly in the credit side.

And then in service contract business, we've got some opportunities there.

So we are very focused on getting them.

And I would say, are we going to get all of it?

I'm not sure that I would say that but we will certainly get the vast majority of it earlier in the year, so they would be in the fourth quarter numbers.

So, if I interpret it correctly, you are going to have a good chunk of the expenses in the numbers by the fourth quarter.

You will have the accretion from LSG in the numbers.

And then you will further have the impact of growth and expense savings on the US.

Is that the story?

Yes.

I think there are a couple of other things.

As we talked about, we've got the corrective actions on our domestic clients, with the mobile loss experience, so that is in there.

So, there is a variety of things in there, in addition to the expense saves.

Okay.

Just a quick question on Health, if there is a delay to the mandate, is that good or bad for your business?

It is an interesting question.

I don't know that we quite know.

What do we know?

We think our decision to stay off the exchanges was the right decision.

We are seeing a lot of activity in all of our products, and sales continued to be robust.

And we are actually anecdotally seeing sales with 1/1 effective dates, which is earlier than we would expect in normal times.

It is usually 30 to 45 days prior to effective dates.

We think that is a result of our systems are up and operating, we have provided clear line of communication for both producers and consumers to see what we're offering in the marketplace.

And we feel quite good about our position.

Okay.

Maybe one final question, if I may.

Just on the M&A strategy, obviously, you have a situation where you've got a very high return business that over time will shrink.

And what I'm curious about is, in your own view, can you grow organically fast enough to sustain the level of earnings that you are currently showing?

Or do you view M&A as not just a nice to have, but a must do?

First, yes, again, and we have not been the best of predictors.

Let's remember, our lender-placed business has grown.

It has grown substantially off of where we thought it might go.

And a lot of that is because Gene and his team have focused on the thing they can control, which is the number of loans we track.

If you will recall, we are probably up 5 million loans from our last investor day, which I think is quite impressive.

Second, I think historically, we know we have free cash being generated, and we are going to deploy that.

And I will let Chris expand on that in just a second.

But we want to buy things that help these businesses.

And we know that placement rates outside our control will ultimately go down.

So yes, we want to do some acquisition.

We want to grow organically.

And we want to do acquisitions.

So Chris, you want to just chat on that?

Yes.

I think the goal is to grow segment net operating income, to generate a more diversified source of that earnings stream.

But on the other hand -- and M&A will play an important role in that -- on the other hand, I think the key to M&A is discipline, and making sure that we don't overpay.

The easiest way to grow is to overpay for that growth.

And if you look at the last four years or so, you can see that we have done a few deals but the lion's share of our capital deployment has been in the form of share repurchase and dividends.

So we have maintained that discipline.

We think that will benefit us going forward.

And it is going to be the combination of disciplined M&A and prudent capital deployment, in this case share repurchase, that is going to create long-term shareholder value.

And I think the last thing with all of that, we have tried to identify for investors the areas we're targeting for growth.

And we have been pretty clear about them -- mobile, multi-family housing, voluntary and affordable health products.

And you can see that the acquisitions, as Chris mentioned earlier, fall right in those categories.

Okay.

All right.

Thank you.

Steven Schwartz from Raymond James & Associates.

Thank you.

Good morning, everybody.

I want to talk about health some more but I do want to ask one question on the situation with the one client in mobile.

First thing, why would a client have worse experience than normal?

Is this a model that they're selling that maybe is popular with teenagers or something like that?

I'm thinking of my own daughter here.

It can be a variety of things.

I think Mike alluded to what we think the best reasons are.

You were talking about breakage, Mike, so that's what led me to --.

We're certainly seeing -- but when you think about the client's specific nature, there could be dynamics in the customer base that is different by client and things like that.

But what we can point to, and a lot of this business is just tracking the data and reacting to it, and that's what we're trying to do in working with our client to do that.

And we have seen variability where claims pick up in the summer, to your point.

There are younger people who have more free time, et cetera, than being in school.

We're going to have that variability.

But we feel confident we understand the problem and have taken the actions to correct it.

Okay.

There was a throw-away line -- maybe it was a throw-away line -- by Mike that we expect experience to return to normal.

But you can't control that.

All you can do is price for the experiences you expect it to be.

Or, can you somehow affect experience?

You've got plan terms and conditions, raising deductibles and various things.

So, you have levers other than just pricing.

And we have those actions underway with this client.

We have already implemented some of them.

We will keep doing it until we correct the problem.

Okay.

And then on health, just a couple.

First, on your essential benefits products, even though you're not on an exchange, are you mandatory take all comers with those products?

Absolutely.

Okay.

So it would seem to me if things got delayed, or the mandate was put off, then could you possibly have an issue, people not being forced to get it and therefore you have some adverse selection problems?

I think, again, trying to speculate on what would be contained if the mandate were relaxed, I don't know if they would just say there is no mandate, if there would be other terms and conditions.

We would have to see exactly what it would be.

But, remember, we've got a broad product portfolio that can address needs of consumers, and we think affordability is that key issue.

Great, okay.

And that's where I wanted to go next.

Now that the pricing is out, you your own pricing on your products, and the pricing is out on the exchanges, how do you think about the attractiveness of the access products, if you will?

Do they still look very attractive in light of the pricing that is now out there and assuming there is a mandate with a penalty?

I would say that we're in a situation where they will be more attractive than they have been up to this point in time.

Can you expand on that, Rob?

Yes.

I think that on the exchanges, prices are going to, by and large, be higher.

Okay.

Then they have been in the private market to date.

Right.

But we've seen the pricing, right?

It is going up.

All right.

I will leave it there and maybe follow up with Francesca.

Okay, thanks, guys.

John Nadel from Stern Agee.

Good morning.

I heard that a lot from teachers, through the years.

(laughter) I have a question.

I wanted to talk about the weaker claims on this one client but I wanted to do it a little bit differently.

If I look at the 99.3 combined ratio this quarter, and recognizing 98 is a target but not necessarily an exact number in any single quarter, but if I just compare the two, it looks like the higher claims was something order of magnitude, $5 million, $6 million.

You mentioned some higher expenses, as well.

So maybe the actual dollar amount of claims is even a little bit lower than that.

I'm curious how that size of incremental claims compares with the, I don't know, the gross written premium, or maybe it is not right to compare it yet to earned premium, maybe more of the gross written, from this client.

Is that a reasonable question?

I know you don't want to mention the client, but maybe you can just size it.

Sure.

So the first thing is, think about it this way.

For this client, the business earns monthly.

So when we take actions and put them into effect, they will correct the entire block.

That is point one.

Point two, the split-out is between, as Mike mentioned, a change in deductible, combined with a pricing change.

So, one will impact, lower the claims themselves, the other will increase the amount of premium we're collecting.

Understood.

So, is it fair to think about it this way, Rob -- the incremental claims are a couple million dollars, that the net effect obviously of your change in deductible and your increase in pricing just essentially recaptures that couple million dollars?

Is that the way to think about it -- that is the difference versus your targeted returns there?

Correct.

You're making assumptions about your frequency and severity of claims.

And we're trying to look at both factors.

You can solve your problem by pricing, or by plan design.

Typically you can't do it with just one or the other.

You really have to do both.

So then, my next question is more about the actual process of getting these adjustments.

So, you've got the early warning systems in place.

You have identified the culprit, if you will, very quickly.

Is this all part of the actual contract that you have got with individual clients, whereby you can automatically take these actions?

Or is it something that you have to literally sit down with them, and renegotiate under the terms and conditions?

Because, clearly, an increase in deductible, and/or an increase in the fee that they're charging to the consumer could have a negative impact on consumer behavior.

IE, maybe the consumer says -- Well, I can go get a different smartphone, or whatever the case may be, a different product, from a different provider, and this, maybe the margin is going to force me to do that.

We work very closely with our clients, obviously, John.

And, as Rob said, we try to structure our arrangements with the clients so our interests are aligned, so we both have the same end goal.

As you point out, we see the problem, we're sitting down with the client saying what do we need to do about it, and then we can react quite rapidly to that, to make the kind of change.

And certainly you have to think about the impact on consumers.

But that is part of the process of managing the business.

And that's why we work hand in glove with our clients.

You see variability, you react to it.

That's an ongoing process.

I'm just trying to understand if that is something where you can just say, even if the client is not particularly happy with it, where you can just say, based on the contractual terms that you have already got in place -- listen, I know you don't like it, but we're doing it.

Sure.

But just think about it -- and you hit the nail on the head with the consumer.

You want to notify the consumer, you want to explain why you're taking the actions you're taking.

We think that is all part of the process to maximize revenue, profitability, et cetera.

You want to tell them in advance when you're doing something.

Yes, I definitely understand the outreach.

The only other question I've got for you is really around the expense initiatives.

I think there are a couple of different segments where you've highlighted, it sounds like there is going to be some fourth-quarter charges, and none of this is fun.

But you gave us the $20 million to 25 million save expected for Solutions.

Can you size what you are expecting to be able to accomplish in, I think it was Health and Benefits, or maybe it is Health Benefits and Corporate?

We're working on all of those, John.

I'm not quite ready to size them for you today.

But we will certainly be reporting out to you, as we firm up the plans.

And just as a reminder, because I think I missed it in the prepared remarks, it was either Rob or you, Mike, the $75 million of expense level in Corporate for 2013, I think you made a comment about where you directionally expect that to go next year.

I just missed it.

Whether it was flat or down.

I said we think it is at the peak now, John.

And it will start to decline into next year.

Very helpful.

Thank you.

Seth Weiss from Bank of America Merrill Lynch.

Hi, good morning, thanks a lot.

Just wanted to know if you could give us any update on discussions with the FHFA, and maybe where you hear they are in the process of their discussions on reform in LPI and mortgage servicing?

Sure.

We've had numerous discussions with the FHFA.

Remember, the mortgage servicers are our clients.

They work in tandem with the FHFA.

The FHFA has put out proposed regulations on changes involving commissions and reinsurance.

And that is about all we know right now.

I think the ball is in their court to figure out how they are going to finalize those things.

Okay.

And the discussions from what you have heard have been centered on those two issues of commissions and reinsurance?

It hasn't bled over into any other issues?

Not that we're aware of.

Not to our knowledge.

Okay, thanks a lot.

And just one clarification on health, if maybe you could just remind us about the access products.

These products -- just remind me if I'm correct here that they satisfy the individual mandate but they're not subject to the MLR.

Is that the right dynamic?

They're limited benefits, Seth and they're not subject to the MLR.

So the people who buy them would have to pay a fine.

Okay.

So it does not satisfy that individual mandate.

Correct.

Okay.

Thanks a lot.

Mark Hughes from SunTrust.

Thank you very much.

Good morning.

You had suggested that the pricing on the exchanges was higher than what might be available or what would have been available in the individual market previously.

Is there a way to give us a sense of magnitude of that difference?

I think it is a state-by-state comparison.

It is a function of the age of the person looking to go.

Remember, they've narrowed the age rating bands on what is out there.

But also remember this business is now all guaranteed issue, whereas in the past we have been able to underwrite.

So, we believe those factors will lead to higher rates.

And in some cases benefits are higher, too.

Absolutely.

Do you have any conclusions internally when you look at those things across the state, any feeling for what the magnitude of that difference is?

Again, there has been a lot put out.

I think the best place to probably turn is the Society of Actuaries study.

I don't recall quite what their number was, but it was a significant increase to the cost, in their estimation.

But until we actually see who shows up, you're speculating on who the enrollees are a little bit.

So it is a guessing game and we are going to find out here over the next few months.

So, you haven't been able to do a survey of pricing or anything like that?

Sure, we definitely have.

Remember, we had to set our prices for all essential health benefit plans.

Our prices are higher than they were.

And it is very specific around plan of benefits, age of the person, and geography.

Okay.

And then a final question.

The opportunity to continue to take share in Specialty Property, you point out that has been a nice driver of growth, over the last 12, 24 months.

As we look out ahead, and we think about the movement within the industry, and your customer base, do you think there is as much opportunity to take share?

Or should that stabilize a little bit?

I think the big key is our alignment with the market leaders, both the money center banks and the specialty servicers has positioned us well, as portfolios move around.

We think we continue to be positioned that way.

But I don't know of any specific portfolios that are considering moving at this time.

When you look through that market, the position of your partners, do you think they will continue to take share?

We think we are positioned with the industry leaders.

So to the extent they can continue to grow and remain leaders, that we would grow with them, Mark.

Okay.

Thank you.

Thanks for joining us this morning.

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

Please reach out to Francesca and Suzanne with additional questions.

Thank you.

This does conclude today's teleconference.

Please disconnect your lines at this time.

And have a wonderful day.