Assurant Inc (AIZ) 2013 Q4 法說會逐字稿

Welcome to Assurant's fourth 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, and good morning, everyone.

We look forward to discussing our fourth quarter and full year 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 fourth quarter and full year 2013 results.

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

We'll started 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 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 supplement posted at Assurant.com.

Now I'll turn the call over to Rob.

Thanks, Francesca, and good morning everyone.

We are pleased by our progress in 2013.

We took actions on several fronts to diversify and grow earnings for the long term.

We strengthened our core specialty businesses as we applied consumer insights to meet customers' needs, accelerated growth in targeted areas, and realigned our resources to focus on the best emerging opportunities.

As we look at Assurant's performance, we measure our progress with three key financial metrics.

Operating return on equity, excluding AOCI, was 10.6% for the year.

Book value per diluted share, excluding AOCI, increased 10.4% in 2013, our third consecutive year of double digit growth, and revenue, defined as net earned premiums and fees, grew by 8.2% for the year, driven by Specialty Property and Solutions.

Fee income increased by 23%, with much of the growth coming from businesses with lower capital requirements.

During the year, our businesses generated strong Free Cash Flow, enabling us to return $470 million to shareholders, deploy $360 million in strategic transactions to diversify our specialty portfolio, and at the same time, maintain financial flexibility to invest capital in a disciplined manner to benefit shareholders.

Our 2013 acquisitions illustrate several themes, which we believe are important for successful M&A.

These include proprietary sourcing of opportunities in areas we've targeted for expansion, identifying businesses that allow us to add value by leveraging our core capabilities, and focusing on cash returns.

Now I'll provide updates for each of our business segments.

Assurant Solutions remain committed to improving net operating income, with a focus on delivering $50 million in the fourth quarter earnings this year.

We shifted resources away from non-growth areas to support opportunities in mobile and expand our market share in Latin America and Europe.

We took actions in other areas of the business to improve efficiency and reduce expenses.

In Mobile, we're pleased with several recently launched programs that allow us to introduce innovative consumer Solutions and boost our franchise.

As of year end, we supported more than 15 million Mobile Devices through our global protection programs.

The acquisition of Lifestyle Services Group, or LSG, transforms our European business into a mobile platform that we will build upon.

Integration is progressing ahead of schedule as we consolidate our European operations and Management structures.

Last year, we grew our operations in Latin America by leveraging our expertise in the mobile, auto, and service contract markets.

Our recent investment in Ike enables us to build on this success.

We expect the customer base created by this partnership to provide a platform to cross sell our complimentary products and assistant services to increase revenues in Latin America.

During 2013, Solutions reduced expenses in non-growth areas, including our domestic credit business, and parts of our service contract portfolio, in response to market changes.

These actions will help Solutions achieve their 2014 goals and continue to increase earnings in the future.

I'll now move to Assurant Specialty Property.

2013 was a year of industry-wide change, with significant movement and consolidation of loan portfolios.

We benefited from these shifts, and continue to play an important role in the support of our clients as they met servicing requirements.

Without significant hurricane activity, Specialty Property reported solid results in 2013.

Loan growth and reduced seeded premiums were key drivers in lender placed.

Our continued expansion in the multi-family housing and property preservation niches also contributed to our revenue growth.

Multi-family housing is a business we built organically, and then strengthened in 2011 with the SureDeposit acquisition.

During the past five years, we've increased multi-family housing revenues by an average of 31% per year to more than $190 million in 2013.

We believe we can continue to grow this business at a double digit pace by expanding our service offerings and adding new clients.

As we broaden our role within the mortgage value chain, we can further leverage our capabilities and client relationships.

The acquisition of Field Asset Services, or FAS, is a good example.

This fee income business further diversifies Specialty Property's revenue stream.

By providing inspections and repairs, we're helping clients preserve the value of the homes in their portfolios.

As these actions demonstrate, we're taking steps to strengthen and diversify our property business to maintain attractive returns and help offset expected declines in lender placed premiums.

Let's now turn to Assurant Health.

During 2013, Health responded quickly to consumer needs with a broad and appealing set of products.

This demonstrated agility and was affirmed by our fourth-quarter sales of $319 million, the best sales quarter in our history.

Sales were driven by significant activity prompted by the first open enrollment period under the Affordable Care Act, or ACA.

Early in 2013, we decided to defer our participation on the public exchanges.

Instead, we focused on helping customers and agents understand how the changes would affect them, and providing options to meet their individual needs.

This turned out to be the right decision.

We believe we captured market share due to our diverse product offerings, robust systems, and broad distribution channels.

Individual major medical products, which include the essential health benefits outlined by the ACA, were a significant driver of fourth-quarter sales.

We're proud of these results, which underscore the importance of individual major medical as a core specialty business for Health.

Longer term, we also believe many consumers will seek affordable alternatives to major medical, products we also provide.

In 2014, we expect growth in premiums and insured lives, yet as expected, profits will continue to be modest this year.

We believe more attractive returns for shareholders will emerge in 2015 after reform changes are fully implemented.

We also expect the risk mitigation mechanisms under the ACA will provide important downside protection in the new guaranteed issue environment.

At Assurant Employee Benefits, we remain focused on growing our voluntary products and services as we shift resources away from traditional employer-paid insurance.

Clients and customers cite the ease of enrollment and administration, our broad product suite, and expansive demo network as key differentiators.

For the year, voluntary sales and net earned premiums were up 25% and 7%, respectively.

Looking ahead, we're adapting our dental product to provide customers multiple options that fit their needs under the ACA.

We recently joined the new Be Swift private exchange.

We expect to expand participation on private exchanges in 2014, and are focused on select partners that value our differentiated approach to voluntary.

This week, we marked our tenth anniversary as a publicly traded Company.

We're proud of all we've accomplished during the past decade, and are encouraged by the possibilities of the years ahead.

We look forward, on our upcoming Investor Day on March 11, when our executive team will share more of our long term strategy and objectives with you.

And with that, I'll turn to Mike for more detailed comments on our fourth quarter 2013 results and the outlook for the year ahead.

Thanks, Rob.

I'll begin with Solutions.

Net operating income for the fourth quarter reflected $12.8 million of restructuring charges as we integrated our LSG acquisition in Europe and streamlined other operations.

Excluding disclosed items, net operating income totaled $32.6 million, compared to $27.9 million in the fourth quarter of 2012.

More favorable service contract results and previous expense management actions drove the improvement.

For the fourth quarter, Solutions net earned premiums and fees increased by 18%, driven primarily by domestic auto and mobile service contracts and growth in Latin America.

Fee income increased by 46%, reflecting the market success of the mobile programs launched last year, as well as contributions from LSG.

Excluding disclosed items, our international combined ratio for the quarter was 101.9%, an increase of 70 basis points from the fourth quarter of 2012.

For the full year, it improved 90 basis points to 101.5%, driven by expense reductions in Europe, partially offset by about $8 million of M&A fees recorded in the second half of the year.

Absent restructuring charges, our domestic combined ratio for the fourth quarter also improved.

This reflected expense efficiencies and more favorable service contract results, including mobile.

Last November, we implemented underwriting changes at our domestic mobile client to mitigate high third quarter loss experience.

These corrective actions improved our experience in the quarter, and will be fully reflected in our first quarter financials.

We continue to be excited about our partnership with T-Mobile.

Their Jump program generated significant subscriber growth during the last half of 2013.

Beginning in late January, the first Jump customers became eligible to upgrade their devices.

Initial experience is in line with our expectations, but it's still early.

Under this program, we earn fee income and expense credits for administering the protection program and the Jump upgrade.

In 2014, we expect continued growth in Latin America.

Despite recent economic volatility there, we believe the region offers attractive market characteristics.

Our recent investment in Ike allows us to further expand and diversify our footprint across Latin America.

We are on track to close the second phase of this initial investment soon.

As minority owners, we will report results from the Ike investment using equity method accounting.

This means that our share of the company's earnings will be reported as part of fees and other income in our Income Statement, and our net equity at Ike will be included in the other asset category on the balance sheet.

Overall, we expect Solutions' profitability to improve during the second half of 2014, leading to $50 million of net operating income in the fourth quarter.

The increase will be driven primarily by better margins from mobile as we scale our new programs, and improved European results as we move forward with LSG.

Our European restructuring, in conjunction with expense reductions in other non-growth areas, will produce $20 million to $25 million of annualized pre-tax expense savings.

At Specialty Property, fourth quarter results benefited from no reportable catastrophes, compared with $135 million of losses from Superstorm Sandy in the fourth quarter of 2012.

Excluding catastrophe losses, net operating income declined due to higher non-cat loss experience and additional operating expenses.

Our non-catastrophe loss ratio for the quarter increased 660 basis points compared to fourth quarter 2012's very favorable levels, driven by higher claims and lower premium rates.

Our fourth-quarter expense ratio increased by 830 basis points versus 2012, due to volume growth in our lender place business, new services we perform for our clients, and higher legal and regulatory expenses, including litigation reserves.

We continue to make progress in resolving outstanding matters related to lender-placed insurance.

Fourth-quarter results include our field asset services acquisition.

Since this is a fee income business, it has a different expense ratio target than our insurance businesses.

For the quarter, it increased Specialty Property's expense ratio by 230 basis points, or $25 million of expense, which was nearly offset by fee income.

We are pleased with the sales pipeline for the business, and we expect it to be modestly profitable in 2014 after amortization of intangible assets and integration-related costs.

Our placement rate at the end of the quarter was 2.77%, a 10 basis point reduction from year end 2012, reflecting the improving state of the overall housing market.

This was partially offset by contributions from recently added loan portfolios, including 200,000 loans on-boarded in the fourth quarter.

Our new lender placed product is now available in 44 states, most recently in Florida.

We're working with insurance departments in the remaining states to complete the rollout later this year.

At the federal level, the new FHFA mortgage servicer guidelines, which eliminate commissions and client quota share arrangements on GSE loans, go into effect on June 1. Our new product can support this, and already has been implemented with many of our clients.

For 2014, we expect Specialty Property's revenues to decline slightly from record 2013 levels, reflecting lower premium rates and reductions in placement rates as seriously delinquent loans are resolved.

Revenue will also be affected by the overall number of loans tracked.

In 2013, we benefited from several significant loan portfolio transfers.

As the mortgage servicing market continues to evolve, we expect additional transfer activity in 2014.

One of our clients has informed us that they may move some of their loans to another carrier.

A possible transition is being discussed, and we will provide more information when it becomes available.

Our expense ratio is expected to increase in 2014, largely driven by the fee-based businesses acquired last year, as well as costs to support lender placed servicing requirements and reductions in lender placed premiums.

As we previously discussed, Specialty Property launched a broad multi-year initiative in 2013 to standardize our lender placed platform and enhance our service while lowering our operating costs.

This initiative, along with continued growth in our targeted areas, will support attractive returns for the business over the long term.

At Assurant Health, fourth-quarter net operating income was in line with our expectations, and reflected an elevated tax rate and a previously announced $3 million after-tax severance charge.

Excluding this charge, pre-tax earnings increased by approximately $8 million year over year.

The improvement was driven by increased revenue, partially offset by higher commission expenses on new sales of individual major medical policies.

In addition, fourth quarter 2012 results were reduced by an adjustment to our premium rebate accrual.

As a reminder, Health's commissions reflect a blend of higher first year rates and lower renewal rates.

A higher proportion of first year policies will lead to increased commission expenses.

General expenses excluding commissions continued to decline, benefiting from ongoing expense management efforts.

Revenues grew 7% year over year to $417 million, driven by prior sales of affordable choice, supplemental and small group products.

While we expect our recent strong sales to generate solid revenue growth in 2014, profitability will continue to be affected by the higher first year commission expenses.

Our tax rate will remain elevated, due to the non-deductibility of certain expenses under the Affordable Care Act.

At Employee Benefits, net operating income declined by $6.3 million to $10.8 million in the fourth quarter of 2013.

This reflected weaker year-over-year disability results, although they did improve sequentially from the third quarter.

Experience across all other product lines ran as expected.

Net earned premiums and fees increased by 2% from the fourth quarter of 2012.

Growth in voluntary was offset by premium declines in our employer paid business.

Sales were strong in the quarter and for the full year.

More than half of total sales were voluntary products, including dental.

We expect sales momentum in voluntary will lead to premium growth in 2014, though overall earnings will continue to be affected by the low interest rate environment and employment trends.

Employee Benefits is focusing on improving profitability long term.

Fourth-quarter results include a $1.4 million after-tax severance charge, which should produce approximately $3 million of pre-tax savings in 2014.

Other actions to improve efficiency are underway.

Turning to Corporate, we ended the quarter with $440 million of deployable capital at the Holding Company, in addition to our $250 million risk buffer and $467 million set aside to repay our 2014 notes, which mature next week.

During the fourth quarter, we paid $115 million for our investment in Ike, and we also returned $111 million to shareholders through buybacks and stock dividends.

Operating company dividends for the year exceeded segment operating income.

Based on our current assessment, we expect that 2014 operating company dividends will roughly equal segment earnings.

Additional capital needs due to growth in some lines of business should be offset by capital releases and others, including lender placed.

As in prior years, dividends will be weighted toward the second half of the year.

We will continue to focus on ways to make more efficient use of our capital, while meeting regulatory and rating agency targets.

The fourth-quarter Corporate segment operating loss was higher than expected at $25 billion, driven by additional employee-related costs and approximately $3 million of third party M&A fees.

For 2014, we expect the corporate operating loss to be about $70 million, a 15% decrease versus 2013, due to reduced benefit plan costs and other expense reductions.

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

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

(Operator Instructions)

Thank you.

Our first question comes from Mark Hughes from SunTrust.

Good morning.

In the case of the block of loans that you described that you're in discussion that may move elsewhere, can you talk about the rationale for that kind of move?

Do the new FHFA rules lead to perhaps more movement in loans once those are fully implemented?

We are still in discussions on all of this, and we'll let you know as the discussions evolve.

But we just wanted to put you on notice that we had this information.

We thought it was important that we provide that to you, but we don't really have any more specifics, Mark.

Okay.

And then when you look at 2014, for your outlook for Specialty Property, looking at your mix of business and the rate changes on a State by State basis, how much of a headwind is rate in 2014?

And then perhaps again in 2015, as you see it now?

Mike, do you want to?

Sure, Mark.

Our rate -- and rates have been going down with the new product, and we implemented some of that in 2013.

Now in Florida, we've announced a 10% drop, effective the first of this year.

And remember, the way these things work is, we roll out over the course of the year, so it takes awhile for the full impact to be reflected.

So I think the rates will continue to put those through.

In some cases, we've also had reductions in commissions under the new Regs.

That's also being passed through.

And then the other factors that drive Specialty Property's revenue are the number of loans which reflect transfers and things like that.

And then the other one is, of course, is the placement rate.

And on the placement rate side, down a little this year.

I think that we've mentioned in the past, Mark, that our legacy portfolio, the placement rate has been dropping even a little more, and we benefited from portfolios coming in that had higher placement rates.

So those are all factors that are working into the ASP outlook.

Thank you.

Our next question come from Jeff Schuman from KBW.

Your line is open.

Good morning, Jeff.

Good morning.

I just wanted to follow on Mark's question.

I wasn't sure if I heard an answer to the question about what we should expect in terms of rate changes nationally?

We have some visibility, obviously, in Florida and California.

I think we lack visibility, maybe, on what's happening in other states.

Can you give us a little perspective on that, please?

Sure.

I think that you can think about it, as Mike pointed out, a couple different ways.

Ultimate effect is probably 18 months out from introduction in the state.

We have some states that are fully in there.

Others, Florida, we've just introduced full effect in 2015.

But if you put it all together, I would say it's probably a low double digit impact in 2014 from the rates.

Correct.

And then you've got the other factors we talked about earlier, Jeff.

Okay, so low double digit in 2014, and then some additional impact of 2015, just because these things take awhile to work?

Correct.

Yes.

Okay, that's helpful.

And then we probably we ask about this every quarter, but can you give us any quantification around the placement rates on the legacy business and how that's trending?

Yes, I don't think we have specific numbers for you there, Jeff.

But the lender -- excuse me.

The legacy portfolio, we are seeing drops in the placement rates, and those have sort of continued to trend down.

As we've discussed, our overall placement rate has been increased by the new portfolios that we transferred in over the course of 2013, which have had a bit higher rates.

But that legacy trend is down.

Okay, thank you.

Our next question is from Sean Dargan from Macquarie.

Good morning, Sean.

Good morning.

Just taking the baton and running with it, maybe I can ask it a different way.

When I lock at the spread of exposure by region, it seems that some of the portfolios you have brought on, you've increased your northeastern coastal exposure, which tends to line up with judicial foreclosure states where there's still a backlog, and specifically New Jersey, New York and Connecticut.

Am I right to think that, if some of the portfolios you brought on have increased your exposure to those states, and that's kept your average placement rate somewhat elevated?

That's correct.

Those change -- judicial state is a driver.

Okay.

And we should think, as those judicial states work through their backlogs, that that will perhaps drive an average lower placement rate?

That's correct.

Okay, thanks.

I just wanted to make sure I was thinking about that the right way.

Thank you.

No, you've got it.

Our next question comes from Mark Finkelstein from Evercore.

Your line is open.

Good morning Mark.

Good morning.

Where do we start?

Actually, I'll start with a follow-up to the answer given on Jeff's question.

When you talked about low double digit as a way of thinking about the rate declines in 2014, is that gross or net of commission changes?

Yes, that's all-in.

So the low double digit would be a rate, but you also get some offsets from commission.

So the true rate decrease would maybe not be quite the low double digits?

Is that the way to think about that?

Not sure quite what you're driving at, but I think if you look at the gross change, it's going to be a low double digit number.

Right, but I'm saying -- but you should get some offset by not paying commission?

That is true.

Again, remember there's all these factors that are in motion.

It will depend -- we've introduced things like geographic ratings, so it will be a function of --where the properties are placed will have an impact, but we know commissions are coming down.

Okay, moving on to medical.

Obviously huge sales quarter with ACA.

How does the underlying risks that you've received compare to what you assumed in your filed rates?

And is it better, is it in line, is it worse?

Are you getting adverse selection?

Can you walk through the underlying risk pool of what you're getting?

Sure.

So I think the first thing in our sales is to realize we have policies with fourth quarter effective dates, which don't fall under the Affordable Care Act.

They're prior to that.

And you might look at that as people who wanted to buy policies and have a period of time before the ACA provisions were going to take effect.

But we have quite a bit of business that came in with January 1 and later effective dates that fall right into that category.

And just a couple comments I'd make is, when we established our strategy in health, it was focused on affordability and choice.

A lot of people have felt that in the ACA environment, a metallic plan is a metallic plan.

We happen to offer a number of different, say, bronze plans that will appeal differently to different consumer groups, and so we think that choice is still an important component.

I think when you look at who has come in, our results are similar to a lot of things you've heard in the press: a little bit older than we expected.

So demographic is a consideration.

The other one is the morbidity characteristics of the pool.

Little early to know what that looks like yet.

We can say that it's a little bit older than we expected, but manageable.

It's not a huge deviation from what we expected.

Okay, and in your opening remarks, Rob, you talked about 2015 and reform changes that should help improve the profitability of the block as you look at 2015.

Can you walk through what those changes are, and how it should affect the 2015 profitability of the health business?

Yes, and I'll let Mike comment here, as well.

But one of the big ones he mentioned which is first, historically we've had higher first year commissions, and we've had -- because of underwriting we've done, we've had better morbidity in first year business.

We don't do anything [dacking] of those commissions, and aren't going to, but you can think about, in the new pool, we are not going to have necessarily better morbidity, which may mean that first year experience is not going to be quite as good, okay?

But then we talked about all the different mechanisms going on for risk mitigation, and they come in over time a little bit.

And then I think last, just in our overall results, as we get bigger, and Mike mentioned we took some expenses out, we are gaining scale and leverage in the business that will grow over time, so it's really a combination of all of those different things.

Okay, and then one last question, if I may, which is, should we expect a first quarter sales to look a lot like fourth quarter, in terms of a lot of ACA-type bronze metallic type plans?

Or did you really see the activity in the fourth quarter?

So I kind of think two things.

I think the ACA is going to change the distribution of sales within medical, and it will be heavily fourth and first quarter oriented, okay?

But life events, which are, I left an employer and I need coverage somewhere else, those are going to go on across the whole year.

And that's an important contributor to our sales activity.

I think the real unknown, and we'll know a little bit more about this at the end of the first quarter is, are we going to see more people who struggle with the affordability issues turning to alternative products?

And just the sales activity in the fourth quarter was heavily influenced by this, get it done before the end of the year kind of mark.

Obviously that's not going to recur in the first quarter.

Right.

Okay, thank you.

Our next question comes from Chris Giovanni from Goldman Sachs.

Your line is open.

Good morning, Chris.

Good morning.

Thanks so much.

I guess first question in terms of the loans.

In the past, when you've on-boarded some loans, you've given us some indication about the placement rates on those, maybe being above or below the existing placement rate.

So wondering if you could give us some indication on the loans that you could potentially lose here?

Where they are relative to the current placement rate?

Yes, really, we're in discussions on all this, Chris, and we don't really have any color to offer.

When it's available, we're obviously going to provide it.

Okay, and then on Solutions, you have the $50 million target out for 4Q.

Could you potentially give us maybe a break down of how that's carved out relative to US versus maybe some of the other developed markets like Lat Am, Europe, Canada?

The drivers, Chris, of where solutions lift in earnings this year, there's several areas that we're looking at.

We're -- the growth in our mobile business and expect to expand the profit margins there.

So we've obviously got the LSG acquisition in Europe that's going to be a help there.

But we expect overall solid growth and contributions from mobile.

Then Europe is going to be a big focus as we integrate that region.

We had some, obviously, expenses, severance to charter the setter that we took in the fourth quarter.

So we really expect disproportionate improvement in Europe.

And then just the overall expense management.

We've got that reducing expenses in non-growth areas.

So we've got mobile, we've got the Europe integration, and expense management being the three drivers.

And then if I look a little bit beyond 2014, our acquisitions of Ike and LSG will help drive earnings going forward.

They are not going to contribute much in 2014 to earnings, because of amortization of intangibles and integration costs.

Okay and then Rob, obviously, Argentina is one of your more developed markets, and that country has certainly been in focus here with the emerging market concerns.

And probably way too early to think about any impact that this is having on your business, but could you give us some update?

I know you talked back in 2008 at the Solutions Day a fair amount about Argentina, but if things were to maybe go down the wrong path there, how should we think about potential risks that that could have for your business there, if any?

Sure.

So let's start with Latin America.

We've been there a long time.

We've been through cycles before there, and we like Latin America because of the market characteristics that it offers.

We've got a broad footprint.

We're in more than just Argentina; we're in a number of countries down there.

And if we look internationally, we're in even a broader footprint.

So I guess when I look at Argentina, the great thing is we're not -- the business generates all the capital it needs itself.

We are not putting more money in there.

We've had very strong results there over time, but as part of our overall portfolio, it's a small component of overall international.

Chris, maybe you want to comment a little bit on how we look at some things when we size up Latin America?

Yes, the other point I'd just make around capital deployment and the required hurdle rates for investments in countries outside of the US is, we do factor in country risk and currency risk when we set target hurdle rates.

The other point I'd make with respect to Argentina is, in our capital forecast -- and again, operating earnings and dividends coming up to the Holding Company, we are not forecasting operating earnings out of Argentina to come back into the US.

So we're factoring in all of these relative exposures.

Okay and then Chris, lastly on Capital Management broadly.

Just updated thoughts around what you're thinking there?

Obviously 2013 was active in terms of M&A as well as buybacks.

Should we expect a similar story in 2014?

Yes, I think so.

I think the issue for us, the outlook going forward will be about flexibility and maintaining our discipline.

Again, the flexibility coming from operating earnings and our ability to get those earnings up to the Holding Company as dividends.

We still -- we think this year, although it's early, and we will continue to update you.

We do expect to get aggregate operating earnings to the Holding Company in the form of dividends.

We do think the stock is attractive, and a prudent use of deployable capital.

But we also think the combination of profitable growth opportunities, either organically or through M&A, and returning capital to shareholders through share repurchase, is going to be the combination that will produce the greatest long term value.

Great, thanks so much.

Our next question is from Steven Schwartz from Raymond James & Company.

Good morning, Steven.

Hello, good morning, everybody.

I want to head back to Health, if I could, and follow-up some of Mark's questions.

The sales, I think, Rob, as you noted -- or I think it was you who noted it that -- or maybe it was Mike.

In a lot of the sales for this quarter were renew me now so later in 2014, I don't get stuck with Obamacare and having to pay more and maybe not getting the policy that I wanted.

And I gather this is prevalent, particularly in the red states.

Now do I understand it correctly?

When you talk about sales, if I were to buy a policy in July of any year, a 12 month policy from you, and then 12 months later, I renew the policy, that's a sale?

There are two sales there?

No.

So you should think about sales as a first time buyer or someone who left us and came back, but there's been a period where they've not been insured by us.

And that's -- okay, this is important.

So that's also true of somebody who came to you and said -- so if somebody already had your policy and then renewed, that's not a sale.

Correct.

But if somebody didn't have your policy wanted to get your policy before January 1 and did, that's a sale?

Correct.

Now here's something I don't understand.

So you've got these large amount -- huge amount of sales.

Yes.

But the membership, it grew, but it grew like it always did.

How come the membership doesn't grow faster?

That's a good question.

And the answer is, the way we count membership is business that is in effect as of the year end.

So we've got a lot of first quarter sales that are not reflected in the membership.

So you'll see it all show up the next quarter we report, Steven.

Okay, all right, good.

And then -- okay, so moving on from that, you talked about private exchanges with regards to Employee Benefits.

Is -- you have always done individual, but the private exchanges that are developing for large cases, I don't know.

Does your IMM product work on that, or not really?

Again, private exchanges, I would say, are in their infancy of development.

And we're evaluating them both on the Benefits side and within our Health business.

I'd point out that we decided to not go on the public exchanges, but I'll tell you, during the quarter, a lot of people actually bought directly from us by coming to our website.

Or they came to our website and then were toggled to one of our own counselors to help them sell.

So how the private exchange market is going to evolve is still unknown.

I'd expect modest activity, but we want to get our feet in the water and understand how that market is going to develop.

Okay, and then one more, if I may.

You're talking about 2015 risk quarters and whatever.

I was not aware.

You don't participate on the public exchanges now, but do you still benefit from the various risk payments that the government will make if your risk doesn't look like what it's supposed to look like?

Yes, we do, Steven.

There's one -- there's three, I think, main risk transfer mechanisms.

One of them is only for the -- if you're selling on the exchanges, so we wouldn't participate in that, but the other two we would.

Okay, great.

And of course, the impact of those depends on the demographics of our insured population compared to the industry, so it's going to take some time until we get a bead on how we line up with that.

Okay.

And then one quick last one.

What's the rate on the notes that are going to be called?

The Fed 2014 maturity is a 5 5/8% coupon.

The way you can think about it is the debt capacity, or the expose load associated with the debt prior to our issue in March of last year, was roughly $60 million pre-tax.

The new structure, which includes $200 million more of debt, will be roughly $55 million pre-tax.

So again, the flexibility we had last year, opportunistic debt raise produced some good expense numbers going forward.

Okay, great.

Thanks guys.

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

The line is open.

Good morning, John.

Good morning.

A couple of questions on Specialty Property.

You guys had done a good job of giving us the foreshadowing about the idea that expense levels would increase, that you had some additional expenses around on-boarding new loans, adding to your call center, some regulatory issues, that sort of thing.

I'm just curious, in 4Q's expense load for specialty property, are you at that new run rate, or do you still have more to do?

I think we've added a lot of people to the service centers, John, so I'd say we're probably about at the levels that we need there.

There's still, I think, some ramping up of activity, but I'd say we're getting close to what should be a run rate on the activity per loan.

Okay, and then -- sorry go ahead.

I was just going to say that Gene and his team will now sit down and look at all of our different work flows.

And obviously, we're going to look to find ways to improve our expense structure.

And some of those things that Rob alludes to there involve systems work and things like that, too, that takes some period of time.

So I think the goal is to automate many of these things that we've had to deal with by adding lots of people, and that's why we alluded to this being sort of a multi-year initiative.

Got it.

Okay.

The second question, and maybe it's more for Chris.

You guys obviously buy reinsurance at different points in the year; that's what you've been doing for the last couple of years.

There's no secret that catastrophe or property, catastrophe reinsurance costs are coming down and coming down dramatically.

I'm just wondering if you can give us a sense for what your approach is going to be for this year.

I think if -- your exposure have probably changed a bit, certainly, on a year-over-year basis.

But I'm just wondering, do you let some of those savings from lower reinsurance costs drop to the bottom line?

Or are you just going to essentially layer on more protection and have about the same spend?

Just want to get a sense for how you're going to think about that.

Well, I think, obviously, the absence of any significant cats in 2013, and equally importantly, the additional capacity from the Capital Markets, has produced very favorable reinsurance pricing conditions.

We're looking at, ballpark, roughly 15% drop on a risk adjusted basis.

And I think we're going to -- and we've already placed a portion of the program, we've got some cat bonds in place that are multi-year and some other multi-year.

And then we'll go back into the market in June, as we do -- as we have done the last several years.

I think the -- where we see some additional flexibility is some willingness to provide multi-year coverage on an indemnity basis, and then some flexibility around reinstatement premiums.

So those are the main factors at what we're seeing as a by-product of the additional capacity and the reinsurance market, and we're going to factor all that in.

And we'll update you when we finish the placement in June.

I'm just trying to understand, there's so many moving parts when you think about the idea of net earned premium for specialty property overall being maybe slightly down, flat, slightly up.

It's -- appreciate a lot of this different color, but I think this -- I think the reinsurance costs could easily be part of that as well, right?

If you guys just wanted to grow premiums -- net earned premiums, you could.

You could.

Again, there's lots of choices.

What I think about is, all you have to think back is to when RMS11 was there, and everyone was projecting costs will go up.

I think our fundamental belief is, at some point in time, the market will harden then there some events, and we're trying to get multi-year coverage so that we're protected with favorable rates, John.

Yes, I'd say we always start with, obviously, the risk protection, John.

And then once we're comfortable with that, then that's where you can play at the margin with the tradeoffs and the rates or pricing.

But that -- we always start with that risk management focus in our reinsurance buy.

Yes, no, don't get me wrong.

You guys have done a great job with your program of protecting the balance sheet, and I'm not trying to attack on that side.

Thanks.

The other thing I'd point out, John, and again, this is a macro trend issue around placement rate.

As placement rates, as the housing crisis continues through its resolution and placement rates lower, macro events that we've talked about for a number of years.

There is going to be some capital release from the property segment.

And we do -- from lender placed in particular.

And we are -- that is something that we expect to start to see during 2014.

Okay.

And then one last quick follow-up.

Field services, so I think I caught you, Mike, that it's about $25 million in the expense line this quarter.

I guess a little bit less than that on the fee revenue line.

When do you get to the point where that starts contributing?

Can you just remind us when that starts contributing to bottom line?

Yes, I think it will be -- I think we said modestly profitable in 2014, John.

And then, whenever you do these acquisitions, we set up intangibles on the balance sheet.

Those are amortized over time.

So your contribution to earnings grows over time, so modest contribution in 2014 and then growing in 2015 and beyond.

And on the balance sheet where the goodwill increased quarter over quarter, was that all from field services or is lifestyles in there as well?

Lifestyle services is in there, too.

Thank you.

We will take our final question from Seth Weiss from Bank of America.

Your line is open.

Good morning, Seth.

Hi, good morning.

If I could ask just one more on Specialty Property.

You're guiding to the non-cat loss ratio to increase on lower premiums and higher claims frequency.

I understand the lower premium rate and that impact.

Could you comment a little bit on higher claim frequency and why you're expecting that to go up?

Sure.

Historically, we've seen properties that are moving to foreclosure often have just higher claims incidents associated with them, and that's what we're certainly thinking is going to happen here.

Is there any way you could help quantify that impact over 2013?

Yes, I don't know that we're quite able to give you an exact quantification there.

But certainly, we had mild weather overall, so cat issues aside, a lower claim cost in 2013.

So that's why we're just saying that we think that's going to go up.

We think 2013 was a bit lower than it will be.

Okay, great.

That's helpful.

And maybe one final one on Employee Benefits.

Voluntary sales seem to be a tail wind to premiums.

It seems from your guidance that we should think of 2014 as a build out year there, where expenses may offset some of the bottom line positives from these sales.

Is that the right way to think about it, as net neutral to 2014 earnings and going into 2015?

I think that's a fair way to look at it.

In voluntary -- or in benefits, we're excited about voluntary.

We think we've got some real traction in our offerings in that small to medium size market, and they are working hard on expenses.

But I think your analysis was quite good.

Thanks for the questions.

Thanks for joining us this morning.

We look forward to hosting our 2014 Investor Day on March 11 and updating you on key milestones in the months ahead.

Please reach out to Francesca and Suzanne with any additional questions.

Thank you.

This does conclude today's teleconference.

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