Assurant Inc (AIZ) 2015 Q2 法說會逐字稿

Welcome to Assurant's second-quarter 2015 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, Marketing and Communication. You may begin.

Thank you, Matthew, and good morning, everyone. We look forward to discussing our second-quarter 2015 results with you today. Joining me for Assurant's conference call are Alan Colberg, our President and Chief Executive Officer, and Chris Pagano, our Chief Financial Officer and Treasurer.

Yesterday afternoon, we issued a news release announcing our second-quarter 2015 results. The release and corresponding financial supplement are available at Assurant.com. As noted in our news release, beginning with the second quarter, Assurant is revising its presentation of results to reflect our focus on housing and lifestyle specialty protection products and services. As we wind down our major medical operations, results for Assurant Health are now included only net income, and are no longer reflected in net operating income. We will continue to report Assurant employee benefits under operating results as we pursue a sale of that business. Certain prior period results in the financial supplement and in the news release have been revised to conform to the new presentation. We believe these changes provide a more meaningful presentation of quarterly results, and better reflect our strategic focus.

Today's call will contain other non-GAAP financial measures, which we believe are important in evaluating the Company's performance. For more details on these measures, the comparable GAAP measures, and a reconciliation of the two, please refer to the news release and financial supplement posted at Assurant.com. We will begin our call this morning with brief remarks from Alan and Chris before moving to Q&A. Some of the statement made today 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 2014 Form 10-K, first-quarter and upcoming second-quarter Form 10-Q. Now, I'll turn the call over to Alan.

Thanks Francesca, and good morning, everyone. We are pleased with our overall performance in the second quarter. We are moving forward with our strategic realignment, as we position Assurant for long-term profitable growth. During the quarter, our momentum continued in housing and lifestyle. We grew market share, added client partnerships, and expanded our products and services globally. At Assurant Solutions, we strengthened our lifestyle offerings in connected living, which include service contracts and mobile. We extended our partnership with a leading US mobile carrier to offer a buyers' remorse program. We will leverage our repair and logistics expertise to refurbish the unwanted devices and resell them through our global distribution channels, creating value for consumers, our client, and Assurant. Worldwide, mobile currently accounts for approximately 25% of Solutions' revenue, and more than a third of its profitability.

We've begun working with eBay to develop and launch an extended service contract program for new and used auto parts and accessories in the US. This new agreement builds on our long history in the auto warranty sector, and leverages our expertise supporting online retailers. These partnerships reinforce our ability to offer solutions to customers across multiple distribution channels. This is another example of redeploying our capabilities into adjacent specialty areas where we can win.

At Assurant Specialty Property, we are transforming our Lender-Placed platform, to increase efficiency while also maintaining exceptional client service. At the same time, our mortgage solutions business delivered strong organic growth, as we integrated key functions across property preservation and appraisal management to provide additional value for our clients. We also broadened our multi-family housing capabilities through the acquisition of a receivables management company.

During the quarter, we made progress with respect to the sale of Assurant Employee Benefits. Market interest continues to confirm our view that Employee Benefits is a valuable company. The process is moving ahead as planned, and we expect to announce a sale by the end of the third quarter. The wind down in Assurant Healthcare continues, and we are on track with all notifications and actions, so that we can substantially exit the health market by the end of 2016. Following our announcement last month, we stopped issuing new major medical policies. We also reached an agreement in principle to sell our supplemental and self-funded product lines to National General.

Now, let me offer some highlights from our second-quarter results, and then Chris will provide additional details. Annualized operating ROE, excluding AOCI, was 13.3 % year to date. As noted, this excludes health results. Also, adjusting for the sale of American Reliable, Assurant's total revenue was roughly level with second quarter of 2014, as anticipated declines in Lender-Placed were offset by increases in mobile and mortgage solutions fee income. We are pleased that targeted growth areas in solutions and property are up 14%, and now account for 26% of the revenue for these segments, as well as a significant portion of profits. We will continue to align resources toward our best opportunities and adjacent areas.

As we sharpened our strategic focus, solutions and specialty property again generated strong cash flow in the second quarter. This allowed us to return $124 million to shareholders through buybacks and dividends, invest in our specialty businesses, and capitalize health to account for certain exit-related costs. At the end of the quarter, we had $460 million of corporate capital at the holding company. We believe that capital will release during the next 18 months from the health wind down, and the sale of employee benefits will provide us with significant flexibility. We will deploy this capital to build a stronger Assurant, and create additional long-term value for shareholders.

Our second-quarter results reinforced our strategic decision to build on our strengths in housing and lifestyle. Our sharper focus allows us to leverage our track record of sustained industry leadership, to maximize opportunities for profitable global growth. We will continue to extend beyond insurance, to offer integrated services related to consumer risk events. This includes growing our fee-based businesses that require less capital and generate more predicable earnings and cash flow over time.

As always, we are committed to disciplined capital deployment through investments in the business and return of capital to shareholders. We believe these actions will allow us to realize our aspirations of generating top quartile shareholder returns. We're excited about the future, and encouraged by our progress and momentum. And now, I will turn to Chris, who will review results for the quarter and our outlook for 2015 in more detail. Chris?

Thanks, Alan. I'll start with solutions, where core results were in line with our expectations. Excluding a net tax benefit, segment earnings totaled $52 million for the quarter. The $7 million year-over-year decline was primarily attributable to the previously-disclosed loss of a tablet program in May, and less income from mobile carrier marketing programs. International results were negatively affected by foreign exchange pressures and higher legal expenses, related to a review of payment protection policies issued in the UK during 2003 and 2004.

Turning to pre-need, the business benefited from lower mortality, as well as continued growth from our partnership with SCI. Overall, revenue at solutions was flat compared to second quarter of last year, consistent with our outlook for 2015. The client loss noted earlier, foreign exchange volatility, and expected declines at certain brick-and-mortar retailers offset growth in vehicle service contracts and other mobile programs. Looking ahead, we are encouraged by sales momentum in connected living, vehicle service contracts, and pre-need, which we believe will generate profitable growth in future years.

Now, let's turn to Specialty Property, which had a very strong quarter, exceeding our expectations. Net operating income increased $19 million to $87 million, driven by lower claims activity. The loss ratio improved 840 basis points year-over-year, due to fewer reportable catastrophes, and reduced frequency and severity of non-catastrophe claims. As a reminder, the second quarter of 2014 included $22 million of adverse reserve development related to severe winter weather.

Adjusting for the sale of American Reliable, revenues decreased 2%, as declines in Lender-Placed were nearly offset by strong growth in targeted areas. We continued to capture market share in mortgage solutions, while expanding our service capabilities in multi-family housing. We will continue to diversify into adjacent higher-margin fee-based businesses.

Moving to expenses, our reported expense ratio increased 400 basis points year over year to approximately 50%. Two-thirds of the increase was due to a greater proportion of fee-based business. Excluding mortgage solutions, our insurance expense ratio increased by only 100 basis points to roughly 43%. This was driven mainly by lower insurance premiums. We've also made additional investments in our Lender-Placed platform to improve efficiencies long-term. We're on track to generate net savings in the second half of 2015, with more to come next year. These initiatives will help us maintain an insurance expense ratio in the mid-40s, despite declining Lender-Placed revenue. Earlier in the month, we finalized our 2015 catastrophe reinsurance program, purchasing $1.3 billion of coverage. We were pleased to complete our program on attractive terms, while also lowering our retention nearly 20% to $155 million. This comprehensive protection is an important part of our global risk management strategy.

For 2015, we expect property's revenue and earnings to decline, due to the divestiture of American Reliable and the ongoing normalization of Lender-Placed. As the inventory of seriously delinquent loans decreases, placement rates will continue to decline toward our forecasted range of 1.8% to 2.1% in the next few years. Profitable growth within multi-family housing and mortgage solutions, along with international property expansion, will enable Specialty Property to maintain attractive returns long-term.

Turning to employee benefits, earnings in the quarter decreased by $3 million to $11 million, due to less favorable life and disability results compared to second-quarter 2014. While within the normal range of volatility, we saw a modest increase in disability incidents, and an increase in life claims. Dental experience in the quarter remained favorable. Net earned premiums and fee income increased 3%. Our strong voluntary platform, including dental, more than offset declines in employer-paid products. We were pleased by persistency, and sales remained robust.

The Assurant Health run-off operations reported a net loss of $124 million for the second quarter, including $107 million of exit-related charges. These charges are mainly comprised of premium deficiency reserves, asset impairments, and severance. Premium deficiency reserves totaled $80 million after tax, and reflect our view that future premiums and current claims reserves for major medical will be inadequate to cover future claims and direct expenses. The amount recorded in the quarter was slightly above our initial range, to account for additional expenses through the wind down. At the end of the second quarter, we received final notice from the Centers for Medicare and Medicaid services, CMS, regarding risk mitigation payments for 2014 ACA policies. We were pleased that the final amounts for reinsurance and the risk adjustment transfer were slightly better than March 31 estimates. This resulted in a net benefit of $9 million booked in the quarter. CMS confirmed that insurance carriers should receive payments during the third and fourth quarters. We will continue to monitor for any changes to that timetable.

We applied the lessons learned from 2014 and updated industry data to our 2015 estimation process. In the quarter, we accrued $117 million under the risk mitigation programs for 2015 effective policies. This included $68 million for reinsurance and $49 million for the risk adjustment. As of June 30, recoverables for 2015 policies under both programs totaled $237 million. Consistent with last quarter, we did not accrue any net recoverables for the risk corridors. Going forward, we expect to incur an additional $80 million to $95 million of exit costs, primarily related to severance. We will continue to refine our estimates for exit-related costs and the premium deficiency reserves based on actual loss experience, recoverables under the ACA risk mitigation programs, and timing of expense reductions. Results at Health will also reflect certain overhead expenses that cannot be included in the premium deficiency reserve calculation.

Moving to corporate, we ended June with $210 million of deployable capital. Total segment infusions in the second quarter, net of dividends, were $70 million, as we funded capital needs at Health, primarily from operating cash flow. We infused $215 million into Health to account for estimated total exit-related costs through the wind down period, which are recognized immediately under statutory accounting. We believe that this will largely satisfy the capital needs during Health's run-off, subject to any significant changes in our assumptions for claims experience and exit-related expenses. We expect capital supporting Health will be returned to the Holding Company in the form of dividends in late 2016, subject to regulatory approval.

For full-year 2015, we anticipate dividends from the operating segments, excluding Health, to exceed segment operating earnings, subject to growth and rating agency requirements. During the second quarter, we returned $22 million to shareholders in the form of dividends, and we repurchased $102 million worth of stock. Through July 24, we repurchased an additional 257,000 shares for $18 million. Year to date, this represents 5% of total shares outstanding. We continue to believe the stock is attractively priced. The proceeds from the sale of employee benefits, and capital returned from the health wind down will provide additional flexibility to deploy capital prudently, through a combination of share buybacks, common stock dividends, and investments in housing and lifestyle.

The corporate loss for the quarter declined to $9 million due to lower employee-related benefits expenses and a reduction in tax liabilities, which will reverse during the second half of the year. The investment portfolio continues to perform well. Real estate joint venture partnerships generated $13 million of investment income in the quarter spread across the businesses. Our focus for the remainder of 2015 is to position the Company for profitable growth, while successfully managing the exit of the health insurance market and the sale of benefits. We believe all of the actions underway are critical to building a stronger Company for the future. And with that operator, please open the call for questions.

(Operator Instructions)

Seth Weiss, Bank of America Merrill Lynch.

Good morning. Thanks for taking the question. My question is surrounding capital in Health, and just want to make sure I'm thinking about this the right way. I believe from a statutory basis, you have about $340 million of stacked capital in Health. As that the right number?

That is correct, yes.

And if we think about needs at Health, the $80 million to $95 million of severance cost that you commented in the prepared remarks, is that only on a GAAP basis from a stacked basis, if your deficiency reserves and all other estimates are correct? Should we think about all that $340 million being distributable at the end of 2016?

Just a couple of clarifications. So in the $215 million that we infused into Health in the second quarter, that includes all severance, additional indirect expenses, and then the expenses that are also included are in the GAAP calculations. Stat requires that we pre-fund a greater portion of the exit-related costs then does GAAP.

In terms of the -- how we think about it going forward, it is early. We've got some line of sight around claims experience, but in the first half of the year, we are just starting to get some more information around the estimates on the reinsurance recoverables and the risk adjuster We think we've largely funded all of the costs related to the exit, of the losses related to the exit, but we will know more as we go throughout the year. But then eventually, we do expect to get the majority of the capital out of Health in the form of operating dividends at the end of 2016.

And then maybe a broader question about capital and use of capital. I appreciate that you've been hesitant to talk about deployment of capital, in terms of not putting the cart before the horse. But with your commentary, benefits likely being sold by the end of the third quarter, and having a more well-contained health number, could you tell us what's on the table in terms of capital deployment? There are options such as special dividends or increased buyback available? Try to get a sense of if there will be substantial capital coming on in the next 3 to 18 months?

Thanks. Let me clarify the timing of benefits. What we said is we expect to announce a sale by the end of the third quarter. That closing would be sometime in early 2016, just on the timing of benefits. With the capital management, I think the thing that I would say today is we remain committed to that combination of balanced capital deployment, where we return capital to shareholders through various forms, buybacks and dividends, as well as invest in good growth opportunities in our core franchise of housing and lifestyle.

I think you have seen a great track record over the last few years of buyback, including even this year, with 5% of the stock bought back year-to-date. Any other consideration, things like a special dividend, that would be a Board decision, but we are continuing to focus on really the actions that we're taking have repositioned Assurant into a much more attractive set of businesses going forward. We think that will create significant shareholder value, combined with our combination of capital management, which we're going to continue.

Okay, that is helpful. I'll get back in the queue for more. Thanks a lot.

Mark Hughes, SunTrust.

Thank you, good morning. Could you talk about the developing auto partnership with eBay? Is that a template maybe that you be able to apply elsewhere? And then more broadly, of the solutions sales backlog, how are things building as we -- you've given pretty good guidance for this year, but how should we think about the top line as we transition into 2016?

Sure. Broadly the way to think about solutions is we are pursuing a strategy of creating client partnerships, independent almost of the channel of the client. We work with carriers, we work with OEMs, we work with retailers. Increasingly, we work with e-retailers. What you see with the partnership that we announced with eBay, which we are still in the process of launching, so results will be later, is really that ability to work with large client partners across a variety of channels. That's really the hallmark of what solutions does well. Creating value for the consumer and for the client.

The pipeline is robust for solutions. The sales cycle is long. And we will continue to announce new partnerships as appropriate. But I think what you've seen, and with solutions is we made a commitment to investors a couple of years ago, that we expect over a period of time an average annual increase in NOI of 10%. Obviously, with variability year-to-year we still believe that is the right way to think about Solutions' prospects going forward.

And then on the Specialty Property business, I think you might of touched on this, how much of the revenues coming from non-force placed business? I think you might have said 26%, but then how much is earnings of that non-force placed, and what kind of growth rate on that chunk of the business?

Let me offer some overall comments on property, and then Chris, I'll turn to you, go into a little more detail. The way to think about our property business is our business is in a rotation where Lender-Placed is normalizing, as we've been talking about and predicting going back to 2011, and we've been investing in our growth opportunities, which are very attractive, including multi-family housing, and more recently, mortgage solutions. That rotation is well underway. Chris, what would you add?

I guess, to answer the question on revenue, roughly 30% of the revenue is non-Lender-Placed, and that includes multi-family housing and mortgage solutions. Remember it's -- and also the flood business. Again, as Alan points out, the normalization of Lender-Placed is going to throw off additional capital above segment operating earnings that we're going to deploy in other areas within housing and lifestyle. We do expect to be able to grow that business, grow the non Lender-Placed business within property through organically, and then potentially through strategic M&A.

And what would be the growth rate on that 30% chunk?

It's been -- I'm trying to remember what exactly we've disclosed. We have disclosed that multi-family has grown double digits for quite a period of time now. And mortgage solutions, if you recall, on the last couple of earnings calls, we increased our estimate for this year. Originally we had it at $250 million of revenue. This year, we raised it to $300 million on a prior earnings call. There is good growth in both of those businesses. Think of it in the low double digits.

Thank you.

John Nadel, Piper Jaffray.

Good morning, Alan and Chris. A couple of quick ones on Specialty Property. Some helpful commentary to help us think about the expense ratio, as opposed for the insurance business. That mid-40s that you mentioned in your prepared remarks. Thank you for that. As it relates to the favorable weather in the quarter, and ignoring catastrophe losses for the moment, I'm wondering, maybe Chris, you can give us some sense, recognizing any given quarter will have some variability around the mean, but can you give us some sense for how much you think that favorable weather added to -- whether it's earnings or a lower combined ratio, or how to think about that?

A couple of numbers that might be helpful. In terms of the 840 basis points, about 140 of it were better cat losses, okay, so we set that aside. We had again, roughly 2.5 points related to non-cat weather-related, again recognizing the adverse development event that we had in the second quarter of 2014. And then, there is probably another 3 points there that were around fire and theft and vandalism. That's again non-weather related, non-cat. Maybe that helps. The other thing to remember, though, is that as the rate comes down, as premiums drop, we are swimming upstream if you will, around expense ratio. That's where the work and the investments we're making in the Lender-Placed platform, to help us maintain the mid-40s loss ratio, even as Lender-Placed normalizes and the revenues decline.

Got it. I'm glad you addressed that. That was my next question. That mid-40s insurance expense ratio is what you are targeting, inclusive of the expense saves that you're looking for the back half of the year and in 2016, right?

That's correct. We've been net investors, more expense than savings result, but that will change in the second half of 2015, and then we're going to continue to see ongoing benefits in 2016 and beyond.

Okay, thanks.

Sorry to interrupt. Just again, we've got just remember again, this continued rate decline is going to be the challenge there, as we want to maintain the expense ratio with declining premiums.

Understood. Maybe a little nitpicky here but if I look at the Lender-Placed gross written premium this quarter, it looks like it benefited from, I'm guessing from REO additions to the line, because if I look at just the trend in the placement rate, the slight downward tick and the loans tracked as well as your commentary about the declining premium rates, I would have expected lower gross written premium, but it wasn't -- it didn't decline. Can you give a sense for what else is happening there, and how we should think about that underlying trend?

I think you're absolutely right. As a reminder, REO is not part of the placement rate, and we did see a slight uptick there. Then there were some small loan movements, but mostly it is REO.

Okay. Maybe I will follow up off-line to see if we can figure out how to estimate that. And then last one, and I'll get back in the queue, is your outlook for the corporate operating loss of $60 million to $65 million for the full year has not changed. But the first half of the year operating loss was just $13 million. I suppose, it is just that there is some timing issues and maybe some one-time benefits in the first half of the year, but how should we think about that? Do we just jump up the corporate loss to get to that full-year level? What exactly is driving that?

A couple things. Remember there is some tax true-up that occurred in the first half, that will reverse itself, which is about $9 million. And then again, our focus, as it will be with the entire Company as we undertake this repositioning, is around operating expenses and committing resources where they are -- where they get the best sorts of return. While we are staying at $60 million to $65 million for the year, our objective is obviously to lower that number.

Okay, thanks. I'll jump back in the queue. Thank you.

Steven Schwartz, Raymond James.

Good morning, everybody. [Mark and John got a bunch of them.] But if I may, can we -- can you go back and talk about eBay and that deal, and what is it that you are going to be doing for them? Is this an auto warranty type of business?

Yes it is. And very similar to what we're doing with other OEMs or retailers. It is auto parts, auto supplies, sold electronically.

Is this going to be a situation, Alan, whereby there is going to be some delay? There is some OEM warranty, and then you come in after that? And that's when you begin to receive revenues?

It is similar to our vehicle service contract business, but not as long a delay. These are things that have shorter, if at all, OEM warranties on them.

Okay. And then just going back over Seth's question with regard to the capital at Health. I think was $340 million of stat capital. The drain from stat capital is basically, I think, to make this easy, will be anything you missed in the PDR; anything having to do with the change in receivables from the government, and then severance costs. Or severance costs would not be a drain, because that's already in the number? Was that really it?

Yes, I think it's largely the claims experience change in those estimates, which again goes back to the reinsurance recoverables, the risk adjuster. But really unlike the GAAP PDR, the stat PDR -- the $215 million of capital we put into Health is designed to account for virtually all of the costs associated with the exit of the health business.

Okay. All right. And then one more. There was a mention that you made an acquisition in the quarter?

Yes. We made a small acquisition to really continue to build out our multi-family business. In the multi-family business, as a reminder, we work with landlords, we provide a range of products and services. One of the things that we're doing is extending our capabilities is to provide even more value to those companies. And so, one of the things we've added is a collections company, effectively receivables management. It was a small amount of capital going out. It's a small business. Really, we elected to buy the capability as opposed to build it, but it's an extension of our multi-family business.

So it would be like collecting late rent, and stuff like that?

Yes, and very integrated into our business model with our SureDeposit services. A very consistent part of that offering.

Okay. That's what I had left. Thank you.

Sean Dargan, Macquarie.

Good morning. Thanks, and there's been some M&A activity in the insurance space generally recently. I'm wondering what to make of some of the valuations that were obtained in the market. So in Lender-Placed, QBE sold its Lender-Placed business for $90 million, which implies a pretty low valuation. I'm wondering if you can maybe contrast your business with QBEs, or is there any difference?

A couple thoughts. I cannot comment specifically on that deal, because we don't have any unique information on it. In our Lender-Placed business, though, we do feel we have the best business in the industry. We've been consistently gaining share in recent years. We've been reinvesting in that business to improve the capabilities. It's an ordinarily valuable service and product for the mortgage industry. We feel very good about that business as it normalizes, and we're confident it will remain a specialty business for us, as we have talked about.

More broadly, lots of activity going on in the market. We really can't comment on that. We're focused on positioning Assurant around housing and lifestyle. That's a great franchise. It's an area where we have consistently generated specialty returns long-term. It's an area where we hold leadership positions in most of the markets we now are playing in. We're consuming to expand our offerings to be more than just an insurance company, with really integrated offerings through great value for the partners we work with. The businesses we are investing in are less capital-intensive on average, generating very strong free cash flow. We think all those actions are going to maximize the value of Assurant to our shareholders, and we feel good about the go-forward new Assurant.

Okay. Could you give us any sense of what kind of market share you think you have in Lender-Placed?

I'm trying to remember what we have said publicly previously, but we track 34 million loans. That gives you a pretty good sense of the overall share we have, if you just look at total mortgages in the US.

Okay. And given what a Japanese mutual insurer paid for [Spain Corp], I'm wondering if you can characterize the level of interest in your employee benefits business? Has it been very high? Have you been talking to international potential acquirers?

I think one of the positives of the early announcement we made in April is that it has, obviously, created a lot of interest in the Company. The process itself is confidential, so I cannot speak specifically to that. But as I said, we're on track. I think the results and all the dialogue we've had with people so far affirms the value of our voluntary platform, and our dental business.

The business is continuing to perform well, although earnings were down slightly in the quarter, the sales pipeline is strong. Persistency has been good. And we're confident it's going to be a valuable company, and that we'll receive good price for it.

All right, thank you.

John Nadel, Piper Jaffray.

Thanks. Good morning again. Alan, I just wanted to think bigger picture about capital deployment. And maybe get a sense from you how you and the rest of the management team and the Board are thinking about balancing the growth of the business, the return of capital to shareholders, the ROE and EPS impact of buybacks versus the book value per-share impact of buybacks. Obviously, the stock has performed well, and is for the first time in a long time trading above book value, ex AOCI. I guess I am interested in your views on how much dilution to that book value per share you are willing to -- I will call it suffer, if you will, in the form of -- or from buybacks looking forward, or if that is something that is even part of the consideration?

As the Board and as management, we are focused on growing free cash flow and earnings, as the primary thing we do. If we do that, we will create shareholder value over time. I think we remain focused on that combination of how we deploy the capital between returning it to shareholders appropriately and investing in the future. I think you've seen, we have a very strong track record of returning capital.

But increasingly, book value per share is not the metric that is meaningful in thinking about us. We are more than an insurance company, and we continue to evolve toward more fee income and other types of services. So the focus really for us is free cash flow and earnings growth.

John, just another, just to follow-up on that a little bit. Again, continue to believe the stock is attractively priced. Our view is a prospective one. If you think about the next 18 months around distributable earnings, so we've got operating earnings at the segments which we are going to get more than that up this year. We expect proceeds from the sale of benefits, again, probably sometime in the first quarter, and then we expect the return of capital to -- from the runoff of the health business, later in 2016. On top of that, we've got capital being thrown off by the Lender-Placed business as it normalizes. That is the -- that is what's driving our view of value, and will drive our repurchase decisions. As Alan points out, again, it's a combination. We've got to invest in our business to maintain the leadership positions that we have.

And then I guess I will ask the question, not necessarily expecting anything detailed in response. But you are going to have more capital available for deployment than I think at just about any time in the Company's history, over the next, call it, 12 months, give or take. How robust is the M&A sourcing and pipeline and have you done -- have you taken any action to enhance the scale or size of your M&A staffing, to prepare for the potential?

I think I would start with a broad reminder. We are committed to this combination of how we deploy capital. We've been very consistent in that approach over time if you look at our track record, and we've also been very clear that we are looking for acquisitions that are on the smaller side, that extend and build off of the core franchise we have. We have not changed our M&A staffing at all as we go forward.

Got it. Thank you very much.

Michael Kovac, Goldman Sachs.

Thanks for taking my questions. Good morning. I'm wondering within LPI, can you discuss level of price changes that you are seeing at the state level, particularly in some of the larger states, like California or New York and Florida?

Sure. Again, we go back to what we have said in the past, which is this 8% to 9% decline due to rate over the course of 2014 and into 2015. But again, this is an ongoing process. Rate filings are a regular part of our business. We filed and received a rate approval of 4% decrease in Florida most recently, which will start in the second half of this year. We filed our new product with New York, with the 20% rate decline, which began in January. The ongoing rate decline and the normalization of Lender-Placed is going to continue. And again, this is why we're going back to operational efficiencies around the Lender-Placed infrastructure, and maintaining the targeting, that 45% expense ratio. But it is an ongoing process. Those are two examples of recent rate changes.

Great. And then understanding that the reinsurance costs came down in part because your exposures are shrinking. I'm wondering on a pricing basis, what level of reinsurance reductions did you receive?

The way I would think about it, it's probably a 75/25, if you look at the $240 million reinsurance costs down to $180 million. 25% of that is rate, and 75% of that is we're just buying less coverage. Again, we've got the normalization of the business, the sale of American Reliable, all contributing to less exposure.

Great, thanks. And then a higher-level question. As you think about the business post benefits and health, what do you think is the right level of debt to capital? Also, thinking about the fact that you're getting greater fee income relative to some of the more capital-intensive businesses?

I think as we have increased stability of earnings and cash flow, we could potentially support a higher debt-to-capital ratio. Right now, we don't feel any pressure. We've got significant amounts of capital coming to us over the next 18 months, but we will certainly revisit and like the flexibility that additional debt capacity could offer us.

Great, thanks for the answers.

John Hall, Wells Fargo.

Good morning everyone. I've got a couple of follow-on questions. I guess, going back to the QBE property that was on the market, originally when the sale took place at $600 million or $700 million, I could see what you guys would pass on it. Why wouldn't you have taken a look at that, or maybe you did -- as a relatively small cost to lock up market share in the LPI space?

Obviously, we can't comment on M&A and whether we did or did not look anything. We do feel very good about our Lender-Placed business. We have the best platform in the industry. We have continued to build that platform and invest in it, and we feel good about that business.

All right then. And I guess looking a little further out, a lot of the acquisitions have been, from a revenue standpoint, on the fee side of the world. Looking ahead, what do you think the revenue split, a couple of years out, will look like from the standpoint of percentages commenced by fees?

One of things are going to do, and we'll talk about this at the end of the call is we're going to hold an investor day early spring of next year. One of things we want to do in the investor day is give you a better sense of what to expect over time from this Company. So I'm going to pass on the question today, but ultimately, we will talk about how we think it's going to evolve over time, but clearly, we're going to have more fee income over time than we have today.

All right then. 0 for two. I'll stop there. Thanks guys.

Jimmy Bhullar, JPMorgan.

Good morning. I had a couple of questions. First on the health business, how should we think about a ballpark of how much capital could be freed from the business, once it runs off, I'm guessing in 2016. But then the capital comes to the HoldCo in 2017. I think stat capital is about $340 million, but you have put in $215 million this quarter. Should we assume that whatever you are able to take out would be less than the $215 million, because otherwise you wouldn't have put the extra capital in? And then secondly, on the employee benefits business, how has your retention, your sales been affected by just the fact that the business is being put up for bid? Have you seen any impact on that, and do you expect that to affect and turn the price that you get for the business?

Let me start on the benefits question, and then I'll ask Chris to comment on the health business. As we mentioned earlier briefly, the sales pipeline remains solid for that business. Persistency has been good, and consistent with the past. And we have been very encouraged that we really haven't seen any disruption to the business. It's been business as usual. And all of our dialogue with the various companies that we've been in discussion with confirm it's a valuable platform. It's a valuable company. We still expect to receive a very good price for it. I'll turn it over to Chris to talk about Health.

I guess the way I would think about it, Jimmy, is that it's early. We think, based upon our estimates today around claims experience and costs associated with running the business. And again these are costs that extend out into 2017, so we've got a multi-year projection going on right now, but we do believe the $215 million is going to largely be all of the capital we need to put in for this year. That is subject to changes in estimates around the experience, around the recoverables, and the risk-adjuster. And then into [6/2016] and potentially into 2017, we do expect to get the majority of the capital back in the form of operating dividends as we exit the business. We will continue to update and refine our estimates, and we will get a better -- every quarter that goes by, we get a better line of sight of what the end state looks like.

Thank you.

Mark Hughes, SunTrust.

The normalization in pricing for the Lender-Placed business is down 20 in New York, down in Florida. Would you anticipate that's a step function, we are getting the normalization now, and then it ought to revert to more of a consistent pricing, more in line with underlying loss trends and material prices, things like that? Is this a one-time step down?

Yes, I wouldn't want to speculate on that. Again, the filing process around rate is an ongoing one. We have regular dialogue with all of the different states. A lot of it is based upon experience, a lot of is based upon operating costs and other inputs. Keep in mind that, again the filings that once a rate is approved, it then takes the rest of the 12-month period for it to find its way through the all of the policies. There is that process going on, too.

Again, ultimately, the normalization around -- it is a function of rate, it's a function of placement. And it's a function of average insured value, and seriously delinquent loans and REO, et cetera. This is a process. We do believe 1.8% to 2.1% is going to be the long-term target around placement rate. And as that occurs, operational efficiencies, capital that is released from the business as our risk goes down are all going to contribute to normalization, but then a specialty business in its final state.

You had mentioned a UK review that led to some extra legal costs. Is that going to persist into the second half of the year, and is there any risk of any additional expense, or fines, or anything associated with that?

Just is a reminder, those claims relate to a 2003 -2004 set of policies that were sold. There is ongoing work, obviously, being done on it, but at this point, just in broad terms, we feel like we're a properly reserved overall for all litigation and regulatory issues that we have visibility to.

Is there going to be a sustained level of legal spending on that?

I can't speculate on that. It's an ongoing process.

But it's not over?

No, it's not over.

Thank you.

Seth Weiss, Bank of America Merrill Lynch.

Thanks for taking the follow-up question. I just want to follow on couple of questions on Solutions. Particularly in international, and I know that the legal expenses in the UK contributed to the higher combined ratio there. Maybe an update on where you think that combined ratio is heading, and in terms of how it gets there? Is it a runoff of certain business lines, or is it just improved experience in pricing?

There is some noise in the number this quarter and last quarter as well. We still think 98% is an achievable target. We continue to make improvements and investments in infrastructure. We had a lot of expense takeouts in the UK, associated with our acquisition of LSG. We feel like we're making progress, and that we can still get to that 98% combined ratio.

Great. And in terms of getting to that 98% combined ratio, what happens to the top line? Is there a run-off of business there, just in terms of trying to size what improvements there could actually be to the bottom line?

If you think about the investments we've been making, we have very strong growth in mobile and markets outside the US. We referenced the Claro growth and transaction a couple of quarters ago. We see very strong growth occurring in the UK. There is top line growth, and really a mix shift toward a mobile and service contract business outside of the US.

The other thing that's important to remember is just the variability of FX that also plays through. We feel good about the top line momentum. As Chris said, we feel good about the expense actions that we've taken in international that over time allows us to push that combined ratio down.

Okay, so on the cost currency basis, just [expected] the question the trend is [to spill] off, in terms of top line for international?

Yes, we are seeing obvious currency headwind. This is some unprecedented volatility in the last several years. But still feel good about the macro trends. Our long-term view around international in particular, mobile; we still believe these are attractive markets for us to be in, long-term.

Great, thank you.

Thanks everyone, for participating in today's call. We look forward to updating you on our progress throughout the year. Also as I mentioned, we're excited announce we will hold an investor day in early spring 2016 in New York, and we'll provide more details in the coming months. As always, you can reach out to our IR team with any follow-up questions. Thanks, everyone.

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