Welcome to Assurant's first quarter 2014 earnings conference call and webcast. At this time, all participants have been placed in a listen-only mode, and the floor will be open for your questions following management's prepared remarks. If you would like to ask a question at that time, please press *1 on your touchtone phone. If at any point your question has been answered, you may remove yourself from the queue by pressing the # key. We ask that you please pick up your handset to allow optimal sound quality. Lastly, if you should require operator assistance, please press *0. It is now my pleasure to turn the floor over to Francesca Luthi, Senior Vice President, Investor Relations. You may begin.
Thank you, Leo, and good morning, everyone. We look forward to discussing our first quarter 2014 results with you today. Joining me for Assurant's conference call are Rob Pollock, our President and Chief Executive Officer, Mike Peninger, our Chief Financial Officer, and Chris Pagano, our Chief Investment Officer and Treasurer. Yesterday afternoon, we issued a news release announcing our first quarter 2014 results. Both the release and corresponding financial supplement are available at assurant.com. We'll start today's call with brief remarks from Rob and Mike, with Chris joining 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 2013 Form 10-K.
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 on assurant.com. Now, I'll turn the call over to Rob.
Thanks, Francesca, and good morning, everyone. Our first quarter results were strong and consistent with the strategic objectives affirmed at our recent Investor Day. During the quarter, we accelerated actions to adapt our business and strengthen our competitive advantage to grow earnings long term. Let me update you on our key performance metrics for the quarter. Annualized operating return on equity, excluding AOCI, was 11.2%. Book value per diluted share, excluding AOCI, increased 2.6% since year-end. Revenue, defined as net earned premiums and fees, grew by 14.7% year-over-year as each of our business segments expanded in areas targeted for long-term profitable growth. Our balance sheet remains strong. We ended the quarter with approximately $540 million of capital at the holding company, including our $250 million risk buffer.
This gives us flexibility to make investments in our businesses, pursue select acquisitions to support our strategy, and return capital to shareholders. I'll now provide updates for each of our business segments. Assurant Solutions' first quarter results were better than anticipated. The significant year-over-year increase in net operating income reflects strong results in mobile and expense savings from prior restructuring actions. Our integrated mobile solutions are gaining traction with clients and consumers. Since year-end, we expanded the number of covered devices we support in the U.S. by more than 20% and helped our clients implement successful marketing programs. In Europe, the integration of Lifestyle Services Group, or LSG, is progressing on schedule. We are generating the expense savings we anticipated while at the same time building our mobile platform.
Last month, LSG renewed a five-year agreement with their largest client, further cementing their leadership position in the U.K. mobile protection market. In Latin America, our investment in Iké is providing new opportunities to grow our business. As an example, we've had early successes in Mexico selling our credit products to an Iké client. We're excited about the opportunities as we expand the range of products and services we provide across the region. Overall, while quarterly results may vary, we expect Solutions to deliver significant full-year earnings improvement compared to 2013. Growth from mobile, along with continued expense control, will be the key drivers. I'll now move to Assurant Specialty Property, where we continue to take actions to generate long-term profitable growth as placement rates normalize in our lender-placed insurance business.
In particular, we're focusing resources on multifamily housing and opportunities within the mortgage value chain, where we can leverage our strong service capabilities and client relationships. In our multifamily housing business, we now serve more than 1 million policyholders, up 15% from last year. As many consumers continue to choose renting over homeownership, we're broadening our national footprint with both existing and new property managers. In property preservation, we integrated Field Asset Services into our existing business. We expect this acquisition to deliver about $80 million of fee income this year as we expand through existing clients and new prospects. Last week, we announced the acquisition of StreetLinks, a leading provider of appraisal management and valuation services. StreetLinks' robust technology platform and large vendor network are recognized by mortgage companies for their value-added services.
We are confident that the addition of our collateral risk expertise and extensive client relationships will allow us to gain share as this market consolidates. StreetLinks and Field Asset Services further diversify our revenue stream into fee income businesses that are less capital intensive than lender-placed insurance. They also position us more broadly within the mortgage value chain and will help sustain attractive returns at Specialty Property. Let's now turn to Assurant Health. The Affordable Care Act's open enrollment period that ended March 31st prompted significant sales activity in the quarter. First quarter sales totaled $410 million, exceeding the fourth quarter's record by $90 million. We believe this performance demonstrates that our suite of products, extensive provider network, and broad distribution channels remain key differentiators for consumers. The demographic mix of the business sold, including the age distribution, was in line with our pricing assumptions.
As expected, lapses increased as consumers used open enrollment to review their health plan choices. With open enrollment now closed, sales activity will moderate during the next two quarters, driven by life events such as marriage or the loss of employer coverage. We also expect persistency to improve. In advance of the next enrollment period that begins in November, we're considering participation on a select number of public exchanges and will make final decisions during the next few months. We've adapted our business to the changing market. As we grow revenues and maintain strict expense discipline, we continue to believe more attractive returns will start to emerge next year. At Assurant Employee Benefits, we continue to focus on our voluntary business. Sales and net earned premiums in voluntary grew by 40% and 11%, respectively, compared to the first quarter of last year.
This growth more than offset the declines in traditional employer-paid group insurance. Our strategic focus on key brokers continues to drive an increasing percentage of our sales. In addition, Employee Benefits is preparing to participate on several private exchanges. While we do not expect these exchanges to be a material source of near-term sales, they will further expand our distribution and provide important insights as the benefits landscape evolves. Overall, we're pleased with the progress on all fronts during the quarter. Now I'll turn to Mike for more detailed comments on our first quarter results and outlook for the full year.
Thanks, Rob. I'll begin with Solutions. Net operating income for the quarter totaled $49.5 million, up $14.6 million from the same period last year. Results benefited from continued growth in covered mobile devices, prior expense reduction efforts, and about $1.4 million of additional after-tax income from real estate joint venture partnerships. In addition, short-term client marketing programs implemented in the quarter accounted for about $4 million of the increase. These programs demonstrate our ability to partner with clients to provide innovative offerings for consumers and generate new profit streams outside of traditional mobile insurance. Mobile loss experience was very favorable this quarter and benefited from underwriting changes we implemented with a client late last year. Experience on our mobile inventory support programs continued to be in line with our expectations, but it is still early.
As new mobile devices are introduced in the marketplace, we anticipate greater volumes of upgrades and trade-ins, which may cause variability in our results. Solutions net earned premiums increased by 9% and fees by 79% compared with last year due to the market success of our mobile protection programs and contributions from LSG. We also saw modest growth in Latin America despite foreign exchange volatility. Our international combined ratio for the quarter was 101.7%, a 60 basis point improvement from the first quarter of last year. Excluding disclosed items, the combined ratio improved 160 basis points versus the fourth quarter as we start to realize benefits from the LSG acquisition and the European restructuring actions we announced last December. Solutions is on track to deliver significant earnings growth in 2014, but we also believe the dynamics of the mobile market will create greater variability in our quarterly results.
We expect carriers to introduce innovative programs more frequently and accelerate the pace of marketing efforts to attract new subscribers. New phone introductions may also cause fluctuations in loss experience above and beyond the normal seasonal variability. We expect to deliver $50 million of net operating income in the fourth quarter as we realize our targeted expense savings from the European restructuring and expand our mobile franchise. Looking beyond 2014, we continue to believe that an average annual earnings growth rate for Assurant Solutions of 10% is reasonable, as contributions from targeted growth areas and acquisitions offset declines in non-growth areas during the next three years. Assurant Specialty Property continues to generate solid results, with net operating income up slightly year-over-year. After adjusting for disclosed items, however, first quarter income declined by $15 million versus 2013, as growth in lender-placed and other targeted areas was offset by higher loss ratios.
The loss ratio increased by 700 basis points year-over-year, despite lower reportable catastrophe losses. This was driven by the harsh winter weather in a large part of the country, as well as lower premium rates from the implementation of our new lender-placed product. Excluding disclosed items, our first quarter expense ratio increased by 80 basis points versus 2013. This was due to growth in fee-based businesses, which have higher expense ratios, as well as additional service costs in our lender-placed insurance business. Net earned premiums and fees increased by nearly 20% versus 2013, driven by continued growth in lender-placed insurance and multifamily housing. Lender-placed premiums benefited from the previously disclosed discontinuation of a quota share arrangement and loan portfolio additions in 2013. Consistent with prior years, gross written premiums decreased in the first quarter.
As a reminder, seasonality and timing of loan portfolio transfers can cause quarterly fluctuations, particularly when loans are flat canceled. Gross earned premiums, which grew by 4%, are a more meaningful measure of performance. Looking at our lender-placed growth drivers, we onboarded 300,000 new loans in the quarter with placement at renewal, bringing our total loans tracked to 35 million. The placement rate at the end of the quarter declined on both a sequential and year-over-year basis to 2.74%. We noted on our fourth quarter earnings call that we were in discussions with a client regarding a possible transfer of loans to another carrier. Those discussions continue, and we'll provide more information when it becomes available. For 2014, we now expect Assurant Specialty Property revenues to be approximately level with 2013. Continued growth in targeted areas, including fee income from our StreetLinks acquisition, will offset declines in lender-placed insurance.
At Assurant Health, the first quarter net operating loss reflected the continued impact of healthcare reform. We increased our estimate of compensation expenses that are nondeductible under the Affordable Care Act, resulting in a $5.7 million addition to our income tax expense in the quarter. Pre-tax profits, which we believe are a better gauge of health's underlying performance, totaled $7.6 million in the quarter, compared with $14.5 million last year. The decline was due to higher loss experience and higher first-year commission expenses. Starting this year, insurance companies are required to pay a nondeductible annual health insurer fee to fund the public exchanges. The fee increased our reported expenses by $4.7 million in the quarter. Excluding commissions and the insurer fee, expenses continued to decline, illustrating health's ongoing discipline. Our loss ratio was 73.5%, level with the fourth quarter, but up 90 basis points from the first quarter of 2013.
The loss ratio reflects very early claim submissions under ACA policies, partially offset by an estimated contribution from the risk mitigation programs that went into effect this year. Based on our current assumptions, we expect program benefits to increase during the year, but our estimates may change materially as experience develops. We are encouraged by continued sales momentum and strong revenue growth at Health. While higher commissions on these new sales and the revised tax estimate will lead to a modest operating loss in 2014, we continue to expect improved profitability next year as we benefit from increased scale and ongoing expense discipline. At Employee Benefits, net operating income increased from $6.1 million in the first quarter of 2013 to $13.9 million, driven by favorable dental and life experience. Disability results were in line with expectations.
They benefited from a 50 basis point increase in the discount rate on new long-term disability claim reserves, which added nearly $1 million to operating income. Results also included an additional $1.7 million of after-tax income from real estate partnerships. Employee Benefits, like Health, is required to contribute toward the nondeductible ACA insurer fee. This fee added $1.4 million to first quarter expenses. Employee Benefits remains focused on reducing expenses. First quarter results include a small severance charge to streamline operations. We expect additional expense management actions throughout the year as we work to reduce our expense ratio for the long term. Turning to corporate matters, we retired our 2014 notes in February. This reduced our debt to capital ratio to about 21% and will reduce after-tax interest expense for the full year by approximately $12 million versus 2013.
We said at Investor Day, we expect to continue investing in profitable growth opportunities and return capital to shareholders. In the first quarter, buybacks and common stock dividends totaled $39 million. This level of activity reflected the seasonality of our cash flows and the anticipated acquisition of StreetLinks, which closed in April. In the second quarter through April 18th, we bought an additional $12 million worth of stock and remain committed to returning excess capital to shareholders over time. For the full year, we expect net operating company dividends to be roughly equal to segment earnings. As in prior years, dividends will be weighted toward the second half of the year. The first quarter corporate segment operating loss was $21 million versus $13 million last year. Expenses accounted for about a million dollars of the change.
The rest was driven by the effective tax rate, which can vary substantially in the corporate segment from quarter to quarter. For the full year, we expect the corporate loss to be roughly $70 million as we benefit from lower benefit plan costs and other operating efficiencies. We're pleased with our start to 2014 and look forward to updating you as the year progresses. With that, we'll ask the operator to open the call for questions.
The floor is now open for questions. At this time, if you have a question or comment, please press star one on your touch-tone phone. If at any point your question is answered, you may remove yourself from the queue by pressing the pound key. Again, we do ask that while you pose your question, that you pick up your handset to provide optimal sound quality. Our first question is coming from Mark Finkelstein, Evercore.
Good morning.
Good morning.
Mark.
Morning. Firstly, just back to Solutions. Just the $49-plus million of earnings this quarter, I think you framed it out as $1.4 million related to real estate JVs, an additional $4 million related to some of these programs. You suggested mobile loss experience was very favorable. How favorable was this relative to your expectations in trying to think about ongoing earnings in that segment?
Yeah. Go ahead, Rob.
Well, I was going to say, we have directed a lot of resources toward the mobile business and talked about how there are lots of different places we make money within the business. One of them is certainly on the hand protection insurance, but I'd also say there are other sources of profit there. I would not focus in that the handheld insurance is the majority of where we make the earnings necessarily, Mark. It's good, and we're pleased with that loss experience, which will vary, but the other sources are big contributors as well. Mike?
Yeah, I think that we just generally see seasonal fluctuations in the mobile loss experience, Mark, and it can be a variety of things. For example, new phones, new handsets introduced into the marketplace, sometimes in their early durations have worse experience than as the manufacturing process matures and things like that. The things just we've seen them bounce around a bit, and we just wanted to note that they were really favorable in the first quarter.
Above and beyond the two items you specifically talked about, there was favorable experience in the quarter that we should not kind of run rate. Is that a fair statement?
Yeah, that's a fair statement.
Okay. I guess just thinking about Assurant Solutions earnings, no change to, I mean, subtle change to the language, but still kept the $50 million bogey at 2014. Given the strength in this quarter, is there any why not raise that a little?
I think we're executing on our strategy within mobile. We've pointed out that the results were more favorable than we expected. We'd certainly, before we were to make a change, we'd want to see several quarters of that, Mark.
Yeah, I think there's also we've got FX volatility that we sort of flagged that may continue, and we've also got runoff of some of the existing Assurant Solutions businesses. For example, some terminated service contract clients, that's going to go down. Credit insurance, we've talked about before, domestic credit being sort of a runoff business. Then you got going the other way, you've got some growing impact of expense saves from the actions that we've taken there. You got a lot of things going on. We put them all together and say $50 million in the fourth quarter still seems like a reasonable place.
I think we've also pointed out we think we can grow earnings at a 10% clip for the next several years.
Just thinking about subsidiary dividends being back-end weighted, you're actually a net contributor to the subs this quarter. How do we think about capital generation vis-a-vis M&A versus buybacks for the remainder of the year, and how does the pipeline on M&A look?
I think our first quarter pattern is consistent with where we always are. We don't take a lot of dividends out of the business early in the year. I think we've pointed out we think we can get the segment earnings out as dividends over the course of the year, and we'll do that. I think that we're also in the process of we've got some organic growth. We want to make sure as we meet with the rating agencies, we've got things properly funded to maintain our ratings with AM Best. I'll let Chris just talk a little bit about the M&A pipeline and
Some other things.
Maybe just one other comment around segment operating earnings versus dividends. Round numbers, segment operating earnings this quarter were $150 million. We took about $25 million worth of dividends out of the operating companies. Did actually infuse back into about $35 million, roughly, $25 million of which went into Health to support the organic growth that they're seeing there. You can think about still having some operating earnings at the segments that are available for dividends later in the year. As Rob pointed out, and again, if you think about what we did in the way of deploying capital this quarter, the cash flow needs of the holding company were an influence, but again, look for that to normalize during the rest of the year.
The other question is, segment dividends are a function of operating earnings, which is also a function of cat season, so that will also play into our decision-making around deployment. On the M&A side, I think broadly about deploying capital, and that includes organic growth via M&A, and then of course, returning capital to shareholders, which we still think is share repurchase is the best use of any capital we want to go back. When I think about the last several years, in particular 2010 to 2012, share repurchase was really the only alternative. Last year, we saw profitable growth opportunities that provided a comparable risk-return profile to repurchase. You saw that in our activity. We did also return significant capital to shareholders and deployed $350 million in M&A.
I think this year will look on a mixed basis, more like last year than certainly 2010 to 2012. The order of magnitude of the deployment will be a function of earnings and our ability to get that earnings up to the holding company in the form of dividends.
Just one last quick one. Should we be thinking about buybacks as more back-end weighted than historically?
I think the deployment of capital will be consistent with the generation of operating company dividends. To the extent that that is back-end weighted, you could make that link. However, our goal is to be in the market consistently, if possible, also through cat season. We're going to be conservative about how we do that, and also a function of what the go-forward M&A pipeline looks like. Matching up with the ins and outs, and then also the mix related to what we see in the way of both M&A growth and organic growth.
Okay. Thank you.
Our next question's coming from Chris Giovanni of Goldman Sachs.
Morning, Chris.
Morning, Chris.
Morning. A few on property and then one on M&A as well. I guess first on property, the change in the top-line outlook from sort of a slight decrease to flat, is that purely driven by the StreetLinks acquisition, or is there some change as well in the underlying kind of in-force business there?
No, you've picked up on it. It's the StreetLinks acquisition.
Okay.
Other areas we've targeted for growth.
Specific to New York, last year's settlement requires you to price for kind of that 62% loss ratio and then refile, I guess, every three years unless a specific year's loss ratio falls below 40%. Given the weather we saw in the region this quarter, curious if that really eliminates the risk of needing to refile in 2015 and kind of keeps you on that three-year path.
Well, I haven't looked at our experience by state. I'm sure that some of the weather-related claims relate to the Northeast. We have a filing in with the department, and we're in regular dialogues with them as we are with many other insurance departments.
Lastly, just on M&A. You've really been focused, as you've talked about, in two areas, the mobile space and then within the mortgage value chain. Wanted to see if you could give some perspective around where you maybe underappreciated the opportunities or some of the synergies you've seen in those two areas. Also maybe on the other side, maybe where things are moving a bit slower than you would've liked.
On the acquisition side, I think we're very pleased with the progress we've made on all the different deals. LSG was kind of a transformational deal for Europe, and it also really fit into playing in the mobile space, which we liked a lot. We got both a chance to resize our platform in Europe and get expense saves as well as invest in mobile, which we like a lot. Mike, you want to comment a little on some of the things in the mortgage value chain?
Well, we like the opportunities. Obviously, we really like Field Asset Services. We've essentially completed the integration of that. Early indications are right on track there. StreetLinks, we're very excited about. We got a strong platform there. It went through our M&A process, which Chris has talked about before. We feel like we paid a fair price for it, where we think we got-- in all of our acquisitions, another important component is the
Quality of the management teams we're seeing. We've really been happy with that. We feel really good about the pipeline, and I think that we still see opportunities out there. Chris, I don't know if you want to amplify.
No, I guess the only other point I'd make is the key and the importance of integration and execution and the focus by the individual segments and the teams within those segments around maximizing the synergies that were valued in the deal. Each of these deals in our process has a series of assumptions that the segments own, and obviously their goal is to outperform or do better than the assumptions that we made, which is what's going to allow us to deliver value on the M&A activity.
Right.
Then last, the Iké acquisition, we're pleased with that. That's a little bit different acquisition because we've taken a position in the company, and it will report through on an equity method there, but we're quite excited about opportunities we're seeing there to expand across the region.
Okay, great. If I could just sneak one last one in on health. You're obviously showing a ton of sales momentum and scale, certainly important there in terms of trying to reduce the tax burden. Wondering, if you could give us some thoughts on how we should be thinking about how long this type of quarterly volatility could last and if there's anything you guys could potentially look to do to help smooth some of the bottom-line results.
Sure. Again, I think a good place to start on the health side is when the Affordable Care Act was passed, and we evaluated what is the best course of action for shareholders. We embarked on a strategy built on those pillars of affordability and choice. We're quite pleased with the results that we're delivering in that arena, combined with the great reduction in expenses we've been able to achieve as we've taken money out of our expense structure to be more competitive. The taxes are a bit of a complicated issue. As Mike mentioned, we're very focused on the pre-tax side of things. We know that if we can continue to grow pre-tax income, the tax volatility will reduce.
Yeah, I think that's right. I do think, though, Chris, the other reality is that the impact of the risk mitigation programs is very new and we and all companies in the business are working with a world now that's quite a bit different than there was in the past, and we're making estimates and in some cases based on very limited experience, and that'll play out over the course of the year. You can't sort of avoid that. I really think, as Rob said, when we look at this, we've got the focus on the pre-tax results. We've got the sales momentum. We think that our agents distribution channel has resonated. Consumers still want their agents. We still like the long-term potential of the market.
This sort of transition period is going to create a certain amount of volatility, I think, almost regardless what we do.
It's why when we set up the strategy, we said 18 to 24 months after full implementation of the ACA, we're going to have a good line of sight on things, we're getting closer to that.
Thank you. Appreciate the thoughts.
Our next question comes from John Nadel of Sterne Agee.
Morning, John.
Hey, John.
Hey, good morning, everybody. A couple of questions for you in Solutions, then maybe one if we could sort of reconcile the holding company's sort of available capital. If I look at Solutions, if I look at the balance sheet, your equity in Solutions increased pretty significantly versus year-end. I think it's up about $170 million. That's clearly more than the $49 or $50 million of operating income in the quarter. I just was wondering if you could help us understand what drove that. Also, if you think about your $50 million of earnings targeted for 4Q, that was anticipated to get you sort of around that 14% ROE. If equity doesn't come out of this business, it looks more like 12%. Can you sort of help us there?
Yeah, Mike, you want to take the?
Yeah. Well, there's actually lots of adjustments in Solutions. You got the earnings you pointed out, too. We also paid the contingent payment to LSG when that was completed, then this takes a certain amount of time in our process. We have several shared entities, and we get the allocations sort of to each of the businesses calibrated. That just introduces a certain amount of noise, and you see some of that corporate sort of true-up action that went on and added to the equity this quarter. Yeah.
When you look at the $50 million in the fourth quarter, I think about that as if you look at our acquisitions, John, we have evaluated the acquisitions on a cash basis. We feel very good about how they will report through. We've also pointed out that on GAAP, because of the amortization of intangibles, we're not going to see the GAAP profits right away. That's what's causing a bit of that differential between the GAAP ROE and how we've evaluated the deal for the acquisition, which has been on a cash basis.
Okay. I guess, I don't want to put words in your mouth, but should we expect that that $50 million of earnings by 4Q is not going to quite get us to the 14% ROE then?
Well, yeah, we set up earnings as the metric for creation of long-term value. Okay?
Yep.
I think if you go to what, and I'll let Chris comment, but I think he tried to explain how the deals are evaluated when we look at them at Investor Day. Chris?
Yeah. No, I understood that. I get the cash IRR versus GAAP ROE emergence. I'm just trying to understand if we should expect the equity in this segment to come back down a little bit.
Well, yeah. Think about the amortization of those intangibles, and as they amortize, the equity will come down.
Okay.
Okay?
Okay.
We certainly, as we've always done, John, we are always looking to fine-tune that legal entity structure. If there are opportunities, we're certainly not saying we'll never be able to get any equity out or anything. We keep working that issue.
Okay. If I look at looking at StreetLinks, Novation reports a segment or has historically reported a segment that looks like it's entirely the StreetLinks business, and it produced about $7 million of pre-tax income in 2013 and about $9 million of EBITDA. Their revenues did decline 20% in 2013 year-over-year. I'm just wondering, as you price this deal and you look at the next few years, what kind of trends are you expecting from that business? Can we think about that $7 million of pre-tax income as comparable to what you're expecting the business to contribute to as part of Assurant?
Sure. Chris, you want to comment?
Sure. Let me just make a couple comments. I think our view and the way we valued the deal was that the market was going to trend lower in 2014, but then bottom. I think the investment thesis is not about a growth in market, but growth in market share, where we expand our product offerings across the value chain.
We also feel as like we can leverage that platform and some of the other platforms and generate operating efficiency. Really market share gain combined with improving operating margins is really where we think that this deal is going to add value.
Okay. Is that $7 million, is there any reason why your GAAP financials would treat any of their numbers any differently than they did?
Well, you'll have intangibles on this one, too, John, that will start to amortize.
Okay. All right. That's helpful. Then if I could just, one more on Solutions. You've got this big unearned premium on the balance sheet. My sense is that the pace at which you would earn that premium is probably accelerating given most of the growth in that unearned premium balance has probably been coming from mobile. Can you give us a sense for maybe how the pace of earning that premium may be shifting?
Yep. If you think about the components of the unearned premium, John, most of it actually comes from extended service contracts and vehicle service contracts.
Okay.
Extended service contracts typically will start earning after the manufacturer's warranty expires, which can be anywhere from one to two years. On vehicle service contracts, particularly new ones, that's a little more extended and can be in the three-year range.
Yep.
That mix of business will vary.
Okay.
Mobile, really not a lot of UPR coming from mobile because we tend to earn that monthly.
Okay, understood. Thank you. Then just back to the holding company capital. I think if my numbers are right, you ended 2013 with about $440 million of capital excluding the pre-funded debt maturity and excluding your buffer.
Yep.
That number looks like $290 at 1Q. $150 million reduction. I think Chris mentioned $125 million of dividends up during the quarter. Can you just sort of reconcile where all the cash went? I know the buybacks, I know the dividend. What else was it spent on?
Sorry, John. Let me reconcile. We're trying to solve for $150 million is what we're doing.
Okay.
If I misspoke earlier, it was $25 million.
Got it. Okay. $25 million of dividends?
Right.
Okay.
Maybe that's the miscommunication here. This is again, in the first quarter, and this has historically been the pattern, is a typically heavy cash outflow quarter for the operating company. This quarter was no exception. We paid an interest payment, which included the last payment of our Feb 14s, which is about $40 million. We had corporate cash outlays of about $60 million. We then deployed in dividends and share repurchase roughly $40 million. In general, the $10 million of net infusions into the operating companies was a $25 million coming up from operating companies and then $35 million going back down, $25 of which was into the health segment to fund what has been a significant growth in the premiums.
Chris, just real quick, the $60 million of other corporate outlays, as you mentioned, is that StreetLinks or do we think about StreetLinks as coming out of the $290 in 2Q?
No. The StreetLinks, again, back to some of my commentary. We were aware that the StreetLinks acquisition was pending. It did move out into Q2, so it's not part of the calculation.
Got it.
The $60 of corporate is really around some compensation expenses, some tax cash outflows, which is the difference between cash and accrual that tends to come back over the course of the year.
Okay.
Again, not something that I would suggest run rating by any means because again, this is just the seasonality of the operating company cash flow needs.
Got it. Thanks very much. Appreciate it.
Our next question comes from Seth Weiss of Bank of America.
Good morning, Seth.
Good morning. Thank you. Rob, you are talking about the complexity of the health taxes. I think the fixed tax, the ongoing fixed tax liability from ACA, has gone up from what your expectations were going into the year, more than just that $5.7 million increase in the liability that hit this quarter. Can you just help us, for modeling purposes, think about what that fixed tax liability is in health that is impacting the overall tax rate?
Yeah, it is about $20 million, Seth, plus the six or so true-up that I mentioned in the first quarter. $25, $26 million for the year is sort of that nut that we are talking about.
Okay, that $20 million seems to have gone up from last year, which I think was about $15 million. Just in terms of thinking about visibility of that, I know it is a difficult question, but this seems to be the number one thing that is impacting the after-tax returns. What is your confidence on the long term 15%-20% ROE target in health, given that uncertainty on-
Yep
on tax? Do you think that this tax burden sort of flattens out at this point?
We do. We think that the pre-tax is the better measure. We think that we're going to see an improvement in earnings next year on a pre-tax basis, that we'll build toward those attractive returns we've talked about.
I think each year you learn a little bit more. The methodology for estimating gets better, we think we've got a reasonable estimate out there now, Seth. Things can change as we do M&A or something like that. I think we're getting now able to calibrate the impact of this.
Okay, great. Thanks. If I could follow up one on Solutions.
Sure. In terms of the, maybe a little bit more color on the fee income and the client marketing programs that caused that spike in that $4 million number that you highlighted in your prepared remarks. Just to clarify that $4 million, is that above and beyond what you would normally expect, or is that a total contribution? Maybe how do we think about these marketing programs going forward, which I assume are lumpy, but I would think would be somewhat ongoing in nature?
Yep. Well, I think you start with that mobile market, very dynamic, lots going on. You can see the competition for subscribers that's going on amongst different carriers. You've got phone producers producing new phones. I think that the key on all that, Seth, is it's just creating a very dynamic marketplace. We don't really have a tremendous amount of experience, I think on exactly how these programs are going to work out, and we just want all investors to be aware that these aren't going to be smooth. They're going to come, and they'll be a little bit lumpy, and we'll learn more as we move forward and see new devices introduced and see additional programs offered to consumers. What we feel good about is we have been able to support our partners as these programs have rolled out, and they've been successful.
Okay, great. Thanks a lot.
Our next question comes from Sean Dargan of Macquarie.
Morning, Sean.
Good morning. Just going back to StreetLinks. Maybe would it make sense to frame it in terms of EBITDA, what that business earned last year?
Yeah, I'm guessing it made close to $10 million, $9.5 million last year.
Okay, just looking at.
Oh, sorry, I was just going to add. Important what Mike pointed out, or Chris, excuse me, is that number's been coming down over time as this market has been bottoming out.
I was going to say, the MBA mortgage origination forecast is down 37% year-over-year this year. You would have to make up significant market share to, I guess, earn that same level of EBITDA this year, no?
Correct, I think that's one Remember, we're taking things we think we're quite good at, we think we can leverage. We think there's going to be consolidation in the industry, we think if you think about who the clients are for these services, they're people we're dealing with on a regular basis for other things. We think we're going to be able to leverage that successfully.
Okay. Given the guidance of flat revenues and Specialty Property, that doesn't assume the loss of a portfolio. Have you sized what that portfolio would mean in terms of earned premiums?
Well, we look at a lot of factors in providing our outlook, Sean, we've got all the normal drivers, we make assumptions for portfolio activity, these discussions are still ongoing, we really aren't in a position to size that now. As more information becomes available, we'll certainly provide it.
Yeah, I would say again, looking at placement rate, that's going to be the biggest driver of our revenues, and if you go back and look at our investor day, I think Gene tried to lay out what the path would look like for the normalization of those placement rates.
Okay. Just one on Solutions. I guess, is the bull case around mobile that the carriers are not subsidizing phones to the degree which they traditionally have, and therefore, subscribers would hold onto their handsets for a longer period of time and be more inclined to purchase the insurance?
To me, the bull case is more connected everybody, right? More dependence on devices for that whole interconnected world. I think that there's just going to be a lot of dynamism in this market, and we feel very good that we can bring more solutions than just insurance to our partners.
Thank you.
Our next question comes from Steven Schwartz of Raymond James.
Hey, good morning, everybody.
Hey, Steven.
Hey. Just on StreetLinks and following up on John's question. StreetLinks had total assets of about $13 million at year-end. The way to think about this is that the difference between the price you're paying, $60 and $13, that's going to be amortized over time into earnings?
Not all of it, because you'll have a portion that's intangibles, which get amortized over time, and then a portion is goodwill, which doesn't get amortized.
Okay. All right, you're still going to have goodwill. Okay. I don't know if Adam was there or not, I don't remember if you said so. Well, two questions, I guess. One is, lapsation was obviously very, very high associated with the very, very high sales and Obamacare and what have you. Membership increased. It actually didn't increase a whole bunch. How should we think about membership increasing in the first quarter or when you report next time?
Yep.
Well, there's several things going on. Lapse activity was up in the first quarter. Now that we're past open enrollment, I'd make a couple of points. One is, some of our sales haven't sort of been processed through and added into our in-force totals, we'd expect to see some of that coming through in the second quarter. Could also have some amount of lapse activity that would go the other way, too. That sales growth is going through there. Now that open enrollment is out, the activity's really going to slow down. We're going to get sales. We expect to get sales, they'll be driven around life events. Lapse activity would sort of stabilize. I think you should see less sort of volatility going forward.
Yeah, I think that what's changed is the paradigm of when people buy. Used to be kind of uniform over the course of the year. It's now going to be heavily weighted toward the open enrollment periods.
Sure.
When we think about when people lapse, remember, our number one source of lapse is people going back to work. Okay?
Okay.
That was in the old model.
Yeah.
In the new model, it's been changed to being around when they buy, during the open enrollment periods.
Yeah. I had a couple more, if I could. I understand that the risk mitigation adjustment, the assumptions benefited your earnings in the quarter, which would seem to me to imply that you think that your book of business is somewhat more risky than the market. Why would that be?
Well, I think a little different. Remember.
Okay
The basis of a lot of the risk mitigation is everyone pays in to deal with the people who are going to be buying individual health insurance.
Right.
Not just the individual health players, but everybody is making a contribution there. Since we're only in the individual health market, we're going to be a recipient of some of those dollars through these programs. Okay?
Okay.
I think the pool of all of individual health is, it's recognized because of the rules that have been put in place, going to be different and a little riskier.
Yeah.
No underwriting, add benefits, all these things. They've asked everybody to make a contribution to that, all the health insurers.
It's not that you're riskier than other individual health insurers, it's that individual health insurance is going to be riskier than group.
Correct.
Okay.
I also think, you talk about the three Rs, the risk mitigation. One of them doesn't apply to us, the risk corridors, because we haven't been selling on the exchanges. When you think about the reinsurance program, you're estimating, that has nothing to do with the riskiness of your block. That's really just estimating how many of your claims are likely to reach the reinsurance threshold. That's the larger impact for us compared to the risk adjuster that you're sort of talking about, Steven. For both of these programs, they're new, and there's a lot of assumptions and experiences really early, as I said in my prepared remarks. We're just going to see this play out, and we'll be able to give you a much better feel for this stuff as the year goes on.
Then just one more on health. Clearly, sales will decline now that the enrollment period is over. Life events will come into play, obviously, but there's also the potential to continue to sell the Assurant Health Access plans that you have and that you've talked about for years in preparation for the ACA.
Right.
What's the outlook there?
Well, again, we believe that there is a great need for the other type of products around affordability. We're optimistic because we saw them pick up a little in the first quarter, and we've sold a lot of supplemental products along with our major medical. We're going to see that play out just like Mike said on the risk mitigation. Hey, let's get a couple quarters, and we'll be able to provide some actual information as opposed to what we've assumed.
All right, great. Thanks, guys.
Our next and final question comes from Mark Hughes of SunTrust.
Hey, Mark.
Hey, good morning. The impact on the loss ratio in Specialty Property, you said weather, also the change in the plan design, the lower premium. Did you make a stab at how much was weather? I know you gave us the catastrophe number.
Yeah. Weather was definitely the primary driver, Mark. A lot of the winter frozen pipes, those kind of things that went along with all the really cold weather across a lot of the country.
Okay, good. 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 any additional questions.
Thank you. This does conclude today's teleconference. Please disconnect your lines at this time.