Welcome to Assurant's second quarter 2013 earnings conference call and webcast. At this time, all participants have been placed in a listen-only mode, and the floor will be open for your questions following management's prepared remarks. If you would like to ask a question at that time, please press star one on your touch-tone phone. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. We ask that you please pick up your handset to allow optimal sound quality. Lastly, if you should require operator assistance, please press star zero. It is now my pleasure to turn the floor over to Francesca Luthi, senior vice president of investor relations. You may begin.
Thank you, Zach, and good morning, everyone. We look forward to discussing our second quarter 2013 results with you today. Joining me for Assurant's conference call are Rob Pollock, our President and Chief Executive Officer, Mike Peninger, our Chief Financial Officer, and Chris Pagano, our Chief Investment Officer and Treasurer. Yesterday afternoon, we issued a news release announcing our second quarter 2013 results. Both the news 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 participating on the Q&A. Some of the statements we make on today's call may be forward-looking, and actual results may differ materially from those projected in these statements.
Additional information on factors that could cause actual results to differ materially from those projected are provided in yesterday's news release, as well as in our SEC reports, including our 2012 Form 10-K and our first quarter 2013 10-Q. Today's call also will contain non-GAAP financial measures, which we believe are meaningful in evaluating the company's performance. For more details on these measures, the most comparable GAAP measures, and a reconciliation of the two, please refer to the news release and financial supplement posted on assurant.com. I'll turn the call over to Rob.
Thanks, Francesca, and good morning, everyone. Second quarter results were in line with our expectations. While earnings were lower than last year, we are pleased with our progress in expanding each of the areas we are targeting for profitable growth. Our unique capabilities are helping us reach a broad group of consumers in the mobile, renters, health, and voluntary benefits insurance markets. At the same time, our core businesses continue to generate free cash flow, allowing us to return capital to shareholders. I'll start by summarizing our results against the three important financial metrics we use to track our progress. Annualized operating return on equity, excluding AOCI, was 10.5% year to date. Book value per diluted share, excluding AOCI, increased by 5.2% since year end.
Revenue, defined as net earned premiums and fees, increased by 5.8% compared to the first half of 2012, driven by strong growth at Assurant Specialty Property and Assurant Solutions. We're also encouraged by the sequential increase in premiums at Assurant Health and Assurant Employee Benefits. In the quarter, we repurchased $174 million of our stock, and we increased our quarterly dividend by 19%. The strength of our balance sheet provides great flexibility. We continue to look for opportunities to invest in our businesses to support our long-term strategic objectives. At the same time, returning capital to shareholders remains a key priority. We plan to repurchase shares during the current quarter, subject to a number of factors, including the level of storm activity. I'll offer updates on each of our segments. Assurant Solutions continues to drive toward its goal of a 14% ROE in 2014.
We're focused on tightly managing expenses and growing our business profitably in targeted areas through new and existing clients. Specifically, we're scaling our mobile business, expanding our Latin American operations, and improving results in our U.K. business. We are building momentum in our mobile business. During the quarter, we expanded our footprint. Earlier this week, we announced that Assurant Solutions was selected as T-Mobile's partner for their new JUMP! program, including premium handset protection. Assurant Solutions will serve as the risk manager and customer service administrator of the program, the first of its kind to allow consumers to enjoy frequent equipment upgrades without penalty. The new program will be available to 26 million T-Mobile branded customers in the U.S. While Assurant Solutions will be the direct writer of the business, T-Mobile is likely to retain the underwriting risk.
We anticipate the JUMP! program's contribution to net operating income this year will be modest due to the upfront investments necessary to service the business. It will grow in 2014, particularly in the second half of the year, as the number of subscribers enrolled in the program ramps up. During the quarter, we began offering mobile protection to eligible prepaid customers of Boost Mobile and Virgin Mobile, brands both owned by Sprint. As part of the program, we converted existing mobile protection customers to our platform at the end of June. We expect these wins to more than offset the mobile business we lost last year over the next few quarters. The ramp up and ultimate size of these new programs will depend on the appeal of our products in the marketplace.
We're pleased to report the renewal of our partnership with U.S. Cellular for an additional four years. Their constant focus on product innovation and the consumer experience has made U.S. Cellular a valued client and a great partner to Assurant Solutions for many years. We expect to generate attractive returns in mobile as we continue to develop value-added solutions for our partners and their customers in this fast-changing market. Serving the growing middle class in Latin America remains a priority for Assurant, and we are finding many ways to do so. As an example, we recently partnered with Nissan to provide service contracts to their customers in Mexico. We believe we're well-positioned to support the growing auto warranty market in Latin America. In Europe, we completed additional restructuring actions last month to better ensure U.K. profitability in the third quarter.
We believe that our streamlined operations and focus on extended service contracts, including mobile, will allow us to improve returns in the region longer term. At Assurant Specialty Property, we posted strong revenue growth across all of our key product offerings. In our multifamily housing business, we now serve nearly 900,000 policyholders nationwide. This represents a 28% increase since the second quarter of last year. As more consumers choose renting over homeownership, our relationships with leading property managers and other distribution partners will help us capitalize on this growing market. In our lender-placed insurance business, our alignment with market leaders continues to pay off. We now track nearly 34 million loans nationwide and expect to add another 1 million loans in the third quarter. In order to support this volume, we are leasing a new facility in Dayton, Ohio.
This will bring more jobs to the area and build additional capacity so we can continue to provide high-quality service and administrative support for our clients and the homeowners we insure. During the quarter, we continued our proactive outreach with state regulators as well as the FHFA. We completed the implementation of our new lender-placed product in 28 states. In the third quarter, we will introduce the product in 10 more approved states. Our filings in New York and Florida are moving through the rate review process. We responded to the additional questions the departments have raised and will continue our dialogue until the process is completed. At the federal level, the FHFA recently convened a roundtable discussion with key constituents. The purpose was to discuss proposed changes to lender-placed insurance for servicers of GSE loans.
We participated in the session and will continue to assist the FHFA and our clients during their review. We will update you further as we complete the rollout of our new product in other key states and the FHFA finalizes any changes on lender-placed insurance practices for GSE loans. At Assurant Health, total sales grew 35% as we produced double-digit increases across all product lines. We are pleased by continued sales momentum, evidence that consumers recognize the value and affordability of our products. In the quarter, we continued to work through the next phases of healthcare reform. We updated our major medical products to cover the essential benefits required by the Affordable Care Act. We decided to defer our participation on public health exchanges until 2015. Instead, we are focusing resources to help our customers and distribution partners understand how the Affordable Care Act impacts healthcare during this period of transition.
As medical costs continue to increase, we believe consumers will find our affordable choice plans even more attractive. Assurant Employee Benefits posted another strong sales quarter. Year-to-date sales are up 18%. Earnings reflected pressure on our disability products, but dental experience was again excellent. We recently completed a redesign of our dental offerings to provide more tailored solutions for small and mid-sized employers. These enhancements, along with our broad dental network, should continue to increase the appeal of our products to employers and their employees. Overall, throughout Assurant, we remain focused on driving profitable growth across all of our businesses, and we are pleased with our progress so far in 2013. With that, I will turn to Mike for more detailed comments on our results.
Thanks, Rob. I'll start with Solutions. Net operating income declined $2.5 million after adjusting for a $3.8 million non-recurring benefit in the second quarter of 2012 and a $2.7 million charge for a reduction in force in Europe this quarter. Pre-need earnings declined primarily due to lower investment yields. Expenses are up in pre-need, reflecting higher amortization of selling expenses due to the growth that we've seen over the last several quarters. In addition, results at Solutions reflect the previously disclosed loss of a mobile client. Net earned premiums and fees increased by 7% versus the second quarter of 2012. Domestic premium growth again reflected promotional activity at the large client we mentioned last quarter. We also saw increases in our vehicle service contract business. Expansion in Brazil and Mexico drove higher premiums abroad. The international combined ratio declined 250 basis points after adjusting for the disclosed items.
Growth in Latin America and previous expense management actions contributed to the improvement. For the full year, our international operations remain on track to deliver a 100-200 basis point reduction in the combined ratio, excluding disclosed items. The domestic combined ratio remained near the long-term target of 98%. For the second half of 2013, we continue to expect modest top and bottom-line growth as we push toward our goal of a 14% ROE next year. Specialty & Property posted strong results in the quarter, driven primarily by revenue growth from lender-placed loan portfolios added during the past year and the continued expansion of our multifamily housing business. As expected, the additional growth in lender-placed business drove higher general expenses in the quarter. Our placement rate in the quarter was 2.8%, representing a modest decrease from the first quarter of this year and the second quarter of 2012.
We expect placement rates to fluctuate in the near term, reflecting the composition of our recently added loan portfolios. Longer-term, placement rates should decline as the mortgage market rebounds. In the second quarter, we reported a sequential decrease in premiums ceded to clients because a client quota share arrangement was discontinued. This is detailed in the ceded premium shown in our financial supplement. Starting April 1st, we began retaining premiums and underwriting risk for this previously reinsured client. Premiums written prior to April 1st, along with the associated claims, will continue to be ceded proportionately as they run off during the next year. During the second quarter, we completed our 2013 catastrophe reinsurance program at attractive rates. We expanded coverage by nearly 20% to support growth in our lender-placed business.
Our program also supports a small but growing footprint in the Caribbean and Latin America, where Specialty & Property and Solutions partnered to develop a traditional dwelling insurance product for a global banking client. Due to the continued growth of lender-placed loan portfolios, the reduction in ceded premiums, and the expansion of our multifamily housing business, we expect Specialty & Property's revenues for the full year to grow from 2012 levels. Our expense ratio will also increase as we expand capacities to support the growth in the business. Assurant Health reported a small profit in the quarter, consistent with our outlook for the full year. Down considerably from 2012. The decrease is due to a higher effective tax rate and the absence of $14 million in after-tax real estate joint venture income that was included in our second quarter 2012 results. Our loss ratio increased to 75.2%.
This reflects less favorable experience compared to the prior year and pricing changes in response to the minimum loss ratio targets in our major medical business. We expect the ratio to remain around this level in future quarters. We are pleased that net earned premiums grew 4% from the first quarter of this year and that insured lives continue to increase. Growth in our book of business remains an important long-term metric for health. We're encouraged by our progress and remain cautiously optimistic as the healthcare market enters a period of unprecedented change in the second half of 2013. At Assurant Employee Benefits, net earned premiums and fees were flat year-over-year, but up slightly from the first quarter, evidence that our enrollment and administrative services are gaining traction with voluntary customers.
Earnings declined on a year-over-year basis, primarily due to less favorable disability results and the previously disclosed reduction in the discount rate for new claim reserves. Disability experience primarily reflected lower recoveries in the quarter. We've maintained strict pricing discipline in our disability business during the past year and will take additional action as needed. Results across the other product areas were solid. For the full year, we expect continued growth in our voluntary business and overall premiums at Benefits to remain in line with 2012 levels. Turning to corporate matters, we took $185 million of dividends from the operating companies in the second quarter. We continue to anticipate that business segment dividends for the full year will equal operating earnings. As always, dividends will vary depending on the capital needs of the businesses and rating agency requirements. As Rob noted, we repurchased $174 million of stock in the quarter.
We also retired approximately $24 million of our 2014 senior notes through open market transactions. At the end of the second quarter, total debt outstanding amounted to approximately $1.6 billion, including $476 million that will mature in February of 2014. As a reminder, the March issuance increased our after-tax interest expense by approximately $4 million in the quarter. Our corporate operating loss was $22 million, reflecting investments in areas targeted for growth and additional benefit-related costs. For the full year, we still expect our corporate segment operating loss to be between $65 million and $70 million, but likely at the high end of that range. Our investment portfolio continues to perform well.
Yields increased in the quarter, which reduced our unrealized gain position, but they still remain very low compared to historic levels. Our conservative investment philosophy and disciplined asset liability management minimize our portfolio turnover and help moderate the pace of decline in our portfolio yield. We're pleased with our progress in 2013 and look forward to improvement over the second half of the year. 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. Thank you. Our first question is coming from Jeff Schmitt with KBW. Please go ahead.
Thanks. Good morning.
Hey, Jeff.
I was wondering if you could help us a little bit on the change in the captive reinsurance. Is the amount of client-ceded premium likely to remain approximately at the level that we saw in the second quarter, or will that actually come down from here?
Mike, you want to provide some of the details there?
Yeah. Well, we cede, as you know, Jeff, some of our clients we have reinsurance arrangements with, this client this quarter terminated their arrangement. Their ceded premium to them will obviously decline over the last several quarters. Whether the aggregate total goes down depends on volume in the other clients, there's also some ceded reinsurance outside of lender- place too, that go through that line.
I think it's also important to just point out that we will have the premiums. We'll also have the risks associated with that business, Jeff, going forward. The good news, more premiums. Second, we'll have the associated risk associated with the business.
Okay. Essentially, you stop ceding new premiums to that particular captive, there's still premiums-
Right
that you ceded earlier that's okay.
Unearned premiums at 630 will run through under the income statement on the same reinsured basis over the next year, basically.
Okay. On the placement rate, I'm wondering if you can somehow give us a little better feel for the dynamics there, where it appears that maybe the placement rate is actually coming down on some of the legacy business, but then that's kind of obscured by what's happening in the new business. Is there any way for us to kind of see through those dynamics a little better?
Yeah, I'll let Mike talk about the details in a second, but I think we want to start with just thinking about there's a lot of factors influencing things here. It starts with the general economic situation, in terms of people's ability to make payments on homes, so it's impacted by unemployment rates. It's also impacted by government policy around support of the housing market, and in particular, trying to prevent foreclosures. That goes in a little bit then to thinking about, we see differences in that placement rate in different areas. Mike, maybe you want to expand a little bit on that.
I think to your point, Jeff, if you look at the placement rate on our legacy business, I'd say is slightly down, but you get influx of new portfolios, all of which have sort of unique characteristics, and so you get variation in your overall aggregate level. You've got this slowly declining, or slow thus far declining legacy rate. When you get the noise essentially introduced by the new portfolios.
Okay. Thanks a lot.
We'll move next to Chris Giovanni with Goldman Sachs. Please go ahead.
Morning, Chris.
Morning. I guess first question, you mentioned you're going to be rolling out in 10 more states in 3 Qs, so you'll be up to 38. Wondering if you could give an update on kind of % of premium that those represent, particularly as you've now moved through some states that are a bit larger.
Yeah. I think they're the medium-sized states, Jeff. I think the important issue is approval in Florida and New York contribute a big portion of our block, and we need to receive kind of approval there to proceed. They're not in the totals. Obviously, if we can get through the process there, which we anticipate happening, we'll be in a position to roll there as well. Florida, as we've mentioned, represents about a third of our business.
Okay. One just quick follow-up to Jeff's question regarding the ceded business. Was the book that was onboarded to you, was that contemplated as you went through your CAT program this year?
Well, I think that we've been looking at exposure growth in general, and you see that we bought some more reinsurance at the top end, and I'll let perhaps Chris just comment on the program a little bit.
Yeah, Chris, just one point of clarification. In the scenarios where premium is ceded, the client participates in our CAT program alongside us, paying the premiums, the claims, et cetera. When we put a program together, it's contemplating the aggregate book. Now, with respect to the additional $300 million of coverage, that is a function of additional loans that we've got growth in the program, growth in the risk, and in particular, obviously growth in the program in the CAT-prone areas. We always look at that top end and want to be sure we have enough coverage there, Chris, because at the lower end, that's sort of an earnings volatility issue. At the top end, we want that protection. We try to be relatively conservative in setting that top-end limit.
Understood. In health, I guess the sales there continue to be pretty robust. You had the sequential increase in premiums, which I think was the largest since 2003 or so, and recognizing a lot of that has been driven by the shrinkage in insured lives, healthcare reform, and all. Do you feel like you're starting to get a kind of positive inflection point here where scale can start to build a bit, potentially driving down that tax rate over time?
We're certainly hoping so. Again, I think that all of our efforts when the Affordable Care Act was enacted and the strategy we embarked upon around affordability and choice, we really think is paying off. Obviously, affordability will continue to be a big issue going forward for us, Chris. The fourth quarter of this year is obviously going to be kind of a brave new world with the introduction of the exchanges. We'll see what's happened there. We think our fundamental strategy of driving at that affordability is going to prove out, we're quite optimistic about prospects in the health business.
Okay, one last quick one just for Chris, I guess, regarding buybacks. Recognizing you want, I guess, to consistently be in the market, how are you thinking about kind of the pace here as we enter hurricane season? I know in the past you've been somewhat reluctant, but a few years back, Rob, I think you made the point that the stock was just way too cheap, and you'd be pretty active during the hurricane season. Just wanted to get some updated thoughts there.
The capital deployment decisions and the share repurchase activity is always a forward-looking exercise. I think from where we stand right now with $640 million of deployable capital and a stock that we still believe is undervalued and attractively priced, we plan to be in the market through CAT season. We'll of course, be more conservative because that's just how we are. Do want to be in the market consistently. There's a program in place right now, which has been in place since the Rule 10b5-1 program since early April. Once we exit blackout period, we'll recalibrate and make some decisions around repurchase activity in the next several months.
Thanks so much.
We'll move next to Mark Finkelstein with Evercore. Please go ahead.
Morning, Mark.
Hey, Mark Finkelstein.
Hi. Good morning. A few questions. On Assurant Solutions, you have reasonably good transparency, at least into the revenue side. I'm just curious, in terms of the achieving the 14% ROE in 2014, is there anything else you need to do on either the expense side or the capital side to get there?
Yep. A couple of things. We are driving at all levels. I think, I'll let Mike Peninger comment on the expenses, but just in general, we've got changes going on in the market that require that we be nimble about adjusting expenses as markets come and go. I think we're demonstrating we can do that. Each of the businesses has slightly different dynamics associated with it, but we feel very good about the targeted growth areas around mobile, around what we've got going on with vehicle service contracts both in the U.S. and in Latin America. Mike Peninger, do you want to-
I don't know. Just the themes that we've talked about, Mark Finkelstein, are really where we're continuing to focus. As Rob Pollock said, we're driving at that growth, particularly in mobile. We also like to sell our service contracts. We're seeing good growth there. Continued growth in Latin America is important. Expenses are going to continue to be a focus. We took some more action in Europe this quarter. Overall of Assurant Solutions, if you think about the domestic credit business that continues to sort of run off, we got to continue to drive at that expense control. On the capital side, Assurant Solutions has a relatively complicated structure. There's lots of entities, but we're constantly looking for opportunities to take capital out. Just like in all of our businesses, we want to capitalize appropriately for our best ratings and then get everything else up to the holding company.
A little more complicated in some of the entities, we continue to work on a regular basis at that.
Okay. Just on the T-Mobile program, is there any way of framing out a three- or five-year revenue opportunity for this? I'm going a little bit by memory. I thought that you kind of did that on the Telefónica deal. I'm just curious if there's any way of thinking about this 26 million subscriber base, how big can this program get?
Yep. I'm going to take a step back because I think you got to frame this and give T-Mobile tremendous credit for what they've done here. Think about what they've done is they've introduced a program that is both offensive and defensive. On the offensive side, they're trying to grow new subscribers, they've got a program now that will be attractive to anyone who is looking to be with a carrier that will allow them to upgrade regularly. Okay? We've introduced, we're all of two weeks into it. Enthusiastic start, way too early to know exactly what it's going to mean.
In addition, it's defensive in that their current subscriber base, those 26 million subscribers, anyone who might be contemplating leaving them for a phone upgrade now is going to say, "Gee, I can get this here, going forward, I can upgrade a couple times a year." They've really got a great program design. What we're going to find out is, gee, how many new subscribers does it help them attract, how many of their existing subscribers are going to convert? We'll know a little bit more about that in a couple of quarters, I think trying to speculate on it right now is we'd just be guessing.
Okay. Out of curiosity, the public health exchange deferral till 2015, why?
Yep. Well, I think it's just looking at the difficulty in the exchanges getting up, exactly, getting a line of sight on who they're going to attract. We sat and looked at our existing insureds and distributors and said our time would be better spent making sure they understand how they're impacted than trying to attract particularly new people on the exchanges when it's unclear just how many are going to be attracted to them. We're focused on that large distribution footprint we have, our national distribution relationships with State Farm, USAA. We just thought the resources were better applied there.
There's so many unknowns with the exchange and how people will react in purchasing decisions, we think we can get the learnings from that by observing from the side, and as Rob said, putting our resources into other areas to be sure we're ready to go in 2015. I'd also note that, I think you read as much as I do, other carriers are thinking about the same issue, you're seeing a lot of carriers being pretty cautious about the degree of participation in 2014 as well.
Okay. No change in strategy between kind of major medical and the access product in terms of emphasizing access disproportionately relative to what you've been doing?
No.
No.
Okay. All right. Thank you.
We'll go next to John Nadel with Sterne Agee. Please go ahead.
Morning, John.
Hey, John.
Hey, good morning, Rob. Good morning, Mike. A couple of questions for you guys. Rob, if I think of the bigger picture about the mobile wins here with T-Mobile, I think you mentioned a couple of things with Sprint as well. When I think back a couple of years ago when you guys bought the, I think it was called Signal Holdings. When you made that purchase, I think at the time you said, "We'll need to win a couple of new relationships or contracts for this to truly pay off and achieve targeted returns." Assuming you get some growth out of these newer relationships, in particular T-Mobile, does that get you there?
Well, a couple of things. Certainly, we're thrilled about the wins we've got going on. I think they demonstrate that we're a player in this market. The Signal is an asset we are leveraging that's helping us in all these different areas. You're right, John, I certainly said that we were going to need to grow our footprint in mobile for the Signal acquisition to be a success. I think last year, we also told investors we're earning targeted returns in the mobile business already. We think that these new programs provide us an opportunity to continue to demonstrate we can come up with things that are appealing to our partners and to their consumers in the marketplace.
Okay. In particular on the T-Mobile program, this sounds like it's an administrative sort of fee relationship. I guess you'll be booking gross written premiums, but it sounds like that'll be ceded right back to T-Mobile. Can we think about the way that the margin works on this business, or can you give us some color? Maybe just not specifically on T-Mobile, but just in general on how an administrative arrangement would work versus a true insurance arrangement on the mobile side?
Sure. Mike, why don't you start by just commenting on these large relationships?
Sure. Well, these type of arrangements, just like in case of some of our large credit arrangements in the past, there's multiple ways to structure the deals, and they're customized to each client. We need to finalize the details of the T-Mobile arrangement. Assuming, as we said, that it's likely to be reinsured, then you're right, John. You would see gross written premiums. You would see ceded. You get some fees. You get ceding commissions. There's a variety of sort of details that have to go through, and once those are all final, we'll be able to talk a little bit more about those. Overall, we still feel really good about the pricing of the business, the return potential of it, et cetera.
Yep. I'd just point out that, again, if they decide to reinsure it, we're just going to have to put up a little bit less capital.
We are the risk manager on the program for them. We're doing a lot of the logistics support, et cetera. I think we feel tremendous about having landed this relationship.
Yeah. No, I know. I get that. If we compare and contrast, though, a fee type of arrangement versus one where you're truly taking insurance risk, is it fair to say that there's no capital requirement in the former versus something fairly significant in the latter?
I wouldn't say no, because obviously there's working capital issues, John.
Inventory
About all those things. Yeah.
Okay.
I think we are doing a lot of things to try and support T-Mobile, just as we try and do with service contract providers, as we've historically done with credit insurance business.
Okay
I think we can find lots of ways to help them.
Yep. Okay. Just a housekeeping item. Can you remind us, I know you guys took $185 million in dividends up from the subsidiaries or the operating companies in Q2. Can you remind us what that number was in Q1?
I think so far this year, we're at about-
Just over $200, I think.
Yeah, $206 maybe, I think is-
Okay. It was modest in Q1. Okay.
Yep.
Just, when I think about that ceded within the Specialty Property business, and now you've broken out that ceded to clients for us, how should we think about potential for other clients to discontinue that as we move forward? I know part of the N.Y. settlement specifically states that these arrangements have to be terminated. Are we there yet that all of those have been terminated?
Mike, you want to comment on that?
Yeah. N.Y., we're certainly complying with all the provisions there. More broadly, we just have a handful of clients that cede, John, that we have reinsurance, and all those make specific decisions about how they want to handle their arrangements. Whether they choose to continue or not continue is really their decision.
Yeah. No, I get that. I guess I'm more curious whether there's been any real dialogue with that handful of clients without naming names or sizing each one. It seems to me that, I don't know, my sense is that the direction here is that that ceded to clients would continue to decline. Are you having those discussions, or is it just not happening?
No, I think those are really client decisions, and if they approach us, we certainly, again, just it's really kind of like the T-Mobile discussion we have. There's lots of different ways to structure things here.
Okay.
How the transfer risk mechanism works on this, we're going to be back on the risk on some things that had previously gone to a client.
Yeah. As you know, and just to say it, obviously if the reinsurance goes away, the risk changes, the claims, these things are all risk transfer mechanisms, so important to keep that in mind, too.
I just have one last quick one, and that is, do you guys feel like you have any visibility on the timing for some resolution on the Florida and New York rate filings?
It's a back-and-forth process. They've asked a number of questions. We've responded. They've asked a few more. We've responded. It's just an iterative process, John.
It is in their court at this point?
Correct.
Thank you.
We'll go next to Steven Schwartz with Raymond James & Associates. Please go ahead.
Hey, good morning, everybody. Want to, I guess, just rehash a couple of things here. With regard to the captive ceded, Jeff's question to start this off, I didn't really understand it. I guess I want to ask it a different way. Going forward for the rest of the year, all else equals, just looking at the ratio of a ceded premium to captives relative to gross, should that ratio change because of this change from this one client?
Yes.
Again, it'll go down for that client. The aggregate amount depends on growth in other reinsured clients.
No, of course.
this one, of course, will go down, yes.
All right.
There's an unearned premium, essentially, at the end of June. That will run off through our income statement over the next 12 months, basically, and the ceded amounts will run off then.
Okay. All right. Then, the new portfolio of business that you're putting on in Specialty Property, the $1 million, could you remind us, is that flat cancel?
It is. That'll start to contribute over the second half of the year.
Okay. Just returning to health, just so I'm clear here, you're not going to participate in the exchanges. I know you sell access products, you sell short-term medical products, you sell supplemental products as well, but you also sell individual major medical. Will you be able to continue to sell major medical in 2014 off the exchanges without customers having to pay the penalty?
Yes. In fact, I would go so far as to speculate that most of the individual health insurance will be sold off exchange.
Okay. I'm just talking about individual major medical here.
That's what I'm talking about. I'm not talking about for us particularly. I'm talking about for the whole market.
Okay. It has been rumored that Assurant, I guess there's talk Assurant among others, has been very active in renewing individual major medical policies off the original renewal dates. Could you discuss that?
Well, sure. I think the big key is there's a lot of uncertainty surrounding healthcare reform, and we have a lot of customers who are seeking clarity and certainty on how to deal with things. We certainly have a program in place that allows new customers a line of sight on keeping their business under current arrangements through December 2014, I believe. I'm sure some of that may be spilling over to the existing in-force as well. I think it's largely geared toward new buyers, but I think it's probably going that way as well.
Okay. My question then is, to what extent did that, because you talked about the access products and what have you, was that a major player in the increase in sales and premium in the quarter?
Yeah. I think about things two ways. First is, the access versus major medical is really a suitability decision, Steven, around assessing the buyer's needs, and a lot of that is around affordability. Okay?
Right.
I certainly think that buyers in the marketplace who looked for having clarity around their major medical purchase through the late into 2014 certainly helped us. It helped us drive sales. As well with that, our rollout with Aetna's certainly helped us be more competitive in all the major medical markets, and that's been a contributor, too. I'd also add, we've worked hard to help distributors understand how things are going to work, and I think a lot of them are appreciative of that and see opportunities for themselves in the health marketplace as a result.
Thank you. One more, if I may, back on Specialty Property. Your premiums were up very nice. Gross written premium up very nicely sequentially. Yet if you look at the number of loans that you track, multiply that by the placement rate, the number of loans that you have insured probably didn't increase. Maybe slightly decreased, maybe slightly increased from the first quarter, yet you had that nice surge in premiums. Also, the total insured value fell. Is that increase that we saw sequentially, is that really renters?
Yep. Lots of different things in there. I think the first is that we've added 900,000 loans. They're not producing yet.
Right.
I think similarly, when we added some loans in the first quarter into the totals, they were only producing a little bit. We're trying to give you a representation on the number of track loans. I think it then needs to be distilled a little into which of those are producing or not producing. If we move over to our renters area, we are seeing very nice growth in that business and feel good about the prospects there as well. We've mentioned that things are up in all our different products in the property area. I think progress on all fronts.
Until you get the loans on board, you don't have a clear line of sight as to sort of the placement rate characteristics of those either, Steven. That just introduces a little bit of uncertainty in looking forward, too.
Right. I understand that, Mike. Where I was getting at here was that if you were to take a look at the loans that you track, I'm assuming those are considered on board. I've always thought that's what that meant. Then you multiply that by the placement rate. The number of actual loans being insured didn't change between the first quarter and the second quarter.
I think in a steady inventory situation, that would be true, Steven. With all the movement we have going on in these portfolios, we have to go through a letter cycle before they might produce. You just introduce a lot of vagary into some of the placement rate numbers.
Okay.
The timing of when the loans come on, and then what's happening with the legacy policies as well, all those things. You're doing a method there that makes sense conceptually, but there's just a lot of detail under the covers when you try to convert some of those broad aggregate indicators we give you and try to translate them into the actual income statement. It's just a little bit complicated by a lot of timing issues.
Okay, great. Thank you, guys. I appreciate it.
We'll go next to Sean Dargan with Macquarie. Please go ahead.
Sean, go ahead.
Good morning. I have a question about Solutions and your mobile program with T-Mobile. I think you alluded to it, but it seems like we're going through a fundamental shift in the way subscribers buy phones in this country. Can you just describe how that works? Why would I buy a warranty if I can just buy a newer phone six months from now with no penalty?
Well. A couple things. I think your first point is absolutely an issue that's going on, which is the phone and how it's
Paid for has been a part of the monthly service fee, and I think that that's something all carriers are reviewing and trying to figure out are there different ways to deal with that? Okay. I think that one trend is, hey, I have to buy a plan and I get the phone at a subsidized rate. I think carriers are reviewing all that and saying, "Are there different ways to do that?" Okay. Now, I'd separate that from, in terms of a warranty, it's not just a warranty. There's a lot of things involved in the services we provide. I would say that trying to look at just the warranty aspect maybe isn't the right way to think about it. I think it might be to think about how do I protect my data? How do I make sure I have that phone to me immediately?
All these different components start to work in. Gee, I want to trade in the phone that maybe I'm paying for myself. How does that work? All that is wrapped up into this kind of program that T-Mobile has introduced.
Okay, great. Thanks. When we think about the portfolio adds that you've been having, in recent quarters in Specialty Property, what's driving that? I mean, where are they coming from and why would somebody not want those portfolios?
Well, we think we do a great job at servicing our clients. We've been at this for a long time. We've got the systems and processes. I think our clients are very happy with our service. Whenever there's sort of RFP, we feel real good about our chances of winning business through the RFP process. You've also got different servicers and banks out there that are making decisions about their own portfolios. Sometimes they'll decide to sell the servicing rights or move the servicing rights. By our presence in the market, we often are able to win as grow along with our clients because we stay aligned with the industry leaders in the marketplace. That's right.
If you put that at a big macro level, the money center banks have capital requirements related to the mortgage servicing rights. I think all the time they're trying to evaluate that capital requirement. Some of them have made decisions to sell loan portfolios to free up capital that's required to be held around the mortgage servicing rights. The buyers of those are other specialty servicers, and we've got good alignment there.
All right, thank you.
We'll go last to Seth Weiss with Bank of America. Please go ahead.
Morning, Seth.
Hi, good morning. Thanks a lot. Maybe just to focus on the one segment that hasn't really been asked about, Employee Benefits, which I know has a similar ROE goal as Solutions, but obviously it's farther behind in terms of the ROE progress. Maybe from a high level, you could help us think about the trajectory of that and when we could start thinking about getting to a 14% goal, in terms of high level, maybe more detail in on the immediate, the recent rise in rates and how you think about that in terms of your reserve and discount rate, which I know is flat for this quarter.
Let me start at a high level and then Mike can give some more detailed comments on that. We're making a big push into the voluntary marketplace. We believe that those products are less capital intensive than traditional disability. We've also been emphasizing dental, again, similarly, a lower capital requirement commitment. Mike, you want to talk about LTD? I think when you look at benefits, certainly in the near term, they're pressured a little bit in the disability business. We've talked about recovery rates in the small employer space. We look typically at our discount rate annually. When we sort of in the fourth quarter, we review our reserve assumptions and things like that. We made a change last year and we'll look at it again this quarter. More fundamentally, I think for benefits, we have a scale issue with benefits.
They need to grow in that voluntary space, as Rob talked about. We think that's a very attractive space. We continue to believe that the work we're doing at Benefits to improve our enrollment processes and administrative support for the voluntary business is resonating with small employers, that the issues around small employers struggling with medical, they increasingly look to voluntary mechanisms for their ancillary products. We think we're gaining traction there, and we think that that administrative and enrollment complexity is something that no one has solved, and we think we're ahead of the pack there. We really feel good about the prospects in the voluntary space for Benefits going forward. To your point, we've got to see the growth in voluntary. Hopefully as the economy strengthens, return-to-work rates will improve and that'll help the disability.
In dental, we've got one of the leading networks. Dental is a highly valued product among employees, and we're seeing great results there. We'll continue to drive toward, as with all of our businesses, optimizing the capital within Employee Benefits too.
Okay, great. Thanks a lot.
Thanks for joining us this morning. We look forward to updating you on key milestones in the months ahead. Please reach out to Francesca and Suzanne with additional questions.