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Good day, everyone. Welcome to the Assurant fourth quarter 2011 financial results conference call. Today's conference is being recorded. There will be an opportunity to ask questions following today's presentation. Currently, all participants are in a listen-only mode. I would now like to turn the conference over to Ms. Melissa Kivett, Senior Vice President, Investor Relations. Please go ahead.
Thanks very much. Good morning, everyone. We look forward to discussing our fourth quarter and full year 2011 results with you. Joining me for Assurant's conference call are Rob Pollock, our President and Chief Executive Officer, Mike Peninger, our Chief Financial Officer, and Chris Pagano, our Chief Investment Officer and Treasurer. Yesterday afternoon, we issued a news release announcing our fourth quarter and full year results. Both the release and corresponding supplemental financial information are available at assurant.com. You may have noticed that our news release now includes some information you had previously received on the call. Today, we'll focus on the highlights and priorities of each of our businesses and provide more time for Q&A. We'll start today's call with brief remarks from Rob and Mike, and Chris participating in the Q&A session.
Some of the statements we make on today's call may be forward-looking, and actual results may differ materially from those projected in these statements. Additional information on factors that could cause actual results to differ materially from those projected can be found in yesterday's news release, as well as our SEC reports, including our 2010 Form 10-K, available at assurant.com. Today's call 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 supplemental information posted at assurant.com. I'll turn the call over to Rob.
Thanks, Melissa. Good morning, everyone. We are pleased with our results in the quarter. We have grown in areas we have identified as attractive for our future success.
At the same time, we continued to generate substantial free cash flow from operations. This provides us with a strong and flexible capital position. We measure our success with three important financial metrics. First, operating return on equity, excluding accumulated other comprehensive income, or AOCI. We reported a 13.8% annualized return during the fourth quarter, which increased the full-year return to 9.9%. Second, growth in book value per diluted share, excluding AOCI. We saw an increase of about 14% for the year. Third, growth in revenues defined by earned premiums and fee income. Overall, total revenues declined by about 3% in 2011 compared to 2010. In the quarter, we achieved modest growth on both a year-over-year and sequential comparison. The areas we have targeted for future growth are linked to broad social and economic trends.
They include the growing importance of wireless mobile devices to consumers, increases in rental housing versus home ownership, consumers' desire for more choice and greater affordability in their health insurance plans, and employers moving away from payment for benefits to sponsorship of voluntary employee-funded products. We achieved growth in each of these areas in 2011 and believe they offer great opportunities for our future. Let me make some specific comments about the environment each of our businesses face. I will begin with Assurant Solutions. Consumer spending remains sluggish in the U.S., and economic uncertainty persists in Europe. Revenues from our wireless and service contract offerings, especially in Latin America, are expanding. While Assurant Solutions expects overall modest premium growth in 2012, we are disappointed that one of our domestic wireless clients will be leaving. We are in discussions with them concerning the timing. Nonetheless, we remain optimistic.
We continue to allocate resources to wireless due to its underlying growth trajectory and its intersection with our core capabilities. Turning to specialty property, there are fewer mortgage loans originating in the U.S., and foreclosures are projected to increase. Despite these trends, our lender-placed insurance tracking system and product offerings are helping us win business and serve existing clients, some of whom are growing their servicing portfolios. As we have communicated, we are not party to the proposed settlement between the state attorneys general and mortgage servicers. We understand that the proposed terms of the settlement focus primarily on foreclosure practices and loan modifications. Insurance is regulated at the state level. We have regular interaction with the different insurance departments. Occasionally, we receive information requests. Last fall, we received an information request, not a subpoena, from the New York State Department of Financial Services.
We are cooperating fully and are virtually complete with a few data items being produced in the next couple of weeks.
Our lender-placed products provide value to consumers. For example, in the third quarter, we paid claims of more than $75 million on 10,000 homes that were impacted by Hurricane Irene. This underscores that our product provides value and helps customers in their time of need. At Assurant Health, we redesigned many of our products in response to healthcare reform. We also focused on providing affordability and choices of benefits and providers to our customers. Our new relationship with Aetna Signature Administrators broadens our array of healthcare providers and improves affordability of our major medical products. At the same time, it improves engagement with our distributors. During 2012, our products will continue to emphasize affordability and choice, even as we continue to implement healthcare reform changes. Turning next to Assurant Employee Benefits, small employers are not growing payrolls. Until that happens, growth in our benefits business will be challenging.
Meanwhile, we continue to build our capabilities in the voluntary benefits market and focus on our specialized distribution. To summarize, our businesses are well positioned in their targeted markets. Our strong capital position, excellence in risk management, and ability to generate free cash provide the foundation for continued progress. Assurant's track record of adapting to changing markets is well established. Our priorities are clear: to make Assurant more efficient, to focus on long-term profitable growth, and to generate superior returns for our shareholders. Now, I'll turn it over to Mike.
Thanks, Rob. Let's discuss a few highlights and priorities for each of our business segments. I'll start with Assurant Solutions. During the year, Solutions grew its international presence, particularly in the Latin American wireless space. Client contract renewals remained strong, driven by our ability to respond to evolving customer needs. Pre-need sales increased in 2011 over a strong performance in 2010, as we continued to deepen our relationship with SCI. Total earned premiums and fees were virtually flat with the prior year, despite significant top-line pressure caused by previously discussed runoff clients. The major priorities for Solutions in 2012 are to continue to grow the wireless business, improve international profitability, and drive down expenses in the businesses which are not growing. Specialty Properties results reflect the continued ability to win new accounts through our superior tracking capabilities and our overall program.
Our alignment with market leaders, specifically specialty servicers, has allowed us to gain new portfolios, which have helped to offset declining number of loans in the overall marketplace. This was evident during the fourth quarter as our clients were awarded new loan portfolios, mitigating the overall decrease in the number of tracked loans. As usual, we placed a significant portion of our reinsurance program in January. Including our catastrophe bonds, we have finalized about 70% of our total program for the year. We'll provide a complete update when the program is completed in June. We are pleased with the integration of the SureDeposit acquisition, which has allowed us to expand our offerings in the multifamily housing market. We remain optimistic about the long-term growth potential of the rental market. Assurant Health made great progress in 2011. We believe that we are well positioned to successfully navigate additional healthcare reform provisions.
A particularly noteworthy change that will affect health earnings this year is the treatment of loss development relative to year-end reserves. In 2011, favorable development from 2010 reserves for policies subject to the MLR flowed into our reported earnings. In 2012, any favorable development relative to 2011 reserves will increase the MLR rebate liability instead of flowing into earnings. Our 2011 operating costs dropped significantly as we drive toward a streamlined structure that will allow us to succeed under healthcare reform. Sales of health access and supplemental products continued to grow in the fourth quarter. We expect that trend to continue in 2012, and we also expect improvement in our core major medical sales as we implement our new provider network contract with Aetna Signature Administrators. At Assurant Employee Benefits, the lack of payroll growth remains a significant headwind.
In addition, during the fourth quarter, we observed an uptick in our disability incidence rates, which had remained relatively stable over the past few years. It's too soon to say whether this quarter was an aberration or the start of a trend, but we are carefully reviewing the data and will take corrective action if warranted. Our strategic focus on distribution through key brokers and our expanded offerings continue to improve sales of voluntary products. In addition, savings from expense initiatives at Employee Benefits are being redeployed into targeted growth initiatives. Moving on to corporate matters, our investment portfolio continued to perform well during the challenging 2011 environment. While portfolio yields continue to decline due to low new money rates, our relatively stable liability structure and conservative investment approach allow us to maintain yield from current investments for as long as possible.
During 2012, we will maintain our risk profile and look for opportunities to invest operating cash flows at attractive risk-adjusted returns.
In 2012, we expect to return a substantial portion of free cash flow to our shareholders via repurchases and dividends. In order to generate sustained long-term shareholder value, we must also make disciplined investments in our businesses and look for new opportunities to drive profitable growth. With that, we can move into the question and answer portion of the call. Operator, first question, please.
To ask a question, please press the star key, followed by the digit one on your touch-tone telephone. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that's star one for questions. We'll have our first question from Mark Finkelstein with Evercore Partners.
Good morning, Mark.
Good morning. I guess I have a few questions. Firstly, the domestic wireless loss, what was the size of the premium related to that?
We haven't disclosed that. It's just one of several of our clients, Mark.
Okay. I guess, the overall expectation is for growth in Solutions premium, kind of modest growth.
Correct.
Would that assume growth internationally and maybe declines domestically? Is that the way to think about that?
I think that the domestic credit will continue to run off. I think we would expect probably some modest growth domestically on the service contract side and growth internationally. The outlook takes into account the client we mentioned.
Okay. Fair enough. Then the comment on spending free cash flow on dividends and buybacks, does that assume that 2012 earnings will be used on that? Then, how should we think about the growing excess capital on balance sheet? The $760 million was certainly larger than I expected it to be at year-end, particularly given the high buybacks in the fourth quarter. How should we think about that, and when would you look at that and say, maybe we start paring that down above and beyond investments for growth as you characterized in your comments as well as in the press release?
Yep. Let me make just a few comments here, then I'll turn it over to Chris and Mike and let them add. First, I guess I'd start with the fact that we've got some growth going on, which it's modest, but small amounts means that we'll need to leave some capital generation or some of the earnings generation back in the businesses because the rating agency formulas that guide our capital requirements go up a little bit. That being said, I think we're still going to be in that range of being able to dividend out the operating earnings of the different companies. Yeah, it might be a little bit on the margin, but I think that's a fair assumption we can make.
Maybe now I'll turn it over to Chris, and he can take you through, because I think actually that number went down a little during the year. Over the last couple of years, maybe it's gone up modestly. He can just give you some history on that.
Sure. Good morning, Mark. Maybe start with a little bit of a reconciliation for the fourth quarter, and then talk a little bit about the full year 2011 and then 2012 going forward. During the fourth quarter, we began the fourth quarter with $640 million of holding company capital. We took $270 million of operating dividends. Keep in mind, when you think about operating dividends relative to net operating income, we made about $180 million during the fourth quarter. We disclosed during the third quarter conference call that we felt like we had about $50 million of segment earnings still in the segments ready to be dividended up. You think about $230 there, the $180 plus the $50. Then, again, every year, we look to dividend up any available capital from the segments to the holding company where it has maximum flexibility.
We found some other pockets of capital that we're able to send up to the holding company. We paid out $190 million to shareholders, $17 or so in dividends, $173 in share repurchases. There were some corporate inflows of about $40 million. That gets you to the $760 for the full year. For the full year, we took about $520 million of dividends from the operating segments. Keep in mind we made NOI. The NOI was $530. We spent $45 of that from properties earnings for the SureDeposit acquisition. Then returned about $600 in total for the year. With some outflows at corporate, getting you to the $760 number for year-end. Just a couple of things around 2012.
I think the key here is going to be a continuation of the discipline that we've shown and the willingness to return capital to shareholders, which we've shown over the last two years. When you think about since the beginning of 2010, we've returned $1.2 billion to shareholders, $140 million of dividends and $1.06 billion in share repurchases. The real story, though, is the operating cash flow from the segments. When you think about returning $1.2 billion over a two-year period and having your holding company capital position go up from roughly $710 million at year-end 2009 to
760 year-end 2011. In my mind, that's the real story. Going forward, we're going to continue to maintain the discipline. I think the capital deployment question is one we ask every quarter. It's a very dynamic process. The answer for the last eight quarters has been the same, largely driven by strong capital flows and an attractive share price relative to book. That's going to continue to drive our process for 2012.
Okay. All right. Thank you.
We'll go next to Jimmy Bhullar, J.P. Morgan.
Hi, thank you.
Morning, Jimmy.
Hi. Just a couple of questions. First, on the placement rate in the specialty property business has kept inching higher. We'd assumed that that would go down at some point. What are you seeing, what are your expectations for that, and what's been driving it? Second, if you look at the employee benefits margins, excluding the reserve release, it seems like the margins are a lot weaker than they've been. If you could talk about what products specifically caused that, and if it is disability, then what are you seeing in terms of loss and recovery trends in the disability business?
Sure. Let's start on the property side, on the placement rates. We don't have great insight into what will happen moving forward, but we do know what happened in the last quarter is, a client came on board with a number of loans. It was a flat cancel, meaning that all the premium came to us as the servicer took over the portfolio, and the placement rate on that portfolio was quite a bit higher than our portfolio in general, Jimmy. That drove a big part of that placement rate. The other thing I guess I'd say there is obviously, just kind of all the things going on, certainly you have a growing number of loans that are seriously delinquent. At some point in time, we think that will work its way through the pipeline, and that'll be the catalyst for placement rates declining.
On the disability side, Mike, you want to-
Sure. On disability, Jimmy, I think or excuse me, on Assurant Employee Benefits, I think the driver of the lower results was disability. As we've talked for a number of quarters, the recovery rates at Assurant Employee Benefits, how quickly we can get claimants back to work have lengthened a little bit. It's been a little more challenging in the difficult economy to do that. Up until the fourth quarter, we had not seen any particular change in incidence rates in disability, number of new claims, and that's where we saw a bit of an uptick in the fourth quarter. If you think about disability, you have to remember it's a sort of a non-credible coverage because of the low incidence rate. It takes you some time to look at the experience and determine if you're seeing some sort of a pattern or if it's just a temporary aberration.
We have a lot of tools and things to look at that, we're dissecting the block, if we determine that there's actually a sustainable trend, we'll have to take corrective action. That's the story of disability. I think the good news at Assurant Employee Benefits is that dental experience has continued to improve, and we feel good about the progress in that coverage. I think the final piece of benefits is life insurance, where I think you were suffering a little bit quarter-over-quarter in comparison because we had some exceptionally good mortality in 2010. I would say in 2011, good but not spectacularly good. You just got a little bit of a quarter-over-quarter phenomenon there.
Just one more on the specialty property business with all the inquiries going on. Is there any way in which the investigations have affected your business thus far? Like if you're going out seeking price increases or doing anything else where it's affected your ability to price the business appropriately, or you've seen an impact on how you operate in the business.
No, we haven't, Jimmy. One thing I just want to make sure I point out is there have been many misconceptions over this product. We've actually put a white paper up on our website.
Yeah.
Defining how things work, which I think can clarify a lot of the statements that have been made that certainly we don't believe are true about us.
Okay. Thank you.
We'll have our next question from Ed Spehar, Bank of America, Merrill Lynch.
Morning, Ed.
Thank you. Good morning. I guess I'd like to follow up on the question about pricing and specialty property. Two things. First, I believe you have said that a lot of the rate actions that you look for in a year will occur sometime after the storm season. I'm wondering if you could give us anything specific on the amount of rate increases that you've asked for, what's been accepted. Is there any change in the acceptance rate, any change in the level of questioning that you're getting from regulators regarding rate filings? Anything that's different specifically on rate filings, because I think this is the time of year where you'd be doing that. I have one follow-up.
Sure. We're going through our normal process. I guess if you think about last year's storm season, a little bit different than traditionally just a big Hurricane season, we had the tornadoes earlier in the year. The actual filings that take place over the course of years, we've got filings in process. I'd say we're seeing nothing out of the ordinary in terms of how we're moving forward.
Okay, one follow-up. You talk about in the white paper, I think you've said in the past, that you believe your rates are among the lower rates in the Lender-Placed market. First of all, how do you figure that out? Is it from state filings? Secondly, could you give us some sense of how much your rates might differ on average from your competitors?
I think we've put out broad comparisons of where we are versus the underlying voluntary carriers, Ed. Certainly, Gene and his team have done some macro analysis that makes us feel our rates are lower. Anecdotally, I'm sure that there can be situations where that might not be the case because everybody has slightly different rating formulas by geographies and how they act. It's basically a process where we can look at things in the marketplace. Sometimes, in situations where there may be flat cancellations, we can see the rates they've charged, and we know we're cheaper.
Okay. Thank you.
We'll proceed next to Steven Schwartz, Raymond James & Associates.
Hey, good morning, everybody.
Morning.
Morning, Steven.
Good morning. If I can, a couple of follow-ups and some of my own. Just on the capital question, holding company capital $760, what are you considering these days to be a necessary buffer?
The buffer continues to be the $250. That is something we established back in early 2009 as part of our enterprise risk management initiative. Keep in mind, again, my point earlier, we ask the question on a regular basis, the appropriateness of the buffer. The answer's been the same. Going forward, that could change. One of the things that we've also talked about in the last couple of years is our desire to be above the buffer as we head into cat season, sort of a seasonal buffer, if you want to think of it that way. That's a question that we continue to ask. At this point, it's still $250 million. The $760 has a $510 deployable number to it.
Okay. It seems from at least what you're saying, Chris, is that you want to spend your operating income, so you wind up at that $510 again, I guess. Is that an accurate statement?
Again, the thought process here is, in general, we believe we can get operating earnings out of the segments in the form of dividends up to the holding company. Now, operating earnings are a function of what transpires during the course of a year. Rob mentioned the fact that if we do see growth, we may need to keep some of the earnings back to support that growth at the individual segments. Again, Mike made the comment about the need to make some disciplined investments. The deployment priorities also involve the disciplined search for growth. That is an ongoing question that we ask. At this point, I think, and what we've seen in the last two years, given our criteria around acquisitions, that the best use of the deployable capital has been to return it to shareholders.
Given where the share price has traded relative to book and what we think is a very attractive level, share repurchases have been the dominant form of deployment of capital.
Okay. Moving on. Rob, I think you mentioned that the new customer had an extraordinarily high placement rate. Do you have a sense of what the placement rate would have done in specialty property without that customer?
The client addition, I don't have that with me. My guess is it was in the range of where it's been, probably flat.
Okay. I think Gene is there. Maybe, can somebody explain the math? If the market finally clears out and we start to have a lot of foreclosures, how does the math work? All else equal, that would take your loans down. Would that also take the placement rate down?
Okay. Maybe a good way to think about this, Steven, is first, if it's Fannie or Freddie, okay, and it moves to an REO status, we're going to lose that because they self-insure all that business.
That's right.
If it's not a Fannie or Freddie loan, on most of our customers, we have an REO program. It'll move from kind of that individual policy to a bulk policy provided to the then owner of the properties. You can think about it as if it's placed today and moves and it's Fannie and Freddie, we're going to lose it. Otherwise, it's conceivable that it could remain with us, but it's going to have a shorter tenure because obviously they're going to look to get the property sold.
Right. Okay, good. Yeah, I forgot about the Fannie Freddie thing. Then just two quick more. The lost customer on the wireless, I realize you don't want to say how big, but do you know why?
I think a couple of things. One is we have pricing discipline on how we approach things. I think the other is, they had an integration of some things that are different than what we had to offer, and it was evaluated in a holistic sense.
Okay. Last one, just on the reinsurance that you just put in and what you're looking at, what's your thought on rate on line? Is it going to be flat? Is it going to be higher?
I think Chris can probably comment in more detail. I think that, Steven, we're seeing a slightly harder market than we've got growth in our portfolio. I think both of those things are going to drive up the premium a bit. I don't know, Chris, if you want to amplify on that.
I think in general, between the January traditional placement and then more importantly, the cat bond we just placed, we've seen what we think is about a 10%-15% price increase, all other things equal. We feel very good about the fact that we've got 70% placed now heading into the June placement. Again, that's part of our long-term strategy is to place at multiple points during the year. Again, as Mike mentioned, this is not apples to apples. The amount of reinsurance we're going to buy has gone up versus last year, given the growth in the product. That will factor in. Again, we'll give you the full breakdown when we complete the June placement in a couple of quarters, a couple of months, rather.
Okay. Thank you, guys.
We'll proceed next to John Nadel, Sterne Agee.
Morning, John.
Hi. Thanks. Good morning, everybody.
John.
I guess I'll start here. If I look at specialty property, you have that line item that shows the amount of premiums that you cede to your clients and to the government. I think if I recall correctly, the government piece is the flood program. I was hoping you could tell us or give us a sense anyway, what the portion is of that line item that's ceded to clients. I'm guessing as things shift here, the servicers are very likely to no longer be able to take on that premium, and it's likely to come back to you as we look forward. I'm just trying to gauge that.
Yeah, that's just something we haven't provided, John. Obviously, that will all become clearer if what you think happens.
Okay. No willingness even to give us a sense for 20% or 30% or 40%?
Just not something we've disclosed.
Okay. There's also been. I know your white paper addresses this a little bit, but I was hoping maybe you could go into a little bit more detail. I've heard from some who believe that insured values have not come down nearly fast enough relative to home prices nationally, and that as a result, the premiums in dollars, not necessarily premium per $1,000 of coverage, but the premiums in dollars are too high, and this is not necessarily just an issue for your business, but maybe for homeowners insurance business broadly. Can you just give some commentary around that? I think that's a misplaced view, but I'd be interested in your opinion.
Sure. Well, I think a couple of different things here. The first is we work off whatever the prior the voluntary carrier's coverage amount is, makes it nothing we're passing judgment on. We're just taking the program they have and extending that same amount of structural coverage that was in place in the past. Second, obviously, there's a big difference between home prices today and the cost to build or repair when things happen. Those are at a different relationship than we've ever seen historically. I think those things over time will move back to more normal levels. The third thing, I think, with respect to our coverage that often gets lost as well, is we have a dual interest policy.
What that means is when repairs take place, we are often in a situation when the repair takes place that allows the homeowner to stay in the home. We think that's quite important as well, whereas if it was just covering the loan amount, the person who's got the mortgage loan gets covered, but that's not enough to take care of all the damage that's been done. That just doesn't seem like the right approach.
That's an interesting one. Thank you. I guess I almost feel silly asking this question. Maybe it's a bit of a follow-up to Mark's, given you bought back 12.5% of your shares in 2011. With over $500 million of excess capital above your $250 cushion, is there really any reason the pace of your buybacks couldn't accelerate further versus 2011? I guess related to that, I know the board, Rob, typically makes a decision on the dividend in the spring, but have you given any, at least early consideration to maybe a more significant dividend hike to put maybe a truly competitive dividend yield on the stock?
Sure. Well, this is all part of that disciplined capital management strategy we talk about, John. These are all things that we look at periodically. I think Chris and his team, all you have to do is look at the history. It's very disciplined, it's very oriented toward value, and it's very oriented toward the shareholder. Chris, I don't know if there's other things you'd like to add in there.
I guess the only other thing I'd point out is our focus on consistency. Again, doing things the way we've done them quarter after quarter, year after year, using the 10b5-1 program to repurchase stock, being in the market, not doing accelerated because that suggests some sort of point-in-time view of ours. The key being to where there is deployable capital that the best use is to give it back to shareholders, that's what we're going to do. The discussion with the board, again, consistency, every year during the second quarter, we have that discussion. We're going to do that again this year. The other point I want to make is this is a dynamic process. This is not something that, it's not automatic. We ask the questions, the same questions, quarter in, quarter out.
We happen to be coming up with the same answers in the last eight quarters. That's the actions that we've been taking.
Okay. Last one, just a quick one in benefits. I think your press release mentioned that you lost about $40 million of premiums in the January 1 renewal on two different cases. Just be interested if you could give us a sense for how competitive that was. If you were looking for a rate increase of, let's say, X, how much of a discount did that business leave you for relative to X?
Yeah, that wasn't quite the issue on these, John.
Okay.
One was a client that was having relatively poor experience, and we were essentially trying to price correctly for the experience. That was sort of a loss ratio-driven thing. The other one was one of the turnkey reinsurance clients that we've talked about in the BRMS business.
Yes.
That client decided to essentially change its program and retain more of the risks themselves, so they're recapturing the thing. There wasn't any dissatisfaction. In fact, they thought we were doing a fine job for them.
Okay. Thank you very much for the answers.
We'll go next to Mark Hughes, SunTrust.
Morning, Mark.
Thank you very much. The voluntary benefits, you say that you had a lot of success in new sales. How big is that of your total sales within benefits, and how quickly did it grow?
It accounts for roughly, I think, 50% of our sales, Mark, and that's grown steadily, and that's where AE, or Employee Benefits, is investing their resources. As I think I said in my comments, they're taking some of the expense savings there and redeploying them into voluntary investments. They're adding to distribution. The pace of the voluntary growth, we feel pleased with.
Right. You've obviously had a lot of success taking share in specialty property. How's your visibility, or how do you feel about the opportunity ahead to continue to take share? Was there something special about the last year or two that allowed you to capture more? Are conditions just as good going forward?
Well, we think we have a better mousetrap here. That being said, there is one client we are not going to get, that represents a large share of the market. We think everything else is fair game.
The disability claims, anything you can say about the end markets? Was that fairly broad-based in terms of the types of customers that you're serving, types of policyholders in terms of industry distribution?
Yeah. As I said earlier, it's very difficult to look at one quarter of disability experience and draw anything definitive. We didn't see any particular segment of the block. I would say that there were a bit higher than normal large claims this quarter. Sometimes in disability, you can get some variance in the reserves on a high benefit claim can be quite large, you can get a little bit of volatility introduced there, nothing in terms of a particular segment of the block.
Okay. Thank you.
We'll go next to Chris Giovanni, Goldman Sachs.
Good morning, Chris.
Morning, Chris.
Morning. Thanks so much. Question on health. In the outlook, you pointed to kind of reduction in expenses again in 2012, but Q4 looked like it was the first time we hadn't seen sort of a sequential decline in expenses. Wondering, first, if there was anything seasonal in Q4 that drove the uptick, and then next, what type of expense saves further do you think you can take out?
Yep. A couple things. One of the things I'd just point out is we have both short-term and long-term incentive plans that get trued up at the end of the year. We finish stronger than we were thinking at the end of three quarters, and as a result, our accruals went up, and that's pretty much across the board. Okay? That's a little anomaly in the fourth quarter expenses. The health people themselves tremendously focused on continued simplification, they have efforts underway to reduce systems to look at anything that isn't customer-facing and ask questions of why do we have these things.
We've taken out a lot. I think they see opportunities for more, but it's harder. We have some things to deal with healthcare reform, we've mentioned. One of the biggest of which is just dealing with the additional coding requirements associated with ICD 10, I guess. I may have my ICD wrong.
That's right.
Fundamentally, the good news is that a small piece of that, we're actually going to be able to count as quality improvement on the MLR. That was, again, kind of a new news thing in the fourth quarter. Again, they're very focused on the expense side. They're very focused on providing affordability and choice to customers. We're hopeful we're going to see sales continue to increase in this business.
I would just add, Chris, I think Rob sort of commented on this, but certainly all the easier, easy to get or near-term expense savings have been attained at Assurant Health. They've done a great job. What we're working on now is really that hard, detailed simplification of the internal process, simplification of the systems environment, and all of that is just detailed and takes time. They're really on a great track there, so they do feel they can get more.
Okay. Back in 2010, you guys made the decision to stay in the Assurant Health business despite sort of what was going on with healthcare reform. Results certainly have been better than many expected. Do you think the success that you're having now makes this business easier to sell, or should we kind of take the Aetna contract as a sign that you guys are in this business for the long run?
Again, we start all our assessment around two fundamental themes. Is it a specialty business, and can we get to attractive returns for our shareholders? I'd say on both those counts, we're feeling quite good at the progress we've made. We're not to the returns we want yet, but we've made quite a bit of progress. We think that the Aetna deal is a great deal for us around a number of different dimensions and strengthens our position not only with end consumers, but also with our distribution partners. We're very encouraged on how we're moving forward in this business.
Okay. Just, sorry if you addressed this already, but I think you guys met with Best towards the end of the quarter. In the past, it's been you've been able to dividend up 100% of the earnings. Has that changed at all as you move into 2012?
No, the fourth quarter, Best performed and completed its annual review in the fourth quarter. Very pleased with the results. Keep in mind, agency discussions are not once a year or even once a quarter. They occur on a regular basis. I think to the extent that rating agency views evolve, we like to participate in those discussions, react accordingly. Again, comes back to capitalizing the operating entities appropriately given not only the rating agency's views but our views, which are a byproduct of our risk management approach. Right now, as of today, we don't anticipate any changes. Again, it's early in the year. We're going to file our statutory returns and make some determinations around ordinary dividend capacity, et cetera. It's an ongoing discussion and one that we participate actively in and have very good partnerships, we think, with the rating agencies.
Okay. Thanks so much. That helps.
We'll go next to Jeffrey Schumann, Keefe, Bruyette & Woods.
Good morning, Jeff.
Hey, Jeff.
Thanks. Good morning. Two questions on specialty property. First of all, we look at loans track, down about 2% year-over-year. Can you give us some sense of the interplay between how much the market moved and how much your share moved?
Well, a couple of things. The first is that the loans that we have are reported to us by the servicers, and we found that to be a rather fluid number. It's not like we have a perfect inventory on these things all the time, Jeff. That being said, we know that we added a couple of clients during the year, and the additions, there was a number of loans we thought we were going to take over, and then there was a number we actually took over, which reflect just that payoff, foreclosure, all those dynamics going on in the market. Maybe a good way to think about it is, what's happening to the overall inventory. We think that's gone down by several million loans, and we think we've gone down by a smaller percentage.
Okay, that's helpful. On the REO, if you look at the REO penetration of gross written, it's been coming down a fair amount. Is that a reflection of less new flows into REO, or is it more of a reflection of stuff coming out the backside of REO?
Well, you mentioned two. I think there's a third. Those are two of the dynamics. The third is some of our clients have moved to monthly programs on REO versus annualized programs. That will have not an impact on our earned premium, but certainly on our written premium. All those factors are in play. Off the top of my head, I just don't have those relative differences.
Okay, thanks. Lastly, back to the regulatory issues. I think if I characterize some of your comments up front, Rob, maybe this isn't fair or is over-simple. Please correct me, but I think part of what you're saying is that the regulatory focus is largely on the servicers. It's not on the insurers. In fact, you are really not facing issues with your insurance regulators. Therefore, perhaps you're not substantially at risk from this process. I wonder if that kind of oversimplifies it, because I thought one of the issues that was on the table with the servicers was the idea that perhaps they should be required to make much greater efforts to maintain the original voluntary coverages that were in place in order to help manage the cost of the coverage. Is your understanding that issue is on the table?
If so, isn't that something that indirectly would impact you?
A couple of points. First, I think your characterization is right for Assurant. I don't hope to comment on where any other insurers are in the process because I don't really know. I can only comment related to us. Second, I think we've done a lot to try and inform of all the efforts we go through to maintain coverage. That's a big part of the service we provide, and we provide it to our servicers. We start with somewhere during the year, 13% of all mortgage holders. We get some notification that insurance may not be remaining in force. Through our efforts, we're able to reduce that down to the 2% range. I think that's a great value to the servicers, et cetera, as part of that process.
Number one thing we try and do is do exactly what you said, keep that voluntary coverage in place. It's only when none of that happens that we turn to placing the policy.
Okay. That's helpful. I probably didn't appreciate that as well as I should. Thanks, Rob.
We'll have a follow-up from Mark Finkelstein with Evercore Partners. Hi, Mark.
Hey, thanks for the follow-up. Maybe just taking it back a little basic. On health.
Sure
Even if I adjust for the rebate in the quarter and knowing that the favorable reserve development should have been much lighter as that's largely played out, it was still a huge quarter. To a prior question, expenses weren't really the driver. What exactly drove certainly the very large health number relative to my own expectations and I assume others?
I'm just trying to think about a number of factors here. I think health has continued to monitor their experience. They've continued to drive down the expenses. There wasn't anything dramatic aside from the change in the rebate, Mark, that I'm thinking of. Yeah. No, I can't either. Obviously, all the issues that are going on there, we're selling some more business. That's a positive for us. That allows us to spread over that broader base of things. I just think it's the execution of their strategy coming to fruition here.
Okay. Are you still waiting on additional states to decide on the transitional provisions? If so, how big?
I think there are a few still outstanding. Most of them have been decided. I think there are a handful out there, Mark, that we're still waiting to hear on. There's a number we have also heard are not going to be granted. Right. The pool has shrunk for those who might be granted relief. Right.
Okay. Actually just one question on specialty property as a follow-up. I'm trying to kind of square this a little bit. The guidance for 2012 suggested some kind of deterioration in loss ratios, some deterioration in expense ratios, it was largely attributed to product diversification. It wasn't attributed to reinsurance pricing kind of rates. In Chris's comments, you talked about reinsurance pricing going up 10%-15%. I'm trying to think about, does that suggest that pricing on the core product is going up to meet that reinsurance pricing? Does it mean we're kind of reducing our outlays for reinsurance and therefore maybe the risk is going up a little bit? How do I square those comments?
Yeah, it's complicated because remember, for instance, the reinsurance program, we just placed a cat bond.
Right.
We had a cat bond that was rolling off. The market that was in place when that cat bond was brought to market was a tighter market than we're experiencing today. We're going to get some benefit from that. I think that Chris provided some general comments, it depends on the layers we're operating in, where we choose to participate or not participate in the tower. We still have a piece of the program to yet buy. Where we set our deductible is another important consideration. I think the best time to look at all that, Mark, is when we have the final program in place in June, and you'll be able to see the amount of coverage we bought, which is obviously more as we have more exposure in the cat-prone areas.
I think you'll be able to have the best sense of what that means overall. Our process is also on the rate, asking for rate increases at the state levels. We try and take that into account. That can be a little bit lag sometimes as well.
Okay. All right. Thank you.
We'll have our last question from John Nadel, Sterne Agee.
Thanks. Just a quick follow-up, it's sort of along the same lines as Mark, yet again. I'm just looking at the outlook commentary and thinking about specialty property and earned premiums being relatively flat year-over-year. Just when you break down specialty property, obviously, you got the lender-placed, you got the manufactured housing, and you got the other, which is that slew of renters and other products. Can you just give us a sense for, as you look out to 2012, what your general expectations are for each of those pieces that gets you to flat? Are we still looking for specialty property to shrink or no? I mean, for a lender-placed to shrink or no?
Maybe, it'd just be a small amount. It's all going to be a function, John, of the placement rate.
Yeah.
That, and-
Well, obviously that just had a nice lift with the new loans you brought on, right.
We believe so.
Yeah. Is it fair to assume that had that particular loan package not come on, all else equal, we'd be looking at a faster rate of decline, correct?
Well, if you go back again to our Investor Day presentation, we presented an outlook, John.
Yeah.
I think it's lengthening a bit or going more slowly than we might have put out there, that trend, I think, is inevitable. It's really a question of pacing in the Lender-Placed. Where we're really expecting the growth is on that multifamily housing business. We've got SureDeposit is added to our offering there, and that's where we're really expecting to see growth that will help offset this pace of the decline.
Okay.
In the Lender-Placed.
Appreciate that. Just one more quick follow-up on capital or capital levels or whatever. As of the end of the year, what do you estimate your incremental debt capacity is right now?
Well, I think it's still about the $350 million we've talked about. If you look at the debt-to-cap ratio, that's been pretty consistent over the full year.
Yeah.
There, we're going to be opportunistic. It is another source of financial flexibility for us. I think about the interest rate environment and kind of recent commentary from the Fed in terms of what they're going to do, and we want to be very careful about adding capacity when there's no imminent need, and we do have such strong operating cash flows and a large holding company capital position.
I could think of an imminent need. Thank you.
Thanks, John.
Thanks for joining us today. We look forward to updating you on our progress next quarter.
This concludes Assurant's fourth quarter 2011 conference call. Please note, a replay will be available as of 11:00 A.M. Thank you for your participation. You may now disconnect.