Good afternoon, ladies and gentlemen. Welcome to Kemper's 2016 strategic update conference call. My name is Shannon. I'll be your coordinator today. As a reminder, this conference is being recorded for replay purposes. I would now like to introduce your host for today's conference call, Ms. Diana Hickertill, Kemper's Vice President, Investor Relations and Corporate Identity. Ms. Hickertill, you may begin.
Thank you, operator. Good afternoon, everyone. Thank you for joining us. Today, you will hear from our senior executives, including Joe Lacher, Kemper's President and Chief Executive Officer, Mark Green, Kemper's Life and Health Division President, Chip DiPaula, Kemper's Property and Casualty Division President, John Boschelli, Kemper's Chief Investment Officer, and Charles Brooks, Kemper's Chief Information Officer. After the markets closed yesterday, we posted a presentation to the investors section of our website, kemper.com. We will be referring to this presentation during our prepared remarks, following which we will open up the call to a question and answer session. Before we begin the presentation, I'll call your attention to a few key points. All financial references will be to the period ending June 30th, 2016, unless we state otherwise.
We included cautionary language for you to review on slide two of our presentation related to any forward-looking statements that are made. We provided descriptions and reconciliation for all non-GAAP financial measures in the appendix of the presentation. Now I will turn the call over to Joe.
Thanks, Diana. Thanks to everybody who's on the call this afternoon. We appreciate your time and your interest. We're going to try to walk through a number of things today. We're going to work off real quick page three. We'll try to remember to tell you when we're advancing pages here. A view of where the company was at the end of 2015, what we're doing about resetting the table and getting ourselves projected forward, how we're going to get there, what we've done to date. Really, a view and a case for why I think we think this is a pretty exciting opportunity and exciting business going forward.
If I flip to page four, the baseline we're starting with, as we put this together, we felt like we were being a little negative as we sat here, unfortunately, we also wanted to be realistic in terms of looking at what we had. We've got a portfolio of businesses, they were operating without a real clear strategic framework or focus. We probably weren't pushing any of them as hard as we should have, we were getting the financial underperformance you'd expect. Low ROEs. We had at least four or five years of declining revenue. The expense base was heavier than it needed to be, partly from inattention and partly from not being able to keep up with the revenue declines. What a number of us have come to call deferred maintenance.
There were things that probably needed to be dealt with, whether they were cultural, process-oriented, investments in IT infrastructure or missed investments that didn't work. Generally, the normal care and feeding that we would've expected wasn't where it needed to be. Honestly, we had a little bit of a culture of being okay with that. Some element of, this is how things are, this is what you expect, given all those things, we're getting the best we can, we're not that big, this is sort of our lot in life, which wasn't a good place to be. It resulted in the book value ROE correlation you see in the bottom right corner. That's clearly not someplace that we as a team are comfortable with going forward. You look at the businesses in the top right, these bubbles give you their size.
Low or no growth on most of them, ex the newly acquired Alliance United. Some combination of earnings problems and obviously Alliance United, while it had a lot of growth, ended up now having a lot of earnings problems. The mix was one that really needed some attention. One of the things you find about a property that's got deferred maintenance is you got to look underneath it. If you flip to page five, what gets us excited is looking underneath that a little bit and says, okay, what's a structural problem versus what's a fixable problem? What are the real underlying assets? There are a lot of strengths here. We have a strong capital position, more than $200 million in excess capital as we bring that down to date. I think Diana mentioned everything was through mid-year.
This includes the impact of the life claims initiative that we announced earlier in the week. A very strong capital position, a strong life business that's steadily generating capital. We've got a terrific, well-recognized brand. In sort of an odd sense, it's largely undefined. People recognize it, know the name, know we've been here a long time, we, in some cases, have a little bit of a blank slate that we can point it to where we want it to go and what we want it to mean. Huge asset that a lot of companies would fight for. We have a great regulatory foundation. We're licensed in all 50 states. We've got a broad product portfolio, a platform on which to build out a lot of opportunities. That same broad business portfolio gives us a diversified set of platforms.
We've got some non-correlated risks and places where we believe there's some fundamental opportunities to leverage and grow the business once we fix some of these weaknesses. A bright spot in the place is our investment function. It continues to perform well, continues to outperform our peers, and probably, we'll talk about it a little more, is an example where we're actually in some cases using our size and our scale to our advantage to help that work out going forward. We've assembled a proven senior executive team, a group of folks, and we'll talk about that a little more in a minute, that have a track record of results, a track record of delivering on commitments, and a sort of a competitive edge to them, and a drive to want to win. Our weaknesses, again, aren't core unfixable items. It's not like a cracked foundation.
It's not fundamentally having termites running through all of the framing of the house. These are fixable. We've had weak execution. That's something all of us as a senior team know how to deal with. A strategic focus says, where do you want to be? What are you going to build towards? Take out that culture of complacency and put in a standard that says, here's what we're accepting, and here's the pace, and we're going to push for it. That's fixable. The financial underperformance comes, it sticks with the top three. If you do the right things for the right reasons, with the right pace and the right way, it produces, ultimately, good results. We've had part of that deferred maintenance, what I describe again, is a weak technology infrastructure.
We've had a number of write-offs in the last couple of years of attempts to fix that. What I'm really excited about is I think we've got items underway that 12, 18 months from now, we ought to be comfortable saying that we've largely replatformed a big chunk of that infrastructure, and we'll feel good about it, as opposed to feeling like it's dated. As we take those items and think about them, you add them up. If you thought of them almost as a balance sheet, there's a tremendous amount of unrealized potential here. These are short-term fixable liabilities, a bunch of assets that you'd kill for if you were trying to start businesses, and a great amount of unrealized potential that we think we can get after.
If you flip forward to page seven, the first item we believe we need is a clearer focus for the organization. We are not huge. We recognize that. We're not going to be able to jump into a Main Street environment and go head-to-head, in all of our businesses, what some of the biggest players are doing. We've got to carve out a spot where our size and nimbleness can be an advantage. We're going to focus on consumer-related insurance businesses or insurance-related businesses that are inside of the sweet spot of what we know how to do. We're going to target either underserved markets where there's limited or unfocused or weak competition, or places where we have a unique expertise, whether it's distribution or claim or underwriting or combinations thereof, that give us some sort of advantage in that space.
This might be sometimes described as niche businesses or fringe businesses or specialty businesses or things that are just a little bit off the edge of the core everyday day items. I think we'll go on and talk about, in each of our businesses, how we think about them, and where they fit. What it's going to take with those is to build and leverage a set of key corporate capabilities. Some of these are the exact opposite of the weaknesses we've got on there, which is a little bit odd, I understand. Again, they're very fixable and quickly fixable, and they're items that I think play to what will ultimately be our strengths and ultimately a good position for us. We've got to be nimble and able to quickly capitalize on opportunities.
You get there from a heavy reliance on analytics and business intelligence, running businesses by the numbers, having very disciplined risk selection, recognizing that execution is going to be critical, and having a technology and expense base that facilitates that. When you're in the insurance space, particularly in the areas that we are, you're really doing a couple of things. You're predicting the future as you try to figure out how to underwrite and price a risk. You're dealing with large volumes of transactions as you're settling claims. To do that well, you've got to fuel the business on top-quality information and analytics, and you've got to be relentless executors. Just make sure that all the nickels are picked up in the right way, all the I's are dotted and the T's are crossed, and you do it quick and efficient.
That is something that this team knows how to do, and it's something that we very much believe, with this focus on these businesses, that will allow us to create a lot of value. We expect to create that value short-term by fixing some of these problems, and in the intermediate term and longer term, positioning the company to create value organically and inorganically. We're convinced that this is a business that near-term can get to low double-digit ROE, near-term can get to the high single-digit ROE, and in the intermediate longer term can do better than that. High single digit, low double-digit ROE consistently, and growing book value per share. If we take that picture of sort of what do we want to be, and where are we building towards, I'll flip you towards page eight.
I'm excited to be working with this team. They're an experienced team with a proven history of delivering results, a results orientation. They've got different experiences, different points of view, different styles. They have a couple of things in common. One, they're working collaboratively. They have an incredible desire as competitors to win. They've got what I describe all the time and I look for is a constructive dissatisfaction. They're impatient. They want to see things get better. They want to see improvement. They want to deliver competitive advantages into the marketplace, they're collaborative. They recognize that we are going to win as a team, but not as a group of individuals separately working. We're able to push back on each other. We're able to make each other's ideas better. We're able to lob the ball back and forth as a group.
I think that's consistent with this group's track record in other places they've been and will be something that'll be a hallmark of how we march ourselves and the organization going forward. We got a couple new players on this list in the last week. Jim McKinney will be our new CFO in November, and Chris Mullins will join us in October as our Chief Human Resources Officer. Those two will complete the senior team, and I think we've got the gang we need on the field to deliver on our potential. With that, I'm going to ask us to shift and do some discussions of our individual businesses and how they're positioned with this strategic focus, and where they're going to march. I'll throw it over to Mark Green.
Thank you, Joe. For everyone following along, we're on page nine at this point in the deck. I arrived on June 1st and have now spent some time in both St. Louis with our Kemper Home Service folks as well as our Reserve National team in Oklahoma City. During those trips, I spent quite a bit of time doing strategic deep dives into such things as the state of the market, what our core capabilities are in product distribution operations, also where do we see our opportunities in the future. Let me say one thing up front unequivocally. I'm excited about the future of both these businesses. The overarching theme in both of these organizations will be to enhance and optimize our distribution capabilities. In addition to focusing on distribution, both businesses will also benefit from time spent getting better about traditional execution-related activities, as Joe mentioned earlier.
These will include things such as IT infrastructure, certain business segments, and operational processes and flows. Let's begin with our life business. The segment itself is very attractive. There's very little competition, and what competition exists is fragmented or regionalized. The segment is also growing. The communities we serve not only need our products, but they also want our products, and that is a very important distinction. Of course, this segment is also profitable. We're also well-positioned to take advantage of all the opportunities we see within this segment. We have a known and well-respected brand in the communities we serve. We have 2,200 agents selling our products, and we have a very large client base that is available for cross-selling additional products into. We have the operational foundation by way of our filings and infrastructure to react to any changes in the marketplace.
Additionally, our strong balance sheet allows us to play opportunistically where we see new potential. Where will we focus is the big question. Our current book, while profitable, is also shrinking. This puts pressure on us in a variety of ways. Our near-term strategy will be to focus on profitable growth through that distribution. This strategy could take many forms, but expect us to concentrate on a few things. Adjacent markets, such as funeral home or final expense type policies. Affinity partnerships related to our core demographic. Creative ideas around expanding into new geographic areas while keeping startup costs to a minimum. Finally, the potential for M&A if the environment makes sense. Let's move to the health business. I'm equally excited about Reserve National's potential, but for slightly different reasons. As everyone knows, the health segment is obviously very fast-moving given the current environment.
This can and will lead to large gaps between currently available products and consumer needs. Additionally, the scale of this segment is enormous, and the national demographic shifts will continue to push the need for new and unique products. The reasons we are poised to take advantage of these market dynamics are plentiful, but a few of the key components would be our small size, which we can absolutely use to our advantage by being nimble and working to react quickly to shifts in the marketplace. Our current product set is broad, and we have the infrastructure to develop new products and take advantage of new needs as they emerge. We are developing highly efficient processing and policy servicing capabilities. Where will we be focusing on with our health business? It's a very similar story to our life segment.
While we have solid and long tenure distribution on our core indemnity business, there's still significant room to expand in both channel, be that partnerships or affinities, as well as geography. Additionally, distribution will be key in our two smaller divisions within Reserve National, Kemper Benefits and Kemper Senior Solutions, both of which have product depth and core demographic value propositions, but lack efficient and robust distribution. We will evaluate the best ways to move forward on each of these divisions in the near future. Let me close with three items. The first, we are very cognizant of the first do no harm doctrine and will continue to deliver the cash flow you've come to expect in these businesses while working hard to expand our profitable writings in the ways discussed above.
Second, in Kemper Home Service, we have a solid business model that continues to throw off positive cash flow, while Reserve National, not quite as large in terms of economic impact, is a very capable platform with which to incubate new ideas. I like the potential that this diversity will bring to our corporate value proposition. Finally, the Death Master File issue has been an overhang to all of our stakeholders, and I feel very good about where we are on that dynamic. Joe will speak to that in a later slide, so I will not steal his thunder. With that said, let me turn it over to Chip to discuss P&C. Chip?
Thank you, Mark. As Joe mentioned earlier, we have a distinguished brand and the ability to perform at a much higher level than we have in the recent past. As you see on slide 10, we are a regional independent agent player with a strong Main Street disposition. We've been able to leverage our package policy as our value add over the years, and this has been very attractive to our agents. As we all know, the preferred auto and home segment is very crowded, and each carrier looks to distinguish itself from the pack and to be able to compete for shelf space in an agent's office. I've spent my entire career working with independent agents, and after 10 weeks of being here at Kemper, I firmly believe we have the opportunity to enhance the relationships we have with our P&C agents and brokers.
We must look to increase our product and pricing sophistication, ramp up our claims handling practices, and to deliver on ease of doing business initiatives. We are putting the pieces into place to deliver on these keys to success. In order to do this, we must finish our programs to replace our policy administration system and the agency interface. We're taking a hard look at how we handle claims and why results are lagging the industry. I personally have a strong service bias and have learned over the years that one size does not fit all when handling claims. Kemper claims has been underperforming, and we will be correcting this in the weeks and months ahead. I will dive deeper on this subject in a later slide regarding claims effectiveness.
The property and casualty team is confident that we have the ability and the capacity to grow our homeowners book of business and to be able to go on the offense with this line. We recognize personal auto is often commoditized, and we will be competitive in that space, but we do not plan to compete on price alone. In order to be successful with our preferred home and auto lines, we are planning to increase our ability to more fully utilize business intelligence and our analytics competency. We also recognize that we have the potential to leverage our geographic footprint to grow our business. Unlike many of our regional carrier competitors, we have a broad national footprint of untapped opportunity. We will see value here once we solve our underlying performance issues. I will now move to non-standard auto on slide 11.
We have identified non-standard auto as a market that fits into our niche opportunity focus. We see the larger battles being waged over the preferred market segment, and we view that we have the ability to exploit this space. Many larger carriers have entered into the non-standard market segment, only to learn that it can be a very difficult area to compete. By the end of 2016, Kemper will have more than $800 million of non-standard business, and we will have scale and a platform that we can grow. Quite simply, Kemper has the ability to be a strong market player in this arena. In order to accomplish our goals, we must return to our roots and once again become more specialized around all operational aspects of this business.
At Kemper, we will be on our toes and be able to react swiftly to changes in the market, to changes in our experience, and to be responsive to agent and customer needs. We must be nimble. Later in this presentation today, I will discuss Alliance United and our plans to restore profitability to this business. I cannot leave this slide without mentioning our poor results as illustrated on the diagram for non-standard auto. We've been taking steps to improve these results and anticipate increased profitability. The first half of 2016 illustrates an improvement in the normalized combined ratio for our legacy non-standard business. It is still too early to tell if we've turned the corner. Let's watch this over the next few quarters to see if we are on a new trend.
I recognize that non-standard auto customers' expectations are unique, and claims handling processes must align with the business dynamics. The reality of this business is that it can be very difficult to reach the policyholder after a loss, and we may receive very little cooperation from them, as an example, when we do reach them. This further increases the need to have a strong first notice of loss process and to handle as many claims as possible with as few touches required. We are working as a team to deliver our desired results and are excited at the opportunity before us. Now, let me turn the call over to John to review our investments area.
Thank you, Chip. We have two real main drivers that make our group unique and successful. It's how our investment group is structured and our overall asset base size. First, we have a very strong tenured team focused specifically on insurance asset management. That's key. We're not out trying to raise assets, trying to build a platform. We already have the assets. We're designed the portfolio to maximize our output. We take an active approach in our portfolio construction and management. Key is this approach is specifically designed to take advantage of our multi-line insurance businesses platform. Because our businesses have different liability characteristics, liquidity requirements, capital considerations, regulatory environments, and tax codes, we can invest in a more diverse asset base. This diverse asset mix provides correlation benefits that result in higher expected returns, lower investment expenses, and lower overall volatility versus a monoline insurance company asset mix.
The second main point, Joe alluded to this earlier, is our size, and we really do use our size as an advantage. Our small size allows us to be both nimble and strategic, I'm going to give a few examples until Joe cuts me off. Here's my first one. We can be very selective. When we underwrite a credit, we can pass on that credit If we have asset classes that we don't like how the performance is looking or the pricing for that asset class, we can skip that asset class. If we have a credit we like, but it's not valued appropriately, we can take a pass on that from a relative value. We don't have to be in every deal.
We're not so big that we have to be in every deal, we could pass on a deal because we're not specifically tied to a specific index. This flexibility can also work in our favor. If we identify an asset class that's attractive, we can move very quickly and have a meaningful impact on our overall portfolio. $70 million represents about 1% of our portfolio, that's basically a rounding error in some of our peers. Another example, when we want to access an asset class but our scale doesn't support the infrastructure cost, we go out and seek external managers who want to do business with us. It's key. It's a business concept, not just an asset management concept. They get to reduce their overhead costs and become more meaningful to the issuing community. In return, we get what we're looking for.
We get access to their portfolio managers, their analysts, and their deal flow. The key here is we maintain discretion. We pick and choose the assets we want to invest with them, and we're bouncing that off of all different asset classes and asset opportunities. I'll give you another example. We use our scale as an offensive weapon with our alternative investment partners. The alternative investment commitments are used really more for a tool for building a relationship with our general partners who are actually running the funds. We tend to focus on smaller funds where we can be meaningful, and they can be responsive to what we want. This is key. Our peers are much too large to invest in the type of funds and the size of the funds we're going to.
We tend to be one of the few institutional partners that they come across. What we desire in that relationship is an ability to co-invest in the same investments that they are ultimately placing in the fund. We're able to build a diversified portfolio at our own discretion. Once again, whether it's a timing or a credit, we can pass or not for no additional fees. Here's another key, which is I think the biggest driver, is that we do what we call continuous due diligence on our partners. Another way of saying this is cradle-to-grave investing. We're in before they're buying the deals. We're understanding how they're looking at the deal. As that deal progresses, we earn a lot of insight. If it starts to go south, we see how they behave. That, during the entire process, is invaluable type of feedback.
It feeds us how much we want to maybe invest with them again as a partnership or even our co-investments and how to size the co-investments and how aggressive they are in protecting those. I think that's enough. Joe's cutting me off here. Just in total, our returns have been strong relative to the industry and peers while maintaining a similar risk profile. That risk profile can be measured in many different ways. Risky assets as a percentage of admitted assets, capital and surplus deployed, or even predicted volatility. I'm confident we are positioned to execute effectively in any investment environment. We're able to adapt our approach to support Kemper's growth in the future. I'll turn it back over to Joe.
Terrific, John. Thanks. We won't cut you off as long as you keep delivering the results. You're doing fine. Big plus for us. We'll shift now to page 13. As we think about this portfolio of businesses and capabilities, we really want to talk a little bit about our path forward to unlock this value. We've got 3 phases here pictured. To some degree, we've intentionally not put an exact date on it, and we've actually talked about rebuilding, leveraging, and incubating new capabilities and growing as layered across all of those. We could be over simplistic and put an exact date on each one of these. I don't think that's particularly helpful. I think the key element is phase 1's a couple of years. We're going to look at a chunk of this as 2017 and 2018 of fixing these underlying businesses, rebuilding capabilities, enhancing capabilities.
At the same time, we're going to be looking for growth opportunities. We're going to be leveraging new ideas, incubating those new ideas. When something inside of the place is ready to kick it into overdrive, we're going to do that. We're not going to be hostage to a particular date. We're going to be opportunistic when it's right to move forward. We'll talk in a couple of minutes about a number of these specific items, and we've got some details on them. Maybe it's more a thought from an overall perspective. We're going to drive some clear short-term financial improvements and some clear short-term rebuilding of core capabilities. While we're doing those, we're going to deliver those financial results, build out those capabilities.
We're going to do it in a way and invest in a way that positions us for delivering competitive advantages and long-term growth for this franchise. It's not just a quick cash item. All the numbers we'll provide you as we go forward are net of anticipated investments. We think it's a good combination to deliver some near-term results and wisely build out capabilities for that long-term growth. Maybe the broader set of comments before we jump into these specifics is about a couple of things. We're going to and are in the process and have already seen tangible steps forward in building an organization with just a relentless results orientation. It's going to be driven by what term I used before, a constructive dissatisfaction. How in a positive way, we make sure we're not satisfied with where we are. We're constantly looking for improvement.
We're looking for items to capitalize on and move forward. We're going to run these businesses by the numbers. We're going to take a cold, hard, crisp look at the facts and where we are. We're going to have an external orientation to understand where our competitors are, what's going on in the environment, and make fact-based decisions. We're not going to be paralyzed by analysis. We're going to move with a sense of urgency, that results orientation, and what I like to describe as a group that's going to be on the balls of their feet, not on their heels, saying, "How do we move forward?" Whether you're playing defense, whether you're fixing something, or whether you're playing offense, you're on the balls of your feet because it keeps you positioned to move forward.
Hopefully what you see over the next couple of initiatives is that that's the way we've been behaving as an organization in the last six months, and going forward. You're going to see an array of initiatives, but you're also going to see points on the board that are already moving and going forward. We'll flip to page 14, and talk a little bit about our life insurance claims initiative and the DMF. This is a case where it's a combination of, I think, moving past an issue that's been vexing the company for a while and positioning us for the long term. Now, Mark and his team have done a fabulous job dealing with this issue. I'd say, part of what's going on here is we've got a little bit of a new group who's looking at this issue with a fresh set of eyes.
There is a new tool that's in the marketplace with Death Master Files and these databases and these other items that really wasn't available five or six years ago. It wasn't contemplated in policy language. It wasn't contemplated in anybody's operations. The tool's there, and it's one that can be deployed in a way to help our customers. Our view on it, as we look at it, is we need to be for something rather than against something. We've probably spent the last five years worried about what we were against. I think the two things we were railing against are probably legitimate. They are legitimate. Some folks in the industry, some carriers in the industry really did some things that were not good stuff. It was unworthy of our industry. They were using this tool inappropriately, and they were punished for it.
We never did that. We haven't done that in an inappropriate fashion. We're unwilling to be punished for the sins of others, and we're not going to do that. We do think it's bad public policy to retroactively change contracts or to go back and try to rewrite history on items. I don't think that works well. That being said, we've been hoping that there would be a regulatory point of view that was consistent across states on how companies like us should deal with this issue. That has not emerged. I guess our point of view is we're tired of waiting on it. We're going to voluntarily move forward with something. We're going to take a point of view that says this is a tool that can be helpful to consumers.
We've gone through a rigorous internal process and vetting process. We're very comfortable that we can use the DMF on our in-force book of business. We can go back and very thoughtfully and rationally look to see where there's matches, where there's opportunities to reunite loved ones with death benefits from our insureds, and do that in a thoughtful way. I guess the maybe color commentary I'd provide you is we're going to robustly use these tools the way many of the companies that have been involved in settlements have used them in terms of using broad sets of databases, all of the fuzzy matching capabilities, all of the extra items that were done, and we're going to look at the individual risks.
When we have a high probability that somebody matches ours, we've got the name, the social, we've got the address, it looks like our guy, we're going to move forward. If we get wacky items where we've got J. Smith from New York, N.Y., born between 1940 and 1945, that doesn't look like it's a match to us, and we probably won't be moving forward. We think we've designed and defined a very thoughtful process here that's the right thing for the consumers, it's the right thing for us as a company, and it recognizes what tools are available in the marketplace, so we're going to march forward there. It did result in us and will result in us taking a $50 million charge after tax in the third quarter.
That's largely for loss dollars, loss adjustment expense, different costs associated with making this happen, that will run through the third quarter. We believe that this puts us in a terrific position moving forward. It lets Mark and his team very much focus on how to grow the business and put us in a position where we feel great about how we're helping our customers. With that, I'll throw it over to Chip to talk about some of the P&C initiatives.
All right. Thank you, Joe. I'll turn now to slide 15. I've already mentioned earlier today that we must refocus and strengthen our non-standard auto competency. Many of the actions that we are taking with Alliance United are also being applied to our total non-standard auto book. We have said today, and we've said previously, it's going to take time to resolve our issues with Alliance United. Candidly, a perfect storm hit for Kemper after the acquisition. AU was behind on rate and claim staffing just as new business and frequency began to climb. We continue to be aggressive with the rate changes, and this will continue into the future. We recognize that we still need several pricing cycles to get the appropriate rate for this business. However, we're not attacking the problem with rate alone. Underwriting actions and growth management are also important to our profitability strategy.
Our sales leadership team is taking non-rate action with our brokers and agents to improve results as well. The final piece of this equation is aggressive claims handling. Cycle time, for example, was not a priority and unfortunately got away from our claims organization. As we all know, claims do not get better with time, and high levels of new business production further complicate matters. I'm pleased to report we are making progress to restore profitability at Alliance United. We have staffing at needed levels and continue to overstaff in the short term. We're doing a much better job of managing our pending claims load and plan to stop reporting on this issue in future calls as we settle into Alliance United having a claims process that is running effectively. Although we still have work to do, our measurements are starting to move in the right direction.
This takes me to my thoughts on overall claims processes effectiveness on slide 16. Having led customer service and claims at my previous employer, I know the importance of running a high-performing area in claims function. At Kemper, we do not need to reinvent the wheel. However, we must bring our claims handling processes up to date. Currently, as an example, many managers and supervisors have very narrow spans of control. I'm going to ask my management team to step up and take on more responsibility and ownership of their work functions and to own their results. With our strategy, we will be rebuilding our service delivery model as we emphasize key metrics and important initiatives. Our claims team is engaged and ready to take on this challenge.
Over the past several weeks, I've been visiting our large field offices and conducting town hall meetings with the Property and Casualty team. I've found employees who are highly engaged and looking to elevate the organization to be a high performer. Many employees are listening to this call today, and I know excitement is building for the future. They also recognize that improvement needs to be made, and they are involved in helping to shape that process. As I mentioned when I was discussing non-standard auto, reducing our claims cycle time will serve all constituents well. By improving our cycle time and streamlining parts of the claims process, such as call routing and assignments, we will take unnecessary steps out of the process. We will also leverage our investments in Guidewire claims, utilizing the system to its fullest potential.
By taking non-value-added steps from the process, we will begin to take hours from each claim processed. These hours will then turn to days, ultimately lowering expense and improving customer satisfaction and retention. For example, as of this week, we are tracking that 26% of our automobile physical damage estimates are being written within 48 hours for our legacy business. This is the highest level of achieving the under 48-hour target throughout all of 2015 and year to date in 2016. We are tracking to be at 40% before year-end, with our eye towards being at the 70%-80% mark in 2017. When achieved, this will be a first step in moving from point one to point two in the illustration on slide 16 of our document. Our team has the opportunity to not only improve customer satisfaction, but also to drive out redundant and unnecessary expenses.
By improving our expense efficiency through managing our claims more aggressively, we will reduce leakage and allow claims to be a value-added service. We will deliver a net $85 million loss in LAE run rate improvement by the end of 2018. This implies a roughly 5% reduction in Property & Casualty's combined ratio. This is a very exciting and compelling combination. Higher customer satisfaction plus savings flowing to the bottom line, plus improved competitive position equals a profitable, viable, and growing business with strong results. I'm glad to be here at Kemper, and I'm very excited about the opportunity that is ahead for us. The Property and Casualty team is ready for the challenge, and we will be working hard to execute on our strategy. With that, I'll now turn the call over to Charles to walk us through the technology that supports our efforts. Charles?
Thank you, Chip. For those following along, I'm on page 17. We are making significant investments over multiple years to upgrade or rationalize critical components of our ecosystem. As Joe said early on, we had a number of system write-offs, mostly due to some edgy system choices, but also due to some loose processes. Our approach today is fundamentally different. In P&C, we're building around a proven product suite of Guidewire and AgencyPort, both of which are leaders in the U.S. insurance market. We took a lot of risk out of the program by picking these high-quality products. We also have the right partners in place with strong agreements to reward good performance and discourage poor performance through penalties. Our processes are now very disciplined and are helping us to accelerate our pace.
The structure, communications, tools, everything is formalized and working to get us moving at an aggressive pace. Finally, we have the right people in place. Our IT leaders are strong and deeply engaged with their business counterparts on a constant, real-time, and productive basis. Let me talk to you about some specifics. As you just heard from Chip, we started with a complete upgrade of our enterprise claims system platform with Guidewire and are now focused on leveraging that platform to full capability to improve claim outcomes. In P&C, as you see on this page, we have been at our major IT systems upgrade for a few months, and so far, we've hit every target to date. Schedule, budget, quality, even conformance to out-of-the-box functionality, which limits customizations, are all on track. We will start rolling out states in the middle of next year.
In life and health, we are investing in our life platform to move from an aged monolithic architecture to a much more strategic platform. That project is now on track to be delivered in the middle of next year as well. Finally, we're rationalizing our core infrastructure to make us more agile in everyday IT operations, as well as allowing us to scale more easily for growth and acquisitions. We are actively refining and accelerating our cloud strategy and looking at our infrastructure footprint as we move more towards an OpEx model. Over the next few years, we will maintain a relentless focus on execution and continue to accelerate our pace of improving our systems. With that, I'll turn it back over to Joe.
Thanks, Charles. The last item, flipping to page 18 on that list of specific items in the path forward was expense management. Chip talked about claims and included loss in LAE, so there's obviously expenses in LAE. This is really a discussion of OIE or the general administrative and interest and other expenses. On a first half annualized 2016, that's about $300 million in expenses. We've got a series of actions and initiatives that we're working on that will generate $50 million-$65 million pre-tax of expense savings. We do expect, much like the $85 million Chip talked about, this will also drop to the bottom line. These are net of any particular investments that we've identified already to move forward. The timing on these, you can see in the bottom right. We've identified and taken action on $20 million of that already.
All of that will hit by year-end 2016, so the run rate will be there at the start of 2017 and be fully earned in 2017. We're targeting another $20 million-$25 million during 2017, that will be fully realized by the end of the year, so it'll be available for the run rate of 2018. Then another $10 million-$20 million by year-end 2018. All in, $50 million-$65 million by the time we get to the end of 2018. It's from a variety of things. We're either going to do a better job of leveraging our capabilities inside the place. In some cases, we're going to work more outsourcing. We're going to work and leverage technology things like some of that Charles talked about a minute ago. We've got some consolidation opportunities. We've got vendor management.
The same span of control Chip talked about in the claim department is available in other spots. It's real estate. It's paperclips. It's a thousand little things that we're not going to go through each of them bean by bean, but we know where they are, and we're going to start chipping away at them. We may have to buy a couple of wheelbarrows to pick the dollars up off the floor, but we're not going to let that get in our way. We're going to pick the dollars up off the floor and get ourselves positioned going forward. Flipping to page 19, sort of a transition thought. That is a long list of items that we believe in the near term will help us drive this path forward, drive that phase one capability.
Our capital deployment priorities are really thinking about how we're positioned as we get through that phase and we move forward. We need to be an organization that can fund profitable organic growth. The first keyword there is profitable organic growth. We've got to be profitable. We've got to be positioned the right way. It's got to be worth doing. We want to do that. We want to have the capability and believe in the near future, we will to look at strategic acquisitions whether that's in existing businesses we have now in P&C and life, or whether it's looking at other specialized niche businesses. We think there's opportunities for us to take our core capabilities and leverage those. As always, we're going to return capital to shareholders if we don't believe that we can make a superior return on that capital.
We'll promise to you overall that we are going to be good stewards of your capital. If we can't put it to work in an attractive fashion, we'll return it to you through competitive dividends or repurchases. It's worth noting on here, and in our comment on capital earlier, we do as we've previously announced, still intend to restructure our debt. We think we've got $360 million maturing, and we'll do $250 million, so retire $110 million of that under the same timing that we've talked about before. There's no change in that, and that concept was contemplated in our view of excess capital. We've got the money available to do that retiring of that debt. Flip into page 20. We have real meaningful progress made in 2016. I talked about it before. We've got a senior leadership team that's identified. You've heard from a number of them today.
Some of them are relatively short-timers, but I hope you got a feel even with 10, 15, 20 weeks under their belt. They've got an understanding of what's going on inside this business. They've made significant changes, and understand from their past experience where the levers are to make this place hum, and are engaged in doing it. I'm excited that we've got that full team identified. Our biggest issue that was sort of a vexing problem in our life & health business was our DMF unclaimed property issue. We believe we've defined a resolution for that, and we're in process of executing it. We've got our systems program in both life and P&C, both on track and moving forward. Our preferred business has stopped the revenue hemorrhaging that we saw in the last couple of years.
We've stabilized both new business and retention levels there and feel good about that. We've clearly provided what I might describe as a ton of penicillin to Alliance United to try to fix the problems there, and Chip went through that. While not at full health and not quite close to full health, the actions are identified. The progress is being made. It's moving consistently with our expectations, has a ways to go, but we're increasingly confident that we're on the right track. Perhaps more importantly, we've got a set of initiatives running through our P&C claim service delivery model that will unlock a lot of value. It's financial value to the bottom line, it's customer service value, and it's an improved competitive positioning value that I think will be really key to all of the P&C businesses going forward.
We've got a clear path on what we want to do from an expense perspective and have 20 of that $50 million-$65 million already identified and the trigger has been pulled, and those actions are underway. We feel good about the points that have been put on the board to date. We're definitely not happy with where we are and content, but we are on the balls of our feet, moving forward and gaining speed. That really brings me to the last page here, page 21, and the case for this organization. We believe we have a great set of assets and a platform that we can leverage and create a lot of value. A great brand, strong capital position, a diversified portfolio of businesses, a great investment function, and a proven executive team.
With that group of items, we can attack the weaknesses we have in the organization. We are already actively engaging them and making meaningful progress. We're going to rehabilitate these items, not just in a way to get a quick short-term gain, but in a way that builds capabilities so that what we're building is systematic, sustainable competitive advantages for this organization, so that we are positioned for growth, both organically and inorganically. What I hope you see, and we got ourselves twisted up in about six different ways to try to make sure we were communicating this on the right side. I think the important thing to take away from it is a, and I'm going to describe it a couple different ways, a four to four and a half point improvement in ROE.
You can think of it as $135 million-$150 million of pre-tax earnings improvement with loss in LAE at 85% and expenses at 50%-65%. You can think of it as an $88 million-$98 million of after-tax earnings improvement. You can think about it as five points of loss and loss adjustment expense improvement in combined ratio for P&C and a 20 point reduction, 20% reduction in OIE or G&A and interest and other expenses across the place. You can stop, and you can just go back and look at our earnings over the last five years. If you take a view with normal catastrophes and you exclude real-life gains and losses, this business in the last five years has made about $100 million, $105 million.
We think we can push that up $90 million, nearly double that number, by the end of 2019. We get tied up in our underwear about which type of equity are we using in the ROE and which one of these numbers are here, and pick whichever one you want. When you cut through it, a $90 million earnings reduction, five points to P&C loss and LAE ratio, and a 20% reduction in general and administrative and interest and other expenses is a big nut. We think we can do that, and we can do that and are committing to do that net of the investments we're going to put into this place to build our capability for the long term. We're excited about it. We will be pleased if we make this progress, and we will be unhappy at the ROE we're at at the end.
We think we can move beyond that. We'll be pleased with the progress, but we're going to shoot higher, and we're going to be impatient and try to get to those stronger levels quicker. With that, we've got a high level of enthusiasm here. Hopefully, you do, and we'd love to take some of your questions. Operator?
Thank you. Ladies and gentlemen, if you have a question at this time, please press star then one on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Our first question is from Amit Kumar with Macquarie Capital. You may begin.
Thanks, good afternoon, and thanks for doing this call. It's obviously very helpful. Just a few questions to begin with, and I will re-queue after that. The first question is, if I look at slide seven, the last bullet point talks about a low double-digit ROE. This plan talks about hitting an 8% ROE by 2019, and I'm trying to figure out what that delta is exactly.
Okay, Amit, thanks for the question. I don't think it's a delta. I think there's a combination of, that's what we're trying to communicate here. When we think about the phases we're describing on page 13, this is a business that has got a lot of things that are a little bit screwed up. There's a lot of deferred maintenance going on here. We're not going to take a business that has been very effective at producing a 4% and 5% ROE for five years and move it to 12 or 13 in two. What we're telling you is we can make real significant progress in 2017 and 2018.
Move the ROE up four and a half points, improve the combined ratio and the loss dollars and P&C by five points, take 20% out of our expense base in that time period, we believe that there's more beyond that, it's a further out time period. This was not on page seven intending to suggest that we were getting a low double-digit ROE in 2019. It was saying we're building businesses and this is our focus and our goal. It's going to take a while to get there.
Got it. That's helpful. The second question is, again, if I start exceeding my time, please tell me to stop and I'll reach you. Obviously, we've seen the management changes, you've talked about sort of rebuilding the management team after whatever happened previously. Maybe it was Chip or someone was commenting about the employee force is energized, et cetera. At the same time, I'm sure that there are probably employees who might be realizing that they no longer fit into Joe's vision, right? Should we anticipate some sort of a charge or an adjustment, et cetera, as the workforce is sort of rationalized, or is there no need for that piece?
Great question, Amit, there's two or three things to it. A comment I probably should have made earlier and didn't. There's a bit of a paradox that I find inside the place. We might describe it as a broad culture of complacency, at the same time, as you work through and you talk to employees broadly, there's an enthusiasm. There's a belief that the company can perform better. There's a desire to see the results improve. In some ways, it's almost a question of, "Hey, tell me what I can do. Send me in, coach. Point me in the right direction." Which on 1 level is a bit incongruous with what we're talking about, on the other level, it's why we think that it's more easily fixed.
The wrong plays are being called, or they weren't being called, or the standard was too low, and we weren't sending the team in the direction they need to be sent. That's part of that paradox, and then we think we can unlock some value as a result. The second part of your question is there's two elements of it. There may be some people who self-select and say, "I don't want to be on the balls of my feet and running fast and playing hard." If they self-select because they don't want to work that hard and they want to work for the competition, we're okay with that.
Relative to our overall expense load, we're a little heavy right now, and we're not going to knock out $50 million-$65 million without that having some element of changing parts of our cost infrastructure, and that's going to have some elements of people impact. As Chip talked about things like span of control and the like it's going to have a people impact. If people self-select, we don't need to charge for that. If we do the selection, we may in fact have a charge. I can't tell you if exactly we will and when it will. It would probably not surprise me. It would surprise me if we didn't.
Got it. The final question, I'll reach you after this. It's a two-part question. Joe, as you were going through this exercise, did it ever come to the table, I guess, to the board of directors that perhaps there should be some examination if there could be some sort of a strategic alignment or a buyer out there? Was that thing on the table at all, or maybe just talk about that.
Emmett, I can tell you that over the last three or four years, there's been everything on the table inside of the organization. Some of it I've been around for, some of it predates me. I know there's been all sorts of number of issues on the table. We have broad, thoughtful conversations with our board that I would say are fulsome in nature. I think what we're looking at right now is we think our best path forward is we've got a portfolio of businesses that are suffering from this deferred maintenance. We're going to work on fixing all of that. My hope is that we get them all working where we want. Some of them may not do everything we want.
We may be out here two years from now saying we're trying to think about this portfolio and may want to do something different with parts of them. I'm hoping we're adding pieces. We may be at some point subtracting. Given where they are right now, you don't go try to sell your car without detailing it first.
We got some of these businesses that need to be fixed. I'm not saying that we're shooting in that direction, but they're in a point right now where they need a little bit of rehab, and we're going to do that before we think about something else with them.
I guess using that analogy, was there any thought of selling the car stereo at some point?
We've thought about everything, Amit, and we'll continue to. That thought is there.
Okay. I'll stop here. Thank you for the time, and I'll come back. Thank you.
Thanks.
Thank you. Our next question is from Ryan Burns. Janney, you may begin.
Great. Thanks. Thanks for doing this call. I had a question on the growth expectations, I guess, for the preferred book. Obviously, it seems like we're nearing an inflection point with that slowing down. Wanted to discuss is it maybe a geographic realignment? The second part of that is maybe add some potential flavor for potential new niche products there.
I'm going to go ahead and ask Chip to take that one. Thanks, Ryan.
Okay, thanks, Joe. As you think about the geography, first, Ryan, on the short term, it probably does not make a lot of sense at this point to try to change up our footprint. It would really diffuse our focus and could potentially make matters worse as we try to buckle down and get back to our core competencies to deliver on great service and to have a strong, viable organization. When you think about on the longer term, we will evaluate this as part of our ongoing strategy evaluation. I like to have choices, and being on a national platform does that. As we all know, insurance is an evolving business. Many things that we all read in the trade press, when you think about autonomous vehicles, when you think about the connected home and the opportunity that presents itself there.
Down the road, it could be a competitive advantage for us, as a regional carrier, to have licenses in all 50 states. I know from being out in the industry and talking with others, that could be a very enviable position to be in. Why, really at this point, change that? It is not on the top of our list. When you think about where we want to go from a preferred product point of view, so much of it is IT-dependent, and we are working together. Charles and I and our teams are working to get the platforms where we need it to be. We continue, as I mentioned in my commentary, to see a lot of competition in that space, and it tends to be a lower growth segment of the marketplace. We are going to stay focused on the niche markets that we have talked about.
Preferred does play a part of this as we look at the homeowners product and the opportunities that could be presented there. In the months ahead, we will continue to discuss where we are going and the opportunities that we think we can capitalize on. Again, I want to stress, we are going to invest in analytics. We are going to invest in business intelligence. We are going to understand what is going on in the marketplace. We are going to have a competitive product, and we are going to have the service that backs it up.
Okay, great. Maybe back to Joe. I hear a lot of investment in the business, investment in IT, investment in claims unit. Is still a 20% reduction in net expenses doable in that? It seems like those conflict with each other.
Sure. Yeah. Well, two points to it. One, yes. Not being silly about it, or we wouldn't have just committed to it. Let me help you understand pieces of it. Some of the IT components, we're making that investment. We capitalize a piece of it as you'd expect. As it comes online, we will shut down the double system. It works its way through. It's not quite the giant egg and the snake that you'd expect. It works its way out over time, that's very manageable, and it works through in the context of these numbers.
A chunk of what Chip was talking about in claim, I don't think he used the word investment as much as he used redesigning the service delivery model, which in some cases is saying part of what we're doing is, in some cases now, a little bit inefficient, and a little bit ineffective, and we can be more efficient and more effective by changing what we're doing. The net of that, actually, we believe, will reduce some LAE and simultaneously reduce loss. We've already paid for and bought Guidewire. We're not in claim. We're not using it to its full potential. As we do, that will unlock some of that value. The claim piece wasn't a place where I think we were talking about big investments as much as we were talking about harvesting and getting the yield out of the ones that we had.
Got it. Thanks for that. My last one, I'll skip to the back of the line, too. For the DMF file, does that charge include, I guess, potential any state fines? Secondly, does that have any effect on the loss ratio of the current in-force block?
Great question. No, there are no provisions for any fines or penalties because we don't believe there's any case where we did anything wrong and should be fined or penalized. There's none there. The charge is all looking at our in-force book of business, based on some of the testing we've done in getting ready for this, I say testing, we've actually run some things. We'll end up dealing with that for people maybe who've already passed away, is what that'll cover. On a going-forward basis, we'll be using the tool, that will potentially identify people who pass away in the future who might not have called us. There's a whole series of things, it's probably going to take more time than anybody's interested in spending.
Between potential future losses or potential loss adjustment expense or changes in investment income or a bunch of other things around it, our best guess for the next couple of years is $3 million, $3.5 million net of earnings pressure in the life business when you net all of those things together on an ongoing basis. The charge is fully adequate, but it's from the result of actually changing the practice going forward.
Got it. Appreciate that. Thanks for the color.
Sure.
Thank you. Our next question is from Paul Newsome with Sandler O'Neill. You may begin.
I was going to ask about the cost for the change in the operation from the life business, but you just answered it, 3.5%.
Not %, Paul, not %, dollars.
$3.5 billion. My apologies.
You scared my heart there.
I don't mean to do that. We haven't talked at all about capital management in this presentation, and you do have excess capital. Could you perhaps talk about whether or not that excess capital will have a different use perspectively given the change in strategy?
Paul, I'll point you back to page 19. Our capital deployment priorities will be first and foremost before you even look at the numbers on the page, we've got to be good stewards of capital. We've got to make sure that we're getting a reasonable return on that capital for you or return it to shareholders. The first priority is going to be to profitably organically grow the business. The second would be to fund inorganic growth of the business in places where we think we can do accretive transactions and earn a similar return. In cases where we can't, we're first and foremost going to maintain our dividends, and then look at repurchasing shares.
We've slowed share repurchases in the last year, partly because of re-looking at this strategy and partly because we had bad results, and there's been volatility in them, and given that level of results, we wanted to make sure we were in a position where we didn't have a ratings problem or something else. What I would fully expect is, sometime several quarters from now, we're going to be more confident in the position of our businesses. We're going to see more of these fixes taking hold, and we're going to move from being less passive to being more active on all three of these priorities.
I think it obviously sounds like a very good base for thinking about the business perspectively and getting Kemper's business book productively. I want to ask a broader question about reiterations in restructuring and how you think about that because I think people might be concerned, I'm concerned, that we get into next year, this turns into a fairly long process. We see restructuring charges along the way as the team gets deeper and deeper into the issues. Can you give us a sense of how you think about how that process might unfold? Give us a sense of should we be on the lookout for other strategic changes as your team digs deeper in there, and can that have some financial implications with charges of different types?
Okay. Let me help make sure I understand a little bit exactly what you were talking about, Paul. I'm going to ask you to make sure I'm pointing in the right direction. We were getting a little bit of feedback. I think you were asking about from an expense perspective, are we going to be dealing with some restructuring charges? Is there going to be a steady stream of other similarly related charges over the next year or two as we start figuring this out? If I got those questions, just tell me yes. On the second one, what do you mean by other than multiple expense charges?
I just admissible whether they be due to layoffs, to reserves. My experience with situations where companies have trouble is that sometimes people start digging in. They find things that they didn't expect, and that can be both a purely operational expense issue, but it also can be reserve-oriented or other, even investments. You just don't know until you really start digging and take a long time to figure out what you have.
Okay.
That's what I meant by other.
Fair enough. I'm going to answer them in reverse order, then deal with the other. Good news or not good news, we're blessed with relatively short-tail businesses. You're correct. One of the things I would've worried about and would've immediately started doing is saying, "What's there and is the balance sheet strong, and do we have a problem?" Asked all those questions and poked hard at all those questions. I'm several quarters into my tenure in a relatively short-tail business. I don't anticipate or see someplace where we're sideways on that. We've talked to you very clearly about how we're setting reserves in Alliance United, and the noise we've got in our claim processes there that will make it a little more challenging for us to pick those.
I don't anticipate that that's a large reserve charge where somebody wakes up one day and finds an asbestos case or something. They're short-tailed, non-standard auto liabilities that we're going to have a little bit more trouble picking than we otherwise would for a couple of quarters. That may wander around, but I don't think that's what you were targeting. We clearly have taken some action on the life claims issue and the Death Master File, which was an item that would've been the number one item on our risk factor, so it shouldn't have surprised anybody that we were looking at that. Beyond that, I can't swear to you that we'll never find anything, but I haven't even heard of anything that might be sitting in a desk drawer, and I can't imagine with the businesses we're in that we're going to find one.
That said, if we do, we'll let you know quick. You never say never, but I don't know what to think of. From an expense perspective, as I said before, it would surprise me if we didn't have some form of expense restructuring charge to get after these items. Our bias as a management team is to move briskly and to get us where we need to go quickly, and we will move that way.
Great. No, that's exactly what I was looking for. Thank you very much.
Sure. Thanks for the question.
Thank you. Once again, ladies and gentlemen, if you wish to ask a question at this time, please press star then one on your touch-tone telephone. Our next question comes from Matthew Carletti with JMP Securities. You may begin.
Thanks for taking my question and for holding the call. Just two questions, most of the others have been answered. There's a comment made in the P&C portion of the slide deck about going on the offense on homeowners. Without giving away too much competitive intelligence, I was hoping you might be able to expand on that a little bit. Does that involve some sort of repositioning of the product, kind of where it fits upscale versus mid-scale in the market? Or is it more just pricing or underwriting capabilities? What do you mean by turning more offensive?
Matt, this is Chip. I don't want to give away too much of the store. As we mentioned earlier, we're looking at underserved markets. We're looking at areas where we feel we can capitalize in the marketplace. I also talked about having a strong bias towards making sure we have strong business analytics, and we have a strong competency around that. We are going to work on those types of things. We're going to be very contemporary with things like bivariate rating, how we're going to rate. We feel that our package policy continues to be a differentiator for us in the marketplace. I led with that commentary today and how important that is as we compete for shelf space within our agents' offices.
We also view the opportunity with the work with Charles and our IT team as we improve our agency interface and improve our back office systems. We'll be able to become more of a carrier of choice for our agents and brokers. They will look to us because they know they're going to get a strong value proposition with great service backing up the sale.
Okay, great. That's very helpful. Thank you. Just one other question, probably for Joe. I think it was in response to Amit's first question on kind of the double-digit versus the more 8% ROE. It sounded to me like it's just a time issue, that it takes more time to get there, more of a 11, 12, 13 sort of focus or maybe getting to double-digits than kind of the next couple of years. One, just did I hear that correctly? Secondly, do you firmly believe that you can get to a double-digit ROE with time without, say, a change in the underwriting cycle or a change in the investment picture?
Great question. Yes, you did hear it right. That it's a time issue. I think the other thing I said or was trying to say, on page 21, we probably picked the wrong graphic there because what we were trying to highlight is that we see the $85 million pre-tax claim and the $50 to $65 million pre-tax of expense being worth four to four and a half points of ROE. We were not intending that to be an ROE target on the far right.
Gotcha.
We were trying to say, look, this is a value we think we can unlock in the near term. The hope was, the walkaway was, okay, that the place is a little bit screwed up. There's a lot of value that we can unlock in the near term. We're going to put these goals out there and commit to them and work towards them, and we're going to build a track record of doing that while we're building other capabilities to position us for long-term, more effective growth. Our goal will ultimately to be the very high single digit, low double-digit ROEs. We will have to do more work than just the initiatives we were talking about here. We're going to have to get these businesses growing and add capabilities. That's absolutely what we're focused on. I'm struggling to precisely answer your question.
If we're assuming the exact same interest rate in the environment, the exact same pricing cycle, and the exact same scenario, I'm not sure. I think if we got ourselves to a nine or nine and a half, we're no longer the little runt of the litter hanging out at the bottom end of the bad slide. We're moving into the pack, everybody else is going to be moving at the same time. We got to find a way to get into that group and make sure we're picking specialized niches in places where we can build an advantage and work off of those.
Yeah, fair enough.
If we do that, I think there's a capacity to grow. There's a little bit, Matt, maybe I'll phrase it this way. I started at The Travelers 20 some odd years ago. In the early 1990s, the place went from making a couple hundred million dollars a year to losing a couple hundred million dollars a year, and their revenue and capital base was much bigger than ours. It was a crummy ROE. It was terrible financial performance. Now they're held up as a super strong player and a beacon, and they're a component of the Dow. That didn't happen in two and a half years, and they didn't get to that ROE in a couple of steps. I'm not suggesting that I anticipate we're going to end up there, I'm suggesting that we're reasonably screwed up.
We're going to work on fixing that in the near term and are very convinced we can. None of this team came here to be a little less screwed up. Every one of these players and everybody on this team wants to be driving double-digit ROEs and be competitively relevant. That's what we're building towards.
That sounds great, I appreciate, I think all of us appreciate your candidness and your straightforwardness as you go through this and best of luck with everything that comes. Thank you.
Thanks, Matt.
Thank you. Our next question is from Amit Kumar with Macquarie Capital. You may begin.
Thanks. It's just a few follow-ups. The first is, I guess, going back to Matt's question and just a discussion on the P&C book. If I understand this correctly, you haven't generally talked about any new pricing actions today. The discussion is mostly focused on some of the underwriting process, the claims process. Is that fair, or is there a rate hike component, I'm sorry, a pricing change component to this discussion, too, which we haven't touched upon?
Amit, this is Chip.
Hi.
Thank you for your question. As we get our new systems up and running and implemented and fine-tuning to our rating engine and getting much more contemporary to the marketplace, we're going to have the opportunity to do different things. We have a lot of items that are under discussion. We have a lot of items that are being worked on today. As we progress and as we develop as an organization and do the right things, the tackling and blocking with the sport analogies that we've been using today, we will be able to start delivering on those items. It's premature really today to get too deep into those because we're still working on them. We're going to continue to take rate, we're going to continue to take the non-rate actions, active agent management, strong underwriting.
We're going to be building the right institutional muscle so that when we are at the starting line to start introducing things, we're going to be able to execute on that effectively.
When you talk about executing, internally, are you at that point where you can forecast some level of business loss, or is that also premature at this point?
I would say at this point, it's still premature to forecast that. We're not going after this to lose business. We want to grow with the right business, good, profitable business. Are there segments of our organization that are not performing in the P&C world? Yes. Will we evaluate them? Will we take steps in order to correct them first? Yes. You see that in the numbers on a quarterly basis. We're going to work hard there. Today, to make an announcement that we're shedding something or even considering shedding something is just too premature. Back to the analogy of the used car, you fix it up, you make sure that it's running right, then you look at all viable options that you put on the table at that point. We're still in the evaluation stage on that front.
Got it.
Amit
Yeah.
Maybe I'll add one thing. I love that Chip started answering your first question, he went to the strategic positioning issue going forward, that when a new system's available, we're going to be thinking about new products and new capabilities and new competitive items in the marketplace. My sense is your first question might've been a more pedestrian one of just basic blocking and tackling of are we taking rate when we were talking about these other items.
That's correct.
I think our answer is, yeah, we're doing that all the time. We're always taking rates or looking at underwriting actions or doing those things. Those are normal, ordinary course business. We never hang up the cleats and say, "Okay, we've taken all the rate we ever need to do. Now we're good." That stuff's going on all the time and has been and will continue to be. I think what we were focusing on today was significant initiatives that were doing something different that had a financial impact or the more strategic question that Chip answered.
Yeah, I think I got that. Net, it's not a pricing issue per se, or pricing is not the bigger issue to fix. That's what I was trying to get at, where once you, I guess Paul was asking this question, once you started peeling the various layers, then you said, "Oh, okay, we need to look at the pricing piece too. We need to look at the underwriting piece too." That's what I was trying to get at.
I guess maybe the way I'd answer it, Amit, is this is a multivariate problem, not a univariate one. When you set prices, you're trying to set your cost of goods sold and your profit margin to recover that. You look at your expense level, you look at your expected loss cost, you look at your target profits, and you price for that. If you're driving loss cost down and you're driving expenses down, you're increasing profit margin or decreasing net losses. If you're raising prices, you're doing the same thing. The team is very astutely looking at the multivariate problem and looking at where the issues are. If our claim process is out of pattern and it's costing us, on average, more dollars for the same amount of damage than somebody else, we're uncompetitive.
If our expense loads are inefficient in how we deal with things, we spend too much on paperclips, we're inefficient. We try to recover that in pricing. Our prices are uncompetitive. We have trouble growing. These guys are very thoughtfully looking at all of those components and making sure that every dollar we spend, wherever we spend it, whether it's a loss dollar, an LAE dollar, an expense dollar, is a dollar that has to be spent, is effective, is positioning us in the marketplace the right way and is one that can be profitably recouped. They're looking at all those components, which includes rate. We're making enough motion on the others that those are probably the bigger and more interesting things to be talking about right now. All the other action will continue.
Got it. Then just finally, just talking about the percentage changes, going back to page 21 of the slide deck, the 2.5 and 1.5 and 2%, was all that math internally done or did you hire some external consultants, et cetera, to go over this process?
I guess I don't think we needed to, Amit. It wasn't that hard. The lost dollars were $85 million, and the expenses were $50 million-$65 million. We tax affected them, and we divided by equity. We were very confident. We've done a rigorous review of the expense piece and the loss in LAE and the initiatives we've got on those. In different components of those operationally, we've had external folks look at some of the things we're doing from a claim perspective-
Have points about those. We have different vendors that help us on different expense things. We're fairly confident that that was math we were okay with.
Got it. That's what I was looking for, if it was like some sort of a strategic outside review or not. Okay. Thanks for all the answers and good luck for the future.
Thanks for all the questions, Amit. You came in first and fifth on the question list.
Thank you. Our next question is from Ryan Burns with Janney. You may begin.
Oh, I'm not in trouble either, but I just had one more follow-up. I was wondering if you guys, obviously you're talking about normalized first half earnings this year and obviously pointing us towards normalized earnings in 2019. Can you maybe just help us understand what you guys internally think of what a normal cat load is?
Yeah. We're using roughly 15% of homeowners premium. That bounces around from time to time. Roughly that order of magnitude, and I think we've got some exhibits in the back that help you get there, but that's the primary driver.
Great. Thanks.
Thank you. I'm showing no further questions at this time. I'll turn the call back over to Joe Lacher for closing remarks.
Terrific. Thank you, operator, thank you really to everybody on the call for your thoughtful questions, your time, your interest in the organization. We're excited about what we've got going on here. We're I think have our eyes wide open. We're trying to be clear and transparent and candid with you and with our employee base about the things that aren't working quite well. We think every one of those are fixable, that we can make a near-term impact. We've got work actively underway. Hopefully you saw that there's points on the board and progress being made on all those fronts. Hopefully in the places where we've called plays in the last nine months, you've seen that there's action being delivered on those.
I'm hoping you walk away inspired with confidence that we've got a senior management team that understands these issues, has a proven track record, is calling a series of other plays here, and is going to be committed to delivering the results that we talk about in the time frames we talk about. While we're doing that, we think there's a tremendous amount of assets inside of this organization, a great brand, a strong capital position, a great portfolio of businesses, and a team that is passionately committed to taking those and unlocking real value and making sure we're moving in a way that will be competitively recognized on the good side. With that, thank you one more time for your attention, and we look forward to talking to you again in the future.
Thank you.
Thanks, Operator.
This concludes today's conference. Thanks for your participation and have a wonderful day.