Jul 26, 2012
Executives
Melissa Kivett – Senior Vice President, IR Rob Pollock – President and CEO Mike Peninger – CFO Chris Pagano – CIO and Treasurer
Analysts
Chris Giovanni – Goldman Sachs Steven Schwartz - Raymond James and Associates Mark Finkelstein – Evercore Partners John Nadel – Sterne Agee & Leach Sean Dargan – Macquarie Capital Edward Spehar – BofA/Merrill Lynch Jeffrey Schuman – Keefe, Bruyette & Woods Mark Hughes – Suntrust Robinson Humphrey
Operator
Operator
Welcome to the Assurant's second quarter 2012 financial results conference call. (Operator Instructions).
I would now like to turn the call over to Miss Melissa Kivett, Senior Vice President Investor Relations. Please go ahead, Miss Kivett.
Melissa Kivett
Thanks so much, and good morning everyone. We look forward to discussing our second quarter 2012 results with you.
Joining me on Assurant's conference call are Rob Pollock, our President and Chief Executive Officer, Mike Peninger, our Chief Financial Officer, and Chris Pagano, our Chief Investment Officer and Treasurer. Yesterday afternoon, we issued a news release announcing our second quarter results.
Both the release and corresponding supplemental financial information are available on our website at Assurant.com. As a reminder, all prior period financial information presented in the release supplement and on this call reflects the new accounting guidance for deferred acquisition costs, which the company adopted as of January 1st, 2012.
We'll start today's call with brief remarks from Rob and Mike, and Chris participating in the Q and 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 these factors that could cause actual results to differ materially from those projected can be found in yesterday's new release as well as in our SEC reports including our 2011 form 10K available at Assurant.com.
Today's call will also contain non-GAAP financial measures, which we believe are meaningful in evaluating the company's performance. For more details on these measures, the most comparable GAAP measures, and a reconciliation of the two, please refer to the news release and financial supplement posted at Assurant.com.
Now I'll turn the call over to Rob.
Rob Pollock
Thanks, Melissa, and good morning everyone. Our results in the second quarter were strong.
Our strategy to focus on growth in four targeted areas is working despite continued economic headwinds. We continued to return capital to shareholders via dividends and repurchase.
Our activity demonstrates the long term value we believe our shares represent at current prices. We are pleased with our performance against the three important financial metrics we've highlighted before.
First, we reported an annualized operating return on equity excluding accumulated other comprehensive income or AOCI of 14.4% for the quarter. This includes $19 million of income from real estate joint ventures, and $10 million of losses from reportable catastrophes.
Year-to-date, annualized results stand at 14.6%. Second, growth in book value per diluted share excluding AOCI was 5.3% during the quarter.
This brings the year-to-date growth to 9%. Third, revenue defined by net earned premiums and fee income grew by over 2% year-over-year to $1.9 billion.
Year-to-date, the increase is 1.9%. Now let me comment on the businesses.
In Solutions, despite a challenging retail sales environment, our business continued to grow through the addition of new clients. We were pleased to announce our mobile protection program will be offered to T-Mobile's 4G pre-paid customers.
In combination with Telefonica and the Sprint tablet program, it demonstrates our ability to find creative solutions for clients and consumers in this fast growing segment. In international operations, we saw a modest improvement in our combined ratio.
We continue to monitor European results carefully given the economic uncertainty in that region. In Specialty Property, we continued to see growth in both multi-family housing products and lender placed insurance.
While the overall inventory of mortgage loans again declined modestly, we continued to add new loan portfolios. The programs and activities to prevent property foreclosures have caused our coverage to remain in effect far longer than we have seen historically or expected.
As these loans resolve through foreclosure and short sale, which could accelerate, our premiums and earnings will decline. Lender placed returns will be lower than in the past, but as a specialty business, they will continue to be attractive.
After Mike reviews the financial highlights for the quarter, I'll provide additional details and an update on the actions underway in our lender placed business. Assurant Health continues to make great progress in the post-reform environment.
Health is offering affordable choice products for consumers, expanding distribution, and reducing operating expenses. As medical costs continue to increase, we believe consumers will find our affordable choice plans even more attractive.
We are seeing the number of individuals covered under our programs growing. At Assurant Employee Benefits, net operating income improved as all product lines had favorable experience.
Our new agreement with United Concordia announced in June will expand our dental network, which is now one of the largest in the industry. Our growth priority at Benefits is on voluntary products, which represented more than half of our sales for the quarter.
Overall, we were pleased with our results, and believe we are well positioned. And with that, I'll turn it to Mike for more comments in the second quarter.
Mike Peninger
Thanks, Rob. I'll discuss a few second quarter highlights and priorities for each of our businesses starting with Assurant Solutions.
During the second quarter, Solutions growth and net earned premiums and fees was led by Latin America and our domestic service contract business. The international combined ratio improved slightly versus the second quarter of 2011 after adjusting for non-recurring client settlement payments.
The improvement was primarily due to better European underwriting results. We previously announced a lot of a domestic mobile client.
We now know that this contract, which accounted for about $100 million of annualized earned premiums will end on October 1st, 2012. As Rob mentioned, we are very pleased to add new accounts, which will begin the process of replacing the lost business.
Solutions remains very focused on achieving an annual return on equity of at least 14% by 2014. Up from what's currently running at about 10.5% excluding disclosed items.
In this quarter's financial supplement, we've included additional information as an exhibit on page 23 to give you more insight into Solutions domestic, international, and pre-need returns. Reaching the 14% ROE goal requires growth as well as rigorous expense control.
The main drivers will be our ability to grow our mobile business and improve profitability in Europe. We also expect to be able to grow our pre-need and domestic service contract products while maintaining their attractive margins.
Specialty Property results in the second quarter were strong. We added a new under placed client, saw our existing clients expand, and continued to see increased placement rates year-over-year.
Reportable catastrophe losses of $9.8 million this quarter were down substantially compared to the second quarter of 2011 as was our non-catastrophe loss ratio due to less severe spring weather. During the quarter, we on boarded the 2.1 million new loans we announced in the first quarter.
These will begin to produce premiums in the third quarter. An additional 275,000 loans will be added in the third quarter due to a loan portfolio acquisition by one of our Specialty servicer clients.
Since these policies will be flat cancelled, they will also begin producing premiums in the third quarter. Placement rates remain elevated reflecting experience on seriously delinquent loans.
As the market resolves the backlog of delinquencies, placement rates will decline and reduce premiums and their contribution to our earnings. Our lender placed products currently account for about 70% of Specialty Properties premiums.
And in the first six months of 2012, they accounted for just under 90% of the segment's income. Their percentage of total income can vary significantly depending on catastrophe experience and other factors.
We saw a good progress in our multi-family housing products, which achieved double digit growth in net earned premiums and fees. The results of our SureDeposit acquisition continued to exceed our purchase assumptions.
Assurant Health benefited from $13.9 million of after-tax real estate joint venture investment income. Results were strong even without this income as the business continued to focus on reducing operating expenses and expanding distribution.
Loss ratios declined due to favorable loss experience and a change in product mix as affordable choice plans become a bigger proportion of the business. Second quarter expenses were down year-over-year by $12.9 million as we continue to streamline operations and improve our service to customers and agents.
Sales of supplemental products improved as more consumers expanded their health insurance coverage. Individual market sales were up slightly as we continued to execute our network partnership with Aetna.
Small group sales continued to be slow as small employers remain cautious about changing carriers while the market adapts to healthcare reform. Health had an excellent first half of the year.
Going forward, certain provisions of the Patient Protection and Affordable Care Act will make the business more challenging, but we are very encouraged by our progress. At Assurant Employee Benefits, net operating income improved in all major product lines driven by very favorable loss experienced in disability and $1.9 million of after-tax real estate joint venture investment income.
While we were pleased to see improvement in our recoveries this quarter, we caution that incidents and recovery rates can be volatile from quarter to quarter. The disability environment remains difficult and maintaining this quarter's level of claim recoveries will be challenging.
Our dental experience improved this quarter continuing the trend of the past two years. Life results were also good during the second quarter driven by favorable mortality.
Earned premium decreased due to the previously announced loss of two assumed disability clients. Overall sales were down 2% as increases in dental sales were offset by decreases in life and disability sales.
Our strategic focus on partnering with key brokers and our expanded product offerings continue to improve voluntary sales. Moving on to corporate matters, we ended the quarter with $632 million in total holding company capital after returning $180 million to shareholders through repurchases and dividends.
During the second quarter, we took more than $183 million in dividends from our operating companies. And we expect our full year 2012 operating company dividends to at least equal operating company earnings.
We believe our shares are a compelling buy at the current price. And expect to continue our share repurchases during the second half of the year.
Though as always, our decisions around capital deployment will reflect a number of factors including our risk exposure and experience during hurricane season. Our investment portfolio continues to perform well.
We reported $29.8 million in pre-tax income during the quarter from two real estate joint venture partnerships. These investments demonstrated our continuing to find value in this specialized asset collapse.
Our low turnover investment strategy has helped us maintain yields. But like all insurers, we will continue to see yields decline in the current interest rate environment.
And with that, I'll turn it back to Rob.
Rob Pollock
Thanks, Mike. Since our first quarter earnings call, regulatory attention on the lender placed industry has escalated.
We welcome the dialog and understand the benefits that greater clarity on these matters will provide. There is no single industry issue of greater priority for Assurant.
We take to heart our responsibility as the industry leader in lender placed insurance. That is why we are pursuing every opportunity to share our best practices, offer ideas to improve the product and processes, and incorporate input from regulators.
The on-going mortgage crisis in the U.S. continues to cause problems and concerns for many homeowners.
But even during the crisis, it has been widely recognized that lender placed insurance serves an important role in helping the mortgage industry to operate more effectively. Lender placed products provide protection when voluntary coverage lapses or is unavailable to the borrower.
Insuring that appropriate insurance maintained on properties is critical. Perhaps more so than at any other time in the history of the industry.
Today, we want to share as much information as we can about actions we are taking to insure that Assurant remains the leader in lender placed insurance and the current status of regulatory discussions. Let me begin with the actions we have underway.
To meet the changing needs of the lending and housing industries, we are working with regulators to introduce a next generation lender placed product to address some of the unanticipated issues that have developed during the housing crisis. This product will combine flexibility and best practices to address the concerns of various parties including expanded geographic ratings within each state to further differentiate rates for properties more exposed to catastrophe damage from those where the risk is lower.
Adding premium rated flexibility from deductible options that can be modified based on factors such as coverage amount and delinquency status. And continued enhancements to our already extensive customer notification process to make it absolutely clear to borrowers when they have lender placed insurance.
As a proven leader with the systems and capacity to provide unique servicing capabilities for millions of loans, we want help set the pace for a comprehensive next generation lender placed solution. This is a message we are sharing with our clients as well as policy makers and regulators.
Let's move to updates on our discussions. At the national level, we have had several productive conversations with the staff at the Consumer Financial Protection Bureau.
We have shared details of our operation and the practices we currently follow along with additional ideas for improvement. By September of this year, the CFPB expects to issue proposed regulations resulting from Dodd-Frank, which will address lender placed insurance disclosures as well as other servicing issues.
We've met with the FHFA, Fannie Mae, and Freddy Mac to understand their views and have provided detailed analysis and recommendations for lender placed programs. We've continued to speak with Fannie Mae regarding the RFP issued earlier this year.
Based on our discussions with the GSE's, the FHFA, and the mortgage servicers, we believe we can help create a sustainable solution that meets the needs of all interested parties. In August, we will participate in the public forum on lender placed insurance being held by the National Association of Insurance Commissioners as part of its' annual summer meeting.
We will join other industry experts to explain the important role lender placed insurance plays in safeguarding both homeowners and investors. At the state level, in California, we have made the reflective rate filings and have continued our dialog with the Department of Insurance about our proposed rates.
While we originally expected a decision in July regarding our filing, this process is now expected to take a little longer. And at this time, we do not expect a final approval until September.
In New York, we have submitted our next generation product and met with the Department of Financial Services since the May hearings. With their input, we believe we can tailor a new lender placed program to address specific issues pertaining to New Yorkers.
As I hope is clear, there is an enormous amount of work underway. We recognize that all the changes and ultimately a more normal housing market will mean that our lender placed revenues will decline.
And so too will our profits in this business. But we believe the returns though lower than recent years will continue to be attractive.
The Specialty Property team in engaged at every level. We are doing everything possible to initiate in dialog with regulators, provide value to mortgage servicers, protect homeowners and investors, and insure we remain the recognized leader in the lender placed industry.
No one in the industry has the expertise, market presence, and operational capabilities to was Assurant's lender placed team does. Every day, we help homeowners and mortgage servicers by providing exceptional levels of quality and efficiency.
And with that, we can move into the Q and A portion of the call. Operator, first question please.
Operator
Thank you very much, sir. (Operator instructions).
And our first question comes from Chris Giovanni with Goldman Sachs.
Chris Giovanni – Goldman Sachs
Good morning.
Rob Pollock
Good morning, Chris.
Chris Giovanni – Goldman Sachs
Rob, thanks so much for those additional comments. Regarding, I guess, the product change, is this a proactive decision, or sort of a directive decision?
And then, in terms of the delayed response from California, has there been sort of back and forth discussions between you and them, or are you just waiting for a response on their part?
Rob Pollock
Sure, so you know, I think in context, Chris, we have been looking and recognize that there have just been changes in cause by the housing crisis, and we are trying to take steps to adapt, and it’s things that we have been working on for a period of time to do that. So, you know, I think we’ve been proactive – you know, things always take a little longer than you would like them to take, but it’s things that we’ve been working on for a while.
You know, the – all the things that we look at I think are set up to address and provide flexibility to a variety of different things we’ve seen as well as having been provided from, you know, the GSE’s, the regulator’s, et cetera. We’re trying to take, you know, all of those into account, and unfortunately, I think, you’ve got a new [inaudible] with the flexibility to do that.
You know, with California, you know, again, we are engaged in the process, I just think it’s just taken a bit longer than we thought, but I don’t think there is anything you should read into the fact that, you know, it’s been moved back a bit.
Chris Giovanni – Goldman Sachs
Okay, and then the additional disclosure within solutions – I mean, I think they are very helpful. The international piece, I guess, is sort of the one area that obviously doesn’t look like it’s earning the type of ROE’s that you guys would like, and you have clearly indicated a focus on improving that area.
But through this and you’re confidence given some of the pressures we are seeing in Europe in terms of one, growth, and then two, improving the international combine ration?
Rob Pollock
Right, I can take a shot at that, Chris. I think when we think at internal, clearly we are focused on Europe as being the most challenging from a growth stand point given the economic issues there.
We have seen, you know, excellent growth over time in Latin America and Canada. So, you now, our international businesses is a blend of all of those places, so we have added new clients.
The improvement that is going to drive that international ROE up is, I think, you know, disproportionately going to come from Europe as we continue to address the underwriting and pricing issues there, and hopefully add some new clients. We are very focused on getting some clients in our target areas, but if that doesn’t happen then we’ll take the necessary actions on the expense side.
So, yes, I just add to that, Chris, because I think that was an excellent summary Mike provided. Remember our near term goal was to get the UK to break even by mid ’13 – we’ve got a business that is dragging IOE there, and that’s step one in correcting that overall, and that will help quite a bit.
Chris Giovanni – Goldman Sachs
Okay, thanks, I will get back in the cue.
Rob Pollock
Yes.
Operator
Our next question will come from Steven Schwartz with Raymond James and Associates.
Rob Pollock
Good morning, Steven.
Steven Schwartz - Raymond James and Associates
Hey, good morning everybody – a few questions here. It was mentioned that you’ve got a new portfolio coming on in the lender place business – 275,000 new loans – that’s a flat cancel.
Did you mention what the placement rate is on that?
Rob Pollock
I don’t believe we did, but I think the important point is the one that you hit on that will be a flat cancel versus un-renewal, and we’re going to see premium producing in that portfolio in the third quarter, Steven.
Steven Schwartz - Raymond James and Associates
Right.
Rob Pollock
And we’ll have a good idea on what, you know, the placement rate will look like, because we haven’t boarded those loans yet.
Steven Schwartz - Raymond James and Associates
Okay, so – all right.
Rob Pollock
You know, I think in contrast we’ve boarded 2.1 million loans, but – and they show up in our totals, but those are going to produce business on renewal, and because we have boarded them, we have an idea that their placement rate will be in that 1% range.
Steven Schwartz - Raymond James and Associates
Right, yes, okay – so, that is the number that you gave first quarter. Okay, and then moving on, Rob, you made a statement, ACA – some ACA regs coming on board will make the second half more challenging.
Could you detail what those are?
Rob Pollock
Sure, actually Mike made the comment, and I will let him talk about it.
Mike Peninger
PPACA has got some provisions relating – primarily relating around experience credibility, Steven – you know, you’ve got in our – remember the MLR calculation is state-by-state and legal entity-by-legal entity, so, there’s an enormous number of sells in that calculation and there is credibility factors in the calculation. If you have a relatively small amount of premium in any cell, and so that has an impact on – if your experience is better, you get the benefit of that to a certain extent when it is not credible, but as the PPACA, as the years go on, their provisions in the law where the credibility adjustment changes making the target, the MLR requirement higher.
So, sorry if – it’s a relatively complicated calculation, hopefully that is a little bit clearer.
Steven Schwartz - Raymond James and Associates
Rob Pollock
But on that business, the important thing to remember that – Mike lead to this, we’re ultimately going to have to – our margins have got to come out of the difference between the loss ratio that we need to provide and the premium that we collect, and that will be bound on what we can learn.
Steven Schwartz - Raymond James and Associates
Right, right – and then, one more and then I will get back in the cue as well. Mike, the recoveries were good in DI, how is incidents in the quarter?
Mike Peninger
Incidents has remained pretty stable for us, you know, we have seen that trend in the recent couple of years, Steven, that our incident has remained relatively stable, it’s been the recovery that has been more of a challenge for us over time, and we have very good experience this quarter. I just reiterate what I said that results on the recoveries particularly can be volatile from quarter-to-quarter.
Operator
For our next question we’ll move to Mark Finkelstein with Evercore Partners.
Rob Pollock
Morning Mark.
Mark Finkelstein - Evercore Partners
Good morning, I have a few. I guess you mentioned that the CFPB should have something out in September, I’m just curious is it your view that based on the discussions you’ve held with them that is will have fundamental changes in how this business is operated?
Rob Pollock
Remember this CFPB is very focused on the RESPA guidelines Steven…
Rob Pollock
Right, which, you know, may well influence how servicers present information etcetera. I think it’s fundamentally going to be around disclosures and we feel pretty good that our disclosures are good and we have some ideas on how to make them better.
Mark Finkelstein - Evercore Partners
You know, New York and California the two very public states, can you just give us a feel for what’s kind of happening in some other states, for example, Florida or other states that maybe aren’t quite as public as New York and California in terms of the lender placed business and rate filings?
Rob Pollock
Sure we have regular filings and discussions with all the different states over time. I think we’ve tried to highlight the issues where we’re having discussions around rate right now.
So I don’t see anything on the horizon particularly in Florida. You know, we certainly have the issues where lender place is going to be discussed at the NAIC meetings.
We welcome that opportunity because we think it will be an opportunity for all parties to present how the product works, the essential nature of the product, and it’ll allow us to show how we’ve been an innovator in other areas of the lender placed industry at prior times.
Mark Finkelstein - Evercore Partners
Maybe just moving on, to go back to I think it was Chris’s question, on the international OR we have 2%, you have the profit strain of the UK and some other underperforming businesses, you also have investment spend in Latin America and Asia, wherever – how do you think about that path of 2% and how much is contributed from, in terms of getting to double digit returns or getting to double digit returns? What is the path in terms of the pieces of the business that are underperforming versus kind of the investment spend starting to subside?
Rob Pollock
Okay, Mike you want to start?
Mike Peninger
Well I think again Mark we’ve got the issues in Europe that we’re very focused on. There we have targeted sales efforts that vary , you know, targeted areas.
Mobile, for example. And we’re looking at expenses very closely in conjunction with that.
So to the extent we’re able to find clients in those targeted areas that’s great, that will help us, and we’ll get some growth there. To the extent the growth isn’t there then we need to address expenses in Europe.
And so those are the primary focus in Europe, where growth is the most challenging for us. In Latin America, we’ve added new clients and there to your point we have added some, made investments in expenses to build up the capability to service that business.
And remember also that we’ve got, to the extent that we sell service contracts, we’ve got the delayed nature of the revenue recognition because we don’t recognize revenue on extended services contracts until the manufacturer’s warranty wears off. So that business is going to slowly ramp up there and so the challenge in Latin America then is to keep finding those new clients and then start to leverage that infrastructure that we’ve built there.
So I think those are kind of the main things that I’d point to.
Rob Pollock
Yes, I think that the Latin America situation if you turn and look at China, China we’ve had pure investment for a number of years. We announced the five star deal, it’s mostly service contract business, but we now have what we believe is an embedded set of contracts on the business that are going to earn in the future.
And I think Mike detailed how we’ve made a lot of progress on that in Latin America, we now have that going on in China as well. So we have some very developed markets, Canada and Puerto Rico.
We have LatAm that we’re making lots of progress on. We’ve got Europe that we’ve got to get first and we’ve got China that I think is also going to start being a future add to our earning.
So I think that we’ve got every one of these buckets moving in a positive direction in that international area.
Mark Finkelstein - Evercore Partners
Okay, thank you.
Operator
Moving on, we’ll take a question from John Nadel from Sterne Agee.
Rob Pollock
Good morning, John.
John Nadel - Sterne Agee
Good morning, Rob. Good morning, Mike.
A couple of questions. So all these conversations with the, boy it sounded like so much alphabet soup, but with the GSE that you’ve been having, I’m just wondering if you can give us any sense for where things may be headed there.
For instance, I’ve heard that there have been some discussions about the GSE’s potentially taking on near REO properties in addition to the already fully foreclosed properties that we know they already self-insure. I was wondering if you had any thoughts on that.
Rob Pollock
Well I think the big thing as we’ve talked to the different people, John, is just getting an alignment among of the GSE. You know, the FHFA kind of is the regulator over both of those, if you will, or sets direction over both.
And I think the first thing they’re looking to do is just, how do we get alignment and make sure some consistency is going on here. You know, I think that we’ve got a lot of unique capabilities that can help them with whatever solution they want to land on.
And we’ve proposed a number of things to do that in terms of sitting down and showing them things we might do. So I think the real key is for them to just decide what they want to do and we’re trying to help them in that process.
John Nadel - Sterne Agee
Okay, along those lines, Rob, in terms of some of the potential solutions of ways that it could change, I wonder do you think there’s any real potential that Assurant could be an insurance provider, you know, for the GSEs? I know they’ve been self-insuring now for at least the history that I know about.
I’m wondering if there’s a chance that that could shift?
Rob Pollock
Well it’s certainly something we’re trying to talk to them about historically. I think they’re focused on other things right now, John, so we don’t want to give up on that, but I wouldn’t put that as probably as what we’ve seen as the top of their list.
John Nadel - Sterne Agee
Okay, and then separately but still related to lender place, I’m just wondering given the New York division seems so focused on the re-insurance arrangements with you servicer clients and it seems – I think, if memory serves, JP Morgan at the hearing indicated that they reinsure 75% of the premiums in your contract. I’m just wondering if there’s been any movement toward terminating those re-insurance arrangements?
Rob Pollock
So again, we don’t disclose particulars of relationship with clients. All the deals are unique.
That would require, you know, JP Morgan saying they want to do something different John. As it relates to the department itself, remember we’ve had our discussions, there were others who were at the hearing, I’m sure they’ve had discussions, but we’ve not been privy to any of those.
John Nadel - Sterne Agee
Okay, so would it be your expectation that ultimately re-insurance arrangements are terminated or…
Rob Pollock
I wouldn’t speculate on that.
John Nadel - Sterne Agee
Okay. And then finally turning to health, I mean, obviously a terrific quarter even if we take out the real estate income.
It looks like sort of achieving 4% or darn close to it, 4% after tax margin and north of 15% ROE. You know, Mike you mentioned in your opening remarks some additional provisions that were going to be coming on from the reform that might mean that this level of earnings is not necessarily sustainable.
Could you just give us a little bit more help in understanding what’s coming on in the near terms and how much of a pullback in earnings we should expect before we ramp back towards that 4%?
Rob Pollock
Mike can give the details, but I want to go back and just provide a little color here. John, remember what we’ve said is we think we can get to that 4% after tax margin once PPACA is fully implemented, which is after 2014.
We said along the way we have a lot to do, but we can make progress as we go there. But understand the way that the PPACA legislation implements on a year-by-year basis.
We’ve got to make progress and the legislation will push back at things a little bit, so we’ll have that to overcome. So again, I want to put it in the broad context of I think we’re quite pleased with the progress we’re making, but we’ve got more progress to make.
And then Mike, you want to talk about the…
Mike Peninger
Yes, maybe in a little more – I mentioned the credibility issues earlier John, but if you look at our loss ratio this quarter, I think it was in 73% kind of range in health. And if you think about, I think we’ve talked on past calls, this idea that the MLR is 80% and that translates into something lower than that on a gap basis because gap and MLR calculations are somewhat different.
But if you think about business subject to the MLR is going to run probably a little bit higher than 75%, 75, 76, 77, somewhere in that range then you’ve got non-MLR business and that’s where some of the affordable options that we talked about is going to run probably a bit lower loss ratio. And when you start to look at a blend.
And then the challenge going forward relating that I referred to on the call is primarily the credibility adjustment to the extent that we have non-credible business we’re currently getting the benefit of some of that lower loss ratio. But over time we get less benefit from that as PPACA rolls out further over time.
So when you’ve got to look at the blend of all these things when you think about what our loss ratio is going to be going forward. And I think the bottom line is going to be higher than say the 73%, but that’s why it’s so important that we continue to sell new sales of the non-MLR products and continue the work we’re doing to ratchet down expenses, that’s how we sustain the returns.
John Nadel - Sterne Agee
What proportion, just as a quick follow-up, what proportion of the in-force premiums or health segment reserves, I’m not sure what way you’d be willing to talk about this, but what proportion of that is the newer health access, non-MLR type products, at this point.
Rob Pollock
Yes, we haven’t disclosed that yet and it’s relatively modest at this point because these products are starting, you know, we’ve started to really focus on them the last couple of years in the post reform environment, so they’re growing nicely. But they started from sort of a small base.
Mike Peninger
But at some point in the future that is something we will figure out how to disclose. I think the other one that just goes along with it again, is we’re also pleased with the progress we’re making with the networks in the comprehensive or PPACA world as well and we think we’ll have more of those sales in the second half of the year too.
John Nadel - Sterne Agee
That’s helpful. Solid progress in health, absolutely.
Thank you.
Operator
Next we move to Sean Dargan with Macquarie Securities for a question.
Rob Pollock
Good Morning Sean.
Sean Dargan – Macquarie Capital
Good Morning, thank you. In special property I realize that the revenue guidance for the year, I guess, for the year is going up.
But, when we think about the steady state estimate that you put out earlier with a combined ratio of 84 to 88%, and expense ratio of 44 to 46%, is that still the way we should be thinking about this business in the out-years?
Rob Pollock
You know, that’s a reasonable way to think about it. Let’s just reflect for a second on all the changes we’ve seen that have been caused in the last few years.
Because I think it’s important, and we’re trying to deal with all these factors as well. So, if you’d gone back three years ago, we saw a huge consolidation of loan portfolios with the big players.
Now we’re seeing a deconsolidation and move to the specialty players. So, that’s a fundamental difference that’s taking place.
Second, you know, we’re in a situation where delinquent loans have remained high, causing placements to be high. Third, we’ve seen voluntary carriers reducing their exposure in cap prone areas, and we’re seeing out exposure in cap prone areas increase.
So, all these factors are causing us to look at the business a little bit differently then we have in the past. We do feel the big issues on resolution of these delinquent loans, and their movement to either foreclosure or short-sale is likely going to cause our revenues to come down.
I have not been very good at estimating that, via the placement rate on when that’s going to happen, because it’s just very difficult to predict. But we do understand that ultimately a normalized housing market will lead the lower earnings, but we’re still going to have good returns in the business.
Sean Dargan – Macquarie Capital
Now, I realize those returns will be lower than they have been. Can you give us any…
Rob Pollock
I think we tried to provide that guidance Sean, with that look at the combined ratios. Combined ratios going to go up a little bit.
And you can think of that in a couple of different ways. One is, you know, our other products don’t have as attractive of combined ratios, as Lender- Placed Product has had.
The second thing is, you know, some of our expenses in Lender-Placed are fixed. Our tracking system, the cost of running that tracking system are not going to go down when we have fewer policies enforced.
Sean Dargan – Macquarie Capital
Okay, thank you. And just a follow-up about the real estate (inaudible) I think that’s the first time it showed up in a number of years.
Do you expect to see more of that in the near future?
Rob Pollock
I’m going to turn it over the Chris, because I think he can provide some good collar here.
Chris Pagano
Sure, Hi Sean. Let me make just a couple comments, because as you mentioned, we haven’t talked about the real estate portfolio in quite a while.
You know, when we think about real estate, we think of it as kind of a specialty (inaudible) class for us. And, you know, we’ve been in the business for the better part of the last 20 years.
It’s a very small part of the portfolio. If you look at the end of the second quarter, the book value of the real estate portfolio was a little less than $240 million.
It doesn’t produce consistent quarterly gap income, and you see that in the supplement. It’s the main reason we don’t include it when we give you investment yield calculations.
You know, the approach that we take is very Bottoms-Up opportunistic. We don’t have set timetables around acquisition and dispositions.
You know the two partnerships that made up the $29 million of income this quarter, one was in the portfolio less than two years, and the other one was in the portfolio almost twelve years. So, what we do focus on though is, long term value, cash-on-cash return, and we’ve been very successful at it over the years.
Going forward, just to give you an estimate, there’s probably about $55 or $60 million of value in the current portfolio that over time we’ll be able to monetize. But there’s no set timeframe around how long that’s going take.
Again, we want to be opportunistic, we want to let market conditions dictate the investment strategy. You know, the other thing to remember though is, it’s cash return, $19-plus million of after tax profit came into the company last quarter, and I look at that as deployable capital, which we’ll ultimately be able to get up to the holding company and use either for buy backs or to fund profitable growth opportunities.
Sean Dargan – Macquarie Capital
Thank you.
Operator
Our next question will go to Edward Spehar – Bank of America
Rob Pollock
Good Morning Ed.
Edward Spehar – BofA/Merrill Lynch
Thank you, good morning everyone. A few questions, I guess specifically on New York, are you going to provide us at some point do you think anytime soon in terms of what type of rate reduction or sort of targeted margins you might be thinking about on this new generation of your product?
Rob Pollock
The first thing we’ve tried to do Ed, is bound the premium that will be subject to things. I think we’ve identified that as $63 million in the state of New York.
Obviously, we’re having discussions and when we have resolution, we definitely will let people know where things have landed.
Edward Spehar – BofA/Merrill Lynch
Do you get any sense, like you’ve given us some good detail on sort of the timeline or expectations around California, do you have anything similar that you can provide at this point for New York?
Rob Pollock
I don’t believe I do Ed, but when we have something, we’ll certainly provide it.
Edward Spehar – BofA/Merrill Lynch
Okay, and then a related question is: The NAIC meeting, is there any specific agenda that they have or any proposals that have been put forth by anyone to be discussed there. Or is it pretty open ended type of…
Rob Pollock
Yes, I think it’s an opened forum.
Chris Pagano
Both sides will be represented in the discussions, and I think that, you know, there’s just been a general interest to learn more about the Lender-Placed industry. The good news to me is, we have a number of people within the NAIC who are quite impacted and see the need for capacity of Lender-Placed insurance, and they’ll be there as well.
Edward Spehar – BofA/Merrill Lynch
Okay, it’s not like a yes or no minimum loss ratios or anything like that?
Rob Pollock
No.
Edward Spehar – BofA/Merrill Lynch
Okay. And then one last question; With regard to the International ROE and Solutions, can you give us any sense just roughly where that ROE would be if we thought about, you know, Europe and sort of a normal economy or economic recovery type of scenario.
Not necessarily targeted ROE’s in Europe or anything else, but just if the environment was a little more normalized?
Rob Pollock
Well, I think the improvement in Europe is going to come from a combination of some combination of growth and expenses Ed. I don’t think we’re prepared at this point to tell you, you know, to split the equity, the international equity, but to sort of, I think what you’re asking, but we can say that the bulk of – if we think about – you can sort of see from our disclosure and do the numbers, you know, that the international ROE (inaudible) I think previously provided the losses we had in the U.K.
I can’t remember what that was, but I think we said about $35 million. Just think about that going to break even.
Edward Spehar – BofA/Merrill Lynch
Okay, so something similar type of magnitude to that.
Rob Pollock
Right, now recognize that we’ve made progress, it’s not at $35 anymore, but there’s still, you know, we’re not going to break even till the middle of next year.
Edward Spehar – BofA/Merrill Lynch
Okay, thank you.
Operator
We move now to Jeffrey Schuman with KBW.
Rob Pollock
Good Morning Jeff.
Jeffrey Schuman – Keefe, Bruyette & Woods
Good Morning, thank you. I was wondering if you could talk a little more about some of the concepts you mentioned for the next generation Lender-Placed product.
I’m a little slow, so I could use a little help there. So, for example, the expanded geographic rating, I guess the idea is you would – the rating would be more sensitive to levels of cap exposures, is that the basic idea?
Rob Pollock
That would be one of them. I mean, I think – let’s start and go back historically.
You know, this has been a very simple product, and one of the reasons for it is, we wanted to be differentiated from the voluntary market, we take all-comers, and you know the basic genesis of it was in a different time in the housing industry. When we sit down and look at things, there are things we can do differently, and a lot of it really relates to an ability to do things in concert with our mortgage servicers.
So, for instance, we have to have interface and system capabilities to address different things. You brought up geographic rating, and we think that’s one of them.
Clearly if you look at some of our coastal areas, being able to offer different rates on the coast than inland, that certainly makes sense to us, okay. But you can also get into, well maybe they want something else different.
May be they want deductibles that vary by the value of the home, okay, or delinquency status. These are all things we’ve looked to figure out how to build into the product in response to just things we’ve heard from different constituents.
Jeffrey Schuman – Keefe, Bruyette & Woods
Yes, I guess, it’s not immediately clear to me. Some of this responds more to some things the servicers are looking for.
Does this somehow also address some of the regulator concerns, and if these kind of changes have an obvious directional bias to your revenues and earnings?
Rob Pollock
A couple different things: We’re trying to respond to everyone, so the servicers are our clients, and first we have to have enabling capabilities to respond to what’s going on. And the good news is we have the systems and infrastructure that can deal with a lot of these things, that’s quite important.
In some cases the servicers may have limitations with how their systems operate to deal with things. Then you have ideas being offered in by the (GSE’s) or the regulators.
We’re trying to provide a comprehensive solution that can respond to all those things. So you know, again, when that housing market normalizes, when we put the new product out there, we know in total our earnings are going to be smaller, but our returns are still going to be good.
Jeffrey Schuman – Keefe, Bruyette & Woods
Okay, that’s helpful. Just one other thing: On the kind of state by state regulatory read, it sounds like outside of New York and California you’re not having the same types of conversations.
I’m wondering if that at this point is more of a reflection that those states have reviewed the issue, and are find with the rates, or is it more the situation as we see in some cases, that the smaller department sometimes defer to leadership of California and New York and (inaudible) off the outcome there?
Rob Pollock
Again, I think let’s take a starting point here. And the starting point to me is there’s a recognized kind of thought process that there’s an essential need for this product.
How it prices can be debated, the need for the product is uniformed. Everyone sees that it’s essential to making mortgage lending in the housing industry work.
You know, we’ve had conversations with many regulars. I could name them, I’m sure.
So, that’s not the point, but these are the two that are front and center, and we’re trying to engage in active dialogue with them and get to a solution here, and we think the new product can be a big part of that.
Jeffrey Schuman – Keefe, Bruyette & Woods
Okay, thanks a lot Rob.
Operator
Our next question will come from Mark Hughes with Suntrust.
Mark Hughes – Suntrust Robinson Humphrey
Thank you.
Rob Pollock
Good morning, Mark.
Mark Hughes – Suntrust Robinson Humphrey
Good morning. I don’t know if you care to throw out a number, but if you did give full credibility to some of these loss numbers in the various states, how much would that impact the overall loss ratio, say if all this was kicked in immediately?
Rob Pollock
Yeah, I think you’ve got to look at the loss ratio that we present, Mark, the 73%, as I said, you think about fully credible MLR business running somewhere at above 75%, as I said. You know, you’re going to have – our overall aggregate loss ratio is then going to be a blend of that MLR business and the non-MLR business.
So the number would move depending on the mix.
Mark Hughes – Suntrust Robinson Humphrey
And then if I did all that math, where would I come up at?
Rob Pollock
I – you know, we don’t have that with us right now, Mark. I mean, we can try and look to provide further insight on that in future calls, but I think the more important thing is to remember that fully comes into effect in 2014.
So you know, as Mike pointed out, we’re doing 260 calculations to calculate all the rebates because they vary by legal entity, they vary by state, small group, individual, it would take a fair amount of work to do that and we just don’t have it with us right now.
Mark Hughes – Suntrust Robinson Humphrey
Exactly. Understood.
And then how about the –in the benefits business, any comment on underlying pricing, you know, assuming your employee count or customer count stays steady? What are the pricing trends generally?
Rob Pollock
I think that certainly the market is raising prices on disability, Mark, in response to the interest-rate environment and some of the challenges and incidents in recovery that various carriers are seeing. You know, I think we probably started a little bit earlier than some others, but you know, I think the renewal rates are definitely going up.
I hesitate to put out a number, but we’re getting a meaningful – meaningful increases in renewal pricing.
Mark Hughes – Suntrust Robinson Humphrey
Thank you, very much.
Operator
And our last question is coming from Chris Giovanni with Goldman Sachs.
Chris Giovanni – Goldman Sachs
Thanks so much for the follow up. Just a question on capital management.
I guess, you know, you mentioned 380 million of deployable capital and you know, when we look back I guess over the past couple years in the periods where concerns are around sort of regulator inquires and specialty property kind of prop up, you know, going back to the fall of 2010 I guess with the banker article last summer and then you know, the second quarter of this year and you look at the corresponding activity that you guys did with share repurchases, you know, you were repurchasing 160 million, you know, at share prices and call it in the 32 to 34 range. So when we think about sort of the pace of share repurchases going forward, should we be thinking when shares are at this level, that’s the level of share buybacks we should be assuming or should we say, you know what, this is a sustainable rate just given how much deployable capital you guys currently have?
Rob Pollock
Yeah, just a quick comment. First, we’ve tried to reiterate we see the share price as very attractive.
I think Mike and I both said it, I think Chris said it too. And you know, we tend to buy through 10B51 programs, we try and take into account the current situation when we set that 10B51 program into effect.
Chris, you want to provide a little more color there?
Chris Pagano
Yeah, I guess a couple comments. I mean, again, when I think about share repurchase, you know, certainly buying back at current prices is a prudent use of deployable capital.
There’s no question about that. But the goal here is to be disciplined about returning capital, be in the market consistently and also as we head into CAT season, be careful about maintaining what we talked about and called a seasonal buffer.
So as we head into the wind season, we’re going to probably – we’re going to need to likely hold more than the 250 capital buffer that we’ve talked about. In terms of the pace or the degree at which we’re buying relative to share price, you know, we’re not trying to market [inaudible].
The goal and the use of the 10B51 program is to allow us to be in there consistently through blackout periods and again, returning the capital to the shareholders. The other thing to keep in mind is that, you know, even given the significant amount of repurchase activity over the last 18 months or so, you know, shareholder’s equity [inaudible] has not changed at all.
Okay? So this is as much a cash flow profitability story as it is a repurchase story.
Chris Giovanni – Goldman Sachs
Okay, and then just as a quick follow up, is there anything going, I mean, a lots going on in the regulatory side, is there anything that you guys see on the horizon that could preclude you from repurchasing stock or is, you know, your 10B5 program basically diminish the risk there?
Rob Pollock
Well, the way we like to run the repurchase program is quick 10B51 program’s in place to get us through blackout and we go into the next open period, we recalibrate our outlook for capital and then put another program in that will take us to the next blackout period. Now again, keep in mind that also spans quarter end so it’s difficult to link quarterly repurchase activity to the programs that we put in place.
But if we do find ourselves in an open period, blacked out for a reason other than earnings, then that’s going to affect what’s going on.
Chris Giovanni – Goldman Sachs
Okay, thank you very much.
Rob Pollock
Thank you for joining us today. We look forward to updating you on our progress next quarter.