StanCorp Financial Group's Management Presents at JPMorgan 2013 Insurance Conference (Transcript)

Mar.21.13 | About: StanCorp Financial (SFG)

StanCorp Financial Group, Inc. (NYSE:SFG)

March 21, 2013 3:15 pm ET


Floyd F. Chadee - Chief Financial Officer and Senior Vice President

Unknown Analyst

Good afternoon and welcome to the StanCorp conference. It's my pleasure to introduce your speaker today, Mr. Floyd Chadee, who has been the Senior Vice President and Chief Financial Officer of StanCorp since 2008. Prior to his current role, Mr. Chadee held senior roles in Assurant Employee Benefits, Aetna Canada and Mutual of Omaha.

And with that, I'd like to turn the floor over to Mr. Chadee.

Floyd F. Chadee

Thanks. And welcome to the presentation on StanCorp Financial. Thank you for being here. So I'm going to tell you the story of StanCorp over the many years and how it's been evolving over the recent turbulent period for not just the insurance industry but all financial services since that has been occurring since 2008.

So I need to draw your attention to this page that our lawyers have me present here, which is that we will make forward-looking statements in this presentation.

So what is the story of StanCorp? StanCorp has been the same conservative company for 100 years. We look to differentiate in the businesses that we do by being exposed in very specific businesses. We're not everywhere. We're very specialized in what we do, and we believe we're experts in what we do. So expertise comes from essentially 2 different areas. We believe we're experts in the group insurance business, in particular, the complex group disability business, which we've been in for a very long time and which we've managed in a very disciplined way. And I'll go into some more detail later in terms of how we're managing that business through the economic cycle that we've been experiencing lately.

And then on the other side of the balance sheet, we are experts in the mortgage business, particularly the commercial mortgage space, 40% of our assets are in the commercial mortgage space, but in a niche area of that commercial mortgage space, small loans, not everywhere, loans that we underwrite ourselves and not in CMBS where we turnover the underwriting pen to others. We're experts in that business, too. If you look at the evidence over the last few years, the last 4 to 5 years, in terms of what has happened in the commercial mortgage space, we've seen many portfolios of commercial mortgages blow up, given the poor underwriting that they had to start with. In that period, StanCorp had delinquency rates that have gone as high as 43 basis points, which is a miniscule delinquency rate when compared with our most commercial mortgage portfolios.

So we're experts in the businesses that we choose to compete in, which is group insurance, in particular, the complex group disability space, and in the mortgage space on the other side of the balance sheet. I'll show you in a bit the businesses that we've specifically avoided. One, because of the risk characteristics of those businesses. And certainly, we don't believe that we've developed a historical expertise in that. We're not sure anyone else has.

So we have a profitable long-term business. We've avoided variable annuities in long-term care. And the other thing that is important to note about StanCorp is that not only are we conservative in our financial reporting practices, in our reserving policies, but we are very transparent. So for example, later on, I'll show you our discount rate mechanism. The discounting mechanism that we use to apply to all disability claims and how we tie that to investment income. Very transparent, very formulaic and very much unlike some of the very opaque policies being followed throughout the rest of the industry. We have a very high-quality investment portfolio. And I'm going to talk a bit about interest rate management. And our balance sheet is very strong, as I'll show you in a bit. So that's our overall story and to get into some of the details here.

We move to the next slide. So who are exactly? We have a group insurance business, that's our core business. We're also in the asset management space and the individual disability line. So the group insurance business constitutes about 53% of our pretax income, with asset management at about 26% and individual disability at 21%. As we price through an underwriting cycle in the group disability space, our group insurance business is at 53%. In normal circumstances, we would expect that to be more close to 80%. And as we price through the business, we would expect that, over time, we'd get there, assuming that the other businesses remain constant, which they won't. So this is our basic breakup on the liability side with group insurance being our core business.

So that was a slide showing you the businesses that we are in. So moving on to the businesses that we're not in. So we're in group life, and group disability or core businesses. And we do not offer the products that we show on the right-hand side of the slide. We're not in individual life, we're not in long-term care and we're not in variable annuities. What this reflects is a very disciplined approach to the businesses that we do participate in. So for example, individual life, traditional individual life, which in most circumstances, would be viewed as a fairly low-risk product, in this environment of low interest rates going on for a long period of time, individual life is suddenly seeing challenges that it would not have seen before. So when an individual life policies issued, one anticipates getting in premiums over a long period of time. And therefore, one is making a bet on the interest rates environment, in which those premiums would come in to be invested. I think issues of individual life policies are now faced with the question of what to do now that those premiums are coming in, in a much lower interest rates environment.

We never went into long-term care because we believe that the claims on that, the risk characteristics, make the projection of experience in long-term care, fairly and quite uncertain and very much a speculative bet which, I think, is playing out in the industry. In variable annuities, we all know the story in variable annuities and the bets that were placed there. We embedded derivatives in those products and how that played out in the financial crisis.

So instead of those products on the right-hand side, we focus on the products on the left-hand side, which would be group life and group disability, or core products. And these products are particularly attractive, given the environment of uncertainty that we've seen over the last few years. So the ability to reprice the products over a 1 to 3-year period, there is some multiyear guarantee on that product, but normally extends no more than 3 years, in fact, typically 1 to 2 years. So no long-term guarantees in those products in terms of the expectations on pricing. And therefore, we can reprice those products. So in an era of uncertainty that -- as we faced over the last few years, very good products to be in.

Profitability, not spread based. So it's not completely dependent on the interest rate environment and the capacity to produce interest rate spread but very much focused on the underwriting skills that one brings to those products. So group life and group disability, in particular, group disability, very strong underwriting needed in that space. And we've developed a great historical knowledge, deep historical knowledge in the disability space. That also extends out, that skill set of underwriting, also extends out into a mortgage space, wherein a commercial mortgage space, the strategic differentiation is our ability to underwrite those products and to choose the risks in ways that are very different from the competition. And then on group life and group disability, no embedded equity derivatives that blew up as they did in the variable annuity world. So very focused product side management.

And then on the other side of the balance sheet, I show here 2 bars displaying our investment policy. StanCorp's investment policy versus the peer group within the insurance space. And you can see StanCorp's investment philosophy has been very simple over time. Essentially, we are in -- 40% of our book is in the commercial mortgage space, in the niche of small commercial mortgages that has performed very well over time, and the other 60% being in high-quality corporate bonds. So very simple investment policy. We look for excess yield on the mortgage side, where we think we bring our own unique characteristics and our own unique advantage in underwriting in that space. Then we look for the bond portfolio to provide conservatism and stability to the overall investment portfolio.

When you contrast that with a very much different investment portfolio followed by your peer groups, you can see the many asset classes that, over the years, we've avoided. So for example, we've never been into CMBS and RMBS because we believe that getting into those kinds of products is turning over your underwriting pen to others. And since we believe that what we bring to the table is strong underwriting, that would make no sense. We've not been in equity securities and we certainly have not ventured forth into complex derivatives that have been difficult to project. So very simple conservative investment philosophy that has performed very well over time.

How do we use that investment philosophy to translate into the discount rate that we use on the liability side of our business? We do it in a very disciplined way. We look at the yield that we're getting in any quarter. We look at the yield that we're getting on the actual assets that we originate. And then our intent is to take margin off of that to set the discount rate for the new claims that are included in that quarter. We do a 12-month averaging for that process. So we look at the 12-month new money rate, take a margin off of that and set the discount rate for this quarter so that you have a margin between that 12-month new money rate and the 12-month average discount rate. So very formulaic, very straightforward based on the actual assets that you originate and the yield on those assets. So you can see over time that relationship between the 12-month new money yield and the 12-month discount rate is very transparent, very straightforward for investors to understand.

When we look at our balance sheet and we compare it with most -- with the balance sheets of our peer group within the insurance space, one of the measures of the quality of any balance sheet is to look at how much goodwill and other intangible assets are on that balance sheet. And if we look at our goodwill and other intangible assets as a percentage of shareholders equity, we get a number of 20.6%. And you can see, if you compare that with our peer group within the industry, you can see that's the lowest amongst the peer group. So really a very, very high-quality balance sheet, our tangible assets as a percentage of shareholders equity being in excess of that of the peer group, a very high-quality balance sheet.

So where are we today? And this slide shows the guidance that we've provided for 2013. We anticipate that our net income for 2013 would be in the range of $3.40 to $3.80. That's after a year of about $3.24 last year. We expect that our return on average equity would be in the range of 8% to 9%, which is down from where it used to be. We've had years in which we've been in excess of 13%, 14%, 15%. But the entire industry is working through the low interest rate environment. And group disability insurers are working through a period of increasing cost, driven by increased incidence tied to the economic environment. So we, like others within the industry, are working through that period of repricing our book. And our ROE at this point, for this year, anticipated to be in the 8% to 9% range. As we continue to reprice our book, we would anticipate that ROE would go up over time.

The factors affecting the 2013 guidance. We do think that in an environment in which group disability insurers are repricing their book, raising rates, that a disciplined writer would expect to see pressure downwards on the top line. You could have an increase in lapsation of policies. You could see lower sales. So we think that's the rational expectation. And we certainly expect that there will be pressure on the top line. So we think low, maybe low single-digit decline in the group insurance premiums in 2013.

In addition to that, we have an economic environment where there's not a great deal over robust hiring going on. So the organic growth within our persisting policyholders is still slightly negative, reflecting a challenged employment environment. All those factors lead to pressure on the top line. We believe that in an environment in which we're repricing our business, that pressure on the top line is not necessarily a bad thing. In fact, it might be a good thing.

We expected the group insurance annual benefit ratio, reflecting the incidence environment and reflecting the challenged interest rate environment, which we think might lead to a discount rate reduction of 50 to 75 basis points, that group insurance annual benefit ratio will be in the 81% to 84% range this year. And given some low income housing tax credit investments that we've done in the last couple of years, we expect that our effective income tax rate to be in the 22% to 23% this year versus a higher number in previous years.

So as we think of moving from our $3.24 of EPS in 2012, to a $3.40 to $3.80 range in 2013, what are the things that positively affect that movement in EPS and what are the things that negatively affect that movement in EPS? These are basically [ph] through the transition and not -- they're all equal size and not necessarily indicative of the materiality of each one of those effects there. So the group premiums, we expect to have a negative effect because we expect some shrinkage in the group insurance premium industry pricing environment and an environment in which organic growth within our existing policyholders is under pressure. Some of that group in -- that shrinkage in group insurance premium is not necessarily negative to the bottom line because sometimes, one can act to the bottom line by subtraction from the top line if a policyholder is not one to accept a rational rate increase, even though they have a negative -- they're contributing negatively to the bottom line. If such a policyholder walks, it's not necessarily a bad thing for our business.

The group insurance benefit ratio, we expect the movement in the group insurance benefit ratio to be positive next year, which means it will come down based on our repricing efforts here. So that will lead to a positive impact on the bottom line.

Interest rates. Generally, we see further pressure on interest rates today. So even though treasuries may be drifting upwards, given investor expectations at the Fed at some point, we don't know when will be tightening, there still is pressure on credit spreads. I think, many in the financial industry are seeking yield and that demand for yield is going to drive credit spreads down. So we expect overall pressure on interest rates. A lot of that depends -- a lot of how that affects us depends on specifically how they affect the asset classes that we are currently investing in. So for example, as of the end of last year, while one would have anticipated credit spread shrinking, we had quite good experience within our mortgage originations where the spreads have kept up very, very strongly. But there is one who would anticipate pressure on that as we move forward. And there we had many other things, there's some other things that would affect positively the bottom line, showing you the movement from $3.24 to the $3.40 to $3.80 range of guidance.

As we think of our group insurance premiums, this slide is just meant to drill down into the many things that would affect the premium growth. So our sales would positively affect the premium growth outlined or pricing actions on those policies that are persisting will drive the premium lines up. But our pricing actions on terminations likely to drive the premium line down. So terminations being negative.

And then organic growth, which is the growth that we have in the premiums of persisting policyholders. The premium growth that you have on those policyholders. And you can see aging and salary increases will be positive to that growth in the premium -- in the top line. But the place where you see significant pressure still is in the employment levels. Our customers are still continuing to shrink, not as much as they were shrinking 2 to 3 years ago but still continuing to shrink in terms of the number of employees that they have.

Experience rating refunds could have a positive or negative impact on the bottom line. These are the nature of experience rating refunds is in the nature of retrospective premiums from certain sets of policyholders who agree to pay retrospective premiums when their experience turns bad. So it would depend on whether the -- or what the experience is on those particular policyholders for which we have experienced rating refund policies.

And those are all the actions that would lead to the premium growth. We think, overall, the impact of these actions, these various components would be slightly negative growth, premium growth in 2013.

So I talked to you earlier about the pricing action that we're taking for long-term disability. In the first quarter of 2011, we saw an increase in the incidence, disability incidence on our business. And disability incidence would be defined as the number of claims divided by the number of lives covered. So that percentage of incidence going up, went up by somewhere in the vicinity of about 12% in the first quarter of 2011.

You can see on this chart the pricing action that we started taking as we analyzed it at the end through the second quarter, we started taking action deliberately and in the third quarter of 2011. And this chart shows you the schedule of premiums coming up for renewal and therefore repricing for incidence.

So you can see, the end of the first quarter of 2012, we would've gone through about 33% of the block. And at the end of the first quarter of 2013, we would have gone through about 73% of the block. So still a bit left to go. On top of this schedule for repricing for incidence, we've also been changing our pricing as interest rates have gone lower and lower entity and we need to change our pricing based on interest rate expectations. So what is not explicitly shown here is the interest rate pricing that's layered on top of this. But we've been going through this repricing very deliberately and persistently through the last several quarters and we expect that to be very meaningful to our improvement in the benefit ratio.

So when we look at the group insurance benefit ratio, this is the statistic that drives -- that is the most meaningful measure of underwriting performance in the group insurance line. And this chart shows you the quarterly benefit ratio going back all the way to the first quarter of 1999. The blue line shows you a rolling 4 quarter average. So you can see lots of volatility when you look at this group insurance benefit ratio on a quarterly basis but much smoother when you look at it on the fourth quarter rolling average. We tend to think of a quarter's experience in the group disability line as not being a very good measure because one quarter contains so much volatility. And in order to figure out what's going on with the line, one needs to look at it on this rolling 4-quarter average. Here, you can see that what I mentioned earlier in the first quarter of 2011, that blue line going up and this is when we started seeing the pressure on the benefit ratio and group insurance in general. You can see the dotted lines show 81% to 84% range that we anticipate for this year. So a fairly wide range, reflective of the volatility that one might see on a quarterly basis.

We've also invested in tax advantage instruments over the last few years. And this has taken down our effective income tax rate to be in the range of 22% to 23%, which is what we anticipate for 2013.

We've been asked by various investors whether this is a onetime effect? It's not a onetime effect. As this chart shows you, this charts shows you a net income effect that breaks out the impact of the tax credits that are coming from low income housing tax credits, the tax credits, net of the after-tax effect of investment losses that flow through your investment line. So when you net all of those together, this shows the benefit over time of those 2 components of the low income housing tax credits. And what you can see from this is over the next 5 years or so that we've shown here, there is a continuing effect to be had from those asset classes, that asset class. And if you extended further, I mean, you can see the impact decreases over time but it decreases slowly to go on for several more years. So it's not a onetime affect. That 22% to 23% that we have on our income tax -- effective income tax rate can change, depending on the level of income. Give more guidance for this year, we expect the 22% to 23%. But to the extent our income does go up, you would expect this effective income tax rate would also go up, reflecting the leveraging effect of some fixed deductions.

So going back to the notion of a strong balance sheet and strong capital, this slide shows you, on the left-hand side, our risk-based capital. And on the right-hand side, our ratings. You can see, we quote our excess capital in excess of -- or target RBC range of 300%. At 300%, we think that's an appropriate RBC target for a company with our risk characteristics. So as I showed you earlier, we're in the group life disability business, which we think, when compared with other products such as individual life, variable annuities, long-term care, very low-risk products. So low risk on one side of our balance sheet. And when you move to the other side of our balance sheet, you may say, well, we're a very risky company if we have 40% of our assets in mortgages. But the history, the evidence of history would say otherwise because our mortgage portfolio has not only brought us higher yield over time, so higher reward. The evidence would say that in hard times, it has also brought us lower risk because during the financial crisis, we actually took higher capital losses on our AAA bonds than we took in our mortgage portfolio. So we think we have very low risk on the liability side, very low risk on the asset side, and therefore, 300% being an appropriate RBC target.

Well, you can see though, that over the years, while quoting our RBC target at 300%, we've been considerably in excess of that. So at the end of 2012, we were, in fact, around 365% of RBC. So very strong capital base.

On the right-hand side, we have our ratings from the various rating agencies. And you can see very good ratings. Both S&P and Moody's have negative outlooks, which is a reflection of our current repricing environment and our current increased incidence environment.

As of the end of 2012, the capital that we had, which we think of as deployable capital in excess of 300% of RBC, was $360 million. So very significant excess capital base.

So the next slide gets to shareholder returns. And these take the form of both dividends and share repurchases. On the dividend side, you can see from this chart that we've increased our dividend over the last 5 years, as illustrated on this chart. But if you go back to the previous 8 years, we've had 13 consecutive years of annual dividend increases. So certainly, one of the few companies that continued to pay a dividend during the financial crisis, reflecting our confidence in the long-term stability of the company.

Our share repurchases. We do share repurchases on an opportunistic basis, reflecting our view of overall capital generation and our view of the risk and the internal/external economy as might be reflected in equity markets. We were one of the first companies in the insurance space to be out the gate in terms of doing share repurchases after the financial crisis. And last year, when our -- as we were going through our repricing efforts, we've cut back on share repurchases. But as we've said at our last earnings call, we would anticipate that share repurchases would be a very viable option as we look forward, taking into consideration both the consistency of capital generation and the view of the external risks in the economy.

So this slide shows the consistent long-term growth in book value per share. So you can see if you look at over the last decade of book value per share has increased by a consistent 9.3% compound annual rate of return. So reflecting a very disciplined approach to the management of the business, so consistent operations and a solid investment portfolio.

So the key takeaways, in summary. We are going through a repricing process, as most companies in the group disability space are today. We are confident in the underwriting and pricing methodologies that we do. And we are committed to executing on that repricing process. We will continue to monitor interest rates and we are taking pricing actions in addition to address the low interest rate environment. And we will continue to manage the company in the conservative way we've always done, and in addition, a transparent way that we've always done. We will continue to focus on shareholder return, as might be reflected in dividends and in share repurchases as might be appropriate.

So that's the essential story of StanCorp over a long period of time and through the underwriting cycle in which we find ourselves today.

And with that, I would like to open up the floor for questions.

Question-and-Answer Session

Unknown Analyst

I had a couple of questions. First on, you mentioned taking pricing actions in the disability market in the U.S. What are you seeing your competitors do, because a lot of them publicly have talked about raising prices as well?

Floyd F. Chadee

Right. So we would say that if you compare the market today with what it might have been in 2007 before the financial crisis hit, we would say that prices today appear firmer than they were then. There was excessive risk being taken back in 2007. Since then, we've seen some ebb and flow. We've seen our competitors talk about raising prices and then it takes a while to get to actual execution. And even today, I think the people running a group insurance business would say that you can tie in anecdotes of sort of extreme behavior. But I think those anecdotes, if you look generally at the market today, we would say that it is clear that some level of price action is being taken, though inconsistently so across our different geographies and inconsistently so across companies in our space.

Unknown Analyst

And then what's the environment like for issuing commercial mortgages because the life companies are certainly more active there, the banks seem to have come back over the last couple of years. What type of spreads are you getting? How much competition do you see?

Floyd F. Chadee

So we've been monitoring this for quite a while. And we would say that in 2012, we would've anticipated that given the search for yield and given that many financial institutions are going out looking for yield, that we would've seen a shrinkage in spreads in our mortgage business. We had a great year of originations last year and our spreads certainly held up in excess of 300 basis points. But even as we look at it today, while we may not have seen it yet, we do anticipate that there would be pressure on that market. So certainly built into anticipation but not necessarily having seen it yet as of the end of last quarter.

Unknown Analyst

And lastly, just on M&A environment within the group benefits market, a lot of companies have expressed interest in wanting to do deals within group benefits. It seems like there aren't too many willing sellers but just interested what your views are?

Floyd F. Chadee

I'm not sure I got it.

Unknown Analyst

So basically, it seems like a lot of companies are interested in acquisitions within group benefits but not -- there aren't too many active sellers out there, so more demand than supply of potential properties but what are your views on that?

Floyd F. Chadee

So I think, I've been in the group insurance space for quite a while, and I have consistently anticipated consolidation in this space for many, many years that never seem to happen. I mean, the actual deals done in the group insurance space have been few and far between. I think, for the last few years, we've been living in an environment in which on a relative basis, the group insurance business is viewed very favorable relative to the other kinds of product lines that have undergone huge stress, some of which have blown up during the financial crisis. So given that experience, it comes as no surprise that the group insurance lines are viewed as very attractive within the insurance space. I would tend to agree with you that, generally, I mean, the same supply-demand imbalance that you would see from an M&A perspective that has been around for quite a while continues to persist today. Other questions on StanCorp?

Unknown Attendee

Yes, a few from me as well. During your discussion on the repricing actions that you've taken, you talked about doing repricing for current levels of interest rates. Is there any way that you can quantify kind of how much of your book would be appropriately priced for today's interest rates?

Floyd F. Chadee

Yes, I don't know that I can quantify that because the way to think about it is we had an upswing in incidence and we started repricing for that. That incidence level hasn't deteriorated further. And if anything, directionally, it has improved slightly but not materially so. So I think the words we would use, it remains elevated. So repricing for that level of incidence. So it's clear what our timing on the pricing for that is. I think, during that period of pricing for incidence, you've got to think about the interest rate environment as being constantly monitored and we reprice, and then interest rates go down again and we reprice again. So it's a continuous process. I'm not sure I can give a precise quantification of that.

Unknown Attendee

I mean, there are variables that you can't separate, of course. No problem. But I guess what I'm trying to get at is there -- if you can separate the incidence part of the pricing actions, is there a lot more work to do or is there only a little bit more to do? Is there any way you can qualitatively talk about that?

Floyd F. Chadee

Yes, so on the incidence side, certainly we see about 73% of the block already priced. So 27% left. I would say, certainly, significantly more than that on the interest rate side. I don't want to throw out a number. The interest rate, we would -- as of today, it would appear that one might argue, maybe not of today, but maybe of the last few days, one might argue that there's upward pressure on treasuries. So to the extent the interest rate environment stabilizes, then at least we won't necessarily be seeing increasing pressure to reprice on an interest rate point of view. But that all depends on where spreads go because we know there's another effect of insurance companies and other financial institutions searching for yield that could drive spreads down.

Unknown Attendee

Okay. And then in investment portfolio, the 40% concentration of mortgage loans which you talked a lot about today, is that your plan for the foreseeable future, to keep it at that percentage, and would you consider lowering that at any point into the future?

Floyd F. Chadee

Right. So we like that makes up that percentage of our portfolio in the mortgage space. Our expectation is that while we may -- we may, like others, think of diversifying and thinking of different ways to operate within the low interest rate environment, we would expect that the mortgage portfolio would remain about 40%. We like that percentage and the evidence of history would say it has served us extremely well. So no pressure, really, to reduce that percentage.

Unknown Attendee

Okay. And then last one for me. The target benefit ratio of 81% to 84%, does that imply a certain level of unemployment, i.e. do we need to see throughout 2013, unemployment come down for you to be able to hit that target?

Floyd F. Chadee

All right. So it's very -- it's not a one-to-one tie between sort of global measures of unemployment and how it affects the incidence levels, which would affect the benefit ratio within our business. So you got to think about it. What's really driving the benefit ratio within our business, 2 things. One, the level of incidence in the sorts of sectors that we cover and the interest rate environment. So the interest rate environment having been negative for a while, that puts pressure on the benefit ratio. But if you assume the investment environments remain -- at least, remains stable for a bit now, then what would drive the benefit ratio that we anticipate? What would drive that would be the levels, the changes in the levels of employment within the sectors that we cover. So if you think about it, public and education may be lagging a bit behind the private sector in terms of a rebound. So that's one. And then within the private sector, which is about 52% of our book, that excludes public and education, we are biased away from very cyclical types of industries. So for example, we're not very big in construction. But construction is one of the places where you've seen the huge rebound in employment. So to the extent we're in less cyclical industries in the private sector, you would see -- I mean, that takes us away from being tightly correlated with the overall employment levels. So you may see employment pickup but we need to see the employment pickup. We need to see the employment stabilization within the sectors that we cover. And it's important to note, we're not counting on employment pickup to cause a decrease in incidence. As long as the unemployment rate doesn't keep increasing in terms of layoffs, than we would expect to see incidence level to normalize within the sectors that we cover. Okay. Looks like we're down to last 4 seconds here.

Unknown Attendee

Couple more questions on your investment portfolio. Could you speak to how you underwrite in terms of lender value and debt service coverage and where does portfolio stand today and then types of properties that you invest? And then also, how they're distributed geographically? Do you have concentrations at any geography?

Floyd F. Chadee

All right. So there are slides in the deck, which you can see, that would give those pieces of information in terms of types of properties. I mean, we are in retail, we are in office, we are in industrial type warehouse properties. All sectors that have done very well for us. A lot of investors were very concerned about retail properties during the financial crisis. I mean, we thought, retail for example, was going to perform better than office because we are so selective in the retail sector, in the retail properties that we do, but we think there's always use for that space. In terms of geography, I mean, we're very distributed throughout the country. We are a bit higher in California, given that, that's been historically where we've been, where we started and grew our business. Our properties in California performed extremely well during the last few years. I mean, we've been less concentrated in the inland areas in terms of new originations and more on the coastal areas where there is much more demand. So there's California and then there's nuance underwriting in choice within California. In terms of our underwriting rules, I mean, there's a slew of underwriting rules, I don't have the exact figures on DCRs. We have very strong limits on LTBs. Our LTB is on the order of 75% on originations today. So we have had high underwriting standards that we've maintained before the financial crisis, through the financial crisis, and onto today. There are several other features within our mortgage contracts. So for example, we do personal recourse. We don't do loans generally without personal recourse. We do very strong underwriting at the borrowers. So again, reflective of sort of the slew of things that we do on the mortgage side to maintain the underwriting discipline.

Unknown Attendee

Are they amortizing loans?

Floyd F. Chadee

They are amortizing loans. They are amortizing loans.

Unknown Attendee

Okay. And then shifting over to, I guess, the industries that you provide disability benefits. I guess public and education are 2 sectors that have been under maybe a little more pressure than historically. Is there -- are you at a point now where you have visibility to say things have bottomed out and you expect to see some improvement?

Floyd F. Chadee

Yes. So whatever I say about the total block would be significantly influenced by the public and education. So are we seeing employment stabilization, for example? So one of the ways we look at that would be what we call organic growth. We look at our persisting policies and we say is there growth? Growth in the number of lives under coverage or not? We've seen that number get to negative 2%, even more sometimes, but around negative 2% as a result of the financial crisis. We've seen improvement in that number and we expect to see improvement in that number. But we're not projecting necessarily in the short term that you would get employment stabilization in the sense that you get to 0% no net shrinkage, because as of the end of the last quarter, we were still seeing negative growth within those persisting policyholders. So still pressure on the overall economy, in spite of the movements in the equity markets that we saw over the last few days.

Well, it looks our time is up.

Unknown Analyst

Thank you.

Floyd F. Chadee

So thank you very much.

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