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Assurant, Inc. (NYSE:AIZ)

Q4 2013 Results Earnings Call

February 06, 2014, 08:00 AM ET

Executives

Francesca Luthi - Senior Vice President of Investor Relations

Robert B. Pollock - President and Chief Executive Officer

Michael J. Peninger - Executive Vice President and Chief Financial Officer

Christopher J. Pagano - Chief Investment Officer, Executive Vice President, Treasurer and President of Assurant Asset Management

Analysts

Mark D. Hughes - SunTrust Robinson Humphrey, Inc.

Jeffrey R. Schuman - Keefe, Bruyette, & Woods, Inc.

Sean Dargan – Macquarie

Mark Finkelstein - Evercore Partners Inc.

Christopher Giovanni - Goldman Sachs Group Inc.

Steven D. Schwartz - Raymond James & Associates, Inc.

John M. Nadel - Sterne Agee & Leach Inc.

Seth Weiss – Bank of America Merrill Lynch

Operator

Welcome to the Assurant's Fourth Quarter 2013 Earnings Conference Call and Webcast. At this time all participants have been placed in a listen-only mode and the floor will be open for your questions following management's prepared remarks. (Operator Instructions).

It is now my pleasure to turn the floor over to Francesca Luthi, Senior Vice President, Investor Relations. You may begin.

Francesca Luthi

Thank you, and good morning, everyone. We look forward to discussing our fourth quarter and full year 2013 results with you today. Joining me for Assurant's conference call are Rob Pollock, our President and Chief Executive Officer; Mike Peninger, our Chief Financial Officer; and Chris Pagano, our Chief Investment Officer and Treasurer.

Yesterday afternoon we issued a news release announcing our fourth quarter and full year 2013 results. Both the release and corresponding financial supplement are available at assurant.com. We'll start today's call with brief remarks from Rob and Mike, with Chris participating in the Q&A session.

Some of the statements we make on today's call may be forward-looking, and actual results may differ materially from those projected in these statements. Additional information on factors that could cause actual results to differ materially from those projected can be found in yesterday's news release, as well as in our SEC reports including our 2012 Form 10-K and first quarter 2013 10-Q.

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 on assurant.com.

Now I'll turn the call over to Rob.

Robert B. Pollock

Thanks Francesca and good morning everyone. We are pleased by our progress in 2013. We took actions on several fronts to diversify and grow earnings for the long term. We strengthened our core specialty businesses as we applied consumer insights to meet customers' needs, accelerated growth in targeted areas and realigned our resources to focus on the best emerging opportunities.

As we look at Assurant's performance we measure our progress with three key financial metrics. Operating return on equity, excluding AOCI was 10.6% for the year. Book value per diluted share, excluding AOCI increased 10.4% in 2013, our third quarter consecutive year of double-digit growth. And revenue, defined as net earned premiums and fees grew by 8.2% for the year, driven by Specialty Property and solutions.

Fee income increased by 23% with much of the growth coming from businesses with lower capital requirements. During the year our businesses generated strong free-cash flow enabling us to return $470 million to shareholders, deploy $360 million in strategic transactions to diversify our specialty portfolio and at the same time maintain financial flexibility to invest capital in a disciplined manner to benefit shareholders.

Our 2013 acquisitions illustrate several themes, which we believe are important for successful M&A. These include proprietary sourcing of opportunities in areas we targeted for expansion, identifying business that allow us to add value by leveraging our core capabilities and focusing on cash returns.

Now I'll provide updates for each of our business segments. Assurant Solutions remained committed to improving net operating income with a focus on delivering $50 million in the fourth quarter earnings this year. We shifted resources away from non-growth areas to support opportunities in mobile and expand our market share in Latin America and Europe.

We took actions in other areas of the business to improve efficiency and reduce expenses. In mobile we're pleased with several recently launched programs that allow us to introduce innovative consumer solutions and boost our franchise.

As of year-end we supported more than 15 million mobile devices through our global protection programs. The acquisition of Lifestyle Services Group or LSG transforms our European business into a mobile platform that we will build upon. Integration is progressing ahead of schedule as we consolidate our European operations and management structures.

Last year we grew our operations in Latin America by leveraging our expertise in the mobile, auto and service contract markets. Our recent investment in Iké enables us to build on this success. We expect the customer base created by this partnership to provide a platform to cross-sell our complementary products and assistance services to increase revenues in Latin America.

During 2013 solutions reduced expenses in nine growth areas including our domestic credit business and parts of our service contract portfolio in response to market changes. These actions will help solutions achieve their 2014 goals and continue to increase earnings in the future.

I'll now move to Assurant Specialty Property. 2013 was a year of industry-wide change with significant movement in consolidation of loan portfolios. We benefited from these shifts and continue to play an important role in support of our clients as they met servicing requirements.

Without significant hurricane activity Specialty Property reported solid results in 2013. Loan growth and reduced ceded premiums were key drivers in lender-placed. Our continued expansion in the multi-family housing and property preservation niches also contributed to our revenue growth.

Multi-family housing is a business we built organically and then strengthened in 2011 with assured deposit acquisition. During the past five years we've increased multi-family housing revenues by an average of 31% per year to more than $190 million in 2013. We believe we can continue to grow this business at a double-digit pace by expanding our service offerings and adding new clients.

As we broaden our role within the mortgage value chain we can further leverage our capabilities and client relationships. The acquisition of Field Asset Services or FAS is a good example. This fee income business further diversifies Specialty Property's revenue stream. By providing inspections and repairs we're helping clients preserve the value of the homes in their portfolios. As these actions demonstrate we’re taking steps to strengthen and diversify our property business to maintain attractive returns and help offset expected declines in lender price premiums.

Let’s now turn to Assurant Health. During 2013, Health responded quickly to consumer needs with a broad and appealing set of products. This demonstrated agility and was affirmed by our fourth quarter sales of $319 million, the best sales quarter in our history. Sales were driven by significant activity prompted by the first open enrollment period under the Affordable Care Act or ACA.

Early in 2013 we decided to defer our participation on the public exchanges. Instead we focused on helping customers and agents understand how the changes would affect them and providing options to meet their individual needs. This turned out to be the right decision. We believe we captured market share due to our diverse product offerings, robust systems and broad distribution channels.

Individual major medical products which include the essential health benefits outlined in the ACA were a significant driver of fourth quarter sales. We’re proud of these results which underscore the importance of individual major medical as a core specialty business for health. Longer term, we also believe many consumers will seek affordable alternatives to major medical, products we also provide.

In 2014, we expect growth in premiums and insured lives, yet as expected profits will continue to be modest this year. We believe more attractive returns for shareholders will emerge in 2015 after reform changes are fully implemented. We also expect the risk mitigation mechanisms under the ACA will provide important downside protection in the new guaranteed issue environment.

At Assurant Employee Benefits we remain focused on growing our voluntary products and services as we shift resources away from traditional employer paid insurance. Clients and customers cite the ease of enrollment in the administration, our broad products suite and expensive demo network as key differentiators. For the year, voluntary sales and net earned premiums were up 25% and 7% respectively.

Looking ahead, we are adapting our demo product to provide customers multiple options that fit their needs under the ACA. We recently joined the new [Be Swift] private exchange. We expect to expand participation on private exchanges in 2014 and are focused on select partners that value our differentiated approach to voluntary.

This week we marked our 10th anniversary as a publicly traded company. We’re proud of all we’ve accomplished during the past decade and are encouraged by the possibilities of the years ahead. We look forward on our upcoming investor day on March 11 when our executive team will share more about long term strategy and objectives with you.

And with that I will turn to Mike for more detailed comments on our fourth quarter 2013 results and the outlook for a year ahead.

Michael J. Peninger

Thanks, Rob. I'll begin with Solutions. Net operating income for the fourth quarter reflected $12.8 million of restructuring charges as we integrated our LSG acquisition in Europe and streamlined other operations. Excluding disclosed items net operating income totaled $32.6 million compared to $27.9 million in the fourth quarter of 2012. More favorable service contract results and previous expense management actions drove the improvement.

For the fourth quarter, Solutions net earned premiums and fees increased by 18%, driven primarily by domestic auto and mobile service contracts and growth in Latin America. Fee income increased by 46% reflecting the market success of the mobile program’s launch last year as well as contributions from LSG. Excluding disclosed items our international combined ratio for the quarter was 101.9%, an increase of 70 basis points from the fourth quarter of 2012.

For the full year it improved 90 basis points to 101.5% driven by expense reductions in Europe partially offset by about $8 million of M&A fees recorded in the second half of the year. Absent restructuring charges our domestic combined ratio for the fourth quarter also improved. This reflected expense efficiencies and more favorable service contract results, including mobile.

Last November we implemented underwriting changes at a domestic mobile client to mitigate high third quarter loss experience. These corrective actions improved our experience in the quarter and will be fully reflected in our first quarter financials. We continue to be excited about our partnership with T-Mobile. Their JUMP! program created significant subscriber growth during the last half of 2013. Beginning in late January the first JUMP! customers became eligible to upgrade their devices. Initial experience is in-line with our expectations but it's still early. Under this program we earn fee incoming expense credits for administering the protection program and the JUMP! upgrade.

In 2014 we expect continued growth in Latin America. Despite recent economic volatility there we believe the region offers attractive market characteristics. Our recent investments in Iké allows us to further expand and diversify our footprint across Latin America. We are on track to close the second phase of this initial investment soon.

As minority owners we will report result from the Iké investment using equity method accounting. This means that our share of the company's earnings will be reported as part of fees and other income in our income statement and our net equity in Iké will be included in the other asset category on the balance sheet.

Overall we expect Solutions' profitability to improve during the second half of 2014 leading to $50 million of net operating income in the fourth quarter. The increase will be driven primarily by better margins from mobile as we scale our new programs and improve the European results as we move forward with LSG. Our European restructuring in conjunction with expense reduction in other non-growth areas will produce $20 million to $25 million of annualized pretax expense savings.

At Specialty Property fourth quarter results benefited from no reportable catastrophes compared with the $135 million of losses from super storm Sandy in the fourth quarter of 2012. Excluding catastrophe losses net operating income declined due to higher non-cat loss experience and additional operating expenses.

Our non-catastrophe loss ratio for the quarter increased 660 basis points compared to fourth quarter 2012's very favorable levels driven by higher claims and lower premium rates. Our fourth quarter expense ratio increase by 830 basis points versus 2012 due to volume growth in our lender-placed business, new services we performed for our clients and higher legal and regulatory expenses including litigation reserves. We continue to make progress in resolving outstanding matters related to lender-placed insurance.

Fourth quarter result include our Field Asset Services acquisition. Since this is a fee income business it has a different expense ratio target than our insurance businesses. For the quarter it increased Specialty Property's expense ratio by 230 basis points or $25 million of expenses which was nearly offset by fee income. We are pleased with the sales pipeline for the business and we expect it to be modestly profitable in 2014 after amortization of intangible assets and integration related costs.

Our placement rate at the end of the quarter was 2.77%, a 10 basis points reduction from year-end 2012 reflecting the improving state of the overall housing market. This was partially offset by contributions from recently added loan portfolios including 200,000 loans on-boarded in the fourth quarter.

Our new lender-placed product is now available in 44 states most recently in Florida. We are working with insurance departments in the remaining states to complete the roll-out later this year. At the federal level the new FHFA mortgage servicer guidelines which eliminate commissions and client quota-share arrangements on GSE loans go into effect on June 1. Our new product can support this and already has been implemented with many of our clients.

For 2014 we expect Specialty Property's revenues to decline slightly from record 2013 levels reflecting lower premium rates and reductions in placement rates as seriously delinquent loans are resolved. Revenue will also be affected by the overall number of loans tracked. In 2013 we benefited from several significant loan portfolio transfers. As the mortgage servicing market continues to evolve we expect additional transfer activity in 2014.

One of our clients has informed us that they move some of their loans to another carrier. A possible transition is being discussed and we will provide more information when it becomes available.

Our expense ratio is expected to increase in 2014, largely driven by the fee-based businesses acquired last year as well as cost to support lender-placed servicing requirements and reductions in lender-placed premiums.

As we previously discussed, Specialty Property launched a broad multi-year initiative in 2013 to standardize our lender-placed platform, enhance our service while lowering our operating cost. These initiatives along with continued growth in our targeted areas will support attractive returns for the business over the long turn.

At Assurant Health, fourth quarter net operating income was in-line with our expectations and reflected an elevated tax rate in a previously announced $3 million after-tax severance charge. Excluding this charge pretax earnings increased by approximately $8 million year-over-year. The improvement was driven by increased revenue partially offset by higher commission expenses and new sales of individual major medical policies.

In addition, fourth quarter 2012 results were reduced by an adjustment to our premium rebate accrual. As a reminder house commissions reflect a blend of higher first rates and lower renewal rates. A higher proportion of first year policies will lead to increased commission expenses.

General expenses, excluding commissions continued to decline benefiting from ongoing expense management efforts. Revenues grew 7% year-over-year to $417 million driven by prior sales of affordable choice supplemental and small group products. While we expect our recent strong sales to generate solid revenue growth in 2014 profitability will continue to be affected by the higher first year commission expenses.

Our tax rate will remain elevated due to the non-deductibility of certain expenses under the Affordable Care Act. At employee benefits net operating income declined by $6.3 million to $10.8 million in the fourth quarter of 2013. This reflected weaker year-over-year disability results although they did improve sequentially from the third quarter. Experience across all other product lines ran as expected. Net earned premiums and fees increased by 2% from the fourth quarter of 2012.

Growth in voluntary was offset by premium declines in our employer paid business. Sales were strong in the quarter and for the full year. More than half of total sales were voluntary products including dental. We expect sales momentum in voluntary will lead to premium growth in 2014, though overall earnings will continue to be affected by low interest rate environment and employment trends.

Employee benefits is focusing on improving profitability long turn. Fourth quarter include a $1.4 million after-tax severance charge, which should produce approximately $3 million of pretax savings in 2014. Other actions to improve efficiencies are underway.

Turning to corporate, we ended the quarter with $440 million of deployable capital at the holding company in addition to our $250 million risk buffer and $467 million set aside to repay our 2014 notes which mature next week. During the fourth quarter, we paid a $115 million for our investment in Iké and we also returned $111 million to shareholders through buybacks and stock dividends.

Operating company dividends for the year exceeded segment operating income. Based on our current assessment we expect that 2014 operating company dividends will roughly equal segment earnings. Additional capital needs through growth in some line of business should be offset by capital releases and others including lender placed.

As in prior years, dividends will be weighted throughout the second half of the year. We will continue to focus in ways to make more efficient use of our capital while meeting regulatory and rating agency targets. The fourth quarter corporate segment operating loss was higher than expected at $25 billion, driven by additional employee-related costs and approximately $3 million of third-party M&A fees.

For 2014 we expect the corporate operating loss to be about $70 million, a 15% decrease versus 2013 due to reduced benefit plan costs and other expense reductions. We're pleased with our progress in 2013 and are hard at work on the additional steps necessary to support profitable growth in 2014 and beyond.

And with that we'll ask the operator to open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Thank you and our first question comes from Mark Hughes from SunTrust. Your line is open.

Robert B. Pollock

Good morning Mark.

Mark D. Hughes - SunTrust Robinson Humphrey, Inc.

Good morning. In the case the lock up loans that you described that you are in discussion that may move elsewhere, can you talk about the rationale for that kind of move; do the new FHFA rules lead to perhaps more movement in loans once those are fully implemented?

Robert B. Pollock

Well we're still in discussions on all of this and we'll let you know as the discussions evolve. But we just wanted to put you on notice that we have this information. We thought it was important that we provide that to you but we don't really any more specifics Mark.

Mark D. Hughes - SunTrust Robinson Humphrey, Inc.

When you look at the 2014 full year outlook for specialty property, looking at your mix of business and the rate changes on a state by state basis how much of the headwind is rate in 2014 and then perhaps again in 2015, as you see it now?

Michael J. Peninger

Sure Mark our rates have been going down with the new product and we implemented some of that in 2013. Now in Florida we've announced that 10% drop effective 1st of this year. And remember the way these things work is we roll out over the course of the year. So it takes a while for the full impact to be reflected.

So I think the rates will continue to put those through. In some case we've also had reductions in commissions under the new regs that's also being passed through. And then the other factors that drive Specialty Property's revenue are the number of loans which reflect transfers and things like that.

Robert B. Pollock

And the other one is of course placement rates on the placement rate side down a little this year I think that we mentioned in the past Mark that our legacy portfolio, the placement rates been dropping even little more and we benefited from portfolios coming in that at higher placement rates. So those are all factors that are working into the ASP outlook.

Mark D. Hughes - SunTrust Robinson Humphrey, Inc.

Thank you.

Operator

Our next question is from Jeff Schuman from KBW. Your line is open.

Robert B. Pollock

Good morning Jeff.

Jeffrey R. Schuman - Keefe, Bruyette, & Woods, Inc.

Good morning. I just want to follow on Mark's question. I guess there was sort of I heard in the answer to the question about what we should expect in terms of rate changes, kind of national I guess we have some visibility obviously in Florida in California I think we lack visibility may be what's going to happen in other states. Can you give us a little perspective on that please?

Robert B. Pollock

Sure I think that you can think about it as Mike pointed out a couple of different ways ultimate effect is probably 18 months out from introduction in the state we have some states that are fully in there. Others Florida we've just introduced full effect in 2015. But if you put it altogether I would say it's probably a low double-digit impact in 2014 from the rates correct down.

Michael J. Peninger

And then you've got the other factors we talked about earlier ago.

Jeffrey R. Schuman - Keefe, Bruyette, & Woods, Inc.

Okay. So low double-digit in 2014 and then some additional impacted 2015 this could be things take a while to work?

Robert B. Pollock

Correct.

Jeffrey R. Schuman - Keefe, Bruyette, & Woods, Inc.

Okay. That's helpful. And then I guess he probably asked about specific quarter but can you give us any sort of quantification around the placement rate on the legacy business and how that's trending?

Robert B. Pollock

Yeah I don’t think we have specific numbers for you there Jeff but the legacy portfolio we are seeing drops in the placement rates. And those sort of continue to trend down. As we've discussed our overall placement rate has been increased by the new portfolios that we transferred in over the course of 2013 which had a bit higher rates. But that legacy trend is down but that legacy trend is down.

Jeffrey R. Schuman - Keefe, Bruyette, & Woods, Inc.

Okay, thank you.

Operator

Our next question is from Sean Dargan from Macquarie.

Robert B. Pollock

Good morning, Sean.

Sean Dargan – Macquarie

Good morning. Just taking the bit on and running with it maybe I can ask you it a different way. When I look at the spread of exposure by region it seems that some of the portfolios you brought on you have increased your north eastern coastal exposure which tends to line up with judicial foreclosure states where there’s still a backlog and specifically New Jersey, New York and Connecticut. Am I right to think that some of the portfolios you have brought on have increased your exposure to those states and that’s kept your average placement rates somewhat elevated?

Robert B. Pollock

That’s correct. For those changes judicial state is a driver.

Sean Dargan – Macquarie

Okay and I mean we should think as those judicial states work through their backlogs that will perhaps drive an average lower placement rate?

Robert B. Pollock

That’s correct.

Sean Dargan – Macquarie

Okay, thanks. I just wanted make sure I was thinking about that right way. Thank you.

Robert B. Pollock

No, you’ve got it.

Operator

Our next question comes from Mark Finkelstein from Evercore. Your line is open.

Robert B. Pollock

Good morning, Mark.

Michael J. Peninger

Hey, Mark.

Mark Finkelstein - Evercore Partners Inc.

Good morning. Where do we start? Actually I will start with a follow up to the answer given on Jeff’s question. When you talk about low double digit that’s kind of a way thinking about the rate declines in ’14 is that gross or net of commission changes?

Michael J. Peninger

Yeah that’s all in.

Mark Finkelstein - Evercore Partners Inc.

So the low double digit would be a rate, but you also get some offsets from commissions so kind of the true rate decrease would maybe not be quite a low double digit, is that the way to think about that?

Michael J. Peninger

I am not sure quite what you are driving at but I think if you look at the gross change it’s going to be a lower double digit number.

Mark Finkelstein - Evercore Partners Inc.

Right but I am saying but you should get some offset by not paying commissions?

Michael J. Peninger

That is true. You know again, remember there is all these factors that are in motion. It will depend. We’ve introduced things like geographic rating. So it will be a function of where the properties are placed, will have an impact but we know commissions are coming down.

Mark Finkelstein - Evercore Partners Inc.

Okay. Moving onto medical, obviously huge sales quarter with ACA, how does the underlying risk that you have received kind of compared to what you assumed you know in your filed rates, is it better or is it in line or is it worse, you are getting adverse selection? Just can you walk through the underlying risk pool of what you got in?

Michael J. Peninger

Sure. So, you know I think the first thing in our sales is to realize we have policies with fourth quarter effective dates which don't fall under the Affordable Care Act. They’re you know prior to that. And you might look at that as people who wanted to buy policies and have a period of time before the ACA provisions were going to take effect. But we have quite a bit of business that came in with 1/1 and later effective dates that fall right into that category.

And you know just a couple comments I would make when we established our strategy in health it was focused on affordability and choice. A lot of people have felt that in the ACA environment our metallic plan is a metallic plan. We happen to offer a number of different say advanced plans that will appeal differently to different consumer groups and so we think that choice is still an important component.

I think when you look at who has come in our results are similar to a lot of things you have heard in the press little bit older than we expected, so demographic is a consideration, the other one is the morbidity characteristics of the pool. Little early to know what that looks like yet. We can’t say that it’s a little bit older than we expected but manageable. I mean it’s not a huge deviation from what we expected.

Mark Finkelstein - Evercore Partners Inc.

Okay and in your opening remarks Rob you talked about '15 and reform changes that should help improve the profitability of the block as you look at ’15. Can you walk through what those changes are and how it should affect the ’15 profitability of the health business?

Robert B. Pollock

Yeah, you know I will let Mike comment here as well but one of the big ones he mentioned which is first historically we've had higher first year commissions and we've had because of underwriting we've done, we've had better morbidity in first year business.

We don't do any decking of those commissions and aren't going to but you can think about in the new pool we're not going to have necessarily better morbidity which may mean that first year experience is not going to be quite as good. But then we talked about all the different mechanisms going on for risk mitigation and they tend to come in overtime a little bit.

And then I think last just in our overall results as we get bigger and Mike mentioned we took some expenses out, we are gaining scale and leveraging the business that will grow over time. So it's really a combination of all those different things.

Mark Finkelstein - Evercore Partners Inc.

Okay. And then just one last question if I may which is should we expect first quarter sales to look a lot like fourth quarter in terms of a lot of ACA type metallic type plans or did you really see the activity in the fourth quarter?

Robert B. Pollock

So I can say two things I think the ACA is going to change the distribution of sales within that and it will be heavily fourth and first quarter oriented. But live events, which are GLF and employer and they need coverage somewhere else those are going to go on across the whole year and that's an important contributor to our sales activity.

I think the real unknown and we'll know a little bit more about this at the end of the first quarter is are we going to see more people who struggle with the affordability issues turning to alternative products.

Michael J. Peninger

The sales activity in the fourth quarter was heavily influenced by this, get it done before the end of the year kind of Mark, obviously that's not going to recur in the first quarter.

Mark Finkelstein - Evercore Partners Inc.

Okay. Thank you.

Operator

Our next question comes from Chris Giovanni from Goldman Sachs. Your line is open.

Robert B. Pollock

Good morning Chris.

Christopher Giovanni - Goldman Sachs Group Inc.

Good morning, thanks so much. I guess first question in terms of the loans, in the past when you have on-boarded some loans you've given us some indication about the placement rates on those may be being above or below kind of the existing placement rate. So wondering if you could give us some indication on the loans that you could potentially lose here where they are relative to the current placement rate?

Robert B. Pollock

Yeah really we're in discussions on all those Chris and we don't really have any covered offer. When it's available we're obviously going to provide it.

Christopher Giovanni - Goldman Sachs Group Inc.

Okay. And then I guess on solutions you have this $15 million target out for 4Q could you potentially give us may be a breakdown of how that's carved out relative to kind of U.S. versus may be some of the other developed markets like LATAM, Europe, Canada?

Robert B. Pollock

Well the drivers Chris were solutions lift in earnings this year, there are several areas that we're looking at. The growth in our mobile business and expect -- expands our profit margins there. So we've obviously got the LSG acquisition in Europe, that's going to be a help there but we expect overall solid growth and contributions from mobile. Then Europe is going to be a big focus as we integrate that region. We had some obviously expenses, severance charges that we took in the fourth quarter. So we really expect disproportionate improvement in Europe and then just the overall expense management we've got reducing expenses in non-growth areas.

So we've got mobile, we've got the Europe integration and expense management being kind of the three drivers. And then if I look a little bit beyond 2014 our acquisitions of EK and LSG will help to drive earnings going forward they are not going to contribute much in 2014 to earnings because of amortization of intangibles and integration costs.

Christopher Giovanni - Goldman Sachs Group Inc.

Okay. And then Rob obviously Argentina is one of your more developed markets and that country's certainly been focus here with the emerging market concerns. And I guess probably way too early to think about any impact that this is having on your business but could you give us some update. I know you talked back '08 at the Solutions day fair amount of that Argentina but if things were to maybe go down the wrong path there, I mean how should we think about potential risks that could have for your business there, if any?

Robert B. Pollock

Sure. So let's start with Latin America, we've been there one time. We've been through cycles before there and we like Latin America because of the market characteristics that it offers. We've got a broad footprint, we're in more than just Argentina, we're in a number of countries down there and if we look internationally we are even in a broader footprint.

So I guess when I look at Argentina the great thing is we are not -- the business generates all the capital it needs itself, we're not putting more money in there. We've had very strong results there overtime but as part of our overall portfolio it's a small component of overall international. Chris maybe you want to comment a little bit on how we look at some things when we size up Latin America.

Christopher J. Pagano

Yeah, I guess the other point I'd just make around capital deployments and the required hurdle rates for investments in countries outside of the U.S. is we do factor in country risk and currency risk when we set target hurdle rates.

The other point I'd make with respect to Argentina is in our capital forecast and again operating earnings and dividends coming up to the home and company we are not forecasting operating earnings out of Argentina to come back into the U.S. So we are factoring in all of these relative exposures.

Christopher Giovanni - Goldman Sachs Group Inc.

Okay. And then Chris I guess just last on capital management broadly. Just updated thoughts around kind of what you are thinking obviously '13 was active in terms of M&A as-well-as buybacks I mean should we expect kind of a similar story in 2014?

Christopher J. Pagano

Yeah I think the issue for us the outlook forward is going to be about flexibility and maintaining our discipline. Again the flexibility coming from operating earnings and our ability to get those earnings up to the holding company as dividends. We still -- we think this year although it's early and we will continue to update you. We do expect to get aggregate operating earnings to the holding company in form of dividends. We do think the stock is attractive and a prudent use of deployable capital. But we also think the combination of profitable growth opportunities either organically or through M&A and returning capital to shareholders through share repurchase is going to be the combination that will produce the greatest long-term value.

Christopher Giovanni - Goldman Sachs Group Inc.

Great. Thanks so much.

Operator

Our next question is from Steven Schwartz from Raymond James.

Robert B. Pollock

Good morning Steven.

Steven D. Schwartz - Raymond James & Associates, Inc.

Hey, good morning everybody. I want to hit back to health if I could and follow-up some of Mark's questions. The sales I think Rob as you noted and I think it was you who noted it that, maybe it was Mike, lot of the sales for this quarter were renew me now. So later in 2014 I don't get stuck with Obamacare and having to pay more and maybe not getting the policy that I wanted and I gather this is prevalent particularly in the red states.

Now do I understand it correctly when you talk about sales, if I were to buy a policy in July of any year, a 12 month policy from you and then 12 months later I renew the policy that's a sale you mean there are two sales there?

Robert B. Pollock

No. So you should think about sales as a first time buyer or someone who left us and came back but there has been a period where they have not been insured by us.

Steven D. Schwartz - Raymond James & Associates, Inc.

Okay. This is important. So that's also true of somebody who came to you and said, so if somebody already had your policy and then renewed that's not a sale?

Robert B. Pollock

Correct.

Steven D. Schwartz - Raymond James & Associates, Inc.

But if somebody did have your policy, wanted to get your policy before January 1 and did, that's a sale?

Robert B. Pollock

Correct.

Steven D. Schwartz - Raymond James & Associates, Inc.

Now here is something I don't understand, so you have got these large, huge amounts of sales?

Robert B. Pollock

Yes.

Steven D. Schwartz - Raymond James & Associates, Inc.

But the membership it grew but it grew like it always did. How come the membership doesn't grow faster?

Robert B. Pollock

Yeah. That's a good question. And the answer is the way we count membership is business that is in effect as of the year-end. So we've got a lot of first quarter sales that are not reflected in the membership. So you will see they show up the next quarter we report, Steven.

Steven D. Schwartz - Raymond James & Associates, Inc.

Okay. All right. Good. And then, okay, so moving on from that, just you talked about private exchanges with regards to employee benefits, is -- you always done individual but kind of the private exchanges that are developing for large cases. I don't know does your product does your IMM product work on that or not really?

Robert B. Pollock

Again private exchanges I would say are kind of in their infancy of development and we are evaluating both on the benefit side and within our health business. I would point out that we decided to not go on the public exchanges, but I would tell you during the quarter a lot of people actually bought directly from us by coming to our website or they came to our website and then will tackle to one of our own counselors to help them sale.

So how the private exchange market is going to evolve is still unknown. I would expect modest activity but we want to get our feet in the water and understand how that market is going to develop.

Steven D. Schwartz - Raymond James & Associates, Inc.

Okay. And then one more if I may. You are talking about 2015 risk quarters whatever, I was not aware you don't participate on the public exchanges now but you still benefit from the risk payments that the government may give if your risk doesn't look like what it's supposed to look like?

Robert B. Pollock

Yes we do, Steve there is one, there is three I think main risk transfer mechanisms. One of them was only for the -- if you are selling on the exchanges so we wouldn't participate in that. But the other two we would, because the impact of that depends on sort of the demographics of our insured population compared to the industry. So it's going to take some time until we get a bead on how we line up with that.

Steven D. Schwartz - Raymond James & Associates, Inc.

Okay. And then quick last one, what's the rate on the notes that are going to be called?

Robert B. Pollock

The Feb ' 14 maturity or the 5.625 coupon.

Steven D. Schwartz - Raymond James & Associates, Inc.

Yeah, the 5.625.

Robert B. Pollock

The way you can think about it is the debt capacity or the expense load associated with the debt prior to our issue in March of last year was roughly $60 million pretax. The new structure which includes $200 million more of debt will be roughly $55 million pretax. So again the flexibility we had last year, opportunistic debt raise produce some good expense numbers going forward.

Steven D. Schwartz - Raymond James & Associates, Inc.

Okay, great. Thanks, guys.

Operator

Our next question is from John Nadel from Sterne Agee. Your line is open.

Robert B. Pollock

Good morning John.

John M. Nadel - Sterne Agee & Leach Inc.

Hey good morning. I have a couple of questions on Specialty Property. You guys have done a good job sort of giving us the foreshadowing about the idea that expense levels would increase. You had some additional expenses around onboarding your loans, adding to your call center some regulatory issues that sort of thing. I am just curious in 4Qs expense load for Specialty Property you add that new run rate or do you have still more to do?

Robert B. Pollock

I think we have added a lot of people to the service centers John. So I would say we are probably above or at the levels that we need there. I think there is still I think some ramping up of activity, but I'd say we are getting close to what should be a run rate on sort of activity for loan.

John M. Nadel - Sterne Agee & Leach Inc.

Okay. And then sorry go ahead.

Robert B. Pollock

Now I am just going to say that Gene and his team will now sit down and look at all of our different work flows and obviously we're going to look to find ways to improve our expense structure.

Michael J. Peninger

And the sum of those things that Rob alludes to involves systems work and things like that too that takes some period of time. So I think the goal is to automate many of these things that we've had to deal with by adding lots of people. That's why we alluded to this being sort of a multi-year initiative.

John M. Nadel - Sterne Agee & Leach Inc.

Got it. Okay. The second question and maybe it's more for Chris, you guys obviously buy reinsurance at different points in the year, that's what you've been doing for last couple of years. No secret that catastrophe or property catastrophes reinsurance cost are coming down and coming down dramatically. I am just wondering if you could give us a sense for what your approach is going to be for this year.

I think if you -- your exposures have probably changed a bit certainly on a year-over-year basis. But I am just wondering do you let some of those savings from lower reinsurance cost drop to the bottom line or are you just going to essentially layer on more protection and have about the same spend, just want to get a sense for how you are going to think about that?

Christopher J. Pagano

Well I think you know obviously the absence of any significant cats in 2013 and equally importantly additional capacity from the capital markets has produced some very favorable reinsurance pricing conditions. You know we’re looking at ballpark roughly 15% drop on a risk adjusted basis and I think we’re going to and we’ve already placed a portion of the program, we’ve got some cat bonds in place that are multiyear and some other multiyear and then we’ll go back into the market in June as we’ve done for the last several years.

I think where we’re seeing some additional flexibility is some willingness to provide multiyear coverage on an indemnity basis and then some flexibility around reinstatement premium. So those are the main factors what we’re seeing is the byproduct of the additional capacity in the reinsurance market and we’re going to factor all that in and we’ll update you when we finish the placement in June.

John M. Nadel - Sterne Agee & Leach Inc.

Well I guess I am just trying to understand there are so many moving parts when you think about the idea of net earned premium for specialty property overall being maybe slightly down, flat, slightly up. It’s -- I appreciate a lot of this different color but I think the reinsurance cost could easily be part of that as well, right? I mean if you guys just wanted to grow premiums your net earned premiums you could.

Robert B. Pollock

I mean again there’s lots of choices. What I think about is I have to do is think back to when RMS11 was there and everyone was projecting costs would go up. I think our fundamental belief is at some point in time the market will harden, when there are some events and we’re trying to get multiyear coverage, so that we’re protected with favorable rates John.

Christopher J. Pagano

I'd say we always start with obviously the risk protection John and then once we’re comfortable with that then that’s where you can play at the margin with the trade-offs and the rates and pricing but that we always start with that risk management focus on our reinsurance line.

John M. Nadel - Sterne Agee & Leach Inc.

No, don't get me wrong. You guys have done a great job with your program of protecting the balance sheet. I am not trying to attack on that side.

Robert B. Pollock

The other thing I would point out John, again this is kind of a macro trend issue around placement rates as placement rates as the housing crisis continues through its resolution and placement rates slower, macro events that we talked about for number of years there is going to be some capital release from the property segment and we do anticipate some lender placed in particular and that is something that we expect to start to see during 2014.

John M. Nadel - Sterne Agee & Leach Inc.

Okay and one last quick follow up. Skilled services, so I think I caught you Mike that it’s about $25 million in the expense line this quarter, I guess a little bit less than that on the fee revenue line. When do you get to a point where that starts contributing? Can you just remind us when that starts contributing to bottom line?

Michael J. Peninger

Yeah I think it will be I think we said modestly profitable in 2014, John and then whenever you do with these acquisitions we setup intangibles on the balance sheet. Those are amortized over time so your contribution to earnings grows over time, so modest contribution in ’14 and then growing in ’15 and beyond.

John M. Nadel - Sterne Agee & Leach Inc.

And on the balance sheet where the goodwill increased quarter-over-quarter was that all from field services or is lifestyle in there as well?

Michael J. Peninger

Lifestyle services is in there too.

John M. Nadel - Sterne Agee & Leach Inc.

Thank you.

Operator

And we’ll take our final question from Seth Weiss from Bank of America. Your line is open.

Robert B. Pollock

Good morning, Seth.

Seth Weiss – Bank of America Merrill Lynch

Hi, good morning. If I could ask just one more on Specialty Property. You are guiding to the non-cat loss ratio to increase, some lower premiums and higher claims frequency. I understand the lower premium rate and that impact. Could you comment a little bit on higher claim frequency and why you are expecting that to go up?

Robert B. Pollock

Sure. I mean historically we’ve seen properties that are moving to foreclosure often have just higher claims incidents associated with them and that’s what we’re certainly thinking is going to happen here.

Seth Weiss – Bank of America Merrill Lynch

Is there any way you could help sort of quantify that impact over 2013?

Robert B. Pollock

Yeah I don't know that we’re quite able to give you an exact quantification there but certainly we had mild weather overall so cat issues aside there's a lower sort of claim cost in 2013 so that’s why we’re saying we think that’s going to go up, we think ’13 was a bit lower than it will be.

Seth Weiss – Bank of America Merrill Lynch

Okay, great that’s helpful. And maybe one final one on employee benefits, voluntary sales seem to be sort of a tailwind to premiums. It seems from your guidance that we should think of ’14 as sort of a build out year there where expenses may sort of offset some of the bottom line positives from these sales. Is that the right way to think about it as sort of net neutral to ’14 earnings and going into ’15?

Michael J. Peninger

I think that’s a fair way to look at it. I mean in voluntary, in benefits we’re excited about voluntary. We think we’ve got some real traction in our offerings in that small to medium size market and they are working hard on expenses but I think your analysis is quite good.

Seth Weiss – Bank of America Merrill Lynch

Thanks for the questions.

Robert B. Pollock

Thanks for joining us this morning. We look forward to hosting our 2014 investor day on March 11 and updating you on key milestones in the months ahead. Please reach out to Francesca and Suzanne with any additional questions.

Operator

Thank you. This does conclude today’s teleconference. Please disconnect your lines at this time and have a wonderful day.

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