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Assurant, Inc. (NYSE:AIZ)

Q1 2014 Earnings Conference Call

April 24, 2014 08:00 am ET

Executives

Francesca Luthi - Senior Vice President, Investor Relations

Rob Pollock - President, Chief Executive Officer, Director

Mike Peninger - Chief Financial Officer, Executive Vice President

Chris Pagano - Executive Vice President, Treasurer, Chief Investment Officer, President - Assurant Asset Management

Analysts

Mark Finkelstein - Evercore

Chris Giovanni - Goldman Sachs

John Nadel - Sterne, Agee

Seth Weiss - Bank of America

Sean Dargan - Macquarie

Steven Schwartz - Raymond James

Mark Hughes - SunTrust

Operator

Welcome to Assurant's First Quarter 2014 Earnings Conference Call and Webcast. At this time, all participants have been placed in a listen-only mode and the floor will be opened for your questions following management's prepared remarks. (Operator Instructions)

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

Francesca Luthi

Thank you, Leo, and good morning everyone. We look forward to discussing our first quarter 2014 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 first quarter 2014 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 joining 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 2013 Form 10-K.

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 the news release and financial supplements posted at assurant.com.

Now, I'll turn the call over to Rob.

Rob Pollock

Thanks, Francesca, and good morning everyone. Our first quarter results were strong and consistent with the strategic objectives affirmed at our recent Investor Day. During the quarter, we accelerated actions to adapt our business and strengthened our competitive advantage to grow earnings long-term.

Let me update you on our key performance metrics for the quarter. Annualized operating return on equity, excluding AOCI, was 11.2%. Book value per diluted share, excluding AOCI, increased 2.6% since year end. Revenue, defined as net earned premiums and fees grew by 14.7% year-over-year. As each of our business segments expanded in areas targeted for long-term profitable growth.

Our balance sheet remains strong. We ended the quarter with approximately $540 million of capital at the Ocwen company, including our $250 million risk buffer. This gives us flexibility to make investments in our businesses, pursue select acquisitions to support our strategy and return capital to shareholders.

Now, I will provide updates for each of our business segments. Assurant Solutions' first quarter results were better than anticipated. The significant year-over-year increase in net operating income reflects strong results in mobile and expense savings from prior restructuring actions. Our integrated mobile solutions are gaining tractions, traction with clients and consumers.

Since year end, we expanded the number of covered devices we support in the U.S. by more than 20%, and helped our clients implement successful marketing programs. In Europe, the immigration of Lifestyle Services Group, or LSG, is progressing on schedule. We are generating the expense savings we anticipated, while at the same time building our mobile platform.

Last month, LSG renewed a five-year agreement with their largest client, further cementing the leadership position in the U.K. mobile protection [market]. In Latin America, our investment in Iké is providing new opportunities to grow our business. As an example, we have had early successes in Mexico, selling our credit products to an Iké client.

We are excited about the opportunities as we expand the range of products and services we provide across the region. Overall, while quarterly results may vary, we expect Solutions to deliver significant full year earnings improvement compared to 2013. Growth for Mobile, along with continued expense control will be the key drivers.

I will now move to Assurant Specialty Property, where we continued to take actions to generate long-term profitable growth as placement rates normalize in our lender-placed insurance business. In particular, we're focusing resources on multi-family housing and opportunities within the mortgage value chain, where we can leverage our strong service capabilities and client relationships.

In our multi-family housing business, we now serve more than 1 million policyholders, up 15% from last year. As many consumers continue to choose renting over homeownership, we are broadening our national footprint with both, existing and new property managers. In property preservation, we integrated Field Asset Services into our existing business. We expect this acquisition to deliver about $80 million of fee income this year, as we expand through existing clients and new prospects.

Last week, we announced the acquisition of StreetLinks, a leading provider of appraisal management and valuation services. StreetLinks robust technology platform and large vendor network are recognized by mortgage companies for their value-added services. We are confident that the addition of our collateral risk expertise and extensive client relationship will allow us to gain share as this market consolidates.

StreetLinks and Field Asset Services further diversify our revenue stream into fee income businesses that are less capital-intensive than lender-placed insurance. They also position us more broadly within the mortgage value chain and will help sustain attractive returns at Specialty Property.

Let's now turn to Assurant Health, the Affordable Care Act's open enrollment period that ended March 31, prompted significant sales activity in the quarter. First quarter sales totaled $410 million, exceeding the fourth quarter's record by $90 million. We believe this performance demonstrates that our suite of products, extensive provider network and broad distribution channels remain key differentiators for consumers.

The demographic mix of the business sold, including the age distribution was in line with our pricing assumptions. As expected, lapses increased as consumers used open enrollment to review their health plan choices. With open enrollment now closed, sales activity will moderate during the next two quarters, driven by life events such as marriage or the loss of employer coverage.

We also expect persistency to improve. In advance of the next enrollment period that begins in November, we are considering participation on a select number of public exchanges and we will make final decisions during the next few months. We've adapted our business to the changing market. As we grow revenues and maintain strict expense discipline, we continue to believe more attractive returns will start to emerge next year.

At Assurant Employee Benefits, we continue to focus on our voluntary business. Sales and net earned premiums and voluntary grew by 40% and 11%, respectively, compared to the first quarter of last year. This growth more than offset the declines in traditional employer paid group insurance. Our strategic focus on key brokers continues to drive an increasing percentage of our sales. In addition, Employee Benefits is preparing to participate on several private exchanges. While we do not expect these exchanges to be a material source of near-term sales, they will further expand our distribution and provide important insights as the benefits landscape evolves.

Overall, we are pleased with the progress on all fronts during the quarter.

Now, I will turn to Mike for more detailed comments on our first quarter results and outlook for the full year.

Mike Peninger

Thanks, Rob. I'll begin with Solutions. Net operating income for the quarter totaled $49.5 million, up $14.6 million from the same period last year. Results benefited from continued growth and covered mobile devices, prior expense reduction efforts and about $1.4 million of additional after tax income from real estate joint venture partnerships. In addition, short-term client marketing programs implemented in the quarter accounted for about $4 million of the increase. These programs demonstrate our ability to partner with clients to provide innovative offerings for consumers and generate new profit streams outside of traditional mobile insurance.

Mobile loss experience was very favorable this quarter and benefited from underwriting changes we implemented with the client late last year. Experience on our mobile inventory support programs continued to be in line with our expectations, but it is still early. As new mobile devices are introduced in the marketplace, we anticipate greater volumes of upgrades and trade-ins which may cause variability in our results.

Solutions net earned premiums increased by 9% and fees by 79% compared with last year, due to the market success of our mobile protection programs and contributions from LSG. We also saw modest growth in Latin America, despite foreign exchange volatility.

Our International combined ratio for the quarter was 101.7%, a 60-basis point improvement from the first quarter of last year. Excluding disclosed items, the combined ratio improved 160 basis points versus the fourth quarter as we start to realize benefits from LSG acquisition and the European restructuring actions we announced last December.

Solutions is on track to deliver significant earnings growth in 2014, but we also believe the dynamics of the mobile market will create greater variability in our quarterly results. We expect carriers to introduce innovative programs more frequently and accelerate the pace of marketing efforts to attract new subscribers. New phone introductions may also cause fluctuations in loss experience above and beyond the normal seasonal variability. We expect to deliver $50 million of net operating income in the fourth quarter as we realize our targeted expense savings from the European restructuring and expand our mobile franchise.

Looking beyond 2014, we continue to believe that an average annual earnings growth rate for Solutions of 10% is reasonable as contributions from targeted growth areas and acquisitions offset declines in non-growth areas during the next three years.

Specialty Property continues to generate solid results with the net operating income up slightly year-over-year. After adjusting for disclosed items however, first quarter income declined by $15 million versus 2013 as growth in lender-placed and other targeted areas was offset by higher loss ratios. The loss ratio increased by 700 basis points year-over-year, despite lower reportable catastrophe losses. This was driven by the harsh winter weather in a large part of the country as well as lower premium rates from the implementation of our new lender-placed product.

Excluding disclosed items, our first quarter expense ratio increased by 80 basis points versus 2013. This was due to growth in fee-based businesses, which have higher expense ratios as well as additional service costs in our lender-placed insurance business.

Net earned premium and fees increased by nearly 20% versus 2013, driven by continued growth in lender-placed insurance and multi-family housing. Lender-placed premiums benefited from the previously disclosed discontinuation of quota-share arrangement and loan portfolio additions in 2013. Consistent with prior years, gross written premiums decreased in the first quarter. As a reminder, seasonality and timing of loan portfolio transfers can cause quarterly fluctuations particularly when loans are flat canceled. Gross earned premiums which grew by 4% are a more meaningful measure of performance.

Looking at our lender-placed growth drivers, we on boarded 300,000 new loans in the quarter with placement at renewal, bringing our total loans tracked to $35 million. The placement rate at the end of the quarter declined on both, the sequential and year-over-year basis to 2.74%.

We noted on our fourth quarter earnings call that we were in discussions with the client regarding a possible transfer of loans to another carrier. Those discussions continue and we will provide more information when it becomes available.

For 2014, we now expect Specialty Property's revenues to be approximately level with 2013. Continued growth in targeted areas, including fee income from our StreetLinks' acquisition will offset declines in lender-placed insurance.

At Assurant Health, the first quarter net operating loss reflected the continued impact of healthcare reform. We increased our estimate of compensation expenses that are non-deductible under the Affordable Care Act, resulting in a $5.7 million addition to our income tax expense in the quarter.

Pre-tax profits, which we believe are a better gauge of Health's underlying performance, totaled $7.6 million in the quarter compared with $14.5 million last year. The decline was due to higher loss experienced and higher first year commission expenses.

Starting this year, insurance companies are required to pay a non-deductible annual health insurer fee to fund the public exchanges. The fee increased our reported expenses by $4.7 million in the quarter. Excluding commissions and the insurer fee, expenses continued to decline illustrating Health's ongoing discipline.

Our loss ratio was 73.5% level with the fourth quarter, but up 90 basis points from the first quarter of 2013. The loss ratio reflects very early claims submissions under ACA policies, partially offset by an estimated contribution from the risk mitigation programs that went into effect this year. Based on our current assumptions, we expect program benefits to increase during the year, but our estimates may change materially as experience develops.

We are encouraged by continued sales momentum and strong revenue growth at Health, while higher commissions on these new sales and the revised tax estimate will lead to a modest operating loss in 2014. We continue to expect improved profitability next year as we benefit from increased scale and ongoing expense discipline.

At Employee Benefits, net operating income increased from $6.1 million in the first quarter of 2013, to $13.9 million, driven by favorable dental and life experience. Disability results were in line with expectations. They benefited from a 50-basis point increase in the discount rate on new long-term disability claim reserves, which added nearly $1 million to operating income. Results also included an additional $1.7 million of after-tax income from real estate partnerships.

Employee Benefits like Health, is required to contribute towards the non-deductible ACA insurer fee. This fee added $1.4 million to first quarter expenses. Employee benefits remains focused on reducing expenses. First quarter results include a small severance charge to streamline operations. We expect additional expense management actions throughout the year as we work to reduce our expense ratio for the long-term.

Turning to corporate matters, we retired our 2014 notes in February. This reduced our debt-to-capital ratio to about 21%, and will reduce after tax interest expense for the full year by approximately $12 million versus 2013. As we said at Investor Day, we expect to continue investing in profitable growth opportunities and return capital to shareholders.

In the first quarter, buybacks and common stock dividends totaled $39 million. This level of activity reflected the seasonality of our cash flows and the anticipated acquisition of StreetLinks, which closed in April.

In the second quarter through April 18th, we bought an additional $12 million worth of stock and remained committed to returning excess capital to shareholders over time. For the full year, we expect net operating company dividends to be roughly equal to segment earnings. As in prior years, dividends will be weighted toward the second half of the year.

The first quarter Corporate segment operating loss was $21 million versus $13 million last year. Expenses accounted for about $1 million of the change; the rest was driven by the effective tax rate, which can vary substantially in the Corporate segment from quarter-to-quarter.

For the full year, we expect the Corporate loss to be roughly $70 million as we benefit from lower benefit plan costs and other operating efficiencies. We're pleased with our start to 2014, and look forward to updating you as the year progresses.

With that, we will ask the operator to open the call for questions.

Question-and-Answer Session

Operator

The floor is now opened for questions. (Operator Instructions) Our first question is coming from Mark Finkelstein, Evercore.

Mark Finkelstein - Evercore

Good morning.

Rob Pollock

Good morning.

Mark Finkelstein - Evercore

Firstly just back to Solutions, just the $49 million plus of earnings this quarter, I think you framed it out as $1.4 million related to real estate JVs and additional $4 million related to some of these programs, but then you suggested mobile loss experience was very favorable. How favorable was this relative to your expectations. I'm trying to think about kind of ongoing earnings in that segment.

Rob Pollock

Well, I was going to say we have directed a lot of resources towards the mobile business and talked about there are a lots of different places we make money within the business. One of them is certainly on the hand protection insurance, but I would also say there are other sources of profit there, so I would not focus in that the handheld insurance is the majority of where we make the earnings necessarily, Mark, so it's good and we are pleased with that loss experience which will vary, but the other sources are big contributors as well. Mike?

Mike Peninger

Yes. I think that we just generally see seasonal fluctuations in the mobile loss experience, Mark, and it can be a variety of things. For example, new phones, new handsets introduced into the marketplace, sometimes in their early durations have worse experience then as manufacturing process matures and things like that, so. The things as we have seen bounce around a bit; we just wanted to note that they were really favorable in the first quarter.

Mark Finkelstein - Evercore

Above and beyond the two items you specifically talked about, there was favorable experience in the quarter that we should not kind of run rate. Is that a fair statement?

Mike Peninger

Yes. That's a fair statement.

Mark Finkelstein - Evercore

Okay. I guess, just thinking about Solutions' earnings, no change to, I mean, subtle change to the language, but still kept the 50 bogy at 2014. I mean, given the strength in this quarter, why not raise that a little?

Rob Pollock

Again, I think we are executing on our strategy within mobile. We've pointed out that their results were more favorable than we expected. We certainly, before we were to make a change, we would want to see several quarters (Inaudible).

Mike Peninger

Yes. I think there's also, we've got FX volatility that we sort of flagged that may continue and we've also got run-off of some of the existing Solutions businesses. For example, some terminated service contract clients. That is going to go down. Credit insurance, we have talked about before domestic credit being sort of a run-off business. Then you got going the other way, you have got some growing impact of expense saves from actions that we have taken there, so you've got a lot of things going on. We put them all together and say $50 million in the fourth quarter still seems like a reasonable place.

Rob Pollock

I think, we've also pointed out we think we can grow earnings at a 10% clip for the next several years.

Mark Finkelstein - Evercore

Okay. Then just thinking about subsidiary dividends being backend weighted, I mean, you're actually a net contributor to the subs this quarter. I guess how do we think about capital generation vis-à-vis M&A versus buybacks for the remainder of year and how does the pipeline in M&A look?

Mike Peninger

Yes. Again, I think our first quarter pattern is consistent with where we always are. We don't take a lot of dividends out of the business early in the year. I think, we have pointed out we think we can get the segment earnings out as dividends over the course of the year and we will do that. I think that we are also in the process of, we've got some organic growth, we want to make sure as we meet with the rating agencies we have got things properly funded to maintain our ratings with A.M. Best and I will let Chris just talk a little bit about the M&A pipeline and some other things.

Chris Pagano

Yes. Just maybe just one other comment around segment operating earnings versus dividends, so round numbers segment operating earnings this quarter were $150 million. We took about $25 million worth of dividends out of operating companies, did actually infuse back into about $35 million roughly, about $25 million of which went into help to support the organic growth that they are seeing there, but you can think about still having some operating earnings at the segments that are available for dividends later in the year.

As Rob pointed out, again, if you think about what we did in the way of deploying capital this quarter, the cash flow needs of the holding company weren't influenced, but again look for that to normalize during the rest of the year. Now the other question is, segment dividends are a function of operating earnings which is also a function of cap season, so that will also play into our decision making around deployment.

Now, on the M&A side we think about, you know, I think broadly about deploying capital and that includes organic growth, growth via M&A and then of course returning capital to shareholders, which we still think is share repurchase is the best use of any capital we want to go back. When I think about the last several years, in particular 2010 to 2012, share repurchase is really the only alternative.

Last year, we saw profitable growth opportunities that provided a comfortable risk return profile that we purchased and you saw that in our activity. Now, we did also returned significant capital to shareholders and deployed $350 million in M&A, so I think this year we will look on a mix basis more like last year than certainly 2010 to 2012, but the order of magnitude of its deployment will be a function of earnings and our ability to get that earnings up to the holding company in the form of dividends.

Mark Finkelstein - Evercore

Just one last quick one. Should we be thinking about buybacks as more backend-weighted than historically?

Mike Peninger

Well, I think the deployment of capital will be consistent with the generation of operating company dividends, so to the extent that is backend-weighted, you could make that link. However, our goal is to be in the market consistently. If possible, also through cat season, but we are going to be conservative about how we do that and also a function of what the go-forward M&A pipeline looks like. We are matching up with the ins and outs and then also the mix related to what we see in the way of both, M&A growth and organic growth.

Mark Finkelstein - Evercore

Okay. Thank you.

Operator

Our next question is coming from Chris Giovanni of Goldman Sachs.

Rob Pollock

Morning, Chris.

Mike Peninger

Morning, Chris.

Chris Giovanni - Goldman Sachs

Good morning. A few on Property and then one on M&A as well, I guess first on property. The change in the top line outlook from sort of a slight decrease to flat. Is that purely driven by the StreetLinks' acquisition or is there some change as well in the underlying kind of in-force business there?

Mike Peninger

No. You picked up on it. It's the StreetLinks' acquisition and other areas we have targeted for growth.

Chris Giovanni - Goldman Sachs

Okay. Then I guess specific to New York, so last year's settlement requires you to price for kind of that 62% loss ratio and then re-file, I guess every three years unless a specific year's loss ratio falls below 40%, and I guess given the weather we saw in the region this quarter, curious if that really eliminates the risk of needing to re-file in 2015 and kind of keep showing that three-year path?

Rob Pollock

Well, I haven't looked at our experience by the state. I'm sure that some of the weather-related claims relate to the Northeast, but, we have a filing in with the department and we are in regular dialogues with them as we are with many other insurance departments.

Chris Giovanni - Goldman Sachs

Okay. Then lastly just on M&A. You've really been focused as you talked about in two areas, the mobile space and then within the mortgage value chain, so I wanted to see if you could give some perspective around where you may be under appreciated the opportunities or some of the synergies you've seen in those two areas. Then also maybe on the other side, maybe where things are moving a bit slower than you would have liked?

Rob Pollock

Okay. Sure. On the acquisition side, I think, we are very pleased with the progress we have made on all the different deals. LSG was kind of a transformational deal for Europe and it also really fit into playing in the mobile space which we liked a lot, so we got both, a chance to resize our platform in Europe and get expense saves as well as invest in mobile, which we like a lot. Mike, you want to comment little on some of the things in the mortgage value chain?

Mike Peninger

Well, we liked the opportunities. Obviously, we really like Field Asset Services. We've essentially completed the integration of that. Early indications are right on track there. StreetLinks, we are very excited about. We got a strong platform there. It went through our M&A process, which Chris has talked about before. We feel like we paid a fair price for it. We think we got - I mean, all of our acquisitions and other important component is the quality of the management teams we are seeing and naturally we have really been happy with that, we feel really good about the pipeline and I think that we still see opportunities out there. Chris, I don't know if you want to amplify?

Chris Pagano

No. I guess, the only other point I would make is, the key and the importance of integration and execution and the focus by the individual segments and the teams within those segments around maximizing the synergies that were valued in the deal. Each of these deals in our process has a series of assumptions that the segments owned and obviously their goal is to outperform or do better than the assumption that we made which is what is going to allow us to deliver value on the M&A activity.

Rob Pollock

Right. Then last the Iké acquisition, we are please with that. That's a little bit different acquisition, because we've taken a position in the company that will report through on an equity method there, but we are quite excited about opportunities we are seeing there to expand across the region.

Chris Pagano

Okay. Great. If I could just sneak one last one in on Health. You have obviously shown a ton of sales momentum and scale. Certainly important there in terms of trying to reduce the tax burden, but wondering, if you could give us some thoughts on how we should be thinking about how long this type of quarterly volatility could last and if there is anything you guys could potentially look to do to help smooth some of the bottom line results?

Rob Pollock

Again, I think a good place to start on the Health side is, when the Affordable Care Act was passed and we evaluated what is the best course of action for shareholders. We embarked on a strategy built on those pillars of affordability and choice. We are quite pleased with the results that we are delivering in that arena combined with the great reduction in expenses we have been able to achieve as we have taken money out of our expense structure to be more competitive. The taxes are a bit of a complicated issue. As Mike mentioned, we are very focused on the pre-tax side of things and we know that if we can continue to grow pre-tax income, the tax volatility will reduce.

Mike Peninger

I think that's right. I do think though, Chris, the other reality is, that the impact of the risk mitigation programs is very new and we and all companies in the business are working with a world now that's quite a bit different than there was in the past and we are making estimates and in some cases based on very limited experience, and that will play out over the course of the year, so you can't sort of avoid that, but I really think, as Rob said, when we look at this we have got the focus on the pre-tax results, we've got the sales momentum. We think that our agents, distribution channel has resonated, consumers still want their agents, we still like the long-term value, the long-term potential of the market, but this sort of transition period is going to create a certain amount of volatility, I think almost regardless what we do.

Rob Pollock

Exactly, and that's why when we set up the strategy, we said 18 to 24 months after full implementation of ACA, we are going to have a good line of sight on things and we are getting closer to that.

Chris Giovanni - Goldman Sachs

Thank you. Appreciate the thoughts.

Operator

Our next question comes from John Nadel of Sterne, Agee.

Mike Peninger

Good morning, John

John Nadel - Sterne, Agee

Good morning, everybody. A couple of questions for you in Solutions. Then maybe one, if we could sort of reconcile the holding company as sort of available capital, but if I look at Solutions, if I look at the balance sheet, your equity in Solutions increased pretty significantly versus year end. I think, it's up about $170 million. That's clearly more than the $49 million or $50 million of operating income in the quarter. I just was wondering if you could help us understand what drove that. Then also if you think about your $50 million of earnings targeted for 4Q that was anticipated to get, I guess, sort of around that 14% ROE. If equity doesn't come out of this business, it looks more like 12%, so can you sort of help us there?

Rob Pollock

Mike, do you want to take the?

Mike Peninger

Yes. Well, there is an actually lot of adjustments in Solutions. You got the earnings you pointed out too. We also paid the contingent payment to LSG when that was completed. Then it just takes a certain amount of time in our process to get. We have several shared entities and we get the allocations sort of to each of the businesses calibrated that this introduces a certain amount of noise and so you see some of that corporate sort of true-up action that went on and added to the equity this quarter.

Rob Pollock

When you look at the $50 million in the fourth quarter, I think about that as, if you look at our acquisitions, John, we have evaluated the acquisitions on a cash basis. We feel very good about how they will report through, but we have also pointed out that on GAAP because of the amortization of intangibles, we are not going to see the GAAP profits right away, so that’s what's causing a bit of that differential between the GAAP ROE and how we have evaluated the deal for the acquisition, which has been on a cash basis.

John Nadel - Sterne, Agee

Okay. I don't want to put words in your mouth, but should we expect that that $50 million of earnings by 4Q is not going to quite get us to the 14% ROE then?

Rob Pollock

Yes. We set up earnings as the metric for creation of long-term value, okay? I think if you go to what, and I'll let Chris comment, but I think he tried to explain how the deals are evaluated when we looked at them at Investor Day. Chris?

John Nadel - Sterne, Agee

Yes. No. I understood that. I get the cash IRR versus GAAP ROE emergence. I'm just trying to understand if we should expect the equity in this segment to come back down a little bit?

Rob Pollock

Think about amortization of those intangibles, and as they amortized, the equity will come down.

John Nadel - Sterne, Agee

Okay.

Rob Pollock

Okay?

John Nadel - Sterne, Agee

Okay.

Mike Peninger

Certainly as we've always done, John, we are always looking to fine-tune that legal entity structure, and if there are opportunities, we are certainly not saying we will never be able to get any equity out or anything. We keep working that issue.

John Nadel - Sterne, Agee

Okay. Then looking at StreetLinks, Novation reports a segment or has historically reported a segment that looks like it's entirely the StreetLinks business and it produced about $7 million of pre-tax income in 2013 and about $9 million of EBITDA, but the revenues did decline 20% in 2013 year-over-year, so I'm just wondering as you price this deal and you look at the next few years, what kind of trends are you expecting from that business and can we think about that $7 million of pre-tax income as comparable to what you are expecting the business to contribute as part of Assurant's?

Mike Peninger

Chris, you want to comment on it?

Chris Pagano

Sure. Let me just make a couple comments. I think, our view and the way we value the deal was that the market is going to trend lower in 2014, but then bottom. I think, the investment thesis is not about a growth in market, but growth in market share, where we expand our product offerings across the value chain. We also feel as like we can leverage that platform and some of the other platforms and generate operating efficiency, so really market share gain combined with improving operating margins is really where we think that this deal is going to add value.

John Nadel - Sterne, Agee

Okay. Is that $7 million, is there any reason why you are GAAP financials would treat any other numbers any differently than they did?

Rob Pollock

Well, you will have intangibles on this one too, John. We will start to amortize.

John Nadel - Sterne, Agee

Okay. All right. That's helpful. Then, if I could just, one more on Solutions, you have got this big unearned premium on the balance sheet. I think, my sense is that the pace at which you would earn that premium is probably accelerating given most of the growth in net unearned premium balance has probably been coming from mobile, but can you give us a sense for maybe how the pace of earning net premium may be shifting?

Rob Pollock

Yes. If you think about the components of the unearned premium, John, most of it actually comes from extended service contracts and vehicle service contracts.

John Nadel - Sterne, Agee

Okay.

Rob Pollock

Extended service contracts, typically will start earning after the manufacturers' warranty expires, which can be anywhere from one to two years. On vehicle service contracts, particularly new ones, that's a little more extended and can be in the three-year range. That mix of business will vary.

John Nadel - Sterne, Agee

Okay.

Rob Pollock

Mobile, really not a lot of UPR coming from mobile, because we tend to earn that monthly.

John Nadel - Sterne, Agee

Okay. Understood. Thank you. Then just back to the holding company capital. I think if my numbers are right, you ended 2013 with about $440 million of capital excluding the pre-funded debt maturity and excluding your buffer?

Mike Peninger

Yes.

John Nadel - Sterne, Agee

That number looks like $290 million at 1Q, so $150 million reduction. I think, Chris mentioned $125 million of dividends, up during the quarter, so can you just sort of reconcile where all the cash went? I mean, I know the buybacks, I know the dividend, so what else was it's spent on?

Chris Pagano

Sorry, John. Let me reconcile. We are trying to solve for $150 million is what we are doing.

John Nadel - Sterne, Agee

Okay.

Chris Pagano

If I misspoke earlier, it was $25 million.

John Nadel - Sterne, Agee

Got it. Okay. $25 million of dividends?

Chris Pagano

Right.

John Nadel - Sterne, Agee

Maybe that's the miscommunication here, but this is, again, in the first quarter and this has historically has been the pattern. The typically heavy cash outflow quarter for the operating company and this quarter was no exception. We paid an interest payment, which included the last payment of our Feb 14's, which is about $40 million. We had corporate cash outlays of about $60 million. We then deployed in dividends and share repurchase roughly $40 million and then in general the $10 million of net infusions into the operating companies was $25 million coming up from operating companies and then $35 million going back down, $25 million of which was in the Health segment to fund what has been a significant growth in that premiums.

John Nadel - Sterne, Agee

Chris, just real quick. The $60 million of other corporate outlays as you mentioned, is that StreetLinks' or do we think about StreetLinks as coming out of the 290 in 2Q?

Chris Pagano

No. The StreetLinks, again, back to my comments earlier, we were aware that the StreetLinks' acquisition was pending. It did move out into Q2, so it is not part of the of the calculation. $60 million of corporate is really around some compensation expenses, some tax cash outflow which is the difference between cash and accrual that tends to come back over the course of the year, so again it's not something that I would suggest run rating by any means, because again this is just the seasonality of the operating company cash flow needs.

John Nadel - Sterne, Agee

Got it. Thanks very much. Appreciate it.

Operator

Our next question comes from Seth Weiss of Bank of America.

Mike Peninger

Good morning, Seth.

Seth Weiss - Bank of America

Good morning. Thank you. Rob, you are talking about the complexity of the Health taxes. I think, the ongoing fixed tax liability from ACA has gone up from what your expectations were going into the year more than just that $5.7 million increased from the liability that hit this quarter. Can you just help us for modeling purposes to think about what that fixed tax liability is and how is that is impacting the overall tax rate?

Rob Pollock

Yes. It's about $20 million, Seth, plus the $6 million or so true-up that I mentioned in the first quarter, so 25, 26 for the year is sort of that we are talking about.

Seth Weiss - Bank of America

Okay. That $20 million seems to have gone up from last year, which I think was about $15 million. Just in terms of thinking about visibility of that I know it's a difficult question, but this seems to be the number one thing that's impacting the after-tax returns and what's your confidence on the long-term 15% to 20% ROE target in Health, given that uncertainty on tax? Do you think that this tax burden sort of fattens out at this point?

Rob Pollock

We do. Again, we think that the pre-tax is the better measure. We think that we are going to see an improvement in earnings next year on a pre-tax basis and that we will build towards those attractive returns we have talked about.

Mike Peninger

I think, each year you learn a little bit more. The methodology for estimating gets better and so we think we have got a reasonable estimate out there now, Seth. Things can change as we do M&A or something like that, but I think we are getting now - able to calibrate the impact of this.

Seth Weiss - Bank of America

Okay. Great. Thanks. If I could follow-up one on Solutions.

Mike Peninger

Sure.

Seth Weiss - Bank of America

In terms of maybe a little bit more color on the fee income and the client marketing programs that caused that spike in that $4 million number that you highlighted in your prepared remarks. Just to clarify that $4 million, is that above and beyond what you would normally expect or is that a total contribution? Maybe how do we think about these marketing programs going forward, which I assume are lumpy, but I would think would be somewhat ongoing in nature.

Mike Peninger

Yes. I think, you start with that mobile market. Very dynamic. Lots going on, and you can see the competition for subscribers that's going on amongst different carriers. You have got phone producers producing new phones, I think that the key on all that, Seth, it's just creating a very dynamic marketplace.

We don't really have a tremendous amount of experience, and I think on exactly how these programs are going to work out, and we just want all investors to be aware that these are not going to be smooth. They are going to come and they will be a little bit lumpy and we will learn more as we move forward and see new devices introduced and see additional programs offered to consumers.

What we feel good about is, we have been able to support our partners as these programs have rolled out and they have been successful.

Seth Weiss - Bank of America

Okay. Great. Thanks a lot.

Operator

Our next question comes from Sean Dargan of Macquarie.

Mike Peninger

Good morning, Sean.

Sean Dargan - Macquarie

Good morning. Just going back to StreetLinks, would it make sense to frame in terms of EBITDA, what that business earned last year?

Rob Pollock

Yes. I am guessing it made close to $10 million, $9.5 million last year.

Sean Dargan - Macquarie

Okay. Just looking at the…

Rob Pollock

Sorry. I was is going to add now, important what Mike pointed or Chris is that number has been coming down over time as this market has been bottoming out.

Sean Dargan - Macquarie

Yes. I was going to say, I mean the MBA mortgage origination forecast is down 37% year-over-year this year. I mean, you would have to make up significant market share to earn that same level of EBITDA this year?

Rob Pollock

Correct, and I think that's one. Remember, we are taking things we think we are quite good at and we think we can leverage and we think there's going to be consolidation in the industry. If you think about who the clients are for these services are people we are dealing with on a regular basis for other things and we think we are going to be able to leverage that successfully.

Sean Dargan - Macquarie

Okay. Given the guidance of flat revenues in Specialty Property, that doesn't assume the loss of a portfolio. Have you sized what that portfolio would mean in terms of earned premiums?

Mike Peninger

Well, we look at a lot of factors in providing our outlook, Sean, and we've got all the normal drivers and we make assumptions for portfolio activity, but these discussions are still ongoing so we really aren't in a position to size that now. As more information becomes available, we will certainly provide.

Rob Pollock

Yes. I would say again, looking at placement rate, that's going to be the biggest driver of our revenues. If you go back and look at our Investor Day, I think Gene tried to lay out what the path would look like for the normalization of those placement rates.

Sean Dargan - Macquarie

Okay. Just one on solutions, I guess, is the bulk case around mobile that the carriers are not subsidizing phones to the degree, which they traditionally have and therefore subscribers would hold onto their handsets for a longer period of time and be more inclined to purchase the insurance?

Mike Peninger

You know, to me the bulk case is more connected everybody. Right? More dependence on devices for that whole interconnected world, so I think that there's just going to be a lot of dynamism in this market and we feel very good that we can bring more solutions than just insurance to our partners.

Sean Dargan - Macquarie

Thank you.

Operator

Our next question comes from Steven Schwartz of Raymond James.

Steven Schwartz - Raymond James

Good morning, everybody.

Mike Peninger

Hi, Steven.

Steven Schwartz - Raymond James

Just on StreetLinks and following up on John's question, the StreetLinks had total assets of about $13 million at year-end. I mean, is the way to think about this is that the difference between the price we are paying 60 and 13, that's going to amortized over time into earnings?

Rob Pollock

Not of all it, because you will have a portion that's intangibles which get amortized over time and a portion is goodwill, which doesn't get amortized.

Steven Schwartz - Raymond James

All right, so [actually] have goodwill. Okay. Then just I don't know if Adam was there or not. I don't remember if you said so, but as we move - Well, two questions, I guess one is lapsation was obviously very, very high associated with the very, very high sales in Obamacare and what have you, membership increased. It actually didn't increase a whole bunch. How should we think about membership increasing in the first quarter or when you report next time?

Mike Peninger

Yes. Well, there's several things going on. Lapse activity was up in the first quarter. Now that we are past open enrollment, I would make a couple of points. One is, some of our sales haven't sort of been processed through and added into our in-force total, so we would expect to see some of that coming through in the second quarter. It could also have some amount of lapse activity that would go the other way too, but that sales growth is going through there.

Now that open enrollment is out, the activities really going to slow down. We are going to get sales, we expect to get sales, but they will be driven around life events, lapse activities would sort of stabilize, so I think you should see less sort of volatility going forward.

Rob Pollock

Yes. I think that what's changed is the paradigm of when people buy. It used to be [uniform] over the course of the year. It's now going to be heavily weighted toward the open enrollment periods.

Steven Schwartz - Raymond James

Sure.

Rob Pollock

When we think about, when people lapse, remember, our number one source of lapse is people going back to work. Okay?

Steven Schwartz - Raymond James

Okay.

Rob Pollock

That was in the old model. In new model, it's been changed to being around when they buy during the open enrollment periods.

Steven Schwartz - Raymond James

Yes. I had a couple of more if I could. I understand that the risk mitigation adjustment, the assumptions has benefited your earnings in the quarter, which would seem to be you imply that you think that your book of business is somewhat more risky than the market. Why would that be?

Rob Pollock

Well, I think a little different. Remember, the basis of a lot of the risk mitigation is everyone pays in to deal with the people who are going to be buying individual health insurance. Not just the individual health players, but everybody is making a contribution there. Since we are only in the individual health market, we are going to be a recipient of some of those dollars through these programs. Okay?

Steven Schwartz - Raymond James

Okay.

Rob Pollock

So, I don't think it's a matter. I think the pool of all of individual health is, it's recognize, because of the rules that have been put in place going to be different and a little riskier here, no underwriting, all the ads benefits, all these things and they have asked everybody to make a contribution to that all the health insurers.

Steven Schwartz - Raymond James

Okay. It's not that you are riskier than other individual health insurers. It's just that individual health insurance is going to be riskier than group?

Rob Pollock

Correct.

Steven Schwartz - Raymond James

Okay.

Mike Peninger

You talk about the three Rs, the risk mitigation, you know one of them doesn't apply to us, the risk orders, because we haven't been selling on the exchanges, so when you think about the reinsurance program that's really you are estimating. That has nothing to do with the riskiness of your block. That's really just estimating how many of your claims are likely to be reaching the reinsurance threshold and that's the larger impact for us compared to the risk adjuster that you are sort of talking about, Steven.

For both of these programs, they are new and there's a lot of assumptions and experiences really early as I have said in my prepared remarks. We are just going to see this play out and we will be able to give you a much better feel for this stuff as the year goes on.

Steven Schwartz - Raymond James

Okay. Then just one more on Health, clearly sales will decline now that the enrollment period is over. Life events will come into play obviously, but there's also the potential to continue to sell the excess Health plans that you have. I know you've talked about for years in preparation for ACA. Rob, what’s the outlook there?

Rob Pollock

Well, again, we believe that there is a great need for the other type of products around affordability. We are optimistic, because some pick up little in the first quarter and we have sold a lot of supplemental products along with our major medical, so we are going to see that play out just like Mike said on risk mitigation, hey, let's get a couple quarters and we will be able to provide some actual information as opposed to what we have assumed.

Steven Schwartz - Raymond James

All right. Great. Thanks guys.

Operator

Our next and final question comes from Mark Hughes of SunTrust.

Mike Peninger

Hi. Mark.

Mark Hughes - SunTrust

Good morning. The impact on the loss ratio in Specialty Property, you said whether also the change in the plan design a little lower premier. Did you make a stab at how much was weather? I know you gave us the catastrophe number.

Mike Peninger

Yes. Weather was definitely the primary driver, Mark. There is a lot of the winter frozen pipes, those kinds of things that went along with the really cold weather across a lot of the country.

Mark Hughes - SunTrust

Okay. Good. Thank you.

Rob Pollock

Thanks for joining us this morning. We look forward to 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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