Business Context and Reporting Period
Company: Assurant, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2006
Business Overview: Assurant is a holding company providing specialized insurance products and related services in North America and selected international markets. The company operates through four primary segments: Assurant Solutions (credit insurance, extended service contracts, preneed), Assurant Specialty Property (creditor-placed homeowners, manufactured housing), Assurant Health (individual and small group medical), and Assurant Employee Benefits (group dental, disability, and life).
Segment Reclassification: Effective April 1, 2006, the company separated its former Assurant Solutions segment into two distinct segments: Assurant Solutions and Assurant Specialty Property. Prior year data has been recast to reflect this change.
Key Financial Metrics
| Metric (in thousands) | 2006 | 2005 |
|---|---|---|
| Total Revenues | $8,070,584 | $7,497,675 |
| Net Income | $717,418 | $479,355 |
| Earnings Per Share (Diluted) | $5.57 | $3.50 |
| Total Assets | $25,165,148 | $25,365,453 |
| Total Stockholders' Equity | $3,832,597 | $3,699,559 |
| Debt | $971,774 | $971,690 |
| Net Cash Provided by Operating Activities | $934,158 | $899,176 |
| Dividends Paid (Common Stock) | $48,157 | $42,050 |
Material Changes vs. Prior Period
- Net Income Growth: Net income increased by $238,063 (50%) to $717,418. This was primarily driven by strong performance in Assurant Specialty Property due to growth in creditor-placed homeowners premiums, improved loss experience, and the absence of significant catastrophes in 2006 compared to 2005.
- Revenue Increase: Total revenues rose 7.6% to $8.07 billion. Key drivers included a $349 million increase in net earned premiums in Assurant Specialty Property (partially due to the acquisition of Safeco Financial Institution Solutions) and higher fee income in Assurant Solutions.
- Investment Gains: Net realized gains on investments surged to $111,865 in 2006 from $8,235 in 2005. This increase was largely attributable to a $98,300 pre-tax gain from the sale of the company's investment in Private Health Care Systems (PHCS).
- Segment Performance:
- Assurant Specialty Property: Segment net income increased 68% to $241,121. The combined ratio improved to 76.5% from 82.6%.
- Assurant Solutions: Segment net income increased 49% to $198,893, aided by a $40.5 million after-tax legal settlement and growth in extended service contracts.
- Assurant Health: Segment net income decreased 6% to $167,919 due to declining membership and increased competition, despite premium rate increases.
- Assurant Employee Benefits: Segment net income increased 22% to $83,603, driven by favorable group disability and dental experience.
Guidance, Outlook, Risks, and Unusual Items
- Unusual Items:
- Legal Settlement: Assurant Solutions recognized $62,300 in fee income from a legal settlement with a former customer.
- PHCS Sale: The Corporate and Other segment recorded a significant gain from the sale of its investment in PHCS.
- Accounting Changes: The company adopted FAS 123R (Share-Based Payment) on January 1, 2006, resulting in a cumulative effect adjustment of $1,547 to net income.
- Outlook and Management Commentary: Management emphasizes a strategy of building diverse specialty insurance businesses and leveraging core capabilities in risk management and distribution. The company anticipates continued growth in creditor-placed homeowners and extended service contracts. However, it notes a reduction in fee income expected in 2007 due to the loss of a large debt deferment client.
- Key Risks:
- Catastrophe Losses: Exposure to natural and man-made catastrophes, particularly in homeowners lines concentrated in California, Florida, and Texas. While 2006 had no significant catastrophes, 2005 incurred approximately $339 million in pre-tax losses from hurricanes.
- Reinsurance Credit Risk: The company relies on reinsurance for risk management. It remains liable to insureds if reinsurers default. Significant recoverables are held from The Hartford and John Hancock related to divested businesses.
- Interest Rate Risk: Fluctuations in interest rates affect the market value of the fixed-maturity investment portfolio (73% of total investments) and the spread on preneed insurance policies.
- Regulatory and Litigation: Ongoing industry-wide investigations into loss mitigation products and finite risk insurance. The company is cooperating with the SEC and the U.S. Attorney for the Southern District of New York.
Important Facts for Investor Verification
- Reinsurance Concentration: Verify the financial stability of major reinsurers, specifically The Hartford and John Hancock, which hold significant coinsurance trusts related to divested businesses (FFG and LTC).
- Catastrophe Exposure: Assess the geographic concentration of the Assurant Specialty Property segment, where approximately 37% of homeowners insurance in force is located in California, Florida, and Texas.
- Dividend Capacity: Confirm the ability of regulated insurance subsidiaries to pay dividends to the holding company, which is the primary source of funds for shareholder dividends and debt service. The maximum amount payable without regulatory approval in 2007 is approximately $476 million.
- Investment Portfolio Quality: Review the composition of the fixed-maturity portfolio, noting that 67% is rated "A" or better, but 7% is rated "BB" or lower (below investment grade).
- Regulatory Investigations: Monitor the status of ongoing investigations regarding finite risk insurance and loss mitigation products, as outcomes could result in fines or accounting adjustments.