Assurant, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparisons are to Q1 2014 unless otherwise noted. Amounts below are in U.S. dollars; financial figures are in millions unless stated otherwise. Assurant provides specialty insurance products and related services through five reportable segments.
Financial performance and position
| Metric | Q1 2015 | Q1 2014 / prior date | Change |
|---|---|---|---|
| Total revenue | $2,598.6 | $2,448.4 | Up 6% |
| Net income | $50.0 | $137.2 | Down 64% |
| Diluted EPS | $0.71 | $1.86 | Down 62% |
| Net investment income | $152.3 | $168.1 | Down 9% |
| Net realized investment gains, including OTTI | $4.0 | $19.8 | Lower |
| Operating cash flow | $(177.7) | $127.2 | Lower |
Revenue growth reflected higher earned premiums and fees, partly offset by lower investment income and realized gains. Profit fell primarily because Assurant Health recorded lower estimated Affordable Care Act program recoveries and higher claims, while Assurant Specialty Property earnings also declined. Net income margin was approximately 1.9%, versus 5.6% a year earlier.
At March 31, 2015, total assets were $30.8 billion, total liabilities $25.7 billion, and stockholders’ equity $5.1 billion. Cash and cash equivalents were $1.065 billion; debt was $1.171 billion, broadly unchanged from year-end. The $400 million revolving credit facility had $395.7 million available, with no borrowings outstanding; the company reported covenant compliance. Management said liquidity was sufficient for the next 12 months. Holding company capital was $573.5 million, including $250 million reserved as a buffer against remote risks.
Cash used in financing was $104.4 million, including $81.6 million of share repurchases and $18.8 million of dividends. The quarterly dividend was $0.27 per share. Cash declined by $253.5 million during the quarter to $1.065 billion.
Segment results and material changes
- Assurant Solutions: Net income rose 10% to $54.4 million. Growth in mobile devices and related services helped; CWI integration costs and foreign exchange effects were offsets. Management expected 2015 revenue and net income to remain approximately level with 2014, despite discontinuing a tablet warranty program that generated about $100 million of 2014 net earned premiums.
- Assurant Specialty Property: Net income fell 23% to $75.1 million. Lower lender-placed premium and placement rates, portfolio attrition, and the American Reliable Insurance Company (ARIC) divestiture reduced revenue; lower non-catastrophe losses partly offset the pressure. The placement rate was 2.57%, versus 2.74% a year earlier. Management expected full-year premiums and income to decline from 2014.
- Assurant Health: Net loss widened to $84.0 million from $7.1 million. The loss ratio rose to 99.2% from 73.5%; Affordable Care Act policies were about 60% of segment business, versus 18% a year earlier. Management expected elevated claims and uncertainty in program recoveries to affect results.
- Assurant Employee Benefits: Net income declined 27% to $10.1 million, primarily due to lower real estate joint-venture investment income and less favorable disability and life claims. Management expected premium and fee growth from voluntary products, with expense actions intended to offset lower investment income.
Outlook, risks, contingencies and unusual items
- Following a portfolio review, Assurant said it was exploring strategic alternatives, including possible sales, for Assurant Health and Assurant Employee Benefits. Absent a sale, it planned to exit health insurance, with the exit expected to be substantially complete in 2016. The filing cautions that a transaction may not be completed on acceptable terms or at all.
- ARIC was sold in January 2015 for $117.9 million net cash consideration. Final settlement generated a $5.3 million pre-tax gain in Q1; a $21.5 million loss had been recorded in 2014.
- The Indiana regulator initiated a multistate targeted market-conduct examination of lender-placed insurance; 42 states were participating. Assurant also faced related class-action litigation and U.K. payment-protection-insurance complaints. The company had accrued for lender-placed litigation but said any loss beyond accruals could not be estimated. Management did not believe pending matters were likely to materially affect financial condition, though individual-period results or cash flows could be affected.
- Affordable Care Act risk-mitigation receivables and estimates were subject to considerable uncertainty. Q1 included downward revisions to 2014 program estimates; amounts ultimately received may differ substantially from estimates. No risk-corridor receivable was recorded for Q1 2015 because HHS payments were uncertain.
- Key risks include regulatory changes, premium and placement-rate declines, claims and reserve uncertainty, catastrophes, investment-market and credit exposure, foreign exchange, reinsurance collectability, and the ability to execute planned dispositions or the health-market exit.
Most important facts for investors to verify
- How later claims development and final Affordable Care Act program settlements compare with the estimates and receivables recorded at March 31, 2015.
- Whether Assurant Health and Employee Benefits were sold, and the financial, regulatory, and operational effects of any sale or health-market exit.
- Subsequent lender-placed insurance examination and litigation developments, including potential premium, expense, or remediation effects beyond recorded accruals.
- Whether lender-placed placement rates and premiums, catastrophe losses, and mortgage-portfolio attrition track management’s outlook.
- Cash conversion and liquidity trends, including holding-company resources, subsidiary dividend capacity, repurchases, and compliance with debt-facility covenants.