Business context and reporting period
Assurant, Inc. filed this Form 10-K for the fiscal year ended December 31, 2015. It provides specialty insurance and related services through Assurant Solutions, Assurant Specialty Property, Assurant Health, and Assurant Employee Benefits. Unless otherwise stated, amounts below are in U.S. dollars and rounded to millions; the filing reports financial statement amounts in thousands.
The company announced a strategic shift toward housing and lifestyle protection: it began winding down major medical operations and expects to substantially exit health insurance by the end of 2016. It also agreed to sell Assurant Employee Benefits to Sun Life, with closing expected in the first quarter of 2016.
Financial performance and position
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Total revenue | $10,325m | $10,382m |
| Net earned premiums | $8,351m | $8,632m |
| Fees and other income | $1,303m | $1,034m |
| Net investment income | $626m | $656m |
| Income before tax | $201m | $744m |
| Net income | $142m | $471m |
| Diluted EPS | $2.05 | $6.44 |
| Net income margin | 1.4% | 4.5% |
Revenue was nearly flat, down 0.5%, while net income fell 70%. Management attributed the earnings decline chiefly to higher individual major-medical claims and adverse development, lower estimated Affordable Care Act program recoveries, and $106m after tax of health exit and disposal costs. Fees grew, but premiums and investment income declined.
Segment results: Solutions net income fell 10% to $197m; revenue was essentially flat at $4,178m. Specialty Property net income fell 10% to $308m and revenue fell 13% to $2,543m. Health’s net loss widened to $368m from $64m. Employee Benefits net income was $47m, down 3%.
Underwriting indicators: Health’s combined ratio rose to 124.2% from 104.3%; Specialty Property’s was 84.9% versus 85.2%; Solutions reported domestic and international combined ratios of 95.1% and 102.8%, respectively. Employee Benefits’ loss ratio was 68.4% versus 68.2%.
Fourth quarter (unaudited): revenue was $2,548m versus $2,623m in Q4 2014; net income was $65.7m versus $49.8m. Third-quarter 2015 reported a $7.0m net loss.
Cash flow and liquidity: The cash flow statement reports operating cash flow of $255m, investing cash inflow of $264m, and financing cash outflow of $487m; cash and cash equivalents ended the year at $1,288m. The MD&A separately states operating cash flow of $192m, while describing that figure as including certain exchange-rate and held-for-sale effects; the filing text does not reconcile this difference clearly. Holding-company capital was $462m, including $250m designated as a buffer against remote risks. A $400m revolving facility had $396m available and no borrowings outstanding.
Balance sheet and debt: total assets were $30,043m, total stockholders’ equity $4,524m, and debt $1,171m, broadly unchanged from 2014 debt of $1,171m. Book value per basic share declined to $67.92 from $73.73. The company reported compliance with credit-facility covenants, including a 21% debt-to-capitalization ratio under the covenant calculation.
Material changes versus the prior comparable period
- Solutions’ decline reflected the loss of a domestic mobile-tablet program and weaker service-contract volumes at some North American retail clients. Higher mobile-related fees and growth in auto warranties partly offset those pressures.
- Specialty Property premiums declined as lender-placed placement rates and premium rates fell, client business was lost, and American Reliable Insurance Company was sold effective January 1, 2015. Lower non-catastrophe losses and reinsurance costs partly offset the revenue decline.
- Health premiums increased, mainly from individual medical business, but claims and adverse development rose sharply. The segment reported a 103.5% loss ratio and a $78m premium-deficiency reserve at year-end.
- Net investment income fell 5%, and net unrealized gains on fixed maturities declined by $471m, principally reflecting higher Treasury yields and wider credit spreads. Other comprehensive income was a loss of $437m, versus income of $129m in 2014.
- Assurant repurchased 4.2m shares for approximately $285m, paid $94m in dividends, and raised its quarterly dividend to $0.50 during 2015.
Outlook, management commentary, risks and unusual items
Management expected 2016 Solutions net income and premiums and fees to increase, with improvement weighted toward the second half, supported by new mobile programs, improved international profitability, and expense initiatives. Foreign exchange, legacy retail service-contract declines, and credit-insurance run-off were expected headwinds. Specialty Property net income and premiums were expected to decline as lender-placed business normalized, partly offset by efficiencies and growth in adjacent services; catastrophe losses remained a source of volatility.
The company estimated up to $50m of additional 2016 health exit-related charges. Its filing also estimated total health exit costs of $290m, including premium-deficiency reserves, and said remaining exit cash payments were expected to be substantially complete in 2016. The Employee Benefits sale was expected to provide approximately $1.0bn in net cash proceeds, including capital releases. Assurant Health was expected to contribute approximately $475m, subject to claims development, wind-down expenses, ACA recoveries, and regulatory approval.
Key risks include regulatory or rate actions affecting lender-placed insurance; ongoing multistate market-conduct examination and class-action litigation concerning that business; declining placement rates and important client relationships; uncertain health run-off claims and ACA recoveries; catastrophe and reserve risk; investment-market and low-interest-rate exposure; and reinsurance counterparty risk. Management said pending matters were not likely, based on available information, to materially affect financial condition, but could materially affect results or cash flows in an individual period. No final report had been issued for the 43-jurisdiction lender-placed examination.
Ratings agencies downgraded John Alden Life and Time Insurance Company following the health exit announcement and higher-than-expected losses; several ratings had negative outlooks or review implications. The filing also disclosed correction of prior-period errors relating principally to mobile inventory and legacy warranty receivables, reducing 2015 Solutions net income by $8.2m; management concluded the errors were not material to prior or current-period financial statements. The auditor gave an unqualified opinion and reported effective internal control over financial reporting.
Important facts for investors to verify
- Reconcile the $255m operating cash flow in the cash flow statement with the $192m figure in MD&A, and review the related cash-flow definitions.
- Track actual health run-off claims, the $78m year-end premium-deficiency reserve, ACA risk-adjustment and reinsurance collections, and the remaining exit costs.
- Confirm closing terms, timing, regulatory approvals, and realized proceeds for the Sun Life transaction and health-business wind-down.
- Monitor lender-placed insurance placement rates, client retention, filed premium rates, regulatory examination findings, and litigation outcomes.
- Assess the quality and liquidity of investments, the decline in unrealized gains, reinsurance recoverables, and the effect of insurer-subsidiary dividend restrictions on holding-company liquidity.