Assurant, Inc. — 2009 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2009; comparisons are primarily with fiscal 2008. The filing is an annual report, not a standalone fourth-quarter filing. Amounts below are in U.S. dollars and generally shown in millions unless stated otherwise.
Business context
Assurant provides specialized insurance and related services through Assurant Solutions, Assurant Specialty Property, Assurant Health, Assurant Employee Benefits, and Corporate and Other. Products include extended warranties, creditor-placed property insurance, individual and small-group health coverage, and employee dental, disability, and life insurance.
Financial performance and position
| Metric | 2009 | 2008 | Change |
|---|---|---|---|
| Total revenue | $8,700.5 | $8,601.2 | Up 1.2% |
| Net earned premiums and other considerations | $7,550.3 | $7,925.3 | Down 4.7% |
| Net investment income | $698.8 | $774.3 | Down 9.8% |
| Net realized investment losses | $(53.6) | $(428.7) | Losses narrowed |
| Net income | $430.6 | $447.8 | Down 3.8% |
| Diluted EPS | $3.63 | $3.76 | Down 3.5% |
| Operating cash flow* | $269.9 | $999.1 | Down substantially |
*The audited cash-flow statement reports 2009 operating cash flow of $269.9 million. The MD&A separately gives $279.0 million; the filing text does not reconcile the difference. Net income margin was approximately 4.9% of reported total revenue. The effective tax rate was 39.3%, compared with 20.5% in 2008.
At year-end, total assets were $25.84 billion, stockholders’ equity $4.85 billion, and debt $972.1 million carrying value (the senior notes’ aggregate principal was $975 million). Cash and cash equivalents were $1.32 billion; investments were $13.16 billion. Policy liabilities were $15.87 billion. The company reported a 0.17 debt-to-capitalization ratio under its credit-facility covenant and compliance with all covenants.
The $350 million revolving credit facility had $325.1 million available at year-end after letters of credit; there were no facility borrowings and no commercial paper outstanding. The company stated it expected sufficient liquidity for the next 12 months, including debt interest and common dividends. Insurance-subsidiary dividends are subject to regulatory limits.
Segments and changes versus 2008
| Segment | 2009 net income (loss) | 2008 | Key change |
|---|---|---|---|
| Assurant Solutions | $120.1 | $112.2 | Improved 7%; stronger domestic service-contract underwriting, partly offset by UK credit losses and restructuring. |
| Assurant Specialty Property | $406.0 | $405.2 | Nearly flat; no reportable catastrophe losses in 2009, but lower premiums and higher reinsurance costs. |
| Assurant Health | $(30.2) | $120.3 | Turned to a loss as medical utilization, claims development, litigation-related reserves, and lapses worsened. |
| Assurant Employee Benefits | $42.2 | $70.6 | Down 40%, reflecting lower premiums and weaker life, dental, and disability experience. |
- Assurant Health’s combined ratio rose to 105.0% from 93.6%; its loss ratio increased to 75.0% from 64.5%. Management cited $49.8 million of reserve increases related to two claim lawsuits and $3.9 million of H1N1-related claims.
- Specialty Property’s combined ratio improved to 74.7% from 76.4%, primarily because 2008 included significant hurricane and wildfire losses. Homeowners premiums declined, including from reduced real-estate-owned business and client consolidation.
- Solutions gross written premiums fell 16% to $2.96 billion, mainly from lower domestic service-contract sales and continued runoff in domestic credit insurance. Preneed face sales rose to $512.4 million from $445.3 million.
- Employee Benefits’ loss ratio increased to 72.0% from 69.8%. Its goodwill was impaired by $83 million in the fourth quarter, a non-cash charge with no related tax benefit.
Investment markets recovered from 2008’s severe declines: fixed-maturity net unrealized gains were $282.7 million at year-end 2009, versus net unrealized losses of $587.0 million a year earlier. Nevertheless, 2009 net realized investment losses were $53.6 million, including $38.7 million of other-than-temporary impairment losses recognized in earnings. Below-investment-grade securities were approximately 8.6% of the fixed-maturity portfolio by fair value (6.5% rated Ba and 2.1% rated B or lower).
Fourth-quarter results and unusual items
- Fourth-quarter 2009 revenue was $2.18 billion and net income was $11.9 million, versus revenue of $2.22 billion and net income of $182.4 million in fourth-quarter 2008. The 2009 quarter included the $83 million goodwill impairment; the 2008 quarter included a tax benefit and investment losses.
- Assurant received $139 million from Willis Limited in a reinsurance-placement settlement, recorded in Corporate and Other. The after-tax settlement, net of fees and related allowances, was reported as $83.5 million.
- The company recorded $3.5 million for the SEC finite-reinsurance settlement. In January 2010, the SEC filed a complaint; Assurant settled without admitting or denying the allegations, paid the penalty, and agreed to an injunction.
- Effective January 1, 2009, certain new preneed policies moved to universal-life accounting presentation. The company said the change was not material to net income or the balance sheet, but it shifted amounts between premium revenue and fee income.
Outlook, risks, and contingencies
- Management expected Assurant Health to return to profitability by late 2010, citing pricing and plan changes and expense reductions. It also warned that pending U.S. health-care reform could materially affect costs, revenues, and the business.
- Management expected continued mortgage-market contraction, portfolio transfers, and client consolidation to affect Specialty Property premiums and margins. It cited loan additions and losses from client changes, including a 230,000-subprime-loan portfolio loss in January 2010.
- Solutions continued to face deteriorating UK results, high unemployment-related credit claims, consumer-spending weakness, and client bankruptcy risk. Management cited new clients and distribution channels as partial offsets.
- Key broader exposures include claim-reserve uncertainty, catastrophes, investment and interest-rate risk, credit quality, reinsurance recoverability, client and distributor concentration, regulatory change, and insurer rating downgrades. S&P had assigned a negative outlook and lowered Assurant, Inc.’s rating to BBB; two life subsidiaries were lowered to BBB+.
- Two Assurant Health claim-related lawsuits had reserves of $14.7 million and $37.3 million; the company was pursuing available remedies. It also disclosed unresolved London-market reinsurance disputes and a Medicare Secondary Payer interpretation issue for which it could not estimate a possible loss.
- Goodwill totaled $926.4 million after the impairment. Management noted that relatively modest adverse changes in certain valuation assumptions could put Assurant Solutions’ goodwill at risk of impairment.
- The qualified pension plan was underfunded by $88.0 million on a GAAP basis; the company contributed $40 million in 2009 and expected to contribute $40 million in 2010. It stated that statutory insurance subsidiaries exceeded minimum risk-based capital requirements.
No consolidated earnings or revenue guidance was provided. The filing describes forward-looking expectations as subject to significant economic, market, regulatory, claims, and execution risks.
Most important facts for investors to verify
- Reconcile the filing’s conflicting 2009 operating-cash-flow figures ($269.9 million in the audited statement versus $279.0 million in MD&A), and confirm the comparable 2008 presentation.
- Track Assurant Health’s claim utilization, reserve development, pricing actions, and progress toward management’s late-2010 profitability target.
- Assess the sustainability of Specialty Property earnings as mortgage portfolios contract and consolidate, reinsurance costs rise, and catastrophe exposure remains concentrated.
- Review investment portfolio credit quality, impairment judgments, and exposure to reinsurers—especially recoverables related to disposed businesses.
- Monitor ratings, statutory capital, and the ability of regulated subsidiaries to upstream dividends. The filing gives two different 2010 ordinary-dividend capacity figures: approximately $526.5 million and $524.7 million.
- Follow the SEC settlement and remaining litigation, including the two health-claim cases, and evaluate any effect on reserves, reputation, or distribution relationships.