Assurant, Inc. — Q2 2010 Form 10-Q
Reporting period: Three and six months ended June 30, 2010; filed August 4, 2010. Assurant is a specialty insurer operating through Solutions, Specialty Property, Health, Employee Benefits, and Corporate & Other. Dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Total revenue | $2,140.3 | $2,273.6 | $4,308.2 | $4,361.5 |
| Net earned premiums and other considerations | $1,849.9 | $1,875.9 | $3,756.5 | $3,750.4 |
| Net investment income | $175.2 | $174.9 | $349.2 | $353.4 |
| Net realized gains (losses), including OTTI | $19.2 | $(6.1) | $23.6 | $(61.8) |
| Income before tax | $253.5 | $281.5 | $501.8 | $439.4 |
| Net income | $164.7 | $193.3 | $321.9 | $273.9 |
| Diluted EPS | $1.46 | $1.63 | $2.80 | $2.31 |
| Dividends per share | $0.16 | $0.15 | $0.31 | $0.29 |
Q2 net income fell 15%, but six-month net income rose 18%. The Q2 comparison was affected by a prior-year favorable legal settlement ($85 million after tax); excluding that item, management said Q2 net income would have increased about $56 million, supported by improved underwriting and realized investment gains. Six-month results also benefited from stronger underwriting and a $55.5 million after-tax improvement in realized investment gains.
For Q2, Assurant Specialty Property reported segment net income of $103.7 million, up 14%; Assurant Health reported $25.3 million versus a $10.3 million loss; Solutions reported $30.3 million, up 9%; and Employee Benefits reported $12.4 million, up 2%. Six-month segment income improved in each operating segment, with Health rising to $33.7 million from $4.3 million and Specialty Property to $222.2 million from $195.9 million.
Segment underwriting ratios improved year over year: Q2 combined ratio was 73.6% for Specialty Property (77.6% prior year) and 94.5% for Health (105.9%); Solutions’ international combined ratio was 107.3% (111.6%), while domestic was 97.8% (97.6%). Employee Benefits’ Q2 loss ratio improved to 69.2% from 71.2%.
Cash flow, balance sheet and capital
- Six-month operating cash flow was $318.3 million in the cash flow statement; MD&A reports $313.3 million including the effect of exchange-rate changes. Prior-year operating cash flow was negative. Investing cash flow was $(187.9) million and financing cash flow was $(440.3) million, mainly reflecting securities purchases and share repurchases.
- Cash and equivalents were $1,003.7 million at June 30, down from $1,318.6 million at year-end. Total assets were $26,115.3 million and stockholders’ equity $5,038.2 million.
- Debt was $972.1 million; senior notes had $975 million aggregate principal, with maturities in 2014 and 2034. A $350 million revolving facility had no borrowings; $325.6 million was available, subject to letters of credit. The company reported compliance with facility covenants.
- Fixed-maturity investments had fair value of $10,651.7 million; 90.8% were rated Aaa/Aa/A or Baa. Management reported $76.5 million of unrealized losses on fixed maturities and $32.7 million on equity securities at quarter-end.
- The company repurchased 9.49 million shares for $324.3 million in the first half and paid $35.5 million of dividends. Remaining repurchase authorization was $445.8 million. Management said repurchases were reduced entering hurricane season.
Changes, outlook and risks
- Revenue declined 6% in Q2, primarily as fees and other income fell from the prior-year legal settlement; six-month revenue was down 1%. Net earned premiums were broadly stable for the half.
- Management attributed improved operating results to pricing and product changes, expense control, and better underwriting. It expected further improvement in Solutions’ international combined ratio through the remainder of 2010, while noting consumer-spending weakness and start-up expenses from new client relationships.
- Health-care reform creates significant uncertainty for Health and Employee Benefits, including potential product, pricing, expense, and distribution changes. Management warned that later clarification of rules could affect profitability and lead to goodwill or intangible-asset impairment. No quantified earnings guidance was provided.
- Catastrophe exposure remains material. Assurant added $150 million of hurricane reinsurance protection in 2010, bringing the described Ibis Re coverage to $300 million; the protection is subject to index and actual-loss terms. Specialty Property recorded $7.7 million of reportable Tennessee-storm losses in the first half.
- Other risks include reserve adequacy, investment-market and credit losses, reinsurer collectability, regulatory and litigation outcomes, and restricted subsidiary dividends. The filing reports a $6.8 million additional reserve on an impaired commercial mortgage loan, and $85.4 million of deferred tax assets assessed as more likely than not unrealizable.
- The company paid $25.4 million to resolve two Health claim-related lawsuits and released remaining reserves. It also paid a $3.5 million SEC civil penalty in Q1 under a settlement, without admitting or denying the allegations. London-market reinsurance disputes remain subject to ongoing or future settlement discussions; management considers accrued losses adequate.
Management stated that liquidity should be sufficient for the next twelve months, including interest and dividends. It also noted the qualified pension plan remained underfunded by approximately $88 million; $20 million was contributed in the first half and another $20 million was expected during 2010.
Investor verification priorities
- Reconcile the $318.3 million cash-flow statement operating figure with MD&A’s $313.3 million figure, which includes currency effects.
- Assess how much of earnings improvement reflects recurring underwriting versus the Health legal-reserve release, prior-year settlement comparison, and realized investment gains.
- Track final health-care reform rules, Health and Employee Benefits’ operating adjustments, and possible goodwill impairment.
- Review investment credit quality, unrealized losses, mortgage-loan reserves, and assumptions underlying OTTI and Level 3 valuations.
- Monitor catastrophe exposure and reinsurance coverage, including attachment terms, recoverability, and remaining share-buyback activity relative to liquidity and capital needs.
- Follow outstanding London-market reinsurance disputes, litigation and regulatory matters, and insurance-subsidiary dividend capacity.