Assurant, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparative period is Q1 2015. Amounts below are in U.S. dollars and rounded to millions unless stated otherwise.
Business context
Assurant provides specialty insurance and related services, including mobile-device and vehicle protection, renters and lender-placed homeowners insurance, and mortgage services. The company is focusing on housing and lifestyle protection, plans to substantially exit health insurance by year-end 2016, and sold Assurant Employee Benefits to Sun Life on March 1, 2016, primarily through reinsurance transactions.
Financial performance and position
| Metric | Q1 2016 / March 31, 2016 | Prior comparable / December 31, 2015 |
|---|---|---|
| Total revenue | $2,147.5 million | $2,598.6 million |
| Net income | $220.3 million | $50.0 million |
| Diluted EPS | $3.34 | $0.71 |
| Net cash from operating activities | $(339.0) million | $(177.7) million |
| Cash and cash equivalents | $2,060.8 million | $1,288.3 million |
| Total investments | $11,425.1 million | $12,994.8 million |
| Total debt | $1,414.7 million | $1,164.7 million |
| Total stockholders’ equity | $4,564.6 million | $4,524.0 million |
- Reported net income margin was approximately 10.3% of revenue, versus 1.9% in Q1 2015; both periods include unusual items, so this is not a clean measure of underlying profitability.
- Q1 2016 net income included $161.7 million of net realized investment gains, $47.6 million of deferred-disposal-gain amortization, and a $29.6 million pension curtailment gain. The company attributed the increase in earnings largely to the Employee Benefits sale and pension gain.
- Operating cash outflow increased year over year, partly because the health business paid claims while in runoff. Investing activities provided $1,133.0 million, mainly reflecting the Employee Benefits sale and investment sales. The cash flow statement reports a $772.5 million increase in cash.
- Net investment income declined 11% to $135.7 million, primarily due to lower yields and lower invested assets. Interest expense was $14.5 million.
- The company issued a $250 million floating-rate promissory note in March, due March 3, 2017. Its $400 million revolving facility had no borrowings and $396.0 million available; the company reported compliance with covenants. Management said liquidity should be sufficient for the next 12 months.
Material changes and segment trends
- Revenue declined 17% year over year, reflecting the health business runoff and Employee Benefits sale. The company received $926.2 million net cash consideration plus $16 million contingent consideration for Employee Benefits. Of the estimated $638.5 million transaction gain, $120.1 million was recognized at closing and $518.4 million deferred; $44.6 million of deferred gain was amortized in March.
- Assurant Solutions net income fell 13% to $47.1 million, due chiefly to a lost domestic tablet program, lower contributions from some North American retail clients, and an adjustment relating to older preneed policies. Mobile-device and vehicle-protection growth partly offset the declines.
- Assurant Specialty Property net income rose 2% to $76.4 million. Lower expenses and non-catastrophe claims helped, while lender-placed insurance revenue continued to decline amid lower placement rates, lower premium rates, and lost client business. Reportable catastrophe losses were $14.4 million pre-tax versus $5.2 million.
- Assurant Health’s net loss narrowed to $27.2 million from $84.0 million as policies ran off. Its risk-adjustment receivable was $221.5 million and reinsurance recoverables were $265.0 million; management cautioned that ACA program estimates and collections are uncertain.
- The company repurchased 3.42 million shares for $258.4 million and paid $32.4 million in dividends. The quarterly dividend was $0.50 per share.
Outlook, risks and contingencies
- Management expects to substantially complete the health-market exit by the end of 2016 and expects up to $30 million of additional exit-related charges. Total estimated exit costs, including premium-deficiency charges, were approximately $304 million; the estimate may change.
- For Assurant Solutions, management expected full-year 2016 net income and net earned premiums and fees to increase from 2015, with earnings weighted toward the second half. Expected headwinds included foreign-exchange volatility, lower North American retail service-contract revenue, and credit-insurance declines. For Specialty Property, management expected full-year net income and net earned premiums to decrease, with results also affected by catastrophe losses. No clear consolidated full-year earnings guidance is provided in the filing text.
- Risks include lender-placed insurance regulation and litigation, client concentration and lost business, catastrophe losses, reserve and pricing uncertainty, investment-market and interest-rate risks, reinsurer credit risk, and uncertainty over health-program recoveries. A 44-jurisdiction market-conduct examination of lender-placed insurance was ongoing; no final report had been issued. The company reported accrued liabilities for legal and regulatory matters but could not estimate possible losses beyond accruals.
- Management did not believe pending legal matters were likely to materially affect financial condition, while acknowledging that an individual reporting period’s results or cash flows could be materially affected. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- How much of reported earnings reflects recurring operations versus the Employee Benefits sale gains, investment gains, and pension curtailment gain.
- The timing and realization assumptions for the $473.8 million deferred gain remaining at March 31, 2016, including the role of Sun Life policy renewals.
- Whether health-business runoff, ACA receivable collections, and remaining exit costs differ materially from estimates.
- The pace of lender-placed insurance normalization, client retention, regulatory outcomes, and catastrophe losses.
- Cash available at the holding company, subsidiary dividend capacity, debt repayment terms, and the sustainability of share repurchases and dividends.