Assurant, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2014; filed November 4, 2014. Assurant is a diversified insurer and services provider operating through Solutions, Specialty Property, Health, Employee Benefits, and Corporate & Other. Unless otherwise noted, dollar figures below are in millions, rounded from the filing’s thousands.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $2,702.5 | $2,258.7 | $7,759.0 | $6,647.0 |
| Income before taxes | $224.8 | $194.0 | $653.8 | $611.2 |
| Net income | $140.3 | $128.8 | $421.2 | $380.1 |
| Diluted EPS | $1.92 | $1.68 | $5.74 | $4.84 |
| Net investment income | $162.0 | $159.2 | $497.6 | $489.1 |
- Q3 revenue rose 20% and net income 9% year over year; nine-month revenue rose 17% and net income 11%. Q3 net margin was approximately 5.2% versus 5.7%; nine-month net margin was approximately 5.4% versus 5.7%.
- Q3 growth reflected higher earned premiums and fees, particularly in mobile protection and fee-based businesses, and higher investment gains. Nine-month results also included a one-time $20.8 tax benefit from converting certain Canadian branch operations to foreign corporate entities.
- Segment results, Q3 net income (loss): Solutions $51.8 (up 43%); Specialty Property $104.7 (down 9%); Health $(17.4), versus income of $6.6; Employee Benefits $13.1 (up 113%); Corporate & Other $(12.0), improved from $(35.2). For nine months, Health lost $27.0 versus income of $5.3, while Specialty Property earned $270.8 versus $315.8.
- Specialty Property combined ratio rose to 81.8% from 76.2% in Q3 and to 84.3% from 77.3% for nine months. Health’s combined ratio increased to 103.3% from 99.3% in Q3 and 101.5% from 99.1% year to date. Employee Benefits’ Q3 loss ratio improved to 67.4% from 72.7%.
Cash flow, balance sheet, debt and liquidity
- At September 30, total assets were $30.7 billion, total liabilities $25.3 billion, and stockholders’ equity $5.34 billion. Cash and cash equivalents were $1.41 billion, down from $1.72 billion at year-end 2013; investments totaled $14.61 billion.
- Debt was $1.17 billion, down from $1.64 billion at year-end, following repayment of $467.3 million of debt during the first nine months, including the $500 million 2004 note maturity (net cash repayment shown in the cash flow statement). Interest expense was $44.6 million versus $57.4 million a year earlier.
- Nine-month cash flow statement: operating activities provided $514.7 million, investing activities used $143.5 million, and financing activities used $658.3 million; cash declined $305.9 million. Management’s MD&A presents operating cash flow including the exchange-rate effect as $495.9 million and attributes the year-over-year decline chiefly to payment timing and amounts not yet recovered under ACA stabilization programs.
- A new five-year, unsecured $400 million revolving credit facility became effective in September 2014, replacing a $350 million facility. At quarter-end, $395.7 million was available; there were no borrowings, and the company reported compliance with covenants. Management said liquidity should meet needs over the next 12 months.
- Holding-company capital was $562.5 million, including $250 million reserved as a buffer against remote risks. The company repurchased 1.76 million shares for approximately $116.7 million and paid $58.4 million in dividends during the nine months.
Changes, outlook and material matters
- Solutions: Management expected 2014 premiums and fees to increase, led by mobile business. Results may vary with product launches, client marketing and seasonality. Growth in mobile subscribers and the 2013 Lifestyle Services Group acquisition contributed to higher revenue and expenses.
- Specialty Property: Management expected 2014 premiums and fees to increase, but cited lower lender-placed rates, declining placement rates, higher non-catastrophe claim frequency, and a higher expense ratio as pressures. A client’s decision to transfer a portion of its portfolio—about 600,000 loans—was expected to affect results beginning in Q4 2014. Lender-placed products generated 72% of segment earned premiums and approximately 78% of segment net income for the first nine months.
- Health: Higher-than-expected claims from ACA-qualified policies and non-deductible compensation costs drove the segment loss. Management said ACA morbidity was worse than pricing assumptions; it planned to reset pricing for ACA policies in January 2015 and expected rate actions, plan changes and distribution scale to improve results. Management anticipated higher 2014 premiums and fees but also elevated claims, taxes and commissions. ACA reinsurance and risk-adjustment recoveries were estimates subject to substantial uncertainty and expected settlement in 2015; risk corridors did not affect 2014 because Assurant Health was not participating in insurance marketplaces.
- Employee Benefits: Management expected 2014 premiums and fees to grow through voluntary products, with cost reductions intended to offset growth-related spending. Results remain exposed to employment trends and capital markets.
- In October 2014, Assurant agreed to sell American Reliable Insurance Company and its general agency business for approximately $114 million, subject to closing and book-value adjustments; closing was anticipated in Q1 2015. It also acquired French mobile insurance administrator CWI Group for approximately €56 million (about $71 million), subject to conditions and a possible earnout.
- Other material items include the $25.7 million ACA insurer fee paid in Q3; $19.3 million of related expense amortization for the first nine months; and a $5.7 million Q3 expense from a change in the estimated fair value of the Iké option. No Q3 catastrophe losses above the company’s reporting threshold were recorded in Specialty Property; nine-month reportable catastrophe losses were $28.4 million.
- Risks include lender-placed insurance regulation, rate and placement reductions, class-action and other litigation, ACA claim and program-estimate uncertainty, catastrophe losses, investment and interest-rate exposure, foreign exchange, and execution/integration of acquisitions. Management said pending matters were not expected to materially affect financial condition, but individual-period results or cash flows could be affected. No material market-risk changes were reported; disclosure controls were deemed effective.
Important facts for investors to verify
- Whether ACA claim experience, risk-adjustment estimates and 2015 settlements align with assumptions, and whether planned Health pricing changes improve profitability.
- The impact of the lender-placed portfolio transfer, regulatory rate actions and lower placement rates on Specialty Property earnings and combined ratios.
- Whether mobile growth and fee-based expansion convert into sustainable segment income after associated claims and operating expenses.
- Closing terms and financial effects of the American Reliable sale and CWI Group acquisition, including sale adjustments, goodwill, and contingent consideration.
- Capital generation, available holding-company liquidity, subsidiary dividend capacity, debt covenants, and the pace of buybacks and dividends.
- Potential outcomes and accrual adequacy for lender-placed insurance litigation and regulatory matters; the filing does not provide a clear estimate of possible losses beyond accrued amounts.