Business context and reporting period
Assurant, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2014. The insurer operates through Assurant Solutions, Assurant Specialty Property, Assurant Health, Assurant Employee Benefits, and Corporate & Other, offering specialized insurance and related services in North America and selected international markets. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2014 | Q2 2013 | H1 2014 | H1 2013 |
|---|---|---|---|---|
| Total revenue | $2,608.1 | $2,237.8 | $5,056.5 | $4,388.4 |
| Net earned premiums | $2,171.7 | $1,916.4 | $4,232.2 | $3,766.9 |
| Net income | $143.6 | $133.5 | $280.9 | $251.3 |
| Diluted EPS | $1.95 | $1.70 | $3.81 | $3.15 |
| Net investment income | $167.5 | $163.9 | $335.6 | $329.9 |
Q2 revenue rose 16.6% and net income rose 7.6% year over year; H1 revenue rose 15.2% and net income rose 11.8%. Q2 pretax income was $193.8 million versus $210.8 million, while lower income tax expense lifted net income. Consolidated net margin was approximately 5.5% in Q2 2014 versus 6.0% in Q2 2013; the filing does not present these margins directly.
- Assurant Solutions: Q2 segment net income increased to $59.5 million from $31.4 million, mainly on mobile business growth and favorable losses. Revenue increased 19% to $1,031.0 million. Management expects premiums and fees to increase in 2014, primarily from mobile, with quarterly variability from device launches, client marketing and seasonality.
- Assurant Specialty Property: Q2 net income declined 36% to $68.3 million. Its combined ratio worsened to 89.1% from 78.2%, as non-catastrophe losses, severe weather, adverse reserve development and high-severity fire claims offset revenue growth. Management expects modest revenue growth, an elevated non-catastrophe loss ratio and higher expense ratio; a possible loss of a client could materially affect results.
- Assurant Health: Q2 recorded a $2.5 million net loss versus $4.1 million income; H1 loss was $9.6 million versus $1.3 million. Q2 loss ratio rose to 78.1% from 75.2%. Management expects 2014 premiums and fees to increase with ACA-related individual sales, but results depend on emerging claims and uncertain risk-program recoveries; it also expects a high effective tax rate.
- Assurant Employee Benefits: Q2 net income increased 26% to $14.4 million; H1 rose 61% to $28.3 million, supported by favorable disability and life experience and voluntary-product growth. Management expects full-year premiums and fees to increase, with expense savings intended to offset growth costs.
Cash flow, balance sheet and liquidity
- At June 30, total assets were $30.6 billion, total investments $14.7 billion, cash and cash equivalents $1.4 billion, and stockholders’ equity $5.35 billion. Cash declined $318.3 million from year-end 2013.
- H1 cash from operating activities was $261.8 million versus $273.7 million in 2013; investing activities provided $34.6 million versus using $343.6 million; financing activities used $605.8 million versus providing $443.5 million. Financing outflows included $467.3 million of debt repayment, share repurchases and dividends. MD&A also reports operating cash flow of $252.9 million including exchange-rate effects.
- Debt was $1.17 billion, down from $1.64 billion at December 31, 2013, primarily following repayment of $500 million principal on February 18. The company had no borrowings under its $350 million revolving facility; $345.7 million was available at quarter-end. It reported compliance with facility covenants.
- Management reported $559.1 million of holding-company capital available for corporate purposes, including a $250 million buffer for remote risks, and said liquidity should be sufficient for the next 12 months. The 2014 ordinary-dividend capacity of U.S.-domiciled insurance subsidiaries was approximately $484 million, subject to regulatory limits.
- The company repurchased 1.19 million shares for $79.5 million during H1; $625.4 million remained under authorization. The quarterly dividend increased to $0.27 per share from $0.25.
Material changes, outlook and risks
- A $20.8 million one-time tax benefit from converting certain Canadian branch operations to foreign corporate entities contributed to Q2 results. H1 also included $5.7 million of tax expense related to estimated non-deductible ACA compensation expenses.
- ACA premium-stabilization programs materially affect Assurant Health estimates. H1 reinsurance recoveries recorded were $80.0 million and net risk-adjustment premiums were $61.5 million; settlement of 2014 program amounts was scheduled for 2015. Management cautioned that estimates may change substantially as experience develops. Assurant Health was not participating in insurance marketplaces for 2014, so risk corridors had no 2014 impact.
- Assurant acquired StreetLinks on April 16 for $65.9 million, including contingent consideration, and recorded $14.7 million of goodwill and $48.0 million of amortizable intangible assets. It also completed a $21.0 million payment for its 40% interest in Iké’s Latin American operations and paid $31.9 million of delayed and contingent LSG acquisition obligations.
- Specialty Property faces lender-placed insurance rate and practice changes, expected placement-rate declines, elevated claims, and regulatory scrutiny. Lender-placed products represented 73% of segment premiums in H1; management cited a possible client loss that could materially affect the segment.
- The company disclosed lender-placed insurance class actions and regulatory matters, with an accrual for estimated litigation losses; any excess loss range was not estimable. A UK PPI matter was reasonably possible, but no loss estimate was available. Management said pending matters were not currently expected to materially affect financial condition, though an individual period’s results or cash flows could be affected.
- Other stated risks include catastrophe losses, reserve adequacy, investment and interest-rate exposure, reinsurance availability and counterparty risk, regulatory and ACA changes, client concentration, foreign-exchange movements, cyber threats, and acquisition integration. Management said market-risk assumptions were not materially changed during the quarter and reported effective disclosure controls.
- No consolidated full-year earnings or EPS guidance is provided in the supplied filing text. Segment outlook statements are summarized above; management cautioned that interim results are not necessarily indicative of full-year results.
Most important facts for investors to verify
- Whether ACA claims experience and the estimated $141.6 million combined H1 reinsurance recoveries and net risk-adjustment premiums translate into collectible cash and remain supportable as estimates develop.
- Whether Specialty Property claims, lender-placed rate and placement changes, regulatory requirements, and the potential client loss further pressure segment earnings.
- How much of reported earnings growth depends on the $20.8 million one-time tax benefit, and whether segment operating trends persist without it.
- Whether liquidity, subsidiary dividend capacity and capital remain adequate after debt repayment, share repurchases, dividends and any further pension contributions.
- Developments in lender-placed insurance litigation and the UK PPI review, for which potential losses beyond recorded amounts were not quantified.