Assurant, Inc. — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing also reports unaudited quarterly results; “2011 Q4” is not the period covered by this annual report. Financial amounts below are in U.S. dollars, generally shown in millions.
Business context
Assurant is a specialized insurer operating through Assurant Solutions, Assurant Specialty Property, Assurant Health, Assurant Employee Benefits, and Corporate and Other. Its products include warranties and service contracts, preneed life insurance, lender-placed property insurance, health insurance, and employee benefits.
Financial performance and position
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Total revenue | $8,272.8 | $8,527.7 |
| Net earned premiums and other considerations | $7,125.4 | $7,403.0 |
| Net investment income | $689.5 | $703.2 |
| Net income | $545.8 | $279.2 |
| Diluted EPS | $5.58 | $2.50 |
| Operating cash flow, before exchange-rate effect | $855.3 | $540.7 |
- Revenue declined 3.0%; net earned premiums declined 3.8%, and net investment income declined 1.9%. Net margin was approximately 6.6%.
- Net income increased 96%, largely because 2010 included a $306.4 million non-cash goodwill impairment charge. Excluding that charge, 2011 net income of $545.8 million was down about 7% from 2010’s $585.6 million before impairment.
- Cash and cash equivalents were $1,166.7 million; investments were $14,026.2 million. Total assets were $27,115.4 million and stockholders’ equity was $5,026.9 million, up from $4,780.5 million.
- Debt was $972.3 million on the balance sheet; outstanding senior notes had $975 million aggregate principal. The $500 million 5.63% notes mature in 2014 and $475 million 6.75% notes mature in 2034. The company reported an 18% debt-to-capitalization ratio and compliance with credit-facility covenants.
- Cash flow from investing activities was negative $196.6 million and financing activities used $636.8 million. Financing outflows included $533.8 million of common-stock repurchases and $67.4 million of dividends.
- Insurance subsidiaries’ statutory capital and surplus totaled $2,311.5 million, compared with $2,328.3 million in 2010. Their maximum 2012 dividends to the holding company without prior regulatory approval were approximately $504 million.
Segments and changes versus 2010
| Segment | FY 2011 net income | FY 2010 net income | Key change |
|---|---|---|---|
| Assurant Solutions | $141.6 million | $103.2 million | Improved underwriting; international service-contract and credit growth helped offset domestic run-off. |
| Assurant Specialty Property | $305.1 million | $424.3 million | Lower earnings primarily reflected higher catastrophe losses; combined ratio rose to 81.9% from 73.3%. |
| Assurant Health | $40.9 million | $54.0 million | Lower premiums and Affordable Care Act rebate accruals; combined ratio was 98.8% versus 98.1%. |
| Assurant Employee Benefits | $43.1 million | $63.5 million | Less favorable disability and life claims experience; loss ratio rose to 72.2% from 69.6%. |
- Solutions’ gross written premiums increased 14% to $3,638.1 million, while net earned premiums declined slightly amid run-off of domestic credit and former-client service-contract business. Preneed face sales rose to $759.7 million.
- Specialty Property incurred $157.6 million in losses associated with Hurricane Irene, Tropical Storm Lee, Texas wildfires, and severe storms. Management cited catastrophe losses, policy placement rates, and mortgage origination volumes as significant drivers.
- Health recorded a $41.6 million estimated premium rebate for Affordable Care Act minimum medical loss ratio requirements. Individual and group premium volumes declined, while operating expenses fell through cost initiatives.
- Employee Benefits’ net earned premiums declined about 3%; disability and life results weakened, partly offset by improved dental experience.
Outlook, risks, and unusual items
- Management expected 2012 Solutions premiums and fees to grow modestly, Specialty Property premiums and fees to be broadly consistent with 2011, and Health sales of lower-cost supplemental and “affordable choice” products to continue growing. These are management expectations, not a quantified consolidated earnings forecast.
- Management expected Health’s new Aetna Signature Administrators network arrangement, effective March 2012, to broaden provider access and support major-medical sales. Specialty Property noted that product-mix changes could raise expense and non-catastrophe loss ratios.
- The $41.6 million Health rebate accrual remained an estimate; the final amount depended on claims experience and further regulatory interpretation, with final determination expected in mid-2012.
- An $80.0 million release of a capital-loss deferred-tax valuation allowance materially benefited 2011 results. The effective tax rate was 23.7%, compared with 54.0% in 2010.
- Assurant acquired SureDeposit in June 2011 for $45.1 million, expanding its multifamily-housing business. It also recorded a $7.5 million preneed reserve increase for unreported claims identified through use of the Social Security Administration Death Master File.
- On February 7, 2012, the company and two insurance subsidiaries received NYDFS subpoenas regarding lender-placed insurance and document-retention practices. Assurant said it was cooperating, disagreed with the regulator’s interpretation of its document-retention practices, and had modified practices pending resolution.
- Key risks include catastrophe exposure and reinsurance availability, claims-reserve adequacy, low interest rates and investment credit risk, health-care reform, regulatory limits on rates and subsidiary dividends, client and distribution concentration, and ratings downgrades. Moody’s had negative outlooks on the senior debt and certain life and health insurer ratings; S&P had downgraded two health/life subsidiaries in 2011.
- The company reported no 2011 goodwill impairment; $639.1 million of goodwill remained, concentrated in Solutions and Specialty Property. Assurant Solutions’ estimated fair value exceeded carrying value by 19.2%, but management disclosed that a 150-basis-point discount-rate increase or a 250-basis-point terminal-growth-rate reduction, individually, could eliminate that cushion.
- A new insurance acquisition-cost accounting standard scheduled for adoption in 2012 was preliminarily expected to reduce opening stockholders’ equity by $140–$150 million, net of tax; management expected no material net-income effect.
Most important facts for investors to verify
- Whether the final Health MLR rebate differs materially from the $41.6 million accrual, and how continuing health-care reforms affect enrollment, pricing, commissions, and profitability.
- Catastrophe losses, reinsurance recoveries and pricing, and the effect of the January 2012 catastrophe-bond and reinsurance placements on Specialty Property earnings.
- Progress and potential outcomes of the NYDFS lender-placed insurance inquiry and subpoenas, including any business, legal, or compliance consequences.
- Claims development and reserve adequacy, particularly for property and warranty, disability, preneed, and legacy reinsured businesses.
- Holding-company liquidity and subsidiary dividend capacity, including the distinction between the approximately $504 million ordinary 2012 dividend limit and the $523.9 million of net subsidiary distributions received in 2011.
- Investment portfolio credit quality, low-rate sensitivity, and the durability of earnings excluding the tax valuation-allowance benefit and the prior-year goodwill impairment comparison.