Assurant, Inc. — Q2 2009 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2009; filed August 5, 2009. Assurant is a specialized insurer operating through Assurant Solutions, Specialty Property, Health, Employee Benefits, and Corporate & Other. Unless noted otherwise, amounts below are in millions of U.S. dollars; the filing presents financial statements in thousands.
Financial performance and position
| Metric | Q2 2009 | Q2 2008 | Six months 2009 | Six months 2008 |
|---|---|---|---|---|
| Total revenues | $2,273.6 | $2,248.8 | $4,361.5 | $4,426.1 |
| Income before taxes | $281.5 | $249.4 | $439.4 | $535.3 |
| Net income | $193.3 | $190.0 | $273.9 | $376.8 |
| Diluted EPS | $1.63 | $1.59 | $2.31 | $3.15 |
| Net investment income | $174.9 | $201.2 | $353.4 | $399.0 |
| Net realized investment losses | $6.1 | $34.6 | $61.8 | $77.7 |
Q2 revenue rose 1.1% and net income rose 1.8%; first-half revenue fell 1.5% and net income declined 27.3%. Q2 net income benefited substantially from an $85.0 million after-tax Willis Limited settlement. First-half net income also included that gain, but was pressured by weaker underwriting and lower investment income. Q2 and first-half net investment income fell 13% and 11%, respectively, primarily due to lower average invested assets and yields.
Cash flow and liquidity: For the first half, operating cash flow was negative $173.8 million, investing cash flow was positive $5.9 million, and financing cash flow was negative $70.5 million. Cash and cash equivalents fell $231.5 million to $809.2 million. The MD&A also reports operating cash flow of negative $166.9 million including the foreign-exchange effect; the cash-flow statement presents the $6.8 million exchange-rate effect separately. Management said liquidity should be sufficient for the next 12 months.
Balance sheet at June 30: Total assets were $24.82 billion, total liabilities $20.46 billion, and stockholders’ equity $4.36 billion. Investments totaled $12.64 billion. Debt was $972.0 million, largely unchanged from year-end 2008. The $500 million revolving credit facility and commercial-paper program had no amounts outstanding; Assurant reported compliance with facility covenants. Cash and debt should be viewed in the context of the company’s insurance obligations and regulatory capital constraints.
Material changes and segment results
- Assurant Solutions: Q2 segment net income fell 14% to $27.9 million; first-half income fell 27% to $58.2 million. UK credit insurance losses reflected elevated unemployment. Domestic service-contract underwriting improved, while gross written premiums declined 19% in Q2 and 21% for the half, including reduced sales after a client bankruptcy and weaker retail and auto activity.
- Assurant Specialty Property: Q2 net income fell 30% to $91.2 million; first-half income fell 23% to $195.9 million. Lower creditor-placed homeowners premiums reflected servicer consolidation, fewer real-estate-owned policies, and higher catastrophe reinsurance costs. Combined ratios rose to 77.6% in Q2 and 76.0% for the half, from 69.3% and 68.4%.
- Assurant Health: Q2 swung to a $10.3 million net loss from $27.7 million income; first-half net income dropped to $4.3 million from $65.0 million. Higher medical utilization, unfavorable reserve development, and membership declines drove deterioration. The Q2 combined ratio was 105.9%, versus 94.4%; the half-year ratio was 101.9%, versus 93.0%. Management cited a $9.0 million after-tax reserve strengthening in the quarter.
- Assurant Employee Benefits: Q2 net income declined 35% to $12.1 million; first-half income declined 45% to $19.2 million. Lower premiums and investment income, alongside less favorable life, dental, and disability claims experience, weighed on results.
- Corporate & Other: Q2 net income was $72.4 million versus a $19.8 million loss a year earlier, primarily due to the Willis settlement. First-half segment loss narrowed to $3.7 million from $58.9 million.
Stockholders’ equity increased from $3.71 billion at December 31, 2008, largely reflecting $402.5 million of first-half other comprehensive income, including improved unrealized investment marks. Gross unrealized losses on fixed-maturity securities were $458.0 million at June 30, down from $771.4 million at year-end; equity-security unrealized losses were $85.2 million, down from $135.9 million.
Outlook, risks, contingencies, and unusual items
- No earnings guidance was provided. Management expected adequate liquidity over the next 12 months and anticipated catastrophe reinsurance costs to remain at elevated levels for the rest of 2009, excluding potential reinstatement premiums.
- Assurant obtained $150 million of multi-year, fully collateralized catastrophe reinsurance through Ibis Re, covering specified hurricane risks through April 2012.
- On July 30, 2009, S&P lowered ratings on two domestic operating insurers to A-; all seven domestic operating subsidiaries rated by S&P were then rated A-. This occurred after quarter-end.
- The SEC investigation into certain finite-reinsurance contracts continued. Assurant disclosed a verbal side agreement relating to one catastrophe-reinsurance contract, accounted for using reinsurance accounting. Management considered the impact of alternative accounting immaterial, but regulators could disagree; the SEC could seek penalties, other remedies, or a restatement. No civil-penalty accrual was recorded because probability and amount could not be reasonably estimated.
- London-market reinsurance disputes remain subject to negotiations, arbitrations, and litigation. Assurant recorded a $139 million settlement with Willis Limited in June 2009; the after-tax benefit was $85.0 million. Management considered existing accruals for remaining disputes adequate, while noting uncertainty of outcomes.
- Other notable exposures include investment impairment and credit risk, reserve adequacy, catastrophe losses, reinsurance recoverability, competitive and economic pressures, and regulatory or rating-agency capital requirements. Assurant reported $29.1 million of letters of credit outstanding.
- Adoption of revised debt-security impairment guidance reclassified $43.1 million after tax between retained earnings and accumulated other comprehensive loss, with no effect on total equity. First-half net OTTI losses recognized in earnings were $29.8 million.
Important facts for investors to verify
- Whether health claims utilization and reserve development stabilize, and whether premium actions offset higher claims costs.
- How much of reported earnings reflects the one-time Willis settlement, and the likely outcome and financial exposure from the SEC inquiry and remaining reinsurance disputes.
- Investment portfolio credit quality, future impairments, and the impact of market values and yields on investment income and capital.
- Effects of the S&P downgrade, subsidiary dividend limits, and regulatory or rating-agency capital requirements on holding-company liquidity.
- Whether operating cash generation recovers and whether elevated catastrophe reinsurance costs, business volumes, and client relationships affect subsequent results.