Assurant, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2009. Dollar amounts are in thousands unless otherwise stated. Assurant provides specialized insurance and related services through Assurant Solutions, Specialty Property, Health, Employee Benefits, and Corporate & Other.
Financial performance
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Total revenue | $2,156,873 | $1,954,535 | $6,518,359 | $6,380,620 |
| Net earned premiums and other considerations | $1,874,398 | $1,984,136 | $5,624,843 | $5,921,069 |
| Net investment income | $172,924 | $192,314 | $526,335 | $591,299 |
| Net realized investment gains (losses), including impairments | $19,866 | $(299,205) | $(41,965) | $(376,922) |
| Income (loss) before tax | $209,066 | $(163,520) | $648,451 | $371,822 |
| Net income (loss) | $144,730 | $(111,429) | $418,633 | $265,355 |
| Diluted earnings per share | $1.22 | $(0.94) | $3.54 | $2.22 |
Q3 net income improved by $256.2 million year over year; nine-month net income increased 58%. The comparison benefited substantially from sharply lower investment impairment losses and the absence of 2008 hurricane losses. Revenues rose despite lower premiums, in part because 2008 included significant investment losses and 2009 included higher fees and other income. Net investment income declined in both periods, primarily due to lower average invested assets and yields.
Balance sheet, cash flow and liquidity
- At September 30, 2009, total assets were $25.67 billion, total liabilities $20.76 billion, and stockholders’ equity $4.90 billion, up from $3.71 billion at year-end 2008. Accumulated other comprehensive income improved from a $670.9 million loss to $122.4 million income, primarily reflecting investment valuation recovery.
- Cash and cash equivalents were $1.24 billion. Total investments were $13.14 billion, including $9.96 billion of fixed-maturity securities and $502.9 million of equity securities.
- Debt was $972.0 million carrying value. Senior notes have $975 million aggregate principal, with $500 million due in 2014 and $475 million due in 2034. The $500 million revolving facility expires in April 2010; no borrowings were outstanding. Assurant said it was not relying on the facility’s $30 million Lehman Brothers commitment and was in covenant compliance.
- For the nine months, the cash flow statement reports operating cash flow of $213.0 million, investing cash flow of $122.1 million, and financing cash outflow of $147.8 million; cash increased $195.2 million. MD&A also cites operating cash flow of $220.9 million, which includes the $7.9 million foreign-exchange effect.
- Management stated it expected sufficient liquidity for the next 12 months. Subsidiaries paid $336.8 million in dividends or returns of capital during the period; distributions without prior regulatory approval were limited to approximately $437.0 million for 2009.
Segment results and material changes
- Assurant Solutions: Q3 segment net income rose to $31.6 million from $20.4 million; nine-month income fell to $89.8 million from $100.3 million. Domestic service-contract underwriting improved, but gross written premiums declined 16% in Q3 and 20% year to date, with client bankruptcy, weaker retail and auto sales, credit-line runoff, foreign exchange, and UK unemployment among the factors. UK credit insurance remained weak.
- Assurant Specialty Property: Q3 segment net income rose to $103.2 million from $30.9 million; nine-month income increased to $299.1 million from $286.7 million. Lower catastrophe losses drove the improvement: no reportable catastrophe losses were recorded in 2009, compared with 2008 hurricane losses. Premiums declined with lower creditor-placed real-estate-owned policies and servicer consolidations. Management expected these premium pressures to continue over the next two years. Q3 combined ratio was 73.5%; nine-month ratio was 75.2%.
- Assurant Health: Q3 segment loss was $4.8 million versus income of $30.2 million; nine-month loss was $0.5 million versus income of $95.2 million. Higher medical utilization, unfavorable reserve development, premium and membership declines, and a $12.5 million pre-tax charge for a South Carolina Supreme Court ruling weighed on results. Combined ratios were 104.2% for Q3 and 102.7% year to date. The company estimated H1N1 vaccine administration and related services could add $8–$10 million to claims over six to eight months.
- Assurant Employee Benefits: Q3 net income fell to $11.5 million from $21.5 million; nine-month income fell to $30.6 million from $56.4 million. Premiums and investment income declined, while claims experience worsened across product lines. Nine-month loss ratio increased to 72.7% from 69.7%.
- Corporate & Other: Q3 segment income was $3.3 million versus a $214.4 million loss; nine-month loss narrowed to $0.4 million from $273.3 million. Comparisons reflect improved investment results and a $139 million settlement with Willis Limited, recorded in Q2 2009, as well as lower prior-year impairment losses.
Outlook, risks and unusual items
- No specific consolidated earnings or revenue guidance was provided. Management highlighted economic and market conditions, unemployment, claims and reserve adequacy, catastrophe losses, investment values and impairment judgments, reinsurance availability and collectability, regulation, ratings, and competitive pressures as risks.
- Assurant adopted revised debt-security impairment guidance in April 2009. It recorded $32.4 million of net impairment losses in earnings for the first nine months and reclassified non-credit impairment components to other comprehensive income. Management cautioned that a weak or worsening economy could result in further impairments.
- Fixed-maturity unrealized losses were $164.6 million at September 30, down from $771.4 million at year-end 2008; equity-security unrealized losses were $48.2 million, down from $135.9 million. The filing reported that 8% of fixed maturities were rated Ba or lower. Management reported improved credit markets but identified possible additional impairment exposure.
- The SEC investigation into certain finite reinsurance contracts continued. Assurant disclosed a verbal side agreement relating to an expired catastrophe reinsurance contract, said it was accounted for as reinsurance, and stated regulators could disagree. The company could not estimate possible penalties and noted a possible restatement position by the SEC. Several individuals had outstanding Wells notices; the investigation’s outcome and timing were uncertain.
- Other contingencies include ongoing disputes over legacy London-market reinsurance programs and a CMS inquiry concerning Assurant Health’s interpretation of Medicare Secondary Payer requirements. Management said it believed existing accruals for remaining reinsurance disputes were adequate; it could not estimate possible loss related to the CMS matter and did not consider a loss probable.
- The qualified pension plan remained underfunded by approximately $200.9 million. Assurant contributed $30 million during the first nine months and expected to contribute another $10 million in 2009. A lower assumed long-term return on plan assets was expected to increase 2009 pension expense by approximately $9.2 million.
- Assurant repurchased 1.12 million shares for $31.9 million during the first nine months. The quarterly dividend was $0.15 per share; future dividends remain subject to Board discretion and subsidiary dividend capacity.
Important facts for investors to verify
- Whether underlying operating earnings remain strong after separating investment gains, impairments, catastrophe comparisons, and the Willis settlement.
- Whether Health claims trends, reserve development, H1N1 costs, and the South Carolina ruling charge continue to pressure results.
- Whether premium declines and customer or distribution changes persist in Solutions, Specialty Property, and Employee Benefits.
- How investment credit quality, unrealized losses, impairment assumptions, and exposure to lower-rated securities evolve.
- Developments in the SEC investigation, legacy reinsurance disputes, and the CMS matter, including any effect on financial statements or capital.
- Holding-company liquidity, subsidiary dividend capacity, the April 2010 revolving-credit-facility expiry, and the cash-flow presentation difference noted above.