Assurant, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. Assurant provides insurance, protection products and related services across housing, lifestyle and preneed markets. Amounts below are in U.S. dollars, millions unless stated otherwise.
Financial results and position
| Metric | Q1 2018 | Q1 2017 / prior date |
|---|---|---|
| Total revenue | $1,638.6 | $1,551.5 |
| Income before taxes | $136.5 | $215.1 |
| Net income | $106.0 | $143.8 |
| Diluted EPS | $1.96 | $2.53 |
| Operating cash flow | $(75.7) in cash flow statement; MD&A reports $(77.9) including specified adjustments | $24.2 in cash flow statement; MD&A reports $29.0 including specified adjustments |
| Cash and cash equivalents | $2,342.0 | $996.8 at Dec. 31, 2017 |
| Total debt | $2,004.4 | $1,068.2 at Dec. 31, 2017 |
| Total assets / equity | $32,427.9 / $4,501.0 | $31,843.0 / $4,281.5 at Dec. 31, 2017 |
| Common dividend per share | $0.56 | $0.53 |
Revenue rose 6%, while net income fell 26%. The effective tax rate was approximately 22.3%, compared with 33.1% a year earlier. Lower income reflected $20.5 million of after-tax TWG acquisition-related expenses, lower deferred-gain amortization, weaker Health runoff results and higher catastrophe losses; tax savings partly offset these factors.
Operating cash use reflected significant payments for 2017 catastrophe claims and a $41.5 million settlement of an accrued indemnification liability from a prior business sale, partly offset by a $26.7 million derivative settlement. Investing activities provided $79.1 million; financing activities provided $1.34 billion, mainly from acquisition-related debt and preferred-stock issuances.
Segments and material changes
- Global Housing: Net income was $71.2 million, up 15%, helped by lower taxes. Results included $8.7 million of after-tax reportable catastrophe losses, mainly severe Northeastern winter storms. Lender-placed and mortgage-solutions activity declined; multi-family housing and international products grew.
- Global Lifestyle: Net income was $55.8 million, up 6%, and segment revenue increased 14% to $950.6 million, mainly on mobile-program and vehicle-protection growth. Higher benefits, acquisition costs and expenses pressured pre-tax segment income; the risk-business combined ratio rose to 99.1% from 92.2%.
- Global Preneed: Net income was $9.8 million versus $9.9 million. Revenue increased 3%, while expenses increased, including technology costs.
- Corporate and Other: Reported a $32.8 million net loss versus $11.7 million income, primarily reflecting TWG transaction costs, lower deferred-gain amortization and higher interest expense.
Net investment income increased 8% to $130.2 million. Fixed-maturity portfolio unrealized gains fell $242.4 million during the quarter, primarily due to higher Treasury yields and wider credit spreads. Stockholders’ equity increased, but accumulated other comprehensive income declined substantially, from $234.0 million to $51.7 million.
Outlook, financing, risks and unusual items
- Assurant expected Global Housing revenue to approximate 2017 levels; before tax reform, it expected lower earnings excluding catastrophes, with lender-placed and mortgage-solutions declines partly offset by multi-family growth. Management cited an expected effective tax rate of approximately 20%–21% for the segment.
- Management expected modest Global Lifestyle earnings growth before tax reform, revenue growth, and an effective tax rate of approximately 22%–24%. Mobile trade-in activity could vary with smartphone launches and carrier promotions.
- Management expected Global Preneed revenue and earnings to increase modestly before tax reform, with an expected effective tax rate of approximately 22%.
- The pending acquisition of The Warranty Group (TWG) was a major financing and execution matter. Assurant issued $900 million of senior notes, $400 million of subordinated notes and $287.5 million of mandatory convertible preferred stock. It expected to fund cash consideration and repay $590.2 million of TWG debt with financing and available cash. The transaction’s cash consideration was estimated at approximately $800 million to $1.0 billion under the stated share-price collar assumptions.
- Debt includes floating-rate borrowings and subordinated notes carrying a 7% coupon through March 2028, then a floating rate. Certain acquisition-related notes are subject to special mandatory redemption if the acquisition does not close. The filing states management believed liquidity would be sufficient for the next 12 months, including acquisition funding, debt service and dividends.
- Risk factors include catastrophe severity and frequency, reserve and pricing judgments, investment-market exposure, lender-placed insurance declines, regulatory limits on subsidiary dividends, and the ability to close and integrate TWG. Pending lender-placed insurance class actions seek refunds and other relief; management could not estimate possible losses beyond recorded accruals. A further $1.4 million was accrued for Penn Treaty guaranty-fund obligations, with a $6.3 million net liability reported.
- Accounting changes effective in 2018 included revenue recognition for certain service contracts and fair-value changes in equity securities through earnings. A $33.9 million cumulative accounting adjustment reduced AOCI and increased retained earnings; this is not current-period operating income.
Key facts for investors to verify
- Whether and when the TWG acquisition closed, final consideration and financing, and any integration costs or synergies.
- The reconciliation of operating cash flow figures in the cash flow statement and MD&A, and the timing of catastrophe-related claim payments.
- Debt service, floating-rate exposure, preferred dividends and the effect of any acquisition failure or rating changes.
- Trends in lender-placed insurance, mortgage solutions, mobile programs and vehicle protection, including claims ratios and reserve development.
- Potential outcomes of lender-placed insurance litigation and other contingencies beyond recorded accruals.
- The distinction between reported earnings and results affected by tax reform, acquisition expenses, deferred-gain amortization and accounting adoption.