Assurant, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Amounts are in U.S. dollars and millions, except per-share data. Assurant provides insurance, protection products and related services across Global Housing, Global Lifestyle, Global Preneed, and Corporate and Other.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $2,270.3 | $1,586.4 | $5,740.6 | $4,738.4 |
| Income before tax | $75.8 | $(107.6) | $290.6 | $286.2 |
| Net income | $53.0 | $(57.3) | $226.0 | $206.7 |
| Net income attributable to common stockholders | $48.3 | $(57.3) | $216.5 | $206.7 |
| Diluted EPS | $0.76 | $(1.05) | $3.72 | $3.73 |
- Q3 revenue increased 43% year over year; nine-month revenue increased 21%. The TWG acquisition, completed May 31, contributed results from June 1 onward, making comparisons less like-for-like.
- Net earned premiums were $1,853.6 in Q3 and $4,316.8 for nine months. Net investment income was $151.8 and $417.6, respectively. Q3 investment income included acquired TWG assets and consolidated investment entities.
- For Q3, lower catastrophe losses drove the return to profit: after-tax reportable catastrophes were $67.7 versus $191.8 in Q3 2017. Nine-month after-tax reportable catastrophes were $74.1 versus $192.4.
- Global Lifestyle Q3 net income was $75.9, including $29.9 from TWG; Global Housing earned $19.4 after a $110.3 loss in the prior-year quarter; Global Preneed earned $16.8 versus $12.3.
- Global Housing’s risk-based combined ratio was 103.4% in Q3 versus 154.9% a year earlier; Global Lifestyle’s was 97.2% versus 99.2%. Global Lifestyle’s fee-based, capital-light business pre-tax margin was 5.3% versus 3.8%.
- Nine-month operating cash flow was $454.6, compared with $366.4. Investing used $1,904.4, principally reflecting TWG and investment activity; financing provided $1,790.4, primarily from acquisition-related debt and preferred stock issuance. Cash increased $309.8 to $1,306.6.
- At September 30, total assets were $43,443.1, total liabilities $38,203.4, and total equity $5,239.7. Debt was $2,005.4, up from $1,068.2 at year-end 2017. The $450 revolving credit facility had no borrowings.
- Management reported $473 of holding-company capital available for corporate uses, within $621 of holding-company cash and liquid marketable securities; $250 of that capital was intended as a catastrophe-risk buffer. Management stated liquidity should be sufficient for the next 12 months.
Material changes and unusual items
- TWG acquisition: Total consideration was approximately $2,466, comprising cash, repayment of TWG debt and 10.4 million newly issued Assurant shares. TWG contributed $858.7 of revenue and $21.7 of net income from June through September. Nine-month results included $53.1 of pre-tax TWG transaction and integration expenses; management cited $58.6 of after-tax acquisition and integration charges in its year-over-year earnings discussion.
- Mortgage Solutions sale: Sold August 1 for $36.7, including working-capital adjustment, plus potential future payments. The sale produced a $41.0 pre-tax loss. The business’s exit also reduced fee revenue.
- Argentina: After Argentina was classified as highly inflationary, the functional currency of Assurant’s subsidiaries there changed to the U.S. dollar on July 1. Remeasurement generated $17.9 of pre-tax losses in Q3; the filing says management does not anticipate ongoing remeasurement to have a material effect, while noting foreign-exchange volatility.
- Investments and comprehensive income: Nine-month net realized investment losses were $16.6 versus gains of $25.1 a year earlier. Falling fixed-income values reduced fixed-maturity unrealized gains by $458.7 during the first nine months; other comprehensive loss was $379.8.
- Capital actions: The company issued $1.3 billion of notes and $276.4 of mandatory convertible preferred stock to help finance TWG. The preferred stock carries a 6.50% dividend and converts in March 2021. Assurant repurchased $83.2 of common stock and paid $96.1 in common dividends during the first nine months.
Outlook, risks and contingencies
- Management expected 2018 Global Housing net income excluding catastrophes to improve after a roughly 20%–21% effective tax rate, but to decline before the tax benefit, reflecting lender-placed insurance pressures. It expected revenue contraction versus 2017, while excluding the sold Mortgage Solutions business, growth in multifamily housing and specialty property offerings.
- Management expected Global Lifestyle net income to increase with TWG contributions, synergies, organic growth and a roughly 22%–24% effective tax rate. Growth expectations included Connected Living and Global Automotive; discontinued Financial Services partnerships and currency volatility were offsets.
- Management expected modest Global Preneed revenue and net-income growth; the expected effective tax rate was approximately 22%. The filing does not provide consolidated earnings-per-share guidance.
- Hurricane Michael, which struck in October, was estimated to cause $75–$105 of pre-tax losses, below the $120 per-event catastrophe reinsurance retention. The estimate was preliminary and expected to affect Q4 results.
- Key risks include catastrophe severity, reserve adequacy, TWG integration and synergies, lender-placed insurance declines, client or distribution losses, investment-market and interest-rate movements, foreign exchange, reinsurance availability, cyber and data risks, regulation, litigation and potential goodwill or intangible-asset impairment.
- Assurant faces lender-placed insurance class actions and other legal and regulatory matters. Management said excess losses cannot be estimated and could affect an individual period, but did not believe pending matters were likely to materially affect financial condition overall. The filing also reports a $6.4 net liability for Penn Treaty guaranty-fund obligations.
- Credit ratings were lowered in connection with TWG and its financing: Moody’s lowered the senior debt rating to Baa3 and S&P lowered the holding-company rating to BBB; both reported stable outlooks. A.M. Best affirmed legacy Assurant ratings, while assigning TWG entities higher financial-strength ratings.
- Disclosure controls were considered effective, but TWG was excluded from the quarter’s internal-control evaluation while Assurant assessed its controls. TWG represented 26% of assets at September 30.
Important facts for investors to verify
- How much of reported growth and future earnings comes from TWG, and whether expected synergies offset integration costs and acquisition-related debt expense.
- Whether lender-placed insurance declines, catastrophe losses and the Global Housing combined ratio improve as management expects; also track the Q4 impact of Hurricane Michael.
- How cash generation, holding-company capital and insurance-subsidiary dividend capacity compare with debt service, preferred dividends, buybacks and integration needs.
- Whether investment losses, interest-rate and credit-spread movements, and Argentina currency remeasurement affect asset values or earnings further.
- The development of legal and regulatory exposures, reinsurance recoverables and reserve estimates, and the completion of TWG’s internal-control evaluation.
- The Board authorized an additional $600 million share-repurchase program on November 5, 2018; verify subsequent repurchases and their effect on liquidity and share count.