Assurant, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparative period is Q1 2016. Unaudited consolidated financial statements, in U.S. dollars and millions except per-share data. Assurant provides insurance and related risk-management products focused on housing and lifestyle markets. The filing describes a multi-year shift away from health and employee benefits toward specialty housing and lifestyle businesses.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change / context |
|---|---|---|---|
| Total revenue | $1,551.5 | $2,147.5 | Down 28%; prior period included material AEB-sale investment gains and pension curtailment gain. |
| Net earned premiums | $1,050.3 | $1,415.2 | Down 26%; portfolio changes and business-specific revenue declines contributed. |
| Net investment income | $120.6 | $135.7 | Down 11%, primarily from lower yields and invested assets. |
| Income before taxes | $215.1 | $337.6 | Down 36%. |
| Net income | $143.8 | $220.4 | Down 35%. |
| Diluted EPS | $2.53 | $3.34 | Down 24%; weighted-average diluted shares fell to 56.8 million from 65.9 million. |
| Dividend per share | $0.53 | $0.50 | Higher year over year. |
Q1 2016 included $161.7 million of net realized investment gains, including $146.7 million related to the AEB sale, and a $29.6 million pension curtailment gain. Q1 2017 included $37.0 million of deferred-gain amortization and disposal gains, including AEB-related deferred-gain amortization. Management attributed the year-over-year net income decline mainly to lower investment gains and the absence of the curtailment gain; improved Health runoff results partly offset the decline.
Segments and operating metrics
- Global Housing: Net income was $61.9 million, down 19%. Net earned premiums, fees and other income were $531.7 million, down 8%. The risk-business combined ratio rose to 82.9% from 80.7%; fee-based business pre-tax margin fell to 8.8% from 11.0%. Lender-placed insurance and mortgage solutions were weaker; catastrophe losses were lower.
- Global Lifestyle: Net income was $52.4 million, up 27%, including $7.5 million of one-time items, primarily client recoverables. Revenue was $804.9 million, down 14%, largely reflecting a large service-contract client’s program-structure change that management said did not affect net income. Risk-business combined ratio improved to 92.2% from 94.6%; fee-based pre-tax margin improved to 7.1% from 4.5%.
- Global Preneed: Net income was $9.9 million, up from $5.7 million. The prior period included a $3.9 million adjustment for an older policy block.
- Corporate & Other / Health runoff: Corporate & Other net income was $11.7 million versus $113.6 million. Health runoff reported $7.9 million of net income versus a $27.2 million loss, a $35.1 million improvement, primarily from favorable reserve development and settlements.
Cash flow, balance sheet and capital
- Cash and cash equivalents were $874.5 million at March 31, 2017, down from $1,032.0 million at year-end 2016. Total assets were $29,567.7 million and stockholders’ equity was $4,158.8 million.
- Debt was $1,067.3 million, broadly unchanged from $1,067.0 million at year-end. Interest expense was $12.6 million, down from $14.5 million.
- The cash flow statement reports operating cash provided of $24.2 million, investing cash used of $58.8 million, and financing cash used of $127.7 million. MD&A presents operating cash provided as $29.0 million after specified exchange-rate and held-for-sale adjustments; verify the reconciliation.
- Holding-company capital was $604.4 million, including $250.0 million management intended to retain as a buffer for remote risks. Management said liquidity should be sufficient for the next 12 months, including debt interest and dividends. U.S. insurance subsidiaries could pay approximately $319 million in dividends without prior regulatory approval, subject to applicable constraints.
- Assurant repurchased 1.08 million shares for $104.7 million during the quarter; $578.1 million remained under the repurchase authorization. Dividends paid totaled $29.7 million.
Outlook, risks and unusual items
- Management expected 2017 Global Housing premiums and net income, excluding catastrophe losses, to decline versus 2016 as lender-placed insurance moved toward a normalized state; expense savings and growth in fee-based businesses were expected to partly offset declines.
- Management expected Global Lifestyle net income to increase in 2017, supported by connected-living, vehicle-protection and expense initiatives. Revenue was expected to decline due to the service-contract program change, which management said would not affect net income. Foreign-exchange movements, mobile-market variability, and continued declines in legacy credit and retail clients remained risks.
- Management expected Global Preneed fees and net income to increase, citing sales growth and operating efficiencies.
- On February 1, 2017, Assurant acquired Green Tree Insurance Agency for $125 million in cash, with a potential earn-out of up to $25 million. The acquisition added $57.9 million of goodwill and $77.5 million of agency-relationship and renewal-rights intangible assets.
- Lender-placed insurance regulatory settlement terms took effect in Q1. In April, after quarter-end, Assurant paid approximately $85 million for examination, compliance and monitoring costs. Settlement terms also require periodic rate refilings and changes to certain practices. The company faces related class actions; management said excess losses cannot be estimated, while stating pending matters were not believed likely to materially affect financial condition.
- The company accrued $12.5 million in 2016 for estimated guaranty-fund assessments related to Penn Treaty; a liquidation order was granted in March 2017. Management also noted that an individual legal or regulatory outcome could materially affect results or cash flow for a reporting period.
- Investment portfolio risks include interest-rate and credit-spread sensitivity, credit exposure, and real-estate loan concentrations. About 93% of fixed-maturity securities were rated Aaa/Aa/A or Baa at quarter-end. Management reported no material Q1 changes in market-risk assumptions and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Reconcile the $24.2 million cash-flow statement operating-cash figure with the $29.0 million MD&A figure and its stated adjustments.
- Assess recurring earnings separately from prior-year AEB-sale gains, pension curtailment gain, current-quarter one-time Lifestyle items, and deferred-gain amortization.
- Track lender-placed insurance placement rates, regulatory settlement costs and requirements, and the status and potential exposure of related litigation.
- Evaluate whether segment outlook assumptions—particularly Housing declines and Lifestyle growth—are borne out, including the effects of program changes, foreign exchange and catastrophe experience.
- Monitor holding-company liquidity, subsidiary dividend capacity, buybacks, and Green Tree acquisition performance and potential earn-out.