Assurant, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016; filed November 1, 2016. Unless stated otherwise, amounts below are in U.S. dollars. The filing presents financial statement amounts in thousands.
Business context
Assurant provides insurance and related services focused on mobile devices, lifestyle protection and specialty housing. The company was exiting health insurance by year-end 2016 and sold Assurant Employee Benefits to Sun Life on March 1, 2016, primarily through reinsurance transactions. These changes materially affect comparisons with 2015.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $1.834B | $2.534B | $5.779B | $7.778B |
| Net income (loss) | $144.4M | $(7.0)M | $534.0M | $75.8M |
| Diluted EPS | $2.37 | $(0.10) | $8.46 | $1.09 |
| Net income margin | 7.9% | (0.3)% | 9.2% | 1.0% |
| Net investment income | $124.8M | $148.8M | $380.3M | $468.8M |
| Dividends per share | $0.50 | $0.30 | $1.50 | $0.87 |
Reported earnings include substantial nonrecurring or transaction-related items, particularly deferred-gain amortization and gains associated with the Employee Benefits sale. Q3 included $135.8M of amortization of deferred gains and disposal gains. Nine-month results included $309.3M of that revenue, $194.0M of net realized investment gains and a $29.6M pension curtailment gain. The reported margin therefore should not be treated as a direct measure of recurring profitability.
- Q3 segment results: Assurant Solutions net income was $42.7M, down from $52.4M; Specialty Property was $44.6M, down from $87.3M; Health lost $1.7M versus a $144.4M loss; Corporate & Other earned $58.9M versus a $12.8M loss.
- Nine-month segment results: Solutions earned $151.2M versus $167.6M; Specialty Property earned $177.8M versus $249.9M; Health lost $34.3M versus a $352.1M loss. Employee Benefits contributed $10.5M before its March sale.
- Balance sheet at September 30: Total assets were $30.284B; total liabilities $25.779B; stockholders’ equity $4.505B. Total investments were $12.033B and cash and cash equivalents $1.117B. Debt was $1.166B, compared with $1.165B at year-end 2015.
- Cash flows, nine months: Operating activities used $43.1M, versus $529.5M provided in 2015; investing activities provided $631.3M, versus $70.4M; financing activities used $760.3M, versus $325.3M. The decline in operating cash flow primarily reflected Health runoff claims paid without corresponding premiums. Financing outflows included $674.3M of share repurchases and $95.0M of dividends.
- Liquidity and capital: Management reported $874.0M of holding-company capital, including $250M reserved as a buffer for remote risks. The $400M revolving facility had $396.0M available; there were no borrowings and the company reported compliance with covenants. Management said liquidity was sufficient for the next 12 months.
Changes, outlook and notable items
- Revenue and net investment income declined year over year, in part because of the Health runoff and Employee Benefits sale. Reported net income rose sharply, reflecting lower Health losses and the sale-related gains, among other items.
- Solutions’ Q3 earnings were pressured by lower mobile repair and logistics volumes, technology-system costs, and declines in legacy service-contract and credit businesses. Management expected full-year 2016 Solutions net income to decline modestly from 2015, while premiums and fees were expected to increase with mobile and vehicle-protection growth.
- Specialty Property earnings fell amid higher catastrophe claims and continued normalization in lender-placed insurance. Management expected 2016 net income and net earned premiums to decline from 2015. Hurricane Matthew losses, still being assessed at filing, were estimated at up to $70M after tax.
- The company estimated total Health-exit costs of $303.2M, including premium-deficiency charges. Future cash payments were expected to be substantially complete by year-end 2016, with some final wind-down payments extending into 2018.
- During the first nine months, Assurant repurchased 8.43M shares for $687.3M, averaging $81.54 per share; $264.8M remained under the authorization at September 30. The board’s timing and amount of future repurchases would depend on business and market conditions.
- Risks and contingencies include lender-placed insurance regulation and litigation, a multistate market-conduct examination involving 44 jurisdictions, catastrophe exposure, reserve and investment valuation uncertainty, and reinsurance counterparty risk. The company recorded an $18M expense for an estimated indemnification related to a prior disposition. Management said pending legal matters could affect an individual period’s results or cash flows, but did not expect them to materially affect financial condition. Potential Penn Treaty guaranty-fund assessments were not expected to be material.
- Health-program recoveries remain uncertain: the filing disclosed $104.8M of risk-corridor receivables but no net receivable was recorded because HHS payments were uncertain. The company also reported $66.4M of net risk-adjustment receivables.
Important facts for investors to verify
- How much of reported earnings and future revenue reflects the deferred gains from the Employee Benefits sale, and how quickly will the remaining deferred gain be recognized?
- Whether Health runoff costs, claims, receivables and subsidiary dividends develop as expected through the planned exit.
- Actual Hurricane Matthew losses and subsequent catastrophe experience, alongside Specialty Property’s lender-placed placement rates, pricing and client retention.
- Recurring profitability and cash generation after adjusting for sale-related gains, realized investment gains, pension curtailment and other unusual items.
- Developments in lender-placed insurance regulation and litigation, the prior-disposition indemnity estimate, and the collectability of health-program and reinsurance recoverables.
- Whether share repurchases and dividends remain consistent with liquidity, regulatory capital needs and the company’s stated capital priorities.