Assurant, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless stated otherwise.
Business context and reporting period
Assurant provides specialty insurance and related services across five segments: Solutions, Specialty Property, Health, Employee Benefits, and Corporate & Other. After a strategic review, the company decided to exit health insurance and focus on specialty housing and lifestyle protection. It also agreed to sell Assurant Employee Benefits.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $2,534.2 | $2,702.5 | $7,777.7 | $7,759.0 |
| Net income (loss) | $(7.0) | $140.3 | $75.8 | $421.2 |
| Diluted EPS | $(0.10) | $1.92 | $1.09 | $5.74 |
| Net investment income | $148.8 | $162.0 | $468.8 | $497.6 |
- Q3 revenue fell 6%; nine-month revenue was nearly unchanged. Q3 net loss primarily reflected Assurant Health’s losses, including adverse medical claims and exit-related reserve strengthening.
- Nine-month earnings also included $154.4 million after tax of health exit and disposal costs. Lower 2015 investment gains and investment income versus 2014 contributed to the year-to-date earnings decline.
- Segment net income in Q3: Solutions $52.4 million (up 1%); Specialty Property $87.3 million (down 17%); Health loss $144.4 million (versus $17.4 million loss); Employee Benefits $10.4 million (down 20%). Solutions’ Q3 result included a $4.5 million net tax benefit.
- Q3 Specialty Property loss ratio improved to 35.1% from 39.4%, while its expense ratio rose to 52.2% from 47.0%. Health’s combined ratio increased to 139.9% from 103.3%. Employee Benefits’ loss ratio rose to 68.6% from 67.4%.
- Operating cash flow was $529.5 million for the nine months, compared with $514.7 million in 2014; investing activities provided $70.4 million and financing activities used $325.3 million. MD&A presents operating cash flow of $480.2 million after specified classification and exchange-rate effects.
- At September 30, cash and equivalents were $1,543.9 million, total assets $30,586.1 million, stockholders’ equity $4,683.6 million, and debt $1,171.3 million. Debt was broadly unchanged from year-end 2014.
- The company reported $520.6 million of holding-company capital, including $250 million designated as a buffer for remote risks. Its $400 million revolving facility had $395.96 million available; there were no borrowings, and the company reported compliance with covenants.
Material changes and outlook
- Health: Assurant began winding down major medical operations and expected to substantially complete its market exit by the end of 2016. The company expected a further $60–$70 million of exit-related charges, in addition to costs already recorded, and estimated a $200 million capital infusion into Health subsidiaries over the remainder of 2015.
- The Health premium deficiency reserve reached $169.1 million at September 30, including a $46.6 million Q3 increase. Management said estimates could change with claims experience, Affordable Care Act recoveries, and the timing and level of expense reductions. The 2015 individual major medical block was expected to terminate January 1, 2016, with most claims expected to be paid by June 30, 2016.
- Employee Benefits: A definitive agreement provided for an approximately $940 million cash sale to Sun Life, primarily through a ceding commission. Closing was expected in Q1 2016, subject to regulatory approval and other customary conditions.
- Health supplemental and small-group self-funded lines and certain assets were sold to National General effective October 1, 2015 for $14 million cash consideration. The company also sold American Reliable in January 2015 for $117.9 million net cash consideration.
- Management expected 2015 Solutions revenue and net income to remain level with 2014, with mobile and vehicle service contract growth offset by program losses, retail service-contract declines, client marketing changes, and foreign exchange. It expected Specialty Property premiums and net income to decline from 2014; Employee Benefits premiums and fees to increase, with results affected by employment and capital-market conditions.
- Management stated it expected sufficient liquidity for the next 12 months, including debt interest and common dividends. It did not provide consolidated full-year earnings guidance in the supplied filing text.
Risks, contingencies, and unusual items
- Regulators were conducting a multistate targeted market-conduct examination of lender-placed insurance; approximately 42 jurisdictions were participating. The company also faced class-action litigation concerning lender-placed insurance and U.K. complaints involving historical payment-protection policy sales. Losses beyond recorded accruals could not be estimated; management did not believe pending matters were likely to materially affect financial condition.
- Health results depend materially on estimates under the Affordable Care Act’s reinsurance and risk-adjustment programs. The company reported $226.99 million in reinsurance recoverables and $172.72 million in net risk-adjustment receivables at September 30; actual settlements may differ substantially from estimates. No net risk-corridor recoverable was recorded for Q3 because payment uncertainty remained.
- Insurance subsidiary ratings were downgraded or placed under review in connection with the strategic changes, including downgrades for certain Health subsidiaries. Assurant’s debt ratings were reported unchanged, and the filing noted regulatory restrictions on subsidiary dividends.
- Investment portfolio risks include widening credit spreads, interest-rate and market movements, foreign exchange, mortgage exposure, and potential further impairments. Fixed-maturity unrealized losses increased versus year-end, while nine-month other comprehensive income was negative $309.7 million, largely reflecting security valuation and currency changes.
- The qualified pension plan was 93% funded at September 30, with a $61.6 million deficit, compared with 97% and $29.0 million at year-end 2014.
Most important facts for investors to verify
- Whether Health claims development, premium-deficiency reserves, ACA program recoveries, and remaining exit costs track management’s estimates.
- Completion, timing, approvals, and net proceeds of the Employee Benefits sale, and execution of the Health wind-down.
- Trends in lender-placed insurance placements, pricing, client retention, regulatory outcomes, and related litigation exposure.
- Whether holding-company liquidity, subsidiary dividend capacity, and the planned Health capital infusion remain adequate while buybacks and dividends continue.
- Investment portfolio credit quality, unrealized losses, income yields, and the effect of market and foreign-exchange movements on equity and earnings.