Assurant, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Assurant is a diversified insurer and related-services provider, reporting four operating segments—Solutions, Specialty Property, Health, and Employee Benefits—plus Corporate & Other. Dollar amounts below are in millions unless stated otherwise; the filing presents most financial statements in thousands.
Financial performance and position
- Q3 revenue: $2,258.7, up 5.3% from $2,145.1 a year earlier. Net earned premiums were $1,947.4; net investment income was $159.2.
- Q3 earnings: Net income was $128.8, up 2.0% from $126.3; diluted EPS was $1.68 versus $1.52. Income before tax declined to $194.0 from $208.6. Net margin was approximately 5.7%, compared with 5.9%.
- Nine-month results: Revenue rose 4.7% to $6,647.0, while net income fell 17.1% to $380.1. Diluted EPS was $4.84 versus $5.30. Lower investment income, the NYDFS settlement, higher tax expense tied to the Affordable Care Act (ACA), and increased interest expense contributed to the decline.
- Cash flow and liquidity: Operating cash flow was $724.0 for the nine months, versus $429.2 in 2012; investing cash flow was negative $641.6 and financing cash flow was positive $309.7. Cash and equivalents ended at $1,286.7, up from $909.4 at year-end. Management said liquidity was sufficient for the next 12 months. The $350 revolving facility had $344.4 available, with no borrowings outstanding.
- Debt and equity: Debt was $1,638.4, compared with $972.4 at December 31, 2012, following a $700.0 senior-note issuance in March. Total stockholders’ equity declined to $4,782.9 from $5,185.4, including a $444.1 nine-month other comprehensive loss, principally from lower unrealized securities gains. The company repurchased 6.17 million shares for approximately $305.5 and paid $55.8 in dividends during the nine months.
- Investment portfolio: Total investments were $14,874.0. Fixed-maturity fair value was $11,447.6, down from $12,171.6 at year-end; 64.2% of the portfolio was rated A or higher. Net investment income declined 9.6% for the nine months, primarily on lower yields and reduced income from real estate joint ventures.
Material changes and segment trends
- Solutions: Q3 segment net income was $36.2, slightly below $36.7; nine-month income fell 14.9% to $102.5. Growth in service contracts and fees was offset by unfavorable claims on an established domestic mobile program, a lost mobile client, and lower investment income. Excluding a $5.8 tax-liability release, Q3 segment earnings declined more materially.
- Specialty Property: Q3 segment net income rose to $115.1 from $89.4, aided by lender-placed growth and no reportable catastrophes (versus $17.9 after tax in Q3 2012). Nine-month income increased to $315.8 from $294.7, despite the $14.0 NYDFS settlement. Nine-month combined ratio was 77.3%, versus 76.5% in 2012.
- Health: Q3 segment net income declined to $6.6 from $11.3; nine-month income fell to $5.3 from $51.8. The nine-month comparison reflects weaker loss experience, ACA-related tax expense of $10.2, and $13.4 after-tax additional real-estate-joint-venture investment income in 2012. Q3 combined ratio was 99.3%, versus 97.0%.
- Employee Benefits: Q3 segment net income fell to $6.1 from $13.2; nine-month income declined to $23.7 from $40.9. Less favorable disability claims and lower investment income weighed on results. The nine-month loss ratio rose to 71.4% from 69.4%.
Outlook, risks, and unusual items
- No consolidated earnings or EPS guidance is provided. Management expected modest Solutions revenue growth for the rest of 2013, with expense initiatives intended to improve 2014 profitability; restructuring charges were expected. It anticipated Specialty Property revenue growth but flagged placement-rate changes, higher expenses, non-catastrophe claims, and catastrophe losses. Health premiums were expected to decline versus 2012, while insured lives could increase; ACA changes and higher non-deductible expenses were expected to continue affecting results. Employee Benefits premiums and fees were expected to remain broadly consistent with 2012, with additional expense actions planned.
- In October 2013, Assurant agreed in Florida to seek a 10% reduction in lender-placed hazard rates, subject to approval, and to eliminate commissions and client quota-share arrangements under the agreement. The new rates were expected to apply from Q1 2014; practice changes were expected about a year after the agreement.
- Field Asset Services was acquired on September 30 for $54.6. Assurant completed its purchase of Lifestyle Services Group on October 25 for consideration valued at about $172.2; purchase accounting was incomplete in the filing.
- Assurant settled with the NYDFS for $14.0 without admitting or denying wrongdoing and agreed to business-practice changes. Lender-placed insurance class actions remain pending; the company accrued an estimated loss, but said any excess loss range could not be estimated. Management did not believe pending matters were likely to materially harm financial condition, while noting possible effects on results or cash flow in an individual period.
- The ACA drove a $10.2 tax expense from revised estimates of non-deductible compensation costs. Health workforce reductions announced in October were expected to generate a $5.1 pretax severance and outplacement charge in Q4 2013. The company also expected up to $12.5 of additional pension contributions in the remainder of 2013; the qualified plan was 99% funded at quarter-end.
- Other material risks include regulatory or rate changes, catastrophe losses, reserve adequacy, investment-market and credit risk, low interest rates, dependence on clients and distribution partners, reinsurance recoverability, litigation, and execution and integration of acquisitions. The filing reported no material change in market-risk assumptions during Q3.
Important facts for investors to verify
- Whether mobile-program pricing and plan changes restore Solutions claims experience as management expected, and the effect of the retailer business discontinued in September.
- Florida rate filing approval and implementation, lender-placed insurance placement-rate trends, and any further regulatory or litigation developments.
- Health segment performance under ACA requirements, including claims experience, premium trends, tax costs, and the announced workforce reduction.
- Use of the 2013 note proceeds, including repayment of the $467.7 of debt due in February 2014, and the effect of higher debt and interest expense.
- Integration costs and purchase accounting for Lifestyle Services Group, and the performance and valuation of the acquired businesses.
- Investment income and unrealized portfolio values, alongside the company’s capital, dividend, and repurchase plans.