Assurant, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2012. Amounts below are in millions of U.S. dollars unless otherwise stated. Assurant is a diversified insurer and related-services provider with operating segments in insurance products, specialty property, health, and employee benefits.
Financial performance and position
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total revenue | $2,129.3 | $2,062.9 | $4,202.2 | $4,099.6 |
| Net earned premiums and other considerations | $1,792.2 | $1,768.3 | $3,569.3 | $3,530.3 |
| Net investment income | $199.3 | $173.8 | $371.6 | $345.7 |
| Income before tax | $264.7 | $130.6 | $514.3 | $345.1 |
| Net income | $169.2 | $165.0 | $332.4 | $305.8 |
| Diluted earnings per share | $1.94 | $1.67 | $3.76 | $3.05 |
- Revenue rose 3% in Q2 and 3% year to date; net income increased 3% and 9%, respectively. Approximate net margins were 7.9% in Q2 2012 and 8.0% in Q2 2011, and 7.9% and 7.5% for the six-month periods.
- Q2 policyholder benefits fell to $872.0 million from $986.8 million, while underwriting, general and administrative expenses increased to $642.7 million from $598.7 million. Six-month benefits were $1,728.4 million versus $1,879.9 million; expenses were $1,252.8 million versus $1,187.3 million.
- Operating cash flow was $184.5 million for the six months, down from $323.8 million. Management’s cash-flow summary, which includes the effect of exchange-rate changes, reports $181.4 million versus $326.4 million. Investing activities provided $51.4 million; financing activities used $292.5 million. Cash and cash equivalents were $1,107.0 million at June 30, down $59.7 million from year-end.
- Total assets were $27,243.6 million and stockholders’ equity was $5,033.6 million at June 30. Debt was $972.3 million carrying value; senior-note principal totaled $975 million, with $500 million due in 2014 and $475 million due in 2034.
- Liquidity included $632.3 million of holding-company capital, of which $250 million was designated as a buffer against remote risks. The $350 million revolving facility had $330.2 million available; no facility loans or commercial paper were outstanding. The company reported compliance with credit-facility covenants.
- Dividends per share were $0.21 in Q2 and $0.39 for the first half, versus $0.18 and $0.34 in the prior-year periods. The company repurchased 6.97 million shares for approximately $259.4 million during the first half.
Material changes and segment results
- Specialty Property: Q2 net income rose to $92.3 million from $42.3 million, primarily reflecting $32.9 million lower after-tax catastrophe losses and higher lender-placed and multifamily business. Its Q2 combined ratio improved to 78.2% from 92.1%; six-month ratio was 74.8% versus 82.7%.
- Health: Q2 net income increased to $28.9 million from $5.2 million; six-month income was $40.5 million versus $12.4 million. Results included $13.9 million of after-tax income from a real estate joint venture in Q2 and the first half. Premiums declined amid policy lapses and lower sales, while expense reductions and favorable loss experience helped results. Q2 combined ratio improved to 96.5% from 101.0%.
- Employee Benefits: Q2 net income rose to $18.6 million from $8.5 million and first-half income to $27.7 million from $15.0 million, mainly on favorable claims experience. Premiums declined, including from the loss of two assumed disability clients. Q2 loss ratio improved to 66.7% from 73.9%; expense ratio increased to 37.5% from 35.1%.
- Solutions: Q2 net income was $40.4 million versus $39.2 million; first-half income was $83.8 million versus $76.1 million. Growth in service contracts and international business was partly offset by higher expenses and weaker domestic mobile experience. Management disclosed a domestic mobile client loss effective October 1, 2012, representing about $100 million of annualized net earned premium. A $33.2 million one-time correction increased reported gross written premiums but had no net-income impact because of an offsetting deferred commission.
- Corporate & Other: Q2 recorded an $11.1 million net loss versus $69.8 million income in Q2 2011; first-half loss was $24.9 million versus $57.2 million income. The prior-year periods included an $80 million tax benefit from releasing a capital-loss valuation allowance.
Outlook, risks and unusual items
- No specific consolidated earnings guidance was provided. Management expected modest full-year 2012 growth in Specialty Property premiums and fees, but anticipated that higher placement rates would ease as mortgage delinquencies resolve, reducing lender-placed revenue. Management also expected expense and non-catastrophe loss ratios to trend upward in that segment.
- Solutions management cited growth opportunities in mobile, preneed, service contracts, and Europe, while noting European uncertainty and the upcoming domestic mobile-client loss. Health management expected growth in affordable and supplemental plans and improvement in major medical sales in the second half; small-group sales remained weak. Employee Benefits prioritized voluntary products and expected overall 2012 premiums below 2011 levels because of the lost disability clients.
- Lender-placed insurance is subject to significant regulatory scrutiny. New York required the company to propose and justify amended rates; discussions continued. California had not approved the company’s proposed 18% rate decrease. The affected products generated approximately $36 million of Specialty Property net earned premiums in New York and $54 million in California during the first half. Further rate reductions or regulatory actions could materially affect results.
- Other risks include catastrophe losses, health-care reform and medical-loss-ratio requirements, claims and reserve assumptions, low interest rates and investment impairment, reinsurer and credit risk, and litigation or regulatory outcomes. The company reported ordinary-course litigation and did not expect pending matters to have a material adverse effect, but stated that outcomes cannot be predicted.
- Six-month investment income benefited from real estate joint ventures, partly offset by lower investment yields. First-half net realized investment gains were $25.7 million; net OTTI losses recognized in earnings were $1.8 million. Management noted that further impairments could result from economic or market deterioration.
- Adoption of revised insurance acquisition-cost accounting was retrospective and reduced December 31, 2011 stockholders’ equity by $153.0 million. The filing states that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Progress and financial impact of New York and California lender-placed insurance rate proceedings, and any related reviews by other regulators.
- Retention or replacement of the Solutions mobile client and the disability clients lost by Employee Benefits.
- Whether Health’s joint-venture investment contribution and favorable claims experience persist, and how Affordable Care Act requirements affect premiums, rebates, and profitability.
- Underlying operating cash generation, capital available at the holding company, subsidiary dividend capacity, and continued share repurchases and dividends.
- Investment-portfolio credit quality, realized and unrealized losses, mortgage-loan performance, and potential future impairments.