Assurant, Inc. — 2012 Form 10-K Summary
Business context and reporting period
Assurant is a U.S.-based provider of specialized insurance and related services, operating through Assurant Solutions, Assurant Specialty Property, Assurant Health, Assurant Employee Benefits, and Corporate and Other. This annual report covers the fiscal year ended December 31, 2012; the filing also provides fourth-quarter results. Unless noted otherwise, financial amounts below are in U.S. dollars and millions.
Financial performance and position
| Metric | 2012 | 2011 |
|---|---|---|
| Total revenue | $8,508.3 | $8,272.8 |
| Net income | $483.7 | $539.0 |
| Diluted EPS | $5.67 | $5.51 |
| Net investment income | $713.1 | $689.5 |
| Net cash from operating activities, per cash flow statement | $679.7 | $855.3 |
| Cash and cash equivalents at year-end | $909.4 | $1,166.7 |
| Total investments | $14,976.3 | $14,026.2 |
| Total assets | $28,946.6 | $27,019.9 |
| Debt carrying value | $972.4 | $972.3 |
| Stockholders’ equity | $5,185.4 | $4,874.0 |
Revenue increased 2.8%, while net income declined 10.3%. Net margin was approximately 5.7%, compared with 6.5% in 2011. Diluted EPS rose 2.9%, supported in part by a lower weighted-average share count following repurchases. Cash flows used in investing and financing were $449.9 million and $480.6 million, respectively. The filing reports operating cash flow of $673.2 million in the MD&A narrative, differing from the $679.7 million in the consolidated cash flow statement.
Senior notes had $975 million aggregate principal: $500 million at 5.63% due in 2014 and $475 million at 6.75% due in 2034. The $350 million revolving credit facility was undrawn at year-end, with $19.8 million of letters of credit outstanding and $330.2 million available. The company reported an 18% debt-to-capitalization ratio under its credit-facility covenant. It held $781.8 million of holding-company capital, including $250 million designated as a buffer for remote risks; insurance-subsidiary dividends are subject to regulatory limits.
Segments and changes versus 2011
| Segment | 2012 net earned premiums and other considerations | 2012 net income | 2011 net income | Notable year-over-year change |
|---|---|---|---|---|
| Assurant Solutions | $2,579.2 | $123.8 | $136.1 | Net income down 9%; premium revenue up 6%. |
| Assurant Specialty Property | $2,054.0 | $305.0 | $303.7 | Net income broadly flat despite higher catastrophe losses; combined ratio rose to 83.3% from 82.0%. |
| Assurant Health | $1,589.5 | $52.0 | $40.9 | Net income up 27%, while premium revenue fell 7.5%. |
| Assurant Employee Benefits | $1,014.3 | $58.1 | $43.1 | Net income up 35%, while premium revenue fell 4.7%. |
Consolidated revenue rose 2.8%, led by Solutions and Specialty Property growth and higher fees. Policyholder benefits declined to $3,655.4 million from $3,749.7 million, but selling, underwriting and general expenses increased to $4,034.8 million from $3,756.6 million. The 2011 net income included an $80 million tax benefit from releasing a capital-loss valuation allowance; this was the main reason reported 2012 net income fell despite improved results in Health and Employee Benefits. The effective tax rate was 36.2% in 2012 versus 23.7% in 2011.
Outlook, risks, contingencies, and unusual items
- Management outlook: For 2013, management expected modest premium growth at Solutions; slightly higher Specialty Property revenue; Health premium and fee declines and a higher loss ratio; and Employee Benefits premiums and fees broadly consistent with 2012. These are management expectations, not formal earnings guidance. Management also expected a 50-basis-point reduction in the discount rate for new long-term disability claims to 4.25%, reducing Employee Benefits net income by about $4 million.
- Catastrophes: Specialty Property recorded $250.2 million of reportable catastrophe losses before tax in 2012, primarily from Superstorm Sandy, versus $157.6 million in 2011. After-tax catastrophe losses were $162.6 million for the year; $135.0 million occurred in the fourth quarter.
- Regulatory exposure: NYDFS inquiries and discussions over lender-placed insurance rates and practices remained ongoing. California agreed to a 30.5% rate reduction for affected lender-placed hazard policies, effective for policies issued or renewed from January 19, 2013. The filing warns that regulatory outcomes or further rate reductions could materially affect results. Lender-placed products generated about 71% of Specialty Property premiums and about 90% of segment net income in 2012; management expected placement rates eventually to decline.
- Other unusual items: Solutions recorded a $26.5 million pretax impairment of acquired U.K. mortgage-broker intangible assets and a $11.7 million pretax workforce restructuring charge in 2012; after-tax impacts were $20.4 million and $7.7 million, respectively. The fourth quarter also included the intangible impairment. No goodwill impairment was recorded in 2012; goodwill was $640.7 million, and Solutions’ estimated fair value exceeded book value by 10.5%, with sensitivity to valuation assumptions.
- Insurance and investment risks: Key exposures include reserve adequacy, catastrophe severity and reinsurance availability or collectability, low interest rates, investment credit and market risk, and regulatory limits on rates and dividends. Reinsurance recoverables were $6,141.7 million, including $3,619.7 million relating to The Hartford and John Hancock; most assets backing those large arrangements were held in trusts. The Hartford’s rating was under review with negative implications.
- Health reform and litigation: Affordable Care Act provisions, including minimum medical loss ratios, rebates, market changes and future fees, may affect Health and Employee Benefits. The company was involved in ordinary-course litigation and regulatory matters; management did not believe pending matters were likely to materially affect financial condition, but acknowledged an adverse period-specific effect on results or cash flows was possible.
- Accounting change: Retrospective adoption of revised insurance acquisition-cost guidance reduced opening 2010 stockholders’ equity by $146.1 million and revised prior-period amounts.
Most important facts for investors to verify
- Reconcile the two operating-cash-flow figures in the filing: $679.7 million in the cash flow statement versus $673.2 million in the MD&A narrative.
- Track the NYDFS process, California rate reductions, other state regulatory reviews, and the effect of rate and placement changes on Specialty Property earnings.
- Assess the sustainability of earnings excluding the prior-year $80 million tax benefit, 2012 catastrophe losses, and Solutions’ impairment and restructuring charges.
- Review reserve development, especially property and warranty claims, and the collectability and collateral supporting the $6.1 billion of reinsurance recoverables.
- Monitor Health’s transition under health reform, declining premiums, rebate requirements, and management’s projected loss-ratio and expense trends.
- Confirm holding-company liquidity, regulated-subsidiary dividend capacity, the 2014 note maturity, and the pace of share repurchases and dividends.