Assurant, Inc. — Q1 2010 Form 10-Q
Business context and reporting period
Assurant is a specialty insurer operating across creditor-placed and manufactured housing property insurance, credit-related insurance and services, health, and employee benefits. This unaudited report covers the three months ended March 31, 2010; comparisons are with Q1 2009 unless noted. Dollar amounts below are in millions unless otherwise stated.
Financial results and key metrics
- Revenue was $2,167.9, up 3.8% from $2,087.9. Net earned premiums and other considerations increased to $1,906.6 from $1,874.6; net investment income declined to $174.0 from $178.5.
- Net income rose 95% to $157.2 from $80.6; diluted EPS was $1.34 versus $0.68. The increase reflects improved underwriting, much lower investment losses, and a $21.0 million tax valuation allowance charge in Q1 2009.
- Policyholder benefits decreased to $928.0 from $960.3. Total benefits, losses, and expenses declined to $1,919.5 from $1,930.0. The filing does not provide a consolidated underwriting margin.
- Segment results: Specialty Property net income was $118.5 (up 13%); Solutions $28.9 (down 5%); Employee Benefits $16.5 (up 135%); Health $8.4 (down 43%); Corporate & Other net loss was $15.0 versus $76.1.
- Operating ratios: Specialty Property combined ratio improved to 70.8% from 74.5%; Health combined ratio worsened to 99.8% from 97.9%; Employee Benefits loss ratio improved to 71.7% from 75.3% and expense ratio to 32.8% from 35.2%. Solutions’ domestic combined ratio improved to 96.2% from 98.3%, while its international ratio edged higher to 107.8% from 107.3%.
- Cash and cash equivalents were $932.5 at March 31, down from $1,318.6 at year-end. Total assets were $26,238.8; stockholders’ equity was $4,973.6. Debt was $972.1 carrying value ($975.0 million principal); interest expense was $15.2.
- Fixed-maturity investments totaled $10,479.3 at fair value; 91.0% were rated A or better or Baa. Gross unrealized losses on fixed maturities and equities had fallen to $110.6 from $176.7 at year-end.
- Cash flow: the cash-flow statement reports operating cash provided of $121.9, investing cash used of $307.0, and financing cash used of $198.7. MD&A instead reports operating cash provided of $119.7; the filing text does not reconcile this difference. Financing use included $109.2 of share repurchases and $17.6 of dividends.
Material changes versus the prior comparable period
- Revenue gains were led by Specialty Property and Employee Benefits; the latter benefited from a business block acquired from Shenandoah and new distribution clients. Assurant Solutions’ international gross written premiums grew, while domestic credit and preneed earned premiums declined.
- Specialty Property’s improvement included a favorable $13.6 million pre-tax unearned-premium-reserve review adjustment ($7.6 million after tax), lower non-catastrophe losses, and lower commissions. No reportable catastrophe losses occurred in either quarter.
- Health earnings weakened as medical utilization and claims experience deteriorated; its Q1 benefits included $2.8 million related to H1N1 services. Health membership fell to 753,000 from 789,000.
- Investment results shifted from $55.7 million net realized losses in Q1 2009 to $4.5 million net realized gains in Q1 2010. Q1 2010 included $0.8 million of net credit-related other-than-temporary impairment losses recognized in earnings.
- The company repurchased 3.43 million shares for $109.2 million and paid a quarterly dividend of $0.15 per share, compared with $0.14 a year earlier.
Outlook, risks, contingencies, and unusual items
- No quantified company-wide earnings or revenue guidance is provided. Management stated it expected adequate liquidity for the next 12 months.
- Management cited continuing economic weakness, unemployment, and health-care reform as challenges. It was assessing the effects of the March 2010 U.S. health-care legislation, including potential changes to products, pricing, commissions, competition, expenses, and goodwill; management warned impacts could be materially adverse and said lower expense structures may be required.
- Management expects pressure on Specialty Property premiums from declining mortgage balances, low loan originations, and portfolio consolidation. Solutions’ European business remained affected by high UK unemployment and weak European conditions; Employee Benefits faced unemployment-related pressure on small-employer payrolls.
- Goodwill and other intangible assets, particularly in Health and Employee Benefits, could face impairment following health-care reform. The company had $84.973 million of deferred tax assets it assessed as more likely than not not to be realized, primarily reflecting foreign net operating losses.
- Contingencies include a $37.302 million reserve for an Assurant Health rescission-related lawsuit, subject to post-trial motions and possible appeals; a separate South Carolina claim matter was settled for $14.850 million against a $14.650 million prior reserve. The company said remaining London-market reinsurance disputes were uncertain but existing accruals were adequate.
- The company paid a $3.5 million SEC civil penalty in Q1 2010 under a settlement relating to a finite reinsurance arrangement; it neither admitted nor denied the allegations. A potential Medicare Secondary Payer Act issue remained under review with CMS; the company could not estimate any possible loss.
- Subsequent to quarter-end, subsidiaries entered into $150 million of fully collateralized, multi-year catastrophe reinsurance coverage for specified hurricane risks.
- Liquidity and capital considerations include regulatory limits on subsidiary dividends, a $350 million revolving credit facility with no loans outstanding and $325.6 million available at quarter-end, and $975 million principal of senior notes. The company reported compliance with facility covenants.
Important facts for investors to verify
- Reconcile operating cash flow of $121.9 million in the cash-flow statement with $119.7 million in MD&A.
- Assess whether Specialty Property’s favorable reserve review is nonrecurring and how mortgage-market contraction may affect future premiums and margins.
- Track Health claims trends, membership and the financial and goodwill effects of health-care reform as implementation rules develop.
- Review the status and adequacy of reserves for the $37.3 million Health litigation matter and the remaining London reinsurance disputes.
- Monitor portfolio credit quality, impairment assumptions, unrealized losses, and the concentration of long-duration losses in corporate bonds and preferred stock.
- Verify holding-company liquidity, subsidiary dividend capacity, pension funding needs, and the pace of share repurchases against capital priorities.