Assurant, Inc. — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; the filing also reports fourth-quarter results. Unless noted, dollar amounts below are in millions (the filing presents amounts in thousands).
Business context and financial performance
Assurant is a specialized insurer operating through Assurant Solutions, Assurant Specialty Property, Assurant Health, Assurant Employee Benefits, and Corporate and Other. Its products include mobile-device protection and service contracts, lender-placed property insurance, health coverage, and employee benefits.
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Total revenue | $10,381.7 | $9,047.7 | +14.7% |
| Net earned premiums | $8,632.1 | $7,759.8 | +11.2% |
| Net investment income | $656.4 | $650.3 | +0.9% |
| Income before tax | $744.1 | $789.7 | -5.8% |
| Net income | $470.9 | $488.9 | -3.7% |
| Diluted EPS | $6.44 | $6.30 | +2.2% |
| Cash and cash equivalents | $1,318.7 | $1,717.2 | -23.2% |
| Total debt | $1,171.1 | $1,638.1 | -28.5% |
| Stockholders’ equity | $5,181.3 | $4,833.5 | +7.2% |
Net margin was approximately 4.5%, versus 5.4% in 2013. Total assets were $31,562.5 million; policy liabilities were $19,712.0 million. Total investments were $14,131.5 million, including $11,263.2 million of fixed maturities. Net unrealized investment gains rose to $1,279.6 million from $812.4 million.
The cash flow statement reports operating cash flow of $393.8 million, investing cash inflow of $63.9 million, and financing cash outflow of $776.2 million. Separately, MD&A cites operating cash flow of $313.8 million; the filing text does not clearly reconcile these two figures. The company reported $561.5 million of holding-company capital available for general purposes, including a $250 million buffer for remote risks, and management said liquidity was sufficient for the next 12 months. The $400 million revolving credit facility was undrawn; $395.7 million was available after letters of credit. Debt-to-capitalization under the facility covenant was 20%, against a 35% maximum.
Material changes and segment results
- Assurant Solutions: Segment net income rose 75% to $218.9 million. Mobile-device and service-contract growth, favorable domestic loss experience, and restructuring efficiencies helped; international currency movements were a partial offset. Combined ratios were 93.3% domestic and 101.5% international.
- Assurant Specialty Property: Segment net income fell 19% to $341.8 million. Lower lender-placed placement and premium rates and higher non-catastrophe losses weighed on results. The combined ratio increased to 85.2% from 77.9%. Lender-placed products generated 71% of segment premiums and an estimated 73% of segment net income.
- Assurant Health: The segment posted a $63.7 million net loss, versus $5.9 million income in 2013. Individual premiums grew, but ACA-qualified policies had higher-than-assumed claims; reform fees and nondeductible expenses also affected results. The combined ratio rose to 104.3% from 99.6%.
- Assurant Employee Benefits: Segment net income increased 41% to $48.7 million, primarily on favorable claims experience. Voluntary-product growth offset declines in employer-paid products; the loss ratio improved to 68.2% from 70.5%.
- Fee and other income increased to $1,033.8 million from $586.7 million, reflecting growth in mobile administration and acquired service businesses. Acquisitions included CWI Group, StreetLinks, and eMortgage Logic; Assurant also increased its Iké Asistencia investment.
- On January 1, 2015, Assurant sold American Reliable Insurance Company and its general agency business for approximately $114 million. The 2014 results included a $21.5 million pretax loss on the held-for-sale business, including a $15.5 million goodwill write-off; management described the after-tax impact as $19.4 million.
Fourth quarter: Revenue was $2,622.7 million, pretax income $90.3 million, and net income $49.8 million, versus $2,400.6 million, $178.5 million, and $108.8 million, respectively, in fourth-quarter 2013. The filing attributes the earnings decline to increased Assurant Health claims, normalization in lender-placed insurance, and the ARIC sale loss.
Outlook, risks, and unusual items
- Management expected 2015 Solutions net income and net earned premiums and fees to approximate 2014 levels; growth in mobile and vehicle service contracts was expected to be offset by lost or reduced programs and currency volatility.
- Management expected Specialty Property net income and net earned premiums to decline in 2015 due to continued lender-placed normalization, lost client business, and the ARIC sale, partly offset by mortgage-solutions and multi-family housing activity. Catastrophe losses remain a source of variability.
- Health premiums and fees were expected to rise in 2015, but results would depend on ACA claims development and estimated risk-program recoveries. The filing notes that actual ACA program settlements could differ substantially from estimates. The 2014 results included estimated reinsurance recoveries of $277.0 million and risk-adjustment premiums of $121.9 million; both were scheduled for settlement in 2015.
- Employee Benefits expected premium and fee growth from voluntary products, with expense management partly offsetting lower investment income. Management cited low interest rates, employment trends, and capital markets as factors affecting results.
- Material risks include regulatory limits on lender-placed rates and practices, lender-placed insurance litigation and class actions, ACA reform and uncertain risk transfers, catastrophe losses, reserve adequacy, low interest rates and investment values, reinsurer credit exposure, foreign exchange movements, and dependence on significant distribution relationships. Moody’s downgraded the financial-strength ratings of Time Insurance Company and John Alden Life Insurance Company in 2014, citing earnings pressure and ACA concerns; the outlook was stable.
- Assurant paid $14 million under its New York lender-placed insurance agreement and implemented changes to its New York program; Florida rate reductions and changes to commissions and quota-share arrangements also affected the business. Management said it was cooperating with regulators and vigorously defending lender-placed insurance class actions. It did not believe pending matters were likely to materially affect financial condition, though an individual reporting period could be affected.
- Unusual items included a $20.8 million one-time tax benefit from the conversion of certain Canadian operations, a $19.4 million after-tax loss related to the divested business, and a $25.7 million ACA health-insurer fee recorded in expenses.
Most important facts for investors to verify
- Reconcile the filing’s $313.8 million MD&A operating-cash-flow figure with the $393.8 million reported in the consolidated cash flow statement.
- Track ACA claims development and whether estimated reinsurance and risk-adjustment recoveries are collected as expected; confirm how they affect Health profitability and cash flow.
- Monitor lender-placed insurance placement rates, pricing and loss trends, regulatory outcomes, client retention, and litigation exposure.
- Assess reserve adequacy, catastrophe exposure, and the credit quality and collateral protection of the $7,254.6 million of reinsurance recoverables.
- Verify the post-sale effect of ARIC’s divestiture and whether management’s 2015 segment outlook is achieved.
- Review holding-company liquidity, subsidiary dividend capacity, debt maturities, capital returns, and any changes in insurer financial-strength ratings.