Assurant, Inc. — 2013 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2013; the filing also reports fourth-quarter results. Assurant is a diversified specialty insurer operating through Assurant Solutions, Assurant Specialty Property, Assurant Health, Assurant Employee Benefits, and Corporate and Other. Unless noted, amounts below are in U.S. dollars.
Financial performance
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Total revenues | $9.048 billion | $8.508 billion | Up 6% |
| Net earned premiums | $7.760 billion | $7.237 billion | Up 7% |
| Net investment income | $650.3 million | $713.1 million | Down 9% |
| Income before tax | $789.7 million | $757.8 million | Up 4% |
| Net income | $488.9 million | $483.7 million | Up 1% |
| Diluted EPS | $6.30 | $5.67 | Up 11% |
Annual net income edged higher chiefly because after-tax reportable catastrophe losses at Specialty Property fell by $143.5 million. Lower Health and Employee Benefits earnings, reduced investment gains, and higher interest expense partly offset that benefit. The EPS increase also occurred alongside substantial share repurchases.
Fourth-quarter revenue was $2.401 billion and net income was $108.8 million, compared with $2.161 billion and $25.0 million, respectively, in fourth-quarter 2012. The prior-year quarter included severe Superstorm Sandy losses and a Solutions intangible-asset impairment.
Consolidated net investment income declined, reflecting lower yields and $29.5 million less income from real-estate joint ventures. Selling, underwriting and general expenses rose to $3.034 billion from $2.632 billion; interest expense rose to $77.7 million from $60.3 million.
Segments and material year-over-year changes
- Assurant Solutions: Segment net income was $125.2 million, up 1%; premiums increased 8% and fees and other income rose 28%. Service-contract and mobile-program growth, including the LSG acquisition, supported revenue. Results excluding special charges were pressured by unfavorable domestic mobile underwriting, lower preneed investment yields, and higher mortality. Domestic and international combined ratios were 97.9% and 102.8%, respectively.
- Assurant Specialty Property: Segment net income increased 39% to $423.6 million; premiums rose 16%. Its combined ratio improved to 77.9% from 83.3%, primarily as catastrophe losses declined. Lender-placed products generated about 73% of segment premiums and 87% of segment net income in 2013, making the business particularly exposed to regulatory changes and placement trends.
- Assurant Health: Segment net income fell 89% to $5.9 million, while premiums were broadly flat at $1.581 billion. The decline reflected higher taxes associated with the Affordable Care Act, including a $10.2 million tax-liability increase, and the absence of $14.3 million of after-tax joint-venture investment income recorded in 2012. The combined ratio was 99.6% versus 98.5%.
- Assurant Employee Benefits: Segment net income fell 40% to $34.6 million on nearly flat premiums. Less favorable disability and life claims, a lower discount rate for certain new long-term disability claims, and lower investment income weighed on results. The loss ratio increased to 70.5% from 68.3%.
Cash flow, balance sheet, debt and capital
- At year-end, total assets were $29.715 billion, total stockholders’ equity $4.833 billion, and debt $1.638 billion. Cash and cash equivalents were $1.717 billion; total investments were $14.244 billion. Policy liabilities totaled $18.699 billion.
- The audited cash-flow statement reports operating cash flow of $1.028 billion, investing cash outflow of $392.7 million, and financing cash inflow of $196.7 million. Cash increased by $807.8 million to $1.717 billion; the filing separately reports a $23.7 million adverse foreign-exchange effect on cash.
- Assurant issued $700 million of senior notes in March 2013: $350 million at 2.50%, due 2018, and $350 million at 4.00%, due 2023. The $500 million 5.63% notes due in February 2014 were repaid after year-end; the company also had $475 million of 6.75% notes due 2034. The $350 million revolving credit facility was undrawn at year-end, with $345.7 million available.
- Management reported $690.0 million of holding-company capital available for corporate purposes, excluding $467.3 million earmarked for repayment of debt maturing in February 2014; $250 million of the reported holding-company capital was designated as a buffer for remote risks. The company said it expected adequate liquidity for the following 12 months.
- Regulated U.S. insurance subsidiaries had $2.364 billion of statutory capital and surplus and $605.9 million of 2013 statutory net income. All subsidiaries exceeded minimum risk-based capital requirements. Approximately $484 million of dividends could be paid to the holding company in 2014 without prior regulatory approval.
- Assurant repurchased 7.7 million shares in 2013 for approximately $398 million, excluding commissions. It paid $0.96 per share in dividends for the year and authorized an additional $600 million share-repurchase program in November 2013.
Outlook, risks and unusual items
- Management outlook: For 2014, Solutions expected modest revenue improvement, mainly from mobile warranties and Latin America. Specialty Property expected slightly lower premiums and fees, a higher expense ratio, and a higher non-catastrophe loss ratio. Health expected premium and fee growth from new major-medical sales but continued pressure from taxes and commissions. Employee Benefits expected voluntary-product growth and continued expense management. These are management expectations, not quantified company-wide earnings guidance.
- Lender-placed insurance: Florida agreed rate filings include a 10% rate reduction and elimination of commissions and client quota-share arrangements; new and renewing policies were expected to be affected beginning in first-quarter 2014, with practice changes following later. A California rate reduction of 30.5% began applying to eligible policies in January 2013. Federal housing-finance guidelines scheduled for June 2014 also required elimination of commissions and quota-share arrangements on GSE-backed loans. The company expected declining placement rates and warned that additional rate or industry-structure changes could materially hurt results.
- Legal and regulatory matters: Assurant paid a $14 million, non-tax-deductible New York regulatory settlement in 2013, without admitting or denying wrongdoing, and agreed to change certain practices. The company faces lender-placed insurance class actions seeking premium refunds and other relief, as well as regulatory inquiries. It has accrued an estimated litigation loss but said any additional loss or range cannot be estimated; management did not believe pending matters were likely to materially affect financial condition, though an individual reporting period could be affected.
- Health reform: The Affordable Care Act changes underwriting, benefits, expense deductibility, rebates and fees. Assurant Health’s 2014 products were approved in 41 states; it had not participated on public exchanges in 2013. The company estimated a $24 million health-insurer fee liability and corresponding deferred-cost asset for 2014, subject to adjustment.
- Acquisitions and investment: Assurant acquired Field Asset Services and U.K.-based Lifestyle Services Group in 2013 and invested in Iké Asistencia. The Iké investment includes options to acquire remaining interests and a contingent liability; integration, performance and valuation remain relevant risks.
- Other significant risks: Catastrophe losses, reserve estimation, low interest rates and investment valuations, reinsurer credit and availability, client and distributor concentration, regulation, cyber and privacy incidents, foreign exchange exposure, and restricted subsidiary dividends could adversely affect earnings, capital or liquidity. The 2013 net unrealized investment gain position fell to $812.4 million from $1.496 billion, principally as Treasury yields rose.
Important facts for investors to verify
- Whether Florida, federal, and other state lender-placed insurance changes reduce rates, commissions, placement volumes, or profitability beyond management’s assumptions.
- Future placement rates, loan-portfolio transfers, catastrophe losses, reinsurance costs, and Specialty Property’s unusually large contribution to company earnings.
- Health’s post-ACA sales, claims, rebate exposure, tax burden, and ability to earn an acceptable return on new policies.
- Disability claims development and reserve discount assumptions at Employee Benefits, and the adequacy of reserves across all lines.
- Outcomes and possible costs of lender-placed class actions and regulatory matters; the filing does not provide a clear estimate of potential losses beyond amounts accrued.
- Holding-company liquidity after the February 2014 debt repayment, subsidiary dividend capacity, and the sustainability of dividends and repurchases.
- Acquisition integration and performance, including LSG, Field Asset Services, and the Iké investment and related contingent obligations.
The filing presents amounts primarily in thousands, except per-share data. PricewaterhouseCoopers LLP issued an unqualified opinion on the consolidated financial statements and reported effective internal control over financial reporting as of December 31, 2013.