Assurant, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012; filed October 29, 2012. Assurant is a diversified insurer and related-services provider with four operating segments: Solutions, Specialty Property, Health, and Employee Benefits. Unless noted otherwise, dollar amounts below are in millions; statements are unaudited.
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|
| Total revenue | $2,145.1 | $2,061.7 | $6,347.3 | $6,161.3 |
| Income before tax | $208.6 | $112.4 | $722.9 | $457.5 |
| Net income | $126.3 | $74.0 | $458.7 | $379.8 |
| Diluted EPS | $1.52 | $0.77 | $5.30 | $3.84 |
| Dividends per share | $0.21 | $0.18 | $0.60 | $0.52 |
- Q3 revenue increased 4.0% and net income 71%; nine-month revenue increased 3.0% and net income 20.8%. Q3 pretax income rose 85.6%, while the nine-month increase was 58.0%.
- For the nine months, operating cash flow was $429.2; investing cash outflow was $98.3 and financing cash outflow was $422.1. Including the $3.0 adverse exchange-rate effect, management reports operating cash flow of $426.2. Cash and cash equivalents were $1,072.5 at September 30, down from $1,166.7 at year-end 2011.
- Total assets were $28,169.6, total liabilities $22,940.0, and stockholders’ equity $5,229.6. Debt was $972.4; its disclosed fair value was $1,046.4. The $975 million senior notes include $500 million due February 2014 and $475 million due February 2034.
- Liquidity: $617.6 of holding-company capital was available for general purposes, including a $250 million buffer for remote risks. A $350 million revolving facility had $330.2 available; there were no commercial-paper or revolving-loan borrowings, and the company was in covenant compliance. Management said liquidity should cover needs over the next 12 months.
- Investments totaled $14,764.4, including $12,043.9 of fixed maturities. Of fixed-maturity fair value, 92.5% was rated A or higher or Baa; 7.5% was Ba or lower. Net investment income was $169.4 in Q3 (down 1.6%) and $541.0 for nine months (up 4.5%). Nine-month income included $30.5 from real-estate joint ventures; excluding that income, investment income declined.
Segment results and material changes
| Segment net income | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|
| Solutions | $36.7 | $33.7 | $120.5 | $109.8 |
| Specialty Property | $89.4 | $43.4 | $294.7 | $188.4 |
| Health | $11.3 | $5.8 | $51.8 | $18.1 |
| Employee Benefits | $13.2 | $13.6 | $40.9 | $28.6 |
| Corporate & Other | $(24.3) | $(22.4) | $(49.2) | $34.9 |
- Specialty Property drove much of the improvement, primarily through lower catastrophe losses: $27.5 in Q3 2012 versus $80.5 in Q3 2011; $42.6 for nine months versus $157.6. Its combined ratio improved to 79.8% from 92.4% in Q3 and to 76.5% from 86.0% for nine months.
- Solutions benefited from service-contract growth and improved Latin American performance. Q3 included a $2.6 after-tax client settlement benefit and a $2.9 after-tax German premium-tax accrual. Nine-month gross written premiums also included a $33.2 client-reporting correction, offset by deferred commissions, with no net-income impact.
- Health earnings improved with favorable loss experience and cost reductions, despite lower premiums and revenue. Its combined ratio improved to 97.0% in Q3 from 100.5%; nine-month results included $13.9 after-tax of joint-venture investment income. The 2011 comparison included a $4.8 after-tax pharmacy-provider reimbursement.
- Employee Benefits nine-month earnings rose on favorable experience, while premium revenue declined, mainly following the loss of two assumed disability clients. Q3 earnings were broadly flat.
- Corporate & Other shifted from $34.9 nine-month income in 2011 to a $49.2 loss in 2012, largely because 2011 included an $80.0 tax benefit from releasing a capital-loss valuation allowance. Q3 2012 also included $7.4 of additional tax expense tied to settlement of the 2005–2008 IRS audit cycle.
- Shares outstanding declined materially: 10.0 million shares were repurchased during the first nine months for $369.2 million, and the company paid $52.6 million in dividends. The reported share count was 79.5 million at September 30, versus 88.5 million at December 31, 2011.
Outlook, risks, and unusual items
- Management expected modest full-year 2012 net earned premium growth in Solutions, with the loss of a domestic mobile client from October 1 expected to reduce annual net earned premiums by about $100 million. Specialty Property expected 2012 premium growth, but lower 2013 lender-placed premiums and earnings as placement rates decline and California rate cuts take effect. Health expected improved 2012 results but a decline in 2013 from weak small-group sales and preparation costs for health-care reform. Employee Benefits expected lower 2012 premiums after losing two assumed disability clients.
- California agreed to a 30.5% reduction in lender-placed hazard rates, effective for qualifying new or renewed policies from January 19, 2013. Based on 2012 placement rates and the current book, Assurant estimated annualized reductions of about $33 million in net earned premiums and $18 million in net income. New York regulator discussions continued; the company could not estimate a loss range. Further state rate actions could materially affect results.
- Other stated risks include catastrophe losses, reserve adequacy, investment and low-interest-rate risk, credit and reinsurance exposure, health-care reform, litigation and regulation, client or distribution losses, and operational and cyber risks. The company noted that lender-placed products contributed about 70% of Specialty Property premiums and 89% of that segment’s net income in the first nine months of 2012.
- The qualified pension plan was 81% funded, with a $161.9 million deficit versus $125.5 million at year-end. Assurant contributed $37.5 million through September and expected to contribute up to an additional $12.5 million during the remainder of 2012.
- Adoption of revised insurance-acquisition-cost accounting was retrospective: the year-end 2011 adjustment reduced stockholders’ equity by $153.0 million. The filing says the interim results are not necessarily indicative of full-year results.
- Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting. The filing states no material change in market-risk assumptions during Q3.
Important facts for investors to verify
- Whether New York and other state regulatory reviews lead to further lender-placed rate, product, or business changes, and how the California reduction affects 2013 results.
- Whether Specialty Property catastrophe losses and loan-placement rates remain consistent with management’s expectations.
- Whether the mobile-client loss, Health reform-related costs and sales trends, and Employee Benefits client losses affect the stated segment outlook.
- The quality and valuation of investment assets, including commercial mortgages, lower-rated fixed maturities, and securities with unrealized losses; reported unrealized losses improved to $11.9 million on fixed maturities and $6.8 million on equities from $61.4 million and $25.2 million at year-end 2011.
- Capital deployment and liquidity after share repurchases and dividends, including subsidiary dividend capacity, the 2014 senior-note maturity, and pension contributions.
- The ultimate outcome of the NYDFS matter, ordinary-course litigation, and tax matters; management said pending matters were not believed likely to materially affect financial condition, but period-specific earnings or cash flows could be affected.
