Assurant, Inc. Q3 2007 10-Q Summary
Business Context and Reporting Period
This report covers the quarterly period ended September 30, 2007. Assurant, Inc. is a holding company providing specialized insurance products and services, including creditor-placed homeowners insurance, debt protection, credit insurance, warranties, and health insurance. The company operates through five segments: Assurant Solutions, Assurant Specialty Property, Assurant Health, Assurant Employee Benefits, and Corporate & Other.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2007 | Nine Months Ended Sep 30, 2007 |
|---|---|---|
| Total Revenues | $2,148,192 | $6,270,182 |
| Net Income | $187,191 | $532,928 |
| Earnings Per Share (Diluted) | $1.56 | $4.37 |
| Net Investment Income | $194,049 | $601,247 |
| Net Realized Investment Losses | ($13,076) | ($10,592) |
| Total Assets | $26,568,380 | (N/A) |
| Total Debt | $971,831 | (N/A) |
| Cash and Cash Equivalents | $815,147 | (N/A) |
| Operating Cash Flow (9 Months) | (N/A) | $836,839 |
Note: All figures in thousands except per share data.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 8% ($164 million) for the three months and 7% ($407 million) for the nine months compared to the prior year periods. This was primarily driven by growth in the Assurant Specialty Property segment (creditor-placed homeowners business).
- Profitability: Net income increased 24% ($36 million) for the quarter and 15% ($68 million) for the nine months. Specialty Property segment income surged 115% for the quarter due to favorable loss experience and volume growth.
- Investment Performance: The company recorded net realized investment losses of $13.1 million for the quarter, compared to $2.7 million in the prior year quarter. This included writedowns of approximately $6.7 million on fixed income securities deemed other-than-temporarily impaired.
- Segment Performance:
- Assurant Solutions: Net income declined 10% for the quarter due to less favorable loss experience in domestic service contracts and one-time fee income recognized in the prior year.
- Assurant Health: Net income declined 12% due to higher claim experience in the small employer group business.
- Corporate & Other: Net loss widened significantly due to investment writedowns and legal expenses related to an ongoing SEC investigation.
Guidance, Outlook, Risks, and Unusual Items
- SEC Investigation: The company is under investigation by the SEC regarding certain loss mitigation products. In July 2007, five senior executives (including the former CEO and CFO) received Wells notices. Three remain on administrative leave, and two were terminated. The company incurred approximately $4.9 million in legal expenses related to this matter in the third quarter. No fines or penalties have been accrued as the amount cannot be reasonably estimated.
- Leadership Changes: J. Kerry Clayton serves as Interim President and CEO, and Michael J. Peninger serves as Interim CFO.
- Stock Repurchase Program: The company suspended its stock buyback program on September 4, 2007. Approximately $261 million remained under the authorization at the time of suspension.
- Acquisitions: In Q3 2007, the company acquired Swansure Group (UK) and Mayflower National Life Insurance Company for approximately $117 million.
- Investment Risks: The company holds exposure to sub-prime mortgage collateral totaling $85.8 million (0.87% of the fixed maturity portfolio), with a net unrealized loss of $2.2 million. Management believes these losses are temporary.
- Dividends: A quarterly dividend of $0.12 per share was declared on November 9, 2007.
Key Facts for Investor Verification
- SEC Investigation Impact: Verify the potential financial impact of the SEC investigation, including potential fines, penalties, and the status of the five executives involved.
- Investment Portfolio Quality: Review the composition of the fixed maturity portfolio, specifically the $85.8 million exposure to sub-prime collateral and the $6.7 million in other-than-temporary impairment writedowns.
- Segment Loss Ratios: Monitor the combined ratios for Assurant Solutions (100.9% domestic, 102.3% international) and Assurant Health (91.5%), which showed deterioration compared to the prior year.
- Liquidity Position: Confirm the holding company's ability to pay dividends and service debt ($972 million principal) given the suspension of the share repurchase program and ongoing legal costs.
- Accounting Changes: Note the adoption of SOP 05-1 and FIN 48 in 2007, which resulted in cumulative charges to retained earnings.