Business Context and Reporting Period
Company: Assurant, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2007
Business Overview: Assurant is a holding company providing specialized insurance products and related services in North America and selected international markets. The company operates through four primary segments: Assurant Solutions (credit insurance, extended service contracts, preneed life), Assurant Specialty Property (creditor-placed homeowners and manufactured housing insurance), Assurant Health (individual and small group medical), and Assurant Employee Benefits (group dental, disability, and life). The company also maintains a Corporate and Other segment.
Key Financial Metrics
| Metric | 2007 (in thousands) | 2006 (in thousands) |
|---|---|---|
| Total Revenues | $8,453,515 | $8,070,584 |
| Net Income | $653,746 | $717,418 |
| Earnings Per Share (Diluted) | $5.38 | $5.57 |
| Net Investment Income | $799,073 | $736,686 |
| Net Realized (Losses) Gains on Investments | $(62,220) | $111,865 |
| Total Assets | $26,750,316 | $25,165,148 |
| Total Stockholders' Equity | $4,088,903 | $3,832,597 |
| Debt | $971,863 | $971,774 |
| Cash and Cash Equivalents | $804,964 | $987,672 |
Segment Performance Highlights:
- Assurant Specialty Property: Net income increased 57% to $379,240, driven by strong premium growth in creditor-placed homeowners insurance and a combined ratio of 72.2%.
- Assurant Solutions: Net income decreased 28% to $143,921, primarily due to the absence of a $40.5 million legal settlement recognized in 2006 and unfavorable loss experience in Brazil.
- Assurant Health: Net income decreased 10% to $151,743, impacted by declining membership in the small employer group business.
- Corporate and Other: Reported a net loss of $108,179, largely due to net realized investment losses of $62,220 compared to gains in the prior year.
Material Changes Versus Prior Period
- Net Income Decline: Consolidated net income decreased by $63.7 million (9%) year-over-year. The primary driver was a swing in investment results, shifting from $111.9 million in realized gains in 2006 to $62.2 million in realized losses in 2007. This included $31.3 million (after-tax) in write-downs of other-than-temporary impairments.
- Revenue Growth: Total revenues increased 4.7% to $8.45 billion, fueled by growth in net earned premiums from Assurant Specialty Property and Assurant Solutions' extended service contracts.
- Investment Portfolio: Net unrealized gains on fixed maturity securities decreased by $84.0 million due to widening credit spreads in late 2007. The company recorded $48.2 million in pre-tax other-than-temporary impairments in 2007.
- Acquisitions: The company completed three acquisitions in 2007: Mayflower National Life Insurance Company (July), Swansure Group (July), and Centrepoint Insurance Services (October), expanding its preneed and international presence.
Guidance, Outlook, Risks, and Contingencies
SEC Investigation and Management Changes: The company is subject to an ongoing SEC investigation regarding certain finite reinsurance contracts. In July 2007, five senior executives, including the CEO and CFO, received Wells notices. Two executives were terminated, and the CEO was placed on administrative leave before being reinstated in January 2008. The investigation remains unresolved, and the company has not accrued for potential civil penalties as they cannot be reasonably estimated. This situation has led to a negative outlook on financial strength ratings from A.M. Best and S&P, and a review for possible downgrade by Moody's.
Key Risks:
- Investment Risk: Exposure to credit risk in fixed maturity securities and commercial mortgage loans. The company holds $77.6 million in sub-prime related mortgage collateral (0.77% of the fixed maturity portfolio).
- Catastrophe Risk: Significant exposure to natural catastrophes, particularly in homeowners insurance. Approximately 39% of homeowners insurance in force is located in California, Florida, and Texas.
- Reserve Adequacy: Profitability depends heavily on the accuracy of actuarial reserves for future claims. Adverse development in loss reserves could materially reduce earnings.
- Regulatory Risk: Extensive regulation of insurance operations, including potential changes in state laws regarding coverage, pricing, and market conduct.
Unusual Items: The 2006 results included a $40.5 million (after-tax) legal settlement and a $63.9 million (after-tax) gain from the sale of an investment in PHCS, neither of which recurred in 2007.
Important Facts for Investor Verification
- SEC Investigation Status: Verify the current status of the SEC investigation into finite reinsurance contracts and the potential for financial statement restatements or significant penalties.
- Rating Agency Actions: Monitor the final decisions by A.M. Best, S&P, and Moody's regarding the negative outlooks and potential downgrades, as these affect borrowing costs and contract renewals.
- Investment Impairments: Assess the extent of other-than-temporary impairments in the investment portfolio, particularly in the banking and real estate sectors, and the company's intent to hold these assets.
- Sub-prime Exposure: Confirm the current valuation and risk profile of the $77.6 million exposure to sub-prime collateral within the fixed maturity portfolio.
- Reserve Development: Review future quarterly reports for any adverse development in loss reserves, particularly for the Assurant Health and Specialty Property segments.