Assurant, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Amounts are in U.S. dollars, millions except per-share data. Assurant provides insurance and related risk-management products in housing, lifestyle and preneed markets.
Financial results and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $1,586.4 | $1,834.1 | $4,738.4 | $5,779.4 |
| Income (loss) before taxes | $(107.6) | $220.9 | $286.2 | $794.0 |
| Net income (loss) | $(57.3) | $144.4 | $206.7 | $534.1 |
| Diluted EPS | $(1.05) | $2.37 | $3.73 | $8.46 |
| Net investment income | $132.6 | $124.8 | $374.9 | $380.3 |
- Q3 net earned premiums were $1,073.1 versus $1,215.1; nine-month premiums were $3,238.7 versus $3,832.6. Nine-month fees and other income were $1,016.2 versus $1,033.7.
- Q3 policyholder benefits increased to $682.2 from $435.2; nine-month benefits were $1,456.6 versus $1,379.8. Interest expense was $12.2 in Q3 and $37.2 year to date.
- Q3 2017 results included $191.8 after-tax of reportable catastrophe losses, mainly from Hurricanes Harvey, Irma and Maria and the Mexico City earthquake. Nine-month catastrophe losses were $192.4 after tax. Management said Q3 earnings excluding catastrophe effects also reflected lower deferred-gain amortization, partly offset by a $9.6 tax benefit and investment partnership gains.
- At September 30, cash and cash equivalents were $992.8; total investments were $11,676.6; debt was $1,067.9; total assets were $32,405.2; and stockholders’ equity was $4,138.2. Debt’s disclosed fair value was $1,174.0.
- Nine-month cash flow statement figures: operating cash provided $366.4, investing cash used $242.0 and financing cash used $169.7; ending cash was $992.8. MD&A presents operating cash flow of $372.5 including exchange-rate and held-for-sale adjustments.
- Management reported $573.0 of holding-company capital, including $250.0 set aside as a buffer against remote risks, and said liquidity should be sufficient for the next 12 months. Insurance-subsidiary dividends are subject to regulatory limits.
Changes versus prior period and segments
- Revenue fell 13.5% in Q3 and 18.0% for the first nine months; net income fell $201.7 in Q3 and $327.4 year to date. Comparisons are affected by the 2016 sale of Assurant Employee Benefits: deferred-gain amortization was $23.1 in Q3 2017 versus $135.8 in Q3 2016, and $83.5 for nine months versus $309.2. Nine-month realized investment gains also declined to $25.1 from $194.0.
- Global Housing: Q3 net loss was $110.3 versus income of $44.5, primarily due to catastrophe losses. Its risk-business combined ratio was 154.9% versus 92.0%. Lender-placed and mortgage-solutions revenues declined; multi-family housing grew. Nine-month segment income was $7.8 versus $177.8.
- Global Lifestyle: Q3 net income rose to $42.6 from $28.3, including a $9.6 nonrecurring tax benefit; nine-month income was $135.2 versus $119.8. A large service-contract client’s program change shifted revenue presentation from gross to net, reducing reported premiums and expenses without changing program economics. Management cited growth in mobile and vehicle-protection businesses, with continuing legacy-client declines and foreign-exchange and mobile-market variability.
- Global Preneed: Q3 net income was $12.3 versus $14.4; nine-month income increased to $35.0 from $31.4.
Outlook, risks and unusual items
- For 2017, management expected Global Housing premiums and catastrophe-excluded net income to decline from 2016, reflecting lower lender-placed placement rates and reduced mortgage-solutions contributions. Expense actions and multi-family housing growth were expected to partly offset the decline.
- Management expected Global Lifestyle net income to increase in 2017, supported by mobile, vehicle protection and expense efficiencies; revenue was expected to be lower largely because of the client program structure change. Global Preneed fees and net income were expected to increase. No consolidated earnings guidance is provided in the filing.
- On October 17, 2017, Assurant agreed to combine with The Warranty Group (TWG), subject to approvals and other conditions, with closing expected in the first half of 2018. Assurant shareholders would receive TWG Holdings shares; the filing described approximately $372.4 cash consideration to TWG equityholders and repayment of approximately $591.3 of TWG debt. Assurant planned to finance these amounts with new debt and preferred securities and disclosed related bridge and term-loan commitments. The transaction could fail to close, cost more than expected, or result in integration challenges; rating agencies placed ratings under review or CreditWatch in connection with it.
- Assurant expected $6–$8 pre-tax of reportable catastrophe losses from October 2017 California wildfires in Q4.
- The company paid $85.0 in April 2017 under lender-placed insurance market-conduct settlement agreements and faces lender-placed insurance class actions. Management said excess losses from pending legal and regulatory matters cannot be estimated; it did not believe current matters were likely to materially affect financial condition, though a reporting-period impact remains possible.
- Assurant recorded an $11.0 net liability at September 30 for expected guaranty-fund assessments related to Penn Treaty’s liquidation. Reinsurance recoverables were $10,578.3, and the allowance for doubtful reinsurance recoverables rose to $5.3 from $0.3 at year-end 2016.
- During the first nine months, Assurant repurchased 2.54 million shares for $250.5 and paid $88.8 in dividends. The remaining repurchase authorization was $432.4; future repurchases and dividends remain subject to financial, market, regulatory and board considerations.
Key facts for investors to verify
- Catastrophe losses, reinsurance recoveries and subsequent wildfire losses, including their net effect on Q4 results.
- Progress, financing, regulatory and shareholder approvals, and rating-agency outcomes for the proposed TWG transaction.
- Underlying Global Housing performance, especially lender-placed placement rates, mortgage-solutions demand, and catastrophe-excluded loss trends.
- Cash-flow reconciliation between the $366.4 statement figure and $372.5 MD&A figure, plus holding-company liquidity and subsidiary dividend capacity.
- Exposure to lender-placed litigation and regulatory obligations, and the development of the Penn Treaty assessment liability.