Assurant, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Amounts are U.S. dollars in millions, except per-share data. Assurant provides insurance and related risk-management products, with reportable segments in Global Housing, Global Lifestyle and Global Preneed; Corporate & Other includes corporate activities and runoff businesses. The company is transitioning toward specialty housing and lifestyle protection after exiting health insurance and selling Assurant Employee Benefits (AEB) in 2016.
Financial results
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $1,600.5 | $1,797.8 | $3,152.0 | $3,945.3 |
| Income before tax | $178.7 | $235.5 | $393.8 | $573.1 |
| Net income | $120.2 | $169.3 | $264.0 | $389.7 |
| Diluted EPS | $2.16 | $2.70 | $4.71 | $6.06 |
| Net earned premiums | $1,115.3 | $1,202.3 | $2,165.6 | $2,617.5 |
| Net investment income | $121.7 | $119.8 | $242.3 | $255.5 |
| Interest expense | $12.4 | $15.2 | $25.0 | $29.7 |
Net margin was approximately 7.5% in Q2 2017 versus 9.4% in Q2 2016, and 8.4% for the first half versus 9.9% in the prior-year period. Net income declined 29% in Q2 and 32% in the first half. Comparisons are materially affected by lower AEB-related deferred-gain amortization and, for the first half, lower investment gains and the prior-year pension curtailment gain.
Balance sheet, cash flow and capital
- At June 30, 2017, total assets were $30,058.9, total liabilities $25,834.3 and stockholders’ equity $4,224.6. Cash and cash equivalents were $848.2, down from $1,032.0 at year-end 2016.
- Debt was $1,136.6, up from $1,067.0 at year-end. Its disclosed fair value was $1,246.4. Debt increased in part with $69.0 of issuance associated with a short-term facility for a consolidated loan-purchasing entity.
- The cash flow statement reports operating cash used of $0.3, investing cash provided of $3.7 and financing cash used of $192.3 for the first half; cash decreased $183.8. MD&A separately reports $4.8 of operating cash provided after including exchange-rate and held-for-sale adjustments. The filing does not reconcile these presentations in the excerpts provided.
- Holding-company capital was $623.9, including a $250.0 buffer for remote risks. Management said liquidity should be sufficient for the next 12 months, including debt interest and common dividends. Insurance-subsidiary dividends are subject to regulatory limits; approximately $319.0 could be paid by U.S.-domiciled insurance subsidiaries without prior approval in 2017.
- First-half share repurchases were $216.3 for 2.21 million shares; $466.6 remained under the authorization at June 30. Dividends paid were $60.0; the declared/paid quarterly per-share dividend shown was $0.53.
- Investments totaled $11,640.2. Fixed-maturity securities had fair value of $9,579.4, including 93.6% rated Aaa/Aa/A or Baa. Net unrealized gains on the fixed-maturity portfolio increased $171.5 in the first half, primarily as Treasury yields declined and credit spreads tightened.
Material segment and period changes
- Global Housing: Q2 net income was $56.2 versus $56.9; first-half net income was $118.1 versus $133.3. Lower lender-placed and mortgage-solutions revenue and higher non-catastrophe losses weighed on results; fewer reportable catastrophe losses provided an offset. Multi-family housing grew.
- Global Lifestyle: Q2 net income was $40.2 versus $50.1, but the prior-year quarter included an $18.0 tax benefit. First-half net income rose to $92.6 from $91.5. A large service-contract client’s program-structure change reduced reported premiums and expenses; management said overall program economics and profitability were maintained.
- Global Preneed: Q2 net income increased to $12.8 from $11.3; first-half net income increased to $22.7 from $17.0, supported by Canadian business growth and investment income.
- Corporate & Other / runoff: Lower AEB deferred-gain amortization materially reduced reported income. Health runoff improved versus 2016, including favorable reserve development. AEB was sold on March 1, 2016; deferred gains continue to be recognized over the relevant contract periods.
- Green Tree Insurance Agency was acquired on February 1, 2017 for $125.0 cash, with a potential earn-out of up to $25.0. The acquisition added goodwill and customer-related intangible assets.
Outlook, risks and contingencies
- Management expects Global Housing 2017 premiums and net income, excluding reportable catastrophe losses, to decline from 2016 as lender-placed placement rates and mortgage-solutions contributions fall; multi-family growth and expense actions may partly offset this.
- Management expects Global Lifestyle net income to increase in 2017, while reported revenue is expected to decline because of the service-contract program change. It expects approximately $500.0 lower net earned premiums versus 2016 from that change, with a commensurate reduction in expenses; underlying economics are stated to be maintained. Mobile-market variability, foreign exchange and continued legacy credit/retail declines remain factors.
- Management expects Global Preneed fees, other income and net income to increase in 2017, reflecting North American sales growth and operating efficiencies. No consolidated numerical earnings guidance is provided in the supplied filing text.
- Global Housing catastrophe reinsurance coverage for June 1, 2017–May 31, 2018 totals $1,360.0, down from $1,400.0 in the prior period as exposure declined.
- The company paid $85.0 in April under lender-placed insurance regulatory settlement agreements. The agreements require periodic rate re-filings and changes to certain business practices. Lender-placed insurance class actions remain ongoing; management says excess losses cannot be estimated, but does not currently expect pending matters to materially affect financial condition.
- Assurant recorded a net liability of $11.0 at June 30 for estimated guaranty-fund assessments related to Penn Treaty’s liquidation. Market risks include investment yields and values, credit exposure, catastrophe losses, reserve estimates, regulation, foreign exchange and the pace of lender-placed declines. Management reported no material changes to previously disclosed risk factors during Q2.
Important facts for investors to verify
- How much of earnings and revenue decline reflects ordinary operating trends versus AEB deferred-gain amortization, prior-year investment gains and other nonrecurring items.
- Whether lender-placed placement-rate declines, non-catastrophe losses and regulatory changes develop in line with management’s expectations.
- Whether Global Lifestyle growth and profitability offset the reported revenue reduction from the client program restructuring, and how mobile-market and foreign-exchange variability affect results.
- The quality and adequacy of claims reserves, reinsurance recoverables and the company’s ability to upstream capital from regulated insurance subsidiaries.
- The cash-flow presentation difference between the cash flow statement’s $0.3 operating cash use and MD&A’s adjusted $4.8 operating cash provision, and the sustainability of liquidity, dividends and repurchases.
- Potential additional costs or outcomes from lender-placed litigation, guaranty-fund assessments, and the remaining obligations and assumptions underlying AEB deferred-gain recognition.