Business context and reporting period
Assurant, Inc. filed this unaudited Form 10-Q for the quarter ended June 30, 2016. The company provides specialty insurance and related services, including mobile-device and vehicle protection, renters and lender-placed insurance, and mortgage services. Assurant is exiting health insurance by year-end 2016 and sold Assurant Employee Benefits to Sun Life on March 1, 2016, primarily through reinsurance transactions. These portfolio changes make year-over-year revenue comparisons less representative of continuing operations.
Key financial metrics
Amounts below are in USD millions unless otherwise stated.
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $1,797.8 | $2,644.9 | $3,945.3 | $5,243.5 |
| Net income | $169.3 | $32.8 | $389.7 | $82.8 |
| Diluted EPS | $2.70 | $0.47 | $6.06 | $1.18 |
| Net investment income | $119.8 | $167.8 | $255.5 | $320.1 |
| Net realized investment gains | $21.6 | $12.0 | $183.3 | $16.0 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $(301.7) | $168.9 |
Reported net margin was approximately 9.4% for Q2 2016 versus 1.2% in Q2 2015, and 9.9% for the first half versus 1.6%. These comparisons reflect substantial one-time and portfolio-transition effects; they should not be read as underlying operating-margin trends.
At June 30, 2016, total assets were $29.8 billion, stockholders’ equity $4.6 billion, and debt $1.165 billion. Cash and cash equivalents were $1.233 billion. The company reported $395.96 million available under its $400 million revolving credit facility, net of letters of credit, and said it was in compliance with facility covenants. Holding-company capital available for general purposes was $725 million, including a $250 million buffer for remote risks.
Material changes versus prior comparable periods
- Q2 net income rose 416% and first-half net income rose 370%, primarily due to lower Health exit losses and charges, recognition of deferred gains and realized gains associated with the Employee Benefits sale, and a first-quarter pension curtailment gain.
- Q2 revenue fell approximately 32% and first-half revenue approximately 25%, largely reflecting the Health runoff and Employee Benefits disposition, alongside lower investment income.
- Employee Benefits sale consideration included $926.2 million net cash and $16 million contingent consideration. The company recognized $287.5 million of total pretax gains in the first half, while $353.0 million of deferred gain remained at June 30.
- Solutions’ Q2 net income was $61.4 million, roughly flat year over year; first-half income fell 6% to $108.5 million. Specialty Property’s Q2 income fell 35% to $56.9 million and first-half income fell 18% to $133.3 million, reflecting lender-placed insurance normalization, lost business, lower REO volume and higher catastrophe losses.
- Assurant repurchased 5.74 million shares for approximately $451.7 million in the first half and paid $65.0 million in dividends. Shares outstanding declined from 65.85 million at year-end 2015 to 60.61 million at June 30, 2016.
Outlook, management commentary, risks and contingencies
- Management expected Solutions’ full-year 2016 net income and net earned premiums and fees to increase from 2015, while expecting Specialty Property’s net income and net earned premiums to decrease. Specialty Property results were expected to remain exposed to catastrophe losses.
- Assurant expected to substantially complete its Health-market exit by December 31, 2016, with a further $13–$23 million of exit-related charges anticipated. Future cash payments for exit-related charges were expected to be substantially complete by year-end.
- Management stated it expected sufficient liquidity for the next 12 months, including debt interest and dividends. First-half operating cash use reflected Health claims paid without corresponding premium receipts, as well as payment timing.
- Health results remain sensitive to uncertain Affordable Care Act risk-adjustment, reinsurance and risk-corridor estimates. At June 30, the company reported $196.2 million net risk-adjustment receivables and $222.2 million of reinsurance recoverables; actual settlements may differ materially from estimates.
- Risks include lender-placed insurance regulation and rate/placement pressure, reliance on significant clients, claims and reserve adequacy, catastrophe losses, investment and interest-rate risks, reinsurer collectability, cyber and operational risks, and litigation. A multistate examination of lender-placed insurance and related class actions are ongoing; management said pending matters were not believed likely to materially affect financial condition, though an individual period’s results or cash flows could be affected.
- Unusual items also included a $29.6 million pretax pension curtailment gain, a $16.7 million pretax intangible-asset impairment, and a $9.1 million gain from commercial mortgage-loan securitization. A July 1, 2016 acquisition of American Title was completed for approximately $45 million cash.
Important facts for investors to verify
- How much of reported earnings derives from Employee Benefits sale gains, deferred-gain amortization, investment gains and the pension curtailment, versus recurring segment operations.
- Whether Health exit costs, ACA program receivables and eventual settlements remain within management’s estimates, and whether the exit completes by year-end.
- Trends in lender-placed insurance placements, rates, client retention and catastrophe losses, as well as the expected impact of the reinsurance program.
- Whether negative first-half operating cash flow reverses as Health runoff and sale-related cash flows progress, and how much holding-company liquidity remains available after planned uses.
- Potential exposure from lender-placed insurance regulatory proceedings, litigation and reinsurance recoverables, including losses beyond accrued amounts.