Assurant, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015; comparisons are with the corresponding 2014 periods unless stated otherwise. Assurant provides specialty insurance and related services through Solutions, Specialty Property, Health, Employee Benefits, and Corporate & Other. Amounts below are in U.S. dollars; financial statement amounts are shown in millions unless noted.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $2,644.9 | $2,608.1 | $5,243.5 | $5,056.5 |
| Income before tax | $40.0 | $193.8 | $123.2 | $429.0 |
| Net income | $32.8 | $143.6 | $82.8 | $280.9 |
| Diluted EPS | $0.47 | $1.95 | $1.18 | $3.81 |
| Net margin | 1.2% | 5.5% | 1.6% | 5.6% |
- Q2 revenue rose 1.4%, while net income fell 77%; first-half revenue rose 3.7%, while net income fell 71%. The principal reported driver of lower earnings was the Health exit, including $106.7 million of after-tax exit and disposal costs.
- Q2 net earned premiums were $2,138.3 million, down 1.5%; fees and other income increased to $323.6 million from $259.1 million. Net investment income was essentially flat in Q2 at $167.8 million, but declined 4.6% to $320.1 million for the first half, primarily due to lower yields.
- Q2 policyholder benefits increased to $1,267.7 million from $1,149.6 million; total benefits, losses and expenses rose 7.9% to $2,604.9 million. Interest expense was $13.8 million in Q2 and $27.6 million for the first half.
- Segment results were mixed in Q2: Solutions net income was $60.8 million; Specialty Property $87.5 million; Health a $123.8 million loss; Employee Benefits $11.3 million; Corporate & Other a $3.1 million loss.
- Selected Q2 ratios: Specialty Property combined ratio was 83.6% versus 89.1%; Health combined ratio was 130.8% versus 100.6%. Solutions combined ratios were 93.9% for domestic and 103.0% for international business. Employee Benefits loss ratio increased to 71.6% from 67.4%.
Cash flow, balance sheet and liquidity
- At June 30, 2015, total assets were $30,842.1 million, down from $31,562.5 million at year-end 2014; stockholders’ equity was $4,828.0 million, down from $5,181.3 million.
- Cash and cash equivalents were $1,297.4 million; total investments were $13,705.5 million. Debt was $1,171.2 million, broadly unchanged from year-end. The $400 million revolving facility had no borrowings and $395.8 million available, after letters of credit.
- For the first half, the cash flow statement reports $168.9 million provided by operating activities, $55.8 million provided by investing activities, and $230.4 million used in financing activities; cash decreased $21.2 million. MD&A separately reports $153.4 million of operating cash flow including the effect of exchange-rate changes. Management cites payment timing and amounts still to be recovered under Affordable Care Act stabilization programs as factors in the operating cash flow decline.
- Holding company capital was $458.8 million, including $250 million designated as a buffer for remote risks. Management said it expected sufficient liquidity for the next 12 months, including debt interest and dividends. U.S. insurance subsidiaries could pay approximately $476 million in 2015 dividends without prior regulatory approval.
- Assurant repurchased 2.89 million shares for approximately $183.8 million during the first half and paid $40.5 million in dividends. Remaining share repurchase authorization was about $302.8 million.
Material changes, outlook and notable items
- Strategic repositioning: Assurant plans to exit the health insurance market and expects to substantially complete the wind-down by the end of 2016. It is also pursuing a sale of Assurant Employee Benefits. The Health exit-charge estimate totals approximately $253 million: $122.5 million of premium deficiency reserves, $93.5 million of severance and retention, $31 million of impairments and contract/lease terminations, and $6 million of other transaction costs. The company expected a further $80–$95 million of Health exit-related charges during the wind-down, in addition to certain overhead costs.
- Health uncertainty: Health’s first-half loss was $207.7 million. Elevated claims on Affordable Care Act policies and changes in estimated risk-mitigation recoveries contributed to the deterioration. At June 30, the company reported $379.5 million of reinsurance recoverables and $213.0 million of net risk-adjustment receivables; actual program recoveries may differ materially from estimates. No risk-corridor recoverable was recorded.
- Management outlook: Solutions expected full-year 2015 revenue and net income to remain level with 2014, subject to client-program timing, tablet-program loss, retailer volumes and foreign exchange. Specialty Property expected lower full-year premiums and net income, partly offset by mortgage-services growth and expense initiatives; catastrophe losses remain a factor. Employee Benefits expected higher premiums and fees from voluntary products and expense actions, but results could be affected by employment trends and markets; the segment sale is being pursued.
- Business and unusual items: Specialty Property’s Q2 result benefited from fewer catastrophe losses, lower non-catastrophe losses and lower catastrophe reinsurance premiums; ARIC was sold in January 2015 for $117.9 million net cash consideration. Solutions’ Q2 earnings benefited from a foreign-entity reorganization tax benefit and improved preneed mortality, while underlying results faced client losses, lower marketing contributions, foreign exchange pressure and legal costs. The prior-year comparison included a $20.8 million one-time tax benefit.
- Capital and investment risks: Ratings agencies downgraded or placed certain Health subsidiaries under review following the exit announcement, although Assurant’s senior debt ratings were affirmed. The fixed-maturity portfolio’s net unrealized gain declined $267.5 million in the first half, primarily due to higher Treasury yields and credit spreads. The portfolio includes credit, interest-rate, currency and catastrophe exposures.
- Legal and regulatory matters: A multistate targeted market-conduct examination of lender-placed insurance was underway, with 46 states participating. Related class actions seek premium refunds and other relief; the company has accrued an estimated loss, but cannot estimate possible losses above accruals. Management said pending matters were not expected to materially affect financial condition, while acknowledging possible effects on results or cash flows in an individual period.
Investor verification priorities
- Track Health wind-down claims, further exit costs, timing, and the collectability and final settlement of ACA program receivables.
- Verify progress and terms of the Employee Benefits sale, regulatory approvals, and any resulting capital or ratings effects.
- Monitor lender-placed insurance regulatory examinations and litigation, including potential costs beyond recorded accruals.
- Assess whether Specialty Property can offset declining lender-placed premiums and client attrition with mortgage-services growth and cost reductions.
- Reconcile operating cash flow measures in the cash flow statement and MD&A, and monitor holding-company liquidity, subsidiary dividends, and continued buybacks.