Business context and reporting period
Assurant, Inc. is a diversified insurer and related-services provider operating through Assurant Solutions, Assurant Specialty Property, Assurant Health, Assurant Employee Benefits, and Corporate & Other. This unaudited Form 10-Q covers the three months ended March 31, 2014, compared with the first quarter of 2013; balance-sheet comparisons are with December 31, 2013. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q1 2014 | Q1 2013 / prior date |
|---|---|---|
| Total revenue | $2,448.4 | $2,150.6 |
| Net earned premiums | $2,060.5 | $1,850.4 |
| Net investment income | $168.1 | $166.0 |
| Income before tax | $235.3 | $206.4 |
| Net income | $137.2 | $117.8 |
| Diluted EPS | $1.86 | $1.46 |
| Operating cash flow, as presented in cash-flow statement | $127.2 | $51.7 |
- Revenue increased 13.8%, net income 16.5%, and diluted EPS 27.4%. Net margin was approximately 5.6%, versus 5.5% a year earlier; pretax margin was approximately 9.6% in both periods.
- Other comprehensive income was $156.7 million, mainly reflecting higher unrealized securities gains; total comprehensive income was $293.9 million, versus $65.4 million in Q1 2013.
- At March 31, total assets were $29.67 billion, stockholders’ equity $5.10 billion, and debt $1.17 billion, down from $1.64 billion at year-end. The company repaid $467.3 million of debt during the quarter, reflecting repayment at maturity of $500 million principal, net of amounts repurchased in 2013.
- Cash and cash equivalents were $1.11 billion, down $611.3 million from year-end. Cash used in investing was $191.1 million and cash used in financing was $534.2 million. The MD&A reports $114.1 million of operating cash flow including the $13.1 million adverse currency effect; the cash-flow statement reports operating activities separately at $127.2 million.
- Total investments were $14.62 billion. Fixed-maturity securities were $11.60 billion; 63.7% were rated Aaa/Aa/A and 29.6% Baa. Gross unrealized losses declined to $29.2 million on fixed maturities and $3.1 million on equities from $63.1 million and $9.4 million, respectively, at year-end.
- The company reported $537.4 million of holding-company capital, including $250 million designated as a buffer for remote risks. A $350 million revolving facility had $345.7 million available; there were no commercial-paper or revolver borrowings, and the company reported compliance with facility covenants. Management said liquidity should be sufficient for the next 12 months. Insurance-subsidiary dividends remain subject to regulatory limits.
Material changes and segment results
- Assurant Solutions: Net income rose 42% to $49.5 million. Revenue increased 14%, led by mobile-protection growth, client marketing programs, and the 2013 Lifestyle Services Group acquisition. Management expected premiums and fees to increase over 2013, with quarterly variation from device launches, marketing and seasonality.
- Assurant Specialty Property: Net income rose 4% to $97.7 million. Lower catastrophe losses and the prior-year $14 million New York settlement supported the comparison, but harsh winter weather increased non-catastrophe claims. Lender-placed placement rate fell to 2.74% from 2.89%. Management expected premiums and fees to remain level with 2013; targeted growth, including Streetlinks, was expected to be offset partly by lender-placed declines.
- Assurant Health: Net loss widened to $7.1 million from $5.3 million. The loss ratio increased to 73.5% from 72.6%; higher commissions, less favorable individual medical claims and ACA-related effects weighed on results. Management expected full-year premiums and fees to rise with new ACA individual policies, but results to depend on emerging claims and risk-mitigation experience; estimates could change materially and the effective tax rate was expected to remain high.
- Assurant Employee Benefits: Net income increased to $13.9 million from $6.1 million, primarily on favorable life and dental claims, additional real-estate joint-venture investment income, and a higher discount rate for new long-term disability claims. Management expected premiums and fees to increase, with voluntary-product growth and expense actions; results remain sensitive to employment and capital markets.
- Corporate & Other: Net loss increased to $16.8 million from $12.1 million, primarily due to higher tax liabilities; increased realized investment gains partly offset higher interest expense.
Outlook, risks and unusual items
- Management cited lender-placed insurance regulation, rate and commission reductions, possible client losses, litigation, catastrophe exposure, ACA impacts, claims and reserve assumptions, competition, economic and interest-rate conditions, investment impairment and credit risk, foreign exchange, cybersecurity, and reinsurer or counterparty failure among factors that could affect results.
- Assurant Specialty Property faces New York and Florida program changes and federal mortgage-servicer rules effective in 2014 that restrict commissions and quota-share arrangements. A client had indicated a possible loan transfer to another carrier; discussions were continuing. The filing notes expected lender-placed placement-rate declines.
- The company continues to defend lender-placed insurance class actions and cooperate with regulators. It has accrued an estimated litigation loss but says any additional loss or range cannot be estimated. Management did not believe pending matters were likely to materially affect financial condition, while noting an individual period’s results or cash flows could be materially affected.
- The ACA health-insurer fee resulted in a recorded estimated $24 million liability and deferred-cost asset for 2014; $6 million was amortized to expense in Q1. The estimates may be adjusted when assessed. ACA-related non-deductible compensation estimates also increased Q1 tax expense by $5.7 million, compared with $10.2 million in Q1 2013.
- Q1 included $5.1 million after-tax of reportable catastrophe losses in Specialty Property, versus $10.0 million a year earlier. The company made a $20.95 million payment for a 40% interest in Iké Asistencia and paid $31.9 million of delayed and contingent Lifestyle Services Group acquisition obligations. Subsequent to quarter-end, on April 16, Assurant acquired Streetlinks for $60 million cash plus a potential earnout; purchase accounting was incomplete.
- Share repurchases totaled 314,600 shares for $20.9 million, and the quarterly dividend was $0.25 per share. The board’s remaining repurchase authorization was $683.9 million at March 31.
Important facts for investors to verify
- Whether mobile-protection growth, marketing-program profits and LSG contributions are sustainable, and how much earnings depend on client relationships and product-launch timing.
- How lender-placed insurance rate, commission and quota-share changes, the possible client loan transfer, winter claims and pending litigation affect Specialty Property revenue and profitability.
- Whether ACA claims experience and risk-mitigation recoveries develop as assumed, and the resulting impact on Assurant Health losses, taxes and full-year results.
- Whether operating cash generation and holding-company resources remain adequate after debt repayment, acquisitions, dividends and repurchases, given limits on subsidiary dividends.
- How portfolio credit quality, unrealized valuation changes, interest rates and reinsurance recoverability affect investment income, capital and liquidity.