Assurant, Inc. — 2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010; the filing also reports fourth-quarter results. Unless stated otherwise, dollar figures below are in millions. Assurant is a specialized insurer operating through Solutions, Specialty Property, Health, and Employee Benefits, plus Corporate and Other.
Financial results and condition
- Revenue: Total revenue was $8,527.7, down 2.0% from $8,700.5 in 2009. Net earned premiums and other considerations declined 1.9% to $7,403.0; net investment income increased 0.6% to $703.2. Net realized investment gains were $48.4, compared with losses of $53.6 in 2009.
- Profit: Net income was $279.2, down 35.2% from $430.6; diluted EPS was $2.50 versus $3.63. The 2010 effective tax rate was 54.0%, compared with 39.3% in 2009.
- Cash flow: The consolidated cash flow statement reports $540.7 of operating cash flow, $(8.9) from investing activities, and $(699.5) from financing activities. Cash and cash equivalents ended the year at $1,150.5. The MD&A summary gives operating cash flow of $540.3; the filing does not clearly reconcile this difference in the supplied text.
- Balance sheet and debt: Total assets were $26,397.0, stockholders’ equity $4,780.5, and debt $972.2 at year-end. Cash and investments totaled $14,656.0. Senior notes had $975.0 aggregate principal, with 5.625% and 6.75% coupons and maturities in 2014 and 2034. The company reported an 18% debt-to-capitalization ratio and compliance with credit-facility covenants.
- Capital returns and liquidity: Assurant repurchased 15.2 million shares for $533.0 and paid $69.6 in common dividends during 2010. Management said liquidity should be sufficient for the next 12 months. The $350 revolving facility had $325.6 available at year-end; no borrowings were outstanding. Subsidiary dividends without prior regulatory approval were limited to approximately $614.4 in 2011.
Segment performance
- Solutions: Segment net income fell to $103.2 from $120.1, including a $30.9 after-tax intangible impairment. Excluding that charge, income increased $14.1. Gross written premiums rose 8% to $3,196.6, while net earned premiums declined as domestic credit, legacy service-contract, and older preneed business ran off.
- Specialty Property: Net income increased 4.5% to $424.3. Net earned premiums were $1,953.2; combined ratio improved to 73.3% from 74.7%. 2010 included $14.8 after-tax of reportable catastrophe losses.
- Health: Returned to net income of $54.0 from a $30.2 loss. Premiums declined 0.8% to $1,864.1; combined ratio improved to 98.1% from 105.0%. Results included a $17.4 after-tax benefit from a legal-settlement reserve release, alongside restructuring charges.
- Employee Benefits: Net income increased 50.7% to $63.5. Premiums rose 4.7% to $1,101.4; the loss ratio improved to 69.6% from 72.0% and the expense ratio to 35.1% from 36.4%.
- Corporate and Other: Net loss widened to $59.5 from $24.4, primarily because 2009 included an $83.5 after-tax favorable legal settlement; higher 2010 investment gains partly offset this.
Material changes and unusual items
- Fourth-quarter 2010 included $306.4 of non-cash goodwill impairment, eliminating all goodwill assigned to Health ($204.3) and Employee Benefits ($102.1). This compared with an $83.0 impairment in 2009. Management attributed the 2010 write-downs to health reform uncertainty, low interest rates, unemployment, slow recovery, and higher reporting-unit book values.
- Solutions recorded a $47.6 pre-tax impairment of a customer-related intangible after a retailer gave notice that it would not renew a block of acquired business effective June 1, 2011. Management did not expect the contract lapse to materially affect Solutions’ 2011 profitability.
- Net income fell despite $107.1 after-tax improvement in operating segment results and $66.3 after-tax higher realized investment gains, chiefly because impairment charges increased; 2009 also included the $83.5 after-tax settlement benefit.
- Goodwill remaining at year-end was $619.8. Solutions passed its impairment test by a narrow margin: a 100-basis-point higher discount rate or lower terminal growth assumption would have put its estimated fair value below book value.
Outlook, commentary and key risks
- Health reform: Management described 2011 as a transition year, with continued cost reduction, operational simplification, and product changes. It expected Health to break even in 2011, while warning that losses remained possible if its plans failed or demand was weaker than expected. New minimum medical-loss-ratio rebate requirements for certain products began in 2011; the filing notes an 80% threshold.
- Solutions: Management expected 2011 net earned premiums to decline approximately $170 million because of domestic credit-insurance runoff and former large service-contract clients. Preneed sales and international business were identified as growth areas.
- Employee Benefits and investments: Management expected challenging revenue growth until employment and payrolls improved, and anticipated life and disability claims experience returning toward more normal levels. Low interest rates were expected to pressure investment income and increase reserves for new long-term disability claims.
- Principal risks: Health-care reform and minimum loss ratios; catastrophe frequency and severity; claims-reserve adequacy; investment credit, interest-rate and liquidity risk; reinsurer collectability; concentration in important client and distribution agreements; regulatory limits on rates and subsidiary dividends; and litigation or regulatory outcomes.
- Ratings and contingencies: Moody’s lowered rated life and health subsidiaries from A2 to A3 and Assurant’s senior debt from Baa1 to Baa2 during 2010. Management said pending litigation was not expected to have a material adverse effect. A Medicare Secondary Payer interpretation issue remained unresolved; the company said a loss was not probable and could not estimate a possible loss or range.
- Controls and audit: Management and the auditor concluded internal control over financial reporting was effective as of December 31, 2010. The auditor issued an unqualified opinion on the financial statements.
Most important facts for investors to verify
- How much of the 2010 earnings decline is attributable to non-cash impairments and other nonrecurring items, and how Health performs against management’s 2011 break-even expectation.
- Whether the remaining goodwill—especially Solutions’ narrow valuation cushion—remains recoverable under changed earnings, discount-rate, or growth assumptions.
- Actual 2011 premium and profit trends in Solutions and the effect of the identified client non-renewal and domestic credit-insurance runoff.
- Health reform’s effect on pricing, broker distribution, customer retention, and required rebates under minimum loss-ratio rules.
- Claims-reserve development, catastrophe losses, investment impairments, and the collectability and collateralization of the $4,997.3 in reinsurance recoverables.
- Holding-company liquidity and capital-return capacity given regulated subsidiary-dividend limits, debt maturities, and the scale of 2010 share repurchases.