Assurant, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Unaudited results; amounts in U.S. dollars, millions except per-share data. Assurant provides insurance, protection plans and related services across housing, lifestyle and preneed markets.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $1,831.7 | $1,600.5 | $3,470.3 | $3,152.0 |
| Income before tax | $78.3 | $178.7 | $214.8 | $393.8 |
| Net income | $67.0 | $120.2 | $173.0 | $264.0 |
| Net income attributable to common stockholders | $62.2 | $120.2 | $168.2 | $264.0 |
| Diluted EPS | $1.09 | $2.16 | $3.02 | $4.71 |
| Net investment income | $135.6 | $121.7 | $265.8 | $242.3 |
Revenue grew 14% in Q2 and 10% for the first half, while common-stockholder income fell 48% and 36%, respectively. The company attributed the earnings declines chiefly to TWG transaction and integration charges, the mortgage-solutions sale impairment, weaker realized investment results, and lower amortization of deferred gains. Lower tax rates and higher Global Lifestyle earnings partially offset these items.
Operating cash flow was $172.3 for the first half, versus $(0.3) a year earlier. Investing cash use was $1,514.8, principally reflecting the TWG acquisition and investment activity; financing provided $1,644.5, largely from acquisition-related debt and preferred-stock issuance. Cash and cash equivalents were $1,253.7 at June 30, 2018.
Balance sheet, debt and liquidity
Total assets were $42,361.3, total liabilities $37,028.4 and total equity $5,332.9 at June 30, 2018. The substantial year-over-year balance-sheet changes reflect the TWG acquisition. Corporate debt was $2,004.8, compared with $1,068.2 at year-end 2017; the $450 million revolving credit facility was undrawn. Separately consolidated investment-entity liabilities include non-recourse CLO notes.
Assurant reported $497.2 of holding-company capital, of which $250.0 was intended as a buffer for remote risks. Management said liquidity should be sufficient for the next 12 months, including debt interest and common and preferred dividends. The company reported no common-share repurchases during the first half; it said repurchases began in July.
Material changes and unusual items
- Assurant completed its $2.47 billion enterprise-value acquisition of TWG on May 31, 2018. TWG’s June results contributed $210.3 of revenue and $9.3 of net income. Consideration included $894.9 cash, repayment of $595.9 of TWG debt and $975.5 of Assurant common stock; TWG holders received shares representing about 16.5% of Assurant’s common shares at quarter-end.
- TWG-related first-half transaction and integration costs were $42.8 before tax. Preliminary purchase accounting included $1,463.8 of goodwill and $3,995.7 of value of business acquired; these estimates remained subject to adjustment.
- Assurant recorded a $43.5 pre-tax impairment on mortgage-solutions assets held for sale. The business was sold to Xome on August 1, 2018 for $35.0 cash plus potential future payments tied to performance.
- Q2 comprehensive loss was $122.6, versus comprehensive income of $208.8 a year earlier, primarily reflecting investment-securities and foreign-currency translation losses. First-half other comprehensive loss was $338.0.
- Adoption of new financial-instrument guidance moved equity-security fair-value changes into earnings; adoption produced a $33.9 cumulative reclassification from AOCI to retained earnings. The revenue standard was also adopted, affecting certain service contracts and product sales.
Segments and outlook
Global Lifestyle Q2 revenue rose to $1,138.8 from $862.4, primarily due to TWG; segment net income was $68.1 versus $40.2. Excluding TWG, growth in mobile programs and automotive was partly offset by declines in Financial Services. Global Housing Q2 segment net income increased to $72.6 from $56.2, benefiting from lower taxes, improved non-catastrophe loss experience and multifamily growth; lender-placed and mortgage-solutions activity remained pressured. Global Preneed Q2 net income was $14.7 versus $12.8, with modest revenue growth.
Management expected 2018 Global Housing net income, excluding reportable catastrophes, to increase, reflecting an approximately 20%–21% effective tax rate, although income before the tax benefit was expected to decline. Housing revenue was expected to contract, excluding growth in multifamily, international and other products after mortgage-solutions was sold. Management expected Global Lifestyle net income to increase, supported by TWG, synergies, lower taxes and organic growth; Financial Services declines and discontinued client partnerships were offsets. Global Preneed revenue and income were expected to increase modestly, with an approximately 22% effective tax rate. Management expected some tax savings to be reinvested in growth, particularly in the second half; it did not provide consolidated earnings guidance in the supplied filing text.
The 2018 property-catastrophe reinsurance program provided $1.30 billion of coverage, with estimated premiums of $121.0; coverage was placed with more than 40 reinsurers rated A- or better by A.M. Best. Management identified acquisition integration, claim-reserve adequacy, catastrophes, investment values, client retention, competition, cyber and privacy risks, reinsurance, and regulatory and litigation matters among factors that could affect results. Ratings agencies downgraded certain Assurant debt and insurance ratings in connection with the acquisition and financing. Pending lender-placed insurance class actions remain; management said excess losses cannot be estimated, but did not believe pending matters were likely to materially affect financial condition. The filing reported effective disclosure controls, but excluded TWG from the quarter’s internal-control evaluation while the company assessed its controls.
Important facts for investors to verify
- How TWG integration, synergies and preliminary purchase accounting develop, including the large VOBA amortization burden.
- Whether underlying segment growth offsets lender-placed, mortgage-solutions and Financial Services declines, and how the mortgage-solutions sale affects subsequent periods.
- Debt-service costs, credit ratings, preferred dividends and potential dilution when the mandatory convertible preferred stock converts in 2021.
- Reserve development, catastrophe losses and reinsurance recoverability, including the collateral supporting TWG-related reinsurance balances.
- Outcomes and potential costs of lender-placed insurance litigation, and the results of the company’s internal-control assessment of TWG.