Assurant, Inc. — 2016 Form 10-K Summary
Business context and reporting period
Assurant provides risk-management products and services in housing and lifestyle markets, primarily through Global Housing, Global Lifestyle and Global Preneed. This annual report covers the fiscal year ended December 31, 2016; it is not a standalone quarterly filing. Unless stated otherwise, financial amounts below are in millions of U.S. dollars.
In 2016, Assurant substantially exited health insurance and sold Assurant Employee Benefits to Sun Life, primarily through reinsurance transactions. It reorganized its reporting segments and continued a multi-year transformation toward specialty housing and lifestyle products and more fee-based, capital-light services.
Financial performance and condition
| Metric | 2016 | 2015 |
|---|---|---|
| Total revenue | $7,531.8 | $10,325.5 |
| Income before tax | $848.6 | $201.2 |
| Net income | $565.4 | $141.6 |
| Diluted EPS | $9.13 | $2.05 |
| Net investment income | $515.7 | $626.2 |
| Cash and cash equivalents at year-end | $1,032.0 | $1,288.3 |
| Total assets | $29,709.1 | $30,036.4 |
| Debt | $1,067.0 | $1,164.7 |
| Stockholders’ equity | $4,098.1 | $4,524.0 |
Revenue declined about 27%, largely reflecting the health-business runoff and the employee-benefits sale. Net income rose about 299%, but included significant sale-related gains and investment gains; the reported increase should not be read as equivalent growth in recurring operating earnings. Approximate consolidated net margin was 7.5% in 2016 versus 1.4% in 2015.
The company reported cash flows of $134.5 million from operating activities, $725.6 million from investing activities and $1,106.2 million used in financing activities in the audited cash-flow statement. Management’s discussion separately cites operating cash flow of $124.2 million; the filing text does not reconcile this difference clearly. Debt to total capital was reported as 20.7%. The $400 million revolving facility had no loans outstanding, with $391.0 million available after letters of credit; the company reported compliance with its covenants.
Net income by continuing operating segment was $188.7 million for Global Housing, $154.4 million for Global Lifestyle and $42.3 million for Global Preneed. Global Housing’s risk-based combined ratio was 91.1%, compared with 83.4% in 2015; its fee-based business pre-tax margin was 10.8%, versus 11.6%. Global Lifestyle’s risk-based combined ratio was 95.9%, versus 95.5%, and its fee-based pre-tax margin was 3.5%, versus 3.6%.
Material changes versus prior period
- Global Housing net income declined 39% and segment net earned premiums, fees and other income fell about 7%. Lower lender-placed placement and premium rates, lost client business and higher catastrophe losses outweighed growth in renters’ insurance and mortgage solutions.
- Global Lifestyle net income was approximately flat, up 1%; segment net earned premiums, fees and other income rose about 2%. Vehicle protection and connected-living growth helped offset declines in credit insurance and legacy retail programs.
- Global Preneed net income fell 4%, while segment net earned premiums, fees and other income increased about 2%. Higher investment income was offset in part by an adjustment to acquisition-cost amortization and policyholder benefits for an older policy block.
- Consolidated results benefited from $394.5 million of amortization of deferred gains and gains on business disposals, $162.2 million in net realized investment gains, and a $29.6 million pension-curtailment gain. The employee-benefits transaction was the principal source of the disposal-related gains.
- Assurant repurchased 10.5 million shares for approximately $869 million and paid $125.3 million in common dividends. Shares outstanding fell materially during the year.
Outlook, risks and unusual items
Management expected 2017 Global Housing net income, excluding catastrophe losses, and segment revenue to decline as lender-placed business approaches a normalized level; it anticipated continued growth in multi-family housing and mortgage solutions and additional expense savings. It expected Global Lifestyle net income to increase, while reported segment revenue could decline because of a large service-contract client’s program-structure change; management said that change was not expected to affect net income. Global Preneed net income and fees and other income were expected to increase on sales growth and operating efficiencies. These are segment expectations, not consolidated earnings guidance.
- Global Housing incurred $157.4 million of reportable catastrophe losses in 2016, primarily from Hurricane Matthew and flooding, compared with $29.7 million in 2015. A $1.4 billion catastrophe reinsurance program was in place for 2016 and continuing into 2017, subject to its stated retentions and limits.
- A lender-placed insurance regulatory settlement, subject to conditions, would require approximately $85 million in examination, compliance and monitoring costs—not fines or penalties—and changes to practices and rate filings. Assurant expected the agreement to take effect in the first half of 2017. The company also faced lender-placed insurance class actions; management said pending matters were not likely to materially affect financial condition, while acknowledging possible effects on individual-period results or cash flows.
- The company recorded a $23 million estimated indemnification liability related to a prior disposal and a $12.5 million estimated guaranty-association assessment related to Penn Treaty. It also recorded a $23.0 million loss on extinguishment of debt after purchasing $100 million principal amount of 6.75% notes.
- Reinsurance recoverables totaled $9.1 billion. The company remains primarily liable to policyholders if reinsurers fail, although much of the exposure was supported by trusts, letters of credit or other collateral. Recoverables related to Sun Life, The Hartford and John Hancock totaled $6.3 billion.
- Other significant risks include claims-reserve estimation, catastrophe severity, interest-rate and credit-market movements, foreign exchange, client concentration, regulatory changes, cybersecurity and execution of the company’s transformation. Goodwill was not impaired in 2016, but Global Preneed’s estimated fair value exceeded book value by only 5.6%, making it comparatively more sensitive to assumptions.
For the fourth quarter of 2016, revenue was $1,752.3 million and net income was $31.3 million. Results reflected catastrophe losses and continuing lender-placed premium declines. A $5.1 million reduction to fourth-quarter net income resulted from adjustments to health and welfare liabilities, primarily for expenses incurred in the first half of 2016.
Important facts for investors to verify
- Separate recurring operating performance from the employee-benefits sale gains, investment gains, pension-curtailment gain and other unusual items; review the filing’s transaction and segment reconciliations.
- Resolve the operating-cash-flow difference between the audited cash-flow statement ($134.5 million) and management discussion ($124.2 million).
- Track lender-placed placement rates, client retention, rate filings and the effective date and financial impact of the regulatory settlement.
- Assess the assumptions behind catastrophe losses and reinsurance protection, including reinsurer credit quality, collateral and potential recovery delays.
- Monitor holding-company liquidity and regulated-subsidiary dividend capacity: the filing estimates up to $319 million of 2017 dividends without prior regulatory approval, while dividends remain subject to restrictions and approvals.
- Evaluate Global Preneed goodwill sensitivity and the earnings and cash-flow effects of the transformation, business runoff and announced acquisitions.