Assurant, Inc. — Q2 2013 Form 10-Q
Business context and period. Assurant is a holding company whose subsidiaries provide specialized insurance and related services, including service contracts and credit-related products, lender-placed and other property insurance, health insurance, and employee benefits. This unaudited filing covers the quarter and six months ended June 30, 2013; balance-sheet comparisons are with December 31, 2012. Unless stated otherwise, dollar amounts below are in millions.
Financial performance and position
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total revenue | $2,237.8 | $2,129.3 | $4,388.4 | $4,202.2 |
| Net earned premiums | $1,916.4 | $1,792.2 | $3,766.9 | $3,569.3 |
| Net investment income | $163.9 | $199.3 | $329.9 | $371.6 |
| Income before tax | $210.8 | $264.7 | $417.2 | $514.3 |
| Net income | $133.5 | $169.2 | $251.3 | $332.4 |
| Diluted EPS | $1.70 | $1.94 | $3.15 | $3.76 |
| Net margin, calculated as net income / revenue | 6.0% | 7.9% | 5.7% | 7.9% |
- Revenue rose 5% in Q2 and 4% for the first half, led mainly by premium growth. Net income fell 21% and 24%, respectively; lower investment income and higher expenses outweighed revenue growth.
- Six-month operating cash flow was $273.7; the MD&A reports $261.1 including the $12.6 adverse foreign-exchange effect. Investing activities used $343.6 and financing activities provided $443.5. Cash and cash equivalents were $1,270.4 at June 30.
- Total assets were $28,728.8, total liabilities $23,932.9, and stockholders’ equity $4,795.9. Debt was $1,646.9, up from $972.4 at year-end. The $700.0 senior-note issuance was partly offset by $23.7 of debt repurchases.
- Investments totaled $14,648.2. Fixed-maturity securities had fair value of $11,423.2; 64.5% were rated A or higher and 2.1% B or lower. A sharp decline in unrealized securities gains contributed to AOCI falling to $420.5 from $830.4 and to a six-month comprehensive loss of $158.6.
Material changes and segment results
- Assurant Solutions: Q2 net income was $31.4 versus $40.4; first-half income was $66.3 versus $83.8. Premium and fee growth in service contracts was offset by lower investment yields, preneed costs, a lost mobile client, and $2.7 after-tax European restructuring charges. Prior-year results included favorable client settlements.
- Assurant Specialty Property: Q2 net income rose to $106.5 from $92.3, supported by lender-placed portfolio additions and multifamily growth. First-half income declined to $200.8 from $205.3, reflecting the $14.0 NYDFS settlement, higher catastrophe losses, and growth-related costs. First-half combined ratio was 78.0%, versus 74.8%.
- Assurant Health: Q2 net income fell to $4.1 from $28.9; the first half recorded a $1.3 loss versus $40.5 income. Lower investment income, less favorable claims, and Affordable Care Act-related tax effects contributed. Q2 loss ratio increased to 75.2% from 73.0%.
- Assurant Employee Benefits: Q2 net income was $11.5 versus $18.6; first-half income was $17.6 versus $27.7. Less favorable disability results, a lower discount rate for new long-term disability claim reserves, and lower investment income weighed on results.
Outlook, risks, contingencies, and unusual items
- Management expects modest 2013 premium growth at Solutions and continued expense management. Specialty Property revenue is expected to increase with loan portfolio and multifamily growth, but results remain exposed to placement-rate changes, catastrophe losses, and rising expenses. Health premiums are expected to decline versus 2012, with insured lives expected to increase; healthcare reform and elevated tax rates remain significant uncertainties. Employee Benefits expects 2013 premiums and fees to be broadly consistent with 2012.
- Management believes liquidity is sufficient for the next 12 months. The company reported $887.1 of holding-company capital available for general corporate purposes, excluding $476.3 earmarked to repay debt maturing in February 2014; $250.0 of the available amount is reserved as a buffer for remote risks. The $350.0 revolver had $344.4 available, and the company reported covenant compliance.
- In March, Assurant and two subsidiaries agreed to pay $14.0 to the New York Department of Financial Services and modify lender-placed insurance practices, without admitting or denying wrongdoing. Class-action and other lender-placed insurance litigation continues; management said excess potential loss cannot be estimated, while not believing pending matters are likely to materially affect financial condition.
- The company issued $350.0 of 2.50% notes due 2018 and $350.0 of 4.00% notes due 2023, intending to use proceeds partly to repay 2014 maturities. It repurchased 4.25 million shares for $200.6 during the first half, with $302.3 remaining under the authorization. The quarterly dividend was raised to $0.25 per share from $0.21.
- A $10.2 increase in estimated nondeductible compensation expense related to the Affordable Care Act raised the first-half effective tax rate by 245 basis points. The qualified pension plan was 97% funded at June 30; Assurant contributed $25.0 in the first half and expected to contribute up to another $25.0 in 2013.
- Risks highlighted include regulatory action and premium-rate pressure, healthcare reform, catastrophe losses, reserve adequacy, investment and interest-rate risks, reinsurance and counterparty exposure, litigation, and the ability of subsidiaries to pay dividends. Moody’s downgraded two life and health subsidiary ratings in March; S&P upgraded Assurant’s senior debt and several subsidiary financial-strength ratings in June.
Important facts for investors to verify
- Whether premium growth can translate into improved earnings as investment income remains lower and operating costs rise.
- Developments in lender-placed insurance regulation, the New York settlement, placement rates, and litigation exposure beyond accrued amounts.
- Health-segment claims experience, Affordable Care Act effects, and the assumptions behind the nondeductible-compensation tax estimate.
- Investment portfolio sensitivity to market yields and credit spreads, including unrealized losses and the decline in AOCI.
- Funding plans for the February 2014 debt maturity, future capital returns, and the extent to which regulated-subsidiary dividends support holding-company liquidity.