ASSURANT, INC. quarterly report, Q3 FY2011

Assurant, Inc. — Q3 2011 Form 10-Q

Reporting period: Three and nine months ended September 30, 2011; balance sheet compared with December 31, 2010. Assurant is a diversified insurance and related-services holding company with four operating segments: Solutions, Specialty Property, Health, and Employee Benefits. Unless stated otherwise, amounts below are in millions of U.S. dollars and are rounded.

Financial performance and position

Metric	Q3 2011	Q3 2010	Nine months 2011	Nine months 2010
Total revenue	$2,061.7	$2,114.0	$6,161.3	$6,422.1
Income before tax	$115.3	$226.7	$461.9	$728.6
Net income	$76.0	$141.7	$383.6	$463.6
Diluted EPS	$0.79	$1.30	$3.88	$4.11
Dividends per share	$0.18	$0.16	$0.52	$0.47

Q3 revenue declined about 2%; net income fell 46%. Nine-month revenue declined about 4% and net income fell 17%.
Policyholder benefits were $998.9 million in Q3 and $2,881.6 million year to date, compared with $913.3 million and $2,746.6 million, respectively, in 2010. Nine-month expenses overall were $5,699.4 million, slightly above 2010.
Net investment income declined 2% in Q3 and 1% for the nine months, mainly because of lower investment yields. Nine-month realized investment gains were $20.4 million, down from $29.7 million.
Cash from operating activities was $509.7 million in the cash flow statement for the nine months; investing used $145.5 million and financing used $450.2 million. Cash and cash equivalents were $1,059.5 million at September 30, down from $1,150.5 million at year-end.
Total assets were $26,774.0 million and stockholders’ equity was $5,014.5 million at September 30. Debt was $972.2 million carrying value; senior-note principal totaled $975 million.
Fixed-maturity securities had a fair value of $10,978.9 million. Investment-grade ratings Aaa/Aa/A represented 60% of the portfolio and Baa 32%.

Segment results and material changes

Specialty Property: Q3 segment net income fell to $43.7 million from $106.7 million; nine-month income fell to $188.9 million from $328.8 million. Catastrophes and more frequent non-catastrophe weather losses were the main drivers. Q3 reportable catastrophe losses were $80.5 million pretax and $52.3 million after tax; nine-month pretax losses were $157.6 million, versus $7.7 million in 2010. The Q3 combined ratio rose to 92.3% from 72.8%; the nine-month ratio was 85.9% versus 72.4%.
Solutions: Segment net income increased 9% in Q3 to $35.3 million and 24% year to date to $113.0 million, supported by improved service-contract underwriting and preneed results. Domestic legacy credit and service-contract business continued to run off, partly offset by international and new domestic service-contract growth.
Health: Q3 net income was $5.8 million versus $5.3 million; nine-month net income declined to $18.1 million from $39.0 million. Expense reductions helped, but Affordable Care Act medical-loss-ratio rebates, lower sales, and prior-year comparison items weighed on results. The segment accrued $9.3 million of rebates in Q3 and $48.4 million year to date.
Employee Benefits: Net income declined to $13.6 million in Q3 from $16.9 million and to $28.6 million for nine months from $45.8 million. Less favorable disability experience and a lower reserve discount rate were key factors; improved life and dental experience partly offset them. Nine-month loss ratio increased to 73.2% from 70.2%.
Corporate & Other: Nine-month results improved to $34.9 million of income from a $41.6 million loss, primarily due to an $80 million release of a deferred-tax valuation allowance. Q3 loss widened to $22.4 million, including lower realized investment gains and costs related to the replacement credit facility.

Liquidity, capital, outlook, and risks

Management said liquidity should be sufficient for the next 12 months, including debt interest and dividends. Holding-company capital was $638.1 million, of which $250 million was designated as a buffer for remote risks. The company reported $325.7 million available under its $350 million revolving credit facility, no borrowings, and covenant compliance.
The new unsecured four-year revolving facility expires in September 2015 and replaced the prior facility. Assurant estimated annual savings of about $1.4 million. Senior notes bear interest at 5.63% and 6.75%, with maturities in 2014 and 2034.
The company repurchased 9.6 million shares for $359.8 million during the first nine months and had $478.2 million remaining under its authorization. Management expected further repurchases in 2011 subject to market, legal, and regulatory constraints; future dividends remain at the board’s discretion.
Management anticipated modest 2012 net earned-premium and fee growth in Solutions, with international and domestic service contracts and preneed as contributors. It said the newly acquired mortgage-loan portfolio would begin producing premiums in Q4 2011 and expected continued portfolio movement in 2012. No consolidated earnings guidance was provided.
Health’s estimated full-year 2011 MLR rebate accrual was $60–$65 million; the final amount would depend on full-year experience and regulatory interpretation and would not be known with certainty until mid-2012. The Affordable Care Act’s broader effects remained uncertain.
Other risks include catastrophe and weather losses, reserve adequacy, investment and credit-market declines, lower yields, reinsurance availability and recoverability, regulatory changes, client or distribution losses, and rating changes. S&P revised the parent and primary property/casualty outlooks to positive in October, while downgrading primary health subsidiary ratings to BBB; Moody’s had changed relevant outlooks to negative in March.
The qualified pension plan was 82% funded, with a $130.5 million deficit, versus 85% funded and a $96.3 million deficit at year-end. Assurant contributed $40 million in the first nine months and was considering additional 2011 contributions.
Assurant described ordinary-course litigation and said pending matters were not expected to have a material adverse effect. A Medicare Secondary Payer Act interpretation issue remained unresolved with CMS; the company said a loss was not probable and could not estimate a possible loss range. Accruals for legacy London reinsurance disputes were considered adequate, though outcomes remain uncertain.

Important facts for investors to verify

Whether catastrophe and weather losses abate, and the resulting effect on Specialty Property earnings and combined ratios.
The final 2011 health-insurance rebate obligation, subsequent regulatory guidance, and Health segment sales and expense trends.
Whether Solutions’ growth offsets continued runoff in legacy domestic business, and whether the new Specialty Property portfolio and SureDeposit acquisition deliver expected growth.
Investment portfolio credit quality, realized and impairment losses, yields, and exposure to commercial real estate and securities with unrealized losses.
Holding-company liquidity, subsidiary dividend capacity, rating developments, pension funding needs, and capital returns under changing market and regulatory conditions.
Potential outcomes of the CMS matter and legacy reinsurance disputes; the filing does not provide a clear estimate of possible losses for the CMS issue.