ASSURANT, INC. quarterly report, Q3 FY2010

Assurant, Inc. — Q3 2010 Form 10-Q

Business context and reporting period

For the quarter and nine months ended September 30, 2010; unaudited. Assurant provides specialized insurance and related services through Assurant Solutions, Specialty Property, Health, Employee Benefits, and Corporate & Other. Amounts below are in millions of dollars unless stated otherwise.

Financial performance and position

Metric	Q3 2010	Q3 2009	Nine months 2010	Nine months 2009
Total revenue	$2,114	$2,157	$6,422	$6,518
Income before tax	$227	$209	$729	$648
Net income	$142	$145	$464	$419
Diluted EPS	$1.30	$1.22	$4.11	$3.54
Net investment income	$176	$173	$525	$526

Q3 revenue fell 2.0% and net income fell 2.1%; nine-month revenue declined 1.5%, while net income rose 10.7%. The nine-month earnings improvement reflected a $46.6 million after-tax improvement in realized investment results and stronger results in all four operating segments.
Q3 net income was pressured by $9.0 million after-tax of lower realized investment gains, principally a commercial mortgage loan allowance, and a higher effective tax rate (37.5% versus 30.8%). Nine-month 2010 realized investment gains were $29.7 million, compared with losses of $42.0 million in 2009.
Nine-month operating cash flow was $465.5 million; investing cash flow used $100.5 million and financing cash flow used $513.6 million. Cash and equivalents were $1.168 billion at quarter-end, down $150.2 million from year-end. Management’s cash-flow discussion reports operating cash flow of $463.8 million including exchange-rate effects; the filing presents the distinction differently in its statements and MD&A.
At September 30, total assets were $26.85 billion, stockholders’ equity $5.37 billion, and debt $972.1 million carrying value ($975 million principal). Senior notes mature in 2014 and 2034 and carry coupons of 5.625% and 6.750%. The $350 million revolving facility had no borrowings; reported availability was $325.6 million, with letters of credit outstanding. Assurant reported compliance with covenants.
Fixed-maturity investments were $10.82 billion fair value, up from $9.97 billion at year-end. Net unrealized gains increased to $943.9 million from $281.3 million. About 91.8% of fixed maturities were rated Baa or higher. Gross unrealized losses declined to $32.4 million from $143.4 million.

Material changes and segment results

All four operating segments reported higher nine-month after-tax income. Specialty Property contributed $328.8 million, Solutions $91.5 million, Employee Benefits $45.8 million, and Health $39.0 million.
Solutions: Nine-month segment income rose 2% to $91.5 million despite lower revenue. International credit and service-contract growth and improved UK credit losses partly offset domestic credit and service-contract runoff. International combined ratio improved to 104.1% in Q3 from 108.8%; it remained above 100%.
Specialty Property: Nine-month income increased 10% to $328.8 million. Nine-month combined ratio improved to 72.4% from 75.2%, supported by expense reductions and creditor-placed homeowners growth. Q3 results benefited from a mild hurricane season.
Health: Returned to profit: nine-month income was $39.0 million versus a $0.5 million loss. Pricing and plan-design changes, favorable reserve development, and lower expenses contributed. Membership declined to 721,000 from 781,000 a year earlier; nine-month combined ratio improved to 98.2% from 102.7%.
Employee Benefits: Nine-month income rose 50% to $45.8 million, reflecting premium growth from new clients and an acquired block, favorable claims experience, and expense management. Q3 and nine-month loss ratios were 69.5% and 70.2%, respectively.
Shares outstanding at September 30 were 106.5 million, versus 116.6 million at year-end. The company repurchased 10.73 million shares for $369.2 million in the first nine months and paid $52.7 million in dividends.

Outlook, risks, contingencies, and unusual items

Management said liquidity should be sufficient for the next 12 months, including debt interest and dividends. It reported approximately $710 million of holding-company capital, including a $250 million buffer and approximately $460 million deployable capital.
Management expected continued improvement in Solutions’ international results during the rest of 2010. It anticipated Health reform could adversely affect results through the remainder of 2010 and into 2011; Health had modified or discontinued products, introduced new products, and planned further efficiency measures.
Employee Benefits management expected long-term disability loss ratios to rise as claims experience normalizes and low rates require higher reserves for new claims. It also expected pension expense to increase by approximately $10 million in 2011. Assurant expected an additional $10 million pension contribution in 2010; the plan was 81% funded, with a $124.7 million deficit.
Health Care Reform creates uncertainty around minimum medical loss ratios, pricing, product requirements, costs, and market demand, and could lead to goodwill impairment. Management stated the full effects would take years to assess.
Moody’s downgraded Assurant’s senior debt rating from Baa1 to Baa2 and ratings of four insurance subsidiaries from A2 to A3 during Q3. The filing warns that further downgrades could affect client contracts, sales, and borrowing costs.
A commercial mortgage loan was written down to zero after continued regional real-estate weakness; reserves of $9.0 million were recorded in Q3 and $15.8 million in the nine-month period. Management noted impairment estimates depend on judgments and could change.
Other notable items include a $7.6 million pre-tax Health restructuring charge in Q3, a $25.4 million payment resolving two Health lawsuits and release of remaining reserves, and payment of a previously accrued $3.5 million SEC civil penalty. The SEC settlement included a permanent injunction; Assurant neither admitted nor denied the allegations.
Remaining contingencies include ordinary-course litigation, unresolved London-market reinsurance disputes, and a Medicare Secondary Payer interpretation issue for which Assurant said a possible loss was not considered probable and could not be estimated. Management did not expect pending matters to have a material adverse effect, but outcomes remain uncertain.
Catastrophe bonds provided up to $300 million of fully collateralized hurricane reinsurance through 2012 and 2013. The filing also describes exposure to reinsurer performance and potential differences between index-based and actual covered losses.

Important facts for investors to verify

Track Health Care Reform rulemaking, Health membership and profitability, and any goodwill impairment testing or charges.
Monitor ratings and the potential effect of rating-linked termination rights: the filing says certain contracts represent about 15% of Solutions and 24% of Specialty Property net earned premiums and fee income; it also identifies rating thresholds in Health and Employee Benefits contracts.
Review commercial mortgage loan credit quality, investment impairment assumptions, and unrealized gains, particularly if market conditions or issuer credit deteriorate.
Check the sustainability of favorable claims experience in Health and Employee Benefits, the expected normalization of disability claims, and pension funding and expense.
Reconcile the filing’s Specialty Property catastrophe-loss disclosures: it cites $7.7 million of nine-month catastrophe losses from Tennessee storms, but elsewhere states there were no reportable catastrophe losses in the nine-month period.
Assess ongoing share repurchases, holding-company capital availability, subsidiary dividend limits, and the distinction between the cash-flow statement’s operating cash flow and the MD&A figure including exchange-rate effects.