Business Context and Reporting Period
Company: Assurant, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2006
Business Overview: Assurant is a holding company providing specialized insurance products and services in North America and selected international markets. Key segments include Assurant Solutions (credit insurance, warranties), Assurant Specialty Property (creditor-placed homeowners), Assurant Health, and Assurant Employee Benefits. On April 1, 2006, the company restructured its segments, separating Assurant Solutions into two distinct segments and realigning the PreNeed business.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2006 | Nine Months Ended Sep 30, 2006 |
|---|---|---|
| Total Revenues | $1,984,079 | $5,862,951 |
| Net Income | $151,303 | $464,911 |
| Earnings Per Share (Diluted) | $1.18 | $3.58 |
| Net Cash from Operating Activities | N/A | $609,641 |
| Total Assets | $25,023,450 | N/A |
| Total Debt | $971,753 | N/A |
| Cash and Cash Equivalents | $647,137 | N/A |
Material Changes vs. Prior Period
- Net Income Growth: Net income increased 51% to $151.3 million for the quarter and 36% to $464.9 million for the nine months ended September 30, 2006, compared to the same periods in 2005.
- Revenue Drivers: Growth was primarily driven by the Assurant Specialty Property segment due to increased premiums from creditor-placed homeowners business and a lack of significant catastrophes in 2006. The Assurant Solutions segment also contributed via higher fee income from extended service contracts.
- Segment Performance:
- Assurant Specialty Property: Net income rose 69% (quarter) and 70% (nine months), aided by the acquisition of Safeco Financial Institution Solutions, Inc. (SFIS) and improved loss ratios.
- Assurant Health: Net income declined 2% (quarter) and 10% (nine months) due to membership declines from increased competition and strict underwriting guidelines.
- Corporate & Other: Net loss improved significantly (59% for the quarter) due to the absence of reserve strengthening charges on London market reinsurance programs that impacted 2005 results.
- Investment Income: Net investment income increased 3% for the quarter and 7% for the nine months, driven by higher invested assets and short-term rates.
Guidance, Outlook, and Risks
- Accounting Changes: The company adopted FAS 123R (Share-Based Payment) on January 1, 2006, resulting in a one-time cumulative effect adjustment of $1.5 million to net income. The company anticipates adopting FAS 158 (Pension Accounting) by December 31, 2006, which may reduce accumulated other comprehensive income by $80 million to $100 million.
- Future Fee Income: Management anticipates a reduction in fee income in 2007 due to the loss of a large debt deferment client contributing approximately $18 million annually in 2006.
- Legal and Regulatory Risks:
- Mississippi Litigation: The Solutions segment faces pending actions in Mississippi alleging credit insurance was sold without buyer consent. The company believes it has meritorious defenses.
- London Market Reinsurance: Ongoing disputes regarding excess of loss reinsurance programs from 1995-1997 continue, though the company believes accrued reserves are adequate.
- SEC Investigations: The company is cooperating with SEC and U.S. Attorney investigations regarding loss mitigation products and finite risk insurance. No wrongdoing by current officers has been found to date.
- Subsequent Events: On November 10, 2006, the Board approved a new $600 million stock repurchase program and declared a quarterly dividend of $0.10 per share. The company also completed the sale of its equity interest in Private Healthcare Systems, Inc. (PHCS) for approximately $146 million in net proceeds.
Investor Verification Checklist
- Stock Repurchases: Verify the execution of the new $600 million repurchase program announced in November 2006 and the remaining balance of the prior program ($73 million).
- Mississippi Litigation: Monitor developments in the Mississippi credit insurance cases, as the judicial climate is described as unpredictable.
- Fee Income Sustainability: Assess the impact of the anticipated loss of the large debt deferment client on 2007 revenue projections.
- Reinsurance Reserves: Review updates on the London market reinsurance disputes to ensure reserves remain adequate given the inherent uncertainty of settlements.
- Segment Realignment: Confirm the long-term performance trends of the newly separated Assurant Specialty Property segment versus the historical combined data.