Business Context and Reporting Period
Company: Assurant, Inc. (formerly Fortis, Inc.)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2003
Corporate Status: The company was formed in connection with an initial public offering (IPO) that began trading on the New York Stock Exchange on February 5, 2004. Prior to this, it operated as Fortis, Inc., a subsidiary of Fortis N.V. and Fortis SA/NV. Following the IPO, Fortis retained approximately 35% ownership.
Business Overview: Assurant operates four decentralized segments focusing on specialized insurance markets: Assurant Solutions (creditor-placed homeowners, manufactured housing, debt protection), Assurant Health (individual and small group health), Assurant Employee Benefits (group dental, disability, life), and Assurant PreNeed (pre-funded funeral insurance).
Key Financial Metrics
| Metric | 2003 (in millions) | 2002 (in millions) |
|---|---|---|
| Total Revenues | $7,066 | $6,532 |
| Net Income | $186 | $(1,001) |
| Net Income (Excl. Accounting Change) | $186 | $260 |
| Total Assets | $23,728 | $22,279 |
| Total Debt | $1,750 | $0 |
| Net Investment Income | $607 | $632 |
| Investment Yield (Excl. Realized G/L) | 5.61% | 6.20% |
Segment Performance (Income Before Tax):
- Assurant Solutions: $189 million
- Assurant Health: $185 million
- Assurant Employee Benefits: $96 million
- Assurant PreNeed: $55 million
- Corporate and Other: $(266) million
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 8% to $7.066 billion, driven by growth in Assurant Solutions ($285 million increase) and Assurant Health ($175 million increase). This was offset by a slight decline in Assurant PreNeed.
- Profitability Recovery: The company reported a net income of $186 million in 2003, a significant turnaround from the $1.001 billion net loss in 2002. The 2002 loss was primarily due to a one-time $1.261 billion non-cash goodwill impairment charge resulting from the adoption of FAS 142.
- Investment Performance: Net realized losses on investments improved by $120 million, moving from a $118 million loss in 2002 to a $2 million gain in 2003. This was due to a reduction in other-than-temporary impairments ($20 million in 2003 vs. $85 million in 2002).
- Debt Structure: The company incurred $1.75 billion in senior bridge credit facilities in late 2003 to fund the redemption of mandatorily redeemable preferred securities of subsidiary trusts. This resulted in a $206 million interest premium expense in 2003.
- Investment Yield: Net investment income decreased 4% due to a lower interest rate environment, with the yield on average invested assets dropping from 6.20% to 5.61%.
Guidance, Outlook, and Risks
Management Commentary & Outlook:
- Dividend Policy: The Board intends to authorize a quarterly dividend of $0.07 per share of common stock beginning in the second quarter of 2004.
- Capital Markets: In February 2004, the company issued $975 million in senior notes (5.625% due 2014 and 6.750% due 2034) to refinance bridge facilities.
- Rebranding: The company is undergoing a rebranding initiative from "Fortis" to "Assurant," with estimated costs of $10 million to be expensed in 2004.
Key Risks and Contingencies:
- Reserve Adequacy: Profitability depends heavily on the accuracy of reserve estimates for future claims. Future loss development could require increased reserves, adversely affecting earnings.
- Interest Rate Risk: Assurant PreNeed relies on interest rate spreads (investment returns vs. death benefit growth). Declining rates or high inflation could compress these spreads.
- Regulatory Environment: The company faces extensive state and federal regulation (e.g., HIPAA, credit insurance laws). Changes in regulation could increase costs or restrict business practices.
- Reinsurance Credit Risk: The company remains liable for claims even if reinsurers default. Significant reinsurance recoverables ($4.445 billion) are held, with credit risk mitigated by trusts and letters of credit for over 50% of the amount.
- Legal Proceedings: Pending litigation includes actions in Mississippi regarding credit insurance packaging and an indictment in Minnesota regarding campaign finance violations. Management believes accrued amounts are adequate and outcomes will not be material.
Investor Verification Checklist
- Dividend Restrictions: Verify the ability of insurance subsidiaries to pay dividends to the holding company, which is capped at approximately $290 million for 2003 without regulatory approval.
- Reinsurance Counterparty Risk: Review the financial strength of major reinsurers (e.g., The Hartford, John Hancock) given the significant recoverables held.
- Reserve Sensitivity: Assess the impact of interest rate changes on Group Disability and Group Term Life reserves, which are sensitive to discount rate assumptions.
- Rebranding Impact: Monitor the effect of the name change from Fortis to Assurant on persistency rates and sales, particularly in the Health and PreNeed segments.
- Debt Covenants: Confirm compliance with the covenants of the new $500 million senior revolving credit facility and the $975 million senior notes issued in early 2004.