Assurant, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. Amounts are in U.S. dollars; financial figures are in millions unless stated otherwise. Assurant provides risk-management and protection products across Global Housing, Global Lifestyle and Global Preneed. The filing is an annual report; it also reports fourth-quarter results.
Financial performance and liquidity
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Total revenue | $8,057.6 | $6,415.0 |
| Income before taxes | $333.5 | $444.5 |
| Net income attributable to common stockholders | $236.8 | $519.6 |
| Diluted EPS | $3.98 | $9.39 |
| Net investment income | $598.4 | $493.8 |
| Operating cash flow | $656.7 | $530.4 |
Revenue rose 26%, primarily reflecting TWG, acquired May 31, 2018. Common-stockholder net income fell 54%; the prior year included a $177.0 million one-time tax benefit from U.S. tax reform. FY 2018 also included higher TWG acquisition and financing costs, investment losses and a $31.9 million after-tax loss on the Mortgage Solutions sale. The effective tax rate was 24.3%, versus a benefit rate of 16.9% in 2017. Reported net margin was approximately 2.9%, compared with 8.1% in 2017.
At year-end, total assets were $41,089.3, total investments $13,403.9, cash and cash equivalents $1,254.0, debt $2,006.0 and stockholders’ equity $5,112.0. Debt to total capital was 28.2%. Cash flows included $2,202.5 of cash used in investing and $1,838.0 provided by financing. The $450 million revolving credit facility had $441 million available; there were no borrowings outstanding. Management said liquidity was sufficient for the next 12 months.
Segments and changes from prior year
| Segment | FY 2018 revenue (premiums, fees and other income) | FY 2018 segment net income | FY 2017 segment net income |
|---|---|---|---|
| Global Housing | $2,089.2 | $150.8 | $97.4 |
| Global Lifestyle | $5,183.3 | $297.7 | $178.0 |
| Global Preneed | $189.5 | $57.7 | $39.6 |
- Global Lifestyle: Revenue and earnings increased substantially with TWG, which contributed $74.7 million of net operating income after acquisition. Excluding TWG, revenue grew, led by Connected Living and Automotive; Global Financial Services remained pressured by discontinued partnerships and foreign exchange.
- Global Housing: Revenue declined 4%, mainly due to the Mortgage Solutions sale and ongoing lower lender-placed insurance placement rates. Earnings improved with lower catastrophe losses and the lower tax rate, though lender-placed results were affected by weaker non-catastrophe experience and lower REO volumes. Combined ratio for risk-based businesses was 97.7%, versus 99.1%.
- Global Preneed: Revenue and earnings increased, reflecting business growth and higher investment income; the lower tax rate also supported reported earnings.
Reportable catastrophe losses were $214.8 million for FY 2018, net of reinsurance and client profit-sharing adjustments, primarily related to Hurricanes Michael and Florence and California wildfires; FY 2017 losses were $295.7 million. In the fourth quarter of 2018, revenue was $2,317.0 million and net income attributable to common stockholders was $20.3 million, including $95.6 million of after-tax catastrophe losses, partly offset by an $18.4 million gain on the Time Insurance Company sale.
Material events, outlook and risks
- Assurant acquired TWG for $2.47 billion in enterprise value, funded with cash, debt repayment and 10.4 million Assurant shares. Management expects global operating synergies and growth opportunities; integration costs and execution risks remain.
- Mortgage Solutions was sold for $36.7 million plus potential future payments, producing a $40.3 million pre-tax loss. Time Insurance Company was sold for $30.9 million cash, producing an $18.4 million pre-tax gain.
- The company reported goodwill of $2.32 billion after the TWG acquisition. No goodwill impairment was identified in the annual test, but Global Automotive and Global Financial Services had smaller fair-value cushions over carrying value (15% and 5%, respectively). A $20.8 million impairment of certain Green Tree-related intangible assets was recorded.
- No numeric company-wide earnings guidance is provided in the supplied filing text. Management identified Connected Living, Multifamily Housing and Global Automotive as targeted growth businesses. It expects lender-placed insurance placement rates to continue declining in 2019 and said it would pursue expense management to mitigate the effect. In January 2019, Assurant placed approximately 65% of its catastrophe reinsurance program, lowering U.S. per-event retention from $120 million to $80 million pre-tax.
- Key risks include catastrophe severity and reinsurance availability or counterparty failure; claims-reserve uncertainty; investment, interest-rate and credit risks; client and distribution concentration; regulatory limits on rates and subsidiary dividends; litigation, including lender-placed insurance class actions; cybersecurity and privacy compliance; foreign-exchange exposure; and TWG integration. The company reported $9.17 billion in reinsurance recoverables, including significant balances tied to prior business disposals.
- Senior debt ratings were lowered following TWG financing to BBB at S&P and Baa3 at Moody’s, both with stable outlooks. The company reported that its insurance subsidiaries exceeded minimum risk-based capital requirements. The auditor gave unqualified opinions on the financial statements and internal controls, but TWG—representing 28% of assets and 19% of revenue—was excluded from management’s and the auditor’s internal-control assessment while integration and evaluation continued.
- Management said pending legal matters were not likely, based on information then available, to materially affect financial condition individually or in aggregate; it cautioned that an adverse outcome could materially affect results or cash flows in a particular reporting period.
Investor verification priorities
- Separate TWG’s contribution and acquisition-related costs from underlying organic growth, and track whether expected synergies are realized.
- Assess the effect of continued lender-placed insurance placement-rate declines, pricing regulation and non-catastrophe claims trends on Global Housing.
- Review catastrophe exposure, reinsurance limits and recoverability, especially the $18.4 million unfavorable Hurricane Maria development and the large reinsurance balances.
- Monitor debt costs, credit ratings, capital allocation and the constraints on dividends from regulated insurance subsidiaries; the 2019 ordinary-dividend capacity without prior approval was approximately $353.3 million.
- Track integration of TWG’s financial-reporting controls and the sensitivity of goodwill valuations, particularly Global Financial Services and Global Automotive.