Assurant, Inc. — FY 2017 Form 10-K
Reporting period: Year ended December 31, 2017; this is an annual filing, not a standalone fourth-quarter report. Unless noted, amounts are U.S. dollars in millions.
Business context
Assurant provides insurance, service-contract and related risk-management products in housing and lifestyle markets, plus pre-funded funeral insurance and annuities. Its reportable segments are Global Housing, Global Lifestyle, Global Preneed, and Corporate & Other. The company said it largely completed a multi-year transformation focused on housing and lifestyle businesses; its health business was in runoff and Employee Benefits had been sold in 2016.
Financial performance
| Metric | FY 2017 | FY 2016 | Change / context |
|---|---|---|---|
| Total revenue | $6,415.0 | $7,531.8 | Down 15%; affected by the 2016 Employee Benefits sale and a Lifestyle client program change that shifted revenue presentation from gross to net. |
| Net earned premiums | $4,404.1 | $5,007.3 | Down 12%. |
| Income before taxes | $444.5 | $848.6 | Down 48%; 2016 included substantially higher gains associated with the Employee Benefits sale. |
| Net income | $519.6 | $565.4 | Down 8%; includes a $177.0 tax benefit from the Tax Cuts and Jobs Act (TCJA). |
| Diluted EPS | $9.39 | $9.13 | Up 3%, while weighted-average diluted shares fell to 55.3 million from 61.9 million. |
| Net investment income | $493.8 | $515.7 | Down 4%, reflecting lower invested assets and yields. |
| Operating cash flow | $532.7 in MD&A; $530.4 in cash-flow statement | $98.4 in MD&A; $108.6 in cash-flow statement | The filing presents differing figures; verify against the financial statements and reconciliation. |
| Cash and cash equivalents | $996.8 | $1,032.0 | Down $35.2; reported net change in cash was negative $35.2. |
| Total assets / stockholders’ equity | $31,843.0 / $4,270.6 | $29,709.1 / $4,098.1 | Assets and equity increased year over year. |
| Debt | $1,068.2 | $1,067.0 | Broadly unchanged; reported debt-to-total-capital was 20.0%, while the credit-covenant calculation was 21%. |
Reported pretax margin was approximately 6.9%, versus 11.3% in 2016; reported net margin was approximately 8.1%, versus 7.5%. Net margin benefited from the TCJA tax benefit, so these figures are not directly indicative of underlying operating trends.
- Global Housing: Revenue $2,250.6; segment net income $97.4, down 48%. The risk-based combined ratio rose to 99.1% from 91.1%; fee-based business pretax margin was 10.1%, versus 10.8%. Catastrophes and declining lender-placed placement rates weighed on results.
- Global Lifestyle: Revenue $3,510.8; segment net income $178.0, up 15%. The reported revenue decline largely reflects the gross-to-net program change, which management said did not affect earnings. Risk-based combined ratio was 96.2%; fee-based business pretax margin improved to 5.7% from 3.5%.
- Global Preneed: Revenue $443.0; segment net income $39.6, down 6%, including a $5.0 after-tax software impairment. Net earned premiums, fees and other income rose to $181.0 from $171.3.
Material changes and unusual items
- Reportable catastrophe losses were $295.7 for 2017, primarily from Hurricanes Harvey, Irma and Maria, versus $157.4 in 2016. The reported after-tax increase in catastrophe impact was $90.1.
- The $177.0 one-time TCJA benefit reduced deferred tax liabilities following the U.S. corporate-rate reduction to 21%. The company was still assessing certain TCJA provisions; it estimated no transition-tax impact but had not completed its GILTI analysis.
- 2016 included $394.5 of amortization of deferred gains and gains on business disposals, compared with $103.9 in 2017, largely reflecting the Employee Benefits sale. The company attributed $266.5 of the year-over-year net-income decline to lower after-tax gains associated with that sale.
- Assurant paid $85.0 in April 2017 under lender-placed insurance regulatory settlement agreements. It also recorded $12.5 of after-tax benefits in Lifestyle related to client recoverables over the year, and $9.6 of nonrecurring tax benefits.
- The company repurchased 3.93 million shares for $389.5 and paid $119.0 in common dividends during 2017. The annual dividend per share was $2.15, up from $2.03.
Liquidity, debt and capital
Cash from investing activities was negative $541.2 and financing activities were negative $26.7, using the cash-flow statement figures. The company reported $540.0 of holding-company capital, including $250.0 designated as a buffer for remote risks. It said it expected to have sufficient liquidity for the next 12 months. Insurance-subsidiary dividends available without prior regulatory approval in 2018 were estimated at approximately $300.0; subsidiary distributions in 2017 were approximately $374.0.
Debt included $350.0 of 2.50% senior notes due March 2018 and $350.0 of 4.00% notes due 2023, along with $375.0 of 6.75% notes due 2034. A $450.0 revolving credit facility was unused at year-end, with $441.0 available after letters of credit; a $350.0 term-loan facility was also undrawn. The company had a $1.50 billion bridge-loan commitment for the proposed Warranty Group acquisition. Credit facilities were subject to covenants, which the company reported it met.
Outlook, commentary and risks
- 2018 segment outlook: Housing net income excluding catastrophes was expected to decline before tax reform, with revenue approximately at 2017 levels as multi-family housing and mortgage solutions growth offset lender-placed declines. Lifestyle net income was expected to increase before tax reform, with revenue growth in connected living and vehicle protection. Preneed net income and revenue were expected to increase modestly. Management cited expected effective tax rates of approximately 20% for Housing and 22% for Lifestyle and Preneed, with some tax savings to be reinvested. These are segment outlook statements, not consolidated guidance.
- Housing placement rates were expected to continue declining as the market normalized; mortgage origination, refinancing and default activity were also expected to soften. Lifestyle mobile trade-in results were expected to vary with device launches and carrier promotions. Expense savings were expected to build toward late 2018 and 2019.
- Warranty Group transaction: The proposed acquisition was valued at $2.50 billion enterprise value, including existing debt, and was expected to close in Q2 2018 subject to approvals and customary conditions. Consideration included 10.4 million Assurant shares plus cash; the company expected to finance the cash component and repay $591.3 of TWG debt using external financing and available cash. Completion, financing costs, integration and anticipated synergies were uncertain.
- Following the transaction announcement, Moody’s placed the company’s debt and financial-strength ratings under review for downgrade; S&P placed its debt ratings on CreditWatch Negative. The company’s senior debt ratings were BBB+ at S&P and Baa2 at Moody’s.
- Key exposures include catastrophe losses and reinsurance recoverability, client and distributor concentration, lender-placed rate and regulatory pressure, claims-reserve estimation, investment and interest-rate risk, and cybersecurity, privacy and international regulatory requirements. Reinsurance recoverables totaled $9,790.2; management noted that reinsurance does not remove its direct obligations to policyholders.
- The company faced lender-placed insurance class actions and other legal and regulatory matters. Management said pending matters were not believed likely to materially affect financial condition, but noted that outcomes could materially affect results or cash flows in an individual period; possible losses beyond accrued amounts were not estimable.
Important facts for investors to verify
- Reconcile the conflicting operating-cash-flow figures in MD&A and the cash-flow statement.
- Separate recurring earnings from the $177.0 TCJA benefit, sale-related deferred-gain amortization, catastrophe losses, recoverables and other nonrecurring items.
- Track Housing placement rates, catastrophe experience, combined ratio and the effects of lender-placed regulatory rate filings.
- Review the Warranty Group transaction’s final financing, share issuance, closing conditions, rating implications and integration progress.
- Assess the quality and collateral protection of the $9,790.2 reinsurance recoverable balance, as well as limits on regulated subsidiaries’ dividend capacity.
- Monitor litigation and regulatory developments, including lender-placed class actions, and the potential impact of reserve revisions.