Assurant, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; balance-sheet comparisons are with December 31, 2012. Assurant is a holding company whose subsidiaries provide specialty insurance and related services across four operating segments: Solutions, Specialty Property, Health, and Employee Benefits. Unless stated otherwise, dollar amounts below are in millions.
Financial results and key metrics
| Metric | Q1 2013 | Q1 2012 or comparison |
|---|---|---|
| Total revenue | $2,150.6 | $2,072.9; up 3.7% |
| Net earned premiums | $1,850.4 | $1,777.1; up 4.1% |
| Net investment income | $166.0 | $172.3; down 3.7% |
| Income before income taxes | $206.4 | $249.6 |
| Net income | $117.8 | $163.3; down 27.9% |
| Diluted earnings per share | $1.46 | $1.81 |
| Dividend per share | $0.21 | $0.18 |
| Cash and cash equivalents, March 31 | $1,604.6 | $909.4 at December 31, 2012 |
| Total investments, March 31 | $14,882.8 | $14,976.3 at December 31, 2012 |
| Total assets, March 31 | $29,481.5 | $28,946.6 at December 31, 2012 |
| Total stockholders’ equity, March 31 | $5,206.6 | $5,185.4 at December 31, 2012 |
Income before tax was 9.6% of revenue, compared with 12.0% in Q1 2012. The effective tax rate was approximately 42.9%, up from 34.6%; a $10.2 million increase in estimated nondeductible compensation expense under the Affordable Care Act raised the quarter’s tax expense and effective rate by 4.9 percentage points.
Cash flow from operating activities was $51.7 million in the cash-flow statement, versus $1.0 million in Q1 2012. Management’s cash-flow discussion reports $43.6 million after including the negative $8.1 million effect of exchange-rate changes with operating cash flow. Investing activities used $18.5 million; financing activities provided $670.2 million, principally reflecting the new notes. Cash increased by $695.2 million during the quarter.
Debt was $1,670.5 million at March 31, up from $972.4 million at year-end, following issuance of $700 million of senior notes. Assurant received $698.1 million net of discount before offering expenses. The notes comprise $350 million due in 2018 at 2.50% and $350 million due in 2023 at 4.00%. The company intends to use $500 million of proceeds to repay debt maturing in February 2014. It reported $328.958 million available under its $350 million revolving facility, no facility borrowings, and compliance with its covenants.
Material changes and segment performance
- Solutions: Net income fell 20% to $34.9 million. Higher preneed mortality and the loss of a mobile client weighed on results. Revenue rose 8%, supported by domestic and international service-contract growth. Domestic combined ratio increased to 96.9% from 96.3%; international was 102.3%, compared with 101.7% as reported (Q1 2012 included a $3.7 million Canadian premium-tax liability release).
- Specialty Property: Net income declined 17% to $94.2 million. Key pressures included a $14 million New York regulatory settlement, $10.0 million of after-tax catastrophe losses, including adverse Superstorm Sandy development, and higher costs supporting loan growth. Revenue increased 9%. The combined ratio rose to 77.7% from 71.4%.
- Health: The segment reported a $5.3 million net loss versus $11.6 million net income. Revenue declined 7%, principally as individual and small-group premiums fell. The $10.2 million tax adjustment was the main cause of the earnings reversal; the loss ratio improved to 72.6% from 74.2%, while the combined ratio increased to 98.7% from 98.0%.
- Employee Benefits: Net income decreased 33% to $6.1 million. Lower investment income, a lower discount rate for new long-term disability claim reserves, and higher mortality offset favorable dental experience. Revenue fell 3%; the expense ratio rose to 36.9% from 35.9%.
Other notable balance-sheet and capital items: fixed-maturity securities were $12.144 billion at fair value, with $1.352 billion of net unrealized gains over amortized cost; accumulated other comprehensive income declined $52.4 million during the quarter, mainly due to unrealized securities losses and foreign-currency translation. The qualified pension plan was 90% funded, with a $77.5 million deficit, improved from $107.7 million at year-end. Assurant contributed $12.5 million to the plan and expected to contribute up to a further $37.5 million during 2013.
Outlook, risks and unusual items
- Management expected modest 2013 premium growth in Solutions, driven by service contracts, with continued international combined-ratio improvement anticipated from Latin American growth and expense actions. Further UK expense reductions were planned.
- Management expected Specialty Property premiums to increase slightly from 2012, supported by lender-placed and multifamily housing growth. It expected placement rates to decline, and anticipated higher expense and non-catastrophe loss ratios. The segment added 1.7 million loans in Q1 and expected another 0.9 million over the following two quarters.
- Management expected Health premiums and fees to decline as the product mix shifted toward lower-premium offerings, continued expense management, and a persistently high effective tax rate due to nondeductible compensation expenses. Employee Benefits premiums and fees were expected to be broadly consistent with 2012.
- Assurant stated it expected sufficient liquidity for the next 12 months, including debt interest and dividends. Holding-company capital was $880.4 million, excluding $500 million earmarked for 2014 debt repayment; $250 million of the holding-company capital was reserved as a buffer for remote risks. The maximum 2013 dividends payable by U.S. insurance subsidiaries without prior regulatory approval were approximately $524 million, subject to applicable requirements.
- The New York settlement required a $14 million payment, changes to certain business practices, new program and rate filings, and an independently administered refund opportunity for eligible policyholders. Assurant also disclosed a California 30.5% rate reduction for specified lender-placed hazard products, effective for qualifying policies from January 19, 2013. Management cited potential further regulatory changes, including FHFA proposals affecting lender-placed insurance, as risks to rates, commissions, and reinsurance arrangements.
- The company faced lender-placed insurance class actions and other regulatory matters. Management said outcomes could materially affect results or cash flows in an individual period, but did not believe pending matters were likely to materially affect financial condition individually or in aggregate. Other stated risks included catastrophe losses, reserve adequacy, investment and interest-rate conditions, reinsurance counterparty risk, regulatory and tax changes, and cyber and operational risks.
- There were no other-than-temporary investment impairment losses recorded in Q1 2013, compared with $1.8 million recognized in earnings in Q1 2012. Management cautioned that the quarter’s results are not necessarily indicative of full-year results. The filing did not provide consolidated full-year earnings guidance.
Important facts for investors to verify
- Whether the $14 million New York settlement, required business changes, and potential policyholder refunds lead to further costs or affect Specialty Property pricing and renewals.
- The progress and financial impact of California rate reductions, declining lender-placed placement rates, and pending FHFA or other regulatory changes.
- Whether Health’s elevated tax burden and premium declines persist, and how Affordable Care Act requirements affect future results.
- Whether catastrophe losses, including subsequent development on Superstorm Sandy, and reserve estimates materially change.
- Debt repayment plans for the $500 million due in 2014, ongoing liquidity and subsidiary dividend capacity, and the effect of debt issuance on leverage.
- The timing and amount of further pension contributions, share repurchases, and dividends; 600,000 shares were repurchased in Q1 for approximately $26.6 million.