Assurant, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; balance-sheet comparisons are with December 31, 2011. Interim statements are unaudited. Unless noted otherwise, dollar amounts below are in millions; the filing presents amounts in thousands.
Business context and results
Assurant is an insurance holding company operating through Assurant Solutions, Assurant Specialty Property, Assurant Health, Assurant Employee Benefits, and Corporate & Other. Its products include specialty property and health insurance, employee benefits, credit-related insurance, service contracts, and funeral insurance.
| Consolidated metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Total revenue | $2,072.9 | $2,036.7 | Up 1.8% |
| Net income | $163.3 | $140.8 | Up 16.0% |
| Diluted EPS | $1.81 | $1.38 | Up 31.2% |
| Net investment income | $172.3 | $171.9 | Nearly flat |
| Income before tax | $249.6 | $214.4 | Up 16.4% |
Calculated net margin was approximately 7.9%, versus 6.9% in the comparable quarter. Policyholder benefits declined to $856.4 million from $893.0 million; total benefits, losses, and expenses were nearly unchanged at $1,823.3 million. The filing’s reported 2011 comparison reflects retrospective adoption of revised insurance acquisition-cost accounting; that adoption reduced Q1 2011 net income by $1.0 million.
Segments and material period changes
- Solutions: Segment net income was $43.4 million, up from $36.9 million. Revenue rose 5%, supported by international and domestic service-contract growth and higher preneed fees. Management cited continuing weakness in Europe, particularly the U.K., and did not expect U.K. break-even until mid-2013.
- Specialty Property: Segment net income was $113.0 million, up from $102.7 million. Results benefited from loan-portfolio growth, mild winter weather, and no reportable catastrophes; the prior-year quarter included adverse catastrophe loss development. Combined ratio improved to 71.4% from 73.3%.
- Health: Segment net income increased to $11.6 million from $7.2 million, while revenue declined 5%. Cost reductions supported earnings, partly offset by lower sales and higher claims experience. The prior-year result included a $4.8 million after-tax reimbursement from a pharmacy-services provider.
- Employee Benefits: Segment net income rose to $9.1 million from $6.4 million, primarily on favorable life-insurance mortality experience. Revenue fell 3%, including from lost disability-reinsurance clients and limited small-employer payroll growth.
- Corporate & Other: Net loss widened to $13.8 million from $12.6 million, mainly due to a lower income-tax benefit.
Shareholders received a $0.18-per-share dividend, versus $0.16 a year earlier. The company repurchased 2.418 million shares for approximately $99.3 million during the quarter; $206.1 million remained under the authorization at quarter-end.
Cash flow, balance sheet, debt, and liquidity
- Cash and cash equivalents were $1,064.8 million at March 31, down $101.9 million from year-end. Total assets were $27,254.9 million; total liabilities were $22,290.0 million; stockholders’ equity was $4,964.9 million.
- Cash-flow statement amounts show operating cash flow of $1.0 million, investing cash flow of $18.6 million, and financing outflow of $122.3 million. Management’s cash-flow discussion reports $1.8 million of operating cash flow including exchange-rate effects; the comparable 2011 figures are $183.6 million and $187.4 million, respectively. Management attributed the operating-cash-flow decline chiefly to payment timing, including commissions and reinsurance premiums.
- Debt was $972.3 million carrying value. Senior notes have principal totaling $975 million: $500 million at 5.63%, due February 2014, and $475 million at 6.75%, due February 2034. The filing estimates fair value of debt at $1,025.0 million.
- The $350 million revolving credit facility had no loans outstanding; $325.7 million was available after letters of credit. The company reported covenant compliance. Holding-company capital was approximately $596.6 million, including $250 million reserved as a buffer for remote risks. Management said liquidity should be sufficient for the next 12 months.
- The investment portfolio totaled $14,133.8 million. Fixed maturities had $11,322.1 million fair value; 59.5% were rated A or higher, 32.9% Baa, and 7.6% Ba or lower. Net realized gains were $7.5 million, including $1.8 million of net impairment losses recognized in earnings.
Outlook, risks, contingencies, and unusual items
- Management expected modest premium growth in Solutions; 2012 Specialty Property premiums and fees to be broadly consistent with 2011; and near-term Employee Benefits premium pressure. Specialty Property expected 2.1 million newly awarded loans to begin producing premium in Q3. Health anticipated sales support from new distribution and marketing agreements. No consolidated earnings guidance was provided.
- The company received New York Department of Financial Services subpoenas and information requests concerning lender-placed insurance and document retention, responded to a further request in April, and was asked to testify at public hearings. It also had discussions with California regulators over lender-placed insurance rates. Management said it was cooperating; unfavorable regulatory outcomes could affect rates, revenue, costs, reputation, or operations.
- The Affordable Care Act creates medical-loss-ratio rebate requirements for certain health business. Management noted uncertainty about regulatory guidance and the pending Supreme Court decision, and said the law could materially affect results. A separate annual health-insurer fee is scheduled to begin in 2014; its impact was still under evaluation.
- Other disclosed risks include catastrophe losses, investment-market and credit deterioration, interest-rate exposure, reserve adequacy, reinsurance availability and collectability, rating changes, litigation, and regulatory actions. Management did not expect pending litigation to have a material adverse effect, but cannot predict outcomes.
- The qualified pension plan was 86% funded, with a $100.3 million deficit at quarter-end; $12.5 million was contributed in Q1, and up to $37.5 million more was expected during the rest of 2012.
- Retrospective adoption of insurance acquisition-cost guidance reduced December 2011 equity by $153.0 million and restated Q1 2011 net income downward by $1.0 million. Management said adoption of fair-value guidance had no financial-statement impact.
Important facts for investors to verify
- Reconcile the filing’s Q1 2011 net-income figures: the recast financial statements report $140.8 million, while one executive-summary passage cites $141.7 million.
- Review the cash-flow statement versus MD&A presentation: operating cash flow is $1.0 million before the exchange-rate effect and $1.8 million including it; determine the preferred comparison basis.
- Track NYDFS and California proceedings, including potential effects on lender-placed insurance pricing, placement rates, and business practices.
- Monitor Health-segment performance, ACA/MLR rebate estimates and implementation, and progress on cost reductions and distribution agreements.
- Assess investment impairment, mortgage-loan credit quality, catastrophe exposure, pension funding, subsidiary dividend capacity, and the 2014 senior-note maturity alongside ongoing repurchases and dividends.