ASSURANT, INC. quarterly report, Q2 FY2011

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Assurant, Inc. — Q2 2011 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2011; filed August 3, 2011. Unless noted, dollar amounts below are in millions. Assurant is an insurance and related-services holding company with four operating segments: Solutions, Specialty Property, Health, and Employee Benefits.

Financial performance and position

  • Q2 revenue: $2,062.9, down 3.6% from $2,140.3 in Q2 2010. Net earned premiums and other considerations fell to $1,768.3 from $1,849.9; fees and other income rose to $99.6 from $90.0.
  • Q2 earnings: Net income was $165.9, up 0.7% from $164.7; diluted EPS was $1.68 versus $1.46. Income before taxes fell to $131.9 from $253.5. Results included an $80.0 deferred-tax valuation-allowance release; severe weather and other catastrophe losses and weaker Health results offset much of that benefit.
  • First six months: Revenue was $4,099.6, down 4.8%; net income was $307.6, down 4.4%; diluted EPS was $3.06 versus $2.80. The $80.0 tax benefit also affected this period’s comparison.
  • Cash flow: Six-month operating cash flow was $323.8, compared with $318.3 in 2010; investing activities provided $16.8 versus using $187.9; financing activities used $358.6 versus $440.3. Cash and equivalents were $1,135.1 at June 30, down $15.4 from year-end.
  • Balance sheet and debt: Total assets were $26,779.8 and stockholders’ equity $4,876.0. Debt was $972.2 carrying value, consisting principally of $975.0 in senior notes: $500.0 at 5.63% due February 2014 and $475.0 at 6.75% due February 2034. The $350.0 revolving facility had no borrowings; $325.7 was available after letters of credit. The company reported covenant compliance.
  • Capital returns: Repurchased 7.4 million shares for approximately $283.7 million in the first half; $554.4 million remained authorized. The quarterly dividend increased to $0.18 per share from $0.16.
  • Investments: Total investments were $13,593.7. Fixed maturities at fair value were $10,637.4; 59.9% were rated Aaa/Aa/A and 31.4% Baa. Six-month net investment income was $345.7, down 1.0%.

Material changes and segment results

  • Solutions: Q2 segment net income rose to $39.7 from $30.3; first-half income rose to $77.7 from $59.2, with improved underwriting, particularly in service contracts and international business. Domestic credit and some legacy service-contract premiums continued to run off. Management expected 2011 premiums to be similar to 2010 and anticipated growth in 2012.
  • Specialty Property: Q2 segment net income fell to $42.6 from $103.7; first-half income fell to $145.3 from $222.2. Q2 reportable catastrophe losses were $65.7 versus $7.7 a year earlier; first-half losses were $77.1. Q2 combined ratio rose to 92.0% from 73.6%. The company cited severe storms and increased non-catastrophe weather losses. It acquired SureDeposit for $45.1 million in June.
  • Health: Q2 segment net income declined to $5.2 from $25.3; first-half income declined to $12.4 from $33.7. Affordable Care Act minimum medical loss ratio rules contributed to premium rebate accruals of $16.7 for Q2 and $39.2 for the first half. Management estimated full-year 2011 rebates of $70–$80 million, subject to regulatory interpretation and actual experience. Expenses declined following organizational and operational changes, while sales and premiums remained pressured.
  • Employee Benefits: Q2 segment net income declined to $8.5 from $12.4; first-half income declined to $15.0 from $28.9. Management attributed weaker results chiefly to disability and life claims experience, including slower disability claimant recoveries. Q2 sales increased, led by voluntary products.
  • Tax item: Assurant released $80.0 million of valuation allowance on capital-loss deferred tax assets in Q2, based on new tax-planning strategies and expected taxable income. Management continued to assess the realizability of remaining deferred tax assets.

Outlook, risks, and contingencies

  • Management said liquidity should be sufficient for the next 12 months, including debt interest and dividends. It expected to continue share repurchases, subject to market, legal, and regulatory constraints, and anticipated subsidiary dividends broadly equal to operating-company earnings for the remainder of 2011.
  • Specialty Property premiums were expected to remain consistent with year-to-date results, but earnings would depend on catastrophes, particularly hurricanes. Assurant had $300 million of fully collateralized catastrophe-bond reinsurance coverage for specified hurricane events, with agreements expiring in 2012 and 2013.
  • The qualified pension plan was 88% funded, with a $76.7 million GAAP underfunding. The company contributed $20 million in the first half and expected another $20 million contribution during the rest of 2011.
  • Key risks include catastrophe severity, reserve adequacy, investment credit and market risk, reinsurance availability and collectability, regulatory and Affordable Care Act changes, unemployment and economic conditions, client concentration, and ratings deterioration. Moody’s affirmed the company’s Baa2 senior debt and A3 primary life and health subsidiary ratings in March 2011 but changed their outlooks to negative.
  • Management did not believe pending litigation would have a material adverse effect. A Medicare Secondary Payer interpretation issue remained unresolved with CMS; the company said a loss was not probable and could not estimate a possible loss range. London-market reinsurance disputes and routine claims activity remained, with existing accruals considered adequate by management.
  • The filing states that interim results are not necessarily indicative of full-year results. Management’s forward-looking statements are subject to material uncertainty; no consolidated earnings guidance was provided.

Most important facts for investors to verify

  • How much of reported earnings and EPS depends on the $80.0 million tax valuation-allowance release, and whether the remaining deferred tax assets are realizable.
  • Actual 2011 Health MLR rebates versus the estimated $70–$80 million range, and the effect of final rules or state-specific calculations.
  • Specialty Property catastrophe and weather losses, renewal pricing, and the impact of the SureDeposit acquisition.
  • Whether pressure in Health and Employee Benefits improves, including claims trends, policy persistency, sales, and expense savings.
  • Investment portfolio impairments, commercial mortgage loan performance, and the ability of reinsurers and other counterparties to pay claims.
  • Holding-company liquidity and subsidiary dividend capacity, including the effect of the negative rating outlooks and the February 2014 senior-note maturity.