Assurant, Inc. — Q1 2011 Form 10-Q
Business and period: Assurant is a specialty insurance and related-services holding company with operations in Solutions, Specialty Property, Health, and Employee Benefits. This unaudited filing covers the three months ended March 31, 2011, compared with Q1 2010; balance-sheet comparisons are with December 31, 2010. Amounts below are in U.S. dollars and millions unless noted.
Financial performance and position
- Revenue: $2,036.7, down 6.1% from $2,167.9. Net earned premiums and other considerations fell 7.6% to $1,762.0; fees and other income rose 22.5% to $93.9.
- Profit: Pretax income was $214.6, down 13.6%; net income was $141.7, down 9.8%. Diluted EPS increased to $1.39 from $1.34, supported by a lower average diluted share count. Basic EPS was $1.40 versus $1.35. Approximate net margin was 7.0%, compared with 7.3%.
- Costs and margins: Total benefits, losses and expenses declined 5.1% to $1,822.0. Approximate pretax margin was 10.5%, versus 11.5%. Net investment income declined 1.2% to $171.9; investment yields were cited as the primary reason.
- Cash flow: Operating cash flow was $183.6, versus $121.9; investing used $166.5, versus $307.0; financing used $231.1, versus $198.7. Cash and equivalents ended at $940.4, down from $1,150.5 at year-end. MD&A reports operating cash flow of $187.4 including exchange-rate effects; the cash-flow statement reports $183.6 before that effect.
- Balance sheet and debt: Total assets were $26,697.4 and stockholders’ equity $4,747.4. Debt was $972.2, essentially unchanged from year-end; senior notes have principal of $975.0, with maturities in 2014 and 2034. The $350.0 revolving credit facility had no loans outstanding, with $325.6 available after letters of credit. The company reported compliance with its covenants.
- Capital and liquidity: Holding-company excess capital was $584.6, including a $250.0 buffer for tail-event risks and $334.6 described as deployable. Management said liquidity should be sufficient for the next 12 months. Q1 share repurchases totaled 4.42 million shares for $173.3; $664.7 remained under the authorization. The quarterly dividend was $0.16 per share.
Material changes and segment results
- Solutions: Net income rose 32% to $38.0. Improved international underwriting and Preneed results helped, while domestic service-contract and credit-insurance run-off weighed on premiums. Gross written premiums rose 8% to $832.4, and Preneed face sales increased to $169.5.
- Specialty Property: Net income fell 13% to $102.6. Management said results were approximately flat after adjusting for $7.4 after-tax adverse development from Arizona wind and hail storms and a $7.6 after-tax favorable prior-year reserve-review adjustment. Combined ratio increased to 73.3% from 70.8%.
- Health: Net income declined to $7.2 from $8.4. Q1 included a $22.4 pretax accrual for Affordable Care Act medical-loss-ratio rebates. The segment’s loss ratio was 72.8%, versus 71.4%; its combined ratio was 99.3%, versus 99.8%.
- Employee Benefits: Net income fell 61% to $6.5, reflecting weaker disability claim recoveries and higher group-life mortality. The loss ratio increased to 75.4% from 71.7%. A reduction in the reserve interest rate for new long-term disability claims had a $1.25 after-tax Q1 impact.
Outlook, risks and unusual items
- Management expected Health to break even for full-year 2011 and estimated full-year MLR rebate accruals of $80–$90 million. It expected Solutions’ 2011 revenue to be similar to 2010, including approximately $170 million of premium decline from specified domestic run-off sources. Specialty Property was expected to perform well, with weather the main earnings variable; approximately 75% of its 2011 catastrophe reinsurance program had been placed. Employee Benefits’ remaining 2011 quarters were expected to outperform Q1, despite lower disability reserve discount rates and reinvestment yields.
- Management expected subsidiary dividends in 2011 to equal operating-company earnings, subject to regulatory limits and other conditions. The maximum U.S. insurance-subsidiary distributions without prior approval was approximately $614.4 million.
- Key risks include catastrophe losses, reserve-estimation uncertainty, investment impairments and credit/liquidity risk, reinsurance availability and collectability, regulation and pricing pressure, and the uncertain effects of health-care reform. About 40% of commercial mortgage loans were concentrated in California, New York, and Washington; loans with loan-to-value ratios above 95% represented 5.9% of gross mortgage loans. The filing also notes potential losses on reinvested securities-lending collateral.
- Legal matters included ordinary-course litigation and disputes involving historic London-market reinsurance programs; management considered existing related loss accruals adequate but noted uncertainty. Assurant Health also described a Medicare Secondary Payer Act issue with CMS: the company did not consider a loss probable and could not estimate a possible loss or range.
- Q1 net income included $3.8 million of net realized investment gains and $1.6 million of credit-related other-than-temporary impairment losses. A $5.0 million preferred-stock repayment was made. The pension plan was 88% funded, with a $75.5 million GAAP underfunding; the company contributed $10.0 million in Q1 and expected another $30.0 million contribution in 2011.
Important facts for investors to verify
- Whether Health’s projected $80–$90 million full-year rebate accrual and break-even outlook remain achievable as regulations and claims experience develop.
- How Specialty Property catastrophe losses, reinsurance pricing, and mortgage-market contraction affect results and combined ratios.
- Whether Employee Benefits’ disability recovery rates and group-life mortality improve, and the full-year effect of the lower reserve interest rate.
- Whether investment impairment assumptions, commercial mortgage exposures, and reinsurance recoverables remain supportable under adverse economic conditions.
- How share repurchases, subsidiary dividend capacity, and the stated deployable holding-company capital affect liquidity and capital flexibility.