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AIZ > SEC Filings for AIZ > Form 10-Q on 1-May-2013All Recent SEC Filings

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Form 10-Q for ASSURANT INC


Quarterly Report

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

(Dollar amounts in thousands)

This Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") addresses the financial condition of Assurant, Inc. and its subsidiaries (which we refer to collectively as "Assurant" or "the Company") as of March 31, 2013, compared with December 31, 2012, and our results of operations for the three months ended March 31, 2013 and 2012. This discussion should be read in conjunction with our MD&A and annual audited consolidated financial statements as of December 31, 2012 included in our Annual Report on Form 10-K for the year ended December 31, 2012 filed with the U.S. Securities and Exchange Commission (the "SEC") and the March 31, 2013 unaudited consolidated financial statements and related notes included elsewhere in this Form 10-Q. The 2012 Annual Report on Form 10-K, First Quarter 2013 Form 10-Q, and other documents related to the Company are available free of charge through the SEC website at and through our website at

Some of the statements in this MD&A and elsewhere in this report, particularly those anticipating future financial performance, business prospects, growth and operating strategies and similar matters, are forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. You can identify these statements by the fact that they may use words such as "will," "may," "anticipates," "expects," "estimates," "projects," "intends," "plans," "believes," "targets," "forecasts," "potential," "approximately," or the negative version of those words and other words and terms with a similar meaning. Any forward-looking statements contained in this report are based upon our historical performance and on current plans, estimates and expectations. The inclusion of this forward-looking information should not be regarded as a representation by us or any other person that the future plans, estimates or expectations contemplated by us will be achieved. Our actual results might differ materially from those projected in the forward-looking statements. The Company undertakes no obligation to update or review any forward-looking statement, whether as a result of new information, future events or other developments.

In addition to the factors described under "Critical Factors Affecting Results," the following risk factors could cause our actual results to differ materially from those currently estimated by management:

(i) actions by governmental agencies or government sponsored entities or other circumstances, including pending regulatory matters affecting our lender-placed insurance business, that could result in reductions of the premium rates we charge, increases in the claims we pay, fines or penalties, or other expenses;

(ii) the effects of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010, and the rules and regulations thereunder (together the "Affordable Care Act"), on our health and employee benefits businesses;

(iii) loss of significant client relationships, distribution sources and contracts;

(iv) unfavorable outcomes in litigation and/or regulatory investigations that could negatively affect our business and reputation;

(v) current or new laws and regulations that could increase our costs and decrease our revenues;

(vi) a decline in our credit or financial strength ratings (including the risk of ratings downgrades in the insurance industry);

(vii) deterioration in the Company's market capitalization compared to its book value that could result in further impairment of goodwill;

(viii) risks related to outsourcing activities;

(ix) failure to attract and retain sales representatives or key managers;

(x) losses due to natural or man-made catastrophes;

(xi) general global economic, financial market and political conditions (including difficult conditions in financial, capital, credit and currency markets, the global economic slowdown, fluctuations in interest rates or a prolonged period of low interest rates, monetary policies, unemployment and inflationary pressure);

(xii) inadequacy of reserves established for future claims;

(xiii) failure to predict or manage benefits, claims and other costs;

(xiv) uncertain tax positions and unexpected tax liabilities;

(xv) fluctuations in exchange rates and other risks related to our international operations;

(xvi) unavailability, inadequacy and unaffordable pricing of reinsurance coverage;

(xvii) significant competitive pressures in our business;

(xviii) diminished value of invested assets in our investment portfolio (due to, among other things, volatility in financial markets; the global economic slowdown; credit, currency and liquidity risk; other than temporary impairments and increases in interest rates);

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(xix) insolvency of third parties to whom we have sold or may sell businesses through reinsurance or modified co-insurance;

(xx) inability of reinsurers to meet their obligations;

(xxi) credit risk of some of our agents in Assurant Specialty Property and Assurant Solutions;

(xxii) cyber security threats and cyber attacks;

(xxiii) failure to effectively maintain and modernize our information systems;

(xxiv) data breaches compromising client information and privacy;

(xxv) failure to find and integrate suitable acquisitions and new ventures;

(xxvi) inability of our subsidiaries to pay sufficient dividends;

(xxvii) failure to provide for succession of senior management and key executives; and

(xxviii) cyclicality of the insurance industry.

For a more detailed discussion of the risk factors that could affect our actual results, please refer to "Item 1A-Risk Factors" and "Item 7-MD&A Critical Factors Affecting Results" in our 2012 Annual Report on Form 10-K and in this First Quarter 2013 Form 10-Q.

Executive Summary

Assurant has five reportable segments. Our four operating segments are Assurant Solutions, Assurant Specialty Property, Assurant Health, and Assurant Employee Benefits. These operating segments partner with clients who are leaders in their industries in the United States of America (the "U.S.") and select worldwide markets. The operating segments provide warranties and service contracts, pre-funded funeral insurance, debt protection administration, credit-related insurance, lender-placed homeowners insurance, renters insurance and related products, manufactured housing homeowners insurance, individual health and small employer group health insurance, group dental insurance, group disability insurance and reinsurance, group life insurance, group vision and supplemental insurance.

Our fifth segment, Corporate & Other, includes activities of the holding company, financing and interest expenses, net realized gains and losses on investments, interest income earned from short-term investments held and additional costs associated with excess of loss reinsurance programs reinsured and ceded to certain subsidiaries in the London market between 1995 and 1997. Corporate & Other also includes the amortization of deferred gains associated with the sales of Fortis Financial Group and Long-Term Care through reinsurance agreements.

The following discussion relates to the three months ended March 31, 2013 ("First Quarter 2013") and the three months ended March 31, 2012 ("First Quarter 2012").

Consolidated net income decreased 28% to $117,780 in First Quarter 2013 compared with $163,260 for First Quarter 2012. This decrease was primarily driven by declines at our Assurant Specialty Property and Assurant Health segments further described below.

Assurant Solutions net income declined $8,493, or 20%, to $34,907 in First Quarter 2013 compared with $43,400 in First Quarter 2012. Higher mortality rates in our preneed business and the previously disclosed loss of a mobile client contributed to this decline.

Domestic net earned premiums and fees increased, primarily due to accelerated growth at an existing service contract client, as well as growth in our vehicle service contract business as U.S. auto sales continued to rebound. This growth offset declines in other accounts, including the previously disclosed mobile client loss. Our domestic combined ratio increased slightly to 96.9% for First Quarter 2013 from 96.3% in First Quarter 2012, but still below our long-term target of 98.0% due to expense savings actions taken in 2012.

The international combined ratio improved to 102.3% in First Quarter 2013 from 103.2% in First Quarter 2012, excluding a one-time premium tax liability release of $3,700 in Canada in First Quarter 2012. The improvement was primarily due to continued expansion in Latin America across all products and expense management efforts in Europe. Given the continued challenging macroeconomic conditions in the United Kingdom, we plan to reduce their expenses further to meet our commitment of profitability in the region by third quarter of this year. These expense initiatives, together with anticipated growth in Latin America, are expected to drive continued improvement in the international combined ratio over the course of 2013.

Overall, we expect modest premium growth at Assurant Solutions in 2013, reflecting growth in our domestic and international service contract business.

At Assurant Specialty Property, net income declined 17% to $94,244 in First Quarter 2013 from $113,004 in First Quarter 2012. The decrease was primarily driven by a $14,000 settlement agreement with the New York Department of Financial Services (the "NYDFS"), which is discussed further below, and $10,013 (after-tax) of reportable catastrophe losses from hailstorms in the Southeast and unfavorable loss development from Superstorm Sandy. In addition, significant loan volume growth during the past year contributed to higher expenses as we expanded capacity to service these new loans.

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Net earned premiums and fees increased by 9% due to premium production from lender-placed insurance loan portfolios added in 2012 and contributions from multi-family housing products. Our placement rate in First Quarter 2013 remained elevated at 2.89% compared with 2.84% in First Quarter 2012 driven by the loan portfolios acquired in 2012. We added 1,700,000 loans in First Quarter 2013 and expect to add another 900,000 loans over the next two quarters. These new loans will begin to produce net earned premiums later this year, and we expect this growth to help sustain our net earned premiums despite the expected decline in placement rates over the course of 2013.

As we have disclosed, we continue to engage in discussions with various state and federal regulatory departments regarding our lender-placed insurance program. During First Quarter 2013, we reached a settlement with the NYDFS regarding our lender-placed insurance program in that state. Please refer to Assurant Specialty Property's results of operations section further below in this Item 2 for details on this settlement. In addition, the Federal Housing Finance Agency (the "FHFA") issued a notice of several potential changes to lender-placed insurance on loans owned or guaranteed by government sponsored entities, such as the elimination of commissions and servicer affiliated quota share reinsurance. We anticipate that the FHFA will publish final regulations later this year.

In 2012, we began a multi-phased roll-out of our new next generation product to respond to the changed environment following the housing crisis, and we expect it to be available in 28 states by the end of the second quarter. We filed our new product forms and rates in Florida and New York, which are currently undergoing review.

Overall, we expect Assurant Specialty Property's net earned premiums to increase slightly from 2012 due to growth in our lender-placed insurance portfolio and multi-family housing products. We expect overall results to continue to be affected by placement rate trends, premium rate changes, loan portfolio activity, client renewals, and catastrophe losses. We expect our expense ratio, excluding the effect of the NYDFS settlement, to increase in 2013, primarily reflecting increased costs to support new loan portfolios and customer service enhancements. We also expect our non-catastrophe loss ratio to increase due to anticipated higher frequency of such losses compared to 2012.

Assurant Health results declined to a net loss of $5,343 for First Quarter 2013 compared with net income of $11,615 in First Quarter 2012. This decline is primarily due to an increased estimate of non tax-deductible compensation expenses under the Affordable Care Act, which resulted in a $10,205 increase to our income tax expense in First Quarter 2013.

Net earned premiums in our individual markets and small employer group business decreased. However, recent sales momentum has moderated the rate of this decline compared to past quarters. Our individual major medical product sales increased due to our network partnership with Aetna Signature Administrators®. Sales of our supplemental and affordable choice products also increased.

We expect ongoing changes related to healthcare reform to continue to affect this business in 2013. We anticipate our effective tax rate to remain very high due to higher non-deductible compensation expenses. We also expect continued expense management efforts in this business. Overall, we expect net earned premiums and fees to decline, reflecting the continued shift to lower premium products in our individual medical business.

At Assurant Employee Benefits, net income declined 33% to $6,083 in First Quarter 2013 from $9,064 in First Quarter 2012. The decrease was primarily driven by lower net investment income and a reduction in the discount rate for new long-term disability claim reserves. Similar to our preneed business, we experienced higher mortality rates in First Quarter 2013, which offset continued favorable dental experience.

Net earned premiums and fees declined slightly in First Quarter 2013 compared with First Quarter 2012 primarily due to the residual impact of the previously disclosed loss of two assumed disability clients last year. However, sales increased in First Quarter 2013, driven by growth across all major products. Overall, for 2013, we expect net earned premiums and fees to be consistent with 2012 due to continued growth in voluntary products.

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Critical Factors Affecting Results and Liquidity

Our results depend on the appropriateness of our product pricing, underwriting and the accuracy of our methodology for the establishment of reserves for future policyholder benefits and claims, returns on and values of invested assets and our ability to manage our expenses. Factors affecting these items, including unemployment, difficult conditions in financial markets and the global economy, may have a material adverse effect on our results of operations or financial condition. For more information on these factors, see "Item 1A-Risk Factors" and "Item 7-MD&A Critical Factors Affecting Results" in our 2012 Annual Report on Form 10-K.

Management believes the Company will have sufficient liquidity to satisfy its needs over the next twelve months including the ability to pay interest on our debt and dividends on our common stock.

For the three months ended March 31, 2013, net cash provided by operating activities, including the effect of exchange rate changes on cash and cash equivalents, totaled $43,560; net cash used in investing activities totaled $18,511 and net cash provided by financing activities totaled $670,172. We had $1,604,625 in cash and cash equivalents as of March 31, 2013. Please see "-Liquidity and Capital Resources," below for further details.

Critical Accounting Policies and Estimates

Our 2012 Annual Report on Form 10-K described the accounting policies and estimates that are critical to the understanding of our results of operations, financial condition and liquidity. The accounting policies and estimation process described in the 2012 Annual Report on Form 10-K were consistently applied to the unaudited interim consolidated financial statements for First Quarter 2013.

The Assurant Health loss ratio reported on page 46 (the "GAAP loss ratio") differs from the loss ratio calculated under the minimum medical loss ratio ("MLR"). The most significant differences include the fact that the MLR is calculated separately by state and legal entity; the MLR calculation includes credibility adjustments for each entity, which are not applicable to the GAAP loss ratio; the MLR calculation applies only to some of our health insurance products, while the GAAP loss ratio applies to the entire portfolio, including products not governed by the Affordable Care Act; the MLR includes quality improvement expenses, taxes and fees; changes in reserves are treated differently in the MLR calculation; and the MLR premium rebate amounts are considered adjustments to premiums for GAAP reporting whereas they are reported as additions to incurred claims in the MLR rebate estimate calculations.

Assurant Health has estimated its First Quarter 2013 impact of this regulation based on definitions and calculation methodologies outlined in the Interim Final Regulation from HHS released December 1, 2010 with Technical Corrections released December 29, 2010 and the HHS Final Regulation released December 7, 2011. An estimate was based on separate projection models for individual medical and small group business using projections of expected premiums, claims, and enrollment by state, legal entity and market for medical business subject to MLR requirements for the MLR reporting year. In addition, the projection models include quality improvement expenses, state assessments and taxes.

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Assurant Consolidated


The table below presents information regarding our consolidated results of

                                                               For the Three Months Ended
                                                                        March 31,
                                                                 2013                2012
Net earned premiums                                         $    1,850,448        $ 1,777,061
Net investment income                                              165,985            172,295
Net realized gains on investments                                   13,038              7,544
Amortization of deferred gain on disposal of businesses              4,092              4,621
Fees and other income                                              117,060            111,403

Total revenues                                                   2,150,623          2,072,924

Benefits, losses and expenses:
Policyholder benefits                                              857,361            856,358
Selling, underwriting and general expenses (1)                   1,071,760            951,842
Interest expense                                                    15,078             15,076

Total benefits, losses and expenses                              1,944,199          1,823,276

Income before provision for income taxes                           206,424            249,648
Provision for income taxes                                          88,644             86,388

Net income                                                  $      117,780        $   163,260

(1) Includes amortization of deferred acquisition costs ("DAC") and value of business acquired ("VOBA").

The following discussion provides a general overall analysis of how the consolidated results were affected by our four operating segments and our Corporate and Other segment for First Quarter 2013 and First Quarter 2012. Please see the discussion that follows, for each of these segments, for a more detailed analysis of the fluctuations.

For The Three Months Ended March 31, 2013 Compared to The Three Months Ended March 31, 2012

Net Income

Net income decreased $45,480 or 28%, to $117,780 in First Quarter 2013, compared with $163,260 of net income for First Quarter 2012. The decline was primarily due to a $14,000 (non tax-deductible) settlement with the New York Department of Financial Services ("NYDFS") and $10,013 (after-tax) of reportable catastrophe losses in our Assurant Specialty Property segment. There were no reportable catastrophe losses in First Quarter 2012. For additional detail on the NYDFS settlement, please refer to Assurant Specialty Property's results of operations section further below in this Item 2. Also contributing to the decline was a $10,205 tax liability increase due to a change in estimated non-deductible compensation expense related to the Affordable Care Act.

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Assurant Solutions


The tables below present information regarding Assurant Solutions' segment
results of operations:

                                                         For the Three Months
                                                            Ended March 31,
                                                          2013           2012
    Net earned premiums                                $  689,500      $ 626,948
    Net investment income                                  95,229         99,311
    Fees and other income                                  79,112         72,440

    Total revenues                                        863,841        798,699

    Benefits, losses and expenses:
    Policyholder benefits                                 211,737        209,808
    Selling, underwriting and general expenses            599,610        523,177

    Total benefits, losses and expenses                   811,347        732,985

    Segment income before provision for income taxes       52,494         65,714
    Provision for income taxes                             17,587         22,314

    Segment net income                                 $   34,907      $  43,400

    Net earned premiums:
    Credit                                             $   41,732      $  42,832
    Service contracts                                     337,135        305,834
    Other (1)                                              20,541         14,045

    Total domestic                                        399,408        362,711

    Credit                                                 96,778        106,390
    Service contracts                                     168,172        129,061
    Other (1)                                               7,608          6,905

    Total international                                   272,558        242,356

    Preneed                                                17,534         21,881

    Total                                              $  689,500      $ 626,948

    Fees and other income:
    Debt protection                                    $    6,496      $   6,965
    Service contracts                                      33,420         31,015
    Other (1)                                               2,687          1,445

    Total domestic                                         42,603         39,425

    International                                           8,427          9,147
    Preneed                                                28,082         23,868

    Total                                              $   79,112      $  72,440

    Gross written premiums (2):
    Credit                                             $   89,674      $  93,242
    Service contracts                                     440,322        391,694
    Other (1)                                              27,958         23,273

    Total domestic                                        557,954        508,209

    Credit                                                242,547        247,329
    Service contracts                                     176,592        161,523
    Other (1)                                              11,564         11,050

    Total international                                   430,703        419,902

    Total                                              $  988,657      $ 928,111

    Preneed (face sales)                               $  229,478      $ 212,163

    Combined ratios (3):
    Domestic                                                 96.9 %         96.3 %
    International                                           102.3 %        101.7 %

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(1) This includes emerging products and run-off products lines.

(2) Gross written premiums does not necessarily translate to an equal amount of subsequent net earned premiums since Assurant Solutions reinsures a portion of its premiums to insurance subsidiaries of its clients.

(3) The combined ratio is equal to total benefits, losses and expenses divided by net earned premiums and fees and other income excluding the preneed business.

For The Three Months Ended March 31, 2013 Compared to The Three Months Ended March 31, 2012

Net Income

Segment net income decreased $8,493, or 20%, to $34,907 for First Quarter 2013 from $43,400 for First

Quarter 2012, primarily due to higher mortality experience in our preneed business and the previously disclosed loss of a mobile client effective October 1, 2012. First Quarter 2012 included the recognition of a one-time premium tax liability release of $2,405 (after-tax) in Canada.

Total Revenues

Total revenues increased $65,142, or 8%, to $863,841 for First Quarter 2013 from $798,699 for First Quarter

2012. The increase was mainly the result of higher net earned premiums of $62,552 in both our domestic and international service contract businesses. Domestic service contract net earned premiums increased primarily from an existing service contract client as well as additional vehicle service contract clients partially offset by a previously disclosed loss of a mobile client. International service contract net earned premiums increased primarily due to growth in Latin America. Fees and other income increased $6,672, mostly driven by growth in our preneed business. These increases were partially offset by lower net investment income of $4,082 primarily due to lower investment yields.

Gross written premiums increased $60,546, or 7%, to $988,657 for First Quarter 2013 from $928,111 for First Quarter 2012. Domestic gross written premiums, mainly from our automotive and retail service contract business, increased $49,745 from both new and existing clients. Our international service contract business increased $15,069, primarily due to growth in Latin America from new and existing clients. These increases were partially offset by the unfavorable impact of changes in foreign exchange rates.

Preneed face sales increased $17,315, or 8%, to $229,478 for First Quarter 2013 from $212,163 for First Quarter 2012. This increase was mostly attributable to growth from our exclusive distribution partnership with Service Corporation International, the largest funeral provider in North America. This exclusive . . .

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