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AIZ > SEC Filings for AIZ > Form 10-Q on 31-Jul-2013All Recent SEC Filings

Show all filings for ASSURANT INC

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 June 30, 2013, compared with December 31, 2012, and our results of operations for the three and six months ended June 30, 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 June 30, 2013 unaudited consolidated financial statements and related notes included elsewhere in this Form 10-Q. The 2012 Annual Report on Form 10-K, Second 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) losses due to natural and man-made catastrophes;

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

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

(ix) risks related to outsourcing activities;

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

(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);

(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;

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(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 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 and six months ended June 30, 2013 ("Second Quarter 2013" and "Six Months 2013") and the three and six months ended June 30, 2012 ("Second Quarter 2012" and "Six Months 2012").

Consolidated net income decreased $35,647, or 21%, to $133,523 in Second Quarter 2013, compared with $169,170 for Second Quarter 2012. For Six Months 2013, consolidated net income decreased $81,127, or 24%, to $251,303, compared with $332,430 for Six Months 2012.

Assurant Solutions net income decreased to $31,391 for Second Quarter 2013 from $40,363 for Second Quarter 2012. In our preneed business, results declined primarily due to lower investment yields and expenses increased as a result of higher amortization of selling expenses due to growth. In addition, Second Quarter 2013 results reflect a $2,741 (after-tax) charge for a reduction in force in Europe and the previously disclosed loss of a mobile client. Second Quarter 2012 results benefitted from $3,762 (after-tax) in client related settlements.

Net earned premiums and fees at Assurant Solutions increased to $774,565, or 7% for Second Quarter 2013 compared with $721,684 for Second Quarter 2012. Growth in domestic net earned premiums reflects promotional activity at an existing service contract client as well as increased vehicle service contract business. International net earned premiums increased primarily due to expansion in Brazil and Mexico.

We continue to expand our mobile business and recently announced that Assurant Solutions has added new programs with two large domestic mobile carriers. We expect the business from these programs to more than offset the previously disclosed loss of a mobile client.

The international combined ratio declined 250 basis points, excluding $5,700 of favorable client related settlements in Second Quarter 2012 and the $3,560 restructuring charge in Europe in Second Quarter 2013. Growth in Latin America and previous expense management actions contributed to the improvement. We expect these factors to continue to drive improvement in the international combined ratio through 2013. Our domestic combined ratio for Second Quarter 2013 decreased slightly to 97.6% from 97.9% in Second Quarter 2012, and remains below our long-term target of 98.0% due to expense savings actions taken in 2012.

Overall, we expect modest premium growth at Assurant Solutions in 2013, reflecting increased sales in domestic and international service contracts. We also plan to continue our expense management efforts.

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Assurant Specialty Property net income increased $14,198 to $106,520 for Second Quarter 2013 from $92,322 for Second Quarter 2012. The increase was primarily driven by revenue growth from lender-placed loan portfolios added during the past year and the continued expansion of our multi-family housing business. For Six Months 2013 we added 2.6 million loans and expect to add another 1.0 million loans during third quarter 2013. These additional 1.0 million loans will begin to produce net earned premiums later in the year. Our placement rate on lender-placed loans tracked was 2.81% for the Second Quarter 2013 compared with 2.83% in Second Quarter 2012. We continue to expect that placement rates will fluctuate in the near term, reflecting the composition of newly added loan portfolios, but will decline over the longer term.

On April 1, 2013, as a result of the discontinuation of a client quota share arrangement, we began retaining premiums and underwriting risk from a previously reinsured client. Premiums written prior to this date, and the associated claims, will continue to be ceded proportionately as they run off over the next year.

In 2012, we began a multi-phased roll-out of our new next generation lender-placed insurance product to respond to the changed environment following the housing downturn. This product is now available in 28 states and we expect it to be available in 10 more approved states by the end of the third quarter. We also filed new product forms and rates in Florida and New York, which are currently undergoing review.

As previously disclosed, we continue to engage in discussions with various state regulatory and federal departments regarding our lender-placed insurance program. During Six Months 2013 we reached a settlement with the New York Department of Financial Services ("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.

Overall, we expect Assurant Specialty Property's revenues to increase compared to 2012 due to higher volume in lender-placed loan portfolios, the discontinuation of the above-mentioned client reinsurance agreement and growth in multi-family housing products. We expect overall results to continue to be affected by changes in placement rates, loan portfolio activity, premium rates 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 portfolio growth 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's net income decreased to $4,083 for Second Quarter 2013 from $28,932 for Second Quarter 2012. The decrease was primarily due to the absence of $13,856 (after-tax) of net investment income from real estate joint venture partnerships that was included in Second Quarter 2012 results, and a higher effective income tax rate due to limitations on the deductibility of compensation.

Assurant Health's loss ratio increased to 75.2% for Second Quarter 2013 from 73.0% for Second Quarter 2012, reflecting less favorable loss experience compared with prior period and pricing changes in response to the minimum medical loss ratio on our major medical business.

We expect ongoing changes related to healthcare reform to continue to affect Assurant Health over the rest of 2013. We expect net earned premiums to decline compared with 2012 but overall insured lives to increase as consumers look for affordable health care alternatives. In addition, we will continue our expense management efforts. We continue to anticipate our effective tax rate will be elevated due to higher non-deductible compensation expenses.

At Assurant Employee Benefits, net income declined to $11,474 for Second Quarter 2013 from $18,621 for Second Quarter 2012. This decline was primarily due to less favorable disability results, reflecting lower recoveries in Second Quarter 2013, and the previously disclosed reduction in the discount rate for new disability claim reserves.

Net earned premiums increased slightly for Second Quarter 2013 compared with Second Quarter 2012, driven by higher dental sales. Assurant Employee Benefit continues to emphasize enrollment and administrative services for voluntary benefit plans.

Overall, for 2013, we expect net earned premiums and fees to be consistent with 2012 due to continued growth in voluntary products.

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

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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 six months ended June 30, 2013, net cash provided by operating activities, including the effect of exchange rate changes on cash and cash equivalents, totaled $261,096; net cash used in investing activities totaled $(343,602) and net cash provided by financing activities totaled $443,497. We had $1,270,395 in cash and cash equivalents as of June 30, 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 Second Quarter 2013.

The Assurant Health loss ratio reported on page 55 (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 Second 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               For the Six Months
                                                Ended June 30,                    Ended June 30,
                                            2013             2012             2013             2012
Net earned premiums                      $ 1,916,414      $ 1,792,236      $ 3,766,862      $ 3,569,297
Net investment income                        163,924          199,314          329,909          371,609
Net realized gains on investments             20,857           18,175           33,895           25,719
Amortization of deferred gain on
disposal of businesses                         4,072            4,596            8,164            9,217
Fees and other income                        132,499          114,969          249,559          226,372

Total revenues                             2,237,766        2,129,290        4,388,389        4,202,214

Benefits, losses and expenses:
Policyholder benefits                        916,950          872,027        1,774,311        1,728,385
Selling, underwriting and general
expenses (1)                               1,088,529          977,528        2,160,289        1,929,370
Interest expense                              21,520           15,074           36,598           30,150

Total benefits, losses and expenses        2,026,999        1,864,629        3,971,198        3,687,905

Income before provision for income
taxes                                        210,767          264,661          417,191          514,309
Provision for income taxes                    77,244           95,491          165,888          181,879

Net income                               $   133,523      $   169,170      $   251,303      $   332,430

(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 Second Quarter 2013 and Six Months 2013, and Second Quarter 2012 and Six Months 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 June 30, 2013 Compared to the Three Months Ended June 30, 2012

Net Income

The Company reported net income of $133,523 in Second Quarter 2013, a decrease of $35,647, or 21%, compared with $169,170 of net income for Second Quarter 2012. The decrease was primarily due to a $23,004 (after-tax) decline in net investment income, including $17,529 (after-tax) of additional investment income from real estate joint venture partnerships in Second Quarter 2012 compared with Second Quarter 2013. In addition, results in our Assurant Solutions, Assurant Health and Assurant Employee Benefits segments declined, partially offset by improved results in our Assurant Specialty Property segment.

For the Six Months Ended June 30, 2013 Compared to the Six Months Ended June 30, 2012

Net Income

The Company reported net income of $251,303 for Six Months 2013, a decrease of $81,127, or 24%, compared with $332,430 of net income for Six Months 2012. The decrease was primarily due to a $27,105 (after-tax) decline in net investment income, including $16,024 (after-tax) of additional investment income from real estate joint venture partnerships in Six Months 2012 compared with Six Months 2013. In addition, Six Months 2013 includes a $14,000 (non tax-deductible) settlement with the New

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York Department of Financial Services ("NYDFS") and a $9,351 (after-tax) increase in reportable catastrophe losses in our Assurant Specialty Property segment. 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 expenses 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                   For the Six Months
                                              Ended June 30,                        Ended June 30,
                                         2013               2012               2013               2012
Net earned premiums                   $   681,827        $   645,465        $ 1,371,327        $ 1,272,413
Net investment income                      94,428            100,332            189,657            199,643
Fees and other income                      92,738             76,219            171,850            148,659

Total revenues                            868,993            822,016          1,732,834          1,620,715

Benefits, losses and expenses:
Policyholder benefits                     209,713            210,188            421,450            419,996
Selling, underwriting and general
expenses                                  608,948            551,044          1,208,558          1,074,221

Total benefits, losses and
expenses                                  818,661            761,232          1,630,008          1,494,217

Segment income before provision
for income taxes                           50,332             60,784            102,826            126,498
Provision for income taxes                 18,941             20,421             36,528             42,735

Segment net income                    $    31,391        $    40,363        $    66,298        $    83,763

Net earned premiums:
Credit                                $    39,584        $    41,283        $    81,316        $    84,115
Service contracts                         332,278            310,548            669,413            616,382
Other (1)                                  20,752             19,272             41,293             33,317

Total domestic                            392,614            371,103            792,022            733,814

Credit                                     95,962            109,666            192,740            216,056
Service contracts                         168,022            136,970            336,194            266,031
Other (1)                                   7,672              6,975             15,280             13,880

Total international                       271,656            253,611            544,214            495,967

Preneed                                    17,557             20,751             35,091             42,632

Total                                 $   681,827        $   645,465        $ 1,371,327        $ 1,272,413

Fees and other income:
Debt protection                       $     7,526        $     7,086        $    14,022        $    14,051
Service contracts                          43,131             31,182             76,551             62,197
Other (1)                                   1,412                778              4,099              2,223

Total domestic                             52,069             39,046             94,672             78,471

International                              10,160             12,690             18,587             21,837
Preneed                                    30,509             24,483             58,591             48,351

Total                                 $    92,738        $    76,219        $   171,850        $   148,659

Gross written premiums (2):
Credit                                $    94,942        $    98,122        $   184,616        $   191,364
Service contracts                         522,034            472,156            962,356            863,850
Other (1)                                  28,932             32,056             56,890             55,329

Total domestic                            645,908            602,334          1,203,862          1,110,543

Credit                                    243,814            249,001            486,361            496,330
Service contracts                         181,358            153,838            357,950            315,361
Other (1)                                  12,533             11,414             24,097             22,464

Total international                       437,705            414,253            868,408            834,155

Total                                 $ 1,083,613        $ 1,016,587        $ 2,072,270        $ 1,944,698

Preneed (face sales)                  $   256,913        $   233,987        $   486,391        $   446,150

Combined ratios (3):
Domestic                                     97.6 %             97.9 %             97.2 %             97.1 %
International                               102.1 %            101.1 %            102.2 %            101.4 %

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

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