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AIZ > SEC Filings for AIZ > Form 10-K on 19-Feb-2014All Recent SEC Filings

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Form 10-K for ASSURANT INC


19-Feb-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and accompanying notes which appear elsewhere in this report. It contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this report, particularly under the headings "Item 1A - Risk Factors" and "Forward-Looking Statements."

General

We report our results through five segments: Assurant Solutions, Assurant Specialty Property, Assurant Health, Assurant Employee Benefits, and Corporate and Other. The Corporate and Other segment includes activities of the holding company, financing and interest expenses, net realized gains (losses) on investments and investment income earned from short-term investments held. The Corporate and Other segment also includes the amortization of deferred gains associated with the sales of FFG and LTC, through reinsurance agreements as described below.

The following discussion covers the twelve months ended December 31, 2013 ("Twelve Months 2013"), twelve months ended December 31, 2012 ("Twelve Months 2012") and twelve months ended December 31, 2011 ("Twelve Months 2011"). Please see the discussion that follows, for each of these segments, for a more detailed analysis of the fluctuations.

Executive Summary

Consolidated net income increased $5,202, or 1%, to $488,907 for Twelve Months 2013 from $483,705 for Twelve Months 2012. The increase was primarily related to a $143,457 (after-tax) decrease in reportable catastrophe losses in our Assurant Specialty Property segment, partially offset by lower net income in our Assurant Health and Assurant Employee Benefits segments. In addition, our Corporate and Other net loss increased as net realized gains on investments decreased $19,388 (after-tax) and interest expense increased $11,329 (after-tax) due to the March 2013 issuance of senior notes with an aggregate principal amount of $700,000.

Assurant Solutions net income increased $1,399, or 1%, to $125,152 for Twelve Months 2013 from $123,753 for Twelve Months 2012. Twelve Months 2012 included a $20,373 (after-tax) intangible asset impairment charge in our U.K. business and $7,724 (after-tax) workforce restructuring charge. Twelve Months


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2013 included $15,554 (after-tax) of workforce restructuring charges, primarily in our European operations (in connection with our October 2013 acquisition of LSG, a mobile phone insurance provider based in the U.K.), and in our domestic credit insurance and extended protection businesses. Excluding these items, segment net income decreased due to unfavorable domestic mobile underwriting experience. Preneed income also declined due to lower investment yields and higher mortality experience.

Net earned premiums increased 7.9% driven primarily by domestic service contract growth from an existing client, additional vehicle service contracts, and service contract growth in Latin America. Fees and other income increased 27.5%, primarily from mobile programs launched during the year, as well as contributions from LSG.

Overall, we expect Assurant Solutions revenues to improve modestly over the course of 2014, primarily driven by growth in our mobile warranty businesses and continued growth in Latin America. Despite recent economic volatility, we believe Latin America offers attractive market characteristics. Our previously disclosed investment in Iké, a services assistance business with operations in Mexico and other countries in Latin America, is intended to allow us to further expand and diversify our footprint in this region.

Assurant Specialty Property net income increased $118,635, or 39%, to $423,586 for Twelve Months 2013 from $304,951 for Twelve Months 2012. The increase is primarily due to a $143,457 (after-tax) decrease in reportable catastrophe losses and growth in lender-placed homeowners net earned premiums attributable to newly added loan portfolios and the previously disclosed discontinuation of a client quota share reinsurance agreement. Partially offsetting these items were higher non-catastrophe losses, an increase in operating expenses to support new loan portfolios, additional customer service initiatives and increased legal and regulatory expenses, including a $14,000 (non tax-deductible) regulatory settlement with the NYDFS and expenses related to pending class action lawsuits in our lender-placed insurance business.

Our placement rate at the end of 2013 was 2.77 percent, a 10 basis point reduction from year-end 2012, reflecting the improving state of the overall housing market. This was partially offset by contributions from recently added loan portfolios.

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 44 states and we are working with the insurance departments in the remaining states to complete the rollout this year.

For 2014, we expect Assurant Specialty Property net earned premiums and fees to decline slightly from 2013 levels, primarily due to lower contributions from lender-placed homeowners insurance. This outlook assumes lower premium rates and reductions in placement rates. Net earned premiums and fees will also be affected by the overall number of loans tracked. In 2013, we benefitted from several significant loan portfolio transfers. As the mortgage servicing market continues to evolve, we expect additional loan transfer activity in 2014. One of our clients recently informed us of a possible transfer of loans to another carrier, which could reduce profitability. Negotiations with this client are continuing.

We also expect our expense ratio to increase in 2014 primarily due to a higher mix of fee income business related to the acquisition of FAS, a provider of property preservation, restoration and inspection services, as well as additional operating costs to support loan volume and servicing requirements in our lender-placed insurance business. We also expect our non-catastrophe loss ratio to increase due to lower premium rates and anticipated higher frequency of such losses compared to 2013.

Assurant Health net income decreased $46,143, or 89%, to $5,857 for Twelve Months 2013 from $52,000 for Twelve Months 2012. The decrease was primarily attributable to an increased provision for taxes in connection with the Affordable Care Act due to a change in estimated non-deductible compensation expenses, including a $10,205 tax liability increase, and a decrease in net earned premiums. Also, Twelve Months 2012 results included an additional $14,337 (after-tax) of investment income from real estate joint venture partnerships.


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The first open enrollment period under the Affordable Care Act began late in 2013. During the enrollment period, Assurant Health benefited from a significant increase in sales of its individual major medical products, which include the essential health benefits mandated by the Affordable Care Act.

In 2014, we expect Assurant Health net earned premiums and fees to increase due to sales of new major medical policies. In addition, we expect profitability to continue to be negatively affected by a high effective tax rate, due to continued non-deductibility of certain expenses under the Affordable Care Act, and higher sales commissions to be paid on a larger anticipated volume of newly issued policies.

Assurant Employee Benefits net income decreased 40% to $34,553 for Twelve Months 2013 from $58,059 for Twelve Months 2012. The decrease was primarily attributable to less favorable disability loss experience, including a previously disclosed decrease in the reserve discount rate primarily for new long-term disability claims. Additionally, Twelve Months 2013 results were also impacted by lower investment income compared to Twelve Months 2012.

Net earned premiums and fees decreased slightly to $1,038,021 for Twelve Months 2013 from $1,042,732 for Twelve Months 2012 as growth in voluntary products was offset by declines in employer-paid products. Sales increased in 2013 compared with 2012, primarily reflecting improved sales of our voluntary products, including dental.

During 2014, we expect continued sales momentum in voluntary products, which we anticipate will lead to net earned premium growth. Continued expense management actions should offset lower net investment income and higher expenditures to support the growth in voluntary sales. In addition, we expect overall results to be affected by the continued low interest rate environment, employment trends and capital market conditions.

Critical Factors Affecting Results

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."

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 senior notes and dividends on our common stock.

For Twelve Months 2013, net cash provided by operating activities, including the effect of exchange rate changes on cash and cash equivalents, totaled $1,003,819; net cash used in investing activities totaled $392,738 and net cash provided by financing activities totaled $196,699. We had $1,717,184 in cash and cash equivalents as of December 31, 2013. Please see " - Liquidity and Capital Resources," below for further details.

Revenues

We generate revenues primarily from the sale of our insurance policies and service contracts and from investment income earned on our investments. Sales of insurance policies are recognized in revenue as earned premiums while sales of administrative services are recognized as fee income.

Under the universal life insurance guidance, income earned on preneed life insurance policies sold after January 1, 2009 are presented within policy fee income net of policyholder benefits. Under the limited pay insurance guidance, the consideration received on preneed policies sold prior to January 1, 2009 is presented separately as net earned premiums, with policyholder benefits expense being shown separately.


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Our premium and fee income is supplemented by income earned from our investment portfolio. We recognize revenue from interest payments, dividends and sales of investments. Currently, our investment portfolio is primarily invested in fixed maturity securities. Both investment income and realized capital gains on these investments can be significantly affected by changes in interest rates.

Interest rate volatility can increase or reduce unrealized gains or losses in our investment portfolios. Interest rates are highly sensitive to many factors, including governmental monetary policies, domestic and international economic and political conditions and other factors beyond our control. Fluctuations in interest rates affect our returns on, and the market value of, fixed maturity and short-term investments.

The fair market value of the fixed maturity securities in our investment portfolio and the investment income from these securities fluctuate depending on general economic and market conditions. The fair market value generally increases or decreases in an inverse relationship with fluctuations in interest rates, while net investment income realized by us from future investments in fixed maturity securities will generally increase or decrease with interest rates. We also have investments that carry pre-payment risk, such as mortgage-backed and asset-backed securities. Interest rate fluctuations may cause actual net investment income and/or cash flows from such investments to differ from estimates made at the time of investment. In periods of declining interest rates, mortgage prepayments generally increase and mortgage-backed securities, commercial mortgage obligations and bonds are more likely to be prepaid or redeemed as borrowers seek to borrow at lower interest rates. Therefore, in these circumstances we may be required to reinvest those funds in lower-interest earning investments.

Expenses

Our expenses are primarily policyholder benefits, underwriting, general and administrative expenses and interest expense.

Policyholder benefits are affected by our claims management programs, reinsurance coverage, contractual terms and conditions, regulatory requirements, economic conditions, and numerous other factors. Benefits paid or reserves required for future benefits could substantially exceed our expectations, causing a material adverse effect on our business, results of operations and financial condition.

Underwriting, general and administrative expenses consist primarily of commissions, premium taxes, licenses, fees, amortization of deferred costs, general operating expenses and income taxes.

We incur interest expense related to our debt.

Critical Accounting Estimates

Certain items in our consolidated financial statements are based on estimates and judgment. Differences between actual results and these estimates could in some cases have material impacts on our consolidated financial statements.

The following critical accounting policies require significant estimates. The actual amounts realized in these areas could ultimately be materially different from the amounts currently provided for in our consolidated financial statements.

Health Insurance Premium Rebate Liability

The Affordable Care Act was signed into law in March 2010. One provision of the Affordable Care Act, effective January 1, 2011, established a minimum medical loss ratio ("MLR") designed to ensure that a minimum percentage of premiums is paid for clinical services or health care quality improvement activities. The Affordable Care Act established an MLR of 80% for individual and small group business and 85% for large group business.


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If the actual loss ratios, calculated in a manner prescribed by the Department of Health and Human Services ("HHS"), are less than the required MLR, premium rebates are payable to the policyholders by August 1 of the subsequent year.

The Assurant Health loss ratio reported in "Results of Operations" below (the "GAAP loss ratio") differs from the loss ratio calculated under the MLR rules. The most significant differences include: the fact that the MLR is calculated separately by state, legal entity and type of coverage (individual or group); the MLR calculation includes credibility adjustments for each state/entity/coverage cell, 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; 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; and the MLR is calculated using a rolling three years of experience while the GAAP loss ratio represents the current year only.

Assurant Health has estimated the 2013 impact of this regulation based on definitions and calculation methodologies outlined in the HHS regulations and guidance. The 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 businesses subject to MLR requirements for the MLR reporting year. In addition, the projection models include quality improvement expenses, state assessments and taxes.

Reserves

Reserves are established in accordance with GAAP using generally accepted actuarial methods and reflect judgments about expected future claim payments. Calculations incorporate assumptions about inflation rates, the incidence of incurred claims, the extent to which all claims have been reported, future claims processing, lags and expenses and future investment earnings, and numerous other factors. While the methods of making such estimates and establishing the related liabilities are periodically reviewed and updated, the calculation of reserves is not an exact process.

Reserves do not represent precise calculations of expected future claims, but instead represent our best estimates at a point in time of the ultimate costs of settlement and administration of a claim or group of claims, based upon actuarial assumptions and projections using facts and circumstances known at the time of calculation.

Many of the factors affecting reserve adequacy are not directly quantifiable and not all future events can be anticipated when reserves are established. Reserve estimates are refined as experience develops. Adjustments to reserves, both positive and negative, are reflected in the consolidated statement of operations in the period in which such estimates are updated.

Because establishment of reserves is an inherently complex process involving significant judgment and estimates, there can be no certainty that ultimate losses will not exceed existing claim reserves. Future loss development could require reserves to be increased, which could have a material adverse effect on our earnings in the periods in which such increases are made. See "Item 1A - Risk Factors - Risks related to our Company - Our actual claims losses may exceed our reserves for claims, and this may require us to establish additional reserves that may materially affect our results of operations, profitability and capital" for more detail on this risk.


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The following table provides reserve information for our major product lines for the years ended December 31, 2013 and 2012:

                                                           December 31, 2013                                                 December 31, 2012
                                                                            Claims and Benefits                                               Claims and Benefits
                                                                                  Payable                                                           Payable
                                          Future                                         Incurred          Future                                          Incurred
                                          Policy                                          But Not          Policy                                           But Not
                                       Benefits and       Unearned          Case         Reported       Benefits and       Unearned          Case          Reported
                                         Expenses         Premiums        Reserves       Reserves         Expenses         Premiums        Reserves        Reserves
Long Duration Contracts:
Preneed funeral life insurance
policies and investment-type
annuity contracts                     $    4,453,154     $   185,863     $    14,236     $   5,901     $    4,306,947     $   154,998     $    13,139     $     7,297
Life insurance no longer offered             432,075             565           2,200         2,690            445,347             574           3,110           4,437
Universal life and other products
no longer offered                            189,319             125             735         3,110            210,037             127             825           5,133
FFG, LTC and other disposed
businesses                                 3,440,947          34,158         740,704        75,195          3,424,511          35,862         713,258          55,661
Medical                                       94,436          10,454           3,840         9,799             89,540          10,293           6,831          10,016
All other                                     36,641             475          14,943         8,422             37,123             455          15,786           8,904
Short Duration Contracts:
Group term life                                    0           4,135         169,972        29,799                  0           3,681         172,804          30,953
Group disability                                   0           2,537       1,156,693       115,158                  0           2,143       1,189,656         119,431
Medical                                            0         125,817          68,869       153,313                  0         111,351          99,549         148,209
Dental                                             0           5,140           2,402        17,461                  0           4,648           2,442          15,896
Property and warranty                              0       2,514,356         201,336       437,888                  0       2,368,372         459,586         707,472
Credit life and disability                         0         314,420          39,419        52,096                  0         323,510          46,406          57,794
Extended service contracts                         0       3,331,936           6,622        36,790                  0       3,068,652           7,654          38,596
All other                                          0         132,691           3,203        16,575                  0         107,594           2,246          17,499

Total                                 $    8,646,572     $ 6,662,672     $ 2,425,174     $ 964,197     $    8,513,505     $ 6,192,260     $ 2,733,292     $ 1,227,298

For a description of our reserving methodology, see Note 12 to the Consolidated Financial Statements included elsewhere in this report.

Long Duration Contracts

Reserves for future policy benefits represent the present value of future benefits to policyholders and related expenses less the present value of future net premiums. Reserve assumptions reflect best estimates for expected investment yield, inflation, mortality, morbidity, expenses and withdrawal rates. These assumptions are based on our experience to the extent it is credible, modified where appropriate to reflect current trends, industry experience and provisions for possible unfavorable deviation. We also record an unearned revenue reserve which represents premiums received which have not yet been recognized in our consolidated statements of operations.

Historically, premium deficiency testing has not resulted in material adjustments to deferred acquisition costs or reserves. Such adjustments could occur, however, if economic or mortality conditions significantly deteriorated.

Risks related to the reserves recorded for certain discontinued individual life, annuity, and long-term care insurance policies have been 100% ceded via reinsurance. While the Company has not been released from the contractual obligation to the policyholders, changes in and deviations from economic and mortality assumptions used in the calculation of these reserves will not directly affect our results of operations unless there is a default by the assuming reinsurer.


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Short Duration Contracts

Claims and benefits payable reserves for short duration contracts include
(1) case reserves for known claims which are unpaid as of the balance sheet date; (2) IBNR reserves for claims where the insured event has occurred but has not been reported to us as of the balance sheet date; and (3) loss adjustment expense reserves for the expected handling costs of settling the claims. Periodically, we review emerging experience and make adjustments to our reserves and assumptions where necessary. Below are further discussions on the reserving process for our major short duration products.

Group Disability and Group Term Life

Case or claim reserves are set for active individual claims on group long term disability policies and for waiver of premium benefits on group term life policies. Reserve factors used to calculate these reserves reflect assumptions regarding disabled life mortality and claim recovery rates, claim management practices, awards for social security and other benefit offsets and yield rates earned on assets supporting the reserves. Group long term disability and group term life waiver of premium reserves are discounted because the payment pattern and ultimate cost are fixed and determinable on an individual claim basis.

Factors considered when setting IBNR reserves include patterns in elapsed time from claim incidence to claim reporting, and elapsed time from claim reporting to claim payment.

Key sensitivities at December 31, 2013 for group long term disability claim reserves include the discount rate and claim termination rates:

                                Claims and                                         Claims and
                             Benefits Payable                                   Benefits Payable
Group disability,                                   Group disability, claim
discount rate decreased                             termination rate 10%
by 100 basis points         $        1,334,492      lower                      $        1,305,206
Group disability, as                                Group disability, as
reported                    $        1,271,851      reported                   $        1,271,851
Group disability,                                   Group disability, claim
discount rate increased                             termination rate 10%
by 100 basis points         $        1,215,406      higher                     $        1,241,606

The discount rate is also a key sensitivity for group term life waiver of premium reserves (included within group term life reserves).

                                                            Claims and Benefits Payable
Group term life, discount rate decreased by 100
basis points                                               $                     208,277
Group term life, as reported                               $                     199,771
Group term life, discount rate increased by 100
basis points                                               $                     192,122

Medical

IBNR reserves calculated using generally accepted actuarial methods represent the largest component of reserves for short duration medical claims and benefits payable. The primary methods we use in their estimation are the loss development method and the projected claim method. Under the loss development method, we estimate ultimate losses for each incident period by multiplying the current cumulative losses by the appropriate loss development factor. When there is not sufficient data to reliably estimate reserves under the loss development method, . . .

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