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AIZ > SEC Filings for AIZ > Form 10-Q on 29-Apr-2014All Recent SEC Filings

Show all filings for ASSURANT INC

Form 10-Q for ASSURANT INC


29-Apr-2014

Quarterly Report


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

(Dollar amounts in thousands, except number of shares and per-share amounts)

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, 2014, compared with December 31, 2013, and our results of operations for the three months ended March 31, 2014 and 2013. This discussion should be read in conjunction with our MD&A and annual audited consolidated financial statements as of December 31, 2013 included in our Annual Report on Form 10-K for the year ended December 31, 2013 filed with the U.S. Securities and Exchange Commission (the "SEC") and the March 31, 2014 unaudited consolidated financial statements and related notes included elsewhere in this Form 10-Q. The 2013 Annual Report on Form 10-K, First Quarter 2014 Form 10-Q, and other documents related to the Company are available free of charge through the SEC website at www.sec.gov and through our website at www.assurant.com.

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. loss of significant client relationships, distribution sources and contracts;

iii. unfavorable outcomes in litigation and/or regulatory investigations that could negatively affect our business and reputation;

iv. current or new laws and regulations that could increase our costs and decrease our revenues;

v. 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, on our health and employee benefits businesses;

vi. significant competitive pressures in our businesses;

vii. failure to attract and retain sales representatives or key managers;

viii. losses due to natural or man-made catastrophes;

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

x. deterioration in the Company's market capitalization compared to its book value that could result in an impairment of goodwill;

xi. risks related to our international operations, including fluctuations in exchange rates;

xii. 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);

xiii. failure to find and integrate suitable acquisitions and new ventures;

xiv. cyber security threats and cyber attacks;

xv. failure to effectively maintain and modernize our information systems;

xvi. data breaches compromising client information and privacy;


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xvii. failure to predict or manage benefits, claims and other costs;

xviii. uncertain tax positions and unexpected tax liabilities;

xix. inadequacy of reserves established for future claims;

xx. risks related to outsourcing activities;

xxi. unavailability, inadequacy and unaffordable pricing of reinsurance coverage;

xxii. 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);

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

xxiv. inability of reinsurers to meet their obligations;

xxv. credit risk of some of our agents in Assurant Specialty Property and Assurant Solutions;

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 2013 Annual Report on Form 10-K.

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 relates to the three months ended March 31, 2014 ("First Quarter 2014") and the three months ended March 31, 2013 ("First Quarter 2013").

Executive Summary

Consolidated net income increased 17% to $137,245 in First Quarter 2014, compared with $117,780 of net income for First Quarter 2013. The increase was primarily due to improved results in our Assurant Solutions and Assurant Employee Benefits segments.

Assurant Solutions net income increased $14,562, or 42%, to $49,469 for First Quarter 2014 from $34,907 for First Quarter 2013. The increase was primarily due to improved mobile results, reflecting continued growth in covered mobile devices, additional profit from short-term client marketing programs implemented in First Quarter 2014 and favorable loss experience. In addition, prior expense reduction actions contributed to the increase.

First Quarter 2014 net earned premiums increased 9% and fees increased 79% compared with First Quarter 2013 due to the market success of our mobile protection programs and contributions from the Lifestyles Service Group ("LSG") acquisition during the fourth quarter of 2013. We also benefited from modest growth in Latin America despite foreign exchange volatility.

Overall, we expect Assurant Solutions' net earned premiums and fees to increase compared to 2013, primarily driven by growth in mobile. The timing of new mobile device introductions, client marketing programs and seasonal trends in mobile will cause quarterly results to vary.


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At Assurant Specialty Property, net income increased 4%, to $97,741 for First Quarter 2014 from $94,244 for First Quarter 2013. First Quarter 2014 results include $5,093 (after-tax) of reportable catastrophe losses, compared to $10,013 (after-tax) in First Quarter 2013. In addition, First Quarter 2013 results included a $14,000 regulatory settlement. Absent these items, First Quarter 2014 results decreased compared with First Quarter 2013, primarily due to higher non-catastrophe losses from harsh winter weather in a large part of the country.

Net earned premiums and fees increased in First Quarter 2014 compared with First Quarter 2013 mainly attributable to continued growth in our lender-placed insurance and multi-family housing businesses. Lender-placed insurance premiums benefited from the previously disclosed discontinuation of a quota share reinsurance agreement and loan portfolio additions in 2013. Our placement rate in First Quarter 2014 declined to 2.74% compared with 2.89% in First Quarter 2013.

Overall, we expect Assurant Specialty Property's net earned premiums and fees to remain level with 2013. We expect growth in targeted areas, including contributions from the recently announced acquisition of StreetLinks, LLC, to be partially offset by declines in lender-placed insurance. We expect overall results to continue to be affected by catastrophe losses and lower placement and premium rates in lender-placed insurance. In addition, as previously discussed, one of our clients informed us of a possible transfer of loans to another carrier, which could reduce profitability. Discussions with this client are continuing.

We expect our expense ratio to increase, primarily reflecting a higher mix of fee income business and additional operating costs to support our lender-placed insurance business. We also expect our non-catastrophe loss ratio to increase due to higher claims frequency and lower premium rates.

Assurant Health First Quarter 2014 results declined to $(7,069) from $(5,343) for First Quarter 2013, reflecting the continued negative impact of the Affordable Care Act. Less favorable loss experience on individual major medical policies and higher sales commissions paid on newly issued policies drove the decline. In addition, First Quarter 2014 included a $5,749 tax liability increase related to a change in estimated compensation expenses that are non-deductible under the Affordable Care Act, compared to a tax liability increase of $10,205 in First Quarter 2013.

The First Quarter 2014 loss ratio was 73.5 percent, an increase of 90 basis points from First Quarter 2013. This increase reflects very early claim submissions on policies sold during the open enrollment period, partially offset by an estimated contribution from the risk mitigation programs under the Affordable Care Act that went into effect on January 1, 2014. Based on our current assumptions, we expect risk-mitigation program benefits to increase during the year, but our estimates may change materially as experience develops.

First Quarter 2014 sales increased $274,390 from First Quarter 2013 to $411,574 primarily attributable to the Affordable Care Act's open enrollment period that ended March 31, 2014. The demographic mix of sales during this period, including the age distribution, was consistent with our pricing assumptions.

We expect Assurant Health's full year 2014 net earned premiums and fees to increase compared to 2013 due to sales of new individual major medical policies under the Affordable Care Act. We expect overall results to vary based on emerging claims experience under the Affordable Care Act and related risk mitigation programs and we anticipate our effective tax rate to remain very high due to higher non-deductible compensation expenses.

At Assurant Employee Benefits, net income increased $7,832, or 129%, to $13,915 for First Quarter 2014 from $6,083 for First Quarter 2013. The increase is primarily attributable to favorable life and dental loss experience. First Quarter 2014 includes $1,764 (after-tax) of additional investment income from real estate joint venture partnerships compared to First Quarter 2013. First Quarter 2014 results also benefited from an increase in the reserve discount rate for new long-term disability claims.

Voluntary sales and net earned premiums increased 40% and 11% respectively, compared to First Quarter 2013, reflecting our strategic focus on key brokers. In addition, we are preparing to participate on several private exchanges related to the Affordable Care Act. While we do not expect these exchanges to be a material source of near-term sales, they will further expand our distribution.

We expect Assurant Employee Benefits' full year 2014 net earned premiums and fees to increase compared to 2013 due to growth in voluntary products. We also expect continued expense reduction actions will offset higher expenditures to support growth in our voluntary business. We continue to expect results to be affected by employment trends and capital market conditions.


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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 2013 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, 2014, net cash provided by operating activities, including the effect of exchange rate changes on cash and cash equivalents, totaled $114,053; net cash used in investing activities totaled $191,137 and net cash used in financing activities totaled $534,188. We had $1,105,912 in cash and cash equivalents as of March 31, 2014. Please see "-Liquidity and Capital Resources," below for further details.

Critical Accounting Policies and Estimates

Our 2013 Annual Report on Form 10-K describes 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 2013 Annual Report on Form 10-K were consistently applied to the unaudited interim consolidated financial statements for First Quarter 2014.


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Results of Operations

Assurant Consolidated

Overview

The table below presents information regarding our consolidated results of
operations:



                                                             For the Three Months
                                                                Ended March 31,
                                                             2014            2013
Revenues:
Net earned premiums                                       $ 2,060,462     $ 1,850,448
Net investment income                                         168,058         165,985
Net realized gains on investments                              19,751          13,038
Amortization of deferred gain on disposal of businesses         3,660           4,092
Fees and other income                                         196,441         117,060

Total revenues                                              2,448,372       2,150,623

Benefits, losses and expenses:
Policyholder benefits                                       1,008,032         857,361
Selling, underwriting and general expenses (1)              1,188,022       1,071,760
Interest expense                                               17,065          15,078

Total benefits, losses and expenses                         2,213,119       1,944,199

Income before provision for income taxes                      235,253         206,424
Provision for income taxes                                     98,008          88,644

Net income                                                $   137,245     $   117,780

(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 2014 and First Quarter 2013. 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, 2014 Compared to the Three Months Ended March 31, 2013

Net Income

Net income increased $19,465 or 17%, to $137,245 in First Quarter 2014, compared with $117,780 of net income for First Quarter 2013. The increase was primarily due to improved net income of $14,562 and $7,832 in our Assurant Solutions and Assurant Employee Benefits segments, respectively.


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Assurant Solutions

Overview

The table below presents information regarding Assurant Solutions' segment
results of operations:



                                                         For the Three  Months
                                                            Ended March 31,
                                                          2014            2013
    Revenues:
    Net earned premiums                                $   752,667      $ 689,500
    Net investment income                                   94,685         95,229
    Fees and other income                                  141,354         79,112

    Total revenues                                         988,706        863,841

    Benefits, losses and expenses:
    Policyholder benefits                                  255,963        211,737
    Selling, underwriting and general expenses             658,296        599,610

    Total benefits, losses and expenses                    914,259        811,347

    Segment income before provision for income taxes        74,447         52,494
    Provision for income taxes                              24,978         17,587

    Segment net income                                 $    49,469      $  34,907


    Net earned premiums:
    Domestic:
    Credit                                             $    42,958      $  41,732
    Service contracts                                      374,828        337,135
    Other (1)                                               13,376         20,541

    Total Domestic                                         431,162        399,408

    International:
    Credit                                                  83,937         96,778
    Service contracts                                      213,854        168,172
    Other (1)                                                7,735          7,608

    Total International                                    305,526        272,558

    Preneed                                                 15,979         17,534

    Total                                              $   752,667      $ 689,500

    Fees and other income:
    Domestic:
    Debt protection                                    $     7,184      $   6,496
    Service contracts                                       87,823         33,420
    Other (1)                                                3,105          2,687

    Total Domestic                                          98,112         42,603

    International                                           18,200          8,427
    Preneed                                                 25,042         28,082

    Total                                              $   141,354      $  79,112

    Gross written premiums (2):
    Domestic:
    Credit                                             $    88,994      $  89,674
    Service contracts                                      644,079        440,322
    Other (1)                                               21,478         27,958

    Total Domestic                                         754,551        557,954

    International:
    Credit                                                 228,367        242,547
    Service contracts                                      221,378        176,592
    Other (1)                                               12,908         11,564

    Total International                                    462,653        430,703

    Total                                              $ 1,217,204      $ 988,657

    Preneed (face sales)                               $   241,704      $ 229,478

    Combined ratios (3):
    Domestic                                                  93.7 %         96.9 %
    International                                            101.7 %        102.3 %

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


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(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, 2014 Compared to the Three Months Ended March 31, 2013

Net Income

Segment net income increased $14,562, or 42%, to $49,469 for First Quarter 2014 from $34,907 for First Quarter 2013. The increase was primarily driven by improved results in our domestic mobile business due to additional profit generated from client marketing programs and favorable loss experience. In addition, prior expense management actions contributed to the increase.

Total Revenues

Total revenues increased $124,865, or 14%, to $988,706 for First Quarter 2014 from $863,841 for First Quarter 2013. Domestic service contract net earned premiums and fees increased primarily due to growth in subscribers in our mobile services business. International net earned premiums and fees increased mainly due to service contract growth in Europe attributable to the LSG acquisition during the fourth quarter of 2013.

Gross written premiums increased $228,547, or 23%, to $1,217,204 for First Quarter 2014 from $988,657 for First Quarter 2013. Gross written premiums from our domestic service contract business increased $203,757 driven by growth in mobile subscribers. Gross written premiums from our international service contract business increased $44,786 due to growth in Europe attributable to the LSG acquisition and in Latin America from new and existing clients. This increase was partially offset by the unfavorable impact of changes in foreign exchange rates, primarily in Latin America.

Preneed face sales increased $12,226, or 5%, to $241,704 for First Quarter 2014 from $229,478 for First Quarter 2013. This increase was mostly attributable to growth from our exclusive distribution partnership with Service Corporation International ("SCI"), the largest funeral provider in North America. This exclusive distribution partnership is effective through September 29, 2014.

Total Benefits, Losses and Expenses

Total benefits, losses and expenses increased $102,912, or 13%, to $914,259 for First Quarter 2014 from $811,347 for First Quarter 2013. Policyholder benefits increased $44,226 primarily related to the LSG acquisition. Selling, underwriting and general expenses increased $58,686. The increase is primarily related to growth in our domestic mobile business and the LSG acquisition.


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Assurant Specialty Property

Overview

The table below presents information regarding Assurant Specialty Property's
segment results of operations:



                                                          For the Three Months
                                                             Ended March 31,
                                                           2014           2013
   Revenues:
   Net earned premiums                                  $  623,372      $ 529,799
   Net investment income                                    27,875         25,762
   Fees and other income                                    40,759         26,187

   Total revenues                                          692,006        581,748

   Benefits, losses and expenses:
   Policyholder benefits                                   263,118        186,723
   Selling, underwriting and general expenses              281,470        245,279

   Total benefits, losses and expenses                     544,588        432,002

   Segment income before provision for income taxes        147,418        149,746
   Provision for income taxes                               49,677         55,502

   Segment net income                                   $   97,741      $  94,244


   Net earned premiums:
   Homeowners (lender-placed and voluntary)             $  438,949      $ 362,477
   Manufactured housing (lender-placed and voluntary)       58,711         54,453
   Other (1)                                               125,712        112,869

   Total                                                $  623,372      $ 529,799

   Ratios:
   Loss ratio (2)                                             42.2 %         35.2 %
   Expense ratio (3)                                          42.4 %         44.1 %
   Combined ratio (4)                                         82.0 %         77.7 %

(1) This primarily includes lender-placed flood, miscellaneous specialty property and multi-family housing insurance products.

(2) The loss ratio is equal to policyholder benefits divided by net earned premiums.

(3) The expense ratio is equal to selling, underwriting and general expenses divided by net earned premiums and fees and other income.

(4) The combined ratio is equal to total benefits, losses and expenses divided by net earned premiums and fees and other income.

Regulatory Matters

As previously disclosed, on March 21, 2013, the Company and two of its wholly owned subsidiaries, ASIC and ABIC, reached an agreement with the NYDFS regarding the Company's lender-placed insurance business in the State of New York. Under the terms of the agreement, and without admitting or denying any wrongdoing, ASIC made a $14,000 (non tax-deductible) settlement payment to the NYDFS. In addition, among other things, ASIC and ABIC agreed to modify certain business practices in accordance with requirements that apply to all New York-licensed lender-placed insurers of properties in the state, and filed their new lender-placed program and new rates in New York. Proposed changes to the program . . .

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