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AIZ > SEC Filings for AIZ > Form 10-Q on 29-Oct-2012All 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 September 30, 2012, compared with December 31, 2011, and our results of operations for the three and nine months ended September 30, 2012 and 2011. This discussion should be read in conjunction with our MD&A and annual audited consolidated financial statements as of December 31, 2011 included in our Annual Report on Form 10-K for the year ended December 31, 2011 filed with the U.S. Securities and Exchange Commission (the "SEC") and the September 30, 2012 unaudited consolidated financial statements and related notes included elsewhere in this Form 10-Q. The 2011 Annual Report on Form 10-K, Third Quarter 2012 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 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, 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) deterioration in the Company's market capitalization compared to its book value that could result in further impairment of goodwill;

(vii) risks related to outsourcing activities;

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

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

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

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

(xix) inability of reinsurers to meet their obligations;

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

(xxi) cyber security threats and cyber attacks;

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

(xxiii) data breaches compromising client information and privacy;

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

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

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

(xxvii) significant competitive pressures in our businesses; 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 2011 Annual Report on Form 10-K and in this Third Quarter 2012 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 lender-placed homeowners insurance, manufactured housing homeowners insurance, debt protection administration, credit-related insurance, warranties and service contracts, individual health and small employer group health insurance, group dental insurance, group disability insurance, group life insurance and pre-funded funeral 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 nine months ended September 30, 2012 ("Third Quarter 2012" and "Nine Months 2012," respectively) and the three and nine months ended September 30, 2011 ("Third Quarter 2011" and "Nine Months 2011," respectively).

Consolidated net income increased $52,251, or 71%, to $126,288 in Third Quarter 2012, compared with $74,037 for Third Quarter 2011, while net income was $458,718 for Nine Months 2012, an increase of $78,914, or 21%, compared with $379,804 for Nine Months 2011.

Assurant Solutions net income increased to $36,702 for Third Quarter 2012 from $33,674 for Third Quarter 2011, and revenues also increased to $850,166 for Third Quarter 2012 compared with $769,258 for Third Quarter 2011. This increase was primarily due to improved performance in our domestic service contract business, from both automotive and retail clients, and in our Latin America operations. We believe Assurant Solutions' new business opportunities remain strong, particularly in our mobile business, where growth in the use of mobile devices has expanded the market opportunity for our products worldwide. This is evidenced by the previously announced addition of new clients, both domestically and internationally. In addition, our vehicle service contract business has improved as U.S. auto sales have begun to rebound. In Third Quarter 2012, we assumed a block of automotive warranty business, which added $41,117 to gross written premiums. For full year 2012, we expect to achieve modest growth in net earned premiums, although results will be affected by the previously disclosed loss of a domestic mobile client effective October 1, 2012, which accounted for approximately $100,000 of annual net earned premiums. We will continue to focus on reducing expenses, particularly in areas experiencing market pressures such as Europe and the domestic credit business.

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At Assurant Specialty Property, net income improved for Third Quarter 2012 compared with Third Quarter 2011, reflecting revenue growth in lender-placed homeowners insurance and multi-family housing products and lower catastrophe losses. Loans tracked in our lender-placed homeowners insurance business increased from both new and existing clients. In Third Quarter 2012, we added a new client with a portfolio of approximately one million loans. Placement rates remained elevated compared to historic averages, reflecting the continued impact of seriously delinquent loans. However, we continue to anticipate that placement rates will begin to decline as these seriously delinquent loans move to resolution. The pace of this decline will depend largely on the state of the economy, housing policy and client-specific mortgage loan portfolio characteristics. We expect full year 2012 net earned premiums to increase compared to 2011, reflecting additional loan portfolios from new and existing clients and continued growth in multi-family housing products. For 2013, we expect lender-placed net earned premiums and net income to be lower, primarily reflecting a reduction in placement rates coupled with the impact of the California rate reduction (discussed below), partially offset by an increase in loans tracked. We intend to reduce expenses in this business as the lender-placed homeowners insurance business moves to a steady state over the next few years.

On October 22, 2012 we announced that we reached agreement with the California Department of Insurance to reduce premium rates for our lender-placed hazard insurance product by 30.5%. This reduction reflects continued favorable loss experience and different assumptions about future experience compared to our previous rate filing. These rates will be implemented within 90 days and will apply to new policies issued or renewed with effective dates after implementation. For additional detail on this reduction, including the expected financial impact, please refer to Assurant Specialty Property's results of operations section further below in this Item 2.

In addition, we have engaged in discussions with state departments of insurance regarding our next generation lender-placed homeowners insurance product, and have begun to introduce this new product in several states. For example, in Florida, which bears a large proportion of our property catastrophe exposure, we are preparing to file this new product in the fourth quarter of 2012. In Florida, net earned premiums before the cost of catastrophe reinsurance, totaled about $270,000 through Nine Months 2012.

Assurant Health continued to make progress in the post-health care reform environment as net income increased to $11,260 for Third Quarter 2012 from $5,763 for Third Quarter 2011. This improvement reflects continued expense reduction and favorable loss experience. A higher effective tax rate in Third Quarter 2012 reflects healthcare reform restrictions on deductible expenses. Revenues declined in Third Quarter 2012 due to ongoing product mix shifts and challenging economic conditions, particularly in our small group business. We are encouraged by continued improvement in sales of our Health Access and supplemental coverage products during Nine Months 2012 compared with the same period last year. In addition our previously disclosed network agreement with Aetna continues to improve the affordability of the individual major medical products and offers a broader choice of network providers. Assurant Health will face additional challenges as the implementation of the Patient Protection and Affordable Care Act (the "Affordable Care Act") continues to unfold. For full year 2012, we expect results to improve due to favorable loss experience and continued expense savings. For 2013 we expect that our expense management initiatives will continue, though at a slower pace. In addition, we expect continued weak sales in our small group business as employers feel the full impact of healthcare reform. We expect that these trends, combined with additional expenditures required to prepare for the full requirements of the Affordable Care Act in 2014, will lead to a decline in Assurant Health's results next year.

At Assurant Employee Benefits, net income of $13,246 for Third Quarter 2012 remained relatively consistent compared with net income of $13,607 for Third Quarter 2011. Results reflect slightly higher disability loss experience, while overall disability incidence rates remained stable. Dental loss experience improved. Our growth priority continues to be on voluntary products, which accounted for nearly half of new sales and a third of net earned premiums in Third Quarter 2012. For full year 2012, we expect lower net earned premiums primarily due to the previously disclosed loss of two assumed disability clients, but we expect continued growth in voluntary and supplemental products. Looking ahead, persistent high unemployment, low payroll growth and low interest rates should continue to present challenges for the segment.

Critical Factors Affecting Results and Liquidity

Our results depend on the adequacy 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 2011 Annual Report on Form 10-K.

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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 the nine months ended September 30, 2012, net cash provided by operating activities, including the effect of exchange rate changes on cash and cash equivalents, totaled $426,192; net cash used in investing activities totaled $(98,291) and net cash used in financing activities totaled $(422,108). We had $1,072,506 in cash and cash equivalents as of September 30, 2012. Please see "-Liquidity and Capital Resources," below for further details.

Critical Accounting Policies and Estimates

Our 2011 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 2011 Annual Report on Form 10-K were consistently applied to the unaudited interim consolidated financial statements for Nine Months 2012.

On January 1, 2012, the Company adopted the amendments to existing guidance on accounting for costs associated with acquiring or renewing insurance contracts. This guidance was adopted retrospectively and has been applied to all prior period financial information contained in these consolidated financial statements. See Note 3 to the Notes to Consolidated Financial Statements for more information.

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. 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 on page 55 (the "GAAP loss ratio") differs from the loss ratio calculated under the 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 Third Quarter 2012 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          For the Nine Months Ended
                                                     September 30,                      September 30,
                                                 2012              2011              2012             2011
Net earned premiums and other
considerations                              $    1,838,481      $ 1,777,315     $    5,407,778     $ 5,307,635
Net investment income                              169,433          172,176            541,042         517,893
Net realized gains on investments                    8,460              532             34,179          20,355
Amortization of deferred gain on disposal
of businesses                                        4,600            5,114             13,817          15,353
Fees and other income                              124,106          106,578            350,478         300,037

Total revenues                                   2,145,080        2,061,715          6,347,294       6,161,273

Benefits, losses and expenses:
Policyholder benefits                              895,480          997,431          2,623,865       2,877,303
Selling, underwriting and general
expenses (1)                                     1,025,903          936,783          2,955,273       2,781,195
Interest expense                                    15,078           15,078             45,228          45,284

Total benefits, losses and expenses              1,936,461        1,949,292          5,624,366       5,703,782

Income before provision for income taxes           208,619          112,423            722,928         457,491
Provision for income taxes                          82,331           38,386            264,210          77,687

Net income                                  $      126,288      $    74,037     $      458,718     $   379,804

(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 Third Quarter 2012 and Nine Months 2012, and Third Quarter 2011 and Nine Months 2011. Please see the discussion that follows, for each of these segments, for a more detailed analysis of the fluctuations.

For the Three Months Ended September 30, 2012 Compared to the Three Months Ended September 30, 2011

Net Income

The Company reported net income of $126,288 in Third Quarter 2012, an increase of $52,251, or 71%, compared with $74,037 of net income for Third Quarter 2011. The increase was primarily due to improved results in our Assurant Specialty Property segment driven by a $34,466 (after-tax) decrease in reportable catastrophe losses.

For the Nine Months Ended September 30, 2012 Compared to the Nine Months Ended September 30, 2011

Net Income

The Company reported net income of $458,718 in Nine Months 2012, an increase of $78,914, or 21%, compared with $379,804 of net income for Nine Months 2011. The increase was primarily due to improved results in all four of our operating segments, in particular Assurant Specialty Property, whose net income increased $106,290 mainly due to a decrease in reportable catastrophe losses of $74,786 (after-tax). These improved operating segment results were partially offset by an $80,000 release of a capital loss valuation allowance related to deferred tax assets in Nine Months 2011. Please see Note 6 to the Consolidated Financial Results for further information about the valuation allowance release.

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Assurant Solutions


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

                                             For the Three Months             For the Nine Months
                                             Ended September 30,              Ended September 30,
                                             2012            2011            2012             2011
Net earned premiums and other
considerations                            $   669,742      $ 600,679      $ 1,942,155      $ 1,815,305
Net investment income                          97,558         98,453          297,201          295,508
Fees and other income                          82,866         70,126          231,525          196,976

Total revenues                                850,166        769,258        2,470,881        2,307,789

Benefits, losses and expenses:
Policyholder benefits                         219,430        213,417          639,426          641,140
Selling, underwriting and general
expenses                                      574,051        504,118        1,648,272        1,500,262

Total benefits, losses and expenses           793,481        717,535        2,287,698        2,141,402

Segment income before provision for
income taxes                                   56,685         51,723          183,183          166,387
Provision for income taxes                     19,983         18,049           62,718           56,578

Segment net income                        $    36,702      $  33,674      $   120,465      $   109,809

Net earned premiums and other
Credit                                    $    41,201      $  42,438      $   125,316      $   129,926
Service contracts                             347,509        284,786          963,891          884,268
Other (1)                                      10,296         13,644           43,613           38,701

Total domestic                                399,006        340,868        1,132,820        1,052,895

Credit                                        105,293        102,417          321,349          294,352
Service contracts                             138,526        126,833          404,557          371,115
Other (1)                                       7,105          5,827           20,985           17,549

Total international                           250,924        235,077          746,891          683,016

Preneed                                        19,812         24,734           62,444           79,394

Total                                     $   669,742      $ 600,679      $ 1,942,155      $ 1,815,305

Fees and other income:
Debt protection                           $     6,758      $   7,554      $    20,809      $    22,003
Service contracts                              41,009         31,296          103,206           91,349
Other (1)                                       1,123            515            3,346            2,838

Total domestic                                 48,890         39,365          127,361          116,190

International                                   7,103          9,947           28,940           24,286
Preneed                                        26,873         20,814           75,224           56,500

Total                                     $    82,866      $  70,126      $   231,525      $   196,976

Gross written premiums (2):
Credit                                    $   101,057      $ 102,820      $   292,421      $   294,506
Service contracts                             517,088        355,003        1,380,938        1,069,836
Other (1)                                      29,110         23,643           84,439           63,046

Total domestic                                647,255        481,466        1,757,798        1,427,388

Credit                                        249,561        255,324          745,891          756,579
Service contracts                             181,731        161,567          497,092          423,800
Other (1)                                      10,862         10,468           33,326           33,491

Total international                           442,154        427,359        1,276,309        1,213,870

Total                                     $ 1,089,409      $ 908,825      $ 3,034,107      $ 2,641,258

Preneed (face sales)                      $   208,907      $ 195,223      $   655,057      $   567,106

Combined ratios (3):
Domestic                                         97.0 %         99.4 %           97.1 %           97.2 %
International                                   103.4 %        102.2 %          102.1 %          104.0 %

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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 . . .

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