(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, 2012, compared with December 31, 2011, and our results of operations
for the three and six months ended June 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 June 30, 2012 unaudited consolidated
financial statements and related notes included elsewhere in this Form 10-Q. The
2011 Annual Report on Form 10-K, Second Quarter 2012 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) 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;
(ii) 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;
(iii) loss of significant client relationships, distribution sources and
contracts;
(iv) failure to attract and retain sales representatives;
(v) losses due to natural and man-made catastrophes;
(vi) a decline in our credit or financial strength ratings (including the risk of
ratings downgrades in the insurance industry);
(vii) deterioration in the Company's market capitalization compared to its book
value that could result in further impairment of goodwill;
(viii) unfavorable outcomes in litigation and/or regulatory investigations that
could negatively affect our business and reputation;
(ix) current or new laws and regulations that could increase our costs and
decrease our revenues;
(x) general global economic, financial market and political conditions
(including difficult conditions in financial, capital and credit markets,
the global economic slowdown, fluctuations in interest rates or a prolonged
period of low interest rates, monetary policies, unemployment and
inflationary pressure);
(xi) inadequacy of reserves established for future claims;
(xii) failure to predict or manage benefits, claims and other costs;
(xiii) uncertain tax positions;
(xiv) fluctuations in exchange rates and other risks related to our international
operations;
(xv) unavailability, inadequacy and unaffordable pricing of reinsurance coverage;
(xvi) diminished value of invested assets in our investment portfolio (due to,
among other things, volatility in financial markets, the global economic
slowdown, credit and liquidity risk, other than temporary impairments and
increases in interest rates);
(xvii) insolvency of third parties to whom we have sold or may sell businesses
through reinsurance or modified co-insurance;
(xviii) inability of reinsurers to meet their obligations;
(xix) credit risk of some of our agents in Assurant Specialty Property and
Assurant Solutions;
(xx) failure to effectively maintain and modernize our information systems and
protect them from cybersecurity threats;
(xxi) failure to protect client information and privacy;
(xxii) failure to find and integrate suitable acquisitions and new ventures;
(xxiii) inability of our subsidiaries to pay sufficient dividends;
(xxiv) failure to provide for succession of senior management and key executives;
(xxv) significant competitive pressures in our businesses;
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(xxvi) risks related to outsourcing activities; and
(xxvii) 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
Second 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 six months ended June 30, 2012
("Second Quarter 2012" and "Six Months 2012") and the three and six months ended
June 30, 2011 ("Second Quarter 2011" and "Six Months 2011").
Consolidated net income increased $4,154, or 3%, to $169,170 in Second Quarter
2012, compared with $165,016 for Second Quarter 2011, while net income was
$332,430 for Six Months 2012, an increase of $26,663, or 9%, compared with
$305,767 for Six Months 2011.
Assurant Solutions net income increased to $40,363 for Second Quarter 2012 from
$39,187 for Second Quarter 2011. Despite a challenging global retail sales
environment, our business continued to grow through the addition of new clients
and our ability to find creative solutions for clients and consumers. Results
from our international operations improved modestly; however, we continue to
monitor the European economic uncertainty, which we expect will impact future
results. During Second Quarter 2012, net earned premiums and fees increased when
compared with Second Quarter 2011, primarily due to growth in service contract
business both domestically and in Latin America. However, effective October 1,
2012, we will lose a domestic mobile client, which accounted for approximately
$100,000 of annualized net earned premium. Increasing profitability in this
segment will require business growth as well as rigorous expense control. We
expect that the main drivers of this growth will be our ability to grow our
mobile business and to improve results in Europe. In addition, we also expect to
continue growing our preneed and domestic service contract products.
At Assurant Specialty Property, results improved for Second Quarter 2012 when
compared with Second Quarter 2011, primarily due to decreased reportable
catastrophe losses of $32,903 (after-tax) and a lower non-catastrophe loss ratio
due to less severe Spring weather. During the quarter we began tracking
2.1 million new loans resulting from a previously disclosed portfolio
acquisition. An additional 275,000 new loans will be added in the third quarter
of 2012 through a loan portfolio acquisition by one of our Specialty Servicer
clients. We expect these new loans to produce premiums beginning in the third
quarter. Placement rates remained elevated, reflecting experience on seriously
delinquent loans. As the backlog of delinquencies in the mortgage marketplace is
resolved, we anticipate that placement rates will decline, which will reduce net
earned premiums and related income from lender-placed products. Net earned
premiums and fees from our multi-family housing products achieved double-digit
growth period over period. Overall, we expect 2012 net earned premiums and fees
to modestly increase for full year 2012 compared to 2011, reflecting growth in
multi-family housing products and new loan portfolios added by our clients. We
also expect our expense and non-catastrophe loss ratios to trend up as a result
of a changing product mix.
The lender-placed insurance business has recently been an area of focus for
various regulators, consumer advocates, government sponsored entities and
others. As previously disclosed, the Company has been engaged in discussions and
proceedings with certain state regulators regarding our lender-placed insurance
business, including the New York Department of Financial Services (the "NYDFS")
and the California State Department of Insurance (the "California DOI"). As a
result of these discussions and proceedings, the Company may be required to
decrease rates for its annual lender-placed hazard and real estate owned
policies in New York and California. Earlier this year, we initiated
conversations with the Consumer Financial Protection Bureau staff, which
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expects to issue proposed regulations in the next several months addressing
lender-placed insurance disclosures as well as other servicing issues. In
addition, we have been in discussions with the Federal Housing Finance Agency,
Fannie Mae and Freddie Mac to understand their views on the lender-placed
industry, and we have continued discussions with Fannie Mae regarding its
request for proposal issued earlier this year on cost-reduction efforts in the
lender-placed business. In August, we will participate in a public forum on
lender-placed insurance being held by the National Association of Insurance
Commissioners as part of its annual summer meeting. For additional detail on
certain pending regulatory matters, and a discussion of risks related to
regulatory matters, please see "Item 1A-Risk Factors" in this Second Quarter
2012 Form 10-Q.
Assurant Health continued to make progress in the post-health care reform
environment as net income increased to $28,932 for Second Quarter 2012 from
$5,194 for Second Quarter 2011. Results benefited from $13,856 (after-tax) of
increased real estate joint venture partnership investment income. The business
continued to focus on reducing operating expenses and expanding distribution.
Second Quarter 2012 expenses declined $12,885 compared with Second Quarter 2011
as we continued to streamline operations and improve our service to customers
and agents. Loss ratios declined due to favorable loss experience and a change
in product mix as affordable choice plans, an area of strategic focus, comprised
a larger proportion of the business. Sales of supplemental products improved as
more consumers expanded their health insurance coverage. As medical costs
continue to increase, we anticipate sales of our affordable choice plans will
increase. Individual market sales increased slightly as we continue to execute
our network partnership with Aetna Signature Administrators. Small group sales
continued to decline. We believe that small employers remain cautious about
changing carriers while the market adapts to health care reforms. We continue to
expect sales of affordable and supplemental products to increase, and major
medical product sales to improve in the second half of 2012 as a result of our
partnership with Aetna Signature Administrators.
At Assurant Employee Benefits, net income increased to $18,621 for Second
Quarter 2012 from $8,516 for Second Quarter 2011 as all product lines had
favorable loss experience. Although disability claim recoveries improved during
the quarter, incidence and recovery rates can be volatile from quarter to
quarter and the disability environment remains challenging. Our dental loss
experience improved this quarter and a recently announced agreement with United
Concordia will expand our dental network. Life loss experience also improved
during Second Quarter 2012, driven by favorable mortality. Net earned premiums
decreased due to the previously disclosed loss of two assumed disability
clients. Our growth priority continues to be on voluntary products, which
represented more than half of our sales for Second Quarter 2012. We continue to
expect net earned premiums from our voluntary and supplemental products to grow
this year, although overall premiums in 2012 will be lower than in 2011
primarily due to the loss of two previously disclosed disability clients.
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.
Assurant, Inc. regularly evaluates adjustments proposed by taxing authorities.
Tax years 2005-2008 are under federal audit. It is reasonably possible that a
change in the balance of unrecognized tax benefits may occur within the next 12
months. However, based on the information currently available, the Company does
not expect any change to be material to the consolidated financial condition but
could be material to net income in any given period.
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 six months ended June 30, 2012, net cash provided by operating
activities, including the effect of exchange rate changes on cash and cash
equivalents, totaled $181,398; net cash provided by investing activities totaled
$51,417 and net cash used in financing activities totaled $292,536. We had
$1,106,992 in cash and cash equivalents as of June 30, 2012. Please see
"-Liquidity and Capital Resources," below for further details.
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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 Second
Quarter 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 54 (the "GAAP loss ratio")
differs from the loss ratio calculated under the MLR. The most significant
differences include the fact that the MLR loss ratio 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 loss ratio includes quality improvement
expenses, taxes and fees; changes in reserves are treated differently in the MLR
loss ratio 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 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
Overview
The table below presents information regarding our consolidated results of
operations:
For the Three Months Ended For the Six Months Ended
June 30, June 30,
2012 2011 2012 2011Revenues:
Net earned premiums and other
considerations $ 1,792,236 $ 1,768,308 $ 3,569,297 $ 3,530,320
Net investment income 199,314 173,844 371,609 345,717
Net realized gains on investments 18,175 16,046 25,719 19,823
Amortization of deferred gain on
disposal of businesses 4,596 5,105 9,217 10,239
Fees and other income 114,969 99,584 226,372 193,459
Total revenues 2,129,290 2,062,887 4,202,214 4,099,558
Benefits, losses and expenses:
Policyholder benefits 872,027 986,844 1,728,385 1,879,872
Selling, underwriting and general
expenses (1) 977,528 930,326 1,929,370 1,844,412
Interest expense 15,074 15,075 30,150 30,206
Total benefits, losses and expenses 1,864,629 1,932,245
3,687,905 3,754,490
Income before provision (benefit) for
income taxes 264,661 130,642 514,309 345,068
Provision (benefit) for income taxes 95,491 (34,374 ) 181,879 39,301
Net income $ 169,170 $ 165,016 $ 332,430 $ 305,767
(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 2012 and Six Months 2012, and
Second Quarter 2011 and Six 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 June 30, 2012 Compared to The Three Months Ended
June 30, 2011.
Net Income
The Company reported net income of $169,170 in Second Quarter 2012, an increase
of $4,154, or 3%, compared with $165,016 of net income for Second Quarter 2011.
The increase was primarily due to improved results in our Assurant Specialty
Property, Assurant Health and Assurant Employee Benefits segments, partially
offset by an $80,000 release of a capital loss valuation allowance related to
deferred tax assets in Second Quarter 2011. Please see Note 6 to Consolidated
Financial Statements for further information about the valuation allowance
release.
For The Six Months Ended June 30, 2012 Compared to The Six Months Ended June 30,
2011.
Net Income
The Company reported net income of $332,430 for Six Months 2012, an increase of
$26,663, or 9%, compared with $305,767 of net income for Six Months 2011. The
improvement was primarily due to the items noted above.
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Assurant Solutions
Overview
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,
2012 2011 2012 2011
Revenues:
Net earned premiums and other
considerations $ 645,465 $ 613,304 $ 1,272,413 $ 1,214,626
Net investment income 100,332 99,330 199,643 197,055
Fees and other income 76,219 66,164 148,659 126,850
Total revenues 822,016 778,798 1,620,715 1,538,531
Benefits, losses and expenses:
Policyholder benefits 210,188 213,029 419,996 427,723
Selling, underwriting and general
expenses 551,044 506,543 1,074,221 996,144
Total benefits, losses and expenses 761,232 719,572
1,494,217 1,423,867
Segment income before provision for
income taxes 60,784 59,226 126,498 114,664
Provision for income taxes 20,421 20,039 42,735 38,529
Segment net income $ 40,363 $ 39,187 $ 83,763 $ 76,135
Net earned premiums and other
considerations:
Domestic:
Credit $ 41,283 $ 43,163 $ 84,115 $ 87,488
Service contracts 310,548 301,131 616,382 599,482
Other (1) 19,272 13,068 33,317 25,057
Total domestic 371,103 357,362 733,814 712,027
International:
Credit 109,666 99,976 216,056 191,935
Service contracts 136,970 124,034 266,031 244,282
Other (1) 6,975 5,703 13,880 11,722
Total international 253,611 229,713 495,967 447,939
Preneed 20,751 26,229 42,632 54,660
Total $ 645,465 $ 613,304 $ 1,272,413 $ 1,214,626
Fees and other income:
Domestic:
Debt protection $ 7,086 $ 7,284 $ 14,051 $ 14,449
Service contracts 31,182 30,951 62,197 60,053
Other (1) 778 651 2,223 2,323
Total domestic 39,046 38,886 78,471 76,825
International 12,690 6,927 21,837 14,339
Preneed 24,483 20,351 48,351 35,686
Total $ 76,219 $ 66,164 $ 148,659 $ 126,850
Gross written premiums (2):
Domestic:
Credit $ 98,122 $ 97,205 $ 191,364 $ 191,686
Service contracts 472,156 379,433 863,850 714,833
Other (1) 32,056 20,915 55,329 39,403
Total domestic 602,334 497,553 1,110,543 945,922
International:
Credit 249,001 254,046 496,330 501,255
Service contracts 153,838 137,473 315,361 262,233
Other (1) 11,414 10,968 22,464 23,023
Total international 414,253 402,487 834,155 786,511
Total $ 1,016,587 $ 900,040 $ 1,944,698 $ 1,732,433
Preneed (face sales) $ 233,987 $ 202,408 $ 446,150 $ 371,883
Combined ratios (3):
Domestic 97.9 % 96.6 % 97.1 % 96.2 %
International 101.1 % 104.3 % 101.4 % 104.9 %
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(1) This includes emerging products and run-off product lines.
(2) Gross written premiums does not necessarily translate to an equal amount of
subsequent net earned premiums since Assurant Solutions reinsures a portion
of its premiums to insurance subsidiaries of its clients.
(3) The combined ratio is equal to total benefits, losses and expenses divided by
net earned premiums and other considerations and fees and other income
excluding the preneed business.
For the Three Months Ended June 30, 2012 Compared to the Three Months Ended
June 30, 2011.
Net Income
Segment net income increased $1,176, or 3%, to $40,363 for Second Quarter 2012
from $39,187 for Second Quarter 2011 primarily as a result of certain
client-related settlements of $3,762 (after-tax) in Latin America as well as
$1,512 (after-tax) of additional income from real estate joint venture
partnerships. Partially offsetting these items were increased expenses
associated with business growth.
Total Revenues
Total revenues increased $43,218, or 6%, to $822,016 for Second Quarter 2012
from $778,798 for Second Quarter 2011. The increase was mainly the result of
higher net earned premiums and other considerations of $32,161. International
net earned premiums increased in our Latin America region from growth in retail
service contracts, mobile and credit insurance from new and existing clients.
Domestic net earned premiums increased primarily due to service contract growth
in the retail and automotive markets from both new and existing clients. These
increases were partially offset by the unfavorable impact of foreign exchange
rates. Fees and other income increased $10,055, mostly driven by Preneed sales,
service contracts and client-related settlements.
Gross written premiums increased $116,547, or 13%, to $1,016,587 for Second
Quarter 2012 from $900,040 for Second Quarter 2011. Gross written premiums from
our domestic service contract business increased $92,723 from both new and
existing automotive and retail clients, and from a one-time benefit of $33,200
resulting from the correction of a client reporting error. This correction has
no impact on net income because an offsetting deferred commission amount was
recorded. Our international service contract business increased $16,365, mainly
due to growth in Europe from new clients and products. This increase was
partially offset by the unfavorable impact of changes in foreign exchange rates.
Preneed face sales increased $31,579, or 16%, to $233,987 for Second Quarter
2012 from $202,408 for Second Quarter 2011. 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.
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Total Benefits, Losses and Expenses
Total benefits, losses and expenses increased $41,660, or 6%, to $761,232 for
Second Quarter 2012 from $719,572 for Second Quarter 2011. Policyholder benefits
declined $2,841 primarily from improved loss experience in our international
business partially offset by less favorable loss experience in our domestic
mobile business. Selling, underwriting and general expenses increased $44,501.
Commissions, taxes, licenses and fees, of which amortization of DAC is a
component, increased $35,372 due to higher earnings in our international and
domestic service contract businesses. General expenses increased $9,124
primarily due to higher costs associated with the growth of our international
businesses.
For the Six Months Ended June 30, 2012 Compared to the Six Months Ended June 30,
2011.
Net Income
Segment net income increased $7,628, or 10%, to $83,763 for Six Months 2012 from
$76,135 for Six Months 2011 primarily driven by improvement in our international
businesses due to growth and client settlements in Latin America and improved
underwriting experience across most other regions. Our Preneed business
benefited from improved sales in the U.S and Canada. Partially offsetting these
increases was less favorable loss experience in our domestic mobile business as
well as lower earnings from certain domestic blocks of business that are in
run-off.
Total Revenues
Total revenues increased $82,184, or 5%, to $1,620,715 for Six Months 2012 from
$1,538,531 for Six Months 2011. The increase was mainly the result of higher net
earned premiums of $57,787, primarily attributable to increases in both our
international service contract and credit businesses, primarily in our Latin
America and European regions as well as our domestic service contract business.
Domestic service contract net earned premiums increased primarily due to growth
in the retail and automotive markets from new and existing clients. These
increases were partially offset by the unfavorable impact of foreign exchange
rates. Fees and other income increased $21,809, mostly driven by growth in our
Preneed business and client settlements in Latin America.
Gross written premiums increased $212,265, or 12%, to $1,944,698 for Six Months
2012 from $1,732,433 for Six Months 2011. Gross written premiums from our
domestic service contract business increased $149,017 from both new and existing
clients and the one-time benefit of $33,200 resulting from the correction of a
client reporting error mentioned earlier. Our international service contract
business increased $53,128, due primarily to growth in Europe from new clients
and products. This increase was partially offset by the unfavorable impact of
changes in foreign exchange rates.
Preneed face sales increased $74,267, or 20%, to $446,150 for Six Months 2012
from $371,883 for Six Months 2011. This increase was mostly attributable to
growth from our exclusive distribution partnership with SCI.
Total Benefits, Losses and Expenses
Total benefits, losses and expenses increased $70,350, or 5%, to $1,494,217 for
Six Months 2012 from $1,423,867 for Six Months 2011. Policyholder benefits
declined $7,728 primarily from improved loss experience in our international
businesses and our run-off lines of business partially offset by less favorable
loss experience in our domestic mobile business. Selling, underwriting and
general expenses increased $78,077. Commissions, taxes, licenses and fees, of
which amortization of DAC is a component, increased $61,224 due to higher
earnings in our international and domestic service contract businesses. General
expenses increased $16,850 primarily due to higher costs associated with the
growth of our international businesses primarily in our Latin American region.
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Assurant Specialty Property
Overview
The tables below present information regarding Assurant Specialty Property's
segment results of operations:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2012 2011 2012 2011
Revenues:
Net earned premiums and other
considerations $ 491,989 $ 465,095 $ 976,189 $ 932,753
Net investment income 27,686 26,209 52,387 52,390
Fees and other income 23,489 18,250 47,628 35,549
Total revenues 543,164 509,554 1,076,204 1,020,692
Benefits, losses and expenses:
Policyholder benefits 199,887 254,575 355,597 421,528
Selling, underwriting and general
expenses 202,960 190,527
409,972 378,807
Total benefits, losses and expenses 402,847 445,102
765,569 800,335
Segment income before provision for
income taxes 140,317 64,452 310,635 220,357
Provision for income taxes 47,995 22,130 105,309 75,291
Segment net income $ 92,322 $ 42,322
$ 205,326$ 145,066
Net earned premiums and other
considerations:
By major product groupings:
Homeowners (lender-placed and voluntary) $ 336,837 $ 311,833 $ 665,967 $ 622,782
Manufactured housing (lender-placed and
voluntary) 50,631 55,886 101,454 110,522
Other (1) 104,521 97,376 208,768 199,449
Total $ 491,989 $ 465,095 $ 976,189 $ 932,753
Ratios:
Loss ratio (2) 40.6 % 54.7 % 36.4 % 45.2 %
Expense ratio (3) 39.4 % 39.4 % 40.0 % 39.1 %
Combined ratio (4) 78.2 % 92.1 % 74.8 % 82.7 %
(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 and other considerations.
(3) The expense ratio is equal to selling, underwriting and general expenses
divided by net earned premiums and other considerations and fees and other
income.
(4) The combined ratio is equal to total benefits, losses and expenses divided by
net earned premiums and other considerations and fees and other income.
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Pending Regulatory Matters
The Company files rates with the state departments of insurance in the ordinary
course of business. As previously disclosed, in addition to this routine
correspondence the Company has recently been engaged in discussions and
proceedings with certain state regulators regarding our lender-placed insurance
business. For example, we participated in public hearings conducted by the NYDFS
in May 2012 and were subsequently served with an order by the NYDFS requiring us
to propose and justify amended rates for our lender-placed insurance products
sold in the State of New York. We have submitted a response to this order and
are currently engaged in discussions with the NYDFS. Proposed submitted changes
to the program would affect annual lender-placed hazard and real estate owned
policies issued in the State of New York, which accounted for approximately
$64,000 and $36,000 of Assurant Specialty Property's net earned premiums for the
full year 2011 and Six Months 2012, respectively.
In addition, the Company re-filed proposed rates for lender-placed insurance
products with the California DOI. The Company submitted a proposed 18% rate
decrease, which has not yet been approved. The new rates would affect annual
lender-placed hazard and real estate owned policies issued in the State of
California, which accounted for approximately $124,000 and $54,000 of Assurant
Specialty Property's net earned premiums for the full year 2011 and Six Months
2012, respectively.
It is possible that other state departments of insurance and regulatory
authorities may choose to initiate or continue to review the appropriateness of
the Company's premium rates for its lender-placed insurance products. If in the
aggregate such reviews lead to significant decreases in premium rates for the
Company's lender-placed insurance products, our results of operations could be
materially adversely affected. For additional detail on these pending matters,
and a discussion of risks related to regulatory matters, please see "Item
1A-Risk Factors" in this Second Quarter 2012 Form 10-Q.
For the Three Months Ended June 30, 2012 Compared to the Three Months Ended
June 30, 2011.
Net Income
Segment net income increased $50,000, or 118%, to $92,322 for Second Quarter
2012 from $42,322 for Second Quarter 2011. The increase is primarily driven by a
decrease in reportable catastrophe losses of $32,903 (after-tax) coupled with
increased lender-placed homeowners net earned premiums due to expanded loan
portfolios from new and existing clients and growth in our multi-family housing
products.
Total Revenues
Total revenues increased $33,610, or 7%, to $543,164 for Second Quarter 2012
from $509,554 for Second Quarter 2011. Growth in lender-placed homeowners and
renters insurance net earned premiums as well as fee income from our resident
bond product are the main drivers of the revenue increase. Growth in
lender-placed homeowners net earned premiums is primarily due to higher
insurance placement rates and increased loans tracked attributable to client
loan portfolio acquisitions.
Total Benefits, Losses and Expenses
Total benefits, losses and expenses decreased $42,255, or 9%, to $402,847 for
Second Quarter 2012 from $445,102 for Second Quarter 2011. Policyholder benefits
decreased $54,688 primarily due to reportable catastrophe losses in Second
Quarter 2012 of $15,117 compared to $65,738 of reportable catastrophe losses in
Second Quarter 2011. Reportable catastrophe losses includes only individual
catastrophic events that generated losses to the Company in excess of $5,000,
pre-tax and net of reinsurance. Selling, underwriting and general expenses
increased $12,433, to $202,960 for Second Quarter 2012, from $190,527 for Second
Quarter 2011, primarily due to higher operating costs to support business
growth.
For the Six Months Ended June 30, 2012 Compared to the Six Months Ended June 30,
2011.
Net Income
Segment net income increased $60,260, or 42%, to $205,326 for Six Months 2012
from $145,066 for Six Months 2011. The increase is primarily driven by a
decrease in reportable catastrophe losses of $40,320 (after-tax) coupled with
increased lender-placed homeowners net earned premiums due to expanded loan
portfolios from new and existing clients and growth in our multi-family housing
products.
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Total Revenues
Total revenues increased $55,512, or 5%, to $1,076,204 for Six Months 2012 from
$1,020,692 for Six Months 2011. Growth in lender-placed homeowners and renters
insurance net earned premiums as well as fee income from the resident bond
product are the main drivers of the revenue increase. Growth in lender-placed
homeowners net earned premiums is primarily due to client loan portfolio
acquisitions.
Total Benefits, Losses and Expenses
Total benefits, losses and expenses decreased $34,766, or 4%, to $765,569 for
Six Months 2012 from $800,335 for Six Months 2011. Policyholder benefits
decreased $65,931 due to reportable catastrophe losses declining in Six Months
2012 to $15,117 compared with $77,148 of reportable catastrophe losses in Six
Months 2011. Reportable catastrophe losses includes only individual catastrophic
events that generated losses to the Company in excess of $5,000, pre-tax and net
of reinsurance. Selling, underwriting and general expenses increased $31,165, to
$409,972 for Six Months 2012, from $378,807 for Six Months 2011, primarily due
to higher operating costs to support business growth, higher benefit costs, and
non recurring assessment refunds in Six Months 2011.
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Assurant Health
Overview
The tables below present information regarding Assurant Health's segment results
of operations:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2012 2011 2012 2011
Revenues:
Net earned premiums and other
considerations $ 403,029 $ 425,439 $ 810,502 $ 851,601
Net investment income 32,278 11,405 43,406 22,707
Fees and other income 7,612 8,891 15,367 17,839
Total revenues 442,919 445,735 869,275 892,147
Benefits, losses and expenses:
Policyholder benefits 294,033 323,832 596,517 633,994
Selling, underwriting and general expenses 102,154 115,039
206,505 236,764
Total benefits, losses and expenses 396,187 438,871
803,022 870,758
Segment income before provision for income
taxes 46,732 6,864 66,253 21,389
Provision for income taxes 17,800 1,670 25,706 9,005
Segment net income $ 28,932 $ 5,194
$ 40,547$ 12,384
Net earned premiums and other
considerations:
Individual markets:
Individual markets $ 298,317 $ 310,516 $ 599,470 $ 618,444
Small employer group 104,712 114,923 211,032 233,157
Total $ 403,029 $ 425,439 $ 810,502 $ 851,601
Covered lives by product line:
Individual markets 623 582
Small employer group 115 135
Total 738 717
Ratios:
Loss ratio (1) 73.0 % 76.1 % 73.6 % 74.4 %
Expense ratio (2) 24.9 % 26.5 % 25.0 % 27.2 %
Combined ratio (3) 96.5 % 101.0 % 97.2 % 100.2 %
(1) The loss ratio is equal to policyholder benefits divided by net earned
premiums and other considerations.
(2) The expense ratio is equal to selling, underwriting and general expenses
divided by net earned premiums and other considerations and fees and other
income.
(3) The combined ratio is equal to total benefits, losses and expenses divided by
net earned premiums and other considerations and fees and other income.
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The Affordable Care Act
Some provisions of the Affordable Care Act have taken effect already, and other
provisions will become effective at various dates over the next several years.
In December 2010, HHS issued a number of interim final regulations with respect
to the Affordable Care Act. In December 2011, HHS issued their final regulation
regarding the Minimum Loss Ratio ("MLR"). HHS also issued technical corrections
and Q&As throughout 2010 and 2011. Given the sweeping nature of the changes
represented by the Affordable Care Act, our results of operations and financial
position could be materially adversely affected. For more information, see
Item 1A, "Risk Factors-Risks related to our industry-Reform of the health
insurance industry could make our health insurance business unprofitable" in our
2011 Annual Report on Form 10-K.
For the Three Months Ended June 30, 2012 Compared to the Three Months Ended
June 30, 2011
Net Income
Segment net income increased $23,738 to $28,932 for Second Quarter 2012 from
$5,194 for Second Quarter 2011. The increase was primarily attributable to
income from a real estate joint venture partnership, which increased net
investment income by $13,856 (after-tax), reduced expenses associated with
organizational and operational expense reduction initiatives and favorable loss
experience. These items were partially offset by policy lapses and lower sales
of new policies.
Total Revenues
Total revenues decreased $2,816, or less than 1%, to $442,919 for Second Quarter
2012 from $445,735 for Second Quarter 2011. Net earned premiums and other
considerations from our individual markets business decreased $12,199, or 4%,
due to policy lapses and a decline in sales of traditional major medical
policies, partially offset by increased sales of lower priced products and
premium rate increases. Net earned premiums and other considerations from our
small employer group business decreased $10,211, or 9%, due to lower sales and
continued policy lapses, partially offset by premium rate increases. Partially
offsetting these declines was increased net investment income of $21,317, due to
income from a real estate joint venture partnership.
Total Expenses
Total benefits, losses and expenses decreased $42,684, or 10%, to $396,187 for
Second Quarter 2012 from $438,871 for Second Quarter 2011. Policyholder benefits
decreased $29,799, or 9%, and the loss ratio decreased to 73.0% from 76.1%. The
decrease in policyholder benefits was primarily attributable to a decline in
business volume. The decrease in the loss ratio reflects generally favorable
loss experience on traditional medical policies and a growing proportion of
business with lower loss ratios. Selling, underwriting and general expenses
decreased $12,885, or 11%, primarily due to reduced employee-related expenses,
technology costs, and service provider costs.
For the Six Months Ended June 30, 2012 Compared to the Six Months Ended June 30,
2011
Net Income
Segment net income increased $28,163 to $40,547 for Six Months 2012 from $12,384
for Six Months 2011. The increase was primarily attributable to income from a
real estate joint venture partnership, which increased net investment income by
$13,856 (after-tax), reduced expenses associated with organizational and
operational expense reduction initiatives and favorable loss experience.
Partially offsetting these items were lower sales of new policies. Six Months
2011 results included a $4,780 (after-tax) reimbursement from a pharmacy
services provider.
Total Revenues
Total revenues decreased $22,872, or 3%, to $869,275 for Six Months 2012 from
$892,147 for Six Months 2011. Net earned premiums and other considerations from
our individual markets business decreased $18,974, or 3%, due to policy lapses
and a decline in sales of traditional major medical policies, partially offset
by increased sales of lower priced products and premium rate increases. Net
earned premiums and other considerations from our small employer group business
decreased $22,125, or 9%, due to lower sales and continued policy lapses,
partially offset by premium rate increases. Partially offsetting these declines
was increased net investment income of $21,317, due to income from a real estate
joint venture partnership.
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Total Expenses
Total benefits, losses and expenses decreased $67,736, or 8%, to $803,022 for
Six Months 2012 from $870,758 for Six Months 2011. Policyholder benefits
decreased $37,477, or 6%, and the benefit loss ratio decreased to 73.6% from
74.4%. The decrease in policyholder benefits was primarily attributable to a
decline in business volume, partially offset by higher loss experience. The
decrease in the benefit loss ratio reflects generally favorable loss experience
on traditional major medical policies and a growing proportion of business with
lower loss ratios, partially offset by higher loss experience. Selling,
underwriting and general expenses decreased $30,259, or 13%, primarily due to
reduced employee-related expenses, lower technology and service provider costs,
and reduced commissions due to lower sales of new policies.
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Assurant Employee Benefits
Overview
The tables below present information regarding Assurant Employee Benefits'
segment results of operations:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2012 2011 2012 2011
Revenues:
Net earned premiums and other
considerations $ 251,753 $ 264,470 $ 510,193 $ 531,340
Net investment income 34,094 32,572 66,027 65,039
Fees and other income 7,571 6,170 14,579 12,938
Total revenues 293,418 303,212 590,799 609,317
Benefits, losses and expenses:
Policyholder benefits 167,919 195,408 356,275 396,627
Selling, underwriting and general expenses 97,286 94,954 192,635 190,022
Total benefits, losses and expenses 265,205 290,362
548,910 586,649
Segment income before provision for income
taxes 28,213 12,850 41,889 22,668
Provision for income taxes 9,592 4,334 14,204 7,712
Segment net income $ 18,621 $ 8,516
$ 27,685$ 14,956
Net earned premiums and other
considerations:
By major product grouping:
Group dental $ 101,816 $ 105,241 $ 203,558 $ 209,891
All other group disability 103,475 110,022 211,335 224,428
Group life 46,462 49,207 95,300 97,021
Total $ 251,753 $ 264,470 $ 510,193 $ 531,340
Ratios:
Loss ratio (1) 66.7 % 73.9 % 69.8 % 74.6 %
Expense ratio (2) 37.5 % 35.1 % 36.7 % 34.9 %
(1) The loss ratio is equal to policyholder benefits divided by net earned
premiums and other considerations.
(2) The expense ratio is equal to selling, underwriting and general expenses
divided by net earned premiums and other considerations and fees and other
income.
For the Three Months Ended June 30, 2012 Compared to the Three Months Ended
June 30, 2011.
Net Income
Segment net income increased 119% to $18,621 for Second Quarter 2012 from $8,516
for Second Quarter 2011 primarily due to favorable loss experience across all
major product lines, particularly in disability insurance, and $1,826
(after-tax) of increased net investment income from a real estate joint venture
partnership.
Total Revenues
Total revenues decreased 3% to $293,418 for Second Quarter 2012 from $303,212
for Second Quarter 2011. Second Quarter 2012 net earned premiums decreased
$12,717, or 5%, primarily due to the loss of two previously disclosed assumed
disability clients
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as well as decreased sales. Voluntary insurance premiums, an area targeted for
growth, increased when compared with Second Quarter 2011. Net investment income
improved 5%, or $1,522, primarily driven by increased income of $2,810 from a
real estate joint venture partnership, partially offset by lower average
invested assets.
Total Benefits, Losses and Expenses
Total benefits, losses and expenses decreased 9% to $265,205 for Second Quarter
2012 from $290,362 for Second Quarter 2011. The loss ratio decreased to 66.7%
from 73.9%, primarily driven by favorable disability experience due to improved
claim recoveries. The expense ratio increased to 37.5% from 35.1% primarily
attributable to the decrease in net earned premiums.
For the Six Months Ended June 30, 2012 Compared to the Six Months Ended June 30,
2011.
Net Income
Segment net income increased 85% to $27,685 for Six Months 2012 from $14,956 for
Six Months 2011. Similar to Second Quarter 2012, results for Six Months 2012
were driven by favorable loss experience across all major product lines.
Total Revenues
Total revenues decreased 3% to $590,799 for Six Months 2012 from $609,317 for
Six Months 2011. Six Months 2012 net earned premiums decreased $21,147, or 4%,
primarily due to the loss of two previously disclosed assumed disability
clients. Net investment income increased 2%, or $988, driven by $2,916 of income
from a real estate joint venture partnership partially offset by lower average
invested assets.
Total Benefits, Losses and Expenses
Total benefits, losses and expenses decreased 6% to $548,910 for Six Months 2012
from $586,649 for Six Months 2011. The loss ratio decreased to 69.8% from 74.6%,
primarily driven by favorable disability, life and dental loss experience. The
expense ratio increased to 36.7% from 34.9% as a result of decreased net earned
premiums.
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Assurant Corporate & Other
The table below presents information regarding the Corporate & Other segment's
results of operations:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2012 2011 2012 2011
Revenues:
Net investment income $ 4,924 $ 4,328 $ 10,146 $ 8,526
Net realized gains on investments 18,175 16,046 25,719 19,823
Amortization of deferred gain on disposal of
businesses 4,596 5,105 9,217 10,239
Fees and other income 78 109 139 283
Total revenues 27,773 25,588 45,221 38,871
Benefits, losses and expenses:
Policyholder benefits 0 0 0 0
Selling, underwriting and general expenses 24,084 23,263
46,037 42,675
Interest expense 15,074 15,075
30,150 30,206
Total benefits, losses and expenses 39,158 38,338
76,187 72,881
Segment loss before benefit for income taxes (11,385 ) (12,750 )
(30,966 ) (34,010 )
Benefit for income taxes (317 ) (82,547 ) (6,075 ) (91,236 )
Segment net (loss) income $ (11,068 ) $ 69,797 $ (24,891 ) $ 57,226
For The Three Months Ended June 30, 2012 Compared to The Three Months Ended
June 30, 2011.
Net (Loss) Income
Segment results declined $80,865 to a net loss of $(11,068) for Second Quarter
2012 compared with net income of $69,797 for Second Quarter 2011. The decline is
primarily related to an $80,000 release of a capital loss valuation allowance
related to deferred tax assets during Second Quarter 2011. Please see Note 6 in
the Notes to Consolidated Financial Statements for further detail on the
valuation allowance release.
Total Revenues
Total revenues increased $2,185 to $27,773 for Second Quarter 2012 compared with
$25,588 for Second Quarter 2011. The increase in revenues is primarily due to a
$2,129 increase in net realized gains on investments.
Total Benefits, Losses and Expenses
Total expenses increased $820 to $39,158 for Second Quarter 2012 compared with
$38,338 for Second Quarter 2011. The increase in expenses is primarily due to
increased employee related benefits and new business investments in areas
targeted for growth.
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For The Six Months Ended June 30, 2012 Compared to The Six Months Ended June 30,
2011.
Net (Loss) Income
Segment results declined $82,117, to a net loss of $(24,891) for Six Months 2012
compared with net income of $57,226 for Six Months 2011. The decline is mainly
due to an $80,000 release of a capital loss valuation allowance related to
deferred tax assets.
Total Revenues
Total revenues increased $6,350, to $45,221 for Six Months 2012 compared with
$38,871 for Six Months 2011. The increase in revenues is mainly due to a $5,896
increase in net realized gains on investments.
Total Benefits, Losses and Expenses
Total expenses increased $3,306, to $76,187 in Six Months 2012 compared with
$72,881 in Six Months 2011. The increase in expenses is mainly due to increased
employee related benefits and new business investments for areas targeted for
growth.
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Investments
The Company had total investments of $14,155,759 and $14,026,165 as of June 30,
2012 and December 31, 2011, respectively. For more information on our
investments see Note 4 to the Notes to Consolidated Financial Statements
included elsewhere in this report.
The following table shows the credit quality of our fixed maturity securities
portfolio as of the dates indicated:
As of
Fixed Maturity Securities by Credit Quality (Fair Value) June 30, 2012
December 31, 2011
Aaa / Aa / A $ 6,598,815 58.8 % $ 6,620,808 59.1 %
Baa 3,786,670 33.8 % 3,692,709 33.0 %
Ba 582,983 5.2 % 648,817 5.8 %
B and lower 245,955 2.2 % 230,265 2.1 %
Total $ 11,214,423 100.0 % $ 11,192,599 100.0 %
Major categories of net investment income were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
2012 2011 2012 2011
Fixed maturity securities $ 139,396 $ 142,967 $ 280,578 $ 285,019
Equity securities 6,148 7,911 12,020 15,963
Commercial mortgage loans on real estate 19,567 20,325 39,230 40,558
Policy loans 677 741 1,475 1,476
Short-term investments 1,184 1,659 2,561 2,933
Other investments 34,499 4,946 39,573 8,677
Cash and cash equivalents 3,516 1,701 7,417 3,443
Total investment income 204,987 180,250 382,854 358,069
Investment expenses (5,673 ) (6,406 ) (11,245 ) (12,352 )
Net investment income $ 199,314 $ 173,844 $ 371,609 $ 345,717
Net investment income increased $25,470, or 15%, to $199,314 for Second Quarter
2012 compared with $173,844 for Second Quarter 2011. Net investment income
increased $25,892, or 8%, to $371,609 for Six Months 2012 compared with $345,717
for Six Months 2011. The increase for both periods was primarily from income
related to real estate joint venture partnerships, partially offset by lower
investment yields.
As of June 30, 2012, the Company owned $235,067 of securities guaranteed by
financial guarantee insurance companies. Included in this amount was $213,549 of
municipal securities, with a credit rating of A both with and without the
guarantee.
The Company has exposure to sub-prime and related mortgages within our fixed
maturity securities portfolio. At June 30, 2012, approximately 2.9% of our
residential mortgage-backed holdings had exposure to sub-prime mortgage
collateral. This represented approximately 0.2% of the total fixed income
portfolio and 0.9% of the total unrealized gain position. Of the securities with
sub-prime exposure, approximately 15.9% are rated as investment grade. All
residential mortgage-backed securities, including those with sub-prime exposure,
are reviewed as part of the ongoing other-than-temporary impairment monitoring
process.
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Collateralized Transactions
The Company engages in transactions in which fixed maturity securities,
especially bonds issued by the U.S. government, government agencies and
authorities, and U.S. corporations, are loaned to selected broker/dealers.
Collateral, greater than or equal to 102% of the fair value of the securities
lent, plus accrued interest, is received in the form of cash and cash
equivalents held by a custodian bank for the benefit of the Company. The use of
cash collateral received is unrestricted. The Company reinvests the cash
collateral received, generally in investments of high credit quality that are
designated as available-for-sale. The Company monitors the fair value of
securities loaned and the collateral received, with additional collateral
obtained, as necessary. The Company is subject to the risk of loss to the extent
there is a loss on the re-investment of cash collateral.
As of June 30, 2012 and December 31, 2011, our collateral held under securities
lending, of which its use is unrestricted, was $94,608 and $95,221,
respectively, and is included in the consolidated balance sheets under the
collateral held/pledged under securities agreements. Our liability to the
borrower for collateral received was $94,615 and $95,494, respectively, and is
included in the consolidated balance sheets under the obligation under
securities agreements. The difference between the collateral held and
obligations under securities lending is recorded as an unrealized loss and is
included as part of AOCI. All securities with unrealized losses have been in a
continuous loss position for twelve months or longer as of June 30, 2012 and
December 31, 2011. The Company includes the available-for-sale investments
purchased with the cash collateral in its evaluation of other-than-temporary
impairments.
Cash proceeds that the Company receives as collateral for the securities it
lends and subsequent repayment of the cash are regarded by the Company as cash
flows from financing activities, since the cash received is considered a
borrowing. Since the Company reinvests the cash collateral generally in
investments that are designated as available-for-sale, the reinvestment is
presented as cash flows from investing activities.
Liquidity and Capital Resources
Regulatory Requirements
Assurant, Inc. is a holding company and, as such, has limited direct operations
of its own. Our holding company's assets consist primarily of the capital stock
of our subsidiaries. Accordingly, our future cash flows depend upon the
availability of dividends and other statutorily permissible payments from our
subsidiaries, such as payments under our tax allocation agreement and under
management agreements with our subsidiaries. The ability to pay such dividends
and to make such other payments will be limited by applicable laws and
regulations of the states in which our subsidiaries are domiciled, which subject
our subsidiaries to significant regulatory restrictions. The dividend
requirements and regulations vary from state to state and by type of insurance
provided by the applicable subsidiary. These laws and regulations require, among
other things, our insurance subsidiaries to maintain minimum solvency
requirements and limit the amount of dividends these subsidiaries can pay to the
holding company. Along with solvency regulations, the primary driver in
determining the amount of capital used for dividends is the level of capital
needed to maintain desired financial strength ratings from A.M. Best.
It is possible that regulators or rating agencies could become more conservative
in their methodology and criteria, including increasing capital requirements for
our insurance subsidiaries which, in turn, could negatively affect our capital
resources. On October 27, 2011, Standard and Poor's ("S&P") revised the outlook
on Assurant, Inc's counterparty credit rating and the financial strength ratings
of Assurant's primary property and casualty ratings to positive from stable. In
addition, S&P downgraded the financial strength ratings of Assurant's primary
health subsidiaries from BBB+ to BBB and revised the outlook on these entities
to stable from negative. On February 24, 2012, Moody's Investor Services
("Moody's") affirmed Assurant, Inc.'s Senior Debt rating of Baa2, but changed
the outlook on this rating to stable from negative. In addition, Moody's
affirmed the financial strength ratings of Assurant's primary life and health
insurance subsidiaries at A3 but changed the outlook on the ratings of two of
our life and health insurance subsidiaries to stable from negative. A negative
outlook remains on the ratings of Assurant's two other rated life and health
subsidiaries due to concerns about the impact of the Affordable Care Act. For
further information on our ratings and the risks of ratings downgrades, see
"Item 1-Business" and "Item 1A-Risk Factors-Risks Related to Our Company-A.M.
Best, Moody's and S&P rate the financial strength of our insurance company
subsidiaries, and a decline in these ratings could affect our standing in the
insurance industry and cause our sales and earnings to decrease" in our 2011
Annual Report on Form 10-K. For 2012, the maximum amount of distributions our
U.S. domiciled insurance subsidiaries could pay, under applicable laws and
regulations without prior regulatory approval, is approximately $504,000. During
Six Months 2012, we took dividends or returns of capital, net of infusions, of
$238,300 from our subsidiaries. We anticipate that we will be able to take
dividends in 2012 of at least equal to insurance subsidiary earnings.
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Liquidity
As of June 30, 2012, we had $632,297 in holding company capital. The Company
uses the term "holding company capital" to represent cash and other liquid
marketable securities held at Assurant, Inc., out of a total of $794,572, that
we are not otherwise holding for a specific purpose as of the balance sheet
date, but can be used for stock repurchases, stockholder dividends,
acquisitions, and other corporate purposes. $250,000 of the $632,297 of holding
company capital is intended to serve as a buffer against remote risks (such as
large-scale hurricanes). Dividends or returns of capital, net of infusions, made
to the holding company from its operating companies were $238,300 and $523,881
for Six Months 2012 and the year ended December 31, 2011, respectively. We use
these cash inflows primarily to pay expenses, to make interest payments on
indebtedness, to make dividend payments to our stockholders, to make subsidiary
capital contributions, to fund acquisitions and to repurchase our outstanding
shares.
In addition to paying expenses and making interest payments on indebtedness, our
capital management strategy provides for several uses for the cash generated by
our subsidiaries, including without limitation, returning capital to
shareholders through share repurchases and dividends; investing in our
businesses to support growth in targeted areas; and making prudent and
opportunistic acquisitions. We made share repurchases and paid dividends to our
stockholders of $294,863 and $600,314 during Six Months 2012 and the year ended
December 31, 2011, respectively.
The primary sources of funds for our subsidiaries consist of premiums and fees
collected, proceeds from the sales and maturity of investments and net
investment income. Cash is primarily used to pay insurance claims, agent
commissions, operating expenses and taxes. We generally invest our subsidiaries'
excess funds in order to generate investment income.
We conduct periodic asset liability studies to measure the duration of our
insurance liabilities, to develop optimal asset portfolio maturity structures
for our significant lines of business and ultimately to assess that cash flows
are sufficient to meet the timing of cash needs. These studies are conducted in
accordance with formal company-wide Asset Liability Management ("ALM")
guidelines.
To complete a study for a particular line of business, models are developed to
project asset and liability cash flows and balance sheet items under a large,
varied set of plausible economic scenarios. These models consider many factors
including the current investment portfolio, the required capital for the related
assets and liabilities, our tax position and projected cash flows from both
existing and projected new business.
Alternative asset portfolio structures are analyzed for significant lines of
business. An investment portfolio maturity structure is then selected from these
profiles given our return hurdle and risk preference. Sensitivity testing of
significant liability assumptions and new business projections is also
performed.
Our liabilities generally have limited policyholder optionality, which means
that the timing of payments is relatively insensitive to the interest rate
environment. In addition, our investment portfolio is largely comprised of
highly liquid fixed maturity securities with a sufficient component of such
securities invested that are near maturity which may be sold with minimal risk
of loss to meet cash needs. Therefore, we believe we have limited exposure to
disintermediation risk.
Generally, our subsidiaries' premiums, fees and investment income, along with
planned asset sales and maturities, provide sufficient cash to pay claims and
expenses. However, there are instances when unexpected cash needs arise in
excess of that available from usual operating sources. In such instances, we
have several options to raise needed funds, including selling assets from the
subsidiaries' investment portfolios, using holding company cash (if available),
issuing commercial paper, or drawing funds from our revolving credit facility.
In addition, we have filed an automatically effective shelf registration
statement on Form S-3 with the SEC. This registration statement allows us to
issue equity, debt or other types of securities through one or more methods of
distribution. The terms of any offering would be established at the time of the
offering, subject to market conditions. If we decide to make an offering of
securities, we will consider the nature of the cash requirement as well as the
cost of capital in determining what type of securities we may offer.
We paid dividends of $0.21 per common share on June 12, 2012 to stockholders of
record as of May 29, 2012, and $0.18 per common share on March 12, 2012 to
stockholders of record as of February 27, 2012. Any determination to pay future
dividends will be at the discretion of our Board of Directors and will be
dependent upon: our subsidiaries' payment of dividends and/or other statutorily
permissible payments to us; our results of operations and cash flows; our
financial position and capital requirements; general business conditions; any
legal, tax, regulatory and contractual restrictions on the payment of dividends;
and any other factors our Board of Directors deems relevant.
On May 14, 2012, our Board of Directors authorized the Company to repurchase up
to an additional $600,000 of its outstanding common stock, making its total
authorization $733,275 at that date. During the six months ended June 30, 2012,
we repurchased 6,973,821 shares of our outstanding common stock at a cost of
$259,375, exclusive of commissions. As of June 30, 2012, $646,017 remained under
the total repurchase authorization. The timing and the amount of future
repurchases will depend on market conditions and other factors.
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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 shares.
Retirement and Other Employee Benefits
Our qualified pension benefits plan (the "Plan") was under-funded by $156,527
and $125,517 (based on the fair value of Plan assets compared to the projected
benefit obligation) on a GAAP basis at June 30, 2012 and December 31, 2011,
respectively. This equates to an 81% and 83% funded status at June 30, 2012 and
December 31, 2011, respectively. The change in under-funded status is mainly due
to a decrease in the discount rate used to determine the projected benefit
obligation partially offset by favorable investment returns.
In prior years we established a funding policy in which service cost plus 15% of
qualified plan deficit will be contributed annually. During Six Months 2012, we
contributed $25,000 in cash to the Plan. Additional cash, up to $25,000, is
expected to be contributed to the Plan over the remainder of 2012.
Commercial Paper Program
Our commercial paper program requires us to maintain liquidity facilities either
in an available amount equal to any outstanding notes from the program or in an
amount sufficient to maintain the ratings assigned to the notes issued from the
program. Our commercial paper is rated AMB-2 by A.M. Best, P-2 by Moody's and A2
by S&P. Our subsidiaries do not maintain commercial paper or other borrowing
facilities. This program is currently backed up by a $350,000 senior revolving
credit facility, of which $330,240 was available at June 30, 2012, due to
outstanding letters of credit.
On September 21, 2011, we entered into a four-year unsecured $350,000 revolving
credit agreement ("2011 Credit Facility") with a syndicate of banks arranged by
JP Morgan Chase Bank, N.A. and Bank of America, N.A. The 2011 Credit Facility
replaces the Company's prior three-year $350,000 revolving credit facility
("2009 Credit Facility"), which was entered into on December 18, 2009 and was
scheduled to expire in December 2012. The 2009 Credit Facility terminated upon
the effective date of the 2011 Credit Facility. Due to the termination, the
Company wrote off $1,407 of unamortized upfront arrangement fees. The 2011
Credit Facility provides for revolving loans and the issuance of multi-bank,
syndicated letters of credit and/or letters of credit from a sole issuing bank
in an aggregate amount of $350,000 and is available until September 2015,
provided we are in compliance with all covenants. The 2011 Credit Facility has a
sublimit for letters of credit issued thereunder of $50,000. The proceeds of
these loans may be used for our commercial paper program or for general
corporate purposes. The Company may increase the total amount available under
the 2011 Credit Facility to $525,000 subject to certain conditions. No bank is
obligated to provide commitments above their current share of the $350,000
facility.
We did not use the commercial paper program during the six months ended June 30,
2012 or 2011, and there were no amounts outstanding relating to the commercial
paper program at June 30, 2012 and December 31, 2011. We made no borrowings
using either the 2009 or 2011 Credit Facility and no loans are outstanding at
June 30, 2012. We had $19,760 of letters of credit outstanding under the 2011
Credit Facility as of June 30, 2012.
The 2011 Credit Facility contains restrictive covenants and requires that the
Company maintain certain specified minimum ratios and thresholds. Among others,
these covenants include maintaining a maximum debt to capitalization ratio and a
minimum consolidated adjusted net worth. At June 30, 2012, we were in compliance
with all covenants, minimum ratios, and thresholds.
Senior Notes
We have two series of senior notes outstanding in an aggregate principal amount
of $975,000 (the "Senior Notes"). The first series is $500,000 in principal
amount, bears interest at 5.63% per year and is due February 15, 2014. The
second series is $475,000 in principal amount, bears interest at 6.75% per year
and is due February 15, 2034.
Interest on our Senior Notes is payable semi-annually on February 15 and
August 15 of each year. The interest expense incurred related to the Senior
Notes was $15,047 for the three months ended June 30, 2012 and 2011,
respectively, and $30,094 for the six months ended June 30, 2012 and 2011,
respectively. There was $22,570 of accrued interest at June 30, 2012 and 2011,
respectively. The Senior Notes are unsecured obligations and rank equally with
all of our other senior unsecured indebtedness. The Senior Notes are not
redeemable prior to maturity.
In management's opinion, dividends from our subsidiaries together with our
income and gains from our investment portfolio will provide sufficient liquidity
to meet our needs in the ordinary course of business.
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Cash Flows
We monitor cash flows at the consolidated, holding company and subsidiary
levels. Cash flow forecasts at the consolidated and subsidiary levels are
provided on a monthly basis, and we use trend and variance analyses to project
future cash needs, making adjustments to the forecasts when needed.
The table below shows our recent net cash flows:
For the Six Months
Ended June 30,
Net cash provided by (used in): 2012 2011
Operating activities (1) $ 181,398 $ 326,423
Investing activities 51,417 16,806
Financing activities (292,536 ) (358,646 )
Net change in cash $ (59,721 ) $ (15,417 )
(1) Includes effect of exchange rate changes on cash and cash equivalents.
We typically generate operating cash inflows from premiums collected from our
insurance products and income received from our investments while outflows
consist of policy acquisition costs, benefits paid, and operating expenses.
These net cash flows are then invested to support the obligations of our
insurance products and required capital supporting these products. Our cash
flows from operating activities are affected by the timing of premiums, fees,
and investment income received and expenses paid.
Net cash provided by operating activities was $181,398 and $326,423 for Six
Months 2012 and Six Months 2011, respectively. The decrease in cash provided by
operating activities was primarily due to changes in the timing of payments,
including commissions and the Company's defined contribution plan match. Cash
inflows from premiums collected and income received from investments was
consistent period-on-period.
Net cash provided by investing activities was $51,417 and $16,806 for Six Months
2012 and Six Months 2011, respectively. The increase in investing activities was
mainly due to changes in short term investments and a decrease in purchase of
subsidiaries.
Net cash used in financing activities was $292,536 and $358,646 for Six Months
2012 and Six Months 2011, respectively. The decrease in financing activities was
primarily due to decreased purchases of our common stock and the change in
obligation under securities agreements.
The table below shows our cash outflows for interest and dividends for the
periods indicated:
For the Six Months
Ended June 30,
2012 2011
Interest paid on debt $ 30,094 $ 30,150
Common stock dividends 35,349 33,680
Total $ 65,443 $ 63,830
Letters of Credit
In the normal course of business, we issue letters of credit primarily to
support reinsurance arrangements. These letters of credit are supported by
commitments with financial institutions. We had $19,760 and $24,296 of letters
of credit outstanding as of June 30, 2012 and December 31, 2011, respectively.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, see Note 3 to the Notes to
Consolidated Financial Statements.
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