ASSURANT INC – 10-K – Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and accompanying notes which appear elsewhere in this report. It contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this report, particularly under the headings "Item 1A-Risk Factors" and "Forward-Looking Statements." General We report our results through five segments: Assurant Solutions,Assurant Specialty Property,Assurant Health ,Assurant Employee Benefits , and Corporate and Other. The Corporate and Other segment includes activities of the holding company, financing and interest expenses, net realized gains (losses) on investments and interest income earned from short-term investments held. The Corporate and Other segment also includes the amortization of deferred gains associated with the sales of FFG and LTC, through reinsurance agreements as described below. The following discussion covers the twelve months endedDecember 31, 2012 ("Twelve Months 2012"), twelve months endedDecember 31, 2011 ("Twelve Months 2011") and twelve months endedDecember 31, 2010 ("Twelve Months 2010"). Please see the discussion that follows, for each of these segments, for a more detailed analysis of the fluctuations. 42
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Executive Summary
Consolidated net income decreased$55,251 , or 10%, to$483,705 for Twelve Months 2012 from$538,956 for Twelve Months 2011. The decrease is primarily due to an$80,000 release of a capital loss valuation allowance related to deferred tax assets during Twelve Months 2011. Partially offsetting this item was improved net income in ourAssurant Health andAssurant Employee Benefits segments and an increase of$20,652 (after-tax) in net realized gains on investments. Twelve Months 2012 includes$162,634 (after-tax) of Assurant Specialty Property reportable catastrophe losses, primarily due to Superstorm Sandy, compared to$102,469 (after-tax) of reportable catastrophe losses in Twelve Months 2011. Higher catastrophe losses in Twelve Months 2012 were offset by growth in lender-placed homeowners net earned premiums and lower non-catastrophe losses. Assurant Solutions net income decreased$12,297 , or 9%, to$123,753 for Twelve Months 2012 from$136,050 for Twelve Months 2011. This decrease was largely due to a fourth quarter charge of$20,373 (after-tax) for the impairment of certain other intangible assets established primarily in connection with acquisitions of twoU.K. mortgage insurance brokers in 2007, and a fourth quarter workforce restructuring charge of$7,724 (after-tax) primarily relating to our domestic credit and European operations. Twelve Months 2012 also included$6,362 (after-tax) of income from client related settlements. Absent these items, international results improved primarily from continued growth and favorable experience inLatin America . Overall, Assurant Solutions' international combined ratio was 104.8%. In 2013, we expect this combined ratio to continue to improve primarily from expected profitable growth inLatin America and additional expense initiatives inEurope . Domestic results declined primarily from the previously disclosed loss of a mobile client, effectiveOctober 2012 , increased expenses in our mobile and vehicle services businesses to enhance our technology platform and support new business growth, and less favorable underwriting experience in our service contract business. These factors increased our domestic combined ratio to 98.9%. We expect the domestic combined ratio to remain near our target of 98.0% in 2013.
Fee income and sales from our preneed business also improved during Twelve Months 2012, primarily due to our strong relationship with SCI.
Overall, we expect modest premium growth at Assurant Solutions in 2013. We also expect to continue our expense management initiatives in this segment.
Assurant Specialty Property net income increased$1,228 , or less than 1%, to$304,951 for Twelve Months 2012 from$303,723 for Twelve Months 2011. The increase is due to increased lender-placed homeowners net earned premiums, growth in our multifamily housing business and lower non-catastrophe losses, mainly offset by an increase in reportable catastrophe losses of$60,165 (after-tax). The growth in net earned premiums was driven by lender-placed loan portfolio additions and increased placement rates. Our placement rate for Twelve Months 2012 was 2.87% compared to 2.75% in Twelve Months 2011. The 2.87% placement rate is high, compared to historical standards, due to the impact of the new loan portfolios added throughout 2012. We expect placement rates in the near term to fluctuate, reflecting the state of the housing market and the changing composition of our tracked loan portfolios, but we expect placement rates to ultimately decline as the housing market stabilizes. In late 2012, we began a multi-phased roll-out of our new next generation product to respond to the changed environment following the housing crisis. Features of the product include: expanded geographic rating, added premium rating flexibility and continued enhancements to our customer notification process. Our next generation product is available in 14 states and we expect to implement it in 14 more states by the end of the second quarter 2013, with a full roll-out to all other states by the end of 2013. As we have disclosed, we continue to engage in discussions with various state and federal regulatory departments regarding our lender-placed insurance program. For additional detail on certain of these discussions please refer to Assurant Specialty Property's results of operations section further below in this Item 7. 43 -------------------------------------------------------------------------------- For 2013, we expect Assurant Specialty Property's revenue to increase slightly from 2012 due to growth in our lender-placed portfolio and multi-family housing products. We expect overall results to continue to be influenced by placement rate trends, premium rate changes, loan portfolio activity, client renewals, and catastrophe losses. We expect our expense ratio to remain approximately level with 2012 as we continue to improve efficiency while further improving client and customer service. We also expect our non-catastrophe loss ratio to increase due to anticipated higher frequency of such losses compared to a mild winter in 2012.
We expect ongoing changes related to health care reform to continue to affect this business in 2013. As such, we expect our loss ratio to increase, reflecting the continued impact of the MLR requirements on our pricing. In addition, we anticipate our effective tax rate to remain elevated due to limitations imposed by healthcare reform on the deductibility of compensation and certain other payments. We will continue to look for opportunities to further reduce our organizational and operational expenses to offset these pressures, but we expect the rate of reductions to be slower than in the past. We also expect net earned premiums and fees to decline, reflecting the continued shift to lower premium products in our individual medical business.Assurant Employee Benefits net income increased$14,984 , or 35%, to$58,059 for Twelve Months 2012 from$43,075 for Twelve Months 2011. Results for Twelve Months 2012 were driven by favorable experience across most major product lines. Voluntary products, an area of focus, accounted for about 50% ofAssurant Employee Benefits sales and over 35% of net earned premiums and fees, as small and mid-sized business benefit plans have shifted from employer-paid to employee-paid products. We expect 2013 net earned premiums and fees atAssurant Employee Benefits to be consistent with 2012. We anticipate increased sales from our voluntary products to offset expected lower sales of traditional employer-paid products. We plan to lower our discount rate for new long-term disability claims incurred in 2013 by 50 basis points, to 4.25%, which we expect will reduce net income by approximately$4,000 .
Critical Factors Affecting Results
Our results depend on the appropriateness of our product pricing, underwriting and the accuracy of our methodology for the establishment of reserves for future policyholder benefits and claims, returns on and values of invested assets and our ability to manage our expenses. Factors affecting these items, including unemployment, difficult conditions in financial markets and the global economy, may have a material adverse effect on our results of operations or financial condition. For more information on these factors, see "Item 1A-Risk Factors." Management believes the Company will have sufficient liquidity to satisfy its needs over the next twelve months including the ability to pay interest on our Senior Notes and dividends on our common stock. For Twelve Months 2012, net cash provided by operating activities, including the effect of exchange rate changes on cash and cash equivalents, totaled$673,215 ; net cash used in investing activities totaled$449,883 and net cash used in financing activities totaled$480,641 . We had$909,404 in cash and cash equivalents as ofDecember 31, 2012 . Please see "-Liquidity and Capital Resources," below for further details. Revenues We generate revenues primarily from the sale of our insurance policies and service contracts and from investment income earned on our investments. Sales of insurance policies are recognized in revenue as earned premiums while sales of administrative services are recognized as fee income. 44 -------------------------------------------------------------------------------- Under the universal life insurance guidance, income earned on preneed life insurance policies sold afterJanuary 1, 2009 are presented within policy fee income net of policyholder benefits. Under the limited pay insurance guidance, the consideration received on preneed policies sold prior toJanuary 1, 2009 is presented separately as net earned premiums, with policyholder benefits expense being shown separately. Our premium and fee income is supplemented by income earned from our investment portfolio. We recognize revenue from interest payments, dividends and sales of investments. Currently, our investment portfolio is primarily invested in fixed maturity securities. Both investment income and realized capital gains on these investments can be significantly affected by changes in interest rates. Interest rate volatility can increase or reduce unrealized gains or losses in our investment portfolios. Interest rates are highly sensitive to many factors, including governmental monetary policies, domestic and international economic and political conditions and other factors beyond our control. Fluctuations in interest rates affect our returns on, and the market value of, fixed maturity and short-term investments. The fair market value of the fixed maturity securities in our investment portfolio and the investment income from these securities fluctuate depending on general economic and market conditions. The fair market value generally increases or decreases in an inverse relationship with fluctuations in interest rates, while net investment income realized by us from future investments in fixed maturity securities will generally increase or decrease with interest rates. We also have investments that carry pre-payment risk, such as mortgage-backed and asset-backed securities. Interest rate fluctuations may cause actual net investment income and/or cash flows from such investments to differ from estimates made at the time of investment. In periods of declining interest rates, mortgage prepayments generally increase and mortgage-backed securities, commercial mortgage obligations and bonds are more likely to be prepaid or redeemed as borrowers seek to borrow at lower interest rates. Therefore, in these circumstances we may be required to reinvest those funds in lower-interest earning investments. Expenses
Our expenses are primarily policyholder benefits, selling, underwriting and general expenses and interest expense.
Policyholder benefits are affected by our claims management programs, reinsurance coverage, contractual terms and conditions, regulatory requirements, economic conditions, and numerous other factors. Benefits paid or reserves required for future benefits could substantially exceed our expectations, causing a material adverse effect on our business, results of operations and financial condition. Selling, underwriting and general expenses consist primarily of commissions, premium taxes, licenses, fees, amortization of deferred costs, general operating expenses and income taxes.
We incur interest expense related to our debt.
Critical Accounting Estimates Certain items in our consolidated financial statements are based on estimates and judgment. Differences between actual results and these estimates could in some cases have material impacts on our consolidated financial statements. OnJanuary 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 2 to the Notes to Consolidated Financial Statements for more information. 45
-------------------------------------------------------------------------------- The following critical accounting policies require significant estimates. The actual amounts realized in these areas could ultimately be materially different from the amounts currently provided for in our consolidated financial statements.
Health Insurance Premium Rebate Liability
The Affordable Care Act was signed into law inMarch 2010 . One provision of the Act, effectiveJanuary 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 theDepartment of Health and Human Services ("HHS"), are less than the required MLR, premium rebates are payable to the policyholders byAugust 1 of the subsequent year. TheAssurant Health loss ratio reported on page 66 (the "GAAP loss ratio") differs from the loss ratio calculated under the MLR rules. The most significant differences include the fact that the MLR is calculated separately by state, legal entity and type of coverage (individual or group); the MLR calculation includes credibility adjustments for each state/entity/coverage cell, which are not applicable to the GAAP loss ratio; the MLR calculation applies only to some of our health insurance products, while the GAAP loss ratio applies to the entire portfolio, including products not governed by the Affordable Care Act; the MLR includes quality improvement expenses, taxes and fees; changes in reserves are treated differently in the MLR calculation; 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 the 2012 impact of this regulation based on definitions and calculation methodologies outlined in the Interim Final Regulation from HHS releasedDecember 1, 2010 with Technical Corrections releasedDecember 29, 2010 and the HHS Final Regulation releasedDecember 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. Reserves Reserves are established in accordance with GAAP using generally accepted actuarial methods and reflect judgments about expected future claim payments. Calculations incorporate assumptions about inflation rates, the incidence of incurred claims, the extent to which all claims have been reported, future claims processing, lags and expenses and future investment earnings, and numerous other factors. While the methods of making such estimates and establishing the related liabilities are periodically reviewed and updated, the calculation of reserves is not an exact process. Reserves do not represent precise calculations of expected future claims, but instead represent our best estimates at a point in time of the ultimate costs of settlement and administration of a claim or group of claims, based upon actuarial assumptions and projections using facts and circumstances known at the time of calculation. Many of the factors affecting reserve adequacy are not directly quantifiable and not all future events can be anticipated when reserves are established. Reserve estimates are refined as experience develops. Adjustments to reserves, both positive and negative, are reflected in the consolidated statement of operations in the period in which such estimates are updated. 46 -------------------------------------------------------------------------------- Because establishment of reserves is an inherently complex process involving significant judgment and estimates, there can be no certainty that ultimate losses will not exceed existing claim reserves. Future loss development could require reserves to be increased, which could have a material adverse effect on our earnings in the periods in which such increases are made.
The following table provides reserve information for our major product lines for the years ended
December 31, 2012 December 31, 2011 Claims and Benefits Claims and Benefits Payable Payable Future Incurred Future Incurred Policy But Not Policy But Not Benefits and Unearned Case Reported Benefits and Unearned Case Reported Expenses Premiums Reserves Reserves Expenses Premiums Reserve Reserves Long Duration Contracts: Preneed funeral life insurance policies and investment-type annuity contracts $ 4,306,947 $ 154,998 $
13,139
$ 7,555 Life insurance no longer offered 445,347 574 3,110 4,437 456,860 626 1,428
4,487
Universal life and other products no longer offered 210,037 127 825 5,133 229,726 132 988 6,534 FFG, LTC and other disposed businesses 3,424,511 35,862 713,258 55,661 3,491,994 38,039 641,238 55,151 Medical 89,540 10,293 6,831 10,016 86,456 11,097 8,385 10,170 All other 37,123 455 15,786 8,904 8,145 352 46,138 6,993 Short Duration Contracts: Group term life 0 3,681 172,804 30,953 0 4,174 182,355 37,415 Group disability 0 2,143 1,189,656 119,431 0 2,390 1,243,975 133,441 Medical 0 111,351 99,549 148,209 0 135,557 97,964 170,970 Dental 0 4,648 2,442 15,896 0 4,634 2,788 17,436 Property and warranty 0 2,368,372 459,215 706,849 0 2,041,190 199,829 370,814 Credit life and disability 0 300,824 41,711 54,624 0 286,631 50,645 59,949 Extended service contracts 0 2,775,715 3,323 36,908 0 2,498,403 2,425 37,398 All other 0 423,217 11,643 22,980 0 338,725 9,999 19,307 Total $ 8,513,505 $ 6,192,260 $ 2,733,292 $ 1,227,298 $ 8,359,206 $ 5,482,017 $ 2,499,499 $ 937,620
For a description of our reserving methodology, see Note 12 to the Consolidated Financial Statements included elsewhere in this report.
Long Duration Contracts Reserves for future policy benefits represent the present value of future benefits to policyholders and related expenses less the present value of future net premiums. Reserve assumptions reflect best estimates for expected investment yield, inflation, mortality, morbidity, expenses and withdrawal rates. These assumptions are based on our experience to the extent it is credible, modified where appropriate to reflect current trends, industry experience and provisions for possible unfavorable deviation. We also record an unearned revenue reserve which represents premiums received which have not yet been recognized in our consolidated statements of operations.
Historically, premium deficiency testing has not resulted in material adjustments to deferred acquisition costs or reserves. Such adjustments could occur, however, if economic or mortality conditions significantly deteriorated.
47 -------------------------------------------------------------------------------- Risks related to the reserves recorded for certain discontinued individual life, annuity, and long-term care insurance policies have been 100% ceded via reinsurance. While the Company has not been released from the contractual obligation to the policyholders, changes in and deviations from economic and mortality assumptions used in the calculation of these reserves will not directly affect our results of operations unless there is a default by the assuming reinsurer. Short Duration Contracts Claims and benefits payable reserves for short duration contracts include (1) case reserves for known claims which are unpaid as of the balance sheet date; (2) IBNR reserves for claims where the insured event has occurred but has not been reported to us as of the balance sheet date; and (3) loss adjustment expense reserves for the expected handling costs of settling the claims. Periodically, we review emerging experience and make adjustments to our reserves and assumptions where necessary. Below are further discussions on the reserving process for our major short duration products.
Group Disability and Group Term Life
Case or claim reserves are set for active individual claims on group long term disability policies and for waiver of premium benefits on group term life policies. Reserve factors used to calculate these reserves reflect assumptions regarding disabled life mortality and claim recovery rates, claim management practices, awards for social security and other benefit offsets and yield rates earned on assets supporting the reserves. Group long term disability and group term life waiver of premium reserves are discounted because the payment pattern and ultimate cost are fixed and determinable on an individual claim basis. Factors considered when setting IBNR reserves include patterns in elapsed time from claim incidence to claim reporting, and elapsed time from claim reporting to claim payment.
Key sensitivities at
Claims and Claims and Benefits Payable Benefits Payable Group disability, Group disability, claim discount rate decreased termination rate 10% by 100 basis points $ 1,373,851 lower $ 1,343,830 Group disability, as Group disability, as reported $ 1,309,087 reported $ 1,309,087 Group disability, Group disability, claim discount rate increased termination rate 10% by 100 basis points $ 1,250,755 higher $ 1,277,538
The discount rate is also a key sensitivity for group term life waiver of premium reserves (included within group term life reserves).
Claims and Benefits Payable Group term life, discount rate decreased by 100 basis points $
212,494
Group term life, as reported $
203,757
Group term life, discount rate increased by 100 basis points $ 195,908 Medical IBNR reserves calculated using generally accepted actuarial methods represent the largest component of reserves for short duration medical claims and benefits payable. The primary methods we use in their estimation are the loss development method and the projected claim method. Under the loss development method, we estimate ultimate losses for each incident period by multiplying the current cumulative losses by the appropriate 48 -------------------------------------------------------------------------------- loss development factor. When there is not sufficient data to reliably estimate reserves under the loss development method, such as for recent claim periods, the projected claim method is used. This method utilizes expected ultimate loss ratios to estimate the required reserve. Where appropriate, we also use variations on each method or a blend of the two. Reserves for our various product lines are calculated using experience data where credible. If sufficient experience data is not available, data from other similar blocks may be used. Industry data provides additional benchmarks when historical experience is too limited. Reserve factors may also be adjusted to reflect considerations not reflected in historical experience, such as changes in claims inventory levels, changes in provider negotiated rates or cost savings initiatives, increasing or decreasing medical cost trends, product changes and demographic changes in the underlying insured population.
Key sensitivities as of
Claims and Benefits Payable Short duration medical, loss development factors 1% lower* $
262,758
Short duration medical, as reported $
247,758
Short duration medical, loss development factors 1% higher* $ 234,758
* This refers to loss development factors for the most recent four months. Our
historical claims experience indicates that approximately 87% of medical
claims are paid within four months of the incurred date.
Changes in medical loss development may increase or decrease the MLR rebate liability.
Property and Warranty Our Property and Warranty lines of business include lender-placed homeowners, manufactured housing homeowners, multi-family housing, credit property, credit unemployment and warranty insurance and some longer-tail coverages (e.g. asbestos, environmental, other general liability and personal accident). Claim reserves for these lines are calculated on a product line basis using generally accepted actuarial principles and methods. They consist of case and IBNR reserves. The method we most often use in setting our Property and Warranty reserves is the loss development method. Under this method, we estimate ultimate losses for each accident period by multiplying the current cumulative losses by the appropriate loss development factor. We then calculate the reserve as the difference between the estimate of ultimate losses and the current case-incurred losses (paid losses plus case reserves). We select loss development factors based on a review of historical averages, adjusted to reflect recent trends and business-specific matters such as current claims payment practices. The loss development method involves aggregating loss data (paid losses and case-incurred losses) by accident quarter (or accident year) and accident age for each product or product grouping. As the data ages, we compile loss development factors that measure emerging claim development patterns between reporting periods. By selecting the most appropriate loss development factors, we project the known losses to an ultimate incurred basis for each accident period.
The data is typically analyzed using quarterly paid losses and/or quarterly case-incurred losses. Some product groupings may also use annual paid loss and/or annual case-incurred losses, as well as other actuarially accepted methods.
49 -------------------------------------------------------------------------------- Each of these data groupings produces an indication of the loss reserves for the product or product grouping. The process to select the best estimate differs by line of business. The single best estimate is determined based on many factors, including but not limited to: • the nature and extent of the underlying assumptions; • the quality and applicability of historical data-whether internal or industry data;
• current and future market conditions-the economic environment will often
impact the development of loss triangles; • the extent of data segmentation-data should be homogeneous yet credible enough for loss development methods to apply; and • the past variability of loss estimates-the loss estimates on some product
lines will vary from actual loss experience more than others. Most of our credit property and credit unemployment insurance business is either reinsured or written on a retrospective commission basis. Business written on a retrospective commission basis permits management to adjust commissions based on claims experience. Thus, any adjustment to prior years' incurred claims is partially offset by a change in commission expense, which is included in the selling underwriting and general expenses line in our consolidated statements of operations. While management has used its best judgment in establishing its estimate of required reserves, different assumptions and variables could lead to significantly different reserve estimates. Two key measures of loss activity are loss frequency, which is a measure of the number of claims per unit of insured exposure, and loss severity, which is a measure of the average size of claims. Factors affecting loss frequency include the effectiveness of loss controls and safety programs and changes in economic activity or weather patterns. Factors affecting loss severity include changes in policy limits, retentions, rate of inflation and judicial interpretations. If the actual level of loss frequency and severity are higher or lower than expected, the ultimate reserves required will be different than management's estimate. The effect of higher and lower levels of loss frequency and severity levels on our ultimate costs for claims occurring in 2012 would be as follows:
Change in both loss frequency and Ultimate cost of claims Change in cost of claims severity for all Property and Warranty occurring in 2012
occurring in 2012 3% higher $ 1,237,077 $ 71,013 2% higher $ 1,213,173 $ 47,109 1% higher $ 1,189,502 $ 23,438 Base scenario $ 1,166,064 $ 0 1% lower $ 1,142,626 $ (23,438 ) 2% lower $ 1,118,955 $ (47,109 ) 3% lower $ 1,095,051 $ (71,013 )
Reserving for Asbestos and Other Claims
Our property and warranty line of business includes exposure to asbestos, environmental and other general liability claims arising from our participation in various reinsurance pools from 1971 through 1985. This exposure arose from a contract that we discontinued writing many years ago. We carry case reserves, as recommended by the various pool managers, and IBNR reserves totaling$34,946 (before reinsurance) and$27,790 (net of reinsurance) atDecember 31, 2012 . We believe the balance of case and IBNR reserves for these liabilities are adequate. However, any estimation of these liabilities is subject to greater than normal variation and uncertainty due to the general lack of sufficiently detailed data, reporting delays and absence of a generally accepted actuarial methodology for those exposures. There are significant unresolved industry legal issues, including such items as whether coverage exists and what constitutes a claim. In addition, the determination of 50 -------------------------------------------------------------------------------- ultimate damages and the final allocation of losses to financially responsible parties are highly uncertain. However, based on information currently available, and after consideration of the reserves reflected in the consolidated financial statements, we do not believe that changes in reserve estimates for these claims are likely to be material. DAC Information in this report for the years endedDecember 31, 2011 , 2010, 2009, and 2008 has been revised, as applicable, for the retrospective application of the Company's adoption of the amendments to existing guidance on accounting for costs associated with acquiring or renewing insurance contracts. See Note 2 to the Consolidated Financial Statements for more information. Only direct incremental costs associated with the successful acquisition of new or renewal insurance contracts are deferred to the extent that such costs are deemed recoverable from future premiums or gross profits. Acquisition costs primarily consist of commissions and premium taxes. Certain direct response advertising expenses are deferred when the primary purpose of the advertising is to elicit sales to customers who can be shown to have specifically responded to the advertising and the direct response advertising results in probable future benefits. The deferred acquisition costs ("DAC") asset is tested annually to ensure that future premiums or gross profits are sufficient to support the amortization of the asset. Such testing involves the use of best estimate assumptions to determine if anticipated future policy premiums and investment income are adequate to cover all DAC and related claims, benefits and expenses. To the extent a deficiency exists, it is recognized immediately by a charge to the consolidated statements of operations and a corresponding reduction in the DAC asset. If the deficiency is greater than unamortized DAC, a liability will be accrued for the excess deficiency. Long Duration Contracts Acquisition costs for preneed life insurance policies issued prior toJanuary 1, 2009 and certain discontinued life insurance policies have been deferred and amortized in proportion to anticipated premiums over the premium-paying period. These acquisition costs consist primarily of first year commissions paid to agents. For preneed investment-type annuities, preneed life insurance policies with discretionary death benefit growth issued afterJanuary 1, 2009 , universal life insurance policies and investment-type annuity contracts that are no longer offered, DAC is amortized in proportion to the present value of estimated gross profits from investment, mortality, expense margins and surrender charges over the estimated life of the policy or contract. The assumptions used for the estimates are consistent with those used in computing the policy or contract liabilities. Acquisition costs relating to group worksite products, which typically have high front-end costs and are expected to remain in force for an extended period of time, consist primarily of first year commissions to brokers, costs of issuing new certificates and compensation to sales representatives. These acquisition costs are front-end loaded, thus they are deferred and amortized over the estimated terms of the underlying contracts. Acquisition costs relating to individual voluntary limited benefit health policies issued in 2007 and later are deferred and amortized over the estimated average terms of the underlying contracts. These acquisition costs relate to commission expenses which result from commission schedules that pay significantly higher rates in the first year. 51
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Short Duration Contracts
Acquisition costs relating to property contracts, warranty and extended service contracts and single premium credit insurance contracts are amortized over the term of the contracts in relation to premiums earned.
Acquisition costs relating to monthly pay credit insurance business consist mainly of direct response advertising costs and are deferred and amortized over the estimated average terms and balances of the underlying contracts.
Acquisition costs relating to group term life, group disability, group dental and group vision consist primarily of compensation to sales representatives. These acquisition costs are front-end loaded; thus, they are deferred and amortized over the estimated terms of the underlying contracts. Investments We regularly monitor our investment portfolio to ensure investments that may be other-than-temporarily impaired are identified in a timely fashion, properly valued, and charged against earnings in the proper period. The determination that a security has incurred an other-than-temporary decline in value requires the judgment of management. Assessment factors include, but are not limited to, the length of time and the extent to which the market value has been less than cost, the financial condition and rating of the issuer, whether any collateral is held, the intent and ability of the Company to retain the investment for a period of time sufficient to allow for recovery for equity securities, and the intent to sell or whether it is more likely than not that the Company will be required to sell for fixed maturity securities. Any equity security whose price decline is deemed other-than-temporary is written down to its then current market value with the amount of the impairment reported as a realized loss in that period. The impairment of a fixed maturity security that the Company has the intent to sell or that it is more likely than not that the Company will be required to sell is deemed other-than-temporary and is written down to its market value at the balance sheet date, with the amount of the impairment reported as a realized loss in that period. For all other-than-temporarily impaired fixed maturity securities that do not meet either of these two criteria, the Company analyzes its ability to recover the amortized cost of the security by calculating the net present value of projected future cash flows. For these other-than-temporarily impaired fixed maturity securities, the net amount recognized in earnings is equal to the difference between its amortized cost and its net present value. Inherently, there are risks and uncertainties involved in making these judgments. Changes in circumstances and critical assumptions such as a continued weak economy, or unforeseen events which affect one or more companies, industry sectors or countries could result in additional impairments in future periods for other-than-temporary declines in value. See also Note 4 to the Consolidated Financial Statements included elsewhere in this report and "Item 1A-Risk Factors-The value of our investments could decline, affecting our profitability and financial strength" and "Investments" contained later in this item. Reinsurance Reinsurance recoverables include amounts we are owed by reinsurers. Reinsurance costs are expensed over the terms of the underlying reinsured policies using assumptions consistent with those used to account for the policies. Amounts recoverable from reinsurers are estimated in a manner consistent with claim and claim adjustment expense reserves or future policy benefits reserves and are reported in our consolidated balance sheets. An estimated allowance for doubtful accounts is recorded on the basis of periodic evaluations of balances due from reinsurers (net of collateral), reinsurer solvency, management's experience and current economic conditions. The ceding of insurance does not discharge our primary liability to our insureds. 52
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The following table sets forth our reinsurance recoverables as of the dates indicated:December 31, 2012 December 31, 2011
Reinsurance recoverables $ 6,141,737 $ 5,411,064
We have used reinsurance to exit certain businesses, including blocks of individual life, annuity, and long-term care business. The reinsurance recoverables relating to these dispositions amounted to
In the ordinary course of business, we are involved in both the assumption and cession of reinsurance with non-affiliated companies. The following table provides details of the reinsurance recoverables balance for the years endedDecember 31 : 2012 2011
Ceded future policyholder benefits and expense
Ceded unearned premium 1,214,028
1,013,778
Ceded claims and benefits payable 1,540,073 945,900 Ceded paid losses 48,853 51,448 Total $ 6,141,737 $ 5,411,064 We utilize reinsurance for loss protection and capital management, business dispositions and, in Assurant Solutions and Assurant Specialty Property, client risk and profit sharing. See also "Item 1A-Risk Factors-Reinsurance may not be available or adequate to protect us against losses and we are subject to the credit risk of reinsurers," and "Item 7A-Quantitative and Qualitative Disclosures About Market Risk-Credit Risk."
Retirement and Other Employee Benefits
We sponsor qualified and non-qualified pension plans and a retirement health benefits plan covering our employees who meet specified eligibility requirements. The calculation of reported expense and liability associated with these plans requires an extensive use of assumptions including factors such as discount rates, expected long-term returns on plan assets, employee retirement and termination rates and future compensation increases. We determine these assumptions based upon currently available market and industry data, and historical performance of the plan and its assets. The assumptions we use may differ materially from actual results. See Note 20 to our consolidated financial statements for more information on our retirement and other employee benefits, including a sensitivity analysis for changes in the assumed health care cost trend rates. Contingencies We account for contingencies by evaluating each contingent matter separately. A loss is accrued if reasonably estimable and probable. We establish reserves for these contingencies at the best estimate, or, if no one estimated amount within the range of possible losses is more probable than any other, we report an estimated reserve at the low end of the estimated range. Contingencies affecting the Company include litigation matters which are inherently difficult to evaluate and are subject to significant changes. Deferred Taxes Deferred income taxes are recorded for temporary differences between the financial reporting and income tax bases of assets and liabilities, based on enacted tax laws and statutory tax rates applicable to the periods in which the Company expects the temporary differences to reverse. A valuation allowance is established for deferred tax assets if, based on the weight of all available evidence, it is more likely than not that some portion of the asset will not be realized. The valuation allowance is sufficient to reduce the asset to the amount that is more 53
-------------------------------------------------------------------------------- likely than not to be realized. The Company has deferred tax assets resulting from temporary differences that may reduce taxable income in future periods. The detailed components of our deferred tax assets, liabilities and valuation allowance are included in Note 7 to our consolidated financial statements. As ofDecember 31, 2011 , the Company had a cumulative valuation allowance of$10,154 against deferred tax assets of international subsidiaries. During Twelve Months 2012, the Company recognized a cumulative income tax expense of$2,937 related to operating losses of international subsidiaries. As ofDecember 31, 2012 , the Company has a cumulative valuation allowance of$13,091 against deferred tax assets, as it is management's assessment that it is more likely than not that this amount of deferred tax assets will not be realized. The realization of deferred tax assets related to net operating loss carryforwards of international subsidiaries depends upon the existence of sufficient taxable income of the same character in the same jurisdiction. In determining whether the deferred tax asset is realizable, the Company weighed all available evidence, both positive and negative. We considered all sources of taxable income available to realize the asset, including the future reversal of existing temporary differences, future taxable income exclusive of reversing temporary differences, carry forwards and tax-planning strategies.
The Company believes it is more likely than not that the remainder of its deferred tax assets will be realized in the foreseeable future. Accordingly, other than noted herein for certain international subsidiaries, a valuation allowance has not been established.
Future reversal of the valuation allowance will be recognized either when the benefit is realized or when we determine that it is more likely than not that the benefit will be realized. Depending on the nature of the taxable income that results in a reversal of the valuation allowance, and on management's judgment, the reversal will be recognized either through other comprehensive income (loss) or through continuing operations in the consolidated statements of operations. Likewise, if the Company determines that it is not more likely than not that it would be able to realize all or part of the deferred tax asset in the future, an adjustment to the deferred tax asset valuation allowance would be recorded through a charge to continuing operations in the consolidated statements of operations in the period such determination is made. In determining the appropriate valuation allowance, management makes judgments about recoverability of deferred tax assets, use of tax loss and tax credit carryforwards, levels of expected future taxable income and available tax planning strategies. The assumptions used in making these judgments are updated periodically by management based on current business conditions that affect the Company and overall economic conditions. These management judgments are therefore subject to change based on factors that include, but are not limited to, changes in expected capital gain income in the foreseeable future and the ability of the Company to successfully execute its tax planning strategies. Please see "Item 1A-Risk Factors-Risks Related to Our Company-Unanticipated changes in tax provisions or exposure to additional income tax liabilities could materially and adversely affect our results" for more information.
Valuation and Recoverability of Goodwill
Goodwill represented$640,714 and$639,097 of our$28,946,607 and$27,019,862 of total assets as ofDecember 31, 2012 and 2011, respectively. We review our goodwill annually in the fourth quarter for impairment or more frequently if indicators of impairment exist. Such indicators include, but are not limited to, a significant adverse change in legal factors, adverse action or assessment by a regulator, unanticipated competition, loss of key personnel or a significant decline in our expected future cash flows due to changes in company-specific factors or the broader business climate. The evaluation of such factors requires considerable judgment. Any adverse change in these factors could have a significant impact on the recoverability of goodwill and could have a material impact on our consolidated financial statements. 54 -------------------------------------------------------------------------------- We test goodwill for impairment at the reporting unit level and have concluded that our reporting units for goodwill testing are equivalent to our operating segments. The following table illustrates the amount of goodwill carried at each reporting unit: December 31, 2012 2011 Assurant Solutions $ 381,262 $ 379,645 Assurant Specialty Property 259,452 259,452 Assurant Health - - Assurant Employee Benefits - - Total $ 640,714 $ 639,097 For each reporting unit, we first compare its estimated fair value with its net book value. If the estimated fair value exceeds its net book value, goodwill is deemed not to be impaired, and no further testing is necessary. If the net book value exceeds its estimated fair value, we would then perform a second test to calculate the amount of impairment, if any. To determine the amount of any impairment, we would determine the implied fair value of goodwill in the same manner as if the reporting unit were being acquired in a business combination. Specifically, we would determine the fair value of all of the assets and liabilities of the reporting unit, including any unrecognized intangible assets, in a hypothetical calculation that yields the implied fair value of goodwill. If the implied fair value of goodwill is less than the recorded goodwill, we would record an impairment charge for the difference. DuringSeptember 2011 , the FASB issued amended guidance for goodwill and other intangibles. This guidance provides the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, an entity determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment test, as described above. During 2011, the Company chose this option for Assurant Specialty Property, but not for Assurant Solutions. During 2012, the Company performed the Step 1 test for both reporting units.
In cases where Step 1 testing was performed, the following describes the valuation methodologies used in 2012 and 2011 to derive the estimated fair value of the reporting units.
For each reporting unit, we identified a group of peer companies, which have operations that are as similar as possible to the reporting unit. Certain of our reporting units have a very limited number of peer companies. A Guideline Company Method is used to value the reporting unit based upon its relative performance to its peer companies, based on several measures, including price to trailing 12 month earnings, price to projected earnings, price to tangible net worth and return on equity. A Dividend Discount Method ("DDM") is used to value each reporting unit based upon the present value of expected cash flows available for distribution over future periods. Cash flows are estimated for a discrete projection period based on detailed assumptions, and a terminal value is calculated to reflect the value attributable to cash flows beyond the discrete period. Cash flows and the terminal value are then discounted using the reporting unit's estimated cost of capital. The estimated fair value of the reporting unit equals the sum of the discounted cash flows and terminal value. A Guideline Transaction Method values the reporting unit based on available data concerning the purchase prices paid in acquisitions of companies operating in the insurance industry. The application of certain financial multiples calculated from these transactions provides an indication of estimated fair value of the reporting units. 55
-------------------------------------------------------------------------------- While all three valuation methodologies were considered in assessing fair value, the DDM was weighed more heavily since in the current economic environment, management believes that expected cash flows are the most important factor in the valuation of a business enterprise. In addition, recent dislocations in the economy, the scarcity of M&A transactions in the insurance marketplace and the relative lack of directly comparable companies, particularly forAssurant Solutions, make the other methods less credible. Following the 2012 Step 1 test, the Company concluded that the estimated fair value of the Assurant Solutions reporting unit exceeded its net book value by 10.5%, while the Assurant Specialty Property reporting unit exceeded its net book value by 17.4%. Following the 2011 Step 1 test, the Company concluded that the estimated fair value of the Assurant Solutions reporting unit exceeded its net book value by 19.2%. In undertaking our qualitative assessment of the Specialty Property reporting unit in 2011, we considered macro-economic, industry and reporting unit-specific factors. These included (i) the effect of the current interest rate environment on our cost of capital; (ii) Assurant Specialty Property's sustaining market share over the year; (iii) lack of turnover in key management; (iv) 2011 actual performance as compared to expected 2011 performance from our 2010 Step 1 assessment; and, (v) the overall market position and share price ofAssurant, Inc.
Based on our qualitative assessment, having considered the factors in totality we determined that it was not necessary to perform a Step 1 quantitative goodwill impairment test for Assurant Specialty Property and that it was more-likely-than-not that the fair value of Assurant Specialty Property continued to exceed its net book value at year-end 2011.
The determination of fair value of our reporting units requires many estimates and assumptions. These estimates and assumptions primarily include, but are not limited to, earnings and required capital projections discussed above, discount rates, terminal growth rates, operating income and dividend forecasts for each reporting unit and the weighting assigned to the results of each of the three valuation methods described above. Changes in certain assumptions could have a significant impact on the goodwill impairment assessment. For example, an increase of the discount rate of 100 basis points, with all other assumptions held constant, for Assurant Solutions, would result in its estimated fair value being less than its net book value as ofDecember 31, 2012 . Likewise, a reduction of 350 basis points in the terminal growth rate, with all other assumptions held constant, for Assurant Solutions would result in its estimated fair value being less than its net book value as ofDecember 31, 2012 . It would take more significant movements in our estimates and assumptions in order for Assurant Specialty Property's estimated fair value to be less than its net book value. We evaluated the significant assumptions used to determine the estimated fair values of Assurant Solutions and Assurant Specialty Property, both individually and in the aggregate, and concluded they are reasonable. However, should the operating results of either reporting unit decline substantially compared to projected results, or should further interest rate declines further increase the net unrealized investment portfolio gain position, we could determine that we need to record an impairment charge related to goodwill in Assurant Solutions and Assurant Specialty Property.
Recent Accounting Pronouncements-Adopted
OnSeptember 30, 2012 , the Company adopted the amended intangibles-goodwill and other guidance. This guidance allows an entity to first assess qualitative factors to determine whether it is necessary to perform a quantitative impairment test for indefinite-lived intangible assets. Under this amended guidance, an entity would not be required to calculate the fair value of an indefinite-lived intangible asset, unless the entity determines, based on qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amended guidance includes a number of events and circumstances for an entity to consider in conducting the qualitative assessment and did not have an impact on the Company's financial position or results of operations. 56
-------------------------------------------------------------------------------- OnJanuary 1, 2012 , the Company adopted the guidance on fair value measurement. This amended guidance changes certain fair value measurement principles and expands required disclosures to include quantitative and qualitative information about unobservable inputs in Level 3 measurements to achieve common fair value measurement and disclosure requirements in GAAP and International Financial Reporting Standards. The adoption of this guidance did not have an impact on the Company's financial position or results of operations. OnJanuary 1, 2012 , the Company adopted the amendments to existing guidance on accounting for costs associated with acquiring or renewing insurance contracts. The amendments modified the definition of the types of costs incurred by insurance entities that can be capitalized in the acquisition of new and renewal contracts. Under this amended guidance, only direct incremental costs associated with successful insurance contract acquisitions or renewals are deferrable. This guidance was adopted retrospectively and has been applied to all prior period financial information contained in these consolidated financial statements. As ofJanuary 1, 2010 , the beginning of the earliest period presented, the cumulative effect adjustment recorded to reflect this guidance resulted in a decrease of$148,242 in retained earnings, an increase of$2,149 in accumulated other comprehensive income and a decrease of$146,093 in total stockholders' equity. For more information, see Note 2 to the Consolidated Financial Statements. OnDecember 31, 2011 , the Company adopted the new guidance related to the presentation of comprehensive income. This guidance provides two alternatives for presenting comprehensive income. An entity can report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. Each component of net income and each component of other comprehensive income, together with totals for comprehensive income and its two parts, net income and other comprehensive income, are displayed under either alternative. The statement(s) are to be presented with equal prominence as the other primary financial statements. The new guidance eliminates the Company's previously applied option to report other comprehensive income and its components in the statement of changes in stockholders' equity. The guidance does not change the items that constitute net income or other comprehensive income, and does not change when an item of other comprehensive income must be reclassified to net income. The Company chose to early adopt this guidance and therefore is reporting comprehensive income in a separate but consecutive statement, with full retrospective application as required by the guidance. The adoption of this guidance did not have an impact on the Company's financial position or results of operations. OnOctober 1, 2011 , the Company adopted the amended intangibles-goodwill and other guidance. This guidance allows an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under this amended guidance, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amended guidance includes a number of events and circumstances for an entity to consider in conducting the qualitative assessment. The Company chose to early adopt the revised standard and applied the amended guidance to its fourth quarter annual goodwill impairment test. The adoption of the amended guidance results in a change to the procedures for assessing goodwill impairment and did not have an impact on the Company's financial position or results of operations. For more information, see Notes 2 and 10 to the Consolidated Financial Statements. OnJanuary 1, 2011 , the Company adopted the new guidance on multiple deliverable revenue arrangements. This guidance requires entities to use their best estimate of the selling price of a deliverable within a multiple deliverable revenue arrangement if the entity and other entities do not sell the deliverable separate from the other deliverables within the arrangement. In addition, it requires both qualitative and quantitative disclosures. The adoption of this guidance did not have an impact on the Company's financial position or results of operations.
Recent Accounting Pronouncements-Not Yet Adopted
In
57 -------------------------------------------------------------------------------- by the Affordable Care Act. The Affordable Care Act imposes an annual fee on health insurers for each calendar year beginning on or afterJanuary 1, 2014 . The amendments specify that the liability for the fee should be estimated and recorded in full once the entity provides qualifying health insurance in the applicable calendar year in which the fee is payable with a corresponding deferred cost that is amortized to expense ratably over the calendar year during which it is payable. The guidance is effective for calendar years beginning afterDecember 31, 2013 , when the fee initially becomes effective. Therefore, the Company is required to adopt this guidance onJanuary 1, 2014 . The Company is currently evaluating the requirements of the amendments and the potential impact on the Company's financial position and results of operations. Results of Operations Assurant Consolidated Overview The table below presents information regarding our consolidated results of operations: For the Years Ended December 31, 2012 2011 2010 Revenues:
Net earned premiums and other considerations
713,128 689,532 703,190 Net realized gains on investments 64,353 32,580 48,403 Amortization of deferred gains on disposal of businesses 18,413 20,461 10,406 Fees and other income 475,392 404,863 362,684 Total revenues 8,508,270 8,272,804 8,527,722 Benefits, losses and expenses: Policyholder benefits 3,655,404 3,749,734 3,635,999 Selling, underwriting and general expenses (1) 4,034,809 3,756,583 3,918,191 Interest expense 60,306 60,360 60,646 Total benefits, losses and expenses 7,750,519
7,566,677 7,614,836
Segment income before provision for income taxes and goodwill impairment 757,751 706,127 912,886 Provision for income taxes 274,046
167,171 327,898
Segment income before goodwill impairment 483,705 538,956 584,988 Goodwill impairment 0 0 306,381 Net income $ 483,705 $ 538,956 $ 278,607
(1) Includes amortization of DAC and VOBA and underwriting, general and
administrative expenses.
Year Ended
Net income decreased$55,251 , or 10%, to$483,705 for Twelve Months 2012 from$538,956 for Twelve Months 2011. The decrease is primarily due to an$80,000 release of a capital loss valuation allowance related to deferred tax assets during Twelve Months 2011. Partially offsetting this item was improved net income in ourAssurant Health andAssurant Employee Benefits segments and an increase of$20,652 (after-tax) in net realized gains on investments. Twelve Months 2012 includes$162,634 (after-tax) of Assurant Specialty Property reportable catastrophe losses, primarily due to Superstorm Sandy, compared to$102,469 (after-tax) of reportable catastrophe losses in Twelve Months 2011. Higher catastrophe losses in Twelve Months 2012 were offset by growth in lender-placed homeowners net earned premiums and lower non-catastrophe losses. 58
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Year Ended
Net income increased$260,349 , or 93%, to$538,956 for Twelve Months 2011 from$278,607 for Twelve Months 2010. Twelve Months 2010 included a$306,381 non-cash goodwill impairment charge. Absent this charge, net income decreased$46,032 or 8%. The decline is primarily attributable to decreased net income in our Assurant Specialty Property segment mainly due to an increase in reportable catastrophe losses of$87,673 (after-tax) in Twelve Months 2011 and declines in net income at ourAssurant Health andAssurant Employee Benefits segments. Partially offsetting these items was improved net income in ourAssurant Solutions segment and an$80,000 release of a capital loss valuation allowance related to deferred tax assets during Twelve Months 2011. 59
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Assurant Solutions Overview The table below presents information regarding Assurant Solutions' segment results of operations: For the Years Ended December 31, 2012 2011 2010 Revenues: Net earned premiums and other considerations $ 2,579,220 $ 2,438,407 $ 2,484,299 Net investment income 396,681 393,575 397,297 Fees and other income 314,072 265,204 228,052 Total revenues 3,289,973 3,097,186 3,109,648 Benefits, losses and expenses: Policyholder benefits 840,133
847,254 884,405 Selling, underwriting and general expenses (4) 2,267,986 2,037,680 2,059,245
Total benefits, losses and expenses 3,108,119
2,884,934 2,943,650
Segment income before provision for income taxes 181,854 212,252 165,998 Provision for income taxes 58,101 76,202 64,465 Segment net income $ 123,753 $ 136,050 $ 101,533 Net earned premiums and other considerations: Domestic: Credit $ 165,765 $ 173,287 $ 189,357 Service contracts 1,260,578 1,198,510 1,291,725 Other (1) 62,298 53,219 49,016 Total Domestic 1,488,641 1,425,016 1,530,098 International: Credit 425,078 391,124 346,475 Service contracts 556,207 495,853 459,166 Other (1) 28,316 24,692 18,002 Total International 1,009,601 911,669 823,643 Preneed 80,978 101,722 130,558 Total $ 2,579,220 $ 2,438,407 $ 2,484,299 Fees and other income: Domestic: Debt protection $ 27,912 $ 29,501 $ 33,049 Service contracts 139,636 120,896 110,386 Other (1) 4,039 4,123 8,839 Total Domestic 171,587 154,520 152,274 International 38,840 32,059 28,930 Preneed 103,645 78,625 46,848 Total $ 314,072 $ 265,204 $ 228,052 Gross written premiums (2): Domestic: Credit $ 390,648 $ 399,564 $ 422,825 Service contracts 1,799,577 1,470,605 1,193,423 Other (1) 113,067 86,503 65,732 Total Domestic 2,303,292 1,956,672 1,681,980 International: Credit 1,002,347 1,013,486 968,878 Service contracts 722,251 622,674 523,382 Other (1) 44,721 45,312 22,407 Total International 1,769,319 1,681,472 1,514,667 Total $ 4,072,611 $ 3,638,144 $ 3,196,647 Preneed (face sales) $ 863,734 $ 759,692 $ 734,884 Combined ratio (3): Domestic 98.9 % 97.3 % 100.3 % International 104.8 % 104.0 % 106.1 % 60
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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
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.
(4) 2012 & 2010 selling, underwriting and general expenses include
$47,612 , respectively, of intangible asset impairment charges.
Year Ended
Net Income Segment net income decreased$12,297 , or 9%, to$123,753 for Twelve Months 2012 from$136,050 for Twelve Months 2011, primarily due to an other intangible asset impairment charge in ourU.K. business of$20,373 (after-tax) and a workforce restructuring charge of$7,724 (after-tax). Both of these items occurred in the fourth quarter of 2012. In mid-2012, persistency rates ofU.K. mortgage insurance brokers acquired in 2007 declined significantly following actions by an independent underwriter of the business, resulting in the impairment charge. The workforce restructuring charge primarily related to our domestic credit and European operations. Twelve Months 2012 includes$6,362 (after-tax) of income from client related settlements. Absent these items, net income increased$9,438 primarily due to improved results in our International business. The improved International business results were mainly due to growth and improved underwriting experience primarily in our Latin American region. Partially offsetting the improved International results was less favorable domestic service contract underwriting experience as well as lower earnings from certain domestic blocks of credit insurance business that are in run-off. Total Revenues Total revenues increased$192,787 , or 6%, to$3,289,973 for Twelve Months 2012 from$3,097,186 for Twelve Months 2011 mainly as a result of higher net earned premiums and other considerations of$140,813 . Domestic net earned premiums increased primarily attributable to service contract growth in the automotive and retail markets from both new and existing clients including$17,123 related to a new block of business assumed during Twelve Months 2012. International service contract and credit businesses net earned premiums increased primarily in ourLatin America and European regions from both new and existing clients. Fees and other income increased$48,868 , mostly driven by growth in our preneed business and growth in our domestic retail and mobile service contract business, including a favorable one-time client settlement. Gross written premiums increased$434,467 , or 12%, to$4,072,611 for Twelve Months 2012 from$3,638,144 for Twelve Months 2011. Gross written premiums from our domestic service contract business increased$328,972 from both new and existing clients, including$41,117 related to a new assumed block of business and a one-time benefit of$33,200 resulting from the correction of a client reporting error. This correction had no impact on net income since an offsetting deferred commission amount was recorded. Gross written premiums from our international service contract business increased$99,577 due to growth inEurope andLatin America from new and existing clients and products. Preneed face sales increased$104,042 , to$863,734 for Twelve Months 2012 from$759,692 for Twelve Months 2011. This increase was mostly attributable to growth from our exclusive distribution partnership with Service Corporation International ("SCI"), the largest funeral provider inNorth America . This exclusive distribution partnership is effective throughSeptember 29, 2014 .
Total Benefits, Losses and Expenses
Total benefits, losses and expenses increased$223,185 , or 8%, to$3,108,119 for Twelve Months 2012 from$2,884,934 for Twelve Months 2011. Policyholder benefits declined$7,121 primarily from improved loss experience in our international business and from a decrease associated with run-off lines in our preneed and 61
-------------------------------------------------------------------------------- domestic businesses, partially offset by higher policyholder benefits in our domestic service contract business related to business growth and$14,617 related to a new assumed block of business. Selling, underwriting and general expenses increased$230,306 . Commissions, taxes, licenses and fees, of which amortization of DAC is a component, increased$159,623 due to higher earnings in our domestic service contract and international businesses. General expenses increased$70,683 primarily due to an other intangible asset impairment charge of$26,458 and severance expenses of$11,731 . Additionally, costs also increased as a result of supporting the growth of our international businesses, primarily inLatin America .
Year Ended
Net Income Segment net income increased$34,517 , or 34%, to$136,050 for Twelve Months 2011 from$101,533 for Twelve Months 2010. Twelve Months 2010 included an intangible asset impairment charge of$30,948 (after-tax) related to a client notification of non-renewal of a block of domestic service contract business. Absent this item, net income increased$3,569 , or 3%, as a result of improved underwriting experience across our international and domestic service contract businesses. Partially offsetting the improvement was a$4,875 (after-tax) increase to policyholder benefits for unreported claims in our preneed business during fourth quarter 2011 as well as continued reduced earnings from certain domestic blocks of business that are in run-off. Total Revenues Total revenues decreased$12,462 , or less than 1%, to$3,097,186 for Twelve Months 2011 from$3,109,648 for Twelve Months 2010. The decrease was mainly the result of lower net earned premiums of$45,892 , which was primarily attributable to the continued run-off of certain domestic service contract business from former clients that are no longer in business (mainly Circuit City) and the continued run-off of our domestic credit insurance business. Net earned premiums for full year 2011 declined approximately$160,000 from these two sources compared with 2010. Partially offsetting these decreases were new domestic service contract business growth and increases in both our international credit and service contract businesses, which also benefited from the favorable impact of foreign exchange rates. Fees and other income increased$37,152 mainly as a result of increases in our preneed business. Gross written premiums increased$441,497 , or 14%, to$3,638,144 for Twelve Months 2011 from$3,196,647 for Twelve Months 2010. Gross written premiums from our domestic service contract business increased$277,182 primarily due to the 2010 addition of a large new client and an increase in automobile vehicle service contract sales. Our international service contract business increased$99,292 and our international credit business increased$44,608 , primarily due to growth from new and existing clients, particularly inLatin America , and the favorable impact of foreign exchange rates. Partially offsetting these increases was a$23,261 decrease in our domestic credit insurance business, due to the continued run-off of this product line. Preneed face sales increased$24,808 , to$759,692 for Twelve Months 2011 from$734,884 for Twelve Months 2010. This increase was primarily attributable to domestic growth from our exclusive distribution partnership with SCI, the largest funeral provider inNorth America . This exclusive distribution partnership is effective throughSeptember 29, 2014 . Twelve Months 2011 face sales also benefited from recent acquisitions made by SCI. This was partially offset by reduced sales inCanada compared to 2010, when consumer buying increased in advance of a consumer tax rate change that took effectJuly 1, 2010 in certain provinces.
Total Benefits, Losses and Expenses
Total benefits, losses and expenses decreased$58,716 , or 2%, to$2,884,934 for Twelve Months 2011 from$2,943,650 for Twelve Months 2010. Policyholder benefits decreased$37,151 primarily due to improved loss 62 -------------------------------------------------------------------------------- experience across our international and domestic service contract businesses and a decrease associated with certain domestic lines of business that are in run-off. Partially offsetting these items was a$7,500 increase to policyholder benefits for unreported claims related to the use of the U.S.Social Security Administration Death Master File to identify deceased policyholders and beneficiaries in our preneed business during fourth quarter 2011. Selling, underwriting and general expenses decreased$21,565 . Commissions, taxes, licenses and fees, of which amortization of DAC is a component, increased$3,789 due to higher earnings in our international business resulting from growth of the business coupled with the unfavorable impact of foreign exchange rates. This was partially offset by lower earnings in our domestic service contract business. General expenses decreased$25,354 primarily due to the above mentioned$47,612 intangible asset impairment charge and from expense management efforts in domestic lines of business that are in run-off. These decreases were partially offset by higher expenses associated with the growth of our international and domestic service contract businesses. Assurant Specialty Property Overview
The table below presents information regarding Assurant Specialty Property's segment results of operations:
For the Years Ended December 31, 2012 2011 2010 Revenues: Net earned premiums and other considerations $ 2,054,041 $ 1,904,638 $ 1,953,223 Net investment income 103,327 103,259 107,092 Fees and other income 98,621 79,337 69,147 Total revenues 2,255,989 2,087,234 2,129,462 Benefits, losses and expenses: Policyholder benefits 949,157 857,223 684,653 Selling, underwriting and general expenses 844,288 769,826 797,620 Total benefits, losses and expenses 1,793,445
1,627,049 1,482,273
Segment income before provision for income taxes 462,544 460,185 647,189 Provision for income taxes 157,593 156,462 222,658 Segment net income $ 304,951 $ 303,723 $ 424,531 Net earned premiums and other considerations by major product groupings: Homeowners (lender-placed and voluntary) $ 1,418,061 $ 1,274,485 $ 1,342,791 Manufactured housing (lender-placed and voluntary) 207,675 216,613 220,309 Other (1) 428,305 413,540 390,123 Total $ 2,054,041 $ 1,904,638 $ 1,953,223 Ratios: Loss ratio (2) 46.2 % 45.0 % 35.1 % Expense ratio (3) 39.2 % 38.8 % 39.4 % Combined ratio (4) 83.3 % 82.0 % 73.3 %
(1) This primarily includes multi-family housing, lender-placed flood, and
miscellaneous 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. 63
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Regulatory Matters
As previously disclosed, inFebruary 2012 , the Company and two of its wholly owned insurance subsidiaries,ASIC and American Bankers Insurance Company ofFlorida , received subpoenas from the NYDFS regarding the Company's lender-placed insurance business and related document retention practices. Over the next several months, the Company responded to the subpoenas, participated in depositions, responded to additional information requests from the NYDFS on the Company's lender-placed insurance program and, along with other companies in the industry, participated in public hearings conducted by the NYDFS. The Company was subsequently served with an order by the NYDFS requiring the Company to propose and justify amended rates for its lender-placed insurance products sold in theState of New York , to which it responded in earlyJuly 2012 . The Company has since engaged in discussions with the NYDFS and provided additional information concerning its lender-placed insurance program in theState of New York . Proposed changes to the program would affect annual lender-placed hazard and real estate owned policies issued in theState of New York , which accounted for approximately$79,000 and$64,000 of Assurant Specialty Property's net earned premiums for Twelve Months 2012 and Twelve Months 2011, respectively. The Company's discussions with the NYDFS concerning this matter are continuing. 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 been engaged in discussions and proceedings with certain state regulators regarding our lender-placed insurance business. As the Company disclosed onOctober 22, 2012 , ASIC reached an agreement with the California DOI to reduce premium rates for lender-placed hazard insurance products by 30.5%. This rate reduction reflects factors specific toCalifornia such as continued favorable loss experience in the state and different assumptions about future experience compared to our previous rate filing. The new rates inCalifornia began to apply to all policies issued or renewed with effective dates on or afterJanuary 19, 2013 . During Twelve Months 2012, ASIC recorded approximately$111,000 of net earned premiums ($154,000 of gross written premium) inCalifornia for the type of policies subject to the rate reduction. The actual effect of theCalifornia rate decrease on the Company's net earned premiums and net income over the course of 2013 and beyond will depend on a variety of factors, including the Company's mix of lender-placed insurance products, lapse rates, rate and timing of renewals, placement rates, changes in client contracts and actual expenses incurred. Assurant Specialty Property's business strategy has been to pursue long-term growth in lender-placed homeowners insurance and adjacent markets with similar characteristics, such as lender-placed flood insurance and lender-placed mobile home insurance. Lender-placed insurance products accounted for approximately 71% of Assurant Specialty Property's net earned premiums for Twelve Months 2012 and 70% for Twelve Months 2011. The approximate corresponding contributions to segment net income in these periods were 90% and 100%, respectively. The portion of total segment net income attributable to lender-placed products may vary substantially over time depending on the frequency, severity and location of catastrophic losses, the cost of catastrophe reinsurance and reinstatement coverage, the variability of claim processing costs and client acquisition costs, and other factors. In addition, we expect placement rates for these products to decline. 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.
Year Ended
Net Income
Segment net income increased
64 -------------------------------------------------------------------------------- growth in our multi-family housing business and lower non-catastrophe losses, partially offset by an increase in reportable catastrophe losses of$60,165 (after-tax). Growth in lender-placed homeowners net earned premiums is primarily due to growth in loan portfolios from both new and existing clients and increased placement rates. Total Revenues Total revenues increased$168,755 , or 8%, to$2,255,989 for Twelve Months 2012 from$2,087,234 for Twelve Months 2011. The main drivers of the increase are growth in lender-placed homeowners and renters insurance net earned premiums as well as fee income from growth in our resident bond products. 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 that occurred in 2012 and late 2011.
Total Benefits, Losses and Expenses
Total benefits, losses and expenses increased$166,396 , or 10%, to$1,793,445 for Twelve Months 2012 from$1,627,049 for Twelve Months 2011. The loss ratio increased 120 basis points primarily due to higher reportable catastrophe losses which increased the loss ratio 390 basis points. Twelve Months 2012 includes$250,206 of reportable catastrophe losses, mainly due to Superstorm Sandy, compared to$157,645 of reportable catastrophe losses in Twelve Months 2011. Reportable catastrophe losses include only individual catastrophic events that generated losses to the Company in excess of$5,000 , pre-tax and net of reinsurance. The non-catastrophe loss ratio declined 270 basis points primarily due to a decrease in loss frequency across most product lines. The expense ratio increased 40 basis points primarily due to higher operating costs to support business growth partially offset by a decrease in commission expense.
Year Ended
Net Income Segment net income decreased$120,808 , or 29%, to$303,723 for Twelve Months 2011 from$424,531 for Twelve Months 2010. The decline was primarily due to an increase in reportable catastrophe losses of$87,673 (after-tax) in Twelve Months 2011. Increased frequency of non-catastrophe weather related losses during Twelve Months 2011 compared with Twelve Months 2010 also contributed to the decline. Total Revenues Total revenues decreased$42,228 , or 2%, to$2,087,234 for Twelve Months 2011 from$2,129,462 for Twelve Months 2010. Growth in lender-placed homeowners and multi-family housing gross earned premiums was more than offset by increased ceded lender-placed homeowners' premiums and$21,501 in increased catastrophe reinsurance premiums.
Total Benefits, Losses and Expenses
Total benefits, losses and expenses increased$144,776 , or 10%, to$1,627,049 for Twelve Months 2011 from$1,482,273 for Twelve Months 2010. The loss ratio increased 990 basis points with 710 basis points attributed to$134,881 of increased reportable catastrophe losses in Twelve Months 2011 compared to Twelve Months 2010. Reportable loss events for Twelve Months 2011 included Hurricane Irene, Tropical Storm Lee, wildfires inTexas and severe storms, including tornados in the southeast. The principal causes of loss for these events were wind and flood. Reportable loss events for Twelve Months 2010 includedArizona wind and hailstorms andTennessee storms. Reportable catastrophe losses include only individual catastrophic events that generated losses to the Company in excess of$5,000 , pre-tax and net of reinsurance. Commissions, taxes, licenses, and fees decreased$36,869 primarily due to client contract changes which resulted in lower commission expense. General expenses increased$9,075 primarily due to increased employee benefit expenses and costs associated with theJune 2011 SureDeposit acquisition including associated intangible asset amortization. 65
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Assurant Health Overview The table below presents information regardingAssurant Health's segment results of operations: For the Years Ended December 31, 2012 2011 2010 Revenues: Net earned premiums and other considerations (4) $ 1,589,459 $ 1,718,300 $ 1,864,122 Net investment income 64,308 45,911 48,540 Fees and other income 30,518 34,635 40,133 Total revenues 1,684,285 1,798,846 1,952,795 Benefits, losses and expenses: Policyholder benefits 1,174,108 1,271,060 1,302,929 Selling, underwriting and general expenses 421,070 460,646 563,759 Total benefits, losses and expenses 1,595,178
1,731,706 1,866,688
Segment income before provision for income taxes 89,107 67,140 86,107 Provision for income taxes 37,107 26,254 31,233 Segment net income $ 52,000 $ 40,886 $ 54,874 Net earned premiums and other considerations: Individual Markets: Individual markets $ 1,178,878 $ 1,251,447 $ 1,375,005 Small employer group markets 410,581 466,853 489,117 Total $ 1,589,459 $ 1,718,300 $ 1,864,122 Insured lives by product line (5): Individual Markets: Individual 663 603 617 Small employer group 109 129 144 Total 772 732 761 Ratios: Loss ratio (1) 73.9 % 74.0 % 69.9 % Expense ratio (2) 26.0 % 26.3 % 29.6 % Combined ratio (3) 98.5 % 98.8 % 98.0 %(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.
(4) As of
with the minimum medical loss ratio requirements under the Affordable Care
Act. Rebate payments and accruals are reflected within net earned premiums
and other considerations.
(5) As of
supplemental coverages and self-funded group products, purchased by policyholders. Prior periods consisted only of medical policies. 66
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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 before the end of 2014. InDecember 2010 , HHS issued a number of interim final regulations with respect to the Affordable Care Act. InDecember 2011 , HHS issued its final regulation regarding the MLR. InNovember 2012 , HHS issued proposed regulations for 2014 regarding the risk adjustment, reinsurance, and risk corridors programs; cost-sharing reductions; user fees for the federally-facilitated Exchange; advance payments of the premium tax credit, a federally-facilitated Small Business Health Option Program; and the medical loss ratio program. HHS has also issued various technical corrections and FAQ's. For more information, see Item 1A, "Risk Factors-Risk related to our industry-Reform of the health care industry could materially reduce the profitability of certain of our businesses" in this report.
Year Ended
Net Income Segment net income increased$11,114 or 27% to$52,000 for Twelve Months 2012 from$40,886 for Twelve Months 2011. The increase was primarily attributable to$13,856 (after-tax) of additional investment income from a real estate joint venture partnership and lower expenses associated with organizational and operational expense reduction initiatives. Partially offsetting these items were policy lapses and lower sales of new policies. Twelve Months 2011 results included a$4,780 (after-tax) reimbursement from a pharmacy services provider. Total Revenues Total revenues decreased$114,561 , or 6%, to$1,684,285 for Twelve Months 2012 from$1,798,846 for Twelve Months 2011. Net earned premiums and other considerations from our individual markets business decreased$72,569 , or 6%, due to a decline in traditional major medical policies, partially offset by increased sales of lower priced supplemental and affordable choice products and premium rate increases. Net earned premiums and other considerations from our small employer group business decreased$56,272 , or 12%, due to lower sales, partially offset by premium rate increases. Partially offsetting these declines was increased net investment income of$18,397 , due to income from a real estate joint venture partnership.
Total Benefits, Losses and Expenses
Total benefits, losses and expenses decreased$136,528 , or 8%, to$1,595,178 for Twelve Months 2012 from$1,731,706 for Twelve Months 2011. Policyholder benefits decreased$96,952 , or 8%, and the benefit loss ratio decreased to 73.9% from 74.0%. The decrease in policyholder benefits was primarily attributable to a decline in business volume, partially offset by higher loss experience. The slight decrease in the benefit loss ratio reflects a growing proportion of business with lower loss ratios, partially offset by higher loss experience on traditional major medical policies. Selling, underwriting and general expenses decreased$39,576 , or 9%, primarily due to reduced employee-related expenses, lower technology and service provider costs, and reduced commissions due to lower sales of traditional major medical policies.
Year Ended
Net Income Segment net income decreased$13,988 , or 25%, to$40,886 for Twelve Months 2011 from$54,874 for Twelve Months 2010. The decrease was partly attributable to accrued premium rebates of$27,033 (after-tax) associated with the MLR requirement included in the Affordable Care Act for our comprehensive health coverage business. Twelve Months 2011 results include$12,900 (after-tax) of favorable reserve development relative to 2010 year-end reserves, a$4,780 (after-tax) reimbursement from a pharmacy services provider related 67 -------------------------------------------------------------------------------- to prior year activity, reduced expenses associated with organizational and operational expense initiatives, and lower commissions due to agent compensation changes and lower sales of new policies. Twelve Months 2010 results included restructuring charges of$8,721 (after-tax) and a$17,421 (after-tax) benefit from a reserve release related to a legal settlement. Total Revenues Total revenues decreased$153,949 , or 8%, to$1,798,846 for Twelve Months 2011 from$1,952,795 for Twelve Months 2010. Net earned premiums and other considerations from our individual markets business decreased$123,558 , or 9%, due to a decline in traditional individual medical product sales, caused by the transition to supplemental and affordable choice products and changes in agent commissions, resulting from the Affordable Care Act. These decreases were partially offset by premium rate increases and increased sales of supplemental and affordable choice products. Net earned premiums and other considerations before rebates from our small employer group business decreased$15,464 , or 3%, due to lower sales and a continued high level of policy lapses, partially offset by premium rate increases. Twelve Months 2011 included a premium rebate accrual of$41,589 associated with the MLR requirement included in the Affordable Care Act for our comprehensive health coverage business. There was no premium rebate accrual in Twelve Months 2010 as the MLR requirement was not yet in effect.
Total Benefits, Losses and Expenses
Total benefits, losses and expenses decreased$134,982 , or 7%, to$1,731,706 for Twelve Months 2011 from$1,866,688 for Twelve Months 2010. Policyholder benefits decreased$31,869 , or 2%, however, the benefit loss ratio increased to 74.0% from 69.9%. The decrease in policyholder benefits was primarily attributable to favorable reserve development relative to 2010 year-end reserves, a decline in business volume, partially offset by a$26,802 benefit from a reserve release related to a legal settlement in Twelve Months 2010. The increase in the benefit loss ratio was primarily attributable to the inclusion of premium rebates in net earned premiums and other considerations, and a disproportionate decline in benefits in relation to the decrease in net earned premiums and other considerations. Selling, underwriting and general expenses decreased$103,113 , or 18%, primarily due to reduced employee-related and advertising expenses and reduced commissions due to agent compensation changes and lower sales of new policies. 68
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Assurant Employee Benefits Overview
The table below presents information regarding
For the Years Ended December 31, 2012 2011 2010 Revenues: Net earned premiums and other considerations $ 1,014,264 $ 1,064,023 $ 1,101,395 Net investment income 128,485 129,640 132,388 Fees and other income 28,468 25,382 25,152 Total revenues 1,171,217 1,219,045 1,258,935 Benefits, losses and expenses: Policyholder benefits 693,067 767,723 766,050 Selling, underwriting and general expenses 390,042 386,072 395,737 Total benefits, losses and expenses 1,083,109
1,153,795 1,161,787
Segment income before provision for income taxes 88,108 65,250 97,148 Provision for income taxes 30,049 22,175 33,596 Segment net income $ 58,059 $ 43,075 $ 63,552 Net earned premiums and other considerations: By major product grouping: Group dental $ 394,413 $ 412,339 $ 420,439 Group disability (3) 409,757 449,293 488,411 Group life 188,246 193,914 191,892 Group vision and supplemental products 21,848 8,477 653 Total $ 1,014,264 $ 1,064,023 $ 1,101,395 Ratios: Loss ratio (1) 68.3 % 72.2 % 69.6 % Expense ratio (2) 37.4 % 35.4 % 35.1 %
(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) 2011 includes
closed blocks of business we receive a single, upfront premium and in turn we
record a virtually equal amount of claim reserves. We then manage the claims
using our claim management practices.
Year Ended
Net Income Segment net income increased$14,984 , or 35%, to$58,059 for Twelve Months 2012 from$43,075 for Twelve Months 2011. Results for Twelve Months 2012 were driven primarily by favorable loss experience across most major product lines. Total Revenues Total revenues decreased 4% to$1,171,217 for Twelve Months 2012 from$1,219,045 for Twelve Months 2011. Excluding$4,936 of single premium transactions in Twelve Months 2011, Twelve Months 2012 net earned premiums decreased$44,823</money> or 4%. The decrease in net earned premiums was primarily driven by the loss of two assumed disability clients which decreased net earned premiums $36,161 . 69
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Total Benefits, Losses and Expenses
Total benefits, losses and expenses decreased 6% to$1,083,109 for Twelve Months 2012 from$1,153,795 for Twelve Months 2011. During Twelve Months 2012 policyholder benefits were reduced$5,061 based on the results of our annual reserve adequacy studies compared to$10,500 in Twelve Months 2011. Excluding the impact of the annual reserve adequacy studies, the loss ratio decreased to 68.8% from 73.1%, primarily driven by favorable disability, life and dental loss experience. The expense ratio increased to 37.4% from 35.4% primarily as a result of decreased net earned premiums.
Year Ended
Net Income Segment net income decreased 32% to$43,075 for Twelve Months 2011 from$63,552 for Twelve Months 2010. Lower results were primarily attributable to less favorable disability and life insurance loss experience, partially offset by improved dental insurance experience. Twelve Months 2011 results include a decrease in the reserve interest discount rate primarily for new long-term disability claims as well as a$6,630 (after-tax) overall loss and loss adjustment expense reserve release (amounts are included in both policyholders benefits and selling, underwriting and general expenses) related to annual reserve adequacy studies in Twelve Months 2011 compared to$1,829 (after-tax) in Twelve Months 2010. Twelve Months 2010 general expenses included restructuring costs of$4,349 (after-tax). Twelve Months 2011 had no restructuring costs. Total Revenues Total revenues decreased$39,890 to$1,219,045 for Twelve Months Ended 2011 from$1,258,935 for Twelve Months Ended 2010. Excluding single premiums, net earned premiums and other considerations decreased$42,308 . The decrease in net earned premiums and other considerations was primarily driven by the loss of policyholders as a result of pricing actions on a block of assumed disability reinsurance business.
Total Benefits, Losses and Expenses
Total benefits, losses and expenses decreased$7,992 to$1,153,795 for Twelve Months 2011 from$1,161,787 for Twelve Months 2010. During Twelve Months 2011 policyholder benefits were reduced$10,500 based on the results of our annual reserve adequacy studies compared to$5,758 in Twelve Months 2010. Excluding the impact of the reserve adequacy studies, the loss ratio increased to 73.1% from 70.1%, primarily driven by less favorable loss experience across our disability and life insurance products. Selling, underwriting and general expenses decreased 2% to$386,072 for Twelve Months 2011 from$395,737 for Twelve Months 2010, however the expense ratio increased slightly to 35.4% from 35.1% driven by lower net earned premiums. Twelve Months 2010 included$6,690 in restructuring costs. Twelve Months 2011 had no restructuring costs. In addition, general expenses were$2,644 lower in Twelve Months 2011 compared with Twelve Months 2010 due to our annual reserve adequacy studies. Excluding the restructuring costs and the reserve adequacy adjustment in both years, the expense ratio increased to 35.4% for Twelve Months 2011 from 34.3% for Twelve Months 2010. 70
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Corporate and Other
The table below presents information regarding the Corporate and Other segment's results of operations: For the Years Ended December 31, 2012 2011 2010 Revenues: Net investment income $ 20,327 $ 17,147 $ 17,873 Net realized gains on investments 64,353 32,580 48,403 Amortization of deferred gains on disposal of businesses 18,413 20,461 10,406 Fees and other income 3,713 305 200 Total revenues 106,806 70,493 76,882 Benefits, losses and expenses: Policyholder benefits (1,061 ) 6,474 (2,038 ) Selling, underwriting and general expenses 111,423 102,359 101,830 Interest expense 60,306 60,360 60,646 Total benefits, losses and expenses 170,668
169,193 160,438
Segment loss before benefit for income taxes (63,862 ) (98,700 ) (83,556 ) Benefit for income taxes (8,804 ) (113,922 ) (24,054 ) Segment net (loss) income $ (55,058 ) $ 15,222 $ (59,502 )
Year Ended
Net (Loss) Income Segment results decreased$70,280 to$(55,058) for Twelve Months 2012 compared to$15,222 for Twelve Months 2011. This decrease is mainly due to an$80,000 release of a capital loss valuation allowance related to deferred tax assets during Twelve Months 2011. Total Revenues Total revenues increased$36,313 , to$106,806 for Twelve Months 2012 compared with$70,493 for Twelve Months 2011. This increase is primarily due to a$31,773 increase in net realized gains on investments.
Total Benefits, Losses and Expenses
Total benefits, losses and expenses increased
Year Ended
Net Income (Loss) Segment results increased$74,724 to net income of$15,222 for Twelve Months 2011 compared to a net loss of$(59,502) for Twelve Months 2010. This increase is mainly due to an$80,000 release of a capital loss valuation allowance related to deferred tax assets during Twelve Months 2011. 71
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Total Revenues
Total revenues decreased$6,389 , to$70,493 for Twelve Months 2011 compared with$76,882 for Twelve Months 2010. This decrease is primarily due to a decline of$15,823 in net realized gains on investments partially offset by$10,055 of increased amortization of deferred gains on disposal of businesses. During 2010 a portion of the deferred gain liability was re-established resulting from refinements to assumptions associated with policy run-off.
Total Benefits, Losses and Expenses
Total benefits, losses and expenses increased
Goodwill Impairment During 2010, the Company recorded goodwill impairments of$306,381 . No goodwill impairment was recorded during 2012 or 2011. Goodwill accounting guidance requires that goodwill be tested at least annually for impairment or more frequently if indicators of impairment exist. Prior to 2011, goodwill could only be tested for impairment using a two step process. Step 1 of the test identifies potential impairments at the reporting unit level, which for the Company is the same as our operating segments, by comparing the estimated fair value of each reporting unit to its net book value. If the estimated fair value of a reporting unit exceeds its net book value, there is no impairment of goodwill and Step 2 is unnecessary. However, if the net book value exceeds the estimated fair value, then Step 1 is failed, and Step 2 is performed to determine the amount of the potential impairment. Step 2 utilizes acquisition accounting guidance and requires the fair value calculation of all individual assets and liabilities of the reporting unit (excluding goodwill, but including any unrecognized intangible assets). The net fair value of assets less liabilities is then compared to the reporting unit's total estimated fair value as calculated in Step 1. The excess of fair value over the net asset value equals the implied fair value of goodwill. The implied fair value of goodwill is then compared to the carrying value of goodwill to determine the reporting unit's goodwill impairment. During 2011, the FASB issued amended-guidance for goodwill and other intangibles. This guidance provides the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment test, described above. For all reporting units in 2012 and 2010 and for the Assurant Solutions reporting unit in 2011, the Company performed its goodwill impairment test using the two step process. During 2011, for the Assurant Specialty Property reporting unit, the Company chose the option to first perform the qualitative assessment. See "Item 7-Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Factors Affecting Results-Critical Accounting Estimates-Valuation and Recoverability of Goodwill" and Notes 5 and 10 to the Consolidated Financial Statements contained elsewhere in this report for more information. Investments The Company had total investments of$14,976,318 and$14,026,165 as ofDecember 31, 2012 andDecember 31, 2011 , respectively. For more information on our investments see Note 4 to the Consolidated Financial Statements included elsewhere in this report. 72
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The following table shows the credit quality of our fixed maturity securities portfolio as of the dates indicated:
As of
December 31, 2011 Aaa / Aa / A $ 7,319,006 60.1 % $ 6,620,808 59.1 % Baa 4,014,606 33.0 % 3,692,709 33.0 % Ba 542,756 4.5 % 648,817 5.8 % B and lower 295,270 2.4 % 230,265 2.1 % Total $ 12,171,638 100.0 % $ 11,192,599 100.0 %
Major categories of net investment income were as follows:
Years Ended December 31, 2012 2011 2010 Fixed maturity securities $ 553,668 $ 565,486 $ 572,909 Equity securities 24,771 29,645 33,864
Commercial mortgage loans on real estate 79,108 80,903
88,894 Policy loans 3,204 3,102 3,248 Short-term investments 4,889 5,351 5,259 Other investments 54,581 21,326 19,019 Cash and cash equivalents 15,323 7,838 5,577 Total investment income 735,544 713,651 728,770 Investment expenses (22,416 ) (24,119 ) (25,580 ) Net investment income $ 713,128 $ 689,532 $ 703,190 Net investment income increased$23,596 , or 3%, to$713,128 atDecember 31, 2012 from$689,532 atDecember 31, 2011 . The increase is primarily due to$28,974 of increased investment income from real estate joint venture partnerships. Excluding the net investment income from real estate joint venture partnerships, net investment income decreased$5,378 , reflecting lower investment yields.
Net investment income decreased
The net unrealized gain position increased to
As ofDecember 31, 2012 , the Company owned$235,998 of securities guaranteed by financial guarantee insurance companies. Included in this amount was$219,239 of municipal securities, with a credit rating of A both with and without the guarantee. Our states, municipalities and political subdivisions holdings are highly diversified acrossthe United States andPuerto Rico , with no individual state's exposure (including both general obligation and revenue securities) exceeding 0.5% of the overall investment portfolio as ofDecember 31, 2012 andDecember 31, 2011 . AtDecember 31, 2012 andDecember 31, 2011 , the securities include general obligation and revenue bonds issued by states, cities, counties, school districts and similar issuers, including$168,705 and$164,347 , respectively, of advance refunded or escrowed-to-maturity bonds (collectively referred to as "pre-refunded bonds"), which are bonds for which an irrevocable trust has been established to fund the remaining payments of principal and interest. As ofDecember 31, 2012 andDecember 31, 2011 , revenue bonds account for 52% and 51% of the 73
-------------------------------------------------------------------------------- holdings, respectively. Excluding pre-refunded bonds, sales tax, highway, water, fuel sales, transit and miscellaneous (which includes bond banks, finance authorities and appropriations) provide for 82% and 79% of the revenue sources, as ofDecember 31, 2012 andDecember 31, 2011 , respectively. The Company's investments in foreign government fixed maturity securities are held mainly in countries and currencies where the Company has policyholder liabilities, which allow the assets and liabilities to be more appropriately matched. AtDecember 31, 2012 , approximately 67%, 15%, and 6% of the foreign government securities were held in the Canadian government/provincials and the governments ofBrazil andGermany , respectively. AtDecember 31, 2011 , approximately 63%, 13% and 7% of the foreign government securities were held in the Canadian government/provincials and the governments ofBrazil andGermany , respectively. No other country represented more than 5% of our foreign government securities as ofDecember 31, 2012 andDecember 31, 2011 . The Company has European investment exposure in its corporate fixed maturity and equity securities of$1,054,820 with an unrealized gain of$122,420 atDecember 31, 2012 and$868,012 with an unrealized gain of$61,387 atDecember 31, 2011 . Approximately 28% and 31% of the corporate European exposure are held in the financial industry atDecember 31, 2012 andDecember 31, 2011 , respectively. No European country represented more than 5% of the fair value of our corporate securities as ofDecember 31, 2012 andDecember 31, 2011 . Approximately 5% of the fair value of the corporate European securities are pound and euro-denominated and are not hedged to U.S. dollars, but, held to support those foreign-denominated liabilities. Our international investments are managed as part of our overall portfolio with the same approach to risk management and focus on diversification. The Company has exposure to sub-prime and related mortgages within our fixed maturity securities portfolio. AtDecember 31, 2012 , approximately 3.3% 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 1.0% of the total unrealized gain position. Of the securities with sub-prime exposure, approximately 15.0% 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. As required by the fair value measurements and disclosures guidance, the Company has identified and disclosed its financial assets in a fair value hierarchy, which consists of the following three levels:
• Level 1 inputs utilize quoted prices (unadjusted) in active markets for
identical assets or liabilities that the Company can access. • Level 2 inputs utilize other than quoted prices included in Level 1 that
are observable for the asset, either directly or indirectly, for
substantially the full term of the asset. Level 2 inputs include quoted
prices for similar assets in active markets, quoted prices for identical or
similar assets in markets that are not active and inputs other than quoted
prices that are observable in the marketplace for the asset. The observable
inputs are used in valuation models to calculate the fair value for the asset.
• Level 3 inputs are unobservable but are significant to the fair value
measurement for the asset, and include situations where there is little, if
any, market activity for the asset. These inputs reflect management's own
assumptions about the assumptions a market participant would use in pricing
the asset.
A review of fair value hierarchy classifications is conducted on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy.
The Company's Level 2 securities are valued using various observable market inputs obtained from a pricing service. The pricing service prepares estimates of fair value measurements for our Level 2 securities using proprietary valuation models based on techniques such as matrix pricing which include observable market
74 -------------------------------------------------------------------------------- inputs. The fair value measurements and disclosures guidance defines observable market inputs as the assumptions market participants would use in pricing the asset or liability developed on market data obtained from sources independent of the Company. The extent of the use of each observable market input for a security depends on the type of security and the market conditions at the balance sheet date. Depending on the security, the priority of the use of observable market inputs may change as some observable market inputs may not be relevant or additional inputs may be necessary. The following observable market inputs ("standard inputs"), listed in the approximate order of priority, are utilized in the pricing evaluation of Level 2 securities: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data including market research data. When market observable inputs are unavailable to the pricing service, the remaining unpriced securities are submitted to independent brokers who provide non-binding broker quotes or are priced by other qualified sources. If the Company cannot corroborate the non-binding broker quotes with Level 2 inputs, these securities are categorized as Level 3. A non-pricing service source prices certain privately placed corporate bonds using a model with observable inputs including, but not limited to, the credit rating, credit spreads, sector add-ons, and issuer specific add-ons. A non-pricing service source prices our CPI Caps using a model with inputs including, but not limited to, the time to expiration, the notional amount, the strike price, the forward rate, implied volatility and the discount rate.
Management evaluates the following factors in order to determine whether the market for a financial asset is inactive. The factors include, but are not limited to:
• There are few recent transactions, • Little information is released publicly, • The available prices vary significantly over time or among market participants, • The prices are stale (i.e., not current), and • The magnitude of the bid-ask spread.
Illiquidity did not have a material impact in the fair value determination of the Company's financial assets.
The Company generally obtains one price for each financial asset. The Company performs a monthly analysis to assess if the evaluated prices represent a reasonable estimate of their fair value. This process involves quantitative and qualitative analysis and is overseen by investment and accounting professionals. Examples of procedures performed include, but are not limited to, initial and on-going review of pricing service methodologies, review of the prices received from the pricing service, review of pricing statistics and trends, and comparison of prices for certain securities with two different appropriate price sources for reasonableness. Following this analysis, the Company generally uses the best estimate of fair value based upon all available inputs. On infrequent occasions, a non-pricing service source may be more familiar with the market activity for a particular security than the pricing service. In these cases the price used is taken from the non-pricing service source. The pricing service provides information to indicate which securities were priced using market observable inputs so that the Company can properly categorize our financial assets in the fair value hierarchy. Collateralized Transactions The Company engages in transactions in which fixed maturity securities, primarily 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 75 -------------------------------------------------------------------------------- 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 ofDecember 31, 2012 and 2011, our collateral held under securities lending, of which its use is unrestricted, was$94,729 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$94,714 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 gain (loss) and is included as part of AOCI. All securities are in an unrealized gain position as ofDecember 31, 2012 . All securities with unrealized losses as ofDecember 31, 2011 had been in a continuous loss position for twelve months or longer. 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 RequirementsAssurant, 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 holding company's 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. For further information on pending amendments to state insurance holding company laws, including the NAIC's "Solvency Modernization Initiative," see "Item 1A-Risk Factors -Risks Related to Our Company-Changes in regulation may reduce our profitability and limit our growth." 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. OnFebruary 24, 2012 ,Moody's Investor Services ("Moody's") affirmedAssurant 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 ofAssurant'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 ofAssurant's two other rated life and health subsidiaries due to concerns about the impact of the Affordable Care Act. OnDecember 11, 2012 , Standard and Poor's ("S&P") revised the outlook on the financial strength ratings of American Bankers Life Assurance Company ofFlorida andAmerican Memorial Life Insurance Company from stable to positive. 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". For 2013, the maximum amount of dividends our U.S. domiciled insurance subsidiaries could pay, 76 -------------------------------------------------------------------------------- under applicable laws and regulations without prior regulatory approval, is approximately$524,000 . In total, we received dividends or returns of capital, net of infusions, of$581,908 from our subsidiaries during 2012. We expect 2013 dividends from the operating segments to approximate their earnings subject to the growth of the businesses, rating agency and regulatory capital requirements and investment performance. Liquidity As ofDecember 31, 2012 , we had$781,754 in holding company capital. We use the term "holding company capital" to represent cash and other liquid marketable securities held atAssurant, Inc. , out of a total of$950,826 , 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$781,754 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$581,908 ,$523,881 and$832,300 for the years endedDecember 31, 2012 , 2011 and 2010, 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 of 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. During 2012, 2011 and 2010 we made share repurchases and paid dividends to our stockholders of$472,103 ,$600,314 and$602,568 , 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 may be instances when 77 -------------------------------------------------------------------------------- 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 theSEC . 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. OnJanuary 11, 2013 , our Board of Directors declared a quarterly dividend of$0.21 per common share payable onMarch 11, 2013 to stockholders of record as ofFebruary 25, 2013 . We paid dividends of$0.21 per common share onDecember 10, 2012 to stockholders of record as ofNovember 26, 2012 ,$0.21 per common share onSeptember 11, 2012 to stockholders of record as ofAugust 27, 2012 ,$0.21 per common share onJune 12, 2012 to stockholders of record as ofMay 29, 2012 , and$0.18 per common share onMarch 12, 2012 to stockholders of record as ofFebruary 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' payments 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; legal, tax, regulatory and contractual restrictions on the payment of dividends; and other factors our Board of Directors deems relevant. OnMay 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 year endedDecember 31, 2012 , we repurchased 10,899,460 shares of our outstanding common stock at a cost of$402,492 , exclusive of commissions. As ofDecember 31, 2012 ,$502,900 remained under the total repurchase authorization. The timing and the amount of future repurchases will depend on market conditions and other factors. Management believes the Company will have sufficient liquidity to satisfy its needs over the next twelve months, including the ability to pay interest on our Senior Notes and dividends on our common shares.
Retirement and Other Employee Benefits
We sponsor a qualified pension plan, the ("Assurant Pension Plan") and various non-qualified pension plans along with a retirement health benefits plan covering our employees who meet specified eligibility requirements. The reported expense and liability associated with these plans requires an extensive use of assumptions which include, but are not limited to, the discount rate, expected return on plan assets and rate of future compensation increases. We determine these assumptions based upon currently available market and industry data, and historical performance of the plan and its assets. The actuarial assumptions used in the calculation of our aggregate projected benefit obligation vary and include an expectation of long-term appreciation in equity markets which is not changed by minor short-term market fluctuations, but does change when large interim deviations occur. The assumptions we use may differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates or longer or shorter life spans of the participants. The Pension Protection Act of 2006 ("PPA") requires certain qualified plans, like the Assurant Pension Plan, to meet specified funding thresholds. If these funding thresholds are not met, there are negative consequences to theAssurant Pension Plan and participants. If the funded percentage falls below 80%, full payment of lump sum benefits as well as implementation of amendments improving benefits are restricted.
As of
78 -------------------------------------------------------------------------------- payment restrictions did not occur during 2012. The 2012 funded measure will also be used to determine restrictions, if any, that can occur during the first nine months of 2012. Due to the funding status of the Assurant Pension Plan in 2012, no restrictions will exist beforeOctober 2013 (the time that theJanuary 1, 2013 actuarial valuation needs to be completed). Also, based on the estimated funded status as ofJanuary 1, 2013 , we do not anticipate any restrictions on benefits for the remainder of 2013. The Assurant Pension Plan was under-funded by$107,666 and$125,517 (based on the fair value of the assets compared to the projected benefit obligation) on a GAAP basis atDecember 31, 2012 and 2011, respectively. This equates to an 87% and 83% funded status atDecember 31, 2012 and 2011, respectively. The change in under-funded status is mainly due to favorable investment returns as well as contributions made to the plan, partially offset by a decrease in the discount rate used to determine the projected benefit obligation. The Company's funding policy is to contribute amounts to the plan sufficient to meet the minimum funding requirements in ERISA, plus such additional amounts as the Company may determine to be appropriate from time to time up to the maximum permitted. The funding policy considers several factors to determine such additional amounts including items such as the amount of service cost plus 15% of the Assurant Pension Plan deficit and the capital position of the Company. During 2012, we contributed$50,000 in cash to the Assurant Pension Plan. We expect to contribute$50,000 in cash to the Assurant Pension Plan over the course of 2013. See Note 20 to the Consolidated Financial Statements included elsewhere in this report for the components of the net periodic benefit cost. The impact of a 25 basis point change in the discount rate on the 2013 projected benefit expense would result in a change of$2,900 for the Assurant Pension Plan and the various non-qualified pension plans and$50 for the retirement health benefit plan. The impact of a 25 basis point change in the expected return on assets assumption on the 2013 projected benefit expense would result in a change of$1,600 for the Assurant Pension Plan and the various non-qualified pension plans and$100 for the retirement health benefits plan. 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 byA.M. Best , P-2 by Moody's and A-2 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 atDecember 31, 2012 , due to outstanding letters of credit. OnSeptember 21, 2011 , we entered into a four-year unsecured$350,000 revolving credit agreement ("2011 Credit Facility") with a syndicate of banks arranged byJP Morgan Chase Bank, N.A. andBank of America, N.A . The 2011 Credit Facility replaced the Company's prior three-year$350,000 revolving credit facility ("2009 Credit Facility"), which was entered into onDecember 18, 2009 and was scheduled to expire inDecember 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 untilSeptember 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. 79
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We did not use the commercial paper program during the twelve months ended
The 2011 Credit Facility contains restrictive covenants, all of which were met as of
(i) Maintenance of a maximum debt to total capitalization ratio on the last
day of any fiscal quarter of not greater than 35%, and
(ii) Maintenance of a consolidated adjusted net worth in an amount not less
than the "Minimum Amount". For the purpose of this calculation the
"Minimum Amount" is an amount equal to the sum of (a) the base amount
quarter (if positive) ending after
proceeds of any issuance of Capital Stock or
afterJune 30, 2011 .
At
In the event of the breach of certain covenants all obligations under the facility, including unpaid principal and accrued interest and outstanding letters of credit, may become immediately due and payable.
Senior Notes We have two series of senior notes outstanding in an aggregate principal amount of$975,000 . The first series is$500,000 in principal amount, bears interest at 5.63% per year and is dueFebruary 15, 2014 . The second series is$475,000 in principal amount, bears interest at 6.75% per year and is dueFebruary 15, 2034 .
Interest on our Senior Notes is payable semi-annually on
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.
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.
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The table below shows our recent net cash flows:
For the Years Ended December 31, 2012 2011 2010 Net cash provided by (used in): Operating activities (1) $ 673,215 $ 849,633 $ 540,313 Investing activities (449,883 ) (196,588 ) (8,876 ) Financing activities (480,641 ) (636,848 ) (699,473 ) Net change in cash $ (257,309 ) $ 16,197 $ (168,036 )
(1) Includes effect of exchange rates changes on cash and cash equivalents.
Cash Flows for the Years Ended
Operating Activities: 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$673,215 and$849,633 for the years endedDecember 31, 2012 and 2011, respectively. The decreased operating activity cash flow is primarily due to increased catastrophe loss payments, changes in the timing of payments, including commissions and the Company's defined contribution match, partially offset by increased net written premiums in our Assurant Solutions and Assurant Specialty Property segments. Net cash provided by operating activities was$849,633 and$540,313 for the years endedDecember 31, 2011 and 2010, respectively. The increased operating activity cash flow was primarily due to an increase in net written premiums in our Assurant Solutions and Assurant Specialty Property segments. Investing Activities: Net cash used in investing activities was$449,883 and$196,588 for the years endedDecember 31, 2012 and 2011, respectively. The increase in cash used in investing activities is primarily due to increased purchases of fixed maturity and equity securities. Net cash used in investing activities was$196,588 and$8,876 for the years endedDecember 31, 2011 and 2010, respectively. The increase in cash used in investing activities is primarily due to the acquisition of SureDeposit during the second quarter of 2011 and changes in our short-term investments and commercial mortgage loans on real estate. Financing Activities: Net cash used in financing activities was$480,641 and$636,848 for the years endedDecember 31, 2012 and 2011, respectively. The decrease in cash used in financing activities is primarily due to a decrease in the acquisition of common stock. Net cash used in financing activities was$636,848 and$699,473 for the years endedDecember 31, 2011 and 2010, respectively. The decrease in cash used in financing activities is primarily due to changes in the tax benefit from share-based payment arrangements and the change in obligation under securities lending. 81
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The table below shows our cash outflows for interest and dividends for the periods indicated: For the Years Ended December 31, 2012 2011 2010 Security Interest paid on mandatory redeemable preferred stock and debt $ 60,188 $ 60,244 $ 60,539 Common stock dividends 69,393 67,385 69,618 Total $ 129,581 $ 127,629 $ 130,157 Commitments and Contingencies
We have obligations and commitments to third parties as a result of our operations. These obligations and commitments, as of
As of December 31, 2012 Less than 1 1-3 3-5 More than 5 Total Year Years Years Years Contractual obligations : Insurance liabilities (1) $ 19,906,787 $ 2,355,437 $ 1,700,600 $ 1,586,273 $ 14,264,477 Debt and related interest 1,676,438 60,188 564,125 64,125 988,000 Operating leases 111,696 26,184 43,792 23,311 18,409 Pension obligations and postretirement benefit 632,639 43,742 118,264 112,842 357,791 Commitments: Investment purchases outstanding: Commercial mortgage loans on real estate 9,900 9,900 0 0 0 Liability for unrecognized tax benefit 11,446 6,553 4,440 453 0 Total obligations and commitments $ 22,348,906 $ 2,502,004 $ 2,431,221 $ 1,787,004 $ 15,628,677
(1) Insurance liabilities reflect estimated cash payments to be made to
policyholders. Liabilities for future policy benefits and expenses of$8,513,505 and claims and benefits payable of$3,960,590 have been included in the commitments and contingencies table. Significant uncertainties relating to these liabilities include mortality, morbidity, expenses, persistency, investment returns, inflation, contract terms and the timing of payments. Letters of Credit
In the normal course of business, letters of credit are issued primarily to support reinsurance arrangements. These letters of credit are supported by commitments with financial institutions. We had approximately
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements that are reasonably likely to have a material effect on the financial condition, results of operations, liquidity, or capital resources of the Company.
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