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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES |
| EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2010
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES |
| EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 001-31978
Assurant, Inc.
(Exact name of registrant as specified in its charter)
| Delaware | 39-1126612 | |
| (State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) | |
| One Chase Manhattan Plaza, 41st Floor New York, New York |
10005 | |
| (Address of Principal Executive Offices) | (Zip Code) | |
Registrant’s telephone number, including area code:
(212) 859-7000
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class |
Name of Each Exchange on Which Registered | |
| Common Stock, $0.01 Par Value | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Note—Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| x | Large accelerated filer | ¨ | Accelerated filer | ¨ | Non-accelerated filer | ¨ | Smaller reporting company | |||||||||
| (Do not check if a smaller reporting company) | ||||||||||||||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
The aggregate market value of the Common Stock held by non-affiliates of the registrant was $3,718 million at June 30, 2010 based on the closing sale price of $34.70 per share for the common stock on such date as traded on the New York Stock Exchange.
The number of shares of the registrant’s Common Stock outstanding at February 15, 2011 was 99,936,080.
Documents Incorporated by Reference
Certain information contained in the definitive proxy statement for the annual meeting of stockholders to be held on May 12, 2011 (2011 Proxy Statement) is incorporated by reference into Part III hereof.
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ASSURANT, INC.
ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended December 31, 2010
Amounts are presented in United States of America (“U.S.”) dollars and all amounts are in thousands, except number of shares, per share amounts, registered holders, number of employees, beneficial owners, number of securities in an unrealized loss position and number of loans.
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FORWARD-LOOKING STATEMENTS
Some of the statements under “Business,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report, particularly those anticipating future financial performance, business prospects, growth and operating strategies and similar matters, are forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. You can identify these statements by the fact that they may use words such as “will,” “may,” “anticipates,” “expects,” “estimates,” “projects,” “intends,” “plans,” “believes,” “targets,” “forecasts,” “potential,” “approximately,” or the negative version of those words and other words and terms with a similar meaning. Any forward-looking statements contained in this report are based upon our historical performance and on current plans, estimates and expectations. The inclusion of this forward-looking information should not be regarded as a representation by us or any other person that the future plans, estimates or expectations contemplated by us will be achieved. Our actual results might differ materially from those projected in the forward-looking statements. The Company undertakes no obligation to update or review any forward-looking statement, whether as a result of new information, future events or other developments.
In addition to the factors described under “Critical Factors Affecting Results,” the following risk factors could cause our actual results to differ materially from those currently estimated by management: (i) the effects of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010, and the rules and regulations thereunder (together, “the Affordable Care Act”) on our health and employee benefits businesses; (ii) deterioration in the Company’s market capitalization compared to its book value that could result in further impairment of the Company’s goodwill; (iii) loss of significant client relationships, distribution sources and contracts; (iv) failure to attract and retain sales representatives; (v) losses due to natural and man-made catastrophes; (vi) a decline in our credit or financial strength ratings (including the risk of ratings downgrades in the insurance industry); (vii) actions by governmental agencies that could result in the reduction of the premium rates we charge; (viii) unfavorable outcomes in litigation and/or regulatory investigations that could negatively affect our business and reputation; (ix) current or new laws and regulations that could increase our costs and/or decrease our revenues; (x) general global economic, financial market and political conditions (including difficult conditions in financial, capital and credit markets, the global economic slowdown, fluctuations in interest rates, mortgage rates, monetary policies, unemployment and inflationary pressure); (xi) inadequacy of reserves established for future claims losses; (xii) failure to predict or manage benefits, claims and other costs; (xiii) increases or decreases in tax valuation allowances; (xiv) fluctuations in exchange rates and other risks related to our international operations; (xv) unavailability, inadequacy and unaffordable pricing of reinsurance coverage; (xvi) diminished value of invested assets in our investment portfolio (due to, among other things, volatility in financial markets, the global economic slowdown, credit and liquidity risk, other than temporary impairments and inability to target an appropriate overall risk level); (xvii) insolvency of third parties to whom we have sold or may sell businesses through reinsurance or modified co-insurance; (xviii) inability of reinsurers to meet their obligations; (xix) credit risk of some of our agents in Assurant Specialty Property and Assurant Solutions; (xx) failure to effectively maintain and modernize our information systems; (xxi) failure to protect client information and privacy; (xxii) failure to find and integrate suitable acquisitions and new insurance ventures; (xxiii) inability of our subsidiaries to pay sufficient dividends; (xxiv) failure to provide for succession of senior management and key executives; and (xxv) significant competitive pressures in our businesses and (xxvi) cyclicality of the insurance industry. For a more detailed discussion of the risk factors that could affect our actual results, please refer to the “Critical Factors Affecting Results” in Item 7 and “Risk Factors” in Item 1A of this Form 10-K.
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PART I
Assurant, Inc. (“Assurant” or the “Company”) is a Delaware corporation formed in connection with the initial public offering (“IPO”) of its common stock, which began trading on the New York Stock Exchange on February 5, 2004. Prior to the IPO, Fortis, Inc., a Nevada corporation, formed Assurant and merged into it on February 4, 2004.
Assurant is a provider of specialized insurance products and related services in North America and select worldwide markets. Our four operating segments—Assurant Solutions, Assurant Specialty Property, Assurant Health, and Assurant Employee Benefits—partner with clients who are leaders in their industries and build leadership positions in a number of specialty insurance market segments in the United States of America (“U.S.”) and select worldwide markets. These segments provide debt protection administration, credit-related insurance, warranties and service contracts, pre-funded funeral insurance, lender–placed homeowners insurance, manufactured housing homeowners insurance, individual health and small employer group health insurance, group dental insurance, group disability insurance, and group life insurance.
Assurant’s mission is to be the premier provider of specialized insurance products and related services in North America and select international markets. To achieve this mission, we focus on the following areas:
Building and maintaining a portfolio of specialty insurance businesses—Our four operating segments are focused on serving specific sectors of the insurance market. We believe that the diversity of our businesses allows us to maintain a greater level of financial stability because our businesses will generally not be affected in the same way by the same economic and operating trends.
Leveraging a set of core capabilities for competitive advantage—We pursue a strategy of building leading positions in specialized market segments for insurance products and related services in North America as well as select international markets. In these markets, we seek to apply our core capabilities to create a competitive advantage—managing risk; managing relationships with large distribution partners; and integrating complex administrative systems. These core capabilities represent areas of expertise that are advantages within each of our businesses. We seek to generate attractive returns by building on specialized market knowledge, well-established distribution relationships and, in some businesses, economies of scale.
Managing targeted growth initiatives—Our approach to mergers, acquisitions and other growth opportunities reflects our prudent and disciplined approach to managing our businesses. Our mergers and acquisitions process targets new business that supports our existing business model. We establish performance goals in our short-term incentive compensation plan for senior management based on growth in targeted areas.
Identifying and adapting to evolving market needs—Assurant’s businesses strive to adapt to changing market conditions by tailoring product and service offerings to specific client and customer needs. By understanding the dynamics of our core markets, we seek to design innovative products and services that will enable us to sustain long-term profitable growth and market leading positions.
Competition
Assurant’s businesses focus on niche products and related services within broader insurance markets. Although we face competition in each of our businesses, we believe that no single competitor competes against us in all of our business lines. The business lines in which we operate are generally characterized by a limited number of competitors. Competition in each business is based on a number of factors, including quality of service, product features, price, scope of distribution, financial strength ratings and name recognition. The relative importance of these factors varies by product and market. We compete for customers and distributors with insurance companies and other financial services companies in our businesses.
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Competitors of Assurant Solutions and Assurant Specialty Property include insurance companies and financial institutions. Assurant Health’s main competitors are other health insurance companies, Health Maintenance Organizations (“HMOs”) and the Blue Cross/Blue Shield plans in states where we write business. Assurant Employee Benefits’ competitors include other benefit and life insurance companies, dental managed care entities and not-for-profit dental plans.
Segments
For additional information on our segments, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations” and Note 23 to the Consolidated Financial Statements included elsewhere in this report.
Assurant Solutions
| For the Years Ended | ||||||||
| December 31, 2010 | December 31, 2009 | |||||||
| Gross written premiums for selected product groupings (1): |
||||||||
| Domestic extended service contracts and warranties (2) |
$ | 1,193,423 | $ | 1,012,670 | ||||
| International extended service contracts and warranties (2) |
523,382 | 462,964 | ||||||
| Preneed life insurance (face sales) |
734,884 | 512,366 | ||||||
| Domestic credit insurance |
422,825 | 526,532 | ||||||
| International credit insurance |
968,878 | 843,225 | ||||||
| Net earned premiums and other considerations |
$ | 2,484,299 | $ | 2,671,041 | ||||
| Segment net income |
$ | 103,206 | $ | 120,052 | ||||
| Equity(3) |
$ | 1,448,684 | $ | 1,653,817 | ||||
| (1) | Gross written premiums does not necessarily translate to an equal amount of subsequent net earned premium since Assurant Solutions reinsure a portion of their premiums to third parties and to insurance subsidiaries of its clients. |
| (2) | Extended service contracts include warranty contracts for products such as cellular phones, personal computers, consumer electronics and appliances. |
| (3) | Equity excludes accumulated other comprehensive income. |
Products and Services
Assurant Solutions targets growth in three key product areas: domestic and international extended service contracts (“ESC”) and warranties; preneed life insurance; and international credit insurance.
ESC and Warranties: Through partnerships with leading retailers and original equipment manufacturers, we underwrite and provide administrative services for extended service contracts and warranties. These contracts provide consumers with coverage on appliances, consumer electronics, personal computers, cellular phones, automobiles and recreational vehicles, protecting them from certain covered losses. We pay the cost of repairing or replacing customers’ property in the event of damages due to mechanical breakdown, accidental damage, and casualty losses such as theft, fire, and water damage. Our strategy is to provide service to our clients that addresses all aspects of the warranty or extended service contract, including program design and marketing strategy. We provide administration, claims handling and customer service. We believe that we maintain a differentiated position in this marketplace as a provider of both the required administrative infrastructure and insurance underwriting capabilities.
Preneed Life Insurance: Preneed life insurance allows individuals to prepay for a funeral in a single payment or in multiple payments over a fixed number of years. The insurance policy proceeds are used to address funeral costs at death. These products are only sold in the U.S. and Canada and are generally structured as whole life insurance policies in the U.S. and annuity products in Canada.
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Credit Insurance: Our credit insurance products offer protection from life events and uncertainties that arise in purchasing and borrowing transactions. Credit insurance programs generally offer consumers the option to protect a credit card balance or installment loan in the event of death, involuntary unemployment or disability, and are generally available to all consumers without the underwriting restrictions that apply to term life insurance.
Regulatory changes have reduced the demand for credit insurance in the United States. Consequently, we have seen a reduction in domestic gross written premiums generated in the credit insurance market, a trend, we expect to continue.
Marketing and Distribution
Assurant Solutions focuses on establishing strong, long-term relationships with leading distributors of its products and services. We partner with some of the largest consumer electronics and appliance retailers and original equipment manufacturers to market our extended service contract and warranty products.
Several of our distribution agreements are exclusive. Typically these agreements have terms of one to five years and allow us to integrate our administrative systems with those of our clients.
In addition to the domestic market, we operate in Canada, the United Kingdom (“U.K.”), Argentina, Brazil, Puerto Rico, Chile, Germany, Spain, Italy, Mexico and China. In these markets, we primarily sell ESC and credit insurance products through agreements with financial institutions, retailers and wireless service providers. Although there has been contraction in the domestic credit insurance market, several international markets are experiencing growth in the credit insurance business. Expertise gained in the domestic credit insurance market has enabled us to extend our administrative infrastructure internationally. Systems, training, computer hardware and our overall market development approach are customized to fit the particular needs of each targeted international market.
In January 2009, we entered into an agreement to market, administer and underwrite ESC products to Whirlpool Corporation (“Whirlpool”) appliance customers in the U.S. and Canada. Whirlpool is a leading manufacturer and marketer of major home appliances.
On September 26, 2008, the Company acquired the Warranty Management Group business from GE Consumer & Industrial, a unit of General Electric Co. (“GE”). The Company paid GE $140,000 in cash for the sale, transfer and conveyance of certain assets and assumed certain liabilities. As part of the acquisition, the Company entered into a new 10-year agreement to market extended warranties and service contracts on GE-branded major appliances in the U.S. and included warranty distribution agreements with two existing retail customers. In connection with the acquisition of this business, the Company recorded $126,840 of amortizable intangible assets and $13,160 of goodwill. We recorded a charge of $30,948 (after-tax) in the fourth quarter of 2010 for the impairment of a portion of the intangible asset. The impairment charge resulted from the receipt, on November 30, 2010, from one of the retail customers of notification of non-renewal of a block of the acquired business effective June 1, 2011. We do not expect the lapse of the contract to have a material impact on Assurant Solutions’ profitability in 2011.
On October 1, 2008, the Company completed the acquisition of Signal Holdings LLC (“Signal”), a leading provider of wireless handset protection programs and repair services. The Company paid $257,400 in cash for the acquisition, transfer and conveyance of certain assets and assumed certain liabilities. Signal services extended service contracts for 4.2 million wireless subscribers.
Underwriting and Risk Management
We write a significant portion of our contracts on a retrospective commission basis. This allows us to adjust commissions based on claims experience. Under these commission arrangements, the compensation of our
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clients is based upon the actual losses incurred compared to premiums earned after a specified net allowance to us. We believe that these arrangements better align our clients’ interests with ours and help us to better manage risk exposure.
Profits from our preneed life insurance programs are generally earned from interest rate spreads—the difference between the death benefit growth rates on underlying policies and the investment returns generated on the assets we hold related to those policies. To manage these spreads, we regularly adjust pricing to reflect changes in new money yields.
Assurant Specialty Property
| For the Years Ended | ||||||||
| December 31, 2010 | December 31, 2009 | |||||||
| Net earned premiums and other considerations by major product grouping: |
||||||||
| Homeowners (lender-placed and voluntary) |
$ | 1,342,791 | $ | 1,369,031 | ||||
| Manufactured housing (lender-placed and voluntary) |
220,309 | 219,960 | ||||||
| Other (1) |
390,123 | 358,538 | ||||||
| Total |
1,953,223 | $ | 1,947,529 | |||||
| Segment net income |
$ | 424,287 | $ | 405,997 | ||||
| Loss ratio (2) |
35.1 | % | 34.1 | % | ||||
| Expense ratio (3) |
39.5 | % | 41.5 | % | ||||
| Combined ratio (4) |
73.3 | % | 74.7 | % | ||||
| Equity (5) |
$ | 1,134,432 | $ | 1,184,798 | ||||
| (1) | This primarily includes lender-placed flood, miscellaneous specialty property and renters 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. (Fees and other income are not included in the above table) |
| (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. (Fees and other income are not included in the above table) |
| (5) | Equity excludes accumulated other comprehensive income. |
Products and Services
Assurant Specialty Property’s business strategy is to pursue long-term growth in lender-placed homeowners insurance and expand its strategy into other emerging markets with similar characteristics, such as lender-placed flood insurance, lender-placed automobile and renters insurance. Assurant Specialty Property also writes other specialty products.
Lender-placed and voluntary homeowners insurance: The largest product line within Assurant Specialty Property is homeowners insurance, consisting principally of fire and dwelling hazard insurance offered through our lender-placed programs. The lender-placed program provides collateral protection to our mortgage lending and servicing clients in the event that a homeowner does not maintain insurance on a mortgaged dwelling. The majority of our mortgage lending and servicing clients outsource their insurance processing to us. We also provide insurance to some of our clients on properties that have been foreclosed and are being managed by our clients. This type of insurance is called Real Estate Owned (“REO”) insurance. This market experienced growth increases in recent years as a result of the housing crisis, but is now stabilizing.
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We use a proprietary insurance-tracking administration system linked with the administrative systems of our clients to continuously monitor the clients’ mortgage portfolios and verify the existence of insurance on each mortgaged property. We earn fee income for these administration services. In the event that mortgagees do not maintain adequate insurance coverage, we initiate an extensive communication process with the mortgagee. If the mortgagee does not take action we will issue an insurance certificate on the property on behalf of the creditor.
Lender-placed and voluntary manufactured housing insurance: The next largest product line within Assurant Specialty Property is manufactured housing insurance, offered on a lender-placed and voluntary basis. Lender-placed insurance is issued after an insurance tracking process similar to that described above. The tracking is performed by Assurant Specialty Property using a proprietary insurance tracking administration system, or by the lenders themselves. A number of manufactured housing retailers in the U.S. use our proprietary premium rating technology to assist them in selling property coverages at the point of sale.
Other insurance: We believe there are opportunities to apply our lender-placed business model to other products and services. We have developed products in adjacent and emerging markets, such as the lender-placed flood, lender-placed automobile and mandatory insurance rental markets. We also act as an administrator for the U.S. Government under the voluntary National Flood Insurance Program, for which we earn a fee for collecting premiums and processing claims. The business is 100% reinsured to the Federal Government.
Marketing and Distribution
Assurant Specialty Property establishes long-term relationships with leading mortgage lenders and servicers. The majority of our lender-placed agreements are exclusive. Typically these agreements have terms of three to five years and allow us to integrate our systems with those of our clients.
We offer our manufactured housing insurance programs primarily through manufactured housing lenders and retailers, along with independent specialty agents. The independent specialty agents distribute flood products and miscellaneous specialty property products. Renters insurance is distributed primarily through property management companies and affinity marketing partners.
Underwriting and Risk Management
Our lender-placed homeowners insurance program and certain of our manufactured home products are not underwritten on an individual policy basis. Contracts with our clients require us to automatically issue these policies when a borrower’s insurance coverage is not maintained. These products are priced to factor in the lack of individual policy underwriting. We monitor pricing adequacy based on a variety of factors and adjust pricing as required, subject to regulatory constraints.
Because several of our product lines (such as homeowners, manufactured home, and other property policies) are exposed to catastrophic risks, we purchase reinsurance coverage to protect the capital of Assurant Specialty Property and to mitigate earnings volatility. Our reinsurance program generally incorporates a provision to allow the reinstatement of coverage, which provides protection against the risk of multiple catastrophes in a single year.
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Assurant Health
| For the Years Ended | ||||||||
| December 31, 2010 | December 31, 2009 | |||||||
| Net earned premiums and other considerations: |
||||||||
| Individual markets: |
||||||||
| Individual medical |
$ | 1,289,181 | $ | 1,270,198 | ||||
| Short-term medical |
85,824 | 104,238 | ||||||
| Subtotal |
1,375,005 | 1,374,436 | ||||||
| Small employer group medical |
489,117 | 505,192 | ||||||
| Total |
$ | 1,864,122 | $ | 1,879,628 | ||||
| Segment net income (loss) |
$ | 54,029 | $ | (30,220 | ) | |||
| Loss ratio (1) |
69.9 | % | 75.0 | % | ||||
| Expense ratio (2) |
29.7 | % | 31.5 | % | ||||
| Combined ratio (3) |
98.1 | % | 105.0 | % | ||||
| Equity (4) |
$ | 402,166 | $ | 309,206 | ||||
| (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. (Fees and other income are not included in the above table) |
| (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. (Fees and other income are not included in the above table) |
| (4) | Equity excludes accumulated other comprehensive income. |
Product and Services
Assurant Health competes in the individual medical insurance market by offering medical insurance and short-term medical insurance to individuals and families. Our products are offered with different plan options to meet a broad range of customer needs and levels of affordability. Assurant Health also offers medical insurance to small employer groups.
In March 2010, President Obama signed into law the Patient Protection and Affordable Care Act and its companion bill the Health Care and Education Reconciliation Act (together, the “Affordable Care Act”), which represent significant changes to the current U.S. health care system. The legislation is far-reaching and is intended to expand access to health insurance coverage over time. The legislation includes a requirement that most individuals obtain health insurance coverage beginning in 2014 and that most large employers offer coverage to their employees or they will be required to pay a financial penalty. In addition, the new laws encompass certain new taxes and fees, including limitations on the amount of compensation that is tax deductible and new fees which may not be deductible for income tax purposes.
The legislation will also impose new requirements and restrictions, including, but not limited to, guaranteed coverage requirements, prohibitions on some annual and all lifetime limits on amounts paid on behalf of or to our members, increased restrictions on rescinding coverage, establishment of minimum medical loss ratio requirements, the establishment of state insurance exchanges and essential benefit packages, and greater limitations on product pricing.
Although the National Association of Insurance Commissioners (the “NAIC”) has issued model regulations and the Department of Health and Human Services (“HHS”) has issued interim final regulations to implement the minimum medical loss ratio (“MLR”) and rebate provisions of the Affordable Care Act, certain issues remain to be fully resolved, including issues arising from possible further requests by state insurance commissioners for relief from the MLR and the response from the Secretary of HHS to such requests.
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During Second Quarter 2010, we completed an extensive review of our Assurant Health business and considered a number of possible future strategies. Three critical themes emerged from our review: we believe significant opportunities will exist to sell individual medical insurance products, although the dynamics and characteristics of the post-reform market will be different; specialty expertise will still be required; and we believe that we can earn adequate profits in this business over the long-term, without making large commitments of capital. In order to do so, we will have to reduce operating and distribution costs and modify our product lines. Such changes are underway. We may refine our strategy as new regulations are issued or additional regulatory agency actions are taken in the wake of the Affordable Care Act. The full impact of the Affordable Care Act will not be known for many years, as it becomes effective at various dates over the next several years. We believe that the Affordable Care Act will lead to sweeping and fundamental changes to the U.S. health care system that are expected to significantly affect the health insurance industry.
Individual Medical: Our medical insurance products are sold to individuals, primarily between the ages of 18 and 64, and their families, who do not have employer-sponsored coverage. We offer a wide variety of benefit plans at different price points, which allow customers to tailor their coverage to fit their unique needs.
Small Employer Group Medical: Our group medical insurance is primarily sold to small companies with two to fifty employees, although larger employer coverage is available. As of December 31, 2010, our average group size was approximately five employees.
Marketing and Distribution
Our health insurance products are principally marketed through a network of independent agents. We also market through a variety of exclusive and non-exclusive national account relationships and direct distribution channels. In addition, we market our products through North Star Marketing, a wholly-owned affiliate that seeks business directly from independent agents. Since 2000, we have had an exclusive national marketing agreement with a major mutual insurance company whose captive agents market our individual health products. This agreement will expire in September 2018 and allows either company to exit the agreement with six months notice. We provide many of our products through a well-known association’s administrator under an agreement that automatically renews annually. We also have a long-term relationship with a national marketing organization with more than 50 offices.
Underwriting and Risk Management
Following the passage of the Affordable Health Care Act, many of the traditional risk management techniques used to manage the risks of providing health insurance have become less relevant. The Act places several constraints on underwriting and mandates minimum levels of benefits for most medical coverage. It also imposes minimum loss ratio standards on many of our policies. Assurant Health has taken steps to adjust its products, pricing and business practices to comply with the new requirements.
Please see “Management’s Discussion and Analysis—Assurant Health” and “Risk Factors—Risks Related to our Industry—Reform of the health insurance industry could make our health insurance business unprofitable” for further details.
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Assurant Employee Benefits
| For the Years Ended | ||||||||
| December 31, 2010 | December 31, 2009 | |||||||
| Net Earned Premiums and Other Considerations: |
||||||||
| Group dental |
$ | 420,690 | $ | 425,288 | ||||
| Group disability |
488,813 | 434,381 | ||||||
| Group life |
191,892 | 192,468 | ||||||
| Total |
$ | 1,101,395 | $ | 1,052,137 | ||||
| Segment net income |
$ | 63,538 | $ | 42,156 | ||||
| Loss ratio (1) |
69.6 | % | 72.0 | % | ||||
| Expense ratio (2) |
35.1 | % | 36.4 | % | ||||
| Equity (3) |
$ | 582,574 | $ | 537,041 | ||||
| (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. (Fees and other income are not included in the above table) |
| (3) | Equity excludes accumulated other comprehensive income. |
Products and Services
We focus on the needs of businesses with fewer than 500 employees. We believe that our small group risk selection expertise, administrative systems, and strong relationships with brokers who work primarily with small businesses give us a competitive advantage versus other carriers.
We offer group disability, dental, vision, life and supplemental worksite products as well as individual dental products. The group products are offered with funding options ranging from fully employer-paid to fully employee-paid (voluntary). In addition, we reinsure disability and life products through our wholly owned subsidiary, Disability Reinsurance Management Services, Inc. (“DRMS”).
Group Disability: Group disability insurance provides partial replacement of lost earnings for insured employees who become disabled, as defined by their plan provisions. Our products include both short- and long-term disability coverage options. We also reinsure disability policies written by other carriers through our DRMS subsidiary.
Group Dental: Dental benefit plans provide funding for necessary or elective dental care. Customers may select a traditional indemnity arrangement, a PPO arrangement, or a prepaid or managed care arrangement. Coverage is subject to deductibles, coinsurance and annual or lifetime maximums. In a prepaid plan, members must use participating dentists in order to receive benefits.
Success in the group dental business is heavily dependent on a strong provider network. Assurant Employee Benefits owns and operates Dental Health Alliance, L.L.C., a leading dental PPO network. We also have an agreement with Aetna, extending through 2012, that allows us to use Aetna’s Dental Access® network, which we believe increases the attractiveness of our products in the marketplace.
Group Vision: Fully-insured vision coverage is offered through our agreement with Vision Service Plan, Inc. (“VSP”), a leading national supplier of vision insurance. Our plans cover eye exams, glasses, and contact lenses and are usually sold in combination with one or more of our other products.
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Group Life: Group term life insurance provided through the workplace provides benefits in the event of death. We also provide accidental death and dismemberment (“AD&D”) insurance. Insurance consists primarily of renewable term life insurance with the amount of coverage provided being either a flat amount, a multiple of the employee’s earnings, or a combination of the two. We also reinsure life policies written by other carriers through DRMS.
Supplemental Worksite Products: In addition to the traditional voluntary products, we provide group critical illness, cancer, accident, and gap insurance. These products are generally paid for by the employee through payroll deduction, and the employee is enrolled in the coverage(s) at the worksite.
Marketing and Distribution
Our products and services are distributed through a group sales force located in 34 offices near major metropolitan areas. Our sales representatives distribute our products and services through independent brokers and employee-benefits advisors. Daily account management is provided through the local sales offices, further supported by regional sales support centers and a home office customer service department. Compensation of brokers in some cases includes an annual performance incentive, based on volume and retention of business.
DRMS provides turnkey group disability and life insurance solutions to insurance carriers that want to supplement their core product offerings. Our services include product development, state insurance regulatory filings, underwriting, claims management, and other functions typically performed by an insurer’s back office. Assurant Employee Benefits reinsures the risks written by DRMS’ clients, with the clients generally retaining shares ranging from 10% to 60% of the risk.
Underwriting and Risk Management
The pricing of our products is based on the expected cost of benefits, calculated using assumptions for mortality, morbidity, interest, expenses and persistency, and other underwriting factors. Our block of business is diversified by industry and geographic location, which serves to limit some of the risks associated with changing economic conditions.
Disability claims management focuses on helping claimants return to work through a supportive network of services that may include physical therapy, vocational rehabilitation, and workplace accommodation. We employ or contract with a staff of doctors, nurses and vocational rehabilitation specialists, and use a broad range of additional outside medical and vocational experts to assist our claim specialists.
Ratings
Independent rating organizations periodically review the financial strength of insurers, including our insurance subsidiaries. Financial strength ratings represent the opinions of rating agencies regarding the ability of an insurance company to meet its financial obligations to policyholders and contractholders. These ratings are not applicable to our common stock or debt securities. Ratings are an important factor in establishing the competitive position of insurance companies.
Rating agencies also use an “outlook statement” of “positive”, “stable”, “negative” or “developing” to indicate a medium- or long-term trend in credit fundamentals which, if continued, may lead to a rating change. A rating may have a stable outlook to indicate that the rating is not expected to change; however, a stable rating does not preclude a rating agency from changing a rating at any time, without notice.
Most of our active domestic operating insurance subsidiaries are rated by the A.M. Best Company (“A.M. Best”). In addition, six of our domestic operating insurance subsidiaries are also rated by Moody’s Investor Services (“Moody’s”) and seven are rated by Standard & Poor’s Inc., a division of McGraw Hill Companies, Inc. (“S&P”).
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For further information on the risks of ratings downgrades, see “Item 1A—Risk Factors—A.M. Best, Moody’s and S&P rate the financial strength of our insurance company subsidiaries.”
The following table summarizes our outlook statement and financial strength ratings as of December 31, 2010:
| A.M. Best (1) | Moody’s (2) | Standard & Poor’s (3) | ||||
| Outlook |
Stable | Stable | (4) | |||
| Company |
||||||
| American Bankers Insurance Company |
A | A2 | A- | |||
| American Bankers Life Assurance Company |
A- | A3 | A- | |||
| American Memorial Life Insurance Company |
A- | N/A | A- | |||
| American Reliable Insurance Company |
A | N/A | N/A | |||
| American Security Insurance Company |
A | A2 | A- | |||
| Assurant Life of Canada |
A- | N/A | N/A | |||
| Caribbean American Life Assurance Company |
A- | N/A | N/A | |||
| Caribbean American Property Insurance Company |
A | N/A | N/A | |||
| John Alden Life Insurance Company |
A- | A3 | BBB+ | |||
| Reliable Lloyds |
A | N/A | N/A | |||
| Standard Guaranty Insurance Company |
A | N/A | N/A | |||
| Time Insurance Company |
A- | A3 | BBB+ | |||
| UDC Dental California |
A- | N/A | N/A | |||
| Union Security Dental Care New Jersey |
A- | N/A | N/A | |||
| Union Security Insurance Company |
A- | A3 | A- | |||
| Union Security Life Insurance Company of New York |
A- | N/A | N/A | |||
| United Dental Care of Arizona |
A- | N/A | N/A | |||
| United Dental Care of Colorado |
A- | N/A | N/A | |||
| United Dental Care of Michigan |
NR-3 | N/A | N/A | |||
| United Dental Care of Missouri |
A- | N/A | N/A | |||
| United Dental Care of New Mexico |
A- | N/A | N/A | |||
| United Dental Care of Ohio |
NR-3 | N/A | N/A | |||
| United Dental Care of Texas |
A- | N/A | N/A | |||
| United Dental Care of Utah |
NR-3 | N/A | N/A | |||
| Voyager Indemnity Insurance Company |
A | N/A | N/A | |||
| (1) | A.M. Best financial strength ratings range from “A++” (superior) to “S” (suspended). Ratings of A and A- fall under the “excellent” category, which is the second highest of ten ratings categories. A rating of NR-3 indicates that the company is not rated because the rating procedure is inapplicable. |
| (2) | Moody’s insurance financial strength ratings range from “Aaa” (exceptional) to “C” (extremely poor). A numeric modifier may be appended to ratings from “Aa” to “Caa” to indicate relative position within a category, with 1 being the highest and 3 being the lowest. Ratings of A2 and A3 are considered “good” and fall within the third highest of the nine ratings categories. |
| (3) | S&P’s insurer financial strength ratings range from “AAA” (extremely strong”) to “R” (under regulatory supervision). A “+” or “-” may be appended to ratings from categories AA to CCC to indicate relative position within a category. Ratings of A- (“strong”) and BBB+(“adequate”) are within the third and fourth highest of the nine ratings categories, respectively. |
| (4) | S & P has a stable outlook on all of the ratings of the Companies, except for John Alden Life Insurance Company and Time Insurance Company, which have a negative outlook. |
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Enterprise Risk Management
As an insurer, we are exposed to a wide variety of financial, operational and other risks, as described in Item 1A, “Risk Factors.” Enterprise risk management (“ERM”) is, therefore, a key component of our business strategies, policies, and procedures. Our ERM process is an iterative approach with the following key phases:
| 1. | Risk identification; |
| 2. | High-level estimation of risk likelihood and severity; |
| 3. | Risk prioritization at the business and enterprise levels; |
| 4. | Scenario analysis and quantitative impact modeling for key enterprise risks; |
| 5. | Utilization of quantitative results and subject matter expert opinion to help guide business strategy and decision making; |
Through our ERM process and our enterprise risk quantification model we monitor a variety of risk metrics on an ongoing basis, with a particular focus on impact to net income (both GAAP and Statutory), company value and the potential need for capital infusions to subsidiaries under severe stress scenarios.
The Company’s ERM activities are coordinated by an Enterprise Risk Management Committee (“ERMC”), which includes managers from across the Company with knowledge of the Company’s business activities. The ERMC develops risk assessment and risk management policies and procedures. It facilitates the identification, reporting and prioritizing of risks faced by the company, and is responsible for promoting a risk-aware culture throughout the organization. The ERMC also coordinates with each of the Company’s four Business Unit Risk Committees (“BURCs”), which meet regularly and are responsible for the identification of significant risks affecting their respective business unit. Those risks which meet our internally-defined escalation criteria, including emerging risks, are then reported to the ERMC.
Our Board of Directors and senior management are responsible for overseeing significant enterprise risks. The ERMC reports regularly to the Chief Executive Officer and presents its work periodically to both the Board of Directors and the Audit Committee.
Through the use of regular committee meetings, business unit and enterprise risk inventory templates, risk dashboards, hypothetical scenario analysis, and quantitative modeling, the Company strives to identify, track, quantify, communicate and manage our key risks within prescribed tolerances.
Our ERM process continues to evolve, and, when appropriate, we incorporate methodology changes, policy modifications and emerging best practices on an ongoing basis.
Regulation
The Company is subject to extensive federal, state and international regulation and supervision in the jurisdictions where it does business. Regulations vary from jurisdiction to jurisdiction. The following is a summary of significant regulations that apply to our businesses and is not intended to be a comprehensive review of every regulation to which the Company is subject. For information on the risks associated with regulations applicable to the Company, please see Item 1A, “Risk Factors.”
U.S. Insurance Regulation
We are subject to the insurance holding company laws in the states where our insurance companies are domiciled. These laws generally require insurance companies within the insurance holding company system to register with the insurance departments of their respective states of domicile and to furnish reports to such insurance departments regarding capital structure, ownership, financial condition, general business operations and intercompany transactions. These laws also require that transactions between affiliated companies be fair and equitable. In addition, certain intercompany transactions, changes of control, certain dividend payments and transfers of assets between the companies within the holding company system are subject to prior notice to, or approval by, state regulatory authorities.
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Like all U.S. insurance companies, our insurance subsidiaries are subject to regulation and supervision in the jurisdictions in which they do business. In general, this regulation is designed to protect the interests of policyholders, and not necessarily the interests of shareholders and other investors. To that end, the laws of the various states and other jurisdictions establish insurance departments with broad powers with respect to such things as:
| • | licensing and authorizing companies and intermediaries (including agents and brokers) to transact business; |
| • | regulating capital, surplus and dividend requirements; |
| • | regulating underwriting limitations; |
| • | regulating companies’ ability to enter and exit markets or to provide, terminate or cancel certain coverages; |
| • | imposing statutory accounting and annual statement disclosure requirements; |
| • | approving policy forms and mandating certain insurance benefits; |
| • | regulating premium rates, including the ability to disapprove or reduce the premium rates companies may charge; |
| • | regulating claims practices; |
| • | regulating certain transactions between affiliates; |
| • | regulating the content of disclosures to consumers; |
| • | regulating the type, amounts and valuation of investments; |
| • | mandating assessments or other surcharges for guaranty funds and the ability to recover such assessments in the future through premium increases; and |
| • | regulating market conduct and sales practices of insurers and agents. |
Dividend Payment Limitations. The Company’s assets consist primarily of the capital stock of our subsidiaries. Accordingly, our future cash flows depend upon the availability of dividends and other statutorily permissible payments from our subsidiaries. The ability to pay such dividends and to make such other payments is regulated by the states in which our subsidiaries are domiciled. These dividend regulations vary from state to state and by type of insurance provided by the applicable subsidiary, but generally require our insurance subsidiaries to maintain minimum solvency requirements and limit the amount of dividends these subsidiaries can pay to the holding company. For more information, please see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Requirements.”
Risk Based Capital Requirements. In order to enhance the regulation of insurer solvency, the NAIC has established certain risk-based capital standards applicable to life, health and property and casualty insurers. Risk-based capital, which regulators use to assess the sufficiency of an insurer’s statutory capital, is calculated by applying factors to various asset, premium, claim, expense and reserve items. Factors are higher for items which in the NAIC’s view have greater underlying risk. The NAIC periodically reviews the risk-based capital formula and changes to the formula could occur in the future.
Investment Regulation. Insurance company investments must comply with applicable laws and regulations that prescribe the kind, quality and concentration of investments. These regulations require diversification of insurance company investment portfolios and limit the amount of investments in certain asset categories.
Financial Reporting. Regulators closely monitor the financial condition of licensed insurance companies and our insurance subsidiaries are required to file periodic financial reports with insurance regulators. Moreover, states regulate the form and content of these statutory financial statements.
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Products and Coverage. Insurance regulators have broad authority to regulate many aspects of our products and services. For example, some jurisdictions require insurers to provide coverage to persons who would not be considered eligible insurance risks under standard underwriting criteria, dictating the types of insurance and the level of coverage that must be provided to such applicants. Additionally, certain non-insurance products and services, such as service contracts, may be regulated by regulatory bodies other than departments of insurance.
Pricing and Premium Rates. Nearly all states have insurance laws requiring insurers to file price schedules and policy forms with the state’s regulatory authority. In many cases, these price schedules and/or policy forms must be approved prior to use, and state insurance departments have the power to disapprove increases or require decreases in the premium rates we charge.
Market Conduct Regulation. Activities of insurers are highly regulated by state insurance laws and regulations, which govern the form and content of disclosure to consumers, advertising, sales practices and complaint handling. State regulatory authorities enforce compliance through periodic market conduct examinations.
Guaranty Associations and Indemnity Funds. Most states require insurance companies to support guaranty associations or indemnity funds, which are established to pay claims on behalf of insolvent insurance companies. These associations may levy assessments on member insurers. In some states member insurers can recover a portion of these assessments through premium tax offsets and/or policyholder surcharges.
Insurance Regulatory Initiatives. The NAIC and state insurance regulators have considered and are considering various proposals that may alter or increase state authority to regulate insurance companies and insurance holding companies. Please see Item 1A, “Risk Factors—Risks Related to Our Industry—Changes in regulation may reduce our profitability and limit our growth” for a discussion of the risks related to such initiatives.
Federal Regulation
Patient Protection and Affordable Care Act. Although health insurance is generally regulated at the state level, recent legislative actions were taken at the federal level that impose added restrictions on our business, in particular Assurant Health and Assurant Employee Benefits. In March 2010, President Obama signed the Affordable Care Act into law. Provisions of the Affordable Care Act and related reforms have and will become effective at various dates over the next several years and will make sweeping and fundamental changes to the U.S. health care system that are expected to significantly affect the health insurance industry. Although we cannot predict or quantify the precise effects of the Affordable Care Act on our business, they will include, in particular, a requirement that we pay rebates to customers if the loss ratios for some of our products lines are less than specified percentages; the need to reduce commissions, and the consequent risk that insurance producers may sell less of our products than they have in the past; changes in the benefits provided under some of our products; limits on lifetime and annual benefit maximums; a prohibition from imposing any pre-existing condition exclusion as it applies to enrollees under the age of 19 who apply for coverage; limits on our ability to rescind coverage for persons who have misrepresented or omitted material information when they applied for coverage and, after January 1, 2014, elimination of our ability to underwrite health insurance products with certain narrow exceptions; a requirement to offer coverage to any person who applies for such coverage; increased costs to modify and/or sell our products; intensified competitive pressures that limit our ability to increase rates due to state insurance exchanges; significant risk of customer loss; new and higher taxes and fees; and the need to operate with a lower expense structure at both the business segment and enterprise level.
Employee Retirement Income Security Act. Because we provide products and services for certain U.S. employee benefit plans, we are subject to regulation under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). ERISA places certain requirements on how our Company may do business with employers that maintain employee benefit plans covered by ERISA. Among other things, regulations under
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ERISA set standards for certain notice and disclosure requirements and for claim processing and appeals. In addition, some of our administrative services and other activities may also be subject to regulation under ERISA.
HIPAA, HITECH Act and Gramm-Leach-Bliley Act. The Health Insurance Portability and Accountability Act of 1996, along with its implementing regulations (“HIPAA”), impose various requirements on health insurers, HMOs, health plans and health care providers. Among other things, Assurant Health is subject to HIPAA regulations requiring certain guaranteed issuance and renewability of health insurance coverage for individuals and small groups (generally groups with 50 or fewer employees) and limitations on exclusions based on pre-existing conditions.
HIPAA also imposes requirements on health insurers, health plans and health care providers to ensure the privacy and security of protected health information. These privacy and security provisions were further expanded by the privacy provisions contained in the Health Information Technology for Economic and Clinical Health Act (the “HITECH Act”), which enhances penalties for violations of HIPAA and requires regulated entities to provide notice of security breaches of protected health information to individuals and HHS. In addition, certain of our activities are subject to the privacy regulations of the Gramm-Leach-Bliley Act, which, along with regulations adopted thereunder, generally requires insurers to provide customers with notice regarding how their non-public personal health and financial information is used, and to provide them with the opportunity to “opt out” of certain disclosures.
Dodd-Frank Wall Street Reform and Consumer Protection Act. In July 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which implements comprehensive changes to the regulation of financial services in the U.S. Among other things, Congress created the Consumer Financial Protection Bureau (the “CFPB”). While the CFPB does not have direct jurisdiction over insurance products, it is possible that regulations promulgated by the CFPB may extend its authority more broadly to cover these products and thereby affect the Company or our clients.
International Regulation
We are subject to regulation and supervision of our international operations in various jurisdictions. These regulations, which vary depending on the jurisdiction, include anti-corruption laws; solvency regulations; various privacy, insurance, tax, tariff and trade laws and regulations; and corporate, employment, intellectual property and investment laws and regulations.
In addition to the U.S., the Company operates in Canada, the U.K., Argentina, Brazil, Puerto Rico, Chile, Germany, Spain, Italy, Mexico and China, and our operations are supervised by regulatory authorities of these jurisdictions. For example, our operations in the U.K. are subject to regulation by the Financial Services Authority (the “FSA”). Insurers authorized by the FSA are generally permitted to operate throughout the rest of the European Union, subject to satisfying certain FSA requirements and, in some cases, meeting additional local regulatory requirements.
We are also subject to certain U.S. and foreign laws applicable to businesses generally, including anti-corruption laws. The Foreign Corrupt Practices Act of 1977 (the “FCPA”) regulates U.S. companies in their dealings with foreign officials, prohibiting bribes and similar practices. In addition, the U.K. Anti-Bribery Act, which should become effective during 2011, has wide jurisdiction over certain activities that affect the U.K.
Securities and Corporate Governance Regulation
As a company with publicly-traded securities, Assurant is subject to certain legal and regulatory requirements applicable generally to public companies, including the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) and the New York Stock Exchange (the “NYSE”) relating to public reporting and disclosure, accounting and financial reporting, and corporate governance matters. Additionally, Assurant, Inc. is subject to the corporate governance laws of Delaware, its state of incorporation.
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Environmental Regulation
Because we own and operate real property, we are subject to federal, state and local environmental laws. Potential environmental liabilities and costs in connection with any required remediation of such properties is an inherent risk in property ownership and operation. Under the laws of several states, contamination of a property may give rise to a lien on the property to secure recovery of the costs of the cleanup, which could have priority over the lien of an existing mortgage against the property and thereby impair our ability to foreclose on that property should the related loan be in default. In addition, under certain circumstances, we may be liable for the costs of addressing releases or threatened releases of hazardous substances at properties securing mortgage loans held by us.
Other Information
Customer Concentration
In the opinion of Company’s management, there is no single customer or group of affiliated customers whose loss would have a material adverse effect on the Company. No one customer or group of affiliated customers accounts for 10% or more of the Company’s consolidated revenues.
Employees
We had approximately 14,000 employees as of February 15, 2011. Assurant Solutions has employees in Argentina, Brazil, Italy, Spain and Mexico that are represented by labor unions and trade organizations. We believe that employee relations are satisfactory.
Sources of Liquidity
For a discussion of the Company’s sources and uses of funds, see “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources,” and Note 15 to the Consolidated Financial Statements contained elsewhere in this report.
Taxation
For a discussion of tax matters affecting the Company and its operations, see Note 8 to the Consolidated Financial Statements contained elsewhere in this report.
Financial Information about Reportable Business Segments
For financial information regarding reportable business segments of the Company, see “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Note 23 to the Consolidated Financial Statements contained elsewhere in this report.
Available Information
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, the Statements of Beneficial Ownership of Securities on Forms 3, 4 and 5 for our Directors and Officers and all amendments to such reports, filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge through the SEC website at www.sec.gov. These documents are also available free of charge through the Investor Relations page of our website (www.assurant.com) as soon as reasonably practicable after filing. Other information found on our website is not part of this or any other report filed with or furnished to the SEC.
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| Item 1A. | Risk Factors. |
Certain factors may have a material adverse effect on our business, financial condition and results of operations and you should carefully consider them. It is not possible to predict or identify all such factors.
Risks Related to Our Company
Our revenues and profits may decline if we were unable to maintain relationships with significant clients, distributors and other parties important to the success of our business.
Our relationships and contractual arrangements with significant clients, distributors, original equipment manufacturers and other parties with whom we do business are important to the success of our segments. Many of these arrangements are exclusive. For example, in Assurant Solutions, we have exclusive relationships with retailers and financial and other institutions through which we distribute our products, including an exclusive distribution relationship with SCI relating to the distribution of our preneed insurance policies. In Assurant Specialty Property, we have exclusive relationships with mortgage lenders and manufactured housing lenders, manufacturers and property managers. In Assurant Health, we have exclusive distribution relationships for our individual health insurance products with a major mutual insurance company as well as a relationship with a well-known association through which we provide many of our individual health insurance products. We also maintain contractual relationships with several separate networks of health and dental care providers, each referred to as a PPO, through which we obtain discounts. Typically, these relationships and contractual arrangements have terms ranging from one to five years.
Although we believe we have generally been successful in maintaining our clients, distribution and associated relationships, if these parties decline to renew or seek to terminate these arrangements or seek to renew these contracts on terms less favorable to us, our results of operations and financial condition could be materially adversely affected. For example, a loss of one or more of the discount arrangements with PPOs could lead to higher medical or dental costs and/or a loss of members to other medical or dental plans. In addition, we are subject to the risk that these parties may face financial difficulties, reputational issues or problems with respect to their own products and services, which may lead to decreased sales of our products and services. Moreover, if one or more of our clients or distributors consolidate or align themselves with other companies, we may lose business or suffer decreased revenues.
Sales of our products and services may be reduced if we are unable to attract and retain sales representatives or to develop and maintain distribution sources.
We distribute our insurance products and services through a variety of distribution channels, including independent employee benefits specialists, brokers, managing general agents, life agents, financial institutions, mortgage lenders and servicers, retailers, funeral homes, association groups and other third-party marketing organizations.
Our relationships with these distributors are significant both for our revenues and profits. We do not distribute our insurance products and services through captive or affiliated agents. In Assurant Health, we depend in large part on the services of independent agents and brokers and on associations in the marketing of our products. In Assurant Employee Benefits, independent agents and brokers who act as advisors to our customers market and distribute our products. Strong competition exists among insurers to form relationships with agents and brokers of demonstrated ability. We compete with other insurers for relationships with agents, brokers, and other intermediaries primarily on the basis of our financial position, support services, product features, and more generally through our ability to meet the needs of their clients, our customers. Independent agents and brokers are typically not exclusively dedicated to us, but instead usually also market the products of our competitors and therefore we face continued competition from our competitors’ products. Moreover, our ability to market our products and services depends on our ability to tailor our channels of distribution to comply with changes in the regulatory environment in which we and such agents and brokers operate.
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The minimum loss ratios imposed by the Affordable Care Act have compelled health insurers to decrease broker commission levels. Similarly, the Company recently decreased its commission levels for distribution channels that market Assurant Health’s individual medical and small employer group medical products. Although the Company believes that its revised commission schedule is competitive with those of other health insurers adapting to the new reform environment, this reduction could pressure our relationship with the distribution channels that we rely on to market our Assurant Health products and/or our ability to attract new brokers and agents, which could materially adversely affect our results of operations and financial condition. In addition, many of the agents and brokers who distribute Assurant Employee Benefits products make a large part of their living from sales of health insurance. To the extent that some of them decide to pursue other occupations, the resulting loss of distribution could have a material adverse impact on the sales of Assurant Employee Benefits’ products.
We have our own sales representatives whose distribution process varies by segment. We depend in large part on our sales representatives to develop and maintain client relationships. Our inability to attract and retain effective sales representatives could materially adversely affect our results of operations and financial condition.
General economic, financial market and political conditions may materially adversely affect our results of operations and financial conditions. Particularly, difficult conditions in financial markets and the global economy may negatively affect the results of all of our business segments.
General economic, financial market and political conditions may have a material adverse effect on our results of operations and financial condition. Limited availability of credit, deteriorations of the global mortgage and real estate markets, declines in consumer confidence and consumer spending, increases in prices or in the rate of inflation, continuing high unemployment, or disruptive geopolitical events could contribute to increased volatility and diminished expectations for the economy and the markets, including the market for our stock. These conditions could also affect all of our business segments. Specifically, during periods of economic downturn:
| • | individuals and businesses may (i) choose not to purchase our insurance products, warranties and other related products and services, (ii) terminate existing policies or contracts or permit them to lapse, (iii) choose to reduce the amount of coverage they purchase, and (iv) in the case of business customers of Assurant Health or Assurant Employee Benefits, have fewer employees requiring insurance coverage due to reductions in their staffing levels; |
| • | clients are more likely to experience financial distress or declare bankruptcy or liquidation which could have an adverse impact on the remittance of premiums from such clients as well as the collection of receivables from such clients for items such as unearned premiums; |
| • | disability insurance claims and claims on other specialized insurance products tend to rise; |
| • | there is a higher loss ratio on credit card and installment loan insurance due to rising unemployment and disability levels; |
| • | there is an increased risk of fraudulent insurance claims; |
| • | insureds tend to increase their utilization of health and dental benefits if they anticipate becoming unemployed or losing benefits; and |
| • | substantial decreases in loan availability and origination could reduce the demand for credit insurance that we write or debt cancellation or debt deferment products that we administer, and on the placement of hazard insurance under our lender-placed insurance programs. |
In addition, general inflationary pressures may affect the costs of medical and dental care, as well as repair and replacement costs on our real and personal property lines, increasing the costs of paying claims. Inflationary pressures may also affect the costs associated with our preneed insurance policies, particularly those that are guaranteed to grow with the Consumer Price Index (or “CPI”). Conversely, deflationary pressures may affect the pricing of our products.
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Our earnings could be materially affected by an impairment of goodwill.
Goodwill represented $619,779 of our $26,397,018 in total assets as of December 31, 2010. We review our goodwill annually in the fourth quarter for impairment or more frequently if circumstances indicating that the asset may be impaired exist. Such circumstances could include a sustained significant decline in our share price, a decline in our actual or expected future cash flows or income, a significant adverse change in the business climate, or slower growth rates, among others. Based on our 2010 annual goodwill impairment test, we determined that our Assurant Health and Assurant Employee Benefits reporting units experienced an impairment of $306,381. Based on the same test, it was determined that the goodwill assigned to our other two reporting units were not impaired. Circumstances such as those mentioned above could trigger an impairment of some or all of the remaining goodwill on our balance sheet, which could have a material adverse effect on our profitability. For more information on our annual goodwill impairment testing and the goodwill of our segments, please see “Item 7—MD&A—Critical Factors Affecting Results—Value and Recoverability of Goodwill.”
Competitive pressures or regulators could force us to reduce our rates.
The premiums we charge are subject to review by regulators. If they consider our loss ratios to be too low, they could require us to reduce our rates. In addition, competitive conditions may put pressure on our rates. In either case, significant rate reductions could materially reduce our profitability.
Catastrophe losses, including man-made catastrophe losses, could materially reduce our profitability and have a material adverse effect on our results of operations and financial condition.
Our insurance operations expose us to claims arising out of catastrophes, particularly in our homeowners, life and other personal lines of business. We have experienced, and expect to experience, catastrophe losses that materially reduce our profitability or have a material adverse effect on our results of operations and financial condition. Catastrophes can be caused by various natural events, including, but not limited to, hurricanes, windstorms, earthquakes, hailstorms, severe winter weather, fires, epidemics and the long-term effects of climate change, or can be man-made catastrophes, including terrorist attacks or accidents such as airplane crashes. While the frequency and severity of catastrophes are inherently unpredictable, increases in the value and geographic concentration of insured property, the geographic concentration of insured lives, and the effects of inflation could increase the severity of claims from future catastrophes.
Catastrophe losses can vary widely and could significantly exceed our expectations. They may cause substantial volatility in our financial results for any fiscal quarter or year and could materially reduce our profitability or materially adversely affect our financial condition. Our ability to write new business also could be affected.
Because Assurant Specialty Property’s lender-placed homeowners and lender-placed manufactured housing insurance products are designed to automatically provide property coverage for client portfolios, our concentration in certain catastrophe-prone states like Florida, California and Texas may increase in the future. Furthermore, the withdrawal of other insurers from these or other states may lead to adverse selection and increased use of our products in these areas and may negatively affect our loss experience.
The exact impact of the physical effects of climate change is uncertain. It is possible that changes in the global climate may cause long-term increases in the frequency and severity of storms, resulting in higher catastrophe losses, which could materially affect our results of operations and financial condition.
Our group life and health insurance operations could be materially impacted by catastrophes such as a terrorist attack, a natural disaster, a pandemic or an epidemic that causes a widespread increase in mortality or disability rates or that causes an increase in the need for medical care. If the severity of such an event were sufficiently high, it could exceed our reinsurance coverage limits and could have a material adverse effect on our
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results of operations and financial condition. In addition, with respect to our preneed insurance policies, the average age of policyholders is approximately 73 years. This group is more susceptible to certain epidemics than the overall population, and an epidemic resulting in a higher incidence of mortality could have a material adverse effect on our results of operations and financial condition.
We may also lose premium income due to a large-scale business interruption caused by a catastrophe combined with legislative or regulatory reactions to the event.
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.
Ratings are an important factor in establishing the competitive position of insurance companies. A.M. Best rates most of our domestic operating insurance subsidiaries. Moody’s rates six of our domestic operating insurance subsidiaries and S&P rates seven of our domestic operating insurance subsidiaries. These ratings are subject to periodic review by A.M. Best, Moody’s, and S&P, and we cannot assure that we will be able to retain them. In 2010 for example, Moody’s lowered the financial strength rating of our rated life and health insurance subsidiaries from A2 to A3 and lowered the senior debt rating of Assurant, Inc. from Baa1 to Baa2, citing uncertainty surrounding the viability of several of the Company’s core insurance products as a result of changes in the health insurance marketplace due to the Affordable Care Act. S&P currently has a negative outlook on our two principal health insurance subsidiaries, citing uncertainty of operating performance under the Affordable Care Act.
Rating agencies may change their methodology or requirements for determining ratings, or they may become more conservative in assigning ratings. Rating agencies or regulators could also increase capital requirements for the Company or its subsidiaries. Any reduction in our ratings could materially adversely affect the demand for our products from intermediaries and consumers, and materially adversely affect our results. In addition, any reduction in our financial strength ratings could materially adversely affect our cost of borrowing.
As of December 31, 2010, contracts representing approximately 17% of Assurant Solutions’ and 24% of Assurant Specialty Property’s net earned premiums and fee income contain provisions requiring the applicable subsidiaries to maintain minimum A.M. Best financial strength ratings ranging from “A” or better to “B” or better, depending on the contract. Our clients may terminate these contracts or fail to renew them if the subsidiaries’ ratings fall below these minimums. Under our marketing agreement with SCI, American Memorial Life Insurance Company (“AMLIC”), one of our subsidiaries, is required to maintain an A.M. Best financial strength rating of “B” or better throughout the term of the agreement. If AMLIC fails to maintain this rating for a period of 180 days, SCI may terminate the agreement.
Additionally, certain contracts in the DRMS business, representing approximately 7% of Assurant Employee Benefits’ net earned premiums for the year ended December 31, 2010 contain provisions requiring the applicable subsidiaries to maintain minimum A.M. Best financial strength ratings of “A-” or better. DRMS clients may terminate the agreements and, in some instances, recapture in-force business if the ratings of applicable subsidiaries fall below “A-”. Similarly, distribution and service agreements representing approximately 17% of Assurant Health’s net earned premiums for the year ended December 31, 2010 contain provisions requiring the applicable subsidiaries to maintain minimum A.M. Best financial strength ratings of “A-” or better, for the distribution agreements, or “B+” or better, for the service agreement. If the ratings of applicable Assurant Health subsidiaries fall below these threshold ratings levels, distribution and service partners could terminate their agreements. Termination or failure to renew these agreements could materially and adversely affect our results of operations and financial condition.
Unfavorable conditions in the capital and credit markets may significantly and adversely affect our access to capital and our ability to pay our debts or expenses.
The global capital and credit markets experienced extreme volatility and disruption during 2008 and through early 2009. In many cases, companies’ ability to raise money was severely restricted. Although conditions in the
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capital and credit markets have improved significantly, they could again deteriorate. Our ability to borrow or raise money is important if our operating cash flow is insufficient to pay our expenses, meet capital requirements, repay debt, pay dividends on our common stock or make investments. The principal sources of our liquidity are insurance premiums, fee income, cash flow from our investment portfolio and liquid assets, consisting mainly of cash or assets that are readily convertible into cash. Sources of liquidity in normal markets also include a variety of short- and long-term instruments.
If our access to capital markets is restricted, our cost of capital could go up, thus decreasing our profitability and reducing our financial flexibility. Our results of operations, financial condition, cash flows and statutory capital position could be materially and adversely affected by disruptions in the capital markets.
The value of our investments could decline, affecting our profitability and financial strength.
Investment returns are an important part of our profitability. Significant fluctuations in the fixed maturity market could impair our profitability, financial condition and/or cash flows. Our investments are subject to market-wide risks and fluctuations, as well as to risks inherent in particular securities. In addition, certain factors affecting our business, such as volatility of claims experience, could force us to liquidate securities prior to maturity, causing us to incur capital losses. See “Item 7A—Quantitative and Qualitative Disclosures About Market Risk—Interest Rate Risk.”
The performance of our investment portfolio is subject to continuing fluctuations due to changes in interest rates and market conditions.
Changes in interest rates can materially adversely affect the performance of some of our investments. Interest rate volatility can increase or reduce unrealized gains or unrealized losses in our 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. Fixed maturity and short-term investments represented 81% of the fair value of our total investments as of December 31, 2010.
The fair market value of the fixed maturity securities in our portfolio and the investment income from these securities fluctuate depending on general economic and market conditions. Because all of our fixed maturity securities are classified as available for sale, changes in the market value of these securities are reflected in our balance sheet. Their fair market value generally increases or decreases in an inverse relationship with fluctuations in interest rates, while net investment income from fixed-maturity investments increases or decreases directly with interest rates. In addition, actual net investment income and/or cash flows from investments that carry prepayment risk, such as mortgage-backed and other asset-backed securities, may differ from those anticipated at the time of investment as a result of interest rate fluctuations. An increase in interest rates will also increase the net unrealized losses in our current investment portfolio.
We employ asset/liability management strategies to reduce the adverse effects of interest rate volatility and to increase the likelihood that cash flows are available to pay claims as they become due. Our asset/liability management strategies may fail to eliminate or reduce the adverse effects of interest rate volatility, and significant fluctuations in the level of interest rates may have a material adverse effect on our results of operations and financial condition. If our investment portfolio is not appropriately matched with our insurance liabilities, we could also be forced to liquidate investments prior to maturity at a significant loss to pay claims and policyholder benefits.
Our preneed insurance policies are generally whole life insurance policies with increasing death benefits. In extended periods of declining interest rates or rising inflation, there may be compression in the spread between the death benefit growth rates on these policies and the investment income that we can earn, resulting in a negative spread. As a result, declining interest rates or high inflation rates may have a material adverse effect on
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our results of operations and our overall financial condition. See “Item 7A—Quantitative and Qualitative Disclosures About Market Risk—Inflation Risk” for additional information.
Assurant Employee Benefits calculates reserves for long-term disability and life waiver of premium claims using net present value calculations based on interest rates at the time reserves are established and expectations regarding future interest rates. Waiver of premium refers to a provision in a life insurance policy pursuant to which an insured with a disability that lasts for a specified period no longer has to pay premiums for the duration of the disability or for a stated period, during which time the life insurance coverage continues. If interest rates decline, reserves for open and/or new claims in Assurant Employee Benefits would need to be calculated using lower discount rates, thereby increasing the net present value of those claims and the required reserves. We expect this to happen in the first quarter of 2011. Depending on the magnitude of the decline, such changes could have a material adverse effect on our results of operations and financial condition. In addition, investment income may be lower than that assumed in setting premium rates.
Our investment portfolio is subject to various risks that may result in realized investment losses.
We are subject to credit risk in our investment portfolio, primarily from our investments in corporate bonds, preferred stocks, leveraged loans, municipal bonds, and commercial mortgages. Defaults by third parties in the payment or performance of their obligations could reduce our investment income and realized investment gains or result in the continued recognition of investment losses. The value of our investments may be materially adversely affected by increases in interest rates, downgrades in the corporate bonds included in the portfolio and by other factors that may result in the continued recognition of other-than-temporary impairments. Each of these events may cause us to reduce the carrying value of our investment portfolio.
Further, the value of any particular fixed maturity security is subject to impairment based on the creditworthiness of a given issuer. As of December 31, 2010, fixed maturity securities represented 79% of the fair value of our total invested assets. Our fixed maturity portfolio also includes below investment grade securities (rated “BB” or lower by nationally recognized securities rating organizations). These investments comprise approximately 7% of the fair value of our total investments as of December 31, 2010 and generally provide higher expected returns, but present greater risk and can be less liquid than investment grade securities. A significant increase in defaults and impairments on our fixed maturity investment portfolio could materially adversely affect our results of operations and financial condition. See “Item 7A—Quantitative and Qualitative Disclosures About Market Risk—Credit Risk” for additional information on the composition of our fixed maturity investment portfolio.
We currently invest in a small amount of equity securities (approximately 3% of the fair value of our total investments as of December 31, 2010). However, we have had higher percentages in the past and may make more such investments in the future. Investments in equity securities generally provide higher expected total returns, but present greater risk to preservation of capital than our fixed maturity investments. Recent volatility in the equity markets has led, and may continue to lead, to a decline in the market value of our investments in equity securities.
If treasury rates or credit spreads were to increase, the Company may have additional realized and unrealized investment losses and increases in other-than-temporary impairments. The determination that a security has incurred an other-than-temporary decline in value requires the judgment of management. Inherently, there are risks and uncertainties involved in making these judgments. Changes in facts, circumstances, or critical assumptions could cause management to conclude that further impairments have occurred. This could lead to additional losses on investments. For further details on net investment losses and other-than-temporary-impairments, please see Note 5 to the Consolidated Financial Statements included elsewhere in this report.
Derivative instruments generally present greater risk than fixed maturity investments or equity investments because of their greater sensitivity to market fluctuations. Since August 1, 2003, we have been using derivative
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instruments to manage the exposure to inflation risk created by our preneed insurance policies that are tied to the CPI. However, the protection provided by these derivative instruments would be limited if there were a sharp increase in inflation on a sustained long-term basis which could have a material adverse effect on our results of operations and financial condition.
Our commercial mortgage loans and real estate investments subject us to liquidity risk.
Our commercial mortgage loans on real estate investments (which represented approximately 10% of the fair value of our total investments as of December 31, 2010) are relatively illiquid. If we require extremely large amounts of cash on short notice, we may have difficulty selling these investments at attractive prices and/or in a timely manner.
The risk parameters of our investment portfolio may not assume an appropriate level of risk, thereby reducing our profitability and diminishing our ability to compete and grow.
In pricing our products and services, we incorporate assumptions regarding returns on our investments. Accordingly, our investment decisions and objectives are a function of the underlying risks and product profiles of each of our operating segments. If we do not assume sufficient risk levels in our investment portfolio, the return on our investments may be insufficient to meet our pricing assumptions and profit targets over the long term. If, in response, we choose to increase our product prices, our ability to compete and grow may be diminished.
Environmental liability exposure may result from our commercial mortgage loan portfolio and real estate investments.
Liability under environmental protection laws resulting from our commercial mortgage loan portfolio and real estate investments may weaken our financial strength and reduce our profitability. For more information, please see Item 1, “Business—Regulation—Environmental Regulation.”
Our actual claims losses may exceed our reserves for claims, and this may require us to establish additional reserves that may materially reduce our earnings, profitability and capital.
We maintain reserves to cover our estimated ultimate exposure for claims and claim adjustment expenses with respect to reported claims and incurred but not reported claims (“IBNR”) as of the end of each accounting period. Reserves, whether calculated under accounting principles generally accepted in the U.S. (“GAAP”), Statutory Accounting Principles (“SAP”) or accounting principles required in foreign jurisdictions, do not represent an exact calculation of exposure. Reserving is inherently a matter of judgment; our ultimate liabilities could exceed reserves for a variety of reasons, including changes in macroeconomic factors (such as unemployment and interest rates), case development and other factors. We also adjust our reserves from time to time as these factors and our claims experience changes. Reserve development and paid losses exceeding corresponding reserves could have a material adverse effect on our earnings.
We face risks associated with our international operations.
Our international operations face political, legal, operational and other risks that we may not face in our domestic operations. For example, we may face the risk of restrictions on currency conversion or the transfer of funds; burdens and costs of compliance with a variety of foreign laws; political or economic instability in countries in which we conduct business, including possible terrorist acts; foreign exchange rate fluctuations; diminished ability to legally enforce our contractual rights; differences in cultural environments and unexpected changes in regulatory requirements; exposure to local economic conditions and restrictions on the withdrawal of non-U.S. investment and earnings; and potentially substantial tax liabilities if we repatriate the cash generated by our international operations back to the U.S. If our business model is not successful in a particular country, we
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may lose all or most of our investment in that country. In addition, as we engage with international clients, we have made certain up-front commission payments, which we may not recover if the business does not materialize as we expect. As our international business grows, we rely increasingly on fronting carriers or intermediaries in other countries to maintain their licenses and product approvals, satisfy local regulatory requirements and continue in business.
For information on the significant international regulations that apply to our Company, please see Item 1, “Business—Regulation—International Regulation.”
Fluctuations in the exchange rate of the U.S. dollar and other foreign currencies may materially and adversely affect our results of operations.
While most of our costs and revenues are in U.S. dollars, some are in other currencies. Because our financial results in certain countries are translated from local currency into U.S. dollars upon consolidation, the results of our operations may be affected by foreign exchange rate fluctuations. We do not currently hedge foreign currency risk. If the U.S. dollar weakens against the local currency, the translation of these foreign-currency-denominated balances will result in increased net assets, net revenue, operating expenses, and net income or loss. Similarly, our net assets, net revenue, operating expenses, and net income or loss will decrease if the U.S. dollar strengthens against local currency. These fluctuations in currency exchange rates may result in gains or losses that materially and adversely affect our results of operations.
Unanticipated changes in tax provisions or exposure to additional income tax liabilities could materially and adversely affect our results.
During 2010, the Company had deferred tax assets related to realized and unrealized capital losses that were generated during 2009 and 2008. In accordance with applicable income tax guidance, the Company must determine whether its ability to realize the value of its deferred tax asset in the future is “more likely than not.” Under the income tax guidance, a deferred tax asset should be reduced by a valuation allowance if, based on the weight of all available evidence, it is more likely than not that some portion of the deferred tax asset will not be realized. The Company increased its valuation allowance by $9,050 during 2010, resulting in a balance of $90,738. The realization of deferred tax assets depends upon the existence of sufficient taxable income of the same character during the carryback or carryforward periods.
In determining the appropriate valuation allowance, management made certain judgments relating to 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 in making these judgments are updated periodically on the basis of current business conditions affecting the Company and overall economic conditions. These management judgments are therefore subject to change due to factors that include, but are not limited to, changes in our ability to realize expected capital gains in the foreseeable future or in our ability to execute other tax planning strategies. Management will continue to assess and determine the need for, and the amount of, the valuation allowance in subsequent periods. Any change in the valuation allowance could have a material impact on our results of operations and financial condition.
Additionally, certain limitations on the deductibility of employee compensation due to the Affordable Care Act may affect the deductibility of certain payments made to employees and service providers by various Assurant entities in amounts that have not been determined.
The failure to effectively maintain and modernize our information systems could adversely affect our business.
Our business is dependent upon the ability to keep current with technological advances. Our ability to keep our systems integrated with those of our clients is critical to the success of our business. If we do not effectively maintain our systems and update them to address technological advancements, our relationships and ability to do
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business with our clients may be adversely affected. We could also experience other adverse consequences, including unfavorable underwriting and reserving decisions, internal control problems and security breaches resulting in loss of data.
We may be unable to accurately price for benefits, claims and other costs, which could reduce our profitability.
Our profitability could vary depending on our ability to predict and price for benefits, claims and other costs including, but not limited to, medical and dental costs and the frequency and severity of property claims. This ability could be affected by factors such as inflation, changes in the regulatory environment, changes in industry practices, changes in legal, social or environmental conditions, or new technologies. The inability to accurately price for benefits, claims and other costs could materially adversely affect our results of operations and financial condition.
Reinsurance may not be available or adequate to protect us against losses, and we are subject to the credit risk of reinsurers.
As part of our overall risk and capacity management strategy, we purchase reinsurance for certain risks underwritten by our various operating segments. Although the reinsurer is liable to us for claims properly ceded under the reinsurance arrangements, we remain liable to the insured as the direct insurer on all risks reinsured. Ceded reinsurance arrangements therefore do not eliminate our obligation to pay claims. We are subject to credit risk with respect to our ability to recover amounts due from reinsurers. The inability to collect amounts due from reinsurers could materially adversely affect our results of operations and our financial condition.
Reinsurance for certain types of catastrophes could become unavailable or prohibitively expensive for some of our businesses. In such a situation, we might also be adversely affected by state regulations that prohibit us from excluding catastrophe exposures or from withdrawing from or increasing premium rates in catastrophe-prone areas.
Our reinsurance facilities are generally subject to annual renewal. We may not be able to maintain our current reinsurance facilities and, even where highly desirable or necessary, we may not be able to obtain other reinsurance facilities in adequate amounts and at favorable rates. Inability to obtain reinsurance at favorable rates or at all could cause us to reduce the level of our underwriting commitments, to take more risk, or to incur higher costs. These developments could materially adversely affect our results of operations and financial condition.
We have sold businesses through reinsurance that could again become our direct financial and administrative responsibility if the purchasing companies were to become insolvent.
In the past, we have sold, and in the future we may sell, businesses through reinsurance ceded to third parties. For example, in 2001 we sold the insurance operations of our Fortis Financial Group (“FFG”) division to The Hartford Financial Services Group, Inc. (“The Hartford”) and in 2000 we sold our Long Term Care (“LTC”) division to John Hancock Life Insurance Company (“John Hancock”), now a subsidiary of Manulife Financial Corporation. Most of the assets backing reserves coinsured under these sales are held in trusts or separate accounts. However, if the reinsurers became insolvent, we would be exposed to the risk that the assets in the trusts and/or the separate accounts would be insufficient to support the liabilities that would revert to us.
The A.M. Best ratings of The Hartford and John Hancock are currently A and A+, respectively. A.M. Best downgraded the issuer credit and financial strength ratings of The Hartford from A+ to A in February 2009. Currently, A.M. Best maintains a stable outlook on The Hartford’s financial strength ratings and a negative outlook on John Hancock’s financial strength ratings.
We also face the risk of again becoming responsible for administering these businesses in the event of reinsurer insolvency. We do not currently have the administrative systems and capabilities to process these
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businesses. Accordingly, we would need to obtain those capabilities in the event of an insolvency of one or more of the reinsurers. We might be forced to obtain such capabilities on unfavorable terms with a resulting material adverse effect on our results of operations and financial condition.
Due to the structure of our commission program, we are exposed to risks related to the creditworthiness and reporting systems of some of our agents, third party administrators and clients in Assurant Solutions and Assurant Specialty Property.
We are subject to the credit risk of some of the clients and/or agents with which we contract in Assurant Solutions and Assurant Specialty Property. We advance agents’ commissions as part of our preneed insurance product offerings. These advances are a percentage of the total face amount of coverage. There is a one-year payback provision against the agency if death or lapse occurs within the first policy year. If SCI, which receives the largest shares of such agent commissions, were unable to fulfill its payback obligations, this could have an adverse effect on our operations and financial condition.
In addition, some of our clients, third party administrators and agents collect and report premiums or pay claims on our behalf. These parties’ failure to remit all premiums collected or to pay claims on our behalf on a timely and accurate basis could have an adverse effect on our results of operations.
We face significant competitive pressures in our businesses, which could reduce our profitability.
We compete for customers and distributors with many insurance companies and other financial services companies for business and individual customers, employer and other group customers, agents, brokers and other distribution relationships. Some of our competitors may offer a broader array of products than our subsidiaries or have a greater diversity of distribution resources, better brand recognition, more competitive pricing, lower costs, greater financial strength, more resources, or higher ratings.
Many of our insurance products, particularly our group benefits and group health insurance policies, are underwritten annually. There is a risk that group purchasers may be able to obtain more favorable terms from competitors, rather than renewing coverage with us. Competition may, as a result, adversely affect the persistency of our policies, as well as our ability to sell products.
Some of our competitors may have a lower target for returns on capital allocated to their business than we do, which may enable them to undercut our prices. In addition, in certain markets, we compete with organizations that have a substantial market share. In particular, certain large competitors of Assurant Health may be able to obtain favorable financial arrangements from health care providers that are unavailable to us, putting us at a competitive disadvantage and potentially adversely affecting our revenues and profits.
In addition, as financial institutions gain experience with debt protection administration, their reliance on third party administrators, such as Assurant Solutions may diminish, thereby reducing our revenues and profits.
New competition could also cause the supply of insurance to change, which could affect our ability to price our products at attractive rates and thereby adversely affect our underwriting results. Although there are some impediments facing potential competitors who wish to enter the markets we serve, the entry of new competitors into our markets can occur, affording our customers significant flexibility in moving to other insurance providers.
Failure to protect our clients’ confidential information and privacy could result in the loss of reputation and customers, reduce our profitability and/or subject us to fines, litigation and penalties, and the costs of compliance with privacy and security laws could adversely affect our business.
Our businesses are subject to a variety of privacy regulations and confidentiality obligations. If we do not properly comply with privacy and security laws and regulations that require us to protect confidential
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information, we could experience adverse consequences, including loss of customers and related revenue, regulatory problems (including fines and penalties), loss of reputation and civil litigation, which could adversely affect our business and results of operations. As have other entities in the health care industry, we have incurred and will continue to incur substantial costs in complying with the requirements of applicable privacy and security laws. For more information on the privacy and security laws that apply to us, please see Item 1, “Business—Regulation.”
We may be unable to grow our business as we would like if we cannot find suitable acquisition candidates at attractive prices or integrate them effectively.
Historically, acquisitions and new ventures have played a significant role in the growth of some of our businesses. We may not be able to identify suitable acquisition candidates or new venture opportunities, to finance or complete such transactions on acceptable terms, or to integrate acquired businesses successfully.
Acquisitions entail a number of risks including, among other things, inaccurate assessment of liabilities; difficulties in realizing projected efficiencies, synergies and cost savings; difficulties in integrating systems and personnel; failure to achieve anticipated revenues, earnings or cash flow; an increase in our indebtedness; and a limitation in our ability to access additional capital when needed. Our failure to adequately address these acquisition risks could materially adversely affect our results of operations and financial condition.
The inability of our subsidiaries to pay sufficient dividends to us could prevent us from meeting our obligations and paying future stockholder dividends.
As a holding company whose principal assets are the capital stock of our subsidiaries, we rely primarily on dividends and other statutorily permissible payments from our subsidiaries to meet our obligations for payment of interest and principal on outstanding debt obligations and to pay dividends to stockholders and corporate expenses. The ability of our subsidiaries to pay dividends and to make such other payments in the future will depend on their statutory surplus, future statutory earnings and regulatory restrictions. Except to the extent that we are a creditor with recognized claims against our subsidiaries, claims of the subsidiaries’ creditors, including policyholders, have priority over creditors’ claims with respect to the assets and earnings of the subsidiaries. If any of our subsidiaries should become insolvent, liquidate or otherwise reorganize, our creditors and stockholders will have no right to proceed against their assets or to cause the liquidation, bankruptcy or winding-up of the subsidiary under applicable liquidation, bankruptcy or winding-up laws. The applicable insurance laws of the jurisdiction where each of our insurance subsidiaries is domiciled would govern any proceedings relating to that subsidiary, and the insurance authority of that jurisdiction would act as a liquidator or rehabilitator for the subsidiary. Both creditors and policyholders of the subsidiary would be entitled to payment in full from the subsidiary’s assets before we, as a stockholder, would be entitled to receive any distribution from the subsidiary.
The payment of dividends by any of our regulated insurance company subsidiaries in excess of specified amounts (i.e., extraordinary dividends) must be approved by the subsidiary’s domiciliary state department of insurance. Ordinary dividends, for which no regulatory approval is generally required, are limited to amounts determined by a formula, which varies by state. The formula for the majority of the states in which our subsidiaries are domiciled is based on the prior year’s statutory net income or 10% of the statutory surplus as of the end of the prior year. Some states limit ordinary dividends to the greater of these two amounts, others limit them to the lesser of these two amounts and some states exclude prior year realized capital gains from prior year net income in determining ordinary dividend capacity. Some states have an additional stipulation that dividends may only be paid out of earned surplus. If insurance regulators determine that payment of an ordinary dividend or any other payments by our insurance subsidiaries to us (such as payments under a tax sharing agreement or payments for employee or other services) would be adverse to policyholders or creditors, the regulators may block such payments that would otherwise be permitted without prior approval. Future regulatory actions could further restrict the ability of our insurance subsidiaries to pay dividends. For more information on the maximum
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amount our subsidiaries could pay us in 2011 without regulatory approval, see “Item 5—Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities—Dividend Policy.”
Our credit facilities also contain limitations on our ability to pay dividends to our stockholders if we are in default or such dividend payments would cause us to be in default of our obligations under the credit facilities.
Any additional material restrictions on the ability of insurance subsidiaries to pay dividends could adversely affect our ability to pay any dividends on our common stock and/or service our debt and pay our other corporate expenses.
The success of our business strategy depends on the continuing service of key executives and the members of our senior management team, and any failure to adequately provide for the succession of senior management and other key executives could have an adverse effect on our results of operations.
Our business and results of operations could be adversely affected if we fail to adequately plan for the succession of our senior management and other key executives. Although we have succession plans for key executives, this does not guarantee that they will stay with us.
Risks Related to Our Industry
Reform of the health insurance industry could make our health insurance business unprofitable.
In March 2010, President Obama signed the Affordable Care Act into law. Provisions of the Affordable Care Act and related reforms have and will become effective at various dates over the next several years and will make sweeping and fundamental changes to the U.S. health care system that are expected to significantly affect the health insurance industry. For more information on the Affordable Care Act, please see Item 1, “Business—Regulation—Federal Regulation—Patient Protection and Affordable Care Act.”
The Affordable Care Act requires Assurant Health, for some products, to increase benefits, to limit rescission to cases of intentional fraud and, eventually, to insure pre-existing conditions in all lines of insurance, among other things. If, for those products, Assurant Health’s actual loss ratios fall short of required minimum loss ratios (by state and legal entity), we are required to rebate the difference to consumers. We have made, and are continuing to make, significant changes to the operations and products of Assurant Health to adapt to the new environment. In 2011, we expect the operations of Assurant Health to break even, but Assurant Health could lose money in 2011 and beyond if our plans for operating in the new environment are unsuccessful or if there is less demand than we expect for our products in the new environment.
Our business is subject to risks related to litigation and regulatory actions.
From time to time, we may be subject to a variety of legal and regulatory actions relating to our current and past business operations, including, but not limited to:
| • | disputes over coverage or claims adjudication including, but not limited to, pre-existing conditions in individual medical contracts and rescissions of policies; |
| • | disputes over our treatment of claims, where states or insured may allege that we failed to make required payments or to meet prescribed deadlines for adjudicating claims; |
| • | disputes regarding sales practices, disclosures, premium refunds, licensing, regulatory compliance, underwriting and compensation arrangements; |
| • | disputes with agents, brokers or network providers over compensation and termination of contracts and related claims; |
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| • | actions by state regulatory authorities that may challenge our ability to increase or maintain our premium rates and/or require us to reduce current premium rates; |
| • | disputes alleging packaging of credit insurance products with other products provided by financial institutions; |
| • | disputes with tax and insurance authorities regarding our tax liabilities; |
| • | disputes relating to customers’ claims that the customer was not aware of the full cost or existence of the insurance or limitations on insurance coverage; and |
| • | industry-wide investigations regarding business practices including, but not limited to, the use and the marketing of certain types of insurance policies or certificates of insurance. |
Unfavorable outcomes in litigation or regulatory proceedings, or significant problems in our relationships with regulators, could materially adversely affect our results of operations and financial condition, our reputation, and our ability to continue to do business. They could also expose us to further investigations or litigations.
We are subject to extensive laws and regulations, which increase our costs and could restrict the conduct of our business.
Our insurance subsidiaries are subject to extensive regulation and supervision in the jurisdictions in which they do business. Such regulation is generally designed to protect the interests of policyholders. To that end, the laws of the various states and other jurisdictions establish insurance departments with broad powers over, among other things: licensing and authorizing the transaction of business; capital, surplus and dividends; underwriting limitations; companies’ ability to enter and exit markets; statutory accounting and other disclosure requirements; policy forms; coverage; companies’ ability to provide, terminate or cancel certain coverages; premium rates, including regulatory ability to disapprove or reduce the premium rates companies may charge; trade and claims practices; certain transactions between affiliates; content of disclosures to consumers; type, amount and valuation of investments; assessments or other surcharges for guaranty funds and companies’ ability to recover assessments through premium increases; and market conduct and sales practices.
For a discussion of various laws and regulations affecting our business, please see Item 1, “Business—Regulation.”
If regulatory requirements impede our ability to conduct certain operations, our results of operations and financial condition could be materially adversely affected. In addition, we may be unable to maintain all required licenses and approvals and our business may not fully comply with the wide variety of applicable laws and regulations, or the relevant regulators’ interpretation of these laws and regulations. In such events, the insurance regulatory authorities could preclude or temporarily suspend us from operating, limit some or all of our activities, or fine us. These types of actions could materially adversely affect our results of operations and financial condition.
Changes in regulation may reduce our profitability and limit our growth.
Legislation or other regulatory reform that increases the regulatory requirements imposed on us or that changes the way we are able to do business may significantly harm our business or results of operations in the future. For example, some states have imposed new time limits for the payment of uncontested covered claims and require health care and dental service plans to pay interest on uncontested claims not paid promptly within the required time period. Some states have also granted their insurance regulatory agencies additional authority to impose monetary penalties and other sanctions on health and dental plans engaging in certain unfair payment practices. If we were unable for any reason to comply with these requirements, it could result in substantial costs to us and may materially adversely affect our results of operations and financial condition.
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In addition, new interpretations of existing laws, or new judicial decisions affecting the insurance industry, could adversely affect our business.
Legislative or regulatory changes that could significantly harm our subsidiaries and us include, but are not limited to:
| • | imposed reductions on premium levels, limitations on the ability to raise premiums on existing policies, or new minimum loss ratios; |
| • | increases in minimum capital, reserves and other financial viability requirements; |
| • | enhanced or new regulatory requirements intended to prevent future financial crises or to otherwise ensure the stability of institutions; |
| • | new licensing requirements; |
| • | restrictions on the ability to offer certain types of insurance products; |
| • | prohibitions or limitations on provider financial incentives and provider risk-sharing arrangements; |
| • | more stringent standards of review for claims denials or coverage determinations; |
| • | guaranteed-issue requirements restricting our ability to limit or deny coverage; |
| • | new benefit mandates; |
| • | increased regulation relating to lender-placed insurance; |
| • | limitations on our ability to build appropriate provider networks and, as a result, manage health care and utilization due to “any willing provider” legislation, which requires us to take any provider willing to accept our reimbursement; |
| • | limitations on the ability to manage health care and utilization due to direct access laws that allow insureds to seek services directly from specialty medical providers without referral by a primary care provider; and |
| • | restriction of solicitation of insurance consumers by funeral board laws for prefunded funeral insurance coverage. |
There are currently several proposals to amend state insurance holding company laws to increase the scope of insurance holding company regulation. These include model laws proposed by the International Association of Insurance Supervisors and the NAIC that provide for uniform standards of insurer corporate governance, group-wide supervision of insurance holding companies, adjustments to risk-based capital ratios, and additional regulatory disclosure requirements for insurance holding companies. In addition, the NAIC has proposed a “Solvency Modernization Initiative” that focuses on capital requirements, corporate governance and risk management, statutory accounting and financial reporting, and reinsurance. We cannot predict the effect of these initiatives on the Company at this time.
The insurance and related businesses in which we operate may be subject to periodic negative publicity, which may negatively affect our financial results.
We communicate with and distribute our products and services ultimately to individual consumers. There may be a perception that some of these purchasers may be unsophisticated and in need of consumer protection. Accordingly, from time to time, consumer advocacy groups or the media may focus attention on our products and services, thereby subjecting us to negative publicity.
We may also be negatively affected if another company in one of our industries or in a related industry engages in practices resulting in increased public attention to our businesses. Negative publicity may also result
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from judicial inquiries, unfavorable outcomes in lawsuits, or regulatory or governmental action with respect to our products, services and industry commercial practices. Negative publicity may cause increased regulation and legislative scrutiny of industry practices as well as increased litigation or enforcement action by civil and criminal authorities. Additionally, negative publicity may increase our costs of doing business and adversely affect our profitability by impeding our ability to market our products and services, constraining our ability to price our products appropriately for the risks we are assuming, requiring us to change the products and services we offer, or increasing the regulatory burdens under which we operate.
The insurance industry can be cyclical, which may affect our results.
Certain lines of insurance that we write can be cyclical. Although no two cycles are the same, insurance industry cycles have typically lasted for periods ranging from two to ten years. In addition, the upheaval in the global economy during 2008 and 2009 has been much more widespread and has affected all the businesses in which we operate. We expect to see continued cyclicality in some or all of our businesses in the future, which may have a material adverse effect on our results of operations and financial condition.
Risks Related to Our Common Stock
Given the recent economic climate, our stock may be subject to stock price and trading volume volatility. The price of our common stock could fluctuate or decline significantly and you could lose all or part of your investment.
In recent years, the stock markets have experienced significant price and trading volume volatility. Company-specific issues and market developments generally in the insurance industry and in the regulatory environment may have caused this volatility. Our stock price could materially fluctuate or decrease in response to a number of events and factors, including but not limited to: quarterly variations in operating results; operating and stock price performance of comparable companies; changes in our financial strength ratings; limitations on premium levels or the ability to maintain or raise premiums on existing policies; regulatory developments and negative publicity relating to us or our competitors. In addition, broad market and industry fluctuations may materially and adversely affect the trading price of our common stock, regardless of our actual operating performance.
Applicable laws, our certificate of incorporation and by-laws, and contract provisions may discourage takeovers and business combinations that some stockholders might consider to be in their best interests.
State laws and our certificate of incorporation and by-laws may delay, defer, prevent or render more difficult a takeover attempt that our stockholders might consider in their best interests. For example, Section 203 of the General Corporation Law of the State of Delaware may limit the ability of an “interested stockholder” to engage in business combinations with us. An interested stockholder is defined to include persons owning 15% or more of our outstanding voting stock. These provisions may also make it difficult for stockholders to replace or remove our directors, facilitating director enhancement that may delay, defer or prevent a change in control. Such provisions may prevent our stockholders from receiving the benefit from any premium to the market price of our common stock offered by a bidder in a takeover context. Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our common stock if they are viewed as discouraging future takeover attempts.
Our certificate of incorporation or by-laws also contain provisions that permit our Board of Directors to issue one or more series of preferred stock, prohibit stockholders from filling vacancies on our Board of Directors, prohibit stockholders from calling special meetings of stockholders and from taking action by written consent, and impose advance notice requirements for stockholder proposals and nominations of directors to be considered at stockholder meetings.
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Additionally, applicable state insurance laws may require prior approval of an application to acquire control of a domestic insurer. State statutes generally provide that control over a domestic insurer is presumed to exist when any person directly or indirectly owns, controls, has voting power over, or holds proxies representing, 10% or more of the domestic insurer’s voting securities. However, the State of Florida, in which some of our insurance subsidiaries are domiciled, sets this threshold at 5%. Because a person acquiring 5% or more of our common stock would indirectly control the same percentage of the stock of our Florida subsidiaries, the insurance change of control laws of Florida would apply to such transaction and at 10% the laws of many other states would likely apply to such a transaction. Prior to granting such approval, a state insurance commissioner will typically consider such factors as the financial strength of the applicant, the integrity of the applicant’s board of directors and executive officers, the applicant’s plans for the future operations of the domestic insurer and any anti-competitive results that may arise from the consummation of the acquisition of control.
We may also, under some circumstances involving a change of control, be obligated to repay our outstanding indebtedness under our revolving credit facility and other agreements. We or any possible acquirer may not have available financial resources necessary to repay such indebtedness in those circumstances, which may constitute an event of default resulting in acceleration of indebtedness and potential cross-default under other agreements. The threat of this could have the effect of delaying or preventing transactions involving a change of control, including transactions in which our stockholders would receive a substantial premium for their shares over then-current market prices, or which they otherwise may deem to be in their best interests.
Item 1B. Unresolved Staff Comments
None.
We own eight properties, including five buildings whose locations serve as headquarters for our operating segments, two buildings that serve as operation centers for Assurant Solutions and Assurant Specialty Property and one building that serves as a claims training center for Assurant Specialty Property. Assurant Solutions and Assurant Specialty Property share headquarters buildings located in Miami, Florida and Atlanta, Georgia. Assurant Specialty Property has operations centers located in Florence, South Carolina and Springfield, Ohio. Assurant Solutions’ preneed business also has a headquarters building in Rapid City, South Dakota. Assurant Employee Benefits has a headquarters building in Kansas City, Missouri. Assurant Health has a headquarters building in Milwaukee, Wisconsin. We lease office space for various offices and service centers located throughout the U.S. and internationally, including our New York, New York corporate office and our data center in Woodbury, Minnesota. Our leases have terms ranging from month-to-month to twenty-five years. We believe that our owned and leased properties are adequate for our current business operations.
The Company is involved in litigation in the ordinary course of business, both as a defendant and as a plaintiff. See Note 26 to the Consolidated Financial Statements for a description of certain matters. The Company may from time to time be subject to a variety of legal and regulatory actions relating to our current and past business operations. While the Company cannot predict the outcome of any pending or future litigation, examination or investigation, we do not believe that the outcome of pending matters will have a material adverse effect individually or in the aggregate, on the Company’s financial position, results of operations, or cash flows.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Stock Performance Graph
The following chart compares the total stockholder returns (stock price increase plus dividends) on our common stock from December 31, 2005 through December 31, 2010 with the total stockholder returns for the S&P 400 Midcap Index, as the broad equity market index, and the S&P 400 Multi-Line Insurance Index and S&P 500 Multi-Line Insurance Index, as the published industry indexes. The graph assumes that the value of the investment in the common stock and each index was $100 on December 31, 2005 and that all dividends were reinvested.
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Total Return to Stockholders
(Includes reinvestment of dividends)
| Base Period 12/31/05 |
INDEXED RETURNS Years Ending |
|||||||||||||||||||||||
| Company / Index |
12/31/06 | 12/31/07 | 12/31/08 | 12/31/09 | 12/31/10 | |||||||||||||||||||
| Assurant, Inc. |
100 | 128.01 | 156.25 | 70.97 | 71.36 | 94.98 | ||||||||||||||||||
| S&P 400 MidCap Index |
100 | 110.32 | 119.12 | 75.96 | 104.36 | 132.16 | ||||||||||||||||||
| S&P 500 Multi-line Insurance Index* |
100 | 107.58 | 93.71 | 10.61 | 14.47 | 17.83 | ||||||||||||||||||
| S&P 400 Multi-line Insurance Index* |
100 | 121.75 | 109.98 | 78.01 | 90.12 | 105.59 | ||||||||||||||||||
| ANNUAL RETURN PERCENTAGE Years Ending |
||||||||||||||||||||||||
| Company / Index |
12/31/06 | 12/31/07 | 12/31/08 | 12/31/09 | 12/31/10 | |||||||||||||||||||
| Assurant, Inc. |
28.01 | 22.06 | (54.58 | ) | 0.56 | 33.09 | ||||||||||||||||||
| S&P 400 MidCap Index |
10.32 | 7.98 | (36.23 | ) | 37.38 | 26.64 | ||||||||||||||||||
| S&P 500 Multi-line Insurance Index* |
7.58 | (12.89 | ) | (88.68 | ) | 36.35 | 23.23 | |||||||||||||||||
| S&P 400 Multi-line Insurance Index* |
21.75 | (9.67 | ) | (29.07 | ) | 15.52 | 17.17 | |||||||||||||||||
| * | S&P 400 Multi-line Insurance Index is comprised of mid-cap companies, while the S&P 500 Multi-line Insurance Index is comprised of large-cap companies. |
Common Stock Price
Our common stock is listed on the NYSE under the symbol “AIZ.” The following table sets forth the high and low intraday sales prices per share of our common stock as reported by the NYSE for the periods indicated.
| Year Ended December 31, 2010 |
High | Low | Dividends | |||||||||
| First Quarter |
$ | 34.60 | $ | 29.08 | $ | 0.15 | ||||||
| Second Quarter |
$ | 38.01 | $ | 32.47 | $ | 0.16 | ||||||
| Third Quarter |
$ | 41.24 | $ | 33.95 | $ | 0.16 | ||||||
| Fourth Quarter |
$ | 41.87 | $ | 33.43 | $ | 0.16 | ||||||
| Year Ended December 31, 2009 |
High | Low | Dividends | |||||||||
| First Quarter |
$ | 31.44 | $ | 16.34 | $ | 0.14 | ||||||
| Second Quarter |
$ | 29.60 | $ | 20.88 | $ | 0.15 | ||||||
| Third Quarter |
$ | 32.49 | $ | 21.65 | $ | 0.15 | ||||||
| Fourth Quarter |
$ | 33.37 | $ | 28.94 | $ | 0.15 | ||||||
Holders
On February 15, 2011, there were approximately 333 registered holders of record of our common stock. The closing price of our common stock on the NYSE on February 15, 2011 was $40.33.
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Shares Repurchased
| Period in 2010 |
Total Number of Shares Purchased |
Average Price Paid Per Share |
Total Number of Shares Purchased as Part of Publicly Announced Programs (1) |
Approximate Dollar Value of Shares that may yet be Purchased under the Programs (2) |
||||||||||||
| January 1 – January 31 |
— | $ | — | — | $ | 770,685 | ||||||||||
| February 1 – February 28 |
1,304,915 | 30.46 | 1,304,915 | 730,958 | ||||||||||||
| March 1 – March 31 |
2,121,554 | 32.73 | 2,121,554 | 661,569 | ||||||||||||
| Total first quarter |
3,426,469 | 31.86 | 3,426,469 | 661,569 | ||||||||||||
| April 1 – April 30 |
1,783,816 | 35.07 | 1,783,816 | 599,045 | ||||||||||||
| May 1 – May 31 |
1,982,400 | 35.44 | 1,982,400 | 528,829 | ||||||||||||
| June 1 – June 30 |
2,300,000 | 35.78 | 2,300,000 | 446,581 | ||||||||||||
| Total second quarter |
6,066,216 | 35.46 | 6,066,216 | 446,581 | ||||||||||||
| July 1 – July 31 |
1,185,000 | 36.19 | 1,185,000 | 403,721 | ||||||||||||
| August 1 – August 31 |
52,000 | 38.11 | 52,000 | 401,740 | ||||||||||||
| September 1 – September 30 |
— | — | — | 401,740 | ||||||||||||
| Total third quarter |
1,237,000 | 36.27 | 1,237,000 | 401,740 | ||||||||||||
| October 1 – October 31 |
— | — | — | 401,740 | ||||||||||||
| November 1 – November 30 |
2,305,960 | 35.35 | 2,305,960 | 320,510 | ||||||||||||
| December 1 – December 31 |
2,189,000 | 37.69 | 2,189,000 | 238,040 | ||||||||||||
| Total fourth quarter |
4,494,960 | 36.44 | 4,494,960 | 238,040 | ||||||||||||
| Total through December 31 |
15,224,645 | $ | 35.01 | 15,224,645 | $ | 238,040 | ||||||||||
| (1) | Shares purchased pursuant to the November 10, 2006 publicly announced share repurchase authorization of up to $600,000 of outstanding common stock, which was increased by an authorization on January 22, 2010 for the repurchase of up to an additional $600,000 of outstanding common stock. |
| (2) | The Company repurchased 843,000 shares of its outstanding common shares from January 1, 2011 to January 14, 2011 at a cost of $32,453. On January 18, 2011, the Company’s Board of Directors authorized the Company to repurchase up to an additional $600,000 of its outstanding common stock making the total authorization available at that date $805,587. |
Dividend Policy
On January 14, 2011, our Board of Directors declared a quarterly dividend of $0.16 per common share payable on March 14, 2011 to stockholders of record as of February 28, 2011. We paid dividends of $0.16 on December 13, 2010, September 14, 2010 and June 8, 2010 and $0.15 per common share on March 8, 2010. We paid dividends of $0.15 on December 14, 2009, September 15, 2009 and June 9, 2009 and $0.14 per common share on March 9, 2009. Any determination to pay future dividends will be at the discretion of our Board of Directors and will be dependent upon: our subsidiaries’ ability to make dividend 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.
We are a holding company and, therefore, our ability to pay dividends, service our debt and meet our other obligations depends primarily on the ability of our regulated U.S. domiciled insurance subsidiaries to pay dividends and make other statutorily permissible payments to us. Our insurance subsidiaries are subject to significant regulatory and contractual restrictions limiting their ability to declare and pay dividends. See “Item 1A—Risk Factors—Risks Relating to Our Company—The inability of our subsidiaries to pay sufficient
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dividends to us could prevent us from meeting our obligations and paying future stockholder dividends.” For the calendar year 2011, the maximum amount of dividends that our regulated U.S. domiciled insurance subsidiaries could pay to us under applicable laws and regulations without prior regulatory approval is approximately $614,362. Dividends or returns of capital paid by our subsidiaries totaled $886,200 in 2010.
We may seek approval of regulators to pay dividends in excess of any amounts that would be permitted without such approval. However, there can be no assurance that we would obtain such approval if sought.
Payments of dividends on shares of common stock are subject to the preferential rights of preferred stock that our Board of Directors may create from time to time. For more information regarding restrictions on the payment of dividends by us and our insurance subsidiaries, including pursuant to the terms of our revolving credit facilities, see “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”
In addition, our $350,000 revolving credit facility restricts payments of dividends if an event of default under the facility has occurred or a proposed dividend payment would cause an event of default under the facility.
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.
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Item 6. Selected Financial Data
Assurant, Inc.
Five-Year Summary of Selected Financial Data
| As of and for the years ended December 31, | ||||||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
| Consolidated Statement of Operations Data: |
||||||||||||||||||||
| Revenues |
||||||||||||||||||||
| Net earned premiums and other considerations |
$ | 7,403,039 | $ | 7,550,335 | $ | 7,925,348 | $ | 7,407,730 | $ | 6,843,775 | ||||||||||
| Net investment income |
703,190 | 698,838 | 774,347 | 799,073 | 736,686 | |||||||||||||||
| Net realized gains (losses) on investments (1) |
48,403 | (53,597 | ) | (428,679 | ) | (62,220 | ) | 111,865 | ||||||||||||
| Amortization of deferred gain on disposal of businesses |
10,406 | 22,461 | 29,412 | 33,139 | 37,300 | |||||||||||||||
| Fees and other income |
362,684 | 482,464 | 300,800 | 275,793 | 340,958 | |||||||||||||||
| Total revenues |
8,527,722 | 8,700,501 | 8,601,228 | 8,453,515 | 8,070,584 | |||||||||||||||
| Benefits, losses and expenses |
||||||||||||||||||||
| Policyholder benefits (2) |
3,640,978 | 3,867,982 | 4,019,147 | 3,712,711 | 3,535,521 | |||||||||||||||
| Amortization of deferred acquisition costs and value of businesses acquired |
1,521,238 | 1,601,880 | 1,671,680 | 1,429,735 | 1,186,710 | |||||||||||||||
| Underwriting, general and administrative expenses |
2,392,035 | 2,377,364 | 2,286,170 | 2,238,851 | 2,191,368 | |||||||||||||||
| Interest expense |
60,646 | 60,669 | 60,953 | 61,178 | 61,243 | |||||||||||||||
| Goodwill impairment (3) |
306,381 | 83,000 | — | — | — | |||||||||||||||
| Total benefits, losses and expenses |
7,921,278 | 7,990,895 | 8,037,950 | 7,442,475 | 6,974,842 | |||||||||||||||
| Income before provision for income taxes and cumulative effect of change in accounting principle |
606,444 | 709,606 | 563,278 | 1,011,040 | 1,095,742 | |||||||||||||||
| Provision for income taxes (4) |
327,267 | 279,032 | 115,482 | 357,294 | 379,871 | |||||||||||||||
| Net income before cumulative effect of change in accounting principle |
279,177 | 430,754 | 447,796 | 653,746 | 715,871 | |||||||||||||||
| Cumulative effect of change in accounting principle (5) |
— | — | — | — | 1,547 | |||||||||||||||
| Net income |
$ | 279,177 | $ | 430,574 | $ | 447,796 | $ | 653,746 | $ | 717,418 | ||||||||||
| Earnings per share : |
||||||||||||||||||||
| Basic |
||||||||||||||||||||
| Net income before cumulative effect of change in accounting principle |
$ | 2.52 | $ | 3.65 | $ | 3.79 | $ | 5.45 | $ | 5.64 | ||||||||||
| Cumulative effect of change in accounting principle |
— | — | — | — | 0.01 | |||||||||||||||
| Net income |
$ | 2.52 | $ | 3.65 | $ | 3.79 | $ | 5.45 | $ | 5.65 | ||||||||||
| Diluted |
||||||||||||||||||||
| Net income before cumulative effect of change in accounting principle |
$ | 2.50 | $ | 3.63 | $ | 3.76 | $ | 5.38 | $ | 5.55 | ||||||||||
| Cumulative effect of change in accounting principle |
— | — | — | — | 0.01 | |||||||||||||||
| Net income |
$ | 2.50 | $ | 3.63 | $ | 3.76 | $ | 5.38 | $ | 5.56 | ||||||||||
| Dividends per share |
$ | 0.63 | $ | 0.59 | $ | 0.54 | $ | 0.46 | $ | 0.38 | ||||||||||
| Share data: |
||||||||||||||||||||
| Weighted average shares outstanding used in per share calculations |
110,632,551 | 118,036,632 | 118,005,967 | 119,934,873 | 127,000,784 | |||||||||||||||
| Plus: Dilutive securities |
840,663 | 459,008 | 968,712 | 1,624,694 | 1,934,251 | |||||||||||||||
| Weighted average shares used in diluted per share calculations |
111,473,214 | 118,495,640 | 118,974,679 | 121,559,567 | 128,935,035 | |||||||||||||||
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| As of and for the years ended December 31, | ||||||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
| Selected Consolidated Balance Sheet Data: |
||||||||||||||||||||
| Cash and cash equivalents and investments |
$ | 14,655,994 | $ | 14,476,384 | $ | 13,107,476 | $ | 14,552,115 | $ | 13,416,817 | ||||||||||
| Total assets |
$ | 26,397,018 | $ | 25,860,667 | $ | 24,514,586 | $ | 26,750,316 | $ | 25,165,148 | ||||||||||
| Policy liabilities (6) |
$ | 16,520,321 | $ | 15,869,524 | $ | 15,806,235 | $ | 15,903,289 | $ | 14,513,106 | ||||||||||
| Debt |
$ | 972,164 | $ | 972,058 | $ | 971,957 | $ | 971,863 | $ | 971,774 | ||||||||||
| Mandatorily redeemable preferred stock |
$ | 5,000 | $ | 8,160 | $ | 11,160 | $ | 21,160 | $ | 22,160 | ||||||||||
| Total stockholder’s equity |
$ | 4,780,537 | $ | 4,853,249 | $ | 3,709,505 | $ | 4,088,903 | $ | 3,832,597 | ||||||||||
| Per share data: |
||||||||||||||||||||
| Total book value per share (7) |
$ | 46.31 | $ | 41.27 | $ | 31.53 | $ | 34.65 | $ | 31.22 | ||||||||||
| (1) | Included in net realized gains (losses) are other-than-temporary impairments of $11,167, $38,660, $340,153 and $48,184 for 2010, 2009, 2008 and 2007, respectively. During 2006, we recorded an investment gain of $98,342 related to the sale of our equity interest in PHCS. |
| (2) | During 2008, we incurred losses of $132,615 associated with hurricanes Gustav and Ike. |
| (3) | Following the completion of our annual goodwill impairment analysis, we recorded an impairment charge of $306,381 related to Assurant Employee Benefits and Assurant Health and a charge of $83,000 related to Assurant Employee Benefits during the fourth quarters of 2010 and 2009, respectively. The impairment charges resulted in a decrease to net income but did not have any related tax benefit. |
| (4) | During 2008, we recorded a $84,864 tax benefit due to the sale of a non-operating subsidiary and the related deferred tax assets on a capital loss carryover. |
| (5) | On January 1, 2006, we adopted the share based compensation guidance. As a result, we recognized a cumulative adjustment of $1,547. |
| (6) | Policy liabilities include future policy benefits and expenses, unearned premiums and claims and benefits payable. |
| (7) | Total stockholders’ equity divided by the basic shares of common stock outstanding. At December 31, 2010, 2009 and 2008 there were 103,227,238, 117,591,250, and 117,640,936 shares, respectively, of common stock outstanding. At December 31, 2007 and 2006 there were 118,012,036 and 122,772,350 shares of common stock outstanding. |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and accompanying notes which appear elsewhere in this report. It contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this report, particularly under the headings “Item 1A—Risk Factors” and “Forward-Looking Statements.”
General
We report our results through five segments: Assurant Solutions, Assurant Specialty Property, Assurant Health, Assurant Employee Benefits, and Corporate and Other. The Corporate and Other segment includes activities of the holding company, financing expenses, net realized gains (losses) on investments, interest income earned from short-term investments held, interest income from excess surplus of insurance subsidiaries not allocated to other segments, run-off Asbestos business, and additional costs associated with excess of loss reinsurance and ceded to certain subsidiaries in the London market between 1995 and 1997. The Corporate and Other segment also includes the amortization of deferred gains associated with the portions of the sales of FFG and LTC, which were sold through reinsurance agreements as described below.
The following discussion covers the twelve months ended December 31, 2010 (“Twelve Months 2010”), twelve months ended December 31, 2009 (“Twelve Months 2009”) and twelve months ended December 31, 2008 (“Twelve Months 2008”). Please see the discussion that follows, for each of these segments, for a more detailed analysis of the fluctuations.
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Executive Summary
Net income decreased $151,397, or 35%, to $279,177 for Twelve Months 2010 from $430,574 for Twelve Months 2009. Twelve Months 2010 includes $107,075 (after-tax) of improved operating segment results and $66,300 (after-tax) of increased realized gains on investments, compared with Twelve Months 2009. However, results decreased primarily due to a non-cash goodwill impairment charge of $306,381 in Twelve Months 2010 compared with an $83,000 non-cash goodwill impairment charge in Twelve Months 2009. In addition, Twelve Months 2009 includes an $83,542 (after-tax) favorable legal settlement.
Assurant Solutions net income decreased to $103,206 for Twelve Months 2010 compared with $120,052 for Twelve Months 2009. Excluding a $30,948 (after-tax) intangible asset impairment charge, net income increased $14,102. This charge was related to a client notification in Fourth Quarter 2010 of a non renewal of a block of domestic service contract business effective June 1, 2011. During 2010, Assurant Solutions continued to focus on developing new client relationships and distribution channels while managing expenses. These efforts generated increased gross written premiums of $232,578 compared with prior year. In our domestic business, we are diversifying our client base by growing the Original Equipment Manufacturer channel. The Twelve Months 2010 international combined ratio improved 480 basis points compared with Twelve Months 2009, led by improvements in the United Kingdom (“U.K.”). In addition, we added new international wireless clients in markets we believe continues to offer growth opportunities. We also added new Latin American service contracts and credit insurance clients, a trend we expect will continue in 2011. Growth in Europe is proving to be more challenging, but we believe our product offerings position us well for when the European economy recovers. Our preneed life insurance business continued to deliver strong results as new sales and operating profits improved 43% and 15%, respectively, over prior year. We expect this business to continue its solid performance in 2011.
Assurant Specialty Property produced another strong year as segment results increased to $424,287 for Twelve Months 2010, from $405,997 for Twelve Months 2009. Assurant Specialty Property implemented many process improvements in 2010 that controlled expenses while adding new clients and tracking more loans. During 2010 and 2009, the lack of major catastrophic storm activity has helped drive strong results. However, during the fourth quarter of 2010, we experienced $9,811 (after-tax) of catastrophe-related losses due to wind and hail storms in Arizona. Loan counts, a key performance indicator, increased in 2010 compared with 2009 primarily due to the addition of new clients. Placement rate for prime loans during the fourth quarter of 2010 were at their highest levels ever and we expect them to remain elevated through 2011. However, subprime placement rates declined to their lowest levels since September 2008. In the aggregate, placement rates continue to rise, though we believe that total placement rates and loan inventories will decline to historical levels over the next several years. The classification between prime and subprime is blurring due to loan portfolio movement within the industry and inconsistent classifications by lenders. We believe the clients we added in 2010 combined with our alignment with leading mortgage servicers should help offset these declines.
Assurant Health increased its net income to $54,029 for Twelve Months 2010 from a net loss of $(30,220) for Twelve Months 2009 while preparing to operate in an environment with new regulations and changing dynamics in 2011. This improved financial performance was driven by pricing actions, plan design changes, and substantial cost reductions. Our sales, like most of our competitors, have slowed as consumers and agents adjust to the post-reform environment. The Affordable Care Act has altered and created disruption in the health insurance marketplace that will likely continue for some time. We have implemented transformational actions in the business during 2010, most notably a reduced commission structure for our distributors, which will better position us to compete in the future. We anticipate adapting our strategy as we more fully understand how consumers, providers, and distributors adjust to the new health care environment. 2011 will be a transition year at Assurant Health, as we continue to streamline and simplify our operations, while enhancing service for our customers. Please see “Results of Operations-Assurant Health” that follows for further information.
Assurant Employee Benefits net income increased to $63,538 for Twelve Months 2010 compared with $42,156 for Twelve Months 2009 driven by favorable claims experience and expense management. Assurant Employee Benefits continues to emphasize worksite and voluntary products, which provide affordable solutions
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that meet the needs of employers and employees. However, until employment rates increase and payrolls expand, revenue growth will be challenged. We expect our dental business results to continue to improve due to pricing actions taken, but we expect life and disability loss experience to revert to more traditional levels. We plan to lower our discount rate for new long-term disability claims in 2011, as interest rates remain at low levels. This low interest rate environment will also continue to pressure our investment income.
Critical Factors Affecting Results
Our results depend on the appropriateness of our product pricing and underwriting, the accuracy of the reserves we establish for future policyholder benefits and claims, returns on invested assets and our ability to manage our expenses. Therefore, factors affecting these items may have a material adverse effect on our results of operations or financial condition. For a listing of those factors see “Item 1A—Risk Factors.”
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.
Effective January 1, 2009, new preneed life insurance policies in which death benefit increases are determined at the discretion of the Company are accounted for as universal life contracts under the universal life insurance accounting guidance. For contracts sold prior to January 1, 2009, these types of preneed life insurance sales were accounted for and will continue to be accounted for under limited pay insurance guidance. The change from reporting certain preneed life insurance policies in accordance with the universal life insurance guidance versus the limited pay insurance guidance is not material to the consolidated statement of operations or balance sheets.
Under the universal life insurance guidance, income earned on new preneed life insurance policies is presented within policy fee income net of policyholder benefits. Under the limited pay insurance guidance, the consideration received on preneed policies 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 unrealized losses in our 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.
Beginning January 1, 2011, Assurant Health will be required to start accruing for rebates to customers if the minimum loss ratio for some of its products is less than 80%. The rebate accrual will be reflected as a reduction to net earned premiums in the Statement of Operations.
The fair market value of the fixed maturity securities in our 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,
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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 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 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 related expenses related to our debt and mandatorily redeemable preferred stock.
Critical Accounting Estimates
Certain items in our consolidated financial statements are based on estimates and judgment. Differences between actual results and these estimates could in some cases have material impacts on our consolidated financial statements.
The following critical accounting policies require significant estimates. The actual amounts realized in these areas could ultimately be materially different from the amounts currently provided for in our consolidated financial statements.
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 statement of operations in the period in which such estimates are updated.
Because establishment of reserves is an inherently uncertain process, there can be no certainty that ultimate losses will not exceed existing claims 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.
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The following table provides reserve information of our major product lines for the years ended December 31, 2010 and 2009:
| December 31, 2010 | December 31, 2009 | |||||||||||||||||||||||||||||||
| Future Policy Benefits and Expenses |
Unearned Premiums |
Claims and Benefits Payable |
Future Policy Benefits and Expenses |
Unearned Premiums |
Claims and Benefits Payable |
|||||||||||||||||||||||||||
| Case Reserves |
Incurred But Not Reported Reserves |
Case Reserve |
Incurred But Not Reported Reserves |
|||||||||||||||||||||||||||||
| Long Duration Contracts: |
||||||||||||||||||||||||||||||||
| Preneed funeral life insurance policies and investment-type annuity contracts |
$ | 3,862,431 | $ | 78,986 | $ | 12,009 | $ | 4,085 | $ | 3,629,601 | $ | 37,672 | $ | 10,431 | $ | 4,018 | ||||||||||||||||
| Life insurance no longer offered |
467,574 | 649 | 1,577 | 265 | 478,839 | 681 | 1,639 | 339 | ||||||||||||||||||||||||
| Universal life and other products no longer offered |
246,177 | 197 | 272 | 8,727 | 263,360 | 168 | 233 | 8,744 | ||||||||||||||||||||||||
| FFG, LTC and other disposed businesses |
3,435,762 | 39,119 | 33,535 | 567,557 | 2,879,224 | 41,531 | 25,542 | 421,605 | ||||||||||||||||||||||||
| Medical |
87,588 | 9,340 | 7,515 | 11,044 | 93,447 | 11,665 | 18,137 | 13,737 | ||||||||||||||||||||||||
| All other |
5,621 | 324 | 18,465 | 5,115 | 5,162 | 335 | 18,197 | 6,225 | ||||||||||||||||||||||||
| Short Duration Contracts: |
||||||||||||||||||||||||||||||||
| Group term life |
— | 4,550 | 209,514 | 36,486 | — | 3,710 | 218,191 | 37,419 | ||||||||||||||||||||||||
| Group disability |
— | 2,567 | 1,251,999 | 152,275 | — | 7,705 | 1,274,378 | 143,052 | ||||||||||||||||||||||||
| Medical |
— | 104,169 | 104,288 | 186,102 | — | 112,603 | 169,260 | 190,366 | ||||||||||||||||||||||||
| Dental |
— | 4,400 | 3,079 | 18,063 | — | 4,334 | 5,709 | 19,464 | ||||||||||||||||||||||||
| Property and Warranty |
— | 1,887,759 | 168,952 | 349,479 | — | 1,896,897 | 173,009 | 368,242 | ||||||||||||||||||||||||
| Credit Life and Disability |
— | 307,430 | 61,808 | 69,644 | — | 366,313 | 81,726 | 77,581 | ||||||||||||||||||||||||
| Extended Service Contracts |
— | 2,363,836 | 2,855 | 40,373 | — | 2,482,683 | 2,350 | 50,207 | ||||||||||||||||||||||||
| All other |
— | 260,673 | 8,211 | 17,875 | — | 187,267 | 10,013 | 16,513 | ||||||||||||||||||||||||
| Total |
$ | 8,105,153 | $ | 5,063,999 | $ | 1,884,079 | $ | 1,467,090 | $ | 7,349,633 | $ | 5,153,564 | $ | 2,008,815 | $ | 1,357,512 | ||||||||||||||||
For a description of our reserving methodology, see Note 13 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 income statements.
Historically, premium deficiency testing has not resulted in a material adjustment to deferred acquisition costs or reserves. Such adjustments could occur however, if economic or mortality conditions significantly deteriorated.
Risks related to the reserves recorded for certain discontinued individual life, annuity, and long-term care insurance policies have been 100% ceded via reinsurance. While the Company has not been released from the contractual obligation to the policyholders, changes in and deviations from economic and mortality assumptions used in the calculation of these reserves will not directly affect our results of operations unless there is a default by the assuming reinsurer.
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Short Duration Contracts
Claims and benefits payable reserves for short duration contracts include (1) case reserves for known claims which are unpaid as of the balance sheet date; (2) IBNR reserves for claims where the insured event has occurred but has not been reported to us as of the balance sheet date; and (3) loss adjustment expense reserves for the expected handling costs of settling the claims. Periodically, we review emerging experience and make adjustments to our reserves and assumptions where necessary. Below are further discussions on the reserving process for our major short duration products.
Group Disability and Group Term Life
Case or claim reserves are set for active individual claims on group long term disability policies and for waiver of premium benefits on group term life policies. Reserve factors used to calculate these reserves reflect assumptions regarding disabled life mortality and claim recovery rates, claim management practices, awards for social security and other benefit offsets and yield rates earned on assets supporting the reserves. Group long term disability and group term life waiver of premium reserves are discounted because the payment pattern and ultimate cost are fixed and determinable on an individual claim basis. Our reserves discount rate for claims incurred prior to 2011 is 5.25%. Though our final determination has not yet been made, our current estimate is that claims incurred after 2011 will be 50 to 100 basis points lower, which will ultimately increase policyholder benefits.
Factors considered when setting IBNR reserves include patterns in elapsed time from claim incidence to claim reporting, and elapsed time from claim reporting to claim payment.
Key sensitivities at December 31, 2010 for group long term disability claim reserves include the discount rate and claim termination rates.
| Claims and Benefits Payable |
Claims and Benefits Payable |
|||||||||
| Group disability, discount rate decreased by 100 basis points |
$ | 1,475,253 | Group disability, claim termination rate 10% lower |
$ | 1,440,519 | |||||
| Group disability, as reported |
$ | 1,404,274 | Group disability, as reported | $ | 1,404,274 | |||||
| Group disability, discount rate increased by 100 basis points |
$ | 1,340,328 | Group disability, claim termination rate 10% higher |
$ | 1,371,305 | |||||
The discount rate is also a key sensitivity for group term life waiver of premium reserves.
| Claims and Benefits Payable | ||||
| Group term life, discount rate decreased by 100 basis points |
$ | 255,162 | ||
| Group term life, as reported |
$ | 246,000 | ||
| Group life, discount rate increased by 100 basis points |
$ | 237,765 | ||
Medical
IBNR reserves calculated using generally accepted actuarial methods represent the largest component of reserves for Medical claims and benefits payable. The primary methods we use in their estimation are the loss development method and the projected claim method for recent claim periods. Under the loss development method, we estimate ultimate losses for each incident period by multiplying the current cumulative losses by the appropriate loss development factor. The projected claim method is used when development methods do not provide enough data to reliably estimate reserves and utilize expected ultimate loss ratios to calculate the required reserve. Where appropriate, we use variations on each method or a blend of the two.
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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 factors 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 December 31, 2010 for medical reserves include claims processing levels, claims under case management, medical inflation, seasonal effects, medical provider discounts and product mix.
| Claims and Benefits Payable* | ||||
| Medical, loss development factors 1% lower |
$ | 303,390 | ||
| Medical, as reported |
$ | 290,390 | ||
| Medical, loss development factors 1% higher |
$ | 278,390 | ||
| * | 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. |
None of the changes in incurred claims from prior years in our Medical line of business were attributable to any change in our reserve methods.
Property and Warranty
Our Property and Warranty lines of business includes lender-placed homeowners, manufactured housing homeowners, credit property, credit unemployment and warranty insurance and some longer-tail coverages (e.g. asbestos, environmental, other general liability and personal accident). 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.
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; |
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| • | 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 insurance business is written on a retrospective commission basis, which permits management to adjust commissions based on claims experience. Thus, any adjustment to prior years’ incurred claims in this line of business is partially offset by a change in contingent commissions, which is included in the selling, underwriting and general expenses line in our results 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 2010 would be as follows:
| Change in both loss frequency and severity for all Property and Warranty |
Ultimate cost of claims occurring in 2010 |
Change in cost of claims occurring in 2010 |
||||||
| 3% higher |
$ | 550,004 | $ | 31,573 | ||||
| 2% higher |
$ | 539,376 | $ | 20,945 | ||||
| 1% higher |
$ | 528,852 | $ | 10,421 | ||||
| Base scenario |
$ | 518,431 | $ | 0 | ||||
| 1% lower |
$ | 508,010 | $ | (10,421 | ) | |||
| 2% lower |
$ | 497,486 | $ | (20,945 | ) | |||
| 3% lower |
$ | 486,858 | $ | (31,573 | ) | |||
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 short duration contract that we discontinued writing many years ago. We carry case reserves, as recommended by the various pool managers, and IBNR reserves totaling $35,668 (before reinsurance) and $25,461 (net of reinsurance) at December 31, 2010. 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 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.
One of our subsidiaries, American Reliable Insurance Company (“ARIC”), participated in certain excess of loss reinsurance programs in the London market and, as a result, reinsured certain personal accident, ransom and
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kidnap insurance risks from 1995 to 1997. ARIC and a foreign affiliate ceded a portion of these risks to retrocessionaires. ARIC ceased reinsuring such business in 1997. However, certain risks continued beyond 1997 due to the nature of the reinsurance contracts written. ARIC and some of the other reinsurers involved in the programs have sought to void certain treaties on various grounds, including material misrepresentation and non-disclosure by the ceding companies and intermediaries involved in the programs. Some of the retrocessionaires have sought to avoid certain treaties with ARIC and the other reinsurers and some reinsureds have sought collection of disputed balances under some of the treaties. Disputes under these contracts generally involve multiple layers of reinsurance, and allegations that the reinsurance programs involved interrelated claims “spirals” devised to disproportionately pass claims losses to higher-level reinsurance layers.
Many of the companies involved in these programs, including ARIC, are currently involved in negotiations, arbitrations and/or litigation, in an effort to resolve these disputes. The disputes involving ARIC and an affiliate, Assurant General Insurance Limited (formerly Bankers Insurance Company Limited (“AGIL”)), for the 1995 and 1996 program years are subject to working group settlements negotiated with other market participants. Negotiations, arbitrations and litigation are still ongoing or will be scheduled for the remaining disputes.
In 2007, there were two settlements relating to parts of the 1997 program. During 2008, there was a settlement relating to the 1997 program. Loss accruals previously established relating to the 1996 and 1997 program were adequate. In 2010, the loss reserve balance decreased by $18,600 resulting from a $9,200 settlement relating to the 1997 program and settlements made to the 1995 and 1996 programs. As of December 31, 2010, we have $6,521 in loss reserves accrued. We believe, based on information currently available, that the amounts accrued are adequate. However, the inherent uncertainty of arbitrations and lawsuits, including the uncertainty of estimating whether any settlements we may enter into in the future would be on favorable terms, makes it difficult to predict outcomes with certainty.
In June 2009, ARIC and AGIL, wholly-owned subsidiaries of the Company, entered into a settlement agreement with Willis Limited, a subsidiary of Willis Group Holdings Limited (“Willis Limited”). The settlement agreement related to an action commenced in 2007 in the English Commercial Court pertaining to the placement of personal accident reinsurance. Under the settlement agreement, Willis Limited paid ARIC and AGIL a total of $139,000, which was recorded in the Corporate and Other segment.
DAC
Deferred acquisition costs (“DAC”) represent expenses incurred in prior periods primarily for the production of new business, that have been deferred for financial reporting purposes. Acquisition costs primarily consist of commissions, policy issuance expenses, premium tax and certain direct marketing expenses.
The 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 statement 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 to January 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 and sales and policy issue costs.
For preneed investment-type annuities, preneed life insurance policies with discretionary death benefit growth issued after January 1, 2009, universal life insurance policies and investment-type annuity contracts that
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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 and one time policy transfer fees and costs of issuing new certificates. 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 commissions payable under schedules that pay significantly higher rates in the first year.
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 marketing 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 and group dental 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.
Acquisition costs on the majority of individual medical contracts issued from 2003 through 2006, all individual medical contracts issued after 2006 and all small group medical contracts consist primarily of commissions to agents and brokers and compensation to representatives. These contracts are considered short duration because the terms of the contract are not fixed at issue and they are not guaranteed renewable. As a result, these costs are not deferred, but rather are recorded in the statement of operations in the period in which they are incurred.
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, or 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.
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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 5 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.
The following table sets forth our reinsurance recoverables as of the dates indicated:
| December 31, 2010 | December 31, 2009 | |||||||
| Reinsurance recoverables |
$ | 4,997,316 | $ | 4,231,734 | ||||
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 $3,488,908 and $2,790,765 at December 31, 2010 and 2009, respectively.
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 ended December 31:
| 2010 | 2009 | |||||||
| Ceded future policyholder benefits and expense |
$ | 3,344,066 | $ | 2,786,916 | ||||
| Ceded unearned premium |
796,944 | 698,985 | ||||||
| Ceded claims and benefits payable |
823,731 | 680,836 | ||||||
| Ceded paid losses |
32,575 | 64,997 | ||||||
| Total |
$ | 4,997,316 | $ | 4,231,734 | ||||
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 insurers,” 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
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results. See Note 22 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 using the Contingencies guidance. This requires management to evaluate 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 number 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 likely than not to be realized. The Company has significant deferred tax assets resulting from capital loss carryforwards and other 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 8 to our consolidated financial statements.
During 2008, the Company realized a tax benefit of $174,864 upon the sale of a non-operating subsidiary, United Family Life Insurance Company (“UFLIC”), and recorded an offsetting valuation allowance of $90,000. During 2009, the Company recognized $16,000 of other comprehensive income which reduced the valuation allowance to $74,000. During 2010, the Company recognized $6,000 of expense which increased the valuation allowance to $80,000. The increase in the valuation allowance was primarily related to fluctuations in gains resulting from certain tax planning strategies as well as fluctuations in gross unrealized gains. The gross deferred tax asset for cumulative realized and unrealized capital losses as of December 31, 2010 is $246,300, including the carryover from the loss on the sale of UFLIC.
The realization of deferred tax assets depends upon the existence of sufficient taxable income of the same character during the carry back or carry forward period. U.S. tax rules mandate that capital losses can only be recovered against capital gains. An example of capital gains would be gains from the sale of investments. The company is dependent upon having capital gain income in the foreseeable future to use the capital loss carryforward in its entirety. To support the capital deferred tax asset, the Company is able to rely on future taxable capital gain income from gross unrealized gains in its investment portfolio. The Company is also able to rely on the use of various tax planning strategies to forecast taxable gains in the foreseeable future.
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 and carry forwards, taxable income in carry back years and tax-planning strategies.
We have identified certain prudent and feasible strategies which could generate taxable future capital gain income. Tax planning strategies are actions that management ordinarily might not take, but would take, if necessary, to realize a tax benefit for a carryforward before it expires. Examples include, but are not limited to, changing the character of taxable or deductible amounts from ordinary income or loss to capital gain or loss or accelerating taxable amounts. While no commitments to implement any strategy have been made, these strategies have been considered in the analysis of the recoverability of the Company’s deferred tax assets and the reduction of the valuation allowance.
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The gross deferred tax asset related to net operating loss carryforwards on international subsidiaries is $52,897. Management believes that it is more likely than not that some of this asset will not be realized in the foreseeable future. Therefore, a cumulative valuation allowance of $9,971 has been recorded as of December 31, 2010. The Company is dependent on income of the same character in the same jurisdiction to support the deferred tax assets related to net operating loss carryforwards of international subsidiaries.
As of December 31, 2010, the Company had a cumulative valuation allowance of $90,738 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 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 capital loss carryovers and 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 statement 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 statement 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 $619,779 and $926,398 of our $26,397,018 and $25,860,667 of total assets as of December 31, 2010 and 2009, 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 sustained significant decline in our market capitalization 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.
We have concluded that our reporting units for goodwill testing are equivalent to our reported operating segments, excluding the Corporate and Other segment. Therefore, we test goodwill for impairment at the reporting unit level.
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The following table illustrates the amount of goodwill carried to each reporting unit:
| December 31, | ||||||||
| 2010 | 2009 | |||||||
| Assurant Solutions |
$ | 379,935 | $ | 380,291 | ||||
| Assurant Specialty Property |
239,844 | 239,726 | ||||||
| Assurant Health |
— | 204,303 | ||||||
| Assurant Employee Benefits |
— | 102,078 | ||||||
| Total |
$ | 619,779 | $ | 926,398 | ||||
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 then perform a second test to calculate the amount of impairment, if any. To determine the amount of any impairment, we 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 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 record an impairment charge for the difference.
The following describes the valuation methodologies used in both 2010 and 2009 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 were discounted using a market participant weighted average cost of capital estimated for a reporting unit. After discounting the future discrete earnings to their present value, the Company estimated the terminal value attributable to the years beyond the discrete operating plan period. The discounted terminal value was then added to the aggregate discounted distributable earnings from the discrete operating plan period to estimate the fair value of the reporting unit.
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.
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 for Assurant Solutions, make the other methods less credible.
Following the 2010 goodwill assessment, the Company concluded that the net book values of the Assurant Employee Benefits and Assurant Health reporting units exceeded their estimated fair values. Based on the results of the Step 2 test, the Company recorded impairment charges of $102,078 and $204,303 related to the Assurant Employee Benefits and Assurant Health reporting units, respectively, representing their entire goodwill asset balances. During 2009, the Company concluded that the net book value of the Assurant Employee Benefits reporting unit exceeded its estimated fair value and recorded an $83,000 impairment charge after performing a Step 2 test. The 2010 impairments at Assurant Employee Benefits and Assurant Health reflect the effects of the
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Affordable Care Act, the low interest rate environment, continuing high unemployment, the slow pace of the economic recovery and increased net book value primarily related to their investment portfolios. The 2009 impairment at Assurant Employee Benefits reflected the challenging near term growth environment for the business and an increased net book value, primarily related to their investment portfolio. Management remains confident in the long-term prospects of both the Assurant Employee Benefits and Assurant Health reporting units. See Note 6 and 11 for further information.
The two reporting units that passed the 2010 Step 1 test, Assurant Solutions and Assurant Specialty Property, had estimated fair values that exceeded their net book values by 1.9% and 62.9%, respectively. Assurant Solutions passed the 2010 Step 1 test, by a slim margin mainly due to a significant increase in its net book value. The low interest rate environment in 2010 resulted in a significant increase in net unrealized gains in Assurant Solutions’ fixed income investments.
The determination of fair value of our reporting units requires significant 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 of December 31, 2010. Likewise, a reduction of 100 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 of December 31, 2010. 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 each reporting unit, both individually and in the aggregate, and concluded they are reasonable. However, should weak market conditions continue for an extended period or should the operating results of any of our reporting units decline substantially compared to projected results, or interest rates decline further increasing the net unrealized gain position related to the reporting units investment portfolio and thus the reporting units’ net book values, we could determine that we need to record an impairment charge related to goodwill in our Assurant Solutions or Assurant Specialty Property reporting units.
Recent Accounting Pronouncements—Adopted
On January 1, 2010, the Company adopted the new guidance on transfers of financial assets. This new guidance amends the derecognition guidance and eliminates the exemption from consolidation for qualifying special-purpose entities. The adoption of this new guidance did not have an impact on the Company’s financial position or results of operations.
On January 1, 2010, the Company adopted the new guidance on the accounting for a variable interest entity (“VIE”). This new guidance amends the consolidation guidance applicable to VIEs to require a qualitative assessment in the determination of the primary beneficiary of the VIE, to require an ongoing reconsideration of the primary beneficiary, to amend the events that trigger a reassessment of whether an entity is a VIE and to change the consideration of kick-out rights in determining if an entity is a VIE. The adoption of this new guidance did not have an impact on the Company’s financial position or results of operations.
On July 1, 2009, the Company adopted the new guidance that establishes a single source of authoritative accounting and reporting guidance recognized by the FASB for nongovernmental entities (the “Codification”). The Codification does not change current GAAP, but is intended to simplify user access to all authoritative GAAP by providing all the authoritative literature related to a particular topic in one place. All existing accounting standard documents will be superseded and all other accounting literature not included in the
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Codification will be considered non-authoritative. The adoption of the new guidance did not have an impact on the Company’s financial position or results of operations. References to accounting guidance contained in the Company’s consolidated financial statements and disclosures have been updated to reflect terminology consistent with the Codification. Plain English references to the accounting guidance have been made along with references to the ASC topic number and name.
On December 31, 2009, the Company adopted the new guidance on postretirement benefit plan assets. This new guidance requires companies to make additional disclosures about plan assets for defined benefit pension and other postretirement benefit plans. The additional disclosure requirements include how investment allocation decisions are made, the major categories of plan assets and the inputs and valuation techniques used to measure the fair value of plan assets. The adoption of this new guidance did not have an impact on the Company’s financial position or results of operations. See Note 22 for further information.
On October 1, 2009, the Company adopted the new guidance on measuring the fair value of liabilities. When the quoted price in an active market for an identical liability is not available, this new guidance requires that either the quoted price of the identical or similar liability when traded as an asset or another valuation technique that is consistent with the fair value measurements and disclosures guidance be used to fair value the liability. The adoption of this new guidance did not have an impact on the Company’s financial position or results of operations.
On April 1, 2009, the Company adopted the new OTTI guidance. This new guidance amends the previous guidance for debt securities and modifies the presentation and disclosure requirements for debt and equity securities. In addition, it amends the requirement for an entity to positively assert the intent and ability to hold a debt security to recovery to determine whether an OTTI exists and replaces this provision with the assertion that an entity does not intend to sell or it is not more likely than not that the entity will be required to sell a security prior to recovery of its amortized cost basis. Additionally, this new guidance modifies the presentation of certain OTTI debt securities to only present the impairment loss within the results of operations that represents the credit loss associated with the OTTI with the remaining impairment loss being presented within other comprehensive income (loss) (“OCI”). At adoption, the Company recorded a cumulative effect adjustment to reclassify the non-credit component of previously recognized OTTI securities which resulted in an increase of $43,117 (after-tax) in retained earnings and a decrease of $43,117 (after-tax) in AOCI. See Note 5 for further information.
On April 1, 2009, the Company adopted the new guidance on determining fair value in illiquid markets. This new guidance clarifies how to estimate fair value when the volume and level of activity for an asset or liability have significantly decreased. This new guidance also clarifies how to identify circumstances indicating that a transaction is not orderly. Under this new guidance, significant decreases in the volume and level of activity of an asset or liability, in relation to normal market activity, requires further evaluation of transactions or quoted prices and exercise of significant judgment in arriving at fair values. This new guidance also requires additional interim and annual disclosures. The adoption of this new guidance did not have an impact on the Company’s financial position or results of operations.
On April 1, 2009, the Company adopted the new fair value of financial instruments guidance. This new guidance requires disclosures about the fair value of financial instruments already required in annual financial statements to be included within interim financial statements. This new guidance also requires disclosure of the methods and assumptions used to estimate fair value. The adoption of this new guidance did not have an impact on the Company’s financial position or results of operations. See Note 6 for further information.
On January 1, 2009, the Company adopted the revised business combinations guidance. The revised guidance retains the fundamental requirements of the previous guidance in that the acquisition method of accounting be used for all business combinations, that an acquirer be identified for each business combination and for goodwill to be recognized and measured as a residual. The revised guidance expands the definition of transactions and events that qualify as business combinations to all transactions and other events in which one entity obtains control over one or more other businesses. The revised guidance broadens the fair value
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measurement and recognition of assets acquired, liabilities assumed and interests transferred as a result of business combinations. It also increases the disclosure requirements for business combinations in the consolidated financial statements. The adoption of the revised guidance did not have an impact on the Company’s financial position or results of operations. However, should the Company enter into a business combination in 2010 or beyond, our financial position or results of operations could incur a significantly different impact than had it recorded the acquisition under the previous business combinations guidance. Earnings volatility could result, depending on the terms of the acquisition.
On January 1, 2009, the Company adopted the new consolidations guidance. The new guidance requires that a noncontrolling interest in a subsidiary be separately reported within equity and the amount of consolidated net income attributable to the noncontrolling interest be presented in the statement of operations. The new guidance also calls for consistency in reporting changes in the parent’s ownership interest in a subsidiary and necessitates fair value measurement of any noncontrolling equity investment retained in a deconsolidation. The adoption of the new guidance did not have an impact on the Company’s financial position or results of operations.
On January 1, 2009, the Company applied the fair value measurements and disclosures guidance for all non-financial assets and liabilities measured at fair value on a non-recurring basis. The application of this guidance for those assets and liabilities did not have an impact on the Company’s financial position or results of operations. The Company’s non-financial assets measured at fair value on a non-recurring basis include goodwill and intangible assets. In a business combination, the non-financial assets and liabilities of the acquired company would be measured at fair value in accordance with the fair value measurements and disclosures guidance. The requirements of this guidance include using an exit price based on an orderly transaction between market participants at the measurement date assuming the highest and best use of the asset by market participants. To perform a market valuation, the Company is required to use a market, income or cost approach valuation technique(s). The Company performs its annual impairment analyses of goodwill and indefinite-lived intangible assets in the fourth quarter, or when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. If Step 1 of the impairment test indicates that the net book value of the reporting unit is greater than the estimated fair value, then Step 2 test is required. Step 2 requires that the Company measure the fair value of goodwill of the reporting unit. As mentioned above, the application of this guidance which was used to measure the fair value of goodwill in Step 2 of the goodwill impairment test did not have an impact on the Company’s financial position or results of operations.
On January 1, 2009, the Company adopted the new earnings per share guidance on participating securities and the two class method. The new guidance requires unvested share-based payment awards that have non- forfeitable rights to dividend or dividend equivalents to be treated as participating securities. Therefore, the Company’s restricted stock and restricted stock units which have non-forfeitable rights to dividends are included in calculating basic and diluted earnings per share under the two-class method. All prior period earnings per share data presented have been adjusted retrospectively. The adoption of the new guidance did not have a material impact on the Company’s basic and diluted earnings per share calculations for the years ended December 31, 2009 and 2008. See Note 24 for further information.
On January 1, 2008, the Company adopted the fair value measurements and disclosures guidance. This guidance defined fair value, addressed how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under GAAP and expanded disclosures about fair value measurements. This guidance was applied prospectively for financial assets and liabilities measured on a recurring basis as of January 1, 2008 except for certain financial assets that were measured at fair value using a transaction price. For these financial instruments, which the Company has, this guidance required limited retrospective adoption and thus the difference between the fair values using a transaction price and the fair values using an exit price of the relevant financial instruments was shown as a cumulative-effect adjustment to the January 1, 2008 retained earnings balance. At adoption, the Company recognized a $4,400 decrease to other assets, and a corresponding decrease of $2,860 (after-tax) to retained earnings. See Notes 5 and 6 for further information regarding these financial instruments and the fair value disclosures, respectively.
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Recent Accounting Pronouncements—Not Yet Adopted
In October 2010, the Financial Accounting Standards Board (“FASB”) issued amendments to existing guidance on accounting for costs associated with acquiring or renewing insurance contracts. The amendments modify 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, acquisition costs are defined as costs that are related directly to the successful acquisition of new or renewal insurance contracts. The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. Therefore, the Company is required to adopt this guidance on January 1, 2012. Prospective application as of the date of adoption is required; however retrospective application to all prior periods presented upon the date of adoption is also permitted, but not required. Early adoption is permitted, but only at the beginning of an entity’s annual reporting period. The Company is currently evaluating the requirements of the amendments and the potential impact, if any, on the Company’s financial position and results of operations.
In September 2009, the FASB issued new guidance on multiple deliverable revenue arrangements. This new 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. This new guidance is effective for new or materially modified arrangements in fiscal years beginning on or after June 15, 2010. Earlier application is permitted as of the beginning of a fiscal year. The Company did not apply the guidance early, thus it is required to adopt this new guidance on January 1, 2011. The adoption of this new guidance will not have an impact on the Company’s financial position or 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, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| Revenues: |
||||||||||||
| Net earned premiums and other considerations |
$ | 7,403,039 | $ | 7,550,335 | $ | 7,925,348 | ||||||
| Net investment income |
703,190 | 698,838 | 774,347 | |||||||||
| Net realized gains (losses) on investments |
48,403 | (53,597 | ) | (428,679 | ) | |||||||
| Amortization of deferred gains on disposal of businesses |
10,406 | 22,461 | 29,412 | |||||||||
| Fees and other income |
362,684 | 482,464 | 300,800 | |||||||||
| Total revenues |
8,527,722 | 8,700,501 | 8,601,228 | |||||||||
| Benefits, losses and expenses: |
||||||||||||
| Policyholder benefits |
3,640,978 | 3,867,982 | 4,019,147 | |||||||||
| Selling, underwriting and general expenses (1) |
3,913,273 | 3,979,244 | 3,957,850 | |||||||||
| Interest expense |
60,646 | 60,669 | 60,953 | |||||||||
| Total benefits, losses and expenses |
7,614,897 | 7,907,895 | 8,037,950 | |||||||||
| Segment income before provision for income taxes and goodwill impairment |
912,825 | 792,606 | 563,278 | |||||||||
| Provision for income taxes |
327,267 | 279,032 | 115,482 | |||||||||
| Segment income before goodwill impairment |
585,558 | 513,574 | 447,796 | |||||||||
| Goodwill impairment |
306,381 | 83,000 | — | |||||||||
| Net income |
$ | 279,177 | $ | 430,574 | $ | 447,796 | ||||||
| (1) | Includes amortization of DAC and VOBA and underwriting, general and administrative expenses. |
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Year Ended December 31, 2010 Compared to the Year Ended December 31, 2009
Net income decreased $151,397, or 35%, to $279,177 for Twelve Months 2010 from $430,574 for Twelve Months 2009. Twelve Months 2010 includes $107,075 (after-tax) of improved segment results and $66,300 (after-tax) of increased realized gains on investments, compared with Twelve Months 2009. However, results decreased primarily due to a non-cash goodwill impairment charge of $306,381 in Twelve Months 2010 compared with an $83,000 non-cash goodwill impairment charge in Twelve Months 2009. In addition, Twelve Months 2009 includes an $83,542 (after-tax) favorable legal settlement.
Year Ended December 31, 2009 Compared to the Year Ended December 31, 2008
Net income decreased $17,222, or 4%, to $430,574 for Twelve Months 2009 from $447,796 for Twelve Months 2008. The decrease was primarily due to a $(30,220) net loss for Assurant Health for Twelve Months 2009 compared with net income of $120,254 for Twelve Months 2008. In addition, Twelve Months 2009 includes a non-cash goodwill impairment charge of $83,000. These negative items were partially offset by lower net realized losses on investments of $243,803 (after-tax) as Twelve Months 2009 includes $34,838 (after-tax) compared with $278,641 (after-tax) in Twelve Months 2008.
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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, |
||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| Revenues: |
||||||||||||
| Net earned premiums and other considerations |
$ | 2,484,299 | $ | 2,671,041 | $ | 2,813,407 | ||||||
| Net investment income |
397,297 | 391,229 | 420,615 | |||||||||
| Fees and other income |
228,052 | 216,550 | 182,508 | |||||||||
| Total revenues |
3,109,648 | 3,278,820 | 3,416,530 | |||||||||
| Benefits, losses and expenses: |
||||||||||||
| Policyholder benefits |
889,387 | 1,029,151 | 1,198,758 | |||||||||
| Selling, underwriting and general expenses (5) |
2,052,628 | 2,055,348 | 2,041,892 | |||||||||
| Total benefits, losses and expenses |
2,942,015 | 3,084,499 | 3,240,650 | |||||||||
| Segment income before provision for income taxes |
167,633 | 194,321 | 175,880 | |||||||||
| Provision for income taxes |
64,427 | 74,269 | 63,697 | |||||||||
| Segment net income |
$ | 103,206 | $ | 120,052 | $ | 112,183 | ||||||
| Net earned premiums and other considerations: |
||||||||||||
| Domestic: |
||||||||||||
| Credit |
$ | 189,357 | $ | 241,293 | $ | 279,497 | ||||||
| Service contracts |
1,291,725 | 1,411,953 | 1,364,886 | |||||||||
| Other (1) |
49,017 | 84,939 | 60,159 | |||||||||
| Total Domestic |
1,530,099 | 1,738,185 | 1,704,542 | |||||||||
| International: |
||||||||||||
| Credit |
346,475 | 320,462 | 368,442 | |||||||||
| Service contracts |
459,166 | 415,694 | 355,248 | |||||||||
| Other (1) |
18,001 | 15,731 | 20,175 | |||||||||
| Total International |
823,642 | 751,887 | 743,865 | |||||||||
| Preneed (4) |
130,558 | 180,969 | 365,000 | |||||||||
| Total |
$ | 2,484,299 | $ | 2,671,041 | $ | 2,813,407 | ||||||
| Fees and other income: |
||||||||||||
| Domestic: |
||||||||||||
| Debt protection |
$ | 33,049 | $ | 40,058 | $ | 34,459 | ||||||
| Service contracts |
110,386 | 102,410 | 79,298 | |||||||||
| Other (1) |
8,839 | 18,534 | 26,661 | |||||||||
| Total Domestic |
152,274 | 161,002 | 140,418 | |||||||||
| International |
28,930 | 27,730 | 32,919 | |||||||||
| Preneed (4) |
46,848 | 27,818 | 9,171 | |||||||||
| Total |
$ | 228,052 | $ | 216,550 | $ | 182,508 | ||||||
| Gross written premiums (2): |
||||||||||||
| Domestic: |
||||||||||||
| Credit |
$ | 422,825 | $ | 526,532 | $ | 604,101 | ||||||
| Service contracts |
1,193,423 | 1,012,670 | 1,530,284 | |||||||||
| Other (1) |
65,732 | 92,111 | 71,393 | |||||||||
| Total Domestic |
1,681,980 | 1,631,313 | 2,205,778 | |||||||||
| International: |
||||||||||||
| Credit |
968,878 | 843,225 | 827,457 | |||||||||
| Service contracts |
523,382 | 462,964 | 477,652 | |||||||||
| Other (1) |
22,407 | 26,567 | 27,381 | |||||||||
| Total International |
1,514,667 | 1,332,756 | 1,332,490 | |||||||||
| Total |
$ | 3,196,647 | $ | 2,964,069 | $ | 3,538,268 | ||||||
| Preneed (face sales) |
$ | 734,884 | $ | 512,366 | $ | 445,313 | ||||||
| Combined ratio (3): |
||||||||||||
| Domestic |
100.5 | % | 97.2 | % | 100.6 | % | ||||||
| International |
105.9 | % | 110.7 | % | 108.2 | % | ||||||
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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) | Effective January 1, 2009, new preneed life insurance policies in which death benefit adjustments are determined at the discretion of the Company are accounted for as universal life contracts. For contracts sold prior to January 1, 2009, these preneed life insurance policies were accounted for and will continue to be accounted for under the limited pay insurance guidance. In accordance with the universal life insurance guidance, income earned on new preneed life insurance policies is presented within policy fee income net of policyholder benefits. Under the limited pay insurance guidance, the consideration received on preneed policies is presented separately as net earned premiums, with policyholder benefits expense being shown separately. The change from reporting certain preneed life insurance policies in accordance with the universal life insurance guidance versus the limited pay insurance guidance is not material to the statement of operations or balance sheet. |
| (5) | 2010 selling, underwriting and general expenses includes a $47,612 intangible asset impairment charge. |
Year Ended December 31, 2010 Compared to the Year Ended December 31, 2009
Net Income
Segment net income decreased $16,846, or 14%, to $103,206 for Twelve Months 2010 from $120,052 for Twelve Months 2009 primarily due to an intangible asset impairment charge of $30,948 (after-tax) related to a fourth quarter 2010 client notification of non-renewal of a block of domestic service contract business effective June 1, 2011.
Absent this item, net income increased $14,102, or 12%, as a result of improved underwriting results in our international and preneed businesses. International results improved primarily due to favorable loss experience in our U.K. credit insurance business and growth in Latin America. These items were partially offset by decreased underwriting results primarily attributable to the run-off of certain lines of business, and a $6,048 (after-tax) change in the value of our consumer price index caps (derivative instruments that protect against inflation risk in our preneed products). Additionally, Twelve Months 2009 net income included a $10,800 (after-tax) restructuring charge.
Total Revenues
Total revenues decreased $169,172, or 5%, to $3,109,648 for Twelve Months 2010 from $3,278,820 for Twelve Months 2009. The decrease was the result of lower net earned premiums of $186,742, which was primarily attributable to the continued run-off of: certain domestic extended service contract business as earnings from former clients that are no longer in business; preneed policies sold before January 1, 2009; and domestic credit insurance business.
Partially offsetting these decreases was the addition of new domestic service contract business clients and growth in both our international credit and service contracts businesses, which also benefited from the favorable impact of foreign exchange rates. We expect net earned premiums in 2011 to decline $170,000 due to the run-off of domestic credit insurance business and former large extended services contract clients that are no longer in business.
Fees and other income improved as a result of increases in preneed business, partially offset by mark-to-market losses associated with our consumer price index caps. Net investment income primarily increased due to the favorable impact of foreign exchange rates.
Gross written premiums increased $232,578, or 8%, to $3,196,647 for Twelve Months 2010 from $2,964,069 for Twelve Months 2009. Gross written premiums from our domestic service contract business increased $180,753 due to the addition of new clients and an increase in automobile vehicle service contracts as automobile sales increased and from premiums reported by certain clients in a timelier manner than in the past. This had no effect on net earned premiums. In addition, consistent with our international expansion strategy, our
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international credit business increased $125,653 due to growth across several countries from both new and existing clients and from the favorable impact of foreign exchange rates. Gross written premiums from our international service contract business increased $60,418, primarily due to favorable foreign exchange rates and growth from existing clients, partially offset by lower premiums in Denmark due to our decision to exit that market in 2009. Gross written premiums from our domestic credit insurance business decreased $103,707, due to the continued runoff of this product line. Other domestic gross written premiums decreased $26,379 mainly due to a one-time campaign with Ford Motor Company conducted and completed in Second Quarter 2009.
Preneed face sales increased $222,518 primarily due to increased consumer buying in advance of a less favorable tax rate change in certain Canadian provinces, as well as growth from our exclusive distribution partnership with Services Corporation International (“SCI”) the largest funeral provider in North America, and increased sales initiatives.
Total Benefits, Losses and Expenses
Total benefits, losses and expenses decreased $142,484, or 5%, to $2,942,015 for Twelve Months 2010 from $3,084,499 for Twelve Months 2009. Policyholder benefits decreased $139,764 primarily due to improved loss experience in our U.K. credit business and in our domestic service contract business from existing and run-off clients, the run-off of preneed policies sold before January 1, 2009, and the continued run-off of our domestic credit business.
Selling, underwriting and general expenses decreased $2,720. Commissions, taxes, licenses and fees, of which amortization of DAC is a component, decreased $42,585 as commission expense related to our domestic service contract business declined due to lower net earned premiums, partially offset by increased commission expense in our international business due to higher net earned premiums in that business coupled with the unfavorable impact of foreign exchange rates. General expenses increased $39,865 primarily due to the above-mentioned $47,612 (pre-tax) intangible asset impairment charge, the amortization of previously capitalized upfront client commission payments, as we continue to grow our international business and distribution channels, and the unfavorable impact of foreign exchange rates. Partially offsetting these increases was cost savings realized in Twelve Months 2010 as a result of a restructuring in Twelve Months 2009. This restructuring added $16,500 to expenses in Twelve Months 2009.
Year Ended December 31, 2009 Compared to the Year Ended December 31, 2008
Net Income
Segment net income increased $7,869, or 7%, to $120,052 for Twelve Months 2009 from $112,183 for Twelve Months 2008. The increase was primarily the result of favorable underwriting results in our domestic service contract business from existing and run-off clients. Partially offsetting this increase was unfavorable loss experience in our U.K. credit insurance business primarily resulting from higher unemployment rates in the U.K. compared with the prior year, a $19,101 (after-tax) decrease in net investment income and $10,800 (after-tax) of restructuring charges in our domestic and international businesses. Twelve Months 2008 included charges of $24,700 (after-tax) related to our exit from the Denmark market, client bankruptcies, and a loss on a discontinued product in Brazil which were partially offset by $9,900 (after-tax) of income from client related settlements.
Total Revenues
Total revenues decreased $137,710, or 4%, to $3,278,820 for Twelve Months 2009 from $3,416,530 for Twelve Months 2008. The decrease is mainly attributable to reduced net earned premiums and other considerations of $142,366, primarily resulting from the application of universal life insurance accounting guidance, in our Preneed business. Absent this item, net earned premiums increased $35,000, or 1%, due to our domestic and international service contract business from premiums written in prior periods and from a one-time campaign with Ford Motor Company conducted and completed in Second Quarter 2009. This increase was
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partially offset by unfavorable changes in foreign exchange rates as the U.S. dollar strengthened against international currencies, combined with the continued runoff of our domestic credit insurance business. Also contributing to the decrease in revenues was lower net investment income of $29,386, or 7%, primarily due to lower average invested assets and lower investment yields. These decreases were partially offset by an increase in fees and other income of $34,042, or 19%, primarily from the application of the universal life insurance accounting guidance for our Preneed business and the continued growth of our service contract businesses resulting from acquisitions made in the latter part of 2008.
Gross written premiums decreased $574,199, or 16%, to $2,964,069 for Twelve Months 2009 from $3,538,268 for Twelve Months 2008. This decrease was driven primarily by lower domestic service contract business of $517,614, primarily due to a client bankruptcy and decreased retail and auto sales due to the slowdown in consumer spending. Gross written premiums from our domestic credit insurance business decreased $77,569, due to the continued runoff of this product line. Gross written premiums from our international service contract business decreased $14,688, primarily the result of unfavorable changes in foreign exchange rates. This was partially offset by growth from both new and existing clients, consistent with our international expansion strategy. Gross written premiums from our international credit business increased $15,768 primarily driven by growth in several countries due to strong growth from new and existing clients. This was partially offset by unfavorable changes in foreign exchange rates and the slowdown in the U.K. mortgage market. Preneed face sales were $67,053 higher due to growth from our exclusive distribution partnership with SCI and increased sales initiatives.
Total Benefits, Losses and Expenses
Total benefits, losses and expenses decreased $156,151, or 5%, to $3,084,499 for Twelve Months 2009 from $3,240,650 for Twelve Months 2008. Policyholder benefits decreased $169,607, primarily due to the above mentioned application of universal life insurance accounting guidance, in our Preneed business. Also contributing to the decrease were lower losses from a discontinued credit life product in Brazil and improved loss experience in our domestic service contract business from existing and run-off clients. This was partially offset by unfavorable loss experience in our U.K. credit insurance business primarily resulting from higher unemployment rates than the prior year. During the Twelve Months 2009, we ceased distributing unemployment insurance-related products through the internet but losses from similar products sold through more traditional distribution channels increased as a result of the prolonged high unemployment in the U.K. Selling, underwriting and general expenses increased $13,456. General expenses increased $82,616, primarily due to higher expenses associated with recent domestic extended service contract business acquisitions and restructuring charges relating to our international businesses of $10,600 and $5,900 for our domestic businesses. Commissions, taxes, licenses and fees, of which amortization of DAC is a component, decreased $69,160, primarily due to the corresponding favorable change in foreign exchange rates in our international business and reduced commission expense resulting from acquisitions completed in the latter part of 2008. Also contributing to the decrease was the above-mentioned application of universal life insurance accounting guidance in our Preneed business. These declines in Twelve Months 2009 were partially offset by an $18,000 reduction in commission expense related to the accrual of contractual receivables established from certain domestic service contract clients recorded in Twelve Months 2008.
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Assurant Specialty Property
Overview
The table below presents information regarding Assurant Specialty Property’s segment results of operations:
| For the Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| Revenues: |
||||||||||||
| Net earned premiums and other considerations |
$ | 1,953,223 | $ | 1,947,529 | $ | 2,048,238 | ||||||
| Net investment income |
107,092 | 110,337 | 123,043 | |||||||||
| Fees and other income |
69,147 | 56,890 | 50,000 | |||||||||
| Total revenues |
2,129,462 | 2,114,756 | 2,221,281 | |||||||||
| Benefits, losses and expenses: |
||||||||||||
| Policyholder benefits |
684,652 | 664,182 | 785,403 | |||||||||
| Selling, underwriting and general expenses |
797,996 | 832,528 | 817,848 | |||||||||
| Total benefits, losses and expenses |
1,482,648 | 1,496,710 | 1,603,251 | |||||||||
| Segment income before provision for income tax |
646,814 | 618,046 | 618,030 | |||||||||
| Provision for income taxes |
222,527 | 212,049 | 212,827 | |||||||||
| Segment net income |
$ | 424,287 | $ | 405,997 | $ | 405,203 | ||||||
| Net earned premiums and other considerations by major product groupings: |
||||||||||||
| Homeowners (lender placed and voluntary) |
$ | 1,342,791 | $ | 1,369,031 | $ | 1,471,012 | ||||||
| Manufactured housing (lender placed and voluntary) |
220,309 | 219,960 | 225,209 | |||||||||
| Other (1) |
390,123 | 358,538 | 352,017 | |||||||||
| Total |
$ | 1,953,223 | $ | 1,947,529 | $ | 2,048,238 | ||||||
| Ratios: |
||||||||||||
| Loss ratio (2) |
35.1 | % | 34.1 | % | 38.3 | % | ||||||
| Expense ratio (3) |
39.5 | % | 41.5 | % | 39.0 | % | ||||||
| Combined ratio (4) |
73.3 | % | 74.7 | % | 76.4 | % | ||||||
| (1) | Primarily includes lender placed flood, miscellaneous specialty property and renters 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. |
Year Ended December 31, 2010 Compared to the Year Ended December 31, 2009
Net Income
Segment net income increased $18,290, or 5%, to $424,287 for Twelve Months 2010 from $405,997 for Twelve Months 2009. The improvement is primarily due to an improved expense ratio as a result of lower commission expense due to increases in client-ceded premiums and operational improvements. Results for Twelve Months 2010 include $14,797 (after tax) of reportable catastrophe losses, including losses from Arizona wind and hailstorms in fourth quarter 2010 and Tennessee storms during second quarter 2010. There were no reportable catastrophes during Twelve Months 2009.
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Total Revenues
Total revenues increased $14,706, or 1%, to $2,129,462 for Twelve Months 2010 from $2,114,756 for Twelve Months 2009. Growth in lender placed homeowners, lender-placed flood and renters insurance products gross earned premiums and increased fee income were partially offset by increased ceded lender placed homeowners’ premiums and lower real estate owned premiums.
Total Benefits, Losses and Expenses
Total benefits, losses and expenses decreased $14,062, or 1%, to $1,482,648 for Twelve Months 2010 from $1,496,710 for Twelve Months 2009. The decrease was primarily due to lower selling, underwriting, and general expenses of $34,532 compared with Twelve Months 2009, partially offset by increased policyholder benefits of $20,470. The overall loss ratio increased 100 basis points primarily due to $22,764 of reportable catastrophes in Twelve Months 2010 and the non-recurrence of a $9,023 subrogation reimbursement in Twelve Months 2009. These items are partially offset by lower small-scale weather related losses. Commissions, taxes, licenses and fees decreased $37,676, primarily due to client contract changes that resulted in lower commission expenses and a release of a premium tax reserve. General expenses increased $3,144 primarily due to increased employee related expenses.
Year Ended December 31, 2009 Compared to the Year Ended December 31, 2008
Net Income
Segment net income was relatively flat at $405,997 for Twelve Months 2009 compared to $405,203 for Twelve Months 2008. However, Twelve Months 2008 included $86,200 (after-tax), net of reinsurance, of losses from hurricanes Gustav and Ike, $8,600 (after-tax) in catastrophe reinsurance reinstatement premiums and $5,050 (after-tax) in catastrophe losses from California wildfires. There were no reportable catastrophe losses in Twelve Months 2009, however, net earned premiums decreased $65,461 (after-tax) compared with Twelve Months 2008 primarily related to reduced real estate owned insurance business and higher reinsurance costs.
Total Revenues
Total revenues decreased $106,525, or 5%, to $2,114,756 for Twelve Months 2009 from $2,221,281 for Twelve Months 2008. The decrease in revenues is primarily due to decreased net earned premiums of $100,709, or 5%. The decrease is primarily attributable to lower lender-placed homeowners insurance net earned premiums due to decreased premiums from real estate owned property, several lost clients due to the financial industry consolidation and a $29,434 increase in catastrophe reinsurance costs. Increased placement rates in our non-real estate owned lender-placed business and increased average insured values partially offset these negative effects.
Total Benefits, Losses and Expenses
Total benefits, losses and expenses decreased $106,541 or 7%, to $1,496,710 for Twelve Months 2009 from $1,603,251 for Twelve Months 2008. The decrease was due to lower policyholder benefits of $121,221 partially offset by higher selling, underwriting, and general expenses of $14,680. The decrease in policyholder benefits was due to a decrease in reportable catastrophe losses of $132,600, net of reinsurance, related to Hurricanes Ike and Gustav and $7,770 related to California wildfire losses in Twelve Months 2008. There were no reportable catastrophe losses in Twelve Months 2009. Commissions, taxes, licenses and fees decreased $32,022, primarily due to the decline in net earned premiums. General expenses increased $46,702 primarily due to additional services provided to our clients, such as loss drafts, along with investment in technology and infrastructure initiatives. In addition, Twelve Months 2009 included $3,800 in severance costs related to a reduction in force, including the closure of our California operations center. Twelve Months 2009 combined ratio was 74.7% compared with 76.4% for Twelve Months 2008.
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Assurant Health
Overview
The table below presents information regarding Assurant Health’s segment results of operations:
| For the Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| Revenues: |
||||||||||||
| Net earned premiums and other considerations |
$ | 1,864,122 | $ | 1,879,628 | $ | 1,951,955 | ||||||
| Net investment income |
48,540 | 47,658 | 57,464 | |||||||||
| Fees and other income |
40,133 | 39,879 | 38,917 | |||||||||
| Total revenues |
1,952,795 | 1,967,165 | 2,048,336 | |||||||||
| Benefits, losses and expenses: |
||||||||||||
| Policyholder benefits |
1,302,928 | 1,410,171 | 1,258,188 | |||||||||
| Selling, underwriting and general expenses |
565,060 | 604,698 | 604,605 | |||||||||
| Total benefits, losses and expenses |
1,867,988 | 2,014,869 | 1,862,793 | |||||||||
| Segment income (loss) before provision for income tax |
84,807 | (47,704 | ) | 185,543 | ||||||||
| Provision (benefit) for income taxes |
30,778 | (17,484 | ) | 65,289 | ||||||||
| Segment net income (loss) |
$ | 54,029 | $ | (30,220 | ) | $ | 120,254 | |||||
| Net earned premiums and other considerations: |
||||||||||||
| Individual Markets: |
||||||||||||
| Individual medical |
$ | 1,289,181 | $ | 1,270,198 | $ | 1,276,743 | ||||||
| Short-term medical |
85,824 | 104,238 | 101,435 | |||||||||
| Subtotal |
1,375,005 | 1,374,436 | 1,378,178 | |||||||||
| Small employer group: |
489,117 | 505,192 | 573,777 | |||||||||
| Total |
$ | 1,864,122 | $ | 1,879,628 | $ | 1,951,955 | ||||||
| Membership by product line: |
||||||||||||
| Individual Markets: |
||||||||||||
| Individual medical |
557 | 568 | 578 | |||||||||
| Short-term medical |
60 | 78 | 92 | |||||||||
| Subtotal |
617 | 646 | 670 | |||||||||
| Small employer group: |
144 | 121 | 131 | |||||||||
| Total |
761 | 767 | 801 | |||||||||
| Ratios: |
||||||||||||
| Loss ratio (1) |
69.9 | % | 75.0 | % | 64.5 | % | ||||||
| Expense ratio (2) |
29.7 | % | 31.5 | % | 30.4 | % | ||||||
| Combined ratio (3) |
98.1 | % | 105.0 | % | 93.6 | % | ||||||
| (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. |
The Affordable Care Act
In March 2010, President Obama signed the Affordable Care Act. Provisions of the Affordable Care Act have and will become effective at various dates over the next several years. During Second Quarter 2010,
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management completed an extensive review of the Assurant Health segment and considered a number of possible future strategies. On the basis of this review, management believes that opportunities continue to exist in the individual medical marketplace and initiated various modifications necessary to operate in the new environment.
In November 2010, HHS issued interim final regulations with respect to the Affordable Care Act, with a comment period continuing into first quarter 2011. As a result, the impact of the Affordable Care Act is clearer but not yet fully known. Management continues to modify its business model to adapt to these new regulations and will continue to monitor HHS and state regulatory activity for clarification and additional regulations. Given the sweeping nature of the changes represented by the Affordable Care Act, our results of operations and financial position could be materially adversely affected. For more information, see Item 1, “Risk Factors—Risk related to our industry—Recently enacted legislation reforming the U.S. health care system may have a material adverse effect on our financial condition and results of operations.”
Year Ended December 31, 2010 Compared to the Year Ended December 31, 2009
Net Income/(Loss)
Segment results increased $84,249, to net income of $54,029 for Twelve Months 2010 from a net loss of $(30,220) for Twelve Months 2009. The increase is primarily attributable to corrective pricing actions and plan design changes that began in late 2009. Twelve Months 2010 includes a $17,421 (after-tax) benefit from a reserve release related to a legal settlement, while Twelve Months 2009 included charges of $32,370 (after-tax) relating to unfavorable rulings in two claim-related lawsuits, a restructuring charge of $2,925 (after-tax) and H1NI-related medical charges of $2,535 (after-tax). Twelve Months 2010 results were also affected by favorable claim reserve development and reduced expenses associated with expense management initiatives, partially offset by restructuring charges of $8,721 (after-tax).
Total Revenues
Total revenues decreased $14,370, or less than 1%, to $1,952,795 for Twelve Months 2010 from $1,967,165 for Twelve Months 2009. Net earned premiums and other considerations from our individual medical business increased $18,983, or 1%, primarily due to premium rate increases. The effect of the premium rate increases was partially offset by declining members that is resulting from a continued high level of policy lapses and lower sales. Net earned premiums and other considerations from our small employer group business decreased $16,075, or 3%, due to a continued high level of policy lapses, partially offset by premium rate increases. Short-term medical net earned premiums and other considerations decreased $18,414, or 18%, due to a reduction in policies sold, partially offset by premium rate increases.
Total Benefits, Losses and Expenses
Total benefits, losses and expenses decreased $146,881, or 7%, to $1,867,988 for Twelve Months 2010 from $2,014,869 for Twelve Months 2009. Policyholder benefits decreased $107,243, or 8%, and the benefit loss ratio decreased to 69.9% from 75.0%. The decrease was primarily due to a $26,802 benefit from a reserve release related to a legal settlement and favorable claim reserve development during Twelve Months 2010 compared to last year, partially offset by higher estimated claim experience in small employer group business. Twelve Months 2009 also includes charges of $49,800 relating to unfavorable rulings in two claim-related lawsuits. Selling, underwriting and general expenses decreased $39,638, or 7%, primarily due to reduced employee-related and advertising expenses, lower amortization of deferred acquisition costs, and reduced commission expense due to lower sales of new policies. Twelve Months 2010 includes restructuring charges of $13,417 that were the result of expense management initiatives to help transition the business for the post-health care reform. Twelve Months 2009 also included a restructuring charge of $4,500.
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Year Ended December 31, 2009 Compared to the Year Ended December 31, 2008
Net (Loss)/Income
Segment results decreased $150,474, or 125%, to a net loss of $(30,220) for Twelve Months 2009 from net income of $120,254 for Twelve Months 2008. The decrease is primarily attributable to deteriorating claims experience caused by higher medical benefits utilization in all products, $32,370 (after-tax) of charges relating to reserve increases for outcomes in two unfavorable claim-related lawsuits, H1N1-related medical services, unfavorable claim reserve development, the continuing decline in small employer group net earned premiums and increased expenses including $2,925 (after-tax) of restructuring costs.
Total Revenues
Total revenues decreased $81,171, or 4%, to $1,967,165 for Twelve Months 2009 from $2,048,336 for Twelve Months 2008. Net earned premiums and other considerations from our individual medical business decreased $6,545, or less than 1%, while net earned premiums and other considerations from our small employer group business decreased $68,585, or 12%, both due to a continued high level of policy lapses which were partially offset by premium rate increases. The decline in small employer group business is also due to increased competition and our adherence to strict underwriting guidelines. Also, net investment income decreased $9,806 due to lower yields and lower average invested assets.
Total Benefits, Losses and Expenses
Total benefits, losses and expenses increased $152,076, or 8%, to $2,014,869 for Twelve Months 2009 from $1,862,793 for Twelve Months 2008. Policyholder benefits increased $151,983, or 12%, and the loss ratio increased to 75.0% from 64.5%. The increase in the benefit loss ratio was primarily due to deteriorating claims experience and unfavorable claim reserve development on both individual medical business and small employer group business due to increased utilization and intensity of medical services, coupled with a non-proportionate decline in net earned premiums and $49,800 of reserve increases stemming from two separate claim related lawsuits. In addition, policyholder benefits include $3,900 for H1N1-related medical services. Selling, underwriting and general expenses increased $93, or less than 1%. Higher expenses including $4,500 of restructuring costs, increased advertising expense of $8,155, and increased loss adjustment expense were partially offset by lower amortization of deferred acquisition costs.
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Assurant Employee Benefits
Overview
The table below presents information regarding Assurant Employee Benefits’ segment results of operations:
| For the Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| Revenues: |
||||||||||||
| Net earned premiums and other considerations |
$ | 1,101,395 | $ | 1,052,137 | $ | 1,111,748 | ||||||
| Net investment income |
132,388 | 133,365 | 147,027 | |||||||||
| Fees and other income |
25,152 | 28,343 | 26,139 | |||||||||
| Total revenues |
1,258,935 | 1,213,845 | 1,284,914 | |||||||||
| Benefits, losses and expenses: |
||||||||||||
| Policyholder benefits |
766,049 | 757,070 | 775,684 | |||||||||
| Selling, underwriting and general expenses |
395,759 | 392,901 | 400,816 | |||||||||
| Total benefits, losses and expenses |
1,161,808 | 1,149,971 | 1,176,500 | |||||||||
| Segment income before provision for income tax |
97,127 | 63,874 | 108,414 | |||||||||
| Provision for income taxes |
33,589 | 21,718 | 37,857 | |||||||||
| Segment net income |
$ | 63,538 | $ | 42,156 | $ | 70,557 | ||||||
| Net earned premiums and other considerations: |
||||||||||||
| By major product groupings: |
||||||||||||
| Group dental |
$ | 420,690 | $ | 425,288 | $ | 435,115 | ||||||
| Group disability single premiums for closed blocks (3) |
— | — | 11,447 | |||||||||
| All other group disability |
488,813 | 434,381 | 459,208 | |||||||||
| Group life |
191,892 | 192,468 | 205,978 | |||||||||
| Total |
$ | 1,101,395 | $ | 1,052,137 | $ | 1,111,748 | ||||||
| Ratios: |
||||||||||||
| Loss ratio (1) |
69.6 | % | 72.0 | % | 69.8 | % | ||||||
| Expense ratio (2) |
35.1 | % | 36.4 | % | 35.2 | % | ||||||
| (1) | The loss ratio is equal to policyholder benefits divided by net earned premiums and other considerations. |
| (2) | The expense ratio is equal to selling, underwriting and general expenses divided by net earned premiums and other considerations and fees and other income. |
| (3) | This represents single premium on closed blocks of group disability business. For 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 December 31, 2010 Compared to the Year Ended December 31, 2009
Net Income
Segment net income increased 51% to $63,538 for Twelve Months 2010 from $42,156 for Twelve Months 2009. The increase in net income was primarily attributable to favorable loss experience in all product lines. Favorable disability results and life mortality, as well as dental pricing actions, contributed to the improvement. Twelve Months 2010 includes restructuring charges of $4,349 (after-tax) compared to restructuring charges of $2,445 (after-tax) in Twelve Months 2009.
Total Revenues
Total revenues increased 4% to $1,258,935 for Twelve Months 2010 from $1,213,845 for Twelve Months 2009. Net earned premiums increased 5% or $49,258 mainly due to assumed premiums from two new clients in
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our DRMS distribution channel and the acquisition of a block of business from Shenandoah Life Insurance Company, all added in Fourth Quarter 2009. This was partially offset by decreases in our direct products as a result of a challenging sales and persistency environment which continues to affect revenue growth.
Total Benefits, Losses and Expenses
Total benefits, losses and expenses increased 1% to $1,161,808 for Twelve Months 2010 from $1,149,971 for Twelve Months 2009. The loss ratio decreased to 69.6% in Twelve Months 2010 from 72.0% in Twelve Months 2009 primarily due to higher net earned premiums and favorable loss experience across the disability, life, and dental products. Disability incidence and life mortality levels continue to be very favorable compared to prior year.
The expense ratio decreased to 35.1% for Twelve Months 2010 from 36.4% for Twelve Months 2009 driven by higher net earned premiums and expense management initiatives partially offset by restructuring charges. Twelve Months 2010 includes $6,690 in restructuring charges compared to $3,760 in Twelve Months 2009.
Year Ended December 31, 2009 Compared to the Year Ended December 31, 2008
Net Income
Segment net income decreased $28,401 or 40%, to $42,156 for Twelve Months 2009 from $70,557 for Twelve Months 2008. The decrease in net income was primarily driven by lower net earned premiums and less favorable life, dental and disability loss experience. In addition, net investment income was lower by $8,880 (after-tax) due to decreased average invested assets and lower investment yields. In addition, net income includes a reserve release related to annual reserve adequacy studies of $2,102 (after-tax) in Twelve Months 2009 compared with $3,485 (after-tax) in Twelve Months 2008.
Total Revenues
Total revenues decreased 5% to $1,213,845 for Twelve Months 2009 from $1,284,914 for Twelve Months 2008. Twelve Months 2008 net earned premiums include $11,447 of single premiums on closed blocks of business. Excluding single premiums on closed blocks of business, net earned premiums decreased 4%, or $48,164, driven by decreases in all products. The overall decrease is due to increased lapses and fewer covered lives due to higher unemployment, along with a difficult sales environment which presents a challenge to revenue growth. Although we added two new clients in the fourth quarter of 2009, assumed premiums from our DRMS distribution channel decreased $7,626 or 5% for Twelve Months 2009 compared to the prior year, excluding single premiums from closed blocks of business. An additional $4,594 of assumed premiums in the fourth quarter of 2009 is attributable to the acquisition of a block of business from Shenandoah Life Insurance Company. Net investment income decreased 9% or $13,662 due to a decrease in average invested assets and lower investment yields. In addition, Twelve Months 2008 included $1,294 in real estate joint venture partnership income while Twelve Months 2009 includes a loss of $237 from real estate joint venture partnerships.
Total Benefits, Losses and Expenses
Total benefits, losses and expenses decreased 2 % to $1,149,971 for Twelve Months 2009 from $1,176,500 for Twelve Months 2008. The loss ratio increased to 72.0% from 69.8%, primarily driven by less favorable experience across all products with the exception of assumed disability business through our Disability RMS distribution channel. Overall, disability recovery rates were less favorable for Twelve Months 2009 compared with the prior year, although incidence remained steady. Group life and dental experience were less favorable when compared with the prior year. Dental experience was impacted by higher utilization in Twelve Months 2009. Our annual reserve adequacy studies led to a release of $3,234, for Twelve Months 2009 resulting in a reduction to benefits and expenses compared with $5,362 in Twelve Months 2008.
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Excluding the single premiums on closed blocks of business in the prior year, the expense ratio increased to 36.4% from 35.2% driven by lower net earned premiums as well as additional costs incurred with new client additions and $3,760 of restructuring costs in Twelve Months 2009. We continued to manage expenses and experienced a 2% or $7,915 decrease for Twelve Months 2009 in selling, underwriting and general expenses compared with Twelve Months 2008.
Corporate and Other
The table below presents information regarding the Corporate and Other segment’s results of operations:
| For the Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| Revenues: |
||||||||||||
| Net investment income |
$ | 17,873 | $ | 16,249 | $ | 26,198 | ||||||
| Net realized gains (losses) on investments |
48,403 | (53,597 | ) | (428,679 | ) | |||||||
| Amortization of deferred gains on disposal of businesses |
10,406 | 22,461 | 29,412 | |||||||||
| Fees and other income |
200 | 140,802 | 3,236 | |||||||||
| Total revenues |
76,882 | 125,915 | (369,833 | ) | ||||||||
| Benefits, losses and expenses: |
||||||||||||
| Policyholder benefits |
(2,038 | ) | 7,408 | 1,114 | ||||||||
| Selling, underwriting and general expenses |
101,830 | 93,769 | 92,689 | |||||||||
| Interest expense |
60,646 | 60,669 | 60,953 | |||||||||
| Total benefits, losses and expenses |
160,438 | 161,846 | 154,756 | |||||||||
| Segment loss before benefit for income taxes |
(83,556 | ) | (35,931 | ) | (524,589 | ) | ||||||
| Benefit for income taxes |
(24,054 | ) | (11,520 | ) | (264,188 | ) | ||||||
| Segment net loss |
$ | (59,502 | ) | $ | (24,411 | ) | $ | (260,401 | ) | |||
Year Ended December 31, 2010 Compared to the Year Ended December 31, 2009
Net Loss
Segment net loss increased $35,091 to $(59,502) for Twelve Months 2010 compared to a net loss of $(24,411) for Twelve Months 2009. This increase is mainly due to the non-recurrence of an $83,542 (after-tax) favorable legal settlement, net of attorney fees and allowances for related recoverables with Willis Limited in Twelve Months 2009. In addition, amortization of deferred gains on disposal of businesses declined $7,836 (after-tax) as a portion of the deferred gain liability was re-established during the fourth quarter of 2010 resulting from refinements to assumptions associated with policy run-off. Partially offsetting these items is a $66,300 (after-tax) increase in realized gains on investments.
Total Revenues
Total revenues decreased $49,033, to $76,882 for Twelve Months 2010 compared with $125,915 for Twelve Months 2009. This decrease is primarily due to the above-mentioned favorable legal settlement of $139,000 with Willis Limited in Twelve Months 2009, partially offset by increased net realized gains on investments of $102,000. In addition, amortization of deferred gains on disposal of businesses declined $12,055 for reasons noted above.
Total Benefits, Losses and Expenses
Total benefits, losses and expenses remained relatively flat at $160,438 for Twelve Months 2010 compared with $161,846 for Twelve Months 2009.
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Year Ended December 31, 2009 Compared to the Year Ended December 31, 2008
Net Loss
Segment net loss improved $235,990 to $(24,411) for Twelve Months 2009 compared with $(260,401) for Twelve Months 2008. Segment results improved mainly due to a decline in net realized losses on investments of $243,803 (after-tax) and the above-mentioned $83,542 (after-tax) favorable legal settlement with Willis Limited. Segment results also include a $3,500 (after-tax) penalty to settle the previously disclosed SEC investigation regarding a finite reinsurance arrangement. Expenses related to the SEC investigation, which included reimbursements of certain SEC investigation related expenses through our director and officer insurance coverage, were $4,076 (after-tax) lower in Twelve Months 2009 compared with Twelve Months 2008. These improvements were partially offset by a tax benefit of $88,994 related to the sale of an inactive subsidiary included in Twelve Months 2008, $9,914 of tax expense from the change in deferred tax asset valuation allowance, previously disclosed executive compensation expense (severance and special retirement bonus) of $4,550 (after-tax) and a decline in net investment income of $6,467 (after-tax).
Total Revenues
Total revenues increased $495,748, to $125,915 for Twelve Months 2009 compared with $(369,833) for Twelve Months 2008. The increase in revenues is mainly due to an improvement of $375,082 in net realized losses on investments and the above-mentioned favorable legal settlement with Willis Limited. Included in net realized losses on investments were other-than-temporary impairments (“OTTI”) of $38,660 and $340,153 for Twelve Months 2009 and Twelve Months 2008, respectively. These increases were partially offset by a decline of $9,949 in net investment income as a result of lower short-term interest rates and lower average invested assets and $6,951 in lower amortization of deferred gains on disposal of businesses.
Total Benefits, Losses and Expenses
Total expenses increased $7,090, to $161,846 in Twelve Months 2009 compared with $154,756 in Twelve Months 2008. The increase in expenses is mainly due to additional executive compensation expense of $7,000.
Goodwill Impairment
The goodwill impairment test has two steps. 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. 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 6 and 11 to the Consolidated Financial Statements contained elsewhere in this report for more information.
Investments
The Company had total investments of $13,505,478 and $13,157,832 as of December 31, 2010 and December 31, 2009, respectively. For more information on our investments see Note 5 to the Notes to Consolidated Financial Statements included elsewhere in this report.
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The following table shows the credit quality of our fixed maturity securities portfolio as of the dates indicated:
| As of | ||||||||||||||||
| Fixed Maturity Securities by Credit Quality (Fair Value) |
December 31, 2010 | December 31, 2009 | ||||||||||||||
| Aaa / Aa / A |
$ | 6,488,208 | 61.2 | % | $ | 6,152,842 | 61.8 | % | ||||||||
| Baa |
3,227,216 | 30.4 | % | 2,953,964 | 29.6 | % | ||||||||||
| Ba |
618,465 | 5.8 | % | 647,321 | 6.5 | % | ||||||||||
| B and lower |
278,663 | 2.6 | % | 212,645 | 2.1 | % | ||||||||||
| Total |
$ | 10,612,552 | 100.0 | % | $ | 9,966,772 | 100.0 | % | ||||||||
Major categories of net investment income were as follows:
| Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| Fixed maturity securities |
$ | 572,909 | $ | 558,639 | $ | 584,712 | ||||||
| Equity securities |
33,864 | 38,189 | 45,775 | |||||||||
| Commercial mortgage loans on real estate |
88,894 | 92,116 | 95,013 | |||||||||
| Policy loans |
3,248 | 3,329 | 3,717 | |||||||||
| Short-term investments |
5,259 | 7,933 | 16,256 | |||||||||
| Other investments |
19,019 | 17,453 | 27,395 | |||||||||
| Cash and cash equivalents |
5,577 | 8,359 | 26,990 | |||||||||
| Total investment income |
728,770 | 726,018 | 799,858 | |||||||||
| Investment expenses |
(25,580 | ) | (27,180 | ) | (25,511 | ) | ||||||
| Net investment income |
$ | 703,190 | $ | 698,838 | $ | 774,347 | ||||||
Net investment income increased $4,352, or 1%, to $703,190 at December 31, 2010 from $698,838 at December 31, 2009. The increase is due to higher invested assets partially offset by lower investment yields.
Net investment income decreased $75,509, or 10%, to $698,838 at December 31, 2009 from $774,347 at December 31, 2008. The decrease is due to lower overall investment yields.
The credit markets improved throughout 2010. As a result, many securities in the portfolio have shown improved market values throughout the period. This has led to a net unrealized gain position of $617,538 as of December 31, 2010, compared to $281,327 as of December 31, 2009.
As of December 31, 2010, the Company owned $178,997 of securities guaranteed by financial guarantee insurance companies. Included in this amount was $155,244 of municipal securities, with a credit rating of A+ both with and without the guarantee.
The Company has exposure to sub-prime and related mortgages within our fixed maturity security portfolio. At December 31, 2010, approximately 2.3% 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 0.7% of the total unrealized gain position. Of the securities with sub-prime exposure, approximately 26% are rated as investment grade. All residential mortgage-backed securities, including those with sub-prime exposure, are reviewed as part of the ongoing other-than-temporary impairment monitoring process.
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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 has the ability to 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.
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 which include observable market inputs. Observable market inputs are the assumptions market participants would use in pricing the asset or liability based on market data obtained from independent sources. 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.
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. To price municipal bonds, the pricing service uses material event notices and new issue data inputs in addition to the standard inputs. To price residential and commercial mortgage-backed securities and asset-backed securities, the pricing service uses vendor trading platform data, monthly payment information and collateral performance inputs in addition to the standard inputs. To price fixed maturity securities denominated in Canadian dollars, the pricing service uses observable inputs, including but not limited to, benchmark yields, reported trades, issuer spreads, benchmark securities and reference data. The pricing service also evaluates each security based on relevant market information including: relevant credit information, perceived market movements and sector news. Valuation models can change period to period, depending on the appropriate observable inputs that are available at the balance sheet date to price a security.
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 and are categorized as Level 3 securities. The Company could not corroborate the non-binding broker quotes with Level 2 inputs.
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.
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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.
Securities Lending and Borrowing
The Company engages in transactions in which fixed maturity securities, especially bonds issued by the U.S. government, government agencies and authorities, and U.S. corporations, are loaned to selected broker/dealers. Collateral, greater than or equal to 102% of the fair value of the securities lent, plus accrued interest, is received in the form of cash and cash equivalents held by a custodian bank for the benefit of the Company. The use of cash collateral received is unrestricted. The Company reinvests the cash collateral received, generally in investments of high credit quality that are designated as available-for-sale. The Company monitors the fair value of securities loaned and the collateral received, with additional collateral obtained, as necessary. The Company is subject to the risk of loss to the extent there is a loss on the re-investment of cash collateral.
As of December 31, 2010 and 2009, our collateral held under securities lending, of which its use is unrestricted, was $122,219 and $218,129, respectively, while our liability to the borrower for collateral received was $122,931 and $220,279, respectively. The difference between the collateral held and obligations under securities lending is recorded as an unrealized loss and is included as part of AOCI. All securities with unrealized losses have been in a continuous loss position for twelve months or longer as of December 31, 2010 and December 31, 2009. 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.
The Company began engaging in transactions during 2010 in which securities issued by the U.S. government and government agencies and authorities, are purchased under agreements to resell (“reverse repurchase agreements”). The Company may take possession of the securities purchased under reverse repurchase agreements. Collateral, greater than or equal to 100% of the fair value of the securities purchased, plus accrued interest, is pledged in the form of cash and cash equivalents or other securities, as provided for in
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the underlying agreement to selected broker/dealers. The use of the cash collateral pledged is unrestricted. Interest earned on the collateral pledged is recorded as investment income. As of December 31, 2010, we had $14,370 of receivables under securities loan agreements which is included in other assets on the consolidated balance sheets.
The Company enters into these reverse repurchase agreements in order to initiate short positions in its investment portfolio. The borrowed securities are sold in the marketplace. The Company records obligations to return the securities that we no longer hold as a liability. The financial liabilities resulting from these borrowings are carried at fair value with the changes in value reported as realized gains or losses. As of December 31, 2010, we had $14,281 of obligations to return borrowed securities which is included in accounts payable and other liabilities on the consolidated balance sheets.
Liquidity and Capital Resources
Regulatory Requirements
Assurant, Inc. is a holding company, and as such, has limited direct operations of its own. Our holding company assets consist primarily of the capital stock of our subsidiaries. Accordingly, our future cash flows depend upon the availability of dividends and other statutorily permissible payments from our subsidiaries, such as payments under our tax allocation agreement and under management agreements with our subsidiaries. The ability to pay such dividends and to make such other payments will be limited by applicable laws and regulations of the states in which our subsidiaries are domiciled, which subject our subsidiaries to significant regulatory restrictions. The dividend requirements and regulations vary from state to state and by type of insurance provided by the applicable subsidiary. These laws and regulations require, among other things, our insurance subsidiaries to maintain minimum solvency requirements and limit the amount of dividends these subsidiaries can pay to the holding company. Along with solvency regulations, the primary driver in determining the amount of capital used for dividends is the level of capital needed to maintain desired financial strength ratings from A. M. Best. Given recent economic events that have affected the insurance industry, both regulators and 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. For 2011, the maximum amount of distributions our U.S. insurance subsidiaries could pay, under applicable laws and regulations without prior regulatory approval, is approximately $614,362. In total, we have taken dividends, net of infusions, of $832,300 from our operating companies during 2010. We anticipate that we will be able to take dividends in 2011 of at least equal to operating company earnings.
Liquidity
As of December 31, 2010, we had approximately $878,622 in capital at the holding company. Excluding our $250,000 capital buffer against tail-event risks, we have $628,622 in deployable capital. Dividends or returns of capital paid by our subsidiaries were $886,200, $703,099 and 453,303 for the years ended December 31, 2010, 2009 and 2008, 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 2010, 2009 and 2008 we made share repurchases and dividends of $602,568, $101,545 and $122,672, respectively.
The primary sources of funds for our subsidiaries consist of premiums and fees collected, the proceeds from the sales and maturity of investments and 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.
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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 have limited policyholder optionality which results in policyholder behavior that is relatively insensitive to the interest rate environment. In addition, our investment portfolio is largely comprised of highly liquid fixed maturity securities with a sufficient component of such securities invested that are near maturity which may be sold with minimal risk of loss to meet cash needs. Therefore, we believe we have limited exposure to disintermediation risk.
Generally, our subsidiaries’ premiums, fees and investment income, along with planned asset sales and maturities, provide sufficient cash to pay claims and expenses. However, there are instances when unexpected cash needs arise in excess of that available from usual operating sources. In such instances, we have several options to raise needed funds, including selling assets from the subsidiaries’ investment portfolios, using holding company cash (if available), issuing commercial paper, or drawing funds from our revolving credit facility. In addition, we have filed an automatically effective shelf registration statement on Form S-3 with the SEC. This registration statement allows us to issue equity, debt or other types of securities through one or more methods of distribution. The terms of any offering would be established at the time of the offering, subject to market conditions. If we decide to make an offering of securities, we will consider the nature of the cash requirement as well as the cost of capital in determining what type of securities we may offer.
On January 14, 2011, we announced that our Board of Directors declared a quarterly dividend of $0.16 per common share payable on March 14, 2011 to stockholders of record as of February 28, 2011. We paid dividends of $0.16 on December 13, 2010, September 14, 2010 and June 8, 2010 and $0.15 per common share on March 8, 2010. We paid dividends of $0.15 on December 14, 2009, September 15, 2009 and June 9, 2009 and $0.14 per common share on March 9, 2009. Any determination to pay future dividends will be at the discretion of our Board of Directors and will be dependent upon: our subsidiaries’ payment of dividends and/or other statutorily permissible payments to us; our results of operations and cash flows; our financial position and capital requirements; general business conditions; legal, tax, regulatory and contractual restrictions on the payment of dividends; and other factors our Board of Directors deems relevant.
During the year ended December 31, 2010, the Company repurchased 15,224,645 shares of its outstanding common stock at a cost of $532,950. On January 18, 2011, the Company’s Board of Directors authorized the Company to repurchase up to an additional $600,000 of its outstanding common stock, making its total authorization $805,587 at that date. The timing and the amount of future repurchases will depend on market conditions and other factors.
Management believes that we will have sufficient liquidity to satisfy our needs over the next twelve months, including the ability to pay interest on our senior notes and dividends on our common shares.
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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 the Assurant 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 January 1, 2010, the Assurant Pension Plan’s funded percentage was 113% on a PPA calculated basis. Therefore, benefit and payment restrictions did not occur during 2010. The 2010 funded measure will also be used to determine restrictions, if any, that can occur during the first nine months of 2011. Due to the funding status of the Assurant Pension Plan in 2010, no restrictions will exist before October 2011 (the time that the January 1, 2011 actuarial valuation needs to be completed). Also, based on the estimated funded status as of January 1, 2011, we do not anticipate any restrictions on benefits for the remainder of 2011.
The Assurant Pension Plan was under-funded by $96,278 and $87,977 (based on the fair value of the assets compared to the projected benefit obligation) on a GAAP basis at December 31, 2010 and 2009, respectively. This equates to an 85% and 84% funded status at December 31, 2010 and 2009, respectively. The change in under-funded status is mainly due to a decrease in the discount rate used to determine the projected benefit obligation, which is partially offset by better than expected asset performance.
In prior years we established a funding policy in which service cost plus 15% of the Assurant Pension Plan deficit is contributed annually. During 2010, we contributed $40,000 in cash to the Assurant Pension Plan. We expect to contribute at least $40,000 in cash to the Assurant Pension Plan over the course of 2011. See Note 22 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 2011 projected benefit expense would result in a change of $2,300 for the Assurant Pension Plan and the various non-qualified pension plans and $300 for the retirement health benefit plan. The impact of a 25 basis point change in the expected return on assets assumption on the 2011 projected benefit expense would result in a change of $1,400 for the Assurant Pension Plan and the various non-qualified pension plans and $100 for the retirement health benefits plan.
Commercial Paper Program
The Company’s commercial paper program requires the Company to maintain liquidity facilities either in an available amount equal to any outstanding notes from the program or in an amount sufficient to maintain the ratings assigned to the notes issued from the program. Our commercial paper is rated AMB-2 by A.M. Best, P-2 by Moody’s and A2 by S&P. The Company’s subsidiaries do not maintain commercial paper or other borrowing facilities at their level. This program is currently backed up by a $350,000 senior revolving credit facility, of which $325,604 was available at December 31, 2010, due to outstanding letters of credit.
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On December 18, 2009, the Company entered into a three-year unsecured revolving credit agreement (“2009 Credit Facility”) with a syndicate of banks arranged by JP Morgan Chase Bank, Inc. and Bank of America, Inc. The 2009 Credit Facility provides for revolving loans and the issuance of multi-bank, syndicated letters of credit and/or letters of credit from a sole issuing bank in an aggregate amount of $350,000 and is available until December 2012, provided the Company is in compliance with all covenants. The agreement has a sublimit for letters of credit issued under the agreement of $50,000. The proceeds of these loans may be used for the Company’s commercial paper program or for general corporate purposes.
The Company did not use the commercial paper program during the twelve months ended December 31, 2010 and 2009 and there were no amounts relating to the commercial paper program outstanding at December 31, 2010 and December 31, 2009. The Company made no borrowings using the 2009 Credit Facility and no loans are outstanding at December 31, 2010. The Company does have $24,396 of letters of credit outstanding under the 2009 Credit Facility as of December 31, 2010.
The 2009 Credit Facility contains restrictive covenants, all of which were met as of December 31, 2010. These covenants include (but are not limited to):
| (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 consolidate |