UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| þ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended June 30, 2008March 31, 2009
OR
| ¨ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from________ to_____
Assurant, Inc.
(Exact name of registrant as specified in its charter)
| Delaware | 001-31978 | 39-1126612 | ||
(State or other jurisdiction of incorporation) | (Commission File Number) | (I.R.S. Employer Identification No.) |
One Chase Manhattan Plaza, 41st Floor
New York, New York 10005
(212) 859-7000
(Address, including zip code, and telephone number, including
area code, of Registrant’s Principal Executive Offices)
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 þ 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 ¨ NO ¨
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.
| Large accelerated filer | þ | Accelerated filer ¨ | ||||
| Non-accelerated filer | ¨ | (Do not check if a smaller reporting company) | Smaller reporting company ¨ | |||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES ¨ NO þ
The number of shares of the registrant’s Common Stock outstanding at AugustMay 1, 20082009 was 118,594,275.117,753,411.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2008MARCH 31, 2009
Assurant, Inc. and Subsidiaries
Consolidated Balance Sheets (unaudited)
At June 30, 2008March 31, 2009 and December 31, 20072008
| June 30, 2008 | December 31, 2007 | |||||
| (in thousands except per share and share amounts) | ||||||
Assets | ||||||
Investments: | ||||||
Fixed maturity securities available for sale, at fair value (amortized cost - $9,870,433 in 2008 and $10,026,355 in 2007) | $ | 9,689,741 | $ | 10,126,415 | ||
Equity securities available for sale, at fair value (cost - $800,984 in 2008 and $702,698 in 2007) | 717,549 | 636,001 | ||||
Commercial mortgage loans on real estate, at amortized cost | 1,486,138 | 1,433,626 | ||||
Policy loans | 56,220 | 57,107 | ||||
Short-term investments | 472,215 | 410,878 | ||||
Collateral held under securities lending | 510,903 | 541,650 | ||||
Other investments | 594,571 | 541,474 | ||||
Total investments | 13,527,337 | 13,747,151 | ||||
Cash and cash equivalents | 956,603 | 804,964 | ||||
Premiums and accounts receivable, net | 528,351 | 580,379 | ||||
Reinsurance recoverables | 3,916,486 | 3,904,348 | ||||
Accrued investment income | 151,018 | 149,165 | ||||
Tax receivable | 58,364 | 26,012 | ||||
Deferred acquisition costs | 2,917,852 | 2,895,345 | ||||
Property and equipment, at cost less accumulated depreciation | 270,139 | 275,779 | ||||
Deferred income taxes, net | 10,349 | — | ||||
Goodwill | 828,743 | 832,656 | ||||
Value of business acquired | 116,510 | 125,612 | ||||
Other assets | 268,105 | 265,617 | ||||
Assets held in separate accounts | 2,662,175 | 3,143,288 | ||||
Total assets | $ | 26,212,032 | $ | 26,750,316 | ||
| March 31, 2009 | December 31, 2008 | |||||
| (in thousands except per share and share amounts) | ||||||
Assets | ||||||
Investments: | ||||||
Fixed maturity securities available for sale, at fair value (amortized cost—$9,320,038 in 2009 and $9,204,228 in 2008) | $ | 8,616,598 | $ | 8,591,266 | ||
Equity securities available for sale, at fair value (cost—$540,903 in 2009 and $577,356 in 2008) | 374,376 | 474,873 | ||||
Commercial mortgage loans on real estate, at amortized cost | 1,495,420 | 1,506,694 | ||||
Policy loans | 57,793 | 58,096 | ||||
Short-term investments | 664,272 | 703,402 | ||||
Collateral held under securities lending | 181,177 | 234,027 | ||||
Other investments | 488,410 | 498,434 | ||||
Total investments | 11,878,046 | 12,066,792 | ||||
Cash and cash equivalents | 664,339 | 1,040,684 | ||||
Premiums and accounts receivable, net | 439,534 | 513,181 | ||||
Reinsurance recoverables | 4,076,574 | 4,010,170 | ||||
Accrued investment income | 153,819 | 144,679 | ||||
Tax receivable | — | 44,156 | ||||
Deferred acquisition costs | 2,579,420 | 2,650,672 | ||||
Property and equipment, at cost less accumulated depreciation | 277,288 | 278,621 | ||||
Deferred income taxes, net | 530,700 | 449,372 | ||||
Goodwill | 1,005,027 | 1,001,899 | ||||
Value of business acquired | 104,627 | 108,204 | ||||
Other assets | 508,908 | 427,347 | ||||
Assets held in separate accounts | 1,602,362 | 1,778,809 | ||||
Total assets | $ | 23,820,644 | $ | 24,514,586 | ||
See the accompanying notes to the consolidated financial statements
Assurant, Inc. and Subsidiaries
Consolidated Balance Sheets (unaudited)
At June 30, 2008March 31, 2009 and December 31, 20072008
| June 30, 2008 | December 31, 2007 | |||||||
| (in thousands except per share and share amounts) | ||||||||
Liabilities | ||||||||
Future policy benefits and expenses | $ | 7,205,884 | $ | 7,189,496 | ||||
Unearned premiums | 5,531,862 | 5,410,709 | ||||||
Claims and benefits payable | 3,311,611 | 3,303,084 | ||||||
Commissions payable | 201,460 | 267,886 | ||||||
Reinsurance balances payable | 87,181 | 104,105 | ||||||
Funds held under reinsurance | 48,192 | 50,147 | ||||||
Deferred gain on disposal of businesses | 202,066 | 216,772 | ||||||
Obligation under securities lending | 510,903 | 541,650 | ||||||
Accounts payable and other liabilities | 1,220,149 | 1,332,824 | ||||||
Deferred income taxes, net | — | 108,429 | ||||||
Debt | 971,909 | 971,863 | ||||||
Mandatorily redeemable preferred stock | 11,160 | 21,160 | ||||||
Liabilities related to separate accounts | 2,662,175 | 3,143,288 | ||||||
Total liabilities | 21,964,552 | 22,661,413 | ||||||
Commitments and contingencies (Note 11) | ||||||||
Stockholders’ equity | ||||||||
Common stock, par value $0.01 per share, 800,000,000 shares authorized, 118,267,434 and 117,808,007 shares outstanding at June 30, 2008 and December 31, 2007, respectively | 1,442 | 1,438 | ||||||
Additional paid-in capital | 2,912,038 | 2,904,970 | ||||||
Retained earnings | 2,612,291 | 2,269,107 | ||||||
Accumulated other comprehensive (loss) income | (137,768 | ) | 53,911 | |||||
Treasury stock, at cost; 25,997,943 shares at June 30, 2008 and December 31, 2007 | (1,140,523 | ) | (1,140,523 | ) | ||||
Total stockholders’ equity | 4,247,480 | 4,088,903 | ||||||
Total liabilities and stockholders’ equity | $ | 26,212,032 | $ | 26,750,316 | ||||
| March 31, 2009 | December 31, 2008 | |||||||
| (in thousands except per share and share amounts) | ||||||||
Liabilities | ||||||||
Future policy benefits and expenses | $ | 7,150,150 | $ | 7,095,645 | ||||
Unearned premiums | 5,227,849 | 5,407,859 | ||||||
Claims and benefits payable | 3,278,332 | 3,302,731 | ||||||
Commissions payable | 192,295 | 233,200 | ||||||
Reinsurance balances payable | 67,862 | 88,393 | ||||||
Funds held under reinsurance | 38,492 | 38,433 | ||||||
Deferred gain on disposal of businesses | 180,558 | 187,360 | ||||||
Obligation under securities lending | 202,616 | 256,506 | ||||||
Accounts payable and other liabilities | 1,165,168 | 1,433,028 | ||||||
Tax payable | 64,496 | — | ||||||
Debt | 971,982 | 971,957 | ||||||
Mandatorily redeemable preferred stock | 8,160 | 11,160 | ||||||
Liabilities related to separate accounts | 1,602,362 | 1,778,809 | ||||||
Total liabilities | 20,150,322 | 20,805,081 | ||||||
Commitments and contingencies (Note 12) | ||||||||
Stockholders’ equity | ||||||||
Common stock, par value $0.01 per share, 800,000,000 shares authorized, 117,533,500 and 117,368,534 shares outstanding at March 31, 2009 and December 31, 2008, respectively | 1,445 | 1,443 | ||||||
Additional paid-in capital | 2,936,265 | 2,928,160 | ||||||
Retained earnings | 2,714,463 | 2,650,371 | ||||||
Accumulated other comprehensive loss | (782,328 | ) | (670,946 | ) | ||||
Treasury stock, at cost; 26,997,943 shares at March 31, 2009 and December 31, 2008 | (1,199,523 | ) | (1,199,523 | ) | ||||
Total stockholders’ equity | 3,670,322 | 3,709,505 | ||||||
Total liabilities and stockholders’ equity | $ | 23,820,644 | $ | 24,514,586 | ||||
See the accompanying notes to the consolidated financial statements
Assurant, Inc. and Subsidiaries
Consolidated Statement of Operations (unaudited)
Three and Six Months Ended June 30,March 31, 2009 and 2008 and 2007
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
| 2008 | 2007 | 2008 | 2007 | ||||||||||||
| (in thousands except number of shares and per share amounts) | |||||||||||||||
Revenues | |||||||||||||||
Net earned premiums and other considerations | $ | 1,995,516 | $ | 1,798,687 | $ | 3,936,933 | $ | 3,558,196 | |||||||
Net investment income | 201,211 | 190,302 | 398,985 | 407,198 | |||||||||||
Net realized (losses) gains on investments | (34,574 | ) | (3,086 | ) | (77,717 | ) | 2,484 | ||||||||
Amortization of deferred gain on disposal of businesses | 7,327 | 8,246 | 14,706 | 16,595 | |||||||||||
Fees and other income | 79,280 | 70,578 | 153,178 | 137,517 | |||||||||||
Total revenues | 2,248,760 | 2,064,727 | 4,426,085 | 4,121,990 | |||||||||||
Benefits, losses and expenses | |||||||||||||||
Policyholder benefits | 998,208 | 902,053 | 1,935,667 | 1,791,575 | |||||||||||
Amortization of deferred acquisition costs and value of business acquired | 425,088 | 355,045 | 830,297 | 674,759 | |||||||||||
Underwriting, general and administrative expenses | 560,763 | 539,859 | 1,094,204 | 1,095,071 | |||||||||||
Interest expense | 15,287 | 15,296 | 30,575 | 30,593 | |||||||||||
Total benefits, losses and expenses | 1,999,346 | 1,812,253 | 3,890,743 | 3,591,998 | |||||||||||
Income before provision for income taxes | 249,414 | 252,474 | 535,342 | 529,992 | |||||||||||
Provision for income taxes | 59,460 | 86,194 | 158,558 | 184,255 | |||||||||||
Net income | $ | 189,954 | $ | 166,280 | $ | 376,784 | $ | 345,737 | |||||||
Earnings Per Share | |||||||||||||||
Basic | $ | 1.61 | $ | 1.38 | $ | 3.19 | $ | 2.85 | |||||||
Diluted | $ | 1.59 | $ | 1.36 | $ | 3.16 | $ | 2.80 | |||||||
Dividends per share | $ | 0.14 | $ | 0.12 | $ | 0.26 | $ | 0.22 | |||||||
Share Data: | |||||||||||||||
Weighted average shares outstanding used in basic per share calculations | 118,059,955 | 120,657,052 | 117,971,858 | 121,399,339 | |||||||||||
Plus: Dilutive securities | 1,432,882 | 1,835,452 | 1,451,648 | 1,934,888 | |||||||||||
Weighted average shares used in diluted per share calculations | 119,492,837 | 122,492,504 | 119,423,506 | 123,334,227 | |||||||||||
| Three Months Ended March 31, | ||||||||
| 2009 | 2008 | |||||||
| (in thousands except per share and share amounts) | ||||||||
Revenues | ||||||||
Net earned premiums and other considerations | $ | 1,874,579 | $ | 1,941,417 | ||||
Net investment income | 178,479 | 197,774 | ||||||
Net realized losses on investments | (55,689 | ) | (43,143 | ) | ||||
Amortization of deferred gain on disposal of businesses | 6,802 | 7,379 | ||||||
Fees and other income | 83,706 | 73,898 | ||||||
Total revenues | 2,087,877 | 2,177,325 | ||||||
Benefits, losses and expenses | ||||||||
Policyholder benefits | 960,342 | 937,459 | ||||||
Amortization of deferred acquisition costs and value of business acquired | 387,794 | 405,208 | ||||||
Underwriting, general and administrative expenses | 566,685 | 533,442 | ||||||
Interest expense | 15,189 | 15,288 | ||||||
Total benefits, losses and expenses | 1,930,010 | 1,891,397 | ||||||
Income before provision for income taxes | 157,867 | 285,928 | ||||||
Provision for income taxes | 77,286 | 99,098 | ||||||
Net income | $ | 80,581 | $ | 186,830 | ||||
Earnings Per Share | ||||||||
Basic | $ | 0.68 | $ | 1.58 | ||||
Diluted* | $ | 0.68 | $ | 1.56 | ||||
Dividends per share | $ | 0.14 | $ | 0.12 | ||||
Share Data: | ||||||||
Weighted average shares outstanding used in basic per share calculations* | 117,891,543 | 118,103,519 | ||||||
Plus: Dilutive securities* | 76,204 | 1,283,802 | ||||||
Weighted average shares used in diluted per share calculations* | 117,967,747 | 119,387,321 | ||||||
*Prior period amounts have been adjusted in accordance with FSP EITF 03-6-1. See Notes 3 and 9.
See the accompanying notes to the consolidated financial statements
Assurant, Inc. and Subsidiaries
Consolidated Statement of Changes in Stockholders’ Equity (unaudited)
From December 31, 20072008 through June 30, 2008March 31, 2009
| Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | Total | ||||||||||||||||||
Balance, December 31, 2007 | $ | 1,438 | $ | 2,904,970 | $ | 2,269,107 | $ | 53,911 | $ | (1,140,523 | ) | $ | 4,088,903 | ||||||||||
Stock plan exercises | 4 | (9,306 | ) | — | — | — | (9,302 | ) | |||||||||||||||
Stock plan compensation expense | — | 11,154 | — | — | — | 11,154 | |||||||||||||||||
Tax benefit of exercise of stock options | — | 5,220 | — | — | — | 5,220 | |||||||||||||||||
Dividends | — | — | (30,740 | ) | — | — | (30,740 | ) | |||||||||||||||
Cumulative effect of change in accounting principles (Note 2) | — | — | (2,860 | ) | — | — | (2,860 | ) | |||||||||||||||
Comprehensive income: | |||||||||||||||||||||||
Net income | — | — | 376,784 | — | — | 376,784 | |||||||||||||||||
Other comprehensive loss: | |||||||||||||||||||||||
Net change in unrealized (losses) on securities, net of taxes | — | — | — | (195,407 | ) | — | (195,407 | ) | |||||||||||||||
Net change in foreign currency translation, net of taxes | — | — | — | 283 | — | 283 | |||||||||||||||||
Amortization of pension and postretirement unrecognized net periodic benefit, net of taxes | 3,445 | 3,445 | |||||||||||||||||||||
Total other comprehensive loss | (191,679 | ) | |||||||||||||||||||||
Total comprehensive income: | 185,105 | ||||||||||||||||||||||
Balance, June 30, 2008 | $ | 1,442 | $ | 2,912,038 | $ | 2,612,291 | $ | (137,768 | ) | $ | (1,140,523 | ) | $ | 4,247,480 | |||||||||
| Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Treasury Stock | Total | ||||||||||||||||||
Balance, December 31, 2008 | $ | 1,443 | $ | 2,928,160 | $ | 2,650,371 | $ | (670,946 | ) | $ | (1,199,523 | ) | $ | 3,709,505 | |||||||||
Stock plan exercises | 2 | 3,221 | — | — | — | 3,223 | |||||||||||||||||
Stock plan compensation expense | — | 5,539 | — | — | — | 5,539 | |||||||||||||||||
Change in tax benefit from share-based payment arrangements | — | (655 | ) | — | — | — | (655 | ) | |||||||||||||||
Dividends | — | — | (16,489 | ) | — | — | (16,489 | ) | |||||||||||||||
Comprehensive loss: | |||||||||||||||||||||||
Net income | — | — | 80,581 | — | — | 80,581 | |||||||||||||||||
Other comprehensive loss: | |||||||||||||||||||||||
Net change in unrealized losses on securities, net of taxes of $53,557 | — | — | — | (106,926 | ) | — | (106,926 | ) | |||||||||||||||
Net change in foreign currency translation, net of taxes of $1,562 | — | — | — | (5,057 | ) | — | (5,057 | ) | |||||||||||||||
Amortization of pension and postretirement unrecognized net periodic benefit, net of taxes of $(324) | — | — | 601 | — | 601 | ||||||||||||||||||
Total other comprehensive loss | (111,382 | ) | |||||||||||||||||||||
Total comprehensive loss: | (30,801 | ) | |||||||||||||||||||||
Balance, March 31, 2009 | $ | 1,445 | $ | 2,936,265 | $ | 2,714,463 | $ | (782,328 | ) | $ | (1,199,523 | ) | $ | 3,670,322 | |||||||||
See the accompanying notes to the consolidated financial statements
Assurant, Inc. and Subsidiaries
Consolidated Statement of Cash Flows (unaudited)
SixThree Months Ended June 30,March 31, 2009 and 2008 and 2007
| Six Months Ended June 30, | ||||||||
| 2008 | 2007 | |||||||
| (in thousands) | ||||||||
Net cash provided by operating activities | $ | 433,660 | $ | 516,157 | ||||
Investing activities | ||||||||
Sales of: | ||||||||
Fixed maturity securities available for sale | 1,086,904 | 1,002,756 | ||||||
Equity securities available for sale | 169,352 | 137,069 | ||||||
Property and equipment and other | 561 | 1,256 | ||||||
Subsidiary, net of cash transferred | 31,853 | — | ||||||
Maturities, prepayments, and scheduled redemption of: | ||||||||
Fixed maturity securities available for sale | 343,634 | 372,995 | ||||||
Purchases of: | ||||||||
Fixed maturity securities available for sale | (1,362,023 | ) | (1,620,973 | ) | ||||
Equity securities available for sale | (284,393 | ) | (128,226 | ) | ||||
Property and equipment and other | (28,798 | ) | (33,423 | ) | ||||
Change in commercial mortgage loans on real estate | (52,490 | ) | (88,938 | ) | ||||
Change in short term investments | (87,728 | ) | 51,774 | |||||
Change in other invested assets | (64,471 | ) | 16,187 | |||||
Change in policy loans | 822 | 988 | ||||||
Change in collateral held under securities lending | 30,747 | (263,305 | ) | |||||
Net cash used in investing activities | (216,030 | ) | (551,840 | ) | ||||
Financing activities | ||||||||
Repayment of mandatorily redeemable preferred stock | (10,000 | ) | — | |||||
Excess tax benefits from stock-based payment arrangements | 5,220 | 7,374 | ||||||
Acquisition of treasury stock | — | (190,688 | ) | |||||
Dividends paid | (30,740 | ) | (26,731 | ) | ||||
Change in obligation under securities lending | (30,747 | ) | 263,305 | |||||
Commercial paper issued | — | 39,958 | ||||||
Commercial paper repaid | — | (40,000 | ) | |||||
Net cash (used in) provided by financing activities | (66,267 | ) | 53,218 | |||||
Effect of exchange rate changes on cash and cash equivalents | 276 | 4,864 | ||||||
Change in cash and cash equivalents | 151,639 | 22,399 | ||||||
Cash and cash equivalents at beginning of period | 804,964 | 987,672 | ||||||
Cash and cash equivalents at end of period | $ | 956,603 | $ | 1,010,071 | ||||
| Three Months Ended March 31, | ||||||||
| 2009 | 2008 | |||||||
| (in thousands) | ||||||||
Net cash (used in) provided by operating activities | $ | (264,569 | ) | $ | 450,192 | |||
Investing activities | ||||||||
Sales of: | ||||||||
Fixed maturity securities available for sale | 176,029 | 575,869 | ||||||
Equity securities available for sale | 16,908 | 81,492 | ||||||
Property and equipment and other | 137 | 1,251 | ||||||
Maturities, prepayments, and scheduled redemption of: | ||||||||
Fixed maturity securities available for sale | 175,548 | 189,552 | ||||||
Purchases of: | ||||||||
Fixed maturity securities available for sale | (489,486 | ) | (578,632 | ) | ||||
Equity securities available for sale | (5,677 | ) | (177,592 | ) | ||||
Property and equipment and other | (13,286 | ) | (15,455 | ) | ||||
Change in commercial mortgage loans on real estate | 10,798 | (37,875 | ) | |||||
Change in short term investments | 37,572 | (242,936 | ) | |||||
Change in other invested assets | 2,145 | (5,946 | ) | |||||
Change in policy loans | 267 | 58 | ||||||
Change in collateral held under securities lending | 53,890 | 20,303 | ||||||
Net cash used in investing activities | (35,155 | ) | (189,911 | ) | ||||
Financing activities | ||||||||
Repayment of mandatorily redeemable preferred stock | (3,000 | ) | (10,000 | ) | ||||
Change in tax benefit from share-based payment arrangements | (655 | ) | 599 | |||||
Dividends paid | (16,489 | ) | (14,173 | ) | ||||
Change in obligation under securities lending | (53,890 | ) | (20,303 | ) | ||||
Net cash used in financing activities | (74,034 | ) | (43,877 | ) | ||||
Effect of exchange rate changes on cash and cash equivalents | (2,587 | ) | (774 | ) | ||||
Change in cash and cash equivalents | (376,345 | ) | 215,630 | |||||
Cash and cash equivalents at beginning of period | 1,040,684 | 804,964 | ||||||
Cash and cash equivalents at end of period | $ | 664,339 | $ | 1,020,594 | ||||
See the accompanying notes to the consolidated financial statements
Assurant, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
SixThree Months Ended June 30,March 31, 2009 and 2008 and 2007
(In thousands, except per share and share amounts)
1. Nature of Operations
Assurant, Inc. (the “Company”) is a holding company whose subsidiaries provide specialized insurance products and related services in North America and selected other international markets.
Assurant, Inc.The Company is traded on the New York Stock Exchange under the symbol AIZ.
Through its operating subsidiaries, the Company provides creditor-placed homeowners insurance, manufactured housing homeowners insurance, debt protection administration, creditcredit-related insurance, warranties and extended service contracts, individual health and small employer group health insurance, group dental insurance, group disability insurance, group life insurance and pre-funded funeral insurance.
2. Basis of Presentation
The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. Accordingly, these statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.
InThe interim financial data as of March 31, 2009 and for the three months ended March 31, 2009 and March 31, 2008 is unaudited; in the opinion of management, the interim data includes all adjustments, (consistingconsisting only of a normal recurring nature) consideredadjustments, necessary forto a fair statement of the consolidated financial statements have been included.results for the interim periods. The unaudited interim consolidated financial statements include the accounts of the Company and all of its wholly owned subsidiaries. All inter-company transactions and balances are eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the 20082009 presentation.
The Company recorded an after-tax cumulative effect of change in accounting principle of $(2,860) onEffective January 1, 2008, related to2009, new preneed life insurance policies in which death benefit increases are determined at the adoptiondiscretion of the Company are accounted for as universal life contracts under Statement of Financial Accounting Standards (“FAS”) No. 157,97,Fair Value MeasurementsAccounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments (“FAS 157”97”). For contracts sold prior to January 1, 2009, these types of preneed life insurance sales are accounted for and will continue to be accounted for under FAS No. 60,Accounting and Reporting by Insurance Enterprises.The amountdifference between reporting in accordance with FAS 60 and FAS 97 is reflectednot material. In addition, this change did not materially impact the Company’s results of operations, but resulted in the statementCompany recording policy fee income instead of changes in stockholders’ equity as required. See Notes 3net earned premiums and 5 for further information regarding the adoption of FAS 157.incurred losses.
As part of our ongoing monitoring process, we regularly review our investment portfolio to ensure that investments that may be other-than-temporarily impaired are identified on a timely basis and that any impairment is charged against earnings in the proper period. We have reviewed these securities and recorded $27,573 and $70,982 of other-than-temporary impairments for the three and six months ended June 30, 2008. There were no other-than-temporary impairments for the three and six months ended June 30, 2007.
Operating results for the three and six months ended June 30, 2008March 31, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008.2009. The accompanying unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.2008.
3. Recent Accounting Pronouncements
Recent Accounting Pronouncements - Adopted
On January 1, 2008, the Company adopted FAS 157 which defines fair value, addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under GAAP and expands disclosures about fair value measurements. FAS 157 is 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, FAS 157
Assurant, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
Six Months Ended June 30, 2008 and 2007
(In thousands, except per share and share amounts)
requires 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 will be 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 Note 5 for further information regarding FAS 157.
On January 1, 2008,2009, the Company adopted FAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities (“FAS 159”). FAS 159 provides a choice to measure many financial instruments and certain other items at fair value on specified election dates and requires disclosures about the electionStatement of the fair value option. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. The Company has chosen not to elect the fair value option for any financial or non-financial instruments as of the adoption date, thus the adoption of FAS 159 did not have an impact on the Company’s financial position or results of operations.
On January 1, 2008, the Company adopted Emerging Issues Task Force (“EITF”) Issue No. 06-10,Accounting for Deferred Compensation and Postretirement Benefit Aspects of Collateral Assignment Split-Dollar Life Insurance Arrangements(“EITF 06-10”). EITF 06-10 provides guidance regarding the employer’s recognition of the liability and the related compensation costs for collateral assignment split-dollar life insurance arrangements that provide a benefit to an employee that extends into postretirement periods. This consensus concludes that for a collateral assignment split-dollar life insurance arrangement, an employer should recognize a liability for future benefits in accordance with FAS No. 106,Employers’ Accounting For Postretirement Benefits Other-Than-Pensions,(if, in substance, a postretirement benefit plan exists) or Accounting Principles Board Opinion No. 12,Deferred Compensation Contracts,(“APB 12”) (if the arrangement is, in substance, an individual deferred compensation contract) based on the substantive agreement with the employee. The Company has been recording its liability for future benefits in accordance with APB 12, thus the adoption of EITF 06-10 did not have an impact on the Company’s financial position or results of operations.
Recent Accounting Pronouncements – Not Yet Adopted
In December 2007, the Financial Accounting Standards Board (“FASB”FAS”) issued FAS No. 141R,Business Combinations(“FAS 141R”). FAS 141R replaces FAS No. 141,Business Combinations(“FAS 141”).FAS 141R retains the fundamental requirements of FAS 141 that the purchaseacquisition 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. FAS 141R 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
Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)—(Continued)
Three Months Ended March 31, 2009 and 2008
(In thousands, except per share and share amounts)
or more other businesses. FAS 141R broadens the fair value measurement and recognition of assets acquired, liabilities assumed, and interests transferred as a result of business combinations. FAS 141R also increases the disclosure requirements for business combinations in the consolidated financial statements. FAS 141R is effective for fiscal periods beginning after December 15, 2008. Therefore, the Company is required to adopt FAS 141R on January 1, 2009. The Company is currently evaluating the requirementsadoption of FAS 141R and the potentialdid not have an impact on the Company’s financial position andor results of operations. However, should the Company enter into any business combination in 2009 or beyond, our financial position or results of operations could incur a significantly different impact than had it recorded the acquisition under FAS 141. Earnings volatility could result, depending on the terms of the acquisition.
In December 2007,On January 1, 2009, the FASB issuedCompany adopted FAS No. 160,Non-ControllingNoncontrolling Interest in Consolidated Financial Statements—an amendment of ARB No. 51(“FAS 160”). FAS 160 requires that a non-controllingnoncontrolling interest in a subsidiary be separately reported within equity and the amount of consolidated net income attributable to the non-controllingnoncontrolling interest be presented in the statement of operations. FAS 160 also calls for consistency in reporting changes in the parent’s ownership interest in a subsidiary and necessitates fair value measurement of any non-controllingnoncontrolling equity investment retained in a deconsolidation. FAS 160 is effective for fiscal periods beginning after December 15, 2008. Therefore, the Company is required to adopt FAS 160 on January 1, 2009. The Company is currently evaluating the requirementsadoption of FAS 160 and the potentialdid not have an impact on the Company’s financial position andor results of operations.
Assurant, Inc.On January 1, 2009, the Company applied FAS No. 157,Fair Value Measurements (“FAS 157”), for all non-financial assets and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
Six Months Ended June 30, 2008 and 2007
(In thousands, except per share and share amounts)
In February 2008, theliabilities measured at fair value on a non-recurring basis in accordance with FASB issued Financial Statement ofStaff Position (“FSP”) FAS 157-2,Effective Date of FAS 157 (“(“FSP FAS 157-2”). FSP FAS 157-2 defers, which postponed the effective date of FAS 157 for all non-financialthose assets and non-financial liabilities measured or disclosed at fair value in the financial statements on a non-recurring basis to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years, which for the Company is January 1, 2009. The Company is currently evaluatingapplication of FSP FAS 157-2 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 FAS 157. The requirements of FAS 157 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. The Company would use a market, income or cost approach valuation technique to perform the valuations. Since the Company performs its annual impairment analyses of goodwill and indefinite-lived intangible assets in the fourth quarter of each year and since no impairment trigger event occurred during the first quarter of 2009, the application of FAS 157 for itsall non-financial assets and non-financial liabilities measured at fair value on a non-recurring basis anddid not have an impact on the potentialCompany’s financial position or results of operations. However, there may be an impact during 2009 on the Company’s financial position and results of operations.operations when the Company performs an impairment analysis of goodwill and indefinite-lived intangible assets due to the difference in fair value methodology required under FAS 157.
In June 2008,On January 1, 2009, the FASB issuedCompany adopted FSP EITF No.Emerging Issues Task Force (“EITF”) Issue 03-6-1,Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities, (“FSP EITF 03-6-1”). FSP EITF 03-6-1 requires companies to treat unvested share-based payment awards that have non-forfeitable rights to dividend or dividend equivalents as participating securities. Therefore, these financial instruments needthe Company’s restricted stock and restricted stock units which have non-forfeitable rights to bedividends are included in calculating basic and diluted earnings per share under the two-class method described in FAS No. 128,Earnings Per Share(“FAS 128”). All prior period EPSearnings per share data presented will behave been adjusted retrospectively. The adoption of FSP EITF 03-6-1 willdid not have a material impact on the Company’s basic and diluted earnings per share calculations for the periods ended March 31, 2009 and 2008. See Note 9 for further information.
Recent Accounting Pronouncements - Not Yet Adopted
In April 2009, the FASB issued FSP FAS 157-4,Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly(“FSP FAS 157-4”). FSP FAS 157-4 supersedes FSP FAS 157-3,Determining the Fair Value of a
Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)—(Continued)
Three Months Ended March 31, 2009 and 2008
(In thousands, except per share and share amounts)
Financial Asset When the Market for That Asset Is Not Active. FSP FAS 157-4 reiterates that fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. FSP FAS 157-4 requires companies to evaluate certain factors to determine whether there has been a significant decrease in the volume and level of activity for the asset or liability when compared with normal market activity for the asset or liability (or similar assets or liabilities). If a company concludes there has been a significant decrease in the volume and level of activity for the asset or liability in relation to normal market activity for the asset or liability (or similar assets or liabilities), further analysis of the transactions or quoted prices is required and a significant adjustment to the transactions or quoted prices may be necessary to estimate fair value in accordance with FAS 157. A company would need to determine whether or not a transaction is orderly based on the information that is available without undue cost and effort. If a transaction is not orderly, little reliance would be placed on that transaction price when estimating fair value. If a transaction is not known to be orderly, that transaction price would be considered when estimating fair value. However, less reliance would be placed on prices from transactions that are not known to be orderly as compared to transactions that are known to be orderly. FSP FAS 157-4 also requires additional disclosures in the period of adoption and in interim and annual periods. FSP FAS 157-4 is effective for fiscal years beginninginterim and annual periods ending after DecemberJune 15, 2008. Therefore,2009, with early adoption permitted for periods ending after March 15, 2009. The Company did not elect the early adoption option; therefore, the Company is required to adopt FSP EITF 03-6-1 on January 1,FAS 157-4 for the period ending June 30, 2009. The Company is currently evaluating the requirements of FSP EITF 03-6-1FAS 157-4 and the potential impact on the Company’s basicfinancial position and dilutedresults of operations.
In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2,Recognition and Presentation of Other-Than-Temporary Impairments (“OTTI”) (“FSP FAS 115-2 and FAS 124-2”). FSP FAS 115-2 and FAS 124-2 changes both the trigger to record an OTTI and the impairment amount that would be recognized in the results of operations for debt securities only. FSP FAS 115-2 and FAS 124-2 replaces the existing requirement that the company’s management assert that it has both the intent and ability to hold an impaired security until recovery in order for an impairment to be considered temporary; with a requirement that management assert that (a) it does not have the intent to sell the security; and (b) it is more likely than not it will not have to sell the security before recovery of its amortized cost basis. An OTTI would be triggered if the company does not expect to recover its amortized cost basis in the security. If selling the security is more likely than not before recovery of the amortized cost basis, the difference between the security’s fair value and its amortized cost basis would be recorded in the results of operations. If selling the security is not more likely than not before recovery of the amortized cost basis, an OTTI would not have occurred unless there were credit losses, which would need to be recognized in the results of operations. Losses, other than credit, would be recognized within other comprehensive (loss) income (“OCI”), net of applicable taxes. The total OTTI would be presented in the results of operations with an offset for the amount of the OTTI that would be recognized in OCI. Credit losses should be measured based on the difference between the amortized cost basis of the security and the present value of expected future cash flows to be collected. As of the beginning of the period of adoption, there is also a requirement for a cumulative effect adjustment to reclassify the non-credit component of a previously recognized OTTI from retained earnings to accumulated OCI if the entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery. FSP FAS 115-2 and FAS 124-2 require additional disclosures in the period of adoption and in both interim and annual periods for debt and equity securities that are and are not other than temporarily impaired. FSP FAS 115-2 and FAS 124-2 are effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company did not elect the early adoption option; therefore, the Company is required to adopt FSP FAS 115-2 and FAS 124-2 for the period ending June 30, 2009. The Company is currently evaluating the requirements of FSP FAS 115-2 and FAS 124-2 and the potential impact on the Company’s financial position and results of operations.
In April 2009, the FASB issued FSP FAS 107-1 and Accounting Principles Board Opinion (“APB”) 28-1,Interim Disclosures about Fair Value of Financial Instruments (“FSP FAS 107-1 and APB 28-1”). FSP FAS
Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)—(Continued)
Three Months Ended March 31, 2009 and 2008
(In thousands, except per share calculations.and share amounts)
On May 1,
107-1 and APB 28-1 will require interim disclosures of fair value measurements for all financial instruments within the scope of FAS 107. FSP FAS 107-1 and APB 28-1 will require disclosure of the methods and assumptions used to estimate fair value. FSP FAS 107-1 and APB 28-1 is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company did not elect the early adoption option; therefore, the Company is required to adopt FSP FAS 107-1 and APB 28-1 for the period ending June 30, 2009. The adoption of FSP FAS 107-1 and APB 28-1 will not have an impact on the Company’s financial position or results of operations.
In December 2008, the Company sold a subsidiary, United Family Life Insurance Company (“UFLIC”FASB issued FSP FAS 132R-1,Employers’ Disclosures About Postretirement Plan Benefit Assets(“FSP FAS 132R-1”). FSP FAS 132R-1 will require entities that are subject to the disclosure requirements of FAS 132R,Employers’ Disclosures about Pensions and Other Postretirement Benefits—an amendment of FASB Statements No. 87, 88, and 106, to make additional disclosures about plan assets for defined benefit pension and other postretirement benefit plans. The additional disclosure requirements of FSP FAS 132R-1 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. FSP FAS 132R-1 will be effective for fiscal years ending after December 15, 2009. Therefore, the Company is required to adopt FSP FAS 132R-1 on December 31, 2009. The adoption of FSP FAS 132R-1 will not have an impact on the Company’s financial position or results of operations.
Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)—(Continued)
Three Months Ended March 31, 2009 and 2008
(In thousands, except per share and share amounts)
4. Investments
The following tables show the cost or amortized cost, gross unrealized gains and losses and fair value of our fixed maturity and equity securities as of the dates indicated:
| March 31, 2009 | |||||||||||||
| Cost or Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||
Fixed maturity securities: | |||||||||||||
United States Government and government agencies and authorities | $ | 120,273 | $ | 8,822 | $ | (23 | ) | $ | 129,072 | ||||
States, municipalities and political subdivisions | 871,498 | 28,901 | (8,594 | ) | 891,805 | ||||||||
Foreign governments | 528,041 | 17,412 | (12,043 | ) | 533,410 | ||||||||
Public utilities | 1,198,744 | 17,693 | (61,112 | ) | 1,155,325 | ||||||||
Mortgage-backed | 989,841 | 39,616 | (45,918 | ) | 983,539 | ||||||||
All other corporate | 5,611,641 | 55,731 | (743,925 | ) | 4,923,447 | ||||||||
Total fixed maturity securities | $ | 9,320,038 | $ | 168,175 | $ | (871,615 | ) | $ | 8,616,598 | ||||
Equity securities: | |||||||||||||
Industrial, miscellaneous and all other | $ | 5,384 | $ | 283 | $ | (2,008 | ) | $ | 3,659 | ||||
Non-sinking fund preferred stocks | 535,519 | 3,244 | (168,046 | ) | 370,717 | ||||||||
Total equity securities | $ | 540,903 | $ | 3,527 | $ | (170,054 | ) | $ | 374,376 | ||||
| December 31, 2008 | |||||||||||||
| Cost or Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||
Fixed maturity securities: | |||||||||||||
United States Government and government agencies and authorities | $ | 136,725 | $ | 13,784 | $ | (22 | ) | $ | 150,487 | ||||
States, municipalities and political subdivisions | 874,134 | 14,122 | (14,676 | ) | 873,580 | ||||||||
Foreign governments | 503,620 | 19,391 | (9,693 | ) | 513,318 | ||||||||
Public utilities | 1,162,447 | 23,868 | (59,604 | ) | 1,126,711 | ||||||||
Mortgage-backed | 981,275 | 29,887 | (46,877 | ) | 964,285 | ||||||||
All other corporate | 5,546,027 | 79,407 | (662,549 | ) | 4,962,885 | ||||||||
Total fixed maturity securities | $ | 9,204,228 | $ | 180,459 | $ | (793,421 | ) | $ | 8,591,266 | ||||
Equity securities: | |||||||||||||
Industrial, miscellaneous and all other | $ | 5,384 | $ | 283 | $ | (1,618 | ) | $ | 4,049 | ||||
Non-sinking fund preferred stocks | 571,972 | 11,114 | (112,262 | ) | 470,824 | ||||||||
Total equity securities | $ | 577,356 | $ | 11,397 | $ | (113,880 | ) | $ | 474,873 | ||||
Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)—(Continued)
Three Months Ended March 31, 2009 and 2008
(In thousands, except per share and share amounts)
Throughout 2008 and continuing into 2009, the fixed maturity and equity security markets experienced significant volatility and declines in market values. These declines were primarily due to declines in the housing market, credit availability, as well as a third party for proceeds of $32,715. The Company recognizedgeneral economic slowdown. As a pre-tax gain of $3,175 from the sale. result, certain securities directly exposed to these factors have had significant market value declines.
In connection with these market declines, we recorded net realized losses, including other-than-temporary impairments, in the salestatement of UFLIC,operations as follows:
| Three Months Ended March 31, | ||||||||
| 2009 | 2008 | |||||||
Net realized (losses) gains related to sales: | ||||||||
Fixed maturity securities | $ | (8,574 | ) | $ | 4,212 | |||
Equity securities | (21,639 | ) | (3,553 | ) | ||||
Other investments | (37 | ) | (393 | ) | ||||
Total net realized (losses) gains related to sales | (30,250 | ) | 266 | |||||
Net realized losses related to other-than-temporary impairments: | ||||||||
Fixed maturity securities | (23,136 | ) | (38,565 | ) | ||||
Equity securities | (2,303 | ) | (4,844 | ) | ||||
Total net realized losses related to other-than-temporary impairments | (25,439 | ) | (43,409 | ) | ||||
Total net realized losses | $ | (55,689 | ) | $ | (43,143 | ) | ||
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 any impairments are 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, and the intent and ability of the Company alsoto retain the investment for a period of time sufficient to allow for recovery. Inherently, there are risks and uncertainties involved in making these judgments. Changes in circumstances and critical assumptions such as a continued weak economy, a more pronounced economic downturn 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. Any security whose price decrease 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. Realized gains and losses on sales of investments are recognized on the specific identification basis.
When we determine that there is an associated taxother-than-temporary impairment, we write down the value of the security to the current market value, which reduces the cost basis. In periods subsequent to the recognition of an other-than-temporary impairment, we generally accrete into net investment income the discount (or amortize the reduced premium) resulting from the reduction in cost basis, based upon the amount and timing of the expected future cash flows over the remaining life of the security.
Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)—(Continued)
Three Months Ended March 31, 2009 and 2008
(In thousands, except per share and share amounts)
The investment category and duration of the Company’s gross unrealized losses on fixed maturity securities and equity securities at March 31, 2009 and December 31, 2008 were as follows:
| March 31, 2009 | |||||||||||||||||||||
| Less than 12 Months | 12 Months or More | Total | |||||||||||||||||||
| Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||||||
Fixed maturity securities: | |||||||||||||||||||||
United States Government and government agencies and authorities | $ | 1,086 | $ | (23 | ) | $ | — | $ | — | $ | 1,086 | $ | (23 | ) | |||||||
States, municipalities and political subdivisions | 110,602 | (4,661 | ) | 75,984 | (3,933 | ) | 186,586 | (8,594 | ) | ||||||||||||
Foreign governments | 164,947 | (5,902 | ) | 21,006 | (6,141 | ) | 185,953 | (12,043 | ) | ||||||||||||
Public utilities | 353,368 | (21,661 | ) | 297,322 | (39,451 | ) | 650,690 | (61,112 | ) | ||||||||||||
Mortgage-backed | 127,923 | (14,557 | ) | 126,634 | (31,361 | ) | 254,557 | (45,918 | ) | ||||||||||||
All other corporate | 2,092,729 | (287,963 | ) | 1,423,755 | (455,962 | ) | 3,516,484 | (743,925 | ) | ||||||||||||
Total fixed maturity securities | $ | 2,850,655 | $ | (334,767 | ) | $ | 1,944,701 | $ | (536,848 | ) | $ | 4,795,356 | $ | (871,615 | ) | ||||||
Equity securities: | |||||||||||||||||||||
Industrial, miscellaneous and all other | $ | 2,930 | $ | (2,008 | ) | $ | — | $ | — | $ | 2,930 | $ | (2,008 | ) | |||||||
Non-sinking fund preferred stocks | 134,514 | (58,203 | ) | 209,431 | (109,843 | ) | 343,945 | (168,046 | ) | ||||||||||||
Total equity securities | $ | 137,444 | $ | (60,211 | ) | $ | 209,431 | $ | (109,843 | ) | $ | 346,875 | $ | (170,054 | ) | ||||||
Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)—(Continued)
Three Months Ended March 31, 2009 and 2008
(In thousands, except per share and share amounts)
| December 31, 2008 | |||||||||||||||||||||
| Less than 12 Months | 12 Months or More | Total | |||||||||||||||||||
| Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||||||
Fixed maturity securities: | |||||||||||||||||||||
United States Government and government agencies and authorities | $ | 983 | $ | (22 | ) | $ | — | $ | — | $ | 983 | $ | (22 | ) | |||||||
States, municipalities and political subdivisions | 361,383 | (12,397 | ) | 27,545 | (2,279 | ) | 388,928 | (14,676 | ) | ||||||||||||
Foreign governments | 117,133 | (5,853 | ) | 28,478 | (3,840 | ) | 145,611 | (9,693 | ) | ||||||||||||
Public utilities | 474,251 | (34,099 | ) | 185,491 | (25,505 | ) | 659,742 | (59,604 | ) | ||||||||||||
Mortgage-backed | 155,781 | (27,512 | ) | 84,046 | (19,365 | ) | 239,827 | (46,877 | ) | ||||||||||||
All other corporate | 2,430,886 | (346,331 | ) | 1,140,375 | (316,218 | ) | 3,571,261 | (662,549 | ) | ||||||||||||
Total fixed maturity securities | $ | 3,540,417 | $ | (426,214 | ) | $ | 1,465,935 | $ | (367,207 | ) | $ | 5,006,352 | $ | (793,421 | ) | ||||||
Equity securities: | |||||||||||||||||||||
Industrial, miscellaneous and all other | $ | 3,366 | $ | (1,618 | ) | $ | — | $ | — | $ | 3,366 | $ | (1,618 | ) | |||||||
Non-sinking fund preferred stocks | 171,637 | (49,291 | ) | 212,669 | (62,971 | ) | 384,306 | (112,262 | ) | ||||||||||||
Total equity securities | $ | 175,003 | $ | (50,909 | ) | $ | 212,669 | $ | (62,971 | ) | $ | 387,672 | $ | (113,880 | ) | ||||||
The total gross unrealized losses represent less than 21% and 17% of the aggregate fair value of the related securities at March 31, 2009 and December 31, 2008, respectively. Approximately 38% and 53% of these gross unrealized losses have been in a continuous loss position for less than twelve months at March 31, 2009 and December 31, 2008, respectively. The total gross unrealized losses are comprised of 1,331 and 1,409 individual securities at March 31, 2009 and December 31, 2008, respectively. At March 31, 2009, 51%, 11% and 9% of the gross unrealized losses for fixed maturity and equity securities were concentrated in the financial, consumer cyclical and industrial industries, respectively.
For fixed maturity securities, 39.4% and 31.5% of the gross unrealized losses at March 31, 2009 and December 31, 2008 were from $444,404 and $373,385 of securities with a fair value below 70% of amortized cost, or 5.2% and 4.4% of our total fixed maturity security portfolio. The percentage of fair value to amortized cost for fixed maturity securities with gross unrealized losses at March 31, 2009 and December 31, 2008 are shown in the following tables.
Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)—(Continued)
Three Months Ended March 31, 2009 and 2008
(In thousands, except per share and share amounts)
| March 31, 2009 | |||||||||||||
| Par Value | Unrealized (Loss) Gain | Fair Value | % to Total Fixed Maturity Securities | ||||||||||
> 80% of amortized cost | $ | 4,011,764 | $ | (307,252 | ) | $ | 3,677,051 | 42.7 | % | ||||
70% to 80% of amortized cost | 895,213 | (221,109 | ) | 673,901 | 7.8 | % | |||||||
<70% of amortized cost | 799,490 | (343,254 | ) | 444,404 | 5.2 | % | |||||||
Gross unrealized losses on fixed maturity securities | 5,706,467 | (871,615 | ) | 4,795,356 | 55.7 | % | |||||||
Gross unrealized gains on fixed maturity securities | 3,854,177 | 168,175 | 3,821,242 | 44.3 | % | ||||||||
Net unrealized loss on fixed maturity securities | $ | 9,560,644 | $ | (703,440 | ) | $ | 8,616,598 | 100.0 | % | ||||
| December 31, 2008 | |||||||||||||
| Par Value | Unrealized (Loss) Gain | Fair Value | % to Total Fixed Maturity Securities | ||||||||||
> 80% of amortized cost | $ | 4,282,068 | $ | (322,856 | ) | $ | 3,941,539 | 45.9 | % | ||||
70% to 80% of amortized cost | 911,984 | (220,308 | ) | 691,428 | 8.0 | % | |||||||
<70% of amortized cost | 627,811 | (250,257 | ) | 373,385 | 4.4 | % | |||||||
Gross unrealized losses on fixed maturity securities | 5,821,863 | (793,421 | ) | 5,006,352 | 58.3 | % | |||||||
Gross unrealized gains on fixed maturity securities | 3,614,294 | 180,459 | 3,584,914 | 41.7 | % | ||||||||
Net unrealized loss on fixed maturity securities | $ | 9,436,157 | $ | (612,962 | ) | $ | 8,591,266 | 100.0 | % | ||||
Securities Lending
The Company engages in transactions in which fixed maturity securities, especially bonds issued by the United States 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 $24,566, primarily relatedthe Company. The use of cash collateral received is unrestricted. The Company reinvests the cash collateral received, generally in investments of high credit quality and are designated as available-for-sale under FASB Statement No. 115,Accounting for Certain Investments in Debt and Equity Securities (“FAS 115”). The Company monitors the fair value of securities loaned and the collateral received, with additional collateral obtained as necessary. The Company is subject to capitalthe risk of loss carry backs.to the extent there is a loss in the re-investment of cash collateral.
As of March 31, 2009 and December 31, 2008, our collateral held under securities lending, of which its use is unrestricted, was $181,177 and $234,027, respectively, while our liability to the borrower for collateral received was $202,616 and $256,506, respectively. The difference between the collateral held and obligations under securities lending is recorded as an unrealized loss and is included as part of accumulated other comprehensive loss. The Company has actively reduced the size of the program to mitigate counter-party exposure. 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 which are designated as available-for-sale under FAS 115, the reinvestment is presented as cash flows from investing activities.
Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)—(Continued)
Three Months Ended March 31, 2009 and 2008
(In thousands, except per share and share amounts)
5. Fair Value Disclosures
FAS 157 defines fair value, establishes a framework for measuring fair value, creates a fair value hierarchy based on the quality of inputs used to measure fair value and enhances disclosure requirements for fair value measurements. FAS 157 defines fair value as the price that would be received to sell an asset or paypaid to transfer a liability in an orderly transaction between market participants at the measurement date. In accordance with FAS 157, the Company has categorized its recurring basis financial assets and liabilities based on the priority of the inputs to the valuation technique, into a three-level fair value hierarchy. The FASB has deferred the effective date of FAS 157 until January 1, 2009 for non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a non-recurring basis in accordance with FSP FAS 157-2.
The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
The levels of the fair value hierarchy and its application to the Company’s financial assets and liabilities are described below:
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Financial assets and liabilities utilizing Level 1 inputs include certain U.S. mutual funds, money market funds, common stock and certain foreign securities.
Assurant, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
Six Months Ended June 30, 2008 and 2007
(In thousands, except per share and share amounts)
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. Financial assets utilizing Level 2 inputs include corporate, municipal, foreign government and public utilities bonds, private placement bonds, U.S. Government and agency securities, mortgage and asset backed securities, preferred stocks and certain U.S. and foreign mutual funds.
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. Financial assets utilizing Level 3 inputs include certain preferred stocks, corporate bonds and mortgage backedmortgage-backed securities that were quoted by brokers and could not be corroborated by Level 2 inputs and derivatives.
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.
Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)—(Continued)
Three Months Ended March 31, 2009 and 2008
(In thousands, except per share and share amounts)
The following table presentstables present the Company’s fair value hierarchy for those recurring basis assets and liabilities as of June 30,March 31, 2009 and December 31, 2008.
| March 31, 2009 | |||||||||||||||||||||||||||||||||
Financial Assets | Total | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||
Fixed maturity securities | $ | 9,689,741 | $ | 4,996 | $ | 9,469,516 | $ | 215,229 | $ | 8,616,598 | $ | 2,378 | $ | 8,454,432 | $ | 159,788 | |||||||||||||||||
Equity securities | 717,549 | 5,003 | a | 692,690 | 19,856 | 374,376 | 2,774 | a | 355,437 | 16,165 | |||||||||||||||||||||||
Short-term investments | 472,215 | 356,911 | 115,304 | — | 664,272 | 533,998 | 130,274 | — | |||||||||||||||||||||||||
Collateral held under securities lending | 470,903 | 65,184 | 405,719 | — | 142,177 | 47,257 | 94,920 | — | |||||||||||||||||||||||||
Other investments | 300,671 | 95,975 | b | 195,456 | c | 9,240 | c | 230,178 | 56,883 | b | 167,249 | c | 6,046 | c | |||||||||||||||||||
Cash equivalents | 693,572 | 693,572 | — | 446,983 | 446,983 | — | — | ||||||||||||||||||||||||||
Other assets | 5,003 | — | — | 5,003 | 8,934 | — | — | 8,934 | |||||||||||||||||||||||||
Assets held in separate accounts | 2,581,005 | 2,377,711 | a | 203,294 | — | 1,526,146 | 1,362,206 | a | 163,940 | — | |||||||||||||||||||||||
Total financial assets | $ | 14,930,659 | $ | 3,599,352 | $ | 11,081,979 | $ | 249,328 | $ | 12,009,664 | $ | 2,452,479 | $ | 9,366,252 | $ | 190,933 | |||||||||||||||||
Financial Liabilities | |||||||||||||||||||||||||||||||||
Other liabilities | $ | 95,975 | $ | 95,975 | b | $ | — | $ | — | $ | 56,883 | $ | 56,883 | b | $ | — | $ | — | |||||||||||||||
| December 31, 2008 | |||||||||||||||||||||||||||||||||
Financial Assets | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||||||
Fixed maturity securities | $ | 8,591,266 | $ | 2,398 | $ | 8,427,643 | $ | 161,225 | |||||||||||||||||||||||||
Equity securities | 474,873 | 3,165 | a | 455,352 | 16,356 | ||||||||||||||||||||||||||||
Short-term investments | 703,402 | 611,460 | 91,942 | — | |||||||||||||||||||||||||||||
Collateral held under securities lending | 159,028 | 54,192 | 104,836 | — | |||||||||||||||||||||||||||||
Other investments | 239,605 | 56,296 | b | 176,285 | c | 7,024 | c | ||||||||||||||||||||||||||
Cash equivalents | 674,390 | 674,390 | — | — | |||||||||||||||||||||||||||||
Other assets | 7,080 | — | — | 7,080 | |||||||||||||||||||||||||||||
Assets held in separate accounts | 1,701,996 | 1,523,024 | a | 178,972 | — | ||||||||||||||||||||||||||||
Total financial assets | $ | 12,551,640 | $ | 2,924,925 | $ | 9,435,030 | $ | 191,685 | |||||||||||||||||||||||||
Financial Liabilities | |||||||||||||||||||||||||||||||||
Other liabilities | $ | 56,296 | $ | 56,296 | b | $ | — | $ | — | ||||||||||||||||||||||||
a | Mainly includes mutual fund investments |
b | Comprised of Assurant |
c | Consists of invested assets associated with a modified coinsurance arrangement |
Assurant, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)—(Continued)
SixThree Months Ended June 30,March 31, 2009 and 2008 and 2007
(In thousands, except per share and share amounts)
The following table summarizestables summarize the change in balance sheet carrying value associated with Level 3 financial assets carried at fair value during the three months ended June 30,March 31, 2009 and March 31, 2008:
| Total Level 3 Assets | Fixed Maturity Securities | Equity Securities | Other Investments | Other Assets | |||||||||||||||
Balance, beginning of quarter | $ | 216,207 | $ | 191,280 | $ | 11,626 | $ | 9,613 | $ | 3,688 | |||||||||
Total net gains (realized/unrealized) included in earnings | 1,552 | 411 | — | 13 | 1,128 | ||||||||||||||
Net unrealized losses included in stockholder’s equity | (9,958 | ) | (9,910 | ) | (8 | ) | (40 | ) | — | ||||||||||
Purchases, issuances, (sales) and (settlements) | 22,829 | 21,048 | 1,940 | (346 | ) | 187 | |||||||||||||
Net transfers in | 18,698 | 12,400 | 6,298 | — | — | ||||||||||||||
Balance, end of period | $ | 249,328 | $ | 215,229 | $ | 19,856 | $ | 9,240 | $ | 5,003 | |||||||||
The following table summarizes the change in balance sheet carrying value associated with Level 3 financial assets carried at fair value during the six months ended June 30, 2008
| Three Months Ended March 31, 2009 | |||||||||||||||||||||||||||||||||||||||
| Total Level 3 Assets | Fixed Maturity Securities | Equity Securities | Other Investments | Other Assets | Total Level 3 Assets | Fixed Maturity Securities | Equity Securities | Other Investments | Other Assets | ||||||||||||||||||||||||||||||
Balance, beginning of year | $ | 282,581 | $ | 256,937 | $ | 12,116 | $ | 10,368 | $ | 3,160 | $ | 191,685 | $ | 161,225 | $ | 16,356 | $ | 7,024 | $ | 7,080 | |||||||||||||||||||
Total net gains (losses) (realized/unrealized) included in earnings | (91 | ) | (538 | ) | — | 16 | 431 | 929 | (704 | ) | — | 1 | 1,632 | ||||||||||||||||||||||||||
Net unrealized losses included in stockholder’s equity | (15,975 | ) | (14,870 | ) | (654 | ) | (451 | ) | — | ||||||||||||||||||||||||||||||
Net unrealized gains (losses) included in stockholder’s equity | 2,023 | 2,671 | (365 | ) | (283 | ) | — | ||||||||||||||||||||||||||||||||
Purchases, issuances, (sales) and (settlements) | 26,560 | 23,901 | 1,940 | (693 | ) | 1,412 | 8,206 | 8,680 | — | (696 | ) | 222 | |||||||||||||||||||||||||||
Net transfers in (out of) | (43,747 | ) | (50,201 | ) | 6,454 | — | — | ||||||||||||||||||||||||||||||||
Net transfers (out of) in | (11,910 | ) | (12,084 | ) | 174 | — | — | ||||||||||||||||||||||||||||||||
Balance, end of period | $ | 249,328 | $ | 215,229 | $ | 19,856 | $ | 9,240 | $ | 5,003 | $ | 190,933 | $ | 159,788 | $ | 16,165 | $ | 6,046 | $ | 8,934 | |||||||||||||||||||
| Three Months Ended March 31, 2008 | |||||||||||||||||||||||||||||||||||||||
| Total Level 3 Assets | Fixed Maturity Securities | Equity Securities | Other Investments | Other Assets | |||||||||||||||||||||||||||||||||||
Balance, beginning of year | $ | 282,581 | $ | 256,937 | $ | 12,116 | $ | 10,368 | $ | 3,160 | |||||||||||||||||||||||||||||
Total (losses) gains (realized/unrealized) included in earnings | (1,643 | ) | (950 | ) | — | 3 | (696 | ) | |||||||||||||||||||||||||||||||
Net unrealized losses included in stockholder’s equity | (6,017 | ) | (4,959 | ) | (646 | ) | (412 | ) | — | ||||||||||||||||||||||||||||||
Purchases, issuances, (sales) and (settlements) | 3,731 | 2,853 | — | (346 | ) | 1,224 | |||||||||||||||||||||||||||||||||
Net transfers (out of) in | (62,445 | ) | (62,601 | ) | 156 | — | — | ||||||||||||||||||||||||||||||||
Balance, end of period | $ | 216,207 | $ | 191,280 | $ | 11,626 | $ | 9,613 | $ | 3,688 | |||||||||||||||||||||||||||||
FAS 157 describes three different valuation techniques to be used in determining fair value for financial assets and liabilities: the market, income or cost approaches. The three valuation techniques described withinin FAS 157 are consistent with generally accepted valuation methodologies. The market approach valuation techniques use prices and other relevant information from market transactions involving identical or comparable assets or liabilities. When possible, quoted prices (unadjusted) in active markets are used as of the period-end date. Otherwise, valuation techniques consistent with the market approach including matrix pricing and comparables are used. Matrix pricing is a mathematical technique employed to value certain securities without relying exclusively on quoted prices for those securities but comparing those securities to benchmark or comparable securities. Comparables use market multiples, which might lie in ranges with a different multiple for each comparable.
Income approach valuation techniques convert future amounts, such as cash flows or earnings, to a single present amount, or a discounted amount. These techniques rely on current market expectations of future amounts as of the period-end date. Examples of income approach valuation techniques include present value techniques, option-pricing models, binomial or lattice models that incorporate present value techniques, and the multi-period excess earnings method.
Cost approach valuation techniques are based upon the amount that would be required to replace the service capacity of an asset at the period-end date, or the current replacement cost. That is, from the perspective of
Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)—(Continued)
Three Months Ended March 31, 2009 and 2008
(In thousands, except per share and share amounts)
a market participant (seller), the price that would be received for the asset is determined based on the cost to a market participant (buyer) to acquire or construct a substitute asset of comparable utility, adjusted for obsolescence.
While not all three approaches are not applicable to all financial assets or liabilities, where appropriate, one or more valuation techniquetechniques may be used. For all the financial assets and liabilities included in the above hierarchy, excluding derivatives and private placement bonds, the market valuation technique is generally used. For private placement bonds and derivatives, the income valuation technique is generally used. For the period ended June 30, 2008,March 31, 2009, the application of the valuation technique applied to similar assets and liabilities has been consistent.
Level 1 and Level 2 valuationssecurities are valued using various observable market inputs obtained from a pricing service. The pricing service prepares estimates of fair value measurements for our Level 2 securities using proprietary valuation models based on techniques such as matrix pricing which include observable market inputs. FAS 157 defines observable market inputs as the assumptions market participants would use in pricing the asset or liability developed on market data obtained from
Assurant, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
Six Months Ended June 30, 2008 and 2007
(In thousands, except per share and share amounts)
sources independent of the Company. The extent of the use of each observable market input for a security depends on the type of security and the market conditions at the balance sheet date. Depending on the security, the priority of the use of observable market inputs may change as some observable market inputs may not be relevant or additional inputs may be necessary. The following observable market inputs, 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. EachThe pricing service also evaluates each security is evaluated 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, 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.
Management uses the following criteria in order to determine whether the market for a financial asset is inactive:
The volume and level of trading activity in the asset have declined significantly from historical levels,
The available prices vary significantly over time or among market participants,
The prices are stale (i.e., not current), and
The magnitude of 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 evaluated 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. As a result of this analysis, if the Company determines there is a more appropriate fair value based upon available market data, which happens infrequently, the price of a security is adjusted accordingly. The pricing service provides
Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)—(Continued)
Three Months Ended March 31, 2009 and 2008
(In thousands, except per share and share amounts)
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.
6. Income Taxes
As of December 31, 2008, the Company had a cumulative valuation allowance against deferred tax assets of $98,793. During the three months ended March 31, 2009, the Company recognized income tax expense of $19,069 and other comprehensive loss of $7,000 to increase the valuation allowance. The increase in the valuation allowance was primarily related to an increase in deferred tax assets from additional realized capital losses and other-than-temporary impairments in our investment portfolio. It is management’s assessment that it is more likely than not that $124,862 of deferred tax assets will not be realized.
The Company’s ability to realize deferred tax assets depends on its ability to generate sufficient taxable income of the same character within the carryback or carryforward periods. In assessing future GAAP taxable income, the Company has considered all sources of taxable income available to realize its deferred tax asset, including the future reversal of existing temporary differences, future taxable income exclusive of reversing temporary differences and carryforwards, taxable income in carryback years and tax-planning strategies. If changes occur in the assumptions underlying the Company’s tax planning strategies or in the scheduling of the reversal of the Company’s deferred tax liabilities, the valuation allowance may need to be adjusted in the future.
7. Debt
In February 2004, the Company issued two series of senior notes with an aggregate principal amount of $975,000.$975,000 (the “Senior Notes”). The Company received net proceeds of $971,537 from this transaction, which represents the principal amount less the discount. The discount of $3,463 is being amortized over the life of the notesSenior Notes and is included as part of interest expense inon the statement of operations.
The interest expense incurred related to the senior notesSenior Notes was $15,047, including $7,523 of accrued interest, for the three months ended June 30,March 31, 2009 and 2008, and 2007, respectively, and $30,094 for the six months ended June 30, 2008 and 2007 respectively. There was $22,570 of accrued interest at June 30, 2008 and 2007, respectively. The Company made an interest payment of $30,094 on February 15, 2008.2009.
In March 2004, the Company established a $500,000 commercial paper program, which is available for working capital and other general corporate purposes. This program is backed up by a $500,000 senior revolving credit facility. The Company did not useThere were no amounts relating to the commercial paper program during the six months ended June 30, 2008. During 2007, the Company used proceeds from the commercial paper program for general corporate purposes, all of which were repaid during 2007.outstanding at March 31, 2009. The Company did not use the revolving credit facility during the sixthree months ended June 30, 2008March 31, 2009 or the twelve months ended December 31, 2007.2008 and no amounts are currently outstanding. The $500,000 senior revolving credit facility contains a $30,000 commitment from Lehman Brothers Bank, FSB (“Lehman”). Based on the financial condition of Lehman, the Company is not relying on Lehman’s commitment.
The revolving credit facility contains restrictive covenants and requirescovenants. The terms of the revolving credit facility also require that the Company maintain certain specified minimum ratios and thresholds. TheAmong others, these covenants include maintaining a maximum debt to capitalization ratio and a minimum consolidated adjusted net worth. At March 31, 2009 the Company iswas in compliance with all covenants, minimum ratios and thresholds.
Directors Compensation Plan
The Company’s Amended and Restated Directors Compensation Plan, as amended, permitted the issuance of up to 500,000 shares of the Company’s common stock to non-employee Directors. The compensation expense recorded related to these shares was $625 for the three and six months ended June 30, 2007. Effective May 2008, no new grants will be made under this plan and all future grants issued to directors will be issued from the Assurant, Inc Long- Term Equity Incentive Plan, discussed further below.
Assurant, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)—(Continued)
SixThree Months Ended June 30,March 31, 2009 and 2008 and 2007
(In thousands, except per share and share amounts)
8. Stock Based Compensation
Long-Term Equity Incentive Plan
In May 2008, the shareholders of the Company approved the Assurant, Inc. Long-Term Equity Incentive Plan (“ALTEIP”), which authorizes the granting of up to 3,400,000 shares of the Company’s common stock to employees, officers and non-employee directors. Under the ALTEIP, the Company may grant awards based on shares of our Common Stock, including stock options, stock appreciation rights (“SARs”), restricted stock (including performance shares), unrestricted stock, restricted stock units (“RSUs”), performance share units (“PSUs”) and dividend equivalents. All future share-based grants will be issued under the ALTEIP.
The Compensation Committee of the Board of Directors (the “Compensation Committee”) has decided to award PSUs and RSUs in 2009. RSUs and PSUs are promises to provide actual stock at the end of a vesting period or performance period. The RSUs granted under the ALTEIP were based on salary grade and performance and will vest one-third each year over a three-year period. RSUs receive dividend equivalents in cash during the restricted period and they will not have voting rights during the restricted period. PSUs will accrue dividend equivalents during the performance period, which will be paid in cash at the end of the performance period.
For the PSU portion of an award, the number of shares a participant will receive upon vesting is contingent upon the Company meeting certain pre-established performance goals, identified below, at the end of a three-year performance period. At the end of the three-year performance period, these performance goals will be measured to determine the number of shares a participant will receive. The payout levels can vary between 0% and 150% (maximum) of the target (100%) ALTEIP award amount based on the Company’s level of performance against the pre-established performance goals.
PSU Performance Goals.For 2009, the Compensation Committee has established earnings per share growth, revenue growth and total stockholder return as the three performance measures for PSU awards. Earnings per share growth is defined as the year-over-year change in GAAP net income divided by average diluted shares outstanding. Revenue growth is defined as year-over-year change in GAAP total revenues as disclosed in the Company’s annual statement of operations. Total stockholder’s return is defined as appreciation in Company stock plus dividend yield to stockholders. The particular performance goals were set based on the performance of each measure relative to the A.M. Best U.S. Insurance Index.
Under the ALTEIP, the Company’s CEO is authorized by the Board of Directors to grant common stock, restricted stock and RSUs to employees other than the executive officers of the Company (as defined in Section 16 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Restricted stock and RSUs granted under this program may have different vesting periods.
Long-Term Incentive Plan
ThePrior to the approval of the ALTEIP, share based awards were granted under the 2004 Assurant Long-Term Incentive Plan (“ALTIP”), which authorized the granting of up to 10,000,000 new shares of the Company’s common stock to employees and officers under the Assurant Long Term Incentive Plan (“ALTIP”),ALTIP, Business Value Rights Program (“BVR”) and CEO Equity Grants Program. Under the ALTIP, the Company was authorized to grant restricted stock and Stock Appreciation Rights (“SARs”). EffectiveSARs. Since May 2008, no new grants will behave been made under this plan and all future grants will be issued from the Assurant, Inc. Long-Term Equity Incentive Plan, discussed further below. Unearned compensation, representing the market value of the shares at the date of issuance, is charged to earnings over the vesting period.plan.
Restricted stock granted under the ALTIP vests pro ratably over a three year period. SARs granted prior to 2007 under the ALTIP cliff vest as of December 31 of the second calendar year following the calendar year in which the right was granted, and have a five year contractual life. SARs granted in 2007 and through May 2008 cliff vest on the third anniversary from the date the award was granted, and have a five year contractual life. SARs
Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)—(Continued)
Three Months Ended March 31, 2009 and 2008
(In thousands, except per share and share amounts)
granted under the BVR Program have a three year cliff vesting period. Restricted stock granted under the CEO Equity Grants Program have variable vesting schedules.
Long-Term Equity Incentive PlanRestricted Stock Units
In May 2008,RSUs granted to employees and to non-employee directors were 671,118 for the Company adoptedthree months ended March 31, 2009. The compensation expense recorded related to RSUs was $393 with the Assurant, Inc. Long-Term Equity Incentive Plan (“ALTEIP”),related total income tax benefit of $138 for the three months ended March 31, 2009. The weighted average grant date fair value for RSUs granted during the three months ended March 31, 2009 was $20.26.
As of March 31, 2009, there was $11,919 of unrecognized compensation cost related to outstanding RSUs. That cost is expected to be recognized over a weighted-average period of 2.01 years.
Performance Share Units
PSUs granted to employees and to non-employee directors were 631,118 for the three months ended March 31, 2009. The compensation expense recorded related to PSUs was $402 with the related total income tax benefit of $141 for the three months ended March 31, 2009. The weighted average grant date fair value for PSUs granted during the three months ended March 31, 2009 was $20.39.
As of March 31, 2009, there was approximately $12,498 of unrecognized compensation cost related to outstanding PSUs. That cost is expected to be recognized over a weighted-average period of 2.29 years.
The fair value of each PSU was estimated on the date of grant using a Monte Carlo simulation model, which authorizesutilizes multiple variables that determine the grantingprobability of up to 3,400,000 sharessatisfying the market condition stipulated in the award. Expected volatilities for awards issued during the three months ended March 31, 2009 were based on the historical stock price of the Company’s common stock to employees, officers and non-employee Directors. Under the ALTEIP, the Company is authorized to grant various stock awards including but not limited to SARs, restricted stock and restricted stock units, performance shares and performance units. All future share-basedpeer insurance group. The expected term for grants will be issued underduring the ALTEIP.
Restricted stock and SARs grantedthree months ended March 31, 2009 was assumed to non-employee Directors in May 2008 vested immediately. SARs granted to non-employee Directors have a five year contractual life.
The Company’s CEO is authorized byequal the Board of Directors to grant common stock and restricted stock to employees other than the executive officersaverage of the Company (as defined in Section 16vesting period of the Securities Exchange ActPSUs. The risk-free rate was based on the U.S. Treasury yield curve in effect at the time of 1934, as amended (the “Exchange Act”)) limited to 100,000 new shares per year. Restricted stock granted under this program have different vesting schedules.grant.
Restricted Stock
The restricted sharesRestricted stock granted to employees and to non-employee Directorsdirectors were 35,84610,900 and 16,79684,785 for the three months ended June 30,March 31, 2009 and 2008, and 2007, respectively, and 120,631 and 83,409 for the six months ended June 30, 2008 and 2007, respectively. The compensation expense recorded related to restricted stock was $2,248$1,529 and $912$1,455 for the three months ended June 30,March 31, 2009 and 2008, and 2007, respectively, and $3,703 and $2,080 for the six months ended June 30, 2008 and 2007, respectively. The related total income tax benefit recognized was $589$535 and $319$509 for the three months ended June 30,March 31, 2009 and 2008, and 2007, respectively, and $1,098 and $728 for the six months ended June 30, 2008 and 2007, respectively. The weighted average grant date fair value for restricted stock granted during the sixthree months ended June 30,March 31, 2009 and 2008 was $29.77 and 2007 was $62.59 and $53.88,$61.11, respectively.
As of June 30, 2008,March 31, 2009, there was $7,784$5,029 of unrecognized compensation cost related to outstanding restricted stock. That cost is expected to be recognized over a weighted-average period of 1.41.15 years. The total fair value of sharesrestricted stock vested during the three months ended June 30,March 31, 2009 and 2008 was $1,008 and 2007$1,738, respectively.
Stock Appreciation Rights
There were no SARs granted during the three months ended March 31, 2009. There were 1,495,600 SARs granted during the three months ended March 31, 2008. The compensation expense recorded related to SARs was $3,717$2,155 and $2,826, respectively, and $5,455 and $3,003$3,060 for the sixthree months ended June 30,March 31, 2009 and 2008, respectively. The related total income tax benefit recognized was $754 and 2007,$1,071 for the three months ended March 31, 2009 and 2008, respectively.
Assurant, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)—(Continued)
SixThree Months Ended June 30,March 31, 2009 and 2008 and 2007
(In thousands, except per share and share amounts)
Stock Appreciation Rights
There were 8,091 and 9,980 SARs granted during the three months ended June 30, 2008 and 2007, respectively, and 1,497,891 and 1,541,505 granted during the six months ended June 30, 2008 and 2007, respectively. The compensation expense recorded related to SARs was $3,541 and $3,840 for the three months ended June 30, 2008 and 2007, respectively, and $6,600 and $6,005 for the six months ended June 30, 2008 and 2007, respectively. The related total income tax benefit recognized was $1,199 and $1,305 for the three months ended June 30, 2008 and 2007, respectively, and $2,270 and $2,063 for the six months ended June 30, 2008 and 2007, respectively. The weighted average grant date fair value for SARs granted during the six months ended June 30, 2008 was $13.77.
The total intrinsic value of SARs exercised during the sixthree months ended June 30,March 31, 2009 and 2008 was $45 and 2007 was $35,963 and $52,447,$2,518, respectively. As of June 30, 2008,March 31, 2009, there was approximately $24,245$15,669 of unrecognized compensation cost related to outstanding SARs. That cost is expected to be recognized over a weighted-average period of 1.71.34 years.
The fair value of each SAR outstandinggranted to employees and officers was estimated on the date of grant using the Black-Scholes option-pricing model. Expected volatilities for awards issued during the sixthree months ended June 30,March 31, 2008 were based on the median historical stock price volatility of insurance guideline companies and implied volatilities from traded options on the Company’s stock. The expected term for grants issued during the sixthree months ended June 30,March 31, 2008 was assumed to equal the average of the vesting period of the SARs and the full contractual term of the SARs. The risk-free rate for periods within the contractual life of the option was based on the U.S. Treasury yield curve in effect at the time of grant. The dividend yield is based on the current expected annual dividend and share price onas of the grant date.
Directors Compensation Plan
The Company’s Amended and Restated Directors Compensation Plan, as amended, permitted the issuance of up to 500,000 shares of the Company’s common stock to non-employee directors. Since May 2008, all grants issued to directors have been issued from the ALTEIP, discussed above. There were no common shares issued or expense recorded for the three months ended March 31, 2009 and 2008, respectively.
Employee Stock Purchase Plan
Under the Employee Stock Purchase Plan (“ESPP”), the Company is authorized to issue up to 5,000,000 new shares to employees who are participants in the ESPP. Eligible employees can purchase stockshares at a 10% discount applied to the lower of the closing price of the common stock on the first or last day of the offering period. The compensation expense recorded related to the ESPP was $330$1,059 and $324$521 for the three months ended June 30,March 31, 2009 and 2008, and 2007, respectively, and $851 and $660respectively.
In January 2009, the Company issued 133,994 shares to employees at a discounted price of $27.00 for the six months ended June 30,offering period of July 1, 2008 and 2007, respectively.
through December 31, 2008. In January 2008, the Company issued 70,646 shares to employees at a discounted price of $53.45 for the offering period of July 1, 2007 through December 31, 2007. In January 2007, the Company issued 80,282 shares to employees at a discounted price of $43.52 for the offering period of July 1 through December 31, 2006.
In July 2008, the Company issued 65,841 shares to employees at a discounted price of $59.13 for the offering period of January 1 through June 30, 2008, related to the ESPP. In July 2007, the Company issued 75,468 shares to employees at a discounted price of $50.26 for the offering period of January 1 through June 30, 2007, related to the ESPP.
The fair value of each award under the ESPP was estimated at the beginning of each offering period using the Black-Scholes option-pricing model. Expected volatilities are based on implied volatilities from traded options on the Company’s stock and the historical volatility of the Company’s stock. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The dividend yield is based on the current annualized dividend and share price as of the grant date.
Assurant, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)—(Continued)
SixThree Months Ended June 30,March 31, 2009 and 2008 and 2007
(In thousands, except per share and share amounts)
9. Earnings Per Common Share
In accordance with FSP EITF 03-6-1, as described in Note 3, restricted stock and RSUs which have non-forfeitable rights to dividends are included in calculating basic and diluted earnings per share under the two-class method. The two-class method is an earnings allocation formula that determines EPS for each class of common stock according to dividends declared and participation rights in undistributed earnings. All prior period EPS data presented has been adjusted retrospectively.
The following table presents net income, the weighted average common shares used in calculating basic earnings per common share and those used in calculating diluted earnings per common share for each income categoryperiod presented below.
| Three months ended June 30, | Six months ended June 30, | Three months ended March 31, | ||||||||||||||||||
| 2008 | 2007 | 2008 | 2007 | 2009 | 2008 | |||||||||||||||
Numerator | ||||||||||||||||||||
Net income | $ | 189,954 | $ | 166,280 | $ | 376,784 | $ | 345,737 | $ | 80,581 | $ | 186,830 | ||||||||
Deduct dividends paid | (16,489 | ) | (14,173 | ) | ||||||||||||||||
Undistributed earnings | $ | 64,092 | $ | 172,657 | ||||||||||||||||
Denominator | ||||||||||||||||||||
Weighted average shares outstanding used in basic earnings per share calculations | 118,059,955 | 120,657,052 | 117,971,858 | 121,399,339 | 117,891,543 | 118,103,519 | ||||||||||||||
Incremental common shares from: | ||||||||||||||||||||
SARs | 1,265,602 | 1,671,766 | 1,278,959 | 1,777,823 | 59,801 | 1,283,802 | ||||||||||||||
Restricted stock | 101,387 | 88,127 | 106,796 | 81,506 | ||||||||||||||||
ESPP | 65,893 | 75,559 | 65,893 | 75,559 | ||||||||||||||||
PSUs | 16,403 | — | ||||||||||||||||||
Weighted average shares used in diluted earnings per share calculations | 119,492,837 | 122,492,504 | 119,423,506 | 123,334,227 | 117,967,747 | 119,387,321 | ||||||||||||||
Earnings per share | ||||||||||||||||||||
Basic | $ | 1.61 | $ | 1.38 | $ | 3.19 | $ | 2.85 | ||||||||||||
Diluted | $ | 1.59 | $ | 1.36 | $ | 3.16 | $ | 2.80 | ||||||||||||
Earnings per Common Share - Basic | ||||||||||||||||||||
Distributed earnings | $ | 0.14 | $ | 0.12 | ||||||||||||||||
Undistributed earnings | 0.54 | 1.46 | ||||||||||||||||||
Net income | $ | 0.68 | $ | 1.58 | ||||||||||||||||
Earnings per Common Share - Diluted | ||||||||||||||||||||
Distributed earnings | $ | 0.14 | $ | 0.12 | ||||||||||||||||
Undistributed earnings | 0.54 | 1.44 | ||||||||||||||||||
Net income | $ | 0.68 | $ | 1.56 | ||||||||||||||||
Average restricted sharesSARs totaling zero4,874,288 and 220312,477 for the three months ended June 30,March 31, 2009 and 2008, and 2007, respectively, and 1,229 and 43,475, for the six months ended June 30, 2008 and 2007, respectively, were outstanding but were anti-dilutive and thus not included in the computation of diluted EPS under the treasury stock method. Average SARs totaling 1,471,068 and 1,512,666 for the three months ended June 30, 2008 and 2007, respectively, and 891,177 and 975,700 for the six months ended June 30, 2008 and 2007, respectively, were also outstanding but were anti-dilutive and thus not included in the computation of diluted EPS under the treasury stock method.
Assurant, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)—(Continued)
SixThree Months Ended June 30,March 31, 2009 and 2008 and 2007
(In thousands, except per share and share amounts)
10. Retirement and Other Employee Benefits
The components of net periodic benefit cost for the Company’s qualified pension benefits plan, nonqualified pension benefits plan and retirement health benefits plan for the three and six months ended June 30,March 31, 2009 and 2008 and 2007 were as follows:
| Qualified Pension Benefits For the three months ended June 30, | Nonqualified Pension Benefits (1) For the three months ended June 30, | Retirement Health Benefits For the three months ended June 30, | |||||||||||||||||||||||||||||||||||||||||||
| 2008 | 2007 | 2008 | 2007 | 2008 | 2007 | ||||||||||||||||||||||||||||||||||||||||
Service cost | $ | 5,300 | $ | 5,184 | $ | 475 | $ | 509 | $ | 775 | $ | 734 | |||||||||||||||||||||||||||||||||
Interest cost | 6,575 | 6,165 | 1,475 | 1,429 | 950 | 866 | |||||||||||||||||||||||||||||||||||||||
Expected return on plan assets | (9,275 | ) | (8,141 | ) | — | — | (300 | ) | (314 | ) | |||||||||||||||||||||||||||||||||||
Amortization of prior service cost | 725 | 764 | 200 | 275 | 325 | 336 | |||||||||||||||||||||||||||||||||||||||
Amortization of net loss | 1,050 | 1,868 | 350 | 385 | — | — | |||||||||||||||||||||||||||||||||||||||
Settlement charge under FAS 88 | — | — | 1,748 | 115 | — | — | |||||||||||||||||||||||||||||||||||||||
Net periodic benefit cost | $ | 4,375 | $ | 5,840 | $ | 4,248 | $ | 2,713 | $ | 1,750 | $ | 1,622 | |||||||||||||||||||||||||||||||||
| Qualified Pension Benefits | Nonqualified Pension Benefits (1) | Retirement Health Benefits | |||||||||||||||||||||||||||||||||||||||||||
| Qualified Pension Benefits For the six months ended June 30, | Nonqualified Pension Benefits (1) For the six months ended June 30, | Retirement Health Benefits For the six months ended June 30, | For the three months ended March 31, | For the three months ended March 31, | For the three months ended March 31, | ||||||||||||||||||||||||||||||||||||||||
| 2008 | 2007 | 2008 | 2007 | 2008 | 2007 | 2009 | 2008 | 2009 | 2008 | 2009 | 2008 | ||||||||||||||||||||||||||||||||||
Service cost | $ | 10,600 | $ | 10,234 | $ | 950 | $ | 1,009 | $ | 1,550 | $ | 1,484 | $ | 5,450 | $ | 5,300 | $ | 550 | $ | 475 | $ | 675 | $ | 775 | |||||||||||||||||||||
Interest cost | 13,150 | 12,215 | 2,950 | 2,804 | 1,900 | 1,766 | 7,350 | 6,575 | 1,600 | 1,475 | 1,050 | 950 | |||||||||||||||||||||||||||||||||
Expected return on plan assets | (18,550 | ) | (15,941 | ) | — | — | (600 | ) | (614 | ) | (8,800 | ) | (9,275 | ) | — | — | (475 | ) | (300 | ) | |||||||||||||||||||||||||
Amortization of prior service cost | 1,450 | 1,539 | 400 | 600 | 650 | 661 | 100 | 725 | 150 | 200 | 325 | 325 | |||||||||||||||||||||||||||||||||
Amortization of net loss | 2,100 | 3,468 | 700 | 1,010 | — | — | |||||||||||||||||||||||||||||||||||||||
Settlement charge under FAS 88 | — | — | 1,748 | 115 | — | — | |||||||||||||||||||||||||||||||||||||||
Amortization of net loss (gain) | 125 | 1,050 | 275 | 350 | (50 | ) | — | ||||||||||||||||||||||||||||||||||||||
Curtailment credit/special termination benefits | — | — | (549 | ) | — | — | — | ||||||||||||||||||||||||||||||||||||||
Net periodic benefit cost | $ | 8,750 | $ | 11,515 | $ | 6,748 | $ | 5,538 | $ | 3,500 | $ | 3,297 | $ | 4,225 | $ | 4,375 | $ | 2,026 | $ | 2,500 | $ | 1,525 | $ | 1,750 | |||||||||||||||||||||
| (1) | The Company’s nonqualified plans are unfunded. |
During the first sixthree months of 2008,2009, $10,000 was contributed to the qualified pension benefits plan.plan (“Plan”). An additional $10,000$30,000 is expected to be contributed to the qualified pension benefits planPlan over the remaining courseremainder of 2008.2009.
The Benefit Plans Investment Committee of the Company (“Investment Committee”) oversees the investment of the Plan assets and periodically conducts a review of the investment strategies and policies of the Plan. This includes a review of the strategic asset allocation, including the relationship of the Plan liabilities and portfolio structure. The current target asset allocation and their respective ranges are:
| Low | Target | High | |||||||
Debt securities | 45 | % | 50 | % | 55 | % | |||
Equity securities * | 45 | % | 50 | % | 55 | % |
| * | Target asset allocations for equity securities include allocations for alternative investments. The Company expects to invest certain plan assets in alternative investments, examples of which include funds of hedge funds, private real estate and private equity, during 2009. |
Effective January 1, 2009, the Company decided to modify its expected long-term return on plan assets assumption from 8.25% to 7.50%. The Company believes that this revised assumption better reflects the projected return on the invested assets, given the current market conditions and the modified portfolio structure.
Assurant, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)—(Continued)
SixThree Months Ended June 30,March 31, 2009 and 2008 and 2007
(In thousands, except per share and share amounts)
11. Segment Information
The Company has five reportable segments, which are defined based on the nature of the products and services offered: Assurant Solutions, Assurant Specialty Property, Assurant Health, Assurant Employee Benefits, and Corporate & Other. Assurant Solutions provides creditcredit-related insurance, including life, disability and unemployment, debt protection administration services, warranties and extended service contracts, life insurance policies and annuity products that provide benefits to fund pre-arranged funerals. Assurant Specialty Property provides creditor-placed homeowners insurance and manufactured housing homeowners insurance. Assurant Health provides individual, short-term and small group health insurance. Assurant Employee Benefits provides employee and employer paid dental, disability, and life insurance products and related services. Corporate & Other includes activities of the holding company, financing and interest expenses, net realized gains (losses) on investments, interest income earned from short-term investments held and additional costs associated with excess of loss reinsurance programs reinsured and ceded to certain subsidiaries in the London market between 1995 and 1997. Corporate & Other also includes the amortization of deferred gains associated with the sales of Fortis Financial Group and Long-Term Care through reinsurance agreements.
The Company evaluates performance of the operating business segments based on after-tax segment income (loss) excluding realized gains (losses) on investments. The Company determines reportable segments in a manner consistent with the way the Company organizes for purposes of making operating decisions and assessing performance.
Assurant, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)—(Continued)
SixThree Months Ended June 30,March 31, 2009 and 2008 and 2007
(In thousands, except per share and share amounts)
The following tables summarize selected financial information by segment:
| Three Months Ended June 30, 2008 | Three Months Ended March 31, 2009 | |||||||||||||||||||||||||||||||||||||||
| Solutions | Specialty Property | Health | Employee Benefits | Corporate & Other | Consolidated | Solutions | Specialty Property | Health | Employee Benefits | Corporate & Other | Consolidated | |||||||||||||||||||||||||||||
Revenues | ||||||||||||||||||||||||||||||||||||||||
Net earned premiums and other considerations | $ | 700,629 | $ | 533,914 | $ | 487,725 | $ | 273,248 | $ | — | $ | 1,995,516 | $ | 644,612 | $ | 493,790 | $ | 472,346 | $ | 263,831 | $ | — | $ | 1,874,579 | ||||||||||||||||
Net investment income | 108,425 | 31,997 | 15,302 | 38,919 | 6,568 | 201,211 | 97,995 | 29,436 | 12,477 | 34,157 | 4,414 | 178,479 | ||||||||||||||||||||||||||||
Net realized losses on investments | — | — | — | — | (34,574 | ) | (34,574 | ) | — | — | — | — | (55,689 | ) | (55,689 | ) | ||||||||||||||||||||||||
Amortization of deferred gain on disposal of businesses | — | — | — | — | 7,327 | 7,327 | — | — | — | — | 6,802 | 6,802 | ||||||||||||||||||||||||||||
Fees and other income | 47,668 | 11,996 | 9,637 | 7,208 | 2,771 | 79,280 | 52,031 | 13,324 | 9,914 | 6,758 | 1,679 | 83,706 | ||||||||||||||||||||||||||||
Total revenues | 856,722 | 577,907 | 512,664 | 319,375 | (17,908 | ) | 2,248,760 | 794,638 | 536,550 | 494,737 | 304,746 | (42,794 | ) | 2,087,877 | ||||||||||||||||||||||||||
Benefits, losses and expenses | ||||||||||||||||||||||||||||||||||||||||
Policyholder benefits | 306,173 | 171,793 | 325,504 | 193,642 | 1,096 | 998,208 | 272,022 | 167,800 | 321,960 | 198,728 | (168 | ) | 960,342 | |||||||||||||||||||||||||||
Amortization of deferred acquisition costs and value of business acquired | 327,268 | 83,750 | 4,721 | 9,349 | — | 425,088 | 280,536 | 94,133 | 3,475 | 9,650 | — | 387,794 | ||||||||||||||||||||||||||||
Underwriting, general and administrative expenses | 175,805 | 122,589 | 139,083 | 88,005 | 35,281 | 560,763 | 195,068 | 115,784 | 146,765 | 85,637 | 23,431 | 566,685 | ||||||||||||||||||||||||||||
Interest expense | — | — | — | — | 15,287 | 15,287 | — | — | — | — | 15,189 | 15,189 | ||||||||||||||||||||||||||||
Total benefits, losses and expenses | 809,246 | 378,132 | 469,308 | 290,996 | 51,664 | 1,999,346 | 747,626 | 377,717 | 472,200 | 294,015 | 38,452 | 1,930,010 | ||||||||||||||||||||||||||||
Segment income (loss) before provision (benefit) for income tax | 47,476 | 199,775 | 43,356 | 28,379 | (69,572 | ) | 249,414 | 47,012 | 158,833 | 22,537 | 10,731 | (81,246 | ) | 157,867 | ||||||||||||||||||||||||||
Provision (benefit) for income taxes | 15,121 | 68,733 | 15,635 | 9,749 | (49,778 | ) | 59,460 | 16,701 | 54,165 | 7,865 | 3,709 | (5,154 | ) | 77,286 | ||||||||||||||||||||||||||
Segment income (loss) after tax | $ | 32,355 | $ | 131,042 | $ | 27,721 | $ | 18,630 | $ | (19,794 | ) | $ | 30,311 | $ | 104,668 | $ | 14,672 | $ | 7,022 | $ | (76,092 | ) | ||||||||||||||||||
Net income | $ | 189,954 | $ | 80,581 | ||||||||||||||||||||||||||||||||||||
| Three Months Ended June 30, 2007 | As of March 31, 2009 | |||||||||||||||||||||||||||||||||||||||
Segment Assets: | ||||||||||||||||||||||||||||||||||||||||
Segment assets, excluding goodwill | $ | 10,867,501 | $ | 3,266,046 | $ | 1,015,213 | $ | 2,510,592 | $ | 5,156,265 | $ | 22,815,617 | ||||||||||||||||||||||||||||
| Solutions | Specialty Property | Health | Employee Benefits | Corporate & Other | Consolidated | |||||||||||||||||||||||||||||||||||
Revenues | ||||||||||||||||||||||||||||||||||||||||
Net earned premiums and other considerations | $ | 618,675 | $ | 393,614 | $ | 513,936 | $ | 272,462 | $ | — | $ | 1,798,687 | ||||||||||||||||||||||||||||
Net investment income | 100,784 | 23,667 | 16,290 | 39,408 | 10,153 | 190,302 | ||||||||||||||||||||||||||||||||||
Net realized losses on investments | — | — | — | — | (3,086 | ) | (3,086 | ) | ||||||||||||||||||||||||||||||||
Amortization of deferred gain on disposal of businesses | — | — | — | — | 8,246 | 8,246 | ||||||||||||||||||||||||||||||||||
Fees and other income | 40,957 | 12,654 | 10,445 | 6,379 | 143 | 70,578 | ||||||||||||||||||||||||||||||||||
Goodwill | 1,005,027 | |||||||||||||||||||||||||||||||||||||||
Total revenues | 760,416 | 429,935 | 540,671 | 318,249 | 15,456 | 2,064,727 | ||||||||||||||||||||||||||||||||||
Total assets | $ | 23,820,644 | ||||||||||||||||||||||||||||||||||||||
Benefits, losses and expenses | ||||||||||||||||||||||||||||||||||||||||
Policyholder benefits | 258,527 | 130,866 | 329,327 | 183,333 | — | 902,053 | ||||||||||||||||||||||||||||||||||
Amortization of deferred acquisition costs and value of business acquired | 276,882 | 65,448 | 4,617 | 8,098 | — | 355,045 | ||||||||||||||||||||||||||||||||||
Underwriting, general and administrative expenses | 178,258 | 93,844 | 154,471 | 93,992 | 19,294 | 539,859 | ||||||||||||||||||||||||||||||||||
Interest expense | — | — | — | — | 15,296 | 15,296 | ||||||||||||||||||||||||||||||||||
Total benefits, losses and expenses | 713,667 | 290,158 | 488,415 | 285,423 | 34,590 | 1,812,253 | ||||||||||||||||||||||||||||||||||
Segment income (loss) before provision (benefit) for income tax | 46,749 | 139,777 | 52,256 | 32,826 | (19,134 | ) | 252,474 | |||||||||||||||||||||||||||||||||
Provision (benefit) for income taxes | 16,539 | 49,570 | 18,418 | 11,351 | (9,684 | ) | 86,194 | |||||||||||||||||||||||||||||||||
Segment income (loss) after tax | $ | 30,210 | $ | 90,207 | $ | 33,838 | $ | 21,475 | $ | (9,450 | ) | |||||||||||||||||||||||||||||
Net income | $ | 166,280 | ||||||||||||||||||||||||||||||||||||||
Assurant, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)—(Continued)
SixThree Months Ended June 30,March 31, 2009 and 2008 and 2007
(In thousands, except per share and share amounts)
| Six Months Ended June 30, 2008 | ||||||||||||||||||||
| Solutions | Specialty Property | Health | Employee Benefits | Corporate & Other | Consolidated | |||||||||||||||
Revenues | ||||||||||||||||||||
Net earned premiums and other considerations | $ | 1,384,122 | $ | 1,015,341 | $ | 983,785 | $ | 553,685 | $ | — | $ | 3,936,933 | ||||||||
Net investment income | 215,155 | 61,372 | 30,950 | 77,288 | 14,220 | 398,985 | ||||||||||||||
Net realized losses on investments | — | — | — | — | (77,717 | ) | (77,717 | ) | ||||||||||||
Amortization of deferred gain on disposal of businesses | — | — | — | — | 14,706 | 14,706 | ||||||||||||||
Fees and other income | 91,949 | 25,589 | 19,043 | 13,763 | 2,834 | 153,178 | ||||||||||||||
Total revenues | 1,691,226 | 1,102,302 | 1,033,778 | 644,736 | (45,957 | ) | 4,426,085 | |||||||||||||
Benefits, losses and expenses | ||||||||||||||||||||
Policyholder benefits | 592,853 | 316,606 | 632,069 | 393,043 | 1,096 | 1,935,667 | ||||||||||||||
Amortization of deferred acquisition costs and value of business acquired | 635,261 | 167,091 | 9,594 | 18,351 | — | 830,297 | ||||||||||||||
Underwriting, general and administrative expenses | 343,345 | 228,090 | 291,391 | 179,904 | 51,474 | 1,094,204 | ||||||||||||||
Interest expense | — | — | — | — | 30,575 | 30,575 | ||||||||||||||
Total benefits, losses and expenses | 1,571,459 | 711,787 | 933,054 | 591,298 | 83,145 | 3,890,743 | ||||||||||||||
Segment income (loss) before provision (benefit) for income tax | 119,767 | 390,515 | 100,724 | 53,438 | (129,102 | ) | 535,342 | |||||||||||||
Provision (benefit) for income taxes | 39,855 | 134,729 | 35,740 | 18,476 | (70,242 | ) | 158,558 | |||||||||||||
Segment income (loss) after tax | $ | 79,912 | $ | 255,786 | $ | 64,984 | $ | 34,962 | $ | (58,860 | ) | |||||||||
Net income | $ | 376,784 | ||||||||||||||||||
| As of June 30, 2008 | ||||||||||||||||||||
Segment assets: | ||||||||||||||||||||
Segments assets, excluding goodwill | $ | 11,625,390 | $ | 3,295,284 | $ | 1,188,921 | $ | 2,658,344 | $ | 6,615,350 | $ | 25,383,289 | ||||||||
Goodwill | 828,743 | |||||||||||||||||||
Total assets | $ | 26,212,032 | ||||||||||||||||||
| Six Months Ended June 30, 2007 | ||||||||||||||||||||
| Solutions | Specialty Property | Health | Employee Benefits | Corporate & Other | Consolidated | |||||||||||||||
Revenues | ||||||||||||||||||||
Net earned premiums and other considerations | $ | 1,201,686 | $ | 760,655 | $ | 1,026,720 | $ | 569,135 | $ | — | $ | 3,558,196 | ||||||||
Net investment income | 212,801 | 45,536 | 35,560 | 91,295 | 22,006 | 407,198 | ||||||||||||||
Net realized gains on investments | — | — | — | — | 2,484 | 2,484 | ||||||||||||||
Amortization of deferred gain on disposal of businesses | — | — | — | — | 16,595 | 16,595 | ||||||||||||||
Fees and other income | 79,008 | 25,250 | 20,133 | 12,656 | 470 | 137,517 | ||||||||||||||
Total revenues | 1,493,495 | 831,441 | 1,082,413 | 673,086 | 41,555 | 4,121,990 | ||||||||||||||
Benefits, losses and expenses | ||||||||||||||||||||
Policyholder benefits | 501,871 | 247,653 | 647,111 | 394,940 | — | 1,791,575 | ||||||||||||||
Amortization of deferred acquisition costs and value of business acquired | 518,760 | 130,573 | 10,726 | 14,700 | — | 674,759 | ||||||||||||||
Underwriting, general and administrative expenses | 364,025 | 199,518 | 309,772 | 186,343 | 35,413 | 1,095,071 | ||||||||||||||
Interest expense | — | — | — | — | 30,593 | 30,593 | ||||||||||||||
Total benefits, losses and expenses | 1,384,656 | 577,744 | 967,609 | 595,983 | 66,006 | 3,591,998 | ||||||||||||||
Segment income (loss) before provision (benefit) for income tax | 108,839 | 253,697 | 114,804 | 77,103 | (24,451 | ) | 529,992 | |||||||||||||
Provision (benefit) for income taxes | 34,560 | 89,056 | 40,442 | 26,671 | (6,474 | ) | 184,255 | |||||||||||||
Segment income (loss) after tax | $ | 74,279 | $ | 164,641 | $ | 74,362 | $ | 50,432 | $ | (17,977 | ) | |||||||||
Net income | $ | 345,737 | ||||||||||||||||||
| As of December 31, 2007 | ||||||||||||||||||||
Segment Assets: | ||||||||||||||||||||
Segments assets, excluding goodwill | $ | 11,936,776 | $ | 2,956,414 | $ | 1,236,591 | $ | 2,807,698 | $ | 6,980,181 | $ | 25,917,660 | ||||||||
Goodwill | 832,656 | |||||||||||||||||||
Total assets | $ | 26,750,316 | ||||||||||||||||||
| Three Months Ended March 31, 2008 | ||||||||||||||||||||
| Solutions | Specialty Property | Health | Employee Benefits | Corporate & Other | Consolidated | |||||||||||||||
Revenues | ||||||||||||||||||||
Net earned premiums and other considerations | $ | 683,493 | $ | 481,427 | $ | 496,060 | $ | 280,437 | $ | — | $ | 1,941,417 | ||||||||
Net investment income | 106,730 | 29,375 | 15,648 | 38,369 | 7,652 | 197,774 | ||||||||||||||
Net realized losses on investments | — | — | — | — | (43,143 | ) | (43,143 | ) | ||||||||||||
Amortization of deferred gain on disposal of businesses | — | — | — | — | 7,379 | 7,379 | ||||||||||||||
Fees and other income | 44,281 | 13,593 | 9,406 | 6,555 | 63 | 73,898 | ||||||||||||||
Total revenues | 834,504 | 524,395 | 521,114 | 325,361 | (28,049 | ) | 2,177,325 | |||||||||||||
Benefits, losses and expenses | ||||||||||||||||||||
Policyholder benefits | 286,680 | 144,813 | 306,565 | 199,401 | — | 937,459 | ||||||||||||||
Amortization of deferred acquisition costs and value of business acquired | 307,993 | 83,340 | 4,873 | 9,002 | — | 405,208 | ||||||||||||||
Underwriting, general and administrative expenses | 167,540 | 105,502 | 152,308 | 91,899 | 16,193 | 533,442 | ||||||||||||||
Interest expense | — | — | — | — | 15,288 | 15,288 | ||||||||||||||
Total benefits, losses and expenses | 762,213 | 333,655 | 463,746 | 300,302 | 31,481 | 1,891,397 | ||||||||||||||
Segment income (loss) before provision (benefit) for income tax | 72,291 | 190,740 | 57,368 | 25,059 | (59,530 | ) | 285,928 | |||||||||||||
Provision (benefit) for income taxes | 24,734 | 65,996 | 20,105 | 8,727 | (20,464 | ) | 99,098 | |||||||||||||
Segment income (loss) after tax | $ | 47,557 | $ | 124,744 | $ | 37,263 | $ | 16,332 | $ | (39,066 | ) | |||||||||
Net income | $ | 186,830 | ||||||||||||||||||
| As of December 31, 2008 | ||||||||||||||||||||
Segment Assets: | ||||||||||||||||||||
Segment assets, excluding goodwill | $ | 11,151,178 | $ | 3,335,130 | $ | 1,040,761 | $ | 2,559,065 | $ | 5,426,553 | $ | 23,512,687 | ||||||||
Goodwill | 1,001,899 | |||||||||||||||||||
Total assets | $ | 24,514,586 | ||||||||||||||||||
Assurant, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)—(Continued)
SixThree Months Ended June 30,March 31, 2009 and 2008 and 2007
(In thousands, except per share and share amounts)
12. Commitments and Contingencies
In the normal course of business, the Company issues letters of credit are issued primarily to support reinsurance arrangements. These letters of credit are supported by commitments with financial institutions. The Company had $54,117$28,927 and $31,813$29,617 of letters of credit outstanding as of June 30, 2008March 31, 2009 and December 31, 2007,2008, respectively.
The Company is involved in litigation in the ordinary course of business, both as a defendant and as a plaintiff. The Company may from time to time be subject to a variety of legal and regulatory actions relating to the Company’s current and past business operations. While the Company cannot predict the outcome of any pending or future litigation, examination or investigation, and although no assurances can be given, the Company does not believe that any pending matter will have a material adverse effect individually or in the aggregate, on the Company’s financial condition, results of operations, or cash flows.
One of the Company’s 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 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 are seeking to avoid certain treaties on various grounds, including material misrepresentation and non-disclosure by the ceding companies and intermediaries involved in the programs. Similarly, some of the retrocessionaires are seeking avoidance of certain treaties with ARIC and the other reinsurers and some reinsureds are seeking collection of disputed balances under some of the treaties. The disputes 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 between multiple layers of retrocessionaires, reinsurers, ceding companies and intermediaries, including brokers, in an effort to resolve these disputes. Many of the disputes involving ARIC and an affiliate, Bankers Insurance Company Limited (“BICL”), relating to the 1995 and 1997 program years, were resolved by settlement or arbitration in 2005. As a result of the settlements and an arbitration (in which ARIC did not prevail) additional information became available in 2005, and based on management’s best estimate, the Company increased its reserves and recorded a total pre-tax charge of $61,943 for the year ended December 31, 2005.arbitration. Negotiations, arbitrations and litigation are still ongoing or will be scheduled for the remaining disputes. On February 28, 2006, there was a settlement relating to the 1996 program.
In 2007, there were two settlements relating to parts of the 1997 program. During 2008, there was a $35,000 settlement relating to the 1997 program. Loss accruals previously established relating to the 1996 and 1997 programs were adequate. The Company believes, based on information currently available, that the amounts accrued for currently outstanding disputes are adequate. However, the inherent uncertainty of arbitrations and lawsuits, including the uncertainty of estimating whether any settlements the Company may enter into in the future would be on favorable terms, makes it difficult to predict the outcomes with certainty.
As previously disclosed, the Company and certain of its officers and former employees have received subpoenas and requests from the SEC in connection with its investigation by the SEC staffStaff into certain finite reinsurance contracts entered into by the Company. The Company is cooperating fully and is complying with the requests.
The Company conducted an evaluation of the transactions that could potentially fall within the scope of the subpoenas, as defined by the authorities, and the Company has provided information as requested. On the basis of our investigation, the Company has concluded that there was a verbal side agreement with respect to one of our reinsurers under our catastrophiccatastrophe reinsurance program. The contract to which this verbal side agreement applied was accounted for using reinsurance accounting as opposed to deposit accounting. While management believes that the difference resulting from the appropriate alternative accounting treatment would be immaterial to our financial position or results of operations, regulators may reach a different conclusion. In 2004 and 2003, premiums ceded to this reinsurer were $2,600 and $1,500, respectively, and losses ceded were $10,000 and zero, respectively. This contract expired in December 2004 and was not renewed.
Assurant, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)—(Continued)
SixThree Months Ended June 30,March 31, 2009 and 2008 and 2007
(In thousands, except per share and share amounts)
In July 2007, the Company learned that each of the following five individuals, Robert B. Pollock, President and Chief Executive Officer, Philip Bruce Camacho, Executive Vice President and Chief Financial Officer, Adam Lamnin, Executive Vice President and Chief Financial Officer of Assurant Solutions/Assurant Specialty Property, Michael Steinman, Senior Vice President and Chief Actuary of Assurant Solutions/Assurant Specialty Property and Dan Folse, Vice President-Risk Management of Assurant Solutions/Assurant Specialty Property, received Wells notices from the SEC in connection with its ongoing investigation. A Wells notice is an indication that the staff of the SEC is considering recommending that the SEC bring a civil enforcement action against the recipient for violating provisions of the federal securities laws. Under SEC procedures, the recipients have the opportunity to respond to the SEC staffStaff before a formal recommendation is finalized and before the Commissioners themselves consider any recommendations.
On July 17, 2007, the Company announced that the Board of Directors (the “Board”) had placed all five employees on administrative leave, pending further review of this matter. The Board’s actions were based on the recommendations of its Special Committee of non-management directors which thereafter undertook a thorough investigation of the events that had resulted in the receipt of the Wells notices. The Special Committee has reviewed relevant documents, conducted interviews and worked with outside counsel to investigate these matters and to recommend appropriate actions to the Board with respect to the SEC investigation. On August 9, 2007, Messrs. SteinmanSteinman’s and Folse’s employment with the Company was terminated.
On the basis of an extensive review of evidence concerning this matter and the work of the Special Committee, the Board unanimously voted to reinstate Mr. Pollock as President and Chief Executive Officer, effective January 28, 2008. Effective March 15, 2009, Mr. Camacho resigned from his position as Executive Vice President and Chief Financial Officer of the Company. Starting March 16, 2009, Mr. Camacho began assisting the Company as a consultant for a 12-month transition period. The Board also reinstated Mr. Lamnin, who returned to the Company reporting to Mr. Pollock, and initially, assisting with a variety of strategic projects. The Board’s decisions to reinstate Messrs. Pollock and Lamnin and Mr. Camacho’s decision to reinstate Mr. Pollock impliesresign imply no conclusion concerning the outcome of the SEC staff’sStaff’s ongoing investigation, and the SEC staff’sStaff’s Wells noticenotices to him remainsthem remain in effect. The SEC staff’sStaff’s inquiry continues and the Company is cooperating fully. We cannot predict the duration or outcome of the investigation.
In the course of its response to SEC staffStaff inquiries, the Company identified certain problems related to ourits document production process. These production issues have delayed resolution of this matter. The Company believes that it has now completed its response to the SEC staff’sStaff’s document request. Messrs. Camacho and Lamnin remain on administrative leave.
In relation to the SEC investigation discussed above, the SEC may charge the Company and/or the individuals with violations of the federal securities laws, including alleging violations of Sections 10(b), 13(a), and/or 13(b) of the Securities Exchange Act of 1934, and/or Section 17(a) of the Securities Act of 1933, and may seek civil monetary penalties, injunctive relief and other remedies against the Company and individuals, including potentially seeking a bar preventing one or more individuals from serving as an officer or director of a public company. The SEC may also take the position that the Company should restate its consolidated financial statements to address the accounting treatment referred to above. No settlement of any kind can be reached without approval by the SEC and the Company has not accrued for any civil monetary penalties because the Company cannot reasonably estimate the probability or amount of such penalties at this time.
Assurant, Inc.
Notes to Consolidated Financial Statements (unaudited)—(Continued)
Three Months Ended March 31, 2009 and 2008
(In thousands, except per share and share amounts)
During July 2008,
13. Subsequent Events
On May 5, 2009, the Company entered into a definitive agreement with Signal Holdings LLCreinsurance agreements providing for $150,000 in multi-year, fully collateralized reinsurance from Ibis Re Ltd. (“Signal”Ibis Re”), a leading provider of wireless handset protectionnon-consolidated special purpose reinsurance company domiciled in the Cayman Islands. Ibis Re financed the property catastrophe reinsurance coverage by issuing $150,000 in catastrophe bonds to qualified institutional buyers in a private placement.
The new reinsurance coverage is designed to complement the Company’s existing property catastrophe reinsurance and state-specific reinsurance programs and repair services, to acquire Signal’s outstanding capital stockenhance its ability to manage risk related to catastrophe losses. The reinsurance consists of two separate layers of coverage providing for $250,000an aggregate of $150,000 of reinsurance coverage against losses from individual hurricane events in an all-cash transaction. The transaction, which is pending regulatory approval, is expected to close inHawaii and along the fourth quarterGulf and Eastern Coasts of 2008.the United States until April 2012.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Dollar amounts in thousands)
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) addresses the financial condition of Assurant, Inc. and its subsidiaries (which we refer to collectively as Assurant)“Assurant”) as of June 30, 2008,March 31, 2009, compared with December 31, 2007,2008, and our results of operations for the three and six months ended June 30, 2008March 31, 2009 and 2007.2008. This discussion should be read in conjunction with our MD&A and annual audited consolidated financial statements as of December 31, 20072008 included in our Annual Report on Form 10-K for the year ended December 31, 20072008 filed with the U.S. Securities and Exchange Commission (“SEC”(the “SEC”) and the June 30, 2008March 31, 2009 unaudited consolidated financial statements and related notes included elsewhere in this Form 10-Q.
Some of the statements included in this MD&A and elsewhere in this report, particularly those anticipating future financial performance, business prospects, growth and operating strategies and similar matters, are forward-looking statements that involve a numberwithin the meaning of risks and uncertainties.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 lookingforward-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 publicly 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 in the section below entitled “Critical Factors Affecting Results,” the following risk factors could cause our actual results to differ materially from those currently estimated by management: (i) failure to maintain significant client relationships, distribution sources and contractual arrangements; (ii) failure to attract and retain sales representatives; (iii) deterioration in the Company’s market capitalization compared to its book value that could impair the Company’s goodwill; (iv) 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 and inflationary pressure); (iv) inadequacy of reserves established for future claims losses; (v) failure to predict or manage benefits, claims and other costs; (vi) diminished value of invested assets in our investment portfolio (due to, among other things, the recent volatility in financial markets, the global economic slowdown, credit and liquidity risk, other than temporary impairments, environmental liability exposure and inability to target an appropriate overall risk level); (vi) inadequacy of reserves established for future claims losses; (vii) failure to predict or manage benefits, claims and other costs; (viii) losses due to natural and man-made catastrophes; (viii)(ix) increases or decreases in tax valuation allowances; (x) fluctuations in exchange rates and other risks related to our international operations; (xi) unavailability, inadequacy and unaffordable pricing of reinsurance coverage; (ix)(xii) current or new laws and regulations that could increase our costs or limit our growth; (xiii) inability of reinsurers to meet their obligations; (x)(xiv) insolvency of third parties to whom we have sold or may sell businesses through reinsurance or modified co-insurance; (xi)(xv) credit risk of some of our agents in Assurant Specialty Property and Assurant Solutions; (xii)(xvi) a further decline in the manufactured housing industry; (xiii)(xvii) a decline in our credit or financial strength ratings; (xiv)ratings (including the currently heightened risk of ratings downgrades in the insurance industry); (xviii) failure to effectively maintain and modernize our information systems; (xv)(xix) failure to protect client information and privacy; (xvi)(xx) failure to find and integrate suitable acquisitions and new insurance ventures; (xvii)(xxi) inability of our subsidiaries to pay sufficient dividends; (xviii)(xxii) failure to provide for succession of senior management and key executives; (xix)(xxiii) negative publicity and impact on our business and negative publicity due to unfavorable outcomes in litigation and regulatory investigations (including the potential impact on our reputation and business of a negative outcome in the ongoing SEC investigation); (xx)and (xxiv) significant competitive pressures in our businesses and cyclicality of the insurance industry: (xxi) current or new laws and regulations that could increase our costs or limit our growth.industry. These risk factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this report. For a more detailed discussion of the risk factors that could affect our actual results, please refer to the subsection entitled “Risk Factors” in Item 1A in our 20072008 Annual Report on Form 10-K.
Company Overview
Assurant is a premier provider of specialized insurance products and related services in North America and selected international markets. We have five reportable segments, four of which are operating segments, — Assurant Solutions;Solutions, Assurant Specialty Property;Property, Assurant Health;Health, and Assurant Employee Benefits. These operating segments have partnered with clients who are leaders in their industries and have built leadership positions in a number of specialty insurance market segments in the United States of America (“U.S.”) and selected international markets. The Assurant business segments provide creditor-placed homeowners insurance; manufactured housing homeowners insurance; debt protection administration services; creditcredit-related insurance including life, disability and unemployment; warranties and
extended services service contracts; individual, short-term and small employer group health insurance; group dental insurance; group disability insurance; group life insurance; and pre-funded funeral insurance. Our remaining segment is Corporate & Other which includes activities of the holding company, financing and interest expenses, net realized gains (losses) on investments, interest income earned from short-term investments held and additional costs associated with excess of loss reinsurance programs reinsured and ceded to certain subsidiaries in the London market between 1995 and 1997. Corporate & Other also includes the amortization of deferred gains associated with the sales of Fortis Financial Group and Long-Term Care through reinsurance agreements.
Critical Factors Affecting Results and Liquidity
Our results depend on the adequacy of our product pricing, underwriting and the accuracy of our methodology for the establishment of reserves for future policyholder benefits and claims, returns on and values of invested assets and our ability to manage our expenses. Therefore, factors affecting these items, including difficult conditions in financial markets and the global economic slowdown, may have a material adverse effect on our results of operations or financial condition.condition during 2009. For example, our first quarter 2009 results reflected increased claims activity driven in some cases by heavy utilization of medical services among consumers who feared the potential loss of insurance coverage. Similarly, the effects of proposed or recently passed government regulation on our sales and profitability is not yet known, but could negatively affect our results of operations or financial condition during 2009. For more information on these factors, see “Item 1A—Risk Factors” and “Item 7—MD&A Critical Factors Affecting Results” in our 2008 Annual Report on Form 10-K.
Management believes the Company will have sufficient liquidity to satisfy its needs over the next twelve months. For the three months ended March 31, 2009, net cash used in operating activities totaled $(267,156); net cash used in investing activities totaled $(35,155) and net cash used in financing activities totaled $(74,034). We had $664,339 in cash and cash equivalents as of March 31, 2009. Please see “—Liquidity and Capital Resources,” below for further details.
Critical Accounting Policies and Estimates
Our 20072008 Annual Report on Form 10-K described the accounting policies and estimates that are critical to the understanding of our results of operations, financial condition and liquidity. The accounting policies and estimates described in the 20072008 Annual Report on Form 10-K were consistently applied to the unaudited interim consolidated financial statements for the sixthree months ended June 30, 2008.
Recent Accounting Pronouncements - Adopted
On January 1, 2008, the Company adopted FAS 157 which defines fair value, addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under GAAP and expands disclosures about fair value measurements. FAS 157 is 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, FAS 157 requires 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 will be 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 Note 5 for further information regarding FAS 157.
On January 1, 2008, the Company adopted FAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities (“FAS 159”). FAS 159 provides a choice to measure many financial instruments and certain other items at fair value on specified election dates and requires disclosures about the election of the fair value option. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. The Company has chosen not to elect the fair value option for any financial or non-financial instruments as of the adoption date, thus the adoption of FAS 159 did not have an impact on the Company’s financial position or results of operations.
On January 1, 2008, the Company adopted Emerging Issues Task Force (“EITF”) Issue No. 06-10,Accounting for Deferred Compensation and Postretirement Benefit Aspects of Collateral Assignment Split-Dollar Life Insurance Arrangements (“EITF 06-10”). EITF 06-10 provides guidance regarding the employer’s recognition of the liability and the related compensation costs for collateral assignment split-dollar life insurance arrangements that provide a benefit to an employee that extends into postretirement periods. This consensus concludes that for a collateral assignment split-dollar life insurance arrangement, an employer should recognize a liability for future benefits in accordance with FAS No. 106,Employers’ Accounting For Postretirement Benefits Other-Than-Pensions, (if, in substance, a postretirement benefit plan exists) or Accounting Principles Board Opinion No. 12,Deferred Compensation Contracts, (“APB 12”) (if the arrangement is, in substance, an individual deferred compensation contract) based on the substantive agreement with the employee. The Company has been recording its liability for future benefits in accordance with APB 12, thus the adoption of EITF 06-10 did not have an impact on the Company’s financial position or results of operations.
Recent Accounting Pronouncements – Not Yet Adopted
In December 2007, the Financial Accounting Standards Board (“FASB”) issued FAS No. 141R,Business Combinations(“FAS 141R”). FAS 141R replaces FAS No. 141,Business Combinations(“FAS 141”).FAS 141R retains the fundamental requirements of FAS 141 that the purchase 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. FAS 141R 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. FAS 141R broadens the fair value measurement and recognition of assets acquired, liabilities assumed, and interests transferred as a result of business combinations. FAS 141R also increases the disclosure requirements for business combinations in the financial statements. FAS 141R is effective for fiscal periods beginning after December 15, 2008. Therefore, the Company is required to adopt FAS 141R on January 1,March 31, 2009. The Company is currently evaluating the requirements of FAS 141R and the potential impact on the Company’s financial position and results of operations.
In December 2007, the FASB issued FAS No. 160,Non-Controlling Interest in Consolidated Financial Statements—an amendment of ARB No. 51(“FAS 160”). FAS 160 requires that a non-controlling interest in a subsidiary be separately reported within equity and the amount of consolidated net income attributable to the non-controlling interest be presented in the statement of operations. FAS 160 also calls for consistency in reporting changes in the parent’s ownership interest in a subsidiary and necessitates fair value measurement of any non-controlling equity investment retained in a deconsolidation. FAS 160 is effective for fiscal periods beginning after December 15, 2008. Therefore, the Company is required to adopt FAS 160 on January 1, 2009. The Company is currently evaluating the requirements of FAS 160 and the potential impact on the Company’s financial position and results of operations.
In February 2008, the FASB issued Financial Statement of Position FAS 157-2,Effective Date of FAS 157 (“FSP FAS 157-2”). FSP FAS 157-2 defers the effective date of FAS 157 for all non-financial assets and non-financial liabilities measured or disclosed at fair value in the financial statements on a non-recurring basis to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years, which for the Company is January 1, 2009. The Company is currently evaluating the requirements of FAS 157 for its non-financial assets and non-financial liabilities measured on a non-recurring basis and the potential impact on the Company’s financial position and results of operations.
In June 2008, the FASB issued FSP EITF No. 03-6-1,Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities, (“FSP EITF 03-6-1”). FSP EITF 03-6-1 requires companies to treat unvested share-based payment awards that have non-forfeitable rights to dividend or dividend equivalents as participating securities. Therefore, these financial instruments need to be included in calculating basic and diluted earnings per share under the two-class method described in FAS No. 128,Earnings Per Share. All prior period EPS data presented will be adjusted retrospectively. FSP EITF 03-6-1 will be effective for fiscal years beginning after December 15, 2008. Therefore, the Company is required to adopt FSP EITF 03-6-1 on January 1, 2009. The Company is currently evaluating the requirements of FSP EITF 03-6-1 and the potential impact on the Company’s basic and diluted earnings per share calculations.
Assurant Consolidated
Overview
The tablestable below presentpresents information regarding our consolidated results of operations:
| For the Three Months Ended June 30, | For the Six Months Ended June 30, | ||||||||||||||||||||||
| 2008 | 2007 | 2008 | 2007 | For the Three Months Ended March 31, | |||||||||||||||||||
| (in thousands) | 2009 | 2008 | |||||||||||||||||||||
Revenues: | |||||||||||||||||||||||
Net earned premiums and other considerations | $ | 1,995,516 | $ | 1,798,687 | $ | 3,936,933 | $ | 3,558,196 | $ | 1,874,579 | $ | 1,941,417 | |||||||||||
Net investment income | 201,211 | 190,302 | 398,985 | 407,198 | 178,479 | 197,774 | |||||||||||||||||
Net realized (losses) gains on investments | (34,574 | ) | (3,086 | ) | (77,717 | ) | 2,484 | ||||||||||||||||
Net realized losses on investments | (55,689 | ) | (43,143 | ) | |||||||||||||||||||
Amortization of deferred gain on disposal of businesses | 7,327 | 8,246 | 14,706 | 16,595 | 6,802 | 7,379 | |||||||||||||||||
Fees and other income | 79,280 | 70,578 | 153,178 | 137,517 | 83,706 | 73,898 | |||||||||||||||||
Total revenues | 2,248,760 | 2,064,727 | 4,426,085 | 4,121,990 | 2,087,877 | 2,177,325 | |||||||||||||||||
Benefits, losses and expenses: | |||||||||||||||||||||||
Policyholder benefits | 998,208 | 902,053 | 1,935,667 | 1,791,575 | 960,342 | 937,459 | |||||||||||||||||
Selling, underwriting and general expenses (1)(2) | 985,851 | 894,904 | 1,924,501 | 1,769,830 | |||||||||||||||||||
Selling, underwriting and general expenses (1) | 954,479 | 938,650 | |||||||||||||||||||||
Interest expense | 15,287 | 15,296 | 30,575 | 30,593 | 15,189 | 15,288 | |||||||||||||||||
Total benefits, losses and expenses | 1,999,346 | 1,812,253 | 3,890,743 | 3,591,998 | 1,930,010 | 1,891,397 | |||||||||||||||||
Income before provision for income taxes | 249,414 | 252,474 | 535,342 | 529,992 | 157,867 | 285,928 | |||||||||||||||||
Provision for income taxes | 59,460 | 86,194 | 158,558 | 184,255 | 77,286 | 99,098 | |||||||||||||||||
Net income | $ | 189,954 | $ | 166,280 | $ | 376,784 | $ | 345,737 | $ | 80,581 | $ | 186,830 | |||||||||||
| (1) | Includes amortization of |
The following discussion provides a high level analysis of how the consolidated results were affected by our four operating segments and our Corporate and Other segment for the three and six months ended June 30,March 31, 2009 (“First Quarter 2009”) and three months ended March 31, 2008 (“SecondFirst Quarter 2008” and “Six Months 2008”, respectively) and three and six months ended June 30, 2007 (“Second Quarter 2007” and “Six Months 2007”, respectively)). Please see the discussion that follows, for each of these segments, for a more detailed analysis of the fluctuations.
For The Three Months Ended June 30, 2008March 31, 2009 Compared to The Three Months Ended June 30, 2007.March 31, 2008.
Net Income
NetFirst Quarter 2009 had a net income increased $23,674,of $80,581, a decrease of $106,249, or 14%57%, to $189,954compared with $186,830 in net income for SecondFirst Quarter 2008 from $166,280 for Second Quarter 2007.2008. The increasedecrease was primarily due to theless favorable underwriting results from our four operating segments, a decline of the Assurant Specialty Property segment, whose net income increased $40,835 to $131,042 for Second Quarter 2008, compared with $90,207 for Second Quarter 2007 and a $24,566 tax benefit associated with the sale of a subsidiary, United Family Life Insurance Company (“UFLIC”). The increase$12,542, after-tax, in the Assurant Specialty Property segment is primarily due to higher net earned premiums resulting from creditor placed homeowners insurance, a continued favorable combined ratio and higher net investment income due to increasedlower average invested assets. Partially offsetting the strong results of the Assurant Specialty Property segmentassets and the UFLIC related tax benefit were:
lower investment yields and an $8,155, after-tax, increase in net realized losses on investments of $(22,473) (after-tax) in Second Quarter 2008 compared with net realized losses of $(2,006) (after-tax) in Second Quarter 2007,
a decrease of $6,117 in Assurant Health net incomedue primarily to $27,721 in Second Quarter 2008 from $33,838 in Second Quarter 2007,
a decrease of $2,845 in Assurant Employee Benefits net income to $18,630 in Second Quarter 2008 from $21,475 in Second Quarter 2007, and
a decrease of $14,443 in Assurant Corporate & Other net income, excluding the UFLIC tax benefit and net realized losses on investments, in Second Quarter 2008 from Second Quarter 2007.
The net realized losses on investments in Second Quarter 2008 include $17,923 (after-tax)sales of realized losses from the write-down of other-than-temporary declines in our investment portfolio, while Second Quarter 2007 had none. The decrease in Assurant Health’s net income is primarily attributable to an increase in the individual medical benefit loss ratio and the continuing decline in small employer group net earned premiums, partially offset by improved claim experience on small employer group business. The decrease in Assurant Employee Benefits net income is primarily attributable to less favorable dental and disability experience, partially offset by a decrease in selling, underwriting and general expenses. The decrease in Assurant Corporate & Other net income is primarily related to increases in costs related to the ongoing SEC investigation regarding certain loss mitigation products, increases in external professional fees and compensation expense and a decrease in net investment income.
For The Six Months Ended June 30, 2008 Compared to The Six Months Ended June 30, 2007.
Net Income
Net income increased $31,047 or 9%, to $376,784 for Six Months 2008 from $345,737 for Six Months 2007. The increase was primarily due to the results of the Assurant Specialty Property segment, whose net income increased $91,145 to $255,786 for Six Months 2008, compared with $164,641 for Six Months 2007 due to higher net earned premiums resulting from creditor placed homeowners insurance, a continued favorable combined ratio and higher net investment income due to increased average invested assets. Also contributing to the increase was a $24,566 tax benefit associated with the sale of UFLIC.
Partially offsetting the strong results of the Assurant Specialty Property segment and the UFLIC related tax benefit were net realized losses on investments of $(50,516) (after-tax) in Six Months 2008 compared with net realized gains of $1,615 (after-tax) in Six Months 2007. The net realized losses on investments in Six Months 2008 include $46,138 (after-tax) of realized losses from the write-down of other-than-temporary declines in our investment portfolio, while Six Months 2007 had none. In addition, net investment income declined $5,338 (after-tax) to $259,340 (after-tax) for Six Months 2008, compared with $264,678 (after-tax) for Six Months 2007. This decline is primarily due to $23,733 (after-tax) of real estate joint venture partnership income included in Six Months 2007, while Six Months 2008 had $2,247 (after-tax) of net investment income from real estate joint venture partnerships. Partially offsetting the effects of the real estate joint venture partnership income is increased net investment income due to increased average invested assets.investments.
Assurant Solutions
Overview
The tables below present information regarding our Assurant Solutions’ segment results of operations:
| For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||||||
| 2008 | 2007 | 2008 | 2007 | For the Three Months Ended March 31, | ||||||||||||||||
| (in thousands) | 2009 | 2008 | ||||||||||||||||||
Revenues: | ||||||||||||||||||||
Net earned premiums and other considerations | $ | 700,629 | $ | 618,675 | $ | 1,384,122 | $ | 1,201,686 | $ | 644,612 | $ | 683,493 | ||||||||
Net investment income | 108,425 | 100,784 | 215,155 | 212,801 | 97,995 | 106,730 | ||||||||||||||
Fees and other income | 47,668 | 40,957 | 91,949 | 79,008 | 52,031 | 44,281 | ||||||||||||||
Total revenues | 856,722 | 760,416 | 1,691,226 | 1,493,495 | 794,638 | 834,504 | ||||||||||||||
Benefits, losses and expenses: | ||||||||||||||||||||
Policyholder benefits | 306,173 | 258,527 | 592,853 | 501,871 | 272,022 | 286,680 | ||||||||||||||
Selling, underwriting and general expenses (4)(5) | 503,073 | 455,140 | 978,606 | 882,785 | ||||||||||||||||
Selling, underwriting and general expenses | 475,604 | 475,533 | ||||||||||||||||||
Total benefits, losses and expenses | 809,246 | 713,667 | 1,571,459 | 1,384,656 | 747,626 | 762,213 | ||||||||||||||
Segment income before provision for income taxes | 47,476 | 46,749 | 119,767 | 108,839 | 47,012 | 72,291 | ||||||||||||||
Provision for income taxes | 15,121 | 16,539 | 39,855 | 34,560 | 16,701 | 24,734 | ||||||||||||||
Segment net income | $ | 32,355 | $ | 30,210 | $ | 79,912 | $ | 74,279 | $ | 30,311 | $ | 47,557 | ||||||||
Net earned premiums and other considerations: | ||||||||||||||||||||
Domestic: | ||||||||||||||||||||
Credit | $ | 69,808 | $ | 76,109 | $ | 143,061 | $ | 157,030 | $ | 65,941 | $ | 73,253 | ||||||||
Service contracts | 335,552 | 280,274 | 655,066 | 542,137 | 346,508 | 319,515 | ||||||||||||||
Other (1) | 15,186 | 15,517 | 30,620 | 32,206 | 14,579 | 15,434 | ||||||||||||||
Total Domestic | 420,546 | 371,900 | 828,747 | 731,373 | 427,028 | 408,202 | ||||||||||||||
International: | ||||||||||||||||||||
Credit | 88,661 | 92,413 | 186,925 | 189,290 | 74,173 | 98,264 | ||||||||||||||
Service contracts | 90,128 | 62,543 | 167,795 | 105,260 | 87,903 | 77,667 | ||||||||||||||
Other (1) | 6,903 | 10,260 | 16,501 | 19,239 | 3,660 | 9,598 | ||||||||||||||
Total International | 185,692 | 165,216 | 371,221 | 313,789 | 165,736 | 185,529 | ||||||||||||||
Preneed | 94,391 | 81,559 | 184,153 | 156,524 | 51,848 | 89,762 | ||||||||||||||
Total | $ | 700,629 | $ | 618,675 | $ | 1,384,122 | $ | 1,201,686 | $ | 644,612 | $ | 683,493 | ||||||||
Fees and other income: | ||||||||||||||||||||
Domestic: | ||||||||||||||||||||
Domestic: | ||||||||||||||||||||
Debt protection | $ | 8,284 | $ | 7,469 | $ | 16,198 | $ | 16,219 | $ | 9,271 | $ | 7,915 | ||||||||
Service contracts | 19,941 | 17,190 | 38,312 | 34,067 | 27,709 | 18,370 | ||||||||||||||
Other (1) | 7,439 | 5,205 | 13,174 | 11,698 | 3,947 | 5,735 | ||||||||||||||
Total Domestic | 35,664 | 29,864 | 67,684 | 61,984 | 40,927 | 32,020 | ||||||||||||||
International | 9,706 | 4,384 | 19,446 | 8,876 | 6,072 | 9,740 | ||||||||||||||
Preneed | 2,298 | 6,709 | 4,819 | 8,148 | 5,032 | 2,521 | ||||||||||||||
Total | $ | 47,668 | $ | 40,957 | $ | 91,949 | $ | 79,008 | $ | 52,031 | $ | 44,281 | ||||||||
Gross written premiums (2): | ||||||||||||||||||||
Domestic: | ||||||||||||||||||||
Credit | $ | 135,346 | $ | 152,341 | ||||||||||||||||
Service contracts | 246,883 | 393,811 | ||||||||||||||||||
Other (1) | 15,074 | 16,758 | ||||||||||||||||||
Total Domestic | 397,303 | 562,910 | ||||||||||||||||||
International: | ||||||||||||||||||||
Credit | 171,379 | 219,212 | ||||||||||||||||||
Service contracts | 107,070 | 101,002 | ||||||||||||||||||
Other (1) | 5,387 | 11,348 | ||||||||||||||||||
Total International | 283,836 | 331,562 | ||||||||||||||||||
Total | $ | 681,139 | $ | 894,472 | ||||||||||||||||
Preneed (face sales) | $ | 103,124 | $ | 104,424 | ||||||||||||||||
Combined ratio (3): | ||||||||||||||||||||
Domestic | 98.3 | % | 96.5 | % | ||||||||||||||||
International | 107.3 | % | 102.3 | % | ||||||||||||||||
Gross written premiums (2): Domestic: Credit Service contracts Other (1) Total Domestic International: Credit Service contracts Other (1) Total International Total Preneed (face sales) Combined ratio (3): Domestic International $ 152,730 $ 167,738 $ 305,071 $ 329,581 396,157 448,143 789,968 902,547 17,076 22,014 33,834 42,878 565,963 637,895 1,128,873 1,275,006 214,407 201,353 433,619 392,768 110,714 86,948 211,716 166,530 8,962 13,933 20,310 24,355 334,083 302,234 665,645 583,653 $ 900,047 $ 904,129 $ 1,794,519 $ 1,858,659 $ 120,859 $ 102,360 $ 225,283 $ 188,418 99.4 % 100.8 % 98.0 % 100.9 % 111.4 % 109.7 % 106.9 % 106.1 %
| (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 |
For The Three Months Ended June 30, 2008March 31, 2009 Compared to The Three Months Ended June 30, 2007.March 31, 2008.
Net Income
Segment net income increased $2,145,decreased $17,246, or 7%36%, to $32,355$30,311 for SecondFirst Quarter 20082009 from $30,210$47,557 for SecondFirst Quarter 2007.2008. The increasedecrease was primarily due to improved underwriting results in our domestic service contract business. Partially offsetting this increase was unfavorable experience with a credit life product in Brazil of $6,900 (after-tax) in Second Quarter 2008 compared with $4,400 (after-tax) in Second Quarter 2007 due to additional information received from a client combined with continued investments made to support our strategic international expansion. Second Quarter 2007 included $8,010 (after-tax) of contract settlement fee income related to the sale of marketing rights for our Independent US Preneed business and income from our completed clients’ commission reconciliation project.
Total Revenues
Total revenues increased $96,306, or 13%, to $856,722 for Second Quarter 2008 from $760,416 for Second Quarter 2007. The increase is primarily attributable to an increase in net earned premiums and other considerations of $81,954, due to growth in our domestic and international service contract business as well as growth in our Preneed life insurance (“Preneed”) business. Growth in our Preneed business is mainly due to the acquisition of Mayflower National Life Insurance Company (“Mayflower”) in the later part of 2007. These increases were slightly offset by the continued runoff of our domestic credit insurance and domestic independent preneed businesses. Also contributing to the increase in revenues was an increase in fees and other income of $6,711, or 16%, primarily from various international acquisitions made subsequent to Second Quarter 2007, combined with the continued growth of our service contract business. Net investment income increased $7,641, or 8%, primarily attributable to higher average invested assets from growth in our international and domestic service contract and preneed businesses.
We experienced growth in gross written premium from our international and Preneed businesses and a decline in gross written premium from our domestic service contract and credit insurance businesses for Second Quarter 2008 compared with Second Quarter 2007. Gross written premiums from our international credit business increased $13,054, primarily driven by increased marketing efforts, strong client performance, greater outstanding credit card balances, as well as the favorable impact of foreign exchange rates. Gross written premiums in our international service contract business increased $23,766 from both new and existing clients, which is consistent with our international expansion strategy. We experienced an increase in our Preneed face sales primarily due to new business generated from former Alderwoods funeral homes and growth from our existing exclusive distribution partnership with Service Corporation International (“SCI”) funeral homes. Gross written premiums in our domestic service contract business decreased $51,986 primarily due to the store closings of a client and the impact of lower retail sales from other clients, partially offset by increases in premium from new clients. Gross written premiums from our domestic credit insurance business decreased $15,008 due to the continued runoff of our domestic credit insurance business.
Total Benefits, Losses and Expenses
Total benefits, losses and expenses increased $95,579, or 13%, to $809,246 for Second Quarter 2008 from $713,667 for Second Quarter 2007. Policyholder benefits increased $47,646, primarily driven by the growth in net earned premiums from our domestic and international service contract and Preneed businesses, as well as unfavorable loss experience in a credit life product in Brazil. Selling, underwriting, and general expenses increased $47,933. Commissions, taxes, licenses and fees, of which amortization of DAC is a component, increased $35,713, primarily due to the overall commission rate increases caused by the change in business mix. This was evidenced by higher earnings in our service contract business, which has higher commission rates, compared to the lower commission rates on the decreasing domestic credit business. Additionally, Second Quarter 2007 included $6,900 of income from our completed clients commission reconciliation project. Total commission expenses also reflect reduced commission payments related to certain extended service contract clients who have not previously met minimum performance thresholds specified in their contracts. General expenses increased $12,220, due to higher employment expenses associated with continued investment in international expansion and amortization of other intangibles associated with international acquisitions made subsequent to Second Quarter 2007.
For The Six Months Ended June 30, 2008 Compared to The Six Months Ended June 30, 2007.
Net Income
Segment net income increased $5,633, or 8%, to $79,912 for Six Months 2008 from $74,279 for Six Months 2007. The increase is primarily due to $11,700 (after-tax) of income related to the accrual of contractual receivables established fromfor certain domestic service contract clientscontracts and unfavorable loss experience primarily in the first quarter ofour United Kingdom (“UK”) credit insurance business in First Quarter 2009 compared with First Quarter 2008. Partially offsetting this increase was unfavorable experience with a credit life product in Brazil of $6,900In addition, net investment income decreased $5,678 (after-tax) in SecondFirst Quarter 20082009 compared with $4,400 (after-tax) in Second Quarter 2007the same period last year due to additional information received from a client. In addition, Second Quarter 2007 included $8,010 (after-tax) of income related to contract settlement fees received related to the sale of marketing rights for the Independent U.S. Preneed business and $6,900 of income from our completed clients commission reconciliation project. Net investment income increased $1,530 (after-tax). This increase is primarily attributable to Six Months 2008 having higherlower average invested assets compared with Six Months 2007 due to growthand lower investment yields. These decreases were partially offset by improved underwriting results from our domestic businesses including earnings from acquisitions made in our international and domestic service contract business. This increase is partially offset by net investment incomebusiness in the latter part of $10,070 (after-tax) from real estate joint venture partnerships included in Six Months 2007. Absent these items, net income increased primarily due to2008 and improved underwriting results in our domestic and international service contract business, offset by continued investments made to support our strategic international expansion.excluding the UK credit business discussed above.
Total Revenues
Total revenues increased $197,731,decreased $39,866, or 13%5%, to $1,691,226$794,638 for Six Months 2008First Quarter 2009 from $1,493,495$834,504 for Six Months 2007.First Quarter 2008. The increasedecrease is primarily attributable to an increase inreduced net earned premiums and other considerations of $182,436, due$38,881, primarily resulting from our application of Statement of Financial Accounting Standards (“FAS”) No. 97,Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments (“FAS 97”), beginning January 1, 2009 for new Preneed life insurance policies in which death benefit increases are determined at the discretion of the Company. These types of policies will now be accounted for as universal life contracts. For contracts sold prior to growthJanuary 1, 2009, these types of Preneed life insurance sales were accounted for and will continue to be accounted for under FAS No. 60,Accounting and Reporting by Insurance Enterprises(“FAS 60”). The difference between reporting in accordance with FAS 97 compared with FAS 60 is not material but impacted various income statement captions including net earned premiums and other considerations; however it had no impact on our domestic and international service contract business as well as growthoverall net income. Absent this item, net earned premiums would have decreased by approximately $7,000, or 1%. The decrease in our Preneed business. Growth in our Preneed business is mainly duenet earned premiums was also related to the acquisition of Mayflower in late 2007. These increases were slightly offset by the continued runoff of our domestic credit insurance and the Preneed independent U.S. businesses and the unfavorable impact of foreign exchange. These declines were partially offset by higher revenues in our domestic independent preneed businesses.service contract business from premiums written in prior periods as well as growth in our international service contract business from both new and existing clients. Also contributing to the increasedecrease in revenues was an increase in feeslower net investment income of $8,735, or 8%, due primarily to lower average invested assets and lower investment yields. Fees and other income of $12,941,increased $7,750, or 16%18%, primarily from various international acquisitions made subsequent to Second Quarter 2007 combined with the continued growth of our service contract businesses mostly resulting from acquisitions made in the latter part of 2008 and the application of FAS 97 for our Preneed business. Net investment income increased $2,354,
Gross written premiums decreased $213,333, or 1%24%, despite net investment income of
$15,493 recognized in Six Months 2007to $681,139 for First Quarter 2009 from real estate joint venture partnerships compared with $1,210 in Six Months$894,472 for First Quarter 2008. Absent this investment income from real estate joint venture partnerships, net investment income increased $16,637, or 8%, primarily attributable to higher average invested assets from growth in our international and domestic businesses.
We experienced growth in grossGross written premium from international and Preneed businesses and a decline in gross written premiumpremiums from our domestic service contract business decreased $146,928, primarily due to a client bankruptcy as well as lower retail and credit insurance businesses for the Six Months 2008 compared with Six Months 2007.auto sales. Gross written premiums from our international credit business increased $40,851,decreased $47,833 primarily driven by increased marketing efforts, strong client performance, which led to greater outstanding credit card balances, as well as the favorableunfavorable impact of foreign exchange rates.rates as the U.S. dollar strengthened against international currencies and the slowdown in the UK mortgage market. This was partially offset by growth in other countries from increased marketing efforts and strong client production. Gross written premiums from our domestic credit insurance business decreased $16,995, due to the continued runoff of this product line. Gross written premiums in our international service contractscontract business increased $45,186 primarily$6,068 attributable to growth from both new and existing clients, which is consistent with our international expansion strategy. We experienced an increase in ourThis growth was partially offset by the unfavorable impact of foreign exchange rates. Preneed face sales primarily due to new business generated from former Alderwoods funeral homes and growth from existing SCI funeral homes. Gross written premiums in our domestic service contract business decreased $112,579 primarily due to the store closings of a client and the impact of lower retail sales from other clients, partially offset by increases in premium from new clients. Gross written premiums from our domestic credit insurance business decreased $24,510 due to the continued runoff of our domestic credit insurance business.were relatively consistent, decreasing $1,300.
Total Benefits, Losses and Expenses
Total benefits, losses and expenses increased $186,803,decreased $14,587, or 14%2%, to $1,571,459$747,626 for Six Months 2008First Quarter 2009 from $1,384,656$762,213 for Six Months 2007.First Quarter 2008. Policyholder benefits increased $90,982,decreased $14,658, primarily drivendue to the above-mentioned application of FAS 97 in our Preneed business. This was offset by higher losses related to growth in net earned premiums from our domestic and international service contract and Preneed businesses,business, combined with unfavorable loss experience in aour UK credit life product in Brazil.business, sold through the internet resulting from higher unemployment rates. Selling, underwriting and general expenses increased $95,821.$71. General expenses increased $17,340, primarily due to higher expenses associated with the recent domestic service contract business acquisitions. Commissions, taxes, licenses and fees, of which amortization of DAC is a component, increased $66,532,decreased $17,269, primarily due to the overall commission rate increases caused by the changedecrease in business mix. This was evidenced by higher earningsnet earned premiums in our service contractinternational business which has higherfavorable impact of foreign exchange rates, and reduced commission rates, comparedexpense resulting from the acquisitions in the latter part of 2008. These declines in First Quarter 2009 were partially offset by an $18,000 reduction in commission expense related to the lower commission rates on the decreasingaccrual of contractual receivables established from certain domestic credit business. Additionally, Six Months 2007 included $6,900 of income from our completed clients commission reconciliation project. Total commission expenses also reflect reduced commission payments related to certain extended service contract clients who have not previously met minimum performance thresholds specifiedrecorded in their contracts, as well as an $18,000 receivable established at March 31, 2008 to reflect payments due from those clients. General expenses increased $29,289, due to additional costs associated with growth of the domestic service contract business as well as continued investment in international expansion.First Quarter 2008.
Assurant Specialty Property
Overview
The tables below present information regarding our Assurant Specialty Property’s segment results of operations:
| For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||
| 2008 | 2007 | 2008 | 2007 | |||||||||
| (in thousands) | ||||||||||||
Revenues: | ||||||||||||
Net earned premiums and other considerations | $ | 533,914 | $ | 393,614 | $ | 1,015,341 | $ | 760,655 | ||||
Net investment income | 31,997 | 23,667 | 61,372 | 45,536 | ||||||||
Fees and other income | 11,996 | 12,654 | 25,589 | 25,250 | ||||||||
Total revenues | 577,907 | 429,935 | 1,102,302 | 831,441 | ||||||||
Benefits, losses and expenses: | ||||||||||||
Policyholder benefits | 171,793 | 130,866 | 316,606 | 247,653 | ||||||||
Selling, underwriting and general expenses (5)(6) | 206,339 | 159,292 | 395,181 | 330,091 | ||||||||
Total benefits, losses and expenses | 378,132 | 290,158 | 711,787 | 577,744 | ||||||||
Segment income before provision for income taxes | 199,775 | 139,777 | 390,515 | 253,697 | ||||||||
Provision for income taxes | 68,733 | 49,570 | 134,729 | 89,056 | ||||||||
Segment net income | $ | 131,042 | $ | 90,207 | $ | 255,786 | $ | 164,641 | ||||
Net earned premiums and other considerations by major product groupings: | ||||||||||||
Homeowners (Creditor Placed and Voluntary) | $ | 391,153 | $ | 276,663 | $ | 733,488 | $ | 527,552 | ||||
Manufactured Housing (Creditor Placed and Voluntary) | 56,483 | 50,452 | 113,545 | 101,122 | ||||||||
Other (1) | 86,278 | 66,499 | 168,308 | 131,981 | ||||||||
Total | $ | 533,914 | $ | 393,614 | $ | 1,015,341 | $ | 760,655 | ||||
Gross written premiums for selected product groupings: | ||||||||||||||||||||||||
Homeowners (Creditor Placed and Voluntary) | $ | 529,444 | $ | 380,099 | $ | 948,945 | $ | 699,152 | ||||||||||||||||
Manufactured Housing (Creditor Placed and Voluntary) | 79,451 | 77,042 | 149,582 | 144,827 | ||||||||||||||||||||
| For the Three Months Ended March 31, | ||||||||||||||||||||||||
| 2009 | 2008 | |||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||
Net earned premiums and other considerations | $ | 493,790 | $ | 481,427 | ||||||||||||||||||||
Net investment income | 29,436 | 29,375 | ||||||||||||||||||||||
Fees and other income | 13,324 | 13,593 | ||||||||||||||||||||||
Total revenues | 536,550 | 524,395 | ||||||||||||||||||||||
Benefits, losses and expenses: | ||||||||||||||||||||||||
Policyholder benefits | 167,800 | 144,813 | ||||||||||||||||||||||
Selling, underwriting and general expenses | 209,917 | 188,842 | ||||||||||||||||||||||
Total benefits, losses and expenses | 377,717 | 333,655 | ||||||||||||||||||||||
Segment income before provision for income taxes | 158,833 | 190,740 | ||||||||||||||||||||||
Provision for income taxes | 54,165 | 65,996 | ||||||||||||||||||||||
Segment net income | $ | 104,668 | $ | 124,744 | ||||||||||||||||||||
Net earned premiums and other considerations by major product groupings: | ||||||||||||||||||||||||
Homeowners (creditor placed and voluntary) | $ | 348,447 | $ | 342,335 | ||||||||||||||||||||
Manufactured housing (creditor placed and voluntary) | 55,876 | 57,061 | ||||||||||||||||||||||
Other (1) | 89,467 | 82,031 | ||||||||||||||||||||||
Total | $ | 493,790 | $ | 481,427 | ||||||||||||||||||||
Gross earned premiums by major product groupings: | ||||||||||||||||||||||||
Homeowners (creditor placed and voluntary) | $ | 437,391 | $ | 402,062 | ||||||||||||||||||||
Manufactured housing (creditor placed and voluntary) | 77,484 | 80,850 | ||||||||||||||||||||||
Other | 151,429 | 140,793 | ||||||||||||||||||||||
Total | $ | 666,304 | $ | 623,705 | ||||||||||||||||||||
Gross written premiums by major product groupings: | ||||||||||||||||||||||||
Homeowners (creditor placed and voluntary) | $ | 412,706 | $ | 419,501 | ||||||||||||||||||||
Manufactured housing (creditor placed and voluntary) | 69,852 | 70,131 | ||||||||||||||||||||||
Other (1) | 169,849 | 150,435 | 295,165 | 262,757 | 131,701 | 125,316 | ||||||||||||||||||
Total | $ | 778,744 | $ | 607,576 | $ | 1,393,692 | $ | 1,106,736 | $ | 614,259 | $ | 614,948 | ||||||||||||
Ratios: | ||||||||||||||||||||||||
Loss ratio (2) | 32.2 | % | 33.2 | % | 31.2 | % | 32.6 | % | 34.0 | % | 30.1 | % | ||||||||||||
Expense ratio (3) | 37.8 | % | 39.2 | % | 38.0 | % | 42.0 | % | 41.4 | % | 38.1 | % | ||||||||||||
Combined ratio (4) | 69.3 | % | 71.4 | % | 68.4 | % | 73.5 | % | 74.5 | % | 67.4 | % | ||||||||||||
| (1) | This primarily includes flood, |
| (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. |
For The Three Months Ended June 30, 2008March 31, 2009 Compared to The Three Months Ended June 30, 2007.March 31, 2008.
Net Income
Segment net income increased $40,835decreased $20,076, or 45%16%, to $131,042$104,668 for SecondFirst Quarter 20082009 from $90,207$124,744 for SecondFirst Quarter 2007. This increase2008. The decrease in net income is primarily due to higher net earned premiums from our creditor placed homeowners insuranceincreased catastrophe reinsurance costs of $8,427, after-tax, and continued favorable combined ratios due to a lower loss ratio despite a higher level of weather relatedincreased benefits, losses and our ability to leverage the benefitsexpenses. In addition, First Quarter 2008 included $4,618, after-tax, of scale. Net income also improved due tofrom a $5,414 (after-tax) increase in net investment income as a result of higher average invested assets resulting from the continued growth of the business.client-related settlement.
Total Revenues
Total revenues increased $147,972,$12,155 or 35%2%, to $577,907$536,550 for SecondFirst Quarter 20082009 from $429,935$524,395 for SecondFirst Quarter 2007.2008. The increase in revenues is primarily due to increased net earned premiums of $140,300, or 36%.$12,363. The increase is attributable to the growth of creditor placed homeowners insurance, which was primarily driven by thean increase in average insured valuesvalue of properties and an increased percentage of policies placed per loans tracked. Also, net investment income increased $8,330 or 35%Partially offsetting these increases is a $12,965 increase in Secondcatastrophe reinsurance costs and a 1,100 decrease in loans tracked compared with First Quarter 2008, compared with Second Quarter 2007,primarily in sub-prime mortgages, due to higher average invested assets.market consolidation.
Total Benefits, Losses and Expenses
Total benefits, losses and expenses increased $87,974$44,062 or 30%13%, to $378,132$377,717 for SecondFirst Quarter 20082009 from $290,158$333,655 for SecondFirst Quarter 2007.2008. This increase was due to an increase in policyholder benefits of $40,927$22,987 and higher selling, underwriting, and general expenses of $47,047.$21,075. The increase in policyholder benefits is primarily attributable to increased non-catastrophe losses associated with a normal winter weather compared to the corresponding growth in creditor placed homeowners insurance and increased weather related losses. We have historically reported Insurance Services Office (“ISO”)mild winter of 2008. There were no reportable catastrophe related losses in excess of $5,000 per event. No single event reached that threshold during Secondfor First Quarter 20082009 or 2007. However, there was an unusually high frequency of ISO events in SecondFirst Quarter 2008 which resulted in $11,500 (after-tax) of catastrophe related losses compared with $3,400 (after-tax) in Second Quarter 2007. The combined ratio improved to 69.3% from 71.4%, due to a lower loss ratio despite a higher level of weather related losses, and the benefits of scale.2008. Commissions, taxes, licenses and fees increased $35,381,$6,833, primarily due to the associated increasea $7,104 release of an expense reimbursement accrual in net earned premiums and a $8,400 benefit in Second Quarter 2007 from our completed clients commission reconciliation project. General expenses increased $11,665 primarily due to increases in employment related expenses consistent with business growth.
For The Six Months Ended June 30, 2008 Compared to The Six Months Ended June 30, 2007.
Net Income
Segment net income increased $91,145, or 55%, to $255,786 for Six Months 2008 from $164,641 for Six Months 2007. This increase in net income is primarily due to higher net earned premium growth resulting from creditor placed homeowners insurance and continued favorable combined ratios due to a lower loss ratio despite a higher level of weather related losses and our ability to leverage the benefits of scale. Net income also improved due to an increase in net investment income of $10,293 (after-tax)no longer required as a result of higher average invested assets resulting from the continued growth of the business.
Total Revenues
Total revenuesa new contract. General expenses increased $270,861, or 33%, to $1,102,302 for Six Months 2008 from $831,441 for Six Months 2007. The increase in revenues is$14,242 primarily due to increased net earned premiums of $254,686, or 33%. The increase is attributableadditional services provided to the growth of creditor placed homeowners insurance which was primarily driven by an increaseour clients, such as loss drafts, along with investment in average insured values of propertiestechnology and an increased percentage of policies placed per loans tracked. Also, net investment income increased $15,836 or 35%, due to higher average invested assets.
Total Benefits, Losses and Expenses
Total benefits, losses and expenses increased $134,043, or 23%, to $711,787 for Six Months 2008 from $577,744 for Six Months 2007. This increase was due to an increase in policyholder benefits of $68,953 and higher selling, underwriting, and general expenses of $65,090. The increase in policyholder benefits is primarily attributable to the corresponding growth in creditor placed homeowners insurance and increased weather related losses. Theinfrastructure initiatives. First Quarter 2009 combined ratio improved to 68.4% from 73.5%, due to a lower losswas 74.5% compared with 67.4% for First Quarter 2008. Excluding the additional catastrophe reinsurance costs, First Quarter 2009 combined ratio despite a higher level of weather related losses, and the benefits of scale. Commissions, taxes, licenses and fees increased $45,269, primarily due to the associated increase in net earned premiums. General expenses increased $19,820 primarily due to increases in employment related expenses consistent with business growth.would have been 72.6%.
Assurant Health
Overview
The tables below present information regarding Assurant Health’s segment results of operations:
| For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||||||||||
| 2008 | 2007 | 2008 | 2007 | For the Three Months Ended March 31, | ||||||||||||||||||||
| (in thousands) | 2009 | 2008 | ||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||
Net earned premiums and other considerations | $ | 487,725 | $ | 513,936 | $ | 983,785 | $ | 1,026,720 | $ | 472,346 | $ | 496,060 | ||||||||||||
Net investment income | 15,302 | 16,290 | 30,950 | 35,560 | 12,477 | 15,648 | ||||||||||||||||||
Fees and other income | 9,637 | 10,445 | 19,043 | 20,133 | 9,914 | 9,406 | ||||||||||||||||||
Total revenues | 512,664 | 540,671 | 1,033,778 | 1,082,413 | 494,737 | 521,114 | ||||||||||||||||||
Benefits, losses and expenses: | ||||||||||||||||||||||||
Policyholder benefits | 325,504 | 329,327 | 632,069 | 647,111 | 321,960 | 306,565 | ||||||||||||||||||
Selling, underwriting and general expenses (4)(5) | 143,804 | 159,088 | 300,985 | 320,498 | ||||||||||||||||||||
Selling, underwriting and general expenses | 150,240 | 157,181 | ||||||||||||||||||||||
Total benefits, losses and expenses | 469,308 | 488,415 | 933,054 | 967,609 | 472,200 | 463,746 | ||||||||||||||||||
Segment income before provision for income taxes | 43,356 | 52,256 | 100,724 | 114,804 | 22,537 | 57,368 | ||||||||||||||||||
Provision for income taxes | 15,635 | 18,418 | 35,740 | 40,442 | 7,865 | 20,105 | ||||||||||||||||||
Segment net income | $ | 27,721 | $ | 33,838 | $ | 64,984 | $ | 74,362 | $ | 14,672 | $ | 37,263 | ||||||||||||
Net earned premiums and other considerations: | ||||||||||||||||||||||||
Individual markets: | ||||||||||||||||||||||||
Individual medical | $ | 318,095 | $ | 320,442 | $ | 637,851 | $ | 635,104 | $ | 317,070 | $ | 319,756 | ||||||||||||
Short term medical | 24,583 | 23,499 | 48,122 | 46,060 | ||||||||||||||||||||
Short-term medical | 26,048 | 23,539 | ||||||||||||||||||||||
Subtotal | 342,678 | 343,941 | 685,973 | 681,164 | 343,118 | 343,295 | ||||||||||||||||||
Small employer group: | 145,047 | 169,995 | 297,812 | 345,556 | ||||||||||||||||||||
Small employer group | 129,228 | 152,765 | ||||||||||||||||||||||
Total | $ | 487,725 | $ | 513,936 | $ | 983,785 | $ | 1,026,720 | $ | 472,346 | $ | 496,060 | ||||||||||||
Membership by product line: | ||||||||||||||||||||||||
Individual markets: | ||||||||||||||||||||||||
Individual medical | 587 | 650 | 572 | 599 | ||||||||||||||||||||
Short term medical | 101 | 99 | ||||||||||||||||||||||
Short-term medical | 94 | 87 | ||||||||||||||||||||||
Subtotal | 688 | 749 | 666 | 686 | ||||||||||||||||||||
Small employer group: | 142 | 181 | 123 | 152 | ||||||||||||||||||||
Total | 830 | 930 | 789 | 838 | ||||||||||||||||||||
Ratios: | ||||||||||||||||||||||||
Loss ratio (1) | 66.7 | % | 64.1 | % | 64.2 | % | 63.0 | % | 68.2 | % | 61.8 | % | ||||||||||||
Expense ratio (2) | 28.9 | % | 30.3 | % | 30.0 | % | 30.6 | % | 31.2 | % | 31.1 | % | ||||||||||||
Combined ratio (3) | 94.4 | % | 93.1 | % | 93.0 | % | 92.4 | % | 97.9 | % | 91.7 | % | ||||||||||||
| (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. |
For the Three Months Ended June 30, 2008March 31, 2009 Compared to the Three Months Ended June 30, 2007.March 31, 2008.
Net Income
Segment net income decreased $6,117,$22,591, or 18%61%, to $27,721$14,672 for SecondFirst Quarter 20082009 from $33,838$37,263 for SecondFirst Quarter 2007.2008. The decrease is primarily attributable to an increaseunfavorable claim reserve development in both the individual medical benefit loss ratioand small employer group businesses, and the continuing decline in small employer group net earned premiums, partially offsetpremiums. The unfavorable claim reserve development is primarily due to claims paid in First Quarter 2009 that related to services rendered in Fourth Quarter 2008 being higher than expected as a result of changing consumer and provider behavior caused by improved claim experience on small employer group business.the deteriorating economic conditions.
Total Revenues
Total revenues decreased $28,007,$26,377, or 5%, to $512,664$494,737 for SecondFirst Quarter 20082009 from $540,671$521,114 for SecondFirst Quarter 2007.2008. Net earned premiums and other considerations from our individual medical business decreased $2,347,$2,686, or 1%, primarily due to reduced membership, partially offset by premium rate increases. This market has become increasingly competitive as established players and new regional entrants are more aggressively targeting this growing segment of the health insurance market. Net earned premiums and other considerations from our small employer group business decreased $24,948,$23,537, or 15%, due to a decline in members, partially offset by premium rate increases. The decline in the small employer group members is due to increased competition and our adherence to strict underwriting guidelines. Also,In addition, net investment income decreased $988$3,171 due to lower average invested assets.
Total Benefits, Losses and Expenses
Total benefits, losses and expenses decreased $19,107,increased $8,454, or 4%2%, to $469,308$472,200 for SecondFirst Quarter 20082009 from $488,415$463,746 for SecondFirst Quarter 2007.2008. Policyholder benefits decreased $3,823,increased $15,395, or 1%5%, althoughand the benefit loss ratio increased to 66.7%68.2% from 64.1%61.8%. TheAs referred to above, the increase in the benefit loss ratio was primarily attributable to higher claims experience on both individual medical business coupled with a non-proportionate decline in net earned premiums. Our small employer group business had more favorable loss experience in Second Quarter 2008 compared with Second Quarter 2007. Selling, underwriting and general expenses decreased $15,284, or 10%, primarily due to lower commission expenses for both individual medical and small employer group business as well as a continued focus on expense management.
For the Six Months Ended June 30, 2008 Compared to the Six Months Ended June 30, 2007.
Net Income
Segment net income decreased $9,378, or 13%, to $64,984 for Six Months 2008 from $74,362 for Six Months 2007. The decrease is primarily attributable to an increaseservices provided in the individual medical benefit loss ratio and the continuingFourth Quarter 2008 coupled with a non-proportionate decline in small employer group net earned premiums, partially offset by improved claim experience on small employer group business.
Total Revenues
Total revenues decreased $48,635, or 4%, to $1,033,778 for Six Months 2008 from $1,082,413 for Six Months 2007. Net earned premiums and other considerations from our individual medical business increased $2,747, or less than 1%, due to premium rate increases. Net earned premiums and other considerations from our small employer group business decreased $47,744, or 14%, due to a decline in members, partially offset by premium rate increases. The decline in small employer group business is due to increased competition and our adherence to strict underwriting guidelines. Also, net investment income decreased $4,610 due to lower investment income from real estate joint venture partnerships and lower average invested assets.
Total Benefits, Losses and Expenses
Total benefits, losses and expenses decreased $34,555, or 4%, to $933,054 for Six Months 2008 from $967,609 for Six Months 2007. Policyholder benefits decreased $15,042, or 2%, although the benefit loss ratio increased to 64.2% from 63.0%. The increase in the benefit loss ratio was due primarily to higher claims experience on individual medical business coupled with a non-proportionate decline in net earned premiums. Our small employer group business had more favorable loss experience in Six Months 2008 compared to Six Months 2007. Selling, underwriting and general expenses decreased $19,513,$6,941, or 6%4%, primarily due to lower commission expenses for both individual medicaltechnology costs and small employer group business as well as a continued focus on expense management.general expenses.
Assurant Employee Benefits
Overview
The tables below present information regarding the Assurant Employee Benefits’Benefits segment results of operations:
| For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||||||||||
| 2008 | 2007 | 2008 | 2007 | For the Three Months Ended March 31, | ||||||||||||||||||||
| (in thousands) | 2009 | 2008 | ||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||
Net earned premiums and other considerations | $ | 273,248 | $ | 272,462 | $ | 553,685 | $ | 569,135 | $ | 263,831 | $ | 280,437 | ||||||||||||
Net investment income | 38,919 | 39,408 | 77,288 | 91,295 | 34,157 | 38,369 | ||||||||||||||||||
Fees and other income | 7,208 | 6,379 | 13,763 | 12,656 | 6,758 | 6,555 | ||||||||||||||||||
Total revenues | 319,375 | 318,249 | 644,736 | 673,086 | 304,746 | 325,361 | ||||||||||||||||||
Benefits, losses and expenses: | ||||||||||||||||||||||||
Policyholder benefits | 193,642 | 183,333 | 393,043 | 394,940 | 198,728 | 199,401 | ||||||||||||||||||
Selling, underwriting and general expenses (4)(5) | 97,354 | 102,090 | 198,255 | 201,043 | ||||||||||||||||||||
Selling, underwriting and general expenses | 95,287 | 100,901 | ||||||||||||||||||||||
Total benefits, losses and expenses | 290,996 | 285,423 | 591,298 | 595,983 | 294,015 | 300,302 | ||||||||||||||||||
Segment income before provision for income taxes | 28,379 | 32,826 | 53,438 | 77,103 | 10,731 | 25,059 | ||||||||||||||||||
Provision for income taxes | 9,749 | 11,351 | 18,476 | 26,671 | 3,709 | 8,727 | ||||||||||||||||||
Segment net income | $ | 18,630 | $ | 21,475 | $ | 34,962 | $ | 50,432 | $ | 7,022 | $ | 16,332 | ||||||||||||
Ratios: | ||||||||||||||||||||||||
Loss ratio (1) | 70.9 | % | 67.3 | % | 71.0 | % | 69.4 | % | 75.3 | % | 71.1 | % | ||||||||||||
Expense ratio (2) | 34.7 | % | 36.6 | % | 34.9 | % | 34.6 | % | 35.2 | % | 35.2 | % | ||||||||||||
Net earned premiums and other considerations | ||||||||||||||||||||||||
By major product grouping: | ||||||||||||||||||||||||
Group dental | $ | 108,976 | $ | 102,567 | $ | 215,049 | $ | 204,102 | $ | 105,565 | $ | 106,073 | ||||||||||||
Group disability single premiums for closed blocks (3) | — | — | 5,500 | 22,847 | — | 5,500 | ||||||||||||||||||
All Other group disability | 113,327 | 115,539 | 229,627 | 233,728 | ||||||||||||||||||||
All other group disability | 109,704 | 116,300 | ||||||||||||||||||||||
Group life | 50,945 | 54,356 | 103,509 | 108,458 | 48,562 | 52,564 | ||||||||||||||||||
Total | $ | 273,248 | $ | 272,462 | $ | 553,685 | $ | 569,135 | $ | 263,831 | $ | 280,437 | ||||||||||||
| (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. |
For The Three Months Ended June 30, 2008March 31, 2009 Compared to The Three Months Ended June 30, 2007.March 31, 2008.
Net Income
Segment net income decreased $2,845$9,310, or 13%57%, to $18,630$7,022 for SecondFirst Quarter 20082009 from $21,475$16,332 for SecondFirst Quarter 2007.2008. The decrease in net income was primarily driven by less favorable dentalloss experience and disability experience,lower net investment income, partially offset by a decrease in selling, underwriting and general expenses.
Total Revenues
Total revenues increased $1,126decreased $20,615, or 6%, to $319,375$304,746 for SecondFirst Quarter 20082009 from $318,249$325,361 for SecondFirst Quarter 2007. The increase in revenue is primarily driven by an increase of $786 in2008. First Quarter 2008 net earned premiums and an increaseinclude $5,500 of $829 in fees and other income, partially offset by decreased net investment incomesingle premiums on closed blocks of $489. We continue to see overall growth in net earned premium, specifically in our small case business.
Total Benefits, Losses and Expenses
Total benefits, losses and expenses increased $5,573 or 2% to $290,996 for Second Quarter 2008 from $285,423 for Second Quarter 2007. The loss ratio increased to 70.9% from 67.3%, as our dental and disability loss experience was less favorable. Our current year disability loss experience is favorable compared with our historical loss experience, due to continued good incidence, and favorable disability recovery rates, which includes claimants who return to work. Group dental loss experience was unfavorable compared to the prior year. Group life loss experience, while less favorable compared to the prior year, is favorable from a historical standpoint. The expense ratio decreased, to 34.7% from 36.6%, driven by a decrease in credited interest rates paid on deposit funds and a focus on expense management.
For The Six Months Ended June 30, 2008 Compared to The Six Months Ended June 30, 2007.
Net Income
Segment net income decreased $15,470 or 31% to $34,962 for Six Months 2008 from $50,432 for Six Months 2007. The decrease in net income was primarily driven by a decrease in net investment income from real estate joint venture partnerships of approximately $9,096 (after-tax) and less favorable dental experience.
Total Revenues
Total revenues decreased $28,350 or 4% to $644,736 for Six Months 2008 from $673,086 for Six Months 2007. Excluding single premiumpremiums on closed blocks of business, net earned premiums decreased $11,106 or 4% primarily driven by a decrease in assumed premium through our Disability RMS distribution channel as three clients made strategic decisions to discontinue their reinsurance relationship with Disability RMS during 2007 and other considerations increased $1,897, as2008 and have been recapturing business since terminating the relationship. In addition, we have begunseen an increase in
lapses of larger employer cases and the increased unemployment environment will present a challenge to see overall growth in net earned premiums, specifically in our small case business.revenue growth. Net investment income decreased $14,007, primarily because Six Months 2007 included $15,204 in real estate joint venture partnerships$4,212 or 11% driven by lower invested assets and lower investment income, while Six Months 2008 included $1,210.yields.
Total Benefits, Losses and Expenses
Total benefits, losses and expenses decreased $4,685$6,287 or 1%2% to $591,298$294,015 for Six Months 2008First Quarter 2009 from $595,983$300,302 for Six Months 2007. DisabilityFirst Quarter 2008. The loss experience was consistent with 2007 results. We continue to see favorable disability experience in the current year, driven by continued good incidence, and favorable disability recovery rates, which includes claimants who return to work. Group dental and group life experience was unfavorable when compared with the same period in prior year. Group life experience still remains favorable from a historical standpoint. The expense ratio increased to 34.9%75.3% from 34.6%.71.1%, primarily driven by less favorable group disability experience. Disability recovery rates, including claimants who returned to work, were unfavorable in First Quarter 2009 compared to the prior year period mainly due to the ailing economy, which led to a reduction in the number of claimants recovering from disabilities. In addition, we experienced an increase in high dollar disability claims in First Quarter 2009 compared with First Quarter 2008. Group life and dental experience were also less favorable when compared to the prior year period. Excluding the single premiums on closed blocks of business in the prior year period, the expense ratio decreased to 35.3%35.2% from 36.0%,35.8% driven by lower sales related costs and a decrease in interest rates paid on deposit funds and continued focus on expense management.
Assurant Corporate & Other
Overview
The Corporate and& Other segment includes activities of the holding company, financing expenses, net realized (losses) gainslosses on investments, interest income earned from short-term investments held and additional costs associated with excess of loss reinsurance programs reinsured and ceded to certain subsidiaries in the London market between 1995 and 1997. The Corporate and& Other segment also includes the amortization of deferred gains associated with the sales of Fortis Financial Group (“FFG”) (a business we sold via reinsurance in April 2001) and Long Term Care (“LTC”) (a business we sold via reinsurance in March 2000).
The table below presents information regarding the Corporate & Other segment’s results of operations:
| For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||||||||||
| 2008 | 2007 | 2008 | 2007 | For the Three Months Ended March 31, | ||||||||||||||||||||
| (in thousands) | 2009 | 2008 | ||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||
Net investment income | $ | 6,568 | $ | 10,153 | $ | 14,220 | $ | 22,006 | $ | 4,414 | $ | 7,652 | ||||||||||||
Net realized (losses) gains on investments | (34,574 | ) | (3,086 | ) | (77,717 | ) | 2,484 | |||||||||||||||||
Net realized losses on investments | (55,689 | ) | (43,143 | ) | ||||||||||||||||||||
Amortization of deferred gain on disposal of businesses | 7,327 | 8,246 | 14,706 | 16,595 | 6,802 | 7,379 | ||||||||||||||||||
Fees and other income | 2,771 | 143 | 2,834 | 470 | 1,679 | 63 | ||||||||||||||||||
Total (losses) revenues | (17,908 | ) | 15,456 | (45,957 | ) | 41,555 | ||||||||||||||||||
Total losses | (42,794 | ) | (28,049 | ) | ||||||||||||||||||||
Benefits, losses and expenses: | ||||||||||||||||||||||||
Policy-holder benefits | 1,096 | — | 1,096 | — | ||||||||||||||||||||
Policyholder benefits | (168 | ) | — | |||||||||||||||||||||
Selling, underwriting and general expenses | 35,281 | 19,294 | 51,474 | 35,413 | 23,431 | 16,193 | ||||||||||||||||||
Interest expense | 15,287 | 15,296 | 30,575 | 30,593 | 15,189 | 15,288 | ||||||||||||||||||
Total benefits, losses and expenses | 51,664 | 34,590 | 83,145 | 66,006 | 38,452 | 31,481 | ||||||||||||||||||
Segment loss before benefit for income taxes | (69,572 | ) | (19,134 | ) | (129,102 | ) | (24,451 | ) | (81,246 | ) | (59,530 | ) | ||||||||||||
Benefit for income taxes | (49,778 | ) | (9,684 | ) | (70,242 | ) | (6,474 | ) | (5,154 | ) | (20,464 | ) | ||||||||||||
Segment net loss | $ | (19,794 | ) | $ | (9,450 | ) | $ | (58,860 | ) | $ | (17,977 | ) | $ | (76,092 | ) | $ | (39,066 | ) | ||||||
For The Three Months Ended June 30, 2008March 31, 2009 Compared to The Three Months Ended June 30, 2007.March 31, 2008.
Net IncomeLoss
Segment net loss increased $10,344,$37,026, or 109%95%, to $(19,794)$(76,092) for SecondFirst Quarter 2008 from $(9,450) for Second Quarter 2007. This increase in2009 compared with a net loss is mainly due to additional after-taxof $(39,066) for First Quarter 2008. The increased net loss was a result of an $8,155, after tax, increase in net realized losses on investments due primarily to realized losses on sales of $20,467, increasesinvestments, a decline in costsnet investment income and an increase in expenses primarily due to compensation related costs. Additionally, the benefit for income taxes declined $15,310 primarily related to a $21,000 increase to the tax valuation allowance related to deferred tax assets driven by additional realized capital losses and other-than-temporary impairments during First Quarter 2009. Partially offsetting these amounts was a $1,882, after-tax, expense reduction relating to the ongoing SEC investigation regarding certain loss mitigation products an increase in external professional fees, a decrease in net investment incomedue to reduced expenses and $2,900the reimbursement of income included in Second Quarter 2007, from the change in certain tax liabilities. These increases to net loss were partially offset by a $2,064 gain (after-tax) from the sale of UFLICSEC investigation related expenses through our director and an additional associated tax benefit of $24,566.officer insurance coverage.
Total Revenues
Total revenues decreased $33,364$14,745, or 216%53%, to $(17,908)$(42,794) for SecondFirst Quarter 2008 from $15,4562009 compared with $(28,049) for SecondFirst Quarter 2007. Revenues declined2008. The decline in revenues was mainly due to additionalan increase in net realized losses on investments of $31,488$12,546 compared to the prior year period and a decline in net investment income of $3,585. The increase to$3,238 resulting from lower short-term and overnight interest rates in First Quarter 2009. First Quarter 2009 and First Quarter 2008 net realized losses on investments was primarily driven byinclude $25,439 and $43,409, respectively, from the write-down of other-than-temporary declines in our investment portfolio of $27,573. The decrease in net investment income was driven by a significant decrease in overnight interest rates coupled with lower average invested assets. Partially offsetting these decreases was an increase in fees and other income of $2,628 driven by the gain of $3,175 from the sale of UFLIC.portfolio.
Total Benefits, Losses and Expenses
Total benefits, losses and expenses increased $17,074, or 49%, to $51,664 for Second Quarter 2008 from $34,590 for Second Quarter 2007. This increase is primarily due to $4,600 of costs related to the ongoing SEC investigation regarding certain loss mitigation products, $6,700 of increased compensation expense relating to severance and retirement benefits and $2,300 of increased externally contracted services for various ongoing projects.
For The Six Months Ended June 30, 2008 Compared to The Six Months Ended June 30, 2007.
Net Income
Segment net loss increased $40,883, or 227%, to $(58,860) for Six Months 2008 from $(17,977) for Six Months 2007. This increase is mainly due to additional net realized losses on investments of $52,131 (after-tax), increases in costs related to the ongoing SEC investigation regarding certain loss mitigation products, increases in both external professional fees and compensation expense, and a decrease in net investment income. These increases to net loss were partially offset by the gain on the sale of UFLIC and the associated tax benefit of $24,566 and $2,866 of expense included in Six Months 2007, from the change in certain tax liabilities.
Total Revenues
Total revenues decreased $87,512, or 211%, to $(45,957) for Six Months 2008 from $41,555 for Six Months 2007. Revenues declined mainly due to additional net realized losses of $80,201 and a decrease in net investment income of $7,786. The increase in net realized losses on investments was primarily driven by the write-down of other-than-temporary declines in our investment portfolio of $70,982. The decrease in net investment income was driven by a significant decrease in overnight interest rates coupled with lower average invested assets. Partially offsetting these decreases was an increase in fees and other income of $2,364 due to the gain of $3,175 on the sale of UFLIC.
Total Benefits, Losses and Expenses
Total expenses increased $17,139,$6,971, or 26%22%, to $83,145$38,452 for Six Months 2008 from $66,006First Quarter 2009 compared with $31,481 for Six Months 2007.First Quarter 2008. The increase isin expenses was primarily due to additional costs of $7,100$7,000 in compensation related to the ongoing SEC investigation regarding certain loss mitigation products, $6,700 of increased compensation expense relating to severance and retirement benefits and $3,200 of increased external professional fees for various ongoing projects.accruals.
Investments
The following table showstables show the carryingcost or amortized cost, gross unrealized gains and losses and fair value of our investments by type of security as of the dates indicated:
| As of June 30, 2008 | As of December 31, 2007 | |||||||||||
Fixed maturity securities | $ | 9,689,741 | 72 | % | $ | 10,126,415 | 73 | % | ||||
Equity securities | 717,549 | 5 | % | 636,001 | 5 | % | ||||||
Commercial mortgage loans on real estate | 1,486,138 | 11 | % | 1,433,626 | 10 | % | ||||||
Policy loans | 56,220 | 1 | % | 57,107 | 1 | % | ||||||
Short-term investments | 472,215 | 3 | % | 410,878 | 3 | % | ||||||
Collateral held under securities lending | 510,903 | 4 | % | 541,650 | 4 | % | ||||||
Other investments | 594,571 | 4 | % | 541,474 | 4 | % | ||||||
Total investments | $ | 13,527,337 | 100 | % | $ | 13,747,151 | 100 | % | ||||
Of our fixed maturity securities shown above, 67% and 69% (based on total fair value) were invested in securities rated “A” or better as of June 30, 2008 and December 31, 2007, respectively.
The following table provides the cumulative net unrealized gains (losses), pre-tax, on fixed maturity securities and equity securities as of the dates indicated:
| As of June 30, 2008 | As of December 31, 2007 | |||||||
Fixed maturity securities: | ||||||||
Amortized cost | $ | 9,870,433 | $ | 10,026,355 | ||||
Net unrealized (losses) gains | (180,692 | ) | 100,060 | |||||
Fair value | $ | 9,689,741 | $ | 10,126,415 | ||||
Equity securities: | ||||||||
Cost | $ | 800,984 | $ | 702,698 | ||||
Net unrealized (losses) | (83,435 | ) | (66,697 | ) | ||||
Fair value | $ | 717,549 | $ | 636,001 | ||||
| March 31, 2009 | |||||||||||||
| Cost or Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||
Fixed maturity securities: | |||||||||||||
United States Government and government agencies and authorities | $ | 120,273 | $ | 8,822 | $ | (23 | ) | $ | 129,072 | ||||
States, municipalities and political subdivisions | 871,498 | 28,901 | (8,594 | ) | 891,805 | ||||||||
Foreign governments | 528,041 | 17,412 | (12,043 | ) | 533,410 | ||||||||
Public utilities | 1,198,744 | 17,693 | (61,112 | ) | 1,155,325 | ||||||||
Mortgage-backed | 989,841 | 39,616 | (45,918 | ) | 983,539 | ||||||||
All other corporate | 5,611,641 | 55,731 | (743,925 | ) | 4,923,447 | ||||||||
Total fixed maturity securities | $ | 9,320,038 | $ | 168,175 | $ | (871,615 | ) | $ | 8,616,598 | ||||
Equity securities: | |||||||||||||
Industrial, miscellaneous and all other | $ | 5,384 | $ | 283 | $ | (2,008 | ) | $ | 3,659 | ||||
Non-sinking fund preferred stocks | 535,519 | 3,244 | (168,046 | ) | 370,717 | ||||||||
Total equity securities | $ | 540,903 | $ | 3,527 | $ | (170,054 | ) | $ | 374,376 | ||||
December 31, 2008 | |||||||||||||
| Cost or Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||
Fixed maturity securities: | |||||||||||||
United States Government and government agencies and authorities | $ | 136,725 | $ | 13,784 | $ | (22 | ) | $ | 150,487 | ||||
States, municipalities and political subdivisions | 874,134 | 14,122 | (14,676 | ) | 873,580 | ||||||||
Foreign governments | 503,620 | 19,391 | (9,693 | ) | 513,318 | ||||||||
Public utilities | 1,162,447 | 23,868 | (59,604 | ) | 1,126,711 | ||||||||
Mortgage-backed | 981,275 | 29,887 | (46,877 | ) | 964,285 | ||||||||
All other corporate | 5,546,027 | 79,407 | (662,549 | ) | 4,962,885 | ||||||||
Total fixed maturity securities | $ | 9,204,228 | $ | 180,459 | $ | (793,421 | ) | $ | 8,591,266 | ||||
Equity securities: | |||||||||||||
Industrial, miscellaneous and all other | $ | 5,384 | $ | 283 | $ | (1,618 | ) | $ | 4,049 | ||||
Non-sinking fund preferred stocks | 571,972 | 11,114 | (112,262 | ) | 470,824 | ||||||||
Total equity securities | $ | 577,356 | $ | 11,397 | $ | (113,880 | ) | $ | 474,873 | ||||
Net unrealized gains on
The industry categories that comprise our “All other corporate” and “Public utilities” fixed maturity securities decreased $280,752 to a net unrealized loss of $(180,692)captions above as of June 30, 2008the dates indicated are:
| March 31, 2009 | December 31, 2008 | |||||||||||||
| Fair Value | Net Unrealized (Loss) Gain | Fair Value | Net Unrealized (Loss) Gain | |||||||||||
Industry Category: | ||||||||||||||
Consumer cyclical | $ | 863,019 | $ | (107,105 | ) | $ | 891,923 | $ | (112,339 | ) | ||||
Consumer non-cyclical | 300,920 | (8,058 | ) | 302,847 | (12,697 | ) | ||||||||
Energy | 588,340 | (61,717 | ) | 604,332 | (65,668 | ) | ||||||||
Financials | 1,591,825 | (362,312 | ) | 1,671,617 | (228,940 | ) | ||||||||
Health care | 363,758 | (20,107 | ) | 290,201 | (15,594 | ) | ||||||||
Industrials | 859,480 | (88,748 | ) | 859,641 | (100,011 | ) | ||||||||
Materials | 221,392 | (30,988 | ) | 220,934 | (41,477 | ) | ||||||||
Technology | 129,219 | (9,075 | ) | 124,490 | (6,579 | ) | ||||||||
Telecommunications | 373,861 | (14,444 | ) | 367,051 | (11,610 | ) | ||||||||
Utilities | 781,464 | (28,974 | ) | 750,551 | (23,792 | ) | ||||||||
Other corporate | 371 | 10 | 374 | 11 | ||||||||||
Collaterized debt obligations | 5,123 | (95 | ) | 5,635 | (182 | ) | ||||||||
Total all other corporate and public utilities | $ | 6,078,772 | $ | (731,613 | ) | $ | 6,089,596 | $ | (618,878 | ) | ||||
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) | March 31, 2009 | December 31, 2008 | ||||||||||
Aaa / Aa / A | $ | 5,638,489 | 65.4 | % | $ | 5,706,913 | 66.4 | % | ||||
Baa | 2,384,793 | 27.7 | % | 2,364,693 | 27.5 | % | ||||||
Ba | 467,895 | 5.4 | % | 402,942 | 4.7 | % | ||||||
B and lower | 125,421 | 1.5 | % | 116,718 | 1.4 | % | ||||||
Total | $ | 8,616,598 | 100.0 | % | $ | 8,591,266 | 100.0 | % | ||||
Major categories of net investment income were as follows:
| Three Months Ended March 31, | ||||||||
| 2009 | 2008 | |||||||
Fixed maturity securities | $ | 138,411 | $ | 147,992 | ||||
Equity securities | 10,232 | 11,613 | ||||||
Commercial mortgage loans on real estate | 23,683 | 23,763 | ||||||
Policy loans | 775 | 872 | ||||||
Short-term investments | 2,538 | 4,646 | ||||||
Other investments | 5,787 | 7,038 | ||||||
Cash and cash equivalents | 3,845 | 8,285 | ||||||
Total investment income | 185,271 | 204,209 | ||||||
Investment expenses | (6,792 | ) | (6,435 | ) | ||||
Net investment income | $ | 178,479 | $ | 197,774 | ||||
Net investment income decreased $19,295, or 10%, to $178,479 for First Quarter 2009 from December 31, 2007.$197,774 for First Quarter 2008. The decrease was primarily due to increases in interest spreads across many sectors during the period, partially offset by a decrease in treasurylower average invested assets and lower investment yields. The A-rated corporate spreads which started the year at 189 basis points over treasury securities increased to 258 basis points over treasury yields in the first half of 2008. The yield on 10-year treasury securities decreased 54 basis points between June 30,
Throughout 2008 and December 31, 2007. Net unrealized losses oncontinuing into 2009, the fixed maturity and equity securities increased $16,738 to a net unrealized loss of $(83,435) as of June 30, 2008 from December 31, 2007. The increase wassecurity markets experienced significant volatility and declines in market values. These declines were primarily due to changesdeclines in the preferred stock market.housing market, credit availability, as well as a general economic slowdown. As a result, certain securities directly exposed to these factors have had significant market value declines.
In connection with these market declines, we recorded net realized losses, including other-than-temporary impairments, in the statement of operations as follows:
| Three Months Ended March 31, | ||||||||
| 2009 | 2008 | |||||||
Net realized (losses) gains related to sales: | ||||||||
Fixed maturity securities | $ | (8,574 | ) | $ | 4,212 | |||
Equity securities | (21,639 | ) | (3,553 | ) | ||||
Other investments | (37 | ) | (393 | ) | ||||
Total net realized (losses) gains related to sales | (30,250 | ) | 266 | |||||
Net realized losses related to other-than-temporary impairments: | ||||||||
Fixed maturity securities | (23,136 | ) | (38,565 | ) | ||||
Equity securities | (2,303 | ) | (4,844 | ) | ||||
Total net realized losses related to other-than-temporary impairments | (25,439 | ) | (43,409 | ) | ||||
Total net realized losses | $ | (55,689 | ) | $ | (43,143 | ) | ||
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 any impairments are 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, and the intent and ability of the Company to retain the investment for a period of time sufficient to allow for recovery. Inherently, there are risks and uncertainties involved in making these judgments. Changes in circumstances and critical assumptions such as a continued weak economy, a more pronounced economic downturn 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. Any security whose price returndecrease is deemed other-than-temporary is written down to its then current market value with the amount of Merrill Lynch Global Bond Index - Preferred Stock, Hybrid index decreased 4.76% between June 30, 2008the impairment reported as a realized loss in that period. Realized gains and December 31, 2007.losses on sales of investments are recognized on the specific identification basis.
NetWhen we determine that there is an other-than-temporary impairment, we write down the value of the security to the current market value, which reduces the cost basis. In periods subsequent to the recognition of an other-than-temporary impairment, we generally accrete into net investment income increased $10,909, or 6%, to $201,211 for Second Quarter 2008the discount (or amortize the reduced premium) resulting from $190,302 for Second Quarter 2007. The increase is primarily due to an increasethe reduction in average invested assets.cost basis, based upon the amount and timing of the expected future cash flows over the remaining life of the security.
Net investment income decreased $8,213, or 2%, to $398,985 for Six Months 2008 from $407,198 for Six Months 2007. The decrease is primarily due to lower investment income from real estate joint venture partnerships, partially offset by an increase in average invested assets.
The investment category and duration of the Company’sour gross unrealized losses on fixed maturity securities and equity securities at June 30,March 31, 2009 and December 31, 2008 and the length of time the securities have been in an unrealized loss position were as follows:
| Less than 12 months | 12 Months or More | Total | |||||||||||||||||||
| Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | ||||||||||||||||
Fixed maturity securities | |||||||||||||||||||||
Bonds | $ | 4,389,493 | $ | (177,944 | ) | $ | 1,348,867 | $ | (131,918 | ) | $ | 5,738,360 | $ | (309,862 | ) | ||||||
Equity securities | |||||||||||||||||||||
Common stock | 374 | (4 | ) | — | — | 374 | (4 | ) | |||||||||||||
Preferred stocks | 390,481 | (45,681 | ) | 222,621 | (42,372 | ) | 613,102 | (88,053 | ) | ||||||||||||
Total | $ | 4,780,348 | $ | (223,629 | ) | $ | 1,571,488 | $ | (174,290 | ) | $ | 6,351,836 | $ | (397,919 | ) | ||||||
| March 31, 2009 | |||||||||||||||||||||
| Less than 12 Months | 12 Months or More | Total | |||||||||||||||||||
| Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||||||
Fixed maturity securities: | |||||||||||||||||||||
United States Government and government agencies and authorities | $ | 1,086 | $ | (23 | ) | $ | — | $ | — | $ | 1,086 | $ | (23 | ) | |||||||
States, municipalities and political subdivisions | 110,602 | (4,661 | ) | 75,984 | (3,933 | ) | 186,586 | (8,594 | ) | ||||||||||||
Foreign governments | 164,947 | (5,902 | ) | 21,006 | (6,141 | ) | 185,953 | (12,043 | ) | ||||||||||||
Public utilities | 353,368 | (21,661 | ) | 297,322 | (39,451 | ) | 650,690 | (61,112 | ) | ||||||||||||
Mortgage-backed | 127,923 | (14,557 | ) | 126,634 | (31,361 | ) | 254,557 | (45,918 | ) | ||||||||||||
All other corporate | 2,092,729 | (287,963 | ) | 1,423,755 | (455,962 | ) | 3,516,484 | (743,925 | ) | ||||||||||||
Total fixed maturity securities | $ | 2,850,655 | $ | (334,767 | ) | $ | 1,944,701 | $ | (536,848 | ) | $ | 4,795,356 | $ | (871,615 | ) | ||||||
Equity securities: | |||||||||||||||||||||
Industrial, miscellaneous and all other | $ | 2,930 | $ | (2,008 | ) | $ | — | $ | — | $ | 2,930 | $ | (2,008 | ) | |||||||
Non-sinking fund preferred stocks | 134,514 | (58,203 | ) | 209,431 | (109,843 | ) | 343,945 | (168,046 | ) | ||||||||||||
Total equity securities | $ | 137,444 | $ | (60,211 | ) | $ | 209,431 | $ | (109,843 | ) | $ | 346,875 | $ | (170,054 | ) | ||||||
| December 31, 2008 | |||||||||||||||||||||
| Less than 12 Months | 12 Months or More | Total | |||||||||||||||||||
| Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||||||
Fixed maturity securities: | |||||||||||||||||||||
United States Government and government agencies and authorities | $ | 983 | $ | (22 | ) | $ | — | $ | — | $ | 983 | $ | (22 | ) | |||||||
States, municipalities and political subdivisions | 361,383 | (12,397 | ) | 27,545 | (2,279 | ) | 388,928 | (14,676 | ) | ||||||||||||
Foreign governments | 117,133 | (5,853 | ) | 28,478 | (3,840 | ) | 145,611 | (9,693 | ) | ||||||||||||
Public utilities | 474,251 | (34,099 | ) | 185,491 | (25,505 | ) | 659,742 | (59,604 | ) | ||||||||||||
Mortgage-backed | 155,781 | (27,512 | ) | 84,046 | (19,365 | ) | 239,827 | (46,877 | ) | ||||||||||||
All other corporate | 2,430,886 | (346,331 | ) | 1,140,375 | (316,218 | ) | 3,571,261 | (662,549 | ) | ||||||||||||
Total fixed maturity securities | $ | 3,540,417 | $ | (426,214 | ) | $ | 1,465,935 | $ | (367,207 | ) | $ | 5,006,352 | $ | (793,421 | ) | ||||||
Equity securities: | |||||||||||||||||||||
Industrial, miscellaneous and all other | $ | 3,366 | $ | (1,618 | ) | $ | — | $ | — | $ | 3,366 | $ | (1,618 | ) | |||||||
Non-sinking fund preferred stocks | 171,637 | (49,291 | ) | 212,669 | (62,971 | ) | 384,306 | (112,262 | ) | ||||||||||||
Total equity securities | $ | 175,003 | $ | (50,909 | ) | $ | 212,669 | $ | (62,971 | ) | $ | 387,672 | $ | (113,880 | ) | ||||||
The total gross unrealized losses represent less than 7%21% and 17% of the aggregate fair value of the related securities.securities at March 31, 2009 and December 31, 2008, respectively. Approximately 56%38% and 53% of these gross unrealized losses have been in a continuous loss position for less than twelve months.months at March 31, 2009 and December 31, 2008, respectively. The total gross total unrealized losses are comprised of 1,5661,331 and 1,409 individual securities with 68%in March 31, 2009 and December 31, 2008, respectively. At March 31, 2009, 51%, 11% and 9% of the individual securities having an unrealized loss of less than $200. The total
gross unrealized losses onfor fixed maturity securities thatand equity securities were concentrated in the financial, consumer cyclical and industrial industries, respectively.
For fixed maturity securities, 39.4% and 31.5% of the gross unrealized losses at March 31, 2009 and December 31, 2008 were from $444,404 and $373,385 of securities with a continuous unrealized loss position for greater than six months but less than 12 months were approximately $77,892.
As partfair value below 70% of amortized cost, or 5.2% and 4.4%, respectively, of our ongoing monitoring process, we regularly review our investment portfoliofixed maturity security portfolio. The percentage of fair value to ensure that investments that may be other-than-temporarily impairedamortized cost for fixed maturity securities with gross unrealized losses at March 31, 2009 and December 31, 2008 are identified on a timely basis and that any impairment is charged against earningsshown in the proper period. We have reviewed these securities and recorded $70,982 of other-than-temporary impairments for Six Months 2008. There were no other–than-temporary impairments for Six Months 2007. Due to issuers’ continued satisfaction of the securities’ obligations in accordance with their contractual terms and their continued expectations to do so, as well as our evaluation of the fundamentals of the issuers’ financial condition, we believe that the prices of the securities in an unrealized loss position as of June 30, 2008 were temporarily depressed primarily as a result of the prevailing level of interest rates at the time the securities were purchased. We have the ability and intent to hold these assets until the date of recovery.
The aggregate amounts of the Company’s current holdings as of June 30, 2008 of Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”) and their related unrealized gain (loss) are as follows:following tables.
| Residential Mortgage-Backed (at fair value) | Unrealized Gain | Senior and Subordinated Debt (at fair value) | Unrealized Gain | Preferred Stock (at fair value) | Unrealized Loss | ||||||||||||||
Fannie Mae | $ | 445,839 | $ | 1,108 | $ | 37,820 | $ | 900 | $ | 45,408 | $ | (7,399 | ) | ||||||
Freddie Mac | 176,370 | 1,834 | 25,326 | 493 | 48,902 | (9,627 | ) | ||||||||||||
| March 31, 2009 | |||||||||||||
| Par value | Unrealized (loss) gain | Fair value | % to total fixed maturity securities | ||||||||||
> 80% of amortized cost | $ | 4,011,764 | $ | (307,252 | ) | $ | 3,677,051 | 42.7 | % | ||||
70% to 80% of amortized cost | 895,213 | (221,109 | ) | 673,901 | 7.8 | % | |||||||
<70% of amortized cost | 799,490 | (343,254 | ) | 444,404 | 5.2 | % | |||||||
Gross unrealized losses on fixed maturity securities | 5,706,467 | (871,615 | ) | 4,795,356 | 55.7 | % | |||||||
Gross unrealized gains on fixed maturity securities | 3,854,177 | 168,175 | 3,821,242 | 44.3 | % | ||||||||
Net unrealized losses on fixed maturity securities | $ | 9,560,644 | $ | (703,440 | ) | $ | 8,616,598 | 100.0 | % | ||||
| December 31, 2008 | |||||||||||||
| Par value | Unrealized (loss) gain | Fair value | % to total fixed maturity securities | ||||||||||
> 80% of amortized cost | $ | 4,282,068 | $ | (322,856 | ) | $ | 3,941,539 | 45.9 | % | ||||
70% to 80% of amortized cost | 911,984 | (220,308 | ) | 691,428 | 8.0 | % | |||||||
<70% of amortized cost | 627,811 | (250,257 | ) | 373,385 | 4.4 | % | |||||||
Gross unrealized losses on fixed maturity securities | 5,821,863 | (793,421 | ) | 5,006,352 | 58.3 | % | |||||||
Gross unrealized gains on fixed maturity securities | 3,614,294 | 180,459 | 3,584,914 | 41.7 | % | ||||||||
Net unrealized losses on fixed maturity securities | $ | 9,436,157 | $ | (612,962 | ) | $ | 8,591,266 | 100.0 | % | ||||
As of June 30, 2008,March 31, 2009, the Company does not own any common stock of Fannie Mae or Freddie Mac.
As of June 30, 2008, the Company owns $339,568owned $269,088 of securities guaranteed by financial guarantee insurance companies. Included in this amount were $268,731$229,318 of municipal securities, whose credit rating was AAA+ both with the guarantee, but would have had a rating of A+and without the guarantee. Due to the credit rating downgrades of the financial guarantee insurance companies in 2008, their financial guarantee is providing minimal or no value in the current market environment.
The following table represents ourCompany has exposure to sub-prime and related mortgages within our fixed maturity security portfolio as well as the current net unrealized loss position at June 30, 2008.
| Market Value | Percentage of Portfolio | Net Unrealized Loss | ||||||||
| (in thousands) | ||||||||||
Fixed maturity portfolio: | ||||||||||
Sub-prime first lien mortgages | $ | 40,331 | 0.42 | % | $ | (2,374 | ) | |||
Second lien mortgages (including sub-prime second lien mortgages) | 14,287 | 0.15 | % | (872 | ) | |||||
Total exposure to sub-prime collateral | $ | 54,618 | 0.57 | % | $ | (3,246 | ) | |||
portfolio. At June 30,March 31, 2009 and December 31, 2008, approximately 6.0%1.9% and 2.3%, respectively, of the mortgage-backed holdings had exposure to the sub-prime mortgage collateral.collateral which consisted of first and second lien mortgages. This represented approximately 0.6%0.2% and 0.3% of the total fixed maturity portfolio and 1.1%0.1% and 0.1% of the total unrealized loss position.position at March 31, 2009 and December 31, 2008, respectively. Of the securities with sub-prime exposure, approximately 96% are81% and 84% were rated as investment grade.grade as of March 31, 2009 and December 31, 2008, respectively. We havehad no sub-prime exposure to collateralized debt obligations.obligations as of March 31, 2009 and December 31, 2008. All mortgage-backed securities, including those with sub-prime exposure, are reviewed as part of the ongoing other-than-temporary impairment monitoring process.
As required by FAS 157, the Company has identified and disclosed its financial assets in a fair value hierarchy, which consists of the following three levels. Seelevels:
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Critical Accounting PoliciesCompany has the ability to access. Financial assets and estimates section for a further discussion of FAS 157. liabilities utilizing Level 1 inputs include certain U.S. mutual funds, money market funds, common stock and certain foreign securities.
Level 2 valuationsinputs 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. Financial assets utilizing Level 2 inputs include corporate, municipal, foreign government and public utilities bonds, private placement bonds, U.S. Government and agency securities, mortgage and asset backed securities, preferred stocks and certain U.S. and foreign mutual funds.
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. Financial assets utilizing Level 3 inputs include certain preferred stocks, corporate bonds and mortgage-backed securities that were quoted by brokers and could not be corroborated by Level 2 inputs and derivatives.
A review of the fair value hierarchy classifications is conducted on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy.
The following tables present the Company’s fair value hierarchy for those recurring basis assets and liabilities as of March 31, 2009 and December 31, 2008.
| March 31, 2009 | ||||||||||||||||||
Financial Assets | Total | Level 1 | Level 2 | Level 3 | ||||||||||||||
Fixed maturity securities | $ | 8,616,598 | $ | 2,378 | $ | 8,454,432 | $ | 159,788 | ||||||||||
Equity securities | 374,376 | 2,774 | a | 355,437 | 16,165 | |||||||||||||
Short-term investments | 664,272 | 533,998 | 130,274 | — | ||||||||||||||
Collateral held under securities lending | 142,177 | 47,257 | 94,920 | — | ||||||||||||||
Other investments | 230,178 | 56,883 | b | 167,249 | c | 6,046 | c | |||||||||||
Cash equivalents | 446,983 | 446,983 | — | — | ||||||||||||||
Other assets | 8,934 | — | — | 8,934 | ||||||||||||||
Assets held in separate accounts | 1,526,146 | 1,362,206 | a | 163,940 | — | |||||||||||||
Total financial assets | $ | 12,009,664 | $ | 2,452,479 | $ | 9,366,252 | $ | 190,933 | ||||||||||
Financial Liabilities | ||||||||||||||||||
Other liabilities | $ | 56,883 | $ | 56,883 | b | $ | — | $ | — | |||||||||
Financial Assets Fixed maturity securities Equity securities Short-term investments Collateral held under securities lending Other investments Cash equivalents Other assets Assets held in separate accounts Total financial assets Financial Liabilities Other liabilities December 31, 2008 Total Level 1 Level 2 Level 3 $ 8,591,266 $ 2,398 $ 8,427,643 $ 161,225 474,873 3,165 a 455,352 16,356 703,402 611,460 91,942 — 159,028 54,192 104,836 — 239,605 56,296 b 176,285 c 7,024 c 674,390 674,390 — — 7,080 — — 7,080 1,701,996 1,523,024 a 178,972 — $ 12,551,640 $ 2,924,925 $ 9,435,030 $ 191,685 $ 56,296 $ 56,296 b $ — $ —
a | Mainly includes mutual fund investments |
b | Comprised of Assurant Investment Plan, American Security Insurance Company Investment Plan and Assurant Deferred Compensation Plan investments and related liability which are invested in mutual funds |
c | Consists of invested assets associated with a modified coinsurance arrangement |
Level 1 and Level 2 securities are valued using various observable market inputs obtained from a pricing service. The pricing service prepares estimates of fair value measurements for our Level 2 securities using proprietary valuation models based on techniques such as matrix pricing which include observable market inputs. FAS 157 defines observable market inputs as the assumptions market participants would use in pricing the asset or liability developed on market data obtained from sources independent of the Company. The extent of the use of each observable market input for a security depends on the type of security and the market conditions at the balance sheet date. Depending on the security, the priority of the use of observable market inputs may change as some observable market inputs may not be relevant or additional inputs may be necessary. The following observable market inputs, 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. EachThe pricing service also evaluates each security is evaluated 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, the remaining un-priced 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.
Management uses the following criteria in order to determine whether the market for a financial asset is inactive:
The volume and level of trading activity in the asset have declined significantly from historical levels,
The available prices vary significantly over time or among market participants,
The prices are stale (i.e., not current), and
The magnitude of 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 evaluated 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. As a result of this analysis, if the Company determines there is a more appropriate fair value based upon available market data, which happens infrequently, the price of a security is adjusted accordingly. 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
The Company engages in transactions in which fixed maturity securities, especially bonds issued by the United States 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 and are designated as available-for-sale under FASB Statement No. 115,Accounting for Certain Investments in Debt and Equity Securities(“FAS 115”). 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 in the re-investment of cash collateral.
As of March 31, 2009 and December 31, 2008, our collateral held under securities lending, of which its use is unrestricted, was $181,177 and $234,027, respectively, while our liability to the borrower for collateral received was $202,616 and $256,506, respectively. The difference between the collateral held and obligations under securities lending is recorded as an unrealized loss and is included as part of accumulated other comprehensive loss. The Company has actively reduced the size of the program to mitigate counter-party exposure. 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 which are designated as available-for-sale under FAS 115, the reinvestment is presented as cash flows from investing activities.
Liquidity and Capital Resources
Regulatory Requirements
Assurant, Inc. is a holding company, and as such, has limited direct operations of its own. Our holding companycompany’s assets consist primarily of the capital stock of our subsidiaries. Accordingly, our future cash flows depend upon the availability of dividends and other statutorily permissible payments from our subsidiaries, such as payments under our tax allocation agreement and under management agreements with our subsidiaries. The ability to pay such dividends and to make such other payments will be limited by applicable laws and regulations of the states in which our subsidiaries are domiciled, which subject our subsidiaries to significant regulatory restrictions. The dividend requirements and regulations vary from state to state and by type of insurance provided by the applicable subsidiary. These laws and regulations require, among other things, our insurance subsidiaries to maintain minimum solvency requirements and limit the amount of dividends these subsidiaries can pay to the holding company. SolvencyAlong with solvency regulations, capital requirements and rating agency requirements are some of the factors usedprimary driver in
determining the amount of capital used for dividends.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 2008,2009, the maximum amount of distributions our subsidiaries could pay, under applicable laws and regulations without prior regulatory approval, for our statutory subsidiaries, is approximately $445,154.$437,017. This amount decreased by $45,126 from what was reported in our Annual Report on Form 10-K due to realized and unrealized capital losses in First Quarter 2009.
Rating organizations review the financial strength of insurers, including our insurance subsidiaries. For details on the ratings of our insurance subsidiaries as of December 31, 2008, refer to “Item 1—Business—Ratings” in our 2008 Annual Report on Form 10-K.
Liquidity
Dividends or returns of capital paid by our subsidiaries were $184,303 and $436,900 for Six Months 2008 and$453,303 for the year ended December 31, 2007, respectively.2008. We useused 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 periodically repurchase our outstanding common stock.shares. No dividends or returns of capital were paid by our subsidiaries for First Quarter 2009.
The primary sources of funds for our subsidiaries consist of premiums and fees collected, the proceeds from the sales and maturity of investments and net investment income. Cash is primarily used to pay insurance claims, agent commissions, operating expenses and taxes. We generally invest our subsidiaries’ excess funds in order to generate investment income.
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 where 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, andor drawing funds from our revolving credit facility. WeIn addition, on November 6, 2008, we 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 permanencenature of the cash needrequirement as well as the cost of each source of fundscapital in determining which option to utilize.what type of securities we may offer.
We paid dividends of $0.14 per common share on June 10, 2008March 9, 2009 to shareholders of record as of May 27, 2008 and $0.12 per common share on March 10, 2008 to shareholdersstockholders of record as of February 25, 2008.23, 2009. Any determination to pay future dividends will be at the discretion of our Board of Directors and will be dependentdepend upon: our subsidiaries’ payment of dividends and/or other statutorily permissible payments to us; our results of operations and cash flows; our financial position and capital requirements; general business conditions; any legal, tax, regulatory and contractual restrictions on the payment of dividends; and any other factors our Board of Directors deems relevant.
Management believes the Company will have sufficient liquidity to satisfy its needs over the next twelve months, including the ability to pay interest on our Senior Notes and dividends on our common shares.
Retirement and Other Employee Benefits
Our qualified pension benefits plan (the “Plan”) was $30,283 over-funded$200,855 under-funded at DecemberMarch 31, 2007.2009. In prior years we established a funding policy in which service cost plus 15% of qualified plan deficit will be contributed annually. During the first six months of 2008,First Quarter 2009, we contributed $10,000 to the qualified pension benefits plan.Plan. We expect to contribute an additional $10,000$30,000 to the qualified pension benefits planPlan over the remaining courseremainder of 2008.2009.
The Benefit Plans Investment Committee of the Company (“Investment Committee”) oversees the investment of the Plan assets and periodically conducts a review of the investment strategies and policies of the Plan. This includes a review of the strategic asset allocation, including the relationship of the Plan liabilities and portfolio structure. The current target asset allocation and their respective ranges are:
| Low | Target | High | |||||||
Debt securities | 45 | % | 50 | % | 55 | % | |||
Equity securities * | 45 | % | 50 | % | 55 | % |
| * | Target asset allocations for equity securities include allocations for alternative investments. We expect to invest certain plan assets in alternative investments, examples of which include funds of hedge funds, private real estate and private equity, during 2009. |
Effective January 1, 2009, we decided to modify our expected long-term return on plan assets assumption from 8.25% to 7.50%. We believe that this revised assumption better reflects the projected return on the invested assets, given the current market conditions and the modified portfolio structure. This change in assumption will increase full year 2009 plan expenses by approximately $9,200.
Commercial Paper Program
In March 2004, we establishedWe have a $500,000 commercial paper program, which is available for working capital and other general corporate purposes. This program is backed up by a $500,000 senior revolving credit.credit facility. We did not use the commercial paper program or the revolving credit facility during the sixthree months ended June 30, 2008.March 31, 2009. The $500,000 senior revolving credit facility contains a $30,000 commitment from Lehman Brothers Bank, FSB (“Lehman”). Based on the financial condition of Lehman, we are not relying on Lehman’s commitment.
The revolving credit facility contains restrictive covenants and requirescovenants. The terms of the revolving credit facility also require that the Companywe maintain certain specified minimum ratios and thresholds. We areAmong others, these covenants include maintaining a maximum debt to capitalization ratio and a minimum consolidated adjusted net worth. At March 31, 2009, we were in compliance with all covenants, minimum ratios and thresholds.thresholds, and there have been no material changes to the financial ratios presented in our 2008 Annual Report on Form 10-K.
Senior Notes
On February 18, 2004, we issued two series of senior notes inwith an aggregate principal amount of $975,000. The first series is $500,000 in principal amount, bears interest at 5.625% per year and is payable in a single installment due February 15, 2014. The second series is $475,000 in principal amount, bears interest at 6.750%6.75% per year and is payable in a single installment due February 15, 2034. Our senior notes are2034 (collectively, the “Senior Notes”). The Senior Notes were rated bbb by A.M. Best Company, Baa1 by Moody’s Investor Services and BBB+ by Standard & PoorsPoor’s Inc., as of March 31, 2009.
Interest on our senior notesthe Senior Notes is payable semi-annually on February 15 and August 15 of each year. The senior notesinterest expense incurred related to the Senior Notes was $15,047, including $7,523 of accrued interest, for the three months ended March 31, 2009 and 2008, respectively. The Company made an interest payment of $30,094 on February 15, 2009. The Senior Notes are unsecured obligations and rank equally with all of our other senior unsecured indebtedness. The senior notesSenior Notes are not redeemable prior to maturity.
In management’s opinion, our subsidiaries’ cash flow from operations together with our income and realizable gains from our investment portfolio will provide sufficient liquidity to meet our needs in the ordinary course of business.
Cash Flows
We monitor cash flows at the consolidated, holding company and subsidiary levels. Cash flow forecasts at the consolidated and subsidiary levels are provided on a monthly basis, and we use trend and variance analyses to project future cash needs making adjustments to the forecasts when needed.
The table below shows our recent net cash flows:
| For The Six Months Ended June 30, | For The Three Months Ended March 31, | |||||||||||||||
| 2008 | 2007 | 2009 | 2008 | |||||||||||||
| (in thousands) | ||||||||||||||||
Net cash provided by (used in): | ||||||||||||||||
Net cash (used in) provided by: | ||||||||||||||||
Operating activities (1) | $ | 433,936 | $ | 521,021 | $ | (267,156 | ) | $ | 449,418 | |||||||
Investing activities | (216,030 | ) | (551,840 | ) | (35,155 | ) | (189,911 | ) | ||||||||
Financing activities | (66,267 | ) | 53,218 | (74,034 | ) | (43,877 | ) | |||||||||
Net change in cash | $ | 151,639 | $ | 22,399 | $ | (376,345 | ) | $ | 215,630 | |||||||
| (1) | Includes effect of exchange rate changes on cash and cash equivalents. |
Net cash (used in) provided by operating activities was $433,936$(267,156) and $521,021$449,418 for the six months ended June 30,First Quarter 2009 and First Quarter 2008, and 2007, respectively. The decrease in netoperating activity cash provided by operating activities isflow was primarily due to decline ina combination of reduced gross written premium from our domestic service contractpremiums and credit insurance businesses for Six Months 2008 compared with Six Months 2007.higher paid claims primarily the result of deteriorating economic conditions and hurricanes Ike and Gustav, which occurred in 2008.
Net cash used in investing activities was $216,030$35,155 and $551,840$189,911 for the six months ended June 30,First Quarter 2009 and First Quarter 2008, and 2007, respectively. The decreasechange in net cash used in investing activities is primarily due to the changedecreases in purchases of fixed maturity and equity securities, coupled with a decrease in collateral held under securities lending.lending, short-term investments and commercial mortgage loans, partially offset by lower sales of fixed maturity and equity securities.
Net cash used in financing activities was $66,267$74,034 and net cash provided by financing activities was $53,218$43,877 for the six months ended June 30,First Quarter 2009 and First Quarter 2008, and 2007, respectively. The change in net cash used in financing activities iswas primarily due to the changechanges in obligation under securities lending partiallyand dividends paid to shareholders, offset by purchasesa decrease in the redemption of treasury stock during 2007.our mandatorily redeemable preferred stock.
The table below shows our cash outflows for distributionsinterest and dividends for the periods indicated:
| For the Six Months Ended June 30, | For the Three Months Ended March 31, | |||||||||||
Security | 2008 | 2007 | 2009 | 2008 | ||||||||
| (in thousands) | ||||||||||||
Mandatorily redeemable preferred stock dividends and interest paid | $ | 30,430 | $ | 30,550 | ||||||||
Interest paid on mandatorily redeemable preferred stock and debt | $ | 30,212 | $ | 30,312 | ||||||||
Common stock dividends | 30,740 | 26,731 | 16,489 | 14,173 | ||||||||
Total | $ | 61,170 | $ | 57,281 | $ | 46,701 | $ | 44,485 | ||||
Letters of Credit
In the normal course of business, we issue letters of credit are issuedprimarily to support reinsurance arrangements. These letters of credit are supported by commitments with financial institutions. We had $54,117$28,927 and $31,813$29,617 of letters of credit outstanding as of June 30, 2008March 31, 2009 and December 31, 2007,2008, respectively.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements see Note 3 of the Notes to Consolidated Financial Statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Our 20072008 Annual Report on Form 10-K described our Quantitative and Qualitative Disclosures About Market Risk. There were no material changes to the assumptions or risks during the sixthree months ended June 30, 2008.March 31, 2009.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
The Company’s Chief Executive Officer and interim Chief Financial Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of June 30, 2008.March 31, 2009. Based on that review, the Company’s Chief Executive Officer and interim Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective to provide reasonable assurance that information the Company is required to disclose in its reports under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported accurately including, without limitation, ensuring that such information is accumulated and communicated to the Company’s management as appropriate to allow timely decisions regarding required disclosure.
Internal ControlsControl over Financial Reporting
During the quarter ending June 30, 2008,March 31, 2009, we have made no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II
OTHER INFORMATION
There have been no material developmentsItem 1. Legal Proceedings.
The Company is involved in litigation in the period coveredordinary course of business, both as a defendant and as a plaintiff. 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 and although no assurances can be given, the Company does not believe that any pending matter will have a material adverse effect individually or in the aggregate, on the Company’s financial position, results of operations, or cash flows.
As previously disclosed, the Company and certain of its officers and former employees have received subpoenas and requests from the SEC in connection with an investigation by the SEC Staff into certain finite reinsurance contracts entered into by the Company. The Company is cooperating fully and is complying with the requests.
The Company conducted an evaluation of the transactions that could potentially fall within the scope of the subpoenas, as defined by the authorities, and the Company has provided information as requested. On the basis of our investigation, the Company has concluded that there was a verbal side agreement with respect to one of our reinsurers under our catastrophe reinsurance program. The contract to which this report.verbal side agreement applied was accounted for using reinsurance accounting as opposed to deposit accounting. While management believes that the difference resulting from the appropriate alternative accounting treatment would be immaterial to our financial position or results of operations, regulators may reach a different conclusion. In 2004 and 2003, premiums ceded to this reinsurer were $2,600 and $1,500, respectively, and losses ceded were $10,000 and zero, respectively. This contract expired in December 2004 and was not renewed.
In July 2007, the Company learned that each of the following five individuals, Robert B. Pollock, President and Chief Executive Officer, Philip Bruce Camacho, Executive Vice President and Chief Financial Officer, Adam Lamnin, Executive Vice President and Chief Financial Officer of Assurant Solutions/Assurant Specialty Property, Michael Steinman, Senior Vice President and Chief Actuary of Assurant Solutions/Assurant Specialty Property and Dan Folse, Vice President-Risk Management of Assurant Solutions/Assurant Specialty Property, received Wells notices from the SEC in connection with its ongoing investigation. A Wells notice is an indication that the staff of the SEC is considering recommending that the SEC bring a civil enforcement action against the recipient for violating various provisions of the federal securities laws. Under SEC procedures, the recipients have the opportunity to respond to the SEC Staff before a formal recommendation is finalized and before the Commissioners themselves consider any recommendations.
On July 17, 2007, the Company announced that the Board of Directors (the “Board”) had placed all five employees on administrative leave, pending further review of this matter. The Board’s actions were based on the recommendations of its Special Committee of non-management directors which thereafter undertook a thorough investigation of the events that had resulted in the receipt of the Wells notices. The Special Committee has reviewed relevant documents, conducted interviews and worked with outside counsel to investigate these matters and to recommend appropriate actions to the Board with respect to the SEC investigation. On August 9, 2007, Messrs. Steinman’s and Folse’s employment with the Company was terminated.
On the basis of an extensive review of evidence concerning this matter and the work of the Special Committee, the Board unanimously voted to reinstate Mr. Pollock as President and Chief Executive Officer, effective January 28, 2008. Effective March 15, 2009, Mr. Camacho resigned from his position as Executive Vice President and Chief Financial Officer of the Company. Starting March 16, 2009, Mr. Camacho began assisting the Company as a consultant for a 12-month transition period. The Board also reinstated Mr. Lamnin, who returned to the Company reporting to Mr. Pollock, and initially, assisting with a variety of strategic projects. The Board’s decisions to reinstate Messrs. Pollock and Lamnin and Mr. Camacho’s decision to resign imply no conclusion concerning the outcome of the SEC Staff’s ongoing investigation, and the SEC Staff’s Wells notices to them remain in effect. The SEC Staff’s inquiry continues and we cannot predict the duration or outcome of the investigation.
In the course of its response to SEC Staff inquiries, the Company identified certain problems related to its document production process. These production issues have delayed resolution of this matter. The Company believes that it has now completed its response to the SEC Staff’s document request.
In relation to the SEC investigation discussed above, the SEC may charge the Company and/or individuals with violations of the federal securities laws, including alleging violations of Sections 10(b), 13(a), and/or 13(b) of the Securities Exchange Act of 1934, and/or Section 17(a) of the Securities Act of 1933, and may seek civil monetary penalties, injunctive relief and other remedies against the Company and individuals, including potentially seeking a bar preventing one or more of the individuals from serving as an officer or director of a public company. The SEC may also take the position that the Company should restate its consolidated financial statements to address the accounting treatment referred to above. No settlement of any kind can be reached without approval by the SEC and we have not accrued for any civil monetary penalties because the Company cannot reasonably estimate the probability or amount of such penalties at this time.
Our 20072008 Annual Report on Form 10-K described our Risk Factors. ThereOther than as discussed in Item 1, there have been no material changes to the Risk Factors during the sixthree months ending June 30, 2008.ended March 31, 2009.
The BoardItem 2. Unregistered Sale of DirectorsEquity Securities and Use of the Company consists of three classes of directors, with the members of each class holding office until their successors are duly elected and qualified. At each Annual Meeting of the Stockholders of the Company (the “Annual Meeting”), the successors to the class of directors whose term expires at such meeting are nominated for election for a term expiring at the Company’s Annual Meeting held in the third year following the year of election. At the Company’s Annual Meeting held on May 15,Proceeds2008, the four nominees listed under (a) below were elected as directors to hold office for terms ending in 2011 or until their respective successors are duly elected and qualified. The following directors, constituting the members of the two classes of directors whose terms did not expire at such annual meeting, continued to serve as directors of the Company: Howard L. Carver, Juan N. Cento, Allen R. Freedman, Charles John Koch, H. Carroll Mackin, and Robert B. Pollock.
In addition, at the 2008 Annual Meeting, the Company’s stockholders ratified the appointment of PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm for the 2008 fiscal year; approved the Assurant, Inc. Executive Short Term Incentive Plan, and approved the Assurant, Inc. Long Term Equity Incentive Plan.None.
The number of votes cast for and against and abstentions as to each of these matters was as follows:
(a) Election of Directors:
Name of Director | Votes For | Votes Withheld | ||
John Michael Palms | 99,662,282 | 3,246,449 | ||
Robert J. Blendon | 100,868,304 | 2,040,427 | ||
Beth L. Bronner | 100,290,897 | 2,617,834 | ||
David B. Kelso | 102,007,619 | 901,112 |
Votes For | Votes Against | Abstentions | ||
101,055,158 | 1,124,780 | 728,793 |
Votes For | Votes Against | Abstentions | ||
99,078,434 | 3,109,854 | 720,443 |
Votes For | Votes Against | Abstentions | Broker Non- votes | |||
81,954,276 | 14,986,002 | 718,871 | 5,249,582 |
Pursuant to the rules and regulations of the SEC, the Company has filed or incorporated by reference certain agreements as exhibits to this quarterly report on Form 10-Q. These agreements may contain representations and warranties by the parties. These representations and warranties have been made solely for the benefit of the other party or parties to such agreements and (i) may have been qualified by disclosures made to such other party or parties, (ii) were made only as of the date of such agreements or such other date(s) as may be specified in such agreements and are subject to more recent developments, which may not be fully reflected in the Company’s public disclosure, (iii) may reflect the allocation of risk among the parties to such agreements and (iv) may apply materiality standards different from what may be viewed as material to investors. Accordingly, these representations and warranties may not describe the Company’s actual state of affairs at the date hereof and should not be relied upon.
The following exhibits either (a) are filed with this report or (b) have previously been filed with the SEC and are incorporated herein by reference to those prior filings. Exhibits are available upon request at the investor relations section of our website atwww.assurant.com. www.assurant.com. Our website is not a part of this report and is not incorporated by reference in this report.
|
| |
| 10.1 | ||
| Restricted Stock Unit Award Agreement for Time-based Awards under the Assurant, Inc. Long Term Equity Incentive Plan (incorporated by reference from Exhibit | ||
| 10.2 | Separation Agreement, dated March 3, 2009, by and between Assurant, Inc. and Philip Bruce Camacho (incorporated by reference from Exhibit 10.1 to the Registrant’s Form 8-K, originally filed on March 9, 2009). | |
| 10.3 | Consulting Agreement, dated March 3, 2009, by and between Assurant, Inc. | |
| 31.1 | Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer. | |
| 31.2 | Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer. | |
| 32.1 | Certification of Chief Executive Officer of Assurant, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 32.2 | Certification of Chief Financial Officer of Assurant, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| ASSURANT, INC. | ||||||||
| Date: | By: | /s/ Robert B. Pollock | ||||||
| Name: Robert B. Pollock | ||||||||
| Title:President and Chief Executive Officer | ||||||||
| Date: | By: | /s/ Michael J. Peninger | ||||||
| Name: Michael J. Peninger | ||||||||
| Title:Executive Vice President and | ||||||||
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