UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
AMENDMENT NO.1
| x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended June 30, 2006
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 | O01-31978 | 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 x NO ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO x
The number of shares of the registrant’s Common Stock outstanding at August 1, 2006 was 126,269,272.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2006
TABLE OF CONTENTS
EXPLANATORY NOTE
This Amendment No. 1 on Form 10-Q/A is being filed for the purpose of amending Items 1 and 4 of Part I of the Quarterly Report on Form 10-Q for the quarter ended June 30, 2006 of Assurant, Inc. (the “Company”) to reflect the restatement of the Company’s Unaudited Interim Consolidated Statements of Cash Flows for the six months ended June 30, 2006 and 2005, as described in Footnote 2 to the Unaudited Interim Consolidated Financial Statements included in this Form 10-Q/A. All other Items of the original filing on Form 10-Q made on August 9, 2006 are unaffected by the changes to the Unaudited Interim Consolidated Statements of Cash Flows and such Items have not been included in this Amendment. Information in this Form 10-Q/A is generally stated as of June 30, 2006 and does not reflect any subsequent information or events other than the restatement of the Unaudited Interim Consolidated Statements of Cash Flows. More current information with respect to the Company is contained within its Quarterly Report on Form 10-Q for the quarter ended September 30, 2006, and other filings with the Securities and Exchange Commission.
Assurant, Inc. and Subsidiaries
Consolidated Balance Sheet (unaudited)
At June 30, 2006 and December 31, 2005
| June 30, 2006 |
December 31, 2005 | |||||
| (in thousands except number of shares) | ||||||
| Assets |
||||||
| Investments: |
||||||
| Fixed maturities available for sale, at fair value (amortized cost - $8,968,986 in 2006 and $8,668,595 in 2005) |
$ | 8,866,664 | $ | 8,961,778 | ||
| Equity securities available for sale, at fair value (cost - $757,602 in 2006 and $694,977 in 2005) |
730,382 | 693,101 | ||||
| Commercial mortgage loans on real estate, at amortized cost |
1,252,612 | 1,212,006 | ||||
| Policy loans |
59,149 | 61,043 | ||||
| Short-term investments |
239,149 | 427,474 | ||||
| Collateral held under securities lending |
605,939 | 610,662 | ||||
| Other investments |
542,015 | 549,759 | ||||
| Total investments |
12,295,910 | 12,515,823 | ||||
| Cash and cash equivalents |
663,501 | 855,569 | ||||
| Premiums and accounts receivable, net |
512,016 | 454,789 | ||||
| Reinsurance recoverables |
3,949,569 | 4,447,810 | ||||
| Accrued investment income |
133,299 | 128,150 | ||||
| Tax receivable |
24,855 | 3,868 | ||||
| Deferred income taxes, net |
53,302 | — | ||||
| Deferred acquisition costs |
2,176,079 | 2,022,308 | ||||
| Property and equipment, at cost less accumulated depreciation |
274,670 | 267,720 | ||||
| Goodwill |
805,254 | 804,864 | ||||
| Value of businesses acquired |
143,255 | 151,512 | ||||
| Other assets |
246,867 | 240,605 | ||||
| Assets held in separate accounts |
3,253,839 | 3,472,435 | ||||
| Total assets |
$ | 24,532,416 | $ | 25,365,453 | ||
See the accompanying notes to the consolidated financial statements
2
Assurant, Inc. and Subsidiaries
Consolidated Balance Sheet (unaudited)
At June 30, 2006 and December 31, 2005
| June 30, 2006 |
December 31, 2005 |
|||||||
| (in thousands except number of shares) | ||||||||
| Liabilities |
||||||||
| Future policy benefits and expenses |
$ | 6,742,776 | $ | 6,664,854 | ||||
| Unearned premiums |
4,049,636 | 3,851,614 | ||||||
| Claims and benefits payable |
3,490,444 | 3,875,223 | ||||||
| Commissions payable |
264,994 | 301,209 | ||||||
| Reinsurance balances payable |
81,168 | 129,547 | ||||||
| Funds held under reinsurance |
51,993 | 78,578 | ||||||
| Deferred gain on disposal of businesses |
268,356 | 287,212 | ||||||
| Obligation under securities lending |
605,939 | 610,662 | ||||||
| Accounts payable and other liabilities |
1,158,026 | 1,351,196 | ||||||
| Deferred income taxes, net |
— | 47,514 | ||||||
| Debt |
971,731 | 971,690 | ||||||
| Mandatorily redeemable preferred stock |
23,160 | 24,160 | ||||||
| Liabilities related to separate accounts |
3,253,839 | 3,472,435 | ||||||
| Total liabilities |
$ | 20,962,062 | $ | 21,665,894 | ||||
| Commitments and contingencies (note 10) |
$ | — | $ | — | ||||
| Stockholders’ equity | ||||||||
| Common stock, par value $.01 per share, 800,000,000 shares authorized, 142,841,938 and 142,563,829 shares issued, 127,278,688 and 130,591,834 shares outstanding at June 30, 2006 and December 31, 2005, respectively |
$ | 1,428 | $ | 1,426 | ||||
| Additional paid-in capital |
2,885,081 | 2,880,329 | ||||||
| Retained earnings |
1,297,249 | 1,006,910 | ||||||
| Unamortized restricted stock compensation (127,601 shares at December 31, 2005) |
— | (2,829 | ) | |||||
| Accumulated other comprehensive (loss) income |
(39,997 | ) | 219,499 | |||||
| Treasury stock, at cost;15,401,194 and 11,844,394 shares at June 30, 2006 and December 31, 2005, respectively |
(573,407 | ) | (405,776 | ) | ||||
| Total stockholders’ equity |
3,570,354 | 3,699,559 | ||||||
| Total liabilities and stockholders’ equity |
$ | 24,532,416 | $ | 25,365,453 | ||||
See the accompanying notes to the consolidated financial statements
3
Assurant, Inc. and Subsidiaries
Consolidated Statement of Operations (Unaudited)
Three and Six Months Ended June 30, 2006 and 2005
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||
| 2006 | 2005 | 2006 | 2005 | ||||||||||
| (in thousands except number of shares and per share amounts) | |||||||||||||
| Revenues | |||||||||||||
| Net earned premiums and other considerations |
$ | 1,685,322 | $ | 1,623,239 | $ | 3,357,975 | $ | 3,255,133 | |||||
| Net investment income |
180,438 | 177,018 | 373,000 | 341,218 | |||||||||
| Net realized gains/(losses) on investments |
2,272 | 4,079 | (2,180 | ) | 4,571 | ||||||||
| Amortization of deferred gain on disposal of businesses |
10,022 | 11,784 | 18,855 | 23,647 | |||||||||
| Fees and other income |
71,036 | 58,183 | 131,222 | 112,088 | |||||||||
| Total revenues |
1,949,090 | 1,874,303 | 3,878,872 | 3,736,657 | |||||||||
| Benefits, losses and expenses | |||||||||||||
| Policyholder benefits |
874,204 | 924,011 | 1,763,883 | 1,867,535 | |||||||||
| Amortization of deferred acquisition costs and value of business acquired |
284,781 | 227,095 | 570,164 | 442,541 | |||||||||
| Underwriting, general and administrative expenses |
542,627 | 519,784 | 1,039,676 | 1,031,131 | |||||||||
| Interest expense |
15,315 | 15,314 | 30,630 | 30,628 | |||||||||
| Total benefits, losses and expenses |
1,716,927 | 1,686,204 | 3,404,353 | 3,371,835 | |||||||||
| Income before income taxes and cumulative effect of change in accounting principle |
232,163 | 188,099 | 474,519 | 364,822 | |||||||||
| Income taxes |
81,027 | 60,475 | 162,458 | 122,800 | |||||||||
| Net income before cumulative effect of change in accounting principle |
151,136 | 127,624 | 312,061 | 242,022 | |||||||||
| Cumulative effect of change in accounting principle |
— | — | 1,547 | — | |||||||||
| Net Income |
$ | 151,136 | $ | 127,624 | $ | 313,608 | $ | 242,022 | |||||
| Earnings per share: | |||||||||||||
| Basic |
|||||||||||||
| Net income before cumulative effect of change in accounting principle |
$ | 1.18 | $ | 0.93 | $ | 2.42 | $ | 1.74 | |||||
| Cumulative effect of change in accounting principle |
— | — | 0.01 | — | |||||||||
| Net income |
$ | 1.18 | $ | 0.93 | $ | 2.43 | $ | 1.74 | |||||
| Diluted |
|||||||||||||
| Net income before cumulative effect of change in accounting principle |
$ | 1.16 | $ | 0.92 | $ | 2.38 | $ | 1.73 | |||||
| Cumulative effect of change in accounting principle |
— | — | 0.01 | — | |||||||||
| Net income |
$ | 1.16 | $ | 0.92 | $ | 2.39 | $ | 1.73 | |||||
| Dividends per share |
$ | 0.10 | $ | 0.08 | $ | 0.18 | $ | 0.15 | |||||
| Share Data: | |||||||||||||
| Weighted average shares outstanding used in per share calculations |
128,488,126 | 137,700,163 | 129,239,104 | 138,712,723 | |||||||||
| Plus: Dilutive securities |
1,839,508 | 1,319,225 | 1,958,041 | 1,317,326 | |||||||||
| Weighted average shares used in diluted per share calculations |
130,327,634 | 139,019,388 | 131,197,145 | 140,030,049 | |||||||||
See the accompanying notes to the consolidated financial statements
4
Assurant, Inc. and Subsidiaries
Consolidated Statement of Changes in Stockholders’ Equity (unaudited)
From December 31, 2005 through June 30, 2006
| Common Stock |
Additional Paid-in Capital |
Retained Earnings |
Unamortized Restricted Stock Compensation |
Accumulated Other Comprehensive Income (Loss) |
Treasury Stock |
Total | Shares of Common Stock Issued | ||||||||||||||||||||||
| (in thousands except number of shares) | |||||||||||||||||||||||||||||
| Balance, December 31, 2005 |
$ | 1,426 | $ | 2,880,329 | $ | 1,006,910 | $ | (2,829 | ) | $ | 219,499 | $ | (405,776 | ) | $ | 3,699,559 | 142,563,829 | ||||||||||||
| Stock Plan Exercises |
2 | (2,315 | ) | — | 2,829 | — | — | 516 | 278,109 | ||||||||||||||||||||
| Stock Plan compensation expense |
— | 6,392 | — | — | — | — | 6,392 | — | |||||||||||||||||||||
| Tax benefit of exercise of stock options |
— | 675 | — | — | — | — | 675 | ||||||||||||||||||||||
| Dividends |
— | — | (23,269 | ) | — | — | — | (23,269 | ) | — | |||||||||||||||||||
| Acquistion of Treasury Shares |
— | — | — | — | — | (167,631 | ) | (167,631 | ) | — | |||||||||||||||||||
| Comprehensive income: |
|||||||||||||||||||||||||||||
| Net income |
— | — | 313,608 | — | — | — | 313,608 | — | |||||||||||||||||||||
| Other comprehensive income: |
|||||||||||||||||||||||||||||
| Net change in unrealized gains/(losses) on securities, net of taxes |
— | — | — | — | (275,620 | ) | — | (275,620 | ) | — | |||||||||||||||||||
| Foreign currency translation, net of taxes |
— | — | — | — | 16,124 | — | 16,124 | — | |||||||||||||||||||||
| Total other comprehensive income |
(259,496 | ) | — | ||||||||||||||||||||||||||
| Total Comprehensive income: |
54,112 | — | |||||||||||||||||||||||||||
| Balance, June 30, 2006 |
$ | 1,428 | $ | 2,885,081 | $ | 1,297,249 | $ | — | $ | (39,997 | ) | $ | (573,407 | ) | $ | 3,570,354 | 142,841,938 | ||||||||||||
See the accompanying notes to the consolidated financial statements
5
Assurant, Inc. and Subsidiaries
Consolidated Statement of Cash Flows (unaudited)
Six Months Ended June 30, 2006 and 2005
| Six Months Ended June 30, | ||||||||
| 2006 Restated |
2005 Restated |
|||||||
| (in thousands) | ||||||||
| Net cash provided by operating activities | $ | 311,557 | $ | 183,878 | ||||
| Investing activities |
||||||||
| Sales of: |
||||||||
| Fixed maturities available for sale |
1,033,280 | 783,822 | ||||||
| Equity securities available for sale |
143,411 | 53,226 | ||||||
| Property and equipment |
1,359 | 88 | ||||||
| Maturities, prepayments, and scheduled redemptions of: |
||||||||
| Fixed maturities available for sale |
331,667 | 417,509 | ||||||
| Purchases of: |
||||||||
| Fixed maturities available for sale |
(1,820,858 | ) | (1,455,190 | ) | ||||
| Equity securities available for sale |
(168,640 | ) | (113,992 | ) | ||||
| Property and equipment |
(24,541 | ) | (21,824 | ) | ||||
| Subsidiary, net of cash received(1) |
47,514 | — | ||||||
| Change in commercial mortgage loans on real estate |
(39,618 | ) | (51,760 | ) | ||||
| Change in short term investments |
188,937 | 42,675 | ||||||
| Change in other invested assets |
(11,468 | ) | (11,630 | ) | ||||
| Change in policy loans |
1,944 | 866 | ||||||
| Change in collateral held under securities lending |
4,723 | (46,611 | ) | |||||
| Net cash (used in) investing activities |
(312,290 | ) | (402,821 | ) | ||||
| Financing activities |
||||||||
| Repayment of mandatorily redeemable preferred stock |
(1,000 | ) | — | |||||
| Issuance of common stock |
516 | 2,145 | ||||||
| Excess tax benefits from stock-based payment arrangements |
675 | — | ||||||
| Acquisition of treasury stock |
(163,496 | ) | (115,284 | ) | ||||
| Dividends paid |
(23,269 | ) | (20,800 | ) | ||||
| Change in obligation under securities lending |
(4,723 | ) | 46,611 | |||||
| Commercial paper issued |
39,962 | 39,959 | ||||||
| Commercial paper repaid |
(40,000 | ) | (40,000 | ) | ||||
| Net cash (used in) financing activities |
(191,335 | ) | (87,369 | ) | ||||
| Change in cash and cash equivalents |
(192,068 | ) | (306,312 | ) | ||||
| Cash and cash equivalents at beginning of period |
855,569 | 807,082 | ||||||
| Cash and cash equivalents at end of period |
$ | 663,501 | $ | 500,770 | ||||
| (1) | This relates to the acquisition of Safeco Financial Institution Solutions, Inc. acquired on May 1, 2006. |
See the accompanying notes to the consolidated financial statements
6
Assurant, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Six Months Ended June 30, 2006 and 2005
1. Nature of Operations
Assurant, Inc. (formerly, Fortis, Inc.) (the “Company”) is a holding company whose subsidiaries provide specialized insurance products and related services in North America and selected international markets. Prior to the Initial Public Offering (“the IPO”) on February 5, 2004, Fortis, Inc. was incorporated in Nevada and was indirectly wholly owned by Fortis N.V. of the Netherlands and Fortis SA/NV of Belgium (collectively, “Fortis”) through their affiliates, including their wholly owned subsidiary, Fortis Insurance N.V.
In connection with the IPO, Fortis, Inc. was merged into Assurant, Inc., a Delaware corporation, which was formed solely for the purpose of the redomestication of Fortis, Inc. After the merger, Assurant, Inc. became the successor to the business, operations and obligations of Fortis, Inc. Assurant, Inc. 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, credit 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.
In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair statement of the financial statements have been included. Certain prior period amounts have been reclassified to conform to the 2006 presentation.
Dollar amounts are in thousands, except for number of shares and per share amounts.
The 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.
Operating results for the three and six months ended June 30, 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006. The accompanying 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, 2005.
Restatement of Interim Consolidated Statements of Cash Flows (unaudited)
The Interim Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2006 and 2005 has been restated to reflect the following:
| 1. | Changes in the net receivable/payable from unsettled investment purchases and sales, previously classified within “adjustments to reconcile net income to net cash provided by (used in) operating activities,” have been reclassified to cash flows from investing activities, to the extent such balances pertained to investments classified as available for sale. |
| 2. | Changes in the acquisition of treasury shares to reflect the unsettled purchases previously classified within “adjustment to reconcile net income to net cash provided by (used in) operating activities,” have been reclassified to cash flows from financing activities. |
As a result of the restatements to correct these errors, previously reported cash flows provided by (used in) operating activities, cash flows provided by (used in) investing activities, and cash flows provided by (used in) financing activities were increased or reduced for the six months ended June 30, 2006 and 2005 as follows:
| Six Months Ended June 30, 2006 |
||||||||||||
| As Previously Reported |
Impact of Restatement |
As Restated | ||||||||||
| Net cash provided by operating activities |
$ | 170,113 | $ | 141,444 | $ | 311,557 | ||||||
| Net cash (used in) investing activities |
(166,711 | ) | (145,579 | ) | (312,290 | ) | ||||||
| Net cash (used in) financing activities |
(195,470 | ) | 4,135 | (191,335 | ) | |||||||
| Change in cash and cash equivalents |
(192,068 | ) | — | (192,068 | ) | |||||||
| Cash and cash equivalents at beginning of period |
855,569 | — | 855,569 | |||||||||
| Cash and cash equivalents at end of period |
$ | 663,501 | $ | — | $ | 663,501 | ||||||
| Six Months Ended June 30, 2005 |
||||||||||||
| As Previously Reported |
Impact of Restatement |
As Restated | ||||||||||
| Net cash provided by operating activities |
$ | 194,167 | $ | (10,289 | ) | $ | 183,878 | |||||
| Net cash (used in) investing activities |
(407,698 | ) | 4,877 | (402,821 | ) | |||||||
| Net cash (used in) financing activities |
(92,781 | ) | 5,412 | (87,369 | ) | |||||||
| Change in cash and cash equivalents |
(306,312 | ) | — | (306,312 | ) | |||||||
| Cash and cash equivalents at beginning of period |
807,082 | — | 807,082 | |||||||||
| Cash and cash equivalents at end of period |
$ | 500,770 | $ | — | $ | 500,770 | ||||||
The restatements had no impact on the total change in cash and cash equivalents within the Unaudited Interim Consolidated Statements of Cash Flows or on the Unaudited Interim Consolidated Statements of Operations or Unaudited Interim Consolidated Balance Sheet.
3. Recent Accounting Pronouncements and Change in Accounting Principle
On January 1, 2006, the Company adopted Statement of Financial Accounting Standards (“FAS”) No. 123 (revised 2004), Share-Based Payment (“FAS 123R”) which replaces Statement of Financial Accounting Standards No. 123, Share-Based Payment and supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. FAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. The pro forma disclosures previously permitted under FAS 123 are no longer an alternative to financial statement recognition. Under FAS 123R, the Company must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost, and the transition method to be used at date of adoption. The Company adopted FAS 123R using the modified prospective method which requires that compensation expense be recorded for all unvested stock options at the beginning of the first quarter of adoption of FAS 123R. The adoption of FAS 123R did not have a material impact on the Company’s consolidated financial statements. See Note 5 for further information regarding the adoption of FAS 123R.
7
Assurant, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Six Months Ended June 30, 2006 and 2005
On January 1, 2006, the Company adopted FAS No. 154, Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20, Accounting Changes, and Statement No. 3, Reporting Accounting Changes in Interim Financial Statements (“FAS 154”). FAS 154 changes the accounting and reporting of a change in accounting principle. Prior to FAS 154, the majority of voluntary changes in accounting principles were required to be recognized as a cumulative effect adjustment within net income during the period of the change. FAS 154 requires retrospective application to prior period financial statements unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. The adoption of FAS 154 did not have a material effect on our consolidated financial position or results of operations.
In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109 (“FIN 48”). This Interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Interpretation is effective for fiscal years beginning after December 15, 2006 and, therefore, the Company is required to adopt FIN 48 by the first quarter of 2007. The Company is currently evaluating the requirements of FIN 48 and the potential impact on the Company’s financial statements.
The Company adopted FAS 142, Goodwill and Other Intangible Assets, on January 1, 2002 (“FAS 142”). As part of the adoption of FAS 142, the Company is required to test goodwill for impairment on at least an annual basis. The Company performs annual goodwill impairment testing during the fourth quarter of each year based on actual data through October 1st. The April 1, 2006 changes to segment reporting (see note 9) required the Company to perform an additional impairment test on the Assurant Preneed, Assurant Solutions and Assurant Specialty Property segments. The Company’s impairment test concluded that goodwill is not impaired.
4. Debt
In February 2004, the Company issued two series of senior notes with an aggregate principal amount of $975,000. The Company received net proceeds from this transaction of $971,537, which represents the principal amount less the discount. The discount will be amortized over the life of the notes.
The interest expense incurred related to the senior notes was $15,047 for the three months ended June 30, 2006 and 2005, respectively, and $30,094 for the six months ended June 30, 2006 and 2005, respectively. The Company made an interest payment of $30,094 on February 15, 2006.
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. On February 7, 2006 and May 8, 2006 the Company used $20,000 and $20,000, respectively, from the commercial paper program for general corporate purposes, which was repaid on February 14, 2006 and May 15, 2006, respectively. There were no amounts relating to the commercial paper program outstanding at June 30, 2006. The Company did not use the revolving credit facility during the six months ended June 30, 2006 and no amounts are currently outstanding.
The revolving credit facility contains restrictive covenants. The terms of the revolving credit facility also require that the Company maintain certain specified minimum ratios and thresholds. The Company is in compliance with all covenants and the Company maintains all specified minimum ratios and thresholds.
8
Assurant, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Six Months Ended June 30, 2006 and 2005
5. Stock Based Compensation
Stock Based Incentive Plan
Prior to January 1, 2006, the Company accounted for stock based compensation plans in accordance with the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), which required compensation expense for compensatory plans to be recognized based on the intrinsic value of the award. Effective January 1, 2006, the Company adopted the recognition provisions of Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (“FAS 123R”) using the modified prospective transition method and, therefore, has not restated results for prior periods. Under this transition method, stock-based compensation costs are recognized based on the grant date fair value, in accordance with FAS 123R, for new awards granted after January 1, 2006 as well as any unvested portion of awards granted prior to January 1, 2006. For the six months ended June 30, 2006, the Company recognized compensation costs net of a 5% per year forfeiture rate on a pro-rated basis over the remaining vesting period.
FAS 123R requires that a one time cumulative adjustment be made at the adoption date to record an estimate of future forfeitures on outstanding awards. This adjustment is the amount of compensation cost recorded prior to the adoption of FAS 123R related to outstanding awards that are not expected to vest, based on an estimate of forfeitures as of the FAS 123R adoption date. The cumulative adjustment, net of taxes, had a positive impact of $1,547 on the consolidated results of operations of the Company for the six months ended June 30, 2006.
Also in connection with the adoption of FAS 123R, the Company reclassified $2,829 of Unamortized Restricted Stock Compensation (contra-equity account) outstanding at December 31, 2005 to additional paid in capital. Under FAS 123R, an equity instrument is not recorded to stockholders’ equity until the related compensation expense is recorded over the requisite vesting period of the award. Prior to the adoption of FAS 123R, and in accordance with APB 25, the Company recorded the full fair value of all issued but unvested Restricted Stock to additional paid in capital with an offsetting amount to Unamortized Restricted Stock Compensation (contra-equity account) which represented the amount of compensation costs not yet recognized for Restricted Stock.
Director’s Compensation Plan
The Company’s Director’s Compensation Plan permits the issuance of up to 500,000 shares of the Company’s common stock to Non-Employee Directors. Under this Plan, each Non-Employee Director shall receive annual compensation in the form of both common stock and Stock Appreciation Rights (“SARs”) equal to $60 each. Awards to a Non-Employee Director vest immediately and must be held for 5 years subsequent to the date of grant or settlement, or one year post-resignation. The compensation expense recorded related to shares issued under the Director’s Plan was $565 and $445 for the three and six months ended June 30, 2006 and 2005, respectively.
Long-Term Incentive Plan (“LTIP”)
The 2004 Long-Term Incentive Plan provides for the granting of up to 10,000,000 shares of the Company’s common stock to employees and officers under the Assurant Long Term Incentive Plan (“ALTIP”), Business Value Rights (“BVR”) and CEO Equity Grants Plan.
The ALTIP authorizes the granting of Restricted Stock and SARs, subject to approval by the Compensation Committee, which is made up of members of the Board of Directors. Restricted Stock grants under the ALTIP are made annually and vest pro ratably over a three year period. Unearned compensation, representing the market value of the shares at the date of issuance, is charged to earnings over the vesting period. SARs grants under the ALTIP are also made annually and have a three year cliff vesting period and a five year contractual life. SARs not exercised prior to the end of the contractual life are automatically exercised on that date.
9
Assurant, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Six Months Ended June 30, 2006 and 2005
The BVR plan authorizes the granting of SARs, subject to the approval of the Compensation Committee or their designee. SARs grants under this plan are made annually and have a three year cliff vesting period and a three year contractual life, at the end of which the rights are automatically exercised.
The CEO Equity Grants Plan authorizes the granting of Restricted Stock, limited to 100,000 shares per year, subject to the approval of the CEO as authorized by the Compensation Committee. Restricted Stock grants under this plan have variable vesting schedules and grant dates.
All shares awarded under the LTIP vest and are exercised net of taxes at the option of the participants.
Restricted Stock
A summary of the Company’s outstanding Restricted Stock as of June 30, 2006, is presented below:
| Shares | Weighted-Average Grant-Date Fair Value | |||||
| Shares outstanding at December 31, 2005 |
127,601 | $ | 32.86 | |||
| Grants |
96,327 | 49.36 | ||||
| Vests |
(48,390 | ) | 31.07 | |||
| Forfeitures |
(13,482 | ) | 29.97 | |||
| Shares outstanding at June 30, 2006 |
162,056 | $ | 43.44 | |||
The compensation expense recorded related to Restricted Stock was $909 and $79 for the three months ended June 30, 2006 and 2005, respectively, and $1,520 and $159 for the six months ended June 30, 2006 and 2005, respectively. The related total income tax benefit recognized was $318 and zero for the three months ended June 30, 2006 and 2005, respectively, and $531 and zero for the six months ended June 30, 2006 and 2005, respectively.
As of June 30, 2006, there was $5,435 of unrecognized compensation cost related to outstanding Restricted Stock. That cost is expected to be recognized over a weighted-average period of 1.7 years. The total fair value of shares vested during the three months ended June 30, 2006 and 2005 was $1,296 and zero, respectively, and $2,231 and $580 for the six months ended June 30, 2006 and 2005, respectively.
Stock Appreciation Rights
On April 7, 2005, the Company approved an amendment to the Long-Term Incentive Plan. The amendment, which was effective June 30, 2005, amended SARs from rights that paid appreciation to participants in the form of cash to rights that pay appreciation to participants in the form of Company stock.
10
Assurant, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Six Months Ended June 30, 2006 and 2005
A summary of the Company’s SARs as of June 30, 2006, is presented below:
| Rights | Weighted Average Exercise Price |
Weighted Average Remaining |
Aggregate Intrinsic Value | ||||||||
| SARs outstanding, December 31, 2005 |
5,981,397 | $ | 27.40 | ||||||||
| Grants |
1,400,377 | 49.25 | |||||||||
| Exercises |
(379,907 | ) | 24.92 | ||||||||
| Forfeitures and adjustments |
(174,995 | ) | 32.24 | ||||||||
| SARs outstanding, June 30, 2006 |
6,826,872 | $ | 31.89 | 5.0 | $ | 113,886 | |||||
| SARs exercisable at June 30, 2006 |
2,844,200 | $ | 24.51 | 5.3 | $ | 67,941 | |||||
The fair value of each SARs outstanding was estimated on the date of grant using the Black-Scholes option-pricing model. Expected volatilities for awards issued during the six months ended June 30, 2005 were based on the median historical stock price volatility of a peer group of insurance companies. Expected volatilities for awards issued during the six months ended June 30, 2006 were based on the median historical stock price volatility of a peer group of insurance companies and implied volatilities from traded options on the Company’s stock. The expected term for rights granted under the previous plan that were converted on June 30, 2005 was assumed to be the optimal term from the employee’s perspective under the Black-Scholes Model. The expected term for grants made subsequent to the June 30, 2005 conversion was assumed to equal the average of the vesting period of the right and the full contractual term of the right. 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.
| For awards granted during the six months ended June 30, | ||||
| 2006 | 2005 | |||
| Expected Volatility |
20.25%-22.85% | 27.19% | ||
| Risk Free Interest Rates |
4.77%-4.89% | 3.69% | ||
| Dividend Yield |
0.65% | 0.89% | ||
| Expected Life |
3.00-3.88 | 3.75 | ||
There were 1,400,377 SARs granted during the three and six month periods ended June 30, 2006. The compensation expense recorded related to SARs was $3,728 and $6,678 for the three and six months ended June 30, 2006, respectively, and the related income tax benefit recognized was $1,274 and $2,306 for the three and six months ended June 30, 2006, respectively. Total compensation expense includes expense for SARs granted to the Board of Directors, which vest immediately.
The total intrinsic value of SARs options exercised during the six months ended June 30, 2006 was $8,406. As of June 30, 2006, there was approximately $25,402 of unrecognized compensation cost related to outstanding SARs. That cost is expected to be recognized over a weighted-average period of 1.6 years.
Executive 401K Plan
During the first six months of 2005, the Company purchased 12,900 treasury shares for $438 via a Rabbi Trust which was allocated to the Assurant Stock fund. Effective September 2005, the Assurant Stock Fund was dissolved and the Company’s stock will no longer be offered to participants of the Executive 401K Plan.
11
Assurant, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Six Months Ended June 30, 2006 and 2005
Employee Stock Purchase Plan
The Company’s Employee Stock Purchase Plan (“ESPP”), authorizes the issuance of up to 5,000,000 shares to employees who are participants in the Plan. The ESPP allows eligible employees to contribute, through payroll deductions, up to 15% of their after-tax compensation in each offering period toward the purchase of Company shares. There are two offering periods during the year (January 1 through June 30 and July 1 through December 31) and shares are purchased at the end of each offering period at 90% of the lower of the closing price of Company’s stock on the first or last day of the offering period. Prior to January 1, 2006, participants’ contribution was limited to a maximum of $6 per offering period. The ESPP was amended in November 2005 to increase the maximum contribution to $7.5 per offering period, or $15 per year.
The ESPP is offered to individuals who are scheduled to work at least 20 hours per week and at least five months per year, have been continuously employed for at least six months by the start of the offering period, are not temporary employees (employed less than 12 months), and have not been on a leave of absence for more than 90 days immediately preceding the offering period. Participants must be employed on the last day of the offering period in order to purchase Company shares under the ESPP. The maximum number of shares that can be purchased each offering period is 5,000 shares per employee.
In January 2006, the Company issued 73,992 shares to employees at a price of $32.59 for the offering period of July 1 through December 31, 2005, relating to the ESPP. In January 2005, the Company issued 71,860 shares at a price per share of $23.67 for the offering period of July 1 through December 31, 2004, relating to the ESPP.
In July 2006, the Company issued 78,575 shares to employees at a price per share of $39.66 for the offering period of January 1 through June 30, 2006, relating to the ESPP. In July 2005, the Company issued 77,017 shares at a price per share of $27.63 for the offering period of January 1 through June 30, 2005, relating to the ESPP.
The compensation expense recorded related to the ESPP was $257 and $574 for the three and six months ended June 30, 2006, respectively. Prior to the adoption of FAS 123R, the Company accounted for ESPP in accordance with APB 25 as non-compensatory plan, and accordingly did not record any compensation expense.
The fair value of each award under ESPP was estimated at the beginning of each offering period using the Black-Scholes option-pricing model and the assumptions in the following table. 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.
| For awards issued during the six months ended June 30, |
||||||
| 2006 | 2005 | |||||
| Expected Volatility |
21.09 | % | 15.90 | % | ||
| Risk Free Interest Rates |
3.35 | % | 1.63 | % | ||
| Dividend Yield |
0.88 | % | 1.06 | % | ||
| Expected Life |
0.5 | 0.5 | ||||
12
Assurant, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Six Months Ended June 30, 2006 and 2005
Pro-Forma Disclosure
The following pro forma information of net income and net income per share amounts were determined as if the Company had accounted for SARs and the ESPP Plan under the fair value method of FAS 123 for the three and six months ended June 30, 2005. This disclosure is not equivalent to the impact of FAS 123R.
| For the Three Months Ended June 30, |
For the Six Months Ended June 30, |
|||||||
| Net income as reported |
$ | 127,624 | $ | 242,022 | ||||
| Add: Stock-based employee compensation expense included in reported net income, net of related tax effects |
5,796 | 16,637 | ||||||
| Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects |
(21,450 | ) | (32,047 | ) | ||||
| Pro forma net income |
$ | 111,970 | $ | 226,612 | ||||
| Earnings per share as reported: |
||||||||
| Basic |
||||||||
| Diluted |
$ | 0.93 | $ | 1.74 | ||||
| $ | 0.92 | $ | 1.73 | |||||
| Pro forma earnings per share: |
||||||||
| Basic |
||||||||
| Diluted |
$ | 0.81 | $ | 1.63 | ||||
| $ | 0.81 | $ | 1.62 | |||||
13
Assurant, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Six Months Ended June 30, 2006 and 2005
6. Stock Repurchase
The following table shows the shares repurchased during the periods indicated:
| Period in 2006 |
Number of Shares Purchased |
Average Price Paid Per Share |
Total Number of Shares Purchased as Part of | ||||
| January |
450,200 | 44.33 | 450,200 | ||||
| February |
416,600 | 44.49 | 416,600 | ||||
| March |
550,000 | 46.38 | 550,000 | ||||
| April |
475,000 | 48.86 | 475,000 | ||||
| May |
475,000 | 49.90 | 475,000 | ||||
| June |
1,190,000 | 47.67 | 1,190,000 | ||||
| Total |
3,556,800 | $ | 47.13 | 3,556,800 | |||
For the six months ended June 30, 2006, the Company repurchased 3,556,800 shares of the Company’s outstanding common stock at a cost of $167,631 and has $228,109 remaining to purchase shares pursuant to the November 11, 2005 publicly announced repurchase program.
14
Assurant, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Six Months Ended June 30, 2006 and 2005
7. Earnings Per Common Share
The following table presents 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 category presented below.
| Three months ended June 30, | Six months ended June 30, | |||||||||||
| 2006 | 2005 | 2006 | 2005 | |||||||||
| (in thousands except number of shares and per share amounts) | ||||||||||||
| Numerator | ||||||||||||
| Net income before cumulative effect of change in accounting principle |
$ | 151,136 | $ | 127,624 | $ | 312,061 | $ | 242,022 | ||||
| Cumulative effect of change in accounting principle (Note 5) |
— | — | 1,547 | — | ||||||||
| Net income |
$ | 151,136 | $ | 127,624 | $ | 313,608 | $ | 242,022 | ||||
| Denominator | ||||||||||||
| Weighted average shares outstanding used in basic per share calculations |
128,488,126 | 137,700,163 | 129,239,104 | 138,712,723 | ||||||||
| Incremental common shares from assumed: |
||||||||||||
| SARs |
1,749,120 | 1,239,224 | 1,818,701 | 1,188,658 | ||||||||
| Executive 401K plan |
— | 32,250 | — | 28,091 | ||||||||
| Restricted stock |
54,400 | 21,532 | 54,660 | 21,272 | ||||||||
| ESPP |
35,988 | 26,219 | 84,680 | 79,305 | ||||||||
| Weighted average shares used in diluted per share calculations |
130,327,634 | 139,019,388 | 131,197,145 | 140,030,049 | ||||||||
| Earnings per share: | ||||||||||||
| Basic |
||||||||||||
| Net income before cumulative effect of change in accounting principle |
$ | 1.18 | $ | 0.93 | $ | 2.42 | $ | 1.74 | ||||
| Cumulative effect of change in accounting principle |
— | — | 0.01 | — | ||||||||
| Net income |
$ | 1.18 | $ | 0.93 | $ | 2.43 | $ | 1.74 | ||||
| Diluted |
||||||||||||
| Net income before cumulative effect of change in accounting principle |
$ | 1.16 | $ | 0.92 | $ | 2.38 | $ | 1.73 | ||||
| Cumulative effect of change in accounting principle |
— | — | 0.01 | — | ||||||||
| Net income |
$ | 1.16 | $ | 0.92 | $ | 2.39 | $ | 1.73 | ||||
Restricted shares totaling 32,139 and 75,742 for the three months ended June 30, 2006 and 2005, respectively, and 94,130 and 75,742 for the six months ended June 30, 2006 and 2005, respectively, were outstanding but were anti-dilutive and thus not included in the computation of diluted EPS under the treasury method. Average SARs totaling 698,939 for the three and six months ended June 30, 2006 were also outstanding but were anti-dilutive and thus not included in the computation of diluted EPS under the treasury method.
15
Assurant, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Six Months Ended June 30, 2006 and 2005
8. 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, 2006 and 2005 were as follows:
| Qualified Pension Benefits | Nonqualified Pension Benefits (1) | Retirement Health Benefits | ||||||||||||||||||||
| For the three months ended June 30, |
For the three months ended June 30, |
For the three months ended June 30, |
||||||||||||||||||||
| 2006 | 2005 | 2006 | 2005 | 2006 | 2005 | |||||||||||||||||
| Service cost |
$ | 4,961 | $ | 4,575 | $ | 465 | $ | 452 | $ | 698 | $ | 629 | ||||||||||
| Interest cost |
5,459 | 5,065 | 1,316 | 1,259 | 771 | 781 | ||||||||||||||||
| Expected return on plan assets |
(7,135 | ) | (6,565 | ) | — | — | (283 | ) | (267 | ) | ||||||||||||
| Amortization of prior service cost |
764 | 764 | 165 | 175 | 333 | 327 | ||||||||||||||||
| Amortization of net loss |
1,996 | 1,766 | 904 | 993 | — | — | ||||||||||||||||
| One Time Settlement Charge under FAS 88 |
— | — | 609 | — | — | — | ||||||||||||||||
| Net periodic benefit cost |
$ | 6,045 | $ | 5,605 | $ | 3,459 | $ | 2,879 | $ | 1,519 | $ | 1,470 | ||||||||||
| Qualified Pension Benefits | Nonqualified Pension Benefits (1) | Retirement Health Benefits | ||||||||||||||||||||
| For the six months ended June 30, |
For the six months ended June 30, |
For the six months ended June 30, |
||||||||||||||||||||
| 2006 | 2005 | 2006 | 2005 | 2006 | 2005 | |||||||||||||||||
| Service cost |
$ | 9,861 | $ | 9,060 | $ | 915 | $ | 981 | $ | 1,398 | $ | 1,195 | ||||||||||
| Interest cost |
10,734 | 10,116 | 2,616 | 2,503 | 1,596 | 1,559 | ||||||||||||||||
| Expected return on plan assets |
(14,160 | ) | (12,554 | ) | — | — | (558 | ) | (413 | ) | ||||||||||||
| Amortization of prior service cost |
1,539 | 1,528 | 340 | 350 | 658 | 654 | ||||||||||||||||
| Amortization of net loss |
4,071 | 3,405 | 1,829 | 1,820 | — | — | ||||||||||||||||
| One Time Settlement Charge under FAS 88 |
— | — | 609 | — | — | — | ||||||||||||||||
| Net periodic benefit cost |
$ | 12,045 | $ | 11,555 | $ | 6,309 | $ | 5,654 | $ | 3,094 | $ | 2,995 | ||||||||||
| (1) | The Company’s nonqualified plans are unfunded. |
During the first six months of 2006, the Company contributed $6,500, $3,744 and $546 to the qualified pension benefits plan, nonqualified pension benefits plan and the retirement health benefits plan, respectively. The Company expects to contribute $23,700 to its pension benefit plans and $1,500 to its retirement health benefit plan for the full year 2006.
9. Segment Information
On April 1, 2006, the Company separated Assurant Solutions business segment into two business segments: Assurant Solutions and Assurant Specialty Property. In addition, concurrent with the creation of the new Assurant Solutions and Assurant Specialty Property segments, the Company realigned the PreNeed segment under the new Assurant Solutions segment. The segment income statement for the three and six months ended June 30, 2005 and the segment assets for the year ended December 31, 2005 have been recast to reflect the new segment reporting structure.
In connection with the segment changes described above, the Company transferred the run-off Asbestos business previously in the Assurant Solutions segment to the Corporate & Other segment. The transfer of this business is consistent with the Company’s policy of managing run-off business in the Corporate & Other segment.
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 credit insurance, including life, disability and unemployment, debt protection administration services, warranties and extended service contracts and 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
16
Assurant, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Six Months Ended June 30, 2006 and 2005
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 segment income after-tax 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.
17
Assurant, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Six Months Ended June 30, 2006 and 2005
The following tables summarize selected financial information by segment:
| Three Months Ended June 30, 2006 | |||||||||||||||||||
| Solutions | Specialty Property |
Health | Employee Benefits |
Corporate & Other |
Consolidated | ||||||||||||||
| Revenues | |||||||||||||||||||
| Net earned premiums and other considerations |
$ | 592,182 | $ | 290,972 | $ | 519,587 | $ | 282,581 | $ | — | $ | 1,685,322 | |||||||
| Net investment income |
98,951 | 17,923 | 17,110 | 38,744 | 7,710 | 180,438 | |||||||||||||
| Net realized gains on investments |
— | — | — | — | 2,272 | 2,272 | |||||||||||||
| Amortization of deferred gain on disposal of businesses |
— | — | — | — | 10,022 | 10,022 | |||||||||||||
| Fees and other income |
39,525 | 13,587 | 10,250 | 7,547 | 127 | 71,036 | |||||||||||||
| Total revenues |
730,658 | 322,482 | 546,947 | 328,872 | 20,131 | 1,949,090 | |||||||||||||
| Benefits, losses and expenses |
|||||||||||||||||||
| Policyholder benefits |
247,208 | 110,474 | 321,322 | 195,195 | 5 | 874,204 | |||||||||||||
| Amortization of deferred acquisition costs and value of business acquired |
212,671 | 59,541 | 6,374 | 6,195 | — | 284,781 | |||||||||||||
| Underwriting, general and administrative expenses |
211,758 | 62,828 | 156,645 | 95,632 | 15,764 | 542,627 | |||||||||||||
| Interest expense |
— | — | — | — | 15,315 | 15,315 | |||||||||||||
| Total benefits, losses and expenses |
671,637 | 232,843 | 484,341 | 297,022 | 31,084 | 1,716,927 | |||||||||||||
| Segment income (loss) before income tax |
59,021 | 89,639 | 62,606 | 31,850 | (10,953 | ) | 232,163 | ||||||||||||
| Income taxes |
21,873 | 30,363 | 21,590 | 11,260 | (4,059 | ) | 81,027 | ||||||||||||
| Segment income (loss) after tax |
$ | 37,148 | $ | 59,276 | $ | 41,016 | $ | 20,590 | $ | (6,894 | ) | ||||||||
| Net Income |
$ | 151,136 | |||||||||||||||||
| Three Months Ended June 30, 2005 | |||||||||||||||||||
| Solutions | Specialty Property |
Health | Employee Benefits |
Corporate & Other |
Consolidated | ||||||||||||||
| Revenues | |||||||||||||||||||
| Net earned premiums and other considerations |
$ | 554,829 | $ | 207,696 | $ | 544,294 | $ | 316,420 | $ | — | $ | 1,623,239 | |||||||
| Net investment income |
100,107 | 14,843 | 17,170 | 38,274 | 6,624 | 177,018 | |||||||||||||
| Net realized gains on investments |
— | — | — | — | 4,079 | 4,079 | |||||||||||||
| Amortization of deferred gain on disposal of businesses |
— | — | — | — | 11,784 | 11,784 | |||||||||||||
| Fees and other income |
30,574 | 10,168 | 10,270 | 6,993 | 178 | 58,183 | |||||||||||||
| Total revenues |
685,510 | 232,707 | 571,734 | 361,687 | 22,665 | 1,874,303 | |||||||||||||
| Benefits, losses and expenses | |||||||||||||||||||
| Policyholder benefits |
269,284 | 72,294 | 333,101 | 241,537 | 7,795 | 924,011 | |||||||||||||
| Amortization of deferred acquisition costs and value of business acquired |
167,330 | 46,997 | 7,584 | 5,184 | — | 227,095 | |||||||||||||
| Underwriting, general and administrative expenses |
185,969 | 61,233 | 155,801 | 99,843 | 16,938 | 519,784 | |||||||||||||
| Interest expense |
— | — | — | — | 15,314 | 15,314 | |||||||||||||
| Total benefits, losses and expenses |
622,583 | 180,524 | 496,486 | 346,564 | 40,047 | 1,686,204 | |||||||||||||
| Segment income (loss) before income tax |
62,927 | 52,183 | 75,248 | 15,123 | (17,382 | ) | 188,099 | ||||||||||||
| Income taxes |
20,535 | 17,970 | 25,881 | 5,311 | (9,222 | ) | 60,475 | ||||||||||||
| Segment income (loss) after tax |
$ | 42,392 | $ | 34,213 | $ | 49,367 | $ | 9,812 | $ | (8,160 | ) | ||||||||
| Net Income |
$ | 127,624 | |||||||||||||||||
18
Assurant, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Six Months Ended June 30, 2006 and 2005
| Six Months Ended June 30, 2006 | ||||||||||||||||||||
| Solutions | Specialty Property |
Health | Employee Benefits |
Corporate & Other |
Consolidated | |||||||||||||||
| Revenues | ||||||||||||||||||||
| Net earned premiums and other considerations |
$ | 1,162,570 | $ | 543,721 | $ | 1,042,992 | $ | 608,692 | $ | — | $ | 3,357,975 | ||||||||
| Net investment income |
196,033 | 34,713 | 41,111 | 79,583 | 21,560 | 373,000 | ||||||||||||||
| Net realized losses on investments |
— | — | — | — | (2,180 | ) | (2,180 | ) | ||||||||||||
| Amortization of deferred gain on disposal of businesses |
— | — | — | — | 18,855 | 18,855 | ||||||||||||||
| Fees and other income |
73,695 | 23,045 | 19,976 | 14,379 | 127 | 131,222 | ||||||||||||||
| Total revenues |
1,432,298 | 601,479 | 1,104,079 | 702,654 | 38,362 | 3,878,872 | ||||||||||||||
| Benefits, losses and expenses | ||||||||||||||||||||
| Policyholder benefits |
495,588 | 180,933 | 646,723 | 440,634 | 5 | 1,763,883 | ||||||||||||||
| Amortization of deferred acquisition costs and value of business acquired |
430,378 | 114,037 | 13,473 | 12,276 | — | 570,164 | ||||||||||||||
| Underwriting, general and administrative expenses |
388,929 | 117,421 | 312,258 | 188,665 | 32,403 | 1,039,676 | ||||||||||||||
| Interest expense |
— | — | — | — | 30,630 | 30,630 | ||||||||||||||
| Total benefits, losses and expenses |
1,314,895 | 412,391 | 972,454 | 641,575 | 63,038 | 3,404,353 | ||||||||||||||
| Segment income (loss) before income tax |
117,403 | 189,088 | 131,625 | 61,079 | (24,676 | ) | 474,519 | |||||||||||||
| Income taxes |
40,508 | 65,368 | 45,513 | 21,304 | (10,235 | ) | 162,458 | |||||||||||||
| Segment income (loss) after tax |
$ | 76,895 | $ | 123,720 | $ | 86,112 | $ | 39,775 | $ | (14,441 | ) | $ | 312,061 | |||||||
| Cumulative effect of change in accounting principle |
1,547 | |||||||||||||||||||
| Net income |
$ | 313,608 | ||||||||||||||||||
| As of June 30, 2006 | ||||||||||||||||||||
| Segment Assets: | ||||||||||||||||||||
| Segments assets, excluding goodwill |
$ | 10,284,736 | $ | 2,095,451 | $ | 1,492,308 | $ | 2,933,983 | $ | 6,920,684 | $ | 23,727,162 | ||||||||
| Goodwill |
805,254 | |||||||||||||||||||
| Total Assets |
$ | 24,532,416 | ||||||||||||||||||
| Six Months Ended June 30, 2005 | ||||||||||||||||||||
| Solutions | Specialty Property |
Health | Employee Benefits |
Corporate & Other |
Consolidated | |||||||||||||||
| Revenues | ||||||||||||||||||||
| Net earned premiums and other considerations |
$ | 1,090,181 | $ | 408,790 | $ | 1,093,820 | $ | 662,342 | $ | — | $ | 3,255,133 | ||||||||
| Net investment income |
186,303 | 29,824 | 34,875 | 76,257 | 13,959 | 341,218 | ||||||||||||||
| Net realized gains on investments |
— | — | — | — | 4,571 | 4,571 | ||||||||||||||
| Amortization of deferred gain on disposal of businesses |
— | — | — | — | 23,647 | 23,647 | ||||||||||||||
| Fees and other income |
59,663 | 18,361 | 20,601 | 13,182 | 281 | 112,088 | ||||||||||||||
| Total revenues |
1,336,147 | 456,975 | 1,149,296 | 751,781 | 42,458 | 3,736,657 | ||||||||||||||
| Benefits, losses and expenses | ||||||||||||||||||||
| Policyholder benefits |
528,958 | 143,038 | 678,469 | 509,275 | 7,795 | 1,867,535 | ||||||||||||||
| Amortization of deferred acquisition costs and value of business acquired |
323,156 | 92,988 | 16,507 | 9,890 | — | 442,541 | ||||||||||||||
| Underwriting, general and administrative expenses |
387,143 | 110,362 | 303,641 | 192,154 | 37,831 | 1,031,131 | ||||||||||||||
| Interest expense |
— | — | — | — | 30,628 | 30,628 | ||||||||||||||
| Total benefits, losses and expenses |
1,239,257 | 346,388 | 998,617 | 711,319 | 76,254 | 3,371,835 | ||||||||||||||
| Segment income (loss) before income tax |
96,890 | 110,587 | 150,679 | 40,462 | (33,796 | ) | 364,822 | |||||||||||||
| Income taxes |
31,064 | 38,082 | 51,639 | 14,271 | (12,256 | ) | 122,800 | |||||||||||||
| Segment income after tax |
$ | 65,826 | $ | 72,505 | $ | 99,040 | $ | 26,191 | $ | (21,540 | ) | |||||||||
| Net Income |
$ | 242,022 | ||||||||||||||||||
| As of December 31, 2005 | ||||||||||||||||||||
| Segment Assets: | ||||||||||||||||||||
| Segments assets, excluding goodwill |
$ | 10,457,115 | $ | 2,262,901 | $ | 1,452,878 | $ | 2,898,472 | $ | 7,489,223 | $ | 24,560,589 | ||||||||
| Goodwill |
804,864 | |||||||||||||||||||
| Total Assets |
$ | 25,365,453 | ||||||||||||||||||
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Assurant, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Six Months Ended June 30, 2006 and 2005
10. Commitments and Contingencies
In the normal course of business, letters of credit are issued primarily to support reinsurance arrangements. These letters of credit are supported by commitments with financial institutions. The Company had $33,839 of letters of credit outstanding as of June 30, 2006.
The Company is regularly 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 or results of operations.
The Solutions segment is subject to a number of pending actions, primarily in the State of Mississippi, many of which allege that the Company’s credit insurance products were packaged and sold with lenders’ products without buyer consent. The judicial climate in Mississippi is such that the outcome of these cases is extremely unpredictable. The Company has been advised by legal counsel that the Company has meritorious defenses to all claims being asserted against the Company. The Company believes, based on information currently available, that the amounts it has accrued are adequate.
In addition, 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. 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. Loss accruals previously established relating to the 1996 program 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.
The Company was notified on August 26, 2004 that a former employee is being investigated by the criminal division of the Internal Revenue Service (“IRS”) for responses he made to questions he was asked by the IRS relating to an approximately $18,000 tax reserve taken by the Company in 1999. Recently, counsel for the employee was notified by the IRS that the matter was closed in February 2006 with no action taken.
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Assurant, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Six Months Ended June 30, 2006 and 2005
As part of ongoing, industry-wide investigations, the Company has received various subpoenas and requests from the United States Securities and Exchange Commission and the United States Attorney for the Southern District of New York seeking the production of various documents. The areas of inquiry addressed to the Company include “certain loss mitigation products” and documents relating to the use of finite risk insurance. The Company is cooperating fully with these investigations and is complying with these requests.
Based on the Company’s investigation to date into this matter, the Company has concluded that there was a verbal side agreement with respect to one of the Company’s reinsurers under its catastrophic reinsurance program. While management believes that the difference resulting from the appropriate alternative accounting treatment would be immaterial to the Company’s 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 $0, respectively. This contract expired in December of 2004 and was not renewed.
The Audit Committee of the Company’s Board of Directors, with the assistance of independent counsel has completed its initial investigation of the matter raised by the subpoenas and continues to respond to inquiries from the regulatory agencies. The Audit Committee has not found any wrongdoing on the part of any current officers of the Company. The Company has enhanced its internal controls regarding reinsurance and these controls are being appropriately monitored to ensure their effectiveness.
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Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
The Company’s Chief Executive Officer and Chief Financial Officer had previously evaluated the effectiveness of the Company’s disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act of 1934, as of June 30, 2006. This included an evaluation of disclosure controls and procedures applicable to the period covered by and existing through the original filing of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006. Based on that review, the Company’s Chief Executive Officer and Chief Financial Officer had previously 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. In connection with this filing on Form 10-Q/A, the Chief Executive Officer and Chief Financial Officer reevaluated our disclosure controls and procedures and concluded they were effective as of June 30, 2006 as described above. In reaching this conclusion, management considered the impact of the restatement described in Note 2 to the financial statements included in this filing.
Internal Control over Financial Reporting
No material weaknesses were identified at June 30, 2006. During the quarter ending June 30, 2006, there were 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.
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PART II
OTHER INFORMATION
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 at www.assurant.com.
| Exhibit Number |
Exhibit Description | |
| 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. | |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| ASSURANT, INC. | ||||
| Date: November 14, 2006 | By: | /s/ Robert B. Pollock | ||
| Name: | Robert B. Pollock | |||
| Title: | President and Chief Executive Officer | |||
| Date: November 14, 2006 | By: | /s/ P. Bruce Camacho | ||
| Name: | P. Bruce Camacho | |||
| Title: | Executive Vice President and Chief Financial Officer | |||
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