SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-31978
(Exact name of registrant as specified in its charter)
(State or Other Jurisdiction
of Incorporation or Organization)
28 Liberty Street, 41st Floor
New York, New York
(Address of Principal Executive Offices)
Registrant’s telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Name of Each Exchange on Which Registered
Common Stock, $0.01 Par Value
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨
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Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
¨ (Do not check if a smaller reporting company)
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
The aggregate market value of the Common Stock held by non-affiliates of the registrant was $5.56 billion at June 30, 2017 based on the closing sale price of $103.69 per share for the common stock on such date as traded on the New York Stock Exchange.
The number of shares of the registrant’s Common Stock outstanding at February 8, 2018 was 52,475,408.
Documents Incorporated by Reference
Certain information contained in the definitive proxy statement for the Company's 2018 annual meeting of stockholders is incorporated by reference into Part III hereof.
ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended December 31, 2017
TABLE OF CONTENTS
Amounts are presented in United States of America (“U.S.”) dollars and all amounts are in millions, except for number of shares, per share amounts, registered holders, number of employees, beneficial owners, number of securities in an unrealized loss position and number of loans.
Some statements under “Business,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Annual Report on Form 10-K (this "Report"), particularly those anticipating future financial performance, business prospects, growth and operating strategies and similar matters, including with respect to estimated reportable catastrophes and the pending transaction, are forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. You can identify these statements by the use of words such as “will,” “may,” “can,” “anticipates,” “expects,” “estimates,” “projects,” “intends,” “plans,” “believes,” “targets,” “forecasts,” “potential,” “approximately,” or the negative version of those words and other words and terms with a similar meaning. Any forward-looking statements contained in this report are based upon our historical performance and on current plans, estimates and expectations. The inclusion of this forward looking information should not be regarded as a representation by us or any other person that the future plans, estimates or expectations contemplated by us will be achieved. Our actual results might differ materially from those projected in the forward-looking statements. Assurant, Inc. ("the Company" or "Assurant") undertakes no obligation to update or review any forward-looking statement, whether as a result of new information, future events or other developments. For a discussion of the risk factors that could affect our actual results, please refer to “Critical Factors Affecting Results” in Item 7 and “Risk Factors” in Item 1A of this Report.
Unless the context otherwise requires, references to the terms “Assurant,” the “Company,” “we,” “us” and “our” refer to our consolidated operations.
Item 1. Business
Assurant, Inc. was incorporated as a Delaware corporation in 2004.
Assurant is a global provider of risk management solutions in the housing and lifestyle markets, protecting where people live and the goods they buy. Assurant operates in North America, Latin America, Europe and Asia Pacific through three operating segments: Global Housing, Global Lifestyle, and Global Preneed. Assurant partners with clients who are leaders in their industries to provide consumers a diverse range of protection products and services. Through its Global Housing segment, Assurant provides lender-placed homeowners, manufactured housing and flood insurance; renters insurance and related products (referred to as our “multi-family housing” business); and valuation and field services (referred to as our “mortgage solutions” business). Through its Global Lifestyle segment, Assurant provides mobile device protection products and related services and extended service products and related services for consumer electronics and appliances (referred to as our “Connected Living” business); vehicle protection services; and credit insurance. Global Preneed provides pre-funded funeral insurance and annuity products.
Our Competitive Strengths
Our financial strength and our core capabilities across our businesses create competitive advantages that we believe allow us to support our clients and our profitable growth over the long term.
Our financial strength. We believe we have a strong balance sheet with a low leverage ratio. As of December 31, 2017, we had $31.84 billion in assets and our debt to total capital was 20.0%. In addition, our Global Housing, Global Lifestyle and Global Preneed segments generate significant amounts of cash flow, which provides us with the flexibility to make appropriate investments in strategic capabilities, and enter into partnerships with our clients.
Client and consumer insights support product innovation. During our long business tenure, we have developed a comprehensive understanding of our clients and the consumer markets we serve. We seek to leverage consumer insights, together with deep market knowledge and capabilities, to anticipate and identify the specific needs of our clients and consumers they serve. We intend to continue to capitalize on our client and consumer insights to introduce new and innovative products and services and to adapt those products and services to address emerging issues.
Value chain integration. We own or manage multiple pieces of the value chain, which enables us to create products and service offerings based on specific client needs and provide a more seamless experience for consumers. Offering end-to-end solutions allows us to adapt more quickly and efficiently to client and consumer needs. Visibility across the value chain helps us collect and share insights to improve the consumer experience and our offerings.
Our Strategy for Profitable Growth
Our vision is to be the premier provider of risk management solutions in our addressable markets within the housing and lifestyle markets globally. To achieve this vision, we recently underwent a multi-year transformation to position ourselves for long-term profitable growth by:
Growing our portfolio of market leading businesses. We leverage our competitive strengths to focus on niche businesses where we can maintain or reach market leading positions and achieve attractive returns. We periodically assess our business portfolio to ensure we align resources with the best opportunities within the housing and lifestyle markets and, currently, we have identified connected living, multi-family housing and vehicle protection services as key businesses targeted for growth. We are focused on growing our businesses by continuing to invest in niche capabilities, further expanding our offerings and diversifying our distribution channels.
Providing integrated risk management offerings. We provide an array of services that are complementary to our risk-based products. As we adapt our business portfolio to respond to client and consumer needs, our mix of business will continue to evolve. In 2017, fee-based, capital-light businesses accounted for $2.78 billion, or 48%, of net earned premiums, fees and other income for Global Housing, Global Lifestyle and Global Preneed, compared to 52% in 2016. This business mix shift will diversify our revenue and earnings.
Implementing a more agile and efficient operating model. We expect that the implementation of our global operating model, including a more integrated organizational structure across our global operations, will achieve efficiencies to support our profitable growth long-term. We reorganized our global business operating structure to increase competitive agility and deliver
superior customer experience and centralizing key support functions to reduce overall expenditures over time and benefit from economies of scale.
Deploying our capital strategically. We deploy capital to invest in and grow our businesses, repurchase shares and pay dividends. Our approach to mergers, acquisitions and other growth opportunities reflects our prudent and disciplined approach to managing our capital. We target new business and capabilities that complement or support our business model, which is focused on expanding capabilities and distribution in targeted growth businesses globally.
Assurant largely completed its multi-year transformation in 2017. We made considerable progress in advancing our position as a leading provider of risk management solutions. In October 2017, we announced our agreement to acquire The Warranty Group, a premier provider of extended service contracts, for $2.50 billion from TPG Capital. In January 2018, we amended the transaction structure following the enactment of the U.S. Tax Cuts and Jobs Act ("TCJA"). The proposed acquisition will help enhance our position as a leading lifestyle provider, specifically within the vehicle protection business, with significant operating synergies and deepened global footprint. The transaction is expected to close in the second quarter of 2018, subject to regulatory approvals and other customary closing conditions. Integration planning between both companies has begun and will continue through the close of the transaction and thereafter.
Throughout 2017, we managed our capital prudently. At year-end, Assurant fulfilled its two-year commitment to return $1.50 billion to shareholders by the end of 2017. The goal was intended to return a majority of the proceeds from the 2016 sale of our Assurant Employee Benefits business and dividends from our wind down of Assurant's health business to shareholders through share repurchases and common stock dividends.
In addition, the Company continued to move to a more integrated global organizational structure for its business operations and key support functions. We created an enterprise global procurement function to realize expense savings from third-party providers, which in turn can fund ongoing investments in our businesses. During the year we invested in digital and data analytics areas and also established capability centers for enterprise strategic account management, customer experience, robotics and artificial intelligence. We will continue to focus on strengthening our competitive advantage as we look to maximize shareholder value.
The composition of our reportable segments match how we view and manage our business. For additional information on our segments, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations” and Note 3 to the Consolidated Financial Statements included elsewhere in this Report.
For the Years Ended
December 31, 2017
December 31, 2016
December 31, 2015
Net earned premiums, fees and other by major product grouping:
Manufactured housing and other
Segment net income
Combined ratio for risk-based businesses (1)
Pre-tax income margin for fee-based, capital-light businesses (2)
Equity, excluding accumulated other comprehensive income
The combined ratio for risk-based businesses is equal to total policyholder benefits, losses and expenses, including reportable catastrophe losses, divided by net earned premiums and fees and other income for lender-placed insurance, manufactured housing and other insurance businesses.
The pre-tax margin for fee-based, capital-light businesses equals income before provision for income taxes divided by net earned premiums and fees and other income for multi-family housing and mortgage solutions.
Our Products and Services
Global Housing has three key lines of business: lender-placed insurance, multi-family housing (which is comprised of renters insurance and related products) and mortgage solutions (which is comprised of property inspection and preservation, valuation and title services and other property risk management services). We also provide voluntary manufactured housing, homeowners and flood insurance.
Lender-placed insurance: We provide lender-placed insurance for homeowners, manufactured housing and flood as described below.
Lender-placed homeowners insurance. Lender-placed homeowner's insurance consists principally of fire and dwelling hazard insurance offered through our lender-placed program. The lender-placed program provides collateral protection to lenders, mortgage servicers and investors in mortgaged properties in the event that a homeowner does not maintain insurance on a mortgaged dwelling. Lender-placed insurance provides structural coverage, similar to that of a standard homeowner's policy. The amount of coverage is often based on the last known insurance coverage under the prior policy for the property and provides replacement cost coverage on the property. It protects both the lender’s interest and the borrower’s interest and equity. We also provide Real Estate Owned (“REO”) insurance, consisting of insurance on foreclosed properties managed by our clients.
In the majority of cases, we use a proprietary insurance-tracking administration system linked with the administrative systems of our clients to monitor clients’ mortgage portfolios to verify the existence of insurance on each mortgaged property and identify those that are uninsured. If there is a potential lapse in insurance coverage, we begin a process of notification and outreach to both the homeowner and the last known insurance carrier or agent through phone calls and written correspondence, which generally takes up to 90 days to complete. If coverage cannot be verified at the end of this process, the mortgage servicer procures a lender-placed policy for which the homeowner is responsible for paying the related premiums. Our placement rates reflect the percentage of insurance policies placed to loans tracked. The homeowner always retains the option to obtain or renew the insurance of his or her choice.
Lender-placed manufactured housing insurance. Lender-placed manufactured housing insurance consists principally of fire and dwelling hazard insurance for manufactured housing offered through our lender-placed program. Lender-placed insurance for manufactured housing is issued after an insurance tracking process similar to that described above. In most cases, tracking is performed using a proprietary insurance tracking administration system.
Lender-placed flood insurance. Lender-placed flood insurance consists of flood insurance offered through our lender-placed program. It provides collateral protection to lenders in mortgaged properties in the event a homeowner does not maintain flood insurance. Lender-placed flood insurance is issued after an insurance tracking process similar to that described above.
Multi-family housing: We offer renters insurance for a wide variety of multi-family rental properties, including vacation rentals, providing content protection for renters’ personal belongings and liability protection for the property owners against renter-caused damage. We also provide tenant bonds as an alternative to a security deposit, which allows our clients to offer a lower move-in cost option while minimizing the risk of loss from damages, and receivables management, which helps our clients to maximize the collection of amounts owed by prior tenants.
Mortgage solutions: We have capabilities across the mortgage loan lifecycle to better serve our clients by offering mortgage related services. Our service offerings include:
•Field Services. We provide field services, inspection services, restoration and REO asset management to mortgage servicing clients and investors through a nationwide network of independent contractors.
•Valuation and Title Services. We provide valuation services across the origination, home equity and default markets through a nationwide network of independent contractors as well as internal appraisers. Valuation services include origination, default and home equity appraisals, broker price opinions which assist mortgage servicing clients with determining property values and alternative valuations products. We also provide title and settlement services to home equity lenders, as well as conventional mortgage lenders and refinancing lenders.
Manufactured housing and other insurance products: We offer voluntary manufactured housing insurance, homeowners insurance, and several other niche products. Our voluntary insurance generally provides structural coverage, as well as content and liability coverage. We are the second largest administrator for the U.S. government under the voluntary National Flood Insurance Program (“NFIP”), for which we earn fees for collecting premiums and processing claims. This business is 100% reinsured to the U.S. government.
Distribution and Clients
Global Housing establishes long-term relationships with leading mortgage lenders, mortgage servicers, other financial institutions and property management companies. The majority of our lender-placed agreements are exclusive. Typically, these agreements have terms of three to five years and allow us to integrate our systems with those of our clients. We offer our manufactured housing insurance programs primarily through manufactured housing lenders and retailers, along with independent specialty agents. Independent specialty agents also distribute flood products and other specialty property products. Multi-family housing products are distributed primarily through property management companies and affinity marketing partners. Our mortgage solutions services are provided directly to mortgage lenders and servicers, typically under non-exclusive arrangements.
As of December 31, 2017, no single Global Housing client accounted for 10% or more of our consolidated revenue. However, Global Housing is dependent on a few clients, and the loss of any one or more such clients could have a material adverse effect on the Company's results of operations and cash flows. See “Item 1A. Risk Factors - Our revenues and profits may decline if we are unable to maintain relationships with significant clients, distributors and other parties important to the success of our business, or renew contracts with them on favorable terms, or if those parties face financial, reputational or regulatory issues.”
Our Addressable Markets and Market Activity
With respect to the lender-placed market, placement rates have declined as the housing market has improved resulting in lower net earned premiums. We expect placement rates to continue to decline in 2018 as the lender-placed market moves closer to what we expect to be its steady state.
The U.S. renters insurance market is a growing market where we believe there is opportunity to increase our market share. Decreasing homeownership rates have contributed to growth of rental households and, consequently, demand for rental insurance.
We expect the default and valuations markets to be lower than 2017 levels due to expected lower origination, refinancing, delinquency and default volumes. We believe there are opportunities for growth from increasing wallet share with existing clients and increasing our market share with new clients. This along with continued focus on expense management should improve overall results.
In February 2017, the Company acquired Green Tree Insurance Agency, Inc., which sells housing protection products, including voluntary homeowners and manufactured housing policies, and other insurance products.
The Company earns premiums on its insurance products and fees for its other services. Our lender-placed homeowners insurance program and certain of our lender-placed manufactured housing products are not underwritten on an individual policy basis. Contracts with our clients require us to issue these policies automatically when a borrower’s insurance coverage is not maintained. These products are priced to factor in the additional risk from ensuring all client properties are provided continuous insurance coverage. We monitor pricing adequacy based on a variety of factors and adjust pricing as required, subject to regulatory constraints.
Because several of our business lines (such as homeowners, manufactured housing, and other property policies) are exposed to catastrophe risks, we purchase reinsurance coverage to protect capital and to mitigate earnings volatility. The Company continues to expand its international footprint by partnering with financial services clients and assuming dwelling-related business in the Caribbean Islands and Latin America. Our reinsurance program generally incorporates a provision to allow for the reinstatement of coverage, which provides protection against the risk of multiple catastrophes in a single year. For 2017 and continuing into 2018, Assurant purchased a $1.31 billion property catastrophe reinsurance program. The U.S. per-occurrence catastrophe coverage provides $975.0 million of protection in excess of $120.0 million of retention and Caribbean and Latin American catastrophe coverage provides up to $152.5 million in excess of $17.5 million retention and $183.5 million in excess of $4.5 million retention, respectively.
We experience seasonal fluctuation in some of our lines of businesses but we have not experienced material seasonal trends overall. Seasonality for mortgage solutions is in line with seasonality in the overall housing and mortgage markets. Several of our business lines are exposed to catastrophe risks, which experience seasonal fluctuations as large catastrophes such as hurricanes typically occur in the second half of the year.
For the Years Ended
December 31, 2017
December 31, 2016
December 31, 2015
Net earned premiums, fees and other by major product groupings:
Global connected living (mobile, service contracts and assistance services) (1)
Global vehicle protection services
Global credit and other
Segment net income
Combined ratio for risk-based businesses (2)
Pre-tax income margin for fee-based, capital-light businesses (3)
Equity, excluding accumulated other comprehensive income (4)
In 2017, 2016 and 2015, 58.7%, 45.2% and 40.2% of the total was from mobile products, 39.3%, 54.7% and 59.7% was from service contracts, and 2.0%, 0.1% and 0.1% was from assistance services, respectively. In 2017, net earned premiums, fees and other income decreased as a result of a change in program structure for a large service contract client.
The combined ratio for risk-based businesses is equal to total benefits, losses and expenses divided by net earned premiums and fees and other income for global vehicle protection services, global credit and other insurance businesses.
The pre-tax income margin for fee-based, capital-light businesses equals income before provision for income taxes divided by net earned premiums and fees and other income for global connected living.
For purposes of presentation comparability, the 2015 equity measure reflects goodwill as if it were reallocated using the same fair value percentage as 2016. However, such segment change and reallocation did not occur until 2016.
Our Products and Services
Global Lifestyle has three key lines of business: global connected living, which includes mobile device protection products and related services, extended service contracts (insurance policies and warranties) (“ESCs”) for consumer electronics and appliances, and assistance services; global vehicle protection services; and global credit and other insurance.
Global connected living: Through partnerships with mobile carriers, original equipment manufacturers (“OEMs”), e-commerce and other retailers and multiple system operators (“MSOs”), we underwrite and provide administrative services for ESCs. These contracts provide consumers with coverage on mobile devices and consumer electronics and appliances, protecting them from certain covered losses. We pay the cost of repairing or replacing these consumer goods in the event of loss, theft, accidental damage and mechanical breakdown or electronic malfunction after the manufacturer's warranty expires. Our strategy is to provide integrated service offerings to our clients that address all aspects of the insurance, ESC or warranty: program design and marketing strategy, risk management, data analytics, customer support and claims handling, supply chain and service delivery, and repair and logistics. For example, we seek to provide end-to-end mobile device lifecycle services in our mobile business - from when the device is received and inspected, repaired or refurbished, and ultimately disposed of through a sale to third parties or used to meet an insurance claim. In addition to extended protection for multiple devices, our mobile offerings include trade-in and upgrade programs, premium customer support including device self-diagnostic tools, and device disposition. We believe that with the required administrative capability, supply chain and technical support infrastructure and insurance underwriting capabilities, we maintain a differentiated position in this marketplace.
In addition, global connected living also includes our 40% investment in Iké Asistencia (“Iké”), a services assistance business with significant business in Mexico and other countries in Latin America. Iké primarily provides roadside assistance, home assistance, travel, mobile and other protection products and services.
Global vehicle protection services: We underwrite and provide administrative services for vehicle service contracts (“VSCs”) and ancillary products providing coverage for vehicles, including parts, such as automobiles, trucks, recreational vehicles and motorcycles. For VSCs, we pay the cost of repairing a customer’s vehicle in the event of mechanical breakdown. For ancillary products, coverage varies, but, generally, we pay the cost of repairing, servicing, or replacing parts or other financial compensation in the event of mechanical breakdown, accidental damage or theft. We provide integrated service offerings to our clients, including program design and marketing strategy, risk management, data analytics, customer support and claims handling, reinsurance facilitation, as well as actuarial consulting.
Global credit and other insurance: Our global credit and other lines of business maintain a suite of over 45 protection and assurance products delivering the best combination of features and benefits for varying customer segment needs. With over 75
major financial services clients, we provide value-added financial services in the U.S., Canada, Argentina, Brazil, Mexico, Puerto Rico, Chile and the United Kingdom (“U.K.”), ranging from traditional credit insurance to travel and ID protection. Although credit insurance has been in decline in the U.S., it continues to be actively sold internationally.
Distribution and Clients
Global Lifestyle operates globally, with approximately 73% of its revenue from North America (U.S. and Canada), 15% from Latin America (Brazil, Argentina, Puerto Rico, Mexico, Chile, Colombia and Peru), 11% from Europe (U.K., France, Italy, Spain and Germany) and 1% from Asia Pacific (South Korea, China and Japan). Global Lifestyle focuses on establishing strong, long-term relationships with clients that are leaders in their markets, including leading distributors of our products and services. In our mobile business, we partner with mobile carriers, manufacturers, MSOs, retailers and financial institutions that market our mobile device protection and related services. We also partner with some of the largest OEMs and consumer electronics retailers, appliance retailers (including electronic commerce retailers) and MSOs to market our ESC products.
In international markets, we primarily sell consumer service contracts, including mobile device protection, and credit insurance products through agreements with financial institutions, retailers and mobile service providers. Systems, training, computer hardware and our overall market development approach are customized to fit the particular needs of each targeted international market. For additional information relating to our international operations, see “Item 1A. Risk Factors - We face risks associated with our international operations.”
Most of our distribution agreements are exclusive. Typically, these agreements are multi-year with terms between 3 and 5 years on average and allow us to integrate our administrative systems with those of our clients.
As of December 31, 2017, no single Global Lifestyle client accounted for 10% or more of our consolidated revenue. However, Global Lifestyle is dependent on a few clients and the loss of any one or more such clients could have a material adverse effect on the Company's results of operations and cash flows. See “Item 1A. Risk Factors - Our revenues and profits may decline if we are unable to maintain relationships with significant clients, distributors and other parties important to the success of our business, or renew contracts from them on favorable terms, or if those parties face financial, reputational or regulatory issues.”
Our Addressable Markets and Market Activity
The mobile insurance market is a large and growing global market. While smartphone penetration in the U.S. and European markets are very high, the international markets have continued to grow. The worldwide used and refurbished smartphone market is also expected to continue to grow.
In addition, consumer needs relating to mobile devices are continuing to expand in scope. We believe there are growth opportunities in bundled protection products, which support customers as they take full advantage of the features and functions of their smart phones through their daily interaction with a connected world. Customer support programs, device financing, buyback and trade-in programs are just a few areas that have or are gaining traction. Expanded capabilities like repair and logistics, technical support for customers and digital security allow us to create product offers that customers may find compelling.
Our business is subject to fluctuations in mobile device trade-in volumes based on the release of new devices and carrier promotional programs, as well as to changes in the mobile market dynamics. For example, as a general trend, we believe the average smartphone replacement cycle is lengthening; however, this trend may be reversed based on new technology and innovation.
In the vehicle sales markets, the U.S. new vehicle sales have been relatively flat in 2017, with new auto sales being down while light duty trucks and SUV sales show year over year increase. The used market remains strong and continues to grow. International new vehicle sales continue to grow in most markets.
The Company earns premiums on its insurance and warranty products and fees for its other services. We write a portion of our contracts on a retrospective commission basis. This allows us to adjust commissions on the basis of claims experience. Under these commission arrangements, the compensation of our clients is based upon the actual losses incurred compared to premiums earned after a specified net allowance to us. We believe that these arrangements better align our clients’ interests with ours and help us to better manage risk exposure.
In our mobile business, we carry inventory to meet delivery requirements of certain clients. Our mobile business is subject to the risk that the value of the inventory (as well as devices that are subject to guaranteed buybacks) will be impacted adversely by price reductions or technological changes affecting the usefulness or desirability of the devices and parts, physical
problems resulting from faulty design or manufacturing, as well as increased competition and growing industry emphasis on cost containment. We take various actions to reduce our risk, including monitoring our inventory levels and controlling the timing of purchases, as well as obtaining return rights for some programs and devices. However, no assurance can be given that we will be adequately protected against declines in value. Inventory levels may vary from period to period, due to, among other things, differences between actual demand and forecast, the addition of new devices and parts and strategic purchases. Payment terms with clients may also vary, resulting in fewer inventory financed by clients and more inventory financed with our own capital. See “Item 1A. Risk Factors - A decline in the value of devices in our inventory or subject to guaranteed buybacks could have a material adverse effect on our profitability.”
We experience some seasonal fluctuations that impact demand in each of our lines of businesses and losses in some, but we have not experienced material seasonal trends overall. For example, seasonality for ESCs and VSCs is in line with seasonality of retail and automobile markets. In addition, our mobile results may fluctuate quarter to quarter due to the timing of release of new devices and carrier promotional programs.
For the Years Ended
December 31, 2017
December 31, 2016
December 31, 2015
Net earned premiums, fees and other income
Segment net income
Equity, excluding other comprehensive income (1)
For purposes of presentation comparability, the 2015 equity measure reflects goodwill as if it were reallocated using the same fair value percentage as 2016. However, such segment change and reallocation did not occur until 2016.
Global Preneed offers pre-funded funeral insurance in Canada and the U.S.
Our Products and Services
Pre-funded funeral insurance provides whole life insurance or annuity death benefits to fund the costs associated with pre-arranged funerals, which are planned and paid for in advance of death. Our pre-funded funeral insurance products are typically structured as whole life insurance policies in the U.S. and offer limited pay or pay for life options. In Canada, our pre-funded funeral insurance products are typically structured as limited pay annuity contracts. Product choices are based on the health and financial situation of the customer and the distribution channel.
Consumers have the choice of making their policy payments as a single lump-sum payment, through multi-payment plans that spread payments out over a period of time, or as a pay for life policy. Our insurance policy is intended to cover the cost of the prearranged funeral and the funeral home generally becomes the irrevocable assignee of any proceeds from the insurance policy. However, the insured may name a beneficiary for excess proceeds; otherwise, any excess proceeds are paid to the estate. The funeral home agrees to provide the selected funeral at death in exchange for the policy proceeds. Because the death benefit under many of our policies is designed to grow over time, it assists the funeral firm that is the assignee in managing its funeral inflation risk. Assurant does not provide any funeral goods and services in connection with our pre-funded funeral insurance policies; the life insurance and annuity policies pay death benefits in cash only.
Distribution and Clients
Assurant distributes its pre-funded funeral insurance products through funeral homes, general agents and funeral home partners in both the U.S. and Canada. We distribute our pre-funded funeral insurance products through two distribution channels: the independent funeral home market (in Canada) through general agents representing those locations and corporate funeral home partners (in both the U.S. and Canada). Our policies are sold by licensed insurance agents or enrollers, who in some cases may also be a funeral director.
We are the sole provider of pre-funded funeral insurance for Service Corporation International (“SCI”) in Canada and the U.S. SCI is the largest funeral provider in North America based on total revenues. Our exclusive distribution partnership with SCI in the U.S. runs through 2024; in Canada, the exclusive agreement runs through September 2018.
Our Addressable Market and Market Activity
Growth in preneed sales has been traditionally driven by distribution with a high correlation between new sales of pre-funded funeral insurance and the number of preneed counselors or enrollers marketing the product and expansion in sales and marketing capabilities. In addition, as alternative distribution channels are identified, such as targeting affinity groups and
employers, we believe growth in this market could accelerate. We believe that the preneed market is characterized by an aging population combined with low penetration of the over-65 market with approximately 10,000 baby boomers turning 65 every day.
We intend to increase sales by broadening our distribution relationships and increasing share in Canada. Through our general agency system, we provide programs and a sales force for our funeral firm clients to increase their local market share. In the U.S., we also intend to direct funerals to SCI’s funeral locations and reduce SCI’s cost to sell and manage its preneed operation through their sales counselors and third-party sellers. We integrate our processes with SCI’s insurance production to support SCI managing their preneed business.
Global Preneed generally writes whole life insurance policies with increasing death benefits and obtains the majority of its profits from interest rate spreads. Interest rate spreads refer to the difference between the death benefit growth rates on pre-funded funeral insurance policies and the investment returns generated on the assets we hold related to those policies. To manage these spreads, we monitor the movement in new money yields and evaluate our actual net new achievable yields monthly. This information is used to evaluate rates to be credited on applicable new and in force pre-funded funeral insurance policies and annuities. In addition, we review asset benchmarks and perform asset/liability matching studies to maximize yield and reduce risk.
Global Preneed utilizes underwriting to select and price insurance risks. We regularly monitor mortality assumptions to determine if experience remains consistent with these assumptions and to ensure that our product pricing remains appropriate. We periodically review our underwriting, agent and policy contract provisions and pricing guidelines so that our policies remain competitive and supportive of our marketing strategies and profitability goals.
Most of our pre-funded whole-life funeral insurance policies have increasing death benefits, some of which are pegged to changes in the Consumer Price Index (“CPI”). We have employed risk mitigation strategies to seek to minimize our exposure to a rapid increase in inflation, including derivative instruments. However, exposure can still exist due to potential differences in the amount of business and the notional amount of the protection.
Independent rating organizations periodically review the financial strength of insurers, including our insurance subsidiaries. Financial strength ratings represent the opinions of rating agencies regarding the ability of an insurance company to meet its financial obligations to policyholders and contract holders. These ratings are not applicable to our common stock or debt securities. Ratings are an important factor in establishing the competitive position of insurance companies.
Rating agencies also use an “outlook statement” of “positive,” “stable,” “negative” or “developing” to indicate a medium- or long-term trend in credit fundamentals which, if continued, may lead to a rating change. A rating may have a stable outlook to indicate that the rating is not expected to change; however, a stable rating does not preclude a rating agency from changing a rating at any time, without notice.
Most of our active domestic operating insurance subsidiaries are rated by the A.M. Best Company (“A.M. Best”). In addition, four of our domestic operating insurance subsidiaries are also rated by Moody’s Investor Services (“Moody’s”) and five are rated by Standard & Poor’s Inc., a division of McGraw Hill Companies, Inc. (“S&P”). The ratings issued on our companies by these agencies are announced publicly and are available from the agencies.
For further information on the risks of ratings downgrades, see “Item 1A - Risk Factors - A.M. Best, Moody’s and S&P rate the financial strength of our insurance company subsidiaries, and a decline in these ratings could affect our standing in the insurance industry and cause our sales and earnings to decrease.”
The following table summarizes our financial strength ratings and outlook of our domestic operating insurance subsidiaries as of December 31, 2017:
A.M. Best (1)
American Bankers Insurance Company
American Bankers Life Assurance Company
American Memorial Life Insurance Company
American Security Insurance Company
Assurant Life of Canada
Caribbean American Life Assurance Company
Caribbean American Property Insurance Company
Standard Guaranty Insurance Company
Union Security Insurance Company
Union Security Life Insurance Company of New York
Voyager Indemnity Insurance Company
A.M. Best financial strength ratings range from “A++” (superior) to “S” (suspended). Ratings of A and A- fall under the “excellent” category, which is the second highest of ten ratings categories. Ratings of B+ fall under the "good" category, which is the third highest of ten ratings categories. A.M. Best has a stable outlook on all of Assurant's financial strength ratings.
Moody’s insurance financial strength ratings range from “Aaa” (exceptional) to “C” (extremely poor). A numeric modifier may be appended to ratings from “Aa” to “Caa” to indicate relative position within a category, with 1 being the highest and 3 being the lowest. Ratings of A2 and A3 are considered “good” and fall within the third highest of the nine ratings categories. Moody's has placed Assurant's financial strength ratings under review for downgrade.
S&P’s insurer financial strength ratings range from “AAA” (extremely strong) to “R” (under regulatory supervision). A “+” or “-” may be appended to ratings from categories AA to CCC to indicate relative position within a category. Ratings of A (strong) are within the third highest of the nine ratings categories. S&P has a stable outlook on all of Assurant's financial strength ratings.
Enterprise Risk Management
The Company has made effective risk management a key ongoing corporate objective. As a global risk management provider, the Company faces risks that could have a material adverse effect on its business, financial condition and results of operations. For detailed information on these risks, please see the section entitled “Item 1A - Risk Factors”. Because the risks faced by the Company span a wide variety of disciplines, both senior management and the Board of Directors (“Board”) are involved in oversight of the Company’s risk management policies and practices. As described below and consistent with their charters, the committees of the Board oversee risk management in specific areas and regularly discuss risk-related issues with the entire Board.
In 2016, the Company established the Office of Risk Management ("ORM”), which coordinates the Company’s risk management activities, and is led by the Company’s Chief Risk Officer (“CRO”). The Company’s internal risk governance structure is headed by the Executive Risk Committee (“ERC”), which is chaired by our Chief Executive Officer (“CEO”) and composed of our CRO, Chief Financial Officer (“CFO”), Chief Operating Officer (“COO”) and Chief Legal Officer. The ERC is responsible for the strategic directive of the Company’s enterprise risk management and provides updates to the Board. The Enterprise Risk Management Committee (the “ERMC”), which is chaired by our CRO and includes senior members of risk management and other areas of the company, is responsible for the interdisciplinary oversight of business unit and enterprise risks and the design, management and approval of the risk appetite framework and limits. The ERMC reports to the ERC and provides updates to the Finance and Risk Committee of the Board (the “F&RC”).
The Company also has a Business Risk Committee, Finance and Investment Risk Committee and Insurance Risk Committee, which are each composed of managers from across the Company with knowledge related to the scope of the committee. Each committee is responsible for the oversight, management and reporting of different sets of risks. These committees report to the ERMC and have issue-specific committees that report to them. The ORM develops risk assessment and risk management policies, facilitates reporting and prioritizing in the assessment of risk, and coordinates with the committees described above, the Internal Audit Services department, and other corporate committees and departments charged with functions related to risk management.
As the focus committee for enterprise risk management, the F&RC reviews a number of enterprise risks, including with respect to the Company’s operating segments and the Company’s investment, financing, capital management and catastrophe reinsurance activities. The F&RC regularly reviews risks, policies, strategies and outcomes in those areas with the CFO and Chief Investment Officer. Although the F&RC acts as the focus committee of the Board for enterprise risk management matters, the full Board maintains responsibility for and is actively involved in oversight of enterprise risk management. In addition, the Audit Committee focuses on risks relating to financial reporting, legal compliance, ethics, fraud deterrence and internal controls and procedures; the Compensation Committee focuses on risks relating to executive retention and compensation plan design.
The Company is subject to extensive federal, state and international regulation and supervision in the jurisdictions where it does business. Regulations vary from jurisdiction to jurisdiction. The following is a summary of significant regulations that apply to our businesses, and where applicable, our health business wind-down operations, but is not intended to be a comprehensive review of every regulation to which the Company is subject. For information on the risks associated with regulations applicable to the Company, please see Item 1A, “Risk Factors.”
U.S. Insurance Regulation
We are subject to the insurance holding company laws in the states where our insurance companies are domiciled. These laws generally require insurance companies within the insurance holding company system to register with the insurance departments of their respective states of domicile and to furnish reports to such insurance departments regarding capital structure, ownership, financial condition, general business operations and intercompany transactions. These laws also require that transactions between affiliated companies be fair and equitable. In addition, certain intercompany transactions, changes of control, certain dividend payments and transfers of assets between the companies within the holding company system are subject to prior notice to, or approval by, state regulatory authorities.
Like all U.S. insurance companies, our insurance subsidiaries are subject to regulation and supervision in the jurisdictions where they do business. In general, these regulations are designed to protect the interests of policyholders, and not necessarily the interests of shareholders and other investors. To that end, the laws of the various states and other jurisdictions establish insurance departments with broad powers with respect to such things as:
capital, surplus and dividends;
underwriting requirements and limitations (including, in some cases, minimum or target loss ratios);
entrance into and exit from states;
introduction, cancellation and termination of certain coverages;
statutory accounting and annual statement disclosure requirements;
product types, policy forms and mandated insurance benefits;
fines, penalties and assessments;
claims practices, including occasional regulatory requirements to pay claims on terms other than those mandated by underlying policy contracts;
transactions between affiliates;
the form and content of disclosures to consumers;
the type, amounts and valuation of investments;
annual tests of solvency and reserve adequacy;
assessments or other surcharges for guaranty funds and the recovery of assessments through premium increases; and
market conduct and sales practices of insurers and agents.
Dividend Payment Limitations. Our holding company’s assets consist primarily of the capital stock of our subsidiaries. Accordingly, our holding company’s future cash flows depend upon the availability of dividends and other statutorily permissible payments from our subsidiaries. The ability to pay such dividends and to make such other payments is regulated by the states in which our subsidiaries are domiciled. These dividend regulations vary from state to state and by type of insurance provided by the applicable subsidiary, but generally require our insurance subsidiaries to maintain minimum solvency requirements and limit the amount of dividends these subsidiaries can pay to the holding company. For more information, please see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Regulatory Requirements.”
Risk-Based Capital Requirements. In order to enhance the regulation of insurer solvency, the National Association of Insurance Commissioners (“NAIC”) has established certain risk-based capital standards applicable to life, health and property and casualty insurers. Risk-based capital, which regulators use to assess the sufficiency of an insurer’s statutory capital, is calculated by applying factors to various asset, premium, expense, liability and reserve items. Factors are higher for items which in the NAIC’s view have greater underlying risk. The NAIC periodically reviews the risk-based capital formula and changes to the formula could occur in the future.
Investment Regulation. Insurance company investments must comply with applicable laws and regulations that prescribe the kind, quality and concentration of investments. These regulations require diversification of insurance company investment portfolios and limit the amount of investments in certain asset categories.
Financial Reporting. Regulators closely monitor the financial condition of licensed insurance companies. Our insurance subsidiaries are required to file periodic financial reports with insurance regulators. Moreover, states regulate the form and content of these statutory financial statements.
Products and Coverage. Insurance regulators have broad authority to regulate many aspects of our products and services. Additionally, certain non-insurance products and services, such as service contracts, may be regulated by regulatory bodies other than departments of insurance.
Pricing and Premium Rates. Nearly all states have insurance laws requiring insurers to file price schedules and policy forms with the state’s regulatory authority. In many cases, these price schedules and/or policy forms must be approved prior to use, and state insurance departments have the power to disapprove increases or require decreases in the premium rates we charge.
Market Conduct Regulation. Activities of insurers are highly regulated by state insurance laws and regulations, which govern the form and content of disclosure to consumers, advertising, sales practices and complaint handling. State regulatory authorities enforce compliance through periodic market conduct examinations.
Guaranty Associations and Indemnity Funds. Most states require insurance companies to support guaranty associations or indemnity funds, which are established to pay claims on behalf of insolvent insurance companies. These associations may levy assessments on member insurers. In some states member insurers can recover a portion of these assessments through premium tax offsets and/or policyholder surcharges.
Insurance Regulatory Initiatives. The NAIC, state regulators and professional organizations have considered and are considering various proposals that may alter or increase state authority to regulate insurance companies and insurance holding companies. Please see Item 1A, “Risk Factors - Changes in insurance regulation may reduce our profitability and limit our growth” for a discussion of the risks related to such initiatives.
Employee Retirement Income Security Act. We are subject to regulation under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). ERISA places certain requirements on how the Company may administer employee benefit plans covered by ERISA. Among other things, regulations under ERISA set standards for certain notice and disclosure requirements and for claim processing and appeals.
Gramm-Leach-Bliley Act, HIPAA and HITECH Act. Certain of our activities are subject to the privacy regulations of the Gramm-Leach-Bliley Act, which, along with regulations adopted thereunder, generally requires insurers to provide customers with notice regarding how their nonpublic personal financial information is used, and to provide them with the opportunity to “opt out” of certain disclosures, if applicable. In addition, the Health Insurance Portability and Accountability Act of 1996, including the Health Information Technology for Economic and Clinical Health Act and its accompanying Omnibus Rule (“HIPAA”), impose various requirements on covered entities. Some of our entities are subject to HIPAA regulations and are required to ensure the privacy and security of protected health information.
Dodd-Frank Wall Street Reform and Consumer Protection Act. Regulations under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) address mortgage servicers’ obligations to correct errors asserted by mortgage loan borrowers; to provide certain information requested by such borrowers; and to provide protections to such
borrowers in connection with lender-placed insurance. These requirements affect our operations because, in many instances, we administer such operations on behalf of our mortgage servicer clients. While the Consumer Financial Protection Bureau ("CFPB") does not have direct jurisdiction over insurance products, it is possible that additional regulations promulgated by the CFPB, such as those mentioned, may extend its authority more broadly to cover these products and thereby affect the Company or our clients.
Patient Protection and Affordable Care Act. Although health insurance is generally regulated at the state level, the Affordable Care Act introduced a significant component of federal regulation for health insurers. Although the Assurant Health business is in runoff, some provisions of the Affordable Care Act continue to apply to us.
We are subject to regulation and supervision of our international operations in various jurisdictions. These regulations, which vary depending on the jurisdiction, include anti-corruption laws; solvency and market conduct regulations; various privacy, insurance, tax, tariff and trade laws and regulations; and corporate, employment, intellectual property and investment laws and regulations. The Company operates in Canada, the U.K., France, Argentina, Brazil, Puerto Rico, Chile, Germany, Spain, Italy, Hungary, Mexico, Japan, South Korea and China and our businesses are supervised by local regulatory authorities of these jurisdictions. We also have business activities in Peru and Colombia where we have gained access to these markets by registering certain entities, where required, to act as reinsurers.
Our insurance operations in the U.K., for example, are subject to regulation by the Financial Conduct Authority and Prudential Regulation Authority. Authorized insurers are generally permitted to operate throughout the rest of the European Union, subject to satisfying certain requirements of these regulatory bodies and meeting additional local regulatory requirements. In March 2017, the U.K. formally initiated the process to leave the E.U. (commonly referred to as "Brexit"). Brexit negotiations are ongoing and its impact on U.K. insurers and entities operating on a cross-border basis within the E.U. is uncertain. Assurant is in the process of incorporating an insurance entity within the E.U. to ensure the Company has continued access to the European markets after Brexit has concluded.
Additionally, the International Association of Insurance Supervisors (the “IAIS”) is developing a model common framework for the supervision of Internationally Active Insurance Groups (“IAIGs”), which includes group-wide supervisory oversight across national boundaries and the establishment of ongoing supervisory colleges. The Company qualifies for the IAIG designation, however at present time no regulatory body has applied to supervise the Company in this manner. The IAIS is looking to implement the International Capital Standard over the coming years, however we do not expect the Company to be involved in the early development of the framework. At this time, we cannot predict what additional capital requirements, compliance costs or other burdens these requirements would impose on us.
The Company must also comply with the recently enacted E.U. General Data Protection Regulation (“GDPR”). All E.U. Member States must implement GDPR by May 2018. The regulation’s goal is to impose increased individual rights and protections for all personal data located or originating from the E.U. GDPR is extraterritorial in that it applies to all business in the E.U. and any business outside the E.U. that process E.U. personal data of individuals in the E.U. Moreover, there are significant fines associated with non-compliance.
Securities and Corporate Governance Regulation
As a company with publicly traded securities, the Company is subject to certain legal and regulatory requirements applicable generally to public companies, including the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) and the New York Stock Exchange (the “NYSE”) relating to public reporting and disclosure, accounting and financial reporting, and corporate governance matters. Additionally, Assurant, Inc. is subject to the corporate governance laws of Delaware, its state of incorporation.
Certain of our subsidiaries are registered investments advisers and as such are subject to the Investment Advisers Act of 1940, as amended (the “Advisers Act”). The Advisers Act, together with the SEC’s regulations and interpretations thereunder, imposes substantive and material restrictions and requirements on the operations of investment advisers that cover, among other things, disclosure of information about our business to clients; maintenance of written policies and procedures; maintenance of extensive books and records; restrictions on the types of fees we may charge, including performance fees; solicitation arrangements; engaging in transactions with clients; maintaining an effective compliance program; custody of client assets; client privacy; advertising; pay-to-play; and cybersecurity. The SEC is authorized to institute proceedings and impose sanctions for violations of the Advisers Act, ranging from fines and censures to termination of an adviser’s registration.
We are subject to certain U.S. and foreign laws applicable to businesses generally, including anti-corruption laws. The Foreign Corrupt Practices Act of 1977 (the "FCPA") regulates U.S. companies in their dealings with foreign officials, prohibiting bribes and similar practices. In addition, the U.K. Anti-Bribery Act has wide applicability to certain activities that
affect U.K. companies, their commercial activities in the U.K., and potentially that of their affiliates located outside of the U.K. Anti-bribery and corruption laws and regulations continue to be implemented and/or enhanced across most of the jurisdictions in which we operate.
Because we own and operate real property, we are subject to federal, state and local environmental laws. Potential environmental liabilities and costs in connection with any required remediation of such properties is an inherent risk in property ownership and operation. Under the laws of several states, contamination of a property may give rise to a lien on the property to secure recovery of the costs of the cleanup, which could have priority over the lien of an existing mortgage against the property and thereby impair our ability to foreclose on that property should the related loan be in default. In addition, under certain circumstances, we may be liable for the costs of addressing releases or threatened releases of hazardous substances at properties securing mortgage loans held by us.
As the Company continues to evolve its business mix to cover other non-insurance based products and services, it becomes subject to other legal and regulatory requirements, including regulations of the Consumer Financial Protection Bureau and other federal, state and municipal regulatory bodies, as well as additional regulatory bodies in non-U.S. jurisdictions. Examples include import and export trade compliance for the movement of mobile devices across geographic borders and health, safety, labor and environmental regulations impacting our mobile supply chain operations.
We had approximately 14,750 employees, including approximately 13,600 full-time employees, as of December 31, 2017. The Company has employees in Argentina, Brazil, Italy, Spain and Mexico that are represented by labor unions and trade organizations. We believe that employee relations are satisfactory.
Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, the Statements of Beneficial Ownership of Securities on Forms 3, 4 and 5 for our Directors and Officers and all amendments to such reports, filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge through the SEC website at www.sec.gov . These documents are also available at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. Further information on the operation of the Public Reference room can be found by calling the SEC at 1-800-SEC-0330. These documents are also available free of charge through the Investor Relations page of our website (www.assurant.com) as soon as reasonably practicable after filing. Other information found on our website is not part of this or any other report filed with or furnished to the SEC.
Item 1A. Risk Factors
Certain factors may have a material adverse effect on our business, financial condition and results of operations. You should carefully consider them, along with the other information presented in this report. It is not possible to predict or identify all such factors.
Risks Related to Our Transaction with The Warranty Group
We may not be able to successfully or timely complete the pending transaction with The Warranty Group (“TWG”).
The completion of the pending transaction with TWG is subject to the satisfaction of certain conditions set forth in the Amended and Restated Agreement and Plan of Merger dated as of January 8, 2018 (the “A&R Merger Agreement”), including the expiration or termination of applicable waiting periods under antitrust laws, the receipt of certain regulatory and governmental approvals, there being no material adverse effect on the Company or TWG prior to the closing of the transaction and other customary conditions. The Company will be unable to complete the proposed transaction until each of the conditions to closing is either satisfied or waived.
In deciding whether to grant certain of the government approvals, the relevant governmental entity may impose certain requirements or obligations as conditions for its approval or in connection with its review. The Company can provide no assurance that it will obtain the necessary approvals or that any required conditions will not have an adverse effect on the Company following the completion of the transaction. In addition, the Company can provide no assurance that these conditions will not result in the abandonment of the pending transaction.
The A&R Merger Agreement may be terminated prior to closing under certain circumstances. For example, if at the time when the closing conditions have been met, the Company Pre-Closing Stock Price (as defined in the A&R Merger Agreement) has decreased or increased more than 20% from $95.4762, TWG or the Company, respectively, will have the right to terminate the A&R Merger Agreement unless the other party elects to adjust the consideration pursuant to the A&R Merger Agreement. The A&R Merger Agreement may also be terminated by either party if the closing has not occurred by December 17, 2018.
Matters relating to the transaction (including integration planning) have required and will continue to require substantial commitments of time and resources, which could otherwise have been devoted to other opportunities. The Company may be required to pay significant costs relating to the transaction, whether or not the transaction is consummated. In addition, in certain circumstances, the Company may be required to pay a termination fee or reimburse TWG’s expenses in connection with a termination of the A&R Merger Agreement. For these and other reasons, our failure to complete the pending transaction could adversely affect our business, operating results and financial condition.
If we are unable to integrate TWG effectively we may not realize the anticipated benefits of the pending transaction.
Strategic transactions like the TWG transaction create numerous uncertainties and risks and require significant effort and expenditures. We will need to effectively manage the integration of TWG and its personnel as well as changes in operations and systems. We may encounter unexpected difficulties or incur unexpected costs, including diversion of management’s attention to integration of operations and corporate and administrative infrastructures; difficulties in achieving anticipated business opportunities and growth prospects from combining the businesses of TWG with that of Assurant; difficulties in the integration of operations and systems; difficulties in the assimilation of employees and corporate cultures; and challenges in keeping existing customers and obtaining new customers.
If any of these factors impairs our ability to integrate our operations with those of TWG successfully or on a timely basis, we may not be able to realize the anticipated operating synergies and efficiencies, anticipated revenues, earnings and profitable growth and other expected benefits from combining the businesses. In addition, we may be required to spend additional time or money on integration that otherwise would be spent on the development and expansion of our business.
The market price of our common stock may decline following the closing of the transaction if the integration of TWG is unsuccessful, takes longer than expected or fails to achieve financial benefits to the extent anticipated by financial analysts or investors, or the effect of the business combination on the financial results of the combined company is otherwise not consistent with the expectations of financial analysts or investors.
We expect to incur significant additional indebtedness to finance our acquisition of TWG, which could affect our financial position.
We expect to finance our proposed acquisition of TWG with a combination of external financing, which is expected to include additional indebtedness, as well as cash on hand. Incurring additional indebtedness may have a number of consequences for us. In particular, it will require us to use cash to pay the principal of and interest on such indebtedness, thereby reducing the amount of cash that may be available for capital expenditures, acquisitions, stock repurchases, dividends or other purposes. It may limit our ability to obtain additional financing in the future on favorable terms. It may also increase our vulnerability to downturns or adverse changes in general economic, industry or competitive conditions, and limit our flexibility to plan for or react to competitive challenges in our business or market conditions.
Following the announcement of our proposed acquisition of TWG, in October 2017, S&P placed the Company’s debt ratings on Creditwatch Negative and Moody’s placed the Company’s debt and financial strength ratings under review for downgrade. Please see “-Risks Related to the Company-Financial Risks--A credit rating agency downgrade of our corporate senior debt rating could significantly impact our business.”
Risks Related to the Company
Business and Competitive Risks
Our revenues and profits may decline if we are unable to maintain relationships with significant clients, distributors and other parties important to the success of our business, or renew contracts with them on favorable terms, or if those parties face financial, reputational or regulatory issues.
The success of our business depends largely on our relationships and contractual arrangements with significant clients, including mortgage servicers, lenders, mobile device carriers, retailers, OEMs, agents and other parties. Many of these arrangements are exclusive and some rely on preferred provider or similar relationships. If our key clients, intermediaries or other parties terminate important business arrangements with us, or renew contracts on terms less favorable to us, our cash flows, results of operations and financial condition could be materially adversely affected. In addition, each of our Global Lifestyle, Global Housing and Global Preneed segments receives a substantial portion of its revenue from a few clients. A reduction in business with or the loss of one or more of our significant clients could have a material adverse effect on the results of operations and cash flows of individual segments or of the Company. Examples of important business arrangements
include, at Global Lifestyle, relationships with mobile device carriers, retailers, OEMs and financial and other institutions through which we distribute our products and services. At Global Preneed, we have an exclusive distribution relationship with SCI relating to the distribution of our preneed insurance policies. At Global Housing, we have exclusive and non-exclusive relationships with certain mortgage lenders and manufactured housing lenders and property managers, and in turn we are eligible to insure properties securing loans guaranteed by or sold to government-sponsored entities and serviced by the mortgage loan servicers with whom we do business. In addition, the transfer by mortgage servicer clients of loan portfolios to other carriers or the participation by other carriers in insuring lender-placed insurance risks that we have historically insured could materially reduce our revenues and profits from this business.
We are also subject to the risk that clients, distributors and other parties may face financial difficulties, reputational issues, problems with respect to their own products and services or regulatory restrictions or compliance issues that may lead to a decrease in or cessation of sales of our products and services. If one or more of our clients or distributors, for example in the wireless and related markets, consolidate or align themselves with other companies, we may lose significant business, resulting in material decreases in revenues and profits.
Significant competitive pressures or changes in customer preference could affect our results of operations.
We compete with many insurance companies, financial services companies, mobile device repair and logistics companies, technology and software companies and specialized competitors that focus on one market, product or service for business and customers, and for agents and other distribution relationships. Some of our competitors may offer a broader array of products and services than we do or be better able to tailor those products and services to customer needs, greater diversity of distribution resources, better brand recognition, more competitive pricing, lower costs, greater financial strength, more resources or higher ratings.
There is a risk that purchasers may be able to obtain more favorable terms from competitors, rather than renewing coverage with us. As a result, competition may adversely affect the persistency of our policies, as well as our ability to sell products and provide services. In addition, some of our competitors may price their products or services below ours, putting us at a competitive disadvantage and potentially adversely affecting our revenues and results of operations.
For Global Lifestyle, our ability to adequately and effectively price our products and services is affected by, among other things, the evolving nature of consumer needs and preferences and improvements in technology, which could result in a reduction in consumer demand and in the prices of products and services we offer. For Global Housing, our lender-placed products are not underwritten on an individual policy basis and our contracts with clients require us to issue these policies automatically when a borrower’s insurance coverage is not maintained. Consequently, increases in the risks we assume for homes could potentially adversely affect our results of operations.
New competition and technological advancements could also cause the supply of insurance or other products and services we offer to change, which could affect our ability to price our products at attractive rates. New competitors could enter our markets, take business from us or require us to reduce the prices of our products and services.
In our lender-placed insurance business, we use a proprietary insurance-tracking administration system linked with the administrative systems of our clients to monitor the clients’ mortgage portfolios to verify the existence of insurance on each mortgaged property and identify those that are uninsured. The development by others of competing systems or equivalent capabilities could reduce our revenues and results of operations.
General economic, financial market and political conditions may materially adversely affect our results of operations and financial condition and conditions in the markets in which we operate may negatively affect the results of our business segments.
General economic, financial market and political disruptions could have a material adverse effect on our results of operations and financial condition. Limited availability of credit, deteriorations of the global mortgage and real estate markets, declines in consumer confidence and consumer spending, increases in prices or in the rate of inflation, periods of high unemployment, persistently low or rapidly increasing interest rates and disruptive geopolitical events could contribute to increased volatility and diminished expectations for the economy and the financial markets, including the market for our stock. These conditions could also affect all of our business segments. Specifically, during periods of economic downturn:
individuals and businesses may (i) choose not to purchase our insurance products, warranties and other products and services, (ii) terminate existing policies or contracts or permit them to lapse and (iii) choose to reduce the amount of coverage they purchase;
clients are more likely to experience financial distress or declare bankruptcy or liquidation which could have an adverse impact on the remittance of premiums from such clients as well as the collection of receivables from such clients for items such as unearned premiums;
claims on certain specialized insurance products tend to rise;
there is a higher loss ratio on credit card and installment loan insurance due to rising unemployment and disability levels;
there is an increased risk of fraudulent insurance claims; and
substantial decreases in loan availability and origination could reduce the demand for credit insurance that we write or debt cancellation or debt deferment products that we administer, and on the placement of hazard insurance under our lender-placed insurance programs.
General inflationary pressures may affect repair and replacement costs on our real and personal property lines, increasing the costs of paying claims. Inflationary pressures may also affect the costs associated with our preneed insurance policies, particularly those that are guaranteed to grow with the CPI. Conversely, deflationary pressures may affect the pricing of our products and services.
Conditions in the housing and lifestyle markets in which we operate, including the rate of introduction and success of new products or technologies or promotional programs and the overall health of the electronics and appliances retail markets, automobile sales market and housing and mortgage markets may also affect our business segments by impacting the demand and pricing for our products and services, the costs of paying claims or otherwise.
We face risks associated with our international operations.
Our international operations face economic, political, legal, operational and other risks. For example, we face the risk of restrictions on currency conversion or the transfer of funds; burdens and costs of compliance with a variety of foreign laws and regulations; political or economic instability in countries in which we conduct business, including possible terrorist acts; inflation and foreign exchange rate fluctuations; diminished ability to enforce our contractual rights; differences in cultural environments and changes in regulatory requirements, including changes in regulatory treatment of certain products or services; exposure to local economic conditions; and restrictions on the repatriation of non-U.S. investment and earnings.
If our business model is not successful in a particular country or region or it experiences economic, political or other instability, we may lose all or most of our investment in that country or region. As we continue to expand in select worldwide markets, our business becomes increasingly exposed to these risks identified above, in particular where certain countries have recently experienced economic or political instability, such as Brazil. In addition, concerns about the European Union (the “E.U.”), including the status of the United Kingdom’s exit from the E.U. (commonly referred to as “Brexit”), has caused uncertainty in the financial markets and exchange rate fluctuation. Changes to the E.U. or post-Brexit U.K. regulatory frameworks applicable to our business could increase compliance costs and negatively impact the region’s economic conditions, financial markets and exchange rates, which could adversely affect our European business.
As we engage with international clients, we may make certain up-front commission payments or similar cash outlays, which we may not recover if the business does not develop as we expect. These up-front payments are typically supported by various protections, such as letters of guarantee, but we may not recover our initial outlays and other amounts owed to us fully or timely. As our international business grows, we rely increasingly on fronting carriers or intermediaries in certain countries to maintain their licenses and product approvals, satisfy local regulatory requirements and continue in business. If they fail to do so, our business, reputation and relationships with our customers could be adversely affected.
For information on the significant international regulations that apply to our Company, please see Item 1, “Business - Regulation - International Regulation.”
Catastrophe losses, including human-made catastrophe losses, could materially reduce our profitability and have a material adverse effect on our results of operations and financial condition.
Our insurance operations expose us to claims arising out of catastrophes and non-catastrophes (losses such as theft and vandalism), particularly in our homeowners insurance businesses. We have experienced, and expect to continue to experience, catastrophe losses that materially reduce our profitability or have a material adverse effect on our results of operations and financial condition. Catastrophes include reportable catastrophe losses (individual catastrophe events that generated losses in excess of $5.0 million, pre-tax and net of reinsurance). Catastrophes can be caused by various natural events, which may be exacerbated by climate change, including, but not limited to, hurricanes, windstorms, earthquakes, hailstorms, floods, severe winter weather, fires and epidemics, or can be human-made catastrophes, including terrorist attacks or accidents such as airplane crashes. While the frequency and severity of catastrophes are inherently unpredictable, increases in the value and geographic concentration of insured property, the geographic concentration of insured lives and the effects of inflation could increase the severity of claims from future catastrophes. While the exact impact of the physical effects of climate change is uncertain, changes in the global climate may cause long-term increases in the frequency and severity of storms, resulting in higher catastrophe losses, which could materially affect our results of operations and financial condition.
Catastrophe losses can vary widely and could significantly exceed our expectations. We use catastrophe modeling tools that help estimate our probable losses, but these projections are based on historical data and other assumptions that may differ
materially from actual events. If the severity of an event were sufficiently high (for example, in the event of an extremely large catastrophe), it could exceed our reinsurance coverage limits and could have a material adverse effect on our results of operations and financial condition, affecting our ability to write new business. We may also lose premium income due to a large-scale business interruption caused by a natural or human-made catastrophe or by legislative or regulatory reactions to the event. Such an event could also cause substantial volatility in our financial results from period to period and could materially reduce our profitability.
Accounting rules do not permit insurers to reserve for such catastrophic events before they occur. Once a catastrophic event occurs, the establishment of appropriate reserves is an inherently uncertain and complex process. The ultimate cost of losses may vary materially from recorded reserves and such variance may have a material adverse effect on our results of operations, capital and financial condition.
Because Global Housing’s lender-placed homeowners and lender-placed manufactured housing insurance products are designed to automatically provide property coverage for client portfolios, our concentration in certain catastrophe-prone states like Florida, California, Texas and New York may increase. The withdrawal of other insurers from these or other states may lead to adverse selection and increased use of our products in these areas and may negatively affect our loss experience. In addition, with respect to our preneed insurance policies, the average age of policyholders is approximately 73 years. This group is more susceptible to certain epidemics than the overall population, and an epidemic resulting in a higher incidence of mortality could have a material adverse effect on our results of operations and financial condition.
We may be unable to grow our business if we cannot find suitable acquisition candidates at attractive prices and integrate them effectively or identify new areas for organic growth.
We expect acquisitions to play a role in the growth of some of our businesses. We recently announced the acquisition of TWG, which is expected to close in the second quarter of 2018. However, there can be no assurances that we will continue to be able to identify suitable acquisition candidates or new venture opportunities or to finance or complete such transactions on acceptable terms. Additionally, the integration of acquired businesses may result in significant challenges and additional costs, and we may be unable to accomplish such integration smoothly or successfully.
Acquired businesses may not provide us with the benefits that we anticipate. Acquisitions entail a number of risks and uncertainties, some of which may differ from those historically associated with our operations. These include, among other things, inaccurate assessment of liabilities; difficulties in realizing projected efficiencies, synergies and cost savings; difficulties in integrating systems and personnel and additional costs related thereto; failure to achieve anticipated revenues, earnings or cash flow; an increase in our indebtedness; and a limitation in our ability to access additional capital when needed. Our failure to adequately address these acquisition risks could materially adversely affect our results of operations and financial condition.
Our ability to effectively identify and capitalize on opportunities for organic growth depends, among other things, on our ability to identify and successfully enter and market our services in new geographic markets and market segments, our ability to recruit and ret