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Assurant 10-Q 2008

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2
Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2008

OR

 

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                      to                     

 

 

Assurant, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   001-31978   39-1126612
(State or other jurisdiction
of incorporation)
  (Commission File Number)   (I.R.S. Employer
Identification No.)

One Chase Manhattan Plaza, 41st Floor

New York, New York 10005

(212) 859-7000

(Address, including zip code, and telephone number, including

area code, of Registrant’s Principal Executive Offices)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  x

The number of shares of the registrant’s Common Stock outstanding at November 1, 2008 was 117,616,961.

 

 

 


Table of Contents

ASSURANT, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2008

TABLE OF CONTENTS

 

Item
Number

        Page
Number
     PART I     
     FINANCIAL INFORMATION     
1.    Financial Statements of Assurant, Inc.:   
   Consolidated Balance Sheets (unaudited) at September 30, 2008 and December 31, 2007    2
   Consolidated Statement of Operations (unaudited) for the three and nine months ended September 30, 2008 and 2007    4
   Consolidated Statement of Changes in Stockholders’ Equity (unaudited) from December 31, 2007 through September 30, 2008    5
   Consolidated Statement of Cash Flows (unaudited) for the nine months ended September 30, 2008 and 2007    6
   Notes to Consolidated Financial Statements (unaudited) for the three and nine months ended September 30, 2008 and 2007    7
2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations    31
3.    Quantitative and Qualitative Disclosures About Market Risk    55
4.    Controls and Procedures    55
   PART II   
   OTHER INFORMATION   
1.    Legal Proceedings    57
1A.    Risk Factors    57
2.    Unregistered Sale of Equity Securities and Use of Proceeds    62
6.    Exhibits    63
   Signatures    64

 

1


Table of Contents

Assurant, Inc.

Consolidated Balance Sheets (unaudited)

At September 30, 2008 and December 31, 2007

 

 

     September 30, 2008    December 31, 2007
     (in thousands except per share and share amounts)

Assets

     

Investments:

     

Fixed maturity securities available for sale, at fair value (amortized cost - $9,674,940 in 2008 and $10,026,355 in 2007)

   $ 9,059,614    $ 10,126,415

Equity securities available for sale, at fair value (cost - $594,035 in 2008 and $702,698 in 2007)

     491,813      636,001

Commercial mortgage loans on real estate, at amortized cost

     1,502,086      1,433,626

Policy loans

     57,475      57,107

Short-term investments

     620,434      410,878

Collateral held under securities lending

     343,321      541,650

Other investments

     533,974      541,474
             

Total investments

     12,608,717      13,747,151

Cash and cash equivalents

     1,053,679      804,964

Premiums and accounts receivable, net

     514,551      580,379

Reinsurance recoverables

     4,015,817      3,904,348

Accrued investment income

     163,502      149,165

Tax receivable

     23,886      26,012

Deferred acquisition costs

     2,783,598      2,895,345

Deferred income taxes, net

     327,540      —  

Property and equipment, at cost less accumulated depreciation

     266,281      275,779

Goodwill

     840,490      832,656

Value of business acquired

     112,460      125,612

Other assets

     391,406      265,617

Assets held in separate accounts

     2,252,388      3,143,288
             

Total assets

   $ 25,354,315    $ 26,750,316
             

See the accompanying notes to the consolidated financial statements

 

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Table of Contents

Assurant, Inc.

Consolidated Balance Sheets (unaudited)

At September 30, 2008 and December 31, 2007

 

 

     September 30, 2008     December 31, 2007  
     (in thousands except per share and share amounts)  

Liabilities

    

Future policy benefits and expenses

   $ 7,232,105     $ 7,189,496  

Unearned premiums

     5,579,160       5,410,709  

Claims and benefits payable

     3,424,780       3,303,084  

Commissions payable

     215,704       267,886  

Reinsurance balances payable

     112,076       104,105  

Funds held under reinsurance

     46,747       50,147  

Deferred gain on disposal of businesses

     194,687       216,772  

Obligation under securities lending

     355,961       541,650  

Accounts payable and other liabilities

     1,225,803       1,332,824  

Deferred income taxes, net

     —         108,429  

Debt

     971,933       971,863  

Mandatorily redeemable preferred stock

     11,160       21,160  

Liabilities related to separate accounts

     2,252,388       3,143,288  
                

Total liabilities

     21,622,504       22,661,413  
                

Commitments and contingencies (Note 14)

    

Stockholders’ equity

    

Common stock, par value $0.01 per share, 800,000,000 shares authorized, 117,362,285 and 117,808,007 shares outstanding at September 30, 2008 and December 31, 2007, respectively

     1,443       1,438  

Additional paid-in capital

     2,921,290       2,904,970  

Retained earnings

     2,484,399       2,269,107  

Accumulated other comprehensive (loss) income

     (475,798 )     53,911  

Treasury stock, at cost; 26,997,943 and 25,997,943 shares at September 30, 2008 and December 31, 2007

     (1,199,523 )     (1,140,523 )
                

Total stockholders’ equity

     3,731,811       4,088,903  
                

Total liabilities and stockholders’ equity

   $ 25,354,315     $ 26,750,316  
                

See the accompanying notes to the consolidated financial statements

 

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Table of Contents

Assurant, Inc.

Consolidated Statement of Operations (unaudited)

Three and Nine Months Ended September 30, 2008 and 2007

 

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2008     2007     2008     2007  
     (in thousands except number of shares and per share amounts)  

Revenues

        

Net earned premiums and other considerations

   $ 1,984,136     $ 1,893,388     $ 5,921,069     $ 5,451,584  

Net investment income

     192,314       194,049       591,299       601,247  

Net realized losses on investments

     (299,205 )     (13,076 )     (376,922 )     (10,592 )

Amortization of deferred gain on disposal of businesses

     7,379       8,298       22,085       24,893  

Fees and other income

     69,911       65,533       223,089       203,050  
                                

Total revenues

     1,954,535       2,148,192       6,380,620       6,270,182  
                                

Benefits, losses and expenses

        

Policyholder benefits

     1,095,048       935,545       3,030,715       2,727,120  

Amortization of deferred acquisition costs and value of business acquired

     422,767       359,756       1,253,064       1,034,515  

Underwriting, general and administrative expenses

     585,050       553,458       1,679,254       1,648,529  

Interest expense

     15,190       15,288       45,765       45,881  
                                

Total benefits, losses and expenses

     2,118,055       1,864,047       6,008,798       5,456,045  
                                

(Loss) income before (benefit) provision for income taxes

     (163,520 )     284,145       371,822       814,137  

(Benefit) provision for income taxes

     (52,091 )     96,954       106,467       281,209  
                                

Net (loss) income

   $ (111,429 )   $ 187,191     $ 265,355     $ 532,928  
                                

Earnings Per Share

        

Basic

   $ (0.95 )   $ 1.58     $ 2.25     $ 4.43  

Diluted

   $ (0.95 )   $ 1.56     $ 2.23     $ 4.37  

Dividends per share

   $ 0.14     $ 0.12     $ 0.40     $ 0.34  

Share Data:

        

Weighted average shares outstanding used in basic per share calculations

     117,750,167       118,447,175       117,897,422       120,404,471  

Plus: Dilutive securities

     —         1,294,259       1,247,054       1,657,540  
                                

Weighted average shares used in diluted per share calculations

     117,750,167       119,741,434       119,144,476       122,062,011  
                                

See the accompanying notes to the consolidated financial statements

 

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Assurant, Inc.

Consolidated Statement of Changes in Stockholders’ Equity (unaudited)

From December 31, 2007 through September 30, 2008

 

 

     Common
Stock
   Additional
Paid-in
Capital
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss)
    Treasury
Stock
    Total  
     (in thousands)  

Balance, December 31, 2007

   $ 1,438    $ 2,904,970     $ 2,269,107     $ 53,911     $ (1,140,523 )   $ 4,088,903  

Stock plan exercises

     5      (6,475 )     —         —         —         (6,470 )

Stock plan compensation expense

     —        17,058       —         —         —         17,058  

Tax benefit of exercise of stock options

     —        5,737       —         —         —         5,737  

Dividends

     —        —         (47,203 )     —         —         (47,203 )

Acquisition of common shares

     —        —         —         —         (59,000 )     (59,000 )

Cumulative effect of change in accounting principles (Note 2)

     —        —         (2,860 )     —         —         (2,860 )

Comprehensive loss:

             

Net income

     —        —         265,355       —         —         265,355  

Other comprehensive loss:

             

Net change in unrealized losses on securities, net of taxes

     —        —         —         (498,881 )     —         (498,881 )

Net change in foreign currency translation, net of taxes

     —        —         —         (35,455 )     —         (35,455 )

Amortization of pension and postretirement unrecognized net periodic benefit, net of taxes

        —         —         4,627       —         4,627  
                   

Total other comprehensive loss

                (529,709 )
                   

Total comprehensive loss:

                (264,354 )
                                               

Balance, September 30, 2008

   $ 1,443    $ 2,921,290     $ 2,484,399     $ (475,798 )   $ (1,199,523 )   $ 3,731,811  
                                               

See the accompanying notes to the consolidated financial statements

 

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Table of Contents

Assurant, Inc.

Consolidated Statement of Cash Flows (unaudited)

Nine Months Ended September 30, 2008 and 2007

 

 

     Nine Months Ended September 30,  
     2008     2007  
     (in thousands)  

Net cash provided by operating activities

   $ 814,371     $ 836,839  
                

Investing activities

    

Sales of:

    

Fixed maturity securities available for sale

     1,727,766       1,484,451  

Equity securities available for sale

     239,956       224,181  

Property and equipment and other

     380       100  

Subsidiary, net of cash transferred

     31,853       1,151  

Maturities, prepayments, and scheduled redemption of:

    

Fixed maturity securities available for sale

     445,164       483,301  

Purchases of:

    

Fixed maturity securities available for sale

     (2,046,675 )     (2,392,169 )

Equity securities available for sale

     (314,990 )     (211,433 )

Property and equipment and other

     (37,388 )     (39,753 )

Subsidiaries and warranty business, net of cash transferred

     (142,689 )     (102,237 )

Change in commercial mortgage loans on real estate

     (69,004 )     (138,293 )

Change in short term investments

     (238,878 )     4,308  

Change in other invested assets

     (37,072 )     17,854  

Change in policy loans

     (472 )     1,280  

Change in collateral held under securities lending

     179,232       (288,902 )
                

Net cash used in investing activities

     (262,817 )     (956,161 )
                

Financing activities

    

Repayment of mandatorily redeemable preferred stock

     (10,000 )     (1,000 )

Excess tax benefits from stock-based payment arrangements

     5,737       7,471  

Acquisition of common stock

     (59,000 )     (315,570 )

Dividends paid

     (47,203 )     (40,877 )

Change in obligation under securities lending

     (185,689 )     288,902  

Commercial paper issued

     —         39,958  

Commercial paper repaid

     —         (40,000 )
                

Net cash used in financing activities

     (296,155 )     (61,116 )
                

Effect of exchange rate changes on cash and cash equivalents

     (6,684 )     7,913  
                

Change in cash and cash equivalents

     248,715       (172,525 )

Cash and cash equivalents at beginning of period

     804,964       987,672  
                

Cash and cash equivalents at end of period

   $ 1,053,679     $ 815,147  
                

See the accompanying notes to the consolidated financial statements

 

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Table of Contents

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2008 and 2007

(In thousands, except per share and share amounts)

 

1. Nature of Operations

Assurant, Inc. (the “Company”) is a holding company whose subsidiaries provide specialized insurance products and related services in North America and selected international markets.

The Company is traded on the New York Stock Exchange under the symbol AIZ.

Through its operating subsidiaries, the Company provides creditor-placed homeowners insurance, manufactured housing homeowners insurance, debt protection administration, 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 of a normal recurring nature) considered necessary for a fair statement of the consolidated financial statements have been included. The unaudited interim consolidated financial statements include the accounts of the Company and all of its wholly owned subsidiaries. All inter-company transactions and balances are eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the 2008 presentation.

The Company recorded an after-tax cumulative effect of change in accounting principle of $(2,860) on January 1, 2008, related to the adoption of Statement of Financial Accounting Standards (“FAS”) No. 157, Fair Value Measurements (“FAS 157”). The amount is reflected in the statement of changes in stockholders’ equity as required. See Notes 3 and 7 for further information regarding the adoption of FAS 157.

During the period ended September 30, 2008, our liability for unrecognized tax benefits decreased $8,731 due to an IRS audit settlement.

Operating results for the three and nine months ended September 30, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008. The accompanying unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.

3. Recent Accounting Pronouncements

Recent Accounting Pronouncements - Adopted

On January 1, 2008, the Company adopted FAS 157 which defines fair value, addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under GAAP and expands disclosures about fair value measurements. FAS 157 is applied prospectively for financial assets and liabilities measured on a recurring basis as of January 1, 2008 except for certain financial assets that were measured at fair value using a transaction price. For these financial instruments, which the Company has, FAS 157 requires limited retrospective adoption and thus the difference between the fair values using a transaction price and the fair values using an exit price of the relevant financial instruments will be shown as a cumulative-effect adjustment to the January 1, 2008 retained earnings balance. At adoption, the Company recognized a $4,400 decrease to other assets, and a corresponding decrease of $2,860 (after-tax) to retained

 

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Table of Contents

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2008 and 2007

(In thousands, except per share and share amounts)

 

 

earnings. Effective September 30, 2008, the Company adopted Financial Statement of Position (“FSP”) FAS 157-3, Determining the Fair Value of a Financial Asset in a Market That Is Not Active (“FSP FAS 157-3”). FSP FAS 157-3 clarifies the application of FAS 157 regarding the pricing of securities in an inactive market. The adoption of FSP FAS 157-3 did not have an impact on the Company’s financial position or results of operations. See Note 7 for further information regarding FAS 157.

On January 1, 2008, the Company adopted FAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“FAS 159”). FAS 159 provides a choice to measure many financial instruments and certain other items at fair value on specified election dates and requires disclosures about the election of the fair value option. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. The Company has chosen not to elect the fair value option for any financial or non-financial instruments as of the adoption date, thus the adoption of FAS 159 did not have an impact on the Company’s financial position or results of operations.

On January 1, 2008, the Company adopted Emerging Issues Task Force (“EITF”) Issue No. 06-10, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Collateral Assignment Split-Dollar Life Insurance Arrangements (“EITF 06-10”). EITF 06-10 provides guidance regarding the employer’s recognition of the liability and the related compensation costs for collateral assignment split-dollar life insurance arrangements that provide a benefit to an employee that extends into postretirement periods. This consensus concludes that for a collateral assignment split-dollar life insurance arrangement, an employer should recognize a liability for future benefits in accordance with FAS No. 106, Employers’ Accounting For Postretirement Benefits Other-Than-Pensions, (if, in substance, a postretirement benefit plan exists) or Accounting Principles Board Opinion No. 12, Deferred Compensation Contracts, (“APB 12”) (if the arrangement is, in substance, an individual deferred compensation contract) based on the substantive agreement with the employee. The Company has been recording its liability for future benefits in accordance with APB 12, thus the adoption of EITF 06-10 did not have an impact on the Company’s financial position or results of operations.

Recent Accounting Pronouncements - Not Yet Adopted

In December 2007, the Financial Accounting Standards Board (“FASB”) issued FAS No. 141R, Business Combinations (“FAS 141R”). FAS 141R replaces FAS No. 141, Business Combinations (“FAS 141”). FAS 141R retains the fundamental requirements of FAS 141 that the purchase method of accounting be used for all business combinations, that an acquirer be identified for each business combination and for goodwill to be recognized and measured as a residual. FAS 141R expands the definition of transactions and events that qualify as business combinations to all transactions and other events in which one entity obtains control over one or more other businesses. FAS 141R broadens the fair value measurement and recognition of assets acquired, liabilities assumed, and interests transferred as a result of business combinations. FAS 141R also increases the disclosure requirements for business combinations in the financial statements. FAS 141R is effective for fiscal periods beginning after December 15, 2008. Therefore, the Company is required to adopt FAS 141R on January 1, 2009. The Company is currently evaluating the requirements of FAS 141R and the potential impact on the Company’s financial position and results of operations.

In December 2007, the FASB issued FAS No. 160, Non-Controlling Interest in Consolidated Financial Statements—an amendment of ARB No. 51 (“FAS 160”). FAS 160 requires that a non-controlling interest in a subsidiary be separately reported within equity and the amount of consolidated net income attributable to the non-controlling interest be presented in the statement of operations. FAS 160 also calls for consistency in reporting changes in the parent’s ownership interest in a subsidiary and necessitates fair value measurement of any non-controlling equity investment retained in a deconsolidation. FAS 160 is effective for fiscal periods beginning after December 15, 2008. Therefore, the Company is required to adopt FAS 160 on January 1, 2009. The Company is currently evaluating the requirements of FAS 160 and the potential impact on the Company’s financial position and results of operations.

 

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Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2008 and 2007

(In thousands, except per share and share amounts)

 

 

In February 2008, the FASB issued FSP FAS 157-2, Effective Date of FAS 157 (“FSP FAS 157-2”). FSP FAS 157-2 defers the effective date of FAS 157 for all non-financial assets and non-financial liabilities measured or disclosed at fair value in the financial statements on a non-recurring basis to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years, which for the Company is January 1, 2009. The Company is currently evaluating the requirements of FAS 157 for its non-financial assets and non-financial liabilities measured on a non-recurring basis and the potential impact on the Company’s financial position and results of operations.

In June 2008, the FASB issued FSP EITF No. 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities, (“FSP EITF 03-6-1”). FSP EITF 03-6-1 requires companies to treat unvested share-based payment awards that have non-forfeitable rights to dividends or dividend equivalents as participating securities. Therefore, these financial instruments need to be included in calculating basic and diluted earnings per share under the two-class method described in FAS No. 128, Earnings Per Share. All prior period EPS data presented will be adjusted retrospectively. FSP EITF 03-6-1 will be effective for fiscal years beginning after December 15, 2008. Therefore, the Company is required to adopt FSP EITF 03-6-1 on January 1, 2009. The adoption of FSP EITF 03-6-1 is not expected to have a material impact on the Company’s basic and diluted earnings per share calculations.

4. Business Combinations

On September 26, 2008 the Company acquired the Warranty Management Group business from GE Consumer & Industrial, a unit of General Electric (“GE”). The Company paid GE $140,000 in cash for the sale, transfer and conveyance of certain assets and will assume certain liabilities. In connection with the acquisition of this business, the Company recorded $126,840 in amortizable intangible assets and $13,160 in goodwill. The factors that contributed to the recognition of goodwill include: marketing knowledge gained from the pre-existing relationship, acquisition of key former GE employees and increased sales opportunities not afforded the Company under the pre-existing relationship. As part of the acquisition, the Company entered into a new 10-year agreement to market extended warranties and service contracts on GE- branded major appliances in the United States.

In a separate transaction, GE paid the Company $115,000 in cash in connection with the termination of the existing strategic alliance. Under the pre-existing relationship, the Company sold extended warranties directly to GE appliance purchasers and through leading retailers. After the acquisition, the Company assumed full responsibility for operating the extended warranty business it previously co-managed and shared with GE. Due to the termination of the existing strategic alliance, the Company reduced its deferred acquisition cost (“DAC”) asset.

The results of operations of the GE Warranty Management Group will not have a material effect on the Company’s results, and accordingly, proforma information has not been disclosed.

5. Business Dispositions

On May 1, 2008, the Company sold a subsidiary, United Family Life Insurance Company (“UFLIC”), to a third party for proceeds of $32,715. The Company recognized a pre-tax gain of $3,175 from the sale. In connection with the sale of UFLIC, the Company also recognized an associated tax benefit of $24,566, primarily related to capital loss carry backs.

 

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Table of Contents

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2008 and 2007

(In thousands, except per share and share amounts)

 

 

6. Investments

The following tables show the cost or amortized cost, gross unrealized gains and losses and fair value of our fixed maturity and equity securities as of the dates indicated:

 

     September 30, 2008
     Cost or Amortized
Cost
   Gross Unrealized
Gains
   Gross Unrealized
Losses
    Fair Value

Fixed maturity securities:

          

United States Government and government agencies and authorities

   $ 147,075    $ 5,469    $ (58 )   $ 152,486

States, municipalities and political subdivisions

     960,329      6,856      (34,140 )     933,045

Foreign governments

     552,404      6,868      (14,062 )     545,210

Public utilities

     1,203,536      7,253      (87,535 )     1,123,254

Mortgage backed securities

     937,132      8,502      (22,316 )     923,318

All other corporate bonds

     5,874,464      24,761      (516,924 )     5,382,301
                            

Total fixed maturity securities

   $ 9,674,940    $ 59,709    $ (675,035 )   $ 9,059,614
                            

Equity securities:

          

Industrial, miscellaneous and all other

   $ 5,671    $ 284    $ (500 )   $ 5,455

Non-sinking fund preferred stocks

     588,364      1,049      (103,055 )     486,358
                            

Total equity securities

   $ 594,035    $ 1,333    $ (103,555 )   $ 491,813
                            
     December 31, 2007
     Cost or Amortized
Cost
   Gross Unrealized
Gains
   Gross Unrealized
Losses
    Fair Value

Fixed maturity securities:

          

United States Government and government agencies and authorities

   $ 287,064    $ 10,236    $ (22 )   $ 297,278

States, municipalities and political subdivisions

     630,196      16,931      (578 )     646,549

Foreign governments

     680,097      28,815      (4,666 )     704,246

Public utilities

     1,152,023      32,265      (10,541 )     1,173,747

Mortgage backed securities

     1,014,009      12,672      (6,067 )     1,020,614

All other corporate bonds

     6,262,966      143,166      (122,151 )     6,283,981
                            

Total fixed maturity securities

   $ 10,026,355    $ 244,085    $ (144,025 )   $ 10,126,415
                            

Equity securities:

          

Industrial, miscellaneous and all other

   $ 21,193    $ 1,283    $ —       $ 22,476

Non-sinking fund preferred stocks

     681,505      3,830      (71,810 )     613,525
                            

Total equity securities

   $ 702,698    $ 5,113    $ (71,810 )   $ 636,001
                            

 

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Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2008 and 2007

(In thousands, except per share and share amounts)

 

 

We regularly monitor our investment portfolio to ensure investments that may be other-than-temporarily impaired are identified in a timely fashion, properly valued, and any impairments are charged against earnings in the proper period. The determination that a security has incurred an other-than-temporary decline in value requires the judgment of management. Assessment factors include, but are not limited to, the length of time and the extent to which the market value has been less than cost, the financial condition and rating of the issuer, whether any collateral is held, and the intent and ability of the Company to retain the investment for a period of time sufficient to allow for recovery. Inherently, there are risks and uncertainties involved in making these judgments. Changes in circumstances and critical assumptions such as a continued weak economy, a more pronounced economic downturn or unforeseen events which affect one or more companies, industry sectors, or countries could result in additional impairments in future periods for other-than-temporary declines in value. Any security whose price decrease is deemed other-than-temporary is written down to its then current market level with the amount of the impairment reported as a realized loss in that period. Realized gains and losses on sales of investments are recognized on the specific identification basis.

The net realized losses including other-than-temporary impairments recorded in the statement of operations are summarized as follows:

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
             2008                     2007                     2008                     2007          

Net realized (losses) gains related to sales:

        

Fixed maturity securities

   $ (19,982 )   $ (7,473 )   $ (20,988 )   $ (9,039 )

Equity securities

     (43,190 )     (4,161 )     (47,546 )     (5,585 )

Commercial mortgage loans on real estate

     —         —         952       —    

Other investments

     (428 )     5,257       (2,753 )     11,884  

Collateral held under securities lending

     (6,457 )     —         (6,457 )     —    
                                

Total related to sales

     (70,057 )     (6,377 )     (76,792 )     (2,740 )
                                

Net realized losses related to other-than-temporary impairments:

        

Fixed maturity securities

     (108,106 )     (6,191 )     (166,676 )     (6,191 )

Equity securities

     (116,901 )     (508 )     (129,313 )     (508 )

Other investments

     (4,141 )     —         (4,141 )     (1,153 )
                                

Total other-than-temporary impairments

     (229,148 )     (6,699 )     (300,130 )     (7,852 )
                                

Total

   $ (299,205 )   $ (13,076 )   $ (376,922 )   $ (10,592 )
                                

 

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Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2008 and 2007

(In thousands, except per share and share amounts)

 

 

When we determine that there is an other-than-temporary impairment, we write down the value of the security to the current market value, which reduces the cost basis. In periods subsequent to the recognition of an other-than-temporary impairment, we generally accrete into net investment income the discount (or amortize the reduced premium) resulting from the reduction in cost basis, based upon the amount and timing of the expected future cash flows over the remaining life of the security.

The investment category of the Company’s gross unrealized losses on fixed maturity securities and equity securities at September 30, 2008 and December 31, 2007 and the length of time the securities have been in an unrealized loss position were as follows:

 

     September 30, 2008  
     Less than 12 months     12 Months or More     Total  
     Fair Value    Unrealized
Losses
    Fair Value    Unrealized
Losses
    Fair Value    Unrealized
Losses
 

Fixed maturity securities:

               

United States Government and government agencies and authorities

   $ 7,219    $ (58 )   $ —      $ —       $ 7,219    $ (58 )

States, municipalities and political subdivisions

     749,029      (33,100 )     10,812      (1,040 )     759,841      (34,140 )

Foreign governments

     315,680      (13,605 )     7,873      (457 )     323,553      (14,062 )

Public utilities

     806,763      (63,775 )     137,897      (23,760 )     944,660      (87,535 )

All other corporate bonds

     3,494,676      (312,211 )     978,316      (204,713 )     4,472,992      (516,924 )

Mortgage backed securities

     328,664      (14,924 )     92,510      (7,392 )     421,174      (22,316 )
                                             

Total fixed maturity securities

   $ 5,702,031    $ (437,673 )   $ 1,227,408    $ (237,362 )   $ 6,929,439    $ (675,035 )
                                             

Equity securities:

               

Industrial, miscellaneous and all other

   $ 4,752    $ (500 )   $ —      $ —       $ 4,752    $ (500 )

Non-sinking fund preferred stocks

     214,606      (48,585 )     181,737      (54,470 )     396,343      (103,055 )
                                             

Total equity securities

   $ 219,358    $ (49,085 )   $ 181,737    $ (54,470 )   $ 401,095    $ (103,555 )
                                             

 

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Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2008 and 2007

(In thousands, except per share and share amounts)

 

 

     December 31, 2007  
     Less than 12 months     12 Months or More     Total  
     Fair Value    Unrealized
Losses
    Fair Value    Unrealized
Losses
    Fair Value    Unrealized
Losses
 

Fixed maturity securities:

               

United States Government and government agencies and authorities

   $ 1,108    $ (1 )   $ 10,189    $ (21 )   $ 11,297    $ (22 )

States, municipalities and political subdivisions

     98,544      (525 )     6,031      (53 )     104,575      (578 )

Foreign governments

     99,985      (2,966 )     47,285      (1,700 )     147,270      (4,666 )

Public utilities

     317,542      (6,436 )     114,001      (4,105 )     431,543      (10,541 )

All other corporate bonds

     102,488      (3,277 )     224,233      (2,790 )     326,721      (6,067 )

Mortgage backed securities

     2,125,337      (89,862 )     699,116      (32,289 )     2,824,453      (122,151 )
                                             

Total fixed maturity securities

   $ 2,745,004    $ (103,067 )   $ 1,100,855    $ (40,958 )   $ 3,845,859    $ (144,025 )
                                             

Equity securities:

               

Non-sinking fund preferred stocks

   $ 399,160    $ (58,427 )   $ 106,487    $ (13,383 )   $ 505,647    $ (71,810 )
                                             

We did not consider these securities in an unrealized loss position to be other-than-temporarily impaired at September 30, 2008 or December 31, 2007, based on factors noted above and also because management has the ability and intent to hold these assets until recovery in value occurs and we believe the securities will generally continue to perform in accordance with their contractual terms.

Securities Lending

The Company engages in transactions in which fixed maturity securities, especially bonds issued by the United States government, government agencies and authorities, and U.S. corporations, are loaned to selected broker/dealers. Collateral, greater than or equal to 102% of the fair value of the securities lent plus accrued interest, is received in the form of cash and cash equivalents held by a custodian bank for the benefit of the Company. The Company monitors the fair value of securities loaned and the collateral received, with additional collateral obtained as necessary. The Company is subject to the risk of loss to the extent there is a loss in the re-investment of cash collateral.

Our liability to the borrower for collateral received was $355,961 and the fair value of the collateral reinvested was $343,321 at September 30, 2008. The difference between these amounts is recorded as an unrealized loss and is included as part of accumulated other comprehensive income.

7. Fair Value Measurements

FAS 157 defines fair value, establishes a framework for measuring fair value, creates a fair value hierarchy based on the quality of inputs used to measure fair value and enhances disclosure requirements for fair value measurements. FAS 157 defines fair value as the price that would be received to sell an asset or pay to transfer a liability in an orderly transaction between market participants at the measurement date. In accordance with FAS 157, the Company has categorized its recurring basis financial assets and liabilities based on the priority of the inputs to the valuation technique, into a three-level fair value hierarchy. The FASB has deferred the

 

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Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2008 and 2007

(In thousands, except per share and share amounts)

 

 

effective date of FAS 157 until January 1, 2009 for non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a non-recurring basis in accordance with FSP FAS 157-2.

The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

The levels of the fair value hierarchy and its application to the Company’s financial assets and liabilities are described below:

 

   

Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Financial assets and liabilities utilizing Level 1 inputs include certain U.S. mutual funds, money market funds, common stock and certain foreign securities.

 

   

Level 2 inputs utilize other than quoted prices included in Level 1 that are observable for the asset, either directly or indirectly, for substantially the full term of the asset. Level 2 inputs include quoted prices for similar assets in active markets, quoted prices for identical or similar assets in markets that are not active and inputs other than quoted prices that are observable in the marketplace for the asset. The observable inputs are used in valuation models to calculate the fair value for the asset. Financial assets utilizing Level 2 inputs include corporate, municipal, foreign government and public utilities bonds, private placement bonds, U.S. Government and agency securities, mortgage and asset backed securities, preferred stocks and certain U.S. and foreign mutual funds.

 

   

Level 3 inputs are unobservable but are significant to the fair value measurement for the asset, and include situations where there is little, if any, market activity for the asset. These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset. Financial assets utilizing Level 3 inputs include certain preferred stocks, corporate bonds and mortgage backed securities that were quoted by brokers and could not be corroborated by Level 2 inputs and derivatives.

A review of fair value hierarchy classifications is conducted on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy.

 

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Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2008 and 2007

(In thousands, except per share and share amounts)

 

 

The following table presents the Company’s fair value hierarchy for those recurring basis assets and liabilities as of September 30, 2008.

 

Financial Assets

   Total    Level 1     Level 2     Level 3  

Fixed maturity securities

   $ 9,059,614    $ 3,691     $ 8,874,399     $ 181,524  

Equity securities

     491,813      4,349  a     467,906       19,558  

Short-term investments

     620,434      503,980       116,454       —    

Collateral held under securities lending

     233,320      22,016       211,304       —    

Other investments

     268,664      76,744  b     181,272  c     10,648  c

Cash equivalents

     841,866      841,866       —      

Other assets

     3,725      —         —         3,725  

Assets held in separate accounts

     2,173,524      1,980,250  a     193,274       —    
                               

Total financial assets

   $ 13,692,960    $ 3,432,896     $ 10,044,609     $ 215,455  
                               

Financial Liabilities

                       

Other liabilities

   $ 76,744    $ 76,744  b   $ —       $ —    
                               

 

a

Mainly includes mutual fund investments

b

Comprised of Assurant Incentive Plan investments and related liability which are invested in mutual funds

c

Consists of invested assets associated with a modified coinsurance arrangement

The following table summarizes the change in balance sheet carrying value associated with Level 3 financial assets carried at fair value during the three months ended September 30, 2008:

 

     Total
Level 3
Assets
    Fixed
Maturity
Securities
    Equity
Securities
    Other
Investments
    Other
Assets
 

Balance, beginning of quarter

   $ 249,328     $ 215,229     $ 19,856     $ 9,240     $ 5,003  

Total net losses (realized/unrealized) included in earnings

     (27,986 )     (26,422 )     —         (5 )     (1,559 )

Net unrealized losses included in stockholder’s equity

     (3,239 )     (1,006 )     (1,580 )     (653 )     —    

Purchases, issuances, (sales) and (settlements)

     (5,286 )     (5,227 )     —         (340 )     281  

Net transfers in (out of)

     2,638       (1,050 )     1,282       2,406       —    
                                        

Balance, end of period

   $ 215,455     $ 181,524     $ 19,558     $ 10,648     $ 3,725  
                                        

 

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Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2008 and 2007

(In thousands, except per share and share amounts)

 

 

The following table summarizes the change in balance sheet carrying value associated with Level 3 financial assets carried at fair value during the nine months ended September 30, 2008:

 

     Total
Level 3
Assets
    Fixed
Maturity
Securities
    Equity
Securities
    Other
Investments
    Other
Assets
 

Balance, beginning of year

   $ 282,581     $ 256,937     $ 12,116     $ 10,368     $ 3,160  

Total net (losses) gains (realized/unrealized) included in earnings

     (28,077 )     (26,961 )     —         11       (1,127 )

Net unrealized losses included in stockholder’s equity

     (19,214 )     (15,875 )     (2,234 )     (1,105 )     —    

Purchases, issuances, (sales) and (settlements)

     21,274       18,674       1,940       (1,032 )     1,692  

Net transfers (out of) in

     (41,109 )     (51,251 )     7,736       2,406       —    
                                        

Balance, end of period

   $ 215,455     $ 181,524     $ 19,558     $ 10,648     $ 3,725  
                                        

FAS 157 describes three different valuation techniques to be used in determining fair value for financial assets and liabilities: the market, income or cost approaches. The three valuation techniques described in FAS 157 are consistent with generally accepted valuation methodologies. The market approach valuation techniques use prices and other relevant information from market transactions involving identical or comparable assets or liabilities. When possible, quoted prices (unadjusted) in active markets are used as of the period-end date. Otherwise, valuation techniques consistent with the market approach including matrix pricing and comparables are used. Matrix pricing is a mathematical technique employed to value certain securities without relying exclusively on quoted prices for those securities but comparing those securities to benchmark or comparable securities. Comparables use market multiples, which might lie in ranges with a different multiple for each comparable.

Income approach valuation techniques convert future amounts, such as cash flows or earnings, to a single present amount, or a discounted amount. These techniques rely on current market expectations of future amounts as of the period-end date. Examples of income approach valuation techniques include present value techniques, option-pricing models, binomial or lattice models that incorporate present value techniques, and the multi-period excess earnings method.

Cost approach valuation techniques are based upon the amount that would be required to replace the service capacity of an asset at the period-end date, or the current replacement cost. That is, from the perspective of a market participant (seller), the price that would be received for the asset is determined based on the cost to a market participant (buyer) to acquire or construct a substitute asset of comparable utility, adjusted for obsolescence.

While all three approaches are not applicable to all financial assets or liabilities, where appropriate, one or more valuation techniques may be used. For all the financial assets and liabilities included in the above hierarchy, excluding derivatives and private placement bonds, the market valuation technique is generally used. For private placement bonds and derivatives, the income valuation technique is generally used. For the period ended September 30, 2008, the application of valuation technique applied to similar assets and liabilities has been consistent.

Level 1 and Level 2 securities are valued using various observable market inputs obtained from a pricing service. The pricing service prepares estimates of fair value measurements for our Level 2 securities using proprietary valuation models based on techniques such as matrix pricing which include observable market inputs. FAS 157 defines observable market inputs as the assumptions market participants would use in pricing the asset or liability developed on market data obtained from sources independent of the Company. The extent of the use of each observable market input for a security depends on the type of security and the market conditions at the

 

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Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2008 and 2007

(In thousands, except per share and share amounts)

 

 

balance sheet date. Depending on the security, the priority of the use of observable market inputs may change as some observable market inputs may not be relevant or additional inputs may be necessary. The following observable market inputs, listed in the approximate order of priority, are utilized in the pricing evaluation of Level 2 securities: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. The pricing service also evaluates each security based on relevant market information including: relevant credit information, perceived market movements and sector news. Valuation models can change period to period, depending on the appropriate observable inputs that are available at the balance sheet date to price a security. When market observable inputs are unavailable, the remaining unpriced securities are submitted to independent brokers who provide non-binding broker quotes or are priced by other qualified sources and are categorized as Level 3 securities.

Management uses the following criteria in order to determine whether the market for a financial asset is inactive:

 

 

The volume and level of trading activity in the asset have declined significantly from historical levels

 

 

The available prices vary significantly over time or among market participants,

 

 

The prices are stale (i.e., not current), and

 

 

The magnitude of bid-ask spread.

Illiquidity did not have a material impact in the fair value determination of the Company’s financial assets.

The Company generally obtains one price for each financial asset. The Company performs a monthly analysis to assess if the evaluated prices represent a reasonable estimate of their fair value. This process involves quantitative and qualitative analysis and is overseen by investment and accounting professionals. Examples of procedures performed include, but are not limited to, initial and on-going review of pricing service methodologies, review of the prices received from the pricing service, review of pricing statistics and trends, and comparison of prices for certain securities with two different appropriate price sources for reasonableness. As a result of this analysis, if the Company determines there is a more appropriate fair value based upon available market data, which happens infrequently, the price of a security is adjusted accordingly. The pricing service provides information to indicate which securities were priced using market observable inputs so that the Company can properly categorize our financial assets in the fair value hierarchy.

8. 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 of $971,537 from this transaction, which represents the principal amount less the discount. The discount of $3,463 is being amortized over the life of the notes and is included as part of interest expense in the statement of operations.

The interest expense incurred related to the senior notes was $15,047 for the three months ended September 30, 2008 and 2007, respectively, and $45,141 for the nine months ended September 30, 2008 and 2007 respectively. There was $7,523 of accrued interest at September 30, 2008 and 2007, respectively. The Company made interest payments of $30,094 on February 15, 2008 and August 15, 2008.

In March 2004, the Company established a $500,000 commercial paper program, which is available for working capital and other general corporate purposes. This program is backed up by a $500,000 senior revolving credit facility. The Company did not use the commercial paper program during the nine months ended September 30, 2008. During 2007, the Company used proceeds from the commercial paper program for general corporate

 

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Table of Contents

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2008 and 2007

(In thousands, except per share and share amounts)

 

 

purposes, all of which were repaid during 2007. The Company did not use the revolving credit facility during the nine months ended September 30, 2008 or the twelve months ended December 31, 2007.

The revolving credit facility contains restrictive covenants and requires that the Company maintain certain specified minimum ratios and thresholds. The Company is in compliance with all covenants, minimum ratios and thresholds.

9. Stock Based Compensation

Directors Compensation Plan

The Company’s Amended and Restated Directors Compensation Plan, as amended, permitted the issuance of up to 500,000 shares of the Company’s common stock to non-employee Directors. Effective May 2008, no new grants will be made under this plan and all future grants issued to directors will be issued from the Assurant, Inc. Long-Term Equity Incentive Plan, discussed further below. The compensation expense recorded related to these shares was $625 for the nine months ended September 30, 2007. There was no expense recorded for the three months ended September 30, 2007, or for the three and nine months ended September 30, 2008.

Long-Term Incentive Plan

The 2004 Long-Term Incentive Plan authorized the granting of up to 10,000,000 new shares of the Company’s common stock to employees and officers under the Assurant Long Term Incentive Plan (“ALTIP”), Business Value Rights Program (“BVR”) and CEO Equity Grants Program. Under the ALTIP, the Company was authorized to grant restricted stock and stock appreciation rights (“SARs”). Effective May 2008, no new grants will be made under this plan and all future grants will be issued from the Assurant, Inc. Long-Term Equity Incentive Plan, discussed further below. Unearned compensation, representing the market value of the shares at the date of issuance, is charged to earnings over the vesting period.

Restricted stock granted under the ALTIP vests pro ratably over a three year period. SARs granted prior to 2007 under the ALTIP, cliff vest as of December 31 of the second calendar year following the calendar year in which the right was granted, and have a five year contractual life. SARs granted in 2007 and through May 2008 cliff vest on the third anniversary from the date the award was granted, and have a five year contractual life. SARs granted under the BVR Program have a three year cliff vesting period. Restricted stock granted under the CEO Equity Grants Program have variable vesting schedules.

Long-Term Equity Incentive Plan

In May 2008, the Company adopted the Assurant, Inc. Long-Term Equity Incentive Plan (“ALTEIP”), which authorizes the granting of up to 3,400,000 shares of the Company’s common stock to employees, officers and non-employee Directors. Under the ALTEIP, the Company is authorized to grant various stock awards including but not limited to SARs, restricted stock and restricted stock units, performance shares and performance units. All future share-based grants will be issued under the ALTEIP.

Restricted stock and SARs granted to non-employee Directors in May 2008 vested immediately. SARs granted to non-employee Directors have a five year contractual life.

The Company’s CEO is authorized by the Board of Directors to grant common stock and restricted stock to employees other than the executive officers of the Company (as defined in Section 16 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) limited to 100,000 new shares per year. Restricted stock granted under this program have different vesting schedules.

 

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Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2008 and 2007

(In thousands, except per share and share amounts)

 

 

Restricted Stock

The restricted shares granted to employees and to non-employee Directors were 12,245 and 27,050 for the three months ended September 30, 2008 and 2007, respectively, and 132,876 and 110,459 for the nine months ended September 30, 2008 and 2007, respectively. The compensation expense recorded related to restricted stock was $1,778 and $1,618 for the three months ended September 30, 2008 and 2007, respectively, and $5,481 and $3,698 for the nine months ended September 30, 2008 and 2007, respectively. The related total income tax benefit recognized was $622 and $566 for the three months ended September 30, 2008 and 2007, respectively, and $1,721 and $1,294 for the nine months ended September 30, 2008 and 2007, respectively. The weighted average grant date fair value for restricted stock granted during the nine months ended September 30, 2008 and 2007 was $62.96 and $55.23, respectively.

As of September 30, 2008, there was $6,804 of unrecognized compensation cost related to outstanding restricted stock. That cost is expected to be recognized over a weighted-average period of 1.2 years. The total fair value of shares vested during the three months ended September 30, 2008 and 2007 was $378 and $179, respectively, and $5,833 and $3,182 for the nine months ended September 30, 2008 and 2007, respectively.

Stock Appreciation Rights

There were no SARs granted during the three months ended September 30, 2008 and 2007 and 1,497,891 and 1,541,505 granted during the nine months ended September 30, 2008 and 2007, respectively. The compensation expense recorded related to SARs was $3,643 and $3,236 for the three months ended September 30, 2008 and 2007, respectively, and $10,243 and $9,241 for the nine months ended September 30, 2008 and 2007, respectively. The related total income tax benefit recognized was $1,275 and $1,132 for the three months ended September 30, 2008 and 2007, respectively, and $3,545 and $3,196 for the nine months ended September 30, 2008 and 2007, respectively. The weighted average grant date fair value for SARs granted during the nine months ended September 30, 2008 was $13.77.

The total intrinsic value of SARs exercised during the nine months ended September 30, 2008 and 2007 was $38,496 and $53,389, respectively. As of September 30, 2008, there was approximately $22,519 of unrecognized compensation cost related to outstanding SARs. That cost is expected to be recognized over a weighted-average period of 1.5 years.

The fair value of each SAR outstanding was estimated on the date of grant using the Black-Scholes option-pricing model. Expected volatilities for awards issued during the nine months ended September 30, 2008 were based on the median historical stock price volatility of insurance guideline companies and implied volatilities from traded options on the Company’s stock. The expected term for grants issued during the nine months ended September 30, 2008 was assumed to equal the average of the vesting period of the SARs and the full contractual term of the SARs. The risk-free rate for periods within the contractual life of the option was based on the U.S. Treasury yield curve in effect at the time of grant. The dividend yield is based on the current expected annual dividend and share price on the grant date.

Employee Stock Purchase Plan

Under the Employee Stock Purchase Plan (“ESPP”), the Company is authorized to issue up to 5,000,000 new shares to employees who are participants in the ESPP. Eligible employees can purchase stock at a 10% discount applied to the lower of the closing price of the common stock on the first or last day of the offering period. The compensation expense recorded related to the ESPP was $483 and $415 for the three months ended September 30, 2008 and 2007, respectively, and $1,334 and $1,076 for the nine months ended September 30, 2008 and 2007, respectively.

 

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Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2008 and 2007

(In thousands, except per share and share amounts)

 

 

In January 2008, the Company issued 70,646 shares to employees at a discounted price of $53.45 for the offering period of July 1, 2007 through December 31, 2007. In January 2007, the Company issued 80,282 shares to employees at a discounted price of $43.52 for the offering period of July 1, 2006 through December 31, 2006.

In July 2008, the Company issued 65,841 shares to employees at a discounted price of $59.13 for the offering period of January 1, 2008 through June 30, 2008, related to the ESPP. In July 2007, the Company issued 75,468 shares to employees at a discounted price of $50.26 for the offering period of January 1, 2007 through June 30, 2007, related to the ESPP.

The fair value of each award under the ESPP was estimated at the beginning of each offering period using the Black-Scholes option-pricing model. Expected volatilities are based on implied volatilities from traded options on the Company’s stock and the historical volatility of the Company’s stock. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

10. Stock Repurchase

On August 7, 2008, the Company purchased 1,000,000 of its common shares from Fortis Insurance N.V. (“Fortis”) at a price, including transaction fees, of $59.00 per share for a total of $59,000. The shares were purchased in a private aftermarket block transaction.

In September 2007, the Company announced the suspension of its stock buyback program. The purchase of shares from Fortis does not constitute a resumption of its buyback program, which remains on hold. The Company continues to evaluate the potential to implement a new buyback program.

 

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Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2008 and 2007

(In thousands, except per share and share amounts)

 

 

11. 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 September 30,    Nine months ended September 30,
     2008     2007    2008    2007

Numerator

          

Net (loss) income

   $ (111,429 )   $ 187,191    $ 265,355    $ 532,928
                            

Denominator

          

Weighted average shares outstanding used in basic earnings per share calculations

     117,750,167       118,447,175      117,897,422      120,404,471

Incremental common shares from :

          

SARs

     —         1,216,688      1,137,360      1,585,790

Restricted stock

     —         77,571      104,196      71,750

ESPP

     —         —        5,498      —  
                            

Weighted average shares used in diluted earnings per share calculations

     117,750,167       119,741,434      119,144,476      122,062,011
                            

Earnings per share

          

Basic

   $ (0.95 )   $ 1.58    $ 2.25    $ 4.43

Diluted*

   $ (0.95 )   $ 1.56    $ 2.23    $ 4.37

 

* Per FAS128, no potential common shares are included in the computation of diluted per share amount when a loss from operations exists.

Average restricted shares totaling 26,662 for the three months ended September 30, 2007, and 336 and 65,579, for the nine months ended September 30, 2008 and 2007, respectively, were outstanding but were anti-dilutive and thus not included in the computation of diluted EPS under the treasury stock method. Average SARs totaling 1,468,543 for the three months ended September 30, 2007, and 1,065,998 and 1,145,150 for the nine months ended September 30, 2008 and 2007, respectively, were also outstanding but were anti-dilutive and thus not included in the computation of diluted EPS under the treasury stock method.

 

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Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2008 and 2007

(In thousands, except per share and share amounts)

 

 

12. 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 nine months ended September 30, 2008 and 2007 were as follows:

 

     Qualified Pension Benefits     Nonqualified Pension Benefits (1)    Retirement Health Benefits  
     For the three months
ended September 30,
    For the three months
ended September 30,
   For the three months
ended September 30,
 
     2008     2007     2008    2007    2008     2007  

Service cost

   $ 5,196     $ 5,252     $ 481    $ 514    $ 626     $ 726  

Interest cost

     7,098       6,222       1,572      1,456      958       849  

Expected return on plan assets

     (9,040 )     (8,312 )     —        —        (717 )     (321 )

Amortization of prior service cost

     717       758       175      250      346       341  

Amortization of net loss (gain)

     399       2,003       299      264      (118 )     —    
                                              

Net periodic benefit cost

   $ 4,370     $ 5,923     $ 2,527    $ 2,484    $ 1,095     $ 1,595  
                                              
     Qualified Pension Benefits     Nonqualified Pension Benefits (1)    Retirement Health Benefits  
     For the nine months
ended September 30,
    For the nine months
ended September 30,
   For the nine months
ended September 30,
 
     2008     2007     2008    2007    2008     2007  

Service cost

   $ 15,796     $ 15,486     $ 1,431    $ 1,523    $ 2,176     $ 2,210  

Interest cost

     20,248       18,437       4,522      4,260      2,858       2,615  

Expected return on plan assets

     (27,590 )     (24,253 )     —        —        (1,317 )     (935 )

Amortization of prior service cost

     2,167       2,297       575      850      996       1,002  

Amortization of net loss (gain)

     2,499       5,471       999      1,274      (118 )     —    

Settlement charge under FAS 88

     —         —         1,748      115      —         —    
                                              

Net periodic benefit cost

   $ 13,120     $ 17,438     $ 9,275    $ 8,022    $ 4,595     $ 4,892  
                                              

 

(1) The Company’s nonqualified plans are unfunded.

During the first nine months of 2008, $15,000 was contributed to the qualified pension benefits plan. An additional $5,000 is expected to be contributed to the qualified pension benefits plan over the remainder of 2008.

 

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Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2008 and 2007

(In thousands, except per share and share amounts)

 

 

13. Segment Information

The Company has five reportable segments, which are defined based on the nature of the products and services offered: Assurant Solutions, Assurant Specialty Property, Assurant Health, Assurant Employee Benefits, and Corporate & Other. Assurant Solutions provides credit insurance, including life, disability and unemployment, debt protection administration services, warranties and extended service contracts, life insurance policies and annuity products that provide benefits to fund pre-arranged funerals. Assurant Specialty Property provides creditor-placed homeowners insurance and manufactured housing homeowners insurance. Assurant Health provides individual, short-term and small group health insurance. Assurant Employee Benefits provides employee and employer paid dental, disability, and life insurance products and related services. Corporate & Other includes activities of the holding company, financing and interest expenses, net realized gains (losses) on investments, interest income earned from short-term investments held and additional costs associated with excess of loss reinsurance programs reinsured and ceded to certain subsidiaries in the London market between 1995 and 1997. Corporate & Other also includes the amortization of deferred gains associated with the sales of Fortis Financial Group and Long-Term Care through reinsurance agreements.

The Company evaluates performance of the operating segments based on after-tax segment income (loss) excluding realized gains (losses) on investments. The Company determines reportable segments in a manner consistent with the way the Company organizes for purposes of making operating decisions and assessing performance.

 

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Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2008 and 2007

(In thousands, except per share and share amounts)

 

 

The following tables summarize selected financial information by segment:

 

     Three Months Ended September 30, 2008  
     Solutions    Specialty Property    Health    Employee
Benefits
   Corporate &
Other
    Consolidated  

Revenues

                

Net earned premiums and other considerations

   $ 707,115    $ 513,228    $ 486,700    $ 277,093    $ —       $ 1,984,136  

Net investment income

     105,539      31,129      13,769      35,278      6,599       192,314  

Net realized losses on investments

     —        —        —        —        (299,205 )     (299,205 )

Amortization of deferred gain on disposal of businesses

     —        —        —        —        7,379       7,379  

Fees and other income

     40,623      12,501      10,100      6,475      212       69,911  
                                            

Total revenues

     853,277      556,858      510,569      318,846      (285,015 )     1,954,535  
                                            

Benefits, losses and expenses

                

Policyholder benefits

     295,190      302,105      311,790      185,951      12       1,095,048  

Amortization of deferred acquisition costs and value of business acquired

     326,468      82,731      4,263      9,305      —         422,767  

Underwriting, general and administrative expenses

     201,311      125,788      148,082      90,421      19,448       585,050  

Interest expense

     —        —        —        —        15,190       15,190  
                                            

Total benefits, losses and expenses

     822,969      510,624      464,135      285,677      34,650       2,118,055  
                                            

Segment income (loss) before provision (benefit) for income tax

     30,308      46,234      46,434      33,169      (319,665 )     (163,520 )

Provision (benefit) for income taxes

     9,921      15,292      16,230      11,712      (105,246 )     (52,091 )
                                            

Segment income (loss) after tax

   $ 20,387    $ 30,942    $ 30,204    $ 21,457    $ (214,419 )  
                                      

Net loss

                 $ (111,429 )
                      

 

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Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2008 and 2007

(In thousands, except per share and share amounts)

 

 

     Three Months Ended September 30, 2007  
     Solutions    Specialty Property    Health    Employee
Benefits
   Corporate &
Other
    Consolidated  

Revenues

                

Net earned premiums and other considerations

   $ 649,915    $ 445,211    $ 514,233    $ 284,029    $ —       $ 1,893,388  

Net investment income

     105,631      25,862      15,753      38,046      8,757       194,049  

Net realized losses on investments

     —        —        —        —        (13,076 )     (13,076 )

Amortization of deferred gain on disposal of businesses

     —        —        —        —        8,298       8,298  

Fees and other income

     36,623      12,063      10,688      6,040      119       65,533  
                                            

Total revenues

     792,169      483,136      540,674      328,115      4,098       2,148,192  
                                            

Benefits, losses and expenses

                

Policyholder benefits

     284,755      129,354      326,479      194,957      —         935,545  

Amortization of deferred acquisition costs and value of business acquired

     277,005      70,341      4,420      7,990      —         359,756  

Underwriting, general and administrative expenses

     174,505      107,397      149,508      93,988      28,060       553,458  

Interest expense

     —        —        —        —        15,288       15,288  
                                            

Total benefits, losses and expenses

     736,265      307,092      480,407      296,935      43,348       1,864,047  
                                            

Segment income (loss) before provision (benefit) for income tax

     55,904      176,044      60,267      31,180      (39,250 )     284,145  

Provision (benefit) for income taxes

     18,527      61,362      20,902      10,788      (14,625 )     96,954  
                                            

Segment income (loss) after tax

   $ 37,377    $ 114,682    $ 39,365    $ 20,392    $ (24,625 )  
                                      

Net income

                 $ 187,191  
                      

 

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Table of Contents

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2008 and 2007

(In thousands, except per share and share amounts)

 

 

     Nine Months Ended September 30, 2008  
     Solutions    Specialty
Property
   Health    Employee
Benefits
   Corporate &
Other
    Consolidated  

Revenues

                

Net earned premiums and other considerations

   $ 2,091,237    $ 1,528,569    $ 1,470,485    $ 830,778    $ —       $ 5,921,069  

Net investment income

     320,694      92,501      44,719      112,566      20,819       591,299  

Net realized losses on investments

     —        —        —        —        (376,922 )     (376,922 )

Amortization of deferred gain on disposal of businesses

     —        —        —        —        22,085       22,085  

Fees and other income

     132,572      38,090      29,143      20,238      3,046       223,089  
                                            

Total revenues

     2,544,503      1,659,160      1,544,347      963,582      (330,972 )     6,380,620  
                                            

Benefits, losses and expenses

                

Policyholder benefits

     888,043      618,711      943,859      578,994      1,108       3,030,715  

Amortization of deferred acquisition costs and value of business acquired

     961,729      249,822      13,857      27,656      —         1,253,064  

Underwriting, general and administrative expenses

     544,656      353,878      439,473      270,325      70,922       1,679,254  

Interest expense

     —        —        —        —        45,765       45,765  
                                            

Total benefits, losses and expenses

     2,394,428      1,222,411      1,397,189      876,975      117,795       6,008,798  
                                            

Segment income (loss) before provision (benefit) for income tax

     150,075      436,749      147,158      86,607      (448,767 )     371,822  

Provision (benefit) for income taxes

     49,776      150,021      51,970      30,188      (175,488 )     106,467  
                                            

Segment income (loss) after tax

   $ 100,299    $ 286,728    $ 95,188    $ 56,419    $ (273,279 )  
                                      

Net income

                 $ 265,355  
                      
     As of September 30, 2008  

Segment assets:

                

Segments assets, excluding goodwill

   $ 11,748,132    $ 3,420,976    $ 1,085,988    $ 2,548,886    $ 5,709,843     $ 24,513,825  
                                      

Goodwill

                   840,490  
                      

Total assets

                 $ 25,354,315  
                      

 

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Table of Contents

Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2008 and 2007

(In thousands, except per share and share amounts)

 

 

     Nine Months Ended September 30, 2007  
     Solutions    Specialty
Property
   Health    Employee
Benefits
   Corporate &
Other
    Consolidated  

Revenues

                

Net earned premiums and other considerations

   $ 1,851,601    $ 1,205,866    $ 1,540,953    $ 853,164    $ —       $ 5,451,584  

Net investment income

     318,432      71,398      51,313      129,341      30,763       601,247  

Net realized losses on investments

     —        —        —        —        (10,592 )     (10,592 )

Amortization of deferred gain on disposal of businesses

     —        —        —        —        24,893       24,893  

Fees and other income

     115,631      37,313      30,821      18,696      589       203,050  
                                            

Total revenues

     2,285,664      1,314,577      1,623,087      1,001,201      45,653       6,270,182  
                                            

Benefits, losses and expenses

                

Policyholder benefits

     786,626      377,007      973,590      589,897      —         2,727,120  

Amortization of deferred acquisition costs and value of business acquired

     795,765      200,914      15,146      22,690      —         1,034,515  

Underwriting, general and administrative expenses

     538,530      306,915      459,280      280,331      63,473       1,648,529  

Interest expense

     —        —        —        —        45,881       45,881  
                                            

Total benefits, losses and expenses

     2,120,921      884,836      1,448,016      892,918      109,354       5,456,045  
                                            

Segment income (loss) before provision (benefit) for income tax

     164,743      429,741      175,071      108,283      (63,701 )     814,137  

Provision (benefit) for income taxes

     53,087      150,418      61,344      37,459      (21,099 )     281,209  
                                            

Segment income (loss) after tax

   $ 111,656    $ 279,323    $ 113,727    $ 70,824    $ (42,602 )  
                                      

Net income

                 $ 532,928  
                      
     As of December 31, 2007  

Segment assets:

                

Segments assets, excluding goodwill

   $ 11,936,776    $ 2,956,414    $ 1,236,591    $ 2,807,698    $ 6,980,181     $ 25,917,660  
                                      

Goodwill

                   832,656  
                      

Total assets

                 $ 26,750,316  
                      

 

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Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2008 and 2007

(In thousands, except per share and share amounts)

 

 

14. 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 $53,652 and $31,813 of letters of credit outstanding as of September 30, 2008 and December 31, 2007, respectively.

The Company is involved in litigation in the ordinary course of business, both as a defendant and as a plaintiff. The Company may from time to time be subject to a variety of legal and regulatory actions relating to the Company’s current and past business operations. While the Company cannot predict the outcome of any pending or future litigation, examination or investigation and although no assurances can be given, the Company does not believe that any pending matter will have a material adverse effect individually or in the aggregate, on the Company’s financial condition, results of operations, or cash flows.

One of the Company’s subsidiaries, American Reliable Insurance Company (“ARIC”), participated in certain excess of loss reinsurance programs in the London market and, as a result, reinsured certain personal accident, ransom and kidnap insurance risks from 1995 to 1997. ARIC and a foreign affiliate ceded a portion of these risks to retrocessionaires. ARIC ceased reinsuring such business in 1997. However, certain risks continued beyond 1997 due to the nature of the reinsurance contracts written. ARIC and some of the other reinsurers involved in the programs are seeking to avoid certain treaties on various grounds, including material misrepresentation and non-disclosure by the ceding companies and intermediaries involved in the programs. Similarly, some of the retrocessionaires are seeking avoidance of certain treaties with ARIC and the other reinsurers and some reinsureds are seeking collection of disputed balances under some of the treaties. The disputes generally involve multiple layers of reinsurance, and allegations that the reinsurance programs involved interrelated claims “spirals” devised to disproportionately pass claims losses to higher-level reinsurance layers.

Many of the companies involved in these programs, including ARIC, are currently involved in negotiations, arbitrations and/or litigation between multiple layers of retrocessionaires, reinsurers, ceding companies and intermediaries, including brokers, in an effort to resolve these disputes. Many of the disputes involving ARIC and an affiliate, Bankers Insurance Company Limited (“BICL”), relating to the 1995 and 1997 program years, were resolved by settlement or arbitration in 2005. As a result of the settlements and an arbitration (in which ARIC did not prevail) additional information became available in 2005, and based on management’s best estimate, the Company increased its reserves and recorded a total pre-tax charge of $61,943 for the year ended December 31, 2005. Negotiations, arbitrations and litigation are still ongoing or will be scheduled for the remaining disputes. On February 28, 2006 there was a settlement relating to the 1996 program. In 2007, there were two settlements relating to parts of the 1997 program. Loss accruals previously established relating to the 1996 and 1997 programs were adequate. The Company believes, based on information currently available, that the amounts accrued for currently outstanding disputes are adequate. However, the inherent uncertainty of arbitrations and lawsuits, including the uncertainty of estimating whether any settlements the Company may enter into in the future would be on favorable terms, makes it difficult to predict the outcomes with certainty.

As previously disclosed, the Company and certain of its officers and former employees have received subpoenas and requests from the SEC in connection with its investigation by the SEC staff into certain finite reinsurance contracts entered into by the Company. The Company is cooperating fully and is complying with the requests.

The Company conducted an evaluation of the transactions that could potentially fall within the scope of the subpoenas, as defined by the authorities, and the Company has provided information as requested. On the basis of our investigation, the Company has concluded that there was a verbal side agreement with respect to one of our reinsurers under our catastrophic reinsurance program. The contract to which this verbal agreement applied was accounted for using reinsurance accounting as opposed to deposit accounting. While management believes

 

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Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2008 and 2007

(In thousands, except per share and share amounts)

 

 

that the difference resulting from the appropriate alternative accounting treatment would be immaterial to our financial position or results of operations, regulators may reach a different conclusion. In 2004 and 2003, premiums ceded to this reinsurer were $2,600 and $1,500, respectively, and losses ceded were $10,000 and zero, respectively. This contract expired in December 2004 and was not renewed.

In July 2007, the Company learned that each of the following five individuals, Robert B. Pollock, President and Chief Executive Officer, Philip Bruce Camacho, Executive Vice President and Chief Financial Officer, Adam Lamnin, Executive Vice President and Chief Financial Officer of Assurant Solutions/Assurant Specialty Property, Michael Steinman, Senior Vice President and Chief Actuary of Assurant Solutions/Assurant Specialty Property and Dan Folse, Vice President-Risk Management of Assurant Solutions/Assurant Specialty Property, received Wells notices from the SEC in connection with its ongoing investigation. A Wells notice is an indication that the staff of the SEC is considering recommending that the SEC bring a civil enforcement action against the recipient for violating provisions of the federal securities laws. Under SEC procedures, the recipients have the opportunity to respond to the SEC staff before a formal recommendation is finalized and before the Commissioners themselves consider any recommendations.

On July 17, 2007, the Company announced that the Board of Directors (the “Board”) had placed all five employees on administrative leave, pending further review of this matter. The Board’s actions were based on the recommendations of its Special Committee of non-management directors which thereafter undertook a thorough investigation of the events that had resulted in the receipt of the Wells notices. The Special Committee has reviewed relevant documents, conducted interviews and worked with outside counsel to investigate these matters and to recommend appropriate actions to the Board with respect to the SEC investigation. On August 9, 2007, Messrs. Steinman and Folse’s employment with the Company was terminated.

On the basis of an extensive review of evidence concerning this matter and the work of the Special Committee, the Board unanimously voted to reinstate Mr. Pollock as President and Chief Executive Officer, effective January 28, 2008. The Board’s decision to reinstate Mr. Pollock implies no conclusion concerning the outcome of the SEC staff’s ongoing investigation, and the SEC staff’s Wells notice to him remains in effect. The SEC staff’s inquiry continues, and the Company is cooperating fully. We cannot predict the duration or outcome of the investigation.

In the course of its response to SEC staff inquiries, the Company identified certain problems related to its document production process. These production issues have delayed resolution of this matter. The Company believes that it has now completed its response to the SEC staff’s document request. Messrs. Camacho and Lamnin remain on administrative leave.

In relation to the SEC investigation discussed above, the SEC may charge the Company and/or the individuals with violations of the federal securities laws, including alleging violations of Sections 10(b), 13(a), and/or 13(b) of the Securities Exchange Act of 1934, and/or Section 17(a) of the Securities Act of 1933, and may seek civil monetary penalties, injunctive relief and other remedies against the Company and individuals, including potentially seeking a bar preventing one or more individuals from serving as an officer or director of a public company. The SEC may also take the position that the Company should restate its consolidated financial statements to address the accounting treatment referred to above. No settlement of any kind can be reached without approval by the SEC and the Company has not accrued for any civil monetary penalties because the Company cannot reasonably estimate the probability or amount of such penalties at this time.

 

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Assurant, Inc.

Notes to Consolidated Financial Statements (unaudited)

Nine Months Ended September 30, 2008 and 2007

(In thousands, except per share and share amounts)

 

 

15. Subsequent Events

On October 1, 2008 the Company completed the acquisition of Signal Holdings LLC (“Signal”). The Company paid $253,100 in cash for the outstanding capital stock of Signal, a leading provider of wireless handset protection programs and repair services.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Dollar amounts in thousands)

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) addresses the financial condition of Assurant, Inc. and its subsidiaries (which we refer to collectively as Assurant) as of September 30, 2008, compared with December 31, 2007, and our results of operations for the three and nine months ended September 30, 2008 and 2007. This discussion should be read in conjunction with our MD&A and annual audited consolidated financial statements as of December 31, 2007 included in our Annual Report on Form 10-K for the year ended December 31, 2007 filed with the U.S. Securities and Exchange Commission (the “SEC”) and the September 30, 2008 unaudited consolidated financial statements and related notes included elsewhere in this Form 10-Q.

Some of the statements included in this MD&A and elsewhere in this report, particularly those anticipating future financial performance, business prospects, growth and operating strategies and similar matters, are forward-looking statements that involve a number of risks and uncertainties. You can identify these statements by the fact that they may use words such as “will,” “may,” “anticipates,” “expects,” “estimates,” “projects,” “intends,” “plans,” “believes,” “targets,” “forecasts,” “potential,” “approximately,” or the negative version of those words and other words and terms with a similar meaning. Any forward looking statements contained in this report are based upon our historical performance and on current plans, estimates and expectations. The inclusion of this forward-looking information should not be regarded as a representation by us or any other person that the future plans, estimates or expectations contemplated by us will be achieved. Our actual results might differ materially from those projected in the forward-looking statements. The Company undertakes no obligation to update or review any forward-looking statement, whether as a result of new information, future events or other developments.

In addition to the factors described in the section below entitled “Critical Factors Affecting Results,” the following risk factors could cause our actual results to differ materially from those currently estimated by management: (i) failure to maintain significant client relationships, distribution sources and contractual arrangements; (ii) failure to attract and retain sales representatives; (iii) general global economic, financial market and political conditions (including difficult conditions in financial markets and the global economic slowdown, fluctuations in interest rates, mortgage rates, monetary policies and inflationary pressure); (iv) inadequacy of reserves established for future claims losses; (v) failure to predict or manage benefits, claims and other costs; (vi) diminished value of invested assets in our investment portfolio (due to, among other things, the recent volatility in financial markets and global economic slowdown, credit and liquidity risk, environmental liability exposure and inability to target an appropriate overall risk level); (vii) losses due to natural and man-made catastrophes; (viii) unavailability, inadequacy and unaffordable pricing of reinsurance coverage; (ix) inability of reinsurers to meet their obligations; (x) insolvency of third parties to whom we have sold or may sell businesses through reinsurance or modified co-insurance; (xi) credit risk of some of our agents in Assurant Specialty Property and Solutions; (xii) a further decline in the manufactured housing industry; (xiii) a decline in our credit or financial strength ratings (including the current heightened risk of rating downgrades in the insurance industry); (xiv) failure to effectively maintain and modernize our information systems; (xv) failure to protect client information and privacy; (xvi) failure to find and integrate suitable acquisitions and new insurance ventures; (xvii) inability of our subsidiaries to pay sufficient dividends; (xviii) failure to provide for succession of senior management and key executives; (xix) negative publicity and impact on our business due to unfavorable outcomes in litigation and regulatory investigations (including the potential impact on our reputation and business of a negative outcome in the ongoing SEC investigation); (xx) significant competitive pressures in our businesses and cyclicality of the insurance industry: (xxi) current or new laws and regulations that could increase our costs or limit our growth. These risk factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this report. For a more detailed discussion of the risk factors that could affect our actual results, please refer to the “Risk Factors” in item 1A of this Form 10-Q and in our 2007 Annual Report on Form 10-K.

Company Overview

Assurant is a premier provider of specialized insurance products and related services in North America and selected international markets. We have five reportable segments, four of which are operating segments, Assurant Solutions, Assurant Specialty Property, Assurant Health, and Assurant Employee Benefits. These operating segments have partnered with clients who are leaders in their industries and have built leadership positions in a number of specialty insurance market segments in the U.S. and selected international markets. The Assurant

 

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business segments provide creditor-placed homeowners insurance; manufactured housing homeowners insurance; debt protection administration services; credit insurance including life, disability and unemployment; warranties and extended services contracts; individual, short-term and small employer group health insurance; group dental insurance; group disability insurance; group life insurance; and pre-funded funeral insurance. Our remaining segment is Corporate & Other which includes activities of the holding company, financing and interest expenses, net realized gains (losses) on investments, interest income earned from short-term investments held and additional costs associated with excess of loss reinsurance programs reinsured and ceded to certain subsidiaries in the London market between 1995 and 1997. Corporate & Other also includes the amortization of deferred gains associated with the sales of Fortis Financial Group and Long-Term Care through reinsurance agreements.

Critical Factors Affecting Results

Our results depend on the adequacy of our product pricing, underwriting and the accuracy of our methodology for the establishment of reserves for future policyholder benefits and claims, returns on and values of invested assets and our ability to manage our expenses. Therefore, factors affecting these items, including difficult conditions in financial markets and the global economic slowdown, may have a material adverse effect on our results of operations or financial condition.

For information on how the current state of the global capital and credit markets may affect our results, refer to “Item 1A-Risk Factors.”

Critical Accounting Policies and Estimates

Our 2007 Annual Report on Form 10-K described the accounting policies and estimates that are critical to the understanding of our results of operations, financial condition and liquidity. The accounting policies and estimates described in the 2007 Annual Report on Form 10-K were consistently applied to the unaudited interim consolidated financial statements for the nine months ended September 30, 2008.

 

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Assurant Consolidated

Overview

The tables below present information regarding our consolidated results of operations:

 

     For the Three Months Ended
September 30,
    For the Nine Months Ended
September 30,
 
     2008     2007     2008     2007  
     (in thousands)  

Revenues:

        

Net earned premiums and other considerations

   $ 1,984,136     $ 1,893,388     $ 5,921,069     $ 5,451,584  

Net investment income

     192,314       194,049       591,299       601,247  

Net realized losses on investments

     (299,205 )     (13,076 )     (376,922 )     (10,592 )

Amortization of deferred gain on disposal of businesses

     7,379       8,298       22,085       24,893  

Fees and other income

     69,911       65,533       223,089       203,050  
                                

Total revenues

     1,954,535       2,148,192       6,380,620       6,270,182  
                                

Benefits, losses and expenses:

        

Policyholder benefits

     1,095,048       935,545       3,030,715       2,727,120  

Selling, underwriting and general expenses (1)(2)

     1,007,817       913,214       2,932,318       2,683,044  

Interest expense

     15,190       15,288       45,765       45,881  
                                

Total benefits, losses and expenses

     2,118,055       1,864,047       6,008,798       5,456,045  
                                

(Loss) income before (benefit) provision for income taxes

     (163,520 )     284,145       371,822       814,137  

(Benefit) provision for income taxes

     (52,091 )     96,954       106,467       281,209  
                                

Net (loss) income

   $ (111,429 )   $ 187,191     $ 265,355     $ 532,928  
                                

 

(1) Includes amortization of deferred acquisition costs (“DAC”) and value of business acquired (“VOBA”).
(2) Includes commissions, taxes, licenses and fees.

The following discussion provides a high level analysis of how the consolidated results were affected by our four operating segments and our Corporate and Other segment for the three and nine months ended September 30, 2008 (“Third Quarter 2008” and “Nine Months 2008”, respectively) and three and nine months ended September 30, 2007 (“Third Quarter 2007” and “Nine Months 2007”, respectively). Please see the discussion that follows, for each of these segments, for a more detailed analysis of the fluctuations.

For The Three Months Ended September 30, 2008 Compared to The Three Months Ended September 30, 2007.

Net Income

Third Quarter 2008 incurred a net loss of $(111,429), a decrease of $298,620, or 160%, compared with $187,191 in net income for Third Quarter 2007. The decrease was primarily due to net realized losses on investments of $194,483 (after-tax) and losses associated with hurricanes Gustav and Ike of $86,200 (after-tax). Included in realized losses are other-than-temporary impairments of $148,946 (after-tax).

For The Nine Months Ended September 30, 2008 Compared to The Nine Months Ended September 30, 2007.

Net Income

Net income decreased $267,573, or 50%, to $265,355 for Nine Months 2008 from $532,928 for Nine Months 2007. The decrease was primarily due to the reasons noted above.

 

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Assurant Solutions

Overview

The tables below present information regarding our Assurant Solutions’ segment results of operations:

 

     For the Three Months Ended
September 30,
    For the Nine Months Ended
September 30,
 
     2008     2007     2008     2007  
     (in thousands)  

Revenues:

        

Net earned premiums and other considerations

   $ 707,115     $ 649,915     $ 2,091,237     $ 1,851,601  

Net investment income

     105,539       105,631       320,694       318,432  

Fees and other income

     40,623       36,623       132,572       115,631  
                                

Total revenues

     853,277       792,169       2,544,503       2,285,664  
                                

Benefits, losses and expenses:

        

Policyholder benefits

     295,190       284,755       888,043       786,626  

Selling, underwriting and general expenses (4)(5)

     527,779       451,510       1,506,385       1,334,295  
                                

Total benefits, losses and expenses

     822,969       736,265       2,394,428       2,120,921  
                                

Segment income before provision for income taxes

     30,308       55,904       150,075       164,743  

Provision for income taxes

     9,921       18,527       49,776       53,087  
                                

Segment net income

   $ 20,387     $ 37,377     $ 100,299     $ 111,656  
                                

Net earned premiums and other considerations:

        

Domestic:

        

Credit

   $ 70,270     $ 75,638     $ 213,331     $ 232,668  

Service contracts

     334,386       292,762       989,453       834,899  

Other (1)

     13,685       14,496       44,305       46,702  
                                

Total Domestic

     418,341       382,896       1,247,089       1,114,269  
                                

International:

        

Credit

     98,645       98,431       285,570       287,721  

Service contracts

     93,745       64,561       261,540       169,821  

Other (1)

     (139 )     8,307       16,362       27,546  
                                

Total International

     192,251       171,299       563,472       485,088  
                                

Preneed

     96,523       95,720       280,676       252,244  
                                

Total

   $ 707,115     $ 649,915     $ 2,091,237     $ 1,851,601  
                                

Fees and other income:

        

Domestic:

        

Debt protection

   $ 8,495     $ 7,415     $ 24,694     $ 23,634  

Service contracts

     18,472       16,679       56,783       50,746  

Other (1)

     6,873       6,320       20,047       18,018  
                                

Total Domestic

     33,840       30,414       101,524       92,398  
                                

International

     7,272       5,179       26,718       14,055  

Preneed

     (489 )     1,030       4,330       9,178  
                                

Total

   $ 40,623     $ 36,623     $ 132,572     $ 115,631  
                                

Gross written premiums (2):

        

Domestic:

        

Credit

   $ 151,717     $ 168,135     $ 456,788     $ 497,716  

Service contracts

     385,153       434,465       1,175,121       1,337,012  

Other (1)

     17,858       22,353       51,692       65,232  
                                

Total Domestic

     554,728       624,953       1,683,601       1,899,960  
                                

International:

        

Credit

     213,322       219,945       646,941       612,713  

Service contracts

     133,226       118,754       344,942       285,284  

Other (1)

     1,375       11,176       21,685       35,531  
                                

Total International

     347,923       349,875       1,013,568       933,528  
                                

Total

   $ 902,651     $ 974,828     $ 2,697,169     $ 2,833,488  
                                

Preneed (face sales)

   $ 121,021     $ 107,341     $ 346,304     $ 295,759  

Combined ratio (3):

        

Domestic

     104.7 %     100.9 %     100.2 %     100.9 %

International

     105.6 %     102.3 %     106.4 %     104.7 %

 

(1) This includes emerging products and run-off products lines.

 

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(2) Gross written premiums does not necessarily translate to an equal amount of subsequent net earned premiums since Assurant Solutions reinsures a portion of its premiums to insurance subsidiaries of its clients.
(3) The combined ratio is equal to total benefits, losses and expenses divided by net earned premiums and other considerations and fees and other income excluding the preneed business.
(4) Includes amortization of DAC and VOBA.
(5) Includes commissions, taxes, licenses and fees.

For The Three Months Ended September 30, 2008 Compared to The Three Months Ended September 30, 2007.

Net Income

Segment net income decreased $16,990, or 45%, to $20,387 for Third Quarter 2008 from $37,377 for Third Quarter 2007. The decrease was primarily due to less favorable results in our domestic service contract business, including the effects of the termination of the existing strategic alliance with General Electric (“GE”). Also contributing to the decrease was less favorable credit insurance loss experience in the United Kingdom and increased expenses in certain countries to support our international expansion. Partially offsetting these declines were favorable client settlements related to reserves previously established for a credit life product in Brazil.

On September 26, 2008, the Company acquired the Warranty Management Group business from GE Consumer & Industrial, a unit of GE. The Company paid GE $140,000 in cash for the sale, transfer and conveyance of certain assets and will assume certain liabilities. As part of the acquisition, the Company entered into a new 10-year agreement to market extended warranties and service contracts on GE-branded major appliances in the United States.

In a separate transaction, GE paid the Company $115,000 in cash in connection with the termination of the existing strategic alliance. Under the pre-existing relationship, the Company sold extended warranties directly to GE appliance purchasers and through leading retailers. After the acquisition, the Company assumed full responsibility for operating the extended warranty business it previously co-managed and shared with GE. Due to the termination of the existing strategic alliance, the Company reduced its deferred acquisition costs (“DAC”) asset.

Total Revenues

Total revenues increased $61,108, or 8%, to $853,277 for Third Quarter 2008 from $792,169 for Third Quarter 2007. The increase in revenues is primarily attributable to increased net earned premiums and other considerations of $57,200. This increase is due to growth in our domestic and international service contract business, which was driven by higher earnings on premiums written in prior periods. We also experienced growth

 

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in our Preneed life insurance (“Preneed”) business from increased earnings from our existing exclusive distribution partnership with Service Corporation International (“SCI”) funeral homes. These increases were partially offset by the continued runoff of our domestic credit insurance and Preneed Independent US business and a recently acquired runoff block of preneed business from Mayflower National Life Insurance Company (“Mayflower”). Subsequent to the acquisition, we merged Mayflower, a leading provider of preneed insurance products and services, into our existing preneed life insurer, American Memorial Life Insurance Company, where we continue to write all new preneed business. Also contributing to the increase in revenues was an increase in fees and other income of $4,000, or 11%, primarily from various international acquisitions made in and subsequent to Third Quarter 2007, combined with the continued growth of our service contract businesses.

Gross written premiums decreased $72,177, to $902,651 in the Third Quarter 2008 from $974,828 for Third Quarter 2007. Gross written premiums from our domestic service contract business decreased $49,312, primarily due to the store closings of a client and the impact of lower retail sales from other clients, partially offset by increases in premium from new clients. Gross written premiums from our domestic credit insurance business decreased $16,418 due to the continued runoff of this product line. Gross written premiums from our international credit business decreased $6,623 primarily driven by credit difficulties experienced in the United Kingdom housing market. This was offset by growth in other countries from increased marketing efforts, strong client production, and the favorable impact of foreign exchange rates. Partially offsetting these decreases is increased gross written premiums in our international service contracts business of $14,472 primarily from growth with both new and existing clients, which is consistent with our international expansion strategy, and the favorable impact of foreign exchange rates. We experienced an increase in our Preneed face sales of $13,680 primarily due to new business generated from former Alderwoods funeral homes and growth from our existing exclusive distribution partnership with SCI funeral homes.

Total Benefits, Losses and Expenses

Total benefits, losses and expenses increased $86,704, or 12%, to $822,969 for Third Quarter 2008 from $736,265 for Third Quarter 2007. Policyholder benefits increased $10,435, primarily driven by the growth in net earned premiums from our domestic and international service contract and Preneed businesses. This was partially offset by improved loss experience in our international business including the improved results in the credit life product in Brazil. Selling, underwriting and general expenses increased $76,269. Commissions, taxes, licenses and fees, of which amortization of DAC is a component, increased $62,637, primarily due to an increase in the overall commission rate caused by the change in business mix. This was evidenced by higher earnings in our service contract business, which has higher commission rates, compared to the lower commission rates on the decreasing domestic credit business. Additionally, Third Quarter 2008 includes the effects of the termination of the existing strategic alliance with GE. General expenses increased $13,632, due to higher employment expenses associated with our continued investment in international expansion combined with the amortization of intangibles associated with international acquisitions made during the latter part of 2007.

For The Nine Months Ended September 30, 2008 Compared to The Nine Months Ended September 30, 2007.

Net Income

Segment net income decreased $11,357, or 10%, to $100,299 for Nine Months 2008 from $111,656 for Nine Months 2007. The decrease is due in part to income recognized of $8,600 (after-tax) in 2007 related to settlement fees received related to the sale of marketing rights for the Independent U.S. Preneed business and the completed clients commission reconciliation project. In addition, net income decreased due to less favorable loss experience in our international businesses and continued investments made to support our strategic international expansion and higher expenses associated with the acquisitions internationally during the latter part of 2007. Net investment income increased $1,470 (after-tax). This increase is primarily attributable to an increase of approximately $10,900 (after-tax) resulting from higher average invested assets attributable to growth in our international and domestic service contract business partially offset by decreased investment income from lower distributions from real estate joint venture partnerships of approximately $9,400 (after-tax). The decrease in real estate joint venture partnership income is due to greater sales of underlying properties in Nine Months 2007 compared with Nine Months 2008 given more favorable real estate market conditions in 2007.

 

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Total Revenues

Total revenues increased $258,839, or 11%, to $2,544,503 for Nine Months 2008 from $2,285,664 for Nine Months 2007. The increase in revenues is primarily attributable to increased net earned premiums and other considerations of $239,636. This increase is due to growth in our domestic and international service contract business driven by higher earnings on premiums written in prior periods. We also experienced growth in our Preneed business from increased earnings from the acquisition of Mayflower in late 2007 and earnings from the existing exclusive distribution partnership with SCI funeral homes. These increases were offset by the continued runoff of our domestic credit insurance and the Preneed Independent US businesses. Also contributing to the increase in revenues was an increase in fees and other income of $16,941, or 15%, primarily from various international acquisitions made during the latter part of 2007 combined with the continued growth of our service contract businesses. Net investment income increased $2,262, or 1%, despite net investment income of $15,680 recognized in Nine Months 2007 from real estate joint venture partnerships compared with $1,210 in Nine Months 2008. Absent this investment income from real estate joint venture partnerships, net investment income increased $16,732, or 6%, primarily attributable to higher average invested assets from growth in our international and domestic service contract businesses.

Gross written premiums decreased $136,319, to $2,697,169 in the Third Quarter 2008 from $2,833,488 for Third Quarter 2007. Gross written premiums from our domestic service contract business decreased $161,891, primarily due to the store closings of a client and the impact of lower retail sales from other clients, partially offset by increases in premium from new clients. Gross written premiums from our domestic credit insurance business decreased $40,928 due to the continued runoff of this product line. These decreases were partially offset by increased gross written premiums in our international business. Gross written premiums from our international credit business increased $34,228 primarily driven by increased marketing efforts, strong client production, and the favorable impact of foreign exchange rates partially offset by credit difficulties experienced in the United Kingdom housing market. Gross written premiums in our international service contracts business increased $59,658 primarily from growth with both new and existing clients consistent with our international expansion strategy, and the favorable impact of foreign exchange rates. We experienced an increase in our Preneed face sales of $50,545 primarily due to new business generated from former Alderwoods funeral homes and growth from our existing exclusive distribution partnership with SCI funeral homes.

Total Benefits, Losses and Expenses

Total benefits, losses and expenses increased $273,507, or 13%, to $2,394,428 for Nine Months 2008 from $2,120,921 for Nine Months 2007. Policyholder benefits increased $101,417, primarily driven by growth in net earned premiums from our domestic and international service contract and Preneed businesses, combined with unfavorable loss experience in a credit life product in Brazil. Selling, underwriting and general expenses increased $172,090. Commissions, taxes, licenses and fees, of which amortization of DAC is a component, increased $129,169, primarily due to an increase in the overall commission rate increases caused by the change in business mix. This was evidenced by higher earnings in our service contract business, which has higher commission rates, compared to the lower commission rates on the decreasing domestic credit business. In addition, contributing to the increase was $7,800 of income recorded in 2007 from our completed clients commission reconciliation project combined with the effects of the termination of the existing strategic alliance with GE in Third Quarter 2008. General expenses increased $42,921, due to additional costs associated with the growth of the domestic service contract business as well as higher expenses associated with the continued investment in international expansion and increased expenses from amortization of intangible assets associated with international acquisitions made in the latter part of 2007.

 

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Assurant Specialty Property

Overview

The tables below present information regarding our Assurant Specialty Property’s segment results of operations:

 

     For the Three Months Ended
September 30,
    For the Nine Months Ended
September 30,
 
     2008     2007     2008     2007  
     (in thousands)  

Revenues:

        

Net earned premiums and other considerations

   $ 513,228     $ 445,211     $ 1,528,569     $ 1,205,866  

Net investment income

     31,129       25,862       92,501       71,398  

Fees and other income

     12,501       12,063       38,090       37,313  
                                

Total revenues

     556,858       483,136       1,659,160       1,314,577  
                                

Benefits, losses and expenses:

        

Policyholder benefits

     302,105       129,354       618,711       377,007  

Selling, underwriting and general expenses (5)(6)

     208,519       177,738       603,700       507,829  
                                

Total benefits, losses and expenses

     510,624       307,092       1,222,411       884,836  
                                

Segment income before provision for income taxes

     46,234       176,044       436,749       429,741  

Provision for income taxes

     15,292       61,362       150,021       150,418  
                                

Segment net income

   $ 30,942     $ 114,682     $ 286,728     $ 279,323  
                                

Net earned premiums and other considerations by major product groupings:

        

Homeowners (Creditor Placed and Voluntary)

   $ 368,066     $ 317,607     $ 1,101,554     $ 845,159  

Manufactured Housing (Creditor Placed and Voluntary)

     55,389       54,132       168,934       155,254  

Other (1)

     89,773       73,472       258,081       205,453  
                                

Total

   $ 513,228     $ 445,211     $ 1,528,569     $ 1,205,866  
                                

Gross written premiums for selected product groupings:

        

Homeowners (Creditor Placed and Voluntary)

   $ 492,069     $ 420,184     $ 1,441,014     $ 1,119,336  

Manufactured Housing (Creditor Placed and Voluntary)

     80,909       77,885       230,491       222,712  

Other (1)

     187,929       156,235       483,094       418,992  
                                

Total

   $ 760,907     $ 654,304     $ 2,154,599     $ 1,761,040  
                                

Ratios:

        

Loss ratio (2)

     58.9 %     29.1 %     40.5 %     31.3 %

Expense ratio (3)

     39.7 %     38.9 %     38.5 %     40.8 %

Combined ratio (4)

     97.1 %     67.2 %     78.0 %     71.2 %

 

(1) This primarily includes flood, agricultural, specialty auto and renters insurance products.
(2) The loss ratio is equal to policyholder benefits divided by net earned premiums and other considerations.
(3) The expense ratio is equal to selling, underwriting and general expenses divided by net earned premiums and other considerations and fees and other income.
(4) The combined ratio is equal to total benefits, losses and expenses divided by net earned premiums and other considerations and fees and other income.
(5) Includes amortization of DAC and VOBA.
(6) Includes commissions, taxes, licenses and fees.

 

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For The Three Months Ended September 30, 2008 Compared to The Three Months Ended September 30, 2007.

Net Income

Segment net income decreased $83,740, or 73%, to $30,942 for Third Quarter 2008 from $114,682 for Third Quarter 2007. The decrease in net income was primarily due to incurred losses from Hurricanes Gustav and Ike of $86,200 (after-tax), net of reinsurance, and $8,600 (after-tax) in catastrophe reinsurance reinstatement premiums and related expenses. Third Quarter 2007 had no reportable hurricane related costs. Partially offsetting these hurricane costs was an increase in net investment income of $3,424 (after-tax) as a result of higher average invested assets resulting from the continued growth of the business.

Total Revenues

Total revenues increased $73,722 or 15%, to $556,858 for Third Quarter 2008 from $483,136 for Third Quarter 2007. The increase in revenues was primarily due to increased net earned premiums and other considerations of $68,017, or 15% net of reinsurance costs of $26,600, including catastrophe reinsurance reinstatement premiums of $13,173 related to losses incurred from Hurricane Ike. The increase was mainly attributable to the growth of creditor placed homeowners insurance net earned premiums. This was primarily driven by a 15% increase in average insured values of properties and increased policy penetration rates. Partially offsetting these factors was a net decrease in tracked loans in Third Quarter 2008 due to continued market consolidation and declining inventory of sub-prime loans. In addition, net investment income increased $5,267 or 20% in Third Quarter 2008 compared to Third Quarter 2007 due to higher invested assets.

Total Benefits, Losses and Expenses

Total benefits, losses and expenses increased $203,532, or 66%, to $510,624 for Third Quarter 2008 from $307,092 for Third Quarter 2007. This increase was due to an increase in policyholder benefits of $172,751 and higher selling, underwriting, and general expenses of $30,781. The increase in policyholder benefits is primarily attributable to losses incurred relating to Hurricanes Gustav and Ike of $132,600, net of reinsurance, additional other weather related losses and corresponding growth in creditor placed homeowners insurance. The combined ratio increased to 97.1% from 67.2%, primarily due to the losses from Hurricanes Gustav and Ike and the additional other weather related losses and expenses. Commissions, taxes, licenses and fees increased $11,220, primarily due to the associated increase in net earned premiums and a $3,500 benefit in the Third Quarter 2007 from a completed client commission reconciliation project. General expenses increased $19,561 primarily due to increases in employment related expenses consistent with business growth and additional hurricane related expenses.

For The Nine Months Ended September 30, 2008 Compared to The Nine Months Ended September 30, 2007.

Net Income

Segment net income increased $7,405, or 3%, to $286,728 for Nine Months 2008 from $279,323 for Nine Months 2007. The increase in net income was primarily due to higher net earned premiums resulting from creditor placed homeowners insurance and our ability to leverage the benefits of scale. Net income also improved due to an increase in net investment income of $13,717 (after-tax) as a result of higher average invested assets resulting from the continued growth of the business. Partially offsetting these increases are losses from Hurricanes Gustav and Ike of $86,200 (after-tax), net of reinsurance, and $8,600 (after-tax) in catastrophe reinsurance reinstatement premiums and related expenses. We did not have any reportable hurricane related costs during Nine Months 2007.

Total Revenues

Total revenues increased $344,583, or 26%, to $1,659,160 for Nine Months 2008 from $1,314,577 for Nine Months 2007. The increase in revenues was primarily due to increased net earned premiums and other considerations of $322,703, or 27% net of reinsurance costs of $17,500, including catastrophe reinsurance reinstatement premiums of $13,173 related to losses incurred from Hurricane Ike. The increase in net earned premium was mainly attributable to the growth of creditor placed homeowners insurance net earned premiums. This was primarily driven by an increase in average insured value of properties and increased policy penetration rates. Partially offsetting these factors was a net decrease in tracked

 

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loans in Nine Months 2008 due to continued market consolidation and declining inventory of sub-prime loans. In addition, net investment income increased $21,103, or 30%, in the Nine Months 2008 compared to Nine Months 2007, due to higher invested assets.

Total Benefits, Losses and Expenses

Total benefits, losses and expenses increased $337,575, or 38%, to $1,222,411 for Nine Months 2008 from $884,836 for Nine Months 2007. This increase was due to an increase in policyholder benefits of $241,704 and higher selling, underwriting, and general expenses of $95,871. The increase in policyholder benefits is primarily attributable to the $132,600, net of reinsurance, of losses incurred relating to hurricanes Gustav and Ike, additional other weather related losses and corresponding growth in creditor placed homeowners insurance. The combined ratio increased to 78.0% from 71.2%, due to the losses from hurricanes Gustav and Ike partially offset by our ability to leverage benefits of scale. Commissions, taxes, licenses and fees increased $56,489, primarily due to the associated increase in net earned premiums. General expenses increased $39,382 primarily due to increases in employment related expenses consistent with business growth.

Assurant Health

Overview

The tables below present information regarding Assurant Health’s segment results of operations:

 

     For the Three Months Ended
September 30,
    For the Nine Months Ended
September 30,
 
     2008     2007     2008     2007  
     (in thousands)  

Revenues:

        

Net earned premiums and other considerations

   $ 486,700     $ 514,233     $ 1,470,485     $ 1,540,953  

Net investment income

     13,769       15,753       44,719       51,313  

Fees and other income

     10,100       10,688       29,143       30,821  
                                

Total revenues

     510,569       540,674       1,544,347       1,623,087  
                                

Benefits, losses and expenses:

        

Policyholder benefits

     311,790       326,479       943,859       973,590  

Selling, underwriting and general expenses (4)(5)

     152,345       153,928       453,330       474,426  
                                

Total benefits, losses and expenses

     464,135       480,407       1,397,189       1,448,016  
                                

Segment income before provision for income taxes

     46,434       60,267       147,158       175,071  

Provision for income taxes

     16,230       20,902       51,970       61,344  
                                

Segment net income

   $ 30,204     $ 39,365     $ 95,188     $ 113,727  
                                

Net earned premiums and other considerations:

        

Individual markets:

        

Individual medical

   $ 319,188     $ 323,490     $ 957,039     $ 958,594  

Short-term medical

     27,335       26,336       75,457       72,396  
                                

Subtotal

     346,523       349,826       1,032,496       1,030,990  

Small employer group:

     140,177       164,407       437,989       509,963  
                                

Total

   $ 486,700     $ 514,233     $ 1,470,485     $ 1,540,953  
                                

Membership by product line:

        

Individual markets:

        

Individual medical

         585       638  

Short-term medical

         101       101  
                    

Subtotal

         686       739  

Small employer group:

         136       171  
                    

Total

         822       910  
                    

Ratios:

        

Loss ratio (1)

     64.1 %     63.5 %     64.2 %     63.2 %

Expense ratio (2)

     30.7 %     29.3 %     30.2 %     30.2 %

Combined ratio (3)

     93.4 %     91.5 %     93.2 %     92.1 %

 

(1) The loss ratio is equal to policyholder benefits divided by net earned premiums and other considerations.

 

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(2) The expense ratio is equal to selling, underwriting and general expenses divided by net earned premiums and other considerations and fees and other income.
(3) The combined ratio is equal to total benefits, losses and expenses divided by net earned premiums and other considerations and fees and other income.
(4) Includes amortization of DAC and VOBA.
(5) Includes commissions, taxes, licenses and fees.

For the Three Months Ended September 30, 2008 Compared to the Three Months Ended September 30, 2007.

Net Income

Segment net income decreased $9,161, or 23%, to $30,204 for Third Quarter 2008 from $39,365 for Third Quarter 2007. The decrease was primarily attributable to less favorable results in the individual medical business and the continuing decline in small employer group net earned premiums.

Total Revenues

Total revenues decreased $30,105, or 6%, to $510,569 for Third Quarter 2008 from $540,674 for Third Quarter 2007. Net earned premiums and other considerations from our individual medical business, decreased $4,302 or 1%, primarily due to reduced membership, partially offset by premium rate increases. This market has become increasingly competitive as established players and new regional entrants are more aggressively targeting this growing segment of the health insurance market. Net earned premiums and other considerations from our small employer group business decreased $24,230, or 15%, due to a decline in members, partially offset by premium rate increases. The decline in the small employer group members is due to increased competition and our adherence to strict underwriting guidelines. In addition, net investment income decreased $1,984 due to lower average invested assets.

Total Benefits, Losses and Expenses

Total benefits, losses and expenses decreased $16,272, or 3%, to $464,135 for Third Quarter 2008 from $480,407 for Third Quarter 2007. Policyholder benefits decreased $14,689, or 5%, although the benefit loss ratio increased to 64.1% from 63.5%. The increase in the benefit loss ratio was primarily attributable to higher claims experience on individual medical business coupled with a non-proportionate decline in net earned premiums. Selling, underwriting and general expenses decreased $1,583, or 1%, primarily due to lower commission expenses for both individual medical and small employer group business associated with the decline in net earned premiums.

 

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For the Nine Months Ended September 30, 2008 Compared to the Nine Months Ended September 30, 2007.

Net Income

Segment net income decreased $18,539, or 16%, to $95,188 for Nine Months 2008 from $113,727 for Nine Months 2007. The decrease was primarily attributable to less favorable results in the individual medical business and the continuing decline in small employer group net earned premiums, partially offset by improved claim experience on small employer group business.

Total Revenues

Total revenues decreased $78,740, or 5%, to $1,544,347 for Nine Months 2008 from $1,623,087 for Nine Months 2007. Net earned premiums and other considerations from our individual medical business decreased $1,555 due to reduced membership, partially offset by premium rate increases. Net earned premiums and other considerations from our small employer group business decreased $71,974, or 14%, due to a decline in members, partially offset by premium rate increases. The decline in small employer group business was due to increased competition and our adherence to strict underwriting guidelines. Additionally, net investment income decreased $6,594 due to lower distributions from real estate joint venture partnerships and lower average invested assets. The decrease in real estate joint venture partnership income is due to greater sales of underlying properties in Nine Months 2007 compared with Nine Months 2008 given the more favorable real estate market conditions in 2007.

Total Benefits, Losses and Expenses

Total benefits, losses and expenses decreased $50,827, or 4%, to $1,397,189 for Nine Months 2008 from $1,448,016 for Nine Months 2007. Policyholder benefits decreased $29,731, or 3%, although the benefit loss ratio increased to 64.2% from 63.2%. The increase in the benefit loss ratio was due primarily to higher claims experience on individual medical business coupled with a non-proportionate decline in net earned premiums. Our small employer group business had more favorable loss experience in Nine Months 2008 compared to Nine Months 2007. Selling, underwriting and general expenses decreased $21,096, or 4%, primarily due to lower commission expenses for both individual medical and small employer group business associated with the decline in net earned premiums.

Assurant Employee Benefits

Overview

The tables below present information regarding the Assurant Employee Benefits segment results of operations:

 

     For the Three Months Ended
September 30,
    For the Nine Months Ended
September 30,
 
     2008