filings.toolsItem 1. Business
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Item 1. Business
Assurant, Inc. was incorporated as a Delaware corporation in 2004.
Assurant safeguards clients and consumers when the unexpected occurs. A global provider of specialty protection products and related services, Assurant operates in North America, Latin America, Europe and other select worldwide markets through four operating segments. Assurant Solutions, Assurant Specialty Property, Assurant Health and Assurant Employee Benefits partner with clients who are leaders in their industries to provide consumers peace of mind and financial security. Our diverse range of products and services include mobile device protection products and services; extended service products and related services for consumer electronics, appliances and vehicles; pre-funded funeral insurance; lender-placed homeowners insurance; property preservation and valuation services; flood insurance; renters insurance and related products; debt protection administration; credit insurance; manufactured housing homeowners insurance; group dental insurance; group disability insurance; and group life insurance.
As previously announced, the Company will substantially exit the health insurance market in 2016 and has signed a definitive agreement to sell its Assurant Employee Benefits segment to Sun Life Assurance Company of Canada ("Sun Life"), a subsidiary of Sun Life Financial Inc. This transaction is expected to close by the end of the first quarter of 2016. See Note 3 and Note 4, respectively, contained elsewhere in the report for more information.
Assurant’s vision is to be the premier provider of specialty protection products and related services in North America, Latin America, Europe and other select worldwide markets. To achieve this vision, we focus on the following areas:
Building and managing a portfolio of specialty insurance businesses and related services – Our operating segments are focused on serving specific sectors of the housing and lifestyle protection market. We continue to develop and add specialty market capabilities where we can meet unserved consumers’ needs, achieve superior returns, and leverage enterprise resources.
Leveraging a set of core capabilities for competitive advantage – We apply our core capabilities to create competitive advantages – managing risk; managing relationships with large distribution partners; and integrating complex administrative systems. These core capabilities represent areas of expertise that are advantages within each of our businesses. We seek to generate attractive returns by building on specialized market knowledge, well-established distribution relationships and, in some businesses, economies of scale.
Identifying and adapting to evolving market needs – Assurant’s businesses strive to adapt to changing market conditions by tailoring product and service offerings to specific client and customer needs. By understanding consumer dynamics in our core markets, we seek to design innovative products and services that will enable us to sustain long-term profitable growth and market leading positions.
Strategic capital deployment – We deploy capital to invest in our businesses, repurchase shares and pay dividends. Our approach to mergers, acquisitions and other growth opportunities reflects our prudent and disciplined approach to managing our capital. Our mergers, acquisitions and business development process targets new business and capabilities that complements or supports our business model.
Competition
Assurant’s businesses focus on niche products and related services within broader insurance markets. Although we face competition in each of our businesses, we believe that no single competitor competes against us in all of our business lines. The business lines in which we operate are generally characterized by a limited number of competitors. Competition in each business is based on a number of factors, including quality of service, product features, price, scope of distribution, financial strength ratings and name recognition. The relative importance of these factors varies by product and market. We compete for customers and distributors with insurance companies and other financial services companies in our businesses.
Competitors of Assurant Solutions and Assurant Specialty Property include insurance companies, financial institutions and mobile device repair and logistics companies. Historically, Assurant Health’s main competitors were other health insurance companies, Health Maintenance Organizations (“HMOs”) and the Blue Cross/Blue Shield plans in states where we sold business. Assurant Employee Benefits’ competitors include other benefit and life insurance companies, dental managed care entities and not-for-profit dental plans.
Segments
For additional information on our segments, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations” and Note 22 to the Notes to the Consolidated Financial Statements included elsewhere in this report.
Assurant Solutions
| For the Years Ended | |||||||
| December 31, 2015 | December 31, 2014 | ||||||
| Net earned premiums for selected product groupings: | |||||||
| Extended service contracts and warranties - domestic (1) | $ | 1,644,352 | $ | 1,631,339 | |||
| Extended service contracts and warranties - international (1) | 802,477 | 850,454 | |||||
| Preneed life insurance | 60,403 | 61,093 | |||||
| Credit insurance - domestic | 132,130 | 160,794 | |||||
| Credit insurance - international | 254,211 | 318,104 | |||||
| Other | 122,273 | 107,084 | |||||
| Total | $ | 3,015,846 | $ | 3,128,868 | |||
| Fees and other income | $ | 785,611 | $ | 667,852 | |||
| Segment net income | $ | 197,183 | $ | 218,948 | |||
| Combined ratio (2): | |||||||
| Domestic | 95.1 | % | 93.5 | % | |||
| International | 102.8 | % | 101.5 | % | |||
| Equity (3) | $ | 2,035,772 | $ | 1,605,669 |
| (1) | Extended service contracts include warranty contracts for products such as mobile devices, personal computers, consumer electronics, appliances, automobiles and recreational vehicles. |
| (2) | The combined ratio is equal to total benefits, losses and expenses divided by net earned premiums and fees and other income excluding the preneed business. |
| (3) | Equity excludes accumulated other comprehensive income. |
Products and Services
Assurant Solutions targets profitable growth in three key product areas: domestic and international extended service contracts (“ESCs”) and warranties, including mobile device protection; preneed life insurance; and international credit insurance.
ESC and Warranties: Through partnerships with leading retailers, mobile carriers and original equipment manufacturers (“OEMs”) and direct to consumer distribution, we underwrite and provide administrative services for ESCs and warranties. These contracts provide consumers with coverage on mobile devices, personal computers, consumer electronics, appliances, automobiles and recreational vehicles, protecting them from certain covered losses. We pay the cost of repairing or replacing customers’ property in the event of mechanical breakdown, accidental damage, and casualty losses such as theft, fire, and water damage. Our strategy is to provide service to our clients that addresses all aspects of the ESC or warranty, including program design and marketing strategy. We also provide administration, claims handling, logistics, and customer service. We believe that with both the required administrative infrastructure and insurance underwriting capabilities, we maintain a differentiated position in this marketplace.
Preneed Life Insurance: Preneed life insurance allows individuals to prepay for a funeral in a single payment or in multiple payments over a fixed number of years. The insurance policy proceeds are used to address funeral costs at death. These products are only sold in the U.S. and Canada and are generally structured as whole life insurance policies in the U.S. and annuity products in Canada.
Credit Insurance: Our credit insurance products offer protection from life events and uncertainties that arise in purchasing and borrowing transactions. Credit insurance programs generally offer consumers the option to protect a credit card or installment loan balance or payments in the event of death, involuntary unemployment or disability, and are generally available to all consumers without the underwriting restrictions that apply to term life insurance.
Regulatory changes have reduced the demand for credit insurance sold through banks in the U.S. Consequently, we continue to experience a reduction in credit insurance domestic gross written premiums, a trend we expect to continue.
Marketing and Distribution
Assurant Solutions focuses on establishing strong, long-term relationships with leading distributors of its products and services. We partner with some of the largest consumer electronics and appliance retailers and OEMs to market our ESC and warranty products. In our mobile business, we partner with leading mobile service providers, retailers and banks and market our mobile protection insurance and related services through them. In our preneed life insurance business, we have an exclusive relationship with Services Corporation International (“SCI”), the largest funeral provider in North America.
Several of our distribution agreements are exclusive. Typically these agreements have terms of one to 10 years and allow us to integrate our administrative systems with those of our clients.
In addition to the domestic market, we do business in Canada, the United Kingdom (“U.K.”), Ireland, Argentina, Brazil, Puerto Rico, Chile, Germany, Spain, Italy, France, Mexico, China, Colombia, Peru and South Korea. In these markets, we primarily sell consumer service contracts, including mobile device protection, and credit insurance products through agreements with financial institutions, retailers and mobile service providers. Systems, training, computer hardware and our overall market development approach are customized to fit the particular needs of each targeted international market.
In 2014, we acquired CWI Group (“CWI”), a market-leading mobile administrator in France. This acquisition has strengthened Assurant Solutions’ market-leading capabilities in mobile device protection and expanded its distribution into independent retailers and the financial services affinity market in Europe.
In 2013, we acquired Lifestyle Services Group (“LSG”), a mobile phone insurance provider based in the U.K. This acquisition has allowed us to develop and expand our European mobile business platform. In addition, we made an investment in Ike Asistencia (“Iké”), a services assistance business with significant business in Mexico and other countries in Latin America. Iké primarily provides roadside assistance, home assistance, travel, mobile and other protection products. This investment has allowed us to expand our customer base and strengthen our presence in Latin America.
As of December 31, 2015 no single Assurant Solutions client accounted for 10% or more of our consolidated revenue. However, Assurant Solutions is dependent on a few clients, the loss of any one or more such clients could have a material adverse effect on the Company's results of operations and cash flows.
Underwriting and Risk Management
We write a significant portion of our contracts on a retrospective commission basis. This allows us to adjust commissions on the basis of claims experience. Under these commission arrangements, the compensation of our clients is based upon the actual losses incurred compared to premiums earned after a specified net allowance to us. We believe that these arrangements better align our clients’ interests with ours and help us to better manage risk exposure.
Profits from our preneed life insurance programs are generally earned from interest rate spreads - the difference between the death benefit growth rates on underlying policies and the investment returns generated on the assets we hold related to those policies. To manage these spreads, we regularly adjust pricing to reflect changes in new money yields.
Assurant Specialty Property
| For the Years Ended | |||||||
| December 31, 2015 | December 31, 2014 | ||||||
| Net earned premiums by major product grouping: | |||||||
| Homeowners (lender-placed and voluntary) | $ | 1,425,799 | $ | 1,743,965 | |||
| Manufactured housing (lender-placed and voluntary) | 165,657 | 237,576 | |||||
| Other (1) | 453,245 | 524,556 | |||||
| Total | $ | 2,044,701 | $ | 2,506,097 | |||
| Fees and other income | $ | 405,545 | $ | 301,048 | |||
| Segment net income | $ | 307,705 | $ | 341,757 | |||
| Loss ratio (2) | 38.6 | % | 43.3 | % | |||
| Expense ratio (3) | 52.7 | % | 46.5 | % | |||
| Combined ratio (4) | 84.9 | % | 85.2 | % | |||
| Equity (5) | $ | 1,351,122 | $ | 1,264,216 |
| (1) | Other primarily includes multi-family housing, lender-placed flood, and miscellaneous insurance products. |
| (2) | The loss ratio is equal to policyholder benefits divided by net earned premiums. |
| (3) | The expense ratio is equal to selling, underwriting and general expenses divided by net earned premiums and fees and other income. |
| (4) | The combined ratio is equal to total benefits, losses and expenses divided by net earned premiums and fees and other income. |
| (5) | Equity excludes accumulated other comprehensive income. |
Products and Services
Assurant Specialty Property targets profitable growth in lender-placed homeowners insurance, and adjacent niches such as multi-family housing insurance; lender-placed and voluntary flood insurance; home appraisal, inspection and preservation; receivables management for property management companies; and other property risk management services.
Lender-placed and voluntary homeowners insurance: The largest product line within Assurant Specialty Property is homeowners insurance, consisting principally of fire and dwelling hazard insurance offered through our lender-placed program. The lender-placed program provides collateral protection to lenders, mortgage servicers and investors in mortgaged properties in the event that a homeowner does not maintain insurance on a mortgaged dwelling. Lender-placed insurance coverage is not limited to the outstanding loan balance; it provides structural coverage, similar to that of a standard homeowners policy. The amount of coverage is often based on the last known insurance coverage under the prior policy for the property and provides replacement cost coverage on the property and thus ensures that a home can be repaired or rebuilt in the event of damage. It protects both the lender’s interest and the borrower’s interest and equity. We also provide insurance on foreclosed properties managed by our clients. This type of insurance is Real Estate Owned (“REO”) insurance. The lender-placed homeowners and REO markets experienced significant growth in prior years as a result of the housing crisis, but they are now declining.
In the majority of cases, we use a proprietary insurance-tracking administration system linked with the administrative systems of our clients to monitor clients’ mortgage portfolios to verify the existence of insurance on each mortgaged property and identify those that are uninsured. If there is a potential lapse in insurance coverage, we begin a process of notification and outreach to both the homeowner and the last-known insurance carrier or agent through phone calls and written correspondence. This process takes up to 90 days to complete. If coverage cannot be verified at the end of this process, the mortgage servicer procures a lender-placed policy for which the homeowner is responsible for paying the related premiums. The percentage of insurance policies placed to loans tracked represents our placement rates. The homeowner is still encouraged, and always maintains the option, to obtain or renew the insurance of his or her choice.
To meet the changing needs of the lending and housing industries, Assurant Specialty Property has worked with regulators to introduce a next generation lender-placed homeowners product to address some of the unanticipated issues that developed during the housing crisis. This product combines flexibility and best practices to address the concerns of various parties. The product contains expanded geographic ratings within each state to further differentiate rates for properties more exposed to catastrophes from those where the risk is lower, added premium rating flexibility from deductible options that can be modified based on factors such as coverage amount and delinquency status, and continued enhancements to our already extensive customer notification process to make it more clear to borrowers when they have lender-placed insurance.
Lender-placed and voluntary manufactured housing insurance: Manufactured housing insurance is offered on a lender-placed and voluntary basis. Lender-placed insurance is issued after an insurance tracking process similar to that described above. The tracking is performed by Assurant Specialty Property using a proprietary insurance tracking administration system, or by the lenders themselves. A number of manufactured housing retailers in the U.S. use our proprietary premium rating technology to assist them in selling property coverage at the point of sale.
Other insurance and mortgage services: We have developed products and services in adjacent and emerging markets, such as lender-placed and voluntary flood insurance, multi-family housing insurance and mortgage property risk management services. In 2013, we acquired Field Asset Services (“FAS”), a company that leverages its nationwide network of independent contractors to perform property preservation, restoration and inspection services for mortgage servicing clients and investors. In 2014, we acquired StreetLinks, a leader in valuation solutions and technologies, which is among the largest independent appraisal management companies in the United States. Also, in 2014, we acquired eMortgage Logic, a leading provider of property broker price opinions assisting mortgage servicing clients with determining property values. The acquisitions of FAS, Streetlinks and eMortgage Logic comprise our Mortgage Solutions business. We are also one of the largest administrators for the U.S. Government under the voluntary National Flood Insurance Program, for which we earn a fee for collecting premiums and processing claims. This business is 100% reinsured to the U.S. Government.
Marketing and Distribution
Assurant Specialty Property establishes long-term relationships with leading mortgage lenders and servicers. The majority of our lender-placed agreements are exclusive. Typically, these agreements have terms of three to five years and allow us to integrate our systems with those of our clients.
We offer our manufactured housing insurance programs primarily through manufactured housing lenders and retailers, along with independent specialty agents. The independent specialty agents distribute flood products and miscellaneous specialty property products. Multi-family housing products are distributed primarily through property management companies and affinity marketing partners.
Our property risk management services are provided directly to mortgage lenders and servicers, typically under non-exclusive arrangements.
On January 1, 2015, we sold our general agency business and primary associated insurance carrier, American Reliable Insurance Company (“ARIC”) to Global Indemnity Group, Inc., a subsidiary of Global Indemnity plc. The business offers specialty personal lines and agricultural insurance through general and independent agents.
As of December 31, 2015 no single Assurant Specialty Property client accounted for 10% or more of our consolidated revenue. However, Assurant Specialty Property is dependent on a few clients, the loss of any one or more such clients could have a material adverse effect on the Company's results of operations and cash flows.
Underwriting and Risk Management
Our lender-placed homeowners insurance program and certain of our manufactured housing products are not underwritten on an individual policy basis. Contracts with our clients require us to issue these policies automatically when a borrower’s insurance coverage is not maintained. These products are priced to factor in the additional underwriting risk from ensuring all client properties are provided continuous insurance coverage. We monitor pricing adequacy based on a variety of factors and adjust pricing as required, subject to regulatory constraints.
Because several of our product lines (such as homeowners, manufactured housing, and other property policies) are exposed to catastrophe risks, we purchase reinsurance coverage to protect the capital of Assurant Specialty Property and to mitigate earnings volatility. Our reinsurance program generally incorporates a provision to allow the reinstatement of coverage, which provides protection against the risk of multiple catastrophes in a single year.
Assurant Health
| For the Years Ended | |||||||
| December 31, 2015 | December 31, 2014 | ||||||
| Net earned premiums: | |||||||
| Individual | $ | 1,895,970 | $ | 1,544,968 | |||
| Small employer group | 327,726 | 400,484 | |||||
| Total | $ | 2,223,696 | $ | 1,945,452 | |||
| Fees and other income | $ | 54,622 | $ | 40,016 | |||
| Segment net loss | $ | (367,907 | ) | $ | (63,748 | ) | |
| Loss ratio (1) | 103.5 | % | 81.0 | % | |||
| Expense ratio (2) | 23.2 | % | 25.0 | % | |||
| Combined ratio (3) | 124.2 | % | 104.3 | % | |||
| Equity (4) | $ | 574,230 | $ | 443,385 |
| (1) | The loss ratio is equal to policyholder benefits divided by net earned premiums. |
| (2) | The expense ratio is equal to selling, underwriting and general expenses divided by net earned premiums and fees and other income. |
| (3) | The combined ratio is equal to total benefits, losses and expenses divided by net earned premiums and fees and other income. |
| (4) | Equity excludes accumulated other comprehensive income. |
Products and Services
After a comprehensive review of strategic alternatives, the Company decided to exit the health insurance market as it focuses on its housing and lifestyle protection offerings. Assurant began to wind down its major medical operations in June 2015, and the Company expects to substantially complete its exit of the health insurance market by the end of 2016.
Until we put Assurant Health in run-off in 2015, it competed in the individual and small-group medical insurance markets by offering major medical insurance, short-term medical insurance, and supplemental coverage options to individuals and families. Our products were offered with different plan options to meet a broad range of customer needs, levels of affordability and to meet the requirements of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010, and the rules and regulations thereunder (together, the “Affordable Care Act”). Assurant Health also offered medical insurance to small employer groups.
Individual Medical: Assurant Health provided medical insurance products to individuals, primarily between the ages of 18 and 64, and their families, who did not have employer-sponsored coverage. We offered a wide variety of benefit plans at different price points, which allow customers to tailor their coverage to fit their unique needs. These plans include those with the essential health benefits required under the Affordable Care Act, as well as supplemental products.
Small Employer Group Medical: Assurant Health provided group medical insurance to small companies with two to fifty employees, although larger employer coverage is available. We offered fully insured products with the essential health benefits
required by the Affordable Care Act, as well as self-funded employer options and individual products sold through the workplace.
On October 1, 2015, we sold our supplemental and small-group self funded lines of business and certain assets to National General Holdings Corp. ("National General") for cash consideration of $14,000.
In March 2012, we entered into a new provider network arrangement with Aetna Signature Administrators ® (“Aetna”). This multi-year agreement provides our major medical customers with access to more than one million health care providers and 7,500 hospitals nationwide.
Marketing and Distribution
Until we put Assurant Health in run-off in 2015, our health insurance products were principally marketed through a network of independent agents. We also marketed through a variety of exclusive and non-exclusive national account relationships and direct distribution channels.
Underwriting and Risk Management
Following the passage of the Affordable Care Act, many of the traditional risk management techniques used to manage the risks of providing health insurance have become less relevant. Assurant Health took steps to adjust its products, pricing and business practices to comply with the new requirements. Following the announcement of the Company's decision to exit the health insurance market, sales of new health insurance policies have ended.
Please see “Management’s Discussion and Analysis - Assurant Health” and “Risk Factors - Risks Related to our Industry - Reform of the health insurance industry could materially reduce the profitability of certain of our businesses or render them unprofitable” for further details.
Assurant Employee Benefits
| For the Years Ended | |||||||
| December 31, 2015 | December 31, 2014 | ||||||
| Net Earned Premiums: | |||||||
| Group disability | $ | 398,172 | $ | 409,028 | |||
| Group dental | 396,925 | 392,502 | |||||
| Group life | 204,526 | 200,285 | |||||
| Group supplemental and vision products | 67,131 | 49,910 | |||||
| Total | $ | 1,066,754 | $ | 1,051,725 | |||
| Voluntary | $ | 478,588 | $ | 441,479 | |||
| Employer-paid and other | 588,166 | 610,246 | |||||
| Total | $ | 1,066,754 | $ | 1,051,725 | |||
| Fees and other income | $ | 25,006 | $ | 24,204 | |||
| Segment net income | $ | 47,322 | $ | 48,681 | |||
| Loss ratio (1) | 68.4 | % | 68.2 | % | |||
| Expense ratio (2) | 36.5 | % | 37.1 | % | |||
| Equity (3) | $ | 532,332 | $ | 540,964 |
| (1) | The loss ratio is equal to policyholder benefits divided by net earned premiums. |
| (2) | The expense ratio is equal to selling, underwriting and general expenses divided by net earned premiums and fees and other income. |
| (3) | Equity excludes accumulated other comprehensive income. |
On September 9, 2015, the Company agreed to sell its Assurant Employee Benefits Segment business to Sun Life. The transaction is expected to close by the end of the first quarter of 2016.
Products and Services
Assurant Employee Benefits offers group disability, dental, life, vision and supplemental products as well as individual dental products. The group products are offered with funding options ranging from fully employer-paid to fully employee-paid (voluntary). In addition, we reinsure disability and life products through our wholly owned subsidiary, Disability Reinsurance Management Services, Inc. (“DRMS”).
We focus on the needs of the small to mid-size employer. We believe that our group risk selection expertise, ease of enrollment and administration, our broad product suite, expansive dental network and strong relationships with brokers who work primarily with small to mid-size businesses give us a competitive advantage versus other carriers in this market.
Group Disability: Group disability insurance provides partial replacement of lost earnings for insured employees who become disabled, as defined by their plan provisions. Our products include both short- and long-term disability coverage options. We also reinsure disability policies written by other carriers through our DRMS subsidiary.
Group Dental: Dental benefit plans provide funding for necessary or elective dental care. Customers may select a traditional indemnity arrangement, a Preferred Provider Organization (“PPO”) arrangement, or a prepaid or managed care arrangement. Coverage is subject to deductibles, coinsurance and annual or lifetime maximums. In a prepaid plan, members must use participating dentists in order to receive benefits.
Success in the group dental business is heavily dependent on a strong provider network. Assurant Employee Benefits owns and operates Dental Health Alliance, L.L.C. (“DHA”), a leading dental PPO network. The Company has a larger network with DHA, marketed as Assurant Dental Network, which combines network agreements with partners such as Aetna and United Concordia Dental. We believe that our large combined network, Assurant Dental Network, increases the attractiveness of our products in the marketplace and the strength of the Assurant Employee Benefits dental offering.
Group Life: Group term life insurance provided through the workplace provides benefits in the event of death. We also provide accidental death and dismemberment insurance. Insurance consists primarily of renewable term life insurance with the amount of coverage provided being either a flat amount, a multiple of the employee’s earnings, or a combination of the two. We also reinsure life policies written by other carriers through DRMS.
Group Supplemental and Vision Products: Fully-insured vision coverage is offered through our agreement with Vision Service Plan, Inc., a leading national supplier of vision insurance. Our plans cover eye exams, glasses, and contact lenses and are usually sold in combination with one or more of our other products. In addition to the traditional voluntary products, we provide group critical illness, cancer, accident, and gap insurance. These products are generally paid for by the employee through payroll deductions, and the employee is enrolled in the coverage(s) at the worksite.
Marketing and Distribution
Our products and services are distributed through a group sales force located in 32 offices near major metropolitan areas. Our sales representatives distribute our products and services through independent brokers and employee-benefits advisors. Daily account management is provided through local sales offices, further supported by a centralized home office customer service department. Broker compensation in some cases includes an annual performance incentive, based on volume and retention of business.
DRMS provides turnkey group disability and life insurance solutions to insurance carriers that want to supplement their core product offerings. Our services include product development, state insurance regulatory filings, underwriting, claims management, and other functions typically performed by an insurer’s back office. Assurant Employee Benefits reinsures the risks written by DRMS’ clients, with the clients generally retaining shares that vary by contract.
Underwriting and Risk Management
The pricing of our products is based on the expected cost of benefits, calculated using assumptions for mortality, morbidity, interest, expenses and persistency, and other underwriting factors. Our block of business is diversified by industry and geographic location, which serves to limit some of the risks associated with changing economic conditions.
Disability claims management focuses on helping claimants return to work through a supportive network of services that may include physical therapy, vocational rehabilitation, and workplace accommodation. We employ or contract with a staff of doctors, nurses and vocational rehabilitation specialists, and use a broad range of additional outside medical and vocational experts to assist our claim specialists.
Ratings
Independent rating organizations periodically review the financial strength of insurers, including our insurance subsidiaries. Financial strength ratings represent the opinions of rating agencies regarding the ability of an insurance company to meet its financial obligations to policyholders and contract holders. These ratings are not applicable to our common stock or debt securities. Ratings are an important factor in establishing the competitive position of insurance companies.
Rating agencies also use an “outlook statement” of “positive,” “stable,” “negative” or “developing” to indicate a medium- or long-term trend in credit fundamentals which, if continued, may lead to a rating change. A rating may have a stable outlook to indicate that the rating is not expected to change; however, a stable rating does not preclude a rating agency from changing a rating at any time, without notice.
Most of our active domestic operating insurance subsidiaries are rated by the A.M. Best Company (“A.M. Best”). In addition, six of our domestic operating insurance subsidiaries are also rated by Moody’s Investor Services (“Moody’s”) and seven are rated by Standard & Poor’s Inc., a division of McGraw Hill Companies, Inc. (“S&P”).
For further information on the risks of ratings downgrades, see “Item 1A - Risk Factors - Risks Related to our Company - A.M. Best, Moody’s and S&P rate the financial strength of our insurance company subsidiaries, and a decline in these ratings could affect our standing in the insurance industry and cause our sales and earnings to decrease.”
The following table summarizes our financial strength ratings and outlook of our domestic operating insurance subsidiaries as of December 31, 2015:
| A.M. Best (1) | Moody’s (2) | Standard & Poor’s (3) | |||
| Outlook | (4) | (5) | (6) | ||
| Company | |||||
| American Bankers Insurance Company | A | A2 | A | ||
| American Bankers Life Assurance Company | A- | A3 | A | ||
| American Memorial Life Insurance Company | A- | N/A | A | ||
| American Security Insurance Company | A | A2 | A | ||
| Assurant Life of Canada | A- | N/A | N/A | ||
| Caribbean American Life Assurance Company | A- | N/A | N/A | ||
| Caribbean American Property Insurance Company | A | N/A | N/A | ||
| John Alden Life Insurance Company | B+ | Ba1 | BB+ | ||
| Reliable Lloyds | A | N/A | N/A | ||
| Standard Guaranty Insurance Company | A | N/A | N/A | ||
| Time Insurance Company | B+ | Ba1 | BB+ | ||
| UDC Dental California | A- | N/A | N/A | ||
| Union Security Dental Care New Jersey | A- | N/A | N/A | ||
| Union Security Insurance Company | A- | A3 | A- | ||
| Union Security Life Insurance Company of New York | A- | N/A | N/A | ||
| United Dental Care of Arizona | A- | N/A | N/A | ||
| United Dental Care of Colorado | A- | N/A | N/A | ||
| United Dental Care of Michigan | NR | N/A | N/A | ||
| United Dental Care of Missouri | A- | N/A | N/A | ||
| United Dental Care of New Mexico | A- | N/A | N/A | ||
| United Dental Care of Ohio | NR | N/A | N/A | ||
| United Dental Care of Texas | A- | N/A | N/A | ||
| United Dental Care of Utah | NR | N/A | N/A | ||
| Voyager Indemnity Insurance Company | A | N/A | N/A |
| (1) | A.M. Best financial strength ratings range from “A++” (superior) to “S” (suspended). Ratings of A and A- fall under the “excellent” category, which is the second highest of ten ratings categories. Ratings of B+ fall under the "good" category, which is the third highest of ten ratings categories. |
| (2) | Moody’s insurance financial strength ratings range from “Aaa” (exceptional) to “C” (extremely poor). A numeric modifier may be appended to ratings from “Aa” to “Caa” to indicate relative position within a category, with 1 being the highest and 3 being the lowest. Ratings of A2 and A3 are considered “good” and fall within the third highest of the nine ratings categories. Ratings of Ba1 are subject to substantial credit risk and fall within the fifth highest of the nine ratings categories. |
| (3) | S&P’s insurer financial strength ratings range from “AAA” (extremely strong) to “R” (under regulatory supervision). A “+” or “-” may be appended to ratings from categories AA to CCC to indicate relative position within a category. Ratings of A and A- (strong) and BB+ (vulnerable) are within the third and fifth highest of the nine ratings categories, respectively. |
| (4) | A.M. Best has a stable outlook on all of the ratings of the above entities, except for Union Security Insurance Company and Union Security Life Insurance Company of New York, which are under review with negative implications, and the dental HMO entities, which are under review with positive implications. |
| (5) | Moody's has a stable outlook on all of the ratings of the above entities, except for John Alden Life Insurance Company and Time Insurance Company, which have a negative outlook. |
| (6) | S&P has a stable outlook on all of the ratings of the above entities, except for Union Security Insurance Company, which is on Creditwatch Positive. |
Enterprise Risk Management
As an insurer, we are exposed to a wide variety of financial, operational and other risks, as described in Item 1A, “Risk Factors.” Enterprise risk management (“ERM”) is, therefore, a key component of our business strategies, policies, and procedures. Our ERM process is an iterative approach with the following key phases:
| 1. | Risk identification; |
| 2. | High-level estimation of risk likelihood and severity; |
| 3. | Risk prioritization at the business and enterprise levels; |
| 4. | Scenario analysis and detailed modeling of likelihood and severity of key enterprise risks; |
| 5. | Use of quantitative results and subject matter expert opinion to help guide business strategy and decision making. |
Through our ERM process and our enterprise risk quantification model, we monitor a variety of risk metrics on an ongoing basis, with a particular focus on impact to net income (both GAAP and Statutory), company value and the potential need for capital infusions to subsidiaries under severe stress scenarios. The analysis of capital under stress scenarios informs our capital management actions and helps ensure our continued ability to pay policyholder benefits.
The Company’s ERM activities are coordinated by an Enterprise Risk Management Committee (“ERMC”), which includes managers from across the Company with knowledge of the Company’s business activities, including representation from the Compliance, Actuarial, Information Technology, Finance, Internal Audit and Asset Management departments. The ERMC develops risk assessment and risk management policies and procedures. It facilitates the identification, reporting and prioritizing of risks faced by the Company, and is responsible for promoting a risk-aware culture throughout the organization. The ERMC also coordinates with each of the Company’s Business Unit Risk Committees (“BURCs”), which meet regularly and are responsible for the identification of significant risks affecting their respective business units.
Our Board of Directors and senior management are responsible for overseeing significant enterprise risks. The ERMC presents its work periodically to the Board of Directors and its Finance and Investment Committee.
Through the use of regular committee meetings, business unit and enterprise risk inventory templates and dashboards, hypothetical scenario analysis, and quantitative modeling, the Company strives to identify, track, quantify, communicate and manage our key risks in a manner consistent with our risk appetite and high level strategy.
Our ERM process continues to evolve, and, when appropriate, we incorporate methodology changes, policy modifications and emerging best practices on an ongoing basis.
Regulation
The Company is subject to extensive federal, state and international regulation and supervision in the jurisdictions where it does business. Regulations vary from jurisdiction to jurisdiction. In 2015, the Company announced a strategic realignment of its portfolio to focus on specialty housing and lifestyle protection products and services. As a result of the partial sale of Assurant Health and the runoff of the remaining business and the impending sale of Assurant Employee Benefits, a number of regulations are or will soon be no longer relevant for Assurant. The following is a summary of significant regulations that apply to our businesses, and where applicable, our health business wind-down operations, but is not intended to be a comprehensive review of every regulation to which the Company is subject. For information on the risks associated with regulations applicable to the Company, please see Item 1A, “Risk Factors.”
U.S. Insurance Regulation
We are subject to the insurance holding company laws in the states where our insurance companies are domiciled. These laws generally require insurance companies within the insurance holding company system to register with the insurance departments of their respective states of domicile and to furnish reports to such insurance departments regarding capital structure, ownership, financial condition, general business operations and intercompany transactions. These laws also require that transactions between affiliated companies be fair and equitable. In addition, certain intercompany transactions, changes of control, certain dividend payments and transfers of assets between the companies within the holding company system are subject to prior notice to, or approval by, state regulatory authorities.
Like all U.S. insurance companies, our insurance subsidiaries are subject to regulation and supervision in the jurisdictions where they do business. In general, these regulations are designed to protect the interests of policyholders, and not necessarily the interests of shareholders and other investors. To that end, the laws of the various states and other jurisdictions establish insurance departments with broad powers with respect to such things as:
| • | licensing; |
| • | capital, surplus and dividends; |
| • | underwriting requirements and limitations (including, in some cases, minimum or target loss ratios); |
| • | entrance into and exit from states; |
| • | introduction, cancellation and termination of certain coverages; |
| • | statutory accounting and annual statement disclosure requirements; |
| • | product types, policy forms and mandated insurance benefits; |
| • | premium rates; |
| • | fines, penalties and assessments; |
| • | claims practices, including occasional regulatory requirements to pay claims on terms other than those mandated by underlying policy contracts; |
| • | transactions between affiliates; |
| • | the form and content of disclosures to consumers; |
| • | the type, amounts and valuation of investments; |
| • | annual tests of solvency and reserve adequacy; |
| • | assessments or other surcharges for guaranty funds and the recovery of assessments through premium increases; and |
| • | market conduct and sales practices of insurers and agents. |
Dividend Payment Limitations. Our holding company’s assets consist primarily of the capital stock of our subsidiaries. Accordingly, our holding company’s future cash flows depend upon the availability of dividends and other statutorily permissible payments from our subsidiaries. The ability to pay such dividends and to make such other payments is regulated by the states in which our subsidiaries are domiciled. These dividend regulations vary from state to state and by type of insurance provided by the applicable subsidiary, but generally require our insurance subsidiaries to maintain minimum solvency requirements and limit the amount of dividends these subsidiaries can pay to the holding company. For more information, please see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Regulatory Requirements.”
Risk-Based Capital Requirements. In order to enhance the regulation of insurer solvency, the National Association of Insurance Commissioners (“NAIC”) has established certain risk-based capital standards applicable to life, health and property and casualty insurers. Risk-based capital, which regulators use to assess the sufficiency of an insurer’s statutory capital, is calculated by applying factors to various asset, premium, expense, liability and reserve items. Factors are higher for items which in the NAIC’s view have greater underlying risk. The NAIC periodically reviews the risk-based capital formula and changes to the formula could occur in the future.
Investment Regulation. Insurance company investments must comply with applicable laws and regulations that prescribe the kind, quality and concentration of investments. These regulations require diversification of insurance company investment portfolios and limit the amount of investments in certain asset categories.
Financial Reporting. Regulators closely monitor the financial condition of licensed insurance companies. Our insurance subsidiaries are required to file periodic financial reports with insurance regulators. Moreover, states regulate the form and content of these statutory financial statements.
Products and Coverage. Insurance regulators have broad authority to regulate many aspects of our products and services. For example, some jurisdictions require insurers to provide coverage to persons who would not be considered eligible insurance risks under standard underwriting criteria, dictating the types of insurance and the level of coverage that must be provided to such applicants. Additionally, certain non-insurance products and services, such as service contracts, may be regulated by regulatory bodies other than departments of insurance.
Pricing and Premium Rates. Nearly all states have insurance laws requiring insurers to file price schedules and policy forms with the state’s regulatory authority. In many cases, these price schedules and/or policy forms must be approved prior to use, and state insurance departments have the power to disapprove increases or require decreases in the premium rates we charge.
Market Conduct Regulation. Activities of insurers are highly regulated by state insurance laws and regulations, which govern the form and content of disclosure to consumers, advertising, sales practices and complaint handling. State regulatory authorities enforce compliance through periodic market conduct examinations.
Guaranty Associations and Indemnity Funds. Most states require insurance companies to support guaranty associations or indemnity funds, which are established to pay claims on behalf of insolvent insurance companies. These associations may levy assessments on member insurers. In some states member insurers can recover a portion of these assessments through premium tax offsets and/or policyholder surcharges.
Insurance Regulatory Initiatives. The NAIC, state regulators and professional organizations have considered and are considering various proposals that may alter or increase state authority to regulate insurance companies and insurance holding companies. Please see Item 1A, “Risk Factors - Risks Related to Our Industry - Changes in regulation may reduce our profitability and limit our growth” for a discussion of the risks related to such initiatives.
Federal Regulation
Patient Protection and Affordable Care Act. Although health insurance is generally regulated at the state level, the Affordable Care Act introduced a significant component of federal regulation for health insurers. Although the Assurant Health business is in run-off, some provisions of the Affordable Care Act continue to apply to us. In particular, provisions of the Affordable Care Act and related reforms include a requirement that we pay premium rebates to customers if the loss ratios for some of our product lines are less than specified percentages; changes in the benefits provided under some of our products; elimination of limits on lifetime and annual benefit maximums; a prohibition from imposing any pre-existing condition exclusion; limits on our ability to rescind coverage for persons who have misrepresented or omitted material information when they applied for coverage and, elimination of our ability to underwrite health insurance products with certain narrow exceptions; mandated essential health benefits; new and higher taxes and fees and limitations on the deductibility of compensation and certain other payments; and the need to operate with a lower expense structure at both the business segment and enterprise level. Additionally, under the Affordable Care Act, significant premium stabilization programs became effective in 2014. These reinsurance, risk adjustment, and risk corridor programs impose certain requirements on us, including, among other things, that we make contributions to fund the reinsurance program and, under some circumstances, risk transfer payments related to the risk adjustment program and payments to the Department of Health and Human Services related to the risk corridor program.
Employee Retirement Income Security Act. Because we provide products and services for certain U.S. employee benefit plans, we are subject to regulation under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). ERISA places certain requirements on how the Company may do business with employers that maintain employee benefit plans covered by ERISA. Among other things, regulations under ERISA set standards for certain notice and disclosure requirements and for claim processing and appeals. In addition, some of our administrative services and other activities may also be subject to regulation under ERISA.
HIPAA, HITECH Act and Gramm-Leach-Bliley Act. The Health Insurance Portability and Accountability Act of 1996, along with its implementing regulations (“HIPAA”), impose various requirements on health insurers, HMOs, health plans and health care providers. Among other things, Assurant Health and Assurant Employee Benefits are subject to HIPAA regulations requiring certain guaranteed issuance and renewability of health insurance coverage for individuals and small groups (generally groups with 50 or fewer employees) and limitations on exclusions based on pre-existing conditions. HIPAA also imposes administrative simplification requirements for electronic transactions.
HIPAA also imposes requirements on health insurers, health plans and health care providers to ensure the privacy and security of protected health information. These privacy and security provisions were further expanded by the privacy provisions contained in the Health Information Technology for Economic and Clinical Health Act (the “HITECH Act”) and its accompanying Omnibus Rule enacted in January 2013, which enhances penalties for violations of HIPAA and requires regulated entities to provide notice of security breaches of protected health information to individuals and HHS. In addition, certain of our activities are subject to the privacy regulations of the Gramm-Leach-Bliley Act, which, along with regulations adopted thereunder, generally requires insurers to provide customers with notice regarding how their non-public personal health and financial information is used, and to provide them with the opportunity to “opt out” of certain disclosures, if applicable.
Dodd-Frank Wall Street Reform and Consumer Protection Act. Regulations under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) address mortgage servicers’ obligations to correct errors asserted by mortgage loan borrowers; to provide certain information requested by such borrowers; and to provide protections to such borrowers; in connection with lender-placed insurance; and these requirements affect our operations because, in many instances, we administer such operations on behalf of our mortgage servicer clients. While the CFPB does not have direct jurisdiction over insurance products, it is possible that additional regulations promulgated by the CFPB, such as those mentioned, may extend its authority more broadly to cover these products and thereby affect the Company or our clients.
International Regulation
We are subject to regulation and supervision of our international operations in various jurisdictions. These regulations, which vary depending on the jurisdiction, include anti-corruption laws; solvency and market conduct regulations; various privacy, insurance, tax, tariff and trade laws and regulations; and corporate, employment, intellectual property and investment laws and regulations.
Outside the U.S., the Company operates in Canada, the U.K., Ireland, France, Argentina, Brazil, Puerto Rico, Chile, Germany, Spain, Italy, Mexico and China and our businesses are supervised by local regulatory authorities of these
jurisdictions. We also have business activities in Peru, Colombia and South Korea where we have gained access to these markets by registering certain entities, where required, to act as reinsurers.
Our operations in the U.K., for example, are subject to regulation by the Financial Conduct Authority and Prudential Regulation Authority. Authorized insurers are generally permitted to operate throughout the rest of the European Union, subject to satisfying certain requirements of these regulatory bodies and meeting additional local regulatory requirements.
We are also subject to certain U.S. and foreign laws applicable to businesses generally, including anti-corruption laws. The Foreign Corrupt Practices Act of 1977 (the “FCPA”) regulates U.S. companies in their dealings with foreign officials, prohibiting bribes and similar practices. In addition, the U.K. Anti-Bribery Act has wide applicability to certain activities that affect U.K. companies, their commercial activities in the U.K., and potentially that of their affiliates located outside of the U.K.
Additionally, the International Association of Insurance Supervisors (the “IAIS”) is developing a model common framework (“ComFrame”) for the supervision of Internationally Active Insurance Groups (“IAIGs”), which includes additional group-wide supervisory oversight across national boundaries and the establishment of ongoing supervisory colleges. The IAIS has announced that it expects by 2016 to develop a risk-based global insurance capital standard applicable to IAIGs, with full implementation beginning in 2019. As of December 31, 2015, Assurant meets the numerical criteria to qualify as an IAIG, but the decision whether to treat Assurant as an IAIG is left to the discretion of its domestic and foreign insurance regulators. Should such regulators decide to treat Assurant as an IAIG, Assurant will be subject to the additional requirements of ComFrame. At this time, we cannot predict whether our insurance regulators will treat us as an IAIG, and what additional capital requirements, compliance costs or other burdens these requirements would impose on us, if we were subject to them.
Securities and Corporate Governance Regulation
As a company with publicly-traded securities, Assurant is subject to certain legal and regulatory requirements applicable generally to public companies, including the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) and the New York Stock Exchange (the “NYSE”) relating to public reporting and disclosure, accounting and financial reporting, and corporate governance matters. Additionally, Assurant, Inc. is subject to the corporate governance laws of Delaware, its state of incorporation.
Environmental Regulation
Because we own and operate real property, we are subject to federal, state and local environmental laws. Potential environmental liabilities and costs in connection with any required remediation of such properties is an inherent risk in property ownership and operation. Under the laws of several states, contamination of a property may give rise to a lien on the property to secure recovery of the costs of the cleanup, which could have priority over the lien of an existing mortgage against the property and thereby impair our ability to foreclose on that property should the related loan be in default. In addition, under certain circumstances, we may be liable for the costs of addressing releases or threatened releases of hazardous substances at properties securing mortgage loans held by us.
Other Non-Insurance Regulation
As the Company continues to evolve its business mix to cover other non-insurance based products and services, it becomes subject to other legal and regulatory requirements, including regulations of the Consumer Financial Protection Bureau and other federal, state and municipal regulatory bodies, as well as additional regulatory bodies in non-U.S. jurisdictions.
Other Information
Customer Concentration
No one customer or group of affiliated customers accounts for 10% or more of the Company’s consolidated revenues.
Employees
We had approximately 16,700 employees as of January 31, 2016. Assurant Solutions has employees in Argentina, Brazil, Italy, Spain and Mexico that are represented by labor unions and trade organizations. We believe that employee relations are satisfactory.
Sources of Liquidity
For a discussion of the Company’s sources and uses of funds, see “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources,” and Note 15 to the Consolidated Financial Statements contained elsewhere in this report.
Taxation
For a discussion of tax matters affecting the Company and its operations, see Note 8 to the Consolidated Financial Statements contained elsewhere in this report.
Financial Information about Reportable Business Segments
For financial information regarding reportable business segments of the Company, see “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Note 22 to the Consolidated Financial Statements contained elsewhere in this report.
Available Information
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, the Statements of Beneficial Ownership of Securities on Forms 3, 4 and 5 for our Directors and Officers and all amendments to such reports, filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge through the SEC website at www.sec.gov . These documents are also available at the SEC's Public Reference Room at 100F Street, NE, Washington, DC 20549. Further information on the operation of the Public Reference room can be found by calling the SEC at 1-800-SEC-0330. These documents are also available free of charge through the Investor Relations page of our website ( www.assurant.com ) as soon as reasonably practicable after filing. Other information found on our website is not part of this or any other report filed with or furnished to the SEC.
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