filings.toolsItem 16. Form 10-K Summary
460K characters. Original on sec.gov ·
Item 16. Form 10-K Summary
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized on February 19, 2021.
| ASSURANT, INC. | ||||||||
| By: | /S/ ALAN B. COLBERG | |||||||
| Name: | Alan B. Colberg | |||||||
| Title: | Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf of the registrant in the capacities indicated on February 19, 2021.
| Signature | Title | |||||||
| /S/ ALAN B. COLBERG | President, Chief Executive Officer and Director (Principal Executive Officer) | |||||||
| Alan B. Colberg | ||||||||
| /S/ RICHARD S. DZIADZIO | Executive Vice President and Chief Financial Officer (Principal Financial Officer) | |||||||
| Richard S. Dziadzio | ||||||||
| /S/ DIMITRY DIRIENZO | Senior Vice President, Chief Accounting Officer and Controller (Principal Accounting Officer) | |||||||
| Dimitry DiRienzo | ||||||||
| * | Non-Executive Board Chair | |||||||
| Elaine D. Rosen | ||||||||
| * | Director | |||||||
| Paget L. Alves | ||||||||
| * | Director | |||||||
| J. Braxton Carter | ||||||||
| * | Director | |||||||
| Juan N. Cento | ||||||||
| * | Director | |||||||
| Harriet Edelman | ||||||||
| * | Director | |||||||
| Lawrence V. Jackson | ||||||||
| * | Director | |||||||
| Jean-Paul L. Montupet | ||||||||
| * | Director | |||||||
| Debra J. Perry | ||||||||
| * | Director | |||||||
| Ognjen Redzic | ||||||||
| * | Director | |||||||
| Paul J. Reilly | ||||||||
| * | Director | |||||||
| Robert W. Stein |
| *By: | /S/ RICHARD S. DZIADZIO | |||||||
| Name: | Richard S. Dziadzio | |||||||
| Attorney-in-Fact |
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Assurant, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Assurant, Inc. and its subsidiaries (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of operations, of comprehensive income, of changes in stockholders’ equity and of cash flows for each of the three years in the period ended December 31, 2020, including the related notes and financial statement schedules listed in the index appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Annual Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
F-1
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Valuation of Claims and Benefits Payable Reserves for Short Duration Insurance Contracts
As described in Notes 2 and 17 to the consolidated financial statements, the Company maintains claims and benefits payable reserves for short duration insurance contracts. Reserves are established using generally accepted actuarial methods and reflect judgments about expected future claim payments. The reserve liability is based on the expected ultimate cost of settling the claims. As of December 31, 2020, the Company’s total liability for claims and benefits payable was $2.66 billion, which included $1.88 billion of liabilities for short duration contracts. Claims and benefits payable reserves include case reserves for known claims which are unpaid as of the balance sheet date; incurred but not reported reserves for claims where the insured event has occurred but has not been reported as of the balance sheet date; and loss adjustment expense reserves for the expected handling costs of settling the claims. Factors used in the calculation of the reserves include experience derived from historical claim payments and actuarial assumptions. As described by management, the best estimate of ultimate loss and loss adjustment expense is generally selected from a blend of different actuarial methods that are applied consistently each period, considering significant assumptions including projected loss development factors and expected loss ratios.
The principal considerations for our determination that performing procedures relating to the valuation of claims and benefits payable reserves for short duration insurance contracts is a critical audit matter are (i) the significant judgment by management when determining their estimates, which led to a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence relating to the actuarial methods and projected loss development factors and expected loss ratio assumptions; and (ii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the valuation of claims and benefits payable reserves for short duration insurance contracts, including controls over the selection of actuarial methods, completeness and accuracy of claims data and the development of the significant assumptions. On a test basis, these procedures also included, among others, testing the completeness and accuracy of historical claims data provided by management and the involvement of professionals with specialized skill and knowledge to assist in either (i) testing management’s process for determining the estimates by evaluating the appropriateness of management’s actuarial methods and the reasonableness of projected loss development factors and expected loss ratio assumptions; or (ii) developing an actuarially determined independent estimate utilizing actual historical data and loss development patterns, as well as industry data and other benchmarks, and comparing this independent estimate to management’s actuarially determined reserves.
Valuation of Future Policy Benefits and Claims and Benefits Payable for Certain Long Duration Insurance Contracts
As described in Notes 2 and 17 to the consolidated financial statements, the Company maintains future policy benefits and expense reserves for universal life insurance policies, variable life insurance policies and investment-type annuity contracts of the disposed and runoff businesses consisting of policy account balances before applicable surrender charges and certain deferred policy initiation fees. The Company maintains future policy benefits and expense reserves for certain preneed life insurance contracts, for policies fully covered by reinsurance and certain life, annuity, group life conversion, and medical insurance policies no longer offered which are equal to the present value of future benefits to policyholders plus related expenses less the present value of future net premiums. The Company also maintains claims and benefits payable for policies fully covered by reinsurance and certain life, annuity, group life conversion, and medical insurance policies no longer offered which are equal to the present value of future benefit payments and related expenses. As of December 31, 2020, the Company’s total future policy benefits and expenses reserve was $10.06 billion, which included $3.48 billion of liabilities for business disposed through reinsurance and in runoff and $2.18 billion of liabilities for preneed long duration contracts estimated using traditional contracts reserving models. As of December 31, 2020, the Company’s total liability for claims and benefits payable was $2.66 billion, which included $742.5 million of liabilities for long duration business disposed through reinsurance and in runoff. Factors used in the calculation of the reserves include experience derived from historical claim payments, expected future premiums and actuarial assumptions. The reserve assumptions include mortality, morbidity, inflation, lapse, margin, withdrawal and discount rates for future policy benefits and expense reserves, and inflation, mortality, morbidity, and discount rates for claims and benefits payable that are based on the Company’s experience.
F-2
The principal considerations for our determination that performing procedures relating to the valuation of future policy benefits and expenses and claims and benefits payable for certain long duration insurance contracts is a critical audit matter are (i) the significant judgment by management when determining their estimates, which led to a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence relating to the actuarial methods and mortality, morbidity, and discount rate assumptions; and (ii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the valuation of future policy benefits and expenses, as well as claims and benefits payable for certain long duration contracts, including controls over the selection of actuarial methods, completeness and accuracy of data and the development of significant assumptions. On a test basis, these procedures also included, among others, testing management’s process for determining the estimates, which included testing the completeness and accuracy of historical claims data provided by management and the involvement of professionals with specialized skill and knowledge to assist in evaluating the reasonableness of management’s mortality, morbidity and discount rate assumptions for future policy benefits and expenses and claims and benefits payable. These professionals with specialized skill and knowledge also assisted in evaluating the appropriateness of the actuarial methods used, which included performing testing of the valuation models for future policy benefits and expense reserves.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 19, 2021
We have served as the Company’s auditor since 2000.
F-3
Assurant, Inc.
Consolidated Balance Sheets
As of December 31, 2020 and 2019
| December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| (in millions except number of shares and per share amounts) | |||||||||||
| Assets | |||||||||||
| Investments: | |||||||||||
| Fixed maturity securities available for sale, at fair value (net of allowances for credit losses of $1.5 at December 31, 2020; amortized cost – $11,532.4 and $11,064.8 at December 31, 2020 and 2019, respectively) | $ | 13,449.0 | $ | 12,322.4 | |||||||
| Equity securities at fair value | 404.1 | 388.5 | |||||||||
| Commercial mortgage loans on real estate, at amortized cost (net of allowances for credit losses of $7.7 and $0.6 at December 31, 2020 and 2019, respectively) | 754.3 | 815.0 | |||||||||
| Short-term investments | 333.2 | 402.5 | |||||||||
| Other investments (net of allowances for credit losses of $1.4 at December 31, 2020) | 738.8 | 638.9 | |||||||||
| Total investments | 15,679.4 | 14,567.3 | |||||||||
| Cash and cash equivalents | 2,228.6 | 1,867.1 | |||||||||
| Premiums and accounts receivable (net of allowances for credit losses of $13.8 and $15.3 at December 31, 2020 and 2019, respectively) | 1,556.4 | 1,692.8 | |||||||||
| Reinsurance recoverables (net of allowances for credit losses of $26.3 and $2.8 at December 31, 2020 and 2019, respectively) | 9,839.9 | 9,593.4 | |||||||||
| Accrued investment income | 129.7 | 131.1 | |||||||||
| Deferred acquisition costs | 7,573.5 | 6,668.0 | |||||||||
| Property and equipment, net | 493.3 | 433.7 | |||||||||
| Goodwill | 2,589.3 | 2,343.4 | |||||||||
| Value of business acquired | 1,156.5 | 2,004.3 | |||||||||
| Other intangible assets, net | 696.2 | 540.2 | |||||||||
| Other assets (net of allowances for credit losses of $1.8 and $1.7 at December 31, 2020 and 2019, respectively) | 518.8 | 590.1 | |||||||||
| Assets held in separate accounts | 2,188.3 | 1,839.7 | |||||||||
| Assets of consolidated investment entities (1) | — | 2,020.1 | |||||||||
| Total assets | $ | 44,649.9 | $ | 44,291.2 | |||||||
| Liabilities | |||||||||||
| Future policy benefits and expenses | $ | 10,062.0 | $ | 9,807.3 | |||||||
| Unearned premiums | 17,308.0 | 16,603.6 | |||||||||
| Claims and benefits payable | 2,659.5 | 2,687.7 | |||||||||
| Commissions payable | 708.5 | 540.5 | |||||||||
| Reinsurance balances payable | 362.4 | 358.5 | |||||||||
| Funds held under reinsurance | 358.6 | 319.4 | |||||||||
| Accounts payable and other liabilities | 2,794.9 | 2,758.5 | |||||||||
| Debt | 2,252.9 | 2,006.9 | |||||||||
| Liabilities related to separate accounts | 2,188.3 | 1,839.7 | |||||||||
| Liabilities of consolidated investment entities (1) | — | 1,687.0 | |||||||||
| Total liabilities | 38,695.1 | 38,609.1 | |||||||||
| Commitments and contingencies (Note 27) | |||||||||||
| Stockholders’ equity | |||||||||||
| 6.50% Series D mandatory convertible preferred stock, par value $1.00 per share, 2,875,000 shares authorized, issued and outstanding at December 31, 2020 and 2019, respectively | 2.9 | 2.9 | |||||||||
| Common stock, par value $0.01 per share, 800,000,000 shares authorized, 62,967,808 and 161,607,866 shares issued and 57,967,808 and 59,945,893 shares outstanding at December 31, 2020 and 2019, respectively | 0.6 | 1.6 | |||||||||
| Additional paid-in capital | 1,956.8 | 4,537.7 | |||||||||
| Retained earnings | 3,548.7 | 5,966.4 | |||||||||
| Accumulated other comprehensive income | 709.8 | 411.5 | |||||||||
| Treasury stock, at cost; 5,000,000 and 101,661,973 shares at December 31, 2020 and 2019, respectively (2) | (267.4) | (5,267.3) | |||||||||
| Total Assurant, Inc. stockholders’ equity | 5,951.4 | 5,652.8 | |||||||||
| Non-controlling interest | 3.4 | 29.3 | |||||||||
| Total equity | 5,954.8 | 5,682.1 | |||||||||
| Total liabilities and equity | $ | 44,649.9 | $ | 44,291.2 |
(1)The following table presents information on assets and liabilities related to consolidated investment entities as of December 31, 2019. During the third quarter of 2020, the Company sold its collateralized loan obligation asset management platform and outsourced its real estate asset management, which resulted in the deconsolidation of the consolidated investment entities. Refer to Notes 4 and 9 for additional information.
| December 31, 2019 | |||||
| Assets | |||||
| Cash and cash equivalents | $ | 32.9 | |||
| Investments, at fair value | 1,957.9 | ||||
| Other receivables | 29.3 | ||||
| Total assets | $ | 2,020.1 | |||
| Liabilities | |||||
| Collateralized loan obligation notes, at fair value | $ | 1,603.1 | |||
| Other liabilities | 83.9 | ||||
| Total liabilities | $ | 1,687.0 |
(2)During the fourth quarter of 2020, the Company retired $5.30 billion of its treasury stock. Refer to Note 2 for additional information.
See the accompanying Notes to the Consolidated Financial Statements
F-4
Assurant, Inc.
Consolidated Statements of Operations
Years Ended December 31, 2020, 2019 and 2018
| Years Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| (in millions except number of shares and per share amounts) | |||||||||||||||||
| Revenues | |||||||||||||||||
| Net earned premiums | $ | 8,342.7 | $ | 8,020.0 | $ | 6,156.9 | |||||||||||
| Fees and other income | 1,182.7 | 1,311.2 | 1,308.1 | ||||||||||||||
| Net investment income | 574.9 | 675.0 | 598.4 | ||||||||||||||
| Net realized (losses) gains on investments (including $20.3, $2.6 and $0.6 of impairment losses for the years ended December 31, 2020, 2019 and 2018, respectively) | (16.2) | 66.3 | (62.7) | ||||||||||||||
| Amortization of deferred gains on disposal of businesses | 10.7 | 14.3 | 56.9 | ||||||||||||||
| Total revenues | 10,094.8 | 10,086.8 | 8,057.6 | ||||||||||||||
| Benefits, losses and expenses | |||||||||||||||||
| Policyholder benefits | 2,549.3 | 2,654.7 | 2,342.6 | ||||||||||||||
| Amortization of deferred acquisition costs and value of business acquired | 3,672.0 | 3,322.1 | 2,300.8 | ||||||||||||||
| Underwriting, general and administrative expenses | 3,110.0 | 3,250.5 | 2,980.4 | ||||||||||||||
| Goodwill impairment (Note 15) | 137.8 | — | — | ||||||||||||||
| Iké net losses (Note 4) | 5.9 | 163.0 | — | ||||||||||||||
| Interest expense | 104.5 | 110.6 | 100.3 | ||||||||||||||
| Loss on extinguishment of debt | — | 31.4 | — | ||||||||||||||
| Total benefits, losses and expenses | 9,579.5 | 9,532.3 | 7,724.1 | ||||||||||||||
| Income before provision for income taxes | 515.3 | 554.5 | 333.5 | ||||||||||||||
| Provision for income taxes | 72.6 | 167.7 | 80.9 | ||||||||||||||
| Net income | 442.7 | 386.8 | 252.6 | ||||||||||||||
| Less: Net income attributable to non-controlling interest | (0.9) | (4.2) | (1.6) | ||||||||||||||
| Net income attributable to stockholders | 441.8 | 382.6 | 251.0 | ||||||||||||||
| Less: Preferred stock dividends | (18.7) | (18.7) | (14.2) | ||||||||||||||
| Net income attributable to common stockholders | $ | 423.1 | $ | 363.9 | $ | 236.8 | |||||||||||
| Earnings Per Common Share | |||||||||||||||||
| Basic | $ | 7.04 | $ | 5.87 | $ | 4.00 | |||||||||||
| Diluted | $ | 6.99 | $ | 5.84 | $ | 3.98 | |||||||||||
| Share Data | |||||||||||||||||
| Weighted average common shares outstanding used in basic per common share calculations | 60,114,670 | 61,942,969 | 59,239,608 | ||||||||||||||
| Plus: Dilutive securities | 3,065,268 | 370,499 | 305,916 | ||||||||||||||
| Weighted average common shares used in diluted per common share calculations | 63,179,938 | 62,313,468 | 59,545,524 |
See the accompanying Notes to the Consolidated Financial Statements
F-5
Assurant, Inc.
Consolidated Statements of Comprehensive Income
Years Ended December 31, 2020, 2019 and 2018
| Years Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| (in millions) | |||||||||||||||||
| Net income | $ | 442.7 | $ | 386.8 | $ | 252.6 | |||||||||||
| Other comprehensive income (loss): | |||||||||||||||||
| Change in unrealized gains on securities, net of taxes of $(63.5), $(153.1) and $93.7 for the years ended December 31, 2020, 2019 and 2018, respectively | 223.8 | 555.5 | (342.3) | ||||||||||||||
| Change in unrealized gains on derivative transactions, net of taxes of $0.6, $0.4 and $(4.9) for the years ended December 31, 2020, 2019 and 2018, respectively | (2.4) | (1.3) | 18.4 | ||||||||||||||
| Change in credit related impairment losses, net of taxes of $(0.3) for the year ended December 31, 2020. | 1.2 | — | — | ||||||||||||||
| Change in non-credit related impairment losses, net of taxes of $(0.2), $(0.1) and $1.8 for the years ended December 31, 2020, 2019 and 2018, respectively | 0.6 | 0.4 | (6.7) | ||||||||||||||
| Change in foreign currency translation, net of taxes of $3.8, $(1.1) and $2.6 for the years ended December 31, 2020, 2019 and 2018, respectively | 63.3 | 16.7 | (94.2) | ||||||||||||||
| Amortization of pension and postretirement unrecognized net periodic benefit cost and change in funded status, net of taxes of $(3.2), $1.1 and $3.4 for the years ended December 31, 2020, 2019 and 2018, respectively (1) | 11.8 | (4.4) | (12.7) | ||||||||||||||
| Total other comprehensive income (loss) | 298.3 | 566.9 | (437.5) | ||||||||||||||
| Total comprehensive income (loss) | 741.0 | 953.7 | (184.9) | ||||||||||||||
| Less: Comprehensive income attributable to non-controlling interest | (0.9) | (4.2) | (1.6) | ||||||||||||||
| Total comprehensive income (loss) attributable to common stockholders | $ | 740.1 | $ | 949.5 | $ | (186.5) |
(1)Change in year ended December 31, 2020 includes the prior service credit resulting from the February 2020 amendment of the Retirement Health Benefits Plan. Refer to Note 24 for further information.
See the accompanying Notes to the Consolidated Financial Statements
F-6
Assurant, Inc.
Consolidated Statements of Changes in Stockholders’ Equity
Years Ended December 31, 2020, 2019 and 2018
| Preferred Stock | Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income | Treasury Stock | Non-controlling Interest | Total | ||||||||||||||||||||||||||||||||||||||||
| (in millions, except per share amounts) | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance, January 1, 2018 | $ | — | $ | 1.5 | $ | 3,197.9 | $ | 5,697.3 | $ | 234.0 | $ | (4,860.1) | $ | 10.9 | $ | 4,281.5 | |||||||||||||||||||||||||||||||
| Cumulative effect of change in accounting principles, net of taxes (1) | — | — | — | (40.6) | 48.1 | — | — | 7.5 | |||||||||||||||||||||||||||||||||||||||
| Stock plan exercises | — | — | 7.2 | — | — | — | — | 7.2 | |||||||||||||||||||||||||||||||||||||||
| Stock plan compensation expense | — | — | 57.1 | — | — | — | — | 57.1 | |||||||||||||||||||||||||||||||||||||||
| Common stock dividends ($2.28 per share) | — | — | — | (133.8) | — | — | — | (133.8) | |||||||||||||||||||||||||||||||||||||||
| Acquisition of common stock | — | — | (15.5) | — | — | (132.3) | — | (147.8) | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 251.0 | — | — | 1.6 | 252.6 | |||||||||||||||||||||||||||||||||||||||
| Issuance of preferred stock | 2.9 | — | 273.5 | — | — | — | — | 276.4 | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock | — | 0.1 | 975.4 | — | — | — | — | 975.5 | |||||||||||||||||||||||||||||||||||||||
| Preferred stock dividends ($4.93 per share) | — | — | — | (14.2) | — | — | — | (14.2) | |||||||||||||||||||||||||||||||||||||||
| Change in equity of non-controlling interests | — | — | — | — | — | — | 9.4 | 9.4 | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | (437.5) | — | — | (437.5) | |||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2018 | $ | 2.9 | $ | 1.6 | $ | 4,495.6 | $ | 5,759.7 | $ | (155.4) | $ | (4,992.4) | $ | 21.9 | $ | 5,133.9 | |||||||||||||||||||||||||||||||
| Stock plan exercises | — | — | 7.1 | — | — | — | — | 7.1 | |||||||||||||||||||||||||||||||||||||||
| Stock plan compensation expense | — | — | 55.9 | — | — | — | — | 55.9 | |||||||||||||||||||||||||||||||||||||||
| Common stock dividends ($2.43 per share) | — | — | — | (151.4) | — | — | — | (151.4) | |||||||||||||||||||||||||||||||||||||||
| Acquisition of common stock | — | — | (20.9) | — | — | (274.9) | — | (295.8) | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 382.6 | — | — | 4.2 | 386.8 | |||||||||||||||||||||||||||||||||||||||
| Preferred stock dividends ($6.52 per share) | — | — | — | (18.7) | — | — | — | (18.7) | |||||||||||||||||||||||||||||||||||||||
| Change in equity of non-controlling interest | — | — | — | (5.8) | — | — | 3.2 | (2.6) | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | 566.9 | — | — | 566.9 | |||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2019 | $ | 2.9 | $ | 1.6 | $ | 4,537.7 | $ | 5,966.4 | $ | 411.5 | $ | (5,267.3) | $ | 29.3 | $ | 5,682.1 | |||||||||||||||||||||||||||||||
| Cumulative effect of change in accounting principles, net of taxes (2) | — | — | — | (20.4) | — | — | — | (20.4) | |||||||||||||||||||||||||||||||||||||||
| Stock plan exercises | — | — | 8.6 | — | — | — | — | 8.6 | |||||||||||||||||||||||||||||||||||||||
| Stock plan compensation expense | — | — | 57.9 | — | — | — | — | 57.9 | |||||||||||||||||||||||||||||||||||||||
| Common stock dividends ($2.55 per share) | — | — | — | (154.6) | — | — | — | (154.6) | |||||||||||||||||||||||||||||||||||||||
| Acquisition of common stock | — | — | (20.3) | — | — | (299.8) | — | (320.1) | |||||||||||||||||||||||||||||||||||||||
| Retirement of treasury stock (Note 2) | — | (1.0) | (2,626.4) | (2,672.3) | — | 5,299.7 | — | — | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 441.8 | — | — | 0.9 | 442.7 | |||||||||||||||||||||||||||||||||||||||
| Preferred stock dividends ($6.50 per share) | — | — | — | (18.7) | — | — | — | (18.7) | |||||||||||||||||||||||||||||||||||||||
| Change in equity of non-controlling interest | — | — | — | 6.5 | — | — | (25.2) | (18.7) | |||||||||||||||||||||||||||||||||||||||
| Acquisition of non-controlling interests | — | — | (0.7) | — | — | — | (1.6) | (2.3) | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | 298.3 | — | — | 298.3 |
F-7
| Balance, December 31, 2020 | $ | 2.9 | $ | 0.6 | $ | 1,956.8 | $ | 3,548.7 | $ | 709.8 | $ | (267.4) | $ | 3.4 | $ | 5,954.8 |
(1)Amounts relate to: (i) the requirement to recognize the changes in fair value of equity securities directly within income (resulting in a reclassification of unrealized gains as of December 31, 2017 between accumulated other comprehensive income (“AOCI”) and retained earnings); (ii) the impact of adoption of the new revenue recognition standard for revenues from service contracts and sales of products; and (iii) the reclassification from AOCI to retained earnings for stranded tax effects resulting from the U.S. Tax Cuts and Jobs Act.
(2)Amount relates to the adoption of a new accounting standard for accounting for expected credit losses for assets held at amortized cost, which established allowances for such expected credit losses as of January 1, 2020. See Notes 2 and 5 for additional information.
See the accompanying Notes to the Consolidated Financial Statements
F-8
Assurant, Inc.
Consolidated Statements of Cash Flows
Years Ended December 31, 2020, 2019 and 2018
| Years Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| (in millions) | |||||||||||||||||
| Operating activities | |||||||||||||||||
| Net income attributable to stockholders | $ | 441.8 | $ | 382.6 | $ | 251.0 | |||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||||||||
| Noncash revenues, expenses, gains and losses included in income: | |||||||||||||||||
| Deferred tax expense | 191.6 | 89.5 | 21.4 | ||||||||||||||
| Amortization of deferred gains on disposal of businesses | (10.7) | (14.3) | (56.9) | ||||||||||||||
| Depreciation and amortization | 144.3 | 125.8 | 126.9 | ||||||||||||||
| Net realized losses (gains) on investments, including impairment losses | 16.2 | (66.3) | 62.7 | ||||||||||||||
| Loss on extinguishment of debt | — | 31.4 | — | ||||||||||||||
| Net losses on sales of businesses and buildings | — | 17.0 | 21.9 | ||||||||||||||
| Stock based compensation expense | 57.9 | 55.9 | 57.1 | ||||||||||||||
| Other intangible asset impairment | 2.7 | 16.2 | 20.8 | ||||||||||||||
| Goodwill impairment | 137.8 | — | — | ||||||||||||||
| Iké related charges, net of derivative gains (1) | 1.7 | 163.0 | — | ||||||||||||||
| Changes in operating assets and liabilities: | |||||||||||||||||
| Change in insurance policy reserves and expenses | 988.1 | 1,680.5 | 549.6 | ||||||||||||||
| Change in premiums and accounts receivable | 186.1 | (63.7) | (220.2) | ||||||||||||||
| Change in commissions payable | 169.3 | 102.3 | (10.7) | ||||||||||||||
| Change in reinsurance recoverable | (233.3) | (396.9) | 609.0 | ||||||||||||||
| Change in reinsurance balance payable | 3.5 | 24.8 | 3.8 | ||||||||||||||
| Change in funds withheld under reinsurance | 37.9 | 44.6 | (104.7) | ||||||||||||||
| Change in deferred acquisition costs and value of business acquired (2) | (546.8) | (889.4) | (602.4) | ||||||||||||||
| Change in taxes receivable (3) | 24.3 | 26.6 | 137.3 | ||||||||||||||
| Change in other assets and other liabilities | (257.0) | 100.1 | (209.9) | ||||||||||||||
| Other | (13.4) | (16.3) | — | ||||||||||||||
| Net cash provided by operating activities | 1,342.0 | 1,413.4 | 656.7 | ||||||||||||||
| Investing activities | |||||||||||||||||
| Sales of: | |||||||||||||||||
| Fixed maturity securities available for sale | 627.6 | 2,105.8 | 3,513.8 | ||||||||||||||
| Equity securities | 44.0 | 118.1 | 66.7 | ||||||||||||||
| Other invested assets | 113.1 | 128.9 | 90.6 | ||||||||||||||
| Subsidiaries, net of cash transferred (4) | — | — | 60.6 | ||||||||||||||
| Iké foreign currency hedge (1) | 22.0 | — | — | ||||||||||||||
| Maturities, calls, prepayments, and scheduled redemption of: | |||||||||||||||||
| Fixed maturity securities available for sale | 1,047.0 | 713.8 | 820.8 | ||||||||||||||
| Commercial mortgage loans on real estate | 64.0 | 65.5 | 120.6 | ||||||||||||||
| Purchases of: | |||||||||||||||||
| Fixed maturity securities available for sale | (2,080.2) | (2,960.6) | (4,373.6) | ||||||||||||||
| Equity securities | (50.5) | (87.1) | (62.4) | ||||||||||||||
| Commercial mortgage loans on real estate | (8.5) | (117.3) | (215.4) | ||||||||||||||
| Other invested assets (5) | (102.4) | (76.5) | (54.8) | ||||||||||||||
| Property and equipment and other | (121.2) | (110.3) | (82.8) | ||||||||||||||
| Subsidiary, net of cash transferred (6) | (458.6) | (7.6) | (1,110.7) | ||||||||||||||
| Net cash outflow related to sale of interests in Iké and termination of put/call obligations (1) | (73.3) | — | — | ||||||||||||||
| Consolidated investment entities (Note 9): | |||||||||||||||||
| Purchases of investments | (353.1) | (1,311.0) | (1,774.8) | ||||||||||||||
| Sale of investments | 550.2 | 935.1 | 848.5 | ||||||||||||||
| Change in short-term investments | 41.7 | (24.4) | (52.2) | ||||||||||||||
| Other | 3.0 | 7.8 | 2.6 | ||||||||||||||
| Net cash used in investing activities | (735.2) | (619.8) | (2,202.5) | ||||||||||||||
| Financing activities | |||||||||||||||||
| Issuance of mandatory convertible preferred stock, net of issuance costs (Note 20) | — | — | 276.4 | ||||||||||||||
| Issuance of debt, net of issuance costs (Note 19) | 243.7 | 346.7 | 1,285.7 | ||||||||||||||
| Repayment of debt, including tender offer premium (Note 19) | — | (379.6) | (350.0) | ||||||||||||||
| Issuance of collateralized loan obligation notes (Note 9) | — | 398.6 | 842.5 | ||||||||||||||
| Issuance of debt for consolidated investment entities (Note 9) | — | 189.1 | 637.3 | ||||||||||||||
| Repayment of debt for consolidated investment entities (Note 9) | (1.2) | (319.3) | (591.6) | ||||||||||||||
| Borrowing under secured revolving credit facility | 200.0 | — | — | ||||||||||||||
| Payments on secured revolving credit facility | (200.0) | — | — | ||||||||||||||
| Acquisition of common stock | (297.0) | (271.8) | (139.3) | ||||||||||||||
| Common stock dividends paid | (154.6) | (151.3) | (133.8) | ||||||||||||||
| Preferred stock dividends paid | (18.7) | (18.7) | (14.2) | ||||||||||||||
| Employee stock purchases and withholdings | (10.3) | 19.7 | 15.7 | ||||||||||||||
| Proceeds from transfer of rights to ACA recoverables (Note 4) | — | 26.7 | — | ||||||||||||||
| Proceeds repaid on transfer of rights to ACA recoverable | (26.7) | — | — | ||||||||||||||
| Non-controlling interest | — | — | 9.2 | ||||||||||||||
| Other (7) | — | (19.3) | 0.1 | ||||||||||||||
| Net cash (used in) provided by financing activities | (264.8) | (179.2) | 1,838.0 | ||||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | 19.5 | (1.3) | (35.0) | ||||||||||||||
| Change in cash and cash equivalents | 361.5 | 613.1 | 257.2 | ||||||||||||||
| Cash and cash equivalents at beginning of period | 1,867.1 | 1,254.0 | 996.8 | ||||||||||||||
| Cash and cash equivalents at end of period | $ | 2,228.6 | $ | 1,867.1 | $ | 1,254.0 | |||||||||||
| Supplemental information: | |||||||||||||||||
| Income taxes paid | $ | 98.5 | $ | 93.1 | $ | 93.9 | |||||||||||
| Interest paid on debt | $ | 103.6 | $ | 103.2 | $ | 79.5 |
(1)Relates to Iké disposition and related financing. Refer to Note 4 for additional information.
(2)Refer to Notes 13 and 16 for further detail on amortization of DAC and VOBA, respectively.
(3)The year ended December 31, 2020 includes receipt of $204.9 million federal tax refund, which includes interest, related to the ability to carryback net operating losses to prior periods under the CARES Act. Refer to Note 12 for additional information.
(4)The year ended December 31, 2018 represents cash received, net of cash transferred, from the sale of Mortgage Solutions ($36.7 million) and Time Insurance Company ($23.9 million). For additional information, refer to Note 4.
(5)The year ended December 31, 2020 includes loan to Iké Grupo. Refer to Note 4 for additional information.
(6)Amounts for the year ended December 31, 2020 primarily consists of $135.8 million in cash consideration for the acquisition of American Financial & Automotive Services, Inc,. net of $39.6 million of cash acquired, $276.8 million in cash consideration for the acquisition of HYLA, Inc., net of $72.0 million of cash acquired, and $46.0 million in total cash consideration, net of $23.9 million of cash acquired for four business acquisitions within the Global Lifestyle business. Refer to Note 3 for additional information. Amounts for the year ended December 31, 2018 primarily consist of $1.49 billion of cash used to fund a portion of the total purchase price of the TWG acquisition, inclusive of the $595.9 million repayment of pre-existing TWG debt at the acquisition date, net of $380.1 million of TWG cash acquired. Refer to Note 3 for further information.
(7)Amounts for the year ended December 31, 2019 relates to the settlement of a contingent payable from the Company’s acquisition of certain renewal rights in a prior year.
See the accompanying Notes to the Consolidated Financial Statements
F-9
Assurant, Inc.
Notes to the Consolidated Financial Statements
(in millions except number of shares and per share amounts)
1. Nature of Operations
Assurant, Inc. (the “Company”) is a global provider of lifestyle and housing solutions that support, protect and connect major consumer purchases. The Company partners with leading brands to develop innovative products and services and to deliver enhanced customer experience. The Company operates in North America, Latin America, Europe and Asia Pacific through three operating segments: Global Lifestyle, Global Housing and Global Preneed. Through its Global Lifestyle segment, the Company provides mobile device solutions and extended service products and related services for consumer electronics and appliances (referred to as “Connected Living”); vehicle protection and related services (referred to as “Global Automotive”); and credit protection and other insurance products (referred to as “Global Financial Services and Other”). Through its Global Housing segment, the Company provides lender-placed homeowners insurance, lender-placed manufactured housing insurance and lender-placed flood insurance (referred to as “Lender-placed Insurance”); renters insurance and related products (referred to as “Multifamily Housing”); and voluntary manufactured housing insurance, voluntary homeowners insurance and other specialty products (referred to as “Specialty and Other”). Through its Global Preneed segment, the Company provides pre-funded funeral insurance, final need insurance and related services.
The Company’s common stock is traded on the New York Stock Exchange under the symbol “AIZ.”
2. Summary of Significant Accounting Policies
Basis of Presentation
The Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Amounts are presented in United States of America (“U.S.”) Dollars and all amounts are in millions, except for number of shares, per share amounts and number of securities. Certain prior period amounts have been reclassified to conform to the 2020 presentation. The Consolidated Financial Statements include the results of our acquisition of TWG Holdings Limited and its subsidiaries (“TWG”) from June 1, 2018.
Principles of Consolidation
The Consolidated Financial Statements include the accounts of the Company, all of the controlled subsidiaries (generally through a greater than 50% ownership of voting rights and voting interests) and variable interest entities (“VIEs”) of which the Company is the primary beneficiary. Equity investments in entities that the Company does not consolidate, but where the Company has significant influence or where the Company has more than a minor influence over the entity’s operating and financial policies, are accounted for under the equity method. Non-controlling interest consists of equity that is not attributable directly or indirectly to the Company. All material inter-company transactions and balances are eliminated in consolidation. In order to facilitate the Company’s closing process, financial information from certain foreign subsidiaries and affiliates is reported on a one to three-month lag.
Use of Estimates
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts. The items affected by the use of estimates include but are not limited to, investments, reinsurance recoverables, premium and accounts receivables, deferred acquisition costs (“DAC”), value of business acquired (“VOBA”), deferred income taxes and associated valuation allowances, goodwill, intangible assets, future policy benefits and expenses, unearned premiums, claims and benefits payable, deferred gain on disposal of businesses, pension and post-retirement liabilities and commitments and contingencies. The estimates are sensitive to market conditions, investment yields, mortality, morbidity, commissions and other acquisition expenses, policyholder behavior and other factors. Actual results could differ from the estimates recorded. The Company believes all amounts reported are reasonable and adequate.
Fair Value
The Company uses an exit price for its fair value measurements. An exit price is defined as the amount received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In measuring fair value, the Company gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. See Note 10 for additional information.
F-10
Foreign Currency
For foreign affiliates where the local currency is the functional currency, unrealized foreign currency translation gains and losses net of deferred income taxes have been reflected in accumulated other comprehensive income (“AOCI”). Other than for two of the Company’s Canadian subsidiaries, deferred taxes have not been provided for unrealized currency translation gains and losses since the Company intends to indefinitely reinvest the earnings in these other jurisdictions. Transaction gains and losses on assets and liabilities denominated in foreign currencies are recorded in underwriting, general and administrative expenses in the consolidated statements of operations during the period in which they occur.
Management generally identifies highly inflationary markets as those markets whose cumulative inflation rates over a three-year period exceeds 100%, in addition to considering other qualitative and quantitative factors. Beginning July 1, 2018, as a result of the classification of Argentina’s economy as highly inflationary, the functional currency of our Argentina subsidiaries was changed from the local currency to U.S. Dollars. The subsidiaries’ non-U.S. Dollar denominated monetary assets and liabilities have been subject to remeasurement since July 1, 2018. For the years ended December 31, 2020, 2019 and 2018, the remeasurement resulted in $7.5 million, $18.4 million and $17.2 million, respectively, of net pre-tax losses which the Company classified within underwriting, general and administrative expenses in the consolidated statements of operations. Based on the relative size of the subsidiaries’ operations and net assets subject to remeasurement, the Company does not anticipate the ongoing remeasurement to have a material impact on the Company’s results of operations or financial condition.
Variable Interest Entities
The Company may enter into agreements with other entities that are deemed to be VIEs. Entities that do not have sufficient equity at risk to allow the entity to finance its activities without additional financial support or in which the equity investors, as a group, do not have the characteristic of a controlling financial interest are referred to as VIEs. A VIE is consolidated by the variable interest holder that is determined to have the controlling financial interest (the “primary beneficiary”) as a result of having both the power to direct the activities that most significantly impact the VIE’s economic performance and the obligation to absorb losses or right to receive benefits from the VIE that could potentially be significant to the VIE. The Company determines whether it is the primary beneficiary of an entity subject to consolidation based on a qualitative assessment of the VIE’s capital structure, contractual terms, the nature of the VIE’s operations and purpose and the Company’s relative exposure to the related risks of the VIE on the date it becomes initially involved in the VIE. The Company holds both consolidated and non-consolidated VIEs. Prior to the deconsolidation in the third quarter of 2020, the consolidated collateralized loan obligation (“CLO”) entities met the definition of a collateralized financing entity. See Note 9 for additional information. Financial information from certain consolidated VIEs are reported on a lag including CLOs and real estate funds that were reported on a three-month lag prior to the deconsolidation.
Investments
Fixed maturity securities are classified as available-for-sale as defined in the investments guidance and are reported at fair value. If the fair value is higher than the amortized cost for fixed maturity securities, the excess is an unrealized gain; and, if lower than amortized cost, the difference is an unrealized loss. Net unrealized gains and losses on securities classified as available-for-sale, less deferred income taxes, are included in AOCI.
Effective January 1, 2020, the Company adopted certain changes to the accounting and reporting for impairments involving available for sale securities, including presentation of credit-related impairments as an allowance rather than as an other-than-temporary impairment, eliminating duration of unrealized losses as a consideration when assessing recognition of an impairment, recognition of credit impairments upon purchase of securities as applicable, and requiring reversals of previously recognized credit-related impairments when applicable.
For available for sale fixed maturity securities in an unrealized loss position for which the Company does not intend to sell or for which it is more likely than not that the Company would not be required to sell before an anticipated recovery in value, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, the Company considers the extent to which fair value is less than amortized cost basis, changes to the credit rating of the security by a nationally recognized statistical ratings organization and any adverse conditions specifically related to the security, industry or geographic area, among other factors. If this assessment indicates a potential credit loss may exist, the present value of cash flows expected to be collected are compared to the security’s amortized cost basis. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit-related impairment exists, and a charge to income and an associated allowance for credit losses is recorded for the credit-related impairment. Any impairment not related to credit losses is recorded through other comprehensive income. The amount of the allowance for credit losses is limited to the amount by which fair value is less than the amortized cost basis. Upon recognizing a credit-related impairment, the cost basis of the security is not adjusted.
Subsequent changes in the allowance for credit losses are recorded as provision for, or reversal of, credit loss expense. For fixed maturities where the Company records a credit loss, a determination is made as to the cause of the impairment and
F-11
whether the Company expects a recovery in the value. Write-offs are charged against the allowance when management concludes the financial asset is uncollectible. For fixed maturities where the Company expects a recovery in value, the effective yield method is utilized, and the investment is amortized to par.
For available for sale fixed maturity securities that the Company intends to sell, or for which it is more likely than not that the Company will be required to sell before recovery of its amortized cost basis, the entire impairment loss, or difference between the fair value and amortized cost basis of the security, is recognized in net realized gains (losses). The new cost basis of the security is the previous amortized cost basis less the impairment recognized and is not adjusted for any subsequent recoveries in fair value.
The Company reports receivables for accrued investment income separately from fixed maturities available for sale and elected not to measure allowances for credit losses for accrued investment income as uncollectible balances are written off in a timely manner.
Equity securities that have readily determinable fair values are measured at fair value with changes in fair value recognized in net realized gains (losses) on investments on the Company’s consolidated statements of operations. The Company has certain equity investments that do not have readily determinable fair values and the Company has elected the measurement alternative to carry such investments at cost, less impairment and to mark to fair value when observable prices in identical or similar investments from the same issuer occur.
Equity securities accounted for under the measurement alternative are impaired if a qualitative assessment based upon several indicators such as earnings performance, offers to sell or purchase, ability to continue as a going concern and macroeconomic factors indicates the equity investment is impaired and the fair value of the investment is less than its carrying value. If a qualitative assessment indicates impairment a quantitative analysis which uses probability weighted potential outcomes is performed to determine the amount of the impairment to be recognized that result in a fair value measurement.
Commercial mortgage loans on real estate are reported at unpaid principal balances, adjusted for amortization of premium or discount, less any allowance for credit losses. The allowance for the Company’s commercial mortgage loans is based on the present value of expected future cash flows discounted at the loan’s effective interest rate, utilizing a probability-of-default and loss given default methodologies, which incorporate various probability weighted economic scenarios. The probability of default is estimated using macroeconomic factors as well as individual loan characteristics, including loan-to-value (“LTV”) and debt service coverage ratios (“DSC”), loan term, collateral type, geography and underlying credit. The loss given default is driven primarily by the type and value of underlying collateral, and to a lesser extent by expected liquidation costs and time to recovery. Each loan is analyzed individually based on loan-specific data elements to estimate the expected loss and then aggregated.
The Company places loans on nonaccrual status after 90 days of delinquent payments (unless the loans are secured and in the process of collection). A loan may be placed on nonaccrual status before this time if information is available that suggests collection is unlikely. The Company charges off loan and accrued interest balances that are deemed uncollectible. Charge offs are recorded to net income in the period deemed uncollectible. Refer to Note 5 for further details on the allowance for credit losses on commercial mortgage loans.
Prior to January 1, 2020, the allowance for loan loss was based on management’s analysis of factors including actual loan loss experience, specific events based on geographical, political or economic conditions, industry experience, loan groupings that have probable and estimable losses and individually impaired loan loss analysis. A loan was considered individually impaired when it became probable that the Company would be unable to collect all amounts due, including principal and interest, according to the contractual terms of the loan agreement. Indicative factors of impairment included, but were not limited to, whether the loan was current, the value of the collateral and the financial position of the borrower. If a loan was individually impaired, the Company used one of the following valuation methods based on the individual loan’s facts and circumstances to measure the impairment amount: (1) the present value of expected future cash flows, (2) the loan’s observable market price, or (3) the fair value of collateral. Changes in the allowance for loan losses was recorded in net realized losses on investments, excluding other-than-temporary impairment (“OTTI”) losses.
Short-term investments include securities and other investments with durations of one year or less, but greater than three months, between the date of purchase and maturity. These amounts are reported at cost or amortized cost, which approximates fair value.
Other investments consist primarily of investments in joint ventures, partnerships, equity investments that do not have readily determinable fair values, invested assets associated with a modified coinsurance arrangement, invested assets associated with the Assurant Investment Plan (the “AIP”), the American Security Insurance Company Investment Plan (the “ASIC”) and the Assurant Deferred Compensation Plan (the “ADC”), as well as policy loans. The joint ventures and partnerships are valued according to the equity method of accounting. In applying the equity method, the Company uses financial information provided by the investee, generally on a three-month lag. The invested assets related to the modified coinsurance arrangement, the AIP,
F-12
the ASIC and the ADC are classified as trading securities. The equity investments are accounted for under the measurement alternative. Policy loans are reported at unpaid principal balances, which do not exceed the cash surrender value of the underlying policies.
Realized gains and losses on sales of investments are recognized on the specific identification basis.
Investment income is recorded as earned and reported net of investment expenses. The Company uses the interest method to recognize interest income on its commercial mortgage loans.
The Company anticipates prepayments of principal in the calculation of the effective yield for mortgage-backed securities and structured securities. The retrospective method is used to adjust the effective yield for the majority of the Company’s mortgage-backed and structured securities. For credit-sensitive structured securities, the effective yield is recalculated on a prospective basis.
Total OTTI Losses
Prior to January 1, 2020, the Company separated OTTI losses of a debt security into two components of credit and non-credit losses. For debt securities with credit losses and non-credit losses or gains, total OTTI losses was the total of the decline in fair value from either the most recent OTTI determination or a prior period end in which the fair value declined until the current period end valuation date. This amount did not include any securities that had fair value increases. For debt securities that the Company had either the intent to sell or it was more likely than not that it would be required to sell below amortized cost, total OTTI losses were the amount by which the fair value of the security was less than its amortized cost basis at the period end valuation date and the decline in fair value was deemed to be OTTI.
The amount of the OTTI related to a credit loss was recognized in earnings, and the amount of the OTTI related to other, non-credit factors (e.g., interest rates, market conditions, etc.) was recorded as a component of other comprehensive income. The difference between the amortized cost of the security and the present value of projected future cash flows expected to be collected represented a credit loss that was recognized in earnings. If the estimated fair value was less than the present value of projected future cash flows expected to be collected, this portion of OTTI represented a non-credit loss that was recorded in other comprehensive income.
Cash and Cash Equivalents
The Company considers all highly liquid securities and other investments with durations of three months or less between the date of purchase and maturity to be cash equivalents. These amounts are carried at cost, which approximates fair value. Cash balances are reviewed at the end of each reporting period to determine if negative cash balances exist. If negative cash balances exist, the cash accounts are netted with other positive cash accounts of the same bank provided the right of offset exists between the accounts. If the right of offset does not exist, the negative cash balances are reclassified to accounts payable and other liabilities.
Restricted cash and cash equivalents, of $14.6 million and $12.8 million at December 31, 2020 and 2019, respectively, principally related to cash deposits involving insurance programs with restrictions as to withdrawal and use, are classified within cash and cash equivalents in the consolidated balance sheets.
Reinsurance
For both ceded and assumed reinsurance, risk transfer requirements must be met for reinsurance accounting to apply. If risk transfer requirements are not met, the contract is accounted for as a deposit, resulting in the recognition of cash flows under the contract through a deposit asset or liability and not as revenue or expense. To meet risk transfer requirements, a reinsurance contract must include both insurance risk, consisting of both underwriting and timing risk, and a reasonable possibility of a significant loss for the assuming entity. Similar risk transfer criteria are used to determine whether directly written insurance contracts should be accounted for as insurance or as a deposit.
Reinsurance recoverables include amounts related to paid benefits and estimated amounts related to unpaid policy and contract claims, future policyholder benefits and policyholder contract deposits. The cost of reinsurance is recognized as a reduction to premiums earned over the terms of the underlying reinsured policies. Amounts recoverable from reinsurers are estimated in a manner consistent with claim and claim adjustment expense reserves or future policy benefits reserves and are reported in the consolidated balance sheets. The cost of reinsurance related to long-duration contracts is recognized over the life of the underlying reinsured policies. The ceding of insurance does not discharge the Company’s primary liability to insureds, thus a credit exposure exists to the extent that any reinsurer is unable to meet the obligation assumed in the reinsurance agreements. To mitigate this exposure to reinsurer insolvencies, the Company evaluates the financial condition of its reinsurers and typically holds collateral (in the form of funds withheld, trusts and letters of credit) as security under the reinsurance agreements.
F-13
Effective January 1, 2020, the Company adopted the expected credit loss model for reinsurance recoverables. The Company uses a probability of default and loss given default methodology in estimating the allowance, whereby the credit ratings of reinsurers are used in determining the probability of default. The allowance is established for reinsurance recoverables on paid and unpaid future policy benefits and claims and benefits. Prior to applying default factors, the net exposure to credit risk is reduced for any collateral for which the right of offset exists, such as funds withheld, assets held in trust and letters of credit, which are part of the reinsurance arrangements, with adjustments to include consideration of credit exposure on the collateral. The methodology used by the Company incorporates historical default factors for each reinsurer based on their credit rating using comparably rated bonds as published by a major ratings service. The allowance is based upon the Company’s ongoing review of amounts outstanding, length of collection periods, changes in reinsurer credit standing and other relevant factors.
Prior to January 1, 2020, an allowance for doubtful accounts was recorded on the basis of periodic evaluations of balances due from reinsurers (net of collateral), reinsurer solvency, historical collection experience and current economic conditions.
Funds held under reinsurance represent amounts contractually held from assuming companies in accordance with reinsurance agreements.
Reinsurance premiums assumed are calculated based upon payments received from ceding companies together with accrual estimates, which are based on both payments received and in force policy information received from ceding companies. Any subsequent differences arising on such estimates are recorded in the period in which they are determined.
Premiums and Accounts Receivable
Premiums and accounts receivable includes insurance premiums receivable from policyholders and amounts due from sponsors or agents. Effective January 1, 2020, the Company adopted the expected credit loss model for premiums and accounts receivable. For receivables due directly from the insured or consumer, the allowance for credit losses is generally calculated by aging the receivable balances and applying default factors based on the Company’s historical collection data. For receivables due from product sponsors or agents, receivable balances are generally segregated by the sponsor or agent and an appropriate default factor is determined based on creditworthiness, billing terms and aging of balances. The financial exposure of a credit loss is determined net of offsets (such as related unearned premium reserves for consumer receivables and receivables net of commissions payable, profit share liabilities and captive reinsurance for balances due from sponsors/agents) prior to applying a default factor. Prior to January 1, 2020, an allowance for doubtful accounts was recorded on the basis of periodic evaluations of balances due from third parties, considering historical collection experience, solvency and current economic conditions.
Deferred Acquisition Costs
Only direct and incremental costs associated with the successful acquisition of new or renewal insurance contracts are deferred to the extent that such costs are deemed recoverable from future premiums or gross profits. Acquisition costs primarily consist of commissions and premium taxes. Certain direct response advertising expenses are deferred when the primary purpose of the advertising is to elicit sales to customers who can be shown to have specifically responded to the advertising and the direct response advertising results in probable future benefits.
All other acquisition-related costs, including those related to general advertising and solicitation, market research, agent training, product development, unsuccessful sales and underwriting efforts, as well as all indirect costs, are expensed as incurred.
Premium deficiency testing is performed annually and generally reviewed quarterly. Such testing involves the use of assumptions including the anticipation of investment income to determine if anticipated future policy premiums are adequate to recover all DAC and related claims, benefits and expenses. To the extent a premium deficiency exists, it is recognized immediately by a charge to the consolidated statement of operations and a corresponding reduction in DAC. If the premium deficiency is greater than unamortized DAC, a loss (and related liability) is recorded for the excess deficiency.
Short Duration Contracts
Acquisition costs relating to extended service contracts, vehicle service contracts, mobile device protection, credit insurance, lender-placed homeowners insurance and flood, multifamily housing and manufactured housing insurance are amortized over the term of the contracts in relation to premiums earned. These acquisition costs consist primarily of advance commissions paid to agents.
Long Duration Contracts
Acquisition costs for pre-funded funeral (“preneed”) life insurance policies issued prior to 2009, final need insurance policies and certain life insurance policies no longer offered are deferred and amortized in proportion to actual and anticipated future premiums over the premium-paying period. These acquisition costs consist primarily of first year commissions paid to agents.
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For preneed investment-type annuities, preneed life insurance policies with discretionary death benefit growth issued after January 1, 2009, universal life insurance policies, and investment-type annuities no longer offered, DAC is amortized in proportion to the present value of estimated gross profits from investment, mortality, expense margins and surrender charges over the estimated life of the policy or contract. Estimated gross profits include the impact of unrealized gains or losses on investments as if these gains or losses had been realized, with corresponding credits or charges included in AOCI. The assumptions used for the estimates are consistent with those used in computing the policy or contract liabilities.
Property and Equipment
Property and equipment are reported at cost less accumulated depreciation. Depreciation is calculated on a straight-line basis over estimated useful lives with a maximum of 39.5 years for buildings, a maximum of seven years for furniture and a maximum of five years for equipment. Expenditures for maintenance and repairs are charged to income as incurred. Expenditures for improvements are capitalized and depreciated over the remaining useful life of the asset.
Property and equipment also include capitalized software costs, comprised of purchased software as well as certain internal and external costs incurred during the application development stage that directly relate to obtaining, developing or upgrading internal use software. Such costs are capitalized and amortized using the straight-line method over their estimated useful lives, not to exceed 15 years. Property and equipment are assessed for impairment when impairment indicators exist.
Goodwill
Goodwill represents the excess of acquisition costs over the net fair value of identifiable assets acquired and liabilities assumed in a business combination. Goodwill is deemed to have an indefinite life and is not amortized, but rather is tested at least annually for impairment. The Company performs the annual goodwill impairment test as of October 1 each year, or more frequently if indicators of impairment exist. Such indicators include: a significant adverse change in legal factors, an adverse action or assessment by a regulator, unanticipated competition, loss of key personnel or a significant decline in the Company’s expected future cash flows due to changes in company-specific factors or the broader business climate. The evaluation of such factors requires considerable management judgment.
Goodwill is tested for impairment at the reporting unit level, which is either at the operating segment or one level below, if that component is a business for which discrete financial information is available and segment management regularly reviews such information. Components within an operating segment can be aggregated into one reporting unit if they have similar economic characteristics.
At the time of the annual goodwill test, the Company has the option to first assess qualitative factors to determine whether it is necessary to perform a quantitative goodwill impairment test. The Company is required to perform an additional quantitative step if it determines qualitatively that it is more likely than not (likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount, including goodwill. Otherwise, no further testing is required.
If the Company determines that it is more likely than not that the reporting unit’s fair value is less than the carrying value, or otherwise elects to perform the quantitative testing, the Company compares the estimated fair value of the reporting unit with its net book value. If the reporting unit’s estimated fair value exceeds its net book value, goodwill is deemed not to be impaired. If the reporting unit’s net book value exceeds its estimated fair value, an impairment loss will be recognized for the amount by which the reporting unit’s carrying amount exceeds its fair value, not to exceed the carrying amount of goodwill in that reporting unit. Refer to Note 15 for further details on goodwill impairment testing for 2020.
Other Intangible Assets
Intangible assets that have finite lives, including but not limited to, customer contracts, customer relationships and marketing relationships, are amortized over their estimated useful lives based on the pattern in which the intangible asset is consumed, which may be other than straight-line. Estimated useful lives of finite intangible assets are required to be reassessed on at least an annual basis. For intangible assets with finite lives, impairment is recognized if the carrying amount is not recoverable and exceeds the fair value of the other intangible asset. Generally other intangible assets with finite lives are only tested for impairment if there are indicators of impairment (“triggers”) identified. Triggers include, but are not limited to, a significant adverse change in the extent, manner or length of time in which the intangible asset is being used or a significant adverse change in legal factors or in the business climate that could affect the value of the other intangible asset.
VOBA represents the value of expected future profits in unearned premium for insurance contracts acquired in an acquisition. For vehicle service contracts and extended service contracts, such as those purchased in connection with the TWG acquisition, the amount is determined using estimates, for premium earnings patterns, paid loss development patterns, expense loads and discount rates applied to cash flows that include a provision for credit risk. The amount determined represents the purchase price paid to the seller for producing the business. For vehicle service contracts and extended service contracts, VOBA is amortized consistent with the premium earning patterns of the underlying in-force contracts. For limited payment policies, preneed life insurance policies, universal life policies and annuities, VOBA is determined using estimates for mortality, lapse,
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maintenance expenses, investment returns and other applicable purchase assumptions at the date of purchase and is amortized over the expected life of the policies. VOBA is tested at least annually in the fourth quarter for recoverability.
Amortization expense and impairment charges, as relevant, are included in underwriting, general and administrative expenses in the consolidated statements of operations.
Other Assets
Other assets consist primarily of dealer loans, investments in unconsolidated entities, inventory associated with the Company’s mobile protection business and prepaid items. Dealer loans are carried at unpaid principal balances, adjusted for amortization of premium or discount, less allowance for expected credit losses. Dealer loans are comprised of loans to producers of reinsured warranty contract sales. The full carrying values of dealer loans are secured by the producers’ interest in the future profits in the reinsured business. The Company accounts for investments in unconsolidated entities using the equity method of accounting since the Company can exert significant influence over the investee but does not have effective control over the investee. The Company’s equity in the net income (loss) from equity method investments is recorded as income (loss) with a corresponding increase (decrease) in the investment. Judgment regarding the level of influence over each equity method investee includes considering factors such as ownership interest, board representation and policy making decisions. In applying the equity method, the Company uses financial information provided by the investee, which may be received on a lag basis of up to three months.
Separate Accounts
Assets and liabilities associated with separate accounts relate to premium and annuity considerations for variable life and annuity products for which the contract-holder, rather than the Company, bears the investment risk. Separate account assets (with matching liabilities) are reported at fair value. Revenues and expenses related to the separate account assets and liabilities, to the extent of benefits paid or provided to the separate account policyholders, are excluded from the amounts reported in the accompanying consolidated statements of operations because the underlying accounts involve investment-type annuity contracts and/or are subject to reinsurance.
Reserves
Reserves are established using generally accepted actuarial methods and reflect judgments about expected future premium and claim payments. Factors used in their calculation include experience derived from historical claim payments, expected future premiums and actuarial assumptions. Calculations incorporate assumptions about the incidence of incurred claims, the extent to which all claims have been reported, reporting lags, expenses, inflation rates, future investment earnings, internal claims processing costs and other relevant factors. The estimation of reserves includes an element of uncertainty given that management is using historical information and methods to project future events and reserve outcomes.
The recorded reserves represent the Company’s best estimate at a point in time of the ultimate costs of settlement and administration of a claim or group of claims based upon actuarial assumptions and projections using facts and circumstances known at the time of calculation. The adequacy of reserves may be impacted by future trends in claims severity, frequency, judicial theories of liability and other factors. These variables are affected by both external and internal events, including but not limited to: changes in the economic cycle, inflation, changes in repair costs, natural or human-made catastrophes, judicial trends, legislative changes and claims handling procedures.
Many of these items are not directly quantifiable and not all future events can be anticipated when reserves are established. Reserve estimates are refined as experience develops. Adjustments to reserves, both positive and negative, are reflected in the consolidated statement of operations in the period in which such estimates are updated. Because establishment of reserves is an inherently complex process involving significant judgment and estimates, there can be no certainty that future settlement amounts for claims incurred through the financial reporting date will not vary from reported claims reserves. Future loss development could require reserves to be increased or decreased, which could have a material effect on the Company’s earnings in the periods in which such increases or decreases are made. However, based on information currently available, the Company believes its reserve estimates are adequate.
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The following table provides reserve information as of December 31, 2020 and 2019:
| December 31, 2020 | December 31, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||
| Claims and Benefits Payable | Claims and Benefits Payable | ||||||||||||||||||||||||||||||||||||||||||||||
| Future Policy Benefits and Expenses | Unearned Premiums | Case Reserves | Incurred But Not Reported Reserves | Future Policy Benefits and Expenses | Unearned Premiums | Case Reserves | Incurred But Not Reported Reserves | ||||||||||||||||||||||||||||||||||||||||
| Long Duration Contracts: | |||||||||||||||||||||||||||||||||||||||||||||||
| Global Preneed (1) | $ | 6,582.4 | $ | 0.8 | $ | 31.0 | $ | 6.8 | $ | 6,327.6 | $ | 25.4 | $ | 22.3 | $ | 7.6 | |||||||||||||||||||||||||||||||
| Disposed and runoff businesses | 3,479.6 | 17.8 | 673.0 | 69.5 | 3,382.3 | 19.2 | 646.0 | 59.2 | |||||||||||||||||||||||||||||||||||||||
| All other | — | — | — | — | 97.4 | 0.1 | 1.7 | 1.4 | |||||||||||||||||||||||||||||||||||||||
| Short Duration Contracts: | |||||||||||||||||||||||||||||||||||||||||||||||
| Global Lifestyle | — | 15,817.9 | 133.7 | 393.9 | — | 15,115.7 | 136.6 | 359.5 | |||||||||||||||||||||||||||||||||||||||
| Global Housing | — | 1,467.4 | 180.0 | 471.9 | — | 1,436.0 | 171.2 | 480.4 | |||||||||||||||||||||||||||||||||||||||
| Disposed and runoff businesses | — | 4.1 | 575.2 | 124.5 | — | 7.2 | 647.4 | 154.4 | |||||||||||||||||||||||||||||||||||||||
| Total | $ | 10,062.0 | $ | 17,308.0 | $ | 1,592.9 | $ | 1,066.6 | $ | 9,807.3 | $ | 16,603.6 | $ | 1,625.2 | $ | 1,062.5 |
(1)Global Preneed future policy benefits and expenses include reserves estimated using traditional reserving models calculated as the present value of future benefits to policyholders and related expenses, less the present value of future net premiums, of $2.18 billion and $2.29 billion as of December 31, 2020 and 2019, respectively. The remaining future policy benefits and expenses primarily represent investment-type annuities and life insurance policies with discretionary benefits with account-value based reserves.
Long Duration Contracts
The Company’s long duration contracts that are actively being sold are preneed life insurance policies and annuity contracts.
Future policy benefits and expense reserves for preneed investment-type annuities and preneed life insurance policies with discretionary death benefits, along with universal life insurance policies, variable life insurance policies and investment-type annuity contracts of the disposed and runoff businesses, consist of policy account balances before applicable surrender charges and certain deferred policy initiation fees that are being recognized in income over the terms of the policies. Policy benefits charged to expense during the period include amounts paid in excess of policy account balances and interest credited to policy account balances. Unearned revenue reserves for the preneed life insurance contracts represent the balance of the excess of gross premiums over net premiums that is still to be recognized in future years’ income in a constant relationship to estimated gross profits.
Future policy benefits and expense reserves for other preneed life insurance contracts are equal to the present value of future benefits to policyholders and related expenses less the present value of future net premiums. Reserve assumptions are selected using best estimates for inflation, mortality, margins and discount rates which are locked in unless a premium deficiency exists. These assumptions reflect current trends, are based on Company experience and include provision for adverse deviation. An unearned revenue reserve is also recorded for these contracts and represents the balance of the excess of gross premiums over net premiums that is still to be recognized in future years’ income in a constant relationship to insurance in force.
Future policy benefits and expense reserves for policies fully covered by reinsurance and certain life, annuity, group life conversion, and medical insurance policies no longer offered are equal to the present value of future benefits to policyholders plus related expenses less the present value of future net premiums. These amounts are estimated based on assumptions as to the discount, inflation, mortality, morbidity and withdrawal rates as well as other assumptions that are based on the Company’s experience. These assumptions reflect anticipated trends and include provisions for adverse deviations.
Claims and benefits payable for policies fully covered by reinsurance and certain life, annuity, group life conversion, and medical insurance policies no longer offered are equal to the present value of future benefit payments and related expenses. These amounts are estimated based on assumptions as to inflation, mortality, morbidity and discount rates as well as other assumptions that are based on the Company’s experience.
Changes in the estimated liabilities are reported as a charge or credit to policyholder benefits as the estimates are updated.
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Short Duration Contracts
The Company’s short duration contracts include products and services in the Global Housing and Global Lifestyle segments, and Assurant Employee Benefits policies fully covered by reinsurance and certain medical policies no longer offered. The main product lines for Global Housing include lender-placed homeowners and flood, Multifamily Housing and manufactured housing. For Global Lifestyle, the main product lines include extended service contracts, vehicle services contracts, mobile device protection and credit insurance. For short duration contracts, claims and benefits payable reserves are recorded when insured events occur. The liability is based on the expected ultimate cost of settling the claims. The claims and benefits payable reserves include (1) case reserves for known but unpaid claims as of the balance sheet date; (2) incurred but not reported (“IBNR”) reserves for claims where the insured event has occurred but has not been reported to the Company as of the balance sheet date; and (3) loss adjustment expense reserves for the expected handling costs of settling the claims. Factors used in the calculation include experience derived from historical claim payments and actuarial assumptions including loss development factors and expected loss ratios.
The Company has exposure to asbestos, environmental and other general liability claims arising from its participation in various reinsurance pools from 1971 through 1985. This exposure arose from a short duration contract that the Company discontinued writing many years ago. The Company carries case reserves for these liabilities as recommended by the various pool managers and IBNR reserves. Estimation of these liabilities is subject to greater than normal variation and uncertainty due to the general lack of sufficiently detailed data, reporting delays and absence of a generally accepted actuarial methodology for determining the exposures. There are significant unresolved industry legal issues, including such items as whether coverage exists and what constitutes an occurrence. In addition, the determination of ultimate damages and the final allocation of losses to financially responsible parties are highly uncertain.
Changes in the estimated liabilities are recorded as a charge or credit to policyholder benefits as estimates are updated. Fees paid by the National Flood Insurance Program for processing and adjudication services are reported as a reduction of underwriting, general and administrative expenses.
Debt
The Company reports debt net of acquisition costs, unamortized discount or premium and repurchases. Interest expense related to debt is expensed as incurred. See Note 19 for additional information.
Contingencies
A loss contingency is recorded if reasonably estimable and probable. The Company establishes reserves for these contingencies at the best estimate, or if no one estimated amount within the range of possible losses is more probable than any other, the Company records an estimated reserve at the low end of the estimated range. Contingencies affecting the Company primarily relate to legal and regulatory matters, which are inherently difficult to evaluate and are subject to significant changes.
Retirement of Treasury Stock
The Company accounts for the retirement of repurchased shares using the par value method. This method of accounting allocates the cost of repurchased and retired shares between paid-in capital and retained earnings by comparing the price of shares repurchased to the original issue proceeds of those shares. When the repurchase price of the shares is greater than the original issue proceeds, the excess is charged to retained earnings. The Company uses an average cost method to determine the cost of the repurchased shares to be retired. The Company retired $5.30 billion of treasury stock in the fourth quarter of 2020.
Premiums
Long Duration Contracts
The Company’s long duration contracts that are actively being sold are preneed life insurance policies. The preneed life insurance policies include provisions for death benefit growth that are either pegged to changes in the Consumer Price Index or determined periodically at the discretion of management. For preneed life insurance policies issued prior to 2009, revenues are recognized when due from policyholders. For preneed life insurance policies with discretionary death benefits and preneed investment-type annuity contracts, revenues consist of charges assessed against policy balances. Revenues are recognized ratably as earned income over the premium-paying periods of the policies for group worksite insurance products.
For traditional life insurance contracts previously sold by the Global Preneed business, revenue is recognized when due from policyholders.
For universal life insurance and investment-type annuity contracts previously sold by the Global Lifestyle segment, revenues consist of charges assessed against policy balances.
Premiums for the Company’s previously sold long-term care insurance and traditional life insurance contracts are recognized as revenue when due from the policyholder. For universal life insurance and investment-type annuity contracts,
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revenues consist of charges assessed against policy balances. All of these premiums (related to the Company’s former Fortis Financial Group and Long-Term Care businesses that were previously sold) are ceded.
Short Duration Contracts
The Company’s short duration contracts revenue is recognized over the contract term in proportion to the amount of insurance protection provided. The Company’s short duration contracts primarily include extended service contracts, vehicle services contracts, mobile device protection, credit insurance, lender-placed homeowners and flood insurance, Multifamily Housing, manufactured housing, the Assurant Employee Benefits policies fully covered by reinsurance (group term life, group disability, dental and vision) and individual medical contracts no longer offered.
Reinsurance reinstatement premiums are recognized in the same period as the loss event that gave rise to the reinstatement premium and are netted against net earned premiums in the consolidated statements of operations.
Fees and Other Income
The Company derives fees and other income from providing administrative services, mobile related services and mortgage property risk management services. These fees are recognized as the services are performed.
The Company reports revenues related to long duration and short duration insurance contracts as premiums, including insurance contracts written by non-insurance affiliates, such as certain extended service contracts, consistent with the Company’s principal business of insurance. Components of consideration paid by the insured are generally not separated as fees and other income. However, when a component of the consideration paid by an insured both does not involve fulfilling the insurance obligation (in that it does not involve acquisition, claims or other administrative aspects of the insurance contract) and the related service could have been written as a separate contract, it is reported in fees and other income.
Preneed life insurance policies with discretionary death benefits are considered universal life-type contracts for which consideration paid is not reported as premiums. Therefore, income earned is presented within fees and other income.
Dealer obligor service contracts are sales in which an unaffiliated retailer/dealer is the obligor and the Company provides administrative services only. For these contract sales, the Company recognizes administrative fee revenue on a pro-rata basis over the terms of the service contract which correspond to the period in which the services are performed.
The unexpired portion of fee revenues are deferred and amortized over the term of the contracts. These unexpired amounts are reported in accounts payable and other liabilities on the consolidated balance sheets.
Underwriting, General and Administrative Expenses
Underwriting, general and administrative expenses consist primarily of commissions, premium taxes, licenses, fees, salaries and personnel benefits and other general operating expenses and are expensed as incurred.
Income Taxes
Current federal income taxes are recognized based upon amounts estimated to be payable or recoverable as a result of taxable operations for the current year. Deferred income taxes are recorded for temporary differences between the financial reporting basis and income tax basis of assets and liabilities, based on enacted tax laws and statutory tax rates applicable to the periods in which the Company expects the temporary differences to reverse. A valuation allowance is established for deferred tax assets when it is more likely than not that an amount will not be realized. The impact of changes in tax rates on all deferred tax assets and liabilities are required to be reflected within income on the enactment date, regardless of the financial statement component where the deferred tax originated.
The Company classifies net interest expense related to tax matters and any applicable penalties as a component of income tax expense.
Earnings Per Common Share
Basic earnings per common share is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted earnings per common share reflects the potential dilution that could occur if securities or other contracts that can be converted into common stock were exercised as of the end of the period, if dilutive. Restricted stock and restricted stock units that have non-forfeitable rights to dividends or dividend equivalents are included in calculating basic and diluted earnings per common share under the two-class method.
Comprehensive Income
Comprehensive income is comprised of net income, net unrealized gains and losses on foreign currency translation, net unrealized gains and losses on securities classified as available for sale, and expenses for pension and post-retirement plans, less deferred income taxes.
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Deferred Gain on Disposal of Businesses
In March 2016, the Company sold its Assurant Employee Benefits business using coinsurance contracts. In April 2001, the Company sold its Fortis Financial Group business using a modified coinsurance contract. In March 2000, the Company sold its Long-Term Care business using a coinsurance contract. Since the form of these sales did not discharge the Company’s primary liability to the insureds, the gain on these disposals was deferred and reported as a liability. The liability is amortized and recognized as revenue over the estimated life of the contracts’ terms. The Company reviews and evaluates the estimates affecting the deferred gain on disposal of the respective businesses at least annually, and adjusts the pattern of recognition accordingly.
Leases
The Company records expenses for operating leases on a straight-line basis over the lease term. The Company also accounts for the lease liability, deferred rent liability and right of use assets consistent with its accounting policy as referenced below.
Recent Accounting Pronouncements – Adopted
Measurement of credit losses on financial instruments held at amortized cost (“CECL”): In June 2016, the Financial Accounting Standards Board (“FASB”) issued amended guidance on reporting credit losses for assets held at amortized cost and available for sale debt securities. For assets held at amortized cost, the amended guidance eliminates the probable recognition threshold and instead requires an entity to reflect the current estimate of all expected credit losses. For available for sale debt securities, credit losses are measured in a manner similar to accounting requirements in effect prior to adoption; however, the amended guidance requires that credit-related impairment losses be presented as an allowance rather than as a permanent impairment. The amendments affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, premium receivables, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The Company adopted this standard as of January 1, 2020. Refer to Note 5 for additional information.
Customer’s accounting for implementation costs incurred in a cloud computing arrangement that is a service contract: In August 2018, the FASB issued guidance aligning the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. For these arrangements, the guidance also limits the period to expense capitalized implementation costs based on the term of the hosting agreement, including the noncancellable period of the arrangement plus periods covered by options to extend the arrangement that are reasonably certain of exercise. The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments. The Company adopted the guidance on its effective date of January 1, 2020 with no material impact on its financial position and results of operations.
Lease accounting: On January 1, 2019 the Company adopted the new lease guidance on a modified retrospective basis and therefore did not restate comparative periods. The new guidance requires that entities recognize assets and liabilities associated with leases on the balance sheet and disclose key information about leasing arrangements. The Company and its subsidiaries lease office space and equipment under operating lease arrangements for which the Company is the lessee. Therefore, the primary change at the time of adoption involved the recognition of right-of-use assets and lease liabilities related to operating leases with terms in excess of 12 months in which the Company is the lessee. Upon adoption, the Company elected the package of practical expedients permitted under the transition guidance, which allowed the carryforward of 1) historical lease classifications, 2) the prior assessment of whether a contract is or contains a lease, and 3) initial direct costs for any leases that existed prior to adoption. As of January 1, 2019, the new lease liability and right-of-use asset was $85.3 million and $78.0 million, respectively. Deferred rent liability of $7.3 million, which was required under the previous guidance, was reversed. There was an immaterial impact on equity upon adoption.
Recent Accounting Pronouncements – Not Yet Adopted
Targeted improvements to the accounting for long-duration contracts: In August 2018, the FASB issued guidance that provides targeted improvements to the accounting for long-duration contracts. The guidance includes the following primary changes: assumptions supporting benefit reserves will no longer be locked-in but must be updated at least annually with the impact of changes to the liability reflected in earnings (except for discount rates); the discount rate assumptions will be based on upper-medium grade (low credit risk) fixed-income instrument yield instead of the earnings rate of invested assets; the discount rate must be evaluated at each reporting date and the impact of changes to the liability estimate as a result of updating the discount rate assumption is required to be recognized in other comprehensive income; the provision for adverse deviation is eliminated; and premium deficiency testing is eliminated. Other noteworthy changes include the following: differing models for amortizing deferred acquisition costs will become uniform for all long-duration contracts based on a constant rate over the expected term of the related in-force contracts; all market risk benefits associated with deposit contracts must be reported at fair value with changes reflected in income except for changes related to credit risk which will be recognized in other
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comprehensive income; and disclosures will be expanded to include disaggregated roll forwards of the liability for future policy benefits, policyholder account balances, market risk benefits, separate account liabilities, and deferred acquisition costs, as well as information about significant inputs, judgments, assumptions and methods used in measurement.
The guidance is effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. Early adoption is permitted. Generally, the amendments are applied retrospectively as of the beginning of the earliest period presented with two transition options available for changing the assumptions.
This guidance will apply to the Company’s preneed life insurance policies, as well as its annuity and universal life products (which are no longer offered and are in runoff). The Company is evaluating the requirements of this guidance and the potential impact on the Company’s financial position and results of operations.
Simplifying the Accounting for Income Taxes: In December 2019, the FASB issued new guidance to simplify the accounting for income taxes by removing certain exceptions to the general principles and also simplification of areas such as franchise taxes, step-up in tax basis goodwill, separate entity financial statements and interim recognition of enactment of tax laws or rate changes. The standard will be effective for our annual reporting periods beginning after December 15, 2020, including interim reporting periods within those fiscal years. The Company does not expect any material impact on its financial position and results of operations upon adoption in 2021.
Facilitation of the Effects of Reference Rate Reform on Financial Reporting: In March 2020, the FASB issued guidance which provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued.
The relief is applicable only to legacy contracts if the amendments made to the agreements are solely for reference rate reform activities. The provisions must be applied consistently for all relevant transactions other than derivatives, which may be applied at a hedging relationship level. The guidance is effective upon issuance. The guidance on contract modifications is applied prospectively from any date beginning March 12, 2020. Unlike other topics, the provisions of this update are only available until December 31, 2022, when the reference rate replacement activity is expected to have been completed.
As certain published LIBOR periods are expected to be discontinued after 2021, the Company is evaluating the provisions of this new accounting guidance and the impact to debt, investments and derivatives that have references to LIBOR and the subsequent transition to alternative reference rates.
Improvements to Convertible Instruments and Contracts in an Entity’s Own Equity: In August 2020, the FASB issued guidance that simplifies accounting for convertible instruments by removing major separation models required under current GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument and more convertible preferred stock as a single equity instrument with no separate accounting for embedded conversion features. The guidance removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more contracts in an entity’s own equity to qualify for it. The guidance also simplifies the diluted earnings per common share (“EPS”) calculation in the areas of convertible instruments and instruments that qualify for the derivatives scope exception for contracts in an entity’s own equity to address accounting for the guidance changes to the classification, recognition and measurement.
This guidance will be effective for the Company beginning January 1, 2022. Early adoption is permitted. The Company is evaluating the requirements of this guidance and the potential impact on its financial position and results of operations.
3. Acquisitions
HYLA
On December 1, 2020, the Company acquired HYLA, Inc. (“HYLA”), a leading provider of smartphone software, trade-in and upgrade services. The total consideration was $348.8 million, comprised of a base purchase price of $325.0 million and purchase price adjustments of $23.8 million, including excess cash in the business. The transaction resulted in provisional estimates of $32.5 million in net assets, $226.8 million of goodwill and $89.5 million of other intangible assets (net of deferred tax liability of $23.7 million), which are primarily customer relationships and software amortizable over 15 and 6 years, respectively.
American Financial & Automotive Services
On May 1, 2020, the Company acquired American Financial & Automotive Services, Inc. (“AFAS”), a provider of auto finance and insurance products and services, including vehicle service contracts, guaranteed asset protection insurance and other ancillary products. The total consideration was $176.9 million, comprised of a base purchase price of $157.5 million, contingent consideration of $1.5 million and other purchase price adjustments of $17.9 million, including excess cash in the
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business. The transaction resulted in provisional estimates of $2.9 million in net liabilities, $104.0 million of goodwill and $75.8 million of other intangible assets, which are primarily dealer relationships amortizable over 15 years.
TWG
On May 31, 2018, the Company acquired TWG for a total enterprise value of $2.47 billion.
Acquisition-related Costs
Transaction costs related to the TWG acquisition were expensed as incurred. These costs included advisory, legal, accounting, valuation and other professional and consulting fees, as well as general and administrative costs. Transaction costs incurred for the years ended December 31, 2019 and 2018 were $0.6 million and $30.6 million, respectively, which were reported through the underwriting, general and administrative expenses line item in the consolidated statements of operations. There were no transaction costs incurred for the year ended December 31, 2020.
As a part of the ongoing integration of operations, the Company has incurred, and will continue to incur, costs associated with restructuring systems, processes and workforce. These costs include such items as severance, retention, facilities and consulting. Integration costs incurred for the years ended December 31, 2020, 2019 and 2018 were $19.3 million, $27.6 million and $29.8 million, respectively, which were reported through the underwriting, general and administrative expenses line item in the consolidated statements of operations.
Financial Results
The following table summarizes the results of the acquired TWG operations from June 1, 2018 through December 31, 2018 that have been included within the Company’s consolidated statements of operations (based on how TWG was allocated to the Company’s reportable segments).
| June 1, 2018 to December 31, 2018 | |||||||||||||||||
| Global Lifestyle (1) | Corporate and Other (2) | Total | |||||||||||||||
| Total revenues | $ | 1,536.1 | $ | (8.4) | $ | 1,527.7 | |||||||||||
| Net income attributable to stockholders | $ | 84.0 | $ | (21.6) | $ | 62.4 |
(1)The TWG net income allocated to the Global Lifestyle segment included $9.3 million after-tax of client recoverables related to a contract termination payment.
(2)The TWG net income allocated to Corporate and Other included $11.0 million of net losses as a result of the remeasurement of the Argentina subsidiary’s non-U.S. Dollar denominated monetary assets and liabilities, $10.7 million integration expenses and $8.4 million net realized losses on investments, partially offset by income tax benefits, which include a $5.7 million tax structuring benefit. Refer to Note 2 for further information on the net losses due to remeasurement and Note 12 for further information on the income tax benefit.
Unaudited Supplemental Pro Forma Consolidated Financial Information
The following table provides unaudited supplemental pro forma consolidated financial information for the year ended December 31, 2018, as if TWG had been acquired as of January 1, 2017. The unaudited supplemental pro forma consolidated financial information is presented solely for informational purposes and is not necessarily indicative of the consolidated results of operations that might have been achieved had the transaction been completed as of the date indicated, nor are they meant to be indicative of any anticipated consolidated results of operations that the combined company will experience in the future.
| Year Ended December 31, 2018 | |||||
| Total revenues | $ | 9,108.0 | |||
| Net income attributable to stockholders | $ | 333.1 | |||
| Basic earnings per common share | $ | 4.95 | |||
| Diluted earnings per common share | $ | 4.93 |
F-22
4. Dispositions and Exit Activities
Dispositions
Sale of Collateralized Loan Obligation Asset Management Platform
In July 2020, the Company sold its CLO asset management platform for $20.0 million in cash consideration, resulting in a net gain of $18.3 million, including costs to sell, for the year ended December 31, 2020, reported through underwriting, general and administrative expenses in the consolidated statements of operations. The Company incurred additional exit related expenses of $7.5 million for the year ended December 31, 2020, that were also included in underwriting, general and administrative expenses in the consolidated statements of operations. Prior to the sale, the CLOs were VIEs that the Company consolidated, as described in Note 9. The Company retained its direct investments in the CLOs following the sale, but deconsolidated the CLOs in third quarter 2020 since it no longer acts as collateral manager and, as a result, no longer has the power to control the CLO entities.
Sale of Investment in Iké
In 2014, the Company made an approximately 40% investment in Iké Grupo, Iké Asistencia and certain of their affiliates (collectively, “Iké”), a services assistance business, for which the Company paid approximately $110.0 million. At the same time, the Company also entered into a shareholders’ agreement that provided the right to acquire the remainder of Iké from the majority shareholders and the majority shareholders the right to put their interests in Iké to the Company (together, the “put/call”) in mid-2019 at a predetermined price. During 2019, the Company entered into a cooperation agreement with the majority shareholders of Iké to extend the put/call. In January 2020, in lieu of exercising the put/call, the Company entered into a formal agreement to sell its interests in Iké.
In May 2020, the Company completed the sale of its interests in Iké and terminated its put/call obligations recognizing a net loss on sale of $3.9 million pre-tax and $2.9 million after-tax in the second quarter of 2020. Prior to the sale, in 2020, the Company recorded aggregate impairment losses and put/call valuation losses of $22.3 million compared to $163.0 million for the year ended December 31, 2019, which was comprised of a $78.3 million impairment that includes consideration of cumulative foreign currency translation losses of $38.4 million recorded in other comprehensive income and a pre-tax charge of $84.7 million related to the change in value of the put/call for the year ended December 31, 2019. In connection with the anticipated sale, the Company entered into a financial derivative in January 2020 that provided an economic hedge against declines in the Mexican Peso relative to the U.S. Dollar since the purchase price was to be paid in Mexican Pesos. The Company settled its position upon the sale, resulting in a cash inflow of $22.0 million, and net realized (losses) gains on the derivative of $20.3 million during the second quarter of 2020.
In total, the Company recorded net pre-tax charges of $5.9 million and $163.0 million for the years ended December 31, 2020 and 2019, respectively, presented as Iké net losses in the consolidated statements of operations. For the year ended December 31, 2020, total impairment and put/call losses resulted in a tax benefit of $6.7 million; however, this was fully offset by a valuation allowance as the realizability of the tax losses in the related tax jurisdiction is unlikely. There was tax expense of $4.3 million on the income arising on the financial derivative in the second quarter of 2020, as such contract was originated in the U.S. tax jurisdiction. The losses in 2019 generated deferred tax assets of $48.8 million when applying the applicable effective tax rate. The Company recognized a full valuation allowance of the $48.8 million that arose in 2019 and $0.9 million established against the Iké deferred tax asset as of December 31, 2018. As such, after-tax charges of $9.3 million and $163.9 million were recorded for the years ended December 31, 2020 and 2019, respectively.
In connection with the sale, the Company provided financing to Iké Grupo in an aggregate principal amount of $34.0 million (the “Iké Loan”). The Iké Loan matures in May 2025, bears floating interest at a rate equal to three-month LIBOR plus 4.25% per annum payable quarterly and provides for quarterly principal amortization payments through the maturity date. The Iké Loan, which has an outstanding balance of $32.3 million as of December 31, 2020, is classified in other investments in the consolidated balance sheets and interest income is reflected as a component of net investment income in the consolidated statements of operations.
Time Insurance Company
On December 3, 2018, the Company sold Time Insurance Company (“TIC”), a subsidiary of the runoff Assurant Health business, to Haven Holdings, Inc. for cash consideration of $30.9 million. During the year ended December 31, 2018, the Company recorded a gain on the sale of $18.4 million, with $17.7 million classified in underwriting, general and administrative expenses and $0.7 million classified as an offset to net realized losses on investments in the consolidated statements of operations.
F-23
Mortgage Solutions
On August 1, 2018, the Company sold its valuation and field services business (referred to as “Mortgage Solutions”) to Xome, an indirect wholly owned subsidiary of WMIH Corp., for $36.7 million (comprised of $35.0 million cash consideration and a $1.7 million working capital adjustment based on the terms of the transaction agreement) and potential future payments based on revenue retention targets and certain types of new business. The sale included Assurant Services, LLC and its wholly owned subsidiaries Assurant Field Services, Assurant Valuations Originations, Assurant Valuations Default and Assurant Title. The Company entered into a transition services agreement to provide ongoing services for one year for fees approximating the cost of such services. During the year ended December 31, 2018, the Company recorded total pre-tax losses of $40.3 million on the sale. The loss is classified in underwriting, general and administrative expenses in the consolidated statements of operations.
Assurant Health Exit Activities
The Company substantially completed its exit from the health insurance market as of December 31, 2016, a process that began in 2015. Between 2014 and 2016, the Company participated in the reinsurance, risk adjustment and risk corridor programs introduced by the Patient Protection and Affordable Health Care Act of 2010 (“ACA”). In connection with these programs, the Company held a $106.7 million gross risk corridor receivable due to the Company’s participation in the risk corridor program in 2015, which was reduced by a full valuation allowance because payments from the U.S. Department of Health and Human Services were considered unlikely, resulting in no net receivable. In December 2018, the Company subsidiary that held the receivable rights, TIC, was sold to a third party. In connection with the sale, the Company and TIC entered into a participation agreement (the “Participation Agreement”) in which the Company was granted a 100% participation interest in the future claim proceeds, if any, of the risk corridor receivable recovered by TIC.
The collection prospects of the risk corridor receivables began to improve following litigation challenging the legal basis for non-payment under the ACA program. This led to increasing levels of market participant interest in the purchase of the interests in such receivables, despite the remaining uncertainty of the outcome of the pending litigation.
During the fourth quarter of 2019, the Company entered into an agreement with a third-party in which it received $26.7 million in cash as consideration for all future claim proceeds, less 20% of cash received in excess of the initial consideration of $26.7 million, which would be retained by the Company. The upfront cash proceeds received by the Company in 2019 were non-recourse. The Company deemed the amount to be indicative of recovery of its interests in the risk corridor receivables and accordingly adjusted the valuation allowance by $26.7 million, through a reduction to underwriting, general and administrative expenses in the consolidated statement of operations for the year ended December 31, 2019 with a corresponding increase in other assets in the consolidated balance sheet as of December 31, 2019.
During the fourth quarter of 2020, the U.S. Department of Health and Human Services paid $101.4 million, net of legal and other costs, for TIC’s risk corridor receivable, which was remitted to the Company pursuant to the Participation Agreement. The Company remitted $86.5 million to the third party and retained $14.9 million related to its 20% share of the excess proceeds pursuant to the agreement. The Company adjusted the valuation allowance for the additional $74.7 million, as partially offset by the incremental payment to the third party for the additional proceeds of $59.8 million, which is accounted for similar to interest expense on the initial consideration (both recorded through underwriting, general and administrative expenses).
5. Allowance for Credit Losses
The Company adopted the expected credit loss standard using a modified retrospective method for all financial assets measured at amortized cost. Results for the reporting periods beginning January 1, 2020 and after are presented under such method while prior period amounts are reported in accordance with previous applicable GAAP. The Company recorded a decrease of $20.4 million to retained earnings, net of tax, as of January 1, 2020 for the cumulative impact of adoption.
The following table illustrates the impact of adoption:
F-24
| As of January 1, 2020 | |||||||||||||||||
| Prior to adoption | As reported on adoption | Impact of adoption | |||||||||||||||
| Financial assets, at amortized cost: | |||||||||||||||||
| Reinsurance recoverables | $ | 9,593.4 | $ | 9,570.9 | $ | (22.5) | |||||||||||
| Premiums and accounts receivable, net | 1,692.8 | 1,691.0 | (1.8) | ||||||||||||||
| Commercial mortgage loans on real estate | 815.0 | 813.4 | (1.6) | ||||||||||||||
| Total | $ | 12,101.2 | $ | 12,075.3 | (25.9) | ||||||||||||
| Tax effect | 5.5 | ||||||||||||||||
| Cumulative effect of adoption | $ | (20.4) |
The total allowance for credit losses for the financial assets was $52.5 million, $46.2 million and $20.3 million as of December 31, 2020, January 1, 2020 (date of adoption) and December 31, 2019, respectively.
For the year ended December 31, 2020, the net increase in the allowance for credit losses that reduced pre-tax income was $12.0 million, consisting of increases in the allowance for credit losses of $15.9 million, partially offset by recoveries of $3.9 million, principally related to account write-downs established prior to implementation of the new standard. The net increase is classified in the consolidated statements of operations as follows: $3.6 million is included in underwriting, general and administrative expenses and $8.4 million included in net realized losses on investments, comprised of $5.5 million related to commercial mortgage loans on real estate, $1.5 million related to available for sale fixed maturity securities and $1.4 million related to the Iké Loan (as referenced in Note 4).
Reinsurance Recoverables
As part of the Company’s overall risk and capacity management strategy, reinsurance is used to mitigate certain risks underwritten by various business segments. The Company is exposed to the credit risk of reinsurers, as the Company remains liable to insureds regardless of whether related reinsurance recoverables are collected. As of December 31, 2020 and 2019, reinsurance recoverables totaled $9.84 billion and $9.59 billion, respectively, the majority of which are protected from credit risk by various types of collateral or other risk mitigation mechanisms, such as trusts, letters of credit or by withholding the assets in a modified coinsurance or funds withheld arrangement.
The Company utilizes external credit ratings published by S&P Global Ratings, a division of S&P Global Inc., at the balance sheet date when determining the allowance. Where rates are not available, the Company assigns default credit ratings based on if the reinsurer is authorized or unauthorized. Of the total recoverables subject to the allowance, 71% were rated A- or better, 23% were rated BBB or BB, and 6% were not rated based on the Company’s analysis and assigned ratings.
The following table presents the changes in the CECL allowance for reinsurance recoverables by portfolio segment for the year ended December 31, 2020.
| Global Lifestyle | Global Housing | Global Preneed | Corporate and Other | Total | |||||||||||||||||||||||||
| Balance, December 31, 2019 | $ | 2.5 | $ | 0.3 | $ | — | $ | — | $ | 2.8 | |||||||||||||||||||
| Cumulative effect of adoption | 3.9 | 0.7 | 0.2 | 17.7 | 22.5 | ||||||||||||||||||||||||
| Incremental allowance | — | 0.1 | — | 3.2 | 3.3 | ||||||||||||||||||||||||
| Recoveries | (2.5) | — | — | — | (2.5) | ||||||||||||||||||||||||
| Other | — | 0.3 | (0.1) | — | 0.2 | ||||||||||||||||||||||||
| Balance, December 31, 2020 | $ | 3.9 | $ | 1.4 | $ | 0.1 | $ | 20.9 | $ | 26.3 |
For the year ended December 31, 2020, the incremental allowance of $3.3 million was principally due to the reduction of anticipated recoveries upon default following the recent economic impact related to COVID-19. When determining the allowance at December 31, 2020, the Company did not increase default probabilities by reinsurer since there had been no credit rating downgrades or major negative credit indications of the Company’s reinsurers that has impacted rating. The allowance may be increased and income reduced in future periods if there are future ratings downgrades or other measurable information supporting an increase in reinsurer default probabilities, including, but not limited to, collateral reductions.
Premium and Accounts Receivables
The Company is exposed to credit risk from premiums and other accounts receivables. For premiums receivable, the exposure to loss upon a default is often mitigated by the ability to terminate the policy on default and offset the corresponding
F-25
unearned premium liability. The Company has other mitigating offsets from amounts payable on commissions and profit share arrangements when the counterparty to the receivable is a sponsor/agent of the Company’s insurance product.
The following table presents the changes in the allowance for credit losses by portfolio segment for premium and account receivables for the year ended December 31, 2020.
| Global Lifestyle | Global Housing | Global Preneed | Corporate and Other | Total | |||||||||||||||||||||||||
| Balance, December 31, 2019 | $ | 14.2 | $ | 0.2 | $ | 0.5 | $ | 0.4 | $ | 15.3 | |||||||||||||||||||
| Cumulative effect of adoption | 1.3 | 0.5 | — | — | 1.8 | ||||||||||||||||||||||||
| Incremental allowance | 0.9 | 2.9 | — | 0.2 | 4.0 | ||||||||||||||||||||||||
| Recoveries | (1.4) | — | — | — | (1.4) | ||||||||||||||||||||||||
| Write-offs | (5.6) | — | — | — | (5.6) | ||||||||||||||||||||||||
| Foreign currency translation | (0.3) | — | — | — | (0.3) | ||||||||||||||||||||||||
| Balance, December 31, 2020 | $ | 9.1 | $ | 3.6 | $ | 0.5 | $ | 0.6 | $ | 13.8 |
For the year ended December 31, 2020, the incremental allowance of $4.0 million relates to an increase in past due accounts and default factors following the economic impact related to COVID-19 to reflect the expectation that future defaults will exceed historical defaults. There is a risk that income may be reduced in future periods for additional credit losses.
Commercial Mortgage Loans
Upon adoption of the expected credit loss standard on January 1, 2020, the Company increased its allowance for credit losses from $0.6 million to $2.2 million with the after-tax impact of $1.3 million reflected in retained earnings. For the year ended December 31, 2020, the CECL allowance was increased by an additional $5.5 million due to an increase in anticipated default factors following the recent economic impact related to COVID-19. Refer to Notes 2 and 8 for additional information on commercial mortgage loans.
Available for Sale Securities
The Company recorded a $1.5 million allowance for credit losses on fixed maturity securities available for sale for the year ended December 31, 2020. Refer to Note 2 for additional information on available for sale securities.
6. Segment Information
As of December 31, 2020, the Company had four reportable segments, which are defined based on the manner in which the Company’s chief operating decision maker, the Chief Executive Officer (“CEO”), reviews the business to assess performance and allocate resources, and which align to the nature of the products and services offered:
-
Global Lifestyle: provides mobile device solutions and extended service products and related services for consumer electronics and appliances (referred to as “Connected Living”); vehicle protection and related services (referred to as “Global Automotive”); and credit protection and other insurance products (referred to as “Global Financial Services and Other”);
-
Global Housing: provides lender-placed homeowners insurance, lender-placed manufactured housing insurance and lender-placed flood insurance (referred to as “Lender-placed Insurance”); renters insurance and related products (referred to as “Multifamily Housing”); and voluntary manufactured housing insurance, voluntary homeowners insurance and other specialty products (referred to as “Specialty and Other”;
-
Global Preneed: provides pre-funded funeral insurance, final need insurance and related services; and
-
Corporate and Other: includes activities of the holding company, financing and interest expenses, net realized gains (losses) on investments (which includes unrealized gains (losses) on equity securities and changes in fair value of direct investments in collateralized loan obligations), interest income earned from short-term investments held, income (expenses) primarily related to the Company’s frozen benefit plans, amounts related to businesses previously disposed of through reinsurance and the run-off of the Assurant Health business. Corporate and Other also includes goodwill impairments, the foreign currency gains (losses) from remeasurement of monetary assets and liabilities, changes in the fair value of derivative instruments and other expenses related to merger and acquisition activities, as well as other
F-26
highly variable or unusual items other than reportable catastrophes (reportable catastrophe losses, net of reinsurance and client profit sharing adjustments, and including reinstatement and other premiums).
The Company determined its reportable segments using the management approach described in accounting guidance regarding disclosures about segments of an enterprise and related information. These reportable segment groupings are consistent with information used by our chief operating decision maker to assess performance and allocate resources. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. See Note 2 for additional information.
The following tables summarize selected financial information by segment for the periods indicated:
| Year Ended December 31, 2020 | |||||||||||||||||||||||||||||
| Global Lifestyle | Global Housing | Global Preneed | Corporate and Other | Consolidated | |||||||||||||||||||||||||
| Revenues | |||||||||||||||||||||||||||||
| Net earned premiums | $ | 6,442.2 | $ | 1,833.6 | $ | 66.9 | $ | — | $ | 8,342.7 | |||||||||||||||||||
| Fees and other income | 895.4 | 143.7 | 142.5 | 1.1 | 1,182.7 | ||||||||||||||||||||||||
| Net investment income | 194.3 | 72.8 | 282.0 | 25.8 | 574.9 | ||||||||||||||||||||||||
| Net realized losses on investments | — | — | — | (16.2) | (16.2) | ||||||||||||||||||||||||
| Amortization of deferred gains on disposal of businesses (1) | — | — | — | 10.7 | 10.7 | ||||||||||||||||||||||||
| Total revenues | 7,531.9 | 2,050.1 | 491.4 | 21.4 | 10,094.8 | ||||||||||||||||||||||||
| Benefits, losses and expenses | |||||||||||||||||||||||||||||
| Policyholder benefits | 1,412.6 | 852.1 | 284.4 | 0.2 | 2,549.3 | ||||||||||||||||||||||||
| Amortization of deferred acquisition costs and value of business acquired | 3,365.9 | 225.6 | 80.5 | — | 3,672.0 | ||||||||||||||||||||||||
| Underwriting, general and administrative expenses (2) | 2,189.1 | 677.3 | 66.3 | 177.3 | 3,110.0 | ||||||||||||||||||||||||
| Goodwill impairment | — | — | — | 137.8 | 137.8 | ||||||||||||||||||||||||
| Iké net losses | — | — | — | 5.9 | 5.9 | ||||||||||||||||||||||||
| Interest expense | — | — | — | 104.5 | 104.5 | ||||||||||||||||||||||||
| Loss on extinguishment of debt | — | — | — | — | — | ||||||||||||||||||||||||
| Total benefits, losses and expenses | 6,967.6 | 1,755.0 | 431.2 | 425.7 | 9,579.5 | ||||||||||||||||||||||||
| Segment income (loss) before provision (benefit) for income taxes | 564.3 | 295.1 | 60.2 | (404.3) | 515.3 | ||||||||||||||||||||||||
| Provision (benefit) for income taxes | 127.1 | 61.3 | 12.2 | (128.0) | 72.6 | ||||||||||||||||||||||||
| Segment income (loss) after taxes | 437.2 | 233.8 | 48.0 | (276.3) | 442.7 | ||||||||||||||||||||||||
| Less: Net income attributable to non-controlling interest | — | — | — | (0.9) | (0.9) | ||||||||||||||||||||||||
| Net income (loss) attributable to stockholders | 437.2 | 233.8 | 48.0 | (277.2) | 441.8 | ||||||||||||||||||||||||
| Less: Preferred stock dividends | — | — | — | (18.7) | (18.7) | ||||||||||||||||||||||||
| Net income (loss) attributable to common stockholders | $ | 437.2 | $ | 233.8 | $ | 48.0 | $ | (295.9) | $ | 423.1 | |||||||||||||||||||
| Segment assets (3) | $ | 24,360.8 | $ | 4,014.3 | $ | 7,627.0 | $ | 8,647.8 | $ | 44,649.9 |
F-27
| Year Ended December 31, 2019 | |||||||||||||||||||||||||||||
| Global Lifestyle | Global Housing | Global Preneed | Corporate and Other | Consolidated | |||||||||||||||||||||||||
| Revenues | |||||||||||||||||||||||||||||
| Net earned premiums | $ | 6,073.7 | $ | 1,885.1 | $ | 61.2 | $ | — | $ | 8,020.0 | |||||||||||||||||||
| Fees and other income | 1,020.5 | 148.6 | 139.7 | 2.4 | 1,311.2 | ||||||||||||||||||||||||
| Net investment income | 250.8 | 95.2 | 285.3 | 43.7 | 675.0 | ||||||||||||||||||||||||
| Net realized gains on investments | — | — | — | 66.3 | 66.3 | ||||||||||||||||||||||||
| Amortization of deferred gains on disposal of businesses (1) | — | — | — | 14.3 | 14.3 | ||||||||||||||||||||||||
| Total revenues | 7,345.0 | 2,128.9 | 486.2 | 126.7 | 10,086.8 | ||||||||||||||||||||||||
| Benefits, losses and expenses | |||||||||||||||||||||||||||||
| Policyholder benefits | 1,516.2 | 869.5 | 269.0 | — | 2,654.7 | ||||||||||||||||||||||||
| Amortization of deferred acquisition costs and value of business acquired | 3,015.7 | 221.5 | 84.9 | — | 3,322.1 | ||||||||||||||||||||||||
| Underwriting, general and administrative expenses (2) | 2,277.6 | 711.6 | 67.3 | 194.0 | 3,250.5 | ||||||||||||||||||||||||
| Iké net losses | — | — | — | 163.0 | 163.0 | ||||||||||||||||||||||||
| Interest expense | — | — | — | 110.6 | 110.6 | ||||||||||||||||||||||||
| Loss on extinguishment of debt | — | — | — | 31.4 | 31.4 | ||||||||||||||||||||||||
| Total benefits, losses and expenses | 6,809.5 | 1,802.6 | 421.2 | 499.0 | 9,532.3 | ||||||||||||||||||||||||
| Segment income (loss) before provision (benefit) for income taxes | 535.5 | 326.3 | 65.0 | (372.3) | 554.5 | ||||||||||||||||||||||||
| Provision (benefit) for income taxes | 126.2 | 67.6 | 12.8 | (38.9) | 167.7 | ||||||||||||||||||||||||
| Segment income (loss) after taxes | 409.3 | 258.7 | 52.2 | (333.4) | 386.8 | ||||||||||||||||||||||||
| Less: Net income attributable to non-controlling interest | — | — | — | (4.2) | (4.2) | ||||||||||||||||||||||||
| Net income (loss) attributable to stockholders | 409.3 | 258.7 | 52.2 | (337.6) | 382.6 | ||||||||||||||||||||||||
| Less: Preferred stock dividends | — | — | — | (18.7) | (18.7) | ||||||||||||||||||||||||
| Net income (loss) attributable to common stockholders | $ | 409.3 | $ | 258.7 | $ | 52.2 | $ | (356.3) | $ | 363.9 | |||||||||||||||||||
| Segment assets (3) | $ | 22,893.7 | $ | 4,046.1 | $ | 7,440.1 | $ | 9,911.3 | $ | 44,291.2 |
F-28
| Year Ended December 31, 2018 | |||||||||||||||||||||||||||||
| Global Lifestyle | Global Housing | Global Preneed | Corporate and Other | Consolidated | |||||||||||||||||||||||||
| Revenues | |||||||||||||||||||||||||||||
| Net earned premiums | $ | 4,291.8 | $ | 1,806.2 | $ | 58.4 | $ | 0.5 | $ | 6,156.9 | |||||||||||||||||||
| Fees and other income | 891.5 | 283.0 | 131.1 | 2.5 | 1,308.1 | ||||||||||||||||||||||||
| Net investment income | 189.4 | 80.8 | 278.0 | 50.2 | 598.4 | ||||||||||||||||||||||||
| Net realized losses on investments | — | — | — | (62.7) | (62.7) | ||||||||||||||||||||||||
| Amortization of deferred gains on disposal of businesses (1) | — | — | — | 56.9 | 56.9 | ||||||||||||||||||||||||
| Total revenues | 5,372.7 | 2,170.0 | 467.5 | 47.4 | 8,057.6 | ||||||||||||||||||||||||
| Benefits, losses and expenses | |||||||||||||||||||||||||||||
| Policyholder benefits | 1,145.6 | 938.4 | 263.3 | (4.7) | 2,342.6 | ||||||||||||||||||||||||
| Amortization of deferred acquisition costs and value of business acquired | 2,025.8 | 204.5 | 70.5 | — | 2,300.8 | ||||||||||||||||||||||||
| Underwriting, general and administrative expenses (2) | 1,812.6 | 837.1 | 60.1 | 270.6 | 2,980.4 | ||||||||||||||||||||||||
| Interest expense | — | — | — | 100.3 | 100.3 | ||||||||||||||||||||||||
| Total benefits, losses and expenses | 4,984.0 | 1,980.0 | 393.9 | 366.2 | 7,724.1 | ||||||||||||||||||||||||
| Segment income (loss) before provision (benefit) for income taxes | 388.7 | 190.0 | 73.6 | (318.8) | 333.5 | ||||||||||||||||||||||||
| Provision (benefit) for income taxes | 91.0 | 39.2 | 15.9 | (65.2) | 80.9 | ||||||||||||||||||||||||
| Segment income (loss) after taxes | 297.7 | 150.8 | 57.7 | (253.6) | 252.6 | ||||||||||||||||||||||||
| Less: Net income attributable to non-controlling interest | — | — | — | (1.6) | (1.6) | ||||||||||||||||||||||||
| Net income (loss) attributable to stockholders | 297.7 | 150.8 | 57.7 | (255.2) | 251.0 | ||||||||||||||||||||||||
| Less: Preferred stock dividends | — | — | — | (14.2) | (14.2) | ||||||||||||||||||||||||
| Net income (loss) attributable to common stockholders | $ | 297.7 | $ | 150.8 | $ | 57.7 | $ | (269.4) | $ | 236.8 |
(1)The years ended December 31, 2020, 2019 and 2018 included $2.4 million, $13.8 million and $46.9 million, respectively, related to the amortization of deferred gains associated with the 2016 sale of Assurant Employee Benefits. The remaining Assurant Employee Benefits unamortized deferred gain as of December 31, 2020 was $0.2 million.
(2)The year ended December 31, 2019 for Corporate and Other included a $7.4 million loss on assets held for sale associated with an office building previously used as the headquarters for a business in runoff. The years ended December 31, 2020, 2019 and 2018 for Corporate and Other included $7.5 million, $18.4 million and $17.2 million, respectively, of net losses from foreign exchange related to the remeasurement of net monetary assets in Argentina as a result of the classification of Argentina’s economy as highly inflationary beginning July 1, 2018. The years ended December 31, 2019 and 2018 for Corporate and Other included impairment losses of $15.6 million and $20.8 million, respectively, on intangible assets. The year ended December 31, 2018 for Corporate and Other included a $17.7 million gain on the sale of Time Insurance Company and a $40.3 million loss on the sale of Mortgage Solutions.
(3)Segment assets for Global Lifestyle, Global Housing and Global Preneed do not include net unrealized gains on securities attributable to those segments, which are all included within Corporate and Other.
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The Company principally operates in the U.S., as well as Europe, Latin America, Canada and Asia. The following table summarizes selected financial information by geographic location for the years ended or as of December 31, 2020, 2019 and 2018:
| Location | Revenues | Long-lived Assets | |||||||||
| 2020 | |||||||||||
| United States | $ | 8,031.3 | $ | 470.1 | |||||||
| Foreign countries | 2,063.5 | 23.2 | |||||||||
| Total | $ | 10,094.8 | $ | 493.3 | |||||||
| 2019 | |||||||||||
| United States | $ | 7,883.2 | $ | 391.2 | |||||||
| Foreign countries | 2,203.6 | 42.5 | |||||||||
| Total | $ | 10,086.8 | $ | 433.7 | |||||||
| 2018 | |||||||||||
| United States | $ | 6,217.0 | $ | 378.8 | |||||||
| Foreign countries | 1,840.6 | 13.7 | |||||||||
| Total | $ | 8,057.6 | $ | 392.5 |
Revenue is based in the country where the product was sold and the physical location of long-lived assets, which are primarily property and equipment. There are no reportable major customers that accounted for 10% or more of the Company’s consolidated revenues for the years ended December 31, 2020, 2019 or 2018.
The Company’s net earned premiums, fees and other income by segment and product are as follows for the periods indicated:
| Years Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Global Lifestyle: | |||||||||||||||||
| Connected Living (mobile and service contracts) | $ | 3,836.6 | $ | 3,768.4 | $ | 2,800.6 | |||||||||||
| Global Automotive | 3,113.0 | 2,873.6 | 1,909.2 | ||||||||||||||
| Global Financial Services and Other | 388.0 | 452.2 | 473.5 | ||||||||||||||
| Total | $ | 7,337.6 | $ | 7,094.2 | $ | 5,183.3 | |||||||||||
| Global Housing: | |||||||||||||||||
| Lender-placed Insurance | $ | 1,052.5 | $ | 1,109.2 | $ | 1,149.7 | |||||||||||
| Multifamily Housing | 451.6 | 429.2 | 406.1 | ||||||||||||||
| Specialty and Other | 473.2 | 495.3 | 417.3 | ||||||||||||||
| Mortgage Solutions (sold in August 2018) | — | — | 116.1 | ||||||||||||||
| Total | $ | 1,977.3 | $ | 2,033.7 | $ | 2,089.2 | |||||||||||
| Global Preneed | $ | 209.4 | $ | 200.9 | $ | 189.5 |
7. Contract Revenues
The Company partners with clients to provide consumers a diverse range of protection products and services. The Company’s revenues from protection products are accounted for as insurance contracts and are recognized over the term of the insurance protection provided. Revenues from service contracts and sales of products are recognized as the contractual performance obligations are satisfied or the products are delivered. Revenue is measured as the amount of consideration the Company expects to be entitled to in exchange for performing the services or transferring products. If payments are received
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before the related revenue is recognized, the amount is recorded as unearned revenue or advance payment liabilities, until the performance obligations are satisfied or the products are transferred.
The disaggregated revenues from service contracts included in fees and other income on the consolidated statement of operations are $714.1 million, $852.8 million and $693.1 million for Global Lifestyle and $95.6 million, $104.1 million and $241.9 million for Global Housing for the years ended December 31, 2020, 2019 and 2018, respectively.
Global Lifestyle
In the Company’s Global Lifestyle segment, revenues from service contracts and sales of products are primarily from the Company’s Connected Living business. Through partnerships with mobile carriers, the Company provides administrative services related to its mobile device protection products, including program design and marketing strategy, risk management, data analytics, customer support and claims handling, supply chain and service delivery, repair and logistics, and device disposition. Administrative fees are generally billed monthly based on the volume of services provided during the billing period (for example, based on the number of mobile subscribers) with payment due within a short-term period. Each service or bundle of services, depending on the contract, is an individual performance obligation with a standalone selling price. The Company recognizes revenue as it invoices, which corresponds to the value transferred to the customer.
The Company also repairs, refurbishes and then sells mobile and other electronic devices, on behalf of its client, for a bundled per unit fee. The entire processing of the device is considered one performance obligation with a standalone selling price and thus, the per unit fee is recognized when the products are sold. Payments are generally due prior to shipment or within a short-term period.
Global Housing
In the Company’s Global Housing segment, revenues from service contracts and sales of products are primarily from the Company’s Lender-placed Insurance business. Under the Company’s Lender-placed Insurance business, the Company provides loan and claim payment tracking services for lenders. Until the sale of the Mortgage Solutions business in August 2018, the Company previously offered valuation and title services and products across the origination, home equity and default markets, as well as field services, inspection services, restoration and real estate owned asset management services to mortgage servicing clients and investors. The Company generally invoices its customers weekly or monthly based on the volume of services provided during the billing period with payment due within a short-term period. Each service is an individual performance obligation with a standalone selling price. The Company recognizes revenue as it invoices, which corresponds to the value transferred to the customer.
Contract Balances
The receivables and unearned revenue under these contracts were $257.9 million and $89.8 million, respectively, as of December 31, 2020, and $185.0 million and $87.6 million, respectively, as of December 31, 2019. These balances are included in premiums and accounts receivable and the accounts payable and other liabilities, respectively, in the consolidated balance sheets. Revenue from service contracts and sales of products recognized during the years ended December 31, 2020 and 2019 that was included in unearned revenue as of December 31, 2019 and 2018 were $43.3 million and $57.9 million, respectively.
In certain circumstances, the Company defers upfront commissions and other costs in connection with client contracts in excess of one year where the Company can demonstrate future economic benefit. For these contracts, expense is recognized as revenues are earned. The Company periodically assesses recoverability based on the performance of the related contracts. As of December 31, 2020 and 2019, the Company had approximately $13.8 million and $25.8 million, respectively, of such intangible assets that will be expensed over the term of the client contracts.
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8. Investments
The following tables show the cost or amortized cost, allowance for credit losses, gross unrealized gains and losses, and fair value of the Company’s fixed maturity securities as of the dates indicated:
| December 31, 2020 | |||||||||||||||||||||||||||||
| Cost or Amortized Cost | Allowance for Credit Losses | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||||||||||||||
| Fixed maturity securities: | |||||||||||||||||||||||||||||
| U.S. government and government agencies and authorities | $ | 98.7 | $ | — | $ | 6.0 | $ | — | $ | 104.7 | |||||||||||||||||||
| States, municipalities and political subdivisions | 287.9 | — | 35.3 | (0.1) | 323.1 | ||||||||||||||||||||||||
| Foreign governments | 886.3 | — | 154.2 | (0.6) | 1,039.9 | ||||||||||||||||||||||||
| Asset-backed | 551.7 | — | 14.9 | (2.1) | 564.5 | ||||||||||||||||||||||||
| Commercial mortgage-backed | 327.5 | — | 21.3 | (1.4) | 347.4 | ||||||||||||||||||||||||
| Residential mortgage-backed | 1,017.5 | — | 86.5 | (0.2) | 1,103.8 | ||||||||||||||||||||||||
| U.S. corporate | 6,080.2 | (1.5) | 1,230.1 | (8.6) | 7,300.2 | ||||||||||||||||||||||||
| Foreign corporate | 2,282.6 | — | 383.4 | (0.6) | 2,665.4 | ||||||||||||||||||||||||
| Total fixed maturity securities | $ | 11,532.4 | $ | (1.5) | $ | 1,931.7 | $ | (13.6) | $ | 13,449.0 |
| December 31, 2019 | |||||||||||||||||||||||||||||
| Cost or Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | Impairment in AOCI (1) | |||||||||||||||||||||||||
| Fixed maturity securities: | |||||||||||||||||||||||||||||
| U.S. government and government agencies and authorities | $ | 188.9 | $ | 5.3 | $ | (0.1) | $ | 194.1 | $ | — | |||||||||||||||||||
| States, municipalities and political subdivisions | 216.1 | 26.4 | — | 242.5 | — | ||||||||||||||||||||||||
| Foreign governments | 916.9 | 94.3 | (0.8) | 1,010.4 | — | ||||||||||||||||||||||||
| Asset-backed | 502.4 | 3.1 | (2.3) | 503.2 | — | ||||||||||||||||||||||||
| Commercial mortgage-backed | 212.7 | 10.2 | (0.8) | 222.1 | — | ||||||||||||||||||||||||
| Residential mortgage-backed | 1,235.3 | 52.4 | (1.4) | 1,286.3 | 3.1 | ||||||||||||||||||||||||
| U.S. corporate | 5,679.8 | 818.9 | (2.1) | 6,496.6 | 16.5 | ||||||||||||||||||||||||
| Foreign corporate | 2,112.7 | 255.4 | (0.9) | 2,367.2 | — | ||||||||||||||||||||||||
| Total fixed maturity securities | $ | 11,064.8 | $ | 1,266.0 | $ | (8.4) | $ | 12,322.4 | $ | 19.6 |
(1)Represents the amount of non-credit related impairment recognized in AOCI. Amount includes unrealized gains and losses on impaired securities relating to changes in the value of such securities subsequent to the impairment measurement date prior to adoption of ASC 326. See Note 2 for further information.
The Company’s state, municipality and political subdivision holdings are highly diversified across the U.S., with no individual state, municipality or political subdivision exposure (including both general obligation and revenue securities) exceeding 0.4% and 0.3% of the overall investment portfolio as of December 31, 2020 and 2019, respectively. As of December 31, 2020 and 2019, the securities included general obligation and revenue bonds issued by states, cities, counties, school districts and similar issuers, including $44.3 million and $51.9 million, respectively, of advance refunded or escrowed-to-maturity bonds (collectively referred to as “pre-refunded bonds”), which are bonds for which an irrevocable trust has been established to fund the remaining payments of principal and interest. As of December 31, 2020 and 2019, revenue bonds accounted for 67% and 60% of the holdings, respectively. Excluding pre-refunded revenue bonds, the activities supporting the income streams of the Company’s revenue bonds are across a broad range of sectors, primarily water, airport and marina, specifically pledged tax revenues, leases, colleges and universities and other miscellaneous sources such as bond banks, finance authorities and appropriations.
The Company’s investments in foreign government fixed maturity securities are held mainly in countries and currencies where the Company has policyholder liabilities, to facilitate matching of assets to the related liabilities. As of December 31, 2020, approximately 59%, 12% and 8% of the foreign government securities were held in Canadian government/provincials
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and the governments of Brazil and Mexico, respectively. As of December 31, 2019, approximately 58%, 20% and 6% of the foreign government securities were held in Canadian government/provincials and the governments of Brazil and Mexico, respectively. No other country represented more than 4% and 5% of the Company’s foreign government securities as of December 31, 2020 and 2019, respectively.
The Company had European investment exposure in its corporate fixed maturity securities of $900.2 million with a net unrealized gain of $120.9 million as of December 31, 2020 and $802.3 million with a net unrealized gain of $82.4 million as of December 31, 2019. Approximately 27% and 28% of the corporate fixed maturity European exposure was held in the financial industry as of December 31, 2020 and 2019, respectively. The Company’s largest European country exposure (the United Kingdom) represented approximately 4% of the fair value of the Company's corporate fixed maturity securities as of December 31, 2020 and 2019. The Company’s international investments are managed as part of the overall portfolio with the same approach to risk management and focus on diversification.
The Company had exposure to the energy sector in its corporate fixed maturity securities of $793.7 million with a net unrealized gain of $101.2 million as of December 31, 2020 and $784.4 million with a net unrealized gain of $93.1 million as of December 31, 2019. Approximately 85% and 94% of the energy exposure is rated as investment grade as of December 31, 2020 and December 31, 2019, respectively.
The cost or amortized cost and fair value of fixed maturity securities as of December 31, 2020 by contractual maturity are shown below. Actual maturities may differ from contractual maturities because issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties.
| December 31, 2020 | |||||||||||
| Cost or Amortized Cost | Fair Value | ||||||||||
| Due in one year or less | $ | 432.8 | $ | 438.6 | |||||||
| Due after one year through five years | 2,520.6 | 2,710.4 | |||||||||
| Due after five years through ten years | 2,579.3 | 2,920.6 | |||||||||
| Due after ten years | 4,103.0 | 5,363.7 | |||||||||
| Total | 9,635.7 | 11,433.3 | |||||||||
| Asset-backed | 551.7 | 564.5 | |||||||||
| Commercial mortgage-backed | 327.5 | 347.4 | |||||||||
| Residential mortgage-backed | 1,017.5 | 1,103.8 | |||||||||
| Total | $ | 11,532.4 | $ | 13,449.0 |
The following table shows the major categories of net investment income for the periods indicated:
| Years Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Fixed maturity securities | $ | 481.8 | $ | 492.8 | $ | 451.6 | |||||||||||
| Equity securities | 20.7 | 22.1 | 21.5 | ||||||||||||||
| Commercial mortgage loans on real estate | 36.8 | 36.6 | 33.4 | ||||||||||||||
| Short-term investments | 5.8 | 13.6 | 22.0 | ||||||||||||||
| Other investments | 22.9 | 49.2 | 41.6 | ||||||||||||||
| Cash and cash equivalents | 13.4 | 36.1 | 25.7 | ||||||||||||||
| Revenues from consolidated investment entities (1) | 56.3 | 119.2 | 77.8 | ||||||||||||||
| Total investment income | 637.7 | 769.6 | 673.6 | ||||||||||||||
| Investment expenses | (25.9) | (24.5) | (23.3) | ||||||||||||||
| Expenses from consolidated investment entities (1) | (36.9) | (70.1) | (51.9) | ||||||||||||||
| Net investment income | $ | 574.9 | $ | 675.0 | $ | 598.4 |
(1)The following table shows the revenues net of expenses from consolidated investment entities for the periods indicated. Refer to Note 9 for further detail.
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| Years Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Investment income (loss) from direct investments in: | |||||||||||||||||
| Real estate funds (1) | $ | 8.3 | $ | 25.1 | $ | 11.3 | |||||||||||
| CLO entities | 8.0 | 17.0 | 9.5 | ||||||||||||||
| Investment management fees | 3.1 | 7.0 | 5.1 | ||||||||||||||
| Net investment income from consolidated investment entities | $ | 19.4 | $ | 49.1 | $ | 25.9 |
(1)The investment income from the real estate funds includes income (loss) attributable to non-controlling interest of $1.1 million, $3.8 million and $2.1 million for the years ended December 31, 2020, 2019 and 2018, respectively.
No material investments of the Company were non-income producing for the years ended December 31, 2020, 2019 and 2018.
The following table summarizes the proceeds from sales of available-for-sale fixed maturity securities and the gross realized gains and gross realized losses that have been recognized in the statement of operations as a result of those sales for the periods indicated:
| Years Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Fixed maturity securities: | |||||||||||||||||
| Proceeds from sales | $ | 627.6 | $ | 2,105.1 | $ | 3,516.9 | |||||||||||
| Gross realized gains | $ | 29.8 | $ | 35.1 | $ | 18.2 | |||||||||||
| Gross realized losses | (11.9) | (15.0) | (59.8) | ||||||||||||||
| Net realized gains (losses) from sales of fixed maturity securities | $ | 17.9 | $ | 20.1 | $ | (41.6) |
For securities sold at a loss during the year ended December 31, 2020, the average period of time these securities were trading continuously at a price below book value was approximately 4 months.
The following table sets forth the net realized gains (losses), including impairments, recognized in the statement of operations for the periods indicated:
| Years Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Net realized gains (losses) related to sales and other: | |||||||||||||||||
| Fixed maturity securities | $ | 18.0 | $ | 20.4 | $ | (42.8) | |||||||||||
| Equity securities (1) | 23.3 | 49.6 | (14.9) | ||||||||||||||
| Commercial mortgage loans on real estate | (5.4) | (0.2) | 0.6 | ||||||||||||||
| Other investments | 0.5 | 8.9 | 2.7 | ||||||||||||||
| Consolidated investment entities (2) | (32.3) | (9.8) | (7.7) | ||||||||||||||
| Total net realized gains (losses) related to sales and other | 4.1 | 68.9 | (62.1) | ||||||||||||||
| Net realized losses related to impairments: | |||||||||||||||||
| Fixed maturity securities (3) | (3.2) | (1.1) | (0.1) | ||||||||||||||
| Other investments (1) | (17.1) | (1.5) | (0.5) | ||||||||||||||
| Total net realized losses related to impairments | (20.3) | (2.6) | (0.6) | ||||||||||||||
| Total net realized gains (losses) | $ | (16.2) | $ | 66.3 | $ | (62.7) |
(1)The years ended December 31, 2020, 2019 and 2018 include $10.5 million, $13.4 million and $16.9 million, respectively, of net gains on equity investment holdings accounted for under the measurement alternative. The carrying value of equity investments accounted for under the measurement alternative was $98.7 million and $90.1 million as of December 31, 2020 and 2019, respectively. These investments are included within other investments on the consolidated balance sheets. For the years ended December 31, 2020 and 2019, there were impairments of $17.1 million and $1.5 million, respectively. There were no impairments for the year ended December 31, 2018. For the years ended December 31, 2020, 2019 and 2018, the cumulative carry value fair value increases were $35.1 million, $24.6 million, and $16.9 million, respectively. For the years ended December 31, 2020 and 2019, the cumulative impairment losses were $18.6 million and $1.5 million, respectively. There were no impairment losses for the year ended December 31, 2018.
(2)Consists of net realized losses from the change in fair value of the Company’s direct investment in CLOs. Refer to Notes 4 and 9 for additional information.
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(3)Includes credit losses of $1.5 million on fixed maturity securities available for sale for the year ended December 31, 2020. Refer to Note 5 for additional information.
The following table sets forth the portion of unrealized gains (losses) related to equity securities for the periods indicated:
| Years Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Net gains (losses) recognized on equity securities | $ | 23.3 | $ | 49.6 | $ | (14.9) | |||||||||||
| Less: Net realized gains (losses) related to sales of equity securities | 7.0 | 5.2 | 3.9 | ||||||||||||||
| Total net unrealized gains (losses) on equity securities held | $ | 16.3 | $ | 44.4 | $ | (18.8) |
The investment category and duration of the Company’s gross unrealized losses on fixed maturity securities, as of December 31, 2020 and 2019 were as follows:
| December 31, 2020 | |||||||||||||||||||||||||||||||||||
| Less than 12 months | 12 Months or More | Total | |||||||||||||||||||||||||||||||||
| Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||||||||||||||||||||
| Fixed maturity securities: | |||||||||||||||||||||||||||||||||||
| States, municipalities and political subdivisions | $ | 10.4 | $ | (0.1) | $ | — | $ | — | $ | 10.4 | $ | (0.1) | |||||||||||||||||||||||
| Foreign governments | 36.6 | (0.6) | — | — | 36.6 | (0.6) | |||||||||||||||||||||||||||||
| Asset-backed | 85.3 | (1.2) | 69.1 | (0.9) | 154.4 | (2.1) | |||||||||||||||||||||||||||||
| Commercial mortgage-backed | 34.1 | (0.7) | 3.3 | (0.7) | 37.4 | (1.4) | |||||||||||||||||||||||||||||
| Residential mortgage-backed | 25.4 | (0.1) | 1.6 | (0.1) | 27.0 | (0.2) | |||||||||||||||||||||||||||||
| U.S. corporate | 128.4 | (7.0) | 15.9 | (1.6) | 144.3 | (8.6) | |||||||||||||||||||||||||||||
| Foreign corporate | 46.5 | (0.6) | — | — | 46.5 | (0.6) | |||||||||||||||||||||||||||||
| Total fixed maturity securities | $ | 366.7 | $ | (10.3) | $ | 89.9 | $ | (3.3) | $ | 456.6 | $ | (13.6) |
| December 31, 2019 | |||||||||||||||||||||||||||||||||||
| Less than 12 months | 12 Months or More | Total | |||||||||||||||||||||||||||||||||
| Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||||||||||||||||||||
| Fixed maturity securities: | |||||||||||||||||||||||||||||||||||
| U.S. government and government agencies and authorities | $ | 21.9 | $ | (0.1) | $ | — | $ | — | $ | 21.9 | $ | (0.1) | |||||||||||||||||||||||
| Foreign governments | 115.7 | (0.8) | — | — | 115.7 | (0.8) | |||||||||||||||||||||||||||||
| Asset-backed | 66.9 | (0.2) | 105.1 | (2.1) | 172.0 | (2.3) | |||||||||||||||||||||||||||||
| Commercial mortgage-backed | 20.0 | (0.3) | 4.3 | (0.5) | 24.3 | (0.8) | |||||||||||||||||||||||||||||
| Residential mortgage-backed | 82.5 | (0.6) | 82.6 | (0.8) | 165.1 | (1.4) | |||||||||||||||||||||||||||||
| U.S. corporate | 87.5 | (1.4) | 14.4 | (0.7) | 101.9 | (2.1) | |||||||||||||||||||||||||||||
| Foreign corporate | 45.8 | (0.7) | 7.5 | (0.2) | 53.3 | (0.9) | |||||||||||||||||||||||||||||
| Total fixed maturity securities | $ | 440.3 | $ | (4.1) | $ | 213.9 | $ | (4.3) | $ | 654.2 | $ | (8.4) |
Total gross unrealized losses represented approximately 3% and 1% of the aggregate fair value of the related securities as of December 31, 2020 and 2019, respectively. Approximately 76% and 49% of these gross unrealized losses had been in a continuous loss position for less than twelve months as of December 31, 2020 and 2019, respectively. The total gross unrealized losses are comprised of 230 and 330 individual securities as of December 31, 2020 and 2019, respectively. In accordance with its policy, the Company concluded that for these securities, the gross unrealized losses as of December 31, 2020 and December 31, 2019 were related to non-credit factors and therefore, did not recognize credit-related losses during the year ended December 31, 2020. Additionally, the Company currently does not intend to and is not required to sell these investments prior to an anticipated recovery in value.
The cost or amortized cost and fair value of available-for-sale fixed maturity securities in an unrealized loss position as of December 31, 2020, by contractual maturity, is shown below:
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| December 31, 2020 | |||||||||||
| Cost or Amortized Cost, Net of Allowance | Fair Value | ||||||||||
| Due in one year or less | $ | 0.9 | $ | 0.9 | |||||||
| Due after one year through five years | 42.6 | 41.6 | |||||||||
| Due after five years through ten years | 71.0 | 70.1 | |||||||||
| Due after ten years | 133.2 | 125.2 | |||||||||
| Total | 247.7 | 237.8 | |||||||||
| Asset-backed | 156.5 | 154.4 | |||||||||
| Commercial mortgage-backed | 38.8 | 37.4 | |||||||||
| Residential mortgage-backed | 27.2 | 27.0 | |||||||||
| Total | $ | 470.2 | $ | 456.6 |
The Company has entered into commercial mortgage loans, collateralized by the underlying real estate, on properties located throughout the U.S. and Canada. As of December 31, 2020, approximately 41% of the outstanding principal balance of commercial mortgage loans was concentrated in the states of California, Utah and New York. Although the Company has a diversified loan portfolio, an economic downturn could have an adverse impact on the ability of its debtors to repay their loans. The outstanding balance of commercial mortgage loans range in size from $0.1 million to $12.1 million as of December 31, 2020 and from less than $0.1 million to $12.3 million as of December 31, 2019.
Credit quality indicators for commercial mortgage loans are loan-to-value and debt-service coverage ratios. Loan-to-value and debt-service coverage ratios are measures commonly used to assess the credit quality of commercial mortgage loans. The loan-to-value ratio compares the principal amount of the loan to the fair value of the underlying property collateralizing the loan, and is commonly expressed as a percentage. The debt-service coverage ratio compares a property’s net operating income to its debt-service payments and is commonly expressed as a ratio. The loan-to-value and debt-service coverage ratios are generally updated annually in the fourth quarter.
The following table presents the amortized cost basis of commercial mortgage loans, excluding allowance for credit losses, by origination year for certain key credit quality indicators at December 31, 2020.
| Origination Year | |||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | 2017 | 2016 | Prior | Total | % of Total | ||||||||||||||||||||||||||||||||||||||||
| Loan to value ratios (1): | |||||||||||||||||||||||||||||||||||||||||||||||
| 70% and less | $ | 2.9 | $ | 98.5 | $ | 159.8 | $ | 124.5 | $ | 89.9 | $ | 204.5 | $ | 680.1 | 89.3 | % | |||||||||||||||||||||||||||||||
| 71% to 80% | 2.6 | 14.0 | 23.6 | 14.9 | 6.9 | 7.2 | 69.2 | 9.1 | % | ||||||||||||||||||||||||||||||||||||||
| 81% to 95% | — | 3.3 | — | — | — | 2.2 | 5.5 | 0.7 | % | ||||||||||||||||||||||||||||||||||||||
| Greater than 95% | — | — | — | 6.0 | — | 1.2 | 7.2 | 0.9 | % | ||||||||||||||||||||||||||||||||||||||
| Total | $ | 5.5 | $ | 115.8 | $ | 183.4 | $ | 145.4 | $ | 96.8 | $ | 215.1 | $ | 762.0 | 100.0 | % | |||||||||||||||||||||||||||||||
| Origination Year | |||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | 2017 | 2016 | Prior | Total | % of Total | ||||||||||||||||||||||||||||||||||||||||
| Debt service coverage ratios (2): | |||||||||||||||||||||||||||||||||||||||||||||||
| Greater than 2.0 | $ | 5.5 | $ | 42.2 | $ | 59.3 | $ | 58.7 | $ | 77.8 | $ | 114.6 | $ | 358.1 | 46.9 | % | |||||||||||||||||||||||||||||||
| 1.5 to 2.0 | — | 30.8 | 76.5 | 54.7 | 19.0 | 52.8 | 233.8 | 30.7 | % | ||||||||||||||||||||||||||||||||||||||
| 1.0 to 1.5 | — | 39.0 | 47.6 | 26.0 | — | 36.4 | 149.0 | 19.6 | % | ||||||||||||||||||||||||||||||||||||||
| Less than 1.0 | — | 3.8 | — | 6.0 | — | 11.3 | 21.1 | 2.8 | % | ||||||||||||||||||||||||||||||||||||||
| Total | $ | 5.5 | $ | 115.8 | $ | 183.4 | $ | 145.4 | $ | 96.8 | $ | 215.1 | $ | 762.0 | 100.0 | % |
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(1)LTV ratio derived from current loan balance divided by the fair value of the property. The fair value of the underlying commercial properties is updated at least annually.
(2)DSC ratio calculated using most recent reported operating income results from property operators divided by annual debt service coverage.
As of December 31, 2020, the Company had mortgage loan commitments outstanding of approximately $7.0 million.
The Company had short term investments and fixed maturity securities of $602.6 million and $594.2 million as of December 31, 2020 and 2019, respectively, on deposit with various governmental authorities as required by law.
The Company has entered into certain interest rate derivatives that qualify for hedge accounting to manage interest rate risk on the Company’s debt. See Note 19 for additional information on these derivatives. The Company also utilizes derivatives on a limited basis to limit interest rate, foreign exchange and inflation risks and bifurcates the options on certain securities where the option is not clearly and closely related to the host instrument. These derivatives do not qualify as effective hedges for accounting purposes; therefore, they are marked-to-market and the gain or loss is recorded in the statements of operations in fees and other income, underwriting, general and administrative expenses and realized gains (losses). Amounts related to derivative instruments that do not qualify for hedge accounting as of December 31, 2020 and 2019 are assets of $0.4 million and $0.6 million, respectively, liabilities of $0.7 million and $101.8 million, respectively, all of which are included in the consolidated balance sheets. The gain (loss) from derivative instruments recorded in the results of operations related to these derivatives totaled $6.6 million, $(89.5) million and $11.0 million for the years ended December 31, 2020, 2019 and 2018, respectively. See Note 4 for additional information on the Iké put/call option (which comprise the majority of the 2019 balance sheet liability and the loss from derivative instruments).
9. Variable Interest Entities
In the normal course of business, the Company is involved with various types of investment entities that may be considered VIEs. The Company evaluates its involvement with each entity to determine whether consolidation is required. The Company’s maximum risk of loss is limited to the carrying value and unfunded commitments of its investments in the VIEs.
Consolidated VIEs
One of the Company’s subsidiaries was registered with the U.S. Securities and Exchange Commission (the “SEC”) as an investment adviser. The subsidiary managed and invested in CLOs and real estate funds and conducted other forms of investment activities. Prior to third quarter 2020, the Company had determined that the CLOs and real estate fund were VIEs and consolidated each because the Company was deemed to be the primary beneficiary of these entities due to (i) its role as collateral manager, which gave it the power to direct the activities that most significantly impact the economic performance of the entities, and (ii) its economic interest in the entities, which exposed it to losses and the right to receive benefits that could potentially be significant to the entities. During the third quarter 2020, the Company sold its CLO asset management platform and outsourced its real estate asset management. As a result of these transactions, the Company deconsolidated the CLO entities and real estate fund since it no longer acts as collateral manager and, as a result, no longer has the power to control these entities. See Note 4 for additional information on the sale of the CLO asset management platform.
Collateralized Loan Obligations: Prior to the deconsolidation in the third quarter of 2020, the CLO entities were collateralized financing entities. Under the elected measurement alternative for collateralized financing entities, the carrying value of the CLO debt equals the fair value of the CLO assets (senior secured leveraged loans) as the assets have more observable fair values. The CLO liabilities are reduced by the fair value of the beneficial interests the Company retains in the CLO and the carrying value of any beneficial interests that represent compensation for services. CLO earnings attributable to the Company’s shareholders are measured by the change in the fair value of the Company’s CLO investments, net investment income earned and investment management and contingent performance fees earned. Investment management fees are reported as a reduction to investment expenses in the consolidated statements of operations. The assets of the CLOs are legally isolated from the Company’s creditors and can only be used to settle obligations of the CLOs. The liabilities of the CLOs are non-recourse to the Company and the Company has no obligation to satisfy the liabilities of the CLOs.
As of December 31, 2020, due to the deconsolidation, the CLO investments of $92.2 million are reported in the consolidated balance sheet in fixed maturity securities and other investments. As of December 31, 2019, the carrying value of the Company’s investment in the CLOs that had closed was $77.4 million in subordinated debt tranches and $21.1 million in senior debt tranches.
The Company’s retained beneficial interests in subordinated tranches are measured at fair value using the market or income valuation techniques using significant unobservable inputs and assumptions, including prepayment, default rate, recovery lag, reinvestment, collateral liquidation price, discount rate and call date assumptions.
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Real Estate Fund: Prior to the deconsolidation in the third quarter of 2020, the Company’s real estate fund investment was a closed ended fund that include contributions from third party investors, which were recorded as non-controlling interests. Real estate fund earnings attributable to the Company’s shareholders are measured by the net investment income of the real estate fund, which includes the change in fair value of the Company’s investments in the real estate fund and investment management fees earned. The Company had a majority investment in the real estate fund in the form of an equity interest. As of December 31, 2020, the real estate fund equity interest of $43.0 million is reported in the consolidated balance sheet in other investments. The carrying value of the Company’s investment in the real estate fund was $88.3 million as of December 31, 2019.
Fair Value of VIE Assets and Liabilities
The Company categorizes its fair value measurements according to a three-level hierarchy. See Note 10 for the definition of the three levels of the fair value hierarchy. The following table presents the Company’s fair value hierarchy for financial assets and liabilities held by consolidated investment entities measured at fair value on a recurring basis as of December 31, 2019.
| December 31, 2019 | |||||||||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||
| Financial Assets | |||||||||||||||||||||||
| Investments: | |||||||||||||||||||||||
| Cash and cash equivalents | $ | 32.9 | $ | 32.9 | (1) | $ | — | $ | — | ||||||||||||||
| Corporate debt securities | 1,850.7 | — | 1,850.7 | — | |||||||||||||||||||
| Real estate fund | 107.2 | — | — | 107.2 | |||||||||||||||||||
| Total financial assets | $ | 1,990.8 | $ | 32.9 | $ | 1,850.7 | $ | 107.2 | |||||||||||||||
| Financial Liabilities | |||||||||||||||||||||||
| Collateralized loan obligation notes | $ | 1,603.1 | $ | — | $ | 1,603.1 | $ | — | |||||||||||||||
| Total financial liabilities | 1,603.1 | — | 1,603.1 | — |
(1)Amounts consist of money market funds.
Level 2 Securities
Corporate debt securities: These assets were comprised of senior secured leveraged loans. The Company values these securities using estimates of fair value from a pricing service which utilizes the market valuation technique. The primary observable market inputs used by the pricing service are prices of reported trades from dealers. The fair value was calculated using a simple average of the prices received.
Collateralized loan obligation notes: As the Company elected the measurement alternative, the carrying value of the CLO debt was equal to the fair value of the CLO assets. The CLO notes were classified within Level 2 of the fair value hierarchy, consistent with the classification of the majority of the CLO financial assets.
Level 3 Securities
Real estate fund: These assets were comprised of investments in limited partnerships whose underlying investments are real estate properties. Management estimates the fair value of these real estate assets using the market, income or cost approach valuation techniques, using significant unobservable inputs and assumptions, including capitalization rates, discount rates, market comparable prices, leasing assumptions and replacement costs.
The following table summarizes the change in balance sheet carrying value associated with Level 3 assets held by consolidated investment entities measured at fair value for the years ended December 31, 2020 and 2019:
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| Years Ended December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Balance, beginning of period | $ | 107.2 | $ | 112.0 | |||||||
| Sales | (61.0) | (30.0) | |||||||||
| Deconsolidation adjustments (1) | (54.5) | — | |||||||||
| Total income included in earnings (2) | 8.3 | 25.2 | |||||||||
| Balance, end of period | $ | — | $ | 107.2 |
(1)Deconsolidation adjustments include $8.8 million related to non-controlling interests and $45.7 million related to investments retained, which are now included in other investments.
(2)Total income included in earnings includes $1.1 million and $3.8 million of pre-tax income related to non-controlling interests for 2020 and 2019, respectively.
Non-Consolidated VIEs
The Company invests in private equity limited partnerships and real estate joint ventures. These investments are generally accounted for under the equity method as the primary beneficiary criteria is not met; however, the Company is able to exert significant influence over the investees operating and financial policies. These investments are included in the consolidated balance sheets in other investments. As of December 31, 2020, the Company’s maximum exposure to loss is its recorded carrying value of $253.9 million and unfunded commitments of $50.4 million.
Commercial Mortgage Loan Securitization
In 2016, the Company transferred commercial mortgage loans on real estate into a trust. Upon transfer, the loans were securitized as a source of funding for the Company and as a means of transferring the economic risk of the loans to third parties. The securitized assets are legally isolated from the Company’s creditors and can only be used to settle obligations of the trust. The Company does not have the power to direct the activities of the trust, nor does it provide guarantees or recourse to the trust other than standard representations and warranties. The Company retained an interest in the trust in the form of subordinate securities issued by the trust. The trust is a VIE that the Company does not consolidate.
As of December 31, 2020 and 2019, the maximum loss exposure the Company had to the trust was $19.9 million and $19.1 million, respectively. The Company calculates its maximum loss exposure based on the unlikely event that all the assets in the trust become worthless and the effect it would have on the Company’s consolidated balance sheets based upon its retained interest in the trust. The securities purchased from the trust are included within fixed maturity securities available for sale at fair value on the consolidated balance sheet and are part of the Company’s ongoing impairment review. See Note 10 for additional information on the Company’s fair value inputs and valuation techniques.
See Note 2 for additional information on significant accounting policies related to VIEs.
10. Fair Value Disclosures
Fair Values, Inputs and Valuation Techniques for Financial Assets and Liabilities Disclosures
The fair value measurements and disclosures guidance defines fair value and establishes a framework for measuring fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company has categorized its recurring fair value basis financial assets and liabilities into a three-level fair value hierarchy based on the priority of the inputs to the valuation technique.
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 takes into account factors specific to the asset or liability.
The levels of the fair value hierarchy are described below:
- Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company can access.
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-
Level 2 inputs utilize other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active and inputs other than quoted prices that are observable in the marketplace for the asset or liability. The observable inputs are used in valuation models to calculate the fair value for the asset or liability.
-
Level 3 inputs are unobservable but are significant to the fair value measurement for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset or liability.
The Company reviews fair value hierarchy classifications on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy.
The following tables present the Company’s fair value hierarchy for assets and liabilities measured at fair value on a recurring basis as of December 31, 2020 and 2019. The amounts presented below for short-term investments, other investments, cash equivalents, assets held in and liabilities related to separate accounts and other liabilities differ from the amounts presented in the consolidated balance sheets because only certain investments or certain assets and liabilities within these line items are measured at estimated fair value. Other investments are comprised of investments in the Assurant Investment Plan (“AIP”), the American Security Insurance Company Investment Plan, the Assurant Deferred Compensation Plan, a modified coinsurance arrangement and other derivatives. Other liabilities are comprised of investments in the AIP, contingent considerations related to business combinations and other derivatives, including the put/call for Iké. The fair value amount and the majority of the associated levels presented for other investments and assets and liabilities held in separate accounts are received directly from third parties.
| December 31, 2020 | ||||||||||||||||||||||||||
| Financial Assets | Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||
| Fixed maturity securities: | ||||||||||||||||||||||||||
| U.S. government and government agencies and authorities | $ | 104.7 | $ | — | $ | 104.7 | $ | — | ||||||||||||||||||
| States, municipalities and political subdivisions | 323.1 | — | 323.1 | — | ||||||||||||||||||||||
| Foreign governments | 1,039.9 | 0.5 | 1,039.0 | 0.4 | ||||||||||||||||||||||
| Asset-backed | 564.5 | — | 562.1 | 2.4 | ||||||||||||||||||||||
| Commercial mortgage-backed | 347.4 | — | 324.0 | 23.4 | ||||||||||||||||||||||
| Residential mortgage-backed | 1,103.8 | — | 1,103.8 | — | ||||||||||||||||||||||
| U.S. corporate | 7,300.2 | — | 7,273.5 | 26.7 | ||||||||||||||||||||||
| Foreign corporate | 2,665.4 | — | 2,630.7 | 34.7 | ||||||||||||||||||||||
| Equity securities: | ||||||||||||||||||||||||||
| Mutual funds | 42.3 | 42.3 | — | — | ||||||||||||||||||||||
| Common stocks | 22.6 | 20.7 | 0.7 | 1.2 | ||||||||||||||||||||||
| Non-redeemable preferred stocks | 339.2 | — | 337.1 | 2.1 | ||||||||||||||||||||||
| Short-term investments | 294.7 | 243.2 | (2) | 51.5 | — | |||||||||||||||||||||
| Other investments | 241.3 | 72.9 | (1) | 168.3 | (3) | 0.1 | ||||||||||||||||||||
| Cash equivalents | 1,563.0 | 1,541.0 | (2) | 22.0 | (3) | — | ||||||||||||||||||||
| Assets held in separate accounts | 2,152.0 | 1,970.5 | (1) | 181.5 | (3) | — | ||||||||||||||||||||
| Total financial assets | $ | 18,104.1 | $ | 3,891.1 | $ | 14,122.0 | $ | 91.0 | ||||||||||||||||||
| Financial Liabilities | ||||||||||||||||||||||||||
| Other liabilities | $ | 76.1 | $ | 72.9 | (1) | $ | 0.5 | (4) | $ | 2.7 | (5) | |||||||||||||||
| Liabilities related to separate accounts | 2,152.0 | 1,970.5 | (1) | 181.5 | (3) | — | ||||||||||||||||||||
| Total financial liabilities | $ | 2,228.1 | $ | 2,043.4 | $ | 182.0 | $ | 2.7 |
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| December 31, 2019 | ||||||||||||||||||||||||||
| Financial Assets | Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||
| Fixed maturity securities: | ||||||||||||||||||||||||||
| U.S. government and government agencies and authorities | $ | 194.1 | $ | — | $ | 194.1 | $ | — | ||||||||||||||||||
| States, municipalities and political subdivisions | 242.5 | — | 242.5 | — | ||||||||||||||||||||||
| Foreign governments | 1,010.4 | 0.3 | 1,010.1 | — | ||||||||||||||||||||||
| Asset-backed | 503.2 | — | 503.2 | — | ||||||||||||||||||||||
| Commercial mortgage-backed | 222.1 | — | 198.6 | 23.5 | ||||||||||||||||||||||
| Residential mortgage-backed | 1,286.3 | — | 1,286.3 | — | ||||||||||||||||||||||
| U.S. corporate | 6,496.6 | — | 6,494.8 | 1.8 | ||||||||||||||||||||||
| Foreign corporate | 2,367.2 | — | 2,331.5 | 35.7 | ||||||||||||||||||||||
| Equity securities: | ||||||||||||||||||||||||||
| Mutual funds | 45.5 | 45.5 | — | — | ||||||||||||||||||||||
| Common stocks | 23.5 | 22.8 | 0.7 | — | ||||||||||||||||||||||
| Non-redeemable preferred stocks | 319.5 | — | 317.3 | 2.2 | ||||||||||||||||||||||
| Short-term investments | 367.5 | 271.4 | (2) | 96.1 | — | |||||||||||||||||||||
| Other investments | 234.6 | 70.3 | (1) | 164.3 | (3) | — | ||||||||||||||||||||
| Cash equivalents | 1,287.5 | 1,277.8 | (2) | 9.7 | (3) | — | ||||||||||||||||||||
| Assets held in separate accounts | 1,806.3 | 1,623.7 | (1) | 182.6 | (3) | — | ||||||||||||||||||||
| Total financial assets | $ | 16,406.8 | $ | 3,311.8 | $ | 13,031.8 | $ | 63.2 | ||||||||||||||||||
| Financial Liabilities | ||||||||||||||||||||||||||
| Other liabilities | $ | 172.0 | $ | 70.3 | (1) | $ | 101.5 | (6) | $ | 0.2 | ||||||||||||||||
| Liabilities related to separate accounts | 1,806.3 | 1,623.7 | (1) | 182.6 | (3) | — | ||||||||||||||||||||
| Total financial liabilities | $ | 1,978.3 | $ | 1,694.0 | $ | 284.1 | $ | 0.2 |
(1)Primarily includes mutual funds and related obligations.
(2)Primarily includes money market funds.
(3)Primarily includes fixed maturity securities and related obligations.
(4)Primarily includes derivative liabilities.
(5)Includes contingent consideration liabilities.
(6)Includes the put/call related to the investment in Iké. See Note 5 for more information.
The following tables summarize the change in balance sheet carrying value associated with Level 3 financial assets and liabilities carried at fair value for the years ended December 31, 2020 and 2019:
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| Year Ended December 31, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, beginning of period | Total gains (losses) (realized/ unrealized) included in earnings (1) | Net unrealized gains (losses) included in other comprehensive income (2) | Purchases | Sales | Transfers in (3) | Transfers out (3) | Balance, end of period | |||||||||||||||||||||||||||||||||||||||||||
| Financial Assets | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Fixed Maturity Securities | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign governments | — | — | — | — | — | 0.4 | — | 0.4 | ||||||||||||||||||||||||||||||||||||||||||
| Asset-backed | — | — | 0.1 | 2.3 | — | — | — | 2.4 | ||||||||||||||||||||||||||||||||||||||||||
| Commercial mortgage-backed | 23.5 | (2.4) | 2.3 | — | — | — | — | 23.4 | ||||||||||||||||||||||||||||||||||||||||||
| Residential mortgage-backed | — | — | 0.2 | 13.8 | (1.1) | 1.0 | (13.9) | — | ||||||||||||||||||||||||||||||||||||||||||
| U.S. corporate | 1.8 | 0.4 | 1.7 | 21.7 | (0.5) | 6.8 | (5.2) | 26.7 | ||||||||||||||||||||||||||||||||||||||||||
| Foreign corporate | 35.7 | (0.2) | 0.5 | 7.4 | (1.9) | 5.6 | (12.4) | 34.7 | ||||||||||||||||||||||||||||||||||||||||||
| Equity Securities | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock | — | — | — | — | — | 1.2 | — | 1.2 | ||||||||||||||||||||||||||||||||||||||||||
| Non-redeemable preferred stocks | 2.2 | — | (4.1) | — | — | 4.0 | — | 2.1 | ||||||||||||||||||||||||||||||||||||||||||
| Other investments | — | — | (1.1) | — | — | 2.7 | (1.5) | 0.1 | ||||||||||||||||||||||||||||||||||||||||||
| Other assets | — | 20.7 | — | 1.7 | (22.0) | (0.2) | (0.2) | — | ||||||||||||||||||||||||||||||||||||||||||
| Financial Liabilities | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Other liabilities | (0.2) | (0.4) | — | (2.5) | — | 0.2 | 0.2 | (2.7) | ||||||||||||||||||||||||||||||||||||||||||
| Total level 3 assets and liabilities | $ | 63.0 | $ | 18.1 | $ | (0.4) | $ | 44.4 | $ | (25.5) | $ | 21.7 | $ | (33.0) | $ | 88.3 |
| Year Ended December 31, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, beginning of period | Total gains (losses) (realized/ unrealized) included in earnings (1) | Net unrealized gains (losses) included in other comprehensive income (2) | Purchases | Sales | Transfers in (3) | Transfers out (3) | Balance, end of period | |||||||||||||||||||||||||||||||||||||||||||
| Financial Assets | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Fixed Maturity Securities | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Asset-backed | $ | — | $ | — | $ | 0.1 | $ | 23.3 | $ | — | $ | 1.5 | $ | (24.9) | $ | — | ||||||||||||||||||||||||||||||||||
| Commercial mortgage-backed | 38.9 | (2.9) | (0.2) | 4.0 | (13.7) | 11.9 | (14.5) | 23.5 | ||||||||||||||||||||||||||||||||||||||||||
| Residential mortgage-backed | — | — | — | 3.8 | — | — | (3.8) | — | ||||||||||||||||||||||||||||||||||||||||||
| U.S. corporate | 12.7 | (0.1) | 0.3 | 4.0 | (9.8) | 9.0 | (14.3) | 1.8 | ||||||||||||||||||||||||||||||||||||||||||
| Foreign corporate | 49.5 | 0.3 | 2.3 | 5.2 | (21.6) | — | — | 35.7 | ||||||||||||||||||||||||||||||||||||||||||
| Equity Securities | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Non-redeemable preferred stocks | 2.2 | — | — | — | — | — | — | 2.2 | ||||||||||||||||||||||||||||||||||||||||||
| Other investments | 0.5 | (3.4) | — | 2.9 | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Other receivables | 5.0 | (5.0) | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Other assets | 2.6 | (4.1) | — | 4.4 | (2.6) | — | (0.3) | — | ||||||||||||||||||||||||||||||||||||||||||
| Financial Liabilities | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Other liabilities | (41.2) | (63.3) | — | 23.5 | — | — | 80.8 | (0.2) | ||||||||||||||||||||||||||||||||||||||||||
| Total level 3 assets and liabilities | $ | 70.2 | $ | (78.5) | $ | 2.5 | $ | 71.1 | $ | (47.7) | $ | 22.4 | $ | 23.0 | $ | 63.0 |
(1)Included as part of net realized gains on investments, excluding other-than-temporary impairment losses, in the consolidated statements of operations.
(2)Included as part of change in unrealized gains on securities in the consolidated statement of comprehensive income.
(3)Transfers are primarily attributable to changes in the availability of observable market information and the re-evaluation of the observability of valuation inputs.
Three different valuation techniques can be used in determining fair value for financial assets and liabilities: the market, income or cost approaches. The three valuation techniques described in the fair value measurements and disclosures guidance are consistent with generally accepted valuation methodologies. The market approach valuation techniques use prices and other relevant information generated by 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 (such as for mutual funds and money market funds). Otherwise, the Company uses valuation techniques consistent with the market approach including matrix pricing and comparables. Matrix pricing is a mathematical technique employed principally to value debt securities without relying
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exclusively on quoted prices for those securities but, rather, relying on the securities’ relationship to other benchmark quoted securities. Market approach valuation techniques often use market multiples derived from a set of comparables. Multiples might lie in ranges with a different multiple for each comparable. The selection of where within the range the appropriate multiple falls requires judgment, considering both qualitative and quantitative factors specific to the measurement.
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 not all three approaches are applicable to all financial assets or liabilities, where appropriate, the Company may use one or more valuation techniques. For all the classes of financial assets and liabilities included in the above hierarchy, excluding certain derivatives and certain privately placed corporate bonds, the Company generally uses the market valuation technique. For certain privately placed corporate bonds and certain derivatives, the Company generally uses the income valuation technique. For the years ended December 31, 2020 and 2019, the application of the valuation technique applied to the Company’s classes of financial assets and liabilities has been consistent.
Level 1 Securities
The Company’s investments and liabilities classified as Level 1 as of December 31, 2020 and 2019 consisted of mutual funds and related obligations, money market funds, foreign government fixed maturity securities and common stocks that are publicly listed and/or actively traded in an established market.
Level 2 Securities
The Company values Level 2 securities using various observable market inputs obtained from a pricing service. The pricing service prepares estimates of fair value measurements for the Company’s Level 2 securities using proprietary valuation models based on techniques such as matrix pricing which include observable market inputs. The fair value measurements and disclosures guidance defines observable market inputs as the assumptions market participants would use in pricing the asset or liability developed on market data obtained from sources independent of the Company. The extent of the use of each observable market input for a security depends on the type of security and the market conditions at the balance sheet date. Depending on the security, the priority of the use of observable market inputs may change as some observable market inputs may not be relevant or additional inputs may be necessary. The Company uses the following observable market inputs (“standard inputs”), listed in the approximate order of priority, 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 including market research data. Further details for Level 2 investment types follow:
U.S. government and government agencies and authorities: U.S. government and government agencies and authorities securities are priced by the Company’s pricing service utilizing standard inputs. Included in this category are U.S. Treasury securities which are priced using vendor trading platform data in addition to the standard inputs.
States, municipalities and political subdivisions: States, municipalities and political subdivisions securities are priced by the Company’s pricing service using material event notices and new issue data inputs in addition to the standard inputs.
Foreign governments: Foreign government securities are primarily fixed maturity securities denominated in local currencies which are priced by the Company’s pricing service using standard inputs. The pricing service also evaluates each security based on relevant market information including relevant credit information, perceived market movements and sector news.
Commercial mortgage-backed, residential mortgage-backed and asset-backed: Commercial mortgage-backed, residential mortgage-backed and asset-backed securities are priced by the Company’s pricing service using monthly payment information and collateral performance information in addition to the standard inputs. Additionally, commercial mortgage-backed securities and asset-backed securities utilize new issue data while residential mortgage-backed securities utilize vendor trading platform data.
U.S. and foreign corporate: Corporate securities are priced by the Company’s pricing service using standard inputs. Non-investment grade securities within this category are priced by the Company’s pricing service using observations of equity and credit default swap curves related to the issuer in addition to the standard inputs. Certain privately placed corporate bonds are priced by a non-pricing service source using a model with observable inputs including, but not limited to, the credit rating, credit spreads, sector add-ons, and issuer specific add-ons.
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Non-redeemable preferred stocks: Non-redeemable preferred stocks are priced by the Company’s pricing service using observations of equity and credit default swap curves related to the issuer in addition to the standard inputs.
Short-term investments, other investments, cash equivalents, assets held in separate accounts and liabilities related to separate accounts: To price the fixed maturity securities and related obligations in these categories, the pricing service utilizes the standard inputs.
Other liabilities: Foreign exchange forwards are priced using a pricing model which utilizes market observable inputs including foreign exchange spot rate, forward points and date to settlement.
Valuation models used by the pricing service can change from period to period, depending on the appropriate observable inputs that are available at the balance sheet date to price a security.
Level 3 Securities
The Company’s investments classified as Level 3 as of December 31, 2020 and 2019 consisted of $90.9 million and $63.2 million, respectively, of fixed maturity and equity securities. All of the Level 3 fixed maturity and equity securities are priced using non-binding third-party manager quotes, for which the underlying quantitative inputs are not developed by the Company and are not readily available or observable.
Other investments and other liabilities: The Company prices swaptions and options using a Black-Scholes pricing model incorporating third-party market data, including swap volatility data. The Company prices credit default swaps using non-binding quotes obtained from third-party broker-dealers recognized as market participants. Inputs factored into the non-binding quotes include market observable trades related to the actual credit default swap being priced, trades in comparable credit default swaps, quality of the issuer, structure and liquidity.
In May 2020, the Company completed the sale of its interests in Iké and terminated its put/call obligations. For the year ended December 31, 2019, the Company used the market approach to value the investment in Iké, which included consideration of the observable formal agreement to sell our interests in Iké for which significant observable inputs were used in the valuation. See Note 4 for more information.
The fair value of the contingent consideration is estimated using a discounted cash flow model. Inputs may include future business performance, earn out caps, and applicable discount rates. A non-pricing service source prices certain derivatives using a model with inputs including, but not limited to, the time to expiration, the notional amount, the strike price, the forward rate, implied volatility and the discount rate.
Management evaluates the following factors in order to determine whether the market for a financial asset is inactive. The factors include, but are not limited to:
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whether there are few recent transactions,
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whether little information is released publicly,
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whether the available prices vary significantly over time or among market participants,
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whether the prices are stale (i.e., not current), and
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the magnitude of the bid-ask spread.
Illiquidity did not have a material impact in the fair value determination of the Company’s financial assets as of December 31, 2020 or 2019.
The Company generally obtains one price for each financial asset. The Company performs a periodic analysis to assess if the evaluated prices represent a reasonable estimate of the financial assets’ fair values. 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. Following this analysis, the Company generally uses the best estimate of fair value based upon all available inputs. On infrequent occasions, a non-pricing service source may be more familiar with the market activity for a particular security than the pricing service. In these cases the price used is taken from the non-pricing service source. The pricing service provides information to indicate which securities were priced using market observable inputs so that the Company can properly categorize the Company’s financial assets in the fair value hierarchy.
Disclosures for Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
The Company also measures the fair value of certain assets and liabilities, generally on an annual basis, or when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. These assets include
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commercial mortgage loans, equity investments accounted for under the measurement alternative, goodwill and finite-lived intangible assets.
In 2020 and 2019, as a result of third-party market observable transactions that were of the same issuer and determined to be similar, the Company marked certain of its equity investments accounted for under the measurement alternative to fair value. The carrying value of investments under the measurement alternative marked to fair value on a non-recurring basis as of December 31, 2020 and 2019 was $14.1 million and $30.5 million, respectively. Given the significant unobservable inputs involved in valuation of these investments, they are classified in Level 3 of the fair value hierarchy. Generally, these valuations utilize the market approach, or an option pricing model backsolve method, which is a valuation approach that can be used to determine the value of common shares for companies with complex capital structures in which there have not been any recent transactions involving common shares. Inputs include capitalization tables, investment past and future performance projections, time to exit, discount rate and volatility based upon an appropriate industry group. For the year-ended December 31, 2020, the Company recorded fair value increases of $10.5 million related to two market observable transactions of one investment. For the year-ended December 31, 2019, the Company recorded fair value increases of $13.4 million related to four market observable transactions for two investments.
In 2020 and 2019, as a result of a qualitative analysis indicating an impairment existed, the Company performed a quantitative analysis utilizing a probability weighted scenario model and determined certain investments were impaired. Model inputs include capitalization tables, investment past and future company performance projections, and discount rate. Based upon model outputs, impairments of $17.1 million and $1.5 million were recorded for the years-ended December 31, 2020 and 2019, respectively.
Refer to Note 15 for the results of the 2020 goodwill impairment testing.
Fair Value of Financial Instruments Disclosures
The financial instruments guidance requires disclosure of fair value information about financial instruments, for which it is practicable to estimate such fair value. Therefore, it requires fair value disclosure for financial instruments that are not recognized or are not carried at fair value in the consolidated balance sheets. However, this guidance excludes certain financial instruments, including those related to insurance contracts and those accounted for under the equity method (such as partnerships).
For the financial instruments included within the following financial assets and financial liabilities, the carrying value in the consolidated balance sheets equals or approximates fair value. Please refer to the Fair Values Inputs and Valuation Techniques for Financial Assets and Liabilities Disclosures section above for additional information on the financial instruments included within the following financial assets and financial liabilities and the methods and assumptions used to estimate fair value:
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Cash and cash equivalents;
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Fixed maturity securities;
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Equity securities;
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Short-term investments;
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Other investments;
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Assets held in separate accounts;
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Other liabilities; and
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Liabilities related to separate accounts.
In estimating the fair value of the financial instruments that are not recognized or are not carried at fair value in the consolidated balance sheets, the Company used the following methods and assumptions:
Commercial mortgage loans on real estate: The fair value of commercial mortgage loans on real estate utilizes a third-party matrix pricing model. For fixed rate loans, the matrix process uses a yield buildup approach to create a pricing yield, with components for base yield, credit quality spread, property type spread, and a weighted average life spread. Floating rate loans are priced with a target quality spread over the swap curve. A dollar price for each loan is derived from the pricing yield or spread by a discounted cash flow methodology.
Other investments: Other investments include low income housing tax credits, business debentures, and credit tenant loans which are recorded at cost or amortized cost, as well as policy loans. The carrying value reported for these investments approximates fair value.
Other assets: The carrying value of dealer loans approximates fair value.
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Policy reserves under investment products: The fair values for the Company’s policy reserves under investment products are determined using discounted cash flow analysis. Key inputs to the valuation include projections of policy cash flows, reserve runoff, market yields and risk margins.
Funds held under reinsurance: The carrying value reported approximates fair value due to the short maturity of the instruments.
Debt: The fair value of debt is based upon matrix pricing performed by the pricing service utilizing the standard inputs.
The following tables disclose the carrying value, fair value and hierarchy level of the financial instruments that are not recognized or are not carried at fair value in the consolidated balance sheets as of the dates indicated:
| December 31, 2020 | |||||||||||||||||||||||||||||
| Fair Value | |||||||||||||||||||||||||||||
| Carrying Value | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||
| Financial Assets | |||||||||||||||||||||||||||||
| Commercial mortgage loans on real estate | $ | 754.3 | $ | 824.1 | $ | 824.1 | |||||||||||||||||||||||
| Other investments | 67.6 | 67.6 | 29.7 | 37.9 | |||||||||||||||||||||||||
| Other assets | 23.3 | 23.3 | 23.3 | ||||||||||||||||||||||||||
| Total financial assets | $ | 845.2 | $ | 915.0 | $ | 29.7 | $ | — | $ | 885.3 | |||||||||||||||||||
| Financial Liabilities | |||||||||||||||||||||||||||||
| Policy reserves under investment products (Individual and group annuities, subject to discretionary withdrawal) (1) | $ | 529.3 | $ | 595.0 | $ | 595.0 | |||||||||||||||||||||||
| Funds held under reinsurance | 358.6 | 358.6 | 358.6 | ||||||||||||||||||||||||||
| Debt | 2,252.9 | 2,540.0 | 2,540.0 | ||||||||||||||||||||||||||
| Total financial liabilities | $ | 3,140.8 | $ | 3,493.6 | $ | 358.6 | $ | 2,540.0 | $ | 595.0 |
| December 31, 2019 | |||||||||||||||||||||||||||||
| Fair Value | |||||||||||||||||||||||||||||
| Carrying Value | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||
| Financial Assets | |||||||||||||||||||||||||||||
| Commercial mortgage loans on real estate | $ | 815.0 | $ | 843.8 | — | — | $ | 843.8 | |||||||||||||||||||||
| Other investments | 49.9 | 49.9 | 30.7 | — | 19.2 | ||||||||||||||||||||||||
| Other assets | 28.9 | 28.9 | — | — | 28.9 | ||||||||||||||||||||||||
| Total financial assets | $ | 893.8 | $ | 922.6 | $ | 30.7 | — | $ | 891.9 | ||||||||||||||||||||
| Financial Liabilities | |||||||||||||||||||||||||||||
| Policy reserves under investment products (Individual and group annuities, subject to discretionary withdrawal) (1) | $ | 551.6 | $ | 588.4 | — | — | $ | 588.4 | |||||||||||||||||||||
| Funds held under reinsurance | 319.4 | 319.4 | 319.4 | — | — | ||||||||||||||||||||||||
| Debt | 2,006.9 | 2,190.6 | — | 2,190.6 | — | ||||||||||||||||||||||||
| Total financial liabilities | $ | 2,877.9 | $ | 3,098.4 | $ | 319.4 | $ | 2,190.6 | $ | 588.4 |
(1)Only the fair value of the Company’s policy reserves for investment-type contracts (those without significant mortality or morbidity risk) are reflected in the tables above.
11. Premiums and Accounts Receivable
Receivables are reported net of an allowance for uncollectible amounts. A summary of such receivables is as follows as of the dates indicated:
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| December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Insurance premiums receivable | $ | 1,485.0 | $ | 1,632.9 | |||||||
| Other receivables | 85.2 | 75.2 | |||||||||
| Allowance for uncollectible amounts | (13.8) | (15.3) | |||||||||
| Total | $ | 1,556.4 | $ | 1,692.8 |
Effective January 1, 2020, the Company adopted the expected credit loss model for premiums and accounts receivable. Refer to Note 2 for additional information on the methodology and refer to Note 5 for the impact of adoption and a roll forward of the allowance balance for the year ended December 31, 2020.
12. Income Taxes
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted, implementing numerous changes to tax law including temporary changes regarding the prior and future utilization of net operating losses, temporary changes to the prior and future limitations on interest deductions, temporary suspension of certain payment requirements for the employer portion of Social Security taxes, technical corrections from prior tax legislation for tax depreciation of certain qualified improvement property, and the creation of certain refundable employee retention credits.
During the year ended December 31, 2020, the Company filed a refund claim for $198.4 million and recorded a $79.3 million tax benefit related to the ability to carryback net operating losses to prior periods under the CARES Act, resulting in a decrease of the net deferred tax asset of $107.1 million and an increase to the current receivable of $186.4 million. The Company accrued a $5.1 million after-tax interest benefit related to the refund from the carryback for the year ended December 31, 2020, included in the provision for income taxes in the consolidated statements of operations. The Company received the full amount of the refund plus interest in July 2020. The Company also recorded refundable employee retention tax credits of $5.2 million for the year ended December 31, 2020, respectively, included in underwriting, general and administrative expenses in the consolidated statements of operations, and has deferred the timing of payroll taxes as permitted by the CARES Act. The Company continues to assess the impact of this legislation and any changes that could have a potential impact on its financial position and results of operations.
The components of income tax expense (benefit) were as follows for the periods indicated:
| Years Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Pre-tax income: | |||||||||||||||||
| Domestic | $ | 373.2 | $ | 523.3 | $ | 215.8 | |||||||||||
| Foreign | 142.1 | 31.2 | 117.7 | ||||||||||||||
| Total pre-tax income | $ | 515.3 | $ | 554.5 | $ | 333.5 |
| Years Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Current expense (benefit): | |||||||||||||||||
| Federal and state | $ | (164.3) | $ | 19.7 | $ | 5.7 | |||||||||||
| Foreign | 45.3 | 58.5 | 53.8 | ||||||||||||||
| Total current expense (benefit) | (119.0) | 78.2 | 59.5 | ||||||||||||||
| Deferred expense (benefit): | |||||||||||||||||
| Federal and state | 184.7 | 92.2 | 31.0 | ||||||||||||||
| Foreign | 6.9 | (2.7) | (9.6) | ||||||||||||||
| Total deferred expense (benefit) | 191.6 | 89.5 | 21.4 | ||||||||||||||
| Total income tax expense (benefit) | $ | 72.6 | $ | 167.7 | $ | 80.9 |
The provision for foreign taxes includes amounts attributable to income from U.S. possessions that are considered foreign under U.S. tax laws. International operations of the Company are subject to income taxes imposed by the jurisdiction in which they operate.
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A reconciliation of the federal income tax rate to the Company’s effective income tax rate follows for the periods indicated:
| Years Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Federal income tax rate: | 21.0 | % | 21.0 | % | 21.0 | % | |||||||||||
| Reconciling items: | |||||||||||||||||
| Non-taxable investment income | (0.5) | (0.6) | (1.2) | ||||||||||||||
| Foreign earnings (1) | 1.6 | 0.8 | 3.5 | ||||||||||||||
| Non-deductible compensation | 0.8 | 0.7 | 0.9 | ||||||||||||||
| Tax reform deferred revaluation (2) | — | — | 0.5 | ||||||||||||||
| Goodwill impairment (3) | 5.6 | — | — | ||||||||||||||
| Change in valuation allowance (4) | 1.3 | 8.7 | (0.5) | ||||||||||||||
| Net operating loss carryback - CARES Act (5) | (15.7) | — | — | ||||||||||||||
| Other | — | (0.4) | 0.1 | ||||||||||||||
| Effective income tax rate: | 14.1 | % | 30.2 | % | 24.3 | % |
(1)Results for 2020, 2019, and 2018 primarily include the impact of foreign earnings taxed at different rates. In addition, 2018 reflects a benefit of 2.8% related to international reorganizations.
(2)The U.S. Tax Cuts and Jobs Act (the “TCJA”) reduced the corporate tax rate to 21%, effective January 1, 2018. The Company recorded an adjustment to its original estimate of $1.5 million in 2018, which had a 0.5% impact to the effective tax rate.
(3)In 2020, the Company recorded an impairment on goodwill and thus had a permanent tax adjustment of $28.9 million.
(4)The change in valuation allowance in 2019 is primarily related to the valuation allowance of $49.7 million established on the deferred taxes that arose related to losses incurred on our investment in Iké. The change in valuation allowance in 2020 is primarily related to an additional valuation allowance of $6.7 million related to Iké. The change in valuation allowance in 2018 was due to movements in valuation allowances in other foreign subsidiaries.
(5)The CARES Act includes a five year net operating loss (“NOL”) carryback provision, which enabled the Company to benefit from certain losses and remeasure certain deferred tax assets and liabilities at the former federal tax rate of 35%. In 2020, the Company recorded a tax benefit related to the NOL carryback provision.
A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2020, 2019 and 2018 is as follows:
| Years Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Balance at beginning of year | $ | (12.5) | $ | (11.8) | $ | (6.7) | |||||||||||
| Additions based on tax positions related to the current year | (0.5) | (0.5) | (2.5) | ||||||||||||||
| Reductions based on tax positions related to the current year | — | — | — | ||||||||||||||
| Additions for tax positions of prior years | (2.7) | (0.4) | (4.1) | ||||||||||||||
| Reductions for tax positions of prior years | 0.1 | 0.2 | 0.6 | ||||||||||||||
| Lapses | — | — | 0.9 | ||||||||||||||
| Balance at end of year | $ | (15.6) | $ | (12.5) | $ | (11.8) |
Total unrecognized tax benefits of $17.9 million, $14.0 million and $13.0 million for the years ended December 31, 2020, 2019 and 2018, respectively, which includes interest and penalties, would impact the Company’s consolidated effective tax rate if recognized. The liability for unrecognized tax benefits is included in accounts payable and other liabilities on the consolidated balance sheets.
The Company’s continuing practice is to recognize interest expense related to income tax matters in income tax expense. During the years ended December 31, 2020, 2019 and 2018, the Company recognized approximately $1.5 million, $0.7 million and $0.4 million, respectively, of interest expense related to income tax matters. The Company had $1.8 million, $0.8 million and $0.5 million of interest accrued as of December 31, 2020, 2019 and 2018, respectively. The Company had $0.8 million of penalties accrued as of December 31, 2020, 2019 and 2018.
The Company does not anticipate any significant increase or decrease of unrecognized tax benefit within the next 12 months.
The Company and its subsidiaries file income tax returns in the U.S. and various state and foreign jurisdictions. The Company has substantially concluded all U.S. federal income tax matters for years through 2015. Substantially all non-U.S.
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income tax matters have been concluded for years through 2010, and all state and local income tax matters have been concluded for years through 2008.
The tax effects of temporary differences that result in significant deferred tax assets and deferred tax liabilities are as follows as of the dates indicated:
| December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Deferred Tax Assets | |||||||||||
| Policyholder and separate account reserves | $ | 808.1 | $ | 1,063.5 | |||||||
| Net operating loss carryforwards | 53.8 | 147.0 | |||||||||
| Investments, net | 91.1 | 57.3 | |||||||||
| Credit carryforwards | 33.0 | 38.0 | |||||||||
| Employee and post-retirement benefits | 25.5 | 32.8 | |||||||||
| Compensation related | 29.9 | 31.6 | |||||||||
| Capital loss carryforwards | 9.8 | 3.1 | |||||||||
| Other | 54.1 | 123.3 | |||||||||
| Total deferred tax assets | 1,105.3 | 1,496.6 | |||||||||
| Less valuation allowance | (27.6) | (76.6) | |||||||||
| Deferred tax assets, net of valuation allowance | 1,077.7 | 1,420.0 | |||||||||
| Deferred Tax Liabilities | |||||||||||
| Deferred acquisition costs | (1,211.2) | (1,472.0) | |||||||||
| Net unrealized appreciation on securities | (413.3) | (274.0) | |||||||||
| Intangible assets | (105.8) | (67.5) | |||||||||
| Total deferred tax liabilities | (1,730.3) | (1,813.5) | |||||||||
| Net deferred income tax liabilities | $ | (652.6) | $ | (393.5) |
A cumulative valuation allowance of $27.6 million existed as of December 31, 2020 based on management’s assessment that it is more likely than not that certain deferred tax assets attributable to international subsidiaries will not be realized.
The Company’s ability to realize deferred tax assets depends on its ability to generate sufficient taxable income of the same character within the carryback or carryforward periods. In assessing future taxable income, the Company considered all sources of taxable income available to realize its deferred tax asset, including the future reversal of existing temporary differences, future taxable income exclusive of reversing temporary differences and carryforwards, taxable income in carryback years and tax-planning strategies. If changes occur in the assumptions underlying the Company’s tax planning strategies or in the scheduling of the reversal of the Company’s deferred tax liabilities, the valuation allowance may need to be adjusted in the future.
Other than for certain wholly owned Canadian and Latin American subsidiaries, the Company plans to indefinitely reinvest the earnings in other jurisdictions. Under current U.S. tax law, no material income taxes are anticipated on future repatriation of earnings. Therefore, deferred taxes have not been provided.
Global intangible low taxed income (“GILTI”): The TCJA creates a new requirement that certain income (i.e., GILTI) earned by controlled foreign corporations (“CFCs”) must be included currently in the gross income of the CFCs’ U.S. shareholder. GILTI is the excess of the U.S. shareholder’s “net CFC tested income” over 10% of the aggregate of the U.S. shareholder’s pro rata share of the qualified business asset investment of each CFC with respect to which it is a U.S. shareholder. Under GAAP, the Company is allowed to make an accounting policy election of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred or (2) factoring such amounts into the company’s measurement of its deferred taxes. The Company has elected to recognize the current tax on GILTI as a period expense in the period the tax is incurred. Under this policy, the Company has not provided deferred taxes related to temporary differences that upon their reversal will affect the amount of income subject to GILTI in the period. The GILTI current period expense is immaterial.
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The net operating loss carryforwards by jurisdiction are as follows as of the dates indicated:
| December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Federal net operating loss carryforwards (1) | $ | 66.8 | $ | 509.8 | |||||||
| Foreign net operating loss carryforwards (2) | 162.4 | 170.0 |
(1)All NOLs as of December 31, 2019 were used during the year and carried back under the CARES Act. New NOLs were recorded during the year ended December 31, 2020 due to the acquisition of HYLA. $58.7 million of net operating losses as of December 31, 2020 expire between 2030 and 2036 and $8.1 million has an unlimited carryforward.
(2)Of the $162.4 million as of December 31, 2020, $44.5 million expires between 2021 and 2040 and $117.9 million has an unlimited carryforward period.
13. Deferred Acquisition Costs
Information about deferred acquisition costs is as follows as of the dates indicated:
| December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Beginning balance | $ | 6,668.0 | $ | 5,103.0 | $ | 3,484.5 | |||||||||||
| Costs deferred | 3,736.1 | 3,747.3 | 3,094.0 | ||||||||||||||
| Amortization | (2,830.6) | (2,182.3) | (1,475.5) | ||||||||||||||
| Ending balance | $ | 7,573.5 | $ | 6,668.0 | $ | 5,103.0 |
14. Property and Equipment
Property and equipment consisted of the following as of the dates indicated:
| December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Land | $ | 10.9 | $ | 10.9 | |||||||
| Buildings and improvements | 248.6 | 238.4 | |||||||||
| Furniture, fixtures and equipment | 581.3 | 512.9 | |||||||||
| Total | 840.8 | 762.2 | |||||||||
| Less accumulated depreciation | (347.5) | (328.5) | |||||||||
| Total | $ | 493.3 | $ | 433.7 |
During the year ended December 31, 2019, the Company recorded a $7.4 million loss on assets held for sale associated with an office building previously used as the headquarters for a business in runoff. Depreciation expense for the years ended December 31, 2020, 2019 and 2018 amounted to $60.0 million, $55.3 million and $39.0 million, respectively. Depreciation expense is included in underwriting, general and administrative expenses in the consolidated statements of operations.
15. Goodwill
The Company has assigned goodwill to its reporting units for impairment testing purposes. The Company has five reporting units consisting of three reporting units within the Global Lifestyle operating segment, including Connected Living, Global Automotive and Global Financial Services, as well as Global Housing and Global Preneed (whereby the reporting unit for impairment testing was at the operating segment level). The Corporate and Other segment is not assigned any goodwill.
Global Preneed Goodwill Impairment
During the third quarter of 2020, the Company identified impairment indicators impacting the fair value of the Global Preneed reportable segment in connection with exploring strategic alternatives for the Global Preneed business, including the possible sale of the business, to focus on opportunities within the Global Lifestyle and Global Housing segments. Such impairment indicators included the evaluation of the long-term economic performance of the segment in light of further expected declines in interest rates from the resurgence of COVID-19 cases. As interest rates are critical to the performance of the business, the anticipated long-term declines in interest rates were expected to have adverse impacts on existing business and
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cause significant challenges to profitability from new business. The overall expected adverse impact to the business in the segment was an important indicator that triggered the requirement for an interim goodwill impairment analysis in the third quarter of 2020. As a result, an updated fair value assessment was completed based on how a market participant would consider the long-term outlook for business performance, long-term forecasts of the interest rate environment and its impact on the fair value of liabilities.
The fair value of the reportable segment was determined using a discounted cash flow method which calculated the present value of future earnings developed from projected earnings arising from existing and new business and considered all aspects of the business including investment assumptions of asset portfolios. The fair value calculated in the third quarter of 2020 was lower than the carrying value of the reportable segment, resulting in the pre-tax and after-tax impairment charge of the entire goodwill of $137.8 million related to the segment. The goodwill impairment charge is reported separately in the consolidated statements of operations for the year ended December 31, 2020, with a corresponding reduction to goodwill in the consolidated balance sheet as of December 31, 2020.
Quantitative Impairment Testing
For the annual October 1, 2020 goodwill impairment test, the Company performed quantitative tests for all reporting units with goodwill (Connected Living, Global Automotive, Global Financial Services, and Global Housing).
The following describes the various valuation methodologies used in the quantitative test which were weighted using our judgment as to which were the most representative in determining the estimated fair value of the reporting units.
A Dividend Discount Method (“DDM”) was used to value each of the reporting units based upon the present value of expected cash flows available for distribution over future periods. Cash flows were estimated for a discrete projection period based on detailed assumptions, and a terminal value was calculated to reflect the value attributable to cash flows beyond the discrete period. Cash flows and the terminal value were then discounted using each reporting unit’s estimated cost of capital. The estimated fair value of each reporting unit represented the sum of the discounted cash flows and terminal value.
A Guideline Company Method, in which we identified a group of peer companies that have similar operations to the reporting unit, was used; however, direct peer comparisons for the reporting units were limited given the diversity of the products and services within the businesses. This method was used to value each reporting unit based upon its relative performance to peer companies, based on several measures, including price to trailing 12-month earnings, price to projected earnings, price to tangible net worth and return on equity.
A Guideline Transaction Method was not used in the valuations due to the impact of COVID-19 on the markets in 2020 and the absence of sufficient observable transactions post COVID-19.
While DDM and Guideline Company valuation methodologies were considered in assessing fair value, the DDM was weighted more heavily since management believes that expected cash flows are the most important factor in the valuation of a business enterprise, and also considering the lack of directly-comparable peer companies. Based on the quantitative assessment performed as of October 1, 2020, the Company concluded that the estimated fair values of each reporting unit exceeded their respective book values and therefore determined that goodwill was not impaired.
A roll forward of goodwill by reportable segment is provided below as of and for the years indicated:
| Global Lifestyle (1) | Global Housing | Global Preneed | Consolidated | ||||||||||||||||||||
| Balance at December 31, 2018 (2) | $ | 1,804.7 | $ | 379.5 | $ | 137.6 | $ | 2,321.8 | |||||||||||||||
| Acquisitions | 20.2 | — | — | 20.2 | |||||||||||||||||||
| Foreign currency translation and other | 1.0 | — | 0.4 | 1.4 | |||||||||||||||||||
| Balance at December 31, 2019 (2) | 1,825.9 | 379.5 | 138.0 | 2,343.4 | |||||||||||||||||||
| Acquisitions (3) | 374.6 | — | — | 374.6 | |||||||||||||||||||
| Impairments | — | — | (137.8) | (137.8) | |||||||||||||||||||
| Foreign currency translation and other | 9.3 | — | (0.2) | 9.1 | |||||||||||||||||||
| Balance at December 31, 2020 (2) | $ | 2,209.8 | $ | 379.5 | $ | — | $ | 2,589.3 |
(1)As of December 31, 2020, $715.2 million, $1,421.3 million and $73.3 million of goodwill was assigned to the Connected Living, Global Automotive and Global Financial Services and Other reporting unit, respectively. As of December 31, 2019, $461.5 million, $1,291.7 million and $72.7 million of goodwill was assigned to the Connected Living, Global Automotive and Global Financial Services and Other reporting unit, respectively.
(2)Consolidated goodwill reflects $1,405.9 million of accumulated impairment loss at December 31, 2020, and $1,268.1 million of accumulated impairment losses at December 31, 2019 and 2018.
(3)Includes goodwill from the HYLA and AFAS acquisitions (refer to Note 3), as well as goodwill from several less significant transactions.
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16. VOBA and Other Intangible Assets
VOBA
Information about VOBA is as follows for the periods indicated:
| Years Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Beginning balance | $ | 2,004.3 | $ | 3,157.8 | $ | 24.4 | |||||||||||
| Additions (adjustments) | — | (4.0) | 3,972.6 | ||||||||||||||
| Amortization, net of interest accrued | (842.0) | (1,127.4) | (825.2) | ||||||||||||||
| Foreign currency translation and other | (5.8) | (22.1) | (14.0) | ||||||||||||||
| Ending balance | $ | 1,156.5 | $ | 2,004.3 | $ | 3,157.8 |
As of December 31, 2020, the outstanding VOBA balance is primarily attributable to the TWG acquisition within the Global Lifestyle segment.
As of December 31, 2020, the estimated amortization of VOBA for the next five years and thereafter is as follows:
| Year | Amount | ||||
| 2021 | $ | 537.6 | |||
| 2022 | 331.0 | ||||
| 2023 | 192.3 | ||||
| 2024 | 86.6 | ||||
| 2025 | 4.0 | ||||
| Thereafter | 5.0 | ||||
| Total | $ | 1,156.5 |
Other Intangible Assets
Information about other intangible assets is as follows as of the dates indicated:
| As of December 31, | |||||||||||||||||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||||||||||||||
| Carrying Value | Accumulated Amortization | Net Other Intangible Assets | Carrying Value | Accumulated Amortization | Net Other Intangible Assets | ||||||||||||||||||||||||||||||
| Contract based intangibles (1) | $ | 432.0 | $ | (51.0) | $ | 381.0 | $ | 437.0 | $ | (41.3) | $ | 395.7 | |||||||||||||||||||||||
| Customer related intangibles | 519.5 | (306.2) | 213.3 | 382.0 | (285.4) | 96.6 | |||||||||||||||||||||||||||||
| Marketing related intangibles | 10.1 | (3.5) | 6.6 | 5.6 | (5.6) | — | |||||||||||||||||||||||||||||
| Technology based intangibles | 117.6 | (22.3) | 95.3 | 62.0 | (14.1) | 47.9 | |||||||||||||||||||||||||||||
| Total | $ | 1,079.2 | $ | (383.0) | $ | 696.2 | $ | 886.6 | $ | (346.4) | $ | 540.2 |
(1)As of December 31, 2020 and 2019, contract based intangibles included $13.7 million of indefinite-lived intangible assets.
Total amortization of other intangible assets for the years ended December 31, 2020, 2019 and 2018 was $73.9 million, $62.2 million and $77.9 million, respectively.
Other intangible assets that have finite lives, including customer relationships, customer contracts and other intangible assets, are amortized over their useful lives. The estimated amortization of other intangible assets with finite lives for the next five years and thereafter is as follows:
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| Year | Amount | ||||
| 2021 | $ | 86.0 | |||
| 2022 | 76.3 | ||||
| 2023 | 76.0 | ||||
| 2024 | 69.0 | ||||
| 2025 | 64.7 | ||||
| Thereafter | 310.5 | ||||
| Total other intangible assets with finite lives | $ | 682.5 |
17. Reserves
Short Duration Contracts
Continuing Business (Global Lifestyle and Global Housing)
The Company’s short duration contracts include products and services within the Global Lifestyle and Global Housing segments. The main product lines for Global Lifestyle include extended service contracts, vehicle service contracts, mobile device protection and credit insurance, and for Global Housing the main product lines include lender-placed homeowners and flood, Multifamily Housing and manufactured housing.
Total IBNR reserves are determined by subtracting case basis incurred losses from the ultimate loss and loss adjustment expense estimates. Ultimate loss and loss adjustment expenses are estimated utilizing generally accepted actuarial loss reserving methods. The reserving methods employed by the Company include the Chain Ladder, Munich Chain Ladder and Bornhuetter-Ferguson methods. Reportable catastrophe losses are analyzed and reserved for separately using a frequency and severity approach. The methods all involve aggregating paid and case-incurred loss data by accident quarter (or accident year) and accident age for each product grouping. As the data ages, loss development factors are calculated that measure emerging claim development patterns between reporting periods. By selecting loss development factors indicative of remaining development, known losses are projected to an ultimate incurred basis for each accident period. The underlying premise of the Chain Ladder method is that future claims development is best estimated using past claims development, whereas the Bornhuetter-Ferguson method employs a combination of past claims development and an estimate of ultimate losses based on an expected loss ratio. The Munich Chain Ladder method takes into account the correlations between paid and incurred development in projecting future development factors and is typically more applicable to products experiencing greater variability in incurred to paid ratios.
The best estimate of ultimate loss and loss adjustment expense is generally selected from a blend of the different methods that are applied consistently each period considering significant assumptions, including projected loss development factors and expected loss ratios. There have been no significant changes in the methodologies and assumptions utilized in estimating the liability for unpaid loss and loss adjustment expenses for any of the periods presented.
Disposed and Runoff Short Duration Insurance Lines
Short duration contracts within the disposed business include certain medical policies no longer offered and Assurant Employee Benefits policies disposed of via reinsurance. Reserves and reinsurance recoverables for previously disposed business are included in the consolidated balance sheets. See Note 18 for additional information.
The Company has runoff exposure to asbestos, environmental and other general liability claims arising from the Company’s participation in certain reinsurance pools from 1971 through 1985 from contracts discontinued many years ago. The amount of carried case reserves are based on recommendations of the various pool managers. Using information currently available, and after consideration of the reserves reflected in the consolidated financial statements, the Company does not believe or expect that changes in reserve estimates for these claims are likely to be material.
Long Duration Contracts
Continuing Business (Global Preneed)
The Company’s long duration contracts are primarily comprised of preneed life insurance and annuity policies. Future policy benefits make up the largest portion of Global Preneed liabilities. Claims and benefits payable reserves are less significant. Reserve assumptions for mortality, inflation, lapse, margin and discount rates are company-specific based on pricing assumptions and experience studies.
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For business issued during the years ended December 31, 2020 and 2019, discount rates ranged between 1.25% and 4.00%. Death benefit increases for business issued during the years ended December 31, 2020 and 2019 ranged between 0.0% and 3.6%. Canadian annuity products typically have surrender charges that vary by product series and premium paying period. Surrender charges on U.S. annuity contracts generally range from 7.0% to 0.0% and grade to zero over a period of seven years.
Disposed and Runoff Long Duration Insurance Lines
The Company has long-term care exposures which are fully reinsured within the disposed business. The Company also has universal life and annuity products that are no longer offered and are in runoff. Reserves have been established based on the following assumptions. Interest rates credited on annuities were at guaranteed rates, ranging from 3.5% to 4.0%, except for a limited number of policies with guaranteed crediting rates of 4.5%. All annuity policies are past the surrender charge period. Crediting interest rates on universal life fund are at guaranteed rates of 4.0% to 4.1%. Universal life funds are subject to surrender charges that vary by product, age, sex, year of issue, risk class, face amount and grade to zero over a period not longer than 20 years.
Reserve Roll Forward
The following table provides a roll forward of the Company’s beginning and ending claims and benefits payable balances. Claims and benefits payable is the liability for unpaid loss and loss adjustment expenses and are comprised of case and IBNR reserves.
Since unpaid loss and loss adjustment expenses are estimates, the Company’s actual losses incurred may be more or less than the Company’s previously developed estimates, which is referred to as either unfavorable or favorable development, respectively.
The best estimate of ultimate loss and loss adjustment expense is generally selected from a blend of methods that are applied consistently each period. There have been no significant changes in the methodologies and assumptions utilized in estimating the liability for unpaid loss and loss adjustment expenses for any of the periods presented.
| Years Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Claims and benefits payable, at beginning of year (1) | $ | 2,687.7 | $ | 2,813.7 | $ | 3,782.2 | |||||||||||
| Less: Reinsurance ceded and other | (1,900.0) | (2,053.7) | (3,193.3) | ||||||||||||||
| Net claims and benefits payable, at beginning of year | 787.7 | 760.0 | 588.9 | ||||||||||||||
| Acquired reserves as of acquisition date (2) | — | — | 140.7 | ||||||||||||||
| Incurred losses and loss adjustment expenses related to: | |||||||||||||||||
| Current year | 2,590.1 | 2,670.9 | 2,353.0 | ||||||||||||||
| Prior years | (40.8) | (16.2) | (7.4) | ||||||||||||||
| Total incurred losses and loss adjustment expenses | 2,549.3 | 2,654.7 | 2,345.6 | ||||||||||||||
| Paid losses and loss adjustment expenses related to: | |||||||||||||||||
| Current year | 2,019.9 | 2,097.8 | 1,887.1 | ||||||||||||||
| Prior years | 519.9 | 529.2 | 428.1 | ||||||||||||||
| Total paid losses and loss adjustment expenses | 2,539.8 | 2,627.0 | 2,315.2 | ||||||||||||||
| Net claims and benefits payable, at end of year | 797.2 | 787.7 | 760.0 | ||||||||||||||
| Plus: Reinsurance ceded and other (3) | 1,862.3 | 1,900.0 | 2,053.7 | ||||||||||||||
| Claims and benefits payable, at end of year (3) | $ | 2,659.5 | $ | 2,687.7 | $ | 2,813.7 |
(1)Claims and benefits payable and related reinsurance ceded were reduced by $730.0 million in December 2018 as a result of the sale of Time Insurance Company, a legal entity associated with the previously exited Assurant Health business.
(2)Acquired reserves from TWG include $419.9 million of gross claims and benefits payable and $279.2 million of ceded claims and benefits payable. The reserve roll forward includes the activity of TWG for the relevant periods since the acquisition date.
(3)Includes reinsurance recoverables and claims and benefits payable of $95.8 million, $86.8 million and $119.8 million as of December 31, 2020, 2019 and 2018, respectively, which were ceded to the U.S. government. The Company acts as an administrator for the U.S. government under the voluntary National Flood Insurance Program.
The Company experienced net favorable prior year development in each of the years ended December 31, 2020, 2019 and 2018. A comparison of net (favorable) unfavorable prior year development is shown below across the Company’s current and former segments and businesses.
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| Prior Year Incurred Loss Development for the Years Ending December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Global Lifestyle | $ | (27.6) | $ | (24.0) | $ | (16.6) | |||||||||||
| Global Housing | (8.0) | 13.6 | 16.3 | ||||||||||||||
| Global Preneed | (0.3) | (0.3) | (0.5) | ||||||||||||||
| All Other | (4.9) | (5.5) | (6.6) | ||||||||||||||
| Total | $ | (40.8) | $ | (16.2) | $ | (7.4) |
Global Lifestyle experienced net favorable loss development in each of the years ended December 31, 2020, 2019 and 2018. Global Lifestyle experienced similar amounts of net favorable development in 2020 and 2019 of $27.6 million and $24.0 million, respectively, which increased from 2018 due to increased business volume resulting from the acquisition of TWG in May 2018. Global Housing experienced net favorable development of $8.0 million in 2020 primarily attributable to prior year reportable catastrophes. Global Housing experienced net unfavorable development in 2019 and 2018 primarily due to higher than expected losses from Hurricane Maria. A more detailed explanation of the claims development from Global Lifestyle and Global Housing is presented below, including claims development by accident year. Reserves for the longer-tail property coverages included in All Other (e.g., asbestos, environmental and other general liability) had no material changes in estimated amounts for incurred claims in prior years.
The following tables represent the Global Lifestyle and Global Housing segments’ incurred claims and allocated claim adjustment expenses, net of reinsurance, less cumulative paid claims and allocated claim adjustment expenses, net of reinsurance to reconcile to total claims and benefits payable, net of reinsurance as of December 31, 2020. The tables provide undiscounted information about claims development by accident year for the significant short duration claims and benefits payable balances in Global Lifestyle and Global Housing.
The following factors are relevant to the loss development information included in the tables below:
-
Table Presentation:** The tables are organized by accident year. For certain categories of claims and for reinsurance recoverables, losses may sometimes be reclassified to an earlier or later accident year as more information about the date of occurrence becomes available to us. These reclassifications are shown as development in the respective years in the tables below. Predominantly, the Company writes short-tail lines that are written on occurrence basis. Five years of claims development information is provided since most of the claims are fully developed after five years, as shown in the average payout ratio tables.
-
Table Groupings:** The groupings have homogeneous risk characteristics with similar development patterns and would generally be subject to similar trends and reflect our reportable segments.
-
Impact of Reinsurance:** The reinsurance program varies by exposure type. Historically, the Company has leveraged facultative and treaty reinsurance, both on pro-rata and excess of loss basis. The reinsurance program may change from year to year, which may affect the comparability of the data presented in the tables.
-
IBNR:** Includes development from past reported losses in IBNR.
-
Information excluded from tables:** Unallocated loss adjustment expenses are excluded from the tables.
-
Foreign exchange rates:** The loss development for operations outside of the U.S. is presented for all accident years using the current exchange rates at December 31, 2020. Although this approach requires restating all prior accident year information, the changes in exchange rates do not impact incurred and paid loss development trends.
-
Acquisitions:** Includes acquisitions from all accident years presented in the tables. For purposes of this disclosure, we have applied the retrospective method for the acquired reserves, including incurred and paid claim development histories throughout the relevant tables. It should be noted that historical reserves for the acquired business were established by the acquired companies using methods, assumptions and procedures then in effect which may differ from our current reserving bases. Accordingly, it may not be appropriate to extrapolate future reserve adequacy based on the aggregated historical results shown in the tables.
-
Dispositions:** Excludes dispositions from all accident years presented in the tables.
-
Claim counts:** Considers a reported claim to be one claim for each claimant or feature for each loss occurrence. Reported claims for losses from assumed reinsurance contracts are not available and hence not included in the reported claims. There are limitations that should be considered on the reported claim count data in the tables below, including:
◦Claim counts are presented only on a reported (not an ultimate) basis;
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◦The tables below include lines of business and geographies at a certain aggregated level which may indicate different frequency and severity trends and characteristics, and may not be as meaningful as the claim count information related to the individual products within those lines of business and geographies;
◦Certain lines of business are more likely to be subject to occurrences involving multiple claimants and features, which can distort measures based on the reported claim counts in the table below; and
◦Reported claim counts are not adjusted for ceded reinsurance, which may distort the measure of frequency or severity.
- Required Supplemental Information:** The information about incurred and paid loss development for all periods preceding year ended December 31, 2020 and the related historical claims payout percentage disclosure is unaudited and is presented as required supplementary information.
Global Lifestyle Net Claims Development Tables
| Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance | December 31, 2020 | |||||||||||||||||||||||||
| Years Ended December 31, | Total of Incurred-but-Not Reported Liabilities Plus Expected Development on Reported Claims (1) | Cumulative Number of Reported Claims (2) | ||||||||||||||||||||||||
| Accident Year | 2016 Unaudited | 2017 Unaudited | 2018 Unaudited | 2019 Unaudited | 2020 | |||||||||||||||||||||
| 2016 | $ | 1,113.2 | $ | 1,085.2 | $ | 1,092.1 | $ | 1,092.9 | $ | 1,092.6 | $ | 0.3 | 11,221,288 | |||||||||||||
| 2017 | 1,214.2 | 1,191.8 | 1,191.4 | 1,191.5 | 1.0 | 10,378,241 | ||||||||||||||||||||
| 2018 | 1,393.2 | 1,368.5 | 1,362.0 | 6.8 | 9,797,399 | |||||||||||||||||||||
| 2019 | 1,540.1 | 1,519.1 | 12.3 | 10,088,185 | ||||||||||||||||||||||
| 2020 | 1,474.3 | 160.5 | 9,123,552 | |||||||||||||||||||||||
| Total | $ | 6,639.5 |
| Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance | |||||||||||||||||
| Years Ended December 31, | |||||||||||||||||
| Accident Year | 2016 Unaudited | 2017 Unaudited | 2018 Unaudited | 2019 Unaudited | 2020 | ||||||||||||
| 2016 | $ | 915.6 | $ | 1,074.1 | $ | 1,082.2 | $ | 1,085.3 | $ | 1,086.9 | |||||||
| 2017 | 990.2 | 1,176.2 | 1,183.0 | 1,185.3 | |||||||||||||
| 2018 | 1,163.7 | 1,341.7 | 1,351.9 | ||||||||||||||
| 2019 | 1,311.1 | 1,497.5 | |||||||||||||||
| 2020 | 1,246.6 | ||||||||||||||||
| Total | $ | 6,368.2 | |||||||||||||||
| Outstanding claims and benefits payable before 2016, net of reinsurance | 9.4 | ||||||||||||||||
| Claims and benefits payable, net of reinsurance | $ | 280.7 |
| Average Annual Payout of Incurred Claims by Age, Net of Reinsurance | ||||||||||||||
| Year 1 Unaudited | Year 2 Unaudited | Year 3 Unaudited | Year 4 Unaudited | Year 5 Unaudited | ||||||||||
| 85.0% | 13.9% | 0.7% | 0.2% | 0.2% |
(1)Includes a provision for development on case reserves.
(2)Number of paid claims plus open (pending) claims. Claim count information related to ceded reinsurance is not reflected as it cannot be reasonably defined or quantified, given that the Company’s reinsurance includes non-proportional treaties.
Using the December 31, 2020 foreign exchange rates for all years, Global Lifestyle experienced $27.6 million of net favorable loss development for the year ended December 31, 2020, compared to net favorable loss development of $24.0 million and $16.6 million for the years ended December 31, 2019 and 2018, respectively. These amounts are based on the change in net incurred losses from the claims development tables above, plus additional impacts from accident years prior to 2016. Many of these contracts and products contain retrospective commission (profit sharing) provisions that would result in offsetting increases or decreases in expense dependent on if the development was favorable or unfavorable.
For the year ended December 31, 2020, the net favorable development from Global Lifestyle was attributable to nearly all lines of business across most of the Company’s regions with a concentration on more recent accident years and based on emerging evaluations regarding loss experience each period. Growth in new business contributed to the net favorable development in 2020, as more claims data supported an adjustment to initial estimated loss rates. Growth areas that contributed
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to the net favorable development included vehicle service contracts sold in North America and extended service contracts sold across Asia Pacific. For the year ended December 31, 2019, favorable development was primarily from mobile device protection products and extended service contract products written in North America. In particular, new mobile business was favorable relative to prior expectations. For the year ended December 31, 2018, favorable development was attributable to extended service contracts sold in the United States, lower than expected frequency for credit insurance sold in Canada and Puerto Rico, and lower than expected frequency and severity of mobile device protection products sold in South America.
Foreign exchange rate movements over time caused some of the reserve differences shown in the reserve roll forward and prior year incurred loss tables to vary from what is reflected in the claims development tables for Global Lifestyle. The impacts by year were $0.5 million, $(0.4) million, and $1.0 million for the years ended December 31, 2020, 2019 and 2018, respectively. The claims development tables above remove the impact due to changing foreign exchange rates over time for comparability.
Global Housing Net Claims Development Tables
| Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance | December 31, 2020 | |||||||||||||||||||||||||
| Years Ended December 31, | Total of Incurred-but-Not Reported Liabilities Plus Expected Development on Reported Claims (1) | Cumulative Number of Reported Claims (2) | ||||||||||||||||||||||||
| Accident Year | 2016 Unaudited | 2017 Unaudited | 2018 Unaudited | 2019 Unaudited | 2020 | |||||||||||||||||||||
| 2016 | $ | 852.8 | $ | 835.1 | $ | 839.9 | $ | 843.2 | $ | 842.6 | $ | 2.4 | 201,359 | |||||||||||||
| 2017 | 965.3 | 977.0 | 991.8 | 987.3 | 17.1 | 251,921 | ||||||||||||||||||||
| 2018 | 918.5 | 916.6 | 916.6 | 12.2 | 201,894 | |||||||||||||||||||||
| 2019 | 854.7 | 852.4 | 56.8 | 200,508 | ||||||||||||||||||||||
| 2020 | 858.7 | 234.8 | 188,785 | |||||||||||||||||||||||
| Total | $ | 4,457.6 |
| Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance | |||||||||||||||||
| Years Ended December 31, | |||||||||||||||||
| Accident Year | 2016 Unaudited | 2017 Unaudited | 2018 Unaudited | 2019 Unaudited | 2020 | ||||||||||||
| 2016 | $ | 599.4 | $ | 781.6 | $ | 817.6 | $ | 832.5 | $ | 838.5 | |||||||
| 2017 | 701.1 | 902.7 | 943.5 | 963.5 | |||||||||||||
| 2018 | 622.8 | 854.9 | 893.8 | ||||||||||||||
| 2019 | 546.6 | 763.1 | |||||||||||||||
| 2020 | 557.1 | ||||||||||||||||
| Total | $ | 4,016.0 | |||||||||||||||
| Outstanding claims and benefits payable before 2016, net of reinsurance | 4.0 | ||||||||||||||||
| Claims and benefits payable, net of reinsurance | $ | 445.6 |
| Average Annual Payout of Incurred Claims by Age, Net of Reinsurance | ||||||||||||||
| Year 1 Unaudited | Year 2 Unaudited | Year 3 Unaudited | Year 4 Unaudited | Year 5 Unaudited | ||||||||||
| 69.3% | 23.7% | 4.3% | 1.9% | 0.7% |
(1)Includes a provision for development on case reserves.
(2)Number of paid claims plus open (pending) claims. Claim frequency is determined at a claimant reporting level. Depending on the nature of the product and related coverage triggers, it is possible for a claimant to contribute multiple claim counts in a given policy period. Claim count information related to ceded reinsurance is not reflected as it cannot be reasonably defined or quantified, given that the Company’s reinsurance includes non-proportional treaties.
For the year ended December 31, 2020, Global Housing experienced $8.0 million of net favorable loss development, compared to unfavorable net loss development of $13.6 million and $16.3 million for the years ended December 31, 2019 and 2018, respectively. These amounts are based on the change in net incurred losses from the claims development data above, plus additional impacts from accident years prior to 2016. For the year ended December 31, 2020, the net favorable development for Global Housing was primarily attributable to a reserve release from Hurricane Maria in response to settling claims for less than expected. This follows two years of reserve increase for Maria, where severity trends had been outpacing initial assumptions. Net development excluding reportable catastrophes was flat as favorable claim frequency trends on lender-placed homeowners and other products were offset by unfavorable development from sharing economy products. For the year ended December 31, 2019, Global Housing experienced net unfavorable development in accident year 2017 due to rising severity trends from Hurricane Maria leading to an $11.3 million increase. Non-catastrophe claims were higher than expected in accident year 2018
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due to higher than expected losses from small commercial and sharing economy products. For the year ended December 31, 2018, Global Housing experienced net unfavorable development from Hurricane Maria of $18.4 million as projected losses exceeded available reinsurance limits. Excluding catastrophes, favorable development decreased due to rising severity trends for water damage and non-catastrophe related weather claims on lender-placed homeowners products.
Reconciliation of the Disclosure of Net Incurred and Paid Claims Development to the Liability for Unpaid Claims and Benefits Payable
| December 31, 2020 | |||||
| Net outstanding liabilities | |||||
| Global Lifestyle | $ | 280.7 | |||
| Global Housing | 445.6 | ||||
| Other short-duration insurance lines (1) | 23.7 | ||||
| Disposed business short-duration insurance lines (Assurant Health) | 2.5 | ||||
| Claims and benefits payable, net of reinsurance | 752.5 | ||||
| Reinsurance recoverable on unpaid claims | |||||
| Global Lifestyle (2) | 446.5 | ||||
| Global Housing | 197.3 | ||||
| Other short-duration insurance lines (1) | 3.1 | ||||
| Disposed business short-duration insurance lines (Assurant Employee Benefits and Assurant Health) | 471.0 | ||||
| Total reinsurance recoverable on unpaid claims | 1,117.9 | ||||
| Insurance lines other than short-duration (3) | 780.3 | ||||
| Unallocated claim adjustment expense | 8.8 | ||||
| Total claims and benefits payable | $ | 2,659.5 |
(1)Asbestos and pollution reserves represents $19.1 million of the other short-duration insurance lines, with $3.1 million recoveries.
(2)Disposed of property and casualty business represents $201.9 million of the $446.5 million in reinsurance recoverables for Global Lifestyle.
(3)Amount consists of certain long-duration contract exposures, primarily disabled life reserves of the long-term care business which are fully ceded through reinsurance. Refer to Note 2 for further details.
18. Reinsurance
In the ordinary course of business, the Company is involved in both the assumption and cession of reinsurance with non-affiliated companies. The following table provides details of the reinsurance recoverables balance as of the dates indicated:
| December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Ceded future policyholder benefits and expense | $ | 3,316.9 | $ | 3,329.3 | |||||||
| Ceded unearned premium | 4,579.8 | 4,248.1 | |||||||||
| Ceded claims and benefits payable | 1,856.7 | 1,895.5 | |||||||||
| Ceded paid losses | 86.5 | 120.5 | |||||||||
| Total | $ | 9,839.9 | $ | 9,593.4 |
A key credit quality indicator for reinsurance is the A.M. Best Company (“A.M. Best”) financial strength ratings of the reinsurer. A.M. Best financial strength ratings are an independent opinion of a reinsurer’s ability to meet ongoing obligations to policyholders. The A.M. Best ratings for new reinsurance agreements where there is material credit exposure are reviewed at the time of execution. The A.M. Best ratings for existing reinsurance agreements are reviewed on a quarterly basis, or sooner based on developments. The following table provides the reinsurance recoverable as of December 31, 2020 grouped by A.M. Best financial strength ratings:
F-58
| A.M. Best Rating of Reinsurer | Ceded future policyholder benefits and expense | Ceded unearned premiums | Ceded claims and benefits payable | Ceded paid losses | Total | ||||||||||||||||||||||||
| A++ or A+ | $ | 1,986.9 | $ | 89.3 | $ | 1,275.0 | $ | 8.5 | $ | 3,359.7 | |||||||||||||||||||
| A or A- | 123.6 | 103.3 | 75.9 | 27.8 | 330.6 | ||||||||||||||||||||||||
| B++ or B+ | 488.3 | 17.6 | 19.5 | 0.3 | 525.7 | ||||||||||||||||||||||||
| Not Rated (1) | 741.6 | 4,369.6 | 488.5 | 50.5 | 5,650.2 | ||||||||||||||||||||||||
| Total | 3,340.4 | 4,579.8 | 1,858.9 | 87.1 | 9,866.2 | ||||||||||||||||||||||||
| Less: Allowance | (23.5) | — | (2.2) | (0.6) | (26.3) | ||||||||||||||||||||||||
| Net reinsurance recoverable | $ | 3,316.9 | $ | 4,579.8 | $ | 1,856.7 | $ | 86.5 | $ | 9,839.9 |
(1)Not Rated ceded claims and benefits payable included reinsurance recoverables of $95.8 million as of December 31, 2020 which were ceded to the U.S. government. The Company acts as an administrator for the U.S. government under the voluntary National Flood Insurance Program.
The Company has used reinsurance to exit certain businesses, including the Assurant Employee Benefits business and blocks of individual life, annuity, and long-term care business. The reinsurance recoverables relating to these dispositions amounted to $4.80 billion as of December 31, 2020, of which $4.42 billion was attributable to the four reinsurers with the largest reinsurance recoverable balances relating to these dispositions: Sun Life, John Hancock, Talcott Resolution (formerly owned by The Hartford) and Employers Reassurance Corporation (“ERAC”). The A.M. Best financial strength ratings of the first three reinsurers was A+, A+ and B++, respectively. A.M. Best currently maintains a stable outlook on the financial strength ratings of Sun Life, John Hancock and Talcott Resolution. A.M. Best withdrew its rating for ERAC in 2019. General Electric Company (“GE”), the ultimate parent of ERAC, has a capital maintenance agreement in place to maintain ERAC’s risk-based capital (“RBC”) ratios at an acceptable regulatory level, which has been maintained in recent years through capital infusions into ERAC. Most of the assets backing reserves relating to reinsurance recoverables from Sun Life, John Hancock and Talcott Resolution are held in trust. There are no assets or other collateral backing reserves relating to reinsurance recoverables from ERAC.
A substantial portion of the Not Rated category is related to Global Lifestyle’s and Global Housing’s agreements to reinsure premiums and risks related to business generated by certain clients to the clients’ own captive insurance companies or to reinsurance subsidiaries in which the clients have an ownership interest. To mitigate exposure to credit risk for these reinsurers, the Company evaluates the financial condition of the reinsurer and typically holds substantial collateral (in the form of funds withheld, trusts and letters of credit) as security. The Not Rated category also includes recoverables from the National Flood Insurance Program and the Florida Hurricane Catastrophe Fund.
Effective January 1, 2020, the Company adopted the expected credit loss model for reinsurance recoverables. Refer to Note 2 for additional information on the methodology and refer to Note 5 for the impact of adoption and a roll forward of the allowance balance for the year ended December 31, 2020. Prior to January 1, 2020, an allowance for doubtful accounts related to reinsurance recoverables was recorded on the basis of periodic evaluations of balances due from reinsurers (net of collateral), reinsurer solvency, management’s experience and current economic conditions.
The effect of reinsurance on premiums earned and benefits incurred was as follows for the periods indicated:
| Years Ended December 31, | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Long Duration | Short Duration | Total | Long Duration | Short Duration | Total | Long Duration | Short Duration | Total | |||||||||||||||||||||||||||||||||||||||||||||
| Direct earned premiums | $ | 240.3 | $ | 14,927.8 | $ | 15,168.1 | $ | 244.9 | $ | 14,192.4 | $ | 14,437.3 | $ | 412.8 | $ | 11,291.0 | $ | 11,703.8 | |||||||||||||||||||||||||||||||||||
| Premiums assumed | 1.5 | 133.3 | 134.8 | 3.0 | 213.8 | 216.8 | 3.3 | 150.0 | 153.3 | ||||||||||||||||||||||||||||||||||||||||||||
| Premiums ceded | (165.9) | (6,794.3) | (6,960.2) | (175.9) | (6,458.2) | (6,634.1) | (346.0) | (5,354.2) | (5,700.2) | ||||||||||||||||||||||||||||||||||||||||||||
| Net earned premiums | $ | 75.9 | $ | 8,266.8 | $ | 8,342.7 | $ | 72.0 | $ | 7,948.0 | $ | 8,020.0 | $ | 70.1 | $ | 6,086.8 | $ | 6,156.9 | |||||||||||||||||||||||||||||||||||
| Direct policyholder benefits | $ | 779.8 | $ | 5,647.7 | $ | 6,427.5 | $ | 916.0 | $ | 5,479.6 | $ | 6,395.6 | $ | 1,252.8 | $ | 5,050.1 | $ | 6,302.9 | |||||||||||||||||||||||||||||||||||
| Policyholder benefits assumed | 12.0 | 122.3 | 134.3 | 13.1 | 213.4 | 226.5 | 14.9 | 93.9 | 108.8 | ||||||||||||||||||||||||||||||||||||||||||||
| Policyholder benefits ceded | (501.0) | (3,511.5) | (4,012.5) | (651.6) | (3,315.8) | (3,967.4) | (995.7) | (3,073.4) | (4,069.1) | ||||||||||||||||||||||||||||||||||||||||||||
| Net policyholder benefits | $ | 290.8 | $ | 2,258.5 | $ | 2,549.3 | $ | 277.5 | $ | 2,377.2 | $ | 2,654.7 | $ | 272.0 | $ | 2,070.6 | $ | 2,342.6 |
F-59
The Company had $513.8 million and $534.4 million of invested assets held in trusts or by custodians as of December 31, 2020 and 2019, respectively, for the benefit of others related to certain reinsurance arrangements.
The Company utilizes ceded reinsurance for loss protection and capital management, business dispositions, and in the Global Lifestyle and Global Housing segments, for client risk and profit sharing.
Loss Protection and Capital Management
As part of the Company’s overall risk and capacity management strategy, the Company purchases reinsurance for certain risks underwritten by the Company’s various segments, including significant individual or catastrophic claims.
For those product lines where there is exposure to losses from catastrophe events, the Company closely monitors and manages its aggregate risk exposure by geographic area. The Company has entered into reinsurance treaties to manage exposure to these types of events.
Business Divestitures
The Company has used reinsurance to sell certain businesses, such as the disposals of Assurant Employee Benefits, Fortis Financial Group and Long-Term Care. Reinsurance was used in these cases to facilitate the transactions because the businesses shared legal entities with operating segments that the Company retained. Assets supporting liabilities ceded relating to these businesses are mainly held in trusts and the separate accounts relating to Fortis Financial Group are still reflected in the Company’s consolidated balance sheets.
If the reinsurers became insolvent, the Company would be exposed to the risk that the assets in the trusts and/or the separate accounts, if any, would be insufficient to support the liabilities that would revert back to the Company. The reinsurance recoverable from Sun Life was $520.4 million and $606.1 million as of December 31, 2020 and 2019, respectively. The reinsurance recoverable from Talcott Resolution was $499.6 million and $511.2 million as of December 31, 2020 and 2019, respectively. The reinsurance recoverable from John Hancock was $2.55 billion and $2.49 billion as of December 31, 2020 and 2019, respectively.
The reinsurance agreement associated with the Fortis Financial Group sale also stipulates that Talcott Resolution contributes funds to increase the value of the separate account assets relating to Modified Guaranteed Annuity business sold if such value declines below the value of the associated liabilities. If Talcott Resolution fails to fulfill these obligations, the Company will be obligated to make these payments.
In addition, the Company would be responsible for administering this business in the event of reinsurer insolvency. The Company does not currently have the administrative systems and capabilities to process this business. Accordingly, the Company would need to obtain those capabilities in the event of an insolvency of one or more of the reinsurers of these businesses. The Company might be forced to obtain such capabilities on unfavorable terms with a resulting material adverse effect on our results of operations and financial condition.
As of December 31, 2020, the Company was not aware of any regulatory actions taken with respect to the solvency of the insurance subsidiaries of Sun Life, Talcott Resolution or John Hancock that reinsure the Assurant Employee Benefits, Fortis Financial Group and Long-Term Care businesses, and the Company has not been obligated to fulfill any of such reinsurers’ obligations.
Sun Life, John Hancock and Talcott Resolution have paid their obligations when due and there have been no disputes.
Segment Client Risk and Profit Sharing
The Global Lifestyle and Global Housing segments write business produced by their clients, such as mobile providers, mortgage lenders and servicers, and financial institutions, and reinsure all or a portion of such business to insurance subsidiaries of some clients. Such arrangements allow significant flexibility in structuring the sharing of risks and profits on the underlying business.
A substantial portion of Global Lifestyle’s and Global Housing’s reinsurance activities are related to agreements to reinsure premiums and risks related to business generated by certain clients to the clients’ own captive insurance companies or to reinsurance subsidiaries in which the clients have an ownership interest. Through these arrangements, the Company’s insurance subsidiaries share some of the premiums and risk related to client-generated business. When the reinsurance companies are not authorized to do business in the state of domicile of the Company’s insurance subsidiary, the Company’s insurance subsidiary generally obtains collateral, such as a trust or a letter of credit, from the reinsurance company or its affiliate in an amount equal to the outstanding reserves to obtain full statutory financial credit in the domiciliary state for the reinsurance.
The Company’s reinsurance agreements do not relieve the Company from its direct obligation to its insureds. Thus, a credit exposure exists to the extent that any reinsurer is unable to meet the obligations assumed in the reinsurance agreements.
F-60
To mitigate its exposure to reinsurance insolvencies, the Company evaluates the financial condition of its reinsurers and typically holds substantial collateral (in the form of funds withheld, trusts and letters of credit) as security under the reinsurance agreements.
19. Debt
The following table shows the principal amount and carrying value of the Company’s outstanding debt, less unamortized discount and issuance costs as applicable, as of December 31, 2020 and 2019:
| December 31, 2020 | December 31, 2019 | ||||||||||||||||||||||
| Principal Amount | Carrying Value | Principal Amount | Carrying Value | ||||||||||||||||||||
| Floating Rate Senior Notes due March 2021 (1) | $ | 50.0 | $ | 50.0 | $ | 50.0 | $ | 49.9 | |||||||||||||||
| 4.00% Senior Notes due March 2023 | 350.0 | 348.9 | 350.0 | 348.5 | |||||||||||||||||||
| 4.20% Senior Notes due September 2023 | 300.0 | 298.4 | 300.0 | 297.8 | |||||||||||||||||||
| 4.90% Senior Notes due March 2028 | 300.0 | 297.2 | 300.0 | 296.8 | |||||||||||||||||||
| 3.70% Senior Notes due February 2030 | 350.0 | 347.0 | 350.0 | 346.8 | |||||||||||||||||||
| 6.75% Senior Notes due February 2034 | 275.0 | 272.3 | 275.0 | 272.1 | |||||||||||||||||||
| 7.00% Fixed-to-Floating Rate Subordinated Notes due March 2048 (2) | 400.0 | 395.4 | 400.0 | 395.0 | |||||||||||||||||||
| 5.25% Subordinated Notes due January 2061 | 250.0 | 243.7 | — | — | |||||||||||||||||||
| Total Debt | $ | 2,252.9 | $ | 2,006.9 |
(1)Bears floating interest at a rate equal to three-month LIBOR plus 1.25% per annum.
(2)Bears a 7.00% annual interest rate to March 2028 and an annual interest rate equal to three-month LIBOR plus 4.135% thereafter.
For the years ended December 31, 2020, 2019 and 2018, interest expense was $104.5 million, $110.6 million and $100.3 million, respectively. Interest expense includes derivative related activities described in the interest rate derivatives section below. There was $31.8 million and $30.2 million of accrued interest at December 31, 2020 and 2019, respectively.
Debt Issuances
Recent Issuances
2061 Subordinated Notes: In November 2020, the Company issued subordinated notes due January 2061 with a principal amount of $250.0 million, which bear interest at an annual rate of 5.25% (the “2061 Subordinated Notes”). Interest is payable quarterly in arrears beginning in April 2021. On or after January 2026, the Company may redeem the 2061 Subordinated Notes in whole at any time or in part from time to time, at a redemption price equal to their principal amount plus accrued and unpaid interest, provided that if they are not redeemed in whole, a minimum amount must remain outstanding. At any time prior to January 2026, the Company may redeem the 2061 Subordinated Notes in whole but not in part, within 90 days after the occurrence of a tax event, rating agency event or regulatory capital event as defined in the global note representing the 2061 Subordinated Notes, at a redemption price equal to (i) with respect to a rating agency event, 102% of their principal amount and (ii) with respect to a tax event or a regulatory capital event, their principal amount plus accrued and unpaid interest. See below, under 2048 Subordinated Notes (as defined below), for more information on terms applicable to both series.
The Company used the net proceeds of $243.7 million from the 2061 Subordinated Notes, along with cash on hand, to finance the acquisition of HYLA. See Note 3 for additional information on the acquisition.
Senior Notes
2030 Senior Notes: In August 2019, the Company issued senior notes with an aggregate principal amount of $350.0 million which bear interest at a rate of 3.70% per year, mature in February 2030 and were issued at a 0.035% discount to the public (the “2030 Senior Notes”). Interest is payable semi-annually in arrears beginning in February 2020. Prior to November 2029, the Company may redeem the 2030 Senior Notes at any time in whole or from time to time in part at a make-whole premium plus accrued and unpaid interest. On or after that date, the Company may redeem the 2030 Senior Notes at any time in whole or from time to time in part at a redemption price equal to 100% of the principal amount being redeemed plus accrued and unpaid interest.
The Company used the net proceeds from the offering, together with cash on hand, to purchase $100.0 million of its 6.75% senior notes due 2034 in a cash tender offer, to redeem $250.0 million of its floating rate senior notes due 2021 (the
F-61
“2021 Senior Notes”) and to pay related premiums, fees and expenses. In connection with the tender offer, the Company recognized a loss on extinguishment of debt of $31.4 million, primarily related to incremental consideration required to be paid to debtholders as a result of the interest rate differential over the remaining term as compared to current rates. Additionally, the Company recognized a $2.6 million loss from the settlement of the three-year interest rate swap that hedged interest rate exposure on the portion of the 2021 Senior Notes that were redeemed in September 2019. The $2.6 million loss was reclassified out of accumulated other comprehensive income and recorded through interest expense.
In connection with the issuance of the 2030 Senior Notes, the Company recognized $3.0 million of interest expense related to premiums paid for a series of derivative transactions that were entered into in July 2019 to hedge the related interest rate risk.
In March 2018, the Company issued the following three series of senior notes with an aggregate principal amount of $900.0 million:
*•*2021 Senior Notes: The first series of senior notes is $300.0 million in principal amount, bears floating interest rate equal to three-month LIBOR plus 1.25% (1.50% as of December 31, 2020) and matures in March 2021. Interest on the 2021 Senior Notes is payable quarterly. Commencing on or after March 2019, the Company may redeem the 2021 Senior Notes at any time in whole or from time to time in part at a redemption price equal to 100% of the principal amount being redeemed plus accrued and unpaid interest. In August 2019, the Company redeemed $250.0 million of the $300.0 million then outstanding aggregate principal amount of the 2021 Senior Notes, plus accrued and unpaid interest to the redemption date.
*•*2023 Senior Notes: The second series of senior notes is $300.0 million in principal amount, bears interest at 4.20% per year, matures in September 2023 and was issued at a 0.233% discount to the public (the “2023 Senior Notes”). Interest on the 2023 Senior Notes is payable semi-annually. Prior to August 2023, the Company may redeem the 2023 Senior Notes at any time in whole or from time to time in part at a make-whole premium plus accrued and unpaid interest. On or after that date, the Company may redeem the 2023 Senior Notes at any time in whole or from time to time in part at a redemption price equal to 100% of the principal amount being redeemed plus accrued and unpaid interest.
*•*2028 Senior Notes: The third series of senior notes is $300.0 million in principal amount, bears interest at 4.90% per year, matures in March 2028 and was issued at a 0.383% discount to the public (the “2028 Senior Notes”). Interest on the 2028 Senior Notes is payable semi-annually. Prior to December 2027, the Company may redeem the 2028 Senior Notes at any time in whole or from time to time in part at a make-whole premium plus accrued and unpaid interest. On or after that date, the Company may redeem the 2028 Senior Notes at any time in whole or from time to time in part at a redemption price equal to 100% of the principal amount being redeemed plus accrued and unpaid interest.
The interest rate payable on each of the 2021 Senior Notes, 2023 Senior Notes, 2028 Senior Notes and 2030 Senior Notes will be subject to adjustment from time to time, if either Moody’s Investor Service, Inc. (“Moody’s”) or S&P Global Ratings, a division of S&P Global Inc. (“S&P”) downgrades the credit rating assigned to such series of senior notes to Ba1 or below or to BB+ or below, respectively, or subsequently upgrades the credit ratings once the senior notes are at or below such levels. The following table details the increase in interest rate over the issuance rate by rating with the impact equal to the sum of the number of basis points next to such rating for a maximum increase of 200 basis points over the issuance rate:
| Rating Agencies | ||||||||||||||||||||
| Rating Levels | Moody’s (1) | S&P (1) | Interest Rate Increase (2) | |||||||||||||||||
| 1 | Ba1 | BB+ | 25 basis points | |||||||||||||||||
| 2 | Ba2 | BB | 50 basis points | |||||||||||||||||
| 3 | Ba3 | BB- | 75 basis points | |||||||||||||||||
| 4 | B1 or below | B+ or below | 100 basis points |
(1)Including the equivalent ratings of any substitute rating agency.
(2)Applies to each rating agency individually.
In March 2013, the Company issued two series of senior notes with an aggregate principal amount of $700.0 million. The first series was $350.0 million in principal amount, bore interest at 2.50% per year and was repaid at maturity in March 2018. The second series is $350.0 million in principal amount and was issued at a 0.365% discount to the public. This series bears interest at 4.00% per year and matures in March 2023. Interest is payable semi-annually. The Company may redeem the outstanding series of senior notes in whole or in part at any time and from time to time before maturity at the redemption price set forth in the global note representing the outstanding series of senior notes.
F-62
In February 2004, the Company issued senior notes with an aggregate principal amount of $475.0 million at a 0.61% discount to the public, which bear interest at 6.75% per year and matures in February 2034. Interest is payable semi-annually. These senior notes are not redeemable prior to maturity. In December 2016 and August 2019, the Company completed a cash tender offers of $100.0 million each in aggregate principal amount of such senior notes. A loss on extinguishment of debt of $31.4 million was reported for the year ended December 31, 2019.
Other Subordinated Notes
2048 Subordinated Notes: In March 2018, the Company issued fixed-to-floating rate subordinated notes due March 2048 with principal amount of $400.0 million (the “2048 Subordinated Notes”), which bear interest from March 2018 to March 2028 at an annual rate of 7.00%, payable semi-annually. The 2048 Subordinated Notes will bear interest at an annual rate equal to three-month LIBOR plus 4.135%, payable quarterly, beginning in June 2028. On or after March 2028, the Company may redeem the 2048 Subordinated Notes in whole at any time or in part from time to time, at a redemption price equal to their principal amount plus accrued and unpaid interest, provided that if they are not redeemed in whole, a minimum amount must remain outstanding. At any time prior to March 2028, the Company may redeem the 2048 Subordinated Notes in whole but not in part, within 90 days after the occurrence of a tax event, rating agency event or regulatory capital event as defined in the global note representing the 2048 Subordinated Notes, at a redemption price equal to (i) with respect to a rating agency event, 102% of their principal amount and (ii) with respect to a tax event or a regulatory capital event, their principal amount plus accrued and unpaid interest.
In addition, so long as no event of default with respect to the 2048 Subordinated Notes and 2061 Subordinated Notes (together, the “Subordinated Notes”) has occurred and is continuing, the Company has the right, on one or more occasions, to defer the payment of interest on the Subordinated Notes for one or more consecutive interest periods for up to five years as described in the global note representing the Subordinated Notes. During a deferral period, interest will continue to accrue on the Subordinated Notes at the then-applicable interest rate. At any time when the Company has given notice of its election to defer interest payments on the Subordinated Notes, the Company generally may not make payments on or redeem or purchase any shares of the Company’s capital stock or any of its debt securities or guarantees that rank upon the Company’s liquidation on a parity with or junior to the Subordinated Notes, subject to certain limited exceptions.
Credit Facility and Commercial Paper Program
The Company has a five-year senior unsecured $450.0 million revolving credit agreement (the “Credit Facility”) with a syndicate of banks arranged by JPMorgan Chase Bank, N.A. and Wells Fargo Bank, National Association. The Credit Facility provides for revolving loans and the issuance of multi-bank, syndicated letters of credit and letters of credit from a sole issuing bank in an aggregate amount of $450.0 million, which may be increased up to $575.0 million. The Credit Facility is available until December 2022, provided the Company is in compliance with all covenants. The Credit Facility has a sublimit for letters of credit issued thereunder of $50.0 million. The proceeds of these loans may be used for the Company’s commercial paper program or for general corporate purposes.
In March 2020, the Company drew down $200.0 million from its Credit Facility as a precautionary measure to strengthen its liquidity position and capital flexibility due to the uncertainty caused by the COVID-19 pandemic. The initial interest period for the loan ended in June 2020 and bore a floating interest rate equal to three-month LIBOR plus 1.50% per annum. Upon expiration of the initial interest period, the Company continued the $200.0 million loan for an additional month bearing a floating interest rate equal to one-month LIBOR plus 1.50% per annum. The Company repaid the full $200.0 million loan in July 2020. Total interest expense on the $200.0 million draw for the year ended December 31, 2020 was $1.7 million.
The Company’s commercial paper program requires the Company to maintain liquidity facilities either in an available amount equal to any outstanding notes from the program or in an amount sufficient to maintain the ratings assigned to the notes issued from the program. The Company’s commercial paper is rated AMB-1 by A.M. Best, P-3 by Moody’s and A-2 by S&P. The Company’s subsidiaries do not maintain commercial paper or other borrowing facilities. This program is currently backed up by the Credit Facility, of which $445.5 million was available at December 31, 2020, and $4.5 million letters of credit were outstanding.
The Company did not use the commercial paper program during the years ended December 31, 2020 or 2019 and there were no amounts relating to the commercial paper program outstanding as of December 31, 2020 or 2019. Besides the aforementioned draw down, the Company made no borrowings using the Credit Facility during the years ended December 31, 2020 or 2019 and no loans were outstanding as of December 31, 2020 or 2019.
Covenants
The Credit Facility contains restrictive covenants including, but not limited to:
F-63
(i)Maintenance of a maximum consolidated total debt to capitalization ratio on the last day of any fiscal quarter of not greater than 0.35 to 1.0, subject to certain exceptions; and
(ii)Maintenance of a consolidated adjusted net worth in an amount not less than a “Minimum Amount” equal to the sum of (a) the greater of 70% of the Company’s consolidated adjusted net worth on the date of the closing of the TWG acquisition and $2.72 billion, (b) 25% of consolidated net income for each fiscal quarter (if positive) beginning with the first fiscal quarter ending after the date of the closing of the TWG acquisition and (c) 25% of the net cash proceeds received from any capital contribution to, or issuance of any capital stock, disqualified capital stock and hybrid securities, received after the closing of the TWG acquisition.
In the event of a breach of certain covenants, all obligations under the Credit Facility, including unpaid principal and accrued interest and outstanding letters of credit, may become immediately due and payable.
Interest Rate Derivatives
In March 2018, the Company exercised a series of derivative transactions it had entered into in 2017 to hedge the interest rate risk related to expected borrowing to finance the TWG acquisition. The Company determined that the derivatives qualified for hedge accounting as effective cash flow hedges and recognized a deferred gain of $26.7 million upon settlement that was reported through other comprehensive income. The deferred gain is being recognized as a reduction in interest expense related to the 2023 Senior Notes, the 2028 Senior Notes and the Subordinated Notes on an effective yield basis. The amortization of the deferred gain for the years ended December 31, 2020, 2019 and 2018 was $3.0 million, $3.0 million and $2.2 million, respectively. The remaining deferred gain as of December 31, 2020 and 2019 was $18.6 million and $21.5 million, respectively. Additionally, the Company expensed $8.6 million of the premium paid for the derivatives as a component of interest expense for the year ended December 31, 2018.
20. Equity Transactions
Common Stock
Changes in the number of shares of common stock outstanding are as follows for the periods presented:
| December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Shares of common stock outstanding, beginning | 59,945,893 | 61,908,979 | 52,417,812 | ||||||||||||||
| Issuance of shares of common stock for TWG acquisition | — | — | 10,399,862 | ||||||||||||||
| Vested restricted stock and restricted stock units, net (1) | 213,569 | 248,333 | 170,426 | ||||||||||||||
| Issuance related to performance share units (1) | 157,155 | 117,581 | 110,137 | ||||||||||||||
| Issuance related to ESPP | 90,166 | 88,498 | 80,425 | ||||||||||||||
| Shares of common stock repurchased | (2,438,975) | (2,417,498) | (1,269,683) | ||||||||||||||
| Shares of common stock outstanding, ending | 57,967,808 | 59,945,893 | 61,908,979 |
(1)Vested restricted stock, restricted stock units and performance share units are shown net of shares of common stock retired to cover participant income tax liabilities.
The Company is authorized to issue 800,000,000 shares of common stock. In addition, 150,001 shares of Class B common stock and 400,001 shares of Class C common stock are authorized but have not been issued.
Stock Repurchase
On November 5, 2018, the Company’s Board of Directors (the “Board”) authorized the Company to repurchase up to $600.0 million aggregate cost at purchase of its outstanding common stock.
During the year ended December 31, 2020, the Company repurchased 2,438,975 shares of the Company’s outstanding common stock at a cost of $299.8 million, exclusive of commissions, leaving $186.5 million remaining under the November 2018 repurchase authorization at December 31, 2020. During the years ended December 31, 2019 and 2018, the Company repurchased 2,417,498 and 1,269,683 shares of the Company’s outstanding common stock at a cost, exclusive of commissions, of $274.9 million and $132.3 million, respectively.
The timing and the amount of future repurchases will depend on market conditions, the Company’s financial condition, results of operations and liquidity and other factors.
F-64
Issuance of Mandatory Convertible Preferred Stock
In March 2018, the Company issued 2,875,000 shares of the MCPS at a public offering price of $100.00 per share. The net proceeds from the sale of the MCPS was $276.4 million after deducting underwriting discounts and offering expenses.
Each outstanding share of MCPS will convert automatically on March 15, 2021 into between 0.9398 (the “minimum conversion rate”) and 1.1277 shares of common stock, subject to customary anti-dilution adjustments. At any time prior to March 2021, holders may elect to convert each share of MCPS into shares of common stock at the minimum conversion rate or in the event of a fundamental change at the specified rates defined in the Certificate of Designations of the MCPS.
Dividends on the MCPS will be payable on a cumulative basis when, as and if declared, at an annual rate of 6.50% of the liquidation preference of $100.00 per share. The Company may pay declared dividends in cash or, subject to certain limitations, in shares of the Company’s common stock, or in any combination of cash and shares of the Company’s common stock quarterly, commencing in June 2018 and ending in March 2021. No dividend or distribution may be declared or paid on common stock or any other class or series of junior stock, and no common stock or any other class or series of junior stock or parity stock may be purchased, redeemed or otherwise acquired for consideration unless all accumulated and unpaid dividends on the MCPS for all preceding dividend periods have been declared and paid in full, subject to certain limited exceptions. The Company paid preferred stock dividends of $18.7 million for the years ended December 31, 2020 and 2019.
21. Stock Based Compensation
In accordance with the guidance on share-based compensation, the Company recognized stock-based compensation costs based on the grant date fair value. For the years ended December 31, 2020, 2019 and 2018, the Company recognized compensation costs net of a 5% per year estimated forfeiture rate on a pro-rated basis over the remaining vesting period.
Long-Term Equity Incentive Plan
Under the Assurant, Inc. 2017 Long-Term Equity Incentive Plan (the “ALTEIP”), as amended in May 2019, the Company is authorized to issue up to 1,588,797 new shares of the Company’s common stock to employees, officers and non-employee directors. Under the ALTEIP, the Company may grant awards based on shares of its common stock, including stock options, stock appreciation rights (“SARs”), restricted stock (including performance shares), unrestricted stock, restricted stock units (“RSUs”), performance share units (“PSUs”) and dividend equivalents. All share-based grants are awarded under the ALTEIP.
The Compensation Committee of the Board (the “Compensation Committee”) awards RSUs and PSUs annually. RSUs and PSUs are promises to issue actual shares of common stock at the end of a vesting period or performance period. The RSUs granted to employees under the ALTEIP are based on salary grade and performance and generally vest one-third each year over a three-year period. RSUs receive dividend equivalents in cash during the restricted period and do not have voting rights during the restricted period. RSUs granted to non-employee directors also vest one-third each year over a three-year period, however, issuance of vested shares and payment of dividend equivalents is deferred until separation from Board service. PSUs accrue dividend equivalents during the performance period based on a target payout and will be paid in cash at the end of the performance period based on the actual number of shares issued.
Under the ALTEIP, the Company’s CEO is authorized by the Board to grant common stock, restricted stock and RSUs to employees other than the Company’s executive officers. The Compensation Committee recommends the annual share allotment that can be awarded by the CEO under this program. Restricted stock and RSUs granted under this program may have different vesting periods.
The fair value of RSUs is estimated using the fair market value of a share of the Company’s common stock at the date of grant. The fair value of PSUs is estimated using the Monte Carlo simulation model. The number of shares of common stock a participant will receive upon vesting of a PSU award is contingent upon the Company’s performance with respect to selected metrics, as identified below. The payout levels for 2020, 2019 and 2018 awards can vary between 0% and 200% (maximum) of the target (100%) ALTEIP award amount, based on the Company’s level of performance against the selected metrics.
2020 and 2019 PSU Performance Goals. The Compensation Committee established total shareholder return and net operating earnings per diluted share, excluding reportable catastrophes, as the two equally weighted performance measures for PSU awards in 2020 and 2019. Total shareholder return is defined as appreciation in Company’s common stock plus dividend yield to stockholders and will be measured by the performance of the Company relative to the S&P 500 Index over the three-year performance period. Net operating earnings per diluted common share, excluding reportable catastrophes, is a Company-specific profitability metric and is defined as the Company’s net operating earnings, excluding reportable catastrophes, divided by the number of fully diluted common shares outstanding at the end of the period. This metric is an absolute metric that is
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measured against a three-year cumulative target established by the Compensation Committee at the award date and is not tied to the performance of peer companies.
2018 PSU Performance Goals. In July 2018, the Compensation Committee granted PSUs to the management committee that reflect the remaining half of each executive’s annual target long-term incentive opportunity plus an additional opportunity to further incentivize and retain executives with respect to the TWG acquisition. Payout for the PSUs is determined by reference to two metrics measured over a thirty-month performance period: (i) total shareholder return relative to the S&P 500 Index (weighted at 60%) and (ii) the realization of net pre-tax synergies in connection with the TWG acquisition (weighted at 40%) provided that a net operating earnings per share (excluding reportable catastrophes) goal is met in 2020. The aggregate grant date fair value of the additional target opportunity provided to all members of the management committee, including the Company’s CEO and other named executive officers, was $11.1 million. The additional target opportunity granted to the Company’s CEO had a grant date fair value of $4.0 million.
Restricted Stock Units
A summary of the Company’s outstanding RSUs is presented below:
| Restricted Stock Units | Weighted-Average Grant-Date Fair Value | ||||||||||
| Restricted stock units outstanding at December 31, 2019 | 749,954 | $ | 95.69 | ||||||||
| Grants (1) | 340,879 | 96.33 | |||||||||
| Vests (2) | (320,354) | 96.10 | |||||||||
| Forfeitures and adjustments | (46,753) | 97.90 | |||||||||
| Restricted stock units outstanding at December 31, 2020 | 723,726 | $ | 95.67 | ||||||||
| Restricted stock units vested, but deferred at December 31, 2020 | 63,755 | $ | 76.95 |
(1)The weighted average grant date fair value for RSUs granted in 2019 and 2018 was $102.86 and $93.20, respectively.
(2)The total fair value of RSUs vested was $32.3 million, $38.4 million and $25.3 million for the years ended December 31, 2020, 2019 and 2018, respectively.
The following table shows a summary of RSU activity during the years ended December 31, 2020, 2019 and 2018:
| Years Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| RSU compensation expense | $ | 29.4 | $ | 29.5 | $ | 36.0 | |||||||||||
| Income tax benefit | (5.2) | (5.3) | (6.5) | ||||||||||||||
| RSU compensation expense, net of tax | $ | 24.2 | $ | 24.2 | $ | 29.5 |
As of December 31, 2020, there was $21.0 million of unrecognized compensation cost related to outstanding RSUs. That cost is expected to be recognized over a weighted-average period of 0.99 years.
Performance Share Units
A summary of the Company’s outstanding PSUs is presented below:
| Performance Share Units | Weighted-Average Grant-Date Fair Value | ||||||||||
| Performance share units outstanding at December 31, 2019 | 622,010 | $ | 112.38 | ||||||||
| Grants (1) | 303,204 | 87.53 | |||||||||
| Vests (2) | (256,607) | 112.10 | |||||||||
| Performance adjustment (3) | 42,884 | 111.11 | |||||||||
| Forfeitures and adjustments | (37,392) | 107.59 | |||||||||
| Performance share units outstanding at December 31, 2020 | 674,099 | $ | 101.45 |
(1)The weighted average grant date fair value for PSUs granted in 2019 and 2018 was $105.23 and $123.51, respectively.
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(2)The total fair value of PSUs vested was $24.9 million, $19.7 million and $16.5 million for the years ended December 31, 2020, 2019 and 2018, respectively.
(3)Represents the change in PSUs issued based upon the attainment of performance goals established by the Company.
PSU grants above represent initial target awards and do not reflect potential increases or decreases resulting from the financial performance objectives to be determined at the end of the prospective performance period. The actual number of PSUs to be issued at the end of each performance period will range from 0% to 200% of the initial target awards.
The following table shows a summary of PSU activity during the years ended December 31, 2020, 2019 and 2018:
| Years Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| PSU compensation expense | $ | 26.5 | $ | 23.2 | $ | 19.6 | |||||||||||
| Income tax benefit | (2.6) | (2.7) | (3.1) | ||||||||||||||
| PSU compensation expense, net of tax | $ | 23.9 | $ | 20.5 | $ | 16.5 |
As of December 31, 2020, there was $19.9 million of unrecognized compensation cost related to outstanding PSUs. That cost is expected to be recognized over a weighted-average period of 0.86 years.
The fair value of PSUs with market conditions was estimated on the date of grant using a Monte Carlo simulation model, which utilizes multiple variables that determine the probability of satisfying the market condition stipulated in the award. Expected volatilities for awards granted during the years ended December 31, 2020, 2019 and 2018 were based on the historical prices of the Company’s common stock and peer group. The expected term for grants issued during the years ended December 31, 2020, 2019 and 2018 was assumed to equal the average of the vesting period of the PSUs. The risk-free rate was based on the U.S. Treasury yield curve in effect at the time of grant.
| For awards granted during the years ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Expected volatility | 27.23 | % | 20.92 | % | 23.17 | % | |||||||||||
| Expected term (years) | 2.79 | 2.80 | 2.46 | ||||||||||||||
| Risk free interest rate | 0.41 | % | 2.40 | % | 2.64 | % |
Employee Stock Purchase Plan
Under the Employee Stock Purchase Plan (the “ESPP”), the Company is authorized to issue up to 5,000,000 new shares of common stock to employees who are participants in the ESPP. The ESPP allows eligible employees to contribute, through payroll deductions, portions of their after-tax compensation in each offering period toward the purchase of shares of the Company’s common stock. There are two offering periods during the year (January 1 through June 30 and July 1 through December 31) and shares of common stock are purchased at the end of each offering period at 90% of the lower of the closing price of the common stock on the first or last day of the offering period. Participants must be employed on the last trading day of the offering period in order to purchase shares of common stock under the ESPP. The maximum number of shares of common stock that can be purchased is 5,000 per employee. Participants’ contributions are limited to a maximum contribution of $7.5 thousand per offering period, or $15.0 thousand per year.
The ESPP is offered to individuals who are scheduled to work a certain number of hours per week, have been continuously employed for at least six months by the start of the offering period, are not temporary employees (employed less than 12 months) and have not been on a leave of absence for more than 90 days immediately preceding the offering period.
In January 2021, the Company issued 59,753 shares of common stock at a discounted price of $90.96 for the offering period of July 1, 2020 through December 31, 2020. In January 2020, the Company issued 39,645 shares of common stock at a discounted price of $98.09 for the offering period of July 1, 2019 through December 31, 2019.
In July 2020, the Company issued 50,521 shares of common stock to employees at a discounted price of $92.96 for the offering period of January 1, 2020 through June 30, 2020. In July 2019, the Company issued 45,515 shares of common stock to employees at a discounted price of $81.09 for the offering period of January 1, 2019 through June 30, 2019.
The compensation expense recorded related to the ESPP was $2.0 million, $1.3 million and $1.5 million for the years ended December 31, 2020, 2019 and 2018, respectively. The related income tax benefit for disqualified disposition was $0.1 million and $0.2 million for the years ended December 31, 2020 and 2018, respectively. There was no income tax benefit for disqualified disposition for the year ended December 31, 2019.
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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 and assumptions in the table below. Expected volatilities are based on implied volatilities from traded options on the Company’s common stock and the historical volatility of the Company’s common stock. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The dividend yield is based on the current annualized dividend and common stock price as of the grant date.
| For awards issued during the years ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Expected volatility | 16.38 - 52.04% | 18.47 - 26.91% | 20.90 - 27.73% | ||||||||||||||
| Risk free interest rates | 0.17 - 1.57% | 2.10 - 2.56% | 1.61 - 2.14% | ||||||||||||||
| Dividend yield | 1.89 - 2.46% | 2.18 - 2.63% | 1.49 - 1.56% | ||||||||||||||
| Expected term (years) | 0.5 | 0.5 | 0.5 |
Non-Stock Based Incentive Plans
Deferred Compensation
The Company’s deferred compensation programs consist of the AIP, the ASIC and the ADC. The AIP and the ASIC provided key employees the ability to exchange a portion of their compensation for options to purchase certain third-party mutual funds. The AIP and the ASIC were frozen in December 2004 and no additional contributions can be made to either the AIP or the ASIC. Effective March 1, 2005 and amended and restated on January 1, 2008, the ADC Plan was established in order to comply with the American Jobs Creation Act of 2004 (the “Jobs Act”) and Section 409A of the Internal Revenue Code of 1986, as amended (the “IRC”). The ADC provides key employees the ability to defer a portion of their eligible compensation to be notionally invested in a variety of mutual funds. Deferrals and withdrawals under the ADC are intended to be fully compliant with the Jobs Act definition of eligible compensation and distribution requirements.
22. Accumulated Other Comprehensive Income
Certain amounts included in the consolidated statements of comprehensive income are net of reclassification adjustments. The following tables summarize those reclassification adjustments (net of taxes) for the periods indicated:
| Year Ended December 31, 2020 | |||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | Net unrealized gains on securities | Net unrealized gains on derivative transactions | Credit Related Impairment | Non-Credit Related Impairment | Unamortized net (losses) on Pension Plans | Accumulated other comprehensive income (loss) | |||||||||||||||||||||||||||||||||||
| Balance at December 31, 2019 | $ | (358.9) | $ | 856.5 | $ | 17.1 | $ | — | $ | 15.5 | $ | (118.7) | $ | 411.5 | |||||||||||||||||||||||||||
| Change in accumulated other comprehensive income before reclassifications | 24.9 | 232.9 | — | — | 0.6 | 15.8 | 274.2 | ||||||||||||||||||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive income | 38.4 | (9.1) | (2.4) | 1.2 | — | (4.0) | 24.1 | ||||||||||||||||||||||||||||||||||
| Net current-period other comprehensive income (loss) | 63.3 | 223.8 | (2.4) | 1.2 | 0.6 | 11.8 | 298.3 | ||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | $ | (295.6) | $ | 1,080.3 | $ | 14.7 | $ | 1.2 | $ | 16.1 | $ | (106.9) | $ | 709.8 |
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| Year Ended December 31, 2019 | |||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | Net unrealized gains on securities | Net unrealized gains on derivative transactions | Non-Credit Related Impairment | Unamortized net (losses) on Pension Plans | Accumulated other comprehensive income (loss) | ||||||||||||||||||||||||||||||
| Balance at December 31, 2018 | $ | (375.6) | $ | 301.0 | $ | 18.4 | $ | 15.1 | $ | (114.3) | $ | (155.4) | |||||||||||||||||||||||
| Change in accumulated other comprehensive income before reclassifications | 16.7 | 564.6 | 1.0 | 0.4 | (4.5) | 578.2 | |||||||||||||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive income | — | (9.1) | (2.3) | — | 0.1 | (11.3) | |||||||||||||||||||||||||||||
| Net current-period other comprehensive income (loss) | 16.7 | 555.5 | (1.3) | 0.4 | (4.4) | 566.9 | |||||||||||||||||||||||||||||
| Balance at December 31, 2019 | $ | (358.9) | $ | 856.5 | $ | 17.1 | $ | 15.5 | $ | (118.7) | $ | 411.5 |
(1)See Note 2 for additional information.
| Year Ended December 31, 2018 | |||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | Net unrealized gains on securities | Net unrealized gains on derivative transactions | Non-Credit Related Impairment | Unamortized net (losses) on Pension Plans | Accumulated other comprehensive income (loss) | ||||||||||||||||||||||||||||||
| Balance at December 31, 2017 | $ | (281.5) | $ | 581.2 | $ | — | $ | 17.9 | $ | (83.6) | $ | 234.0 | |||||||||||||||||||||||
| Change in accumulated other comprehensive income before reclassifications | (94.2) | (367.6) | 20.1 | (6.7) | (15.2) | (463.6) | |||||||||||||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive income | — | 25.3 | (1.7) | — | 2.5 | 26.1 | |||||||||||||||||||||||||||||
| Net current-period other comprehensive (loss) income | (94.2) | (342.3) | 18.4 | (6.7) | (12.7) | (437.5) | |||||||||||||||||||||||||||||
| Cumulative effect of change in accounting principles (1) | 0.1 | 62.1 | — | 3.9 | (18.0) | 48.1 | |||||||||||||||||||||||||||||
| Balance at December 31, 2018 | $ | (375.6) | $ | 301.0 | $ | 18.4 | $ | 15.1 | $ | (114.3) | $ | (155.4) |
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The following tables summarize the reclassifications out of AOCI for the periods indicated.
| Details about AOCI components | Amount reclassified from AOCI | Affected line item in the statement where net income is presented | ||||||||||||||||||||||||
| Years Ended December 31, | ||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||||||||
| Foreign currency translation adjustment | $ | 38.4 | $ | — | $ | — | Iké net losses (see Note 5) | |||||||||||||||||||
| — | — | — | Provision for income taxes | |||||||||||||||||||||||
| $ | 38.4 | $ | — | $ | — | Net of tax | ||||||||||||||||||||
| Net unrealized (gains) losses on securities | $ | (11.5) | $ | (11.5) | $ | 32.0 | Net realized gains (losses) on investments | |||||||||||||||||||
| 2.4 | 2.4 | (6.7) | Provision for income taxes | |||||||||||||||||||||||
| $ | (9.1) | $ | (9.1) | $ | 25.3 | Net of tax | ||||||||||||||||||||
| Unrealized gains on derivative transactions | $ | (2.9) | $ | (3.0) | $ | (2.2) | Interest expense | |||||||||||||||||||
| 0.5 | 0.7 | 0.5 | Provision for income taxes | |||||||||||||||||||||||
| $ | (2.4) | $ | (2.3) | $ | (1.7) | Net of tax | ||||||||||||||||||||
| Credit related impairments | $ | 1.5 | $ | — | $ | — | Net realized gains (losses) on investments | |||||||||||||||||||
| (0.3) | — | — | Provision for income taxes | |||||||||||||||||||||||
| $ | 1.2 | $ | — | $ | — | Net of tax | ||||||||||||||||||||
| Amortization of pension and postretirement unrecognized net periodic benefit cost: | ||||||||||||||||||||||||||
| Amortization of net loss | $ | 5.1 | $ | — | $ | 2.7 | (1) | |||||||||||||||||||
| Amortization of prior service credit | (11.3) | — | — | (1) | ||||||||||||||||||||||
| Settlement loss | 1.0 | 0.1 | 0.5 | (1) | ||||||||||||||||||||||
| (5.2) | 0.1 | 3.2 | Total before tax | |||||||||||||||||||||||
| 1.2 | — | (0.7) | Provision for income taxes | |||||||||||||||||||||||
| $ | (4.0) | $ | 0.1 | $ | 2.5 | Net of tax | ||||||||||||||||||||
| Total reclassifications for the period | $ | 24.1 | $ | (11.3) | $ | 26.1 | Net of tax |
(1)These AOCI components are included in the computation of net periodic pension cost. See Note 24 for additional information.
23. Statutory Information
The Company’s insurance subsidiaries prepare financial statements in accordance with Statutory Accounting Principles (“SAP”) prescribed or permitted by the insurance departments of their states of domicile. Prescribed SAP includes the Accounting Practices and Procedures Manual of the National Association of Insurance Commissioners (“NAIC”) as well as state laws, regulations and administrative rules.
The principal differences between SAP and GAAP are: (1) policy acquisition costs are expensed as incurred under SAP, but are deferred and amortized under GAAP; (2) VOBA is not capitalized under SAP but is under GAAP; (3) amounts collected from holders of universal life-type and annuity products are recognized as premiums when collected under SAP, but are initially recorded as contract deposits under GAAP, with cost of insurance recognized as revenue when assessed and other contract charges recognized over the periods for which services are provided; (4) the classification and carrying amounts of investments in certain securities are different under SAP than under GAAP; (5) the criteria for providing asset valuation allowances, and the methodologies used to determine the amounts thereof, are different under SAP than under GAAP; (6) the timing of establishing certain reserves, and the methodologies used to determine the amounts thereof, are different under SAP than under GAAP; (7) certain assets are not admitted for purposes of determining surplus under SAP; (8) methodologies used to determine the amounts of deferred taxes, intangible assets and goodwill are different under SAP than under GAAP; and (9) the criteria for obtaining reinsurance accounting treatment is different under SAP than under GAAP, and SAP allows net presentation of insurance reserves and reinsurance recoverables.
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The combined statutory net income, excluding intercompany dividends and surplus note interest, and capital and surplus of the Company’s U.S. domiciled statutory insurance subsidiaries is as follows:
| Years Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Property & Casualty (“P&C”) companies | $ | 445.5 | $ | 313.3 | $ | 234.0 | |||||||||||
| Life and Health (“L&H”) companies | 98.3 | 104.7 | 157.5 | ||||||||||||||
| Total statutory net income (1) | $ | 543.8 | $ | 418.0 | $ | 391.5 |
(1)Results included $59.2 million, $35.9 million and $26.0 million of statutory net income for the years ended December 31, 2020, 2019 and 2018, respectively, from Virginia Surety Company, an insurance subsidiary from the TWG acquisition.
| December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| P&C companies | $ | 1,567.3 | $ | 1,623.2 | |||||||
| L&H companies | 445.8 | 405.7 | |||||||||
| Total statutory capital and surplus | $ | 2,013.1 | $ | 2,028.9 |
The Company also has non-insurance subsidiaries and foreign insurance subsidiaries that are not subject to SAP. The statutory net income and statutory capital and surplus amounts presented above do not include foreign insurance subsidiaries in accordance with SAP.
Insurance enterprises are required by state insurance departments to adhere to minimum RBC requirements developed by the NAIC. All of the Company’s insurance subsidiaries exceed minimum RBC requirements.
The payment of dividends to the Company by any of the Company’s regulated U.S domiciled insurance subsidiaries in excess of a certain amount (i.e., extraordinary dividends) must be approved by the subsidiary’s domiciliary jurisdiction department of insurance. Ordinary dividends, for which no regulatory approval is generally required, are limited to amounts determined by a formula, which varies by jurisdiction. The formula for the majority of the jurisdictions in which the Company’s subsidiaries are domiciled is based on the prior year’s statutory net income or 10% of the statutory surplus as of the end of the prior year. Some jurisdictions limit ordinary dividends to the greater of these two amounts, others limit them to the lesser of these two amounts and some jurisdictions exclude prior year realized capital gains from prior year net income in determining ordinary dividend capacity. Some jurisdictions have an additional stipulation that dividends may only be paid out of earned surplus. If insurance regulators determine that payment of an ordinary dividend or any other payments by the Company’s insurance subsidiaries to the Company (such as payments under a tax sharing agreement or payments for employee or other services) would be adverse to policyholders or creditors, the regulators may block such payments that would otherwise be permitted without prior approval. Based on the dividend restrictions under applicable laws and regulations, the maximum amount of dividends that the Company’s U.S domiciled insurance subsidiaries could pay to the Company in 2021 without regulatory approval is approximately $542.4 million. No assurance can be given that there will not be further regulatory actions restricting the ability of the Company’s insurance subsidiaries to pay dividends.
State regulators require insurance companies to meet minimum capitalization standards designed to ensure that they can fulfill obligations to policyholders. Minimum capital requirements are based on the RBC Ratio, which is a ratio of a company’s total adjusted capital (“TAC”) to its RBC. TAC is equal to statutory surplus adjusted to exclude certain statutory liabilities. RBC is calculated by applying specified factors to various asset, premium, expense, liability, and reserve items.
Generally, if a company’s RBC Ratio is below 100% (the “Authorized Control Level”), the insurance commissioner of the company’s jurisdiction of domicile is authorized to take control of the company, to protect the interests of policyholders. If the RBC Ratio is greater than 100% but less than 200% (the “Company Action Level”), the company must submit a RBC plan to the commissioner of the jurisdiction of domicile. Corrective actions may also be required if the RBC Ratio is greater than the Company Action Level but the company fails certain trend tests.
As of December 31, 2020, the TAC of each of the Company’s insurance subsidiaries exceeded the Company Action Level and no trend tests that would require regulatory action were violated. As of December 31, 2020, the TAC of the Company’s L&H entities subject to RBC requirements was $488.6 million. The corresponding Authorized Control Level was $68.9 million. As of December 31, 2020, the TAC of the Company’s P&C entities subject to RBC requirements was $1.57 billion. The corresponding Authorized Control Level was $323.7 million.
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24. Retirement and Other Employee Benefits
Defined Benefit Plans
The Company and its subsidiaries participate in a non-contributory, qualified defined benefit pension plan (“Assurant Pension Plan”) covering substantially all employees. The Assurant Pension Plan is considered “qualified” because it meets the requirements of IRC Section 401(a) (“IRC 401(a)”) and the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). The Assurant Pension Plan is a pension equity plan with a grandfathered final average earnings plan for a certain group of employees. Benefits are based on certain years of service and the employee’s compensation during certain such years of service. The Company’s funding policy is to contribute amounts to the Assurant Pension Plan sufficient to meet the minimum funding requirements in ERISA, plus such additional amounts as the Company may determine to be appropriate from time to time up to the maximum permitted. The funding policy considers several factors to determine such additional amounts, including items such as the amount of service cost plus 15% of the Assurant Pension Plan deficit and the capital position of the Company. During the year ended December 31, 2020, there were no contributions to the Assurant Pension Plan. Due to the Assurant Pension Plan’s current funding status, no contributions to the Assurant Pension Plan are expected during the year ending December 31, 2021. Assurant Pension Plan assets are maintained in a separate trust. Assurant Pension Plan assets and benefit obligations are measured as of December 31, 2020.
The Company also has various non-contributory, non-qualified supplemental plans covering certain employees including the Assurant Executive Pension Plan and the Assurant Supplement Executive Retirement Plan (the “SERP”). Since these plans are “non-qualified” they are not subject to the requirements of IRC 401(a) and ERISA. As such, the Company is not required, and does not, fund these plans. The qualified and nonqualified plans are referred to as “Pension Benefits” unless otherwise noted. The Company has the right to modify or terminate these benefits; however, the Company will not be relieved of its obligation to plan participants for their vested benefits.
In addition, the Company provides certain life and health care benefits (“Retirement Health Benefits”) for retired employees and their dependents. On July 1, 2011, the Company terminated certain health care benefits for employees who did not qualify for “grandfathered” status and no longer offers these benefits to new hires. The Company contribution, plan design and other terms of the remaining benefits did not change for those grandfathered employees. The Company has the right to modify or terminate these benefits.
Effective January 1, 2014, the Pension Benefits plans were closed to new hires. Effective January 1, 2016, the Assurant Pension Plan was amended and split into two separate plans, the Assurant Pension Plan No. 1 (“Plan No. 1”) and the Assurant Pension Plan No. 2 (“Plan No. 2”). Plan No. 1 generally covered all eligible employees (including the active population as of January 1, 2016, the remainder of the terminated vested population and all Puerto Rico participants). Plan No. 2 generally included a subset of the terminated vested population and the total population who commenced distribution of their accrued benefit prior to January 1, 2016. Assets for Plan No. 1 and Plan No. 2 remained in the Assurant, Inc. Pension Plan Trust. Effective December 31, 2017, Plan No. 1 and Plan No. 2 were merged back together into the Assurant Pension Plan.
Effective March 1, 2016, the Pension Benefits and Retirement Health Benefits (together, the “Plans”) were amended such that no additional benefits will be earned after February 29, 2016.
In February 2020, the Company amended the Retirement Health Benefits to terminate effective December 31, 2024 (the “Termination Date”). Benefits will be paid up to the Termination Date. The Retirement Health Benefits obligations were re-measured using a discount rate of 1.55%, selected based on a cash flow analysis using a bond yield curve as of February 29, 2020, and the fair market value of the Retirement Health Benefits assets as of February 29, 2020. The remeasurement resulted in a reduction to the Retirement Health Benefits obligations of $65.6 million and a corresponding prior service credit in AOCI, which will be reclassified from AOCI as it is amortized in the net periodic benefit cost over the remaining period until the Termination Date.
F-72
The following table presents information on the Plans for the periods indicated:
| Pension Benefits | Retirement Health Benefits | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Change in projected benefit obligation | |||||||||||||||||||||||
| Projected benefit obligation at beginning of year | $ | (825.1) | $ | (752.2) | $ | (85.4) | $ | (94.5) | |||||||||||||||
| Interest cost | (22.4) | (28.6) | (0.7) | (3.1) | |||||||||||||||||||
| Amendments | — | — | 65.6 | — | |||||||||||||||||||
| Actuarial (loss) gain, including curtailments and settlements | (99.0) | (99.5) | (5.4) | 7.5 | |||||||||||||||||||
| Benefits paid | 51.2 | 55.2 | 4.6 | 4.7 | |||||||||||||||||||
| Projected benefit obligation at end of year | $ | (895.3) | $ | (825.1) | $ | (21.3) | $ | (85.4) | |||||||||||||||
| Change in plan assets | |||||||||||||||||||||||
| Fair value of plan assets at beginning of year | $ | 809.0 | $ | 732.3 | $ | 44.0 | $ | 41.9 | |||||||||||||||
| Actual return (loss) on plan assets | 88.0 | 119.7 | 4.7 | 6.6 | |||||||||||||||||||
| Employer contributions | 8.3 | 13.7 | 0.2 | 0.2 | |||||||||||||||||||
| Benefits paid (including administrative expenses) | (52.5) | (56.7) | (4.6) | (4.7) | |||||||||||||||||||
| Fair value of plan assets at end of year | $ | 852.8 | $ | 809.0 | $ | 44.3 | $ | 44.0 | |||||||||||||||
| Funded status at end of year | $ | (42.5) | $ | (16.1) | $ | 23.0 | $ | (41.4) |
In accordance with the guidance on retirement benefits, the Company aggregates the results of the qualified and non-qualified plans as “Pension Benefits” and is required to disclose the aggregate projected benefit obligation, accumulated benefit obligation and fair value of plan assets, if the obligations within those plans exceed plan assets.
As of December 31, 2020 and 2019, the fair value of plan assets, projected benefit obligation, funded status at end of year and the accumulated benefit obligation of Pension Benefits were as follows:
| Qualified Pension Benefits | Unfunded Nonqualified Pension Benefits | Total Pension Benefits | |||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||
| Fair value of plan assets | $ | 852.8 | $ | 809.0 | $ | — | $ | — | $ | 852.8 | $ | 809.0 | |||||||||||||||||||||||
| Projected benefit obligation | (809.6) | (742.6) | (85.7) | (82.5) | (895.3) | (825.1) | |||||||||||||||||||||||||||||
| Funded status at end of year | $ | 43.2 | $ | 66.4 | $ | (85.7) | $ | (82.5) | $ | (42.5) | $ | (16.1) | |||||||||||||||||||||||
| Accumulated benefit obligation | $ | 809.6 | $ | 742.6 | $ | 85.7 | $ | 82.5 | $ | 895.3 | $ | 825.1 |
Amounts recognized in the consolidated balance sheets consist of:
| Pension Benefits | Retirement Health Benefits | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Assets | $ | 43.2 | $ | 66.4 | $ | 23.0 | $ | — | |||||||||||||||
| Liabilities | $ | (85.7) | $ | (82.5) | $ | — | $ | (41.4) |
Amounts recognized in AOCI consist of:
| Pension Benefits | Retirement Health Benefits | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | 2020 | 2019 | 2018 | ||||||||||||||||||||||||||||||
| Net (loss) gain | $ | (194.2) | $ | (157.4) | $ | (141.9) | $ | 5.9 | $ | 8.5 | $ | (2.5) | |||||||||||||||||||||||
| Prior service (cost) credit | (0.4) | (0.5) | (0.6) | 54.3 | — | — | |||||||||||||||||||||||||||||
| $ | (194.6) | $ | (157.9) | $ | (142.5) | $ | 60.2 | $ | 8.5 | $ | (2.5) |
F-73
Components of net periodic benefit cost, recorded in underwriting, general and administrative expenses in the consolidated statements of operations, and other amounts recognized in AOCI for the years ended December 31 2020, 2019, and 2018 were as follows:
| Pension Benefits | Retirement Health Benefits | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | 2020 | 2019 | 2018 | ||||||||||||||||||||||||||||||
| Net periodic benefit cost | |||||||||||||||||||||||||||||||||||
| Interest cost | $ | 22.4 | $ | 28.6 | $ | 26.3 | $ | 0.7 | $ | 3.1 | $ | 3.3 | |||||||||||||||||||||||
| Expected return on plan assets | (30.6) | (35.5) | (36.2) | (1.8) | (1.9) | (2.2) | |||||||||||||||||||||||||||||
| Amortization of prior service credit (cost) | 0.1 | — | — | (11.3) | — | — | |||||||||||||||||||||||||||||
| Amortization of net loss (gain) | 5.1 | 1.2 | 2.7 | — | (1.2) | — | |||||||||||||||||||||||||||||
| Curtailment/settlement loss | 1.0 | 0.1 | 0.5 | — | — | — | |||||||||||||||||||||||||||||
| Net periodic benefit cost | $ | (2.0) | $ | (5.6) | $ | (6.7) | $ | (12.4) | $ | — | $ | 1.1 | |||||||||||||||||||||||
| Other changes in plan assets and benefit obligations recognized in accumulated other comprehensive income | |||||||||||||||||||||||||||||||||||
| Prior service cost | $ | — | — | — | $ | (65.6) | — | — | |||||||||||||||||||||||||||
| Net loss (gain) | 42.9 | 16.8 | 23.1 | 2.5 | (12.2) | (3.5) | |||||||||||||||||||||||||||||
| Amortization of prior service (cost) credit | (0.1) | — | — | 11.3 | — | — | |||||||||||||||||||||||||||||
| Amortization of net (loss) gain | (6.1) | (1.3) | (3.3) | — | 1.2 | — | |||||||||||||||||||||||||||||
| Total recognized in accumulated other comprehensive income (loss) | $ | 36.7 | $ | 15.5 | $ | 19.8 | $ | (51.8) | $ | (11.0) | $ | (3.5) | |||||||||||||||||||||||
| Total recognized in net periodic benefit cost and other comprehensive income (loss) | $ | 34.7 | $ | 9.9 | $ | 13.1 | $ | (64.2) | $ | (11.0) | $ | (2.4) |
The Company uses a five-year averaging method to determine the market-related value of Pension Benefits plan assets, which is used to calculate the expected return of plan assets component of the Plans’ expense. Under this methodology, asset gains/losses that result from actual returns which differ from the Company’s expected long-term rate of return on assets assumption are recognized in the market-related value of assets on a level basis over a five-year period. The difference between actual as compared to expected asset returns for the Plans will be fully reflected in the market-related value of plan assets over the next five years using the methodology described above. Other post-employment benefit assets under the Retirement Health Benefits are valued at fair value.
Determination of the projected benefit obligation was based on the following weighted-average assumptions for the years ended December 31, 2020, 2019 and 2018:
| Qualified Pension Benefits | Unfunded Nonqualified Pension Benefits | Retirement Health Benefits | |||||||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | 2020 | 2019 | 2018 | 2020 | 2019 | 2018 | |||||||||||||||||||||||||||||||||||||||||||||
| Discount rate | 2.39 | % | 3.27 | % | 4.36 | % | 2.20 | % | 3.11 | % | 4.21 | % | 0.60 | % | 3.23 | % | 4.31 | % |
Determination of the net periodic benefit cost was based on the following weighted-average assumptions for the years ended December 31, 2020, 2019 and 2018:
| Qualified Pension Benefits | Unfunded Nonqualified Pension Benefits | Retirement Health Benefits | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | 2020 | 2019 | 2018 | 2020 Pre-Amendment | 2020 Post-Amendment | 2019 | 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Discount rates: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Effective discount rate for benefit obligations | 3.27 | % | 4.33 | % | 3.68 | % | 3.11 | % | 4.21 | % | 3.49 | % | 3.23 | % | 1.55 | % | 4.30 | % | 3.63 | % | |||||||||||||||||||||||||||||||||||||||
| Effective rate for interest on benefit obligations | 2.84 | % | 3.98 | % | 3.31 | % | 2.77 | % | 3.88 | % | 3.09 | % | 2.83 | % | 1.53 | % | 3.99 | % | 3.27 | % | |||||||||||||||||||||||||||||||||||||||
| Expected long-term return on plan assets | 4.15 | % | 4.75 | % | 4.75 | % | — | % | — | % | — | % | 4.15 | % | 4.15 | % | 4.75 | % | 4.75 | % |
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The selection of the Company’s discount rate assumption reflects the rate at which the Plans’ obligations could be effectively settled at December 31, 2020, 2019 and 2018. The methodology for selecting the discount rate was to match each Plan’s cash flows to that of a yield curve that provides the equivalent yields on zero-coupon corporate bonds for each maturity. The yield curve utilized in the cash flow analysis was comprised of 204 bonds rated AA by either Moody’s or S&P’s with maturities between zero and 30 years. The discount rate for each Plan is the single rate that produces the same present value of cash flows. The Company utilizes a split rate approach for purposes of determining the benefit obligations and service cost as well as a spot rate approach for the calculation of interest on these items in the determination of the net periodic benefit cost.
To develop the expected long-term rate of return on assets assumption, the Company considered the current level of expected returns on risk free investments (primarily government bonds), the historical level of the risk premium associated with the other asset classes in which the portfolio is invested and the expectations for future returns of each asset class. The expected long-term rate of return on Plan assets reflects the average rate of earnings expected on the funds invested or to be invested. The expected return for each asset class was then weighted based on the targeted asset allocation to develop the expected long-term rate of return on asset assumptions for the portfolio. The Company believes the current assumption reflects the projected return on the invested assets, given the current market conditions and the modified portfolio structure. Actual return (loss) on Plan assets was 10.9%, 16.3% and (4.0)% for the years ended December 31, 2020, 2019 and 2018, respectively.
The assumed health care cost trend rates used in measuring the accumulated postretirement benefit obligation and net periodic benefit cost were as follows:
| Retirement Health Benefits | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Health care cost trend rate assumed for next year: | |||||||||||||||||
| Pre-65 Non-reimbursement Plan | 8.0% | 8.2% | 8.0% | ||||||||||||||
| Post-65 Non-reimbursement Plan (Medical) | 5.9% | 5.9% | 5.9% | ||||||||||||||
| Post-65 Non-reimbursement Plan (Rx) | 13.0% | 13.5% | 13.0% | ||||||||||||||
| Pre-65 Reimbursement Plan | 9.7% | 9.9% | 10.4% | ||||||||||||||
| Post-65 Reimbursement Plan | 9.7% | 9.9% | 10.4% | ||||||||||||||
| Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) | 4.5% | 4.5% | 4.5% | ||||||||||||||
| Year that the rate reaches the ultimate trend rate | |||||||||||||||||
| Pre-65 Non-reimbursement Plan | 2039 | 2038 | 2037 | ||||||||||||||
| Post-65 Non-reimbursement Plan (Medical & Rx) | 2039 | 2038 | 2037 | ||||||||||||||
| Pre-65 Reimbursement Plan | 2039 | 2038 | 2037 | ||||||||||||||
| Post-65 Reimbursement Plan | 2039 | 2038 | 2037 |
The assets of the Plans are managed to maximize their long-term pre-tax investment return, subject to the following dual constraints: minimization of required contributions and maintenance of solvency requirements. It is anticipated that periodic contributions to the Plans will, for the foreseeable future, be sufficient to meet benefit payments thus allowing the balance to be managed according to a long-term approach. The Benefit Plan Investment Committee (“BPIC”) for the Plans meets on a quarterly basis and reviews the re-balancing of existing fund assets and the asset allocation of new fund contributions.
The goal of the Company’s asset strategy is to ensure that the growth in the value of the Plan’s assets over the long-term, both in real and nominal terms, manages (controls) risk exposure. Risk is managed by investing in a broad range of asset classes, and within those asset classes, a broad range of individual securities. Diversification by asset classes stabilizes total results over short-term time periods. Each asset class is externally managed by outside investment managers appointed by the BPIC. Derivatives may be used consistent with the Plan’s investment objectives established by the BPIC. All securities must be U.S. Dollar denominated.
The BPIC oversees the investment of the Company’s plan assets and periodically reviews the investment strategies, strategic asset allocation, liabilities and portfolio structure of the Company’s plan assets. After a 2017 review and considering the funded status of the Assurant Pension Plan, the BPIC transitioned plan assets to a new target asset allocation consisting of 80% fixed income, 10% real estate, 5% hedge funds and 5% equities.
The assets of the Plans are primarily invested in fixed maturity securities. Interest rate risk is hedged by aligning the duration of the fixed maturity securities with the duration of the liabilities. Specifically, interest rate swaps can be used if needed to synthetically extend the duration of fixed maturity securities to match the duration of the liabilities, as measured on a projected benefit obligation basis. In addition, the Plans’ fixed income securities have exposure to credit risk. In order to
F-75
adequately diversify and limit exposure to credit risk, the BPIC established parameters which include a limit on the asset types that managers are permitted to purchase, maximum exposure limits by sector and by individual issuer (based on asset quality) and minimum required ratings on individual securities. As of December 31, 2020, 86% of plan assets were invested in fixed maturity securities and 15%, 15% and 14% of those securities were concentrated in the energy and power, finance and real estate, and communication industries, with no exposure to any single creditor in excess of 4%, 8% and 11% of those industries, respectively. As of December 31, 2020, 3% of plan assets were invested in equity securities and 96% of the Plans’ equity securities were invested in a mutual fund that attempts to replicate the return of the S&P 500 Index by investing its assets in large capitalization stocks that are included in the S&P 500 Index using a weighting similar to the S&P 500 Index. The remainder of the assets are invested in real estate and other alternative assets.
The fair value hierarchy for the Company’s qualified pension plan and other postretirement benefit plan assets at December 31, 2020 by asset category, is as follows:
| Qualified Pension Benefits | December 31, 2020 | ||||||||||||||||
| Financial Assets | Total | Level 1 | Level 2 | ||||||||||||||
| Cash equivalents: | |||||||||||||||||
| Short-term investment funds | $ | 10.6 | $ | — | $ | 10.6 | |||||||||||
| Equity securities: | |||||||||||||||||
| Preferred stock | 1.2 | 1.2 | — | ||||||||||||||
| Mutual funds- U.S. listed large cap | 26.2 | 26.2 | — | ||||||||||||||
| Fixed maturity securities: | |||||||||||||||||
| U.S. & foreign government and government agencies and authorities | 174.8 | — | 174.8 | ||||||||||||||
| Corporate- U.S. & foreign investment grade | 483.1 | — | 483.1 | ||||||||||||||
| Corporate- U.S. & foreign high yield | 55.5 | — | 55.5 | ||||||||||||||
| Mutual funds - U.S. investment grade | 15.9 | 15.9 | — | ||||||||||||||
| Other investments measured at net asset value (1) | 108.4 | — | — | ||||||||||||||
| Total financial assets (2) | $ | 875.7 | $ | 43.3 | $ | 724.0 |
(1)In accordance with fair value measurements and disclosures guidance, certain investments that are measured at fair value using the net asset value practical expedient have not been classified in the fair value hierarchy. The net asset values of $38.2 million, $7.1 million and $63.1 million as of December 31, 2020 are used as a practical expedient to fair value of the multi-strategy hedge fund, private equity fund and real estate fund, respectively. The multi-strategy hedge fund, which is reported on a one month lag, was liquidated on December 31, 2020.
(2)The difference between the fair value of Plan assets above and the amount used in determining the funded status is due to interest receivable and net receivable/payable for unsettled trades, which is not required to be included in the fair value hierarchy.
| Retirement Health Benefits | December 31, 2020 | ||||||||||||||||
| Financial Assets | Total | Level 1 | Level 2 | ||||||||||||||
| Cash equivalents: | |||||||||||||||||
| Short-term investment funds | $ | 0.6 | $ | — | $ | 0.6 | |||||||||||
| Equity securities: | |||||||||||||||||
| Preferred stock | 0.1 | 0.1 | — | ||||||||||||||
| Mutual funds- U.S. listed large cap | 1.3 | 1.3 | — | ||||||||||||||
| Fixed maturity securities: | |||||||||||||||||
| U.S. & foreign government and government agencies and authorities | 9.1 | — | 9.1 | ||||||||||||||
| Corporate- U.S. & foreign investment grade | 25.1 | — | 25.1 | ||||||||||||||
| Corporate- U.S. & foreign high yield | 2.9 | — | 2.9 | ||||||||||||||
| Mutual funds - U.S. investment grade | 0.8 | 0.8 | — | ||||||||||||||
| Other investments measured at net asset value (1) | 5.7 | — | — | ||||||||||||||
| Total financial assets (2) | $ | 45.6 | $ | 2.2 | $ | 37.7 |
(1)In accordance with fair value measurements and disclosures guidance, certain investments that are measured at fair value using the net asset value practical expedient have not been classified in the fair value hierarchy. The net asset values of $2.0 million, $0.4 million and $3.3 million as of December 31, 2020 are used as a practical expedient to fair value of the multi-strategy hedge fund, private equity fund and real estate fund, respectively. The multi-strategy hedge fund, which is reported on a one month lag, was liquidated on December 31, 2020.
(2)The difference between the fair value of Plan assets above and the amount used in determining the funded status is due to interest receivable and net receivable/payable for unsettled trades, which is not required to be included in the fair value hierarchy.
F-76
The fair value hierarchy for the Company’s qualified pension plan and other postretirement benefit plan assets at December 31, 2019 by asset category, is as follows:
| Qualified Pension Benefits | December 31, 2019 | ||||||||||||||||
| Financial Assets | Total | Level 1 | Level 2 | ||||||||||||||
| Cash and cash equivalents: | |||||||||||||||||
| Short-term investment funds | $ | 9.7 | $ | — | $ | 9.7 | |||||||||||
| Equity securities: | |||||||||||||||||
| Preferred stock | 2.6 | 2.6 | — | ||||||||||||||
| Mutual funds- U.S. listed large cap | 22.1 | 22.1 | — | ||||||||||||||
| Fixed maturity securities: | |||||||||||||||||
| U.S. & foreign government and government agencies and authorities | 133.0 | — | 133.0 | ||||||||||||||
| Corporate- U.S. & foreign investment grade | 477.4 | — | 477.4 | ||||||||||||||
| Corporate- U.S. & foreign high yield | 48.8 | — | 48.8 | ||||||||||||||
| Other investments measured at net asset value (1) | 109.7 | — | — | ||||||||||||||
| Total financial assets (2) | $ | 803.3 | $ | 24.7 | $ | 668.9 |
(1)In accordance with fair value measurements and disclosures guidance, certain investments that are measured at fair value using the net asset value practical expedient have not been classified in the fair value hierarchy. The net asset values of $39.3 million, $8.4 million and $62.0 million as of December 31, 2019 are used as a practical expedient to fair value of the multi-strategy hedge fund, private equity fund and real estate fund, respectively.
(2)The difference between the fair value of Plan assets above and the amount used in determining the funded status is due to interest receivable and net receivable/payable for unsettled trades, which is not required to be included in the fair value hierarchy.
| Retirement Health Benefits | December 31, 2019 | ||||||||||||||||
| Financial Assets | Total | Level 1 | Level 2 | ||||||||||||||
| Cash and cash equivalents: | |||||||||||||||||
| Short-term investment funds | $ | 0.5 | $ | — | $ | 0.5 | |||||||||||
| Equity securities: | |||||||||||||||||
| Preferred stock | 0.1 | 0.1 | — | ||||||||||||||
| Mutual funds- U.S. listed large cap | 1.2 | 1.2 | — | ||||||||||||||
| Fixed maturity securities: | |||||||||||||||||
| U.S. & foreign government and government agencies and authorities | 7.2 | — | 7.2 | ||||||||||||||
| Corporate- U.S. & foreign investment grade | 26.0 | — | 26.0 | ||||||||||||||
| Corporate- U.S. & foreign high yield | 2.7 | — | 2.7 | ||||||||||||||
| Other investments measured at net asset value (1) | 6.0 | — | — | ||||||||||||||
| Total financial assets (2) | $ | 43.7 | $ | 1.3 | $ | 36.4 |
(1)In accordance with fair value measurements and disclosures guidance, certain investments that are measured at fair value using the net asset value practical expedient have not been classified in the fair value hierarchy. The net asset values of $2.1 million, $0.5 million and $3.4 million as of December 31, 2019 are used as a practical expedient to fair value of the multi-strategy hedge fund, private equity fund and real estate fund, respectively.
(2)The difference between the fair value of Plan assets above and the amount used in determining the funded status is due to interest receivable and net receivable/payable for unsettled trades, which is not required to be included in the fair value hierarchy.
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 the Company’s Level 2 securities using proprietary valuation models based on techniques such as matrix pricing which include observable market inputs. Observable market inputs for Level 1 and Level 2 securities are consistent with the observable market inputs described in Note 10.
The Company obtains one price for each investment. A quarterly analysis is performed 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 benefits, 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 pricing statistics and trends, and comparison of prices for certain securities with two different appropriate price sources for reasonableness. Following this analysis, the Company uses the best estimate of fair value based upon all available inputs. The pricing service provides information regarding their pricing procedures so that the Company can properly categorize the Plans’ financial assets in the fair value hierarchy.
F-77
The following pension benefits are expected to be paid over the next ten-year period:
| Pension Benefits | Retirement Health Benefits | ||||||||||
| 2021 | $ | 53.6 | $ | 5.2 | |||||||
| 2022 | 62.8 | 5.4 | |||||||||
| 2023 | 52.4 | 5.5 | |||||||||
| 2024 | 52.7 | 5.5 | |||||||||
| 2025 | 52.0 | — | |||||||||
| 2026 - 2030 | 256.7 | — | |||||||||
| Total | $ | 530.2 | $ | 21.6 |
Defined Contribution Plan
The Company and its subsidiaries participate in a defined contribution plan covering substantially all employees. The defined contribution plan provides benefits payable to participants on retirement or disability and to beneficiaries of participants in the event of the participant’s death. The amounts expensed by the Company related to this plan were $41.3 million, $38.4 million and $36.9 million for the years ended December 31, 2020, 2019 and 2018, respectively.
25. Earnings per Common Share
The following table presents net income, the weighted average common shares used in calculating basic EPS and those used in calculating diluted EPS for each period presented below. Diluted EPS reflects the incremental common shares from: (1) common shares issuable upon vesting of PSUs and ESPP using the treasury stock method; and (2) common shares issuable upon conversion of the MCPS using the if-converted method. Refer to Notes 20 and 21 for further information regarding potential common stock issuances. The outstanding RSUs have non-forfeitable rights to dividend equivalents and are therefore included in calculating basic and diluted EPS under the two-class method.
F-78
| Years Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Numerator | |||||||||||||||||
| Net income attributable to stockholders | $ | 441.8 | $ | 382.6 | $ | 251.0 | |||||||||||
| Less: Preferred stock dividends | (18.7) | (18.7) | (14.2) | ||||||||||||||
| Net income attributable to common stockholders | 423.1 | 363.9 | 236.8 | ||||||||||||||
| Less: Common stock dividends paid | (154.6) | (151.4) | (133.8) | ||||||||||||||
| Undistributed earnings | $ | 268.5 | $ | 212.5 | $ | 103.0 | |||||||||||
| Denominator | |||||||||||||||||
| Weighted average common shares outstanding used in basic earnings per common share calculations | 60,114,670 | 61,942,969 | 59,239,608 | ||||||||||||||
| Incremental common shares from: | |||||||||||||||||
| PSUs | 311,712 | 332,873 | 260,904 | ||||||||||||||
| ESPP | 51,631 | 37,626 | 45,012 | ||||||||||||||
| MCPS | 2,701,925 | — | — | ||||||||||||||
| Weighted average common shares used in diluted earnings per common share calculations | 63,179,938 | 62,313,468 | 59,545,524 | ||||||||||||||
| Earnings per common share – Basic | |||||||||||||||||
| Distributed earnings | $ | 2.57 | $ | 2.44 | $ | 2.26 | |||||||||||
| Undistributed earnings | 4.47 | 3.43 | 1.74 | ||||||||||||||
| Net income attributable to common stockholders | $ | 7.04 | $ | 5.87 | $ | 4.00 | |||||||||||
| Earnings per common share – Diluted | |||||||||||||||||
| Distributed earnings | $ | 2.45 | $ | 2.43 | $ | 2.25 | |||||||||||
| Undistributed earnings | 4.54 | 3.41 | 1.73 | ||||||||||||||
| Net income attributable to common stockholders | $ | 6.99 | $ | 5.84 | $ | 3.98 |
Average PSUs totaling 58, 20 and 39,065 for the years ended December 31, 2020, 2019 and 2018, respectively, were outstanding but were anti-dilutive and thus not included in the computation of diluted EPS under the treasury stock method. Average MCPS totaling 2,695,025 and 2,357,090 for the years ended December 31, 2019 and 2018, respectively, were anti-dilutive and thus not included in the computation of diluted EPS under the if-converted method.
F-79
26. Quarterly Results of Operations (Unaudited)
The Company’s quarterly results of operations for the years ended December 31, 2020 and 2019 are summarized in the tables below:
| Three Month Periods Ended | |||||||||||||||||||||||
| March 31 | June 30 | September 30 | December 31 | ||||||||||||||||||||
| 2020 | |||||||||||||||||||||||
| Total revenues | $ | 2,565.6 | $ | 2,471.6 | $ | 2,502.5 | $ | 2,555.1 | |||||||||||||||
| Income (loss) before provision for income taxes | 109.2 | 226.8 | (4.1) | 183.4 | |||||||||||||||||||
| Net income (loss) attributable to common stockholders | 150.0 | 173.5 | (34.9) | 134.5 | |||||||||||||||||||
| Basic per share data: | |||||||||||||||||||||||
| Income (loss) before provision for income taxes | $ | 1.80 | $ | 3.76 | $ | (0.07) | $ | 3.09 | |||||||||||||||
| Net income (loss) | $ | 2.48 | $ | 2.87 | $ | (0.58) | $ | 2.27 | |||||||||||||||
| Diluted per share data (1): | |||||||||||||||||||||||
| Income (loss) before provision for income taxes | $ | 1.72 | $ | 3.58 | $ | (0.07) | $ | 2.94 | |||||||||||||||
| Net income (loss) | $ | 2.43 | $ | 2.81 | $ | (0.58) | $ | 2.23 | |||||||||||||||
| March 31 | June 30 | September 30 | December 31 | ||||||||||||||||||||
| 2019 | |||||||||||||||||||||||
| Total revenues | $ | 2,435.6 | $ | 2,545.5 | $ | 2,499.3 | $ | 2,606.4 | |||||||||||||||
| Income (loss) before provision for income taxes | 217.0 | 183.3 | (24.6) | 178.8 | |||||||||||||||||||
| Net income (loss) attributable to common stockholders | 161.0 | 139.5 | (59.5) | 122.9 | |||||||||||||||||||
| Basic per share data: | |||||||||||||||||||||||
| Income (loss) before provision for income taxes | $ | 3.47 | $ | 2.95 | $ | (0.40) | $ | 2.92 | |||||||||||||||
| Net income (loss) | $ | 2.57 | $ | 2.24 | $ | (0.96) | $ | 2.01 | |||||||||||||||
| Diluted per share data (1): | |||||||||||||||||||||||
| Income (loss) before provision for income taxes | $ | 3.30 | $ | 2.81 | $ | (0.40) | $ | 2.78 | |||||||||||||||
| Net income (loss) | $ | 2.52 | $ | 2.21 | $ | (0.96) | $ | 1.98 |
(1)In accordance with earnings per share guidance, diluted per common share amounts are computed in the same manner as basic per common share amounts when a loss from operations exists.
Fourth quarter 2020 and third quarter 2020 results include $27.3 million and $87.0 million after-tax reportable catastrophes, respectively, due to several storms including Hurricane Laura. Third quarter 2020 results also include a $137.8 million impairment of the goodwill related to the Global Preneed reporting unit (refer to Note 15). First Quarter 2020 results reflect the impact of a $79.3 million tax benefit related to the CARES Act, which allows the carryback of net operating losses to years taxed at higher federal income tax rates. Refer to Note 12 for additional information.
Fourth quarter 2019 and third quarter 2019 results reflect the impact of $32.5 million and $124.8 million after-tax charges related to the investment in Iké, respectively. Refer to Note 4 for additional information. Third quarter 2019 results also reflect the impact of $36.3 million after-tax reportable catastrophes, primarily related to Hurricane Dorian, and a $9.9 million after-tax reduction to net income to adjust for the net over-capitalization of deferred acquisition costs, primarily at one of the Global Preneed international subsidiaries, occurring over a ten-year period.
F-80
27. Commitments and Contingencies
Risks and Uncertainties
The Company continues to closely monitor developments related to the COVID-19 pandemic to assess the ongoing impact on its business, results of operations and financial condition. While still evolving, the COVID-19 pandemic has caused significant global economic and financial market disruption, resulting in increased financial market volatility, business and operational challenges such as the temporary closures of businesses, and overall diminished expectations for the economy and the financial markets.
At this time, it is not possible to estimate how long it will take to halt the spread of the virus or the long-term effects that the COVID-19 pandemic could have on the economy or the Company’s business. The extent to which the COVID-19 pandemic impacts the Company’s business, results of operations or financial condition will depend on future developments which are highly uncertain and difficult to predict, including the severity and duration of the pandemic and the actions taken by government authorities and other third parties to contain or address its impact. Even after the COVID-19 outbreak has subsided, the Company may experience materially adverse impacts to its business, results of operations and financial condition as a result of the pandemic’s global economic impact.
Leases
The Company and its subsidiaries lease office space and equipment under operating lease arrangements. Certain facility leases contain escalation clauses based on increases in the lessors’ operating expenses.
As of December 31, 2020 and 2019, the lease liability was $77.7 million and $76.4 million, respectively, included in accounts payable and other liabilities in the consolidated balance sheets. As of December 31, 2020 and 2019, the right-of-use asset was $67.0 million and $69.5 million, respectively, included in other assets in the consolidated balance sheets. For the years ended December 31, 2020 and 2019, the operating lease cost recognized for leases with terms in excess of 12 months was $23.8 million and $22.1 million, respectively, and related cash outflows reducing the lease liability were $22.7 million and $21.3 million, respectively. At December 31, 2020, the weighted average remaining lease term and discount rate was 6.0 years and 4.0%, respectively. At December 31, 2019, the weighted average remaining lease term and discount rate was 7.0 years and 4.4%, respectively. For the years ended December 31, 2020 and 2019, the short-term lease cost recognized for leases with terms of 12 months or less was $3.4 million and $4.2 million, respectively.
At December 31, 2020, the lease liability by maturity is as follows:
| 2021 | $ | 23.0 | |||
| 2022 | 16.9 | ||||
| 2023 | 13.3 | ||||
| 2024 | 10.0 | ||||
| 2025 | 6.2 | ||||
| Thereafter | 19.5 | ||||
| Total future lease payments | 88.9 | ||||
| Less: Imputed interest | (11.2) | ||||
| Total lease liability | $ | 77.7 |
Rent expense was $27.4 million for the year ended December 31, 2018. Sublease income was $0.7 million for the year ended December 31, 2018.
Letters of Credit
In the normal course of business, letters of credit are issued primarily to support reinsurance arrangements in which the Company is the reinsurer. These letters of credit are supported by commitments under which the Company is required to indemnify the financial institution issuing the letter of credit if the letter of credit is drawn. The Company had $7.6 million and $12.1 million of letters of credit outstanding as of December 31, 2020 and 2019, respectively.
Legal and Regulatory Matters
The Company is involved in a variety of litigation and legal and regulatory proceedings relating to its current and past business operations and, from time to time, it may become involved in other such actions. The Company continues to defend itself vigorously in these proceedings. The Company has participated and may participate in settlements on terms that the Company considers reasonable.
F-81
The Company has established an accrued liability for certain legal and regulatory proceedings. The possible loss or range of loss resulting from such litigation and regulatory proceedings, if any, in excess of the amounts accrued is inherently unpredictable and uncertain. Consequently, no estimate can be made of any possible loss or range of loss in excess of the accrual. Although the Company cannot predict the outcome of any pending legal or regulatory proceeding, or the potential losses, fines, penalties or equitable relief, if any, that may result, it is possible that such outcome could have a material adverse effect on the Company’s consolidated results of operations or cash flows for an individual reporting period. However, on the basis of currently available information, management does not believe that the pending matters are likely to have a material adverse effect, individually or in the aggregate, on the Company’s financial condition.
F-82
Assurant, Inc.
Schedule I – Summary of Investments Other – Than – Investments in Related Parties
| December 31, 2020 | |||||||||||||||||
| Cost or Amortized Cost | Fair Value | Amount at which shown in balance sheet | |||||||||||||||
| (in millions) | |||||||||||||||||
| Fixed maturity securities: | |||||||||||||||||
| U.S. government and government agencies and authorities | $ | 98.7 | $ | 104.7 | $ | 104.7 | |||||||||||
| States, municipalities and political subdivisions | 287.9 | 323.1 | 323.1 | ||||||||||||||
| Foreign governments | 886.3 | 1,039.9 | 1,039.9 | ||||||||||||||
| Asset-backed | 551.7 | 564.5 | 564.5 | ||||||||||||||
| Commercial mortgage-backed | 327.5 | 347.4 | 347.4 | ||||||||||||||
| Residential mortgage-backed | 1,017.5 | 1,103.8 | 1,103.8 | ||||||||||||||
| U.S. corporate | 6,080.2 | 7,300.2 | 7,300.2 | ||||||||||||||
| Foreign corporate | 2,282.6 | 2,665.4 | 2,665.4 | ||||||||||||||
| Total fixed maturity securities | 11,532.4 | 13,449.0 | 13,449.0 | ||||||||||||||
| Equity securities: | |||||||||||||||||
| Common stocks | 16.6 | 22.6 | 22.6 | ||||||||||||||
| Non-redeemable preferred stocks | 298.4 | 339.2 | 339.2 | ||||||||||||||
| Mutual funds | 38.8 | 42.3 | 42.3 | ||||||||||||||
| Total equity securities | 353.8 | 404.1 | 404.1 | ||||||||||||||
| Commercial mortgage loans on real estate | 754.3 | 824.1 | 754.3 | ||||||||||||||
| Short-term investments | 333.2 | 333.2 | 333.2 | ||||||||||||||
| Other investments | 738.8 | 738.8 | 738.8 | ||||||||||||||
| Total investments | $ | 13,712.5 | $ | 15,749.2 | $ | 15,679.4 |
F-83
Assurant, Inc.
Schedule II – Condensed Balance Sheet (Parent Only)
| December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| (in millions, except number of shares) | |||||||||||
| Assets | |||||||||||
| Investments: | |||||||||||
| Equity investment in subsidiaries | $ | 7,620.2 | $ | 6,915.8 | |||||||
| Fixed maturity securities available for sale, at fair value (amortized cost – $127.6 and $256.6 at December 31, 2020 and 2019, respectively) | 139.2 | 269.5 | |||||||||
| Equity securities at fair value | 4.7 | 6.4 | |||||||||
| Short-term investments | 8.1 | 2.7 | |||||||||
| Other investments | 108.7 | 112.7 | |||||||||
| Total investments | 7,880.9 | 7,307.1 | |||||||||
| Cash and cash equivalents | 277.4 | 256.7 | |||||||||
| Receivable from subsidiaries, net | 47.4 | 74.8 | |||||||||
| Income tax receivable | 41.4 | — | |||||||||
| Accrued investment income | 1.2 | 2.3 | |||||||||
| Property and equipment, at cost less accumulated depreciation | 190.0 | 174.8 | |||||||||
| Other assets | 70.9 | 77.4 | |||||||||
| Total assets | $ | 8,509.2 | $ | 7,893.1 | |||||||
| Liabilities | |||||||||||
| Accounts payable and other liabilities | $ | 304.9 | $ | 222.1 | |||||||
| Income tax payable | — | 11.3 | |||||||||
| Debt | 2,252.9 | 2,006.9 | |||||||||
| Total liabilities | 2,557.8 | 2,240.3 | |||||||||
| Commitments and Contingencies | |||||||||||
| Stockholders’ equity | |||||||||||
| 6.50% Series D mandatory convertible preferred stock, par value $1.00 per share, 2,875,000 shares authorized, issued and outstanding at December 31, 2020 and 2019, respectively | 2.9 | 2.9 | |||||||||
| Common stock, par value $0.01 per share, 800,000,000 shares authorized, 62,967,808 and 161,607,866 shares issued and 57,967,808 and 59,945,893 shares outstanding at December 31, 2020 and 2019, respectively | 0.6 | 1.6 | |||||||||
| Additional paid-in capital | 1,956.8 | 4,537.7 | |||||||||
| Retained earnings | 3,548.7 | 5,966.4 | |||||||||
| Accumulated other comprehensive income | 709.8 | 411.5 | |||||||||
| Treasury stock, at cost; 5,000,000 and 101,661,973 shares at December 31, 2020 and 2019, respectively | (267.4) | (5,267.3) | |||||||||
| Total stockholders’ equity | 5,951.4 | 5,652.8 | |||||||||
| Total liabilities and stockholders’ equity | $ | 8,509.2 | $ | 7,893.1 |
See the accompanying Notes to the Parent Only Condensed Financial Statements
F-84
Assurant, Inc.
Schedule II – Condensed Income Statement (Parent Only)
| Years Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| (in millions) | |||||||||||||||||
| Revenues | |||||||||||||||||
| Net investment income | $ | 3.4 | $ | 10.8 | $ | 14.7 | |||||||||||
| Net realized gains (losses) on investments | 4.2 | 1.1 | (0.1) | ||||||||||||||
| Fees and other income | 239.7 | 205.2 | 106.0 | ||||||||||||||
| Equity in net income of subsidiaries | 607.7 | 593.6 | 453.9 | ||||||||||||||
| Total revenues | 855.0 | 810.7 | 574.5 | ||||||||||||||
| Expenses | |||||||||||||||||
| General and administrative expenses | 376.9 | 333.9 | 269.9 | ||||||||||||||
| Interest expense | 104.5 | 110.6 | 100.3 | ||||||||||||||
| Loss on extinguishment of debt | — | 31.4 | — | ||||||||||||||
| Total expenses | 481.4 | 475.9 | 370.2 | ||||||||||||||
| Income before benefit for income taxes | 373.6 | 334.8 | 204.3 | ||||||||||||||
| Benefit for income taxes | (69.1) | (52.0) | (48.3) | ||||||||||||||
| Net income | 442.7 | 386.8 | 252.6 | ||||||||||||||
| Less: Net income attributable to non-controlling interest | (0.9) | (4.2) | (1.6) | ||||||||||||||
| Net income attributable to stockholders | $ | 441.8 | $ | 382.6 | $ | 251.0 |
See the accompanying Notes to the Parent Only Condensed Financial Statements
F-85
Assurant, Inc.
Schedule II – Condensed Statements of Comprehensive Income (Parent Only)
| Years Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| (in millions) | |||||||||||||||||
| Net income | $ | 442.7 | $ | 386.8 | $ | 252.6 | |||||||||||
| Other comprehensive income (loss): | |||||||||||||||||
| Change in unrealized gains on securities, net of taxes of $—, $(4.3) and $3.0 for the years ended December 31, 2020, 2019 and 2018, respectively | 0.1 | 16.3 | (11.3) | ||||||||||||||
| Change in unrealized gains on derivative transactions, net of taxes of $0.6, $0.4 and $(4.9) for the years ended December 31, 2020, 2019 and 2018, respectively | (2.3) | (1.3) | 18.4 | ||||||||||||||
| Change in foreign currency translation, net of taxes of $—, $— and $— for the years ended December 31, 2020, 2019 and 2018, respectively | (0.1) | — | — | ||||||||||||||
| Amortization of pension and postretirement unrecognized net periodic benefit cost and change in funded status, net of taxes of $(3.2), $1.1 and $3.4 for the years ended December 31, 2020, 2019 and 2018, respectively | 11.9 | (4.2) | (12.7) | ||||||||||||||
| Change in subsidiary other comprehensive income | 288.7 | 556.1 | (431.9) | ||||||||||||||
| Total other comprehensive income (loss) | 298.3 | 566.9 | (437.5) | ||||||||||||||
| Total comprehensive income (loss) | 741.0 | 953.7 | (184.9) | ||||||||||||||
| Less: Net income attributable to non-controlling interest | (0.9) | (4.2) | (1.6) | ||||||||||||||
| Total comprehensive income (loss) attributable to stockholders | $ | 740.1 | $ | 949.5 | $ | (186.5) |
See the accompanying Notes to the Parent Only Condensed Financial Statements
F-86
Assurant, Inc.
Schedule II – Condensed Cash Flows (Parent Only)
| Years Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| (in millions) | |||||||||||||||||
| Operating Activities | |||||||||||||||||
| Net cash provided by operating activities | $ | 644.0 | $ | 550.2 | $ | 548.8 | |||||||||||
| Investing Activities | |||||||||||||||||
| Sales of: | |||||||||||||||||
| Fixed maturity securities available for sale | 165.0 | 363.3 | 413.1 | ||||||||||||||
| Equity securities | 1.6 | 5.9 | 12.6 | ||||||||||||||
| Other invested assets | 9.6 | 15.8 | 74.1 | ||||||||||||||
| Property, buildings and equipment (1) | 37.3 | 3.3 | 0.1 | ||||||||||||||
| Subsidiary, net of cash transferred (2) | — | — | 31.5 | ||||||||||||||
| Maturities, calls, prepayments, and scheduled redemption of: | |||||||||||||||||
| Fixed maturity securities available for sale | 17.4 | 16.2 | 26.2 | ||||||||||||||
| Purchases of: | |||||||||||||||||
| Fixed maturity securities available for sale | (45.7) | (328.8) | (372.8) | ||||||||||||||
| Equity securities | — | (5.7) | (2.8) | ||||||||||||||
| Other invested assets | (3.6) | (15.2) | (38.8) | ||||||||||||||
| Property and equipment and other | (82.9) | (59.7) | (31.9) | ||||||||||||||
| Subsidiary, net of cash transferred (3) | — | — | (1,490.9) | ||||||||||||||
| Capital contributed to subsidiaries | (592.2) | (74.8) | (61.0) | ||||||||||||||
| Return of capital contributions from subsidiaries | 139.2 | 24.9 | 14.0 | ||||||||||||||
| Change in short-term investments | (5.4) | — | 11.5 | ||||||||||||||
| Net cash used in investing activities | (359.7) | (54.8) | (1,415.1) | ||||||||||||||
| Financing Activities | |||||||||||||||||
| Issuance of debt, net of issuance costs (Note 19 to the Consolidated Financial Statements) | 243.7 | 346.7 | 1,285.7 | ||||||||||||||
| Borrowings under secured revolving credit facility | 200.0 | — | — | ||||||||||||||
| Payments on secured revolving credit facility | (200.0) | — | — | ||||||||||||||
| Repayment of debt, including tender offer premium | — | (379.6) | (350.0) | ||||||||||||||
| Issuance of mandatory convertible preferred stock, net of issuance costs (Note 19) | — | — | 276.4 | ||||||||||||||
| Acquisition of common stock | (297.0) | (271.8) | (139.3) | ||||||||||||||
| Preferred stock dividends paid | (18.7) | (18.7) | (14.2) | ||||||||||||||
| Common stock dividends paid | (154.6) | (151.3) | (133.8) | ||||||||||||||
| Employee stock purchases and withholdings | (10.3) | 13.3 | 1.4 | ||||||||||||||
| Proceeds from transfer of rights to ACA recoverables (Note 4 to the Consolidated Financial Statements) | — | 26.7 | — | ||||||||||||||
| Proceeds paid back on transfer of rights to ACA recoverable | (26.7) | — | — | ||||||||||||||
| Other | — | — | 0.1 | ||||||||||||||
| Net cash (used in) provided by financing activities | (263.6) | (434.7) | 926.3 | ||||||||||||||
| Change in cash and cash equivalents | 20.7 | 60.7 | 60.0 | ||||||||||||||
| Cash and cash equivalents at beginning of period | 256.7 | 196.0 | 136.0 | ||||||||||||||
| Cash and cash equivalents at end of period | $ | 277.4 | $ | 256.7 | $ | 196.0 |
(1)Amount for the year ended December 31, 2020 related to the sale of a building from the Parent to a subsidiary (which is eliminated for consolidated reporting).
(2)Amounts for the year ended December 31, 2018 relate to cash received from the sale of Time Insurance Company ($23.9 million). For additional information, refer to Note 4 to the Consolidated Financial Statements.
(3)Amounts for the year ended December 31, 2018 primarily consist of $1.49 billion of cash used to fund a portion of the total purchase of the TWG acquisition, inclusive of the $595.9 million repayment of pre-existing TWG debt at the acquisition date.
F-87
See the accompanying Notes to the Parent Only Condensed Financial Statements
F-88
Assurant, Inc.
Notes to the Parent Only Condensed Financial Statements
Assurant, Inc.’s (the “Registrant”) investments in consolidated subsidiaries are stated at cost plus equity in income of consolidated subsidiaries. The accompanying Parent Only Condensed Financial Statements of the Registrant should be read in conjunction with the Consolidated Financial Statements and Notes thereto of the registrant and its subsidiaries included in the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020 filed with the Securities and Exchange Commission on February 19, 2021.
F-89
Assurant, Inc.
Schedule III – Supplementary Insurance Information
| Segment | Deferred acquisition costs | Future policy benefits and expenses | Unearned premiums | Claims and benefits payable | Premium revenue | Net investment income | Benefits claims, losses and settlement expenses | Amortization of deferred acquisition costs | Other operating expenses (1) | Property and Casualty premiums written | |||||||||||||||||||||||||||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Year Ended December 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Global Lifestyle | $ | 7,236.0 | $ | 87.4 | $ | 15,818.0 | $ | 732.2 | $ | 6,442.2 | $ | 194.3 | $ | 1,412.6 | $ | 2,530.8 | $ | 3,024.2 | $ | 1,028.0 | |||||||||||||||||||||||||||||||||||||||
| Global Housing | 152.2 | — | 1,467.4 | 651.9 | 1,833.6 | 72.8 | 852.1 | 225.6 | 677.3 | 1,850.8 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Global Preneed | 1,283.0 | 6,582.4 | 566.4 | 37.8 | 66.9 | 282.0 | 284.4 | 74.2 | 72.6 | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Corporate and Other | (1,097.7) | 3,392.2 | (543.8) | 1,237.6 | — | 25.8 | 0.2 | — | 183.2 | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Total segments | $ | 7,573.5 | $ | 10,062.0 | $ | 17,308.0 | $ | 2,659.5 | $ | 8,342.7 | $ | 574.9 | $ | 2,549.3 | $ | 2,830.6 | $ | 3,957.3 | $ | 2,878.8 | |||||||||||||||||||||||||||||||||||||||
| Year Ended December 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Global Lifestyle | $ | 5,985.6 | $ | 97.5 | $ | 15,115.8 | $ | 729.5 | $ | 6,073.7 | $ | 250.8 | $ | 1,516.2 | $ | 1,882.4 | $ | 3,410.9 | $ | 1,083.9 | |||||||||||||||||||||||||||||||||||||||
| Global Housing | 136.1 | — | 1,436.0 | 651.6 | 1,885.1 | 95.2 | 869.5 | 221.5 | 711.6 | 1,833.7 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Global Preneed | 1,180.2 | 6,327.6 | 500.9 | 29.9 | 61.2 | 285.3 | 269.0 | 78.4 | 73.8 | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Corporate and Other | (633.9) | 3,382.2 | (449.1) | 1,276.7 | — | 43.7 | — | — | 357.0 | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Total segments | $ | 6,668.0 | $ | 9,807.3 | $ | 16,603.6 | $ | 2,687.7 | $ | 8,020.0 | $ | 675.0 | $ | 2,654.7 | $ | 2,182.3 | $ | 4,553.3 | $ | 2,917.6 | |||||||||||||||||||||||||||||||||||||||
| Year Ended December 31, 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Global Lifestyle | $ | 4,075.1 | $ | 112.2 | $ | 13,819.9 | $ | 709.8 | $ | 4,291.8 | $ | 189.4 | $ | 1,145.6 | $ | 1,207.1 | $ | 2,631.3 | $ | 716.8 | |||||||||||||||||||||||||||||||||||||||
| Global Housing | 128.6 | — | 1,472.5 | 651.3 | 1,806.2 | 80.8 | 938.4 | 204.5 | 837.1 | 1,852.7 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Global Preneed | 1,051.9 | 5,943.7 | 437.3 | 27.6 | 58.4 | 278.0 | 263.3 | 63.9 | 66.7 | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Corporate and Other | (152.6) | 3,185.0 | (81.7) | 1,425.0 | 0.5 | 50.2 | (4.7) | — | 270.6 | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Total segments | $ | 5,103.0 | $ | 9,240.9 | $ | 15,648.0 | $ | 2,813.7 | $ | 6,156.9 | $ | 598.4 | $ | 2,342.6 | $ | 1,475.5 | $ | 3,805.7 | $ | 2,569.5 |
(1)Includes amortization of value of business acquired and underwriting, general and administration expenses.
F-90
Assurant, Inc.
Schedule IV – Reinsurance
| Direct amount | Ceded to other Companies | Assumed from other Companies | Net amount | Percentage of amount assumed to net | |||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||||
| Year Ended December 31, 2020 | |||||||||||||||||||||||||||||
| Life Insurance in Force | $ | 22,197.1 | $ | 13,058.0 | $ | 478.1 | $ | 9,617.2 | 5.0 | % | |||||||||||||||||||
| Premiums: | |||||||||||||||||||||||||||||
| Life insurance | $ | 299.6 | $ | 190.3 | $ | 1.4 | $ | 110.7 | 1.3 | % | |||||||||||||||||||
| Accident and health insurance | 623.5 | 446.8 | 0.5 | 177.2 | 0.3 | % | |||||||||||||||||||||||
| Property and liability insurance | 14,245.0 | 6,323.1 | 132.9 | 8,054.8 | 1.6 | % | |||||||||||||||||||||||
| Total earned premiums | $ | 15,168.1 | $ | 6,960.2 | $ | 134.8 | $ | 8,342.7 | 1.6 | % | |||||||||||||||||||
| Benefits: | |||||||||||||||||||||||||||||
| Life insurance | $ | 528.0 | $ | 240.5 | $ | 11.0 | $ | 298.5 | 3.7 | % | |||||||||||||||||||
| Accident and health insurance | 438.0 | 387.6 | (3.9) | 46.5 | (8.4) | % | |||||||||||||||||||||||
| Property and liability insurance | 5,461.5 | 3,384.4 | 127.2 | 2,204.3 | 5.8 | % | |||||||||||||||||||||||
| Total policyholder benefits | $ | 6,427.5 | $ | 4,012.5 | $ | 134.3 | $ | 2,549.3 | 5.3 | % | |||||||||||||||||||
| Year Ended December 31, 2019 | |||||||||||||||||||||||||||||
| Life Insurance in Force | $ | 28,750.3 | $ | 18,724.6 | $ | 516.2 | $ | 10,541.9 | 4.9 | % | |||||||||||||||||||
| Premiums: | |||||||||||||||||||||||||||||
| Life insurance | $ | 381.3 | $ | 275.6 | $ | 2.9 | $ | 108.6 | 2.7 | % | |||||||||||||||||||
| Accident and health insurance | 796.5 | 620.5 | 1.6 | 177.6 | 0.9 | % | |||||||||||||||||||||||
| Property and liability insurance | 13,259.5 | 5,738.0 | 212.3 | 7,733.8 | 2.7 | % | |||||||||||||||||||||||
| Total earned premiums | $ | 14,437.3 | $ | 6,634.1 | $ | 216.8 | $ | 8,020.0 | 2.7 | % | |||||||||||||||||||
| Benefits: | |||||||||||||||||||||||||||||
| Life insurance | $ | 555.8 | $ | 281.9 | $ | 12.5 | $ | 286.4 | 4.4 | % | |||||||||||||||||||
| Accident and health insurance | 590.5 | 566.3 | 0.2 | 24.4 | 0.8 | % | |||||||||||||||||||||||
| Property and liability insurance | 5,249.3 | 3,119.2 | 213.8 | 2,343.9 | 9.1 | % | |||||||||||||||||||||||
| Total policyholder benefits | $ | 6,395.6 | $ | 3,967.4 | $ | 226.5 | $ | 2,654.7 | 8.5 | % | |||||||||||||||||||
| Year Ended December 31, 2018 | |||||||||||||||||||||||||||||
| Life Insurance in Force | $ | 53,831.6 | $ | 50,110.5 | $ | 554.1 | $ | 4,275.2 | 13.0 | % | |||||||||||||||||||
| Premiums: | |||||||||||||||||||||||||||||
| Life insurance | $ | 526.8 | $ | 402.5 | $ | 3.8 | $ | 128.1 | 3.0 | % | |||||||||||||||||||
| Accident and health insurance | 1,234.2 | 1,067.8 | 2.4 | 168.8 | 1.4 | % | |||||||||||||||||||||||
| Property and liability insurance | 9,942.8 | 4,229.9 | 147.1 | 5,860.0 | 2.5 | % | |||||||||||||||||||||||
| Total earned premiums | $ | 11,703.8 | $ | 5,700.2 | $ | 153.3 | $ | 6,156.9 | 2.5 | % | |||||||||||||||||||
| Benefits: | |||||||||||||||||||||||||||||
| Life insurance | $ | 599.9 | $ | 330.7 | $ | 12.8 | $ | 282.0 | 4.5 | % | |||||||||||||||||||
| Accident and health insurance | 1,114.4 | 1,095.8 | 0.4 | 19.0 | 2.1 | % | |||||||||||||||||||||||
| Property and liability insurance | 4,588.6 | 2,642.6 | 95.6 | 2,041.6 | 4.7 | % | |||||||||||||||||||||||
| Total policyholder benefits | $ | 6,302.9 | $ | 4,069.1 | $ | 108.8 | $ | 2,342.6 | 4.6 | % |
F-91
Assurant, Inc.
Schedule V – Valuation and Qualifying Accounts
| Additions | |||||||||||||||||||||||||||||
| Balance at Beginning of Year | Charged to Costs and Expenses | Charged to Other Accounts | Deductions | Balance at End of Year | |||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||||
| For the Year Ended December 31, 2020 | |||||||||||||||||||||||||||||
| Valuation allowance for foreign deferred tax assets | $ | 76.6 | $ | (46.7) | $ | — | $ | 2.3 | $ | 27.6 | |||||||||||||||||||
| Allowance for credit losses related to available for sale fixed maturity securities | — | 1.5 | — | — | 1.5 | ||||||||||||||||||||||||
| Allowance for credit losses related to commercial mortgage loans on real estate | 0.6 | 5.5 | 1.6 | — | 7.7 | ||||||||||||||||||||||||
| Allowance for credit losses related to the Iké Loan | — | 1.4 | — | — | 1.4 | ||||||||||||||||||||||||
| Allowance for credit losses related to premiums and accounts receivable | 15.3 | 2.6 | 1.4 | 5.5 | 13.8 | ||||||||||||||||||||||||
| Allowance for credit losses related to dealer loan receivable | 1.7 | — | 0.1 | — | 1.8 | ||||||||||||||||||||||||
| Allowance for credit losses related to reinsurance recoverables | 2.8 | 1.3 | 22.3 | 0.1 | 26.3 | ||||||||||||||||||||||||
| Total | $ | 97.0 | $ | (34.4) | $ | 25.4 | $ | 7.9 | $ | 80.1 | |||||||||||||||||||
| For the Year Ended December 31, 2019 | |||||||||||||||||||||||||||||
| Valuation allowance for foreign deferred tax assets | $ | 26.4 | $ | 50.2 | $ | — | $ | — | $ | 76.6 | |||||||||||||||||||
| Allowance for credit losses related to commercial mortgage loans on real estate | 0.4 | 0.2 | — | — | 0.6 | ||||||||||||||||||||||||
| Allowance for credit losses related to premiums and accounts receivable | 16.1 | 1.5 | — | 2.3 | 15.3 | ||||||||||||||||||||||||
| Allowance for credit losses related to dealer loan receivable | 1.6 | 0.1 | — | — | 1.7 | ||||||||||||||||||||||||
| Allowance for credit losses related to reinsurance recoverables | 0.3 | 2.5 | — | — | 2.8 | ||||||||||||||||||||||||
| Total | $ | 44.8 | $ | 54.5 | $ | — | $ | 2.3 | $ | 97.0 | |||||||||||||||||||
| For the Year Ended December 31, 2018 | |||||||||||||||||||||||||||||
| Valuation allowance for foreign deferred tax assets | $ | 9.2 | $ | (0.5) | $ | 17.8 | $ | 0.1 | $ | 26.4 | |||||||||||||||||||
| Allowance for credit losses related to commercial mortgage loans on real estate | 1.0 | (0.6) | — | — | 0.4 | ||||||||||||||||||||||||
| Allowance for credit losses related to premiums and accounts receivable | 12.5 | 0.3 | 6.4 | 3.1 | 16.1 | ||||||||||||||||||||||||
| Allowance for credit losses related to dealer loan receivable | — | — | 1.6 | — | 1.6 | ||||||||||||||||||||||||
| Allowance for credit losses related to reinsurance recoverables | 0.3 | — | — | — | 0.3 | ||||||||||||||||||||||||
| Total | $ | 23.0 | $ | (0.8) | $ | 25.8 | $ | 3.2 | $ | 44.8 |
F-92
Previous: Item 15. Exhibits and Financial Statement Schedules