(3) Following the completion of our annual goodwill impairment analysis, we recorded an impairment charge of $306,381 related to Assurant Employee Benefits and Assurant Health and a charge of $83,000 related to Assurant Employee Benefits during the fourth quarters of 2010 and 2009, respectively. The impairment charges resulted in a decrease to net income but did not have any related tax benefit.
(6) Total stockholders’ equity divided by the basic shares of common stock outstanding. At December 31, 2011, 2010 and 2009 there were 89,743,761, 103,227,238, and 117,591,250 shares, respectively, of common stock outstanding. At December 31, 2008 and 2007 there were 117,640,936 and 118,012,036 shares of common stock outstanding.
Assurant Solutions net income increased to $141,553 for Twelve Months 2011 from $103,206 for Twelve Months 2010. Twelve Months 2010 included an intangible asset impairment charge of $30,948 (after-tax) related to a client notification of non-renewal of a block of domestic service contract business. Consumer spending remains sluggish in the U.S. and economic uncertainty persists in Europe. However, revenues from our service contract offerings, including wireless, especially in Latin America, are expanding. Client contract renewals remain strong, driven by our ability to respond to evolving customer needs. Preneed sales increased in 2011 compared with 2010, primarily due to our strong relationship with SCI. Total net earned premiums and fees declined slightly in 2011 due to an approximate $160,000 reduction in premiums from the continued run-off of the domestic credit business and service contracts sold through former clients. Overall, modest premium growth is expected in 2012, even with the recent notification of an upcoming loss of a domestic wireless client. We continue to allocate resources to the wireless business due to its potential for growth and its intersection with our core capabilities.
Assurant Specialty Property net income decreased $119,222, to $305,065 for Twelve Months 2011 from $424,287 for Twelve Months 2010. The decline is primarily due to an increase in reportable catastrophe losses of $87,673 (after-tax) in Twelve Months 2011. There are fewer mortgage loans originating in the U.S. and foreclosures are projected to increase. Despite these trends, our alignment with market leaders, specifically specialty servicers, has allowed us to gain new portfolios, which have helped to offset a decline of loans in the overall marketplace. This was evident during the fourth quarter of 2011 as our clients gained new loan portfolios, mitigating the overall decrease in the number of tracked loans. We placed a significant portion of our reinsurance program in January 2012, including issuing a new catastrophe bond. The integration of the June 2011 SureDeposit acquisition has allowed us to expand our product offerings in the multi-family housing market. We expect net earned premiums and fees in 2012 to be consistent with 2011 amounts, reflecting growth in multi-family housing and a modest decline in lender-placed homeowners premiums. As our product mix changes, we anticipate our expense and non-catastrophe loss ratios will rise. Overall results are subject to catastrophe losses, changes in placement rates for lender-placed policies, and mortgage loan origination volume.
Assurant Health net income decreased to $40,886 for Twelve Months 2011 from $54,029 for Twelve Months 2010. The decrease was partly attributable to accrued premium rebates of $27,033 (after-tax) associated with the MLR requirement included in the Affordable Care Act for our comprehensive health coverage business. Our 2011 operating costs dropped significantly due to organizational and operational expense initiatives that will better position us to succeed under health care reform. We have redesigned many of our products in response to health care reform. Sales of lower cost products, offering more limited benefits than traditional major medical insurance, grew in 2011 and we expect that trend to continue in 2012. Our new relationship with Aetna Signature Administrators® broadens the network of health care providers to which our major medical customers have access and improves affordability of those products, while improving engagement with our distributers. We expect this new relationship to improve our major medical sales. Beginning in 2012, any favorable loss development relative to 2011 reserves will increase the MLR rebate liability instead of flowing into earnings as was the case in 2011.
Assurant Employee Benefits net income decreased to $43,113 for Twelve Months 2011 from $63,538 for Twelve Months 2010. Lower results were primarily attributable to less favorable disability and life insurance loss
experience, partially offset by improved dental insurance experience. During the fourth quarter of 2011 our disability incidence rates increased compared with prior years. We expect continued growth in net earned premiums of our voluntary and supplemental products. However, overall growth in our Assurant Employee Benefits business will be challenging in the near term, due to the loss of two DRMS clients and the lack of small employers’ payroll growth. Our strategic focus on distribution through key brokers and our expanded offerings continue to improve sales of voluntary, or employee-paid products. In addition, savings from expense initiatives are being redeployed to targeted growth initiatives.
Management believes the Company will have sufficient liquidity to satisfy its needs over the next twelve months including the ability to pay interest on our Senior Notes and dividends on our common stock.
We incur interest expenses related to our debt and mandatorily redeemable preferred stock, if any.
The Assurant Health loss ratio reported on page 63 (the “GAAP loss ratio”) differs from the loss ratio calculated under the MLR rules (“MLR loss ratio”) specified under the Affordable Care Act. The most significant differences include: the MLR loss ratio is calculated separately by state and legal entity; the MLR loss ratio calculation includes credibility adjustments for each entity, which are not applicable to the GAAP loss ratio; the MLR loss ratio calculation applies only to some of our health insurance products, while the GAAP loss ratio applies to the entire portfolio, including products not governed by the Affordable Care Act; the MLR loss ratio includes quality improvement expenses, taxes and fees; changes in reserves are treated differently in the MLR loss ratio calculation; and the premium rebate amounts are considered adjustments to premiums for GAAP reporting whereas they are reported as additions to incurred claims in the MLR rebate estimate calculations.
We estimated the 2011 full-year premium rebate accrual to be $41,589; however, further emerging regulations and interpretations from HHS as well as additional loss experience on claims incurred in 2011 could cause the actual premium rebate to differ. We will not know the actual premium rebate amount with certainty until mid-2012; it will be based on actual premium and claim experience for all of 2011. The estimated liability may also need to be adjusted for any further regulatory clarifications or transition relief granted for states in which we do business. The premium rebate is presented as a reduction of net earned premiums in the consolidated statement of operations and included in unearned premiums in the consolidated balance sheets.
The following table provides reserve information for our major product lines for the years ended December 31, 2011 and 2010:
Key sensitivities at December 31, 2011 for group long term disability claim reserves include the discount rate and claim termination rates.
IBNR reserves calculated using generally accepted actuarial methods represent the largest component of reserves for Medical claims and benefits payable. The primary methods we use in their estimation are the loss development method and the projected claim method for recent claim periods. Under the loss development method, we estimate ultimate losses for each incident period by multiplying the current cumulative losses by the appropriate loss development factor. The projected claim method is used when development methods do not provide enough data to reliably estimate reserves and utilize expected ultimate loss ratios to calculate the required reserve. Where appropriate, we use variations on each method or a blend of the two.
Key sensitivities as of December 31, 2011 for medical reserves include claims processing levels, claims under case management, medical inflation, seasonal effects, medical provider discounts and product mix.
Changes in medical loss development may increase or decrease the MLR rebate liability. For more information see Critical Accounting Estimates below.
The data is typically analyzed using quarterly paid losses and/or quarterly case-incurred losses. Some product groupings may also use annual paid loss and/or annual case-incurred losses, as well as other actuarially accepted methods.
current and future market conditions-the economic environment will often impact the development of loss triangles;
Most of our credit property and credit unemployment insurance business is either reinsured or written on a retrospective commission basis. Business written on a retrospective commission basis permits management to adjust commissions based on claims experience. Thus, any adjustment to prior years’ incurred claims is partially offset by a change in commission expense, which is included in the selling underwriting and general expenses line in our consolidated results of operations.
If the actual level of loss frequency and severity are higher or lower than expected, the ultimate reserves required will be different than management’s estimate. The effect of higher and lower levels of loss frequency and severity levels on our ultimate costs for claims occurring in 2011 would be as follows:
One of our subsidiaries, American Reliable Insurance Company (“ARIC”), participated in certain excess of loss reinsurance programs in the London market and, as a result, reinsured certain personal accident, ransom and kidnap insurance risks from 1995 to 1997. ARIC and a foreign affiliate ceded a portion of these risks to retrocessionaires. ARIC ceased reinsuring such business in 1997. However, certain risks continued beyond 1997 due to the nature of the reinsurance contracts written. ARIC and some of the other reinsurers involved in the programs have sought to void certain treaties on various grounds, including material misrepresentation and non-disclosure by the ceding companies and intermediaries involved in the programs. Some of the retrocessionaires have sought to avoid certain treaties with ARIC and the other reinsurers and some reinsureds have sought collection of disputed balances under some of the treaties. Disputes under these contracts generally involve multiple layers of reinsurance, and allegations that the reinsurance programs involved interrelated claims “spirals” devised to disproportionately pass claims losses to higher-level reinsurance layers.
Many of the companies involved in these programs, including ARIC, are currently involved in negotiations, arbitrations and/or litigation in an effort to resolve these disputes. The disputes involving ARIC and an affiliate, Assurant General Insurance Limited (formerly Bankers Insurance Company Limited (“AGIL”)), for the 1995 and 1996 program years are subject to working group settlements negotiated with other market participants. Negotiations, arbitrations and litigation are still ongoing or will be scheduled for the remaining disputes.
In the last five years, several settlements have been made relating to the 1995-1997 programs which have reduced ARIC’s liabilities significantly. Most notably, in 2010, the loss reserve balance decreased by $18,600 resulting from a $9,200 settlement relating to the 1997 program and settlements made to the 1995 and 1996 programs. In 2011, uncertainty continued to be resolved and the reserve balances were reduced by $3,870 accordingly. Carried case and IBNR reserves total $2,453 as of December 31, 2011. We believe, based on information currently available, that the amounts accrued are adequate. However, the inherent uncertainty of arbitrations and lawsuits, including the uncertainty of estimating whether any settlements we may enter into in the future would be on favorable terms, makes it difficult to predict outcomes with certainty.
Deferred acquisition costs (“DAC”) represent expenses incurred in prior periods, primarily for the production of new business, that have been deferred for financial reporting purposes. Acquisition costs primarily consist of commissions, policy issuance expenses, premium tax and certain direct marketing expenses.
Acquisition costs relating to group worksite products, which typically have high front-end costs and are expected to remain in force for an extended period of time, consist primarily of first year commissions to brokers and costs of issuing new certificates. These acquisition costs are front-end loaded, thus they are deferred and amortized over the estimated terms of the underlying contracts.
Acquisition costs relating to individual voluntary limited benefit health policies issued in 2007 and later are deferred and amortized over the estimated average terms of the underlying contracts. These acquisition costs relate to commissions payable under schedules that pay significantly higher rates in the first year.
We regularly monitor our investment portfolio to ensure investments that may be other-than-temporarily impaired are identified in a timely fashion, properly valued, and charged against earnings in the proper period. The determination that a security has incurred an other-than-temporary decline in value requires the judgment of management. Assessment factors include, but are not limited to, the length of time and the extent to which the market value has been less than cost, the financial condition and rating of the issuer, whether any collateral is held, the intent and ability of the Company to retain the investment for a period of time sufficient to allow for recovery for equity securities, and the intent to sell or whether it is more likely than not that the Company will be required to sell for fixed maturity securities.
We have used reinsurance to exit certain businesses, including blocks of individual life, annuity, and long-term care business. The reinsurance recoverables relating to these dispositions amounted to $3,622,481 and $3,488,908 at December 31, 2011 and 2010, respectively.