We own eight properties, including five buildings whose locations serve as headquarters for our operating segments, two buildings that serve as operation centers for Assurant Specialty Property and one building that serves as a claims training center for Assurant Specialty Property. Assurant Solutions and Assurant Specialty Property share headquarters buildings located in Miami, Florida and Atlanta, Georgia. Assurant Specialty Property has operations centers located in Florence, South Carolina and Springfield, Ohio. Assurant Solutions’ preneed business also has a headquarters building in Rapid City, South Dakota. Assurant Employee Benefits has a headquarters building in Kansas City, Missouri. Assurant Health has a headquarters building in Milwaukee,
(1) Included in net realized gains (losses) are other-than-temporary impairments of $1,843, $7,836, $11,167, $38,660 and $340,153 for 2012, 2011, 2010, 2009 and 2008, respectively.
(2) During 2012, we incurred losses of $250,206, mainly associated with Superstorm Sandy. During 2011, we incurred losses of $157,645 associated with Hurricane Irene, Tropical Storm Lee, wildfires in Texas and severe storms, including tornados in the southeast. During 2008, we incurred losses of $132,615 associated with Hurricanes Gustav and Ike. Reportable catastrophe losses include only individual catastrophic events that generated losses to the Company in excess of $5,000, pre-tax and net of reinsurance.
(6) Total stockholders’ equity divided by the basic shares of common stock outstanding. At December 31, 2012, 2011, 2010, 2009 and 2008 there were 79,866,858, 89,743,761, 103,227,238, 117,591,250 and 117,640,936 shares, respectively, of common stock outstanding.
We report our results through five segments: Assurant Solutions, Assurant Specialty Property, Assurant Health, Assurant Employee Benefits, and Corporate and Other. The Corporate and Other segment includes activities of the holding company, financing and interest expenses, net realized gains (losses) on investments and interest income earned from short-term investments held. The Corporate and Other segment also includes the amortization of deferred gains associated with the sales of FFG and LTC, through reinsurance agreements as described below.
Consolidated net income decreased $55,251, or 10%, to $483,705 for Twelve Months 2012 from $538,956 for Twelve Months 2011. The decrease is primarily due to an $80,000 release of a capital loss valuation allowance related to deferred tax assets during Twelve Months 2011. Partially offsetting this item was improved net income in our Assurant Health and Assurant Employee Benefits segments and an increase of $20,652 (after-tax) in net realized gains on investments. Twelve Months 2012 includes $162,634 (after-tax) of Assurant Specialty Property reportable catastrophe losses, primarily due to Superstorm Sandy, compared to $102,469 (after-tax) of reportable catastrophe losses in Twelve Months 2011. Higher catastrophe losses in Twelve Months 2012 were offset by growth in lender-placed homeowners net earned premiums and lower non-catastrophe losses.
Assurant Solutions net income decreased $12,297, or 9%, to $123,753 for Twelve Months 2012 from $136,050 for Twelve Months 2011. This decrease was largely due to a fourth quarter charge of $20,373 (after-tax) for the impairment of certain other intangible assets established primarily in connection with acquisitions of two U.K. mortgage insurance brokers in 2007, and a fourth quarter workforce restructuring charge of $7,724 (after-tax) primarily relating to our domestic credit and European operations. Twelve Months 2012 also included $6,362 (after-tax) of income from client related settlements.
Domestic results declined primarily from the previously disclosed loss of a mobile client, effective October 2012, increased expenses in our mobile and vehicle services businesses to enhance our technology platform and support new business growth, and less favorable underwriting experience in our service contract business. These factors increased our domestic combined ratio to 98.9%. We expect the domestic combined ratio to remain near our target of 98.0% in 2013.
Fee income and sales from our preneed business also improved during Twelve Months 2012, primarily due to our strong relationship with SCI.
Assurant Specialty Property net income increased $1,228, or less than 1%, to $304,951 for Twelve Months 2012 from $303,723 for Twelve Months 2011. The increase is due to increased lender-placed homeowners net earned premiums, growth in our multifamily housing business and lower non-catastrophe losses, mainly offset by an increase in reportable catastrophe losses of $60,165 (after-tax). The growth in net earned premiums was driven by lender-placed loan portfolio additions and increased placement rates.
Our placement rate for Twelve Months 2012 was 2.87% compared to 2.75% in Twelve Months 2011. The 2.87% placement rate is high, compared to historical standards, due to the impact of the new loan portfolios added throughout 2012. We expect placement rates in the near term to fluctuate, reflecting the state of the housing market and the changing composition of our tracked loan portfolios, but we expect placement rates to ultimately decline as the housing market stabilizes.
In late 2012, we began a multi-phased roll-out of our new next generation product to respond to the changed environment following the housing crisis. Features of the product include: expanded geographic rating, added premium rating flexibility and continued enhancements to our customer notification process. Our next generation product is available in 14 states and we expect to implement it in 14 more states by the end of the second quarter 2013, with a full roll-out to all other states by the end of 2013. As we have disclosed, we continue to engage in discussions with various state and federal regulatory departments regarding our lender-placed insurance program. For additional detail on certain of these discussions please refer to Assurant Specialty Property’s results of operations section further below in this Item 7.
We expect ongoing changes related to health care reform to continue to affect this business in 2013. As such, we expect our loss ratio to increase, reflecting the continued impact of the MLR requirements on our pricing. In addition, we anticipate our effective tax rate to remain elevated due to limitations imposed by healthcare reform on the deductibility of compensation and certain other payments. We will continue to look for opportunities to further reduce our organizational and operational expenses to offset these pressures, but we expect the rate of reductions to be slower than in the past. We also expect net earned premiums and fees to decline, reflecting the continued shift to lower premium products in our individual medical business.
For Twelve Months 2012, net cash provided by operating activities, including the effect of exchange rate changes on cash and cash equivalents, totaled $673,215; net cash used in investing activities totaled $449,883 and net cash used in financing activities totaled $480,641. We had $909,404 in cash and cash equivalents as of December 31, 2012. Please see “-Liquidity and Capital Resources,” below for further details.
On January 1, 2012, the Company adopted the amendments to existing guidance on accounting for costs associated with acquiring or renewing insurance contracts. This guidance was adopted retrospectively and has been applied to all prior period financial information contained in these consolidated financial statements. See Note 2 to the Notes to Consolidated Financial Statements for more information.
The Affordable Care Act was signed into law in March 2010. One provision of the Act, effective January 1, 2011, established a minimum medical loss ratio (“MLR”) designed to ensure that a minimum percentage of premiums is paid for clinical services or health care quality improvement activities. The Affordable Care Act established an MLR of 80% for individual and small group business and 85% for large group business. If the actual loss ratios, calculated in a manner prescribed by the Department of Health and Human Services (“HHS”), are less than the required MLR, premium rebates are payable to the policyholders by August 1 of the subsequent year.
Assurant Health has estimated the 2012 impact of this regulation based on definitions and calculation methodologies outlined in the Interim Final Regulation from HHS released December 1, 2010 with Technical Corrections released December 29, 2010 and the HHS Final Regulation released December 7, 2011. An estimate was based on separate projection models for individual medical and small group business using projections of expected premiums, claims, and enrollment by state, legal entity and market for medical business subject to MLR requirements for the MLR reporting year. In addition, the projection models include quality improvement expenses, state assessments and taxes.
Because establishment of reserves is an inherently complex process involving significant judgment and estimates, there can be no certainty that ultimate losses will not exceed existing claim reserves. Future loss development could require reserves to be increased, which could have a material adverse effect on our earnings in the periods in which such increases are made.
Key sensitivities at December 31, 2012 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 short duration medical claims and benefits payable. The primary methods we use in their estimation are the loss development method and the projected claim method. Under the loss development method, we estimate ultimate losses for each incident period by multiplying the current cumulative losses by the appropriate
the past variability of loss estimates-the loss estimates on some product lines will vary from actual loss experience more than others.
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 statements 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 2012 would be as follows:
Our property and warranty line of business includes exposure to asbestos, environmental and other general liability claims arising from our participation in various reinsurance pools from 1971 through 1985. This exposure arose from a contract that we discontinued writing many years ago. We carry case reserves, as recommended by the various pool managers, and IBNR reserves totaling $34,946 (before reinsurance) and $27,790 (net of reinsurance) at December 31, 2012. We believe the balance of case and IBNR reserves for these liabilities are adequate. However, any 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 those exposures. There are significant unresolved industry legal issues, including such items as whether coverage exists and what constitutes a claim. In addition, the determination of
ultimate damages and the final allocation of losses to financially responsible parties are highly uncertain. However, based on information currently available, and after consideration of the reserves reflected in the consolidated financial statements, we do not believe that changes in reserve estimates for these claims are likely to be material.
Information in this report for the years ended December 31, 2011, 2010, 2009, and 2008 has been revised, as applicable, for the retrospective application of the Company’s adoption of the amendments to existing guidance on accounting for costs associated with acquiring or renewing insurance contracts. See Note 2 to the Consolidated Financial Statements for more information.
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 annuity contracts that are 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. The assumptions used for the estimates are consistent with those used in computing the policy or contract liabilities.
Acquisition costs relating to monthly pay credit insurance business consist mainly of direct response advertising costs and are deferred and amortized over the estimated average terms and balances of the underlying contracts.
Reinsurance recoverables include amounts we are owed by reinsurers. Reinsurance costs are expensed over the terms of the underlying reinsured policies using assumptions consistent with those used to account for the 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 our consolidated balance sheets. An estimated allowance for doubtful accounts is 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 ceding of insurance does not discharge our primary liability to our insureds.
We utilize reinsurance for loss protection and capital management, business dispositions and, in Assurant Solutions and Assurant Specialty Property, client risk and profit sharing. See also “Item 1A - Risk Factors-Reinsurance may not be available or adequate to protect us against losses and we are subject to the credit risk of reinsurers,” and “
The consolidated financial statements and financial statement schedules in Part IV, Item 15(a) 1 and 2 of this report are incorporated by reference into this Item 8.