The following discussion covers the twelve months ended December 31, 2012 (“Twelve Months 2012”), twelve months ended December 31, 2011 (“Twelve Months 2011”) and twelve months ended December 31, 2010 (“Twelve Months 2010”). Please see the discussion that follows, for each of these segments, for a more detailed analysis of the fluctuations.
Overall, we expect modest premium growth at Assurant Solutions in 2013. We also expect to continue our expense management initiatives in this segment.
For 2013, we expect Assurant Specialty Property’s revenue to increase slightly from 2012 due to growth in our lender-placed portfolio and multi-family housing products. We expect overall results to continue to be influenced by placement rate trends, premium rate changes, loan portfolio activity, client renewals, and catastrophe losses. We expect our expense ratio to remain approximately level with 2012 as we continue to improve efficiency while further improving client and customer service. We also expect our non-catastrophe loss ratio to increase due to anticipated higher frequency of such losses compared to a mild winter in 2012.
Assurant Health net income increased $11,114, or 27%, to $52,000 for Twelve Months 2012 from $40,886 for Twelve Months 2011. The increase was primarily attributable to $13,856 (after-tax) of additional investment income from a real estate joint venture partnership and lower expenses associated with organizational and operational expense reduction initiatives.
Assurant Employee Benefits net income increased $14,984, or 35%, to $58,059 for Twelve Months 2012 from $43,075 for Twelve Months 2011. Results for Twelve Months 2012 were driven by favorable experience across most major product lines. Voluntary products, an area of focus, accounted for about 50% of Assurant Employee Benefits sales and over 35% of net earned premiums and fees, as small and mid-sized business benefit plans have shifted from employer-paid to employee-paid products.
We expect 2013 net earned premiums and fees at Assurant Employee Benefits to be consistent with 2012. We anticipate increased sales from our voluntary products to offset expected lower sales of traditional employer-paid products. We plan to lower our discount rate for new long-term disability claims incurred in 2013 by 50 basis points, to 4.25%, which we expect will reduce net income by approximately $4,000.
We generate revenues primarily from the sale of our insurance policies and service contracts and from investment income earned on our investments. Sales of insurance policies are recognized in revenue as earned premiums while sales of administrative services are recognized as fee income.
Our premium and fee income is supplemented by income earned from our investment portfolio. We recognize revenue from interest payments, dividends and sales of investments. Currently, our investment portfolio is primarily invested in fixed maturity securities. Both investment income and realized capital gains on these investments can be significantly affected by changes in interest rates.
The Assurant Health loss ratio reported on page 66 (the “GAAP loss ratio”) differs from the loss ratio calculated under the MLR rules. The most significant differences include the fact that the MLR is calculated separately by state, legal entity and type of coverage (individual or group); the MLR calculation includes credibility adjustments for each state/entity/coverage cell, which are not applicable to the GAAP loss ratio; the MLR 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 includes quality improvement expenses, taxes and fees; changes in reserves are treated differently in the MLR calculation; and the MLR 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.
The following table provides reserve information for our major product lines for the years ended December 31, 2012 and 2011:
Historically, premium deficiency testing has not resulted in material adjustments to deferred acquisition costs or reserves. Such adjustments could occur, however, if economic or mortality conditions significantly deteriorated.
loss development factor. When there is not sufficient data to reliably estimate reserves under the loss development method, such as for recent claim periods, the projected claim method is used. This method utilizes expected ultimate loss ratios to estimate the required reserve. Where appropriate, we also use variations on each method or a blend of the two.
Key sensitivities as of December 31, 2012 for short duration medical reserves include claims processing levels, claims under case management, medical inflation, seasonal effects, medical provider discounts and product mix.
Only direct 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.
The deferred acquisition costs (“DAC”) asset is tested annually to ensure that future premiums or gross profits are sufficient to support the amortization of the asset. Such testing involves the use of best estimate assumptions to determine if anticipated future policy premiums and investment income are adequate to cover all DAC and related claims, benefits and expenses. To the extent a deficiency exists, it is recognized immediately by a charge to the consolidated statements of operations and a corresponding reduction in the DAC asset. If the deficiency is greater than unamortized DAC, a liability will be accrued for the excess deficiency.
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 $3,619,747 and $3,622,481 at December 31, 2012 and 2011, respectively.