Assurant 2014 Annual Report Download - page 49

35ASSURANT, INC. – 2014 Form 10-K
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
estimated recoveries under Affordable Care Act risk mitigation
programs. In addition, we expect net earned premiums and
fees to increase in 2015 due to increased premium rates and
strong sales of individual major medical policies.
Assurant Employee Benefits net income increased $14,128,
or 41%, to $48,681 for Twelve Months 2014 from $34,553
for Twelve Months 2013. The increase was primarily
attributable to favorable loss experience across all major
product lines.
Net earned premiums and fees increased by 4% due to growth
in voluntary products. This increase was partially offset by
declines in employer-paid products.
During 2015, we expect net earned premiums and fees to increase
compared with Twelve Months 2014 due to growth in voluntary
products. Continued expense management actions should
offset lower net investment income. In addition, we expect
overall results to be affected by the continued low interest rate
environment, employment trends and capital market conditions.
Critical Factors Affecting Results
Our results depend on the appropriateness of our product
pricing, underwriting and the accuracy of our methodology
for the establishment of reserves for future policyholder
benefi ts and claims, returns on and values of invested assets
and our ability to manage our expenses. Factors affecting
these items, including unemployment, diffi cult conditions
in fi nancial markets and the global economy, may have
a material adverse effect on our results of operations or
fi nancial condition. For more information on these factors,
see “Item 1A — Risk Factors.”
Management believes the Company will have suffi cient
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.
For Twelve Months 2014, net cash provided by operating
activities, including the effect of exchange rate changes and
the reclassifi cation of assets held for sale on cash and cash
equivalents, totaled $313,782; net cash provided by investing
activities totaled $63,889 and net cash used in fi nancing
activities totaled $776,199. We had $1,318,656 in cash and
cash equivalents as of December 31, 2014. Please see “—
Liquidity and Capital Resources,” below for further details.
Revenues
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.
Under the universal life insurance guidance, income earned on
preneed life insurance policies sold after January 1, 2009 are
presented within policy fee income net of policyholder benefi ts.
Under the limited pay insurance guidance, the consideration
received on preneed policies sold prior to January 1,
2009 is presented separately as net earned premiums, with
policyholder benefi ts expense being shown separately.
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 fi xed maturity securities. Both investment income
and realized capital gains on these investments can be
signifi cantly affected by changes in interest rates.
Interest rate volatility can increase or reduce unrealized
gains or losses in our investment portfolios. Interest rates
are highly sensitive to many factors, including governmental
monetary policies, domestic and international economic and
political conditions and other factors beyond our control.
Fluctuations in interest rates affect our returns on, and the
market value of, fi xed maturity and short-term investments.
The fair market value of the fi xed maturity securities in our
investment portfolio and the investment income from these
securities fl uctuate depending on general economic and
market conditions. The fair market value generally increases
or decreases in an inverse relationship with fl uctuations
in interest rates, while net investment income realized
by us from future investments in fi xed maturity securities
will generally increase or decrease with interest rates. We
also have investments that carry pre-payment risk, such as
mortgage-backed and asset-backed securities. Interest rate
fl uctuations may cause actual net investment income and/or
cash fl ows from such investments to differ from estimates
made at the time of investment. In periods of declining
interest rates, mortgage prepayments generally increase and
mortgage-backed securities, commercial mortgage obligations
and bonds are more likely to be prepaid or redeemed as
borrowers seek to borrow at lower interest rates. Therefore,
in these circumstances we may be required to reinvest those
funds in lower-interest earning investments.
Expenses
Our expenses are primarily policyholder benefi ts, underwriting,
general and administrative expenses and interest expense.
Policyholder benefi ts are affected by our claims management
programs, reinsurance coverage, contractual terms and
conditions, regulatory requirements, economic conditions, and
numerous other factors. Benefi ts paid or reserves required for
future benefi ts could substantially exceed our expectations,
causing a material adverse effect on our business, results of
operations and fi nancial condition.
Underwriting, general and administrative expenses consist
primarily of commissions, premium taxes, licenses, fees,
amortization of deferred costs, general operating expenses
and income taxes.
We incur interest expense related to our debt.