Assurant 2012 Annual Report Download - page 40

ASSURANT, INC.2012 Form10-K32
PARTII
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
We expect ongoing changes related to health care reform to continue
to a ect this business in 2013. As such, we expect our loss ratio to
increase, re ecting the continued impact of the MLR requirements
on our pricing. In addition, we anticipate our e ective 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 o set 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, re ecting the continued shift to
lower premium products in our individual medical business.
Assurant Employee Bene ts 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 Bene ts
sales and over 35% of net earned premiums and fees, as small and
mid-sized business bene t plans have shifted from employer-paid to
employee-paid products.
We expect 2013 net earned premiums and fees at Assurant Employee
Bene ts to be consistent with 2012. We anticipate increased sales from
our voluntary products to o set 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.
Critical Factors Aff ecting 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 bene ts and claims, returns on and
values of invested assets and our ability to manage our expenses. Factors
a ecting these items, including unemployment, di cult conditions in
 nancial markets and the global economy, may have a material adverse
e ect on our results of operations or  nancial condition. For more
information on these factors, see “Item 1A—Risk Factors.”
Management believes the Company will have su 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 2012, net cash provided by operating activities,
including the e ect 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  nancing 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.
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 bene 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 bene 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  xed maturity securities. Both investment income
and realized capital gains on these investments can be signi cantly
a ected 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 a ect our returns on,
and the market value of,  xed maturity and short-term investments.
 e fair market value of the  xed maturity securities in our investment
portfolio and the investment income from these securities  uctuate
depending on general economic and market conditions.  e fair market
value generally increases or decreases in an inverse relationship with
 uctuations in interest rates, while net investment income realized by
us from future investments in  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  uctuations may cause actual net investment
income and/or cash  ows from such investments to di er 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.  erefore, in these circumstances we may be required to reinvest
those funds in lower-interest earning investments.
Expenses
Our expenses are primarily policyholder bene ts, selling, underwriting
and general expenses and interest expense.
Policyholder bene ts are a ected by our claims management programs,
reinsurance coverage, contractual terms and conditions, regulatory
requirements, economic conditions, and numerous other factors. Bene ts
paid or reserves required for future bene ts could substantially exceed
our expectations, causing a material adverse e ect on our business,
results of operations and  nancial condition.
Selling, underwriting and general 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.