SECURITIES AND EXCHANGE COMMISSION
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the fiscal year ended December 31, 2003 | ||
or | ||
o
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TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from to |
Commission file number 001-31978
Assurant, Inc.
Delaware
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39-1126612 | |
(State or Other Jurisdiction of
Incorporation or Organization) |
(I.R.S. Employer
Identification No.) |
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One Chase Manhattan Plaza, 41st Floor
New York, New York (Address of Principal Executive Offices) |
10005
(Zip Code) |
Registrants telephone number, including
area code: (212) 859-7000
Securities registered pursuant to
Section 12(b) of the Act:
Title of Each Class
Name of Each Exchange on Which Registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes o No þ
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes o No þ
The Registrants Common Stock began trading on the New York Stock Exchange on February 5, 2004 and was not traded on the last business day of the registrants most recently completed second fiscal quarter. The aggregate market value of the Common Stock held by non-affiliates of the registrant was $2,360 million at March 1, 2004 based on the closing sale price of $25.80 per share for the Common Stock on such date on The New York Stock Exchange.
The number of shares of the registrants Common Stock outstanding at March 1, 2004 was 142,268,106.
ASSURANT, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
1
FORWARD-LOOKING STATEMENTS
Some of the statements under Business, Managements Discussion and Analysis of Financial Condition and Results of Operations, and elsewhere in this report may contain forward-looking statements which reflect our current views with respect to, among other things, future events and financial performance. You can identify these forward-looking statements by the use of forward-looking words such as outlook, believes, expects, potential, continues, may, will, should, seeks, approximately, predicts, intends, plans, estimates, anticipates or the negative version of those words or other comparable words. Any forward-looking statements contained in this report are based upon our historical performance and on current plans, estimates and expectations. The inclusion of this forward looking information should not be regarded as a representation by us or any other person that the future plans, estimates or expectations contemplated by us will be achieved. Such forward-looking statements are subject to various risks and uncertainties. Accordingly, there are or will be important factors that could cause our actual results to differ materially from those indicated in this report. We believe that these factors include but are not limited to those described under the subsection entitled Risk Factors in Managements Discussion and Analysis of Financial Condition and Results of Operations. These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this report. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.
If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may vary materially from what we projected. Any forward-looking statements you read in this report reflect our current views with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, financial condition, growth strategy and liquidity.
2
PART I
Item 1. | Business |
Assurant, Inc. (Assurant) is a Delaware corporation, formed in connection with the initial public offering of its Common Stock, which began trading on the New York Stock Exchange on February 5, 2004. Prior to that initial trading date, Fortis, Inc., a Nevada corporation, had formed Assurant and merged into it on February 4, 2004. The merger was executed in order to redomesticate Fortis, Inc. from Nevada to Delaware and to change its name. As a result of the merger, Assurant is the successor to the business operations and obligations of Fortis, Inc.
Prior to the offering 100% of the outstanding common stock of Fortis, Inc. was owned indirectly by Fortis N.V., a public company with limited liability incorporated as naamloze vennootschap under Dutch law, and Fortis SA/ NV, a public company with limited liability incorporated as société anonyme/naamloze vennootschap under Belgian law. Following the offering, Fortis N.V. and Fortis SA/ NV, through a wholly owned subsidiary Fortis Insurance N.V., now own approximately 35% of the outstanding common stock of Assurant.
In this report, references to the Company, Assurant, we, us or our refer to (1) Fortis, Inc. and its subsidiaries, and (2) Assurant, Inc. and its subsidiaries after the consummation of the merger described above. References to Fortis refer collectively to Fortis N.V. and Fortis SA/ NV. References to our separation from Fortis refer to the fact that Fortis reduced its ownership of our common stock in connection with the offering.
Overview
We pursue a differentiated strategy of building leading positions in specialized market segments for insurance products and related services in North America and selected other markets. We provide creditor-placed homeowners insurance, manufactured housing homeowners insurance, debt protection administration, credit insurance, warranties and extended service contracts, individual health and small employer group health insurance, group dental insurance, group disability insurance, group life insurance and pre-funded funeral insurance.
The markets we target are generally complex, have a relatively limited number of competitors and, we believe, offer attractive profit opportunities. In these markets, we leverage the experience of our management team and apply our expertise in risk management, underwriting and business-to-business management, as well as our technological capabilities in complex administration and systems. Through these activities, we seek to generate above-average returns by building on specialized market knowledge, well-established distribution relationships and economies of scale.
As a result of our strategy, we are a leader in many of our chosen markets and products. In our Assurant Solutions business, we have leadership positions or are aligned with clients who are leaders in creditor-placed homeowners insurance based on servicing volume, manufactured housing homeowners insurance based on number of homes built and debt protection administration based on credit card balances outstanding. In our Assurant Employee Benefits business, we are a leading writer of group dental plans sponsored by employers based on the number of subscribers and based on the number of master contracts in force. A master contract refers to a single contract issued to an employer that provides coverage on a group basis; group members receive certificates, which summarize benefits provided and serve as evidence of membership. In our Assurant PreNeed business, we are the largest writer of pre-funded funeral insurance measured by face amount of new policies sold. We believe that our leadership positions give us a sustainable competitive advantage in our chosen markets.
We currently have four decentralized operating business segments to ensure focus on critical activities close to our target markets and customers, while simultaneously providing centralized support in key functions. Each operating business segment has its own experienced management team with the autonomy to make decisions on key operating matters. These managers are eligible to receive incentive-based compensation based in part on operating business segment performance and in part on company-wide performance,
3
We organize and manage our specialized businesses
through four operating business segments:
Operating Business
For the Year Ended
Segment
Principal Products and Services
Principal Distribution Channels
December 31, 2003
Total revenues:
$2,678 million
Specialty Property
Creditor-placed homeowners insurance
(including tracking services)
Mortgage lenders and servicers
Segment income before income tax:
$189 million
Manufactured housing homeowners
insurance
Manufactured housing lenders, dealers
and vertically integrated builders
Consumer Protection
Debt protection administration
Credit insurance
Warranties and extended service contracts
Financial institutions (including
credit card issuers) and retailers
Consumer electronics and appliance retailers
Vehicle dealerships
Appliances
Automobiles
and recreational vehicles
Consumer
electronics
Wireless devices
Assurant Health
Total revenues:
$2,091 million
Individual Health
Preferred Provider Organizations
(PPO)
Short-term medical insurance
Student medical insurance
Independent agents
National accounts
Internet
Segment income before income tax:
$185 million
Small Employer Group Health
PPO
Independent agents
Assurant Employee Benefits
Group dental
insurance
Employer-paid
Employee-paid
Employee benefit advisors
Total revenues:
$1,450 million
Segment income before income tax:
$96 million
Brokers
Group disability insurance
DRMS(1)
Group term life insurance
Pre-funded funeral insurance
Service Corporation International
(SCI)
Total revenues:
$722 million
Independent funeral homes
Segment income before income tax:
$55 million
(1) | DRMS refers to Disability Reinsurance Management Services, Inc., one of our wholly owned subsidiaries that provides a turnkey facility to other insurers to write principally group disability insurance. |
4
We also have a Corporate and Other segment, which includes activities of the holding company, financing expenses, net realized gains (losses) on investments, interest income earned from short-term investments held and interest income from excess surplus of insurance subsidiaries not allocated to other segments. The Corporate and Other segment includes the results of operations of Fortis Financial Group (FFG) from January 1, 2001 to March 31, 2001 (the period prior to its disposition). The Corporate and Other segment also includes the amortization of deferred gains associated with the portions of the sales of FFG and Long Term Care (LTC), a business sold on March 1, 2000, through reinsurance agreements as described elsewhere in this document. See Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations Corporate and Other.
For the year ended December 31 , 2003, we generated total revenues of $7,066 million and net income of $186 million. For the year ended December 31, 2002, we generated total revenues of $6,532 million, net income before cumulative effect of change in accounting principle of $260 million and net loss of $1,001 million (after giving effect to a cumulative change in accounting principle of $1,261 million). As of December 31, 2003, we had total assets of approximately $23,728 million, including separate accounts. Our A.M. Best financial strength ratings are either A (Excellent) or A-(Excellent) for all of our domestic operating insurance subsidiaries. A rating of A is the second highest of ten ratings categories and the highest within the category based on modifiers (i.e., A and A- are Excellent) and a rating of A- is the second highest of ten ratings categories and the lowest within the category based on modifiers. We view the A.M. Best ratings as most relevant for the purpose of managing our businesses because these ratings relate to capital management at our insurance subsidiaries. These ratings reflect A.M. Bests opinions of our ability to pay policyholder claims, are not applicable to our common stock or debt securities and are not a recommendation to buy, sell or hold any security, including our common stock.
Operating Business Segments
Our business segments and the related net earned
premiums and other considerations and fees and other income and
segment income before income tax generated by those segments are
as follows for the periods indicated:
Net Earned Premiums and Other Considerations
and
For the Year Ended
For the Year Ended
December 31, 2003
December 31, 2002
Percentage
Percentage
$(In millions)
of Total
$(In millions)
of Total
$
765
12
%
$
583
10
%
1,726
27
1,613
27
2,491
39
2,196
37
1,060
17
894
15
982
15
963
16
2,042
32
1,857
31
1,310
21
1,307
22
534
8
543
9
11
0
25
1
$
6,388
100
%
$
5,928
100
%
5
Segment Income (Loss) Before Income Tax by
Business Segment
For the Year Ended
For the Year Ended
December 31, 2003
December 31, 2002
Percentage
Percentage
$(In millions)
of Total
$(In millions)
of Total
$
189
73
%
$
197
53
%
185
71
143
39
96
37
88
24
55
21
77
21
(266
)
(102
)
(135
)
(37
)
$
259
100
%
$
370
100
%
Assurant Solutions |
Assurant Solutions, which we began operating with the acquisition of American Security Group in 1980, has leadership positions or is aligned with clients who are leaders in creditor-placed homeowners insurance and related mortgage tracking services based on servicing volume, manufactured housing homeowners insurance based on number of homes built and debt protection administration based on credit card balances outstanding. We develop, underwrite and market our specialty insurance products and services through collaborative relationships with our clients (financial institutions, retailers, manufactured housing and automobile dealers, utilities and other entities) to their customers. We serve our clients throughout North America, the Caribbean and selected countries in South America and Europe.
Our principal business lines within our Assurant Solutions segment have experienced growth in varying degrees. Growth in premiums in the homeowners market has been driven by increased home purchase activity due to the low interest rate environment, appreciation in home values, an increasing percentage of the population purchasing homes and mortgage industry consolidation. The manufactured housing market has been more challenging because of a more restrictive lending environment with fewer lenders extending credit and increasingly strict underwriting standards being applied since the late 1990s. Finally, the domestic consumer credit insurance market has been contracting due to an adverse regulatory environment; however, this decline has been offset somewhat by accelerating growth in the debt protection market. This adverse regulatory environment has included, in the last few years, many state regulatory interpretations that impose rigorous agent licensing requirements for employees of lenders who offer credit insurance products as well as federal legislation which dissuades, and various state laws that either dissuade or prohibit, financial institutions from financing single premium credit or other credit insurance on consumer or home loans secured by real estate.
In Assurant Solutions, we provide specialty property and consumer protection products and services. In our specialty property solutions division, our strategy is to further develop our creditor-placed homeowners and manufactured housing homeowners insurance products and related services in order to maintain our leadership position or relationships with clients who are leaders and to gain market share in the mortgage and manufactured housing industries, as well as to develop our renters insurance product line. Renters insurance generally provides coverage for the contents of a renters home or apartment and for liability. In our consumer protection solutions division, we intend to continue to focus on being a low-cost provider of debt protection administration services, to leverage our administrative infrastructure with our large customer base clients and to manage the switch from credit insurance programs to debt protection programs in the United States.
6
The following table provides net earned premiums
and other considerations and fees and other income for Assurant
Solutions for the periods indicated:
For the Year Ended
December 31,
2003
2002
2001
(In millions)
$
733
$
552
$
452
1,629
1,525
1,454
2,362
2,077
1,906
129
119
98
$
2,491
$
2,196
$
2,004
Products and Services |
Specialty Property Solutions. We underwrite a variety of creditor-placed and voluntary homeowners insurance as well as property coverages on manufactured housing, specialty automobiles, including antique automobiles, recreational vehicles, including motorcycles and watercraft, and leased and financed equipment. We also offer complementary programs such as flood insurance, renters insurance and various other property coverages. We are a leading provider of creditor-placed and other collateral protection insurance programs based on number of homes built. These other collateral protection insurance programs may include those that protect a lenders interest in homes, manufactured homes and automobiles. We also offer administration services for some of the largest mortgage lenders and servicers, manufactured housing lenders, dealers and vertically integrated builders and equipment leasing institutions in the United States. Many of our products and services are sold in conjunction with the sale or lease of the underlying property, vehicle or equipment by our clients. Our market strategy is to establish relationships with institutions who are leaders in their chosen markets and therefore can effectively and efficiently distribute our products and services to large customer bases.
The homeowners insurance product line is our largest line in the specialty property solutions division and accounted for approximately 13.9% of Assurant Solutions net earned premiums for the year ended December 31, 2003. The primary program within this line is our creditor-placed homeowners insurance. Creditor-placed homeowners insurance generally consists of fire and dwelling insurance that we provide to ensure collateral protection to a mortgage lender in the event that a homeowner fails to purchase or renew homeowners insurance on a mortgaged dwelling. In our typical arrangements with our mortgage lender and servicer clients, we agree that we will monitor the clients mortgage loan portfolio over time to verify the existence of homeowners insurance protecting the lenders interest in the underlying properties. We have developed a proprietary insurance tracking and administration process to verify the existence of insurance on a mortgaged property. In situations where such mortgaged property does not have appropriate insurance and after notification to the mortgageholder of the failure to have such insurance, we issue creditor-placed insurance policies to ensure the mortgaged property is protected.
We also provide fee-based services to our mortgage lender and servicer clients in the creditor-placed homeowners insurance administration area, which services are complementary to our insurance products. Our ability to offer these services is a critical factor in establishing relationships with our clients. The vast majority of our mortgage lender and servicer clients outsource their insurance processing to us. These fee-based services include receipt of the insurance-related mail, matching of insurance information to specific loans, payment of insurance premiums on escrowed accounts, insurance-related customer service, loss draft administration and other related services. Loss drafts refers to the payment of insurance proceeds for a claim resulting from a loss to insured mortgage property.
The second largest specialty property line in the specialty property solutions division is homeowners insurance for owners of manufactured homes, which accounted for approximately 9.3% of Assurant Solutions
7
We also provide voluntary homeowners insurance and voluntary manufactured housing homeowners insurance, which generally provide comprehensive coverage for the structure, contents and liability, as well as coverage for floods.
Consumer Protection Solutions. We offer a broad array of credit insurance programs, debt protection services and product warranties and extended service contracts, all of which are consumer-related, both domestically and in selected international markets. Consumer protection products and services accounted for approximately 69.0% of Assurant Solutions net earned premiums for the year ended December 31, 2003. Credit insurance and debt protection programs generally offer a consumer a convenient option to protect a credit card or installment loan in the event of a disability, unemployment or death so that the amount of coverage purchased equals the amount of outstanding debt. Under the credit insurance program, the loan or credit card balance is paid off in the case of death and, in the case of unemployment or disability, payments are made on a loan until the covered holder is employed again or medically able to return to work. Under the terms and conditions of a debt protection agreement, the monthly interest due from a customer may be waived or the monthly payments may be paid for a covered life event, such as disability, unemployment or family leave. Most often in the case of the death of a covered account holder, the debt is extinguished under the debt protection program. Coverage is generally available to all consumers without the underwriting restrictions that apply to term life insurance. Term life insurance is life insurance written for a specified period and under which no cash value is generally available on surrender, such as medical examinations and medical history reports. We are the exclusive provider of debt protection administration services and credit insurance for four of the six largest general purpose credit card issuers in the United States based on credit card balances outstanding.
Almost all of the largest credit card issuing institutions in the United States have switched from offering credit insurance to their credit card customers to offering their own banking-approved debt protection programs. Assurant Solutions has been able to maintain all of its major credit card clients as they switched from our credit insurance programs to their debt protection programs. We earn fee income rather than net earned premiums from our debt protection administration services. In addition, margins are lower in debt protection administration than in traditional credit insurance programs. However, because debt protection is not an insurance product, certain costs, such as regulatory costs and costs of capital, are expected to be eliminated as the transition from credit insurance to debt protection administration services continues. The fees from debt protection administration do not fully compensate for the decrease in credit insurance premiums. In addition, we continue to provide credit insurance programs for many leading retailers, consumer finance companies and other institutions who are involved in consumer lending transactions. For the year ended December 31, 2003 compared to the year ended December 31, 2002, our net earned premiums in the U.S. credit insurance business decreased by approximately $178 million while debt protection fee income increased by $21 million. However, the decrease in credit insurance net earned premiums is not analogous to the increase in debt protection fee income because in the credit insurance business we bear insurance risk and pay claims, whereas in the debt protection business we bear no insurance risk and we collect fees for the administrative services we render.
8
We also underwrite, and provide administration services on, warranties and extended service contracts on appliances, consumer electronics, including personal computers, cellular phones and other wireless devices, and vehicles, including automobiles, recreational vehicles and boats. Our strategy is to provide our clients with all aspects of the warranty or extended service contract, including: program design, marketing strategy, technologically advanced administration, claims handling and customer service. We believe that we maintain a differentiated position in the marketplace as a provider of both the required administrative infrastructure and insurance underwriting capabilities.
On September 26, 2003, Assurant Solutions entered into an agreement with General Electric to become the obligor and insurer of all extended service contracts issued directly by entities of GE Consumer Products and their clients. In addition, Assurant Solutions has become the administrator of service contracts covering personal computer products as well as a variety of lawn and garden products.
Marketing and Distribution |
Assurant Solutions markets its insurance programs and administration services directly to large financial institutions, mortgage lenders and servicers, credit card issuers, finance companies, automobile retailers, consumer electronics retailers, manufactured housing lenders, dealers and vertically integrated builders and other institutions.
Assurant Solutions enters into exclusive and other distribution agreements, typically with terms of one to five years, and develops interdependent systems with its clients that permit Assurant Solutions information systems to interface with its clients systems in order to exchange information in a seamless and integrated manner. Through its long-standing relationships, Assurant Solutions has access to numerous potential policyholders and, in collaboration with its clients can tailor its products to suit various market segments. Assurant Solutions maintains a dedicated sales force that establishes and maintains relationships with its clients. Assurant Solutions has a multiple step business development process that is employed by its direct sales force. This multiple step business development process is a sales methodology for contacting, negotiating and consummating business relationships with new clients and enhancing business relationships with existing clients. Assurant Solutions maintains a specialized consumer acquisition marketing services group that manages its direct marketing efforts on behalf of its clients.
In the United States, we have strong distribution relationships with six out of the ten largest mortgage lenders and servicers based on servicing volume, four out of the seven largest manufactured housing builders based on number of homes built, four out of the six largest general purpose credit card issuers based on credit card balances outstanding and five out of the ten largest consumer electronics and appliances retailers based on combined product sales, with an average relationship of at least 10 years.
Underwriting and Risk Management |
We, along with Assurant Solutions predecessors, have over 50 years of experience in providing specialty insurance programs and therefore maintain extensive proprietary actuarial databases and catastrophe models. We believe these databases and catastrophe models enable us to better identify and quantify the expected loss experience of particular products and are employed in the design of our products and the establishment of rates.
We have a disciplined approach to the management of our property product lines. We monitor pricing adequacy on a product by region, state, risk and producer. Subject to regulatory considerations, we seek to make timely commission, premium and coverage modifications where we determine them to be appropriate. In addition, we maintain a segregated risk management area for property exposures whose emphasis includes catastrophic exposure management, reinsurance purchasing and analytical review of profitability based on various catastrophe models. We do not underwrite in our creditor-placed homeowners insurance line, as our contracts with our clients require that we automatically issue these policies, after notice, when a policyholders homeowners policy lapses or is terminated.
9
A distinct characteristic of our credit insurance programs is that the majority of these products have relatively low exposures. This is because policy size is equal to the size of the installment loan or credit card balance. Thus, loss severity for most of this business is low relative to other insurance companies writing more traditional lines of insurance. For those product lines where there is exposure to catastrophes (for example, our homeowners policies), we monitor and manage our aggregate risk exposure by geographic area and have entered into reinsurance treaties to manage our exposure to these types of events.
Also, a significant portion of Assurant Solutions consumer protection solutions contracts are written on a retrospective commission basis, which permits Assurant Solutions to adjust commissions based on claims experience. Under this contingent commission arrangement, as permitted, compensation to the financial institutions and other clients is predicated upon the actual losses incurred compared to premiums earned after a specific net allowance to Assurant Solutions, which we believe aligns our clients interests with ours and helps us to better manage risk exposure.
In Assurant Solutions, our claims processing is automated and combines the efficiency of centralized claims handling, customer service centers and the flexibility of field representatives. This flexibility adds savings and efficiencies to the claims-handling process. Our claims department also provides automated feedback to help with risk assessment and pricing. In our specialty property solutions division, we complement our automated claims processing with field representatives who manage the claims process on the ground where and when needed.
Assurant Health |
Assurant Health, which we began operating with the acquisition of Time Holdings, Inc. (now Fortis Insurance Company) in 1978, is a writer of individual and short-term major medical health insurance. We also provide small employer group health insurance to employer groups primarily of two to fifty employees in size, and health insurance plans to full-time college students. We serve approximately 1.1 million people throughout the United States. We were one of the first companies to offer a Medical Savings Account (MSA) feature as part of our individual health products and we continue to be a provider of MSA-linked individual health policies. MSAs are tax-sheltered savings accounts earmarked for medical expenses and are established in conjunction with one of our PPO or indemnity products.
We expect growth in the health insurance market to be driven by inflation and increases in the cost of providing medical care as well as growth in demand for individual and small group medical products. We generally expect medical cost inflation to be a principal driver of growth in this market; however, reduced funding of health insurance by employers and the increasing attractiveness and flexibility of MSAs could create opportunities for the individual medical insurance market to expand. We believe that the number of persons covered by individually purchased health insurance as well as the number of small employer groups in the United States will increase primarily as a result of the recently passed Medicare Prescription & Modernization Act, which includes a provision for Health Savings Accounts (HSAs) that we believe will increase health insurance options available to consumers and make health insurance more affordable.
In Assurant Health, we intend to continue to concentrate on developing our product capabilities in the individual health insurance market. From 2000 through 2003, we have increased the relative percentage of individual health insurance products to our total health insurance products from approximately 30% of premium dollars to approximately 50% of premium dollars. We have pursued a variety of distribution relationships focused on the individual health insurance market. We seek to maintain the lowest combined ratio of any of our major competitors serving the health care financing needs of individuals, families and small employer groups. We have made progress in achieving this goal and believe we currently have one of the lowest combined ratios in our industry based on the reported results of publicly-traded managed care and health insurance companies as of December 31, 2003.
10
The following table provides net earned premiums
and other considerations, fees and other income and other
operating data for Assurant Health for the periods and as of the
dates indicated:
For the Year Ended
December 31,
2003
2002
2001
(In millions except
membership data)
$
1,036
$
880
$
738
973
954
1,100
2,009
1,834
1,838
33
23
14
$
2,042
$
1,857
$
1,852
65.6
%
66.6
%
71.1
%
28.9
%
29.4
%
26.8
%
93.3
%
95.2
%
97.3
%
761
670
600
376
355
420
1,137
1,025
1,020
(1) | The loss ratio is equal to policyholder benefits divided by net earned premiums and other considerations. |
(2) | The expense ratio is equal to selling, underwriting and general expenses divided by net earned premiums and other considerations and fees and other income. |
(3) | The combined ratio is equal to total benefits, losses and expenses divided by net earned premiums and other considerations and fees and other income. |
Products and Services |
Individual Health Insurance Products. Assurant Healths individual health insurance products are sold to individuals, primarily between the ages of 18 and 64 years, and their families who do not have employer-sponsored coverage. Due to increasingly stringent federal and state restrictions relating to insurance policies sold directly to individuals, we emphasize the sale of individual products through associations and trusts that act as the master policyholder for such products. Our association and trust products offer greater flexibility in pricing, underwriting and product design compared to products sold directly to individuals on a true individual policy basis.
Substantially all of the individual health insurance products we sell are PPO plans, which offer the member the ability to select any health care provider, with benefits reimbursed at a higher level when care is received from a participating network provider. Coverage is typically subject to co-payments or deductibles and coinsurance, with member cost sharing for covered services limited by lifetime policy maximums of $2 million or $3 million, with options to purchase between $6 million and $8 million. Product features often included in these plans are inpatient pre-certification and benefits for preventative services. These products are individually underwritten taking into account the members medical history and other factors, and consist primarily of major medical insurance that renews on an annual basis. The remaining products we sell are indemnity, or fee-for-service, plans. Indemnity plans offer the member the ability to select any health care provider for covered services.
11
At December 31, 2003 and 2002, we had total in force medical certificates of 304,400 and 264,100, respectively, covering approximately 613,000 and 520,000 individuals, respectively. Approximately 15% and 14% of the individual health insurance products we sold in 2003 and 2002, respectively, included an MSA.
Assurant Health markets additional products to the individual market: short-term medical insurance and student health coverage plans. The short-term medical insurance product is designed for individuals who are between jobs or seeking interim coverage before their major medical coverage becomes effective. Short-term medical insurance products are generally sold to individuals with gaps in coverage for six months or less. Student health coverage plans are medical insurance plans sold to full-time college students who are not covered by their parents health insurance, are no longer eligible for dependant coverage or are seeking a more comprehensive alternative to a college-sponsored plan.
Small Employer Health Insurance Products. Our small employer market primarily includes companies with two to fifty employees, although larger employer coverage is available. Our average group size, as of December 31, 2003, was approximately 5 employees. In the case of our small employer group medical insurance, we underwrite the entire group and examine the medical risk factors of the individuals in the group for forecasting and reserving purposes.
Substantially all of the small employer health insurance products that we sold in 2002 and 2003 were PPO products. At December 31, 2003 and 2002, we had total in force medical certificates of 205,300 and 196,500, respectively, covering approximately 376,000 and 355,000 individuals, respectively. The number of small employer groups as of December 31, 2003 and 2002 were approximately 37,700 and 37,400, respectively.
We recently introduced Health Reimbursement Accounts (HRAs), which are employer-funded accounts provided to employees for reimbursement of qualifying medical expenses. We also offer certain ancillary products to meet the demands of small employers for life insurance, short-term disability insurance and dental insurance. In addition, beginning in January 2004, we began offering HSA products to individuals and small employer groups.
Marketing and Distribution |
Our health insurance products are principally marketed to an extensive network of independent agents by Assurant Health distributors. Approximately 150,000 agents had access to Assurant Health products during the 2003 calendar year. We also market our products to individuals through a variety of exclusive and non-exclusive national account relationships and direct distribution channels. In addition, we market our products through NorthStar Marketing, a wholly owned affiliate that proactively seeks business directly from independent agents. Since 2000, Assurant Health has had an exclusive national marketing agreement with Insurance Placement Service, Inc. (IPSI), a wholly-owned subsidiary of State Farm Mutual Automobile Insurance Company (State Farm), pursuant to which IPSI captive agents market Assurant Healths individual health products. Captive agents are representatives of a single insurer or group of insurers who are obligated to submit business only to that insurer, or at a minimum, give that insurer first refusal rights on a sale. The term of this agreement with IPSI will expire in July 2004, but may be extended if agreed to by both parties. In addition, Assurant Health has exclusive distribution relationships with United Services Automobile Association (USAA) and Mutual of Omaha to market Assurant Healths individual health products. The agreement that provides for our arrangement with USAA terminates in July 2005, but may be extended for a one-year period if agreed to by both parties. The agreement that provides for our arrangement with Mutual of Omaha terminates in February 2007 but may be extended if agreed to by both parties. All of these arrangements have four-year terms from their commencement dates and are generally terminable upon our bankruptcy or similar proceeding or a breach of a material provision by us. Additionally, some of these arrangements permit termination after a specified notice period. We also have a solid relationship with Health Advocates Alliance, the association through which we provide many of our individual health insurance products through Assurant Healths agreement with Health Advocates Alliances administrator National Administration Company, Inc. The term of this agreement with National Administration Company will expire in September 2006, but will be automatically extended for an additional two-year term unless prior notice of a partys intent to terminate is given to the other party. Assurant Health also has had a long-term relationship
12
Underwriting and Risk Management |
Assurant Healths underwriting and risk management capabilities include pricing discipline, policy underwriting, renewal optimization, development and retention of provider networks and claims processing.
In establishing premium rates for our health care plans, we use underwriting criteria based upon our accumulated actuarial data, with adjustments for factors such as claims experience and member demographics to evaluate anticipated health care costs. Our pricing considers the expected frequency and severity of claims and the costs of providing the necessary coverage, including the cost of administering policy benefits, sales and other administrative costs. State rate regulation significantly affects pricing. Our health insurance operations are subject to a variety of legislative and regulatory requirements and restrictions covering a range of trade and claim settlement practices. State insurance regulatory authorities have broad discretion in approving a health insurers proposed rates. In addition, HIPAA requires certain guaranteed issuance and renewability of health insurance coverage for individuals and small employer groups and limits exclusions based on existing conditions.
In our individual health insurance business, we medically underwrite our applicants and have implemented programs to improve our underwriting process. These include our tele-underwriting program, which enables individual insurance applicants to be interviewed over the telephone by trained underwriters. Gathering information directly from prospective clients over the telephone greatly reduces the need for costly and time-consuming medical exams and physician reports. We believe this approach leads to lower costs, improved productivity, faster application processing times and improved underwriting information. Our individual underwriting considers not only an applicants medical history, but also lifestyle factors such as avocations and alcohol and drug and tobacco use. Our individual health insurance products generally permit us to rescind coverage if an insured has falsified his or her application.
In our small employer group health insurance business, we underwrite the group on the basis of demographic factors such as age, gender, occupation and geographic location and concentration of the group. In addition, we examine individual-level medical risk factors for forecasting and reserving purposes.
Assurant Health offers a broad choice of PPO network options in each of its markets and enrolls members in the network that Assurant Health believes reduces our price paid for health care services while providing high quality care. Assurant Health enrolls indemnity customers in selected PPO networks to obtain discounts on provider services that would otherwise not be available. In situations where a customer does not obtain services from a contracted provider, Assurant Health applies various usual and customary fees, which limit the amount paid to providers within specific geographic areas.
Provider network contracts are a critical dimension in controlling medical costs since there is often a significant difference between a network negotiated rate and the non-discounted rate. To this end, we retain provider networks through a variety of relationships, which include leased networks that contract directly with individual health care providers, proprietary contracts and Private Health Care Systems, Inc. (PHCS). PHCS is a national private company that maintains a provider network, which consisted of approximately 3,700 hospitals and approximately 400,000 physicians as of December 31, 2003. Assurant Health was a co-founder of PHCS, and as of December 31, 2003 we owned approximately 25% of the company. PHCS has a staff solely dedicated to provider relations.
We seek to manage claim costs in our PPO plans by selecting provider networks that have negotiated favorable arrangements with physicians, hospitals and other health care professionals and requiring participation in our various medical management programs. In addition, we manage costs through extensive underwriting, pricing and product design decisions intended to influence the behavior of our insureds. We provide case management programs and have doctors, nurses and pharmacists on staff who endeavor to manage risks related to medical claims and prescription costs.
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We utilize a broad range of focused traditional cost containment and care management processes across our various product lines to manage risk and to lower costs. These include case management, disease management and pharmacy benefits management programs. Our case management philosophy is built on helping our insureds confront a complex care system to find the appropriate care in a timely and cost effective manner. We believe this approach builds positive relationships with our providers and insureds and helps us achieve cost savings.
Effective July 1, 2003, Assurant Health transitioned its pharmacy benefits management function to Medco Health Solutions, formerly known as Merck-Medco. Medco Health Solutions has established itself as a leader in its industry with more than 57,000 participating pharmacies nationwide. Through Medco Health Solutions advanced technology platforms, Assurant Health is able to access information about customer utilization patterns on a more timely basis to improve its risk management capabilities. In addition to the technology-based advantages, Medco Health Solutions allows us to purchase our pharmacy benefits at competitive prices. Our agreement with Medco Health Solutions expires June 30, 2007. Assurant Health also utilizes co-payments and deductibles to reduce prescription drug costs.
We employ approximately 525 claims employees in locations throughout the United States dedicated to Assurant Health. We have an appeals process pursuant to which policyholders can appeal claims decisions made.
Assurant Employee Benefits |
Assurant Employee Benefits, which we began operating with the acquisition of Mutual Benefit Life Group Division (now Fortis Benefits Insurance Company) in 1991, is a market leader in group dental benefit plans sponsored by employers and funded through payroll deductions based on the number of master contracts in force. We are also a leading provider of disability and term life insurance products and related services to small and medium-sized employers based on number of master contracts in force.
We focus on employer-sponsored programs for employers with fewer than 1,000 employees. We are willing to write programs for employers with more than 1,000 covered employees when they meet our risk profile. At December 31, 2003, substantially all of our coverages in force and 77% of our annualized premiums in force were for employers with less than 1,000 employees. We have a particularly strong emphasis on employers with fewer than 250 employees, which represented approximately 96% and 59% of our in force coverages and premiums, respectively, as of December 31, 2003. Our average in force case size was 57 enrolled employees as of December 31, 2003.
Trends in the U.S. employment market and, in particular, in the cost of the medical benefits component of total compensation, are leading an increasing number of employers to offer new benefits on a voluntary basis. That is, after originally vetting the insurer and typically selecting the particular plan features to be offered, the employer offers the new benefits to employees at their election and at their cost, administered through payroll deduction. Because these products can be economically distributed on this group basis and are convenient to purchase and maintain, they are appealing to employees who might have little opportunity or inclination to purchase similar coverage on an individual basis.
We believe that voluntary products represent a sizeable growth opportunity. Soliciting employees to enroll in employer-sponsored health plans requires effective communication and interaction with the target employee. We have reorganized our home office and sales operations to reflect the strategic importance of this area. As part of this reorganization, we have divided our sales force into those who sell voluntary products and those who sell true group products with each division collaborating with the other to help meet the needs of shared brokers and clients. True group products are group insurance products in which the employer or other group policyholder pays all or part of the premium on behalf of the insured members. We are also investing resources in enhanced enrollment and specialized administrative capabilities for the voluntary market.
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The following table provides net earned premiums
and other considerations, fees and other income and other
operating data for Assurant Employee Benefits for the periods
and as of the dates indicated:
For the Year Ended
December 31,
2003
2002(4)
2001(4)
(In millions, except master
contract data)
$
539
$
554
$
257
461
400
398
256
279
279
1,256
1,233
934
54
74
39
$
1,310
$
1,307
$
973
73.3
%
76.6
%
79.0
%
33.1
%
32.3
%
32.5
%
79.9
%
79.9
%
84.3
%
29,300
30,300
12,500
25,400
27,300
28,700
25,200
25,600
25,500
79,900
83,200
66,700
(1) | The loss ratio is equal to policyholder benefits divided by net earned premiums and other considerations. |
(2) | The expense ratio is equal to selling, underwriting and general expenses divided by net earned premiums and other considerations and fees and other income. |
(3) | The premium persistency ratio is equal to the rate at which existing business for all issue years at the beginning of the period remains in force at the end of the period. The calculation for the year ended December 31, 2002 and 2001 excludes the Dental Benefits Division (DBD) of Protective Life Corporation. |
(4) | The results of DBD, which we acquired on December 31, 2001, and the results of CORE, which we acquired on July 12, 2001, are included in the financial results of the Assurant Employee Benefits segment beginning in 2002 and July 2001, respectively. DBD at the time of acquisition was a leading provider of voluntary (employee-paid) indemnity dental and prepaid dental coverage for employee groups. CORE at the time of acquisition was a leading national provider of employee absence management services and a major provider of disability reinsurance management services to middle-market insurance carriers. |
Products and Services |
Group Dental. Dental benefit plans provide for the funding of necessary or elective dental care. We provide both employee-paid and employer-paid plans. Plans may involve a traditional indemnity arrangement, a PPO arrangement, a prepaid arrangement, or some combination of these programs with employee choice. In a PPO plan, insureds may select any dental provider, but benefits are reimbursed at a higher level when they visit a provider who participates in the PPO. Coverage is subject to deductibles, coinsurance and annual or lifetime maximums. In a prepaid plan, members must go to participating dentists in order to receive benefits. Depending upon the procedure, dental benefits are provided by participating dentists at either no cost or a nominal co-payment.
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Success in the group dental business requires strong provider network development and management skills, a focus on expense management and a claim system capable of efficiently and accurately adjudicating high volumes of transactions. We own and operate a PPO, Dental Health Alliance, L.L.C. We have also developed local managed care networks in 25 states.
In addition to fully insured dental benefits, we also offer administrative services only (ASO) for self-funded dental plans. Under these arrangements, the employers or plan sponsors pay Assurant Employee Benefits a fee for providing these services. As of December 31, 2003, our block of this business consisted of approximately 200 groups and approximately 92,000 covered employees and, for the year ended December 31, 2003, generated $6.6 million of fee revenue.
As of December 31, 2003 and 2002, we had approximately 29,300 and 30,300 group dental plans insured or administered through this segment, respectively, covering or involving in each case approximately 1.4 million members.
Group Disability Insurance. Group disability insurance provides partial replacement of lost earnings for insured employees who become disabled and otherwise qualify for benefits. Our group disability products include both short-term and long-term disability insurance. Group long-term disability insurance provides employees with insurance coverage for loss of income in the event of extended work absences due to sickness or injury. Most policies begin providing benefits following 90 or 180 day waiting periods, and benefits are limited to specified maximums as a percentage of income. Group short-term disability insurance provides coverage for temporary loss of income due to injury or sickness, often effective immediately for accidents and after one week for sickness, also limited to specified maximums as a percentage of income.
DRMS, our wholly owned subsidiary, provides insurance carriers that wish to supplement their core product offerings a turnkey facility with which to write group disability insurance. Services we provide to the insurers for a fee include product development, state insurance regulatory filings, underwriting, claims management or any of the other functions typically performed by an insurers back office. The risks written by DRMS various clients are reinsured into a pool, with the clients generally retaining shares ranging from 0% to 50% of the risks they write. As the largest reinsurer in the pools, our licensed insurance subsidiaries reinsure a substantial majority of the insurance risk that is ceded by the client. Since DRMS clients operate in niches not often reached through our traditional distribution, our participation in the pools enables us, through a form of alternate distribution, to reach customers to whom we would not otherwise have access.
As of December 31, 2003 and 2002, we had approximately 37,500 and 39,100 group disability plans in force, reinsured or administered on an ASO basis, covering approximately 2.7 million and 3.0 million enrolled employees, respectively.
Group Term Life Insurance. Group term life insurance is one of the principal means by which working people in the United States provide for their families against the risk of premature death and often the means whereby they obtain lesser amounts of coverage for their spouses, children or domestic partners. Group term life insurance consists primarily of renewable term life insurance, which is term life coverage that is renewable at the option of the insured who is not required to take a medical examination in order to renew existing amounts of coverage, with the amount of coverage as a flat amount, an amount linked to the employees earnings, or a combination of the two. Employers generally provide a base or foundation level of coverage for their employees and offer the opportunity for employees to increase their coverage to meet specific needs. Also, basic term life insurance is often supplemented with an accidental death or dismemberment policy or rider, which provides additional benefits in the indicated events. Because there are few ways to differentiate an insurer in the area of traditional group term life insurance, we often sell this product line as a complement to our other core employee benefit insurance products. As of December 31, 2003 and 2002, we had approximately 25,200 and 25,600 group life plans in force, covering approximately 1.7 million and 2 million enrolled employees, respectively.
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Marketing and Distribution |
We distribute the products of Assurant Employee Benefits primarily through approximately 160 group sales representatives, located in 40 offices in or near major U.S. metropolitan areas. These representatives work through independent employee benefits advisors, including brokers and other intermediaries, to reach our customers, who are primarily small to medium-sized employers. DRMS employs an independent distribution arm tailored to its needs. Our marketing efforts concentrate on the identification of the employee benefit needs of our targeted customers, the development of tailored products and services designed to meet those needs, the alignment of our Company with select brokers and other intermediaries who value our approach to the market, and the promotion of our Companys brand.
To compete effectively in the small to medium-sized employer marketplace requires a large and broadly distributed sales force with relationships with the brokers and other intermediaries who act as advisors to those employers in connection with their benefits programs. In many cases, these employers and their advisors rely on us for expertise in matching their needs to the collection of solutions available through group benefit programs. Competing effectively also requires systems and work practices suited to a high transaction volume business and the ability to provide a high level of customer service to a large number of clients operating in almost all industries found in the U.S. economy.
Underwriting and Risk Management |
True group products are normally offered to employees on a guaranteed issue basis, meaning that if the group is an acceptable risk, the insurer generally foregoes individual medical underwriting and agrees in advance to accept all applications for insurance from members of the eligible class up to a formula-determined limit. Individual medical underwriting is required on applications for amounts in excess of this limit, or in connection with untimely applications. Our sales representatives and underwriters evaluate the risk characteristics of each prospective insured group and design appropriate plans of insurance. They utilize various techniques such as deductibles, co-payments, guarantee issue limits and waiting periods to control the risk we assume. Voluntary products introduce additional risks due to the fact that employees have some awareness of the risk of loss they personally face, and those employees who believe themselves to be more at risk will be more likely to elect coverage. In order to manage these risks, we customize our plan designs to seek to mitigate adverse selection problems. We also require that a minimum percentage of eligible employees elect a voluntary coverage.
We base the pricing of our products on the expected pay-out of benefits that we calculate using assumptions for mortality, morbidity, interest, expenses and persistency, depending upon the specific product features. Group underwriting takes into account demographic factors such as age, gender and occupation of members of the group as well as the geographic location and concentration of the group. Our disability policies often limit the payment of benefits for certain kinds of conditions, such as pre-existing conditions or disabilities arising from specifically listed medical conditions, in each case as defined in the policies.
Generally, we are not obligated to accept any risk or group of risks from, or to issue a policy or group of policies to, any employer or intermediary. Requests for coverage are reviewed on their merits and generally a policy is not issued unless the particular risk or group has been examined and approved by our underwriters. Group products are typically written with an initial rate guarantee of two years for disability and life insurance and one year for other group products. They are also written on a guaranteed renewable basis, meaning that they are renewable at the option of the insured for a specified number of years, with the right, upon expiration of the guarantee, to re-price to reflect the aggregate experience of our block of business and, where credible, the experience of the group. Credibility in this context means the assessment of the likelihood that the past history of the group is predictive of the future experience of the group. Credibility generally increases with group size or with the quantity of claims filed.
The business underwritten by our Assurant Employee Benefits segment is widely dispersed across geographic areas as well as the industries insured. At December 31, 2003, our top ten states measured by percentage of in force annual premiums contributed approximately 54.5% of our total annualized premiums in
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Our efforts are focused on facilitating claimants return to work through a variety of means, including physical therapy, vocational rehabilitation and retraining and workplace accommodation to assist the insured. In support of this effort, we also employ or contract with a staff of doctors, nurses and vocational rehabilitation specialists. We also utilize a broad range of outside medical and vocational experts for independent evaluations and local vocational services. Finally, we have an investigations unit focused on individuals who have or may be capable of returning to work but continue to claim benefits. Our dental business utilizes a highly automated claims system focused on rapid handling of claims, with 69% of claims adjudicated within seven calendar days for claims received from January 1, 2003 to and including December 31, 2003.
We employ approximately 800 claims employees in locations throughout the United States dedicated to the Assurant Employee Benefits segment. We have a claims review process, including an appeals process pursuant to which policyholders can appeal claims decisions made.
Assurant PreNeed |
Assurant PreNeed, which we began operating with the acquisition of United Family Life Insurance Company in 1980, is the market leader in the United States in pre-funded funeral insurance based on face amount of new policies sold. Pre-funded funeral insurance provides whole life insurance death benefits or annuity benefits used to fund costs incurred in connection with pre-arranged funerals. An annuity is a contract that provides for periodic payments to an annuitant for a specified period of time. In the case of annuities sold by Assurant PreNeed, all the benefits under the contract are generally paid out at the death of the purchaser of the annuity. We distribute our pre-funded funeral insurance products through two separate channels, our independent channel and our American Memorial Life Insurance Company (AMLIC) channel. Our pre-funded funeral insurance products provide benefits to cover the costs incurred in connection with pre-arranged funeral contracts and are distributed primarily through funeral homes and sold mainly to consumers over the age of 65, with an average issue age of 72. Our pre-funded funeral insurance products are typically structured as whole life insurance policies in the United States and as annuity products in Canada. Our independent channels target market is comprised of the 23,000 funeral firms in the United States and Canada, of which approximately 2,000 are active customers.
With our acquisition of AMLIC in 2000, we have become the market leader in the area of pre-funded funeral insurance based on face amount of policies sold. Through our AMLIC channel, we provide the insurance products and support services for the pre-need activities of SCI, the largest funeral provider in North America based on total revenues. As of December 31, 2003, SCI operated approximately 1,800 funeral service locations, cemeteries and crematoria in North America. This commission-based arrangement is anchored by an exclusive ten-year marketing agreement, which commenced on October 1, 2000.
Growth in pre-need sales has been traditionally driven by distribution with a high correlation between new sales of pre-funded funeral insurance and the number of pre-need counselors marketing the product and expansion in sales and marketing capabilities. In addition, as alternative distribution channels are identified, such as targeting affinity groups and employers, we believe growth in this market could accelerate. We believe that the pre-need market is characterized by an aging population combined with low penetration of the over-65 market.
In Assurant PreNeed, our strategy in our independent channel is to increase sales potential by strengthening our distribution relationships. We offer marketing support and programs to our funeral firm clients to increase their local market share, providing training for their sales counselors and assisting them in developing direct-to-consumer marketing programs and lead generation and management tools. Through our AMLIC channel our strategy is to reduce SCIs cost to sell and manage its pre-need operation. We integrate our processes for managing SCIs insurance production into its process for managing its pre-need business. Additionally, in keeping with our goal of aligning SCIs interest with ours, our arrangement with SCI is commission-based; however, we compensate SCI with an escalating production-based commission, with a defined maximum.
18
The following table provides net earned premiums
and other considerations, fees and other income and other
operating data for Assurant PreNeed for the periods and as of
the dates indicated:
For the Year Ended
December 31,
2003
2002
2001
(In millions)
$
283
$
293
$
278
246
245
229
529
538
507
5
5
3
$
534
$
543
$
510
$
308
$
392
$
372
312
319
258
$
620
$
711
$
630
1.71
1.69
1.67
$
2,996
$
2,717
$
2,499
Products |
Pre-Funded Funeral Insurance Policies. Pre-funded funeral insurance provides whole life insurance death benefits or annuity benefits to fund the costs incurred in connection with pre-arranged funeral contracts, or, in a minority of situations, pre-arranged funerals without a pre-arranged funeral contract, which costs typically include funeral firm merchandise and services. Our pre-funded funeral insurance products are typically structured as whole life insurance policies in the United States. In Canada, our pre-funded funeral insurance products are typically structured as annuity contracts for newly issued business. A pre-arranged funeral contract is an arrangement between a funeral firm and an individual whereby the funeral firm agrees to perform the selected funeral upon the individuals death. The consumer then purchases an insurance policy intended to cover the cost of the pre-arranged funeral, and the funeral home generally becomes the irrevocable assignee, or, in certain cases, the beneficiary, of the insurance policy proceeds. However, the insured may name a beneficiary other than the funeral home. The funeral home agrees to provide the selected funeral at death in exchange for the policy proceeds. Because the death benefit under many of our policies is designed to grow over time, the funeral firm that is the assignee of such a policy has managed some or all of its funeral inflation risk. Consumers have the choice of making their policy payments as a single lump-sum payment or through multi-payment plans that spread payments out over a period of three to ten years. We do not provide any funeral goods and services in connection with our pre-funded funeral insurance policies; these policies pay death benefits in cash only.
Marketing and Distribution |
We distribute our pre-funded funeral insurance products through two distribution channels: the independent channel, which distributes through approximately 2,000 funeral homes and selected third-party general agencies, and our AMLIC channel, which distributes through an exclusive relationship with SCI in North America. Our policies are sold by licensed insurance agents or enrollers who in some cases may also be a funeral director. As of December 31, 2003 and 2002, the face amount of our contracts sold through our AMLIC channel represented approximately 50% and 55%, respectively, of our total new life and annuity face sales in Assurant PreNeed.
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Risk Management |
Assurant PreNeed generally writes whole life insurance policies with increasing death benefits and obtains the majority of its profits through interest rate spreads. Interest rate spreads refer to the difference between the death benefit growth rates on pre-funded funeral insurance policies and the investment returns generated on the assets we hold related to those policies. To manage these spreads, we monitor weekly the movement in new money yields and monthly evaluate our actual net new achievable yields. This information is used to evaluate rates to be credited on applicable new and in force pre-funded funeral insurance policies and annuities. In addition, we review asset benchmarks and perform asset/ liability matching studies to develop the optimum portfolio to maximize yield and reduce risk.
In Assurant PreNeed, we utilize underwriting to select and price insurance risks. We regularly monitor mortality assumptions to determine if experience remains consistent with these assumptions and to ensure that our product pricing remains appropriate. We periodically review our underwriting, agent and policy contract provisions and pricing guidelines so that our policies remain competitive and supportive of our marketing strategies and profitability goals.
Many of our pre-funded whole-life funeral insurance policies have increasing death benefits. As of December 31, 2003, approximately 81% of Assurant PreNeeds in force insurance policy reserves relate to policies that provide for death benefit growth, some of which provide for minimum death benefit growth pegged to changes in the Consumer Price Index. Policies that have rates guaranteed to change with the Consumer Price Index represented approximately 13% of Assurant PreNeeds reserves as of December 31, 2003. We have employed risk mitigation strategies to seek to minimize our exposure to a rapid increase in inflation.
In our independent channel, we outsource all of the servicing and administration of our policies.
Ceded Reinsurance
Our operating business segments utilize ceded reinsurance for three major business purposes:
| Loss Protection and Capital Management. As part of our overall risk and capacity management strategy, we purchase reinsurance for certain risks underwritten by our various operating business segments, including significant individual or catastrophic claims, and to free up capital to enable us to write additional business. | |
| Business Dispositions. We have used reinsurance to exit certain businesses, such as our FFG division in 2001 and our LTC business in 2000. Reinsurance was used in these cases to facilitate the transactions because the businesses shared legal entities with business segments that we retained. | |
| Assurant Solutions Client Risk and Profit Sharing. Assurant Solutions writes business produced by its clients, such as mortgage lenders and servicers and financial institutions, and reinsures all or a portion of such business to insurance subsidiaries of the clients. Such arrangements allow significant flexibility in structuring the sharing of risks and profits on the underlying business. |
Loss Protection and Capital Management |
In a traditional indemnity reinsurance transaction, a reinsurer agrees to indemnify another insurer for part or all of its liability under a policy or policies it has issued for an agreed upon premium. These agreements provide for recovery of a portion of losses and associated loss expenses from reinsurers. The terms of these agreements, which are typical for agreements of this type, generally provide, among other things, for the automatic acceptance by the reinsurer of ceded risks in excess of our retention limits (i.e. the amount of loss per individual risk that we are willing to absorb). For excess of loss coverage, we pay premiums to the reinsurers based on rates negotiated and stated in the treaties. For pro rata reinsurance, we pay premiums to the reinsurers based upon percentages of premiums received by us on the business reinsured. These agreements are generally terminable as to new risks by us or by the reinsurer on appropriate notice; however,
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We work with our business segments to develop effective reinsurance arrangements that are consistent with their pricing and operational goals. For example, Assurant Employee Benefits cedes 100% of monthly disability claims in excess of $10,000 per individual insured. For our group term life business, the maximum amount retained on any one life is $800,000 of life insurance including accidental death, limited to $500,000 in life insurance and $300,000 in accidental death and dismemberment insurance. Amounts in excess of these figures are reinsured with other life insurance companies on a yearly renewable term basis. Assurant Solutions purchases property reinsurance for flood risk, with per property limits of $925,000 in excess of $75,000 per individual loss. This treaty has a per occurrence cap of $2,775,000.
For those product lines where there is exposure to catastrophes (for example, homeowners policies written by Assurant Solutions), we closely monitor and manage our aggregate risk exposure by geographic area and have entered into reinsurance treaties to manage our exposure to these types of events. For 2003, catastrophe reinsurance was purchased to manage our risk exposure to a hurricane loss in excess of the modeled 200-year return time loss. We maintain $118 million of catastrophic excess of loss coverage for fire, flood and personal liability risks, with a per occurrence retention of the first $20 million. In addition, 90% of Florida hurricane losses in excess of $19 million are covered by the Florida Hurricane Catastrophe Fund (FHCF), with coverage capped at $58 million. This coverage has been in place as of January 1, 2003 and will continue through May 31, 2004. Future FHCF coverage will be determined by the FHCF in accordance with Florida statutes and will depend upon Assurant Solutions in force Florida risks and the FHCF claims paying capacity. Also, in Assurant Employee Benefits, we have purchased catastrophic reinsurance coverage in the group term life product line of $30 million in excess of our retention of the first $20 million.
A significant portion of Assurant Healths business has been reinsured under non-proportional reinsurance agreements that provide for the reinsurers to indemnify us for losses in a calendar year on combined ratios up to but not exceeding 110%. Such losses, with interest, are offset against any future profits. For calendar years where the combined ratio does not exceed 98%, Assurant Health keeps all the profits on the reinsured business net of the reinsurance fee. For years where the reinsured business is profitable but the combined ratio exceeds 98%, Assurant Health keeps 50% of the profits on the business net of the fee.
With the exception of a small block of older policy forms, all of the LTC business of John Alden, one of our subsidiaries, has been reinsured with ERC Life Reinsurance Corporation (ERC). All risks and profits generated by the reinsured business have been transferred to ERC. The reserves and premium transferred are in excess of 95% of the direct long-term care amounts generated by John Alden. The remaining small block of long-term care policies in John Alden has been reinsured with John Hancock as part of the sale of that division. See Business Dispositions below.
Under indemnity reinsurance transactions in which we are the ceding insurer, we remain liable for policy claims if the assuming company fails to meet its obligations. To limit this risk, we have control procedures in place to evaluate the financial condition of reinsurers and to monitor the concentration of credit risk to minimize this exposure. The selection of reinsurance companies is based on criteria related to solvency and reliability and, to a lesser degree, diversification as well as on developing strong relationships with our reinsurers for the sharing of risks.
In addition, we also purchase reinsurance when capital requirements and the economic terms of the reinsurance make it appropriate to do so.
Business Dispositions |
We have exited businesses through reinsurance ceded to third parties, such as our 2001 sale of the insurance operations of FFG to The Hartford. The assets backing the liabilities on these businesses are held in a trust. All separate account business and John Alden general account business relating to FFG were transferred through modified coinsurance, a form of proportional reinsurance in which the underlying assets and liabilities are still reflected on the ceding companys balance sheet. Under this arrangement, The Hartford
21
In 1997, John Alden sold substantially all of its annuity operations to SunAmerica Life Insurance Company (SunAmerica), now a subsidiary of American International Group, Inc. In connection with the sale, John Alden reinsured its existing block of annuity policies to SunAmerica on a coinsurance basis. This coinsurance was initially on an indemnity basis and the parties agreed to transition the business to an assumption basis as soon as practical. An assumption basis is a form of reinsurance under which policy administration and the contractual relationship with the insured, as well as liabilities, pass to the reinsurer. In certain states, the transition to an assumption basis is subject to policyholder approval. To the extent that such transition does not take place with respect to any particular policy, the policy will remain reinsured on an indemnity basis. As of December 31, 2003, more than 95% of the ceded annuity reserves had either transitioned to an assumption basis or had lapsed.
In 2000, we sold all of our LTC operations to John Hancock. In connection with the sale, we reinsured our existing block of long-term care policies to John Hancock on a coinsurance basis. Under the coinsurance agreement, we transferred 100% of the policy reserves and related assets on this block of business to John Hancock, and John Hancock agreed to be responsible for 100% of the policy benefits. The assets backing the liabilities on this business are held in a trust and John Hancock is obligated to fund the trust if the value of the assets is deemed insufficient to fund the liabilities. If John Hancock fails to fulfill these obligations, we will be obligated to make these payments.
Assurant Solutions Client Risk and Profit Sharing |
Historically, our insurance subsidiaries in Assurant Solutions have ceded a portion of the premiums and risk related to business generated by certain clients to the clients captive insurance companies or to reinsurance companies in which the clients have an ownership interest. In some cases, our insurance subsidiaries have assumed a portion of these ceded premiums and risk from the captive insurance companies and reinsurance companies. Through these arrangements, our insurance subsidiaries share some of the premiums and risk related to client-generated business with these clients. When the reinsurance companies are not authorized to do business in our insurance subsidiarys domiciliary state, our insurance subsidiary generally obtains collateral, such as a trust or a letter of credit, from the reinsurance company or its affiliate in an amount equal to the outstanding reserves to obtain full financial credit in the domiciliary state for the third-party reinsurance. See Item 7A Quantitative and Qualitative Disclosures about Market Risk Credit Risk.
In addition, we have received and responded to a John Doe summons from the Internal Revenue Service requesting information as to the identities of U.S. taxpayers that have engaged in producer-owned reinsurance company transactions in the Turks and Caicos with us. The Internal Revenue Service previously issued a notice stating that certain tax benefits claimed in connection with producer-owned reinsurance company transactions involving credit insurance transactions with producers who own reinsurance companies located in the Turks and Caicos will be denied and is investigating whether tax benefits claimed by the taxpayers they wish to identify are available. This summons states that there is no issue in the investigation relating to our tax liability. However, it is possible that the investigation by the Internal Revenue Service could affect our current reinsurance arrangements.
22
Gross
Annualized Premium in Force, Ceded Portion and Net Amount
Retained
The following table details our gross annualized
premium in force, the portion that was ceded to reinsurers and
the net amount that was retained as of December 31, 2003.
As of December 31, 2003
Percentage
Gross(1)
Ceded
Net
Retained
(In millions)
$
1,409
$
637
$
772
55
%
4,743
949
3,794
80
%
2,520
929
1,591
63
%
$
8,672
$
2,515
$
6,157
(1) | Gross includes direct plus assumed premiums. |
Claims Provisions/ Reserves
In accordance with industry and accounting practices and applicable insurance laws and regulatory requirements, we establish reserves for payment of claims and claims expenses for claims that arise from our insurance policies. We maintain reserves for future policy benefits and unpaid claims expenses. Policy reserves represent the accumulation of the premiums received that are set aside to provide for future benefits and expenses on claims not yet incurred. Claim reserves are established for future payments and associated expenses not yet due on claims that have already been incurred, whether reported to us or not. Reserves do not represent an exact calculation of future policy benefits and expenses but are instead estimates made by us using actuarial and statistical procedures. There can be no assurance that any such reserves would be sufficient to fund our future liabilities in all circumstances. Future loss development could require reserves to be increased, which would adversely affect earnings in current and/or future periods. Adjustments to reserve amounts may be required in the event of changes from the assumptions regarding future morbidity, the incidence of disability claims and the rate of recovery, including the effects thereon of inflation and other societal and economic factors, persistency, mortality, property claim frequency and severity and the interest rates used in calculating the reserve amounts. The reserves reflected in our consolidated financial statements are calculated in accordance with GAAP.
See Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations Critical Accounting Policies Reserves.
Reserves are regularly reviewed and updated, using the most current information. Any adjustments are reflected in the current results of operations. However, because the establishment of reserves is an inherently uncertain process, there can be no assurance that ultimate losses will not exceed existing reserves.
Reserves are reviewed at least quarterly by our business segment management.
Investments
The investment portfolio is a critical part of our business activities and important to our overall profitability. The fundamental investment philosophy is to manage assets, within our stated risk parameters, to generate consistent and high levels of investment income, before gains and losses, while providing a total return that is competitive over the long-term. Our investment team is charged with: maintaining safety of principal and sufficient liquidity; managing credit, interest rate, prepayment and market risks; maintaining adequate diversification among asset classes, industry concentrations and individual issuers; and adhering to all applicable regulatory requirements.
We have individual business segments with different needs and characteristics. Hence, our investment approach for each business segment is tailored to that business segments needs in terms of asset allocation, liquidity needs and duration of assets and liabilities.
23
Organization
The general account is managed by our asset management department, Assurant Asset Management, or AAM. In this capacity, AAM acts as both our investment advisor and our asset manager. As investment advisor, the AAM organization oversees the design and implementation of overall investment policy. As asset manager, AAM is responsible for (i) directly investing those general account assets for which the department has in-house expertise and (ii) selecting and monitoring outside managers for those assets for which AAM has limited expertise. AAM fulfills these roles through its involvement in the establishment of risk management techniques, business segment investment policy and asset benchmark construction and through leadership and participation in our two investment oversight entities: the Companys risk management committee and the individual business segment investment committees.
Investment Process
Our investment process is initiated by the strategic analysis group within AAM. This group designs an appropriate asset allocation benchmark for each portfolio that is tailored to the associated liabilities and is designed to generate the highest level of investment income available given each business segments overall risk tolerance. Although income is the primary objective, total return is a significant secondary objective. We operate our business through multiple legal entities. At least one portfolio is maintained for each legal entity. In addition, separate portfolios are maintained for legal entities that conduct business for more than one business segment. The maturities of the assets are selected so as to satisfy a duration corridor for each portfolio that is appropriate to its underlying liabilities. Duration is the sensitivity of the portfolio to movements of interest rates. The actual duration is dynamic and will change with time and interest rate movement, as will the liability duration. The duration corridor is chosen by analyzing various risk/reward measures from appropriate asset/liability studies. The duration of our portfolio as of December 31, 2003 and 2002 was 5.92 and 5.41 years, respectively. This represents the amalgamated duration of our four operating business segments that is directly tied to their liabilities, many of which are short-tail. It is our intent to manage the portfolios such that their durations closely match the liabilities that they support.
In addition, the asset allocation benchmark will reflect multiple constraints, such as all risk tolerances established by our risk management committee, appropriate credit structure, prepayment risk tolerance, liquidity requirements, capital efficiency, tax considerations and regulatory and rating agency requirements. The individual benchmarks are then aggregated together to give a total asset profile. Asset management is conducted at the portfolio level; however, risk constraints are also in place for the aggregate portfolio. Each benchmark is reviewed at least annually for appropriateness.
Our investment portfolios are invested in the following key asset classes: fixed income securities, including mortgage-backed and other asset-backed securities; preferred stocks; commercial mortgage loans; and commercial real estate. We began investing in private placement loans in the fourth quarter of 2003 and ultimately over the next several years intend to have private placement loans represent 5% of our total invested assets. As of December 31, 2003, we had approximately $19 million invested in private placements. We do not currently invest new money in equity securities; however, we may do so in the future. As of December 31, 2003, less than 1% of the fair value of our total invested assets was invested in common stock.
Fixed Income Portfolio Process
AAM controls the credit risk in the fixed income portfolio through a combination of issuer level credit research and portfolio level credit risk management. At the issuer level, we maintain a credit database that contains both qualitative and quantitative assessments of over 200 issuers and 35 industries. At the portfolio level, we control credit risk primarily through quality and industry diversification, individual issuer limits based upon credit rating and a sell discipline designed to reduce quickly exposure to deteriorating credits. In addition, we monitor changes in individual security values on a semi-monthly basis in order to identify potential problem credits. This process is also incorporated into our impairment watchlist process. The risks in the fixed income portfolio are controlled and monitored.
24
In order to invest in a wide variety of asset classes in our portfolio and to appropriately manage the accompanying risks, we had outsourced the management of almost 14% of our portfolios market value as of December 31, 2003. We have engaged Alliance Capital Management Corp. and Wellington Management Co. for high yield investments, Spectrum Asset Management, Inc. and Flaherty & Crumrine Inc. for preferred stock investments, Prudential Private Placement Investors, LP for our private placements and Lancaster Investment Counsel and Phillips Hager & North Investment Management Ltd. for our Canadian investment portfolios.
Commercial Mortgage Loans Investment Process
We originate fixed rate, first commercial mortgage loans through a nationwide group of exclusive, regional mortgage correspondents. We have a mortgage loan committee within AAM that is responsible for the approval of our mortgage loan related investments. Generally the mortgage correspondents service the loans they originate and we regularly meet with them to help foster a strong working relationship. We are a portfolio lender and generally hold our commercial mortgage loans to maturity. We typically do not securitize or otherwise sell our commercial mortgage loans.
A potential loss reserve based on historical data adjusted for current expectations is maintained and is typically between 1.25% and 2.25% of commercial mortgage loans on real estate. As of December 31, 2003, the reserve was approximately 2.0% of the unpaid principal of our commercial mortgage loans, or $19 million.
Investment Real Estate Process
We invest in income-producing commercial properties to generate attractive risk-adjusted returns as well as to generate operating investment income with the potential for capital gains upon sale of the property. We invest with regional operating partners who generally invest capital in the property with us and provide management and leasing services. Our portfolio is diversified by location, property type, operating partner and lease term. Property types include office buildings, warehouse/industrial buildings and multi-family housing.
Portfolio Composition
Our total invested assets were $10,924 million and $10,084 million, or 46% and 45%, of our total assets, as of December 31, 2003 and 2002, respectively. Our net investment income for the years ended December 31, 2003 and 2002 was 9% and 10%, respectively, of our total revenue, excluding realized investment losses and gains. We had a net realized gain on investments of $2 million for the year ended December 31, 2003 and a net realized loss on investments of $118 million for the year ended December 31, 2002.
As of December 31, 2003 and 2002, fixed maturity securities accounted for 80% of our total invested assets. The corporate bond portfolio is well diversified across industry classes.
The following table sets forth the carrying value
of the securities held in our investment portfolio at the dates
indicated:
At December 31,
2003
2002
(In millions)
$
8,729
$
8,036
456
272
933
842
68
69
276
684
462
181
$
10,924
$
10,084
25
Investment Results
The overall income yield on our investments after investment expenses, excluding net realized investment gains (losses), was 5.61% for the year ended December 31, 2003 and 6.20% for the year ended December 31, 2002. The overall income yield on our investments after investment expenses, including realized gains (losses), was 5.63% for the year ended December 31, 2003 and 5.04% for the year ended December 31, 2002.
The following table sets forth the income yield
and net investment income, excluding realized investment
gains/(losses), for each major investment category for the
periods indicated.
For the Year Ended
For the Year Ended
December 31, 2003
December 31, 2002
Yield(1)
Amount
Yield(1)
Amount
(In millions)
5.96
%
$
473
6.76
%
$
510
7.71
%
27
8.93
%
23
8.00
%
71
9.11
%
78
5.70
%
4
5.10
%
3
1.41
%
7
1.30
%
9
0.40
%
3
1.42
%
9
14.48
%
46
11.48
%
19
5.83
%
631
6.39
%
651
(24
)
(19
)
5.61
%
$
607
6.20
%
$
632
7.33
%
8.42
%
4.10
%
10.26
%
(1) | The yield is calculated by dividing income by average assets. The yield calculation for the year ended December 31, 2003 includes the average of asset positions as of December 31, 2002 and December 31, 2003. The yield calculation for the year ended December 31, 2002 includes the average of asset positions as of December 31, 2001 and December 31, 2002. |
(2) | Total return is calculated using beginning and ending market portfolio value adjusted for external cash flows. |
(3) | The actual portfolio is customized for the liabilities that it supports. It will therefore differ from the Lehman Index, both in asset allocation and duration. As of December 31, 2003, the actual portfolio had a duration of 5.96 years with 4% of the total portfolio in U.S. Government securities, 59% in U.S. credit and 16% in securitized assets. Commercial mortgages and real estate comprised the remainder of the portfolio. In contrast, the Lehman Index had a duration of 4.54 with 34% in U.S. Government securities, 26% in U.S. credit and 40% in securitized assets. |
26
Fixed Maturity
Securities
The amortized cost and fair value of fixed
maturity securities at December 31, 2003 and 2002, by type
of issuer, were as follows:
Gross
Gross
Gross
Amortized
Unrealized
Unrealized
Fair
Cost
Gains
Losses
Value
(In millions)
$
1,647
$
39
$
(4
)
$
1,682
187
16
203
307
12
(1
)
318
910
74
984
5,179
371
(8
)
5,542
$
8,230
$
512
$
(13
)
$
8,729
$
1,576
$
71
$
$
1,647
196
15
211
202
19
(17
)
204
834
55
(10
)
879
4,823
299
(27
)
5,095
$
7,631
$
459
$
(54
)
$
8,036
For similar information regarding our equity securities, see Note 5 of the Notes to Consolidated Financial Statements included elsewhere in this report.
The following table presents our fixed maturity
securities portfolio by NAIC designation and the equivalent
ratings of the nationally recognized securities rating
organizations as of December 31, 2003 and 2002, as well as
the percentage based on fair value, that each designation
comprises:
At December 31, 2003
At December 31, 2002
Percentage
Percentage
NAIC
Rating Agency
Amortized
Fair
of Total
Amortized
Fair
of Total
Rating
Equivalent
Cost
Value
Fair Value
Cost
Value
Fair Value
1
Aaa/Aa/A
$
5,770
$
6,074
70
%
$
5,673
$
6,013
75
%
2
Baa
1,964
2,110
24
%
1,454
1,526
19
%
3
Ba
331
361
4
%
333
338
4
%
4
B
122
135
2
%
108
105
1
%
5
Caa and lower
34
40
0
%
59
50
1
%
6
In or near default
9
9
4
4
Total
$
8,230
$
8,729
100
%
$
7,631
$
8,036
100
%
27
The amortized cost and fair value of fixed
maturity securities at December 31, 2003 and 2002, by
contractual maturity are shown below:
At December 31, 2003
At December 31, 2002
Amortized
Fair
Amortized
Fair
Cost
Value
Cost
Value
(In millions)
$
240
$
245
$
271
$
274
1,728
1,824
1,990
2,085
2,136
2,275
1,647
1,732
2,199
2,425
2,313
2,483
6,303
6,769
6,221
6,574
1,927
1,960
1,410
1,462
$
8,230
$
8,729
$
7,631
$
8,036
Virtually all of our fixed maturity securities portfolio is publicly traded. We have recently initiated a private placement program and plan to invest approximately $500 million in privately placed securities over the next two years. Currently, we have less than 1% of our fixed maturity securities invested in private placement. As of December 31, 2003, approximately 95% of the fair market value of our fixed maturity securities were dollar denominated. As of December 31, 2003, we had approximately $564 (Canadian) million invested in Canadian fixed maturity securities; however, these assets directly support Canadian liabilities.
Commercial Mortgage Loans
We have made commercial mortgage loans, collateralized by the underlying real estate, on properties located throughout the United States. At December 31, 2003 approximately 34% of the outstanding principal balance of commercial mortgage loans was concentrated in the states of California, New York, and Pennslyvania. Although we have a diversified loan portfolio, an economic downturn could have an adverse impact on the ability of our debtors to repay their loans.
Investment Real Estate
We also hold commercial equity real estate as part of our investment portfolio. Investments in real estate joint ventures totaled $57 million and $63 million as of December 31, 2003 and 2002, respectively. We own real estate through real estate joint ventures and partnerships. The main property types within our portfolio are office, industrial/warehouse and multi-family housing.
Competition
We face competition in each of our businesses; however, we believe that no single competitor competes against us in all of our business lines and the business lines in which we operate are generally characterized by a limited number of competitors. Competition in our operating business segments is based on a number of factors, including: quality of service, product features, price, scope of distribution, financial strength ratings and name recognition.
The relative importance of these factors depends on the particular product and market. We compete for customers and distributors with insurance companies and other financial services companies in our various businesses.
Assurant Solutions has numerous competitors in its product lines, but we believe no other company participates in all of the same lines or offers comprehensive capabilities. Competitors include insurance companies and financial institutions. In Assurant Health, we believe the market is characterized by many competitors, and our main competitors include health insurance companies and the Blue Cross/ Blue Shield plans in the states in which we write business. In Assurant Employee Benefits, commercial competitors include other life insurance companies as well as not-for-profit Delta Dental plans. In Assurant PreNeed, our
28
Some of these companies may offer more competitive pricing, greater diversity of distribution, better brand recognition or higher financial strength ratings than we have. Some may also have greater financial resources with which to compete. In addition, many of our insurance products, particularly our group benefits and health insurance policies, are underwritten annually and, accordingly, there is a risk that group purchasers may be able to obtain more favorable terms from competitors rather than renewing coverage with us. The effect of competition may, as a result, adversely affect the persistency of these and other products, as well as our ability to sell products in the future.
Ratings
Rating organizations continually review the financial positions of insurers, including our insurance subsidiaries. Insurance companies are assigned financial strength ratings by independent rating agencies based upon factors relevant to policyholders. Ratings provide both industry participants and insurance consumers meaningful information on specific insurance companies and are an important factor in establishing the competitive position of insurance companies. All of our active domestic operating insurance subsidiaries are rated by A.M. Best. A.M. Best maintains a letter scale rating system ranging from A++ (Superior) to S (Suspended). Six of our domestic operating insurance subsidiaries are also rated by Moodys. In addition, seven of our domestic operating insurance subsidiaries are rated by S&P and Fitch.
Most of our domestic operating insurance subsidiaries have A.M. Best financial strength ratings of A (Excellent), which is the second highest of ten ratings categories and the highest within the category based on modifiers (i.e., A and A- are Excellent). Our other domestic operating insurance subsidiaries have A.M. Best financial strength ratings of A- (Excellent), which is the second highest of ten ratings categories and the lowest within the category based on modifiers.
The Moodys financial strength rating for one of our domestic operating insurance subsidiaries is A2 (Good), which is the third highest of nine ratings categories and mid-range within the category based on modifiers (i.e., A1, A2 and A3 are Good), and for five of our domestic operating insurance subsidiaries is A3 (Good), which is the third highest of nine ratings categories and the lowest within the category based on modifiers.
The S&P financial strength rating for five of our domestic operating insurance subsidiaries is A (Strong), which is the third highest of nine ratings categories and mid-range within the category based on modifiers (i.e., A+, A and A- are Strong), and for two of our domestic operating insurance subsidiaries is A- (Strong), which is the third highest of nine ratings categories and the lowest within the category based on modifiers.
The Fitch financial strength rating for the seven rated domestic insurance companies is A (Strong), which is the third highest of twelve rating categories and mid-range within the category based on modifiers (i.e., A+, A , and A- are Strong).
The objective of A.M. Bests, Moodys, S&Ps, and Fitchs ratings systems is to assist policyholders and to provide an opinion of an insurers financial strength, operating performance, strategic position and ability to meet ongoing obligations to its policyholders. These ratings reflect the opinions of A.M. Best, Moodys, S&P and Fitch of our ability to pay policyholder claims, are not applicable to our common stock or debt securities and are not a recommendation to buy, sell or hold any security, including our common stock or debt securities. These ratings are subject to periodic review by and may be revised upward, downward or revoked at the sole discretion of A.M. Best, Moodys, S&P and Fitch.
29
REGULATION
United States
State Regulation |
General |
Our insurance subsidiaries are subject to regulation in the various states and jurisdictions in which they transact business. The extent of regulation varies, but generally derives from statutes that delegate regulatory, supervisory and administrative authority to a department of insurance in each state. The regulation, supervision and administration relate, among other things, to: standards of solvency that must be met and maintained, the payment of dividends, changes of control of insurance companies, the licensing of insurers and their agents, the types of insurance that may be written, guaranty funds, privacy practices, the ability to enter and exit certain insurance markets, the nature of and limitations on investments, premium rates, restrictions on the size of risks that may be insured under a single policy, reserves and provisions for unearned premiums, losses and other obligations, deposits of securities for the benefit of policyholders, payment of sales compensation to third parties, approval of policy forms and the regulation of market conduct, including underwriting and claims practices.
State insurance departments also conduct periodic examinations of the affairs of insurance companies and require the filing of annual and other reports, prepared under SAP (Statutory Accounting Principles), relating to the financial condition of companies and other matters. Financial examinations completed during the past three years with respect to our operating subsidiaries have not resulted in material negative adjustments to statutory surplus and pending financial and market conduct examinations with respect to these subsidiaries have not identified any material findings to date. Two of our subsidiaries have responded affirmatively to an NAIC survey regarding race-based premiums, resulting in examinations by two state insurance departments. This relates to actions of the subsidiaries or predecessor companies before acquisition by us. One examination has been concluded and one is still in progress and, to date, no penalties have been imposed as a result of these examinations. The amount of in force business as to which these subsidiaries charged race-based premiums is very small, representing less than 1% of the in force block of business of the Company at December 31, 2003. While we do not expect that these examinations will have a material adverse effect on us, there can be no assurance that further examinations or litigation will not occur with respect to race-based premiums.
In February 2003, two of our subsidiaries, American Bankers Insurance Company (ABIC) and American Bankers Life Assurance Company (ABLAC), reached a final settlement with the State of Minnesota in connection with certain alleged regulatory violations. Pursuant to the settlement, ABIC and ABLAC have agreed to stop selling insurance in Minnesota for five years, though they could apply for reinstatement in 20 months. In addition, ABIC may lose its license to conduct business in the State of Minnesota as a result of alleged violations of the Minnesota Fair Campaign Practices Act. However, other member companies of Assurant Solutions with product lines that overlap with those offered by ABIC and ABLAC currently remain authorized to conduct business in the State of Minnesota. See Item 3 Legal Proceedings.
In addition, we are currently engaged in litigation with the Department of Commerce (which regulates insurance) in the State of Minnesota in which we are seeking to enforce an existing consent order allowing us to implement rate increases for our individual medical business in Minnesota.
At the present time, our insurance subsidiaries are collectively licensed to transact business in all 50 states and the District of Columbia, although several of our insurance subsidiaries or prepaid dental plan companies individually are licensed in only one or a few states. We have insurance subsidiaries or prepaid dental plan companies domiciled in the states of Alabama, Arizona, California, Colorado, Delaware, District of Columbia, Florida, Georgia, Kentucky, Michigan, Minnesota, Mississippi, Missouri, Nebraska, New Jersey, New Mexico, New York, Ohio, Oklahoma, Pennsylvania, South Carolina, South Dakota, Texas, Utah, Wisconsin, and in Puerto Rico.
30
Regulation of Credit Insurance Products |
Most states and other jurisdictions in which our insurance subsidiaries do business have enacted laws and regulations that apply specifically to consumer credit insurance. The methods of regulation vary but generally relate to, among other things, the amount and term of coverage, the content of required disclosures to debtors, the filing and approval of policy forms and rates, the ability to provide creditor-placed insurance and limitations on the amount of premiums that may be charged and on the amount of compensation that may be paid as a percentage of premiums. In addition, some jurisdictions have enacted or are considering regulations that may limit profitability arising from credit insurance based on underwriting experience.
The regulation of credit insurance is also affected by judicial activity. For example, recent federal court decisions have enhanced the ability of national banks to engage in activities that effectively compete with our consumer credit insurance business without being subject to various aspects of state insurance regulation.
Regulation of Service Contracts and Warranties |
The extent of regulation over the sale of service contracts and warranties varies considerably from state to state. In the states that do regulate the sales of these products, the regulations generally are less stringent than those applicable to the sale of insurance. For example, most states do not require the filing and approval of contract forms and rates for service contracts and warranties. States that do regulate such contract forms typically require specific wording regarding cancellation rights and regarding the consumers rights in the event of a claim. Most states do not require that individual salespersons of service contracts and warranties be licensed as insurance agents. In the states that do require such a license, salespersons may qualify for a limited license to sell service contracts and warranties without meeting the education and examination requirements applicable to insurance agents. In addition, the compensation paid to salespersons of service contracts and warranties is generally not regulated.
Regulation of Health Insurance Products |
State regulation of health insurance products varies from state to state, although all states regulate premium rates, policy forms and underwriting and claims practices to one degree or another. Most states have special rules for health insurance sold to individuals and small groups. For example, a number of states have passed or are considering legislation that would limit the differentials in rates that insurers could charge for health care coverages between new business and renewal business for small groups with similar demographics. Every state has also adopted legislation that would make health insurance available to all small employer groups by requiring coverage of all employees and their dependents, by limiting the applicability of pre-existing conditions exclusions, by requiring insurers to offer a basic plan exempt from certain benefits as well as a standard plan, or by establishing a mechanism to spread the risk of high risk employees to all small group insurers. The U.S. Congress and various state legislators have from time to time proposed changes to the health care system that could affect the relationship between health insurers and their customers, including external review. In addition, various states are considering the adoption of play or pay laws requiring that employers either offer health insurance or pay a tax to cover the costs of public health care insurance. We cannot predict with certainty the effect that any proposals, if adopted, or legislative developments could have on our insurance businesses and operations.
A number of states have enacted new health insurance legislation over the past several years. These laws, among other things, mandate benefits with respect to certain diseases or medical procedures, require health insurers to offer an independent external review of certain coverage decisions and establish health insurer liability. There has also been an increase in legislation regarding, among other things, prompt payment of claims, privacy of personal health information, health insurer liability and relationships between health insurers and providers. We expect that this trend of increased legislation will continue. These laws may have the effect of increasing our costs and expenses.
In most states in which we operate, we provide our individual health insurance products through an association. The use of associations offers greater flexibility on pricing, underwriting and product design compared to products sold directly to individuals on a true individual policy basis due to the greater regulatory
31
Regulation of Employee Benefits Products |
State regulation of non-medical group products, including group term life insurance, group disability and group dental products, also varies from state to state. As with individual insurance products, the regulation of these products generally also includes oversight over premium rates and policy forms, but often to a lesser degree. The regulatory environment for group term life insurance is relatively established, with few significant changes from year to year.
Group PPO dental insurance policies are generally regulated in the same manner as non-PPO dental policies, except to the extent that a small number of states have chosen to restrict the difference in benefits allowable between in-network and out-of-network services. Also, some states directly regulate the operation of the PPO network by requiring separate licensing or registration for the organization that contracts with the providers of dental care. In those states, PPOs also must comply with varying levels of regulatory oversight concerning the content of PPO contracts and provider practice standards. Most of the states in which prepaid dental plans are written recognize prepaid dental plans as an activity separate from traditional insurance, because providers are compensated through capitation arrangements. In most of these states, prepaid dental plans are written by a single-purpose, single-state affiliate that holds a license distinct from the life and health insurance license required for group dental insurance policies. Entities providing prepaid plans are variously licensed as health maintenance organizations (HMOs), prepaid dental plans, limited service health plans, life and health insurers or risk-bearing PPOs, where such licenses are required. Each state has different rules regarding organization, capitalization and reporting for the separate entities, with additional variations relating to provider contracting, oversight, plan management and plan operations.
Providers of group disability and dental insurance, like providers of group health insurance, are subject to state privacy laws, claims processing rules and prompt pay requirements in various states.
As an extension of past legislative activities in the medical insurance arena, legislative and regulatory consideration, at both the federal and state levels, is being directed toward an effort to mandate what its proponents call mental health parity in the policy provisions of group disability insurance plans. This would require providers of group disability insurance to extend the same benefits for disabilities related to mental illness as are provided for other disabilities.
Group benefit plans and the claims thereunder are also largely subject to federal regulation under ERISA, a complex set of laws and regulations subject to interpretation and enforcement by the Internal Revenue Service and the Department of Labor. ERISA regulates certain aspects of the relationships between us and employers who maintain employee benefit plans subject to ERISA. Some of our administrative services and other activities may also be subject to regulation under ERISA.
Regulation of Pre-Funded Funeral Insurance Products |
State regulation of the pre-funded funeral insurance products business varies considerably from state to state. Our pre-funded funeral insurance products are typically structured as small whole life insurance policies, usually under $10,000 face amount, and are regulated as such by the states. State laws also restrict who may sell a pre-funded funeral. For example, in certain states a pre-funded funeral may only be offered through licensed funeral directors. In New York, the payment of commissions to a funeral director for the sale of insurance is prohibited.
State privacy laws, particularly those with opt-in clauses, can also affect the pre-funded funeral insurance business. These laws make it harder to share information for marketing purposes, such as generating new sales leads. Similarly, state do not call lists, as well as the recently created national do not call list,
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In certain states, insurance companies offering pre-funded funeral insurance products must offer a free-look period of typically 30 days, during which the purchaser of the product may cancel and receive a full refund. Furthermore, in certain states, death benefits under pre-funded funeral insurance products must grow with the Consumer Price Index.
Insurance Holding Company Statutes |
Although as a holding company, Assurant, Inc. is not regulated as an insurance company, we own capital stock in insurance subsidiaries and therefore are subject to state insurance holding company statutes, as well as certain other laws, of each of the states of domicile of our insurance subsidiaries. All holding company statutes, as well as other laws, require disclosure and, in some instances, prior approval of material transactions between an insurance company and an affiliate. The holding company statutes as well as other laws also require, among other things, prior approval of an acquisition of control of a domestic insurer, some transactions between affiliates and the payment of extraordinary dividends or distributions.
Insurance Regulation Concerning Dividends |
The payment of dividends to us by any of our insurance subsidiaries in excess of a certain amount (i.e., extraordinary dividends) must be approved by the subsidiarys domiciliary state department of insurance. Ordinary dividends, for which no regulatory approval is generally required, are limited to amounts determined by formula, which varies by state. The formula for more than half of the states in which our subsidiaries are domiciled is the greater of (i) 10% of the statutory surplus as of the end of the prior year or (ii) the prior years statutory net income. In the remaining states in which our subsidiaries are domiciled, the formula is the lesser amount of clauses (i) and (ii). Some states, however, have an additional stipulation that dividends may only be paid out of earned surplus. If insurance regulators determine that payment of an ordinary dividend or any other payments by our insurance subsidiaries to us (such as payments under a tax sharing agreement or payments for employee or other services) would be adverse to policyholders or creditors, the regulators may block such payments that would otherwise be permitted without prior approval. As part of the regulatory approval process for the acquisition of ABIG in 1999, we entered into an agreement with the Florida Insurance Department pursuant to which ABIC and ABLAC have agreed to limit the amount of ordinary dividends they would pay to us to an amount no greater than 50% of the amount otherwise permitted under Florida law. This agreement expires in August 2004. In addition, we entered into an agreement with the New York Insurance Department as part of the regulatory approval process for the merger of Bankers American Life Assurance Company, one of our New York-domiciled insurance subsidiaries, into First Fortis Life Insurance Company in 2001 pursuant to which First Fortis Life Insurance Company agreed not to pay any dividends to us until fiscal year 2004. No assurance can be given that there will not be further regulatory actions restricting the ability of our insurance subsidiaries to pay dividends. Based on the dividend restrictions under applicable laws and regulations, the maximum amount of dividends that our subsidiaries could pay to us in 2003 without regulatory approval was approximately $290 million, of which approximately $99.5 million had been paid as of December 31, 2003.
Statutory Accounting Practices (SAP) |
SAP is a basis of accounting developed to assist insurance regulators in monitoring and regulating the solvency of insurance companies. It is primarily concerned with measuring an insurers statutory surplus. Accordingly, statutory accounting focuses on valuing assets and liabilities of insurers at financial reporting dates in accordance with appropriate insurance law and regulatory provisions applicable in each insurers domiciliary state.
GAAP is concerned with a companys solvency, but it is also concerned with other financial measurements, such as income and cash flows. Accordingly, GAAP gives more consideration to appropriate matching of revenue and expenses and accounting for managements stewardship of assets than does SAP. As a direct
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Statutory accounting practices established by the NAIC and adopted, for the most part, by the various state insurance regulators determine, among other things, the amount of statutory surplus and statutory net income of our insurance subsidiaries and thus determine, in part, the amount of funds they have available to pay as dividends to us.
Assessments for Guaranty Funds |
Virtually all states require insurers licensed to do business in their state to bear a portion of the loss suffered by some insureds as a result of the insolvency of other insurers. Depending upon state law, insurers can be assessed an amount that is generally equal to between 1% and 3% of premiums written for the relevant lines of insurance in that state each year to pay the claims of an insolvent insurer. A portion of these payments is recoverable through premium rates, premium tax credits or policy surcharges. Significant increases in assessments could limit the ability of our insurance subsidiaries to recover such assessments through tax credits or other means. In addition, there have been some legislative efforts to limit or repeal the tax offset provisions, which efforts, to date, have been generally unsuccessful. These assessments are expected to increase in the future as a result of recent insolvencies.
Insurance Regulations Concerning Change of Control |
Many state insurance regulatory laws intended primarily for the protection of policyholders contain provisions that require advance approval by the state insurance commissioner of any change in control of an insurance company that is domiciled, or, in some cases, having such substantial business that it is deemed to be commercially domiciled, in that state. Prior to granting such approval, the state insurance commissioner will consider such factors as the financial strength of the applicant, the integrity of the applicants board of directors and executive officers, the applicants plans for the future operations of the domestic insurer and any anti-competitive results that may arise from the consummation of the acquisition of control. We own, directly or indirectly, all of the shares of stock of insurance companies domiciled in the states listed in the General section above. Control is generally presumed to exist through the ownership of 10% (5% in the case of Florida, in which certain of our insurance subsidiaries are domiciled) or more of the voting securities of a domestic insurance company or of any company that controls a domestic insurance company. Any purchaser of shares of common stock representing 10% (5% in the case of Florida) or more of the voting power of our capital stock will be presumed to have acquired control of our domestic insurance subsidiaries unless, following application by that purchaser in each insurance subsidiarys state of domicile, the relevant insurance commissioner determines otherwise.
In addition to these filings, the laws of many states contain provisions requiring pre-notification to state agencies prior to any change in control of a non-domestic insurance company admitted to transact business in that state. While these pre-notification statutes do not authorize the state agency to disapprove the change of control, they do authorize issuance of cease and desist orders with respect to the non-domestic insurer if it is determined that some conditions, such as undue market concentration, would result from the acquisition.
Any future transactions that would constitute a change in control of any of our insurance subsidiaries would generally require prior approval by the insurance departments of the states in which our insurance subsidiaries are domiciled or commercially domiciled and may require pre-acquisition notification in those states that have adopted pre-acquisition notification provisions and in which such insurance subsidiaries are admitted to transact business. Regulatory approval for a change of control may also be required in one or more of the foreign jurisdictions in which we have insurance subsidiaries.
These requirements may deter, delay or prevent transactions affecting the control of our common stock, including transactions that could be advantageous to our stockholders.
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Insurance Regulatory Information System |
The NAIC Insurance Regulatory Information System (IRIS) was developed to help state regulators identify companies that may require special attention. The IRIS system consists of a statistical phase and an analytical phase whereby financial examiners review annual statements and financial ratios. The statistical phase consists of 12 key financial ratios based on year-end data that are generated from the NAIC database annually; each ratio has an established usual range of results. These ratios assist state insurance departments in executing their statutory mandate to oversee the financial condition of insurance companies.
A ratio result falling outside the usual range of IRIS ratios is not considered a failing result; rather, unusual values are viewed as part of the regulatory early monitoring system. Furthermore, in some years, it may not be unusual for financially sound companies to have several ratios with results outside the usual ranges. Generally, an insurance company will become subject to regulatory scrutiny if it falls outside the usual ranges of four or more of the ratios. In the past, variances in certain ratios of our insurance subsidiaries have resulted in inquiries from insurance departments, to which we have responded. These inquiries have not led to any restrictions affecting our operations.
Risk-Based Capital (RBC) Requirements
In order to enhance the regulation of insurer solvency, the NAIC has adopted formulas and model laws to implement RBC requirements for life and health insurers, for property and casualty insurers, and, most recently, for health organizations. These formulas and model laws are designed to determine minimum capital requirements and to raise the level of protection that statutory surplus provides for policyholder obligations.
Under laws adopted by individual states, insurers having less total adjusted capital generally, as defined by the National Association of Insurance Commissioners (NAIC), than that required by the relevant RBC formula will be subject to varying degrees of regulatory action, depending on the level of capital inadequacy. The RBC laws provide for four levels of regulatory action. The extent of regulatory intervention and action increases as the ratio of total adjusted capital to RBC falls. The first level, the company action level, requires an insurer to submit a plan of corrective actions to the regulator if total adjusted capital falls below 200% of the RBC amount (or below 250%, when the insurer has a negative trend as defined under the RBC laws if the insurer is a life and health insurer). The second level, the regulatory action level, requires an insurer to submit a plan containing corrective actions and requires the relevant insurance commissioner to perform an examination or other analysis and issue a corrective order if total adjusted capital falls below 150% of the RBC amount. The third level, the authorized control level, authorizes the relevant insurance commissioner to take whatever regulatory actions considered necessary to protect the best interests of the policyholders and creditors of the insurer, which may include the actions necessary to cause the insurer to be placed under regulatory control, i.e., rehabilitation or liquidation, if total adjusted capital falls below 100% of the RBC amount. The fourth action level is the mandatory control level, which requires the relevant insurance commissioner to place the insurer under regulatory control if total adjusted capital falls below 70% of the RBC amount.
The formulas have not been designed to differentiate among adequately capitalized companies that operate with higher levels of capital. Therefore, it is inappropriate and ineffective to use the formulas to rate or to rank these companies. At December 31, 2003, all of our insurance subsidiaries had total adjusted capital in excess of amounts requiring company or regulatory action at any prescribed RBC action level.
Federal Regulation |
General |
In 1945, the U.S. Congress enacted the McCarran-Ferguson Act which declared the regulation of insurance to be primarily the responsibility of the individual states. Although repeal of McCarran-Ferguson is debated in the U.S. Congress from time to time, the federal government generally does not directly regulate the insurance business. However, federal legislation and administrative policies in several areas, including
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Federal Securities Regulation of Fortis Variable Insurance Product Business |
Two of our subsidiaries, Fortis Benefits Insurance Company and First Fortis Life Insurance Company, are subject to various federal securities regulations because they have been involved in the issuance of variable insurance products that are required to be registered as securities under the Securities Act of 1933, as amended (Securities Act). These registered insurance contracts, which are no longer being sold, have been 100% reinsured with The Hartford through modified coinsurance agreements. The Hartford now administers this closed block of business pursuant to a third-party administration agreement. Nevertheless, because these two subsidiaries are still considered the issuers of the products, they are subject to regulation by the SEC. As a result, they must file periodic reports under the Securities Exchange Act of 1934, as amended (Exchange Act) and are periodically examined for compliance with applicable federal securities laws by the SEC.
The Health Insurance Portability and Accountability Act of 1996 (HIPAA) |
As with other lines of insurance, the regulation of health insurance historically has been within the domain of the states. However, HIPAA and the implementing regulations promulgated thereunder by the Department of Health and Human Services impose new obligations for issuers of health and dental insurance coverage and health and dental benefit plan sponsors. HIPAA requires certain guaranteed issuance and renewability of health insurance coverage for individuals and small employer groups (generally 50 or fewer employees) and limits exclusions based on pre-existing conditions. Most of the insurance reform provisions of HIPAA became effective for plan years beginning on or after July 1, 1997.
HIPAA also establishes new requirements for maintaining the confidentiality and security of individually identifiable health information and new standards for electronic health care transactions. The Department of Health and Human Services promulgated final HIPAA regulations in 2002. The privacy regulations required compliance by April 2003, the electronic transactions regulations by October 2003 and the security regulations by April 2005. As have other entities in the health care industry, we have incurred substantial costs in meeting the requirements of these HIPAA regulations and expect to continue to incur costs to achieve and to maintain compliance. We have been working diligently to comply with these regulations in the time periods required. However, there can be no assurances that we will achieve such compliance with all of the required transactions or that other entities with which we interact will take appropriate action to meet the compliance deadlines. Moreover, as a consequence of these new standards for electronic transactions, we may see an increase in the number of health care transactions that are submitted to us in paper format, which could increase our costs to process medical claims.
HIPAA is far-reaching and complex and proper interpretation and practice under the law continue to evolve. Consequently, our efforts to measure, monitor and adjust our business practices to comply with HIPAA are ongoing. Failure to comply could result in regulatory fines and civil lawsuits. Knowing and intentional violations of these rules may also result in federal criminal penalties.
The Terrorism Risk Insurance Act |
On November 26, 2002, the Terrorism Risk Insurance Act was enacted to ensure the availability of insurance coverage for terrorist acts in the United States. This law requires insurers writing certain lines of property and casualty insurance to offer coverage against certain acts of terrorism causing damage within the United States or to U.S. flagged vessels or aircraft. In return, the law requires the federal government to indemnify such insurers for 90% of insured losses resulting from covered acts of terrorism, subject to a premium-based deductible. Any existing policy exclusions for such coverage were immediately nullified by the law, although such exclusions may be reinstated if either the insured consents to reinstatement or fails to pay any applicable increase in premium resulting from the additional coverage within 30 days of being notified of such an increase. It should be noted that an act of terrorism as defined by the law excludes purely domestic terrorism. For an act of terrorism to have occurred, the U.S. Secretary of the Treasury must make several
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The Terrorism Risk Insurance Act required the U.S. Secretary of the Treasury to conduct an expedited study as to whether or not group life insurance should be covered under the law. Based on the study, the Secretary concluded that inclusion of group life insurance was not appropriate.
We have a geographically diverse block of group life business and have secured limited reinsurance protection against catastrophic losses in our group life product line. Nevertheless, we are exposed to the risk of substantial group life losses from a catastrophe, including a terrorist act.
Given that our property and casualty insurance products primarily cover personal residences and personal property, we do not believe our property and casualty exposure to terrorist acts to be significant.
USA PATRIOT Act |
On October 26, 2001, the International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001 was enacted into law as part of the USA PATRIOT Act. Among its many provisions the law requires that financial institutions adopt anti-money laundering programs that include policies, procedures and controls to detect and prevent money laundering, designate a compliance officer to oversee the program and provide for employee training, and periodic audits in accordance with regulations proposed by the U.S. Treasury Department. Proposed Treasury regulations governing portions of our life insurance business would require us to develop and implement procedures designed to detect and prevent money laundering and terrorist financing. We remain subject to U.S. regulations that prohibit business dealings with entities identified as threats to national security. We have licensed software to enable us to detect and prevent such activities in compliance with existing regulations and we are developing policies and procedures designed to comply with the proposed regulations should they come into effect.
There are significant criminal and civil penalties that can be imposed for violation of the aforementioned Treasury regulations. We believe that the steps we are taking to comply with the current regulations and to prepare for compliance with the proposed regulations should be sufficient to minimize the risks of such penalties.
Gramm-Leach-Bliley Act |
On November 12, 1999, the Gramm-Leach-Bliley Act of 1999 became law, implementing fundamental changes in the regulation of the financial services industry in the United States. The act permits the transformation of the already converging banking, insurance and securities industries by permitting mergers that combine commercial banks, insurers and securities firms under one holding company. Under the Act, national banks retain their existing ability to sell insurance products in some circumstances. In addition, bank holding companies that qualify and elect to be treated as financial holding companies may engage in activities, and acquire companies engaged in activities, that are financial in nature or incidental or complementary to such financial activities, including acting as principal, agent or broker in selling life, property and casualty and other forms of insurance, including annuities. A financial holding company can own any kind of insurance company or insurance broker or agent, but its bank subsidiary cannot own the insurance company. Under state law, the financial holding company would need to apply to the insurance commissioner in the insurers state of domicile for prior approval of the acquisition of the insurer, and the act provides that the commissioner, in considering the application, may not discriminate against the financial holding company because it is affiliated with a bank. Under the Act, no state may prevent or interfere with affiliations between banks and insurers, insurance agents or brokers, or the licensing of a bank or affiliate as an insurer or agent or broker. Privacy provisions of the Act became fully effective in 2001. These provisions established consumer protections regarding the security and confidentiality of nonpublic personal information and require us to make full disclosure of our privacy policies to our customers.
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Regulation by the Federal Reserve Board |
Fortis Bank, which is a subsidiary of Fortis, obtained approval in 2002 from state banking authorities and the Federal Reserve Board to establish branch offices in Connecticut and New York. By virtue of the opening of these offices, the U.S. operations of Fortis, including our operations, became subject to the nonbanking prohibitions of Section 4 of the BHCA. In order to continue to operate its U.S. nonbanking operations, including the insurance activities conducted by our subsidiaries, Fortis notified the Federal Reserve Board of its election to be a financial holding company for purposes of the BHCA and the Federal Reserve Boards implementing regulations in Regulation Y. Pursuant to Fortis status as a financial holding company, Fortis and its subsidiaries, including our subsidiaries, are permitted to engage in nonbanking activities in the United States that are financial in nature or incidental to a financial activity as defined in Section 4(k) of the BHCA and in Regulation Y. In particular, Fortis status as a financial holding company permits Fortis to engage in the United States in both banking activities through the U.S. branches of Fortis Bank and insurance activities through our subsidiaries. Activities that are financial in nature include, among other things, insuring, guaranteeing or indemnifying against loss, harm, damage, illness, disability, or death, or providing and issuing annuities, and acting as principal, agent or broker for purposes of the foregoing.
Fortis will continue to qualify as a financial holding company so long as Fortis Bank remains well capitalized and well managed as those terms are defined in Regulation Y. Generally, Fortis Bank will be considered well capitalized if it maintains tier 1 and total risk-based capital ratios of at least 6% and 10%, respectively, and will be considered well managed if it has received at least a satisfactory composite rating of its U.S. branch operations at its most recent examination. As a general matter, as long as Fortis controls us within the meaning of the BHCA or owns more than 5% of any class of our voting shares, the BHCA does not permit us to engage in nonfinancial activities such as manufacturing, distribution of goods and real estate development except to the extent that another exemption under the BHCA, such as the merchant banking exemption, is available. If the Federal Reserve Board were to determine that any of our existing activities were not insurance activities or not otherwise financial in nature or not incidental to such activities, or if Fortis lost and was unable to regain its financial holding company status, we could be required to restructure our operations or divest some of these operations, which could result in increased costs and reduced profitability.
The Federal Reserve Board oversees all of Fortis direct and indirect U.S. subsidiaries for compliance with the BHCA, including our Company. Our Company will be considered a subsidiary of Fortis so long as Fortis owns 25% or more of any class of our voting shares or otherwise controls us within the meaning of the BHCA. In addition, even if we are not a subsidiary of Fortis, the nonfinancial activities restrictions of the BHCA and Regulation Y (discussed above) would continue to apply so long as Fortis owned more than 5% of any class of our voting shares and another BHCA exemption, such as the merchant banking exemption, is not available.
Legislative Developments |
Legislation has been introduced in the U.S. Congress that would allow state-chartered and regulated insurance companies, such as our insurance subsidiaries, to choose instead to be regulated exclusively by a federal insurance regulator. We do not believe that such legislation will be enacted during the current Congressional term.
Numerous proposals to reform the current health care system have been introduced in the U.S. Congress and in various state legislatures. Proposals have included, among other things, modifications to the existing employer-based insurance system, a quasi-regulated system of managed competition among health insurers, and a single-payer, public program. Changes in health care policy could significantly affect our business. For example, federally mandated, comprehensive major medical insurance, if proposed and implemented, could partially or fully replace some of our current products. Furthermore, legislation has been introduced from time to time in the U.S. Congress that could result in the federal government assuming a more direct role in regulating insurance companies.
In addition, the U.S. Congress is considering the expansion of risk retention groups, which were originally established in 1986 to address the lack of available product liability insurance. Risk retention groups may be
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There is also legislation pending in the U.S. Congress and in various states designed to provide additional privacy protections to consumer customers of financial institutions. Legislation in the United States or other jurisdictions could affect our ability to market our products or otherwise limit the nature or scope of our insurance operations.
The NAIC and individual states have been studying small face amount life insurance for the past two years. Some initiatives that have been raised at the NAIC include further disclosure for small face amount policies and restrictions on premium to benefit ratios. The NAIC is also studying other issues such as suitability of insurance products for certain customers. This may have an effect on our pre-funded funeral insurance business. Suitability requirements such as a customer assets and needs worksheet could extend and complicate the sale of pre-funded funeral insurance products.
Medical Savings Accounts were created by U.S. Congress as a trial program in 1996. MSAs allow self-employed individuals, as well as employees of small employers (i.e., employers with 50 or fewer employees), to set aside funds on a tax-free basis for the purpose of paying eligible medical expenses, so long as such persons are covered under a high-deductible health insurance policy. MSA health insurance policies have become an important and growing product line for Assurant Health. On December 8, 2003, the Medicare Prescription & Modernization Act was signed into law. This Act includes a provision providing for HSAs. In addition, the House passed a 12-month extension on MSAs, providing a transition period for the continued offering of MSAs.
Foreign Jurisdictions
A portion of our business is carried on in foreign countries. We have insurance subsidiaries domiciled in Argentina, Brazil, the Dominican Republic, the Turks and Caicos Islands and the United Kingdom. Certain subsidiaries operate in Canada under the branch system. The degree of regulation and supervision in foreign jurisdictions varies from minimal in some to stringent in others. Generally, our insurance subsidiaries operating in such jurisdictions must satisfy local regulatory requirements. Licenses issued by foreign authorities to our insurance subsidiaries are subject to modification or revocation by such authorities, and these subsidiaries could be prevented from conducting business in certain of the jurisdictions where they currently operate. In the past, we have been allowed to modify our operations to conform with new licensing requirements in most jurisdictions.
In addition to licensing requirements, our foreign operations are also regulated in various jurisdictions with respect to: currency, policy language and terms, amount and type of security deposits, amount and type of reserves, amount and type of local investment and the share of profits to be returned to policyholders on participating policies.
Some foreign countries regulate rates on various types of policies. Certain countries have established reinsurance institutions, wholly or partially owned by the state, to which admitted insurers are obligated to cede a portion of their business on terms which do not always allow foreign insurers full compensation. In some countries, regulations governing constitution of technical reserves and remittance balances may hinder remittance of profits and repatriation of assets.
Employees
As of December 31, 2003, we had approximately 12,200 employees. In Assurant Solutions, we have employees in Argentina and Brazil who are represented by labor unions. None of our other employees are subject to collective bargaining agreements governing employment with us or represented by labor unions. We believe that we have an excellent relationship with our employees.
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Item 2. | Properties |
We own seven properties, including five buildings that serve as headquarters locations for our operating business segments and two buildings that serve as call centers for Assurant Solutions. Assurant Solutions has headquarters buildings located in Miami, Florida and Atlanta, Georgia. Assurant Solutions call centers are located in Florence, South Carolina and Springfield, Ohio. Assurant Employee Benefits has a headquarters building in Kansas City, Missouri. Assurant Health has a headquarters building in Milwaukee, Wisconsin. Assurant Preneeds AMLIC channel has a headquarters building in Rapid City, South Dakota. We lease office space for various offices and service centers located throughout the United States and internationally, including our New York corporate office, Assurant PreNeeds Independent channel headquarters in Atlanta and our data center in Woodbury, Minnesota. Our leases have terms ranging from month-to-month to twenty-five years. We believe that our owned and leased properties are adequate for our current business operations.
Item 3. | Legal Proceedings |
We are regularly involved in litigation in the ordinary course of business, both as a defendant and as a plaintiff. We may from time to time be subject to a variety of legal and regulatory actions relating to our current and past business operations. While we cannot predict the outcome of any pending or future litigation, examination or investigation, we do not believe that any pending matter will have a material adverse effect on our financial condition or results of operations.
Assurant Solutions segment is subject to a number of pending actions, primarily in the State of Mississippi, many of which allege that our credit insurance products were packaged and sold with lenders products without buyer consent. The judicial climate in Mississippi is such that the outcome of these cases is extremely unpredictable. We have been advised by legal counsel that we have meritorious defenses to all claims being asserted against us. We believe, based on information currently available, that the amounts accrued for any losses are adequate.
American Bankers Insurance Group (ABIG), part of Assurant Solutions, on behalf of certain subsidiaries, including ABIC and ABLAC, previously entered into a Consent Order and a comprehensive Compliance Plan with 43 participating states relating to compliance with the often disparate state insurance laws, regulations and administrative interpretations which have been difficult to apply to the marketing of ABIGs credit insurance products through financial institutions, retailers and other entities offering consumer financing as a regular part of their business. In addition to an initial settlement of $12 million, ABIG agreed to a multi-state market conduct examination commencing November 23, 1999, for review of ABIGs implementation of the Compliance Plan. A final report was issued on December 19, 2001, and ABIG paid a final settlement of $3 million to participating states.
In February 2002, the State of Minnesota initiated an enforcement action against ABIC and ABLAC, in connection with certain alleged regulatory violations. Thereafter, ABIC and ABLAC filed suit in Minnesota state court seeking to enjoin the enforcement action because the alleged regulatory matters included within the enforcement action were resolved as a part of the above-described Consent Order and Compliance Plan to which Minnesota was a party. In February 2003, the State of Minnesota, ABIC and ABLAC reached a final settlement of all matters included within the enforcement action and the separate state court action filed by ABIC and ABLAC. Pursuant to the settlement, ABIC and ABLAC each agreed to pay $100,000 to the State of Minnesota and agreed to compensate the state for its investigative costs, which totaled $1.8 million. In addition, ABIC and ABLAC agreed to stop selling insurance in Minnesota for five years, though they could apply for reinstatement in 20 months. Other member companies of the Assurant Solutions segment with product lines that overlap those offered by ABIC and ABLAC currently remain authorized to do business in the State of Minnesota. We do not believe that the effect of the settlement during the next five years will have a material impact on our financial condition or results of operations.
On October 1, 2003, a grand jury in Mower County, Minnesota issued an indictment of ABIC and two corporate officers of the Assurant Solutions segment. The indictment alleges that ABIC and its two named corporate officers each violated the Minnesota Fair Campaign Practices Act in connection with two contributions by ABIC to the Republican National State Election Committee totaling $15,000. The
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In addition, 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 risks from 1995 to 1997. ARIC and a foreign affiliate ceded a portion of these risks to other reinsurers (retrocessionaires). ARIC ceased writing 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 are seeking to avoid certain treaties on various grounds, including material misrepresentation and non-disclosure by the ceding companies and intermediaries involved in the programs. Similarly, some of the retrocessionaires are seeking avoidance of certain treaties with ARIC and the other reinsurers and some reinsureds are seeking collection of disputed balances under some of the treaties. The disputes 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, arbitration and/or litigation between multiple layers of retrocessionaires, reinsurers, ceding companies and intermediaries, including brokers, in an effort to resolve these disputes. Many of those disputes relating to the 1995 program year, including those involving ARIC, were settled on December 3, 2003. Loss accruals previously established relating to the 1995 program year were adequate. However, our exposure under the 1995 program year was less significant than the exposure remaining under the 1996 and 1997 program years. We believe, based on information currently available, that the amounts accrued for currently outstanding disputes are adequate. 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 the outcomes with certainty.
As a result of regulatory scrutiny of our industry practices or our businesses, such as examinations of race-based premiums charged in the past by two of our acquired subsidiaries, it is possible that we may be subject to legal proceedings in the future relating to those practices and businesses. See Item 1 Business Regulation.
Item 4. | Submission of Matters to a Vote of Security Holders |
At a Special Meeting of our then sole stockholder, Fortis, Inc., held on October 15, 2003, the following matters were brought before and voted upon by our sole stockholder with the number of votes as indicated below:
1. A proposal to approve the establishment and maintenance of the Assurant, Inc. 2004 Long-Term Incentive Plan, Assurant, Inc. 2004 Employee Stock Purchase Plan, Assurant, Inc. Executive Management Incentive Plan and Assurant, Inc. Directors Compensation Plan. |
Against or | Broker | |||||||||||
For | Withheld | Abstain | Non-votes | |||||||||
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100
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0 | 0 | 0 |
2. A proposal to approve and adopt the merger agreement between Assurant, Inc. and Fortis, Inc., providing for the redomestication of Fortis, Inc. to the State of Delaware pursuant to a merger of Fortis, Inc. with and into Assurant, Inc. |
Against or | Broker | |||||||||||
For | Withheld | Abstain | Non-votes | |||||||||
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|
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100
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0 | 0 | 0 |
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PART II
Item 5. | Market For Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Common Stock Price
Our common stock began trading on the New York Stock Exchange (NYSE) under the symbol AIZ on February 5, 2004. Prior to such date, there was no established public trading market for our common stock. On March 1, 2004, the closing price of our common stock on the NYSE was $25.80.
Holders
As of March 1, 2004, there were approximately 14,900 holders of record of our common stock, and we estimate that there were approximately 38 beneficial owners of our common stock.
Preferred Stock
Our board of directors has the authority, without further action of our stockholders, to issue up to 200,000,000 shares of preferred stock, par value $1.00 per share, in one or more series and to fix the powers, preferences, rights and qualifications, limitations or restrictions thereof, which may include dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences and the number of shares constituting any series or the designations of the series.
As of March 1, 2004, we have designated two series of mandatorily redeemable preferred stock: Series B, of which 19,160 shares were outstanding; and Series C, of which 5,000 shares were outstanding. All of such outstanding shares have a liquidation price of $1,000 per share and rank senior to our common stock with respect to the right to receive dividends and to receive distributions upon the liquidation, dissolution or winding up of Assurant, Inc. Holders of the Series B Preferred Stock are entitled to receive cumulative dividends at the rate of 4.0% per share per annum, multiplied by the $1,000 per share liquidation price, and holders of the Series C Preferred Stock are entitled to receive dividends at the rate of 4.5% per share per annum, multiplied by the $1,000 per share liquidation price. All dividends are payable in arrears on a quarterly basis. Any dividend that is not paid on a specified dividend payment date with respect to a share of such Preferred Stock shall be deemed added to the liquidation price of such share for purposes of computing the future dividends on such share, until such delinquent dividend has been paid in full.
Holders of the Series B Preferred Stock may elect to have any or all of their shares redeemed by us at any time after April 1, 2002 and we must redeem all shares of the Series B Preferred Stock no later than July 1, 2017. Holders of the Series C Preferred Stock may elect to have any or all of their shares redeemed by us at any time after the earlier of (i) April 1, 2022, and (ii) certain specified events, and we must redeem all shares of the Series C Preferred Stock no later than July 1, 2027. We also have the right and the obligation to redeem the Series B Preferred Stock and Series C Preferred Stock upon the occurrence of certain specified events. The redemption price in all cases shall equal the $1,000 per share liquidation price plus all accumulated and unpaid dividends. We are not required to establish any sinking fund or similar funds with respect to such redemptions.
None of the shares of Series B Preferred Stock or Series C Preferred Stock are convertible into common stock or any other equity security of Assurant, Inc. However, holders of the Series B Preferred Stock and Series C Preferred Stock are entitled to one vote per share owned of record on all matters voted upon by Assurant, Inc. stockholders, voting with the holders of common stock as a single class, and not as a separate class or classes. The shares of Series B Preferred Stock and Series C Preferred Stock are subject to certain restrictions on transferability, and we have the right of first refusal to acquire the shares if any holder thereof desires to make a transfer not otherwise permitted by the terms thereof.
42
Dividend Policy
Our board of directors currently intends to authorize the payment of a dividend of $0.07 per share of common stock per quarter to our stockholders of record beginning in the second quarter of 2004. Any determination to pay dividends will be at the discretion of our board of directors and will be dependent upon: our subsidiaries payment of dividends and/or other statutorily permissible payments to us; our results of operations and cash flows; our financial position and capital requirements; general business conditions; any legal, tax, regulatory and contractual restrictions on the payment of dividends; and any other factors our board of directors deems relevant.
We are a holding company and, therefore, our ability to pay dividends, service our debt and meet our other obligations depends primarily on the ability of our insurance subsidiaries to pay dividends and make other statutorily permissible payments to us. Our insurance subsidiaries are subject to significant regulatory and contractual restrictions limiting their ability to declare and pay dividends. See Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations Risk Factors Risks Relating to Our Company The inability of our subsidiaries to pay dividends to us in sufficient amounts could harm our ability to meet our obligations and pay future stockholder dividends. For the calendar year 2003, the maximum amount of dividends that our subsidiaries could pay to us under applicable laws and regulations without prior regulatory approval was approximately $290 million, of which approximately $99.5 million had been paid as of December 31, 2003. In addition, as part of the regulatory approval process for the acquisition of ABIG in 1999, we entered into an agreement with the Florida Insurance Department pursuant to which two of our subsidiaries, ABIC and ABLAC, have agreed to limit the amount of ordinary dividends they would pay to us to an amount no greater than 50% of the amount otherwise permitted under Florida law. This agreement expires in August 2004. One of our subsidiaries, First Fortis Life Insurance Company, also entered into an agreement with the New York Insurance Department as part of the regulatory approval process for the merger of Bankers American Life Assurance Company into First Fortis Life Insurance Company in 2001 pursuant to which First Fortis Life Insurance Company has agreed not to pay any ordinary dividends to us until fiscal year 2004.
In addition, payments of dividends on the Common Stock are subject to the preferential rights of the Series B and Series C Preferred Stock described above, as well as any other outstanding series of preferred stock that our board of directors may create from time to time. For more information regarding restrictions on the payment of dividends by us and our insurance subsidiaries, including pursuant to the terms of our credit facilities, see Item 1 Business Regulation United States State Regulation Insurance Regulation Concerning Dividends and Statutory Accounting Practices (SAP) and Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources.
In addition, our $500 million senior revolving credit facility restricts payments of dividends in the event that an event of default under the facility has occurred or a proposed dividend payment would cause an event of default under the facility. The revolving credit facility provides for general events of default including: failure to pay principal of or interest on any loans under the revolving credit facility; failure to perform or comply with any convenant; breach of any representations or warranties made; default in the performance or compliance with any term that is not remedied or waived within a specified period of time; loss of any insurance license or certain regulatory actions if such action would reasonably be expected to have a material adverse effect; acceleration of or failure to make payments in respect of debt exceeding a specified amount subject to any applicable grace period, or any breach or default with respect to any other material term of such debt; judgment defaults in excess of a specified amount; certain events of bankruptcy or dissolution; and failure to comply with certain ERISA matters. In addition, events of default include the acquisition of more than 30% of our voting power and/or equity securities by any person or group (other than the existing control group).
43
Recent Sales of Unregistered Securities
During the period from 2000 to 2003, pursuant to the Assurant Investment Plan, the Company granted to key employees, in exchange for all or a portion of such employees eligible compensation, options to purchase shares or other equity interests in certain third-party mutual funds, which shares or other equity interests have been registered under the Securities Act. The option grants were made by the Company in reliance on the exemptions from the registration requirements of the Securities Act provided by (a) Rule 701 under the Securities Act as issuances by a company not subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (Exchange Act), pursuant to a written compensatory benefit plan of such company established for its directors and senior employees, and/or (b) Section 4(2) of the Securities Act as issuances to a limited number of sophisticated investors in transactions not involving any public offering.
44
Item 6. | Selected Financial Data |
Five-Year Summary of Selected Financial Data Assurant, Inc.
As of and for the Years Ended December 31, | ||||||||||||||||||||||
|
||||||||||||||||||||||
2003 | 2002 | 2001 | 2000 | 1999 | ||||||||||||||||||
|
|
|
|
|
||||||||||||||||||
(In thousands, except share amounts and per share data) | ||||||||||||||||||||||
Consolidated Statement of Operations
Data:
|
||||||||||||||||||||||
Revenues
|
||||||||||||||||||||||
Net earned premiums and other considerations
|
$ | 6,156,772 | $ | 5,681,596 | $ | 5,242,185 | $ | 5,144,375 | $ | 4,508,795 | ||||||||||||
Net investment income
|
607,313 | 631,828 | 711,782 | 690,732 | 590,487 | |||||||||||||||||
Net realized gains (losses) on investments
|
1,868 | (118,372 | ) | (119,016 | ) | (44,977 | ) | 13,616 | ||||||||||||||
Amortization of deferred gain on disposal of
businesses
|
68,277 | 79,801 | 68,296 | 10,284 | | |||||||||||||||||
Gain on disposal of businesses
|
| 10,672 | 61,688 | 11,994 | | |||||||||||||||||
Fees and other income
|
231,983 | 246,675 | 221,939 | 399,571 | 357,878 | |||||||||||||||||
|
|
|
|
|
||||||||||||||||||
Total revenues
|
7,066,213 | 6,532,200 | 6,186,874 | 6,211,979 | 5,470,776 | |||||||||||||||||
Benefits, losses and expenses
|
||||||||||||||||||||||
Policyholder benefits
|
3,657,763 | 3,435,175 | 3,240,091 | 3,208,054 | 3,061,488 | |||||||||||||||||
Amortization of deferred acquisition costs and
value of business acquired
|
909,149 | 876,185 | 875,703 | 766,904 | 494,000 | |||||||||||||||||
Underwriting, general and administrative expenses
|
1,919,989 | 1,732,047 | 1,619,765 | 1,801,196 | 1,649,811 | |||||||||||||||||
Amortization of goodwill
|
| | 113,300 | 106,773 | 57,717 | |||||||||||||||||
Interest expense
|
1,175 | | 14,001 | 24,726 | 39,893 | |||||||||||||||||
Distributions on preferred securities of
subsidiary trusts
|
112,958 | 118,396 | 118,370 | 110,142 | 53,824 | |||||||||||||||||
Interest premium on redemption of preferred
securities of subsidiary trusts
|
205,822 | | | | | |||||||||||||||||
|
|
|
|
|
||||||||||||||||||
Total benefits, losses and expenses
|
6,806,856 | 6,161,803 | 5,981,230 | 6,017,795 | 5,356,733 | |||||||||||||||||
Income before income taxes and cumulative effect
of change in accounting principle
|
259,357 | 370,397 | 205,644 | 194,184 | 114,043 | |||||||||||||||||
Income taxes
|
73,705 | 110,657 | 107,591 | 104,500 | 57,657 | |||||||||||||||||
|
|
|
|
|
||||||||||||||||||
Net income before cumulative effect of change in
accounting principle
|
$ | 185,652 | $ | 259,740 | $ | 98,053 | $ | 89,684 | $ | 56,386 | ||||||||||||
Cumulative effect of change in accounting
principle
|
| (1,260,939 | ) | | | | ||||||||||||||||
|
|
|
|
|
||||||||||||||||||
Net income (loss)
|
$ | 185,652 | $ | (1,001,199 | ) | $ | 98,053 | $ | 89,684 | $ | 56,386 | |||||||||||
|
|
|
|
|
||||||||||||||||||
Per Share Data:
|
||||||||||||||||||||||
Net income before cumulative effect of change in
accounting principle
|
$ | 1.70 | $ | 2.38 | $ | 0.90 | $ | 0.85 | $ | 0.85 | ||||||||||||
Net income (loss) per share
|
$ | 1.70 | $ | (9.17 | ) | $ | 0.90 | $ | 0.85 | $ | 0.85 | |||||||||||
Weighted average of basic and diluted shares of
common stock outstanding(1)
|
109,222,276 | 109,222,276 | 109,222,276 | 104,915,373 | 66,122,451 | |||||||||||||||||
Dividends per share:
|
||||||||||||||||||||||
Common Stock
|
$ | 1.66 | $ | .38 | $ | 1.00 | $ | .20 | $ | |
45
As of and for the Years Ended December 31,
2003
2002
2001
2000
1999
(In thousands, except share amounts and per share data)
$
11,881,802
$
10,694,772
$
10,319,117
$
10,750,554
$
10,110,136
23,728,319
22,279,055
24,559,157
24,115,139
22,216,730
12,881,796
12,388,623
12,064,643
11,534,891
10,336,265
1,750,000
238,983
1,007,243
196,224
1,446,074
1,446,074
1,449,738
889,850
24,160
24,660
25,160
25,160
22,160
2,632,103
2,555,059
3,452,405
3,367,768
3,164,297
$
24.10
$
23.39
$
31.61
$
32.10
$
47.86
(1) | Reflects only the following events as if such events had occurred at the beginning of the period indicated: |
the exchange of each share of Class A Common Stock of Fortis, Inc. for 10.75882039 shares of Common Stock of Assurant, Inc. in the merger for the purpose of redomestication; and | ||
the automatic conversion of the shares of Class B Common Stock and Class C Common Stock issued in the merger in accordance with their terms simultaneously with the closing of the IPO into an aggregate of 25,841,418 shares of Common Stock of Assurant, Inc. for all of the outstanding Class B Common Stock and Class C Common Stock based on the public offering price of $22 a share. |
(2) | Policy liabilities include future policy benefits and expenses, unearned premiums and claims and benefits payable. |
(3) | The proceeds from the sale of each of these securities were used by the applicable subsidiary trusts to purchase our subordinated debentures, which are eliminated upon consolidation. See Certain Relationships and Related Transactions. |
(4) | Based on total stockholders equity divided by weighted average of basic and diluted shares of common stock outstanding. |
Item 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and accompanying notes which appear elsewhere in this report. It contains forward-looking statements that involve risks and uncertainties. Please see Forward-Looking Statements for more information. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this report, particularly under the headings Risk Factors and Forward-Looking Statements.
General
We pursue a differentiated strategy of building leading positions in specialized market segments for insurance products and related services in North America and selected other markets. We provide: creditor-placed homeowners insurance; manufactured housing homeowners insurance; debt protection administration; credit insurance; warranties and extended service contracts; individual health and small employer group health insurance; group dental insurance; group disability insurance; group life insurance and pre-funded funeral insurance.
The markets we target are generally complex, have a relatively limited number of competitors and, we believe, offer attractive profit opportunities.
46
We report our results through five segments: Assurant Solutions, Assurant Health, Assurant Employee Benefits, Assurant PreNeed and Corporate and Other. The Corporate and Other segment includes activities of the holding company, financing expenses, net realized gains (losses) on investments, interest income earned from short-term investments held and interest income from excess surplus of insurance subsidiaries not allocated to other segments. The Corporate and Other segment includes the results of operations of FFG from January 1, 2001 to March 31, 2001 (the period prior to its disposition). The Corporate and Other segment also includes the amortization of deferred gains associated with the portions of the sales of FFG and LTC. FFG and LTC were sold through reinsurance agreements as described below.
Critical Factors Affecting Results
Our profitability depends on the adequacy of our product pricing, underwriting and the accuracy of our methodology for the establishment of reserves for future policyholder benefits and claims, returns on invested assets and our ability to manage our expenses. As such, factors affecting these items may have a material adverse effect on our results of operations or financial condition.
Revenues |
We derive our revenues primarily from the sale of our insurance policies and, to a lesser extent, fee income by providing administrative services to certain clients. Sales of insurance policies are recognized in revenue as earned premiums while sales of administrative services are recognized as fee income. In late 2000, the majority of our credit insurance clients began a transition from the purchase of our credit insurance products from which we earned premium revenue to debt protection administration programs, from which we earn fee income. Debt protection administration programs include services for non-insurance products that cancel or defer the required monthly payment on outstanding loans when covered events occur.
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. Our investment portfolio is currently primarily invested in fixed maturity securities. Both investment income and realized capital gains on these investments can be significantly impacted by changes in interest rates.
In addition, Assurant PreNeed generally writes whole life insurance policies with increasing death benefits and obtains much of its profits through interest rate spreads. Interest rate spreads refer to the difference between the death benefit growth rates on pre-funded funeral insurance policies and the investment returns generated on the assets we hold related to those policies. As of December 31, 2003, approximately 81% of Assurant PreNeeds in force insurance policy reserves relate to policies that provide for death benefit growth, some of which provide for minimum death benefit growth pegged to changes in the Consumer Price Index. In extended periods of declining interest rates or high inflation, there may be compression in the spread between Assurant PreNeeds death benefit growth rates and its investment earnings. As a result, declining interest rates or high inflation rates may have a material adverse effect on our results of operations and our overall financial condition.
Expenses |
Our expenses primarily consist of policyholder benefits, underwriting, general and administrative expenses, and distributions on preferred securities of subsidiary trusts.
Selling, underwriting and general expenses consist primarily of commissions, premium taxes, licenses, fees, amortization of deferred acquisition costs (DAC) and value of businesses acquired (VOBA) and general operating expenses. For a description of DAC and VOBA, see Notes 2, 18 and 19 of the Notes to Consolidated Financial Statements included elsewhere in this report.
Our profitability depends in large part on accurately predicting benefits, claims and other costs, including medical and dental costs. It also depends on our ability to manage future benefit and other costs through
47
In addition, in December 2003 and January 2004, we redeemed all of the mandatorily redeemable preferred securities of subsidiary trusts for a redemption price equal to their aggregate liquidation amount plus accrued and unpaid interest to the date of redemption and aggregate premium of approximately $206 million, all of which was expensed in the fourth quarter of 2003. We entered into the senior bridge credit facilities described under Liquidity and Capital Resources in connection with these redemptions.
Regulation |
Legislation or other regulatory reform that increases the regulatory requirements imposed on us or that changes the way we are able to do business may significantly harm our business or results of operations in the future. For example, some states have imposed new time limits for the payment of uncontested covered claims and require health care and dental service plans to pay interest on uncontested claims not paid promptly within the required time period. Some states have also granted their insurance regulatory agencies additional authority to impose monetary penalties and other sanctions on health and dental plans engaging in certain unfair payment practices. If we were to be unable for any reason to comply with these requirements, it could result in substantial costs to us and may materially adversely affect our results of operations and financial condition.
For other factors affecting our results of operations or financial condition, see Risk Factors.
Acquisitions and Dispositions of Businesses |
Our results of operations were affected by the following transactions:
On October 10, 2002, we sold the Peer Review and Analysis division (PRA) of CORE, Inc. (CORE) to MCMC, LLC, an independent provider of medical analysis services. No gain or loss was recognized on the sale of PRA.
On June 28, 2002, we sold our 50% ownership in Neighborhood Health Partnership (NHP) to NHP Holding LLC. We recorded pre-tax gains on sale of $11 million, which was included in the Corporate and Other segment.
On December 31, 2001, we acquired Protective Life Corporations Dental Benefits Division (DBD), including the acquisition through reinsurance of Protectives indemnity dental, life and disability business and its prepaid dental subsidiaries. Total revenues of $305 million and income after tax of $15 million were generated by the DBD operations for the year ended December 31, 2002. DBD is included in Assurant Employee Benefits.
On July 12, 2001, we acquired CORE, a national provider of employee absence management services. Total revenues of $31 million and income after tax of $0.2 million were generated by the CORE operations from July 12, 2001 through December 31, 2001, as compared to total revenues of $66 million and income after tax of $3 million in 2002. CORE is included in Assurant Employee Benefits.
On April 2, 2001, we sold our FFG business to The Hartford primarily through a reinsurance arrangement. Total revenues of $146 million and income after tax of $8 million were generated by the FFG operations for the three months ended March 31, 2001, compared to total revenues of $669 million and income after tax of $65 million during 2000. FFG included certain individual life insurance policies, investment-type annuity contracts and mutual fund operations. The sale of the mutual fund operations
48
Prior to April 2, 2001, FFG had issued variable insurance products that are required to be registered as securities under the Securities Act. Variable insurance refers to an investment oriented life insurance policy that offers fixed premiums and a minimum death benefit as well as providing a return linked to an underlying portfolio of securities. These registered insurance contracts, which we no longer sell, have been 100% reinsured with The Hartford through modified coinsurance agreements. The Hartford administers this closed block of business pursuant to a third party administration agreement. Since this block of business was sold through modified coinsurance agreements, separate account assets and separate account liabilities associated with these products continue to be reflected in our financial statements. See the line items entitled Assets held in separate accounts and Liabilities related to separate accounts in our consolidated balance sheets. The liabilities created by these variable insurance policies are tied to the performance of underlying investments held in separate accounts of the insurance company that originally issued such policies. While we own the separate account assets, the laws governing separate accounts provide that the income, gains and losses from assets in the separate account are credited to or charged against the separate account without regard to other income, gains or losses of the insurer. Further, the laws provide that the separate account will not be charged with liabilities arising out of any other business the insurer may conduct. The result of this structure is that the assets held in the separate account correspond to and are equal to the liabilities created by the variable insurance contracts. At December 31, 2003, we had separate account assets and liabilities of $3,805 million compared to $4,809 million on April 2, 2001, the date of the FFG sale.
Comparing our results from period to period requires taking into account these acquisitions and dispositions. For a more detailed description of these acquisitions and dispositions, see Notes 3 and 4 of the Notes to Consolidated Financial Statements included elsewhere in this report.
Critical Accounting Policies
There are certain accounting policies that we consider to be critical due to the amount of judgment and uncertainty inherent in the application of those policies. In calculating financial statement estimates, the use of different assumptions could produce materially different estimates. In addition, if factors such as those described above or in Risk Factors cause actual events to differ from the assumptions used in applying the accounting policies and calculating financial estimates, there could be a material adverse effect on our results of operations, financial condition and liquidity.
We believe the following critical accounting policies require significant estimates which, if such estimates are not materially correct, could affect the preparation of our consolidated financial statements.
Premiums
Short Duration Contracts |
Our short duration contracts are those on which we recognize revenue on a pro rata basis over the contract term. Our short duration contracts primarily include: group term life, group disability medical and dental, property and warranty, credit life and disability, extended service contracts and individual medical issued after 2002 in most jurisdictions.
Long Duration Contracts |
Currently, our long duration contracts being sold are pre-funded funeral life insurance and investment-type annuities. For pre-funded funeral life insurance policies, any excess of the gross premium over the net premium is deferred and is recognized in income in a constant relationship with the insurance in force. For
49
For individual medical contracts sold prior to 2003 and currently in a limited number of jurisdictions and traditional life insurance contracts sold by Assurant PreNeed that are no longer offered, revenue is recognized when due from policyholders.
For universal life insurance and investment-type annuity contracts sold by Assurant Solutions that are no longer offered, revenues consist of charges assessed against policy balances.
Premiums for LTC insurance and traditional life insurance contracts within FFG are recognized as revenue when due from the policyholder. For universal life insurance and investment-type annuity contracts within FFG, revenues consist of charges assessed against policy balances. For the FFG and LTC businesses previously sold, all revenue is ceded to The Hartford and John Hancock, respectively.
Reinsurance Assumed |
Reinsurance premiums assumed are calculated based upon payments received from ceding companies together with accrual estimates which are based on both payments received and in force policy information received from ceding companies. Any subsequent differences arising on such estimates are recorded in the period in which they are determined.
Fee Income |
We primarily derive income from fees received from providing administration services. Fee income is earned when services are performed.
Reserves |
Reserves are established according to generally accepted actuarial principles and are based on a number of factors. These factors include experience derived from historical claim payments and actuarial assumptions to arrive at loss development factors. Such assumptions and other factors include trends, the incidence of incurred claims, the extent to which all claims have been reported and internal claims processing charges. The process used in computing reserves cannot be exact, particularly for liability coverages, since actual claim costs are dependent upon such complex factors as inflation, changes in doctrines of legal liability and damage awards. The methods of making such estimates and establishing the related liabilities are periodically reviewed and updated.
Reserves, whether calculated under GAAP or statutory accounting principles, do not represent an exact calculation of exposure, but instead represent our best estimates, generally involving actuarial projections at a given time, of what we expect the ultimate settlement and administration of a claim or group of claims will cost based on our assessment of facts and circumstances then known. The adequacy of reserves will be impacted by future trends in claims severity, frequency, judicial theories of liability and other factors. These variables are affected by both external and internal events, such as: changes in the economic cycle, changes in the social perception of the value of work, emerging medical perceptions regarding physiological or psychological causes of disability, emerging health issues and new methods of treatment or accommodation, inflation, judicial trends, legislative changes and claims handling procedures.
Many of these items are not directly quantifiable, particularly on a prospective basis. Reserve estimates are refined as experience develops. Adjustments to reserves, both positive and negative, are reflected in the statement of operations of the period in which such estimates are updated. Because establishment of reserves is an inherently uncertain process involving estimates of future losses, there can be no certainty that ultimate losses will not exceed existing claims 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.
50
Short Duration Contracts |
For short duration contracts, claims and benefits payable reserves are recorded when insured events occur. The liability is based on the expected ultimate cost of settling the claims. The claims and benefits payable reserves include (1) case reserves for known but unpaid claims as of the balance sheet date; (2) incurred but not reported (IBNR) reserves for claims where the insured event has occurred but has not been reported to us as of the balance sheet date; and (3) loss adjustment expense reserves for the expected handling costs of settling the claims.
For group disability and group life, the case reserves and IBNR are recorded at an amount equal to the net present value of the expected future claims payments. Group long-term disability and group term life waiver of premium reserves are discounted to the valuation date at the valuation interest rate. The valuation interest rate is determined by taking into consideration actual and expected earned rates on our asset portfolio, with adjustments for investment expenses and provisions for adverse deviation. In July 2003, the valuation interest rate was lowered to 5.25% from 6% for group long-term disability and raised to 5.25% from 3.5% for group term life waiver of premium reserves.
Unearned premium reserves are maintained for the portion of the premiums on short duration contracts that is related to the unexpired period of the policy.
We have exposure to asbestos, environmental and other general liability claims arising from our participation in various reinsurance pools from 1971 through 1983. This exposure arose from a short duration contract that we discontinued writing many years ago. We carried case reserves for these liabilities as recommended by the various pool managers and bulk reserves for IBNR of $37 million (before reinsurance) and $36 million (after reinsurance) in the aggregate at December 31, 2003. 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 an occurrence. 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 financial statements, we believe that any changes in reserve estimates for these claims are not reasonably likely to be material. Asbestos, environmental and other general liability claim payments, net of reinsurance recoveries, were $2.9 million, $1.4 million and $2.2 million for the years ended December 31, 2003, 2002 and 2001, respectively.
One of our subsidiaries, (ARIC), participated in certain excess of loss reinsurance programs in the London market and, as a result, reinsured certain personal accident, ransom and kidnap risks from 1995 to 1997. ARIC and a foreign affiliate ceded a portion of these risks to other reinsurers (retrocessionaires). ARIC ceased writing 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 are seeking to avoid certain treaties on various grounds, including material misrepresentation and non-disclosure by the ceding companies and intermediaries involved in the programs. Similarly, some of the retrocessionaires are seeking avoidance of certain treaties with ARIC and the other reinsurers and some reinsureds are seeking collection of disputed balances under some of the treaties. The disputes 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, arbitration and/or litigation between multiple layers of retrocessionaires, reinsurers, ceding companies and intermediaries, including brokers, in an effort to resolve these disputes. Many of those disputes relating to the 1995 program year, including those involving ARIC, were settled on December 3, 2003. Loss accruals previously established relating to the 1995 program year were adequate. However, our exposure under the 1995 program year was less significant than the exposure remaining under the 1996 and 1997 program years. We believe, based on information currently available, that the amounts accrued for currently outstanding disputes are adequate. The inherent uncertainty
51
Long Duration Contracts |
Future policy benefits and expense reserves on LTC, life insurance policies and annuity contracts that are no longer offered, individual medical contracts sold prior to 2003 or issued in the state of Minnesota and the traditional life insurance contracts within FFG are recorded at the present value of future benefits to be paid to policyholders and related expenses less the present value of the future net premiums. These amounts are estimated and include assumptions as to the expected investment yield, inflation, mortality, morbidity and withdrawal rates as well as other assumptions that are based on our experience. These assumptions reflect anticipated trends and include provisions for possible unfavorable deviations.
Future policy benefits and expense reserves for pre-funded funeral investment-type annuities, universal life insurance policies and investment-type annuity contracts that are no longer offered, and the variable life insurance and investment-type annuity contracts in FFG consist of policy account balances before applicable surrender charges and certain deferred policy initiation fees that are being recognized in income over the terms of the policies. Policy benefits charged to expense during the period include amounts paid in excess of policy account balances and interest credited to policy account balances.
Future policy benefits and expense reserves for pre-funded funeral life insurance contracts are recorded as the present value of future benefits to policyholders and related expenses less the present value of future net premiums. Reserve assumptions are selected using best estimates for expected investment yield, inflation, mortality and withdrawal rates. These assumptions reflect current trends, are based on Company experience and include provision for possible unfavorable deviation. An unearned premium reserve is also recorded for these contracts which represents the balance of the excess of gross premiums over net premiums that is still to be recognized in future years income in a constant relationship to insurance in force.
Deferred Acquisition Costs (DAC) |
The costs of acquiring new business that vary with and are primarily related to the production of new business have been deferred to the extent that such costs are deemed recoverable from future premiums or gross profits. Acquisition costs primarily consist of commissions, policy issuance expenses, premium tax and certain direct marketing expenses.
A premium deficiency is recognized immediately by a charge to the statement of operations as a reduction of DAC to the extent that future policy premiums, including anticipation of interest income, are not adequate to recover all DAC and related claims, benefits and expenses. If the premium deficiency is greater than unamortized DAC, a liability will be accrued for the excess deficiency.
Short Duration Contracts |
DAC relating to property contracts, warranty and extended service contracts and single premium credit insurance contracts are amortized over the term of the contracts in relation to premiums earned.
Acquisition costs relating to monthly pay credit insurance business consist mainly of direct marketing costs and are deferred and amortized over the estimated average terms of the underlying contracts.
Acquisition costs on individual medical issued in most jurisdictions after 2002, small group medical, group term life and group disability consist primarily of commissions to agents and brokers, which are level, and compensation to representatives, which is spread out and is not front-end loaded. These costs do not vary with the production of new business. As a result, these costs are not deferred but rather are recorded in the statement of operations in the period in which they are incurred.
52
Long Duration Contracts |
Acquisition costs for pre-funded funeral life insurance policies and life insurance policies no longer offered are deferred and amortized in proportion to anticipated premiums over the premium-paying period.
For pre-funded funeral investment-type annuities and 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 margins or 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 individual medical contracts issued prior to 2003 and currently in a limited number of jurisdictions are deferred and amortized over the estimated average terms of the underlying contracts. These acquisition costs relate to commissions and policy issuance expenses. Commissions represent the majority of deferred costs and result from commission schedules that pay significantly higher rates in the first year. The majority of deferred policy issuance expenses are the costs of separately underwriting each individual medical contract.
Acquisition costs on the FFG and LTC disposed businesses were written off when the businesses were sold.
Investments |
We regularly monitor our investment portfolio to ensure that investments that may be other than temporarily impaired are identified in a timely fashion and properly valued and that any impairments are charged against earnings in the proper period. Our methodology to identify potential impairments requires professional judgment.
Changes in individual security values are monitored on a semi-monthly basis in order to identify potential problem credits. In addition, pursuant to our impairment process, each month the portfolio holdings are screened for securities whose market price is equal to 85% or less of their original purchase price. Management then makes their assessment as to which of these securities are other than temporarily impaired. Assessment factors include, but are not limited to, the financial condition and rating of the issuer, any collateral held and the length of time the market value of the security has been below cost. Each month the watchlist is discussed at a meeting attended by members of our investment, accounting and finance departments. Each quarter any security whose price decrease is deemed to have been other than temporarily impaired is written down to its then current market level, with the amount of the writedown reflected in our statement of operations for that quarter. Previously impaired issues are also monitored monthly, with additional writedowns taken quarterly if necessary.
Inherently, there are risks and uncertainties involved in making these judgments. Changes in circumstances and critical assumptions such as a continued weak economy, a more pronounced economic downturn or unforeseen events which affect one or more companies, industry sectors or countries could result in additional writedowns in future periods for impairments that are deemed to be other-than-temporary. See also Investments in Note 2 of the Notes to Consolidated Financial Statements included elsewhere in this report.
Reinsurance |
Reinsurance recoverables include amounts related to paid benefits and estimated amounts related to unpaid policy and contract claims, future policyholder benefits and policyholder contract deposits. The cost of reinsurance is accounted for 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. The ceding of insurance does not discharge our primary liability to our
53
Other Accounting Policies |
For a description of other accounting policies applicable to the periods covered by this report, see Note 2 of the Notes to Consolidated Financial Statements included elsewhere in this report.
New Accounting Standard |
On January 1, 2002, we adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (FAS 142). Upon adoption of FAS 142, we ceased amortizing goodwill. In addition, we were required to subject our goodwill to an initial impairment test. As a result of FAS 142, we are required to conduct impairment testing on an annual basis and between annual tests if an event occurs or circumstances change indicating a possible goodwill impairment. In the absence of an impairment event, our net income will be higher as a result of not having to amortize goodwill.
As a result of this initial impairment test, we recognized a non-cash goodwill impairment charge of $1,261 million. The impairment charge was recorded as a cumulative effect of a change in accounting principle as of January 1, 2002. The impairment charge had no impact on cash flows or the statutory-basis capital and surplus of our insurance subsidiaries. We also performed a January 1, 2003 impairment test during the six months ended June 30, 2003 and concluded that goodwill was not further impaired.
See New Accounting Pronouncements in Note 2 of the Notes to Consolidated Financial Statements included elsewhere in this report for a description of additional new accounting standards that are applicable to us.
54
Results of Operations
The table below presents information regarding
our consolidated results of operations:
Total revenues increased by $534 million, or
8%, from $6,532 million for the year ended
December 31, 2002, to $7,066 million for the year
ended December 31, 2003.
Net earned premiums and other considerations
increased by $476 million, or 8%, from $5,681 million
for the year ended December 31, 2002, to
$6,157 million for the year ended December 31, 2003.
The increase in
55
Net investment income decreased by
$25 million, or 4%, from $632 million for the year
ended December 31, 2002, to $607 million for the year
ended December 31, 2003. The decrease was primarily due to
a decrease in investment yields driven by the lower interest
rate environment. The yield on average invested assets was 5.61%
for the year ended December 31, 2003, as compared to 6.20%
for the year ended December 31, 2002.
Net realized gains (losses) on investments
improved by $120 million, or 102%, from net realized losses
of $118 million for the year ended December 31, 2002,
to net realized gains of $2 million for the year ended
December 31, 2003. Net realized gains (losses) on
investments are comprised of both other-than-temporary
impairments and realized capital gains (losses) on sales of
securities. For the year ended December 31, 2003, we had
other-than-temporary impairments of $20 million as compared
to $85 million for the year ended December 31, 2002.
There were no individual impairments in excess of
$10 million for the year ended December 31, 2003.
Impairments on available for sale securities in excess of
$10 million for the year ended December 31, 2002,
consisted of an $18 million writedown of fixed maturity
investments in NRG Energy, a $12 million writedown of fixed
maturity investments in AT&T Canada, and an $11 million
writedown of fixed maturity investments in MCI WorldCom.
Excluding the effects of other-than-temporary impairments, we
recorded an increase in net realized gains of $55 million
in the Corporate and Other segment.
Amortization of deferred gain on disposal of
businesses decreased by $12 million, or 15%, from
$80 million for the year ended December 31, 2002, to
$68 million for the year ended December 31, 2003. The
decrease was consistent with the run-off of the businesses ceded
to The Hartford and John Hancock.
Gain on disposal of businesses decreased by
$11 million, or 100%, from $11 million for the year
ended December 31, 2002 to zero for the year ended
December 31, 2003. There were no disposals in 2003. On
June 28, 2002, we sold our investment in NHP, which
resulted in pretax gains of $11 million.
Fees and other income decreased by
$14 million, or 6%, from $246 million for the year
ended December 31, 2002 to $232 million for the year
ended December 31, 2003. The decrease was primarily due to
$15 million of income recognized in Corporate and Other
segment for the year ended December 31, 2002, associated
with a settlement true-up of a 1999 sale of a small block of
business to a third party and reversal of bad debt allowances
due to successful collection of receivables that had been
previously written off.
Total benefits, losses and expenses increased by
$644 million, or 10%, from $6,162 million for the year
ended December 31, 2002 to $6,806 million for the year
ended December 31, 2003.
Policyholder benefits increased by
$222 million, or 6%, from $3,435 million for the year
ended December 31, 2002, to $3,657 million for the
year ended December 31, 2003. The increase was primarily
due to increases of $144 million, $95 million, and
$8 million in Assurant Solutions, Assurant Health and
Assurant PreNeed, respectively, with an offsetting decrease of
$24 million in Assurant Employee Benefits. The increase in
Assurant Solutions was primarily due to growth in specialty
property products, primarily creditor-placed and voluntary
homeowners insurance lines of business. The increase in Assurant
Health was primarily due to the increase in individual health
insurance business, which is consistent with growth in this
business.
Selling, underwriting and general expenses
increased by $220 million, or 8%, from $2,609 million
for the year ended December 31, 2002, to
$2,829 million for the year ended December 31, 2003.
The increase was primarily due to increases of
$141 million, $43 million, and $11 million in
Assurant Solutions, Assurant Health and Assurant Employee
Benefits, respectively. The increase in Assurant Solutions was
consistent with growth in the specialty property and consumer
protection products business. The increase in Assurant Health
56
Distributions on preferred securities of
subsidiary trusts decreased by $5 million, or 4%, from
$118 million for the year ended December 31, 2002 to
$113 million for the year ended December 31, 2003. We
redeemed $1,250 million of the mandatorily redeemable
preferred securities of subsidiary trusts in mid-December 2003,
resulting in lower expenses. We redeemed the remaining
$196 million of mandatorily redeemable preferred securities
of subsidiary trusts in early January 2004. As a result of the
early extinguishment of all the mandatorily redeemable preferred
securities of subsidiary trusts we incurred $206 million in
interest premiums on redemption of subsidiary trusts for the
year ended December 31, 2003 compared to zero in 2002.
Net income increased by $1,187 million, or
119%, from a loss of $1,001 million for the year ended
December 31, 2002, to a profit of $186 million for the
year ended December 31, 2003.
Net income before cumulative effect of change in
accounting principle for the year ended December 31, 2002
was $260 million. When we adopted FAS 142 in 2002, we
recognized a cumulative effect of change in accounting principle
which resulted in an expense of $1,261 million in 2002 as
compared to zero recognized in 2003.
Income taxes decreased by $36 million, or
33%, from $110 million for the year ended December 31,
2002, to $74 million for the year ended December 31,
2003. The effective tax rate for 2003 was 28.6% compared to
29.7% in 2002.
Total revenues increased by $345 million, or
6%, from $6,187 million in 2001 to $6,532 million in
2002.
Net earned premiums and other considerations
increased by $439 million, or 8%, from $5,242 million
in 2001 to $5,681 million in 2002. Excluding the effect of
the various acquisitions and dispositions described above, net
earned premiums and other considerations increased mainly due to
strong growth in Assurant Solutions primarily as a result of
growth in new business and in Assurant PreNeed primarily due to
an increase in the average size of policies sold by the AMLIC
division.
Net investment income decreased by
$80 million, or 11%, from $712 million in 2001 to
$632 million in 2002. The decrease was primarily due to a
decrease in achieved investment yields, driven by the lower
interest rate environment and a decrease in average invested
assets of $290 million. The yield on average invested
assets was 6.20% for the year ended December 31, 2002 as
compared to 6.83% for the year ended December 31, 2001.
This reflected lower yields on fixed maturity securities and
commercial mortgages.
Net realized losses on investments decreased by
$1 million, or 1%, from $119 million in 2001 to
$118 million in 2002. In 2002, we had other-than-temporary
impairments of $85 million, as compared to $78 million
in 2001. Impairments of available for sale securities in excess
of $10 million in 2002 consisted of an $18 million
writedown of fixed maturity investments in NRG Energy, a
$12 million writedown of fixed maturity investments in
AT&T Canada and an $11 million writedown of fixed
maturity investments in MCI WorldCom. Impairments of available
for sale securities in excess of $10 million in 2001
consisted of a $22 million writedown of fixed maturity
investments in Enron Corp. (Enron).
Amortization of deferred gain on disposal of
businesses increased by $12 million, or 18%, from
$68 million in 2001 to $80 million in 2002. The
increase was primarily due to a full year of amortization of the
deferred gain on the sale of FFG as compared to nine months of
amortization in 2001. This deferred gain on sale is discussed in
more detail under Corporate and Other
below.
57
Gain on disposal of businesses decreased by
$51 million, or 82%, from $62 million in 2001 to
$11 million in 2002. The $62 million reflects the gain
on the sale of FFGs mutual fund operations. The
$11 million reflected the pre-tax gain on the sale of NHP.
Fees and other income increased by
$24 million, or 11%, from $222 million in 2001 to
$246 million in 2002. The increase was primarily due to a
full year of fee income from CORE and an increase in fee income
from Assurant Solutions, mainly from their credit insurance
business transitioning to debt protection administration. In
late 2000, the majority of Assurant Solutions credit
insurance clients began a transition from use of our credit
insurance products to debt protection administration programs,
from which we earn fee income rather than net earned premiums
and where margins are lower than in the traditional credit
insurance programs. However, because debt protection
administration is not an insurance product, certain costs such
as regulatory costs and cost of capital are expected to be
eliminated as the transition from credit insurance to debt
protection administration services continues. The fees from debt
protection administration did not fully compensate for the
decrease in credit insurance premiums The increases were
partially offset by a $42 million, or 63%, decrease from
the Corporate and Other segment due to the sale of FFG
(partially through reinsurance), which had $65 million of
fee income (generated from mutual fund operations included in
such sale) in the first quarter of 2001.
Total benefits, losses and expenses increased by
$181 million, or 3%, from $5,981 million in 2001 to
$6,162 million in 2002.
Policyholder benefits increased by
$195 million, or 6%, from $3,240 million in 2001 to
$3,435 million in 2002. The increase was primarily due to
the effects of the acquisitions and dispositions described
above. The increases were also partially offset by an
$84 million, or 6%, decrease from Assurant Health,
primarily due to a higher mix of individual health insurance
business, which generally has a lower expected loss ratio
relative to small employer group business, disciplined pricing
and product design changes. (Loss premiums and other
considerations include the amount of net premiums allocable to
the expired period of an insurance policy or policies, including
fees earned on interest sensitive policies).
Selling, underwriting and general expenses
increased by $113 million, or 5%, from $2,496 million
in 2001 to $2,609 million in 2002. Assurant Employee
Benefits contributed $106 million of this increase,
primarily due to the DBD and CORE acquisitions. This increase
was offset by a $65 million decrease in the Corporate and
Other segment due to the sale of FFG. Selling, underwriting and
general expenses in Assurant Health increased by
$50 million, primarily due to an increase in the
amortization of DAC and due to costs associated with higher
employee compensation and investments in technology. Also,
selling, underwriting and general expenses in Assurant PreNeed
increased by $17 million, primarily due to an increase in
amortization of DAC and VOBA as a result of an increase in sales
of single pay policies and increases in general expenses.
Amortization of goodwill was zero in 2002
compared to $113 million in 2001, as a result of our
adoption of FAS 142 as described above.
Interest expense decreased from $14 million
in 2001 to $0 in 2002. In April 2001, we used a portion of the
FFG sale proceeds to repay $225 million of outstanding debt
owed to Fortis Finance N.V. (Fortis Finance), a wholly owned
subsidiary of Fortis.
Distributions on preferred securities of
subsidiary trusts in 2002 remained unchanged from 2001 at
$118 million.
Net income decreased by $1,099 million from
a profit of $98 million in 2001 to a loss of
$1,001 million in 2002.
58
Income taxes increased by $2 million, or 2%,
from $108 million in 2001 to $110 million in 2002. The
effective tax rate for 2002 was 29.7% compared to 52.4% in 2001.
The change in the effective tax rate was primarily related to
the elimination of amortization of goodwill in 2002.
When we adopted FAS 142 in 2002, we recognized a
cumulative effect (expense) of change in accounting
principle of $1,261 million in 2002 as compared to zero
recognized in 2001.
The table below presents information regarding
Assurant Solutions segment results of operations:
Total revenues increased by $277 million, or
12%, from $2,401 million for the year ended
December 31, 2002, to $2,678 million for the year
ended December 31, 2003.
Net earned premiums and other considerations
increased by $285 million, or 14%, from $2,077 million
for the year ended December 31, 2002, to
$2,362 million for the year ended December 31, 2003.
This increase was primarily due to $180 million of
additional net earned premiums and other considerations
attributable to our special property products, which includes
approximately $133 million from our creditor-placed and
voluntary homeowners insurance and manufactured housing
homeowners insurance lines of business generated from new
clients and increased sales growth from our existing clients.
Consumer protection products also
59
Net investment income decreased by
$18 million, or 9%, from $205 million for the year
ended December 31, 2002, to $187 million for the year
ended December 31, 2003. The average portfolio yield
dropped 62 basis points from 5.85% for the year ended
December 31, 2002, to 5.23% for the year ended
December 31, 2003 due to the lower interest rate
environment. The average allocated invested assets increased by
approximately 2%.
Fees and other income increased by
$10 million, or 8%, from $119 million for the year
ended December 31, 2002, to $129 million for the year
ended December 31, 2003, primarily due to the continuing
transition of our credit insurance business to our debt
protection administration business.
Total benefits, losses and expenses increased by
$285 million, or 13%, from $2,204 million for the year
ended December 31, 2002, to $2,489 million for the
year ended December 31, 2003.
Policyholder benefits increased by
$144 million, or 19%, from $755 million for the year
ended December 31, 2002, to $899 million for the year
ended December 31, 2003. Our specialty property products
accounted for $112 million of the increase primarily due to
growth in our creditor-placed and voluntary homeowners insurance
lines of business and approximately $18 million of the
increase is attributable to various catastrophes
($30 million in 2003 compared to $12 million in 2002).
Our consumer protection products also contributed
$32 million of the increase primarily due to growth in our
warranty and extended service contracts line of business.
Selling, underwriting and general expenses
increased by $141 million, or 10%, from $1,449 million
for the year ended December 31, 2002, to
$1,590 million for the year ended December 31, 2003.
Selling and underwriting expenses increased by
$116 million, which consisted of $45 million primarily
from our specialty property products due to growth in our
creditor-placed and voluntary homeowners insurance and
manufactured housing insurance lines. Also, $71 million of
the increase was from our consumer protection products due to
increased growth in our warranty and extended service contract
lines of business. General expenses increased by
$25 million, primarily from start up costs related to
setting up new clients in the creditor-placed homeowners
insurance area and increased business from our warranty and
extended service contract products.
Segment income after tax increased by
$1 million, or 1%, from $132 million for the year
ended December 31, 2002, to $133 million for the year
ended December 31, 2003. Excluding the decrease in
investment income of $13 million after-tax, segment income
after tax increased by $14 million, or 11%.
Income taxes decreased by $9 million, or
14%, from $65 million for the year ended December 31,
2002, to $56 million for the year ended December 31,
2003. This decrease was mainly due to a decrease in pre-tax
income and a lower effective tax rate in 2003.
Total revenues increased by $179 million, or
8%, from $2,222 million in 2001 to $2,401 million in
2002.
Net earned premiums and other considerations
increased by $171 million, or 9%, from $1,906 million
in 2001 to $2,077 million in 2002. The increase was
primarily due to approximately $100 million of additional
net earned premiums from our specialty property solutions
products, including approximately $86 million from the growth of
our creditor-placed and voluntary homeowners insurance, flood
insurance and manufactured housing related property coverages.
Consumer protection solutions contributed an additional
$71 million to the increase in net earned premiums
primarily due to the growth of $39 million attributable to
our warranty and extended service contracts business and $58
million from an accidental death and dismemberment product,
60
Net investment income decreased by
$13 million, or 6%, from $218 million in 2001 to
$205 million in 2002. The average portfolio yield dropped
51 basis points from 6.36% in 2001 to 5.85% in 2002 due to the
lower interest rate environment. This decrease was partially
offset by the reinvestment of tax advantaged investments, such
as preferred stock, low-income housing tax credit investments
and tax-exempt municipal bonds, into higher yield taxable
investments. Also, average allocated invested assets increased
by approximately 2%.
Fees and other income increased by
$21 million, or 21%, from $98 million in 2001 to
$119 million in 2002, including $13 million in
additional fee income resulting from our credit insurance
business transitioning to debt protection administration
services.
Total benefits, losses and expenses increased by
$120 million, or 6%, from $2,084 million in 2001 to
$2,204 million in 2002.
Policyholder benefits increased by
$115 million, or 18%, from $640 million in 2001 to
$755 million in 2002. Consumer protection solutions
benefits contributed $98 million of this increase due
primarily to $36 million from the warranty and extended
service contracts business and $24 million from an
accidental death and disability product. The increase was partly
offset by a decrease in benefits in credit insurance products,
which related to the decrease in premiums resulting from the
transition to debt protection administration products. The
growth of our specialty property solutions product lines also
contributed a further $17 million to the increase in
policyholder benefits in 2002, including approximately
$11 million of losses related to Hurricane Lili and Arizona
wildfires. In 2001, we had approximately $10 million in
losses related to tropical storm Allison.
Selling, underwriting and general expenses
increased by $5 million, or less than 1%, from
$1,444 million in 2001 to $1,449 million in 2002.
Commissions, taxes, licenses and fees contributed
$21 million to the increase. The increase was primarily in
our specialty property solutions business from the growth in the
creditor-placed homeowners and manufactured housing homeowners
insurance products. This increase was offset by a decrease in
general expenses of $16 million primarily due to a
non-recurring cost incurred in 2001.
As a result of the foregoing, segment income
after tax increased by $34 million, or 35%, from
$98 million in 2001 to $132 million in 2002.
Income taxes increased $25 million, or 62%,
from $40 million in 2001 to $65 million in 2002. The
increase was primarily due to a 43% increase in segment income
before income tax. The majority of the remaining increase was
due to an increase in our effective tax rate primarily due to
our decision to reduce our ownership of tax-advantaged
investments.
61
The table below presents information regarding
Assurant Healths segment results of operations:
Total revenues increased by $179 million, or
9.0%, from $1,912 million for the year ended
December 31, 2002, to $2,091 million for the year
ended December 31, 2003.
Net earned premiums and other considerations
increased by $175 million, or 10%, from $1,834 million
for the year ended December 31, 2002, to $2,009 million for
the year ended December 31, 2003. Net earned premiums
attributable to our individual health insurance business
increased $156 million due to membership growth and premium
rate increases. Net earned premiums attributable to our small
employer group health insurance business increased
$19 million primarily because we instituted premium rate
increases in select small group markets to sufficiently price
for the underlying medical costs of existing business and for
anticipated future medical trends.
62
Net investment income decreased by
$6 million, or 11%, from $55 million for the year
ended December 31, 2002, to $49 million for the year
ended December 31, 2003. There was a 69 basis point
decrease in yield on the investment portfolio from 6.43% for the
year ended December 31, 2002, to 5.74% for the year ended
December 31, 2003, due to the lower interest rate
environment. Offsetting the decrease in yield was a 5% increase
in average invested assets for the year ended December 31,
2003, over the comparable prior year period.
Fees and other income increased by
$10 million, or 43%, from $23 million for the year
ended December 31, 2002, to $33 million for the year
ended December 31, 2003, due to additional insurance policy
fees and higher fee-based product sales in individual markets,
such as sales of our non-insurance health access discount cards.
Total benefits, losses and expenses increased by
$138 million, or 8%, from $1,768 million for the year
ended December 31, 2002, to $1,906 million for the
year ended December 31, 2003.
Policyholder benefits increased by
$95 million, or 8%, from $1,222 million for the year
ended December 31, 2002, to $1,317 million for the
year ended December 31, 2003. This increase was consistent
with the increase in net earned premiums and other
considerations. The loss ratio improved 100 basis points from
66.6% for the year ended December 31, 2002, to 65.6% for
the year ended December 31, 2003, primarily due to our risk
management activities.
Selling, underwriting and general expenses
increased by $43 million, or 8%, from $546 million for
the year ended December 31, 2002, to $589 million for
the year ended December 31, 2003. Commissions increased by
$33 million corresponding to an increase in first year net
earned premiums over the prior year. Taxes, licenses and fees
decreased by $6 million due to reduced premium tax rates on
a portion of the medical premium. Amortization of deferred
policy acquisition costs increased by $7 million due to
higher sales of individual health insurance products beginning
in 2000. General expenses increased by $9 million mainly due to
additional spending to improve claims experience. The expense
ratio improved 50 basis points from 29.4% for the year ended
December 31, 2002, to 28.9% for the year ended December 31,
2003.
Segment income after tax increased by
$26 million, or 27%, from $95 million for the year ended
December 31, 2002, to $121 million for the year ended
December 31, 2003.
Income taxes increased by $15 million, or
31%, from $49 million for the year ended December 31,
2002, to $64 million for the year ended December 31,
2003. The increase was consistent with the 28% increase in
segment income before income tax during the year ended
December 31, 2003.
Total revenues remained virtually unchanged from
2001 to 2002, at $1,910 million in 2001 as compared to
$1,912 million in 2002.
Net earned premiums and other considerations also
remained stable from 2001 to 2002, at $1,838 million in
2001 as compared to $1,834 million in 2002, with an
increase of $142 million in 2002 in the net earned premiums
attributable to our individual health insurance products being
offset by a decrease of $146 million during such year in
net earned premiums attributable to our small employer group
health insurance products. Net earned premiums attributable to
our individual health insurance business increased due to
membership growth and premium rate increases. Net earned
premiums attributable to our small employer group health
insurance business decreased due to declining membership,
partially offset by small employer group premium rate increases
that we instituted in selected markets to adequately price for
the underlying medical costs of existing business and for
anticipated future medical trends.
63
Net investment income decreased by
$3 million, or 5%, from $58 million in 2001 to
$55 million in 2002. There was a 96 basis point decrease in
yield on the investment portfolio from 7.39% in 2001 to 6.43% in
2002 mainly due to the lower interest rate environment.
Partially offset by the decrease in yield was a 7.7% increase in
average allocated invested assets in 2002.
Fees and other income increased by
$9 million, or 64%, from $14 million in 2001 to
$23 million in 2002 due to additional insurance policy fees
and higher fee-based product sales in our individual health
insurance business.
Total benefits, losses and expenses decreased by
$34 million, or 2%, from $1,802 million in 2001 to
$1,768 million in 2002.
Policyholder benefits decreased by
$84 million, or 6%, from $1,306 million in 2001 to
$1,222 million in 2002. This decrease was principally due
to a higher mix of individual health insurance business which
had a lower loss ratio relative to small employer group health
insurance business, primarily due to disciplined pricing and
product design changes. The loss ratio improved 450 basis points
from 71.1% in 2001 to 66.6% in 2002 due primarily to the higher
mix of individual health insurance business, increased premium
rates and product design changes.
Selling, underwriting and general expenses
increased by $50 million, or 10%, from $496 million in
2001 to $546 million in 2002. Taxes, licenses and fees
increased by $5 million in 2002, or 13%, due to a change in
the mix of business by state and legal entity, and the loss of
favorable consolidated premium tax return benefits triggered by
the disposition of FFG. The amortization of DAC increased by
$21 million in 2002, or 49%, due to higher sales of
individual health insurance products beginning in 2000. General
expenses increased by $34 million in 2002, or 13%, due to
investments in technology, higher employee compensation and
additional spending to achieve loss ratio improvements.
Partially offsetting these increases was a $10 million, or
7%, decrease in commissions due to a higher mix of first year
individual health insurance business. Individual health
insurance policy acquisition costs are deferred and amortized in
subsequent years.
The expense ratio increased by 260 basis points
from 26.8% in 2001 to 29.4% in 2002. This increase was primarily
attributable to the higher commissions on the mix of business in
individual health insurance, investments in technology, higher
employee compensation and additional spending to achieve loss
ratio improvements.
Segment income after tax increased by
$24 million, or 34%, from $71 million in 2001 to
$95 million in 2002.
Income taxes increased by $12 million, or
32%, from $37 million in 2001 to $49 million in 2002.
The increase was consistent with the 33% increase in segment
income before income tax in 2002.
64
The table below presents information regarding
Assurant Employee Benefits segment results of operations:
Total revenues decreased by $5 million, less
than 1%, from $1,455 million for the year ended
December 31, 2002, to $1,450 million for the year
ended December 31, 2003.
65
Net earned premiums and other considerations
increased by $23 million, or 2%, from $1,233 million
for the year ended December 31, 2002, to
$1,256 million for the year ended December 31, 2003.
This increase was primarily due to $61 million of
additional disability reinsurance premiums assumed from DRMS.
Partially offsetting this increase was a $23 million
decrease in group life net earned premiums, due to the
non-renewal of certain unprofitable business and less new
business due to continued pricing discipline. In addition,
dental net earned premiums decreased by $15 million, driven
by lower sales and the non-renewal of a large account. This
resulted in an aggregate premium persistency of 79.9% for 2003,
which was unchanged from 2002.
Net investment income decreased by
$8 million, or 5%, from $148 million for the year
ended December 31, 2002, to $140 million for the year
ended December 31, 2003. There was a 65 basis point
decrease in yield on the investment portfolio from 7.04% for the
year ended December 31, 2002 to 6.39% for the year ended
December 31, 2003 due to the lower interest rate
environment. Average invested assets increased by 8% from 2002
to 2003.
Fees and other income decreased by
$20 million, or 27%, from $74 million for the year
ended December 31, 2002, to $54 million for the year
ended December 31, 2003. The decrease was primarily due to
lower fee revenue from CORE due to the sale of PRA.
Total benefits, losses, and expenses decreased by
$13 million, or 1%, from $1,367 million for the year
ended December 31, 2002, to $1,354 million for the
year ended December 31, 2003.
Policyholder benefits decreased by
$24 million, or 3%, from $945 million for the year
ended December 31, 2002, to $921 million for the year
ended December 31, 2003. The decrease was driven by
favorable development in disability claims and lower claim
volume due to the reduction in dental and group life net earned
premiums. In addition, during the third quarter of 2003, we
completed reserve studies for the group disability, group life,
and group dental products, which concluded that, in the
aggregate, these reserves were redundant. Adjustments were made
to reserves to reflect current mortality and morbidity
experience. In addition, the reserve discount rate on all claims
was changed to reflect the continuing low interest rate
environment. The net impact of these adjustments was a reduction
in reserves of approximately $18 million. The benefits loss
ratio improved from 76.6% in 2002 to 73.3% in 2003. Excluding
the reserve release discussed above, the benefits loss ratio
would have been 74.7% in 2003. This improvement was driven
primarily by favorable disability experience.
Selling, underwriting, and general expenses
increased by $11 million, or 3%, from $422 million for
the year ended December 31, 2002, to $433 million for
the year ended December 31, 2003. The expense ratio
increased from 32.3% in 2002, to 33.1% in 2003, primarily due to
a $6.2 million write-down of previously capitalized
software related to our new administration system.
Segment income after tax increased by
$5 million, or 9%, from $57 million for the year ended
December 31, 2002 to $62 million for the year ended
December 31, 2003.
Income tax expense increased by $3 million,
or 10%, from $31 million for the year ended
December 31, 2002 to $34 million for the year ended
December 31, 2003. The increase was consistent with the 9%
increase in segment income before tax.
Total revenues increased by $338 million, or
30%, from $1,117 million in 2001 to $1,455 million in
2002, substantially all of which was attributable to the
acquisition of DBD.
Net earned premiums and other considerations
increased by $299 million, or 32%, from $934 million
in 2001 to $1,233 million in 2002. Excluding the
$299 million increase in net earned premiums due to the
66
Net investment income increased by
$4 million from $144 million in 2001 to
$148 million in 2002 mainly due to the DBD acquisition.
This increase was offset in part by a decrease in investment
yields by 36 basis points from 7.52% in 2001 to 7.16% in 2002
due to the lower interest rate environment.
Fees and other income increased by
$35 million, or 90%, from $39 million in 2001 to
$74 million in 2002 primarily due to a full year of fee
revenue from CORE, which was acquired on July 12, 2001.
CORE fee revenue was $66 million in 2002, as compared to
the half-year of revenue recorded in 2001 of $31 million.
Total benefits, losses and expenses increased by
$313 million, or 30%, from $1,054 million in 2001 to
$1,367 million in 2002.
Policyholder benefits increased by
$207 million, or 28%, from $738 million in 2001 to
$945 million in 2002. Excluding the $197 million
increase related to the acquisition of DBD, policyholder
benefits increased by $10 million, or 1%, driven by growth
in group dental premiums. Our loss ratio improved 240 basis
points from 79.0% in 2001 to 76.6% in 2002. Excluding the effect
of the DBD acquisition, the loss ratio in 2002 was 80.1%, which
was higher than in 2001 due to slight deterioration in group
dental and group life experience.
Selling, underwriting and general expenses
increased by $106 million, or 34%, from $316 million
in 2001 to $422 million in 2002 primarily due to the DBD
and CORE acquisitions. The expense ratio was virtually unchanged
between 2001 and 2002.
Segment income after tax increased by
$16 million, or 39%, from $41 million in 2001 to
$57 million in 2002.
Income taxes increased by $9 million, or
41%, from $22 million in 2001 to $31 million in 2002.
The increase was consistent with the 40% increase in segment
income before income tax.
67
The table below presents information regarding
Assurant PreNeeds segment results of operations:
Total revenues decreased by $5 million, or
1%, from $727 million for the year ended December 31,
2002, to $722 million for the year ended December 31,
2003.
Net earned premiums and other considerations
decreased by $9 million, or 2%, from $538 million for
the year ended December 31, 2002, to $529 million for
the year ended December 31, 2003. The decrease was
primarily due to a $10 million decline in our AMLIC channel
which was caused by a 24% drop in new face sales from SCI,
AMLICs principal customer.
Net investment income increased by
$4 million, or 2%, from $184 million for the year
ended December 31, 2002, to $188 million for the year
ended December 31, 2003. A 8% increase in average invested
assets was offset by a 34 basis point decrease in the
annualized investment yield, which was 6.91% at
December 31, 2002 compared to 6.57% at December 31,
2003. The increase in average invested assets was due to a
larger inforce block of business. The rate decline reduced net
investment income by $10 million over the comparable prior
year period. The decline in yields was due to the lower interest
rate environment and the restructuring of the portfolio in 2002
to improve credit quality.
Total benefits, losses and expenses increased by
$17 million, or 3%, from $650 million for the year
ended December 31, 2002, to $667 million for the year
ended December 31, 2003.
68
Policyholder benefits increased by
$8 million, or 2%, from $513 million for the year
ended December 31, 2002, to $521 million for the year
ended December 31, 2003. This increase is due to the
increase in business written and other factors. A portion of our
pre-funded funeral insurance policies use a Consumer Price Index
rate credited on policies. The Consumer Price Index rate
increased from 1.97% in 2002 to 2.40% in 2003. This increased
policyholder benefits by $2 million in 2003. In addition,
benefit expense increased $4 million over 2002 levels
related to higher customer utilization of an early pay off
feature that allows conversions from limited pay policies to
single pay policies.
Selling, underwriting and general expenses
increased by $9 million, or 7%, from $137 million for
the year ended December 31, 2002, to $146 million for
the year ended December 31, 2003. Amortization of DAC and
VOBA expense increased $9 million for the year ended
December 31, 2003, principally due to a larger in force
block of business. Overall general operating expenses before
deferral of costs declined $2 million over the comparable
prior year period due to expense control. This reduction
includes a $0.7 million charge associated with
restructuring of the sales force in our independent division.
Non deferrable general operating expenses were even with the
prior year.
Segment income after tax decreased by
$14 million, or 28%, from $50 million for the year ended
December 31, 2002, to $36 million for the year ended
December 31, 2003. This decrease was caused primarily by
smaller spreads between investment income earned and the fixed
benefits credited to policyholders, increased growth credited on
the Consumer Price Index block of business and higher
utilization of the early pay off feature.
Income taxes decreased by $8 million, or
30%, from $27 million for the year ended December 31,
2002, to $19 million for the year ended December 31,
2003, which was consistent with the 28% decrease in segment
income before tax.
Total revenues increased by $38 million, or
6%, from $689 million in 2001 to $727 million in 2002.
Net earned premiums and other considerations
increased by $31 million, or 6%, from $507 million in
2001 to $538 million in 2002. The increase was driven by a
$15 million increase in net earned premiums in 2002 in our
AMLIC channel due to an increase in the average size of the
policies sold and increased earned premiums from the independent
channel due to increased sales through expansion of pre-need
counselors. Policy size increased due to a change in packaging
of funerals sold by SCI.
Net investment income increased by
$5 million, or 3%, from $179 million in 2001 to
$184 million in 2002. An 8% increase in average allocated
invested assets in 2002 resulting from the growth in force
policies resulted in additional investment income in 2002.
Offsetting the increase in invested assets was a 34 basis
point decrease in yield on the investment portfolio from 7.25%
in 2001 to 6.91% in 2002 due to the lower interest rate
environment and restructuring of the investment portfolio to
enhance credit quality. The decline in yields reduced investment
income in 2002.
Fees and other income increased by
$2 million, or 66%, from $3 million in 2001 to
$5 million in 2002.
Total benefits, losses and expenses increased by
$44 million, or 7%, from $606 million in 2001 to
$650 million in 2002.
Policyholder benefits increased by
$27 million, or 6%, from $486 million in 2001 to
$513 million in 2002. The increase in policyholder benefits
was consistent with the increase in business written, partially
offset by other factors. A portion of our pre-funded funeral
insurance policies uses a Consumer Price Index rate as a growth
rate credited on policies. The Consumer Price Index rate
decreased from 3.36% in 2001 to 1.97% in
69
Selling, underwriting and general expenses
increased by $17 million, or 14%, from $120 million in
2001 to $137 million in 2002. The primary reason for the
increase was an increase in amortization of DAC and VOBA of
$12 million in 2002, as a result of the increased sales of
single pay policies versus plans paid over a three-, five- and
ten-year period. The acquisition costs on single pay policies
are amortized in the year of issue, thus causing the increase in
expense levels in 2002 over 2001. All other expenses increased
by $5 million in 2002 from 2001 due primarily to the
increase in premiums. Our mix of business has been moving toward
more single pay policies relative to multi-pay policies
increasing our expenses in any given year.
Segment income after tax decreased by
$4 million, or 7%, from $54 million in 2001 to
$50 million in 2002. This was caused primarily by smaller
spreads between our investment yields and rates we credited to
our policyholders. Also, profits were lower due to higher
utilization of the early pay off feature described above and
higher mortality, offset by the lower Consumer Price Index
credited growth.
Income taxes decreased by $2 million, or 7%,
from $29 million in 2001 to $27 million in 2002, which
was largely consistent with the 7% decrease in segment income
before income tax.
The Corporate and Other segment includes
activities of the holding company, financing expenses, net
realized gains (losses) on investments, interest income
earned from short-term investments held and interest income from
excess surplus of insurance subsidiaries not allocated to other
segments. The Corporate and Other segment includes the results
of operations of FFG, from January 1, 2001 to
March 31, 2001 (the period prior to its disposition). The
Corporate and Other segment also includes the amortization of
deferred gains associated with the sales of FFG and LTC.
70
The table below presents information regarding
Corporate and Others segment results of operations:
As of December 31, 2003, we had
approximately $393 million (pre-tax) of deferred gains that
had not yet been amortized. We expect to amortize deferred gains
from dispositions through 2031. The deferred gains are being
amortized in a pattern consistent with the expected future
reduction of the in force blocks of business ceded to The
Hartford and John Hancock. This reduction is expected to be more
rapid in the first few years after sale and to be slower as the
liabilities in the blocks decrease.
The Corporate and Other segments financial
results were affected by the April 2, 2001 sale of FFG.
Below are the results of FFG that have been included in the
Corporate and Other segment from January 1, 2001 through
March 31, 2001.
71
Total revenues increased by $86 million, or
226%, from $38 million for the year ended December 31,
2002, to $124 million for the year ended December 31,
2003.
Net investment income increased by
$3 million, or 8%, from $40 million for the year ended
December 31, 2002, to $43 million for the year ended
December 31, 2003.
Net realized gains (losses) on investments
improved by $120 million, or 102%, from net realized losses
of $118 million for the year ended December 31, 2002,
to net realized gains of $2 million for the year ended
December 31, 2003. In 2003, we had other than temporary
impairments of $20 million as compared to $85 million
for the year ended December 31, 2002. There were no
individual impairments of available for sale securities in
excess of $10 million in 2003. Impairments on available for
sale securities in excess of $10 million in 2002 consisted
of an $18 million writedown of fixed maturity investments
in NRG Energy, a $12 million writedown of fixed maturity
investments in AT&T Canada and an $11 million writedown
of fixed maturity investments in MCI WorldCom. Excluding the
effects of other-than-temporary impairments, we recorded an
increase in net realized gains of $55 million.
Amortization of deferred gain on disposal of
businesses decreased by $12 million, or 15%, from
$80 million for the year ended December 31, 2002, to
$68 million for the year ended December 31, 2003. This
decrease was consistent with the run-off of the businesses ceded
to The Hartford and John Hancock.
Gains on disposal of businesses decreased by
$11 million, or 100%, from $11 million for the year
ended December 31, 2002, to zero for the year ended
December 31, 2003. On June 28, 2002, we sold our
investment in NHP, which resulted in pre-tax gains of
$11 million.
Fees and other income decreased by
$14 million, or 56%, from $25 million for the year
ended December 31, 2002, to $11 million for the year
ended December 31, 2003. The decrease was primarily due to
$15 million of income recognized in 2002 associated with a
settlement true-up of a 1999 sale of a small block of business
to a third party and reversal of bad debt allowances due to
successful collection of receivables that had been previously
written off.
Total benefits, losses and expenses increased by
$216 million, or 125%, from $173 million for the year
ended December 31, 2002, to $389 million for the year
ended December 31, 2003.
Selling, underwriting and general expenses
increased by $14 million, or 25%, from $55 million for
the year ended December 31, 2002, to $69 million for
the year ended December 31, 2003. This increase was
primarily
72
Distributions on preferred securities of
subsidiary trusts decreased by $5 million, or 4%, from
$118 million for the year ended December 31, 2002, to
$113 million for the year ended December 31, 2003. We
redeemed $1,250 million of our mandatorily redeemable
preferred securities of subsidiary trusts in mid-December 2003,
resulting in lower expenses. We redeemed the remaining
$196 million of mandatorily redeemable preferred securities
of subsidiary trusts in January 2004. As a result of the early
extinguishment of all the mandatorily redeemable preferred
securities of subsidiary trusts we incurred $206 million of
interest premiums for the year ended December 31, 2003
compared to zero recognized in 2002.
Segment loss after tax increased by
$92 million, or 124%, from $74 million in 2002 to
$166 million in 2003. This change was primarily due to the
$206 million of interest premiums incurred related to early
extinguishment of mandatorily redeemable preferred securities of
subsidiary trusts, partially offset by the favorable
$120 million change in net realized capital gains
(losses) on investments.
Income tax benefit increased by $38 million,
or 62%, from $61 million in 2002 to $99 million in
2003. The change in the income tax benefit was consistent with
the change in segment loss before income tax. In 2002 we also
recognized the release of approximately $13 million of
previously provided tax accruals, which were no longer
considered necessary based on the resolution of certain domestic
tax matters.
Year Ended
December 31, 2002 Compared to December 31,
2001
Total revenues decreased by $210 million, or
85%, from $248 million in 2001 to $38 million in 2002.
Net earned premiums and other considerations
decreased by $58 million, or 100%, from $58 million in
2001 to zero in 2002 due to the sale of FFG.
Net investment income decreased by
$72 million, or 64%, from $112 million in 2001 to
$40 million in 2002. Excluding the $32 million
reduction in investment income from the sale of FFG, net
investment income decreased in 2002 as a result of a decrease in
invested assets because we paid down debt and acquired CORE and
DBD.
Net realized losses on investments decreased by
$1 million, or 1%, from $119 million in 2001 to
$118 million in 2002. In 2002, we had other-than-temporary
impairments of $85 million, as compared to $78 million
in 2001. Impairments of available for sale securities in excess
of $10 million in 2002 consisted of an $18 million
writedown of fixed maturity investments in NRG Energy, a
$12 million writedown of fixed maturity investments in
AT&T Canada and an $11 million writedown of fixed
maturity investments in MCI WorldCom. Impairments of available
for sale securities in excess of $10 million in 2001
consisted of a $22 million writedown of fixed maturity
investments in Enron.
Amortization of deferred gain on disposal of
businesses increased by $12 million, or 18%, from
$68 million in 2001 to $80 million in 2002, mainly due
a to full year of amortization of the deferred gain on the sale
of FFG as compared to nine months of amortization in 2001.
Gains on disposal of businesses decreased by
$51 million, or 82%, from $62 million in 2001 to
$11 million in 2002. This decrease was due to the sale of
FFGs mutual fund operations. Also, on June 28, 2002,
we sold our investment in NHP, which resulted in pre-tax gains
of $11 million in 2002.
Fees and other income decreased by
$42 million, or 63%, from $67 million in 2001 to
$25 million in 2002. Excluding the $65 million
reduction in other income due to the sale of FFG, fees and other
income increased by $23 million in 2002 mainly due to
approximately $15 million of income associated with a
settlement true- up of a 1999 sale of a small block of business
to a third party and reversal of bad debt allowances due to
successful collection of receivables that had been previously
written off.
73
Total benefits, losses and expenses decreased by
$149 million, or 46%, from $322 million in 2001 to
$173 million in 2002.
Policyholder benefits decreased by
$70 million, or 100%, from $70 million in 2001 to zero
in 2002. The decrease was entirely due to the sale of FFG.
Selling, underwriting and general expenses
decreased by $65 million, or 54%, from $120 million in
2001 to $55 million in 2002. Excluding the $86 million
reduction in selling, underwriting and general expenses
attributable to the sale of FFG, these expenses increased by
$21 million from 2001 to 2002.
Interest expense decreased by $14 million,
or 100%, from $14 million in 2001 to zero in 2002. We used
a portion of the FFG sale proceeds to repay $225 million of
debt owed to Fortis Finance.
Distributions on preferred securities of
subsidiary trusts in 2002 remained unchanged from 2001 at
$118 million.
Segment loss after tax increased by
$21 million, or 40%, from a $53 million loss in 2001
to a $74 million loss in 2002, primarily due to the sale of
FFG.
Income taxes increased by $40 million, or
190%, from $21 million in 2001 to $61 million in 2002.
Excluding the $4 million reduction in income tax expenses
due to the sale of FFG, income tax benefit increased by
$44 million in 2002. The change in the income tax benefit
was largely consistent with the increase in segment losses
before income tax. In 2002, we also recognized the release of
approximately $13 million of previously provided tax
accruals, which were no longer considered necessary based on the
resolution of certain domestic tax matters.
Investments
The following table shows the carrying value of
our investments by type of security as of the dates indicated:
Of our fixed maturity securities shown above, 70%
and 75% (based on total fair value) were invested in securities
rated A or better as of December 31, 2003 and
December 31, 2002, respectively. As interest rates
decrease, the market value of fixed maturity securities
increases.
74
The following table provides the cumulative net
unrealized gains (pre-tax) on fixed maturity securities and
equity securities as of the dates indicated:
Net unrealized gains on fixed maturity securities
increased by $94 million, or 23%, from December 31,
2002 to December 31, 2003. The increase in net unrealized
gains was primarily due to the decline in investment grade
corporate securities yield spreads combined with an increase in
Treasury yields. Spreads on investment grade corporate
securities fell by approximately 119 basis points while
yields on 10-year Treasury securities increased by 44 basis
points between December 31, 2002 and December 31, 2003.
Net unrealized gains on fixed maturity securities
increased by $246 million, or 155%, from December 31,
2001 to December 31, 2002. This reflected the impact of
declining market interest rates. Yields on 10-year
U.S. Treasury bonds decreased by 121 basis points from
5.03% at December 31, 2001, to 3.82% at December 31,
2002.
Net unrealized gains on equity securities
increased by $12 million, or 171%, from December 31,
2002, to December 31, 2003 and by $3 million, or 75%,
from December 31, 2001 to December 31, 2002.
Reserves
The following table presents reserve information
as of the dates indicated:
Future policy benefits and expenses increased by
$428 million, or 7%, from December 31, 2002 to
December 31, 2003 and by $260 million, or 5%, from
December 31, 2001 to December 31, 2002. The main
contributing factor to these increases was growth in underlying
business.
Unearned premiums decreased by $74 million,
or 2%, from December 31, 2002 to December 31, 2003 and
by $59 million, or 2%, from December 31, 2001 to
December 31, 2002. The decrease is primarily driven by the
run-off of our credit life and disability contracts, offset by
growth in other short duration contracts.
Claims and benefits payable increased by
$139 million, or 4%, from December 31, 2002 to
December 31, 2003 and increased by $124 million, or
4%, from December 31, 2001 to December 31, 2002. The
main contributing factor to these increases was growth in
underlying business.
75
The following table provides reserve information
by our major lines of business for the years ended
December 31, 2003 and 2002:
For a description of our reserving methodology,
see Note 15 of the Notes to Consolidated Financial
Statements included elsewhere in this report.
The following discusses the reserving process for
our major long duration product line.
Reserves for future policy benefits are recorded
as the present value of future benefits to policyholders and
related expenses less the present value of future net premiums.
Reserve assumptions are selected using best estimates for
expected investment yield, inflation, mortality and withdrawal
rates. These assumptions reflect current trends, are based on
Company experience and include provision for possible
unfavorable deviation. An unearned premium reserve is also
recorded which represents the balance of the excess of gross
premiums over net premiums that is still to be recognized in
future years income in a constant relationship to
insurance in force.
Loss recognition testing is performed annually.
Such testing involves the use of best estimate assumptions to
determine if the net liability position (all liabilities less
DAC) exceeds the minimum liability needed. Any premium
deficiency would first be addressed by removing the provision
for adverse deviation. To the extent a premium deficiency still
remains, it would be recognized immediately by a charge to the
statement of operations and a corresponding reduction in DAC.
Any additional deficiency would be recognized as a premium
deficiency reserve.
76
For short duration contracts, claims and benefits
payable reserves are recorded when insured events occur. The
liability is based on the expected ultimate cost of settling the
claims. The claims and benefits payable reserves include
(1) case reserves for known but unpaid claims as of the
balance sheet date; (2) IBNR reserves for claims where the
insured event has occurred but has not been reported to us as of
the balance sheet date; and (3) loss adjustment expense
reserves for the expected handling costs of settling the claims.
Periodically, we review emerging experience and make adjustments
to our case reserves and assumptions where necessary. Below are
further discussions on the reserving process for our major short
duration products.
Case or claim reserves are set for active
individual claims on group disability policies and for
disability waiver of premium benefits on group term life
policies. Assumptions considered in setting such reserves
include disabled life mortality and claim termination rates (the
rates at which disabled claimants come off claim, either through
recovery or death), claim management practices, awards for
social security and other benefit offsets and yield rates earned
on assets supporting the reserves. Group long-term disability
and group term life waiver of premium reserves are discounted
because the payment pattern and ultimate cost are fixed and
determinable on an individual claim basis.
Factors considered when setting IBNR reserves
include patterns in elapsed time from claim incidence to claim
reporting, and elapsed time from claim reporting to claim
payment.
Key sensitivities for group long-term disability
claim reserves include the discount rate and claim termination
rates. If the discount rate were reduced (or increased) by
100 basis points, reserves at December 31, 2003 would
be approximately $52 million higher (or lower). If claim
termination rates were 10% lower (or higher) than currently
assumed, reserves at December 31, 2003 would be
approximately $38 million higher (or lower).
The discount rate is also a key sensitivity for
group term life waiver of premium reserves. If the discount rate
were reduced (or increased) by 100 basis points, reserves
at December 31, 2003 would be approximately
$13 million higher (or lower).
As set forth in Note 15 of the Notes to
Consolidated Financial Statements for the years ended
December 31, 2003, 2002 and 2001, Group Disability incurred
losses related to prior years were approximately
$53 million more, $3 million less and $7 million
less than the reserves that were previously estimated for the
years ended December 31, 2003, 2002 and 2001, respectively.
Group Disability reserves are estimated based on claims incurred
in several prior years. The Group Disability reserve deficiency
in 2003, and its related upward revision reflects the result of
reserve adequacy studies concluded in the third quarter of 2003.
Based on results of those studies, reserves were increased by
$44 million, almost all of which was attributable to a
reduction in the discount rate to reflect current yields on
invested assets. The Group Disability reserve redundancies in
2002 and 2001, which were less than 1% of prior year reserves,
arose as a result of our actual claim recovery rates exceeding
those assumed in our beginning-of-year case reserves, after
taking into account an offset of one less year of discounting
reflected in the Companys end-of-year case reserves.
As set forth in Note 15 of the Notes to
Consolidated Financial Statements for the years ended
December 31, 2003, 2002 and 2001, Group Term Life incurred
losses related to prior years were approximately
$93 million, $29 million and $35 million less
than the reserves that were previously estimated for the years
ended December 31, 2003, 2002 and 2001, respectively. A
significant portion of the Group Term Life reserve is related to
waiver of premium reserves for disabled claimants. Group Term
Life waiver of premium reserves are estimated based on claims
incurred in several prior years.
Reductions in the Group Term Life reserves
reflected the results of reserve adequacy studies conducted in
the third quarter of 2003. Based on the results of those
studies, reserves were reduced by $59 million. The change
in estimate reflects an increase in the discount rate, lower
mortality rates and higher recovery rates. These changes were
made to reflect current yields on invested assets, and recent
mortality and recovery
77
The conclusion of the reserve studies determined
that, in the aggregate, the reserves were redundant. The reserve
discount rate on all claims was changed to reflect the
continuing low interest rate environment. The net impact of
these adjustments was a reduction in reserves of approximately
$18 million, which includes $3 million of reserve
release relating to the group dental business.
IBNR reserves represent the largest component of
reserves estimated for claims and benefits payable in our
Medical line of business, and we use a number of methods in
their estimation, including the loss development method and the
projected claim method for recent claim periods. We use several
methods in our Medical line of business because of the
limitations of relying exclusively on a single method.
A key sensitivity is the loss development factors
used. Loss development factors selected take into consideration
claims processing levels, claims under case management, medical
inflation, seasonal effects, medical provider discounts and
product mix. A 1% reduction (or increase) to the loss
development factors for the most recent four months would result
in approximately $22 million higher (or lower) reserves at
December 31, 2003. Our historical claims experience
indicates that approximately 85% of medical claims are paid
within four months of the incurred date.
As set forth in Note 15 of the Notes to
Consolidated Financial Statements for the years ended
December 31, 2003, 2002 and 2001, actual losses incurred in
our Medical business related to prior years were
$58 million, $43 million and $48 million less
than previously estimated for the years ended December 31,
2003, 2002 and 2001, respectively. Due to the short-tail nature
of this business, these developments relate to claims incurred
in the preceding year (i.e., in 2002, 2001 and 2000,
respectively). The redundancies in our Medical line of business,
and the related downward revisions in our Medical reserve
estimates, were caused by our claims developing more favorably
than expected. Our actual claims experience reflected lower
medical provider utilization and lower medical inflation than
assumed in our prior-year pricing and reserving processes. The
differences in actual versus best estimate paid claim lag rates,
medical provider utilization and medical inflation reflect
experience gains, which are recognized in the period the gains
emerge.
None of the changes in incurred claims from prior
years in our Medical line of business, and the related downward
revisions in our Medical estimated reserves, were attributable
to any change in our reserve methods or assumptions.
Our Property and Warranty line of business
includes creditor-placed homeowners, manufactured housing
homeowners, credit property, credit unemployment and warranty
insurance and some longer-tail coverages which we no longer
write (e.g. asbestos, environmental, other general liability and
personal accident). Our Property and Warranty loss reserves
consist of case reserves and bulk reserves. Bulk reserves
consist of IBNR and development on case reserves. The method we
most often use in setting our Property and Warranty bulk
reserves is the loss development method. Under this method, we
estimate ultimate losses for each accident period by multiplying
the current cumulative losses by the appropriate loss
development factor. We then calculate the bulk reserve as the
difference between the estimate of ultimate losses and the
current case-incurred losses (paid losses plus case reserves).
We select loss development factors based on a review of
historical averages, and we consider recent trends and business
specific matters such as current claims payment practices.
78
We may use other methods depending on data
credibility and product line. We use the estimates generated by
the various methods to establish a range of reasonable
estimates. The best estimate of reserves is selected from the
middle to upper end of third quartile of the range of reasonable
estimates.
As set forth in Note 15 of the Notes to
Consolidated Financial Statements for the periods ended
December 31, 2003, 2002 and 2001, actual losses incurred in
our Property and Warranty lines of business related to prior
years were $13 million less, $2 million more and
$27 million less than previously estimated for the years
ended December 31, 2003, 2002 and 2001, respectively. The
redundancy in our Property and Warranty lines of business, and
the related downward revisions in our estimated reserves in 2001
occurred mostly in our credit unemployment and credit property
insurance coverages, whereas the other coverages showed
immaterial adjustments to prior years incurred losses. The
small deficiency in 2002 largely reflected a shift in the mix of
business away from the credit property and unemployment product
lines. In addition, an increase in the claim frequency of
unemployment contributed to additional development and the small
deficiency experienced in 2002. In 2003, unemployment claim
frequencies stabilized, resulting in a modest redundancy. These
changes reflect experience gains and losses from actual claim
frequencies differing from the best estimate claim frequencies,
and differences in actual versus best estimate paid claim lag
rates. Such gains and losses are recognized in the periods they
emerge.
For the longer-tail Property and Warranty
coverages (e.g., asbestos, environmental, other general
liability and personal accident), there were no changes in
estimated amounts for incurred claims in prior years for all
years.
None of the changes in incurred claims from prior
years, and the related downward revisions in estimated reserves,
was attributable to any change in our reserve methods or
assumptions.
Most of our credit insurance business is written
on a retrospective commission basis, which permits Assurant
Solutions to adjust commissions based on claims experience.
Thus, any adjustment to prior years incurred claims in
this line of business is largely offset by a change in
contingent commissions which is included in the selling,
underwriting and general expenses line in the results of
operations.
Reinsurance
The following table sets forth our reinsurance
recoverables as of the dates indicated:
Reinsurance recoverables decreased by
$205 million, or 4%, from December 31, 2002 to
December 31, 2003. We have used reinsurance to exit certain
businesses, such as the dispositions of FFG and LTC. The
reinsurance recoverables relating to these dispositions amounted
to $2,410 million at December 31, 2003 and
$2,255 million at December 31, 2002.
In the ordinary course of business, we are
involved in both the assumption and cession of reinsurance with
non-affiliated companies. The following table provides details
of the reinsurance recoverables balance for the years ended
December 31:
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We utilize ceded reinsurance for loss protection
and capital management, business dispositions and, in Assurant
Solutions, for client risk and profit sharing.
As part of our overall risk and capacity
management strategy, we purchase reinsurance for certain risks
underwritten by our various business segments, including
significant individual or catastrophic claims, and to free up
capital to enable us to write additional business.
For those product lines where there is exposure
to catastrophes, we closely monitor and manage the aggregate
risk exposure by geographic area, and we have entered into
reinsurance treaties to manage exposure to these types of events.
Under indemnity reinsurance transactions in which
we are the ceding insurer, we remain liable for policy claims if
the assuming company fails to meet its obligations. To limit
this risk, we have control procedures to evaluate the financial
condition of reinsurers and to monitor the concentration of
credit risk to minimize this exposure. The selection of
reinsurance companies is based on criteria related to solvency
and reliability and, to a lesser degree, diversification as well
as developing strong relationships with our reinsurers for the
sharing of risks.
We have used reinsurance to exit certain
businesses, such as the dispositions of FFG and LTC. Reinsurance
was used in these cases to facilitate the transactions because
the businesses shared legal entities with business segments that
we retained. Assets backing liabilities ceded relating to these
businesses are held in trusts, and the separate accounts
relating to FFG are still reflected in our balance sheet.
The reinsurance recoverable from The Hartford was
$1,537 million and $1,558 million as of
December 31, 2003 and 2002, respectively. The reinsurance
recoverable from John Hancock was $873 million and
$697 million as of December 31, 2003 and 2002,
respectively. We would be responsible for administering this
business and funding policyholder liabilities in the event of a
default by reinsurers.
The Assurant Solutions segment writes business
produced by its clients, such as mortgage lenders and servicers
and financial institutions, and reinsures all or a portion of
such business to insurance subsidiaries of the clients. Such
arrangements allow significant flexibility in structuring the
sharing of risks and profits on the underlying business.
A substantial portion of Assurant Solutions
reinsurance activities are related to agreements to reinsure
premiums and risk related to business generated by certain
clients to the clients captive insurance companies or to
reinsurance subsidiaries in which the clients have an ownership
interest. Through these arrangements, our insurance subsidiaries
share some of the premiums and risk related to client-generated
business with these clients. When the reinsurance companies are
not authorized to do business in our insurance subsidiarys
domiciliary state, our insurance subsidiary generally obtains
collateral, such as a trust or a letter of credit, from the
reinsurance company or its affiliate in an amount equal to the
outstanding reserves to obtain full financial credit in the
domiciliary state for the reinsurance. Our reinsurance
agreements do not relieve us from our direct obligation to our
insured. Thus, a credit exposure exists to the extent that any
reinsurer is unable to meet the obligations assumed in the
reinsurance agreements. To minimize our exposure to reinsurance
insolvencies, we evaluate the financial condition of our
reinsurers and hold substantial collateral (in the form of
funds, trusts and letters of credit) as security under the
reinsurance agreements. See Item 7A
Quantitative and Qualitative Disclosures about Market
Risk Credit Risk.
Liquidity and Capital Resources
Assurant, Inc. is a holding company, and as
such, has limited direct operations of its own. Our holding
company assets consist primarily of the capital stock of our
subsidiaries. Accordingly, our future cash flows
80
Dividends and other interest income paid by our
subsidiaries totaled $99.5 million for the year ended
December 31, 2003, $186.5 million for the year ended
December 31, 2002 and $615.4 million for the year
ended December 31, 2001. Figures for 2001 were higher due
to a gain on the sale of FFG. We used these cash inflows
primarily to pay expenses, to perform other acquisitions, to
make interest payments on indebtedness and to make dividend
payments to our stockholders.
The primary sources of funds for our subsidiaries
consist of premiums and fees collected, the proceeds from the
sales and maturity of investments and investment income. Cash is
primarily used to pay insurance claims, agent commissions,
operating expenses and taxes. We generally invest our
subsidiaries excess funds in order to generate income.
Historically, Fortis has maintained a
$1 billion commercial paper facility that we have been able
to access (via intercompany loans) for up to $750 million.
We use the commercial paper facility to cover any cash
shortfalls, which may occur from time to time. During 2003, we
accessed $75 million of this facility for 3 days in
connection with the extinguishment of our mandatorily redeemable
preferred securities of subsidiary trusts. We had no commercial
paper borrowings during the year ended December 31, 2002.
In 2001, $217 million in commercial paper was issued and
redeemed. There was no outstanding commercial paper at year-end
2001. In connection with our separation from Fortis, we no
longer have access to this facility. In March 2004, we intend to
establish a $500 million commercial paper program, which
will be available for working capital and other general
corporate purposes. Our subsidiaries do not maintain commercial
paper or other borrowing facilities at the subsidiary level.
In December 2003, we entered into two senior
bridge credit facilities of $650 million and
$1,100 million. The aggregate indebtedness of
$1,750 million under the facility was in connection with
the extinguishment of our mandatorily redeemable preferred
securities of subsidiary trusts.
On January 30, 2004, we entered into a
$500 million senior revolving credit facility with a
syndicate of banks arranged by Banc One Capital
Markets, Inc. and Citigroup Global Markets, Inc.,
which will be available for working capital and other general
corporate purposes. The revolving credit facility is unsecured
and is available until February 2007, so long as we are not in
default.
The revolving credit facility contains
restrictive covenants. The terms of the revolving credit
facility also require that we maintain certain specified minimum
ratios or thresholds. As of March 11, 2004 we are in
compliance with all covenants and we maintain all specified
minimum ratios and thresholds.
On February 5, 2004, we received a
$725.5 million capital contribution from Fortis
simultaneously with the closing IPO. The proceeds from that
contribution were used to repay the $650 million of
outstanding indebtedness under the senior bridge credit facility
and $75.5 million of outstanding indebtedness under the
$1,100 million senior bridge credit facility. In addition,
we repaid a portion of the $1,100 million senior bridge
credit facility with $49.5 million in cash. We also
refinanced the remaining amount outstanding under the
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On February 18, 2004, we issued two series
of senior notes in an aggregate principal amount of
$975 million. The first series is $500 million in
principal amount, bears interest at 5.625% per year and is
payable in a single installment due February 15, 2014. The
second series is $475 million in principal amount, bears
interest at 6.750% per year and is payable in a single
installment due February 15, 2034.
Interest on our senior notes is payable
semi-annually on February 15 and August 15 of each
year, commencing August 15, 2004. The senior notes are our
unsecured obligations and rank equally with all of our other
senior unsecured indebtedness. The senior notes are not
redeemable prior to maturity. The net proceeds from the issuance
of the senior notes were used to repay a portion of our
outstanding indebtedness under our $1.1 billion senior
bridge facility.
At the time of offering our senior notes, we
entered into a registration rights agreement. The registration
rights agreement requires us to file a registration statement
under the Securities Act to permit the exchange of the senior
notes for registered notes having nearly identical terms as the
senior notes or to permit the registered resale of the senior
notes. If we fail to comply with the filing requirements under
our registration rights agreement within certain time periods,
the interest rates on the senior notes are subject to increase.
Our qualified pension plan was under-funded by
$60 million at December 31, 2003. In accordance with
ERISA, there is no expected minimum funding requirement for 2004
or 2005. Our nonqualified plan, which is unfunded, had a
projected benefit obligation of $72 million at
December 31, 2003. The expected Company payments to
retirees under this plan are approximately $4 million per
year in 2004 and 2005. Also, our post-retirement plans (other
than pension), which are partially funded with $7 million
of assets, had an accumulated post-retirement benefit obligation
of $51 million at December 31, 2003. In addition, the
expected Company payments to retirees and dependents under the
postretirement plan are approximately $1.2 million per year
in 2004 and 2005. See Note 17 of the Notes to Consolidated
Financial Statements included elsewhere in this report.
We estimate that our capital expenditures in
connection with our name change and rebranding initiative will
be approximately $10 million, which we will expense in
2004. We are not currently planning to make any other
significant capital expenditures in 2004 or 2005.
During January 2004 we paid to participants in
the Assurant Appreciation Incentive Rights Plan an aggregate of
$25 million in connection with the cash-out of all
outstanding Fortis, Inc. incentive rights. See
Item 11 Executive
Compensation Long-Term Incentive Plan Awards.
In managements opinion, our
subsidiaries cash flow from operations together with our
income and gains from our investment portfolio will provide
sufficient liquidity to meet our needs in the ordinary course of
business.
We monitor cash flows at both the consolidated
and subsidiary levels. Cash flow forecasts at the consolidated
and subsidiary levels are provided on a monthly basis, and we
use trend and variance analyses to project future cash needs.
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The table below shows our recent net cash flows:
Cash Flows for the Years Ended
December 31, 2003, 2002 and 2001.
The key changes of the net cash inflow of $347 million for
the year ended December 31, 2003 were net purchases of
fixed maturity securities of $1,929 million, maturities of
these securities of $1,131 million, and issuance of debt in
the amount of $2,400 million. Key changes of the net cash
outflow of $58 million for the year ended December 31,
2002 were net purchases of fixed maturity securities of
$1,164 million and maturities of these securities of
$858 million. Key changes of the net cash inflow of
$34 million for the year ended December 31, 2001 were
the sale of FFG for $385 million in cash and changes in our
revenues and expenses from operating activities as described
above.
At December 31, 2003, we had total debt
outstanding of $1,970 million, as compared to
$1,471 million at December 31, 2002, and
December 31, 2001. At December 31, 2003 this debt
consisted of $1,750 million of two senior bridge credit
facility arrangements, $196 million of mandatorily
redeemable preferred securities of subsidiary trusts, and
$24 million of mandatorily redeemable preferred stock. At
December 31, 2002 and 2001 this debt consisted of trust
capital securities, which we classify as mandatorily redeemable
preferred securities of subsidiary trusts, and a small amount of
mandatorily redeemable preferred stock.
The table below shows our cash outflows for
distributions and dividends for the periods indicated:
83
We have obligations and commitments to third
parties as a result of our operations. These obligations and
commitments, as of December 31, 2003, are detailed in the
table below by maturity date as of the dates indicated:
In December 2003 and January 2004, we redeemed
all of the mandatorily redeemable preferred securities of
subsidiary trusts for a redemption price equal to their
aggregate liquidation amount plus accrued and unpaid interest to
the date of redemption and aggregate premium of approximately
$206 million, all of which was expensed in the fourth
quarter of 2003. We entered into the senior bridge credit
facilities described under Liquidity and Capital
Resources in connection with these redemptions.
In the normal course of business, letters of
credit are issued primarily to support reinsurance arrangements.
These letters of credit are supported by commitments with
financial institutions. We had approximately $118 million
and $120 million of letters of credit outstanding as of
December 31, 2003 and December 31, 2002, respectively.
Additionally, as of December 31, 2003, we
had an unused $50 million letter of credit facility.
RISK FACTORS
Risks Related to Our Company
Our relationships and contractual arrangements
with significant clients, distributors and other parties with
which we do business are important to the success of our
business segments. Many of these arrangements are exclusive. For
example, in Assurant Solutions, we have exclusive relationships
with several mortgage lenders
84
For example, Assurant Solutions lost a few
clients over the last three years as a result of bankruptcies
and termination of contracts either by it or its clients;
however, none of the clients lost was significant to its
business. At Assurant Health, client turnover increased slightly
over the last three years from issues related to the slowing
economy, particularly in 2001 through early 2003; however, none
of the clients lost was significant to its business. Similar to
Assurant Health, Assurant Employee Benefits client
turnover increased slightly over the last three years from
issues related to the slowing economy, particularly in 2001
through early 2003, such as companies going out of business and
businesses no longer providing benefits; however, none of the
clients lost was significant to its business. Assurant PreNeed
terminated client relationships with three funeral home groups
in 2003 because of profitability issues with the business;
however, none of the clients terminated was significant to its
business.
We distribute our insurance products and services
through a variety of distribution channels including:
independent employee benefits specialists, brokers, managing
general agents, life agents, financial institutions, funeral
directors, association groups and other third-party marketing
organizations.
We do not distribute our insurance products and
services through captive or affiliated agents except for a small
number of affiliated agents at Assurant Health. Our
relationships with these various distributors are significant
both for our revenues and profits. In Assurant Health, we depend
in large part on the services of independent agents and brokers
and on associations, including Health Advocates Alliance, in the
marketing of our products. In Assurant Employee Benefits,
independent agents and brokers who act as advisors to our
customers, market and distribute our products. Independent
agents and brokers are typically not exclusively dedicated to us
and usually also market products of our competitors. Strong
competition exists among insurers to form relationships with
agents and brokers of demonstrated ability. We compete with
other insurers for sales representatives, agents and brokers
primarily on the basis of our financial position, support
services, compensation and product features. In addition, by
relying on independent agents and brokers to distribute products
for us, we face continued competition from our competitors
products. Moreover, our ability to market our products and
services depends on our ability to tailor our channels of
distribution to comply with changes in the regulatory
environment. Recently, the marketing of health insurance through
association groups has come under increased scrutiny. An
interruption in, or changes to, our relationships with various
third-party distributors or our inability to respond to
regulatory changes could impair our ability to compete and
market our insurance products and services and materially
adversely affect our results of operations and financial
condition.
85
We have our own sales representatives whose role
in the distribution process varies by segment. We depend in
large part on our sales representatives to develop and maintain
client relationships. Our inability to attract and retain
effective sales representatives could materially adversely
affect our results of operations and financial condition.
Our results of operations and financial condition
may be materially adversely affected from time to time by
general economic, financial market and political conditions.
These conditions include economic cycles such as insurance
industry cycles, levels of employment, levels of consumer
lending, levels of inflation and movements of the financial
markets.
Fluctuations in interest rates, monetary policy,
demographics, and legislative and competitive factors also
influence our performance. During periods of economic downturn:
In addition, general inflationary pressures may
affect the costs of medical and dental care, as well as repair
and replacement costs on our real and personal property lines,
increasing the costs of paying claims. Inflationary pressures
may also affect the costs associated with our pre-funded funeral
insurance policies, particularly those that are guaranteed to
grow with the Consumer Price Index.
We maintain reserves to cover our estimated
ultimate exposure for claims and claim adjustment expenses with
respect to reported and unreported claims incurred but not
reported as of the end of each accounting period. Reserves,
whether calculated under GAAP or statutory accounting principles
(SAP), do not represent an exact calculation of exposure, but
instead represent our best estimates, generally involving
actuarial projections at a given time, of what we expect the
ultimate settlement and administration of a claim or group of
claims will cost based on our assessment of facts and
circumstances then known. The adequacy of reserves will be
impacted by future trends in claims severity, frequency,
judicial theories of liability and other factors. These
variables are affected by both external and internal events,
such as: changes in the economic cycle, changes in the social
perception of the value of work, emerging medical perceptions
regarding physiological or psychological causes of disability,
emerging health issues and new methods of treatment or
accommodation, inflation, judicial trends, legislative changes
and claims handling procedures.
Many of these items are not directly
quantifiable, particularly on a prospective basis. Reserve
estimates are refined as experience develops. Adjustments to
reserves, both positive and negative, are reflected in the
statement of operations of the period in which such estimates
are updated. Because establishment of reserves is an inherently
uncertain process involving estimates of future losses, there
can be no certainty that ultimate losses will not exceed
existing claims reserves. During the past three years, we did
not experience substantial deviations in actual claims losses
from reserve estimates previously established. However, future
loss
86
Our profitability depends in large part on
accurately predicting benefits, claims and other costs,
including medical and dental costs, and predictions regarding
the frequency and magnitude of claims on our disability and
property coverages. It also depends on our ability to manage
future benefit and other costs through product design,
underwriting criteria, utilization review or claims management
and, in health and dental insurance, negotiation of favorable
provider contracts. The aging of the population and other
demographic characteristics and advances in medical technology
continue to contribute to rising health care costs. Our ability
to predict and manage costs and claims, as well as our business,
results of operations and financial condition may be adversely
affected by: changes in health and dental care practices,
inflation, new technologies, the cost of prescription drugs,
clusters of high cost cases, changes in the regulatory
environment, economic factors, the occurrence of catastrophes
and numerous other factors affecting the cost of health and
dental care and the frequency and severity of claims in all our
business segments.
The judicial and regulatory environments, changes
in the composition of the kinds of work available in the
economy, market conditions and numerous other factors may also
materially adversely affect our ability to manage claim costs.
As a result of one or more of these factors or other factors,
claims could substantially exceed our expectations, which could
have a material adverse effect on our results of operations and
financial condition.
As industry practices and legal, judicial, social
and other environmental conditions change, unexpected and
unintended issues relating to claims and coverage may emerge.
These issues could materially adversely affect our results of
operations and financial condition by either extending coverage
beyond our underwriting intent or by increasing the number or
size of claims or both. We may be limited in our ability to
respond to such changes, by insurance regulations, existing
contract terms, contract filing requirements, market conditions
or other factors.
In addition, Assurant PreNeed generally writes
whole life insurance policies with increasing death benefits and
obtains much of its profits through interest rate spreads.
Interest rate spreads refer to the difference between the death
benefit growth rates on pre-funded funeral insurance policies
and the investment returns generated on the assets we hold
related to those policies. As of December 31, 2003,
approximately 81% of Assurant PreNeeds in force insurance
policy reserves related to policies that provide for death
benefit growth, some of which provide for minimum death benefit
growth pegged to changes in the Consumer Price Index. In
extended periods of declining interest rates or high inflation,
there may be compression in the spread between Assurant
PreNeeds death benefit growth rates and its investment
earnings. As a result, declining interest rates or high
inflation rates may have a material adverse effect on our
results of operations and our overall financial condition.
Assurant Employee Benefits calculates reserves
for long-term disability and life waiver of premium claims using
net present value calculations based on current interest rates
at the time claims are funded and expectations regarding future
interest rates. If interest rates decline, reserves for open
and/or new claims would need to be calculated using lower
discount rates thereby increasing the net present value of those
claims and the required reserves. Depending on the magnitude of
the decline, this could have a material adverse effect on our
results of operations and financial condition. In addition,
investment income may be lower than that assumed in setting
premium rates.
Our insurance operations expose us to claims
arising out of catastrophes, particularly in our homeowners,
life and other personal business lines. We have experienced, and
expect in the future to experience,
87
The extent of losses from a catastrophe is a
function of both the total amount of insured exposure in the
area affected by the event and the severity of the event. Most
of our catastrophe claims in the past have related to homeowners
and other personal lines coverages, which for the year ended
December 31, 2003 represents approximately 24% of our net
earned premiums and other considerations in our Assurant
Solutions segment. In addition, as of December 31, 2003,
approximately 34% of the insurance in force in our homeowners
and other personal lines relates to properties located in
California, Florida and Texas. As a result of our
creditor-placed homeowners insurance product, our concentration
in these areas may increase in the future. This is because in
our creditor-placed homeowners insurance line, we agree to
provide homeowners insurance coverage automatically. If other
insurers withdraw coverage in these or other states, this may
lead to adverse selection and increased utilization of our
creditor-placed homeowners insurance in these areas.
Claims resulting from natural or man-made
catastrophes could cause substantial volatility in our financial
results for any fiscal quarter or year and could materially
reduce our profitability or harm our financial condition. Our
ability to write new business also could be affected. Increases
in the value and geographic concentration of insured property
and the effects of inflation could increase the severity of
claims from catastrophes in the future.
Pre-tax catastrophe losses in excess of
$1 million (before the benefits of reinsurance) that we
have experienced in recent years are:
In addition, our group life and health insurance
operations could be materially impacted by catastrophes such as
terrorist attacks or by an epidemic that causes a widespread
increase in mortality, morbidity or disability rates or that
causes an increase in the need for medical care. For example,
the influenza epidemic of 1918 caused several million deaths.
Losses due to catastrophes would not generally be covered by
reinsurance and could have a material adverse effect on our
results of operations and financial condition.
Our ability to manage these risks depends in part
on our successful utilization of catastrophic property and life
reinsurance to limit the size of property and life losses from a
single event or multiple events, and life and disability
reinsurance to limit the size of life or disability insurance
exposure on an individual insured life. It also depends in part
on state regulation that may prohibit us from excluding such
risks or from withdrawing from or increasing premium rates in
catastrophe-prone areas. As discussed further below, catastrophe
reinsurance for our group insurance lines is not currently
widely available. This means that the occurrence of a
significant catastrophe could materially reduce our
profitability and have a material adverse effect on our results
of operations and financial condition.
In addition, in Assurant PreNeed the average age
of policyholders is in excess of 70 years. This group is
more susceptible to epidemics than the overall population, and
an epidemic resulting in a higher incidence of mortality could
have a material adverse effect on our results of operations and
financial condition.
88
As part of our overall risk and capacity
management strategy, we purchase reinsurance for certain risks
underwritten by our various business segments. Market conditions
beyond our control determine the availability and cost of the
reinsurance protection we purchase. For example, subsequent to
the terrorist assaults of September 11, 2001, reinsurance
for man-made catastrophes became generally unavailable due to
capacity constraints and, to the limited extent available, much
more expensive. The high cost of reinsurance or lack of
affordable coverage could adversely affect our results. If we
fail to obtain sufficient reinsurance, it could adversely affect
our ability to write future business.
As part of our business, we have reinsured
certain life, property and casualty and health risks to
reinsurers. Although the reinsurer is liable to us to the extent
of the ceded reinsurance, we remain liable as the direct insurer
on all risks reinsured. As a result, ceded reinsurance
arrangements do not eliminate our obligation to pay claims. We
are subject to credit risk with respect to our ability to
recover amounts due from reinsurers. Our reinsurers may not pay
the reinsurance recoverables that they owe to us or they may not
pay such recoverables on a timely basis. A reinsurers
insolvency, underwriting results or investment returns may
affect its ability to fulfill reinsurance obligations.
Our reinsurance facilities are generally subject
to annual renewal. We may not be able to maintain our current
reinsurance facilities and, even where highly desirable or
necessary, we may not be able to obtain other reinsurance
facilities in adequate amounts and at favorable rates. If we are
unable to renew our expiring facilities or to obtain new
reinsurance facilities, either our net exposures would increase
or, if we are unwilling to bear an increase in net exposures, we
may have to reduce the level of our underwriting commitments.
Either of these potential developments could materially
adversely affect our results of operations and financial
condition.
We have sold businesses through reinsurance ceded
to third parties, such as our 2001 sale of FFG to The Hartford.
The assets backing the liabilities on these businesses are held
in a trust, and the separate accounts relating to the FFG
business are still reflected on our balance sheet. However, we
would be responsible for administering this business in the
event of a default by the reinsurer. We do not have the
administrative systems and capabilities to process this business
today. Accordingly, we would need to obtain those capabilities
in the event of an insolvency of one or more of the reinsurers
of these businesses. We might be forced to obtain such
capabilities on unfavorable terms, with a resulting material
adverse effect on our results of operations and financial
condition. In addition, under the reinsurance agreement, The
Hartford is obligated to contribute funds to increase the value
of the separate accounts relating to the business sold if such
value declines. If The Hartford fails to fulfill these
obligations, we will be obligated to make these payments.
We advance agents commissions as part of
our pre-funded funeral insurance product offerings. These
advances are a percentage of the total face amount of coverage
as opposed to a percentage of the first-year premium paid, the
formula that is more common in other life insurance markets.
There is a one-year payback provision against the agency if
death or lapse occurs within the first policy year. There is a
very large producer within Assurant PreNeed and if it were
unable to fulfill its payback obligations, it could have an
adverse effect on our results of operations and financial
condition. However, we have not had any loss experience with
this very large producer to date. In addition, we are subject to
the credit risk of the parties with which we contract in
Assurant Solutions. If these parties fail to remit payments owed
to us or pass on payments they collect on our behalf, it could
have an adverse effect on our results of operations. For
example, a client with whom we do business has declared
bankruptcy. In the event that this client does not honor its
claims obligation, we would be liable for making payment, which
we estimate to be approximately $37 million, net of
offsetting collateral,
89
The manufactured housing industry has experienced
a significant decline in both shipments and retail sales in the
last five years. Manufactured housing shipments have decreased
from approximately 370,000 in 1998 to 130,000 in 2003,
representing a 65% decline. Repossessions are at an all time
high, resale values have been significantly reduced and several
lenders, dealers, manufacturers and vertically integrated
manufactured housing companies have either ceased operations or
gone bankrupt. This downturn in the industry is the result of
several factors, including excess production, aggressive sales
practices, reduced underwriting standards and poor lending
practices. As a result of this downturn, the industry has
experienced consolidation, with the leaders purchasing the
weaker competitors. If these downward trends continue, our
results of operations and financial condition may be adversely
affected.
Ratings have become an increasingly important
factor in establishing the competitive position of insurance
companies. All of our domestic operating insurance subsidiaries
are rated by A.M. Best, six of our domestic operating insurance
subsidiaries are rated by Moodys and seven of our domestic
operating insurance subsidiaries are rated by S&P and Fitch.
The ratings reflect A.M. Bests, Moodys,
S&Ps and Fitchs opinions of our
subsidiaries financial strength, operating performance,
strategic position and ability to meet their obligations to
policyholders. The ratings are not evaluations directed to
investors and are not recommendations to buy, sell or hold our
securities. These ratings are subject to periodic review by
A.M. Best, Moodys, S&P and Fitch, and we cannot
assure you that we will be able to retain these ratings.
Most of our domestic operating insurance
subsidiaries have A.M. Best financial strength ratings of A
(Excellent), which is the second highest of ten
ratings categories and the highest within the category based on
modifiers (i.e., A and A- are Excellent). Our other
domestic operating insurance subsidiaries have A.M. Best
financial strength ratings of A- (Excellent), which
is the second highest of ten ratings categories and the lowest
within the category based on modifiers.
The Moodys financial strength rating is A2
(Good) for one of our domestic operating insurance
subsidiaries, which is the third highest of nine ratings
categories and mid-range within the category based on modifiers
(i.e., A1, A2 and A3 are Good), and A3
(Good) for five of our domestic operating insurance
subsidiaries, which is the third highest of nine ratings
categories and the lowest within the category based on modifiers.
The S&P financial strength rating is A
(Strong) for five of our domestic operating
insurance subsidiaries, which is the third highest of nine
ratings categories and mid-range within the category based on
modifiers (i.e., A+, A and A- are Strong), and A-
(Strong) for two of our domestic operating insurance
subsidiaries, which is the third highest of nine ratings
categories and the lowest within the category based on modifiers.
The Fitch financial strength rating for the seven
rated domestic insurance companies is A (Strong)
which is the third highest of twelve rating categories and
mid-range within the category based on modifiers (i.e., A+, A,
and A- are Strong).
Rating agencies review their ratings periodically
and our current ratings may not be maintained in the future. If
our ratings are reduced from their current levels by
A.M. Best, Moodys, S&P or Fitch, or placed under
surveillance or review with possible negative implications, our
competitive position in the respective insurance industry
segments could suffer and it could be more difficult for us to
market our products. Rating agencies may take action to lower
our ratings in the future due to, among other things: the
competitive
90
As customers and their advisors place importance
on our financial strength ratings, we may lose customers and
compete less successfully if we are downgraded. In addition,
ratings impact our ability to attract investment capital on
favorable terms. If our financial strength ratings are reduced
from their current levels by A.M. Best, Moodys,
S&P or Fitch, our cost of borrowing would likely increase,
our sales and earnings could decrease and our results of
operations and financial condition could be materially adversely
affected.
Contracts representing approximately 18% of
Assurant Solutions net earned premiums and fee income for
the year ended December 31, 2003 contain provisions
requiring the applicable subsidiaries to maintain minimum
A.M. Best financial strength ratings ranging from
A or better to B or better, depending on
the contract. Our clients may terminate these contracts if the
subsidiaries ratings fall below these minimum acceptable
levels. Under our ten-year marketing agreement with SCI,
American Memorial Life Insurance Company (AMLIC), one of our
subsidiaries in the Assurant PreNeed segment, is required to
maintain an A.M. Best financial strength rating of
B or better throughout the term of the agreement. If
AMLIC fails to maintain this rating for a period of
180 days, SCI may terminate the agreement. In our Assurant
Health and Assurant Employee Benefits segments, we do not have
any material contracts that permit termination in the case of a
ratings downgrade.
Since January 1, 2000, none of the A.M. Best
ratings for our domestic operating insurance subsidiaries has
been downgraded. On September 25, 2003, the Moodys
financial strength rating for Fortis Benefits Insurance Company,
one of our domestic operating insurance subsidiaries, was
downgraded from A1 (Good) to A2 (Good)
and the financial strength rating for John Alden Life Insurance
Company, another domestic operating insurance subsidiary, was
downgraded from A2 (Good) to A3 (Good)
in contemplation of the fact that we would no longer be wholly
owned by Fortis. In addition, on May 2, 2003, Moodys
downgraded the insurance financial strength rating of Fortis
Benefits Insurance Company from Aa3 (Excellent) to
A1 (Good) corresponding to the downgrading of
Fortis. These recent downgrades did not have a quantifiable
impact on the business of these subsidiaries primarily because
our operating insurance companies rely solely on the ratings of
A.M. Best for the marketing and sale of their products.
Our business is dependent upon our ability to
keep up to date with technological advances. This is
particularly important in Assurant Solutions, where our systems,
including our ability to keep our systems fully integrated with
those of our clients, are critical to the operation of our
business. Our failure to update our systems to reflect
technological advancements or to protect our systems may
adversely affect our relationships and ability to do business
with our clients.
During the year ended December 31, 2003, we
have spent approximately $90 million in Assurant Solutions,
$55 million in Assurant Health, $43 million in
Assurant Employee Benefits and $4 million in Assurant
PreNeed to maintain, upgrade and consolidate our information
systems. In 2004, we plan to spend for these purposes
approximately $124 million in Assurant Solutions,
$73 million in Assurant Health, $53 million in
Assurant Employee Benefits and $5 million in Assurant
PreNeed.
In addition, our business depends significantly
on effective information systems, and we have many different
information systems for our various businesses. We must commit
significant resources to maintain and enhance our existing
information systems and develop new information systems in order
to keep pace with continuing changes in information processing
technology, evolving industry and regulatory standards and
changing customer preferences. As a result of our acquisition
activities, we have acquired additional information systems. Our
failure to maintain effective and efficient information systems,
or our failure to efficiently and effectively consolidate our
information systems to eliminate redundant or obsolete
applications, could have a material adverse effect on our
results of operations and financial condition. If we do not
maintain
91
Our management information, internal control and
financial reporting systems may need further enhancements and
development to satisfy the financial and other reporting
requirements of being a public company.
A number of our businesses are subject to privacy
regulations and to confidentiality obligations. For example, the
collection and use of patient data in our Assurant Health
segment is the subject of national and state legislation,
including the Health Insurance Portability and Accountability
Act of 1996 (HIPAA), and certain of the activities conducted by
our Assurant Solutions segment are subject to the privacy
regulations of the Gramm-Leach-Bliley Act. We also have
contractual obligations to protect certain confidential
information we obtain from our existing vendors and clients.
These obligations generally include protecting such confidential
information in the same manner and to the same extent as we
protect our own confidential information. The actions we take to
protect such confidential information vary by business segment
and may include among other things: training and educating our
employees regarding our obligations relating to confidential
information; actively monitoring our record retention plans and
any changes in state or federal privacy and compliance
requirements; drafting appropriate contractual provisions into
any contract that raises proprietary and confidentiality issues;
maintaining secure storage facilities for tangible records; and
limiting access to electronic information and maintaining a
clean desk policy aimed at safeguarding certain
current information.
In addition, we must develop, implement and
maintain a comprehensive written information security program
with appropriate administrative, technical and physical
safeguards to protect such confidential information. If we do
not properly comply with privacy regulations and protect
confidential information we could experience adverse
consequences, including regulatory problems, loss of reputation
and client litigation.
See Risks Related to Our
Industry Cost of compliance with privacy laws could
adversely affect our business and results of operations.
From time to time, we evaluate possible
acquisition transactions and the start-up of complementary
businesses, and at any given time, we may be engaged in
discussions with respect to possible acquisitions and new
ventures. While our business model is not dependent upon
acquisitions or new insurance ventures, the time frame for
achieving or further improving upon our desired market positions
can be significantly shortened through opportune acquisitions or
new insurance ventures. Historically, acquisitions and new
insurance ventures have played a significant role in achieving
desired market positions in some, but not all, of our
businesses. We cannot assure you that we will be able to
identify suitable acquisition transactions or insurance
ventures, that such transactions will be financed and completed
on acceptable terms or that our future acquisitions or ventures
will be successful. The process of integrating any companies we
do acquire or investing in new ventures could have a material
adverse effect on our results of operations and financial
condition.
In addition, implementation of an acquisition
strategy entails a number of risks, including among other
things: inaccurate assessment of undisclosed liabilities;
difficulties in realizing projected efficiencies, synergies and
cost savings; failure to achieve anticipated revenues, earnings
or cash flow; an increase in our indebtedness; and a limitation
in our ability to access additional capital when needed.
Our failure to adequately address these
acquisition risks could materially adversely affect our results
of operations and financial condition. Although we believe that
most of our acquisitions have been successful and
92
As a holding company whose principal assets are
the capital stock of our subsidiaries, we rely primarily on
dividends and other statutorily permissible payments from our
subsidiaries to meet our obligations for payment of interest and
principal on outstanding debt obligations, dividends to
stockholders (including any dividends on our common stock) and
corporate expenses. The ability of our subsidiaries to pay
dividends and to make such other payments in the future will
depend on their statutory surplus, future statutory earnings and
regulatory restrictions. Except to the extent that we are a
creditor with recognized claims against our subsidiaries, claims
of the subsidiaries creditors, including policyholders,
have priority with respect to the assets and earnings of the
subsidiaries over the claims of our creditors. If any of our
subsidiaries should become insolvent, liquidate or otherwise
reorganize, our creditors and stockholders will have no right to
proceed against the assets of that subsidiary or to cause the
liquidation, bankruptcy or winding-up of the subsidiary under
applicable liquidation, bankruptcy or winding-up laws. The
applicable insurance laws of the jurisdiction where each of our
insurance subsidiaries is domiciled would govern any proceedings
relating to that subsidiary. The insurance authority of that
jurisdiction would act as a liquidator or rehabilitator for the
subsidiary. Both creditors and policyholders of the subsidiary
would be entitled to payment in full from the subsidiarys
assets before we, as a stockholder, would be entitled to receive
any distribution from the subsidiary.
The payment of dividends to us by any of our
insurance subsidiaries in excess of a certain amount (i.e.,
extraordinary dividends) must be approved by the
subsidiarys domiciliary state department of insurance.
Ordinary dividends, for which no regulatory approval is
generally required, are limited to amounts determined by
formula, which varies by state. The formula for more than half
of the states in which our subsidiaries are domiciled is the
greater of (i) 10% of the statutory surplus as of the end
of the prior year or (ii) the prior years statutory
net income. In the remaining states in which our subsidiaries
are domiciled, the formula is the lesser amount of
clauses (i) and (ii). Some states, however, have an
additional stipulation that dividends may only be paid out of
earned surplus. In addition, as part of the regulatory approval
process for the acquisition of ABIG in 1999, we entered into an
agreement with the Florida Insurance Department pursuant to
which, until August of 2004, two of our subsidiaries have agreed
to limit the amount of ordinary dividends they would pay to us
to an amount no greater than 50% of the amount otherwise
permitted under Florida law. Likewise, one of our subsidiaries,
First Fortis Life Insurance Company, entered into an agreement
with the New York Insurance Department as part of the
regulatory approval process for the merger of Bankers American
Life Assurance Company into First Fortis Life Insurance Company
in 2001 pursuant to which it has agreed not to pay any ordinary
dividends to us until fiscal year 2004. See
Item 1 Business
Regulation United States State
Regulation Insurance Regulation Concerning
Dividends. If insurance regulators determine that payment
of an ordinary dividend or any other payments by our insurance
subsidiaries to us (such as payments under a tax sharing
agreement or payments for employee or other services) would be
adverse to policyholders or creditors, the regulators may block
such payments that would otherwise be permitted without prior
approval. No assurance can be given that there will not be
further regulatory actions restricting the ability of our
insurance subsidiaries to pay dividends. Based on the dividend
restrictions under applicable laws and regulations, the maximum
amount of dividends that our subsidiaries could pay to us in
2003 without regulatory approval was approximately
$290 million, of which approximately $99.5 million was
paid during 2003. We expect that as a result of, among other
things, statutory accounting for our sold businesses, the
maximum amount of dividends our subsidiaries will be able to pay
to us will be significantly lower in 2004. If the ability of
insurance subsidiaries to pay dividends or make other payments
to us is materially restricted by regulatory requirements, it
could adversely affect our ability to pay any dividends on our
common stock and/or service our debt and pay our other corporate
expenses.
Our $500 million senior revolving credit
facility dated as of January 30, 2004 and our Series B
and Series C Preferred Stock also contain limitations on
our ability to pay dividends. See Item 5
Market for
93
Risks Related to Our Industry
In each of our lines of business, we compete with
other insurance companies or service providers, depending on the
line and product, although we have no single competitor who
competes against us in all of the business lines in which we
operate. Assurant Solutions has numerous competitors in its
product lines, but we believe no other company participates in
all of the same lines or offers comprehensive capabilities.
Competitors include insurance companies and financial
institutions. In Assurant Health, we believe the market is
characterized by many competitors, and our main competitors
include health insurance companies and the Blue Cross/ Blue
Shield plans in the states in which we write business. In
Assurant Employee Benefits, commercial competitors include
benefits and life insurance companies as well as not-for-profit
Delta Dental plans. In Assurant PreNeed, our main competitors
are two pre-need life insurance companies with nationwide
representation, Forethought Financial Services and Homesteaders
Life Company, and several small regional insurers. While we are
among the largest competitors in terms of market share in many
of our business lines, in some cases there are one or more major
market players in a particular line of business.
Competition in our businesses is based on many
factors, including quality of service, product features, price,
scope of distribution, scale, financial strength ratings and
name recognition. We compete, and will continue to compete, for
customers and distributors with many insurance companies and
other financial services companies. We compete not only for
business and individual customers, employer and other group
customers, but also for agents and distribution relationships.
Some of our competitors may offer a broader array of products
than our specific subsidiaries with which they compete in
particular markets, may have a greater diversity of distribution
resources, may have better brand recognition, may from time to
time have more competitive pricing, may have lower cost
structures or, with respect to insurers, may have higher
financial strength or claims paying ratings. Some may also have
greater financial resources with which to compete. As a result
of judicial developments and changes enacted by the Office of
the Comptroller of the Currency, financial institutions are now
able to offer a substitute product similar to credit insurance
as part of their basic loan agreement with customers without
being subject to insurance regulations. Also, as a result of the
Gramm-Leach-Bliley Act, which was enacted in November 1999,
financial institutions are now able to affiliate with other
insurance companies to offer services similar to our own. This
has resulted in new competitors with significant financial
resources entering some of our markets. Moreover, some of our
competitors may have a lower target for returns on capital
allocated to their business than we do, which may lead them to
price their products and services lower than we do. In addition,
from time to time, companies enter and exit the markets in which
we operate, thereby increasing competition at times when there
are new entrants. For example, several large insurance companies
have recently entered the market for individual health insurance
products. We may lose business to competitors offering
competitive products at lower prices, or for other reasons,
which could materially adversely affect our results of
operations and financial condition.
In certain markets, we compete with organizations
that have a substantial market share. In addition, with regard
to Assurant Health, organizations with sizable market share or
provider-owned plans may be able to obtain favorable financial
arrangements from health care providers that are not available
to us. Without our own similar arrangements, we may not be able
to compete effectively in such markets.
New competition could also cause the supply of
insurance to change, which could affect our ability to price our
products at attractive rates and thereby adversely affect our
underwriting results. Although there are some impediments facing
potential competitors who wish to enter the markets we serve,
the entry of new competitors into our markets can occur,
affording our customers significant flexibility in moving to
other insurance providers.
94
The insurance industry is cyclical. Although no
two cycles are the same, insurance industry cycles have
typically lasted for periods ranging from two to six years. The
segments of the insurance markets in which we operate tend not
to be correlated to each other, with each segment having its own
cyclicality. Periods of intense price competition due to
excessive underwriting capacity, periods when shortages of
underwriting capacity permit more favorable rate levels,
consequent fluctuations in underwriting results and the
occurrence of other losses characterize the conditions in these
markets. Historically, insurers have experienced significant
fluctuations in operating results due to volatile and sometimes
unpredictable developments, many of which are beyond the direct
control of the insurer, including competition, frequency of
occurrence or severity of catastrophic events, levels of
capacity, general economic conditions and other factors. This
may cause a decline in revenue at times in the cycle if we
choose not to reduce our product prices in order to maintain our
market position, because of the adverse effect on profitability
of such a price reduction. We can be expected therefore to
experience the effects of such cyclicality and changes in
customer expectations of appropriate premium levels, the
frequency or severity of claims or other loss events or other
factors affecting the insurance industry that generally could
have a material adverse effect on our results of operations and
financial condition.
The nature of the market for the insurance and
related products and services we provide is that we interface
with and distribute our products and services ultimately to
individual consumers. There may be a perception that these
purchasers may be unsophisticated and in need of consumer
protection. Accordingly, from time to time, consumer advocate
groups or the media may focus attention on our products and
services, thereby subjecting our industries to periodic negative
publicity. We may also be negatively impacted if another company
in one of our industries engages in practices resulting in
increased public attention to our businesses. Negative publicity
may result in increased regulation and legislative scrutiny of
industry practices as well as increased litigation, which may
further increase our costs of doing business and adversely
affect our profitability by impeding our ability to market our
products and services, requiring us to change our products or
services or increasing the regulatory burdens under which we
operate.
In addition to the occasional employment-related
litigation to which all businesses are subject, we are a
defendant in actions arising out of, and are involved in various
regulatory investigations and examinations relating to, our
insurance and other related business operations. We may from
time to time be subject to a variety of legal and regulatory
actions relating to our current and past business operations,
including, but not limited to:
95
In addition, plaintiffs continue to bring new
types of legal claims against insurance and related companies.
Current and future court decisions and legislative activity may
increase our exposure to these types of claims. Multiparty or
class action claims may present additional exposure to
substantial economic, non-economic or punitive damage awards.
The loss of even one of these claims, if it resulted in a
significant damage award or a judicial ruling that was otherwise
detrimental, could have a material adverse effect on our results
of operations and financial condition. This risk of potential
liability may make reasonable settlements of claims more
difficult to obtain. We cannot determine with any certainty what
new theories of recovery may evolve or what their impact may be
on our businesses.
There are various governmental and administrative
investigations and proceedings pending against us. For example,
an indictment has been issued in Minnesota alleging that one of
our subsidiaries and two corporate officers of Assurant
Solutions each violated the Minnesota Fair Campaign Practices
Act. The outcome of these investigations and proceedings cannot
be predicted, and no assurances can be given that such
investigations or proceedings or any litigation would not
materially adversely affect our results of operations and
financial condition. In addition, if we were to experience
difficulties with our relationship with a regulatory body in a
given jurisdiction, it could have a material adverse effect on
our ability to do business in that jurisdiction. See
Item 3 Legal Proceedings.
Our operating subsidiaries are subject to
extensive regulation and supervision in the jurisdictions in
which they do business. Such regulation is generally designed to
protect the interests of policyholders, as opposed to
stockholders and other investors. To that end, the laws of the
various states establish insurance departments with broad powers
with respect to such things as:
96
Assurant Health is also required by some
jurisdictions to provide coverage to persons who would not
otherwise be considered eligible by insurers. Each of these
jurisdictions dictates the types of insurance and the level of
coverage that must be provided to such involuntary risks. Our
share of these involuntary risks is mandatory and generally a
function of our respective share of the voluntary market by line
of insurance in each jurisdiction. Assurant Health is exposed to
some risk of losses in connection with mandated participation in
such schemes in those jurisdictions in which they are still
effective. In addition, HIPAA imposed insurance reform
provisions as well as requirements relating to the privacy of
individuals. HIPAA requires certain guaranteed issuance and
renewability of health insurance coverage for individuals and
small groups (generally 50 or fewer employees) and limits
exclusions based on pre-existing conditions. Most of the
insurance reform provisions of HIPAA became effective for plan
years beginning July 1, 1997. See also Risks Related
to Our Industry Costs of compliance with privacy
laws could adversely affect our business and results of
operations.
If regulatory requirements impede our ability to
raise premium rates, utilize new policy forms or terminate, deny
or cancel coverage in any of our businesses, our results of
operations and financial condition could be materially adversely
affected. The capacity for an insurance companys growth in
premiums is in part a function of its statutory surplus.
Maintaining appropriate levels of statutory surplus, as measured
by statutory accounting practices and procedures, is considered
important by insurance regulatory authorities and the private
agencies that rate insurers claims-paying abilities and
financial strength. Failure to maintain certain levels of
statutory surplus could result in increased regulatory scrutiny
and enforcement, action by regulatory authorities or a downgrade
by rating agencies.
We may be unable to maintain all required
licenses and approvals and our business may not fully comply
with the wide variety of applicable laws and regulations or the
relevant authoritys interpretation of the laws and
regulations. Also, some regulatory authorities have relatively
broad discretion to grant, renew or revoke licenses and
approvals. If we do not have the requisite licenses and
approvals or do not comply with applicable regulatory
requirements, the insurance regulatory authorities could
preclude or temporarily suspend us from carrying on some or all
of our activities or monetarily penalize us. That type of action
could materially adversely affect our results of operations and
financial condition. See Item 1
Business-Regulation.
Legislation or other regulatory reform that
increases the regulatory requirements imposed on us or that
changes the way we are able to do business may significantly
harm our business or results of operations in the future. For
example, some states have imposed new time limits for the
payment of uncontested covered claims and require health care
and dental service plans to pay interest on uncontested claims
not paid promptly within the required time period. Some states
have also granted their insurance regulatory agencies additional
authority to impose monetary penalties and other sanctions on
health and dental plans engaging in certain unfair payment
practices. If we were to be unable for any reason to
comply with these requirements, it could result in substantial
costs to us and may materially adversely affect our results of
operations and financial condition.
Legislative or regulatory changes that could
significantly harm us and our subsidiaries include, but are not
limited to:
97
State legislatures regularly enact laws that
alter and, in many cases, increase state authority to regulate
insurance companies and insurance holding companies. Further,
state insurance regulators regularly reinterpret existing laws
and regulations and the NAIC regularly undertakes regulatory
projects, all of which can affect our operations. In recent
years, the state insurance regulatory framework has come under
increased federal scrutiny and some state legislatures have
considered or enacted laws that may alter or increase state
authority to regulate insurance companies and insurance holding
companies. Further, the NAIC and state insurance regulators are
re-examining existing laws and regulations, specifically
focusing on modifications to holding company regulations,
interpretations of existing laws and the development of new laws.
Although the U.S. federal government does
not directly regulate the insurance business, changes in federal
legislation and administrative policies in several areas,
including changes in the Gramm-Leach-Bliley Act, financial
services regulation and federal taxation, could significantly
harm the insurance industry and us. Federal legislation and
administrative policies in areas such as employee benefit plan
regulation, financial services regulation and federal taxation
can reduce our profitability. In addition, state legislatures
and the U.S. Congress continue to focus on health care
issues. The U.S. Congress is considering Patients
Bill of Rights legislation, which, if adopted, would permit
health plans to be sued in state court for coverage
determinations and could fundamentally alter the treatment of
coverage decisions under Employee Retirement Income Security Act
of 1974, as amended (ERISA). There recently have been
legislative attempts to limit ERISAs preemptive effect on
state laws. For example, the U.S. Congress has, from time
to time, considered legislation relating to changes in ERISA to
permit application of state law remedies, such as consequential
and punitive damages, in lawsuits for wrongful denial of
benefits, which, if adopted, could increase our liability for
damages in future litigation. Additionally, new interpretations
of existing laws and the passage of new legislation may harm our
ability to sell new policies and increase our claims exposure on
policies we issued previously.
A number of legislative proposals have been made
at the federal level over the past several years that could
impose added burdens on Assurant Health. These proposals would,
among other things, mandate benefits with respect to certain
diseases or medical procedures, require plans to offer an
independent external review of certain coverage decisions and
establish a national health insurance program. Any of these
proposals, if implemented, could adversely affect our results of
operations or financial condition. Federal changes in Medicare
and Medicaid that reduce provider reimbursements could have
negative implications for the private sector due to cost
shifting. When the government reduces reimbursement rates for
Medicare and Medicaid, providers often try to recover shortfalls
by raising the prices charged to privately insured customers.
State small employer group and individual health insurance
market reforms to increase access and affordability could also
reduce profitability by precluding us from appropriately pricing
for risk in our individual and small employer group health
insurance policies.
In addition, the U.S. Congress and some
federal agencies from time to time investigate the current
condition of insurance regulation in the United States to
determine whether to impose federal regulation or to
98
We cannot predict with certainty the effect any
proposed or future legislation, regulations or NAIC initiatives
may have on the conduct of our business. In addition, the
insurance laws or regulations adopted or amended from time to
time may be more restrictive or may result in materially higher
costs than current requirements. See
Item 1 Business
Regulation.
The privacy of individuals has been the subject
of recent state and federal legislation. State privacy laws,
particularly those with opt-in clauses, can affect
the pre-funded funeral insurance business. These laws make it
harder to share information for marketing purposes, such as
generating new sales leads. Similarly, the recently created
do not call list would restrict our ability to
contact customers and, in Assurant Solutions, has lowered our
expectations for growth in our direct-marketed consumer credit
insurance products in the United States.
HIPAA and the implementing regulations that have
thus far been adopted impose new obligations for issuers of
health and dental insurance coverage and health and dental
benefit plan sponsors. HIPAA also establishes new requirements
for maintaining the confidentiality and security of individually
identifiable health information and new standards for electronic
health care transactions. The Department of Health and Human
Services promulgated final HIPAA regulations in 2002. The
privacy regulations required compliance by April 2003, the
electronic transactions regulations by October 2003 and the
security regulations by April 2005. As have other entities in
the health care industry, we have incurred substantial costs in
meeting the requirements of these HIPAA regulations and expect
to continue to incur costs to achieve and to maintain
compliance. We have been working diligently to comply with these
regulations in the time periods required. However, there can be
no assurances that we will achieve such compliance with all of
the required transactions or that other entities with which we
interact will take appropriate action to meet the compliance
deadlines. Moreover, as a consequence of these new standards for
electronic transactions, we may see an increase in the number of
health care transactions that are submitted to us in paper
format, which could increase our costs to process medical claims.
HIPAA is far-reaching and complex and proper
interpretation and practice under the law continue to evolve.
Consequently, our efforts to measure, monitor and adjust our
business practices to comply with HIPAA are ongoing. Failure to
comply could result in regulatory fines and civil lawsuits.
Known and intentional violations of these rules may also result
in federal criminal penalties.
In addition, the Gramm-Leach-Bliley Act requires
that we deliver a notice regarding our privacy policy both at
the delivery of the insurance policy and annually thereafter.
Certain exceptions are allowed for sharing of information under
joint marketing agreements. However, certain state laws may
require individuals to opt in to information sharing instead of
being immediately included. This could significantly increase
costs of doing business. Additionally, when final
U.S. Treasury Department regulations are promulgated in
connection with the USA PATRIOT Act, we will likely have to
expend additional resources to tailor our existing anti-fraud
efforts to the new rules.
Risks Related to Our Relationship with and
Separation from Fortis
Fortis will continue to have representation on
our board of directors and influence our affairs for as long as
it remains a significant stockholder.
99
As of February 5, 2004, Fortis, through
Fortis Insurance N.V., its wholly owned subsidiary, owned
approximately 35% of our outstanding common stock. For as long
as Fortis continues to own shares of common stock representing
more than one-third of the voting power of our outstanding
capital stock entitled to vote on the matter, it will be able to
veto corporate actions requiring a two-thirds vote of our
stockholders. Fortis may have interests that differ from yours
and may vote in a way with which you disagree and which may be
adverse to your interests.
We have entered into a shareholders
agreement with Fortis pursuant to which Fortis has the right to
nominate designees to our board of directors and, subject to
limited exceptions, our board of directors will nominate those
designees as follows: (i) so long as Fortis owns less than
50% but at least 10% of our outstanding common stock, two
designees (out of a maximum of 12 directors); and
(ii) so long as Fortis owns less than 10% but at least 5%
of our outstanding common stock, one designee. Currently, Fortis
has two designees on our board of directors.
In addition, although Fortis has advised us that
it intends to divest all of its shares of our common stock over
a period of time, Fortis is under no obligation to do so.
Subject to the terms of the lock-up agreement described below,
Fortis has the sole discretion to determine the timing of any
such divestiture. See Item 13 Certain
Relationships and Related Transactions for additional
information on lock-up agreements and related party transactions
between our Company and Fortis.
In addition, for so long as Fortis continues to
own less than 50% but at least 10% of our outstanding common
stock, the following will also apply:
or
Various conflicts of interest between Fortis and
us could arise which may be resolved in a manner that is
unfavorable to us, including, but not limited to, the following
areas:
Stock Ownership.
So
long as Fortis owns shares of common stock representing more
than one-third of the voting power of our outstanding capital
stock entitled to vote on the matter, Fortis will be able to
veto mergers and the sale of all or substantially all of our
consolidated assets. With certain limited exceptions, Fortis,
exercising its rights as a stockholder, can veto a merger or
sale without regard to the interests of the other stockholders.
In addition, the shareholders agreement also provides that
for as long as Fortis owns at least 10% of our outstanding
common stock, the following actions may only be taken with the
approval of Fortis Insurance N.V., as stockholder:
100
For more information regarding the
shareholders agreement, see Item 13
Certain Relationships and Related Transactions
Shareholders Agreement.
Cross-Directorships.
Michel Baise and Gilbert Mittler are directors of our Company
who are also currently directors and/or officers of Fortis.
Service as both a director of our Company and as a director or
officer of Fortis or ownership interests of directors or
officers of our Company in the stock of Fortis could create or
appear to create potential conflicts of interest when directors
and officers are faced with decisions that could have different
implications for the two companies. Our directors who are also
directors or officers of Fortis will have obligations to both
companies and may have conflicts of interest with respect to
matters potentially or actually involving or affecting us. For
example, these decisions could relate to:
Allocation of Business
Opportunities.
Although we do not
expect Fortis to compete with us in the near term, there may be
business opportunities that are suitable for both Fortis and us.
Fortis designees may direct such opportunities to Fortis and we
may have no recourse against the Fortis designees or Fortis. We
have no formal mechanisms for allocating business opportunities.
In connection with our separation from Fortis, we
have changed our name and the names of our business units to
Assurant, Inc. and other Assurant names and have launched a
re-branding initiative pursuant to which we will change our
brand name and most of the trademarks and trade names under
which we conduct our business. The transition to our new name in
each of our business segments and subsidiaries will occur
rapidly in the case of some products and business segments and
over specified periods in the case of other products and
business segments. Under the terms of a license from Fortis, we
have only a limited amount of time to continue to use the Fortis
name. Assurant Health, Assurant Employee Benefits and Assurant
PreNeed have expended substantial resources to establish the
Fortis name and reputation in the health, employee benefits and
pre-funded funeral insurance marketplace, particularly among
brokers and consultants acting as advisors in the health and
benefits market and with funeral directors in the pre-funded
funeral market. The impact of the change in trademarks and trade
names and other changes (including, without limitation, the name
change) on our business and operations cannot be fully
predicted, and the lack of an established brand image for the
Assurant name in the health, benefits and pre-funded funeral
insurance marketplace may cause a disruption in sales and
persistency and thus affect profitability. Any such disruption
could also cause rating agencies to lower our financial strength
and other ratings in the future. In addition, the costs of
effecting the name change and branding initiative will be
substantial and are currently estimated to be approximately
$10 million. In certain states we may be required to notify
policyholders of our name change and in certain instances new
certificates may need to be issued. This might result in
increased lapses of our insurance policies.
Fortis Bank SA/NV (Fortis Bank), which is a
subsidiary of Fortis, obtained approval in 2002 from state
banking authorities and the Federal Reserve Board to establish
branch offices in Connecticut and New York. By virtue of
the opening of these offices, the U.S. operations of
Fortis, including our operations, became subject to the
nonbanking prohibitions of Section 4 of the BHCA. In order
to continue to operate its U.S. nonbanking operations,
including the insurance activities conducted by our
subsidiaries, Fortis notified the Federal Reserve Board of its
election to be a financial holding company for purposes of the
BHCA and the Federal Reserve Boards implementing
regulations in Regulation Y. Pursuant to Fortis
status as a financial
101
Fortis will continue to qualify as a financial
holding company so long as Fortis Bank remains well
capitalized and well managed as those terms
are defined in Regulation Y. Generally, Fortis Bank will be
considered well capitalized if it maintains tier 1
and total risk-based capital ratios of at least 6% and 10%,
respectively, and will be considered well managed if
it has received at least a satisfactory composite rating of its
U.S. branch operations at its most recent examination. As a
general matter, as long as Fortis controls us within the meaning
of the BHCA or owns more than 5% of any class of our voting
shares, the BHCA does not permit us to engage in nonfinancial
activities such as manufacturing, distribution of goods and real
estate development except to the extent that another exemption
under the BHCA, such as the merchant banking exemption, is
available. If the Federal Reserve Board were to determine that
any of our existing activities were not insurance activities or
not otherwise financial in nature or not incidental to such
activities, or if Fortis lost and was unable to regain its
financial holding company status, we could be required to
restructure our operations or divest some of these operations,
which could result in increased costs and reduced profitability.
The Federal Reserve Board oversees all of
Fortis direct and indirect U.S. subsidiaries for
compliance with the BHCA, including our Company. Our Company
will be considered a subsidiary of Fortis so long as Fortis owns
25% or more of any class of our voting shares or otherwise
controls us within the meaning of the BHCA. In addition, even if
we are not a subsidiary of Fortis, the nonfinancial activities
restrictions of the BHCA and Regulation Y (discussed above)
would continue to apply so long as Fortis owned more than 5% of
any class of our voting shares and another BHCA exemption, such
as the merchant banking exemption, is not available.
Risks Related to Our Common Stock
State laws and our certificate of incorporation
and by-laws may delay, defer, prevent or render more difficult a
takeover attempt that our stockholders might consider in their
best interests. For instance, they may prevent our stockholders
from receiving the benefit from any premium to the market price
of our common stock offered by a bidder in a takeover context.
Even in the absence of a takeover attempt, the existence of
these provisions may adversely affect the prevailing market
price of our common stock if they are viewed as discouraging
takeover attempts in the future.
State laws and our certificate of incorporation
and by-laws may also make it difficult for stockholders to
replace or remove our directors. These provisions may facilitate
the entrenchment of directors, which may delay, defer or prevent
a change in our control, which may not be in the best interests
of our stockholders.
The following provisions included in our
certificate of incorporation and by-laws have anti-takeover
effects and may delay, defer or prevent a takeover attempt that
our stockholders might consider in their best interests. In
particular, our certificate of incorporation and by-laws:
102
In addition, Section 203 of the General
Corporation Law of the State of Delaware may limit the ability
of an interested stockholder to engage in business
combinations with us. An interested stockholder is defined to
include persons owning 15% or more of our outstanding voting
stock.
Before a person can acquire control of a
U.S. insurance company, prior written approval must be
obtained from the insurance commissioner of the state where the
domestic insurer is domiciled. Generally, state statutes provide
that control over a domestic insurer is presumed to exist if any
person, directly or indirectly, owns, controls, holds with the
power to vote, or holds proxies representing 10% or more of the
voting securities of the domestic insurer. However, the State of
Florida, in which certain of our insurance subsidiaries are
domiciled, defines control as 5% or more. Because a person
acquiring 5% or more of shares of our common stock would
indirectly control the same percentage of the stock of our
Florida subsidiaries, the insurance change of control laws of
Florida would apply to such transaction and at 10%, the laws of
many other states would likely apply to such a transaction.
Prior to granting approval of an application to acquire control
of a domestic insurer, a state insurance commissioner will
typically consider such factors as the financial strength of the
applicant, the integrity of the applicants board of
directors and executive officers, the applicants plans for
the future operations of the domestic insurer and any
anti-competitive results that may arise from the consummation of
the acquisition of control.
From time to time, the stock price and the number
of shares traded of companies in the insurance industry
experience periods of significant volatility. Company-specific
issues and developments generally in the insurance industry and
in the regulatory environment may cause this volatility. Our
stock price may fluctuate in response to a number of events and
factors, including:
103
In addition, broad market and industry
fluctuations may adversely affect the trading price of our
common stock, regardless of our actual operating performance.
Consolidated Overview
For the Year Ended December 31,
2003
2002
2001
(In millions)
$
6,157
$
5,681
$
5,242
607
632
712
2
(118
)
(119
)
68
80
68
11
62
232
246
222
7,066
6,532
6,187
(3,657
)
(3,435
)
(3,240
)
(2,829
)
(2,609
)
(2,496
)
(113
)
(1
)
(14
)
(113
)
(118
)
(118
)
(206
)
(6,806
)
(6,162
)
(5,981
)
260
370
206
(74
)
(110
)
(108
)
186
260
98
(1,261
)
$
186
$
(1,001
)
$
98
(1)
Includes amortization of DAC and VOBA and
underwriting, general and administrative expenses.
Note:
The table above includes amortization of goodwill
in 2001 and the cumulative effect of change in accounting
principle in 2002. These items are only included in this
Consolidated Overview. As a result, the tables presented under
the segment discussions do not total to the same amounts shown
on this consolidated overview table. See Note 20 of the
Notes to Consolidated Financial Statements included elsewhere in
this report.
Year Ended December 31, 2003 Compared
to December 31, 2002
Total Revenues
Table of Contents
Total Benefits, Losses and Expenses
Table of Contents
Net Income
Year Ended December 31, 2002 Compared
to December 31, 2001
Total Revenues
Table of Contents
Total Benefits, Losses and Expenses
Net Income
Table of Contents
Assurant Solutions
Overview
For the Year Ended December 31,
2003
2002
2001
(In millions)
$
2,362
$
2,077
$
1,906
187
205
218
129
119
98
2,678
2,401
2,222
(899
)
(755
)
(640
)
(1,590
)
(1,449
)
(1,444
)
(2,489
)
(2,204
)
(2,084
)
189
197
138
(56
)
(65
)
(40
)
$
133
$
132
$
98
$
733
$
552
$
452
1,629
1,525
1,454
$
2,362
$
2,077
$
1,906
(1)
Specialty Property Solutions includes
a variety of specialized property insurance programs that are
coupled with differentiated administrative capabilities.
(2)
Consumer Protection Solutions
includes an array of debt protection administration services,
credit insurance programs and warranties and extended service
contracts.
Year Ended December 31, 2003 Compared
to December 31, 2002
Total Revenues
Table of Contents
Total Benefits, Losses and Expenses
Segment Income After Tax
Year Ended December 31, 2002 Compared
to December 31, 2001
Total Revenues
Table of Contents
Total Benefits, Losses and Expenses
Segment Income After Tax
Table of Contents
Assurant Health
Overview
For the Year Ended December 31,
2003
2002
2001
(In millions except
membership data)
$
2,009
$
1,834
$
1,838
49
55
58
33
23
14
2,091
1,912
1,910
(1,317
)
(1,222
)
(1,306
)
(589
)
(546
)
(496
)
(1,906
)
(1,768
)
(1,802
)
185
144
108
(64
)
(49
)
(37
)
$
121
$
95
$
71
65.6
%
66.6
%
71.1
%
28.9
%
29.4
%
26.8
%
93.3
%
95.2
%
97.3
%
761
670
600
376
355
420
1,137
1,025
1,020
(1)
The loss ratio is equal to policyholder benefits
divided by net earned premiums and other considerations.
(2)
The expense ratio is equal to selling,
underwriting and general expenses divided by net earned premiums
and other considerations and fees and other income.
(3)
The combined ratio is equal to total benefits,
losses and expenses divided by net earned premiums and other
considerations and fees and other income.
Year Ended December 31, 2003 Compared
to December 31, 2002
Total Revenues
Table of Contents
Total Benefits, Losses and Expenses
Segment Income After Tax
Year Ended December 31, 2002 Compared
to December 31, 2001
Total Revenues
Table of Contents
Total Benefits, Losses and Expenses
Segment Income After Tax
Table of Contents
Assurant Employee Benefits
Overview
For the Year Ended December 31,
2003
2002(4)
2001(4)
(In millions)
$
1,256
$
1,233
$
934
140
148
144
54
74
39
1,450
1,455
1,117
(921
)
(945
)
(738
)
(433
)
(422
)
(316
)
(1,354
)
(1,367
)
(1,054
)
96
88
63
(34
)
(31
)
(22
)
$
62
$
57
$
41
73.3
%
76.6
%
79.0
%
33.1
%
32.3
%
32.5
%
79.9
%
79.9
%
84.3
%
$
539
$
554
$
257
461
400
398
256
279
279
$
1,256
$
1,233
$
934
(1)
The loss ratio is equal to policyholder benefits
divided by net earned premiums and other considerations.
(2)
The expense ratio is equal to selling,
underwriting and general expenses divided by net earned premiums
and other considerations and fees and other income.
(3)
The premium persistency ratio is equal to the
rate at which existing business for all issue years at the
beginning of the period remains in force at the end of the
period. The calculations for the years ended December 31,
2002 and 2001 exclude DBD.
(4)
We acquired DBD on December 31, 2001 and
CORE on July 12, 2001; therefore, the results of DBD and
CORE are included in our Assurant Employee Benefits segment
financial results beginning in 2002 and July 2001, respectively.
Year Ended December 31, 2003 Compared
to December 31, 2002
Total Revenues
Table of Contents
Total Benefits, Losses and Expenses
Segment Income After Tax
Year Ended December 31, 2002 Compared
to Year Ended December 31, 2001
Total Revenues
Table of Contents
Total Benefits, Losses and Expenses
Segment Income After Tax
Table of Contents
Assurant PreNeed
Overview
For the Year Ended
December 31,
2003
2002
2001
(In millions)
$
529
$
538
$
507
188
184
179
5
5
3
722
727
689
(521
)
(513
)
(486
)
(146
)
(137
)
(120
)
(667
)
(650
)
(606
)
55
77
83
(19
)
(27
)
(29
)
$
36
$
50
$
54
$
283
$
293
$
278
246
245
229
$
529
$
538
$
507
Year Ended December 31, 2003 Compared
to December 31, 2002
Total Revenues
Total Benefits, Losses and Expenses
Table of Contents
Segment Income After Tax
Year Ended December 31, 2002 Compared
to December 31, 2001
Total Revenues
Total Benefits, Losses and Expenses
Table of Contents
Segment Income After Tax
Corporate and Other
Overview
Table of Contents
For the Year Ended
December 31,
2003
2002
2001
(In millions)
$
$
$
58
43
40
112
2
(118
)
(119
)
68
80
68
11
62
11
25
67
124
38
248
(70
)
(69
)
(55
)
(120
)
(1
)
(14
)
(113
)
(118
)
(118
)
(206
)
(389
)
(173
)
(322
)
(265
)
(135
)
(74
)
99
61
21
$
(166
)
$
(74
)
$
(53
)
Table of Contents
January 1 through
March 31,
2001
(In millions)
$
49
32
65
146
(48
)
(86
)
(134
)
12
(4
)
$
8
Year Ended December 31, 2003 Compared
to December 31, 2002
Total Revenues
Total Benefits, Losses and Expenses
Table of Contents
Segment Loss After Tax
Total Revenues
Table of Contents
Total Benefits, Losses and Expenses
Segment Loss After Tax
As of
As of
As of
December 31,
December 31,
December 31,
2003
2002
2001
(In millions)
$
8,729
80
%
$
8,036
80
%
$
7,630
79
%
456
4
272
3
247
3
933
9
842
8
869
9
68
1
69
1
68
1
276
2
684
7
627
6
462
4
181
1
209
2
$
10,924
100
%
$
10,084
100
%
$
9,650
100
%
Table of Contents
As of
As of
As of
December 31,
December 31,
December 31,
2003
2002
2001
(In millions)
$
8,230
$
7,631
$
7,471
499
405
159
$
8,729
$
8,036
$
7,630
$
437
$
265
$
243
19
7
4
$
456
$
272
$
247
As of
As of
As of
December 31,
December 31,
December 31,
2003
2002
2001
(In millions)
$
6,235
$
5,807
$
5,547
3,134
3,208
3,267
3,513
3,374
3,250
$
12,882
$
12,389
$
12,064
Table of Contents
December 31, 2003
December 31, 2002
Future
Future
Policy
Claims
Policy
Claims
Benefits
and
Benefits
and
and
Unearned
Benefits
and
Unearned
Benefits
Expenses
Premiums
Payable
Expenses
Premiums
Payable
(In millions)
$
2,276
$
3
$
14
$
1,991
$
3
$
15
688
1
4
693
1
5
322
1
17
334
1
12
2,744
48
177
2,619
48
139
205
57
151
170
75
167
13
394
11
457
4
1,375
4
1,299
67
266
43
202
7
39
8
44
1,149
621
1,135
536
759
403
1,074
445
1,023
18
803
16
2
34
2
37
$
6,235
$
3,134
$
3,513
$
5,807
$
3,208
$
3,374
Long Duration
Pre-Funded Funeral Life Insurance
Table of Contents
Short Duration
Group Disability and Group Term Life
Table of Contents
Medical
Property and Warranty
Table of Contents
As of
As of
December 31,
December 31,
2003
2002
(In millions)
$
4,445
$
4,650
2003
2002
(In millions)
$
2,551
$
2,452
971
1,277
788
744
135
177
$
4,445
$
4,650
Table of Contents
Loss Protection and Capital
Management
Business Dispositions
Assurant Solutions Segment Client Risk and
Profit Sharing
Table of Contents
Table of Contents
Cash Flows
Table of Contents
For the Year Ended
December 31,
2003
2002
2001
(In millions)
$
741
$
365
$
632
(711
)
(380
)
(218
)
317
(43
)
(380
)
$
347
$
(58
)
$
34
For the Year Ended December 31,
Security
2003
2002
2001
(In thousands)
$
128,694
$
117,114
$
133,667
963
1,052
1,053
139,310
67,000
41,877
41,876
42,298
$
310,844
$
160,042
$
244,018
Table of Contents
Commitments and Contingencies
As of December 31,
Less than
More than
1 Year
1-3 Years
3-5 Years
5 Years
Total
(In thousands)
$
196,224
$
$
$
$
196,224
1,750,000
1,750,000
24,160
24,160
39,622
67,406
48,802
44,533
200,363
66,734
66,734
39,552
39,552
75,900
75,900
22,429
22,429
$
2,190,461
$
67,406
$
48,802
$
68,693
$
2,375,362
Letters of Credit
Our profitability may decline if we are
unable to maintain our relationships with significant clients,
distributors and other parties important to the success of our
business.
Table of Contents
Sales of our products and services may be
reduced if we are unable to attract and retain sales
representatives or develop and maintain distribution
sources.
Table of Contents
General economic, financial market and
political conditions may adversely affect our results of
operations and financial condition.
individuals and businesses may choose not to
purchase our insurance products and other related products and
services, may terminate existing policies or contracts or permit
them to lapse, may choose to reduce the amount of coverage
purchased or, in Assurant Employee Benefits and in small group
employer health insurance in Assurant Health, may have fewer
employees requiring insurance coverage due to rising
unemployment levels;
new disability insurance claims and claims on
other specialized insurance products tend to rise;
there is a higher loss ratio on credit card and
installment loan insurance due to rising unemployment
levels; and
insureds tend to increase their utilization of
health and dental benefits if they anticipate becoming
unemployed or losing benefits.
Our actual claims losses may exceed our
reserves for claims, which may require us to establish
additional reserves that may materially reduce our earnings,
profitability and capital.
Table of Contents
We may be unable to accurately predict
benefits, claims and other costs or to manage such costs through
our loss limitation methods, which could have a material adverse
effect on our results of operations and financial
condition.
Catastrophe losses, including man-made
catastrophe losses, could materially reduce our profitability
and have a material adverse effect on our results of operations
and financial condition.
Table of Contents
total losses of approximately $10 million
incurred in 2001 in connection with tropical storm Allison;
total losses of approximately $12 million
incurred in 2002 in connection with Arizona wildfires, Texas
floods and Hurricane Lili; and
total losses of approximately $30 million
incurred in 2003 in connection with various catastrophes caused
by windstorms, hailstorms, tornadoes, Hurricane Isabel, and
wildfires in southern California.
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Reinsurance may not be available or
adequate to protect us against losses, and we are subject to the
credit risk of reinsurers.
We have sold businesses through reinsurance
that could again become our direct financial and administrative
responsibility if the purchasing companies were to become
insolvent.
We are exposed to the credit risk of our
agents in Assurant PreNeed and our clients in Assurant
Solutions.
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A further decline in the manufactured
housing market may adversely affect our results of operations
and financial condition.
The financial strength of our insurance
company subsidiaries is rated by A.M. Best, Moodys,
S&P and Fitch, and a decline in these ratings could affect
our standing in the insurance industry and cause our sales and
earnings to decrease.
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The failure to effectively maintain and
modernize our information systems could adversely affect our
business.
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Failure to protect our clients
confidential information and privacy could result in the loss of
customers, reduction to our profitability and/or subject us to
fines and penalties.
We may not find suitable acquisition
candidates or new insurance ventures and even if we do, we may
not successfully integrate any such acquired companies or
successfully invest in such ventures.
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The inability of our subsidiaries to pay
dividends to us in sufficient amounts could harm our ability to
meet our obligations and pay future stockholder
dividends.
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We face significant competitive pressures
in our businesses, which may reduce premium rates and prevent us
from pricing our products at rates that will allow us to be
profitable.
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The insurance industry is cyclical, which
may impact our results.
The insurance and related businesses in
which we operate may be subject to periodic negative publicity,
which may negatively impact our financial results.
Our business is subject to risks related to
litigation and regulatory actions.
disputes over coverage or claims adjudication;
disputes regarding sales practices, disclosures,
premium refunds, licensing, regulatory compliance and
compensation arrangements;
disputes with our agents, producers or network
providers over compensation and termination of contracts and
related claims;
disputes concerning past premiums charged by
companies acquired by us for coverage that may have been based
on factors such as race;
disputes relating to customers regarding the
ratio of premiums to benefits in our various business segments;
disputes alleging packaging of credit insurance
products with other products provided by financial institutions;
disputes relating to certain excess of loss
programs in the London market;
disputes with taxing authorities regarding our
tax liabilities; and
disputes relating to certain businesses acquired
or disposed of by us.
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We are subject to extensive governmental
regulation, which increases our costs and could restrict the
conduct of our business.
licensing companies to transact business;
authorizing lines of business;
mandating capital and surplus requirements;
regulating underwriting limitations;
imposing dividend limitations;
regulating changes in control;
licensing agents and distributors of insurance
products;
placing limitations on the minimum and maximum
size of life insurance contracts;
restricting companies ability to enter and
exit markets;
admitting statutory assets;
mandating certain insurance benefits;
restricting companies ability to terminate
or cancel coverage;
requiring companies to provide certain types of
coverage;
regulating premium rates, including the ability
to increase premium rates;
approving policy forms;
regulating trade and claims practices;
imposing privacy requirements;
establishing reserve requirements and solvency
standards;
restricting certain transactions between
affiliates;
regulating the content of disclosures to debtors
in the credit insurance area;
regulating the type, amounts and valuation of
investments;
mandating assessments or other surcharges for
guaranty funds;
regulating market conduct and sales practices of
insurers and agents; and
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restricting contact with consumers, such as the
recently created national do not call list, and
imposing consumer protection measures.
Changes in regulation may reduce our
profitability and limit our growth.
legislation that holds insurance companies or
managed care companies liable for adverse consequences of
medical or dental decisions;
limitations on premium levels or the ability to
raise premiums on existing policies;
increases in minimum capital, reserves and other
financial viability requirements;
impositions of fines, taxes or other penalties
for improper licensing, the failure to promptly pay
claims, however defined, or other regulatory violations;
increased licensing requirements;
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prohibitions or limitations on provider financial
incentives and provider risk-sharing arrangements;
imposition of more stringent standards of review
of our coverage determinations;
new benefit mandates;
increased regulation relating to the use of
associations and trusts in the sale of individual health
insurance;
limitations on our ability to build appropriate
provider networks and, as a result, manage health care and
utilization due to any willing provider legislation,
which requires us to take any provider willing to accept our
reimbursement;
limitations on the ability to manage health care
and utilization due to direct access laws that allow insureds to
seek services directly from specialty medical providers without
referral by a primary care provider; and
restriction of solicitation of pre-funded funeral
insurance consumers by funeral board laws.
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Costs of compliance with privacy laws could
adversely affect our business and results of
operations.
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Our board of directors shall consist of no more
than 12 directors (including at least seven independent
directors);
Fortis will have the right to nominate two
designees to our board of directors (out of a maximum of
12 directors), and the shareholders agreement and our
by-laws provide that, subject to limited exceptions, our board
of directors will nominate those designees; and
Pursuant to the shareholders agreement, the
following significant corporate actions may only be taken with
the approval of Fortis Insurance, as shareholder:
any recapitalization, reclassification, spin-off
or combination of any of our securities or any of those of our
principal subsidiaries;
any liquidation, dissolution, winding up or
commencement of voluntary bankruptcy, insolvency, liquidation or
similar proceedings with respect to us or any of our
subsidiaries.
Because Fortis will control us, conflicts
of interest between Fortis and us could be resolved in a manner
unfavorable to us.
any recapitalization, reclassification or
combination of any of our securities or any of those of our
principal subsidiaries (other than certain activities between
wholly owned subsidiaries); and
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any liquidation, dissolution, winding up or
commencement of voluntary bankruptcy or insolvency proceedings
with respect to us or our principal subsidiaries.
disagreement over the desirability of a potential
acquisition or disposition opportunity; or
corporate finance decisions.
The loss of the Fortis name in Assurant
Health, Assurant Employee Benefits and Assurant PreNeed may
affect our profitability.
Because Fortis operates U.S. branch
offices, we are subject to regulation and oversight by the
Federal Reserve Board under the U.S. Bank Holding Company
Act (BHCA).
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insuring, guaranteeing or indemnifying against
loss, harm, damage, illness, disability or death, or providing
and issuing annuities; and
acting as principal, agent or broker for purposes
of the foregoing.
Applicable laws and our certificate of
incorporation and by-laws may discourage takeovers and business
combinations that our stockholders might consider in their best
interests.
permit our board of directors to issue one or
more series of preferred stock;
divide our board of directors into three classes;
limit the ability of stockholders to remove
directors;
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except for Fortis, prohibit stockholders from
filling vacancies on our board of directors;
prohibit stockholders from calling special
meetings of stockholders and from taking action by written
consent;
impose advance notice requirements for
stockholder proposals and nominations of directors to be
considered at stockholder meetings;
subject to limited exceptions, require the
approval of at least two-thirds of the voting power of our
outstanding capital stock entitled to vote on the matter to
approve mergers and consolidations or the sale of all or
substantially all of our assets; and
require the approval by the holders of at least
two-thirds of the voting power of our outstanding capital stock
entitled to vote on the matter for the stockholders to amend the
provisions of our by-laws and certificate of incorporation
described in the second through seventh bullet points above and
this supermajority provision.
Applicable insurance laws may make it
difficult to affect a change of control of our
Company.
Our stock and the stocks of other companies
in the insurance industry are subject to stock price and trading
volume volatility.
quarterly variations in operating results;
natural disasters and terrorist attacks;
changes in financial estimates and
recommendations by securities analysts;
operating and stock price performance of other
companies that investors may deem comparable;
press releases or publicity relating to us or our
competitors or relating to trends in our markets;
regulatory changes;
sales of stock by insiders; and
changes in our financial strength ratings.
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk
As a provider of insurance products, effective risk management is fundamental to our ability to protect both our customers and stockholders interests. We are exposed to potential loss from various market risks, in particular interest rate risk and credit risk. Additionally, we are exposed to inflation risk and to a small extent to foreign currency risk.
Interest rate risk is the possibility that the fair value of liabilities will change more or less than the market value of investments in response to changes in interest rates, including changes in the slope or shape of the yield curve and changes in spreads due to credit risks and other factors.
Credit risk is the possibility that counterparties may not be able to meet payment obligations when they become due. We assume counterparty credit risk in many forms. A counterparty is any person or entity from which cash or other forms of consideration are expected to extinguish a liability or obligation to us. Primarily, our credit risk exposure is concentrated in our fixed income investment portfolio and, to a lesser extent, in our reinsurance recoverables.
Inflation risk is the possibility that a change in domestic price levels produces an adverse effect on earnings. This typically happens when only one of invested assets or liabilities is indexed to inflation.
Foreign exchange risk is the possibility that changes in exchange rates produce an adverse effect on earnings and equity when measured in domestic currency. This risk is largest when assets backing liabilities payable in one currency are invested in financial instruments of another currency. Our general principle is to invest in assets that match the currency in which we expect the liabilities to be paid.
Interest Rate Risk |
Interest rate risk arises as we invest substantial funds in interest-sensitive fixed income assets, such as fixed maturity investments, mortgage-backed and asset-backed securities and commercial mortgage loans, primarily in the United States and Canada. There are two forms of interest rate risk price risk and reinvestment risk. Price risk occurs when fluctuations in interest rates have a direct impact on the market valuation of these investments. As interest rates rise, the market value of these investments falls, and conversely, as interest rates fall, the market value of these investments rises. Reinvestment risk occurs when fluctuations in interest rates have a direct impact on expected cash flows from mortgage-backed and asset-backed securities. As interest rates fall, an increase in prepayments on these assets results in earlier than expected receipt of cash flows forcing us to reinvest the proceeds in an unfavorable lower interest rate environment, and conversely as interest rates rise, a decrease in prepayments on these assets results in later than expected receipt of cash flows forcing us to forgo reinvesting in a favorable higher interest rate environment. As of December 31, 2003, we held $8,729 million of fixed maturity securities at fair market value and $933 million of commercial mortgages at amortized cost for a combined total of 88% of total invested assets. As of December 31, 2002, we held $8,036 million of fixed maturity securities at fair market value and $842 million of commercial mortgages at amortized cost for a combined total of 88% of total invested assets.
We expect to manage interest rate risk by selecting investments with characteristics such as duration, yield, currency and liquidity tailored to the anticipated cash outflow characteristics of our insurance and reinsurance liabilities.
Our group long-term disability reserves are also sensitive to interest rates. Group long-term disability reserves are discounted to the valuation date at the valuation interest rate. The valuation interest rate is determined by taking into consideration actual and expected earned rates on our asset portfolio, with adjustments for investment expenses and provisions for adverse deviation.
104
The interest rate sensitivity of our fixed
maturity security assets is assessed using hypothetical test
scenarios that assume several positive and negative parallel
shifts of the underlying yield curves. We have assumed that both
the United States and Canadian yield curves have a 100%
correlation and, therefore, move together. The individual
securities are repriced under each scenario using a valuation
model. For investments such as mortgage-backed and asset-backed
securities, a prepayment model was used in conjunction with a
valuation model. Our actual experience may differ from the
results noted below particularly due to assumptions utilized or
if events occur that were not included in the methodology. The
following table summarizes the results of this analysis for
bonds, mortgage-backed and asset-backed securities held in our
investment portfolio:
Interest Rate Movement Analysis
-100
-50
0
50
100
(In millions)
$
9,255
$
8,989
$
8,729
$
8,472
$
8,224
6.0
%
3.0
%
0.00
%
(2.9
)%
(5.8
)%
$
526
$
260
$
0
$
(257
)
$
(505
)
Credit Risk |
We have exposure to credit risk primarily as a holder of fixed income securities and by entering into reinsurance cessions.
Our risk management strategy and investment policy is to invest in debt instruments of high credit quality issuers and to limit the amount of credit exposure with respect to any one issuer. We attempt to limit our credit exposure by imposing fixed maturity portfolio limits on individual issuers based upon credit quality. Currently our portfolio limits are 1.5% for issuers rated AA-and above, 1% for issuers rated A- to A+, 0.75% for issuers rated BBB- to BBB+ and 0.38% for issuers rated BB- to BB+. These portfolio limits are further reduced for certain issuers with whom we have credit exposure on reinsurance agreements. We use the lower of Moodys or Standard & Poors ratings to determine an issuers rating. See Item 1 Business Investments.
The following table presents our fixed maturity
investment portfolio by ratings of the nationally recognized
securities rating organizations as of December 31, 2003:
Percentage
Rating
Fair Value
of Total
(In millions)
$
6,074
70%
2,110
24%
361
4%
184
2%
$
8,729
100%
We are also exposed to the credit risk of our reinsurers. When we reinsure, we are still liable to our insureds regardless of whether we get reimbursed by our reinsurer. As part of our overall risk and capacity management strategy, we purchase reinsurance for certain risks underwritten by our various business segments as described above under Reinsurance.
For at least 50% of our $4,445 million of reinsurance recoverables at December 31, 2003, we are protected from the credit risk by using some type of risk mitigation mechanism such as a trust, letter of credit or by withholding the assets in a modified coinsurance or co-funds-withheld arrangement. For example, reserves of $1,537 million and $873 million as of December 31, 2003 relating to two large coinsurance arrangements with The Hartford and John Hancock, respectively, related to sales of businesses. If the value of
105
Inflation Risk |
Inflation risk arises as we invest substantial funds in nominal assets, which are not indexed to the level of inflation, whereas the underlying liabilities are indexed to the level of inflation. Approximately 16% of Assurant PreNeeds insurance policies with reserves of approximately $391 million as of December 31, 2003 have death benefits that are guaranteed to grow with the Consumer Price Index. In times of rapidly rising inflation, the credited death benefit growth on these liabilities increases relative to the investment income earned on the nominal assets resulting in an adverse impact on earnings. We have partially mitigated this risk by purchasing a contract with payments tied to the Consumer Price Index. See Derivatives.
In addition, we have inflation risk in our individual and small employer group health insurance businesses to the extent that medical costs increase with inflation, and we have not been able to increase premiums to keep pace with inflation.
Foreign Exchange Risk |
We are exposed to some foreign exchange risk arising from our international operations mainly in Canada. We also have limited foreign exchange risk exposure to currencies other than the Canadian dollar, primarily British pounds and Danish krone. Total invested assets denominated in these other currencies were less than 1% of our total invested assets at December 31, 2003.
Foreign exchange risk is mitigated by matching our liabilities under insurance policies that are payable in foreign currencies with investments that are denominated in such currency. We have not established any hedge to our foreign currency exchange rate exposure.
We assess our foreign exchange risk by examining the foreign exchange rate exposure of the excess of invested assets over the statutory reserve liabilities denominated in foreign currency. Two stress scenarios are examined.
The first scenario assumes a hypothetical 10% immediate change in the foreign exchange rate.
The second scenario assumes a more severe 2.33 standard deviation event (comparable to a one in 100 probability under a normal distribution).
The modeling techniques we use to calculate our exposure does not take into account correlation among foreign currency exchange rates or correlation among various markets. Our actual experience may differ due to correlation assumptions utilized or if events occur that were not included in the methodology, such as significant illiquidity or other market events.
Derivatives |
Derivatives are financial instruments whose values are derived from interest rates, foreign exchange rates, financial indices or the prices of securities or commodities. Derivative financial instruments may be exchange-traded or contracted in the over-the-counter market and include swaps, futures, options and forward contracts.
Under insurance statutes, our insurance companies may use derivative financial instruments to hedge actual or anticipated changes in their assets or liabilities, to replicate cash market instruments or for certain income-generating activities. These statutes generally prohibit the use of derivatives for speculative purposes. We generally do not use derivative financial instruments.
106
On August 1, 2003, we purchased a contract to partially hedge the inflation risk exposure inherent in some of our pre-funded funeral insurance policies. See Inflation risk.
In 2003, we determined that the modified coinsurance agreement with The Hartford contained an embedded derivative. In accordance with DIG B36, we bifurcated the contract into its debt host and embedded derivative (total return swap) and recorded the embedded derivative at fair value on the balance sheet. Contemporaneous with the adoption of DIG B36, we transferred the invested assets related to this coinsurance agreement from fixed maturities available for sale to trading securities, included in other investments in the December 31, 2003 consolidated balance sheet. The combination of the two aforementioned transactions has no net impact in the consolidated statements of operations for the year ended December 31, 2003.
Item 8. | Financial Statements and Supplementary Data |
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.
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
There have been no disagreements with accountants on accounting and financial disclosure.
Item 9A. | Controls and Procedures |
Under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2003. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of that date in providing a reasonable level of assurance that information we are required to disclose in reports we file or furnish under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods in SEC rules and forms. Further, our disclosure controls and procedures were effective in providing a reasonable level of assurance that information required to be disclosed by us in such reports is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
PART III
Item 10. | Directors and Executive Officers of the Registrant |
Directors
The table below sets forth the names, ages and positions of our directors:
Name | Age | Positions | ||||
|
|
|
||||
John Michael Palms(1)
|
68 | Chairman of the Board | ||||
J. Kerry Clayton(1)
|
58 | Director, President and Chief Executive Officer | ||||
Michel Baise(3)
|
55 | Director | ||||
Robert J. Blendon(1)
|
61 | Director | ||||
Beth L. Bronner(1)
|
52 | Director | ||||
Howard L. Carver(3)
|
59 | Director | ||||
Allen R. Freedman(3)
|
63 | Director | ||||
H. Carroll Mackin(2)
|
63 | Director | ||||
Gilbert Mittler(3)
|
54 | Director |
(1) | Denotes Class I Director with term to expire in 2005. |
107
(2) | Denotes Class II Director with term to expire in 2006. |
(3) | Denotes Class III Director with term to expire in 2007. |
John Michael Palms, Ph.D., D.Sc., Chairman of the Board. Dr. Palms has been a member of our board of directors since March 1990 and became Chairman in October 2003. Dr. Palms is a Distinguished University Professor at the University of South Carolina and was the President of the University of South Carolina from 1991 until his retirement in 2002. Earlier in his career, Dr. Palms served as President of Georgia State University and as a professor and administrator at Emory University. Dr. Palms currently serves on the boards of the Computer Task Group and Simcom International and is the Chair of the Exelon Corporations audit committee. He is also Chairman of the Board of the Institute for Defense Analyses. In the past, Dr. Palms has been a member of various additional company committees and boards including the University of South Carolinas Educational and Development Foundation Boards, NationsBank of the Carolinas audit committee, the audit committee of the Board of Directors of Carolina First Bank, the Mynd Corporations compensation committee and Chair of PECO Energys nuclear committee.
J. Kerry Clayton, President, Chief Executive Officer and Director. Mr. Clayton has been President and Chief Executive Officer of the Company since May 2000 and has been a member of our board of directors since March 1999. From 1993 to 1999, Mr. Clayton served as Executive Vice President of the Company with a variety of responsibilities. From 1985 to 1993, Mr. Clayton served as President of Fortis Benefits Insurance Company, which acquired and combined the operations of Western Life Insurance Company, St. Paul Life Insurance Company and the Group Division of Mutual Benefit Life. He also served as Senior Vice President, Finance of the Company from 1981 to 1985. From 1970 to 1980, Mr. Clayton held various positions with American Security Group (now part of Assurant Solutions), which was acquired by the Company in 1980.
Michel Baise, Director. Mr. Baise has been a member of our board of directors since October 2003. Mr. Baise is currently General Manager Finance of Fortis and has held this position since 1994. From 1989 to 1994, Mr. Baise worked for Societé Générale de Belgique, as Advisor in the Industrial Subsidiaries and Strategy Division. Between 1982 and 1989, Mr. Baise served in various management positions and as a member of the Executive Committee of the Belgian Bank in Hong Kong and Belgium. This was preceded by assignments at the European Asian Bank as Credit Manager in Hamburg, Germany from 1981 to mid-1982, and Operations Manager in Singapore from 1977 to 1980. Mr. Baise began his career in 1972 as a management trainee at Generale Bank, later named Fortis Bank, and held various positions there including Deputy Manager of the Bills Department until 1977. Mr. Baise is Director and Chairman of Fortis Finance, NV a subsidiary of Fortis Insurance N.V. He is also Director and Chairman of various financing vehicles in Luxemburg: Fortfinlux SA, FGF Lux SA, Fortinvestlux SA and in Jersey: Fortis Capital Company, Ltd. He is a member of the Supervisory Board of a mortgage bank in The Netherlands, a subsidiary of Fortis Bank Nederland.
Dr. Robert J. Blendon, Sc.D., Director. Dr. Blendon has been a member of our board of directors since March 1993. Dr. Blendon has been a professor of Health Policy at Harvard Universitys School of Public Health and a professor of Political Analysis at Harvard Universitys Kennedy School of Government since 1987. Previously, he served as Vice President of The Robert Wood Johnson Foundation.
Beth L. Bronner, Director. Ms. Bronner has been a member of our board of directors since January 1994. Ms. Bronner is currently Senior Vice President and Chief Marketing Officer of Jim Beam Brands, a division of Fortune Brands. Prior to joining Jim Beam in 2003, Ms. Bronner was a Partner at LERA Consulting in Chicago, Illinois. Prior to joining LERA Consulting in 2002, Ms. Bronner was the President and Chief Operating Officer of ADVO, Inc., the nations largest full-service targeted direct mail marketing company. Before joining ADVO, Inc. in 2000, Ms. Bronner was President of the Health Division at Sunbeam Corporation. She was also a Senior Vice President and Director of Marketing of North American Consumer Banking at Citibank, N.A. and Vice-President of Emerging Markets for AT&T Company. Since 1993, she has been a member of the board of directors of The Hain-Celestial Group Inc., and has chaired its compensation committee. She also served as a member of Oak Industries, Inc.s audit committee from 1996 until its 2000 merger with Corning Incorporated. Ms. Bronner also serves on the boards of several charitable organizations;
108
Howard L. Carver, Director. Mr. Carver has been a member of our board of directors since June 2002. Mr. Carver is retired as an Office Managing Partner of Ernst & Young. Mr. Carvers career at Ernst & Young spanned five decades, beginning as an auditor and a financial consultant. He later became the director of insurance operations in several Ernst & Young offices, and served as Regional Director of insurance operations, Associate National Director of insurance operations, Co-Chairman of Ernst & Youngs International insurance committee and was a member of the Ernst & Young National Insurance Steering Committee. He retired from Ernst & Young in June of 2002. He currently chairs the audit committees of the Company and the Phoenix National Trust Company, a wholly owned subsidiary of the Phoenix Group. Mr. Carver is a Certified Public Accountant and is a member of both the American Institute of Certified Public Accountants, and the Connecticut Society of CPAs. Mr. Carver also serves on the boards and/or finance committees of several civic/charitable organizations.
Allen R. Freedman, Director. Mr. Freedman has been a member of our board of directors since its inception in 1979. Mr. Freedman is currently the owner and principal of A.R. Freedman & Co., a corporate strategy development firm and is the former Chairman and Chief Executive Officer of the Company, where he served as Chief Executive Officer until May 2000 and Chairman until his retirement in July 2000. In 1979, Mr. Freedman became the Companys president and first employee, initiating the Companys initial strategy and orchestrating its growth over the next 21 years. He began his career in 1964 as a tax lawyer, and a year later, he joined the Internal Revenue Services Office of the Chief Counsel. Mr. Freedman served as Vice President of D.H. Magid & Co. from 1967 to 1970. From there, he served as Vice President of Irving Trust Company (now Bank of New York). In 1975, Mr. Freedman became Executive Vice President and Treasurer of Lewis R. Eisner & Co., where he managed the creation of what is now Assurant in the United States, along with several other investments made by predecessors of Assurant. Beginning in 1978, he initiated and supervised most aspects of Assurants U.S. operations. Since his retirement as Chairman and Chief Executive Officer of the Company, he has served as a Director of Cornerstone Family Services, Chairman of its audit committee and a member of its investment committee. Since 1984, Mr. Freedman has also served as Chairman of the audit committee of Systems & Computer Technologies Corporation (SCTC). In January 2002, he became the Chairman of the Board of SCTC. Most recently, he has become a member of the board of directors of the newly formed Association of Audit Committee Members, Inc.
H. Carroll Mackin, Director. Mr. Mackin is the former Executive Vice President and Treasurer of the Company, where he served from 1980 until his retirement in 1997. Mr. Mackin has been a member of our board of directors since October 1996. Mr. Mackin served as a consultant to the Company in 1979. He was the Companys fourth employee and initiated many of the Companys early activities, including consolidating its investment departments and its first treasury function. Before joining the Company, he was Director for Investments at Forstmann, Leff. He is currently principal owner of Great Northern Manufacturing, LLC, a Louisville, Kentucky-based manufacturer of specialty nails.
Gilbert Mittler, Director. Mr. Mittler is the Chief Financial Officer of Fortis, and has been a member of our board of directors since March 2003. Mr. Mittler joined AG Group, one of the founding companies of Fortis, in 1988 and became at the inception of Fortis in 1990 Director of Fortis Group Finance & Development and Secretary of the Executive and Supervisory Boards of Fortis. He began his career as an accountant at Arthur Andersen in 1974, and subsequently worked for Belgian holding company Sofina as Senior Officer from 1976 to 1988. In 1988, he was recruited to serve as Head of Corporate Development of the AG Group (now Fortis AG), and in 1993 became Managing Director of ASLK Bank (now Fortis Bank) and a member of its Executive Committee, responsible for Finance & Control and foreign operations. In 1998, he became a member of the executive committee of Fortis, and a year later, he was named Managing Director of Fortis (B) and Fortis (NL), maintaining various responsibilities at group level. Since September 2000, he has served as Chief Financial Officer of Fortis and since 2001 also as Managing Director and Chief Financial Officer of Fortis Bank. Mr. Mittler is a member of the board of directors of Caifor, Fortis AG, Fortis Bank and Fortis Insurance N.V. He is also Vice-Chairman of the board of directors of the Banque Générale du Luxembourg and a member of Fortis ASR N.V.s Raad van Commissarissen (Supervisory Board).
109
Composition of Board of Directors
Our by-laws provide that our board of directors shall consist of such number of directors as from time to time fixed exclusively by resolution of the board of directors. However, our certificate of incorporation and the shareholders agreement that we entered into with Fortis Insurance N.V. provide that for so long as Fortis owns at least 10% of our outstanding common stock, our board of directors shall consist of no more than 12 directors (including at least seven independent directors at such time as is required by the listing standards of the New York Stock Exchange). The current board of directors consists of twelve persons and is divided into three classes. There are currently three vacancies arising from the resignations of three Fortis designees. Each director will serve a three year term, with termination staggered according to class, except that Class I Directors have an initial term expiring in 2005 and Class II Directors have an initial term expiring in 2006. The classification and current term of office of each of our directors has been noted in the table listing our board of directors under Directors.
Pursuant to the shareholders agreement that we entered into with Fortis Insurance N.V., Fortis has the right to nominate designees to our board of directors and, subject to limited exceptions, our board of directors will nominate those designees as follows: (i) so long as Fortis owns at least 10% of our outstanding common stock, two designees (out of a maximum of 12 directors); and (ii) so long as Fortis owns less than 10% but at least 5% of our outstanding common stock, one designee. Currently, Fortis has two designees on our board of directors, consisting of Messrs. Baise and Mittler. Fortis has agreed to cause the appropriate number of Fortis designees to resign promptly at any time when the number of Fortis designees on our board of directors exceeds the number of designees to which Fortis is entitled, unless otherwise requested by us.
Committees of the Board of Directors
Executive Committee. The Executive Committee is composed of Messrs. Baise, Clayton, Freedman and Palms and is chaired by Mr. Clayton. This committee acts for the board of directors when a meeting of the full board is not practical.
Compensation Committee. The Compensation Committee is composed of Ms. Bronner and Messrs. Freedman, and Mittler and is chaired by Mr. Freedman. This committee approves, administers and interprets our compensation and benefit policies, including our executive incentive programs. It reviews and makes recommendations to our board of directors to ensure that our compensation and benefit policies are consistent with our compensation philosophy and corporate governance principles. This committee is also responsible for establishing our CEOs compensation.
Audit Committee. The Audit Committee is composed of Messrs. Carver, Mackin and Palms and is chaired by Mr. Carver. This committee has general responsibility for the oversight and surveillance of our accounting, reporting and financial control practices. Among other functions, the committee retains our independent public accountants. Each member of the Audit Committee is a non-management director. Mr. Carver is a financial expert within the definition of that term under the regulations of the Securities Act.
Nominating and Corporate Governance Committee. The Nominating and Corporate Governance Committee is composed of Messrs. Blendon, Mittler and Palms and is chaired by Dr. Palms. This committee oversees our governance policies, nominates directors for election by the board or by stockholders, nominates committee chairpersons and nominates directors for membership on the committees of the board.
Code of Ethics
As a new reporting company we are required to develop an ethics code that applies to all of our directors, officers and employees by October, 2004. We are currently developing an Assurant Ethics Code, and when it is adopted we will make it publicly available on our website at www.assurant.com . If we subsequently make any substantive amendment to the Assurant Ethics Code, or grant any waiver, including any implicit waiver, from a provision of the code, that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions after we adopt and publish the
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Executive Officers
The table below sets forth certain information concerning our executive officers:
Name | Age | Positions | ||||
|
|
|
||||
J. Kerry Clayton
|
58 | President, Chief Executive Officer and Director | ||||
Robert B. Pollock
|
49 | Executive Vice President and Chief Financial Officer | ||||
Lesley Silvester
|
57 | Executive Vice President | ||||
Benjamin M. Cutler
|
59 | Executive Vice President | ||||
Michael J. Peninger
|
49 | Executive Vice President; President and Chief Executive Officer of Assurant Employee Benefits | ||||
Alan W. Feagin
|
57 | Executive Vice President; President and Chief Executive Officer of Assurant PreNeed | ||||
Donald Hamm
|
49 | Executive Vice President; President and Chief Executive Officer of Assurant Health | ||||
Philip Bruce Camacho
|
46 | Executive Vice President; President and Chief Executive Officer of Assurant Solutions | ||||
Katherine Greenzang
|
40 | Senior Vice President, General Counsel and Secretary | ||||
Jeffrey Helman
|
50 | Senior Vice President and General Auditor | ||||
Lucinda Landreth
|
56 | President and Chief Investment Officer of Assurant Asset Management | ||||
Larry M. Cains
|
57 | Senior Vice President, Investor Relations | ||||
Robert Haertel
|
48 | Senior Vice President, Compensation and Benefits | ||||
Edwin L. Harper
|
62 | Senior Vice President, Public Affairs/ Government Relations | ||||
Barbara R. Hege
|
60 | Senior Vice President, Finance (Taxation) | ||||
Lance R. Wilson
|
56 | Senior Vice President and Chief Information Officer |
J. Kerry Clayton, President, Chief Executive Officer and Director. Biography available under Directors.
Robert B. Pollock, Executive Vice President and Chief Financial Officer. Mr. Pollock has been our Executive Vice President and Chief Financial Officer since January 1999. He is also the Chairman of Assurant Solutions. From 1993 to 1999, he served as President and Chief Executive Officer of Assurant Employee Benefits. Mr. Pollock began his career as an actuary at CUNA Mutual Insurance Group in 1974. He then joined the Company as a staff actuary at Assurant Employee Benefits in 1981. In July 1992, Mr. Pollock was appointed Senior Vice President, Group Life and Disability at Assurant Employee Benefits. In July 1993, he was appointed President and Chief Executive Officer of Assurant Employee Benefits. He is a Fellow of the Society of Actuaries and a member of the American Academy of Actuaries. Mr. Pollock was the Chairman of the Disability Insurance Committee for the Health Insurance Association of America (HIAA) for three years.
Lesley Silvester, Executive Vice President. Ms. Silvester has been our Executive Vice President since January 2001. From 1996 to 1999, she served as Director, Group Management Development for the Fortis Group in Brussels. Since returning to the United States in 1999, Ms. Silvester has had responsibility for Human Resources for the Company and, in 2001, assumed Executive Committee responsibility for Assurant PreNeed. Ms. Silvesters professional career spans more than two and a half decades, much of which has been in the insurance industry in human resources management, organization development and strategy. Ms. Silvesters experience includes 15 years with different parts of the Company in the United States and with Fortis in Europe, focusing recently on world-wide senior management development, company learning, human resources strategy and post-merger integration. Ms. Silvester is a Graduate Member of the Institute of
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Benjamin M. Cutler, Executive Vice President. Mr. Cutler has been Executive Vice President of the Company and Chairman, Assurant Health since January 2003. Mr. Cutler has over 30 years of experience in the insurance industry. Prior to his current position, Mr. Cutler served as President and Chief Executive Officer of Assurant Health from 1998 to 2002. Before joining the Company in 1985, Mr. Cutler held various positions at Sun Life Group of America and USLIFE Corporation. Mr. Cutler currently serves as past Chairman and director of Americas Health Insurance Plans (formed by the merger of HIAA and AAHP). Mr. Cutler serves on the board of the Wellness Councils of America.
Michael J. Peninger, Executive Vice President; President and Chief Executive Officer, Assurant Employee Benefits. Mr. Peninger has been President and Chief Executive Officer of Assurant Employee Benefits since January 1999. Mr. Peninger began his career at Northwestern National Life in 1977 as an actuary. He then joined Assurant Employee Benefits in 1985 as a corporate actuary and has held various positions within the Company. In 1991, Mr. Peninger was appointed Senior Vice President and Chief Financial Officer and in 1993 he became Senior Vice President of Finance and Claims of Assurant Employee Benefits. In 1998, Mr. Peninger was appointed Executive Vice President. Mr. Peninger is a Fellow of the Society of Actuaries and a member of the American Academy of Actuaries.
Alan W. Feagin, Executive Vice President; President and Chief Executive Officer, Assurant PreNeed. Mr. Feagin is President and Chief Executive Officer of Assurant PreNeed and Vice-Chairman and Chief Executive Officer of AMLIC, positions he has held since January 1995. Mr. Feagin joined United Family Life Insurance Company (now part of Assurant PreNeed) in 1989 as Senior Vice President, Marketing. He also served as Senior Vice President of Sales of United Family Life before being named President and Chief Executive Officer in 1995. Mr. Feagin has more than 20 years of experience in the marketing, advertising and sales arenas, beginning his career in the soft drink industry. He has served in various senior marketing positions with the McCann-Erickson advertising agency, RJ Reynolds Industries and Canada Dry/ Sunkist Corporation prior to joining the Company.
Donald Hamm, Executive Vice President; President and Chief Executive Officer, Assurant Health. Mr. Hamm has been President and Chief Executive Officer of Assurant Health since January 2003. Mr. Hamm first joined Assurant Health in 1982, holding several executive positions until 1993. He then worked as a principal with William M. Mercer, a consultant with Tillinghast-Towers Perrin and as Vice President of the Southeast Region for Blue Cross/ Blue Shield of Wisconsin prior to rejoining Assurant Health in 1999 as Chief Financial Officer. Mr. Hamm is a Fellow in the Society of Actuaries, a member of the American Academy of Actuaries and a Fellow of the Life Management Institute.
Philip Bruce Camacho, Executive Vice President; President and Chief Executive Officer, Assurant Solutions. Mr. Camacho has been President and Chief Executive Officer of Assurant Solutions since January 2003. Prior to his appointment as President, Mr. Camacho served as Assurant Groups Executive Vice President for Sales and Marketing. Mr. Camacho joined American Bankers in 1990 as Vice President of Information Systems. At the time of the Companys acquisition of American Bankers, he was Executive Vice President, Investor Relations, with responsibility for legal and regulatory affairs, marketing services, licensing, state filings and client administration, as well as investor relations. A certified public accountant, before joining American Bankers, Mr. Camacho worked as an accountant with PricewaterhouseCoopers LLP, specializing in insurance in the United States, United Kingdom and the Caribbean.
Katherine Greenzang, Senior Vice President, General Counsel and Secretary. Ms. Greenzang has been our Senior Vice President, General Counsel and Secretary since June 2001. Ms. Greenzang joined the Company in August 1994 as Corporate Counsel. She was named Assistant Vice President and Corporate Counsel in 1995 and Vice President, Corporate Counsel in 1996 before assuming her current position. Prior to joining the Company, Ms. Greenzang worked as an associate at Dewey Ballantine LLP. She is a member of the American Bar Association, the New York State Bar Association and the Association of Corporate Counsel.
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Jeffrey Helman, Senior Vice President and General Auditor. Mr. Helman has been Senior Vice President and General Auditor since January 1997. As head of Audit Services, he is responsible for fulfilling the internal auditing requirements of the Company and its individual business segments. Mr. Helman has over two decades of experience and expertise in finance and auditing. Prior to joining the Company in 1993 as Vice President, he was a Partner at Arthur Andersen & Company, where he had worked since graduating from college in 1975. Mr. Helman is a Certified Public Accountant and is a member of the Institute of Internal Auditors and the American Institute of Certified Public Accountants.
Lucinda Landreth, President and Chief Investment Officer, Assurant Asset Management. Ms. Landreth has been President and Chief Investment Officer of Assurant Asset Management, a division of the Company since June 2002. Ms. Landreth is responsible for managing the Companys investment portfolio and for overseeing the development and implementation of the Companys investment policy. Ms. Landreth first worked at the Company from 1997 until 2001 as Executive Vice President and Chief Investment Officer of Fortis Mutual Funds, and was responsible for investment performance and process, equity strategy and compliance, as well as developing investment professionals. When the sale of Fortis Financial Group was finalized, Ms. Landreth left the Company. She returned in July of 2002 as Senior Vice President before assuming her current title. Prior to joining the Company, Ms. Landreth was Chief Investment Officer of Alex Brown Advisory and Trust Co., a subsidiary of a major investment bank and securities brokerage in Baltimore. Ms. Landreth started her career as an equity analyst with Philadelphias Provident National Bank in 1970. After holding a succession of positions with what later became PNC Financial Services Group, she was named Managing Director of PNCs Equity Investment area in 1992. Ms. Landreth is a Chartered Financial Analyst.
Larry M. Cains, Senior Vice President, Investor Relations. Mr. Cains has been our Senior Vice President, Investor Relations, since January 2004. Prior to his current position, he served as Senior Vice President, Finance for nine years and was responsible for managing the departments of the Controller, corporate insurance and Information Technology (New York). Prior to assuming that position, Mr. Cains served as the Companys Vice President and Controller for seven years. Mr. Cains has three decades of experience in accounting, finance and general management. Prior to joining the Company in 1988, he was Marsh & McLennans Vice President and Controller for ten years. Earlier in his career, he was employed by Arthur Andersen & Company and Hertz Corporation in accounting and auditing. Mr. Cains is a Certified Public Accountant and is a member of the American Institute of Certified Public Accountants, the New York Society of Certified Public Accountants and Financial Executives International.
Robert Haertel, Senior Vice President, Compensation and Benefits. Mr. Haertel has been Senior Vice President of the Company since January 2001. Prior to his current position he was Vice President, Compensation, a position he held since June 1998. Mr. Haertel began his career in Human Resources as an employee relations generalist for Shell Oil Company in 1979. He then went on to hold various management positions specializing in compensation and human resources at Citicorp, Engelhard Corporation, Bankers Trust and CS First Boston. Prior to joining the Company in June 1998, Mr. Haertel was the director of compensation and benefits at Nielsen Media Research. Mr. Haertel holds a Certified Compensation Professional designation from World at Work (formerly the American Compensation Association) and is a member of the Society of Human Resources Management.
Edwin L. Harper, Senior Vice President, Public Affairs/ Government Relations. Mr. Harper has been our Senior Vice President, Public Affairs/ Government Relations since July 2001. Prior to his current position, Mr. Harper held a number of senior management positions including Chief Operating Officer and Chief Financial Officer of American Security Group (now part of Assurant Solutions) from 1998 to 2001. Prior to joining American Security Group, Mr. Harper held various executive positions, including President and Chief Executive Officer of the Association of American Railroads, Executive Vice President and Chief Financial Officer of the Campbell Soup Company and Senior Vice President and Chief Administrative Officer of CertainTeed Corporation. In 1980, Mr. Harper joined then President-elect Reagans Transition Team. He stayed on to become an Assistant to the President, Deputy Director of the Office on Management and Budget and, later, Chief of Policy Development. Earlier, from 1970 to 1973, he served under President Nixon as a Special Assistant to the President with policy planning and budgeting responsibilities. Mr. Harper has served on the boards of several public companies, academic institutions, civic organizations and professional
113
Barbara R. Hege, Senior Vice President, Finance. Ms. Hege has been Senior Vice President, Finance since December 2000. Ms. Hege joined the Company as Vice President, Taxation, in 1991. Prior to joining the Company, she was Vice President, Finance and Taxation at Mutual Benefit Life Insurance Company. Earlier in her career she was a Senior Manager with KPMG LLP in Chicago. She is a Certified Public Accountant and a Chartered Life Underwriter. She is a member of the American Institute of Certified Public Accountants, the New Jersey Society of Certified Public Accountants, the American Womans Society of Certified Public Accountants, The Society of Financial Service Professionals and a past president of the Chicago Society of Women Certified Public Accountants.
Lance R. Wilson, Senior Vice President and Chief Information Officer. Mr. Wilson has been our Senior Vice President, Shared Services, and Chief Information Officer since April 2000. Prior to joining the Company, Mr. Wilson was Chief Information Officer at Sunbeam Corporation from 1999 to 2000, and also worked for Honeywell Corporation from 1997 to 1999 as Vice President and Chief Information Officer. From 1989 to 1997, Mr. Wilson provided leadership for the information systems activities of the Pillsbury Company, where he was Vice President, Management Information Systems. From 1979 to 1989, Mr. Wilson held various positions with Land OLakes, Inc., where he was responsible for the creation and implementation of a marketing and sales decision support system. Mr. Wilson started his career in 1974 at the U.S. Department of Defense, U.S. Navy, where he was responsible for Management Systems Analysis.
Executive Management Committee and Management Board
A group of executive officers that we refer to as the Executive Management Committee, consisting of the Chief Executive Officer and all Executive Vice Presidents of the Company and the Chief Executive Officers of each of our operating business segments, is ultimately responsible for setting the policies, strategy and direction of the Company, subject to the overall direction and supervision of the board of directors. The current members of the Executive Management Committee are J. Kerry Clayton, Robert B. Pollock, Lesley Silvester, Benjamin M. Cutler, Michael J. Peninger, Alan W. Feagin, Donald Hamm and Philip Bruce Camacho. All of the Companys executive officers constitute a group that we refer to as the Management Board. This group is responsible for setting the operational policies of the Company, including those dealing with shared services, issues that pertain to multiple business segments and corporate functions.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our directors and executive officers, and persons who own more than 10% of our common stock, to file with the SEC initial reports of ownership and reports of changes in ownership of common stock and other equity securities of the Company. Directors, executive officers and greater than 10% stockholders are required by SEC regulation to furnish us copies of all Section 16(a) reports they file.
Because we were not subject to the reporting obligations under Section 16(a) of the Exchange Act during fiscal 2003, no initial reports of ownership and reports of changes in ownership of common stock and other equity securities of the Company were required to be filed in fiscal year 2003.
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Item 11. | Executive Compensation |
Summary Compensation Table
The following table sets forth certain summary
information concerning compensation paid or accrued by the
Company for services rendered in all capacities during the
fiscal years ended December 31, 2003, December 31,
2002 and December 31, 2001 for our Chief Executive Officer
and each of the next four most highly compensated executive
officers during the fiscal year ended December 31, 2003.
These individuals are referred to as the named executive
officers.
Long-Term
Compensation
Annual Compensation
Awards
Payouts
Other
Securities
Annual
Underlying
All Other
Name and Principal Position
Year
Salary
Bonus
Compensation(1)
Options(2)
LTIP(3)
Compensation(4)
($)
($)
($)
(#)
($)
($)
J. Kerry Clayton
2003
811,200
1,622,400
30,000
865,864
President and Chief
2002
780,000
1,560,000
30,000
54,600
Executive Officer
2001
750,000
30,000
450,389
125,067
Robert B. Pollock
2003
649,000
1,103,300
15,000
69,244
468,515
Executive Vice President and
2002
624,000
1,067,368
15,000
43,680
Chief Financial Officer
2001
609,615
6,568
14,000
125,543
87,500
Benjamin M. Cutler
2003
459,700
597,610
10,000
236,808
Executive Vice President
2002
442,000
530,400
4,000
66,640
2001
425,000
510,000
3,500
83,937
44,996
Lesley Silvester
2003
432,600
562,380
10,000
240,942
Executive Vice President
2002
416,000
540,800
10,000
29,120
2001
400,000
3,200
28,609
42,700
Philip Bruce Camacho
2003
525,000
318,150
4,000
129,865
Executive Vice President;
2002
478,400
278,907
4,000
220,000
33,488
President and Chief Executive
2001
464,615
3,700
48,554
Officer, Assurant Solutions
(1) | Perquisites and other personal benefits to the named executive officers were less than both $50,000 and 10% of the total annual salary and bonus reported for the named executive officers, and therefore, information regarding perquisites and other personal benefits has not been included. |
(2) | The option grants shown in this table represent options granted pursuant to the Assurant, Inc. Stock Option Plan to acquire shares of Assurant Inc.s Series D Preferred Stock, the value of which was related to the market value of shares of Fortis N.V. and Fortis SA/ NV, and the Euro to U.S. dollar conversion rate. On October 15, 2003, our board of directors authorized the discontinuance of this plan effective September 22, 2003 and all stock options outstanding thereunder were cancelled in exchange for a payment of the fair value of such options, as determined by an independent third party. |
(3) | Amounts shown in this column represent amounts that were paid or payable in the given year under the Appreciation Incentive Rights Plan. |
(4) | Amounts shown in this column for the fiscal year ended December 31, 2003 include the following amounts: (i) for Mr. Clayton, $14,000 for Company contributions under the Assurant 401(k) Plan, $151,984 for estimated Company contributions under the 401(k) portion of the Assurant Executive Pension and 401(k) Plan, and $699,880 in payment of the fair value for stock options to purchase Assurant, Inc.s Series D Preferred Stock granted pursuant to the Assurant, Inc. Stock Option Plan that were cancelled on September 22, 2003; (ii) for Mr. Pollock, $14,000 for Company contributions under the Assurant 401(k) Plan, $106,146 for estimated Company contributions under the 401(k) portion of the Assurant Executive Pension and 401(k) Plan, and $348,369 in payment of the fair value for stock options to purchase Assurant, Inc.s Series D Preferred Stock granted pursuant to the Assurant, Inc. Stock Option Plan that were cancelled on September 22, 2003; (iii) for Mr. Cutler, $14,000 for Company contributions under the Assurant 401(k) Plan, $55,307 for estimated Company contributions under the |
115
401(k) portion of the Assurant Executive Pension and 401(k) Plan, and $167,501 in payment of the fair value for stock options to purchase Assurant, Inc.s Series D Preferred Stock granted pursuant to the Assurant, Inc. Stock Option Plan that were cancelled on September 22, 2003; (iv) for Ms. Silvester, $14,000 for Company contributions under the Assurant 401(k) Plan, $54,138 for estimated Company contributions under the 401(k) portion of the Assurant Executive Pension and 401(k) Plan, and $172,804 in payment of the fair value for stock options to purchase Assurant, Inc.s Series D Preferred Stock granted pursuant to the Fortis, Inc. Stock Option Plan that were cancelled on September 22, 2003; and (v) for Mr. Camacho, $14,000 for Company contributions under the Assurant 401(k) Plan, $42,273 for estimated Company contributions under the 401(k) portion of the Assurant Executive Pension and 401(k) Plan, and $73,592 in payment of the fair value for stock options to purchase Assurant, Inc.s Series D Preferred Stock granted pursuant to the Assurant, Inc. Stock Option Plan that were cancelled on September 22, 2003. |
Option Grants in 2003
The following table presents information
concerning stock options granted pursuant to the
Assurant, Inc. Stock Option Plan to acquire shares of
Assurant, Inc.s Series D Preferred Stock to the
named executive officers during the fiscal year ended
December 31, 2003. The Stock Option Plan was terminated
effective as of September 22, 2003, and all stock options
outstanding thereunder were cancelled in exchange for a payment
of the fair value of such options, as determined by an
independent third party. Such payment totaled approximately
$2.2 million for all outstanding stock options.
Percent of
Number of
Total
Securities
Options
Grant
Underlying
Granted to
Exercise
Date
Options
Employees
or Base
Present
Granted(1)
in Fiscal
Price
Expiration
Value(2)
Name
(#)
Year
($/Sh)
Date
($)
30,000
32.2%
23.65
3/21/13
293,400
15,000
16.1%
23.65
3/21/13
146,700
10,000
10.7%
23.65
3/21/13
97,800
10,000
10.7%
23.65
3/21/13
97,800
4,000
4.3%
23.65
3/21/13
39,120
(1) | The options were granted pursuant to the Assurant, Inc. Stock Option Plan to acquire shares of Assurant, Inc.s Series D Preferred Stock, the value of which is related to the market value of shares of Fortis N.V. and Fortis SA/NV and the Euro to U.S. dollar conversion rate. The options had a term of ten years and were scheduled to vest as to one-third of the shares on the first three anniversaries of the date of grant. |
(2) | There was no public market for shares of Assurant, Inc.s Series D Preferred Stock on the grant date. The estimated present values for the options listed above are based on the binomial values of the options calculated as of September 22, 2003 by an independent third party, using the following assumptions: (i) the value of one share of Series D Preferred Stock is the sum of the value of 0.9 of one share of Fortis SA/NV and 0.9 of one share of common stock of Fortis N.V., (ii) the exercise price of the option was equal to the fair market value as of the date of grant, (iii) the stock price equals the average of the combined Fortis N.V./ Fortis SA/ NV share price for the three months prior to the calculation; (iv) volatility was calculated as the average of the 60-month historical volatility of the Fortis SA/NV and Fortis N.V. shares at the date of calculation; (v) the annual dividend was calculated as the average of the Fortis SA/NV and Fortis N.V. stock dividend, and (vi) the discount rate was based on the Euro benchmark yield curve for the outstanding term of each option. Although this calculation is not necessarily the value of the options as of their date of grant, it is the value for which they were cashed out, as discussed above. |
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Long-Term Incentive Plan Awards
The following table presents information
concerning long-term incentive plan awards to the named
executive officers under the Assurant Appreciation Incentive
Rights Plan during the fiscal year ended December 31, 2003:
Estimated
Future Payouts
Under Non-
Performance or
Stock Price-
Number of Shares,
Other Period
Based Plans
Units or Other
Until Maturation
Name
Rights (#)
or Payout
Target(1) ($)
20,151
(2)
3 Years
811,200
14,509
(2)
3 Years
584,100
8,565
(2)
3 Years
344,775
8,060
(2)
3 Years
324,450
7,333
(3)
3 Years
341,250
(1) | An eligible employee of Assurant, Inc. receives 75% of his or her award in Assurant, Inc. incentive rights and 25% of his or her award in operating business segment incentive rights. Conversely, an eligible employee of an operating business segment of Assurant receives 25% of his or her award in Assurant, Inc. incentive rights and 75% of his or her award in operating business segment incentive rights. Each incentive right represents the right to the appreciation in value of an incentive right over the vesting period of the award, based on a valuation provided by an independent, qualified appraiser. |
(2) | Represents the total number of incentive rights awarded. Rights are distributed between Assurant, Inc. (75%) and each of the four operating business segments (25%). The Assurant, Inc. incentive rights were replaced with stock appreciation rights on Assurant common stock following the Companys initial public offering. |
(3) | Represents the total number of incentive rights awarded. Rights are distributed between Assurant, Inc. (25%) and Assurant Solutions (75%). The Assurant, Inc. incentive rights were replaced with stock appreciation rights on Assurant common stock following the Companys initial public offering. |
Pension Plans
We maintain two executive defined benefit pension plans, each of which is inter-related with our broad-based, tax-qualified, defined benefit pension plan.
Supplemental Executive Retirement Plan. Effective January 1, 1990, our board of directors adopted the Supplemental Executive Retirement Plan (SERP), which is a non-qualified, unfunded supplemental pension plan for certain key executives of the Company and its subsidiaries. Under the SERP, participants who meet certain conditions are entitled to receive a benefit, called a target benefit, that is then offset (reduced) by certain other benefits, such as the pension payable under our tax-qualified defined benefit pension plan (the Assurant Pension Plan, described below), the benefit payable under the pension portion of the Executive Pension and 401(k) Plan, described below, and Social Security benefits. If the SERP benefit commences at age 60 or later, the target benefit, expressed as a single life annuity, is 50% of the employees base pay plus target short-term incentive bonus, each as most recently approved by our board of directors, multiplied by a fraction, the numerator of which is the employees number of months of employment with the Company or its subsidiaries, and the denominator of which is 240. In other words, after 20 years of employment, the employee will earn a full 50% benefit under this plan. If the SERP benefit commences prior to age 60, then the target benefit will be reduced on an actuarially equivalent basis from age 60 to the date the benefit actually commences.
A participant is not vested in any of his or her benefit under the SERP until the second anniversary of the date he or she commences participation in the plan. On the second anniversary of participation, the participant vests in the SERP benefit at the rate of 3% for each month of employment thereafter with the Company or its
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The default form of payment under the SERP is a single lump payment that is the actuarial equivalent of the SERP benefit. The participant may also elect optional forms of payment under the SERP.
If there is a change in control with respect to the Company or a division, and within two years after the change in control a participants employment is terminated without cause or the participant terminates employment for good reason, then (1) the participant will become 100% vested in his or her SERP benefit; (2) the participant will be credited with 36 additional months of service for purposes of computing his or her target benefit; and (3) the actuarial reduction for commencement of the SERP benefit prior to age 60 will be calculated as though the participant was 36 months older than his or her actual age.
The SERP provides that if the payments to a participant or beneficiary will be made over a period of more than one year and if at the time payments commence the Company is not subject to pending proceedings as a debtor under the U.S. Bankruptcy Code, then Fortis Insurance N.V. will guarantee the payment of SERP benefits to such participant or beneficiary. The SERP further provides that if Fortis Insurance N.V. ceases to be the beneficial owner of the Company, then such guarantee will be limited to the actuarially equivalent value of the participants SERP benefit immediately following such cessation of beneficial ownership.
The table below shows the target benefit payable
under the SERP. The benefit shown is a single life annuity
commencing at age 60.
Target Benefits Payable Under the
Assurant, Inc. SERP
Years of Service(1)
Final Compensation
10
15
20
25
35
$
125,000
$
187,500
$
250,000
$
250,000
$
250,000
187,500
281,250
375,000
375,000
375,000
250,000
375,000
500,000
500,000
500,000
312,500
468,750
625,000
625,000
625,000
375,000
562,500
750,000
750,000
750,000
437,500
656,250
875,000
875,000
875,000
500,000
750,000
1,000,000
1,000,000
1,000,000
562,500
843,750
1,125,000
1,125,000
1,125,000
625,000
937,500
1,250,000
1,250,000
1,250,000
(1) | At December 31, 2003, J. Kerry Clayton had 33.2 years of service and SERP compensation of $1,622,400; Robert B. Pollock had 22.6 years of service and SERP compensation of $1,200,650; Lesley Silvester had 19.3 years of service and SERP compensation of $713,790; Benjamin M. Cutler had 18.1 years of service and SERP compensation of $758,505; and Philip Bruce Camacho had 4.4 years of service and SERP compensation of $840,000. |
Executive Pension and 401(k) Plan. Effective January 1, 1994, our board of directors adopted the Executive Pension and 401(k) Plan, which is a non-qualified, unfunded deferred compensation plan for certain key executives of the Company and its subsidiaries. The pension portion of this plan (referred to herein as the Executive Pension Plan) is intended to restore to participants amounts that they are restricted from receiving under the Assurant Pension Plan, described below, due to section 401(a)(17) of the U.S. tax code, which generally limits the compensation that may be taken into account under a tax-qualified pension plan to no more than $200,000 annually (subject to cost of living adjustments).
A participant becomes vested in the benefits under the Executive Pension Plan after three years of vesting service, if the participant has elected to participate in the pension equity portion of the Assurant Pension Plan
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Assurant Pension Plan. Since 1983, we have maintained the Assurant Pension Plan, which is a tax-qualified, defined benefit pension plan subject to regulation under ERISA. Eligible employees generally may participate in the Plan after completing one year of service with the Company. The Assurant Pension Plan provides for multiple benefit formulas for different groups of participants. Benefits under the plan are payable at termination of employment. A participants benefit may be paid in a lump sum or in various annuity forms.
Employment and Change in Control Agreements
We have entered into change in control severance agreements with Mr. Clayton, our other named executive officers and other officers and key employees. The severance agreements generally provide that if a change in control (as defined) occurs with respect to the business segment for which an employee works, then a two-year trigger period begins. If the employees employment is terminated by us without cause or if the employee resigns for good reason (each as defined) during such two-year period, the employee is entitled to certain cash severance payments and continuation of medical and other welfare benefits for a period of 18 months following the termination of employment at the rate charged active employees.
The amount of cash severance benefits payable to an employee is equal to a multiple (ranging from 1 to 3 depending on the agreement, and equal to 3 for Mr. Clayton and our other named executive officers) times the sum of the employees annual base salary and target annual bonus. One-half of the cash severance is payable within thirty days of the date of the employees termination, and one-half of the cash severance is payable in equal monthly installments over a period ranging from six months (for those with a severance multiple of 1) to 18 months (for those with a severance multiple of 3), offset by the amount of pre-tax compensation earned by the executive during such period. In addition, if a change in control has occurred and the employees employment has been terminated by us without cause or if the employee has resigned for good reason within one year prior to the change in control, then the employee is entitled to the cash severance benefits described above, to be paid in a lump sum in cash within 30 days after the change in control has occurred, and continuation of medical and other welfare benefits for a period of 18 months at the rate charged active employees, except that we shall reimburse the employee for the cost of obtaining such welfare benefits between the date of his or her termination and the date of the change in control. These agreements also provide additional rights including, but not limited to, outplacement services, legal fee reimbursement and reimbursement for any excise tax imposed on the officer by section 4999 of the U.S. tax code.
American Bankers Insurance Group has a severance agreement with Mr. Camacho. If Mr. Camacho terminates his employment because of retirement (as determined in accordance with normal company policies) or death, then Mr. Camacho will receive a severance payment equal to 150% of his current salary, defined as his salary for the 12 months preceding the severance, excluding any bonus or deferred compensation. If Mr. Camachos employment is terminated because of disability, then Mr. Camacho will receive a severance payment equal to 50% of his current annual salary, as defined above. If either Mr. Camachos employment is terminated without cause (as defined in the agreement), or Mr. Camacho terminates employment after a decrease in his base salary to a level less than 80% of the level for any prior year, then Mr. Camacho will receive a severance payment equal to 100% of his current salary, as defined. In each case the severance benefit will be paid in a lump sum on the fifth business day following termination of employment.
Director Compensation
Our board of directors adopted, and our sole stockholder prior to our initial public offering approved, the Assurant Directors Compensation Plan, as amended on December 12, 2003, effective following our initial public offering. The purpose of the plan is to attract, retain and compensate highly qualified individuals for service as members of the board of directors by providing them with competitive compensation and an
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The plan provides for payment of an annual retainer to our non-employee directors of $35,000, payable in cash quarterly. Additional annual retainers will be paid to the Chairman of the Board and committee members and chairpersons as follows: Chairman of the Board: $7,500; Audit Committee: member $3,750, chairperson $7,500; Compensation Committee: member $2,500, chairperson $5,000; Corporate Governance and Nominating Committee: member $2,500, chairperson $5,000; Executive Committee: none. Annual service for this purpose relates to the approximate 12-month periods between annual meetings of our stockholders. A prorated retainer will be paid to any person who becomes a non-employee director other than by election at an annual meeting. The plan also provides for the payment of participation fees of $2,000 for each board or committee meeting and $500 for each board or committee conference call (but not more than one fee for meetings or conference calls held on the same day). The Chairman of the Board or chairperson of a committee may authorize the full meeting fee to be payable with respect to any extended conference call or any other special off-site meeting required as part of a directors service. The plan provides for reasonable reimbursement of travel expenses in connection with attending meetings of our board and its committees, and other company functions where the directors attendance is requested by our Chief Executive Officer. A participant may elect to defer any cash amounts payable under the Directors Compensation Plan into the Assurant Investment Plan.
In addition to cash compensation, the plan provides that each non-employee director will receive, on the later of the effective date of the plan or the first date he or she becomes a non-employee director, an initial award of (1) shares of our common stock having a grant date value equal to the normal (non-prorated) annual cash retainer amount for such year, excluding any retainer related to a committee member or chairperson assignment, and (2) stock appreciation rights with respect to an equal number of shares of common stock. On the day following each annual meeting of our stockholders, beginning in 2005, each non-employee director then in office (other than a director who first became a non-employee director at the stockholders meeting held on the previous day) will receive (1) an award of stock having a grant date value equal to the directors annual cash retainer for such year, excluding any retainer earned by the director as a committee member or chair, and (2) an award of stock appreciation rights with respect to an equal number of shares of common stock. In no event will a director receive both an initial award and an annual award of shares and stock appreciation rights for the same year of service. The stock appreciation rights granted under the plan will have a base value equal to the fair market value of our common stock on the date of grant. Upon exercise of a stock appreciation right, a director will receive a cash payment equal to the excess, if any, of the fair market value of one share of our common stock on the date of exercise over the base value of the right. Stock appreciation rights granted under the plan will be fully vested on the date of grant, but may not be exercised until the fifth anniversary of the date of grant. To the extent not previously exercised, such rights will be automatically exercised on the earlier of the first anniversary of the grantees termination as a director of the Company for any reason or the tenth anniversary of the date of grant.
Subject to adjustment for recapitalization events, the maximum number of shares of our common stock that may be issued under the Directors Compensation Plan is 500,000. The plan will remain in effect until the day following the 2013 annual meeting of our stockholders, unless terminated earlier by our board of directors. The board of directors may at any time terminate or amend the plan, but any such amendment would be subject to stockholder approval if, in the reasonable judgment of the board, the amendment would constitute a material change requiring stockholder approval under applicable laws or the applicable requirements of a stock exchange on which our stock is listed.
Consulting Agreement and Retirement Plan
Effective July 31, 2000, Mr. Freedman retired as the Chief Executive Officer of the Company. In connection with his retirement, Mr. Freedman entered into a Consulting, Non-Compete and Payments Agreement with us and Fortis Insurance N.V. pursuant to which he agreed to (1) perform consulting services
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On July 19, 1999, Mr. Freedman entered in to a Retirement Agreement with us and Fortis Insurance N.V. relating to the payments and benefits to be provided to Mr. Freedman in connection with his scheduled retirement on July 31, 2000. The agreement provided that: as of the date of Mr. Freedmans retirement of July 31, 2000, Mr. Freedman would be fully vested in all amounts earned under our long term incentive plan. The amounts due Mr. Freedman under the long term incentive plan could be deferred by Mr. Freedman for a period of five years beyond the later of his retirement as an employee and his departure from our Board of Directors. The deferred amounts due Mr. Freedman under the long term incentive plan would be put into a trust for the benefit of Mr. Freedman during the deferral period.
On August 1, 2000, we entered into a trust agreement with Wachovia Bank, N.A., for the benefit of Mr. Freedman. The trust was created to carry out the provisions of the retirement agreement and to hold assets contributed by us sufficient to fund our obligation to Mr. Freedman under the long term incentive plan. The Trust constituted an unfunded arrangement, subject to the claims of our creditors in the event of insolvency. We then deposited into the Trust an amount equal to our remaining obligation to Mr. Freedman under the long term incentive plan. On August 25, 2000, a portion of this amount was used, at the direction of Mr. Freedman, to purchase life insurance policies, of which specified family members of Mr. Freedman as the beneficiaries. Premiums on those life insurance policies were payable over time, and payments began on August 25, 2000 and are scheduled to continue through August 25, 2004.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee is composed of Ms. Bronner and Messrs. Freedman and Mittler. There are no interlocks, as defined by the SEC, with respect to any member of the Compensation Committee.
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
The following table sets forth certain information with respect to the beneficial ownership of our Common Stock as of March 1, 2004, by (i) each person who is known by us beneficially to own more than 5% of the outstanding shares of the Common Stock, (ii) each of our directors and nominees, (iii) each of the named executive officers, and (iv) all of our directors and executive officers as a group. Unless otherwise indicated, the holders listed below have sole voting and investment power with respect to all shares of common stock beneficially owned by them.
Beneficial ownership is determined in accordance with the rules of the SEC. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to options held by that person that are currently exercisable or exercisable within 60 days of March 1,
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Name and Address of Beneficial | Amount and Nature of | Percentage | ||||||
Owner(1) | Beneficial Ownership | of Class | ||||||
|
|
|
||||||
Fortis Insurance N.V
|
50,199,131 | 35 | % | |||||
J. Kerry Clayton
|
29,091 | * | ||||||
Robert B. Pollock
|
19,164 | * | ||||||
Benjamin M. Cutler
|
11,491 | * | ||||||
Lesley Silvester
|
16,109 | * | ||||||
Philip Bruce Camacho
|
12,473 | * | ||||||
John Michael Palms
|
11,591 | * | ||||||
Michel Baise
|
| | ||||||
Robert J. Blendon
|
3,591 | * | ||||||
Beth L. Bronner
|
11,591 | * | ||||||
Howard L. Carver
|
6,591 | * | ||||||
Allen R. Freedman
|
11,591 | * | ||||||
H. Carroll Mackin
|
11,591 | * | ||||||
Gilbert Mittler
|
| | ||||||
All directors and executive officers as a group
(24 persons)
|
207,626 | * |
* | Less than 1%. |
(1) | The address for Fortis Insurance N.V. is Archimedeslaan 6, 3500 GA Utrecht The Netherlands. The address for all other persons is c/o Assurant, Inc., One Chase Manhattan Plaza, 41st Floor, New York, New York 10005. |
Equity Compensation Plan Information
The following table sets forth information about the Common Stock that may be issued under all of the Companys existing equity compensation plans as of December 31, 2003. All of the equity compensation plans became effective as of the Companys initial public offering.
(a) Number of Securities | (c) Number of Securities | |||||||||||
to be Issued Upon | (b) Weighted Average | Remaining Available for Future | ||||||||||
Exercise of Outstanding | Exercise Price of | Issuance Under Equity | ||||||||||
Options, Warrants and | Outstanding Options, | Compensation Plans (Excluding | ||||||||||
Plan Category | Rights | Warrants and Rights | Securities Reflected in Column (a) | |||||||||
|
|
|
|
|||||||||
Equity Compensation Plans Approved by Stockholders
|
-0- | n/a | 10,000,000 | (1) | ||||||||
-0- | n/a | 5,000,000 | (2) | |||||||||
-0- | n/a | 500,000 | (3) | |||||||||
Equity Compensation Plans Not Approved by
Stockholders
|
-0- | n/a | -0- | |||||||||
|
|
|||||||||||
Total
|
-0- | 15,500,000 |
(1) | Assurant, Inc. 2004 Long-Term Incentive Plan. Shares reserved under this plan are available for issuance pursuant to the exercise of stock options and stock appreciation rights granted under the plan, and may be granted as awards of restricted stock, performance shares or unrestricted stock. |
(2) | Assurant, Inc. 2004 Employee Stock Purchase Plan. |
(3) | Assurant, Inc. Directors Compensation Plan. Shares reserved under this plan are available for stock grants to non-employee directors. |
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Item 13. | Certain Relationships and Related Transactions |
General
Some of our directors are directors, officers and employees of Fortis and/or its subsidiaries. We have entered into a shareholders agreement with Fortis Insurance N.V. that gives Fortis the right to nominate designees to our board of directors and the right to approve certain significant corporate actions as described under Shareholders Agreement.
In the ordinary course of business, we have entered into a number of agreements with Fortis and its subsidiaries relating to our historical business and our relationship with the Fortis group of companies, the material terms of which are described below. In addition, we have entered into agreements with Fortis relating to our separation from Fortis and the ongoing relationship of our Company and Fortis, as described below.
Registration Rights Agreement
We have entered into a registration rights agreement with Fortis Insurance N.V. pursuant to which we have granted to Fortis Insurance N.V. and its affiliates that become our stockholders (collectively, Fortis Insurance) rights to request registration under the Securities Act to effect a public offering with respect to all or part of the shares of our common stock owned by them from time to time during the term of the agreement so long as the shares to be offered pursuant to the request have an aggregate offering price of at least $500 million (based on the then current market price) and, when the aggregate registrable shares held by the stockholder is less than or, after giving effect to the requested offering will be, less than 20% of the outstanding shares of our common stock, $250 million. We will be required to fulfill such obligation except in limited circumstances. The maximum number of shares to be included in any such public offering will not exceed the maximum number that the managing underwriter of such public offering considers to be appropriate. These rights may be exercised on an unlimited number of occasions with respect to registration statements on Form S-2 or S-3 and on not more than two occasions with respect to registration statements on Form S-1; provided that we will not be obligated to effect more than one registration in any 90-day period.
In addition, subject to limited exceptions, if we propose to register any shares of our common stock, other equity securities or securities convertible into or exchangeable for equity securities, whether or not for sale for our own account, we are required to provide notice to Fortis Insurance, and if requested by Fortis Insurance, we will include its shares in the registration statement. The maximum number of shares to be included in any such public offering will not exceed the maximum number that the managing underwriter of such public offering considers to be appropriate with priority given to securities sought to be included at our request.
During the term of the agreement, Fortis Insurance has agreed not to sell, transfer or hedge any shares of our common stock or any securities convertible into or exchangeable for our common stock for 10 days prior to and 90 days after the effective date of a registration statement for an underwritten public offering of any of our equity securities (unless the underwriters of such offering permit a shorter period).
We are generally obligated to pay all expenses of the registration and offering of shares in connection with any such registration, other than underwriting discounts and commissions. In addition, we have agreed to indemnify Fortis Insurance for damages relating to a material misstatement or omission in any registration statement or prospectus relating to shares of our common stock to be sold by Fortis Insurance. Fortis Insurance has agreed to indemnify us, our officers and our directors on the same basis with respect to material misstatements or omissions relating to information about Fortis Insurance up to the amount of net proceeds received.
Generally, we may grant registration rights to other persons; however, any such registration rights cannot be exercised until after the second anniversary of this offering.
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Shareholders Agreement
We have entered into a shareholders agreement with Fortis Insurance N.V. The shareholders agreement sets forth the following agreements as to corporate governance matters:
Composition of Board of Directors. For so long as Fortis owns at least 10% of our outstanding common stock, our board of directors shall consist of no more than 12 directors (including at least seven independent directors at such time as is required by the listing standards of the New York Stock Exchange). Fortis will have the right to nominate designees to our board of directors and subject to limited exceptions, our board of directors will nominate those designees as follows: (i) so long as Fortis owns at least 10% of our outstanding common stock, two designees (out of a maximum of 12 directors); and (ii) so long as Fortis owns less than 10% but at least 5% of our outstanding common stock, one designee. Currently, Fortis has two designees on our board of directors, both of whom have been designated as Class III directors. Fortis has agreed to cause the appropriate number of Fortis designees to resign promptly at any time when the number of Fortis designees on our board of directors exceeds the number of designees to which Fortis is entitled, unless otherwise requested by us. See Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations Risk Factors Risks Related to Our Relationship with and Separation from Fortis.
Fortis Voting Requirement. As long as Fortis owns at least 10% of our outstanding common stock, certain significant corporate actions may only be taken with the approval of Fortis Insurance N.V., as stockholder. See Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations Risk Factors Risks Related to Our Relationship with and Separation from Fortis for more detail on these provisions.
Cooperation Agreement
We have entered into a cooperation agreement with Fortis Insurance N.V., Fortis N.V. and Fortis SA/NV relating to our separation from Fortis and the ongoing relationship between our Company and Fortis. Pursuant to this agreement, Fortis has granted us non-exclusive, royalty-free rights to use the Fortis name and marks for various transition periods ranging from one to two years depending on the usage of such name or mark.
In addition, if Fortis is required to fully consolidate our financial statements with Fortis financial statements in accordance with International Accounting Standards/ International Financial Reporting Standards 27 (including if for any reason Fortis owns 50% of our outstanding common stock), we will be required to provide specified information to Fortis, including financial information, risk reporting, compliance reporting and drafts of earnings releases and other public filings. We will also be required to provide similar, but more limited, information to Fortis as long as Fortis owns shares representing 20% or more of the voting power of our outstanding common stock or during any period when Fortis is required to account for its investment in our Company under the equity method of accounting in accordance with International Accounting Standards/ International Financial Reporting Standards 28. In addition, we will be required to permit the Fortis internal audit group to inspect our books and records and to discuss affairs, finances and accounts with our officers and auditors as long as Fortis owns shares representing 10% or more of the voting power of our outstanding common stock.
The cooperation agreement also contains provisions relating to, among other things:
| cooperation between us and Fortis on various matters, including the timing of completion of audit reports and regulatory filings; and | |
| existing vendor purchasing arrangements pursuant to which we purchase products and services also used by Fortis (which to the extent permitted by the underlying arrangement will continue for their term). |
We are entitled to indemnification from Fortis for losses arising out of any breach by Fortis of the cooperation agreement. We are required to indemnify Fortis for any losses arising out of any breach by us of the cooperation agreement or any material untrue statement or omission contained in any Fortis filing relating
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SERP Guarantee
Our SERP program provides that if the payments to a participant or beneficiary will be made over a period of more than one year and if at the time payments commence we are not subject to pending proceedings as a debtor under the U.S. Bankruptcy Code, then Fortis Insurance N.V. will guarantee the payment of SERP benefits to such participant or beneficiary. The SERP further provides that if Fortis Insurance N.V. ceases to be the beneficial owner of the Company, then such guarantee will be limited to the actuarially equivalent value of the participants SERP benefit immediately following such cessation of beneficial ownership.
Guarantee of 1997 Capital Securities
In May 1997, Fortis Capital Trust, a trust established by us, issued 150,000 8.40% capital securities (1997 Capital Securities I) to investors and 4,640 8.40% common securities (the 1997 Common Securities I) to us, in each case with a liquidation amount of $1,000 per security. Fortis Capital Trust used the proceeds from the sale of the 1997 Capital Securities I and the 1997 Common Securities I to purchase $154,640,000 of our 8.40% junior subordinated debentures due 2027 (the 1997 Junior Subordinated Debentures I). These debentures are the sole asset of Fortis Capital Trust.
In July 1997, Fortis Capital Trust II, a trust established by us, issued 50,000 7.94% capital securities (1997 Capital Securities II) to investors and 1,547 7.94% common securities (1997 Common Securities II) to us, in each case with a liquidation amount of $1,000 per security. Fortis Capital Trust II used the proceeds from the sale of the 1997 Capital Securities II and the 1997 Common Securities II to purchase $51,547,000 of our 7.94% junior subordinated debentures due 2027 (1997 Junior Subordinated Debentures II). The 1997 Junior Subordinated Debentures II are the sole asset of Fortis Capital Trust II.
With respect to each of Fortis Capital Trust and Fortis Capital Trust II, each us of, Fortis SA/ NV and Fortis N.V. entered into a junior subordinated guarantee of the distributions and payments on the liquidation and redemption of the 1997 Capital Securities I and the 1997 Capital Securities II, respectively, but only to the extent the funds are held by Fortis Capital Trust and Fortis Capital Trust II , respectively, Fortis SA/ NV and Fortis N.V. also entered into a junior subordinated guarantee of the payment of the principal, premium, if any, and interest on the 1997 Junior Subordinated Debentures I and 1997 Junior Subordinates Debentures II (together 1997 Junior Subordinated Denbentures). The 1997 Junior Subordinated Debentures and the guarantees are unsecured, junior subordinated obligations.
In January 2004, we redeemed all of the outstanding 1997 Junior Subordinated Debentures, which resulted in a mandatory redemption of all of the outstanding 1997 Capital Securities I and 1997 Capital Securities II. The issuer trusts under the 1997 Capital Securities I and 1997 Capital Securities II were dissolved in January 2004. We paid a premium of approximately $66.7 million as a result of early redemption.
The 1999 Trust Capital Securities and the Companys Subordinated Debentures
In April 1999, two of our subsidiary trusts, 1999 Fortis Capital Trust I and 1999 Fortis Capital Trust II, issued 200,000 7.60% and 499,850 7.876% trust capital securities (collectively, the 1999 Trust Capital Securities), respectively, to Fortis Capital Funding LP and Fortis Insurance N.V., respectively, in each case with a liquidation amount of $1,000 per security. 1999 Fortis Capital Trust I and 1999 Fortis Capital Trust II used the proceeds from the sale of the applicable 1999 Trust Capital Securities and trust common securities to purchase $200,001,000 and $499,851,000, respectively, of our 7.60% and 7.876% subordinated debentures due 2029 (collectively, the 1999 Subordinated Debentures), respectively. These debentures were the sole assets of the trusts. The 1999 Trust Capital Securities and the 1999 Subordinated Debentures were issued at the time of the issuance by (i) Fortis Floating Rate Capital Funding Trust of Euro 400 million floating rate noncumulative guaranteed trust capital securities, (ii) Fortis Fixed Rate Quarterly Capital Funding Trust of Euro 200 million fixed rate quarterly noncumulative guaranteed trust capital securities and (iii) Fortis Fixed Rate
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2000 Trust Capital Securities and Subordinated Debentures
In March 2000, two of our subsidiary trusts, Fortis Capital Proceeds Trust 2000-1 and Fortis Capital Proceeds Trust 2000-2, issued 150,000 8.48% and 400,000 8.40% trust capital securities (collectively, the 2000 Trust Capital Securities), respectively, to Fortis Insurance N.V., in each case with a liquidation amount of $1,000 per security. Fortis Capital Proceeds Trust 2000-1 and Fortis Capital Proceeds Trust 2000-2 used the proceeds from the sale of the applicable 2000 Trust Capital Securities and trust common securities to purchase $150,001,000 and $400,001,000, respectively, of our 8.48% and 8.40% subordinated debentures due 2030 (collectively, the 2000 Subordinated Debentures), respectively. These debentures were the sole assets of the trusts. In December 2003, we redeemed all of the 2000 Subordinated Debentures at a redemption price of 100% of the principal amount thereof plus (i) accrued interest to the date of redemption and (ii) premium of approximately $73 million, which in turn caused the redemption of all of the 2000 Trust Capital Securities.
Commercial Paper Program and Other Indebtedness
Historically, Fortis has maintained a $1 billion commercial paper facility that we have been able to access (via intercompany loans) for up to $750 million. We have used the commercial paper facility to cover any cash shortfalls, which may occur from time to time. During 2003 we accessed $75 million of this facility for three days in connection with the extinguishment of the mandatorily redeemable preferred securities of subsidiary trusts. We had no commercial paper borrowings with Fortis associated with this commercial paper facility during the year ended December 31, 2002. In 2001, $217 million in commercial paper was issued and redeemed by Fortis on our behalf. We had no outstanding intercompany loans with Fortis related to this commercial paper facility at year end December 31, 2003, 2002 and 2001. In connection with our separation from Fortis, we no longer have access to this facility.
In addition, we previously had indebtedness outstanding in the amount of $225 million to Fortis Finance N.V., which was repaid in April 2001. See Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations.
Reimbursement of Fortis Liaison Office
During 2003, 2002, and 2001, we paid $644,000, $749,000 and $516,000, respectively, to Fortis for costs representing salary, benefits and other expenses of Arie Fakkert, who was then an employee of one of Fortis subsidiaries, and his support staff. Mr. Fakkert, who served on our board from 1987 to 2004, retired from Fortis as of October 3, 2003, and we discontinued these payments as of that date.
Guarantee of Senior Bridge Credit Facilities
Fortis has guaranteed our obligations under the $1,100 million unsecured senior bridge credit facility with a group of banks arranged by Morgan Stanley Senior Funding, Inc., an affiliate of Morgan Stanley & Co. Incorporated, Citigroup Global Markets Inc. and Banc One Capital Market, Inc.
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Fortis has also guaranteed our obligations under a $650 million senior bridge credit facility with a group of banks arranged by Morgan Stanley Senior Funding, Inc., an affiliate of Morgan Stanley & Co, Incorporated, including Merrill Lynch Capital Corp., an affiliate of Merrill, Lynch, Pierce, Fenner & Smith Incorporated, and Credit Suisse First Boston (acting through its Cayman Islands branch), an affiliate of Credit Suisse First Boston LLC. Borrowings under the senior bridge credit facilities were repaid in February 2004 with the proceeds of the capital contribution described under Fortis Capital Contribution(s) and the proceeds of our $975 million bond offering.
Fortis Capital Contribution
We received a $725.5 million capital contribution from Fortis on February 5, 2004 and used the proceeds of that capital contribution to repay the $650 million of outstanding indebtedness under the $650 million senior bridge credit facility and $75.5 million of outstanding indebtedness under the $1,100 million senior bridge credit facility. In exchange for this capital contribution, 32,976,854 shares of our common stock were issued to Fortis Insurance N.V. simultaneously with the closing of our initial public offering on February 5, 2004. See Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources.
Indemnification
Pursuant to an underwriting agreement entered into in connection with our recent offering, we and Fortis Insurance N.V. have agreed to indemnify each other against certain liabilities.
Item 14. | Principal Accountant Fees and Services |
The following table shows the aggregate fees
billed to us by PricewaterhouseCoopers LLP for services rendered
and the percentage of those services that were approved by the
Audit Committee during the fiscal years ended December 31,
2003 and 2002.
Fiscal Year Ended
Fiscal Year Ended
December 31, 2003
December 31, 2002
Percentage of
Percentage of
Services Approved
Services Approved
by Audit
by Audit
Description of Fees
Amount
Committee
Amount
Committee
($ In thousands)
$
6,385
100
%
$
3,661
100
%
1,021
100
%
168
0
%
73
84
%
191
0
%
3
100
%
7
0
%
The nature of the services comprising Audit Fees for the years ended December 31, 2003 and 2002, were for professional services rendered for the audits of the consolidated financial statements of the Company, statutory and subsidiary audits and issuance of comfort letters. The nature of the services comprising Audit Related Fees for the years ended December 31, 2003 and 2002, were for employee benefit audits, assistance with documents filed with the SEC, accounting pronouncement advisory services, due diligence services, advisory services related to Sarbanes-Oxley and procedures performed and reported under SAS 70. The nature of the services comprising Tax Fees for the years ended December 31, 2003 and 2002, were for tax compliance and tax advice. The nature of the fees comprising All Other Fees for the years ended December 31, 2003 and 2002, were for purchases of software.
The Audit Committee of the Board of Directors of the Company has adopted written procedures that address the following:
| Retain and terminate independent auditors and approve all audit engagement fees and terms | |
| Inform each registered public accounting firm performing work for the Company that such firm shall report directly to the Committee |
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| Directly oversee the work of any registered public accounting firm employed by the Company, including the resolution of any disagreement between management and the auditor regarding financial reporting, for the purpose of preparing or issuing an audit report or related work | |
| Approve in advance any significant audit or non-audit engagement or relationship between the Company and the independent auditors, other than prohibited non-auditing services. One hundred percent of services initiated by the independent auditor, subsequent to the adoption of the policy, have been pre-approved. |
Prohibited non-auditing services are services that Congress, the SEC or the Public Company Accounting Oversight Board prohibits through regulation. Notwithstanding the foregoing, pre-approval is not necessary for minor audit services if: (i) the aggregate amount of all such non-audit services provided to the Company constitutes not more than 5% of the total amount of revenues paid by the Company to its auditor during the fiscal year in which the non-audit services are provided; (ii) such services were not recognized by the Company at the time of the engagement to be non-audit services; and (iii) such services are promptly brought to the attention of the Audit Committee and approved prior to the completion of the audit by the Audit Committee or by one or more members of the Audit Committee who are members of the Board to whom authority to grant such approvals has been delegated by the Audit Committee. The Audit Committee may delegate to one or more of its members the authority to approve in advance all significant audit or non-audit services to be provided by the independent auditors so long as it is presented to the full Audit Committee at a later time.
PART IV
Item 15. | Exhibits, Financial Statement Schedules, and Reports on Form 8-K |
(a) 1. Consolidated Financial Statements
The following consolidated financial statements of Assurant, Inc., incorporated by reference into Item 8, are attached hereto:
Page | ||||
|
||||
Consolidated Financial Statements of
Assurant, Inc.
|
||||
Report of Independent Auditors
|
F-1 | |||
Consolidated Balance Sheets of
Assurant, Inc. at December 31, 2003 and 2002
|
F-2 | |||
Consolidated Statements of Operations of
Assurant, Inc. for the Three Fiscal Years in the Period
Ended December 31, 2003
|
F-4 | |||
Consolidated Statements of Changes in
Stockholders Equity of Assurant, Inc. for the Three
Fiscal Years in the Period Ended December 31, 2003
|
F-5 | |||
Consolidated Statements of Cash Flows of
Assurant, Inc. for the Three Fiscal Years in the Period
Ended December 31, 2003
|
F-6 | |||
Notes to Consolidated Financial Statements of
Assurant, Inc.
|
F-8 |
(a) 2. Consolidated Financial Statement Schedules
The following consolidated financial statement schedules of Assurant, Inc. are attached hereto:
Page | ||||||||
|
||||||||
Schedule I
|
| Summary of Investments other than Investments in Related parties | F-57 | |||||
Schedule II
|
| Parent Only Condensed Financial Statements | F-58 | |||||
Schedule III
|
| Supplementary Insurance Information | F-61 | |||||
Schedule IV
|
| Reinsurance | F-62 | |||||
Schedule V
|
| Valuation and Qualifying Accounts | F-65 |
128
(a) 3. Exhibits
The following exhibits either (a) are filed
with this report or (b) have previously been filed with the
SEC and are incorporated herein by reference to those prior
filings. Exhibits are available upon request at the investor
relations section of our website, located at www.assurant.com.
Exhibit
Number
Exhibit Description
3
.1
Restated Certificate of Incorporation of the
Registrant (incorporated by reference from Exhibit 3.1 to
the Registrants Registration Statement on Form S-1/ A
(File No. 333-109984) and amendments thereto, originally
filed on January 13, 2004).
3
.2
Amended and Restated By-Laws of the Registrant
(incorporated by reference from Exhibit 3.2 to the
Registrants Registration Statement on Form S-1/ A
(File No. 333-109984) and amendments thereto, originally
filed on January 13, 2004).
3
.3
Shareholders Agreement between the
Registrant and Fortis Insurance N.V. (incorporated by reference
from Exhibit 3.3 to the Registrants Registration
Statement on Form S-1/ A (File No. 333-109984) and
amendments thereto, originally filed on January 13, 2004).
3
.4
Registration Rights Agreement between the
Registrant and Fortis Insurance N.V. (incorporated by reference
from Exhibit 3.4 to the Registrants Registration
Statement on Form S-1/ A (File No. 333-109984) and
amendments thereto, originally filed on January 13, 2004).
4
.1
Specimen Common Stock Certificate (incorporated
by reference from Exhibit 4.1 to the Registrants
Registration Statement on Form S-1/ A (File
No. 333-109984) and amendments thereto, originally filed on
January 13, 2004).
10
.1
Cooperation Agreement, among the Registrant,
Fortis Insurance N.V., Fortis SA/ NV and Fortis N.V.
(incorporated by reference from Exhibit 10.1 to the
Registrants Registration Statement on Form S-1/ A
(File No. 333-109984) and amendments thereto, originally
filed on January 13, 2004).
10
.2
Stock Option Plan (incorporated by reference from
Exhibit 10.2 to the Registrants Registration
Statement on Form S-1 (File No. 333-109984) and
amendments thereto, originally filed on October 24, 2003).
10
.3
Assurant 2004 Long-Term Incentive Plan
(incorporated by reference from Exhibit 10.3 to the
Registrants Registration Statement on Form S-1/ A
(File No. 333-109984) and amendments thereto, originally
filed on January 13, 2004).
10
.4
Supplemental Executive Retirement Plan, as
amended (incorporated by reference from Exhibit 10.4 to the
Registrants Registration Statement on Form S-1 (File
No. 333-109984) and amendments thereto, originally filed on
October 24, 2003).
10
.5
Executive Pension and 401(k) Plan (incorporated
by reference from Exhibit 10.5 to the Registrants
Registration Statement on Form S-1 (File
No. 333-109984) and amendments thereto, originally filed on
October 24, 2003).
10
.6
Change in Control Severance Agreement with J.
Kerry Clayton (incorporated by reference from Exhibit 10.8
to the Registrants Registration Statement on Form S-1
(File No. 333-109984) and amendments thereto, originally
filed on October 24, 2003).
10
.7
Change in Control Severance Agreement with Robert
B. Pollock (incorporated by reference from Exhibit 10.9 to
the Registrants Registration Statement on Form S-1
(File No. 333-109984) and amendments thereto, originally
filed on October 24, 2003).
10
.8
Change in Control Severance Agreement with
Benjamin M. Cutler (incorporated by reference from
Exhibit 10.10 to the Registrants Registration
Statement on Form S-1 (File No. 333-109984) and
amendments thereto, originally filed on October 24, 2003).
10
.9
Change in Control Severance Agreement with Philip
Bruce Camacho (incorporated by reference from Exhibit 10.11
to the Registrants Registration Statement on Form S-1
(File No. 333-109984) and amendments thereto, originally
filed on October 24, 2003).
10
.10
Change in Control Severance Agreement with Lesley
Silvester (incorporated by reference from Exhibit 10.12 to
the Registrants Registration Statement on Form S-1
(File No. 333-109984) and amendments thereto, originally
filed on October 24, 2003).
129
Exhibit
Number
Exhibit Description
10
.11
Letter Agreement, dated October 17, 1997,
between Fortis, Inc. and Philip Bruce Camacho (incorporated
by reference from Exhibit 10.11 to the Registrants
Registration Statement on Form S-1/ A (File
No. 333-109984) and amendments thereto, originally filed on
December 10, 2003).
10
.12
Assurant Directors Compensation Plan
(incorporated by reference from Exhibit 10.12 to the
Registrants Registration Statement on Form S-1/ A
(File No. 333-109984) and amendments thereto, originally
filed on January 13, 2004).
10
.13
Assurant 2004 Employee Stock Purchase Plan
(incorporated by reference from Exhibit 10.13 to the
Registrants Registration Statement on Form S-1/ A
(File No. 333-109984) and amendments thereto, originally
filed on January 13, 2004).
10
.14
Assurant Executive Management Incentive Plan
(incorporated by reference from Exhibit 10.16 to the
Registrants Registration Statement on Form S-1 (File
No. 333-109984) and amendments thereto, originally filed on
October 24, 2003).
10
.15
Administrative Services Agreement, dated as of
November 13, 1997, among United Family Life Insurance
Company, Liberty Insurance Services Corporation,
Fortis, Inc. and The Liberty Corporation (Certain portions
of this exhibit have been omitted and filed separately with the
Securities and Exchange Commission pursuant to a request for
confidential treatment. The symbol XXX has been
inserted in place of the portions so omitted.) (incorporated by
reference from Exhibit 10.15 to the Registrants
Registration Statement on Form S-1/ A (File
No. 333-109984) and amendments thereto, originally filed on
January 13, 2004).
10
.16
Assurant Appreciation Incentive Rights Plan
(incorporated by reference from Exhibit 10.17 to the
Registrants Registration Statement on Form S-1 (File
No. 333-109984) and amendments thereto, originally filed on
October 24, 2003).
10
.17
Investment Plan (incorporated by reference from
Exhibit 10.18 to the Registrants Registration
Statement on Form S-1 (File No. 333-109984) and
amendments thereto, originally filed on October 24, 2003).
10
.18
Consulting, Non-Compete and Payments Agreement,
dated July 19, 1999, among Fortis, Inc., Allen R.
Freedman and Fortis Insurance N.V. (incorporated by reference
from Exhibit 10.19 to the Registrants Registration
Statement on Form S-1 (File No. 333-109984) and
amendments thereto, originally filed on October 24, 2003).
10
.19
Retirement Agreement, dated July 19, 1999,
among Fortis, Inc., Allen R. Freedman and Fortis Insurance
N.V., as amended (incorporated by reference from
Exhibit 10.20 to the Registrants Registration
Statement on Form S-1 (File No. 333-109984) and
amendments thereto, originally filed on October 24, 2003).
10
.20
Credit Agreement, dated as of December 19,
2003, by and among Fortis, Inc., as the borrower, certain
banks and financial institutions, as the lenders, Morgan Stanley
Senior Funding, Inc. (MSFF), as bookrunner and
lead arranger, Merrill Lynch Capital Corp., as syndication
agent, Credit Suisse First Boston, as documentation agent, and
MSFF, as administrative agent for the lenders (incorporated by
reference from Exhibit 10.20 to the Registrants
Registration Statement on Form S-1/ A (File
No. 333-109984) and amendments thereto, originally filed on
January 13, 2004).
10
.21
Parent Guaranty, dated as of December 19,
2003, by Fortis N.V. and Fortis SA/ NV, in favor of Morgan
Stanley Senior Funding, Inc., as administrative agent for
and representative of the lenders (incorporated by reference
from Exhibit 10.21 to the Registrants Registration
Statement on Form S-1/ A (File No. 333-109984) and
amendments thereto, originally filed on January 13, 2004).
10
.22
Credit Agreement, dated as of December 19,
2003, by and among Fortis, Inc., as the borrower, certain
banks and financial institutions, as the lenders, Citigroup
Global Markets Inc. (CGMI) and Morgan Stanley Senior
Funding, Inc. (MSSF), as joint bookrunners,
CGMI, MSSF and Banc One Capital Markets, Inc., as joint
lead arrangers, MSSF, as syndication agent, Citicorp North
America Inc., as documentation agent, and Bank One, NA, as
administrative agent for the lenders (incorporated by reference
from Exhibit 10.22 to the Registrants Registration
Statement on Form S-1/ A (File No. 333-109984) and
amendments thereto, originally filed on January 13, 2004).
130
Exhibit
Number
Exhibit Description
10
.23
Parent Guaranty, dated as of December 19,
2003, by Fortis N.V. and Fortis SA/ NV, in favor of Bank One,
NA, as administrative agent for and representative of the
lenders (incorporated by reference from Exhibit 10.23 to
the Registrants Registration Statement on Form S-1/ A
(File No. 333-109984) and amendments thereto, originally
filed on January 13, 2004).
10
.24
Lease Agreement, dated October 1, 2000,
between Fortis Benefits Insurance Company and Fortis, Inc.,
as amended (incorporated by reference from Exhibit 10.24 to
the Registrants Registration Statement on Form S-1/ A
(File No. 333-109984) and amendments thereto, originally
filed on January 13, 2004).
10
.25
Agreement, dated September 1, 2003, between
Fortis Insurance Company and its affiliates Fortis Benefits
Insurance Company and John Alden Life Insurance Company and
National Administration Company, Inc. (incorporated by
reference from Exhibit 10.25 to the Registrants
Registration Statement on Form S-1/ A (File
No. 333-109984) and amendments thereto, originally filed on
December 10, 2003).
10
.26
Three Year Credit Agreement, dated as of
January 30, 2004, by and among Assurant, Inc., as the
borrower, certain banks and financial institutions, as the
lenders, Bank One, NA, as administrative agent for the lenders,
Citigroup North America Inc., as syndication agent, and Morgan
Stanley Senior Funding, Inc. and JP Morgan Chase Bank, as
co-documentation agents (incorporated by reference from
Exhibit 10.26 to the Registrants Registration
Statement on form S-1/ A (File No. 333-109984) and
amendments thereto, originally filed on February 3, 2004).
10
.27
Senior Debt Indenture dated as of
February 18, 2004 between Assurant, Inc. and SunTrust
Bank, as Trustee.
10
.28
Registration Rights Agreement dated
February 10, 2004 between Assurant, Inc. and Fortis
Insurance N.V.
21
.1
Subsidiaries of the Registrant. (Incorporate by
reference from exhibit 21.1 to the Registrants
Registration Statement on form S-1/ A (File No. 333-109984)
and amendments thereto, originally filed on January 13,
2004)
23
.1
Consent of PricewaterhouseCoopers LLP.
24
.1
Power of Attorney.
31
.1
Rule 13a-14(a)/15d-14(a) Certification of
Principal Executive Officer.
31
.2
Rule 13a-14(a)/15d-14(a) Certification of
Principal Financial Officer.
32
.1
Certification of Chief Executive Officer of
Assurant, Inc. pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32
.2
Certification of Chief Financial Officer of
Assurant, Inc. pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the year ended December 31, 2003.
131
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized March 29, 2004.
ASSURANT, INC. |
By: | /s/ J. KERRY CLAYTON |
|
|
Name: J. Kerry Clayton | |
Title: President and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities indicated on March 29, 2004.
Signature | Title | |||
|
|
|||
/s/ J. KERRY CLAYTON
J. Kerry Clayton |
President and Chief Executive Officer and
Director
(Principal Executive Officer) |
|||
/s/ ROBERT B. POLLOCK
Robert B. Pollock |
Executive Vice President and Chief Financial
Officer
(Principal Financial Officer) |
|||
*
Larry M. Cains |
Senior Vice President, Investor Relations
(Principal Accounting Officer) |
|||
*
John Michael Palms |
Director | |||
*
Michel Baise |
Director | |||
*
Robert J. Blendon |
Director | |||
*
Beth L. Bronner |
Director | |||
*
Howard L. Carver |
Director | |||
*
Allen R. Freedman |
Director | |||
*
H. Carroll Mackin |
Director |
132
Signature | Title | |||
|
|
|||
*
Gilbert Mittler |
Director | |||
*By: /s/
KATHERINE GREENZANG
Katherine Greenzang Attorney-in-Fact |
133
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors of
Assurant, Inc.:
In our opinion, the consolidated financial
statements listed in the index appearing under
item 15 (a)(1) of this Form 10-K, present fairly,
in all material respects, the financial position of Assurant,
Inc. and its subsidiaries (formerly Fortis, Inc. and
subsidiaries) at December 31, 2003, and 2002, and the
results of their operations and their cash flows for each of the
three years in the period ended December 31, 2003 in
conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion the
financial statement schedules listed in the index appearing
under item 15 (a)(2) of this Form 10-K present
fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated
financial statements. These financial statements and the
financial statement schedules are the responsibility of the
Companys management; our responsibility is to express an
opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
As discussed in Note 2 to the consolidated
financial statements, effective January 1, 2002, the
Company adopted Statement of Financial Accounting Standard
No. 142,
Goodwill and Other Intangible Assets.
/s/ PricewaterhouseCoopers LLP
New York, New York
F-1
ASSURANT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AT
F-2
ASSURANT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AT
F-3
Table of Contents
Table of Contents
Table of Contents
ASSURANT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
OPERATIONS
Years Ended December 31,
2003
2002
2001
(In thousands except number of
shares and per share amounts)
$
6,156,772
$
5,681,596
$
5,242,185
607,313
631,828
711,782
1,868
(118,372
)
(119,016
)
68,277
79,801
68,296
10,672
61,688
231,983
246,675
221,939
7,066,213
6,532,200
6,186,874
3,657,763
3,435,175
3,240,091
909,149
876,185
875,703
1,919,989
1,732,047
1,619,765
113,300
1,175
14,001
112,958
118,396
118,370
205,822
6,806,856
6,161,803
5,981,230
259,357
370,397
205,644
73,705
110,657
107,591
185,652
259,740
98,053
(1,260,939
)
$
185,652
$
(1,001,199
)
$
98,053
109,222,276
109,222,276
109,222,276
$
1.70
$
2.38
$
0.90
(11.55
)
$
1.70
$
(9.17
)
$
0.90
142,268,106
$
1.30
F-4
ASSURANT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS EQUITY
Accumulated
Other
Outstanding
Additional
Comprehensive
Shares of
Common
Paid-in
Retained
Income
Common
Stock
Capital
Earnings
(Loss)
Total
Stock
(In thousands except number of shares and per share amounts)
$
1,092
$
2,063,763
$
1,301,644
$
1,214
$
3,367,713
109,222,276
(109,298
)
(109,298
)
(1,053
)
(1,053
)
98,053
98,053
102,623
102,623
(5,633
)
(5,633
)
195,043
1,092
2,063,763
1,289,346
98,204
3,452,405
109,222,276
(41,876
)
(41,876
)
(1,052
)
(1,052
)
(1,001,199
)
(1,001,199
)
173,699
173,699
8,332
8,332
(35,250
)
(35,250
)
(854,418
)
1,092
2,063,763
245,219
244,985
2,555,059
109,222,276
(181,187
)
(181,187
)
(963
)
(963
)
185,652
185,652
57,325
57,325
16,217
16,217
259,194
$
1,092
$
2,063,763
$
248,721
$
318,527
$
2,632,103
109,222,276
F-5
ASSURANT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH
FLOWS
Years Ended December 31,
2003
2002
2001
(In thousands except number of
shares and per share amounts)
$
185,652
$
(1,001,199
)
$
98,053
1,260,939
204,650
101,745
335,306
(79,404
)
(23,406
)
(82,085
)
48,117
46,867
43,599
(51,789
)
(126,424
)
(195,648
)
(8,162
)
(20,600
)
49,223
113,300
435,950
325,894
130,621
81,767
(138,108
)
83,247
22,886
(17,986
)
28,729
(57,580
)
33,994
129,254
16,546
(31,976
)
(63,315
)
(69,594
)
(79,801
)
(68,296
)
3,133
(108,050
)
(11,259
)
(1,868
)
118,372
119,016
(10,672
)
(61,688
)
10,924
35,374
(15,639
)
741,228
364,963
632,418
1,164,749
3,616,416
3,582,090
133,923
113,866
169,124
2,982
10,488
5,985
131,026
75,658
55,141
1,131,461
858,142
528,346
(3,093,768
)
(4,780,009
)
(4,164,948
)
(305,449
)
(131,775
)
(212,736
)
(81,751
)
(74,667
)
(47,783
)
(123,972
)
(47,594
)
(133,317
)
(87,228
)
26,814
52,862
415,452
(57,623
)
(187,340
)
1,350
(1,141
)
(3,182
)
12,000
137,840
$
(711,225
)
$
(379,425
)
$
(217,918
)
F-6
ASSURANT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH
FLOWS
Years Ended December 31,
2003
2002
2001
(In thousands except number of
shares and per share amounts)
$
$
$
45,577
(79,646
)
7,258
(1,249,850
)
(3,664
)
(500
)
(500
)
74,991
216,924
(74,991
)
(455,907
)
2,400,000
(650,000
)
(181,187
)
(41,876
)
(109,298
)
(963
)
(1,052
)
(1,053
)
317,500
(43,428
)
(379,809
)
347,503
(57,890
)
34,691
610,694
668,584
633,893
$
958,197
$
610,694
$
668,584
$
62,857
$
215,866
$
144,767
$
137,000
$
$
$
114,133
$
117,114
$
133,667
$
$
35,250
$
$
16,217
$
8,332
$
(5,633
)
F-7
ASSURANT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
1. Nature of
Operations
Assurant, Inc. (formerly Fortis, Inc.) (the
Company) is a holding company provider of
specialized insurance products and related services in North
America and selected other markets. At December 31, 2003,
Fortis, Inc. was incorporated in Nevada and was indirectly
wholly owned by Fortis N.V. of the Netherlands and Fortis
SA/ NV of Belgium (collectively, Fortis) through
their affiliates, including their wholly owned subsidiary,
Fortis Insurance N.V. (see Note 12).
On February 5, 2004, Fortis sold
approximately 65% of its ownership interest in Assurant, Inc.
via an Initial Public Offering (IPO). In connection
with the IPO, Fortis, Inc. was merged into Assurant, Inc., a
Delaware corporation, which was formed solely for the purpose of
the redomestication of Fortis, Inc. After the merger, Assurant,
Inc. became the successor to the business, operations and
obligations of Fortis, Inc. Assurant, Inc. is traded on the New
York Stock Exchange under the symbol AIZ.
The following events occurred in connection with
the merger: each share of the existing Class A Common Stock
of Fortis, Inc. was exchanged for 10.75882039 shares of Common
Stock of Assurant, Inc.; the automatic conversion of the shares
of Class B Common Stock and Class C Common Stock into
an aggregate of 25,841,418 shares of Common Stock of Assurant,
Inc.; each share of the existing Series B Preferred Stock
of Fortis, Inc. was exchanged for one share of Series B
Preferred Stock of Assurant, Inc.; each share of the existing
Series C Preferred Stock of Fortis, Inc. was exchanged for
one share of Series C Preferred Stock of Assurant, Inc.
The following events occurred in connection with
the Companys IPO: (1) redeemed the outstanding
$196,224 of mandatorily redeemable preferred securities of
subsidiary trusts in January 2004 (see Note 8),
(2) issued 68,976 shares of Common Stock of Assurant, Inc.
to certain officers of the Company, and (3) issued
32,976,854 shares of Common Stock of Assurant, Inc. to Fortis
Insurance N.V. simultaneously with the closing of the IPO in
exchange for a $725,500 capital contribution based on the public
offering price of the Companys common stock. The Company
used the proceeds of the capital contribution to repay the
$650,000 of outstanding indebtedness under the $650,000 senior
bridge credit facility (see Note 9) and $75,500 of
outstanding indebtedness under the $1,100,000 senior bridge
credit facility. The Company repaid a portion of the $1,100,000
senior bridge credit facility with $49,500 in cash. On
February 18, 2004, the Company refinanced $975,000 of the
remaining $1,100,000 senior bridge credit facility with the
proceeds of the issuance of two senior long-term notes.
Through its operating subsidiaries, the Company
provides creditor-placed homeowners insurance, manufactured
housing homeowners insurance, debt protection administration,
credit insurance, warranties and extended service contracts,
individual health and small employer group health insurance,
group dental insurance, group disability insurance, group life
insurance and prefunded funeral insurance. The Company had
certain individual life insurance policies, investment-type
annuity contracts and mutual fund operations during 2001, which
were sold to the Hartford Financial Services Group (The
Hartford) (see note 4).
2. Summary of
Significant Accounting Policies
Basis of
Presentation
The accompanying consolidated financial
statements have been prepared in accordance with accounting
principles generally accepted in the United States of America
(GAAP). The preparation of financial statements in
conformity with GAAP requires management to make estimates when
recording transactions resulting from business operations based
on information currently available. The most significant items
on the Companys balance sheet that involve accounting
estimates and actuarial determinations are the value of business
acquired (VOBA), goodwill, reinsurance recoverables,
valuation of investments, deferred acquisi-
F-8
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
tion costs (DAC), liabilities for
future policy benefits and expenses, taxes and claims and
benefits payable. The accounting estimates and actuarial
determinations are sensitive to market conditions, investment
yields, mortality, morbidity, commissions and other acquisition
expenses, and terminations by policyholders. As additional
information becomes available or actual amounts are
determinable, the recorded estimates will be revised and
reflected in operating results. Although some variability is
inherent in these estimates, the Company believes the amounts
provided are reasonable and adequate.
Dollar amounts are presented in U.S. dollars and
all amounts are in thousands except for number of shares and
securities and per share amounts, and per security amounts.
Principles of
Consolidation
The consolidated financial statements include the
accounts of the Company and all of its wholly owned
subsidiaries. All significant inter-company transactions and
balances are eliminated in consolidation. See notes 3 and 4
for acquisitions and dispositions of businesses.
Comprehensive
Income
Comprehensive income is comprised of net income
and other comprehensive income, which includes foreign currency
translation, unrealized gains and losses on securities
classified as available for sale, less deferred income taxes and
direct charges for additional minimum pension liability.
Reclassifications
Certain amounts in the 2002 and 2001 financial
statements have been reclassified to conform to the 2003
presentation.
Cash and Cash
Equivalents
The Company considers cash on hand, all operating
cash and working capital cash to be cash equivalents. These
amounts are carried principally at cost, which approximates fair
value. Cash balances are reviewed at the end of each reporting
period to determine if negative cash balances exist. If negative
cash balances do exist, the cash accounts are netted with other
positive cash accounts of the same bank providing the right of
offset exists between the accounts. If the right of offset does
not exist, the negative cash balances are reclassified to
accounts payable.
Investments
The Companys investment strategy is
developed based on many factors including appropriate insurance
asset and liability management, rate of return, maturity, credit
risk, tax considerations and regulatory requirements.
Fixed maturities and equity securities are
classified as available-for-sale and reported at fair value. If
the fair value is higher than the amortized cost for debt
securities or the purchase cost for equity securities, the
excess is an unrealized gain; and if lower than cost, the
difference is an unrealized loss. The net unrealized gains and
losses, less deferred income taxes are included in accumulated
other comprehensive income.
Commercial mortgage loans on real estate are
reported at unpaid balances, adjusted for amortization of
premium or discount, less allowance for losses. Allowances, if
necessary, are established for mortgage loans based on the
difference between the unpaid loan balance and the estimated
fair value of the underlying real estate when such loans are
determined to be in default as to scheduled payments. The change
in the allowance for losses is recorded as realized gains and
losses on investments. Such allowances are based on the present
value of expected future cash flows discounted at the
loans effective interest rate or at the loans
observable market price, or the fair market value of the
collateral if the loan is collateral dependent.
F-9
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Policy loans are reported at unpaid principal
balances, which do not exceed the cash surrender value of the
underlying policies.
Short-term investments include all investment
cash and highly liquid investments. These amounts are carried
principally at cost, which approximates fair value.
Other investments consist of investments in joint
ventures, partnerships, and invested assets associated with a
modified coinsurance arrangement. The joint ventures and
partnerships are valued according to the equity method of
accounting. The invested assets related to the modified
coinsurance arrangements are classified as trading securities
and are reported at fair value. Any changes in the fair value
are recorded as net realized gains and losses in the statement
of operations.
The Company regularly monitors its investment
portfolio to determine that investments that may be other than
temporarily impaired are identified in a timely fashion and
properly valued, and that any impairments are charged against
earnings in the proper period. The Companys methodology to
identify potential impairments requires professional judgment.
Changes in individual security values are monitored on a
semi-monthly basis in order to identify potential credit
problems. In addition, securities whose market price is equal to
85% or less of their original purchase price are added to the
impairment watchlist, which is discussed at monthly meetings
attended by members of the Companys investment, accounting
and finance departments. Any security whose price decrease is
deemed other-than-temporary is written down to its then current
market level. Inherently, there are risks and uncertainties
involved in making these judgments. Changes in circumstances and
critical assumptions such as a continued weak economy, a more
pronounced economic downturn or unforeseen events which affect
one or more companies, industry sectors or countries could
result in additional write downs in future periods for
impairments that are deemed to be other-than-temporary.
Realized gains and losses on sales of investments
and declines in value judged to be other-than-temporary are
recognized on the specific identification basis.
Investment income is recorded as earned net of
investment expenses.
The Company anticipates prepayments of principal
in the calculation of the effective yield for mortgage-backed
securities and structured securities. The majority of the
Companys mortgage-backed securities and structured
securities are of high credit quality. Therefore, the
retrospective method is used to adjust the effective yield.
Reinsurance
Reinsurance recoverables include amounts related
to paid benefits and estimated amounts related to unpaid policy
and contract claims, future policyholder benefits and
policyholder contract deposits. The cost of reinsurance is
accounted for 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 the consolidated balance sheets. The cost of
reinsurance related to long-duration contracts is accounted for
over the life of the underlying reinsured policies. The ceding
of insurance does not discharge the Companys primary
liability to insureds. An estimated allowance for doubtful
accounts is recorded on the basis of periodic evaluations of
balances due from reinsurers, reinsurer solvency,
managements experience, and current economic conditions.
Deferred
Acquisition Costs
The costs of acquiring new business that vary
with and are primarily related to the production of new business
are deferred to the extent that such costs are deemed
recoverable from future premiums or gross
F-10
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
profits. Acquisition costs primarily consist of
commissions, policy issuance expenses, premium taxes and certain
direct marketing expenses.
A premium deficiency is recognized by a charge to
the statement of operations as a reduction of DAC to the extent
that future policy premiums, including anticipation of interest
income, are not adequate to recover all DAC and related claims,
benefits and expenses. If the premium deficiency is greater than
unamortized DAC, a liability will be accrued for the excess
deficiency.
Short
Duration Contracts
DAC relating to property contracts, warranty and
extended service contracts and single premium credit insurance
contracts is amortized over the term of the contracts in
relation to premiums earned.
Acquisition costs on individual medical issued in
most jurisdictions after 2002, small group medical, group term
life, and group disability, consist primarily of commissions to
agents and brokers, which are level, and compensation to
representatives, which is spread out and is not front-end
loaded. These costs do not vary with the production of new
business. As a result, these costs are not deferred, but rather
they are recorded in the consolidated statement of operations in
the period in which they are incurred.
Long
Duration Contracts
Acquisition costs for pre-funded funeral life
insurance policies and life insurance policies no longer offered
are deferred and amortized in proportion to anticipated premiums
over the premium-paying period.
For pre-funded funeral investment type annuities
and universal life and investment-type annuities no longer
offered, DAC is amortized in proportion to the present value of
estimated gross margins or 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 individual medical
contracts issued prior to 2003 and currently in a limited number
of jurisdictions are deferred and amortized over the estimated
average terms of the underlying contracts. These acquisitions
costs relate to commissions and policy issuance expenses.
Commissions represents the majority of deferred costs and result
from commission schedules that pay significantly higher rates in
the first year. The majority of deferred policy issuance
expenses are the costs of separately underwriting each
individual medical contract.
Acquisition costs on the FFG and Long-Term Care
(LTC) disposed businesses were written off when the
businesses were sold.
Property and
Equipment
Property and equipment are reported at cost less
accumulated depreciation. Depreciation is calculated on a
straight-line basis over estimated useful lives with a maximum
of 39.5 years for buildings, 7 years for furniture and
5 years for equipment. Expenditures for maintenance and
repairs are charged to income as incurred. Expenditures for
improvements are capitalized and depreciated over the remaining
useful life of the asset.
Goodwill
Goodwill represents the excess of acquisition
costs over the net fair values of identifiable assets acquired
and liabilities assumed in a business combination. The Company
adopted Statement of Financial Accounting Standards No. 142
(FAS 142),
Goodwill and Other Intangible
Assets,
as of January 1, 2002. Pursuant to
FAS 142, goodwill is deemed to have an indefinite life and
should not be amortized, but rather tested at least
F-11
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
annually for impairment. The goodwill impairment
test has two steps. The first identifies potential impairments
by comparing the fair value of a reporting unit with its book
value, including goodwill. If the fair value of the reporting
unit exceeds the carrying amount, goodwill is not impaired and
the second step is not required. If the carrying value exceeds
the fair value, the second step calculates the possible
impairment loss by comparing the implied fair value of goodwill
with the carrying amount. If the implied goodwill is less than
the carrying amount, a write down is recorded. Prior to the
adoption of FAS 142, goodwill was amortized over
20 years. Upon the adoption of FAS 142, the Company
ceased amortizing goodwill, and recognized a $1,260,939
impairment charge as the cumulative effect of a change in
accounting principle. The measurement of fair value was
determined based on a valuation report prepared by an
independent valuation firm. The valuation was based on an
evaluation of ranges of future discounted earnings, public
company trading multiples and acquisitions of similar companies.
Certain key assumptions considered include forecasted trends in
revenues, operating expenses and effective tax rates. The
Company performs a goodwill impairment test during the second
quarter of each year.
Value of
Business Acquired
VOBA is the identifiable intangible asset
representing the value of the insurance business acquired. The
amount is determined using best estimates for mortality, lapse,
maintenance expenses and investment returns at date of purchase.
The amount determined represents the purchase price paid to the
seller for producing the business. Similar to the amortization
of DAC, the amortization of VOBA is over the premium payment
period for traditional life insurance policies and a small block
of limited payment policies. For the remaining limited payment
policies, all universal life policies and annuities, the
amortization of VOBA is over the expected life time of the
policies.
VOBA is tested for recoverability annually. If it
is determined that future policy premiums and investment income
or gross profits are not adequate to cover related losses or
loss expenses, then VOBA is charged to current earnings.
Separate
Accounts
Assets and liabilities associated with separate
accounts relate to premium and annuity considerations for
variable life and annuity products for which the
contract-holder, rather than the Company, bears the investment
risk. Separate account assets are reported at fair value.
Revenues and expenses related to the separate account assets and
liabilities, to the extent of benefits paid or provided to the
separate account policyholders, are excluded from the amounts
reported in the accompanying consolidated statements of
operations. Through April 1, 2001, the Company received
administrative fees for managing the funds and other fees for
assuming mortality and certain expense risks. Such fees were
included in net earned premiums and other considerations in the
consolidated statements of operations. Since April 1, 2001,
all fees have been ceded to The Hartford (see note 4).
Income
Taxes
Current federal income taxes are charged to
operations based upon amounts estimated to be payable or
recoverable as a result of taxable operations for the current
year. Deferred income taxes are recognized for temporary
differences between the financial reporting basis and income tax
basis of assets and liabilities, based on enacted tax laws and
statutory tax rates applicable to the periods in which we expect
the temporary differences to reverse.
Other
Assets
Other assets include prepaid items and intangible
assets. Identifiable intangible assets with finite lives,
including costs capitalized relating to developing software for
internal use, are amortized on a straight-line
F-12
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
basis over their estimated useful lives. The
Company tests the intangible assets for impairment whenever
circumstances warrant, but at least annually. If impairment
exists, then excess of the unamortized balance over the fair
value of the intangible assets will be charged to earnings at
that time. Other assets also include the Companys
approximately 25% interest in Private Health Care Systems, Inc.
(PHCS). The Company was a co-founder of PHCS, a
provider network. The Company accounts for PHCS according to the
equity method.
Foreign
Currency Translation
For those foreign affiliates where the foreign
currency is the functional currency, unrealized foreign exchange
gains (losses) net of income taxes have been reflected in
Stockholders Equity under the caption Accumulated
other comprehensive income.
Premiums
Short
Duration Contracts
The Companys short duration contracts are
those on which the Company recognizes revenue on a pro-rata
basis over the contract term. The Companys short duration
contracts primarily include individual medical issued after 2002
in most jurisdictions, small group medical, group term life,
group disability, dental, property, credit insurance, warranties
and extended service contracts.
Long
Duration Contracts
Currently, the Companys long duration
contracts being sold are individual medical contracts issued in
the State of Minnesota, pre-funded funeral life insurance and
investment type annuities. For pre-funded funeral life insurance
policies, any excess of the gross premium over the net premium
is deferred and is recognized in income in a constant
relationship with the insurance in force. For pre-funded funeral
investment-type annuity contracts, revenues consist of charges
assessed against policy balances.
For individual medical contracts sold prior to
2003, and currently in a limited number of jurisdictions and
traditional life insurance contracts sold by the PreNeed segment
that are no longer offered, revenue is recognized when due from
policyholders.
For universal life insurance and investment-type
annuity contracts sold by the Solutions segment that are no
longer offered, revenues consist of charges assessed against
policy balances.
Premiums for LTC insurance and traditional life
insurance contracts within FFG are recognized as revenue when
due from the policyholder. For universal life insurance and
investment-type annuity contracts within FFG, revenues consist
of charges assessed against policy balances. For the FFG and LTC
businesses previously sold, all revenue is ceded to the Hartford
and John Hancock, respectively.
Reinsurance
Assumed
Reinsurance premiums assumed are calculated based
upon payments received from ceding companies together with
accrual estimates, which are based on both payments received and
in force policy information received from ceding companies. Any
subsequent differences arising on such estimates are recorded in
the period in which they are determined.
Fee
Income
The Company primarily derives income from fees
received from providing administrative services. Fee income is
earned when services are performed.
F-13
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Administrator obligor service contracts are sales
in which the Company is designated as the obligor. For these
contract sales, the Company recognizes revenues in accordance
with Financial Accounting Standards Board Technical Bulletin
90-1 (TB 90-1),
Accounting for Separately Priced
Extended Warranty and Product Maintenance Contracts,
and
FAS No. 60,
Accounting and Reporting by Insurance
Enterprises.
Administration fees related to these contracts
are generally recognized as earned on the same basis as the
premium is recognized or on a straight-line pro-rata basis.
Administration fees related to the unexpired portion of the
contract term are deferred. Acquisition costs related to these
contracts are also deferred. Both the deferred administration
fees and acquisition costs are amortized over the term of the
contracts. Deferred administration fees at December 31,
2003 and 2002 were $29,076 and 28,845, respectively.
Amortization income recognized in fees and other income for 2003
and 2002 were $23,183 and $26,463, respectively.
Reserves
Reserves are established according to generally
accepted actuarial principles and are based on a number of
factors. These factors include experience derived from
historical claim payments and actuarial assumptions to arrive at
loss development factors. Such assumptions and other factors
include trends, the incidence of incurred claims, the extent to
which all claims have been reported, and internal claims
processing charges. The process used in computing reserves
cannot be exact, particularly for liability coverages, since
actual claim costs are dependent upon such complex factors as
inflation, changes in doctrines of legal liabilities and damage
awards. The methods of making such estimates and establishing
the related liabilities are periodically reviewed and updated.
Short
Duration Contracts
For short duration contracts, claims and benefits
payable reserves are recorded when insured events occur. The
liability is based on the expected ultimate cost of settling the
claims. The claims and benefits payable reserves include
(1) case basis reserves for known but unpaid claims as of
the balance sheet date; (2) incurred but not reported
(IBNR) reserves for claims where the insured event
has occurred but has not been reported to the Company as of the
balance sheet date; and (3) loss adjustment expense
reserves for the expected handling costs of settling the claims.
For group disability, the case base reserves and
the IBNR are calculated based on historical experience and on
assumptions relating to claim severity, frequency, and other
factors. These assumptions are modified as necessary to reflect
anticipated trends, with any adjustment being reflected in
current operations. We establish reserves for disability
policies in an amount equal to the net present value of the
expected claims future payments. Group long-term disability
reserves are discounted to the valuation date at the valuation
interest rate. The valuation interest rate is determined by
taking into consideration actual and expected earned rates on
our asset portfolio, with adjustments for investment expenses
and provisions for adverse deviation.
The Company has exposure to asbestos,
environmental and other general liability claims arising from
its participation in various reinsurance pools from 1971 through
1983. The Company carried case reserves for these liabilities as
recommended by the various pool managers and bulk reserves for
claims incurred but not yet reported of $37,000 (before
reinsurance) and $36,000 (after reinsurance) in the aggregate at
December 31, 2003. Any estimation of these liabilities is
subject to greater than normal variation and uncertainty due to
the general lack of sufficient detailed data, reporting delays,
and absence of generally accepted actuarial methodology for the
exposures. There are significant unresolved industry legal
issues, including such items as whether coverage exists and what
constitutes an occurrence. In addition, the determination of
ultimate damages and the final allocation of losses to
financially responsible parties are highly uncertain.
Unearned premium reserves are maintained for the
portion of the premiums on short duration contracts that is
related to the unexpired period of the policy.
F-14
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Long
Duration Contracts
Future policy benefits and expense reserves on
LTC, life insurance policies that are no longer offered,
individual medical policies issued prior to 2003 or issued in
the State of Minnesota and the traditional life insurance
contracts within FFG are recorded at the present value of future
benefits to be paid to policyholders and related expenses less
the present value of the future net premiums. These amounts are
estimated and include assumptions as to the expected investment
yield, inflation, mortality, morbidity and withdrawal rates as
well as other assumptions that are based on the Companys
experience. These assumptions reflect anticipated trends and
include provisions for possible unfavorable deviations.
Future policy benefits and expense reserves for
pre-funded funeral investment-type annuities, universal life
insurance policies and investment-type annuity contracts no
longer offered, and the variable life insurance and
investment-type annuity contracts in FFG consist of policy
account balances before applicable surrender charges and certain
deferred policy initiation fees that are being recognized in
income over the terms of the policies. Policy benefits charged
to expense during the period include amounts paid in excess of
policy account balances and interest credited to policy account
balances.
Future policy benefits and expense reserves for
pre-funded funeral life insurance contracts are recorded as the
present value of future benefits to policyholders and related
expenses less the present value of future net premiums. Reserve
assumptions are selected using best estimates for expected
investment yield, inflation, mortality and withdrawal rates.
These assumptions reflect current trends, are based on Company
experience and include provision for possible unfavorable
deviation. An unearned premium reserve is also recorded for
these contracts which represents the balance of the excess of
gross premiums over net premiums that is still to be recognized
in future years income in a constant relationship to
insurance in force.
Changes in the estimated liabilities are charged
or credited to operations as the estimates are revised.
Stock Based
Compensation
In contemplation of the IPO, the Companys
Stock Option Plan was terminated effective September 22,
2003, and all stock options thereunder were cancelled in
exchange for a payment of the fair value of such options, as
determined by an independent third party. Payments totaling
$2,237 were made in the fourth quarter of 2003. There is no
further obligation associated with the Companys Stock
Option Plan.
The Company accounted for the stock option plan
as prescribed by APB Opinion No. 25,
Accounting for
Stock Issued to Employees,
(APB 25) and related
interpretations. Accordingly, compensation cost was charged to
income over the service period (vesting period) and was adjusted
for subsequent changes in the market value of the stock that
were subsequently amortized over the vesting period.
The following table illustrates the effect of
applying the fair value recognition provisions of FAS 123,
Accounting for Stock Based Compensation, on net income and
earnings per share. Pro forma information of
F-15
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
net income (loss) and net income
(loss) per share assuming the Company had applied the fair
value recognition provisions of FAS 123, is a follows:
The fair value of each option granted was
estimated at the date of grant using the Black-Scholes multiple
option approach with the following assumptions for options
granted in 2002 and 2001:
Business
Combinations
Effective July 1, 2001, the Company adopted
Financial Accounting Standard 141,
Business Combinations
(FAS 141). FAS 141 requires that all
business combinations initiated after June 30, 2001 be
accounted for under the purchase method of accounting and
establishes specific criteria for the recognition of intangible
assets separately from goodwill. The Company followed this
statement for the acquisitions of the Dental Benefits Division
(DBD) of Protective Life Corporation
(Protective) and CORE, Inc. (CORE) (see
note 3). For the years ended December 31, 2003 and
2002, the Company recognized $3,898 and $4,010, respectively, of
amortization expense related to other identifiable intangible
assets, which are included in underwriting, general and
administrative expenses in the consolidated statements of
operations.
Recent
Accounting Pronouncements
In June 2002, the Financial Accounting Standards
Board (FASB) issued FAS 146,
Accounting for
Costs Associated with Exit or Disposal Activities
(FAS 146). This statement addresses
financial accounting and reporting for costs associated with
exit or disposal activities and nullifies Emerging Issues Task
Force (EITF) Issue 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit on
Activity (Including Certain Costs Incurred in Restructuring
(EITF 94-3)). EITF 94-3 required accrual
of liabilities related to exit and disposal activities at a plan
(commitment) date. FAS 146 requires that a liability
for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. The provisions of
this statement are effective for exit or disposal activities
that are initiated after December 31,
F-16
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2002. The Company adopted this Statement on
January 1, 2003. The adoption of this standard did not have
a material impact on the Companys financial position or
the results of operations.
In November 2002, the FASB issued Interpretation
45,
Guarantors Accounting and Disclosure Requirements
for Guarantees
(FIN 45). FIN 45
requires that a liability be recognized at the inception of
certain guarantees for the fair value of the obligation,
including the ongoing obligation to stand ready to perform over
the term of the guarantee. Guarantees, as defined in
FIN 45, include contracts that contingently require the
Company to make payments to a guaranteed party based on changes
in an underlying obligation that is related to an asset,
liability or equity security of the guaranteed party,
performance guarantees, indemnification agreements and indirect
guarantees of indebtedness of others. This new accounting
standard is effective for certain guarantees issued or modified
after December 31, 2002. In addition, FIN 45 requires
certain additional disclosures. The Company adopted this
standard on January 1, 2003, and the adoption did not have
a material impact on the Companys financial position or
the results of operations.
In December 2002, the FASB issued FAS 148,
Accounting for Stock-Based Compensation
Transition and Disclosure an Amendment of
FAS No. 123
(FAS 148).
FAS 148 provides alternative methods of transition for a
voluntary change to the fair value-based method of accounting
for stock-based employee compensation. FAS 148 also amends
the disclosure requirements of FAS 123, Accounting for
Stock-Based Compensation, to require prominent disclosures in
both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect
of the method used on reported results. This guidance is
effective for fiscal years ending after December 15, 2002,
for transition guidance and annual disclosure provisions and is
effective for interim reports beginning after December 15,
2002, for interim disclosure provisions. The Company accounts
for stock-based employee compensation as prescribed by APB
No. 25 and its interpretations. Therefore, the transition
requirements of FAS 148 do not apply. However, the Company
adopted the disclosure requirements of this standard for the
year ended December 31, 2002.
In January 2003, the FASB issued Interpretation
46 (FIN 46),
Consolidation of Variable Interest
Entities, an Interpretation of Accounting Research Bulletin
No. 51
(ARB 51), which clarifies the
consolidation accounting guidance in ARB 51, Consolidated
Financial Statements, as it applies to certain entities in which
equity investors who do not have the characteristics of a
controlling financial interest or do not have sufficient equity
at risk for the entities to finance their activities without
additional subordinated financial support from other parties.
Such entities are known as variable interest entities
(VIEs). FIN 46 requires that the primary
beneficiary of a VIE consolidate the VIE. FIN 46 also
requires new disclosures for significant relationships with
VIEs, whether or not consolidation accounting is either used or
anticipated. The consolidation requirements of FIN 46 apply
immediately to VIEs created after January 31, 2003. They
apply in the first fiscal year or interim period beginning after
June 15, 2003, to VIEs in which an enterprise holds a
variable interest that was acquired before February 1,
2003. On October 8, 2003, the FASB deferred the adoption of
FIN 46 until reporting periods ending after
December 15, 2003. The Company adopted this Interpretation
on December 31, 2003, and the adoption did not have a
material impact on the Companys financial position or
results of operations.
In April 2003, the FASBs Derivative
Implementation Group (DIG) released FAS 133
Implementation Issue B36, Embedded Derivatives: Modified
Coinsurance Arrangement and Debt Instrument that Incorporates
Credit Risk Exposures that are Unrelated or Only Partially
Related to the Creditworthiness of the obligor under those
Instruments (DIG B36). DIG B36 addresses
whether FAS 133 requires bifurcation of a debt instrument
into a debt host contract and an embedded derivative if the debt
instrument incorporates both interest rate risk and credit risk
exposures that are unrelated or only partially related to the
creditworthiness of the issuer of that instrument. Under
DIG B36, modified coinsurance and coinsurance with funds
withheld reinsurance agreements as well as other types of
receivables and payables where interest is determined by
reference to a pool of fixed maturity assets or a total return
debt index are examples of arrangements containing embedded
derivatives requiring bifurcation. The Company adopted
DIG B36 on October 1, 2003 and determined that the
modified coinsurance agreement with The Hartford contained an
F-17
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
embedded derivative. In accordance with
DIG B36, the Company bifurcated the contract into its debt
host and embedded derivative (total return swap) and recorded
the embedded derivative at fair value on the balance sheet with
changes in the fair value recorded in the statement of
operations. The Company recorded a $22,716 increase in accounts
payable and other liabilities in the consolidated balance sheet
and a $22,716 net realized loss on investments in the
consolidated statements of operations. Contemporaneous with the
adoption of DIG B36, the Company transferred the invested
assets related to this coinsurance agreement from fixed
maturities available for sale to trading securities, included in
other investments in the December 31, 2003 consolidated
balance sheet. The mark-to-market adjustment of the trading
securities resulted in a net realized gain of $22,716, which was
recorded to the consolidated statement of operations as realized
gains on investments. The combination of the two aforementioned
transactions had no net impact in the consolidated statements of
operations for the year ended December 31, 2003.
In April 2003, the FASB issued FAS 149,
Amendment of Statement 133 on Derivative Instruments and
Hedging Activities
(FAS 149). This
statement amends and clarifies financial accounting and
reporting for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively
referred to as derivatives) and for hedging activities under FAS
133, Accounting for Derivative Instruments and Hedging
Activities. This Statement is effective prospectively for
contracts entered into or modified after June 30, 2003 and
prospectively for hedging relationships designated after
June 30, 2003. The Company has assessed that the adoption
of this standard will not have a material impact on the
Companys financial position or the results of operations.
In May 2003, the FASB issued FAS 150,
Accounting For Certain Financial Instruments with
Characteristics of Both Liabilities and Equity
(FAS 150). This statement improves the
accounting for certain financial instruments that, under
previous guidance, issuers could account for as equity, and
requires that these instruments be classified as liabilities in
the consolidated balance sheets. This statement is effective
prospectively for financial instruments entered into or modified
after May 31, 2003 and otherwise is effective at the
beginning of the first interim period beginning after
June 15, 2003. This statement shall be implemented by
reporting the cumulative effect of a change in an accounting
principle for financial instruments created before the issuance
date of the statement and still existing at the beginning of the
interim period of adoption. The Company has adopted this
standard and has reclassified mandatorily redeemable preferred
securities of subsidiary trusts and mandatorily redeemable
preferred stock from mezzanine to liabilities.
On July 7, 2003, the Accounting Standards
Executive Committee (AcSEC) of the American
Institute of Certified Public Accountants (AICPA)
issued Statement of Position 03-1,
Accounting and Reporting
by Insurance Enterprises for Certain Nontraditional Long
Duration Contracts and for Separate Accounts
(SOP 03-1). SOP 03-1 provides guidance
on a number of topics unique to insurance enterprises, including
separate account presentation, interest in separate accounts,
gains and losses on the transfer of assets from the general
account to a separate account, liability valuation, returns
based on a contractually referenced pool of assets or index,
accounting for contracts that contain death or other insurance
benefit features, accounting for reinsurance and other similar
contracts, accounting for annuitization benefits and sales
inducements to contract holders. SOP 03-1 will be effective
for the Companys financial statements on January 1,
2004. The Company assessed this statement and determined that
the adoption of this statement will not have a material impact
on the Companys financial position or the results of
operations.
In December 2003, the FASB issued FAS 132
(Revised 2003),
Employers Disclosure about Pensions and
Other Postretirement Benefits
(FAS 132 Revised 2003). This
statement revises employers disclosure about pension plans
and other postretirement benefit plans. This statement does not
change the measurement or recognition of those plans required by
FAS No. 87, Employers Accounting for Pensions,
No. 88, Employers Accounting for Settlement and
Curtailments of Defined Benefit Pension Plans and for
Termination Benefits, and No. 106, Employers
Accounting for Postretirement Benefits Other Than Pensions. This
statement retains the disclosure requirements contained in
FAS 132, Employers Disclosure about Pensions and
Other Postretirement Benefits, which it replaces. It requires
additional disclosure to that found
F-18
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
in FAS 132 about the assets, obligations,
cash flows, and net periodic benefit cost of defined benefit
pension plans and other defined benefit postretirement plans and
will be effective for fiscal year ending after December 15,
2003. The Company fully adopted this statement. See Note 17.
3. Acquisitions
The following transactions have been accounted
for under the purchase method. Consequently, the purchase price
has been allocated to assets acquired and liabilities assumed
based on the relative fair values. The results of operations of
the businesses acquired have been included in the consolidated
financial statements since the date of acquisition.
Dental
Benefits Division (DBD) of Protective Life
Corporation (Protective)
On December 31, 2001, the Company acquired
DBD, including the acquisition through reinsurance of
Protectives indemnity dental, life, and disability
businesses and purchase of the stock of its prepaid dental
subsidiaries.
Protectives Dental Benefits Division at the
time of acquisition was a leading provider of voluntary
(employee-paid) indemnity dental and prepaid dental coverage for
employee groups. As a result of the acquisition, the Company
expects to be a leading provider of dental insurance products in
the voluntary (employee-paid) market. It also expects to reduce
costs through economies of scale.
The following table summarizes the purchase price
and net cash paid for the transaction:
Of the $54,300 of other intangible assets, $5,600
was assigned to licenses that are not subject to amortization.
The remaining $48,700 consists of the current groups in force
and a dental provider network, which are amortized on a
straight-line basis over their estimated useful lives, which
range from 20 to 30 years.
The following table reflects the Companys
results of operations on an unaudited pro forma basis as if the
acquisition of DBD had been completed on January 1, 2001.
The pro forma results include estimates and assumptions which
management believes are reasonable. However, pro forma results
do not include the effects of synergies and cost reduction
initiatives directly related to the acquisitions. The pro forma
financial information is not necessarily indicative of the
operating results that would have occurred had the acquisitions
been consummated as of the dates indicated, nor are they
necessarily indicative of future operating results.
F-19
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Core, Inc. (CORE)
On July 12, 2001, the Company acquired 100%
of the outstanding common shares of CORE for approximately
$57,000 in cash. CORE at the time of acquisition was a leading
national provider of employee absence management services and a
major provider of disability reinsurance management services to
middle-market insurance carriers. As a result of the
acquisition, the Employee Benefits segment derives expertise in
disability services and solutions, including clinical disability
management and Family and Medical Leave Act administration. The
segment also expects to realize improvements in pricing accuracy
and duration care management through direct access to
COREs data.
4. Dispositions
Neighborhood
Health Partnership (NHP)
On June 28, 2002, the Company sold its 50%
ownership in NHP to NHP Holding LLC for $12,000. NHP is a
Florida Health Maintenance Organization. The Company recorded a
pretax gain on sale of $10,672.
Fortis
Financial Group (FFG)
On April 2, 2001, the Company sold its FFG
business to The Hartford for $1,086,752, net of expenses. FFG
included certain individual life insurance policies,
investment-type annuity contracts and mutual fund operations.
The transaction was structured as a stock sale for the mutual
fund management operations and as a reinsurance arrangement for
the insurance operations (see note 14).
The sale resulted in a total pre-tax gain of
$623,071 of which $61,688 was for the mutual fund operations and
$3,854 was for property and equipment. The total pre-tax gain
was derived by deducting the value of assets and liabilities
sold or ceded from the net proceeds. The net proceeds
attributable to the mutual fund operations and reinsurance
arrangement were determined based on relative values of the
business sold. Such valuations were based on analyses from
external consultants.
Of the total pre-tax gain, $557,529 related to
the reinsurance contracts and was deferred. The reinsurance
contracts did not legally replace the Company as the insurer to
policyholders or extinguish the Companys liabilities to
its policyholders. The reserves for this block of business are
included in the Companys reserves (see note 15). The
deferred gain is being amortized over the remaining life of the
underlying business. The amortization of the deferred gain is
more rapid in the first few years after sale and will be slower
as the liabilities in the reinsured block decrease. During 2003,
2002 and 2001, the Company recognized pre-tax income of
approximately $65,594, $73,024, and $59,647, respectively,
reflecting the amortization of a portion of the deferred gain in
the results of operations.
F-20
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
5. Investments
The amortized cost and fair value of fixed
maturities and equity securities at December 31, 2003 were as
follows:
The amortized cost and fair value of fixed
maturities and equity securities at December 31, 2002 were
as follows:
F-21
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The amortized cost and fair value of fixed
maturities at December 31, 2003 by contractual maturity are
shown below. Expected maturities may differ from contractual
maturities because issuers of the securities may have the right
to call or prepay obligations with or without call or prepayment
penalties.
Proceeds from sales of available for sale
securities were $1,298,672, $3,730,282 and $3,751,214 during
2003, 2002 and 2001 respectively. Gross gains of $49,083,
$117,612, and $115,202 and gross losses of $23,975, $150,951,
and $140,472 were realized on these sales in 2003, 2002 and
2001, respectively.
Major categories of net investment income were as
follows:
F-22
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The net realized gains (losses) recorded in
income for 2003, 2002 and 2001 are summarized as follows:
The Company recorded $20,271, $85,295, and
$78,232 of pre-tax realized losses in 2003, 2002 and 2001,
respectively, associated with other-than-temporary declines in
value of available for sale securities.
The investment category and duration of the
Companys gross unrealized losses on fixed maturities and
equity securities at December 31, 2003 were as follows:
The unrealized loss position at December 31,
2003 consisted of approximately $13,300 in unrealized losses on
fixed maturity securities and approximately $700 in unrealized
losses on equity securities. The total unrealized loss
represents less than 2% of the aggregate fair value of the
related securities. Approximately 99% of these unrealized losses
have been in a continuous loss position for less than twelve
months. The total unrealized losses are comprised of 284
individual securities with 14% of the individual securities
having an
F-23
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
unrealized loss of more than $100. The total
unrealized losses on securities that were in a continuous
unrealized loss position for longer than six months but less
than 12 months was approximately $7,600, with no security
having a market value below 92% of book value.
As part of the Companys ongoing monitoring
process, the Company regularly reviews its investment portfolio
to ensure that investments that may be other than temporarily
impaired are identified on a timely basis and that any
impairment is charged against earnings in the proper period. The
Company has reviewed these securities and concluded that there
were no additional other than temporary impairments as of
December 31, 2003. Due to issuers continued
satisfaction of the securities obligations in accordance
with their contractual terms and their continued expectations to
do so, as well as the Companys evaluation of the
fundamentals of the issuers financial condition;
therefore, the Company believes that the securities in an
unrealized loss status are not impaired and intends to hold them
until recovery.
The Company has made commercial mortgage loans,
collateralized by the underlying real estate, on properties
located throughout the United States. At December 31, 2003,
approximately 34% of the outstanding principal balance of
commercial mortgage loans were concentrated in the states of
California, New York, and Pennsylvania. Although the Company has
a diversified loan portfolio, an economic downturn could have an
adverse impact on the ability of its debtors to repay their
loans. The outstanding balance of commercial mortgage loans
range in size from $22 to $9,350 at December 31, 2003. The
mortgage loan balance is net of an allowance for losses of
$18,854 and $19,106 at December 31, 2003 and 2002,
respectively.
At December 31, 2003, loan commitments
outstanding totaled approximately $75,900. Furthermore, at
December 31, 2003, the Company is committed to fund
additional capital contributions of $22,429 to certain
investments in limited partnerships.
The Company had fixed maturities carried at
$148,860 and $216,055 at December 31, 2003 and 2002,
respectively, on deposit with various governmental authorities
as required by law.
Security
Lending
The Company engages in transactions in which
fixed maturities, especially bonds issued by the United States
Government and Government agencies and authorities, are loaned
to selected broker/dealers. Collateral, greater than or equal to
102% of the fair value of the securities lent plus interest, is
received in the form of cash or marketable securities and held
by a custodian for the benefit of the Company. The Company
monitors the fair value of securities loaned and the collateral
received on a daily basis, with additional collateral obtained
as necessary. The Company is subject to the risk of loss to the
extent that the loaned securities are not returned and the value
of the collateral is less than the market value of the
securities loaned. Management believes such an event is
unlikely. At December 31, 2003 and 2002, securities with a
fair value of $417,533 and $419,000, respectively, were on loan
to select brokers.
F-24
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
6. Property and
Equipment
Property and equipment consists of the following:
Depreciation expense for 2003, 2002 and 2001
amounted to $48,117, $46,867, and $39,958, respectively.
Depreciation expense is included in underwriting, general and
administrative expenses in the consolidated statements of
operations.
7. Premiums and
Accounts Receivable
Receivables are reported at the estimated amounts
collectible net of an allowance for uncollectible items. A
summary of such items is as follows:
8. Mandatorily
Redeemable Preferred Securities of Subsidiary Trusts
Mandatorily redeemable preferred securities of
subsidiary trusts consisted of the following as of
December 31:
Distributions on preferred securities of
subsidiary trusts were $112,958, $118,396 and $118,370 for the
years ended December 31, 2003, 2002 and 2001 respectively.
F-25
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2000 Trust
Capital Securities and Subordinated Debentures
In March 2000, two subsidiary trusts of the
Company, Fortis Capital Proceeds Trust 2000-1 and Fortis Capital
Proceeds Trust 2000-2, issued 150,000 8.48% and 400,000 8.40%
trust capital securities (collectively, the 2000 Trust
Capital Securities), respectively, to Fortis Insurance
N.V. (formerly, Fortis Insurance Holding N.V.) in each case with
a liquidation amount of $1,000 per security.
In mid-December 2003, the Company redeemed 100%
of the outstanding $550,000 of 2000 Trust Capital Securities. As
part of this early redemption, the Company accrued interest
expense to the date of redemption and paid interest premiums of
$73,000. The interest premiums are included in the interest
premiums on redemption of preferred securities of subsidiary
trusts line in the statement of operations.
1999 Trust
Capital Securities and Subordinated Debentures
In April 1999, two subsidiary trusts of the
Company, 1999 Fortis Capital Trust I and 1999 Fortis Capital
Trust II, issued 200,000 7.60% and 499,850 7.88% trust capital
securities (collectively, the 1999 Trust Capital
Securities), respectively, to Fortis Capital Funding L.P.
and Fortis Insurance N.V. (formerly, Fortis Insurance Holding
N.V.), respectively, in each case with a liquidation amount of
$1,000 per security.
In mid-December 2003, the Company redeemed 100%
of the outstanding $699,850 of 1999 Trust Capital Securities. As
part of this early redemption, the Company accrued interest
expense to the date of redemption and paid interest premiums of
$64,000. The interest premiums are included in the interest
premiums on redemption of preferred securities of subsidiary
trusts line in the statement of operations.
1997 Capital
Securities I & II
In May 1997, Fortis Capital Trust, a trust
declared and established by the Company and other parties,
issued 150,000 8.40% capital securities (the 1997 Capital
Securities I) to purchasers and 4,640 8.40% common
securities (the 1997 Common Securities I) to the
Company, in each case with a liquidation amount of $1,000 per
security. Fortis Capital Trust used the proceeds from the sale
of the 1997 Capital Securities I and the 1997 Common Securities
I to purchase $154,640 of the Companys 8.40% junior
subordinated debentures due 2027 (the 1997 Junior
Subordinated Debentures I). These debentures are the sole
assets of Fortis Capital Trust.
In July 1997, Fortis Capital Trust II, a
trust declared and established by the Company and other parties,
issued 50,000 7.94% capital securities (the 1997 Capital
Securities II and, together with the 1997 Capital
Securities, the 1997 Capital Securities) to
purchasers and 1,547 7.94% common securities (the 1997
Common Securities II) to the Company, in each case with a
liquidation amount of $1,000 per security. Fortis Capital
Trust II used the proceeds from the sale of the 1997
Capital Securities II and the 1997 Common
Securities II to purchase $51,547 of the Companys
7.94% junior subordinated debentures due 2027 (the 1997
Junior Subordinated Debentures II and, together with
the 1997 Junior Subordinated Debentures I, the 1997
Junior Subordinated Debentures). These debentures are the
sole assets of Fortis Capital Trust II.
In early January 2004, the Company redeemed 100%
of the outstanding $196,224 of 1997 Capital Securities. In
December 2003 the Company sent an irrevocable notice of
redemption for the 1997 capital securities; therefore, the
Company accrued interest premiums of $66,734 in 2003 and
expensed $2,088 of cost that was capitalized at the time of the
issuance of these securities and was being amortized over the
life of the securities. The interest premiums and capitalized
costs that were expensed are included in the interest premiums
on redemption of preferred securities of subsidiary trusts line
in the statement of operations. See
Note 1 Nature
of Operations
for further detail on the extinguishment of
these securities.
F-26
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
9. Debt
In December 2003, the Company entered into two
senior bridge credit facilities of $650,000 and $1,100,000. The
aggregate indebtedness of $1,750,000 under the facility was in
connection with the extinguishment of the Companys
Mandatorily Redeemable Preferred Securities of Subsidiary
Trusts. See Note 8 for a detail description of these securities
and the repayment terms. The $1,750,000 aggregate indebtedness
under the senior bridge credit facility was paid in full in
January 2004. The interest expense of $1,175 related to the
senior bridge credit facility is included in the statement of
operations in 2003. See Note 25 Subsequent
events for a detailed description of the repayment.
10. Income
Taxes
The Company and the majority of its subsidiaries
are subject to U.S. tax and file a U.S. consolidated federal
income tax return. Information about current and deferred tax
expense follows:
The provision for foreign taxes includes amounts
attributable to income from U.S. possessions that are considered
foreign under U.S. tax laws. International operations of the
Company are subject to income taxes imposed by the jurisdiction
in which they operate.
A reconciliation of the federal income tax rate
to the Companys effective income tax rate follows:
F-27
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The tax effects of temporary differences that
result in significant deferred tax assets and deferred tax
liabilities are as follows:
Deferred taxes have not been provided on the
undistributed earnings of wholly owned foreign subsidiaries
since the Company intends to indefinitely reinvest these
earnings. The cumulative amount of undistributed earnings for
which the Company has not provided deferred income taxes is
approximately $161,853. Upon distribution of such earnings in a
taxable event, the Company would incur additional U.S. income
taxes of approximately $40,000 net of anticipated foreign tax
credits.
Under pre-1984 life insurance company income tax
laws, a portion of a life insurance companys gain
from operations was not subject to current income taxation
but was accumulated, for tax purposes, in a memorandum account
designated as policyholders surplus account.
Amounts in this account only become taxable upon the occurrence
of certain events. The approximate amount in this account was
$95,163 at December 31, 2003 and 2002. Deferred taxes have
not been provided on amounts in this account since the Company
neither contemplates any action nor foresees any events
occurring that would create such tax.
At December 31, 2003, the Company and its
subsidiaries had capital loss carryforwards for U.S. federal
income tax purposes. Capital loss carryforwards total $91,702
and will expire if unused as follows:
11. Mandatorily
Redeemable Preferred Stocks
At December 31, 2003 and 2002, Fortis, Inc.
had three classes of mandatorily redeemable preferred stock:
Series A, Series B and Series C. There were
10,000 Series A shares authorized and none issued or
outstanding at December 31, 2003. There were 30,000
Series B shares authorized and 19,160 shares issued and
outstanding at December 31, 2003. There were 5,000
Series C shares authorized, issued and outstanding at
December 31, 2003. In connection with the merger of Fortis,
Inc and Assurant, Inc., each share of the
F-28
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
existing Series B and Series C
mandatorily redeemable preferred stock of Fortis, Inc. was
exchanged for one share of Series B and C mandatorily
redeemable preferred stock of Assurant, Inc. and all terms of
the stock remained the same. The series A class was retired
at the time of the merger and does not exist in Assurant, Inc.
The carrying value equals the redemption value
for all classes of preferred stock. The Companys board of
directors has the authority to issue up to 200,000,000 shares of
preferred stock, par value $1.00 per share, in one or more
series and to fix the powers, preferences, rights and
qualifications, limitations or restrictions thereof, which may
include dividend rights, conversion rights, voting rights, terms
of redemption, liquidation preferences and the number of shares
constituting any series or the designations of the series.
Information about the preferred stock is as
follows:
There was no change in the outstanding shares of
Series C for the years ended December 31, 2003, 2002
and 2001. Changes in the number of Series B shares
outstanding are as follows:
All shares have a liquidation price of $1,000 per
share and rank senior to common stock with respect to rights to
receive dividends and to receive distributions upon the
liquidation, dissolution or winding up of the Company.
Series B and C: Holders of the Series B
Preferred Stock are entitled to receive cumulative dividends at
the rate of 4.0% per share per annum, multiplied by the $1,000
per share liquidation price, and holders of the Series C
Preferred Stock are entitled to receive dividends at the rate of
4.5% per share per annum multiplied by the $1,000 per share
liquidation price. All dividends are payable in arrears on a
quarterly basis. Any dividend that is not paid on a specified
dividend payment date with respect to a share of such Preferred
Stock shall be deemed added to the liquidation price of such
share for purposes of computing the future dividends on such
share, until such delinquent dividend has been paid.
Holders of the Series B Preferred Stock may
elect to have any or all of their shares redeemed by the Company
at any time after April 1, 2002, and the Company must
redeem all shares of the Series B Preferred Stock no later
than July 1, 2017. Holders of the Series C Preferred
Stock may elect to have any or all of their shares redeemed by
the Company any time after April 1, 2022, and the Company
must redeem all shares of the Series C Preferred Stock no
later than July 1, 2027. The Company also has the right and
the obligation to redeem the Series B Preferred Stock and
Series C Preferred Stock upon the occurrence of certain
specified events. The redemption price in all cases shall equal
the $1,000 per share liquidation price plus all accumulated and
unpaid dividends. The Company is not required to establish any
sinking fund or similar funds with respect to such redemptions.
None of the shares of Series B Preferred Stock or Series C
Preferred Stock are convertible into common stock or any other
equity security of the Company. However, holders of the
F-29
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Series B Preferred Stock and Series C
Preferred Stock are entitled to one vote per share owned of
record on all matters voted upon by the Company stockholders,
voting with the holders of common stock as a single class, and
not as a separate class or classes. The shares of Series B
Preferred Stock and Series C Preferred Stock are subject to
certain restrictions on transferability, and the Company has the
right of first refusal to acquire the shares if any holder
thereof desires to make a transfer not otherwise permitted by
the terms thereof.
12. Stockholders
Equity
Common
Stock
At December 31, 2003 and 2002, Fortis, Inc.
had three classes of common stock, Class A, B and C. There
were 40,000,000 shares authorized, 7,750,000 shares
issued and outstanding of Class A common stock;
150,001 shares authorized, issued and outstanding of
Class B common stock; 400,001 shares authorized,
issued and outstanding of Class C common stock.
In connection with the merger of Fortis, Inc. and
Assurant, Inc., each share of Fortis, Inc. Class A common
stock was exchanged for 10.75882039 shares of common stock
of Assurant, Inc., which totaled 83,380,858 shares. Also,
the Class B common stock and Class C common stock
outstanding were converted into an aggregate of
25,841,418 shares of common stock of Assurant, Inc. These
events resulted in 109,222,276 shares of common stock
outstanding.
In connection with the IPO the Company issued
32,976,854 shares of common stock to Fortis Insurance N.V.
in exchange for $725,500 capital contribution. The Company also
issued 68,976 shares to certain officers of the Company.
These events resulted in 142,268,106 shares of common stock
outstanding as of February 5, 2004.
The Company is authorized to issue
800,000,000 shares of common stock. The 150,001 shares
of Class B and 400,001 shares of Class C common
stock, per the Restated Certificate of Incorporation of
Assurant, Inc., are still authorized but have not been retired
and its management intent not to reissue these shares.
Preferred
Stock
The Board of Directors of the Company has
designated Preferred Stock shares as Series B and
Series C (see Note 11).
13. Statutory
Information
The Companys insurance subsidiaries prepare
financial statements on the basis of statutory accounting
practices (SAP) prescribed or permitted by the
insurance departments of their states of domicile. Prescribed
SAP includes the Accounting Practices and Procedures Manual of
the National Association of Insurance Commissioners
(NAIC) as well as state laws, regulations and
administrative rules.
The principal differences between SAP and GAAP
are: 1) policy acquisition costs are expensed as incurred under
SAP, but are deferred and amortized under GAAP; 2) the value of
business acquired is not capitalized under SAP but is under
GAAP; 3) amounts collected from holders of universal life-type
and annuity products are recognized as premiums when collected
under SAP, but are initially recorded as contract deposits under
GAAP, with cost of insurance recognized as revenue when assessed
and other contract charges recognized over the periods for which
services are provided; 4) the classification and carrying
amounts of investments in certain securities are different under
SAP than under GAAP; 5) the criteria for providing asset
valuation allowances, and the methodologies used to determine
the amounts thereof, are different under SAP than under GAAP; 6)
the timing of establishing certain reserves, and the
methodologies used to determine the amounts thereof, are
different under SAP than under GAAP; 7) certain assets are not
admitted for purposes of determining surplus under SAP; and 8)
the criteria for obtaining reinsurance accounting treatment is
different under SAP than under GAAP.
F-30
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The combined statutory net income and capital and
surplus of the insurance subsidiaries follow:
Insurance enterprises are required by state
insurance departments to adhere to minimum risk-based capital
(RBC) requirements developed by the NAIC. All of the
Companys insurance subsidiaries exceed minimum RBC
requirements.
The payment of dividends to the Company by the
Companys insurance subsidiaries in excess of a certain
amount (i.e., extraordinary dividends) must be approved by the
subsidiaries domiciliary state department of insurance.
Ordinary dividends, for which no regulatory approval is
generally required, are limited to amounts determined by
formula, which varies by state. The formula for the majority of
the states in which the Companys subsidiaries are
domiciled is the lesser of (i) 10% of the statutory surplus
as of the end of the prior year or (ii) the prior
years statutory net income. In some states the formula is
the greater amount of clauses (i) and (ii). Some states,
however, have an additional stipulation that dividends may only
be paid out of earned surplus. If insurance regulators determine
that payment of an ordinary dividend or any other payments by
the Companys insurance subsidiaries to the Company (such
as payments under a tax sharing agreement or payments for
employee or other services) would be adverse to policyholders or
creditors, the regulators may block such payments that would
otherwise be permitted without prior approval. As part of the
regulatory approval process for the acquisition of American
Bankers Insurance Group (ABIG) in 1999, the Company
entered into an agreement with the Florida Insurance Department
pursuant to which American Bankers Insurance Company and
American Bankers Life Assurance Company have agreed to limit the
amount of ordinary dividends they would pay to the Company to an
amount no greater than 50% of the amount otherwise permitted
under Florida law. This agreement expires in August 2004. In
addition, the Company entered into an agreement with the New
York Insurance Department as part of the regulatory approval
process for the merger of Bankers American Life Assurance
Company, one of the Companys New York-domiciled insurance
subsidiaries, into First Fortis Life Insurance Company
(FFLIC) in 2001, pursuant to which FFLIC agreed not
to pay any dividends to the Company until fiscal year 2004. No
assurance can be given that there will not be further regulatory
actions restricting the ability of the Companys insurance
subsidiaries to pay dividends. Based on the dividend
restrictions under applicable laws and regulations, the maximum
amount of dividends that the Companys subsidiaries could
pay to the Company in 2004 without regulatory approval is
approximately $302,000 (Unaudited).
14. Reinsurance
In the ordinary course of business, the Company
is involved in both the assumption and cession of reinsurance
with non-affiliated companies. The following table provides
details of the reinsurance recoverables balance for the years
ended December 31:
F-31
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The effect of reinsurance on premiums earned and
benefits incurred was as follows:
The Company had $624,044 of invested assets held
in trusts or by custodians as of December 31, 2003 for the
benefit of others related to certain reinsurance arrangements.
The Company utilizes ceded reinsurance for loss
protection and capital management, business dispositions, and in
the Solutions segment, for client risk and profit sharing.
Loss
Protection and Capital Management
As part of the Companys overall risk and
capacity management strategy, the Company purchases reinsurance
for certain risks underwritten by the Companys various
segments, including significant individual or catastrophic
claims, and to free up capital to enable the Company to write
additional business.
For those product lines where there is exposure
to catastrophes, the Company closely monitors and manages the
aggregate risk exposure by geographic area and the Company has
entered into reinsurance treaties to manage exposure to these
types of events.
Under indemnity reinsurance transactions in which
the Company is the ceding insurer, the Company remains liable
for policy claims if the assuming company fails to meet its
obligations. To limit this risk, the Company has control
procedures in place to evaluate the financial condition of
reinsurers and to monitor the concentration of credit risk to
minimize this exposure. The selection of reinsurance companies
is based on criteria related to solvency and reliability and, to
a lesser degree, diversification as well as on developing strong
relationships with the Companys reinsurers for the sharing
of risks.
Business
Divestitures
The Company has used reinsurance to exit certain
businesses, such as the disposals of FFG (see note 4) and
LTC. Reinsurance was used in these cases to facilitate the
transactions because the businesses shared legal entities with
business segments that the Company retained. Assets backing
liabilities ceded related to these businesses are held in trusts
for the benefit of the Company and the separate accounts
relating to FFG are still reflected in the Companys
balance sheet.
The reinsurance recoverable from The Hartford was
$1,536,568 and $1,557,660 as of December 31, 2003 and 2002,
respectively. The reinsurance recoverable from John Hancock was
$873,477 and $697,365 as of December 31, 2003 and 2002,
respectively. The Company would be responsible for administering
this business
F-32
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
in the event of a default by reinsurers. In
addition, under the reinsurance agreement, The Hartford is
obligated to contribute funds to increase the value of the
separate accounts relating to the business sold if such value
declines. If The Hartford fails to fulfill these obligations,
the Company will be obligated to make these payments.
Solutions
Segment Client Risk and Profit Sharing
The Assurant Solutions segment writes business
produced by its clients, such as mortgage lenders and servicers
and financial institutions, and reinsures all or a portion of
such business to insurance subsidiaries of the clients. Such
arrangements allow significant flexibility in structuring the
sharing of risks and profits on the underlying business.
A substantial portion of Assurant Solutions
reinsurance activities are related to agreements to reinsure
premiums generated by certain clients to the clients own
captive insurance companies or to reinsurance subsidiaries in
which the clients have an ownership interest. Collateral is
generally obtained in amounts equal to the outstanding reserves
when captive companies are not authorized to operate in the
Companys insurance subsidiarys state of domicile as
required by statutory accounting principles.
The Companys reinsurance agreements do not
relieve the Company from its direct obligation to its insureds.
Thus, a credit exposure exists to the extent that any reinsurer
is unable to meet the obligations assumed in the reinsurance
agreements. To minimize its exposure to reinsurance
insolvencies, the Company evaluates the financial condition of
its reinsurers and holds substantial collateral (in the form of
funds, trusts, and letters of credit) as security under the
reinsurance agreements.
15. Reserves
The following table provides reserve information
by the Companys major lines of business at the dates shown:
F-33
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table provides a roll forward of
the claims and benefits payable for the Companys group
term life, group disability, medical and property and warranty
lines of business. These are the Companys product lines
with the most significant short duration claims and benefits
payable balances. The majority of the Companys credit life
and disability claims and benefits payable are ceded to
reinsurers. The Companys net retained credit life and
disability claims and benefits payable were $129,406, $134,715
and $191,343 at December 31, 2003, 2002 and 2001,
respectively.
F-34
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The claims and benefits payable include claims in
process as well as provisions for incurred but not reported
claims. Such amounts are developed using actuarial principles
and assumptions that consider, among other things, contractual
requirements, historical utilization trends and payment
patterns, benefits changes, medical inflation, seasonality,
membership, product mix, legislative and regulatory environment,
economic factors, disabled life mortality and claim termination
rates and other relevant factors. The Company
F-35
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
consistently applies the principles and
assumptions listed above from year to year, while also giving
due consideration to the potential variability of these factors.
Because claims and benefits payable include
estimates developed from various actuarial methods, the
Companys actual losses incurred may be more or less than
the Companys previously developed estimates. As shown in
the table above, for each of the years ended December 31,
2003, 2002 and 2001 the amounts listed on the line labeled
Incurred losses related to: Prior year are negative
(redundant) for the Group Term Life and Medical lines of
business. This means that the Companys actual losses
incurred related to prior years for these lines were less than
the estimates previously made by the Company. For Group
Disability, the amounts listed are negative (redundant) for
the years ended December 31, 2002 and 2001, and positive
(deficient) for the year ended December 31, 2003. This
means that for 2002 and 2001, the Companys actual losses
incurred related to prior years for this line were less than
what was estimated, while for 2003, actual losses incurred
related to prior years were greater than what was previously
estimated by the Company.
The Group Disability reserve deficiency in 2003,
and its related upward revision reflects the result of reserve
adequacy studies concluded in the third quarter of 2003. Based
on results of those studies, reserves were increased by $44,000,
almost all of which was attributable to a reduction in the
discount rate to reflect current yields on invested assets. The
Group Disability reserve redundancies in 2002 and 2001, which
were less than 1% of prior year reserves, arose as a result of
our actual claim recovery rates exceeding those assumed in our
beginning-of-year case reserves, after taking into account an
offset of one less year of discounting reflected in the
Companys end-of-year case reserves.
The Group Term Life reserve redundancy in 2003,
and its related downward revision reflects the results of
reserve adequacy studies conducted in the third quarter of 2003.
Based on the results of those studies, reserves were reduced by
$59,000. The change in estimate reflects an increase in the
discount rate, lower mortality rates and higher recovery rates.
These changes were made to reflect current yields on invested
assets, and recent mortality and recovery experience. Another
portion of the Group Term Life reserve redundancies in all years
was caused by actual mortality rates being lower than assumed in
our beginning-of-year reserves and recovery rates being higher
than assumed in our beginning-of-year waiver of premium
reserves. The remaining redundancy and related downward revision
were due to shorter-than-expected lags between incurred claim
dates and paid claim dates. These amounts were offset by one
less year of discounting reflected in the Companys
end-of-year waiver of premium reserves.
The conclusion of the reserve studies determined
that, in the aggregate, the reserves were redundant. The reserve
discount rate on all claims was changed to reflect the
continuing low interest rate environment. The net impact of
these adjustments was a reduction in reserves of approximately
$18,000, which includes $3,000 of reserve release relating to
the group dental business.
The redundancies in our Medical line of business,
and the related downward revisions in the Companys Medical
reserve estimates, were caused by the Companys claims
developing more favorably than expected. The Companys
actual claims experience reflected lower medical provider
utilization and lower medical inflation than assumed in the
Companys prior-year pricing and reserving processes.
The redundancy in the Companys Property and
Warranty lines of business, and the related downward revision in
the Companys estimated reserves in 2001 occurred mostly in
the Companys credit unemployment and credit property
insurance coverages, whereas the other coverages showed
immaterial adjustments to prior year incurred losses. The small
deficiency in 2002 largely reflected a shift in the mix of
business away from the credit property and unemployment product
lines. In addition, an increase in the claim frequency of
unemployment contributed to additional development and the small
deficiency experienced in 2002. In 2003, unemployment claim
frequencies stabilized, contributing to a modest redundancy.
These changes reflect experience gains and losses from actual
claim frequencies differing from best estimate claim
frequencies, and differences in actual versus best estimate paid
claim lag rates.
F-36
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
For the longer-tail Property and Warranty
coverages (e.g. asbestos, environmental, other general liability
and personal accident), there were no changes in estimated
amounts for incurred claims in prior years for all years.
Long Duration
Contracts
The Companys long duration contracts are
comprised of pre-funded funeral life insurance policies and
annuity contracts, life insurance policies no longer offered,
universal life and annuities no longer offered and FFG and LTC
disposed businesses. The principal products and services
included in these categories are described in the summary of
significant accounting polices (see note 2).
The Companys PreNeed segment distributes
pre-funded funeral insurance products through two separate
divisions, the independent division and the AMLIC division. The
reserves for future policy benefits and expenses for pre-funded
funeral life and annuity contracts and life insurance no longer
offered by the PreNeed segment differ by division and are
established based upon the following assumptions:
PreNeed
Segment Independent Division
Interest and discount rates for pre-funded
funeral life insurance are level, vary by year of issuance and
product, and ranged from 7.0% to 7.3% in 2003 and 2002 before
provisions for adverse deviation, which ranged from 0.2% to 0.5%
in both 2003 and 2002.
Interest and discount rates for pre-funded life
insurance no longer offered vary by year of issuance and
products and were 7.5% grading to 5.3% over 20 years in
2003 and 2002 with the exception of a block of pre-1980 business
which had a level 8.8% discount rate in both 2003 and 2002.
Mortality assumptions are based upon pricing
assumptions and modified to allow provisions for adverse
deviation. Surrender rates vary by product and are based upon
pricing assumptions. The weighted average lapse rate, including
surrenders, for all life policies issued by the independent
channel was approximately 2.7% and 3.2% in 2003 and 2002,
respectively.
Future policy benefit increases on pre-funded
life insurance policies ranged from 1.0% to 7.0% in 2003 and
2002. Some policies have future policy benefit increases, which
are guaranteed or tied to equal some measure of inflation. The
inflation assumption for these inflation-linked benefits was
3.0% in 2003 and 2002. Traditional life products issued by the
PreNeed segment have level benefits.
The reserves for annuities issued by the
independent division are based on assumed interest rates
credited on deferred annuities, which vary by year of issuance,
and ranged from 2.5% to 5.5% in 2003 and 2002. Withdrawal
charges, if any, generally range from 7.0% to 0%, grading to
zero over a period of seven years for business issued in the
United States. Canadian annuity products have a surrender charge
that varies by product series and premium paying period,
typically grading to zero after all premiums have been paid.
PreNeed
Segment AMLIC Division
Interest and discount rates for pre-funded
funeral life insurance policies issued October 2000 and beyond
vary by issue year and are based on pricing assumptions and
modified to allow for provisions for adverse deviation. 2003
issues used a level 4.8% discount rate, 2002 issues used a level
5.8% discount rate and 2001 issues used a discount rate of 6.0%.
Pre-funded funeral life insurance policies issued prior to
October 2000 and all traditional life policies issued by the
AMLIC division use discount rates, which vary by issue year and
product and ranged from 2.5% to 7.5% in 2003 and 2002.
Mortality assumptions for pre-funded funeral life
insurance products issued in October 2000 and beyond are based
upon pricing assumptions, which approximate actual experience,
and modified to allow for provisions for adverse deviation.
Surrender rates for pre-funded funeral life insurance products
issued in
F-37
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
October 2000 and beyond vary by product and are
based upon pricing assumptions, which approximate actual
experience. Mortality assumptions for all prefunded funeral life
insurance and traditional life insurance issued by the AMLIC
division prior to October 2000 are based on Statutory valuation
requirements with no explicit provision for lapses. The weighted
average lapse rate, including surrenders, for all life policies
issued by the AMLIC division was approximately 1.0% and 1.1% in
2003 and 2002, respectively.
Future policy benefit increases are based upon
pricing assumptions. First-year guaranteed benefit increases
range from 0.0% to 6.0% in 2003 and 2002. Renewal guaranteed
benefit increases range from 0.0% to 3.0% in 2003 and 2002. For
contracts with minimum benefit increases associated with an
inflation index, assumed benefit increases equaled the discount
rate less 3.0% in 2003 and 2002.
The reserves for annuities issued by the AMLIC
division are based on assumed interest rates credited on
deferred annuities and ranged from 1.0% to 6.5% in 2003 and
2002. Withdrawal charges ranged from 0.0% to 8.0% grading to
zero over eight years for business issued in the United States.
Canadian annuity products have a flat 35% surrender charge.
Nearly all the deferred annuities contracts have a 3.0%
guaranteed interest rate.
Universal
Life and Annuities No Longer Offered
The reserves for universal life and annuity
products no longer offered in the Assurant Solutions segment
have been established based on the following assumptions:
Interest rates credited on annuities, which vary by product and
time when funds were received, and ranged from 3.5% to 4.0% in
2003 and were universally 4.0% in 2002. Guaranteed crediting
rates on annuities range from 3.5% to 4.0%. Annuities are also
subject to surrender charges, which vary by contract year and
grade to zero over a period no longer than seven years.
Surrender values will never be less than the amount of paid-in
premiums (net of prior withdrawals) regardless of the surrender
charge. Credited interest rates on universal life funds vary by
product and the funds received ranged from 4.0% to 5.5% in 2003
and 2002. Guaranteed crediting rates where present are equal to
4.0%. Additionally, universal life funds are subject to
surrender charges that vary by product, age, sex, year of issue,
risk class, face amount and grade to zero over a period not
longer than 20 years.
FFG and
LTC
A description of the disposal of FFG can be found
in the dispositions footnote (see note 4). The reserves for FFG
and LTC are included in the Companys reserves in
accordance with FAS 113,
Accounting and Reporting for
Reinsurance of Short-Duration and Long-Duration Contracts.
The Company maintains an offsetting reinsurance recoverable
related to these reserves (see note 14).
Short
Duration Contracts
The Companys short duration contracts are
comprised of group term life, group disability, medical and
dental, property, credit, warranty and all other. The principal
products and services included in these categories are described
in the summary of significant accounting polices (see note 2).
The disability category includes short and long
term disability products. Claims and benefits payable for
long-term disability have been discounted at 5.25% in 2003. The
December 31, 2003 and 2002 liabilities include $1,318,186
and $1,201,592, respectively, of such reserves. The amount of
discounts deducted from outstanding reserves as of
December 31, 2003 and 2002 are $440,460 and $460,937,
respectively.
16. Fair Value
Disclosures
Statement of Financial Accounting Standards
No. 107,
Disclosures About Fair Value of Financial
Instruments
(FAS 107) requires disclosure of
fair value information about financial instruments, as defined
therein, for which it is practicable to estimate such fair
value. These financial instruments may or may not be recognized
in the consolidated balance sheets. In the measurement of the
fair value of certain financial
F-38
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
instruments, if quoted market prices were not
available other valuation techniques were utilized. These
derived fair value estimates are significantly affected by the
assumptions used. Additionally, FAS 107 excludes certain
financial instruments including those related to insurance
contracts.
In estimating the fair value of the financial
instruments presented, the Company used the following methods
and assumptions:
Cash, cash equivalents and short-term
investments:
the carrying amount
reported approximates fair value because of the short maturity
of the instruments.
Fixed maturity securities:
the fair value for fixed maturity
securities is based on quoted market prices, where available.
For fixed maturity securities not actively traded, fair values
are estimated using values obtained from independent pricing
services or, in the case of private placements, are estimated by
discounting expected future cash flows using a current market
rate applicable to the yield, credit quality, and maturity of
the investments.
Equity securities:
fair value of equity securities and
non-sinking fund preferred stocks is based upon quoted market
prices.
Commercial mortgage loans and policy loans:
the fair values of mortgage loans are
estimated using discounted cash flow analyses, based on interest
rates currently being offered for similar loans to borrowers
with similar credit ratings. Mortgage loans with similar
characteristics are aggregated for purposes of the calculations.
The carrying amounts of policy loans reported in the balance
sheets approximate fair value.
Other investments:
the fair values of joint ventures are
calculated based on fair market value appraisals. The invested
assets related to the modified coinsurance arrangements are
classified as trading securities and are reported at fair value.
The carrying amounts of the remaining other investments
approximate fair value.
Policy reserves under investment products:
the fair values for the Companys
policy reserves under the investment products are determined
using cash surrender value.
Separate account assets and liabilities:
separate account assets and
liabilities are reported at their estimated fair values in the
balance sheet.
F-39
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The fair value of the Companys liabilities
for insurance contracts other than investment-type contracts are
not required to be disclosed. However, the fair values of
liabilities under all insurance contracts are taken into
consideration in the Companys overall management of
interest rate risk, such that the Companys exposure to
changing interest rates is minimized through the matching of
investment maturities with amounts due under insurance contracts.
17. Retirement
and Other Employee Benefits
The Company and its subsidiaries participate in a
noncontributory defined benefit pension plan covering
substantially all of their employees. Benefits are based on
certain years of service and the employees compensation
during certain such years of service. The Companys funding
policy is to contribute amounts to the plan sufficient to meet
the minimum funding requirements set forth in the Employee
Retirement Income Security Act of 1974, plus such additional
amounts as the Company may determine to be appropriate from time
to time up to the maximum permitted. Contributions are intended
to provide not only for benefits attributed to service to date,
but also for those expected to be earned in the future. The
Company also has noncontributory, nonqualified supplemental
programs covering certain employees.
In addition, the Company provides certain life
and healthcare benefits for retired employees and their
dependents. Substantially all employees of the Company may
become eligible for these benefits depending on age and years of
service. The Company has the right to modify or terminate these
benefits.
Summarized information on the Companys
qualified pension benefits and postretirement plans for the
years ended December 31 is as follows:
F-40
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The curtailment and settlement gains in 2001
resulted from the sale of FFG (see note 4).
The Companys nonqualified plans are
unfunded. At December 31, 2003, 2002 and 2001 the nonqualified
plans had projected benefit obligations of $71,634, $64,118 and
$52,790 respectively, and accumulated benefit obligations of
$62,176, $53,511 and $44,495, respectively. A minimum pension
liability of $5,750 for these plans was also recorded in
accumulated other comprehensive income in 2003 and 2002.
Information for Pension Plans with an accumulated
benefit obligation in excess of plan assets were as follows:
Components of net pension cost for the year ended
December 31 were as follows:
F-41
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Determination of the projected benefit obligation
was based on the following weighted average assumptions at
December 31:
Determination of the net periodic benefit cost
was based on the following weighted average assumptions for the
year ended December 31:
To develop the expected long-term rate of return
on assets assumption, the Company considered the current level
of expected returns on risk free investments (primarily
government bonds), the historical level of the risk premium
associated with the other asset classes in which the portfolio
is invested and the expectations for future returns of each
asset class. The expected return for each asset class was then
weighted based on the targeted asset allocation to develop the
expected long-term rate of return on asset assumptions for the
portfolio. This resulted in the selection of the 8.25%
assumption for the fiscal year 2003 and 2002, and 9.00% for the
fiscal year 2001.
Assumed health care cost trend rates at
December 31:
Assumed health care cost trend rates have a
significant effect on the amounts reported for the health care
plans. A one-percentage point change in assumed health care cost
trend rates would have the following effects:
F-42
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Companys pension plans and other post
retirement benefit plans weighted-average asset allocation at
December 31 by asset category are as follows:
The goals of the asset strategy are to determine
if the growth in the value of the fund over the long-term, both
in real and nominal terms and manage (control) risk
exposure. Risk is managed by investing in a broad range of asset
classes, and within those asset classes, a broad range of
individual securities.
The Investment Committee that oversees the
investment of the plan assets conducted a review of the
Investment Strategies and Policies of the Plan in the 4th
quarter of 2001. This included a review of the strategic asset
allocation, including the relationship of the Plan liabilities
and portfolio structure. As a result of this review, the
Investment Committee has adopted a target asset allocation and
modified the ranges:
The equity securities category includes both
domestic and foreign equity securities. The target asset equity
security allocation of U.S. and foreign securities is 60% and
15%, respectively.
The Company expects to contribute $11,000 to its
pension plans and $1,200 to its retirement health benefit plan
in 2004.
The following benefit payments, which reflect
expected future service, as appropriate, are expected to be paid:
The Company and its subsidiaries have a defined
contribution plan covering substantially all employees which
provides benefits payable to participants on retirement or
disability and to beneficiaries of participants in the event of
the participants death. Amounts contributed to the plan
and expensed by the Company were $24,684, $23,669 and $21,792 in
2003, 2002 and 2001, respectively.
F-43
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
18. Deferred
Policy Acquisition Costs
Information about deferred policy acquisition
costs follows:
19. Goodwill and
VOBA
Information about goodwill and VOBA follows:
As prescribed under FAS 142, starting
January 1, 2002, the Company has assigned goodwill to its
reportable segments. Below is a rollforward of goodwill by
reportable segment. This assignment of goodwill is performed
only for FAS 142 impairment testing purposes.
Prior to January 1, 2002 goodwill was
amortized over 20 years. Upon the adoption of FAS 142,
amortization of goodwill ceased and the Company recognized a
$1,260,939 impairment charge reflecting the
F-44
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
cumulative effect of change in accounting
principle. Had the provisions of FAS 142 been applied as of
January 1, 2001 net income would have been adjusted as
follows:
As of December 31, 2003, the majority of the
outstanding balance of VOBA is in the Companys PreNeed
segment. VOBA in the PreNeed segment assumes an interest rate
ranging from 6.5% to 7.5%.
At December 31, 2003 the estimated
amortization of VOBA for the next five years is as follows:
20. Segment
Information
The Company has five reportable segments, which
are defined based on the nature of the products and services
offered: Solutions, Health, Employee Benefits, PreNeed, and
Corporate and Other. Solutions provides credit insurance,
including life, disability and unemployment, debt protection
administration services, creditor-placed homeowners insurance
and manufactured housing homeowners insurance. Health provides
individual, short-term and small group health insurance.
Employee Benefits provides employee-paid dental insurance and
employer-paid dental, disability and life insurance products and
related services. PreNeed provides life insurance policies and
annuity products that provide benefits to fund pre-arranged
funerals. Corporate and Other includes activities of the holding
company, financing expenses, net realized gains (losses) on
investments, interest income earned from short-term investments
held and interest income from excess surplus of insurance
subsidiaries not allocated to other segments. Corporate and
Other also includes results of operations of FFG, from
January 1, 2001 to March 31, 2001, the period prior to
its disposition. Corporate and Other also includes the
amortization of deferred gains associated with the portions of
the sales of FFG and LTC (a business sold on March 1, 2000)
through reinsurance agreements.
The Company evaluates performance based on
segment income after-tax excluding impairments and amortization
of goodwill. The Company determines reportable segments in a
manner consistent with the way the Company organizes for
purposes of making operating decisions and assessing
performance. The accounting policies of the reportable segments
are the same as those described in the summary of significant
accounting policies (See note 2).
The Company allocates a notional amount of
invested assets to the segments primarily based on future policy
benefits, claims and unearned premiums and capital allocated to
each segment. The Company assigns net deferred acquisition
costs, value of businesses acquired, reinsurance recoverables
and other assets and liabilities to the respective segments
where those assets or liabilities originate.
Net investment income is allocated based on a
segments proportional share of assets and capital required
to support its business.
F-45
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In August 2003, the Company began to utilize
derivative instruments in managing the PreNeed segments
exposure to inflation risk. The derivative instrument, a
Consumer Price Index Cap (the CPI CAP), limits the
inflation risk on certain policies to a maximum of 5% and has a
notional amount of $454,000 amortizing to zero over
20 years. The CPI CAP does not qualify under GAAP as an
effective hedge; therefore, it is marked-to-marked on a
quarterly basis and the accumulated gain or loss is recognized
in the results of operations in fees and other income. As of
December 31, 2003, the CPI CAP included in other assets
amounted to $8,800 and the income recorded in the results of
operations totaled $100.
The following tables summarize selected financial
information by segment for the year ended and as of
December 31, 2003, 2002 and 2001:
Table of Contents
Table of Contents
Table of Contents
Table of Contents
Table of Contents
Table of Contents
Table of Contents
Table of Contents
Years Ended December 31,
2003
2002
2001
$
185,652
$
(1,001,199
)
$
98,053
(475
)
(630
)
(740
)
(703
)(A)
$
185,177
$
(1,001,829
)
$
96,610
$
1.70
$
(9.17
)
$
0.90
$
1.70
$
(9.17
)
$
0.88
2003
2002
2001
3.74
%
5.03
%
5.09
%
4.05
%
4.92
%
4.75
%
8.70
8.50
8.30
32.70
%
32.70
%
32.70
%
1.98
%
1.98
%
1.98
%
Table of Contents
Table of Contents
Table of Contents
As of
December 31,
2001
$
33,200
16,200
156,400
54,300
60,300
320,400
72,000
$
248,400
Unaudited Pro Forma
Information for the
Year Ended
December 31, 2001
$
6,508,774
$
119,353
Table of Contents
Table of Contents
Cost or
Gross
Gross
Amortized
Unrealized
Unrealized
Cost
Gains
Losses
Fair Value
$
1,646,782
$
39,431
$
(4,467
)
$
1,681,746
187,539
16,181
(41
)
203,679
306,554
11,748
(554
)
317,748
910,810
73,711
(380
)
984,141
5,178,176
371,215
(7,867
)
5,541,524
$
8,229,861
$
512,286
$
(13,309
)
$
8,728,838
$
13
$
$
$
13
1,037
1,461
2,498
1,310
248
(2
)
1,556
434,463
18,640
(730
)
452,373
$
436,823
$
20,349
$
(732
)
$
456,440
Cost or
Gross
Gross
Amortized
Unrealized
Unrealized
Cost
Gains
Losses
Fair Value
$
1,576,339
$
70,549
$
(26
)
$
1,646,862
196,186
15,441
(115
)
211,512
202,154
19,096
(17,413
)
203,837
834,021
54,940
(9,875
)
879,086
4,821,876
298,955
(26,598
)
5,094,233
$
7,630,576
$
458,981
$
(54,027
)
$
8,035,530
Table of Contents
Cost or
Gross
Gross
Amortized
Unrealized
Unrealized
Cost
Gains
Losses
Fair Value
$
19
$
$
(12
)
$
7
14,043
1,410
(1,641
)
13,812
2,392
1,737
(95
)
4,034
248,181
7,592
(1,926
)
253,847
$
264,635
$
10,739
$
(3,674
)
$
271,700
Amortized
Cost
Fair Value
$
240,115
$
244,479
1,727,525
1,824,099
2,136,211
2,275,067
2,199,180
2,424,934
6,303,031
6,768,579
1,926,830
1,960,259
$
8,229,861
$
8,728,838
Years Ended December 31,
2003
2002
2001
$
472,717
$
510,121
$
564,207
27,030
22,674
31,075
70,988
77,913
81,816
3,920
3,511
7,109
6,758
8,510
6,604
46,538
19,546
17,656
3,158
9,079
15,274
(23,796
)
(19,526
)
(11,959
)
$
607,313
$
631,828
$
711,782
Table of Contents
Years Ended December 31,
2003
2002
2001
$
3,754
$
(120,939
)
$
(90,727
)
1,084
2,305
(12,776
)
4,838
(118,634
)
(103,503
)
563
80
(356
)
(3,533
)
182
(15,157
)
$
1,868
$
(118,372
)
$
(119,016
)
Less than 12 months
12 Months or More
Total
Unrealized
Unrealized
Unrealized
Fair Value
Losses
Fair Value
Losses
Fair Value
Losses
$
306,623
$
(4,467
)
$
$
$
306,623
$
(4,467
)
6,783
(33
)
1,531
(8
)
8,314
(41
)
24,901
(554
)
24,901
(554
)
38,934
(374
)
536
(6
)
39,470
(380
)
493,234
(7,710
)
9,122
(157
)
502,356
(7,867
)
$
870,475
$
(13,138
)
$
11,189
$
(171
)
$
881,664
$
(13,309
)
$
$
$
$
$
$
11
(2
)
11
(2
)
36,644
(728
)
317
(2
)
36,961
(730
)
$
36,644
$
(728
)
$
328
$
(4
)
$
36,972
$
(732
)
Table of Contents
Table of Contents
As of December 31,
2003
2002
$
10,781
$
8,788
187,013
135,627
339,784
345,162
537,578
489,577
(253,816
)
(238,792
)
$
283,762
$
250,785
As of December 31,
2003
2002
$
367,766
$
303,049
141,804
134,010
(29,316
)
(35,965
)
$
480,254
$
401,094
Security
Interest Rate
Maturity
2003
2002
8.48
%
03/01/30
$
$
150,000
8.40
%
03/01/30
400,000
7.60
%
04/26/29
200,000
7.88
%
04/26/29
499,850
8.40
%
05/30/27
150,000
150,000
7.94
%
07/31/27
46,224
46,224
$
196,224
$
1,446,074
Table of Contents
Table of Contents
Years Ended December 31,
2003
2002
2001
$
6,335
$
11,688
$
256,045
8,814
8,910
11,721
15,149
20,598
267,766
59,313
92,209
(160,222
)
(757
)
(2,150
)
47
58,556
90,059
(160,175
)
$
73,705
$
110,657
$
107,591
December 31,
2003
2002
2001
35.0
%
35.0
%
35.0
%
(0.6
)
(0.5
)
(1.1
)
(1.3
)
(0.2
)
(1.9
)
(1.7
)
(2.2
)
(0.9
)
(0.8
)
0.2
0.8
0.4
19.2
(0.9
)
(1.1
)
(2.3
)
(1.7
)
(1.3
)
(2.5
)
1.1
5.4
(1.1
)
0.6
28.4
%
29.9
%
52.3
%
Table of Contents
December 31,
2003
2002
$
545,699
$
754,921
159,356
159,620
52,056
66,792
757,111
981,333
349,829
380,872
168,168
291,908
178,793
140,353
696,790
813,133
$
60,321
$
168,200
Expiration Year
Amount
$
22
5,225
202
81,518
4,735
$
91,702
Table of Contents
December 31,
2003
2002
$
19,160
$
19,660
5,000
5,000
$
24,160
$
24,660
For the Years Ended
December 31,
2003
2002
2001
19,660
20,160
20,160
(500
)
(500
)
19,160
19,660
20,160
Table of Contents
Table of Contents
Years Ended and at December 31,
2003
2002
2001
(Unaudited)
$
431,636
$
387,639
$
156,121
$
2,126,190
$
1,939,616
$
1,767,624
2003
2002
$
2,550,566
$
2,451,700
971,315
1,277,238
788,215
743,899
135,169
177,072
$
4,445,265
$
4,649,909
Table of Contents
Years Ended December 31,
2003
2002
2001
Long
Short
Long
Short
Long
Short
Duration
Duration
Total
Duration
Duration
Total
Duration
Duration
Total
$
1,851,451
$
6,266,163
$
8,117,614
$
1,961,426
$
5,852,112
$
7,813,538
$
1,935,214
$
5,927,158
$
7,862,372
22,272
531,652
553,924
59,813
455,853
515,666
82,663
152,953
235,616
(525,967
)
(1,988,799
)
(2,514,766
)
(652,059
)
(1,995,549
)
(2,647,608
)
(748,872
)
(2,106,931
)
(2,855,803
)
$
1,347,756
$
4,809,016
$
6,156,772
$
1,369,180
$
4,312,416
$
5,681,596
$
1,269,005
$
3,973,180
$
5,242,185
$
1,977,338
$
2,975,497
$
4,952,835
$
2,026,418
$
2,777,647
$
4,804,065
$
1,654,973
$
2,850,583
$
4,505,556
12,761
475,754
488,515
64,189
423,776
487,965
81,575
210,637
292,212
(936,785
)
(846,802
)
(1,783,587
)
(1,046,195
)
(810,660
)
(1,856,855
)
(691,138
)
(866,539
)
(1,557,677
)
$
1,053,314
$
2,604,449
$
3,657,763
$
1,044,412
$
2,390,763
$
3,435,175
$
1,045,410
$
2,194,681
$
3,240,091
Table of Contents
December 31, 2003
December 31, 2002
Future Policy
Claims and
Future Policy
Claims and
Benefits and
Unearned
Benefits
Benefits and
Unearned
Benefits
Expenses
Premiums
Payable
Expenses
Premiums
Payable
$
2,275,887
$
2,901
$
13,943
$
1,990,554
$
3,289
$
14,634
688,318
1,310
3,890
693,333
1,392
5,182
321,578
1,106
16,558
334,039
541
11,867
2,744,255
47,863
176,763
2,619,202
48,497
138,604
205,102
57,119
150,906
169,719
75,124
166,848
Table of Contents
December 31, 2003
December 31, 2002
Future Policy
Claims and
Future Policy
Claims and
Benefits and
Unearned
Benefits
Benefits and
Unearned
Benefits
Expenses
Premiums
Payable
Expenses
Premiums
Payable
13,054
394,293
11,270
456,642
3,940
1,374,551
3,949
1,298,704
66,711
266,482
42,629
201,700
7,295
39,312
7,753
44,545
1,148,941
621,128
1,134,626
535,832
758,633
403,267
1,074,053
445,657
1,022,926
18,142
803,031
16,719
2,048
33,574
1,482
37,206
$
6,235,140
$
3,133,847
$
3,512,809
$
5,806,847
$
3,207,636
$
3,374,140
Property and
Group Term Life
Group Disability
Medical
Warranty
$
399,342
$
1,135,696
$
249,075
$
524,748
(44
)
(30,379
)
(2,313
)
(295,541
)
399,298
1,105,317
246,762
229,207
250,583
355,160
871,045
388,946
(34,580
)
(7,266
)
(48,266
)
(26,834
)
216,003
347,894
822,779
362,112
149,752
68,638
682,678
276,582
51,664
215,040
188,070
93,917
201,416
283,678
870,748
370,499
413,885
1,169,533
198,793
220,820
42
33,148
11,089
280,175
24,277
1,018
438,204
1,203,699
209,882
500,995
(42
)
(33,148
)
(11,089
)
(280,175
)
Table of Contents
Property and
Group Term Life
Group Disability
Medical
Warranty
438,162
1,170,551
198,793
220,820
243,855
353,439
757,580
429,174
(28,586
)
(2,896
)
(42,585
)
2,231
215,269
350,543
714,995
431,405
148,484
63,809
577,233
286,272
50,667
225,450
147,746
116,802
199,151
289,259
724,979
403,074
454,280
1,231,835
188,809
249,151
2,362
66,869
12,891
286,681
$
456,642
$
1,298,704
$
201,700
$
535,832
(2,362
)
(66,869
)
(12,891
)
(286,681
)
454,280
1,231,835
188,809
249,151
228,257
374,336
860,772
529,501
(92,781
)
53,047
(58,369
)
(13,076
)
135,476
427,383
802,403
516,425
144,152
56,563
610,119
351,439
51,348
249,141
116,845
121,552
195,500
305,704
726,964
472,991
394,256
1,353,514
264,248
292,585
37
21,037
2,334
328,543
$
394,293
$
1,374,551
$
266,582
$
621,128
(1)
The other in reinsurance ceded and
other included $13,300 and $10,500 in 2002 and 2001,
respectively, of liability balances primarily related to Medical
Savings Accounts. In 2003, Medical Savings Accounts were
transferred to an external third party administrator.
(2)
Represents claims and benefits payable balances
assumed as part of the DBD acquisition.
Table of Contents
Table of Contents
Table of Contents
Table of Contents
December 31, 2003
December 31, 2002
Carry Value
Fair Value
Carry Value
Fair Value
$
958,197
$
958,197
$
610,694
$
610,694
8,728,838
8,728,838
8,035,530
8,035,530
456,440
456,440
271,700
271,700
932,791
1,035,138
841,940
969,247
68,185
68,185
69,377
69,377
275,878
275,878
684,350
684,350
461,473
505,466
181,181
213,882
3,805,058
3,805,058
3,411,616
3,411,616
$
777,854
$
768,857
$
667,319
$
659,449
3,805,058
3,805,058
3,411,616
3,411,616
Table of Contents
Pension Benefits
Retirement Health Benefits
2003
2002
2001
2003
2002
2001
$
(269,959
)
$
(236,500
)
$
(216,588
)
$
(46,405
)
$
(37,763
)
$
(33,334
)
(15,269
)
(12,166
)
(11,317
)
(2,311
)
(1,913
)
(1,662
)
(17,945
)
(16,806
)
(16,481
)
(3,144
)
(2,847
)
(2,604
)
(115
)
(2,524
)
(36,010
)
(18,141
)
(21,494
)
(340
)
(3,785
)
(2,960
)
(1,297
)
3,910
1,787
14,483
15,114
13,654
13,511
1,171
1,200
1,010
(324,184
)
(269,959
)
(236,500
)
(51,029
)
(46,405
)
(37,763
)
174,601
178,966
190,508
46,684
(24,961
)
(2,798
)
578
58,558
35,000
20,000
7,130
1,201
1,010
(14,483
)
(15,877
)
(14,404
)
(14,261
)
(1,172
)
(1,201
)
(1,010
)
263,966
174,601
178,966
6,536
Table of Contents
Pension Benefits
Retirement Health Benefits
2003
2002
2001
2003
2002
2001
(60,218
)
(95,358
)
(57,534
)
(44,493
)
(46,405
)
(37,763
)
91,531
84,215
22,756
1,684
1,777
(2,008
)
21,360
17,743
20,689
13,130
14,438
15,780
$
52,673
$
6,600
$
(14,089
)
$
(29,679
)
$
(30,190
)
$
(23,991
)
$
(13,551
)
$
(59,624
)
$
(14,089
)
$
(29,679
)
$
(30,190
)
$
(23,991
)
17,743
17,743
48,481
48,481
$
52,673
$
6,600
$
(14,089
)
$
(29,679
)
$
(30,190
)
$
(23,991
)
Pension Benefits
2003
2002
2001
$
324,184
$
269,959
$
236,500
277,455
234,225
196,186
263,966
174,601
178,966
Pension Benefits
Retirement Health Benefits
2003
2002
2001
2003
2002
2001
$
15,269
$
12,166
$
11,317
$
2,311
$
1,913
$
1,662
17,945
16,805
16,481
3,144
2,847
2,604
(19,433
)
(17,606
)
(15,849
)
(143
)
2,960
2,946
2,713
1,307
1,343
1,343
(171
)
2,207
(19
)
2,059
28
913
$
18,948
$
14,311
$
17,463
$
6,619
$
6,103
$
5,618
Table of Contents
Pension Benefits
Retirement Health Benefits
2003
2002
2001
2003
2002
2001
6.20
%
6.75
%
7.40
%
6.20
%
6.75
%
7.40
%
Pension Benefits
Retirement Health Benefits
2003
2002
2001
2003
2002
2001
6.75
%
7.40
%
7.56
%(1)
6.75
%
7.40
%
7.56
%(1)
8.25
%
8.25
%
9.00
%
8.25
%
8.25
%
9.00
%
(1)
7.75% for the first three months of 2001 and
7.50% for the last nine months of 2001.
Retirement Health Benefits
2003
2002
2001
10.0
%
11.0
%
12.0
%
5.0
%
5.0
%
5.0
%
2008
2008
2008
Retirement Health Benefits
2003
2002
2001
$
57
$
50
$
45
783
712
683
(55
)
(48
)
(47
)
(745
)
(677
)
(650
)
Table of Contents
Pension Benefits
Retirement Health Benefits
2003
2002
2001
2003
2002
2001
77.5%
61.7
%
63.3
%
77.5
%
0.0
%
N/A
21.4%
19.3
%
35.3
%
21.4
%
0.0
%
N/A
0.0%
0.0
%
0.0
%
0.0
%
0.0
%
N/A
1.1%
19.0
%
1.4
%
1.1
%
100.0
%
N/A
100.0%
100.0
%
100.0
%
100.0
%
100.0
%
N/A
Low
Target
High
20
%
25
%
30
%
65
%
75
%
85
%
Retirement
Pension
Health
Benefits
benefits
$
20,563
$
1,585
21,957
1,795
23,399
2,038
24,892
2,313
26,436
2,591
158,025
18,147
$
275,272
$
28,469
Table of Contents
December 31,
2003
2002
2001
$
1,313,594
$
1,094,765
$
1,283,966
960,944
1,002,585
1,075,473
(885,301
)
(782,473
)
(729,223
)
(531,329
)
4,444
(1,283
)
(4,122
)
$
1,393,681
$
1,313,594
$
1,094,765
Goodwill for the Year Ended
VOBA for the Year Ended
December 31,
December 31,
2003
2002
2001
2003
2002
2001
$
834,138
$
2,089,704
$
1,995,155
$
215,245
$
308,933
$
471,895
208,410
(16,310
)
(113,300
)
(23,848
)
(93,712
)
(146,480
)
(1,260,939
)
(5,615
)
5,373
(561
)
532
24
(172
)
$
828,523
$
834,138
$
2,089,704
$
191,929
$
215,245
$
308,933
Employee
Solutions
Health
Benefits
PreNeed
Consolidated
$
1,654,101
$
217,553
$
179,964
$
38,086
$
2,089,704
(1,260,939
)
(1,260,939
)
(2,367
)
56
7,632
52
5,373
$
390,795
$
217,609
$
187,596
$
38,138
$
834,138
(5,467
)
61
(1,178
)
969
(5,615
)
$
385,328
$
217,670
$
186,418
$
39,107
$
828,523
Table of Contents
Years Ended December 31,
2003
2002
2001
$
185,652
$
(1,001,199
)
$
98,053
113,300
185,652
(1,001,199
)
211,353
$
1.70
$
(9.17
)
$
1.94
Year
Amount
2004
$
21,178
2005
18,943
2006
17,096
2007
15,488
2008
13,903
Table of Contents
Year Ended December 31, 2003
Employee
Corporate &
Solutions
Health
Benefits
PreNeed
Other
Consolidated
$
2,361,815
$
2,009,248
$
1,256,430
$
529,279
$
$
6,156,772
186,850
490,430
139,956
188,224
42,853
607,313
1,868
1,868
68,277
68,277
129,482
32,255
53,793
5,315
11,138
231,983
2,678,147
2,090,933
1,450,179
722,818
124,136
7,066,213
899,229
1,317,046
920,948
520,540
3,657,763
732,470
71,295
105,384
909,149
857,730
517,988
433,192
41,558
69,521
1,919,989
114,133
114,133
205,822
205,822
2,489,429
1,906,329
1,354,140
667,482
389,476
6,806,856
188,718
184,604
96,039
55,336
(265,340
)
259,357
55,529
63,591
34,472
19,314
(99,201
)
73,705
$
133,189
$
121,013
$
61,567
$
36,022
$
(166,139
)
$
185,652
$
185,652
$
6,885,077
$
1,129,614
$
2,412,924
$
3,718,354
$
8,753,827
22,899,796
828,523
$
23,728,319
F-46
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Year Ended December 31, 2002
Employee
Corporate &
Solutions
Health
Benefits
PreNeed
Other
Consolidated
$
2,077,277
$
1,833,656
$
1,232,942
$
537,721
$
$
5,681,596
205,037
55,268
147,722
183,634
40,167
631,828
(118,372
)
(118,372
)
79,801
79,801
10,672
10,672
118,949
22,716
74,324
5,123
25,563
246,675
2,401,263
1,911,640
1,454,988
726,478
37,831
6,532,200
755,140
1,222,049
944,593
513,393
3,435,175
714,178
64,029
96,550
1,428
876,185
735,008
482,057
422,230
39,934
52,818
1,732,047
118,396
118,396
2,204,326
1,768,135
1,366,823
649,877
172,642
6,161,803
196,937
143,505
88,165
76,601
(134,811
)
370,397
64,782
49,059
31,048
26,943
(61,175
)
110,657
$
132,155
$
94,446
$
57,117
$
49,658
$
(73,636
)
$
259,740
(1,260,939
)
$
(1,001,199
)
$
6,937,529
$
1,058,935
$
2,432,411
$
3,418,977
$
7,597,065
$
21,444,917
834,138
$
22,279,055
F-47
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Year Ended December 31, 2001
Employee
Corporate
Solutions
Health
Benefits
PreNeed
& Other
Consolidated
$
1,906,426
$
1,837,839
$
933,594
$
506,716
$
57,610
$
5,242,185
218,213
58,073
144,378
179,093
112,025
711,782
(119,016
)
(119,016
)
68,296
68,296
61,688
61,688
97,685
14,229
39,568
3,336
67,121
221,939
2,222,324
1,910,141
1,117,540
689,145
247,724
6,186,874
639,905
1,306,477
737,802
485,902
70,005
3,240,091
733,186
42,967
85,008
14,542
875,703
711,137
452,528
316,310
34,698
105,092
1,619,765
132,371
132,371
2,084,228
1,801,972
1,054,112
605,608
322,010
5,867,930
138,096
108,169
63,428
83,537
(74,286
)
318,944
39,909
37,548
22,184
29,260
(21,310
)
107,591
$
98,187
$
70,621
$
41,244
$
54,277
$
(52,976
)
$
211,353
(113,300
)
$
98,053
$
7,018,257
$
1,066,290
$
2,117,443
$
3,316,830
$
8,841,353
$
22,360,173
2,089,704
$
24,449,877
F-48
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company operates primarily in the United
States and Canada. The following table summarizes selected
financial information by geographic location for the years ended
or at December 31:
Long-lived
Location
Revenues
Assets
$
6,762,764
$
274,230
303,449
9,532
$
7,066,213
$
283,762
$
6,335,645
$
245,936
196,555
4,849
$
6,532,200
$
250,785
$
6,001,842
$
230,006
185,032
3,467
$
6,186,874
$
233,473
Revenue is based in the country where the product was sold and long-lived assets are based on the physical location of those assets. The Company has no reportable major customers.
21. | Incentive Plans |
Assurant Appreciation Incentive Rights Plan (AAIR Plan): |
Since January 1, 1999, the Company has maintained the Assurant Appreciation Incentive Rights Plan (formerly the Fortis Appreciation Incentive Rights Plan), which provides key employees with the right to receive long-term incentive cash compensation based on the appreciation in value of incentive units of the Company and incentive units of each of its operating business segments. The AAIR Plan is administered by a committee appointed by the Companys board of directors. See note 25 for subsequent amendments to the AAIR Plan.
The Company accounts for the AAIR Plan as a variable plan in accordance with the provisions of APB 25 and its interpretations. Therefore, compensation expense is recognized based on the intrinsic value method.
The value of each right is based on an independent valuation of the Company performed by a qualified appraiser. Each year, the appraiser determines a fair market value for Assurant, Inc. and the individual business segments. Based on this valuation, phantom share prices are established for Assurant, Inc. and each business segment. These share prices are calculated by dividing the market value of Assurant, Inc. or a business segment by the number of outstanding phantom shares in Assurant, Inc. or in that segment.
The phantom share price established for a given grant year becomes the strike price for that year and the exercise price for prior grant years. When the phantom share price determined by subsequent annual valuations increases above the strike price, the rights accrue intrinsic value that will be paid in cash when exercised.
Employees of Assurant, Inc. receive 75% of their award value in Assurant, Inc. incentive rights and the remaining 25% in equal portions of incentive rights from the business segments. Segment participants receive 75% of their award value from their own particular business segment and 25% from Assurant, Inc.
F-49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The incentive rights vest over a three-year period from the date of grant and are exercisable for a period of 7 years from the date the rights are fully vested. Unexercised vested incentive rights are exercised automatically following the tenth anniversary of the date of grant. If upon expiration of the award the strike price is below the exercise price, then the award is automatically forfeited.
The Company recognized $27,072, $19,570, and $7,605 of compensation expense for the AAIR Plan in 2003, 2002, and 2001, respectively.
Upon the closing of the IPO, the AAIR Plan was amended to provide for the cash-out and replacement of Assurant, Inc. incentive rights with stock appreciation rights on the Assurant common stock. The business segment rights outstanding under the plan were not changed or effected. The conversion of outstanding Assurant, Inc. incentive rights occurred as described in this paragraph. The Assurant, Inc. incentive rights were valued as of December 31, 2003 using a special valuation method, as follows. The measurement value of each Assurant, Inc. incentive right as of December 31, 2002, was adjusted to reflect dividends paid by Assurant, Inc., consistent with past practices; such adjusted value was then multiplied by the arithmetic average of the change during calendar year 2003 in the Dow Jones Life Insurance Index, the Dow Jones Property Casualty Index, and the Dow Jones Healthcare Providers Index; and the result became the measurement value of Assurant, Inc. incentive rights as of December 31, 2003.
On January 18, 2004, each Assurant, Inc. incentive right then outstanding under the plan was cashed out for a cash payment equal to the difference, if any, between the measurement value of the Assurant, Inc. incentive rights as of December 31st immediately preceding the date of grant, and the measurement value of that right determined as of December 31, 2003, pursuant to the special valuation. Each outstanding Assurant, Inc. incentive right, whether or not vested, was cancelled effective as of the date it was cashed out. Following the cash-out and cancellation of Assurant, Inc. incentive rights, Assurant granted to each participant whose rights were cashed out a number of stock appreciation rights on Assurants common stock (referred to as replacement rights). The number of replacement rights granted to a participant was equal (1) the measurement value of the participants cashed-out Assurant, Inc. incentive rights, divided by (2) the IPO price of $22 a share. Each replacement right that replaces a vested cashed-out right was vested immediately, and each replacement right that replaces a non-vested cashed-out right will become vested on the vesting date for the corresponding cashed-out right, but no replacement right, whether or not vested, may be exercised sooner than one year from the closing date of the IPO. After that waiting period, each replacement right will be exercisable for the remaining term of the corresponding cancelled right.
Stock Option Plan |
In contemplation of the IPO, the Companys Stock Option Plan was terminated effective as of September 22, 2003, and all stock options thereunder were cancelled in exchange for a payment of the fair value of such options, as determined by an independent third party. Payments totaling $2,237 were made in the fourth quarter. There is no further obligation associated with the Companys Stock Option Plan.
The Company accounted for the Stock Option Plan as a variable plan in accordance with the provisions of APB 25 and its interpretations. Therefore, compensation expense was recognized based on the intrinsic value method. Compensation cost charged to income was $0, $0, and $(1,081) (represents reversal of expense accrual due to reduction of intrinsic value) for the years ended December 31, 2003, 2002 and 2001, respectively.
F-50
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Summarized information about the Companys
Stock Option Plan as of December 31, 2003, 2002 and 2001,
and changes during the years ended on those dates is presented
below:
2003
2002
2001
Weighted-
Weighted-
Weighted-
Average
Average
Average
Options
Exercise Price
Options
Exercise Price
Options
Exercise Price
340,700
$
53.03
314,250
$
46.66
243,601
$
49.49
93,000
$
29.04
83,000
$
47.75
72,400
$
46.25
(56,550
)
$
55.71
(1,751
)
$
51.80
(433,700
)
$
52.54
340,700
$
45.42
314,250
$
48.73
189,800
$
54.84
186,350
$
48.47
$
14.21
$
16.45
Assurant Investment Plan (AIP) |
The Company has adopted the AIP (formerly the Fortis Investment Plan), which provides key employees the ability to exchange a portion of their compensation for options to purchase certain third-party mutual funds. The plan became effective as of January 1, 1999 and is administered by the Companys Senior Vice President-Compensation and Benefits, who is referred to as the administrator. Under the AIP, a participant may exchange all or a portion of his or her eligible compensation for a specific number of options under the plan. Each option represents the right to purchase shares of Company designated third-party mutual funds, as selected by the participant. Each option is fully vested and exercisable on the grant date. Options may not be exercised more than twice in any calendar year, except with the consent of the administrator. For most options, the exercise period generally will expire 120 months after the participants death, disability or retirement or 60 months after the participants termination of employment for any other reason. Until the options are exercised, a participant may instruct the administrator to exchange some or all of the options to purchase different underlying mutual fund units. Employee compensation exchanged for options is included as compensation expense prior to the exchange. Subsequent to the exchange, the Company accounts for invested assets in accordance with Financial Accounting Standard 115, Accounting for Certain Investments in Debt and Equity Securities, and as such, the Company marks-to-market the AIP investment balances on a quarterly basis. This quarterly mark-to-market adjustment equally impacts the AIP investment and the AIP liability balance. When options are exercised, the investment and liability balances are reduced accordingly. The amounts included in other investments and other liabilities were $57,451 and $46,620 at December 31, 2003 and 2002, respectively.
F-51
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Companys components of other
comprehensive income (loss) net of tax at December 31 are
as follows:
22.
Other Comprehensive Income (Loss)
Foreign Currency
Pension
Translation
Unrealized Gains on
Under-
Accumulated Other
Adjustment
Securities
funding
Comprehensive Income
$
(2,225
)
$
3,439
$
$
1,214
(5,633
)
102,623
96,990
(7,858
)
106,062
98,204
8,332
173,699
(35,250
)
146,781
474
279,761
(35,250
)
244,985
16,217
57,325
73,542
$
16,691
$
337,086
$
(35,250
)
$
318,527
23. | Related Party Transactions |
In the ordinary course of business, the Company has entered into a number of agreements with Fortis.
Historically, Fortis maintained a $1,000,000 commercial paper facility that prior to the IPO the Company had been able to access (via intercompany loans) for up to $750,000. The Company has used the commercial paper facility to cover any cash shortfalls, which may occur from time to time. In mid-December 2003, the Company used the commercial paper facility in the amount of $74,991 for three days to cover a cash shortfall in the early extinguishment of the Mandatorily Redeemable Preferred Securities of Subsidiary Trust. There were no intercompany loans with Fortis associated with this commercial paper facility during 2002. The Company had no outstanding intercompany loans with Fortis related to this commercial paper facility at year-end December 31, 2003 and 2002.
During 2003, 2002 and 2001, the Company paid $644, $749, and $516, respectively, to Fortis for costs representing salary, benefits and other expenses of a director of the Company, who was then an employee of a Fortis subsidiary, and his support staff. The Company discontinued these payments as of October 3, 2003.
The other related party transactions are disclosed in notes 1, 8, 11, 12, and 25.
F-52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
24. | Quarterly Results of Operations (Unaudited) |
The Companys quarterly results of
operations for the years ended December 31, 2003 and 2002
are summarized in the tables below:
Three Month Periods Ended
March 31
June 30
September 30
December 31
$
1,731,740
$
1,722,601
$
1,775,577
$
1,836,295
110,367
137,606
145,776
(134,392
)(1)
73,237
90,650
99,398
(77,633
)
$
1.01
$
1.26
$
1.33
$
(1.23
)
$
0.67
$
0.83
$
0.91
$
(0.71
)
Three Month Periods Ended
March 31
June 30
September 30
December 31
$
1,613,301
$
1,611,690
$
1,625,425
$
1,681,784
93,279
108,514
83,888
84,716
(1,196,753
)
77,481
57,665
60,408
$
0.85
$
0.99
$
0.77
$
0.78
$
(10.96
)
$
0.71
$
0.53
$
0.55
(1) | Includes pre-tax interest premium on redemption of preferred securities of subsidiary trusts of $205,822. |
25. | Subsequent Events |
In connection with the IPO (see Note 1) the board of directors of Assurant approved certain employee benefit programs as follows:
2004 Long-Term Incentive Plan |
The 2004 Long-Term Incentive Plan was effective on February 5, 2004.
The 2004 Long-Term Incentive Plan authorizes the granting of awards to employees, officers, and directors in the following forms: (1) options to purchase shares of Assurants common stock, which may be non-statutory stock options or incentive stock options under the U.S. tax code; (2) stock appreciation rights, which give the holder the right to receive the difference between the fair market value per share on the date of exercise over the grant price; (3) performance awards, which are payable in cash or stock upon the attainment of specified performance goals; (4) restricted stock, which is subject to restrictions on transferability and subject to forfeiture on terms set by the Compensation Committee; (5) dividend equivalents, which entitle the participant to payments equal to any dividends paid on the shares of stock underlying an award; and (6) other stock-based awards in the discretion of the Compensation Committee, including unrestricted stock grants.
There are 10,000,000 shares reserved and available for issuance under the plan.
F-53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Upon the closing of the IPO, 68,976 shares of common stock of Assurant, Inc. were granted to certain officers of the Company on February 5, 2004. Any awards will be made at the discretion of the Compensation Committee.
Executive Management Incentive Plan |
The Executive Management Incentive Plan went into effect January 1, 2004. Participation in the Executive Management Incentive Plan is limited to senior officers of the Company and its subsidiaries who are selected to participate in the plan for a given year by the Compensation Committee. The plan provides for the payment of annual monetary awards to each participant equal to a percentage of such participants base salary based upon the achievement of certain designated performance goals. The amount of awards under the plan will be determined at the discretion of the Compensation Committee.
Assurant IPO |
See note 1 and 21 for a discussion of the IPO, merger and related activities.
The Company issued 32,976,854 shares to Fortis Insurance N.V. simultaneously with the closing of the IPO in exchange for a $725,500 capital contribution. The Company also issued 68,976 shares of Common Stock to certain officers of the Company.
On February 5, 2004, the Company received a $725,500 capital contribution from Fortis simultaneously with the closing of the IPO. The proceeds from that contribution were used to repay the $650,000 of outstanding indebtedness under the senior bridge credit facility and $75,500 of outstanding indebtedness under the $1,100,000 senior bridge credit facility.
Assurant Senior Notes |
On February 18, 2004, the Company issued two series of senior notes in an aggregate principal amount $975,000. The first series is $500,000 in principal amount, bears interest at 5.63% per year and is payable in a single installment due February 15, 2014. The second series is $475,000 in principal amount, bears interest at 6.75% per year and is payable in a single installment due February 15, 2034.
Interest on the senior notes is payable semi-annually on February 15 and August 15 of each year, commencing August 15, 2004. The senior notes are unsecured obligations and rank equally with all of the Companys other senior unsecured indebtedness. The senior notes are not redeemable prior to maturity. The net proceeds from the issuance of the senior notes were used to repay the remaining portion of the Companys outstanding indebtedness under the $1,100,000 senior bridge facility.
At the time of the offering of the Companys senior notes, the Company entered into a registration rights agreement. The registration rights agreement requires the Company to file a registration statement under the Securities Act to permit the exchange of the senior notes for registered notes having nearly identical terms as the senior notes or to permit the registered resale of the senior notes. If the Company fails to comply with the filing requirements under the registration rights agreement within certain time periods, the interest rates on the senior notes are subject to increase.
The Company is subject to several debt covenants associated with these senior notes.
As of March 11, 2004, the Company is in compliance with all of the covenants associated with these senior notes.
On January 30, 2004, the Company entered into a $500,000 senior revolving credit facility with a syndicate of banks, which will be available for working capital and other general corporate purposes. The revolving credit facility is unsecured and is available until February 2007.
F-54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The revolving credit facility contains restrictive covenants and also requires that the Company maintain certain specified minimum ratios or thresholds.
As of March 11, 2004, the Company is in compliance with all of the covenants associated with this senior revolving credit facility.
26. | Commitments and Contingencies |
The Company and its subsidiaries lease office
space and equipment under operating lease arrangements. Certain
facility leases contain escalation clauses based on increases in
the lessors operating expenses. At December 31, 2003,
the aggregate future minimum lease payment under operating lease
agreements that have initial or non-cancelable terms in excess
of one year are:
$
39,622
35,788
31,618
25,631
23,171
44,533
$
200,363
Rent expense was $40,463, $43,412 and $32,546 for 2003, 2002 and 2001, respectively.
In the normal course of business, letters of credit are issued primarily to support reinsurance arrangements. These letters of credit are supported by commitments with financial institutions. The Company had approximately $117,000 and $109,000 of letters of credit outstanding as of December 31, 2003 and December 31, 2002, respectively. Additionally, as of December 31, 2003, the Company had an unused $50,000 letter of credit facility.
The Company is regularly involved in litigation in the ordinary course of business, both as a defendant and as a plaintiff. The Company may from time to time be subject to a variety of legal and regulatory actions relating to the Companys current and past business operations. While the Company cannot predict the outcome of any pending or future litigation, examination or investigation, the Company does not believe that any pending matter will have a material adverse effect on the Companys financial condition or results of operations.
The Solutions segment is subject to a number of pending actions, primarily in the State of Mississippi, many of which allege that the Companys credit insurance products were packaged and sold with lenders products without buyer consent. The judicial climate in Mississippi is such that the outcome of these cases is extremely unpredictable. The Company has been advised by legal counsel that the Company has meritorious defenses to all claims being asserted against the Company. The Company believes, based on information currently available, that the amounts accrued are adequate.
American Bankers Insurance Company, part of the Solutions segment, on behalf of certain of its subsidiaries, including American Bankers Insurance Company (ABIC) and American Bankers Life Assurance Company (ABLAC) previously entered into a Consent Order and a comprehensive Compliance Plan with 43 participating states relating to compliance with the often disparate state insurance laws, regulations and administrative interpretations which have been difficult to apply to the marketing of ABIGs credit insurance products through financial institutions, retailers and other entities offering consumer financing as a regular part of their business. In addition to an initial settlement of $12,000, ABIG agreed to a multi-state market conduct examination commencing November 23, 1999, for review of ABIGs implementation of the Compliance Plan. A final report was issued on December 19, 2001, and ABIC paid a final settlement of $3,000 to participating states.
F-55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In February 2002, the State of Minnesota initiated an enforcement action against ABIC and ABLAC, two of the Companys subsidiaries, in connection with certain alleged regulatory violations. Thereafter, ABIC and ABLAC filed suit in Minnesota state court seeking to enjoin the enforcement action because the alleged regulatory matters included within the enforcement action were resolved as a part of the above-described Consent Order and Compliance Plan to which Minnesota was a party. In February 2003, the State of Minnesota, ABIC and ABLAC reached a final settlement of all matters included within the enforcement action and the separate state court action filed by ABIC and ABLAC. Pursuant to the settlement, ABIC and ABLAC each agreed to pay $100 to the State of Minnesota and agreed to compensate the state for its investigative costs which totaled $1,800. In addition, ABIC and ABLAC agreed to stop selling insurance in Minnesota for five years, though it could apply for reinstatement in 20 months. Other member companies of the Solutions segment with product lines that overlap those offered by ABIC and ABLAC currently remain authorized to do business in the State of Minnesota. The Company does not believe that the effect of the settlement during the next five years will have a material impact on the Companys financial condition or results of its operations.
On October 1, 2003, a grand jury in Mower County, Minnesota issued an indictment of ABIC and two corporate officers of the Solutions segment. The indictment alleges that ABIC and its two named corporate officers each violated the Minnesota Fair Campaign Practices Act in connection with two contributions by ABIC to the Republican National State Election Committee totaling $15. The maximum penalty for ABIC is a $40 fine for each alleged violation and/or forfeiture of ABICs license to conduct business in Minnesota. In addition, the maximum monetary penalty for each officer would be $20 per violation, which the Company may reimburse under certain circumstances. Other member companies of the Solutions segment with product lines that overlap those offered by ABIC currently remain authorized to conduct business in the State of Minnesota. ABIC believes that it has meritorious defenses to the claims being asserted against it, and the Company believes, based on information currently available, that any liabilities that could result are not expected to have a material effect on the Companys financial condition or results of operations.
In addition, one of the Companys 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 other reinsurers (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 are seeking to avoid certain treaties on various grounds, including material misrepresentation and non-disclosure by the ceding companies and intermediaries involved in the programs. Similarly, some of the retrocessionaires are seeking avoidance of certain treaties with ARIC and the other reinsurers and some reinsureds are seeking collection of disputed balances under some of the treaties. The disputes 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, arbitration and/or litigation between multiple layers of retrocessionaires, reinsurers, ceding companies and intermediaries, including brokers, in an effort to resolve these disputes. Many of those disputes relating to the 1995 program year, including those involving ARIC, were settled on December 3, 2003. Loss accruals previously established relating to the 1995 program year were adequate. However, the Companys exposure under the 1995 program year was less significant than the exposure remaining under the 1996 and 1997 program years. The Company believes, based on information currently available, that the amounts accrued for currently outstanding disputes are adequate. This loss accrual is managements best estimate. However, the inherent uncertainty of arbitrations and lawsuits, including the uncertainty of estimating whether any settlements the Company may enter into in the future would be on favorable terms, makes it difficult to predict the outcomes with certainty.
F-56
ASSURANT, INC. AND SUBSIDIARIES
Schedule I Summary of
Investments
Amount at
Which Shown in
Amortized Cost
Fair Value
Balance Sheet
(In thousands)
$
1,646,782
$
1,681,746
$
1,681,746
187,539
203,679
203,679
306,554
317,748
317,748
910,810
984,141
984,141
5,178,176
5,541,524
5,541,524
8,229,861
8,728,838
8,728,838
13
13
13
1,037
2,498
2,498
1,310
1,556
1,556
434,463
452,373
452,373
436,823
456,440
456,440
932,791
932,791
68,185
68,185
275,878
275,878
461,473
461,473
$
10,405,011
$
10,923,605
F-57
ASSURANT, INC. AND SUBSIDIARIES
Schedule II Condensed Balance Sheet
F-58
ASSURANT, INC. AND SUBSIDIARIES
Schedule II Condensed
Statement of Operations
Years Ended December 31,
2003
2002
2001
(In thousands)
$
99,500
$
186,550
$
615,400
74,281
81,629
76,180
99,605
11,638
17,570
24,435
185,419
285,749
815,620
52,755
32,697
69,375
114,133
118,395
132,371
205,822
372,710
151,092
201,746
(187,291
)
134,657
613,874
(105,298
)
(16,390
)
(4,338
)
(81,993
)
151,047
618,212
267,645
(1,152,246
)
(520,159
)
$
185,652
$
(1,001,199
)
$
98,053
F-59
ASSURANT, INC. AND SUBSIDIARIES
Schedule II Condensed Cash
Flows
Years Ended December 31,
2003
2002
2001
(In thousands)
$
185,652
$
(1,001,199
)
$
98,053
(267,645
)
1,152,246
520,159
53,154
161,739
(199,389
)
16,850
21,605
19,195
(96,113
)
(97,923
)
54,374
51,078
1,281
(1,790
)
40,345
11,131
37,146
6,798
2,780
11,900
(9,881
)
251,660
539,648
(821,264
)
(136,422
)
(5,000
)
203,665
(142,921
)
770,000
(31,996
)
(39,306
)
(94,300
)
(83,260
)
(175,728
)
(38,556
)
(1,249,850
)
(3,664
)
(500
)
(500
)
74,991
216,924
(74,991
)
(455,907
)
2,400,000
(650,000
)
(181,187
)
(41,876
)
(109,298
)
(963
)
(1,052
)
(1,053
)
317,500
(43,428
)
(352,998
)
224,359
32,504
148,094
238,875
206,371
58,277
$
463,234
$
238,875
$
206,371
F-60
ASSURANT, INC. AND SUBSIDIARIES
As of and for the Years Ended
December 31, 2003, 2002 and 2001
Schedule III Supplementary
Insurance Information
Benefits
Amortization
Future
Claims,
of Deferred
Property and
Deferred
Policy
Claims and
Net
Losses and
Policy
Other
Casualty
Acquisition
Benefits,
Unearned
Benefits
Premium
Investment
Settlement
Acquisition
Operating
Premiums
Segment
Cost
Expenses
Premiums
Payable
Revenue
Income
Expenses
Costs
Expenses
Written
(In thousands)
$
1,088,324
$
321,578
$
2,933,601
$
1,086,098
$
2,361,815
$
186,850
$
899,229
$
727,605
$
862,595
$
1,226,565
1,307
23,525
1,800,595
1,256,430
139,956
920,948
433,192
141,396
197,919
124,148
423,253
2,009,248
49,430
1,317,046
71,295
517,988
161,067
2,971,388
4,657
19,529
529,279
188,224
520,540
86,401
60,541
1,587
2,744,255
47,916
183,334
42,853
69,521
$
1,393,681
$
6,235,140
$
3,133,847
$
3,512,809
$
6,156,772
$
607,313
$
3,657,763
$
885,301
$
1,943,837
$
1,226,565
$
1,018,749
$
334,039
$
3,013,731
$
1,036,351
$
2,077,277
$
205,037
$
755,140
$
638,074
$
811,112
$
1,109,819
22,198
1,791,680
1,232,942
147,722
944,593
422,230
158,142
160,484
118,432
376,678
1,833,656
55,268
1,222,049
64,029
482,057
136,703
2,693,122
4,775
19,897
537,721
183,634
513,393
80,370
56,114
2,619,202
48,500
149,534
40,167
54,246
$
1,313,594
$
5,806,847
$
3,207,636
$
3,374,140
$
5,681,596
$
631,828
$
3,435,175
$
782,473
$
1,825,759
$
1,109,819
$
1,906,426
$
218,213
$
639,905
$
613,607
$
830,716
$
1,058,619
933,594
144,378
737,802
316,310
1,837,839
58,073
1,306,477
42,967
452,528
506,716
179,093
485,902
64,936
54,770
57,610
112,025
70,005
7,713
111,921
$
5,242,185
$
711,782
$
3,240,091
$
729,223
$
1,766,245
$
1,058,619
F-61
ASSURANT, INC. AND SUBSIDIARIES
For the Year Ended December 31,
2003
Schedule IV
Reinsurance
Percentage
Ceded to
Assumed
of Amount
Other
from Other
Assumed
Gross Amount
Companies
Companies
Net Amount
to Net
(In thousands)
$
169,062,847
$
56,441,995
$
724,377
$
113,345,229
0.6
%
1,351,698
637,049
57,459
772,108
7.4
%
4,502,527
949,336
240,063
3,793,254
6.3
%
2,263,389
928,381
256,402
1,591,410
16.1
%
$
8,117,614
$
2,514,766
$
553,924
$
6,156,772
9.0
%
1,338,138
859,514
22,702
501,326
4.5
%
2,686,337
445,981
205,261
2,445,617
8.4
%
928,360
478,092
260,552
710,820
36.7
%
$
4,952,835
$
1,783,587
$
488,515
$
3,657,763
13.4
%
F-62
ASSURANT, INC. AND SUBSIDIARIES
For the Year Ended December 31,
2002
Schedule IV
Reinsurance
Percentage
Ceded to
Assumed
of Amount
Other
from Other
Assumed
Gross Amount
Companies
Companies
Net Amount
to Net
(In thousands)
$
190,535,470
$
67,628,124
$
2,448,687
$
125,356,033
2.0
%
1,792,276
796,026
100,532
1,096,782
9.2
%
4,065,768
1,046,245
268,211
3,287,734
8.2
%
1,955,494
805,337
146,923
1,297,080
11.3
%
$
7,813,538
$
2,647,608
$
515,666
$
5,681,596
9.1
%
1,754,586
1,036,256
123,395
841,725
14.8
%
2,343,568
462,206
211,440
2,092,802
10.1
%
705,911
358,393
153,130
500,648
30.6
%
$
4,804,065
$
1,856,855
$
487,965
$
3,435,175
14.2
%
F-63
ASSURANT, INC. AND SUBSIDIARIES
For the Year Ended December 31,
2001
Schedule IV
Reinsurance
Percentage
Ceded to
Assumed
of Amount
Other
from Other
Assumed
Gross Amount
Companies
Companies
Net Amount
to Net
(In thousands)
$
194,825,776
$
77,457,972
$
8,834,532
$
126,202,336
7.0
%
2,013,923
967,318
68,151
1,114,756
6.1
%
4,202,525
1,196,376
94,514
3,100,663
3.0
%
1,645,924
692,109
72,951
1,026,766
7.1
%
$
7,862,372
$
2,855,803
$
235,616
$
5,242,185
4.5
%
1,518,454
718,510
101,565
901,509
11.3
%
2,372,343
507,843
71,683
1,936,183
3.7
%
614,759
331,324
118,964
402,399
29.6
%
$
4,505,556
$
1,557,677
$
292,212
$
3,240,091
9.0
%
F-64
ASSURANT, INC. AND SUBSIDIARIES
As of December 31, 2003, 2002 and
2001
Schedule V Valuation and
Qualifying Accounts
Additions
Balance at
Charged to
Charged to
Balance at
Beginning of
Costs and
Other
End of
Year
Expenses
Accounts
Deductions
Year
(In thousands)
$
19,106
$
495
$
$
747
$
18,854
35,487
5,189
12,227
28,449
478
288
490
389
867
$
55,071
$
5,972
$
490
$
13,363
$
48,170
$
25,091
$
$
$
5,985
19,106
30,929
6,488
1,930
35,487
1,232
276
55
1,085
478
$
57,252
$
6,764
$
55
$
9,000
$
55,071
$
25,091
$
$
$
$
25,091
21,152
14,153
4,376
30,929
646
1,041
70
525
1,232
$
46,889
$
15,194
$
70
$
4,901
$
57,252
F-65
EXHIBIT 10.27
ASSURANT, INC. EXECUTION COPY
TO
SUNTRUST BANK,
Trustee
SENIOR DEBT INDENTURE
Dated as of February 18, 2004
Table of Contents
PAGE ---- ARTICLE I DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION SECTION 1.1 Definitions ............................................................... 1 SECTION 1.2 Compliance Certificates and Opinions ...................................... 9 SECTION 1.3 Form of Documents Delivered to Trustee .................................... 9 SECTION 1.4 Acts of Holders; Record Dates ............................................. 10 SECTION 1.5 Notices, Etc., to Trustee and Company ..................................... 11 SECTION 1.6 Notice to Holders; Waiver ................................................. 11 SECTION 1.7 Conflict with Trust Indenture Act ......................................... 12 SECTION 1.8 Effect of Headings and Table of Contents .................................. 12 SECTION 1.9 Successors and Assigns .................................................... 12 SECTION 1.10 Separability Clause ....................................................... 12 SECTION 1.11 Benefits of Indenture ..................................................... 12 SECTION 1.12 Governing Law ............................................................. 12 SECTION 1.13 Legal Holidays ............................................................ 12 SECTION 1.14 Language of Notices ....................................................... 13 SECTION 1.15 Limitation on Individual Liability ........................................ 13 ARTICLE II SECURITY FORMS SECTION 2.1 Forms Generally ........................................................... 13 SECTION 2.2 Form of Face of Security .................................................. 14 SECTION 2.3 Form of Reverse of Security ............................................... 19 SECTION 2.4 Form of Trustee's Certificate of Authentication ........................... 26 ARTICLE III THE SECURITIES SECTION 3.1 Amount Unlimited; Issuable in Series ...................................... 26 SECTION 3.2 Denominations ............................................................. 29 SECTION 3.3 Execution, Authentication, Delivery and Dating ............................ 29 SECTION 3.4 Temporary Securities ...................................................... 30 SECTION 3.5 Registration, Registration of Transfer and Exchange ....................... 31 |
SECTION 3.6 Additional Provisions Applicable to Transfer and Exchange of Restricted Securities ..................................................... 34 SECTION 3.7 [Reserved] ................................................................ 35 SECTION 3.8 Form of Certificate to be Delivered in Connection with Transfers Pursuant to Regulation S .................................................. 35 SECTION 3.9 Mutilated, Destroyed, Lost and Stolen Securities .......................... 37 SECTION 3.10 Payment of Interest; Interest Rights Preserved ............................ 37 SECTION 3.11 Persons Deemed Owners ..................................................... 39 SECTION 3.12 Cancellation .............................................................. 39 SECTION 3.13 Interest .................................................................. 39 SECTION 3.14 Form and Payment .......................................................... 40 SECTION 3.15 Global Securities ......................................................... 40 SECTION 3.16 CUSIP Numbers ............................................................. 42 ARTICLE IV SATISFACTION AND DISCHARGE; DEFEASANCE SECTION 4.1 Satisfaction and Discharge of Indenture ................................... 42 SECTION 4.2 Defeasance and Discharge .................................................. 44 SECTION 4.3 Covenant Defeasance ....................................................... 44 SECTION 4.4 Conditions to Defeasance or Covenant Defeasance ........................... 45 SECTION 4.5 Application of Trust Money ................................................ 46 SECTION 4.6 Indemnity for U.S. Government Obligations ................................. 46 ARTICLE V REMEDIES SECTION 5.1 Events of Default ......................................................... 46 SECTION 5.2 Acceleration of Maturity; Rescission and Annulment ........................ 48 SECTION 5.3 Collection of Indebtedness and Suits for Enforcement by Trustee ........... 50 SECTION 5.4 Trustee May File Proofs of Claim .......................................... 50 SECTION 5.5 Trustee May Enforce Claims Without Possession of Securities ............... 51 SECTION 5.6 Application of Money Collected ............................................ 51 SECTION 5.7 Limitation on Suits ....................................................... 52 SECTION 5.8 Unconditional Right of Holders to Receive Principal, Premium and Interest .............................................................. 53 SECTION 5.9 Restoration of Rights and Remedies ........................................ 53 |
SECTION 5.10 Rights and Remedies Cumulative ............................................ 53 SECTION 5.11 Delay or Omission Not Waiver .............................................. 53 SECTION 5.12 Control by Holders ........................................................ 53 SECTION 5.13 Waiver of Past Defaults ................................................... 54 SECTION 5.14 Undertaking for Costs ..................................................... 54 ARTICLE VI THE TRUSTEE SECTION 6.1 Certain Duties and Responsibilities ....................................... 55 SECTION 6.2 Notice of Defaults ........................................................ 56 SECTION 6.3 Certain Rights of Trustee ................................................. 56 SECTION 6.4 Not Responsible for Recitals or Issuance of Securities .................... 58 SECTION 6.5 May Hold Securities ....................................................... 58 SECTION 6.6 Money Held in Trust ....................................................... 58 SECTION 6.7 Compensation and Reimbursement ............................................ 58 SECTION 6.8 Disqualification; Conflicting Interests ................................... 59 SECTION 6.9 Corporate Trustee Required; Eligibility ................................... 59 SECTION 6.10 Resignation and Removal; Appointment of Successor ......................... 59 SECTION 6.11 Acceptance of Appointment by Successor .................................... 61 SECTION 6.12 Merger, Conversion, Consolidation or Succession to Business. .............. 62 SECTION 6.13 Preferential Collection of Claims Against Company ......................... 63 SECTION 6.14 Appointment of Authenticating Agent ....................................... 63 ARTICLE VII HOLDERS LISTS AND REPORTS BY TRUSTEE AND COMPANY SECTION 7.1 Company to Furnish Trustee Names and Addresses of Holders ................. 65 SECTION 7.2 Preservation of Information; Communications to Holders .................... 65 SECTION 7.3 Reports by Trustee ........................................................ 67 SECTION 7.4 Reports by Company ........................................................ 67 ARTICLE VIII CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE SECTION 8.1 Company May Consolidate, Etc., Only on Certain Terms ...................... 68 SECTION 8.2 Successor Corporation Substituted ......................................... 68 |
ARTICLE IX SUPPLEMENTAL INDENTURES SECTION 9.1 Supplemental Indentures Without Consent of Holders ........................ 69 SECTION 9.2 Supplemental Indentures with Consent of Holders ........................... 70 SECTION 9.3 Execution of Supplemental Indentures ...................................... 71 SECTION 9.4 Effect of Supplemental Indentures ......................................... 71 SECTION 9.5 Conformity with Trust Indenture Act ....................................... 71 SECTION 9.6 Reference in Securities to Supplemental Indentures ........................ 71 ARTICLE X COVENANTS SECTION 10.1 Payment of Principal, Premium and Interest ................................ 72 SECTION 10.2 Maintenance of Office or Agency ........................................... 72 SECTION 10.3 Limitation on Liens on Common Stock of Principal Subsidiaries. ............ 72 SECTION 10.4 Limitation on Disposition of Stock ........................................ 73 SECTION 10.5 Money for Securities Payments to Be Held in Trust ......................... 73 SECTION 10.6 Statement by Officers as to Default ....................................... 74 ARTICLE XI REDEMPTION OF SECURITIES SECTION 11.1 Applicability of Article .................................................. 75 SECTION 11.2 Election to Redeem; Notice to Trustee ..................................... 75 SECTION 11.3 Selection by Trustee of Securities to Be Redeemed ......................... 75 SECTION 11.4 Notice of Redemption ...................................................... 76 SECTION 11.5 Deposit of Redemption Price ............................................... 76 SECTION 11.6 Securities Payable on Redemption Date ..................................... 77 SECTION 11.7 Securities Redeemed in Part ............................................... 77 ARTICLE XII SINKING FUNDS SECTION 12.1 Applicability of Article .................................................. 77 SECTION 12.2 Satisfaction of Sinking Fund Payments with Securities ..................... 78 SECTION 12.3 Redemption of Securities for Sinking Fund ................................. 78 |
ASSURANT, INC.
RECONCILIATION AND TIE BETWEEN TRUST INDENTURE ACT OF 1939
AND INDENTURE
TRUST INDENTURE ACT SECTION INDENTURE SECTION Section 310 (a)(l)....................... 6.9 (a)(2) ...................... 6.9 (a)(3) ...................... Not Applicable (a)(4)....................... Not Applicable (b).......................... 6.8 6.10 Section 311 (a).......................... 6.13(a) (b).......................... 6.13(b) (b)(2)....................... 7.3(a)(2) 7.3(b) Section 312 (a).......................... 7.1 7.2(a) (b).......................... 7.2(b) (c).......................... 7.2(c) Section 313 (a).......................... 7.3(a) (b).......................... 7.3(b) (c).......................... 7.3(a), 7.3(b) (d).......................... 7.3(c) Section 314 (a).......................... 7.4,10.5 (b).......................... Not Applicable (c)(l)....................... 1.2 (c)(2)....................... 1.2 (c)(3)....................... Not Applicable (d).......................... Not Applicable (e).......................... 1.2 Section 315 (a).......................... 6.1 (a) (b).......................... 6.2 7.3(a)(6) (c).......................... 6.1 (b) (d).......................... 6.1 (c) (d)(l)....................... 6.1(c)(l) (d)(2)....................... 6.1(c)(2) (d)(3)....................... 6.1(c)(3) (e).......................... 5.14 Section 316 (a).......................... 1.1 (a)(l)(A).................... 5.2 5.12 (a)(1)(B).................... 5.13 (a)(2)....................... Not Applicable (b).......................... 5.8 |
Section 317 (a)(l)....................... 5.3 (a)(2)....................... 5.4 (b).......................... 10.4 Section 318 (a).......................... 1.7 |
NOTE: This reconciliation and tie shall not, for any purpose, be deemed to be a part of the Indenture.
SENIOR DEBT SECURITIES INDENTURE, dated as of February 18, 2004, between ASSURANT, INC. (d/b/a Assurant Group), a corporation duly organized and existing under the laws of the State of Delaware (herein called the "Company"), having its principal office at One Chase Manhattan Plaza, New York, New York, 10005, and SUNTRUST BANK, a state banking corporation duly organized and existing under the laws of the State of Georgia, as Trustee (herein called the "Trustee").
RECITALS OF THE COMPANY
WHEREAS, the Company has duly authorized the issuance from time to time of its unsecured, senior debentures, securities, notes or other evidences of indebtedness (herein called the "Securities"), to be issued in one or more series as provided in this Indenture up to such principal amount or amounts as may from time to time be authorized in accordance with the terms of this Indenture and to provide, among other things, for the authentication, delivery and administration thereof, the Company has duly authorized the execution and delivery of this Indenture; and
WHEREAS, all things necessary to make this Indenture a valid agreement of the Company, in accordance with its terms, have been done;
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
For and in consideration of the premises and the purchase of the Securities by the Holders thereof, it is mutually covenanted and agreed, for the equal and proportionate benefit of all Holders of the Securities or of series thereof, as follows:
ARTICLE I
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
SECTION 1.1 Definitions.
For all purposes of this Indenture, except as otherwise expressly provided or unless the context otherwise requires:
(1) the terms defined in this Article have the meanings assigned to them in this Article and include the plural as well as the singular;
(2) all other terms used herein which are defined in the Trust Indenture Act, either directly or by reference therein, have the meanings assigned to them therein;
(3) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with generally accepted accounting principles, and, except as otherwise herein expressly provided, the term "generally accepted accounting principles" with respect to any computation required or permitted hereunder shall mean such accounting principles as are generally accepted at the date of such computation; and
(4) the words "herein," "hereof" and "hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision.
Certain terms, used principally in Article VI, are defined in that Article.
"Act," when used with respect to any Holder, has the meaning specified in Section 1.4.
"Additional Interest" shall have the meaning specified in
Section 8 of the Registration Rights Agreement between the Company and the
Initial Purchasers (as defined therein), dated as of February___, 2004. All
references herein to interest accrued or payable as of any date shall include
any Additional Interest accrued or payable as of such date as provided in the
Registration Rights Agreement.
"Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control" when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing.
"Agent Members" has the meaning specified in Section 3.15.
"Applicable Procedures" means the rules and procedures of The Depository Trust Company, Euroclear and Clearstream, Luxembourg, in each case to the extent applicable.
"Authenticating Agent" means any Person authorized by the Trustee to act on behalf of the Trustee to authenticate the Securities.
"Board of Directors" means either the board of directors of the Company or any duly authorized committee of that board.
"Board Resolution" means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification and delivered to the Trustee.
"Book Entry Interest" means a beneficial interest in a Global Security, ownership of which shall be maintained and transfers of which shall be made through book entries by the Depositary.
"Business Day" means any calendar day that is not a Saturday, Sunday or legal holiday in New York, New York and a day on which commercial banks are open for business in New York, New York.
"Clearstream, Luxembourg" means Clearstream Banking S.A., or its successor.
"Commission" means the Securities and Exchange Commission, as from time to time constituted, created under the Exchange Act, or, if at any time after the execution of this instrument such Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, then the body performing such duties at such time.
"Common Stock" means, with respect to any Principal Subsidiary, stock of any class, however designated, except stock which is non-participating beyond fixed dividend and liquidation preferences and the holders of which have either no voting rights or limited voting rights entitling them, only in the case of certain contingencies, to elect less than a majority of the Board of Directors (or persons performing similar functions) of such Principal Subsidiary, and shall include securities of any class, however designated, which are convertible into such Common Stock.
"Company" means the Person named as the "Company" in the first paragraph of this instrument until a successor corporation shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Company" shall mean such successor corporation.
"Company Request" or "Company Order" means a written request or order signed in the name of the Company by its Chairman or a Vice Chairman of the Board of Directors, its President, a Vice President, its Chief Financial Officer or its Chief Accounting Officer, and by its Treasurer, a Deputy Treasurer, an Assistant Treasurer, its Secretary or an Assistant Secretary, and delivered to the Trustee.
"Consolidated Assets" means the assets of the Company and its consolidated Subsidiaries.
"Corporate Trust Office" means the office of the Trustee in the City of New York, New York, which at the date hereof is located at Wall Street Plaza, 88 Pine Street, New York, New York 10005, c/o ComputerShare Trust Company of New York.
"Covenant Defeasance" has the meaning specified in
Section 4.3.
"Defaulted Interest" has the meaning specified in
Section 3.10.
"Defeasance" has the meaning specified in Section 4.2.
"Depositary" means, with respect to Securities of any series issuable in whole or in part in the form of one or more Global Securities, a clearing agency registered under the Exchange Act that is designated to act as Depositary for such Securities as contemplated by Section 3.15.
"Euroclear" means Morgan Guaranty Trust Company of New York, Brussels office, or its successor, as operator of the Euroclear system.
"Event of Default" has the meaning specified in Section 5.1.
"Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, and any successor legislation.
"Exchange Securities" shall mean Securities issued in a transaction which has been registered under the Securities Act in exchange for Restricted Securities.
"Floating or Adjustable Rate Provision" means a formula or provision, specified in a Board Resolution or an indenture supplemental hereto, providing for the determination, whether pursuant to objective factors or pursuant to the sole discretion of any Person (including the Company), and periodic adjustment of the interest rate per annum borne by a Floating or Adjustable Rate Security.
"Floating or Adjustable Rate Security" means any Security which provides for interest to be payable thereon at a rate per annum that may vary from time to time over the term thereof in accordance with a Floating or Adjustable Rate Provision.
"Global Security" means a Security that evidences all or part of the Securities of any series and is authenticated and delivered to, and registered in the name of, the Depositary for such Securities or a nominee thereof.
"Holder" means a Person in whose name a Security is registered in the Security Register.
"Indebtedness" means the principal of and any premium and interest due on indebtedness of a Person, whether outstanding on the original date of issuance of the notes or thereafter created, incurred or assumed, which is (a) indebtedness for money borrowed and (b) any amendments, renewals, extensions, modifications and refundings of any such indebtedness. For the purposes of this definition, "indebtedness for money borrowed" means (1) any obligation of, or any obligation guaranteed by, such Person for the repayment of borrowed money, whether or not evidenced by bonds, debentures, notes or other written instruments, (2) any obligation of, or any such obligation guaranteed by, such Person evidenced by bonds, debentures, notes or similar written instruments, including obligations assumed or incurred in connection with the acquisition of property, assets or businesses (provided, however, that (x) the deferred purchase price of any business or property or assets shall not be considered Indebtedness if the purchase price thereof is payable in full within 90 days from the date on which such indebtedness was created and (y) trade accounts payable and accrued liabilities arising in the ordinary course of business shall not be considered Indebtedness) and (3) any obligations of such Person as lessee under leases required to be capitalized on the balance sheet of the lessee under generally accepted accounting principles and leases of property or assets made as part of any sale and lease-back transaction to which such Person is a party.
"Indenture" means this instrument as originally executed or as it may from time to time be supplemented or amended by one or more indentures supplemental hereto entered into pursuant to the applicable provisions hereof and shall include the terms of particular series of Securities established as contemplated by Section 3.1.
"interest," when used with respect to series of Securities includes any additional interest payable on such series of Securities in accordance with the terms of any registration rights agreement entered into by the Company in connection with the issuance of such series of Securities.
"Interest Payment Date," when used with respect to any Security, means the Stated Maturity of an installment of interest on such Security.
"Interest Rate" has the meaning specified in Section 3.13.
"Maturity," when used with respect to any Security, means the date on which the principal of such Security or an installment of principal becomes due and payable as therein or herein provided, whether at the Stated Maturity or by declaration of acceleration, call for redemption or otherwise.
"Non-U.S. Person" means a Person other than a U.S. Person (as defined in Rule 901(k) of Regulation S).
"Officers' Certificate" means a certificate signed by the Chairman or Vice Chairman of the Board of Directors, the President, a Vice President, the Chief Financial Officer or the Chief Accounting Officer, and by the Treasurer, a Deputy Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary, of the Company, and delivered to the Trustee.
"Opinion of Counsel" means a written opinion of counsel, who may be in-house counsel for the Company, which, if required by the Trust Indenture Act, shall comply with the Trust Indenture Act.
"Outstanding," when used with respect to Securities, means, as of the date of determination, all Securities theretofore authenticated and delivered under this Indenture, except:
(i) Securities theretofore cancelled by the Trustee or the Securities Registrar or delivered to the Trustee or the Securities Registrar for cancellation;
(ii) Securities for whose payment or redemption money in the necessary amount has been theretofore deposited with the Trustee or any Paying Agent (other than the Company) in trust or set aside and segregated in trust by the Company (if the Company shall act as its own Paying Agent) for the Holders of such Securities; provided that, if such Securities are to be redeemed, notice of such redemption has been duly given pursuant to this Indenture or provision therefor satisfactory to the Trustee has been made; and
(iii) Securities which have been paid pursuant to Section 3.9 or in exchange for or in lieu of which other Securities have been authenticated and delivered pursuant to this Indenture, other than any such Securities in respect of which there shall have been presented to the Trustee proof satisfactory to it that
such Securities are held by a bona fide purchaser in whose hands such Securities are valid obligations of the Company;
provided that in determining whether the Holders of the requisite principal amount of the Outstanding Securities have given any request, demand, authorization, direction, notice, consent or waiver hereunder Securities owned by the Company or any other obligor upon the Securities or any Affiliate of the Company or of such other obligor shall be disregarded and deemed not to be Outstanding; provided, however, that, in determining whether the Trustee shall be protected in relying, upon any such request, demand, authorization, direction, notice, consent or waiver, only Securities which a Responsible Officer of the Trustee actually knows to be so owned shall be so disregarded. Securities so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee's right so to act with respect to such Securities and that the pledgee is not the Company or any other obligor upon the Securities or any Affiliate of the Company or of such other obligor.
"Paying Agent" means any Person authorized by the Company to pay the principal of (or premium, if any) or interest on any Securities on behalf of the Company.
"Person" means any individual, corporation, partnership, joint venture, association, joint stock company, trust, unincorporated organization or government or any agency or political subdivision thereof.
"Place of Payment," when used with respect to the Securities of any series, means the place or places where the principal of (and premium, if any) and interest on the Securities of that series are payable as specified as contemplated by Section 3.1.
"Predecessor Security" of any particular Security means every previous Security evidencing all or a portion of the same debt as that evidenced by such particular Security; and, for the purposes of this definition, any Security authenticated and delivered under Section 3.6 in exchange for or in lieu of a mutilated, destroyed, lost or stolen Security shall be deemed to evidence the same debt as the mutilated, destroyed, lost or stolen Security.
"Principal Corporate Trust Office" means the principal office of the Trustee, at which at any particular time its corporate trust business shall be principally administered and, which at the date hereof, is located at 25 Park Place N.E., 24th Floor, Atlanta, Georgia 30303, Attention: Corporate Trust Department.
"Principal Subsidiary" means a consolidated Subsidiary of the Company that, as of the time of the determination of whether such consolidated Subsidiary is a "Principal Subsidiary," accounted for 10% or more of the total Consolidated Assets, as set forth in the most recent balance sheet filed by the Company with the Commission.
"Private Placement Legend" has the meaning specified in
Section 2.2.
"QIB" means any "qualified institutional buyer" (as defined in Rule 144A under the Securities Act).
"Redemption Date," when used with respect to any Security to be redeemed, means the date fixed for such redemption by or pursuant to this Indenture.
"Redemption Option Date" means, with respect to a series of Securities, the date specified as contemplated by Section 3.1 on or after which, from time to time, the Company, at its option, may redeem such series of Securities in whole or in part.
"Redemption Price," when used with respect to any Security to
be redeemed, means the price at which it is redeemable as specified pursuant to
Section 3.1 plus any accrued and unpaid interest thereon to, but excluding, the
date of redemption.
"Regular Record Date" for the interest payable on any Interest Payment Date on the Securities of any series means the date specified as such pursuant to Section 3.1.
"Regulation S" means Regulation S under the Securities Act.
"Regulation S Global Security" has the meaning specified in
Section 2.1.
"Regulation S Legend" has the meaning specified in
Section 2.2.
"Regulation S Restricted Period" means with respect to any series of Securities the 40 consecutive days beginning on and including the later of (A) the day on which any Regulation S Securities of such series are offered to persons other than distributors (as defined in Regulation S under the Securities Act) and (B) the date on which any such Securities are originally issued.
"Regulation S Security" has the meaning specified in Section 2.1.
"Resale Restriction Termination Date" shall have the meaning specified in Section 3.6.
"Responsible Officer" means, with respect to the Trustee, any officer within the Principal Corporate Trust Office of the Trustee, including any Vice President, any assistant Vice President, any assistant secretary, the treasurer, any assistant treasurer, any senior trust officer or other officer of the Principal Corporate Trust Office of the Trustee customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of that officer's knowledge of and familiarity with the particular subject.
"Restricted Securities" shall mean Securities of any series that are offered and sold in a transaction that was not registered under the Securities Act.
"Restricted Securities Legend" means the Private Placement Legend set forth in clause (b) of Section 2.2 or the Regulation S Legend set forth in clause (c) of Section 2.2, as applicable.
"Rule 144A" means Rule 144A under the Securities Act.
"Rule 144A Securities" has the meaning specified in Section 2.1.
"Rule 144A Global Security" has the meaning specified in
Section 2.1.
"Securities" has the meaning stated in the first recital of this Indenture and more particularly means any Securities authenticated and delivered under this Indenture, including any Exchange Securities.
"Securities Act" means the Securities Act of 1933, as amended from time to time and any successor legislation.
"Securities Custodian" means the custodian with respect to any Global Security (as appointed by the Depositary), or any successor Person thereto, and shall initially be the Trustee.
"Security Beneficial Owner" means, with respect to a Book Entry Interest, a person who is the beneficial owner of such Book Entry Interest, as reflected on the books of the Depositary, or on the books of a Person maintaining an account with such Depositary (directly as a Depositary participant or as an indirect participant, in each case in accordance with the rules of the Depositary).
"Security Register" and "Security Registrar" have the respective meanings specified in Section 3.5.
"Special Record Date" for the payment of any Defaulted Interest means a date fixed by the Trustee pursuant to Section 3.10.
"Stated Maturity," when used with respect to any Security or any installment of interest thereon, means the date specified in such Security as the fixed date on which the principal (or any portion thereof) of such Security or premium, if any, on such Security or such installment of interest is due and payable.
"Subsidiary" means a corporation, company (including any limited liability company), association, partnership, joint venture, trust or other business entity in which the Company and/or one or more of the Company's other subsidiaries owns at least 50% of the outstanding voting stock.
"Trust Indenture Act" means the Trust Indenture Act of 1939, as in force at the date as of which this instrument was executed, except as provided in Section 9.5.
"Trustee" means the Person named as the "Trustee" in the first paragraph of this instrument until a successor Trustee shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Trustee" shall mean or include each Person who is then a Trustee hereunder, and if at any time there is more than one such Person, "Trustee" as used with respect to the Securities of any series shall mean the Trustee with respect to Securities of that series.
"U.S. Government Obligations" has the meaning specified in
Section 4.4.
"Vice President," when used with respect to the Company or the Trustee, means any vice president, whether or not designated by a number or a word or words added before or after the title "vice president."
SECTION 1.2 Compliance Certificates and Opinions.
Upon any application or request by the Company to the Trustee to take any action under any provision of this Indenture, the Company shall furnish to the Trustee an Officers' Certificate stating that all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with and an Opinion of Counsel stating that in the opinion of such counsel all such conditions precedent, if any, have been complied with, except that in the case of any such application or request as to which the furnishing of such documents is specifically required by any provision of this Indenture relating to such particular application or request, no additional certificate or opinion need be furnished.
Every Officers' Certificate or Opinion of Counsel with respect to compliance with a condition or covenant provided for in this Indenture shall include:
(1) a statement that each individual signing such certificate or opinion has read such covenant or condition and the definitions herein relating thereto;
(2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based;
(3) a statement that, in the opinion of such person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and
(4) a statement as to whether, in the opinion of such person, such condition or covenant has been complied with.
SECTION 1.3 Form of Documents Delivered to Trustee.
In any case where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such Person, or that they be so certified or covered by only one document, but one such Person may certify or give an opinion with respect to some matters and one or more other such Persons as to other matters, and any such Person may certify or give an opinion as to such matters in one or several documents.
Any certificate or opinion of an officer of the Company may be based, insofar as it relates to legal matters, upon a certificate or opinion of, or representations by,
counsel, unless such officer knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to the matters upon which his certificate or opinion is based are erroneous. Any such certificate or Opinion of Counsel may be based, insofar as it relates to factual matters, upon a certificate or opinion of, or representations by, an officer or officers of the Company stating that the information with respect to such factual matters is in the possession of the Company, unless such counsel knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to such matters are erroneous.
Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be consolidated and form one instrument.
SECTION 1.4 Acts of Holders; Record Dates.
(a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided or permitted by this Indenture to be given or taken by Holders shall be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Holders in person or by an agent duly appointed in writing; and, except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments are delivered to the Trustee and, where it is hereby expressly required, to the Company. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "Act" of the Holders signing such instrument or instruments. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Indenture and (subject to Section 6.1) conclusive in favor of the Trustee and the Company, if made in the manner provided in this Section.
(b) The fact and date of the execution by any Person of any such instrument or writing may be proved by the affidavit of a witness of such execution or by a certificate of a notary public or other officer authorized by law to take acknowledgments of deeds, certifying that the individual signing such instrument or writing acknowledged to him the execution thereof. Where such execution is by a signer acting in a capacity other than his individual capacity, such certificate or affidavit shall also constitute sufficient proof of his authority. The fact and date of the execution of any such instrument or writing, or the authority of the Person executing the same, may also be proved in any other manner which the Trustee deems sufficient.
(c) The ownership of Securities shall be proved by the Security Register.
(d) Any request, demand, authorization, direction, notice, consent, waiver or other Act of the Holder of any Security of the same series shall bind every future Holder of the same Security of such series and the Holder of every Security of the same series issued upon the registration of transfer thereof
or in exchange therefor or in lieu thereof in respect of anything done, omitted or suffered to be done by the Trustee or the Company in reliance thereon, whether or not notation of such action is made upon such Security of such series.
SECTION 1.5 Notices, Etc., to Trustee and Company.
Any request, demand, authorization, direction, notice, consent, waiver or Act of Holders or other document provided or permitted by this Indenture to be made upon, given or furnished to, or filed with:
(1) the Trustee by any Holder or by the Company shall be sufficient for every purpose hereunder if made, given, furnished or filed in writing to or with the Trustee at its Corporate Trust Office, Attention: Corporate Trust Administration; provided, however, that such instrument will be considered properly given if submitted in an electronic format, i.e., by facsimile, E-Mail or otherwise, or
(2) the Company by the Trustee or by any Holder shall be sufficient for every purpose hereunder (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to the Company addressed to it at the address of its principal office specified in the first paragraph of the Indenture or at any other address previously furnished in writing to the Trustee by the Company; provided, however, that such instrument will be considered properly given if submitted in an electronic format, e.g., by facsimile, E-Mail or otherwise.
SECTION 1.6 Notice to Holders; Waiver.
Where this Indenture provides for notice to Holders of any event, such notice shall be sufficiently given (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to each Holder affected by such event, at his address as it appears in the Security Register, not later than the latest date and not earlier than the earliest date, prescribed for the giving of such notice. In any case where notice to Holders is given by mail, neither the failure to mail such notice, nor any defect in any notice so mailed, to any particular Holder shall affect the sufficiency of such notice with respect to other Holders. Where this Indenture provides for notice in any manner, such notice may be waived in writing by the Person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by Holders shall be filed with the Trustee, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver.
In case by reason of the suspension of regular mail service or by reason of any other cause it shall be impracticable to give such notice by mail, then such notification as shall be made with the approval of the Trustee shall constitute a sufficient notification for every purpose hereunder. Any notice that is mailed in the manner herein provided shall be conclusively presumed to have been duly given or provided.
SECTION 1.7 Conflict with Trust Indenture Act.
If any provision hereof limits, qualifies or conflicts with the duties imposed by any of Sections 310 to 317, inclusive, of the Trust Indenture Act through operation of Section 318(c) thereof, such imposed duties shall control.
SECTION 1.8 Effect of Headings and Table of Contents.
The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof.
SECTION 1.9 Successors and Assigns.
All covenants and agreements in this Indenture by the Company shall bind its successors and assigns, whether so expressed or not.
SECTION 1.10 Separability Clause.
In case any provision in this Indenture or in the Securities shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby.
SECTION 1.11 Benefits of Indenture.
Nothing in this Indenture or in the Securities, express or implied, shall give to any Person, other than the parties hereto and their successors hereunder and the Holders, any benefit or any legal or equitable right, remedy or claim under this Indenture.
SECTION 1.12 Governing Law.
This Indenture and the Securities shall be governed by, and construed and interpreted in accordance with, the laws of the State of New York, and all rights and remedies shall be governed by such laws.
SECTION 1.13 Legal Holidays.
In any case where any Interest Payment Date, Redemption Date or Stated Maturity of any Security shall not be a Business Day at any Place of Payment, then (notwithstanding any other provision of this Indenture or of the Securities) payment of interest or principal (and premium, if any) need not be made at such Place of Payment on such date, but may be made on the next succeeding Business Day at such Place of Payment with the same force and effect as if made on the Interest Payment Date or Redemption Date, or at the Stated Maturity, provided that no interest shall accrue for the period from and after such Interest Payment Date, Redemption Date or Stated Maturity, as the case may be, except that, if such Business Day is in the next succeeding calendar year, such payment shall be made on the immediately preceding Business Day, in each case with the same force and effect as if made on such date.
SECTION 1.14 Language of Notices.
Any request, demand, authorization, direction, notice, consent, election or waiver required or permitted under this Indenture shall be in the English language, except that, if the Company so elects, any published notice may be in an official language of the country of publication.
SECTION 1.15 Limitation on Individual Liability.
No recourse shall be had for the payment of the principal of or any premium or the interest on any Security, or for any claim based thereon, or otherwise in respect thereof, or based on or in respect of this Indenture, against any incorporator, stockholder, officer or director, past, present or future, as such, of the Company or of any predecessor or successor corporation, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise, all such liability being, by the acceptance hereof and as part of the consideration for the issuance hereof, expressly waived and released.
ARTICLE II
SECURITY FORMS
SECTION 2.1 Forms Generally.
The Securities of each series shall be in substantially the form set forth in this Article, or such other form as shall be established by or pursuant to a Board Resolution or in one or more indentures supplemental hereto, in each case with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Indenture (the provisions of which shall be appropriate to reflect the terms of each series of Securities), and may have imprinted or otherwise reproduced thereon such letters, numbers or other marks of identification and such legends or endorsements as may be required to comply with any law or with any rule or regulation made pursuant thereto or with the rules or regulations of any stock exchange on which the Securities may be listed or Depositary therefor or as may, consistently herewith, be determined by the officers of the Company executing such Securities, as evidenced by their execution of such Securities. If the form of Securities of any series is established by action taken pursuant to a Board Resolution, a copy of an appropriate record of such action shall be certified by the Secretary or an Assistant Secretary of the Company and delivered to the Trustee at or prior to the delivery of the Company Order contemplated by Section 3.3 for the authentication and delivery of such Securities.
Unless determined differently as contemplated by the preceding paragraph, Restricted Securities of a series offered and sold to QIBs in reliance on Rule 144A ("Rule 144A Securities") shall be issued in the form of one or more permanent Global Securities, without interest coupons, bearing appropriate legends as set forth in Section 2.2 (each, a "Rule 144A Global Security").
Unless determined differently as contemplated by the second preceding paragraph, Restricted Securities of a series offered and sold outside the United States of America in reliance on Regulation S (each, a "Regulation S Security") shall be issued in the form of one or more permanent Global Securities, without interest coupons, bearing appropriate legends as set forth in Section 2.2 (each, a "Regulation S Global Security").
The Trustee's certificates of authentication shall be in substantially the form set forth in this Article.
The definitive Securities may be produced in any manner as determined by the officers executing such Securities, as evidenced by their execution of such Securities.
SECTION 2.2 Form of Face of Security.
(a) each Global Security shall bear the following legend on the face thereof:
"THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITARY OR A NOMINEE OF A DEPOSITARY. THIS SECURITY IS EXCHANGEABLE FOR SECURITIES REGISTERED IN THE NAME OF A PERSON OTHER THAN THE DEPOSITARY OR ITS NOMINEE ONLY IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE, AND NO TRANSFER OF THIS SECURITY (OTHER THAN A TRANSFER OF THIS SECURITY AS A WHOLE BY THE DEPOSITARY TO A NOMINEE OF THE DEPOSITARY OR BY A NOMINEE OF THE DEPOSITARY TO THE DEPOSITARY OR ANOTHER NOMINEE OF THE DEPOSITARY) MAY BE REGISTERED EXCEPT IN LIMITED CIRCUMSTANCES.
UNLESS THIS SECURITY IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (55 WATER STREET, NEW YORK, NEW YORK) TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY SECURITY ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY AND ANY PAYMENT HEREON IS MADE TO CEDE & CO., ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY A PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN."
(b) each Rule 144A Global Security (and each definitive Security issued upon the transfer of all or a portion of the beneficial interest in
such Global Security) shall bear the following legend (the "Private Placement Legend") on the face thereof:
"THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND ACCORDINGLY, MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY ITS ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) OR (B) IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS SECURITY IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH RULE 904 UNDER THE SECURITIES ACT, (2) AGREES THAT IT WILL NOT, WITHIN THE TIME PERIOD REFERRED TO IN RULE 144(k) UNDER THE SECURITIES ACT AS IN EFFECT ON THE DATE OF THE TRANSFER OF THIS SECURITY, RESELL OR OTHERWISE TRANSFER THIS SECURITY EXCEPT (A) TO THE ISSUER THEREOF OR ANY SUBSIDIARY THEREOF, (B) INSIDE THE UNITED STATES TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT, (C) OUTSIDE THE UNITED STATES IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH RULE 904 UNDER THE SECURITIES ACT, (D) PURSUANT TO THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT (IF AVAILABLE) OR (E) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND (3) AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS SECURITY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. IN CONNECTION WITH ANY TRANSFER OF THIS SECURITY WITHIN THE TIME PERIOD REFERRED TO IN RULE 144(k) UNDER THE SECURITIES ACT AFTER THE ORIGINAL ISSUANCE OF THE SECURITIES, THE HOLDER MUST TRANSFER AND SUBMIT THIS SECURITY TO THE TRUSTEE. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION," "UNITED STATES" AND "U.S. PERSON" HAVE THE MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT. THE INDENTURE CONTAINS PROVISIONS REQUIRING THE TRUSTEE TO REFUSE TO REGISTER ANY TRANSFER OF THIS SECURITY IN VIOLATION OF THE FOREGOING RESTRICTIONS."; and
(c) each Regulation S Global Security (and each definitive Security issued upon the transfer of all or a portion of the beneficial interest in such Global Security) shall bear the following legend (the "Regulation S Legend") on the face thereof:
"THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND ACCORDINGLY, MAY NOT BE OFFERED OR SOLD WITHIN THE
UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY ITS ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) OR (B) IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS SECURITY IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH RULE 904 UNDER THE SECURITIES ACT, (2) AGREES THAT IT WILL NOT, WITHIN THE TIME PERIOD REFERRED TO IN RULE 144(k) UNDER THE SECURITIES ACT AS IN EFFECT ON THE DATE OF THE TRANSFER OF THIS SECURITY, RESELL OR OTHERWISE TRANSFER THIS SECURITY EXCEPT (A) TO THE ISSUER THEREOF OR ANY SUBSIDIARY THEREOF, (B) INSIDE THE UNITED STATES TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT, (C) OUTSIDE THE UNITED STATES IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH RULE 904 UNDER THE SECURITIES ACT, (D) PURSUANT TO THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT (IF AVAILABLE) OR (E) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND (3) AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS SECURITY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. IN CONNECTION WITH ANY TRANSFER OF THIS SECURITY WITHIN THE TIME PERIOD REFERRED TO IN RULE 144(k) UNDER THE SECURITIES ACT AFTER THE ORIGINAL ISSUANCE OF THE SECURITIES, THE HOLDER MUST TRANSFER AND SUBMIT THIS SECURITY TO THE TRUSTEE. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION," "UNITED STATES" AND "U.S. PERSON" HAVE THE MEANINGS GIVEN TO THEM BY REGULATIONS UNDER THE SECURITIES ACT. THE INDENTURE CONTAINS PROVISIONS REQUIRING THE TRUSTEE TO REFUSE TO REGISTER ANY TRANSFER OF THIS SECURITY IN VIOLATION OF THE FOREGOING RESTRICTIONS."; and
(d) Each Security evidencing a Global Security offered and sold to QIBs pursuant to Rule 144A shall bear a legend in substantially the following form:
"EACH PURCHASER OF THIS SECURITY IS HEREBY NOTIFIED THAT THE SELLER OF
THIS SECURITY MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF
SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER."; and
(e) Each definitive Security shall bear the following additional legend:
"IN CONNECTION WITH ANY TRANSFER, THE HOLDER WILL DELIVER TO THE
REGISTRAR AND TRANSFER AGENT SUCH
CERTIFICATES AND OTHER INFORMATION AS SUCH TRANSFER AGENT MAY REASONABLY REQUIRE TO CONFIRM THAT THE TRANSFER COMPLIES WITH THE FOREGOING RESTRICTIONS."
(f) In addition to any legends required by this Section 2.2, subject to Section 2.1, the face of each Security shall be substantially in the following form:
No.___________________________
CUSIP No._________________________
ASSURANT, INC.
[INSERT TITLE OF SERIES OF SECURITY]
ASSURANT, INC., a Delaware corporation (the "Company," which
term includes any successor corporation under the Indenture hereinafter referred
to), for value received, hereby promises to pay to________________________or
registered assigns, the principal sum of__________________________Dollars
($_______________) on__________________,______, and to pay interest on said
principal sum from______________________,_________, or from the most recent
interest payment date (each such date, an "Interest Payment Date") to which
interest has been paid or duly provided for, [semi-annually] in arrears on
[_______________________________and ___________________________] of each year
commencing_________________________,__________, at [If the Security is to bear
interest at a fixed rate, insert -a rate of_______% per annum,] [If the Security
is a Floating or Adjustable Rate Security, insert -a rate per annum
[computed-determined] in accordance with the [insert defined name of Floating or
Adjustable Rate Provision] set forth below] until the principal hereof shall
have become due and payable, and on any overdue principal and premium, if any,
and (without duplication and to the extent that payment of such interest is
enforceable under applicable law) on any overdue installment of interest at the
same rate per annum compounded [semi-annually]. The amount of interest payable
on any Interest Payment Date shall be computed on the basis of a 360-day year of
twelve 30-day months. In the event that any date on which interest is payable on
this Security is not a Business Day, then payment of interest payable on such
date will be made on the next succeeding day that is a Business Day (and without
any interest or other payment in respect of any such delay), except that, if
such Business Day is in the next succeeding calendar year, such payment shall be
made on the immediately preceding Business Day, in each case with the same force
and effect as if made on such date. The interest installment so payable, and
punctually paid or duly provided for, on any Interest Payment Date will, as
provided in the Indenture, be paid to the Person in whose name this Security (or
one or more Predecessor Securities, as defined in said Indenture) is registered
at the close of business on the regular record date for such interest
installment, which shall be the close of business on
[_____________,_________________] or [_____________,_______] immediately
preceding such Interest Payment Date. Any such interest installment not
punctually paid or duly provided for shall forthwith cease to be payable to the
registered Holders on such regular record date and may be paid to the
Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on a special record date to be fixed by the Trustee for the payment of such defaulted interest, notice thereof shall be given to the registered Holders of this series of Securities not less than 10 days prior to such special record date, or may be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities may be listed, and upon such notice as may be required by such exchange, all as more fully provided in the Indenture. [IN THE CASE OF GLOBAL SECURITY -- Payments on this Global Security will be made in immediately available funds.] [IF PURSUANT TO THE PROVISIONS OF THE INDENTURE THE SECURITIES ARE NO LONGER REPRESENTED BY A GLOBAL SECURITY --The principal of (and premium, if any) and the interest on this Security shall be payable at the office or agency of the Trustee maintained for that purpose in any coin or currency of the United States of America that at the time of payment is legal tender for payment of public and private debts; provided, however, that payment of interest may be made at the option of the Company by check mailed to the registered Holder at such address as shall appear in the Security Register or by wire transfer in immediately available funds if appropriate wire transfer instructions have been received in writing by the Trustee not less than 15 days prior to the applicable Interest Payment Date. Such wire instructions, upon receipt by the Trustee, shall remain in effect until revoked by such Holder.]
[At this point in the Security Form of any series of Floating or Adjustable Rate Securities, the text of the Floating or Adjustable Rate Provision relating thereto should be inserted.]
This Security shall not be entitled to any benefit under the Indenture hereinafter referred to, be valid or become obligatory for any purpose until the Certificate of Authentication hereon shall have been signed by or on behalf of the Trustee.
The provisions of this Security are continued on the reverse side hereof and such continued provisions shall for all purposes have the same effect as though fully set forth at this place.
IN WITNESS WHEREOF, the Company has caused this instrument to be executed.
Dated:____________________
ASSURANT, INC.
By: ____________________________
Name:
Title
SECTION 2.3 Form of Reverse of Security.
This Security is one of a duly authorized series of securities
of the Company (herein sometimes referred to as the "Securities"), specified in
the Indenture, all issued or to be issued in one or more series under and
pursuant to an Indenture dated as of______________, 2004 (the "Indenture"), duly
executed and delivered between the Company and SunTrust Bank, as Trustee (the
"Trustee"), to which Indenture and all indentures supplemental thereto reference
is hereby made for a description of the respective rights, limitations of
rights, obligations, duties and immunities thereunder of the Trustee, the
Company and the Holders of the Securities. By the terms of the Indenture, the
Securities are issuable in series that may vary as to amount, date of maturity,
rate of interest and in other respects as provided in the Indenture. This series
of Securities is not limited in aggregate principal amount. The terms of this
Security include those stated in the Indenture and those made part of the
Indenture by reference to the Trust Indenture Act of 1939, as amended. The
Indenture provides that Securities of a single series may be issued at various
times [,with different maturity dates and may bear interest at different rates].
[Holders of the Securities are entitled to the benefits of the Registration
Rights Agreement, dated as of__________________, 200_ (the "Registration Rights
Agreement"), between the Company and the initial purchasers named therein. The
Securities and any related Exchange Securities shall vote and consent together
on all matters as one class, and no such securities shall have the right to vote
or consent as a separate class.]
[The Securities may be redeemed in whole at any time or in part from time to time, at the Company's option, at a redemption price (the "Redemption Price") equal to the greater of (1) 100% of the principal amount of the Securities to be redeemed and (2) the sum of the present values of the remaining scheduled payments of principal and interest on the Securities discounted to the Redemption Date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at a rate equal to the applicable Treasury Rate plus_________basis points for the Securities, plus, accrued and unpaid interest on the principal amount being redeemed to the Redemption Date.
Any redemption pursuant to this paragraph will be made upon not less than 30 days' nor more than 60 days' notice of the Redemption Date at the Redemption Price. If the Securities are only partially redeemed by the Company pursuant to a redemption, the Securities will be redeemed pro rata or by lot or by any other method utilized by the Trustee, provided that if, at the time of redemption, the Securities are registered as a Global Security, the Depositary shall determine the principal amount of such Securities held by each Security Beneficial Owner to be redeemed in accordance with its procedures.
"Treasury Rate" means, with respect to any Redemption Date,
(1) the yield, under the heading which represents the average for the
immediately preceding week, appearing in the most recently published statistical
release designated "H.15(519)" or any successor publication which is published
weekly by the Board of Governors of the Federal Reserve System and which
establishes yields on actively traded United States Treasury securities adjusted
to constant maturity under the caption "Treasury Constant Maturities," for the
maturity corresponding to the Comparable Treasury Issue (if no
maturity is within three months before or after the Remaining Life, yields for the two published maturities most closely corresponding to the Comparable Treasury Issue will be determined and the Treasury Rate will be interpolated or extrapolated from such yields on a straight line basis, rounding to the nearest month) or (2) if such release (or any successor release) is not published during the week preceding the calculation date or does not contain such yields, the rate per annum equal to the semi-annual equivalent yield-to-maturity of the Comparable Treasury Issue, calculated using a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such Redemption Date. The Treasury Rate will be calculated on the third Business Day preceding the Redemption Date.
"Business Day" means any calendar day that is not a Saturday, Sunday or legal holiday in New York, New York and on which commercial banks are open for business in New York, New York.
"Comparable Treasury Issue" means the United States Treasury security selected by an Independent Investment Banker as having a maturity comparable to the remaining term ("Remaining Life") of the Securities to be redeemed that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of the applicable series of Securities.
"Comparable Treasury Price" means (1) the average of five Reference Treasury Dealer Quotations for such Redemption Date, after excluding the highest and lowest Reference Treasury Dealer Quotations, or (2) if the Independent Investment Banker obtains fewer than five such Reference Treasury Dealer Quotations, the average of all such quotations.
"Independent Investment Banker" means Citigroup Global Markets Inc., Morgan Stanley & Co. Incorporated or Banc One Capital Markets, Inc., and their respective successors, or, if both firms are unwilling or unable to select the Comparable Treasury issue, an independent investment banking institution of national standing appointed by the trustee after consultation with the Company.
"Reference Treasury Dealer means (1) Citigroup Global Markets Inc., Morgan Stanley & Co. Incorporated or Banc One Capital Markets, Inc., and their respective successors; provided, however, that if any of the foregoing shall cease to be a primary U.S. Government securities dealer in New York City (a "Primary Treasury Dealer"), the Company will substitute for such initial purchasers another Primary Treasury Dealer and (2) any other Primary Treasury Dealer selected by the Independent Investment Banker after consultation with the Company.
"Reference Treasury Dealer Quotations" means, with respect to each Reference Treasury Dealer and any Redemption Date, the average, as determined by the Independent Investment Banker, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to
the Independent Investment Banker at 5:00 p.m., New York City time, on the third Business Day preceding such Redemption Date.]
[The Securities of this series are subject to redemption upon not less than 30 days' nor more than 60 days' notice by mail, (1) on_____________in any year commencing with the year___________and ending with the year___________through operation of the sinking fund for this series at a Redemption Price of_____________, (2) at any time [on or after_______________, 200_, as a whole or in part, at the election of the Company, at the following Redemption Prices (expressed as percentages of the principal amount): If redeemed [on or before_____________,_____%, and if redeemed during the 12-month period beginning______________of the years indicated, and thereafter at a Redemption Price equal to________% of the principal amount, together in the case of any such redemption (whether through operation of the sinking fund or otherwise) with accrued interest to the Redemption Date, but interest installments whose Stated Maturity is on or prior to such Redemption Date will be payable to the Holders of such Securities, or one or more Predecessor Securities, of record at the close of business on the relevant Record Dates referred to on the face hereof, all as provided in the Indenture.]
[Notwithstanding the foregoing, the Company may not, prior to________, redeem any Securities of this series as contemplated by Clause (2) of the preceding paragraph as a part of, or in anticipation of, any refunding operation by the application, directly or indirectly, of monies borrowed having an interest cost to the Company (calculated in accordance with generally accepted financial practice) of less than____________________% per annum.]
[The sinking fund for this series provides for redemption on_______________ in each year beginning in the year_____________and ending with the year_____________of [not less than] $________________("mandatory sinking fund") and not more than $__________________ aggregate principal amount of Securities of this series. Securities of this series acquired or redeemed by the Company otherwise than through [mandatory] sinking fund payments may be credited against subsequent [mandatory] sinking fund payments otherwise required to be made in the [inverse] order in which they become due.]
Unless the Company defaults in the payment of the Redemption Price, on and after the Redemption Date, interest shall cease to accrue on the Securities, or portions thereof called for redemption.
In the event of redemption of this Security in part only, a new Security or Securities of this series for the unredeemed portion hereof will be issued in the name of the Holder hereof upon the cancellation hereof.
In case an Event of Default, as defined in the Indenture, shall have occurred and be continuing, the principal of all of the Securities may be declared, and upon such declaration shall become, due and payable, in the manner, with the effect and subject to the conditions provided in the Indenture.
The Indenture contains provisions permitting the Company and the Trustee, with the consent of the Holders of not less than a majority in aggregate principal amount of the Securities of each series affected at the time outstanding, as defined in the Indenture, to execute supplemental indentures for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of the Indenture or of any supplemental indenture or of modifying in any manner the rights of the Holders of the Securities; provided, however, that no such supplemental indenture shall, without the consent of Holders of each Security then outstanding and affected thereby: change the fixed maturity of any Securities of any series, or reduce the principal amount thereof, reduce the rate or change the time or place of payment of interest thereon; reduce any premium payable upon the redemption thereof or change the time at which such Security may or must be redeemed or purchased; change the money in which such Security is payable; waive a default or Event of Default in the payment of principal of or premium, if any, or interest on the Securities (except a rescission of acceleration of the Securities by the holders of at least a majority in aggregate principal amount of the Securities and a waiver of the payment default that resulted from such acceleration); make any change in the provisions of the Indenture relating to waivers of past defaults or the rights of Holders to receive payments of principal of, premium, if any, or interest on any of the Securities; make any change in the ability of the Holders to enforce their rights under the Indenture; reduce the aforesaid percentage of Securities, the Holders of which are required to consent to any such supplemental indenture; [or, except as permitted by the Indenture, increase any conversion price or modify the provisions of the indenture relating to the conversion of any Securities in a manner adverse to Holders].
The Indenture also contains provisions permitting the Holders of a majority in aggregate principal amount of the Securities of any series at the time outstanding affected thereby, on behalf of all of the Holders of the Securities of such series, to waive any past default in the performance of any of the covenants contained in the Indenture, or established pursuant to the Indenture with respect to such series, and its consequences, except a default in the payment of the principal of or premium, if any, or interest on any of the Securities of such series. Any such consent or waiver by the registered Holder of this Security (unless revoked as provided in the Indenture) shall be conclusive and binding upon such Holder and upon all future Holders and owners of this Security and of any Security issued in exchange herefor or in place hereof (whether by registration of transfer or otherwise), irrespective of whether or not any notation of such consent or waiver is made upon this Security.
No reference herein to the Indenture and no provision of this Security or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and premium, if any, and interest on this Security at the time and place and at the rate and in the money herein prescribed.
As provided in the Indenture and subject to certain limitations therein set forth, this Security is transferable or exchangeable by the registered Holder hereof on the Security Register of the Company, upon surrender of this Security for registration of transfer or exchange at the office or agency of the Trustee in the City and State of New York accompanied by a written instrument or instruments of transfer in form satisfactory
to the Company or the Trustee duly executed by the registered Holder hereof or his attorney duly authorized in writing, and thereupon one or more new Securities of authorized denominations and for the same aggregate principal amount and series will be issued to the designated transferee or transferees. No service charge will be made for any such transfer or exchange, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in relation thereto.
Prior to due presentment for registration of transfer or exchange of this Security, the Company, the Trustee, any paying agent and the Security Registrar may deem and treat the registered Holder hereof as the absolute owner hereof (whether or not this Security shall be overdue and notwithstanding any notice of ownership or writing hereon made by anyone other than the Security Registrar) for the purpose of receiving payment of or on account of the principal hereof and premium, if any, and interest due hereon and for all other purposes, and neither the Company nor the Trustee nor any paying agent nor any Security Registrar shall be affected by any notice to the contrary.
No recourse shall be had for the payment of the principal of or any premium or interest on this Security, or for any claim based hereon, or otherwise in respect hereof, or based on or in respect of the Indenture, against any incorporator, stockholder, officer or director, past, present or future, as such, of the Company or of any predecessor or successor corporation, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise, all such liability being, by the acceptance hereof and as part of the consideration for the issuance hereof, expressly waived and released.
[This Global Security is exchangeable for Securities in definitive form only under certain limited circumstances set forth in the Indenture.] Securities of this series so issued are issuable only in registered form without coupons in denominations of $1,000 and any integral multiple thereof. As provided in the Indenture and subject to certain limitations [herein and] therein set forth, Securities of this series [so issued] are exchangeable for a like aggregate principal amount of Securities of this series of a different authorized denomination, as requested by the Holder surrendering the same.
Certain of the Company's obligations under the Indenture with respect to Securities may be terminated if the Company irrevocably deposits with the Trustee money sufficient to pay and discharge the entire indebtedness on all Securities, as provided in the Indenture.
The Indenture and the Securities shall be governed by and construed in accordance with the laws of the State of New York.
All terms used in this Security that are defined in the Indenture shall have the meanings assigned to them in the Indenture.
ASSIGNMENT FORM
To assign this Security, fill in the form below:
I or we assign and transfer this Security to
and irrevocably appoint______________________agent to transfer this Security on the books of the Company. The agent may substitute another to act for him.
Date:______________________ Your Signature:________________________ Signature Guarantee:____________________________________________________________
(Signature must be guaranteed)
The signature(s) should be guaranteed by an eligible guarantor institution (banks, stockbrokers, savings and loan associations and credit unions with membership in an approved signature guarantee medallion program), pursuant to S.E.C. Rule 17Ad-15.
[INCLUDE IF THE SECURITIES ARE REQUIRED TO BEAR A RESTRICTED SECURITIES LEGEND:
In connection with any transfer or exchange of any of the Securities evidenced
by this certificate occurring prior to the date that is two years after the
later of the date of original issuance of such Securities and the last date, if
any, on which such Securities were owned by the Company or any Affiliate of the
Company, the undersigned confirms that such Securities are being:
CHECK ONE BOX BELOW:
1. [ ] acquired for the undersigned's own account, without transfer; or
2. [ ] transferred to the Company; or
3. [ ] transferred pursuant to and in compliance with Rule 144A under the Securities Act of 1933, as amended (the "Securities Act"); or
4. [ ] transferred pursuant to an effective registration statement under the Securities Act; or
5. [ ] transferred pursuant to and in compliance with Regulation S under the Securities Act; or
6. [ ] transferred to an institutional "accredited investor" (as defined in Rule 501(a)(l), (2), (3) or (7) under the Securities Act), that has furnished to the Trustee a signed certificate containing certain representations and agreements (the form of which letter appears as Section 3.7 of the Indenture); or
7. [ ] transferred pursuant to another available exemption from the registration requirements of the Securities Act of 1933
Unless one of the boxes is checked, the Trustee will refuse to register any of
the Securities evidenced by this certificate in the name of any person other
than the registered Holder thereof; provided, however, that if box (5), (6) or
(7) is checked, the Trustee or the Company may require, prior to registering any
such transfer of the Securities, in their sole discretion, such legal opinions,
certifications and other information as the Trustee or the Company may
reasonably request to confirm that such transfer is being made pursuant to an
exemption from, or in a transaction not subject to, the registration
requirements of the Securities Act of 1933, such as the exemption provided by
Rule 144 under such Act.
____________________________________ Signature Signature Guarantee: ______________________________ ____________________________________ (Signature must be guaranteed) Signature |
The signature(s) should be guaranteed by an eligible guarantor institution (banks, stockbrokers, savings and loan associations and credit unions with membership in an approved signature guarantee medallion program), pursuant to S.E.C. Rule 17Ad-15.
TO BE COMPLETED BY PURCHASER IF (1) OR (3) ABOVE IS CHECKED.
The undersigned represents and warrants that it is purchasing or exchanging this Security for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a "qualified institutional buyer" within the meaning of Rule 144A under the Securities Act of 1933, as amended, and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Company as the undersigned has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the transferor is relying upon the undersigned's foregoing representations in order to claim the exemption from registration provided by Rule 144A.
SCHEDULE OF INCREASES OR DECREASES IN GLOBAL SECURITY
The initial principal amount of this Global Security is $____. The following increases or decreases in this Global Security have been made:
Principal Amount of Amount of Amount of this Signature of decrease in increases in Global Security authorized Principal Principal following such officer of Date of Amount of This Amount of this decrease (or Trustee or Exchange Global Security Global Security increase) Depositary -------- --------------- --------------- --------- ---------- |
SECTION 2.4 Form of Trustee's Certificate of Authentication.
The Trustee's certificate of authentication on all Securities shall be substantially in the following form:
CERTIFICATE OF AUTHENTICATION
This is one of the Securities of the series of Securities described in the within-mentioned Indenture.
SunTrust Bank,
as Trustee
By: _________________________
Authorized Signatory
Dated:_________________________
ARTICLE III
THE SECURITIES
SECTION 3.1 Amount Unlimited; Issuable in Series.
The aggregate principal amount of Securities which may be authenticated and delivered under this Indenture is unlimited.
The Securities may be issued in one or more series. There shall be established by or pursuant to a Board Resolution, and set forth in an Officers' Certificate,
or established in one or more indentures supplemental hereto, prior to the issuance of Securities of any series:
(1) the title of the Securities of the series (which shall distinguish the Securities of the series from all Securities of any other series, except to the extent that additional Securities of an existing series are being issued) and, if other than as substantially contemplated by Section 2.1, the form of the Securities of the series;
(2) the date or dates (or manner of determining the same) on which the principal of the Securities of the series is payable, and, if applicable to the series, the terms of any sinking fund obligations with respect to such series;
(3) the rate or rates at which the Securities of the
series shall bear interest, if any, or the Floating or Adjustable Rate
Provision pursuant to which such rate or rates shall be determined, the
date or dates from which any such interest shall accrue, or the method
by which such date or dates shall be determined, the Interest Payment
Dates on which any such interest shall be payable, the Regular Record
Dates for the determination of Holders to whom interest is payable on
any Interest Payment Date, and provisions with respect to the payment
of interest to each of Euroclear and Clearstream, Luxembourg with
respect to a permanent Global Security if other than as provided in
Section 3.10;
(4) if other than as provided in Section 3.14, the place or places where the principal of (and any premium, if any) and interest on Securities of the series shall be payable;
(5) the period or periods within which (including the Redemption Option Date for the series) and the price or prices at which and the terms and conditions upon which any Securities of the series may be redeemed, in whole or in part, at the option of the Company if the Company is to have that option;
(6) if other than denominations of $1,000 and any integral multiple thereof, the denominations in which Securities of the series shall be issuable;
(7) any other event or events of default applicable with respect to the Securities of the series in addition to those provided in Section 5.1(1) through (7);
(8) any other covenant or warranty included for the benefit of Securities of the series in addition to (and not inconsistent with) those included in this Indenture for the benefit of Securities of all series, or any other covenant or warranty included for the benefit of Securities of the series in lieu of any covenant or warranty included in this Indenture for the benefit of Securities of all series, or any provision that any covenant or warranty included in this Indenture for the benefit of Securities of all series shall not be for the benefit of Securities of the series, or any combination of such covenants, warranties or provisions;
(9) the provisions of this Indenture, if any, that shall not apply to the series;
(10) the obligation, if any, of the Company to redeem, purchase or repay Securities of the series pursuant to any sinking fund or analogous provisions or at the option of a Holder thereof and the price or prices at which, the period or periods within which and the terms and conditions upon which Securities of the series shall be redeemed, purchased or repaid, in whole or in part, pursuant to such obligation;
(11) if other than the principal amount thereof, the portion of the principal amount of the Securities which shall be payable upon declaration of acceleration of the maturity thereof pursuant to Section 5.2;
(12) the right, if any, to defer payment of interest on the debt securities and the maximum length of any deferral period;
(13) whether the Securities of the series will be convertible into shares of voting stock or other securities of the Company and, if so, the terms and conditions upon which such Securities will be so convertible, including whether conversion is mandatory, at the option of the holder, or at the option of the Company, the conversion price, the conversion period and any provisions pursuant to which the number of shares of voting stock or other securities of the Company to be received by the holders of such series of Securities would be subject to adjustment;
(14) if other than U.S. dollars, the currency or currency units in which payment of the principal of and any premium and interest on the Securities of the series shall be payable;
(15) the terms and conditions, if any, pursuant to which the Securities of the series are secured;
(16) the terms pursuant to which the Securities of any series are subject to defeasance and satisfaction and discharge, if different than those provided herein;
(17) the date as of which any definitive Security or any Global Security representing Outstanding Securities of that series shall be dated if other than the date of its authentication;
(18) if other than as provided in Article II and this Article III, whether the Securities of the series shall be issued in whole or in part in the form of a Global Security or Securities and, in such case, the Depositary, if any, for such Global Security or Securities;
(19) whether the Company shall enter into an exchange and registration rights agreement with respect to the Securities of the series; and
(20) any other terms of the series (which additional terms shall not be inconsistent with the provisions of this Indenture).
Except as contemplated by Section 2.2, all Securities of any one series shall be substantially identical except as to denomination, rate of interest, Stated Maturity and the date from which interest, if any, shall accrue, and except as may otherwise be provided by or pursuant to such Board Resolution and set forth, or determined in the manner provided, in such Officers' Certificate referred to above or in any such indenture supplemental hereto. The terms of such Securities, as set forth above, may be determined by the Company from time to time if so provided in or established pursuant to the authority granted in Board Resolutions. All Securities of any one series need not be issued at the same time, and unless otherwise provided, a series may be reopened for issuance of additional Securities of such series.
If any of the terms of the Securities of a series are established by action taken pursuant to a Board Resolution, a copy of such Board Resolution shall be certified by the Secretary or an Assistant Secretary of the Company and delivered to the Trustee at or prior to the delivery of the Officers' Certificate setting forth the terms of the Securities of such series.
SECTION 3.2 Denominations.
The Securities of each series shall be issuable in registered form without coupons and in such denominations as shall be specified as contemplated by Section 3.1. In the absence of any such provisions with respect to the Securities of any series, the Securities of such series shall be issuable in denominations of $1,000 and any integral multiple thereof.
SECTION 3.3 Execution, Authentication, Delivery and Dating.
The Securities shall be executed in the name and on behalf of the Company by its Chairman or a Vice Chairman of the Board of Directors, its President, a Vice President, the Chief Financial Officer or the Chief Accounting Officer. The signature of any of these officers on the Securities may be manual or facsimile.
Securities bearing the manual or facsimile signatures of individuals who were at any time the proper officers of the Company shall bind the Company, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the authentication and delivery of such Securities or did not hold such offices at the date of such Securities.
At any time and from time to time after the execution and delivery of this Indenture, the Company may deliver Securities of any series executed by the Company to the Trustee for authentication, together with a Company Order for the authentication and delivery of such Securities, and the Trustee in accordance with the Company Order shall authenticate and deliver such Securities. If the form or terms of the Securities of the series have been established in or pursuant to one or more Board Resolutions as permitted by Sections 2.1 and 3.1, in authenticating such Securities, and accepting the additional
responsibilities under this Indenture in relation to such Securities, the Trustee shall be entitled to receive at the time of the initial delivery by the Company of Securities of such series to the Trustee for authentication, and (subject to Section 6.1) shall be fully protected in relying upon, an Opinion of Counsel stating:
(a) if the form of such Securities has been established by or pursuant to Board Resolution as permitted by Section 2.1, that such form has been established in conformity with the provisions of this Indenture;
(b) if the terms of such Securities have been established by or pursuant to Board Resolution as permitted by Section 3.1, that such terms have been established in conformity with the provisions of this Indenture; and
(c) that such Securities, when authenticated and delivered by the Trustee and issued by the Company in the manner and subject to any conditions specified in such Opinion of Counsel, will constitute valid and legally binding obligations of the Company enforceable in accordance with their terms, subject to bankruptcy, insolvency, reorganization, moratorium, arrangement, fraudulent conveyance, fraudulent transfer and other laws of general applicability relating to or affecting creditors' rights and to general equity principles, and will be entitled to the benefits of this Indenture.
The Trustee shall not be required to authenticate and deliver such Securities if the issue of such Securities pursuant to this Indenture will affect the Trustee's own rights, duties or immunities under the Securities and this Indenture or otherwise in a manner which is not reasonably acceptable to the Trustee.
Subject to Section 3.1(17), each Security shall be dated the date of its authentication.
No Security shall be entitled to any benefit under this Indenture or be valid or obligatory for any purpose unless there appears on such Security a certificate of authentication substantially in the form provided for herein executed by the Trustee by manual signature, and such certificate upon any Security shall be conclusive evidence, and the only evidence, that such Security has been duly authenticated and delivered hereunder and is entitled to the benefits of this Indenture.
Each Depositary designated pursuant to Section 3.1 for a Global Security in registered form must, at the time of its designation and at all times while it serves as Depositary, be a clearing agency registered under the Exchange Act and any other applicable statute or regulation.
SECTION 3.4 Temporary Securities.
Pending the preparation of definitive Securities of any series, the Company may execute, and upon receipt of a Company Order, the Trustee shall authenticate and deliver temporary Securities of such series which are printed, lithographed, typewritten, mimeographed or otherwise produced, in any authorized
denomination, substantially in the form of the definitive Securities in lieu of which they are issued and with such appropriate insertions, omissions, substitutions and other variations as the Company may determine, as evidenced by the execution of such Securities.
If temporary Securities of any series are issued, the Company will cause definitive Securities of that series to be prepared without unreasonable delay. After the preparation of definitive Securities of such series, the temporary Securities of such series shall be exchangeable for definitive Securities of such series upon surrender of the temporary Securities of such series at the office or agency of the Company in a Place of Payment for Securities of that series, without charge to the Holder. Upon surrender for cancellation of any one or more temporary Securities of any series, the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor a like aggregate principal amount of definitive Securities of the same series and of like tenor of authorized denominations. Until so exchanged, the temporary Securities of any series shall in all respects be entitled to the same benefits under this Indenture as definitive Securities of such series authenticated and delivered hereunder.
SECTION 3.5 Registration, Registration of Transfer and Exchange.
The Company shall cause to be kept at the Principal Corporate Trust Office of the Trustee a register (the register maintained in such office and in any other office or agency of the Company in a Place of Payment being herein sometimes collectively referred to as the "Security Register") in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration of Securities, or of Securities of a particular series, and of transfers of Securities or of Securities of such series. The Trustee is hereby appointed "Security Registrar" for the purpose of registering Securities and transfers of Securities as herein provided.
Subject to Section 3.14, upon surrender for registration of transfer of any Security of any series at the office or agency of the Company in a Place of Payment for Securities of that series, the Company shall execute, and the Trustee shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Securities of like tenor of the same series, of any authorized denominations and of a like aggregate principal amount.
Subject to Section 3.14, at the option of the Holder, Securities of any series maybe exchanged for other Securities of like tenor of the same series, of any authorized denominations and of a like aggregate principal amount, upon surrender of the Securities to be exchanged at such office or agency. Whenever any Securities are so surrendered for exchange, the Company shall execute, and the Trustee shall authenticate and deliver, the Securities which the Holder making the exchange is entitled to receive.
Notwithstanding anything to the contrary, Restricted Securities and beneficial interests therein shall only be transferred in a transaction registered under the Securities Act or pursuant to an applicable exemption therefrom and only in accordance with Section 3.6.
Upon the transfer, exchange or replacement of Securities not bearing a Restricted Securities Legend, the Securities Registrar shall deliver Securities that do not bear a Restricted Securities Legend. Upon the transfer, exchange or replacement of Securities bearing a Restricted Securities Legend, the Securities Registrar shall deliver only Securities that bear a Restricted Securities Legend unless (i) such Securities are exchanged for Exchange Securities (ii) such Securities are sold under an effective registration statement or (iii) there is delivered to the Securities Registrar an Opinion of Counsel to the effect that neither such legend nor the related restrictions on transfer are required in order to maintain compliance with the provisions of the Securities Act.
The transfer and exchange of Global Securities or beneficial interests therein shall be effected through the Depositary, in accordance with this Indenture (including applicable restrictions or transfer set forth herein, if any) and the procedures of the Depositary therefore. A transferor of a beneficial interest in a Global Security shall deliver a written order given in accordance with the Depositary's procedures containing information regarding the participant account of the Depositary to be credited with a beneficial interest in such Global Security or another Global Security and such account shall be credited in accordance with such order with a beneficial interest in the applicable Global Security and the account of the Person making the transfer shall be debited by an amount equal to the beneficial interest in the Global Security being transferred.
If the proposed transfer is a transfer of a beneficial interest in one Global Security which is a Restricted Security to a beneficial interest in another Global Security which is a Restricted Security, the Registrar shall reflect on its books and records the date and an increase in the principal amount of the Global Security to which such interest is being transferred in an amount of the Global Security to which such interest is being transferred in an amount equal to the principal amount of the interest to be so transferred, and the Registrar shall reflect on its books and records the date and a corresponding decrease in the principal amount of Global Security from which such interest is being transferred.
Subject to the restrictions on transfer contained herein, if the proposed transfer is a transfer of a beneficial interest in one Global Security which is a Restricted Security to a beneficial interest in another Global Security which is not a Restricted Security, the Registrar shall reflect on its books and records the date and an increase in the principal amount of the Global Security to which such interest is being transferred in an amount of the Global Security to which such interest is being transferred in an amount equal to the principal amount of the interest to be so transferred, and the Registrar shall reflect on its books and records the date and a corresponding decrease in the principal amount of Global Security from which such interest is being transferred. If no Global Securities are then outstanding, the Company shall issue and the Trustee shall authenticate, upon written order of the Company in the form of an Officers' Certificate, a new Global Security in the appropriate principal amount.
If specified by the Company pursuant to Section 3.15 with respect to a series of Securities in registered form, the Depositary for such series of Securities may surrender a Global Security for such series of Securities in exchange in whole or in part
for Securities of such series of like tenor and terms and in definitive form on such terms as are acceptable to the Company and such Depositary. Thereupon the Company shall execute, and the Trustee shall authenticate and deliver, without service charge, but at the Company's expense, (i) to each Person specified by such Depositary a new Security or Securities of the same series, of like tenor and terms and of any authorized denomination as requested by such Person in aggregate principal amount equal to and in exchange for such Person's beneficial interest in the Global Security; and (ii) to such Depositary a new Global Security of like tenor and terms and in a denomination equal to the difference, if any, between the principal amount of the surrendered Global Security and the aggregate principal amount of Securities delivered to Holders thereof.
All Securities issued upon any registration of transfer or exchange of Securities shall be the valid obligations of the Company, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Securities surrendered upon such registration of transfer or exchange.
Every Security presented or surrendered for registration of transfer, exchange or payment shall (if so required by the Company or the Trustee) be duly endorsed, or be accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar, duly executed by the Holder thereof or his attorney duly authorized in writing, and all such registrations of transfer and exchange shall be solely at the Company's expense.
No service charge shall be made for any registration of transfer or exchange of Securities, but the Company may require payment of a sum sufficient to cover any applicable tax or other governmental charge that may be imposed in connection with any registration of transfer or exchange of Securities, other than exchanges pursuant to Section 3.4, 9.6 or 11.7 not involving any transfer.
The Company shall not be required (i) to issue, register the transfer of or exchange any Security of any series during a period beginning at the opening of business 15 days before the day of the mailing of a notice of redemption of Securities of such series selected for redemption under Section 11.3 and ending at the close of business on the day of such mailing or (ii) to register the transfer of or exchange any Security so selected for redemption in whole or in part, except the unredeemed portion of any Security being redeemed in part.
The Trustee shall have no responsibility or obligation to any beneficial owner of a Global Security, a member of, or a participant in, any Depositary or other Person with respect to the accuracy of the records of any Depositary or their nominees or of any participant or member thereof, with respect to any ownership interest in the Securities or with respect to the delivery to any participant, member, beneficial owner or other Person (other than the Depositary) or any notice (including any notice of redemption) or the payment of any amount or delivery of any Securities (or other security or property) under or with respect to such Securities. All notices and communications to be given to the Holders and all payments to be made to Holders in respect of the Securities shall be given or made only to or upon the order of the registered Holders
(which shall be the Depositary or its nominees in the case of Global Securities). The rights of beneficial owners in any Global Security shall be exercised only through the Depositary subject to the Applicable Procedures. The Trustee may conclusively rely and shall be fully protected in relying upon information furnished by the Depositary with respect to its members, participants and any beneficial owners.
The Trustee shall have no obligation or duty to monitor, determine or inquire as to compliance with any restrictions on transfer imposed under this Indenture or under applicable law with respect to any transfer of any interest in any Security (including any transfers between or among, participants, members or beneficial owners of the Depositary in any Global Security) other than to require delivery of such certificates and other documentation or evidence as are expressly required by, and to do so if and when expressly required by, the terms of this Indenture, and to examine the same to determine substantial compliance as to form with the express requirements hereof.
SECTION 3.6 Additional Provisions Applicable to Transfer and Exchange of Restricted Securities.
(a) Notwithstanding any other provision of this Indenture, the following provisions shall apply with respect to any proposed transfer of Rule 144A Securities or Institutional Accredited Investor Securities prior to the date which is two years after the later of the date of its original issue and the last date on which the Company or any Affiliate of the Company was the owner of such Securities (or any predecessor thereto) (the "Resale Restriction Termination Date"):
(i) a transfer of a Rule 144A Security or a beneficial interest therein to a QIB shall be made upon the representation of the transferee, in the form of an assignment on the reverse of the certificate, that it is purchasing the Security for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a QIB within the meaning of Rule 144A, and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Company as such transferee has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the transferor is relying upon its foregoing representations in order to claim the exemption from registration provided by Rule 144A;
(ii) a transfer of a Rule 144A Security or a beneficial interest therein to a Non-U.S. Person shall be made upon receipt by the Trustee or its agent of a certificate substantially in the form set forth in Section 3.8 from the proposed transferor and, if requested by the Company or the Trustee, the delivery of an opinion of counsel, certification and/or other information satisfactory to each of them.
(b) Notwithstanding any other provision of this Indenture, the following provisions shall apply with respect to any proposed transfer of a Regulation S Security prior to the expiration of the Regulation S Restricted Period:
(i) a transfer of a Regulation S Security or a beneficial interest therein to a QIB shall be made upon the representation of the transferee, in the form of assignment on the reverse of the certificate, that it is purchasing the Security for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a QIB within the meaning of Rule 144A, and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Company as such transferee has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the transferor is relying upon its foregoing representations in order to claim the exemption from registration provided by Rule 144A; and
(ii) [Reserved]
(iii) a transfer of a Regulation S Security or a beneficial interest therein to a Non-U.S. Person shall be made upon receipt by the Trustee or its agent of a certificate substantially in the form set forth in Section 3.8 hereof from the proposed transferor and, if requested by the Company or the Trustee, receipt by the Trustee or its agent of an opinion of counsel, certification and/or other information satisfactory to each of them.
After the expiration of the Regulation S Restricted Period, interests in a Regulation S Security may be transferred without requiring the certification set forth in Section 3.8 or any additional certification.
(c) The Company shall deliver to the Trustee an Officer's Certificate setting forth the Resale Restriction Termination Date and the Regulation S Restricted Period.
The Securities Registrar shall retain copies of all letters, notices and other written communications received pursuant to Section 2.2 or this Section 3.6. The Company shall have the right to inspect and make copies of all such letters, notices or other written communications at any reasonable time upon the giving of reasonable written notice to the Securities Registrar.
SECTION 3.7 [Reserved]
SECTION 3.8 Form of Certificate to be Delivered in Connection with Transfers Pursuant to Regulation S.
[Date]
SunTrust Bank
Attention: Corporate Trust Services Division
Re: Assurant, Inc. Notes due 20 (the "Securities")
Ladies and Gentlemen:
In connection with our proposed sale of $_________ aggregate principal amount of the Securities, we confirm that such sale has been effected pursuant to and in accordance with Regulation S under the United States Securities Act of 1933, as amended (the "Securities Act"), and, accordingly, we represent that:
(1) the offer of the Securities was not made to a person in the United States;
(2) either (i) at the time the buy order was originated, the transferee was outside the United States or we and any person acting on our behalf reasonably believed that the transferee was outside the United States or (ii) the transaction was executed in, on or through the facilities of a designated offshore securities market and neither we nor any person acting on our behalf knows that the transaction has been pre-arranged with a buyer in the United States;
(3) no directed selling efforts have been made in the United States in contravention of the requirements of Rule 903(b) or Rule 904(b) of Regulation S, as applicable; and
(4) the transaction is not part of a plan or scheme to evade the registration requirements of the Securities Act.
In addition, if the sale is being made during a distribution compliance period, we represent that the sale is not being made to a United States person or for the account or benefit of a United States person.
You and the Company are entitled to rely upon this letter and are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceedings or official inquiry with respect to the matters covered hereby. Terms used in this certificate have the meanings set forth in Regulation S.
Very truly yours,
[Name of Transferor]
By:_____________________________
Authorized Signature Signature Medallion Guaranteed
SECTION 3.9 Mutilated, Destroyed, Lost and Stolen Securities.
If any mutilated Security is surrendered to the Trustee, the Company shall execute and the Trustee shall authenticate and deliver in exchange and substitution therefor and upon cancellation thereof a new Security of the same series and of like tenor and principal amount and bearing a number not contemporaneously outstanding.
If there shall be delivered to the Company and the Trustee (i) evidence to their satisfaction of the destruction, loss or theft of any Security and (ii) such security or indemnity as may be satisfactory to them, in their discretion, to save each of them and any agent of either of them harmless, then, in the absence of notice to the Company or the Trustee that such Security has been acquired by a bona fide purchaser, the Company shall execute and upon its written request the Trustee shall authenticate and deliver, in lieu of any such destroyed, lost or stolen Security, a new Security of the same series and of like tenor and principal amount and bearing a number not contemporaneously outstanding.
In case any such mutilated, destroyed, lost or stolen Security has become or is about to become due and payable or has been called for redemption pursuant to Section 11.4, the Company in its discretion may, instead of issuing a new Security, pay such Security.
Upon the issuance of any new Security under this Section, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Trustee) connected therewith.
Every new Security of any series issued pursuant to this
Section in lieu of any destroyed, lost or stolen Security shall constitute an
original additional contractual obligation of the Company, whether or not the
destroyed, lost or stolen Security shall be at any time enforceable by anyone,
and shall be entitled to all the benefits of this Indenture equally and
proportionately with any and all other Securities of that series duly issued
hereunder.
All Securities shall be held and owned upon the express condition that the provisions of this Section are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities.
SECTION 3.10 Payment of Interest; Interest Rights Preserved.
Interest on any Security which is payable, and is punctually paid or duly provided for, on any Interest Payment Date shall be paid to the Person in whose name that Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest.
Unless otherwise provided or contemplated by Section 3.1, interest, if any, payable on any Interest Payment Date with respect to a permanent Global Security will be paid to each of Euroclear and Clearstream, Luxembourg with respect to that portion of
such permanent Global Security held for its account by the Depositary. Each of Euroclear and Clearstream, Luxembourg will in such circumstances credit the interest received by it in respect of such permanent Global Security to the accounts of the beneficial owners thereof.
Interest on any Security of any series which is payable, but is not punctually paid or duly provided for, on any Interest Payment Date (herein called "Defaulted Interest") shall forthwith cease to be payable to the Holder on the relevant Regular Record Date by virtue of having been such Holder, and such Defaulted Interest may be paid by the Company, at its election in each case, as provided in clause (1) or (2) below:
(1) The Company may elect to make payment of any Defaulted Interest to the Persons in whose names the Securities of such series (or their respective Predecessor Securities) are registered at the close of business on a Special Record Date for the payment of such Defaulted Interest, which shall be fixed in the following manner. The Company shall notify the Trustee in writing of the amount of Defaulted Interest proposed to be paid on each Security of such series and the date of the proposed payment, and at the same time the Company shall deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Interest as in this Clause provided. Thereupon the Trustee shall fix a Special Record Date for the payment of such Defaulted Interest which shall be not more than 15 days and not less than 10 days prior to the date of the proposed payment and not less than 10 days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Company of such Special Record Date and, in the name and at the expense of the Company, shall cause notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor to be mailed, first- class postage prepaid, to each Holder of Securities of such series at his address as it appears in the Security Register, not less than 10 days prior to such Special Record Date. Notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor having been so mailed, such Defaulted Interest shall be paid to the Persons in whose names the Securities of such series (or their respective Predecessor Securities) are registered at the close of business on such Special Record Date and shall no longer be payable pursuant to the following clause (2).
(2) The Company may make payment of any Defaulted Interest on the Securities of any series in any other lawful manner not inconsistent with the requirements of any securities exchange on which such Securities may be listed, and upon such notice as may be required by such exchange, if, after written notice given by the Company to the Trustee of the proposed payment pursuant to this Clause, such manner of payment shall be deemed practicable by the Trustee in its sole discretion.
Subject to the foregoing provisions of this Section, each Security delivered under this Indenture upon registration of transfer of or in exchange for or in lieu of any other Security shall carry the rights to interest accrued and unpaid, and to accrue, which were carried by such other Security.
For the purposes of determining the Holders who are entitled to participate in any distribution on the Securities in respect of which a Regular Record Date or a Special Record Date is not otherwise provided for in this Indenture, or for the purpose of any other action (unless provided for pursuant to Section 3.1), the Company may from time to time fix a date, not more than 90 days prior to the date of the payment of distribution or other action, as the case may be, as a record date for the determination of the identity of the Holders of record for such purposes.
SECTION 3.11 Persons Deemed Owners.
The Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name any Security is registered as the owner of such Security for the purpose of receiving payment of principal of (and premium, if any) and (subject to Section 3.10) interest on such Security and for all other purposes whatsoever, whether or not such Security shall be overdue, and neither the Company, the Trustee nor any agent of the Company or the Trustee shall be affected by notice to the contrary.
SECTION 3.12 Cancellation.
All Securities surrendered for payment, redemption, registration of transfer or exchange or for credit against any sinking fund payment shall, if surrendered to any Person other than the Trustee, be delivered to the Trustee and shall be promptly cancelled by it. The Company may at any time deliver to the Trustee for cancellation any Securities previously authenticated and delivered hereunder which the Company may have acquired in any manner whatsoever, and all Securities so delivered shall be promptly cancelled by the Trustee. No Securities shall be authenticated in lieu of or in exchange for any Securities cancelled as provided in this Section, except as expressly permitted by this Indenture. Unless otherwise directed by a Company Order, delivery of which must be delivered in a timely manner to prevent such destruction, all cancelled Securities held by the Trustee shall be disposed of by the Trustee in accordance with its procedures for the disposition of cancelled securities as in effect on the date of such disposition, and the Trustee shall deliver a certificate of such disposition to the Company. Notwithstanding the foregoing, the Company may not issue new Securities to replace Securities that it has paid, redeemed or repurchased or that have been delivered to the Trustee for cancellation or that any Holder of Securities has submitted for redemption pursuant to Article XI hereof. Global Securities shall not be disposed of until exchanged in full for definitive Securities or until payment thereon is made in full.
SECTION 3.13 Interest.
(a) Each Security will bear interest at the rate established for the series of Securities of which such Security is a part pursuant to Section 3.1
(the "Interest Rate") from and including the original date of issuance of such Security until the principal thereof becomes due and payable, and on any overdue principal and (to the extent that payment of such interest is enforceable under applicable law) on any overdue installment of interest at the Interest Rate, compounded and payable on the payment dates established for the series of Securities of which such Security is a part pursuant to Section 3.1 (each, an "Interest Payment Date") commencing on the date established for the series of Securities of which such Security is a part pursuant to Section 3.1, to the Person in whose name such Security or any Predecessor Security is registered, at the close of business on the Regular Record Date for such interest installment.
(b) The amount of interest payable for any period will be
computed on the basis of a 360-day year of twelve 30-day months and will include
the first day but exclude the last day of such period. Except as provided in
Section 1.13 hereof, the amount of interest payable for any period shorter than
a full period for which interest is computed will be computed on the basis of
the actual number of days elapsed in each 30-day month.
SECTION 3.14 Form and Payment.
Except as provided in Section 3.15, the Securities of each series shall be issued in fully registered certificated form without interest coupons. Except as provided in Section 3.1, principal and interest on the Securities issued in certificated form will be payable, the transfer of such Securities will be registrable, and such Securities will be exchangeable, for Securities of the same series bearing identical terms and provisions at the office or agency of the Trustee; provided, however, that payment of interest may be made at the option of the Company (1) by check mailed to the Holders of such Securities at such address as shall appear in the Security Register or (2) by wire transfer of immediately available funds to the accounts specified by the Holders thereof. Payments in respect of Securities represented by a Global Security (including principal, premium and interest) will be made by wire transfer of immediately available funds to the accounts specified by the Depositary.
SECTION 3.15 Global Securities.
(a) (i) Except as otherwise provided in accordance with Section 3.1, the Securities shall be issued in the form of one or more permanent global securities in fully registered form without interest coupons (each, a "Global Security"). Any Global Security shall be deposited on behalf of the purchasers of the Securities represented thereby with the Trustee as custodian for the Depositary, and registered in the name of the Depositary or a nominee of the Depositary for the accounts of participants in the Depositary, duly executed by the Company and authenticated by the Trustee as hereinafter provided. The aggregate principal amount of a Global Security may from time to time be increased or decreased by adjustments made on the records of the Trustee and the Depositary or its nominee as hereinafter provided. This Section 3.15(a) shall apply only to a Global Security deposited with or on behalf of the Depositary;
(ii) the Company shall execute and the Trustee shall, in accordance with this Section 3.15(a) and a Company Order, authenticate and deliver initially one or more Global Securities that (i) shall be registered in the name of Cede & Co. or other nominee of such Depositary and (ii) shall be delivered by the Trustee to such Depositary or pursuant to such Depositary's instructions or held by the Trustee as custodian for the Depositary pursuant to a FAST Balance Certificate Agreement between the Depositary and the Trustee; and
(iii) members of, or participants in, the Depositary ("Agent Members") shall have no rights under this Indenture with respect to any Global Security held on their behalf by the Depositary or by the Trustee as the custodian of the Depositary or under such Global Security, and the Depositary may be treated by the Company, the Trustee and any agent of the Company or the Trustee as the absolute owner of such Global Security for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Trustee or any agent of the Company or the Trustee from giving effect to any written certification, proxy or other authorization furnished by the Depositary or impair, as between the Depositary and its Agent Members, the operation of customary practices of such Depositary governing the exercise of the rights of a holder of a beneficial interest in any Global Security.
(b) A Global Security may be transferred, in whole but not in part, only to another nominee of the Depositary, or to a successor Depositary selected or approved by the Company or to a nominee of such successor Depositary.
(c) Notwithstanding any other provisions of this Indenture or the Securities, a Global Security shall not be exchanged in whole or in part for a Security registered in the name of any Person other than the Depositary or one or more nominees thereof, provided that if at any time the Depositary notifies the Company that it is unwilling or unable to continue as Depositary for any series of Securities or if at any time the Depositary for such series shall cease to be a clearing agency registered or in good standing under the Exchange Act, or other applicable statute or regulation, and, in either case, a successor Depositary for such series is not appointed by the Company within 90 days after the Company receives such notice or becomes aware of such condition, as the case may be, or an Event of Default has occurred and is continuing with respect to the Securities, the Company will execute, and, subject to this Article III, the Trustee, upon written notice from the Company, will authenticate and deliver the Securities of such series in definitive registered form without interest coupons, in authorized denominations, and in an aggregate principal amount equal to the principal amount of the Global Security in exchange for such Global Security. In addition, the Company may at any time determine that some or all of the Securities of any series shall no longer be represented by a Global Security. In such event the Company will execute, and subject to Section 3.5, the Trustee, upon receipt of an Officers' Certificate evidencing such determination by the Company, will authenticate and deliver the Securities of such series in definitive registered form
without coupons, in authorized denominations, and in an aggregate principal amount equal to the principal amount of the Global Security for such series so selected in exchange for such Global Security. Upon the exchange of the Global Security for such Securities in definitive registered form without coupons, in authorized denominations, the Global Security shall be cancelled by the Trustee. Such Securities in definitive registered form issued in exchange for the Global Security shall be registered in such names and in such authorized denominations as the Depositary, pursuant to instructions from its direct or indirect participants or otherwise, shall instruct the Trustee and shall bear the applicable legends provided for herein. Any Global Security to be exchanged in whole shall be surrendered by the Depositary to the Trustee, as Securities Registrar. With regard to any Global Security to be exchanged in part, either such Global Security shall be so surrendered for exchange or, if the Trustee is acting as custodian for the Depositary or its nominee with respect to such Global Security, the principal amount thereof shall be reduced, by an amount equal to the portion thereof to be so exchanged, by means of an appropriate adjustment made on the records of the Trustee. Upon any such surrender or adjustment, the Trustee shall deliver such Securities to the Depositary, for delivery to the Persons in whose names such Securities are so registered. In the event of the occurrence of any of the events specified in this paragraph, the Company will promptly make available to the Trustee a reasonable supply of definitive Securities in definitive, fully registered form, without interest coupons.
SECTION 3.16 CUSIP Numbers.
The Company in issuing the Securities may use "CUSIP" numbers (if then generally in use), and, if so, the Trustee shall use "CUSIP" numbers in notices of redemption as a convenience to Holders; provided that any such notice may state that no representation is made as to the correctness of such numbers either as printed on the Securities or as contained in any notice of a redemption and that reliance may be placed only on the other identification numbers printed on the Securities, and any such redemption shall not be affected by any defect in or omission of such numbers. The Company will promptly notify the Trustee of any change in the "CUSIP" numbers.
ARTICLE IV
SATISFACTION AND DISCHARGE; DEFEASANCE
SECTION 4.1 Satisfaction and Discharge of Indenture.
This Indenture shall upon Company Request cease to be of further effect with respect to Securities of any series (except as to any surviving rights of registration of transfer or exchange of Securities herein expressly provided for), and the Trustee, at the expense of the Company, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture, when
(1) either
(i) all Securities of such series theretofore authenticated and delivered (other than (x) Securities which have been destroyed, lost or stolen and which have been replaced or paid as provided in Section 3.9 and (y) Securities for whose payment money has theretofore been deposited in trust or segregated and held in trust by the Company and thereafter repaid to the Company or discharged from such trust, as provided in Section 10.4) have been delivered to the Trustee for cancellation; or
(ii) all such Securities of such series not theretofore delivered to the Trustee for cancellation
(A) have become due and payable, or
(B) will become due and payable at their Stated Maturity within one year, or
(C) are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption by the Trustee in the name, and at the expense, of the Company, and the Company, in the case of (i), (ii) or (iii) above, has deposited or caused to be deposited with the Trustee as trust funds in trust for the purpose an amount of money in U.S. dollars sufficient, or U.S. Government Obligations, the principal of and interest on which when due, will be sufficient or a combination thereof, sufficient in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee to pay and discharge the entire indebtedness on such Securities of that series not theretofore delivered to the Trustee for cancellation, for principal (and premium, if any) and interest to the date of such deposit (in the case of Securities which have become due and payable) or to the Stated Maturity or Redemption Date, as the case may be;
(2) the Company has paid or caused to be paid all other sums payable hereunder with respect to such series by the Company (including all sums payable pursuant to Section 6.7 herein); and
(3) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture have been complied with.
Notwithstanding the satisfaction and discharge of this Indenture, the obligations of the Company to the Trustee under Section 6.7, the rights, duties and immunities of the Trustee hereunder, including, without limitation, those provided in Sections 6.1 and 6.3, the obligations of the Trustee to any Authenticating Agent under Section 6.14, and, if money shall have been deposited with the Trustee pursuant to
subclause (B) of clause (1) of this Section, the obligations of the Trustee under Section 4.2 and the last paragraph of Section 10.4 shall survive.
SECTION 4.2 Defeasance and Discharge.
The following provisions shall apply to the Securities of each
series unless specifically otherwise provided in a Board Resolution, Officers'
Certificate or indenture supplemental hereto provided pursuant to Section 3.1.
In addition to discharge of this Indenture pursuant to Sections 4.1 and 4.3, in
the case of any series of Securities with respect to which an amount sufficient
to pay and discharge the entire indebtedness on such Securities not theretofore
delivered to the Trustee for cancellation, for principal (and premium, if any)
and interest, as certified pursuant to subparagraph (a) of Section 4.4 can be
determined at the time of making the deposit referred to in such subparagraph
(a), the Company shall be deemed to have paid and discharged the entire
indebtedness on all the Securities of such a series as provided in this Section
on and after the date the conditions set forth in Section 4.4 are satisfied, and
the provisions of this Indenture with respect to the Securities of such series
shall no longer be in effect (except as to (i) rights of registration of
transfer and exchange of Securities of such series, (ii) substitution of
mutilated, defaced, destroyed, lost or stolen Securities of such series, (iii)
rights of Holders of Securities of such series to receive, solely from the trust
fund described in subparagraph (a) of Section 4.4, payments of principal thereof
and interest, if any, thereon upon the original stated due dates therefor (but
not upon acceleration), and remaining rights of the Holders of Securities of
such series to receive mandatory sinking fund payments, if any, (iv) the rights,
obligations, duties and immunities of the Trustee hereunder, (v) this Section
4.2 and (vi) the rights of the Holders of Securities of such series as
beneficiaries hereof with respect to the property so deposited with the Trustee
payable to all or any of them) (hereinafter called "Defeasance"), and the
Trustee at the cost and expense of the Company, shall execute proper instruments
acknowledging the same.
SECTION 4.3 Covenant Defeasance.
In the case of any series of Securities with respect to which an amount sufficient to pay and discharge the entire indebtedness on such Securities not theretofore delivered to the Trustee for cancellation, for principal (and premium, if any) and interest, as certified pursuant to subparagraph (a) of Section 4.4 can be determined at the time of making the deposit referred to in such subparagraph (a), (i) the Company shall be released from its obligations under any covenants specified in or pursuant to this Indenture (except as to (A) rights of registration of transfer and exchange of Securities of such series, (B) substitution for mutilated, defaced, destroyed, lost or stolen Securities of such series, (C) rights of Holders of Securities of such series to receive, from the Company pursuant to Section 10.1, payments of principal thereof and interest, if any, thereon upon the original stated due dates therefor (but not upon acceleration), (D) rights of Holders of Securities of such series to receive mandatory sinking fund payments, if any, (E) the rights, obligations, duties and immunities of the Trustee hereunder, and (F) the rights of the Holders of Securities of such series as beneficiaries hereof with respect to the property so deposited with the Trustee payable to all or any of them, including any
additional covenants applicable to such series of Securities specified in
accordance with Section 3.1, and (ii) the occurrence of any event specified in
Sections 5.1(4) (with respect to any of the covenants specified in or pursuant
to this Indenture) and 5.1(7) shall be deemed not to be or result in an Event of
Default, in each case with respect to the Outstanding Securities of such series
as provided in this Section on and after the date the conditions set forth in
Section 4.4 are satisfied (hereinafter called "Covenant Defeasance"), and the
Trustee, at the cost and expense of the Company, shall execute proper
instruments acknowledging the same. For this purpose, such Covenant Defeasance
means that the Company may omit to comply with and shall have no liability in
respect of any term, condition or limitation set forth in any such covenant (to
the extent so specified in the case of Section 5.1(4)), whether directly or
indirectly by reason of any reference elsewhere herein to any such covenant or
by reason of any reference in any such covenant to any other provision herein or
in any other document, but the remainder of this Indenture and the Securities of
such series shall be unaffected thereby.
SECTION 4.4 Conditions to Defeasance or Covenant Defeasance.
The following shall be the conditions to application of either
Section 4.2 or 4.3 to the Outstanding Securities of any series:
(a) with reference to Section 4.2 or 4.3, the Company has irrevocably deposited or caused to be irrevocably deposited with the Trustee as funds in trust, specifically pledged as security for, and dedicated solely to, the benefit of the Holders of Securities of such series (i) cash in an amount, or (ii) direct obligations of the United States of America, backed by its full faith and credit ("U.S. Government Obligations"), maturing as to principal and interest, if any, at such times and in such amounts as will insure the availability of cash, or (iii) a combination thereof, in each case sufficient, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay and discharge (A) the principal of and interest, if any, on all Securities of such series on each date that such principal or interest, if any, is due and payable and (B) any mandatory sinking fund payments on the dates on which such payments are due and payable in accordance with the terms of this Indenture and the Securities of such series;
(b) in the case of Defeasance under Section 4.2, the Company has delivered to the Trustee an Opinion of Counsel based on the fact that (x) the Company has received from, or there has been published by, the Internal Revenue Service a ruling or (y), since the date hereof, there has been a change in the applicable United States federal income tax law, in either case to the effect that, and such opinion shall confirm that, the Holders of the Securities of such series will not recognize income, gain or loss for United States federal income tax purposes as a result of such deposit, Defeasance and discharge and will be subject to United States federal income tax on the same amount and in the same manner and at the same times, as would have been the case if such deposit, Defeasance and discharge had not occurred;
(c) in the case of Covenant Defeasance under Section 4.3, the Company has delivered to the Trustee an Opinion of Counsel to the effect that, and such opinion shall confirm that, the Holders of the Securities of such series will not recognize income, gain or loss for United States federal income tax purposes as a result of such deposit and Covenant Defeasance and will be subject to United States federal income tax on the same amount and in the same manner and at the same times, as would have been the case if such deposit and Covenant Defeasance had not occurred;
(d) such Defeasance or Covenant Defeasance will not result in a breach or violation of, or constitute a default under, any agreement or instrument to which the Company is a party or by which it is bound;
(e) the Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent contemplated by this provision have been complied with; and
(f) the Company has paid or has caused to be paid all sums then outstanding, due and owing under Section 6.7 herein.
SECTION 4.5 Application of Trust Money.
Subject to the provisions of the last paragraph of Section 10.4, all money and U.S. Government Obligations deposited with the Trustee pursuant to Sections 4.1 or 4.4 shall be held in trust, and such money and all money from such U.S. Government Obligations shall be applied by it, in accordance with the provisions of the Securities and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Persons entitled thereto, of the principal (and premium, if any) and interest for whose payment such money and U.S. Government Obligations has been deposited with the Trustee.
SECTION 4.6 Indemnity for U.S. Government Obligations.
The Company shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the U.S. Government Obligations deposited pursuant to Sections 4.1 or 4.4 or the principal or interest received in respect of such obligations other than any such tax, fee or other charge that by law is for the account of the Holders of Outstanding Securities.
ARTICLE V
REMEDIES
SECTION 5.1 Events of Default.
"Event of Default," wherever used herein with respect to Securities of any series, means any one of the following events (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of
law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body) unless it is either inapplicable to a particular series or it is specifically deleted or modified in an indenture supplemental hereto, if any, under which such series of Securities is issued:
(1) default in the payment of interest upon any Security of that series when it becomes due and payable, and continuance of such default for a period of 30 days, and the Interest Payment Date has not been properly extended or deferred; or
(2) default in the payment of the principal of (or premium, if any, on) any Security of that series when it becomes due and payable whether at maturity, upon redemption, by declaration or otherwise, or in any payment required by any sinking or analogous fund established with respect to that series, and the maturity has not been properly extended; or
(3) default in the deposit of any sinking fund payment when and as due by the terms of a Security of that series, and the continuance of such default for a period of 30 days; or
(4) default in the performance, or breach, of any covenant or agreement of the Company in this Indenture (other than a covenant or agreement a default in whose performance or whose breach is elsewhere in this Section specifically dealt with or which has expressly been included in this indenture solely for the benefit of Securities of any series other than that series), and continuance of such default or breach for a period of 60 days after there has been given, by registered or certified mail, to the Company by the Trustee or to the Company and the Trustee by the Holders of at least 25% in aggregate principal amount of the Outstanding Securities of that series a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder; or
(5) default under any mortgage, indenture or instrument
under which there may be issued or by which there may be secured or
evidenced any Indebtedness of the Company or any of its Subsidiaries
(other than Indebtedness owed to the Company or one of its
Subsidiaries) where such Indebtedness now exists, or is created after
the date of this Indenture, if such default is (x) caused by a failure
to pay principal of, or interest or premium (if any) on, such
Indebtedness at final maturity prior to the expiration of the grace
period provided by such Indebtedness on the date of such default; or
(y) results in the acceleration of such Indebtedness prior to its
express maturity; and, in the case of clause (x) and (y), the principal
amount of such Indebtedness, together with the principal amount of any
other such Indebtedness the maturity of which has been so accelerated,
aggregates to $50 million or more and such acceleration is not
rescinded or annulled within 30 days of notice from the Trustee or the
Holders of not less than 25% in aggregate principal amount of the
Outstanding Securities of that series; or
(6) the entry by a court having jurisdiction in the premises of (A) a decree or order for relief in respect of the Company or a Principal Subsidiary in an involuntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or (B) a decree or order adjudging the Company or a Principal Subsidiary a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of the Company or a Principal Subsidiary under any applicable Federal or State law, or appointing a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or a Principal Subsidiary or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and the continuance of any such decree or order for relief or any such other decree or order unstayed and in effect for a period of 90 consecutive days; or
(7) the commencement by the Company or a Principal Subsidiary of a voluntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or of any other case or proceeding to be adjudicated a bankrupt or insolvent, or the consent by it to the entry of a decree or order for relief in respect of the Company or a Principal Subsidiary in an involuntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or to the commencement of any bankruptcy or insolvency case or proceeding against it, or the filing by it of a petition or answer or consent seeking reorganization or relief under any applicable Federal or State law, or the consent by it to the filing of such petition or to the appointment of or taking possession by a custodian, receiver, liquidator, assignee, trustee, sequestrator or similar official of the Company or a Principal Subsidiary or of any substantial part of its property, or the making by it of an assignment for the benefit of creditors, or the admission by it in writing of its inability to pay its debts generally as they become due, or the taking of corporate action by the Company or a Principal Subsidiary in furtherance of any such action; or
(8) any other Event of Default provided with respect to Securities of that series as provided in a supplemental indenture, Board Resolution or Officers' Certificate applicable to such series of Securities.
SECTION 5.2 Acceleration of Maturity; Rescission and Annulment.
If an Event of Default with respect to Securities of any series at the time Outstanding (other than an Event of Default specified in clause (6) or (7) of Section 5.1 hereof) occurs and is continuing, then in each and every such case the Trustee, if the Trustee has actual knowledge thereof, or the Holders of not less than 25% in aggregate principal amount of the Outstanding Securities of that series may, but shall not be obligated to, declare the principal amount of and interest on all of the Securities of that series, including Additional Interest, if any, and any other amount payable under the Indenture, to be due and payable immediately, by a notice in writing to the Company (and to the Trustee if given by the Holders), and upon any such declaration such principal
amount and interest (or specified amount) shall become immediately due and payable. If an Event of Default specified in clause (6) or (7) of Section 5.1 hereof occurs and is continuing, then such amount will ipso facto become immediately due and payable.
At any time after such a declaration of acceleration with respect to Securities of any series has been made and before a judgment or decree for payment of the money due has been obtained by the Trustee as hereinafter in this Article provided, the Holders of Securities representing a majority in aggregate principal amount of the Outstanding Securities of that series, by written notice to the Company and the Trustee, may rescind and annul such declaration and its consequences if:
(1) the Company has paid or deposited with the Trustee a sum sufficient to pay
(A) all overdue interest on all Securities of that series;
(B) the principal of (and premium, if any, on)
any Securities of that series which has become due otherwise
than by such declaration of acceleration and interest thereon
at the rate or rates prescribed therefor in such Securities;
(C) all overdue sinking fund payments with respect to Securities of that series and interest thereon at the rate or rates prescribed therefor in such Securities;
(D) to the extent that payment of such interest is lawful, interest upon overdue interest at the rate or rates prescribed therefor in such Securities; and
(E) all sums paid or advanced by the Trustee hereunder and the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel (including reasonable legal fees and expenses);
and
(2) all Events of Default with respect to Securities of that series, other than the non-payment of the principal of Securities of that series which have become due solely by such declaration of acceleration, have been cured or waived as provided in Section 5.13.
No such rescission shall affect any subsequent default or Event of Default or impair any right consequent thereon.
SECTION 5.3 Collection of Indebtedness and Suits for Enforcement by Trustee.
The Company covenants that if:
(1) default is made in the payment of any interest on any Security when such interest becomes due and payable and such default continues for a period of 30 days;
(2) default is made in the payment of the principal of (or premium, if any, on) any Security at the Stated Maturity thereof; or
(3) default is made in the deposit of any sinking fund payment when and as due by the terms of a Security of any series and such default continues for a period of 30 days;
the Company will, upon demand of the Trustee, pay to it, for the benefit of the Holders of such Securities then Outstanding, the whole amount then due and payable on such Securities for principal (and premium, if any) and interest and for any sinking fund payment and, to the extent that payment of such interest shall be legally enforceable, interest on any overdue principal (and premium, if any), on any overdue interest and on any overdue sinking fund payment, at the rate or rates prescribed therefor in such Securities, and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel.
If the Company fails to pay such amounts forthwith upon such demand, the Trustee, in its own name and as trustee of an express trust, may institute a judicial proceeding for the collection of the sums so due unpaid, may, in its discretion, prosecute such proceeding to judgment or final decree and may enforce the same against the Company or any other obligor upon such Securities of such series and collect the monies adjudged or decreed to be payable in the manner provided by law out of the property of the Company or any other obligor upon such Securities, wherever situated.
If an Event of Default, of which a Responsible Officer of the Trustee has actual knowledge, with respect to Securities of any series occurs and is continuing, the Trustee may in its discretion proceed to protect and enforce its rights and the rights of the Holders of Securities of such series by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Indenture or in aid of the exercise of any power granted herein, or to enforce any other proper remedy.
SECTION 5.4 Trustee May File Proofs of Claim.
In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to the Company or any other obligor upon the Securities or the property of the Company or of such other obligor or their creditors, the Trustee (irrespective of whether the principal of any of the Securities shall then be due and
payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand on the Company for the payment of overdue principal or interest or any sinking fund payment) shall be entitled and empowered, by intervention in such proceeding or otherwise:
(i) to file and prove a claim for the whole amount of principal (and premium, if any) and interest and sinking fund payments owing and unpaid in respect of the Securities and to file such other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel) and of the Holders allowed in such judicial proceeding, and
(ii) to collect and receive any monies or other property payable or deliverable on any such claims and to distribute the same;
and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 6.7.
Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Holder thereof or to authorize the Trustee to vote in respect of the claim of an Holder in any such proceeding.
SECTION 5.5 Trustee May Enforce Claims Without Possession of Securities.
All rights of action and claims under this Indenture or the Securities may be prosecuted and enforced by the Trustee without the possession of any of the Securities or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, be for the ratable benefit of the Holders of the Securities in respect of which such judgment has been recovered.
SECTION 5.6 Application of Money Collected.
Any money collected by the Trustee with respect to a series of Securities pursuant to this Article shall be applied in the following order, at the date or dates fixed by the Trustee and, in case of the distribution of such money on account of principal (or premium, if any), interest or sinking fund payments, upon presentation of the Securities
and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid:
FIRST: To the payment of all amounts due the Trustee under
Section 6.7; and
SECOND: To the payment of the amounts then due and unpaid for principal of (and premium, if any), and interest on, and sinking fund payments with respect to, the Securities in respect of which or for the benefit of which such money has been collected, ratably, without preference or priority of any kind, according to the amounts due and payable on such Securities for principal (and premium, it any), and interest and sinking fund payments, respectively.
Any surplus remaining shall be paid to the Company or to such other persons as shall be entitled to receive it.
SECTION 5.7 Limitation on Suits.
No Holder of any Security of any series shall have any right to institute any proceeding, judicial or otherwise, with respect to this Indenture, or for the appointment of a receiver or trustee, or for any other remedy hereunder, in each case with respect to an Event of Default with respect to such series of Securities, unless:
(1) such Holder has previously given written notice to the Trustee of the happening of one or more Events of Default with respect to the Securities of that series;
(2) the Holders of not less than 25% in aggregate principal amount of the Outstanding Securities of that series shall have made written request to the Trustee to institute proceedings in respect of such Event of Default in its own name as Trustee hereunder;
(3) such Holder or Holders have offered to the Trustee indemnity, reasonably satisfactory to the Trustee, against the costs, expenses (including reasonable legal fees and expenses) and liabilities to be incurred in compliance with such request;
(4) the Trustee for 60 days after its receipt of such notice, request and offer of indemnity has failed to institute any such proceeding; and
(5) no direction inconsistent with such written request has been given to the Trustee during such 60-day period by the Holders of a majority in principal amount of all Outstanding Securities of that series;
it being understood and intended that no one or more of such Holders shall have any right in any manner whatever by virtue of, or by availing of, any provision of this indenture to affect, disturb or prejudice the rights of any other of such Holders, or to obtain or to seek to obtain priority or preference over any other of such Holders or to enforce any right
under this Indenture, except in the manner herein provided and for the equal and ratable benefit of all of such Holders.
SECTION 5.8 Unconditional Right of Holders to Receive Principal, Premium and Interest.
Notwithstanding any other provision in this Indenture, the Holder of any Security shall have the right, which is absolute and unconditional, to receive payment of the principal of (and premium, if any) and (subject to Section 3.10) interest on such Security on the Stated Maturity or Maturities expressed in such Security (or, in the case of redemption, on the Redemption Date) and to institute suit for the enforcement of any such payment, and such rights shall not be impaired without the consent of such Holder.
SECTION 5.9 Restoration of Rights and Remedies.
If the Trustee or any Holder of any Security has instituted any proceeding to enforce any right or remedy under this Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then and in every such case, subject to any determination in such proceeding, the Company, the Trustee and the Holders shall be restored severally and respectively to their former positions hereunder and thereafter all rights and remedies of the Trustee and the Holders shall continue as though no such proceeding had been instituted.
SECTION 5.10 Rights and Remedies Cumulative.
Except as otherwise provided with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities in the last paragraph of Section 3.9, no right or remedy herein conferred upon or reserved to the Trustee or to the Holders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy.
SECTION 5.11 Delay or Omission Not Waiver.
No delay or omission of the Trustee or of any Holder of any Securities to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article or by law to the Trustee or to the Holders may be exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the Holders, as the case may be.
SECTION 5.12 Control by Holders.
The Holders of a majority in principal amount of the Outstanding Securities of any series shall have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee, with respect to the Securities of such series, provided that:
(1) such direction shall not be in conflict with any rule of law or with this Indenture;
(2) the Trustee may take any other action deemed proper by the Trustee that is not inconsistent with such direction; and
(3) unless otherwise provided under the Trust Indenture Act, the Trustee need not take any action that might involve it in personal liability or might be unduly prejudicial to the Holders of the Securities of the affected series not involved in the proceeding.
SECTION 5.13 Waiver of Past Defaults.
The Holders of not less than a majority in principal amount of the Outstanding Securities of any series may on behalf of the Holders of all the Securities of such series waive any past default hereunder with respect to the Securities of such series and its consequences, except a default:
(1) in the payment of the principal of (or premium, if any), or interest on, any Security of such series, or in the payment of any sinking fund installment with respect to the Securities; or
(2) in respect of a covenant or provision hereof which under Article IX cannot be modified or amended without the consent of the Holder of each Outstanding Security of such series affected.
Upon any such waiver, such default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent thereon.
SECTION 5.14 Undertaking for Costs.
All parties to this Indenture agree, and each Holder of any Security by his acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken, suffered or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys' fees, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; but the provisions of this Section shall not apply to any suit instituted by the Company, to any suit instituted by the Trustee, to any suit instituted by any Holder, or group of Holders, holding in the aggregate more than 10% in principal amount of the Outstanding Securities of any series,
or to any suit instituted by any Holder for the enforcement of the payment of the principal of (or premium, if any) or interest on any Security on or after the Stated Maturity or Maturities expressed in such Security (or, in the case of redemption, on or after the Redemption Date).
ARTICLE VI
THE TRUSTEE
SECTION 6.1 Certain Duties and Responsibilities.
(1) Except during the continuance of an Event of Default:
(a) the Trustee undertakes to perform such duties and only such duties as are specifically set forth in this Indenture, and no implied covenants or obligations shall be read into this Indenture against the Trustee; and
(b) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture; but in the case of any such certificates or opinions which by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Indenture; provided, however, that the Trustee shall be under no obligation to ascertain the genuineness of the signatures thereto.
(2) In case an Event of Default with respect to any series of Securities, of which a Responsible Officer of the Trustee has actual knowledge, has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs.
(3) No provision of this Indenture shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that:
(a) this subsection shall not be construed to limit the effect of subsection (1) of this Section;
(b) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts;
(c) the Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Holders of a majority in principal amount of the Outstanding Securities of any
series determined as provided in Section 5.12, relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Indenture with respect to the Securities of such series; and
(d) no provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any personal financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers.
(4) Whether or not therein expressly so provided, every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this Section.
SECTION 6.2 Notice of Defaults.
Within 90 days after the occurrence of any default hereunder with respect to Securities of any series, the Trustee shall transmit at the Company's expense by mail to all Holders of Securities of such series, as their names and addresses appear in the Security Register, notice of such default hereunder actually known to a Responsible Officer of the Trustee or for which the Trustee has received written notice of the event constituting such default at its Principal Corporate Trust Office, unless such default shall have been cured or waived; provided that, except in the case of a default in the payment of the principal of (or premium, if any) or interest on any Security of such series or in the payment of any sinking fund installment with respect to Securities of such series, the Trustee shall be protected in withholding such notice if and so long as a Responsible Officer of the Trustee in good faith determines that the withholding of such notice is in the interest of the Holders of Securities of such series; and provided, further, that in the case of any default of the character specified in Section 5.1(4) with respect to Securities of such series, no such notice to Holders shall be given until at least 30 days after the occurrence thereof. For the purpose of this Section, the term "default" means any event which is, or after notice or lapse of time or both would become, an Event of Default with respect to Securities of such series.
SECTION 6.3 Certain Rights of Trustee.
Subject to the provisions of Section 6.1:
(a) the Trustee may conclusively rely and shall be fully protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties;
(b) any request or direction of the Company mentioned herein shall be sufficiently evidenced by a Company Request or Company Order, and (a)
any resolution of the Board of Directors may be sufficiently evidenced by a Board Resolution;
(c) whenever in the administration of this Indenture the Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Trustee (unless other evidence be herein specifically prescribed) may, in the absence of bad faith on its part, conclusively rely upon an Officers' Certificate;
(d) the Trustee may consult with counsel of its selection and the written advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon;
(e) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders pursuant to this Indenture, unless such Holders shall have offered to the Trustee security or indemnity, reasonably satisfactory to it, against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction;
(f) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of the Company, personally or by agent or attorney; and
(g) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents, attorneys, custodians or nominees and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent, attorney, custodian or nominee appointed with due care by it hereunder.
(h) the rights, privileges, protections, immunities and benefits given to the Trustee, including, without limitation, its right to be indemnified are extended to, and shall be enforceable by, the Trustee in each of its capacities hereunder, and each agent, custodian and other Person employed to act hereunder; and
(i) the Trustee may request that the Company deliver an Officers' Certificate setting forth the names of individuals and/or titles of officers authorized at such time to take specified actions pursuant to this Indenture, which Officers' Certificate may be signed by any person authorized to sign an Officers'
Certificate, including any person specified as so authorized in any such certificate previously delivered and not superseded.
SECTION 6.4 Not Responsible for Recitals or Issuance of Securities.
The recitals contained herein and in the Securities, except the Trustee's certificates of authentication, shall be taken as the statements of the Company, and the Trustee or any Authenticating Agent assumes no responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of this Indenture or of the Securities. The Trustee or any Authenticating Agent shall not be accountable for the use or application by the Company of Securities or the proceeds thereof.
SECTION 6.5 May Hold Securities.
The Trustee, any Authenticating Agent, any Paying Agent, any Security Registrar or any other agent of the Company, in its individual or any other capacity, may become the owner or pledgee of Securities and, subject to Sections 6.8 and 6.13, may otherwise deal with the Company with the same rights it would have if it were not Trustee, Authenticating Agent, Paying Agent, Security Registrar or such other agent.
SECTION 6.6 Money Held in Trust.
Money held by the Trustee in trust hereunder need not be segregated from other funds except to the extent required by law. The Trustee shall be under no liability for interest on any money received by it hereunder except as otherwise agreed with the Company.
SECTION 6.7 Compensation and Reimbursement.
The Company agrees:
(1) to pay to the Trustee from time to time such reasonable compensation for all services rendered by it hereunder as the Company and the Trustee shall from time to time agree in writing (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust);
(2) except as otherwise expressly provided herein, to reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any provision of this Indenture (including the reasonable compensation and the expenses and disbursements of its agents, nominees, custodians and counsel), except any such expense, disbursement or advance as may be attributable to its negligence or bad faith; and
(3) to indemnify the Trustee and any predecessor Trustee, their officers, directors, employees and agents for, and to hold them harmless against, any loss, liability or expense incurred without negligence or bad faith on its part,
arising out of or in connection with the acceptance or administration of the trust or trusts hereunder, including the costs and expenses of defending themselves against any claim or liability (whether asserted by the Company, any Holder or any other person) in connection with the exercise or performance of any of their powers or duties hereunder, including the reasonable fees and expenses of its counsel.
As security for the performance of the obligations of the Company under this Section, the Trustee shall have a lien prior to the Securities upon all property and funds held or collected by the Trustee as such, except funds held in trust for the benefit of Holders of particular Securities. The obligations of the Company under this Section shall survive the satisfaction and discharge of this indenture.
When the Trustee incurs expenses or renders services in connection with an Event of Default specified in Section 5.1(6) or Section 5.1(7), the expenses (including the reasonable charges and expenses of its counsel) and the compensation for the services are intended to constitute expenses of administration under any applicable Federal or state bankruptcy, insolvency or other similar law.
SECTION 6.8 Disqualification; Conflicting Interests.
If the Trustee has or shall acquire any conflicting interest within the meaning of the Trust Indenture Act with respect to the Securities of any series, it shall, within 90 days after a Responsible Officer of the Trustee ascertains that it has such conflicting interest, either eliminate such conflicting interest or resign with respect to the Securities of that series in the manner provided by, and subject to the provisions of the Trust Indenture Act and this Indenture.
SECTION 6.9 Corporate Trustee Required; Eligibility.
There shall at all times be a Trustee hereunder which shall be a corporation organized and doing business under the laws of the United States of America, any State thereof or the District of Columbia, in good standing and having an office in The Borough of Manhattan, the City of New York, which is authorized under such laws to exercise corporate trust powers, having a combined capital and surplus of at least $50,000,000 and subject to supervision or examination by Federal or State authority. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of said supervision or examining authority, then for the purposes of this Section, the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect hereinafter specified in this Article.
SECTION 6.10 Resignation and Removal; Appointment of Successor.
(a) No resignation or removal of the Trustee and no appointment of a successor Trustee pursuant to this Article shall become effective
until the acceptance of appointment by the successor Trustee in accordance with the applicable requirements of Section 6.11.
(b) The Trustee may resign at any time with respect to
the Securities of one or more series by giving written notice thereof to the
Company. If the instrument of acceptance by a successor Trustee required by
Section 6.11 shall not have been delivered to the Trustee within 30 days after
the giving of such notice of resignation, the resigning Trustee may, at the
Company's expense, petition any court of competent jurisdiction for the
appointment of a successor Trustee with respect to the Securities of such
series.
(c) The Trustee may be removed at any time with respect to the Securities of any series by Act of the Holders of a majority in principal amount of the Outstanding Securities of such series, delivered to the Trustee and to the Company.
(d) If at any time:
(1) the Trustee shall fail to comply with Section 6.8 after written request therefor by the Company or by any Holder who has been a bona fide Holder of a Security for at least six months, or
(2) the Trustee shall cease to be eligible under Section 6.9 and shall fail to resign after written request therefor by the Company or by any such Holder, or
(3) the Trustee shall become incapable of acting or shall be adjudged a bankrupt or insolvent or a receiver of the Trustee or of its property shall be appointed or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation,
then, in any such case, (i) the Company, by a Board Resolution, may remove the Trustee with respect to all Securities, or (ii) subject to Section 5.14, any Holder who has been a bona fide Holder of a Security for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee with respect to all Securities and the appointment of a successor Trustee or Trustees.
(e) If the Trustee shall resign, be removed or become incapable of acting, or if a vacancy shall occur in the office of Trustee for any cause, with respect to the Securities of one or more series, the Company, by a Board Resolution, shall promptly appoint a successor Trustee or Trustees with respect to the Securities of that or those series (it being understood that any such successor Trustee may be appointed with respect to the Securities of one or more or all of such series and that at any time there shall be only one Trustee with respect to the Securities of any particular series) and shall comply with the applicable requirements of Section 6.11. If, within one year after such resignation, removal or incapability, or the occurrence of such vacancy, a successor Trustee with respect to the Securities of any series shall be appointed by Act of the
Holders of a majority in principal amount of the Outstanding Securities of such series delivered to the Company and the retiring Trustee, the successor Trustee so appointed shall, forthwith upon its acceptance of such appointment in accordance with the applicable requirements of Section 6.11, become the successor Trustee with respect to the Securities of such series and to that extent supersede the successor Trustee appointed by the Company. If no successor Trustee with respect to the Securities of any series shall have been so appointed by the Company or the Holders and accepted appointment in the manner required by Section 6.11, any Holder who has been a bona fide Holder of a Security of such series for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the appointment of a successor Trustee with respect to the Securities of such series.
(f) If an instrument of acceptance by a successor Trustee shall not have been delivered to the Trustee within 30 days after the giving of such notice of removal, the Trustee being removed may petition, at the expense of the Company, any court of competent jurisdiction for the appointment of a successor Trustee with respect to the Securities of such series.
(g) The Company shall give notice of each resignation and each removal of the Trustee with respect to the Securities of any series and each appointment of a successor Trustee with respect to the Securities of any series by mailing written notice of such event by first-class mail, postage prepaid, to all Holders of Securities of such series as their names and addresses appear in the Security Register. Each notice shall include the name of the successor Trustee with respect to the Securities of such series and the address of its Corporate Trust Office.
SECTION 6.11 Acceptance of Appointment by Successor.
(a) In case of the appointment hereunder of a successor Trustee with respect to all Securities, every such successor Trustee so appointed shall execute, acknowledge and deliver to the Company and to the retiring Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Trustee shall become effective and such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee; but, on the written request of the Company or the successor Trustee, such retiring Trustee shall, upon payment of its charges, execute and deliver an instrument transferring to such successor Trustee all the rights, powers and trusts of the retiring Trustee and shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder.
(b) In case of the appointment hereunder of a successor Trustee with respect to the Securities of one or more (but not all) series, the Company, the retiring Trustee and each successor Trustee with respect to the Securities of one or more series shall execute and deliver an indenture supplemental hereto wherein each successor Trustee shall accept such appointment and which (1) shall contain
such provisions as shall be necessary or desirable to transfer and confirm to, and to vest in, each successor Trustee all the rights, powers, trusts and duties of the retiring Trustee with respect to the Securities of that or those series to which the appointment of such successor Trustee relates, (2) if the retiring Trustee is not retiring with respect to the Securities of all series for which it is the Trustee hereunder, shall contain such provisions as shall be deemed necessary or desirable to confirm that all the rights, powers, trusts and duties of the retiring Trustee with respect to the Securities of that or those series as to which the retiring Trustee is not retiring shall continue to be vested in the retiring Trustee, and (3) shall add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the trusts hereunder by more than one Trustee, it being understood that nothing herein or in such supplemental indenture shall constitute such Trustees co-trustees of the same trust and that each such Trustee shall be trustee of a trust or trusts hereunder separate and apart from any trust or trusts hereunder administered by any other such Trustee; and upon the execution and delivery of such supplemental indenture the resignation or removal of the retiring Trustee shall become effective to the extent provided therein and each such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee with respect to the Securities of that or those series to which the appointment of such successor Trustee relates; but, on written request of the Company or any successor Trustee, such retiring Trustee shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder with respect to the Securities of that or those series to which the appointment of such successor Trustee relates.
(c) Upon request of any such successor Trustee, the Company shall execute any and all instruments for more fully and certainly vesting in and confirming to such successor Trustee all such rights, powers and trusts referred to in paragraph (a) or (b) of this Section, as the case may be.
(d) No successor Trustee shall accept its appointment unless at the time of such acceptance such successor Trustee shall be qualified and eligible under this Article.
(e) The Trustee shall not be liable for the acts or omissions to act of any successor Trustee.
SECTION 6.12 Merger, Conversion, Consolidation or Succession to Business.
Any corporation into which the Trustee may be merged or convened or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder, provided such corporation shall be otherwise qualified and eligible under this Article, without the execution or filing of any paper or any further act on the part of any of the parties hereto. In case any Securities shall have
been authenticated, but not delivered, by the Trustee then in office, any successor by merger, conversion or consolidation to such authenticating Trustee may adopt such authentication and deliver the Securities so authenticated with the same effect as if such successor Trustee had itself authenticated such Securities.
SECTION 6.13 Preferential Collection of Claims Against Company.
(a) If the Trustee shall be or shall become a creditor, directly or indirectly, secured or unsecured, of the Company (or any other obligor of the Securities), the Trustee shall be subject to the provisions of the Trust Indenture Act regarding the collection of claims against the Company (or any such other obligor):
(b) For the purposes of this Section 6.13 only:
(1) the term "cash transaction" means any transaction in which full payment for goods or securities sold is made within seven days after delivery of the goods or securities in currency or in checks or other orders drawn upon banks or bankers and payable upon demand; and
(2) the term "self-liquidating paper" means any draft, bill of exchange, acceptance or obligation which is made, drawn, negotiated or incurred by the Company for the purpose of financing the purchase, processing, manufacturing, shipment, storage or sale of goods, wares or merchandise and which is secured by documents evidencing title to, possession of, or a lien upon, the goods, wares or merchandise or the receivables or proceeds arising from the sale of the goods, wares or merchandise previously constituting the security, provided the security is received by the Trustee simultaneously with the creation of the creditor relationship with the Company arising from the making, drawing, negotiating or incurring of the draft, bill of exchange, acceptance or obligation.
SECTION 6.14 Appointment of Authenticating Agent.
At any time when any of the Securities remain Outstanding, the Trustee may appoint an Authenticating Agent or Agents with respect to one or more series of Securities which shall be authorized to act on behalf of the Trustee to authenticate Securities of such series issued upon exchange, registration of transfer or partial redemption thereof or pursuant to Section 3.9, and the Securities so authenticated shall be entitled to the benefits of this Indenture and shall be valid and obligatory for all purposes as if authenticated by the Trustee hereunder. Wherever reference is made in this Indenture to the authentication and delivery of Securities by the Trustee or the Trustee's certificate of authentication, such reference shall be deemed to include authentication and delivery on behalf of the Trustee by an Authenticating Agent and a certificate of authentication executed on behalf of the Trustee by an Authenticating Agent. Each Authenticating Agent shall be acceptable to the Company and shall at all times be a corporation organized and doing business under the laws of the United States of America, any State thereof or the District of Columbia, authorized under such laws to act as
Authenticating Agent, having a combined capital and surplus of not less than $50,000,000 and subject to supervision or examination by Federal or State authority. If such Authenticating Agent publishes reports of condition at least annually, pursuant to law or to the requirements of said supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such Authenticating Agent shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time an Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, such Authenticating Agent shall resign immediately in the manner and with the effect specified in this Section.
Any corporation into which an Authenticating Agent may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which such Authenticating Agent shall be a party, or any corporation succeeding to the corporate agency or corporate trust business of an Authenticating Agent, shall continue to be an Authenticating Agent, provided such corporation shall be otherwise eligible under this Section, without the execution or filing of any paper or any further act on the part of the Trustee or the Authenticating Agent.
An Authenticating Agent may resign at any time by giving written notice thereof to the Trustee and to the Company. The Trustee may at any time terminate the agency of an Authenticating Agent by giving written notice thereof to such Authenticating Agent and to the Company. Upon receiving such a notice of resignation or upon such a termination, or in case at any time such Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, the Trustee may appoint a successor Authenticating Agent which shall be acceptable to the Company and shall give notice of such appointment by first-class mail, postage prepaid, to all Holders of Securities of the series with respect to which such Authenticating Agent will serve, as their names and addresses appear in the Security Register. Any successor Authenticating Agent upon acceptance of its appointment hereunder shall become vested with all the rights, powers and duties of its predecessor hereunder, with like effect as if originally named as an Authenticating Agent. No successor Authenticating Agent shall be appointed unless eligible under the provisions of this Section.
The Company agrees to pay to each Authenticating Agent from time to time reasonable compensation for its services under this Section.
If an appointment with respect to one or more series is made pursuant to this Section, the Securities of such series may have endorsed thereon an alternative certificate of authentication in the following form:
"This is one of the Securities of the series designated herein referred to in the within-mentioned Indenture."
By:_____________________________
As Authenticating Agent
By:_____________________________
Authorized Signatory
ARTICLE VII
HOLDERS LISTS AND REPORTS BY TRUSTEE AND COMPANY
SECTION 7.1 Company to Furnish Trustee Names and Addresses of Holders.
The Company will furnish or cause to be furnished to the Trustee:
(a) semi-annually not more than 15 days after each Regular Record Date, a list in such form as the Trustee may reasonably require, of the names and addresses of the Holders of Securities of such series to which such Regular Record Date applies, as of such Record Date, and
(b) at such other times as the Trustee may request in writing, within 30 days after the receipt by the Company of any such request, a list of similar form and content as of a date not more than 15 days prior to the time such list is furnished;
provided that if and so long as the Trustee shall be the Security Registrar for such series, such list shall not be required to be furnished.
SECTION 7.2 Preservation of Information; Communications to Holders.
(a) The Trustee shall preserve, in as current a form as is reasonably practicable, the names and addresses of Holders contained in the most recent list furnished to the Trustee as provided in Section 7.1 and the names and addresses of Holders received by the Trustee in its capacity as Security Registrar. The Trustee may destroy any list furnished to it as provided in Section 7.1 upon receipt of a new list so furnished.
(b) If three or more Holders of Securities of the same series (herein referred to as "applicants") apply in writing to the Trustee, and furnish to the Trustee reasonable proof that each such applicant has owned a Security of
such series for a period of at least six months preceding the date of such application, and such application states that the applicants' desire to communicate with other Holders of such series with respect to their rights under this Indenture or under the Securities of such series and is accompanied by a copy of the form of proxy or other communication which such applicants propose to transmit, then the Trustee shall, within five business days after the receipt of such application, at its election, either
(i) afford such applicants access to the information with respect to the Holders of such series furnished to, or received by, and preserved at the time by the Trustee in accordance with Section 7.2(a); or
(ii) inform such applicants as to the approximate number
of Holders of such series whose names and addresses appear in the
information preserved at the time by the Trustee in accordance with
Section 7.2(a), and as to the approximate cost of mailing to such
Holders the form of proxy or other communication, if any, specified in
such application.
If the Trustee shall elect not to afford such applicants access to such information, the Trustee shall, upon the written request of such applicants and at the Company's expense, mail to each Holder of such series whose name and address appear in the information preserved at the time by the Trustee in accordance with Section 7.2(a) a copy of the form of proxy or other communication which is specified in such request, with reasonable promptness after a tender to the Trustee of the material to be mailed and of payment, or provision for the payment, of the reasonable expenses of mailing, unless within five days after such tender the Trustee shall mail to such applicants and file with the Commission, together with a copy of the material to be mailed, a written statement to the effect that, in the opinion of the Trustee, such mailing would be contrary to the best interest of the Holders of such series or would be in violation of applicable law. Such written statement shall specify the basis of such opinion. If the Commission, after opportunity for a hearing upon the objections specified in the written statement so filed, shall enter an order refusing to sustain any of such objections or if, after the entry of an order sustaining one or more of such objections, the Commission shall find, after notice and opportunity for hearing, that all the objections so sustained have been met and shall enter an order so declaring, the Trustee shall mail copies of such material to all such Holders with reasonable promptness after the entry of such order and the renewal of such tender; otherwise the Trustee shall be relieved of any obligation or duty to such applicants respecting their application.
(c) Every Holder of Securities, by receiving and holding the same, agrees with the Company and the Trustee that neither the Company nor the Trustee nor any agent of either of them shall be held accountable by reason of the disclosure of any such information as to the names and addresses of the Holders in accordance with Section 7.2(b), regardless of the source from which such information was derived, and that the Trustee shall not be held accountable by reason of mailing any material pursuant to a request made under Section 7.2(b).
SECTION 7.3 Reports by Trustee.
(a) The Trustee shall transmit to Holders of Securities such reports concerning the Trustee and its actions under this Indenture as may be required pursuant to the Trust Indenture Act at the times and in the manner provided pursuant thereto. If required by Section 313(a) or 313(b) of the Trust Indenture Act, within 60 days after May 15 of each year, the Trustee shall transmit by mail to all Holders of Securities for which it is Trustee hereunder, as their names and addresses appear in the Security Register, a brief report dated as of such May 15, which complies with the provisions of Sections 313(a) and 313(b) of the Trust Indenture Act.
(b) A copy of each such report shall, at the time of such transmission to such Holders, be filed by the Trustee with each securities exchange upon which any such Securities are listed, with the Commission and with the Company. The Company will notify the Trustee when any such Securities are listed on any securities exchange.
SECTION 7.4 Reports by Company.
The Company shall:
(1) file with the Trustee, within 30 days after the
Company is required to file the same with the Commission, copies of the
annual reports and of the information, documents and other reports (or
copies of such portions of any of the foregoing as the Commission may
from time to time by rules and regulations prescribe) which the Company
may be required to file with the Commission pursuant to Section 13 or
Section 15(d) of the Exchange Act; or, if the Company is not required
to file information documents or reports pursuant to either of said
Sections, then it shall file with the Trustee and the Commission, in
accordance with rules and regulations prescribed from time to time by
the Commission, such of the supplementary and periodic information,
documents and reports which may be required pursuant to Section 13 of
the Exchange Act in respect of a security listed and registered on a
national securities exchange as may be prescribed from time to time in
such rules and regulations;
(2) file with the Trustee and the Commission, in accordance with rules and regulations prescribed from time to time by the Commission, such additional information, documents and reports with respect to compliance by the Company with the conditions and covenants of this Indenture as may be required from time to time by such rules and regulations; and
(3) transmit by mail to all Holders, as their names and addresses appear in the Security Register, within 30 days after the filing thereof with the Trustee, such summaries of any information, documents and reports required to be filed by the Company pursuant to paragraphs (1) and (2) of this Section as may
be required by rules and regulations prescribed from time to time by the Commission.
ARTICLE VIII
CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE
SECTION 8.1 Company May Consolidate, Etc., Only on Certain Terms.
The Company shall not consolidate with or merge with or into any other Person (other than in a merger or consolidation in which the Company is the surviving person) or sell, convey, transfer or lease its properties and assets as, or substantially as, an entirety to another Person, unless:
(1) the Person formed by the consolidation or with or into which the Company is merged or the Person that purchases the Company's properties and assets as, or substantially as, an entirety is a corporation, partnership, limited liability company or trust organized and validly existing under the laws of the United States of America, any State or the District of Columbia, and any such Person expressly assumes by supplemental indenture the due and punctual payment of the principal of, and premium, if any, and interest on the Securities and the performance of every other covenant of the Securities and this Indenture on the part of the Company to be performed and observed;
(2) immediately after giving effect to the transaction no Event of Default shall have occurred and be continuing; and
(3) a specified Officers' Certificate and an Opinion of Counsel are delivered to the Trustee, each (i) stating that such consolidation, merger, sale, conveyance, transfer or lease, as the case may be, and any supplemental indenture pertaining thereto, comply with this Article VIII and Article IX, respectively, and (ii) otherwise complying with Section 1.2 herein.
SECTION 8.2 Successor Corporation Substituted.
Upon any consolidation of the Company with, or merger of the Company into, any other Person or any sale, conveyance, transfer or lease of the properties and assets of the Company as, or substantially as, an entirety in accordance with Section 8.1, the successor Person formed by such consolidation or into which the Company is merged or to which such sale, conveyance, transfer or lease is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Indenture with the same effect as if such successor Person had been named as the Company herein, and thereafter, except in the case of a lease, the predecessor corporation shall be relieved of all obligations and covenants under this Indenture and the Securities.
ARTICLE IX
SUPPLEMENTAL INDENTURES
SECTION 9.1 Supplemental Indentures Without Consent of Holders.
In addition to any supplemental indenture otherwise authorized by this Indenture, the Company and the Trustee may from time to time and at any time enter into an indenture or indentures supplemental hereto (which shall conform to the provisions of the Trust Indenture Act as then in effect), without the consent of the Holders, for one or more of the following purposes:
(1) to cure any ambiguity, defect, or inconsistency herein, in the Securities of any series;
(2) to comply with Article VIII;
(3) to provide for uncertificated Securities in addition to or in place of certificated Securities;
(4) to add to the covenants of the Company for the benefit of the Holders of all or any Series of Securities (and if such covenants are to be for the benefit of less than all series of Securities, stating that such covenants are expressly being included solely for the benefit of such series) or to surrender any right or power herein conferred upon the Company;
(5) to add to, delete from, or revise the conditions, limitations, and restrictions on the authorized amount, terms, or purposes of issue, authentication, and delivery of Securities, as herein set forth;
(6) to make any change that does not adversely affect the rights of any Holder in any material respect; or
(7) to provide for the issuance of and establish the form
and terms and conditions of the Securities of any series as provided in
Section 3.1 to establish the form of any certifications required to be
furnished pursuant to the terms of this Indenture or any series of
Securities, or to add to the rights of the Holders of any series of
Securities.
The Trustee is hereby authorized to join with the Company in the execution of any such supplemental indenture, and to make any further appropriate agreements and stipulations that may be therein contained, but the Trustee shall not be obligated to enter into any such supplemental indenture that affects the Trustee's own rights, duties or immunities under this Indenture or otherwise.
Any supplemental indenture authorized by the provisions of this Section may be executed by the Company and the Trustee without the consent of the Holders of
any of the Securities at the time Outstanding, notwithstanding any of the provisions of Section 9.2.
SECTION 9.2 Supplemental Indentures with Consent of Holders.
With the consent of the Holders of not less than a majority in aggregate principal amount of the Securities of each series affected by such supplemental indenture or indentures at the time Outstanding, the Company, when authorized by Board Resolutions, and the Trustee may from time to time and at any time enter into an indenture or indentures supplemental hereto (which shall conform to the provisions of the Trust Indenture Act as then in effect) for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of any supplemental indenture or of modifying in any manner not covered by Section 9.1 the rights of the Holders of the Securities of such series under this Indenture; provided, however, that no such supplemental indenture shall, without the consent of the Holders of each Security then Outstanding and affected thereby,
(1) change the fixed maturity of any Securities of any series, or reduce the principal amount thereof, or reduce the rate or change the time of payment of interest thereon, or reduce any premium payable upon the redemption thereof, or change the time at which the Securities may be redeemed or purchased;
(2) reduce the aforesaid percentage of Securities, the Holders of which are required to consent to any such supplemental indenture;
(3) waive a default or an Event of Default in the payment of principal of or premium, if any, interest or Additional Interest, if any, on any series of Securities (except a rescission of acceleration of such Securities by the Holders of at least a majority in aggregate principal amount Outstanding of such series of Securities and a waiver of the payment default that resulted from such acceleration);
(4) make any series of Securities payable in money other than that stated in the Indenture and such Securities;
(5) make any change in the provisions of the Indenture relating to waivers of past defaults or the rights of Holders of any series of Securities to receive payments of principal of, premium, if any, interest or Additional Interest, if any, on such Securities;
(6) make any change to the abilities of Holders of any series of Securities to enforce their rights under the Indenture or the provisions of the clauses above; or
(7) except as permitted herein, increase the conversion price with regard to any series of Securities or modify any provision of the Indenture relating to conversion of any Securities in a manner adverse to the Holders thereof.
The Trustee shall not be obligated to enter into any such supplemental indenture that affects the Trustee's own rights, duties or immunities under this Indenture or otherwise.
It shall not be necessary for the consent of the Holders of any series affected thereby under this Section to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such consent shall approve the substance thereof.
SECTION 9.3 Execution of Supplemental Indentures.
In executing, or accepting the additional trusts created by, any supplemental indenture permitted by this Article or the modifications thereby of the trusts created by this Indenture, the Trustee shall be entitled to receive, and (subject to Section 6.1) shall be fully protected in relying upon, an Officer's Certificate and an Opinion of Counsel stating that the execution of such supplemental indenture is authorized or permitted by this Indenture and otherwise complying with Section 1.2 herein. The Trustee may, but shall not be obligated to, enter into any such supplemental indenture which affects the Trustee's own rights, duties or immunities under this Indenture or otherwise.
SECTION 9.4 Effect of Supplemental Indentures.
Upon the execution of any supplemental indenture under this Article, this Indenture shall be modified in accordance therewith, and such supplemental indenture shall form a part of this Indenture for all purposes; and every Holder of Securities theretofore or thereafter authenticated and delivered hereunder shall be bound thereby to the extent provided therein.
SECTION 9.5 Conformity with Trust Indenture Act.
Every supplemental indenture executed pursuant to this Article shall conform to the requirements of the Trust Indenture Act as then in effect, to the extent applicable.
SECTION 9.6 Reference in Securities to Supplemental Indentures.
Securities of any series authenticated and delivered after the execution of any supplemental indenture pursuant to this Article may, and shall if required by the Trustee, bear a notation in form approved by the Trustee as to any matter provided for in such supplemental indenture. If the Company shall so determine, new Securities of any series so modified as to conform, in the opinion of the Trustee and the Company, to any such supplemental indenture may be prepared and executed by the Company and authenticated and delivered by the Trustee in exchange for Outstanding Securities of such series.
ARTICLE X
COVENANTS
SECTION 10.1 Payment of Principal, Premium and Interest.
The Company covenants and agrees for the benefit of each series of Securities that it will duly and punctually pay the principal of (and premium, if any) and interest on the Securities of that series in accordance with the terms of the Securities of such series and this Indenture, and will duly comply with all other terms, agreements and conditions contained in, or made in the Indenture for the benefit of, the Securities of such series.
SECTION 10.2 Maintenance of Office or Agency.
The Company will maintain in each Place of Payment for any series of Securities an office or agency where Securities of that series may be presented or surrendered for payment, where Securities of that series may be surrendered for registration of transfer or exchange and where notices and demands to or upon the Company in respect of the Securities of that series and this Indenture may be served. The Company will give prompt written notice to the Trustee of the location, and any change in the location, of such office or agency. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee, and the Company hereby appoints the Trustee as its agent to receive all such presentations, surrenders, notices and demands.
The Company may also from time to time designate one or more other offices or agencies where the Securities of one or more series maybe presented or surrendered for any or all such purposes and may from time to time rescind such designations; provided, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in each Place of Payment for Securities of any series for such purposes. The Company will give prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency.
SECTION 10.3 Limitation on Liens on Common Stock of Principal Subsidiaries.
The Company will not itself, and will not permit any Principal Subsidiary to, directly or indirectly, create, issue, assume, incur, guarantee or permit to exist any Indebtedness that is secured by a mortgage, pledge, lien, security interest or other encumbrance on any Common Stock of a Principal Subsidiary owned by the Company or by any Principal Subsidiary, unless the Company also secures all Securities then Outstanding under this Indenture equally and ratably with, or prior to, the Indebtedness being secured, together with, at the Company's election, any of the Company's or any Principal Subsidiary's other Indebtedness ranking on a parity with, or prior to, the Securities for so long as such Indebtedness is outstanding and is so secured.
SECTION 10.4 Limitation on Disposition of Stock.
The Company will not itself, and will not permit any Principal Subsidiary to, issue, sell, transfer or otherwise dispose of any shares of capital stock of any Principal Subsidiary, or any securities convertible into or exercisable or exchangeable for shares of capital stock of any Principal Subsidiary, or warrants, rights or options to subscribe for or purchase shares of capital stock of any Principal Subsidiary, except for (i) any issuance, sale, assignment, transfer or other disposition of directors' qualifying shares; (ii) any issuance, sale, assignment, transfer or other disposition to the Company or another Principal Subsidiary; (iii) any issuance, sale, assignment, transfer or other disposition of all or any part of the capital stock of any Principal Subsidiary for consideration which is at least equal to the fair value of such capital stock as determined by the Board of Directors (acting in good faith); or (iv) any issuance, sale, assignment, transfer or other disposition made in compliance with an order of a court or regulatory authority of competent jurisdiction.
Notwithstanding the foregoing, the Company may merge or consolidate any of its other Subsidiaries (including its insurance Subsidiaries) into or with another Person and it may sell, transfer or otherwise dispose of its business in accordance with the provisions of Article VIII. Furthermore, the foregoing covenant will not prohibit any issuance or disposition of securities by any other Subsidiary.
SECTION 10.5 Money for Securities Payments to Be Held in Trust.
If the Company shall at any time act as its own Paying Agent with respect to any series of Securities, it will, on or before each due date of the principal of (and premium, if any) or interest on any of the Securities of that series, segregate and hold in trust for the benefit of the Persons entitled thereto a sum sufficient to pay the principal (and premium, if any) or interest so becoming due until such sums shall be paid to such Persons or otherwise disposed of as herein provided and will promptly notify the Trustee of its action or failure so to act.
Whenever the Company shall have one or more Paying Agents for any series of Securities, it will, prior to each due date of the principal of (and premium, if any) or interest on any Securities of that series, deposit with a Paying Agent a sum sufficient to pay the principal (and premium, if any) or interest so becoming due, such sum to be held in trust for the benefit of the Persons entitled to such principal, premium or interest, and (unless such Paying Agent is the Trustee) the Company will promptly notify the Trustee of its action or failure so to act.
The Company will cause each Paying Agent for any series of Securities other than the Trustee to execute and deliver to the Trustee an instrument in which such Paying Agent shall agree with the Trustee, subject to the provisions of this Section, that such Paying Agent will:
(1) hold all sums held by it for the payment of the principal of (and premium, if any) or interest on Securities of that series in trust for the benefit of
the Persons entitled thereto until such sums shall be paid to such Persons or otherwise disposed of as herein provided;
(2) give the Trustee notice of any default by the Company (or any other obligor upon the Securities of that series) in the making of any payment of principal (and premium, if any) or interest on the Securities of that series; and
(3) at any time during the continuance of any such default, upon the written request of the Trustee, forthwith pay to the Trustee all sums so held in trust by such Paying Agent.
The Company may at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture or for any other purpose, pay, or by Company Order direct any Paying Agent to pay, to the Trustee all sums held in trust by the Company or such Paying Agent, such sums to be held by the Trustee upon the same trusts as those upon which such sums were held by the Company or such Paying Agent; and, upon such payment by any Paying Agent to the Trustee, such Paying Agent shall be released from all further liability with respect to such money.
Any money deposited with the Trustee or any Paying Agent, or then held by the Company, in trust for the payment of the principal of (and premium, if any) or interest on any Security of any series and remaining unclaimed for three years after such principal (and premium, if any) or interest has become due and payable shall be paid to the Company on Company Request, or (if then held by the Company) shall be discharged from such trust; and the Holder of such Security shall thereafter, as an unsecured general creditor, look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Company as trustee thereof, shall thereupon cease; provided that the Trustee or such Paying Agent, before being required to make any such repayment, may at the expense of the Company cause to be published once, in a newspaper published in the English language, customarily published on each Business Day and of general circulation in the Borough of Manhattan, The City of New York, New York, notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such publication, any unclaimed balance of such money then remaining will be repaid to the Company.
SECTION 10.6 Statement by Officers as to Default.
The Company will deliver to the Trustee, within 120 days after the end of each fiscal year of the Company ending after the date hereof, an Officers' Certificate stating whether or not to the best knowledge of the signers thereof the Company is in default in the performance and observance of any of the terms, provisions and conditions of Sections 10.1 to 10.5, and if the Company shall be in default, specifying all such defaults and the nature and status thereof of which they may have knowledge.
ARTICLE XI
REDEMPTION OF SECURITIES
SECTION 11.1 Applicability of Article.
Securities of each series shall be redeemable before their respective Stated Maturities in accordance with their respective terms and (except as otherwise specified as contemplated by Section 3.1 for Securities of any series) in accordance with this Article.
SECTION 11.2 Election to Redeem; Notice to Trustee.
Subject to the other provisions of this Article XI, except as otherwise may be specified in this Indenture or, with respect to any series of Securities, as otherwise specified as contemplated by Section 3.1 for the Securities of such series, the Company shall have the right to redeem any series of Securities, in whole at any time or in part from time to time, on or after the Redemption Option Date for such series at the Redemption Price. The election of the Company to redeem any Securities redeemable at the election of the Company shall be evidenced by a Board Resolution. In case of any redemption at the election of the Company, the Company shall, at least 30 days, but not more than 60 days, prior to the Redemption Date fixed by the Company, notify the Trustee in writing of such Redemption Date and of the principal amount of Securities of such series to be redeemed. In the case of any redemption of Securities prior to the expiration of any restriction on such redemption provided in the terms of such Securities or elsewhere in this Indenture, the Company shall furnish the Trustee with an Officers' Certificate and an Opinion of Counsel evidencing compliance with such restriction and otherwise complying with Section 1.2 herein.
SECTION 11.3 Selection by Trustee of Securities to Be Redeemed.
If less than all the Securities of any series are to be redeemed, the particular Securities to be redeemed shall be selected not more than 60 days and not less than 30 days prior to the Redemption Date by the Trustee, from the Outstanding Securities of such series not previously called for redemption, by such method as the Trustee shall deem fair and appropriate and which may provide for the selection for redemption of portions (equal to the minimum authorized denomination for Securities of that series or any integral multiple thereof) of the principal amount of Securities of such series of a denomination larger than the minimum authorized denomination for Securities of that series; provided, that if at the time of redemption such Securities are registered as a Global Security, the Depositary shall determine, in accordance with its procedures, the principal amount of such Securities held by each Security Beneficial Owner to be redeemed.
The Trustee shall promptly notify the Company in writing of the Securities selected for redemption and, in case of any Securities selected for partial redemption, the principal amount thereof to be redeemed.
For all purposes of this Indenture, unless the context otherwise requires, all provisions relating to the redemption of Securities shall relate, in the case of any Securities redeemed or to be redeemed only in part, to the portion of the principal amount of such Securities which has been or is to be redeemed.
SECTION 11.4 Notice of Redemption.
Notice of redemption shall be given by first-class mail, postage prepaid, mailed not less than 30 nor more than 60 days prior to the Redemption Date, to each Holder of Securities to be redeemed, at his address appearing in the Security Register.
All notices of redemption shall state:
(1) the Redemption Date,
(2) the Redemption Price,
(3) if less than all the Outstanding Securities of any series are to be redeemed, the identification (including the CUSIP number, if any, and, in the case of partial redemption, the principal amounts) of the particular Securities of such series to be redeemed,
(4) that on the Redemption Date the Redemption Price will become due and payable upon each such Security to be redeemed and that interest thereon will cease to accrue on and after said date,
(5) the place or places where such Securities are to be surrendered for payment of the Redemption Price, and
(6) that the redemption is for a sinking fund, if such is the case.
Notice of redemption of Securities to be redeemed at the election of the Company shall be given by the Company or, at the Company's written request delivered to the Trustee at least 15 days prior to the date that such Notice is to be given (unless a shorter period shall be acceptable to the Trustee and at the Company's expense), by the Trustee in the name and at the expense of the Company.
SECTION 11.5 Deposit of Redemption Price.
Prior to 10:00 a.m., New York City time, on any Redemption Date, the Company shall deposit with the Trustee or with a Paying Agent (or, if the Company is acting as its own Paying Agent, segregate and hold in trust as provided in Section 10.5) an amount of money sufficient to pay the Redemption Price of, and (except if the Redemption Date shall be an Interest Payment Date) accrued interest on, all the Securities which are to be redeemed on that date.
SECTION 11.6 Securities Payable on Redemption Date.
Notice of redemption having been given as aforesaid, the Securities and portions of Securities so to be redeemed shall, on the Redemption Date, become due and payable at the Redemption Price therein specified, and from and after such Redemption Date (unless the Company shall default in the payment of the Redemption Price and accrued interest) such Securities shall cease to bear interest. Upon surrender of any such Security for redemption in accordance with said notice, such Security shall be paid by the Company at the Redemption Price, together with accrued interest to the Redemption Date; provided that installments of interest whose Stated Maturity is on or prior to the Redemption Date shall be payable to the Holders of such Securities, or one or more Predecessor Securities, registered as such at the close of business on the relevant Record Dates according to their terms and the provisions of Section 3.10.
If any Security called for redemption shall not be so paid upon surrender thereof for redemption, the principal (and premium, if any) shall, until paid, bear interest from the Redemption Date at the rate prescribed therefor in the Security.
The Redemption Price shall be paid on the date of such redemption, provided that the Company shall deposit with the Trustee an amount sufficient to pay the Redemption Price by 10:00 a.m., New York City time, on the date such Redemption Price is to be paid.
Unless the Company defaults in the payment of the Redemption Price, on and after the Redemption Date, interest shall cease to accrue on the Securities, or portions thereof called for redemption.
SECTION 11.7 Securities Redeemed in Part.
Any Security which is to be redeemed only in part shall be surrendered at a Place of Payment for Securities of that series (with, if the Company or the Trustee so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Company duly executed by, the Holder thereof or his attorney duly authorized in writing), and the Company shall execute, and the Trustee shall authenticate and deliver to the Holder of such Security without service charge, a new Security or Securities of the same series, of like tenor and of any authorized denomination as requested by such Holder, in aggregate principal amount equal to and in exchange for the unredeemed portion of the principal of the Security so surrendered.
ARTICLE XII
SINKING FUNDS
SECTION 12.1 Applicability of Article.
The provisions of this Article shall be applicable to any sinking fund for the retirement of Securities of a series except as otherwise specified as contemplated by Section 3.1 for the Securities of such Series.
The minimum amount of any sinking fund payment provided for by the terms of Securities of any series is herein referred to as "Mandatory Sinking Fund Payment," and any payment in excess of the minimum amount provided for by the terms of the Securities of any series is herein referred to as an "Optional Sinking Fund Payment." If provided for by the terms of Securities of any series, the cash amount of any Mandatory Sinking Fund Payment may be subject to reduction as provided in Section 12.2. Each sinking fund payment shall be applied to the redemption of Securities as provided for by the terms of Securities of such series.
SECTION 12.2 Satisfaction of Sinking Fund Payments with Securities.
Unless the form or terms of any Security shall provide otherwise, the Company (1) may deliver to the Trustee Outstanding Securities of a series (other than any previously called for redemption) and (2) may apply as a credit Securities of a series which have been redeemed either at the election of the Company pursuant to the terms of such Security or through the application of permitted Optional Sinking Fund Payments pursuant to the terms of such Securities, in each case in satisfaction of all or any part of any Mandatory Sinking Fund Payment with respect to any Securities of such series required to made pursuant to the terms of Securities as provided for by the terms of such Securities; provided that such Securities have not been previously so credited. Such Securities shall be received and credited for such purpose by the Trustee at the Redemption Price specified in such Securities for redemption throughout operation of the sinking fund and the amount of such sinking fund payment shall be reduced accordingly.
SECTION 12.3 Redemption of Securities for Sinking Fund.
Not less than 60 days prior to each sinking fund payment date for any Securities, the Company will deliver to the Trustee an Officers' Certificate specifying the amount of the next ensuing sinking fund payment for that series pursuant to the terms of that series, the portion thereof, if any, which is to be satisfied by payment of cash and the portion thereof, if any, which is to be satisfied by delivering and crediting Securities of that series pursuant to Section 12.2 and will also deliver to the Trustee any Securities to be so delivered. Not less than 45 days before each sinking fund payment date the Trustee shall select the Securities to be redeemed upon such sinking fund payment date in the manner specified in Section 11.3 and cause notice of the redemption thereof to be given in the name and at the expense of the Company in the manner specified in Section 11.4. The Company shall deposit the amount of cash, if any, required for such sinking fund payment with the Trustee in the manner provided in Section 11.5. Such notice having been duly given, the redemption of such Securities shall be made upon the terms and in the manner stated in Sections 11.6 and 11.7.
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This instrument may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed as of the day and year first above written.
ASSURANT, INC.
BY: /s/ J. Kerry Clayton --------------------------------- Name:J. Kerry Clayton Title: President and CEO |
SUNTRUST BANK, as Trustee
By: _________________________________
Name:
Title
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed as of the day and year first above written.
ASSURANT, INC.
By: _________________________________
Name:
Title
SUNTRUST BANK, as Trustee
By: /s/ B.A. Donaldson ---------------------------------- Name: B.A. DONALDSON Title VICE PRESIDENT |
EXHIBIT 10.28
EXECUTION COPY
REGISTRATION RIGHTS AGREEMENT
by
ASSURANT, INC.
and
FORTIS INSURANCE N.V.
Dated as of February 10, 2004
TABLE OF CONTENTS
Page ---- ARTICLE 1 DEFINITIONS Section 1.01. Definitions ................................................................... 1 ARTICLE 2 REGISTRATION RIGHTS Section 2.01. Demand Rights ................................................................. 5 Section 2.02. "Piggy-Back" Rights ........................................................... 8 Section 2.03. Allocation of Securities Included in a Public Offering ........................ 9 Section 2.04. Requirements with Respect to Registration ..................................... 10 Section 2.05. Transfers; Rights of Transferee of Registrable Securities ..................... 14 Section 2.06. Registration Expenses ......................................................... 14 Section 2.07. Underwriting; Due Diligence ................................................... 15 Section 2.08. Registration In Connection With Hedging Transactions .......................... 15 Section 2.09. Unregistered Offerings ........................................................ 16 Section 2.10. Registration Rights of Other Persons .......................................... 17 Section 2.11. Inconsistent Agreements ....................................................... 17 Section 2.12. "Market Stand-Off" Agreement .................................................. 17 Section 2.13. Limitations on Availability of Registration Rights ............................ 18 ARTICLE 3 REPRESENTATIONS, WARRANTIES AND AGREEMENTS Section 3.01. Company Representations, Warranties and Agreements ............................ 18 Section 3.02. Fortis Insurance Representations, Warranties and Agreements ................... 20 Section 3.03. Survival of Representations and Agreements .................................... 20 ARTICLE 4 INDEMNIFICATION AND CONTRIBUTION Section 4.01. Indemnification and Contribution .............................................. 20 ARTICLE 5 MISCELLANEOUS Section 5.01. Remedies ...................................................................... 24 Section 5.02. Amendments and Waivers ........................................................ 25 Section 5.03. Notices. ...................................................................... 25 Section 5.04. Interpretation ................................................................ 76 |
Page ---- Section 5.05. Counterparts ................................................ 26 Section 5.06. Entire Agreement; No Third Party Beneficiaries .............. 26 Section 5.07. Governing Law ............................................... 26 Section 5.08. Severability ................................................ 27 Section 5.09. Successors and Assigns ...................................... 27 Section 5.10. Use of Terms ................................................ 27 |
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (the "AGREEMENT") is dated as of February 10, 2004, and is being entered into by Assurant, Inc., a Delaware corporation (D/B/A Assurant Group) (the "COMPANY") and Fortis Insurance N.V., a company with limited liability incorporated as naamloze vennootschap under Dutch law ("FORTIS INSURANCE").
RECITALS
WHEREAS, Fortis Insurance owns 142,199,130 shares of common stock, par value $0.01 per share, of the Company (the "COMMON SHARES");
WHEREAS, simultaneously with the execution and delivery of this Agreement, the Company and Fortis Insurance are offering Common Shares to the public in an underwritten secondary offering registered under the Securities Act pursuant to a registration statement on Form S-l, File No. 333-109984 (the "IPO REGISTRATION STATEMENT");
WHEREAS, upon completion of such offering, Fortis Insurance will continue to be a significant shareholder in the Company; and
WHEREAS, the Company has agreed to provide Fortis Insurance and its Affiliates with certain registration rights with respect to the Common Shares owned by them during the term of this Agreement.
NOW, THEREFORE, in consideration of the promises and of the mutual covenants, representations, warranties and agreements contained herein, the parties agree as follows:
ARTICLE 1
DEFINITIONS
Section 1.01. Definitions. As used in this Agreement, including its preamble and recitals, the following terms shall have the following meanings:
"AFFILIATE" shall mean, with respect to any specified Person, any other Person, other than the Company or any of its Subsidiaries, that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with such specified Person. For purposes of this definition, control of a person means the power, direct or indirect, to direct or cause the direction of the management and policies of such person whether by contract or otherwise; and the terms "CONTROLLING" AND "CONTROLLED" have meanings correlative to the foregoing; provided that the term Affiliate when used
in the context of calculating the Shareholder's percentage ownership of the Common Stock or determining Registrable Securities shall exclude officers and directors of the Shareholder.
"BLACKOUT PERIODS" shall have the meaning set forth in Section 2.01(a).
"COMMISSION" shall mean the United States Securities and Exchange Commission.
"COMMON SHARES" shall have the meaning set forth in the first recital.
"COMPANY" shall have the meaning set forth in the preamble.
"DEMAND REQUEST" shall have the meaning set forth in Section 2.01 (a).
"EXCHANGE Act" shall mean the United States Securities Exchange Act of 1934, as amended.
"HEDGING COUNTERPARTY" means a broker-dealer registered under Section 15(b) of the Exchange Act or an Affiliate thereof or any other financial institution or third party.
"HEDGING TRANSACTION" means any transaction involving a security linked to the Registrable Class Securities or any security that would be deemed to be a "derivative security" (as defined in rule 16a-l(c) under the Exchange Act) with respect to the Registrable Class Securities or any transaction (even if not a security) which would (were it a security) be considered such a derivative security, or which transfers some or all of the economic risk of ownership of the Registrable Class Securities, including, without limitation, any forward contract, equity swap, put or call, put or call equivalent position, collar, non-recourse loan, sale of exchangeable security or similar transaction. For the avoidance of doubt, the following transactions shall be deemed to be Hedging Transactions:
(a) transactions by a Shareholder in which a Hedging Counterparty engages in short sales of Registrable Class Securities pursuant to a prospectus and may use Registrable Securities to close out its short position;
(b) transactions pursuant to which a Shareholder sells short Registrable Class Securities pursuant to a prospectus and delivers Registrable Securities to close out its short position; and
(c) transactions by a Shareholder in which the Shareholder delivers, in a transaction exempt from registration under the Securities Act, Registrable Securities to the Hedging Counterparty who will then publicly resell or otherwise transfer such Registrable Securities pursuant to a prospectus or an exemption from registration under the Securities Act.
"INITIAL PUBLIC OFFERING DATE" shall mean the date of the first closing of the initial sale of Common Shares in an initial Public Offering.
"IPO REGISTRATION STATEMENT" shall have the meaning set forth in the second recital.
"MAXIMUM NUMBER" shall have the meaning set forth in Section 2.01(b).
"OTHER SECURITIES" shall have the meaning set forth in the definition of Registrable Securities.
"PERSON" shall mean an individual, trustee, corporation, partnership, joint stock company, trust, unincorporated association, union, business association, firm or a government or agency or political subdivision thereof or other entity.
"PRELIMINARY PROSPECTUS" shall mean any preliminary prospectus that may be included in any Registration Statement.
"PROSPECTUS" shall mean the prospectus included in any Registration Statement (including, without limitation, a prospectus that includes any information previously omitted from a prospectus filed as part of an effective Registration Statement in reliance upon Rule 430A promulgated under the Securities Act), as amended or supplemented by any prospectus supplement, with respect to the terms of the offering of any portion of the Registrable Securities covered by such Registration Statement, and by all other amendments and supplements to the Prospectus, including post-effective amendments, and all material incorporated by reference or deemed to be incorporated by reference in such Prospectus.
"PUBLIC OFFERING" shall mean the offer of Common Shares on a broadly distributed basis, not limited to sophisticated investors, pursuant to a firm-commitment or best-efforts underwriting arrangement.
"REGISTRABLE CLASS SECURITIES" means securities of the Company that are of the same class and series as the Registrable Securities.
"REGISTRABLE SECURITIES" shall mean all or any portion of the Common Shares owned by any Shareholder from time to time during the term of this Agreement. As to any particular Registrable Securities, such Common Shares shall cease to be Registrable Securities when (i) a Registration Statement with respect to the sale of such Common Shares shall have become effective under the Securities Act and such Common Shares shall have been disposed of under such Registration Statement, (ii) such Common Shares shall have been distributed to the public pursuant to Rule 144, (iii) such securities shall have otherwise been transferred or disposed of, and subsequent transfer or disposition of such
Common Shares shall not require their registration or qualification under the Securities Act or any similar state law then in force or (iv) such Common Shares shall have been repurchased by the Company or otherwise ceased to be outstanding. If as a result of any reclassification, stock split, stock dividend, bonus issue, business combination, exchange offer or other transaction or event, any capital stock, evidences of indebtedness, warrants, options, rights or other securities (collectively "OTHER SECURITIES") are issued or transferred to any Shareholder in respect of Registrable Securities held by such holder, references herein to Registrable Securities shall be deemed to include such Other Securities.
"REGISTRATION EXPENSES" shall mean any and all expenses incident to
performance of or compliance with any registration or marketing of securities
pursuant to Article 2, including (i) the fees, disbursements and expenses of the
Company's counsel and accountants in connection with this Agreement and the
performance of the Company's obligations hereunder (including the expenses of
any annual audit letters and "cold comfort" letters required or incidental to
the performance of such obligations); (ii) all expenses, including filing fees,
in connection with the preparation, printing and filing of the registration
statement, any preliminary prospectus or final prospectus, any other offering
document and amendments and supplements thereto and the mailing and delivering
of copies thereof to any underwriters and dealers; (iii) the cost of printing
and producing any agreements among underwriters, underwriting agreements,
selling agreements and any other documents in connection with the offering, sale
or delivery of the securities to be disposed of; (iv) all expenses in connection
with the qualification of the securities to be disposed of for offering and sale
under state securities laws, including the fees and disbursements of counsel for
the underwriters or the Shareholders in connection with such qualification and
in connection with any blue sky and legal investment surveys, including the cost
of printing and producing any such blue sky or legal investment surveys; (v) the
filing fees incident to securing any required review by the National Association
of Securities Dealers, Inc. of the terms of the sale of the securities to be
disposed of; (vi) transfer agents' and registrars' fees and expenses and the
fees and expenses of any other agent or trustee appointed in connection with
such offering; (vii) all security engraving and security printing expenses;
(viii) all fees and expenses payable in connection with the listing of the
securities on any securities exchange or automated interdealer quotation system;
(ix) any other fees and disbursements of underwriters customarily paid by the
issuers of securities, but excluding underwriting discounts and commissions and
transfer taxes, if any; (x) the costs and expenses of the Company and its
officers relating to analyst or investor presentations or any "road show"
undertaken in connection with the registration and/or marketing of any
Registrable Securities; and (xi) other reasonable out-of-pocket costs, fees and
expenses, including the fees and expenses of one outside legal counsel retained
by the Shareholders.
"REGISTRATION STATEMENT" shall mean any registration statement of the Company under the Securities Act that covers any of the Registrable Securities, including the Prospectus, amendments and supplements to such registration statement, including post-effective amendments, all exhibits, and all material incorporated by reference or deemed to be incorporated by reference in such registration statements.
"REGULATIONS" shall mean the General Rules and Regulation of the Commission under the Securities Act.
"REQUESTING HOLDER" shall mean any Shareholder requesting the registration of Registrable Securities pursuant to Section 2.01(a).
"RULE 144" shall mean Rule 144 (or any successor provisions) under the Securities Act.
"RULE 144A" shall mean Rule 144A (or any successor provisions) under the Securities Act.
"RULE 415 OFFERING" means an offering on a delayed or continuous basis pursuant to Rule 415 (or any successor rule to similar effect) under the Securities Act.
"SECURITIES ACT" shall mean the United States Securities Act of 1933, as amended.
"SELLING HOLDER" shall mean a Shareholder included in a relevant Registration Statement.
"SHAREHOLDER" shall mean Fortis Insurance, and any of its Affiliates that holds Registrable Securities from time to time.
"UNDERWRITTEN REGISTRATION OR UNDERWRITTEN OFFERING" shall mean a registration in which securities of the Company are sold to an underwriter for reoffering to the public or pursuant to Rule 144A of the Securities Act.
ARTICLE 2
REGISTRATION RIGHTS
Section 2.01. Demand Rights. (a) At any time, and from time to time, on or after the Initial Public Offering Date (subject to Section 2.01(b)(i)), a Shareholder shall have the right to require the Company to effect the registration under the Securities Act for a Public Offering of all or part of such Shareholder's Registrable Securities, by delivering written notice thereof to the Company
specifying the number of Registrable Securities to be included in such registration and the intended method of distribution thereof (which requested method of disposition may be a Rule 415 Offering) (the "DEMAND REQUEST"). Upon receipt of such Demand Request the Company shall comply with Section 2.04
(b) The Company's obligations pursuant to Section 2.01(a) above are subject to the following limitations and conditions:
(i) the Company shall not be obligated to fulfill the
requirements or file the Registration Statement referred to therein (A)
during any period of time (not to exceed ninety (90) days in the
aggregate with respect to each request) when the Company has determined
to proceed with a Public Offering for its own account and, in the good
faith judgment of the managing underwriter thereof, the fulfillment of
such requirements or such filing would have an adverse effect on such
Public Offering, (B) during any period of time (not to exceed sixty
(60) days with respect to each request) when the Company is in
possession of material non-public information that the board of
directors of the Company has in its good faith judgment determined
could materially and adversely affect a material business situation,
financing transaction or negotiation affecting the Company, (C) during
the 90-day period following the effectiveness of any previous
Registration Statement or (D) during the 180-day period following the
effectiveness of the IPO Registration Statement, except, in the case of
subclause (D) hereof, with the consent of the underwriters controlling
the related lock-up agreement (the periods of time referred to in
subclauses (A), (B), (C) and (D) hereof being hereinafter referred to
as "BLACKOUT PERIODS"); provided, that the aggregate period of time
during which the Company shall be relieved from its obligation to file
such a Registration Statement pursuant to Section 2.01(b)(i), shall in
no event, except in the case of clause (D), exceed ninety (90)
consecutive days with respect to each request; provided, further, that,
in the case of a Blackout Period pursuant to subclause (A) hereof, the
Blackout Period shall earlier terminate upon the completion or
abandonment of the relevant Public Offering; provided, further, that in
the case of a Blackout Period pursuant to subclause (B) hereof, the
Blackout Period shall earlier terminate upon public disclosure by the
Company or public admission by the Company of such material nonpublic
information or such time as such material nonpublic information shall
be publicly disclosed or such time that the Company is no longer in
possession of material nonpublic information; provided, further, that
in the case of a Blackout Period pursuant to subclauses (A), (B), (C)
or (D) hereof, the Company shall furnish to the Requesting Holder a
certified resolution of the Company's board of directors to the effect
that an event permitting a Blackout Period has occurred; provided,
further, that the Company shall not be entitled to exercise its rights
under subclause (B) hereof more than one (1) time in
any twelve (12)-month period; and provided, further, if the Requesting
Holder withdraws its Demand Request pursuant to Section 2.01(e), such
request shall not be considered a Demand Request for purposes of
Section 2.01 (a) and such Demand Request shall be of no further effect;
(ii) the number of Common Shares to be sold in any such Public Offering shall not exceed the maximum number which the managing underwriter thereof considers in good faith to be appropriate based on market conditions and other relevant factors, including pricing and the proportion of Common Shares being sold by the Company and by such holders (the "MAXIMUM NUMBER"); and
(iii) the Registrable Securities to be offered pursuant to such request have an aggregate offering price of (A) subject to (B) below, at least U.S. $500 million (based on the then current market price on the date of delivery of the Demand Request) and (B) when the aggregate Registrable Securities of the Shareholder is less than, or, if after giving effect to the requested offering of the Registrable Securities, the aggregate Registrable Securities will be less than, 20% of the outstanding Common Shares of the Company, at least US $250 million (based on the then current market price on the date of delivery of the Demand Request).
(c) Any Shareholder may exercise its rights under Section 2.01(a)
(x) on an unlimited number of occasions with respect to registration statements
on Forms S-2 or S-3 (or any successors thereto) from such time that the Company
becomes eligible to use such forms and (y) on not more than two occasions after
the date hereof with respect to registration statements on Form S-l (or any
successor thereto); provided that the Company shall not be obligated to effect
more than one registration of Registrable Securities in any 90-day period.
(d) A request by a Requesting Holder that the Company file a Registration Statement shall not be considered a Demand Request if (i) the Registration Statement relating thereto does not become effective, (ii) after it has become effective such Registration Statement (or the use of the Prospectus contained in such Registration Statement) is (A) interfered with by any stop order, injunction or other order or requirement of the Commission or other governmental agency or court for any reason other than a misrepresentation or an omission by any Requesting Holder or (B) delayed, withdrawn, suspended or terminated and, in each case, as a result thereof, at least 80% of the Registrable Securities requested to be registered cannot be completely distributed in accordance with the plan of distribution set forth in the related Registration Statement or (iii) the conditions to closing specified in any purchase agreement or underwriting agreement entered into in connection with such registration are not satisfied or waived other than because of some act or omission by such Requesting Holder.
(e) Any such Requesting Holder delivering a Demand Request shall have the right, at any time prior to the effective date of the Registration Statement relating to such Demand Request, to withdraw such Demand Request without liability to such Requesting Holder, by giving written notice to the Company.
(f) In the event that any registration pursuant to Section 2.01
(a) shall involve, in whole or in part, an underwritten offering, the Requesting
Holder shall select the lead managing underwriter or underwriters and bookrunner
or bookrunners for such underwritten offering (after consultation with the
Company), as well as counsel for the Selling Holders, with respect to such
registration; provided that in connection with any such registration the
Requesting Holder shall include on its pricing committee, which pricing
committee shall be responsible for, among other things, the syndicate structure
of the transaction, if any, as well as the size and the pricing for any such
offering, the Chief Executive Officer of the Company and such inclusion shall be
deemed to be consultation with the Company for purposes of the preceding clause;
and provided further that the Company shall have the right to appoint other
syndicate members with the consent of the Requesting Holder not to be
unreasonably withheld.
(g) Subject to Section 2.10, the Company shall have the right to cause the registration of additional equity securities for sale for the account of any Person that is not a Shareholder (including the Company and any directors, officers or employees of the Company) in any registration of Registrable Securities requested by the Shareholders; provided that the number of Registrable Securities to be included in such registration (including those sought by the Shareholders) shall not exceed the Maximum Number; and provided further that in all cases, the Requesting Holder shall have priority over any such other Person.
Section 2.02. "Piggy-Back" Rights. (a) If the Company proposes to register any of its Common Shares, any other equity securities or securities convertible into or exchangeable for its equity securities under the Securities Act, whether or not for sale for its own account, in a manner that would permit registration of Registrable Securities for sale for cash to the public under the Securities Act, the Company shall give written notice of such proposal at least thirty (30) days before the anticipated filing date, to each Shareholder. In the event that the Company elects to file a "universal shelf registration statement which registers any of the classes of securities referred to in the first sentence of this Section 2.02(a), the Company shall take such steps as would permit the shelf registration statement to be used to permit secondary sales by the Shareholders and shall give written notice of any proposal to make an offering off the shelf registration statement of any class of securities referred to in the first sentence of this Section 2.02(a) at least ten (10) days before, and, if practicable, up to thirty (30) days before, the anticipated offering date, to each Shareholder. Such notices, as applicable, shall specify at a minimum the intended method of distribution of such Common Shares or other securities, the number of Common Shares or other
securities proposed to be registered or offered, the proposed filing date of
such registration statement or offering date in the case of a shelf takedown,
any proposed means of distribution of such Common Shares or other securities and
the proposed managing underwriter, if any. Subject to Section 2.03, upon the
written request of a Shareholder (the "PIGGYBACK REQUEST"), given within fifteen
(15) days after the transmittal of any such written notice by email or facsimile
confirmed by mail (which request shall specify the Registrable Securities
intended to be disposed of by such Shareholder), the Company will include in the
registration statement with respect to such Public Offering, or any prospectus
supplement in the case of a shelf takedown, the number of the Registrable
Securities referred to in such Shareholder's request; provided, that, any
participation in such Public Offering by such Shareholder shall be on
substantially the same terms as the Company's participation therein; and
provided, further, that the number of Registrable Securities to be included in
any such Public Offering shall not exceed the Maximum Number.
(b) Any such Shareholder shall have the right to withdraw a
request to include Registrable Securities in any Public Offering pursuant to
Section 2.02(a), without any liability of such Shareholder by giving written
notice to the Company of its election to withdraw such request at any time prior
to the proposed effective date of such registration statement.
(c) The Company shall not be required to effect any registration of Registrable Securities under Section 2.02(a) incidental to the registration of any equity securities on a Form S-8 or Form S-4 (or any successor forms).
(d) No registration of Registrable Securities effected under
Section 2.02(a) shall relieve the Company of its obligation to effect a
registration of Registrable Securities pursuant to Section 2.01(a).
Section 2.03. Allocation of Securities Included in a Public Offering. If the registration referred to in Section 2.01(a) and Section 2.02(a) is to be an underwritten registration and the managing underwriter thereof advises the Company and the Selling Holders in writing that the number of Common Shares sought to be included in such Public Offering (including those sought to be offered by the Company and those sought to be offered by the Selling Holders) exceeds the Maximum Number, the Common Shares to be included in such Public Offering shall be allocated pursuant to the following procedures:
(a) if such registration or Public Offering is pursuant to Section 2.01(a): the number shall be allocated pro rata among all of the Selling Holders on the basis of the relative number of the Registrable Shares then held by each such Selling Holder (with any number in excess of a Selling Holder's request reallocated among the remaining Selling Holders in a like manner) or in such manner as shall be designated by the Selling Holders; or
(b) if such registration or Public Offering is pursuant to Section 2.02(a): (x) first, securities sought to be included at the request of the Company ("COMPANY SECURITIES") and (y) second, up to the full number of the Registrable Securities included in the Piggyback Request, in excess of the number of Company Securities, to the nearest extent possible on a pro rata basis; provided that if the number of Registrable Securities proposed to be offered by the Selling Holders shall be reduced, such Selling Holders may withdraw their request to include Registrable Securities under Section 2.02(a) and request that 90 days subsequent to the effective date of the registration statement for the registration of such securities such registration of their Registrable Securities be effected under Section 2.01 (a).
Section 2.04. Requirements with Respect to Registration. Subject to
Section 2.06, if and whenever the Company is required by the provisions hereof
to register any Registrable Securities under the Securities Act, including
receipt of a Demand Request pursuant to Section 2.01(a), the Company shall:
(a) As promptly as practicable (and in the case of a Demand Request, in no event more than 60 days following such Demand Request) prepare and file with the Commission a Registration Statement with respect to such Registrable Securities and use its best efforts to cause such Registration Statement to become and remain effective; provided, however, that, before filing any Registration Statement or Prospectus or any amendments or supplements thereto, the Company shall furnish to and afford each Selling Holder and the managing underwriters, if any, a reasonable opportunity to review and comment on copies of all such documents (including copies of any documents to be incorporated by reference therein and all exhibits thereto) proposed to be filed.
(b) As promptly as practicable, prepare and file with the Commission such amendments and supplements to such Registration Statement and the Prospectus used in connection therewith as may be necessary to keep such Registration Statement current and effective and to comply with the provisions of the Securities Act and the Regulations, with respect to the sale or disposition of such Registrable Securities until such time as all of such Registrable Securities have been disposed of in accordance with the intended methods of disposition set forth in such Registration Statement, including in connection with the issuance and sale of any mandatory exchangeable convertible securities but not in excess of 180-days.
(c) Promptly notify each Selling Holder (A) when the Registration Statement or any Prospectus or any amendment or supplement has been filed, and, with respect to the Registration Statement or any post-effective amendment, when the same has become effective, (B) any request by the Commission for amendments or supplements to the Registration Statement or the Prospectus or for additional information, (C) any order issued or threatened by the Commission
suspending the effectiveness of such Registration Statement, preventing or suspending the use of a prospectus or (D) the receipt by the Company of any notification or order with respect to the suspension of the qualification (or exemption from qualification) of any of the Registrable Securities for sale in any jurisdiction or the initiation of any proceedings for such purpose. The Company shall use its best efforts to prevent the issuance of any such order referred to in (C) or (D) and, if any such order is issued, shall use its best efforts to obtain the withdrawal of any such order at the earliest possible moment.
(d) As promptly as practicable, notify each Selling Holder and any Hedging Counterparty, if applicable, in writing at any time when a Prospectus is required to be delivered under the Securities Act of the happening of any event as a result of which the Prospectus included in such Registration Statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and of any request by the Commission or any other regulatory body or other body having jurisdiction for any amendment of or supplement to any Registration Statement or other document relating to such offering, and in either such case, at the request of the Selling Holders and any Hedging Counterparty, if applicable, prepare and furnish to each Selling Holder and any Hedging Counterparty, if applicable, a reasonable number of copies of a supplement to or an amendment of such Prospectus as may be necessary so that, as thereafter delivered to the purchasers of such Registrable Securities, such Prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they are made, not misleading.
(e) Use its best efforts to register or qualify the Registrable Securities covered by such Registration Statement under such securities or blue sky laws of such jurisdictions in the United States as the Selling Holders or the managing underwriter thereof shall reasonably request, and do any and all other acts and things that may be reasonably necessary to enable each Selling Holder or underwriter to consummate the disposition of the Registrable Securities in such jurisdictions; provided, however, that in no event shall the Company be required to qualify to do business as a foreign corporation in any jurisdiction where it is not so qualified, or to execute or file any general consent to service of process under the laws of any jurisdiction.
(f) Subject to clause (e) above and without duplication, use its best efforts to cause all Registrable Securities covered by such Registration Statement to be registered with or approved by such other governmental agencies or authorities in the United States as may be necessary to enable the Selling Holders to consummate the disposition of such Registrable Securities.
(g) Use its best efforts to cause all Registrable Securities covered by such Registration Statement to be (A) listed on the New York Stock Exchange and (B) listed or qualified for trading on any other stock exchange or quotation service on which the Company's outstanding Common Shares are listed or qualified for trading.
(h) Furnish to each Selling Holder, Hedging Counterparty and each underwriter, if any, of the Registrable Securities covered by such Registration Statement such number of conformed copies of such Registration Statement and of each such amendment and supplement thereto (in each case including all exhibits), such number of copies of the Prospectus included in such Registration Statement (including each preliminary prospectus and any summary Prospectus), in conformity with the requirements of the Securities Act and the Regulations, such documents incorporated by reference in such registration statement or prospectus, and such other documents as such Selling Holder, Hedging Counterparty, or such underwriter, if any, may reasonably request, and a copy of any and all transmittal letters or other correspondence to or received from, the Commission or any other governmental agency or self-regulatory body or other body having jurisdiction (including any domestic or foreign securities exchange) relating to such offering.
(i) Include in the "Plan of Distribution" or any analogous section of any shelf registration statement a statement substantially in the following form:
In addition, the selling securityholder may enter into derivative transactions with third parties, or sell securities not covered by this prospectus to third parties in privately negotiated transactions. If the applicable prospectus supplement indicates, in connection with those derivatives, the third parties may sell securities covered by this prospectus and the applicable prospectus supplement, including in short sale transactions. If so, the third party may use securities pledged by the selling securityholder or borrowed from the selling securityholder or others to settle those sales or to close out any related open borrowings of stock, and may use securities received from the selling securityholder in settlement of those derivatives to close out any related borrowings of stock. The third party in such sale transactions may be an underwriter and, if not identified in this prospectus, will be identified in the applicable prospectus supplement (or a post effective amendment).
(j) In connection with an underwritten offering of Registrable Securities and, if applicable, in connection with any Hedging Transaction, (A) cause opinions of counsel to the Company (which counsel and opinions shall be reasonably satisfactory to the managing underwriters), to be delivered to the underwriters, any Hedging Counterparty and the Selling Holders covering the matters customarily covered in opinions requested in underwritten offerings by
selling security holders and (B) cause "cold comfort" letters and updates thereof (which letters and updates shall be reasonably satisfactory to the managing underwriters) from the independent certified public accountants of the Company (and, if necessary, any other independent certified public accountants of any subsidiary of the Company or of any business acquired or owned by the Company for which financial statements and financial data are, or are required to be, included in the Registration Statement), to be delivered to each of the underwriters, any Hedging Counterparty and the Selling Holders of such Registrable Securities included in such underwritten offering, such letters to be in customary form and covering matters of the type customarily covered in "cold comfort" letters in connection with underwritten offerings by selling security holders.
(k) Comply with all applicable rules and regulations of the Commission and make generally available to security holders earnings statements satisfying the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder (or any similar rule promulgated under the Securities Act) not later than 45 days after the end of any 12-month period (or 90 days after the end of any 12-month period if such period is a fiscal year) (A) commencing at the end of any fiscal quarter in which Registrable Securities are sold to underwriters in a Public Offering and (B) if not sold to underwriters in such an offering, commencing on the first day of the fiscal quarter of the Company after the effective date of a Registration Statement, which statements shall cover said 12-month periods.
(1) Cooperate with each Selling Holder, any Hedging Counterparty and the managing underwriter, if any, participating in the disposition of such Registrable Securities in connection with any filings required to be made with the National Association of Securities Dealers, Inc.
(m) At the expense of the Company, use its best efforts to cooperate as requested by the Selling Holders in customary marketing efforts undertaken in connection with the Registrable Securities, including sending appropriate officers of the Company to attend any "road shows" and investor and rating agency presentations scheduled in connection with any such registration.
(n) Furnish for delivery in connection with the closing of any offering of Registrable Securities pursuant to a registration effected pursuant to Section 2.01(a) or Section 2.02(a) unlegended certificates representing ownership of the Registrable Securities being sold in such denominations as shall be requested by each Selling Holder or the underwriters.
(o) Enter into any other customary agreements and take such other actions as are reasonably required in order to expedite or facilitate the disposition of any Registrable Securities or any Registrable Class Securities in connection with any Hedging Transaction or otherwise.
(p) It shall be a condition precedent to the obligation of the Company to take any action with respect to any Registrable Securities that the holder thereof, and any Hedging Counterparty, shall furnish to the Company such information regarding such holder, any Hedging Counterparty, the Registrable Securities and any other Company securities held by such holder as the Company shall reasonably request and as shall be required in connection with the action taken by the Company.
(q) Each holder of Registrable Securities and any Hedging Counterparty agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 2.04(d), such Shareholder and any Hedging Counterparty will forthwith discontinue disposition of Registrable Securities until such Shareholder's receipt of the copies of the supplemented or amended prospectus contemplated by Section 2.04(d), and, if so directed by the Company such Shareholder and any Hedging Counterparty will deliver to the Company (at the Company's expense) all copies (including, without limitation, any and all drafts), other than permanent file copies, then in such Shareholder's or such Hedging Counterparty's possession, of the prospectus covering such Registrable Securities current at the time of receipt of such notice. In the event that the Company shall give any such notice, the period mentioned in Section 2.04(b) shall be extended by the greater of (A) three months, or (B) the number of days during the period from and including the date of the giving of such notice pursuant to Section 2.04(d) to and including the date when each holder of Registrable Securities covered by such registration statement shall have received the copies of the supplemented or amended prospectus contemplated by Section 2.04(d).
Section 2.05. Transfers; Rights of Transferee of Registrable Securities. Each Shareholder agrees not to make any transfer of all or any portion of the Registrable Securities other than to an Affiliate unless and until (a) there is then in effect a registration statement under the Securities Act covering such proposed transfer and such transfer is made in accordance with such registration statement, (b) such transfer is made in accordance with Rule 144 or Rule 144A or (c) such transfer shall not require any registration or qualification under the Securities Act. Notwithstanding the foregoing, a Shareholder may transfer all or a portion of the Registrable Securities to an Affiliate, and such an Affiliate shall be deemed a Shareholder hereunder. The transferring Shareholder shall provide notice to the Company of any such transfer stating the name and address of such transferee and identifying the number of Registrable Securities transferred.
Section 2.06. Registration Expenses. Except as otherwise provided herein, the Company shall pay all Registration Expenses (exclusive of underwriting discounts and commissions, if any) with respect to any particular offering (or proposed offering).
Section 2.07. Underwriting; Due Diligence. (a) If requested by the underwriters for any underwritten offering of Registrable Securities pursuant to a registration requested under Section 2.01 or Section 2.02, the Company shall enter into an underwriting agreement with such underwriters for such offering, which agreement will contain such representations and warranties and covenants by the Company and such other terms and provisions as are customarily contained in underwriting agreements, including indemnification and contribution provisions substantially to the effect and to the extent provided in Article 4, and agreements as to the provision of opinions of counsel and accountants' letters to the effect and to the extent provided in Section 2.04(j). The Selling Holders on whose behalf the Registrable Securities are to be distributed by such underwriters shall be parties to any such underwriting agreement and the representations and warranties by, and the other agreements on the part of, the Company to and for the benefit of such underwriters, shall also be made to and for the benefit of such Selling Holders. Such underwriting agreement shall also contain such representations and warranties by such Selling Holders and such other terms and provisions as are customarily contained in underwriting agreements with respect to secondary distributions on the part of selling shareholders, including indemnification and contribution provisions substantially to the effect and to the extent provided in Article 4.
(b) In connection with the preparation and filing of each Registration Statement registering Registrable Securities under the Securities Act pursuant to Section 2.01 or Section 2.02 or pursuant to Section 2.08, upon reasonable notice the Company shall give the Selling Holders, the underwriters, if any, and any Hedging Counterparty, and their respective counsel and accountants, such reasonable and customary access to its books, records and properties and such opportunities to discuss the business and affairs of the Company with its officers and the independent public accountants who have certified the financial statements of the Company as shall be necessary, in the opinion of such Selling Holders, such underwriters and any Hedging Counterparty, or their respective counsel, to conduct a reasonable investigation within the meaning of the Securities Act; provided that such Selling Holders, the underwriters and any Hedging Counterparty, and their respective counsel and accountants shall use their reasonable best efforts to coordinate any such investigation of the books, records and properties of the Company and any such discussions with the Company's officers and accountants so that all such investigations occur at the same time and all such discussions occur at the same time.
Section 2.08. Registration In Connection With Hedging Transactions.
(a) The Company acknowledges that from time to time a holder of Registrable Securities may seek to enter into one or more Hedging Transactions with a Hedging Counterparty. Notwithstanding anything to the contrary provided herein but subject to the limitations of Section 2.01 (a), the Company agrees that,
in connection with any proposed Hedging Transaction, if, in the reasonable judgment of counsel to the Shareholder of Registrable Securities (after good faith consultation with counsel to the Company), it is necessary or desirable to register under the Securities Act such Hedging Transaction or sales or transfers (whether short or long) of Registrable Class Securities in connection therewith, then the Company shall use its best efforts to take such actions (which may include among other things, the filing of a post-effective amendment to any shelf registration statement to include additional or changed information that is material or is otherwise required to be disclosed, including, without limitation, a description of such Hedging Transaction, the name of the Hedging Counterparty, identification of the Hedging Counterparty or its Affiliates as underwriters or potential underwriters, if applicable, or any change to the plan of distribution) as may reasonably be required to register such Hedging Transactions or sales or transfers of Registrable Class Securities in connection therewith under the Securities Act in a manner consistent with the rights and obligations of the Company hereunder with respect to the registration of Registrable Securities.
(b) The Company agrees to include in each prospectus supplement filed in connection with any proposed Hedging Transaction language mutually agreed upon by the Company, the Shareholder and the Hedging Counterparty describing such Hedging Transaction.
(c) Any information regarding the Hedging Transaction included in a registration statement or prospectus pursuant to this Section 2.08 shall be deemed to be information provided by the Shareholder selling Registrable Securities pursuant to such registration statement for purposes of Section 2.04(p) of this Agreement.
(d) If in connection with a Hedging Transaction a Hedging Counterparty or any Affiliate thereof is (or may be considered) an underwriter or selling securityholder, then it shall be required to provide customary indemnities to the Company regarding itself, the plan of distribution and like matters.
Section 2.09. Unregistered Offerings. The parties hereto hereby agree that, in the event that the Company or one or more Shareholders propose to make an underwritten offering or a sale to a strategic purchaser of Common Shares, any other equity securities or securities convertible or exchangeable for equity securities of the Company (other than an acquisition by the Company financed through the issuance of Common Shares) (i) that is exempt from, or not subject to, the registration requirements of the Securities Act and (ii) in the case of an underwritten offering or sale by one or more Shareholders, with respect to which such Shareholder(s) request the cooperation and participation of the Company or the management of the Company in performing due diligence and marketing such offering to potential investors, the relevant notice provisions of Section 2.01 or Section 2.02 will apply and the required notice will state that the offering or sale
is proposed to be made on an unregistered basis. In that event, the parties agree to proceed with such an offering on an unregistered basis in good faith as and to the extent provided herein with respect to a registered offering and that the provisions of this Agreement will apply mutatis mutandis to such unregistered offering, including, without limitation, provisions relating to "piggy-back" rights, allocations of securities included in an offering, the Company's obligations with respect to an offering (including indemnification provisions and procedures), selection of underwriters (if applicable), expenses associated with an offering and representations and warranties.
Section 2.10. Registration Rights of Other Persons. Prior to the date on which the Shareholder holds Registrable Securities representing less than 50% of the outstanding Common Shares of the Company, the Company may not, without the prior written consent of the Shareholders, grant to any other Person the right to request a registration of securities of the Company under the Securities Act, or the right to be included as a Selling Holder in connection with any registration of Registrable Securities; provided that, if any such written consent is given, the terms of any such right granted or issued shall not be more favorable to such Person than the terms of this Agreement or, any more favorable terms shall also be granted to the Shareholders. On and after such date the Company may grant to any other Person the right to request a registration of securities of the Company under the Securities Act, or the right to be included as a Selling Holder in connection with any registration of Registrable Class Securities; provided that, any such rights may not be exercised by any Person prior to the second anniversary of the Initial Public Offering Date and provided further that the proviso in the preceding sentence is complied with. The Company shall not require the consent of the Shareholders in connection with granting registration rights to purchasers of its securities eligible to benefit from an "Exxon Capital" exchange offer.
Section 2.11. Inconsistent Agreements. The Company shall not hereafter enter into any agreement with respect to its securities which is inconsistent with or violates the rights granted to the Shareholders in this Agreement.
Section 2.12. "Market Stand-Off" Agreement. Each Shareholder hereby agrees that such Shareholder shall not sell, transfer, make any short sale of, grant any option for the purchase, or enter into any hedging or similar transaction with the same economic effect as a sale, of any Common Shares or securities convertible into or exercisable for Common Shares held by such Shareholder (other than the sale pursuant to the registration statement of those securities included in the registration) for 10 days prior to and 90 days (or such lesser period as the lead or managing underwriters may permit) after the effective date of a registration statement for an underwritten public offering of any of the Company's equity securities (or the commencement of the offering to the public of any of the Company's equity securities in the case of a Rule 415 Offering);
provided that the Shareholder, in the case of the 10 day period, has been given written notice of the effective date or the commencement of the public offering to permit compliance with such undertaking and, if such written notice should be delivered after the beginning of such 10 day period, such agreement will relate only to the period from the time of receipt of notice to such effective date or commencement date. Each Shareholder agrees to execute and deliver such other agreements as may be reasonably requested by the Company or the underwriter which are consistent with the foregoing or which are necessary to give further effect thereto.
Section 2.13. Limitations on Availability of Registration Rights. The
registration rights set forth in this Article 2 shall not be available to any
Requesting Holder when the aggregate ownership of the Shareholders is less than
10% of the then outstanding Common Shares and if, in the opinion of counsel to
the Company, which opinion shall be delivered to such Requesting Holder and
shall be in a form satisfactory to U.S. counsel to the Requesting Holder, all of
the Registrable Securities then owned by the Shareholders could be sold (i) in
any 90-day period pursuant to Rule 144 under the Act (without giving effect to
the provisions of Rule 144(k)) or (ii) without restrictions pursuant to Rule
144(k); provided, however, that the Company agrees that the registration rights
set forth in this Article 2 shall be available to any Requesting Holder when the
aggregate ownership of the Shareholders is less than 10% of the then outstanding
Common Shares if such Requesting Holder agrees to pay a pro rata portion of the
Registration Expenses incurred in connection with such registration, such pro
rata portion being the proportion the Registrable Securities offered bears to
the total amount of Common Shares offered on such date.
ARTICLE 3
REPRESENTATIONS, WARRANTIES AND AGREEMENTS
Section 3.01. Company Representations, Warranties and Agreements. The Company represents and warrants to, and agrees with, each Shareholder that:
(i) The Company has all requisite corporate power and authority to execute, deliver, and perform this Agreement. This Agreement has been duly authorized, executed, and delivered by the Company. No consent, authorization, approval, order, license, certificate, or permit of or from, or declaration or filing with, any United States federal, state, local, or other governmental authority or any court or other tribunal is required by the Company for the execution, delivery or performance of this Agreement by the Company (except filings under the Securities Act which will be made and any consents under blue sky or state securities laws which will be obtained).
(ii) The Company shall not enter into any transaction involving the issuance or transfer by any other Person of Other Securities to a Shareholder, or any merger or consolidation in which it is not the surviving Person or any sale, lease or other transfer of all or substantially all the assets of the Company, unless effective provision is made for the assumption by such other Person, jointly and severally with the Company if the Company shall remain in existence, of all of the obligations of the Company hereunder, and in the case of any such issuance or transfer, the registration of such Other Securities on the same basis as the registration of the other Registrable Securities hereunder.
(iii) The execution and delivery of this Agreement by the Company does not, and the consummation of the transactions contemplated hereby will not, violate, conflict with, or result in a breach of any provision of, or constitute a default (with or without notice or lapse of time or both) under, or result in the termination of, or accelerate the performance required by, or result in a right of termination, cancellation, or acceleration of any obligation or the loss of a material benefit under, or result in the creation of any lien, security interest, charge or encumbrance upon any of the properties or assets of the Company or any of its subsidiaries pursuant to any provisions of (A) the articles of incorporation, by-laws or similar governing documents of the Company or any of its subsidiaries, (B) any statute, law, ordinance, rule, regulation, judgment, decree, order, injunction, writ, permit or license of any governmental authority applicable to the Company or any of its subsidiaries or any of their respective properties or assets or (C) any note, bond, mortgage, indenture, deed of trust, license, franchise, permit, concession, contract, lease or other instrument, obligation or agreement of any kind to which the Company or any of its subsidiaries is a party or by which it or any of its properties or assets may be bound or affected as soon as the conditions can be so satisfied.
(iv) The Company covenants that it will file any reports required to be filed by it under the Securities Act and the Exchange Act, will make available "adequate current public information concerning the Company within the meaning of paragraph (c) of Rule 144" and that it will take such further action as any Shareholder may reasonably request, all to the extent required from time to time to enable such Shareholder to sell Registrable Securities without registration pursuant to the available exemptions under the Securities Act. Upon the request of any Shareholder, the Company will deliver to it a written statement as to whether it has complied with such requirements. The Company further covenants to use its reasonable efforts to cause all conditions to the availability of Form S-3 (or any successor form) under the 1933 Act for the filing of registration statements under this Agreement to at all times be satisfied.
Section 3.02. Fortis Insurance Representations, Warranties and Agreements. Fortis Insurance represents and warrants to, and agrees with, the Company, that:
(i) It is duly organized, validly existing, and in good standing under the laws of its jurisdiction of organization. Fortis Insurance has all requisite power and authority to execute, deliver, and perform this Agreement. This Agreement has been duly authorized by Fortis Insurance and has been duly executed and delivered by it.
(ii) Neither Fortis Insurance nor any of its Affiliates will take, directly or indirectly, during the term of this Agreement, any action designed to stabilize (except as may be permitted by applicable law) or manipulate the price of any security of the Company.
(iii) Fortis Insurance shall promptly furnish to the Company upon the Company's request any and all information as may be required by, or as may be necessary or advisable to comply with the provisions of, the Securities Act, the Exchange Act and the Regulations in connections with the preparation and filing of any Registration Statement pursuant hereto, or any amendment or supplement thereto, or any Preliminary Prospectus or Prospectus included therein.
Section 3.03. Survival of Representations and Agreements. All representations, warranties, covenants and agreements contained in this Agreement shall be deemed to be representations, warranties, covenants and agreements at the effective date of each Registration Statement contemplated by this Agreement, and such representations, warranties, covenants and agreements shall remain operative and in full force and effect regardless of any investigation made by or on behalf of the Company, any Shareholder, or any other Person and shall survive termination of this Agreement.
ARTICLE 4
INDEMNIFICATION AND CONTRIBUTION
Section 4.01. Indemnification and Contribution. (a) The Company agrees to indemnify and hold harmless each Shareholder, each person, if any, who controls each Shareholder within the meaning of either Section 15 of the Securities Act or Section 20 of the Securities Exchange Act and each affiliate of the Shareholder within the meaning of Rule 405 under the Securities Act from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred in connection with defending or investigating any such action or claim) caused by any untrue statement or alleged untrue statement of a material fact contained in any
registration statement or any amendment thereof, any preliminary prospectus or prospectus (as amended or supplemented if the Company shall have furnished any amendments or supplements thereto) relating to the Registrable Securities, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages or liabilities are caused by any such untrue statement or omission or alleged untrue statement or omission which is based upon information relating to a Selling Holder or underwriter which is furnished to the Company in writing by such Selling Holder or underwriter expressly for use therein. The Company also agrees to indemnify any underwriter of the Registrable Securities so offered, each person, if any, who controls such underwriter and each affiliate of such underwriter on substantially the same basis as that of the indemnification by the Company of each Selling Holder provided in this Article 4; provided, however, that the foregoing indemnity agreement with respect to any preliminary prospectus shall not inure to the benefit of any underwriter from whom the person asserting any such losses, claims, damages or liabilities purchased Registrable Securities, or any person controlling such underwriter, or any such affiliate of such underwriter, if a copy of the prospectus (as then amended or supplemented if the Company shall have furnished any amendments or supplements thereto) was not sent or given by or on behalf of such underwriter to such person, if required by law so to have been delivered, at or prior to the written confirmation of the sale of the Registrable Securities to such person, and if the prospectus (as so amended or supplemented) would have cured the defect giving rise to such losses, claims, damages or liabilities, unless such failure is the result of noncompliance by the Company with Section 2.04(d) or (h) hereof.
(b) Each Selling Holder agrees to indemnify and hold harmless the Company, its directors, the officers who sign any registration statement, each person, if any, who controls the Company within the meaning of either Section 15 of the Securities Act or Section 20 of the Securities Exchange Act and each affiliate of the Company within the meaning of Rule 405 under the Securities Act, from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred in connection with defending or investigating any such action or claim) caused by any untrue statement or alleged untrue statement of a material fact contained in any registration statement or any amendment thereof, any preliminary prospectus or prospectus (as amended or supplemented if the Company shall have furnished any amendments or supplements thereto) relating to the Registrable Securities, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, but only with reference to information relating to a Selling Holder furnished in writing by or on behalf of such Selling Holder expressly for use in a registration statement, any preliminary prospectus, prospectus or any amendments
or supplements thereto. Each Selling Holder also agrees to indemnify any underwriter of the Registrable Securities so offered, each person, if any, who controls such underwriter and each affiliate of such underwriter on substantially the same basis as that of the indemnification by such Selling Holder of the Company provided in this Article 4; provided, however, that the foregoing indemnity agreement with respect to any preliminary prospectus shall not inure to the benefit of any underwriter from whom the person asserting any such losses, claims, damages or liabilities purchased Registrable Securities, or any person controlling such underwriter, or any such affiliate of such underwriter, if a copy of the prospectus (as then amended or supplemented if the Company shall have furnished any amendments or supplements thereto) was not sent or given by or on behalf of such underwriter to such person, if required by law so to have been delivered, at or prior to the written confirmation of the sale of the Registrable Securities to such person, and if the prospectus (as so amended or supplemented) would have cured the defect giving rise to such losses, claims, damages or liabilities, unless such failure is the result of noncompliance by the Company with Section 2.04(d) or (h) hereof. Notwithstanding any other provision of this Article 4, no Selling Holder's obligations to indemnify pursuant to this Article 4 shall exceed the amount of net proceeds received by such Selling Holder in connection with any offering of its Registrable Securities. Each Selling Holder's obligations to indemnify pursuant to this Section are several in the proportion that the net proceeds of the offering received by such Selling Holder bear to the total net proceeds of the offering received by all Selling Holders and not joint.
(c) Each party indemnified under paragraph (a) or (b) above shall,
promptly after receipt of notice of a claim or action against such indemnified
party in respect of which indemnity may be sought hereunder, notify the
indemnifying party in writing of the claim or action and the indemnifying party,
upon request of the indemnified party, shall assume the defense thereof,
including the employment of counsel reasonably satisfactory to such indemnified
party, and shall assume the payment of all fees and expenses. In any such
action, any indemnified party shall have the right to retain its own counsel,
but the fees and expenses of such counsel shall be at the sole expense of such
indemnified party unless (i) the indemnifying party and the indemnified party
shall have mutually agreed to the retention of such counsel or (ii) the named
parties to any such proceeding (including any impleaded parties) include both
the indemnifying and the indemnified party and representation of both parties by
the same counsel would be inappropriate due to actual or potential differing
interests between them. It is understood that the indemnifying party shall not,
in respect of the legal expenses of any indemnified party in connection with any
claim or action or related proceeding in the same jurisdiction, be liable for
(i) the fees and expenses of more than one separate firm (in addition to any
local counsel) for all underwriters and all persons, if any, who control any
underwriter within the meaning of either Section 15 of the Securities Act or
Section 20 of the Exchange
Act or who are affiliates of any underwriter within the meaning of Rule 405 under the Securities Act, (ii) the fees and expenses of more than one separate firm (in addition to any local counsel) for the Company, its directors, its officers who sign the registration statement and each person, if any, who controls the Company within the meaning of either such Section and (iii) the fees and expenses of more than one separate firm (in addition to any local counsel) for the Selling Holders and all persons, if any, who control the Selling Holders within the meaning of either such Section, and that all such fees and expenses shall be reimbursed as they are incurred. In the case of any such separate firm for the Selling Holders as indemnified parties, such firm shall be designated in writing by the indemnified party that had the largest number of Registrable Securities included in such registration. In the case of any such separate firm for the Company, and such directors, officers and control persons of the Company, such firm shall be designated in writing by the Company. The indemnifying party shall not be liable for any settlement of any claim or action effected without its written consent, but if settled with such consent, or if there be a final judgment for the plaintiff, the indemnifying party shall indemnify and hold harmless such indemnified parties from and against any loss or liability by reason of such settlement or judgment. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened claim or action in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability arising out of such proceeding.
(d) If the indemnification provided for in this Article 4 shall for any reason be unavailable or insufficient to an indemnified party in respect of any loss, liability, cost, claim or damage referred to therein, then each indemnifying party shall, in lieu of indemnifying such indemnified party, contribute to the amount paid or payable by such indemnified party as a result of such loss, liability, cost, claim or damage (i) in such proportion as is appropriate to reflect the relative benefits received by the indemnifying party or parties on the one hand and the indemnified party or parties on the other hand from the offering or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the indemnifying party or parties on the one hand and of the indemnified party or parties on the other hand in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative benefits received by the Selling Holders and the Company on the one hand and the underwriters on the other hand in connection with the offering shall be deemed to be in the same respective proportions as the net proceeds from the offering (before deducting expenses) and the total underwriting discounts and commissions received by the underwriters, in each case as set forth in the table on
the cover of a prospectus, bear to the aggregate public offering price of the
securities. The relative fault of the Company, the Selling Holders and the
underwriters shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by the
Company, by a Selling Holder or by the underwriters and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission. The amount paid or payable by an indemnified party
as a result of the loss, cost, claim, damage or liability, or action in respect
thereof, referred to above in this paragraph (d) shall be deemed to include,
subject to the limitations set forth above, any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. The Company and the Selling Holders agree
that it would not be just and equitable if contribution pursuant to this Article
4 were determined by pro rata allocation (even if the underwriters were treated
as one entity for such purpose) or by any other method of allocation which does
not take account of the equitable considerations referred to in this paragraph.
Notwithstanding any other provision of this Article 4, no Selling Holder shall
be required to contribute any amount in excess of the amount by which the net
proceeds of the offering received by such Selling Holder exceed the amount of
any damages which such Selling Holder has otherwise been required to pay by
reason of such untrue or alleged untrue statement or omission or alleged
omission. Each Selling Holder's obligations to contribute pursuant to this
Section are several in the proportion that the net proceeds of the offering
received by such Selling Holder bears to the total net proceeds of the offering
received by all the Selling Holders and not joint. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation.
(e) Indemnification and contribution similar to that specified in the preceding paragraphs of this Article 4 (with appropriate modifications) shall be given by the Company, the Selling Holders and the underwriters with respect to any required registration or other qualification of securities under any state law or regulation or governmental authority.
(f) The obligations of the parties under this Article 4 shall be in addition to any liability which any party may otherwise have to any other party.
ARTICLE 5
MISCELLANEOUS
Section 5.01. Remedies. In the event of breach by any party of any of its obligations under this Agreement, the other parties, in addition to being entitled to exercise all rights provided herein or granted by law, including recovery of
damages, will be entitled to specific performance of its rights under this Agreement. The Company and each Shareholder agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by the Company or such Shareholder, as the case may be, of any of the provisions of this Agreement and hereby further agrees that, in the event of any action for specific performance in respect of such breach, the Company or such Shareholder, as the case may be, shall waive the defense that a remedy at law would be adequate. No failure or delay on the part of the Company or any Shareholder in exercising any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy.
Section 5.02. Amendments; Waivers and Termination. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, without the written consent of the Company and Fortis Insurance. This Agreement shall terminate (except for the provisions set forth in Sections 3.03 and 4.01), and be of no further force and effect, once the Shareholder owns less than 5% of the Outstanding Common Stock.
Section 5.03. Notices. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally, by telecopier (receipt of which is confirmed) or mailed by registered or certified mail (return receipt requested) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice):
if to the Company, to:
Assurant, Inc.
One Chase Manhattan Plaza
New York, NY 10005
Fax: (212) 859 7034
Attention: Katherine Greenzang, Esq.,
Senior Vice President, General Counsel and Secretary
if to Fortis Insurance, to:
Fortis Insurance N.V.
Archimedeslaan 6
P.O. Box 2049
3500 GA Utrecht
The Netherlands
Attention: Monica Roeling
Phone:+31 30 257 6568
Fax:+31 30 257 7835
with a copy to:
Fortis
Rue Royale, 20
1000 Brussels
Belgium
Attention: Gilbert Mittler
Phone:+32 2 510 5206
Fax:+32 2 510 5621
Section 5.04. Interpretation. When a reference is made in this Agreement to a Section, such reference shall be to a Section of this Agreement unless otherwise indicated. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement.
Section 5.05. Counterparts. This Agreement may be executed in two or more counterparts, all of which shall be considered one and the same agreement and shall become effective when two or more counterparts have been signed by each of the parties and delivered to the other parties, it being understood that all parties need not sign the same counterpart.
Section 5.06. Entire Agreement; No Third Party Beneficiaries. This Agreement (including the documents and the instruments referred to herein) (a) constitutes the entire agreement and supersedes all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof, and (b) is not intended to confer upon any Person other than the parties hereto and their respective successors and permitted assigns, any rights or remedies hereunder.
Section 5.07. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York applicable to contracts to be performed entirely within such State.
Section 5.08. Severability. Wherever possible, each provision hereof shall be interpreted in such a manner as to be valid, legal and enforceable under applicable law, but in case any one or more of the provisions contained herein shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such provision shall be ineffective to the extent, but only to the extent, of such invalidity, illegality or unenforceability without invalidating or rendering unenforceable the remainder of this Agreement, unless such a construction would be unreasonable or materially impair the rights or any party hereto.
Section 5.09. Successors and Assigns. All covenants and agreements contained in this Agreement by or on behalf of any of the parties hereto shall bind and inure to the benefit of the respective successors and permitted assigns of the parties hereto whether so expressed or not. This Agreement shall not be assignable by the Company or the Shareholder except to another Shareholder.
Section 5.10. Use of Terms. This Agreement contemplates the filing of Registration Statements under the Securities Act on numerous occasions involving various offers of securities. In connection with such Registration Statements, there may be identified therein one or more underwriters through which securities are to be offered on behalf of the Company or the Holder, or both, pursuant to either a "firm-commitment" or "best-efforts" arrangement, and, in the case where there is more than one underwriter, one or more of the underwriters may be designated as the "manager" or "representative" or the "co-managers" or "representatives" of the several underwriters. Accordingly, all references herein to an "underwriter" or "underwriters" are intended to refer to a "principal underwriter" (as defined in Rule 405 of the Regulations) and to provide for those transactions in which securities may be offered by or through one or more underwriters, and not to imply that any of the transactions contemplated hereby is conditioned in any manner whatsoever on the participation therein by one or more underwriters on behalf of any party.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.
ASSURANT, INC.
By: /s/ Katherine Greenzang ---------------------------------- Name: KATHERINE GREENZANG Title: SVP |
FORTIS INSURANCE N.V.
By: /s/ Christan Foiner ---------------------------------- Name: CHRISTAN FOINER Title: Attorney-in-fact By: /s/ Kristof Macours ---------------------------------- Name: KRISTOF MACOURS Title: Attorney-in-fact |
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-112502) of Assurant, Inc. of our report dated March 11, 2004 related to the consolidated financial statements and the financial statement schedules of Assurant, Inc., which appears in this Form 10-K.
/s/ PRICEWATERHOUSECOOPERS LLP | |
|
New York, New York
EXHIBIT 24.1
ASSURANT, INC.
POWER OF ATTORNEY
Know all men by these present, that the undersigned directors and officers of Assurant, Inc., a Delaware corporation, hereby constitute and appoint J. Kerry Clayton, Robert B. Pollock, Larry M. Cains, Katherine Greenzang and Douglas R. Lowe, and each of them, the individual's true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for the person and in his or her name, place and stead, in any and all capacities, to sign the Annual Report on Form 10-K for the fiscal year ended December 31, 2003, to be filed by Assurant, Inc., required by the Securities and Exchange Act of 1934, or any amendment to such report, and all other documents in connection therewith to be filed with the Securities and Exchange Commission, granting to said attorneys-in-fact and agents, and each of them full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact as agents or any of them, or the substitutes, may lawfully do or cause to be done by virtue hereof.
Signature Title --------- ----- /s/ J. KERRY CLAYTON _______________________ President and Chief Executive Officer J. Kerry Clayton and Director (Principal Executive Officer) /s/ ROBERT B. POLLOCK ________________________ Executive Vice President and Chief Financial Robert B. Pollock Officer (Principal Financial Officer) /s/ LARRY M. CAINS ___________________________ Senior Vice President, Investor Relations Larry M. Cains (Principal Accounting Officer) /s/ JOHN MICHAEL PALMS ____________________________ Director John Michael Palms |
Assurant, Inc. Power of Attorney Page Two /s/ MICHEL BAISE ______________________________ Director Michel Baise /s/ ROBERT J. BLENDON _______________________________ Director Robert J. Blendon /s/ BETH L. BRONNER ________________________________ Director Beth L. Bronner /s/ HOWARD L. CARVER ________________________________ Director Howard L. Carver /s/ ALLEN R. FREEDMAN ________________________________ Director Allen R. Freedman /s/ H. CARROLL MACKIN _________________________________ Director H. Carroll Mackin /s/ GILBERT MITTLER __________________________________ Director Gilbert Mittler |
Exhibit 31.1
CERTIFICATIONS
I, J. Kerry Clayton, certify that:
1. I have reviewed this annual report on
Form 10-K of Assurant, Inc.;
2. Based on my knowledge, this report does
not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial
statements, and other financial information included in this
report, fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrants other certifying
officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
5. The registrants other certifying
officer(s) and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the
registrants auditors and the audit committee of the
registrants board of directors (or persons performing the
equivalent functions):
(a) Designed such disclosure controls and
procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material
information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
report is being prepared;
(b) Evaluated the effectiveness of the
registrants disclosure controls and procedures and
presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in
the registrants internal control over financial reporting
that occurred during the registrants most recent fiscal
quarter (the registrants fourth fiscal quarter in the case
of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrants
internal control over financial reporting; and
(a) All significant deficiencies and
material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to
adversely affect the registrants ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that
involves management or other employees who have a significant
role in the registrants internal control over financial
reporting.
/s/ J. KERRY CLAYTON
J. Kerry Clayton
President and Chief Executive Officer
Date: March 29, 2004
Exhibit 31.2
CERTIFICATIONS
I, Robert B. Pollock, certify that:
1. I have reviewed this annual report on
Form 10-K of Assurant, Inc.;
2. Based on my knowledge, this report does
not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial
statements, and other financial information included in this
report, fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrants other certifying
officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
5. The registrants other certifying
officer(s) and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the
registrants auditors and the audit committee of the
registrants board of directors (or persons performing the
equivalent functions):
(a) Designed such disclosure controls and
procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material
information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
report is being prepared;
(b) Evaluated the effectiveness of the
registrants disclosure controls and procedures and
presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in
the registrants internal control over financial reporting
that occurred during the registrants most recent fiscal
quarter (the registrants fourth fiscal quarter in the case
of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrants
internal control over financial reporting; and
(a) All significant deficiencies and
material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to
adversely affect the registrants ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that
involves management or other employees who have a significant
role in the registrants internal control over financial
reporting.
/s/ ROBERT B. POLLOCK
Robert B. Pollock
Executive Vice President and Chief Financial
Officer
Date: March 29, 2004
Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
OF
In connection with the annual report of
Assurant, Inc. (the Company) on Form 10-K
for the period ended December 31, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the
Report), I, J. Kerry Clayton, President and
Chief Executive Officer of the Company, certify, pursuant to
18 U.S.C. § 1350, as adopted pursuant to
§ 906 of the Sarbanes-Oxley Act of 2002, that, based
on my knowledge:
1. The Report fully complies with the
requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
2. The information contained in the Report
fairly presents, in all material respects, the financial
condition and results of operations of the Company.
/s/ J. KERRY CLAYTON
J. Kerry Clayton
President and Chief Executive
Officer
Date: March 29, 2004
Exhibit 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
OF
In connection with the annual report of
Assurant, Inc. (the Company) on Form 10-K
for the period ended December 31, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the
Report), I, Robert B. Pollock, Executive Vice
President and Chief Financial Officer of the Company, certify,
pursuant to 18 U.S.C. § 1350, as adopted pursuant
to § 906 of the Sarbanes-Oxley Act of 2002, that,
based on my knowledge:
1. The Report fully complies with the
requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
2. The information contained in the Report
fairly presents, in all material respects, the financial
condition and results of operations of the Company.
/s/ ROBERT B. POLLOCK
Robert B. Pollock
Executive Vice President and Chief Financial
Officer
Date: March 29, 2004