Adopted Accounting Pronouncements
The table below describes the impacts of the ASUs adopted by the Company, effective January 1, 2022:
| | | | | | | | | | | |
Standard | Summary of the Standard | Effective date Method of Adoption | Impact of the Standard on the Company’s Financial Statements |
ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting; as clarified and amended by ASU 2021-01, Reference Rate Reform (Topic 848): Scope and updated by ASU 2022-06, Reference Rate Reform (Topic 848):Deferral of the Sunset Date of Topic 848 | In March 2020, the Financial Accounting Standards Board (“FASB”) issued guidance which provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued.
The relief is applicable only to legacy contracts if the amendments made to the agreements are solely for reference rate reform activities. The provisions must be applied consistently for all relevant transactions other than derivatives, which may be applied at a hedging relationship level. The guidance is effective upon issuance. | The guidance on contract modifications is applied prospectively from any date beginning March 12, 2020. Unlike other topics, the provisions of this update are only available until December 31, 2024, when the reference rate replacement activity is expected to have been completed. | This standard is effective as of January 1, 2022, but has no impact on the Company’s consolidated financial statements as the Company currently has no contracts or hedging relationships for which the reference LIBOR or another reference rate is expected to be discontinued and a GAAP modification is required. |
ASU 2020-06- Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity | In August 2020, the FASB issued guidance that simplifies accounting for convertible instruments by removing major separation models required under current GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument and more convertible preferred stock as a single equity instrument with no separate accounting for embedded conversion features. The guidance removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more contracts in an entity’s own equity to qualify for it. The guidance also simplifies the diluted earnings per common share (“EPS”) calculation in the areas of convertible instruments and instruments that qualify for the derivatives scope exception for contracts in an entity’s own equity to address accounting for the guidance changes to the classification, recognition and measurement. | This standard is effective as of January 1, 2022, and can be adopted either as a modified retrospective method of transition or a fully retrospective method of transition. | This standard has no impact on the Company’s consolidated financial statements as the Company currently has no convertible instruments or contracts in its own equity. |
Future Adoption of Accounting Pronouncements
ASUs not listed below were assessed and either determined to be not applicable or are not expected to have a material impact on the Company’s consolidated financial statements or disclosures. ASUs issued but not yet adopted as of December 31, 2022, that are currently being assessed and may or may not have a material impact on the Company’s consolidated financial statements or disclosures are included.
| | | | | | | | | | | |
Standard | Summary of the Standard | Effective date Method of Adoption | Impact of the Standard on the Company’s Financial Statements |
ASU 2018-12, Financial Services—Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, as amended by ASU 2019-09, Financial Services—Insurance (Topic 944): Effective Date, as amended by ASU 2020-11, Financial Services—Insurance (Topic 944): Effective Date and Early Application and as amended by ASU 2022-05, Financial services—Insurance (Topic 944): Transition for Sold Contracts | The guidance includes the following primary changes: assumptions supporting liabilities for future policy benefits and expenses will no longer be locked-in but must be updated at least annually with the impact of changes to the liability reflected in earnings (except for discount rates); the discount rate assumptions will be based on upper-medium grade (low credit risk) fixed-income instrument yield instead of the earnings rate of invested assets; the discount rate must be evaluated at each reporting date and the impact of changes to the liability estimate as a result of updating the discount rate assumption is required to be recognized in other comprehensive income; the provision for adverse deviation is eliminated; and premium deficiency testing is eliminated. Other noteworthy changes include the following: differing models for amortizing deferred acquisition costs will become uniform for all long-duration contracts based on a constant rate over the expected term of the related in-force contracts; all market risk benefits associated with deposit contracts must be reported at fair value with changes reflected in income except for changes related to credit risk which will be recognized in other comprehensive income: and disclosures will be expanded to include disaggregated roll forwards of the liability for future policy benefits, policyholder account balances, market risk benefits, separate account liabilities, and deferred acquisition costs, as well as information about significant inputs, judgments, assumptions and methods used in measurement.
In December 2022, the FASB issued guidance to provide entities an accounting policy election to not apply the accounting guidance to contracts or legal entities sold and derecognized before the effective date when the entity has no significant continuing involvement with them. The election may be applied on a transaction-by-transaction basis. | January 1, 2023, to be applied retrospectively or modified retrospectively to January 1, 2021 (with early adoption permitted) | The Company will adopt this standard as of January 1, 2023 using the modified retrospective method on liabilities for future policy benefits and expenses to January 1, 2021 for long term care insurance contracts that have been fully reinsured.
The Company will also adopt the amended guidance in ASU 2022-05 to existing contracts as of existing date.
The Company has evaluated that the adoption of this standard along with the amended guidance on transition will have no impact on equity or net income on the long-term care contracts as they are fully reinsured with third party reinsurers. However a disclosure along with a roll-forward table on a gross basis on the long-term care business will be presented in the first quarter financials for the period ended March 31, 2023. |
ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers | The guidance improves comparability after a business combination is reported in the acquirer’s financial statements by providing consistent recognition and measurement guidance for revenue contracts with customers acquired in a business combination and revenue contracts with customers not acquired in a business combination. Generally, the acquirer will recognize the acquired contract assets and contract liabilities at the same amounts recorded by the acquiree. Historically, such amounts were recognized by the acquirer at fair value in the acquisition accounting. Under the amended guidance, the acquirer should account for the acquired revenue contracts as if it had originated the contracts. The amendments provide certain practical expedients for acquirers when recognizing and measuring acquired contract assets and contract liabilities from revenue contracts in a business combination. | January 1, 2023, to be applied prospectively (with early adoption permitted). | The Company will adopt the standard from January 1, 2023. The amendments will be applied to business combinations occurring on or after the effective date of the amendments. |
3. Acquisition
ALI
On November 1, 2022, the Company acquired American Lease Insurance Agency Corporation (“ALI”), a managing general agency headquartered in the Commonwealth of Massachusetts, and its captive subsidiary, The Equipment Lease Reinsurance Company Ltd, licensed in Turks and Caicos, for total consideration of $60.0 million in cash. ALI is a provider of property and liability insurance products for commercial equipment and vehicles that are leased or financed. The Company recorded $37.4 million of goodwill, $19.2 million of other intangible assets, which are primarily dealer relationships amortizable over 10 years, and $1.9 million of VOBA, which is amortizable over 5 years based on the earnings pattern.
4. Dispositions and Exit Activities
Sale of Global Preneed
On August 2, 2021, the Company completed its sale of the legal entities which comprise the businesses previously reported as the Global Preneed segment and certain businesses previously disposed of through reinsurance, which were previously reported in the Corporate and Other segment (collectively, the “disposed Global Preneed business”), to subsidiaries of CUNA Mutual Group (“CUNA”) for an aggregate purchase price at closing of $1.34 billion in cash. The aggregate purchase price was comprised of a base purchase price of $1.25 billion, adjusted for (i) the amount of Leakage (as defined in the Equity Purchase Agreement, dated as of March 8, 2021, by and among the Company, Interfinancial Inc., CMFG Life Insurance Company and TruStage Global Holdings, ULC (the “Equity Purchase Agreement”)) paid by the disposed Global Preneed business after December 31, 2020 and at or prior to the closing of the transaction, (ii) the amount of any Transaction Related Expenses (as defined in the Equity Purchase Agreement) paid by the disposed Global Preneed business after the closing of the transaction, (iii) the difference between the book value of certain assets in the disposed Global Preneed business’s investment portfolio as of December 31, 2020 and the value of cash paid in substitution for the fair market value of such assets by the Company and (iv) the accrual of interest on the base purchase price, as adjusted pursuant to clauses (i) to (iii), at a rate of 6% per annum during the period beginning on January 1, 2021 and ending on the date immediately prior to the date of the closing of the transaction. The net proceeds, which is comprised of the aggregate purchase price less $37.6 million of costs to sell, were $1.31 billion. The net after-tax gain on the sale for the year ended December 31, 2021 was $720.1 million, including $606.0 million of net after-tax gains recognized from accumulated other comprehensive income.
The Company reports a business as held for sale when management has received approval to sell the business and is committed to a formal plan, the business is available for immediate sale, the business is being actively marketed, the sale is anticipated to occur during the ensuing year and certain other specified criteria are met. A business classified as held for sale is recorded at the lower of its carrying amount or estimated fair value less costs to sell, which is required to be remeasured each reporting period. If the carrying amount of the business exceeds its estimated fair value, which is based on the estimated sales price of the transaction, less costs to sell, a loss is recognized. Depreciation is not recorded on assets of a business classified as held for sale.
The Company reports the results of operations of a business as discontinued operations if (i) the business is classified as held for sale; (ii) the business represents a strategic shift that will have a major impact on the Company’s operations and financial results; (iii) the operations and cash flows of the business have been or will be eliminated from the ongoing operations of the Company as a result of the disposal transaction; and (iv) the Company will not have any significant continuing involvement in the operations of the business after the disposal transaction. The results of discontinued operations are reported in net income from discontinued operations in the consolidated statements of operations for all periods presented, commencing in the period in which the business is either disposed of or is classified as held for sale, including any gain or loss recognized on closing or adjustment of the carrying amount to fair value less costs to sell. Assets and liabilities related to a business classified as held for sale which also meets the criteria for discontinued operations are segregated in the consolidated balance sheets for the current and prior periods presented.
Prior to the sale, the Company determined that the disposed Global Preneed business met the criteria to be classified as held for sale and that the sale represented a strategic shift that will have a major impact on the Company’s operations and financial results. Accordingly, the results of operations of the disposed Global Preneed business are presented as net income from discontinued operations in the consolidated statements of operations and segregated in the consolidated statement of cash flows for all periods presented, and the assets and liabilities for the disposed Global Preneed business have been classified as held for sale and segregated for all periods presented in the consolidated balance sheets.
The following table presents the major classes of assets and liabilities as of August 2, 2021, the date of the sale.
| | | | | |
| August 2, 2021 |
Assets | |
Investments: | |
Fixed maturity securities available for sale, at fair value | $ | 6,761.0 | |
Equity securities at fair value | 112.6 | |
Commercial mortgage loans on real estate, at amortized cost | 599.0 | |
Short-term investments | 58.7 | |
Other investments | 14.8 | |
Total investments | 7,546.1 | |
Cash and cash equivalents | 27.3 | |
Premiums and accounts receivable | 4.2 | |
Reinsurance recoverables | 3,235.4 | |
Accrued investment income | 66.8 | |
Deferred acquisition costs (1) | 334.0 | |
Property and equipment, net | 49.3 | |
Value of business acquired | 3.9 | |
Other assets | 20.8 | |
Assets held in separate accounts | 2,322.1 | |
Total assets held for sale | $ | 13,609.9 | |
Liabilities | |
Future policy benefits and expenses | $ | 8,921.8 | |
Unearned premiums (1) | 36.6 | |
Claims and benefits payable | 1,024.2 | |
Commissions payable | 10.6 | |
Reinsurance balances payable | 4.1 | |
Accounts payable and other liabilities | 127.2 | |
Liabilities related to separate accounts | 2,322.1 | |
Total liabilities held for sale | $ | 12,446.6 | |
(1)Deferred acquisition costs and unearned premiums include the impact of changes in unrealized gains (losses) on the amortization.
The following table summarizes the components of net income (loss) from discontinued operations included in the consolidated statements of operations:
| | | | | | | | | | | |
| Years Ended December 31, |
| 2021 | | 2020 |
Revenues | | | |
Net earned premiums | $ | 42.6 | | | $ | 66.9 | |
Fees and other income | 91.0 | | | 151.1 | |
Net investment income | 168.4 | | | 289.3 | |
Net realized gains (losses) on investments and fair value changes to equity securities | 4.2 | | | (8.0) | |
Gain on disposal of businesses (1) | 916.2 | | | — | |
Total revenues | 1,222.4 | | | 499.3 | |
Benefits, losses and expenses | | | |
Policyholder benefits | 172.7 | | | 284.4 | |
Underwriting, selling, general and administrative expenses | 85.2 | | | 142.6 | |
Goodwill impairment (2) | — | | | 137.8 | |
Total benefits, losses and expenses | 257.9 | | | 564.8 | |
Income (loss) from discontinued operations before income taxes | 964.5 | | | (65.5) | |
Benefit for income taxes (3) | 205.6 | | | 12.2 | |
Net income (loss) from discontinued operations | $ | 758.9 | | | $ | (77.7) | |
(1)The year ended December 31, 2021 includes $774.2 million of pre-tax AOCI, primarily net unrealized gains on investments, that was recognized in earnings upon sale.
(2)During the third quarter of 2020, the Company identified impairment indicators impacting the fair value of the Global Preneed reportable segment in connection with exploring strategic alternatives for the Global Preneed business. Such impairment indicators, including the evaluation of the long-term economic performance of the segment in light of further expected declines in interest rates, triggered the requirement for an interim goodwill impairment analysis in the third quarter of 2020. The fair value, which was determined using a discounted cash flow method, was lower than the carrying value, resulting in the impairment charge of the entire goodwill of $137.8 million.
(3)The year ended December 31, 2021 includes $168.2 million of tax on the AOCI that was recognized in earnings upon sale, as noted above.
John Alden Life Insurance Company
On April 1, 2022, the Company completed its sale of JALIC, a run-off business reported in the Corporate and Other segment. Prior to the sale, JALIC met the criteria for held for sale presentation as described above and, therefore, its assets and liabilities were recorded as held for sale in the December 31, 2021 consolidated balance sheet. The major classes of assets and liabilities held for sale included $915.8 million of future policy benefits and expenses, $881.6 million of reinsurance recoverables, $159.6 million of other investments and $117.2 million of claims and benefits payable as of December 31, 2021.
Most of the $881.6 million reinsurance recoverables balance for JALIC, which was included in assets held for sale as of December 31, 2021, was reinsured with Employers Reassurance Corporation (“ERAC”) and was uncollateralized. A.M. Best withdrew its rating for ERAC in 2019. Following the sale of JALIC, the Company no longer has any reinsurance recoverables reinsured with ERAC.
Sale of Collateralized Loan Obligation Asset Management Platform
In July 2020, the Company sold its CLO asset management platform for $20.0 million in cash consideration, resulting in a net gain of $18.3 million, including costs to sell, for the year ended December 31, 2020, reported through underwriting, selling, general and administrative expenses in the consolidated statements of operations. The Company incurred additional exit related expenses of $7.5 million for the year ended December 31, 2020, that were also included in underwriting, selling, general and administrative expenses in the consolidated statements of operations. Prior to the sale, the CLOs were VIEs that the Company consolidated. The Company retained its direct investments in the CLOs following the sale, but deconsolidated the CLOs in third quarter 2020 since it no longer acts as collateral manager and, as a result, no longer has the power to control the CLO entities.
Sale of Investment in Iké
In 2014, the Company made an approximately 40% investment in Iké Grupo, Iké Asistencia and certain of their affiliates (collectively, “Iké”), a services assistance business, for which the Company paid approximately $110.0 million. At the same time, the Company also entered into a shareholders’ agreement that provided the right to acquire the remainder of Iké from the majority shareholders and the majority shareholders the right to put their interests in Iké to the Company (together, the “put/
call”) in mid-2019 at a predetermined price. During 2019, the Company entered into a cooperation agreement with the majority shareholders of Iké to extend the put/call. In January 2020, in lieu of exercising the put/call, the Company entered into a formal agreement to sell its interests in Iké.
In May 2020, the Company completed the sale of its interests in Iké and terminated its put/call obligations recognizing a net loss on sale of $3.9 million pre-tax and $2.9 million after-tax in the second quarter of 2020. Prior to the sale, in 2020, the Company recorded aggregate impairment losses and put/call valuation losses of $22.3 million. In connection with the anticipated sale, the Company entered into a financial derivative in January 2020 that provided an economic hedge against declines in the Mexican Peso relative to the U.S. Dollar since the purchase price was to be paid in Mexican Pesos. The Company settled its position upon the sale, resulting in a cash inflow of $22.0 million, and net realized (losses) gains on the derivative of $20.3 million during the second quarter of 2020.
In total, the Company recorded a net pre-tax charge of $5.9 million for the year ended December 31, 2020, included in underwriting, selling, general and administrative expenses in the consolidated statements of operations. For the year ended December 31, 2020, total impairment and put/call losses resulted in a tax benefit of $6.7 million; however, this was fully offset by a valuation allowance as the realizability of the tax losses in the related tax jurisdiction is unlikely. There was tax expense of $4.3 million on the income arising on the financial derivative in the second quarter of 2020, as such contract was originated in the U.S. tax jurisdiction. As such, an after-tax charge of $9.3 million was recorded for the year ended December 31, 2020.
In connection with the sale, the Company provided financing to Iké Grupo in an aggregate principal amount of $34.0 million (the “Iké Loan”). In April 2021, the Iké Loan was prepaid in full.
Assurant Health Exit Activities
The Company substantially completed its exit from the health insurance market as of December 31, 2016, a process that began in 2015. Between 2014 and 2016, the Company participated in the reinsurance, risk adjustment and risk corridor programs introduced by the Patient Protection and Affordable Health Care Act of 2010 (“ACA”). In connection with these programs, the Company held a $106.7 million gross risk corridor receivable due to the Company’s participation in the risk corridor program in 2015, which was reduced by a full valuation allowance because payments from the U.S. Department of Health and Human Services were considered unlikely, resulting in no net receivable. In December 2018, the Company subsidiary that held the receivable rights, Time Insurance Company (“TIC”), was sold to a third party. In connection with the sale, the Company and TIC entered into a participation agreement (the “Participation Agreement”) in which the Company was granted a 100% participation interest in the future claim proceeds, if any, of the risk corridor receivable recovered by TIC.
The collection prospects of the risk corridor receivables began to improve following litigation challenging the legal basis for non-payment under the ACA program. This led to increasing levels of market participant interest in the purchase of the interests in such receivables, despite the remaining uncertainty of the outcome of the pending litigation.
During the fourth quarter of 2019, the Company entered into an agreement with a third-party in which it received $26.7 million in cash as consideration for all future claim proceeds, less 20% of cash received in excess of the initial consideration of $26.7 million, which would be retained by the Company. The upfront cash proceeds received by the Company in 2019 were non-recourse. The Company deemed the amount to be indicative of recovery of its interests in the risk corridor receivables and accordingly adjusted the valuation allowance by $26.7 million, through a reduction to underwriting, selling, general and administrative expenses in the consolidated statement of operations for the year ended December 31, 2019 with a corresponding increase in other assets in the consolidated balance sheet as of December 31, 2019.
During the fourth quarter of 2020, the U.S. Department of Health and Human Services paid $101.4 million, net of legal and other costs, for TIC’s risk corridor receivable, which was remitted to the Company pursuant to the Participation Agreement. The Company remitted $86.5 million to the third party and retained $14.9 million related to its 20% share of the excess proceeds pursuant to the agreement. The Company adjusted the valuation allowance for the additional $74.7 million, as partially offset by the incremental payment to the third party for the additional proceeds of $59.8 million, which is accounted for similar to interest expense on the initial consideration (both recorded through underwriting, selling, general and administrative expenses).
5. Allowance for Credit Losses
The total allowance for credit losses for the financial assets was $28.4 million and $18.0 million as of December 31, 2022 and 2021, respectively.
The following table presents the net increases (decreases) to the allowance for credit losses as classified in the consolidated statements of operations for the periods indicated:
| | | | | | | | | | | |
| For the Years Ended December 31, |
| 2022 | | 2021 |
Commercial mortgage loans on real estate | $ | 0.7 | | | $ | (0.5) | |
Fixed maturity securities available for sale (1) | — | | | (1.2) | |
Iké Loan (2) | — | | | (1.4) | |
Net realized gains (losses) on investments and fair value changes to equity securities | 0.7 | | | (3.1) | |
Underwriting, selling, general and administrative expenses | 12.7 | | | (0.4) | |
Net increase (decrease) in allowance for credit losses | $ | 13.4 | | | $ | (3.5) | |
(1)These securities were sold during the year ended December 31, 2021. Refer to Note 8 for additional information.
(2)The Iké Loan was repaid in full during the year ended December 31, 2021. Refer to Note 4 for additional information.
Reinsurance Recoverables
As part of the Company’s overall risk and capacity management strategy, reinsurance is used to mitigate certain risks underwritten by various business segments. The Company is exposed to the credit risk of reinsurers, as the Company remains liable to insureds regardless of whether related reinsurance recoverables are collected. As of December 31, 2022 and 2021, reinsurance recoverables totaled $7.01 billion and $6.18 billion, respectively, the majority of which are protected from credit risk by various types of collateral or other risk mitigation mechanisms, such as trusts, letters of credit or by withholding the assets in a modified coinsurance or funds withheld arrangement.
The Company utilizes external credit ratings published by S&P Global Ratings, a division of S&P Global Inc., at the balance sheet date when determining the allowance. Where rates are not available, the Company assigns default credit ratings based on if the reinsurer is authorized or unauthorized. Of the total recoverables subject to the allowance, 77% were rated A- or better, 3% were rated BBB or BB and 20% were not rated based on the Company’s analysis and assigned ratings for the year ended December 31, 2022; and 74% were rated A- or better, 4% were rated BBB or BB, and 22% were not rated based on the Company’s analysis and assigned ratings for the year ended December 31, 2021.
The following table presents the changes in the allowance for credit losses by portfolio segment for reinsurance recoverables for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| Global Lifestyle | | Global Housing | | Corporate and Other | | Total |
Balance, December 31, 2020 | $ | 3.9 | | | $ | 1.4 | | | $ | 19.3 | | | $ | 24.6 | |
Current period change for credit losses | (0.3) | | | (0.2) | | | (1.0) | | | (1.5) | |
| | | | | | | |
Other | — | | | (0.3) | | | (17.8) | | | (18.1) | |
Balance, December 31, 2021 | 3.6 | | | 0.9 | | | 0.5 | | | 5.0 | |
Current period change for credit losses | — | | | 0.2 | | | 0.2 | | | 0.4 | |
| | | | | | | |
Other | — | | | — | | | — | | | — | |
Balance, December 31, 2022 | $ | 3.6 | | | $ | 1.1 | | | $ | 0.7 | | | $ | 5.4 | |
For the year ended December 31, 2022, the current period change for credit losses was $0.4 million. For the year ended December 31, 2021, the current period change for credit losses was $(1.5) million, primarily due to an increase in collateral held as security under the reinsurance agreements. When determining the allowance as of December 31, 2022 and 2021, the Company did not increase default probabilities by reinsurer since there had been no credit rating downgrades or major negative credit indications of the Company’s reinsurers that has impacted rating. The allowance may be increased and income reduced in future periods if there are future ratings downgrades or other measurable information supporting an increase in reinsurer default probabilities, including collateral reductions.
Premium and Accounts Receivables
The Company is exposed to credit risk from premiums and other accounts receivables. For premiums receivable, the exposure to loss upon a default is often mitigated by the ability to terminate the policy on default and offset the corresponding unearned premium liability. The Company has other mitigating offsets from amounts payable on commissions and profit share arrangements when the counterparty to the receivable is a sponsor/agent of the Company’s insurance product.
The following table presents the changes in the allowance for credit losses by portfolio segment for premium and accounts receivables for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| Global Lifestyle | | Global Housing | | Corporate and Other | | Total |
Balance, December 31, 2020 | $ | 9.1 | | | $ | 3.2 | | | $ | 1.0 | | | $ | 13.3 | |
Current period change for credit losses | (0.6) | | | — | | | (0.1) | | | (0.7) | |
Recoveries | (0.1) | | | — | | | (0.6) | | | (0.7) | |
Write-offs | (1.1) | | | (0.9) | | | (0.2) | | | (2.2) | |
Foreign currency translation | (0.3) | | | — | | | — | | | (0.3) | |
Balance, December 31, 2021 | 7.0 | | | 2.3 | | | 0.1 | | | 9.4 | |
Current period change for credit losses | (0.2) | | | 0.1 | | | 2.1 | | | 2.0 | |
| | | | | | | |
Write-offs | (0.9) | | | (0.1) | | | (1.0) | | | (2.0) | |
Foreign currency translation | (0.2) | | | — | | | — | | | (0.2) | |
Balance, December 31, 2022 | $ | 5.7 | | | $ | 2.3 | | | $ | 1.2 | | | $ | 9.2 | |
For the year ended December 31, 2022, the current period change for credit losses was $2.0 million, primarily due to an increase for sharing economy in Corporate and Other. For the year ended December 31, 2021, the current period change for credit losses was $(0.7) million. There is a risk that income may be reduced in future periods for additional credit losses.
Commercial Mortgage Loans
For the years ended December 31, 2022 and 2021, the current period change for credit losses was $0.7 million and $(0.5) million, respectively. Refer to Notes 2 and 8 for additional information on commercial mortgage loans.
Available for Sale Securities
There was no allowance for credit losses as of December 31, 2022 and 2021, as these securities were sold during the year ended December 31, 2021. Refer to Notes 2 and 8 for additional information on available for sale securities.
High Deductible Recoverables
While evaluating sharing economy loss reserves in the fourth quarter of 2022, a reserve strengthening identified a credit risk exposure from recoverables from high deductible claims. Refer to Note 17 for additional information on the reserve strengthening. For the year ended December 31, 2022, the Company recorded an allowance for credit losses for the unsecured portion of the high deductible recoverables of $10.3 million.
6. Segment Information
In conjunction with the transition of the Company’s CEO and chief operating decision maker on January 1, 2022, the Company changed its segment measure of profitability for its reportable segments to an Adjusted EBITDA metric, as the primary measure used for purposes of making decisions about allocating resources to the segments and assessing performance, from segment net income from continuing operations, effective as of that date. Prior period amounts have been revised to reflect the new segment measure of profitability.
Beginning with second quarter 2022, the Company changed the calculation of its segment measure of profitability, Adjusted EBITDA, to exclude certain businesses which the Company expects to fully exit, including the long-tail commercial liability businesses in Global Housing (sharing economy and small commercial businesses), as well as certain legacy long-duration insurance policies within Global Lifestyle (collectively referred to as “non-core operations”), and present them as a reconciling item to consolidated net income from continuing operations. The non-core operations have been or are in the process of being exited by the Company, but do not qualify as held for sale or discontinued operations under GAAP accounting guidance.
As of December 31, 2022, the Company had three reportable segments: Global Lifestyle, Global Housing and Corporate and Other. The Company defines Adjusted EBITDA as net income from continuing operations, excluding net realized gains (losses) on investments and fair value changes to equity securities, COVID-19 direct and incremental expenses, loss on extinguishment of debt, non-core operations (defined above), net income (loss) attributable to non-controlling interests, interest expense, provision (benefit) for income taxes, depreciation expense, amortization of purchased intangible assets, restructuring
costs related to strategic exit activities (outside of normal periodic restructuring and cost management activities), as well as other highly variable or unusual items.
All prior period amounts have been revised, which impacts both segment Adjusted EBITDA and other adjustments under reconciling items to consolidated net income from continuing operations, but does not impact consolidated net income. The sharing economy and small commercial businesses, included in non-core operations and previously reported through the Company’s Global Housing segment, generated Adjusted EBITDA of $(74.9) million, $(12.9) million and $5.7 million for the years ended December 31, 2022, 2021 and 2020, respectively. The legacy long-duration insurance policies included in non-core operations and previously reported through the Company’s Global Lifestyle segment, generated Adjusted EBITDA of $3.2 million, $(1.5) million and $1.7 million for the years ended December 31, 2022, 2021 and 2020, respectively.
Segment Adjusted EBITDA was also revised for an error related to reinsurance of claims and benefits payable within the Connected Living business unit in the Global Lifestyle segment, and for other unrelated immaterial errors. See Note 2 for more information.
Subsequent Event
Effective January 1, 2023, the Company realigned the composition of its reportable segments to correspond with changes to its operating structure. As a result, the Global Housing segment is now comprised of two key lines of business, Homeowners, and Renters and Other. Certain specialty products, mainly the Leased and Financed business, previously reported in the Global Housing segment will now be reported in Global Lifestyle to better align with the Company’s go-to-market strategy. This realignment has no impact on the Company’s consolidated results and will be reflected beginning with first quarter 2023 reporting.
The following table presents segment Adjusted EBITDA with a reconciliation to net income attributable to common shareholders:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
Adjusted EBITDA by segment: | | | | | |
Global Lifestyle | $ | 753.4 | | | $ | 702.1 | | | $ | 636.0 | |
Global Housing | 302.0 | | | 357.1 | | | 318.0 | |
Corporate and Other | (99.2) | | | (93.3) | | | (124.4) | |
Reconciling items to consolidated net income from continuing operations: | | | | | |
Interest expense | (108.3) | | | (111.8) | | | (104.5) | |
Depreciation expense | (86.3) | | | (73.8) | | | (56.1) | |
Amortization of purchased intangible assets | (69.7) | | | (65.8) | | | (52.7) | |
Net realized (losses) gains on investments and fair value changes to equity securities | (179.7) | | | 128.2 | | | (8.2) | |
COVID-19 direct and incremental expenses | (4.7) | | | (10.0) | | | (25.2) | |
Loss on extinguishment of debt | (0.9) | | | (20.7) | | | — | |
Non-core operations (1) | (79.5) | | | (14.4) | | | 7.4 | |
| | | | | |
Restructuring costs | (53.1) | | | (11.8) | | | — | |
Other adjustments | (24.1) | | | (14.5) | | | (13.4) | |
Income attributable to non-controlling interests | — | | | — | | | 1.2 | |
Total reconciling items | (606.3) | | | (194.6) | | | (251.5) | |
Income from continuing operations before income tax expense | 349.9 | | | 771.3 | | | 578.1 | |
Income tax expense | 73.3 | | | 168.4 | | | 58.7 | |
Net income from continuing operations | 276.6 | | | 602.9 | | | 519.4 | |
Net income (loss) from discontinued operations | — | | | 758.9 | | | (77.7) | |
Net income | 276.6 | | | 1,361.8 | | | 441.7 | |
Less: Net income attributable to non-controlling interest | — | | | — | | | (0.9) | |
Net income attributable to stockholders | 276.6 | | | 1,361.8 | | | 440.8 | |
Less: Preferred stock dividends | — | | | (4.7) | | | (18.7) | |
Net income attributable to common stockholders | $ | 276.6 | | | $ | 1,357.1 | | | $ | 422.1 | |
(1) Includes goodwill impairment of $7.8 million for the year ended December 31, 2022. Refer to Note 15 for additional information.
The Company principally operates in the U.S., as well as Europe, Latin America, Canada and Asia Pacific. The following table summarizes selected financial information by geographic location for the years ended or as of December 31, 2022, 2021 and 2020:
| | | | | | | | | | | |
Location | Revenues | | Long-lived Assets |
2022 | | | |
United States | $ | 8,386.6 | | | $ | 606.0 | |
Foreign countries | 1,806.4 | | | 39.1 | |
Total | $ | 10,193.0 | | | $ | 645.1 | |
2021 | | | |
United States | $ | 8,323.9 | | | $ | 530.8 | |
Foreign countries | 1,863.7 | | | 30.6 | |
Total | $ | 10,187.6 | | | $ | 561.4 | |
2020 | | | |
United States | $ | 7,635.3 | | | $ | 423.5 | |
Foreign countries | 1,962.3 | | | 22.6 | |
Total | $ | 9,597.6 | | | $ | 446.1 | |
Revenue is based in the country where the product was sold and the physical location of long-lived assets, which are primarily property and equipment.
The Company’s net earned premiums, fees and other income by segment and product are as follows:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
Global Lifestyle: | | | | | |
Connected Living (1) | $ | 4,233.4 | | | $ | 4,303.2 | | | $ | 4,216.5 | |
Global Automotive | 3,702.7 | | | 3,436.9 | | | 3,115.1 | |
Total | $ | 7,936.1 | | | $ | 7,740.1 | | | $ | 7,331.6 | |
| | | | | |
Global Housing: | | | | | |
Lender-placed Insurance | $ | 1,124.0 | | | $ | 1,065.9 | | | $ | 1,052.5 | |
Multifamily Housing | 482.4 | | | 482.3 | | | 451.6 | |
Specialty and Other | 404.0 | | | 393.2 | | | 397.9 | |
Total | $ | 2,010.4 | | | $ | 1,941.4 | | | $ | 1,902.0 | |
(1)Effective January 1, 2022, the Connected Living line of business includes the previous Global Financial Services and Other line of business. Prior period amounts have been revised to reflect this change.
Net earned premiums, fees and other income from non-core operations were $61.3 million, $62.9 million and $83.5 million for the years ended December 31, 2022, 2021 and 2020, respectively.
The following table presents total assets by segment:
| | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
Global Lifestyle (1) | $ | 27,011.3 | | | $ | 26,120.9 | |
Global Housing (1) | 4,775.4 | | | 4,007.3 | |
Corporate and Other (2) | 1,337.1 | | | 3,792.4 | |
Segment assets | $ | 33,123.8 | | | $ | 33,920.6 | |
(1)Segment assets for Global Lifestyle and Global Housing do not include net unrealized gains (losses) on securities attributable to those segments, which are all included within Corporate and Other.
(2)Includes the assets for non-core operations of $416.6 million and $326.3 million as of December 31, 2022 and 2021, respectively.
7. Contract Revenues
The Company partners with clients to provide consumers with a diverse range of protection products and services. The Company’s revenues from protection products are accounted for as insurance contracts and are recognized over the term of the insurance protection provided. Revenues from service contracts and sales of products are recognized as the contractual performance obligations are satisfied or the products are delivered. Revenue is measured as the amount of consideration the Company expects to be entitled to in exchange for performing the services or transferring products. If payments are received before the related revenue is recognized, the amount is recorded as unearned revenue or advance payment liabilities, until the performance obligations are satisfied or the products are transferred.
The disaggregated revenues from service contracts included in fees and other income on the consolidated statements of operations are $1.09 billion, $1.01 billion and $714.1 million for Global Lifestyle and $84.6 million, $94.3 million and $95.6 million for Global Housing for the years ended December 31, 2022, 2021 and 2020, respectively.
Global Lifestyle
In the Company’s Global Lifestyle segment, revenues from service contracts and sales of products are primarily from the Company’s Connected Living business. Through partnerships with mobile device carriers, the Company provides administrative services related to its mobile device protection products, including program design and marketing strategy, risk management, data analytics, customer support and claims handling, supply chain and service delivery, repair and logistics, and device disposition. Administrative fees are generally billed monthly based on the volume of services provided during the billing period (for example, based on the number of mobile subscribers) with payment due within a short-term period. Each service or bundle of services, depending on the contract, is an individual performance obligation with a standalone selling price. The Company recognizes revenue as it invoices, which corresponds to the value transferred to the customer.
The Company also repairs, refurbishes and then sells mobile and other electronic devices, on behalf of its client, for a bundled per unit fee. The entire processing of the device is considered one performance obligation with a standalone selling price and thus, the per unit fee is recognized when the products are sold. Payments are generally due prior to shipment or within a short-term period.
Global Housing
In the Company’s Global Housing segment, revenues from service contracts and sales of products are primarily from the Company’s Lender-placed Insurance business. Under the Company’s Lender-placed Insurance business, the Company provides loan and claim payment tracking services for lenders. The Company generally invoices its customers weekly or monthly based on the volume of services provided during the billing period with payment due within a short-term period. Each service is an individual performance obligation with a standalone selling price. The Company recognizes revenue as it invoices, which corresponds to the value transferred to the customer.
Contract Balances
The receivables and unearned revenue under these contracts were $271.7 million and $171.1 million, respectively, as of December 31, 2022, and $313.7 million and $191.5 million, respectively, as of December 31, 2021. These balances are included in premiums and accounts receivable and the accounts payable and other liabilities, respectively, in the consolidated balance sheets. Revenue from service contracts and sales of products recognized during the years ended December 31, 2022 and 2021 that was included in unearned revenue as of December 31, 2021 and 2020 were $93.6 million and $75.5 million, respectively.
In certain circumstances, the Company defers upfront commissions and other costs in connection with client contracts in excess of one year where the Company can demonstrate future economic benefit. For these contracts, expense is recognized as revenues are earned. The Company periodically assesses recoverability based on the performance of the related contracts. As of December 31, 2022 and 2021, the Company had approximately $61.4 million and $93.0 million, respectively, of such intangible assets that will be expensed over the term of the client contracts.
8. Investments
The following tables show the cost or amortized cost, allowance for credit losses, gross unrealized gains and losses, and fair value of the Company’s fixed maturity securities as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| Cost or Amortized Cost | | Allowance for Credit Losses | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Fixed maturity securities: | | | | | | | | | |
U.S. government and government agencies and authorities | $ | 92.9 | | | $ | — | | | $ | 0.2 | | | $ | (6.7) | | | $ | 86.4 | |
States, municipalities and political subdivisions | 152.4 | | | — | | | 1.1 | | | (16.0) | | | 137.5 | |
Foreign governments | 416.2 | | | — | | | 0.6 | | | (20.5) | | | 396.3 | |
Asset-backed | 735.1 | | | — | | | 1.4 | | | (40.2) | | | 696.3 | |
Commercial mortgage-backed | 458.6 | | | — | | | 0.2 | | | (56.5) | | | 402.3 | |
Residential mortgage-backed | 492.7 | | | — | | | 0.4 | | | (55.1) | | | 438.0 | |
U.S. corporate | 3,265.1 | | | — | | | 13.9 | | | (317.9) | | | 2,961.1 | |
Foreign corporate | 1,307.8 | | | — | | | 3.4 | | | (145.4) | | | 1,165.8 | |
Total fixed maturity securities | $ | 6,920.8 | | | $ | — | | | $ | 21.2 | | | $ | (658.3) | | | $ | 6,283.7 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Cost or Amortized Cost | | Allowances for Credit Losses | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Fixed maturity securities: | | | | | | | | | |
U.S. government and government agencies and authorities | $ | 83.0 | | | $ | — | | | $ | 2.1 | | | $ | (0.1) | | | $ | 85.0 | |
States, municipalities and political subdivisions | 142.2 | | | — | | | 7.0 | | | (0.7) | | | 148.5 | |
Foreign governments | 436.0 | | | — | | | 5.9 | | | (4.2) | | | 437.7 | |
Asset-backed | 411.1 | | | — | | | 14.2 | | | (2.3) | | | 423.0 | |
Commercial mortgage-backed | 466.7 | | | — | | | 10.3 | | | (3.3) | | | 473.7 | |
Residential mortgage-backed | 578.4 | | | — | | | 25.2 | | | (1.7) | | | 601.9 | |
U.S. corporate | 3,581.2 | | | — | | | 235.9 | | | (14.0) | | | 3,803.1 | |
Foreign corporate | 1,205.3 | | | — | | | 46.0 | | | (8.9) | | | 1,242.4 | |
Total fixed maturity securities | $ | 6,903.9 | | | $ | — | | | $ | 346.6 | | | $ | (35.2) | | | $ | 7,215.3 | |
The cost or amortized cost and fair value of fixed maturity securities as of December 31, 2022 by contractual maturity are shown below. Actual 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.
| | | | | | | | | | | |
| December 31, 2022 |
| Cost or Amortized Cost | | Fair Value |
Due in one year or less | $ | 164.8 | | | $ | 163.6 | |
Due after one year through five years | 1,771.7 | | | 1,697.8 | |
Due after five years through ten years | 2,243.0 | | | 2,016.8 | |
Due after ten years | 1,054.9 | | | 868.9 | |
Total | 5,234.4 | | | 4,747.1 | |
Asset-backed | 735.1 | | | 696.3 | |
Commercial mortgage-backed | 458.6 | | | 402.3 | |
Residential mortgage-backed | 492.7 | | | 438.0 | |
Total | $ | 6,920.8 | | | $ | 6,283.7 | |
The following table shows the major categories of net investment income for the periods indicated:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
Fixed maturity securities | $ | 270.0 | | | $ | 232.8 | | | $ | 228.4 | |
Equity securities | 15.0 | | | 14.9 | | | 14.5 | |
Commercial mortgage loans on real estate | 14.9 | | | 8.9 | | | 8.2 | |
Short-term investments | 4.7 | | | 2.1 | | | 5.7 | |
Other investments | 48.6 | | | 61.0 | | | 16.6 | |
Cash and cash equivalents | 25.7 | | | 8.5 | | | 13.3 | |
Revenues from consolidated investment entities (1) | — | | | — | | | 56.3 | |
Total investment income | 378.9 | | | 328.2 | | | 343.0 | |
Investment expenses | (14.8) | | | (13.8) | | | (20.5) | |
Expenses from consolidated investment entities (1) | — | | | — | | | (36.9) | |
Net investment income | $ | 364.1 | | | $ | 314.4 | | | $ | 285.6 | |
(1)The following table shows the revenues net of expenses from consolidated investment entities for the periods indicated.
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
Investment income (loss) from direct investments in: | | | | | |
Real estate funds (1) | $ | — | | | $ | — | | | $ | 8.3 | |
CLO entities | — | | | — | | | 8.0 | |
Investment management fees | — | | | — | | | 3.1 | |
Net investment income from consolidated investment entities | $ | — | | | $ | — | | | $ | 19.4 | |
(1)The investment income from the real estate funds includes income (loss) attributable to non-controlling interest of $1.1 million for the year ended December 31, 2020.
No material investments of the Company were non-income producing for the years ended December 31, 2022, 2021 and 2020.
The following table summarizes the proceeds from sales of available-for-sale fixed maturity securities and the gross realized gains and gross realized losses that have been recognized in the statement of operations as a result of those sales for the periods indicated:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
Fixed maturity securities: | | | | | |
Proceeds from sales | $ | 2,468.8 | | | $ | 1,361.8 | | | $ | 515.4 | |
Gross realized gains | $ | 9.4 | | | $ | 31.9 | | | $ | 19.6 | |
Gross realized losses | (73.2) | | | (14.8) | | | (6.8) | |
Net realized gains (losses) on investments from sales of fixed maturity securities | $ | (63.8) | | | $ | 17.1 | | | $ | 12.8 | |
For securities sold at a loss during the year ended December 31, 2022, the average period of time these securities were trading continuously at a price below book value was approximately 5 months.
The following table sets forth the net realized gains (losses) on investments and fair value changes to equity securities, including impairments, recognized in the statement of operations for the periods indicated:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
Net realized (losses) gains on investments and fair value changes to equity securities related to sales and other: | | | | | |
Fixed maturity securities | $ | (63.7) | | | $ | 17.2 | | | $ | 12.7 | |
Equity securities (1) (2) | (112.2) | | | 108.3 | | | 21.6 | |
Commercial mortgage loans on real estate | (0.7) | | | 0.5 | | | (1.2) | |
Other investments | 1.5 | | | 2.0 | | | 10.7 | |
Consolidated investment entities (3) | — | | | — | | | (32.3) | |
Total net realized (losses) gains on investments and fair value changes to equity securities related to sales and other | (175.1) | | | 128.0 | | | 11.5 | |
Net realized (losses) gains related to impairments: | | | | | |
Fixed maturity securities (4) | (1.6) | | | 1.2 | | | (2.6) | |
Other investments (1) | (3.0) | | | (1.0) | | | (17.1) | |
Total net realized (losses) gains related to impairments | (4.6) | | | 0.2 | | | (19.7) | |
Total net realized (losses) gains on investments and fair value changes to equity securities | $ | (179.7) | | | $ | 128.2 | | | $ | (8.2) | |
(1)Upward adjustments of $19.5 million, $24.3 million and $10.5 million and impairments of $3.0 million, $1.0 million, and $17.1 million were realized on equity investments accounted for under the measurement alternative for the years ended December 31, 2022, 2021 and 2020, respectively.
(2)The years ended December 31, 2022 and 2021 included $92.5 million in realized and unrealized losses and $85.4 million of unrealized gains, respectively, from four equity positions that went public during 2021. The total fair value of these equity securities as of December 31, 2022 and 2021 was $9.6 million and $133.7 million, respectively, included in equity securities in the consolidated balance sheet. Prior to going public, these equity positions were accounted for under the equity measurement alternative guidance and reported within other investments in the consolidated balance sheet and the fair value was $48.1 million as of December 31, 2020.
(3)Consists of net realized losses from the change in fair value of the Company’s direct investment in CLOs prior to sale of the CLO asset management platform in 2020.
(4)Includes credit losses of $1.2 million on fixed maturity securities available for sale for the year ended December 31, 2020. Specific securities, for which the reserve was established, were sold during the year ended December 31, 2021, resulting in the elimination of the $1.2 million allowance for credit losses.
The following table sets forth the portion of fair value changes to equity securities held for the periods indicated:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
Net (losses) gains recognized on equity securities | $ | (112.2) | | | $ | 108.3 | | | $ | 21.6 | |
Less: Net realized gains (losses) related to sales of equity securities | 20.5 | | | (4.1) | | | 6.6 | |
Total fair value changes to equity securities held | $ | (132.7) | | | $ | 112.4 | | | $ | 15.0 | |
Equity investments accounted for under the measurement alternative are included within other investments on the consolidated balance sheets. The following table summarizes information related to these investments:
| | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
Initial cost | $ | 81.7 | | | $ | 74.4 | |
Cumulative upward adjustments | 50.8 | | | 42.7 | |
Cumulative downward adjustments (including impairments) | (5.0) | | | (15.4) | |
Carrying value | $ | 127.5 | | | $ | 101.7 | |
The investment category and duration of the Company’s gross unrealized losses on fixed maturity securities, as of December 31, 2022 and 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| Less than 12 months | | 12 Months or More | | Total |
| Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
Fixed maturity securities: | | | | | | | | | | | |
U.S. government and government agencies and authorities | $ | 58.5 | | | $ | (2.9) | | | $ | 24.6 | | | $ | (3.8) | | | $ | 83.1 | | | $ | (6.7) | |
States, municipalities and political subdivisions | 77.4 | | | (7.8) | | | 34.5 | | | (8.2) | | | 111.9 | | | (16.0) | |
Foreign governments | 268.5 | | | (12.1) | | | 92.7 | | | (8.4) | | | 361.2 | | | (20.5) | |
Asset-backed | 378.2 | | | (22.0) | | | 218.5 | | | (18.2) | | | 596.7 | | | (40.2) | |
Commercial mortgage-backed | 290.7 | | | (33.2) | | | 109.3 | | | (23.3) | | | 400.0 | | | (56.5) | |
Residential mortgage-backed | 371.3 | | | (31.7) | | | 58.6 | | | (23.4) | | | 429.9 | | | (55.1) | |
U.S. corporate | 2,266.6 | | | (206.3) | | | 370.3 | | | (111.6) | | | 2,636.9 | | | (317.9) | |
Foreign corporate | 843.9 | | | (79.0) | | | 251.8 | | | (66.4) | | | 1,095.7 | | | (145.4) | |
Total fixed maturity securities | $ | 4,555.1 | | | $ | (395.0) | | | $ | 1,160.3 | | | $ | (263.3) | | | $ | 5,715.4 | | | $ | (658.3) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Less than 12 months | | 12 Months or More | | Total |
| Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
Fixed maturity securities: | | | | | | | | | | | |
U.S. government and government agencies and authorities | $ | 31.5 | | | $ | (0.1) | | | $ | — | | | $ | — | | | $ | 31.5 | | | $ | (0.1) | |
States, municipalities and political subdivisions | 48.1 | | | (0.7) | | | — | | | — | | | 48.1 | | | (0.7) | |
Foreign governments | 216.0 | | | (4.1) | | | 4.0 | | | (0.1) | | | 220.0 | | | (4.2) | |
Asset-backed | 257.7 | | | (2.1) | | | 9.8 | | | (0.2) | | | 267.5 | | | (2.3) | |
Commercial mortgage-backed | 274.8 | | | (2.9) | | | 2.0 | | | (0.4) | | | 276.8 | | | (3.3) | |
Residential mortgage-backed | 94.0 | | | (1.5) | | | 10.0 | | | (0.2) | | | 104.0 | | | (1.7) | |
U.S. corporate | 687.8 | | | (13.1) | | | 15.2 | | | (0.9) | | | 703.0 | | | (14.0) | |
Foreign corporate | 394.0 | | | (8.6) | | | 6.7 | | | (0.3) | | | 400.7 | | | (8.9) | |
Total fixed maturity securities | $ | 2,003.9 | | | $ | (33.1) | | | $ | 47.7 | | | $ | (2.1) | | | $ | 2,051.6 | | | $ | (35.2) | |
Total gross unrealized losses represented approximately 12% and 2% of the aggregate fair value of the related securities as of December 31, 2022 and 2021, respectively. Approximately 60% and 94% of these gross unrealized losses had been in a continuous loss position for less than twelve months as of December 31, 2022 and 2021, respectively. The total gross unrealized losses are comprised of 3,826 and 1,202 individual securities as of December 31, 2022 and 2021, respectively. In accordance with its policy, the Company concluded that for these securities, the gross unrealized losses as of December 31, 2022 and December 31, 2021 were related to non-credit factors and therefore, did not recognize credit-related losses during the year ended December 31, 2022. Additionally, the Company currently does not intend to and is not required to sell these investments prior to an anticipated recovery in value.
The cost or amortized cost and fair value of available-for-sale fixed maturity securities in an unrealized loss position as of December 31, 2022, by contractual maturity, is shown below:
| | | | | | | | | | | |
| December 31, 2022 |
| Cost or Amortized Cost, Net of Allowance | | Fair Value |
Due in one year or less | $ | 144.2 | | | $ | 142.9 | |
Due after one year through five years | 1,588.2 | | | 1,510.9 | |
Due after five years through ten years | 2,099.7 | | | 1,864.9 | |
Due after ten years | 963.2 | | | 770.1 | |
Total | 4,795.3 | | | 4,288.8 | |
Asset-backed | 636.9 | | | 596.7 | |
Commercial mortgage-backed | 456.5 | | | 400.0 | |
Residential mortgage-backed | 485.0 | | | 429.9 | |
Total | $ | 6,373.7 | | | $ | 5,715.4 | |
The Company has entered into commercial mortgage loans, collateralized by the underlying real estate, on properties located throughout the U.S. As of December 31, 2022, approximately 34% of the outstanding principal balance of commercial mortgage loans was concentrated in the states of Texas, California and Maryland. 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 $0.1 million to $9.7 million as of December 31, 2022 and from $0.1 million to $9.6 million as of December 31, 2021.
Credit quality indicators for commercial mortgage loans are loan-to-value and debt-service coverage ratios. The loan-to-value ratio compares the principal amount of the loan to the fair value of the underlying property collateralizing the loan, and is commonly expressed as a percentage. The debt-service coverage ratio compares a property’s net operating income to its debt-service payments and is commonly expressed as a ratio. The loan-to-value and debt-service coverage ratios are generally updated annually in the fourth quarter.
The following table presents the amortized cost basis of commercial mortgage loans, excluding allowance for credit losses, by origination year for certain key credit quality indicators at December 31, 2022 and 2021, respectively.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| Origination Year |
| 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Prior | | Total | | % of Total |
Loan to value ratios (1): | | | | | | | | | | | | | | | |
70% and less | $ | 44.0 | | | $ | 45.1 | | | $ | — | | | $ | — | | | $ | — | | | $ | 76.0 | | | $ | 165.1 | | | 55.5 | % |
71% to 80% | 32.7 | | | 75.7 | | | 2.7 | | | — | | | 4.6 | | | — | | | 115.7 | | | 38.9 | % |
81% to 95% | — | | | 14.7 | | | — | | | — | | | — | | | — | | | 14.7 | | | 5.0 | % |
Greater than 95% | — | | | — | | | — | | | — | | | — | | | 1.9 | | | 1.9 | | | 0.6 | % |
Total | $ | 76.7 | | | $ | 135.5 | | | $ | 2.7 | | | $ | — | | | $ | 4.6 | | | $ | 77.9 | | | $ | 297.4 | | | 100.0 | % |
| | | | | | | | | | | | | | | |
| December 31, 2022 |
| Origination Year |
| 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Prior | | Total | | % of Total |
Debt service coverage ratios (2): | | | | | | | | | | | | | | | |
Greater than 2.0 | $ | 24.2 | | | $ | 11.7 | | | $ | — | | | $ | — | | | $ | — | | | $ | 50.8 | | | $ | 86.7 | | | 29.2 | % |
1.5 to 2.0 | 26.8 | | | 11.6 | | | — | | | — | | | 4.6 | | | 6.6 | | | 49.6 | | | 16.7 | % |
1.0 to 1.5 | 25.7 | | | 63.0 | | | — | | | — | | | — | | | 13.7 | | | 102.4 | | | 34.4 | % |
Less than 1.0 | — | | | 49.2 | | | 2.7 | | | — | | | — | | | 6.8 | | | 58.7 | | | 19.7 | % |
Total | $ | 76.7 | | | $ | 135.5 | | | $ | 2.7 | | | $ | — | | | $ | 4.6 | | | $ | 77.9 | | | $ | 297.4 | | | 100.0 | % |
(1)LTV ratio derived from current loan balance divided by the fair value of the property. The fair value of the underlying commercial properties is updated at least annually.
(2)DSC ratio calculated using most recent reported operating income results from property operators divided by annual debt service coverage.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Origination Year |
| 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Prior | | Total | | % of Total |
Loan to value ratios (1): | | | | | | | | | | | | | | | |
70% and less | $ | 71.7 | | | $ | 5.6 | | | $ | — | | | $ | — | | | $ | 4.0 | | | $ | 99.8 | | | $ | 181.1 | | | 70.3 | % |
71% to 80% | 61.8 | | | — | | | — | | | 4.7 | | | — | | | 1.0 | | | 67.5 | | | 26.2 | % |
81% to 95% | — | | | — | | | — | | | — | | | — | | | 1.1 | | | 1.1 | | | 0.4 | % |
Greater than 95% | — | | | — | | | — | | | — | | | 5.8 | | | 2.1 | | | 7.9 | | | 3.1 | % |
Total | $ | 133.5 | | | $ | 5.6 | | | $ | — | | | $ | 4.7 | | | $ | 9.8 | | | $ | 104.0 | | | $ | 257.6 | | | 100.0 | % |
| | | | | | | | | | | | | | | |
| December 31, 2021 |
| Origination Year |
| 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Prior | | Total | | % of Total |
Debt service coverage ratios (2): | | | | | | | | | | | | | | | |
Greater than 2.0 | $ | 59.3 | | | $ | 5.6 | | | $ | — | | | $ | — | | | $ | — | | | $ | 70.5 | | | $ | 135.4 | | | 52.6 | % |
1.5 to 2.0 | 34.1 | | | — | | | — | | | 4.7 | | | 4.0 | | | 17.5 | | | 60.3 | | | 23.4 | % |
1.0 to 1.5 | 40.1 | | | — | | | — | | | — | | | — | | | 9.9 | | | 50.0 | | | 19.4 | % |
Less than 1.0 | — | | | — | | | — | | | — | | | 5.8 | | | 6.1 | | | 11.9 | | | 4.6 | % |
Total | $ | 133.5 | | | $ | 5.6 | | | $ | — | | | $ | 4.7 | | | $ | 9.8 | | | $ | 104.0 | | | $ | 257.6 | | | 100.0 | % |
(1)LTV ratio derived from current loan balance divided by the fair value of the property. The fair value of the underlying commercial properties is updated at least annually.
(2)DSC ratio calculated using most recent reported operating income results from property operators divided by annual debt service coverage.
As of December 31, 2022, the Company had mortgage loan commitments outstanding of approximately $7.9 million.
The Company had short-term investments and fixed maturity securities of $506.1 million and $537.4 million as of December 31, 2022 and 2021, respectively, on deposit with various governmental authorities as required by law.
9. Variable Interest Entities
In the normal course of business, the Company is involved with various types of investment entities that may be considered VIEs. The Company evaluates its involvement with each entity to determine whether consolidation is required. The Company’s maximum risk of loss is limited to the carrying value and unfunded commitments of its investments in the VIEs. There were no consolidated VIEs as of December 31, 2022 and 2021.
Non-Consolidated VIEs
Real Estate Joint Venture and Other Partnerships
The Company invests in real estate joint ventures and limited partnerships, as well as closed ended real estate funds. These investments are generally accounted for under the equity method as the primary beneficiary criteria is not met; however, the Company is able to exert significant influence over the investees operating and financial policies. These investments are included in the consolidated balance sheets in other investments. As of December 31, 2022 and 2021, the Company’s maximum exposure to loss is its recorded carrying value of $242.3 million and $249.3 million, respectively. The Company’s unfunded commitments were $143.6 million as of December 31, 2022.
See Note 2 for additional information on significant accounting policies related to VIEs.
10. Fair Value Disclosures
Fair Values, Inputs and Valuation Techniques for Financial Assets and Liabilities Disclosures
The fair value measurements and disclosures guidance defines fair value and establishes a framework for measuring fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company has categorized its recurring fair value basis financial assets and liabilities into a three-level fair value hierarchy based on the priority of the inputs to the valuation technique.
The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and takes into account factors specific to the asset or liability.
The levels of the fair value hierarchy are described below:
•Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company can access.
•Level 2 inputs utilize other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active and inputs other than quoted prices that are observable in the marketplace for the asset or liability. The observable inputs are used in valuation models to calculate the fair value for the asset or liability.
•Level 3 inputs are unobservable but are significant to the fair value measurement for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset or liability.
The Company reviews fair value hierarchy classifications on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy.
The following tables present the Company’s fair value hierarchy for assets and liabilities measured at fair value on a recurring basis as of December 31, 2022 and 2021. The amounts presented below for short-term investments, other investments, cash equivalents, other assets, assets held in and liabilities related to separate accounts and other liabilities differ from the amounts presented in the consolidated balance sheets because only certain investments or certain assets and liabilities within these line items are measured at estimated fair value. Other investments are comprised of investments in the AIP, the ASIC plan, and the ADC and other derivatives. Other liabilities are comprised of investments in the AIP, contingent considerations related to business combinations and other derivatives. The fair value amount and the majority of the associated levels presented for other investments and assets and liabilities held in separate accounts are received directly from third parties.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | |
Financial Assets | Total | | Level 1 | | Level 2 | | Level 3 | |
Fixed maturity securities: | | | | | | | | |
U.S. government and government agencies and authorities | $ | 86.4 | | | $ | — | | | $ | 86.4 | | | $ | — | | |
States, municipalities and political subdivisions | 137.5 | | | — | | | 137.5 | | | — | | |
Foreign governments | 396.3 | | | — | | | 396.3 | | | — | | |
Asset-backed | 696.3 | | | — | | | 635.9 | | | 60.4 | | |
Commercial mortgage-backed | 402.3 | | | — | | | 402.3 | | | — | | |
Residential mortgage-backed | 438.0 | | | — | | | 438.0 | | | — | | |
U.S. corporate | 2,961.1 | | | — | | | 2,932.3 | | | 28.8 | | |
Foreign corporate | 1,165.8 | | | — | | | 1,158.4 | | | 7.4 | | |
Equity securities: | | | | | | | | |
Mutual funds | 32.7 | | | 32.7 | | | — | | | — | | |
Common stocks | 23.9 | | | 23.2 | | | 0.7 | | | — | | |
Non-redeemable preferred stocks | 224.7 | | | — | | | 224.7 | | | — | | |
Short-term investments | 119.9 | | | 72.2 | | (2) | 47.7 | | (3) | — | | |
Other investments | 60.3 | | | 60.1 | | (1) | — | | | 0.2 | | |
Cash equivalents | 789.1 | | | 647.3 | | (2) | 141.8 | | (3) | — | | |
| | | | | | | | |
| | | | | | | | |
Assets held in separate accounts | 10.1 | | | 4.8 | | (1) | 5.3 | | (3) | — | | |
Total financial assets | $ | 7,544.4 | | | $ | 840.3 | | | $ | 6,607.3 | | | $ | 96.8 | | |
| | | | | | | | |
Financial Liabilities | | | | | | | | |
Other liabilities | $ | 75.3 | | | $ | 60.1 | | (1) | $ | 0.2 | | | $ | 15.0 | | (5) |
Liabilities related to separate accounts | 10.1 | | | 4.8 | | (1) | 5.3 | | (3) | — | | |
Total financial liabilities | $ | 85.4 | | | $ | 64.9 | | | $ | 5.5 | | | $ | 15.0 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | |
Financial Assets | Total | | Level 1 | | Level 2 | | Level 3 | |
Fixed maturity securities: | | | | | | | | |
U.S. government and government agencies and authorities | $ | 85.0 | | | $ | — | | | $ | 85.0 | | | $ | — | | |
States, municipalities and political subdivisions | 148.5 | | | — | | | 148.5 | | | — | | |
Foreign governments | 437.7 | | | — | | | 437.7 | | | — | | |
Asset-backed | 423.0 | | | — | | | 423.0 | | | — | | |
Commercial mortgage-backed | 473.7 | | | — | | | 473.7 | | | — | | |
Residential mortgage-backed | 601.9 | | | — | | | 601.9 | | | — | | |
U.S. corporate | 3,803.1 | | | — | | | 3,799.7 | | | 3.4 | | |
Foreign corporate | 1,242.4 | | | — | | | 1,238.8 | | | 3.6 | | |
Equity securities: | | | | | | | | |
Mutual funds | 33.3 | | | 33.3 | | | — | | | — | | |
Common stocks | 151.1 | | | 15.5 | | | 0.7 | | | 134.9 | | (6) |
Non-redeemable preferred stocks | 261.3 | | | — | | | 261.3 | | | — | | |
Short-term investments | 207.2 | | | 200.1 | | (2) | 7.1 | | | — | | |
Other investments | 72.6 | | | 72.4 | | (1) | — | | | 0.2 | | |
Cash equivalents | 1,243.9 | | | 1,190.9 | | (2) | 53.0 | | (3) | — | | |
| | | | | | | | |
Other assets | 1.7 | | | — | | | 1.7 | | (4) | — | | |
Assets held in separate accounts | 11.8 | | | 7.7 | | (1) | 4.1 | | (3) | — | | |
Total financial assets | $ | 9,198.2 | | | $ | 1,519.9 | | | $ | 7,536.2 | | | $ | 142.1 | | |
| | | | | | | | |
Financial Liabilities | | | | | | | | |
Other liabilities | $ | 76.4 | | | $ | 72.4 | | (1) | $ | — | | | $ | 4.0 | | (5) |
Liabilities related to separate accounts | 11.8 | | | 7.7 | | (1) | 4.1 | | (3) | — | | |
Total financial liabilities | $ | 88.2 | | | $ | 80.1 | | | $ | 4.1 | | | $ | 4.0 | | |
(1)Primarily includes mutual funds and related obligations.
(2)Primarily includes money market funds.
(3)Primarily includes fixed maturity securities and related obligations.
(4)Primarily includes derivatives.
(5)Includes contingent consideration liabilities and other derivatives.
(6)These equity securities are subject to lock up agreements and therefore an illiquidity discount was applied to the exchange traded price, which includes significant unobservable inputs.
The following tables summarize the change in balance sheet carrying value associated with Level 3 financial assets and liabilities carried at fair value for the years ended December 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2022 |
| | Balance, beginning of period | | Total gains (losses) (realized/ unrealized) included in earnings (1) | | Net unrealized gains (losses) included in other comprehensive income (2) | | Purchases | | Sales | | Transfers in (3) | | Transfers out (3) | | Balance, end of period |
Financial Assets | | | | | | | | | | | | | | | | |
Fixed Maturity Securities | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Asset-backed | | $ | — | | | $ | 0.2 | | | $ | (1.5) | | | $ | 11.6 | | | $ | (4.5) | | | $ | 54.6 | | | $ | — | | | $ | 60.4 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
U.S. corporate | | 3.4 | | | — | | | (0.4) | | | 6.7 | | | (0.5) | | | 19.6 | | | — | | | 28.8 | |
Foreign corporate | | 3.6 | | | — | | | (0.3) | | | — | | | (0.3) | | | 4.4 | | | — | | | 7.4 | |
Equity Securities | | | | | | | | | | | | | | | | |
Common stock | | 134.9 | | | 1.1 | | | — | | | 0.2 | | | (1.2) | | | — | | | (135.0) | | | — | |
| | | | | | | | | | | | | | | | |
Other investments | | 0.2 | | | — | | | — | | | — | | | — | | | — | | | — | | | 0.2 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Financial Liabilities | | | | | | | | | | | | | | | | |
Other liabilities | | (4.0) | | | (11.2) | | | — | | | — | | | 0.2 | | | — | | | — | | | (15.0) | |
Total level 3 assets and liabilities | | $ | 138.1 | | | $ | (9.9) | | | $ | (2.2) | | | $ | 18.5 | | | $ | (6.3) | | | $ | 78.6 | | | $ | (135.0) | | | $ | 81.8 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2021 |
| | Balance, beginning of period | | Total gains (losses) (realized/ unrealized) included in earnings (1) | | Net unrealized gains (losses) included in other comprehensive income (2) | | Purchases | | Sales | | Transfers in (3) | | Transfers out (3) | | Balance, end of period |
Financial Assets | | | | | | | | | | | | | | | | |
Fixed Maturity Securities | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Foreign governments | | $ | 0.4 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | (0.4) | | | $ | — | |
Asset-backed | | — | | | — | | | — | | | 1.5 | | | — | | | — | | | (1.5) | | | — | |
Commercial mortgage-backed | | 8.7 | | | (1.9) | | | 0.3 | | | — | | | — | | | — | | | (7.1) | | | — | |
| | | | | | | | | | | | | | | | |
U.S. corporate | | 12.0 | | | 0.2 | | | (0.5) | | | 0.6 | | | (1.2) | | | 3.4 | | | (11.1) | | | 3.4 | |
Foreign corporate | | 3.9 | | | — | | | (0.1) | | | — | | | (0.2) | | | 1.1 | | | (1.1) | | | 3.6 | |
Equity Securities | | | | | | | | | | | | | | | | |
Common stock (4) | | 1.2 | | | 85.6 | | | — | | | — | | | — | | | 48.1 | | | — | | | 134.9 | |
Non-redeemable preferred stocks | | 1.1 | | | — | | | — | | | 1.1 | | | (2.2) | | | — | | | — | | | — | |
Other investments | | 0.1 | | | 0.1 | | | — | | | — | | | — | | | — | | | — | | | 0.2 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Financial Liabilities | | | | | | | | | | | | | | | | |
Other liabilities | | (2.7) | | | (1.3) | | | — | | | — | | | — | | | — | | | — | | | (4.0) | |
Total level 3 assets and liabilities | | $ | 24.7 | | | $ | 82.7 | | | $ | (0.3) | | | $ | 3.2 | | | $ | (3.6) | | | $ | 52.6 | | | $ | (21.2) | | | $ | 138.1 | |
(1)Included as part of net realized gains on investments, excluding other-than-temporary impairment losses, in the consolidated statements of operations.
(2)Included as part of change in unrealized gains on securities in the consolidated statement of comprehensive income.
(3)Transfers are primarily attributable to changes in the availability of observable market information and the re-evaluation of the observability of valuation inputs.
(4)$48.1 million of transfers in represents the cost basis of common stock received through special purpose acquisition company mergers.
Three different valuation techniques can be used in determining fair value for financial assets and liabilities: the market, income or cost approaches. The three valuation techniques described in the fair value measurements and disclosures guidance are consistent with generally accepted valuation methodologies.
The market approach valuation techniques use prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. When possible, quoted prices (unadjusted) in active markets are used as of the period-end date (such as for mutual funds and money market funds). Otherwise, the Company uses valuation techniques consistent with the market approach including matrix pricing and comparables. Matrix pricing is a mathematical technique employed principally to value debt securities without relying exclusively on quoted prices for those securities but, rather, relying on the securities’ relationship to other benchmark quoted securities. Market approach valuation techniques often use market multiples derived from a set of comparables. Multiples might lie in ranges with a different multiple for each comparable. The selection of where within the range the appropriate multiple falls requires judgment, considering both qualitative and quantitative factors specific to the measurement.
Income approach valuation techniques convert future amounts, such as cash flows or earnings, to a single present amount, or a discounted amount. These techniques rely on current market expectations of future amounts as of the period-end date. Examples of income approach valuation techniques include present value techniques, option-pricing models, binomial or lattice models that incorporate present value techniques and the multi-period excess earnings method.
Cost approach valuation techniques are based upon the amount that would be required to replace the service capacity of an asset at the period-end date, or the current replacement cost. That is, from the perspective of a market participant (seller), the price that would be received for the asset is determined based on the cost to a market participant (buyer) to acquire or construct a substitute asset of comparable utility, adjusted for obsolescence.
While not all three approaches are applicable to all financial assets or liabilities, where appropriate, the Company may use one or more valuation techniques. For all the classes of financial assets and liabilities included in the above hierarchy, excluding certain derivatives and certain privately placed corporate bonds, the Company generally uses the market valuation technique.
Level 1 Securities
The Company’s investments and liabilities classified as Level 1 as of December 31, 2022 and 2021 consisted of mutual funds and related obligations, money market funds and common stocks that are publicly listed and/or actively traded in an established market.
Level 2 Securities
The Company values Level 2 securities using various observable market inputs obtained from a pricing service or asset manager. They prepare estimates of fair value measurements for the Company’s Level 2 securities using proprietary valuation models based on techniques such as matrix pricing which include observable market inputs. The fair value measurements and disclosures guidance defines observable market inputs as the assumptions market participants would use in pricing the asset or liability developed on market data obtained from sources independent of the Company. The extent of the use of each observable market input for a security depends on the type of security and the market conditions at the balance sheet date. Depending on the security, the priority of the use of observable market inputs may change as some observable market inputs may not be relevant or additional inputs may be necessary. The Company uses the following observable market inputs (“standard inputs”), listed in the approximate order of priority, in the pricing evaluation of Level 2 securities: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data including market research data. Further details for Level 2 investment types follow:
U.S. government and government agencies and authorities: U.S. government and government agencies and authorities securities are priced by the Company’s pricing service utilizing standard inputs. Included in this category are U.S. Treasury securities which are priced using vendor trading platform data in addition to the standard inputs.
States, municipalities and political subdivisions: States, municipalities and political subdivisions securities are priced by the Company’s pricing service using material event notices and new issue data inputs in addition to the standard inputs.
Foreign governments: Foreign government securities are primarily fixed maturity securities denominated in local currencies which are priced by the Company’s pricing service using standard inputs. The pricing service also evaluates each security based on relevant market information including relevant credit information, perceived market movements and sector news.
Commercial mortgage-backed, residential mortgage-backed and asset-backed: Commercial mortgage-backed, residential mortgage-backed and asset-backed securities are priced by the Company’s pricing service and asset managers using monthly payment information and collateral performance information in addition to the standard inputs. Additionally, commercial mortgage-backed securities and asset-backed securities utilize new issue data while residential mortgage-backed securities utilize vendor trading platform data.
U.S. and foreign corporate: Corporate securities are priced by the Company’s pricing service using standard inputs. Non-investment grade securities within this category are priced by the Company’s pricing service and asset managers using observations of equity and credit default swap curves related to the issuer in addition to the standard inputs. Certain privately placed corporate bonds are priced by a non-pricing service source using a model with observable inputs including the credit rating, credit spreads, sector add-ons, and issuer specific add-ons.
Non-redeemable preferred stocks: Non-redeemable preferred stocks are priced by the Company’s pricing service using observations of equity and credit default swap curves related to the issuer in addition to the standard inputs.
Short-term investments, cash equivalents, assets held in separate accounts and liabilities related to separate accounts: To price the fixed maturity securities and related obligations in these categories, the pricing service utilizes the standard inputs.
Other assets and other liabilities: Foreign exchange forwards are priced using a pricing model which utilizes market observable inputs including foreign exchange spot rate, forward points and date to settlement.
Valuation models used by the pricing service can change from period to period, depending on the appropriate observable inputs that are available at the balance sheet date to price a security.
Level 3 Securities
The Company’s investments classified as Level 3 as of December 31, 2022 and 2021 consisted of $96.6 million and $141.9 million, respectively, of fixed maturity and equity securities. As of December 31, 2022, the Level 3 fixed maturity securities and equities securities are priced using non-binding third-party quotes, for which the underlying quantitative inputs are not developed by the Company and are not readily available or observable. As of December 31, 2021, $133.7 million of the common stock equity securities were priced using a model that incorporates time to exit, discount rate and volatility to calculate fair values which include a discount associated with lock up agreements. The remaining Level 3 fixed maturity securities and equities securities were priced using non-binding third-party quotes.
Other investments and other liabilities: The Company prices swaptions and options using a Black-Scholes pricing model incorporating third-party market data, including swap volatility data. The Company prices credit default swaps using non-binding quotes obtained from third-party broker-dealers recognized as market participants. Inputs factored into the non-binding quotes include market observable trades related to the actual credit default swap being priced, trades in comparable credit default swaps, quality of the issuer, structure and liquidity.
The fair value of the contingent consideration is estimated using a discounted cash flow model. Inputs may include future business performance, earn out caps, and applicable discount rates.
Management evaluates the following factors in order to determine whether the market for a financial asset is inactive. The factors include:
•whether there are few recent transactions,
•whether little information is released publicly,
•whether the available prices vary significantly over time or among market participants,
•whether the prices are stale (i.e., not current), and
•the magnitude of the bid-ask spread.
Illiquidity did not have a material impact in the fair value determination of the Company’s financial assets as of December 31, 2022 or 2021.
The Company generally obtains one price for each financial asset. The Company performs a periodic analysis to assess if the evaluated prices represent a reasonable estimate of the financial assets’ fair values. This process involves quantitative and qualitative analysis and is overseen by investment and accounting professionals. Examples of procedures performed include initial and on-going review of pricing service methodologies, review of the prices received from the pricing service, review of pricing statistics and trends, and comparison of prices for certain securities with two different appropriate price sources for reasonableness. Following this analysis, the Company generally uses the best estimate of fair value based upon all available inputs. On infrequent occasions, a non-pricing service source may be more familiar with the market activity for a particular security than the pricing service. In these cases the price used is taken from the non-pricing service source. The pricing service provides information to indicate which securities were priced using market observable inputs so that the Company can properly categorize the Company’s financial assets in the fair value hierarchy.
Disclosures for Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
The Company also measures the fair value of certain assets and liabilities, generally on an annual basis, or when events or changes in circumstances indicate that the carrying amount of the assets may be affected. These assets include commercial mortgage loans, equity investments accounted for under the measurement alternative, goodwill and finite-lived intangible assets.
In 2022 and 2021, as a result of third-party market observable transactions that were of the same issuer and determined to be similar, the Company marked certain of its equity investments accounted for under the measurement alternative to fair value. The carrying value of investments under the measurement alternative marked to fair value on a non-recurring basis as of December 31, 2022 and 2021 was $40.8 million and $41.8 million, respectively. Given the significant unobservable inputs involved in valuation of these investments, they are classified in Level 3 of the fair value hierarchy. Generally, these valuations utilize the market approach, or an option pricing model backsolve method, which is a valuation approach that can be used to determine the value of common shares for companies with complex capital structures in which there have not been any recent transactions involving common shares. Inputs include capitalization tables, investment past and future performance projections, time to exit, discount rate and volatility based upon an appropriate industry group. For the year ended December 31, 2022, the Company recorded fair value increases of $19.5 million related to three market observable transactions of three investments.
For the year ended December 31, 2021, the Company recorded fair value increases of $25.1 million related to four market observable transactions of four investments and a fair value decrease of $0.8 million related to one market observable transaction.
In 2022 and 2021, as a result of a qualitative analysis indicating an impairment existed, the Company performed a quantitative analysis utilizing a probability weighted scenario model and determined certain investments were impaired. Model inputs include capitalization tables, investment past and future company performance projections, and discount rate. Based upon model outputs, impairments of $3.0 million and $1.0 million were recorded for the years ended December 31, 2022 and 2021, respectively.
Refer to Note 15 for the results of the 2022 goodwill impairment testing.
Fair Value of Financial Instruments Disclosures
The financial instruments guidance requires disclosure of fair value information about financial instruments, for which it is practicable to estimate such fair value. Therefore, it requires fair value disclosure for financial instruments that are not recognized or are not carried at fair value in the consolidated balance sheets. However, this guidance excludes certain financial instruments, including those related to insurance contracts and those accounted for under the equity method (such as partnerships).
For the financial instruments included within the following financial assets and financial liabilities, the carrying value in the consolidated balance sheets equals or approximates fair value. Please refer to the Fair Values Inputs and Valuation Techniques for Financial Assets and Liabilities Disclosures section above for additional information on the financial instruments included within the following financial assets and financial liabilities and the methods and assumptions used to estimate fair value:
•Cash and cash equivalents;
•Fixed maturity securities;
•Equity securities;
•Short-term investments;
•Other investments;
•Other assets;
•Assets held in separate accounts;
•Other liabilities; and
•Liabilities related to separate accounts.
In estimating the fair value of the financial instruments that are not recognized or are not carried at fair value in the consolidated balance sheets, the Company used the following methods and assumptions:
Commercial mortgage loans on real estate: The fair value of commercial mortgage loans on real estate utilizes a third-party matrix pricing model. For fixed rate loans, the matrix process uses a yield buildup approach to create a pricing yield, with components for base yield, credit quality spread, property type spread, and a weighted average life spread. Floating rate loans are priced with a target quality spread over the swap curve. A dollar price for each loan is derived from the pricing yield or spread by a discounted cash flow methodology.
Other investments: Other investments include low income housing tax credits, business debentures, and credit tenant loans which are recorded at cost or amortized cost, as well as policy loans. The carrying value reported for these investments approximates fair value.
Other assets: The carrying value of dealer loans approximates fair value.
Policy reserves under investment products: The fair values for the Company’s policy reserves under investment products are determined using discounted cash flow analysis. Key inputs to the valuation include projections of policy cash flows, reserve runoff, market yields and risk margins.
Funds held under reinsurance: The carrying value reported approximates fair value due to the short maturity of the instruments.
Debt: The fair value of debt is based upon matrix pricing performed by the pricing service utilizing the standard inputs.
The following tables disclose the carrying value, fair value and hierarchy level of the financial instruments that are not recognized or are not carried at fair value in the consolidated balance sheets as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| | | Fair Value |
| Carrying Value | | Total | | Level 1 | | Level 2 | | Level 3 |
Financial Assets | | | | | | | | | |
Commercial mortgage loans on real estate | $ | 295.6 | | | $ | 278.2 | | | $ | — | | | $ | — | | | $ | 278.2 | |
Other investments | 6.7 | | | 6.7 | | | 1.6 | | | — | | | 5.1 | |
Other assets | 12.7 | | | 12.7 | | | — | | | — | | | 12.7 | |
Total financial assets | $ | 315.0 | | | $ | 297.6 | | | $ | 1.6 | | | $ | — | | | $ | 296.0 | |
| | | | | | | | | |
Financial Liabilities | | | | | | | | | |
Policy reserves under investment products (Individual and group annuities, subject to discretionary withdrawal) (1) | $ | 8.0 | | | $ | 8.4 | | | $ | — | | | $ | — | | | $ | 8.4 | |
Funds held under reinsurance | 366.6 | | | 366.6 | | | 366.6 | | | — | | | — | |
Debt | 2,129.9 | | | 1,932.7 | | | — | | | 1,932.7 | | | — | |
Total financial liabilities | $ | 2,504.5 | | | $ | 2,307.7 | | | $ | 366.6 | | | $ | 1,932.7 | | | $ | 8.4 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| | | Fair Value |
| Carrying Value | | Total | | Level 1 | | Level 2 | | Level 3 |
Financial Assets | | | | | | | | | |
Commercial mortgage loans on real estate | $ | 256.5 | | | $ | 266.0 | | | $ | — | | | $ | — | | | $ | 266.0 | |
Other investments | 4.2 | | | 4.2 | | | 2.0 | | | — | | | 2.2 | |
Other assets | 24.9 | | | 24.9 | | | — | | | — | | | 24.9 | |
Total financial assets | $ | 285.6 | | | $ | 295.1 | | | $ | 2.0 | | | $ | — | | | $ | 293.1 | |
| | | | | | | | | |
Financial Liabilities | | | | | | | | | |
Policy reserves under investment products (Individual and group annuities, subject to discretionary withdrawal) (1) | $ | 8.5 | | | $ | 9.6 | | | $ | — | | | $ | — | | | $ | 9.6 | |
Funds held under reinsurance | 364.2 | | | 364.2 | | | 364.2 | | | — | | | — | |
Debt | 2,202.5 | | | 2,456.3 | | | — | | | 2,456.3 | | | — | |
Total financial liabilities | $ | 2,575.2 | | | $ | 2,830.1 | | | $ | 364.2 | | | $ | 2,456.3 | | | $ | 9.6 | |
(1)Only the fair value of the Company’s policy reserves for investment-type contracts (those without significant mortality or morbidity risk) are reflected in the tables above.
11. Premiums and Accounts Receivable
Receivables are reported net of an allowance for uncollectible amounts. A summary of such receivables is as follows as of the dates indicated:
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
Insurance premiums receivable | $ | 2,304.9 | | | $ | 1,878.0 | |
Other receivables | 110.7 | | | 73.9 | |
Allowance for credit losses | (9.2) | | | (9.4) | |
Total | $ | 2,406.4 | | | $ | 1,942.5 | |
12. Income Taxes
The components of income tax expense (benefit) were as follows for the periods indicated:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
Pre-tax income: | | | | | |
Domestic | $ | 250.4 | | | $ | 618.0 | | | $ | 440.4 | |
Foreign | 99.5 | | | 153.3 | | | 137.7 | |
Total pre-tax income | $ | 349.9 | | | $ | 771.3 | | | $ | 578.1 | |
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
Current expense (benefit): | | | | | |
Federal and state | $ | (23.5) | | | $ | 0.6 | | | $ | (182.5) | |
Foreign | 33.0 | | | 36.1 | | | 38.8 | |
Total current expense (benefit) | 9.5 | | | 36.7 | | | (143.7) | |
Deferred expense (benefit): | | | | | |
Federal and state | 65.7 | | | 123.4 | | | 192.0 | |
Foreign | (1.9) | | | 8.3 | | | 10.4 | |
Total deferred expense (benefit) | 63.8 | | | 131.7 | | | 202.4 | |
Total income tax expense (benefit) | $ | 73.3 | | | $ | 168.4 | | | $ | 58.7 | |
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 Company’s effective income tax rate follows for the periods indicated:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
Federal income tax rate: | 21.0 | % | | 21.0 | % | | 21.0 | % |
Reconciling items: | | | | | |
Non-taxable investment income | (0.4) | | | (0.3) | | | (0.3) | |
Foreign earnings (1) | 2.2 | | | 1.0 | | | 1.4 | |
Non-deductible compensation
| 0.8 | | | 0.7 | | | 0.7 | |
Change in liability for prior year tax (2) | (2.8) | | | (0.4) | | | (0.5) | |
Change in valuation allowance (3) | (0.4) | | | (0.2) | | | 1.2 | |
Net operating loss carryback - CARES Act (4) | — | | | — | | | (13.7) | |
Other | 0.5 | | | — | | | 0.4 | |
Effective income tax rate: | 20.9 | % | | 21.8 | % | | 10.2 | % |
(1)Results for 2022, 2021, and 2020 primarily include the impact of foreign earnings taxed at different rates.
(2)The change in liability for prior year tax is primarily related to a foreign derived intangible income (“FDII”) benefit of $9.2 million taken on an amended 2019 income tax return.
(3)The change in valuation allowance in 2020 is primarily related to an additional valuation allowance of $6.7 million related to Iké.
(4)The CARES Act includes a five year net operating loss (“NOL”) carryback provision, which enabled the Company to benefit from certain losses and remeasure certain deferred tax assets and liabilities at the former federal tax rate of 35%. In 2020, the Company recorded a tax benefit related to the NOL carryback provision.
A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2022, 2021 and 2020 is as follows:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
Balance at beginning of year | $ | (18.5) | | | $ | (15.6) | | | $ | (12.5) | |
Additions based on tax positions related to the current year | (0.6) | | | (0.6) | | | (0.5) | |
Reductions based on tax positions related to the current year | — | | | — | | | — | |
Additions for tax positions of prior years | (0.2) | | | (5.9) | | | (2.7) | |
Reductions for tax positions of prior years | 0.8 | | | 3.6 | | | 0.1 | |
Lapses | — | | | — | | | — | |
Balance at end of year | $ | (18.5) | | | $ | (18.5) | | | $ | (15.6) | |
Total unrecognized tax benefits of $20.4 million, $19.9 million and $17.9 million for the years ended December 31, 2022, 2021, and 2020, respectively, which includes interest and penalties, would impact the Company’s consolidated effective tax rate if recognized. The liability for unrecognized tax benefits is included in accounts payable and other liabilities on the consolidated balance sheets.
The Company’s continuing practice is to recognize interest expense related to income tax matters in income tax expense. During the years ended December 31, 2022, 2021, and 2020, the Company recognized approximately $0.7 million, $(0.1) million and $1.5 million, respectively, of interest expense (benefit) related to income tax matters. The Company had $2.4 million, $1.7 million and $1.8 million of interest accrued as of December 31, 2022, 2021 and 2020, respectively. The Company had no penalties accrued as of December 31, 2022 and 2021 and $0.8 million of penalties accrued as of December 31, 2020.
The Company does not anticipate any significant increase or decrease of unrecognized tax benefit within the next 12 months.
The Company and its subsidiaries file income tax returns in the U.S. and various state and foreign jurisdictions. The Company has substantially concluded all U.S. federal income tax matters for years through 2015. Substantially all non-U.S. income tax matters have been concluded for years through 2010, and all state and local income tax matters have been concluded for years through 2008.
The tax effects of temporary differences that result in significant deferred tax assets and deferred tax liabilities are as follows as of the dates indicated:
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
Deferred Tax Assets | | | |
Policyholder and separate account reserves | $ | 610.6 | | | $ | 642.2 | |
Net operating loss carryforwards | 42.3 | | | 78.8 | |
Investments, net | — | | | 9.4 | |
Net unrealized appreciation on securities | 141.1 | | | — | |
Credit carryforwards | 9.5 | | | 26.3 | |
Employee and post-retirement benefits | 7.0 | | | 17.3 | |
Compensation related | 38.3 | | | 37.5 | |
Capital loss carryforwards | 5.2 | | | 0.3 | |
Other | 44.6 | | | 47.1 | |
Total deferred tax assets | 898.6 | | | 858.9 | |
Less valuation allowance | (23.6) | | | (25.1) | |
Deferred tax assets, net of valuation allowance | 875.0 | | | 833.8 | |
Deferred Tax Liabilities | | | |
Deferred acquisition costs | (1,300.0) | | | (1,325.8) | |
Investments, net | (9.6) | | | — | |
Net unrealized appreciation on securities | — | | | (90.1) | |
Intangible assets | (110.9) | | | (101.1) | |
Total deferred tax liabilities | (1,420.5) | | | (1,517.0) | |
Net deferred income tax liabilities | $ | (545.5) | | | $ | (683.2) | |
A cumulative valuation allowance of $23.6 million existed as of December 31, 2022 based on management’s assessment that it is more likely than not that certain deferred tax assets attributable to international subsidiaries will not be realized.
The Company’s ability to realize deferred tax assets depends on its ability to generate sufficient taxable income of the same character within the carryback or carryforward periods. In assessing future taxable income, the Company considered all sources of taxable income available to realize its deferred tax asset, including the future reversal of existing temporary differences, future taxable income exclusive of reversing temporary differences and carryforwards, taxable income in carryback years and tax-planning strategies. If changes occur in the assumptions underlying the Company’s tax planning strategies or in the scheduling of the reversal of the Company’s deferred tax liabilities, the valuation allowance may need to be adjusted in the future.
Other than for certain wholly owned Canadian and Latin American subsidiaries, the Company plans to indefinitely reinvest the earnings in other jurisdictions. Under current U.S. tax law, no material income taxes are anticipated on future repatriation of earnings. Therefore, deferred taxes have not been provided.
Global intangible low taxed income (“GILTI”): The TCJA creates a new requirement that certain income (i.e., GILTI) earned by controlled foreign corporations (“CFCs”) must be included currently in the gross income of the CFCs’ U.S. shareholder. GILTI is the excess of the U.S. shareholder’s “net CFC tested income” over 10% of the aggregate of the U.S. shareholder’s pro rata share of the qualified business asset investment of each CFC with respect to which it is a U.S. shareholder. Under GAAP, the Company is allowed to make an accounting policy election of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred or (2) factoring such amounts into the company’s measurement of its deferred taxes. The Company has elected to recognize the current tax on GILTI as a period expense in the period the tax is incurred. Under this policy, the Company has not provided deferred taxes related to temporary differences that upon their reversal will affect the amount of income subject to GILTI in the period. The GILTI current period expense is immaterial.
The net operating loss carryforwards by jurisdiction are as follows as of the dates indicated:
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
Federal net operating loss carryforwards (1) | $ | 18.4 | | | $ | 203.6 | |
Foreign net operating loss carryforwards (2) | $ | 154.6 | | | $ | 142.1 | |
(1)Of the $18.4 million as of December 31, 2022, $18.4 million of net operating losses expires between 2035 and 2038.
(2)Of the $154.6 million as of December 31, 2022, $41.0 million expires between 2022 and 2037, and $113.6 million has an unlimited carryforward.
13. Deferred Acquisition Costs
Information about deferred acquisition costs is as follows as of the dates indicated:
| | | | | | | | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 | | 2020 |
Beginning balance | $ | 8,811.0 | | | $ | 7,393.5 | | | $ | 6,121.5 | |
Costs deferred | 4,528.7 | | | 4,685.5 | | | 4,028.4 | |
Amortization | (3,662.6) | | | (3,268.0) | | | (2,756.4) | |
Ending balance | $ | 9,677.1 | | | $ | 8,811.0 | | | $ | 7,393.5 | |
14. Property and Equipment
Property and equipment consisted of the following as of the dates indicated:
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
Land | $ | 10.0 | | | $ | 10.0 | |
Buildings and improvements | 229.4 | | | 235.5 | |
Furniture, fixtures and equipment | 119.7 | | | 129.9 | |
Software | 693.4 | | | 541.6 | |
Total | 1,052.5 | | | 917.0 | |
Less accumulated depreciation | (407.4) | | | (355.6) | |
Total | $ | 645.1 | | | $ | 561.4 | |
Depreciation expense for the years ended December 31, 2022, 2021 and 2020 amounted to $86.3 million, $73.8 million and $56.1 million, respectively. Depreciation expense is included in underwriting, selling, general and administrative expenses in the consolidated statements of operations.
15. Goodwill
The Company has assigned goodwill to its reporting units for impairment testing purposes. The Company has four reporting units consisting of three reporting units within the Global Lifestyle operating segment, including Connected Living, Global Automotive and Global Financial Services, as well as Global Housing (whereby the reporting unit for impairment testing was at the operating segment level). In second quarter of 2022, $7.8 million of goodwill, previously included in Global Housing, was allocated to the sharing economy and small commercial businesses which are now included within non-core operations in Corporate and Other.
Quantitative Impairment Testing
For the annual October 1, 2022 goodwill impairment test, the Company performed quantitative tests for all reporting units with goodwill (Connected Living, Global Automotive, Global Financial Services and Global Housing).
The following describes the various valuation methodologies used in the quantitative test which were weighted using our judgment as to which were the most representative in determining the estimated fair value of the reporting units.
A Dividend Discount Method (“DDM”) was used to value each of the reporting units based upon the present value of expected cash flows available for distribution over future periods. Cash flows were estimated for a discrete projection period based on detailed assumptions, and a terminal value was calculated to reflect the value attributable to cash flows beyond the discrete period. Cash flows and the terminal value were then discounted using each reporting unit’s estimated cost of capital. The estimated fair value of each reporting unit represented the sum of the discounted cash flows and terminal value.
A Guideline Company Method, in which we identified a group of peer companies that have similar operations to the reporting unit, was used; however, direct peer comparisons for the reporting units were limited given the diversity of the products and services within the businesses. This method was used to value each reporting unit based upon its relative performance to peer companies, based on several measures, including price to trailing 12-month earnings, price to projected earnings, price to tangible net worth and return on equity.
While DDM and Guideline Company valuation methodologies were considered in assessing fair value, the DDM was weighted more heavily since management believes that expected cash flows are the most important factor in the valuation of a business enterprise, and also considering the lack of directly-comparable peer companies. Based on the quantitative assessment performed as of October 1, 2022, the Company concluded that the estimated fair values of the Global Lifestyle and Global Housing reporting units exceeded their respective book values and therefore determined that the assigned goodwill was not impaired.
Sharing Economy and Small Commercial Businesses Impairment
During the fourth quarter of 2022, the Company identified impairment indicators impacting the fair value of the sharing economy and small commercial businesses, including a decline in long-term economic performance. The fair value of the sharing economy and small commercial businesses was determined using a discounted cash flow method which calculated the present value of the run-off results and considered all aspects of the business including investment assumptions. The fair value calculated in the fourth quarter of 2022 was lower than the carrying value of the run-off businesses, resulting in the pre-tax and after-tax impairment charge of the entire goodwill of $7.8 million. The goodwill impairment charge is reported separately in the consolidated statements of operations for the year ended December 31, 2022, with a corresponding reduction to goodwill in the consolidated balance sheet as of December 31, 2022.
A roll forward of goodwill by reportable segment is provided below as of and for the years indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Global Lifestyle (1) | | Global Housing | | | | Corporate and Other | | Consolidated |
Balance at December 31, 2020 (2) | $ | 2,209.8 | | | $ | 379.5 | | | | | $ | — | | | $ | 2,589.3 | |
Acquisitions (3) | (10.4) | | | — | | | | | — | | | (10.4) | |
| | | | | | | | | |
Foreign currency translation and other | (7.3) | | | — | | | | | — | | | (7.3) | |
Balance at December 31, 2021 (2) | 2,192.1 | | | 379.5 | | | | | — | | | 2,571.6 | |
Acquisitions (3) | 15.2 | | | 37.4 | | | | | — | | | 52.6 | |
Impairments (4) | — | | | — | | | | | (7.8) | | | (7.8) | |
Foreign currency translation and other (4) | (13.4) | | | (7.8) | | | | | 7.8 | | | (13.4) | |
Balance at December 31, 2022 (2) | $ | 2,193.9 | | | $ | 409.1 | | | | | $ | — | | | $ | 2,603.0 | |
(1)As of December 31, 2022, $689.1 million, $1,432.9 million and $71.9 million of goodwill was assigned to the Connected Living, Global Automotive and Global Financial Services reporting unit, respectively. As of December 31, 2021, $698.7 million, $1,420.5 million and $72.9 million of goodwill was assigned to the Connected Living, Global Automotive and Global Financial Services reporting unit, respectively.
(2)Consolidated goodwill reflects $1,413.7 million of accumulated impairment losses at December 31, 2022 and $1,405.9 million of accumulated impairment losses at December 31, 2021 and 2020, respectively.
(3)The change during the year ended December 31, 2021 includes the application of measurement period adjustments, mainly related to the 2020 Hyla acquisition. The change during the year ended December 31, 2022 includes goodwill from the acquisition of ALI and a less significant acquisition. For further information, refer to Note 3.
(4)The change during the year ended December 31, 2022 includes $7.8 million of goodwill being moved from Global Housing to Corporate and Other as part of the transfer of the sharing economy and small commercial businesses, previously reported through the Company’s Global Housing segment.
16. VOBA and Other Intangible Assets
VOBA
Information about VOBA is as follows for the periods indicated:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
Beginning balance | $ | 583.4 | | | $ | 1,152.2 | | | $ | 1,993.7 | |
Additions | 1.9 | | | — | | | — | |
Amortization, net of interest accrued | (322.8) | | | (567.9) | | | (835.7) | |
Foreign currency translation and other | 0.3 | | | (0.9) | | | (5.8) | |
Ending balance | $ | 262.8 | | | $ | 583.4 | | | $ | 1,152.2 | |
As of December 31, 2022, the outstanding VOBA balance is primarily related to the 2018 acquisition of TWG within the Global Lifestyle segment.
As of December 31, 2022, the estimated amortization of VOBA for the next five years and thereafter is as follows:
| | | | | |
Year | Amount |
2023 | $ | 178.2 | |
2024 | 76.7 | |
2025 | 3.7 | |
2026 | 1.7 | |
2027 | 1.4 | |
Thereafter | 1.1 | |
Total | $ | 262.8 | |
Other Intangible Assets
Information about other intangible assets is as follows as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
| Carrying Value | | Accumulated Amortization | | Net Other Intangible Assets | | Carrying Value | | Accumulated Amortization | | Net Other Intangible Assets |
Purchased intangible assets | $ | 956.5 | | | $ | (420.2) | | | $ | 536.3 | | | $ | 930.6 | | | $ | (350.6) | | | $ | 580.0 | |
Operating intangible assets | 154.1 | | | (62.1) | | | 92.0 | | | 227.0 | | | (99.9) | | | 127.1 | |
Total finite-lived intangible assets | 1,110.6 | | | (482.3) | | | 628.3 | | | 1,157.6 | | | (450.5) | | | 707.1 | |
Total indefinite-lived intangible assets | 10.6 | | | — | | | 10.6 | | | 12.1 | | | — | | | 12.1 | |
Total other intangible assets | $ | 1,121.2 | | | $ | (482.3) | | | $ | 638.9 | | | $ | 1,169.7 | | | $ | (450.5) | | | $ | 719.2 | |
Purchased intangible assets primarily consist of contract based and customer related intangibles related to acquisitions over the past few years. Operating intangible assets primarily consist of customer related intangibles. These intangible assets are amortized over their useful lives.
Amortization of other intangible assets is as follows as of the dates indicated:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
Purchased intangible assets | $ | 69.7 | | | $ | 65.8 | | | $ | 52.7 | |
Operating intangible assets | 24.8 | | | 23.1 | | | 21.2 | |
Total | $ | 94.5 | | | $ | 88.9 | | | $ | 73.9 | |
The estimated amortization of other intangible assets with finite lives for the next five years and thereafter is as follows:
| | | | | | | | | | | | | | | | | |
Year | Purchased Intangible Assets | | Operating Intangible Assets | | Total |
2023 | $ | 75.5 | | | $ | 18.1 | | | $ | 93.6 | |
2024 | 71.7 | | | 18.3 | | | 90.0 | |
2025 | 66.9 | | | 17.8 | | | 84.7 | |
2026 | 62.4 | | | 14.9 | | | 77.3 | |
2027 | 50.2 | | | 12.9 | | | 63.1 | |
Thereafter | 209.6 | | | 10.0 | | | 219.6 | |
Total other intangible assets with finite lives | $ | 536.3 | | | $ | 92.0 | | | $ | 628.3 | |
17. Reserves
Short Duration Contracts
Continuing Business (Global Lifestyle and Global Housing)
The Company’s short duration contracts include products and services within the Global Lifestyle and Global Housing segments. The main product lines for Global Lifestyle include extended service contracts, vehicle service contracts, mobile device protection and credit insurance, and for Global Housing the main product lines include lender-placed homeowners and flood, Multifamily Housing and manufactured housing.
Total IBNR reserves are determined by subtracting case basis incurred losses from the ultimate loss and loss adjustment expense estimates. Ultimate loss and loss adjustment expenses are estimated utilizing generally accepted actuarial loss reserving methods. The reserving methods employed by the Company include the Chain Ladder, Munich Chain Ladder and Bornhuetter-Ferguson methods. Reportable catastrophe losses are analyzed and reserved for separately using a frequency and severity approach. The methods involve aggregating paid and case-incurred loss data by accident quarter (or accident year) and accident age for each product grouping. As the data ages, loss development factors are calculated that measure emerging claim development patterns between reporting periods. By selecting loss development factors indicative of remaining development, known losses are projected to an ultimate incurred basis for each accident period. The underlying premise of the Chain Ladder method is that future claims development is best estimated using past claims development, whereas the Bornhuetter-Ferguson method employs a combination of past claims development and an estimate of ultimate losses based on an expected loss ratio. The Munich Chain Ladder method takes into account the correlations between paid and incurred development in projecting future development factors and is typically more applicable to products experiencing greater variability in incurred to paid ratios.
The best estimate of ultimate loss and loss adjustment expense is generally selected from a blend of the different methods that are applied consistently each period considering significant assumptions, including projected loss development factors and expected loss ratios. There have been no significant changes in the methodologies and assumptions utilized in estimating the liability for unpaid loss and loss adjustment expenses for any of the periods presented.
Non-core Operations
Short duration contracts in non-core operations consist of the sharing economy and small commercial products previously reported within Global Housing. While the contracts are classified as short duration, the coverages were predominantly commercial liability and have a long reporting and settlement tail compared to property coverages which make up most of the Company’s core operations.
The reserving methodology described for continuing short duration business is applicable for non-core operations. Given the nature of commercial liability coverages and its relatively long claim runoff duration, additional emphasis is placed on social inflation impacts and analysis of individual case reserve adequacy on known claims. This is done through use of average cost per claim methods that include allowance for future inflation impacts, detailed open claim inventory analysis, and leveraging industry development patterns to supplement the Company’s own historical claims experience.
Disposed and Runoff Short Duration Insurance Lines
Short duration contracts within the disposed business include certain medical policies no longer offered and Assurant Employee Benefits policies disposed of via reinsurance. Reserves and reinsurance recoverables for previously disposed business are included in the consolidated balance sheets. See Note 18 for additional information.
The Company has runoff exposure to asbestos, environmental and other general liability claims arising from the Company’s participation in certain reinsurance pools from 1971 through 1985 from contracts discontinued many years ago. The amount of carried case reserves are based on recommendations of the various pool managers. Using information currently available, and after consideration of the reserves reflected in the consolidated financial statements, the Company does not believe or expect that changes in reserve estimates for these claims are likely to be material.
Long Duration Contracts
Disposed and Runoff Long Duration Insurance Lines
The Company has long-term care exposures which are fully reinsured within the disposed business. The Company also has universal life and annuity products that are no longer offered and are in runoff. Reserves have been established based on the following assumptions: interest rates credited on annuities were at guaranteed rates, ranging from 3.5% to 4.0%, except for a limited number of policies with guaranteed crediting rates of 4.5%; all annuity policies are past the surrender charge period; crediting interest rates on universal life fund are at guaranteed rates of 4.0% to 4.1%; and 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.
Reserve Roll Forward
The following table provides a roll forward of the Company’s beginning and ending claims and benefits payable balances. Claims and benefits payable is the liability for unpaid loss and loss adjustment expenses and are comprised of case and IBNR reserves. These balances do not include the recoverable amounts related to certain high deductible policies in the sharing economy business, included in the non-core operations, for which the Company is responsible for paying the entirety of the claim and is subsequently reimbursed by the insured for the deductible portion of the claim. As of December 31, 2022, the Company had exposure of $379.1 million of reserves below the deductible that it would be responsible for if the clients were to default on their contractual obligation to pay the deductible. Refer to Note 5 for more information on the evaluation of the credit risk exposure from these recoverables.
Since unpaid loss and loss adjustment expenses are estimates, the Company’s actual losses incurred may be more or less than the Company’s previously developed estimates, which is referred to as either unfavorable or favorable development, respectively.
The best estimate of ultimate loss and loss adjustment expenses is generally selected from a blend of methods that are applied consistently each period. There have been no significant changes in the methodologies and assumptions utilized in estimating the liability for unpaid loss and loss adjustment expenses for any of the periods presented.
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
Claims and benefits payable, at beginning of year | $ | 1,604.8 | | | $ | 1,619.9 | | | $ | 1,618.5 | |
Less: Reinsurance ceded and other | (825.9) | | | (850.5) | | | (855.2) | |
Net claims and benefits payable, at beginning of year | 778.9 | | | 769.4 | | | 763.3 | |
Incurred losses and loss adjustment expenses related to: | | | | | |
Current year | 2,304.3 | | | 2,213.5 | | | 2,314.2 | |
Prior years | 55.5 | | | (11.6) | | | (39.0) | |
Total incurred losses and loss adjustment expenses | 2,359.8 | | | 2,201.9 | | | 2,275.2 | |
Paid losses and loss adjustment expenses related to: | | | | | |
Current year | 1,648.1 | | | 1,687.3 | | | 1,777.6 | |
Prior years | 509.4 | | | 505.1 | | | 491.5 | |
Total paid losses and loss adjustment expenses | 2,157.5 | | | 2,192.4 | | | 2,269.1 | |
| | | | | |
Net claims and benefits payable, at end of year | 981.2 | | | 778.9 | | | 769.4 | |
Plus: Reinsurance ceded and other (1) (2) | 1,314.7 | | | 825.9 | | | 850.5 | |
Claims and benefits payable, at end of year (1) | $ | 2,295.9 | | | $ | 1,604.8 | | | $ | 1,619.9 | |
(1)Includes reinsurance recoverables and claims and benefits payable of $424.3 million, $143.8 million and $95.8 million as of December 31, 2022, 2021 and 2020, respectively, which were ceded to the U.S. government. The Company acts as an administrator for the U.S. government under the voluntary National Flood Insurance Program.
(2)The balance reflects a $2.0 million transfer to liabilities held for sale as of December 31, 2021. Refer to Note 4 for additional information.
A comparison of net (favorable) unfavorable prior year development is shown below across the Company’s current and former segments and businesses.
| | | | | | | | | | | | | | | | | |
| Prior Year Incurred Loss Development for the Years Ending December 31, |
| 2022 | | 2021 | | 2020 |
Global Lifestyle | $ | (43.2) | | | $ | (35.2) | | | $ | (27.6) | |
Global Housing | 26.7 | | | 7.9 | | | (26.6) | |
Non-core operations | 77.4 | | | 23.3 | | | 21.2 | |
All Other | (5.4) | | | (7.6) | | | (6.0) | |
Total | $ | 55.5 | | | $ | (11.6) | | | $ | (39.0) | |
The Company experienced net unfavorable loss development for the year ended December 31, 2022 and net favorable loss development for the years ended December 31, 2021 and 2020. Global Lifestyle experienced similar amounts of net favorable development in 2022, 2021 and 2020 of $43.2 million, $35.2 million and $27.6 million, respectively. Global Housing experienced net unfavorable loss development of $26.7 million and $7.9 million in 2022 and 2021, respectively, primarily due to lender-placed homeowners insurance affected by longer claim settlement lags and inflationary impacts. Global Housing experienced net favorable development of $26.6 million in 2020, primarily attributable to prior year reportable catastrophes. The non-core operations, which includes the sharing economy and small commercial businesses, contributed net unfavorable loss development of $77.4 million, $23.3 million, and $21.2 million in 2022, 2021 and 2020, respectively. A more detailed explanation of the claims development from Global Lifestyle, Global Housing and non-core operations is presented below, including claims development by accident year. Reserves for the longer-tail property and casualty coverages included in All Other (e.g., asbestos, environmental and other general liability) had no material changes in estimated amounts for claims incurred in prior years.
The following tables represent the Global Lifestyle, Global Housing and non-core operations incurred claims and allocated claim adjustment expenses, net of reinsurance, less cumulative paid claims and allocated claim adjustment expenses, net of reinsurance to reconcile to total claims and benefits payable, net of reinsurance as of December 31, 2022. The tables provide undiscounted information about claims development by accident year for the significant short duration claims and benefits payable balances.
The following factors are relevant to the loss development information included in the tables below:
•Table Presentation: The tables are organized by accident year. For certain categories of claims and for reinsurance recoverables, losses may sometimes be reclassified to an earlier or later accident year as more information about the date of occurrence becomes available to us. These reclassifications are shown as development in the respective years in the tables below. Predominantly, the Company writes short-tail lines that are written on an occurrence basis. Five years of claims development information is provided since most of the claims are fully developed after five years, as shown in the average payout ratio tables.
•Table Groupings: The groupings have homogeneous risk characteristics with similar development patterns and would generally be subject to similar trends and reflect our reportable segments.
•Impact of Reinsurance: The reinsurance program varies by exposure type. Historically, the Company has leveraged facultative and treaty reinsurance, both on pro-rata and excess of loss basis. The reinsurance program may change from year to year, which may affect the comparability of the data presented in the tables.
•IBNR: Includes development from past reported losses in IBNR.
•Information excluded from tables: Unallocated loss adjustment expenses are excluded from the tables.
•Foreign exchange rates: The loss development for operations outside of the U.S. is presented for all accident years using the current exchange rates at December 31, 2022. Although this approach requires restating all prior accident year information, the changes in exchange rates do not impact incurred and paid loss development trends.
•Acquisitions: Includes acquisitions from all accident years presented in the tables. For purposes of this disclosure, we have applied the retrospective method for the acquired reserves, including incurred and paid claim development histories throughout the relevant tables. It should be noted that historical reserves for the acquired business were established by the acquired companies using methods, assumptions and procedures then in effect which may differ from our current reserving bases. Accordingly, it may not be appropriate to extrapolate future reserve adequacy based on the aggregated historical results shown in the tables.
•Dispositions: Excludes dispositions from all accident years presented in the tables.
•Claim counts: Considers a reported claim to be one claim for each claimant or feature for each loss occurrence. Reported claims for losses from assumed reinsurance contracts are not available and hence not included in the reported claims. There are limitations that should be considered on the reported claim count data in the tables below, including:
◦Claim counts are presented only on a reported (not an ultimate) basis;
◦The tables below include lines of business and geographies at a certain aggregated level which may indicate different frequency and severity trends and characteristics, and may not be as meaningful as the claim count information related to the individual products within those lines of business and geographies;
◦Certain lines of business are more likely to be subject to occurrences involving multiple claimants and features, which can distort measures based on the reported claim counts in the table below; and
◦Reported claim counts are not adjusted for ceded reinsurance, which may distort the measure of frequency or severity.
•Required Supplemental Information: The information about incurred and paid loss development for all periods preceding year ended December 31, 2022 and the related historical claims payout percentage disclosure is unaudited and is presented as required supplementary information.
Global Lifestyle Net Claims Development Tables
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance | | December 31, 2022 |
Years Ended December 31, | | Total of Incurred-but-Not Reported Liabilities Plus Expected Development on Reported Claims (1) | Cumulative Number of Reported Claims (2) |
Accident Year | 2018 Unaudited | 2019 Unaudited | 2020 Unaudited | 2021 Unaudited | 2022 | |
2018 | $ | 1,343.4 | | $ | 1,319.3 | | $ | 1,313.3 | | $ | 1,313.2 | | $ | 1,320.8 | | | $ | 0.6 | | 10,480,823 | |
2019 | | 1,501.3 | | 1,482.9 | | 1,479.7 | | 1,478.6 | | | 1.5 | | 10,538,765 | |
2020 | | | 1,427.8 | | 1,398.6 | | 1,399.5 | | | 4.1 | | 10,261,636 | |
2021 | | | | 1,331.5 | | 1,279.2 | | | 7.4 | | 10,446,662 | |
2022 | | | | | 1,359.7 | | | 139.5 | | 9,146,941 | |
| | | | Total | $ | 6,837.8 | | | | |
| | | | | | | | | | | | | | | | | |
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance |
Years Ended December 31, |
Accident Year | 2018 Unaudited | 2019 Unaudited | 2020 Unaudited | 2021 Unaudited | 2022 |
2018 | $ | 1,123.2 | | $ | 1,294.5 | | $ | 1,304.5 | | $ | 1,307.6 | | $ | 1,316.4 | |
2019 | | 1,281.6 | | 1,463.3 | | 1,470.3 | | 1,472.9 | |
2020 | | | 1,206.2 | | 1,382.3 | | 1,389.2 | |
2021 | | | | 1,106.9 | | 1,265.8 | |
2022 | | | | | 1,139.8 | |
Total | $ | 6,584.1 | |
Outstanding claims and benefits payable before 2018, net of reinsurance | 9.1 | |
Claims and benefits payable, net of reinsurance | $ | 262.8 | |
| | | | | | | | | | | | | | |
Average Annual Payout of Incurred Claims by Age, Net of Reinsurance |
Year 1 Unaudited | Year 2 Unaudited | Year 3 Unaudited | Year 4 Unaudited | Year 5 Unaudited |
85.9% | 12.6% | 0.6% | 0.2% | 0.7% |
(1)Includes a provision for development on case reserves.
(2)Number of paid claims plus open (pending) claims. Claim count information related to ceded reinsurance is not reflected as it cannot be reasonably defined or quantified, given that the Company’s reinsurance includes non-proportional treaties.
Using the December 31, 2022 foreign exchange rates for all years, Global Lifestyle experienced $43.2 million of net favorable loss development for the year ended December 31, 2022, compared to net favorable loss development of $35.2 million and $27.6 million for the years ended December 31, 2021 and 2020, respectively. These amounts are based on the change in net incurred losses from the claims development tables above, plus additional impacts from accident years prior to 2018. Many of these contracts and products contain retrospective commission (profit sharing) provisions that would result in offsetting increases or decreases in expense dependent on if the development was favorable or unfavorable.
Development from Global Lifestyle is attributable to nearly all lines of business across most of the Company’s regions with a concentration on more recent accident years and based on emerging evaluations regarding loss experience each period. For the year ended December 31, 2022, the Global Lifestyle net favorable development was primarily attributable to reserve releases in Global Automotive ancillary products due to the strong used vehicle market. For the year ended December 31, 2021, the release of reserves associated with potential COVID-19-related claims that have not materialized was a contributing factor. For the year ended December 31, 2020, growth in new business contributed to the net favorable development, as more claims data supported an adjustment to initial loss estimates.
Foreign exchange rate movements over time caused some of the reserve differences shown in the reserve roll forward and prior year incurred loss tables to vary from what is reflected in the claims development tables for Global Lifestyle. The impacts by year were $(0.4) million, $(0.7) million, and $0.5 million for the years ended December 31, 2022, 2021 and 2020, respectively. The claims development tables above remove the impact due to changing foreign exchange rates over time for comparability.
Global Housing Net Claims Development Tables
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance | | December 31, 2022 |
Years Ended December 31, | | Total of Incurred-but-Not Reported Liabilities Plus Expected Development on Reported Claims (1) | Cumulative Number of Reported Claims (2) |
Accident Year | 2018 Unaudited | 2019 Unaudited | 2020 Unaudited | 2021 Unaudited | 2022 | |
2018 | $ | 859.0 | | $ | 841.7 | | $ | 838.9 | | $ | 839.7 | | $ | 842.4 | | | $ | 4.7 | | 226,100 | |
2019 | | 740.3 | | 723.4 | | 724.8 | | 733.4 | | | 9.4 | | 206,018 | |
2020 | | | 821.2 | | 823.1 | | 852.4 | | | 27.8 | | 211,781 | |
2021 | | | | 807.6 | | 790.6 | | | 60.1 | | 209,162 | |
2022 | | | | | 893.7 | | | 323.3 | | 199,668 | |
| | | | Total | $ | 4,112.5 | | | | |
| | | | | | | | | | | | | | | | | |
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance |
Years Ended December 31, |
Accident Year | 2018 Unaudited | 2019 Unaudited | 2020 Unaudited | 2021 Unaudited | 2022 |
2018 | $ | 594.3 | | $ | 790.7 | | $ | 820.9 | | $ | 828.3 | | $ | 835.5 | |
2019 | | 489.5 | | 666.8 | | 702.3 | | 719.8 | |
2020 | | | 542.2 | | 748.0 | | 810.9 | |
2021 | | | | 534.9 | | 711.8 | |
2022 | | | | | 491.2 | |
Total | $ | 3,569.2 | |
Outstanding claims and benefits payable before 2018, net of reinsurance | 10.6 | |
Claims and benefits payable, net of reinsurance | $ | 553.9 | |
| | | | | | | | | | | | | | |
Average Annual Payout of Incurred Claims by Age, Net of Reinsurance |
Year 1 Unaudited | Year 2 Unaudited | Year 3 Unaudited | Year 4 Unaudited | Year 5 Unaudited |
67.4% | 24.5% | 5.5% | 1.7% | 0.9% |
(1)Includes a provision for development on case reserves.
(2)Number of paid claims plus open (pending) claims. Claim frequency is determined at a claimant reporting level. Depending on the nature of the product and related coverage triggers, it is possible for a claimant to contribute multiple claim counts in a given policy period. Claim count information related to ceded reinsurance is not reflected as it cannot be reasonably defined or quantified, given that the Company’s reinsurance includes non-proportional treaties.
For the year ended December 31, 2022, Global Housing experienced $26.7 million of net unfavorable loss development, compared to net unfavorable loss development of $7.9 million and net favorable loss development of $26.6 million for the years ended December 31, 2021 and 2020, respectively. These amounts are based on the change in net incurred losses from the claims development data above, plus additional impacts from accident years prior to 2018. For the year ended December 31, 2022, the net unfavorable development for Global Housing was attributable to lender placed homeowners insurance due to rising loss costs from inflation impacting recent accident years coupled with lengthening claim settlement lags, and Tropical Storm Eta development from accident year 2020. For the year ended December 31, 2021, the net unfavorable development for
Global Housing was primarily attributable to lender-placed homeowners insurance, partially offset by net favorable development from other products. The net unfavorable development for lender-placed homeowners insurance was primarily attributable to accident year 2020 and was impacted by longer claim settlement lags for water damage claims and inflation. For the year ended December 31, 2020, the net favorable development for Global Housing was primarily attributable to a reserve release from Hurricane Maria (2017) in response to settling claims for less than expected. Net favorable development excluding reportable catastrophes was primarily due to favorable claim frequency trends on lender-placed homeowners insurance and other products.
Non-core Operations Net Claims Development Tables
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance | | December 31, 2022 |
Years Ended December 31, | | Total of Incurred-but-Not Reported Liabilities Plus Expected Development on Reported Claims (1) | Cumulative Number of Reported Claims (2) |
Accident Year | 2018 Unaudited | 2019 Unaudited | 2020 Unaudited | 2021 Unaudited | 2022 | |
2018 | $ | 60.6 | | $ | 76.3 | | $ | 79.2 | | $ | 86.5 | | $ | 101.0 | | | $ | 6.6 | | 28,095 | |
2019 | | 117.2 | | 133.6 | | 146.8 | | 163.3 | | | 18.4 | | 53,255 | |
2020 | | | 39.1 | | 40.4 | | 63.2 | | | 17.9 | | 28,503 | |
2021 | | | | 38.9 | | 62.2 | | | 24.3 | | 19,838 | |
2022 | | | | | 34.4 | | | 23.2 | | 10,747 | |
| | | | Total | $ | 424.1 | | | | |
| | | | | | | | | | | | | | | | | |
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance |
Years Ended December 31, |
Accident Year | 2018 Unaudited | 2019 Unaudited | 2020 Unaudited | 2021 Unaudited | 2022 |
2018 | $ | 28.2 | | $ | 63.9 | | $ | 72.7 | | $ | 80.6 | | $ | 87.8 | |
2019 | | 56.7 | | 95.8 | | 116.1 | | 131.3 | |
2020 | | | 14.8 | | 22.8 | | 35.4 | |
2021 | | | | 12.8 | | 27.4 | |
2022 | | | | | 7.2 | |
Total | $ | 289.1 | |
Outstanding claims and benefits payable before 2018, net of reinsurance | 0.3 | |
Claims and benefits payable, net of reinsurance | $ | 135.3 | |
| | | | | | | | | | | | | | |
Average Annual Payout of Incurred Claims by Age, Net of Reinsurance |
Year 1 Unaudited | Year 2 Unaudited | Year 3 Unaudited | Year 4 Unaudited | Year 5 Unaudited |
32.4% | 30.3% | 17.3% | 10.9% | 9.1% |
(1)Includes a provision for development on case reserves.
(2)Number of paid claims plus open (pending) claims. Claim frequency is determined at a claimant reporting level. Depending on the nature of the product and related coverage triggers, it is possible for a claimant to contribute multiple claim counts in a given policy period. Claim count information related to ceded reinsurance is not reflected as it cannot be reasonably defined or quantified, given that the Company’s reinsurance includes non-proportional treaties.
For the years ended December 31, 2022, 2021 and 2020, non-core operations contributed unfavorable loss development of $77.4 million, $23.3 million, and $21.2 million, including $15.3 million, $16.2 million and $1.2 million from small commercial and $62.1 million, $7.1 million and $20.0 million from sharing economy products, respectively. The Company stopped writing new small commercial business in 2019 and the claims are in runoff. Small commercial reserves were strengthened in 2021 for the 2018 and 2019 accident years following unfavorable trends in case-incurred development on prior reported liability claims and social inflation concerns. For the year ended December 31, 2022, the net unfavorable development from sharing economy was driven by emerging adverse claim development trends on known claims as well as reserve assumption revisions to reflect relevant industry benchmarks. Both sharing economy and small commercial experienced unfavorable development in 2022 on known claims driven by social inflation and the release of the backlog from courts reopening after COVID-19. For the year ended December 31, 2021, the net unfavorable development for sharing economy products and small commercial was due to reserve strengthening associated with prior reported claims and was across multiple accident years. For the year ended December 31, 2020, the net unfavorable development on sharing economy was driven by an unprofitable client that was discontinued.
Reconciliation of the Disclosure of Net Incurred and Paid Claims Development to the Liability for Unpaid Claims and Benefits Payable
| | | | | |
| December 31, 2022 |
Net outstanding liabilities | |
Global Lifestyle | $ | 262.8 | |
Global Housing | 553.9 | |
Non-core operations | 135.3 | |
Other short-duration insurance lines (1) | 14.7 | |
Disposed business short-duration insurance lines (Assurant Health) | 1.1 | |
Claims and benefits payable, net of reinsurance | 967.8 | |
| |
Reinsurance recoverable on unpaid claims | |
Global Lifestyle (2) | 388.9 | |
Global Housing | 743.1 | |
Non-core operations | 76.4 | |
Other short-duration insurance lines (1) | 2.7 | |
Disposed business short-duration insurance lines (Assurant Employee Benefits and Assurant Health) | 15.5 | |
Total reinsurance recoverable on unpaid claims | 1,226.6 | |
| |
Insurance lines other than short-duration (3) | 88.6 | |
Unallocated claim adjustment expense | 12.9 | |
Total claims and benefits payable | $ | 2,295.9 | |
(1)Asbestos and pollution reserves represents $16.8 million of the other short-duration insurance lines, with $1.9 million recoveries.
(2)Disposed of property and casualty business represents $150.9 million of the $388.9 million in reinsurance recoverables for Global Lifestyle.
(3)Amount consists of certain long-duration contract exposures, primarily disabled life reserves of the long-term care business which are fully ceded through reinsurance. Refer to Note 2 for further details.
18. 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 as of the dates indicated:
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
Ceded future policyholder benefits and expense | $ | 360.6 | | | $ | 338.4 | |
Ceded unearned premium | 5,158.1 | | | 4,950.0 | |
Ceded claims and benefits payable | 1,312.7 | | | 824.0 | |
Ceded paid losses | 174.5 | | | 68.8 | |
Total | $ | 7,005.9 | | | $ | 6,181.2 | |
A key credit quality indicator for reinsurance is the A.M. Best Company (“A.M. Best”) financial strength ratings of the reinsurer. A.M. Best financial strength ratings are an independent opinion of a reinsurer’s ability to meet ongoing obligations to policyholders. The A.M. Best ratings for the reinsurers in new reinsurance agreements where there is material credit exposure are reviewed at the time of execution. The A.M. Best ratings for existing reinsurance agreements are reviewed on a quarterly basis, or sooner based on developments. The following table provides the reinsurance recoverable as of December 31, 2022 grouped by A.M. Best financial strength ratings:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
A.M. Best Rating of Reinsurer | Ceded future policyholder benefits and expense | | Ceded unearned premiums | | Ceded claims and benefits payable | | Ceded paid losses | | Total |
A++ or A+ | $ | 350.6 | | | $ | 74.7 | | | $ | 305.6 | | | $ | 29.8 | | | $ | 760.7 | |
A or A- | 4.2 | | | 136.5 | | | 93.6 | | | 102.5 | | | 336.8 | |
B++ or B+ | 5.7 | | | 11.2 | | | 2.1 | | | 0.1 | | | 19.1 | |
| | | | | | | | | |
| | | | | | | | | |
Not Rated (1) | 0.3 | | | 4,939.8 | | | 912.4 | | | 42.2 | | | 5,894.7 | |
Total | 360.8 | | | 5,162.2 | | | 1,313.7 | | | 174.6 | | | 7,011.3 | |
Less: Allowance | (0.2) | | | (4.1) | | | (1.0) | | | (0.1) | | | (5.4) | |
Net reinsurance recoverable | $ | 360.6 | | | $ | 5,158.1 | | | $ | 1,312.7 | | | $ | 174.5 | | | $ | 7,005.9 | |
(1)Not Rated ceded claims and benefits payable included reinsurance recoverables of $424.3 million as of December 31, 2022 which were ceded to the U.S. government. The Company acts as an administrator for the U.S. government under the voluntary National Flood Insurance Program.
A substantial portion of the Not Rated category is related to Global Lifestyle’s and Global Housing’s agreements to reinsure premiums and risks related to business generated by certain clients to the clients’ own captive insurance companies or to reinsurance subsidiaries in which the clients have an ownership interest. To mitigate exposure to credit risk for these reinsurers, the Company evaluates the financial condition of the reinsurer and typically holds substantial collateral (in the form of funds withheld, trusts and letters of credit) as security.
The effect of reinsurance on premiums earned and benefits incurred was as follows for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Long Duration | | Short Duration | | Total | | Long Duration | | Short Duration | | Total | | Long Duration | | Short Duration | | Total |
Direct earned premiums | $ | 19.3 | | | $ | 17,475.3 | | | $ | 17,494.6 | | | $ | 96.6 | | | $ | 15,813.5 | | | $ | 15,910.1 | | | $ | 34.4 | | | $ | 14,879.6 | | | $ | 14,914.0 | |
Premiums assumed | — | | | 196.7 | | | 196.7 | | | — | | | 168.5 | | | 168.5 | | | — | | | 133.3 | | | 133.3 | |
Premiums ceded | (12.3) | | | (8,913.7) | | | (8,926.0) | | | (88.5) | | | (7,418.0) | | | (7,506.5) | | | (25.8) | | | (6,743.6) | | | (6,769.4) | |
Net earned premiums | $ | 7.0 | | | $ | 8,758.3 | | | $ | 8,765.3 | | | $ | 8.1 | | | $ | 8,564.0 | | | $ | 8,572.1 | | | $ | 8.6 | | | $ | 8,269.3 | | | $ | 8,277.9 | |
Direct policyholder benefits | $ | 55.6 | | | $ | 7,616.8 | | | $ | 7,672.4 | | | $ | 322.2 | | | $ | 5,948.5 | | | $ | 6,270.7 | | | $ | 90.4 | | | $ | 5,585.0 | | | $ | 5,675.4 | |
Policyholder benefits assumed | — | | | 163.4 | | | 163.4 | | | — | | | 139.0 | | | 139.0 | | | — | | | 122.3 | | | 122.3 | |
Policyholder benefits ceded | (51.8) | | | (5,424.2) | | | (5,476.0) | | | (315.0) | | | (3,892.8) | | | (4,207.8) | | | (84.1) | | | (3,438.4) | | | (3,522.5) | |
Net policyholder benefits | $ | 3.8 | | | $ | 2,356.0 | | | $ | 2,359.8 | | | $ | 7.2 | | | $ | 2,194.7 | | | $ | 2,201.9 | | | $ | 6.3 | | | $ | 2,268.9 | | | $ | 2,275.2 | |
The Company had zero invested assets held in trusts or by custodians as of December 31, 2022 and 2021, for the benefit of others related to certain reinsurance arrangements.
The Company utilizes ceded reinsurance for loss protection and capital management, client risk and profit sharing and business divestitures.
Loss Protection and Capital Management
As part of the Company’s overall risk and capacity management strategy, the Company purchases reinsurance for certain risks underwritten by the Company’s various segments, including significant individual or catastrophic claims.
For those product lines where there is exposure to losses from catastrophe events, the Company closely monitors and manages its aggregate risk exposure by geographic area. The Company has entered into reinsurance treaties to manage exposure to these types of events.
Segment Client Risk and Profit Sharing
The Global Lifestyle and Global Housing segments write business produced by their clients, such as mobile providers, mortgage lenders and servicers, and financial institutions, and reinsure all or a portion of such business to insurance subsidiaries of some clients. Such arrangements allow significant flexibility in structuring the sharing of risks and profits on the underlying business.
A substantial portion of Global Lifestyle’s and Global Housing’s reinsurance activities are related to agreements to reinsure premiums and risks related to business generated by certain clients to the clients’ own captive insurance companies or to reinsurance subsidiaries in which the clients have an ownership interest. Through these arrangements, the Company’s insurance subsidiaries share some of the premiums and risk related to client-generated business. When the reinsurance companies are not authorized to do business in the state of domicile of the Company’s insurance subsidiary, the Company’s 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 statutory financial credit in the domiciliary state for the reinsurance.
The Company’s 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 mitigate its exposure to reinsurance insolvencies, the Company evaluates the financial condition of its reinsurers and typically holds substantial collateral (in the form of funds withheld, trusts and letters of credit) as security under the reinsurance agreements.
Business Divestitures
The Company has used reinsurance to sell certain businesses in the past because the businesses shared legal entities with operating segments that the Company retained. Assets supporting liabilities ceded relating to these businesses are mainly held in trusts. If the reinsurers became insolvent, the Company would be exposed to the risk that the assets in the trusts and/or the separate accounts, if any, would be insufficient to support the liabilities that would revert back to the Company. The reinsurance recoverables relating to these divestitures amounted to $626.4 million as of December 31, 2022, of which $436.5 million was attributable to John Hancock, which reinsures the long-term care business and has an A.M. Best financial strength rating of A+ with a stable outlook.
In addition, the Company would be responsible for administering this business in the event of reinsurer insolvency. The Company does not currently have the administrative systems and capabilities to process this business. Accordingly, the Company would need to obtain those capabilities in the event of an insolvency of one or more of the reinsurers of these businesses. The Company might be forced to obtain such capabilities on unfavorable terms with a resulting material adverse effect on our results of operations and financial condition.
As of December 31, 2022, the Company was not aware of any regulatory actions taken with respect to the solvency of the insurance subsidiaries of John Hancock and the Company has not been obligated to fulfill any of its obligations. John Hancock has paid its obligations when due and there have been no disputes.
19. Debt
The following table shows the principal amount and carrying value of the Company’s outstanding debt, less unamortized discount and issuance costs as applicable, as of December 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| Principal Amount | | Carrying Value | | Principal Amount | | Carrying Value |
4.20% Senior Notes due September 2023 | 225.0 | | | 224.7 | | | 300.0 | | | 299.0 | |
4.90% Senior Notes due March 2028 | 300.0 | | | 297.8 | | | 300.0 | | | 297.5 | |
3.70% Senior Notes due February 2030 | 350.0 | | | 347.6 | | | 350.0 | | | 347.3 | |
2.65% Senior Notes due January 2032 | 350.0 | | | 346.7 | | | 350.0 | | | 346.4 | |
6.75% Senior Notes due February 2034 | 275.0 | | | 272.5 | | | 275.0 | | | 272.4 | |
7.00% Fixed-to-Floating Rate Subordinated Notes due March 2048 (1) | 400.0 | | | 396.5 | | | 400.0 | | | 395.9 | |
5.25% Subordinated Notes due January 2061 | 250.0 | | | 244.1 | | | 250.0 | | | 244.0 | |
Total Debt | | | $ | 2,129.9 | | | | | $ | 2,202.5 | |
(1)Bears a 7.00% annual interest rate to March 2028 and an annual interest rate equal to three-month LIBOR plus 4.135% thereafter. Under the terms of the debt agreement, a substitute or successor base rate will be used if the LIBOR base rate has been discontinued.
For the years ended December 31, 2022, 2021 and 2020, interest expense was $108.3 million, $111.8 million and $104.5 million, respectively. Interest expense includes derivative related activities described in the interest rate derivatives section below. There was $32.3 million and $33.9 million of accrued interest as of December 31, 2022 and 2021, respectively.
Debt Issuances
Senior Notes
2032 Senior Notes: In June 2021, the Company issued senior notes with an aggregate principal amount of $350.0 million, which bear interest at a rate of 2.65% per year, mature in January 2032 and were issued at a 0.158% discount to the public (the “2032 Senior Notes”). Interest is payable semi-annually in arrears on January 15 and July 15 of each year, beginning on January 15, 2022. Prior to October 15, 2031, the Company may redeem the 2032 Senior Notes at any time in whole or from time to time in part at a make-whole premium plus accrued and unpaid interest. On or after that date, the Company may redeem the 2032 Senior Notes at any time in whole or from time to time in part at a redemption price equal to 100% of the principal amount being redeemed plus accrued and unpaid interest.
In July 2021, the Company used the net proceeds from the sale of the 2032 Senior Notes, together with cash on hand, to redeem all of the $350.0 million outstanding aggregate principal amount of its 4.00% senior notes due March 2023 and to pay accrued interest, related premiums, fees and expenses, including a loss on extinguishment of debt of $20.7 million for the year ended December 31, 2021.
2030 Senior Notes: In August 2019, the Company issued senior notes with an aggregate principal amount of $350.0 million, which bear interest at a rate of 3.70% per year, mature in February 2030 and were issued at a 0.035% discount to the public (the “2030 Senior Notes”). Interest is payable semi-annually in arrears beginning in February 2020. Prior to November 2029, the Company may redeem the 2030 Senior Notes at any time in whole or from time to time in part at a make-whole premium plus accrued and unpaid interest. On or after that date, the Company may redeem the 2030 Senior Notes at any time in whole or from time to time in part at a redemption price equal to 100% of the principal amount being redeemed plus accrued and unpaid interest.
In March 2018, the Company issued the following three series of senior notes with an aggregate principal amount of $900.0 million:
•The first series of senior notes was redeemed in advance of the original maturity in March 2021.
•2023 Senior Notes: The second series of senior notes is $300.0 million in principal amount, bears interest at 4.20% per year, matures in September 2023 and was issued at a 0.233% discount to the public (the “2023 Senior Notes”). Interest on the 2023 Senior Notes is payable semi-annually. Prior to August 2023, the Company may redeem the 2023 Senior Notes at any time in whole or from time to time in part at a make-whole premium plus accrued and unpaid interest. On or after that date, the Company may redeem the 2023 Senior Notes at any time in whole or from time to time in part at
a redemption price equal to 100% of the principal amount being redeemed plus accrued and unpaid interest. In June 2022, the Company redeemed $75.0 million of the $300.0 million then outstanding aggregate principal amount of the 2023 Senior Notes at a make-whole premium plus accrued and unpaid interest to the redemption date. In connection with the redemption, the Company recognized a loss on extinguishment of debt of $0.9 million.
•2028 Senior Notes: The third series of senior notes is $300.0 million in principal amount, bears interest at 4.90% per year, matures in March 2028 and was issued at a 0.383% discount to the public (the “2028 Senior Notes”). Interest on the 2028 Senior Notes is payable semi-annually. Prior to December 2027, the Company may redeem the 2028 Senior Notes at any time in whole or from time to time in part at a make-whole premium plus accrued and unpaid interest. On or after that date, the Company may redeem the 2028 Senior Notes at any time in whole or from time to time in part at a redemption price equal to 100% of the principal amount being redeemed plus accrued and unpaid interest.
The interest rate payable on each of the 2023 Senior Notes, 2028 Senior Notes, 2030 Senior Notes and 2032 Senior Notes will be subject to adjustment from time to time, if either Moody’s Investor Service, Inc. (“Moody’s”) or S&P Global Ratings, a division of S&P Global Inc. (“S&P”) downgrades the credit rating assigned to such series of senior notes to Ba1 or below or to BB+ or below, respectively, or subsequently upgrades the credit ratings once the senior notes are at or below such levels. The following table details the increase in interest rate over the issuance rate by rating with the impact equal to the sum of the number of basis points next to such rating for a maximum increase of 200 basis points over the issuance rate:
| | | | | | | | | | | | | | | | | | | | |
| | Rating Agencies | | |
Rating Levels | | Moody’s (1) | | S&P (1) | | Interest Rate Increase (2) |
1 | | Ba1 | | BB+ | | 25 basis points |
2 | | Ba2 | | BB | | 50 basis points |
3 | | Ba3 | | BB- | | 75 basis points |
4 | | B1 or below | | B+ or below | | 100 basis points |
(1)Including the equivalent ratings of any substitute rating agency.
(2)Applies to each rating agency individually.
In March 2013, the Company issued two series of senior notes, one of which was repaid at maturity in March 2018. The second series was $350.0 million in aggregate principal amount, was issued at a 0.365% discount to the public, bore interest at 4.00% per year and was to mature in March 2023. In July 2021, we used the proceeds from the issuance of the 2032 Senior Notes, along with cash on hand, to redeem all of the $350.0 million outstanding aggregate principal amount. A loss on extinguishment of debt of $20.7 million was reported for the year ended December 31, 2021.
In February 2004, the Company issued senior notes with an aggregate principal amount of $475.0 million at a 0.61% discount to the public, which bear interest at 6.75% per year and matures in February 2034. Interest is payable semi-annually. These senior notes are not redeemable prior to maturity. In December 2016 and August 2019, the Company completed a cash tender offers of $100.0 million each in aggregate principal amount of such senior notes.
Subordinated Notes
2061 Subordinated Notes: In November 2020, the Company issued subordinated notes due January 2061 with a principal amount of $250.0 million, which bear interest at an annual rate of 5.25% (the “2061 Subordinated Notes”). Interest is payable quarterly in arrears beginning in April 2021. On or after January 2026, the Company may redeem the 2061 Subordinated Notes in whole at any time or in part from time to time, at a redemption price equal to their principal amount plus accrued and unpaid interest, provided that if they are not redeemed in whole, a minimum amount must remain outstanding. At any time prior to January 2026, the Company may redeem the 2061 Subordinated Notes in whole but not in part, within 90 days after the occurrence of a tax event, rating agency event or regulatory capital event as defined in the global note representing the 2061 Subordinated Notes, at a redemption price equal to (i) with respect to a rating agency event, 102% of their principal amount and (ii) with respect to a tax event or a regulatory capital event, their principal amount plus accrued and unpaid interest. See below, under 2048 Subordinated Notes (as defined below), for more information on terms applicable to both series.
2048 Subordinated Notes: In March 2018, the Company issued fixed-to-floating rate subordinated notes due March 2048 with principal amount of $400.0 million (the “2048 Subordinated Notes”), which bear interest from March 2018 to March 2028 at an annual rate of 7.00%, payable semi-annually. The 2048 Subordinated Notes will bear interest at an annual rate equal to three-month LIBOR plus 4.135%, payable quarterly, beginning in June 2028. Under the terms of the debt agreement, a substitute or successor base rate will be used if the LIBOR base rate has been discontinued. On or after March 2028, the Company may redeem the 2048 Subordinated Notes in whole at any time or in part from time to time, at a redemption price equal to their principal amount plus accrued and unpaid interest, provided that if they are not redeemed in whole, a minimum
amount must remain outstanding. At any time prior to March 2028, the Company may redeem the 2048 Subordinated Notes in whole but not in part, within 90 days after the occurrence of a tax event, rating agency event or regulatory capital event as defined in the global note representing the 2048 Subordinated Notes, at a redemption price equal to (i) with respect to a rating agency event, 102% of their principal amount and (ii) with respect to a tax event or a regulatory capital event, their principal amount plus accrued and unpaid interest.
In addition, so long as no event of default with respect to the 2048 Subordinated Notes and 2061 Subordinated Notes (together, the “Subordinated Notes”) has occurred and is continuing, the Company has the right, on one or more occasions, to defer the payment of interest on the Subordinated Notes for one or more consecutive interest periods for up to five years as described in the global note representing the Subordinated Notes. During a deferral period, interest will continue to accrue on the Subordinated Notes at the then-applicable interest rate. At any time when the Company has given notice of its election to defer interest payments on the Subordinated Notes, the Company generally may not make payments on or redeem or purchase any shares of the Company’s capital stock or any of its debt securities or guarantees that rank upon the Company’s liquidation on a parity with or junior to the Subordinated Notes, subject to certain limited exceptions.
Credit Facility and Commercial Paper Program
The Company has a $500.0 million five-year senior unsecured revolving credit facility (the “Credit Facility”) with a syndicate of banks arranged by JPMorgan Chase Bank, N.A. and Wells Fargo Bank, National Association. The Credit Facility provides for revolving loans and the issuance of multi-bank, syndicated letters of credit and letters of credit from a sole issuing bank in an aggregate amount of $500.0 million, which may be increased up to $700.0 million. The Credit Facility is available until December 2026, provided the Company is in compliance with all covenants. The Credit Facility has a sublimit for letters of credit issued thereunder of $50.0 million. The proceeds from these loans may be used for the Company’s commercial paper program or for general corporate purposes.
The Company made no borrowings using the Credit Facility during the year ended December 31, 2022 and no loans were outstanding as of December 31, 2022.
The Company’s commercial paper program requires the Company to maintain liquidity facilities either in an available amount equal to any outstanding notes from the program or in an amount sufficient to maintain the ratings assigned to the notes issued from the program. The Company’s commercial paper is rated AMB-1 by A.M. Best, P-2 by Moody’s and A-2 by S&P. The Company’s subsidiaries do not maintain commercial paper or other borrowing facilities. This program is currently backed up by the Credit Facility, of which $499.8 million was available at December 31, 2022, and $0.2 million letters of credit were outstanding.
The Company did not use the commercial paper program during the years ended December 31, 2022 or 2021 and there were no amounts relating to the commercial paper program outstanding as of December 31, 2022 or 2021.
Covenants
The Credit Facility contains restrictive covenants including:
(i)Maintenance of a maximum consolidated total debt to capitalization ratio on the last day of any fiscal quarter of not greater than 0.35 to 1.0, subject to certain exceptions; and
(ii)Maintenance of a consolidated adjusted net worth in an amount not less than a “Minimum Amount” equal to the sum of (a) $4.20 billion, (b) 25% of consolidated net income (if positive) for each fiscal quarter ending after December 31, 2021 and (c) 25% of the net cash proceeds received from any capital contribution to, or issuance of any capital stock, disqualified capital stock and hybrid securities.
In the event of a breach of certain covenants, all obligations under the Credit Facility, including unpaid principal and accrued interest and outstanding letters of credit, may become immediately due and payable.
Interest Rate Derivatives
In March 2018, the Company exercised a series of derivative transactions it had entered into in 2017 to hedge the interest rate risk related to expected borrowing to finance the TWG acquisition. The Company determined that the derivatives qualified for hedge accounting as effective cash flow hedges and recognized a deferred gain of $26.7 million upon settlement that was reported through other comprehensive income. The deferred gain is being recognized as a reduction in interest expense related to the 2023 Senior Notes, the 2028 Senior Notes and the 2048 Subordinated Notes on an effective yield basis. The amortization of the deferred gain was $3.1 million for the year ended December 31, 2022, and $3.0 million for both of the years ended December 31 2021 and 2020, respectively. The remaining deferred gain as of December 31, 2022 and 2021 was $12.5 million and $15.6 million, respectively.
20. Equity Transactions
Common Stock
Changes in the number of shares of common stock outstanding are as follows for the periods presented:
| | | | | | | | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 | | 2020 |
Shares of common stock outstanding, beginning | 55,754,113 | | | 57,967,808 | | | 59,945,893 | |
Vested restricted stock and restricted stock units, net (1) | 179,434 | | | 214,116 | | | 213,569 | |
Issuance related to performance share units (1) | 147,546 | | | 91,845 | | | 157,155 | |
Issuance related to ESPP | 96,846 | | | 113,555 | | | 90,166 | |
Issuance related to MCPS | — | | | 2,703,911 | | | — | |
Shares of common stock repurchased | (3,347,558) | | | (5,337,122) | | | (2,438,975) | |
Shares of common stock outstanding, ending | 52,830,381 | | | 55,754,113 | | | 57,967,808 | |
(1)Vested restricted stock, restricted stock units and performance share units are shown net of shares of common stock retired to cover participant income tax liabilities.
The Company is authorized to issue 800,000,000 shares of common stock. In addition, 150,001 shares of Class B common stock and 400,001 shares of Class C common stock are authorized but have not been issued.
Stock Repurchase
In January and May 2021, the Company’s Board of Directors (the “Board”) authorized the Company to repurchase up to $600.0 million and $900.0 million, respectively, aggregate cost at purchase of its outstanding common stock.
During the year ended December 31, 2022, the Company repurchased 3,347,558 shares of the Company’s outstanding common stock at a cost of $567.6 million, exclusive of commissions, leaving $274.5 million remaining under the May 2021 repurchase authorization at December 31, 2022. During the years ended December 31, 2021 and 2020, the Company repurchased 5,337,122 and 2,438,975 shares of the Company’s outstanding common stock at a cost, exclusive of commissions, of $844.4 million and $299.8 million, respectively.
The timing and the amount of future repurchases will depend on market conditions, the Company’s financial condition, results of operations and liquidity and other factors.
Mandatory Convertible Preferred Stock
In March 2018, the Company issued 2,875,000 shares of the MCPS, with a par value of $1.00 per share, at a public offering price of $100.00 per share. Each outstanding share of MCPS converted in March 2021 into 0.9405 of common stock, or 2,703,911 common stock in total plus an immaterial amount of cash in lieu of fractional shares. The Company used a portion of its treasury stock for the common stock, using the average cost method to account for the reissuance of such shares.
Dividends on the MCPS were payable on a cumulative basis when, as and if declared, at an annual rate of 6.50% of the liquidation preference of $100.00 per share. The Company paid preferred stock dividends of $4.7 million for the year ended December 31, 2021.
21. Stock Based Compensation
In accordance with the guidance on share-based compensation, the Company recognized stock-based compensation costs based on the grant date fair value. For the years ended December 31, 2022, 2021 and 2020, the Company recognized compensation costs net of a 5% per year estimated forfeiture rate on a pro-rated basis over the remaining vesting period.
Long-Term Equity Incentive Plan
Under the Assurant, Inc. 2017 Long-Term Equity Incentive Plan (the “ALTEIP”), as amended and restated in December 2022, the Company is authorized to issue up to 1,840,112 new shares of the Company’s common stock to employees, officers and non-employee directors. Under the ALTEIP, the Company may grant awards based on shares of its common stock, including stock options, stock appreciation rights, restricted stock (including performance shares), unrestricted stock, restricted stock units (“RSUs”), performance share units (“PSUs”) and dividend equivalents. All share-based grants are awarded under the ALTEIP.
The Compensation Committee of the Board (the “Compensation Committee”) awards RSUs and PSUs annually. RSUs and PSUs are promises to issue actual shares of common stock at the end of a vesting period or performance period. The RSUs granted to employees under the ALTEIP are based on salary grade and performance and generally vest one-third each year over a three-year period. RSUs receive dividend equivalents in cash during the restricted period and do not have voting rights during the restricted period. RSUs granted to non-employee directors also vest one-third each year over a three-year period, however, issuance of vested shares and payment of dividend equivalents is deferred until separation from Board service. PSUs accrue dividend equivalents during the performance period based on a target payout and will be paid in cash at the end of the performance period based on the actual number of shares issued.
Under the ALTEIP and the related equity grant policy, the Company’s CEO is authorized by the Board to grant common stock, restricted stock and RSUs to employees other than the Company’s Section 16 officers. The Compensation Committee recommends total annual funding and the awards are expressed as a dollar amount converted into shares as of each grant date. Restricted stock and RSUs granted under this program may have different vesting periods.
The fair value of RSUs is estimated using the fair market value of a share of the Company’s common stock at the date of grant. The fair value of PSUs is estimated using the Monte Carlo simulation model. The number of shares of common stock a participant will receive upon vesting of a PSU award is contingent upon the Company’s performance with respect to selected metrics, as identified below. The payout levels for 2022, 2021 and 2020 awards can vary between 0% and 200% (maximum) of the target (100%) ALTEIP award amount, based on the Company’s level of performance against the selected metrics.
2022, 2021 and 2020 PSU Performance Goals. The Compensation Committee established total shareholder return and net operating income per diluted share, excluding reportable catastrophes, as the two equally weighted performance measures for PSU awards in 2022, 2021 and 2020. Total shareholder return is defined as appreciation in the Company’s common stock plus dividend yield to stockholders and will be measured by the performance of the Company relative to the S&P 500 Index over the three-year performance period. Net operating income per diluted common share, excluding reportable catastrophes, is a Company-specific profitability metric and is defined as the Company’s net operating income, excluding reportable catastrophes, divided by the number of fully diluted common shares outstanding at the end of the period. This metric is an absolute metric that is measured against a three-year cumulative target established by the Compensation Committee at the award date and is not tied to the performance of peer companies.
Restricted Stock Units
A summary of the Company’s outstanding RSUs is presented below:
| | | | | | | | | | | |
| Restricted Stock Units | | Weighted-Average Grant-Date Fair Value |
Restricted stock units outstanding at December 31, 2021 | 627,434 | | | $ | 113.84 | |
Grants (1) | 241,792 | | | 172.46 | |
Vests (2) | (279,975) | | | 112.18 | |
Forfeitures and adjustments | (27,649) | | | 140.52 | |
Restricted stock units outstanding at December 31, 2022 | 561,602 | | | $ | 138.61 | |
Restricted stock units vested, but deferred at December 31, 2022 | 88,607 | | | $ | 85.54 | |
(1)The weighted average grant date fair value for RSUs granted in 2021 and 2020 was $143.20 and $96.33, respectively.
(2)The total fair value of RSUs vested was $47.0 million, $47.4 million and $32.3 million for the years ended December 31, 2022, 2021 and 2020, respectively.
The following table shows a summary of RSU activity during the years ended December 31, 2022, 2021 and 2020:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
RSU compensation expense | $ | 34.9 | | | $ | 32.8 | | | $ | 29.4 | |
Income tax benefit | (6.4) | | | (5.9) | | | (5.2) | |
RSU compensation expense, net of tax | $ | 28.5 | | | $ | 26.9 | | | $ | 24.2 | |
As of December 31, 2022, there was $23.3 million of unrecognized compensation cost related to outstanding RSUs. That cost is expected to be recognized over a weighted-average period of 0.93 years.
Performance Share Units
A summary of the Company’s outstanding PSUs is presented below:
| | | | | | | | | | | |
| Performance Share Units | | Weighted-Average Grant-Date Fair Value |
Performance share units outstanding at December 31, 2021 | 711,116 | | | $ | 110.31 | |
Grants (1) | 166,072 | | | 217.33 | |
Vests (2) | (245,478) | | | 105.58 | |
Performance adjustment (3) | 26,481 | | | 108.50 | |
Forfeitures and adjustments | (18,025) | | | 142.92 | |
Performance share units outstanding at December 31, 2022 | 640,166 | | | $ | 139.01 | |
(1)The weighted average grant date fair value for PSUs granted in 2021 and 2020 was $148.04 and $87.53, respectively.
(2)The total fair value of PSUs vested was $42.8 million, $24.6 million and $24.9 million for the years ended December 31, 2022, 2021 and 2020, respectively.
(3)Represents the change in PSUs issued based upon the attainment of performance goals established by the Company.
PSU grants above represent initial target awards and do not reflect potential increases or decreases resulting from the financial performance objectives to be determined at the end of the prospective performance period. The actual number of PSUs to be issued at the end of each performance period will range from 0% to 200% of the initial target awards.
The following table shows a summary of PSU activity during the years ended December 31, 2022, 2021 and 2020:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
PSU compensation expense | $ | 24.8 | | | $ | 31.8 | | | $ | 26.5 | |
Income tax benefit | (3.7) | | | (3.3) | | | (2.6) | |
PSU compensation expense, net of tax | $ | 21.1 | | | $ | 28.5 | | | $ | 23.9 | |
As of December 31, 2022, there was $27.2 million of unrecognized compensation cost related to outstanding PSUs. That cost is expected to be recognized over a weighted-average period of 0.70 years.
The fair value of PSUs with market conditions was estimated on the date of grant using a Monte Carlo simulation model, which utilizes multiple variables that determine the probability of satisfying the market condition stipulated in the award. Expected volatilities for awards granted during the years ended December 31, 2022, 2021 and 2020 were based on the historical prices of the Company’s common stock and peer group. The expected term for grants issued during the years ended December 31, 2022, 2021 and 2020 was assumed to equal the average of the vesting period of the PSUs. The risk-free rate was based on the U.S. Treasury yield curve in effect at the time of grant.
| | | | | | | | | | | | | | | | | |
| For awards granted during the years ended December 31, |
| 2022 | | 2021 | | 2020 |
Expected volatility | 33.82 | % | | 34.14 | % | | 27.23 | % |
Expected term (years) | 2.80 | | 2.79 | | 2.79 |
Risk free interest rate | 2.09 | % | | 0.29 | % | | 0.41 | % |
Employee Stock Purchase Plan
Under the Employee Stock Purchase Plan (the “ESPP”), the Company is authorized to issue up to 5,000,000 new shares of common stock to employees who are participants in the ESPP. The ESPP allows eligible employees to contribute, through payroll deductions, portions of their after-tax compensation in each offering period toward the purchase of shares of the Company’s common stock. There are two offering periods during the year (January 1 through June 30 and July 1 through December 31) and shares of common stock are purchased at the end of each offering period at 90% of the lower of the closing price of the common stock on the first or last day of the offering period. Participants must be employed on the last trading day of the offering period in order to purchase shares of common stock under the ESPP. The maximum number of shares of common stock that can be purchased is 5,000 per employee. Participants’ contributions are limited to a maximum contribution of $7.5 thousand per offering period, or $15.0 thousand per year.
The ESPP is offered to individuals who are scheduled to work a certain number of hours per week, have been continuously employed for at least six months by the start of the offering period, are not temporary employees (classified as temporary and employed less than 12 months) and have not been on a leave of absence for more than 90 days immediately preceding the offering period.
In January 2023, the Company issued 65,508 shares of common stock at a discounted price of $112.55 for the offering period of July 1, 2022 through December 31, 2022. In January 2022, the Company issued 46,460 shares of common stock at a discounted price of $140.27 for the offering period of July 1, 2021 through December 31, 2021.
In July 2022, the Company issued 50,385 shares of common stock to employees at a discounted price of $140.64 for the offering period of January 1, 2022 through June 30, 2022. In July 2021, the Company issued 53,802 shares of common stock to employees at a discounted price of $118.90 for the offering period of January 1, 2021 through June 30, 2021.
The compensation expense recorded related to the ESPP was $3.0 million, $2.2 million and $2.0 million for the years ended December 31, 2022, 2021 and 2020, respectively. The related income tax benefit for disqualified disposition was $0.1 million for the years ended December 31, 2022, 2021 and 2020.
The fair value of each award under the ESPP was estimated at the beginning of each offering period using the Black-Scholes option-pricing model and assumptions in the table below. Expected volatilities are based on implied volatilities from traded options on the Company’s common stock and the historical volatility of the Company’s common stock. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The dividend yield is based on the current annualized dividend and common stock price as of the grant date.
| | | | | | | | | | | | | | | | | |
| For awards issued during the years ended December 31, |
| 2022 | | 2021 | | 2020 |
Expected volatility | 20.96 - 25.05% | | 24.56 - 28.67% | | 16.38 - 52.04% |
Risk free interest rates | 0.22 - 2.52% | | 0.06 - 0.09% | | 0.17 - 1.57% |
Dividend yield | 1.54 - 1.73% | | 1.67 - 1.98% | | 1.89 - 2.46% |
Expected term (years) | 0.5 | | 0.5 | | 0.5 |
Non-Stock Based Incentive Plans
Deferred Compensation
The Company’s deferred compensation programs consist of the AIP, the ASIC and the ADC. The AIP and the ASIC provided key employees the ability to exchange a portion of their compensation for options to purchase certain third-party mutual funds. The AIP and the ASIC were frozen in December 2004 and no additional contributions can be made to either the AIP or the ASIC. Effective March 1, 2005 and amended and restated on January 1, 2008, the ADC Plan was established in order to comply with the American Jobs Creation Act of 2004 (the “Jobs Act”) and Section 409A of the Internal Revenue Code of 1986, as amended (the “IRC”). The ADC provides key employees the ability to defer a portion of their eligible compensation to be notionally invested in a variety of mutual funds. Deferrals and withdrawals under the ADC are intended to be fully compliant with the Jobs Act definition of eligible compensation and distribution requirements.
22. Accumulated Other Comprehensive Income
Certain amounts included in the consolidated statements of comprehensive income are net of reclassification adjustments. The following tables summarize those reclassification adjustments (net of taxes) for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2022 |
| Foreign currency translation adjustment | | Net unrealized gains (losses) on securities | | Net unrealized gains on derivative transactions | | Unamortized net (losses) on Pension Plans | | Accumulated other comprehensive (loss) income |
Balance at December 31, 2021 | $ | (326.9) | | | $ | 256.6 | | | $ | 12.4 | | | $ | (92.1) | | | $ | (150.0) | |
Change in accumulated other comprehensive income (loss) before reclassifications | (67.1) | | | (808.7) | | | — | | | 9.0 | | | (866.8) | |
Amounts reclassified from accumulated other comprehensive income (loss) | — | | | 38.9 | | | (2.6) | | | (5.7) | | | 30.6 | |
Net current-period other comprehensive income (loss) | (67.1) | | | (769.8) | | | (2.6) | | | 3.3 | | | (836.2) | |
Balance at December 31, 2022 | $ | (394.0) | | | $ | (513.2) | | | $ | 9.8 | | | $ | (88.8) | | | $ | (986.2) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2021 |
| Foreign currency translation adjustment | | Net unrealized gains on securities | | Net unrealized gains on derivative transactions | | Unamortized net (losses) on Pension Plans | | Accumulated other comprehensive income (loss) |
Balance at December 31, 2020 | $ | (295.6) | | | $ | 1,097.6 | | | $ | 14.7 | | | $ | (106.9) | | | $ | 709.8 | |
Change in accumulated other comprehensive income (loss) before reclassifications | (31.0) | | | (215.9) | | | — | | | 17.3 | | | (229.6) | |
Amounts reclassified from accumulated other comprehensive income (loss) | (0.3) | | | (625.1) | | | (2.3) | | | (2.5) | | | (630.2) | |
Net current-period other comprehensive income (loss) | (31.3) | | | (841.0) | | | (2.3) | | | 14.8 | | | (859.8) | |
Balance at December 31, 2021 | $ | (326.9) | | | $ | 256.6 | | | $ | 12.4 | | | $ | (92.1) | | | $ | (150.0) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2020 |
| Foreign currency translation adjustment | | Net unrealized gains on securities | | Net unrealized gains on derivative transactions | | Unamortized net (losses) on Pension Plans | | Accumulated other comprehensive income |
Balance at December 31, 2019 | $ | (358.9) | | | $ | 872.0 | | | $ | 17.1 | | | $ | (118.7) | | | $ | 411.5 | |
Change in accumulated other comprehensive income (loss) before reclassifications | 24.9 | | | 233.5 | | | — | | | 15.8 | | | 274.2 | |
Amounts reclassified from accumulated other comprehensive income (loss) | 38.4 | | | (7.9) | | | (2.4) | | | (4.0) | | | 24.1 | |
Net current-period other comprehensive income (loss) | 63.3 | | | 225.6 | | | (2.4) | | | 11.8 | | | 298.3 | |
Balance at December 31, 2020 | $ | (295.6) | | | $ | 1,097.6 | | | $ | 14.7 | | | $ | (106.9) | | | $ | 709.8 | |
The following tables summarize the reclassifications out of AOCI for the periods indicated.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Details about AOCI components | | Amount reclassified from AOCI | | Affected line item in the statement where net income is presented |
| | Years Ended December 31, | | |
| | 2022 | | 2021 | | 2020 | | |
Foreign currency translation adjustment | | $ | — | | | $ | (0.8) | | | $ | 38.4 | | | Underwriting, selling, general and administrative expenses (see Note 4) |
| | — | | | 0.5 | | | — | | | Provision for income taxes |
| | $ | — | | | $ | (0.3) | | | $ | 38.4 | | | Net of tax |
Net unrealized gains (losses) on securities | | $ | 49.2 | | | $ | (797.8) | | | $ | (10.0) | | | Net realized (losses) gains on investments and fair value changes to equity securities |
| | (10.3) | | | 172.7 | | | 2.1 | | | Provision for income taxes |
| | $ | 38.9 | | | $ | (625.1) | | | $ | (7.9) | | | Net of tax |
Unrealized gains on derivative transactions | | $ | (3.2) | | | $ | (2.8) | | | $ | (2.9) | | | Interest expense |
| | 0.6 | | | 0.5 | | | 0.5 | | | Provision for income taxes |
| | $ | (2.6) | | | $ | (2.3) | | | $ | (2.4) | | | Net of tax |
Amortization of pension and postretirement unrecognized net periodic benefit cost: | | | | | | | | |
Amortization of net loss | | $ | 4.4 | | | $ | 7.2 | | | $ | 5.1 | | | (1) |
Amortization of prior service credit | | (13.5) | | | (13.5) | | | (11.3) | | | (1) |
Settlement loss | | 1.9 | | | 3.1 | | | 1.0 | | | (1) |
| | (7.2) | | | (3.2) | | | (5.2) | | | Total before tax |
| | 1.5 | | | 0.7 | | | 1.2 | | | Provision for income taxes |
| | $ | (5.7) | | | $ | (2.5) | | | $ | (4.0) | | | Net of tax |
Total reclassifications for the period | | $ | 30.6 | | | $ | (630.2) | | | $ | 24.1 | | | Net of tax |
(1)These AOCI components are included in the computation of net periodic pension cost. See Note 24 for additional information.
23. Statutory Information
The Company’s insurance subsidiaries prepare financial statements in accordance with Statutory Accounting Principles (“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) VOBA 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; (8) methodologies used to determine the amounts of deferred taxes, intangible assets and goodwill are different under SAP than under GAAP; and (9) the criteria for obtaining reinsurance accounting treatment is different under SAP than under GAAP, and SAP allows net presentation of insurance reserves and reinsurance recoverables.
The combined statutory net income, excluding intercompany dividends and surplus note interest, and capital and surplus of the Company’s U.S. domiciled statutory insurance subsidiaries is as follows:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
Property and casualty companies | $ | 283.5 | | | $ | 468.0 | | | $ | 445.5 | |
Life and health companies | 20.0 | | | 18.6 | | | 98.3 | |
Total statutory net income (1) | $ | 303.5 | | | $ | 486.6 | | | $ | 543.8 | |
(1)There was no statutory net income for the years ended December 31, 2022 and 2021 from the insurance entities included in the disposed Global Preneed business due to the August 2021 sale.
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
Property and casualty companies | $ | 1,472.2 | | | $ | 1,529.1 | |
Life and health companies | 80.2 | | | 120.3 | |
Total statutory capital and surplus (1) | $ | 1,552.4 | | | $ | 1,649.4 | |
(1)There was no statutory capital and surplus as of December 31, 2022 and 2021 from the insurance entities included in the disposed Global Preneed business.
The Company also has non-insurance subsidiaries and foreign insurance subsidiaries that are not subject to SAP. The statutory net income and statutory capital and surplus amounts presented above do not include non-insurance subsidiaries and foreign insurance subsidiaries in accordance with SAP.
Insurance enterprises are required by state insurance departments to adhere to minimum RBC requirements developed by the NAIC. All of the Company’s insurance subsidiaries exceed minimum RBC requirements.
The payment of dividends to the Company by any of the Company’s regulated U.S domiciled insurance subsidiaries in excess of a certain amount (i.e., extraordinary dividends) must be approved by the subsidiary’s domiciliary jurisdiction department of insurance. Ordinary dividends, for which no regulatory approval is generally required, are limited to amounts determined by a formula, which varies by jurisdiction. The formula for the majority of the jurisdictions in which the Company’s subsidiaries are domiciled is based on the prior year’s statutory net income or 10% of the statutory surplus as of the end of the prior year. Some jurisdictions limit ordinary dividends to the greater of these two amounts, others limit them to the lesser of these two amounts and some jurisdictions exclude prior year realized capital gains from prior year net income in determining ordinary dividend capacity. Some jurisdictions 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 Company’s 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. Based on the dividend restrictions under applicable laws and regulations, the maximum amount of dividends that the Company’s U.S domiciled insurance subsidiaries could pay to the Company in 2023 without regulatory approval is approximately $344.7 million. No assurance can be given that there will not be further regulatory actions restricting the ability of the Company’s insurance subsidiaries to pay dividends.
State regulators require insurance companies to meet minimum capitalization standards designed to ensure that they can fulfill obligations to policyholders. Minimum capital requirements are based on the RBC Ratio, which is a ratio of a company’s total adjusted capital (“TAC”) to its RBC. TAC is equal to statutory surplus adjusted to exclude certain statutory liabilities. RBC is calculated by applying specified factors to various asset, premium, expense, liability, and reserve items.
Generally, if a company’s RBC Ratio is below 100% (the “Authorized Control Level”), the insurance commissioner of the company’s jurisdiction of domicile is authorized to take control of the company, to protect the interests of policyholders. If the RBC Ratio is greater than 100% but less than 200% (the “Company Action Level”), the company must submit a RBC plan to the commissioner of the jurisdiction of domicile. Corrective actions may also be required if the RBC Ratio is greater than the Company Action Level but the company fails certain trend tests.
As of December 31, 2022, the TAC of each of the Company’s insurance subsidiaries exceeded the Company Action Level and no trend tests that would require regulatory action were violated. As of December 31, 2022, the TAC of the Company’s property and casualty companies subject to RBC requirements was $85.4 million. The corresponding Authorized Control Level was $11.5 million. As of December 31, 2022, the TAC of the Company’s life and health companies subject to RBC requirements was $1.47 billion. The corresponding Authorized Control Level was $304.3 million.
24. Retirement and Other Employee Benefits
Defined Benefit Plans
The Company and its subsidiaries participate in a non-contributory, qualified defined benefit pension plan (“Assurant Pension Plan”) covering substantially all employees. The Assurant Pension Plan is considered “qualified” because it meets the requirements of IRC Section 401(a) (“IRC 401(a)”) and the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). The Assurant Pension Plan is a pension equity plan with a grandfathered final average earnings plan for a certain group of employees. Benefits are based on certain years of service and the employee’s compensation during certain such years of service. The Company’s funding policy is to contribute amounts to the Assurant Pension Plan sufficient to meet the minimum funding requirements in ERISA, plus such additional amounts as the Company may determine to be appropriate from time to time up to the maximum permitted. The funding policy considers several factors to determine such additional amounts, including items such as the amount of service cost plus 15% of the Assurant Pension Plan deficit and the capital position of the Company. During the year ended December 31, 2022, there were no contributions to the Assurant Pension Plan. Due to the Assurant Pension Plan’s current funding status, no contributions to the Assurant Pension Plan are expected during the year ending December 31, 2023. Assurant Pension Plan assets are maintained in a separate trust. Assurant Pension Plan assets and benefit obligations are measured as of December 31, 2022.
The Company also has various non-contributory, non-qualified supplemental plans covering certain employees including the Assurant Executive Pension Plan and the Assurant Supplement Executive Retirement Plan (the “SERP”). Since these plans are “non-qualified” they are not subject to the requirements of IRC 401(a) and ERISA. As such, the Company is not required, and does not, fund these plans. The qualified and nonqualified plans are referred to as “Pension Benefits” unless otherwise noted. The Company has the right to modify or terminate these benefits; however, the Company will not be relieved of its obligation to plan participants for their vested benefits.
In addition, the Company provides certain life and health care benefits (“Retirement Health Benefits”) for retired employees and their dependents. On July 1, 2011, the Company terminated certain health care benefits for employees who did not qualify for “grandfathered” status and no longer offers these benefits to new hires. The Company contribution, plan design and other terms of the remaining benefits did not change for those grandfathered employees. The Company has the right to modify or terminate these benefits.
Effective January 1, 2014, the Pension Benefits plans were closed to new hires. Effective March 1, 2016, the Pension Benefits and Retirement Health Benefits (together, the “Plans”) were amended such that no additional benefits will be earned after February 29, 2016.
In February 2020, the Company amended the Retirement Health Benefits to terminate effective December 31, 2024 (the “Termination Date”). Benefits will be paid up to the Termination Date. The Retirement Health Benefits obligations were re-measured using a discount rate of 1.55%, selected based on a cash flow analysis using a bond yield curve as of February 29, 2020, and the fair market value of the Retirement Health Benefits assets as of February 29, 2020. The remeasurement resulted in a reduction to the Retirement Health Benefits obligations of $65.6 million and a corresponding prior service credit in AOCI, which will be reclassified from AOCI as it is amortized in the net periodic benefit cost over the remaining period until the Termination Date.
The following table presents information on the Plans for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Retirement Health Benefits |
| 2022 | | 2021 | | 2022 | | 2021 |
Change in projected benefit obligation | | | | | | | |
Projected benefit obligation at beginning of year | $ | (832.3) | | | $ | (895.3) | | | $ | (15.3) | | | $ | (21.3) | |
Interest cost | (18.0) | | | (15.2) | | | (0.1) | | | (0.1) | |
Amendments | — | | | — | | | — | | | — | |
Settlements | — | | | 15.7 | | | — | | | — | |
Actuarial gain (1) | 187.3 | | | 28.0 | | | 0.6 | | | 1.5 | |
Benefits paid | 64.5 | | | 34.5 | | | 4.9 | | | 4.6 | |
Projected benefit obligation at end of year | $ | (598.5) | | | $ | (832.3) | | | $ | (9.9) | | | $ | (15.3) | |
Change in plan assets | | | | | | | |
Fair value of plan assets at beginning of year | $ | 827.5 | | | $ | 852.8 | | | $ | 40.9 | | | $ | 44.3 | |
Actual return on plan assets | (139.9) | | | 20.7 | | | (6.8) | | | 1.0 | |
Employer contributions | 20.0 | | | 5.5 | | | 0.2 | | | 0.2 | |
Settlements | — | | | (15.7) | | | — | | | — | |
Benefits paid (including administrative expenses) | (65.8) | | | (35.8) | | | (4.9) | | | (4.6) | |
Fair value of plan assets at end of year | $ | 641.8 | | | $ | 827.5 | | | $ | 29.4 | | | $ | 40.9 | |
Funded status at end of year | $ | 43.3 | | | $ | (4.8) | | | $ | 19.5 | | | $ | 25.6 | |
(1)In 2022, the actuarial gain in the Pension Benefits was primarily due to the significant increase in the discount rate as detailed below.
In accordance with the guidance on retirement benefits, the Company aggregates the results of the qualified and non-qualified plans as “Pension Benefits” and is required to disclose the aggregate projected benefit obligation, accumulated benefit obligation and fair value of plan assets, if the obligations within those plans exceed plan assets.
As of December 31, 2022 and 2021, the fair value of plan assets, projected benefit obligation, funded status at end of year and the accumulated benefit obligation of Pension Benefits were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Qualified Pension Benefits | | Unfunded Nonqualified Pension Benefits | | Total Pension Benefits |
| 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
Fair value of plan assets | $ | 641.8 | | | $ | 827.5 | | | $ | — | | | $ | — | | | $ | 641.8 | | | $ | 827.5 | |
Projected benefit obligation | (547.7) | | | (752.7) | | | (50.8) | | | (79.6) | | | (598.5) | | | (832.3) | |
Funded status at end of year | $ | 94.1 | | | $ | 74.8 | | | $ | (50.8) | | | $ | (79.6) | | | $ | 43.3 | | | $ | (4.8) | |
Accumulated benefit obligation | $ | 547.7 | | | $ | 752.7 | | | $ | 50.8 | | | $ | 79.6 | | | $ | 598.5 | | | $ | 832.3 | |
Amounts recognized in the consolidated balance sheets consist of:
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Retirement Health Benefits |
| 2022 | | 2021 | | 2022 | | 2021 |
Assets | $ | 94.1 | | | $ | 74.8 | | | $ | 19.5 | | | $ | 25.6 | |
Liabilities | $ | (50.8) | | | $ | (79.6) | | | $ | — | | | $ | — | |
Amounts recognized in AOCI consist of:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Retirement Health Benefits |
| 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
Net (loss) gain | $ | (137.5) | | | $ | (163.2) | | | $ | (194.2) | | | $ | (2.1) | | | $ | 6.2 | | | $ | 5.9 | |
Prior service (cost) credit | (0.4) | | | (0.4) | | | (0.4) | | | 27.2 | | | 40.8 | | | 54.3 | |
| $ | (137.9) | | | $ | (163.6) | | | $ | (194.6) | | | $ | 25.1 | | | $ | 47.0 | | | $ | 60.2 | |
Components of net periodic benefit cost, recorded in underwriting, selling, general and administrative expenses in the consolidated statements of operations, and other amounts recognized in AOCI for the years ended December 31, 2022, 2021, and 2020 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Retirement Health Benefits |
| 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
Net periodic benefit cost | | | | | | | | | | | |
Interest cost | $ | 18.0 | | | $ | 15.2 | | | $ | 22.4 | | | $ | 0.1 | | | $ | 0.1 | | | $ | 0.7 | |
Expected return on plan assets | (27.5) | | | (27.3) | | | (30.6) | | | (1.4) | | | (1.5) | | | (1.8) | |
Amortization of prior service credit (cost) | 0.1 | | | 0.1 | | | 0.1 | | | (13.6) | | | (13.6) | | | (11.3) | |
Amortization of net loss (gain) | 5.1 | | | 7.8 | | | 5.1 | | | (0.7) | | | (0.6) | | | — | |
Curtailment/settlement loss | 1.9 | | | 3.1 | | | 1.0 | | | — | | | — | | | — | |
Net periodic benefit cost | $ | (2.4) | | | $ | (1.1) | | | $ | (2.0) | | | $ | (15.6) | | | $ | (15.6) | | | $ | (12.4) | |
Other changes in plan assets and benefit obligations recognized in accumulated other comprehensive income | | | | | | | | | | | |
Prior service cost | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | (65.6) | |
Net (gain) loss | (18.6) | | | (20.1) | | | 42.9 | | | 7.6 | | | (0.9) | | | 2.5 | |
Amortization of prior service (cost) credit | (0.1) | | | (0.1) | | | (0.1) | | | 13.6 | | | 13.6 | | | 11.3 | |
Amortization of net (loss) gain | (7.0) | | | (10.9) | | | (6.1) | | | 0.7 | | | 0.6 | | | — | |
Total recognized in accumulated other comprehensive (loss) income | $ | (25.7) | | | $ | (31.1) | | | $ | 36.7 | | | $ | 21.9 | | | $ | 13.3 | | | $ | (51.8) | |
Total recognized in net periodic benefit cost and other comprehensive (loss) income | $ | (28.1) | | | $ | (32.2) | | | $ | 34.7 | | | $ | 6.3 | | | $ | (2.3) | | | $ | (64.2) | |
The Company uses a five-year averaging method to determine the market-related value of Pension Benefits plan assets, which is used to calculate the expected return of plan assets component of the Plans’ expense. Under this methodology, asset gains/losses that result from actual returns which differ from the Company’s expected long-term rate of return on assets assumption are recognized in the market-related value of assets on a level basis over a five-year period. The difference between actual as compared to expected asset returns for the Plans will be fully reflected in the market-related value of plan assets over the next five years using the methodology described above. Other post-employment benefit assets under the Retirement Health Benefits are valued at fair value.
Determination of the projected benefit obligation was based on the following weighted-average assumptions for the years ended December 31, 2022, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Qualified Pension Benefits | | Unfunded Nonqualified Pension Benefits | | Retirement Health Benefits |
| 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
Discount rate | 5.42 | % | | 2.79 | % | | 2.39 | % | | 5.42 | % | | 2.68 | % | | 2.20 | % | | 5.36 | % | | 1.08 | % | | 0.60 | % |
Determination of the net periodic benefit cost was based on the following weighted-average assumptions for the years ended December 31, 2022, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Qualified Pension Benefits | | Unfunded Nonqualified Pension Benefits | | Retirement Health Benefits |
| 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 Pre-Amendment | | 2020 Post-Amendment |
Discount rates: | | | | | | | | | | | | | | | | | |
Effective discount rate for benefit obligations | 2.79 | % | | 2.39 | % | | 3.27 | % | | 2.68 | % | | 2.20 | % | | 3.11 | % | | 1.08 | % | | 0.60 | % | | 3.23 | % | | 1.55 | % |
Effective rate for interest on benefit obligations | 2.30 | % | | 1.80 | % | | 2.84 | % | | 2.05 | % | | 1.45 | % | | 2.77 | % | | 1.02 | % | | 0.55 | % | | 2.83 | % | | 1.53 | % |
Expected long-term return on plan assets | 3.65 | % | | 3.65 | % | | 4.15 | % | | — | % | | — | % | | — | % | | 3.65 | % | | 3.65 | % | | 4.15 | % | | 4.15 | % |
The selection of the Company’s discount rate assumption reflects the rate at which the Plans’ obligations could be effectively settled at December 31, 2022, 2021 and 2020. The methodology for selecting the discount rate was to match each Plan’s cash flows to that of a yield curve that provides the equivalent yields on zero-coupon corporate bonds for each maturity. The yield curve utilized in the cash flow analysis was comprised of 263 bonds rated AA by either Moody’s or S&P’s with maturities between zero and 30 years. The discount rate for each Plan is the single rate that produces the same present value of cash flows. The Company utilizes a split rate approach for purposes of determining the benefit obligations and service cost as well as a spot rate approach for the calculation of interest on these items in the determination of the net periodic benefit cost.
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 long-term rate of return on Plan assets reflects the average rate of earnings expected on the funds invested or to be invested. 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. The Company believes the current assumption reflects the projected return on the invested assets, given the current market conditions and the modified portfolio structure. Actual return (loss) on Plan assets was (16.9)%, 2.4% and 10.9% for the years ended December 31, 2022, 2021 and 2020 respectively.
The assumed health care cost trend rates used in measuring the accumulated postretirement benefit obligation and net periodic benefit cost were as follows:
| | | | | | | | | | | | | | | | | |
| Retirement Health Benefits |
| 2022 | | 2021 | | 2020 |
Health care cost trend rate assumed for next year: | | | | | |
Pre-65 Non-reimbursement Plan | 5.4% | | 5.5% | | 8.0% |
Post-65 Non-reimbursement Plan (Medical) | 4.2% | | 4.1% | | 5.9% |
Post-65 Non-reimbursement Plan (Rx) | 6.6% | | 6.9% | | 13.0% |
Pre-65 Reimbursement Plan | 5.4% | | 5.4% | | 9.7% |
Post-65 Reimbursement Plan | 5.4% | | 5.4% | | 9.7% |
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) | 4.0% | | 4.0% | | 4.5% |
Year that the rate reaches the ultimate trend rate | | | | | |
Pre-65 Non-reimbursement Plan | 2045 | | 2045 | | 2039 |
Post-65 Non-reimbursement Plan (Medical & Rx) | 2045 | | 2045 | | 2039 |
Pre-65 Reimbursement Plan | 2045 | | 2045 | | 2039 |
Post-65 Reimbursement Plan | 2045 | | 2045 | | 2039 |
The assets of the Plans are managed to maximize their long-term pre-tax investment return, subject to the following dual constraints: minimization of required contributions and maintenance of solvency requirements. It is anticipated that periodic contributions to the Plans will, for the foreseeable future, be sufficient to meet benefit payments thus allowing the balance to be managed according to a long-term approach. The Benefit Plan Investment Committee (“BPIC”) for the Plans meets on a quarterly basis and reviews the re-balancing of existing fund assets and the asset allocation of new fund contributions.
The goal of the Company’s asset strategy is to ensure that the growth in the value of the Plan’s assets over the long-term, both in real and nominal terms, manages (controls) 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. Diversification by asset classes stabilizes total results over short-term time periods. Each asset class is externally managed by outside investment managers appointed by the BPIC. Derivatives may be used consistent with the Plan’s investment objectives established by the BPIC. All securities must be U.S. Dollar denominated.
The BPIC oversees the investment of the Company’s plan assets and periodically reviews the investment strategies, strategic asset allocation, liabilities and portfolio structure of the Company’s plan assets. After a 2017 review and considering the funded status of the Assurant Pension Plan, the BPIC transitioned plan assets to a new target asset allocation consisting of 80% fixed income, 10% real estate, 5% hedge funds and 5% equities.
The assets of the Plans are primarily invested in fixed maturity securities. Interest rate risk is hedged by aligning the duration of the fixed maturity securities with the duration of the liabilities. Specifically, interest rate swaps can be used if needed to synthetically extend the duration of fixed maturity securities to match the duration of the liabilities, as measured on a projected benefit obligation basis. In addition, the Plans’ fixed income securities have exposure to credit risk. In order to
adequately diversify and limit exposure to credit risk, the BPIC established parameters which include a limit on the asset types that managers are permitted to purchase, maximum exposure limits by sector and by individual issuer (based on asset quality) and minimum required ratings on individual securities. As of December 31, 2022, 83% of plan assets were invested in fixed maturity securities and 16%, 13% and 13% of those securities were concentrated in the energy and power, finance and real estate, and communication industries, respectively, with no exposure to any single creditor in excess of 4%, 5% and 13% of those industries, respectively. As of December 31, 2022, 4% of plan assets were invested in equity securities and 97% of the Plans’ equity securities were invested in a mutual fund that attempts to replicate the return of the S&P 500 Index by investing its assets in large capitalization stocks that are included in the S&P 500 Index using a weighting similar to the S&P 500 Index. The remainder of the assets are invested in real estate and other alternative assets.
The fair value hierarchy for the Company’s qualified pension plan and other postretirement benefit plan assets at December 31, 2022 by asset category, is as follows:
| | | | | | | | | | | | | | | | | |
Qualified Pension Benefits | December 31, 2022 |
Financial Assets | Total | | Level 1 | | Level 2 |
Cash equivalents: | | | | | |
Short-term investment funds | $ | 10.6 | | | $ | — | | | $ | 10.6 | |
Equity securities: | | | | | |
Preferred stock | 1.0 | | | 1.0 | | | — | |
Mutual funds - U.S. listed large cap | 27.8 | | | 27.8 | | | — | |
Fixed maturity securities: | | | | | |
U.S. & foreign government and government agencies and authorities | 154.9 | | | — | | | 154.9 | |
Corporate - U.S. & foreign investment grade | 335.2 | | | — | | | 335.2 | |
Corporate - U.S. & foreign high yield | 25.3 | | | — | | | 25.3 | |
Mutual funds - U.S. investment grade | 15.8 | | | 15.8 | | | — | |
Other investments measured at net asset value (1) | 123.0 | | | — | | | — | |
Total financial assets (2) | $ | 693.6 | | | $ | 44.6 | | | $ | 526.0 | |
(1)In accordance with fair value measurements and disclosures guidance, certain investments that are measured at fair value using the net asset value practical expedient have not been classified in the fair value hierarchy. The net asset values of $37.4 million, $6.8 million and $78.8 million as of December 31, 2022 are used as a practical expedient to fair value of the multi-strategy hedge fund, private equity fund and real estate fund, respectively.
(2)The difference between the fair value of Plan assets above and the amount used in determining the funded status is due to interest receivable and net receivable/payable for unsettled trades, which is not required to be included in the fair value hierarchy.
| | | | | | | | | | | | | | | | | |
Retirement Health Benefits | December 31, 2022 |
Financial Assets | Total | | Level 1 | | Level 2 |
Cash equivalents: | | | | | |
Short-term investment funds | $ | 0.5 | | | $ | — | | | $ | 0.5 | |
Equity securities: | | | | | |
| | | | | |
Mutual funds - U.S. listed large cap | 1.3 | | | 1.3 | | | — | |
Fixed maturity securities: | | | | | |
U.S. & foreign government and government agencies and authorities | 7.1 | | | — | | | 7.1 | |
Corporate - U.S. & foreign investment grade | 15.4 | | | — | | | 15.4 | |
Corporate - U.S. & foreign high yield | 1.2 | | | — | | | 1.2 | |
Mutual funds - U.S. investment grade | 0.7 | | | 0.7 | | | — | |
Other investments measured at net asset value (1) | 5.6 | | | — | | | — | |
Total financial assets (2) | $ | 31.8 | | | $ | 2.0 | | | $ | 24.2 | |
(1)In accordance with fair value measurements and disclosures guidance, certain investments that are measured at fair value using the net asset value practical expedient have not been classified in the fair value hierarchy. The net asset values of $1.7 million, $0.3 million and $3.6 million as of December 31, 2022 are used as a practical expedient to fair value of the multi-strategy hedge fund, private equity fund and real estate fund, respectively.
(2)The difference between the fair value of Plan assets above and the amount used in determining the funded status is due to interest receivable and net receivable/payable for unsettled trades, which is not required to be included in the fair value hierarchy.
The fair value hierarchy for the Company’s qualified pension plan and other postretirement benefit plan assets at December 31, 2021 by asset category, is as follows:
| | | | | | | | | | | | | | | | | |
Qualified Pension Benefits | December 31, 2021 |
Financial Assets | Total | | Level 1 | | Level 2 |
Cash and cash equivalents: | | | | | |
Short-term investment funds | $ | 11.1 | | | $ | — | | | $ | 11.1 | |
Equity securities: | | | | | |
Preferred stock | 1.1 | | | 1.1 | | | — | |
Mutual funds - U.S. listed large cap | 33.8 | | | 33.8 | | | — | |
Fixed maturity securities: | | | | | |
U.S. & foreign government and government agencies and authorities | 231.2 | | | — | | | 231.2 | |
Corporate - U.S. & foreign investment grade | 395.5 | | | — | | | 395.5 | |
Corporate - U.S. & foreign high yield | 42.2 | | | — | | | 42.2 | |
Mutual funds - U.S. investment grade | 42.8 | | | 42.8 | | | — | |
Other investments measured at net asset value (1) | 118.8 | | | — | | | — | |
Total financial assets (2) | $ | 876.5 | | | $ | 77.7 | | | $ | 680.0 | |
(1)In accordance with fair value measurements and disclosures guidance, certain investments that are measured at fair value using the net asset value practical expedient have not been classified in the fair value hierarchy. The net asset values of $35.7 million, $7.3 million and $75.8 million as of December 31, 2021 are used as a practical expedient to fair value of the multi-strategy hedge fund, private equity fund and real estate fund, respectively.
(2)The difference between the fair value of Plan assets above and the amount used in determining the funded status is due to interest receivable and net receivable/payable for unsettled trades, which is not required to be included in the fair value hierarchy.
| | | | | | | | | | | | | | | | | |
Retirement Health Benefits | December 31, 2021 |
Financial Assets | Total | | Level 1 | | Level 2 |
Cash and cash equivalents: | | | | | |
Short-term investment funds | $ | 0.6 | | | $ | — | | | $ | 0.6 | |
Equity securities: | | | | | |
Preferred stock | 0.1 | | | 0.1 | | | — | |
Mutual funds - U.S. listed large cap | 1.7 | | | 1.7 | | | — | |
Fixed maturity securities: | | | | | |
U.S. & foreign government and government agencies and authorities | 11.4 | | | — | | | 11.4 | |
Corporate - U.S. & foreign investment grade | 19.6 | | | — | | | 19.6 | |
Corporate - U.S. & foreign high yield | 2.1 | | | — | | | 2.1 | |
Mutual funds - U.S. investment grade | 2.1 | | | 2.1 | | | — | |
Other investments measured at net asset value (1) | 5.8 | | | — | | | — | |
Total financial assets (2) | $ | 43.4 | | | $ | 3.9 | | | $ | 33.7 | |
(1)In accordance with fair value measurements and disclosures guidance, certain investments that are measured at fair value using the net asset value practical expedient have not been classified in the fair value hierarchy. The net asset values of $1.8 million, $0.3 million and $3.7 million as of December 31, 2021 are used as a practical expedient to fair value of the multi-strategy hedge fund, private equity fund and real estate fund, respectively. The multi-strategy hedge fund, which is reported on a one month lag, was liquidated on December 31, 2020.
(2)The difference between the fair value of Plan assets above and the amount used in determining the funded status is due to interest receivable and net receivable/payable for unsettled trades, which is not required to be included in the fair value hierarchy.
Level 1 and Level 2 securities are valued using various observable market inputs obtained from a pricing service. The pricing service prepares estimates of fair value measurements for the Company’s Level 2 securities using proprietary valuation models based on techniques such as matrix pricing which include observable market inputs. Observable market inputs for Level 1 and Level 2 securities are consistent with the observable market inputs described in Note 10.
The Company obtains one price for each investment. A quarterly analysis is performed to assess if the evaluated prices represent a reasonable estimate of their fair value. This process involves quantitative and qualitative analysis and is overseen by benefits, investment and accounting professionals. Examples of procedures performed include initial and on-going review of pricing service methodologies, review of pricing statistics and trends, and comparison of prices for certain securities with two different appropriate price sources for reasonableness. Following this analysis, the Company uses the best estimate of fair value based upon all available inputs. The pricing service provides information regarding their pricing procedures so that the Company can properly categorize the Plans’ financial assets in the fair value hierarchy.
The following pension benefits are expected to be paid over the next ten-year period:
| | | | | | | | | | | |
| Pension Benefits | | Retirement Health Benefits |
2023 | $ | 50.9 | | | $ | 5.2 | |
2024 | 51.3 | | | 5.3 | |
2025 | 50.2 | | | — | |
2026 | 51.7 | | | — | |
2027 | 49.6 | | | — | |
2027 - 2031 | 231.3 | | | — | |
Total | $ | 485.0 | | | $ | 10.5 | |
Defined Contribution Plan
The Company and its subsidiaries participate in a defined contribution plan covering substantially all employees. The defined contribution plan provides benefits payable to participants on retirement or disability and to beneficiaries of participants in the event of the participant’s death. The amounts expensed by the Company related to this plan were $44.1 million, $40.3 million and $41.3 million for the years ended December 31, 2022, 2021 and 2020, respectively.
25. Earnings Per Common Share
The following table presents net income, the weighted average common shares used in calculating basic EPS and those used in calculating diluted EPS for each period presented below. Diluted EPS reflects the incremental common shares from: (1) common shares issuable upon vesting of PSUs and ESPP using the treasury stock method; and (2) common shares issuable upon conversion of the MCPS using the if-converted method. Refer to Notes 20 and 21 for further information regarding potential common stock issuances. The outstanding RSUs have non-forfeitable rights to dividend equivalents and are therefore included in calculating basic and diluted EPS under the two-class method.
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
Numerator | | | | | |
Net income from continuing operations | $ | 276.6 | | | $ | 602.9 | | | $ | 519.4 | |
Less: Net income attributable to non-controlling interest | — | | | — | | | (0.9) | |
Net income from continuing operations attributable to stockholders | 276.6 | | | 602.9 | | | 518.5 | |
Less: Preferred stock dividends | — | | | (4.7) | | | (18.7) | |
Net income from continuing operations attributable to common stockholders | 276.6 | | | 598.2 | | | 499.8 | |
Less: Common stock dividends paid | (150.2) | | | (157.6) | | | (154.6) | |
Undistributed earnings | $ | 126.4 | | | $ | 440.6 | | | $ | 345.2 | |
| | | | | |
Net income from continuing operations attributable to common stockholders | $ | 276.6 | | | $ | 598.2 | | | $ | 499.8 | |
Add: Net income (loss) from discontinued operations | — | | | 758.9 | | | (77.7) | |
Net income attributable to common stockholders | $ | 276.6 | | | $ | 1,357.1 | | | $ | 422.1 | |
| | | | | |
Denominator | | | | | |
Weighted average common shares outstanding used in basic per common share calculations | 54,371,531 | | | 59,140,861 | | | 60,114,670 | |
Incremental common shares from: | | | | | |
PSUs | 348,036 | | | 403,316 | | | 311,712 | |
ESPP | 62,961 | | | 45,604 | | | 51,631 | |
MCPS | — | | | 533,913 | | | 2,701,925 | |
Weighted average common shares outstanding used in diluted per common share calculations | 54,782,528 | | | 60,123,694 | | | 63,179,938 | |
Earnings per common share – Basic | | | | | |
Distributed earnings | $ | 2.76 | | | $ | 2.66 | | | $ | 2.57 | |
Undistributed earnings | 2.33 | | | 7.45 | | | 5.74 | |
Net income from continuing operations | 5.09 | | | 10.11 | | | 8.31 | |
Net income (loss) from discontinued operations | — | | | 12.84 | | | (1.29) | |
Net income attributable to common stockholders | $ | 5.09 | | | $ | 22.95 | | | $ | 7.02 | |
Earnings per common share – Diluted | | | | | |
Distributed earnings | $ | 2.74 | | | $ | 2.62 | | | $ | 2.45 | |
Undistributed earnings | 2.31 | | | 7.41 | | | 5.76 | |
Net income from continuing operations | 5.05 | | | 10.03 | | | 8.21 | |
Net income (loss) from discontinued operations | — | | | 12.63 | | | (1.23) | |
Net income attributable to common stockholders | $ | 5.05 | | | $ | 22.66 | | | $ | 6.98 | |
Average PSUs totaling 52,982, 2,063 and 58 for the years ended December 31, 2022, 2021 and 2020, respectively, were outstanding but were anti-dilutive and thus not included in the computation of diluted EPS under the treasury stock method. There were no anti-dilutive MCPS for all three years presented.
26. Quarterly Results of Operations (Unaudited)
As the revision of prior period financial statements due to an error represented a significant retrospective change (see Note 29), the Company’s quarterly results of operations for the years ended December 31, 2022 and 2021 have been summarized in the tables below:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Month Periods Ended |
| March 31 | | June 30 | | September 30 | | December 31 |
2022 | | | | | | | |
Total revenues | $ | 2,482.7 | | | $ | 2,509.7 | | | $ | 2,547.8 | | | $ | 2,652.8 | |
Income before provision for income taxes | 175.2 | | | 69.9 | | | 8.5 | | | 96.3 | |
Net income from continuing operations | 149.0 | | | 52.2 | | | 7.3 | | | 68.1 | |
Net income attributable to common stockholders | 149.0 | | | 52.2 | | | 7.3 | | | 68.1 | |
Basic per share data: | | | | | | | |
Income before provision for income taxes | $ | 3.14 | | | $ | 1.28 | | | $ | 0.16 | | | $ | 1.80 | |
Net income from continuing operations | $ | 2.67 | | | $ | 0.96 | | | $ | 0.14 | | | $ | 1.27 | |
Net income attributable to common stockholders | $ | 2.67 | | | $ | 0.96 | | | $ | 0.14 | | | $ | 1.27 | |
Diluted per share data: | | | | | | | |
Income before provision for income taxes | $ | 3.12 | | | $ | 1.27 | | | $ | 0.16 | | | $ | 1.79 | |
Net income from continuing operations | $ | 2.65 | | | $ | 0.95 | | | $ | 0.14 | | | $ | 1.27 | |
Net income attributable to common stockholders | $ | 2.65 | | | $ | 0.95 | | | $ | 0.14 | | | $ | 1.27 | |
| | | | | | | |
| March 31 | | June 30 | | September 30 | | December 31 |
2021 | | | | | | | |
Total revenues | $ | 2,432.6 | | | $ | 2,542.3 | | | $ | 2,637.8 | | | $ | 2,574.9 | |
Income before provision for income taxes | 184.8 | | | 239.7 | | | 188.2 | | | 158.6 | |
Net income from continuing operations | 140.8 | | | 187.1 | | | 151.0 | | | 124.0 | |
Net income (loss) attributable to common stockholders | 150.6 | | | 205.8 | | | 879.8 | | | 120.9 | |
Basic per share data: | | | | | | | |
Income before provision for income taxes | $ | 3.12 | | | $ | 3.93 | | | $ | 3.18 | | | $ | 2.77 | |
Net income from continuing operations | $ | 2.30 | | | $ | 3.07 | | | $ | 2.56 | | | $ | 2.16 | |
Net income (loss) attributable to common stockholders | $ | 2.54 | | | $ | 3.38 | | | $ | 14.88 | | | $ | 2.11 | |
Diluted per share data: | | | | | | | |
Income before provision for income taxes | $ | 2.99 | | | $ | 3.91 | | | $ | 3.16 | | | $ | 2.75 | |
Net income from continuing operations | $ | 2.28 | | | $ | 3.05 | | | $ | 2.54 | | | $ | 2.15 | |
Net income (loss) attributable to common stockholders | $ | 2.51 | | | $ | 3.36 | | | $ | 14.79 | | | $ | 2.09 | |
Third quarter 2022 net income from continuing operations includes $97.6 million after-tax reportable catastrophes, primarily related to Hurricane Ian.
Third quarter 2021 and first quarter 2021 net income from continuing operations includes $78.0 million and $34.5 million after-tax reportable catastrophes, primarily related to Hurricane Ida and severe winter storms in Texas, respectively.
27. Restructuring and Related Impairment Charges
In December 2022, the Company finalized its plan to realize greater efficiencies by continuing to simplify its business portfolio and leverage its global footprint to reduce costs. This included realigning its organizational structure and talent to support its business strategy (the “transformational plan”). The Company also accelerated its ongoing real estate consolidation to support work-from-home arrangements given its increasingly hybrid workforce (the “return to work strategy”). The Company expects to complete these actions in 2023.
The following table summarizes the costs by major type that are recorded in underwriting, selling, general and administrative expenses in the consolidated statement of operations for the year ended December 31, 2022 and the estimated remaining costs to be incurred. Substantially all of the charges are expected to be cash. Restructuring costs related to strategic exit activities (outside of normal periodic restructuring and cost management activities) are not allocated to a reportable segment.
| | | | | | | | | | | | | | | | | |
| Costs incurred for the year ended December 31, 2022 | | Estimated Remaining Costs | | Estimated Total Costs |
Transformational plan: | | | | | |
Severance and other employee benefits | $ | 31.7 | | | $ | 3.3 | | | $ | 35.0 | |
Total transformational plan | 31.7 | | | 3.3 | | | 35.0 | |
Return to work strategy: | | | | | |
Contract exit costs | 15.5 | | | 5.6 | | | 21.1 | |
Fixed asset impairment | 1.1 | | | — | | | 1.1 | |
Right-of-use asset impairment | 4.6 | | | 2.8 | | | 7.4 | |
Total return to work strategy | 21.2 | | | 8.4 | | | 29.6 | |
Total restructuring and impairment charges | $ | 52.9 | | | $ | 11.7 | | | $ | 64.6 | |
The following table shows the rollforward of the accrued liability by major type.
| | | | | | | | | | | |
| Transformational Plan | | Return to Work Strategy (contract exit costs) |
Balance at January 1, 2022 | $ | — | | | $ | 5.6 | |
Charges incurred | 31.7 | | | 15.5 | |
Cash payments | (2.4) | | | (1.8) | |
Balance at December 31, 2022 | $ | 29.3 | | | $ | 19.3 | |
28. Commitments and Contingencies
Leases
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.
As of December 31, 2022 and 2021, the lease liability was $39.7 million and $60.5 million, respectively, included in accounts payable and other liabilities in the consolidated balance sheets. As of December 31, 2022 and 2021, the right-of-use asset was $29.6 million and $47.7 million, respectively, included in other assets in the consolidated balance sheets. For the years ended December 31, 2022, 2021 and 2020 the operating lease cost recognized for leases with terms in excess of 12 months was $18.1 million, $23.1 million and $23.8 million respectively, and related cash outflows reducing the lease liability were $19.3 million, $23.8 million and $22.7 million, respectively. As of December 31, 2022, the weighted average remaining lease term and discount rate was 5.6 years and 4.4%, respectively. As of December 31, 2021, the weighted average remaining lease term and discount rate was 6.0 years and 4.3%, respectively. For the years ended December 31, 2022, 2021 and 2020 the short-term lease cost recognized for leases with terms of 12 months or less was $1.5 million, $2.9 million and $3.4 million, respectively.
At December 31, 2022, the lease liability by maturity is as follows:
| | | | | |
2023 | $ | 15.9 | |
2024 | 12.7 | |
2025 | 6.5 | |
2026 | 4.8 | |
2027 | 1.3 | |
Thereafter | 0.8 | |
Total future lease payments | 42.0 | |
Less: Imputed interest | (2.3) | |
Total lease liability | $ | 39.7 | |
Letters of Credit
In the normal course of business, letters of credit are issued for various purposes. These letters of credit are supported by commitments under which the Company is required to indemnify the financial institution issuing the letter of credit if the letter of credit is drawn. The Company had $2.7 million and $7.2 million of letters of credit outstanding as of December 31, 2022 and 2021, respectively.
Legal and Regulatory Matters
The Company is involved in a variety of litigation and legal and regulatory proceedings relating to its current and past business operations and, from time to time, it may become involved in other such actions. The Company continues to defend itself vigorously in these proceedings. The Company has participated and may participate in settlements on terms that the Company considers reasonable.
The Company has established an accrued liability for certain legal and regulatory proceedings. The possible loss or range of loss resulting from such litigation and regulatory proceedings, if any, in excess of the amounts accrued is inherently unpredictable and uncertain. Consequently, no estimate can be made of any possible loss or range of loss in excess of the accrual. Although the Company cannot predict the outcome of any pending legal or regulatory proceeding, or the potential losses, fines, penalties or equitable relief, if any, that may result, it is possible that such outcome could have a material adverse effect on the Company’s consolidated results of operations or cash flows for an individual reporting period. However, on the basis of currently available information, management does not believe that the pending matters are likely to have a material adverse effect, individually or in the aggregate, on the Company’s financial condition.
29. Revision of Prior Period Financial Statements
The Company revised its prior period financial statements for an error related to reinsurance of claims and benefits payable within the Connected Living business unit in the Global Lifestyle segment occurring in late 2018 through first quarter 2022 that resulted in an understatement of policyholder benefits and an overstatement of net income. See Note 2 for additional information. In addition, the Company has corrected other unrelated immaterial errors which were previously recorded in the periods in which the Company identified them.
A summary of revisions to our previously reported financial statements is presented below (in millions, except for per share data).
Revised Consolidated Balance Sheet
| | | | | | | | | | | | | | | | | |
| As of December 31, 2021 |
| As Reported | | Adjustment | | As Revised |
Reinsurance recoverables | $ | 6,178.9 | | | $ | 2.3 | | | $ | 6,181.2 | |
Other Assets | 692.1 | | | 6.8 | | | 698.9 | |
Total assets | 33,911.5 | | | 9.1 | | | 33,920.6 | |
Claims and benefits payable | 1,595.9 | | | 8.9 | | | 1,604.8 | |
Reinsurance balances payable | 420.4 | | | 25.8 | | | 446.2 | |
Total liabilities | 28,421.8 | | | 34.7 | | | 28,456.5 | |
Retained Earnings | 4,066.8 | | | (25.6) | | | 4,041.2 | |
Total Assurant, Inc. stockholders’ equity | 5,489.7 | | | (25.6) | | | 5,464.1 | |
Total equity | 5,489.7 | | | (25.6) | | | 5,464.1 | |
Total liabilities and equity | 33,911.5 | | | 9.1 | | | 33,920.6 | |
Revised Consolidated Statements of Operations
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2021 | | Year Ended December 31, 2020 |
| As Reported | Adjustment | As Revised | | As Reported | Adjustment | As Revised |
Revenues | | | | | | | |
Net earned premiums | $ | 8,572.1 | | $ | — | | $ | 8,572.1 | | | $ | 8,275.8 | | $ | 2.1 | | $ | 8,277.9 | |
Total revenues | 10,187.6 | | — | | 10,187.6 | | | 9,595.5 | | 2.1 | | 9,597.6 | |
Benefits, losses and expenses: | | | | | | | |
Policyholder benefits | 2,195.7 | | 6.2 | | 2,201.9 | | | 2,264.9 | | 10.3 | | 2,275.2 | |
Underwriting, general and administrative expenses | 3,240.6 | | 5.5 | | 3,246.1 | | | 3,053.8 | | (5.5) | | 3,048.3 | |
Total benefits, losses and expenses | 9,404.6 | | 11.7 | | 9,416.3 | | | 9,014.7 | | 4.8 | | 9,019.5 | |
Income from continuing operations before income tax expense | 783.0 | | (11.7) | | 771.3 | | | 580.8 | | (2.7) | | 578.1 | |
Income tax expense | 169.5 | | (1.1) | | 168.4 | | | 60.4 | | (1.7) | | 58.7 | |
Net income from continuing operations | 613.5 | | (10.6) | | 602.9 | | | 520.4 | | (1.0) | | 519.4 | |
Net income | 1,372.4 | | (10.6) | | 1,361.8 | | | 442.7 | | (1.0) | | 441.7 | |
Net income attributable to stockholders | 1,372.4 | | (10.6) | | 1,361.8 | | | 441.8 | | (1.0) | | 440.8 | |
Net income attributable to common stockholders | 1,367.7 | | (10.6) | | 1,357.1 | | | 423.1 | | (1.0) | | 422.1 | |
Basic earnings per share from continuing operations | 10.29 | | (0.18) | | 10.11 | | | 8.33 | | (0.02) | | 8.31 | |
Basic earnings per share attributable to common stockholders | 23.13 | | (0.18) | | 22.95 | | | 7.04 | | (0.02) | | 7.02 | |
Diluted earnings per share from continuing operations | 10.20 | | (0.17) | | 10.03 | | | 8.22 | | (0.01) | | 8.21 | |
Diluted earnings per share attributable to common stockholders | 22.83 | | (0.17) | | 22.66 | | | 6.99 | | (0.01) | | 6.98 | |
Revised Consolidated Statements of Comprehensive Income
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2021 | | Year Ended December 31, 2020 |
| As Reported | Adjustment | As Revised | | As Reported | Adjustment | As Revised |
Net Income | $ | 1,372.4 | | $ | (10.6) | | $ | 1,361.8 | | | $ | 442.7 | | $ | (1.0) | | $ | 441.7 | |
Total comprehensive income | 512.6 | | (10.6) | | 502.0 | | | 741.0 | | (1.0) | | 740.0 | |
Total comprehensive income attributable to stockholders | 512.6 | | (10.6) | | 502.0 | | | 740.1 | | (1.0) | | 739.1 | |
Revised Consolidated Statements of Changes in Equity
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2021 | | Year Ended December 31, 2020 |
| As Reported | Adjustment | As Revised | | As Reported | Adjustment | As Revised |
Beginning equity | $ | 5,954.8 | | $ | (15.2) | | $ | 5,939.6 | | | $ | 5,682.1 | | $ | (14.2) | | $ | 5,667.9 | |
Net Income | 1,372.4 | | (10.6) | | 1,361.8 | | | 442.7 | | (1.0) | | 441.7 | |
| | | | | | | |
Ending equity | 5,489.7 | | (25.6) | | 5,464.1 | | | 5,954.8 | | (15.2) | | 5,939.6 | |
Revised Consolidated Statement of Cash Flows
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2021 | | Year Ended December 31, 2020 |
| As Reported | Adjustment | As Revised | | As Reported | Adjustment | As Revised |
Operating activities | | | | | | | |
Net Income Attributable to Stockholders | $ | 1,372.4 | | $ | (10.6) | | $ | 1,361.8 | | | $ | 441.8 | | $ | (1.0) | | $ | 440.8 | |
Change in insurance policy reserves and expenses | 1,454.6 | | (0.7) | | 1,453.9 | | | 697.3 | | 4.3 | | 701.6 | |
Change in commissions payable | (43.3) | | — | | (43.3) | | | 171.3 | | 0.6 | | 171.9 | |
Change in reinsurance recoverable | (445.5) | | (1.4) | | (446.9) | | | (232.3) | | (1.0) | | (233.3) | |
Change in reinsurance balance payable | 81.6 | | 8.3 | | 89.9 | | | 2.3 | | 8.8 | | 11.1 | |
Change in deferred acquisition costs and value of business acquired | (879.1) | | 5.5 | | (873.6) | | | (456.6) | | (5.6) | | (462.2) | |
Change in taxes receivable | (157.1) | | 11.3 | | (145.8) | | | 24.4 | | (1.7) | | 22.7 | |
Change in other assets and other liabilities | 163.2 | | (12.9) | | 150.3 | | | (260.9) | | (4.4) | | (265.3) | |
Other | (3.9) | | 0.5 | | (3.4) | | | 2.2 | | — | | 2.2 | |
Net cash provided by operating activities | 781.7 | | — | | 781.7 | | | 1,342.0 | | — | | 1,342.0 | |
Assurant, Inc.
Schedule I – Summary of Investments Other – Than – Investments in Related Parties
| | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| Cost or Amortized Cost | | Fair Value | | Amount at which shown in balance sheet |
| (in millions) |
Fixed maturity securities: | | | | | |
U.S. government and government agencies and authorities | $ | 92.9 | | | $ | 86.4 | | | $ | 86.4 | |
States, municipalities and political subdivisions | 152.4 | | | 137.5 | | | 137.5 | |
Foreign governments | 416.2 | | | 396.3 | | | 396.3 | |
Asset-backed | 735.1 | | | 696.3 | | | 696.3 | |
Commercial mortgage-backed | 458.6 | | | 402.3 | | | 402.3 | |
Residential mortgage-backed | 492.7 | | | 438.0 | | | 438.0 | |
U.S. corporate | 3,265.1 | | | 2,961.1 | | | 2,961.1 | |
Foreign corporate | 1,307.8 | | | 1,165.8 | | | 1,165.8 | |
Total fixed maturity securities | 6,920.8 | | | 6,283.7 | | | 6,283.7 | |
Equity securities: | | | | | |
Common stocks | 38.8 | | | 23.9 | | | 23.9 | |
Non-redeemable preferred stocks | 241.7 | | | 224.7 | | | 224.7 | |
Mutual funds | 35.4 | | | 32.7 | | | 32.7 | |
Total equity securities | 315.9 | | | 281.3 | | | 281.3 | |
Commercial mortgage loans on real estate | 295.6 | | | | | 295.6 | |
Short-term investments | 155.5 | | | | | 155.5 | |
Other investments | 508.4 | | | | | 508.4 | |
Total investments | $ | 8,196.2 | | | | | $ | 7,524.5 | |
Assurant, Inc.
Schedule II – Condensed Balance Sheet (Parent Only)
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| (in millions, except number of shares) |
Assets | | | |
Investments: | | | |
Equity investment in subsidiaries | $ | 5,670.9 | | | $ | 6,390.1 | |
Fixed maturity securities available for sale, at fair value (amortized cost – $326.0 and $879.4 at December 31, 2022 and 2021, respectively) | 306.1 | | | 881.9 | |
Equity securities at fair value | — | | | 3.9 | |
Short-term investments | 16.2 | | | 84.7 | |
Other investments | 83.0 | | | 109.6 | |
Total investments | 6,076.2 | | | 7,470.2 | |
Cash and cash equivalents | 126.8 | | | 82.9 | |
Receivable from subsidiaries, net | 81.8 | | | 77.8 | |
Income tax receivable | 13.0 | | | 11.4 | |
Accrued investment income | 2.4 | | | 5.1 | |
Property and equipment, at cost less accumulated depreciation | 197.5 | | | 228.9 | |
Other assets | 169.7 | | | 83.8 | |
Assets held for sale (Note 4 to the Consolidated Financial Statements) | — | | | 12.1 | |
Total assets | $ | 6,667.4 | | | $ | 7,972.2 | |
Liabilities | | | |
Accounts payable and other liabilities | $ | 308.8 | | | $ | 305.6 | |
| | | |
Debt | 2,129.9 | | | 2,202.5 | |
Total liabilities | 2,438.7 | | | 2,508.1 | |
Stockholders’ equity | | | |
Common stock, par value $0.01 per share, 800,000,000 shares authorized, 55,126,470 and 58,050,202 shares issued and 52,830,381 and 55,754,113 shares outstanding at December 31, 2022 and 2021, respectively | 0.6 | | | 0.7 | |
Additional paid-in capital | 1,637.8 | | | 1,695.0 | |
Retained earnings | 3,699.3 | | | 4,041.2 | |
Accumulated other comprehensive income | (986.2) | | | (150.0) | |
Treasury stock, at cost; 2,296,089 shares at December 31, 2022 and 2021 | (122.8) | | | (122.8) | |
Total stockholders’ equity | 4,228.7 | | | 5,464.1 | |
Total liabilities and stockholders’ equity | $ | 6,667.4 | | | $ | 7,972.2 | |
See the accompanying Notes to the Parent Only Condensed Financial Statements
Assurant, Inc.
Schedule II – Condensed Income Statement (Parent Only)
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| (in millions) |
Revenues | | | | | |
Net investment income | $ | 13.8 | | | $ | 12.6 | | | $ | 3.4 | |
Net realized (losses) gains on investments and fair value changes to equity securities | (35.8) | | | (1.3) | | | 4.2 | |
Fees and other income | 283.9 | | | 290.5 | | | 231.7 | |
Equity in net income of subsidiaries | 462.1 | | | 805.6 | | | 690.7 | |
Total revenues | 724.0 | | | 1,107.4 | | | 930.0 | |
Expenses | | | | | |
General and administrative expenses | 402.4 | | | 426.8 | | | 376.9 | |
Interest expense | 108.3 | | | 111.8 | | | 104.5 | |
Loss on extinguishment of debt (Note 19 to the Consolidated Financial Statements) | 0.9 | | | 20.7 | | | — | |
Total expenses | 511.6 | | | 559.3 | | | 481.4 | |
Income from continuing operations before benefit for income taxes | 212.4 | | | 548.1 | | | 448.6 | |
Benefit for income taxes | (64.2) | | | (54.8) | | | (70.8) | |
Net income from continuing operations | 276.6 | | | 602.9 | | | 519.4 | |
Net income (loss) from discontinued operations (Note 4 to the Consolidated Financial Statements) | — | | | 758.9 | | | (77.7) | |
Net income | 276.6 | | | 1,361.8 | | | 441.7 | |
Less: Net income attributable to non-controlling interest | — | | | — | | | (0.9) | |
Net income attributable to stockholders | $ | 276.6 | | | $ | 1,361.8 | | | $ | 440.8 | |
See the accompanying Notes to the Parent Only Condensed Financial Statements
Assurant, Inc.
Schedule II – Condensed Statements of Comprehensive Income (Parent Only)
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| (in millions) |
Net income | $ | 276.6 | | | $ | 1,361.8 | | | $ | 441.7 | |
Other comprehensive (loss) income: | | | | | |
Change in unrealized gains on securities, net of taxes of $4.5, $1.2 and $— for the years ended December 31, 2022, 2021 and 2020, respectively | (20.2) | | | (7.8) | | | 0.1 | |
Change in unrealized gains on derivative transactions, net of taxes of $0.7, $0.6 and $0.6 for the years ended December 31, 2022, 2021 and 2020, respectively | (2.6) | | | (2.3) | | | (2.3) | |
Change in foreign currency translation, net of taxes of $0.4, $(0.4) and $— for the years ended December 31, 2022, 2021 and 2020, respectively | (1.4) | | | 1.4 | | | (0.1) | |
Amortization of pension and postretirement unrecognized net periodic benefit cost and change in funded status, net of taxes of $(0.8), $(3.9) and $(3.2) for the years ended December 31, 2022, 2021 and 2020, respectively | 3.0 | | | 14.6 | | | 11.9 | |
Change in subsidiary other comprehensive income | (815.0) | | | (865.7) | | | 288.7 | |
Total other comprehensive (loss) income | (836.2) | | | (859.8) | | | 298.3 | |
Total comprehensive income | (559.6) | | | 502.0 | | | 740.0 | |
Less: Net income attributable to non-controlling interest | — | | | — | | | (0.9) | |
Total comprehensive income attributable to stockholders | $ | (559.6) | | | $ | 502.0 | | | $ | 739.1 | |
See the accompanying Notes to the Parent Only Condensed Financial Statements
Assurant, Inc.
Schedule II – Condensed Cash Flows (Parent Only)
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| (in millions) |
Operating Activities | | | | | |
Net cash provided by operating activities - discontinued operations | $ | — | | | $ | 11.7 | | | $ | 47.9 | |
Net cash provided by operating activities - continuing operations | 209.0 | | | 385.5 | | | 596.1 | |
Net cash provided by operating activities | 209.0 | | | 397.2 | | | 644.0 | |
Investing Activities | | | | | |
Sales of: | | | | | |
Fixed maturity securities available for sale | 659.0 | | | 575.0 | | | 165.0 | |
Equity securities | 5.0 | | | 0.8 | | | 1.6 | |
Other invested assets | 2.2 | | | 4.7 | | | 9.6 | |
Property, buildings and equipment (1) | 3.1 | | | 0.1 | | | 37.3 | |
Subsidiary, net of cash transferred (2) | 4.8 | | | 1,342.9 | | | — | |
Maturities, calls, prepayments, and scheduled redemption of: | | | | | |
Fixed maturity securities available for sale | 178.4 | | | 70.9 | | | 17.4 | |
Purchases of: | | | | | |
Fixed maturity securities available for sale | (3.9) | | | (1,231.4) | | | (45.7) | |
Equity securities | (1.5) | | | — | | | — | |
Other invested assets | (0.2) | | | (0.7) | | | (3.6) | |
Property and equipment and other | (145.6) | | | (123.1) | | | (75.8) | |
| | | | | |
Capital contributed to subsidiaries | (91.8) | | | (67.0) | | | (579.2) | |
Return of capital contributions from subsidiaries | 10.5 | | | 2.5 | | | 139.2 | |
Change in short-term investments | 33.4 | | | (76.6) | | | (5.4) | |
Other | (0.1) | | | — | | | — | |
Net cash used in investing activities - discontinued operations | — | | | — | | | (20.1) | |
Net cash provided by (used in) investing activities | 653.3 | | | 498.1 | | | (359.7) | |
Financing Activities | | | | | |
Issuance of debt, net of issuance costs (Note 19 to the Consolidated Financial Statements) | — | | | 347.2 | | | 243.7 | |
Borrowing under unsecured revolving credit facility | — | | | — | | | 200.0 | |
Payments on unsecured revolving credit facility | — | | | — | | | (200.0) | |
Repayment of debt, including tender offer premium (Note 19) | (75.9) | | | (419.8) | | | — | |
Acquisition of common stock | (572.8) | | | (839.3) | | | (297.0) | |
Preferred stock dividends paid | — | | | (4.7) | | | (18.7) | |
Common stock dividends paid | (150.2) | | | (157.6) | | | (154.6) | |
Employee stock purchases and withholdings | (19.5) | | | (15.6) | | | (10.3) | |
| | | | | |
Proceeds repaid on transfer of rights to ACA recoverable (Note 4) | — | | | — | | | (26.7) | |
| | | | | |
Net cash used in financing activities | (818.4) | | | (1,089.8) | | | (263.6) | |
Change in cash and cash equivalents | 43.9 | | | (194.5) | | | 20.7 | |
Cash and cash equivalents at beginning of period | 82.9 | | | 277.4 | | | 256.7 | |
Cash and cash equivalents at end of period | 126.8 | | | 82.9 | | | 277.4 | |
Less: Cash and cash equivalents of discontinued operations at end of period | — | | | — | | | (26.7) | |
Cash and cash equivalents of continuing operations at end of period | $ | 126.8 | | | $ | 82.9 | | | $ | 250.7 | |
(1)Amount for the year ended December 31, 2020 related to the sale of a building from the Parent to a subsidiary (which is eliminated for consolidated reporting).
(2)Amount for the year ended December 31, 2021 related to the sale of the disposed Global Preneed business. For additional information, refer to Note 4 to the Consolidated Financial Statements.
See the accompanying Notes to the Parent Only Condensed Financial Statements
Assurant, Inc.
Notes to the Parent Only Condensed Financial Statements
Assurant, Inc.’s (the “Registrant”) investments in consolidated subsidiaries are stated at cost plus equity in income of consolidated subsidiaries. The accompanying Parent Only Condensed Financial Statements of the Registrant should be read in conjunction with the Consolidated Financial Statements and Notes thereto of the registrant and its subsidiaries included in the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022 filed with the Securities and Exchange Commission on February 17, 2023.
Assurant, Inc.
Schedule III – Supplementary Insurance Information
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Segment | Deferred acquisition costs | | Future policy benefits and expenses | | Unearned premiums | | Claims and benefits payable | | Premium revenue | | Net investment income | | Benefits claims, losses and settlement expenses | | Amortization of deferred acquisition costs | | Other operating expenses (1) | | Property and Casualty premiums written |
(in millions) |
Year Ended December 31, 2022 | | | | | | | | | | | | | | | | |
Global Lifestyle | $ | 9,519.1 | | | $ | 9.5 | | | $ | 18,135.9 | | | $ | 652.5 | | | $ | 6,829.9 | | | $ | 249.4 | | | $ | 1,325.5 | | | $ | 3,430.0 | | | $ | 2,676.6 | | | $ | 745.2 | |
Global Housing | 154.7 | | | — | | | 1,661.2 | | | 1,302.3 | | | 1,874.0 | | | 80.0 | | | 915.2 | | | 232.6 | | | 640.6 | | | 2,058.2 | |
Corporate and Other | 3.3 | | | 419.0 | | | 5.3 | | | 341.1 | | | — | | | 26.9 | | | 0.5 | | | — | | | 126.1 | | | — | |
Other Reconciling Items (2) | — | | | — | | | — | | | — | | | 61.4 | | | 7.8 | | | 118.6 | | | — | | | 260.4 | | | — | |
Total | $ | 9,677.1 | | | $ | 428.5 | | | $ | 19,802.4 | | | $ | 2,295.9 | | | $ | 8,765.3 | | | $ | 364.1 | | | $ | 2,359.8 | | | $ | 3,662.6 | | | $ | 3,703.7 | | | $ | 2,803.4 | |
Year Ended December 31, 2021 | | | | | | | | | | | | | | | | |
Global Lifestyle | $ | 8,650.8 | | | $ | 10.8 | | | $ | 17,101.9 | | | $ | 701.4 | | | $ | 6,712.7 | | | $ | 198.8 | | | $ | 1,333.1 | | | $ | 3,034.4 | | | $ | 2,869.3 | | | $ | 865.9 | |
Global Housing | 156.6 | | | — | | | 1,514.3 | | | 661.7 | | | 1,796.6 | | | 78.0 | | | 798.8 | | | 233.6 | | | 629.9 | | | 1,815.6 | |
Corporate and Other | 3.6 | | | 402.4 | | | 7.5 | | | 241.7 | | | — | | | 31.9 | | | — | | | — | | | 125.5 | | | — | |
Other Reconciling Items (2) | — | | | — | | | — | | | — | | | 62.8 | | | 5.7 | | | 70.0 | | | — | | | 189.2 | | | — | |
Total | $ | 8,811.0 | | | $ | 413.2 | | | $ | 18,623.7 | | | $ | 1,604.8 | | | $ | 8,572.1 | | | $ | 314.4 | | | $ | 2,201.9 | | | $ | 3,268.0 | | | $ | 3,813.9 | | | $ | 2,681.5 | |
Year Ended December 31, 2020 | | | | | | | | | | | | | | | | |
Global Lifestyle | $ | 7,235.6 | | | $ | 12.2 | | | $ | 15,818.0 | | | $ | 728.8 | | | $ | 6,436.2 | | | $ | 191.5 | | | $ | 1,411.8 | | | $ | 2,530.8 | | | $ | 2,944.5 | | | $ | 1,028.0 | |
Global Housing | 151.6 | | | — | | | 1,463.4 | | | 583.0 | | | 1,758.3 | | | 68.5 | | | 794.3 | | | 225.6 | | | 632.6 | | | 1,783.8 | |
Corporate and Other | 6.3 | | | 1,346.3 | | | 11.7 | | | 308.1 | | | — | | | 17.6 | | | — | | | — | | | 142.5 | | | — | |
Other Reconciling Items (2) | — | | | — | | | — | | | — | | | 83.4 | | | 8.0 | | | 69.1 | | | — | | | 163.8 | | | — | |
Total | $ | 7,393.5 | | | $ | 1,358.5 | | | $ | 17,293.1 | | | $ | 1,619.9 | | | $ | 8,277.9 | | | $ | 285.6 | | | $ | 2,275.2 | | | $ | 2,756.4 | | | $ | 3,883.4 | | | $ | 2,811.8 | |
(1)Includes amortization of value of business acquired and underwriting, general and administrative expenses.
(2)Other reconciling items reflect the items excluded from the segment measure of profitability, Adjusted EBITDA. See Note 6 for more information on Adjusted EBITDA and the reconciliation of the segment Adjusted EBITDA to the consolidated net income from continuing operations.
Assurant, Inc.
Schedule IV – Reinsurance
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Direct amount | | Ceded to other Companies | | Assumed from other Companies | | Net amount | | Percentage of amount assumed to net |
| (in millions) | | |
Year Ended December 31, 2022 | | | | | | | | | |
Life Insurance in Force | $ | 7,208.5 | | | $ | 4,837.8 | | | $ | 1.7 | | | $ | 2,372.4 | | | 0.1 | % |
Premiums: | | | | | | | | | |
Life insurance | $ | 166.7 | | | $ | 128.2 | | | $ | 0.1 | | | $ | 38.6 | | | 0.3 | % |
Accident and health insurance | 508.4 | | | 331.0 | | | 3.0 | | | 180.4 | | | 1.7 | % |
Property and liability insurance | 16,819.5 | | | 8,466.8 | | | 193.6 | | | 8,546.3 | | | 2.3 | % |
Total earned premiums | $ | 17,494.6 | | | $ | 8,926.0 | | | $ | 196.7 | | | $ | 8,765.3 | | | 2.2 | % |
Benefits: | | | | | | | | | |
Life insurance | $ | 32.2 | | | $ | 20.6 | | | $ | — | | | $ | 11.6 | | | — | % |
Accident and health insurance | 76.8 | | | 65.5 | | | 0.4 | | | 11.7 | | | 3.4 | % |
Property and liability insurance | 7,563.4 | | | 5,389.9 | | | 163.0 | | | 2,336.5 | | | 7.0 | % |
Total policyholder benefits | $ | 7,672.4 | | | $ | 5,476.0 | | | $ | 163.4 | | | $ | 2,359.8 | | | 6.9 | % |
Year Ended December 31, 2021 | | | | | | | | | |
Life Insurance in Force | $ | 7,431.3 | | | $ | 4,953.8 | | | $ | 2.5 | | | $ | 2,480.0 | | | 0.1 | % |
Premiums: | | | | | | | | | |
Life insurance | $ | 199.6 | | | $ | 161.0 | | | $ | 0.2 | | | $ | 38.8 | | | 0.5 | % |
Accident and health insurance | 537.8 | | | 364.7 | | | 1.4 | | | 174.5 | | | 0.8 | % |
Property and liability insurance | 15,172.7 | | | 6,980.8 | | | 166.9 | | | 8,358.8 | | | 2.0 | % |
Total earned premiums | $ | 15,910.1 | | | $ | 7,506.5 | | | $ | 168.5 | | | $ | 8,572.1 | | | 2.0 | % |
Benefits: | | | | | | | | | |
Life insurance | $ | 180.6 | | | $ | 163.6 | | | $ | — | | | $ | 17.0 | | | — | % |
Accident and health insurance | 222.1 | | | 204.9 | | | — | | | 17.2 | | | — | % |
Property and liability insurance | 5,868.0 | | | 3,839.3 | | | 139.0 | | | 2,167.7 | | | 6.4 | % |
Total policyholder benefits | $ | 6,270.7 | | | $ | 4,207.8 | | | $ | 139.0 | | | $ | 2,201.9 | | | 6.3 | % |
Year Ended December 31, 2020 | | | | | | | | | |
Life Insurance in Force | $ | 8,270.1 | | | $ | 5,842.4 | | | $ | 3.8 | | | $ | 2,431.5 | | | 0.2 | % |
Premiums: | | | | | | | | | |
Life insurance | $ | 171.8 | | | $ | 128.3 | | | $ | 0.2 | | | $ | 43.7 | | | 0.5 | % |
Accident and health insurance | 493.6 | | | 317.8 | | | 0.2 | | | 176.0 | | | 0.1 | % |
Property and liability insurance | 14,248.6 | | | 6,323.3 | | | 132.9 | | | 8,058.2 | | | 1.6 | % |
Total earned premiums | $ | 14,914.0 | | | $ | 6,769.4 | | | $ | 133.3 | | | $ | 8,277.9 | | | 1.6 | % |
Benefits: | | | | | | | | | |
Life insurance | $ | 49.0 | | | $ | 34.1 | | | $ | (0.7) | | | $ | 14.2 | | | (4.9) | % |
Accident and health insurance | 162.4 | | | 111.9 | | | (4.0) | | | 46.5 | | | (8.6) | % |
Property and liability insurance | 5,464.0 | | | 3,376.5 | | | 127.0 | | | 2,214.5 | | | 5.7 | % |
Total policyholder benefits | $ | 5,675.4 | | | $ | 3,522.5 | | | $ | 122.3 | | | $ | 2,275.2 | | | 5.4 | % |