Assurant Inc. (AIZ) is expected to report pre-tax catastrophe losses in the range of $65 million to $75 million in the second quarter of 2011. Massive destruction caused by natural calamities, such as hailstrom, tornadoes, winds and floods throughout the Southeast and Midwest United States, have accounted for the losses.
Earlier during the first quarter, management had estimated preliminary pre-tax loss of $15 million from high storm activity in April. Last year, Assurant Specialty incurred after-tax catastrophe losses of $5.0 million, impacting earnings per share by 4 cents.
Assurant also maintains a catastrophe reinsurance program. It has already placed about 75% of the 2011 program and expects the pricing for the remaining 25% to be in line with last year. The company will issue a comprehensive update in June, detailing its complete 2011 reinsurance program.
We expect Assurant’s second quarter earnings to be modestly affected by the catastrophe loss (cat loss). According to the Zacks Consensus Estimate, the company’s earnings per share (EPS) would be $1.24 in the second quarter. During the first quarter of 2011, Assurant’s EPS of $1.37 exceeded the Zacks Consensus Estimate by 15 cents and the year-ago quarter’s EPS by 5 cents. Assurant Specialty Property’s first quarter 2011 net operating income was approximately $103 million, including over $7 million of after-tax adverse claim reserve development from the previously reported Arizona hailstorms in the fourth quarter of 2010.
Some of Assurant’s units, such as Assurant Health and Employee Benefits, are facing tough times. Faced with a challenging environment, Assurant Health has traditionally underperformed. Total membership dropped 4.6% sequentially during the fourth quarter of 2010, marking the fourteenth consecutive quarterly decline. As such, it has concentrated on this business by enhancing its product offering and changing its pricing and plan designs. We are uncertain about the impact these initiatives (particularly pricing increases) will have on improving margins as the health insurance market remains very competitive. We also remain concerned about the reduction in earnings owing to the minimum loss ratio mandate of the Health care reform.
The Employee Benefits segment has been pressured by persistent economic challenges in the small group sector, leading to higher lapse rates and lower premium growth on in-force policies. Since there have been few new employee additions and a modest wage growth, premium income from the segment will likely remain under pressure in the near term. Moreover, the continued low interest rate environment will restrain investment income from employee benefits in 2011.
Taking into consideration the overall operating environment surrounding the company, we maintain our Neutral recommendation on the stock of New York-based Assurant.
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